FORM 10 - Q / A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the three months ended March 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 (I.R.S. Employer Identification No.)
incorporation or organization)
5790 Widewaters Parkway, Syracuse, 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 -- 2,751,718 shares as of May 13, 1994.
The undersigned registrant hereby amends the following items,
financial statements, exhibits or other portions of its Quarterly Report for
March 31, 1994 on Form 10-Q as set forth in the pages attached hereto:
Part 1 Item 2. Management Discussion and Analysis
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this amendment to be signed on its
behalf by the undersigned thereunto duly authorized.
COMMUNITY BANK SYSTEM, INC.
(Registrant)
Date: May 31, 1994 By: DAVID G. WALLACE
David G. Wallace
Senior Vice President
and Chief Financial
Officer
Part 1. Financial Information
Item 2. Management Discussion and Analysis of Financial Condition and
Results of Operations
The purpose of the discussion is to present material changes in Community
Bank System, Inc.'s financial condition and results of operations during
the three months ended March 31, 1994 which are not otherwise apparent
from the consolidated financial statements included in these reports.
Earnings Performance Summary
Three Months Ended Change
3/31/94 3/31/93 Amount Percent
(000's)
Net Income $2,400 $2,379 $21 0.9%
Earnings per share $0.85 $0.86 ($0.00) -0.6%
Weighted average
shares outstanding 2,808 2,767 41 1.5%
Return on average assets 1.33% 1.44% -0.11% N/A
Average assets $730,155 $670,508 $59,647 8.9%
Return on average
shareholders' equity 15.54% 17.83% -2.29% N/A
Average shareholders' equity $62,636 $54,100 $8,536 15.8%
* May not foot due to rounding
Net income for first quarter 1994 was $2.4 million, up .9% over the
comparable 1993 period. Earnings per share were $.85, down 1.2% because of
greater shares outstanding largely due to the impact of a higher stock price on
valuing unexercised options. Return on assets and return on shareholder equity
remained above peer bank norms at 1.33% and 15.54%, respectively.
Consistent with many banks, CBSI's margin between earning asset yields and
cost of funds has continued to narrow from historic highs as the economy
strengthens. Compared to the first quarter of last year, the average yield on
loans and investments is off 95 basis points while the rate on interest-bearing
deposits and borrowings declined by only about one third that amount.
Consequently, the net interest margin was reduced by 65 basis points to 5.62%.
All but two percent of the impact of margin shrinkage was offset by very
satisfactory earning asset growth. Virtually all of this growth reflects
greater loans outstanding, which climbed over $55 million on average or 15.2%.
This increase was funded by 3.3% more in average deposits and higher short-term
borrowings.
Though net interest income was down slightly this quarter, several factors
more than compensated for this dip: a 15.6% improvement in fee income, largely
reflecting a 23% climb from fiduciary services and higher revenues on merchant
VISA processing; tight expense control, which held the increase over the prior
year to 1.8%; and a 41% reduction in loan loss provision expense, made possible
by managing net charge-offs to a low .23% of average loans.
Net Interest Income
Net interest income is the difference between interest earned on loans and
other investments and interest paid on deposits and other sources of funds. On
a tax-equivalent basis, net interest income for the first three months of this
year fell a relatively small $229,000 to $9.5 million, off 2.4% from the same
period in 1993. Excluding premiums received on investment securities called in
March of last year (largely an unplanned event), the decrease in net interest
income would have been an even smaller $71,000 or .7%.
The change in net interest income reflects both the change in net interest
margin (yield on earning assets less cost of funds as a percent of earning
assets) and the change in earning asset levels. The table below shows these
underlying dynamics.
For the Quarter Net Net Yield on Rate on Average Loans /
Ended: Interest Interest Earning Int-Bear Earning Earning
(000's) Income Margin Assets Liab Assets Assets
------ ------ ------ ------ ------ ------
Amount and Change Period
from Preceding Quarter End
------ ------ ------ ------ ------ ------
December 31, 1992
Amount $9,773 6.31% 9.36% 3.62% $615,682 57.9%
Change N/A N/A N/A N/A N/A N/A
March 31, 1993
Amount $9,529 6.16% 9.20% 3.50% $626,992 58.1%
Change ($244) -0.15% -0.16% -0.12% 1.8% 0.1
June 30, 1993
Amount $9,536 5.97% 8.81% 3.37% $641,067 59.7%
Change $6 -0.20% -0.39% -0.12% 2.2% 1.6
September 30, 1993
Amount $9,609 5.94% 8.74% 3.27% $642,270 61.7%
Change $73 -0.03% -0.07% -0.11% 0.2% 2.0
December 31, 1993
Amount $9,383 5.73% 8.51% 3.15% $649,678 62.2%
Change ($225) -0.21% -0.23% -0.12% 1.2% 0.6
March 31, 1994
Amount $9,458 5.62% 8.25% 3.16% $682,789 59.1%
Change $75 -0.11% -0.26% 0.02% 5.1% (3.2)
Change from
March 31, 1993 to
March 31, 1994
Amount ($71) -0.54% -0.95% -0.33% $55,797 1.0%
% Change -0.7% --- --- --- 8.9% ---
Note: (a) All net interest income, margin, and earning asset yield figures are
full-tax equivalent.
