FORM 10 - Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the three months ended March 31, 1996
Commission file number 0-11716
COMMUNITY BANK SYSTEM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 16-1213679
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5790 Widewaters Parkway, DeWitt, New York 13214
(Address of principal executive offices) (Zip Code)
315/445-2282
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter periods that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
Common Stock, $1.25 par value -- 3,682,315 shares as of May 9, 1996.
<PAGE>
INDEX
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
Part I. Information
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets --
March 31, 1996, December 31, 1995 and March 31, 1995
Consolidated statements of income --
Three months ended March 31, 1996 and 1995
Consolidated statements of cash flows --
Three months ended March 31, 1996 and 1995
Item 2. Management Discussion and Analysis of Financial Conditions
and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Securities Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
<TABLE>
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
March 31, December 31, March 31,
ASSETS 1996 1995 1995
Cash and due from banks $69,022,782 $56,903,103 $50,721,496
Interest bearing deposits with other banks 0 0 0
Federal funds sold 0 6,000,000 0
TOTAL CASH AND CASH EQUIVALENTS 69,022,782 62,903,103 50,721,496
Investment securities
U.S. Treasury 8,509,441 8,524,661 16,607,542
U.S. Government agencies and corporations 241,365,255 226,972,372 175,918,083
States and political subdivisions 16,663,625 15,868,356 17,761,948
Mortgage-backed securities 214,249,615 195,188,655 162,407,975
Other securities 20,083,043 20,081,918 13,930,297
Federal Reserve Bank 1,395,750 1,395,750 551,550
TOTAL INVESTMENT SECURITIES 502,266,729 468,031,712 387,177,395
Loans 587,540,411 573,620,687 519,252,700
Less: Unearned discount 11,044,954 13,469,032 23,871,714
Reserve for possible loan losses 7,186,385 6,976,385 6,423,564
NET LOANS 569,309,072 553,175,270 488,957,422
Bank premises and equipment 16,888,080 16,935,856 10,651,544
Accrued interest receivable 9,856,481 9,150,503 8,006,653
Intangible assets 33,303,314 33,970,375 5,987,253
Other assets 7,480,640 7,878,194 8,777,761
TOTAL ASSETS $1,208,127,098 $1,152,045,013 $960,279,524
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing $145,986,499 $140,288,323 $101,167,608
Interest bearing 913,521,838 876,657,901 621,212,656
TOTAL DEPOSITS 1,059,508,337 1,016,946,224 722,380,264
Federal funds purchased and securities sold under
agreements to repurchase 10,000,000 0 43,765,000
Term borrowings 25,550,000 25,550,000 115,550,000
Obligations under capital lease 0 0 0
Accrued interest and other liabilities 11,580,612 9,488,540 9,621,279
TOTAL LIABILITIES 1,106,638,949 1,051,984,764 891,316,543
Shareholders' equity
Preferred stock $100 stated value 4,500,000 4,500,000 0
Common stock $1.25 par value 4,602,894 4,599,531 3,485,187
Surplus 32,981,986 32,955,273 14,885,100
Undivided profits 58,799,981 57,079,501 51,768,386
Unrealized gains (losses) on available for sale securities 641,327 977,457 (1,172,571)
Less: Shares issued under
employee stock plan - unearned 38,039 51,513 3,121
TOTAL SHAREHOLDERS' EQUITY 101,488,149 100,060,249 68,962,981
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,208,127,098 $1,152,045,013 $960,279,524
See notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- -----------------------------------------------------------------------------------
<S> <C> <C>
Three Months Ended
March 31,
INTEREST INCOME 1996 1995
Interest and fees on loans $13,479,523 $11,470,601
Interest and dividends on investments:
U.S. Treasury 160,024 296,841
U.S. Government agencies and corporations 4,512,712 3,378,957
States and political subdivisions 259,657 301,490
Mortgage-backed securities 3,576,185 2,965,514
Other securities 365,550 209,784
Interest on federal funds sold 322,506 32,777
Interest on deposits at other banks 0 0
22,676,157 18,655,964
INTEREST EXPENSE
Interest on deposits
Savings 2,557,772 2,002,495
Time 6,539,406 3,888,923
Interest on federal funds purchased, securities
sold under agreements to repurchase and
Term borrowings 374,099 2,339,030
Interest on capital lease 0 0
9,471,277 8,230,448
NET INTEREST INCOME 13,204,880 10,425,516
Provision for possible loan losses 588,174 254,411
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 12,616,706 10,171,105
OTHER INCOME
Fiduciary services 423,165 339,936
Service charges on deposit accounts 973,863 661,759
Other service charges, commissions and fees 551,748 377,849
Other operating income 4,260 17,506
Investment security gain (loss) 0 0
1,953,036 1,397,050
14,569,742 11,568,155
OTHER EXPENSES
Salaries, wages and employee benefits 4,703,731 3,711,283
Occupancy expense of bank premises, net 802,087 540,068
Equipment and furniture expense 573,518 426,158
Other 3,172,261 2,346,128
9,251,597 7,023,637
INCOME BEFORE INCOME TAXES 5,318,145 4,544,518
Income taxes 2,180,000 1,793,000
NET INCOME $3,138,145 $2,751,518
Earnings per common share $0.82 $0.98
See notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For Three Months Ended March 31, 1996 and 1995
