-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TE5ircNbLEPSFn6M3wV5Ejvja9W2RBnrlt78kbsjYuQnziOSJqcGOAXx2OJ2uLja SnhPdQlUV8CrSsYe1s4E7Q== 0000950110-98-000652.txt : 19980518 0000950110-98-000652.hdr.sgml : 19980518 ACCESSION NUMBER: 0000950110-98-000652 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMUNITY BANK SYSTEM INC CENTRAL INDEX KEY: 0000723188 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 161213679 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13695 FILM NUMBER: 98626538 BUSINESS ADDRESS: STREET 1: 5790 WIDEWATERS PKWY CITY: DEWITT STATE: NY ZIP: 13214 BUSINESS PHONE: 3154452282 MAIL ADDRESS: STREET 1: 5790 WIDEWATERS PARKWAY CITY: DEWITT STATE: NY ZIP: 13214 10-Q 1 FORM 10-Q ================================================================================ FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the three months ended March 31, 1998 Commission file number 0-11716 COMMUNITY BANK SYSTEM, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 16-1213679 ------------------------------- ---------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5790 Widewaters Parkway, DeWitt, New York 13214 --------------------------------------------------- (Address of principal executive offices) (Zip Code) 315/445-2282 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common Stock, No par value - 7,613,200 shares as of May 5, 1998. ================================================================================ INDEX COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES PART I. INFORMATION Item 1. Financial Statements (Unaudited) Consolidated balance sheets -- March 31, 1998, December 31, 1997 and March 31, 1997 Consolidated statements of income -- Three months ended March 31, 1998 and 1997. Consolidated statements of cash flows -- Three months ended March 31, 1998 and 1997 Consolidated statements of comprehensive income -- Three months ended March 31, 1998 and 1997. Item 2. Management Discussion and Analysis of Financial Conditions and Results of Operations PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults upon Senior Securities Item 4. Submission of Matters to a Vote of Securities Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K 2 COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CONDITION
March 31 December 31 March 31 1998 1997 1997 - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 64,686,762 $ 82,106,403 $ 46,467,487 Federal Funds Sold 1,600,000 0 0 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL CASH AND CASH EQUIVALENTS 66,286,762 82,106,403 46,467,487 Investment securities U.S. Treasury 2,992,493 2,991,739 2,989,454 U.S. Government agencies and corporations 227,910,659 243,234,221 322,184,705 States and political subdivisions 21,768,260 20,181,494 12,545,365 Mortgage-backed securities 370,726,156 311,840,524 242,828,289 Federal Reserve Bank 2,173,950 2,173,950 2,134,200 Other securities 26,835,107 26,760,028 26,719,892 ------------------------------------------------------- Investment securities at Cost 652,406,625 607,181,956 609,401,905 Market value adjustment on available for sale securities 3,741,491 4,710,022 (269,428) - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENT SECURITIES 656,148,116 611,891,978 609,132,477 Loans 857,869,463 845,962,085 679,031,322 Less: Unearned discount 2,310,242 2,750,228 4,853,448 Reserve for possible loan losses 12,433,894 12,433,812 8,400,477 - ----------------------------------------------------------------------------------------------------------------------------------- NET LOANS 843,125,327 830,778,045 665,777,397 Bank premises and equipment 24,116,529 23,649,279 16,563,027 Accrued interest receivable 13,544,060 13,392,818 13,288,228 Intangible assets 57,502,891 58,671,755 30,567,479 Other assets 14,844,107 13,251,973 13,488,215 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 1,675,567,792 $ 1,633,742,251 $ 1,395,284,310 =================================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits Noninterest bearing $ 197,455,823 $ 202,573,162 $ 137,976,026 Interest bearing 1,198,849,976 1,143,112,796 923,084,638 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL DEPOSITS 1,396,305,799 1,345,685,958 1,061,060,664 Federal funds purchased 0 45,000,000 34,800,000 Term borrowings 111,000,000 80,000,000 150,000,000 Company obligated mandatorily redeemable preferred securities of subsidiary Community Capital Trust 1 holding solely junior subordinated debentures of the company 29,805,375 29,803,688 29,798,625 Accrued interest and other liabilities 18,654,322 15,240,622 13,380,963 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 1,555,765,496 1,515,730,268 