(b) Net interest income, margin, and earning asset yield figures exclude
premiums on called bonds of $158, $146, and $297 as of March 10,
July 10, and October 10, 1993, respectively.
* May not foot due to rounding
The primary reason for the change in net interest margin over the last
three years reflects the interaction of the interest rate environment and the
structural nature of the bank's balance sheet. Because savings and money market
accounts have been repricing downward and time deposits have a relatively short
maturity, the bank's cost of funds initially fell at a faster pace than the
yield on earning assets, which contain a high portion of fixed rate obligations
of longer maturity. In addition, the prime lending rate, to which most of the
company's variable rate loans are tied, has been relatively stable, causing an
even wider spread over falling deposit rates.
As a specific example, from the fourth quarter of 1991 to the fourth
quarter of 1992, when margins reached their peak of 6.31%, the yield on earning
assets fell only 85 basis points while the rate on interest bearing deposits
fell a much faster 187 basis points.
Since fourth quarter 1992, rates on deposits have been falling more slowly,
down only 46 basis points compared an 111 basis point decline in earning asset
yield, caused by the run-off of high yielding loans and investments being
reinvested at lower yields. Thus, margins have narrowed during the period shown
by the table because the yield on earning assets is now falling faster than the
rate on deposits.
Comparing the first quarter just ended to one year earlier, the net
interest margin has narrowed by 54 basis points due to the rate on interest-
bearing liabilities falling only about one third of the decrease in earning
asset yield. However, the $55.8 million increase in earning assets shown in the
above table almost offset the impact of this shrinkage. Had margins remained
constant, net interest income would have increased by over $820,000; however,
this potential improvement was more than eliminated by margin erosion, resulting
in the $71,000 reduction in net interest income shown, excluding the impact of
the March bond call premiums.
Lastly, net interest income is greater than it would have been because the
mix of earning assets has moved toward a greater share invested in loans, which
have a higher overall yield than investments. Except for seasonal factors, the
ratio has been rising steadily since loans began to turn up in April of 1992,
reaching 59.1% for the quarter just ended, up one percentage point from a year
earlier. The decrease in the loans/earning assets ratio from the fourth quarter
1993 represents relatively sharp 16.5% growth in the investment portfolio since
year end as investment opportunities became more attractive than in the fall.
Despite its recent decrease, net interest margin has long been a historical
strength for CBSI, being in the 96th peer percentile based comparative data as
of December 31, 1993. This performance is largely the result of very high
earning asset yields, being in the 95th percentile, versus cost of funds in the
44th percentile.
Noninterest Income
Noninterest or other income, including service charges, commissions
and fees, trust income, and income from other sources totaled approximately
$1.02 million for the three months ended March 31, 1994, up $139,000 or 15.7%
from the same period last year.
Three Months Ended Change
3/31/94 3/31/93 Amount Percent
(000's)
Fiduciary services $341 $263 $78 29.5%
Service charges of $355 $349 $7 2.0%
deposit accounts
Other service charges, $328 $263 $65 24.8%
commissions, and fees
Net gain (loss) on sale ($3) $8 ($11) -136.0%
of investments and
other assets
---------- ---------- ---------- ---------
Total noninterest income
- Amount $1,021 $883 $139 15.7%
- % of Average
assets 0.57% 0.53% 0.03% ---
* May not foot due to rounding
As shown by the table above, more than half the increase reflects improved
fiduciary income: personal trust fees up 28%, largely due to estate
settlements; employee benefit trust revenue up 12%, as steady growth in this
three year old line of business continues; and $16,000 in commissions on the
sale of fixed rate annuities, a program launched through CBSI's branch network
in early January after licensing and extensive training last fall. Two other
items which explain most of the balance of the increase are higher fees from
handling Canadian exchange for our customers and greater revenues from merchant
VISA processing.
Management recognizes that the company's level of noninterest income is
unsatisfactory, its ratio to average assets being .57% year-to-date or less than
half the peer average. As noted above, progress was made this quarter to
address this shortfall by implementing the sale of fixed rate annuities through
our 33 branch locations as a supplement to traditional certificates of deposit.
In addition, full service brokerage/financial planning products will be offered
through dedicated sales representatives covering five strategic market
territories; two of these individuals are now in place. Lastly, we recently
received approval to be a seller/servicer of residential mortgages for Fannie
Mae (the Federal National Mortgage Association), a key step in developing a
meaningful source of loan servicing income, as well as being a useful
asset/liability management tool. While modest in 1994, income from these new
products is expected to be meaningful in future years.
Noninterest Expense
Noninterest expense or overhead for the three months ended March 31,
1994 increased by a small $111,000 to $6.26 million or 1.8% more than the same
period last year. The table below summarizes the major components of change.
