FORM 10 - Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the nine months ended September 30, 1995
Commission file number 0-11716
COMMUNITY BANK SYSTEM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 16-1213679
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5790 Widewaters Parkway, DeWitt, New York 13214
(Address of principal executive offices) (Zip Code)
315/445-2282
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $1.25 par value -- 3,674,425 shares as of November 8, 1995.
<PAGE>
INDEX
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets --
September 30, 1995, December 31, 1994 and September 30, 1994.
Consolidated statements of income --
Three months ended September 30, 1995 and 1994 and nine months ended
September 30, 1995 and 1994
Consolidated statements of cash flows --
Nine months ended September 30, 1995 and 1994
Item 2. Management Discussion and Analysis of Financial Conditions and
Results of Operations
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Securities Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For Nine Months Ended September 30, 1995 and 1994
Increase (Decrease) in Cash and Cash Equivalents
1995 1994
- ----------------------------------------------------------------------------------------------------
Operating Activities:
<S> <C> <C>
Net income $8,353,018 $7,761,871
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation 1,135,329 1,090,783
Net amortization of intangible assets 889,971 227,046
Net accretion of security premiums and discounts (1,020,668) (258,750)
Provision for loan losses 1,128,657 976,505
Provision for deferred taxes 190,586 100,171
(Gain)\Loss on sale of investment securities 149,750 1,695
Change in interest receivable (3,238,914) (1,011,740)
Change in other assets and other liabilities 2,172,546 (1,228,993)
Change in unearned loan fees and costs (80,924) 64,785
- ----------------------------------------------------------------------------------------------------
Net Cash Provided By Operating Activities 9,679,351 7,723,373
- ----------------------------------------------------------------------------------------------------
Investing Activities:
Proceeds from sales of investment securities 3,950,250 10,900,000
Proceeds from maturities of investment securities 46,664,006 38,137,975
Purchases of investment securities (149,766,331) (123,097,045)
Net change in loans outstanding (62,360,975) (52,821,382)
Capital expenditures (7,662,939) (1,086,891)
Premium paid for branch acquisitions (32,446,459) (5,479,000)
- ----------------------------------------------------------------------------------------------------
Net Cash Used By Investing Activities (201,622,448) (133,446,343)
- ----------------------------------------------------------------------------------------------------
Financing Activities:
Net change in demand deposits,
NOW accounts, and savings accounts 191,240,040 30,397,193
Net change in certificates of deposit 201,829,291 69,204,186
Net change in term borrowings (162,300,000) 35,250,000
Payments on lease obligation (42,036)
Issuance (retirement) of common and preferred stock 27,962,850 344,267
Cash dividends (2,978,947) (2,321,726)
- ----------------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 255,753,234 132,831,884
- ----------------------------------------------------------------------------------------------------
Change In Cash And Cash Equivalents 63,810,137 7,108,914
Cash and cash equivalents at beginning of year 30,522,189 27,512,278
- ----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 94,332,326 34,621,192
====================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid For Interest $22,543,115 $14,818,510
====================================================================================================
Cash Paid For Income Taxes $5,353,452 $4,379,081
====================================================================================================
<PAGE>
SUPPLEMENTAL DISCLOSURE OF NONCASH AND OTHER
INVESTING ACTIVITIES:
Gross change in unrealized net gains and (losses)
on available for sale securities 3,327,391 (4,634,151)
</TABLE>
Proceeds from maturities of investment securities
for 1995 included $27,418,674 from available for
sale and $19,245,333 from held to maturity securities.
Purchases of investment securities for 1995
included $53,591,493 of available for sale and
$96,174,839 of held to maturity securities.
All proceeds from sale of investment securities in 1995
related to available for sale securities.
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- ----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months
September 30, September 30,
<S> <C> <C> <C> <C>
INTEREST INCOME 1995 1994 1995 1994
Interest and fees on loans $12,921,662 $10,449,931 $36,531,460 $29,636,985
Interest and dividends on investments:
U.S. Treasury 232,928 485,941 831,450 1,457,623
U.S. Government agencies and corporations 4,207,083 1,934,444 11,168,627 5,058,541
States and political subdivisions 248,350 360,276 828,401 1,092,894
Mortgage-backed securities 3,528,308 2,489,464 9,490,387 6,414,672
Other securities 318,056 218,837 789,105 482,039
Interest on federal funds sold 897,271 0 930,048 0
Interest on deposits at other banks 0 0 0 1,133
22,353,658 15,938,893 60,569,478 44,143,887
INTEREST EXPENSE
Interest on deposits
Savings 2,882,700 2,218,044 6,910,453 6,186,820
Time 6,257,370 2,606,308 14,469,132 6,809,371
Interest on federal funds purchased, securities
sold under agreements to repurchase and
Term borrowings 479,771 903,279 5,458,707 2,230,383
Interest on capital lease 0 0 0 629
9,619,841 5,727,631 26,838,292 15,227,203
NET INTEREST INCOME 12,733,817 10,211,262 33,731,186 28,916,684
Provision for possible loan losses 275,217 315,088 1,128,657 976,505
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 12,458,600 9,896,174 32,602,529 27,940,179
OTHER INCOME
Fiduciary services 336,024 352,765 1,023,130 1,077,473
Service charges on deposit accounts 961,083 694,107 2,326,488 1,890,929
Other service charges, commissions and fees 503,504 561,679 1,261,584 1,229,202
Other operating income 7,938 4,144 118,464 29,012
Investment security gain (loss) 0 0 (149,750) (1,695)
1,808,549 1,612,695 4,579,916 4,224,921
14,267,149 11,508,869 37,182,445 32,165,100
OTHER EXPENSES
Salaries, wages and employee benefits 4,561,056 3,333,273 11,872,247 9,817,500
Occupancy expense of bank premises, net 707,945 490,100 1,806,139 1,511,716
Equipment and furniture expense 513,603 438,997 1,393,510 1,287,327
Other 3,446,035 2,707,672 8,311,531 6,948,686
9,228,639 6,970,042 23,383,427 19,565,229
INCOME BEFORE INCOME TAXES 5,038,510 4,538,827 13,799,018 12,599,871
Income taxes 2,008,000 1,826,000 5,446,000 4,838,000
NET INCOME $3,030,510 $2,712,827 $8,353,018 $7,761,871
Earnings per common share $0.77 $0.96 $2.62 $2.76
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For Nine Months Ended September 30, 1995 and 1994
Increase (Decrease) in Cash and Cash Equivalents
1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities:
Net income $8,353,018 $7,761,871
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation 1,135,329 1,090,783
Net amortization of intangible assets 889,971 227,046
Net accretion of security premiums and discounts (1,020,668) (258,750)
Provision for loan losses 1,128,657 976,505
Provision for deferred taxes 190,586 100,171
(Gain)\Loss on sale of investment securities 149,750 1,695
Change in interest receivable (3,238,914) (1,011,740)
Change in other assets and other liabilities 2,172,546 (1,228,993)
Change in unearned loan fees and costs (80,924) 64,785
- ----------------------------------------------------------------------------------------------------
Net Cash Provided By Operating Activities 9,679,351 7,723,373
- ----------------------------------------------------------------------------------------------------
Investing Activities:
Proceeds from sales of investment securities 3,950,250 10,900,000
Proceeds from maturities of investment securities 46,664,006 38,137,975
Purchases of investment securities (149,766,331) (123,097,045)
Net change in loans outstanding (62,360,975) (52,821,382)
Capital expenditures (7,662,939) (1,086,891)
Premium paid for branch acquisitions (32,446,459) (5,479,000)
- ----------------------------------------------------------------------------------------------------
Net Cash Used By Investing Activities (201,622,448) (133,446,343)
- ----------------------------------------------------------------------------------------------------
<PAGE>
Financing Activities:
Net change in demand deposits,
NOW accounts, and savings accounts 191,240,040 30,397,193
Net change in certificates of deposit 201,829,291 69,204,186
Net change in term borrowings (162,300,000) 35,250,000
Payments on lease obligation (42,036)
Issuance (retirement) of common and preferred stock 27,962,850 344,267
Cash dividends (2,978,947) (2,321,726)
- ----------------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 255,753,234 132,831,884
- ----------------------------------------------------------------------------------------------------
Change In Cash And Cash Equivalents 63,810,137 7,108,914
Cash and cash equivalents at beginning of year 30,522,189 27,512,278
- ----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 94,332,326 34,621,192
====================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid For Interest $22,543,115 $14,818,510
====================================================================================================
Cash Paid For Income Taxes $5,353,452 $4,379,081
====================================================================================================
SUPPLEMENTAL DISCLOSURE OF NONCASH AND OTHER
INVESTING ACTIVITIES:
Gross change in unrealized net gains and (losses)
on available for sale securities 3,327,391 (4,634,151)
</TABLE>
Proceeds from maturities of investment securities
for 1995 included $27,418,674 from available for
sale and $19,245,333 from held to maturity securities.
