FORM 10 - Q/A
AMENDMENT NUMBER 2
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, 1995
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, $1.25 par value -- 2,789,750 shares as of May 3, 1995.
<PAGE>
INDEX
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets --
March 31, 1995, December 31, 1994 and March 31, 1994.
Consolidated statements of income --
Three months ended March 31, 1995 and 1994
Consolidated statements of cash flows --
Three months ended March 31, 1995 and 1994.
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
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
March 31, December 31, March 31,
ASSETS 1995 1994 1994
Cash and due from banks $50,721,496 $30,522,189 $28,551,066
Interest bearing deposits with other banks 0 0 90,000
Federal funds sold 0 0 0
TOTAL CASH AND CASH EQUIVALENTS 50,721,496 30,522,189 28,641,066
Investment securities
U.S. Treasury 16,607,542 16,624,198 27,469,783
U.S. Government agencies and corporations 175,918,083 170,462,427 92,713,368
States and political subdivisions 17,761,948 20,777,354 23,806,800
Mortgage-backed securities 162,407,975 155,376,150 144,472,287
Other securities 13,930,297 14,727,925 6,500,539
Federal Reserve Bank 551,550 551,550 500,350
TOTAL INVESTMENT SECURITIES 387,177,395 378,519,604 295,463,127
Loans 519,252,700 510,738,775 451,449,946
Less: Unearned discount 23,871,714 27,659,684 24,979,937
Reserve for possible loan losses 6,423,564 6,281,109 5,707,451
NET LOANS 488,957,422 476,797,982 420,762,558
Bank premises and equipment 10,651,544 10,591,510 9,904,811
Accrued interest receivable 8,006,653 6,657,326 4,796,604
Intangible assets 5,987,253 6,106,608 412,800
Other assets 8,777,761 6,305,990 8,106,192
TOTAL ASSETS $960,279,524 $915,501,209 $768,087,158
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing $101,167,608 $103,006,969 $90,407,560
Interest bearing 621,212,656 576,630,655 531,810,494
TOTAL DEPOSITS 722,380,264 679,637,624 622,218,054
Federal funds purchased and securities sold under
agreements to repurchase 43,765,000 57,300,000 31,500,000
Term borrowings 115,550,000 105,550,000 45,550,000
Obligations under capital lease 0 0 16,938
Accrued interest and other liabilities 9,621,279 6,724,070 6,073,359
TOTAL LIABILITIES 891,316,543 849,211,694 705,358,351
Shareholders' equity
Preferred stock $1.00 par value 0 0 0
Common stock $1.25 par value 3,485,187 3,485,187 3,436,898
Surplus 14,885,100 14,885,096 14,386,731
Undivided profits 51,768,386 49,853,313 44,560,452
Unrealized gains (losses) on available for sale securities (1,172,571) (1,930,414) 350,032
Less: Shares issued under
employee stock plan - unearned 3,121 3,667 5,306
TOTAL SHAREHOLDERS' EQUITY 68,962,981 66,289,515 62,728,807
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $960,279,524 $915,501,209 $768,087,158
See notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- ----------------------------------------------------------------------------------------------
Three Months
March
INTEREST INCOME 1995 1994
<S> <C> <C>
Interest and fees on loans $11,470,601 $9,335,055
Interest and dividends on investments:
U.S. Treasury 296,841 482,490
U.S. Government agencies and corporations 3,378,957 1,554,825
States and political subdivisions 301,490 370,897
Mortgage-backed securities 2,965,514 1,608,333
Other securities 209,784 154,895
Interest on federal funds sold 32,777 0
Interest on deposits at other banks 0 1,058
18,655,964 13,507,553
INTEREST EXPENSE
Interest on deposits
Savings 2,002,495 1,927,579
Time 3,888,923 1,999,316
Interest on federal funds purchased, securities
sold under agreements to repurchase and
Term borrowings 2,339,030 505,738
Interest on capital lease 0 501
8,230,448 4,433,134
NET INTEREST INCOME 10,425,516 9,074,419
Provision for possible loan losses 254,411 239,172
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 10,171,105 8,835,247
OTHER INCOME
Fiduciary services 339,936 324,570
Service charges on deposit accounts 661,759 563,638
Other service charges, commissions and fees 337,097 311,625
Other operating income 58,258 32,526
Investment security gain (loss) 0 (3,125)
1,397,050 1,229,234
11,568,155 10,064,481
OTHER EXPENSES
Salaries, wages and employee benefits 3,711,283 3,283,990
Occupancy expense of bank premises, net 540,068 533,288
Equipment and furniture expense 426,158 414,883
Other 2,346,128 2,024,089
7,023,637 6,256,250
INCOME BEFORE INCOME TAXES 4,544,518 3,808,231
Income taxes 1,793,000 1,408,000
NET INCOME $2,751,518 $2,400,231
Earnings per common share $0.98 $0.85
See notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For Three Months Ended March 31, 1995 and 1994
Increase (Decrease) in Cash and Cash Equivalents
1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities:
Net income $2,751,518 $2,400,231
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation 359,012 372,510
Amortization of intangible assets 119,355 39,464
Provision for loan losses 254,411 239,172
Provision for deferred taxes (37,021) (114,101)
Loss on sale of investment securities 0 3,125
Gain on sale of Loans (15,506) 0
Loss on sale of assets (2,000) (185)
Change in interest receivable (1,349,327) (257,835)
Change in interest payable and accrued expenses 1,209,821 643,050
Change in unearned loan fees and costs (37,635) 2,280
- ----------------------------------------------------------------------------------------------------
Net Cash Provided By Operating Activities 3,252,628 3,327,711
- ----------------------------------------------------------------------------------------------------
Investing Activities:
Proceeds from sales of investment securities 0 10,900,000
Proceeds from maturities of investment securities (24,184,602) 7,733,056
Purchases of investment securities 17,133,295 (62,162,318)
Net change in loans outstanding (13,956,164) (11,088,057)
Capital expenditures (417,046) (231,354)
- ----------------------------------------------------------------------------------------------------
Net Cash Used By Investing Activities (21,424,517) (54,848,673)
- ----------------------------------------------------------------------------------------------------
Financing Activities:
Net change in demand deposits,
NOW accounts, and savings
accounts 579,180 23,741,781
Net change in certificates of deposit 42,163,460 10,161,030
Net change in term borrowings (3,535,000) 19,500,000
Payments on lease obligation 0 (25,098)
Issuance of common stock 0 14,082
Cash dividends (836,445) (742,045)
- ----------------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 38,371,195 52,649,750
- ----------------------------------------------------------------------------------------------------
Change In Cash And Cash Equivalents 20,199,307 1,128,788
Cash and cash equivalents at beginning of year 30,522,189 27,512,278
- ----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR 50,721,496 28,641,066
====================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid For Interest $6,042,995 $4,154,416
====================================================================================================
Cash Paid For Income Taxes $474,503 $390,950
====================================================================================================
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES: None
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)
March 1995
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, 1995 are not necessarily indicative of
the results that may be expected for the year ended December 31, 1995.
The Company adopted FAS 114, "Accounting by Creditors for
Impairment of a Loan", on January 1, 1995. Under the new standard, a
loan is considered impaired, based on current information and events,
if it is probable that the Company will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. The measurement of impaired
loans is generally based on the present value of expected future cash
flows discounted at the historical effective interest rate, except
that all collateral-dependent loans are measured for impairment based
on the fair value of the collateral. No additional provision for
credit losses needed to be recognized as a result of the adoption of
FAS 114.
The adequacy of the allowance for credit losses is peridically
evaluated by the Company in order to maintain the allowance at a level
that is sufficient to absorb probable credit losses. Management's
evaluation of the adequacy of the allowance is based on a review of
the Company's historical loss experience, known and inherent risks in
the loan portfolio, including adverse circumstances that may affect
the ability of the borrower to repay interest and/or principal, the
estimated value of collateral, and an analysis of the levels and
trends of delinquencies, charge-offs, and the risk ratings of the
various loan catagories. Such factors as the level and trend of
interest rates and condition of the national and local economies are
also considered.
The allowance for credit losses is established through charges to
earnings in the form of a provision for credit loasses. Increases and
decreases in the allowance due to changes in the measurement of the
impaired loans are included in the provision for credit loansses.
Loans continue to be classified as impaired unless that are brought
fully current and the collection of scheduled interest and principal
is considered probable.
<PAGE>
When a loan or portion of a loan is determined to be
uncollectible, the portion deemed uncollectible is charged against the
allowance and subsequent recoveries, if any, are credited to the
allowance.
At March 31, 1995, the recorded investment in loans for which
impairment has been recognized in accordance with FAS 114 totaled
$4,203,000 with a corresponding valuation allowance of $1,519,000.
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 three months ended March 31, 1995 which are not
otherwise apparent from the consolidated financial statements included
in these reports. Certain information pertaining to the pending acquisition
by Community Bank, N.A. of 15 branch locations from The Chase Manhattan Bank,
N.A. (the "Acquisition") is set forth at the conclusion of the discussion.
Earnings Performance Summary
Three Months Ended Change
3/31/95 3/31/94 Amount Percent
(000s)
Net Income $2,752 $2,400 $352 14.6%
Earnings per share $0.98 $0.85 $0.13 15.3%
Weighted average
shares outstanding 2,815 2,808 8 0.3%
Return on average assets 1.20% 1.33% -0.13% N/A
Average assets $929,778 $730,155 $199,623 27.3%
Return on average
shareholders' equity 16.62% 15.54% 1.08% N/A
Average shareholders' equity $67,151 $62,636 $4,514 7.2%
Percentage of average
shareholders' equity to
average assets 7.22% 8.58% -1.36% N/A
Net income for first quarter 1995 reached a record high of $2.75
million, up 14.6% over the comparable 1994 period. Earnings per share
rose 15.3% to $.98, also a record for the company.
These records reflect continued excellent loan growth, an
improved level of noninterest income, and enhanced utilization of
shareholder capital. As a result, return on shareholder equity rose
to 16.62%, up more than one percentage point from first quarter 1994.
In addition, dividends to shareholders were 11.1% higher than one year
earlier as a result of an increase approved last August to an
annualized payment of $1.20 per share.
<PAGE>
Despite a narrower margin between earning asset yields and rates
paid on deposits, as reflected by the bank's 63 basis point reduction
in net interest margin from last year, CBSI's net interest income rose
a very satisfactory 14.9% (nominal) for the quarter. This increase
resulted from record loan growth of over 16% as well as 31% more in
investment securities. In particular, net growth in automobile
financing originated through dealers was very strong, up approximately
$37 million or 48% from one year earlier. Overall business lending
was nearly 14% higher while consumer mortgages increased almost 7%.
More than 40% of the $161 million growth in earning assets this
quarter was funded by the bank's four branch acquisitions in 1994,
with the balance from greater deposits held by municipalities and
borrowings from the Federal Home Loan Bank (FHLB). As discussed in
its recently released annual report, the company intends to repay
virtually all its FHLB borrowings with deposits to be assumed in
connection with the Acquisition.
A 13.7% improvement in noninterest income for the quarter
reflected higher fees from the sale of annuities, mutual funds, and
employee benefit trust products as well as greater service charges and
commissions from an expanded customer base gained from 1994's
acquisitions. Overhead was up 12.3% for the quarter, with more than
half the increase reflecting personnel costs. Staff has been added
because of the newly acquired branches as well as to support business
development efforts. Other increases related to the new branches were
reflected in greater occupancy, FDIC insurance, and deposit intangible
amortization expense. Lastly, certain other costs were higher due to
activities in preparation for the Acquisition and timing differences compared
to first quarter 1994.
Asset quality remained good at the company. Net charge-offs were
very low at .09% of average loans, and nonperforming loans were down
slightly from the year-end 1994 level to .64% of loans outstanding.
These factors enabled loan loss provision expense to be nearly
unchanged from first quarter 1994 and still maintain the ratio of loan
loss reserves to loans outstanding at the year-end 1994 level of
1.30%. Though down from one year ago, the ratio of reserves to
nonperformers is considered ample by management at 2.0 times.
The following sections 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
first quarter 1995 increased $1.3 million (14.2%) over the same period
in 1994 to $10.6 million. Compared with fourth quarter 1994, there
was a $120,000 decline.
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>
<TABLE>
<CAPTION>
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
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1993
Amount $9,146 5.59% 8.36% 2.69% $649,680 62.2%
Change ($224) -0.20% -0.23% -0.12% 1.2% 0.6
March 31, 1994
Amount $9,251 5.51% 8.15% 2.72% $680,577 59.1%
Change $ 105 -0.07% -0.21% 0.03% 4.8% (3.2)
June 30, 1994
Amount $9,802 5.34% 8.10% 2.82% $736,720 59.1%
Change $ 552 -0.18% -0.06% 0.10% 8.2% 0.0
September 30, 1994
Amount $10,380 5.31% 8.23% 2.99% $776,195 59.1%
Change $ 578 -0.03% 0.14% 0.18% 5.4% 0.0
December 31, 1994
Amount $10,684 5.09% 8.39% 3.37% $832,113 56.1%
Change $ 304 -0.21% 0.15% 0.38% 7.2% (3.0)
March 31, 1995
Amount $10,564 4.88% 8.69% 3.90% $877,322 56.1%
Change ($120) -0.21% 0.30% 0.53% 5.4% 0.1
Change from
March 31, 1994 to
March 31, 1995
Amount $ 1,313 -0.63% 0.53% 1.18% $196,745 -2.9%
% Change 14.2% --- --- --- 28.9% ---
</TABLE>
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 a premium on a called bonds of $297 on
October 10, 1993.
* May not foot due to rounding
<PAGE>
From fourth quarter 1992 through mid-1994, margins have narrowed
because the yield on earning assets fell faster than the cost of funds
rate. Since mid-1994 the margin has continued to narrow as the bank's
cost of funds has increased at a faster pace than the earning asset
yield. More specifically, from fourth quarter 1992 to second quarter
1994, the cost of funds rate (total interest expense divided by total
deposits plus borrowings) was down only 28 basis points compared to a
110 basis point decline in earning asset yield. Since second quarter
1994, the cost of funds rate is up 108 BP largely due to an increasing
volume of higher cost borrowings versus lower cost deposits (whose
rate increases have lagged), while the yield on earning assets has
grown only 59 BPs (as lower yielding loans gradually mature or reprice
and are replaced with higher yields).
