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 September 30, 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 -- 3,725,203 shares as of November 13, 1996.
<PAGE>
INDEX
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
Part I. Information
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets --
September 30, 1996, December 31, 1995 and September 30, 1995
Consolidated statements of income --
Three months ended September 30, 1996 and 1995 and nine months
ended September 30, 1996 and 1995
Consolidated statements of cash flows --
Nine months ended September 30, 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>
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1996 1995 1995
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 52,588,513 $ 56,903,103 $ 46,932,326
Federal funds sold 0 6,000,000 47,400,000
--------------- --------------- ---------------
TOTAL CASH AND CASH EQUIVALENTS 52,588,513 62,903,103 94,332,326
Investment securities
U.S. Treasury 2,987,989 8,524,661 8,539,080
U.S. Government agencies and corporations 296,697,193 226,972,372 236,548,042
States and political subdivisions 19,396,053 15,868,356 15,636,238
Mortgage-backed securities 257,761,480 195,188,655 200,470,937
Other securities 17,317,833 20,081,918 20,106,091
Federal Reserve Bank 1,395,750 1,395,750 569,600
--------------- --------------- ---------------
TOTAL INVESTMENT SECURITIES 595,556,298 468,031,712 481,869,988
Loans 633,915,849 573,620,687 561,310,415
Less: Unearned discount 7,223,139 13,469,032 16,319,521
Reserve for possible loan losses 7,805,234 6,976,385 6,791,385
--------------- --------------- ---------------
NET LOANS 618,887,476 553,175,270 538,199,509
Bank premises and equipment 16,665,612 16,935,856 17,147,617
Accrued interest receivable 12,248,114 9,150,503 9,896,240
Intangible assets 31,922,060 33,970,375 37,663,096
Other assets 9,553,442 7,878,194 7,806,111
--------------- --------------- ---------------
TOTAL ASSETS $ 1,337,421,515 $ 1,152,045,013 $ 1,186,914,887
=============== =============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing $ 144,508,906 $ 140,288,323 $ 149,984,614
Interest bearing 893,718,280 876,657,901 922,722,341
--------------- --------------- ---------------
TOTAL DEPOSITS 1,038,227,186 1,016,946,224 1,072,706,955
Federal funds purchased and securities sold under
agreements to repurchase 40,850,000 0 0
Term borrowings 140,000,000 25,550,000 550,000
Accrued interest and other liabilities 12,480,126 9,488,540 12,186,796
--------------- --------------- ---------------
TOTAL LIABILITIES 1,231,557,312 1,051,984,764 1,085,443,751
Shareholders' equity
Preferred stock $100 stated value 4,500,000 4,500,000 9,000,000
Common stock $1.25 par value 4,656,504 4,599,531 4,593,031
Surplus 33,215,104 32,955,273 32,740,106
Undivided profits 63,358,427 57,079,501 55,227,384
Unrealized gains (losses) on available for
sale securities 194,198 977,457 38,105
Shares issued under employee stock plan - unearned (60,030) (51,513) (127,490)
--------------- --------------- ---------------
TOTAL SHAREHOLDERS' EQUITY 105,864,203 100,060,249 101,471,136
--------------- --------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,337,421,515 $ 1,152,045,013 $ 1,186,914,887
=============== =============== ===============
</TABLE>
See notes to consolidated financial statements
<PAGE>
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
<S> <C> <C> <C> <C>
INTEREST INCOME 1996 1995 1996 1995
Interest and fees on loans $14,396,967 $12,921,662 $41,711,487 $ 36,531,460
Interest and dividends on
investments:
U.S Treasury 109,606 232,928 425,231 831,450
U.S. Government agencies
and corporations 5,838,472 4,207,083 15,586,936 11,168,627
States and
political subdivisions 255,053 248,350 749,586 828,401
Mortgage-backed securities 4,116,944 3,528,308 11,563,405 9,490,387
Other securities 651,984 318,056 1,337,820 789,105
Interest on federal funds sold 751 897,271 335,470 930,048
Interest on deposits at
other banks 0 0 0 0
----------- ----------- ----------- ------------
25,369,777 22,353,658 71,709,935 60,569,478
INTEREST EXPENSE
Interest on deposits
Savings 2,518,117 2,882,700 7,562,088 6,910,453
Time 6,488,619 6,257,370 19,582,989 14,469,132
Interest on federal funds
purchased, securities
sold under agreements to
repurchase and Term
borrowings 2,125,367 479,771 3,532,057 5,458,707
----------- ----------- ----------- ------------
11,132,103 9,619,841 30,677,134 26,838,292
----------- ----------- ----------- ------------
NET INTEREST INCOME 14,237,674 12,733,817 41,032,801 33,731,186
Provision for possible
loan losses 630,000 275,217 1,827,068 1,128,657
----------- ----------- ----------- ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 13,607,674 12,458,600 39,205,733 32,602,529
OTHER INCOME
Fiduciary services 306,628 336,024 1,103,924 1,023,130
Service charges on deposit
accounts 1,042,093 961,083 3,034,871 2,326,488
Commissions on investment
products 194,033 90,720 568,436 343,355
Other service charges,
commissions and fees 491,224 412,784 1,263,947 918,229