Purchases of investment securities for 1995
included $53,591,493 of available for sale and
$96,174,839 of held to maturity securities.
All proceeds from sale of investment securities in 1995
related to available for sale securities.
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
Community Bank System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
September 1995
Note A -- Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for fair presentation have
been included. Operating results for the nine-month period ended September 30,
1995 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1995.
Note B -- Issuance of Common and Preferred Stock
On June 30, 1995, Community Bank System, Inc. raised approximately $24
million by issuing 710,000 shares of its common stock at a price of $24.25 per
share and 90,000 shares of its cumulative perpetual preferred stock at a price
of $100 per share at a combined cost of issuance of $2.4 million. On July 10,
1995 an additional $3.5 million in capital was raised when Community Bank
System, Inc. issued an additional 112,500 shares of its common stock pursuant to
an overallotment option granted to the underwriter and 40,000 shares from its
reserve for directors and employees, all at a price of $24.25 per share. This
stock was issued principally in connection with the subsequent acquisition of 15
branch offices of The Chase Manhattan Bank, N.A. in Northern and Central New
York during the third quarter of 1995.
Note C -- Acquisition
On December 6, 1994, the company and the bank entered into a Purchase and
Assumption Agreement ("the Agreement") with The Chase Manhattan Bank, N.A.
("Chase") to purchase certain assets and assume certain liabilities 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.
On July 14, 1995, the acquisition closed whereby the bank assumed deposits,
accrued interest and other liabilities totalling approximately $383 million
after final closing adjustments. In addition, the bank acquired certain small
business and consumer loans totalling approximately $13.9 million; certain real
property, furniture and equipment related to the branch facilities for a
purchase price of approximately $5.1 million; and currency, coin and other
assets totalling approximately $5.5 million. After paying a deposit premium of
8.25% on the acquired deposits totalling approximately $32.4 million, the bank
received approximately $330.2 million in cash from Chase as consideration for
the net deposit liabilities assumed.
<PAGE>
Note D -- Pending Divestiture
On September 26, 1995 the company and the bank entered into an agreement
under which NBT Bank, N.A. will purchase the branches of Community Bank located
in New Hartford, Norwich and Utica. The three branches that NBT will acquire
were part of the Chase transaction outlined in Note C above. The transaction is
subject to federal regulatory approvals.
Note E -- Redeeming of Half of Preferred Stock
On November 1, 1995, Community Bank System, Inc. announced that it plans to
repay, prior to maturity, half ($4.5 million or 45,000 shares) of its 9%
cumulative perpetual preferred stock, effective November 15, 1995. This action,
which will eliminate a relatively high cost funding source, reflects the success
of CBSI's recent common stock issuance, good progress in assimilating the bank's
July 1995 purchase of 15 branches from The Chase Manhattan Bank, N.A. (see Note
C) and the confidence that its tier 1 ratio will remain in excess of the minimum
required for well-capitalized banks.
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
The information required by rule 10.01 of Regulation S-X is
presented on the previous pages.
Item 2. Management Discussion and Analysis of Financial Condition and
Results of Operations
The purpose of the discussion is to present material changes in Community
Bank System, Inc.'s financial condition and results of operations during the
nine months ended September 30, 1995 which are not otherwise apparent from the
consolidated financial statements included in these reports. When used in this
report, the term "CBSI" means Community Bank System, Inc. and its subsidiaries
on a consolidated basis, unless indicated otherwise. Financial performance
comparisons to peer bank holding companies are based on data through June 30,
1995 as provided by the Federal Reserve System; the peer group is comprised of
263 banks having $500 million to $1 billion in assets.
<PAGE>
Earnings Performance Summary
Three Months Ended Change
9/30/95 9/30/94 Amount Percent
(000s)
Net Income $3,031 $2,713 $318 11.7%
Earnings per share $0.77 $0.96 ($0.20) -20.3%
Weighted average
shares outstanding 3,689 2,819 870 30.8%
Return on average assets 1.04% 1.30% -0.26% N/A
Average assets $1,155,716 $829,081 $326,635 39.4%
Return on average
shareholders' equity 12.47% 16.69% -4.21% N/A
Average shareholders' equity $98,947 $64,500 $34,447 53.4%
Percentage of average shareholders'
equity to average assets 8.56% 7.78% 0.78% N/A
Nine Months Ended Change
9/30/95 9/30/94 Amount Percent
(000s)
Net Income $8,353 $7,762 $591 7.6%
Earnings per share $2.62 $2.76 ($0.14) -5.1%
Weighted average
shares outstanding 3,109 2,813 296 10.5%
Return on average assets 1.10% 1.32% -0.23% N/A
Average assets $1,016,404 $783,541 $232,864 29.7%
Return on average
shareholders' equity 14.36% 16.34% -1.98% N/A
Average shareholders' equity $78,946 $63,520 $15,426 24.3%
Percentage of average shareholders'
equity to average assets 7.77% 8.11% -0.34% N/A
* May not foot due to rounding
<PAGE>
Net income for the third quarter and first nine months of 1995 reached a record
high of $3.031 million and $8.353 million, respectively, up 11.7% and 7.6% over
the comparable 1994 periods.
As a result of the company's issuance of nearly 863,000 additional common shares
in late June and early July of this year, common shares outstanding increased by
almost 31% in the third quarter, resulting in earnings per share of $.77, down
19.8% from the same quarter last year. For the nine month period, earnings per
share were $2.62, off 5.1%.
These results reflect the impact of the company's mid-July 1995 purchase of 15
branches from The Chase Manhattan Bank, N.A.. Large one time expenditures
related to absorbing the new branches amounted to approximately $510,000 in the
third quarter. One hundred thousand dollars of these third quarter expenses was
offset by a refund from the FDIC of excess insurance premiums collected for June
of this year. The net after-tax impact of these one time expenses is
approximately $.06 per share.
The branch acquisition increased the bank's deposit base by approximately $383
million or 51%. Loan growth has been strong from the acquired branches with
over $4.3 million booked since the acquisition date in July. After accounting
for fixed assets and the deposit purchase price, all but $47 million in funds
acquired has been placed in a variety of medium term investments at a weighted
average yield at time of purchase of 7.58%. The remaining short-term funds
largely represent the deposits of three former Chase branches whose pending sale
to NBT Bank, N.A. was announced on September 26.
Third quarter net interest income rose a favorable 24.7% or $2.5 million versus
the same period last year; compared to third quarter 1995, net interest income
is up 20.5% or $2.2 million. This latter increase reflects earnings from both
the additional $157 million in net earning assets (after repayment of
borrowings) acquired from Chase and July's capital raising efforts, as well as
loan growth in the bank's markets excluding the Chase branches of $11.5 million
during the quarter.
Over the last twelve months, including the impact of the 15 branches acquired
from Chase, loans have climbed more than $75 million or over 16%, while
investments have risen $204 million or nearly 63%. The primary components of
loan growth are the bank's business lending products (up over $30 million or
22%) and indirect consumer loans, predominantly automobile financing through
dealers (up $38 million or 40%). Increases continue to be modest in the
consumer direct loan product line, which includes home equity products (up $5.0
million or 5.1%), and consumer mortgages (up $2.2 million or 1.5%, net of $3.1
million in originations sold in the secondary market.)