1,289,040,252 - ----------------------------------------------------------------------------------------------------------------------------------- Shareholders' equity: Preferred stock $100 stated value 0 0 0 Common stock (7,602,968; 7,586,512; 7,518,262 shares) 7,602,968 7,586,512 7,518,262 Surplus 32,560,730 32,401,331 31,102,618 Undivided profits 77,502,669 75,335,527 67,822,605 Accumulated other Comprehensive Income 2,213,092 2,778,913 (158,962) Shares issued under employee stock plan - unearned (77,163) (90,300) (40,465) - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 119,802,296 118,011,983 106,244,058 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,675,567,792 $ 1,633,742,251 $ 1,395,284,310 ===================================================================================================================================
3 COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31 1998 1997 - ----------------------------------------------------------------------------------------------------------- INTEREST INCOME: Interest and fees on loans $19,839,103 $15,773,634 Interest and dividends on investments: U.S. Treasury 66,949 66,900 U.S. Government agencies and corporations 4,555,845 5,993,539 States and political subdivisions 290,246 220,182 Mortgage-backed securities 5,585,751 4,470,233 Other securities 484,064 395,663 Interest on federal funds sold 67,529 127,443 Interest on deposits at other banks 492 414 - ----------------------------------------------------------------------------------------------------------- Total interest income 30,889,979 27,048,008 - ----------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Interest on deposits Savings 3,127,612 2,332,800 Time 9,311,924 7,032,560 Interest on federal funds purchased and term borrowings 1,548,985 2,824,132 Interest on mandatorily redeemable capital securities of subsidiary 732,938 488,625 - ----------------------------------------------------------------------------------------------------------- Total interest expense 14,721,459 12,678,117 - ----------------------------------------------------------------------------------------------------------- Net interest income 16,168,521 14,369,891 Less: Provision for possible loan losses 1,371,000 730,000 - ----------------------------------------------------------------------------------------------------------- Net Interest income after provision for loan losses 14,797,521 13,639,891 - ----------------------------------------------------------------------------------------------------------- OTHER INCOME: Fiduciary and investment services 470,523 381,539 Service charges on deposit accounts 1,397,701 950,564 Commissions on investment products 250,423 221,289 Other service charges, commissions and fees 977,172 766,673 Other operating income 321,371 6,180 Investment security gain (loss) 266,145 0 - ----------------------------------------------------------------------------------------------------------- Total other income 3,683,335 2,326,245 - ----------------------------------------------------------------------------------------------------------- OTHER EXPENSES: Salaries and employee benefits 6,443,718 5,261,450 Occupancy expense, net 1,071,072 802,565 Equipment and furniture expense 801,842 629,020 Amortization of intangible assets 1,168,864 674,010 Other 3,178,643 2,812,224 - ----------------------------------------------------------------------------------------------------------- Total other expenses 12,664,140 10,179,269 - ----------------------------------------------------------------------------------------------------------- Income before income taxes 5,816,716 5,786,867 Income taxes 2,129,000 2,122,000 - ----------------------------------------------------------------------------------------------------------- NET INCOME $ 3,687,716 $ 3,664,867 =========================================================================================================== EARNINGS PER SHARE - BASIC $0.49 $0.48 - DILUTED $0.48 $0.47 ===========================================================================================================
4 COMMUNITY BANK SYSTEM, INC. CONSOLIDATED STATEMENT OF CASH FLOWS For Three Months Ended March 31, 1998 and 1997