Other income 405,569 7,938 422,688 118,464
Investment security
gain (loss) 0 0 0 (149,750)
----------- ----------- ----------- ------------
2,439,547 1,808,549 6,393,866 4,579,916
----------- ----------- ----------- ------------
OTHER EXPENSES 16,047,221 14,267,149 45,599,599 37,182,445
Salaries, wages and
employee benefits 4,956,317 4,561,056 14,339,753 11,872,247
Occupancy expense of bank
premises, net 746,234 707,945 2,290,823 1,806,139
Equipment and
furniture expense 585,552 513,603 1,726,708 1,393,510
Amortization of
intangible assets 707,280 710,145 2,143,777 950,698
Other 2,663,604 2,735,890 7,468,485 7,360,833
----------- ----------- ----------- ------------
9,658,987 9,228,639 27,969,546 23,383,427
----------- ----------- ----------- ------------
INCOME BEFORE INCOME TAXES 6,388,234 5,038,510 17,630,053 13,799,018
Income taxes 2,596,000 2,008,000 7,175,000 5,446,000
----------- ----------- ----------- ------------
NET INCOME $ 3,792,234 $ 3,030,510 $10,455,053 $ 8,353,018
=========== =========== =========== ============
Earnings per common share $ 0.99 $ 0.77 $ 2.72 $ 2.62
=========== =========== =========== ============
</TABLE>
See notes to consolidated financial statements
<PAGE>
COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For Nine Months Ended September 30, 1996 and 1995
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
1996 1995
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities:
Net income $ 10,455,053 $ 8,353,018
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 2,210,108 1,135,329
Net amortization of intangible assets 2,083,653 889,971
Net accretion of security premiums and discounts (1,565,635) (1,020,668)
Provision for loan losses 1,827,068 1,128,657
Provision for deferred taxes 190,586
7,149
(Gain)\Loss on sale of investment securities 0 149,750
(Gain)\Loss on sale of loans (48,136) (89,967)
(Gain)\Loss on sale of assets (11,822) (28,497)
Change in interest receivable (3,097,611) (3,238,914)
Change in other assets and other liabilities 1,837,258 1,822,658
Change in unearned loan fees and costs (598,782) (80,924)
- - -----------------------------------------------------------------------------------------------------
Net Cash Provided By Operating Activities 13,098,303 9,210,999
- - -----------------------------------------------------------------------------------------------------
Investing Activities:
Proceeds from sales of investment securities 2,766,400 3,950,250
Proceeds from maturities of held to maturity
investment securities 52,039,664 19,245,333
Proceeds from maturities of available for sale
investment securities 24,569,334 27,418,674
Purchases of held to maturity investment securities (129,033,626) (96,174,839)
Purchases of available for sale investment securities (77,634,810) (53,591,493)
Net change in loans outstanding (66,892,356) (62,360,975)
Capital expenditures (1,933,822) (7,662,939)
Premium paid for branch acquisitions (29,558) (32,446,459)
- - -----------------------------------------------------------------------------------------------------
Net Cash Used By Investing Activities (196,148,774) (201,622,448)
- - -----------------------------------------------------------------------------------------------------
Financing Activities:
Net change in demand deposits,
NOW accounts, and savings accounts (447,759) 191,240,040
Net change in certificates of deposit 21,728,721 201,829,291
Net change in term borrowings 155,300,000 (162,300,000)
Issuance (retirement) of common and preferred stock 204,391 27,962,850
Cash dividends (4,049,472) (2,510,595)
- - -----------------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 172,735,881 256,221,586
- - -----------------------------------------------------------------------------------------------------
Change In Cash And Cash Equivalents (10,314,590) 63,810,137
Cash and cash equivalents at beginning of year 62,903,103 30,522,189
- - -----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 52,588,513 94,332,326
=====================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid For Interest $ 27,859,125 $ 22,543,115
=====================================================================================================
Cash Paid For Income Taxes $ 7,182,149 $ 5,353,452
=====================================================================================================
SUPPLEMENTAL DISCLOSURE OF NONCASH AND OTHER
INVESTING ACTIVITIES:
Dividends declared and unpaid $ 1,340,798 $ 1,102,297
=====================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Community Bank System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
September 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 nine month period ended September 30,
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
nine months ended September 30, 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 June 30,
1996 as provided by the Federal Reserve System; the peer group is comprised of
114 bank holding companies having $1 to $3 billion in assets.
