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, 2000
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 - 7,093,059 shares outstanding as of May 11, 2000
1
<PAGE>
INDEX
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
Part I. Information
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets --
March 31, 2000, December 31, 1999 and March 31, 1999
Consolidated statements of income --
Three months ended March 31, 2000 and 1999
Consolidated statements of cash flows --
Three months ended March 31, 2000, and 1999
Consolidated statements of comprehensive income --
Three months ended March 31, 2000 and 1999
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Securities Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
2
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
March 31, December 31, March 31,
2000 1999 1999
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C>
Cash and due from banks $71,510,871 $76,526,657 $56,591,562
Federal funds sold 7,800,000 24,200,000 0
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL CASH AND CASH EQUIVALENTS 79,310,871 100,726,657 56,591,562
Investment securities
U.S. Treasury 2,999,843 2,999,518 2,996,258
U.S. Government agencies and corporations 209,511,839 174,097,408 165,697,013
States and political subdivisions 123,889,874 123,265,608 85,759,689
Mortgage-backed securities 292,748,775 290,000,398 298,555,688
Federal Reserve Bank 2,293,950 2,173,950 2,173,950
Other securities 60,409,691 60,278,119 38,298,734
---------------------------------------------
Investment securities at cost 691,853,972 652,815,001 593,481,332
Market value adjustment on available for sale securities (21,001,456) (22,127,416) 5,935,989
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES 670,852,516 630,687,585 599,417,321
Loans 1,034,127,545 1,009,942,875 918,038,990
Less: Unearned discount 640,022 720,360 1,135,082
Reserve for possible loan losses 13,915,327 13,420,610 12,593,682
- -----------------------------------------------------------------------------------------------------------------------------
NET LOANS 1,019,572,196 995,801,905 904,310,226
Bank premises and equipment 25,637,373 25,508,863 24,512,141
Accrued interest receivable 15,008,802 14,168,068 13,293,285
Intangible assets 48,374,472 49,484,949 53,373,796
Other assets 24,846,480 24,323,539 7,399,370
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,883,602,710 $1,840,701,566 $1,658,897,701
=============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits
Noninterest bearing $249,891,997 $225,012,768 $229,271,885
Interest bearing 1,170,892,557 1,135,293,216 1,140,640,068
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 1,420,784,554 1,360,305,984 1,369,911,953
Federal funds purchased 0 0 26,200,000
Term borrowings 299,000,000 324,000,000 95,000,000
Company obligated mandatorily redeemable preferred securities
of subsidiary, Community Capital Trust I holding solely junior
subordinated debentures of the Company 29,818,875 29,817,188 29,812,125
Accrued interest and other liabilities 21,580,718 18,090,941 17,455,496
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,771,184,147 1,732,214,113 1,538,379,574
- -----------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock (7,093,059; 7,092,259; 7,262,829 7,641,159 7,640,359 7,639,429
shares outstanding)
Surplus 33,338,119 33,327,586 33,245,970
Undivided profits 98,592,247 95,340,837 86,608,852
Accumulated other comprehensive income (12,422,361) (13,088,367) 3,511,137
Treasury stock (548,100; 548,100; 376,600 shares) (14,718,788) (14,718,787) (10,464,675)
Shares issued under employee stock plan - unearned (11,813) (14,175) (22,586)
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 112,418,563 108,487,453 120,518,127
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,883,602,710 $1,840,701,566 $1,658,897,701
=============================================================================================================================
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
March 31,
2000 1999
- ----------------------------------------------------------------------------------------
Interest Income:
<S> <C> <C>
Interest and fees on loans $22,655,660 $20,249,179
Interest and dividends on investments:
U.S. Treasury 66,888 67,556
U.S. Government agencies and corporations 3,549,568 3,220,327
States and political subdivisions 1,609,808 825,083
Mortgage-backed securities 5,231,370 4,076,979
Other securities 1,021,077 541,198
Interest on federal funds sold 301,590 0
Interest on deposits at other banks 134,758 421
- ----------------------------------------------------------------------------------------
Total interest income 34,570,720 28,980,743
- ----------------------------------------------------------------------------------------
Interest expense:
Interest on deposits
Savings 2,661,111 2,764,916
Time 8,509,698 7,905,181
Interest on federal funds purchased and
term borrowings 4,846,692 1,705,978
Interest on mandatorily redeemable capital
securities of subsidiary 732,938 732,937
- ----------------------------------------------------------------------------------------
Total interest expense 16,750,439 13,109,012
- ----------------------------------------------------------------------------------------
Net interest income 17,820,281 15,871,731
Less:Provision for possible loan losses 1,209,290 1,168,604
- ----------------------------------------------------------------------------------------
Net Interest income after provision for loan losses 16,610,991 14,703,127
- ----------------------------------------------------------------------------------------
Other income:
Fiduciary and investment services 645,580 698,054
Service charges on deposit accounts 1,770,399 1,579,388
Commissions on investment products 395,331 323,913
Other service charges, commissions and fees 1,286,623 1,032,513
Miscellaneous income 44,519 192,695
Investment security gains (losses) (212,236) 276,642
- ----------------------------------------------------------------------------------------
Total other income 3,930,216 4,103,205
- ----------------------------------------------------------------------------------------
Other expenses:
Salaries and employee benefits 6,818,843 6,585,205
Occupancy expense, net 1,034,366 1,057,636
Equipment and furniture expense 911,485 895,776
Amortization of intangible assets 1,110,476 1,157,923
Other 3,487,673 3,522,550
- ----------------------------------------------------------------------------------------
Total other expenses 13,362,845 13,219,090
- ----------------------------------------------------------------------------------------
Income before income taxes 7,178,362 5,587,242
Income taxes 2,153,750 1,899,187
- ----------------------------------------------------------------------------------------
NET INCOME $5,024,612 $3,688,055
========================================================================================
Earnings per share - Basic $0.71 $0.51
- Diluted $0.70 $0.50
========================================================================================
See notes to consolidated financial statements
</TABLE>
4
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<TABLE>
<CAPTION>
COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For Three Months Ended March 31, 2000, 1999
2000 1999
- ----------------------------------------------------------------------------------------------------
Operating Activities:
<S> <C> <C>
Net income $ 5,024,612 $ 3,688,055
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 743,647 247,408
Amortization of intangible assets 1,110,476 1,157,923
Net amortization of security premiums and discounts (32,163) 1,699,180
Amortization of discount on loans (80,338) (172,024)
Provision for loan losses 1,209,290 1,168,604
Provision for deferred taxes (730,136) 1,622,172
(Gain)\loss on sale of investment securities 212,236 (276,642)
(Gain)\loss on sale of loans and other assets (44,519) (98,728)
Change in interest receivable (840,734) (917,951)
Change in other assets and other liabilities 3,240,847 3,059,561
Change in unearned loan fees and costs (199,472) (314,034)
- ----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 9,613,746 10,863,524
- ----------------------------------------------------------------------------------------------------
Investing Activities:
Proceeds from sales of investment securities 11,519,958 4,616,500
Proceeds from maturities of held to maturity investment securities 580,423 657,496
Proceeds from maturities of available for sale investment securities 6,876,115 46,665,041
Purchases of held to maturity investment securities (1,030,225) (666,049)
Purchases of available for sale investment securities (57,165,315) (59,882,642)
Net change in loans outstanding (24,646,593) (119,642)
Loans purchased in branch acquisition 0 0
Capital expenditures (1,013,779) (191,059)
Proceeds from sales of property and equipment 132,963 313,755
Other investing activities 0 (93,500)
- ----------------------------------------------------------------------------------------------------
Net cash used by investing activities (64,746,453) (8,700,100)
- ----------------------------------------------------------------------------------------------------
Financing Activities:
Net change in demand deposits, NOW accounts,and savings accounts 13,720,808 (5,920,198)
Net change in certificates of deposit 46,757,762 (2,233,427)
Net change in federal funds purchased 0 (8,500,000)
Net change in term borrowings (25,000,000) (5,000,000)
Issuance of common and preferred stock 11,333 179,228
Treasury stock purchased 0 (1,312,719)
Cash dividends (1,772,982) (1,678,184)
- ----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 33,716,921 (24,465,300)
- ----------------------------------------------------------------------------------------------------
Change in cash and cash equivalents (21,415,787) (22,301,876)
Cash and cash equivalents at beginning of year 100,726,657 78,893,438
- ----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 79,310,871 56,591,562
====================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $14,625,337 $13,388,354
====================================================================================================
Cash paid for income taxes $ 465,373 $277,015
====================================================================================================
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
AND INVESTING ACTIVITIES:
Dividends declared and unpaid $1,773,202 $1,670,450
Gross change in unrealized gains and (losses) on
available-for-sale securities $1,125,961 ($1,309,562)
====================================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
5
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<TABLE>
<CAPTION>
COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For Three Months Ended March 31, 2000 and 1999
2000 1999
- -------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), before tax:
<S> <C> <C>
Unrealized gains on securities:
Change in unrealized holding gains (losses) arising during period $ 913,725 $ (1,032,920)
Less: Reclassification adjustment for gains included in
net income 212,236 (276,642)
- -------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), before tax 1,125,961 (1,309,562)
Income tax benefit related to items of other (459,955) 534,956
comprehensive income
- -------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax 666,006 (774,606)
Plus: Net income 5,024,612 3,688,055
- -------------------------------------------------------------------------------------------------------------
Comprehensive income $ 5,690,618 $ 2,913,449
=============================================================================================================
See notes to consolidated financial statements
</TABLE>
6
<PAGE>
Community Bank System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2000
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, 2000
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2000.
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 March 31, 2000 were
$31,249,455 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.
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, 2000
and 1999:
For three months ended March 31, 2000 Income Shares Per share
amount
- --------------------------------------------------------------------------------
Net Income $ 5,024,612
Basic EPS $ 5,024,612 7,092,527 $ 0.71
Effect of diluted securities:
Stock options 0 88,452
---------------------------
DILUTED EPS $ 5,024,612 7,180,979 $ 0.70
================================================================================
- --------------------------------------------------------------------------------
For three months ended March 31, 1999 Income Shares Per share
amount
- --------------------------------------------------------------------------------
Net Income $ 3,688,055
Basic EPS $ 3,688,055 7,285,839 $ 0.51
Effect of diluted securities:
Stock options 0 97,669
---------------------------
DILUTED EPS $ 3,688,055 7,383,508 $ 0.50
================================================================================
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's Discussion and Analysis of Financial Condition and of
Operations
The purpose of the discussion is to present material changes in Community Bank
System, Inc.'s financial condition and results of operations during the three
months ended March 31, 2000 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, 1999 as provided by the Federal Reserve System; the peer group is comprised
of 159 bank holding companies having $1 to $3 billion in assets.
8
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<TABLE>
<CAPTION>
COMMUNITY BANK SYSTEM, INC.
SUMMARY OF OPERATIONS
EARNINGS AND BALANCE SHEET RECAP
1ST QUARTER 2000 AND PRIOR QUARTER COMPARISONS
000s Omitted Three Months Ended,
Line -------- March 31, March 31, Change Change
No. Earnings 2000 1999 Amount Percent
--- -------- --------- --------- --------- ----------------
<S> <C> <C> <C> <C>
1 Net interest income $17,820 $15,872 $1,948 12.3%
2 Loan loss provision 1,209 1,169 40 3.4%
3 Net interest income after 16,611 14,703 1,908 13.0%
provision for loan losses
4 Investment security
gain (loss) (212) 277 (489) -176.5%
5 Other income 4,143 3,826 317 8.3%
6 Other expense 12,253 12,061 192 1.6%
7 Intangible amortization 1,110 1,158 (48) -4.1%
8 Inc before inc tax 7,179 5,587 1,592 28.5%
9 Income tax 2,154 1,899 255 13.4%
10 Net income $5,025 $3,688 $1,337 36.3%
Earnings per share
11a Basic $0.71 $0.51 $0.20 39.2%
11b Diluted $0.70 $0.50 $0.20 40.0%
======== ======== ======== ========
----------------------
Balances At Period End
----------------------
12 Loans $1,033,488 $916,904 $116,584 12.7%
13 Investments (excl. mkt val adj) 692,300 593,541 98,759 16.6%
14 Earning assets 1,725,787 1,510,445 215,342 14.3%
15 Loan loss reserve 13,915 12,594 1,321 10.5%
16 Intangible assets 48,374 53,374 (5,000) -9.4%
17 Total assets 1,883,603 1,658,898 224,705 13.5%
18 Deposits 1,420,785 1,369,912 50,873 3.7%
19 Borrowings 328,819 151,012 177,807 117.7%
20 Total equity $112,419 $120,518 ($8,099) -6.7%
</TABLE>
9a
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANK SYSTEM, INC.
SUMMARY OF OPERATIONS
EARNINGS AND BALANCE SHEET RECAP
1ST QUARTER 2000 AND PRIOR QUARTER COMPARISONS
000s Omitted Three Months Ended,
Line -------- March 31, Dec 31, Change Change
No. Earnings 2000 1999 Amount Percent
--- -------- --------- --------- --------- ----------------
<S> <C> <C> <C> <C>
1 Net interest income $17,820 $17,996 ($176) -1.0%
2 Loan loss provision 1,209 $1,447 (238) -16.4%
3 Net interest income after 16,611 16,549 62 0.4%
provision for loan losses
4 Investment security
gain (loss) (212) (415) 203 48.9%
5 Other income 4,143 3,896 247 6.3%
6 Other expense 12,253 11,911 342 2.9%
7 Intangible amortization 1,110 1,149 (39) -3.4%
8 Inc before inc tax 7,179 6,970 209 3.0%
9 Income tax 2,154 1,973 181 9.2%
10 Net income $5,025 $4,997 $28 0.6%
Earnings per share
11a Basic $0.71 $0.70 $0.01 1.4%
11b Diluted $0.70 $0.69 $0.01 1.4%
======== ======== ======== ========
----------------------
Balances At Period End
----------------------
12 Loans $1,033,488 $1,009,223 $24,265 2.4%
13 Investments (excl. mkt val adj) 692,300 653,182 39,118 6.0%
14 Earning assets 1,725,787 1,662,405 63,382 3.8%
15 Loan loss reserve 13,915 13,421 494 3.7%
16 Intangible assets 48,374 49,485 (1,111) -2.2%
17 Total assets 1,883,603 1,840,702 42,901 2.3%
18 Deposits 1,420,785 1,360,306 60,479 4.4%
19 Borrowings 328,819 353,817 (24,998) -7.1%
20 Total equity $112,419 $108,487 $3,932 3.6%
</TABLE>
9b
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANK SYSTEM, INC.