<PAGE>
Also benefiting net interest income was a slight upturn in the bank's net
interest margin to 4.82% this quarter from 4.74% in third quarter 1995; these
results compare to 5.31% earned in third quarter 1994 in a higher financial
market rate environment. Margins have improved since June 30 largely because of
replacing in excess of $188 million in borrowings at an average rate of 6.22%
with the Chase deposits, which had an effective core deposit rate of 3.78% as of
the acquisition date. In addition, certain of the Chase deposit products were
simplified or priced downward upon acquisition to conform to the bank's deposit
product strategy.
Non-interest income rose a satisfactory 12.2% in the third quarter, bringing the
increase for the first nine months to 11.9% versus the comparable 1994 period.
The improvement largely reflects higher fees from the sale of annuities and
mutual funds, as well as greater overdraft fees, service charges and commissions
from an expanded customer base gained from acquisitions in 1994 besides the
Chase branch purchase. Growth has been partially offset by the loss of fees
from a large but relatively low profit margin merchant for whom the bank
processed charge card purchases; excluding all Visa merchant discount fees, non-
interest income was up over 34% in the third quarter and 25% year-to-date
compared to the same periods last year.
Overhead was up 32% in the third quarter, resulting in an overall 20% increase
for the first nine months of this year compared to 1994's results. More than
half the third quarter increase of $2.3 million reflected personnel costs.
Staff increased by approximately 115 full-time equivalents in connection with
the acquisition of the Chase branches and required operations center support.
Other increases related to the new branches were reflected in greater occupancy
and fixtures expense, supplies, data processing, and deposit intangible
amortization expense.
Importantly, approximately $510,000 in estimated large one-time expenses were
incurred this quarter due to the Chase acquisition in a variety of areas, the
primary categories being employee severance and overtime, office supplies, data
processing conversion expense, and customer check repurchase expense. Excluding
these items, overhead would have increased by $1.8 million or 25% compared to
third quarter 1994.
A very positive change in the third quarter was the announcement in September of
lower FDIC deposit insurance premiums, effective retroactively to June 1 of this
year. As a result, FDIC insurance expense pertaining to the third quarter was
reduced by nearly 65% or $234,000 even after additional coverage required by the
Chase branch deposits. This improvement is in addition to the refund the bank
received this quarter of approximately $100,000 for excess insurance premiums
collected for June.
Asset quality remains good at the company. Net charge-offs for the quarter were
very satisfactory at .14% of average loans; for the first nine months of 1995,
the net charge-off ratio improved slightly from the prior year to .16%.
Nonperforming loans have been maintained at a relatively low level, ending the
quarter at $1.8 million versus $2.6 million one year earlier. As a result, the
ratio of nonperforming loans to loans outstanding stood at .33%, an improvement
from .55% at September 30, 1994. Consequently, the third quarter loan loss
provision expense was slightly less than a year ago, sufficient to achieve a
ratio of loan loss reserves to loans outstanding of 1.25%. The present ratio of
reserves to nonperformers is considered very ample by management at nearly 3.7
times.
<PAGE>
The following sections of this report discuss more fully the balance sheet
and earnings trends summarized above.
Net Interest Income
On a tax-equivalent basis, net interest income for third quarter 1995
increased $2.5 million (23.8%) over the same period in 1994 to $12.8 million.
Compared with second quarter 1995, there was a $2.2 million increase.
The change in net interest income reflects both the change in net interest
margin and the change in earning asset levels. The table below shows these
underlying dynamics.
For the Quarter Net Net Yield on Cost Average Loans /
Ended: Interest Interest Earning of Earning Earning
(000's) Income Margin Assets Funds Assets Assets
------ ------ ------ ------ ------ ------
Amount and Change Period
from Preceding Quarter End
------ ------ ------ ------ ------ ------
September 30, 1994
Amount $10,380 5.31% 8.23% 2.99% $776,195 59.1%
Change $578 -0.03% 0.14% 0.18% 5.4% 0.0
December 31, 1994
Amount $10,684 5.09% 8.39% 3.37% $832,113 56.1%
Change $304 -0.21% 0.15% 0.38% 7.2% (3.0)
March 31, 1995
Amount $10,564 4.88% 8.69% 3.90% $877,322 56.1%
Change ($120) -0.21% 0.30% 0.53% 5.4% 0.1
June 30, 1995
Amount $10,699 4.74% 8.73% 4.09% $904,478 54.7%
Change $135 -0.14% 0.04% 0.19% 3.1% (1.5)
September 30, 1995
Amount $12,849 4.82% 8.43% 3.66% $1,057,820 50.7%
Change $2,150 0.07% -0.30% -0.43% 17.0% (3.9)
<PAGE>
Change from
September 30, 1994 to
September 30, 1995
Amount $2,469 -0.49% 0.19% 0.66% $281,625 -8.4%
% Change 23.8% --- --- --- 36.3% ---
For the Year
Ended:
(000's)
September 30, 1994
Amount $29,433 5.38% 8.16% 2.85% $731,514 59.1%
Change --- --- --- --- --- ---
September 30, 1995
Amount $34,111 4.81% 8.60% 3.87% $947,201 50.7%
Change 15.9% -0.56% 0.44% 1.01% 29.5% (8.4)
Note: (a) All net interest income, margin, and earning asset yield figures are
full-tax equivalent.
(b) Net interest income, margin, and earning asset yield figures exclude
premiums on called bonds of $158, $146, and $297 as of March 10,
July 10, and October 10, 1993, respectively.
* May not foot due to rounding
<PAGE>
Comparing the quarter just ended to third quarter 1994, the net interest
margin narrowed by 49 basis points due to the cost of funds rate increasing by
66 basis points compared to a 19 basis point increase in the yield on earning
assets (up due to higher financial market rates). The cost of fund rate
increase is attributable both to the growing mix of time deposits as well as the
increasing time deposit rate prior to the Chase transaction: Customers have
moved from lower yielding transaction accounts. In addition, a large proportion
of time deposits was acquired in the Chase transaction. The $281.6 million
increase in earning assets shown in the above table more than offset the impact
of this margin shrinkage on net-interest income.
A comparison of third quarter 1995 to second quarter 1995 shows a 7 BP
increase in the net interest margin. The yield on earning assets fell 30 BP
since the acquired Chase deposits was temporarily invested in short-term, lower
yielding instruments. The cost of funds rate dropped an even greater 43 basis
points because virtually all high cost short-term borrowings were replaced with
low cost Chase deposits. The $153 million growth in earning assets during the
quarter along with improved margin resulted in net interest income growing $2.2
million.
Net interest margin (NIM) is in the 49th percentile based on comparative
peer data as of June 30, 1995 (prior to the Chase acquisition). This
performance is largely the result of high earning asset yields being in the
favorable 71st percentile, versus cost of funds being above norm in the
unfavorable 73rd percentile. It should be noted that the Chase transaction
subsequent to June 30, 1995 caused NIM to improve slightly.
Non-Interest Income
Non-interest income totaled approximately $1.8 million for the three months
ended September 30, 1995, $196,000 or 12.1% over the same period last year.
This brings 1995 YTD non-interest income to $4.6 million, up 8.4% from the first
nine months of 1994.
Three Months Ended Change
9/30/95 9/30/94 Amount Percent
(000's)
Fiduciary services $336 $353 ($17) -4.7%
Service charges on $961 $694 $267 38.5%
deposit accounts
Annuity and mutual $91 $16 $75 462.3%
fund sales
Other service charges, $413 $546 ($133) -24.3%
commissions, and fees
Net gain (loss) on sale $8 $4 $4 91.6%
of investments and
other assets
------- ------- ------- -------
Total noninterest income
- Amount $1,809 $1,613 $196 12.1%
- % of Average
assets 0.62% 0.77% -0.15% ---
<PAGE>
Nine Months Ended Change
9/30/95 9/30/94 Amount Percent
(000's)
Fiduciary services $1,023 $1,077 ($54) -5.0%
Service charges on $2,326 $1,891 $436 23.0%
deposit accounts
Annuity and mutual $343 $78 $265 339.6%
fund sales
Other service charges, $918 $1,151 ($233) -20.2%
commissions, and fees
Net gain (loss) on sale ($31) $27 ($59) -214.5%
of investments and
other assets
------- ------- ------- -------
Total noninterest income
- Amount $4,580 $4,225 $355 8.4%
- % of Average
assets 0.60% 0.72% -0.12% ---
* May not foot due to rounding
<PAGE>
As shown by the table above, 38.5% growth was experienced in income from
service charges on deposits. This improvement reflects the impact of acquiring
$388 million in deposits from the 15 Chase branches as well as continued efforts
to reduce the number of waived charges. Annuity and mutual fund sales
commissions, a program which began early in 1994, grew more than 4.5 times from
one year earlier to $91,000.