Comparing the quarter just ended to one year earlier, the net
interest margin narrowed by 63 basis points due to a 53 basis point
increase in the yield on earning assets compared to the cost of funds
rate increasing by 118 basis points (for the same reason outlined in
the preceding paragraph). However, the $196.7 million increase in
earning assets shown in the above table more than offsets the impact
of this shrinkage. Had margins remained constant, net interest income
would have increased by $2.6 million versus $1.3 million actually
realized.
Net interest income is also less than it would have been because
since third quarter 1993, the mix of earning assets has moved toward a
greater share in investments, which have a lower overall yield than
loans. This change in mix as measured by the loans to earning asset
ratio is the result of improved investment opportunities funded with
short-term borrowings and the second quarter 1994 acquisition of four
branches, about one-third of whose deposits was placed in the
investment portfolio.
Comparing first quarter 1995 to fourth quarter 1994 shows a 21 BP
decline in the net interest margin. The yield on earning assets
increased 30 basis points due to increased financial market rates and
prime rate increases in November 1994 and February 1995, while the
cost of funds rate rose 53 basis points because of a slight increase
in deposit rates plus fed funds increases (corresponding to prime
movements), which raised the rate on short-term borrowings. Despite
$45.2 million in earning asset growth, net interest income fell
$120,000 from the prior quarter due to the declining margin and two
fewer days (had the number of days been equal, net interest income
would have been over $100,000 higher than the prior quarter).
Despite its recent decrease, net interest margin has long been a
historical strength for CBSI, being in the top peer quartile based on
comparative data as of December 31, 1994. This performance is largely
the result of very high earning asset yields, being in the 80th to
90th percentile, versus cost of funds being slightly above norm in the
66th percentile.
<PAGE>
Non-Interest Income
Non-interest income, including service charges, commissions,
overdraft fees, trust income and fees from other sources, totaled
approximately $1.4 million for the three months ended March 31, 1995,
up $168,000 (13.7%) from the same period last year.
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Change
3/31/95 3/31/94 Amount Percent
(000's)
<S> <C> <C> <C> <C>
Fiduciary services $ 340 $ 325 $ 15 4.7%
Service charges on $ 662 $ 564 $ 98 17.4%
deposit accounts
Annuity and mutual
fund sales $ 128 $ 16 $112 702.8%
Other service charges,
commissions, and fees $ 250 $ 328 ($78) -23.8%
Net gain (loss) on sale
of investments and
other assets $ 18 ($3) $ 20 695.4%
------- ------- ------- -------
Total noninterest income
- Amount $1,397 $1,229 $168 13.7%
- % of Average
assets 0.61% 0.68% -0.07% ---
</TABLE>
As shown by the table above, income from service charges on
deposits is responsible for more than 58% of the total change from
first quarter 1994 versus the quarter just ended and is the result of
overdrafts and other fees associated with increased deposit accounts;
this improvement reflects the four branches purchased during the last
twelve months and efforts to reduce the number of waived charges.
Increases also occurred in fiduciary services attributable to
growth in employee benefit trust services. Personnel trust was
essentially flat (due to declines in periodic, less predictable estate
fees). Additionally, other service charges rose due to significant
growth in the sale of annuities and mutual funds (a program launched
through CBSI's branch network early in 1994) and the reinstatement of
a holiday extension program for installment loans. Growth was
partially offset by declining Visa merchant discount fees attributable
to loss of a large vendor.
Management recognizes that the company's level of non-interest
income must be improved, its ratio to average assets being .61% for
the quarter, or the first peer quartile (the 7 basis point decrease
from one year earlier reflects CBSI's strong asset growth). Progress
continues to be made to address this shortfall by maintaining
competitive and value-based service charges; selling fixed rate
annuities through our 36 customer facilities; offering full service
brokerage/financial planning products through dedicated sales
representatives in selected markets; and selling/servicing residential
mortgages (which began in mid-1994).
<PAGE>
Non-Interest Expense
Non-interest expense or overhead for the three months ended March
31, 1995 increased by $767,000 (12.3%) over the same period last year
to $7.0 million. The table below summarizes the major components of
change.
Three Months Ended Change
3/31/95 3/31/94 Amount Percent
(000's)
Personnel Expense $3,711 $3,284 $427 13.0%
Occupancy, furniture, $ 966 $ 948 $ 18 1.9%
and equipment
Administrative and business $1,175 $ 963 $212 22.0%
development
All other expense $1,171 $1,061 $110 10.4%
------- ------- ------- -------
Total noninterest expense
- Amount $7,024 $6,256 $767 12.3%
- % of Average
assets 3.06% 3.47% -0.41% ---
Efficiency ratio 58.7% 59.7% -1.0% ---
Approximately 55% of the quarterly increase resides in personnel
expense, the primary reasons being modest annual merit awards and 43
additional full-time equivalent (FTE) positions, resulting in a total
of 440 employees as of March 31, 1995. These additions pertain to the
Columbia Savings branch acquisition (21 FTE); the acquisition of the
Chase Cato, New York branch in fourth quarter 1994; 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 four new branches offset by
a milder 1994-95 winter (as compared to the prior winter).
Administrative expenses were up due to higher supplies and deposit
insurance (both increases due to branch acquisitions). Computer
services climbed due to an accounting change to reflect the external
servicing costs of the EBT function. The amortization of intangibles
rose $78,000 primarily due to the acquisition of the Columbia
branches, whose $5.5 million premium (or 8.6% of the deposits assumed)
added approximately $365,000 per annum over the prescribed 15 year
amortization period. Finally, there were various other increases
related to inflation, volume growth and acquisitions.
The above increases were offset by lower advertising expense
(caused by more in-house ad creation and reduced rate associated
advertising) and reduced Visa processing expense, related to the loss
of a large vendor.
<PAGE>
As a percentage of average assets, annualized overhead declined
satisfactorily from 3.47% in first quarter 1994 to 3.06% in first
quarter 1995; the latter level is now favorably below the peer norm
and is attributable to persistent cost control efforts as well as
asset growth (much of which was in the bank's investment portfolio,
which requires minimal overhead). CBSI's efficiency ratio (operating
expense divided by recurring operating income) decreased slightly in
the first quarter from 59.7% last year to 58.7% this year, nicely
below the peer bank average of 61.6% as of 12/31/94; the 1.0%
improvement is caused by a greater percentage of earnings resulting
from borrowing and investments rather than loans and deposits (which
consume more overhead).
Income and Income Taxes
Income before tax was approximately $4.5 million for the quarter
ended March 31, 1995, a $736,000 (19.3%) increase from the same period
last year. As shown by the table below, the increases in overhead
for the quarter are more than offset by greater net interest income
and higher non-interest income.
Three Months Ended Change
3/31/95 3/31/94 Amount Percent
(000's)
Net interest income $10,426 $9,074 $1,351 14.9%
Loan loss provision $ 254 $ 239 $ 15 6.4%
Net interest income $10,171 $8,835 $1,336 15.1%
after provision for
loan losses
Other income $ 1,397 $1,229 $ 168 13.7%
Other expense $ 7,024 $6,256 $ 767 12.3%
Income before $ 4,545 $3,808 $ 736 19.3%
income tax
Income tax $ 1,793 $1,408 $ 385 27.3%
Net income $ 2,752 $2,400 $ 351 14.6%
As a result of higher pre-tax income, YTD income taxes increased
by $385,000. CBSI's marginal tax rates are 35% federal and 9% state
(plus a 4.0% surcharge scheduled to be phased out over time). First
quarter 1995's effective tax rate of 39.5% is higher than first
quarter 1994's rate due to the decreasing proportion of tax-exempt
municipals. Compared to our peers, the company's effective tax rate is
unfavorable because of New York State's very high tax level as well as
tax exempt security holdings being slightly below the norm.
<PAGE>
Capital
Three Months Ended Change
3/31/95 3/31/94 Amount Percent
Tier 1 leverage ratio 6.70% 8.07% -1.37% N/A
Tier 1 capital to 12.41 14.62 -2.21 N/A
risk asset ratio
Cash dividend declared $0.30 $0.27 $0.03 11.1%
per common share
Dividend payout 30.4% 30.9% -0.53% N/A
Book value per share:
Total $24.73 $22.81 $1.92 8.4%
Tangible 22.59 22.66 (0.08) (0.3)
As of March 31, 1995, the tier I leverage ratio of 6.70% was 137
basis points lower than one year earlier. The decrease in the ratio is
the combined result of the $5.5 million intangible from the Columbia
branch acquisition, which added approximately $58 million in deposits
after run-off and $77 million in higher borrowings to help fund loan
and investment growth. The $1.2 million negative after tax market value
adjustment for the available-for-sale investment portfolio is excluded
from the calculation per the OCC's definition.
Though below the peer norm of 7.79% as of December 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. As noted more
fully below, it is expected that the Acquisition will result in a
decrease in tier I leverage ratio such that CBSI and the bank will be
classified as "adequately capitalized" immediately following
consummation of the Acquisition. As noted below, institutions are
deemed by the FDIC to be "adequately capitalized" with respect to
tier I leverage ratio if the ratio is between 4.0% and 5.0%. See
"Pending Acquisition."
As a result of the aforementioned reasons, the tier I risk-based
capital ratio as of March 31, 1995 was 12.41% or 221 basis points lower
than it was one year ago. This compares to a 6% "well-capitalized"
regulatory minimum. To the degree that earning asset growth results
from investment purchases, this risk-based ratio is more favorable
than the nominal leverage ratio since investments have a lower risk
component than most loans.
Total capital reached $69.0 million as of March 31, 1995, $6.3
million (10.1%) higher than twelve months earlier. This increase is
attributable to dividends declared on common stock of $3.2 million
over the twelve months ended March 31, 1995 versus net income of $10.5
million during the same time frame. The remaining difference is due
to additional shares issued in exercise of incentive stock options and
changes in the market value adjustment. The higher YTD dividend shown
above reflects a 3 cent per share increase (11.1%) in the quarterly
dividend approved by the CBSI Board of Directors in August 1994, the
fourth dividend hike within three years. The YTD 1994 dividend
pay-out of 30.4% is at the low end of the company's targeted 30-40%
guideline.
<PAGE>
The 8.4% increase in book value per share from March 31, 1994
approximates the increase in total capital discussed above, slightly
offset by 1.4% more in shares outstanding largely because of the
impact of a higher stock price on valuing unexercised options.
Tangible book value per share declined slightly since first quarter
1994 due to the intangible resulting from the acquisition of the three
Columbia Savings branches.
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.
<TABLE>
<CAPTION>
For the Quarter Market Market Market # of Cash Share
Ended: Price Price Price Shares Dividend Volume
High Low Close Outstanding Declared Traded
------ ------ ------ ------ ------ ------
Amount and Change
from Preceding Quarter
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
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%
September 30, 1994
Amount $31.75 $29.00 $31.00 2,775,150 $0.30 186,797
Change 4.1% 1.8% 1.6% 0.3% 11.1% -26.4%
December 31, 1994
Amount $31.75 $25.75 $26.25 2,788,150 $0.30 146,706
Change 0.0% -11.2% -15.3% 0.5% 0.0% -21.5%
March 31, 1995
Amount $27.75 $25.25 $27.13 2,788,150 $0.30 343,668
Change -12.6% -1.9% 3.3% 0.0% 0.0% 134.3%
Change from
March 31, 1994 to
March 31, 1995
Amount ($3.00) ($3.25) ($2.13) 38,632 $0.03 214,739
% Change -9.8% -11.4% -7.3% 1.4% 11.1% 166.6%
</TABLE>
<PAGE>
Loans
Loans outstanding, net of unearned discount, were $495.2 million
as of March 31, 1995, a very favorable $68.8 million (16.1%) growth in
the prior 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. Strong growth in the last
year has been experienced in consumer indirect and business lending.
Additionally, reasonable growth has been felt in consumer direct and
consumer mortgages. All four types are more fully defined in the
company's 1994 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, 1993
Amount $95,502 $74,321 $127,618 $120,430 $417,871 9.15%
Change 0.4% 3.1% 6.2% 9.7% 5.2% (0.15)
March 31, 1994
Amount $92,908 $77,103 $133,085 $123,373 $426,470 9.02%
Change -2.7% 3.7% 4.3% 2.4% 2.1% (0.13)
June 30, 1994
Amount $93,768 $86,230 $138,349 $127,180 $445,527 9.07%
Change 0.9% 11.8% 4.0% 3.1% 4.5% 0.05
September 30, 1994
Amount $98,280 $94,464 $142,012 $134,724 $469,480 9.12%
Change 4.8% 9.5% 2.6% 5.9% 5.4% 0.05
December 31, 1994
Amount $98,777 $102,491 $143,137 $138,675 $483,079 9.26%
Change 0.5% 8.5% 0.8% 2.9% 2.9% 0.14
March 31, 1995
Amount $98,633 $113,895 $142,289 $140,477 $495,294 9.52%
Change -0.1% 11.1% -0.6% 1.3% 2.5% 0.26
Change from
March 31, 1994 to
March 31, 1995
Amount $5,725 $36,792 $9,204 $17,103 $68,824 0.51
Change 6.2% 47.7% 6.9% 13.9% 16.1% N/A
Loan mix
March 31, 1994 21.8% 18.1% 31.2% 28.9% 100.0%
March 31, 1995 19.9% 23.0% 28.7% 28.4% 100.0%
Change -1.9% 4.9% -2.5% -0.6% ---
</TABLE>
* May not foot due to rounding
<PAGE>
Greater than 50% of CBSI's loan growth in the last twelve months
came from the indirect lending portfolio (applications taken at dealer
locations), which grew 48%. This reflects both high automobile demand
industry-wide, which began in the spring of 1993, as well as greater
emphasis on this product line in CBSI's Southern Region. These
factors produced a strong 11.1% increase in the quarter just ended.
Approximately, 55% of the bank's indirect automobile loans are used
versus 45% new. About 7% of the consumer indirect portfolio consists
of mobile homes, and recreational and other vehicles.
