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 six months ended June 30, 1994
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 Identification No.)
incorporation or organization)
5790 Widewaters Parkway, Syracuse, 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, $1.25 par value -- 2,770,150 shares as of August 12, 1994.
<PAGE>
INDEX
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets --
June 30, 1994, December 31, 1993 and June 30, 1993.
Consolidated statements of income --
Three months ended June 30, 1994 and 1993 and
six months ended June 30, 1994 and 1993.
Consolidated statements of cash flows --
six months ended June 30, 1994 and 1993.
Item 2. Management Discussion and Analysis of Financial Conditions
and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Securities Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
- - ----------------------------------------------------------------------------------------------------------
June 30, December 31, June 30,
1994 1993 1993
<S> <C> <C> <C>
ASSETS
Cash and due from banks $33,925,122 $27,422,278 $33,397,351
Interest bearing deposits with other banks 0 90,000 188,000
Federal funds sold 0 0 0
TOTAL CASH AND CASH EQUIVALENTS 33,925,122 27,512,278 33,585,351
Investment securities
U.S. Treasury 27,173,746 27,797,096 28,211,303
U.S. Government agencies and corporations 100,397,674 86,615,555 89,223,964
States and political subdivisions 21,245,769 24,584,525 26,938,754
Mortgage-backed securities 153,484,605 108,319,876 105,305,626
Other securities 11,342,609 5,636,214 7,632,783
Federal Reserve Bank 551,550 500,350 500,350
TOTAL INVESTMENT SECURITIES 314,195,953 253,453,616 257,812,780
Loans 471,709,542 443,601,070 408,913,908
Less: Unearned discount 26,182,653 25,729,899 27,083,834
Reserve for possible loan losses 5,970,451 5,706,609 5,349,562
NET LOANS 439,556,438 412,164,562 376,480,512
Bank premises and equipment 9,676,990 10,045,782 10,052,528
Accrued interest receivable 5,163,945 4,538,769 5,069,011
Intangible assets 5,821,897 452,264 533,049
Other assets 9,531,975 4,885,244 6,787,413
TOTAL ASSETS $817,872,320 $713,052,515 $690,320,644
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing $96,642,099 $88,644,788 $86,986,518
Interest bearing 579,050,131 499,670,455 514,781,722
TOTAL DEPOSITS 675,692,230 588,315,243 601,768,240
Federal funds purchased and securities sold under
agreements to repurchase 32,500,000 57,000,000 16,500,000
Term borrowings 40,550,000 550,000 10,000,000
Obligations under capital lease 0 42,036 91,127
Accrued interest and other liabilities 5,313,157 5,158,809 4,907,091
TOTAL LIABILITIES 754,055,387 651,066,088 633,266,458
Shareholders' equity
Preferred stock $1.00 par value 0 0 0
Common stock $1.25 par value 3,457,460 3,435,398 3,402,770
Surplus 14,617,429 14,374,149 14,040,468
Undivided profits 46,462,129 42,902,266 39,618,201
Unearned gains (losses) on available for
sale securities (715,325) 1,280,466 0
Less: Shares issued under
employee stock plan - unearned 4,760 5,852 7,253
TOTAL SHAREHOLDERS' EQUITY 63,816,933 61,986,427 57,054,186
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $817,872,320 $713,052,515 $690,320,644
<FN>
See notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- - --------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
<S> <C> <C> <C> <C>
INTEREST INCOME 1994 1993 1994 1993
Interest and fees on loans $10,092,535 $9,183,219 $19,635,779 $18,231,331
Interest and dividends on investments:
U.S. Treasury 489,192 518,300 971,682 1,036,814
U.S. Government agencies and corporations 1,569,272 1,628,035 3,124,097 3,425,477
States and political subdivisions 361,721 456,800 732,618 918,515
Mortgage-backed securities 2,316,875 1,839,251 3,925,208 3,756,724
Other securities 108,307 174,334 263,202 431,267
Interest on federal funds sold 0 51,591 0 52,640
Interest on deposits at other banks 75 15,783 1,133 18,398
14,937,977 13,867,313 28,653,719 27,871,166
INTEREST EXPENSE
Interest on deposits
Savings 2,041,197 2,313,342 3,968,776 4,542,749
Time 2,203,747 2,140,825 4,203,063 4,185,179
Interest on federal funds purchased, securities
sold under agreements to repurchase and
Term borrowings 821,366 92,999 1,327,104 353,140
Interest on capital lease 128 1,594 629 3,542
5,066,438 4,548,760 9,499,572 9,084,610
NET INTEREST INCOME 9,871,539 9,318,553 19,154,147 18,786,556
Provision for possible loan losses 422,245 375,000 661,417 781,920
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 9,449,294 8,943,553 18,492,730 18,004,636
OTHER INCOME
Fiduciary services 384,195 291,351 724,708 554,300
Service charges on deposit accounts 392,648 356,047 748,097 704,549
Other service charges, commissions and fees 325,433 206,096 621,115 437,601
Other operating income 38,750 14,442 71,276 53,997
Investment security gain (loss) 1,430 0 (1,695) 0
1,142,456 867,936 2,163,501 1,750,447
10,591,750 9,811,489 20,656,231 19,755,083
OTHER EXPENSES
Salaries, wages and employee benefits 3,200,237 2,957,155 6,484,227 5,980,914
Occupancy expense of bank premises, net 488,328 433,142 1,021,616 920,890
Equipment and furniture expense 433,447 406,531 848,330 810,792
Other 2,216,925 2,152,880 4,241,014 4,382,468
6,338,937 5,949,708 12,595,187 12,095,064
INCOME BEFORE INCOME TAXES 4,252,813 3,861,781 8,061,044 7,660,019
Income taxes 1,604,000 1,433,000 3,012,000 2,852,443
NET INCOME $2,648,813 $2,428,781 $5,049,044 $4,807,576
Earnings per common share $0.94 $0.87 $1.80 $1.73
See notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For Six Months Ended June 30, 1994 and 1993
Increase (Decrease) in Cash and Cash Equivalents
1994 1993
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities:
Net income $5,049,044 $4,807,576
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation 1,092,070 726,138
Amortization of intangible assets (5,369,633) 80,784
Provision for loan losses 661,417 781,920
Provision for deferred taxes (123,064) 98,726
Loss on sale of investment securities 1,695 0
Gain on sale of assets 909 0
Change in interest receivable (625,176) 388,352
Change in interest payable and accrued expenses (1,199,198) (1,973,202)
Change in unearned loan fees and costs 23,040 92,320
- - ----------------------------------------------------------------------------------------------------
Net Cash Provided By Operating Activities (488,895) 5,002,614
- - ----------------------------------------------------------------------------------------------------
Investing Activities:
Proceeds from sales of investment securities 10,900,000 2,015,036
Proceeds from maturities of investment securities (11,722,208) 35,257,307
Purchases of investment securities (62,162,318) (32,096,682)
Net change in loans outstanding (31,000,660) (21,157,200)
Capital expenditures (724,187) (246,090)
- - ----------------------------------------------------------------------------------------------------
Net Cash Used By Investing Activities (94,709,373) (16,227,629)
- - ----------------------------------------------------------------------------------------------------
Financing Activities:
Net change in demand deposits,
NOW accounts, and savings
accounts 39,940,357 33,612,536
Net change in certificates of deposit 47,436,630 10,241,026
Net change in term borrowings 15,500,000 (26,355,900)
Payments on lease obligation (42,036) (47,656)
Issuance of common stock 265,342 186,250
Cash dividends (1,489,181) (1,357,333)
- - ----------------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 101,611,112 16,278,923
- - ----------------------------------------------------------------------------------------------------
Change In Cash And Cash Equivalents 6,412,844 5,073,908
Cash and cash equivalents at beginning of year 27,512,278 28,511,443
- - ----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR 33,925,122 33,585,351
====================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid For Interest $9,355,532 $9,123,586
====================================================================================================
Cash Paid For Income Taxes $3,149,463 $2,629,772
====================================================================================================
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
None
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
Community Bank System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
June 1994
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 six month period ended June 30, 1994
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1994.