These increases were partially offset by declines in other non-interest
income categories. Fiduciary services fell 4.7% due to 28.6% lower employee
benefit trust income. Growth was also offset by declining Visa merchant
discount fees attributable to the loss of a large vendor.
The 15 basis point decrease (to .60%) in the non-interest income ratio to
average assets from one year earlier reflects CBSI's strong asset growth,
primarily attributable to acquired deposits. Progress continues to be made to
address the bank's peer shortfall (first or lowest peer quartile) by maintaining
competitive and value-based service charges; offering full service
brokerage/financial planning products through dedicated sales representatives in
selected markets; and selling/servicing residential mortgages (which began
during mid-1994).
Non-Interest Expense
Non-interest expense, for the three months ended September 30, 1995
increased by $2.3 million (32.4%) over the same period last year to $9.2
million, bringing the year-to-date (YTD) total up 19.5% over the first nine
months of 1994 to $23.4 million. The table below summarizes the major
components of change.
Three Months Ended Change
9/30/95 9/30/94 Amount Percent
(000's)
Personnel Expense $4,561 $3,333 $1,228 36.8%
Occupancy, furniture, $1,222 $929 $292 31.5%
and equipment
Administrative and business $1,341 $1,092 $249 22.8%
development
All other expense $2,105 $1,616 $489 30.3%
------- ------- ------- -------
Total noninterest expense
- Amount $9,229 $6,970 $2,259 32.4%
- % of Average
assets 3.17% 3.34% -0.17% ---
Efficiency ratio 63.0% 58.1% 4.8% ---
<PAGE>
Nine Months Ended Change
9/30/95 9/30/94 Amount Percent
(000's)
Personnel Expense $11,872 $9,818 $2,055 20.9%
Occupancy, furniture, $3,200 $2,799 $401 14.3%
and equipment
Administrative and business $3,885 $3,173 $713 22.5%
development
All other expense $4,426 $3,776 $650 17.2%
------- ------- ------- -------
Total noninterest expense
- Amount $23,383 $19,565 $3,818 19.5%
- % of Average
assets 3.08% 3.34% -0.26% ---
Efficiency ratio 60.2% 58.1% 2.1% ---
* May not foot due to rounding
As noted in the Earnings Performance Summary, approximately $510,000 in
estimated large one-time expenses were incurred this quarter due to the Chase
acquisition in a variety of areas, the primary categories being employee
severance and overtime, office supplies, data processing conversion expense, and
customer check repurchase expense.
Over 54% of the total quarterly increase resides in personnel expense, the
primary reasons being modest annual merit awards and an average 143 additional
full-time equivalent (FTE) positions, resulting in a total of 579 employees as
of September 30, 1995. These additions reflect the full impact of the
acquisition of the 15 Chase branches resulting in 115 additional FTE, as well as
the Chase Cato, New York branch in fourth quarter 1994; expanded business
development efforts in the lending and fiduciary services functions; and the
need to service the bank's increased transaction volumes over the last twelve
months.
The remainder of the quarter's overhead increase compared to the same quarter
last year is spread over a number of expense categories. Higher occupancy
expense resulted from a total of 17 new locations during the last twelve months.
Administrative expenses were up due to higher supplies caused by the branch
acquisitions. The amortization of intangibles rose due to the acquisition of
the Chase branches and the resulting $32.2 million premium. Finally, there were
various other increases related to inflation, volume growth and acquisitions,
partially offset by lower credit card processing expense (with the loss of a
large vendor) and the $554,000 FDIC insurance refund (approximately $100,000
being attributable to the second quarter), bringing the deposit insurance rate
down from 23 BP to 4 BP.
As a percentage of average assets, annualized overhead declined from 3.34% in
third quarter 1994 to 3.17% in third quarter 1995; the latter level is favorably
below the peer norm and is attributable to persistent cost control efforts as
well as asset growth (much of which was in the bank's investment portfolio,
which requires minimal overhead). CBSI's efficiency ratio (operating expense
divided by recurring operating income) increased in 1995 to 63.0% from 58.1%
last year caused by replacing borrowings with deposits (which require more
overhead) and one time expenses during the quarter. As of June 30, 1995, the
bank's efficiency ratio was in the favorable 25th peer percentile (prior to the
Chase transaction).
<PAGE>
Income and Income Taxes
As shown by the table below, income before tax was approximately $3.03 million
for the quarter ended September 30, 1995, a $500,000 (11.0%) increase from the
same period last year, bringing the YTD total to $13.8 million or 9.5% more than
the first nine months of 1994.
Three Months Ended Change
9/30/95 9/30/94 Amount Percent
(000's)
Net interest income $12,734 $10,211 $2,523 24.7%
Loan loss provision $275 $315 ($40) -12.7%
Net interest income $12,459 $9,896 $2,562 25.9%
after provision for
loan losses
Other income $1,809 $1,613 $196 12.1%
Other expense $9,229 $6,970 $2,259 32.4%
Income before $5,039 $4,539 $500 11.0%
income tax
Income tax $2,008 $1,826 $182 10.0%
Net income $3,031 $2,713 $318 11.7%
Nine Months Ended Change
9/30/95 9/30/94 Amount Percent
(000's)
Net interest income $33,731 $28,917 $4,815 16.6%
Loan loss provision $1,129 $977 $152 15.6%
Net interest income $32,603 $27,940 $4,662 16.7%
after provision for
loan losses
Other income $4,580 $4,225 $355 8.4%
Other expense $23,383 $19,565 $3,818 19.5%
Income before $13,799 $12,600 $1,199 9.5%
income tax
Income tax $5,446 $4,838 $608 12.6%
Net income $8,353 $7,762 $591 7.6%
* May not foot due to rounding
<PAGE>
As a result of higher pre-tax income, YTD income taxes increased by
$608,000. CBSI's marginal tax rates are 35% federal and 9% state (plus a 7.5%
surcharge scheduled to be phased out over time). Third quarter 1995's effective
tax rate was 39.8% and is slightly lower than third quarter 1994's rate.
Compared to our peers, the company's effective tax rate is unfavorable because
of New York State's very high tax level as well as tax exempt security holdings
being slightly below the norm.
Capital
Nine Months Ended Change
9/30/95 9/30/94 Amount Percent
Tier 1 leverage ratio 5.55% 7.16% -1.61% N/A
Tier 1 capital to 10.41 12.91 -2.50 N/A
risk asset ratio
Cash dividend declared $0.90 $0.81 $0.09 11.1%
per common share
Dividend payout (Common) 33.2% 29.9% 3.33% N/A
Book value per share: Total $25.17 $23.43 $1.73 7.4%
: Tangible 14.92 21.38 (6.46) (30.2)
As of September 30, 1995, the tier I leverage ratio of 5.55% was 161 basis
points lower than one year earlier. However, it is still well above the 5%
minimum required to be a "well-capitalized" bank as defined by the FDIC. The
decrease in the ratio is attributable to the acquired Chase deposits and
associated intangibles, offset by favorable third quarter earnings and continued
amortization of intangibles from previous acquisitions. This was also partially
offset by a total of 862,500 shares ($20.9 million) in common stock and 90,000
($9.0 million) shares in preferred stock that were issued from late second
quarter to early third quarter for the Chase branch acquisition. Of this $29.9
million in gross proceeds, $2.4 million was deducted as the combined cost of
issuance.
As a result of the aforementioned reasons, the tier I risk-based capital ratio
as of September 30, 1995 was 10.41%, or 250 basis points lower than it was as of
June 30, 1994. This compares to a 6% "well-capitalized" regulatory minimum.
