SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
THIS DOCUMENT IS A COPY OF THE FORM 10-K FILED ON APRIL 3, 1995
PURSUANT TO A RULE 201 TEMPORARY HARDSHIP EXEMPTION
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994 Commission file number 0-11716
COMMUNITY BANK SYSTEM, INC.
(Exact name of registrant as specified in its charter)
Delaware 16-1213679
(State or other jurisdiction of incorporation) (I.R.S. Employer
Identification No.)
5790 Widewaters Parkway, DeWitt, New York 13214
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (315) 445-2282
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.25 Par Value
Indicate by check mark whether the registrant (1) has filed all
reports to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during all the preceding 12 months (or for such shorter period 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
State the aggregate market value of the voting stock held by
non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the stock was sold, or the
average bid and asked prices of such stock, as of a specified date within
60 days prior to the date of filing.
$75,280,050 based upon average selling price of $27.00 and 2,788,150 shares
on March 27, 1995
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
2,788,150 shares Common Stock $1.25 Par Value at March 7, 1994
DOCUMENTS INCORPORATED BY REFERENCE.
List hereunder the following documents if incorporated by reference
and the Part of the Form 10-K into which the document is incorporated: (1)
Any annual report to security holders; (2) Any proxy or information
statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c)
under the Securities Act of 1933.
1. Definitive Proxy Statement for Annual Meeting of
Stockholders to be held on May 3, 1995 .........Part III
Exhibit index on page 64
<PAGE>
Part I
Item 1. Business
General
Community Bank System, Inc. ("Company") was incorporated on April 15,
1983, under the Delaware General Corporation Law. Its principal office is
located at 5790 Widewaters Parkway, DeWitt, New York 13214 and its
telephone number is (315) 445-2282. The Company became a bank holding
company in 1984 with the acquisition of The St. Lawrence National Bank
("St. Lawrence Bank") on February 3, 1984 and the First National Bank of
Ovid (renamed Horizon Bank, N.A or "Horizon Bank") on March 2, 1984. Also
in 1984 the Company obtained a national bank charter for its third
wholly-owned subsidiary bank, The Exchange National Bank ("Exchange Bank"),
and on July 1, 1984 Exchange Bank acquired the deposits and certain of the
assets of three branches of the Bank of New York located in southwestern
New York. On September 30, 1987, the Company acquired The Nichols National
Bank ("Nichols Bank") located in Nichols, New York. On September 30, 1988,
the Company acquired ComuniCorp, Inc., a one-bank holding company located
in Addison, New York, the parent company to Community National Bank
("Community Bank"). On March 26, 1990, Community Bank opened the Corning
Market Street branch from the Company's acquisition of deposits and certain
assets from Key Bank of Central New York. On January 1, 1992, the
Company's five banking affiliates consolidated into a single, wholly-owned
national banking subsidiary, known as Community Bank, N.A. ("Bank"). On
March 31, 1993, the Bank's marketing representative office in Ottawa,
Canada was closed. On June 3, 1994, the Company acquired three branch
offices in Canandaigua, Corning and Wellsville, New York from the
Resolution Trust Corporation. On October 28, 1994, the Company acquired
the Cato, New York branch of The Chase Manhattan Bank, N.A.
The Company had a wholly-owned data processing subsidiary,
Northeastern Computer Services, Inc. ("Northeastern"). Northeastern was
acquired by the Company from the St. Lawrence Bank on May 31, 1984 pursuant
to a corporate reorganization. Northeastern had previously been a
wholly-owned subsidiary of the St. Lawrence Bank and was the survivor of a
merger with Lawban Computer Systems, Inc., another wholly-owned subsidiary
of the St. Lawrence Bank. Northeastern's office was located at 6464
Ridings Road, Syracuse, New York. In December 1991, the Company entered
into a five year agreement with Mellon Bank, N.A. to provide data
processing services. On June 30, 1992, Northeastern ceased operations and
was dissolved.
The Company also had a wholly-owned mortgage banking subsidiary,
Community Financial Services, Inc. (CFSI), which was established in June
1986; it commenced operation in January 1987. In July 1988, CFSI purchased
Salt City Mortgage Corp., a Syracuse-based mortgage broker. CFSI was
dissolved in 1990.
The Company provides banking services through its two regional offices
at 45-49 Court Street, Canton, New York and 201 North Union Street, Olean,
New York, as well as through 36 banking offices in the counties of St.
Lawrence, Jefferson, Lewis, Cayuga, Seneca, Ontario, Oswego, Allegheny,
Cattaraugus, Tioga, and Steuben. The administrative office is located at
5790 Widewaters Parkway, DeWitt, New York, in Onondaga County. 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.
<PAGE>
The Bank is a member of the Federal Reserve System and the Federal
Home Loan Bank of New York ("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. Over 70% of
loans outstanding are made to consumers borrowing on an installment and
mortgage loan basis. In addition, the typical loan to the Company's
commercial business borrowers is 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.
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
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.
<PAGE>
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(1) of 14.2% including
commercial banks, credit unions, savings and loan associations and savings
banks. 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(1) of 1.3% including commercial banks, credit unions, savings and loan
associations and savings banks. 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 sub-markets, 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(1) of 13.1% including commercial banks credit unions, savings
and loan associations and savings banks. 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(1) of 6.7% including commercial banks, credit unions, savings
and loan associations and savings banks. 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.
(1) Deposit market share data as of June 30, 1994, as calculated by
Sheshunoff Information Services, Inc.
Employees
As of December 31, 1994, 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 117
full-time equivalent employees currently employed by Chase at the Chase
Branches and add approximately 36 additional full-time equivalent
employees. Neither the Company nor the Bank is a party to any collective
bargaining agreement. See "Pending Acquisition".
<PAGE>
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.
<PAGE>
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 market 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.
<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.
<PAGE>
Capital Requirements
The Federal Reserve Board has established risk-based capital
guidelines which are applicable to bank holding companies. The guidelines
established 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 December 31, 1994 were 12.43% and 13.68%, 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 to 200
basis points. The Company's Tier I leverage ratio as of December 31, 1994
was 6.83%, 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.
<PAGE>
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.
FDICIA also provides for increased funding of the FDIC insurance
fund through a risk-related premium schedule for insured depository
institutions. Under this schedule, 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
beginning January 1, 1995, will be 0.23% of insured deposits. Following
the proposed acquisition of 15 branches from The Chase Manhattan Bank, N.A.
(See "Pending Acquisition"), it is anticipated that the Bank's premium will
increase to 0.26%.
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:
Adequately Capitalized Well Capitalized
Total Risk-Based Capital Ratio 8% 10%
Tier I Risk-Based Capital Ratio 4% 6%
Tier I Leverage Ratio 4% 5%
<PAGE>
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 December 31, 1994, the Bank's total risk-based capital
ratio and Tier I risk - based capital ratio were 13.68% and 12.43%,
respectively, and its Tier I leverage ratio as of such date was 6.83%. 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 "Pending Acquisition--Regulatory
Conditions/Capital Plan."
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.
<PAGE>
Item 2. 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 December 31, 1994 had a net book value of $10.6 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.
Item 3. Legal Proceedings
On March 28, 1995 the Company received papers in connection with
a lawsuit filed by three shareholders in the Supreme Court of the State of
New York, Albany County, against the Company, the Bank, and its directors.
The complaint alleges that the Company's and the Bank's directors failed to
exercise due care and breached their fiduciary duties in connection with
entering into the Purchase and Assumption Agreement ("Agreement") with The
Chase Manhattan Bank, N.A. on December 6, 1994 for the acquisition of
certain assets and assumption of certain liabilities by the Bank related to
15 Chase branch offices ("Acquisition"). The action seeks to enjoin the
consummation of the Agreement, offering of stock in connection with the
Acquisition, or performing any acts in furtherance of the consummation of
any stock offerings.
The three defendants bring the action individually and
derivatively on behalf of the Company. The Company and the directors have
retained legal counsel and expect to vigorously defend against the action.
The Company intends to defend and indemnify the directors in accordance
with the Company's Bylaws and Delaware law.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Executive Officers of the Registrant
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.
<PAGE>
Name and Age Position
Sanford A. Belden President and Chief
Age 52 Executive Officer of the
Company and the Bank
David G. Wallace Treasurer of the Company
Age 50 and Senior Vice
President and Chief
Financial Officer of the
Bank
James A. Wears Regional President,
Age 45 Northern Region
of the Bank
Michael A. Patton Regional President,
Age 49 Southern Region
of the Bank
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.
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.
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.
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.
<PAGE>
Part II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters
The Common Stock has been traded over-the-counter on the Nasdaq
National Market under the symbol "CBSI" since September 16, 1986. 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 2,788,150
shares of Common Stock outstanding on March 10, 1995 held by
approximately 1,720 shareholders of record.
Price Range Cash Dividend
---------------------- Declared Per
High Low Share
-------------
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
The Company has historically paid regular quarterly cash
dividends on its Common Stock, and declared a cash dividend of $0.30 per
share for the first quarter 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. 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 "Supervision and Regulation -- Limits On
Dividends and Other Payments."
