<PAGE>
RULE NO. 424(b)(1)
REGISTRATION NO. 33-58539
LOGO COMMUNITY BANK SYSTEM, INC.
750,000 SHARES OF COMMON STOCK
90,000 SHARES OF 9.00% CUMULATIVE PERPETUAL PREFERRED STOCK, SERIES A
This Prospectus relates to two separate offerings, one of 750,000 shares of
Common Stock, par value $1.25 per share (the "Common Stock") of Community Bank
System, Inc. (the "Company"), and the other of 90,000 shares of 9.00%
Cumulative Perpetual Preferred Stock, Series A (the "Preferred Stock") of the
Company. The offerings of Common Stock and Preferred Stock are referred to
herein as the Common Stock Offering and the Preferred Stock Offering,
respectively, and collectively as the Offerings.
The Company is a bank holding company incorporated under the laws of the
State of Delaware, which is the parent of Community Bank, National
Association, a federally chartered national bank (the "Bank"). The Company's
outstanding Common Stock is traded over-the-counter on the Nasdaq National
Market under the symbol CBSI. On June 27, 1995, the last closing bid price of
the Common Stock on the Nasdaq National Market was $24.00 per share. See
"Description of Capital Stock" and "Market for Common Stock and Dividends."
The offering price per share of Common Stock will be determined by agreement
between the Company and the Underwriters. See "Underwriting."
The offering price per share of Preferred Stock is $100.00. Holders of
shares of Preferred Stock will be entitled to a cumulative cash dividend at
the rate of 9.00% per annum which dividend will be payable semi-annually on
September 30 and March 31 of each year. The Preferred Stock has a perpetual
maturity and is redeemable, in whole or in part, at the option of the Company
at the redemption price set forth herein. See "Description of Capital Stock --
Preferred Stock."
The Company has reserved up to 40,000 shares of Common Stock (the "Reserved
Shares") for sale to directors, officers, and employees of the Bank at the
public offering price. See "Underwriting -- Reserved Shares."
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
INVESTORS, SEE "RISK FACTORS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share of Common Stock............... $24.250 $1.455 $22.795
- --------------------------------------------------------------------------------
Per Reserved Share of Common Stock(3)... $24.250 $-- $24.250
- --------------------------------------------------------------------------------
Total Common Stock(4)................... $18,187,500 $1,033,050 $17,154,450
- --------------------------------------------------------------------------------
Per Share of Preferred Stock............ $100.00 $3.00 $97.00
- --------------------------------------------------------------------------------
Total Preferred Stock................... $ 9,000,000 $ 270,000 $8,730,000
</TABLE>
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- -------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $551,330.
(3) Assuming all Reserved Shares are sold directly by the Company.
(4) The Company has granted the Underwriters a 30-day option to purchase up to
112,500 additional shares of Common Stock to cover over-allotments, if
any. If the Underwriters exercise this option in full, the total Price to
Public of Common Stock, Underwriting Discount and Commissions, and
Proceeds to the Company will be $20,915,625, $1,196,738 and $19,718,887,
respectively. See "Underwriting."
---------------
The shares of Common Stock and Preferred Stock are offered, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters and
subject to certain other conditions. The Underwriters reserve the right to
withdraw, cancel or modify such offer and to reject orders in whole or in
part. It is expected that delivery of certificates evidencing the Common Stock
and the Preferred Stock will be made against payment therefor at the offices
of M.A. Schapiro & Co., Inc., One Chase Manhattan Plaza, New York, New York,
10005 on or about June 30, 1995.
---------------
M.A. SCHAPIRO & CO., INC.
FIRST ALBANY CORPORATION
THE DATE OF THIS PROSPECTUS IS JUNE 27, 1995.
<PAGE>
[Insert list of branch offices, map of market area showing acquired branches
and current branch locations, and insert of market area in relation to New York
State]
2
<PAGE>
IN CONNECTION WITH THESE OFFERINGS, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE COMMON STOCK
AND THE PREFERRED STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER
MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
THE SHARES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR SAVINGS DEPOSITS AND
ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC") OR ANY
OTHER GOVERNMENT AGENCY.
----------------
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission ("the Commission"). Such reports, proxy
statements and other information can be inspected and copied at prescribed
rates at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional
offices of the Commission located at 75 Park Place, New York, New York 10007
and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material can also be obtained at prescribed
rates from the Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549.
The Company has filed with the Commission a Registration Statement on Form S-
2 (together with all amendments and supplements thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act")
with respect to the Common Stock and the Preferred Stock. This Prospectus omits
certain information contained in the Registration Statement, certain items of
which are contained in exhibits to the Registration Statement as permitted by
the rules and regulations of the Commission. For further information with
respect to the Company and the Common Stock and Preferred Stock, reference is
made to the Registration Statement, including the exhibits filed as a part
thereof, which may be inspected at the principal office of the Commission
without charge at 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of the Registration Statement may be obtained from the Commission at
its principal office at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, upon payment of prescribed fees. Statements contained in this Prospectus
as to the contents of any contract or other document are not necessarily
complete and, where the contract or the document has been filed as an exhibit
to the Registration Statement, each such statement is qualified in all respects
by reference to the applicable document filed with the Commission.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents are incorporated in this Prospectus by reference:
(i) The Company's Annual Report on Form 10-K for the year ended December
31, 1994; and
(ii) All reports filed by the Company pursuant to Section 13(a) or 15(d)
of the Exchange Act since December 31, 1994.
Any statement contained in a document incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company will provide, without charge and upon oral or written request, to
each person to whom this Prospectus is delivered, a copy of any or all of the
documents that have been incorporated by reference in this Prospectus (other
than exhibits to such documents). Requests for such documents should be
directed to Community Bank System, Inc., 5790 Widewaters Parkway, DeWitt, New
York 13214, Attention: Ms. Loretta L. Marx, Corporate Secretary, (315) 445-
2282.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is not intended to be complete and is qualified in its
entirety by the more detailed information and the Consolidated Financial
Statements and the Notes thereto appearing elsewhere in this Prospectus and in
the documents incorporated herein by reference.
THE COMPANY
Community Bank System, Inc. (the "Company") is a bank holding company
headquartered in DeWitt, New York which owns all of the outstanding stock of
Community Bank, National Association (the "Bank"). The Bank is a full service
commercial bank providing a range of banking services through its two regional
offices in Canton, New York and Olean, New York, and through a total of 36
banking offices in the counties of St. Lawrence, Jefferson, Lewis, Cayuga,
Seneca, Ontario, Oswego, Allegany, Cattaraugus, Tioga and Steuben.
As of March 31, 1995, the Company had consolidated assets and deposits of
$960.3 million and $722.4 million, respectively. The Company's net income for
the year ended December 31, 1994 was $10.1 million, or $3.59 per share, and its
net income for the three month period ended March 31, 1995 was $2.8 million, or
$0.98 per share.
The Bank offers a broad range of financial services to both commercial and
retail customers located in its market area, including accepting time, demand
and savings deposits, and making secured and unsecured commercial, real estate
and consumer loans. Related financial services provided include a range of
trust services and the offering of annuities, mutual funds and other non-
deposit investment products. The Bank's lending activities primarily take the
form of commercial, agricultural, consumer and real estate loans and indirect
consumer financing. The Bank's lending and investment activities are funded
principally by deposits gathered through its retail branch office network.
Consistent with its commitment to serving the financial needs of customers in
the local communities where its offices are located, the Bank's marketing
efforts are directed primarily towards individuals and small- to medium-sized
businesses. The Bank's strategy for growth focuses primarily on the further
development of its community-based retail branch network. As a community-
oriented bank, the Bank's emphasis is on development of long-term customer
relationships, personalized service, convenient locations, and responding to
the specific needs of individuals and businesses in its market area. The
Company believes that the local character of the business environment,
knowledge of the customer and customer needs, and comprehensive retail and
small business products, together with rapid decision-making at the branch and
regional level, enable the Bank to compete effectively in its market area.
PENDING ACQUISITION
The Bank and the Company have entered into a Purchase and Assumption
Agreement (the "Agreement") with The Chase Manhattan Bank, N.A. ("Chase") for
the acquisition of certain assets and the assumption of certain liabilities
(the "Acquisition") relating to 15 Chase branch offices 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"). Subject to the terms of the Agreement, on the closing date
the Bank will assume deposits 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 and April 30, 1995, the Chase Deposits totaled $450.9 million and
$425.2 million, respectively. These amounts are subject to change due to run-
off or growth of deposits occurring prior to the closing date. In addition, the
Bank will acquire certain assets related to the Chase Branches including
certain
4
<PAGE>
small business and consumer loans (the "Chase Loans"), which totaled
approximately $25.2 million as of March 31, 1995, at face value, and branch
facilities and fixed operating assets associated with the Chase Branches (the
"Chase Assets") at a purchase price of approximately $5.3 million.
Upon closing the Acquisition, based upon March 31, 1995 estimates, the amount
of net cash to be received by the Bank from Chase would be approximately $385.3
million. This estimate is determined as follows: based upon March 31, 1995
estimates, the gross amount to be paid to the Bank by Chase pursuant to the
Agreement is approximately $453.2 million consisting of (i) Chase Deposits of
$450.9 million, (ii) accrued interest on Chase Deposits totaling approximately
$2.0 million and (iii) a payment for post-retirement medical costs for
transferred Chase employees approximating $331,000. The Agreement also provides
that, based upon March 31, 1995 estimates, approximately $67.9 million is to be
netted against the gross amount consisting of (i) a deposit premium totaling
$37.2 million on $450.9 million of Chase Deposits as of March 31, 1995, (ii)
$25.2 million of Chase Loans, (iii) $5.3 million for the Chase Assets and (iv)
accrued interest receivable to be acquired by the Bank totaling $160,000.
The Acquisition will have an adverse effect on the Company's and the Bank's
regulatory capital. Under regulatory guidelines a "well-capitalized"
institution is required to maintain a total risk-based capital ratio of 10.00%,
a Tier I risk-based capital ratio of 6.00% and a Tier I leverage ratio of
5.00%. Assuming proceeds to the Company of approximately $25.7 million from the
Offerings on a pro forma basis as of March 31, 1995, the Bank would have a
total risk-based capital ratio of 9.93%, a Tier I risk-based capital ratio of
8.82% and a Tier I leverage ratio of 4.15%. These capital ratios will reflect a
decline from the Bank's reported capital ratios at March 31, 1995 of 13.46% for
total risk-based capital, 12.21% for Tier I risk-based capital and 6.59% for
the Tier I leverage ratio. The interest rate risk profile of the Bank will
change from being liability sensitive prior to the Acquisition to being asset
sensitive following the Acquisition. This shift is due to the replacement of
short-term capital market borrowings of the Bank with the longer-term core
deposits of the Chase Branches and the initial investment of proceeds from the
Acquisition into short-term investments.
It is anticipated that the Acquisition will close during the third quarter of
1995. The closing is contingent upon, among other things, receipt by the
parties of all necessary regulatory approvals. In the event that the Bank is
unable to proceed to closing due to a lack of regulatory approval or the
Company's inability to raise sufficient capital, the Bank is obligated to pay
Chase a "break-up fee" of up to $1.85 million. The Offerings are conditioned
upon the Bank receiving regulatory approval for the Acquisition but are not
conditioned upon consummation of the Acquisition. By letter dated June 8, 1995,
the Office of the Comptroller of the Currency (the "OCC") granted approval for
the Acquisition on the condition that the Company contribute capital to the
Bank as contemplated by the Bank's application to the OCC.
The Company and the Bank view the Acquisition as a unique opportunity to
augment the Bank's branch network in existing market areas, as well as to
expand the Bank's network into contiguous markets in Central and Northern New
York State. The acquisition of the Chase Branches provides the opportunity for
the Bank to increase its business substantially and improve the quality of its
services to existing market areas, without significantly increasing overhead or
operating costs.
POTENTIAL DISPOSITION
Subject to general market conditions and the Company's ongoing assessment of
its 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. As of the date of this
Prospectus, the Company has had several substantive discussions with potential
purchasers of deposits, although no binding commitments have been made. The
purpose of any such divestiture 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
5
<PAGE>
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 (above 5.0%), as defined by the Federal Deposit Insurance
Corporation ("FDIC"), from the "adequately capitalized" range (between 4.0% and
5.0%) following the Acquisition.
CAPITAL PLAN
The Acquisition will have an adverse effect on the Company's and the Bank's
regulatory capital ratios. In order to offset the reduction in regulatory
capital ratios resulting from the Acquisition, the Company will raise
approximately $25.3 million (net of expenses) in the Offerings. 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 OFFERINGS
<TABLE>
<S> <C>
COMMON STOCK
Common Stock Offered.............. 750,000 shares.(1)
Common Stock Outstanding After the
Common Stock Offering............ 3,541,750 shares.(2)
Reserved Shares................... The Company has reserved up to 40,000
shares of Common Stock for sale to direc-
tors, officers and employees of the Bank at
the public offering price. See "Underwrit-
ing -- Reserved Shares."
Market For Common Stock........... The Common Stock is traded over-the-counter
on the Nasdaq National Market under the
symbol "CBSI."
PREFERRED STOCK
Preferred Stock Offered........... 90,000 shares.
Maturity.......................... Perpetual.
Dividends......................... Cash dividends are cumulative from the date
of issue and are payable semi-annually in
arrears, at the rate of 9.00% per annum or
$9.00 per share per annum.
Redemption........................ The Preferred Stock may, at the Company's
option, be redeemed, in whole or in part at
the redemption price set forth herein. See
"Description of Capital Stock -- Preferred
Stock."
Voting............................ Non-voting, except that in certain events,
holders of Preferred Stock will have the
right to elect two members to the Company's
Board of Directors. See "Description of
Capital Stock -- Preferred Stock."
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
Liquidation Preference............. $100.00 per share plus accrued and unpaid
dividends before distribution to holders of
Common Stock.
Minimum Purchase................... The Preferred Stock will be offered to the
public with a minimum purchase requirement
of 10,000 shares.
Market for Preferred Stock......... The Company may make an application to have
the Preferred Stock approved for quotation
on the Nasdaq National Market, although
there can be no assurance that the Company
will be able to do so. If the Preferred
Stock is approved for quotation on the
Nasdaq National Market, M.A. Schapiro &
Co., Inc. ("M.A. Schapiro") intends to make
a market in the Preferred Stock.
USE OF PROCEEDS..................... The primary purpose of the Offerings is to
raise additional capital in form and amount
sufficient to maintain the Bank's Tier I
leverage ratio at no lower than 4.0% upon
consummation of the Acquisition. See "Use
of Proceeds."
DIVIDEND POLICY..................... The Company has historically paid regular
quarterly cash dividends on its Common
Stock, and declared a cash dividend of
$0.30 per share for each of the first and
second quarters of 1995. The Company's
Board of Directors presently intends to
continue its dividend payment policy on the
Common Stock, as well as pay regular cash
dividends on the Preferred Stock as and
when due. See "Market for Common Stock and
Dividends," "Certain Regulatory Considera-
tions" and "Description of Capital Stock--
Preferred Stock."
</TABLE>
(1) Does not include 112,500 shares of Common Stock that may be issued pursuant
to the Underwriters' over-allotment option.
(2) Based on 2,791,750 shares of Common Stock outstanding on the date of this
Prospectus plus the shares of Common Stock offered hereby. If the over-
allotment option is exercised in full, the total number of shares of Common
Stock outstanding would be 3,654,250.
7
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, potential
investors should consider the following factors before purchasing the Common
Stock or the Preferred Stock offered hereby.
NEGATIVE EFFECT OF ACQUISITION ON REGULATORY CAPITAL
The Bank currently operates 36 banking facilities in 11 counties in the
Northern, Finger Lakes and Southern Tier regions of New York State. Pursuant to
the Agreement, the Bank plans to acquire 15 additional banking facilities in 10
counties in Central and Northern New York State. The Bank currently maintains
facilities in five of these 10 counties. 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 of 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:
<TABLE>
<CAPTION>
MARCH 31, 1995 RATIOS AFTER
REGULATORY MINIMUMS RATIOS ACQUISITION
----------------------------------- ----------------- ------------
WELL ADEQUATELY UNDER-
CAPITALIZED CAPITALIZED CAPITALIZED COMPANY BANK COMPANY BANK
----------- ----------- ----------- -------- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Total risk-based capital
ratio.................. 10.00% 8.00% <8.00% 13.65% 13.46% 10.19% 9.93%
Tier I risk-based capi-
tal 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
</TABLE>
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. For a discussion of the regulatory consequences of a failure by
the Bank or the Company to meet minimum regulatory ratios, see "Certain
Regulatory Considerations -- Capital Requirements" and "--Federal Deposit
Insurance Corporation Improvement Act of 1991."
GENERAL RISKS OF THE ACQUISITION
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
8
<PAGE>
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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
INVESTMENT OF ACQUIRED FUNDS AND IMPACT ON NET INTEREST MARGIN
As of March 31, 1995, the Chase Deposits totaled $450.9 million and the Chase
Loans totaled $25.2 million. While approximately $41.2 million of the Chase
Deposits are non-interest-bearing, the Bank will acquire substantially more
interest-bearing liabilities than interest-earning assets. The Bank currently
plans to use the approximately $385.3 million in cash expected to be received
in the Acquisition (representing the approximately $450.9 million of the Chase
Deposits as of March 31, 1995, plus other net liabilities of approximately $2.1
million, less (a) a deposit premium of 8.25% or approximately $37.2 million,
(b) approximately $25.2 million in Chase Loans, and (c) approximately $5.3
million in fixed assets and branch facilities) (the "Acquired Funds") 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. See "The Acquisition -- Impact of the Acquisition on Operating
Performance." 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. 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.
See "The Acquisition -- Impact of the Acquisition on Operating Performance."
POSSIBLE INABILITY TO DISPOSE OF BRANCHES AND RELATED DEPOSITS
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 purpose of such
divestitures would be to mitigate any potential 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 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. See "Prospectus
9
<PAGE>
Summary--Potential Disposition" and "The Acquisition--Impact of the Acquisition
on Operating Performance Assuming Intended Potential Disposition."
The reduction of public funds, and corresponding reduction in assets, from
the Bank's balance sheet will result in improved regulatory capital ratios. The
sale of branch locations and related deposits, however, could result in greater
improvement in regulatory capital ratios if the Bank were to receive a premium
for those deposits. A branch sale could also, therefore, result in improved
tangible book value whereas a reduction in public funds would have no impact on
tangible book value. The benefits associated with the sale of branches and
related deposits will not be realized until, and unless, a sale occurs and the
degree of such benefit will depend on such variables as the amount of deposits
sold, the premium received on the sale of such deposits, the reduction in
associated operating expenses, and foregone non-interest income, loan income
and investment income.
Economic and other factors beyond the control of the Company's management may
affect the Company's ability to consummate the disposition of the deposits and
branch locations. These factors include regional economic conditions which may
limit the number of potential purchasers of the assets as well as the timing of
the divestitures. Any potential disposition would also be subject to regulatory
approval, including the approval of the OCC. There can be no assurance that the
Company will be able to locate and secure a purchaser of the branch locations
or deposits to be sold, structure a disposition of the assets on terms that are
favorable to the Company, complete the dispositions within a reasonable time
frame or at all, or obtain the necessary regulatory approvals.
LENDING RISKS -- CREDIT QUALITY
A central focus of the Company's and the Bank's strategic plan is the
continued development and growth of a diversified loan portfolio, with emphasis
on commercial, consumer and real estate loans made to borrowers within the
Bank's market areas. Certain risks are inherent in the lending function,
including a borrower's inability to pay, insufficient collateral coverage and
changes in interest rates. Repayment risk on commercial loans is most
significantly affected by changing economic conditions in a particular
geographical area, business or industry which could impair future operating
performance. Risks associated with real estate loans and general business loans
include changes in general economic conditions which may affect underlying
collateral values as well as the borrower's ability to repay. Installment and
other consumer loans are subject to repayment risk which the Company believes
is mitigated by the diverse portfolio of such loans, the relatively low average
balances outstanding on individual extensions of credit, and the Bank's
distributed network of branches.
As soon as practicable after consummation of the Acquisition, the Bank
intends to begin investing the Acquired Funds in commercial, installment and
mortgage loans. Given the volume of Acquired Funds to be invested in such
loans, there can be no assurance that the Bank will be able to make sufficient
loans meeting the Bank's credit quality standards within an acceptable time
frame.
DILUTIVE IMPACT OF THE ACQUISITION AND COMMON STOCK OFFERING
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 Common Stock
outstanding following completion of the Common Stock Offering (23.6% if the
Underwriters' over-allotment option 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
10
<PAGE>
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.
IMPACT OF INTEREST RATE CHANGES
The Company's results of operations are derived almost entirely from the
operations of the Bank and are heavily dependent on its net interest income.
Net interest income is the difference between the interest income received on
interest-earning assets, including loans and securities, and the interest
expense incurred in connection with interest-bearing liabilities, including
deposits and borrowings. Net interest income can be significantly affected by
changes in market interest rates. The Company actively monitors its assets and
liabilities in an effort to minimize the effects of changes in interest rates
primarily by altering the mix and maturity of the Company's loans, investments
and funding sources.
Changes in interest rates also affect the volume of loans originated by the
Bank, as well as the value of its loans and other interest-earning assets,
including investment securities. In addition, changes in interest rates may
result in disintermediation, which is the flow of funds away from bank accounts
into direct investments, such as U.S. Government and corporate securities, and
other investment instruments such as mutual funds which, due to the absence of
federal insurance premiums and reserve requirements, can generally pay higher
rates of return than commercial banks.
As discussed above, the Bank's strategy is to invest the Acquired Funds in
investment securities in the near-term and in loans in the long-term. Changes
in interest rates will affect the value of, and interest earned on, the Bank's
investment securities which, in the near-term following the Acquisition, will
represent an increased portion of the Bank's assets. In addition, interest rate
changes will affect the Bank's ability to increase the volume of its loan
originations in the long-term following the Acquisition. Therefore, the success
of the Bank's post-Acquisition strategy will depend, in large part, on the
Company's ability to manage interest rate risk. Management intends to make
investment decisions in conjunction with 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.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Asset/Liability Management." While the Bank's intended purchases
of investment securities will not be immune from price volatility, seasoned 15-
year fixed-rate mortgage-backed securities would be expected to have less
volatility than that found in conventional 15-year or 30-year mortgage-backed
securities. There can be no assurance, however, that the Company's method of
managing interest rate risk will be effective in avoiding undue interest rate
or market value risk or that the Company will be able to effectively manage the
interest rate risk with respect to the Acquisition. See "The Acquisition --
Impact of the Acquisition on Operating Performance."
ALLOWANCE FOR LOAN LOSSES
The Company believes that the Bank has established adequate allowances for
loan losses in accordance with generally accepted accounting principles.
However, future additions to the allowances may be necessary due to changes in
economic conditions and growth of the Bank's loan portfolio. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. An increase in the
Bank's allowance for loan losses would negatively affect the Company's
earnings.
During 1993 the Financial Accounting Standards Board issued Statement No.
114, "Accounting by Creditors for Impairment of a Loan" and No. 118, which
amends certain provisions of No. 114. The adoption of these standards as of
January 1, 1995 had no effect on the Company's financial statements for the
three months ended March 31, 1995.
11
<PAGE>
ECONOMIC CONDITIONS AND MONETARY POLICIES
Conditions beyond the Company's control may have a significant impact on
changes in net interest income from one period to another. Examples of such
conditions could include: (i) the strength of credit demands by customers; (ii)
fiscal and debt management policies of the federal government, including
changes in tax laws; (ii) the Federal Reserve Board's monetary policy,
including the percentage of deposits that must be held in the form of non-
earning cash reserves; (iv) the introduction and growth of new investment
instruments and transaction accounts by non-bank financial competitors; and (v)
changes in rules and regulations governing the payment of interest on deposit
accounts.
REGIONAL ECONOMIC FACTORS
The Bank's current branches are located in St. Lawrence, Jefferson, Lewis,
Cayuga, Seneca, Ontario, Oswego, Allegany, Cattaraugus, Tioga and Steuben
counties in the Northern, Finger Lakes and Southern Tier areas of New York
State. The Chase Branches are located in Norwich, Watertown, Boonville, New
Hartford, Utica, Skaneateles, Geneva, Pulaski, Seneca Falls, Hammondsport,
Canton, Newark and Penn Yan, New York. Although mitigated by geographic
dispersion of the branches, the concentration of the Bank's market in Central
and Northern New York State exposes it to risks resulting from changes
affecting regional economic conditions. A significant decline in economic
conditions or real estate values in the areas of New York State in which the
Bank operates could adversely affect the quality of the Bank's loan portfolio
and its ability to invest the Acquired Funds in loans promptly after the
Acquisition.
REGULATION
The banking industry is heavily regulated. These regulations are intended to
protect depositors and the FDIC, not the shareholders of banking institutions.
Applicable laws, regulations, interpretations and enforcement policies have
been subject to significant, and sometimes retroactively applied, changes in
recent years, and may be subject to significant future changes. There can be no
assurance that such future changes will not adversely affect the business of
the Company. In addition, the burden imposed by federal and state regulations
may place banks in general, and the Bank specifically, at a competitive
disadvantage compared to less regulated competitors.
SOURCE OF FUNDS FOR DIVIDENDS ON COMMON STOCK AND PREFERRED STOCK
The Company's principal source of funds to pay cash dividends on the Common
Stock and Preferred Stock are the earnings of and dividends paid by the Bank.
Bank regulations, as well as the terms of current or any future preferred stock
issuances or loan agreements, may restrict the ability of the Bank to pay
dividends to the Company. See "Certain Regulatory Considerations -- Limits on
Dividends and Other Revenue Sources." The Company does not anticipate that the
Acquisition will have any significant impact on the Company's ability to pay
dividends. The Company presently intends to continue its policy of paying
regular quarterly dividends on the Common Stock, as well as to pay regular cash
dividends on the Preferred Stock as and when due. See "Market for Common Stock
and Dividends."
NO PRIOR MARKET FOR THE PREFERRED STOCK
Prior to the Preferred Stock Offering there has been no public market for the
Preferred Stock. Although the Company may make an application to have the
Preferred Stock approved for quotation on the Nasdaq National Market, there can
be no assurance that any active and liquid trading market for the Preferred
Stock will develop after the Preferred Stock Offering. If the Preferred Stock
is approved for quotation on the Nasdaq National Market, M.A. Schapiro intends
to make a market in the Preferred Stock.
COMPETITION
The Company operates in a series of competitive local markets, and competes
with commercial banks, savings banks, savings and loan associations, credit
unions and other financial institutions. See "Business --
12
<PAGE>
Competition." Many of these entities are larger institutions that have
significantly greater financial, management and other resources than the
Company. There can be no assurance that the Company's profitability will not be
negatively affected by expansion of competitors in and into its primary
markets.
DEPENDENCE ON KEY INDIVIDUALS
The Company is dependent in large part on its ability to retain the services
of certain key personnel, including Sanford A. Belden (President and Chief
Executive Officer); James A. Wears (Regional President, Northern Region);
Michael A. Patton (Regional President, Southern Region); and David G. Wallace
(Senior Vice President and Chief Financial Officer). The Company has employment
contracts with these officers. See "Management -- Employment Agreements." The
Company's continued success is also dependent on its ability to retain and
attract qualified employees to meet the Company's needs in connection with the
Acquisition.
ANTI-TAKEOVER EFFECTS
The Company's Certificate of Incorporation and By-Laws contain certain
provisions which may impede any merger, consolidation, takeover or other
business combination involving the Company or may discourage a potential
acquiror from making a tender offer or otherwise attempting to obtain control
of the Company. These provisions include a classified board of directors;
supermajority provisions with respect to the approval of certain business
combinations by the Company's shareholders and directors; the availability of
authorized but unissued shares of common and preferred stock; and a requirement
that the provisions of the Certificate of Incorporation designed to protect the
Company from unfriendly takeover attempts can only be amended by a
supermajority of the Company's shareholders and directors. See "Description of
Capital Stock -- Certain Certificate of Incorporation and By-Laws Provisions."
In addition, the Company has adopted a Stockholder Protection Rights Plan (the
"Rights Plan") which is designed to protect shareholders in the event of an
unsolicited offer or attempt to acquire control of the Company. See
"Description of Capital Stock -- Rights Plan."
These provisions are intended to avoid costly takeover battles and lessen the
Company's vulnerability to a hostile change in control, thereby enhancing the
possibility that the Board of Directors can maximize shareholder value in
connection with any unsolicited offer to acquire the Company. However, anti-
takeover provisions can also have the effect of depressing the Company's stock
price because they are an impediment to potential investors and their ability
to gain control of the Company, and thus discourage activities such as
unsolicited merger proposals, acquisitions or tender offers by which
shareholders might otherwise receive enhanced consideration for their shares.
13
<PAGE>
THE COMPANY
The Company is a bank holding company incorporated in 1983 under the laws of
the State of Delaware whose sole banking subsidiary is the Bank. The Bank is a
national bank formed in 1992 by consolidation of the Company's then existing
banking subsidiaries, The St. Lawrence National Bank, Horizon Bank, N.A., The
Exchange National Bank, The Nichols National Bank and Community National Bank.
The Bank provides banking services through its two regional offices in Canton,
New York and Olean, New York, as well as through 36 banking offices in the
counties of St. Lawrence, Jefferson, Lewis, Cayuga, Seneca, Ontario, Oswego,
Allegany, Cattaraugus, Tioga and Steuben.
At March 31, 1995, the Company had consolidated assets and deposits of $960.3
million and $722.4 million, respectively. The Company's net income for the year
ended December 31, 1994 was $10.1 million, or $3.59 per share, and its net
income for the three month period ended March 31, 1995 was $2.8 million, or
$0.98 per share. The Bank is a member of the Federal Reserve System and its
deposits are insured by the FDIC up to applicable limits.
The Bank is a community retail bank committed to the philosophy of serving
the financial needs of customers in local communities. The Bank's branches are
generally located in small cities and villages within its geographic market
areas. The Company believes that the local character of business, knowledge of
the customer and customer needs, and comprehensive retail and small business
products, together with rapid decision-making at the branch and regional level,
enable the Bank to compete effectively.