1998 1997 - ----------------------------------------------------------------------------------------------------------- Operating Activities: Net income 3,687,716 3,664,867 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 665,616 506,127 Net amortization of intangible assets 1,168,864 674,010 Net amortization of security premiums and discounts 1,075,442 13,034 Provision for loan losses 1,371,000 730,000 Provision for deferred taxes (99,961) (534,417) (Gain)\Loss on sale of investment securities (266,145) 0 (Gain)\Loss on sale of loans and other assets (154,181) (6,179) Change in interest receivable (151,242) (2,498,157) Change in other assets and other liabilities 2,335,750 324,421 Change in unearned loan fees and costs (200,321) (122,633) - ----------------------------------------------------------------------------------------------------------- Net Cash Provided By Operating Activities 9,432,538 2,751,073 - ----------------------------------------------------------------------------------------------------------- Investing Activities: Proceeds from sales of investment securities 10,923,567 0 Proceeds from maturities of held to maturity investment securities 11,041,165 9,878,731 Proceeds from maturities of available for sale investment securities 10,920,596 2,426,408 Purchases of held to maturity investment securities (522,769) (5,390,851) Purchases of available for sale investment securities (78,396,525) (39,390,368) Net change in loans outstanding (13,488,611) (22,032,463) Capital expenditures (1,008,035) (287,118) Net Cash Used By Investing Activities (60,530,612) (54,795,661) - ----------------------------------------------------------------------------------------------------------- Financing Activities: Net change in demand deposits, NOW accounts, and savings accounts 11,020,805 (2,993,565) Net change in certificates of deposit 39,599,035 36,840,973 Net change in Federal Funds purchased (45,000,000) 3,000,000 Net change in term borrowings 31,000,000 (15,000,000) Issuance of mandatorily redeemable capital securities of subsidiary 0 29,798,625 Issuance (retirement) of common and preferred stock 175,855 (4,135,397) Cash dividends (1,517,262) (1,533,287) - ----------------------------------------------------------------------------------------------------------- Net Cash Provided By Financing Activities 35,278,433 45,977,349 - ----------------------------------------------------------------------------------------------------------- Change In Cash And Cash Equivalents (15,819,641) (6,067,239) Cash and cash equivalents at beginning of year 82,106,403 52,534,726 - ----------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD 66,286,762 46,467,487 =========================================================================================================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash Paid For Interest $12,251,164 $10,464,668 =========================================================================================================== Cash Paid For Income Taxes $133,277 $1,620,380 =========================================================================================================== SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES: Dividends declared and unpaid $1,520,574 $1,353,287 ===========================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. 5 COMMUNITY BANK SYSTEM, INC. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For Three Months Ended March 31, 1998 and 1997
1998 1997 - ------------------------------------------------------------------------------------------------------------------------------- Other comprehensive income, before tax: Unrealized gains on securities: Decrease in unrealized holding gains arising during period $ (690,441) $ (1,875,958) Less: reclassification adjustment for gains included in net income (266,145) 0 - ------------------------------------------------------------------------------------------------------------------------------- Other comprehensive income, before tax (956,586) (1,875,958) Income tax expense related to items of other comprehensive income 390,765 769,143 - ------------------------------------------------------------------------------------------------------------------------------- Other comprehensive income, net of tax (565,821) (1,106,815) Plus: Net income 3,687,716 3,664,867 - ------------------------------------------------------------------------------------------------------------------------------- Comprehensive income $ 3,121,895 $ 2,558,052 ===============================================================================================================================
