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, 1997
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 -- 7,518,262 shares as of April 30, 1997.
<PAGE>
INDEX
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
Part I. Information
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets --
March 31, 1997, December 31, 1996 and March 31, 1996
Consolidated statements of income -- Three months ended March
31, 1997 and 1996.
Consolidated statements of cash flows -- Three months ended
March 31, 1997 and 1996
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
<PAGE>
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1997 1996 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $46,467,487 $52,534,726 $69,022,782
- -------------------------------------------------------------------------------------------------------------------------
TOTAL CASH AND CASH EQUIVALENTS 46,467,487 52,534,726 69,022,782
Investment securities
U.S. Treasury 2,989,454 2,988,749 8,509,441
U.S. Government agencies and corporations 321,735,928 285,280,374 241,365,255
States and political subdivisions 12,557,967 18,248,144 16,663,625
Mortgage-backed securities 242,991,979 250,349,672 214,249,615
Federal Reserve Bank 2,134,200 1,402,850 1,395,750
Other securities 26,722,949 20,283,502 20,083,043
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES 609,132,477 578,553,291 502,266,729
Loans 679,031,322 658,366,564 587,540,411
Less: Unearned discount 4,853,448 5,892,689 11,044,954
Reserve for possible loan losses 8,400,477 8,127,752 7,186,385
- -------------------------------------------------------------------------------------------------------------------------
NET LOANS 665,777,397 644,346,123 569,309,072
Bank premises and equipment 16,563,027 16,782,034 16,888,080
Accrued interest receivable 13,288,228 10,790,071 9,856,481
Intangible assets 30,567,479 31,241,489 33,303,314
Other assets 13,488,215 9,616,928 7,480,640
- -------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,395,284,310 $1,343,864,662 $1,208,127,098
=========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits
Noninterest bearing $137,976,026 $144,351,214 $145,986,499
Interest bearing 923,084,638 882,862,042 913,521,838
- -------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 1,061,060,664 1,027,213,256 1,059,508,337
Federal funds purchased 34,800,000 31,800,000 10,000,000
Term borrowings 150,000,000 165,000,000 25,550,000
Mandatorily redeemable capital securities of subsidiary 29,798,625 0 0
Accrued interest and other liabilities 13,380,963 10,499,179 11,580,612
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,289,040,252 1,234,512,435 1,106,638,949
- -------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock $100 stated value 0 4,500,000 4,500,000
Common stock 7,518,262 4,671,504 4,602,894
Surplus 31,102,618 33,584,773 32,981,986
Undivided profits 67,822,605 65,691,025 58,799,981
Unrealized gains (losses) on available for sale securities (158,962) 947,853 641,327
Shares issued under employee stock plan - unearned (40,465) (42,928) (38,039)
- -------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 106,244,058 109,352,227 101,488,149
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,395,284,310 $1,343,864,662 $1,208,127,098
=========================================================================================================================
</TABLE>
See notes to consolidated financial statements
<PAGE>
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest Income:
Interest and fees on loans $15,773,634 $13,479,523
Interest and dividends on investments:
U.S. Treasury 66,900 160,024
U.S. Government agencies and corporations 5,993,539 4,512,712
States and political subdivisions 220,182 259,657
Mortgage-backed securities 4,470,233 3,576,185
Other securities 395,663 365,550
Interest on federal funds sold 127,443 322,506
Interest on deposits at other banks 414 0
- ---------------------------------------------------------------------------------------------------------------
Total interest income 27,048,008 22,676,157
- ---------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits
Savings 2,332,800 2,557,772
Time 7,032,560 6,539,406
Interest on federal funds purchased and
term borrowings 2,824,132 374,099
Interest on mandatorily redeemable capital securities
of subsidiary 488,625 0
- ---------------------------------------------------------------------------------------------------------------
Total interest expense 12,678,117 9,471,277
- ---------------------------------------------------------------------------------------------------------------
Net interest income 14,369,891 13,204,880
Less: Provision for possible loan losses 730,000 588,174
- ---------------------------------------------------------------------------------------------------------------
Net Interest income after provision for loan losses 13,639,891 12,616,706
- ---------------------------------------------------------------------------------------------------------------
Other income:
Fiduciary and investment services 381,539 423,165
Service charges on deposit accounts 950,564 973,863
Commissions on investment products 221,289 160,851
Other service charges, commissions and fees 766,673 390,897
Other operating income 6,180 4,260
Investment security gain (loss) 0 0
- ---------------------------------------------------------------------------------------------------------------
Total other income 2,326,245 1,953,036
- ---------------------------------------------------------------------------------------------------------------
Other expenses:
Salaries and employee benefits 5,261,450 4,703,731
Occupancy expense, net 802,565 802,087
Equipment and furniture expense 629,020 573,518
Amortization of intangible assets 674,010 702,399
Other 2,812,224 2,469,862
- ---------------------------------------------------------------------------------------------------------------
Total other expenses 10,179,269 9,251,597
- ---------------------------------------------------------------------------------------------------------------
Income before income taxes 5,786,867 5,318,145
Income taxes 2,122,000 2,180,000
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