Three Months Ended Change
3/31/94 3/31/93 Amount Percent
(000's)
Personnel Expense $3,284 $3,024 $260 8.6%
Occupancy, furniture, $948 $892 $56 6.3%
and equipment
Adminstrative and business $1,133 $1,197 ($64) -5.4%
development
All other expense $891 $1,032 ($141) -13.7%
---------- ---------- ---------- --------
Total noninterest income
- Amount $6,256 $6,145 $111 1.8%
- % of Average
assets 3.47% 3.72% -0.24% ---
Efficiency ratio 59.7% 58.2% 1.5% ---
* May not foot due to rounding
The primary areas of increased expense include the following: Salary
expense rose 9.4% due to the impact of annual merit increases and 14 additional
full-time equivalent positions (up 3.5%) to 403 employees as of the most recent
quarter end; these additions pertain to lending, fiduciary services, management
trainees, and various administrative areas, several of which had been approved
or previously filled positions but were open a year earlier. Occupancy expense
(excluding furniture and equipment) was up 9.3% due unusually heavy maintenance
and utilities costs caused by the harsh winter. And profit and loss expense was
higher due to an IRS tax penalty which CBSI is continuing to dispute and timing
differences on expenditures for repossessed property.
The above increases were nearly offset by reduced use of outside
consultants for bank acquisition analysis, lower advertising expense due to the
absence of a significant seasonal deposit promotion, less relocation expense
related to new hires/transferred employees, and reduced supplies and telephone
expense as a result of various cost saving activities undertaken in the past
year.
As a percentage of average assets, annualized overhead declined
satisfactorily from 3.72% in 1993 to 3.47% for the first three months of this
year, a level now below the peer norm. On the other hand, CBSI's efficiency
ratio (recurring expense divided by recurring operating income) increased
slightly from 58.2% last year to 59.7% owing to the 2% decrease in net interest
income caused by narrowing spreads; the ratio still compares favorably to the
peer bank average of 61.4%.
Income and Income Taxes
Income before income tax was approximately $3.8 million for the quarter
ended March 31, 1994, virtually unchanged from the same period last year. As
shown by the table below, the decrease in net interest income was almost matched
by lower loan loss provision expense. This slight net shortfall was offset by a
greater improvement in non-interest income than the increase in overhead.
Three Months Ended Change
3/31/94 3/31/93 Amount Percent
(000's)
Net interest income $9,283 $9,468 ($185) -2.0%
Loan loss provision $239 $407 ($168) -41.2%
Net interest income $9,043 $9,061 ($18) -0.2%
after provision for
loan losses
Other income $1,021 $883 $139 15.7%
Other expense $6,256 $6,145 $111 1.8%
Income before $3,808 $3,798 $10 0.3%
income tax
Income tax $1,408 $1,419 ($11) -0.8%
Net income $2,400 $2,379 $21 0.9%
* May not foot due to rounding
Consistent with pretax income performance, income taxes payable were
essentially the same as in 1993. The effective tax rate was down an
insignificant .4 percentage points to 37.0%. CBSI's marginal tax rates are 35%
federal (up from 34% prior to the passing of the Omnibus Budget Reconciliation
Act of 1993) and 9% state. Compared to peers, the company's effective tax rate
is in the unfavorable 77th percentile; this is explained by New York State's
very high tax level as well as tax exempt security holdings being slightly below
the norm in the 44th percentile.
Capital
Three Months Ended Change
3/31/94 3/31/93 Amount Percent
Tier 1 leverage ratio 8.12% 7.93% 0.18% N/A
Tier 1 capital to 14.62 14.63 (0.01) N/A
risk asset ratio
Cash dividend declared $0.27 $0.25 $0.02 8.0%
per common share
Dividend payout 30.9% 28.3% 2.60% N/A
Book value per share: Total $22.81 $20.35 $2.46 12.1%
: Tangible 22.66 20.14 2.53 12.5
* May not foot due to rounding
The capital position of Community Bank System, Inc. continues to be strong.
As of March 31, 1994, the tier I capital to assets ratio of 8.12% was 18 basis
points higher than one year earlier; 4 basis points of this increase was caused
by a positive market value adjustment of $350,000 after tax for the Available
for Sale investment portfolio as required by SFAS No. 115 (see further
discussion in the last section of this report). Though matching the peer norm
as of year end 1993, CBSI's tier I ratio is well above the 5% minimum required
for "well-capitalized" banks.
As a result of a relatively larger loan portfolio, which has a higher risk-
based component than most investments, the tier I capital to risk asset ratio at
quarter-end was virtually the same as one year earlier at 14.62%; this compares
to an 8% regulatory minimum. Management is confident that capital levels are
fully sufficient to support a larger balance sheet, providing ample and prudent
capacity, for example, for selected branch acquisitions or leveraged investment
strategies.
Total capital reached $62.7 million at quarter end, $7.6 million or 13.7%
higher than twelve months earlier. This increase is attributable to dividends
declared on common stock of $2.9 million versus net income of nearly $9.6
million, or a 30.4% dividend payout. The higher first quarter 1994 dividend
reflects a 2 cents per share or 8% increase approved by the Board of Directors
last August, the third dividend increase within two years. The first quarter
1994 dividend payout of 30.9% is at the low end of the company's targeted 30-40%
guideline.