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
1996 1995
- --------------------------------------------------------------------------------------------------
Operating Activities:
Net income $3,138,145 $2,751,518
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 485,262 359,012
Net amortization of intangible assets 702,399 119,355
Net accretion of security premiums and discounts (675,655) (325,696)
Provision for loan losses 588,174 254,411
Provision for deferred taxes 140,010 (37,021)
(Gain)\Loss on sale of investment securities 0 0
(Gain)\Loss on sale of loans (4,536) (15,506)
(Gain)\Loss on sale of assets 276 (2,000)
Change in interest receivable (705,978) (1,349,327)
Change in other assets and other liabilities 2,395,952 1,535,518
Change in unearned loan fees and costs (94,536) (37,635)
- --------------------------------------------------------------------------------------------------
Net Cash Provided By Operating Activities 5,969,513 3,252,629
- --------------------------------------------------------------------------------------------------
Investing Activities:
Proceeds from sales of investment securities 0 0
Proceeds from maturities of held to maturity investment securities 5,981,751 (18,863,990)
Proceeds from maturities of available for sale investment securities 17,553,153 (5,320,612)
Purchases of held to maturity investment securities (32,237,521) 17,133,295
Purchases of available for sale investment securities (25,429,259) 0
Net change in loans outstanding (16,622,903) (13,956,164)
Capital expenditures (443,542) (417,046)
Premium paid for branch acquisitions (29,558) 0
- --------------------------------------------------------------------------------------------------
Net Cash Used By Investing Activities (51,227,879) (21,424,517)
- --------------------------------------------------------------------------------------------------
Financing Activities:
Net change in demand deposits,
NOW accounts, and savings accounts 24,780,429 579,180
Net change in certificates of deposit 17,781,684 42,163,460
Net change in term borrowings 10,000,000 (3,535,000)
Issuance (retirement) of common and preferred stock 30,076 0
Cash dividends (1,214,144) (836,445)
- --------------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 51,378,045 38,371,195
- --------------------------------------------------------------------------------------------------
Change In Cash And Cash Equivalents 6,119,679 20,199,307
Cash and cash equivalents at beginning of year 62,903,103 30,522,189
- --------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 69,022,782 50,721,496
==================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid For Interest $8,134,677 $6,042,995
==================================================================================================
Cash Paid For Income Taxes $401,535 $474,503
==================================================================================================
SUPPLEMENTAL DISCLOSURE OF NONCASH AND OTHER
INVESTING ACTIVITIES:
Dividends declared and unpaid $1,235,415 $836,445
==================================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
Community Bank System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
March 1996
Note A -- Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for fair presentation have been included. Operating
results for the three-month period ended March 31, 1996 are not necessarily
indicative of the results that may be expected for the year ended December
31, 1996.
Part 1. Financial Information
Item 1. Financial Statements
The information required by rule 10.01 of Regulation S-X is
presented on the previous pages.
Item 2. Management Discussion and Analysis of Financial Condition
and of Operations
The purpose of the discussion is to present material changes in
Community Bank System, Inc.'s financial condition and results of operations
during the three months ended March 31, 1996 which are not otherwise
apparent from the consolidated financial statements included in these
reports. When used in this report, the term "CBSI" means Community Bank
System, Inc. and its subsidiaries on a consolidated basis, unless indicated
otherwise. Financial performance comparisons to peer bank holding
companies are based on data through December 31, 1995 as provided by the
Federal Reserve System; the peer group is comprised of 110 bank holding
companies having $1 to $3 billion in assets.
I. EARNINGS PERFORMANCE SUMMARY
Three Months Ended Change
3/31/96 3/31/95 Amount Percent
(000's)
Net Income $3,138 $2,752 $387 14.1%
Earnings per share $0.82 $0.98 ($0.16) -16.3%
Weighted average
shares outstanding 3,712 2,815 897 31.9%
Return on average assets 1.08% 1.20% -0.12% N/A
Average assets $1,173,828 $929,778 $244,051 26.2%
Return on average
shareholders' equity 12.76% 16.62% -3.86% N/A
Average shareholders' equity $100,223 $67,151 $33,073 49.3%
Percentage of average shareholders'
equity to average assets 8.54% 7.22% 1.32% N/A
* May not foot due to rounding
A. Net Income Trend
Net income for the first quarter of 1996 reached a record high of $3.138
million, up 14.1% over the comparable 1995 period.
