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