SUMMARY OF OPERATIONS
EARNINGS AND BALANCE SHEET RECAP
1ST QUARTER 2000 AND PRIOR QUARTER COMPARISONS
000s Omitted Three Months Ended,
Line -------- Dec 31, Sep 30, Change Change
No. Earnings 1999 1999 Amount Percent
--- -------- --------- --------- --------- ----------------
<S> <C> <C> <C> <C>
1 Net interest income $17,996 $17,554 $442 2.5%
2 Loan loss provision 1,447 1,099 348 31.7%
3 Net interest income after 16,549 16,455 94 0.6%
provision for loan losses
4 Investment security
gain (loss) (415) (499) 84 16.8%
5 Other income 3,896 4,521 (625) -13.8%
6 Other expense 11,911 12,113 (202) -1.7%
7 Intangible amortization 1,149 1,153 (4) -0.3%
8 Inc before inc tax 6,970 7,211 (241) -3.3%
9 Income tax 1,973 2,309 (336) -14.6%
10 Net income $4,997 $4,902 $95 1.9%
Earnings per share
11a Basic $0.70 $0.69 $0.01 1.4%
11b Diluted $0.69 $0.68 $0.01 1.5%
======== ======== ======== ========
----------------------
Balances At Period End
----------------------
12 Loans $1,009,223 $982,673 $26,550 2.7%
13 Investments (excl. mkt val adj) 653,182 643,054 10,128 1.6%
14 Earning assets 1,662,405 1,625,727 36,678 2.3%
15 Loan loss reserve 13,421 12,922 499 3.9%
16 Intangible assets 49,485 51,189 (1,704) -3.3%
17 Total assets 1,840,702 1,774,168 66,534 3.8%
18 Deposits 1,360,306 1,372,001 (11,695) -0.9%
19 Borrowings 353,817 269,216 84,601 31.4%
20 Total equity $108,487 $111,648 ($3,161) -2.8%
</TABLE>
9c
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANK SYSTEM, INC.
SUMMARY OF OPERATIONS
KEY RATIO RECAP
1ST QUARTER 2000 AND PRIOR QUARTER COMPARISONS
000s Omitted Three Months Ended,
Line ------------- March 31, March 31, Change Change
No. Profitability 2000 1999 Amount Percent
--- ------------- --------- --------- --------- -----------------
<S> <C> <C> <C>
21 Return on assets 1.09% 0.90% 0.19 %pts. ---
22 Return on equity 18.52% 12.36% 6.16 %pts. ---
23 Cash earnings per share ( diluted) $0.79 $0.59 $0.20 33.9%
24 Tangible return on assets 1.23% 1.06% 0.17 %pts. ---
25 Tangible return on equity 20.94% 14.66% 6.28 %pts. ---
26 Net interest margin 4.31% 4.38% (0.07)%pts. ---
27 Non interest income/ 18.3% 19.0% (0.7)%pts. ---
operating income (excl sec gains)
28 Efficiency ratio
(excl one time items 54.0% 59.0% (5.0)%pts. ---
& intangible amortization)
-------
Capital
-------
29 Tier I leverage ratio 5.80% 5.81% (0.01)%pts. ---
Common shares outstanding
30a Weighted average 7,181 7,384 (203) -2.7%
30b Period end 7,093 7,263 (170) -2.3%
31 Cash dividends declared
per common share $0.25 $0.23 $0.02 8.7%
32 Common stock price $22.81 $23.81 ($1.00) -4.2%
33a Book value $15.85 $16.59 ($0.74) -4.5%
33b Tangible book value $9.03 $9.24 ($0.21) -2.3%
--------------------
Asset Quality Ratios
--------------------
34 Loan loss reserve /
loans outstanding 1.35% 1.37% (0.02)%pts. ---
35 Nonperforming loans /
loans outstanding 0.57% 0.49% 0.08 %pts. ---
36 Loan loss reserve /
nonperforming loans 235% 282% (47)%pts. ---
37 Net charge-offs /
average loans 0.28% 0.45% (0.17)%pts. ---
38 Loan loss provision /
net charge-offs 169% 115% 54 %pts. ---
39 Nonperforming assets /
loans outstanding + OREO 0.69% 0.60% 0.09 %pts. ---
</TABLE>
10a
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANK SYSTEM, INC.
SUMMARY OF OPERATIONS
KEY RATIO RECAP
1ST QUARTER 2000 AND PRIOR QUARTER COMPARISONS
000s Omitted Three Months Ended,
Line ------------- March 31, Dec 31, Change Change
No. Profitability 2000 1999 Amount Percent
--- ------------- --------- --------- --------- ----------------
<S> <C> <C> <C>
21 Return on assets 1.09% 1.11% (0.02)%pts. ---
22 Return on equity 18.52% 17.94% 0.58 %pts. ---
23 Cash earnings per share ( diluted) $0.79 $0.79 $0.00 0.0%
24 Tangible return on assets 1.23% 1.26% (0.03)%pts. ---
25 Tangible return on equity 20.94% 20.38% 0.56 %pts. ---
26 Net interest margin 4.31% 4.49% (0.18)%pts. ---
27 Non interest income/ 18.3% 17.3% 1.0 %pts. ---
operating income (excl sec gains)
28 Efficiency ratio
(excl one time items 54.0% 52.9% 1.1 %pts. ---
& intangible amortization)
-------
Capital
-------
29 Tier I leverage ratio 5.80% 5.80% 0.00 %pts. ---
Common shares outstanding
30a Weighted average 7,181 7,213 (32) -0.4%
30b Period end 7,093 7,092 1 0.0%
31 Cash dividends declared
per common share $0.25 $0.25 $0.00 0.0%
32 Common stock price $22.81 $23.13 ($0.32) -1.4%
33a Book value $15.85 $15.30 $0.55 3.6%
33b Tangible book value $9.03 $8.32 $0.71 8.5%
--------------------
Asset Quality Ratios
--------------------
34 Loan loss reserve /
loans outstanding 1.35% 1.33% 0.02 %pts. ---
35 Nonperforming loans /
loans outstanding 0.57% 0.57% 0.00 %pts. ---
36 Loan loss reserve /
nonperforming loans 235% 235% 0 %pts. ---
37 Net charge-offs /
average loans 0.28% 0.38% (0.10)%pts. ---
38 Loan loss provision /
net charge-offs 169% 153% 16 %pts. ---
39 Nonperforming assets /
loans outstanding + OREO 0.69% 0.67% 0.02 %pts. ---
</TABLE>
10b
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANK SYSTEM, INC.