<PAGE>
I. EARNINGS PERFORMANCE SUMMARY
<TABLE>
<CAPTION>
Three Months Ended Change
9/30/96 9/30/95 Amount Percent
(000's)
<S> <C> <C> <C> <C>
Net Income $3,792 $3,031 $762 25.1%
Earnings per share $0.99 $0.77 $0.22 28.6%
Weighted average
shares outstanding 3,724 3,687 37 1.0%
Return on average assets 1.17% 1.04% 0.13% N/A
Average assets $1,288,949 $1,155,716 $133,233 11.5%
Return on average
shareholders' equity 14.70% 12.47% 2.23% N/A
Average shareholders' equity $104,362 $98,947 $5,414 5.5%
Percentage of average shareholders'
equity to average assets 8.10% 8.56% -0.46% N/A
</TABLE>
* May not foot due to rounding
A. Net Income Trend
Net income and earnings per share reached record highs in the third quarter
of 1996 at $3.792 million and $.99, respectively. Compared to third quarter
1995, net income rose 25% while earnings per share were up 29%. For the first
nine months of the year, net income was $10.455 million, 25% higher than in
1995, while earnings per share rose 3.8% to $2.72, reflecting 20% more shares
outstanding due to last year's common stock issuance. The .$99 per share
compares favorably to $.92 per share in the second quarter and $ .82 per share
in the first quarter of this year.
This achievement also reflects elimination of the short-term earnings per
share dilution caused by the company's mid-1995 purchase of 15 branches from The
Chase Manhattan Bank, N.A. and related $27.5 million capital raising. In
addition, tangible book value per share has accelerated nicely to $18.64, up 25%
from the September 30, 1995 level of $14.92.
Steady improvement since last year's branch acquisition resulted in return
on shareholder equity reaching 14.70% for the quarter just ended. Tangible
return on tangible equity, which a growing number of bank analysts and investors
consider to be a better measure of a company's core profitability and value
being created for shareholders, increased to 24.21%. While third quarter results
have not yet been released for the 28 bank regional peer group against which we
regularly compare performance, our tangible return on tangible equity was the
highest for this group in the second quarter of this year.
<PAGE>
B. Balance Sheet Trends
Loans outstanding increased 4.5% during the quarter, up from 4.0% and 2.9%
growth during the second and first quarters of 1996, respectively. Over the last
twelve months, loans have risen by 15%, marking consistent progress toward a
fourth consecutive year in which loan growth has exceeded 15%. More than 40% of
the $82 million in loan growth originated in the markets served by the former
Chase branches; excluding their impact, loans would have risen by 8.7%,
highlighting the strategic contribution of the new branches to CBSI's success.
The primary components of the $66.5 million increase in loans since year
end 1995 are the bank's business lending products (up $22.0 million); indirect
consumer loans (up $24.9 million), predominantly reflecting automobile financing
through an established dealer network; and consumer mortgages (up $14.8 million,
net of $5.6 million in originations sold service-retained in the secondary
market). Increases continue to be modest in the consumer direct loan product
line (up $4.8 million, including variable-rate home equity products). The
portfolio contains no credit card receivables.
Investments totaled $595.3 million for the quarter just ended, up $20.8
million (3.6%) from June 30, 1996. The second quarter increase is attributable
to favorable buying opportunities funded by capital market borrowings. Since
September 30, 1995, there has been $66.0 million (12.5%) in investment growth.
Total deposits have increased 1.6% since June 30, 1996 to $1.04 billion,
largely the result of seasonal inflows of municipal deposits in September
compared to a low period for municipal deposits in June, caused in part by New
York State budget delays . During the last twelve months, total deposits have
fallen $34.5 million or 3.2%, reflecting the sale in December 1995 of three of
the original 15 Chase branches with $43 million in deposits.
C. Income Statement Trends
Third quarter tax equivalent net interest income rose 11.8% or $1.5 million
versus the same period last year. The improvement reflects average earning asset
growth of $128 million, 38% of which resulted from an expansion of the company's
investment portfolio largely during the second quarter of this year when
financial market rates were attractive. Continued steady loan growth throughout
the last twelve months along with CBSI's targeted investment strategy was funded
by greater borrowings, almost 55% or $100 million at original terms of one year
or more as of quarter end. The net interest margin for the quarter was unchanged
from a year earlier at 4.82%. Ten basis points of the current margin reflects a
one-time accounting change that the company had the flexibility to adopt
coincident with its share ($263,000) of the one-time assessment signed into law
on September 30 to rebuild the SAIF deposit insurance fund.