The 12.1% increase in book value per share from March 31, 1993 approximates
the increase in total capital discussed above, slightly offset by 1.5% more in
shares outstanding largely because of the impact of a higher stock price on
valuing unexercised options. The higher increase in tangible book per share
reflects a $161,000 or 28% reduction in intangibles due to planned amortization.
The common shares of Community Bank System, Inc. are traded in the NASDAQ
National Market System under the symbol CBSI. Stock price activity, cash
dividends declared, and share volume traded for the last six quarters are shown
below.
For the Quarter Market Market Market Cash Share
Ended: Price Price Price Dividend Volume
High Low Close Declared Traded
------ ------ ------ ------ ------
Amount and Change
from Preceding Quarter
------ ------ ------ ------ ------
December 31, 1992
Amount $25.00 $20.00 $23.75 $0.25 89,000
Change N/A N/A N/A N/A N/A
March 31, 1993
Amount $30.75 $23.00 $29.00 $0.25 315,000
Change 23.0% 15.0% 22.1% 0.0% 253.9%
June 30, 1993
Amount $30.00 $25.00 $27.00 $0.25 299,000
Change -2.4% 8.7% -6.9% 0.0% -5.1%
September 30, 1993
Amount $30.00 $26.00 $30.00 $0.27 467,000
Change 0.0% 4.0% 11.1% 8.0% 56.2%
December 31, 1993
Amount $30.50 $27.88 $28.50 $0.27 253,000
Change 1.7% 7.2% -5.0% 0.0% -45.8%
March 31, 1994
Amount $30.75 $28.50 $29.25 $0.27 129,000
Change 0.8% 2.2% 2.6% 0.0% -49.0%
Change from
March 31, 1993 to
March 31, 1994
Amount $0.00 $5.50 $0.25 $0.02 (186,000)
% Change 0.0% 23.9% 0.9% 8.0% -59.0%
Loans
Loans outstanding, net of unearned discount, reached an all-time high of
$426.5 million as of March 31, 1994, up 16.1% from one year earlier. As shown
in the table below, CBSI is predominantly a retail bank, with more than 71% of
its outstandings spread across three basic consumer loan types. These types are
more fully defined in the company's 1993 annual report.
For the Quarter Consumer Consumer Consumer Business Total Yield on
Ended: Direct Indirect Mortgages Lending Loans Loans
(000's) ------- -------- -------- -------- ------ -------
Amount and Change Quarterly
from Preceding Quarter Average
------- -------- -------- -------- ------ --------
December 31, 1992
Amount $94,608 $71,314 $100,656 $95,779 $362,356 10.35%
Change N/A N/A N/A N/A N/A N/A
March 31, 1993
Amount $92,005 $68,650 $105,577 $101,234 $367,467 10.07%
Change -2.8% -3.7% 4.9% 5.7% 1.4% (0.28)
June 30, 1993
Amount $90,296 $71,123 $111,873 $108,537 $381,830 9.88%
Change -1.9% 3.6% 6.0% 7.2% 3.9% (0.19)
September 30, 1993
Amount $95,102 $72,120 $120,124 $109,788 $397,134 9.54%
Change 5.3% 1.4% 7.4% 1.2% 4.0% (0.34)
December 31, 1993
Amount $95,502 $74,321 $127,618 $120,430 $417,871 9.38%
Change 0.4% 3.1% 6.2% 9.7% 5.2% (0.16)
March 31, 1994
Amount $92,908 $77,103 $133,085 $123,373 $426,470 9.22%
Change -2.7% 3.7% 4.3% 2.4% 2.1% (0.16)
Change from
March 31, 1993 to
March 31, 1994
Amount $903 $8,454 $27,508 $22,139 $59,003 (0.85)
Change 1.0% 12.3% 26.1% 21.9% 16.1% N/A
Loan Mix
March 31, 1993 25.0% 18.7% 28.7% 27.5% 100.0%
March 31, 1994 21.8% 18.1% 31.2% 28.9% 100.0%
Change -3.3% -0.6% 2.5% 1.4% ---
* May not foot due to rounding
Growth during the quarter just ended was a relatively good 2.1% in light of
the normally slow winter season. The reason for the pick-up compared to the
first quarter 1993 increase of 1.4% was stronger consumer indirect loan demand,
largely reflecting the purchase of automobiles consistent with strong demand
nationwide; approximately 42% of indirect automobile loans outstanding are for
new vehicles versus 58% for used. While growth was not as good in percentage
terms as in the prior year, residential mortgages climbed more on an absolute
basis this quarter, despite the season and the expected slowdown in refinancing
as financial market rates continue to rise.
The remaining two loan types had lower first quarter growth versus the 1993
quarter. Consumer direct loans declined because of steady run off of the
conventional installment and direct personal loan components since the 1990
recession. And business loans rose a relatively modest 2.4% compared to more
than twice that pace a year earlier.