Almost 25% of CBSI's loan growth in the last twelve months came
from the generally prime-based business lending portfolio, which grew
nearly 14%. Though a relatively low prime lending rate has encouraged
borrowing in the last year, small and medium sized companies have also
been receptive to CBSI's responsive and personalized service. In
addition, experienced lending officers who have joined the bank in the
last two years have enhanced commercial loan growth. The recent
increases in the prime rate may have dampened demand a bit, as
evidenced by growth of 1.3% during the last three months (the lowest
since third quarter 1993).
The almost 7% increase in consumer mortgages since first quarter
1994 (or 13% of total loan growth) is attributable to the increasing
mortgage rate environment, the continued wind-down of the fixed rate
refinancing boom of the last two years, and a program to sell
mortgages in the secondary market implemented by CBSI in third quarter
1994. Volume fell slightly in the first quarter with $800,000 in
secondary market sales. Considering mortgage sales and normal
portfolio amortization, management anticipates little future growth
within this loan type, outside of that provided by the branches to be
acquired in the Acquisition.
Consumer direct loans have grown a favorable 6.2% since March 31,
1994. This category had been essentially flat since the end of 1992
after the accumulation and periodic sale of student loans is
considered. The line of business started to show small increases in
mid 1994 but has since leveled with a flat quarter for conventional
installment and direct personal lending. Borrowing under home equity
lines of credit has generally maintained steady growth, but fell
slightly in the last three months due to decreased demand which had
been absorbed with 1994's teaser rate promotion in conjunction with
increasing first quarter 1995 rates.
<PAGE>
Loans at CBSI have now climbed for twelve consecutive quarters,
which compares very favorably to 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. While the mix of consumer mortgages
fell in the last twelve months after a sharp increase in 1991-1993,
the indirect loan share is rising after a slide which started before
the 1990 recession and eased late in 1994. Although there has been
favorable growth in consumer mortgages and consumer direct, the loan
mix of each fell with stronger growth in other loan categories.
As discussed in the net interest income section of this report,
earning asset yields have grown 53 basis points over the last twelve
months. Despite a 281 basis point increase in the average prime rate
for the three months ending March 31, 1995 over the same period last
year, the loan yield has grown only 51 basis points. This has
resulted from the slow runoff of lower yielding loans and market
pressure keeping rates on many loan types relatively low.
Nonetheless, CBSI's predominantly retail loan mix and related pricing
objectives have maintained a very favorable overall loan yield, being
in the top peer quartile based on data as of December 31, 1994.
<PAGE>
Loan Loss Provision and Reserve for Loan Losses
The provision for future loan losses was $254,000 for the three
months ended March 31, 1995, up $15,000 (6.4%) versus the same period
last year.
Net charge-offs for the quarter were $112,000 (a very modest .09%
of loans), down from $238,000 a year ago due a slight decline in gross
charge offs and recoveries of two large commercial loans. CBSI's net
charge offs are slightly above the peer norm, being in the 59th
percentile as of December 31, 1994.
<TABLE>
<CAPTION>
3 Months 3 Months 12 Months 12 Months 12 Months
(000s or % Ratios) Mar 31, Mar 31, Dec 31, Dec 31, Dec 31,
1995 1994 1994 1993 1992
- ---------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Charge-offs $112 $238 $1,128 $782 $2,057
Net Charge-offs/Ave Loans 0.09% 0.23% 0.25% 0.20% 0.59%
Gross Charge-offs $298 $338 $1,616 $1,410 $2,601
Gross Charge-offs/Ave Loans 0.25% 0.33% 0.36% 0.37% 0.74%
Recoveries $186 $99 $488 $628 $545
Recoveries/Prior year 46.6% 28.6% 34.6% 24.2% 8.5%
gross charge offs
</TABLE>
The lower provision along with strong loan growth discussed above
caused the ratio of loan loss reserve to total loans to fall to 1.30%.
Despite the ratio's decline, the reserve reached a new high at quarter
end of $6.4 million. Management believes that having a loan loss
reserve ratio in the neighborhood of 1.25% is consistent with CBSI's
credit quality, which has enabled the reserve for loan losses to cover
the level of non-performing loans by approximately two times or more
since the company's restructuring as a single bank. Today's coverage
of loan loss reserves over non-performers is favorable at 202%.
Included in this coverage is an ample 12% in reserves to absorb
general, unforeseen losses.
<TABLE>
<CAPTION>
3 Months 3 Months 12 Months 12 Months 12 Months
(000's or % Ratios) Mar 31, Mar 31, Dec 31, Dec 31, Dec 31,
1995 1994 1994 1993 1992
- ---------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Non-Performing Loans $3,183 $2,509 $3,257 $2,391 $1,606
Non-Performing Loans/Loans 0.64% 0.59% 0.67% 0.57% 0.44%
Loan Loss Allowance $6,424 $5,707 $6,281 $5,707 $4,982
Loan Loss Allowance/Loans 1.30% 1.34% 1.30% 1.37% 1.37%
Loan Loss Allowance/ 202% 227% 193% 239% 310%
Non-Performing Loans
Loan Loss Provision $254 $239 $1,702 $1,506 $2,727
Loan Loss Provision/ 227% 100% 151% 193% 133%
Net Charge-offs
</TABLE>
<PAGE>
Non-performing loans increased 27% from twelve months earlier to
$3.2 million as of the most recent quarter end attributable to one
large commercial loan for which corrective action is being taken.
Also up from the March 31, 1994 level was the ratio of non-performers
to loans outstanding to .64%; the slightly higher level at December
31, 1994 was in the peer normal 45th percentile.
The ratio of loan loss provision to net charge offs for the most
recent quarter end was 227%, well above the 100% ratio twelve months
earlier due the objective to maintain the ratio of loan loss allowance
to total loans at 1.30%.
<PAGE>
The following table reflects the detail on non-performing and
restructured loan levels. The ratio of non-performing assets to total
assets was .36% as of March 31, 1995, down 5 basis points from a year
ago. There is no troubled debt restructuring as of the most recent
quarter end versus a year earlier at $228,000; the change reflects
being paid out of previously restructured commercial loans. The ratio
of nonperforming assets to loans plus OREO remains with the company's
objective of .75%.
<TABLE>
<CAPTION>
3 Months 3 Months 12 Months 12 Months 12 Months
(000's or % Ratios) Mar 31, Mar 31, Dec 31, Dec 31, Dec 31,
1995 1994 1994 1993 1992
- ---------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Loans accounted for on a $2,448 $1,971 $2,396 $1,738 $881
non-accrual basis
Accruing loans which are
contractually past due
90 days or more as to
principal and interest
payments $735 $538 $861 $653 $726
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 $0 $228 $15 $243 $356
Other Real Estate (OREO) $235 $375 $223 $433 $459
----- ----- ----- ----- -----
Total Non-Performing Assets $3,418 $3,112 $3,495 $3,067 $2,422
Total Non-Performing Assets/ 0.36% 0.41% 0.38% 0.43% 0.36%
Total Assets
Total Non-Performing Assets/
Total Loans and OREO .69% .73% .72% .73% .67%
* May not foot due to rounding
</TABLE>
<PAGE>
Total delinquencies at $6.1 million (loans greater than 30 days
past due plus nonaccruals) declined slightly from one year earlier,
and the ratio to total loans at 1.18% remained favorable to peer norms
and improved from prior periods. The reason for the dollar decrease
is improved installment loan collection efforts. Installment and real
estate delinquencies decreased slightly.
<TABLE>
<CAPTION>
Delinquencies 3 Months 3 Months 12 Months 12 Months 12 Months
30 days - Non-accruing Mar 31, Mar 31, Dec 31, Dec 31, Dec 31,
(000's or % Ratios) 1995 1994 1994 1993 1992
- ---------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Delinquencies $6,127 $6,304 $6,765 $7,004 $6,894
Ratio to Total Loans 1.18% 1.40% 1.32% 1.58% 1.76%
Time & Demand $3,181 $2,798 $3,107 $2,633 $1,758
Ratio to Time & Demand 2.17% 2.16% 2.14% 2.07% 1.72%
Installment $1,858 $2,282 $2,664 $3,156 $4,026
Ratio to Installment 0.94% 1.45% 1.41% 2.01% 2.53%
Real Estate $1,088 $1,225 $994 $1,214 $1,110
Ratio to Real Estate 0.62% 0.74% 0.56% 0.76% 0.85%
Note: Ratios to Gross Loans
* May not foot due to rounding
</TABLE>
<PAGE>
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 8.4 percentage points from a year ago to 80.0%,
reflecting borrowings as an increased source of funding in order to
achieve management's balance sheet leverage objectives. Average
earning assets have increased $196.7 million over the last twelve
months, while average deposits have grown only $100.5 million.
The table below displays the components of total deposits
including volume and rate trends over the last six 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, 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 88.4%
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%
September 30, 1994
Amount $101,110 $256,496 $77,446 $244,149 $679,201 87.5%
Yield / Rate ---- 2.64% 2.62% 4.24% 2.82%
December 31, 1994
Amount $104,427 $248,710 $68,067 $262,359 $683,564 82.1%
Yield / Rate ---- 2.56% 2.67% 4.77% 3.03%
March 31, 1995
Amount $102,850 $237,540 $66,035 $295,808 $702,233 80.0%
Yield / Rate ---- 2.63% 2.83% 5.33% 3.40%
Change in quarterly
average outstandings
& yield / rate
March 31, 1994 to
March 31, 1995
Amount $10,328 ($3,582) ($5,968) $99,708 $100,486 -8.4%
% Change 11.2% -1.5% -8.3% 50.8% 16.7%
Change (% pts) ---- 0.14 0.31 1.20 0.76
Deposit Mix
March 31, 1994 15.4% 40.1% 12.0% 32.6% 100.0%
March 31, 1995 14.6% 33.8% 9.4% 42.1% 100.0%
Change -0.7% -6.2% -2.6% 9.5% ----
</TABLE>
* May not foot due to rounding
<PAGE>
Average total deposits for the quarter were 16.7% higher than the
comparable 1994 period. As shown by the table, virtually all of the
deposit growth was in time deposits (up $99.7 million), with the
remainder split between $10.3 million in demand deposit growth and
declines in savings and money markets. The major reasons for the
total deposit increase are the $62.4 million Columbia Banking, FSA
deposit acquisition late in the second quarter 1994, the Chase Cato
branch acquisition in fourth quarter 1994, and an expanded business
customer base consistent with increases in commercial loans.
The deposit mix has changed slightly since first quarter 1994.
Time deposits have increased with the recent upturn in financial
market rates as funds shifted back from temporarily being parked in
savings and money market accounts. Additionally, the time deposit mix
expanded with the high proportion of time deposits in the acquired
Columbia branches and CBNA bidding more aggressively early in first
quarter 1995 on public fund CD's which had more favorable rates than
short term borrowings.
While borrowing costs have risen with the recent movement in the
federal funds rate (see table in the following section), the above
table shows that the average rates on interest bearing deposits have
lagged this increase. As of December 31, 1994, CBSI's average rate on
interest bearing deposits was in the 53rd peer percentile.
After having steadily fallen for a number of quarters, the
average rate on total deposits appears to have bottomed out in second
quarter 1994 and has increased since then. The 37 basis point rise in
average cost of deposits during the quarter is attributable to the
increasing IPC deposit rates and more aggressive municipal time
deposit bidding (which has since come down with New York State funds
being paid out to many school districts).
Liquidity and Borrowing Position
Liquidity involves the ability to raise funds, to support asset
growth, to meet requirements for deposit withdrawals, to maintain
reserve requirements, and to 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.
The bank's liquidity level as of March 31, 1995 is considered by
management to be adequate. In the event of a liquidity crisis, over
$83 million (essentially short term assets minus short term
liabilities) or 8.7% of assets could be converted into cash within a
30-day time period. This puts the liquidity position 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 7.1% as of this
quarter end. This longer period encompasses continued service to loan
customers and normal loan and deposit flows anticipating viability of
the institution after coping with the initial crisis. The 90-day
ratio is temporarily lower than the policy minimum because of
anticipated outflows of public funds over the next 90 days and high
levels of securities pledged to municipal deposit accounts (both
related to the timing of state school district funding). 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 in the last decade.
<PAGE>
The following table shows the trend of loans, investments, large
liability certificates of deposit and other borrowings over the last
six quarters.
<TABLE>
<CAPTION>
For the Quarter Average Average Ave Core Ave CDs 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, 1993
Amount $404,944 $244,735 $576,448 $24,693 $26,394 $535,834
Yield / Rate 9.15% 6.58% 2.64% 3.35% 3.16% 3.15%
March 31, 1994
Amount $419,874 $260,703 $576,613 $25,134 $58,850 $568,074
Yield / Rate 9.02% 6.77% 2.60% 3.72% 3.49% 3.16%
June 30, 1994
Amount $435,678 $301,042 $605,653 $34,548 $81,048 $625,117
Yield / Rate 9.07% 6.68% 2.60% 3.67% 4.07% 3.25%
September 30, 1994
Amount $454,383 $321,811 $644,302 $34,899 $79,676 $657,767
Yield / Rate 9.12% 6.98% 2.74% 4.33% 4.50% 3.45%
December 31, 1994
Amount $473,920 $358,193 $642,190 $41,374 $129,074 $708,211
Yield / Rate 9.26% 7.23% 2.91% 4.78% 5.18% 3.87%
March 31, 1995
Amount $488,436 $388,886 $644,375 $57,858 $153,625 $753,008
Yield / Rate 9.52% 7.64% 3.18% 5.89% 6.17% 4.43%
Change in quarterly
average outstandings
& yield / rate from
March 31, 1994 to
March 31, 1995
Amount $68,562 $128,183 $67,761 $32,724 $94,775 $184,933
% Change 16.3% 49.2% 11.8% 130.2% 161.0% 32.6%
Change (%pts) 0.51 0.87 0.58 2.18 2.69 1.27
</TABLE>
Note:(a) Net interest income, margin, and earning asset yield figures
exclude a premium on a called bonds of $297 on October 10, 1993.
(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 first quarter 1995 averaged $153.6 million
compared to $58.9 million a year earlier. This resulted from CBSI'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 was executed within
the guideline of maintaining the tier I leverage ratio in the 6.5-7%
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 $40
million as of quarter end.
CBNA's Federal Home Loan Bank borrowings are currently comprised
of 90 day terms or less, with 27% at the currently manageable
overnight 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 company intends to repay virtually all of its FHLB borrowings
with deposits to be assumed in the Acquisition. This is the main reason
behind management's decision to maintain a short-term borrowing position.