The Company's administrative office is located at 5790 Widewaters Parkway,
DeWitt, New York and its telephone number is (315) 445-2282. The Bank's
Northern Region has its regional office at 45-49 Court Street, Canton, New
York, and operates 18 banking offices in the New York counties of St. Lawrence,
Jefferson and Lewis. The Bank's Southern Region has its regional office at 201
North Union Street, Olean, New York, and operates 18 banking offices in Seneca,
Ontario, Oswego, Cayuga, Allegany, Cattaraugus, Tioga and Steuben Counties.
THE ACQUISITION
TERMS AND CONDITIONS OF THE ACQUISITION
On December 6, 1994, the Bank and the Company entered into a Purchase and
Assumption Agreement (the "Agreement") with The Chase Manhattan Bank, N.A.
("Chase"). The Agreement provides for the acquisition of certain assets and the
assumption of certain liabilities by the Bank (the "Acquisition") 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").
It is anticipated that the Acquisition will 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,
and December 31, 1994, the Chase Deposits totaled $450.9 million and $459.1
million, respectively, which amount is subject to change due to run-off or
growth of deposits occurring prior to the closing date. As of April 30, 1995,
the Chase Deposits totaled $425.2 million. 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
14
<PAGE>
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 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 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.
The closing of the Acquisition is contingent upon receipt by the parties of
all necessary regulatory approvals, including approval of the OCC. See "The
Acquisition--Regulatory Conditions and Capital Plan." By letter dated June 8,
1995, the OCC granted approval for the Acquisition on the condition that the
Company contribute capital to the Bank as contemplated by the Bank's
application to the OCC. See "Use of Proceeds." 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.
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.
15
<PAGE>
. 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 consumer
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 Federal Home Loan Bank of New York ("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 an
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.
For a discussion of the potential risks to the Company inherent in the
Acquisition, see "Risk Factors."
REGULATORY CONDITIONS AND CAPITAL PLAN
The Acquisition is contingent upon obtaining necessary regulatory approvals
and maintaining certain regulatory capital ratios. In order to maintain
required regulatory capital ratios, the Company and the Bank must raise
additional capital prior to consummation of the Acquisition.
16
<PAGE>
In conjunction with the Acquisition, the Company will raise approximately
$25.3 million (net of expenses) in additional capital through 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%. Approximately
$8.7 million of the additional capital will be raised through the Preferred
Stock Offering. See "Description of Capital Stock -- Preferred Stock." The
balance of the additional capital, approximately $16.6 million, is being raised
through the Common Stock Offering.
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.
By letter dated June 8, 1995, the OCC granted approval for the Acquisition on
the condition that the Company contribute capital to the Bank as contemplated
by the Bank's application to the OCC. See "Use of Proceeds."
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. As of the date of this
Prospectus, 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. See "Risk Factors--Possible Inability to Dispose of Branches
and Related Deposits."
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma consolidated balance sheet has been derived
from the historical balance sheet of the Company, adjusted to give effect to
the proposed acquisition of selected assets and the assumption of selected
liabilities in connection with the Acquisition, repayment of borrowings, and
the issuance and sale of Common Stock and Preferred Stock through the Offerings
as though such transactions had occurred on March 31, 1995. The unaudited pro
forma consolidated balance sheet is not necessarily indicative of the financial
position that would have been achieved had the transactions reflected therein
occurred on such date. The pro forma adjustments with respect to the
Acquisition reflect March 31, 1995 balances which are in accordance with the
terms of the Agreement and are subject to change prior to the closing date in
accordance with the terms of the Agreement. The unaudited pro forma
consolidated balance sheet also does not purport to project the balance sheet
of the Company as of the period shown or for any future period. For unaudited
information regarding the liabilities being assumed and assets being acquired
by the Bank in the Acquisition, see the Schedule of Liabilities to be Assumed
and Assets to be Acquired by Community Bank, N.A. located elsewhere in this
Prospectus.
17
<PAGE>
COMMUNITY BANK SYSTEM, INC.
PRO FORMA CONSOLIDATED STATEMENT OF CONDITION
PENDING ACQUISITION AND OFFERINGS AS IF THEY OCCURRED ON MARCH 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
---------------------------
OFFERINGS(2) PRO FORMA
AS REPORTED ACQUISITION(1) AND OTHER TOTAL
----------- -------------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Cash, cash equivalents
and due from banks... $ 50,722 $385,258(3) $(133,032) $ 302,948
Investment securities
(approximate market
value of $391,124)... 387,177 387,177
Loans................. 519,253 25,235 544,488
Less: Unearned dis-
count................ 23,872 23,872
Reserve for possi-
ble loan losses.... 6,424 6,424
-------- -------- ----------
Net loans........... 488,957 25,235 514,192
Premises and equip-
ment, net............ 10,652 5,314 15,966
Accrued interest re-
ceivable............. 8,007 160 8,167
Intangible assets,
net.................. 5,987 37,197(4) 43,184
Other assets.......... 8,778 8,778
-------- -------- --------- ----------
TOTAL ASSETS.......... $960,280 $453,164 $(133,032) $1,280,412
======== ======== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits
Non-interest bear-
ing................ $101,168 $ 41,183 $ 142,351
Interest bearing.... 621,213 409,693 1,030,906
-------- -------- ----------
Total deposits...... 722,381 450,876 1,173,257
Federal funds pur-
chased............. 43,765 (43,765)(5)
Term borrowings..... 115,550 (115,000)(5) 550
Accrued interest and
other liabilities.. 9,621 2,288(6) 11,909
-------- -------- --------- ----------
Total liabilities. 891,317 453,164 (158,765) 1,185,716
Shareholders' equity:
Preferred stock..... 9,000 9,000
Common stock........ 3,485 938 4,423
Surplus............. 14,885 15,795 30,680
Undivided profits... 51,768 51,768
Unrealized net gains
(losses) on avail-
able-for-sale secu-
rities............. (1,172) (1,172)
Shares issued under
employee stock
plan-unearned...... (3) (3)
-------- -------- --------- ----------
Total sharehold-
ers' equity...... 68,963 25,733 94,696
-------- -------- --------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY... $960,280 $453,164 $(133,032) $1,280,412
======== ======== ========= ==========
Tier I leverage ratio. 6.70% 4.25%
Total book value per
common share......... $24.73 $24.22
Tangible book value
per common share..... $22.59 $12.02
</TABLE>
The accompanying notes are an integral part of the pro forma consolidated
statement of condition.
18
<PAGE>
COMMUNITY BANK SYSTEM, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF CONDITION
MARCH 31, 1995
(UNAUDITED)
(1) Reflects pending acquisition of the Chase Branches after giving effect to
consummation of the Acquisition and related purchase accounting
adjustments by the Company as if they occurred on March 31, 1995.
(2) Reflects the Common Stock Offering of 750,000 shares at $25.50 per share
and the Preferred Stock Offering of 90,000 shares at $100.00 per share,
less estimated expenses of $2.4 million.
(3) Consideration received from Chase in connection with the Acquisition in
accordance with the Agreement.
(4) Includes core deposit value of $18.2 million to be amortized over 10 years
using an accelerated method and goodwill of $19.0 million to be amortized
on a straight-line basis over 25 years.
(5) Reflects payment of FHLB borrowings, except $550,000 3-year term borrowing
scheduled to mature in 1996.
(6) Reflects accrued interest payable of $1,957,520 and estimated post-
retirement benefit obligations other than pensions of $331,200.
CHASE DEPOSITS
The Chase Deposits totaled $450.9 million on March 31, 1995. As of April 30,
1995, the Chase Deposits totaled $425.2 million, which amount is subject to
further change due to run-off or growth of the aggregate deposit balance
occurring prior to the closing date. The following provides summary
information as of March 31, 1995 and December 31, 1994 regarding the Chase
Deposits. Rate information has been derived from records provided by Chase,
and is based on weighted-average rates in effect at March 31, 1995 and
December 31, 1994. Rate information with respect to public funds is not
readily available.
<TABLE>
<CAPTION>
MARCH 31, 1995
--------------------------------------
INDIVIDUALS,
PARTNERSHIPS
& CORPORATIONS
--------------- PUBLIC FUNDS TOTAL
BALANCE RATE BALANCE BALANCE
--------- ----- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Non-interest bearing demand............. $ 36,385 $ 4,798 $ 41,183
Interest-bearing demand................. 58,895 2.05% 21,278 80,173
Savings................................. 121,973 3.33% 6,488 128,462
Time deposits........................... 184,344 5.20% 16,714 201,058
--------- ------- --------
Total Deposits........................ $ 401,597 3.70% $49,278 $450,876
========= ======= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
--------------------------------------
INDIVIDUALS,
PARTNERSHIPS
& CORPORATIONS
--------------- PUBLIC FUNDS TOTAL
BALANCE RATE BALANCE BALANCE
--------- ----- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Non-interest bearing demand............. $ 41,401 $ 4,519 $ 45,920
Interest-bearing demand................. 63,621 2.03% 13,181 76,802
Savings................................. 124,416 3.17% 9,405 133,821
Time deposits........................... 186,796 4.86% 15,761 202,557
--------- ------- --------
Total deposits........................ $ 416,234 3.44% $42,866 $459,100
========= ======= ========
</TABLE>
19
<PAGE>
The following table summarizes the remaining maturities of the Chase Deposits
in amounts of $100,000 or more outstanding at March 31, 1995 and December 31,
1994. Maturity information with respect to public funds is not readily
available.
<TABLE>
<CAPTION>
AT MARCH 31, 1995 AT DECEMBER 31, 1994
----------------- --------------------
(IN THOUSANDS)
<S> <C> <C>
Non-public deposits
Less than three months............ $ 2,923 $ 2,054
Three months to six months........ 4,384 2,722
Six months to one year............ 2,186 4,281
Over one year..................... 3,277 3,780
------- -------
Total non-public deposits........... 12,770 12,837
Public funds........................ 16,714 15,761
------- -------
Total........................... $29,484 $28,598
======= =======
</TABLE>
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. See "Risk Factors."
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 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
of 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
20
<PAGE>
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. See "Risk Factors -- Lending Risks -- Credit Quality." 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 assumed 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 with 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. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations--Asset/Liability Management."
21
<PAGE>
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 therefore
no assurance can be given, anticipated loan growth could increase these 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) net 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.
22
<PAGE>
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:
<TABLE>
<CAPTION>
AMOUNT
-------------
(IN MILLIONS)
<S> <C>
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
=============
</TABLE>
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 $220,000 (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
23
<PAGE>
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
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. See "The Acquisition --
Potential Disposition." 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 reduced 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.
24
<PAGE>
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.
USE OF PROCEEDS
The primary purpose of the Offerings is to raise additional capital to
support the Bank's continued growth, including capital in form and amount
sufficient to maintain the Bank's Tier I leverage ratio at no lower than 4.0%
upon consummation of the Acquisition.
The net proceeds to be received by the Company from the Common Stock
Offering are estimated to be $16.6 million ($19.2 million if the Underwriters'
over-allotment option is fully exercised). The net proceeds to be received by
the Company from the Preferred Stock Offering are estimated to be $8.7
million. The aggregate net proceeds from the Offerings are therefore estimated
to be $25.3 million ($27.9 million if the Underwriters' over-allotment option
is fully exercised). The net proceeds of the Offerings will be contributed by
the Company to the Bank as capital surplus which is expected to qualify as
regulatory capital of the Bank under the regulatory capital guidelines of the
OCC. The Bank intends to use the net proceeds for general corporate purposes,
including the making of loans and investments in the ordinary course of
business. The Bank presently intends to use a portion of the net proceeds to
repay short-term borrowings. The aggregate outstanding amount of such short-
term borrowings was $158.8 million as of March 31, 1995. The average interest
rate of such borrowings was approximately 6.40% as of March 31, 1995, and all
such borrowings mature no later than April 30, 1995.
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at March 31, 1995 and as adjusted to give effect to the Offerings
(assuming the Underwriters' over-allotment option is not exercised). See
"Underwriting." The following should be read in conjunction with the
consolidated financial statements and notes thereto of the Company appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT MARCH 31, 1995
-----------------------
ACTUAL AS ADJUSTED(1)
------- --------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Shareholders' Equity:
Common Stock, par value $1.25 per share, 5,000,000
shares authorized, 2,788,150 shares issued (and
3,538,150 shares issued, as adjusted)............... $ 3,485 $ 4,423
Preferred Stock, par value $1.00 per share, 500,000
shares authorized, 90,000 shares issued and
outstanding as adjusted............................. -- 9,000
Surplus................................................ 14,885 30,680
Undivided profits...................................... 51,768 51,768
Unrealized net losses on available-for-sale securities. (1,172) (1,172)
Shares issued under employee stock plan -- unearned.... (3) (3)
------- -------
Total shareholders' equity........................... $68,963 $94,696
======= =======
</TABLE>
(1) Assumes that 750,000 shares of Common Stock are sold at $25.50 per share,
90,000 shares of Preferred Stock are sold at $100.00 per share and that
the net proceeds therefrom are approximately $25.7 million after estimated
expenses. If the Underwriters' over-allotment option is exercised in full,
862,500 shares of Common Stock would be sold, resulting in net proceeds
from the Offerings of approximately $28.4 million.
25
<PAGE>
MARKET FOR COMMON STOCK AND DIVIDENDS
The Common Stock has been traded over-the-counter on the Nasdaq National
Market under the symbol "CBSI" since September 16, 1986. On June 27, 1995, the
last reported sale and bid price of the Common Stock, as reported on the Nasdaq
National Market, was $24.25 and $24.00, respectively. The following table sets
forth the high and low bid quotations for the Common Stock, and the cash
dividends declared with respect thereto, for the periods indicated. The
quotations represent bid prices between dealers, do not include retail mark-
ups, mark-downs or commissions, and do not necessarily represent actual
transactions. There were 2,791,750 shares of Common Stock outstanding on June
1, 1995.
<TABLE>
<CAPTION>
PRICE RANGE CASH DIVIDEND
------------- DECLARED PER
HIGH LOW SHARE
------ ------ -------------
<S> <C> <C> <C>
1995:
First Quarter.................................. $27.00 $25.25 $0.30
Second Quarter (April 1 through June 27)....... 29.00 24.25 $0.30
1994:
First Quarter.................................. $30.75 $28.50 $0.27
Second Quarter................................. 30.50 28.50 0.27
Third Quarter.................................. 31.75 29.00 0.30
Fourth Quarter................................. 31.75 25.75 0.30
-----
$1.14
=====
1993:
First Quarter.................................. $30.50 $27.88 $0.25
Second Quarter................................. 30.00 26.00 0.25
Third Quarter.................................. 30.00 25.00 0.27
Fourth Quarter................................. 30.75 23.00 0.27
-----
$1.04
=====
</TABLE>
The Company has historically paid regular quarterly cash dividends on its
Common Stock, and declared a cash dividend of $0.30 per share for each of the
first and second quarters of 1995. The Board of Directors of the Company
presently intends to continue the payment of regular quarterly cash dividends
on the Common Stock, as well as to make payment of regularly scheduled
dividends on the Preferred Stock as and when due, subject to the Company's need
for those funds. See "Description of Capital Stock -- Preferred Stock."
However, because substantially all of the funds available for the payment of
dividends by the Company are derived from the Bank, future dividends will
depend upon the earnings of the Bank, its financial condition, its need for
funds and applicable governmental policies and regulations. See "Certain
Regulatory Considerations -- Limits On Dividends and Other Revenue Sources."
Prior to the Preferred Stock Offering, there has been no public market for
the Preferred Stock. The Company may make an application to have the Preferred
Stock approved for quotation on the Nasdaq National Market or on a national
exchange, although there can be no assurance that the Company will be able to
do so. If the Preferred Stock is approved for quotation on the Nasdaq National
Market, M.A. Schapiro intends to make a market in the Preferred Stock. The
Company anticipates that there will be fewer than 10 holders of Preferred Stock
after the Preferred Stock Offering.
26
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth selected consolidated historical financial
data of the Company as of and for each of the years in the five year period
ended December 31, 1994 (the "Year End Data") and the three months ended March
31, 1995 and March 31, 1994 (the "Quarterly Data"). The historical "Income
Statement Data", "End of Period Balance Sheet Data", "Per Share Data",
"Outstanding Shares", and certain "Selected Ratios" contained in the Year End
Data are derived from financial statements which have been audited by Coopers
& Lybrand, L.L.P., independent public accountants. All other information
contained in the Year End Data and all Quarterly Data are unaudited. All
financial information in this table should be read in conjunction with the
information contained in "Capitalization", "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and with the
Consolidated Financial Statements and the related notes thereto included
elsewhere in this Prospectus. See also "The Acquisition -- Impact of the
Acquisition on Operating Performance" for a discussion of the impact of the
Acquisition on certain of the Selected Consolidated Financial Information.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
---------------------- ----------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income........ $ 18,656 $ 13,508 $ 61,575 $ 54,642 $ 56,345 $ 59,364 $ 60,200
Interest expense....... 8,230 4,434 22,130 17,733 21,608 29,838 33,329
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income.... 10,426 9,074 39,445 36,909 34,737 29,526 26,871
Provision for possible
loan losses........... 254 239 1,702 1,506 2,727 2,516 2,960
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income af-
ter provision for pos-
sible loan losses..... 10,172 8,835 37,743 35,403 32,010 27,010 23,911
Non-interest income.... 1,397 1,229 5,120 4,764 5,082 4,623 4,820
Non-interest expense... 7,024 6,256 26,498 24,827 26,447 26,665 25,873
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income
taxes................. 4,545 3,808 16,365 15,340 10,645 4,968 2,858
Provision for income
taxes................. 1,793 1,408 6,256 5,765 3,139 1,296 753
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income............. $ 2,752 $ 2,400 $ 10,109 $ 9,575 $ 7,506 $ 3,672 $ 2,105
========== ========== ========== ========== ========== ========== ==========
END OF PERIOD BALANCE
SHEET DATA:
Total Assets........... $ 960,280 $ 768,087 $ 915,501 $ 713,053 $ 669,274 $ 634,492 $ 617,851
Net Loans.............. 495,381 426,470 483,079 417,871 362,356 348,569 364,733
Earning Assets......... 882,558 722,023 861,599 671,415 625,342 577,986 569,148
Total Deposits......... 722,381 622,218 679,638 588,315 557,915 575,876 561,207
Long-term debt and cap-
ital lease obliga-
tions................. 550 567 550 592 139 862 1,020
Shareholders' equity... 68,963 62,729 66,290 61,986 53,417 48,244 46,440
AVERAGE BALANCE SHEET
DATA:
Total Assets........... $ 929,778 $ 730,155 $ 808,948 $ 684,863 $ 650,804 $ 622,927 $ 613,157
Net Loans.............. 488,436 419,874 446,135 382,680 351,241 352,921 370,190
Earning Assets......... 877,322 680,577 756,871 640,070 601,636 576,323 565,770
Total Deposits......... 702,233 601,747 651,479 598,860 585,571 566,447 556,893
Long-term debt and cap-
ital lease obliga-
tions................. 550 576 557 256 379 924 1,095
Shareholders' equity... 67,151 62,636 64,033 57,298 50,868 47,182 46,611
PER SHARE DATA:
Net Income............. $ 0.98 $ 0.85 $ 3.59 $ 3.43 $ 2.76 $ 1.36 $ 0.78
Cash dividend declared. 0.30 0.27 1.14 1.04 0.90 0.76 0.76
Period-end book value.. 24.73 22.81 23.78 22.55 19.81 17.93 17.18
Period-end tangible
book value............ 22.59 22.66 21.59 22.39 19.58 17.58 16.62
OUTSTANDING SHARES:
Average during period.. 2,815,377 2,807,651 2,814,710 2,788,330 2,722,093 2,694,101 2,703,698
End of period.......... 2,788,150 2,749,518 2,788,150 2,748,318 2,696,760 2,690,260 2,703,385
SELECTED RATIOS:
Return on average total
assets(1)............. 1.20% 1.33% 1.25% 1.40% 1.15% 0.59% 0.34%
Return on average
shareholders' equi-
ty(1)................. 16.62 15.54 15.79 16.71 14.76 7.78 4.52
Dividend payout ratio.. 30.40 30.93 31.24 29.67 32.26 55.74 97.62
Net interest margin
(taxable equivalent
basis)(1)............. 4.88 5.51 5.30 5.90 5.82 5.14 4.77
Non-interest income to
average assets (ex-
cluding security gains
and losses)(1)........ 0.61 0.68 0.69 0.70 0.75 0.78 0.79
Efficiency ratio....... 58.72 59.68 57.94 58.45 65.48 75.55 78.39
Non-performing assets
to period-end total
loans and other real
estate owned.......... 0.69 0.73 0.72 0.73 0.67 1.56 1.38
Allowance for loan
losses to period-end
loans................. 1.30 1.34 1.30 1.37 1.37 1.24 0.99
Allowance for loan
losses to period-end
non-performing loans.. 201.94 227.48 192.79 238.67 310.05 185.40 112.64
Allowance for loan
losses to period-end
non-performing assets. 188.04 183.40 179.67 186.06 205.72 78.81 71.35
Net charge-offs (recov-
eries) to average to-
tal loans(1).......... 0.09 0.23 0.25 0.20 0.59 0.51 0.59
Average net loans to
average total depos-
its................... 69.55 69.78 68.48 63.90 59.98 62.30 66.47
Period-end total share-
holders' equity to pe-
riod end assets....... 7.18 8.17 7.24 8.69 7.98 7.60 7.52
Tier I capital to risk-
adjusted assets....... 12.41 14.62 12.43 14.87 13.13 13.01 11.62
Total risk-based capi-
tal to risk-adjusted
assets................ 13.65 15.87 13.68 16.12 14.37 13.96 12.56
Tier I leverage ratio.. 6.70 8.07 6.80 8.46 7.90 7.49 7.88
Ratio of earnings to
fixed charges:
Including interest on
deposits.............. 154.94 185.22 173.40 185.75 148.72 116.54 108.53
Excluding interest on
deposits.............. 290.89 802.70 500.78 1,753.02 2,233.27 1,397.39 614.03
</TABLE>
- -------
(1) Annualized for the three months ended March 31, 1995 and 1994
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion is intended to facilitate an understanding and
assessment of significant changes in trends related to the financial condition
of the Company and the results of its operations. The following discussion and
analysis should be read in conjunction with the Selected Consolidated Financial
Data and the Company's Consolidated Financial Statements and related notes
thereto appearing elsewhere in this Prospectus. All references in the
discussion to financial condition and results of operations are to the
consolidated position and results of the Company and its subsidiaries taken as
a whole.
RESULTS OF OPERATIONS
In the first quarter of 1995, the Company's net income increased $352,000 or
14.6% over the first quarter of 1994. During this period, earnings per share
rose 15.3% to $0.98, a record quarterly level for the Company. In 1994, the
Company's net income increased 5.6% from $9.6 million in 1993 to $10.1 million,
a record level for the Company. In 1994, earnings per share reached $3.59, up
4.7% over the $3.43 reported in 1993. 1992's net income was $7.5 million or
$2.76 per share. The Company's earnings growth in the first quarter of 1995 and
in 1994 was influenced by the following factors:
. Net interest income in the first quarter of 1995 on a fully tax-
equivalent basis increased 14.2% over the first quarter of 1994 due to
earning asset growth of 28.9%. During 1994, net interest income on a
fully tax-equivalent basis increased 6.3% over 1993, reflecting earning
asset growth of 18.2%, which more than offset the impact of a 59 basis
point decline in the Company's net interest margin from its historical
annual high in 1993.
. Non-interest income was up 13.7% during the first quarter of 1995 over
the first quarter of 1994, reflecting higher fees from sales of
annuities, mutual funds, and employee benefit trust products, as well as
greater service charges and commissions from an expanded customer base
gained from acquisitions completed in 1994. During 1994, non-interest
income was up 7.5% over 1993 due largely to continued strength in
fiduciary services income, the first-year impact of new investment
product sales, and growth in general service charges, commissions and
fees; excluding net losses on the sale of investment securities and other
assets, non-interest income rose 17.6% over 1993.
. Non-interest expense increased 12.3% during the first quarter of 1995
over the first quarter of 1994. More than half of this increase reflected
higher personnel costs due to acquisitions completed in the second half
of 1994. Staff has also been added to support business development
efforts. The remaining increases were related to greater occupancy costs,
higher FDIC insurance costs and increased deposit intangible amortization
expense. In addition, certain other costs were higher due to activities
in preparation for the Acquisition. During 1994, non-interest expense
increased 6.7% over 1993, reflecting increased staff related to four
branches acquired by the Bank in 1994, certain related conversion costs,
and amortization of deposit intangibles associated with these branch
purchases.
. Loan loss provision expense was up $15,000, or 6.3%, during the first
quarter of 1995 over the first quarter of 1994. During this period, net
charge-offs were $112,000 or 0.09% of average loans, with the provision
covering net charge-offs by 2.3 times. During 1994, loan loss provision
expense rose 13.0%, generally consistent with record loan growth of
15.6%; net charge-offs were $1.1 million, or 0.25% of average loans, with
the provision covering net charge-offs by 1.5 times. Effective January 1,
1995, the Company adopted FASB Statement No. 114, "Accounting by
Creditors for Impairment of a Loan" and related Statement No. 118, which
had no effect on the Company's financial statements as of and for the
three months ended March 31, 1995.
These results reflect the fourth consecutive year of increased earnings since
the Company consolidated its five commercial bank subsidiaries into a single-
bank entity and ceased operations of unprofitable non-bank subsidiaries. No
further expenses relating to this consolidation were incurred in 1994 or 1995.
In 1993, one-time expenditures related to the consolidation amounted to
$164,000, due primarily to costs associated with closing the Bank's marketing
representative office in Ottawa, Canada. In 1992, consolidation-related costs
were a substantially greater $812,000.
28
<PAGE>
The Company's return on average stockholders' equity was 16.62% during the
first quarter of 1995 compared with 15.54% during the first quarter of 1994.
The return on average total assets for the first quarter of 1995 was 1.20%, as
compared to 1.33% for the first quarter of 1994. The Company's return on
average stockholders' equity was 15.79% in 1994, as compared to 16.71% in 1993
and 14.76% in 1992. The return on average total assets for 1994 was 1.25%, as
compared to 1.40% for 1993 and 1.15% for 1992.
NET INTEREST INCOME
Net interest income, the largest single component of the Company's earnings,
represents the difference between income earned on loans and other interest-
earning assets and interest expense paid on deposits and borrowing. Net
interest margin is the difference between the gross yield on interest-earning
assets and the cost of interest-bearing funds as a percent of average interest-
earning assets.
The Company's net interest income is affected by the change in the amount and
mix of interest-earning assets and interest-bearing liabilities, referred to as
a "volume change." It is also affected by changes in yields earned on assets
and rates paid on deposits and other borrowed funds, referred to as a "rate
change."
29
<PAGE>
The following table sets forth certain information concerning average
interest-earning assets and interest-bearing liabilities and the yields and
rates thereon. Interest income and resultant yield information in the table is
on a fully tax-equivalent basis for the three-year period ended December 31,
1994 and the three months ended March 31, 1995 and March 31, 1994. Marginal
federal income tax rates of 22%, 34% and 34% were utilized for 1992, 1993 and
1994, respectively and 34% and 35%, respectively, for the first quarters of
1994 and 1995. Averages are computed on daily average balances for each month
in the period divided by the number of days in the period. Yields and amounts
earned include loan fees. Non-accrual loans have been included in interest-
earning assets for purposes of these computations.
<TABLE>
<CAPTION>
ANNUALIZED FOR THE
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------------
1995 1994
------------------------------ ------------------------------
AVERAGE AVERAGE
AVERAGE AMOUNT OF YIELD/RATE AVERAGE AMOUNT OF YIELD/RATE
BALANCE INTEREST PAID BALANCE INTEREST PAID
-------- --------- ---------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Federal funds sold and
securities purchased under
agreements to resell........ $ 2,266 $ 33 5.87% $ 0 $ 0 0.00%
Time deposits in other banks. 0 0 0.00 90 1 4.77
Taxable investment securities 367,710 6,851 7.56 236,871 3,801 6.51
Non-taxable investment
securities.................. 18,910 439 9.43 23,742 547 9.35
Loans (net of unearned
discount)................... 488,436 11,471 9.52 419,874 9,335 9.02
-------- ------- -------- ------
Total interest-earning assets 877,322 18,794 8.69 680,577 13,684 8.15
Non-interest earning assets:
Cash and due from banks...... 31,690 31,191
Premises and equipment...... 10,665 10,051
Other assets................. 19,524 11,821
Less allowance for loan losses (6,320) (5,697)
Net unrealized gains/(losses)
on available-for-sale
portfolio................... (3,103) 2,212
-------- --------
Total........................ $929,778 $730,155
======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing liabilities
Savings deposits............. $303,575 $ 2,002 2.68% $313,125 $1,928 2.50%
Time deposits................ 295,808 3,889 5.33 196,099 1,998 4.13
Term borrowings.............. 153,075 2,333 6.18 58,274 500 3.48
Long-term borrowing.......... 550 6 4.42 576 7 4.93
-------- ------- -------- ------
Total interest-bearing
liabilities................. 753,008 8,230 4.43 568,074 4,433 3.16
Non-interest-bearing
liabilities
Demand deposits.............. 102,850 92,523
Other liabilities............ 6,769 6,922
Stockholders' equity.......... 67,151 62,636
-------- --------
Total........................ $929,778 $730,155
======== ========
Net interest income........... $10,564 $9,251
======= ======
Net yield on interest-earning
assets....................... 4.88% 5.51%
==== ====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1994 1993 1992
------------------------------ ------------------------------ ------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE AMOUNT OF YIELD/RATE AVERAGE AMOUNT OF YIELD/RATE AVERAGE AMOUNT OF YIELD/RATE
BALANCE INTEREST PAID BALANCE INTEREST PAID BALANCE INTEREST PAID
-------- --------- ---------- -------- --------- ---------- -------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Federal funds sold and
securities purchased under
agreements to resell........ $ 0 $ 0 0.00% $ 1,669 $ 53 3.18% $ 7,624 $ 285 3.74%
Time deposits in other banks. 25 1 4.59 146 20 13.70 453 25 5.52
Taxable investment securities 287,892 19,444 6.75 228,661 16,550 7.24 212,328 17,057 8.03
Non-taxable investment
securities.................. 22,819 2,103 9.22 26,914 2,631 9.78 29,990 2,266 7.56
Loans (net of unearned
discount)................... 446,135 40,699 9.12 382,680 36,236 9.47 351,241 36,932 10.52
-------- ------- -------- ------- -------- -------
Total interest-earning assets 756,871 62,247 8.23 640,070 55,490 8.67 601,636 56,565 9.41
Non-interest earning assets:
Cash and due from banks...... 32,411 29,056 32,832
Premises and equipment...... 10,335 10,673 11,858
Other assets................. 15,896 10,439 9,120
Less allowance for loan losses (5,860) (5,375) (4,642)
Net unrealized gains/(losses)
on available-for-sale
portfolio................... (705) 0 0
-------- -------- --------
Total........................ $808,948 $684,863 $650,804
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing liabilities
Savings deposits............. $323,443 $ 8,249 2.55% $320,966 $ 8,677 2.70% $301,228 $10,442 3.47%
Time deposits................ 229,449 9,964 4.34 190,166 8,285 4.36 201,229 10,909 5.42
Term borrowings.............. 87,334 3,917 4.49 22,979 771 3.36 8,373 257 3.07
Long-term borrowing..........