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
The information required by rule 10.01 of Regulation S-X is
presented on the previous pages.
Item 2. Management Discussion and Analysis of Financial Condition and
Results 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 six
months ended June 30, 1994 which are not otherwise apparent from the
consolidated financial statements included in these reports.
Earning Performance Summary
Three Months Ended Change
6/30/94 6/30/93 Amount Percent
(000's)
Net Income $2,649 $2,429 $220 9.1%
Earnings per share $0.94 $0.87 $0.07 8.0%
Weighted average
shares outstanding 2,811 2,783 28 1.0%
Return on average assets 1.34% 1.42% -0.07% N/A
Average assets $790,299 $687,364 $102,935 15.0%
Return on average
shareholders' equity 16.76% 17.43% -0.67% N/A
Average shareholders' equity $63,404 $55,903 $7,501 13.4%
Six Months Ended Change
6/30/94 6/30/93 Amount Percent
(000's)
Net Income $5,049 $4,808 $241 5.0%
Earnings per share $1.80 $1.73 $0.07 3.8%
Weighted average
shares outstanding 2,809 2,775 34 1.2%
Return on average assets 1.34% 1.43% -0.09% N/A
Average assets $760,393 $678,973 $81,420 12.0%
Return on average
shareholders' equity 16.16% 17.62% -1.47% N/A
Average shareholders' equity $63,022 $55,007 $8,016 14.6%
* May not foot due to rounding
<PAGE>
Net Income for the second quarter of 1994 reached an all-time high of $2.6
million, up $220,000 (9.1%) from the comparable 1993 period. Compared to the
first quarter of 1994, earnings climbed an even stronger 10.4%. Earnings per
share at $.94 registered an 8.0% improvement over second quarter 1993,
reflecting increased earnings slightly offset by 1.0% more in weighted average
shares outstanding. Return on assets and return on shareholders equity remain
above peer bank norms at 1.34% and 16.76%, respectively. Strong second quarter
earnings brought 1994 year-to-date net income to $5.0 million, $241,000 (5.0%)
over the first six months of 1993.
Despite continued narrowing of net interest margins industry-wide, as
reflected by the bank's half point reduction over last year, CBSI's net interest
income rose a satisfactory 5.3% for the quarter. This increase resulted from
strong loan growth of 16.7% as well as nearly 22% more in investment securities.
A good portion of earning asset growth was funded by the company's recent
acquisition of three former Columbia Banking FSA branches from the Resolution
Trust Corporation. For the six months as a whole, net interest income was
higher by 2.0%.
Second quarter earnings also benefited from greater fee income, which
included almost 32% more in trust-related fees as well as meaningful results
from a program launched at the beginning of the year to sell fixed rate
annuities through the bank's branch system. Overhead rose a relatively modest
6.5%, with about 60% of the increase reflecting personnel required to support
business development efforts, staff the new branches, and service transaction
volumes which have been building over the last twelve months. For the entire
six month period, non-interest income rose nearly 24% over one year earlier
while overhead was up 4.1%.
Lastly, asset quality remains strong. Net charge-offs for the quarter were
very modest at .15% of average loans, and non-performing loans were reduced from
the year earlier level to a small .47% of loans outstanding. Consistent with
4.5% loan growth during the last three months, the quarter's provision for loan
losses rose 12.6% over the same period last year, holding the ratio of loan loss
reserve to loans constant at the March 31, 1994 level of 1.34%. Coverage of the
reserve over nonperformers was ample at 2.8 times.
The remainder of this report more fully discusses the balance sheet and
earnings trends summarized above.
Net Interest Income
Net interest income is the difference between interest earned on loans and
other investments and interest paid on deposits and other sources of funds. On
a tax-equivalent basis, net interest income for second quarter 1994 increased
$507,000 (5.3%) over the same period in 1993 to $10.0 million. Compared with
first quarter 1994, there was a $584,000 improvement.
The change in net interest income reflects both the change in net interest
margin (yield on earning assets less cost of funds as a percentage of earning
assets) and the change in earning asset levels. The table below shows these
underlying dynamics.
<PAGE>
For the Quarter Net Net Yield on Cost Average Loans /
Ended: Interest Interest Earning of Earning Earning
(000's) Income Margin Assets Funds Assets Assets
------ ------ ------ ------ ------ ------
Amount and Change Period
from Preceding Quarter End
------ ------ ------ ------ ------ ------
December 31, 1992
Amount $9,773 6.31% 9.36% 3.10% $615,682 57.9%
Change N/A N/A N/A N/A N/A N/A
March 31, 1993
Amount $9,529 6.16% 9.20% 3.01% $626,992 58.1%
Change ($244) -0.15% -0.16% -0.09% 1.8% 0.1
June 30, 1993
Amount $9,536 5.97% 8.81% 2.91% $641,067 59.7%
Change $6 -0.20% -0.39% -0.10% 2.2% 1.6
September 30, 1993
Amount $9,609 5.94% 8.74% 2.80% $642,270 61.7%
Change $73 -0.03% -0.07% -0.11% 0.2% 2.0
December 31, 1993
Amount $9,383 5.73% 8.51% 2.69% $649,678 62.2%
Change ($225) -0.21% -0.23% -0.12% 1.2% 0.6
March 31, 1994
Amount $9,458 5.62% 8.25% 2.72% $682,789 59.1%
Change $75 -0.11% -0.26% 0.03% 5.1% (3.2)
June 30, 1994
Amount $10,043 5.47% 8.23% 2.82% $736,418 58.6%
Change $584 -0.15% -0.02% 0.10% 7.9% (0.4)
Change from
June 30, 1993 to
June 30, 1994
Amount $507 -0.49% -0.58% -0.09% $95,351 -1.0%
% Change 5.3% --- --- --- 14.9% ---
For the Year
Ended:
(000's)
June 30, 1993
Amount $19,065 6.06% 8.95% 2.96% $634,068 59.7%
Change --- --- --- --- --- ---
June 30, 1994
Amount $19,501 5.54% 8.24% 2.77% $709,751 58.6%
Change $436 -0.52% -0.71% -0.19% 11.9% (1.0)
Note: (a) All net interest income, margin, and earning asset yield figures are
full-tax equivalent.
(b) Net interest income, margin, and earning asset yield figures exclude
premiums on called bonds of $158, $146, and $297 as of March 10,
July 10, and October 10, 1993, respectively.
* May not foot due to rounding
<PAGE>
Since the fourth quarter of 1992, margins have narrowed because the yield
on earning assets has fallen faster than the rate on deposits. More
specifically, the cost of funds rate (total interest expense divided by total
deposits plus borrowings) is down only 28 basis points compared to a 113 basis
point decline in earning asset yield. The latter reflects downward repricing of
approximately $30 million in adjustable rate mortgages and continued steady
runoff of high yielding loans and investments. Reductions in deposit rates have
been relatively mild during this period, in contrast to more aggressive
decreases in 1992, which contributed to a widening of net interest margin.