Compared to second quarter 1996, tax equivalent net interest income
increased $656,000. Average earning assets climbed almost $62 million, about a
third of which reflected investment portfolio growth. The net interest margin
narrowed by 9 basis points. This was caused by a higher cost of funds resulting
from an increased share of longer term borrowings offset by a slightly higher
earning asset yield resulting from the one-time accounting change discusses
above.
Noninterest income in third quarter 1996 climbed 35% over the same period
last year. More than half the growth reflects the contribution of CBSI's
acquisition earlier in the quarter of Benefit Plans Administrative Services,
Inc. (BPA), a pension administration and consulting firm located in Utica, NY.
The balance of the improvement, which represents a 14.8% increase versus third
quarter 1995, largely reflects higher fees from the sale of annuities and mutual
funds, increased Visa merchant and debit card fees, and greater overdraft fees,
service charges and commissions from an expanded customer base gained from last
year's Chase branch purchase. For the first nine months of this year,
noninterest income rose 35% versus the comparable 1995 period (excluding net
securities losses in second quarter 1995).
<PAGE>
Overhead was up 4.7% this quarter compared to the third quarter in 1995.
Both periods contain certain nonrecurring expense items. Excluding this
quarter's impact of the SAIF insurance assessment and added overhead of the BPA
acquisition and last year's impact of one-time expenses related to the Chase
branch acquisition, overhead increased by 6.3 %. The bulk of the addition
reflects higher benefit and incentive expenses as well as a full quarter's
impact of a variety of occupancy, equipment, and processing costs associated
with the new branches. Compared to second quarter 1996, overhead rose .5%,
excluding the SAIF assessment and BPA acquisition. For the first nine months of
this year, overhead rose 19.6%; 1996 contains the full impact of the Chase and
BPA acquisitions while 1995 reflects only a partial quarter's impact of the new
branches. When non interest expense is expressed as a percentage of assets, the
bank is in the favorable 41st peer percentile.
The company's efficiency ratio (overhead compared to recurring operating
income) improved from the third quarter 1995 level by 5.5 percentage points to
57.5%. This performance compares positively to the national peer bank median of
59.8% based on data available through June 30, 1996. The ratio is now better
than the level prior to the Chase transaction, and excluding the amortization of
intangibles, is an even more meaningful 5.0% lower at 53.3%. This improvement
reflects continued focus on strict expense control as well as leveraging CBSI's
capital through the Chase branch acquisition and subsequent selected capital
market borrowing.
Primarily as a result of higher pretax income, YTD 1996 income taxes
increased by $1.7 million 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).
D. Asset Quality Trend
Asset quality remains good at the company. Net charge-offs for the third
quarter were .19% of average loans, slightly more than for the comparable
quarter last year but lower than in each of the subsequent quarters.
Nonperforming loans continue to be monitored closely and managed conservatively,
ending the quarter at $3.2 million, up $1.4 million over the September 30, 1995
level. As a result, the ratio of nonperforming loans to loans outstanding has
risen 18 basis points since then to .51% at quarter end, still only about half
the national peer bank median of 1.02% at June 30, 1996. This increase was
largely due to higher but manageable levels of nonaccruing commercial loans and
90-day real estate and installment loan delinquencies. Total delinquencies and
nonaccruals were 1.31% of total loans at quarter end, well within the company's
internal guideline of 2.0%.
Third quarter loan loss provision expense was about 1.3 times greater than
for the same period last year. Coverage of net charge-offs improved to 214%,
consistent with CBSI's strong loan growth so that the ratio of loan loss
reserves to loans outstanding was maintained at 1.25%. Coverage of the reserve
over nonperformers is considered strong by management at 2.4 times, which
compares favorably to the national peer bank norm of 2.1 times as of June 30,
1996. Over 12% of the reserve is available for absorbing general, unforeseen
loan losses after allocation by specific customer and loan type.
<PAGE>
E. Capital and Other Trends
As of September 30, 1996, the tier I leverage ratio was 5.65% versus 5.55%
twelve months earlier. The increase in the ratio is attributable to favorable
earnings during the last 12 months and scheduled amortization of intangible
assets, partially offset by the continued strategy to leverage the balance sheet
when favorable investment opportunities present themselves. The present ratio
also includes the impact of redeeming (in 1995) 45,000 shares ($4.5 million) in
preferred stock. The ratio is still well above the 5% minimum required to be a
"well-capitalized" bank as defined by the FDIC. Compared to second quarter 1996,
the ratio remained unchanged due to strong investment growth funded with capital
market borrowings being fully offset by earnings and intangible amortization.