SUMMARY OF OPERATIONS
KEY RATIO RECAP
1ST QUARTER 2000 AND PRIOR QUARTER COMPARISONS
000s Omitted Three Months Ended,
Line ------------- Dec 31, Sep 30, Change Change
No. Profitability 1999 1999 Amount Percent
--- ------------- --------- --------- --------- ----------------
<S> <C> <C> <C>
21 Return on assets 1.11% 1.12% (0.01)%pts. ---
22 Return on equity 17.94% 17.17% 0.77 %pts. ---
23 Cash earnings per share ( diluted) $0.79 $0.77 $0.02 2.6%
24 Tangible return on assets 1.26% 1.27% (0.01)%pts. ---
25 Tangible return on equity 20.38% 19.56% 0.82 %pts. ---
26 Net interest margin 4.49% 4.49% 0.00 %pts. ---
27 Non interest income/ 17.3% 19.9% (2.6)%pts. ---
operating income (excl sec gains)
28 Efficiency ratio
(excl one time items 52.9% 52.6% 0.3 %pts. ---
& intangible amortization)
-------
Capital
-------
29 Tier I leverage ratio 5.80% 5.79% 0.01 %pts. ---
Common shares outstanding
30a Weighted average 7,213 7,248 (35) -0.5%
30b Period end 7,092 7,141 (49) -0.7%
31 Cash dividends declared
per common share $0.25 $0.25 $0.00 0.0%
32 Common stock price $23.13 $27.38 ($4.25) -15.5%
33a Book value $15.30 $15.63 ($0.33) -2.1%
33b Tangible book value $8.32 $8.55 ($0.23) -2.7%
--------------------
Asset Quality Ratios
--------------------
34 Loan loss reserve /
loans outstanding 1.33% 1.32% 0.01 %pts. ---
35 Nonperforming loans /
loans outstanding 0.57% 0.42% 0.15 %pts. ---
36 Loan loss reserve /
nonperforming loans 235% 316% (81)%pts. ---
37 Net charge-offs /
average loans 0.38% 0.51% (0.13)%pts. ---
38 Loan loss provision /
net charge-offs 153% 89% 64 %pts. ---
39 Nonperforming assets /
loans outstanding + OREO 0.67% 0.48% 0.19 %pts. ---
</TABLE>
10c
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANK SYSTEM, INC.
SUMMARY OF OPERATIONS
KEY RATIO RECAP
1ST QUARTER 2000 AND PRIOR QUARTER COMPARISONS
000s Omitted Three Months Ended,
Line ------------------------ March 31, March 31, Change Change
No. Asset Quality Components 2000 1999 Amount Percent
--- ------------------------ --------- --------- --------- ----------------
<S> <C> <C> <C> <C>
40 Nonaccruing loans $5,320 $2,751 $2,569 93.4%
41 90+ days delinquent 592 1,709 (1,117) -65.4%
--- ----- ------ ----
42 Tot nonperforming loans $5,912 $4,460 $1,452 32.6%
43 Troubled debt restructurings 130 156 (26) -16.7%
44 Other real estate 1,050 935 115 12.3%
----- --- --- ----
45 Tot nonperforming assets $7,092 $5,551 $1,541 27.8%
46 Net Charge-Offs 715 1,016 (301) -29.6%
---------------------------------
Components of Net Interest Margin
---------------------------------
47 Loan yield 8.95% 8.97% (0.02)%pts. --- ---
48 Investment yield 7.13% 6.26% 0.87 %pts. --- ---
49 Earning asset yield 8.20% 7.91% 0.29 %pts. --- ---
50 Interest bearing deposits rate 3.92% 3.80% 0.12 %pts. --- ---
51 Borrowed funds rate 6.36% 6.15% 0.21 %pts. --- ---
52 Cost of all interest bearing funds 4.50% 4.09% 0.41 %pts. --- ---
53 Cost of funds (includes DDA) 3.87% 3.48% 0.39 %pts. --- ---
54 Cost of funds / earning assets 3.89% 3.53% 0.36 %pts. --- ---
55 Net interest margin 4.31% 4.38% (0.07)%pts. --- ---
56 Full tax equivalent adjustment $718 $389 $329 84.6%
---------------------------
Average Balances for Period
---------------------------
57 Loans $1,017,566 $915,828 $101,738 11.1%
58 Investments (excl. mkt val adj.) 712,463 590,570 121,893 20.6%
59 Earning assets 1,730,029 1,506,398 223,631 14.8%
60 Total assets 1,859,693 1,669,044 190,649 11.4%
61 Deposits 1,388,181 1,366,368 21,813 1.6%
62 Borrowings 352,762 160,846 191,916 119.3%
63 Total equity $109,144 $120,986 ($11,842) -9.8%
</TABLE>
11a
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANK SYSTEM, INC.
SUMMARY OF OPERATIONS
KEY RATIO RECAP
1ST QUARTER 2000 AND PRIOR QUARTER COMPARISONS
000s Omitted Three Months Ended,
Line ------------------------ March 31, Dec 31, Change Change
No. Asset Quality Components 2000 1999 Amount Percent
--- ------------------------ --------- --------- --------- ----------------
<S> <C> <C> <C> <C>
40 Nonaccruing loans $5,320 $4,666 $654 14.0%
41 90+ days delinquent 592 $1,047 (455) -43.5%
--- ------ ---- ----
42 Tot nonperforming loans $5,912 $5,713 $199 3.5%
43 Troubled debt restructurings 130 122 8 6.6%
44 Other real estate 1,050 884 166 18.8%
----- --- --- ----
45 Tot nonperforming assets $7,092 $6,719 $373 5.6%
46 Net Charge-Offs 715 949 (234) -24.7%
---------------------------------
Components of Net Interest Margin
---------------------------------
47 Loan yield 8.95% 8.97% (0.02)%pts. --- ---
48 Investment yield 7.13% 6.96% 0.17 %pts. --- ---
49 Earning asset yield 8.20% 8.18% 0.02 %pts. --- ---
50 Interest bearing deposits rate 3.92% 3.82% 0.10 %pts. --- ---
51 Borrowed funds rate 6.36% 5.96% 0.40 %pts. --- ---
52 Cost of all interest bearing funds 4.50% 4.27% 0.23 %pts. --- ---
53 Cost of funds (includes DDA) 3.87% 3.65% 0.22 %pts. --- ---
54 Cost of funds / earning assets 3.89% 3.68% 0.21 %pts. --- ---
55 Net interest margin 4.31% 4.49% (0.18)%pts. --- ---
56 Full tax equivalent adjustment $718 $628 $90 14.3%
---------------------------
Average Balances for Period
---------------------------
57 Loans $1,017,566 $997,212 $20,354 2.0%
58 Investments (excl. mkt val adj.) 712,463 647,100 65,363 10.1%
59 Earning assets 1,730,029 1,644,312 85,717 5.2%
60 Total assets 1,859,693 1,785,850 73,843 4.1%
61 Deposits 1,388,181 1,361,607 26,574 2.0%
62 Borrowings 352,762 297,795 54,967 18.5%
63 Total equity $109,144 $110,502 ($1,358) -1.2%
</TABLE>
11b
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANK SYSTEM, INC.