6 COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 1998 NOTE A -- BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the three month period ended March 31, 1998 are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. On January 29, 1997, Community Bank System, Inc. formed a wholly-owned subsidiary, Community Capital Trust I, a Delaware statutory business trust. The Trust has issued $30 million aggregate liquidation amount of 9.75% company-obligated Mandatorily Redeemable Preferred Securities representing undivided beneficial interests in the assets on the Trust. The Company borrowed the proceeds of the Preferred Securities from the Trust by issuing Junior Subordinated Debentures to the Trust having substantially similar terms as the Preferred Securities. The sole assets of the Trust on March 31, 1998 were $30,733,375 aggregate principal amount of the Company's Junior Subordinated Debentures, together with the related accrued interest receivable thereon. The Preferred Securities mature in 2027, and are treated as Tier 1 capital by the Federal Reserve Bank of New York. The guarantees issued by the Company for the Trust, together with the Company's obligations under the Trust Agreement, the Junior Subordinated Debentures and the Indenture under which the Junior Subordinated Debentures were issued, constitute a full and unconditional guarantee by the Company of the Preferred Securities issued by the Trust. Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This pronouncement requires the Company to report the effects of unrealized investment holding gains or losses on comprehensive income as displayed in the Statement of Comprehensive Income. NOTE B -- EARNINGS PER SHARE Basic earnings per share is computed based on the weighted average shares outstanding. Diluted earnings per share is computed based on the weighted average shares outstanding adjusted for the dilutive effect of the assumed exercise of stock options during the year. The following is a reconciliation of basic to diluted earnings per share for the three months ended March 31:
- ---------------------------------------------------------------------------------------- Income Shares Per Share Amount - ---------------------------------------------------------------------------------------- 1998 Net Income $ 3,687,716 BASIC EPS 3,687,716 7,598,054 $0.49 ===== Effect of diluted securities: Stock options 0 144,888 ----------------------------------------------- DILUTED EPS $ 3,687,716 7,742,942 $0.48 ===== - ---------------------------------------------------------------------------------------- 1997 Net Income $ 3,664,867 Less: Preferred stock dividends (78,750) ----------- BASIC EPS 3,586,117 7,501,482 $0.48 ===== Effect of diluted securities: Stock options 0 118,851 ---------------------------------------------- DILUTED EPS $ 3,586,117 7,620,333 $0.47 ===== - ----------------------------------------------------------------------------------------
7 PART 1. FINANCIAL INFORMATION Item 1. Financial Statements The information required by rule 10.01 of Regulation S-X is presented on the previous pages. Item 2. Management Discussion and Analysis of Financial Condition and of Operations The purpose of the discussion is to present material changes in Community Bank System, Inc.'s financial condition and results of operations during the three months ended March 31, 1998 which are not otherwise apparent from the consolidated financial statements included in these reports. When used in this report, the term "CBSI" means Community Bank System, Inc. and its subsidiaries on a consolidated basis, unless indicated otherwise. Financial performance comparisons to peer bank holding companies are based on data through December 31, 1997 as provided by the Federal Reserve System; the peer group is comprised of 140 bank holding companies having $1 to $3 billion in assets. 8 COMMUNITY BANK SYSTEM, INC. Page 9 SUMMARY OF OPERATIONS EARNINGS AND BALANCE SHEET RECAP 1ST QUARTER 1998
000s Omitted Three Months Ended March 31, Three Months Ended, Line Change Change Mar 31 Dec 31 Change Change No. 1998 1997 Amount Percent 1998 1997 Amount Percent --- ---- ---- ------ ------- ---- ---- ------ ------- 1 Net interest income $16,168 $14,370 $1,798 12.5% $16,168 $17,109 ($941) -5.5% 2 Loan loss provision 1,371 730 641 87.8% 1,371 1,665 (294) -17.7% 3 Net interest income after 14,797 13,640 1,157 8.5% 14,797 15,444 (647) -4.2% provision for loan losses 4 Investment security gain (loss) 266 0 266 -- 266 (19) 285 -- 5 Other income 3,416 2,326 1,090 46.9% 3,416 3,567 (151) -4.2% 6 Other expense 11,494 9,505 1,989 20.9% 11,494 11,724 (230) -2.0% 7 Intangible amortization 1,169 674 495 73.4% 1,169 1,182 (13) -1.1% 8 Income before income tax 5,816 5,787 29 0.5% 5,816 6,086 (270) -4.4% 9 Income tax 2,129 2,122 7 0.3% 2,129 2,092 37 1.8% 10 Net income $3,688 $3,665 $23 0.6% $3,688 3,994 ($306) -7.7% Earnings per share 11a Basic $0.49 $0.48 $0.01 2.1% $0.49 $0.53 ($0.04) -7.5% 11b Diluted $0.48 $0.47 $0.01 2.1% $0.48 $0.52 ($0.04) -7.7% ===== ===== ===== === ===== ===== ====== === ----------------------------- At