NET INCOME $3,664,867 $3,138,145
===============================================================================================================
Earnings per share $0.47 $0.41
===============================================================================================================
</TABLE>
<PAGE>
COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For Three Months Ended March 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities:
Net income 3,664,867 3,138,145
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 506,127 485,262
Net amortization of intangible assets 674,010 702,399
Net accretion of security premiums and discounts 13,034 (675,655)
Provision for loan losses 730,000 588,174
Provision for deferred taxes (534,417) 140,010
(Gain)\Loss on sale of investment securities 0 0
(Gain)\Loss on sale of loans (6,179) (4,536)
(Gain)\Loss on sale of assets 0 276
Change in interest receivable (2,498,157) (705,978)
Change in other assets and other liabilities 324,421 2,395,952
Change in unearned loan fees and costs (122,633) (94,536)
- ------------------------------------------------------------------------------------------------------------
Net Cash Provided By Operating Activities 2,751,073 5,969,513
- ------------------------------------------------------------------------------------------------------------
Investing Activities:
Proceeds from sales of investment securities 0 0
Proceeds from maturities of held to maturity investment securities 9,878,731 5,981,751
Proceeds from maturities of available for sale investment securities 2,426,408 17,553,153
Purchases of held to maturity investment securities (5,390,851) (32,237,521)
Purchases of available for sale investment securities (39,390,368) (25,429,259)
Net change in loans outstanding (22,032,463) (16,622,903)
Capital expenditures (287,118) (443,542)
Premium paid for branch acquisitions 0 (29,558)
- ------------------------------------------------------------------------------------------------------------
Net Cash Used By Investing Activities (54,795,661) (51,227,879)
- ------------------------------------------------------------------------------------------------------------
Financing Activities:
Net change in demand deposits, NOW accounts, and savings accounts (2,993,565) 24,780,429
Net change in certificates of deposit 36,840,973 17,781,684
Net change in Federal Funds Purchased 3,000,000 10,000,000
Payments on term borrowings (15,000,000) 0
Issuance of mandatorily redeemable capital securities of subsidiary 29,798,625 0
Issuance (retirement) of common and preferred stock (4,135,397) 30,076
Cash dividends (1,533,287) (1,214,144)
- ------------------------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 45,977,349 51,378,045
- ------------------------------------------------------------------------------------------------------------
Change In Cash And Cash Equivalents (6,067,239) 6,119,679
Cash and cash equivalents at beginning of year 52,534,726 62,903,103
- ------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 46,467,487 69,022,782
============================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid For Interest $10,464,668 $8,134,677
============================================================================================================
Cash Paid For Income Taxes $1,620,380 $401,535
============================================================================================================
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
AND INVESTING ACTIVITIES:
Dividends declared and unpaid $1,353,287 $1,235,415
============================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Community Bank System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
March 1997
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, 1997
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1997.
Note B -- Recent Events
On January 29, 1997, Community Bank System, Inc. formed a wholly-owned
subsidiary, Community Capital Trust I, a newly-formed Delaware business trust.
The trust issued $30 million of 9.75% Company-obligated Mandatorily Redeemable
Capital Securities, Series A of Community Capital Trust I Holding Solely Parent
Debentures. The Company borrowed the proceeds of the Capital Securities from its
subsidiary by issuing Deeply Subordinated Junior Debentures having substantially
similar terms. The Capital Securities mature in year 2027 and are treated as
Tier I capital by the Federal Reserve Bank of New York.
On March 10, 1997, Community Bank System, Inc. redeemed all of its
remaining $4.5 million of 9.0% Cumulative Perpetual Preferred Stock at a 4%
premium from the proceeds of the issuance of its Junior Subordinated Debentures.
A two-for-one stock split was approved by shareholders at a Special
Shareholders Meeting held on February 19, 1997. Shareholders of record at the
close of business on February 10, 1997 were issued one additional share of
common stock for each share already held on March 12, 1997.
On February 11, 1997, Community Bank, N.A. signed an agreement with
KeyBank of New York to acquire eight branches with total deposits of
approximately $161 million in Western New York from KeyBank of New York.
Approximately $28 million in loans will be purchased in this transaction. These
branches are scheduled to close in June of 1997.
On March 21, 1997, Community Bank, N.A. signed a Purchase and
Assumption Agreement with Fleet Bank to acquire twelve branches in Northern New
York with deposits of approximately $182 million and loans totaling
approximately $71 million. These branches are scheduled to close in June of
1997. This acquisition is subject to regulatory approval.
Effective for periods ending after December 15, 1997, including
interim periods, the Company adopted FASB 128 "Earnings Per Share". The
accompanying presentations of earnings per share are in accordance with APB 15.
The adoption of this pronouncement is not expected to have a material effect.
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, 1997 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, 1996 as provided by the Federal Reserve System; the peer group is comprised
of 126 bank holding companies having $1 to $3 billion in assets.
