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 nine months ended September 30, 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
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 - 7,104,929 shares outstanding as of November 3, 1999
1
<PAGE>
INDEX
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
Part I. Information
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets --
September 30, 1999, December 31, 1998 and September 30, 1998
Consolidated statements of income -- Three months ended
September 30, 1999 and 1998 and nine months ended September 30,
1999 and 1998
Consolidated statements of cash flows --
Nine months ended September 30, 1999, and 1998
Consolidated statements of comprehensive income --
Nine months ended September 30, 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
None
2
<PAGE>
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $65,091,886 $78,893,438 $57,081,062
Federal funds sold 0 0 0
- ----------------------------------------------------------------------------------------------------------------------
TOTAL CASH AND CASH EQUIVALENTS 65,091,886 78,893,438 57,081,062
Investment securities
U.S. Treasury 2,998,612 2,994,897 2,994,070
U.S. Government agencies and corporations 172,245,313 167,469,638 187,224,026
States and political subdivisions 116,938,713 44,628,567 38,679,080
Mortgage-backed securities 288,510,826 336,090,432 333,253,723
Federal Reserve Bank 2,173,950 2,173,950 2,173,950
Other securities 59,856,087 32,936,733 26,847,678
Investment securities at cost 642,723,501 586,294,217 591,172,527
Market value adjustment on available for sale securities (13,380,293) 7,245,550 10,952,652
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES 629,343,208 593,539,767 602,125,179
Loans 983,509,902 918,527,226 910,973,997
Less: Unearned discount 836,869 1,307,106 1,525,582
Reserve for possible loan losses 12,922,448 12,441,255 12,441,255
- ----------------------------------------------------------------------------------------------------------------------
NET LOANS 969,750,585 904,778,865 897,007,160
Bank premises and equipment 25,326,018 24,877,782 24,695,272
Accrued interest receivable 14,040,688 12,375,334 12,859,935
Intangible assets 51,188,821 54,438,219 55,183,219
Other assets 19,426,697 11,785,296 10,405,536
- ----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,774,167,903 $1,680,688,701 $1,659,357,363
======================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits
Noninterest bearing $235,931,666 $249,863,649 $217,916,933
Interest bearing 1,136,069,588 1,128,201,929 1,184,988,007
- ----------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 1,372,001,254 1,378,065,578 1,402,904,940
- ----------------------------------------------------------------------------------------------------------------------
Federal funds purchased 19,400,000 34,700,000 2,000,000
Term borrowings 220,000,000 100,000,000 80,000,000
Company obligated mandatorily redeemable preferred securities
of subsidiary, Community Capital Trust I holding solely junior
subordinated debentures of the Company 29,815,500 29,810,438 29,808,750
Accrued interest and other liabilities 21,303,212 17,947,217 17,046,269
- ----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,662,519,966 1,560,523,233 1,531,759,959
- ----------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock (7,141,429; 7,296,453; 7,557,391 7,640,029 7,623,053 7,622,291
shares outstanding)
Surplus 33,254,071 32,842,772 32,833,532
Undivided profits 92,117,129 84,591,247 82,497,354
Accumulated other comprehensive income (7,914,444) 4,285,743 6,478,493
Treasury stock (498,600; 326,600; 64,900 shares) (13,431,869) (9,151,956) (1,791,618)
Shares issued under employee stock plan - unearned (16,979) (25,391) (42,648)
- ----------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 111,647,937 120,165,468 127,597,404
- ----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,774,167,903 $1,680,688,701 $1,659,357,363
======================================================================================================================
See notes to consolidated financial statements
</TABLE>
3
<PAGE>
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans $21,437,547 $21,164,790 $62,308,068 $61,551,640
Interest and dividends on investments:
U.S. Treasury 67,630 67,338 202,839 201,455
U.S. Government agencies and corporations 3,073,221 4,084,379 9,127,545 12,969,949
States and political subdivisions 1,431,908 459,370 3,548,344 1,104,110
Mortgage-backed securities 4,701,497 4,921,719 12,953,255 15,772,155
Other securities 1,040,067 478,871 2,480,103 1,519,832
Interest on federal funds sold 0 111,768 3,681 276,298
Interest on deposits at other banks 457 467 1,542 1,462
- ------------------------------------------------------------------------------------------------------------------------
Total interest income 31,752,327 31,288,702 90,625,377 93,396,901
- ------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits
Savings 2,805,526 3,060,212 8,393,354 9,376,800
Time 7,800,575 9,633,466 23,590,750 28,686,287
Interest on federal funds purchased and
term borrowings 2,859,363 1,349,012 6,497,460 4,531,357
Interest on mandatorily redeemable capital
securities of subsidiary 732,938 732,938 2,198,813 2,198,813
- ------------------------------------------------------------------------------------------------------------------------
Total interest expense 14,198,402 14,775,628 40,680,377 44,793,257
- ------------------------------------------------------------------------------------------------------------------------
Net interest income 17,553,925 16,513,074 49,945,000 48,603,644
Less: Provision for possible loan losses 1,099,178 1,176,560 3,689,140 3,850,638
- ------------------------------------------------------------------------------------------------------------------------
Net Interest income after provision for loan losses 16,454,747 15,336,514 46,255,860 44,753,006
- ------------------------------------------------------------------------------------------------------------------------
Other income:
Fiduciary and investment services 535,356 461,804 1,786,192 1,407,096
Service charges on deposit accounts 1,889,621 1,848,686 5,205,664 4,874,648
Commissions on investment products 237,008 311,259 861,293 909,688
Other service charges, commissions and fees 1,838,951 1,342,208 4,087,740 3,391,740
Miscellaneous income 20,107 101,937 286,683 583,005
Investment security gains (losses) (498,990) 132,331 (222,348) 1,397,859
- ------------------------------------------------------------------------------------------------------------------------
Total other income 4,022,053 4,198,225 12,005,224 12,564,036
- ------------------------------------------------------------------------------------------------------------------------
Other expenses:
Salaries and employee benefits 6,655,947 6,357,263 19,734,494 19,343,180
Occupancy expense, net 937,947 1,041,066 2,982,896 3,115,793
Equipment and furniture expense 778,568 992,138 2,577,291 2,608,620
Amortization of intangible assets 1,152,563 1,156,859 3,465,998 3,488,536
Other 3,740,429 3,440,803 10,911,859 10,261,926
- ------------------------------------------------------------------------------------------------------------------------
Total other expenses 13,265,454 12,988,129 39,672,538 38,818,055
- ------------------------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary item 7,211,346 6,546,610 18,588,546 18,498,987
Income taxes 2,309,064 2,374,083 5,949,768 6,736,701
- ------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item 4,902,282 4,172,527 12,638,778 11,762,286
Cumulative effect of adopting FAS 133, net of taxes 0 193,859 0 193,859
- ------------------------------------------------------------------------------------------------------------------------
NET INCOME $4,902,282 $4,366,386 $12,638,778 $11,956,145
========================================================================================================================
Earnings per share - Basic $0.69 $0.57 $1.75 $1.57
- Diluted $0.68 $0.56 $1.73 $1.54
========================================================================================================================
See notes to consolidated financial statements
</TABLE>
4
<PAGE>
COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For Nine Months Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities:
Net income $12,638,778 $11,956,145
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 2,192,378 2,084,204
Amortization of intangible assets 3,465,998 3,488,536
Net amortization of security premiums and discounts 3,462,248 4,502,473
Amortization of discount on loans (470,237) 0
Provision for loan losses 3,689,140 3,850,638
Provision for deferred taxes 2,836,389 373,378
(Gain)\loss on sale of investment securities 222,348 (1,397,859)
(Gain)\loss on sale of loans and other assets (192,329) (267,262)
Change in interest receivable (1,665,354) 532,883
Change in other assets and other liabilities 1,449,636 1,559,877
Change in unearned loan fees and costs (992,999) (1,129,105)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 26,635,996 25,553,908