SUMMARY OF OPERATIONS
KEY RATIO RECAP
1ST QUARTER 2000 AND PRIOR QUARTER COMPARISONS
000s Omitted Three Months Ended,
Line ------------------------ Dec 31, Sep 30, Change Change
No. Asset Quality Components 1999 1999 Amount Percent
--- ------------------------ --------- --------- --------- ---------------
<S> <C> <C> <C> <C>
40 Nonaccruing loans $4,666 $3,257 $1,409 43.3%
41 90+ days delinquent 1,047 836 211 25.2%
42 Tot nonperforming loans $5,713 $4,093 $1,620 39.6%
43 Troubled debt restructurings 122 119 3 2.5%
44 Other real estate 884 501 383 76.4%
45 Tot nonperforming assets $6,719 $4,713 $2,006 42.6%
46 Net Charge-Offs 949 1,232 (283) -23.0%
---------------------------------
Components of Net Interest Margin
---------------------------------
47 Loan yield 8.97% 8.85% 0.12 %pts. ---
48 Investment yield 6.96% 6.74% 0.22 %pts. ---
49 Earning asset yield 8.18% 8.00% 0.18 %pts. ---
50 Interest bearing deposits rate 3.82% 3.72% 0.10 %pts. ---
51 Borrowed funds rate 5.96% 5.88% 0.08 %pts. ---
52 Cost of all interest bearing funds 4.27% 4.10% 0.17 %pts. ---
53 Cost of funds (includes DDA) 3.65% 3.49% 0.16 %pts. ---
54 Cost of funds / earning assets 3.68% 3.51% 0.17 %pts. ---
55 Net interest margin 4.49% 4.49% 0.00 %pts. ---
56 Full tax equivalent adjustment $628 $614 $14 2.3%
---------------------------
Average Balances for Period
---------------------------
57 Loans $997,212 $960,860 $36,352 3.8%
58 Investments (excl. mkt val adj.) 647,100 643,622 3,478 0.5%
59 Earning assets 1,644,312 1,604,482 39,830 2.5%
60 Total assets 1,785,850 1,743,095 42,755 2.5%
61 Deposits 1,361,607 1,371,162 (9,555) -0.7%
62 Borrowings 297,795 242,367 55,428 22.9%
63 Total equity $110,502 $113,266 ($2,764) -2.4%
</TABLE>
11c
<PAGE>
Earnings per share (diluted) for first quarter 2000 reached $.70, a record high
for the Company and up 40% over the prior year's level of $.50. Net income rose
over 36% to $5.03 million from $3.69 million in 1999. Return on equity (ROE)
increased a substantial 6.16 percentage points to 18.52%, while return on assets
(ROA) climbed to 1.09%, up 19 basis points.
Earnings continue to be sustained at record levels for the third consecutive
quarter. Loans have climbed a strong $24 million since year-end, now up nearly
13% from one year earlier. Net charge-offs were down by almost 30% from last
year's first quarter, enabling the provision for future loan losses to be
unchanged. Despite a modest reduction in spreads, net interest income rose by
12.3% or $1.95 million. Noninterest income (excluding securities transactions)
grew 8.3% or $317,000 while growth in overhead was held to a minimal 1.1%
increase or $144,000. Securities losses of $212,000 were recognized on $11.6
million in sales, with an expected future benefit to investment interest income.
And lastly, the Company's blended tax rate was lowered to 30% as a result of
selected investment portfolio strategies and effective tax planning.
Cash earnings per share (diluted) also reached record levels, up 34% to $.79 for
the quarter. Tangible return on equity climbed to 20.94%, exceeding nominal ROE
by 2.42 percentage points for the same period, while cash ROA rose to 1.23%. 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 12.3% increase in net interest income for the quarter reflects $224 million
more in average earning assets (up 14.8%), including $31 million in temporary
money market instruments resulting from borrowings toward year end in
anticipation of Year 2000 cash needs. Of the remaining increase, $102 million
resulted from loan growth and the balance from investment portfolio purchases,
which began in late spring 1999 when buying opportunities became more favorable.
Nearly 84% of the $193 million net increase in earning assets was funded with
borrowings, with the balance from personal and business deposits (up $25 million
or 2.1%). As a result, average borrowings as a percent of total funds sources
almost doubled during the period, rising to 20.3% in first quarter 2000 compared
to 10.5% one year earlier.
First quarter net interest margin was 4.31%, seven basis points less than four
quarters earlier. Besides the impact of expanded borrowings, the margin reflects
the five 25 basis point increases (beginning in mid-1999) in the federal funds
rate as managed by the Federal Reserve and steady accompanying increases in the
prime rate, Treasurys, and other financial market rates. Though the yield on
earning assets rose 29 basis points during the last year versus seven basis
points in the cost of deposits, the higher mix of borrowings and an increase in
the borrowing rate of 21 basis points caused the net interest margin to narrow
slightly.
First quarter 2000 net interest income compared to the fourth quarter 1999 level
was influenced by several seasonal and other special factors. These factors
include the positive seasonal impact of the Bank's holiday extension program in
fourth quarter 1999; the negative spread on excess Year 2000 liquidity, largely
in first quarter 2000; and several other operational adjustments which affected
both quarters. When the results for both quarters are adjusted for these
factors, the reported change in first quarter net interest income (full-tax
equivalent basis) moves from an $87,000 decrease to a $391,000 increase.
Accordingly, the adjusted net interest margin for the two quarters remains
unchanged at 4.41%, a better indication of normalized margins than the reported
decrease from 4.49% in fourth quarter 1999 to 4.31% this quarter. Nonetheless,
further narrowing of margins may occur as past and forecasted Federal Reserve
actions and capital market responses work their way through the Bank's balance
sheet and interest rate risk position. Management is implementing programs
designed to mitigate the impact of narrowing spreads, including raising rates on
new installment loans and terming out certain borrowings where intermediate term
rates are more favorable than short term rates due to the inverted Treasury
yield curve.
Noninterest income (excluding securities transactions) for first quarter 2000
rose $317,000 or 8.3% from one year earlier to $4.14 million. Nearly 62% of the
increase related to financial services, which rose by $194,000 or 13.7%. The
greatest portion of that improvement was a 21% climb in mutual fund and
insurance product commissions, followed by growth in insurance revenues, which
more than doubled. Revenues from the Company's EBT/BPA business, which provides
investment management, pension administration and consulting services, rose
7.1%, while personal trust fees increased 5.4%. The balance of the increase in
12
<PAGE>
noninterest income was from general banking fees, which rose 8.9% from overdraft
fees (up 18.3%) and deposit service charges (up 6.5%). Compared to fourth
quarter 1999, noninterest income improved by $247,000 or 6.3%.
Financial services now comprise 39% of total noninterest income (excluding
securities transactions); specialty products, which largely includes electronic
and mortgage banking and servicing activities, contribute 12%; and general
banking fees make up 49% of noninterest income. Despite higher fees from VISA
and ATM transactions, specialty product revenues were flat in the first quarter
due to reduced mortgage banking activity. Secondary market originations and
sales were $2.7 million versus $18.2 million one year earlier, reflective of
increasingly slower demand over the last year for residential refinancing due to
rising interest rates.
Noninterest income, excluding transactions related to investment securities and
disposal of branch properties, as a percent of operating income was 18.3% in the
first quarter, a small .7 percentage point decrease from the prior year. This
ratio is expected to climb in second quarter 2000 as a result of the April 3rd
acquisition of Elias Asset Management, an investment advisory firm with over
$700 million in assets under management and 1999 revenues of $3.2 million.