Total capital reached $101.5 million as of September 30, 1995, $36.5 million
(56.1%) higher than twelve months earlier. This increase is attributable to net
income of $10.1 million over the twelve months ended September 30, 1995 and
raised capital of $27.5 million (net of issuance costs) versus dividends
declared on common stock of $3.6 million and on preferred stock of $202,500
during the same time frame. The remaining difference is due to additional
shares issued in exercise of incentive stock options and changes in the market
value adjustment. The higher YTD dividend shown above reflects a 3 cent per
share increase (11.1%) in the quarterly dividend per common share approved by
the CBSI Board of Directors in August 1994, the fourth dividend increase within
three years. The YTD 1995 common dividend payout of 33.2% has increased from
the same 1994 period but remains at the low end of the company's targeted 30-40%
guideline. The increase in the ratio is attributable to the higher number of
common shares outstanding. Including the preferred dividend, the payout grows
to 39.9%
<PAGE>
Book value per share increased 7.4% from September 30, 1994 while tangible book
value per share fell 30.2%, reflecting the deposit premium resulting from the
July 1995 Chase acquisition.
The common shares of Community Bank System, Inc. are traded in the NASDAQ
National Market System under the symbol CBSI. Stock price activity, numbers of
shares outstanding, cash dividends declared and share volume traded are shown
below.
For the Quarter Market Market Market # of Cash Share
Ended: Price Price Price Shares Dividend Volume
High Low Close Outstanding Declared Traded
------ ------ ------ ------ ------ ------
Amount and Change
from Preceding Quarter
------ ------ ------ ------ ------ ------
September 30, 1994
Amount $31.75 $29.00 $31.00 2,775,150 $0.30 186,797
Change 4.1% 1.8% 1.6% 0.3% 11.1% -26.4%
December 31, 1994
Amount $31.75 $25.75 $26.25 2,788,150 $0.30 146,706
Change 0.0% -11.2% -15.3% 0.5% 0.0% -21.5%
March 31, 1995
Amount $27.75 $25.25 $27.13 2,788,150 $0.30 343,668
Change -12.6% -1.9% 3.3% 0.0% 0.0% 134.3%
June 30, 1995
Amount $29.00 $24.25 $25.50 3,503,150 $0.30 1,945,143
Change 4.5% -4.0% -6.0% 25.6% 0.0% 466.0%
September 30, 1995
Amount $36.50 $25.25 $33.75 3,674,325 $0.30 2,664,957
Change 25.9% 4.1% 32.4% 4.9% 0.0% 37.0%
Change from
September 30, 1994 to
September 30, 1995
Amount $4.75 ($3.75) $2.75 899,175 $0.00 2,478,160
% Change 15.0% -12.9% 8.9% 32.4% 0.0% 1326.7%
Note that the stock touched a new high of $36.50 during third quarter 1995,
ending the period at $33.75 or up 32.4% from three months earlier. Volume was
up a significant 37% over second quarter 1995.
<PAGE>
Loans
Loans outstanding, net of unearned discount, were a record $544.9 million
as of September 30, 1995, a very favorable $75.5 million (16.1%) growth over the
prior twelve months. Outstandings have now climbed for fourteen consecutive
quarters. As shown in the table below, CBNA is predominantly a retail bank,
with more than 70% of its outstandings spread across three basic consumer loan
types. All four types are more fully defined in the company's 1994 annual
report.
For the Quarter Consumer Consumer Consumer Business Total Yield on
Ended: Direct Indirect Mortgages Lending Loans Loans
(000's) ------ ------ ------ ------ ------ ------
Amount and Change
Quarterly
from Preceding Quarter
Average
------ ------ ------ ------ ------ ------
September 30, 1994
Amount $98,280 $94,464 $142,012 $134,724 $469,480 9.12%
Change 4.8% 9.5% 2.6% 5.9% 5.4% 0.05
December 31, 1994
Amount $98,777 $102,491 $143,137 $138,675 $483,079 9.26%
Change 0.5% 8.5% 0.8% 2.9% 2.9% 0.14
March 31, 1995
Amount $98,633 $113,895 $142,289 $140,477 $495,294 9.52%
Change -0.1% 11.1% -0.6% 1.3% 2.5% 0.26
June 30, 1995
Amount $97,480 $127,439 $142,413 $147,978 $515,311 9.60%
Change -1.2% 11.9% 0.1% 5.3% 4.0% 0.08
September 30, 1995
Amount $103,316 $132,509 $144,206 $164,960 $544,991 9.63%
Change 6.0% 11.5% 1.3% 11.5% 5.8% 0.03
Change from
September 3 to
September 30, 1995
Amount $5,036 $38,046 $2,195 $30,235 $75,511 0.51
Change 5.1% 40.3% 1.5% 22.4% 16.1% N/A
Loan mix
September 30, 1994 20.9% 20.1% 30.2% 28.7% 100.0%
September 30, 1995 19.0% 24.3% 26.5% 30.3% 100.0%
Change -2.0% 4.2% -3.8% 1.6% ---
* May not foot due to rounding
<PAGE>
Over 50% of the bank's loan growth in the last twelve months came from the
indirect lending portfolio (applications taken at dealer locations), which grew
40%. This reflects both high automobile demand industry-wide, as well as
continued greater emphasis on this product line in the bank's Southern Region.
Almost 40% of the bank's loan growth in the last twelve months came from the
generally prime-based business lending portfolio, which increased over 22%. Just
under half of this growth came from commercial loans acquired with the 15 Chase
branches. Thoughout the bank's market area, small- and medium-sized companies
continue to be receptive to CBSI's responsive and personalized service provided
by the bank's expanded team of experienced lenders. Growth during the most
recent quarter was 11.5%, primarily resulting from the acquired Chase loans.
The minimal 1.5% increase in consumer mortgages since third quarter 1994 (or 6%
of total loan growth) is largely attributable to a program of selling mortgages
in the secondary market implemented by the bank in third quarter 1994. Volume
grew 1.3% in third quarter 1995 after $1.4 million in secondary market sales of
originations with terms generally in excess of 15 years.
Consumer direct loans have grown a favorable 5.1% since September 30, 1994.
This category had been essentially flat since the end of 1992 after the
accumulation and periodic sale of student loans. Under half of the 6% growth in
the most recent quarter is the result of acquired Chase personal credit lines
tied to demand deposit accounts.
Despite a 125 basis point increase in the average prime rate for the three
months ending September 30, 1995 over the same period last year, the loan yield
has grown only 51 basis points. This has resulted from the slow runoff of lower
yielding loans and market pressure keeping rates on many loan types relatively
low. Nonetheless, the bank's predominantly retail loan mix and related pricing
objectives have maintained a favorable overall loan yield, being in the 70th
peer percentile based on data as of June 30, 1995.
<PAGE>
Loan Loss Provision and Reserve for Loan Losses
The provision for future loan losses was $275,000 for the three months ended
September 30, 1995, down $40,000 (12.7%) versus the same period last year.
Net charge-offs for the quarter were $183,000 (.14% of loans), down from
$243,000 for third quarter 1994 primarily due to an increase in recoveries. The
bank's net charge-offs to average loans ratio is essentially equal to the peer
norm, being in the 52nd percentile as of June 30, 1995.
3 Months 3 Months 9 Months 9 Months 12 Month
(000's or % Ratios) Sept 30, Sept 30, Sept 30, Sept 30, Dec 31,
1995 1994 1994 1993 1992
- ---------- ---- ---- ---- ---- ----
Net Charge-offs $183 $243 $618 $641 $1,128
Net Charge-offs/Ave Loans 0.14% 0.21% 0.16% 0.20% 0.25%
Gross Charge-offs $360 $375 $1,150 $995 $1,616
Gross Charge-offs/Ave Loans 0.27% 0.33% 0.30% 0.30% 0.36%
Recoveries $178 $132 $532 $354 $488
Recoveries/Prior year 43.6% 37.0% 44.0% 33.6% 34.6%
gross charge offs
The strong loan growth discussed above (due in part to the acquired Chase loans)
caused the ratio of loan loss reserve to total loans to fall slightly from a
year ago to 1.25%. Despite the ratio's decline, the reserve reached a new high
at quarter end of $6.8 million. Management believes that having a loan loss
reserve ratio in the neighborhood of 1.25% is consistent with the bank's credit
quality, which has enabled the reserve for loan losses to cover the level of
non-performing loans by approximately two times or more since the bank's
restructuring as a single bank. Current coverage of loan loss reserves over
non-performers is very favorable at 373%, an increase from 236% a year ago due
to growth in the provision for loan losses and a significant reduction in non-
performing loans.