- -------------------------------------------------------------------------------------------------------------------
Investing Activities:
Proceeds from sales of investment securities 10,003,654 68,334,830
Proceeds from maturities of held to maturity investment securities 2,160,894 49,116,687
Proceeds from maturities of available for sale investment securities 143,357,875 55,553,922
Purchases of held to maturity investment securities (2,968,688) (7,021,469)
Purchases of available for sale investment securities (212,667,616) (153,079,155)
Net change in loans outstanding (66,969,193) (68,760,903)
Capital expenditures (2,700,055) (3,052,680)
Proceeds from sales of property and equipment 23,339 0
Other investing activities (216,600) 0
- -------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (129,976,390) (58,908,768)
- -------------------------------------------------------------------------------------------------------------------
Financing Activities:
Net change in demand deposits, NOW accounts, and savings accounts (7,563,501) 42,812,882
Net change in certificates of deposit 1,499,177 14,406,100
Net change in federal funds purchased (15,300,000) (43,000,000)
Net change in term borrowings 120,000,000 0
Issuance (retirement) of common and preferred stock 187,928 464,449
Treasury stock purchased (4,279,913) (1,791,618)
Cash dividends (5,004,849) (4,562,294)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 89,538,842 8,329,519
- -------------------------------------------------------------------------------------------------------------------
Change in cash and cash equivalents (13,801,552) (25,025,342)
Cash and cash equivalents at beginning of year 78,893,438 82,106,403
- -------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 65,091,886 57,081,062
===================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $40,252,379 $41,977,506
===================================================================================================================
Cash paid for income taxes $3,113,379 $7,011,612
===================================================================================================================
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
AND INVESTING ACTIVITIES:
Dividends declared and unpaid $1,786,232 $1,749,286
Gross change in unrealized gains and (losses) on
available-for-sale securities ($20,625,844) $6,254,573
===================================================================================================================
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
5
<PAGE>
COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For Nine Months Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Other comprehensive income (loss), before tax:
Unrealized gains on securities:
Change in unrealized holding gains (losses) arising
during period $ (20,848,192) $ 7,652,432
Less: Reclassification adjustment for gains included in
net income 222,348 (1,397,859)
- ---------------------------------------------------------------------------------------------
Other comprehensive income (loss), before tax (20,625,844) 6,254,573
Income tax benefit related to items of other comprehensive 8,425,657 (2,554,993)
income
- ---------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax (12,200,187) 3,699,580
Plus: Net income 12,638,778 11,956,145
- ---------------------------------------------------------------------------------------------
Comprehensive income
$ 438,591 $ 15,655,725
=============================================================================================
See notes to consolidated financial statements
</TABLE>
6
<PAGE>
Community Bank System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 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 nine month period ended September 30,
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. ("Company"),formed a
wholly-owned subsidiary, Community Capital Trust I ("Trust"), 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 September 30,
1999 were $31,246,080 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
<PAGE>
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 and nine months ended
September 30, 1999 and 1998:
- -------------------------------------------------------------------------------
For nine months ended Income Shares Per share
September 30, 1999 amount
- -------------------------------------------------------------------------------
Net Income 12,638,778
Basic EPS 12,638,778 7,215,683 $ 1.75
Effect of diluted securities:
Stock options 0 87,493
-----------------------
DILUTED EPS $12,638,778 7,303,176 $ 1.73
===============================================================================
- -------------------------------------------------------------------------------
For nine months ended Income Shares Per share
September 30, 1998 amount
- -------------------------------------------------------------------------------
Net Income 11,956,145
Basic EPS 11,956,145 7,610,264 $ 1.57
Effect of diluted securities:
Stock options 0 131,348
-----------------------
DILUTED EPS $11,956,145 7,741,612 $ 1.54
===============================================================================
- -------------------------------------------------------------------------------
For three months ended Income Shares Per share
September 30, 1999 amount
- -------------------------------------------------------------------------------
Net Income 4,902,282
Basic EPS 4,902,282 7,144,248 $ 0.69
Effect of diluted securities:
Stock options 0 85,191
-----------------------
DILUTED EPS $4,902,282 7,229,439 $ 0.68
===============================================================================
- -------------------------------------------------------------------------------
For three months ended Income Shares Per share
September 30, 1998 amount
- -------------------------------------------------------------------------------
Net Income 4,366,386
Basic EPS 4,366,386 7,616,519 $ 0.57
Effect of diluted securities:
Stock options 0 138,041
-----------------------
DILUTED EPS $4,366,386 7,754,560 $ 0.56
===============================================================================
8
<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'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 nine
months ended September 30, 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 June 30,
1999 as provided by the Federal Reserve System; the peer group is comprised of
156 bank holding companies having $1 to $3 billion in assets.
Forward-Looking Statements
This document contains comments or information that constitute forward-looking
statements (within the meaning of the Private Securities Litigation Reform Act
of 1995), which involve significant risks and uncertainties. Actual results may
differ materially from the results discussed in the forward-looking statements.
Moreover, the Company's plans, objectives and intentions are subject to change
based on various factors (some of which are beyond the Company's control).
Factors that could cause actual results to differ from those discussed in the
forward-looking statements include: (1) risks related to credit quality,
interest rate sensitivity and liquidity; (2) the strength of the U.S. economy in
general and the strength of the local economies where the Company conducts its
business; (3) the effect of, and changes in, monetary and fiscal policies and
laws, including interest rate policies of the Board of Governors of the Federal
Reserve System; (4) inflation, interest rate, market and monetary fluctuations;
(5) the timely development of new products and services and customer perception
of the overall value thereof (including features, pricing and quality) compared
to competing products and services; (6) changes in consumer spending, borrowing
and savings habits; (7) technological changes; (8) any acquisitions or mergers
that might be considered by the Company and the costs and factors associated
therewith; (9) the ability to maintain and increase market share and control
expenses; (10) the effect of changes in laws and regulations (including laws and
regulations concerning taxes, banking, securities and insurance) and generally
accepted accounting principles; (11) changes in the Company's organization,
compensation and benefit plans and in the availability of, and compensation
levels for, employees in its geographic markets; (12) the costs and effects of
litigation and of any adverse outcome in such litigation; and (13) the success
of the Company at managing the risks of the foregoing.
The foregoing list of important factors is not exclusive. Such forward-looking
statements speak only as of the date on which they are made and the Company does
not undertake any obligation to update any forward-looking statement, whether
written or oral, to reflect events or circumstances after the date on which such
statement is made. If the Company does update or correct one or more
forward-looking statements, investors and others should not conclude that the
Company will make additional updates or corrections with respect thereto or with
respect to other forward-looking statements.