Loans at CBSI have now climbed for eight consecutive quarters, performance
which compares very favorably against the banking industry in general. Since
March 31, 1993, the largest portion of the $59 million in growth has come from
consumer mortgages (47%), owing to the national refinancing surge and the bank's
strategy to actively participate in it. Business lending accounted for the next
largest share (38%), reflecting strong receptiveness from small and medium-sized
companies to CBSI's approach of offering responsive, personalized service based
on decision-making at the local level. After bottoming out in the spring of
1993 following several years of decline, consumer indirect loans contributed 14%
of the last twelve months' growth. And consumer direct loans remained virtually
flat due to positive trends of home equity and student loans.
The change in loan portfolio mix by type over the last year is shown at the
bottom of the above table. The resulting shares continue the trend of the
previous five years of greater consumer mortgage and business lending focus, and
reduced consumer direct presence. The consumer indirect share has now
stabilized following erosion since 1989.
As discussed in the net interest income section of this report, earning
asset yields have fallen 95 basis points over the four quarters ending March 31,
1994. The loan yield component has fallen 85 basis points. Nonetheless, CBSI's
predominantly retail loan mix and related pricing objectives have maintained a
very favorable overall loan yield, being in the 93rd peer percentile as of year-
end 1993.
Loan Loss Provision and Reserve for Loan Losses
The provision for future loan losses was $239,000 for the three months
ended March 31, 1994, down $168,000 or 41% versus the same period last year.
The reasons that the loan loss provision was able to be reduced are a highly
favorable net charge-off experience; a manageable level of non-performing loans,
defined as non-accruing loans plus loans 90 days past due but still accruing;
and a loan loss reserve fully adequate to support a higher level of loans.
As the table below shows, 1994's net charge-offs to date are reduced from
the prior year's level due to lower gross charge-offs. CBSI's general
experience has been at or slightly better than the peer norm, but recent net
charge-off results have been stronger further, being in the favorable 37th peer
percentile as of December 31, 1993.
3 Months 3 Months 12 Months 12 Months 12 Months
(000's or % Ratios) Mar 31, Mar 31, Dec 31, Dec 31, Dec 31,
1994 1993 1993 1992 1991
- - ---------- ---- ---- ---- ---- ----
Net Charge-offs $238 $325 $782 $2,057 $1,810
Net Charge-offs/Ave Loans 0.23% 0.36% 0.20% 0.59% 0.51%
Gross Charge-offs $338 $488 $1,410 $2,601 $2,271
Gross Charge-offs/Ave Loans 0.33% 0.54% 0.37% 0.74% 0.64%
Recoveries $99 $163 $628 $545 $461
Recoveries/Prior year 28.6% 29.5% 24.2% 83.8% 18.0%
gross charge offs
Non-performing loans remained at a manageable level as of the most recent
quarter end at $2.5 million, up $538,000 from twelve months earlier. The
primary reason for the increase is higher commercial loan non-accruals in CBNA's
Southern Region, where staff has become more conservative in placing credits in
this classification. Though up a bit from March 31, 1993's level, the overall
ratio of non-performers to loans outstanding is acceptable at .59%, being in the
low 23rd peer percentile as of year-end 1993.
Loan loss reserves reached a new high as of September 30, 1993 of $5.7
million or 1.44% of loans outstanding, having been steadily built since year-end
1991. Net charge-offs have continued to remain low and non-performers well
within control. Moreover, our regulators recently concurred in their regular
examination that reserves were very adequate, and management is confident that
it is sufficient to support planned, full-year 1994 loan growth.
As a result, the bank has maintained third quarter 1993's reserve level by
having the loan loss provision expense cover net charge-offs dollar for dollar.
The ratio of loan loss provision to net charge-offs for the most recent quarter
end thus decreased from 125% twelve months earlier to 100%. The cushion of loan
loss reserves over non-performers is considered ample at 227%, down slightly
from year end 1993 when it was above the peer norm in the favorable 72nd
percentile.
3 Months 3 Months 12 Months 12 Months 12 Months
(000's or % Ratios) Mar 31, Mar 31, Dec 31, Dec 31, Dec 31,
1994 1993 1993 1992 1991
- - ---------- ---- ---- ---- ---- ----
Non-Performing Loans $2,509 $1,972 $2,391 $1,606 $2,326
Non-Performing Loans/Loans 0.59% 0.54% 0.57% 0.44% 0.67%
Loan Loss Allowance $5,707 $5,064 $5,707 $4,982 $4,312
Loan Loss Allowance/Loans 1.34% 1.38% 1.37% 1.37% 1.24%
Loan Loss Allowance/ 227% 257% 239% 310% 185%
Non-Performing Loans
Loan Loss Provision $238 $407 $1,506 $2,727 $2,516
Loan Loss Provision/ 100% 125% 193% 133% 139%
Net Charge-offs
The following table sets forth detail on non-performing and restructured
loans and other real estate owned. Consistent with CBSI's low non-performing
loan levels, the ratio of non-performing assets to total assets was .41%,
virtually the same as at December 31, 1993 when it was well below the 25th peer
percentile.