<PAGE>
I. EARNINGS PERFORMANCE SUMMARY
<TABLE>
<CAPTION>
Three Months Ended Change
3/31/97 3/31/96 Amount Percent
(000's)
<S> <C> <C> <C> <C>
Net Income $3,665 $3,138 $527 16.8%
Earnings per share $0.47 $0.41 $0.06 14.6%
Weighted average
shares outstanding 7,620 7,427 193 2.6%
Return on average assets 1.08% 1.08% 0.01% N/A
Average assets $1,373,667 $1,173,828 $199,839 17.0%
Return on average
shareholders' equity 13.79% 12.76% 1.03% N/A
Average shareholders' equity $108,887 $100,223 $8,664 8.6%
Percentage of average shareholders'
equity to average assets 7.93% 8.54% -0.61% N/A
</TABLE>
* May not foot due to rounding
A. Net Income Trend
Net income for the first quarter of 1997 rose 16.8% over the same period
last year to $3.665 million while earnings per share were up 14.6% to $.47.
Compared to fourth quarter 1996, this quarter's net income and earnings per
share were virtually unchanged. All per share results have been adjusted for the
company's 2 for 1 stock split effective March 12, 1997. Return on equity rose
1.03 percentage points from the three months ended March 31, 1996 to 13.79% for
the same 1997 period, while tangible or cash return on equity reached 15.32%.
<PAGE>
B. Balance Sheet Trends
Loan growth represented the strongest first quarter in CBSI's history,
nearly 33% more than in first quarter 1996. During the last year, loans have
climbed a record 16.9%, about one third of which came from new markets opened by
the mid-1995 branch purchases from The Chase Manhattan Bank, N.A.
Loans outstanding increased by $21.7 million or 3.3% during the first
quarter, significantly better than the $16.3 million or 2.9% growth during first
quarter 1996. The primary components of the increase in loans since year end
1996 are indirect consumer loans (up $9.4 million), predominantly reflecting
automobile financing through an established dealer network; business lending
products (up $7.3 million), largely due to expanded floor plan lending to
automobile dealers; consumer direct loans (up $3.1 million), reflecting limited
growth in direct installment lending in certain of the bank's new markets; and
consumer mortgages (up $1.8 million, net of $1.5 million in originations sold
service-retained in the secondary market), growth of which has moderated because
of seasonal slowdown and higher financial market rates. The portfolio contains
no credit card receivables.
Investments (excluding market value adjustment) totaled $609.4 million for
the quarter just ended, up $32.5 million (5.6%) from December 31, 1996
attributable to favorable buying opportunities in January and March. Since March
31, 1996, there has been $108.3 million (21.6%) in investment growth, almost
entirely funded by a variety of capital market borrowings.
Total deposits have increased $33.8 million (3.3%) since December 31,
1996, largely the result of seasonal inflows of municipal deposits. During the
last twelve months, total deposits are up $1.6 million or less than 1%,
reflecting growth in individual and business deposits being almost completely
offset by declines in municipal deposits.
C. Income Statement Trends
Major positive factors for the quarter as compared to fourth quarter 1996
were an increase in net interest income of $137,000 on a $52.2 million expansion
in earning assets, a $340,000 reduction in loan loss provision expense made
possible by lower net charge-offs following a more aggressive posture taken in
the fourth quarter, and a lower effective tax rate. Offsetting these
improvements was a combination of $154,000 less in noninterest income, due to
reduced estate and overdraft fees and the lack of securities gains, and $699,000
more in overhead expense caused by annual salary and benefits increases typical
of the first quarter, seasonally higher advertising and occupancy expense, and a
more normal level of foreclosed property expense following a fourth quarter
recovery.
First quarter net interest income rose 8.8% or $1.2 million versus the
same quarter a year ago. The improvement reflects earning asset growth of $205
million, slightly more than half of which represents an expansion of the
company's investment portfolio largely during the second quarter of 1996 when
financial market rates were attractive. Continued steady loan growth throughout
the last twelve months along with CBSI's targeted investment strategy was funded
by greater borrowings, nearly half or $100 million with original terms of one
year or more. The company is expected to have the capacity to pay down all its
borrowings with the lower cost deposits of the two recently announced branch
acquisitions (discussion to follow). The net interest margin for the quarter was
down 42 basis points from one year ago to 4.62%, reflective of higher borrowing
costs in part resulting from the issuance of $30 million in 9.75% Trust
Preferred securities.
Noninterest income rose nicely, up over 19%, due to improved sales of
mutual funds as well as the contribution of the company's July 1996 purchase of
Benefit Plans Administrators (BPA) of Utica, NY.
<PAGE>
The company's first quarter 1997 efficiency ratio (overhead compared to
recurring operating income) was unchanged from one year earlier at 60.6%.
Recurring operating income (net interest income plus noninterest income) and
overhead both increased by 10%. Excluding the addition of BPA's overhead in
1997, noninterest expense rose 5.8% reflecting annual personnel expense
increases, the impact of stock-based director compensation, a one-time
consulting fee, higher advertising expense, greater data processing expense
consistent with higher transaction volumes, and increased problem asset costs,
net of the scheduled reduction in intangible amortization expense. Noninterest
income increased 1.5% before the contribution of BPA's pension administration
revenues and related investment management fees earned through CBNA's trust
department. The first quarter efficiency ratio excluding the impact of
intangibles rose slightly to 56.6% from a year earlier.
Despite higher pretax income, first quarter 1997 income taxes fell by
$58,000 from the same 1996 period because of increases in non-taxable investment
income. As a result, the tax effective rate was reduced to 36.7% versus 41.0%
one year earlier. CBSI's marginal tax rates are 35% for federal and 9% for state
tax purposes.