As a result of the company's issuance of 862,500 of additional common
shares in late June and early July of 1995, common shares outstanding were
higher by almost 32% in the first quarter, causing a reduction in earnings
per share to $.82, down 16.3% from first quarter 1995, when earnings per
share established an all-time high of $.98.
The $.82 compares favorably to $.80 per share in fourth quarter 1995 and
$.77 in third quarter 1995, when results first reflected the company's
mid-July 1995 purchase of 15 branches from The Chase Manhattan Bank, N.A.
Another example of the company's steady progress since the acquisition is
the increase in tangible book value per share to $17.29 from the September
30, 1995 level of $14.92.
<PAGE>
B. Balance Sheet Trends
Loans outstanding increased 2.9% during the quarter, up from 2.5% growth
during first quarter 1995. Over 60% of the $16.3 million in loan growth
since year end to $576 million was originated in markets served by the
former Chase branches, which presently comprise 32% of the bank's depositor
base.
The primary components of the increase in loans since year end are the
bank's business lending products (up $7.4 million); indirect consumer loans
(up $3.7 million), predominantly reflecting automobile financing through an
established dealer network; and consumer mortgages (up $3.7 million, net of
$2.0 million in originations sold service-retained in the secondary
market). Increases continue to be modest in the consumer direct loan
product line (up $1.4 million, including variable-rate home equity
products). The portfolio contains no credit card receivables.
Investments totaled $502 million for the quarter just ended, up $28.2
million (6.0%) from year-end 1995. This increase is attributable to
favorable investing opportunities largely funded by capital market
borrowings.
Total deposits increased 4.2% since December 31, 1995 to $1.06 billion,
largely the result of seasonal increases in municipal deposits. Average
total deposits for the quarter were down 1.25% from fourth quarter 1995
because of the sale of three former Chase branches in mid-December 1995 to
NBT Bank, N.A..
C. Income Statement Trends
First quarter net interest income rose a strong 26% or $2.8 million versus
the same period last year. This increase reflects a 15 basis point
improvement in net interest margin to 5.04%, largely due to a lower overall
rate paid on interest-bearing deposits. Compared to fourth quarter 1995,
the net interest margin was virtually unchanged.
Noninterest income in first quarter 1996 climbed 40% over the same period
last year to $2.0 million. The nearly $560,000 improvement largely
reflects expanded fiduciary income, higher fees from annuity and mutual
fund sales, and increased Visa merchant and debit card fees, as well as
greater overdraft fees, service charges and commissions from an expanded
customer base gained from last year's Chase branch purchase. Progress
continues toward addressing the bank's relative shortfall in noninterest
income compared to its peers.
Overhead was up 32% this quarter to $9.3 million compared to first quarter
1995. Approximately 45% of the $2.2 million increase reflected personnel
costs, relating to the acquisition of the Chase branches and required
operational support, annual merit awards, and selective staff additions in
lending and financial product sales. A significant balance of the
non-personnel expense increase was also related to the new branches and the
cost of servicing their 25,000 customers, in addition to amortization of
intangible assets associated with the Chase transaction. As a percentage
of average assets, annualized overhead is favorably below the peer norm and
is attributable to persistent cost control efforts as well as strong asset
growth.
Compared to fourth quarter 1995, overhead was lower by 4.0% or more
than $380,000. The reduction is explained by the absence of over $150,000
in one-time Chase-related acquisition expenses incurred in the October to
December period, the sale of the three branches to NBT Bank, N.A. in late
fourth quarter 1995, and an intensified focus on expense control in 1996.
As a result, the company's efficiency ratio (overhead compared to recurring
operating income) improved from the fourth quarter 1995 level by 1.8
percentage points to 60.6%. This compares favorably to the peer bank
median of 62.8% based on data available through year-end 1995.
Primarily as a result of higher pretax income, YTD 1996 income taxes
increased by $387,000 over the same 1995 period. CBSI's marginal tax rates
are 35% federal and 9% state (plus a 2.5% surcharge scheduled to be phased
out over time).
The company is currently under examination 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
ultimate resolution will not have a material impact on the financial
statements. However, approximately $70,000 was provided in 1996's first
quarter to cover the proposed adjustments (in addition to provisions made
in 1995), and as a result, first quarter 1996's effective tax rate was
41.0% as compared to first quarter 1995's rate of 39.4%.