3 Months 3 Months 12 Months 12 Months 12 Months
(000's or % Ratios) Mar 31, Mar 31, Dec 31, Dec 31, Dec 31,
1994 1993 1993 1992 1991
- - ---------- ---- ---- ---- ---- ----
Loans accounted for on a $1,971 $1,082 $1,738 $881 $1,369
non-accrual basis
Accruing loans which are
contractually past due
90 days or more as to
principal and interest
payments $538 $890 $653 $726 $957
Loans which are "troubled
debt restructurings" as
defined in Statement of
Financial Accounting
Standards No. 15
"Accounting by Debtors
and Creditors for
Troubled Debt
Resructurings $228 $326 $243 $356 $1,720
Other Real Estate $375 $499 $433 $459 $1,426
----- ----- ----- ----- -----
Total Non-Performing Assets $3,112 $2,797 $3,067 $2,422 $5,472
Total Non-Performing Assets/ 0.41% 0.41% 0.43% 0.36% 0.86%
Total Assets
* May not foot due to rounding
Deposits
Deposits are the primary source of funds for use in lending and investment
activities, amounting to 88.1% of average earning assets for the quarter ended
March 31, 1994. This relationship compares to 92.9% for the same period last
year, and in part reflects CBSI's planned asset/liability management strategy to
enhance net interest income by being in a net borrowed funds position, a
practice which began in the early fall of 1992. The reason for the reduction in
the first quarter 1994 deposit to earning assets ratio from the fourth quarter
1993 level reflects deposits being unchanged while earning assets increased by
$33.1 million. As shown in the next section of this report, this increase was
funded by greater borrowings.
The table below displays the components of total deposits and volume and
rate trends over the last five quarters.
For the Quarter Average Average Average Average Average Average
Ended: Demand Savings Money Time Total Deposits/
(000's) Market Deposits Earning
------ ------ ------ ------ ------ Assets
Amount and Average Rate
------ ------ ------ ------ ------ ------
December 31, 1992
Amount $86,323 $226,541 $78,579 $191,046 $582,489 94.6%
Yield / Rate ---- 3.05% 2.82% 4.73% 3.11%
March 31, 1993
Amount $84,744 $237,060 $78,189 $182,275 $582,268 92.9%
Yield / Rate ---- 2.91% 2.73% 4.55% 2.98%
June 30, 1993
Amount $85,818 $251,997 $81,296 $195,382 $614,493 95.9%
Yield / Rate ---- 2.85% 2.72% 4.44% 2.94%
September 30, 1993
Amount $88,563 $240,831 $78,329 $189,625 $597,350 93.0%
Yield / Rate ---- 2.68% 2.64% 4.38% 2.82%
December 31, 1993
Amount $91,701 $241,030 $75,144 $193,265 $601,141 92.5%
Yield / Rate ---- 2.53% 2.50% 4.17% 2.67%
March 31, 1994
Amount $92,522 $241,123 $72,003 $196,099 $601,747 88.1%
Yield / Rate ---- 2.49% 2.52% 4.13% 2.65%
Change in average
outstandings from
March 31, 1993 to
March 31, 1994
Amount $7,779 $4,063 ($6,186) $13,824 $19,479 -4.7%
% Change 9.2% 1.7% -7.9% 7.6% 3.3%
Change in
yield / rate from
March 31, 1993 to
March 31, 1994
Change (% pts) ---- (0.42) (0.22) (0.41) (0.33)
Deposit Mix
March 31, 1993 14.6% 40.7% 13.4% 31.3% 100.0%
March 31, 1994 15.4% 40.1% 12.0% 32.6% 100.0%
Change 0.8% -0.6% -1.5% 1.3% ----
* May not foot due to rounding
Total average deposits for the quarter ended March 31, 1994 were 3.3%
higher than for the comparable period last year. Forty percent of the growth
was in demand deposits, with the greatest share of the increase in business
checking followed by personal accounts. Factors contributing to this climb
include: an expanded business customer base consistent with record increases in
business loans; the spring 1993 closing of the Jefferson National Bank in CBNA's
Northern Region; and the sale of the former Manufacturer's Hanover branches in
the Olean market. The latter two market share factors also underlie the
combined 2.4% increase in all other accounts.
The mix of savings, money market, and time accounts has changed slightly
since first quarter 1993. An increase in time deposits over two years in
maturity, which began with CBSI's 1-2-3 C.D. promotion in the late winter/early
spring period last year, has continued on a small but steady basis. During the
same period, money market deposits have been reduced. Besides a conscious shift
of our public funds customers out of low rate liquid deposits into certificates
of deposit, the recent turn up in financial market rates and CBSI's more
competitive pricing in the longer maturities appears to be encouraging consumers
to extend their maturity preferences as well. At about 27% of total deposits as
of March 31, 1993, time deposits under $100,000 are well below their share in a
more normal interest rate environment; during the fourth quarter of 1991, this
category averaged 37% of total deposits.
The above table also shows that the decrease in rates on interest-bearing
deposits has slowed markedly in the most recent quarter, suggesting that overall
rates are most likely at their bottom. As of year-end 1993, CBSI's average rate
on interest-bearing deposits under $100,000 was at the peer norm or 48th
percentile.