Loans rose over $24 million during the last three months to $1.033 billion, the
strongest first quarter loan growth in the Company's history and a sharp
contrast to last year's flat first quarter. During the last twelve months, loans
have grown by almost $117 million or 12.7%. By far the largest share of growth
in loans outstanding for the quarter was in commercial loans at $14.1 million or
58% of total growth. This pace of increase falls within the $10-$15 million
range over the last four quarters, bringing the rate of growth during the last
year to 15.5%. Consumer mortgages held in portfolio was the second fastest
growing loan category for the quarter, up $4.8 million or 20% of total growth.
Borrowers continue to use this vehicle to term out portions of their consumer
debt, largely explaining the $21 million or 10.6% increase since March 31, 1999.
Consumer direct loans (including home equity loans) were up $3.2 million for the
quarter, accounting for 13% of total loan growth. Outstandings have increased
12.1% over the last twelve months, with growth beginning during second quarter
1999 as a result of the successful "Summer Sizzler" promotion, whose momentum
has been carried through to the current period. Lastly, indirect consumer
installment loans (predominantly automobile financing) grew $2.2 million during
the last 90 days (9% of total loan growth), for a $22 million or 10.9% rise
since March 31, 1999. Loans began to climb in late March 1999 after falling
since mid 1998 when the Company adopted more conservative underwriting
practices.
Nonperforming loans ended the quarter at $5.9 million or .57% of loans
outstanding, up $1.5 million and 8 basis points, respectively, compared to one
year ago, with practically all of the increase taking place during fourth
quarter 1999. Based on the most recent peer bank data as of December 31, 1999,
when the Company's nonperforming loan ratio was also .57%, CBSI ranked more
favorably than the peer norm of .64%. The primary single reason for the fourth
quarter increase was a $1.9 million loan to a commercial business which
experienced start-up problems with a new piece of equipment, thus causing a
delay in projected higher cash flow. The equipment is now operative, and the
loan is fully backed by collateral and a small specific assignment of loan loss
reserve.
The ratio of loan loss reserves to loans outstanding ended the quarter at 1.35%,
down a minimal two basis points during the last twelve months. Coverage over
nonperformers decreased 47 percentage points to 235%, the same as at year end
1999 and a level which management believes to be adequate in light of the
minimum exposure to loss of the above nonaccruing commercial loan, which is the
cause of the lower ratio. Another measure of strength is that the reserve equals
more than the Bank's actual losses of the last three years. The ratio of
delinquencies (30 days or more) and nonaccruals to total loans increased
slightly to 1.41% at quarter end, up nine basis points from year-end 1999 and 11
basis points from the prior quarter-end level. This ratio has remained in the
1.30% to 1.50% range for the last 27 months, well within the Company's internal
guideline of 2.0%.
13
<PAGE>
Net charge-offs for the first quarter fell substantially from the same period
last year, both in absolute dollars (down $301,000 or 30%) and as a percent of
average outstandings (down 17 basis points to .28%). Most of the improvement was
due to lower installment loan charge-offs, indicative of more conservative
underwriting practices and follow-up surveillance adopted during 1998.
Installment net charge-offs averaged .79% this quarter versus 1.20% in first
quarter 1999 and 1.03% for last year as a whole. Commercial and mortgage loan
net charge-offs were miniscule this quarter. Though the reduction in net
charge-offs enabled the loan loss provision to be virtually unchanged from first
quarter last year, it nonetheless covered total actual net charge-offs by 1.69
times. This ample margin serves as a precaution in the event the Upstate New
York economy weakens after its long sustained period of relative economic
health.
The Company's first quarter efficiency ratio (recurring overhead less intangible
amortization compared to net interest plus recurring other income) improved to
54.0% from 59.0% last year. This favorable trend is a function of several
factors: an increase in net interest income due to higher earning assets,
elimination of accelerated premium amortization of the Company's CMO securities,
steady progress in developing more sources of noninterest income, and persistent
control of overhead expense. For first quarter 2000, overhead (before intangible
amortization) rose $192,000 or 1.6% over the prior year's level. All of this
increase represents personnel expense, up $234,000 or 3.5%, reflective of annual
merit increases, five fewer full-time equivalent staff, and greater benefits
expense, partially offset by changes in a variety of categories.
Liquidity
- ---------
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 availability 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 March 31, 2000, this
ratio was 15.6% and 18.3%, respectively, excluding the Company's capacity to
borrow additional funds from the Federal Home Loan Bank.
Effects of Inflation
- --------------------
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation.
Virtually all of the assets and liabilities of the Company are monetary in
nature. As a result, interest rate changes have a more significant impact on the
Company's performance than general levels of inflation.
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 accounting
principles generally accepted in the United States; (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.
14
<PAGE>
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.
Year 2000
- ---------
As of the date of this filing, the Company has not incurred any significant
business interruption as a result of the Year 2000 issue. The Company will
continue to monitor the issue throughout 2000 and expeditiously remediate any
issues that may arise. Based on the Company's readiness efforts, the Company
does not reasonably foresee any material Year 2000 issues, and therefore, costs
associated with any potential issues are not expected to have a material adverse
effect on either the financial condition or operating capacity of the Company.
15
<PAGE>
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.
<TABLE>
<CAPTION>
First Quarter Ended March 31,
-----------------------------------------------------------------------------
2000 1999
-----------------------------------------------------------------------------
(000's omitted except yields Avg. Amt. of Avg. Avg. Amt. of Avg.
and rates) Balance Interest Yield/Rate Balance Interest Yield/Rate
Paid Paid
ASSETS:
-----------------------------------------------------------------------------
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold $30,782 $432 5.64% $0 $0 0.00%
Time deposits in other banks 369 4 4.82% 44 0 3.91%
Taxable investment securities 559,201 9,926 7.14% 525,192 7,906 6.11%
Nontaxable investment securities 122,111 2,270 7.48% 65,334 1,214 7.54%
Loans (net of unearned discount) 1,017,566 22,656 8.95% 915,825 20,249 8.97%
-------- --------- ---------- ----------
Total interest-earning assets 1,730,029 $35,288 8.20% 1,506,395 $29,369 7.91%
Noninterest earning assets
Cash and due from banks 60,006 60,613
Premises and equipment 25,609 24,773
Other Assets 69,453 81,030
Less:allowance for loans (4,410) (12,405)
Net unrealized gains/(losses) on
available-for-sale portfolio (20,994) 8,638
-------- ----------
Total $1,859,693 $1,669,044
======== ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Interest-bearing liabailities
Savings deposits $493,653 $2,660 2.17% $522,730 $2,766 2.15%
Time deposits 651,866 8,510 5.25% 615,011 7,905 5.21%
Short-term borrowings 252,944 3,895 6.19% 61,022 732 4.87%
Long-term borrowings 99,818 1,685 6.79% 99,824 1,706 6.93%
-------- --------- ---------- ----------
Total interest-bearing 1,498,281 16,750 4.50% 1,298,587 13,109 4.09%
liabilities
Noninterest bearing liabilities
Demand deposits 242,662 228,627
Other liabilities 9,606 20,844
Shareholders' equity 109,144 120,986
-------- ----------
Total $1,859,693 $1,669,044
======== ==========
Net interest earnings $18,538 $16,260
========== ==========
Net yield on interest-earning assets 4.31% 4.28%
========== ==========
Federal tax exemption on nontaxable
investment securities included in interest income 718 389
</TABLE>
16
<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:
-------------------------------------------
1st Quarter 2000 versus 1st Quarter 1999
-------------------------------------------
Increase (Decrease) Due to Change In (1)
Net
Volume Rate Change
Interest earned on:
Federal funds sold and securities
purchased under agreements to resell $0 $0 $432
Time deposits in other banks 4 0 4
Taxable investment securities 559 1,461 2,020
Nontaxable investment securities 1,123 (67) 1,056
Loans (net of unearned discounts) 2,595 (188) 2,407
Total interest-earning assets (2) $4,724 $1,195 $5,919
Interest paid on:
Savings deposits ($278) $172 ($106)
Time deposits 540 65 605
Short-term borrowings 2,911 252 3,163
Long-term borrowings (0) (21) (21)
Total interest-bearing liabilities (2) $2,221 $1,420 $3,641
Net interest earnings (2) $2,184 $94 $2,278
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.