<PAGE>
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 comprised 43.9% 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, 1993
Amount $114,413 $108,320 $24,585 $6,227 $253,544 37.8%
Change 2.8% 6.9% -11.0% -4.0% 2.8% (0.6)
March 31, 1994
Amount $120,183 $144,472 $23,807 $7,091 $295,553 40.9%
Change 5.0% 33.4% -3.2% 13.9% 16.6% 3.2
June 30, 1994
Amount $127,571 $153,485 $21,246 $11,894 $314,196 40.9%
Change 6.1% 6.2% -10.8% 67.7% 6.3% (0.0)
September 30, 1994
Amount $145,870 $146,423 $22,166 $10,444 $324,902 40.9%
Change 14.3% -4.6% 4.3% -12.2% 3.4% 0.0
December 31, 1994
Amount $187,087 $155,376 $20,777 $15,279 $378,520 43.9%
Change 28.3% 6.1% -6.3% 46.3% 16.5% 3.0
March 31, 1995
Amount $192,526 $162,408 $17,762 $14,482 $387,177 43.9%
Change 2.9% 4.5% -14.5% -5.2% 2.3% (0.1)
Change from
March 31, 1994 to
March 31, 1995
Amount $72,342 $17,936 ($6,045) $7,391 $91,624 2.9%
Change 60.2% 12.4% -25.4% 104.2% 31.0% ---
Investment Mix
March 31, 1994 40.7% 48.9% 8.1% 2.4% 100.0%
March 31, 1995 49.7% 41.9% 4.6% 3.7% 100.0%
Change 9.1% -6.9% -3.5% 1.3% ---
</TABLE>
Note: (a) Includes CMOs and pass-throughs
(b) Includes Money Market Investments, Federal Home Loan Bank, and
other
* May not foot due to rounding
<PAGE>
Investments totaled $387 million for the quarter just ended, up
$92 million (31.0%) from twelve months prior. This increase is
attributable to (a) the previously mentioned strategy of increasing
net interest income by growing earning asset levels when favorable
investment opportunities are available and (b) deposits acquired via
four new branches in the last twelve months.
As rates were rising in the first and second quarters in 1994,
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%) was seen from December 1993 to March 1994 in mortgage backed
securities. In the middle of second quarter 1994, as rates began to
level (and fall slightly in first quarter 1995), call protection
investments were purchased.
Thus, from March 1994 to March 1995 there is less growth in
mortgage backed securities (12.4%) to $162.4 million than in call
protection U.S. Governments (60.2%) to $192.5 million.
Additional growth in investments resulted from significant
increases in the bank's Federal Home Loan Bank stock level (reflected
in other investments) as required by increased FHLB borrowing levels.
Over the last twelve months, the investment portfolio mix has
shifted such that there are increased proportions of U.S. Government
securities (50% as of March 31, 1995) and other investments (Federal
Home Loan Bank stock), while a decreasing proportion of tax exempt and
mortgage backed securities.
The average fully taxable equivalent yield in the last year has
increased from 6.77% to 7.64% as the result of lower yielding
investments running off and taking advantage of increased market
rates. As of December 31, 1994, CBSI's overall investment yield is in
the highly favorable 88th percentile.
The average portfolio life based on earliest redemption date has
increased from 3.3 years on March 31, 1994 to 3.9 years attributable
to the increasing mix of investments with call protection features.
Although interest rates have risen dramatically since March of
1994, little change in the market value of the bank's investment
portfolio has occurred. Portfolio appreciaion dropped slightly from
101.7% of book value one year ago to 100.5% of book value as of March
31, 1995.
Management, although keenly aware of how interest rate volatility
may change the market value of its investments, continues to place an
overriding emphasis on the future earnings stream of its portfolio;
thus, its decision to classify the majority of new investment
purchases as held-to-maturity.
The held-to-maturity portfolio (78% of the total investments)
amounted to $302 million as of March 31, 1994. Average time to
maturity of these securities, based on the earliest redemption date,
was 3.5 years, reflecting the increasing mix of call protection
investments. The portfolio recorded a market value appreciation of
$3.9 million or 1.3% above book value for the quarter just ended.
<PAGE>
As of the most recent quarter end, $72 million or 22% 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 to manage 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 chose to place in its AFS portfolio
all collateralized mortgage obligations and most publicly traded
securities with a stated final maturity or call date of two years or
less. As of March 31, 1995, the AFS portfolio average maturity based
on earliest redemption date was 5.5 years, and the pre-tax market
value adjustment was a negative $2.0 million or (2.8%) 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 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
(000s) Yield (Years) Book Total Adjustment Gains /
(a) (b) Portfolio (Pretax) (Losses)
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C>
December 31, 1993 6.58% 2.3 103.7% 50.0% $2,164 ($15)
March 31, 1994 6.77% 3.3 101.7% 41.8% $592 ($3)
June 30, 1994 6.68% 2.9 99.5% 38.5% ($1,209) $0
September 30, 1994 6.98% 2.6 98.5% 36.0% ($2,470) $0
December 31, 1994 7.23% 3.6 97.8% 22.8% ($3,263) ($499)
March 31, 1995 7.64% 3.9 100.5% 21.8% ($1,982) $0
Change from
March 31, 1994 to
March 31, 1995 0.87% 0.6 -1.2% -20.0% ($2,573) $3
</TABLE>
Note: (a) Net interest income, margin, and earning asset yield
figures exclude a premium on a called bonds of $297 on October 10,
1993.
(b) Based on earliest redemption date.
* May not foot due to rounding
<PAGE>
PENDING ACQUISITION
As noted in CBSI's 1994 10-K Annual Report, the bank and the
company have entered into a Purchase and Assumption Agreement (the
"Agreement") with The Chase Manhattan Bank, N.A. ("Chase"), which
provides for the acquisition of certain assets and the assumption of certain
liabilities by the bank relating to the 15 Chase branches located in Norwich,
Watertown (two), Boonville, New Hartford, Utica, Skaneateles, Geneva,
Pulaski, Seneca Falls, Hammondsport, Canton, Newark (two), and Penn Yan, New
York (the "Chase Branches"). The purpose of this section is to set forth the
status of the Acquisition as of March 31, 1995 and to update the discussion
in the Annual Report through the use of March 31, 1995 information.
The Acquisition is currently expected to close during the third quarter
of 1995. At the closing, and subject to the terms of the Agreement, the bank
will assume deposit liabilities booked at the Chase Branches (the "Chase
Deposits") and pay Chase a premium of 8.25% on the Chase Deposits. As of
March 31, 1995 the Chase Deposits totaled $450.9 million, which amount is
subject to the change due to run-off or growth of deposits occurring prior to
the closing date. In addition, the bank will acquire certain small business
and consumer loans associated with the Chase Branches (the "Chase Loans"), as
well as the real property owned or leased by Chase for operation of the Chase
Branches and related furniture, equipment and other fixed operating assets
(the "Chase Assets"). The Acquisition will be accounted for as a purchase;
the excess of liabilities assumed over assets acquired (goodwill)
approximates $19.0 million and will be amortized over a 25-year period on a
straight-line basis. In addition, approximately $18.2 million of the premium
will be attributed to the value of the Chase Deposits (the "Core Deposit
Value"), which will be amortized over 10 years on an accelerated method. For
tax purposes, both the excess of liabilities assumed over assets acquired and
the core deposit value will be amortized over a 15-year period on a straight-
line basis and is expected to be fully deductible under current law.
The bank will acquire the Chase Loans at face value and the Chase Assets
at fair market value with the exception of furniture, equipment and other
fixed assets which will be acquired at book value. The face value of the
Chase Loans as of March 31, 1995 was approximately $25.2 million, and the
total purchase price of the Chase Assets is approximately $5.3 million. The
deposit premium will be calculated on the basis of the average amount of
Chase Deposits outstanding over specified time periods preceding the closing
date, except that if the closing date occurs after June 30, 1995, the closing
date for purposes of calculating the average amount of Chase Deposits
outstanding will be June 30, 1995. Payment of the premium on the Chase
Deposits, as well as the purchase price for the Chase Loans and Chase Assets,
will be effectuated through an appropriate reduction of the cash received to
fund deposits assumed by the bank. Accordingly, the bank expects to receive
approximately $385.3 million in cash from Chase at the closing (the "Acquired
Funds") in connection with its assumption of Chase Deposits of $450.9 million
as of March 31, 1995, after deduction of (a) the deposit premium of
approximately $37.2 million, (b) the purchase price of the Chase Loans of
approximately $25.2 million, (c) the purchase price of the Chase Assets of
approximately $5.3 million, and the addition of (d) other net liabilities of
$2.1 million.
The bank currently plans to use the approximately $385.3 million in cash
expected to be received in the Acquisition to (i) fund investment security
purchases and repay short-term borrowings and (ii) make loans in the market
areas of the Chase Branches and thereby earn a return on the Acquired Funds.
The company anticipates that it may take in excess of five years to invest
the Acquired Funds in loans such that the resulting loan to deposit ratio
approximates the loan to deposit ratio of the company prior to the
Acquisition. In the interim, the bank will invest the Acquired Funds in
seasoned 15-year fixed-rate mortgage-backed securities and repay short-term
borrowings of the bank pursuant to an investment strategy adopted by the
company. It is expected that such investment securities will earn interest
at rates lower than the interest rates that would be earned on loans and,
thus, the bank's net interest margin will decrease in the short- to
medium-term. The company believes that the net interest margin will increase
over the long-term as the bank invests the Acquired Funds in loans at market
rates. However, there can be no assurance that the Bank will be able to
invest the Acquired Funds in loans at market rates or that the Bank will be
able to earn a favorable net interest margin through investing the Acquired
Funds in investment securities until loans can be made. Management currently
intends to classify approximately one-third of these securities as
available-for-sale investments with the remaining two-thirds classified as
held-to-maturity. As with any fixed-rate investment, market value
appreciation or depreciation of investment securities will occur depending
upon the movement of interest rates. While the bank's intended purchases
of seasoned 15-year fixed-rate mortgage-backed securities will not be
immune from such forces, price volatility is expected to be less than that
found in conventional 15-year or 30-year mortgage-backed securities. Given
fluctuations in market conditions, there can be no assurance that management's
current strategy for allocating the Acquired Funds to loans and investment
securities will be the investment allocation ultimately pursued by the
company.
The bank has reviewed the Chase Loans and found them to be fully
performing with acceptable risk ratings. The Agreement provides the bank the
right to reject any loan failing to meet the bank's underwriting standards as
provided in the Agreement, as well as loans which may be adversely affected
by environmental conditions relating to real property securing such loans.
In connection with its evaluation of the Acquisition, the bank examined the
Chase Loans using substantially the same criteria, analyses and collateral
evaluations that the Bank has traditionally used in the ordinary course of
its business.
The bank will retain approximately 103 full-time equivalent Chase
employees currently associated with the Chase Branches. The Agreement
requires the bank to recognize prior service with Chase for purposes of
vesting and eligibility under the bank's benefit plans and to maintain base
salary for all such transferred employees for a period of at least one year
following the closing except in the case of discharge for cause, voluntary
separation, death, or disability. All pension obligations earned by Chase
employees prior to the Acquisition will be funded by Chase. The Agreement
also requires Chase to pay the bank an amount, at closing, equal to the
accounting benefit Chase would receive resulting from the reduction of the
post retirement medical benefit liability under Statement of Financial
Accounting Standards No. 106, "Accounting for Postretirement Benefits Other
than Pensions."
Pursuant to the Agreement, environmental inspection of the Chase
Branches has been performed, and Chase is expected to remedy all material
violations of environmental laws discovered during such inspections. The
bank has the right to refuse specific properties in the event any
noncompliance with environmental laws is not remedied.
Effect Of Pending Acquisition On Capital
In conjunction with the Acquisition, the company anticipates raising
approximately $25.7 million (net of expenses) in additional capital through
public offerings of common and preferred stock (the "Offerings") to offset
the reduction in regulatory capital ratios associated with the Acquisition.
The company will contribute the additional capital to the bank as capital
surplus with the objective of maintaining the bank's Tier I leverage ratio
following consummation of the Acquisition in the "adequately capitalized"
range, which is defined by the FDIC as between 4.0% and 5.0%.
The Company's sale of newly issued shares of Common Stock in the Common
Stock Offering will represent approximately 21.2% of the shares of the
Company's common stock outstanding following completion of the Common Stock
Offering (23.6% if the over-allotment option granted to the underwriters is
fully exercised). The Common Stock Offering will result in a 26.9% increase
over the current number of shares outstanding (a 30.9% increase if the
Underwriters' over-allotment option is fully exercised). Therefore, in the
near term, the Company expects that the Offerings and the Acquisition will
result in a dilution of the Company's return on equity, earnings per share,
and tangible book value per share. However, the Company's long-term strategy,
as evidenced by the Acquisition, is to enhance earnings per share, return on
equity and tangible book value per share by deploying assets from investments
into loans, continuing its asset growth and maintaining a favorable efficiency
ratio. The Company believes that any initial dilution of earnings per share,
return on equity, or tangible book value per share will be outweighed by the
long-term benefits to the Company associated with the financial flexibility
and opportunities which the Company expects to derive from the Acquisition.
There can be no assurance, however, that the Company will be able to achieve
these goals.
In the event the bank is unable to close the Acquisition due to a lack
of regulatory approval and the determining factor relates to the Community
Reinvestment Act, Equal Credit Opportunity Act, the Fair Housing Act or
possible anti-competitive effects, the bank is obligated to pay Chase a
"break-up fee" of $1.0 million. In the event the Bank is unable to proceed
to closing due to its inability to raise sufficient capital or due to a lack
of regulatory approval for any other reason, the bank is obligated to pay
Chase a "break-up fee" of $1.85 million.
The Acquisition is expected to have a negative effect on the regulatory
capital ratios of the company and the bank. Following the Acquisition and
assuming net proceeds from the Offerings of $25.7 million, the company's Tier
I leverage ratio will decrease from 6.70% (as of March 31, 1995) to 4.25%.