D. Asset Quality Trend
Asset quality remains strong at the company. Net charge-offs for the
first quarter were $378,000 or .27% of average loans, a 6 basis point
decline since last year's fourth quarter ratio of .33% but an 18 basis
point increase compared to first quarter 1995, which had unusually
favorable gross charge-off and recovery experience. Nonperforming loans
continue to be monitored closely and managed conservatively, ending the
quarter at $2.6 million, a 17% decrease from a year earlier. The current
level represents a modest increase over the year-end 1995 level of $2.0
million, largely due to greater nonaccruing commercial and real estate
loans. As a result, the ratio of nonperforming loans to loans outstanding
stood at .46% at quarter end, still highly favorable compared to the peer
median of .99% at December 31, 1995. There is no troubled debt
restructuring as of the most recent quarter end.
Loan loss provision expense was slightly less in first quarter 1996 than in
the fourth quarter 1995, nonetheless sufficient to maintain the ratio of
loan loss reserves to loans outstanding at 1.25% and cover a slightly lower
level of net chargeoffs. This resulted in coverage over nonperformers
considered very ample by management at 2.7 times.
<PAGE>
E. Capital and Other Trends
As of March 31, 1996, the tier I leverage ratio of 5.76% was 95 basis
points lower than 12 months earlier. However, it is still well above the
5% minimum required to be a "well-capitalized" bank as defined by the FDIC.
The decrease in the ratio is attributable to the acquired Chase deposits
and associated intangibles, partially offset by favorable earnings during
the last 12 months and continued amortization of intangibles from previous
acquisitions. The present ratio also includes the impact of 862,500 shares
($18.5 million in net proceeds) in common stock and 90,000 ($9.0 million)
shares in preferred stock that were issued mid 1995 to finance the Chase
branch acquisition.
As a result of the aforementioned reasons, the tier I risk-based capital
ratio as of March 31, 1996 was 10.67%, or 174 basis points lower than it
was as of March 31, 1995. This compares to a 6% "well-capitalized"
regulatory minimum.
Book value per share increased 6.5% from March 31, 1995 to $26.34,
while tangible book value per share fell 23.5% to $17.29 over the same
period, reflecting the deposit premium resulting from the July 1995 Chase
branch acquisition.
The bank's liquidity level is extremely favorable as of March 31, 1996. In
the event of a liquidity crisis, over $232.7 million (essentially short
term assets minus short term liabilities) or 19.3% of assets could be
converted into cash within a 30-day time period. Over a 90 day time
period, 17.7% of assets could be converted to cash.
As shown by the statement of cash flows preceding the Management Discussion
and Analysis, the bank's cash and cash equivalents grew $6.1 million during
the quarter to $69.0 million as of March 31, 1996, a level $18.3 million
higher than one year earlier. Net cash provided by operating activities
was $6.0 million reflecting favorable earnings. Financing activities
provided cash of $51.4 million, of which investing activities utilized
$51.2 million due to investment purchases and maturities, the premium paid
on the acquisition, and loan growth.
II. SUPPLEMENTAL INFORMATION TO EARNINGS PERFORMANCE SUMMARY
The following sections of this report discuss more fully certain of the
balance sheet and earnings trends summarized above.
A. Net Interest Income
The change in net interest income reflects changes in net interest margin,
earning asset levels, and the number of days of accrual in the period.
On a tax-equivalent basis, net interest income for first quarter 1996
increased $2.8 million (26.1%) over the same 1995 period to $13.3 million.
This reflects a $187 million increase (21.3%) in average earning assets due
to the Chase acquisition and a 15 basis point increase in the net interest
margin, largely due to a lower cost of funds resulting from using the
Chase deposits to pay down higher cost borrowings.
Compared with fourth quarter 1995, there was a $142,000 decrease in net
interest income. The change is primarily attributable to one less day in
the quarter. There was little to no change in earning assets or net
interest margin between the two periods.
The table below shows these underlying dynamics.
For the Quarter Net Net Yield on Cost Average Loans /
Ended: Interest Interest Earning of Earning Earning
(000's) Income Margin Assets Funds Assets Assets
------ ------ ------ ------ ------ ------
Amount and Change Period
from Preceding Quarter End
------ ------ ------ ------ ------ ------
March 31, 1995
Amount $10,564 4.88% 8.69% 3.90% $877,322 56.1%
Change ($120) -0.21% 0.30% 0.53% 5.4% 0.1
June 30, 1995
Amount $10,699 4.74% 8.73% 4.09% $904,478 54.7%
Change $135 -0.14% 0.04% 0.19% 3.1% (1.5)
September 30, 1995
Amount $12,849 4.82% 8.43% 3.66% $1,057,820 50.7%
Change $2,150 0.07% -0.30% -0.43% 17.0% (3.9)
December 31, 1995
Amount $13,467 5.05% 8.60% 3.56% $1,058,510 54.2%
Change $618 0.23% 0.17% -0.09% 0.1% 3.4
March 31, 1996
Amount $13,325 5.04% 8.62% 3.59% $1,063,977 53.4%
Change ($142) -0.01% 0.02% 0.02% 0.5% (0.7)
Change from
March 31, 1995 to
March 31, 1996
Amount $2,761 0.15% -0.07% -0.31% $186,655 ($0)
% Change 26.1% --- --- --- 21.3% ---
Note: (a) All net interest income, margin, and earning asset yield figures are
full-tax equivalent.