As a result of the aforementioned reasons, the tier I risk-based capital
ratio as of September 30, 1996 was 10.57%, or 16 basis points higher than it was
as of September 30, 1995. This compares to a 6% "well-capitalized" regulatory
minimum.
Book value per share increased 8.1% from September 30, 1995 to $27.21 as of
the of the most recent quarter end, while tangible book value per share (which
additionally reflects intangible amortization) has risen nicely to $18.64, up
25.0% over the same period.
<PAGE>
The bank's liquidity level is very favorable as of September 30, 1996. In
the event of a liquidity crisis, over $230 million (essentially short term
assets minus short term liabilities) or 17.1% of assets could be converted into
cash within a 30-day time period. Over a 90 day time period, 16.1% 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 $3.2 million during the
quarter to $52.6 million as of September 30, 1996, a level $41.7 million lower
than one year earlier. Net cash provided by operating activities was $13.1
million reflecting favorable earnings. Financing activities provided cash of
$172.7 million. Investing activities utilized $196.1 million.
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
and earning asset levels.
On a tax-equivalent basis, net interest income for third quarter 1996
increased $1.5 million (11.7%) over the same 1995 period to $14.4 million. This
reflects a $128.09 million (12.1%) increase in average earning assets with $80
million in loan growth and $48 million in investment growth. The net interest
margin was unchanged from a year earlier largely due to the 12 BP higher cost of
funds resulting from the increased mix of longer term borrowings being fully
offset by higher earning asset yields largely due to the aforementioned one-time
accounting change.
Compared to second quarter 1996, there was a $656,000 increase in net
interest income. The change is attributable to earning asset growth, partially
offset by a 9 BP lower net interest margin.
<PAGE>
The table below shows these underlying dynamics.
<TABLE>
<CAPTION>
For the Quarter Net Net Yield on Cost Average
Ended: Interest Interest Earning of Earning
(000's) Income Margin Assets Funds Assets
(b)
---------------------------------------------------------
Amount and Change from Preceeding Quarter
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
September 30, 1995
Amount $12,849 4.82% 8.43% 3.66% $1,057,820
Change $2,150 0.07% -0.30% -0.43% 17.0%
December 31, 1995
Amount $13,467 5.05% 8.60% 3.56% $1,058,510
Change $618 0.23% 0.17% -0.09% 0.1%
March 31, 1996
Amount $13,325 5.04% 8.62% 3.59% $1,063,977
Change ($142) -0.01% 0.02% 0.02% 0.5%
June 30, 1996
Amount $13,698 4.90% 8.51% 3.64% $1,124,059
Change $373 -0.14% -0.11% 0.05% 5.6%
September 30, 1996
Amount $14,355 4.82% 8.55% 3.78% $1,185,913
Change $656 -0.09% 0.04% 0.14% 5.5%
Change from
September 30, 1995 to
September 30, 1996
Amount $1,506 0.00% 0.12% 0.12% $128,093 $0
% Change 11.7% --- --- --- 12.1% ---
</TABLE>
Note: (a) All net interest income, margin, and earning asset yield figures are
full-tax equivalent.
(b) Interest expense divided by total deposits and borrowed funds.
* May not foot due to rounding
Despite the high proportion of (89th peer percentile) of the bank's assets being
in investments (whose yields are relatively low compared to loans), the net
interest margin is in the favorable 66th peer percentile as of June 30, 1996.
This is attributable to high earning asset yields being in the favorable 71st
percentile and a low cost of funds being in the 40th percentile.
<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>
<CAPTION>
For the Quarter Market Market Market # of Cash Share
Ended: Price Price Price Shares Dividend Volume
High Low Close Outstanding Declared Traded
------------------------------------------------------------------------------------
Amount and Change from Preceeding Quarter
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
September 30, 1995
Amount $36.75 $25.25 $33.75 3,674,325 $0.30 2,664,957
Change 26.7% 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 -6.8% 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%
June 30, 1996
Amount $32.50 $30.75 $31.13 3,682,315 $0.33 447,194
Change -0.8% 1.7% 0.4% 0.0% 0.0% 41.4%
September 30, 1996
Amount $35.50 $34.00 $34.25 3,725,203 $0.36 445,958
Change 9.2% 10.6% 10.0% 1.2% 9.1% -0.3%
Change from
September 30, 1995 to
September 30, 1996
Amount ($1.25) $8.75 $0.50 50,878 $0.06 (2,218,999)
% Change -3.4% 34.7% 1.5% 1.4% 20.0% -83.3%
</TABLE>
CBSI's stock closed third quarter 1996 at $34.25, up 1.5% from one year
earlier when it closed at $33.75. The volume of shares traded at 445,958 was 83%
less than during third quarter 1995, when trading was unusually high related to
market speculation regarding the Chase transaction.