9
<PAGE>
COMMUNITY BANK SYSTEM, INC.
SUMMARY OF OPERATIONS
EARNINGS AND BALANCE SHEET RECAP
3RD QUARTER 1999 AND FULL YEAR COMPARISONS
<TABLE>
<CAPTION>
000s Omitted Three Months Ended September 30,
Line Change Change
No. Earnings 1999 1998 Amount Percent
--------------- ----------------------------------------
<S> <C> <C> <C> <C>
1 Net interest income $17,554 $16,513 $1,041 6.3%
2 Loan loss provision 1,099 1,177 (78) -6.6%
3 Net interest income
after provision for
loan losses 16,455 15,336 1,119 7.3%
4 Investment security
gain (loss) (499) 132 (631) ---
5 Other income 4,521 4,066 455 11.2%
6 Other expense 12,113 11,831 282 2.4%
7 Intangible amortization 1,153 1,157 (4) -0.3%
8a Inc before inc tax and 7,211 6,546 665 10.2%
extraordinary items
8b FAS 133 net of income taxes 0 194 (194) -100.0%
9 Income tax 2,309 2,374 (65) -2.7%
10 Net income $4,902 $4,366 $536 12.3%
Earnings per share
11a Basic $0.69 $0.57 $0.12 21.1%
11b Diluted $0.68 $0.56 $0.12 21.4%
===================================================
Balances At Period End
----------------------
12 Loans $982,673 $909,448 $73,225 8.1%
13 Investments (excl mkt val adj,
incl money mkt inv) 643,054 591,208 51,846 8.8%
14 Earning assets 1,625,727 1,500,656 125,071 8.3%
15 Loan loss reserve 12,922 12,441 481 3.9%
16 Intangible assets 51,189 55,183 (3,994) -7.2%
17 Total assets 1,774,168 1,659,357 114,811 6.9%
18 Deposits 1,372,001 1,402,905 (30,904) -2.2%
19 Borrowings 269,216 111,809 157,407 140.8%
20 Total equity $111,648 $127,597 ($15,949) -12.5%
</TABLE>
10a
<PAGE>
<TABLE>
<CAPTION>
000s Omitted Nine Months Ended September 30,
Line Change Change
No. Earnings 1999 1998 Amount Percent
--------------- ----------------------------------------
<S> <C> <C> <C> <C>
1 Net interest income $49,945 $48,604 $1,341 2.8%
2 Loan loss provision 3,689 3,851 (162) -4.2%
3 Net interest income 46,256 44,753 1,503 3.4%
after provision for
loan losses
4 Investment security (222) 1,398 (1,620) ---
gain (loss)
5 Other income 12,227 11,166 1,061 9.5%
6 Other expense 36,206 35,329 877 2.5%
7 Intangible amortization 3,466 3,489 (23) -0.7%
8a Inc before inc tax and 18,589 18,499 90 0.5%
extraordinary items
8b FAS 133 net of income taxes 0 194 (194) -100.0%
9 Income tax 5,950 6,737 (787) -11.7%
10 Net income $12,639 $11,956 $683 5.7%
Earnings per share
11a Basic $1.75 $1.57 $0.18 11.5%
11b Diluted $1.73 $1.54 $0.19 12.3%
===================================================
Balances At Period End
----------------------
12 Loans $982,673 $909,448 $73,225 8.1%
13 Investments (excl mkt val adj,
incl money mkt inv) 643,054 591,208 51,846 8.8%
14 Earning assets 1,625,727 1,500,656 125,071 8.3%
15 Loan loss reserve 12,922 12,441 481 3.9%
16 Intangible assets 51,189 55,183 (3,994) -7.2%
17 Total assets 1,774,168 1,659,357 114,811 6.9%
18 Deposits 1,372,001 1,402,905 (30,904) -2.2%
19 Borrowings 269,216 111,809 157,407 140.8%
20 Total equity $111,648 $127,597 ($15,949) -12.5%
</TABLE>
10b
<PAGE>
000s Omitted Three Months Ended
<TABLE>
<CAPTION>
Line Sep 30, Jun 30, Change Change
No. Earnings 1999 1999 Amount Percent
--------------- -------------------------------------------
<S> <C> <C> <C> <C>
1 Net interest income $17,554 $16,519 $1,035 6.3%
2 Loan loss provision 1,099 1,421 (322) -22.7%
3 Net interest income
after provision for
loan losses 16,455 15,098 1,357 9.0%
4 Investment security
gain (loss) (499) 0 (499) ---
5 Other income 4,521 3,880 641 16.5%
6 Other expense 12,113 12,033 80 0.7%
7 Intangible amortization 1,153 1,155 (2) -0.2%
8a Inc before inc tax and 7,211 5,790 1,421 24.5%
extraordinary items
8b FAS 133 net of income taxes 0 0 0 0.0%
9 Income tax 2,309 1,742 567 32.6%
10 Net income $4,902 $4,048 $854 21.1%
Earnings per share
11a Basic $0.69 $0.56 $0.13 23.2%
11b Diluted $0.68 $0.55 $0.13 23.6%
==================================================
Balances At Period End
----------------------
12 Loans $982,673 $942,380 $40,293 4.3%
13 Investments (excl mkt val adj, 643,054 639,734 3,320 0.5%
incl money mkt inv)
14 Earning assets 1,625,727 1,582,114 43,613 2.8%
15 Loan loss reserve 12,922 13,055 (133) -1.0%
16 Intangible assets 51,189 52,299 (1,110) -2.1%
17 Total assets 1,774,168 1,748,666 25,502 1.5%
18 Deposits 1,372,001 1,379,290 (7,289) -0.5%
19 Borrowings 269,216 237,014 32,202 13.6%
20 Total equity $111,648 $113,294 ($1,646) -1.5%
</TABLE>
10c
<PAGE>
COMMUNITY BANK SYSTEM, INC.