17
<PAGE>
C) The following table sets forth information by category of noninterest
expenses of the Company for the periods indicated.
Three Months Ended March 31,
---------------------------------------
(000's omitted) Change Change
2000 1999 Amount Percent
---------------------------------------
Personnel expense $ 6,819 $ 6,585 $ 234 3.6%
Net occupancy expense 1,034 1,058 (24) -2.3%
Equipment expense 911 896 15 1.7%
Professional fees 465 458 7 1.5%
Data processing expense 1,055 900 155 17.2%
Amortization 1,110 1,158 (48) -4.1%
Stationary and supplies 235 297 (62) -20.9%
Deposit insurance premiums 70 48 22 45.8%
Disposition of branch properties 7 213 (206) -96.7%
Other 1,656 1,606 50 3.1%
---------------------------------------
Total $ 13,362 $ 13,219 $ 143 1.1%
Total operating expenses as a
percentage of average assets 2.89% 3.21% -0.32% pts
Efficiency ratio
(excl one time items & intang. amort) 54.0% 59.0% -5.0% pts
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 March 31,
(000's omitted)
------------------------------------------------
Change Change
2000 1999 Amount Percent
------------------------------------------------
Real estate mortgages:
Residential $ 341,965 $ 312,101 $ 29,864 9.6%
Commercial loans secured by
real estate 122,878 108,155 14,723 13.6%
Farm 17,533 12,188 5,345 43.9%
------------------------------------------------
Total 482,376 432,444 49,932 11.5%
Commercial, financial, and agricultural
Agricultural 28,025 22,940 5,085 22.2%
Commercial and financial 181,664 157,307 24,356 15.5%
------------------------------------------------
Total 209,688 180,247 29,441 16.3%
Installment loans to individuals:
Direct 108,154 93,334 14,820 15.9%
Indirect 223,408 201,537 21,871 10.9%
Student and other 1,997 2,501 (504) -20.2%
------------------------------------------------
Total 333,559 297,372 36,187 12.2%
Other Loans 8,504 7,976 528 6.6%
------------------------------------------------
Gross Loans 1,034,128 918,039 116,088 12.6%
------------------------------------------------
Less: Unearned discounts 640 1,135 (495) -43.6%
------------------------------------------------
Net loans 1,033,488 916,904 116,583 12.7%
Reserve for possible loan losses 13,915 12,594 1,321 10.5%
------------------------------------------------
Loans net of loan loss reserve $ 1,019,572 $ 904,310 $ 115,262 12.7%
18
<PAGE>
E) The following table reconciles the differences between the line of business
loan breakdown reflected in the narrative of this report and on Table D as
compared to regulatory reporting definitions reflected on the Call Report.
<TABLE>
<CAPTION>
Line Of Business
------------------------------------------------- ---------
Consumer Consumer Consumer Business Total
Direct Indirect Mortgages Lending Loans
------------ ---------- ------------ --------- ---------
(000's omitted)
Regulatory Reporting
- --------------------
Categories
- -------------
<S> <C> <C> <C> <C>
Loans secured by real estate
Residential $ 93,647 $ 223,306 $ 25,012 $ 341,965
Commercial 32 304 122,542 122,878
Farm 36 - 17,497 17,533
Agricultural loans 654 - 27,371 28,025
Commercial loans 5,735 - 175,929 181,664
Installment loans to individuals $ 105,356 $ 223,408 119 4,676 333,559
Other loans 1,020 - 7,484 8,504
-
Total loans 206,480 223,408 223,729 380,511 1,034,128
-
Unearned (640) - - - (640)
Discounts
-
Net Loans $ 205,840 $ 223,408 $ 223,729 $ 380,511 $ 1,033,488
</TABLE>
19
<PAGE>
F) The following table presents information concerning the aggregate amount of
nonperforming assets:
<TABLE>
<CAPTION>
As of March 31,
(000's omitted)
---------------------------------------------
Change Change
2000 1999 Amount Percent
---------------------------------------------
<S> <C> <C> <C> <C>
Loans accounted for on a
nonaccrual basis $ 5,320 $ 2,751 $ 2,569 93.4%
Accruing loans which are contractually
past due 90 days or more as to
principal or interest payments 592 1,709 (1,117) -65.4%
--- ----- ------ ----
Total nonperforming loans 5,912 4,460 1,452 32.6%
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" 130 156 (26) -16.7%
Other Real Estate 1,050 935 115 12.3%
----- --- --- ----
Total nonperforming assets $ 7,092 $ 5,551 $ 1,541 27.8%
Ratio of allowance for loan losses to
period-end loans 1.35% 1.37% (0.02) % pts ---
Ratio of allowance for loan losses to
period-end nonperforming loans 235.4% 282.4% (47.0) % pts ---
Ratio of allowance for loan losses to
period-end nonperforming assets 196.2% 226.9% (30.7) % pts ---
Ratio of nonperforming assets to period-end
total loans and other real estate owned 0.69% 0.60% 0.09 % pts ---
</TABLE>
The impact of interest not recognized on nonaccrual loans, and interest income
that would have been recorded if the restructured loans had been current in
accordance with their original terms, was immaterial. The Company's policy is to
place a loan on a nonaccrual status and recognize income on a cash basis when it
is more than ninety days past due, except when in the opinion of management it
is well secured and in the process of collection.