Liquidity and Borrowing Position
Liquidity involves the ability to raise funds to support asset growth, meet
deposit withdrawals and other borrowing needs, maintain reserve requirements,
and otherwise sustain operations. This is accomplished through maturities of
loans and investments; deposit growth; and access to sources of funds other than
deposits, such as the federal funds market, the Federal Home Loan Bank (FHLB),
lines of credit with other banks, and selling securities under agreements to
repurchase. Management considers all of the above factors in evaluating
liquidity requirements and believes its present position to be adequate. Over
$113 million in unused borrowing capacity was available within 30 days as of
March 31, 1994; at 14.5% of total assets, this liquidity level is well above the
bank's 7.5% policy guideline, which is more fully discussed in the company's
annual report.
The following table shows the trend of loans, investments, large liability
certificates of deposit, and other borrowings over the last five quarters.
For the Quarter Average Average Ave Core Ave CD's Average Public
Ended: Loans Investments Deposits >$100,000 Borrowings Funds /
(000's) (a) (b) Average
------ ------ ------ ------ ------ Deposits
Amount and Average Yield / Rate
------ ------ ------ ------ ------ ------
December 31, 1992
Amount $358,494 $257,188 $553,565 $28,924 $20,580 N/A
Yield / Rate 10.35% 7.96% 3.10% 3.36% 2.74% ----
March 31, 1993
Amount $364,386 $262,606 $561,322 $20,945 $28,340 17.7%
Yield / Rate 10.07% 7.75% 2.96% 3.38% 3.75% ----
June 30, 1993
Amount $372,749 $268,318 $590,523 $23,971 $12,138 18.5%
Yield / Rate 9.88% 7.33% 2.89% 3.29% 3.13% ----
September 30, 1993
Amount $388,137 $254,134 $579,514 $17,836 $25,043 15.9%
Yield / Rate 9.54% 7.30% 2.76% 3.55% 3.24% ----
December 31, 1993
Amount $404,944 $244,733 $576,448 $24,693 $26,394 16.9%
Yield / Rate 9.38% 6.58% 2.64% 3.35% 3.16% ----
March 31, 1994
Amount $419,874 $262,915 $576,613 $25,133 $58,850 17.3%
Yield / Rate 9.22% 6.71% 2.60% 3.72% 3.49% ----
Change in average
outstandings from
March 31, 1993 to
March 31, 1994
Amount $55,487 $310 $15,291 $4,188 $30,509 (0.4)
% Change 15.2% 0.1% 2.7% 20.0% 107.7% ----
Change in
yield / rate from
March 31, 1993 to
March 31, 1994
Change (%pts) (0.85) (1.04) (0.36) 0.34 (0.26)
<FN>
Note: (a) Yield on average investments calculated on a full-tax equivalent
basis. Excludes premiums on called bonds of $158, $146, and
$297 as of March 10, July 10, and October 10, 1993, respectively.
(b) Defined as total deposits minus CD's > $100,000. Rate includes
impact of non-interest bearing transaction accounts.
* May not foot due to rounding
For the first three months of 1994, CBSI's net short-term borrowing
position averaged $58.9 million versus $28.3 million for the same period last
year. Nearly one third of borrowings at March 31, 1994 were at an attractive
fixed rate with a one year maturity. Borrowings and certificates of deposit are
used interchangeably according to the more cost effective option for the
maturity of funds desired.
Compared to first quarter 1993, expanded borrowings and 3.3% higher
deposits on average enabled $55.5 million or 15.2% more in loans outstanding as
well as a slight increase in average investments. The bank continues to
practice the strategy of maintaining or increasing the level of the investment
portfolio if reinvestment opportunities are attractive and capital and non-
deposit funding sources are sufficient. This strategy largely underlies the
increase in borrowings during the quarter just ended.
Because of its strong capital structure, CBSI is able to manage its net
borrowing position to maintain earning asset levels targeted to produce a tier I
leverage ratio of 7.75-8.0% under normal asset growth assumptions. On a short-
term basis, borrowings also cushion fluctuations in deposits; the bank services
a large municipal deposit base which tends to be seasonal in nature. CBNA's
monthly asset/liability management committee monitors the trade-off between
raising funds through retail deposits versus large liability C.D.'s and other
borrowings.
Investments and Asset/Liability Management
The level and composition of Community Bank System, Inc.'s investment
portfolio is designed to balance the constraints of liquidity, interest rate
risk, capital, and credit risk while providing an acceptable rate of return. In
meeting that objective, the portfolio comprises nearly 41% of earning assets at
the present time and contributes a substantial steady stream of interest income
using high quality securities with relatively short expected maturities.
As shown by the table below, investments consist primarily of U.S. Treasury
securities, mortgage-backed securities (including U.S. Agencies and
collateralized mortgage obligations), and tax-exempt obligations of state and
political subdivisions. All investment strategies are developed in conjunction
with the bank's asset/liability position, with particular attention given to
interest rate risk.
