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, 1999
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
As of May 7, 1999 the registrant had outstanding 7,214,329 shares of its common
stock without par valve.
1
INDEX
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
Part I. Information
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets --
March 31, 1999, December 31, 1998 and March 31, 1998
Consolidated statements of income --
Three months ended March 31, 1999 and 1998
Consolidated statements of cash flows --
Three months ended March 31, 1999, and 1998
Consolidated statements of comprehensive income --
Three months ended March 31, 1999 and 1998
Item 2. Management's 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,
1999 1998 1998
- -------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $56,591,562 $78,893,438 $64,686,762
Federal funds sold 0 0 1,600,000
- -------------------------------------------------------------------------------------------------------------
TOTAL CASH AND CASH EQUIVALENTS 56,591,562 78,893,438 66,286,762
Investment securities
U.S. Treasury 2,996,258 2,994,897 2,992,493
U.S. Government agencies and corporations 165,697,013 167,469,638 227,910,659
States and political subdivisions 85,759,689 44,628,567 21,768,260
Mortgage-backed securities 298,555,688 336,090,432 370,726,156
Federal Reserve Bank 2,173,950 2,173,950 2,173,950
Other securities 38,298,734 32,936,733 26,835,107
-----------------------------------------------
Investment securities at cost 593,481,332 586,294,217 652,406,625
Market value adjustment on available for sale 5,935,989 7,245,550 3,741,491
securities
- -------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES 599,417,321 593,539,767 656,148,116
Loans 918,038,990 918,527,226 857,869,463
Less: Unearned discount 1,135,082 1,307,106 2,310,242
Reserve for possible loan losses 12,593,682 12,441,255 12,433,894
- -------------------------------------------------------------------------------------------------------------
NET LOANS 904,310,226 904,778,865 843,125,327
Bank premises and equipment 24,512,141 24,877,782 24,116,529
Accrued interest receivable 13,293,285 12,375,334 13,544,060
Intangible assets 53,373,796 54,438,219 57,502,891
Other assets 7,399,370 11,785,296 14,844,107
- -------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,658,897,701 $1,680,688,701 $1,675,567,792
=============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits
Noninterest bearing $229,271,885 $249,863,649 $197,455,823
Interest bearing 1,140,640,068 1,128,201,929 1,198,849,976
- -------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 1,369,911,953 1,378,065,578 1,396,305,799
Federal funds purchased 26,200,000 34,700,000 0
Term borrowings 95,000,000 100,000,000 111,000,000
Company obligated mandatorily redeemable preferred
securities of subsidiary, Community Capital Trust I holding
solely junior subordinated debentures of the company 29,812,125 29,810,438 29,805,375
Accrued interest and other liabilities 17,455,496 17,947,217 18,654,322
- -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,538,379,574 1,560,523,233 1,555,765,496
- -------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock (7,262,829; 7,296,453; 7,602,968 shares 7,639,429 7,623,053 7,602,968
outstanding)
Surplus 33,245,970 32,842,772 32,560,730
Undivided profits 86,608,852 84,591,247 77,502,669
Accumulated other comprehensive income 3,511,137 4,285,743 2,213,092
Treasury stock (376,600; 326,000 shares) (10,464,675) (9,151,956) 0
Shares issued under employee stock plan - unearned (22,586) (25,391) (77,163)
- -------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 120,518,127 120,165,468 119,802,296
- -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,658,897,701 $1,680,688,701 $1,675,567,792
=============================================================================================================
See notes to consolidated financial statements.
3
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
March 31,
1999 1998
- ---------------------------------------------------------------------------------------------------------
Interest Income:
Interest and fees on loans $20,249,179 $19,839,103
Interest and dividends on investments:
U.S. Treasury 67,556 66,949
U.S. Government agencies and corporations 3,220,327 4,555,845
States and political subdivisions 825,083 290,246
Mortgage-backed securities 4,076,979 5,585,751
Other securities 541,198 484,064
Interest on federal funds sold 0 67,529
Interest on deposits at other banks 421 492
- ---------------------------------------------------------------------------------------------------------
Total interest income 28,980,743 30,889,979
- ---------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits
Savings 2,764,916 3,127,611
Time 7,905,181 9,311,924
Interest on federal funds purchased and
term borrowings 1,705,978 1,548,985
Interest on mandatorily redeemable capital
securities of subsidiary 732,937 732,938
- ---------------------------------------------------------------------------------------------------------
Total interest expense 13,109,012 14,721,458
- ---------------------------------------------------------------------------------------------------------
Net interest income 15,871,731 16,168,521
Less: Provision for possible loan losses 1,168,604 1,371,000
- ---------------------------------------------------------------------------------------------------------
Net Interest income after provision for loan losses 14,703,127 14,797,521
- ---------------------------------------------------------------------------------------------------------
Other income:
Fiduciary and investment services 698,054 470,523
Service charges on deposit accounts 1,579,388 1,397,701
Commissions on investment products 323,913 250,423
Other service charges, commissions and fees 1,032,513 977,172
Other operating income 192,695 321,371
Investment security gains (losses) 276,642 266,145
- ---------------------------------------------------------------------------------------------------------
Total other income 4,103,205 3,683,335
- ---------------------------------------------------------------------------------------------------------
Other expenses:
Salaries and employee benefits 6,585,205 6,443,718
Occupancy expense, net 1,057,636 1,071,072
Equipment and furniture expense 895,776 801,842
Amortization of intangible assets 1,157,923 1,168,864
Other 3,522,550 3,178,644
- ---------------------------------------------------------------------------------------------------------
Total other expenses 13,219,090 12,664,140
- ---------------------------------------------------------------------------------------------------------
Income before income taxes 5,587,242 5,816,716
Income taxes 1,899,187 2,129,000
- ---------------------------------------------------------------------------------------------------------
NET INCOME $3,688,055 $3,687,716
=========================================================================================================
Earnings per share - Basic $0.51 $0.49
- Diluted $0.50 $0.48
=========================================================================================================
See notes to consolidated financial statements.