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities................. 640,226 22,130 3.46 534,111 17,733 3.32 510,830 21,608 4.23
Non-interest-bearing
liabilities
Demand deposits.............. 98,587 87,728 83,114
Other liabilities............ 6,102 5,726 5,992
Stockholders' equity.......... 64,033 57,298 50,868
-------- -------- --------
Total........................ $808,948 $684,863 $650,804
======== ======== ========
Net interest income........... $40,117 $37,757 $34,957
======= ======= =======
Net yield on interest-earning
assets....................... 5.30% 5.90% 5.82%
==== ===== =====
</TABLE>
30
<PAGE>
The Company's net interest income, on a fully tax equivalent basis, was $10.6
million during the first quarter of 1995. This represented a $1.3 million or
14.2% increase over the first quarter of 1994. This increase resulted from
growth in interest-earning assets, primarily taxable investment securities and
loans. The Company's net interest income, on a fully tax-equivalent basis, was
$40.1 million in 1994. This represented a $2.4 million or 6.3% increase from
1993 and resulted primarily from growth in interest-earning assets. Net
interest income grew $2.8 million or 8.0% in 1993 over 1992. Over $600,000 of
1993's growth reflects premiums received on $12.9 million in investment
securities called for redemption.
Average interest-earning assets grew by $196.7 million, or 28.9%, during the
first quarter of 1995 over the first quarter of 1994. Average interest-earning
assets grew by $116.8 million in 1994, after increasing by $38.4 million in
1993 and $25.3 million in 1992. Slightly less than half of 1994's growth was
made possible by an expanded deposit base, with branch acquisitions
contributing approximately 60% of that deposit increase. Greater short-term
borrowing from the FHLB provided the balance of funding needed to support 1994
interest-earning asset growth. During the first quarter of 1995, average loans
increased $68.6 million or 16.3% over the first quarter of 1994 while average
investments increased $126.0 million or 48.3% during the first quarter of 1995
over the first quarter of 1994. In 1994, average loans increased $63.5 million
or 16.6% over 1993, while average investments increased $55.1 million or 21.6%
over 1993. The components of 1993's growth were a 9.0% increase in average
loans over 1992 and a 5.5% rise in average investments.
As discussed above, the increase in interest-earning assets in 1994 was in
excess of the growth funded by the expanded deposit base provided by the Bank's
branch acquisitions. This expanded deposit base contributed approximately $14.1
million of the increase in average time deposits in 1994, with the balance
reflecting a shift in consumer preference from holding funds in lower yielding
savings and money market accounts. A substantial portion of the increase in
investment securities was funded with borrowings from the FHLB, reflective of
the Bank's stated objective to actively utilize its tangible capital.
Average borrowings increased by $64.3 million in 1994 to $87.3 million or to
11.5% of the interest-earning assets. In 1993 average borrowings were $23.0
million or 3.6% of interest-earning assets. This increased leverage had a
significantly favorable impact on the Company's net interest income as a result
of the positive spread between the yield on earning assets and cost of borrowed
funds.
Average borrowings for the first quarter of 1995 were $153.6 million, an
increase of $94.8 million from the first quarter of 1994 and $24.6 million from
the fourth quarter of 1994. Similar to the preceding two years, a substantial
portion of the increases supported investment security purchases. Average
investments outstanding for the first quarter of 1995 rose $30.7 million over
1994's fourth quarter due to less attractive investment opportunities in a
falling rate environment; most of the increase reflects the full quarter's
effect of purchases made toward the end of 1994. Virtually all of the Bank's
borrowings are expected to be replaced with lower cost core deposit liabilities
assumed in the Acquisition.
As more fully explained in "Business--Loan Portfolio," growth in average
loans of 16.6% in 1994 and 9.0% in 1993 reflects the following general trends:
. Expanded residential real estate lending, which grew rapidly through
year-end 1993, largely due to refinancing caused by the historically low
mortgage rate environment, with growth slowing thereafter as rates began
to rise;
. A relatively steady increase throughout the period in lending to small-
and medium-sized businesses;
. An increase in indirect installment lending in the spring of 1993 after a
three-and-one-half year decline, with accelerated growth in the spring of
1994 as new and used car sales climbed nationwide; and
. Relatively stagnant general direct installment lending until the spring
of 1994, with moderate improvement thereafter.
31
<PAGE>
The same trends experienced in 1994 have continued through the first quarter
of 1995, explaining growth in average loans of $68.6 million or 16.3% over the
comparable 1994 period.
Average net interest margin decreased 63 basis points to 4.88% in the first
quarter of 1995 compared with the first quarter of 1994. This decline in net
interest margin was due to a 54 basis point increase in the yield on interest-
earning assets compared to an increase of 127 basis points in the rate on
interest-bearing liabilities. During this period, the cost of funds rate has
increased 118 basis points, largely due to an increasing volume of higher cost
borrowings versus lower cost deposits (whose rates have lagged). The yield on
loans has risen 50 basis points as lower yielding loans have gradually matured
or repriced and have been replaced at higher yields. The yield on investments
rose 88 basis points due to improved investment opportunities and an expanded
portfolio. However, the $196.7 million increase in interest-earning assets more
than offset the impact of this margin decline on net interest income.
Average net interest margin decreased 60 basis points to 5.30% in 1994, as
compared to 5.90% in 1993 and 5.82% in 1992. For the fourth quarter of 1994,
the average net interest margin was 5.11%. This most recent level reflects a
decline from the peak achieved in the fourth quarter of 1992 of 6.16%. During
1993, rates on interest-bearing liabilities fell more slowly than the decline
in interest-earning asset yields. In 1994, interest-earning asset yields
continued to decrease through early spring before turning up with a lag in
response to the rising prime and other financial market rates. As such, yields
ended the year slightly higher than they began. On the other hand, the average
rate paid on interest-bearing liabilities increased in the first quarter of
1994, coincident with the rise in the Federal Funds rate, and ended the year
almost three quarters of a point higher than where it started.
The above rate patterns reflect the changing financial market environment and
the structure of the Bank's balance sheet. More specifically, the Company's
deposits have a shorter maturity or are subject to repricing more frequently
than its loans and investments, both of which are more fixed-rate in nature but
with a high degree of cash flow. As a result, with the exception of prime rate-
based loans, the Bank's overall yield on interest-earning assets adjusts more
slowly than rates paid on certificates of deposit; moderating this latter
impact is the typical lag of rate changes on regular savings and money market
accounts behind certificates of deposit repricing. Rates on the Bank's FHLB
borrowing, the majority of which are overnight or mature within 30 days, mirror
the rise in the Federal Funds rate.
The effect of interest rate changes on prepayment patterns over the 1992-1994
period had a modest impact on the Bank's performance.
During this time period, the weighted average maturity of the Bank's mortgage
backed security ("MBS") portfolio was less than 12.5 years in stated final
maturity. Thus, although the portfolio was subject to variations in anticipated
prepayments, the changes experienced were relatively mild in nature. In
addition, the average remaining premium paid on the portfolio ranged from
100.5% to 101.5% of par; therefore, even with increases or decreases in
anticipated prepayments, the effect on net interest income was small.
The Bank's residential mortgage portfolio, like most financial institution
portfolios during this time period, experienced a noticeable increase in
prepayments as a result of customers choosing to refinance into lower cost
mortgages. In order to mitigate this risk, the Bank embarked upon a program to
sell conforming residential mortgages into the secondary market. In May 1994,
the Bank became an approved originator of mortgages for the Federal National
Mortgage Association.
32
<PAGE>
Net interest income may also be analyzed by segregating the volume and rate
components of interest income and interest expense. The following table sets
forth for the periods indicated a summary of the changes in net interest income
on a fully tax equivalent basis for each major category of interest-earning
assets and interest-bearing liabilities resulting from volume changes and rate
changes:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1995 COMPARED TO
THREE MONTHS ENDED
MARCH 31, 1994 1994 COMPARED TO 1993 1993 COMPARED TO 1992
---------------------------------- --------------------------------- ---------------------------------
INCREASE (DECREASE)
DUE INCREASE (DECREASE) INCREASE (DECREASE)
TO CHANGE IN (1) DUE TO CHANGE IN (1) DUE TO CHANGE IN (1)
--------------------- --------------------- ---------------------
VOLUME RATE NET CHANGE VOLUME RATE NET CHANGE VOLUME RATE NET CHANGE
---------- ---------- ---------------------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earned
on:
Federal funds
sold and
securities
purchased under
agreement to
resell......... $ 33 $ 0 $ 33 $ (27) $ (26) $ (53) $ (223) $ (9) $ (232)
Time deposits in
other banks.... (1) 0 (1) (11) (8) (19) (17) 12 (5)
Taxable
investment
securities..... 2,361 689 3,050 4,070 (1,176) 2,894 1,312 (1,819) (507)
Non-taxable
investment
securities..... (140) 32 (108) (384) (144) (528) (232) 597 365
Loans (net of
unearned
discount)...... 1,595 541 2,136 5,840 (1,377) 4,463 3,158 (3,854) (696)
--------- ---------- -------- --------- ---------- ------ --------- ---------- -------
Total interest-
earning
assets(2)...... $ 4,157 $ 953 $ 5,110 $ 9,694 $ (2,937) $6,757 $ 3,509 $ (4,584) $(1,075)
========= ========== ======== ========= ========== ====== ========= ========== =======
Interest paid on:
Savings
deposits....... $ (314) $ 388 $ 74 $ 65 $ (493) $ (428) $ 702 $ (2,467) $(1,765)
Time deposits... 1,203 688 1,891 1,717 (38) 1,679 (600) (2,024) (2,624)
Short-term
borrowing...... 1,241 592 1,833 2,812 334 3,146 455 59 514
Long-term debt.. 0 (1) (1) (6) 6 0 (10) 10 0
--------- ---------- -------- --------- ---------- ------ --------- ---------- -------
Total interest-
bearing
liabilities(2). $ 1,699 $ 2,098 $ 3,798 $ 3,627 $ 770 $4,397 $ 985 $ (4,860) $(3,875)
========= ========== ======== ========= ========== ====== ========= ========== =======
Net interest
income(2)....... $ 7,086 $ (5,773) $ 1,313 $ 6,403 $ (4,043) $2,360 $ 2,304 $ 496 $ 2,800
========= ========== ======== ========= ========== ====== ========= ========== =======
</TABLE>
(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of change in each.
(2) Changes due to volume and rate are computed from the respective changes in
average balances and rates of the totals; they are not a summation of the
changes of the components.
As a result of narrower margins, all of the increase in the Company's net
interest income for the three months ended March 31, 1995 and for the full year
ended 1994 was due to interest-earning asset growth. More specifically,
approximately $7.1 million of 1995's growth in net interest income was due to
higher volume partially offset by $5.8 million from narrower margins. In 1994
net interest income increased $6.4 million due to higher volume partially
offset by $4.0 million from narrower margins. This mix is in contrast to 1993's
improvement in net interest income of $2.8 million of which wider margins
contributed approximately $500,000.
NON-INTEREST INCOME
Non-interest income is comprised principally of fees from banking operations
and revenues from one-time events, such as net gains/losses from the sale of
investments, loans, and miscellaneous assets. Management's focus is to build
recurring fee-based income sources and to take advantage of one-time events
when they support a specific business objective.
During the first quarter of 1995, non-interest income was $1.4 million, up
$168,000, or 13.7%, from the first quarter of 1994. Income from service charges
on deposits explains more than 58% of this change, and is the result of
overdraft fees and other fees associated with increased deposit accounts from
branches acquired during 1994.
33
<PAGE>
In 1994, non-interest income was $5.1 million as compared to $4.8 million in
1993 and $5.1 million in 1992. All subcategories of recurring non-interest
income showed an increase in 1994 but were partially offset by non-recurring
investment security losses.
The following table sets forth information by category of non-interest income
for the Company for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -------------------------
1995 1994 1994 1993 1992
--------- --------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Fiduciary and investment
services..................... $ 340 $ 325 $ 1,380 $ 1,113 $ 898
Service charges on deposits... 405 356 1,621 1,478 1,419
Overdraft fees................ 257 208 971 901 847
Other service charges and
fees......................... 337 311 1,519 1,186 1,455
Other operating income........ 58 32 131 101 279
Investment security gains
(losses)..................... 0 (3) (502) (15) 184
--------- --------- ------- ------- -------
Total....................... $ 1,397 $ 1,229 $ 5,120 $ 4,764 $ 5,082
========= ========= ======= ======= =======
Total non-interest income
(excluding investment
security gains (losses)) as a
percentage of average
assets(1).................... 0.61% 0.68% 0.69% 0.70% 0.75%
</TABLE>
(1) Annualized for the three month periods ended March 31, 1995 and 1994.
Income from fiduciary services increased $15,000, or 4.6%, during the first
quarter of 1995 over the first quarter of 1994 due primarily to growth in
employee benefit trust services. Additionally, other service charges rose due
to significant growth in the sale of annuities and mutual funds, as well as the
reinstatement of a holiday extension program for installment loans. Growth was
partially offset by declining merchant credit card discount fees attributable
to the loss of one large vendor account. In 1994, income from fiduciary
services increased $267,000, or 24.0% from 1993, to approximately $1.4 million,
primarily attributable to increased business development efforts. Service
charges and overdraft fees grew to approximately $2.6 million, a 9.0% increase
due to a higher deposit base and the Company's commitment to reduce fee
waivers. Investment services (selling mutual funds and annuities through the
Bank's branch network and financial service representatives in selected
geographic markets) was a new product offered in 1994. Income generated from
this product in 1994 was $148,000, and is included in other service charges and
fees.
There were no investment security gains or losses during the first quarter of
1995, compared to a loss of $3,000 during the first quarter of 1994. Investment
security losses of $502,000 in 1994 were caused by the sale of approximately
$27.2 million (carrying value) in investment securities. Investment security
losses in 1993 were $15,000, while investment security gains in 1992 were
$184,000. The $318,000 decline in non-interest income from 1992 to 1993 was due
to this difference in investment security gains and the absence of fees
associated with the Company's non-bank computer subsidiary, which was closed in
late 1992.
34
<PAGE>
NON-INTEREST EXPENSE
The following table sets forth information by category of non-interest
expenses of the Company for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -------------------------
1995 1994 1994 1993 1992
--------- --------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Salary expense................ $ 2,840 $ 2,542 $10,486 $ 9,631 $ 9,932
Payroll taxes and benefits.... 871 742 2,612 2,321 2,010
Net occupancy expense......... 540 533 2,043 1,814 1,849
Equipment expense............. 426 415 1,697 1,642 2,327
Professional fees............. 298 286 1,282 1,528 1,417
Data processing expense....... 490 525 2,573 2,193 1,805
Amortization.................. 120 41 355 166 348
Stationary and supplies....... 222 132 739 696 898
Deposit insurance premiums.... 381 331 1,390 1,317 1,308
Other......................... 836 709 3,321 3,519 4,553
--------- --------- ------- ------- -------
Total..................... $ 7,024 $ 6,256 $26,498 $24,827 $26,447
========= ========= ======= ======= =======
Total operating expenses as a
percentage of average
assets(1).................... 3.06% 3.47% 3.28% 3.63% 4.06%
Efficiency ratio(2)........... 58.72% 59.68% 57.94% 58.45% 65.48%
</TABLE>
(1) Annualized for the three month periods ended March 31, 1995 and 1994.
(2) Non-interest expense divided by recurring operating income
Non-interest expenses increased by $768,000, or 12.3%, during the first
quarter of 1995 over the first quarter of 1994. Non-interest expenses increased
$1.7 million, or 6.7%, to $26.5 million in 1994, compared to a decline of $1.6
million, or 6.1%, from 1992 to 1993. Salary and benefit expenses comprised the
largest share of non-interest expense, increasing $427,000, or 13.0%, during
the first quarter of 1995 over the first quarter of 1994, and increasing 9.6%
from 1993 to 1994 after decreasing 0.8% from 1992 to 1993. The increase in the
first quarter of 1995 was due largely to 43 additional full-time employees
resulting in a total of 440 employees as of March 31, 1995. Most of these new
employees were hired in the second half of 1994 to support four new branches
and business development efforts. The increase in personnel expense in 1994
reflected the partial year impact of these same new hires. The decrease from
1992 to 1993 was due to the closing of a non-bank subsidiary late in 1992.
Amortization, supplies, net occupancy, and FDIC insurance premiums increased
in the first quarter of 1995 compared to the first quarter of 1994 and in 1994
in comparison to 1993, both periods as a result of the Bank's acquisition of
three Columbia Savings FSA branches from the Resolution Trust Company in June
1994 and the Bank's acquisition of Chase's Cato, New York branch in October
1994.
INCOME TAX EXPENSE
Total income tax expense of the Company was approximately $1.8 million for
the first quarter of 1995 versus $1.4 million for the first quarter of 1994,
and $6.3 million, $5.8 million and $3.1 million for the years 1994, 1993, and
1992, respectively. The Company's effective income tax rate for the first
quarter of 1995 and years 1994, 1993 and 1992 was 39.5%, 38.2%, 37.6%, and
29.5%, respectively. Year-to-year increases are the result of higher taxable
operating revenues and a higher effective tax rate. The higher effective tax
rate for the first quarter of 1995 over previous periods is due to the
Company's decreasing proportion of tax-exempt municipal investments.
Effective January 1993, the Company adopted the provisions of SFAS No. 109,
"Accounting for Income Taxes", which requires an asset-liability approach to
recognizing the tax effects of temporary differences between tax and financial
reporting. In prior years, the Company accounted for the tax effects of timing
differences between tax and financial reporting using Accounting Principle
Board Opinion Number 11. This change had no significant effect on the 1993
consolidated financial statements.
35
<PAGE>
ASSET/LIABILITY MANAGEMENT
Asset/liability management involves the maintenance of an appropriate balance
between interest sensitive assets and interest sensitive liabilities to reduce
interest rate exposure while also providing liquidity to satisfy the cash flow
requirements of operations and to meet customers' fluctuating demands for
funds, either in terms of loan requests or deposit withdrawals.
The Company's management has placed an increased emphasis on interest rate
sensitivity management. Interest-earning assets and interest-bearing
liabilities are those which have yields or rates which are subject to change
within a future time period due to maturity of the instrument or changes in the
rate environment. Gap refers to the difference between interest-earning assets
and interest-bearing liabilities repricing within given time frames. As a
result, major fluctuations in net interest income and net earnings could occur
due to imbalances between the amounts of interest-earning assets and interest-
bearing liabilities, as well as different repricing characteristics.
Asset/liability management seeks to protect earnings by maintaining an
appropriate balance between interest-earning assets and interest-bearing
liabilities in order to minimize fluctuations in the net interest margin and
net earnings in periods of volatile interest rates.
A tool known as a gap maturity matrix is used to isolate interest rate
sensitivity or repricing mismatches between assets and liabilities. The
diagonal band of bold faced numbers in boxes on the matrix below indicates
basic matching of asset/liability repricing and maturity opportunities.
Outstandings shown above the band are assets subject to repricing more quickly
than their supporting liabilities (asset sensitivity). Outstandings shown below
the band are liabilities subject to repricing more quickly than the assets
which they support (liability sensitivity).
36
<PAGE>
SOURCES
OF
FUNDS
The following is the Company's gap maturity matrix:
AS OF MARCH 31, 1995(1)(2)
<TABLE>
<CAPTION>
USES OF FUNDS
>60 37-60 25-36 13-24 181-360 91-180 61-90 31-60 1-30
ASSETS MONTHS MONTHS MONTHS MONTHS DAYS DAYS DAYS DAYS DAYS DAILY TOTALS
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
210,182 99,525 153,371 153,828 80,520 63,972 12,906 11,938 174,038 960,280
LIABILITIES 5.16% 8.41% 8.86% 8.64% 8.65% 8.44% 8.82% 8.83% 9.51% 8.04%
--------------------------------------------------------------------------------------------------------------
>60 387,694 210,182 99,525 77,987 387,694
Months............. 1.35% 3.81% 7.06% 7.51% 5.39%
37-60 19,955 19,955 19,955
Months............. 6.27% 2.58% 2.58%
25-36 11,313 11,313 11,313
Months............. 5.74% 3.11% 3.11%
13-24 52,904 44,117 8,788 52,904
Months............. 5.01% 3.85% 3.63% 3.81%
181-360 126,672 126,672 126,672
Days............... 4.58% 4.05% 4.05%
91-180 95,828 18,369 77,460 95,828
Days............... 4.18% 4.45% 4.47% 4.46%
61-90 35,843 3,061 32,783 35,843
Days............... 5.32% 3.33% 3.13% 3.14%
31-60 23,909 23,909 23,909
Days............... 5.08% 3.36% 3.36%
1-30 162,398 7,281 12,906 11,938 130,274 162,398
Days 6.08% 2.36 2.74 2.75 3.43% 3.28%
Daily.............. 43,765 43,765 43,765
6.13% 3.38% 3.38%
------- ------- ------ ------- ------- ------ ------ ------ ------ ------- -------
Totals(3).......... 960,280 210,182 99,525 153,371 153,828 80,520 63,972 12,906 11,938 174,038 0 960,280
------- ------- ------ ------- ------- ------ ------ ------ ------ ------- ----- -------
Net Interest
Spread............. 3.67% 3.81% 7.06% 5.49% 4.08% 4.42% 3.13% 2.74% 2.75% 3.42% 0.00% 4.36%
</TABLE>
(1) Outstandings (dollars in thousands) and yields by repricing interval (days
or months)
(2) 85% of savings from accounts of individuals, partnerships and corporations
(IPC) are treated as >60 months. 15% of IPC Savings spread over 24 months.
100% of IPC Money Market (MM) treated as 91-180 days. 100% of savings from
accounts of U.S. government, state and local municipalities (Public Funds)
and MM are treated as 181 to 360 days.
(3) Totals may not foot due to rounding.
(C) Copyright Darling Consulting Group, Inc. 1988, 1989, 1990
37
<PAGE>
As of March 31, 1995, the Bank was structurally liability sensitive in its
short-term (under one year) strategic planning horizon and essentially neutral
in its long-term (over one year) horizon. As indicated by the matrix, net
short-term liability sensitivity was $213.1 million while long-term asset
sensitivity was $8.3 million. Much of the short-term sensitivity was the
result of funding longer-term investment securities with shorter-term
borrowings. Such a funding mismatch was carried out with the intention that
such borrowing would be temporary in nature. These short-term borrowings are
expected to be replaced with lower cost core deposit liabilities assumed in
the Acquisition. As a result of this replacement, the interest rate risk
profile of the Bank following the Acquisition will change from liability
sensitive to asset sensitive. See "The Acquisition."
The following table sets forth supporting information to the gap matrix
concerning interest rate sensitivity of the Company's consolidated assets and
liabilities as of March 31, 1995:
<TABLE>
<CAPTION>
MARCH 31, 1995(1)(2)
------------------------------------------------------------
NON-RATE
DAYS SENSITIVE
----------------------------- 1-5 AND OVER 5
0-90 91-180 181-365 YEARS YEARS TOTAL(3)
-------- -------- --------- -------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Due from banks......... -- -- -- -- $ 50,721 $ 50,721
Investments:
Fixed-rate mortgage-
backed.............. $ 5,088 $ 4,944 $ 9,481 $ 69,781 63,412 152,706
Floating-rate mort-
gage-backed......... 9,702 -- -- -- -- 9,702
Floating-rate deben- --
tures............... 6,198 -- -- -- 6,198
Other investments.... 10,403 23,370 10,841 156,627 17,331 218,572
-------- -------- --------- -------- --------- --------
Total investments.. 31,391 28,314 20,322 226,408 80,743 387,178
Loans:
Adjustable rate...... 5,791 11,291 12,963 -- -- 30,045
Fixed-rate........... 4,202 4,078 7,789 48,514 49,238 113,821
Home equity.......... 31,931 -- -- -- -- 31,931
Commercial variable.. 84,023 -- -- -- -- 84,023
Other commercial..... 23,931 2,779 4,725 30,462 -- 61,897
Installment, net..... 17,613 17,510 34,721 101,340 2,480 173,664
-------- -------- --------- -------- --------- --------
Total loans........ 167,491 35,658 60,198 180,316 51,718 495,381
Loan loss reserve...... -- -- -- -- (6,424) (6,424)
Other assets........... -- -- -- -- 33,424 33,424
-------- -------- --------- -------- --------- --------
TOTAL ASSETS(3)........ $198,882 $ 63,972 $ 80,520 $406,724 $ 210,182 $960,280
======== ======== ========= ======== ========= ========
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Deposits:
Demand deposits...... -- -- -- -- 101,168 101,168
Savings/NOW.......... 2,871 2,871 20,538 11,484 202,259 240,023
Money markets........ -- 38,443 29,974 -- -- 68,417
CDs/IRA/Other........ 104,279 54,514 76,160 72,138 5,681 312,772
-------- -------- --------- -------- --------- --------
Total deposits..... 107,150 95,828 126,672 83,622 309,108 722,380
Short-term funds....... 158,765 -- -- 550 -- 159,315
Other liabilities...... -- -- -- -- 9,622 9,622
Shareholders' equity... -- -- -- -- 68,963 68,963
-------- -------- --------- -------- --------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS'
EQUITY(3)............. $265,915 $ 95,828 $ 126,672 $ 84,172 $ 387,693 $960,280
======== ======== ========= ======== ========= ========
INTEREST RATE
SENSITIVITY GAP....... $(67,033) $(31,856) $ (46,152) $322,552 $(177,511)
-------- -------- --------- -------- ---------
CUMULATIVE INTEREST
RATE SENSITIVITY GAP.. $(67,033) $(98,889) $(145,041) $177,511 0
-------- -------- --------- -------- ---------
</TABLE>
- --------
(1) Outstandings and yields by repricing interval (days or months).
(2) 85% of savings accounts of individuals, partnerships and corporations
("IPC") are treated as >60 months. 15% of IPC Savings spread over 24
months. 100% of IPC Money Market ("MM") treated as 91-180 days. 100% of
savings from accounts of U.S. government, state and local municipalities
(Public Funds) and MM are treated as 181-360 days.
(3) Totals may not foot due to rounding.
38
<PAGE>
LIQUIDITY AND BORROWING
The primary objective of liquidity management is to maintain a balance
between sources and uses of funds in order that the cash flow needs of the Bank
are met in the most economical and expedient manner. The liquidity needs of a
financial institution require the availability of cash to meet the withdrawal
demands of depositors and the credit commitments of borrowers. Due to the
potential for unexpected fluctuation in deposits and loans, active management
of the Bank's liquidity is critical. In order to respond to these
circumstances, sources of both on- and off-balance sheet funding are in place.
Traditionally, the Bank has relied on such sources as cash on hand, loan and
investment maturities, and large certificates of deposit to fund liquidity
needs. The Bank has chosen to expand its sources to include lines of credit
with the FHLB and other correspondent banks, as well as securities repurchase
agreements with a number of brokerage firms. Excess short-term borrowing
capacity, under lines of credit, available for use as of March 31, 1995
amounted to approximately $65.6 million, compared to $62.0 million as of
December 31, 1994 and to $64.5 million as of December 31, 1993. The Company has
additional borrowing capacity under securities repurchase agreements.
The Bank's primary approach to measuring liquidity is known as the Basic
Surplus/Deficit model. It is used to calculate liquidity over two time periods:
first, the relationship within 30 days between liquid assets and short term
liabilities which are vulnerable to non-replacement; and second, a projection
of subsequent cash flow funding needs over an additional 60 days. The Bank's
minimum policy level of liquidity under the Basic Surplus/Deficit model is 7.5%
of total assets for both the 30- and 90-day time horizons. At December 31,
1994, this ratio was 12.8% and 13.3%, respectively. As of March 31, 1995, the
ratio was 8.7% and 7.1%, respectively. The 90-day ratio is temporarily lower
than the policy minimum as of March 31, 1995 because of anticipated outflows of
public funds over the ensuing 90 days and high levels of securities pledged to
municipal accounts.
As of March 31, 1995, borrowings amounted to $159.3 million, compared to
$162.9 million as of December 31, 1994 and $57.6 million at December 31, 1993.
Although the 1994 year-end and 1995 quarter-end increases in borrowings versus
1993's level are attributable in part to seasonal deposit fluctuations and
greater than expected fourth quarter loan demand, the majority of new funding
was to support management's investment portfolio objectives during 1994.
Average borrowing for 1994 totaled $87.3 million versus $23.0 million in 1993.
The Chase Deposits are expected to be used to repay the Bank's currently
outstanding short-term borrowing. See "The Acquisition."
CAPITAL RESOURCES
The Company's Tier I capital to risk-weighted assets ratio at March 31, 1995
was 12.41%, compared to 12.43% at December 31, 1994, 14.87% at December 31,
1993 and 13.13% at December 31, 1992. These ratios exceed the regulatory Tier I
capital requirement of 4.00%. The Company's total risk-based capital to risk-
weighted assets ratio at March 31, 1995 was 13.65%, compared to 13.68% at
December 31, 1994, 16.12% at December 31, 1993 and 14.37% at December 31, 1992.