Comparing the second quarter just ended to one year earlier, the net
interest margin narrowed by 49 basis points due to a 58 basis point decline in
the yield on earning assets while the cost of funds rate decreased by only 9
basis points. However, the $95.4 million increase in earning assets shown in
the above table more than offset the impact of this shrinkage. Had margins
remained constant, net interest income would have increased by over $1.4 million
versus $507,000 actually realized.
Net interest income is also less than it would have been because the mix of
earning assets has moved toward a greater share in investments, which have a
lower overall yield than loans. Despite very satisfactory loan growth, the
loans to earning asset ratio has declined since the fourth quarter of 1993 as
the result of improved investment opportunities funded with short-term
borrowings and the recent acquisition of the three Columbia branches.
Comparing second quarter 1994 to first quarter 1994 shows a continued
decline in the net interest margin. However, the yield on earning assets
remained essentially constant (the decline has slowed due to increased financial
market rates) while the cost of funds rate rose 10 BP because of a higher
federal funds rate (raising short-term borrowing costs). The net interest
margin would have been 5.42% or 5 basis points lower had it not been for a $10
million (12%) increase in demand deposits.
Despite its recent decrease, net interest margin has long been a historical
strength for CBSI, being slightly above the norm in the 86th peer percentile
based on comparative data as of March 31, 1994. This performance is largely the
result of very high earning asset yields, being in the 92nd percentile, versus
cost of funds being slightly above norm in the 62nd percentile.
Non-Interest Income
Non-interest income, including service charges, commissions, fees, trust
income and income from other sources, totaled approximately $1.1 million for the
three months ended June 30, 1994, up $275,000 (31.6%) from the same period last
year. This brings 1994 YTD non-interest income to $2.2 million, up 23.6% from
the same 1993 period.
<PAGE>
Three Months Ended Change
6/30/94 6/30/93 Amount Percent
(000's)
Fiduciary services $384 $291 $93 31.9%
Service charges on $393 $356 $37 10.3%
deposit accounts
Other service charges, $339 $219 $121 55.3%
commissions, and fees
Net gain (loss) on sale $26 $2 $24 1226.9%
of investments and
other assets
---------- ---------- --------------------
Total noninterest income
- Amount $1,142 $868 $275 31.6%
- % of Average
assets 0.58% 0.51% 0.07% ---
Six Months Ended Change
6/30/94 6/30/93 Amount Percent
(000's)
Fiduciary services $725 $554 $170 30.8%
Service charges on $748 $705 $44 6.2%
deposit accounts
Other service charges, $668 $482 $186 38.6%
commissions, and fees
Net gain (loss) on sale $23 $10 $13 128.9%
of investments and
other assets
---------- ---------- --------------------
Total noninterest income
- Amount $2,164 $1,750 $413 23.6%
- % of Average
assets 0.57% 0.52% 0.05% ---
* May not foot due to rounding
<PAGE>
As shown by the table above, income from fiduciary services accounts for a
third of the total change and is the result of increases in personal trust fees,
up 29% as a result of new business and more timely billing, and in employee
benefit trust revenue, up 35% largely reflecting an accounting change to more
accurately identify EBT gross revenue and external servicing costs.
Additionally, $53,000 was earned in commissions on the sale of fixed rate
annuities, a program launched through CBSI's branch network early in 1994.
Increases also occurred in deposit service charges and other commissions,
attributable both to a larger number of demand deposit accounts and selected
adjustments in CBSI's fee schedule. Lastly, a $24,000 gain was realized in June
on the periodic loan sale to Sallie Mae of loans which become out-of-school.
Management recognizes that the company's level of non-interest income is
unsatisfactory, its ratio to average assets being .58% for the quarter or
approximately half the peer norm. As noted above, progress is being made
addressing this shortfall by maintaining competitive and value-based service
charges; selling fixed rate annuities through our 34 customer facilities;
offering full service brokerage/financial planning products through dedicated
sales representatives in selective markets; and selling/servicing residential
mortgages, the first such transaction being with the Federal National Mortgage
Association shortly after the end of the second quarter. While only minimal
benefit will be realized in 1994, income from these new products is expected to
be a significant source of earnings in future years.
Non-Interest Expense
Non-interest expense or overhead for the three months ended June 30, 1994
increased by $389,000 (6.5%) over the same period last year to $6.3 million,
bringing the YTD total up 4.1% over last year to $12.6 million. The table below
summarizes the major components of change.
<PAGE>
Three Months Ended Change
6/30/94 6/30/93 Amount Percent
(000's)
Personnel Expense $3,200 $2,957 $243 8.2%
Occupancy, furniture, $922 $840 $82 9.8%
and equipment
Administrative and business $1,118 $1,063 $55 5.1%
development
All other expense $1,099 $1,090 $9 0.9%
---------- ---------- --------------------
Total noninterest expense
- Amount $6,339 $5,950 $389 6.5%
- % of Average
assets 3.22% 3.47% -0.25% ---
Efficiency ratio 56.7% 57.2% -0.5% ---
Six Months Ended Change
6/30/94 6/30/93 Amount Percent
(000's)
Personnel Expense $6,484 $5,981 $503 8.4%
Occupancy, furniture, $1,870 $1,732 $138 8.0%
and equipment
Administrative and business $2,081 $2,188 ($107) -4.9%
development
All other expense $2,160 $2,195 ($35) -1.6%
---------- ---------- --------------------
Total noninterest expense
- Amount $12,595 $12,095 $500 4.1%
- % of Average
assets 3.34% 3.59% -0.25% ---
Efficiency ratio 58.1% 57.7% 0.5% ---
* May not foot due to rounding
<PAGE>
Better than 60% of the quarterly increase results from salary and benefit
increases caused by modest annual merit awards and 33 additional full time
equivalent positions, resulting in a total of 429 employees as of June 30, 1994.
These additions pertain to the Columbia branch acquisition (21 FTE); the opening
of a denovo branch in Waddington, New York late in 1993 (formerly a Jefferson
National Bank branch prior to being closed by the FDIC); expanded business
development efforts in the lending and fiduciary services functions; and the
need to service the bank's increased transaction volumes over the last twelve
months.
The remainder of the quarter's overhead increase compared to the same
quarter last year is spread over a number of expense categories. Higher
occupancy expense resulted from the harsh winter and the new Waddington branch
property. Administrative expenses were up due to the timing of postage payments
and increases in various volume and acquisition-related expenses. Computer
services climbed due to an accounting change to reflect the external servicing
costs of the employee benefit trust function. Finally, the amortization of
intangibles rose due to the acquisition of the Columbia branches, whose $5.5
million premium (or 8.6% of deposits assumed) added approximately $365,000 per
annum over the prescribed 15 year amortization period.
The above increases were offset by reduced use of outside consultants for
bank and branch acquisition analysis, lower relocation expenses related to new
hires/transferred employees, and less profit and loss expense due to a reduced
need to write down repossessed property.
It should be noted that the overall effect of the Columbia branch
acquisition was minimal as the transaction did not occur until late in the
second quarter just ended.
As a percentage of average assets, annualized overhead declined
satisfactorily from 3.47% in the second quarter of 1993 to 3.22% in the second
quarter of 1994, a level now favorably below the peer norm. CBSI's efficiency
ratio (recurring expense divided by recurring operating income) decreased
slightly in the second quarter from 57.2% last year to 56.7% this year (the peer
bank average is 61.8% as of 12/31/93); this improvement reflects higher net
interest income and other income.