The bank's Tier I leverage ratio will decrease from 6.59% (as March 31, 1995)
to 4.15%. As a result of the expected decrease in the bank's Tier I leverage
ratio, the bank will not qualify under regulatory guidelines as a "well
capitalized" institution but rather as an "adequately capitalized"
institution. As an "adequately capitalized" institution, the bank's cost of
FDIC deposit insurance may increase.
The following table sets forth the required regulatory ratios, the
ratios of the company and the bank as of March 31, 1995, and the ratios
expected to be achieved by the company and the bank; upon consummation of the
Acquisition:
March 31, 1995 Ratios After
Regulatory Minimums Ratios Acquisition
Well Adequately Under-
Capitalized Capitalized Capitalized Company Bank Company Bank
Total
risk-based
capital ratio ...10.00% 8.00% <8.00% 13.65% 13.46% 10.19% 9.93%
Tier I
risk-based
capital ratio.... 6.00% 4.00% <4.00% 12.41% 12.21% 9.08% 8.82%
Tier I
leverage ratio....5.00% 4.00% <4.00% 6.70% 6.59% 4.25% 4.15%
The bank's goal is to return to "well capitalized" status within
approximately 12 months after consummation of the Acquisition. Until the
company's Tier I leverage ratio returns to the "well capitalized" range, the
additional leverage caused by the Acquisition will restrict the company's
ability to consummate other possibly beneficial transactions which require
further leverage or would result in the creation of additional intangibles.
Acquisitions accounted for on a pooling of interests basis may not be
precluded during this period if the transaction would facilitate returning to
"well capitalized" status. Historically, the bank has targeted a Tier I
leverage ratio well in excess of the regulatory minimum to allow for
potential branch acquisitions and leverage strategies. The company believes
that the Acquisition represents an opportunity which warrants foregoing such
excess capacity in the near-term in order to maximize the potential long-term
benefits of the Acquisition to the Company. While the bank expects to return
to "well capitalized" status within approximately 12 months after
consummation of the Acquisition and the Offerings, there can be no assurance
that the bank will be able to do so.
On March 6, 1995, Inner City Press/Community on the Move ("ICP") through
its Executive Director, Matthew Lee, submitted to the OCC written comments in
opposition to the bank's application for approval of the Acquisition and
requested a public hearing on the application. ICP's objections to approval
of the application included the bank's and Chase's Community Reinvestment Act
and fair lending record and the potential anti-competitive effects of the
Acquisition. ICP also incorporated written comments previously filed with
the OCC in connection with an unrelated application filed by Chase, which
application was approved by the OCC on February 10, 1995 notwithstanding
ICP's comments. In addition to the ICP comments, the bank is aware that
additional comments critical of the Acquisition have been submitted to the
OCC by one of the company's institutional shareholders.
The bank does not believe that these comments, or the ICP comments,
raise any issues sufficient to warrant denial of the bank's application.
Potential Disposition
Subject to general market conditions and the company's ongoing
assessment of business objectives, the bank anticipates that there will be a
reduction in deposits of approximately $108 million consisting of
approximately $26 million of Chase Deposits expected to run-off between March
31, 1995 and consummation of the Acquisition and approximately $82 million in
deposits divested through a combination of selling certain branch locations
and related deposits and reducing public funds from the bank's balance sheet.
The company has had several substantive discussions with potential purchasers
of deposits, although no binding commitments have been made. The purpose of
any such divestitures would be to mitigate any potential adverse impact of
the Acquisition on the company's earnings per share and tangible book value,
reduce the company's exposure to interest rate risk, and strengthen the
bank's capital ratios. Any such divestitures would occur subsequent to the
consummation of the Acquisition, would be structured to maximize the bank's
business objectives at that time, and would help facilitate the bank's return
to a Tier I leverage ratio in the "well capitalized" range. There can be no
assurance of the size or impact of any divestiture, or that a divestiture
will actually occur.
Reasons for the Acquisition
The following summarizes the major objectives of the Acquisition and the
benefits the company expects will accrue to the operations of the bank from
the acquisition.
* The Chase Branches consolidate and extend the bank's branch network
into contiguous markets. Assuming the Acquisition and the
Offerings were completed as of March 31, 1995, the company would
have total assets in excess of $1.2 billion and 50 locations (net
of the planned closing of one of the Canton facilities and prior to
any potential dispositions). The Chase Branches will link the
bank's existing Northern New York and Finger Lakes/Southern Tier
distribution network.
* The Chase Branches are located in markets with which the bank is
already familiar, either because it is servicing them to some
degree already without a branch facility, or because they are
similar to the bank's existing markets, being comprised of small
towns and villages outside of metropolitan trade centers. Of the
13 towns in which the Chase Branches are located, the Chase
Branches are ranked either first, second or third in deposit market
share as of June 30, 1994 in 10 of the towns, which, when coupled
with the bank's present branches, will result in the bank being
ranked either first, second or third in 36 of the 41 towns in which
the bank will operate branches.
* Although the Acquisition includes only a relatively small amount of
loans outstanding, the depositor base of the Chase Branches
includes approximately 300 small business customers and 30,000
customer households. Because of Chase's centralized style of
underwriting and servicing, the company believes that these markets
offer significant future growth opportunities. Based on the bank's
locally responsive approach to loan decision-making, personalized
service, and knowledge of these markets, the bank believes that,
prior to any secondary market sales, the achievement of a 40.0%
loan to deposit ratio in the Chase Branches (compared to a 5.6%
level as of March 31, 1995) would be reasonable within five years.
The bank's loan to deposit ratio for its present branch network is
approximately 68.6% as of March 31, 1995.
* The company believes that the Chase Deposits are largely stable,
relatively low cost core deposit funds, similar to the bank's
existing deposit base. The Chase Deposits will be used to replace
the bank's presently higher cost FHLB borrowings, thus lowering
overall funding costs and improving the bank's liquidity. After
providing for purchased loans, branch facilities and equipment, and
the deposit premium, approximately $218 million of cash received
(net of repayment of short-term borrowings) will be temporarily
placed in the bank's investment portfolio, increasing its size by
nearly 58% (or approximately 65% including the impact of the
Offerings). It is the company's intention to invest these funds in
a mix of securities intended to produce a high, relatively stable
level of interest income and provide on-going cash flow to help
fund expected loan growth and/or be subsequently reinvested in
other investment securities.
* The Acquisition leverages the company's existing infrastructure.
The Chase Branches will be administratively managed from either the
bank's Northern or Southern Region by existing senior management
personnel. The Northern and Southern regional service centers will
process the added loan and deposit volumes, with incremental
overhead limited to volume-sensitive staff and equipment.
Similarly, a limited number of audit, loan review, and accounting
personnel will be added. Up to a total of approximately 36 full-
time employees may be added to the bank over a period of time
following consummation of the Acquisition. The personnel acquired
from Chase include only branch-related personnel, including
approximately eight small-business lending and support staff and
two residential mortgage origination personnel, for a total of
approximately 103 full-time equivalent employees. To assist with
the integration of the Chase Branches into its existing branch
network, the bank has engaged and outside consultant to focus on
customer sales and service training, operations center planning and
upgrading; a full-time internal project coordinator has also been
retained.
* The company believes that the Acquisition provides it with the
opportunity to increase non-interest income because annuities and
mutual funds have been offered at the Chase Branches for several
years. The bank only sold fixed-rate annuities at its branches
during calendar year 1994 and was not fully staffed until late 1994
to sell variable-rate annuities and mutual funds. Consequently,
the staff at the Chase Branches and the bank's new investment
products should complement each other in increasing referrals for
the sale of these products.
It should be noted that the bank has not historically made acquisitions
on the same scale as the Acquisition, and the future growth of the bank and
the company will depend on the success of the Acquisition. The success of
the Acquisition will, in turn, depend on a number of factors, including,
without limitation: the bank's ability to integrate the Chase Branches into
the current operations of the bank; its ability to limit the outflow of
deposits held by its new customers in the Chase Branches; its success in
deploying the cash received in the Acquisition into assets bearing
sufficiently high yields without incurring unacceptable credit or interest
rate risk; its ability to control the incremental non-interest expense from
the Chase Branches in a manner that enables the company to maintain its
favorable overall efficiency ratio; its ability to retain and attract the
appropriate personnel to staff the Chase Branches; and its ability to earn
acceptable levels of non-interest income from the Chase Branches. No
assurance can be given that the bank will be able to integrate the Chase
Branches successfully; that the operation of the Chase Branches will not
adversely affect the company's existing profitability; that the company will
be able to achieve results in the future similar to those achieved by the
bank's existing banking offices; or that the bank will be able to manage its
growth resulting from the Acquisition effectively.
Impact of the Acquisition on Operating Performance
The following discussion represents the company's current assessment of
the impact of the Acquisition on the operating performance of the company.
Numerous factors, including factors outside the company's control (such as
the general level of interest rates and both national and regional economic
conditions), may significantly alter the effects described below. As such,
there can be no assurance that the effects of the Acquisition will meet the
company's expectations.
Significant Assumptions. In addition to the assumptions stated below,
the company made the following assumptions in arriving at the conclusions
discussed in this section: (i) regional and national economic conditions will
remain stable with no drastic improvement or slowdown in the economy; (ii)
the Chase Branches are in markets similar to the bank's current markets and
therefore the bank's experience in generating loans and fee income and in
maintaining core deposits is a reasonable basis for making further
assumptions about the impact of the Acquisition; and (iii) run-off of Chase
Deposits, if any, will occur prior to consummation of the Acquisition. While
the company believes that these assumptions and the other assumptions stated
throughout this section were reasonable at the time they were made, there
can be no assurance that actual results will be consistent with these
assumptions.
The basis for the company's conclusion that approximately $26 million
of the Chase Deposits will run-off prior to the closing date of the
Acquisition is that (i) certain customers will choose to remain with Chase
because they bank near their place of work where Chase still operates;
(ii) certain customers will elect to switch banks because they would rather
bank with a larger, superregional institution; and (iii) certain
municipalities that value selected cash management services offered by Chase
(such as those which automatically invest idle cash balances into an
interest-earning deposit or an overnight repurchase agreement) but not
offered by the bank will stay with Chase. With the exception of these cash
management services and personal computer banking, the company believes that
the services offered by the bank will be virtually as broad as those offered
by Chase and that its services for small businesses will be offered so as to
provide greater service than that offered by Chase.
Net Interest Income. When the Acquisition is consummated and prior to
any expected deposit run-offs and divestitures, the bank is expected to
assume deposit liabilities which totaled $450.9 million as of March 31, 1995
and receive approximately $25.2 million in loans and $385.3 million in cash.
However, for purposes of its net interest income analysis, the company assumed
that the Chase Deposits totaled $425.2 million, which was the balance of such
deposits as of April 30, 1995 and approximates the company's estimate of
$26 million in deposit run-off prior to the closing of the Acquisition. This
would result in the bank receiving approximately $361.7 million in cash upon
closing the Acquisition. An additional $25.7 million in cash is expected to
be received from the net proceeds of the Offerings. The cash from the
Acquisition and the Offerings will be used to fund investment security
purchases, repay short-term borrowings of the bank, and fund additional
growth. The impact of the Acquisition on interest income is expected,
therefore, to include (i) interest income from investment securities
purchased, (ii) interest income from the Chase Loans, and (iii) interest
income from new loans originated through the Chase Branches. The impact of
the Acquisition on interest expense is expected to include (i) interest
expense of the Chase Deposits which had an average cost of approximately
3.70% as of March 31, 1995 and (ii) the benefit of the lower interest
expense on the Chase Deposits which will replace the bank's higher
costing short-term borrowings which had an average cost of approximately
6.40% as of March 31, 1995. The company believes that these rates do not
differ significantly from those existing at mid May 1995, which was the basis
for the company's analysis described below.
The company currently estimates that, prior to any secondary market
sales, the bank could make net new loans in an amount equal to at least 40.0%
of the Chase Deposits outstanding within five years after consummation of the
Acquisition, although there can be no assurance that the bank will be able to
do so. These loans are estimated to grow at a steady rate for purposes of
the company's analysis. Because the demographics of both consumers and
businesses served by the Chase Branches are similar to those markets in
which the bank currently operates, new loans are expected to be similar to
the bank's current loan distribution with respect to types and pricing
characteristics, subject to market conditions. Given the bank's current
loan distribution and the Chase Loans to be acquired, the company estimates
that such new loans could have an average yield of approximately 10% assuming
a flat interest rate scenario. This estimate is dependent upon the bank's
ability to generate new lending business and acquire market share from
those financial institutions currently serving the small business loan
customers in these markets.
Since a large portion of the funds received in the Acquisition and the
Offerings will initially be invested in securities, the company, assisted by
an asset/liability consultant, has undertaken analyses to determine a
strategy for the optimal deployment of these funds. In order to determine
this investment strategy, the Company has conducted an analysis of the impact
of the Acquisition on the bank's overall asset/liability risk position. A
variety of interest rate simulations was considered, including, but not
limited to, a flat rate environment, a rising rate environment with the
Federal Funds rate increasing 200 basis points, and a falling rate
environment with the Federal Funds rate decreasing 200 basis points. Each of
these scenarios assumed interest rates existing at mid May 1995 and that
any interest rate movements occurred at regular intervals during the
first year of the Acquisition and remained constant thereafter. Additionally,
the company, along with its asset/liability advisor, used historical
experience to estimate the impact of Federal Funds rate changes on, among
other things, deposit interest rates, the prime lending rate, Treasury rates
and prepayment speeds for mortgage securities. The company continues to
utilize and update its analysis as conditions warrant.
The analysis combined the bank's March 31,1995 asset/liability profile
with that of the Chase Branches. A number of investment strategies was then
examined, focusing on the goal of enhancing the profitability of the Bank
while limiting the volatility of earnings under a variety of interest rate
environments. Such an investment strategy could be accomplished with a
variety of approaches, including maturity laddering of bonds (with and
without call features), purchasing mortgage-backed securities whose average
life characteristics meet the investment objective, or a combination of these
or similar securities. The company has determined that the strategy which it
currently expects will best achieve its goals is investing the net funds
received in the Acquisition and the Offerings in seasoned 15-year fixed-rate
mortgage-backed securities with an average duration of two to four years.
In its analysis, the company assumed that this type of security would have
a yield of approximately 7.00% in the flat rate scenario. Management
currently intends to classify approximately one-third of these securities
as available-for sale investments with the remaining two-thirds classified
as held-to-maturity.