These ratios exceed the regulatory total risk-based capital requirement of
8.00%. The Company's Tier I leverage ratio at March 31, 1995 was 6.70%,
compared to 6.80% at December 31, 1994, 8.46% at December 31, 1993 and 7.90% at
December 31, 1992. These ratios exceed the regulatory Tier I leverage ratio
requirement of 4.00%. The decrease in the above capital ratios since year-end
1993 is the combined result of the intangible asset acquired from branch
acquisitions, additional deposits from acquisitions and additional borrowings
which fund loan and investment growth. The capital ratios as of March 31, 1995
are expected to be adversely affected by the Acquisition. See "Risk Factors--
Negative Effect of Acquisition on Regulatory Capital."
EFFECTS OF INFLATION
The financial statements and related data presented herein have been prepared
in accordance with generally accepted accounting principles which require the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation.
39
<PAGE>
Virtually all of the assets and liabilities of the Company are monetary in
nature. As a result, interest rate changes have a more significant impact on
the Company's performance than the effects of general levels of inflation.
PENDING ACQUISITION
For a discussion of the Company's current assessment of the impact of the
Acquisition on the operating performance of the Company, see "The
Acquisition -- Impact of the Acquisition on Operating Performance."
BUSINESS
GENERAL
The Company is a Delaware corporation, incorporated in 1983 as a bank holding
company subject to the Bank Holding Company Act of 1956, as amended. The
Company's principal business is to serve as a holding company for the Bank. The
Bank is a national bank formed in 1992 by consolidation of the Company's then
existing banking subsidiaries, The St. Lawrence National Bank, Horizon Bank,
N.A., The Exchange National Bank, The Nichols National Bank and Community
National Bank.
The Bank is a full service commercial bank providing a range of commercial
and retail banking services through its two regional offices in Canton, New
York and Olean, New York, as well as through 36 banking offices in the Northern
New York, Finger Lakes and Southern Tier counties of St. Lawrence, Jefferson,
Lewis, Cayuga, Seneca, Ontario, Oswego, Allegany, Cattaraugus, Tioga and
Steuben.
The Bank is a member of the Federal Reserve System and FHLB, and its deposits
are insured by the FDIC up to applicable limits.
BANKING SERVICES
The Bank offers a range of commercial and retail banking services in each of
its market areas to business, individual, agricultural and government
customers.
Account Services. The Bank's account services include checking accounts,
negotiable orders of withdrawal ("NOW") and savings accounts, time deposit
accounts and individual retirement accounts.
Lending Activities. The Bank's lending activities include the making of
residential and farm loans, business lines of credit, working capital
facilities, inventory and dealer floor plans, as well as installment,
commercial, term and student loans.
The Company believes that its predominant focus on the retail borrower
enables its loan portfolio to be highly diversified. As of March 31, 1995, over
70% of loans outstanding were made to consumers borrowing on an installment and
mortgage loan basis. In addition, the typical loan to the Company's commercial
business borrowers was under $50,000, with less than 15% of the commercial
portfolio being in loans in excess of $500,000.
Other Services. The Bank offers a range of trust services, including
investment management, financial planning and custodial services. The Bank also
offers safe deposit boxes, travelers checks, money orders, wire transfers,
collections, foreign exchange, drive-in facilities and twenty-four hour
depositories. Through an accounts receivable management program, the Bank
provides a service to qualifying businesses by purchasing accounts receivable
on a discounted basis. In addition, through an affiliation with Prime Vest,
Inc., the Bank offers non-bank financial products including fixed- and
variable-rate annuities, mutual funds, and stock investments.
40
<PAGE>
LOAN PORTFOLIO
Net loans grew $12.2 million, or 2.6%, during the first quarter of 1995 to
$489.0 million at March 31, 1995. Net loans grew 15.7% from $412.2 million at
year-end 1993 to $476.8 million at year-end 1994. This increase was achieved in
most loan categories and was attributable to business development efforts by
the Bank's lending personnel. The largest volume gain was realized in
installment loans to individuals.
Direct installment loans to individuals declined steadily from $83.3 million
as of year-end 1990 to $55.4 million as of March 31, 1995. This decline was due
to a variety of factors, primarily borrowing under lines of credit secured by
residential real estate (on which the interest is tax-deductible as opposed to
direct installment loans); the paydown of installment debt with the proceeds
from residential mortgage refinancing, which surged when rates were at their
historical lows in the 1992-1994 period; and intense competition particularly
from credit unions in certain of the Bank's markets.
This decline in direct installment loan demand has been partially offset by
increases in the Bank's own home equity loan product and conventional
residential mortgages as well as growth in indirect installment loans. Over 90%
of the Bank's indirect installment portfolio was automobile financing as of
March 31, 1995. The Bank's ability to grow this portfolio is largely dependent
upon the strength of auto sales in its market areas. The addition or loss of a
single dealer relationship can significantly impact the Bank's opportunities to
generate a large number of loans. The Bank attempts to limit the variability of
new car demand by also making loans for used cars, the demand for which is
often dictated by consumer transportation requirements rather than economic
strength or weakness. In addition, lending on an indirect basis creates a
dependency on the Bank's relationship with automobile dealers.
The amounts of the Bank's loans outstanding (net of deferred loan fees or
costs) at the dates indicated are shown in the following table according to
type of loan:
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT MARCH 31, --------------------------------------------
1995 1994 1993 1992 1991 1990
------------ -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgages
Residential........... $194,640 $196,548 $177,059 $146,135 $121,982 $109,995
Commercial loans
secured by real
estate............... 35,389 34,677 31,851 23,411 14,270 10,627
Commercial real
estate............... 891 927 1,063 1,647 2,316 2,237
Farm.................. 7,782 7,625 7,421 6,670 1,105 1,115
-------- -------- -------- -------- -------- --------
Total............... 238,702 239,777 217,394 177,863 139,673 123,974
-------- -------- -------- -------- -------- --------
Commercial, financial,
and agricultural
Agricultural loans.... 12,802 13,295 11,564 10,152 16,664 16,823
Commercial loans...... 69,884 67,976 58,252 40,524 44,301 48,875
-------- -------- -------- -------- -------- --------
Total............... 82,686 81,271 69,816 50,676 60,965 65,698
-------- -------- -------- -------- -------- --------
Installment loans to
individuals
Direct................ 55,367 58,371 58,963 64,486 74,848 83,328
Indirect.............. 130,387 121,148 89,513 88,068 100,140 120,972
Student and other..... 10,926 8,690 6,337 6,492 3,353 7,888
-------- -------- -------- -------- -------- --------
Total............... 196,680 188,209 154,813 159,046 178,341 212,188
-------- -------- -------- -------- -------- --------
Other loans............. 1,185 1,482 1,578 3,778 4,419 5,109
-------- -------- -------- -------- -------- --------
Gross loans............. 519,253 510,739 443,601 391,363 383,398 406,969
Less: Unearned discount. 23,872 27,660 25,730 29,007 34,829 42,235
Reserve for possible
loan losses.......... 6,424 6,281 5,706 4,982 4,312 3,607
-------- -------- -------- -------- -------- --------
Net loans............... $488,957 $476,798 $412,165 $357,374 $344,257 $361,127
======== ======== ======== ======== ======== ========
</TABLE>
41
<PAGE>
Real Estate Mortgages. Real estate mortgages decreased by $1.1 million, or
0.5%, during the quarter ended March 31, 1995, due to sales of residential real
estate mortgages and normal portfolio amortization. Real estate mortgages
increased 10.3% in 1994, as compared to 22.2% in 1993 and 27.3% in 1992.
Significant increases in residential real estate mortgages reflected the
nationwide surge in refinancing, but slowed in 1994 due to increasing interest
rates. Outstandings of the Bank's home equity loan product have continued to
grow in recent years in response to its tax-deductible nature and the Bank's
marketing efforts.
Commercial, Financial, and Agricultural. Growth in this category of 1.7%
during the first quarter of 1995, 16.4% in 1994 and 37.8% in 1993 was due to
increased business development efforts as a result of adding commercial lenders
to marketplaces in the Southern Region and an agricultural lender in the Bank's
Northern Region. The economic recession which began in mid-1990 caused the
decrease in volumes from 1990 to 1992. Approximately 90% of the Bank's
commercial customers borrow less than $100,000, which as a group constitute
half of commercial loans outstanding.
Installment Loans to Individuals. The 21.6% increase in this category in
1994, as well as the 4.5% increase during the first quarter of 1995, reflect a
reversal of the declining trend reflected for 1990 through 1993. This reversal
resulted from increased demand for installment debt indirectly originated
through automobile, marine and mobile home dealers. This type of lending has
been strong in the Bank's Northern Region for a number of years, while the
commitment to indirect lending in the Southern Region was re-emphasized in late
1993 with continued growth in 1994. The declining trend from 1990 through 1993
resulted from the 1990-91 national recession and the lag in economic rebound in
the rural New York State markets in which the Bank does business.
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
The following table shows the amount of loans outstanding as of March 31,
1995 and December 31, 1994 which, based on remaining scheduled repayments of
principal, are due in the periods indicated:
<TABLE>
<CAPTION>
AT MARCH 31, 1995 AT DECEMBER 31, 1994
---------------------------------------- ------------------------------------------
MATURING
TOTAL MATURING AFTER ONE MATURING TOTAL
ONE YEAR ONE YEAR TO FIVE YEARS BOOK IN ONE YEAR BUT WITHIN AFTER BOOK
OR LESS FIVE YEARS AND AFTER VALUE OR LESS FIVE YEARS FIVE YEARS VALUE
-------- ----------- ---------- -------- ----------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial,
and agricultural....... $15,238 $48,963 $18,485 $82,686 $19,398 $ 43,120 $ 18,753 $ 81,271
Real estate -- mortgage. 824 22,066 215,812 238,702 1,440 17,275 221,062 239,777
Installment............. 55,521 111,443 7,029 173,993 53,162 101,967 6,902 162,031
------- -------- -------- -------- ------- -------- -------- --------
Total................. $71,583 $182,472 $241,326 $495,381 $74,000 $162,362 $246,717 $483,079
======= ======== ======== ======== ======= ======== ======== ========
</TABLE>
The following table sets forth the sensitivity of the loan amounts due after
one year to changes in interest rates:
<TABLE>
<CAPTION>
MARCH 31, 1995 DECEMBER 31, 1994
------------------------ ------------------------
FIXED RATE VARIABLE RATE FIXED RATE VARIABLE RATE
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Due after one year but
within five years...... $124,721 $ 57,751 $109,611 $ 52,751
Due after five years.... 164,948 76,378 166,559 80,158
-------- -------- -------- --------
Total................. $289,669 $134,129 $276,170 $132,909
======== ======== ======== ========
</TABLE>
42
<PAGE>
NON-PERFORMING ASSETS
The following table presents information concerning the aggregate amount of
non-performing assets:
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT MARCH 31, --------------------------------------
1995 1994 1993 1992 1991 1990
------------ ------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans accounted for on a
non-accrual basis........ $2,447 $2,396 $1,738 $ 881 $1,369 $2,064
Accruing loans which are
contractually past due 90
days or more as to
principal or interest
payments................. 734 862 653 726 957 1,138
------ ------ ------ ------ ------ ------
Total non-performing
loans.................... 3,181 3,258 2,391 1,607 2,326 3,202
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 15 243 356 1,720 1,423
Other real estate......... 235 223 433 459 1,426 430
------ ------ ------ ------ ------ ------
Total non-performing
assets................. $3,416 $3,496 $3,067 $2,422 $5,472 $5,055
====== ====== ====== ====== ====== ======
Ratio of allowance for
loan losses to period-end
loans.................... 1.30% 1.30% 1.37% 1.37% 1.24% 0.99%
Ratio of allowance for
loan losses to period-end
non-performing loans..... 201.94% 192.79% 238.67% 310.05% 185.40% 112.64%
Ratio of allowance for
loan losses to period-end
non-performing assets.... 188.04% 179.67% 186.06% 205.72% 78.81% 71.35%
Ratio of non-performing
assets to period-end
total loans and other
real estate owned........ 0.69% 0.72% 0.73% 0.67% 1.56% 1.38%
</TABLE>
The impact of interest not recognized on non-accrual loans, and interest
income that would have been recorded if the restructured loans had been current
in accordance with their original terms, was immaterial. The Bank's policy is
to place a loan on a non-accrual status and recognize income on a cash basis
when it is more than 90 days past due, except when in the opinion of management
it is well secured and in the process of collection.
Non-performing loans, defined as non-accrual loans plus accruing loans 90
days or more past due, totaled $3.2 million at March 31, 1995 and $3.3 million
at December 31, 1994. The year-end 1994 level is approximately $870,000 higher
than at year-end 1993, largely due to a construction loan where recent cost
overruns delayed permanent financing by the Farmers' Home Administration. At
year-end 1993, a more critical view of certain commercial credits was taken by
the Company's then new chief executive officer and lending personnel added as a
result of organizational turnover; the result was an increase in non-performing
loans of about $780,000 to $2.4 million.
Total delinquencies, defined as all loans over 30 days past due, decreased
10.1% as of March 31, 1995 from year-end 1994 to $6.1 million. This compares to
a decrease of 2.7% in 1994 to $6.8 million. The general reduction in
delinquencies reflects the consolidation of the Southern Region collection
department, heavy emphasis on taking prompt corrective action, and adherence to
a strict and timely charge-off policy. Other real estate owned totaled
approximately $235,000, or 0.02% of total assets as of March 31, 1995,
virtually unchanged from year-end 1994.
During 1993, the Financial Accounting Standards Board issued Statement No.
114, "Accounting By Creditors for Impairment of a Loan." At March 31, 1995, the
recorded investment in loans for which impairment has been recognized in
accordance with SFAS 114 totaled $4.2 million with a corresponding valuation
allowance of $1.5 million. As of March 31, 1995, virtually all of such loans
were performing assets.
43
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes loan balances at the end of each period
indicated and the daily average amount of loans. Also summarized are changes
in the allowance for possible loan losses arising from loans charged off and
recoveries on loans previously charged off and additions to the allowance
which have been charged to expenses.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- ------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
--------- --------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Amount of loans
outstanding at end of
period...................... $ 519,253 $ 451,450 $510,739 $443,601 $391,363 $383,398 $406,968
========= ========= ======== ======== ======== ======== ========
Daily average amount of loans
(net of unearned discounts). $ 488,436 $ 419,874 $446,135 $382,680 $351,034 $352,960 $370,190
========= ========= ======== ======== ======== ======== ========
Balance of allowance for
possible loan losses at
beginning of period......... $ 6,281 $ 5,707 $ 5,706 $ 4,982 $ 4,312 $ 3,607 $ 2,848
Loans charged off:
Commercial, financial, and
agricultural.............. 49 35 502 236 951 244 893
Real estate mortgage....... 13 0 41 19 92 41 90
Installment................ 235 303 1,072 1,155 1,558 1,983 1,577
--------- --------- -------- -------- -------- -------- --------
Total loans
charged off............. 297 338 1,615 1,410 2,601 2,268 2,560
Recoveries of loans
previously charged off:
Commercial, financial, and
agricultural.............. 41 3 38 85 25 28 69
Real estate mortgage....... 25 0 1 1 0 0 16
Installment................ 120 96 449 542 517 429 274
--------- --------- -------- -------- -------- -------- --------
Total recoveries......... 186 99 488 628 544 457 359
--------- --------- -------- -------- -------- -------- --------
Net loans charged off........ 111 239 1,127 782 2,057 1,811 2,201
--------- --------- -------- -------- -------- -------- --------
Additions to allowance
charged to expense (1)...... 254 239 1,702 1,506 2,727 2,516 2,960
--------- --------- -------- -------- -------- -------- --------
Balance at end of period..... $ 6,424 $ 5,707 $ 6,281 $ 5,706 $ 4,982 $ 4,312 $ 3,607
========= ========= ======== ======== ======== ======== ========
Ratio of net charge-offs to
average loans outstanding (2) 0.09% 0.23% 0.25% 0.20% 0.59% 0.51% 0.59%
</TABLE>
(1) The additions to the allowance during 1990 through the first quarter of
1995 were determined using actual loan loss experience and future
projected loan losses and other factors affecting the estimate of possible
loan losses.
(2) Annualized for three months ended March 31, 1995 and 1994.
44
<PAGE>
Loans charged off during the first quarter of 1995 totaled $297,000 as
compared to $338,000 for the first quarter of 1994. Loans charged off in 1994
totaled $1.6 million as compared to $1.4 million in 1993 and $2.6 million in
1992. Net loans charged off totaled $111,000 during the first quarter of 1995
versus $239,000 for the comparable 1994 quarter. Net charge offs were $1.1
million in 1994, $782,000 in 1993, and $2.1 million in 1992.
The allowance for possible loan losses has been allocated according to the
amount deemed to be reasonably necessary to provide for the possibility of
losses being incurred within the following categories of loans at the dates
indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT MARCH 31, -----------------------------------------------------------------
1995 1994 1993 1992
--------------------- --------------------- --------------------- ---------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN LOANS IN
EACH EACH EACH EACH
AMOUNT OF CATEGORY TO AMOUNT OF CATEGORY TO AMOUNT OF CATEGORY TO AMOUNT OF CATEGORY TO
ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS
--------- ----------- --------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial,
financial, &
agricultural.... $2,079 15.94% $1,832 15.91% $3,464 15.74% $1,864 12.95%
Real estate --
mortgage........ 2,121 46.00% 2,222 46.95% 341 49.01% 220 45.45%
Installment...... 1,518 38.06% 1,422 37.14% 1,342 35.25% 1,400 41.60%
Unallocated...... 706 N/A 805 N/A 559 N/A 1,498 N/A
------ ------ ------ ------ ------ ------ ------ ------
Total........... $6,424 100.00% $6,281 100.00% $5,706 100.00% $4,982 100.00%
====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
AT DECEMBER 31,
-------------------------------------------
1991 1990
--------------------- ---------------------
PERCENT OF PERCENT OF
LOANS IN LOANS IN
EACH EACH
AMOUNT OF CATEGORY TO AMOUNT OF CATEGORY TO
ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS
--------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial,
financial, &
agricultural.... $1,241 15.45% $1,039 16.35%
Real estate --
mortgage........ 130 37.16% 46 30.84%
Installment...... 2,015 47.39% 1,252 52.80%
Unallocated...... 926 N/A 1,270 N/A
------ ------ ------ ------
Total........... $4,312 100.00% $3,607 100.00%
====== ====== ====== ======
</TABLE>
INVESTMENT PORTFOLIO
As of March 31, 1995, the carrying value of the Company's total investment
portfolio was $387.2 million, an increase of 2.3% from December 31, 1994, at
which time the carrying value of the Company's total investment portfolio was
$378.5 million, up $125.1 million from the prior year. As of March 31, 1995,
approximately 78.2% of the carrying value of the Company's total investment
portfolio is designated "held-to-maturity" and the balance is designated held
"available-for-sale."
The following table sets forth the amortized cost and market value for the
Company's held-to-maturity investment securities portfolio:
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT MARCH 31, -------------------------------------
1995 1994 1993
------------------ ------------------ ------------------
AMORTIZED AMORTIZED AMORTIZED
COST/BOOK MARKET COST/BOOK MARKET COST/BOOK MARKET
VALUE VALUE VALUE VALUE VALUE VALUE
--------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
Government corporations
and agencies........... $160,184 $164,265 $154,672 $154,367 $ 53,995 $ 57,984
Obligations of states
and political
subdivisions........... 15,785 16,400 17,304 17,772 17,164 18,522
Corporate securities.... 2 2 2 2 2 2
Mortgage-backed
securities............. 126,674 125,925 120,178 115,613 54,686 56,464
-------- -------- -------- -------- -------- --------
Total................. $302,645 $306,592 $292,156 $287,754 $125,847 $132,972
======== ======== ======== ======== ======== ========
</TABLE>
45
<PAGE>
The following table sets forth the amortized cost and market value for the
Company's available-for-sale investment portfolio, followed by the carrying
value of the total investment portfolio:
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT MARCH 31, -------------------------------------
1995 1994 1993
------------------ ------------------ ------------------
AMORTIZED AMORTIZED AMORTIZED
COST/BOOK MARKET COST/BOOK MARKET COST/BOOK MARKET
VALUE VALUE VALUE VALUE VALUE VALUE
--------- ------- --------- ------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies........... $ 33,137 $32,342 $ 33,691 $32,415 $ 58,722 $ 60,418
Obligations of states
and political
subdivisions........... 1,940 1,977 3,432 3,472 7,194 7,420
Corporate securities.... 69 69 567 568 1,109 1,153
Mortgage-backed
securities............. 36,967 35,733 37,235 35,199 53,177 53,362
Equity securities(1).... 13,850 13,860 14,149 14,158 4,740 4,753
Federal Reserve Bank
common stock........... 551 551 552 552 500 500
-------- ------- -------- ------- -------- --------
Totals................ $ 86,514 $84,532 $ 89,626 $86,364 $125,442 $127,606
======= ======= ========
Net unrealized
gains/(losses) on
available-for-sale
portfolio.............. (1,982) (3,262) 2,164
-------- -------- --------
Total available-for-
sale portfolio....... 84,532 86,364 127,606
Total held-to-maturity
portfolio............ 302,645 292,156 125,847
-------- -------- --------
Total carrying value
of investment
portfolio.......... $387,177 $378,520 $253,453
======== ======== ========
</TABLE>
(1) Includes $13,506, $13,506, $13,805, $13,805, $4,396 and $4,396 of FHLB
common stock.
The following table sets forth the amortized cost and market value of the
Company's investment portfolio as of December 31, 1992:
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
--------- --------
(IN THOUSANDS)
<S> <C> <C>
U.S. Treasury securities and obligations of U.S.
government corporations and agencies................ $106,797 $112,679
Obligations of states and political subdivisions..... 27,940 29,207
Corporate securities................................. 5,182 5,254
Mortgage-backed securities........................... 117,931 120,936
Equity securities.................................... 4,448 4,459
Federal Reserve Bank common stock.................... 500 500
-------- --------
Totals............................................. $262,798 $273,035
======== ========
</TABLE>
The 2.3% increase in carrying value of the Company's investment portfolio
during the first quarter of 1995 reflects the positive impact of a falling
interest rate environment on the valuation of the available-for-sale portfolio,
plus additional securities purchased during the quarter. The 49.3% increase
between 1993 and 1994 in the carrying value of the Company's investment
portfolio is largely attributed to an unusually low starting balance at the
beginning of 1994 as well as by investment of the net proceeds from $75.2
million in deposits assumed in 1994 through the acquisition of four branches.
In late 1993, the Company allowed the portfolio to mature rather than
aggressively purchase new securities during a time of historically low interest
rates. This decision continued into the first quarter of 1994 until February,
when the initial increase in overnight rates by the Federal Reserve Bank
occurred. In addition to the funds provided by the branch acquisitions, growth
in the investment portfolio was supported by $85.8 million in increased FHLB
borrowing during the last nine months of 1994.
As interest rates began their rise in the first quarter of 1994, the Company
began to pursue a strategy that focused on purchasing securities with high cash
flow characteristics. Bonds purchased during this period
46
<PAGE>
included premium 15-year and balloon mortgage-backed securities. The average
duration of these instruments principally ranged from 1.5 to 3.4 years.
As the movement in longer-term rates began to stabilize further in 1994, the
Company's investment securities objective moved away from cash flow production
to call protection. Bonds purchased during this period included ten-year agency
debentures with three- and five-year embedded call options. An issuer of bonds
will likely exercise its right to call a bond when market interest rates are
below that of the coupon on the bond. When a call option is exercised, all bond
principal is repaid in full to the Bank for reinvestment purposes. Therefore,
the Bank may be required to invest the repaid principal in securities paying a
lower yield than the bond that was called. Depending on whether the embedded
call options are exercised at a future date, the average duration of these
instruments ranged between 2.5 and 6.9 years.
Finally, as the yield curve flattened late in the fourth quarter, purchases
were largely confined to slightly discounted, intermediate-term mortgage-backed
securities. The average duration of these instruments ranged between 4.0 and
5.0 years while providing a modest level of cash flow for reinvestment
purposes.
During 1994, the composition of the Company's investment portfolio continued
to shift away from the municipal, corporate and private sectors to U.S.
Government agency bonds and agency mortgage-backed obligations. As of March 31,
1995, the total book value of U.S. Treasury and agency bonds and agency
mortgage-backed obligations represented approximately 92% of total-book value
of portfolio investments, up from a level of 88% at year-end 1993. The
portfolio's weighting under risk-based capital requirements at March 31, 1995
was 17.7% as compared to 18.1% at December 31, 1994 and 16.6% as of December
31, 1993.
The average life of the portfolio, including the exercise of embedded call
options, extended to 3.9 years at March 31, 1995 and 3.5 years as of December
31, 1994. As of December 31, 1993, the average life of the portfolio stood at
2.3 years. The investment strategies pursued during 1994 and the first quarter
of 1995 were largely responsible for this extension.
Average investment yields for the first quarter of 1995 increased to 7.65%,
up from 6.77% for the first quarter of 1994 and 6.93% for the full year 1994
and 7.24% in 1993 (adjusted for a one-time benefit in 1993 of approximately
$600,000 in option-adjusted premiums received from agency debentures called
prior to maturity). The decline in investment yields in 1994 is attributed to
lower investment yields on securities purchased in the latter half of 1993 and
early 1994 while the increase for the first quarter of 1995 reflected the rise
in rates that occurred during much of 1994 and 1995 and portfolio additions
during that period.
During the fourth quarter of 1994, the Company chose to sell $27.2 million
(carrying value) in securities from its available-for-sale portfolio, replacing
lower yielding investments with higher yielding investments. Although these
sales produced a net pre-tax loss of approximately $502,000 for the quarter,
the loss is expected to be recaptured in 1995 through the higher yields earned
from reinvestment of the sales proceeds. In addition, the reinvestment will
produce a higher level of future earnings, net of the pre-tax loss, over the
average term-to-maturity of the investments sold.
The Bank does not currently engage in the purchase or sale of off-balance
sheet derivatives, nor does it hold in portfolio any structured notes such as
agency step-up notes, inverse floaters, indexing amortized notes, dual index
notes, principal-only strips ("POs") or interest-only strips ("IOs").
47
<PAGE>
The following tables set forth as of the dates indicated, the maturities of
investment securities and the weighted-average yields of such securities,
which have been calculated on the basis of the cost, weighted for scheduled
maturity of each security, and adjusted to a fully tax-equivalent basis:
<TABLE>
<CAPTION>
AT MARCH 31, 1995
------------------------------------------------------------
AMOUNT
AMOUNT MATURING AMOUNT AMOUNT
MATURING AFTER ONE MATURING AFTER MATURING
WITHIN ONE BUT WITHIN FIVE YEARS BUT AFTER TOTAL
HELD-TO-MATURITY PORTFOLIO YEAR OR LESS FIVE YEARS WITHIN TEN YEARS TEN YEARS COST
- -------------------------- ------------ ---------- ---------------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
U.S. Treasury and other
U.S. government agencies. $ 100 $ 7,697 $152,387 $ 0 $160,184
Mortgage-backed
securities............... 3 10,769 5,574 110,328 126,674
States and political
subdivisions............. 3,861 9,860 2,064 0 15,785
Other..................... 0 2 0 0 2
------ ------- -------- -------- --------
Total investment
securities............. $3,964 $28,328 $160,025 110,328 $302,645
====== ======= ======== ======== ========
Weighted-average yield for
year (1)................. 5.80% 7.08% 7.42% 7.75% 7.49%
<CAPTION>
AVAILABLE-FOR-SALE
PORTFOLIO
- ------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury and other
U.S. government agencies. $ 500 $ 2,107 $ 30,530 $ 0 $ 33,137
Mortgage-backed
securities............... 0 1,739 5,890 29,338 36,967
States and political
subdivisions............. 1,506 252 182 0 1,940
Other..................... 69 0 0 0 69
------ ------- -------- -------- --------
Total investment
securities............. $2,075 $ 4,098 $ 36,602 $ 29,338 $ 72,113
====== ======= ======== ======== ========
Weighted-average yield for
year (1)................. 7.58% 6.61% 6.89% 6.67% 6.80%
</TABLE>
(1) Weighted-average yields on the tax-exempt obligations have been computed
on a fully tax-equivalent basis assuming a marginal federal tax rate of
35%. These yields are an arithmetic computation of accrued income divided
by average balance; they may differ from the yield-to-maturity, which
considers the time value of money.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1994
------------------------------------------------------------
AMOUNT
AMOUNT MATURING AMOUNT MATURING AMOUNT
MATURING AFTER ONE AFTER FIVE YEARS MATURING
WITHIN ONE BUT WITHIN BUT AFTER TOTAL
HELD-TO-MATURITY PORTFOLIO YEAR OR LESS FIVE YEARS WITHIN TEN YEARS TEN YEARS COST
- -------------------------- ------------ ---------- ---------------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
U.S. Treasury and other
U.S. government agencies. $ 0 $ 7,794 $146,878 $ 0 $154,672
Mortgage-backed
securities............... 5 11,075 5,948 103,150 120,178
States and political
subdivisions............. 4,509 10,725 2,071 0 17,305
Other..................... 0 2 0 0 2
------ ------- -------- -------- --------
Total investment
securities............. $4,514 $29,596 $159,897 103,150 $292,157
====== ======= ======== ======== ========
Weighted-average yield for
year (1)................. 4.68% 7.06% 7.39% 7.66% 7.41%
<CAPTION>
AVAILABLE-FOR-SALE
PORTFOLIO
- ------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury and other
U.S. government agencies. $ 999 $ 2,107 $ 30,585 $ 0 $ 33,691
Mortgage-backed
securities............... 0 1,739 6,016 29,480 37,235
States and political
subdivisions............. 2,998 252 182 0 3,432
Other..................... 567 0 0 0 567
------ ------- -------- -------- --------
Total investment
securities............. $4,564 $ 4,098 $ 36,783 $ 29,480 $ 74,925
====== ======= ======== ======== ========
Weighted-average yield for
year (1)................. 7.54% 6.93% 6.85% 6.68% 6.83%
</TABLE>
(1) Weighted-average yields on the tax-exempt obligations have been computed
on a fully tax-equivalent basis assuming a marginal federal tax rate of
34%. These yields are an arithmetic computation of accrued income divided
by average balance; they may differ from the yield-to-maturity, which
considers the time value of money.