<PAGE>
Item 6. Selected Financial Data
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 historical "Income Statement
Data" and historical "Statement of Condition Data" are derived from
financial statements which have been audited by Coopers & Lybrand L.L.P.,
independent public accountants. The "Per Share Data", "Selected Ratios"
and "Other Data" for all periods 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 "Pending 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>
Years ended December 31,
---------------------------------------------------------
1994 1993 1992 1991 1990
----------- ----------- ----------- ---------- ----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Interest income $61,575 $54,642 $56,345 $59,364 $60,200
Interest expense 22,130 17,733 21,608 29,838 33,329
----------- ----------- ----------- ---------- ----------
Net interest income 39,445 36,909 34,737 29,526 26,871
Provision for possible loan losses 1,702 1,506 2,727 2,516 2,960
----------- ----------- ----------- ---------- ----------
Net interest income after provision for
for possible loan losses 37,743 35,403 32,010 27,010 23,911
Non-interest income 5,120 4,764 5,082 4,623 4,820
Non-interest expense 26,498 24,827 26,447 26,665 25,873
----------- ----------- ----------- ---------- ----------
Income before income taxes 16,365 15,340 10,645 4,968 2,858
Provision for income taxes 6,256 5,765 3,139 1,296 753
----------- ----------- ----------- ---------- ----------
Net income $10,109 $9,575 $7,506 $3,672 $2,105
=========== =========== =========== ========== ==========
End of Period Balance Sheet Data:
Total Assets $915,501 $713,053 $669,274 $634,492 $617,851
Net Loans 483,079 417,871 362,356 348,569 364,733
Earning Assets 861,599 671,415 625,342 577,986 569,148
Total Deposits 679,638 588,315 557,915 575,876 561,207
Long-term debt and Obligations Under Capital Lease 550 592 139 862 1,020
Shareholders' equity 66,290 61,986 53,417 48,244 46,440
<PAGE>
Average Balance Sheet Data:
Total Assets $808,948 $684,863 $650,804 $622,927 $613,157
Net Loans 446,135 382,680 351,241 352,921 370,190
Earning Assets 756,871 640,070 601,636 576,323 565,770
Total Deposits 651,479 598,860 585,571 566,447 556,893
Long-term debt 557 256 379 924 1,095
Shareholders' equity 64,033 57,298 50,868 47,182 46,611
Per Share Data:
Net Income $3.59 $3.43 $2.76 $1.36 $0.78
Cash dividend declared 1.14 1.04 0.90 0.76 0.76
Period-end book value 23.78 22.55 19.81 17.93 17.18
Period-end tangible book value 21.59 22.39 19.58 17.58 16.67
Outstanding Shares:
Average during period 2,814,710 2,788,330 2,722,093 2,694,101 2,703,698
End of period 2,788,150 2,748,318 2,696,760 2,690,260 2,703,385
Selected Ratios:
Return on average total assets 1.25% 1.40% 1.15% 0.59% 0.34%
Return of average shareholders' equity 15.79% 16.71% 14.69% 7.78% 4.52%
Dividend payout ratio 31.24% 29.67% 32.26% 55.74% 97.62%
Net interest margin (taxable equivalent basis) 5.31% 5.90% 5.82% 5.14% 4.77%
Noninterest income to average assets
(excludes security gains (losses)) 0.69% 0.70% 0.75% 0.78% 0.79%
Efficiency ratio 57.94% 58.45% 65.48% 75.55% 78.39%
Non-performing assets to period-end total loans and
other real estate owned 0.72% 0.73% 0.67% 1.56% 1.38%
Allowance for loan losses to period-end loans 1.30% 1.37% 1.37% 1.24% 0.99%
Allowance for loan losses to period-end
non-performing loans 192.79% 238.67% 310.05% 185.40% 112.64%
Allowance for loan losses to period-end
non-performing assets 179.67% 186.06% 205.72% 78.81% 71.35%
Net charge-offs (recoveries) to average total loans 0.25% 0.20% 0.59% 0.51% 0.59%
Average net loans to average total deposits 68.48% 63.90% 59.98% 62.30% 66.47%
Period-end total shareholders' equity to
period end assets 7.24% 8.69% 7.98% 7.60% 7.52%
Tier I capital to risk-adjusted assets 12.43% 14.87% 13.13% 13.01% 11.62%
Total capital to risk-adjusted assets 13.68% 16.12% 14.37% 13.96% 12.56%
Tier I capital Leverage ratio 6.83% 8.46% 7.90% 7.49% 7.88%
</TABLE>
<PAGE>
Item 7. Management 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 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 1994 was influenced by the following factors:
* Net interest income on a fully tax-equivalent basis increased
6.3% over 1993, reflecting earning asset growth of 18.1%, 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 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 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 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.
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 nonbank subsidiaries. No further expenses relating to this
consolidation were incurred in 1994. 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.
The Company's return on average stockholders' equity was 15.79%
in 1994, as compared to 16.71% in 1993 and 14.69% 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.
<PAGE>
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 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."
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 using marginal federal income tax rates of 22%, 34%
and 34%, respectively. 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.
<PAGE>
<TABLE>
<CAPTION>
December 31,
1994 1993
--------------------------- ---------------------------
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 0 0 0.00% 1,669 53 3.18%
Time deposits in other banks 25 1 4.59 146 20 13.70
Taxable investment securities 287,892 19,444 6.75 228,661 16,550 7.24
Non-taxable investment securities 22,819 2,103 9.22 26,914 2,631 9.78
Loans (net of unearned discount) 446,135 40,699 9.12 382,680 36,236 9.47
Total interest-earning assets 756,871 62,247 8.23 640,070 55,490 8.67
Non-interest earning assets:
Cash and due from banks 32,411 29,056
Premises and equipment 10,335 10,673
Other assets 15,896 10,439
Less allowance for loan losses (5,860) (5,375)
Net unrealized gains/(losses) on available for
sale portfolio (705)
--------- ---------
Total 808,948 684,863
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities
Savings deposits 323,443 8,249 2.55 320,966 8,677 2.70
Time deposits 229,449 9,964 4.34 190,166 8,285 4.36
Term borrowings 87,334 3,917 4.49 22,979 771 3.36
Total interest-bearing liabilities 640,226 22,130 3.46 534,111 17,733 3.32
Non-interest-bearing liabilities
Demand deposits 98,587 87,728
Other liabilities 6,102 5,726
Stockholders' equity 64,033 57,298
--------- ---------
Total 808,948 684,863
========= =========
Net interest earnings 40,117 37,757
======= =======
Net yield on interest-earning assets 5.31% 5.90%
======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1992
---------------------------
Average
Average Amount of Yield/Rate
Balance Interest Paid
<S> <C> <C> <C>
ASSETS
Interest-earning assets:
Federal funds sold and securities purchased
under agreements to resell 7,624 285 3.74%
Time deposits in other banks 453 25 5.52
Taxable investment securities 212,328 17,057 8.03
Non-taxable investment securities 29,990 2,266 7.56
Loans (net of unearned discount) 351,241 36,932 10.52
Total Interest-Earning Assets 601,636 56,565 9.41
Non-Interest Earning Assets:
Cash and Due from Banks 32,832
Premises and Equipment 11,858
Other Assets 9,120
Less Allowance for Loan Losses (4,642)
Net Unrealized gains/(losses) on
Available for Sale portfolio
---------
Total 650,804
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-Bearing Liabilities
Savings Deposits 301,228 10,442 3.47
Time Deposits 201,229 10,909 5.42
Term borrowings 8,373 257 3.07
Total interest bearing liabilities 510,830 21,608 4.23
Non-Interest Bearing Liabilities
Demand Deposits 83,114
Other Liabilities 5,992
Stockholders' Equity 50,868
---------
Total 650,804
=========
Net Interest Earnings 34,957
=======
Net Yield on Interest-Earning Assets 5.82%
======
</TABLE>
<PAGE>
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 $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. 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.
Average net interest margin decreased 59 basis points to 5.31% 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.
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 for each major category of interest-earning
assets and interest-bearing liabilities resulting from volume changes and
rate changes:
<PAGE>
<TABLE>
<CAPTION>
1994 Compared to 1993 1993 Compared to 1992
Increase (Decrease) Due Increase (Decrease) Due
to Change in (1) to Change in (1)
------------------------------ ------------------------------
Volume Rate Net Change Volume Rate Net Change
<S> <C> <C> <C>
Interest earned on:
Federal funds sold and securities
purchased under agreement to resell $ (27) $ (26) $ (53) $ (223) $ (9) $ (232)
Time deposits in other banks (11) (8) (19) (17) 12 (5)
Taxable investment securities 4,070 (1,176) 2,894 1,312 (1,819) (507)
Non-taxable investment securities (384) (144) (528) (232) 597 365
Loans (net of unearned discount) 5,840 (1,377) 4,463 3,158 (3,854) (696)
Total Interest-Earning Assets (2) $9,694 $(2,937) $6,757 $3,509 $(4,584) $(1,075)
Interest paid on:
Savings Deposits $ 65 $ (493) $ (428) $ 702 $(2,467) $(1,765)
Time Deposits 1,717 (38) 1,679 (600) (2,024) (2,624)
Short-term borrowing 2,812 334 3,146 455 59 514
Long-term debt (6) 6 0 (10) 10 0
Total interest bearing liabilities (2) $3,627 $ 770 $4,397 $ 985 $(4,860) $(3,875)
Net Interest Earnings (2) $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 in 1994 was due to interest-earning asset
growth. More specifically, approximately $6.4 million of 1994's growth in
net interest income was due to higher volume 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.