4
COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For Three Months Ended March 31, 1999 and 1998
1999 1998
- -------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 3,688,055 $ 3,687,716
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 247,408 665,616
Amortization of intangible assets 1,157,923 1,168,864
Net amortization of security premiums and discounts 1,699,180 1,075,442
Amortization of discount on loans (172,024) 0
Provision for loan losses 1,168,604 1,371,000
Provision for deferred taxes 1,622,172 (99,961)
(Gain)/Loss on sale of investment securities (276,642) (266,145)
(Gain)/Loss on sale of loans and other assets (98,728) (154,181)
Change in interest receivable (917,951) (151,242)
Change in other assets and other liabilities 3,059,561 2,335,750
Change in unearned loan fees and costs (314,034) (200,321)
- -------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 10,863,524 9,432,538
- -------------------------------------------------------------------------------------------------------
Investing Activities:
Proceeds from sales of investment securities 4,616,500 10,923,567
Proceeds from maturities of held to maturity investment securities 657,496 11,041,165
Proceeds from maturities of available for sale investment securities 46,665,041 10,920,596
Purchases of held to maturity investment securities (666,049) (522,769)
Purchases of available for sale investment securities (59,882,641) (78,396,525)
Net change in loans outstanding (119,642) (13,488,611)
Capital expenditures (191,059) (1,008,035)
Proceeds from sales of property and equipment 313,755 0
Mortgage servicing rights (93,500) 0
- -------------------------------------------------------------------------------------------------------
Net cash used by investing activities (8,700,100) (60,530,612)
- -------------------------------------------------------------------------------------------------------
Financing Activities:
Net change in demand deposits, NOW accounts, and savings accounts (5,920,198) 11,020,805
Net change in certificates of deposit (2,233,427) 39,599,035
Net change in federal funds purchased (8,500,000) (45,000,000)
Net change in term borrowings (5,000,000) 31,000,000
Issuance (retirement) of common and preferred stock 179,228 175,855
Treasury stock purchased (1,312,719) 0
Cash dividends (1,678,184) (1,517,262)
- -------------------------------------------------------------------------------------------------------
Net cash provided by financing activities (24,465,300) 35,278,433
- -------------------------------------------------------------------------------------------------------
Change in cash and cash equivalents (22,301,876) (15,819,641)
Cash and cash equivalents at beginning of year 78,893,438 82,106,403
- -------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 56,591,562 66,286,762
=======================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $13,388,354 $12,251,164
=======================================================================================================
Cash paid for income taxes $277,015 $133,277
=======================================================================================================
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
AND INVESTING ACTIVITIES:
Dividends declared and unpaid 1,670,450 $1,520,574
Gross change in unrealized gains and (losses) on
available-for-sale securities (1,309,561) $3,095,590
=======================================================================================================
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, 1999 and 1998
1999 1998
- -----------------------------------------------------------------------------------------------------
Other comprehensive income, before tax:
Unrealized gains on securities:
Change in unrealized holding gains arising during period $ (1,032,920) $ 3,361,766
Less: Reclassification adjustment for gains included in
net income (276,642) (266,145)
- -----------------------------------------------------------------------------------------------------
Other comprehensive income, before tax (1,309,562) 3,095,621
Income tax expense related to items of other comprehensive income 534,956 (1,264,561)
- -----------------------------------------------------------------------------------------------------
Other comprehensive income, net of tax (774,606) 1,831,060
Plus: Net income 3,688,055 3,687,716
- -----------------------------------------------------------------------------------------------------
Comprehensive income $ 2,913,449 $ 5,518,776
=====================================================================================================
See notes to consolidated financial statements.
6
Community Bank System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 1999
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, 1999
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1999.
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 of 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, 1999 were
$30,740,125 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.
Effective July 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The Company elected to reclassify $212,735,000 of its
held-to-maturity securities as available-for-sale upon adoption of FAS 133.
7
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, 1999
and 1998:
- ------------------------------------------------------------------------------------------------
Income Shares Per Share Amount
- ------------------------------------------------------------------------------------------------
Net Income for Three Months Ended
March 31, 1999 3,688,055
Basic EPS 3,688,055 7,285,839 $ 0.51
Effect of diluted securities:
Stock options 0 97,669
-----------------------------
DILUTED EPS $3,688,055 7,383,508 $ 0.50
==========================================================================================
- ------------------------------------------------------------------------------------------------
Income Shares Per Share Amount
- ------------------------------------------------------------------------------------------------
Net Income for Three Months Ended
March 31, 1998 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
==========================================================================================
8
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's 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, 1999 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, 1998 as provided by the Federal Reserve System; the peer group is comprised
of 152 bank holding companies having $1 to $3 billion in assets.