SUMMARY OF OPERATIONS
EARNINGS AND BALANCE SHEET RECAP
3RD QUARTER 1999 AND FULL YEAR COMPARISONS
<TABLE>
<CAPTION>
000s Omitted Three Months Ended September 30,
Line Change Change
No. Profitability 1999 1998 Amount Percent
-------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
21 Return on assets 1.12% 1.03% 0.09 %pts.---
22 Return on equity 17.17% 14.08% 3.09 %pts.---
23 Cash EPS (diluted) $0.77 $0.65 $0.12 18.5%
24 Tangible return on 1.27% 1.19% 0.08 %pts.---
assets
25 Tangible return on 19.56% 16.28% 3.28 %pts.---
equity
26 Net interest margin 4.49% 4.34% 0.15 %pts.---
27 Non interest income/ 19.9% 19.6% 0.4 %pts.---
operating income (excl sec gains)
28 Efficiency ratio 52.6% 56.9% (4.3) %pts.---
(excl one time items and
intangible amortization)
Capital
-------
29 Tier I leverage ratio 5.79% 5.92% (0.13) %pts.---
Common shares
30a Weighted average 7,248 7,756 (508) -6.6%
30b Period end 7,141 7,557 (416) -5.5%
31 Cash dividends declared $0.25 $0.23 $0.02 8.7%
per common share
32 Common stock price $27.38 $28.69 ($1.32) -4.6%
33a Book value $15.63 $16.88 ($1.25) -7.4%
33b Tangible book value $8.55 $9.58 ($1.03) -10.8%
Asset Quality Ratios
--------------------
34 Loan loss reserve /
loans outstanding 1.32% 1.37% (0.05) %pts.---
35 Nonperforming loans /
loans outstanding 0.42% 0.48% (0.06) %pts.---
36 Loan loss reserve /
nonperforming loans 316% 286% 30 %pts.---
37 Net charge-offs /
average loans 0.51% 0.52% (0.01) %pts.---
38 Loan loss provision /
net charge-offs 89% 100% (11) %pts.---
39 Nonperforming assets /
loans outstanding+OREO 0.48% 0.62% (0.14) %pts.---
</TABLE>
11a
<PAGE>
<TABLE>
<CAPTION>
000s Omitted Nine Months Ended September 30,
Line Change Change
No. Profitability 1999 1998 Amount Percent
-------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
21 Return on assets 0.99% 0.95% 0.04 %pts. ---
22 Return on equity 14.36% 13.24% 1.12 %pts. ---
23 Cash EPS (diluted) $2.01 $1.81 $0.20 11.0%
24 Tangible return on 1.15% 1.12% 0.03 %pts. ---
assets
25 Tangible return on 16.69% 15.52% 1.17 %pts. ---
equity
26 Net interest margin 4.45% 4.33% 0.12 %pts. ---
27 Non interest income/ 19.2% 18.6% 0.6 %pts. ---
operating income (excl sec gains)
28 Efficiency ratio 56.0% 58.6% (2.6) %pts. ---
(excl one time items and )
intangible amortization)
Capital
-------
29 Tier I leverage ratio 5.79% 5.92% (0.13) %pts. ---
Common shares
30a Weighted average 7,321 7,742 (421) -5.4%
30b Period end 7,141 7,557 (416) -5.5%
31 Cash dividends declared $0.71 $0.63 $0.08 12.7%
per common share
32 Common stock price $27.38 $28.69 ($1.32) -4.6%
33a Book value $15.63 $16.88 ($1.25) -7.4%
33b Tangible book value $8.55 $9.58 ($1.03) -10.8%
Asset Quality Ratios
--------------------
34 Loan loss reserve /
loans outstanding 1.32% 1.37% (0.05)%pts. ---
35 Nonperforming loans /
loans outstanding 0.42% 0.48% (0.06)%pts. ---
36 Loan loss reserve /
nonperforming loans 316% 286% 30 %pts. ---
37 Net charge-offs /
average loans 0.46% 0.59% (0.13)%pts. ---
38 Loan loss provision /
net charge-offs 115% 100% 15 %pts. ---
39 Nonperforming assets /
loans outstanding+OREO 0.48% 0.62% (0.14)%pts. ---
</TABLE>
11b
<PAGE>
<TABLE>
<CAPTION>
000s Omitted Three Months Ended,
Line Sep 30, Jun 30, Change Change
No. Profitability 1999 1999 Amount Percent
-------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C>
21 Return on assets 1.12% 0.96% 0.16 %pts. ---
22 Return on equity 17.17% 13.66% 3.51 %pts. ---
23 Cash EPS (diluted) $0.77 $0.65 $0.12 18.5%
24 Tangible return on 1.27% 1.12% 0.15 %pts. ---
assets
25 Tangible return on 19.56% 15.96% 3.60 %pts. ---
equity
26 Net interest margin 4.49% 4.48% 0.01 %pts. ---
27 Non interest income/ 19.9% 18.5% 1.4 %pts. ---
operating income (excl sec gains)
28 Efficiency ratio 52.6% 57.6% (5.0) %pts. ---
(excl one time items and )
intangible amortization)
Capital
29 Tier I leverage ratio 5.79% 5.71% 0.08 %pts. ---
Common shares
30a Weighted average 7,248 7,322 (74) -1.0%
30b Period end 7,141 7,144 (3) 0.0%
31 Cash dividends declared $0.25 $0.23 $0.02 8.7%
per common share
32 Common stock price $27.38 $25.38 $2.00 7.9%
33a Book value $15.63 $15.86 ($0.23) -1.4%
33b Tangible book value $8.55 $8.54 $0.01 0.1%
Asset Quality Ratios
34 Loan loss reserve /
loans outstanding 1.32% 1.39% (0.07) %pts. ---
35 Nonperforming loans /
loans outstanding 0.42% 0.50% (0.08) %pts. ---
36 Loan loss reserve /
nonperforming loans 316% 278% 38 %pts. ---
37 Net charge-offs /
average loans 0.51% 0.41% 0.10 %pts. ---
38 Loan loss provision /
net charge-offs 89% 148% (59) %pts. ---
39 Nonperforming assets /
loans outstanding+OREO 0.48% 0.60% (0.12) %pts. ---
</TABLE>
11c
<PAGE>
COMMUNITY BANK SYSTEM, INC.
SUMMARY OF OPERATIONS
EARNINGS AND BALANCE SHEET RECAP
3RD QUARTER 1999 AND FULL YEAR COMPARISONS
000s Omitted
<TABLE>
<CAPTION>
Three Months Ended September 30,
Line Change Change
No. Asset Quality Components 1999 1998 Amount Percent
-----------------------------------------
<S> <C> <C> <C> <C> <C>
40 Nonaccruing loans $3,257 $2,726 $531 19.5%
41 90+ days delinquent 836 1,629 -793 -48.7%
42 Tot nonperforming loans $4,093 $4,355 -$262 -6.0%
43 Troubled debt 119 138 -19 -13.8%
restructurings
44 Other real estate 501 1,248 -747 -59.9%
45 Tot nonperforming assets $4,713 $5,741 ($1,028) -17.9%
Components of Net Interest Margin
46 Loan yield 8.85% 9.34% (0.49) %pts. ---
47 Investment yield 6.74% 6.53% 0.21 %pts. ---
48 Earning asset yield 8.00% 8.18% (0.18) %pts. ---
49 Interest bearing deposits rate 3.72% 4.21% (0.49) %pts. ---
50 Borrowed funds rate 5.88% 6.73% (0.85) %pts. ---
51 Cost of all interest 4.10% 4.44% (0.34) %pts. ---
bearing funds
52 Cost of funds 3.49% 3.81% (0.32) %pts. ---
(includes DDA)
53 Cost of funds / earning 3.51% 3.84% (0.33) %pts. ---
assets
54 Net interest margin 4.49% 4.34 0.15 %pts. ---
55 Full tax equivalent adj. $614 $214 $400 186.9%
Average Balances for Period
56 Loans $960,860 $898,992 $61,868 6.9%
57 Investments
(excl. mkt val adj) 643,622 629,083 14,539 2.3%
58 Earning assets 1,604,482 1,528,075 76,407 5.0%
59 Total assets 1,743,095 1,682,609 60,486 3.6%
60 Deposits 1,371,162 1,416,923 (45,761) -3.2%
61 Borrowings 242,367 122,696 119,671 97.5%
62 Total equity $113,266 $123,061 ($9,795) -8.0%
</TABLE>
12a
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
Line Change Change
No. Asset Quality Components 1999 1998 Amount Percent
-----------------------------------------
<S> <C> <C> <C> <C> <C>
40 Nonaccruing loans $3,257 $2,726 $531 19.5%
41 90+ days delinquent 836 1,629 -793 -48.7%
42 Tot nonperforming loans $4,093 $4,355 -$262 -6.0%
43 Troubled debt restructurings 119 138 -19 -13.8%
restructurings
44 Other real estate 501 1,248 -747 -59.9%
45 Tot nonperforming assets $4,713 $5,741 -$1,028 -17.9%
Components of Net Interest Margin