Income and Income Taxes
Income before tax was approximately $4.3 million for the quarter ended June
30, 1994, a $391,000 (10.1%) increase from the same period last year, bringing
the YTD total to $8.1 million or 5.2% more than in 1993. As shown by the table
below, the increases in overhead and loan loss provision for the quarter are
more than offset by improvement in net interest income and non-interest income.
<PAGE>
Three Months Ended Change
6/30/94 6/30/93 Amount Percent
(000's)
Net interest income $9,872 $9,319 $553 5.9%
Loan loss provision $422 $375 $47 12.6%
Net interest income $9,449 $8,944 $506 5.7%
after provision for
loan losses
Other income $1,142 $868 $275 31.6%
Other expense $6,339 $5,950 $389 6.5%
Income before $4,253 $3,862 $391 10.1%
income tax
Income tax $1,604 $1,433 $171 11.9%
Net income $2,649 $2,429 $220 9.1%
Six Months Ended Change
6/30/94 6/30/93 Amount Percent
(000's)
Net interest income $19,154 $18,787 $368 2.0%
Loan loss provision $661 $782 ($121) -15.4%
Net interest income $18,493 $18,005 $488 2.7%
after provision for
loan losses
Other income $2,164 $1,750 $413 23.6%
Other expense $12,595 $12,095 $500 4.1%
Income before $8,061 $7,660 $401 5.2%
income tax
Income tax $3,012 $2,852 $160 5.6%
Net income $5,049 $4,808 $241 5.0%
* May not foot due to rounding
<PAGE>
As a result of higher pre-tax income, YTD income taxes increased by
$160,000, with the effective tax rate being essentially unchanged. CBSI's
marginal tax rates are 35% federal (up from 34% prior to passing the Omnibus
Budget Reconciliation Act of 1993) and 9% state (plus a 15% surcharge scheduled
to be phased out over time). Compared to our peers, the company's effective tax
rate at 37.4% is unfavorable because of New York State's very high tax level as
well as tax exempt security holdings being slightly below the norm.
Capital
Six Months Ended Change
6/30/94 6/30/93 Amount Percent
Tier 1 leverage ratio 7.14% 8.19% -1.05% N/A
Tier 1 capital to 13.09 14.89 (1.80) N/A
risk asset ratio
Cash dividend declared $0.54 $0.50 $0.04 8.0%
per common share
Dividend payout 29.5% 28.2% 1.30% N/A
Book value per share: Total $23.07 $20.96 $2.11 10.1%
: Tangible 20.97 20.76 0.20 1.0
The capital position of Community Bank System, Inc. continues to be ample.
As of June 30, 1994, the tier I capital to assets ratio of 7.14% was 105 basis
points lower than one year earlier; this significant decrease is the result of
the $5.5 million intangible from the Columbia Savings deposit acquisition, $46
million higher borrowings to help fund loan and investment growth, and a
$715,000 negative after tax market value adjustment for the available for sale
investment portfolio (as required by SFAS 115).
Though below the peer norm of 7.96% as of March 31, 1994, CBSI's tier I
leverage ratio is well above the 5% minimum required to be a "well-capitalized"
bank as defined by the FDIC. Management's objective is to maintain the tier I
ratio in the 7% range, adequate for regulatory requirements with sufficient
capacity for potential branch acquisitions and leverage strategies.
As a result of the fore-mentioned reasons, the tier I risk-based capital
ratio as of June 30, 1994 was 13.09% or 180 basis points lower than it was one
year ago. This compares to an 6% "well-capitalized" regulatory minimum. To the
degree that earning asset growth results from investment purchases, this risk-
based ratio is more favorable since investments have a lower risk component than
most loans.
Total capital reached $63.8 million as of June 30, 1994, $6.8 million
(11.9%) higher than twelve months earlier. This increase is attributable to
dividends declared on common stock of $3.0 million over the twelve months ended
June 30, 1994 versus net income of $9.8 million during the same time frame. The
higher first half dividend shown above reflects a 2 cent per share increase (8%)
in the quarterly dividend approved by the CBSI Board of Directors last August,
the third dividend hike within two years. The YTD 1994 dividend pay-out of
29.5% is slightly below the company's targeted 30-40% guideline.
The 10.1% increase in book value per share from June 30, 1993 approximates
the increase in total capital discussed above, slightly offset by 1.6% more in
shares outstanding largely because of the impact of a higher stock price on
valuing unexercised options. Tangible book value per share is slightly (1%)
higher than a year ago, but has decreased 7.5% since the first quarter of 1994
due to the intangible resulting from the acquisition of the three Columbia
branches.
<PAGE>
The common shares of Community Bank System, Inc. are traded in the NASDAQ
National Market System under the symbol CBSI. Stock price activity, numbers of
shares outstanding, cash dividends declared and share volume traded are shown
below.
For the Quarter Market Market Market # of Cash Share
Ended: Price Price Price Shares Dividend Volume
High Low Close Outstanding Declared Traded
------ ------ ------ ------ ------ ------
Amount and Change
from Preceding Quarter
------ ------ ------ ------ ------ ------
December 31, 1992
Amount $25.00 $20.00 $23.75 2,696,760 $0.25 89,000
Change N/A N/A N/A N/A N/A N/A
March 31, 1993
Amount $30.75 $23.00 $29.00 2,709,816 $0.25 315,000
Change 23.0% 15.0% 22.1% 0.5% 0.0% 253.9%
June 30, 1993
Amount $30.00 $25.00 $27.00 2,722,216 $0.25 299,000
Change -2.4% 8.7% -6.9% 0.5% 0.0% -5.1%
September 30, 1993
Amount $30.00 $26.00 $30.00 2,745,079 $0.27 467,000
Change 0.0% 4.0% 11.1% 0.8% 8.0% 56.2%
December 31, 1993
Amount $30.50 $27.88 $28.50 2,748,318 $0.27 253,000
Change 1.7% 7.2% -5.0% 0.1% 0.0% -45.8%
March 31, 1994
Amount $30.75 $28.50 $29.25 2,749,518 $0.27 128,929
Change 0.8% 2.2% 2.6% 0.0% 0.0% -49.0%
June 30, 1994
Amount $30.50 $28.50 $30.50 2,765,968 $0.27 253,665
Change -0.8% 0.0% 4.3% 0.6% 0.0% 96.7%
Change from
June 30, 1993 to
June 30, 1994
Amount $0.50 $3.50 $3.50 43,752 $0.02 (45,335)
% Change 1.7% 14.0% 13.0% 1.6% 8.0% -15.2%
<PAGE>
Loans
Loans outstanding, net of unearned discount, were $445.5 million as of June
30, 1994, a very favorable $63.7 million (16.7%) increase in the last twelve
months. As shown in the table below, CBSI is predominantly a retail bank, with
over 70% of its outstandings spread across three basic consumer loan types.
These types are more fully defined in the company's 1993 annual report.