3 Months 3 Months 9 Months 9 Months 12 Month
(000's or % Ratios) Sept 30, Sept 30, Sept 30, Sept 30, Dec 31,
1995 1994 1994 1993 1992
- ---------- ---- ---- ---- ---- ----
Non-Performing Loans $1,819 $2,560 $1,819 $2,560 $3,258
Non-Performing Loans/Loans 0.33% 0.55% 0.33% 0.33% 0.67%
Loan Loss Allowance $6,791 $6,042 $6,791 $6,042 $6,281
Loan Loss Allowance/Loans 1.25% 1.29% 1.25% 1.29% 1.30%
Loan Loss Allowance/ 373% 236% 373% 236% 193%
Non-Performing Loans
Loan Loss Provision $275 $315 $1,129 $977 $1,702
Loan Loss Provision/ 151% 129% 183% 152% 151%
Net Charge-offs
<PAGE>
Non-performing loans decreased almost 29% from twelve months earlier to
$1.8 million as of the most recent quarter end, basically attributable to a
write-down on one large commercial loan and its subsequent take out by the
Farmers Home Administration. Also down from the September 30, 1994 level was
the ratio of non-performers to loans outstanding to .33% as of September 30,
1995; the higher .64% level at June 30, 1995 was in the favorable 42nd peer
percentile.
The ratio of loan loss provision to net charge offs for the most recent
quarter end was 151%, slightly higher than the 129% ratio twelve months earlier
due to the higher level of charge-offs in third quarter 1994.
The following table reflects the detail on non-performing and restructured
loan levels. The ratio of non-performing assets to total assets was .19% as of
September 30, 1995, down 15 basis points from a year ago basically due to the
write-down of one non-performing commercial loan. There is no troubled debt
restructuring as of the most recent quarter end versus $31,000 one year earlier;
the change reflects being paid out of previously restructured commercial loans.
OREO for all periods is recorded at the lower of cost or market less estimated
cost to sell. The ratio of nonperforming assets to loans plus OREO at .41%
remains better than the company's internal goal of less than .75%.
9 Months 9 Months 12 Month 12 Month 12 Months
(000's or % Ratios) Sept 30, Sept 30, Dec 31, Dec 31, Dec 31,
1995 1994 1994 1993 1992
- ---------- ---- ---- ---- ---- ----
Loans accounted for on a $1,359 $1,737 $2,396 $1,738 $881
non-accrual basis
Accruing loans which are
contractually past due
90 days or more as to
principal and interest
payments $460 $823 $862 $653 $726
Loans which are "troubled
debt restructurings" as
defined in Statement of
Financial Accounting
Standards No. 15
"Accounting by Debtors
and Creditors for
Troubled Debt
Restructurings $0 $31 $15 $243 $356
Other Real Estate (OREO) $443 $302 $223 $433 $459
----- ----- ----- ----- -----
Total Non-Performing Assets $2,262 $2,893 $3,496 $3,067 $2,422
Total Non-Performing Assets/ 0.19% 0.34% 0.38% 0.43% 0.36%
Total Assets
Total Non-Performing Assets/ 0.41% 0.62% 0.72% 0.73% 0.67%
Total Loans & OREO
Loan Loss Allowance / 300% 209% 194% 197% 259%
Non-Performing Assets
* May not foot due to rounding
<PAGE>
Total delinquencies at $6.1 million (loans greater than 30 days past due plus
nonaccruals) declined 19% from one year earlier, and the ratio to total loans at
1.08% is very favorable and improved from prior periods. The reason for the
dollar decrease is the commercial loan charge-offs during the prior twelve
months causing time & demand delinquencies to decrease substantially. The
dollar amount of installment loan delinquencies increased. However, with the
strong loan growth, the ratio to total installment loans fell. Real estate
delinquencies increased slightly due to a higher level of non-accrual loans.
Delinquencies 3 Months 3 Months 12 Month 12 Month 12 Month
30 days - Non-accruing Sept 30, Sept 30, Dec 31, Dec 31, Dec 31,
(000's or % Ratios) 1995 1994 1994 1993 1992
- ---------- ---- ---- ---- ---- ----
Total Delinquencies $6,055 $7,459 $6,765 $7,004 $6,894
Ratio to Total Loans 1.08% 1.50% 1.32% 1.58% 1.76%
Time & Demand $1,831 $3,851 $3,107 $2,633 $1,758
Ratio to Time & Demand 1.08% 2.70% 2.14% 2.07% 1.72%
Installment $2,718 $2,467 $2,664 $3,156 $4,026
Ratio to Installment 1.28% 1.37% 1.41% 2.01% 2.53%
Real Estate $1,506 $1,141 $994 $1,214 $1,110
Ratio to Real Estate 0.84% 0.65% 0.56% 0.76% 0.85%
Note: Ratios to Gross Loans
* May not foot due to rounding
Deposits
Deposits are the primary source of funding for loans and investments as
measured by the deposits to earning asset ratio. This ratio is up 8.5
percentage points from a year ago to 96.0%, reflecting borrowings being paid off
with the deposits acquired from Chase. Average earning assets have increased
$282 million over the last twelve months, while average deposits have grown a
greater $336 million.
<PAGE>
The table below displays the components of total deposits including volume
and rate trends over the last seven quarters.
For the Quarter Average Average Average Average Average Average
Ended: Demand Savings Money Time Total Deposits/
(000's) Market Deposits Earning
------ ------ ------ ------ ------ Assets
Amount and Average Rate
------ ------ ------ ------ ------ ------
September 30, 1994
Amount $101,110 $256,496 $77,446 $244,149 $679,201 87.5%
Yield / Rate ---- 2.64% 2.62% 4.24% 2.82%
December 31, 1994
Amount $104,427 $248,710 $68,067 $262,359 $683,564 82.1%
Yield / Rate ---- 2.56% 2.67% 4.77% 3.03%
March 31, 1995
Amount $102,850 $237,540 $66,035 $295,808 $702,233 80.0%
Yield / Rate ---- 2.63% 2.83% 5.33% 3.40%
June 30, 1995
Amount $104,882 $233,875 $63,308 $310,756 $712,820 78.8%
Yield / Rate ---- 2.68% 2.94% 5.58% 3.57%
September 30, 1995
Amount $142,413 $345,812 $79,542 $447,253 $1,015,020 96.0%
Yield / Rate ---- 2.68% 2.72% 5.55% 3.57%
Change in quarterly average
outstandings & yield / rate
September 30, 1994 to
September 30, 1995
Amount $41,304 $89,316 $2,097 $203,104 $335,819 8.5%
% Change 40.9% 34.8% 2.7% 83.2% 49.4%
Change (% pts) ---- 0.04 0.10 1.32 0.75
Deposit Mix
September 30, 1994 14.9% 37.8% 11.4% 35.9% 100.0%
September 30, 1995 14.0% 34.1% 7.8% 44.1% 100.0%
Change -0.9% -3.7% -3.6% 8.1% ----
Year-to-date average
outstandings: (000's)
September 30, 1994
Amount $96,619 $250,016 $75,674 $218,358 $640,666 87.6%
Yield / Rate ---- 2.54% 2.54% 4.17% 2.71% ----
September 30, 1995
Amount $116,860 $272,806 $69,678 $351,827 $811,170 85.6%
Yield / Rate ---- 2.67% 2.82% 5.50% 3.52% ----
Change in YTD average
outstandings & yield / rate
from September 30, 1994 to
September 30, 1995
Amount $20,241 $22,790 ($5,996) $133,469 $170,504 (1.9)
% Change 20.9% 9.1% -7.9% 61.1% 26.6% ----
Change (%pts) ---- 0.13 0.28 1.33 0.81
* May not foot due to rounding
<PAGE>
Average total deposits for the quarter were 49.4% higher than third quarter
1994. As shown by the table, 60.5% of all of the deposit growth was in time
deposits (up $203.1 million), with the remainder split between $41.3 million in
demand deposit growth and $89.3 million in savings growth. The major reasons
for the total deposit increase were the $388 million in deposits from the 15
Chase branches acquired in third quarter 1995 and the Chase Cato branch
acquisition in fourth quarter 1994.