<PAGE>
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.
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 years indicated:
Years ended December 31,
--------------------------------------------
1994 1993 1992
--------- --------- --------
(In thousands)
Fiduciary and investment services $1,380 $1,113 $ 898
Service charges on deposits 1,621 1,478 1,419
Overdraft fees 971 901 847
Other service charges and fees 1,519 1,186 1,455
Other operating income 131 101 279
Investment security gains (losses) (502) (15) 184
--------- --------- --------
Total $5,120 $4,764 $5,082
Total non-interest income
(excluding investment security
gains (losses) as a percentage
of average assets) 0.69% 0.70% 0.75%
Income from fiduciary services increased $267,000, or 24.0% from
1993, to approximately $1.4 million in 1994, 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.
Investment security losses of $502,000 in 1994 were caused by the
sale of approximately $27.2 million 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.
<PAGE>
Non-Interest Expense
The following table sets forth information by category of non-
interest expenses of the Company for the years indicated:
Years ended December 31,
---------------------------------------------
1994 1993 1992
--------- --------- ---------
(In thousands)
Salary expense $10,486 $9,631 $9,932
Payroll taxes and benefits 2,612 2,321 2,010
Net occupancy expense 2,043 1,814 1,849
Equipment expense 1,697 1,642 2,327
Professional fees 1,282 1,528 1,417
Data processing expense 2,573 2,193 1,805
Amortization 355 166 348
Stationary and supplies 739 696 898
Deposit insurance premiums 1,390 1,317 1,308
Other 3,321 3,519 4,553
--------- --------- ---------
Total $26,498 $24,827 $26,447
Total operating expenses as
a percentage of average
assets 3.28% 3.63% 4.06%
Efficiency ratio (1) 57.94% 58.45% 65.48%
(1)Non-interest expense to recurring operating income
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 expenses comprised the largest share of non-interest
expense, increasing 8.9% from 1993 to 1994 after decreasing 3.0% from 1992
to 1993. The increase in 1994 is a result of 34 additional full-time
employees hired largely to support four new branches and business
development efforts. The decrease from 1992 to 1993 was due to the closing
of a non-bank subsidiary late in 1992.
Amortization, supplies, data processing, net occupancy, and FDIC
insurance premiums increased in 1994 in comparison to 1993 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.
<PAGE>
Income Tax Expense
Total income tax expense of the Company was approximately $6.3 million,
$5.8 million and $3.1 million in 1994, 1993, and 1992, respectively. The
Company's effective income tax rate for the years 1994, 1993 and 1992 was
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.
<PAGE>
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.
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 on the matrix 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).
<PAGE>
The following is the Company's gap maturity matrix as of December
31, 1994:
<TABLE>
<CAPTION>
FUNDING MATRIX
As of December 31, 1994
(COMMUNITY BANK SYSTEM, INC.)
USES OF FUNDS
| |Outstandings ($000's) and Yields (%) by Repricing Interval (Days or Months)
| |
| Assets | >60 37-60 25-36 13-24 181-360 91-180 61-90 31-60 1-30
| | Months Months Months Months Days Days Days Days Days
------|--------|---------------------------------------------------------------------------------
Liab &|915,501 | 278,726 91,302 98,150 84,515 98,501 41,621 23,950 23,560 175,176
Capital| 8.40%| 6.50% 8.61% 9.22% 8.65% 9.72% 10.28% 9.29% 8.85% 9.36%
------|--------|------------------------------------|--------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
>60 |378,152 | 278,726 91,302 8,124 |
Months| 1.38%| 5.12% 7.22% 7.84% |
| | |
37-60 | 18,245 | 18,245 |
SOURCES Months| 5.84%| 3.38% |
OF | | |
FUNDS 25-36 | 10,896 | 10,896 |
Months| 5.47%| 3.75% |
Outstand. | | |
($000's) 13-24 | 66,974 | 60,885 6,089 |
and Months| 4.64%| 4.58% 3.00%|
Yields (%) ----------------------------------------------------|
by 181-36|113,057 | 78,426 34,631
Repricing Days | 4.12%| 3.52% 5.60%
Interval | |
(days or 91-180| 99,866 | 63,869 35,997
months) Days | 3.74%| 5.98% 6.54%
| |
61-90 | 18,847 | 5,624 13,223
Days | 4.42%| 5.86% 4.87%
| |
31-60 | 56,151 | 10,727 23,560 21,864
Days | 5.43%| 3.86% 3.42% 3.93%
| |
1-30 | 96,012 | 96,012
Days | 5.12%| 4.24%
| |
Daily | 57,300 | 57,300
| 5.13%| 4.23%
------|-------------------------------------------------------------------------------------------
Totals|915,501 278,726 91,302 98,150 84,515 98,501 41,621 23,950 23,560 175,176
| 3.31%
--------------------------------------------------------------------------------------------------
Net
Int
Margin 5.02% 5.12% 7.22% 4.53% 3.48% 5.85% 6.45% 4.42% 3.42% 4.20%
------ -------- ---------------------------------------------------------------------------------
</TABLE>
Note:
IPC = Accounts of individuals, partnerships, and corporations.
Public = Accounts of U.S. government, state, and local municipalities.
85% of IPC Savings are treated as core (> 60 months). 100% of Public Fund
Savings are treated as 181 - 360 days.
95% of IPC Money Markets are treated as core (91 - 180 days). 100% of Public
Fund Money Markets are treated as 181-360 days.
15% of IPC Savings are spread over 24 months, and 5% of IPC Money Markets are
in 181 to 360 days.
Totals may not foot due to rounding.
<PAGE>
The following table sets forth information concerning interest rate
sensitivity of the Company's consolidated assets and liabilities as of
December 31, 1994:
<TABLE>
<CAPTION>
As of December 31, 1994
------------------------------
Non-rate
Days Sensitive
--------- --------- --------- 1-5 and Over
0-90 91-180 181-365 Years 5 Years TOTAL
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Due from banks 30,522 30,522
Fixed-rate mortgage -
backed 4,165 4,072 7,877 65,551 57,967 139,632
Floating-rate mortgage
backed 9,926 9,926
Floating rate debentures 6,082 6,082
Other investments 19,093 1,039 10,915 111,434 80,398 222,879
--------- --------- --------- --------- --------- ---------
Total investments 39,266 5,111 18,792 176,985 138,365 378,519
Mortgages:
Adjustable rate 8,160 4,907 17,520 153 30,740
Fixed rate 4,122 4,122 8,244 24,722 71,187 112,397
Home equity 32,113 32,113
Commercial variable 104,774 104,774
Other commercial 5,902 2,002 2,987 18,476 9,305 38,672
Installment, net 28,350 25,479 50,957 53,631 5,966 164,383
--------- --------- --------- --------- --------- ---------
Total loans 183,421 36,510 79,708 96,982 86,458 483,079
Loan loss reserve (6,281) (6,281)
Other assets 29,662 29,662
TOTAL ASSETS 222,687 41,621 98,500 273,967 278,726 915,501
========= ========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Demand deposits 103,007 103,007
Savings / NOW 3,068 3,069 21,045 12,274 201,860 241,316
Money markets 42,608 22,099 64,707
CD's / IRA / Other 62,943 54,189 69,913 83,291 272 270,608
--------- --------- --------- --------- --------- ---------
Total deposits 66,011 99,866 113,057 95,565 305,139 679,638
Short - term funds 162,300 550 162,850
Other liabilities 6,723 6,723
Capital 66,290 66,290
TOTAL LIABILITIES AND
CAPITAL 228,311 99,866 113,057 96,115 378,152 915,501
========= ========= ========= ========= ========= =========
INTEREST RATE SENSITIVITY GAP (5,624) (58,245) (14,557) 177,852 (99,426)
CUMULATIVE INTEREST RATE (5,624) (63,869) (78,426) 99,426 0
SENSITIVITY GAP
</TABLE>
<PAGE>
As of December 31, 1994, the Bank was structurally liability sensitive
in both its short-term (under one year) strategic planning horizon and in its
long-term (over one year) horizon. Much of this sensitivity was the result of
funding longer-term fourth quarter investment purchases with shorter-term
borrowing. 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. See "Pending Acquisition."
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 available for use as of December 31, 1994
amounted to approximately $116.9 million, compared to $84.4 million as of
December 31, 1993. This increase was largely due to the increased size of
the investment portfolio, which provided 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 December 31, 1994, borrowing amounted to $162.9 million as compared
to $59.6 million at December 31, 1993. Although this increase is
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 the year totaled $87.3 million versus $23.0 million in the
prior year. The Chase Deposits are expected to be used to repay the Bank's
currently outstanding short-term borrowing. See "Pending Acquisition."