9
COMMUNITY BANK SYSTEM, INC.
SUMMARY OF OPERATIONS
EARNINGS AND BALANCE SHEET RECAP
1ST QUARTER 1999 AND 4TH QUARTER 1998 COMPARISONS
000s Omitted Three Months Ended March 31, Three Months Ended,
Line ----------- Change Change Mar 31, Dec 31, Change Change
No. Earnings 1999 1998 Amount Percent 1999 1998 Amount Percent
--- ----------- ------- ------- ------- ------- ------- ------- ------- -------
1 Net interest income $ 15,872 $ 16,169 ($297) -1.8% $ 15,872 $ 15,791 $ 81 0.5%
2 Loan loss provision 1,169 1,371 (202) -14.7% 1,169 1,272 (103) -8.1%
3 Net interest income after 14,703 14,798 (95) -0.6% 14,703 14,519 184 1.3%
provision for loan losses
4 Investment security
gain (loss) 277 266 11 -- 277 561 (284) --
5 Other income 3,826 3,417 409 12.0% 3,826 3,915 (89) -2.3%
6 Other expense 12,061 11,495 566 4.9% 12,061 11,907 154 1.3%
7 Intangible amortization 1,158 1,169 (11) -0.9% 1,158 1,151 7 0.6%
8 Income before tax 5,587 5,817 (230) -4.0% 5,587 5,937 (350) -5.9%
9a Income tax 1,899 2,129 (230) -10.8% 1,899 2,165 (266) -12.3%
10 Net income $ 3,688 $ 3,688 $ 0 0.0% $ 3,688 $ 3,772 (84) -2.2%
Earnings per share
11a Basic $ 0.51 $ 0.49 $ 0.02 4.1% $ 0.51 $ 0.51 $ 0.00 0.0%
11b Diluted $ 0.50 $ 0.48 $ 0.02 4.2% $ 0.50 $ 0.51 ($ 0.01) -2.0%
=========== =========== =========== ====== =========== =========== =========== ===
----------------------
Balances At Period End
----------------------
12 Loans $ 916,904 $ 855,559 $ 61,345 7.2% $ 916,904 $ 917,220 ($ 316) 0.0%
13 Investments (excl. mkt val adj) 593,481 652,407 (58,925) -9.0% 593,481 586,294 7,187 1.2%
14 Earning assets 1,510,445 1,509,601 844 0.1% 1,510,445 1,503,549 6,896 0.5%
15 Loan loss reserve 12,594 12,434 160 1.3% 12,594 12,441 153 1.2%
16 Intangible assets 53,374 57,503 (4,129) -7.2% 53,374 54,438 (1,064) -2.0%
17 Total assets 1,658,898 1,675,568 (16,670) -1.0% 1,658,898 1,680,689 (21,791) -1.3%
18 Deposits 1,369,912 1,396,306 (26,394) -1.9% 1,369,912 1,378,066 (8,154) -0.6%
19 Borrowings 151,012 140,805 10,207 7.2% 151,012 164,510 (13,498) -8.2%
20 Total equity $ 120,518 $ 119,803 $ 715 0.6% $ 120,518 $ 120,165 $ 353 0.3%
10
COMMUNITY BANK SYSTEM, INC.
SUMMARY OF OPERATIONS
KEY RATIO RECAP
1ST QUARTER 1999 AND 4TH QUARTER 1998 COMPARISONS
000s Omitted
Three Months Ended March 31, Three Months Ended,
Line ------------- Change Change Mar 31, Dec 31, Change Change
No. Profitability 1999 1998 Amount Percent 1999 1998 Amount Percent
------------- ------- ------- ------- ------- ------- ------- ------- -------
21 Return on assets 0.90% 0.91% (0.01) %pts.-- 0.90% 0.90% (0.00) %pts.--
22 Return on equity 12.36% 12.54% (0.18) %pts.-- 12.36% 12.32% 0.04 %pts.--
23 Cash earnings per share (dilute) $0.59 $0.57 $0.02 3.5% $0.59 $0.60 ($0.01) -1.3%
24 Tangible return on assets 1.06% 1.08% (0.02) %pts.-- 1.06% 1.06% 0.00 %pts.--
25 Tangible return on equity 14.66% 14.89% (0.23) %pts.-- 14.66% 14.54% 0.12 %pts.--
26 Net interest margin 4.38% 4.45% (0.07) %pts.-- 4.38% 4.25% 0.13 %pts.--
27 Non interest income/ 19.0% 19.0% 0.0 %pts.-- 19.0% 21.5% (2.5) %pts.--
operating income (excl.