<TABLE>
<CAPTION>
For the Quarter Consumer Consumer Consumer Business Total Yield on
Ended: Direct Indirect Mortgages Lending Loans Loans
(000's) ------ ------ ------ ------ ------ ------
Amount and Change Quarterly
from Preceding Quarter Average
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1992
Amount $94,608 $71,314 $100,656 $95,779 $362,356 10.35%
Change N/A N/A N/A N/A N/A N/A
March 31, 1993
Amount $92,005 $68,650 $105,577 $101,234 $367,467 10.07%
Change -2.8% -3.7% 4.9% 5.7% 1.4% (0.28)
June 30, 1993
Amount $90,296 $71,123 $111,873 $108,537 $381,830 9.88%
Change -1.9% 3.6% 6.0% 7.2% 3.9% (0.19)
September 30, 1993
Amount $95,102 $72,120 $120,124 $109,788 $397,134 9.54%
Change 5.3% 1.4% 7.4% 1.2% 4.0% (0.34)
December 31, 1993
Amount $95,502 $74,321 $127,618 $120,430 $417,871 9.38%
Change 0.4% 3.1% 6.2% 9.7% 5.2% (0.16)
March 31, 1994
Amount $92,908 $77,103 $133,085 $123,373 $426,470 9.22%
Change -2.7% 3.7% 4.3% 2.4% 2.1% (0.16)
June 30, 1994
Amount $93,768 $86,230 $138,349 $127,180 $445,527 9.29%
Change 0.9% 11.8% 4.0% 3.1% 4.5% 0.07
Change from
June 30, 1993 to
June 30, 1994
Amount $3,472 $15,107 $26,475 $18,643 $63,697 (0.59)
Change 3.8% 21.2% 23.7% 17.2% 16.7% N/A
Loan mix
June 30, 1993 23.6% 18.6% 29.3% 28.4% 100.0%
June 30, 1994 21.0% 19.4% 31.1% 28.5% 100.0%
Change -2.6% 0.7% 1.8% 0.1% ---
</TABLE>
* May not foot due to rounding
<PAGE>
Greater than 40% of loan growth in the last twelve months resulted from
consumer mortgages. The near 24% increase in that line of business is
attributable to the attractive mortgage rate environment and the resulting fixed
rate refinancing boom during 1993. While growth during the second quarter of
1994 has slowed with higher interest rates, consumer mortgages rose an
acceptable 4.0% from the preceding quarter.
CBSI's generally prime-based commercial loan portfolio climbed over 17%
from a year ago; though a relatively low prime lending rate has encouraged
borrowing, small and medium sized companies have been additionally receptive to
CBSI's responsive and personalized service. Experienced lending officers who
have joined the bank in the last two years have also enhanced commercial loan
growth. While the recent increases in the prime rate may have dampened demand a
bit, as evidenced by growth of 3.1% during the last three months, expansion of
the business lending portfolio remains good.
Growth of 21% during the last twelve months in indirect consumer loans
(applications taken at dealer locations) reflects both high automobile demand
industry-wide, which began in the spring of last year, as well as greater
emphasis on this product line in CBNA's Southern Region. These factors on top
of a normally strong buying season produced a vigorous 11.8% increase in the
quarter just ended. Approximately, 58% of the bank's indirect automobile loans
are used versus 42% new. About 9% of the consumer indirect portfolio consists
of mobile homes and recreational and other vehicles.
Consumer direct loans have grown 3.8% since June 30, 1993, but have
essentially been flat since the end of 1992. The accumulation and periodic sale
of student loans caused some fluctuation during this period. The positive
growth trend in home equity loans (which are included in this product line as an
alternative to direct personal loans) has barely offset run off in the
installment and other personal loan components of this category.
Loans at CBSI have now climbed for nine consecutive quarters, which
compares very favorably against the banking industry in general. The change in
loan portfolio mix by type over the last year is shown at the bottom of the
above table. The resulting mix echoes the trend of the previous several years
of more consumer mortgages and commercial loans; the indirect loan share began
to turn up in the first quarter of this year after a slide which started before
the 1990 recession. There continues to be a decreasing direct consumer loan
presence.
As discussed in the net interest income section of this report, earning
asset yields have fallen 58 basis points over the last twelve months. The loan
yield has fallen 59 basis points. Nonetheless, CBSI's predominantly retail loan
mix and related pricing objectives have maintained a very favorable overall loan
yield, being in the 90th peer percentile as of March 31, 1994.
Loan Loss Provision and Reserve for Loan Losses
The provision for future loan losses was $422,000 for the three months
ended June 30, 1994, up $47,000 (12.6%) versus the same period last year. Net
charge-offs for the quarter were a very low $159,000 (.15% of loans), up a bit
from $90,000 a year ago due to fewer recoveries. The primary reason for the
higher provision was to maintain the ratio of loan loss reserve to total loans
at the first quarter's 1.34% level, a strategy management considers prudent in
light of strong loan growth. As a result, the reserve reached a new high at
quarter end of $6.0 million.
As the table below shows, 1994's YTD net charge offs are reduced from the
prior year's level due to lower gross charge offs, partially offset by lower
recoveries. CBSI's general experience has been at or slightly better than the
peer norm, being in the 60th percentile as of March 31, 1994.
<PAGE>
3 Months 3 Months 6 Months 6 Months 12 Months
(000's or % Ratios) June 30 June 30 June 30 June 30 Dec 31,
1994 1993 1994 1993 1993
- - ---------- ---- ---- ---- ---- ----
Net Charge-offs $159 $90 $398 $415 $782
Net Charge-offs/Ave Loans 0.15% 0.10% 0.19% 0.23% 0.20%
Gross Charge-offs $282 $261 $620 $749 $1,410
Gross Charge-offs/Ave Loans 0.26% 0.28% 0.29% 0.41% 0.37%
Recoveries $123 $171 $222 $334 $628
Recoveries/Prior year 35.0% 26.3% 31.8% 25.9% 24.2%
gross charge offs
Non-performing loans remained at a manageable level as of the most recent
quarter end at $2.1 million, down $273,000 from twelve months earlier. The
major reason for the decrease was pay-outs on several large commercial loan non-
performers. Also down from the June 30, 1993 level was the ratio of non-
performers to loans outstanding to .47%; the slightly higher level at March 31,
1994 was in the favorable the 32nd percentile.
The ratio of loan loss provision to net charge offs for the most recent
quarter end was 265%, well below the 417% ratio twelve months earlier when the
reserve was being built more aggressively. Nonetheless, today's coverage of
loan loss reserves over non-performers is stronger at 282% than a year earlier.
Moreover, CBNA's regulators recently concurred that reserves were very adequate.
3 Months 3 Months 6 Months 6 Months 12 Months
(000's or % Ratios) June 30 June 30 June 30 June 30 Dec 31,
1994 1993 1994 1993 1993
- - ---------- ---- ---- ---- ---- ----
Non-Performing Loans $2,114 $2,387 $2,114 $2,387 $2,391
Non-Performing Loans/Loans 0.47% 0.63% 0.47% 0.63% 0.57%
Loan Loss Allowance $5,970 $5,350 $5,970 $5,350 $5,707
Loan Loss Allowance/Loans 1.34% 1.40% 1.34% 1.40% 1.37%
Loan Loss Allowance/ 282% 224% 282% 224% 239%
Non-Performing Loans
Loan Loss Provision $422 $375 $661 $782 $1,506
Loan Loss Provision/ 265% 417% 166% 189% 193%
Net Charge-offs
<PAGE>
The following table reflects the detail on non-performing and restructured
loan levels. The ratio of non-performing assets to total assets was .31% as of
June 30, 1994, down 16 basis points from a year ago. Troubled debt
restructuring declined significantly to only $39,000 compared to three months
earlier at $228,000 and a year earlier at $301,000; the change reflects being
paid out of a previously restructured commercial loan.