As reflected in the table above, the deposit mix has had material changes
since third quarter 1994 because of the impact of the aforementioned acquisition
on rasing our time deposit mix to 44%.
The above table shows that the average rates on interest bearing deposits
have lagged behind the 125 BP increase in Fed Funds, moving up only 75 BP.
Savings and money market rates accounted for the lag, increasing only 4 BP and
10 BP, respectively. As of June 30, 1995, the bank's average rate on interest
bearing deposits were slightly better than the norm in the 48th peer percentile.
Liquidity and Borrowing Position
Liquidity involves the ability to raise funds to support asset growth, to
meet requirements for deposit withdrawals, to maintain reserve requirements, and
to otherwise sustain operations.
The bank's liquidity level is extremely favorable as of September 30, 1995.
In the event of a liquidity crisis, over $293.6 million (essentially short term
assets minus short term liabilities) or 24.7% of assets could be converted into
cash within a 30-day time period. This puts the liquidity position well above
the bank's 7.5% internal policy minimum. The same policy minimum applies to
projections over a 90-day period for which the actual ratio is 23.0% as of this
quarter end.
As shown by the statement of cash flows preceding the Management Discussion
and Analysis, the bank's cash and cash equivalents grew $59.7 million YTD to
$94.3 million as of September 30, 1995. YTD net cash was provided by operating
activities of $9.7 million (caused by favorable earnings). Financing activities
provided cash of $255.8 million (attributable to deposits from the Chase
acquisition and issuance of common and preferred stock) that was utilized by
investing activities of $201.6 million (due to investment purchases and
maturities, the premium paid on the acquisition and loan growth).
<PAGE>
The following table shows the trend of loans, investments, large liability
certificates of deposit and other borrowings over the last seven quarters.
For the Quarter Average Average Ave Core Ave CDs Average Interest
Ended: Loans Investments Deposits >$100,000 Borrowings Bearing
(000's) (a) (b)
Liabilities
------ ------ ------ ------ ------ ------
Amount and Average Yield / Rate
------ ------ ------ ------ ------ ------
September 30, 1994
Amount $454,383 $321,811 $644,302 $34,899 $79,676 $657,767
Yield / Rate 9.12% 6.98% 2.74% 4.33% 4.50% 3.45%
December 31, 1994
Amount $473,920 $358,193 $642,190 $41,374 $129,074 $708,211
Yield / Rate 9.26% 7.23% 2.91% 4.78% 5.18% 3.87%
March 31, 1995
Amount $488,436 $388,886 $644,375 $57,858 $153,625 $753,008
Yield / Rate 9.52% 7.64% 3.18% 5.89% 6.17% 4.43%
June 30, 1995
Amount $507,159 $397,319 $650,142 $62,679 $169,277 $777,216
Yield / Rate 9.60% 7.62% 3.37% 5.71% 6.26% 4.64%
September 30, 1995
Amount $532,156 $525,664 $958,027 $56,993 $29,002 $901,609
Yield / Rate 9.63% 7.21% 3.45% 5.70% 6.56% 4.23%
Change in quarterly average
outstandings & yield / rate
from September 30, 1994 to
September 30, 1995
Amount $77,772 $203,853 $313,725 $22,095 ($50,673) $243,842
% Change 17.1% 63.3% 48.7% 63.3% -63.6% 37.1%
Change (%pts) 0.51 0.23 0.71 1.37 2.07 0.78
Year-to-date average
outstandings: (000's)
September 30, 1994
Amount $436,771 $294,742 $609,104 $31,562 $73,267 $617,315
Yield / Rate 9.07% 6.81% 2.65% 3.93% 4.07% 3.30%
September 30, 1995
Amount $509,410 $437,791 $751,997 $59,174 $116,845 $811,155
Yield / Rate 9.59% 7.46% 3.35% 5.77% 6.25% 4.42%
<PAGE>
Change in YTD average
outstandings & yield / rate
from September 30, 1994 to
September 30, 1995
Amount $72,639 $143,048 $142,893 $27,611 $43,578 $193,841
% Change 16.6% 48.5% 23.5% 87.5% 59.5% 31.4%
Change (%pts) 0.52 0.64 0.70 1.84 2.17 1.13
Note: (a) Yield on average investments calculated on a full-tax equivalent
basis. Excludes premiums on called bonds of $158, $146, and
$297 as of March 10, July 10, and October 10, 1993, respectively.
(b) Defined as total deposits minus CDs > $100,000. Rate includes
impact of non-interest bearing transaction accounts.
* May not foot due to rounding
Borrowings for third quarter 1995 averaged $29.0 million compared to $79.7
million for third quarter 1994. This resulted from borrowings being virtually
paid off with acquired Chase deposits and capital issued from the end of June
through mid-July. CBSI does not anticipate borrowing until buying opportunities
and financial market conditions make investment purchases attractive and
prudent.
The slight eight basis point increase in the rate on core deposits from second
to third quarter 1995 reflects the bank's greater mix of interest-bearing
deposits resulting from the Chase acquisition.
<PAGE>
Investments and Asset/Liability Management
The level and composition of the bank's investment portfolio is designed to
balance the constraints of liquidity, interest rate risk, capital and credit
risk, while providing an acceptable rate of return. In meeting that objective,
the portfolio at quarter end comprised 49.3% of earning assets (up from 40.9% 12
months prior due to the investment of excess Chase deposits).
As shown by the table below, the bank's investments consist primarily of
U.S. treasury securities, mortgage-backed securities (including U.S. agencies
and collateralized mortgage obligations), and tax-exempt obligations of state
and political subdivisions. All investment strategies are developed in
conjunction with the bank's asset/liability position, with particular attention
given to managing interest rate risk.
For the Quarter U.S. Mtg-Backs Tax Other Total Invests/
Ended: Gov'ts (a) Exempts (b) Investments Earning
(000s) ------ ------ ------ ------ ------ Assets
Amount and Change
from Preceding Quarter (Period
------ ------ ------ ------ ------ End)
September 30, 1994
Amount $145,870 $146,423 $22,166 $10,444 $324,902 40.9%
Change 14.3% -4.6% 4.3% -12.2% 3.4% 0.0
December 31, 1994
Amount $187,087 $155,376 $20,777 $15,279 $378,520 43.9%
Change 28.3% 6.1% -6.3% 46.3% 16.5% 3.0
March 31, 1995
Amount $192,526 $162,408 $17,762 $14,482 $387,177 43.9%
Change 2.9% 4.5% -14.5% -5.2% 2.3% (0.1)
June 30, 1995
Amount $212,508 $177,284 $16,727 $20,675 $427,195 45.3%
Change 10.4% 9.2% -5.8% 42.8% 10.3% 1.5
September 30, 1995
Amount $245,087 $200,471 $15,636 $68,076 $529,270 49.3%
Change 15.3% 13.1% -6.5% 229.3% 23.9% 3.9
Change from
September 30, 1994 to
September 30, 1995
Amount $99,217 $54,048 ($6,529) $57,631 $204,368 8.4%
Change 68.0% 36.9% -29.5% 551.8% 62.9% ---
Investment Mix
September 30, 1994 44.9% 45.1% 6.8% 3.2% 100.0%
September 30, 1995 46.3% 37.9% 3.0% 12.9% 100.0%
Change 1.4% -7.2% -3.9% 9.6% ---
Note: (a) Includes CMO's and pass through's
(b) Includes Money Market Investments, Federal Home Loan Bank,
and other stock
* May not foot due to rounding
<PAGE>
Investments totaled $529 million for the quarter just ended, up $204 million
(62.9%) from the third quarter of 1994. This increase is attributable to
investing deposits from the 15 Chase branches and the growing level of
borrowings prior to acquisition.
During third quarter 1995, with the large amount of funds to be invested from
the Chase acquisition and uncertainty in the financial markets there was similar
growth in both cash flow producing investments (such as 15 year seasoned
mortgage backs) and call protection investments (US Governments).