Consistent with the bank's long-standing practice, all of the assumed
investment decisions were developed in conjunction wiht the bank's asset/
liability position, with particular attention given to the interest rate
risk of the bank's entire balance sheet, not just that associated with
incremental investment decisions.
As with any fixed-rate investment, market value appreciation or
depreciation will occur depending upon the movement of interest rates. While
the bank's purchases of seasoned 15-year mortgage-backed securities will not
be immune from such forces, price volatility is expected to be less than
that found in conventional 15-year or 30-year mortgage-backed securities.
In addition, falling interest rates may shorten and rising interest
rates may extend the duration of these mortgage-backed securities. This
means that in a falling interest rate environment, the bank would have
additional proceeds from prepayments that would have to be reinvested at
lower market rates. In a rising interest rate environment, the bank would
have fewer proceeds to reinvest in securities or loans. The company included
the anticipated impacts of interest rate movements on the durations of these
securities in its analysis.
Using the assumptions set forth above, the company estimates that,
following closing of the Acquisition, it will have approximately $220.8
million to invest in these securities ($361.7 million in cash received from
Chase at the closing of the Acquisition plus $25.7 million in net proceeds
from the Offerings less $158.8 million used to repay the Bank's short-term
borrowings and $7.8 million needed to provide for reserve requirements and
vault cash) and that such investment will take place over a 12 month period
with excess funds temporarily invested in short-term investments. The
company anticipates using some of these funds to support loan growth during
this period which will result in lower average investments. Since the
interest rate environment could change substantially before all the funds
from the Acquisition are invested, however, it is impossible to predict with
certainty which investment combination will ultimately be pursued by the
bank or the length of time it will take to make these investments. It is the
bank's intention that the mix of securities selected will provide continuing
cash flows to help fund expected loan growth and/or to subsequently invest in
other securities.
Given the company's current expectations for loan growth, the intended
investment strategy, the repayment of the Bank's short-term borrowings and
the acquired deposit liabilities, the company and its asset/liability
consultant have analyzed potential results for the company under a variety of
interest rate scenarios. The analysis showed that the Acquisition could add
to net interest income in the first full year of operation approximately
$8.1 million in the falling rate scenario, $10.7 million in the flat rate
scenario and $13.0 million in the rising rate scenario. This is the result of
increased interest income of $14.2 million, $16.5 million and $19.9 million
and increased interest expense of $6.1 million, $5.8 million and $6.9 million,
respectively, in a falling, flat and rising rate scenario. Changes in net
interest income under differing interest rate environments result from
contractual restrictions on and bank discretion as to the timing of asset and
liability repricing, scheduled and prepaid cash flows in earning assets and
interest bearing liabilities, and differences in how the yield curve is
anticipated to react to the various movements in the Federal Funds rate.
In conducting this analysis, the only variable factor utilized by the company
was interest rates. That is, the company did not assume significant
variations in its asset/liability mix. As the company is not in a position
to predict future interest rates, it is unable to assign probabilities to the
results of its analysis. Interest rate movements may occur at different times
and in different amounts than those assumed by the company, and therefore no
assurance can be made that these estimates will be indicative of actual
results. While interest rates will continue to have a substantial impact on
future earnings levels and no assurance can be given, anticipated loan growth
could increase levels of net interest income in future years.
Provision for Loan Losses. The Chase Loans and any new loans originated
by the bank through the Chase Branches will meet the underwriting standards of
the bank. As the loan portfolio grows, the bank expects to add annually to
its allowance for loan losses by approximately 0.55% to 0.60% (after net
charge-offs) of average new loans, building to a loan loss reserve of 1.30%
of period-end loans within approximately four years. Assuming (i) new loans
grow steadily over a five-year period, prior to any secondary market sales,
to an amount equalling 40% of the Chase Deposits and (ii) the April 30, 1995
Chase Deposits balance of $425.2 million, the Acquisition could add between
$0.2 million and $0.3 million to the bank's provision expense in the first
full year. Actual loan loss reserves will be based on numerous factors,
including the state of the national and regional economies and local real
estate values, and may be higher or lower than the bank's current
expectations.
Non-Interest Income. The company expects to earn additional non-
interest income through deposit service charges and by selling trust and
investment products to the customers of the Chase Branches. The bank has
historically earned approximately 70 basis points on average assets in non-
interest income. While actual results will be based on numerous factors, many
of which are not in the company's control, and, therefore, no assurance can
be given, the company believes that a rate of 50 to 70 basis points of the
Chase Deposits is a reasonable approximation of the level of non-interest
income it could earn after the Acquisition. The company expects that most of
this non-interest income will be derived from fees earned on deposit accounts
through service charges and overdraft fees. Because of the similarities in
the deposit bases and the fee structures of the Chase Branches and the bank,
the company expects its historical rate of approximately 40 basis points of
average deposits earned in such fees to be comparable at the Chase Branches.
Other non-interest income is expected to be generated through annuity fees,
trust income (both personal and employee benefit), merchant credit card
income and mortgage servicing fees from loans sold into the secondary market.
The combination of these sources could result in additional non-interest
income of $2.3 million to $3.2 million on an annualized basis. For purposes
of this non-interest income analysis, the company assumed the Chase Deposits
as of March 31, 1995. The company does not believe that if it had assumed
the Chase Deposits as of April 30, 1995 there would be a material impact
on the company's estimates or on the estimated impact of the Acquisition on
the operating performance of the company as a whole.
Non-Interest Expense. The company has estimated the cost of operating
the Chase Branches within the bank's existing infrastructure. The following
is a breakdown of the additional annual expenses anticipated over the first
full year of operations:
Amount
(In millions)
Salary and employee benefits...............$ 3.3 to 3.6
Occupancy expense.......................... 1.1
Amortization of intangible assets.......... 3.0
Other expense.............................. 3.4 to 3.6
------------
Total incremental non-interest expense....$10.8 to 11.3
=============
Salary and employee benefits include approximately 103 full-time
equivalent employees currently at the Chase Branches. Up to approximately 36
full-time equivalent employees may be added over a period of time following
the Acquisition, primarily in the bank's operations centers to service the
Chase Deposits, Chase Loans, and expected loan growth. Occupancy expense
includes estimated costs of refurbishment and other capital expenditures that
the bank is expected to incur after completion of the Acquisition.
For income tax purposes, the intangible assets created from the 8.25%
deposit premium paid in the Acquisition are fully tax-deductible and
amortizable on a straight-line basis over a 15 year period under current law.
For financial statement proposes, generally accepted accounting principles as
currently in effect require that a portion of the premium be attributed to
the Core Deposit Value and amortized over the expected life of the Chase
Deposits in a manner approximating their decay rate. The balance of the
premium is attributable to the cost of entering the new banking markets
represented by the Chase Branches, and is amortizable on a straight-line
basis over a 25-year period.
Assuming the Chase Deposits as of March 31, 1995, the Core Deposit
Value is expected to be $18.2 million, amortizable over a 10-year period.
For the first full year, amortization of the Core Deposit Value and other
intangibles is expected to be approximately $3.0 million, declining to
$2.8 million and $2.5 million in the second and third years, respectively.
The company does not believe that assuming the Chase Deposits as of
April 30, 1995 would have a material impact on the Core Deposit Value and
other intangibles or the amortization thereof.
Other expenses include conversion costs and data processing expenses
estimated for the Acquisition as well as the other support costs needed to
operate the Chase Branches, including the impact of increased FDIC deposit
insurance premiums to the bank of approximately $210,000 (assuming that the
bank remains in the "adequately capitalized" designation for one year
following the Acquisition). $275,000 of other expenses are one-time charges
(mostly anticipated to be incurred in 1995) necessary in order to effect the
Acquisition. In addition, the company expects to incur $1.9 million in
related incremental capital expenditures. For purposes of this non-interest
expense analysis, the company assumed the Chase Deposits as of March 31, 1995.
The company does not believe that if it had assumed the Chase Deposits as of
April 30, 1995, there would be a material impact on the company's estimates
or on the estimated impact of the Acquisition on the operating performance
of the company as a whole.
Depending on the actual number of employees to be added to service the
incremental business from the Chase Branches and discretion in incurring
other incremental expenses, total incremental expense may range from $10.8
million to $11.3 million in the first full year of operating the Chase
Branches.
Impact of the Acquisition on Operating Performance
Assuming Intended Potential Disposition
As noted above, the Bank anticipates that there will be a reduction in
deposits of approximately $108 million consisting of approximately $26
million in Chase Deposits expected to run-off between March 31, 1995 and
consummation of the Acquisition and approximately $82 million in deposits
divested through a combination of selling certain branch locations and
related deposits and reducing public funds from the Bank's balance sheet.
The company estimates that any branch sales would not be completed until at
least three months after consummation of the Acquisition. These divestitures,
if and when completed, should have the effect of returning the Bank's Tier I
leverage ratio to the "well capitalized" level more quickly and should reduce
potential variances in earnings levels. If the Bank were to divest $82
million in deposits and if $26 million in run-off of Chase Deposits occurred
prior to the Acquisition, the following are the company's estimates of the
impact to its operations:
Net Interest Income. Using the same analysis described above, the
company estimates that the intended disposition could result in additional
net interest income of $8.1 million, $9.8 million and $11.6 million compared
to $8.1 million, $10.7 million and $13.0 million, respectively, in the
falling, flat and rising rate environments without the intended disposition.
This is the result of increased interest income of $13.5 million, $15.4
million and $18.7 million and interest expense of $5.4 million, $5.6 million
and $7.1 million, respectively, in the falling, flat, and rising rate
scenarios. The differences in the company's estimate of interest expense
assuming the disposition versus the company's estimate without the intended
disposition is the result of reduced deposit levels for part of the year
offset by increased borrowings during the second half of the year. The
company assumed for purposes of this analysis that such borrowings would total
approximately $150 million by the end of the first year following the
Acquisition. As discussed above, the company expects loan generation to
reach 40% of the reduced deposit total by the fifth year of operation. The
company expects a similar mix of investment securities to be purchased.
Because it is estimated that only $149.1 million will be available for
purchasing investment securities and funding additional growth given the
deposit reduction, the company believes it could have these funds fully
invested within 8 to 12 months, subject to market conditions. However, as
discussed above, the company expects to utilize the increased borrowings in
the second half of the year to fund an increase in investments. Therefore,
the average level of investments is expected to be only slightly lower than
without the intended disposition.
Provision for Loan Losses. The only direct effect of divestitures on
the bank's provision level would be due to lower loan volumes as a result of
fewer branch locations to originate new loans. Assuming net new loans grow
steadily over a five-year period prior to any secondary market sales, to an
amount equalling 40% of the reducted deposit total, the Acquisition could
add approximately $0.2 million to the bank's provision expense in the first
full year.
Non-Interest Income. The reduction in deposits could reduce the
expected additional income by $0.4 million to $0.7 million which could result
in additional non-interest income to the bank of $1.9 million to $2.5
million, rather than $2.3 million to $3.2 million. The decline is due only to
the assumption that there are fewer deposits and accounts as a result of the
divestitures from which to generate fees and service charges, as well as to
cross-sell other investment products. The company still expects to earn from
50 to 70 basis points on the deposit total for the same reasons discussed
above.
Non-Interest Expense. A $108 million reduction in deposits as described
above would result in reduced expenses. The extent of such reductions would
be largely dependent upon the number and identity of branches sold. The
company estimates the savings to be approximately $1.3 million in the first
full year of operations. This could cause the net impact from the Acquisition
on non-interest expense to be reduced from $10.8 million to $11.3 million to
approximately $9.5 million to $10.0 million.
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:
(2.1) Purchase and Assumption Agreement dated December 6, 1994 among
the Registrant, Community Bank, N.A. and The Chase Manhattan
Bank, N.A., previously filed with the Commission on April 11,
1995 as Exhibit 10.01 to the Registrant's Registration
Statement on Form S-2 (No. 33-58539) and incorporated herein
by reference.
(2.2) First Amendment dated April 4, 1995 to Purchase and Assumption
Agreement dated December 6, 1994 among the Registrant,
Community Bank, N.A. and The Chase Manhattan Bank, N.A.,
previously filed with the Commission on April 11, 1995 as
Exhibit 10.02 to the Registrant's Registration Statement on
Form S-2 (No. 33-58539) and incorporated herein by reference.
(3.1) Certificate of Incorporation of the Registrant, as amended,
previously filed with the Commission on May 30, 1995 as
Exhibit 3.1 to the Registrant's Registration Statement on Form
S-2 (No. 33-58539) and incorporated herein by reference.
(3.2) Bylaws of the Registrant, as amended, previously filed with
the Commission on May 30, 1995 as Exhibit 3.2 to the
Registrant's Registration Statement on Form S-2 (No. 33-58539)
and incorporated herein by reference.
(10) Employment Agreement dated January 1, 1995 between the Registrant,
Community Bank, N.A. and Sanford A. Belden.
(11) Statement re Computation of earnings per share
b) Reports on Form 8-K: Filed on 2/27/95.
Item 5. Other Information. News release:
Stockholder Protection Rights Plan
adopted by CBSI Board of Directors
<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: June 5, 1995 /s/ Sanford A. Belden
--------------------------------
Sanford A. Belden, President and
Chief Executive Officer
Date: June 5, 1995 /s/ David G. Wallace
--------------------------------
David G. Wallace, Senior Vice President
Chief Financial Officer
<PAGE>
EXHIBIT 10
EMPLOYMENT AGREEMENT
This sets forth the Employment Agreement made effective as of
January 1, 1995 between (i) COMMUNITY BANK SYSTEM, INC., a Delaware
corporation and registered bank holding company, and COMMUNITY BANK, N.A., a
national banking association, both having offices located in Dewitt, New York
(collectively, the "Employer"), and (ii) SANFORD A. BELDEN, an individual
currently residing at 9 Lynacres Boulevard, Fayetteville, New York
("Employee"). This agreement supersedes the employment agreement between the
parties, effective as of October 1, 1992, which provided for employment for a
term ending on September 30, 1995.
WITNESSETH
IN CONSIDERATION of the premises and mutual agreements and
covenants contained herein, and other good and valuable consideration, the
parties agree as follows:
1. Employment.
(a) Term. Employer shall continue to employ Employee, and
Employee shall continue to serve, as Director, President and Chief Executive
Officer of Employer for a three year term commencing on January 1, 1995 and
ending on December 31, 1997 ("Period of Employment"), subject to termination
as provided in paragraph 3 hereof.