* May not foot due to rounding
The company's net interest margin is in the 70th percentile as of December
31, 1995. This performance is largely the result of high earning asset
yields being in the favorable 71st percentile versus cost of funds being at
the peer norm.
<PAGE>
B. Capital
The common shares of Community Bank System, Inc. are traded in the NASDAQ
National Market System under the symbol CBSI. Stock price activity,
numbers of shares outstanding, cash dividends declared and share volume
traded are shown below.
<TABLE>
For the Quarter Market Market Market # of Cash Share
Ended: Price Price Price Shares Dividend Volume
High Low Close Outstanding Declared Traded
------ ------ ------ ------ ------ ------
Amount and Change
from Preceding Quarter
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
March 31, 1995
Amount $27.75 $25.25 $27.13 2,788,150 $0.30 199,855
Change -12.6% -1.9% 3.3% 0.0% 0.0% 36.2%
June 30, 1995
Amount $29.00 $24.25 $25.50 3,503,150 $0.30 1,945,143
Change 4.5% -4.0% -6.0% 25.6% 0.0% 466.0%
September 30, 1995
Amount $36.50 $25.25 $33.75 3,674,325 $0.30 2,664,957
Change 25.9% 4.1% 32.4% 4.9% 0.0% 37.0%
December 31, 1995
Amount $34.25 $31.00 $32.00 3,679,625 $0.33 629,130
Change -6.2% 22.8% -5.2% 0.1% 10.0% -76.4%
March 31, 1996
Amount $32.75 $30.25 $31.00 3,682,315 $0.33 316,309
Change -4.4% -2.4% -3.1% 0.1% 0.0% -49.7%
Change from
March 31, 1995 to
March 31, 1996
Amount $5.00 $5.00 $3.88 894,165 $0.03 116,454
% Change 18.0% 19.8% 14.3% 32.1% 10.0% -8.0%
</TABLE>
CBSI's stock closed first quarter 1996 at $31.00, over 14% higher than one
year earlier, and consistent with an overall higher trading range. The
volume of shares traded at 316,000 was approximately 58% greater than
during first quarter 1995.
The cash dividend shown above reflects a 3 cent (10%) per share increase in
the quarterly dividend per common share that was effective in fourth
quarter 1995. This was the fifth dividend increase within four years. The
1996 common dividend payout of 38.7% has increased from the same 1995
period but remains within the company's targeted 30-40% guideline.
C. Loans
Loans outstanding, net of unearned discount, reached a record $576.5
million as of March 31, 1996, a very favorable $ 81.1 million (16.4%)
growth in the last twelve months. Outstandings have now climbed for
sixteen consecutive quarters. As shown in the table below, CBNA is
predominantly a retail bank, with almost 70% of its outstandings spread
across three basic consumer loan types.
<PAGE>
<TABLE>
For the Quarter Consumer Consumer Consumer Business Total Yield on
Ended: Direct Indirect Mortgages Lending Loans Loans
(000's) -------- -------- -------- -------- -------- -------
Amount and Change Quarterly
from Preceding Quarter Average
-------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
March 31, 1995
Amount $98,641 $113,895 $142,371 $140,475 $495,381 9.52%
Change -0.1% 11.1% -0.5% 1.3% 2.5% 0.26
June 30, 1995
Amount $97,480 $127,439 $142,413 $147,978 $515,311 9.60%
Change -1.2% 11.9% 0.0% 5.3% 4.0% 0.08
September 30, 1995
Amount $103,316 $132,509 $144,206 $164,960 $544,991 9.63%
Change 6.0% 11.5% 1.3% 11.5% 5.8% 0.03
December 31, 1995
Amount $104,317 $135,107 $146,561 $174,167 $560,152 9.65%
Change 1.0% 5.6% 1.6% 5.6% 2.8% 0.02
March 31, 1996
Amount $105,759 $138,821 $150,301 $181,614 $576,495 9.52%
Change 1.4% 2.7% 2.6% 4.3% 2.9% (0.13)
Change from
March 31, 1995 to
March 31, 1996
Amount $7,118 $24,926 $7,930 $41,140 $81,114 -0.00%
Change 7.2% 21.9% 5.6% 29.3% 16.4% N/A
Loan mix
March 31, 1995 to 19.9% 23.0% 28.7% 28.4% 100.0%
March 31, 1996 18.3% 24.1% 26.1% 31.5% 100.0%
Change -1.6% 1.1% -2.7% 3.1% ---
* May not foot due to rounding
</TABLE>
Included in loan growth over the past year is the favorable impact of the
Chase branch purchase, which initially contributed $12.8 million in largely
commercial loans. Since that time, loans at these branch locations have
increased by over 165% to $34.3 million. Without the impact of the new
Chase markets, loan growth would have been limited to 9.4% for the last
twelve months, indicating the strategically-important contribution of the
Chase branch purchase.