6 Months 6 Months 12 Months 12 Months 12 Months
(000's or % Ratios) June 30 June 30 Dec 31, Dec 31, Dec 31,
1994 1993 1993 1992 1991
- - ---------- ---- ---- ---- ---- ----
Loans accounted for on a $1,550 $1,731 $1,738 $881 $1,369
non-accrual basis
Accruing loans which are
contractually past due
90 days or more as to
principal and interest
payments $564 $656 $653 $726 $957
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 $39 $301 $243 $356 $1,720
Other Real Estate $390 $589 $433 $459 $1,426
----- ----- ----- ----- -----
Total Non-Performing Assets $2,543 $3,277 $3,067 $2,422 $5,472
Total Non-Performing Assets/ 0.31% 0.47% 0.43% 0.36% 0.86%
Total Assets
* May not foot due to rounding
<PAGE>
Delinquencies for loans greater than 30 days past due plus nonaccruing
loans as of June 30, 1994 have declined across all major loan categories from
the prior twelve months as reflected in the following table. The major reasons
for the decreases are improved collection efforts and non-performing loan
payouts.
Delinquencies 6 Months 6 Months 12 Months 12 Months 12 Months
30 days - Non-accruing June 30 June 30 Dec 31, Dec 31, Dec 31,
(000's or % Ratios) 1994 1993 1993 1992 1991
- - ---------- ---- ---- ---- ---- ----
Total Delinquencies $5,605 $6,103 $7,004 $6,894 $9,928
Ratio to Total Loans 1.19% 1.49% 1.58% 1.76% 2.62%
Time & Demand $2,299 $2,176 $2,633 $1,758 $2,908
Ratio to Time & Demand 1.71% 1.91% 2.07% 1.72% 3.21%
Installment $2,330 $2,484 $3,156 $4,026 $5,803
Ratio to Installment 1.40% 1.62% 2.01% 2.53% 3.24%
Real Estate $976 $1,444 $1,214 $1,110 $1,217
Ratio to Real Estate 0.57% 1.02% 0.76% 0.85% 1.11%
Note: Ratios to Gross Loans
* May not foot due to rounding
Deposits
Deposits are the primary source of funding for loans and investments as
measured by the deposits to earning asset ratio. This ratio is down 8.9
percentage points from a year ago to 86.9%, reflecting borrowings as an
increased source of funding in order to achieve management's balance sheet
leverage objectives. Earning assets have increased $95.4 million over the last
twelve months, while deposits have grown $25.7 million. Third quarter 1994
deposit growth will be substantially higher when the full impact of the recent
Columbia Banking acquisition is realized.
<PAGE>
The table below displays the components of total deposits and volume and
rate trends over the last seven quarters.
<TABLE>
<CAPTION>
For the Quarter Average Average Average Average Average Average
Ended: Demand Savings Money Time Total Deposits/
(000's) Market Deposits Earning
------ ------ ------ ------ ------ Assets
Amount and Average Rate
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1992
Amount $86,323 $226,541 $78,579 $191,046 $582,489 94.6%
Yield / Rate ---- 3.05% 2.82% 4.73% 3.11%
March 31, 1993
Amount $84,744 $237,060 $78,189 $182,275 $582,268 92.9%
Yield / Rate ---- 2.91% 2.73% 4.55% 2.98%
June 30, 1993
Amount $85,818 $251,997 $81,296 $195,382 $614,493 95.9%
Yield / Rate ---- 2.85% 2.72% 4.44% 2.94%
September 30, 1993
Amount $88,563 $240,831 $78,329 $189,625 $597,350 93.0%
Yield / Rate ---- 2.68% 2.64% 4.38% 2.82%
December 31, 1993
Amount $91,701 $241,030 $75,144 $193,265 $601,141 92.5%
Yield / Rate ---- 2.53% 2.50% 4.17% 2.67%
March 31, 1994
Amount $92,522 $241,123 $72,003 $196,099 $601,747 88.1%
Yield / Rate ---- 2.49% 2.52% 4.13% 2.65%
June 30, 1994
Amount $96,131 $252,259 $77,514 $214,297 $640,200 86.9%
Yield / Rate ---- 2.49% 2.47% 4.12% 2.66%
Change in quarterly average
outstandings & yield / rate
June 30, 1993 to
June 30, 1994
Amount $10,312 $262 ($3,782) $18,915 $25,707 -8.9%
% Change 12.0% 0.1% -4.7% 9.7% 4.2%
Change (% pts) ---- (0.36) (0.24) (0.32) (0.28)
Deposit Mix
June 30, 1993 14.0% 41.0% 13.2% 31.8% 100.0%
June 30, 1994 15.0% 39.4% 12.1% 33.5% 100.0%
Change 1.1% -1.6% -1.1% 1.7% ----
<PAGE>
Year-to-date average
outstandings: (000's)
June 30, 1993
Amount $85,284 $244,570 $79,751 $188,865 $598,469 94.4%
Yield / Rate ---- 2.88% 2.73% 4.50% 2.96% ----
June 30, 1994
Amount $94,337 $246,722 $74,773 $205,248 $621,080 87.5%
Yield / Rate ---- 2.49% 2.49% 4.13% 2.65% ----
Change in YTD average
outstandings & yield / rate
from June 30, 1993 to
June 30, 1994
Amount $9,052 $2,152 ($4,977) $16,384 $22,610 (6.9)
% Change 10.6% 0.9% -6.2% 8.7% 3.8% ----
Change (%pts) ---- (0.39) (0.23) (0.37) (0.30)
</TABLE>
* May not foot due to rounding
Average total deposits for the quarter were 4.2% higher than the comparable
1993 period. Nineteen million dollars (75%) of this growth was in time deposits
and $10 million in demand deposits. This was offset slightly by a decrease in
money market accounts. The major reasons for the increase are the $62.4 million
Columbia Banking FSA deposit acquisition late in the quarter, the Waddington
denovo branch, an expanded business customer base consistent with record
increases in commercial loans, the spring 1993 closing of the Jefferson National
Bank in CBNA's Northern Region, and the sale of the former Manufacturer's
Hanover branches in the Southern Region.
The deposit mix has changed slightly since the second quarter of 1993.
Time deposits have increased with the recent up turn in financial market rates;
the bank has chosen to promote longer term personal C.D.s aggressively as part
of its overall asset/liability management strategy to lengthen its funding
structure. Additionally, municipal time deposits have moved toward more
historical levels since higher rates have decreased the temporary parking of
public funds in money market and savings accounts.
While borrowing costs have risen with the recent movement in the federal
funds rate, the above table shows that the average rates on interest bearing
deposits have lagged or been flat for the last two quarters. The time deposit
trend also reflects run-off of C.D.s at higher rates than currently being
offered. As of March 31, 1994, CBSI's average rate on interest bearing deposits
was in the 59th percentile.
Liquidity and Borrowing Position
Liquidity involves the ability to raise funds to support asset growth, meet
requirements for deposit withdrawals, maintain reserve requirements and
otherwise sustain operations. This is accomplished through maturities of loans
and investments, deposit growth, and access to sources of funds other than local
deposits (such as borrowings from the Federal Home Loan Bank, selling securities
under agreements to repurchase, and various other sources). All of these
factors are considered by management in evaluating the bank's liquidity
requirements and position assessment.