Additional growth in investments resulted from excess funds being placed in Fed
Funds sold (reflected in other investments). The fed funds position is expected
to be liquidated upon the consummation of the sale of three branches to NBT
Bank, N.A., currently expected before year-end 1995.
Over the last twelve months, the investment portfolio mix has shifted such that
there are increased proportions of U.S. Government securities (46% as of
September 30, 1995) and other investments (Federal Home Loan Bank stock and Fed
Funds Sold), with a decreasing proportion of tax exempt and mortgage backed
securities.
The average fully taxable equivalent yield (including the lower yielding Fed
Funds Sold) in the last year has increased from 6.98% to 7.21% as the result of
lower yielding investments running off and taking advantage of increased market
rates. The 41 BP decline since June 30, 1995 is the result of the large amount
Fed Funds Sold position; excluding the position, the portfolio yield as of
quarter end was 7.40. As of June 30, 1995, the bank's higher 7.62% overall
investment yield was in the very favorable 95th percentile.
The average portfolio life based on earliest redemption date has increased from
2.6 years on September 30, 1994 to 4.4 years on September 30, 1995, attributable
to the increasing mix of investments with call protection features.
The portfolio market value increased slightly from 98.5% of book value one year
ago to 102.5% of book value as of September 30, 1995.
Although keenly aware of how interest rate volatility may change the market
value of its investments, the bank continues to place an overriding emphasis on
the future earnings stream of its portfolio; thus, the majority of new
investment purchases are classified as held-to-maturity rather than available-
for-sale.
The held-to-maturity portfolio (78.9% of the total investments) amounted to $320
million as of September 30, 1995. Average time to maturity of these securities,
based on the earliest redemption date, was 3.6 years. The portfolio recorded a
market value appreciation of $11.5 million, or 3.2% above book value, for the
quarter just ended.
As of the most recent quarter end, 21.1% of the investment portfolio is
classified as available-for-sale (AFS) in accordance with SFAS No. 115. The
most common criteria for placing securities in the AFS portfolio is the need to
sell securities for liquidity needs and to manage interest rate risk. However,
CBSI's liquidity position does not rely on such security sales, and interest
rate risk is managed at the time of investment purchase rather than after the
fact.
<PAGE>
To be conservative, the bank chose to place in its AFS portfolio virtually all
collateralized mortgage obligations and agency securities with a stated final
maturity or call date of two years or less. As of the most recent quarter end,
less than 15% of the bank's entire portfolio was invested in agency-guaranteed
collateralized mortgage obligations (CMOs). The portfolio does not contain any
Principal Only (PO), Interest Only (IO), or Inverse Floater Traunches.
As of September 30, 1995, the AFS portfolio average maturity based on earliest
redemption date was 4.4 years, and the pre-tax market value adjustment was a
favorable $65,000. Having a reasonably sized AFS portfolio gives the bank
flexibility to sell lower yielding investments and replace them with higher
yields when short-term losses can be recouped with higher future earnings.
The following table displays several of the underlying investment portfolio
statistical measures discussed above on a quarterly basis since December 31,
1993.
For the Quarter Portfolio Portfolio Portfolio AFS AFS Market Net
Ended: Average Maturity Market / Portfolio / Value Realized
(000's) Yield (Years) Book Total Adjustment Gains /
(a) (b) Portfolio (Pretax) (Losses)
-------- -------- -------- -------- -------- --------
September 30, 1994 6.98% 2.6 98.5% 36.0% ($2,470) $0
December 31, 1994 7.23% 3.6 97.8% 22.8% ($3,263) ($499)
March 31, 1995 7.64% 3.9 100.5% 21.8% ($1,982) $0
June 30, 1995 7.62% 4.0 103.3% 24.8% $39 ($150)
September 30, 1995 7.21% 4.4 102.5% 21.1% $65 $0
Change from
September 3to
September 30, 1995 0.23% 1.8 4.0% -14.9% $2,535 $0
Note: (a) Yield on average investments calculated on a full-tax equivalent
basis. Excludes premiums on called bonds of $158, $146, and
$297 as of March 10, July 10, and October 10, 1993, respectively.
(b) Based on earliest redemption date.
* May not foot due to rounding
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings.
Not Applicable
Item 2. Changes in Securities.
On July 10, 1995, the underwriters exercised their overallotment option of
112,500 shares of common stock and on July 11, 1995 CBSI issued 40,000 shares of
common stock to reserve for employees. These exercises were made in connection
with and are included in the 862,500 shares of common stock and 90,000 shares of
preferred stock issued.
Item 3. Defaults Upon Senior Securities.
Not Applicable.
Item 4. Submission of Matters to a Vote of Securities Holders.
Not Applicable.
Item 5. Other Information.
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits required by Item 601 of Regulation S-K:
(4) Form of Certificate of the Powers, Designations, Preferences, and
Rights of CBSI's Cumulative Perpetual Preferred Stock, Series A,
previously filed with the Commission on June 26, 1995 as Exhibit 4.1
to CBSI's Registration Statement on Form S-2 (No. 33-58539) and
incorporated herein by reference.
(11) Statement re Computation of earnings per share
b) No reports on Form 8-K were filed during third quarter 1995.
<PAGE>
Signatures
Pursuant to the requirements of The Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Community Bank System, Inc.
Date: November 14, 1995 /s/ Sanford A. Belden
Sanford A. Belden, President and
Chief Executive Officer
Date: November 14, 1995 /s/ David G. Wallace
David G. Wallace, Senior Vice
President Chief Financial Officer
<PAGE>
Community Bank System, Inc.
Statement re Earnings Per Share Computation
Exhibit 11
Three Months Ended Six Months Ended
September 30, September 30,
1995 1994 1995 1994
Primary Earnings
Per Share
Net Income 3,030,510 2,712,827 8,353,018 7,761,871
Less:
Accrued Preferred
Stock Dividend -202,500 0 -202,500 0
--------- ---------- --------- ---------
Income applicable
to common stock 2,828,010 2,712,827 8,150,518 7,761,871
========= ========= ========= =========
Weighted average number
of common shares 3,646,104 2,770,727 3,077,915 2,759,612
Add: Shares issuable from
assumed exercise of
incentive stock options 42,848 48,561 30,759 53,050
--------- --------- --------- ---------
Weighted average number of
common shares - adjusted 3,688,952 2,819,288 3,108,674 2,812,662
========= ========= ========= =========
Primary earnings per share $0.77 $0.96 $2.62 $2.76
========= ========= ========= =========
Fully Diluted Earnings Per Share
Net Income 2,828,010 2,712,827 8,150,518 7,716,871
========= ========= ========= =========
Weighted average number of
common shares - adjusted 3,696,422 2,821,068 3,128,985 2,816,418
Add: Equivalent number of
common shares assuming
conversion of preferred
--------- --------- --------- ---------
Weighted average number of
common shares - adjusted 3,696,422 2,821,068 3,128,985 2,816,418
========= ========= ========= =========
Fully diluted earnings
per share $0.77 $0.96 $2.60 $2.76
========= ========= ========= =========
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 46,932
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 47,400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 370,132
<INVESTMENTS-CARRYING> 370,132
<INVESTMENTS-MARKET> 381,817
<LOANS> 544,990
<ALLOWANCE> 6,791
<TOTAL-ASSETS> 1,186,915
<DEPOSITS> 1,072,707
<SHORT-TERM> 0
<LIABILITIES-OTHER> 12,180
<LONG-TERM> 550
<COMMON> 4,593
0
9,000
<OTHER-SE> 87,878
<TOTAL-LIABILITIES-AND-EQUITY> 1,186,915
<INTEREST-LOAN> 36,531
<INTEREST-INVEST> 23,107
<INTEREST-OTHER> 930
<INTEREST-TOTAL> 60,569
<INTEREST-DEPOSIT> 21,379
<INTEREST-EXPENSE> 26,838
<INTEREST-INCOME-NET> 33,731
<LOAN-LOSSES> 1,129
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 23,383
<INCOME-PRETAX> 13,799
<INCOME-PRE-EXTRAORDINARY> 13,799
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,353
<EPS-PRIMARY> 2.62
<EPS-DILUTED> 2.60
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