Over 50% of the bank's loan growth in the last twelve months came from the
generally prime-based business lending portfolio, which increased more than
29%. Just under a third of this growth came from commercial loans acquired
at acquisition of the 12 retained Chase branches.
More than 30% of the bank's loan growth in the last twelve months came from
the indirect lending portfolio (applications taken at dealer locations),
which grew 22%. This reflects good automobile demand industry-wide
(despite some slowing in recent quarters), as well as continued greater
emphasis on this product line in the bank's Southern Region.
The remaining growth over this period resulted from a 5.6% increase in
consumer mortgages and a 7.2% growth in consumer direct loans (applications
taken at branch locations).
Despite a 50 BP decrease in the average prime rate, the average loan yield
for the quarter just ended is unchanged from the same quarter a year ago.
This is attributable to significant growth in the higher yielding
commercial loans (although yields are lower than a year ago), a reduced mix
of mortgage loans, and mortgage and installment loan rates remaining
relatively stable.
The 13 basis point decrease in the loan yield since fourth quarter 1995 is
the result of the impact of 25 BP drops in the prime rate in both December
1995 and February 1996.
D. Deposits
The table below displays the components of total deposits including volume
and rate trends over the last five quarters.
<PAGE>
<TABLE>
For the Quarter Average Average Average Average Average Average
Ended: Demand Savings Money Time Total Deposits/
(000's) Market Deposits Earning
-------- -------- ------- -------- ------- Assets
Amount and Average Rate
-------- -------- ------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
March 31, 1995
Amount $102,850 $237,540 $66,035 $295,808 $702,233 80.0%
Yield / Rate ---- 2.63% 2.83% 5.33% 3.40%
June 30, 1995
Amount $104,882 $233,875 $63,308 $310,756 $712,820 78.8%
Yield / Rate ---- 2.68% 2.94% 5.58% 3.57%
September 30, 1995
Amount $142,413 $345,812 $79,542 $447,253 $1,015,020 96.0%
Yield / Rate ---- 2.68% 2.72% 5.55% 3.57%
4.16%
December 31, 1995
Amount $144,997 $363,553 $74,627 $465,560 $1,048,737 99.1%
Yield / Rate ---- 2.54% 2.62% 5.60% 3.55%
March 31, 1996
Amount $141,690 $347,589 $70,753 $475,561 $1,035,593 97.3%
Yield / Rate ---- 2.46% 2.48% 5.53% 3.53%
Change in quarterly average
outstandings & yield / rate
March 31, 1995
March 31, 1996
Amount $38,840 $110,048 $4,718 $179,754 $333,360 $0
% Change 37.8% 46.3% 7.1% 60.8% 47.5% 21.6%
Change (% pts) ---- -0.18 -0.35 0.20 0.13 0.00
Deposit Mix
March 31, 1995 to 14.6% 33.8% 9.4% 42.1% 100.0%
March 31, 1996 13.8% 34.7% 7.1% 44.4% 100.0%
Change -0.8% 0.8% -2.3% 2.3% ----
* May not foot due to rounding
</TABLE>
There was a 47.5% increase in average deposits from first quarter 1995 to
the quarter just ended . Of this growth, almost 54% was in time deposits
(up $180 million), with the remainder split between $39 million in demand
deposit growth and $110 million in savings growth. The major reason for
the total deposit increase was the $383 million in deposits from the 15
Chase branches acquired in third quarter 1995, less $43 million in deposits
sold to NBT Bank in mid-December.
Despite decreases from first quarter 1995 to first quarter 1996 in savings
and money market rates (average Fed Funds moved down 43 BP during this
period), the average deposit rate moved up 13 BP attributable to an
expanding mix of higher (and increased) cost time deposits.
E. Liquidity and Borrowing Position
The following table shows the trend of major earning assets and funding
sources over the last five quarters.