Period End ----------------------------- 12 Loans $855,559 $674,178 $181,381 26.9% $855,559 $843,212 $12,347 1.5% 13 Investments (excl. mkt val adj) 654,042 609,431 44,611 7.3% 654,042 607,216 46,826 7.7% 14 Earning assets 1,509,601 1,283,609 225,992 17.6% 1,509,601 1,450,428 59,173 4.1% 15 Loan loss reserve 12,434 8,400 4,034 48.0% 12,434 12,434 (0) 0.0% 16 Intangible assets 57,503 30,567 26,936 88.1% 57,503 58,672 (1,169) -2.0% 17 Total assets 1,675,568 1,395,284 280,284 20.1% 1,675,568 1,633,742 41,826 2.6% 18 Deposits 1,396,306 1,061,061 335,245 31.6% 1,396,306 1,345,686 50,620 3.8% 19 Borrowings 140,805 184,800 (43,995) -23.8% 140,805 154,804 (13,999) -9.0% 20 Total equity $119,802 $106,244 $13,558 12.8% $119,802 $118,012 $1,790 1.5% ----------------------------- Average Balances for Period ----------------------------- 21 Loans $849,211 $661,724 $187,487 28.3% $849,211 $835,673 $13,538 1.6% 22 Investments (excl. mkt val adj) 637,942 608,487 29,455 4.8% 637,942 593,754 44,188 7.4% 23 Earning assets 1,487,153 1,270,211 216,942 17.1% 1,487,153 1,429,427 57,726 4.0% 26 Total assets 1,648,987 1,373,657 275,330 20.0% 1,648,987 1,583,747 65,240 4.1% 27 Deposits 1,376,320 1,038,433 337,887 32.5% 1,376,320 1,352,189 24,131 1.8% 28 Borrowings 136,602 213,961 (77,359) -36.2% 136,602 97,522 39,080 40.1% 29 Total equity $119,309 $108,887 $10,422 9.6% $119,309 $115,234 $4,075 3.5%
9
COMMUNITY BANK SYSTEM, INC. Page 10 SUMMARY OF OPERATIONS KEY RATIO RECAP 1ST QUARTER 1998 000s Omitted Three Months Ended March 31, Three Months Ended, Line Change Change Mar 31 Dec 31 Change Change No. 1998 1997 Amount Percent 1998 1997 Amount Percent - --- ---- ---- ------ ------- ------ ------ ------ ------- 30 Return on assets 0.91% 1.08% (0.17)%pts. -- 0.91% 1.00% (0.09)%pts. -- 31a Return on equity 12.54% 13.79% (1.25)%pts. -- 12.54% 13.75% (1.21)%pts. -- 31b Tangible return on equity 14.89% 15.32% (0.43)%pts. -- 14.89% 16.16% (1.27)%pts. -- 32a Net interest margin (FTE) 4.45% 4.62% (0.17)%pts. -- 4.45% 4.79% (0.34)%pts. -- 32b Full-tax equivalent (FTE) 137 104 33 31.7% 137 135 2 1.5% Efficiency ratio 33a Nominal 64.2% 60.6% 3.6%pts. -- 64.2% 62.0% 2.2%pts. -- 33b Excludes intangible amort. 58.3% 56.6% 1.7%pts. -- 58.3% 56.3% 2.0%pts. -- 34 Tier I leverage ratio 5.65% 7.74% (2.09)%pts. -- 5.65% 5.67% (0.02)%pts. -- 35a Weighted average common shares 7,743 7,620 123 1.6% 7,743 7,717 26 0.3% 35b Period-end common shares outstanding 7,602 7,518 84 1.1% 7,602 5,857 1,745 29.8% ---------------------------------------- --------------------------------------- 36 Loan loss reserve / loans outstanding 1.45% 1.25% 0.20 %pts. -- 1.45% 1.47% (0.02)%pts. -- 37 Nonperforming loans / loans outstanding 0.48% 0.49% (0.01)%pts. -- 0.48% 0.49% (0.01)%pts. -- 38 Loan loss reserve / nonperforming loans 303% 255% 48%pts. -- 303% 298% 5%pts. -- 39 Net charge-offs / average loans 0.65% 0.28% 0.37%pts. -- 0.65% 0.76% (0.11)%pts. -- 40 Loan loss provision / net charge-offs 100% 160% (60)%pts. -- 100% 104% (4)%pts. -- 41 Nonperforming assets / loans outstanding + OREO 0.58% 0.60% (0.02)%pts. -- 0.58% 0.60% (0.02)%pts. -- ---------------------------------------- --------------------------------------- 42 Nonaccruing loans 2,532 2,253 279 12.4% 2,532 1,385 1,147 82.8% 43 90+ days delinquent 1,578 1,043 535 51.3% 1,578 2,788 (1,210) -43.4% ----- ----- --- ---- ----- ----- ------- ------ 44 Tot nonperforming loans 4,110 3,296 814 24.7% 4,110 4,173 (63) -1.5% 45 Troubled debt restructurings 88 53 35 66.0% 88 -- 88 -- 46 Other real estate 870 726 144 19.8% 870 881 (11) -1.2% ----- ----- --- ---- ----- ----- ---- ------ 47 Tot nonperforming assets 5,068 4,022 1,046 26.0% 5,068 5,054 14 0.3% ---------------------------------------- --------------------------------------- 48 Cash dividends declared per common share $0.20 $0.18 $0.02 11.1% $0.20 $0.20 $0.00 0.0% 49 Common stock price $34.00 $23.50 $10.50 44.7% $34.00 $31.30 $2.70 8.6% 50a Book value $15.76 $14.13 $1.63 11.5% $15.76 $15.56 $0.20 1.3% 50b Tangible book value $8.18 $10.07 ($1.89) -18.8% $8.18 $7.82 $0.36 4.6%