<PAGE>
Capital Resources
The Company's Tier I capital to risk-weighted assets ratio at December 31,
1994 was 12.43%, compared to 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 December 31, 1994 was 13.68% as compared to 16.12%
at December 31, 1993 and 14.37% at December 31, 1992. These ratios
exceeded the regulatory total risk-based capital requirement of 8.00%.
The Company's Tier I leverage ratio at December 31, 1994 was 6.83%,
compared to 8.46% at December 31, 1993 and 7.90 at December 31, 1992.
These ratios exceeded the regulatory Tier I leverage ratio requirement of
4.00%.
<PAGE>
Loan Portfolio
Net loans grew 15.7% from $412.2 million in 1993 to $476.8 million in 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.
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>
December 31,
---------------------------------------------------------------------------------
1994 1993 1992 1991 1990
--------- --------- --------- --------- ---------
(In Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Real estate mortgages
Residential $196,548 $177,059 $146,135 $121,982 $109,995
Commercial loans secured by real estate 34,677 31,851 23,411 14,270 10,627
Commercial real estate 927 1,063 1,647 2,316 2,237
Farm 7,625 7,421 6,670 1,105 1,115
--------- --------- --------- --------- ---------
Total $239,777 $217,394 $177,863 $139,673 $123,974
Commercial, financial, and agricultural
Agricultural loans $13,295 $11,564 $10,152 $16,664 $16,823
Commercial loans 67,976 58,252 40,524 44,301 48,875
--------- --------- --------- --------- ---------
Total $81,271 $69,816 $50,676 $60,965 $65,698
Installment loans to individuals
Direct $58,371 $58,963 $64,486 $74,848 $83,328
Indirect 121,148 89,513 88,068 100,140 120,972
Student & Other 8,690 6,337 6,492 3,353 7,888
--------- --------- --------- --------- ---------
Total $188,209 $154,813 $159,046 $178,341 $212,188
Other Loans $1,482 $1,578 $3,778 $4,419 $5,109
--------- --------- --------- --------- ---------
Gross loans $510,739 $443,601 $391,363 $383,398 $406,969
Less: Unearned discount 27,660 25,730 29,007 34,829 42,235
Reserve for possible loan losses 6,281 5,706 4,982 4,312 3,607
--------- --------- --------- --------- ---------
Net loans $476,798 $412,165 $357,374 $344,257 $361,127
</TABLE>
<PAGE>
Real Estate Mortgages. 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 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 reflects 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 December
31, 1994 which, based on remaining scheduled repayments of principal, are
due in the periods indicated:
<TABLE>
<CAPTION>
At December 31, 1994
----------------------------------------------------------------------------
Maturing in Maturing After Maturing After
One Year One Year but within Five Years Total
or Less Five Years Book Value
--------- ----------- ---------- ----------
(In Thousands of Dollars)
<S> <C> <C> <C> <C>
Commercial, financial, and agricultural $19,398 $43,120 $18,753 $81,271
Real estate - construction 0 0 0 0
Real estate - mortgage 1,440 17,275 221,062 239,777
Installment 53,162 101,967 6,902 162,031
--------- ----------- ---------- ----------
TOTAL $74,000 $162,362 $246,717 $483,079
========= =========== ========== ==========
</TABLE>
<PAGE>
The following table sets forth the sensitivity of the amounts due after one year
to changes in interest rates:
<TABLE>
<CAPTION>
At December 31, 1994
------------------------------
Fixed Rate Variable Rate
------------ ----------
<S> <C> <C>
Due after one year but within five years $109,611 $52,751
Due after five years 166,559 80,158
----------- ----------
TOTAL $276,170 $132,909
=========== ==========
</TABLE>
Non-Performing Assets
The following table presents information concerning the aggregate
amount of non-performing assets:
At December 31,
---------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(Dolloars in thousands)
Loans accounted for on a
non-accrual basis 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 862 653 726 957 1,138
---------------------------------------------
Total non-performing loans 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" 15 243 356 1,720 1,423
Other real estate 223 433 459 1,426 430
---------------------------------------------
Total non-performing assets 3,496 3,067 2,422 5,472 5,055
=============================================
Ratio of allowance for loan
losses to period-end loans 1.30% 1.37% 1.37% 1.24% 0.99%
Ratio of allowance for loan
losses to period-end
non-performing loans 192.79% 238.67% 310.05% 185.40% 112.64%
Ratio of allowance for loan
losses to period-end
non-performing assets 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 0.72% 0.73% 0.67% 1.56% 1.38%
<PAGE>
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. CBSI's
policy is to place a loan on a non-accrual status and recognize income on a
cash basis when it is more than ninety days past due, except when in the
opinion of management it is well secured and in the process of collection.
<PAGE>
Non-performing loans, defined as non-accrual loans plus accruing loans 90
days or more past due, totaled $3.3 million at December 31, 1994. This
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
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 $223,000, or 0.02% of total assets.
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.
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.
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------
1994 1993 1992 1991 1990
--------- --------- --------- --------- ---------
(In Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Amount of loans outstanding at end of period $510,739 $443,601 $391,363 $383,398 $406,968
========= ========= ========= ========= =========
Daily average amount of loans (net of unearned discounts) $446,135 $382,680 $351,034 $352,960 $370,190
========= ========= ========= ========= =========
Balance of allowance for possible loan losses
at beginning of period 5,706 4,982 4,312 3,607 2,848
Loans charged off:
Commercial, financial, and agricultural 502 236 951 244 893
Real estate construction 0 0 0 0 0
Real estate mortgage 41 19 92 41 90
Installment 1,072 1,155 1,558 1,983 1,577
TOTAL LOANS CHARGED OFF 1,615 1,410 2,601 2,268 2,560
Recoveries of loans previously charged off:
Commercial, financial, and agricultural 38 85 25 28 69
Real estate construction 0 0 0 0 0
Real estate mortgage 1 1 0 0 16
Installment 449 542 517 429 274
TOTAL RECOVERIES 488 628 544 457 359
Net loans charged off 1,127 782 2,057 1,811 2,201
Additions to allowance charged to expense (1) 1,702 1,506 2,727 2,516 2,960
Balance at end of period 6,281 5,706 4,982 4,312 3,607
Ratio of net chargeoffs to average loans outstanding 0.25% 0.20% 0.59% 0.51% 0.59%
</TABLE>
(1) The additions to the allowance during 1990 through 1994 were determined
using actual loan loss experience and future projected loan losses and
other factors affecting the estimate of possible loan losses.
<PAGE>
Loans charged off in 1994 totalled $1.6 million as compared to $1.4 million
in 1993 and $2.6 million in 1992. Net loans charged off totaled $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>
December 31, 1994 December 31, 1993 December 31, 1992 December 31, 1991 December 31, 1990
Percent of Percent of Percent of Percent of Percent
Loans in Loans in Loans in Loans in of Loans
Each Each Each Each in Each
Amount of Catagory to Amount of Catagory to Amount of Catagory to Amount of Catagory to Amount of Catagory
Allowance Total Loans Allowance Total Loans Allowance Total Loans Allowance Total Loans Allowance to Loans
------------------ ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C>
Commercial,
financial, &
agricultural $1,832 15.91% $3,464 15.74% $1,864 12.95% $1,241 15.45% $1,039 16.35%
Real estate -
construction 0 0.00% 0 0.00% 0 0.00% 0 0.00% 0 0.00%
Real estate -
mortgage 2,222 46.95% 341 49.01% 220 45.45% 130 37.16% 46 30.84%
Installment 1,422 37.14% 1,342 35.25% 1,400 41.60% 2,015 47.39% 1,252 52.80%
Unallocated 805 N/A 559 N/A 1,498 N/A 926 N/A 1,270 N/A
TOTAL $6,281 100.00% $5,706 100.00% $4,982 100.00% $4,312 100.00% $3,607 100.00%
</TABLE>
Investment Portfolio
As of December 31, 1994, the carrying value of the Company's total
investment portfolio was $378.5 million, up $125.1 million from the prior
year. Approximately 77.2% 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."
<PAGE>
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,
1994 1993
Amortized Market Amortized Market
Cost/Book Value Cost/Book Value
Value Value
(In Thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of
U.S. government
corporations and
agencies $ 154,672 $ 154,367 $ 53,995 $ 57,984
Obligations of states
and political subdivisions 17,304 17,772 17,164 18,522
Corporate securities 2 2 2 2
Mortgage-backed
securities 120,178 115,613 54,686 56,464
- --------------------------------------------------------------------------------------------------------
TOTALS $ 292,156 $ 287,754 $ 125,847 $ 132,972
</TABLE>
<PAGE>
The following table sets forth the amortized cost and market value for
the Company's available-for-sale investment portfolio:
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------
1994 1993
--------------------------------------------------------------
Amortized Market Amortized Market
Cost/Book Value Cost/Book Value
Value Value
(In Thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of
U.S. government
corporations and
agencies $ 33,691 $ 32,415 $ 58,722 $ 60,418
Obligations of states
and political subdivisions 3,432 3,472 7,194 7,420
Corporate securities 567 568 1,109 1,153
Mortgage-backed
securities 37,235 35,198 53,177 53,362
Equity securities (1) 14,149 14,158 4,740 4,753
Federal Reserve
Bank common stock 552 552 500 500
--------- --------- --------- ---------
TOTALS $ 89,626 $ 86,363 $ 125,442 $ 127,606
Net Unrealized gains/(losses)
on Available for Sale portfolio (3,262) 2,164
--------- ---------
Grand Total Carrying Value 378,520 253,453
========= =========
</TABLE>
(1) Includes $13,805, $13,805, $4,396 and $4,396 of FHLB common stock at
December 31, 1994 and 1993, respectively.