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
For the Quarter Average Average Ave Core Ave Average Interest
Ended: Loans Investments Deposits Municipal Capital Market Bearing
(000's) (a) (b) Deposits Borrowings Liabilities
------- -------- -------- -------- -------- ------
Amount and Average Yield / Rate
------- -------- -------- -------- -------- ------
March 31, 1995
Amount $488,436 $388,886 $581,033 $121,200 $153,625 $753,008
Yield / Rate 9.52% 7.64% 3.38% 3.51% 6.17% 4.43%
June 30, 1995
Amount $507,159 $397,319 $587,592 $125,228 $169,277 $777,216
Yield / Rate 9.60% 7.62% 3.55% 3.66% 6.26% 4.64%
September 30, 1995
Amount $532,156 $525,664 $892,283 $122,737 $29,002 $901,609
Yield / Rate 9.63% 7.21% 3.61% 3.30% 6.56% 4.23%
December 31, 1995
Amount $550,480 $508,031 $921,111 $127,626 $5,604 $909,344
Yield / Rate 9.65% 7.45% 3.60% 3.24% 5.39% 4.13%
March 31, 1996
Amount $569,267 $494,710 $884,358 $151,235 $26,143 $920,046
Yield / Rate 9.52% 7.57% 3.57% 3.29% 5.76% 4.14%
Change in quarterly average
outstandings & yield / rate
from March 31, 1995 to
March 31, 1996
Amount $80,831 $105,823 $303,326 $30,034 ($127,481) $167,038
% Change 16.5% 27.2% 52.2% 24.8% -83.0% 22.2%
Change (%pts) -0.00 -0.06 0.20 -0.22 -0.42 -0.29
</TABLE>
Note (a) Yield on average investments calculated on a full-tax
equivalent basis.
(b) Defined as total deposits minus municipal deposits; includes
CDs > $100,000 for individuals and businesses.
* May not foot due to rounding
Borrowings for first quarter 1996 averaged $26.1 million compared to
$153.6 million for first quarter 1995. This resulted from borrowings
being virtually paid off with the acquired Chase deposits and capital
issued from the end of June through mid-July 1995. Borrowing levels have
increased in the most recent quarter to fund investment opportunities
resulting from favorable market conditions.
F. Investments and Asset/Liability Management
The investment portfolio at quarter end comprised 46.6% of earning assets,
up from 43.9% on March 31, 1995, primarily due to the investment by
acquisition date of Chase deposits in excess of those required to paydown
capital market borrowings and fund the purchased loans. In addition,
following the reduction in money market investments associated with the
sale of deposits to NBT Bank, investments have increased through a
combination of floating and fixed rate investment purchases. As a result,
the investment portfolio has grown by $115.1 million or 29.7% during the
last twelve months.
As shown by the table below, the bank's investments consist primarily of
U.S. treasury securities, mortgage-backed securities (including U.S.
agencies and collateralized mortgage obligations), and tax-exempt
obligations of state and political subdivisions. As of the most recent
quarter end, 18.5% of the bank's entire portfolio was invested in
agency-guaranteed collateralized mortgage obligations (CMOs). The
portfolio does not contain any Principal Only (PO), Interest Only (IO), or
Inverse Floater Traunches.
<PAGE>
<TABLE>
Invests /
For the Quarter U.S. Mtg-Backs Tax Other Total Earning
Ended: Gov'ts (a) Exempts (b) Investments Assets
(000's) -------- -------- ------- ------- -------- -------
Amount and Change (Period
from Preceding Quarter End)
-------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
March 31, 1995
Amount $192,526 $162,408 $17,762 $14,482 $387,177 43.9%
Change 2.9% 4.5% -14.5% -5.2% 2.3% (0.1)
June 30, 1995
Amount $212,508 $177,284 $16,727 $20,675 $427,195 45.3%
Change 10.4% 9.2% -5.8% 42.8% 10.3% 1.5
September 30, 1995
Amount $245,087 $200,471 $15,636 $68,076 $529,270 49.3%
Change 15.3% 13.1% -6.5% 229.3% 23.9% 3.9
December 31, 1995
Amount $235,497 $195,189 $15,868 $27,478 $474,032 45.8%
Change -3.9% -2.6% 1.5% -59.6% -10.4% (3.4)
March 31, 1996
Amount $249,875 $214,250 $16,664 $21,479 $502,267 46.6%
Change 6.1% 9.8% 5.0% -21.8% 6.0% 0.7
Change from
March 31, 1995 to
March 31, 1996
Amount $57,349 $51,842 ($1,098) $6,997 $115,089 2.7%
Change 29.8% 31.9% -6.2% 48.3% 29.7% ---
Investment Mix
March 31, 1995 49.7% 41.9% 4.6% 3.7% 100.0%
March 31, 1996 49.7% 42.7% 3.3% 4.3% 100.0%
Change 0.0% 0.7% -1.3% 0.5% ---
Note: (a) Includes CMO's and pass throughs
(b) Includes Money Market Investments, Federal Home Loan Bank, and other stock
</TABLE>
* May not foot due to rounding
The average fully taxable equivalent yield in the last year has remained
relatively stable, decreasing only 7 basis points to 7.57% on average for
first quarter 1996 versus first quarter 1995; this limited reduction was
achieved despite falling market rates in the third and fourth quarters of
1995 and much of the first quarter of 1996. The favorable 12 basis point
movement in the portfolio rate compared to fourth quarter 1995 is the
result of increasing market rates toward the end of the quarter, which
allowed the bank to replace lower yielding fed funds sold and maturing
investments with higher yielding securities; in addition, a $221,000 bond
discount was taken into income as a result of a security being called.