10 Net income was essentially unchanged from the same period last year at $3.688 million (up .6%) while diluted earnings per share (EPS) were up 2.1% to $.48. The primary reason for the greater improvement in EPS was the absence of dividends on the Company's mid-1995 cumulative perpetual preferred stock, the remaining half of which was redeemed in March 1997. Return on equity (ROE) was off 1.25 percentage points to 12.54%. Performance was stronger on a cash basis, which excludes the non-cash amortization of premiums paid for acquisitions. Cash earnings per share rose 9.6% over the prior year to $.57, while tangible or cash return on equity was down 43 basis points to 14.89%. A combination of both positive and negative factors influenced our first quarter earnings. On the positive side, loan growth continues to be good, up $12.3 million or 1.5% during the quarter; the contribution of the 20 branches acquired in mid-1997 from KeyBank, N.A. and Fleet Bank has been significant, accounting for over 40% of loan growth over the last six months. Also important to our results is a 14% reduction in net charge-offs to $1.37 million or .65% of average loans outstanding from uncharacteristically high levels for us in the fourth quarter of last year. While our loan loss provision expense accordingly fell $294,000, it nonetheless is $641,000 greater than one year earlier, before net charge-offs began to rise and loans began a $181 million or 27%, climb due to acquisitions and internal growth. Lastly, growth in overhead was a very modest $84,000 or .7% for the quarter compared to fourth quarter last year, after adjusting the latter downward for $314,000 in nonrecurring expense related to our 1997 acquisitions. Dampening the bank's performance was the cost of the devastating January 1998 ice storm in the North Country, where a major portion of the Bank's branches and related operations center are located. Nearly $200,000 in incremental impact was incurred, comprised of expenditures for temporary power, repairs, and overtime along with higher borrowing costs and lost service charge income relating to overdrafts, deposit service charges and ATM fees. Also, a primary negative factor during the first quarter was the impact of unusually high mortgage refinancing activity nationwide, which caused the premiums on certain of our collateralized mortgage obligation securities (CMOs) to be written down on an accelerated basis in accordance with conservative accounting practice. The estimated cost of this write-down was approximately $300,000, the bulk of which was offset by $266,000 in gains from selling selected callable securities and reinvesting the proceeds in an instrument having more desirable interest rate risk characteristics. While high mortgage refinancing may continue, causing further CMO premium write-downs, no further expense related to the ice storm is expected. When results for first quarter 1998 are compared to the fourth quarter 1997 level, net income and earnings per share were down by 7.7% or $306,000 and $.04 respectively. Excluding nonrecurring or unusual items in both periods, earnings per share were $.47 for the first quarter versus $.48 for the fourth quarter, down $.01 or 2.1%. First quarter net interest income rose 12.5% or nearly $1.8 million versus the same period last year; compared to fourth quarter 1997, net interest income was off by 5.5% or $941,000. A variety of nonrecurring or seasonal factors influenced these results: first quarter 1997 benefited from nonrecurring loan late charges and was impacted by only two months' interest on the Company's then newly issued trust preferred securities, which funded acquisitions a few months later; the fourth quarter benefited from nonrecurring discount accretion on called investment securities as well as record fees from the Company's annual holiday loan payment extension program; and first quarter 1998 absorbed premium write-downs on CMO securities and various ice storm impacts. Of the reduction in first quarter net interest income from the fourth quarter level, all but $42,000 or 4% can be explained by the above circumstances and fewer days in the quarter. Adjusting reported net interest income for items in all three periods results in a net interest margin of 4.56%, 4.65%, and 4.55% for first quarter 1997, fourth quarter 1997, and first quarter 1998, respectively. The reasons for the 10 basis point reduction in first quarter 1998's adjusted margin from the fourth quarter level are slightly lower loan yields, about a 17 basis point reduction in investment yields owing to the difficulty of investing in a flat Treasury yield curve environment, and a greater portion of borrowed funds. The impact of accelerated CMO premium amortization in the first quarter was about an 8 basis point reduction in the quarter's net interest margin. Loans outstanding have increased by $28.7 million or 3.50% since September 30, 1997 to $855.6 million compared to $47.5 million growth for the same 1996-1997 six month period or 7.6%. The primary reasons for slowing growth are reduced installment loan generation, reflecting a tightening of underwriting standards in selected markets, as well as an interruption in normal consumer demand in the Company's