D. Asset Quality
Asset quality remains good. The ratio of net charge-offs to loans for
first quarter 1997 was approximately the same as one year ago at .28% while the
ratio of non-performing loans to loans outstanding was up slightly to .49%,
still less than half the level of peer banks nationwide based on data available
as of year-end 1996.
First quarter 1997 loan loss provision expense was $142,000 more than the
prior year's level, reflecting coverage of a $79,000 increase in net charge-offs
caused by indirect installment loans and the company's practice of increasing
the loan loss reserve consistent with loan growth so that the reserve/loans
outstandings ratio is maintained at 1.25%. Nonperforming loans rose $663,000 or
25% from one year earlier to $3.296 million, with commercial and installment
loans sharing equally in the increase. Despite this softening during the last
twelve months from the company's unusually favorable levels of asset quality
over the last several years, loan portfolio credit strength remains better than
industry norms; as of year-end 1996 data, CBSI's nonperforming loans/loans
outstanding ratio was in the very strong 15th peer percentile. Combined
delinquencies and nonaccruals were 1.38% of total loans at quarter end compared
to 1.33% one year earlier and 1.46% at year end, all measures well within the
company's internal guideline of 2.0%. Besides present coverage of the loan loss
reserve over nonperformers being 2.6 times versus peer bank coverage of 2.1
times as of December 31, 1996, nearly 13% of the reserve is available for
absorbing general, unforeseen loan losses after allocation by specific customer
and loan type.
E. Capital and Other Trends
As of March 31, 1997, the tier I leverage ratio was 7.74% versus 5.75%
twelve months earlier. The large increase in the ratio is attributable to the
impact of the issuance of $30 million in Trust Preferred securities offset by
the redemption in early March of the remaining 45,000 shares ($4.5 million) of
more expensive cumulative perpetual preferred stock. Growth in the present ratio
also considers the favorable earnings during the last 12 months and scheduled
amortization of intangible assets, partially offset by the continued strategy to
leverage the balance sheet when favorable investment opportunities present
themselves. Compared to December 31, 1996, the ratio was up 1.98 percentage
points due to the Trust Preferred offering, first quarter earnings and
intangible amortization, partially offset by investment growth funded with
capital market borrowings.
As a result of the aforementioned reasons, the tier I risk-based capital
ratio of March 31, 1997 was 13.95%, or 328 basis points higher than it was as of
March 31, 1996. This compares to a 6% "well-capitalized " regulatory minimum.
<PAGE>
Book value per share increased 7.3% from March 31, 1996 to $14.13 as of
the most recent quarter end, while tangible book value per share (which
additionally reflects intangible amortization) has risen nicely to $10.07, up
16.4% over the same period.
The bank's liquidity level is very favorable as of March 31, 1997. In the
event of a liquidity crisis, almost $250 million (essentially short term assets
minus short term liabilities) or 17.8% of assets could be converted into cash
within a 30-day time period. Over a 90 day time period, 16.7% of assets could be
converted to cash.
As shown by the statement of cash flows preceding the Management
Discussion and Analysis, the bank's cash and cash equivalents decreased by $6.1
million during the quarter to $46.5 million as of March 31, 1997, a level $22.6
million lower than one year earlier. The reduction in cash and cash equivalents
during first quarter 1997 reflects earning asset expansion (about 60% of which
related to net growth in investment securities) more than offsetting growth in
certificates of deposit and net capital market borrowings. Net cash provided by
operating activities during first quarter 1997 offset approximately one third of
the net cash shortfall of investing activities over financing activities.
F. Acquisitions
Besides strong earnings growth, the first quarter was marked by
agreements with KeyCorp and Fleet Financial Group to purchase eight branches in
Western New York and twelve branches in Northern New York, respectively. The
combined impact of these transactions, both of which are expected to close by
mid-year, is the addition of approximately $343 million in deposits and the
purchase of up to $95 million in loans. Both acquisitions are anticipated to be
immediately accretive to earnings after payment of certain one-time expenses. As
previously discussed, capital to fund this expansion was raised earlier in the
quarter through the issuance of $30 million in Trust Preferred securities, a
portion of which was used to redeem the remainder of more expensive cumulative
perpetual preferred stock issued in mid-1995. All these accomplishments taken
together, CBSI's assets are expected to increase by 14% over year-end 1996
levels to $1.5 billion by mid year, establishing what management considers a
strong platform for continued earnings growth.
<PAGE>
II. SUPPLEMENTAL INFORMATION TO EARNINGS PERFORMANCE SUMMARY
The following sections of this report discuss more fully certain of the
balance sheet and earnings trends summarized above.
A. Net Interest Income
Changes in net interest income reflect changes in both net interest
margin and earning asset levels.