<PAGE>
The following table sets forth the amortized cost and market value as of
December 31, 1992:
1992
Amortized Market
Cost Value
---------------------------
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
====================================================================
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
included premium 15-year and balloon mortgage-backed securities. The
average duration of these instruments 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.
Depending on whether the embedded call options are exercised at a future
date, the average duration of these instruments ranged between 2.5 and 6.6
years.
<PAGE>
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.
<PAGE>
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 December 31, 1994, the latter two security types represented
approximately 90% of total portfolio investments, up from a level of 88% at
year-end 1993. The portfolio's weighting under risk-based capital
requirements at December 31, 1994 was 18.1%, up slightly from 16.6% as of
December 31, 1993.
The average life of the portfolio, including the exercise of embedded call
options, extended to 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 were largely responsible for this extension.
Average investment yields for 1994 declined to 6.95% from 7.24% for 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). This decrease is attributed to lower investment yields on
securities purchased in the latter half of 1993 and early 1994.
During the fourth quarter of 1994, the Company chose to sell $27.2 million
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 following table sets forth as of December 31, 1994, 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:
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1994
----------------------------------------------------------------------------------------
Amount Amount Amount Amount
Maturing Maturing Maturing After Maturing Total
Within After One but Five but After Ten Cost
One Year Within within Ten Book
or Less Five Years
--------- ------------ ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Held-to-Maturity Portfolio
- --------------------------
U.S. Treasury and other
U.S. government agencies 0 7,794 146,878 0 154,672
Mortage-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 29,596 154,897 103,150 292,157
Weighted average yield for year (1) 4.68% 7.06% 7.39% 7.66% 7.41%
Available-for-sale Portfolio
- ----------------------------
U.S. Treasury and other
U.S. government agencies 999 2,107 30,585 0 33,691
Mortage-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.
<PAGE>
Deposits
The Bank offers a variety of deposit instruments typical of most commercial
banks. 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 is attributed largely
to the Bank's three branch purchases in the middle of 1994 and one in the
fourth quarter of 1994. The growth rate in 1992 was 3.4%.
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.
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 years
indicated:
<TABLE>
<CAPTION>
Years ended December 31,
1994 1993 1992
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
------------------ ------------------ ------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Non-interest-bearing demand
deposits $98,587 N/A $87,728 N/A $83,114 N/A
Interest-bearing demand deposits 65,805 1.68 % 63,607 1.88 % 62,525 2.84 %
Regular savings deposits 183,881 2.85 179,128 3.03 156,964 3.79
Money market deposits 73,757 2.57 78,231 2.63 81,739 3.32
Time deposits 229,449 4.34 190,166 4.36 201,229 5.42
--------- --------- ---------
TOTAL AVERAGE DAILY
AMOUNT OF DOMESTIC DEPOSITS $651,479 2.80 % $598,860 2.83 % $585,571 3.65 %
========= ========= =========
</TABLE>
<PAGE>
The remaining maturities af time deposits in amoints of $100,000 or more
outstanding at December 31, 1994 and 1993 are summarized below:
At December 31,
(Dollars in Thousands)
1994 1993
--------- ---------
Less than three months $29,963 $12,410
Three months to six months 9,983 7,869
Six months to one year 4,248 1,881
Over one year 3,589 85
--------- ---------
$47,783 $22,245
========= =========
Borrowing
The following table summarizes the outstanding balances of short-term
borrowing of the Company for the years indicated:
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------
1994 1993 1992
(Dollars in thousands)
<S> <C> <C> <C>
Federal funds purchased $57,300 $57,000 $32,836
Term borrowings at banks (Original Term)
90 days or less 80,000 0 20,000
1 year 25,000 0 0
--------- ----------- ---------
Balance at end of period $162,300 $57,000 $52,836
========= =========== =========
Daily Average during the year 86,777 22,892 8,034
Maximum month-end balance 163,700 57,000 52,836
Weighted average rate
during the year 4.48% 3.35% 3.02%
Year-end average rate 5.44% 3.00% 3.13%
</TABLE>
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.
Average borrowing for the year 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."
<PAGE>
Return on Assets and Equity
Return on average assets, return on average equity, dividend payout and
equity to asset ratios for the years indicated are as follows:
Year ended December 31,
-------------------------------------
1994 1993 1992
---- ---- ----
Percentage of net income to:
average total assets 1.25% 1.40% 1.15%
Percentage of net income to 15.79 16.71 14.69
average shareholders equity
Percentage of dividends 31.24 29.67 32.26
declared per common share to
net income per common share
Percentage of average 7.92 8.37 7.85
shareholder's equity to average
total assets
Effects of Inflation
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in
terms of historical dollars without considering changes in the relative
purchasing power of money over time due to inflation.
Virtually all of the assets and liabilities of the Company are monetary in
nature. As a result, interest rate changes have a more significant impact
on the Company's performance than the effects of general levels of inflation.
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 December 31, 1994, the Chase Deposits totaled
$459.1 million, which amount is subject to change due to run-off or growth
of deposits occurring prior to the closing date. As of February 28, 1995,
the Chase Deposits totaled $451.7 million. In addition, the Bank will
acquire certain assets related to the Chase Branches including certain
small business and consumer loans (the "Chase Loans"), which totaled
approximately $25.2 million as of December 31, 1994, at face value, and
branch facilities and fixed operating assets associated with the Chase
Branches (the "Chase Assets") at a purchase price of approximately $5.1
million.
<PAGE>
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 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.
Reasons for Acquisition
The following summarizes the Company's 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, resulting in the Bank having assets in excess of $1.2
billion (after repayment of short-term borrowings) and 50 locations
(net of the planned closing of one of the Canton facilities and prior to
any potential dispositions). The Chase Branches will link the Bank's
existing Northern New York and Finger Lakes/Southern Tier distribution
network.
* The Chase Branches are located in markets with which the Bank is already
familiar, either because it is servicing them to some degree already
without a branch facility, or because they are similar to the Bank's
existing markets, being comprised of small towns and villages outside of
metropolitan trade centers. Of the 13 towns in which the Chase Branches
are located, the Chase Branches are ranked either first, second or third
in deposit market share as of June 30, 1994 in 10 of the towns, which,
when coupled with the Bank's present branches, will result in the Bank
being ranked either first, second or third in 36 of the 41 towns in
which the Bank will operate branches.
* Although the Acquisition includes only a relatively small amount of
loans outstanding, the depositor base of the Chase Branches includes
approximately 300 small business customers and 30,000 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 the achievement of a 40.0% loan to
deposit ratio in the Chase Branches (compared to a 4.7% level as of the
closing date of the Acquisition) to be reasonable within five years.
The Bank's loan to deposit ratio for its present branch network is
approximately 71.0% as of year-end 1994.
<PAGE>
* 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 $220 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
60%. 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. A total
of approximately 36 full-time employees are expected to be added to the
Bank upon consummation of the Acquisition. The personnel acquired from
Chase include only branch-related personnel, including approximately 14
small business lending and support staff and three residential mortgage
origination personnel, for a total of approximately 117 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.
Regulatory Conditions/Capital Plan
The Acquisition is contingent upon obtaining necessary regulatory approvals
and maintaining certain regulatory the 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.
In conjunction with the Acquisition, the Company anticipates raising
approximately $26.7 million (net of issuance costs) 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 $10.0 million of the
additional capital will be raised through the Preferred Stock Offering.
The balance of the additional capital, approximately $16.7 million, is
being raised through the Common Stock Offering.
<PAGE>
Potential Disposition
Subject to general market conditions and the Company's ongoing assessment
of business objectives, the Bank intends to divest up to $125 million in
deposits through a combination of selling certain branch locations and
related deposits and reducing public funds from the Bank's balance sheet.
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.
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.
<PAGE>
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 $459.1 million as of December 31, 1994
and receive approximately $25.2 million in loans and $391.5 million in
cash. An additional $26.7 million in cash is expected to be received from
the net proceeds of the Offerings. The cash will be used to fund
investment security purchases, repay short-term borrowings of the Bank, and
fund additional growth. The impact of the Acquisition on net interest
income is expected, therefore, to include (i) interest income from
investment securities purchased, (ii) interest income from the Chase Loans,
(iii) interest income from new loans originated through the Chase Branches,
and (iv) interest expense of the Chase Deposits, including the benefit of
the lower interest expense on the Chase Deposits which will replace higher
cost FHLB borrowings.