20
<PAGE>
G) 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 March 31,
(000's omitted)
--------------------------------------------------
Change Change
2000 1999 Amount Percent
--------------------------------------------------
<S> <C> <C> <C> <C>
Amount of loans outstanding at end of period $ 1,034,128 $ 918,039 $ 116,089 12.6%
Daily average amount of loans (net 1,017,566 915,825 101,741 11.1%
of unearned discount)
Balance of allowance for possible
loan losses at beginning of period 13,421 12,441 980 7.9%
Loans charged off:
Commercial, financial, and agricultural 52 126 (74) -58.7%
Real estate construction 0 0
Real estate mortgage 11 30 (19) -63.3%
Installment 930 1,184 (254) -21.5%
--------------------------------------------------
Total loans charged off 993 1,340 (347) -25.9%
Recoveries of loans previously charged off:
Commercial, financial, and agricultural 29 60 (31) -51.7%
Real estate construction 0 0 0 0%
Real estate mortgage 1 3 (2) (66.6%)
Installment 248 261 (13) -5.0%
--------------------------------------------------
Total recoveries 278 324 (46) -14.2%
Net loans charged off 715 1,016 (301) -29.6%
Additions to allowance charged to expense 1,209 1,169 40 3.4%
Balance at end of period $ 13,915 $ 12,594 $ 1,321 10.5%
Ratio of net charge-offs to average loans outstanding 0.28% 0.45% -0.17% ------
</TABLE>
21
<PAGE>
H) 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 March 31,
-------------------------------------------
2000 1999 Change Change
Amount Percent
-------------------------------------------
<S> <C> <C> <C> <C>
Personal trust $ 370 $ 351 $ 19 5.4%
EBT/BPA 743 694 49 7.1%
Insurance 103 46 57 123.9%
Other investment products 390 322 68 21.1%
-------------------------------------------
Total financial services 1,606 1,413 193 13.7%
Electronic banking 359 283 76 26.9%
Mortgage banking 108 185 (77) -41.6%
Commercial leasing 17 7 10 142.9%
-------------------------------------------
Total specialty products 484 475 9 1.9%
Deposit service charges 821 771 50 6.5%
Overdraft fees 848 717 131 18.3%
Commissions 389 401 (12) -3.0%
-------------------------------------------
General banking services 2,058 1,889 169 8.9%
Miscellaneous revenue (5) 49 (54) -110.2%
-------------------------------------------
Total noninterest income
(excl security gains/losses) 4,143 3,826 317 8.3%
Security gains/losses (212) 277 (489) -176.5%
Disposition of branch properties 0 0 (0) 0.0%
-------------------------------------------
Total noninterest income $ 3,931 $ 4,103 $ (172) -4.2%
Noninterest income as a percentage of
operating income
(excl securities gains/losses & disposal 18.3% 19.0% (0.7) %pts. ---
of branch properties)
</TABLE>
Item 3. Quantative and Qualitative Disclosure about Market Risk
Interest Rate 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, over both a short-term tactical and longer-term strategic time horizon, 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
interest-related level and trends.
22
<PAGE>
As 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 (BP) 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 100 BP shift in interest rates are used as a basis to conduct day-to-day
business decisions.
Historically with increases in the yield curve, income simulations have shown
that the Bank's net interest income tended to be higher than in flat rate
environments. This was caused by the Bank's structural asset sensitivity (which
by definition indicates that earning assets would mature or reprice sooner than
a corresponding liability) and because loan and investment rates tended to
closely track prime or movement in various Treasurys while funding costs
(largely deposits) generally moved upward at a much slower pace.
Conversely, the same factors that widened simulated margins in a rising rate
environment created risk in a falling rate environment.
The mid-1999 reversal of falling interest rates provided the Bank with a
strategic opportunity to not only increase net interest income, but also address
its falling interest rate risk concerns. This was accomplished by extending the
maturity and call protection of new investment purchases made throughout the
year and by making the strategic decision to keep the bulk of the Bank's
borrowing position short (terms of 180 days or less as opposed to longer term
borrowings).
As a result, if there were no growth in the balance sheet, simulation results
now show the Bank to be better off as rates fall. The following reflects the
Company's one-year net interest income sensitivity based on asset and liability
levels on December 31, 1999, assuming no growth in the balance sheet, and
assuming 200 BP movements over a twelve month period in the prime rate, federal
funds rate and the entire Treasury yield curve (assuming no change from its
current inverted/flat shape):
REGULATORY MODEL
------------------------------------------------------------
Rate Change Dollar Change Percent of Flat Rate
In Basis Points (in 000s) Net Interest Income
--------------- --------- -------------------
+ 200 bp $ (1,663) (2.3%)
- 200 bp $ 436 .1%
A second simulation was performed based on what the Company believes to be
conservative levels of balance sheet growth (8% for loans, 2% for deposits and
necessary increases in borrowings, with no growth in investment or any other
major portions of the balance sheet), along with 100 BP movements over a twelve
month period in the prime rate and federal funds rate, and a yield curve moving
closer to historical spreads to fed funds. Under this set of assumptions, the
Bank's net interest income is neutral in a rising rate environment because
spreads are wider under a steeper yield curve, rate increases on certain
interest-bearing deposit accounts can be lagged to a greater degree, and earning
assets are added higher and higher rates. In a falling rate environment, net
interest income is slightly worse off than if rates were unchanged because of
the less likely rate reduction in certain interest bearing accounts over the
narrower 100 basis point change. Thus, given the second set of assumptions, the
risk of rate changes of the magnitude tested appears to be somewhat negated.
23
<PAGE>
The following reflects the Company's one-year net interest income sensitivity
analysis based on asset and liability levels on December 31, 1999, assuming the
aforementioned balance sheet growth and yield curve changes:
MANAGEMENT MODEL
------------------------------------------------------------
Rate Change Dollar Change Percent of Flat Rate
In Basis Points (in 000s) Net Interest Income
--------------- --------- -------------------
+ 100 bp $ 13 .02%
- 100 bp $ (365) (.49%)
Management does not anticipate any significant differences when the net interest
income analysis is completed based on March 31, 2000 data. The preceding
interest rate risk analyses do 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 analyses do not reflect
actions that ALCO might take in responding to or anticipating changes in
interest rates.
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
- Elias Asset Management, Inc., State of Delaware
b) Reports on Form 8-K:
Report filed on February 25, 2000
Item 5: Other Events
Press release dated February 7, 2000 announcing a definitive
agreement for Community Bank System, Inc. to acquire stock of
Elias Asset Management, Inc.
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: May 15, 2000 /s/ Sanford A. Belden
Sanford A. Belden,President and
Chief Executive Officer
Date: May 15, 2000 /s/ David G. Wallace
David G. Wallace,
Chief Financial Officer
26
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-2000
<PERIOD-END> Mar-31-2000
<CASH> 71,511
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 7,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 665,361
<INVESTMENTS-CARRYING> 5,492
<INVESTMENTS-MARKET> 5,084
<LOANS> 1,033,488
<ALLOWANCE> 13,915
<TOTAL-ASSETS> 1,883,603
<DEPOSITS> 1,420,785
<SHORT-TERM> 229,000
<LIABILITIES-OTHER> 21,581
<LONG-TERM> 70,000
<COMMON> 7,641
29,819
0
<OTHER-SE> 104,778
<TOTAL-LIABILITIES-AND-EQUITY> 1,883,603
<INTEREST-LOAN> 22,656
<INTEREST-INVEST> 11,479
<INTEREST-OTHER> 436
<INTEREST-TOTAL> 34,571
<INTEREST-DEPOSIT> 11,171
<INTEREST-EXPENSE> 16,750
<INTEREST-INCOME-NET> 17,820
<LOAN-LOSSES> 1,209
<SECURITIES-GAINS> (212)
<EXPENSE-OTHER> 13,363
<INCOME-PRETAX> 7,178
<INCOME-PRE-EXTRAORDINARY> 7,178
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,025
<EPS-BASIC> 0.71
<EPS-DILUTED> 0.70
<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>