On a tax-equivalent basis, net interest income for first quarter 1997
increased $1.1 million (8.6%) over the same 1996 period to $14.5 million. This
reflects a $206 million (19.4%) increase in average earning assets with $92.5
million in loan growth and $113.5 million in investment growth. The net interest
margin was 41 BP lower than a year earlier . This was largely due to the 52
basis point (BP) higher cost of funds resulting from a $188 million increase in
average capital market borrowings, which included the aforementioned issuance of
the $30 million of 9.75% Trust Preferred stock. Partially offsetting was a 5 BP
increase in earning asset yields largely due to $321,000 in non-recurring income
from adopting the practice of recognizing loan late fees when incurred rather
than when collected. Excluding non-recurring income, the first quarter net
interest margin would have been 4.52%.
Compared to fourth quarter 1997, there was a $124,000 increase in net
interest income. The change is attributable to earning asset growth, partially
offset by the 8 BP lower net interest margin for the reasons previously
outlined.
<PAGE>
The table below shows these underlying dynamics.
<TABLE>
<CAPTION>
For the Quarter Net Net Yield on Cost Average
Ended: Interest Interest Earning of Earning
(000's) Income Margin Assets Funds Assets
(a) (a) (a) (b)
-------------------------------------------------------------------
Amount and Change from Preceding Quarter
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
March 31, 1996
Amount $13,325 5.04% 8.62% 3.59% $1,063,977
Change ($142) -0.01% 0.02% 0.02% 0.5%
June 30, 1996
Amount $13,698 4.90% 8.51% 3.64% $1,124,059
Change $373 -0.14% -0.11% 0.05% 5.6%
September 30, 1996
Amount $14,355 4.82% 8.55% 3.78% $1,185,913
Change $656 -0.09% 0.04% 0.14% 5.5%
December 31, 1996
Amount $14,350 4.70% 8.55% 3.91% $1,214,708
Change ($5) -0.12% 0.00% 0.13% 2.4%
March 31, 1997
Amount $14,474 4.62% 8.67% 4.11% $1,269,910
Change $124 -0.08% 0.12% 0.20% 4.5%
Change from
March 31, 1996 to
March 31, 1997
Amount $1,149 -0.41% 0.05% 0.52% $205,934
% Change 8.6% --- --- --- 19.4%
</TABLE>
Note: (a) All net interest income, margin, and earning asset yield figures are
full-tax equivalent.
(b) Interest expense divided by total deposits and borrowed funds.
* May not foot due to rounding
Despite the high proportion (88th peer percentile) of the bank's assets being in
investments (whose yields are relatively low compared to loans), the net
interest margin is in the favorable 62nd peer percentile as of December 31,
1996. This is attributable to high earning asset yields being in the favorable
73rd percentile and a low cost of funds being in the 46th percentile.
<PAGE>
B. Capital
The common shares of Community Bank System, Inc. are traded in the NASDAQ
National Market System under the symbol CBSI. Stock price activity, numbers of
shares outstanding, cash dividends declared and share volume traded are shown
below. Note that all per share figures have been adjusted for CBSI's 2 for 1
stock split effective March 12, 1997.
<TABLE>
<CAPTION>
For the Quarter Market Market Market # of Cash Share
Ended: Price Price Price Shares Dividend Volume
High Low Close Outstanding Declared Traded
---------------------------------------------------------------------------------------
Amount and Change from Preceding Quarter
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
March 31, 1996
Amount $16.38 $15.13 $15.50 7,364,630 $0.17 316,309
Change -4.4% -2.4% -3.1% 0.1% 0.0% -49.7%
June 30, 1996
Amount $16.25 $15.38 $15.57 7,364,630 $0.17 447,194
Change -0.8% 1.7% 0.4% 0.0% 0.0% 41.4%
September 30, 1996
Amount $17.75 $17.00 $17.13 7,450,406 $0.18 445,958
Change 9.2% 10.6% 10.0% 1.2% 9.1% -0.3%
December 31, 1996
Amount $20.13 $17.00 $19.63 7,474,406 $0.18 624,249
Change 13.4% 0.0% 14.6% 0.3% 0.0% 40.0%
March 31, 1997
Amount $24.25 $19.25 $23.50 7,518,262 $0.18 652,661
Change 20.5% 13.2% 19.7% 0.6% 0.0% 4.6%
Change from
March 31, 1996 to
March 31, 1997
Amount $7.88 $4.13 $8.00 153,632 $0.02 336,352
% Change 48.1% 27.3% 51.6% 2.1% 9.1% 106.3%
</TABLE>
CBSI's stock closed first quarter 1997 at $23.50, up 51.6% from one year
earlier when it closed at $15.50. The volume of shares traded at 652,661 was
106% more than during first quarter 1996, due largely to NASDAQ's standard
practice of not adjusting the historical volume of shares traded in the event of
a stock split.
The cash dividend shown above reflects a 1.5 cent (9%) per share increase
in the quarterly dividend per common share that was effective in third quarter
1996. This most recent increase was the sixth dividend increase within five
years. The 1996 common dividend payout of 36.9% has decreased slightly (with
higher earnings) from the same 1997 period but remains within the company's
targeted 30-40% guideline.
<PAGE>
C. Loans
Loans outstanding, net of unearned discount, reached a record $674.2
million as of March 31, 1997, a very favorable $ 97.7 million (16.9%) growth in
the last twelve months. Outstandings have now climbed for nineteen consecutive
quarters. As shown in the table below, CBNA is predominantly a retail bank, with
almost 68% of its outstandings spread across three basic consumer loan types.