nonrecurring items)
28 Efficiency ratio
(excl. nonrecurring items 59.0% 58.2% 0.8 %pts.-- 59.0% 57.6% 1.4 %pts.--
& intangible amortization)
-------
Capital
-------
29 Tier I leverage ratio 5.81% 5.65% 0.16 %pts.-- 5.81% 5.71% 0.10 %pts.--
Common shares outstanding
30a Weighted average 7,384 7,743 (359) -4.6% 7,384 7,463 (79) -1.1%
30b Period end 7,263 7,602 (339) -4.5% 7,263 7,296 (33) -0.5%
31 Cash dividends declared
per common share $0.23 $0.20 $0.03 15.0% $0.23 $0.23 $0.00 0.0%
32 Common stock $23.81 $34.00 ($10.19) -30.0% $23.81 $29.31 ($5.50) -18.8%
33a Book value $16.59 $15.76 $0.83 5.3% $16.59 $16.47 $0.12 0.8%
33b Tangible book value $9.24 $8.18 $1.06 13.0% $9.24 $9.01 $0.23 2.6%
--------------------
Asset Quality Ratios
--------------------
34 Loan loss reserve /
loans outstanding 1.37% 1.45% (0.08) %pts.-- 1.37% 1.36% 0.01 %pts. --
35 Nonperforming loans /
loans outstanding 0.49% 0.48% 0.01 %pts.-- 0.49% 0.43% 0.06 %pts.--
36 Loan loss reserve /
nonperforming loans 282% 303% (21) %pts.-- 282% 312% (30) %pts.--
37 Net charge-offs /
average loans 0.45% 0.65% (0.20) %pts.-- 0.45% 0.55% (0.10) %pts.--
38 Loan loss provision /
net charge-offs 115% 100% 15 %pts.-- 115% 100% 15 %pts.--
39 Nonperforming assets /
loans outstanding + OREO 0.60% 0.58% 0.02 %pts.-- 0.60% 0.56% 0.04 %pts.--
11
COMMUNITY BANK SYSTEM, INC.
SUMMARY OF OPERATIONS
KEY RATIO RECAP
1ST QUARTER 1999 AND 4TH QUARTER 1998 COMPARISONS
000s Omitted
Three Months Ended March 31, Three Months Ended,
Line ------------------------ Change Change Mar 31, Dec 31, Change Change
No. Asset Quality Components 1999 1998 Amount Percent 1999 1998 Amount Percent
------------------------ ------- ------- ------- ------- ------- ------- ------- -------
40 Nonaccruing loans $2,751 $2,532 $219 8.6% $2,751 $2,473 $278 11.2%
41 90+ days delinquent 1,709 1,578 131 8.3% 1,709 1,513 196 13.0%
42 Tot nonperforming loans $4,460 $4,110 $350 8.5% $4,460 $3,986 $474 11.9%
43 Troubled debt restructurings 156 88 68 ------ 156 134 22 16.4%
44 Other real estate 935 870 65 7.5% 935 1,182 -247 -20.9%
45 Tot nonperforming assets $5,551 $5,068 $483 9.5% $5,551 $5,302 $249 4.7%
---------------------------------
Components of Net Interest Margin
---------------------------------
46 Loan yield 8.97% 9.47% (0.50)%pts. --- 8.97% 9.23% (0.26)%pts. ---
47 Investment yield 6.26% 7.11% (0.85)%pts. --- 6.26% 5.81% 0.45 %pts. ---
48 Earning asset yield 7.91% 8.46% (0.55)%pts. --- 7.91% 7.90% 0.01 %pts. ---
49 Interest bearing deposits rate 3.80% 4.30% (0.50)%pts. --- 3.80% 3.98% (0.18)%pts. ---
50 Borrowed funds rate 6.15% 6.77% (0.62)%pts. --- 6.15% 6.44% (0.29)%pts. ---
51 Cost of all interest bearing funds 4.09% 4.56% (0.47)%pts. --- 4.09% 4.24% (0.15)%pts. ---
52 Cost of funds (includes DDA) 3.48% 3.95% (0.47)%pts. --- 3.48% 3.60% (0.12)%pts. ---
53 Cost of funds / earning assets 3.53% 4.01% (0.48)%pts. --- 3.53% 3.65% (0.12)%pts. ---
54 Net interest margin 4.38% 4.45% (0.07)%pts. --- 4.38% 4.25% 0.13 %pts. ---
55 Full tax equivalent adjustment $389 $137 $252 183.9% $389 $220 $169 76.8%
---------------------------
Average Balances for Period
---------------------------
56 Loans $915,828 $849,211 $66,617 7.8% $915,828 $912,334 $3,494 0.4%
57 Investments (excl. mkt val adj) 590,570 654,042 (63,472) -9.7% 590,570 583,156 7,414 1.3%
58 Earning assets 1,506,395 1,487,153 19,242 1.3% 1,506,395 1,495,489 10,906 0.7%
59 Total assets 1,669,044 1,648,991 20,053 1.2% 1,669,044 1,658,911 10,133 0.6%
60 Deposits 1,366,368 1,376,320 (9,952) -0.7% 1,366,368 1,382,537 -16,169 -1.2%
61 Borrowings 160,846 136,602 24,244 17.7% 160,846 132,021 28,825 21.8%
62 Total equity $120,986 $119,310 $1,676 1.4% $120,986 $121,461 -$475 -0.4%
12
Earnings per share (diluted) for first quarter 1999 reached $.50, a record
high for any first quarter and up 4.2% over the prior year. Net income equaled
the first quarter 1998 level at $3.688 million. The greater improvement in
earnings per share reflects 4.6% fewer average shares outstanding as a result of
the Company's share repurchase program. Since its inception last fall, nearly
377,000 shares or 4.9% of shares outstanding have been bought back, including
50,000 during the first quarter. Compared to fourth quarter 1998 results,
earnings per share (diluted) were lower by $.01 or 2.0% while net income was off
$84,000 or 2.2%.