48
<PAGE>
DEPOSITS
The Bank offers a variety of deposit instruments typical of most commercial
banks. Total deposits averaged $702.2 million for the three months ended March
31, 1995, up $100.5 million or 16.7% from the three months ended March 31,
1994. Total deposits averaged $651.5 million in 1994, $598.9 million in 1993
and $585.6 million in 1992. The deposit growth of 8.8% in 1994 was almost four
times the growth rate in 1993. This rate, and the rate for the first quarter of
1995, are attributed largely to the Bank's three branch purchases in the middle
of 1994 and one in the fourth quarter of 1994. During the first quarter of
1995, use of public fund certificates of deposit also increased, as such
certificates of deposit proved to be a more cost-effective source of funds than
borrowing from the FHLB. The growth rate of deposits in 1992 was 3.4%.
As of March 31, 1995, the Bank's deposit mix changed slightly since the first
quarter of 1994. As interest rates increased during this period, funds shifted
from lower-rate savings and money market accounts to higher-rate time deposits.
In addition, acquired deposits, with their higher ratio of time deposits to
total deposits, increased the overall percentage of Bank deposits held as time
deposits.
With the exception of 1994, the Bank's level of stable core deposits has
climbed at a faster rate than total deposits; the 1990-1994 average core
deposit growth rate was 6.3% versus 4.7% for all deposits. The difference
represents the Company's objective to reduce certificates of deposit of
$100,000 or more when a satisfactory margin cannot be earned over the
prevailing large deposit market rate or when other more cost effective forms of
temporary borrowing can be obtained. In 1994 certificates of deposit increased
over the prior year because rates in certain maturities were competitive with
FHLB borrowings. This funding advantage has continued in the first quarter of
1995.
Deposits of local municipalities accounted for $81.2 million or 13.2% of
average core deposits in 1994.
The average daily amount of deposits and the average rate paid on each of the
following deposit categories is summarized below for the periods indicated:
<TABLE>
<CAPTION>
AT MARCH 31, YEAR ENDED DECEMBER 31,
------------------------------------- --------------------------------------------------------
1995 1994 1994 1993 1992
------------------ ------------------ ------------------ ------------------ ------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE PAID BALANCE RATE PAID BALANCE RATE PAID BALANCE RATE PAID BALANCE RATE PAID
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest-bearing
demand deposits....... $102,850 N/A $ 92,522 N/A $ 98,587 N/A $ 87,728 N/A $ 83,114 N/A
Interest-bearing demand
deposits.............. 66,475 1.73% 62,942 1.71% 65,805 1.68% 63,607 1.88% 62,525 2.84%
Regular savings
deposits.............. 171,065 2.98 178,181 2.77 183,881 2.85 179,128 3.03 156,964 3.79
Money market deposits.. 66,035 2.83 72,003 2.52 73,757 2.57 78,231 2.63 81,739 3.32
Time deposits.......... 295,808 5.33 196,099 4.13 229,449 4.34 190,166 4.36 201,229 5.42
-------- -------- -------- -------- --------
Total average daily
amount of domestic
deposits............. $702,233 3.40% $601,747 2.65% $651,479 2.80% $598,860 2.83% $585,571 3.65%
======== ======== ======== ======== ========
</TABLE>
The remaining maturities of time deposits in amounts of $100,000 or more
outstanding at the dates indicated are summarized below:
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT MARCH 31, ---------------
1995 1994 1993
------------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Less than three months............................ $50,332 $29,963 $12,410
Three months to six months........................ 9,164 9,983 7,869
Six months to one year............................ 7,414 4,248 1,881
Over one year..................................... 4,489 3,589 85
------- ------- -------
Total........................................... $71,399 $47,783 $22,245
======= ======= =======
</TABLE>
49
<PAGE>
BORROWING
The following table summarizes the outstanding balances of short-term
borrowing of the Company for the periods indicated:
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
----------------- --------------------------
1995 1994 1994 1993 1992
-------- ------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Federal funds purchased......... $43,765 $31,500 $ 57,300 $57,000 $32,836
Term borrowing at banks
(original term)
90 days or less............... 95,000 20,000 80,000 0 20,000
1 year........................ 20,000 25,000 25,000 0 0
-------- ------- -------- ------- -------
Balance at end of period.... $158,765 $76,500 $162,300 $57,000 $52,836
======== ======= ======== ======= =======
Daily average during the period. $153,075 $58,274 $ 86,777 $22,892 $ 8,034
Maximum month-end balance....... $171,600 $76,500 $163,700 $57,000 $52,836
Weighted-average rate during the
period(1)...................... 6.18% 3.48% 4.48% 3.35% 3.02%
Period-end average rate......... 6.40% 3.81% 5.44% 3.00% 3.13%
</TABLE>
(1) Annualized for the three months ended March 31, 1995 and 1994.
At March 31, 1995, total short-term borrowing amounted to $158.8 million as
compared to $76.5 million at March 31, 1994. Year-end 1994 total short-term
borrowing amounted to $162.3 million as compared to $57.0 million at year-end
1993. While a portion of this borrowing was attributable to seasonal deposit
fluctuations and greater than expected fourth quarter loan demand, the majority
of new funding was to support the Company's investment portfolio objectives
during 1994 and the first quarter of 1995. Average borrowing for the first
quarter of 1995 totaled $153.1 million as compared to $58.3 million for the
first quarter of 1994. Average borrowing for the full year 1994 totaled $87.3
million versus $23.0 million in 1993. The Chase Deposits are expected to be
used in part to repay the Bank's currently outstanding short-term borrowings.
See "The Acquisition."
RETURN ON ASSETS AND EQUITY
Return on average assets, return on average equity, dividend payout and
equity to asset ratios for the periods indicated are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -------------------------
1995 1994 1994 1993 1992
--------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Percentage of net income to
average total assets(1)...... 1.20% 1.33% 1.25% 1.40% 1.15%
Percentage of net income to
average shareholders'
equity(1).................... 16.62 15.54 15.79 16.71 14.76
Percentage of dividends
declared per common share to
net income per common share.. 30.40 30.93 31.24 29.67 32.26
Percentage of average
shareholders' equity to
average total assets......... 7.22 8.58 7.92 8.37 7.82
</TABLE>
(1) Annualized for the three months ended March 31, 1995 and 1994.
COMPETITION
The Company, through the Bank, competes in three distinct banking markets in
the Northern ("Northern Market"), Finger Lakes ("Finger Lakes Market"), and
Southern Tier ("Southern Tier Market") regions of New York State. The Bank
considers its primary market areas in these regions to be the counties in which
it has banking facilities. Major competitors in these markets include local
branches of regional affiliates of banks based in New York City, Albany or
Buffalo, New York, as well as local independent banking and thrift institutions
and federal credit unions. Other competitors for deposits and loans within the
Bank's market areas include insurance companies, money market funds, consumer
finance companies and
50
<PAGE>
financing affiliates of consumer durable goods manufacturers. Lastly, personal
and corporate trust and investment counseling services in competition with the
Bank are offered by insurance companies, investment counseling firms and other
financial service firms and individuals.
The Bank is predominantly a retail bank committed to the philosophy of
serving the financial needs of customers in local communities. The Bank's
branches are generally located in small cities and villages within its
geographic market areas. The Company believes that the local character of
business, the Bank's knowledge of the customer and customer needs, and its
comprehensive retail and small business products, together with rapid
decision-making at the branch and regional level, enable the Bank to compete
effectively.
NORTHERN MARKET. Branches in the Northern Market compete for loans and
deposits in the three county primary market area of St. Lawrence, Jefferson
and Lewis Counties in Northern New York State. Within this market area, the
Bank maintains a market share of 14.2% including commercial banks, credit
unions, savings and loan associations and savings banks./1/ The Northern
Region operates 18 office locations, and the Bank is ranked either first or
second in market share in 13 of the 14 towns where these offices are located.
The Bank's Northern Region also competes for loans where it has no banking
facilities; this secondary market area includes Franklin County.
FINGER LAKES MARKET. In the Finger Lakes Market, the Bank operates seven
office locations competing for loans and deposits in the four-county primary
market area of Seneca, Oswego, Ontario and Cayuga Counties. Within the Finger
Lakes Market area, the Bank maintains a market share of 1.3% including
commercial banks, credit unions, savings and loan associations and savings
banks./1/ The Bank is ranked either first or second in market share in five of
the seven Finger Lakes Market area towns where its offices are located.
SOUTHERN TIER MARKET. The Bank's Southern Tier Market consists of two
submarkets, the Olean submarket and the Corning submarket.
Olean Submarket. The Olean Submarket competes for loans and deposits in the
primary market area of Cattaraugus and Allegany Counties in the Southern Tier
of New York State. Within this area, the Bank maintains a market share of
13.1% including commercial banks, credit unions, savings and loan associations
and savings banks./1/ The Olean Submarket operates four office locations, and
the Bank is ranked either first or second in market share in three of the four
towns where these offices are located. The Bank also competes for loans where
it has no banking facilities; this secondary market area includes Chautauqua
County.
Corning Submarket. The Corning Submarket competes for loans and deposits in
the primary market area of Steuben and Tioga Counties in the Southern Tier of
New York State. Within this area, the Bank maintains a market share of 6.7%
including commercial banks, credit unions, savings and loan associations and
savings banks./1/ The Corning Submarket operates seven office locations, and
the Bank is ranked either first or second in market share in four of the five
towns where these offices are located. The Bank also competes for loans where
it has no banking facilities; this secondary market area includes Chemung and
Schuyler Counties in New York State, and Tioga County in Pennsylvania.
LEGAL PROCEEDINGS
The Company and the Bank are subject to ordinary routine litigation
incidental to their business, none of which is considered by management to be
likely to have a material adverse effect on the Company or the Bank. On March
27, 1995, the Company, the Bank and each of the directors of the Company and
the Bank were named defendants in a shareholder derivative action brought in
New York Supreme Court, Albany County. The plaintiffs alleged in substance
that the directors failed to exercise due care and breached their fiduciary
duties to the Company in pursuing and approving the Acquisition. By
stipulation and order dated April 21, 1995, however, all claims asserted by
the plaintiffs were discontinued and the case was dismissed.
- --------
(1) Deposit market share data as of June 30, 1994, as calculated from
information provided by Sheshunoff Information Services, Inc.
51
<PAGE>
EMPLOYEES
As of March 31, 1995, the Bank employed approximately 440 full-time
equivalent employees. The Bank provides a variety of employment benefits and
considers its relationship with its employees to be good. Upon consummation of
the Acquisition the Bank will retain approximately 103 full-time equivalent
employees currently employed by Chase at the Chase Branches, and may add up to
approximately 36 additional full-time equivalent employees over a period of
time following consummation of the Acquisition. Neither the Company nor the
Bank is a party to any collective bargaining agreement.
PROPERTIES
The Company leases its administrative offices at 5790 Widewaters Parkway,
DeWitt, New York. The Bank owns its regional offices in Olean, New York and
Canton, New York. Of the Bank's 36 branch offices, 32 are owned by the Bank,
and four are located on long-term leased premises.
Real property and related banking facilities owned by the Company at March
31, 1995 had a net book value of $10.7 million and none of the properties was
subject to any encumbrances. For the year ended December 31, 1994, rental fees
of $502,312 were paid on facilities leased by the Bank for its operations. For
the three month period ended March 31, 1995, rental fees of $126,426 were paid
on such facilities.
52
<PAGE>
MANAGEMENT
DIRECTORS
The Company's Board of Directors currently consists of 13 persons. Each of
the directors of the Company is also a director of the Bank. In accordance with
the Bylaws of the Company, the Board is divided into three classes as nearly
equal in number as possible. The members of each class are elected for a term
of three years with one class of directors elected annually. The Board of
Directors holds regular quarterly meetings in its capacity as the Board of
Directors of the Company and regular monthly meetings in its capacity as the
Board of Directors of the Bank.
The following table sets forth certain information with respect to the
directors of the Company and the Bank.
<TABLE>
<CAPTION>
TERM
NAME AGE EXPIRES DIRECTOR SINCE
---- --- ------- --------------
<S> <C> <C> <C>
Sanford A. Belden 52 1997 1992
John M. Burgess 59 1998 1991
Richard C. Cummings 65 1996 1983
William M. Dempsey 57 1996 1984
Nicholas A. DiCerbo 48 1997 1985
Benjamin Franklin 69 1997 1984
James A. Gabriel 47 1998 1984
Lee T. Hirschey 59 1997 1991
Earl W. MacArthur (Chairman) 67 1998 1983
David C. Patterson 53 1997 1991
William N. Sloan 61 1996 1991
William D. Stalder 70 1996 1983
Hugh G. Zimmer 68 1998 1989
</TABLE>
DIRECTOR COMPENSATION
As directors of both the Company and the Bank, Board members receive an
annual retainer of $8,000; $500 for each Board meeting they attend; $500 for
each Executive Committee meeting they attend; and $350 for each committee
meeting they attend. Mr. Belden does not receive an annual retainer or
compensation for attending Board or committee meetings. The Chair of the Board
receives an all inclusive $46,000 annual retainer for serving in that capacity.
The Chairs of the Loan Committee and the Personnel Committee each receive an
annual retainer of $2,500; and the Chairs of the Investment Committee, the
Trust Committee and the Audit/Compliance/Risk Management Committee each receive
an annual retainer of $750. The Company also pays the travel expenses incurred
by each director in attending meetings of the Board.
Directors may elect to defer all or a portion of their director fees pursuant
to a Deferred Compensation Plan for Directors. Directors who elect to
participate in the Plan designate the percentage of their director fees which
they wish to defer (the deferred fees) and the date to which they wish to defer
payment of benefits under the plan (the distribution date). The plan
administrator establishes an account for each participating director and
credits to such account (i) on the date a participating director would have
otherwise received payment of his deferred fees, the number of shares of Common
Stock which could have been purchased with the deferred fees, and (ii) from
time to time such additional number of shares of Common Stock which could have
been purchased with any dividends which would have been received had shares
equal to the number of shares credited to the account actually been issued and
outstanding. On the distribution date, the participating director shall be
entitled to receive either (i) shares of Common Stock equal to the number of
shares credited to the director's account, or (ii) at the Company's election,
cash equal to the fair market value of the number
53
<PAGE>
of shares credited to the account as of the distribution date. The effect of
the plan is to permit directors to invest deferred director fees in stock of
the Company, having the benefit of any stock price appreciation and dividends
as well as the risk of any decrease in the stock price. To the extent that
directors participate in the plan, the interests of participating directors
will be more closely associated with the interests of shareholders in achieving
growth in the Company's stock price.
EXECUTIVE OFFICERS OF THE COMPANY AND BANK
The following table sets forth certain information about the principal
executive officers of the Company and the Bank, each of whom is elected by the
Board of Directors and each of whom holds office at the discretion of the Board
of Directors.
<TABLE>
<CAPTION>
NAME AND AGE POSITION
------------ --------
<C> <S>
Sanford A. Belden, Age 52 President and Chief Executive Officer of the
Company and the Bank
David G. Wallace, Age 50 Treasurer of the Company and Senior Vice
President and Chief Financial Officer of the
Bank
James A. Wears, Age 46 Regional President, Northern Region of the Bank
Michael A. Patton, Age 50 Regional President, Southern Region of the Bank
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has an employment agreement with Mr. Belden dated January 1, 1995
providing for his employment as the Company's President and Chief Executive
Officer until December 31, 1997. The agreement may be terminated by the Board
for good cause at any time. The agreement requires that Mr. Belden devote his
full business time and attention to the performance of his duties for a base
salary of $240,000 for 1995, $275,000 for 1996 and $300,000 for 1997. In the
event that the Company's average assets during any monthly reporting period
reach $1.75 billion, Mr. Belden's base salary will be reviewed by the Board.
The agreement also provides Mr. Belden with a supplemental retirement benefit
which amounts to 4% of his final five year average salary, multiplied by his
years of service (15 year maximum), payable at age 65 in the form of an
actuarially reduced joint and 50% survivor benefit. Benefits payable prior to
age 65, or in another form, are subject to the same actuarial adjustments as
benefits payable under the Company's pension plan. The supplemental retirement
payments are reduced by the benefit payable under the Company's pension plan,
plus Mr. Belden's social security benefit, plus the benefits payable from two
other pension plans in which Mr. Belden participated prior to joining the
Company in 1992. If, upon expiration of Mr. Belden's employment agreement, the
Company elects not to renew, Mr. Belden will be entitled to severance pay equal
to one year of his then current base salary, provided that such severance
payments shall cease if Mr. Belden subsequently obtains employment or becomes
self-employed during the severance period. If Mr. Belden's employment is
terminated for reasons other than cause within two years following a change of
control of the Company, the Company will retain him as a consultant for two
years at an annual consulting fee equal to his base salary, will reimburse him
for any loss incurred on the sale of his home, and all of his stock options
shall become fully exercisable. Additionally, in the event of a change of
control, Mr. Belden's years of service for supplemental retirement benefit
purposes shall include his consultation period plus an additional three years.
The Company also maintains one year employment agreements with Messrs. Wears,
Patton and Wallace. These agreements provide for severance pay equal to the
employee's base salary for the balance of the term of the agreement plus
benefits under the Company's regular severance policy, and change of control
benefits which include a two-year consulting engagement, accelerated vesting on
all outstanding stock options, and in the case of Mr. Wallace, crediting for
retirement funding purposes in the greater amount of actual years of service or
20 years. The agreements may be terminated by the Board for good cause at any
time.
54
<PAGE>
BUSINESS EXPERIENCE OF DIRECTORS AND OFFICERS
The following is a brief description of the principal occupation and business
experience of each director and executive officer of the Company and Bank named
above for the last five years.
SANFORD A. BELDEN (Director; President and Chief Executive Officer of the
Company and the Bank). Mr. Belden has been President and Chief Executive
Officer of the Company and the Bank since October 1, 1992. Mr. Belden was
formerly Manager, Eastern Region, Rabobank Nederland, New York, New York from
1990 to 1992 and prior thereto served as President, Community Banking for First
Bank System, Minneapolis, Minnesota, a multi-state bank holding company.
JOHN M. BURGESS (Director). Until his retirement in 1991, Mr. Burgess was
President of Kinney Drugs, Inc., a drug and retail chain with stores located
throughout Northern New York.
RICHARD C. CUMMINGS (Director). Mr. Cummings is a partner in the law firm of
Cummings, McGuire, Dunckel & Campany in Lowville, New York.
WILLIAM M. DEMPSEY (Director). Mr. Dempsey is the Vice President of Finance
and Administration of Rochester Institute of Technology in Rochester, New York.
NICHOLAS A. DICERBO (Director). Mr. DiCerbo is a partner with the law firm of
DiCerbo and Palumbo in Olean, New York.
BENJAMIN FRANKLIN (Director). Mr. Franklin is retired and formerly of counsel
to the law firm of Franklin & Gabriel in Ovid, New York.
JAMES A. GABRIEL (Director). Mr. Gabriel is a partner with the law firm of
Franklin & Gabriel in Ovid, New York.
LEE T. HIRSCHEY (Director). Mr. Hirschey is the President and Chief Executive
Officer of Climax Manufacturing Company, a converter and manufacturer of paper
products with facilities in Castorland, Lowville and West Carthage, New York.
EARL W. MACARTHUR (Chairman of the Board). Dr. MacArthur is the Vice
President of WMASC Educational Search Specialists, an employment search firm
specializing in placement of presidents and senior academic officers for
colleges and universities located in the United States. Prior to 1993, Dr.
MacArthur was the President of the State University of New York at Canton, New
York.
DAVID C. PATTERSON (Director). Mr. Patterson is the President and owner of
Wight and Patterson, Inc., a manufacturer and seller of livestock feed located
in Canton, New York.
MICHAEL A. PATTON (Regional President, Southern Region of the Bank). Mr.
Patton was the President and Chief Executive Officer of The Exchange National
Bank, a former subsidiary of the Company, from 1984 until January 1992, when,
in connection with the consolidation of the Company's five subsidiary banks
into the Bank, he was named to his current position as Regional President for
the Southern Region of the Bank.
WILLIAM N. SLOAN (Director). Mr. Sloan is an Associate Professor of
Mathematics at Potsdam College of the State University of New York in Potsdam,
New York.
WILLIAM D. STALDER (Director). Until his retirement in 1990, Mr. Stalder was
a partner in the firm of Witherbee & Whelan, a retail cemetery monument and
burial vault business.
DAVID G. WALLACE (Treasurer of the Company; Senior Vice President and Chief
Financial Officer of the Bank). Mr. Wallace became Vice President and Chief
Financial Officer in November 1988, and has been Senior Vice President and
Chief Financial Officer since August 1991.
55
<PAGE>
JAMES A. WEARS (Regional President, Northern Region of the Bank). Mr. Wears
served as Senior Vice President of The St. Lawrence National Bank, a former
subsidiary of the Company, from 1988 through January 1991, and as its President
and Chief Executive Officer from January 1991 until January 1992. Following the
January 1992 consolidation of the Company's five subsidiary banks into the
Bank, Mr. Wears was named to his current position as Regional President for the
Northern Region of the Bank.
HUGH G. ZIMMER (Director). Prior to his retirement in 1989, Mr. Zimmer was
President of The Nichols National Bank, Nichols, New York, which was
consolidated into the Bank, as of January 1, 1992.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth, as of June 1, 1995, certain information
regarding the beneficial ownership of Common Stock by (i) each director and
named executive officer of the Company and (ii) all named directors and
executive officers of the Company as a group. Based on the Company's records,
no person owned 5% or more of the outstanding Common Stock.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1)(2) PERCENT OF CLASS
------------------------------------ --------------------------- ----------------
<S> <C> <C>
Sanford A. Belden............ 2,000 0.07%
Fayetteville, New York
John M. Burgess.............. 3,210 0.11%
Governeur, New York
Richard C. Cummings ......... 5,677 0.20%
Glenfield, New York
William M. Dempsey .......... 800 0.03%
Rochester, New York
Nicholas A. DiCerbo ......... 19,987 0.72%
Olean, New York
Benjamin Franklin ........... 35,088 1.26%
Ovid, New York
James A. Gabriel............. 8,768 0.31%
Ovid, New York
Lee T. Hirschey.............. 8,356 0.30%
Carthage, New York
Earl W. MacArthur............ 1,434 0.05%
Morristown, New York
David C. Patterson........... 3,046 0.11%
Canton, New York
Michael A. Patton............ 10,475 0.38%
Olean, New York
William N. Sloan............. 237 0.01%
Potsdam, New York
William D. Stalder........... 13,380 0.48%
Morristown, New York
David G. Wallace............. 7,516 0.27%
Cazenovia, New York
James A. Wears............... 10,431 0.37%
Ogdensburg, New York
Hugh G. Zimmer............... 20,386 0.73%
Nichols, New York
All Directors and Officers as
a Group..................... 150,791 5.40%
</TABLE>
(Footnotes on next page)
56
<PAGE>
- --------
(1) Represents all shares as to which the named individual possessed sole or
shared voting or investment power as of June 1, 1995, including shares held
by, in the name of, or in trust for, spouse and dependent children of named
individual and other relatives living in the same household, even if
beneficial ownership has been disclaimed as to any of these shares by the
nominee or director.
(2) The listed amounts include shares as to which certain directors are
beneficial owners but not the sole beneficial owners as follows: Mr.
Burgess' wife holds 300 shares in her own name; Dr. MacArthur's wife holds
150 shares; Mr. Belden holds 1,648 shares jointly with his wife; Mr. Zimmer
holds 16,737 shares jointly with his wife; Mr. Cummings' wife holds 141
shares in her own name; Mr. Sloan holds 68 shares jointly with his wife;
Mr. DiCerbo holds 4,176 shares jointly with his wife, 12,290 shares are
held in the name of the law partnership of DiCerbo and Palumbo, 140 shares
are held by his wife, 160 shares are held by his daughter, 400 shares are
held by his son, and 1,000 shares are held in trust for his children; Mr.
Franklin's wife holds 2,352 shares in her own name; Mr. Hirschey's wife
holds 1,000 shares in her own name and Mr. Hirschey holds 1,000 shares as
Trustee for the Retirement Plan of Climax Manufacturing Company; Mr.
Stalder's wife holds 128 shares in her name; Mr. Patterson holds 1,190
shares jointly with his wife. Mr. Zimmer owns presently exercisable stock
options to purchase 1,000 shares of common stock; Mr. Patton is the
beneficial owner of 1,392 shares held by Company's 401K plan, his wife owns
100 shares in her name and his daughters own 203 shares collectively in
their names; Mr. Wears is the beneficial owner of 3,800 shares held by the
Company's 401K plan and holds 2,142 shares jointly with his wife, and 2,391
shares are held by his wife in her name; and Mr. Wallace is the beneficial
owner of 3,036 shares held by the Company's 401K plan.
CERTAIN REGULATORY CONSIDERATIONS
Bank holding companies and national banks are regulated by state and federal
law. The following is a summary of certain laws and regulations that govern the
Company and the Bank. To the extent that the following information describes
statutory or regulatory provisions, it is qualified in its entirety by
reference to the actual statutes and regulations thereunder.
BANK HOLDING COMPANY SUPERVISION
The Company is registered as a bank holding company under the Bank Holding
Company Act of 1956, as amended (the "BHCA") and as such is subject to
regulation by the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"). As a bank holding company, the Company's activities
and those of its subsidiary are limited to the business of banking and
activities closely related or incidental to banking. Under Federal Reserve
Board policy, a bank holding company is expected to act as a source of
financial strength to its subsidiary banks and to make capital contributions to
a troubled bank subsidiary. The Federal Reserve Board may charge the bank
holding company with engaging in unsafe and unsound practices for failure to
commit resources to a subsidiary bank when required. A required capital
injection may be called for at a time when the Company does not have the
resources to provide it. Any capital loans by the Company to its subsidiary
bank would be subordinate in right of payment to depositors and to certain
other indebtedness of such subsidiary banks.
The BHCA requires the prior approval of the Federal Reserve Board in any case
where a bank holding company proposes to acquire direct or indirect ownership
or control of more than 5% of any class of the voting shares of, or
substantially all of the assets of, any bank (unless it owns a majority of such
bank's voting shares) or otherwise to control a bank or to merge or consolidate
with any other bank holding company. The BHCA also prohibits a bank holding
company, with certain exceptions, from acquiring more than 5% of the voting
shares of any company that is not a bank. The BHCA would prohibit the Federal
Reserve Board from approving an application from the Company to acquire shares
of a bank located outside of New York, unless such an acquisition is
specifically authorized by statute of the state in which the bank whose shares
are to be acquired is located.
However, the Riegal-Neal Interstate Banking and Efficiency Act of 1994
(enacted on September 29, 1994) provides that, among other things,
substantially all state law barriers to the acquisition of banks by out-of-
state bank holding companies will be eliminated effective September 29, 1995.
The law will also permit interstate branching by banks effective as of June 1,
1997, subject to the ability of states to opt-out completely or to set an
earlier effective date. The Company anticipates that the effect of the new law
may be to increase competition within the markets in which the Company
operates, although the Company cannot predict the effect to which competition
will increase in such markets or the timing of such increase.
57
<PAGE>
OCC SUPERVISION
The Bank is supervised and regularly examined by the OCC. The various laws
and regulations administered by the OCC affect corporate practices such as
payment of dividends, incurring debt and acquisition of financial institutions
and other companies, and affect business practices, such as payment of interest
on deposits, the charging of interest on loans, types of business conducted and
location of offices. There are no regulatory orders or outstanding issues
resulting from regulatory examinations of the Bank.
LIMITS ON DIVIDENDS AND OTHER REVENUE SOURCES
The Company's ability to pay dividends to its shareholders is largely
dependent on the Bank's ability to pay dividends to the Company. In addition to
state law requirements and the capital requirements discussed below, the
circumstances under which the Bank may pay dividends are limited by federal
statutes, regulations and policies. For example, as a national bank, the Bank
must obtain the approval of the OCC for the payment of dividends if the total
of all dividends declared in any calendar year would exceed the total of the
Bank's net profits, as defined by applicable regulations, for that year,
combined with its retained net profits for the preceding two years.
Furthermore, the Bank may not pay a dividend in an amount greater than its
undivided profits then on hand after deducting its losses and bad debts, as
defined by applicable regulations. At December 31, 1994, the Bank had $18.0
million in undivided profits legally available for the payment of dividends.
In addition, the Federal Reserve Board and the OCC are authorized to
determine under certain circumstances that the payment of dividends would be an
unsafe or unsound practice and to prohibit payment of such dividends. The
payment of dividends that deplete a bank's capital base could be deemed to
constitute such an unsafe or an unsound practice. The Federal Reserve Board has
indicated that banking organizations should generally pay dividends only out of
current operating earnings.
There are also statutory limits on the transfer of funds to the Company by
its banking subsidiary whether in the form of loans or other extensions of
credit, investments or asset purchases. Such transfers by the Bank to the
Company generally are limited in amount to 10% of the Bank's capital and
surplus, or 20% in the aggregate. Furthermore, such loans and extensions of
credit are required to be collateralized in specified amounts.
CAPITAL REQUIREMENTS
The Federal Reserve Board has established risk-based capital guidelines which
are applicable to bank holding companies. The guidelines establish a framework
intended to make regulatory capital requirements more sensitive to differences
in risk profiles among banking organizations and take off-balance sheet
exposures into explicit account in assessing capital adequacy. The Federal
Reserve Board guidelines define the components of capital, categorize assets
into different risk classes and include certain off-balance sheet items in the
calculation of risk-weighted assets. At least half of the total capital must be
comprised of common equity, retained earnings and a limited amount of perpetual
preferred stock, less goodwill ("Tier I capital"). Banking organizations that
are subject to the guidelines are required to maintain a ratio of Tier I
capital to risk-weighted assets of at least 4.00% and a ratio of total capital
to risk-weighted assets of at least 8.00%. The appropriate regulatory authority
may set higher capital requirements when an organization's particular
circumstances warrant. The remainder ("Tier 2 capital") may consist of a
limited amount of subordinated debt, limited-life preferred stock, certain
other instruments and a limited amount of loan and lease loss reserves. The sum
of Tier I capital and Tier 2 capital is "total risk-based capital." The
Company's Tier I and total risk-based capital ratios as of March 31, 1995 were
12.41% and 13.65%, respectively.