<TABLE>
<CAPTION>
For the Quarter Consumer Consumer Consumer Business Total Yield on
Ended: Direct Indirect Mortgages Lending Loans Loans
(000's)
-------------------------------------------------------------------------------
Quarterly
Amount and Change from Preceding Quarter Average
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
March 31, 1996
Amount $105,759 $138,821 $150,301 $181,614 $576,495 9.52%
Change 1.4% 2.7% 2.6% 4.3% 2.9% (0.13)
June 30, 1996
Amount $105,895 $149,197 $155,579 $188,868 $599,538 9.44%
Change 0.1% 7.5% 3.5% 4.0% 4.0% (0.08)
September 30, 1996
Amount $109,137 $159,996 $161,388 $196,171 $626,693 9.36%
Change 3.1% 7.2% 3.7% 3.9% 4.5% (0.08)
December 31, 1996
Amount $122,087 $167,629 $151,691 $211,068 $652,474 9.46%
Change 11.9% 4.8% -6.0% 7.6% 4.1% 0.10
March 31, 1997
Amount $125,219 $177,051 $153,512 $218,396 $674,178 9.67%
Change 2.6% 5.6% 1.2% 3.5% 3.3% 0.20
Change from
March 31, 1996 to
March 31, 1997
Amount $19,460 $38,230 $3,211 $36,781 $97,682 0.14%
Change 18.4% 27.5% 2.1% 20.3% 16.9% N/A
Loan mix
March 31, 1996 to 18.3% 24.1% 26.1% 31.5% 100.0%
March 31, 1997 18.6% 26.3% 22.8% 32.4% 100.0%
Change 0.2% 2.2% -3.3% 0.9% ---
</TABLE>
* May not foot due to rounding
Almost 40% of the bank's loan growth in the last twelve months came from
the indirect lending portfolio (applications taken at dealer locations), which
grew 27.5%. This reflects good automobile demand industry-wide, as well as
continued greater emphasis on this product line in the bank's Southern Region.
Almost 38% of the bank's loan growth in the last twelve months came from
the generally prime-based business lending portfolio, which increased 20.3%
reflecting strong business development efforts.
The remaining growth over this period resulted from a 2.1% increase in
consumer mortgages and an 18.4% growth in consumer direct loans (applications
taken at branch locations). Both increases reflect a change in late October 1996
to reporting fixed rate Home Equities in Consumer Direct Loans instead of
Consumer Mortgages.
Due, in part, to the $321,000 loan late fee accounting classification
change, partially offset by a 7 BP decrease in the average prime rate, the
average loan yield for the quarter just ended is 14 BP higher than a year ago.
<PAGE>
D. Asset Quality
The following table reflects the detail of non-performing and restructured
loan levels. The ratio of non-performing assets to total assets was .29% as of
March 31, 1997, up 3 basis points from a year ago. OREO for all periods is
recorded at the lower of cost or market less estimated cost to sell. The ratio
of nonperforming assets to loans plus OREO at .60% remains better than the
company's internal goal of less than .75%. Nonaccruing loans rose $281,000 or
14.2%. The change in loans delinquent 90 days or more reflects some softening in
commercial and real estate loans.
(000's or % Ratios)
March 31, March 31, December 31,
1997 1996 1996
Loans accounted for on a $2,253 $1,972 $2,023
non-accrual basis
Accruing loans which are
contractually past due
90 days or more as to
principal and interest
payments $1,043 $661 $823
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" $53 $0 $32
Other Real Estate (OREO) $726 $511 $746
Total Non-Performing Assets $4,075 $3,144 $3,624
Total Non-Performing Assets/ 0.29% 0.26% 0.27%
Total Assets
Total Non-Performing Assets/ 0.60% 0.54% 0.55%
Total Loans & OREO
Loan Loss Allowance / 206% 229% 224%
Non-Performing Assets
* May not foot due to rounding
<PAGE>
E. Deposits
The table below displays the components of total deposits including
volume and rate trends over the last five quarters.
<TABLE>
<CAPTION>
For the Quarter Average Average Average Average Average Average
Ended: Demand Savings Money Time Total Deposits/
(000's) Market Deposits Earning
Assets
--------------------------------------------------------------------------------
Amount and Average Rate
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
March 31, 1996
Amount $141,690 $347,589 $70,753 $475,561 $1,035,593 97.3%
Yield / Rate ---- 2.46% 2.48% 5.53% 3.53%
June 30, 1996
Amount $143,227 $347,462 $63,224 $485,358 $1,039,270 92.5%
Yield / Rate ---- 2.43% 2.46% 5.43% 3.50%
September 30, 1996
Amount $144,692 $341,349 $67,941 $472,739 $1,026,721 86.6%
Yield / Rate ---- 2.44% 2.48% 5.46% 3.49%
December 31, 1996
Amount $146,338 $329,640 $59,907 $491,323 $1,027,208 84.6%
Yield / Rate ---- 2.43% 2.49% 5.54% 3.58%
March 31, 1997
Amount $141,725 $325,911 $58,503 $512,295 $1,038,433 81.8%
Yield / Rate ---- 2.45% 2.50% 5.57% 3.66%
Change in quarterly average
outstandings & yield / rate
March 31, 1996 to
March 31, 1997
Amount $34 ($21,678) ($12,250) $36,734 $2,840 -15.6%
% Change 0.0% -6.2% -17.3% 7.7% 0.3% -16.0%
Change (% pts) ---- 0.00 0.02 0.04 0.12
Deposit Mix
March 31, 1996 to 13.7% 33.6% 6.8% 45.9% 100.0%
March 31, 1997 13.6% 31.4% 5.6% 49.3% 100.0%
Change 0.0% -2.2% -1.2% 3.4% ----
</TABLE>
* May not foot due to rounding
Average deposits changed slightly, up $2.8 million or 0.3% for the 1997
quarter just ended as compared to the same 1996 quarter. Large decreases in
Savings and Money Market accounts, ($21.7) and ($12.3) million, respectively,
were offset by a $36.7 million increase in Time Deposits, reflecting the bank's
objective to extend its deposit liabilities by offering very competitive rates
on its Certificates of Deposit.