46 Loan yield 8.90% 9.40% (0.50) %pts. ---
47 Investment yield 6.53% 6.75% (0.22) %pts. ---
48 Earning asset yield 7.96% 8.27% (0.31) %pts. ---
49 Interest bearing deposits rate 3.76% 4.27% (0.51) %pts. ---
50 Borrowed funds rate 6.01% 6.71% (0.70) %pts. ---
51 Cost of all interest 4.09% 4.52% (0.43) %pts. ---
bearing funds
52 Cost of funds 3.47% 3.90% (0.43) %pts. ---
(includes DDA)
53 Cost of funds / earning 3.51% 3.95% (0.43) %pts. ---
assets
54 Net interest margin 4.45% 4.33% 0.12 %pts. ---
55 Full tax equivalent adj. $1,578 $516 $1,062 205.8%
Average Balances for Period
56 Loans $935,650 $875,455 $60,195 6.9%
57 Investments
(excl. mkt val adj) 612,457 642,342 (29,885) -4.7%
58 Earning assets 1,548,107 1,517,797 30,310 2.0%
59 Total assets 1,702,105 1,674,595 27,510 1.6%
60 Deposits 1,371,853 1,401,471 (29,618) -2.1%
61 Borrowings 193,311 134,038 59,273 44.2%
62 Total equity $117,687 $120,759 ($3,072) -2.5%
</TABLE>
12b
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended,
Line Sep 30, Jun 30, Change Change
No. Asset Quality Components 1999 1999 Amount Percent
-----------------------------------------
<S> <C> <C> <C> <C>
40 Nonaccruing loans $3,257 $3,515 -$258 -7.3%
41 90+ days delinquent 836 1,189 -353 -29.7%
42 Tot nonperforming loans $4,093 $4,704 -$611 -13.0%
43 Troubled debt restructurings 119 123 -4 -3.3%
restructurings
44 Other real estate 501 853 -352 -41.3%
45 Tot nonperforming assets $4,713 $5,680 -$967 -17.0%
Components of Net Interest Margin
46 Loan yield 8.85% 8.90% (0.05) %pts.---
47 Investment yield 6.74% 6.55% 0.19 %pts.---
48 Earning asset yield 8.00% 7.97% 0.03 %pts.---
49 Interest bearing deposits rate 3.72% 3.76% (0.04) %pts.---
50 Borrowed funds rate 5.88% 6.08% (0.20) %pts.---
51 Cost of all interest 4.10% 4.07% 0.03 %pts.---
bearing funds
52 Cost of funds 3.49% 3.45% 0.04 %pts.---
(includes DDA)
53 Cost of funds / earning 3.51% 3.50% 0.01 %pts.---
assets
54 Net interest margin 4.49% 4.48% 0.01 %pts.---
55 Full tax equivalent adj $614 $575 $39 6.8%
Average Balances for Period
56 Loans $960,860 $929,770 $31,090 3.3%
57 Investments
(excl. mkt val adj) 643,622 602,596 41,026 6.8%
58 Earning assets 1,604,482 1,532,366 72,116 4.7%
59 Total assets 1,743,095 1,693,361 49,734 2.9%
60 Deposits 1,371,162 1,377,975 -6,813 -0.5%
61 Borrowings 242,367 175,824 66,543 37.8%
62 Total equity $113,266 $118,894 -$5,628 -4.7%
</TABLE>
12c
<PAGE>
Earnings per share (diluted) for third quarter 1999 reached $.68, a record high
for the Company and up 21% over the prior year; for the nine month period,
earnings per share rose 12.3% to $1.73. Net income for the quarter and nine
months was $4.902 million and $12.639 million, up 12.3% and 5.7%, respectively.
The greater improvement in earnings per share reflects fewer average shares
outstanding as a result of the Company's share repurchase program; since its
inception last fall, 498,600 shares or 6.5% of shares outstanding have been
bought back. Compared to second quarter 1999 results, earnings per share
(diluted) were higher by $.13 or 24% while net income was up $854,000 or 21%.
Cash earnings per share (diluted) for the quarter increased to $.77, up 10.2%
compared to last year. Cash or tangible return on assets (ROA) was 1.27% versus
nominal ROA at 1.12%. And tangible return on equity (ROE) for the quarter rose
3.28 percentage points over one year earlier to 19.56%, exceeding nominal ROE by
2.39 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 non-cash impact of amortizing the
premiums paid for the acquisitions.
The Company's record high results reflect a combination of continued stability
in our net interest margin over the last six months at 4.49% this quarter (up 15
basis points from one year ago), a second consecutive period of strong loan
growth from being unchanged during the first quarter (up 8.1% since September
30, 1998), and greater contribution from the Bank's investment portfolio, where
yields have improved and a full three-months' benefit was felt from purchases
made during the April to June 1999 period (the portfolio being now 8.8% higher
than one year earlier).
Other important performance factors include increased noninterest income (up
11.2% from third quarter last year), careful management of overhead (up slightly
from second quarter levels but a modest 2.4% increase over four quarters
earlier), and improved tax planning (reflected in a 4.5 percentage point
reduction in the year-to-date effective tax rate). Nearly $500,000 in securities
losses was realized this quarter on sales of $5.9 million, resulting in higher
net interest income in future periods; $132,000 in gains was recognized in third
quarter 1998 as part of managing our investment portfolio on a total return
basis in that interest rate environment.
An overriding achievement of the quarter is that net interest income (full tax
equivalent) achieved the highest level in our history, exceeding its previous
record in fourth quarter 1997. Net interest income has improved for the third
consecutive period to $18.2 million from the 1998 quarterly low in the fourth
quarter of $16.0 million. Even though fourth quarter 1997 margins were 30 basis
points higher than now, the current net interest milestone occurred because of
$175 million more in average earning assets. Seventy two percent of that
increase reflects loan growth despite Upstate New York's generally lackluster
economy.
Net interest income in the most recent quarter also benefited from the
restoration of yields on the Company's premium collateralized mortgage
obligations (CMOs), whose performance had been penalized since first quarter
1998 due to historically high refinancing activity causing unusually large
prepayments on the underlying mortgages. Funding of $76 million in growth in
average earning assets over the last year has largely been a combination of $22
million more in personal and business demand deposits (up 10.9%) and growth in
capital market borrowings, $61 million of which replaced run-off of large
municipal deposits.
Third quarter noninterest income (excluding net securities gains/losses) rose
11.2% from one year earlier to $4.5 million. Over half of the increase related
to financial services, which rose by $260,000. The two primary factors
explaining that improvement are 22% more revenues from the Company's EBT/BPA
business, which provides investment management, pension administration and
consulting services, and a 50% increase in the annual dividend the Company
receives from the sale of creditor life insurance underwritten by a subsidiary
of the New York State Bankers Association. The balance of the increase in
noninterest income was from deposit service charges and miscellaneous
commissions, which rose over 13%.