In addition, the Federal Reserve Board has established a minimum leverage
ratio of Tier I capital to quarterly average assets less goodwill ("Tier I
leverage ratio") of 3.00% for bank holding companies that meet certain
specified criteria, including that they have the highest regulatory rating. All
other bank holding companies are required to maintain a Tier I leverage ratio
of 3.00% plus an additional cushion of at least 100
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<PAGE>
to 200 basis points. The Company's Tier I leverage ratio as of March 31, 1995
was 6.70%, which exceeded its regulatory requirement of 4.00%. The guidelines
also provide that banking organizations experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions
substantially above the minimum supervisory levels, without significant
reliance on intangible assets. The Company is subject to the same OCC capital
requirements as those that apply to the Bank.
In February 1994, the federal banking agencies proposed amendments to their
respective risk-based capital requirements that would explicitly identify
concentration of credit risk and certain risks arising from nontraditional
activities, and the management of such risks, as important factors to consider
in assessing an institution's overall capital adequacy. The proposed amendments
do not, however, mandate any specific adjustments to the risk-based capital
calculations as a result of such factors. On August 24, 1994, the Federal
Reserve Board issued proposed amendments to its risk-based capital standards
that would increase the amount of capital required under such standards for
long-dated interest rate and exchange rate contracts and for derivative
contracts based on equity securities and indexes, precious metals (other than
gold) and other commodities. The proposed amendments would also permit banking
institutions to recognize the effect of bilateral netting arrangements in
calculating their exposure to derivative contracts for risk-based capital
purposes. The Company and the Bank do not expect that these proposals, if
adopted in their current form, would have a material effect on its financial
condition or results of operations.
For a discussion of the impact of the Acquisition and the Offerings on the
Company's capital and leverage ratios, see "Risk Factors--Negative Effect of
Acquisition on Regulatory Capital" and "The Acquisition--Regulatory Conditions
and Capital Plan."
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
In December 1991, Congress enacted the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), which substantially revised the bank
regulatory and funding provisions of the Federal Deposit Insurance Act and made
significant revisions to several other federal banking statutes. FDICIA
provides for, among other things, (i) a recapitalization of the Bank Insurance
Fund of the FDIC (the "BIF") by increasing the FDIC's borrowing authority and
providing for adjustments in its assessment rates; (ii) annual on-site
examinations of federally-insured depository institutions by banking
regulators; (iii) publicly available annual financial condition and management
reports for financial institutions, including audits by independent
accountants; (iv) the establishment of uniform accounting standards by federal
banking agencies; (v) the establishment of a "prompt corrective action" system
of regulatory supervision and intervention, based on capitalization levels,
with more scrutiny and restrictions placed on depository institutions with
lower levels of capital; (vi) additional grounds for the appointment of a
conservator or receiver; (vii) a requirement that the FDIC use the least-cost
method of resolving cases of troubled institutions in order to keep the costs
to insurance funds at a minimum; (viii) more comprehensive regulation and
examination of foreign banks; (ix) consumer protection provisions including a
Truth-in-Savings Act; (x) a requirement that the FDIC establish a risk-based
deposit insurance assessment system; (xi) restrictions or prohibitions on
accepting brokered deposits, except for institutions which significantly exceed
minimum capital requirements; and (xii) certain additional limits on deposit
insurance coverage.
Under the FDIC's risk-related premium schedule for insured depository
institutions, FDIC insurance premiums range from 0.23% for the best
capitalized, healthiest institutions, to 0.31% for the weakest institutions.
The Bank's premium for the semi-annual assessment period ending December 31,
1994, was 0.23% of insured deposits. Following the Acquisition, it is
anticipated that the Bank's premium will increase to 0.26%.
On January 31, 1995, the FDIC published two proposed rules which outline the
agency's plan for semi-annual assessment rates applicable to institutions
insured by the Bank Insurance Fund ("BIF") and the Savings Association
Insurance Fund ("SAIF"). Under the proposals, BIF members such as the Bank
would pay assessment rates ranging from 0.04% to 0.31% depending on their risk
classification, while SAIF
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<PAGE>
members would pay assessment rates ranging from 0.23% to 0.31%. Presently, both
BIF and SAIF members pay according to the 0.23% to 0.31% schedule. The proposed
BIF rates are expected to become effective in mid-1995. If the FDIC's proposed
BIF rule becomes effective, the Company anticipates that the Bank's premium
following the Acquisition will be 0.07% as an "adequately capitalized" bank.
When the Bank's Tier I leverage ratio reaches 5%, the premium will be 0.04% as
a "well capitalized" bank.
FDICIA requires federal banking agencies to take "prompt corrective action"
with respect to banks that do not meet minimum capital requirements. FDICIA
establishes five capital tiers: "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." The following table sets forth the minimum capital ratios
that a bank must satisfy in order to be considered "well capitalized" or
"adequately capitalized" under Federal Reserve Board regulations:
<TABLE>
<CAPTION>
ADEQUATELY CAPITALIZED WELL CAPITALIZED
---------------------- ----------------
<S> <C> <C>
Total Risk-Based Capital Ratio..... 8% 10%
Tier I Risk-Based Capital Ratio.... 4% 6%
Tier I Leverage Ratio.............. 4% 5%
</TABLE>
If a bank does not meet all of the minimum capital ratios necessary to be
considered "adequately capitalized," it will be considered "undercapitalized,"
"significantly undercapitalized," or "critically undercapitalized," depending
upon the amount of the shortfall in its capital. As of March 31, 1995, the
Bank's total risk-based capital ratio and Tier I risk-based capital ratio were
13.46% and 12.21%, respectively, and its Tier I leverage ratio as of such date
was 6.59%. As a result of the Acquisition and the infusion of additional
capital from the Offerings, it is anticipated that the Bank will be classified
as "adequately capitalized." See "The Acquisition -- Regulatory Conditions and
Capital Plan," "Risk Factors--Negative Effect of Acquisition on Regulatory
Capital."
Notwithstanding the foregoing, if its principal federal regulator determines
that an "adequately capitalized" institution is in an unsafe or unsound
condition or is engaging in an unsafe or unsound practice, it may require the
institution to submit a corrective action plan, restrict its asset growth and
prohibit branching, new acquisitions and new lines of business. Among other
things, an institution's principal federal regulator may deem the institution
to be engaging in an unsafe or unsound practice if it receives a less than
satisfactory rating for asset quality, management, earnings or liquidity in its
most recent examination.
Possible sanctions for undercapitalized depository institutions include a
prohibition on the payment of dividends and a requirement that an institution
submit a capital restoration plan to its principal federal regulator. The
capital restoration plan of an undercapitalized bank will not be approved
unless any holding company that controls the bank guarantees the bank's
performance. The obligation of a controlling bank holding company to fund a
capital restoration plan is limited to the lesser of five percent (5%) of an
undercapitalized subsidiary's assets or the amount required to meet regulatory
capital requirements. If an undercapitalized depository institution fails to
submit or implement an acceptable capital restoration plan, it can be subjected
to more severe sanctions, including an order to sell sufficient voting stock to
become adequately capitalized. Critically undercapitalized institutions are
subject to the appointment of a receiver or conservator.
In addition, FDICIA requires regulators to impose new non-capital measures of
bank safety, such as loan underwriting standards and minimum earnings levels.
Regulators are also required to perform annual on-site bank examinations, place
limits on real estate lending by banks and tighten auditing requirements.
Many of the provisions of FDICIA will be implemented through the adoption of
regulations by the various federal banking agencies. Although the precise
effect of the legislation on the Company and the Bank therefore cannot be
assessed at this time, the Company does not anticipate that such regulations
will materially affect its operating results, financial condition or liquidity.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue 5,000,000 shares of common stock, $1.25
par value per share and 500,000 shares of preferred stock, $1.00 par value per
share. As of June 1, 1995, 2,791,750 shares of Common Stock were issued and
outstanding. The remaining authorized but unissued shares of the Company's
Common Stock may be issued by the Board without further shareholder approval.
On June 21, 1995, the Company's Board of Directors duly adopted a resolution
fixing the designation, number, preferences and other rights and limitations of
the Preferred Stock. The terms of the Preferred Stock are more fully set forth
in the Certificate of the Powers, Designations, Preferences and Rights of the
Series A 9.00% Cumulative Perpetual Preferred Stock (the "Preferred Stock
Certificate") which is filed as an exhibit to the Registration Statement. Upon
consummation of the Preferred Stock Offering, all shares of the Preferred Stock
will be issued and outstanding.
The Company's Certificate of Incorporation also authorizes the Company's
Board of Directors, without shareholder approval, to issue up to 410,000 shares
of additional preferred stock (which amount excludes the Series A Preferred
Stock) and to establish the relative rights, designations, preferences and
limitations or restrictions of the preferred stock (the "Blank Check Preferred
Stock.") As of the date of this Prospectus there were no shares of Blank Check
Preferred Stock outstanding.
COMMON STOCK
Voting Rights. The holders of Common Stock are entitled to one vote per share
on all matters to be voted on by the shareholders. Such shareholders do not
have cumulative voting rights in the election of directors.
Dividends. The Company may pay dividends as declared from time to time by the
Board of Directors out of funds legally available therefor, subject to certain
restrictions. Although the Board of Directors of the Company has indicated its
intention to continue the payment of cash dividends on the Common Stock, no
assurance can be given that any dividends will be declared or, if declared,
what the amount of the dividends will be or whether such dividends, once
declared, will continue. As a bank holding company, the Company's ability to
pay such dividends is primarily a function of the dividend payments it receives
from the Bank. See "Dividends" and "Certain Regulatory Considerations -- Limits
on Dividends and Other Revenue Sources." The holders of Common Stock will be
entitled to receive any dividends on the Common Stock in proportion to their
holdings of Common Stock.
Rights in Liquidation. In the event of a liquidation, dissolution or winding
up of the Company, each holder of Common Stock would be entitled to receive,
after payment of all debts and liabilities of the Company and after any
required distribution to holders of any issued and outstanding preferred stock,
a pro rata portion of all assets of the Company available for distribution to
holders of Common Stock.
No Preemptive Rights; No Redemption. Holders of shares of Common Stock are
not entitled to preemptive rights with respect to any shares of any capital
stock of the Company that may be issued. The Common Stock is not subject to
call or redemption and is fully paid and non-assessable.
PREFERRED STOCK
General. The Preferred Stock has no preemptive rights and is not convertible
into any shares of Common Stock. The rights of the holders of shares of
Preferred Stock will be subordinate to the rights of the Company's general
creditors. There is no sinking fund with respect to the Preferred Stock. Upon
issuance the Preferred Stock will be fully paid and non-assessable.
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<PAGE>
Rank. The Preferred Stock will rank, with respect to dividend rights and
rights on liquidation, winding up or dissolution of the Company, senior to the
Common Stock and to all other classes and series of equity securities of the
Company, now or hereafter authorized, issued or outstanding (the Common Stock
and such other classes of equity securities referred to herein as the "Junior
Stock"), other than classes of series of equity securities ranking on a parity
with the Preferred Stock (the "Parity Stock"). The Preferred Stock will be
subject to the creation of such Parity Stock and Junior Stock to the extent not
expressly prohibited by the Company's Certificate of Incorporation.
Dividend Rights. Holders of Preferred Stock are entitled to be paid, if and
when declared by the Board of Directors, out of funds legally available
therefor, cumulative semi-annual cash dividends at the rate of 9.00% per annum
(the "Preferred Dividend"). The Preferred Dividend will have priority over any
dividends with respect to the Junior Stock. The Preferred Dividend will
accumulate from and including the earliest date of original issuance of the
Preferred Stock and will be payable on March 31 and September 30 of each year
(each a "Dividend Payment Date") with the first payment on September 30, 1995
representing a pro rated amount from the date of issuance. Dividends will be
payable to holders of record as they appear on the books of the Company at the
close of business on a date not more than 30 calendar days and not less than 10
calendar days preceding the Dividend Payment Date therefor, as determined by
the Board of Directors (the "Record Date").
As long as the Preferred Stock is outstanding and any payment of the
Preferred Dividend is in arrears, the Company may not (i) declare, pay or set
apart for payment any dividends on any shares of Common Stock or other Junior
Stock, or (ii) make any payment on account of, or set apart payment for, the
purchase, redemption or other retirement of, or with respect to any sinking or
other similar fund or agreement for the purchase, redemption or other
retirement of, any shares of Common Stock or Junior Stock, or (iii) make any
distribution in respect of Common Stock or Junior Stock, whether directly or
indirectly, and whether in cash, obligations or securities of the Company or
other property, other than dividends or distributions of Junior Stock which is
neither convertible into, nor exchangeable for, any securities of the Company
other than Junior Stock or rights, warrants options or calls exercisable or
exchangeable for or convertible into Junior Stock, or (iv) permit any
corporation or other entity controlled directly or indirectly by the Company to
purchase or otherwise acquire or redeem any shares of Common Stock or other
Junior Stock or any warrants, calls or options exercisable or exchangeable for
or convertible into shares of Common Stock or Junior Stock.
Dividends in arrears with respect to the Preferred Stock may be declared and
paid at any time, without reference to any regular Dividend Payment Date, to
holders of record at the close of business as they appear on the books of the
Company on the Record Date established with respect to such payment in arrears.
If there is any Parity Stock outstanding, and if the Payment of dividends on
any shares of Preferred Stock or Parity Stock is in arrears, the Company, in
making any dividend payment on account of the Preferred Stock or Parity Stock,
is required to make such payment ratably upon all outstanding shares of the
Preferred Stock and the Parity Stock in proportion to the respective amounts of
accrued dividends in arrears upon such shares of Preferred Stock and Parity
Stock to the date of such dividend payment.
Holders of shares of Preferred Stock will not be entitled to any dividends,
whether payable in cash, obligations or securities of the Company or other
property, in excess of full accrued dividends on the Preferred Stock. No
interest, or sum of money in lieu of interest, will be payable in respect of
any dividend or other payment or payments which may be in arrears with respect
to the Preferred Stock. All dividends paid with respect to the Preferred Stock
will be paid ratably to the holders entitled thereto.
The ability of the Company to pay dividends on the Preferred Stock may be
limited by the Delaware General Corporation Law and will depend on the
Company's ability to obtain funds for such purpose from the Bank. See "Certain
Regulatory Considerations--Limits on Dividends and Other Revenue Sources."
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<PAGE>
Liquidation Preference. In the event of any liquidation, dissolution or
winding up of the Company, voluntary or involuntary, the holders of Preferred
Stock will be entitled to receive out of the assets of the Company available
for distribution to stockholders, before any distribution of assets is made to
the holders of Common Stock or other Junior Stock, the amount of $100 per share
plus an amount equal to all accrued and unpaid dividends thereon to the date
fixed for such liquidation, dissolution or winding up. If, upon any voluntary
or involuntary liquidation, dissolution or winding up of the Company, the
amounts payable with respect to the Preferred Stock and any Parity Stock are
not paid in full, the holders of Preferred Stock and of such Parity Stock will
share ratably in any such distribution of assets of the Company in proportion
to the full respective preferential amounts (including accrued and unpaid
dividends) to which they are entitled. After payment to the holders of
Preferred Stock of the full preferential amount of the liquidating distribution
(including accrued and unpaid dividends) to which they are entitled, the
holders of the Preferred Stock will be entitled to no further participation in
any distribution of assets by the Company. All distributions made with respect
to the Preferred Stock in connection with such liquidation, dissolution or
winding up of the Company will be made pro rata to the holders entitled
thereto. Neither the voluntary sale, conveyance, exchange or transfer of all or
any part of the property or assets of the Company, nor the consolidation,
merger or other business combination of the Company with or into any other
corporation, will be considered a voluntary or involuntary liquidation,
dissolution or winding up of the Company.
Optional Redemption. On or before December 31, 1995, the Preferred Stock is
redeemable ratably at the option of the Company for cash, in whole or in part,
at any time and from time to time, at $100 per share plus accrued and unpaid
dividends, without interest. On or after January 1, 1996, the Preferred Stock
is redeemable ratably at the option of the Company for cash, in whole or in
part, at any time and from time to time, at the declining redemption price per
share set forth below plus accrued and unpaid dividends, without interest, to
the extent that the Company has funds legally available therefor:
<TABLE>
<CAPTION>
IF REDEEMED DURING THE REDEMPTION PRICE PER
12 MONTHS BEGINNING SHARE OF PREFERRED
JANUARY 1, STOCK
------------------- --------------------
<S> <C>
1996 $105
1997 104
1998 103
1999 102
2000 101
2001 and thereafter 100
</TABLE>
The Company will mail notice of redemption to each holder of record of the
shares of Preferred Stock to be redeemed as they appear on the books of the
Company at the close of business on a date not less than 30 nor more than 60
calendar days prior to the redemption date, as determined by the Board of
Directors. From and after the redemption date (unless the Company defaults in
providing for the payment of the redemption price plus accrued and unpaid
dividends), dividends will cease to accrue on the shares of the Preferred Stock
called for redemption, all rights of the holders thereof (except the right to
receive the redemption price plus accrued and unpaid dividends, without
interest) will cease with respect to such shares, and such shares of the
Preferred Stock will no longer be deemed to be outstanding and shall not have
the status of the Preferred Stock.
As long as the payment of any dividends on shares of the Preferred Stock or
any Parity Stock is in arrears, no shares of the Preferred Stock or Parity
Stock will be redeemed unless all such shares are simultaneously redeemed, and
the Company may not (i) make payment on account of, or set apart payment for,
the purchase or other acquisition, redemption, retirement or other requirement
of, or with respect to, any Parity Stock or any warrants, rights, calls or
options exercisable or exchangeable for or convertible into Parity Stock or
(ii) permit any corporation or other entity controlled directly or indirectly
by the Company to purchase or otherwise acquire or redeem any Parity Stock or
any warrants, rights, calls or options exercisable or exchangeable for or
convertible into Parity Stock; provided, however, that the foregoing will not
prevent the purchase or other acquisition of such shares pursuant to a purchase
or exchange offer made on the same terms to holders of all such shares
outstanding.
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<PAGE>
Voting Rights. Except as indicated below and except as required by applicable
law, the holders of the Preferred Stock will not be entitled to vote for any
purpose. To the extent that the holders of Preferred Stock are entitled to
vote, each holder shall be entitled to one vote for each share of the Preferred
Stock held by such holder.
As long as any shares of the Preferred Stock remain outstanding, the
affirmative vote of the holders of at least two-thirds of the votes entitled to
be cast with respect to the then outstanding shares of the Preferred Stock,
voting separately as one class, at a meeting duly held for that purpose, will
be necessary (i) to authorize, create or issue or increase the authorized or
issued amount of any class or series of equity securities of the Company
ranking senior or on a parity with the Preferred Stock as to dividend rights or
rights upon liquidation, winding up or dissolution of the Company, or (ii) to
repeal, amend or otherwise change any of the provisions of the Certificate of
Incorporation (including the Preferred Stock Certificate) in any manner which
adversely affects the powers, preferences, voting power or other rights or
privileges of the Preferred Stock, or (iii) to sell, lease or convey all or
substantially all of the Company's assets if as a result of such transaction
the Preferred Stock would be purchased for or otherwise converted into
consideration of less than its Liquidation Preference plus any accrued and
unpaid dividends or as a result of which the Preferred Stock would continue in
existence but with an adverse alteration in its specified designations, rights,
preferences or privileges.
If at any time three Preferred Dividends, whether consecutive or not, shall
be in arrears, in whole or in part, and shall not be paid in cash, then,
without further action, the Board of Directors shall be increased by two and
the holders of Preferred Stock will have the exclusive right at the next annual
meeting of stockholders for the election of directors or special meeting called
for such purpose, voting separately as one class, to elect two directors.
Unless otherwise required by law, such newly elected directors will not
become members of any of the three classes of directors otherwise required by
the Certificate of Incorporation and bylaws of the Company. All rights of the
holders of the Preferred Stock to elect such directors will continue in effect
until the Company is no longer in arrears or in default in respect of the
payment of dividends on the Preferred Stock, at which time such voting right of
the holders of the Preferred Stock shall terminate, without further action,
subject to revesting in the event of each and every subsequent failure of the
Company to pay such dividends for the requisite number of periods as described
above.
The term of office of all directors elected by the holders of the Preferred
Stock in office at any time when the aforesaid voting right is vested in such
holders shall terminate upon the election of the successors at any meeting of
stockholders entitled to vote thereon for the purpose of electing directors.
Any director who shall have been elected by holders of the Preferred Stock may
be removed at any time, either with or without cause, by the affirmative vote
of the holders of record of a majority of the outstanding shares of the
Preferred Stock, voting separately as one class, at a duly held stockholders'
meeting.
CERTAIN CERTIFICATE OF INCORPORATION AND BYLAWS PROVISIONS
There are provisions in the Company's Certificate of Incorporation, Bylaws,
and Stockholder Protection Rights Plan which are intended to discourage non-
negotiated takeover attempts. These provisions are intended to avoid costly
takeover battles and lessen the Company's vulnerability to a hostile change in
control, thereby enhancing the possibility that the Board of Directors can
maximize shareholder value in connection with an unsolicited offer to acquire
the Company. However, anti-takeover provisions can also have the effect of
depressing the Company's stock price because they are an impediment to
potential investors and their ability to gain control of the Company, and thus
discourage activities such as unsolicited merger proposals, acquisitions, or
tender offers by which shareholders might otherwise receive enhanced
consideration for their shares.
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<PAGE>
The Company's Certificate of Incorporation authorizes 5,000,000 shares of
Common Stock, of which 2,791,750 shares were outstanding as of June 1, 1995.
The Certificate of Incorporation also authorizes the issuance of 500,000 shares
of preferred stock, of which 90,000 constitute the Preferred Stock and of which
410,000 are available for issuance as Blank Check Preferred Stock. The
remaining 2,208,250 shares of authorized but unissued Common Stock, and the
410,000 shares of authorized but unissued Blank Check Preferred Stock, may be
issued by the Board without further shareholder approval (if consistent with
its fiduciary responsibilities), except as may be required with respect to a
particular transaction by applicable law or by regulatory agencies having
jurisdiction over the Company, and could be utilized to deter future attempts
to gain control of the Company.
The Company has a classified Board which provides for the Board to be divided
into three classes, as nearly equal in number as possible, with approximately
one third of the directors to be elected annually for three-year terms. A
classified board helps to assure continuity and stability of corporate
leadership and policy by extending the time required to elect a majority of the
directors to at least two successive annual meetings. This extension of time
may also tend to discourage a tender offer or takeover bid by making it more
difficult for a majority of shareholders to change the composition of the Board
of Directors.
The Company's Certificate of Incorporation contains a provision which
provides that certain business combinations require the affirmative vote of
either (a) the holders of three-fourths of the Company's outstanding Common
Stock and a majority of the continuing directors; or (b) the holders of two-
thirds of the Company's outstanding Common Stock and two-thirds of the
continuing directors. These "supermajority" requirements could result in the
Company's board and management (who owned or controlled approximately 5.40% of
the Company's Common Stock as of June 1, 1995) exercising a stronger influence
over any proposed takeover by refusing to approve a proposed business
combination and by obtaining sufficient additional votes, including votes
obtained through the issuance of additional shares to parties friendly to their
interests, to preclude the two-thirds or three-fourths shareholder approval
requirement.
The Company's Certificate of Incorporation also provides that the provisions
designed to protect the Company from unfriendly takeover attempts can only be
amended by an affirmative vote of (a) holders of at least three-fourths of the
outstanding Common Stock of the Company and a majority of the continuing
directors, or (b) holders of at least two-thirds of the outstanding Common
Stock of the Company and two-thirds of the continuing directors.
RIGHTS PLAN
On February 21, 1995, the Company's Board of Directors adopted a Stockholder
Protection Rights Plan ("Plan") and declared a distribution on February 24,
1995 to shareholders of record as of February 21, 1995 of one Right for each
outstanding share of the Common Stock. The Plan is intended to protect
shareholders in the event an unsolicited offer or attempt to acquire control of
the Company is made, including a coercive or unfair offer or other takeover
attempt that could impair the ability of the Company's Board of Directors to
fully represent the interests of the Company's shareholders. One Right will
attach to each share of Common Stock offered hereby.
The Rights become exercisable in the event that a person, entity or group
("Person") acquires, or commences a tender offer which, if successful, would
enable such Person to acquire, 15% or more of the outstanding shares of the
Common Stock. Each Right initially entitles stockholders to purchase one share
of Common Stock at an exercise price of $85.00 per share, subject to
adjustments. If, after the Rights become exercisable, a Person acquires 15% or
more of the outstanding shares of the Common Stock, the holder of each Right
may purchase, for the then current exercise price of the Right, that number of
shares having a market value equal to twice the exercise price. If, after the
Rights become exercisable, the Company merges or consolidates with, sells or
transfers 50% if its assets (as measured by book value, market value, or
operating income or cash flow productivity) to, or engages in certain other
transactions with, another Person, the Company shall take such steps as are
necessary to ensure, and shall not consummate or permit such
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transaction to occur until it shall have entered into an agreement with the
other Person providing, that upon consummation of the transaction, holders of
each Right shall be entitled to purchase, for the then current exercise price
of the Right, that number of shares of the Common Stock of the other Person
having a market value equal to twice the exercise price, and further providing
that the other Person shall assume all of the Company's obligations under the
Plan.
The Rights may be redeemed by the Company under certain circumstances at a
price of $ 0.01 per Right, and will expire on February 21, 2005 if not redeemed
or exercised earlier. If there are not sufficient shares of the Common Stock
authorized at the time the Rights become exercisable, the Board of Directors
will secure stockholder authorization for sufficient additional shares or,
alternatively, will provide for the issuance of other securities or assets of
the Company having an equivalent value upon exercise of the Rights.
66
<PAGE>
UNDERWRITING
SALE OF COMMON STOCK
Subject to the terms and conditions set forth in an underwriting agreement
(the "Common Stock Underwriting Agreement") dated the date hereof, M.A.
Schapiro and First Albany Corporation (the "Underwriters") have severally
agreed to purchase, and the Company has agreed to sell to them, the respective
number of shares of Common Stock set forth opposite the names of such
Underwriters below. In the Common Stock Underwriting Agreement, the several
Underwriters have agreed, subject to the terms and conditions set forth
therein, to purchase all such shares of Common Stock (other than those covered
by the over-allotment option described below), if any are purchased. In the
event of default by an Underwriter with respect to its obligation to purchase
the shares of Common Stock, the Common Stock Underwriting Agreement provides
that, in certain circumstances, purchase commitments of the nondefaulting
Underwriter may be increased or the Common Stock Underwriting Agreement may be
terminated.
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
---- ----------------
<S> <C>
M.A. Schapiro & Co., Inc................................. 355,000
First Albany Corporation................................. 355,000
-------
Total................................................ 710,000
=======
</TABLE>
The Underwriters have advised the Company that they propose initially to
offer the shares of Common Stock to the public at the public offering price set
forth on the cover page of this Prospectus, and to certain dealers at such
price less a concession not in excess of $0.80 per share. The Underwriters may
allow, and such dealers may reallow, a discount not in excess of $0.10 per
share of Common Stock on sales to certain other dealers. After the initial
public offering, the public offering price, concession and discount may be
changed by the Underwriters.
The offering price per share of Common Stock will be determined by agreement
between the Underwriters and the Company. Such determination will be based on
price/earnings and book value multiples of comparable financial institutions,
the financial condition and prospects of the Company and market conditions at
the time of the offering.
The Company has granted the Underwriters an option exercisable for 30 days
after the date hereof to purchase up to 112,500 additional shares of Common
Stock to cover over-allotments, if any, at the initial public offering price of
the Common Stock, less the underwriting discount. If the Underwriters exercise
this option, each of the Underwriters will have a firm commitment, subject to
certain conditions, to purchase approximately the same percentage thereof which
the number of shares of Common Stock to be purchased by it shown in the
foregoing table bears to the shares of Common Stock initially offered hereby.
The Company, its executive officers and its directors, and each holder of 5%
or more of the Common Stock have agreed not to offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock, or any securities convertible
into or exercisable or exchangeable for Common Stock, for a period of 180 days
after the date of this Prospectus without the prior written consent of the
Underwriters, other than the shares of Common Stock offered hereby.
RESERVED SHARES
The Company has reserved up to 40,000 shares of Common Stock for sale to
certain directors, officers and employees of the Company. There will be no
underwriting discount on the Reserved Shares which will be sold directly by the
Company to the directors, officers and employees of the Company who agree to
purchase such shares. If the Reserved Shares are not purchased by directors,
officers, and employees of the Bank, they will be available for sale to the
public by the Underwriters.
67
<PAGE>
SALE OF PREFERRED STOCK
Subject to the terms and conditions set forth in an underwriting agreement
(the "Preferred Stock Underwriting Agreement") dated the date hereof, M.A.
Schapiro has agreed to purchase, and the Company has agreed to sell to M.A.
Schapiro, 90,000 shares of Preferred Stock. In the Preferred Stock Underwriting
Agreement, M.A. Schapiro has agreed, subject to the terms and conditions set
forth therein, to purchase all of such shares of Preferred Stock, if any are
purchased. The obligation of M.A. Schapiro to purchase shares of Preferred
Stock is not contingent on the obligation of M.A. Schapiro to purchase any
shares of Common Stock.
M.A. Schapiro has advised the Company that it proposes to offer the shares of
Preferred Stock at the public offering price set forth on the cover page of
this Prospectus. M.A. Schapiro intends to sell the shares of Preferred Stock
directly to investors and not through dealers. The Preferred Stock will be
offered to the public with a minimum purchase requirement of 10,000 shares. If
the Preferred Stock is approved for quotation on the Nasdaq National Market,
M.A. Schapiro intends to make a market in the Preferred Stock.
GENERAL
The Company has agreed to indemnify the several Underwriters against certain
liabilities which may be incurred in connection with the Common Stock Offering
or the Preferred Stock Offering, including liability arising under the
Securities Act.
M.A. Schapiro has from time to time provided certain financial advisory
services to the Company for which M.A. Schapiro has received customary
compensation. These services include advising the Company with respect to
potential mergers and acquisitions from time to time. M.A. Schapiro acted as
financial advisor to the Company in connection with the Acquisition. M.A.
Schapiro and First Albany Corporation each make a market in the Common Stock
and trade the securities of the Company for their own account and for the
accounts of their customers and may at any time hold long or short positions in
such securities.