Despite average Fed Funds moving down 15 BP's during this period, the
average total deposit rate moved up 13 BP's attributable to an expanding mix of
higher cost time deposits. This higher mix reflects the continuing flow of
Savings and Money Markets back into Time Deposits.
<PAGE>
F. Liquidity and Borrowing Position
The following table shows the trend of major earning assets and funding
sources over the last five quarters.
<TABLE>
<CAPTION>
For the Quarter Average Average Ave Core Average Average Average
Ended: Loans Investments Deposits Municipal Capital Market Interest
(000's) (a) (b) Deposits Borrowings Bearing
Liabilities
---------------------------------------------------------------------------------
Amount and Average Yield / Rate
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
March 31, 1996
Amount $569,267 $494,710 $884,358 $151,235 $26,143 $920,046
Yield / Rate 9.52% 7.57% 3.57% 3.29% 5.76% 4.14%
June 30, 1996
Amount $589,407 $534,653 $893,135 $146,136 $73,858 $969,902
Yield / Rate 9.44% 7.48% 3.52% 3.39% 5.62% 4.18%
September 30, 1996
Amount $611,922 $573,991 $900,950 $125,771 $144,987 $1,027,016
Yield / Rate 9.36% 7.69% 3.54% 3.14% 5.83% 4.31%
December 31, 1996
Amount $639,764 $574,944 $903,111 $124,097 $168,011 $1,048,880
Yield / Rate 9.46% 7.53% 3.62% 3.26% 5.94% 4.45%
March 31, 1996
Amount $661,724 $608,187 $902,103 $136,330 $213,961 $1,110,670
Yield / Rate 9.67% 7.59% 3.72% 3.25% 6.28% 4.63%
Change in quarterly average
outstandings & yield / rate
from March 31, 1996 to
March 31, 1997
Amount $92,456 $113,477 $17,745 ($14,905) $187,818 $190,624
% Change 16.2% 22.9% 2.0% -9.9% 718.4% 20.7%
Change (%pts) 0.14 0.01 0.15 -0.05 0.52 0.49
</TABLE>
Note (a) Yield on average investments calculated on a full-tax equivalent basis.
(b) Defined as total deposits minus municipal deposits; includes
CDs > $100,000 for individuals and businesses.
* May not foot due to rounding
Borrowings for first quarter 1997 averaged $214.0 million compared to
$168.0 million for fourth quarter 1996. The increase resulted in part from the
issuance of $30 million of Capital Securities in anticipation of funding future
branch deposit acquisitions and repaying the company's more expensive
outstanding preferred stock. Average loans grew $92.5 million (16.2%) in the
last year while average investments grew $113.5 million or 22.9%; the combined
increase was funded almost entirely with capital market borrowings.
<PAGE>
G. Investments and Asset/Liability Management
The investment portfolio at quarter end comprised 47.5% of earning assets,
up from 46.6% on March 31, 1996, increasing primarily through fixed rate
investment purchases. As a result, the investment portfolio has grown by $108.3
million or 21.6% during the last twelve months.
As shown by the table below, the bank's investments consist primarily of
U.S. treasury securities, mortgage-backed securities (including U.S. agencies
and collateralized mortgage obligations), and tax-exempt obligations of state
and political subdivisions.