The Company currently estimates that the Bank could make net new loans in
an amount equal to at least 40.0% of the 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. 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.
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 rates increasing 200 basis points, and a falling rate
environment with rates decreasing 200 basis points. The Company continues
to utilize and update its analysis as conditions warrant.
<PAGE>
The analysis combined the Bank's year-end 1994 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 two-
thirds of the net funds received in the Acquisition and the Offerings in
seasoned 15-year mortgage-backed securities with an average duration of two
to four years and one-third of the net funds in U.S. Treasury and agency
securities with an average maturity of one year.
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. 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 between $12.0 million and $16.5 million to net interest income in the
first full year of operations. 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.
Loan Loss Provision
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 0.30% to 0.35% (net of charge-
offs) of average loans, building to a loan loss reserve of 1.30% of period-
end loans within approximately four years. Actual loan loss reserves will
be based on numerous factors and may be higher or lower than the Bank's
current expectations.
Non-Interest Income
The Company expects to earn additional non-interest income through
deposit service charges and by selling trust and investment products
to the customers of the Chase Branches. The Bank has historically
earned approximately 70 basis points on average assets in non-interest
income. While actual results will be based on numerous factors, many of
which are not in the Company's control, and, therefore, no assurance can be
given, the Company believes that a rate of 50 to 70 basis points of the
Chase Deposits is a reasonable approximation of the level of non-interest
income it could earn after the Acquisition. This could result in
additional non-interest income of $2.3 million to $3.2 million on an
annualized basis.
<PAGE>
Non-Interest Expense
The Company has estimated the cost of operating the Chase Branches
within the Bank's existing infrastructure. The following is a
breakdown of the additional annual expenses anticipated over the first
full year of operations: Amount
------
(In millions)
Salary and employee benefits $ 3.6
Occupancy expense 1.1
Amortization of intangible assets 3.1
Other expense 3.6
-----
Total incremental non-interest expense $11.4
=====
Salary and employee benefits include approximately 117 full-time equivalent
employees currently at the Chase Branches and approximately 36 full-time
equivalent employees expected to be added, 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 expected life of the deposits (the "Core Deposit Value"),
amortizable over that expected life in a manner approximating the decay
rate of the deposits. 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.
The Core Deposit Value is expected to be $19.1 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 $3.1 million,
declining to $2.8 million and $2.6 million in the second and third years,
respectively.
Other expenses include conversion costs and data processing expenses
estimated for the Acquisition as well as the other support costs needed to
operate the Chase Branches, including the impact of increased FDIC deposit
insurance premiums to the Bank of approximately $210,000 (assuming that the
Bank remains in the "adequately capitalized" designation for one year
following the Acquisition). $275,000 of other expenses are one-time
charges (mostly anticipated to be incurred in 1995) necessary in order to
effect the Acquisition. In addition, the Company expects to incur $1.9
million in related incremental capital expenditures.
<PAGE>
Impact of the Acquisition on Operating Performance
Assuming Intended Potential Disposition
Subsequent to the Acquisition, the Bank intends to divest up to $125
million in deposits through a combination of selling certain branch
locations and related deposits and reducing public funds from the Bank's
balance sheet. See "Pending Acquisition - Potential Disposition." These
divestitures, if and when completed, should have the effect of returning
the Company's Tier I leverage ratio to the "well capitalized" level and
should reduce potential variances in earnings levels. If the Bank were to
divest $125 million in deposits, the following are the Company's estimates
of the impact to its operations:
Net Interest Income
Using the same analysis described above, the reduction in the Bank's
size could result in additional net interest income of $8.1 million to
$12.2 million rather than $12.0 million to $16.5 million.
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.
Non-Interest Income
The reduction in deposits could reduce the expected additional income
by $0.6 million to $0.9 million which could result in additional non-interest
income to the Bank of $1.7 million to $2.3 million, rather than $2.3 million
to $3.2 million.
Non-Interest Expense
Divesting $125 million of deposits and branches 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 $1.5 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 $11.4 million to approximately $9.9 million.
<PAGE>
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements and auditor's reports of
Community Bank System, Inc. and subsidiaries are contained on pages
45 through 61 of this item.
- - Consolidated Statements of Condition --
December, 31, 1994 and 1993
- - Consolidated Statements of Income --
Years ended December 31, 1994, 1993, and 1992
- - Consolidated Statements of Changes in Stockholders' Equity --
Years ended December 31, 1994, 1993, and 1992
- - Consolidated Statement of Cash Flows --
Years ended December 31, 1994, 1993, and 1992
- - Notes to Consolidated Financial Statements --
December 31, 1994
- - Auditors' report
Quarterly Selected Data (Unaudited) are contained on page 62.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CONDITION
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
December 31, December 31,
1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $30,522,189 $27,422,278
Interest bearing deposits with other banks 0 90,000
- ------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 30,522,189 27,512,278
Investment securities (approximate market
value of $374,117,000 and $260,580,000) 378,519,604 253,453,616
Loans 510,738,775 443,601,069
Less: Unearned discount 27,659,684 25,729,899
Reserve for possible loan losses 6,281,109 5,706,609
- ------------------------------------------------------------------------------------------------------------
Net loans 476,797,982 412,164,561
Premises and equipment, net 10,591,510 10,045,782
Accrued interest receivable 6,657,326 4,538,769
Intangible assets, net 6,106,608 452,264
Other assets 6,305,990 4,885,245
- ------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $915,501,209 $713,052,515
============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits
Noninterest bearing $103,006,969 $88,644,788
Interest bearing 576,630,655 499,670,455
- ------------------------------------------------------------------------------------------------------------
Total deposits 679,637,624 588,315,243
Federal funds purchased 57,300,000 57,000,000
Term borrowings 105,550,000 550,000
Obligation under capital lease 0 42,036
Accrued interest and other liabilities 6,724,070 5,158,809
- ------------------------------------------------------------------------------------------------------------
Total liabilities 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
and 2,748,318 shares issued and outstanding 3,485,187 3,435,398
Surplus 14,885,096 14,374,149
Undivided profits 49,853,313 42,902,266
Unrealized net gains (losses) on available for sale securities (1,930,414) 1,280,466
Less: Shares issued under employee stock plan-unearned 3,667 5,852
- ------------------------------------------------------------------------------------------------------------
Total shareholders' equity 66,289,515 61,986,427
- ------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $915,501,209 $713,052,515
============================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
Years Ended December 31,
1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $40,699,073 $36,235,800 $36,932,349
Interest and dividends on investments:
U.S. Treasury 1,800,534 2,041,156 1,659,934
U.S. government agencies and corporations 8,078,065 6,981,414 6,359,240
States and political subdivisions 1,427,476 1,783,253 2,054,964
Mortgage-backed securities 8,922,926 6,831,166 8,273,881
Other securities 645,828 696,693 754,936
Interest on federal funds sold 0 52,760 285,645
Interest on deposits with other banks 1,133 20,325 24,490
- --------------------------------------------------------------------------------------------------------------
Total interest income 61,575,035 54,642,567 56,345,439
- --------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 18,213,046 16,961,993 21,352,303
Interest on federal funds purchased, and
term borrowings from banks 3,916,073 766,883 242,278
Interest on capital lease 629 4,463 13,586
- --------------------------------------------------------------------------------------------------------------
Total interest expense 22,129,748 17,733,339 21,608,167
- --------------------------------------------------------------------------------------------------------------
Net interest income 39,445,287 36,909,228 34,737,272
Less: Provision for possible loan losses 1,702,466 1,506,131 2,726,788
- --------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 37,742,821 35,403,097 32,010,484
- --------------------------------------------------------------------------------------------------------------
Other income:
Fiduciary and investment services 1,379,566 1,113,217 898,060
Service charges on deposit accounts 2,593,282 2,379,405 2,266,064
Other service charges, commissions and fees 1,519,043 1,185,642 1,454,938
Other operating income 130,822 101,008 278,582
Investment security gains (losses) (502,343) (15,000) 184,271
- --------------------------------------------------------------------------------------------------------------
Total other income 5,120,370 4,764,272 5,081,915
- --------------------------------------------------------------------------------------------------------------
Operating income 42,863,191 40,167,369 37,092,399
- --------------------------------------------------------------------------------------------------------------
Other expenses:
Salaries and employee benefits 13,098,207 11,951,973 11,941,972
Occupancy expense, net 2,042,571 1,813,773 1,849,196
Equipment and furniture expense 1,697,230 1,641,750 2,326,589
Other 9,659,660 9,419,692 10,329,862
- --------------------------------------------------------------------------------------------------------------
Total other expenses 26,497,668 24,827,188 26,447,619
- --------------------------------------------------------------------------------------------------------------
Income before income taxes 16,365,523 15,340,181 10,644,780
Income taxes 6,256,305 5,765,407 3,139,239
- --------------------------------------------------------------------------------------------------------------
NET INCOME $10,109,218 $9,574,774 $7,505,541
==============================================================================================================
Earnings per share $3.59 $3.43 $2.76
==============================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
Years ended December 31, 1992, 1993 and 1994
<TABLE>
<CAPTION>
Common Unrealized
Shares Net Gains
Issued (Losses)
Under on
Employee Available
Common Undivided Stock Plan For Sale
Stock Surplus Profits - 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 - 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
=================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
Increase (Decrease) in Cash, Cash
Equivalents, and Non Cash Activities