(b) Employer. Whenever in this Agreement Employee is
entitled to compensation, benefits or other remuneration from Employer, the
term Employer shall mean only Community Bank, N.A. Employee shall not be
entitled to any compensation, benefits or other remuneration from Community
Bank System, Inc.
(c) Salary. During the period of January 1, 1995 through
December 31, 1995, Employer shall pay Employee base salary at an annual rate
of $240,000 ("Base Salary"). Employee's Base Salary for the period January
1, 1996 through December 31, 1996 shall be $275,000. Employee's Base Salary
for the period January 1, 1997 through December 31, 1997 shall be $300,000.
Employee's Base Salary is payable in accordance with Employer's regular
payroll practices for executive employees.
(d) Incentive Bonuses. Employee shall be entitled to annual
incentive bonuses pursuant to the terms of the executive incentive
compensation plan which has been approved by the Board of Directors of
Employer to cover key personnel of Employer. Upon termination of Employee's
employment pursuant to subparagraph 3(a), 3(b) 3(c) or 7, Employee shall be
entitled to a pro rata portion (based on Employee's complete months of active
employment in the applicable year) of the annual incentive bonus that is
payable with respect to the year during which the termination occurs or, in
the case of a termination upon Employee's disability pursuant to subparagraph
3(c), the date the Disability Period began.
(e) Renegotiations. Beginning January 1, 1997 (12 months
before the end of the Period of Employment), Employee and Employer shall
commence good faith negotiations, to be completed by June 30, 1997, for
Employee's continued employment by Employer after the end of the Period of
Employment. If Employee and Employer cannot agree on the terms of Employee's
continued employment by December 31, 1997, and Employee ceases to be employed
by Employer, Employee shall be entitled to be paid (i) as severance
compensation, one year of Base Salary, payable in equal installments in
accordance with Employer's regular payroll practice from January 1, 1998
through December 31, 1998, and (ii) an amount equal to the sum of Employee's
non-vested accrued benefit (determined as of Employee's employment
termination date using, as applicable, the mortality table and discount rate
used by Employer's actuary to determine funding requirements for Employer's
qualified defined benefit plan) under paragraph 6 of this Agreement and under
all tax-qualified retirement plans (within the meaning of Section 401(a) of
the Internal Revenue Code and including any plan of Employer that is subject
to Section 401(k) of the Internal Revenue Code) maintained by Employer and in
which Employee is a covered participant, with the total to be paid in 12
equal monthly installments commencing 30 days after Employee's termination of
employment. If Employee's employment by Employer is not continued after
December 31, 1997 as a result of Employee's decision not to continue such
employment, then Employer shall not be obligated to continue to pay
Employee's Base Salary as severance compensation, or to pay Employee an
amount equal to Employee's non-vested accrued benefits under Employer's tax-
qualified retirement plans, in accordance with this paragraph 1(e). Payments
of Base Salary as severance compensation pursuant to this paragraph 1(e)
shall be reduced to the extent Employee receives severance or similar
compensation pursuant to any severance pay plan or similar plan, program or
arrangement maintained by Employer. If Employee obtains any employment or
becomes self-employed following the termination of Employee's employment by
Employer (including self-employment pursuant to paragraph 7(a)(i)), payment
of Employee's Base Salary as severance compensation shall cease. For any
period during which Employee's Base Salary is continued as severance
compensation, Employee shall be eligible to continue to participate in
Employer's group-term life insurance plan and group health benefit plan as if
Employee were an active, full-time employee of Employer. Employee's right to
"COBRA" continuation coverage under Employer's group health benefit plan
shall commence as of the end of the period during which Base Salary is
continued as severance compensation.
(f) In the event Employer's average assets during any monthly
reporting period during the Employment Period reach $1.75 billion, Employer
agrees to review Employee's Base Salary as provided for under paragraph 1(c)
above.
2. Duties during the Period of Employment. Employee shall have
full responsibility, subject to the control of Employer's Board of Directors,
for the supervision of all aspects of Employer's business and operations, and
the discharge of such other duties and responsibilities to Employer as may
from time to time be reasonably assigned to Employee by Employer's Board of
Directors. Employee shall report to the Board of Directors of Employer.
Employee shall devote Employee's best efforts to the affairs of Employer,
serve faithfully and to the best of Employee's ability and devote all of
Employee's working time and attention, knowledge, experience, energy and
skill to the business of Employer, except that Employee may affiliate with
professional associations, business and civic organizations. Employee shall
serve on the Board of Directors of, or as an officer of Employer's
affiliates, without additional compensation if requested to do so by the
Board of Directors of Employer. Employee shall receive only the compensation
and other benefits described in this Agreement for Employee's duties as a
Director of Employer.
3. Termination. Employee's employment by Employer shall be
subject to termination as follows:
(a) Expiration of the Term. This Agreement shall terminate
automatically at the expiration of the Period of Employment unless the
parties enter into a written agreement extending Employee's employment.
(b) Termination Upon Death. This Agreement shall terminate
upon Employee's death. In the event this Agreement is terminated as a result
of Employee's death, Employer shall continue payments of Employee's Base
Salary for a period of 60 days following Employee's death to the beneficiary
designated by Employee on the "Beneficiary Designation Form" attached to this
Agreement as Appendix A.
(c) Termination Upon Disability. Employer may terminate this
Agreement upon Employee's disability. For the purpose of this Agreement,
Employee's inability to perform Employee's duties hereunder by reason of
physical or mental illness or injury for a period of 26 successive weeks (the
"Disability Period") shall constitute disability. The determination of
disability shall be made by a physician selected by Employer and a physician
selected by Employee; provided, however, that if the two physicians so
selected shall disagree, or if Employer shall disagree with the findings of
the physicians, the determination of disability shall be submitted to
arbitration in accordance with the rules of the American Arbitration
Association and the decision of the arbitrator shall be binding and
conclusive on Employee and Employer. During the Disability Period, Employee
shall be entitled to 100% of Employee's Base Salary otherwise payable during
that period, reduced by any other benefits to which Employee may be entitled
for the Disability Period on account of such disability (including, but not
limited to, benefits provided under any disability insurance policy or
program, worker's compensation law, or any other benefit program or
arrangement).
(d) Termination for Cause. Employer may terminate Employee's
employment immediately for "cause" by written notice to Employee. For
purposes of this Agreement, a termination shall be for "cause" if the
termination results from any of the following events:
(i) Material breach of this Agreement;
(ii) Misconduct as an executive or director of Employer,
or any subsidiary or affiliate of Employer for which Employee is
performing services hereunder including, but not limited to,
misappropriating any funds or property of any such company, or
attempting to obtain any personal profit (x) from any transaction to
which such company is a party or (y) from any transaction with any third
party in which Employee has an interest which is adverse to the interest
of any such company, unless, in either case, Employee shall have first
obtained the written consent of the Board of Directors of Employer;
(iii) unreasonable neglect or refusal to perform the
duties assigned to Employee under or pursuant to this Agreement;
(iv) Conviction of a crime involving moral turpitude;
(v) Adjudication as a bankrupt, which adjudication has
not been contested in good faith, unless bankruptcy is caused directly
by Employer's unexcused failure to perform its obligations under this
Agreement;
(vi) Failure to follow the reasonable instructions of the
Board of Directors of Employer, provided that the instructions do not
require Employee to engage in unlawful conduct; or
(vii) Any violation of the rules or regulations of
the Office of the Comptroller of the Currency or of any other regulatory
agency.
Notwithstanding any other term or provision of this Agreement to the
contrary, if Employee's employment is terminated for cause, Employee shall
forfeit all rights to payments and benefits otherwise provided pursuant to
this Agreement; provided, however, that Base Salary shall be paid through the
date of termination.
4. Fringe Benefits.
(a) Benefit Plans. During the Period of Employment, Employee
shall be eligible to participate in any employee pension benefit plans (as
that term is defined under Section 3(2) of the Employee Retirement Income
Security Act of 1974, as amended), Employer-paid group life insurance plans,
medical plans, dental plans, long-term disability plans, business travel
insurance programs and other fringe benefit programs maintained by Employer
for the benefit of its executive employees. Participation in any of
Employer's benefit plans and programs shall be based on, and subject to
satisfaction of, the eligibility requirements and other conditions of such
plans and programs.
(b) Expenses. Upon submission to Employer of vouchers or
other required documentation, Employee shall be reimbursed for Employee's
actual out-of-pocket travel and other expenses reasonably incurred and paid
by Employee in connection with Employee's duties hereunder, not to include
country club dues or membership fees. Reimbursable expenses must be
submitted to the Personnel Committee of Employer's Board of Directors for
review on a quarterly basis.
(c) Other Benefits. During the Period of Employment,
Employee also shall be entitled to receive the following benefits:
(i) Paid vacation of 4 weeks during each calendar year
(with no carry over of unused vacation to a subsequent year) and any
holidays that may be provided to all employees of Employer in accordance
with Employer's holiday policy;
(ii) Reasonable sick leave;
(iii) Reimbursement of membership fees incurred by
Employee at a health club of Employee's choice;
(iv) The use of an Employer-owned automobile of
Employee's choice, the purchase and replacement of which shall be
subject to the approval of the Personnel Committee of the Board of
Directors of Employer; and
(v) Reimbursement of the purchase price of a car
telephone and all Employer-related business charges incurred in
connection with the use of such telephone.
5. Stock Options.
(a) 1992 Stock Option Grant. Pursuant to a 1992 Non-
Statutory Stock Option Agreement made effective as of October 1, 1992
("Option Agreement"), which Option Agreement implemented the grant of options
provided for in the 1992 Employment Agreement between Employee and Employer
("Employment Agreement"), Employee was granted options to purchase 48,000
shares of common stock of Community Bank System, Inc. The Option Agreement
provides that Employee's right to exercise options upon a termination of
employment shall be governed by the terms of the Employment Agreement. The
parties hereby agree that the Option Agreement shall be amended to
incorporate into the Option Agreement specific terms regarding the exercise
of options following Employee's termination of employment and to make such
other changes as the parties shall agree to make.
(b) Future Grants. Employer shall cause the Personnel
Committee of the Board of Directors of Employer to review whether Employee
should be granted additional options to purchase shares of common stock of
Community Bank System, Inc. Such review may be conducted pursuant to the
terms of the Community Bank System, Inc. 1994 Long-Term Incentive
Compensation Program or independently, as the Personnel Committee shall
determine. Reviews shall be conducted no less frequently than annually.
6. Supplemental Retirement Benefit.
(a) Employer shall pay Employee an annual supplemental
retirement benefit equal to the product of (i) 4%, times (ii) Employee's
number of years of service, times (iii) Employee's final average
compensation, with the product of (i) times (ii) times (iii) reduced by
Employee's other retirement benefits. The foregoing benefit shall only be
paid if Employee is credited with a minimum of five years of service.
(b) For purposes of this paragraph 6, "years of service"
shall be credited to Employee in the same manner as years of service are
credited to Employee under the Community Bank System, Inc. Pension Plan, as
amended through December 31, 1994 ("Pension Plan"); provided that, for
purposes of this paragraph 6, (i) Employee's service to Employer as a
consultant pursuant to paragraph 7(a) (i) shall be included in Employee's
years of service, and (ii) Employee shall be credited with additional years
of service to the extent provided pursuant to paragraph 7 (a) (iii); and
provided further that no more than 15 years of service will be taken into
account under this paragraph 6.
(c) For purposes of this paragraph 6, Employee's "final
average compensation" shall be the annual average of Employee's Base Salary
and cash bonus received during the five consecutive calendar years preceding
Employee's termination or retirement that produces the highest average;
provided that, for purposes of this paragraph 6(i) if Employee shall be
employed by Employer for less than five consecutive calendar years,
Employee's final average compensation shall be the annual average of
Employee's Base Salary and cash bonus received during Employee's actual
period of employment with Employer, and (ii) the cash bonus received by
Employee in 1993 shall be deemed to have been received by Employee in 1994.
(d) For purposes of this paragraph 6, Employee's "other
retirement benefits" shall mean the sum of
(i) the annual benefit payable to Employee from the
Pension Plan, plus
(ii) the estimated annual benefit payable to Employee
pursuant to the Federal Social Security Act, plus
(iii) the annual benefit payable to Employee under
the defined benefit pension plan maintained by Farm Credit (in which
Employee was a participant prior to his employment with Employer), plus
(iv) the annual benefit that could be provided by (A)
Employer contributions (other than elective deferrals) made on
Employee's behalf under the Community Bank System, Inc. Employee Savings
and Retirement Plan, (B) First Bank System contributions (other than
elective deferrals) made on Employee's behalf under the defined
contribution plan maintained by First Bank System (in which Employee was
a participant prior to his employment with Employer), and (C) actual
earnings on contributions under (A) and (B), if such contributions and
earnings were converted to a benefit payable at the same time and in the
same form as the benefit paid under this paragraph 6, using the factors
applied to determine actuarial equivalents under the Pension Plan at the
time payments begin under this paragraph 6.
The amount of "other retirement benefits," determined as of the date of this
Agreement, is reflected on Appendix B attached to this Agreement. To the
extent Employee receives a payment of "other retirement benefits" prior to
the date supplemental retirement benefits are paid pursuant to this paragraph
6, and such amounts are not rolled over or transferred to an individual
retirement account or tax-qualified retirement plan, the total of "other
retirement benefits" shall be determined by including amounts received and
not rolled over or transferred and assuming such amounts earned interest at
an annual rate of 6% from the date received to the date "other retirement
benefits" are calculated. Employee shall provide such financial and other
information as Employer may reasonably require to determine "other retirement
benefits."
(e) For purposes of paragraph 6, Employee's Social Security
Benefit ("Benefit") will be valued by the actual Benefit Employee receives or
is qualified to receive at the time Employee elects to receive the
supplemental retirement benefit, or if Employee has not yet qualified for the
Benefit, the Benefit will be valued by the maximum benefit available to a
then 62 year old individual.
(f) For the purposes of paragraph 6, Employer's Pension Plan
Benefit will be Employee's accrued benefit under the Plan, determined as of
the date Employee elects to receive the supplemental retirement plan benefit,
adjusted for the timing and form of benefit.