<TABLE>
<CAPTION>
For the Quarter U.S. Mtg-Backs Tax Other Market Total Invests /
Ended: Gov'ts (a) Exempts (b) Value Investments Earning
(000's) Adjustment Assets
at
Period
----------------------------------------------------------------------------- End
Amount and Change from Preceding Quarter
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
March 31, 1996
Amount $250,033 $213,031 $16,642 $21,468 $1,092 $502,267 46.6%
Change 6.3% 9.9% 5.0% -21.8% -34.4% 6.0% 0.7
June 30, 1996
Amount $308,641 $228,843 $15,508 $21,469 $107 $574,568 48.9%
Change 23.4% 7.4% -6.8% 0.0% -90.2% 14.4% 2.4
September 30, 1996
Amount $299,909 $257,234 $19,379 $18,704 $331 $595,556 48.7%
Change -2.8% 12.4% 25.0% -12.9% 208.5% 3.7% (0.2)
December 31, 1996
Amount $287,949 $249,071 $18,233 $21,686 $1,614 $578,553 47.0%
Change -4.0% -3.2% -5.9% 16.1% 388.1% -2.8% (1.7)
March 31, 1997
Amount $325,174 $242,825 $12,545 $28,887 ($269) $609,162 47.5%
Change 12.9% -2.5% -31.2% 33.0% -116.7% 5.3% 0.5
Change from
March 31, 1996 to
March 31, 1997
Amount $75,141 $29,794 ($4,097) $7,419 ($1,362) $106,896 0.9%
Change 30.1% 14.0% -24.6% 34.6% -124.7% 21.3% ---
Investment Mix
March 31, 1996 to 49.8% 42.4% 3.3% 4.3% 0.2% 100.0%
March 31, 1997 53.4% 39.9% 2.1% 4.7% 0.0% 100.0%
Change 3.6% -2.6% -1.3% 0.5% -0.3% ---
</TABLE>
Note:(a) Includes CMO's and pass throughs
(b) Includes Money Market Investments, Federal Home Loan Bank,
and other stock
* May not foot due to rounding
<PAGE>
The average fully taxable equivalent yield in the last year has
increased slightly to 7.59% on average for first quarter 1997 versus 7.57% for
first quarter 1996.
The portfolio market value decreased from 102.1% of book value one year
ago to 100.6% of book value as of March 31, 1997. The portfolio duration
increased from 3.1 years on March 31, 1996 to 3.3 years on March 31, 1997.
As of the most recent quarter end, 40.0% of the investment portfolio was
classified as available-for-sale (AFS) in accordance with SFAS No. 115, with the
remainder (60.0%) as held-to-maturity. The pretax market value adjustment of the
AFS portfolio was an unfavorable ($269,000) as compared to $1,092,000 a year
earlier.
<PAGE>
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 New York
b) Reports on Form 8-K: Filed on 3/6/97
Item 5. Other Events. News Release.
News release dated January 29, 1997 announcing the placement of
Capital Securities.
News release dated February 11, 1997 announcing the purchase of
eight KeyCorp Western NY branches by Community Bank, N.A.
News release dated February 20, 1997 announcing: the
declaration of its quarterly dividend, shareholder approval of
a two-for-one stock split, the plan to redeem CBSI's remaining
portion of its $4.5 million 9% Cumulative Perpetual Preferred
Stock.
<PAGE>
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 15, 1997 /s/ Sanford A. Belden
----------------------------------------------------
Sanford A. Belden, President and
Chief Executive Officer
Date: May 15, 1997 /s/ David G. Wallace
----------------------------------------------------
David G. Wallace, Senior Vice President
Chief Financial Officer
COMMUNITY BANK SYSTEM, INC.
Statement re: Earnings Per Share Computation
Exhibit 11
Three Months Ended
March 31,
1997 1996
Primary Earnings Per Share
Net Income $3,664,867 $3,138,145
Less: Accured Dividend on
Preferred Stock (78,750) (101,250)
--------------------------------------
Income applicable
to common stock $3,586,117 $3,036,895
--------------------------------------
Weighted average number
of common shares 7,501,482 7,363,934
Add: Shares issuable from
assumed exercise of
incentive stock options 118,851 63,499
--------------------------------------
Weighted average number of
common shares - adjusted 7,620,333 7,427,433
--------------------------------------
Primary Earnings Per Share $0.47 $0.41
======================================
Fully Diluted Earnings Per Share
Income applicable
to common stock $3,586,117 $3,036,895
--------------------------------------
Weighted average number
of common shares 7,501,482 7,363,934
Add: Shares issuable from
assumed exercise of
incentive stock options 138,728 63,499
--------------------------------------
Weighted average number of
common shares - adjusted 7,640,210 7,427,433
--------------------------------------
Add: Equivalent number of
common shares assumijng
conversion of preferred 0 0
--------------------------------------
Weighted average number of
common shares - adjusted 7,640,210 7,427,433
--------------------------------------
Fully diluted earnings per share $0.47 $0.41
======================================
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 46,467
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 243,735
<INVESTMENTS-CARRYING> 365,397
<INVESTMENTS-MARKET> 369,231
<LOANS> 674,178
<ALLOWANCE> 8,400
<TOTAL-ASSETS> 1,395,284
<DEPOSITS> 1,061,061
<SHORT-TERM> 34,800
<LIABILITIES-OTHER> 13,381
<LONG-TERM> 150,000
29,799
0
<COMMON> 7,518
<OTHER-SE> 98,726
<TOTAL-LIABILITIES-AND-EQUITY> 1,395,284
<INTEREST-LOAN> 15,774
<INTEREST-INVEST> 11,146
<INTEREST-OTHER> 128
<INTEREST-TOTAL> 27,048
<INTEREST-DEPOSIT> 9,365
<INTEREST-EXPENSE> 12,678
<INTEREST-INCOME-NET> 14,370
<LOAN-LOSSES> 730
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 10,179
<INCOME-PRETAX> 5,787
<INCOME-PRE-EXTRAORDINARY> 5,787
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,665
<EPS-PRIMARY> 0.47
<EPS-DILUTED> 0.47
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