Cash earnings per share (diluted) for the quarter increased to $.59, up
3.5% compared to last year. Cash or tangible return on assets (ROA) was 1.06%
versus nominal ROA at .90%. Tangible return on equity (ROE) at 14.66% exceeded
nominal ROE by 2.30 percentage points for the same period. The difference
between cash and nominal results reflects the contribution of the Company's
branch acquisitions on an economic basis, which excludes the noncash impact of
amortizing the premiums paid for the acquisitions.
Our record high results for any first quarter reflect a combination of
continued strong growth in noninterest income (up 12%, excluding net securities
gains), careful management of overhead (up 2.8%, before disposition of redundant
branch facilities), successful extension of last year's downward trend in net
charge-offs, and improved tax planning. Excluding the benefit of net securities
gains less expenses related to branch closures ($75,000 this quarter versus
$241,000 last year at this time), earnings per share were up 6.5%.
Particularly important to the Company's results compared to fourth quarter
1998 is a stabilization in net interest income, up .5% following a 4.4% decrease
from the third quarter 1998 level. The reason for the improvement was a 13 basis
point increase in the net interest margin to 4.38%. This reflects a better yield
on the Company's investment portfolio due to the impact of reduced principle
prepayments on the Company's mortgage backed securities; in addition, there was
a further reduction in our overall cost of funds due largely to downward pricing
on time deposits, a trend which began in second quarter 1998. Earning asset
growth since year end has been limited to a very modest increase in the
securities portfolio in anticipation of expected run-off. Loans outstanding were
virtually unchanged.
Noninterest income from customer services rose 17.4% to $3.6 million, with
more than half the increase related to expanded financial services income:
personal trust fees and mutual fund sales commissions climbed a combined 29%
while investment management, pension administration and consulting fees earned
by the Company's EBT/BPA business climbed nearly 25%. The balance of the
customer-based income growth came from consumer fees, largely comprised of
overdraft fees, deposit service charges, and general commissions, which together
rose over 12%, primarily reflecting pricing increases which took place during
the second quarter of 1998.
Noncustomer related revenues of $469,000 are comprised of nonrecurring
other income and miscellaneous income. All of the $277,000 in nonrecurring
income in first quarter 1999 consisted of a gain realized on the sale of a $4.6
million agency bond expected to be called within 18 months; the proceeds were
reinvested in intermediate term tax exempt securities to rebalance the portfolio
in the event of falling interest rates. This transaction compares about equally
to $266,000 in gains taken in first quarter 1998 but is less than half the
$561,000 realized in fourth quarter 1998. Total nonrecurring income of $241,000
in first quarter 1998 further considers $25,000 in losses related to the
disposition of branch properties no longer in use. Miscellaneous income consists
largly of the quarter's secondary mortgage market-related activities: $53,000
was earned on $18.2 million in loans sold while $92,000 was recognized in
mortgage servicing rights.
Noninterest income, excluding nonrecurring income, as a percent of
operating income remained at 19.0% in first quarter 1999 equal to the same
period one year earlier.
13
Loan loss provision expense decreased to under $1.2 million in the quarter,
$202,000 below the same quarter last year and $103,000 less than fourth quarter
1998. This improvement was made possible by a significant reduction in net
charge-offs, as indicated by a decrease in its ratio to average loans to .45%
from an unusually high level for our Company of .76% in the fourth quarter of
1997. The provision covered net charge-offs by 1.15 times this quarter as
opposed to equaling net charge-offs during 1998. This additional coverage was
taken as a precaution in the event the Upstate New York economy weakens after
its long sustained period of relative economic health. Net installment loan
charge-offs were down over 24% from one year earlier, reflecting steady
reduction with the exception of a slight up-tick in the intervening 1998 second
quarter. Commercial loan net charge-offs were very modest, down 39% from first
quarter 1998.
Loans decreased slightly during the first quarter, down approximately
$300,000 from the year-end 1998 level to $916.9 million. During the last twelve
months, loans have grown by $61.3 million or 7.2%. This quarter's results
compare to increases of $7.8 million during fourth quarter 1998 and $12.3
million in last year's first quarter. Though commercial loan growth at $3.6
million was well over twice the fourth quarter pace, the increase in consumer
mortgages at $3.0 million was significantly less than in the fourth quarter,
reflecting the same seasonal softness as in first quarter 1998. Consumer
indirect loans continued their downward course which began during third quarter
1998, off $2.9 million due to conservative underwriting standards on
originations and increased competition. And consumer direct loans were down by
an even greater $4.0 million; conventional borrowings ran off along with regular
amortization of the home equity portfolio. See the Company's 1998 Form 10-K for
definitions of the above four major loan categories. Origination and sale of
mortgages in the secondary market were $18.2 million for the quarter, almost
three times the amount for the same period last year.
Nonperforming loans ended the quarter at $4.5 million or .49% of loans
outstanding, up $350,000 and .01%, respectively, from one year earlier. Compared
to year-end 1998, nonperformers have risen by $474,000 or 12%. The primary
reasons for the recent increase relate to several isolated commercial real
estate and commercial business loans and a home equity loan, circumstances which
the Company is accustomed to coping with from time to time. As of year-end 1998,
when the ratio of nonperformers to loans outstanding was .43%, the comparable
peer bank ratio was .78%, ranking the Company in the favorable 30th percentile.