The cash dividend shown above reflects a 3 cent (9%) per share increase in
the quarterly dividend per common share that was effective in third quarter
1996, as well as a 3 cent increase effective in the fourth quarter of last year.
This most recent increase was the sixth dividend increase within five years. The
1996 common dividend payout of 36.1% has increased from the same 1995 period but
remains within the company's targeted 30-40% guideline.
<PAGE>
C. Loans
Loans outstanding, net of unearned discount, reached a record $626.7
million as of September 30, 1996, a very favorable $ 81.7 million (15.0%) growth
in the last twelve months. Outstandings have now climbed for eighteen
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.
<TABLE>
<CAPTION>
For the Quarter Consumer Consumer Consumer Business Total Yield on
Ended: Direct Indirect Mortgages Lending Loans Loans
(000's)
---------------------------------------------------------------------------------------------
Amount and Change from Preceeding Quarter Quarterly Average
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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)
June 30, 1996
Amount $105,895 $149,197 $155,579 $188,868 $599,538 9.44%
Change 0.1% 7.5% 3.5% 4.0% 4.0% (0.08)
September 30, 1996
Amount $109,137 $159,996 $161,388 $196,171 $626,693 9.36%
Change 3.1% 7.2% 3.7% 3.9% 4.5% (0.08)
Change from
September 30, 1995 to
September 30, 1996
Amount $5,821 $27,487 $17,181 $31,212 $81,702 -0.27%
Change 5.6% 20.7% 11.9% 18.9% 15.0% N/A
Loan mix
September 30, 1995 to 19.0% 24.3% 26.5% 30.3% 100.0%
September 30, 1996 17.4% 25.5% 25.8% 31.3% 100.0%
Change -1.5% 1.2% -0.7% 1.0% ---
</TABLE>
* May not foot due to rounding
Since the Chase acquisition, loans at the remaining 12 branch locations have
increased by over 3.2 times to $52.7 million.
Almost 40% of the bank's loan growth in the last twelve months came from
the generally prime-based business lending portfolio, which increased 18.9%
reflecting strong business development efforts.
<PAGE>
More than a third of the bank's loan growth in the last twelve months came
from the indirect lending portfolio (applications taken at dealer locations),
which grew 20.7%. This reflects good automobile demand industry-wide, 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 11.9% increase in
consumer mortgages and an 5.6% growth in consumer direct loans (applications
taken at branch locations).
Due, in part, to an over a 50 BP decrease in the average prime rate, the
average loan yield for the quarter just ended is 27 BP lower than the same
quarter a year ago.
<PAGE>
D. Asset Quality
The following table reflects the detail of non-performing and restructured loan
levels. The ratio of non-performing assets to total assets was .29% as of
September 30, 1996, up 10 basis points from a year ago. There is no troubled
debt restructuring. OREO for all periods is recorded at the lower of cost or
market less estimated cost to sell. The ratio of nonperforming assets to loans
plus OREO at .62% remains better than the company's internal goal of less than
.75%. Non-performing assets were up $677,000 or 49.8%. Over half of this
increase was caused by one large mortgage loan whose condition is being
monitored closely.
3 Months 3 Months 12 Months
(000's or % Ratios) September 30, September 30, Dec 31,
1996 1995 1995
Loans accounted for on a $2,036 $1,359 $1,328
non-accrual basis
Accruing loans which are
contractually past due
90 days or more as to
principal and interest
payments $1,176 $ 460 $ 667
Loans which are "troubled
debt restructurings" as
defined in Statement of
Financial Accounting
Standards No. 15
"Accounting by Debtors
and Creditors for
Troubled Debt
Restructurings $ 0 $ 0 $ 0
Other Real Estate (OREO) $ 693 $ 443 $ 614
Total Non-Performing Assets $3,905 $2,262 $2,609
Total Non-Performing Assets/ 0.29% 0.19% 0.23%
Total Assets
Total Non-Performing Assets/ 0.62% 0.41% 0.47%
Total Loans & OREO
Loan Loss Allowance / 200% 300% 267%
Non-Performing Assets
* May not foot due to rounding
<PAGE>
E. Deposits
The table below displays the components of total deposits including volume
and rate trends over the last five quarters.