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:
Depreciation 1,434,356 1,467,370 1,759,862
Net amortization of intangible assets 350,569 161,569 343,641
Net accretion of security
premiums and discounts (511,974) (515,161) (467,441)
Provision for loan losses 1,702,466 1,506,131 2,726,788
Provision for deferred taxes (454,968) (409,081) 146,995
(Gain)\loss on sale of investment securities 502,343 15,000 (184,271)
Change in interest receivable (2,118,557) 918,594 (590,722)
Change in other assets and other liabilities 2,183,987 (309,512) (549,637)
Change in unearned loan fees and costs 76,510 169,022 224,950
- ---------------------------------------------------------------------------------------------
Net Cash Provided By Operating Activities 13,273,950 12,578,706 10,915,706
- ---------------------------------------------------------------------------------------------
Investing Activities:
Proceeds from sales of investment securities 29,240,847 3,000,000 20,298,180
Proceeds from maturities of investment securities 64,275,075 111,504,503 54,138,365
Purchases of investment securities (223,998,813) (103,379,889) (108,013,700)
Net change in loans outstanding (65,860,765) (56,466,193) (16,068,199)
Capital expenditures (1,992,834) (984,675) (1,225,043)
Proceeds from sales of capital assets 0 17,122 132,424
Premium paid for branch acquisitions (6,004,913) 0 0
- ---------------------------------------------------------------------------------------------
<PAGE>
Net Cash Used By Investing Activities (204,341,403) (46,309,132) (50,737,973)
- ---------------------------------------------------------------------------------------------
Financing Activities:
Net change in demand deposits,
NOW accounts, and savings
accounts 11,755,827 18,213,745 33,206,445
Net change in certificates of deposit 79,566,554 12,186,820 (51,167,434)
Net change in term borrowings 105,300,000 4,714,100 48,835,900
Payments on lease obligation (42,036) (96,747) (723,023)
Issuance of common stock 560,456 553,809 80,328
Cash dividends (3,063,437) (2,840,466) (2,421,284)
- ---------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 194,077,364 32,731,261 27,810,932
- ---------------------------------------------------------------------------------------------
Change In Cash And Cash Equivalents 3,009,911 (999,165) (12,011,335)
Cash and cash equivalents at beginning of year 27,512,278 28,511,443 40,522,778
- ---------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR 30,522,189 27,512,278 28,511,443
=============================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid For Interest $21,369,189 $18,063,232 $23,068,870
=============================================================================================
Cash Paid For Income Taxes $5,945,320 $7,143,311 $3,711,341
=============================================================================================
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH AND OTHER
INVESTING ACTIVITIES:
Gross change in unrealized net gains and (losses)
on available for sale securities ($5,426,535) $2,164,046
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.
<PAGE>
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.
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.
<PAGE>
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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.
<PAGE>
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 (2,814,710 in
1994; 2,788,330 in 1993; and 2,722,093 in 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.
<PAGE>
NOTE B:INVESTMENT SECURITIES
The amortized cost and estimated market values of investments in
securities as of December 31 are as follows:
<TABLE>
<CAPTION>
1994
- -----------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Held to Maturity Portfolio Cost Gains Losses Value
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
<PAGE>
- -----------------------------------------------------------------------------------------
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
=========================================================================================
<PAGE>
1993
- ---------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Held to Maturity Portfolio Cost Gains Losses Value
- ---------------------------------------------------------------------------------------
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>
<PAGE>
The amortized cost and estimated market value of debt securities at
December 31, 1994 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>
Held to Maturity Available for Sale
Carrying Est. Market Carrying Est. Market
(Figures in dollars) Value Value Value Value
- ----------------------------------------------------------------------------------------------------
<S> <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.
<PAGE>
NOTE C: LOANS
Major classifications of loans at December 31 are summarized as follows:
- ------------------------------------------------------------------------------
1994 1993
- ------------------------------------------------------------------------------
Real estate mortgages:
Residential $196,547,718 $177,058,875
Commercial 35,603,929 32,914,622
Farm 7,624,577 7,420,575
Agricultural loans 13,295,398 11,564,058
Commercial loans 67,975,882 58,251,529
Installment loans to individuals 188,209,205 154,813,023
Other loans 1,482,066 1,578,387
------------- -------------
510,738,775 443,601,069
Less: Unearned discount (27,659,684) (25,729,899)
Reserve for possible loan losses (6,281,109) (5,706,609)
------------- -------------
Net loans $476,797,982 $412,164,561
==============================================================================
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.
Changes in the reserve for possible loan losses for the years ended
December 31 are summarized below:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
1994 1993 1992
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at the beginning of year $5,706,609 $4,982,451 $4,312,422
Provision charged to expense 1,702,466 1,506,131 2,726,788
Loans charged off (1,615,712) (1,410,390) (2,601,486)
Recoveries 487,746 628,417 544,727
------------- ------------- -------------
Balance at end of year $6,281,109 $5,706,609 $4,982,451
==============================================================================================
</TABLE>
The Company grants real estate, consumer, and commercial loans to
customers throughout New York State.
<PAGE>
NOTE D: PREMISES AND EQUIPMENT
Premises and equipment consist of the following at December 31:
- ----------------------------------------------------------------------------
1994 1993
- ----------------------------------------------------------------------------
Land and land improvements $2,253,625 $2,089,927
Bank premises owned 11,998,034 11,140,847
Equipment 7,923,757 10,071,301
------------- -------------
Premises and equipment, gross 22,175,416 23,302,075
Less: Allowance for depreciation 11,583,906 13,256,293
------------- -------------
Premises and equipment, net $10,591,510 $10,045,782
=============================================================================
NOTE E: INTANGIBLE ASSETS
Intangible assets consist of the following at December 31:
- -----------------------------------------------------------------------------
1994 1993
- -----------------------------------------------------------------------------
Core deposit intangible $573,400 $573,400
Goodwill and other intangibles 6,593,203 1,112,340
------------- -------------
Intangible assets, gross 7,166,603 1,685,740
Less: Accumulated amortization 1,059,995 1,233,476
------------- -------------
Intangible assets, net $6,106,608 $452,264
=============================================================================
NOTE F: DEPOSITS
Deposits by type at December 31 are as follows:
- -------------------------------------------------------------------
1994 1993
- -------------------------------------------------------------------
Demand $103,006,969 $88,644,788
Savings 306,023,336 308,629,692
Time 270,607,319 191,040,763
------------- -------------
Total deposits $679,637,624 $588,315,243
===================================================================
The estimated fair values of deposits at December 31, 1994 and
1993 were approximately $677,087,000 and $589,795,000, respectively.
At December 31, 1994 and 1993, time certificates of deposit in
denominations of $100,000 and greater totaled $47,783,000
and $22,245,000, respectively.
<PAGE>
NOTE G: TERM BORROWINGS
At December 31, 1994 and 1993, outstanding borrowings were as follows:
- --------------------------------------------------------------------
1994 1993
- --------------------------------------------------------------------
Federal funds purchased $57,300,000 $57,000,000
Short-term borrowings 105,000,000
Long-term borrowings 550,000 550,000
------------- -------------
$162,850,000 $57,550,000
====================================================================
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%.
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.
The provision (benefit) for income taxes for the years ended December 31
is as follows:
- ---------------------------------------------------------------------------
1994 1993 1992
- ---------------------------------------------------------------------------
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
==============================================================================
<PAGE>
The components of the net deferred tax asset, included in other assets, as
of December 31 are as follows:
- -----------------------------------------------------------------------
1994 1993
- -----------------------------------------------------------------------
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
=======================================================================
Note H: Income Taxes (Continued)
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:
- ------------------------------------------------------------------------------
1994 1993 1992
- ------------------------------------------------------------------------------
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%
==============================================================================
<PAGE>
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 maxium
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:
- -------------------------------------------------------------------------------
1994 1993
- -------------------------------------------------------------------------------
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
===============================================================================
<PAGE>
NOTE I: PENSION PLAN (Continued)
- -------------------------------------------------------------------------------
1994 1993
- -------------------------------------------------------------------------------
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
===============================================================================
The increase in the discount rate from 7% to 8% decreased the projected
benefit obligation at December 31, 1994 by $1,007,272.
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.
<PAGE>
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:
- ------------------------------------------------------------------------------
1994 1993
- ------------------------------------------------------------------------------
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
==============================================================================
<PAGE>
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.
The following sets forth the funded status of the plan as of December 31:
- ------------------------------------------------------------------------------
1994 1993
- ------------------------------------------------------------------------------
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)
==============================================================================
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.