The ratio of loan loss reserves to loans outstanding increased slightly during
the quarter to 1.37%, resulting in coverage over nonperformers at 282%, a level
which management believes to be adequate. There continues to be a steady down
trend in the ratio of delinquencies (30 days or more) and nonaccruals to total
loans, which ended the quarter at 1.30%, improving from 1.40% at year-end 1998
and 1.82% at year-end 1997, well within the Company's internal guideline of
2.0%.
The Company's first quarter 1999 efficiency ratio (recurring overhead less
intangible amortization divided by net interest income and other income
excluding nonrecurring items) increased to 59.0% from 58.2% one year earlier.
The primary reason for this softening is the reduction in net interest income
caused by a lower margin, exacerbated over the last five quarters by the impact
of historically high mortgage refinancing on the value of the Company's premium
CMO securities. Using the premium amortization absorbed in first quarter 1998 as
a base, this amortization was $912,000 higher in first quarter 1999, which
explains approximately a 2.5 percentage point increase in the efficiency ratio
for an adjusted ratio of 56.5%. In fourth quarter 1998, the amortization was
nearly $1.5 million higher than the base period, causing the ratio to be higher
by 4.0 percentage points. As is shown by these two comparisons, the influence of
the abnormal premium amortization on the efficiency ratio is expected to lessen
as the remaining premium is consequently reduced; in addition, high mortgage
prepayments will logically diminish if the slope of the Treasury yield curve
steepens relative to current short-term rates.
14
The Company continues to focus on improving its underlying efficiency as
measured by control of overhead and improvement in the generation of noninterest
income, a share of which (largely general service charges, commissions, and
fees) helps to recoup certain operating expenses. As noted above, growth in
overhead (excluding nonrecurring branch disposal expenses of $202,000 in 1999)
was held to 2.8% or $353,000 over first quarter 1998. The largest single source
of the increase was in personnel expense (up a modest 2.2%), followed by greater
loan origination expense (up 49% due partially to timing issues), and higher
equipment expense reflecting selected branch expansion and modernization (up
16.3%).
15
Year 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather the four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions or engage in normal
business activities.
Based on its assessment, the Company determined that the majority of its
processing systems are outsourced to industry standard vendors. The Company,
through its Year 2000 Committee, has identified critical vendors and processes
and have put in place monitoring and measuring techniques to assure its critical
vendors are complying with the Federal Financial Institutions Examining Council
guidelines for Year 2000 compliance. In brief, the Company's loan, deposit, and
general ledger systems are outsourced to Fiserv, Inc.; the investment accounting
system is outsourced to First Tennessee Bank; ATM processing is outsourced to
Mellon Network Services, Inc.; and the trust accounting system employs Sungard
software. The Company is subject to quarterly reviews by the Office of the
Comptroller of the Currency (OCC), including Year 2000 compliance. The Company
presently believes that with modifications to existing software and conversions
to new software, the Year 2000 issue can be mitigated without impact on the
Company's operations.
The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the status of Year 2000 compliance
and whether appropriate contingency plans and business resumption plans are in
place in the event the vendor or customer should experience a Year 2000
compliant failure. To date, 72% of our vendors have responded that they are Year
2000 compliant and 19% have reported that they are working diligently and will
be compliant, and 9% have not yet stated their position (additional vendors have
been added since last reported). The Company is closely following the progress
of those vendors who are working on Year 2000 modification and will seek
alternate vendors for all suppliers that cannot become Year 2000 compliant or
those vendors who have failed to respond to the Company's inquiries.
The Company is utilizing both internal and external resources to reprogram
or replace, test and validate the software for Year 2000 modifications. It has
estimated that the overall Year 2000 dollar expense for upgrades and equipment
will total between $500,000 and $1,000,000. This budget estimate includes (but
is not limited to) expenditures for upgrades to item processing software and
hardware, NCR ATM's, third party reviews of outsourcing vendors, proxy testing,
PC software and hardware, the cost of service vendor mailings, follow-up
testing, customer awareness efforts and commercial customer risk assessments.
The Company completed all renovations on critical systems before April 30, 1999.
To date, the Company has incurred approximately $410,000 in expense, funded
through general operations, related to the assessment of and
renovation/replacement efforts in connection with its Year 2000 project plan. No
major information technology projects have been significantly delayed as a
result of Year 2000 compliance efforts.
The cost of the project and the date on which the Company plans to complete
the Year 2000 modifications are based on management's best estimates and
efforts, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modifications plans and other factors. The Company does not anticipate any
material disruption of service; however, there can be no guarantee that these
estimates will be achieved.
16
Supplemental Schedules
A) The following table sets forth certain information concerning average
interest-earning assets and interest-bearing liabilities and the yields and
rates thereon. Interest income and resultant yield information in the
tables are on a fully tax-equivalent basis using a marginal federal income
tax rate of 35%. Averages are computed on daily average balances for each
month in the period divided by the number of days in the period. Yields and
amounts earned include loan fees. Nonaccrual loans have been included in
interest earnings for purposes of these computations.