Northern Region caused by the ice storm. Commercial loan growth remains good; growth over the most recent six month period was $23.5 million or 8.5%. As previously discussed, asset quality improved in first quarter 1998 compared to fourth quarter 1997. The $230,000 reduction in net charge-offs largely reflects a 48% drop in the direct installment loan category partially offset by an 18% increase in indirect installment loan net charge-offs. Nonperforming loans remained virtually unchanged from year-end levels at a favorable .48% of outstandings, enabling the provision to be limited to replacing net charge-offs. Though the loan loss reserve to loans ratio decreased slightly to 1.45%, coverage over nonperformers remains an ample 3.0 times, compared to the 2.8 times industry norm at December 31, 1997. Combined delinquencies and nonaccruals improved to 1.51% of total loans at quarter end versus 1.82% at year end, remaining within the Company's internal guideline of 2.0%. 11 The Company's first quarter 1998 efficiency ratio (overhead compared to net interest and other income before net securities gains) rose to 64.2% from 62.0% at year end. Besides the reduction from fourth quarter levels in net interest income discussed above, noninterest income was lower by $151,000; the primary reasons are reduced personal trust estate fees, which periodically fluctuate, and lost overdraft, deposit service charges, and ATM fees estimated to be caused by the ice storm. Nonrecurring income was virtually the same in both periods at $320,000. And about half of the $84,000 increase in recurring overhead also reflects the ice storm (temporary power, repairs, and overtime). Excluding all non-recurring items in the first quarter (except the accelerated write-down of CMO premiums, whose longevity is uncertain until the recent trend in mortgage refinancing activity becomes clearer) as well as the Company's relatively high level of intangible amortization, the efficiency ratio was 58.6%, slightly better than the peer bank norm of 58.9% as of December 31, 1997. Adjusted for the same non-recurring items, the ratio of noninterest income to operating income was 16.3%, a significant 2.2 percentage point increase over one year earlier, reflective of the Company's strategy to increase its income sources that are less susceptible to interest rate fluctuation. YEAR 2000 Our Company is keenly aware of the challenges presented by Year 2000 Business Risk compliance. We have established a task force comprised of key personnel to define and coordinate the Year 2000 effort. CBSI has adopted the five elements outlined by its banking regulators: Awareness, Assessment, Renovation, Validation, and Implementation. It is anticipated that complete review and verification of our internal systems, as well as those of our major service providers, will be accomplished by December 31, 1998. Management believes that there will be no incomplete or untimely aspects in the Year 2000 implementation. Our overall assessment indicates that the Year 2000 effort will not have a material financial impact on current or future operating conditions or financial results. 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings. Not Applicable Item 2. Changes in Securities. Not Applicable Item 3. Defaults Upon Senior Securities. Not Applicable. Item 4. Submission of Matters to a Vote of Securities Holders. Not Applicable. Item 5. Other Information. Not Applicable. Item 6. Exhibits and Reports on Form 8-K a) Exhibits required by Item 601 of Regulation S-K: (11) Statement re Computation of earnings per share (21) Subsidiaries of the registrant - Community Bank, National Association, State of New York - Community Financial Services, Inc., State of New York - Community Capital Trust I, State of Delaware - Benefit Plans Administrative Services, Inc., State of New York b) Reports on Form 8-K: N/A 13 SIGNATURES Pursuant to the requirements of The Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMMUNITY BANK SYSTEM, INC. Date: May 14, 1998 /s/ SANFORD A. BELDEN ----------------------------------------- Sanford A. Belden, President and Chief Executive Officer Date: May 14, 1998 /s/ DAVID G. WALLACE ----------------------------------------- David G. Wallace, Senior Vice President Chief Financial Officer 14 EX-27 2 ARTICLE 9 FDS FOR 10-Q
9 1,000 3-MOS DEC-31-1998 MAR-31-1998 64,687 0 1,600 0 376,812 253,062 260,772 855,559 12,434 1,675,568 1,396,306 6,000 18,654 105,000 29,805 0 7,603 112,199 1,675,568 19,839 10,983 68 30,890 12,440 14,721 16,169 1,371 266 12,664 5,817 5,817 0 0 3,688 0.49 0.48 0 0 0 0 0 0 0 0 0 0 0 0
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