<TABLE>
<CAPTION>
For the Quarter Average Average Average Average Average Average
Ended: Demand Savings Money Time Total Deposits/
(000's) Market Deposits Earning
Assets
-----------------------------------------------------------------------------------
Amount and Average Rate
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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%
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%
June 30, 1996
Amount $143,227 $347,462 $63,224 $485,358 $1,039,270 92.5%
Yield / Rate ---- 2.43% 2.46% 5.43% 3.50%
September 30, 1996
Amount $144,692 $341,349 $67,941 $472,739 $1,026,721 86.6%
Yield / Rate ---- 2.44% 2.48% 5.46% 3.49%
Change in quarterly
average outstandings
& yield / rate
September 30, 1995 to
September 30, 1996
Amount $2,278 ($4,463) ($11,602) $25,487 $11,701 ($0)
% Change 1.6% -1.3% -14.6% 5.7% 1.2% -9.8%
Change (% pts) ---- -0.24 -0.24 -0.09 -0.08 0.00
Deposit Mix
September 30, 1995 to 14.0% 34.1% 7.8% 44.1% 100.0%
September 30, 1996 14.1% 33.2% 6.6% 46.0% 100.0%
Change 0.1% -0.8% -1.2% 2.0% ----
</TABLE>
* May not foot due to rounding
<PAGE>
There was a 1.2% increase in average deposits from third quarter 1995 to
the quarter just ended. This was made up of $25.5 million or 5.7% growth in time
deposits and $2.3 million or 1.6% growth in average demand deposits. This was
offset by declines in savings and money market accounts of $4.5 million (-1.3%)
and $11.6 million (-14.6%), respectively. This increase in average total
deposits comes despite the sale of three branches with $43 million in deposits
in December of 1995 to NBT bank.
<PAGE>
Despite average Fed Funds moving down 50 BP during this period and material
interest rate decreases from third quarter 1995 to third quarter 1996 in all
individual deposit categories, the average total deposit rate moved down only 8
BP attributable to an expanding mix of higher cost time deposits. This higher
mix reflects the strategy to attract additional time deposits competitively
priced with capital market borrowings.
F. Liquidity and Borrowing Position
The following table shows the trend of major earning assets and funding
sources over the last five quarters.
<TABLE>
<CAPTION>
For the Quarter Average Average Ave Core Average Average Average
Ended: Loans Investments Deposits Municipal Capital Market Interest
(000's) (a) (b) Deposits Borrowings Bearing
Liabilities
-------------------------------------------------------------------------------------------------
Amount and Average Yield / Rate
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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%
June 30, 1996
Amount $589,407 $534,653 $893,135 $146,136 $73,858 $969,902
Yield / Rate 9.44% 7.48% 3.52% 3.39% 5.62% 4.18%
September 30, 1996
Amount $611,922 $573,991 $900,950 $125,771 $144,987 $1,027,016
Yield / Rate 9.36% 7.69% 3.54% 3.14% 5.83% 4.31%
Change in quarterly
average outstandings
& yield / rate from
September 30, 1995
to September 30, 1996
Amount $79,766 $48,327 $8,667 $3,034 $115,985 $125,407
% Change 15.0% 9.2% 1.0% 2.5% 399.9% 13.9%
Change (%pts) -0.27 0.48 -0.07 -0.16 -0.73 0.08
</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 third quarter 1996 averaged $144.9 million compared to $29.0
million for third quarter 1995. This increase resulted from borrowings being
virtually paid off with the acquired Chase deposits and capital issued from the
end of June through mid-
<PAGE>
July 1995. Borrowing levels have increased to fund investment opportunities
resulting from favorable market conditions. Average loans grew $79.8 million
(15%) in the last year while average investments grew $48.3 million or 9.2%, the
combined increase funded almost entirely with the aforementioned capital market
borrowings.
G. Investments and Asset/Liability Management
The investment portfolio at quarter end comprised 48.7% of earning assets,
down from 49.3% on September 30, 1995, increasing through a combination of
floating and fixed rate investment purchases. As a result, the investment
portfolio has grown by $66.0 million or 12.5% 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, 19.9% 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.
<TABLE>
<CAPTION>
For the Quarter U.S. Mtg-Backs Tax Other Total Invests /
Ended: Gov'ts (a) Exempts (b) Investments Earning
(000's) (c) Assets
at
-----------------------------------------------------------------------------------
Period
Amount and Change from Preceding Quarter End
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
September 30, 1995
Amount $244,887 $200,644 $15,609 $68,065 $529,205 49.3%
Change 15.4% 13.0% -6.5% 229.4% 23.9% 3.9
December 31, 1995
Amount $235,137 $193,919 $15,844 $27,467 $472,367 45.8%
Change -4.0% -3.4% 1.5% -59.6% -10.7% (3.4)
March 31, 1996
Amount $250,033 $213,031 $16,642 $21,468 $501,174 46.6%
Change 6.3% 9.9% 5.0% -21.8% 6.1% 0.7
June 30, 1996
Amount $308,641 $228,843 $15,508 $21,469 $574,461 48.9%
Change 23.4% 7.4% -6.8% 0.0% 14.6% 2.4
September 30, 1996
Amount $299,909 $257,234 $19,379 $18,704 $595,226 48.7%
Change -2.8% 12.4% 25.0% -12.9% 3.6% (0.2)
Change from
September 30, 1995 to
September 30, 1996
Amount $55,022 $56,590 $3,770 ($49,361) $66,020 -0.5%
Change 22.5% 28.2% 24.2% -72.5% 12.5% ---
Investment Mix
September 30, 1995 to 46.3% 37.9% 2.9% 12.9% 100.0%
September 30, 1996 50.4% 43.2% 3.3% 3.1% 100.0%
Change 4.1% 5.3% 0.3% -9.7% ---
</TABLE>
<PAGE>
Note: (a) Includes CMOs and pass throughs
(b) Includes Money Market Investments, Federal Home Loan Bank,
and other stock
(c) Excludes market value adjustment
* May not foot due to rounding
<PAGE>
The average fully taxable equivalent yield in the last year has increased
40 basis points to 7.61% on average for third quarter 1996 versus third quarter
1995; this increase is largely the result of the aforementioned accounting
change, which resulted in two third quarter Federal Home Loan Bank dividends.