The portfolio market value increased slightly from 100.5% of book value one
year ago to 102.1% of book value as of March 31, 1996.
The average portfolio life based on earliest redemption date increased from
3.9 years on March 31, 1995 to 5.2 years on March 31, 1996, attributable to
buying selected longer term floating rate investments (move with 1 month
LIBOR and 3 month T-Bill) structured to minimize interest rate risk.
As of the most recent quarter end, 31.8% of the investment portfolio was
classified as available-for-sale (AFS) in accordance with SFAS No. 115 with
the remainder (68.2%) as held-to-maturity. The pretax market value
adjustment of the AFS portfolio was a favorable $1.1 million as compared to
($1.9) million a year earlier.
<PAGE>
G. Subsequent Events
On April 29, 1996, Community Bank System, Inc. (CBSI) and Benefit Plans
Administrators (BPA), an independent third party administrator of defined
benefit and defined contribution plans located in Utica, NY, announced
that they signed a definitive agreement under which BPA would be a
wholly-owned subsidiary of CBSI. BPA's revenues for its most recent fiscal
year end were $1.3 million.
Part II. Other Information
Item 1. Legal Proceedings.
Not Applicable
Item 2. Changes in Securities.
Not Applicable
Item 3. Defaults Upon Senior Securities.
Not Applicable.
Item 4. Submission of Matters to a Vote of Securities Holders.
Not Applicable.
Item 5. Other Information.
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits required by Item 601 of Regulation S-K:
(11) Statement re Computation of earnings per share
(21) 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) No reports on Form 8-K were filed during first quarter 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of The Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Community Bank System, Inc.
Date: May 14, 1996 /s/ Sanford A. Belden
Sanford A. Belden, President
and Chief Executive Officer
Date: May 14, 1996 /s/ David G. Wallace
David G. Wallace, Senior Vice President
and Chief Financial Officer
<PAGE>
Community Bank System, Inc.
Statement re Earnings Per Share Computation
Exhibit 11
Three Months Ended
March 31,
1996 1995
Primary Earnings Per Share
Net Income 3,138,145 2,751,518
Less: Accrued Preferred
Stock Dividend -101,250 0
------------- -------------
Income applicable
to common stock 3,036,895 2,751,518
========= =========
Weighted average number
of common shares 3,681,967 2,788,150
Add: Shares issuable from
assumed exercise of
incentive stock options 30,192 27,227
------------- -------------
Weighted average number of
common shares - adjusted 3,712,159 2,751,518
========== ===========
Primary earnings per share $0.82 $0.98
========== ===========
Fully Diluted Earnings Per Share
Net Income 3,036,895 2,751,518
========== ===========
Weighted average number of
common shares - adjusted 3,712,159 2,818,963
Add: Equivalent number of
common shares assuming
conversion of preferred
---------- -----------
Weighted average number of
common shares - adjusted 3,712,159 2,818,963
========== ===========
Fully diluted earnings
per share $0.82 $0.98
========== ===========
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 69,022
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 159,706
<INVESTMENTS-CARRYING> 342,542
<INVESTMENTS-MARKET> 351,244
<LOANS> 576,495
<ALLOWANCE> 7,186
<TOTAL-ASSETS> 1,208,127
<DEPOSITS> 1,059,508
<SHORT-TERM> 10,000
<LIABILITIES-OTHER> 11,581
<LONG-TERM> 25,550
0
4,500
<COMMON> 4,603
<OTHER-SE> 92,385
<TOTAL-LIABILITIES-AND-EQUITY> 1,208,127
<INTEREST-LOAN> 13,480
<INTEREST-INVEST> 8,873
<INTEREST-OTHER> 323
<INTEREST-TOTAL> 22,676
<INTEREST-DEPOSIT> 9,097
<INTEREST-EXPENSE> 9,471
<INTEREST-INCOME-NET> 13,205
<LOAN-LOSSES> 588
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,252
<INCOME-PRETAX> 5,318
<INCOME-PRE-EXTRAORDINARY> 5,318
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,138
<EPS-PRIMARY> 0.82
<EPS-DILUTED> 0.82
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