LEGAL MATTERS
The validity of the shares of Common Stock and Preferred Stock offered hereby
will be passed upon for the Company by Bond, Schoeneck & King, LLP, Syracuse,
New York. Certain legal matters will be passed upon for the Underwriters by
Cadwalader, Wickersham & Taft, New York, New York.
EXPERTS
The consolidated statements of condition as of December 31, 1994 and 1993 and
the consolidated statements of income, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1994
included in this Prospectus have been so included in reliance on the report of
Coopers & Lybrand L.L.P., independent accountants, given on the authority of
said firm as experts in auditing and accounting.
68
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND OTHER INFORMATION
COMMUNITY BANK SYSTEM, INC.
<TABLE>
<S> <C>
Report of Independent Accounts........................................... F- 2
Consolidated Statements of Condition as of March 31, 1995 (unaudited),
December 31, 1994 and 1993.............................................. F- 3
Consolidated Statements of Income for the Three Month Periods Ended March
31, 1995 and 1994 (unaudited) and for the Years Ended December 31, 1994,
1993 and 1992........................................................... F- 4
Consolidated Statements of Changes in Shareholders' Equity for the Three
Month Periods Ended March 31, 1995 and 1994 (unaudited) and for the
Years Ended December 31, 1994, 1993 and 1992............................ F- 5
Consolidated Statements of Cash Flows for the Three Month Periods Ended
March 31, 1995 and 1994 (unaudited) and for the Years Ended December 31,
1994, 1993 and 1992..................................................... F- 6
Notes to Consolidated Financial Statements............................... F- 7
OTHER INFORMATION
Supplementary Consolidated Financial Information (unaudited)............. F-24
Schedule of Liabilities to be Assumed and Assets to be Acquired by
Community Bank, N.A. (unaudited)........................................ F-25
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Community Bank System, Inc.
We have audited the accompanying consolidated statements of condition of
Community Bank System, Inc. and Subsidiaries as of December 31, 1994 and 1993
and the related consolidated statements of income, changes in shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial condition of Community Bank
System, Inc. and Subsidiaries as of December 31, 1994 and 1993, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994 in conformity with generally
accepted accounting principles.
As further discussed in the notes to the consolidated financial statements,
the Company changed its method of accounting for post-retirement benefits other
than pensions, income taxes, and investments in 1993.
Coopers & Lybrand L.L.P.
Syracuse, New York
January 27, 1995, except for Note O
as to which the date is February 21, 1995
F-2
<PAGE>
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and due from banks............... $ 50,721,496 $ 30,522,189 $ 27,422,278
Interest bearing deposits with other
banks................................ 90,000
------------ ------------ ------------
Total cash and cash equivalents... 50,721,496 30,522,189 27,512,278
Investment securities (approximate
market value of $391,124,000,
$374,117,000 and $260,580,000)....... 387,177,395 378,519,604 253,453,616
Loans................................. 519,252,700 510,738,775 443,601,069
Less: Unearned discount............... 23,871,714 27,659,684 25,729,899
Reserve for possible loan losses.... 6,423,564 6,281,109 5,706,609
------------ ------------ ------------
Net loans......................... 488,957,422 476,797,982 412,164,561
Premises and equipment, net........... 10,651,544 10,591,510 10,045,782
Accrued interest receivable........... 8,006,653 6,657,326 4,538,769
Intangible assets, net................ 5,987,253 6,106,608 452,264
Other assets.......................... 8,777,761 6,305,990 4,885,245
------------ ------------ ------------
Total assets...................... $960,279,524 $915,501,209 $713,052,515
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits
Noninterest bearing................. $101,167,608 $103,006,969 $ 88,644,788
Interest bearing.................... 621,212,656 576,630,655 499,670,455
------------ ------------ ------------
Total deposits.................... 722,380,264 679,637,624 588,315,243
Federal funds purchased............. 43,765,000 57,300,000 57,000,000
Term borrowings..................... 115,550,000 105,550,000 550,000
Obligation under capital lease...... 42,036
Accrued interest and other
liabilities........................ 9,621,279 6,724,070 5,158,809
------------ ------------ ------------
Total liabilities................. 891,316,543 849,211,694 651,066,088
------------ ------------ ------------
Shareholders' equity:
Preferred stock
500,000 shares authorized
Common stock $1.25 par value;
5,000,000 shares authorized,
2,788,150, 2,788,150, and 2,748,318
shares issued and outstanding...... 3,485,187 3,485,187 3,435,398
Surplus............................. 14,885,100 14,885,096 14,374,149
Undivided profits................... 51,768,386 49,853,313 42,902,266
Unrealized net gains (losses) on
available for sale securities...... (1,172,571) (1,930,414) 1,280,466
Less: Shares issued under employee
stock plan-unearned................ 3,121 3,667 5,852
------------ ------------ ------------
Total shareholders' equity........ 68,962,981 66,289,515 61,986,427
------------ ------------ ------------
Total liabilities and
shareholders' equity............. $960,279,524 $915,501,209 $713,052,515
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31
---------------------- -------------------------------------
1995 1994 1994 1993 1992
----------- ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest income:
Interest and fees on
loans................ $11,470,601 $9,335,055 $40,699,073 $36,235,800 $36,932,349
Interest and dividends
on investments:
U.S. Treasury....... 296,841 482,490 1,800,534 2,041,156 1,659,934
U.S. government
agencies and
corporations....... 3,378,957 1,554,825 8,078,065 6,981,414 6,359,240
States and political
subdivisions....... 301,490 370,897 1,427,476 1,783,253 2,054,964
Mortgage-backed
securities......... 2,965,514 1,608,333 8,922,926 6,831,166 8,273,881
Other securities.... 209,784 154,895 645,828 696,693 754,936
Interest on federal
funds sold............. 32,777 52,760 285,645
Interest on deposits
with other banks....... 1,058 1,133 20,325 24,490
----------- ---------- ----------- ----------- -----------
Total interest
income............. 18,655,964 13,507,553 61,575,035 54,642,567 56,345,439
----------- ---------- ----------- ----------- -----------
Interest expense:
Interest on deposits.. 5,891,418 3,926,895 18,213,046 16,961,993 21,352,303
Interest on federal
funds purchased, and
term borrowings from
banks................ 2,339,030 505,738 3,916,073 766,883 242,278
Interest on capital
lease................ 501 629 4,463 13,586
----------- ---------- ----------- ----------- -----------
Total interest
expense............ 8,230,448 4,433,134 22,129,748 17,733,339 21,608,167
----------- ---------- ----------- ----------- -----------
Net interest income. 10,425,516 9,074,419 39,445,287 36,909,228 34,737,272
Less: Provision for
possible loan losses... 254,411 239,172 1,702,466 1,506,131 2,726,788
----------- ---------- ----------- ----------- -----------
Net interest income
after provision for
loan losses.......... 10,171,105 8,835,247 37,742,821 35,403,097 32,010,484
----------- ---------- ----------- ----------- -----------
Other income:
Fiduciary and
investment services.. 339,936 324,570 1,379,566 1,113,217 898,060
Service charges on
deposit accounts..... 661,759 563,638 2,593,282 2,379,405 2,266,064
Other service charges,
commissions and fees. 337,097 311,625 1,519,043 1,185,642 1,454,938
Other operating
income............... 58,258 32,526 130,822 101,008 278,582
Investment security
gains (losses)....... (3,125) (502,343) (15,000) 184,271
----------- ---------- ----------- ----------- -----------
Total other income.. 1,397,050 1,229,234 5,120,370 4,764,272 5,081,915
----------- ---------- ----------- ----------- -----------
Operating income.... 11,568,155 10,064,481 42,863,191 40,167,369 37,092,399
----------- ---------- ----------- ----------- -----------
Other expenses:
Salaries and employee
benefits............. 3,711,283 3,283,990 13,098,207 11,951,973 11,941,972
Occupancy expense,
net.................. 540,068 533,288 2,042,571 1,813,773 1,849,196
Equipment and
furniture expense.... 426,158 414,883 1,697,230 1,641,750 2,326,589
Other................. 2,346,128 2,024,089 9,659,660 9,419,692 10,329,862
----------- ---------- ----------- ----------- -----------
Total other
expenses........... 7,023,637 6,256,250 26,497,668 24,827,188 26,447,619
----------- ---------- ----------- ----------- -----------
Income before income
taxes................ 4,544,518 3,808,231 16,365,523 15,340,181 10,644,780
Income taxes.......... 1,793,000 1,408,000 6,256,305 5,765,407 3,139,239
----------- ---------- ----------- ----------- -----------
Net Income.......... $ 2,751,518 $2,400,231 $10,109,218 $ 9,574,774 $ 7,505,541
=========== ========== =========== =========== ===========
Earnings per share.. $ .98 $ .85 $ 3.59 $ 3.43 $ 2.76
=========== ========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994 AND THREE MONTH PERIODS ENDED
MARCH 31, 1995 AND 1994 (UNAUDITED)
<TABLE>
<CAPTION>
UNREALIZED
NET GAINS
COMMON SHARES (LOSSES) ON
ISSUED UNDER AVAILABLE
COMMON UNDIVIDED EMPLOYEE STOCK FOR SALE
STOCK SURPLUS PROFITS PLAN--UNEARNED SECURITIES TOTAL
---------- ----------- ----------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1992................... $3,362,825 $13,806,005 $31,083,701 $(8,988) $48,243,543
Net income--1992....... 7,505,541 7,505,541
Cash dividends:
Common, $.90 per share. (2,421,284) (2,421,284)
Common stock issued
under employee stock
plan.................. 8,125 74,108 6,875 89,108
---------- ----------- ----------- --------- ------------- -----------
Balance at December 31,
1992................... $3,370,950 $13,880,113 $36,167,958 $(2,113) $ 0 $53,416,908
Net income--1993....... 9,574,774 9,574,774
Cash dividends:
Common, $1.04 per
share................. (2,840,466) (2,840,466)
Common stock issued
under employee stock
plan.................. 64,448 494,036 (3,739) 554,745
Market value adjustment
on available for sale
investments........... 1,280,466 1,280,466
---------- ----------- ----------- --------- ------------- -----------
Balance at December 31,
1993................... $3,435,398 $14,374,149 $42,902,266 $(5,852) $ 1,280,466 $61,986,427
Net income--Three
months ended
March 31, 1994........ 2,400,231 2,400,231
Cash dividends:
Common, $.27 per share. (742,045) (742,045)
Common stock issued
under employee stock
plan.................. 1,500 12,582 546 14,628
Market value adjustment
on available for sale
investments........... (930,434) (930,434)
---------- ----------- ----------- --------- ------------- -----------
Balance at March 31,
1994................... $3,436,898 $14,386,731 $44,560,452 $(5,306) $ 350,032 $62,728,807
========== =========== =========== ========= ============= ===========
Balance at December 31,
1993................... $3,435,398 $14,374,149 $42,902,266 $ (5,852) $ 1,280,466 $61,986,427
Net income--1994....... 10,109,218 10,109,218
Cash dividends:
Common, $1.14 per
share................. (3,158,171) (3,158,171)
Common stock issued
under employee stock
plan.................. 49,789 510,947 2,185 562,921
Market value adjustment
on available for sale
investments........... (3,210,880) (3,210,880)
---------- ----------- ----------- --------- ------------- -----------
Balance at December 31,
1994.................. $3,485,187 $14,885,096 $49,853,313 $(3,667) $(1,930,414) $66,289,515
Net income--Three
Months ended
March 31, 1995........ 2,751,518
Cash dividends: 2,751,518
Common, $.30 per share. (836,445) (836,445)
Common stock issued
under employee stock
plan.................. 4 546 550
Market value adjustment
on available for sale
investments........... 757,843 757,843
---------- ----------- ----------- --------- ------------- -----------
Balance at March 31,
1995.................. $3,485,187 $14,885,100 $51,768,386 $ (3,121) $ (1,172,571) $68,962,981
========== =========== =========== ========= ============= ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND NON CASH ACTIVITIES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31
------------------------ -------------------------------------------
1995 1994 1994 1993 1992
----------- ----------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net income............ $ 2,751,518 $ 2,400,231 $ 10,109,218 $ 9,574,774 $ 7,505,541
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation......... 359,012 372,510 1,434,356 1,467,370 1,759,862
Net amortization of
intangible assets... 119,355 39,464 350,569 161,569 343,641
Net accretion of
security premiums
and discounts....... (325,696) (55,850) (511,974) (515,161) (467,441)
Provision for loan
losses.............. 254,411 239,172 1,702,466 1,506,131 2,726,788
Provision for
deferred taxes...... (37,021) (114,101) (454,968) (409,081) 146,995
(Gain) loss on sale
of investment
securities.......... 3,125 502,343 15,000 (184,271)
Change in interest
receivable.......... (1,349,327) (257,835) (2,118,557) 918,594 (590,722)
Change in other
assets and other
liabilities......... 1,518,011 698,715 2,183,987 (309,512) (549,637)
Change in unearned
loan fees and costs. (37,635) 2,280 76,510 169,022 224,950
----------- ----------- ------------- ------------- -------------
Net Cash Provided By
Operating
Activities......... 3,252,628 3,327,711 13,273,950 12,578,706 10,915,706
----------- ----------- ------------- ------------- -------------
Investing Activities:
Proceeds from sales of
investment
securities........... 10,900,000 29,240,847 3,000,000 20,298,180
Proceeds from
maturities of
investment
securities........... 10,081,988 7,733,056 64,275,075 111,504,503 54,138,365
Purchases of
investment
securities........... (17,133,295) (62,162,318) (223,998,813) (103,379,889) (108,013,700)
Net change in loans
outstanding.......... (13,956,164) (11,088,057) (65,860,765) (56,466,193) (16,068,199)
Capital expenditures.. (417,046) (231,354) (1,992,834) (984,675) (1,225,043)
Proceeds from sales of
capital assets....... 17,122 132,424
Premium paid for
branch acquisitions.. (6,004,913)
----------- ----------- ------------- ------------- -------------
Net Cash Used By
Investing
Activities......... (21,424,517) (54,848,673) (204,341,403) (46,309,132) (50,737,973)
----------- ----------- ------------- ------------- -------------
Financing Activities:
Net change in demand
deposits, NOW
accounts, and savings
accounts............. 579,180 23,741,781 11,755,827 18,213,745 33,206,445
Net change in
certificates of
deposit.............. 42,163,460 10,161,030 79,566,554 12,186,820 (51,167,434)
Net change in term
borrowings........... (3,535,000) 19,500,000 105,300,000 4,714,100 48,835,900
Payments on lease
obligation........... (25,098) (42,036) (96,747) (723,023)
Issuance of common
stock................ 14,082 560,456 553,809 80,328
Cash dividends........ (836,445) (742,045) (3,063,437) (2,840,466) (2,421,284)
----------- ----------- ------------- ------------- -------------
Net Cash Provided By
Financing Activi-
ties............... 38,371,195 52,649,750 194,077,364 32,731,261 27,810,932
----------- ----------- ------------- ------------- -------------
Change In Cash And Cash
Equivalents............ 20,199,307 1,128,788 3,009,911 (999,165) (12,011,335)
Cash and cash
equivalents at
beginning of year.... 30,522,189 27,512,278 27,512,278 28,511,443 40,522,778
----------- ----------- ------------- ------------- -------------
CASH AND CASH
EQUIVALENTS AT END OF
YEAR.................. 50,721,496 28,641,066 $ 30,522,189 $ 27,512,278 $ 28,511,443
=========== =========== ============= ============= =============
SUPPLEMENTAL
DISCLOSURES OF CASH
FLOW INFORMATION:
Cash Paid For
Interest............. $ 6,042,995 $ 4,154,416 $ 21,369,189 $ 18,063,232 $ 23,068,870
=========== =========== ============= ============= =============
Cash Paid For Income
Taxes................ $ 474,503 $ 390,950 $ 5,945,320 $ 7,143,311 $ 3,711,341
=========== =========== ============= ============= =============
SUPPLEMENTAL DISCLOSURE
OF NON CASH AND OTHER
INVESTING ACTIVITIES:
Gross change in
unrealized net gains
and (losses) on
available for sale
securities........... $ 1,280,788 $(1,572,476) $ (5,426,535) $ 2,164,046
</TABLE>
Proceeds from maturities of investment securities for the first quarter of
1995 included $3,546,960 from available for sale and $6,535,028 from held to
maturity securities. All purchases of investment securities for 1995 were held
to maturity securities.
Proceeds from maturities of investment securities for 1994 included
$27,695,203 from available for sale and $36,579,872 from held to maturity
securities.
Purchases of investment securities for 1994 included $22,055,530 of available
for sale and $201,943,283 of held to maturity securities.
All proceeds from sale of investment securities in 1994 related to available
for sale securities.
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND YEARS ENDED DECEMBER
31, 1994, 1993 AND 1992
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, which include Community Bank, N.A. and a
currently inactive nonbanking subsidiary. Northeastern Computer Services, Inc.,
established in 1981, provided computer servicing activities for the Company,
its subsidiaries, thrift institutions, and credit unions, until it was
dissolved in June 1992. All intercompany accounts and transactions have been
eliminated in consolidation.
Basis of Presentation
In the opinion of management, the accompanying unaudited condensed
consolidated statement of condition as of March 31, 1995 and the unaudited
condensed consolidated statements of income, changes in shareholders' equity
and cash flows for the three-month periods ended March 31, 1995 and 1994
include all adjustments, consisting of normal recurring accruals, necessary for
fair presentation.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks and federal funds sold. Generally, federal
funds are sold for one-day periods.
The carrying amounts reported in the balance sheet for cash and cash
equivalents approximate those assets' fair values.
Investment Securities
Effective December 31, 1993 the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." As required by this pronouncement, the Company has
classified its investments in debt and equity securities as held to maturity or
available for sale. Held to maturity securities are those for which the Company
has the positive intent and ability to hold to maturity, and are reported at
cost, adjusted for amortization of premiums and accretion of discounts. Debt
securities not classified as held to maturity are classified as available for
sale and are reported at fair market value with net unrealized gains and losses
reflected as a separate component of shareholders' equity, net of applicable
income taxes. None of the Company's investment securities has been classified
as trading securities.
The average cost method is used in determining the realized gains and losses
on sales of investment securities, which are reported under other income-
investment security gains (losses).
Fair values for investment securities are based on quoted market prices,
where available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
Loans
For variable rate loans that reprice frequently and with no significant
credit risk, fair values are based on carrying values. Fair values for fixed
rate loans are estimated using discounted cash flow analyses, using interest
rates currently being offered for loans with similar terms to borrowers of
similar credit quality. The carrying amount of accrued interest approximates
its fair value.
Interest on Loans and Reserve for Possible Loan Losses
Interest on commercial loans and mortgages is accrued and credited to
operations based upon the principal amount outstanding. Unearned discount on
installment loans is recognized as income over the term of the loan,
principally by the actuarial method. Nonrefundable loan fees and related direct
costs are deferred and amortized over the life of the loan as an adjustment to
loan yield using the effective interest method.
F-7
<PAGE>
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND YEARS ENDED DECEMBER
31, 1994, 1993 AND 1992
The Company's banking subsidiary places a loan on nonaccrual status and
recognizes income on a cash basis when it is more than ninety days past due (or
sooner, if management concludes collection of interest is doubtful), except
when in the opinion of management, it is well-collateralized and in the process
of collection.
The reserve for possible loan losses is maintained at a level considered
adequate to provide for potential loan losses. The reserve is increased by
provisions charged to expense and reduced by net charge-offs. The level of the
reserve is based on management's evaluation of potential losses in the loan
portfolio, as well as prevailing economic conditions.
During 1993, the Financial Accounting Standards Board issued Statement No.
114, "Accounting By Creditors for Impairment of a Loan." This pronouncement,
effective for fiscal years beginning 1995, is not expected to have a material
effect on the Company's financial statements.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. The
annual provision for depreciation is computed using the straight-line method in
amounts sufficient to recognize the cost of depreciable assets over their
estimated useful lives. Maintenance and repairs are charged to expense as
incurred.
Other Real Estate
Properties acquired through foreclosure, or by deed in lieu of foreclosure,
are recorded at the lower of the unpaid loan balance plus settlement costs, or
fair value. The carrying value of individual properties is subsequently
adjusted to the extent that it exceeds estimated fair value.
Intangible Assets
Intangible assets represent core deposit intangibles and goodwill arising
from various acquisitions. Core deposit intangibles are being amortized on a
straight-line basis over five to eight years. Goodwill is being amortized on a
straight-line basis over ten to fifteen years.
Deposits
The fair values disclosed for demand and savings deposits are equal to the
carrying amounts at the reporting date. The carrying amounts for variable rate
money market accounts and certificates of deposit approximate their fair values
at the reporting date. Fair values for fixed rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregated expected
monthly maturities on time deposits. The carrying value of accrued interest
approximates fair value.
Term Borrowings
The carrying amounts of federal funds purchased, short-term and long-term
borrowings approximate their fair values.
Earnings Per Share
Earnings per share are computed on the basis of weighted average common and
common-equivalent shares outstanding throughout each year (2,815,377 and
2,807,651 in the first quarter of 1995 and 1994 respectively, and 2,814,710 in
1994; 2,788,330 in 1993; and 2,722,093 in 1992).
F-8
<PAGE>
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND YEARS ENDED DECEMBER
31, 1994, 1993 AND 1992
Fair Values of Financial Instruments
FASB Statement No. 107, "Disclosures about Fair Value of Financial
Instruments," requires disclosure of fair value information on financial
instruments, whether or not recognized in the balance sheet, for which it is
practicable to estimate that value. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. Statement 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
Reclassification
Certain amounts from 1993 and 1992 have been reclassified to conform to the
current year's presentation.
NOTE B: INVESTMENT SECURITIES
The amortized cost and estimated market values of investments in securities
are as follows:
<TABLE>
<CAPTION>
AT MARCH 31, 1995
------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
HELD TO MATURITY PORTFOLIO
U.S Treasury securities and
obligations of U.S.
government corporations and
agencies.................... $160,183,822 $4,707,696 $ 627,767 $164,263,751
Obligations of states and
political subdivisions....... 15,784,637 646,516 30,459 16,400,694
Corporate securities.......... 1,500 405 280 1,625
Mortgage-backed securities.... 126,675,125 1,641,269 2,390,025 125,926,369
------------ ---------- ---------- ------------
Totals...................... $302,645,084 $6,995,886 $3,048,531 $306,592,439
============ ========== ========== ============
AVAILABLE FOR SALE PORTFOLIO
U.S Treasury securities and
obligations of U.S.
government corporations and
agencies.................... $ 33,136,707 $ 176,533 $ 971,437 $ 32,341,803
Obligations of states and
political subdivisions....... 1,940,313 36,999 0 1,977,312
Corporate securities.......... 68,884 0 0 68,884
Mortgage-backed securities.... 36,966,659 30,529 1,264,338 35,732,850
------------ ---------- ---------- ------------
Totals...................... $ 72,112,563 $ 244,061 $2,235,775 $ 70,120,849
============ ========== ========== ============
Equity securities............. 13,849,900 10,013 0 13,859,913
Federal Reserve
Bank common stock........... 551,550 0 0 551,550
------------ ---------- ---------- ------------
Totals...................... $ 86,514,013 $ 254,074 $2,235,775 $ 84,532,312
============ ========== ========== ============
Net unrealized gains/(losses)
on Available for Sale
portfolio.................... (1,981,702)
------------
Grand Total Carrying Value.. $387,177,395
============
</TABLE>
F-9
<PAGE>
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND YEARS ENDED DECEMBER
31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
AT DECEMBER 31, 1994
------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
HELD TO MATURITY PORTFOLIO
U.S Treasury securities and
obligations of U.S.
government corporations and
agencies.................... $154,672,077 $2,150,801 $2,455,356 $154,367,522
Obligations of states and
political subdivisions....... 17,304,829 498,618 31,730 17,771,717
Corporate securities.......... 1,500 392 322 1,570
Mortgage-backed securities.... 120,177,983 290,077 4,854,711 115,613,349
------------ ---------- ---------- ------------
Totals...................... $292,156,389 $2,939,888 $7,342,119 $287,754,158
============ ========== ========== ============
AVAILABLE FOR SALE PORTFOLIO
U.S Treasury securities and
obligations of U.S.
government corporations and
agencies.................... $ 33,691,404 $ 53,101 $1,329,958 $ 32,414,547
Obligations of states and
political subdivisions....... 3,432,127 40,398 0 3,472,525
Corporate securities.......... 566,756 1,093 0 567,849
Mortgage-backed securities.... 37,235,167 18,070 2,055,070 35,198,167
------------ ---------- ---------- ------------
Totals...................... $ 74,925,454 $ 112,662 $3,385,028 $ 71,653,088
============ ========== ========== ============
Equity securities............. 14,148,700 9,877 0 14,158,577
Federal Reserve
Bank common stock........... 551,550 0 0 551,550
------------ ---------- ---------- ------------
Totals...................... $ 89,625,704 $ 122,539 $3,385,028 $ 86,363,215
============ ========== ========== ============
Net unrealized gains/(losses)
on Available for Sale
portfolio.................... (3,262,489)
------------
Grand Total Carrying Value.. $378,519,604
============
</TABLE>
F-10
<PAGE>
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND YEARS ENDED DECEMBER
31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
AT DECEMBER 31, 1993
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
HELD TO MATURITY PORTFOLIO
U.S Treasury securities and
obligations of U.S.
government corporations and
agencies..................... $ 53,995,027 $3,990,065 $ 65 $ 57,985,027
Obligations of states and
political subdivisions........ 17,164,639 1,360,881 2,881 18,522,639
Corporate securities........... 1,500 0 0 1,500
Mortgage-backed securities..... 54,686,107 1,818,858 40,858 56,464,107
------------ ---------- -------- ------------
Totals....................... $125,847,273 $7,169,804 $ 43,804 $132,973,273
============ ========== ======== ============
AVAILABLE FOR SALE PORTFOLIO
U.S Treasury securities and
obligations of U.S.
government corporations and
agencies..................... $ 58,722,296 $1,730,788 $ 35,460 $ 60,417,624
Obligations of states and
political subdivisions........ 7,194,351 225,535 0 7,419,886
Corporate securities........... 1,109,257 43,444 0 1,152,701
Mortgage-backed securities..... 53,176,543 453,957 267,929 53,362,571
------------ ---------- -------- ------------
Totals....................... $120,202,447 $2,453,724 $303,389 $122,352,782
============ ========== ======== ============
Equity securities.............. 4,739,500 13,711 0 4,753,211
Federal Reserve
Bank common stock............ 500,350 0 0 500,350
------------ ---------- -------- ------------
Totals....................... $125,442,297 $2,467,435 $303,389 $127,606,343
============ ========== ======== ============
Net unrealized gains/(losses)
on Available for Sale
portfolio..................... 2,164,046
------------
Grand Total Carrying Value... $253,453,616
============
</TABLE>
The amortized cost and estimated market value of debt securities by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AT MARCH 31, 1995
-------------------------------------------------
HELD TO MATURITY AVAILABLE FOR SALE
------------------------- -----------------------
CARRYING EST. MARKET AMORTIZED EST. MARKET
VALUE VALUE COST VALUE
------------ ------------ ----------- -----------
(FIGURES IN DOLLARS)
<S> <C> <C> <C> <C>
Due in one year or less................. $ 3,960,650 $ 3,973,621 $ 2,074,779 $ 2,092,090
Due after one through five years........ 17,558,535 18,092,896 2,358,843 2,303,251
Due after five years through ten years.. 154,450,774 158,599,553 30,712,282 29,992,658
Due after ten years..................... 0 0 0 0
Total................................. 175,969,959 180,666,070 35,145,904 34,387,999
Mortgage-backed securities 126,675,125 125,926,369 36,966,659 35,732,850
------------ ------------ ----------- -----------
Total................................. $302,645,084 $306,592,439 $72,112,563 $70,120,849
============ ============ =========== ===========
</TABLE>
F-11
<PAGE>
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND YEARS ENDED DECEMBER
31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
AT DECEMBER 31, 1994
-------------------------------------------------
HELD TO MATURITY AVAILABLE FOR SALE
------------------------- -----------------------
CARRYING EST. MARKET AMORTIZED EST. MARKET
VALUE VALUE COST VALUE
------------ ------------ ----------- -----------
(FIGURES IN DOLLARS)
<S> <C> <C> <C> <C>
Due in one year or less...... $ 4,508,714 $ 4,505,586 $ 4,563,756 $ 4,595,482
Due after one through five
years....................... 18,520,170 18,938,541 2,359,610 2,315,041
Due after five years through
ten years................... 148,949,522 148,696,274 30,766,921 29,544,399
Due after ten years.......... 0 0 0 0
Total...................... 171,978,406 172,140,401 37,690,287 36,454,922
Mortgage-backed securities... 120,177,983 115,613,757 37,235,167 35,198,166
------------ ------------ ----------- -----------
Total...................... $292,156,389 $287,754,158 $74,925,454 $71,653,088
============ ============ =========== ===========
</TABLE>
Proceeds from sales of investments in debt securities during 1994, 1993 and
1992 were approximately $29,241,000, $3,000,000 and $20,298,000, respectively.
Gross gains of approximately $258,000 and $215,000 for 1994 and 1992 and gross
losses of $761,000, $15,000 and $31,000 were realized on those sales in 1994,
1993 ,and 1992, respectively.
Investment securities with a carrying value of $199,032,705 and $132,506,000
at December 31, 1994 and 1993, respectively, were pledged to collateralize
deposits and for other purposes required by law.
NOTE C: LOANS
Major classifications of loans are summarized as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31
AT MARCH 31 --------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Real estate mortgages:
Residential.................... $194,638,988 $196,547,718 $177,058,875
Commercial..................... 36,280,825 35,603,929 32,914,622
Farm........................... 7,782,340 7,624,577 7,420,575
Agricultural loans............... 12,801,805 13,295,398 11,564,058
Commercial loans................. 69,883,905 67,975,882 58,251,529
Installment loans to individuals. 196,679,745 188,209,205 154,813,023
Other loans...................... 1,185,092 1,482,066 1,578,387
------------ ------------ ------------
519,252,700 510,738,775 443,601,069
Less: Unearned discount.......... (23,871,714) (27,659,684) (25,729,899)
Reserve for possible loan loss-
es............................ (6,423,564) (6,281,109) (5,706,609)
------------ ------------ ------------
Net loans........................ $488,957,422 $476,797,982 $412,164,561
============ ============ ============
</TABLE>
The estimated fair values of loans receivable net of unearned discount at
December 31, 1994 and 1993 were $473,655,000 and $420,878,000, respectively.