The 13 basis point increase in the portfolio rate in third quarter 1996 compared
to second quarter 1996 again is largely due to the extra FHLB dividend.
Excluding the extra FHLB dividend, the third quarter average investment rise was
7.48%.
The portfolio market value decreased from 102.5% of book value one year
ago to 100.6% of book value as of September 30, 1996.
The average portfolio life based on earliest redemption date increased
from 4.4 years on September 30, 1995 to 5.2 years on September 30, 1996, largely
attributable to first quarter 1996 buying of selected longer term floating rate
investments (which move with 1 month LIBOR and 3 month T-Bill) structured to
minimize interest rate risk.
As of the most recent quarter end, 33.8% of the investment portfolio was
classified as available-for-sale (AFS) in accordance with SFAS No. 115, with the
remainder (66.2%) as held-to-maturity. The pretax market value adjustment of the
AFS portfolio was a favorable $ 331,000 as compared to $65,000 a year earlier.
<PAGE>
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: November 14, 1996 /s/ Sanford A. Belden
----------------------------------
Sanford A. Belden, President and
Chief Executive Officer
Date: November 14, 1996 /s/ David G. Wallace
----------------------------------
David G. Wallace, Senior Vice President
Chief Financial Officer
COMMUNITY BANK SYSTEM, INC.
Statement re: Earnings Per Share Computation
Exhibit 11
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Primary Earnings Per Share
Net Income $3,792,234 $3,030,510 $10,455,053 $8,353,018
Less: Accured Dividend on
Preferred Stock (101,250) (202,500) (303,750) (202,500)
Income applicable
to common stock $3,690,984 $2,828,010 $10,151,303 $8,150,518
Weighted average number
of common shares 3,687,881 3,646,104 3,695,147 3,077,915
Add: Shares issuable from
assumed exercise of
incentive stock options 36,542 40,953 32,782 30,474
Weighted average number of
common shares - adjusted 3,724,423 3,687,057 3,727,929 3,108,389
Primary Earnings Per Share $0.99 $0.77 $2.72 $2.62
Fully diluted Earnings Per Share
Net Income $3,690,984 $2,828,010 $10,151,303 $8,150,518
Weighted average number of
common shares - adjusted 3,724,423 3,687,057 3,727,929 3,108,389
Add: Equivalent number of
common shares assumijng
conversion of preferred 0 0 0 0
Weighted average number of
common shares - adjusted 3,724,423 3,687,057 3,727,929 3,108,389
Fully diluted earnings per share $0.99 $0.77 $2.72 $2.62
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 52589
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 201177
<INVESTMENTS-CARRYING> 394379
<INVESTMENTS-MARKET> 397671
<LOANS> 626693
<ALLOWANCE> 7805
<TOTAL-ASSETS> 1337422
<DEPOSITS> 1038227
<SHORT-TERM> 40850
<LIABILITIES-OTHER> 12480
<LONG-TERM> 140000
0
4500
<COMMON> 4657
<OTHER-SE> 96708
<TOTAL-LIABILITIES-AND-EQUITY> 1337422
<INTEREST-LOAN> 41711
<INTEREST-INVEST> 29664
<INTEREST-OTHER> 335
<INTEREST-TOTAL> 71710
<INTEREST-DEPOSIT> 27145
<INTEREST-EXPENSE> 30677
<INTEREST-INCOME-NET> 41033
<LOAN-LOSSES> 1827
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 27970
<INCOME-PRETAX> 17630
<INCOME-PRE-EXTRAORDINARY> 17630
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10455
<EPS-PRIMARY> 2.72
<EPS-DILUTED> 2.72
<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>