<PAGE>
Information with respect to stock options and warrants under the above plans
is as follows:
- ------------------------------------------------------------------------------
Number
Number Option Price of Shares
of Shares Per Share Exercisable
- ------------------------------------------------------------------------------
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 15.5-30.25 74,840
==============================================================================
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 acheivement of pre-established financial
objectives during the forfeiture period. Restricted stockholders have dividend
and voting rights during the forfeiture period. 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.
<PAGE>
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 nonperfomance 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.
- -------------------------------------------------------------------------------
1994 1993
- -------------------------------------------------------------------------------
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
===============================================================================
The fair value of these instuments 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.
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.
<PAGE>
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:
- --------------------------------------------------------
Years ending
December 31: Building Equipment Total
- --------------------------------------------------------
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
========================================================
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 region 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 proforma basis are
not presented since historical financial information for the branches
acquired is not available.
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.
<PAGE>
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 right 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.
<PAGE>
The following are the condensed balance sheets, statements of income and
statements of cash flows for the Parent Company:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
CONDENSED BALANCE SHEETS
- -----------------------------------------------------------------------------------
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>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
- -----------------------------------------------------------------------------------------------------
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
=====================================================================================================
<PAGE>
NOTE P: PARENT COMPANY STATEMENTS (Continued)
</TABLE>
<TABLE>
<CAPTION>
=====================================================================================================
STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash, Cash Equivalents and Noncash Activities
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.
<PAGE>
Coopers & Lybrand 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 Demcember 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 principle 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 of 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 futher 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.
/s/ Coopers & Lybrand L.L.P.
Syracuse, New York
January 27, 1995, except for Note O as to which the date is February 21, 1995
<PAGE>
<TABLE>
Two-Year Selected Quarterly Data
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
1994 RESULTS
- ----------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- ----------------------------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $9,074 $9,631 $10,212 10,528 $39,445
Provision for loan losses 239 422 316 725 1,702
--------- --------- --------- --------- ---------
Net interest income after
provision for loan losses 8,835 9,209 9,896 9,803 37,743
Total other income 1,229 1,383 1,613 895 5,120
Total other expenses 6,256 6,339 6,970 6,933 26,498
--------- --------- --------- --------- ---------
Income before income tax 3,808 4,253 4,539 3,765 16,365
Income tax 1,408 1,604 1,826 1,418 6,256
--------- --------- --------- --------- ---------
Net income $2,400 $2,649 $2,713 $2,347 $10,109
Earnings per share $0.85 $0.94 $0.96 $0.84 $3.59
======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1993 RESULTS
- ----------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- ----------------------------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $9,260 $9,101 $9,309 9,239 $36,909
Provision for loan losses 407 375 464 260 1,506
--------- --------- --------- --------- ---------
Net interest income after
provision for loan losses 8,853 8,726 8,845 8,979 35,403
Total other income 1,091 1,085 1,413 1,175 4,764
Total other expenses 6,146 5,949 6,308 6,424 24,827
--------- --------- --------- --------- ---------
Income before income tax 3,798 3,862 3,950 3,730 15,340
Income tax 1,419 1,433 1,484 1,429 5,765
--------- --------- --------- --------- ---------
Net income $2,379 $2,429 $2,466 $2,301 $9,575
Earnings per share $0.86 $0.87 $0.88 $0.82 $3.43
======================================================================================================================
</TABLE>
<PAGE>
Item 9. Disagreements on accounting and financial disclosure
None
Part III
Item 10. Directors and Executive Officers of the Registrant
This item is incorporated by reference from the registrant's definitive
Proxy Statement. Information concerning executive officers is included in Part
I after Item 4 of this Form 10-K Annual Report.
Item 11. Executive Compensation
This item is incorporated by reference from the registrant's definitive
Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
This item is incorporated by reference from the registrant's definitive
Proxy Statement.
Item 13. Certain Relationships and Related Transactions
This item is incorporated by reference from the registrant's definitive
Proxy Statement.
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents Filed
1. The following consolidated financial statements of
Community Bank System, Inc. and subsidiaries are included in Item 8:
- - Consolidated Statements of Condition --
December, 31, 1994 and 1993
- - Consolidated Statements of Income --
Years ended December 31, 1994, 1993, and 1992
- - Consolidated Statements of Changes in Stockholders' Equity --
Years ended December 31, 1994, 1993, and 1992
- - Consolidated Statement of Cash Flows --
Years ended December 31, 1994, 1993, and 1992
- - Notes to Consolidated Financial Statements --
December 31, 1994
- - Auditors' report
- - Quarterly selected data --
Years ended December 31, 1994 and 1993 (unaudited)
2. Schedules are omitted since the required information is
either not applicable or shown elsewhere in the financial statements.
3. Listing of Exhibits
(11) Statement re: Computation of earnings per share
(22) Subsidiaries of the registrant
- Community Bank, National Association, State of New York
- Northeastern Computer Services, Inc., State of New York
- Community Financial Services, Inc., State of New York
(b) Reports on Form 8-K
- Report filed June 3, 1994 item #5 Other Events.
- Report filed December 6, 1994 item #5 Other Events.
(c) See Exhibit 14(a)(3) above.
(d) See Exhibit 14(a)(2) above
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 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.
By: /s/ Sanford A. Belden
Sanford A. Belden
President, Chief Executive Officer and Director
March 15, 1995
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on the 15th day of March
1995.
Name Title
Chairman of the
Board of Directors
/s/ Dr. Earl W. MacArthur and Director
Dr. Earl W. MacArthur
/s/ David G. Wallace Treasurer
David G. Wallace
Directors:
/s/ John M. Burgess /s/ Richard C. Cummings
John M. Burgess, Director Richard C. Cummings, Director
/s/ William M. Dempsey
William M. Dempsey, Director
/s/ Benjamin Franklin /s/ James A. Gabriel
Franklin, Director James A. Gabriel, Director
/s/ Lee T. Hirschey /s/ David C. Patterson
Lee T. Hirschey, Director David C. Patterson, Director
/s/ William N. Sloan /s/ William D. Stalder
William N. Sloan, Director William D. Stalder, Director
/s/ Hugh G. Zimmer
Hugh G. Zimmer, Director
<PAGE>
Community Bank System, Inc.
Statement re Earnings Per Share Computation
Exhibit 11
Three Months Ended Year Ended
December 31, December 31,
1994 1993 1994 1993
Primary Earnings Per Share
Net Income 2,347,347 2,301,661 10,109,218 9,574,774
Dividends on
preferred shares
--------- --------- --------- ---------
Income applicable
to common stock 2,347,347 2,301,661 10,109,218 9,574,774
========= ========= ========= =========
Weighted average number
of common shares 2,778,824 2,746,842 2,764,454 2,724,428
Add: Shares issuable from
assumed exercise of
incentive stock options 41,976 59,323 50,256 63,902
--------- --------- --------- ---------
Weighted average number of
common shares - adjusted 2,820,800 2,806,165 2,814,710 2,788,330
========= ========= ========= =========
Primary earnings per share $0.84 $0.82 $3.59 $3.43
===== ===== ===== =====
Fully Diluted Earnings Per Share
Net Income 2,347,347 2,301,661 10,109,218 9,574,774
========= ========= ========= =========
Weighted average number of
common shares - adjusted 2,820,800 2,806,165 2,814,710 2,791,659
Add: Equivalent number of
common shares assuming
conversion of preferred
--------- --------- --------- ---------
Weighted average number of
common shares - adjusted 2,820,800 2,806,165 2,814,710 2,791,659
========= ========= ========= =========
Fully diluted earnings per share $0.84 $0.82 $3.59 $3.43
===== ===== ===== =====
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 30,522
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 292,156
<INVESTMENTS-CARRYING> 292,156
<INVESTMENTS-MARKET> 287,754
<LOANS> 483,079
<ALLOWANCE> 6,281
<TOTAL-ASSETS> 915,501
<DEPOSITS> 679,638
<SHORT-TERM> 162,300
<LIABILITIES-OTHER> 6,724
<LONG-TERM> 550
<COMMON> 3,485
0
0
<OTHER-SE> 62,804
<TOTAL-LIABILITIES-AND-EQUITY> 915,501
<INTEREST-LOAN> 40,699
<INTEREST-INVEST> 20,875
<INTEREST-OTHER> 1
<INTEREST-TOTAL> 61,575
<INTEREST-DEPOSIT> 18,213
<INTEREST-EXPENSE> 3,917
<INTEREST-INCOME-NET> 39,445
<LOAN-LOSSES> 1,702
<SECURITIES-GAINS> (502)
<EXPENSE-OTHER> 26,498
<INCOME-PRETAX> 16,366
<INCOME-PRE-EXTRAORDINARY> 16,366
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,109
<EPS-PRIMARY> 3.59
<EPS-DILUTED> 3.59
<YIELD-ACTUAL> 5.31
<LOANS-NON> 2,396
<LOANS-PAST> 862
<LOANS-TROUBLED> 15
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,706
<CHARGE-OFFS> 1,615
<RECOVERIES> 488
<ALLOWANCE-CLOSE> 6,281
<ALLOWANCE-DOMESTIC> 6,281
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 805
</TABLE>