<PAGE>
The bank's liquidity level as of June 30, 1994 is deemed by management to
be adequate. In the event of a liquidity crisis, over $113 million (essentially
short term assets minus short term liabilities) or 13.9% of assets could be
converted into cash within a 30 day time period. This puts the liquidity
position well above the bank's 7.5% policy minimum. The same policy minimum
applies to projections over a 90-day period, for which the actual ratio was
10.2% as of this quarter end. This longer period encompasses continued service
to loan customers and normal deposit outflows anticipating viability of the
institution after coping with the initial crisis. While this liquidity approach
and related measures have been practiced by leading banks for a number of years,
they have recently been validated by the New England banking crises.
The following table shows the trend of loans, investments, large liability
certificates of deposit and other borrowings over the last five quarters.
<TABLE>
<CAPTION>
For the Quarter Average Average Ave Core Ave CD's Average Interest
Ended: Loans Investments Deposits >$100,000 Borrowings Bearing
(000's) (a) (b) Liabilities
------ ------ ------ ------ ------ ------
Amount and Average Yield / Rate
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1992
Amount $358,494 $257,188 $553,565 $28,924 $20,580 $516,746
Yield / Rate 10.35% 7.96% 3.10% 3.36% 2.74% 3.61%
March 31, 1993
Amount $364,386 $262,606 $561,322 $20,945 $28,340 $525,864
Yield / Rate 10.07% 7.75% 2.96% 3.38% 3.75% 3.50%
June 30, 1993
Amount $372,749 $268,318 $590,523 $23,971 $12,138 $540,813
Yield / Rate 9.88% 7.33% 2.89% 3.29% 3.13% 3.37%
September 30, 1993
Amount $388,137 $254,134 $579,514 $17,836 $25,043 $533,829
Yield / Rate 9.54% 7.30% 2.76% 3.55% 3.24% 3.27%
December 31, 1993
Amount $404,944 $244,733 $576,448 $24,693 $26,394 $535,834
Yield / Rate 9.38% 6.58% 2.64% 3.35% 3.16% 3.15%
March 31, 1994
Amount $419,874 $262,915 $576,613 $25,133 $58,850 $568,074
Yield / Rate 9.22% 6.71% 2.60% 3.72% 3.49% 3.16%
June 30, 1994
Amount $435,678 $300,740 $605,653 $34,548 $81,048 $625,117
Yield / Rate 9.29% 6.69% 2.60% 3.67% 4.07% 3.25%
<PAGE>
Change in quarterly average
outstandings & yield / rate
from June 30, 1993 to
June 30, 1994
Amount $62,930 $32,421 $15,130 $10,577 $68,910 $84,304
% Change 16.9% 12.1% 2.6% 44.1% 567.7% 15.6%
Change (%pts) (0.59) (0.64) (0.29) 0.38 0.94 (0.12)
Year-to-date average
outstandings: (000's)
June 30, 1993
Amount $368,591 $265,478 $576,003 $22,466 $20,194 $533,380
Yield / Rate 9.97% 7.54% 2.93% 3.33% 3.44% 3.44%
June 30, 1994
Amount $427,820 $281,932 $591,213 $29,867 $70,010 596,753
Yield / Rate 9.26% 6.70% 2.60% 3.69% 3.82% 3.21%
Change in YTD average
outstandings & yield / rate
from June 30, 1993 to
June 30, 1994
Amount $59,229 $16,454 $15,210 $7,400 $49,816 $63,374
% Change 16.1% 6.2% 2.6% 32.9% 246.7% 11.9%
Change (%pts) (0.71) (0.84) (0.33) 0.36 0.39 (0.23)
</TABLE>
Note: (a) Yield on average investments calculated on a full-tax equivalent
basis. Excludes premiums on called bonds of $158, $146, and
$297 as of March 10, July 10, and October 10, 1993, respectively.
(b) Defined as total deposits minus CD's > $100,000. Rate includes
impact of non-interest bearing transaction accounts.
* May not foot due to rounding
<PAGE>
Borrowings for second quarter 1994 averaged $81.0 million as compared to
$12.1 million a year earlier. This resulted from CBNA's strategy to increase
net interest income by expanding earning assets as long as loan and investment
opportunities are attractive and non-deposit funding sources are sufficient. As
discussed in the capital section of this report, this strategy is being executed
within the guideline of maintaining the tier I leverage ratio in the 7% range.
In addition, borrowings are constrained by an internal guideline not to exceed
50% of assets eligible to collateralize borrowings. This would provide for
unused borrowing capacity of $77 million as of quarter end in the event of an
unforeseen liquidity or other need.
CBNA's Federal Home Loan Bank borrowings are comprised of primarily 90 day
terms or less, with the bulk at the currently favorable overnight rate. Twenty
million dollars represents a one year term borrowing at a low fixed rate. The
bank's asset/liability management committee monitors the trade-off between
raising funds through retail deposits versus large liability certificates of
deposit and other borrowings. Management uses borrowings and certificates of
deposit interchangeably according to the more cost effective option for the
maturity of funds desired. On a short-term basis, borrowings also cushion
fluctuations in deposits; the bank services a large municipal deposit base that
varies with seasonal cash requirements and revenue flows.
The average borrowing rate for the quarter just ended at 4.07% is higher
than the average rate on C.D.s greater than $100,000 for the first time in over
two years (first quarter 1993 had prior period adjustment). Until recently, it
had been more cost effective to borrow in the national financial markets. While
CD rates lagged the second quarter's increase in the federal funds rate, Federal
Home Loan bank borrowing rates increased in lock-step.
Investments and Asset/Liability Management
The level and composition of Community Bank System, Inc.'s investment
portfolio is designed to balance the constraints of liquidity, interest rate
risk, capital and credit risk while providing an acceptable rate of return. In
meeting that objective, the portfolio at quarter end comprises 41.4% of earning
assets and contributes a substantial steady stream of interest income using high
quality securities with relatively short maturities.
As shown by the table below, the bank's investments consist primarily of
U.S. treasury securities, mortgage-backed securities (including U.S. agencies
and collateralized mortgage obligations), and tax-exempt obligations of state
and political subdivisions. All investment strategies are developed in
conjunction with the bank's asset/liability position, with particular attention
given to managing interest rate risk.
<PAGE>
<TABLE>
<CAPTION>
For the Quarter U.S. Mtg-Backs Tax Other Total Invests /
Ended: Gov'ts (a) Exempts (b) Investments Earning Assets
(000's) ------ ------ ------ ------ ------ ------
Amount and Change (Period
from Preceding Quarter End)
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1992
Amount $106,797 $116,487 $27,940 $11,762 $262,986 42.1%
Change N/A N/A N/A N/A N/A N/A
March 31, 1993
Amount $120,475 $107,659 $27,797 $9,506 $265,437 41.9%
Change 12.8% -7.6% -0.5% -19.2% 0.9% (0.1)
June 30, 1993
Amount $117,435 $105,787 $26,939 $7,840 $258,001 40.3%
Change -2.5% -1.7% -3.1% -17.5% -2.8% (1.6)
September 30, 1993
Amount $111,309 $101,248 $27,612 $6,554 $246,723 38.3%
Change -5.2% -4.3% 2.5% -16.4% -4.4% (2.0)
December 31, 1993
Amount $114,413 $107,567 $24,585 $6,980 $253,544 37.8%
Change 2.8% 6.2% -11.0% 6.5% 2.8% (0.6)
March 31, 1994
Amount $120,183 $144,284 $23,807 $7,279 $295,553 40.9%
Change 5.0% 34.1% -3.2% 4.3% 16.6% 3.2
June 30, 1994
Amount $127,571 $149,475 $21,246 $15,904 $314,196 41.4%
Change 6.1% 3.6% -10.8% 118.5% 6.3% 0.4
Change from
June 30, 1993 to
June 30, 1994
Amount $10,136 $43,688 ($5,693) $8,064 $56,195 1.0%
Change 8.6% 41.3% -21.1% 102.9% 21.8% ---
Investment Mix
June 30, 1993 45.5% 41.0% 10.4% 3.0% 100.0%
June 30, 1994 40.6% 47.6% 6.8% 5.1% 100.0%
Change -4.9% 6.6% -3.7% 2.0% ---
Note: (a) Includes CMO's and pass-through's
(b) Includes Money Market Investments, Federal Home Loan Bank,
and other stock
</TABLE>
* May not foot due to rounding
<PAGE>
Investments totaled $314 million for the quarter just ended, up $56 million
(21.8%) from twelve months prior. This increase (largely in the first six
months of 1994) is attributable to the previously mentioned strategy of
increasing net interest income by growing earning asset levels when favorable
investment opportunities are available.