First Quarter Ended March 31,
-----------------------------------------------------------------------------
1999 1998
-----------------------------------------------------------------------------
(000's omitted except yields Avg. Amt. of Avg. Avg. Amt. of Avg.
and rates) Balance Interest Yield/Rate Balance Interest Yield/Rate
Paid Paid
ASSETS:
-----------------------------------------------------------------------------
Interest-earning assets:
Federal funds sold $ 0 $ 0 0.00% $ 5,106 $ 68 5.36%
Time deposits in other banks 44 0 3.91% 35 0 5.70%
Taxable investment securities 525,192 7,906 6.11% 612,498 10,693 7.08%
Nontaxable investment securities 65,334 1,214 7.54% 20,303 427 8.53%
Loans (net of unearned discount) 915,825 20,249 8.97% 849,211 19,839 9.47%
----------- ---------
Total interest-earning assets 1,506,395 29,369 7.91% 1,487,153 31,027 8.46%
Noninterest earning assets
Cash and due from banks 60,613 60,407
Premises and equipment 24,773 23,658
Other Assets 81,030 85,340
Less:allowance for loans (12,405) (12,321)
Net unrealized gains/(losses) on
available-for-sale portfolio 8,638 4,755
----------- ---------
Total $ 1,669,044 $ 1,648,992
=========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities
Savings deposits $ 522,730 2,766 2.15% $ 504,737 3,128 2.51%
Time deposits 615,011 7,905 5.21% 667,313 9,312 5.66%
Short-term borrowings 61,022 732 4.87% 16,131 227 5.70%
Long-term borrowings 99,824 1,706 6.93% 120,471 2,055 6.92%
------------------------- ----------------------
Total interest-bearing 1,298,587 13,109 4.09% 1,308,652 14,722 4.56%
liabilities
Noninterest bearing liabilities
Demand deposits 228,627 204,270
Other liabilities 20,844 16,759
Shareholders' equity 120,986 119,311
----------- ---------
Total $ 1,669,044 $ 1,648,992
=========== =========
Net interest earnings $ 16,260 $ 16,305
========== ==========
Net yield on interest-earning 4.38% 4.45%
assets
========== ===========
Federal tax exemption on nontaxable investment
securities included in interest income 389 137
17
B) The change in net interest income may be analyzed by segregating the volume
and rate components of the changes in interest income and interest expense
for each underlying category.
The volume and rate components of interest income and interest expense for each
underlying category are as follows:
------------------------------------------------------------
1st Quarter 1999 Compared to 1st Quarter 1998
------------------------------------------------------------
Increase (Decrease) Due to Change
In (1)
Volume Rate Net Change
Interest earned on:
Federal funds sold and securities
purchased under agreements to resell $ (34) $ (34) $ (68)
Time deposits in other banks 1 (1) -
Taxable investment securities (1,421) (1,366) (2,787)
Nontaxable investment securities 1,130 (343) 787
Loans (net of unearned 5,321 (4,911) 410
discounts)
Total interest-earning assets (2) 2,440 (4,098) (1,658)
Interest paid on:
Savings deposits 651 (1,013) (362)
Time deposits (698) (709) (1,407)
Short-term borrowings 734 (229) 505
Long-term borrowings (370) 21 (349)
Total interest-bearing liabilities (112) (1,501) (1,613)
Net interest earnings (2) $ 919 $ (964) $ (45)
(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of change in each.
(2) Changes due to volume and rate are computed from the respective changes in
average balances and rates of the totals; they are not a summation of the
changes of the components.
18
C) The following table sets forth information by category of noninterest
expenses of the Company for the periods indicated.
Three Months Ended March 31,
(000's omitted)
----------------------------------------------------------------------
Change Change
1999 1998 Amount Percent
----------------------------------------------------------------------
Personnel expense $ 6,585 $ 6,444 $ 141 2.2%
Net occupancy expense 1,058 1,071 (13) -1.2%
Equipment expense 896 802 94 11.7%
Professional fees 458 381 77 20.2%
Data processing expense 900 973 (73) -7.5%
Amortization 1,158 1,169 (11) -0.9%
Stationary and supplies 297 295 2 0.7%
Deposit insurance premiums 48 49 (1) -2.0%
Expense on disposition of branch
properties 202 0 202 100.0%
Other 1,617 1,480 137 9.3%
----- ----- ----- -----
Total $13,219 $12,664 $ 555 4.4%
Total operating expenses as a
percentage of average assets 3.21% 3.11% 0.10% pts
Efficiency ratio 59.0% 58.2% 0.8% pts
(excl. nonrecurring items and intangibles)
D) The amounts of the Company's loans outstanding (net of deferred loan fees
or costs) at the dates indicated are shown in the following table according
to type of loan:
(000's omitted) As of March 31,
--------------------------------------------------------------------
Change Change
1999 1998 Amount Percent
--------------------------------------------------------------------
Real estate mortgages:
Residential $ 300,730 $ 271,249 $ 29,481 10.9%
Commercial loans secured by
real estate 119,526 98,100 21,426 21.8%
Farm 12,188 10,794 1,394 12.9%
Total 432,444 380,143 52,301 13.8%
Commercial, financial, and agricultural
Agricultural 22,940 23,221 (281) -1.2%
Commercial and financial 157,307 150,501 6,806 4.5%
Total 180,247 173,722 6,525 3.8%
Installment loans to
individuals:
Direct 99,736 98,960 776 0.8%
Indirect 201,537 199,707 1,830 0.9%
Student and other 2,501 4,748 (2,247) -47.3%
Total 303,774 303,415 359 0.1%
Other Loans 1,574 563 1,011 179.6%
Gross Loans 918,039 857,843 60,196 7.0%
Less: Unearned discounts 1,135 2,284 (1,149) -50.3%
Net loans 916,904 855,559 61,345 7.2%
Reserve for possible loan losses 12,594 12,434 160 1.3%
Loans net of loan loss reserve $ 904,310 $ 843,125 $ 61,185 7.3%
19
The following table presents information concerning the aggregate amount of
nonperforming assets:
As of March 31,
(000's omitted)
--------------------------------------------------------
Change Change
1999 1998 Amount Percent
--------------------------------------------------------
Loans accounted for on a
nonaccrual basis $ 2,751 $ 2,532 $ 219 8.6%
Accruing loans which are
contractually past due 90 days
or more as to principal or
interest payments 1,709 1,578 131 8.3%
----- ----- ----- -----
Total nonperforming loans 4,460 4,110 350 8.5%
Loans which are "troubled debt
restructurings" as defined in
Statement of Financial Accounting
Standards No. 15 "Accounting by
Debtors and Creditors for
Troubled Debt Restructurings" 156 0 156
Other Real Estate 935 870 65 7.5%
----- ----- ----- -----
Total nonperforming assets $ 5,551 $ 4,980 $ 571 11.5%
Ratio of allowance for loan losses
to period-end loans 1.37% 1.45% (.08)% pts. -----
Ratio of allowance for loan losses
to period-end nonperforming loans 282.4% 303.0% (20.6)% pts. -----
Ratio of allowance for loan losses
to period-end nonperforming assets 226.9% 249.7% (22.8)% pts. -----
Ratio of nonperforming assets to period-end
total loans and other real estate owned 0.60% 0.58% .02% pts. -----
The impact of interest not recognized on nonaccrual loans, and interest
income that would have been recorded if the restructured loans had been current
in accordance with their original terms, was immaterial. The Company's policy is
to place a loan on a nonaccrual status and recognize income on a cash basis when
it is more than ninety days past due, except when in the opinion of management
it is well secured and in the process of collection.
20
The following table summarizes loan balances at the end of each period
indicated and the daily average amount of loans. Also summarized are
changes in the allowance for possible loan losses arising from loans
charged off and recoveries on loans previously charged off and additions to
the allowance which have been charged to expenses.
Three Months Ended March 31,
(000's omitted)
-------------------------------------------
Change Change
1999 1998 Amount Percent
-------------------------------------------
Amount of loans outstanding at end
of period $ 918,039 $ 857,842 $ 60,197 7.0%
Daily average amount of loans (net 915,825 849,211 66,614 7.8%
of unearned discount)
Balance of allowance for possible
loan losses at beginning of period 12,441 12,434 7 0.1%
Loans charged off:
Commercial, financial, and 126 179 (53) -29.6%
agricultural
Real estate construction 0 0
Real estate mortgage 30 43 (13) -30.2%
Installment 1,184 1,390 (206) -14.8%
Total loans charged off 1,340 1,612 (272) -16.9%
Recoveries of loans previously
charged
off:
Commercial, financial, and 60 70 (10) -14.3%
agricultural
Real estate construction 0 0
Real estate mortgage 3 0
Installment 261 171 90 52.6%
Total recoveries 324 241 83 34.4%
Net loans charged off 1,016 1,371 (355) -25.9%
Additions to allowance charged to
expense 1,169 1,371 (202) -14.7%
Balance at end of period $ 12,594 $ 12,434 $ 160 1.3%
Ratio of net chargeoffs to average
loans outstanding 0.45% 0.65% (.20%) -----
21
G) The following table sets forth information by category of noninterest
income for the Company for the periods indicated.
(000's omitted) Three Months Ended March 31,
------------------------------------------------------------
1999 1998 Change Change
Amount Percent
------------------------------------------------------------
Personal trust services $ 351 $ 274 $ 77 28.1%
Mutual fund and related investment products 324 250 74 29.6%
BPA/EBT income 694 557 137 24.6%
Deposit service charges 862 814 48 5.9%
Overdraft fees 717 584 133 22.8%
Other services charges and fees 686 617 69 11.2%
--- --- -- -----
Total customer related revenue 3,634 3,096 538 17.4%
----- ----- --- -----
Security gains 277 266 11 4.1%
Disposition of branch properties 0 (25) 25 100%
- ---- -- ----
Nonrecurring other income 277 241 36 14.9%
Miscellaneous income 192 346 (154) (52.0%)
--- --- ----- -------
Total $ 4,103 $ 3,683 $ 420 11.4%
===== ===== === =====
Total noninterest income (excluding nonrecurring
items) as a percentage of operating income 19.0% 19.0%
22
art 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:
(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
- CBNA Treasury Management Corporation, State of Delaware
- Community Investment Services, Inc., State of New York
- CBNA Preferred Funding Corporation, State of Delaware
b) Reports on Form 8-K:
N/A
23
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 13, 1999
/s/ Sanford A. Belden
Sanford A. Belden, President and
Chief Executive Officer
Date: May 13, 1999
/s/ Charles M. Ertel
Charles M. Ertel, Assistant Treasurer
(Chief Accounting Officer)
24