(g) The supplemental retirement benefit described in
paragraph six shall be payable commencing on the first day of the month
following the later of (i) Employee's receipt of all payment due under the
terms of this Agreement (other than this paragraph 6) (ii) termination of
employment with Employer, or (iii) Employee's attainment of age 58.
(h) The supplemental retirement benefit described in this
paragraph 6 shall be paid in the form of an actuarially reduced Joint and 50%
Survivor benefit with Employee's spouse as survivor annuitant; provided
however, that if Employee's simultaneously commences receipt of Employer's
Pension Plan benefit, then the benefit under this paragraph 6 shall be paid
in the same form as Employee's Pension Plan Benefit. If Employee or his
beneficiaries shall receive payment of Employee's benefit under the Pension
Plan in a form other than a single life annuity for Employee's life and/or
prior to Employee's attainment of age 65, the supplement retirement benefit
under this paragraph 6 shall be converted to the same form of payment and/or
subject to the same early retirement reduction, using the factors applied to
determine actuarial equivalents and early retirement benefits under the
Pension Plan at the time payments begin.
(i) Employer shall establish a "grantor trust" (as that term
is defined in Internal Revenue Code Section 671) to aid it in the
accumulation and payment of the supplement retirement benefit described in
this paragraph 6; provided that the trust shall be established with the
intention that the creation and funding of the trust shall not result in the
recognition of gross income by Employee of any amount credited under the
trust prior to the date the amount is paid or made available. Assets of the
trust, and any other assets set aside by Employer to satisfy its obligations
under this Agreement, shall remain at all times subject to the claims of
Employer's general creditors. Employee and his beneficiaries shall not have
any rights under this paragraph 6 that are senior to the claims of general
unsecured creditors of Employer.
(j) The right to receive the supplemental retirement benefit
described in this paragraph 6 shall not be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge or encumbrance,
nor subject to attachment, garnishment, levy, execution or other legal or
equitable process for the debts, contracts or liabilities of Employee or his
beneficiaries.
7. Change of Control.
(a) If Employee's employment by Employer (as an employee)
shall cease for reasons other than "cause" (as described in paragraph 3(d))
within 2 years following a "Change of Control" that occurs during the Period
of Employment, Employer shall:
(i) Retain the services of Employee, on an independent
contractor basis, as a consultant to Employer for a period of no less
than 24 months at an annual consulting fee rate equal to Employee's Base
Salary in effect at the time of Employee' s termination;
(ii) Provide Employee with fringe benefits, or the cash
equivalent of such benefits, identical to those described in paragraph
4(a) for the period during which Employee is retained as a consultant
pursuant to (i) above;
(iii) Credit Employee with three additional years of
service for purposes of determining Employee's supplemental retirement
benefit described in paragraph 6.
(iv) Treat as immediately exercisable all unexpired stock
options described in paragraph 5 that are not otherwise exercisable or
that have not been exercised; and
(v) Pay to Employee the difference between the total
purchase price paid by Employee for the home owned by him in the
Syracuse area and the proceeds of the sale of such home by Employee
following the termination of his employment not later than December 31,
1997 if he elects to move outside of the metropolitan Syracuse area to
take other employment and he establishes to the satisfaction of the
Board of Directors of Employer that he is unable despite reasonable
efforts to sell the home within one year from the termination of his
employment for a sum equal to the purchase price, or, in lieu thereof,
Employer may purchase the home for a sum equal to the price Employee
paid for it.
(vi) If any portion of the amounts paid to, or value
received by, Employee following a "Change of Control" (whether paid or
received pursuant to this paragraph 7 or otherwise) constitutes an
"excess parachute payment" within the meaning of Internal Revenue Code
Section 280G, then the parties shall negotiate a restructuring of
payment dates and/or methods (but not payment amounts) to minimize or
eliminate the application of Internal Revenue Code Section 280G. If an
agreement to restructure payments cannot be reached within 60 days of
the date the first payment is due under this paragraph 7, then payments
shall be made without restructuring. Employee shall be responsible for
all taxes and penalties payable by Employee as a result of Employee's
receipt of an "excess parachute payment."
(b) For purposes of paragraph 7(a), a "Change of
Control" shall be deemed to have occurred if:
(i) any "person," including a "group" as determined in
accordance with the Section 13(d) (3) of the Securities Exchange Act of
1934 ("Exchange Act"), is or becomes the beneficial owner, directly or
indirectly, of securities of Employer representing 30% or more of the
combined voting power of Employer's then outstanding securities;
(ii) as a result of, or in connection with, any tender
offer or exchange offer, merger or other business combination (a
"Transaction"), the persons who were directors of Employer before the
Transaction shall cease to constitute a majority of the Board of
Directors of Employer or any successor to Employer;
(iii) Employer is merged or consolidated with another
corporation and as a result of the merger or consolidation less than 70%
of the outstanding voting securities of the surviving or resulting
corporation shall then be owned in the aggregate by the former
stockholders of Employer, other than (A) affiliates within the meaning
of the Exchange Act, or (B) any party to the merger or consolidation;
(iv) a tender offer or exchange offer is made and
consummated for the ownership of securities of Employer representing 30%
or more of the combined voting power of Employer's then outstanding
voting securities; or
(v) Employer transfers substantially all of its assets
to another corporation which is not controlled by Employer.
8. Withholding. Employer shall deduct and withhold from
compensation and benefits provided under this Agreement all necessary income
and employment taxes and any other similar sums required by law to be
withheld.
9. Covenants.
(a) Confidentiality. Employee shall not, without the prior
written consent of Employer, disclose or use in any way, either during his
employment by Employer or thereafter, except as required in the course of his
employment by Employer, any confidential business or technical information or
trade secret acquired in the course of Employee's employment by Employer.
Employee acknowledges and agrees that it would be difficult to fully
compensate Employer for damages resulting from the breach or threatened
breach of the foregoing provision and, accordingly, that Employer shall be
entitled to temporary preliminary injunctions and permanent injunctions to
enforce such provision. This provision with respect to injunctive relief
shall not, however, diminish Employer's right to claim and recover damages.
Employee covenants to use his best efforts to prevent the publication or
disclosure of any trade secret or any confidential information concerning the
business or finances of Employer or Employer's affiliates, or any of its or
their dealings, transactions or affairs which may come to Employee's
knowledge in the pursuance of his duties or employment.
(b) No Competition. Employee's employment is subject to the
condition that during the term of his employment hereunder and for a period
of 12 months following the date of termination of his employment (the "Date
of Termination"), Employee shall not, directly or indirectly, own, manage,
operate, control or participate in the ownership, management, operation or
control of, or be connected as an officer, employee, partner, director,
individual proprietor, lender, consultant or otherwise with, or have any
financial interest in, or aid or assist anyone else in the conduct of, any
entity or business (a "Competitive Operation") which competes in the banking
industry or with any other business conducted by Employer or by any group,
affiliate, division or subsidiary of Employer, in any area or market where
such business is being conducted at the Date of Termination. Employee shall
keep Employer fully advised as to any activity, interest, or investment
Employee may have in any way related to the banking industry. It is
understood and agreed that, for the purposes of the foregoing provisions of
this paragraph, (i) no business shall be deemed to be a business conducted by
Employer or any group, division, affiliate or subsidiary of Employer unless
5% or more of Employer's consolidated gross sales or operating revenues is
derived from, or 5% or more of Employer's consolidated assets are devoted to,
such business; (ii) no business conducted by any entity by which Employee is
employed or in which he is interested or with which he is connected or
associated shall be deemed competitive with any business conducted by
Employer or any group, division or subsidiary of Employer unless it is one
from which 2% or more of its consolidated gross sales or operating revenues
is derived, or to which 2% or more of its consolidated assets are devoted;
and (iii) no business which is conducted by Employer at the Date of
Termination and which subsequently is sold by Employer shall, after such
sale, be deemed to be a Competitive Operation within the meaning of this
paragraph. Ownership of not more than 5% of the voting stock of any publicly
held corporation shall not constitute a violation of this paragraph.
(c) Certain Affiliates of Employer. It is understood that
Employee may have access to technical knowledge, trade secrets and customer
lists of affiliates of Employer or companies which Employer's parent may
acquire in the future and may serve as a member of the board of directors or
as an officer or employee of an affiliate of Employer. Employee covenants
that he shall not, during the term of his employment by Employer or for a
period of 12 months thereafter, in any way, directly or indirectly, own,
manage, operate, control or participate in the ownership, management,
operation or control of, or be connected as an officer, employee, partner,
director, individual proprietor, lender, consultant or otherwise aid or
assist anyone else in any business or operation which competes with or
engages in the business of such an affiliate.
(d) Termination of Payments. Upon the breach by Employee of
any covenant under this paragraph 9, Employer may offset and/or recover from
Employee immediately any and all severance benefits paid to Employee under
paragraph 1(e) hereof in addition to any and all other remedies available to
Employer under the law or in equity.
(e) The non-competition provisions of paragraphs 9(b) and
9(c) shall not apply if Employee's employment ceases within the two-year
period following a change of control within the meaning of paragraph 7.
10. Notices. Any notice which may be given hereunder shall be
sufficient if in writing and mailed by certified mail, return receipt
requested, to Employee at his Residence and to Employer at 5790 Widewaters
Parkway, Dewitt, New York 13214 or at such other addresses as either Employee
or Employer may, by similar notice, designate.
11. Rules, Regulations and Policies. Employee shall abide by and
comply with all of the rules, regulations, and policies of Employer,
including without limitation Employer's policy of strict adherence to, and
compliance with, any and all requirements of the banking, securities, and
antitrust laws and regulations.
12. No Prior Restrictions. Employee affirms and represents that
Employee is under no obligations to any former employer or other third party
which is in any way inconsistent with, or which imposes any restriction upon,
the employment of Employee by Employer, or Employee's undertakings under this
Agreement.
13. Return of Employer's Property. After Employee has received
notice of termination or at the end of the term hereof, whichever first
occurs, Employee shall forthwith return to Employer all documents and other
property in his possession belonging to Employer.
14. Construction and Severability. The invalidity of any one or
more provisions of this Agreement or any part thereof, all of which are
inserted conditionally upon their being valid in law, shall not affect the
validity of any other provisions to this Agreement; and in the event that one
or more provisions contained herein shall be invalid, as determined by a
court of competent jurisdiction, this instrument shall be construed as if
such invalid provisions had not been inserted.
15. Governing Law. This Agreement was executed and delivered in
New York and shall be construed and governed in accordance with the laws of
the State of New York.
16. Assignability and Successors. This Agreement may not be
assigned by Employee or Employer, except that this Agreement shall be binding
upon and shall inure to the benefit of the successor of Employer through
merger or corporate reorganization.
17. Miscellaneous. This Agreement constitutes the entire
understanding and agreement between the parties with respect to the subject
matter hereof and shall supersede all prior understandings and agreements,
including a letter agreement between Employer and Employee dated September
16, 1992 and an employment agreement made effective as of October 1, 1992.
This Agreement cannot be amended, modified, or supplemented in any respect,
except by a subsequent written agreement entered into by the parties hereto.
The services to be performed by Employee are special and unique; it is agreed
that any breach of this Agreement by Employee shall entitle Employer (or any
successor or assigns of Employer), in addition to any other legal remedies
available to it, to apply to any court of competent jurisdiction to enjoin
such breach. The provisions of paragraphs 1(e), 7 and 9 hereof shall survive
the termination of this Agreement.
18. Counterparts. This Agreement may be executed in counterparts
(each of which need not be executed by each of the parties), which together
shall constitute one and the same instrument.
19. Jurisdiction and Venue. The jurisdiction of any proceeding
between the parties arising out of, or with respect to, this Agreement shall
be in a court of competent jurisdiction in New York State, and venue shall be
in Onondaga County. Each party shall be subject to the personal jurisdiction
of the courts of New York State.
The foregoing is established by the following signatures of the
parties.
COMMUNITY BANK SYSTEM, INC.
By: /s/ Earl W. MacArthur
Its: Chairman of the Board
COMMUNITY BANK, N.A.
By: /s/ Earl W. MacArthur
Its: Chairman of the Board
/s/ Sanford A. Belden
SANFORD A. BELDEN
<PAGE>
APPENDIX B
LISTING OF QUALIFIED RETIREMENT BENEFITS REFERRED TO IN PARAGRAPH 6
<PAGE>
APPENDIX A
BENEFICIARY DESIGNATION FORM
Pursuant to the Employment Agreement between (i)
Community Bank System, Inc. and Community Bank, N.A., and (ii)
Sanford A. Belden, dated as of October 1, 1994 ("Agreement"), I,
Sanford A. Belden, hereby designate Elizabeth G. Belden, my wife,
as the beneficiary of amounts payable upon my death in accordance
with paragraph 3(b) of the Agreement. My beneficiary's current
address is 9 Lynacres Boulevard, Fayetteville, New York.
Dated: 12/22/94 /s/ Sanford A.
Belden
Sanford A. Belden
/s/ Barry S. Kublin
Witness
<PAGE>
Community Bank System, Inc.
Statement re Earnings Per Share Computation
Exhibit 11
Three Months Ended
March 31, March
31,
1995 1994
Primary Earnings Per Share
Net Income 2,751,518
2,400,231
----------
- ---------
Income applicable
to common stock 2,751,518
2,400,231
==========
=========
Weighted average number
of common shares 2,788,150
2,748,905
Add: Shares issuable from
assumed exercise of
incentive stock options 27,227
58,746
---------
- ---------
Weighted average number of
common shares - adjusted 2,815,377
2,807,651
=========
=========
Primary earnings per share $0.98
$0.85
=========
=========
Fully Diluted Earnings Per Share
Net Income 2,751,518
2,400,231
=========
=========
Weighted average number of
common shares - adjusted 2,818,963
2,807,651
Add: Equivalent number of
common shares assuming
conversion of preferred
---------
- ---------
Weighted average number of
common shares - adjusted 2,818,963
2,807,651
=========
=========
Fully diluted earnings per share $0.98
$0.85
=========
=========
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<ARTICLE> 9
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 50,721
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<TOTAL-ASSETS> 960,280
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<SHORT-TERM> 158,765
<LIABILITIES-OTHER> 9,621
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0
0
<OTHER-SE> 65,478
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