13
<PAGE>
For the first nine months, noninterest income, excluding net securities
gains/losses and one-time events related to the disposition of branch
properties, has risen by nearly $1.0 million or 8.9% over the same period last
year. Financial services, which now comprises 37% of total fee income, rose
12.8%; specialty products, which largely includes electronic and mortgage
banking and servicing activities, climbed 32%, contributing 11% of fee income;
and general banking fees, making up 52% of noninterest income, increased 2.6%.
Noninterest income, excluding transactions related to investment securities and
disposal of branch properties, as a percent of operating income rose to 19.2% in
the first nine months of 1999 compared to 18.6% one year earlier.
Loans rose over $40 million during the last three months to nearly $983 million,
the strongest quarterly loan growth in the Company's history (the last record,
excluding acquisitions, being in second quarter 1998), building on a $25 million
increase in the preceding quarter. During the last twelve months, loans have
grown by over $73 million or 8.1%; in addition, $43.8 million in mortgages has
been originated and sold in the secondary market, resulting in total managed
loan growth of 11.9%. The largest share of growth in loans outstanding during
the third quarter was in commercial loans at $14.7 million, 16% greater than the
previous quarter's increase and well in excess of growth in the three quarters
prior to that. Consumer direct loans (including home equity loans), which last
quarter rose modestly for the first time since the Company's mid-1997 branch
acquisitions, increased an unusually large $13.2 million, primarily due to the
successful "Summer Sizzler" promotion. Next, extending the climb which began in
late March 1999, indirect consumer installment loans (predominantly automobile
financing) increased an additional $9.0 million, over 50% more than second
quarter 1999's pick-up. Lastly, consumer mortgages were up a modest $3.4 million
in response to reduced mortgage activity caused by rising interest rates.
Similarly, origination and sale of mortgages in the secondary market were $6.0
million for the quarter, which compares to $8.8 million in second quarter 1999
and $11.1 million in third quarter 1998.
Nonperforming loans ended the quarter at $4.0 million or .42% of loans
outstanding, down over $600,000 and .08%, respectively, during the last three
months and below September 30, 1998 levels as well. Based on the most recent
peer bank data as of June 30, 1999, when the Company's nonperforming loan ratio
was .50%, CBSI ranked in the favorable 36th percentile. With the exception of
last quarter, nonperforming loans have been in the acceptable $4.0-$4.4 million
range for the last two years.
The ratio of loan loss reserves to loans outstanding decreased seven basis
points during the quarter to 1.32%, but because of lower nonperforming loans,
coverage over nonperformers improved to 316%, a level which management believes
to be adequate. The ratio of delinquencies (30 days or more) and nonaccruals to
total loans decreased from the June 30, 1999 level to 1.35% at September 30,
having remained in the 1.30% to 1.50% band for the last eighteen months, well
within the Company's internal guideline of 2.0%.
Loan loss provision expense decreased to $1.1 million for the third quarter,
$78,000 below the same period last year and $322,000 less than for the second
quarter of this year. This latter large decrease is due to the provision in that
period having anticipated $275,000 in charge-offs in the current quarter on two
commercial customers. Actual charge-offs taken on those loans were $380,000. Net
charge-offs on installment loans continued to exhibit the improvements achieved
since their peak in fourth quarter 1997, down $1.0 million or 30% for the first
nine months of 1999 versus 1998, and as a percentage of installment loans
outstanding, averaging almost 45 basis points lower at 1.02%. Net charge-offs
for the Company as a whole averaged .46% of loans outstanding through September
30 versus .59% last year. The year-to-date provision covered actual net
charge-offs by 1.15 times, this margin having been established in 1999 as a
precaution in the event the Upstate New York economy weakens after its long
sustained period of relative economic health.
14
<PAGE>
The Company's nine month efficiency ratio (recurring overhead less intangible
amortization compared to net interest plus recurring other income) improved to
56.0% from 58.5% through September 30 of last year. This favorable trend is a
function of several factors: an increase in net interest margin due to a lower
cost of funds and reduced premium amortization on the Company's CMO securities,
growth in earning assets, steady progress in developing more sources of
noninterest income, and persistent control of overhead expense. For the first
nine months of this year, overhead (before intangible amortization) rose
$877,000 or 2.5% over the same 1998 period. Excluding branch disposal expenses
of $501,000 this year versus none in 1998 and $142,000 in losses on fraudulent
customer transactions, overhead has risen .7%.
15
<PAGE>
Year 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than 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
is outsourced to First Tennessee Bank; ATM processing is outsourced to U. S.
Bank Network Services; and the trust account 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 the modifications to existing software and the conversions to
new software that have been completed, that the year 2000 issue has been
mitigated without impact on the Company's operations.
The Company has completed formal communications with all of its significant
suppliers and large customers to determine the status of Year 2000 compliance
and, if appropriate, contingency plans and business resumption plans are in
place in the unlikely event the vendor or customer should experience a Year 2000
compliant failure. To date, 90% of our vendors have responded that they are Year
2000 compliant, 8% have reported that they are working diligently and will be
Year 2000 compliant before January 1, 2000 and 2% 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 the
project and none of the later group is deemed to be in any way significant.
The Company has utilized both internal and external resources to reprogram or
replace, test and validate the software for Year 2000 modifications. The Company
has estimated that the overall Year 2000 dollar expense for upgrades and
equipment will total between $800,000 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 vendors mailings,
follow-up testing, customer awareness efforts and commercial customer risk
assessments. The Company has completed all renovations on critical systems. To
date, the Company has incurred approximately $655,000 in expenses, funded
through general operations. No major information technology projects have been
significantly delayed as a result of Year 2000 compliance efforts. The costs of
the project 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
<PAGE>
Market Risk
Market risk is the risk of loss in a financial instrument arising from adverse
changes in market rates/prices such as interest rates, foreign currency exchange
rates, commodity prices, and equity prices. The Company's primary market risk
exposure is interest rate risk. The ongoing monitoring and management of this
risk is an important component of the Company's asset/liability management
process, which is governed by policies established by its Board of Directors,
which reviews and approves them annually. The Board of Directors delegates
responsibility for carrying out the asset/liability management policies to the
Asset/Liability Committee (ALCO). In this capacity, ALCO develops guidelines and
strategies impacting the Company's asset/liability management related activities
based upon estimated market risk sensitivity, policy limits, and overall market
related interest level and trends.
At Community Bank System, Inc., the fundamental purpose behind interest rate
risk management is to maximize net interest income over both a short-term
tactical and longer-term strategic time horizon. Because the Company does not
believe it is possible to reliably predict future interest rate movements, it
has maintained an appropriate process and set of measurement tools which enable
it to identify and quantify sources of interest rate risk.
The primary tool used by the Company in managing interest rate risk is income
simulation. The analysis begins by measuring the impact of differences in
maturity and repricing of all balance sheet positions. Such work is further
augmented by adjusting for prepayment and embedded option risk found naturally
in certain asset and liability classes. Finally, balance sheet growth and
funding expectations are added to the analysis in order to reflect the strategic
initiatives set forth by the Company.