As rates were rising in the first quarter of 1994 and early second quarter,
cash flow producing investments (such as 15 year seasoned mortgage backed
securities) were purchased to provide an expected flow of funds for reinvestment
at higher rates later on. Thus, significant growth (34.1%) was seen from
December 1993 to March 1994 in mortgage backed securities. In the middle of the
second quarter, as rates began to level, call protection investments were
purchased. Thus, from March 1994 to June 1994, there is less growth in mortgage
backed securities (3.6%) than in call protection U.S. Governments (6.1%).
As the result of these first and second quarter purchases, mortgage backed
securities grew to $149.5 million, up $43.7 million (41.3%) from June 30, 1993,
while U.S. government securities grew to $127.6 million, up $10.1 million (8.6%)
over the same period. Additional growth in investments resulted from more than
doubling the bank's Federal Home Loan Bank stock level (reflected in other
investments) as required by the increased borrowing levels.
Thus, the investment portfolio mix has shifted such that there are
increased proportions of mortgage backed securities (47.6% as of June 30, 1994)
and other investments (Federal Home Loan Bank stock), while a decreasing
proportion of tax exempt and U.S. government securities.
The average fully taxable equivalent yield in the last year has decreased
from 7.33% to 6.69% as higher yielding investments have run off. Nonetheless,
as of March 31, 1994 CBSI's overall investment yield is in the highly favorable
85th percentile. As rates in the financial markets increased in the first two
quarters of 1994, the downward trend in the average investment yield stabilized.
The average portfolio life based on earliest redemption date has extended
slightly in the last twelve months to 2.9 years, reflecting the desire to take
advantage of higher yields further out on the yield curve. Consistent with the
recent rise in financial market rates, the portfolio's market value appreciation
decreased from $12.1 million or 4.9% of book value one year ago to a $1.6
million loss or (.5%) of book value as of June 30, 1994.
As of the most recent quarter end, $122 million or 38.5% of the investment
portfolio is classified as available for sale in accordance with SFAS No. 115,
which was adopted as of year-end 1993. The most common criteria for placing
securities in the AFS portfolio is the need to sell securities for liquidity
needs and in the management of interest rate risk. However, CBSI's liquidity
position does not rely on security sales, and interest rate risk is managed at
the time of investment purchase rather than after the fact.
To be conservative, the bank has chosen to place in its AFS portfolio all
collateralized mortgage obligations and publicly traded securities with a stated
final maturity or call date of two years or less. As of June 30, 1994 the AFS
portfolio average maturity based on earliest redemption date was 1.9 years
and the pre-tax market value adjustment was negative $1.2 million or (1.1%) of
book value. The available for sale portfolio has been decreasing since the
adoption of SFAS 115; since that time, all new purchases have been classified as
held to maturity.
The held to maturity portfolio (61.5% of the total investments) amounted to
$189.2 million as of June 30, 1994. Average time to maturity of these
securities based on the earliest redemption date was 3.5 years, reflecting a
high (but slowing) rate of prepayments on mortgage backed holdings. The
portfolio recorded a market value loss of $404,000 or .3% below book value for
the quarter just ended.
<PAGE>
The following table displays several of the underlying investment portfolio
statistical measures discussed above on a quarterly basis since December 31,
1992.
<TABLE>
<CAPTION>
For the Quarter Portfolio Portfolio Portfolio AFS AFS Market Net
Ended: Average Maturity Market / Portfolio/ Value Realized
(000's) Yield (Years) Book Total Adjustment Gains /
(a) (b) Portfolio (Pretax) (Losses)
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1992 7.96% 2.7 103.9% N/A N/A $0
March 31, 1993 7.75% 2.7 105.2% N/A N/A $0
June 30, 1993 7.33% 2.5 104.9% N/A N/A $0
September 30, 1993 7.30% 2.6 104.8% N/A N/A $0
December 31, 1993 6.58% 2.3 103.7% 50.0% $2,164 ($15)
March 31, 1994 6.71% 3.3 101.7% 41.8% $592 ($3)
June 30, 1994 6.69% 2.9 99.5% 38.5% ($1,209) $0
Change from
June 30, 1993 to
June 30, 1994 -0.64% 0.4 -5.4% N/A N/A $0
</TABLE>
Note: (a) Yield on average investments calculated on a full-tax equivalent
basis. Excludes premiums on called bonds of $158, $146, and
$297 as of March 10, July 10, and October 10, 1993, respectively.
(b) Based on earliest redemption date.
* May not foot due to rounding
<PAGE>
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits required by Item 601 of Regulation S-K:
(11) Statement re Computation of earnings per share
b) Reports on Form 8-K: Filed on 8/15/94.
Item 5. Other Information. News release:
Community Bank, N.A. acquires three branches of
former Columbia Banking FSA from Resolution
Trust Corporation on June 3, 1994.
<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: August 15, 1994 /s/ Sanford A. Belden
______________________________
Sanford A. Belden, President and
Chief Executive Officer
Date: August 15, 1994 /s/ David G. Wallace
___________________________
David G. Wallace, Senior
Vice President and
Chief Financial Officer
<PAGE>
Community Bank System, Inc.
Statement re Earnings Per Share Computation
Exhibit 11
Three Months Ended Six Months Ended
June 30, June 30,
1994 1993 1994 1993
Primary Earnings Per Share
Net Income 2,648,813 2,428,781 5,049,044 4,807,576
---------- --------- --------- ---------
Income applicable
to common stock 2,648,813 2,428,781 5,049,044 4,807,576
========== ========= ========= =========
Weighted average number
of common shares 2,758,969 2,717,338 2,753,965 2,709,641
Add: Shares issuable from
assumed exercise of
incentive stock options 51,778 65,355 55,235 65,745
--------- --------- --------- ---------
Weighted average number of
common shares - adjusted 2,810,747 2,782,693 2,809,200 2,775,386
========= ========= ========= =========
Primary earnings per share $0.94 $0.87 $1.80 $1.73
===== ===== ===== =====
Fully Diluted Earnings Per Share
Net Income 2,648,813 2,428,781 5,049,044 4,807,576
========= ========= ========= =========
Weighted average number of
common shares - adjusted 2,814,895 2,782,693 2,812,389 2,778,651
Add: Equivalent number of
common shares assuming
conversion of preferred
--------- --------- --------- ---------
Weighted average number of
common shares - adjusted 2,814,895 2,782,693 2,812,389 2,778,651
========= ========= ========= =========
Fully diluted earnings per share $0.94 $0.87 $1.80 $1.73
===== ===== ===== =====