F-12
<PAGE>
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND YEARS ENDED DECEMBER
31, 1994, 1993 AND 1992
Changes in the reserve for possible loan losses are summarized below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31 YEAR ENDED DECEMBER 31
---------------------------- -------------------------------------
1995 1994 1994 1993 1992
------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at the beginning
of year................ $ 6,281,109 $ 5,706,609 $ 5,706,609 $ 4,982,451 $ 4,312,422
Provision charged to
expense................ 254,411 239,172 1,702,466 1,506,131 2,726,788
Loans charged off....... (297,523) (337,796) (1,615,712) (1,410,390) (2,601,486)
Recoveries.............. 185,567 99,466 487,746 628,417 544,727
------------- ------------- ----------- ----------- -----------
Balance at end of year.. $ 6,423,564 $ 5,707,451 $ 6,281,109 $ 5,706,609 $ 4,982,451
============= ============= =========== =========== ===========
</TABLE>
Effective January 1, 1995, the Company adopted FASB Statement No. 114,
"Accounting by Creditors for Impairment of a Loan" and related Statement
No.118, which had no effect on the Company's financial statements as of and for
the three months ended March 31, 1995. At March 31, 1995, the recorded
investment in loans for which impairment has been recognized in accordance with
SFAS No. 114 totaled $4,203,000, with a corresponding valuation allowance of
$1,519,000.
The Company grants real estate, consumer, and commercial loans to customers
throughout New York State.
NOTE D: PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31
AT MARCH 31 -----------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Land and land improvements............. $ 2,258,980 $ 2,253,625 $ 2,089,927
Bank premises owned.................... 12,128,464 11,998,034 11,140,847
Equipment.............................. 8,167,463 7,923,757 10,071,301
----------- ----------- -----------
Premises and equipment, gross........ 22,554,907 22,175,416 23,302,075
Less: Allowance for depreciation....... 11,903,363 11,583,906 13,256,293
----------- ----------- -----------
Premises and equipment, net.......... $10,651,544 $10,591,510 $10,045,782
=========== =========== ===========
</TABLE>
NOTE E: INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31
AT MARCH 31 ---------------------
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
Core deposit intangible................. $ 573,400 $ 573,400 $ 573,400
Goodwill and other intangibles.......... 6,593,203 6,593,203 1,112,340
---------- ---------- ----------
Intangible assets, gross.............. 7,166,603 7,166,603 1,685,740
Less: Accumulated amortization.......... 1,179,350 1,059,995 1,233,476
---------- ---------- ----------
Intangible assets, net................ $5,987,253 $6,106,608 $ 452,264
========== ========== ==========
</TABLE>
F-13
<PAGE>
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND YEARS ENDED DECEMBER
31, 1994, 1993 AND 1992
NOTE F: DEPOSITS
Deposits by type are as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31
AT MARCH 31 -------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Demand.............................. $101,167,608 $103,006,969 $ 88,644,788
Savings............................. 308,441,878 306,023,336 308,629,692
Time................................ 312,770,778 270,607,319 191,040,763
------------ ------------ ------------
Total deposits.................... $722,380,264 $679,637,624 $588,315,243
============ ============ ============
</TABLE>
The estimated fair values of deposits at December 31, 1994 and 1993 were
approximately $677,087,000 and $589,795,000, respectively.
At March 31, 1995 and December 31, 1994 and 1993, time certificates of
deposit in denominations of $100,000 and greater totaled $71,399,000,
$47,783,000 and $22,245,000, respectively.
NOTE G: TERM BORROWINGS
Outstanding borrowings were as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31
AT MARCH 31 ------------------------
1995 1994 1993
------------ ------------ -----------
<S> <C> <C> <C>
Federal funds purchased............. $ 43,765,000 $ 57,300,000 $57,000,000
Short-term borrowings............... 115,000,000 105,000,000
Long-term borrowings................ 550,000 550,000 550,000
------------ ------------ -----------
$159,315,000 $162,850,000 $57,550,000
============ ============ ===========
</TABLE>
All short and long-term borrowings above represent Federal Home Loan Bank
advances. These advances are secured by a blanket lien on the Company's
residential real estate loan portfolio.
Borrowings are classified as short-term if their maturity is one year or
less. As of year-end 1994 all short-term borrowings were scheduled to mature
within 53 days. Long-term borrowings mature in 1996. The interest rate on this
borrowing is 4.5%. As of March 31, 1995, all short-term borrowings were
scheduled to mature within 24 days.
NOTE H: INCOME TAXES
Effective January 1, 1993 the Company adopted the provisions of SFAS No. 109
"Accounting for Income Taxes," which requires an asset-liability approach to
recognizing the tax effects of temporary differences between tax and financial
reporting. In prior years, the Company accounted for the tax effects of timing
differences between tax and financial reporting using Accounting Principle
Board Opinion Number 11. This change had no significant effect on the 1993
consolidated financial statements.
F-14
<PAGE>
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND YEARS ENDED DECEMBER
31, 1994, 1993 AND 1992
The provision (benefit) for income taxes for the years ended December 31 is
as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal................................. $4,993,505 $4,542,509 $2,024,798
State................................... 1,717,768 1,631,979 967,446
Deferred:
Federal................................. (341,226) (305,383) 60,600
State................................... (113,742) (103,698) 86,395
---------- ---------- ----------
Total income taxes.................... $6,256,305 $5,765,407 $3,139,239
========== ========== ==========
</TABLE>
The components of the net deferred tax asset, included in other assets, as of
December 31 are as follows:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Allowance for loan losses............................. $2,555,480 $1,945,137
Deferred loan fees.................................... 294,470 326,758
Medical insurance and other reserves.................. 176,197 267,184
Pension and postretirement benefits................... 354,562 157,091
Investment securities................................. 388,683
---------- ----------
Total deferred tax asset.............................. $3,769,392 $2,696,170
---------- ----------
Investment securities................................. $1,576,164
Depreciation.......................................... 66,238 87,474
---------- ----------
Total deferred tax liability.......................... $ 66,238 $1,663,638
---------- ----------
Net deferred tax asset................................ $3,703,154 $1,032,532
========== ==========
</TABLE>
The deferred income taxes in 1992 result from timing differences in the
recognition of income and expense for tax and financial statement purposes. The
principal timing differences in 1992 were the loan loss provision, accretion on
investments and corporate restructuring, which resulted in a deferred tax
expense of $146,995 in 1992.
A reconciliation of the differences between the federal statutory income tax
rate and the effective tax rate for the years ended December 31 is shown in the
following table:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Federal statutory income
tax rate................. 35.0 % 35.0 % 34.0 %
Increase (reduction) in
taxes resulting from:
Tax-exempt interest..... (2.8) (3.8) (5.7)
State income taxes, net
of federal benefit..... 6.4 6.5 6.5
Alternative minimum tax. (5.6)
Other................... (0.4) (0.1) 0.3
---- ---- ----
Effective income tax rate. 38.2 % 37.6 % 29.5 %
==== ==== ====
</TABLE>
F-15
<PAGE>
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND YEARS ENDED DECEMBER
31, 1994, 1993 AND 1992
NOTE I: PENSION PLAN
The Company has a noncontributory defined benefit pension plan for all
eligible employees. The plan is administered by the Trust Department of
Community Bank, N.A. under the direction of an appointed retirement board. The
policy of the Company is to fund the plan to the extent of its maximum tax
deductibility.
The net periodic pension cost and assumptions used in the accounting for the
years ended December 31 were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Service cost--benefits earned during the
year..................................... $ 227,005 $ 199,848 $ 169,430
Interest cost on projected benefit
obligation............................... 513,981 477,913 437,131
Actual return on plan assets.............. 164,442 (684,572) (450,584)
Administrative expenses................... 101,695 85,971 72,635
Net amortization and deferral............. (884,693) (204) (224,125)
--------- --------- ---------
Net periodic pension cost............... $ 122,430 $ 78,956 $ 4,487
========= ========= =========
Discount rate............................. 8.0% 7.0% 9.0%
Expected long term rate of return on
assets................................... 9.0% 9.0% 9.0%
Rate of increase in compensation levels... 4.0% 4.0% 5.5%
</TABLE>
The entire amount of unrecognized gains and losses is amortized over the
average remaining service lives of the participants on a straight-line basis.
The following table presents a reconciliation of the plan's funded status at
December 31:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested.......................................... $ 5,924,223 $ 6,185,662
Nonvested....................................... 28,389 37,241
----------- -----------
Accumulated benefit obligation.................... $ 5,952,612 $ 6,222,903
=========== ===========
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Projected benefit obligation...................... $(6,888,795) $(7,317,594)
Plan assets at fair value......................... 6,996,892 7,623,102
----------- -----------
Plan assets in excess of projected benefit
obligation....................................... 108,097 305,508
Unrecognized net loss (gain) from past experience
different from that assumed and effects of
changes in assumptions........................... 1,049,638 952,249
Unrecognized prior service cost, being recognized
over 17 years.................................... (324,317) (339,507)
Unrecognized net asset at date of adoption, being
recognized over 17 years......................... (203,517) (225,760)
----------- -----------
Prepaid pension cost included in other assets..... $ 629,901 $ 692,490
=========== ===========
</TABLE>
The increase in the discount rate from 7% to 8% decreased the projected
benefit obligation at December 31, 1994 by $1,007,272.
F-16
<PAGE>
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND YEARS ENDED DECEMBER
31, 1994, 1993 AND 1992
Plan assets consist primarily of listed stocks, governmental securities and
cash equivalents. The plan is authorized to invest up to 10% of the fair value
of its total assets in common stock of Community Bank System, Inc. At December
31, 1994 and 1993, the plan holds 1,160 and 10,660 shares, respectively, of the
sponsor company common stock.
The Company also has an Employee Savings and Retirement Plan, which is
administered by the Trust Department of Community Bank, N.A. The Employee
Savings and Retirement Plan includes Section 401(k) and Thrift provisions as
defined under the Internal Revenue Code. The provisions permit employees to
contribute up to 15% of their total compensation on a pre-tax or post-tax
basis. The Company's match amounts to 50% on the first 6% contributed. Company
contributions to the trust amounted to $460,459, $361,827 and $370,170 in 1994,
1993 and 1992, respectively.
NOTE J: POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides health and life insurance benefits for eligible retired
employees and their dependents. An employee becomes eligible for these benefits
by satisfying plan provisions which include certain age and/or service
requirements. Medical benefits are based on years of service at retirement,
with forty years of service being required in order to be fully eligible for
benefits. The medical plans pay a stated percentage of medical expenses reduced
by deductibles and other coverages. The Medicare supplement policy provides for
a $100,000 maximum lifetime benefit. Generally, life insurance benefits are
equal to $5,000.
Effective January 1, 1993 the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions". This statement requires that the cost of
postretirement benefits be accrued for during the service lives of employees.
The Company elected the prospective transition approach and is amortizing the
transition obligation over a 20 year period.
A plan amendment effective January 1, 1994 limits the Company's expense to a
maximum of $2,500 per person per year for medical coverage. This has decreased
the APBO at January 1, 1994 by approximately $779,000, reducing the remaining
unrecognized transition obligation and decreasing the annual expense by
approximately $41,000.
Net periodic postretirement benefit cost at December 31 includes the
following components:
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Service Cost.............................................. $ 73,200 $ 89,900
Amortization of transition obligation over 20.1 years..... 61,200 102,000
Amortization of unrecognized net loss over 19.5 years..... 21,800
Interest on APBO less interest on expected benefit
payments................................................. 156,300 180,500
-------- --------
Net periodic postretirement benefit cost.................. $312,500 $372,400
======== ========
</TABLE>
A 10.5 percent annual rate of increase in the per capita costs of covered
health care benefits was assumed for 1994, gradually decreasing to 5.5 percent
by the year 2051. Increasing the assumed health care cost trend rates by one
percentage point would increase the accumulated postretirement benefit
obligation as of December 31, 1994 by $255,000 and increase the aggregate of
the service cost and interest cost components of net periodic postretirement
benefit cost for 1994 by $26,000. A discount rate of 8% was used to determine
the accumulated postretirement benefit obligation.
F-17
<PAGE>
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND YEARS ENDED DECEMBER
31, 1994, 1993 AND 1992
The following sets forth the funded status of the plan as of December 31:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Accumulated Postretirement Benefit Obligation
(APBO):
Retirees........................................ $ 1,047,500 $ 1,117,600
Fully eligible active plan participants......... 97,400 59,700
Other active plan participants.................. 885,800 1,509,500
----------- -----------
Total APBO.................................... 2,030,700 2,686,800
Plan assets at fair value......................... 0 0
----------- -----------
Accumulated postretirement benefits obligation in
excess of plan assets............................ (2,030,700) (2,686,800)
Unrecognized portion of net obligation at
transition....................................... 1,108,100 1,948,700
Unrecognized net loss............................. 458,500 483,300
----------- -----------
Accrued postretirement benefit cost............... $ (464,100) $ (254,800)
=========== ===========
</TABLE>
NOTE K: INCENTIVE COMPENSATION
The Company has long-term incentive compensation programs for officers and
key employees including incentive stock options (ISO's), restricted stock
awards, nonqualified stock options (NQSO's) and warrants, and retroactive stock
appreciation rights.
Incentive stock options and warrants are granted at a price which is not less
than market value at the time of the grant and are exercisable within ten
years, but no earlier than one year from the date of the grant at dates
specified by the Board of Directors of the Company. Retroactive stock
appreciation rights may be granted with respect to both ISO's and NQSO's.
Information with respect to stock options and warrants under the above plans
is as follows:
<TABLE>
<CAPTION>
NUMBER
NUMBER OPTION PRICE OF SHARES
OF SHARES PER SHARE EXERCISABLE
--------- ------------ -----------
<S> <C> <C> <C>
Outstanding at December 31, 1991.......... 167,790 11.74-21.50 159,143
Granted................................. 59,000 13.00-25.00
Exercised............................... (6,300) 11.74-16.00
Cancelled............................... (1,000) 17.50
Outstanding at December 31, 1992.......... 219,490 11.74-25.00 159,990
Granted................................. 1,000 29.00-30.25
Exercised............................... (66,800) 11.74-18.25
Outstanding at December 31, 1993.......... 153,690 11.74-30.25 105,540
Granted................................. 14,150 28.50
Exercised............................... (42,800) 15.50-16.63
Outstanding at December 31, 1994.......... 125,040 15.50-30.25 74,840
</TABLE>
The program also provides for issuance of stock under a restricted stock
award plan subject to forfeiture terms as designated by the Board of Directors
of the Company. Stock issued under this plan is subject to restrictions as to
continuous employment and/or achievement of pre-established financial
objectives during the forfeiture period.
F-18
<PAGE>
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND YEARS ENDED DECEMBER
31, 1994, 1993 AND 1992
Restricted stock awarded in 1993 amounted to 200 shares. Total expense is
determined based on the market value of the stock at the date of grant and is
being accrued over the period the restrictions lapse. Expense in 1994, 1993,
and 1992 was $2,185, $2,186 and $9,574, respectively.
There were 130,000 and 46,909 shares available for future grants or awards
under the various programs described above at December 31, 1994 and 1993,
respectively.
NOTE L: COMMITMENTS, CONTINGENT LIABILITIES AND RESTRICTIONS
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments consist primarily of commitments to extend credit,
which involve, to varying degrees, elements of credit risk in excess of the
amount recognized in the statement of condition. The contract amount of those
commitments to extend credit reflects the extent of involvement the Company has
in this particular class of financial instrument. The Company's exposure to
credit loss in the event of nonperformance by the other party to the financial
instrument for commitments to extend credit is represented by the contractual
amount of the instrument. The Company uses the same credit policies in making
commitments as it does for on-balance-sheet instruments.
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Financial instruments whose contract amounts
represent credit risk at December 31:
Letters of credit............................... $ 507,000 $ 847,000
Commitments to make or purchase loans or to
extend credit on lines of credit............... 61,525,000 61,296,000
----------- -----------
Total......................................... $62,032,000 $62,143,000
=========== ===========
</TABLE>
The fair value of these instruments is insignificant.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the customer. Collateral held varies but may
include residential real estate, income-producing commercial properties, and
personal property.
The Company had unused lines of credit totaling $62,031,000 and $64,452,000
at December 31, 1994 and 1993, respectively.
The approval of bank regulatory authorities is required before dividends paid
by the bank subsidiary during the year can exceed certain prescribed limits.
Approximately $17,955,000 is free of limitations at December 31, 1994.
F-19
<PAGE>
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND YEARS ENDED DECEMBER
31, 1994, 1993 AND 1992
The Company is required to maintain a reserve balance, as established by the
Federal Reserve Bank of New York. The required average total reserve for the
14-day maintenance period ended December 31, 1994 was $11,498,000 of which
$3,397,000 was required to be on deposit with the Federal Reserve Bank of New
York. The remainder, $8,101,000, was represented by cash on hand.
The Company is currently being examined by the Internal Revenue Service in
connection with tax years 1990 to 1993, and has received certain notices of
proposed adjustments. The Company intends to vigorously defend its position
with respect to these proposed adjustments and believes the ultimate resolution
will not have a material effect on the financial statements.
NOTE M: LEASES
Rental expense included in operating expenses amounted to $502,312, $474,863,
and $735,940 in 1994, 1993 and 1992, respectively.
The future minimum rental commitments as of December 31, 1994 for all
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31: BUILDING EQUIPMENT TOTAL
------------------------- -------- --------- --------
<S> <C> <C> <C>
1995......................................... $331,971 $24,828 $356,799
1996......................................... 281,451 20,124 301,575
1997......................................... 177,051 20,124 197,175
1998......................................... 172,252 18,447 190,699
1999......................................... 119,318 119,318
Thereafter................................... 869,232 869,232
</TABLE>
NOTE N: BRANCH ACQUISITIONS
On December 6, 1994 the Company and the Bank signed a Purchase and Assumption
Agreement with The Chase Manhattan Bank, N.A. ("Chase"), a wholly owned
subsidiary of The Chase Manhattan Corporation, for the acquisition of certain
assets and the assumption of certain liabilities by the Bank relating to 15
Chase branch offices located in the Northern, Central, and Finger Lakes regions
of New York State. These locations include Norwich, Watertown (2), Boonville,
New Hartford, Utica, Skaneateles, Geneva, Pulaski, Seneca Falls, Hammondsport,
Canton, Newark (2), and Penn Yan, New York.
Pursuant to the Agreement, the Bank would assume certain deposit liabilities
estimated to be approximately $458 million, purchase certain loans estimated to
be approximately $25 million, and purchase at various prices certain real
property, furniture and equipment related to the branches having a book value
of approximately $3.2 million. The Bank will receive approximately $392 million
in cash as consideration for the net deposit liabilities, reflecting a deposit
premium of 8.25%, or approximately $38 million. The sale is subject to
regulatory approvals and financing arrangements, and is expected to close
during the third quarter of 1995. Subject to certain events and conditions, the
Agreement requires the Bank to pay Chase between $1,000,000 and $1,850,000 in
the event the transaction is not consummated. In conjunction with this
acquisition, the Company is expected to effect a public offering in the second
or third quarter of 1995 of additional common and preferred stock, principally
to offset the resulting dilution of regulatory capital ratios. Results of
operations on a pro forma basis are not presented since historical financial
information for the branches acquired is not available.
F-20
<PAGE>
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND YEARS ENDED DECEMBER
31, 1994, 1993 AND 1992
On June 6, 1994, the Company completed the purchase of three branches from
the Resolution Trust Corporation, and on October 28, 1994 the Company acquired
a branch from The Chase Manhattan Bank, N.A. These acquisitions have been
accounted for as purchases and their results of operations are included in the
consolidated financial statements from their respective dates of acquisition.
In total the Company received $68 million in cash, consisting of approximately
$75 million for the assumption of deposit liabilities less approximately $1
million in assets received and a deposit premium of approximately $6 million.
The premium is being amortized on a straight-line basis over 15 years.
NOTE O: SUBSEQUENT EVENT
On February 21, 1995 the Company adopted a Stockholders Protection Rights
Plan and declared a dividend of one right for each outstanding share of common
stock. The rights can only be exercised when an individual or group has
acquired or attempts to acquire 15% or more of the Company's common stock, if
such action the Board of Directors believes is not in the best interest of
stockholders. Each right then entitles the holder to acquire common stock
having a market value equivalent to two times the stated exercise price. The
rights expire in February 2005 and may be redeemed by the Company in whole at a
price of $.01 per right.
NOTE P: PARENT COMPANY STATEMENTS
Community Bank System, Inc. (the Parent Company) contributed to its wholly-
owned subsidiary, Community Bank, N.A., substantially all of its assets and
liabilities as of January 1, 1992. During 1992, all operating expenses related
to these assets and liabilities were recorded by the subsidiary bank.
The following are the condensed balance sheets, statements of income and
statements of cash flows for the Parent Company:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1994 1993
----------- -----------
<S> <C> <C>
Assets:
Cash and cash equivalents....................... $ 723,024 $ 161,482
Investment securities (approximate market value
of $348,000 and $337,000)...................... 348,001 344,644
Investment in and advances to subsidiaries...... 66,058,804 62,225,446
Other assets.................................... 375 2,375
----------- -----------
Total assets.................................. $67,130,204 $62,733,947
=========== ===========
Liabilities:
Accrued liabilities............................. $ 840,689 $ 747,520
Shareholders' equity.............................. 66,289,515 61,986,427
----------- -----------
Total liabilities and shareholders' equity.... $67,130,204 $62,733,947
=========== ===========
</TABLE>
F-21
<PAGE>
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND YEARS ENDED DECEMBER
31, 1994, 1993 AND 1992
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------------
1994 1993 1992
----------- ---------- ----------
<S> <C> <C> <C>
Dividends from subsidiaries............ $ 3,160,414 $3,310,544 $2,870,000
Interest on investments and deposits... 6,465 6,220 10,052
----------- ---------- ----------
Total revenues..................... 3,166,879 3,316,764 2,880,052
----------- ---------- ----------
Expenses:
Interest on short-term borrowing..... 2,243 7,862
Other expenses....................... 2,374 1,279
----------- ---------- ----------
Total expenses..................... 4,617 1,279 7,862
----------- ---------- ----------
Income before tax benefit and equity in
undistributed net income of
subsidiaries.......................... 3,162,262 3,315,485 2,872,190
Income tax benefit (expense)........... (706) (1,857) (7,730)
----------- ---------- ----------
Income before equity in undistributed
net income of subsidiaries............ 3,161,556 3,313,628 2,864,460
Equity in undistributed net income:
Subsidiary banks..................... 6,949,905 6,731,475 4,749,000
Bank-related subsidiaries............ (2,243) (470,329) (107,919)
----------- ---------- ----------
Net income........................... $10,109,218 $9,574,774 $7,505,541
=========== ========== ==========
</TABLE>
F-22
<PAGE>
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND YEARS ENDED DECEMBER
31, 1994, 1993 AND 1992
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND NONCASH ACTIVITIES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Operating Activities:
Net income......................... $10,109,218 $ 9,574,774 $ 7,505,541
Adjustments to reconcile net income
to net cash provided by operating
activities:
Amortization..................... 2,185 2,186 9,575
Equity in undistributed net
income of subsidiaries.......... (6,946,956) (6,259,289) (4,641,081)
Net change in accrued expenses... 2,000 100,679 194,360
----------- ----------- -----------
Net Cash Provided By Operating
Activities.......................... 3,166,447 3,418,350 3,068,395
----------- ----------- -----------
Investing Activities:
Purchases of investment securities. (7,191) (5,120) (8,941)
Net change in loans outstanding.... 250,000
Capital contributions to
subsidiaries...................... (1,152,730) (113,300)
----------- ----------- -----------
Net Cash Provided (Used) By Investing
Activities.......................... (7,191) (1,157,850) 127,759
----------- ----------- -----------
Financing Activities:
Net change in loans to
subsidiaries...................... (66,548) (908,904)
Net change in borrowings from
subsidiaries...................... 4,685
Issuance (retirement) of common
stock............................. 560,457 553,809 80,328
Cash dividends..................... (3,158,171) (2,840,466) (2,421,284)
----------- ----------- -----------
Net Cash (Used) By Financing
Activities.......................... (2,597,714) (2,353,205) (3,245,175)
----------- ----------- -----------
Change In Cash And Cash Equivalents.. 561,542 (92,705) (49,021)
Cash and cash equivalents at
beginning of year................. 161,482 254,187 303,208
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF
YEAR................................ $ 723,024 $ 161,482 $ 254,187
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash Paid For Interest............. $ 2,243 $ 7,311
=========== =========== ===========
Cash Paid For Income Taxes......... $ 22,692
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING ACTIVITIES:
Gross change in unrealized net
gains and (losses) on available
for sale securities............... $(5,426,534) $ 2,164,046
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-23
<PAGE>
SUPPLEMENTARY CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1994 1994 1994 1994 1995
--------- -------- ------------- ------------ ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net interest income..... $9,074 $9,631 $10,212 $10,528 $10,426
Provision for loan loss-
es..................... 239 422 316 725 254
------ ------ ------- ------- -------
Net interest income af-
ter provision for loan
losses................. 8,835 9,209 9,896 9,803 10,172
Total other income...... 1,229 1,383 1,613 895 1,397
Total other expenses.... 6,256 6,339 6,970 6,933 7,024
------ ------ ------- ------- -------
Income before income
tax.................... 3,808 4,253 4,539 3,765 4,545
Income tax.............. 1,408 1,604 1,826 1,418 1,793
------ ------ ------- ------- -------
Net income.............. $2,400 $2,649 $ 2,713 $ 2,347 $ 2,752
Earnings per share...... $0.85 $0.94 $0.96 $0.84 $0.98
====== ====== ======= ======= =======
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1993 1993 1993 1993 1994
--------- -------- ------------- ------------ ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net interest income..... $9,260 $9,101 $ 9,309 $ 9,239 $ 9,074
Provision for loan loss-
es..................... 407 375 464 260 239
------ ------ ------- ------- -------
Net interest income af-
ter provision for loan
losses................. 8,853 8,726 8,845 8,979 8,835
Total other income...... 1,091 1,085 1,413 1,175 1,229
Total other expenses.... 6,146 5,949 6,308 6,424 6,256
------ ------ ------- ------- -------
Income before income
tax.................... 3,798 3,862 3,950 3,730 3,808
Income tax.............. 1,419 1,433 1,484 1,429 1,408
------ ------ ------- ------- -------
Net income.............. $2,379 $2,429 $ 2,466 $ 2,301 $ 2,400
Earnings per share...... $0.86 $0.87 $0.88 $0.82 $0.85
====== ====== ======= ======= =======
</TABLE>
F-24
<PAGE>
SCHEDULE OF LIABILITIES TO BE ASSUMED AND ASSETS TO BE ACQUIRED BY COMMUNITY
BANK, N.A.
MARCH 31, 1995
(UNAUDITED)
The following unaudited schedule of liabilities to be assumed and assets to
be acquired by Community Bank, N.A. in connection with the Acquisition has been
derived from the accounting records of The Chase Manhattan Bank, N.A. as of
March 31, 1995, and should be read in conjunction with "The Acquisition --
Unaudited Pro forma Financial Information".
<TABLE>
<S> <C>
Liabilities to be assumed by Community Bank, N.A.:
Deposits
Non-interest-bearing........................................... $ 41,182,911
Interest-bearing............................................... 409,692,727
------------
Total deposits............................................... 450,875,638
Accrued interest payable......................................... 1,957,520
------------
Total liabilities to be assumed by Community Bank, N.A....... $452,833,158
============
Assets to be acquired by Community Bank, N.A.:
Cash............................................................. $ 5,426,194
Loans
Commercial business............................................ 12,771,244
Commercial real estate......................................... 9,714,481
Other.......................................................... 2,749,379
------------
Total loans.................................................. 25,235,104
Premises and equipment, net...................................... 3,029,452
Accrued interest receivable...................................... 160,421
------------
Total assets to be acquired by Community Bank, N.A........... $ 33,851,171
============
</TABLE>
F-25
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
---------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Available Information...................................................... 3
Incorporation of Certain Information by Reference.......................... 3
Prospectus Summary......................................................... 4
Risk Factors............................................................... 8
The Company................................................................ 14
The Acquisition............................................................ 14
Use of Proceeds............................................................ 25
Capitalization............................................................. 25
Market for Common Stock and Dividends...................................... 26
Selected Consolidated Financial Information................................ 27
Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 28
Business................................................................... 40
Management................................................................. 53
Security Ownership of Certain Beneficial Owners and Management............. 56
Certain Regulatory Considerations.......................................... 57
Description of Capital Stock............................................... 61
Underwriting............................................................... 67
Legal Matters.............................................................. 68
Experts.................................................................... 68
Index to Consolidated Financial Statements................................. F-1
</TABLE>
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCOR-
PORATED BY REFERENCE IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMA-
TION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITA-
TION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO
WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE REGISTERED SECURITIES OFFERED HEREBY IN
ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
750,000 SHARES COMMON STOCK
90,000 SHARES CUMULATIVE
PERPETUAL PREFERRED STOCK,
SERIES A
LOGO
COMMUNITY BANK SYSTEM, INC.
---------------
PROSPECTUS
---------------
M.A. SCHAPIRO & CO., INC.
FIRST ALBANY CORPORATION
June 27, 1995
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
GRAPHICS APPENDIX LIST
PAGE WHERE
GRAPHIC
APPEARS DESCRIPTION OF GRAPHIC OR CROSS REFERENCE
- --------------------------------------------------------------------------------
TX 2 Map of New York State depicting location of the Bank's current
branch facilities, and branch facilities to be acquired from The
Chase Manhattan Bank, N.A.
- --------------------------------------------------------------------------------
TX 37 GAP MATURITY MATRIX (PAGE 37):
The Gap Maturity Matrix contains a diagonal band of bold
face numbers in boxes. These numbers include each amount and
yield figure for which the repricing intervals for "Sources of
Funds" and Uses of Funds" are identical, specifically:
---------
210,182
3.81%
11,313
3.11%
8,788
3.63%
130,274
3.43%