Changes in net interest income are reviewed after subjecting the balance sheet
to an array of Treasury yield curve possibilities including an up or down 200
basis point movement in rates from current levels. While such an aggressive
movement in rates provides management with good insight as to how the Company's
profit margins may perform under extreme market conditions, results from a more
modest shift in interest rates are used as a basis to conduct day-to-day
business decisions.
The following reflects the Company's one year net interest income sensitivity
analysis as of June 30, 1999. In addition to a 200 basis point increase/decrease
in rates, this analysis assumes a static, no growth balance sheet:
Rate Change Estimated
Basis Points Net Interest Income Sensitivity
+ 200 bp .20%
- 200 bp (1.25%)
The Company does not anticipate that results of the sensitivity analysis based
on September 30, 1999 data will materially differ from the June 30, 1999
results.
The preceeding interest rate risk analysis does not represent a Company forecast
and should not be relied upon as being indicative of expected operating results.
These hypothetical estimates are based upon numerous assumptions including: the
nature and timing of interest rate levels including yield curve shape,
prepayments on loans and securities, deposit decay rates, pricing decisions on
loans and deposits, reinvestment/replacement of asset and liability cashflows,
and others. While the assumptions are developed based upon current economic and
local market conditions, the Company cannot make any assurances as to the
predictive nature of these assumptions including how customer preferences or
competitor influences might change. Furthermore, the sensitivity analysis does
not reflect actions that ALCO might take in responding to or anticipating
changes in interest rates.
17
<PAGE>
Due to the potential for unexpected fluctuations in deposits and loans, active
management of the Company's liquidity is critical. In order to respond to these
circumstances, adequate sources of both on- and off-balance sheet funding are in
place.
CBSI's primary approach to measuring liquidity is known as the Basic
Surplus/Deficit model. It is used to calculate liquidity over two time periods:
first, the relationship within 30 days between liquid assets and short-term
liabilities which are vulnerable to nonreplacement; and second, a projection of
subsequent cash flow funding needs over an additional 60 days. The minimum
policy level of liquidity under the Basic Surplus/Deficit approach is 7.5% of
total assets for both the 30 and 90 day time horizons. As of September 30, 1999,
this ratio was 16.5% and 18.4%, respectively.
18
<PAGE>
<TABLE>
<CAPTION>
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.
Third Quarter Ended September 30,
---------------------------------------------------------------------
1999 1998
---------------------------------------------------------------------
(000's omitted except Avg. Amt. of Avg. Avg. Amt. of Avg.
yields and rates) Balance Interest Yield/Rate Balance Interest Yield/Rate
Paid Paid
ASSETS: ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ 0 $ 0 0.00% $ 8,191 $ 112 5.41%
Time deposits in 74 0 1.24% 35 0 5.30%
other banks
Taxable investment 530,251 8,990 6.73% 585,392 9,553 6.47%
securities
Nontaxable investment 113,297 1,938 6.79% 35,465 673 7.53%
securities
Loans (net of 960,860 21,438 8.85% 898,992 21,165 9.34%
unearned discount) -------- --------- --------- ---------
Total interest-earning 1,604,482 32,366 8.00% 1,528,075 31,503 8.18%
assets
Noninterest earning assets
Cash and due from 57,340 55,615
banks
Premises and equipment 24,307 24,649
Other Assets 78,341 82,709
Less:allowance for loans (12,942) (12,270)
Net unrealized gains/(losses)
on available-for-sale
portfolio (8,433) 3,831
-------- ---------
Total $ 1,743,095 $ 1,682,609
========= =========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Interest-bearing liabilities
Savings deposits $ 514,671 2,806 2.16% $ 511,138 3,060 2.38%
Time deposits 615,821 7,801 5.03% 685,490 9,634 5.58%
Short-term borrowings 142,552 1,862 5.18% 7,182 103 5.69%
Long-term borrowings 99,815 1,730 6.88% 115,514 1,979 6.80%
----------------- -------------------
Totalinterest-bearing 1,372,859 14,199 4.10% 1,319,324 14,776 4.44%
liabilities
Noninterest bearing
liabilities
Demand deposits 240,670 220,294
Other liabilities 16,300 19,930
Shareholders' equity 113,266 123,061
-------- ---------
Total $ 1,743,095 $ 1,682,609
========= =========
Net interest earnings $ 18,167 $ 16,727
========= =========
Net yield on 4.49% 4.34%
interest-earning assets ======= =======
Federal tax exemption on nontaxable investment
securities included in interest income 614 214
</TABLE>
19
<PAGE>
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:
---------------------------------
3rd Quarter 1999 versus 3rd
Quarter 1998
---------------------------------
Increase (Decrease) Due to
Change In (1)
Net
Volume Rate Change
Interest earned on:
Federal funds sold and
securities purchased under (56) (56) (112)
agreements to resell
Time deposits in other banks 2 (2) -
Taxable investment (2,486) 1,923 (563)
securities
Nontaxable investment 1,714 (449) 1,265
securities
Loans (net of unearned 5,147 (4,874) 273
discounts)
Total interest-earning
assets (2) 4,365 (3,502) 863
Interest paid
on: 138 (392) (254)
Savings deposits
Time deposits (930) (903) (1,833)
Short-term borrowings 1,823 (64) 1,759
Long-term borrowings (398) 149 (249)
Total interest-bearing 2,909 (3,486) (577)
liabilities (2)
Net interest earnings (2) 853 587 1,440
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.
20
<PAGE>
C) The following table sets forth information by category of noninterest
expenses of the Company for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
(000's omitted) -------------------------------------- --------------------------------------
Change Change Change Change
1999 1998 Amount Percent 1999 1998 Amount Percent
-------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Personnel expense 6,655 6,357 298 4.7% 19,734 19,343 391 2.0%
Net occupancy expense 938 1,041 (103) -9.9% 2,983 3,116 (133) -4.3%
Equipment expense 778 993 (215) -21.7% 2,577 2,609 (32) -1.2%
Professional fees 570 535 35 6.5% 1,533 1,466 67 4.6%
Data processing expense 1,050 957 93 9.7% 2,877 2,989 (112) -3.7%
Amortization 1,153 1,157 (4) -0.3% 3,466 3,489 (23) -0.7%
Stationary and supplies 291 333 (42) -12.6% 911 1,051 (140) -13.3%
Deposit insurance premiums 44 48 (4) -8.3% 137 143 (6) -4.2%
Disposition of branch 179 0 179 100.0% 501 0 501 100.0%
properties
Other 1,607 1,825 (218) -11.9% 4,953 4,870 83 1.7%
-------------------------------------- --------------------------------------
Total 13,265 12,988 277 2.1% 39,672 38,818 854 2.2%
Total operating expenses
as a percentage of
average assets 3.02% 3.06% -0.04% pts 3.12% 3.10% 0.02% pts
Efficiency ratio 52.6% 56.9% -4.3% pts 56.0% 58.6% -2.6% pts
(excl one time items & intang. amort)
</TABLE>
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:
As of September 30,
(000's omitted) -------------------------------
Change Change
1999 1998 Amount Percent
Real estate mortgages: -------------------------------
Residential 310,964 290,066 20,898 7.2%
Commercial loans secured
by real estate 127,625 111,747 15,878 14.2%
Farm 15,253 11,902 3,351 28.2%
-------------------------------
Total 453,842 413,715 40,127 9.7%
Commercial, financial, and agricultural
Agricultural 26,172 24,478 1,694 6.9%
Commercial and financial 170,984 159,525 11,459 7.2%
-------------------------------
Total 197,156 184,003 13,153 7.1%
Installment loans to individuals:
Direct 106,537 99,817 6,720 6.7%
Indirect 216,905 206,536 10,369 5.0%
Student and other 6,469 6,049 420 6.9%
-------------------------------
Total 329,911 312,402 17,509 5.6%
Other Loans 2,601 854 1,747 204.6%
-------------------------------
Gross Loans 983,510 910,974 72,536 8.0%
Less: Unearned discounts 837 1,526 (689) -45.2%
-------------------------------
Net loans 982,673 909,448 73,225 8.1%
Reserve for possible loan losses 12,922 12,441 481 3.9%
-------------------------------
Loans, net of loan loss reserve 969,751 897,007 72,744 8.1%
21
<PAGE>
E) The following table presents information concerning the aggregate amount of
nonperforming assets:
As of September 30,
(000's omitted)
----------------------------------------------
Change Change
1999 1998 Amount Percent
----------------------------------------------
Loans accounted for on a
nonaccrual basis 3,257 2,726 531 19.5%
Accruing loans which are
contractually past due 90 days
or more as to principal or interest
payments 836 1,629 (793) -48.7%
Total nonperforming loans 4,093 4,355 (262) -6.0%
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" 119 138 (19) -13.8%
Other Real Estate 501 1,248 (747) -59.9%
Total nonperforming assets 4,713 5,741 (1,028) -17.9%
Ratio of allowance for loan
losses to period-end loans 1.32% 1.37% (0.05)% pts ---
Ratio of allowance for loan
losses to period-end
nonperforming loans 315.7% 286.0% 29.7% pts ---
Ratio of allowance for loan
losses to period-end
nonperforming assets 274.2% 216.7% 57.5% pts ---
Ratio of nonperforming assets to
period-end total loans and
other real estate owned 0.48% 0.62% (0.14)% 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.
22
<PAGE>
F) 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.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
(000's omitted)
----------------------------------------- -------------------------------------------
Change Change Change Change
1999 1998 Amount Percent 1999 1998 Amount Percent
----------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amount of loans outstanding at end
of period 983,510 910,974 72,536 8.0% 983,510 910,974 72,536 8.0%
Daily average amount of loans (net 960,860 898,992 61,868 6.9% 935,650 898,992 36,658 4.1%
of unearned discount)
Balance of allowance for possible
loan losses at beginning of period 13,055 12,441 614 4.9% 12,441 12,434 7 0.1%
Loans charged off:
Commercial, financial, and agricultural 492 129 363 281.4% 864 410 454 110.7%
Real estate construction 0 0 0 0
Real estate mortgage 0 20 (20) -100.0% 33 20 13 65.0%
Installment 1,000 1,235 (235) -19.0% 3,167 4,075 (908) -22.3%
----------------------------------------- -------------------------------------------
Total loans charged off 1,492 1,384 108 7.8% 4,064 4,505 (441) -9.8%
Recoveries of loans previously charged off:
Commercial, financial, and agricultural 2l 51 (30) -58.8% 113 133 (20) -15.0%
Real estate construction 0 0 0 0
Real estate mortgage 2 0 5 0
Installment 237 157 80 51.0% 738 529 209 39.5%
----------------------------------------- -------------------------------------------
Total recoveries 260 208 52 25.0% 856 662 194 29.3%
Net loans charged off 1,232 1,176 56 4.8% 3,208 3,843 (635) -16.5%
Additions to allowance charged to
expense 1,099 1,176 (77) -6.5% 3,689 3,850 (161) -4.2%
Balance at end of period 12,922 12,441 481 3.9% 12,922 12,441 481 3.9%
Ratio of net chargeoffs to average loans
outstanding 0.51% 0.52% -0.01% ------ 0.46% 0.59% -0.13% ------
</TABLE>
23
<PAGE>
G) The following table sets forth information by category of noninterest
income for the Company for the periods indicated.
<TABLE>
<CAPTION>
(000's omitted) Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------------------------------------------
1999 1998 Change Change 1999 1998 Change Change
Amount Percent Amount Percent
-------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Personal trust services 295 292 3 1.0% 962 860 102 11.9%
Mutual fund and related
investment products 262 312 (50) -16.0% 899 910 (11) -1.2%
BPA/EBT income 670 594 76 12.8% 1,992 1,761 231 13.1%
Deposit service charges 1,047 1,003 44 4.4% 2,850 2,725 125 4.6%
Overdraft fees 843 846 (3) -0.4% 2,356 2,150 206 9.6%
Other service charges 1,407 918 489 53.3% 2,904 2,177 727 33.4%
and fees
-------------------------------- ---------------------------------
Total customer related 4,524 3,965 559 14.1% 11,963 10,583 1,380 13.0%
revenue
Net security gains (499) 132 (631) -478.0% (222) 1,398 (1,620) -115.9%
(losses)
Disposition of branch 0 0 0 0 0 (68) 68 -100.0%
properties
-------------------------------- ---------------------------------
Nonrecurring other (499) 132 (631) -478.0% (222) 1,330 (1,552) -116.7%
income
Miscellaneous income (3) 101 (104) -103.0% 264 651 (387) -59.4%
-------------------------------- ---------------------------------
Total 4,022 4,198 (176) -4.2% 12,005 12,564 (559) -4.4%
Total noninterest income
(excluding nonrecurring
items) as a percentage 19.9% 19.6% 0.4%pts--- 19.2% 18.6% 0.6%pts---
of operating income
</TABLE>
24
<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:
(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:
None
25
<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: November 12, 1999
Sanford A. Belden, President and
Chief Executive Officer
Date: November 12, 1999
Charles M. Ertel, Assistant Treasurer
Chief Accounting Officer
26
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Sep-30-1999
<PERIOD-END> Sep-30-1999
<CASH> 65,092
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 624,497
<INVESTMENTS-CARRYING> 4,846
<INVESTMENTS-MARKET> 4,882
<LOANS> 982,673
<ALLOWANCE> 12,922
<TOTAL-ASSETS> 1,774,168
<DEPOSITS> 1,372,001
<SHORT-TERM> 169,400
<LIABILITIES-OTHER> 21,303
<LONG-TERM> 70,000
<COMMON> 7,640
29,816
0
<OTHER-SE> 104,008
<TOTAL-LIABILITIES-AND-EQUITY> 1,774,168
<INTEREST-LOAN> 62,308
<INTEREST-INVEST> 28,312
<INTEREST-OTHER> 5
<INTEREST-TOTAL> 90,625
<INTEREST-DEPOSIT> 31,984
<INTEREST-EXPENSE> 40,680
<INTEREST-INCOME-NET> 49,945
<LOAN-LOSSES> 3,689
<SECURITIES-GAINS> (222)
<EXPENSE-OTHER> 39,673
<INCOME-PRETAX> 18,589
<INCOME-PRE-EXTRAORDINARY> 18,589
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,639
<EPS-BASIC> 1.75
<EPS-DILUTED> 1.73
<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>