For the Quarter U.S. Mtg-Backs Tax Other Total Invests /
Ended: Gov'ts (a) Exempts (b) Investments Earning
(000's) ------ ------ ------ ------ ------ Assets
Amount and Change
from Preceding Quarter (Period
------ ------ ------ ------ ------ End)
December 31, 1992
Amount $106,797 $116,487 $27,940 $11,762 $262,986 42.1%
Change N/A N/A N/A N/A N/A N/A
March 31, 1993
Amount $120,475 $107,659 $27,797 $9,506 $265,437 41.9%
Change 12.8% -7.6% -0.5% -19.2% 0.9% (0.1)
June 30, 1993
Amount $117,435 $105,787 $26,939 $7,840 $258,001 40.3%
Change -2.5% -1.7% -3.1% -17.5% -2.8% (1.6)
September 30, 1993
Amount $111,309 $101,248 $27,612 $6,554 $246,723 38.3%
Change -5.2% -4.3% 2.5% -16.4% -4.4% (2.0)
December 31, 1993
Amount $114,413 $107,567 $24,585 $6,980 $253,544 37.8%
Change 2.8% 6.2% -11.0% 6.5% 2.8% (0.6)
March 31, 1994
Amount $120,183 $144,284 $23,807 $7,279 $295,553 40.9%
Change 5.0% 34.1% -3.2% 4.3% 16.6% 3.2
Change from
March 31, 1993 to
March 31, 1994
Amount ($292) $36,625 ($3,990) ($2,227) $30,116 -1.0%
Change -0.2% 34.0% -14.4% -23.4% 11.3% ---
Investment Mix
March 31, 1993 45.4% 40.6% 10.5% 3.6% 100.0%
March 31, 1994 40.7% 48.8% 8.1% 2.5% 100.0%
Change -4.7% 8.3% -2.4% -1.1% ---
<FN>
Note: (a) Includes CMO's
(b) Includes Money Market Investments
* May not foot due to rounding
Approximately $124 million or 42% of the bank's investment portfolio as of
March 31, 1994 is carried as Available for Sale (AFS) in accordance with SFAS
No. 115, which was adopted as of year-end 1993. The most common criteria for
placing securities in the AFS portfolio is the need to sell securities for
liquidity and interest rate risk management. CBSI's liquidity practice does not
rely on securities sales, and interest rate risk is managed at the time of
security purchase rather than after the fact.
To be conservative, however, the bank has chosen to place in its AFS
portfolio all collateralized mortgage obligations and publicly traded securities
with a stated final maturity or call date of two years or less. As of March 31,
1994, the AFS portfolio average maturity based on earliest redemption date was
1.4 years, and the pretax market value adjustment (MVA) was $591,000 or .5%
above book value. The bank estimates that for each 25 basis point parallel
shift in the yield curve, the change in pretax MVA for the present AFS portfolio
is approximately $600,000.
The Held to Maturity portfolio amounted to nearly $172 million as of March
31, 1994. Holdings were primarily mortgage-backed securities (58%) and U.S.
Agency obligations (27%). Average time to maturity of debt securities based on
the earliest redemption date was about 4.6 years, reflecting a high rate of
prepayments on mortgage-backed holdings. The portfolio recorded market value
appreciation of $4.4 million or 2.6% above book value for the quarter just
ended.
Purchases during first quarter 1994 were placed in the Held to Maturity
portfolio; in anticipation of rising financial market rates, additions were
primarily high cash flow, seasoned mortgage-backed securities with a three to
four year expected life. This strategy explains the bulk of the 8.3 percentage
point increase in the mortgage-backed portfolio mix indicated in the table
above.
Compared to twelve months earlier, total investments outstanding have risen
by 11.3% to $295.6 million. For the investment portfolio as a whole, the
average time to maturity of debt securities based on the earliest redemption
date was about 3.3 years at quarter end, compared to 2.7 years one year earlier.
Consistent with the recent rise in financial market rates, market value
appreciation decreased from $13.4 million or 5.2% of book value one year ago to
$5.0 million or 1.7% of book value at March 31, 1994. As of year-end 1993,
CBSI's market value appreciation was in the 80th peer percentile.
The average fully taxable equivalent yield on the total investment
portfolio was 6.71% for the first three months of 1994, down 104 basis from the
same period one year earlier, excluding the favorable impact of $158,000 in
premiums on $3.4 million in bonds called in March of last year. This decrease
reflects the steady decline over the last several years in investment yields
available in the financial markets for the maturity range and investment type
that CBSI is presently seeking. Nonetheless, CBSI's overall investment yield is
highly favorable to peers, being in the 97th percentile as of December 31, 1993.
The trend of the decrease in investment yield suggests that it may have reached
its low point if financial market rates continue their upturn, which began in
October 1993.
The table below displays several of the underlying investment portfolio
statistical measures discussed above on a quarterly basis since December 31,
1992.
For the Quarter Portfolio Portfolio Portfolio AFS Market Net
Ended: Average Maturity Market / Value Realized
(000's) Yield (Years) Book Adjustment Gains /
(a) (b) (Pretax) (Losses)
-------- -------- -------- -------- --------
December 31, 1992 7.96% 2.7 103.9% N/A $0
March 31, 1993 7.75% 2.7 105.2% N/A $0
June 30, 1993 7.33% 2.5 104.9% N/A $0
September 30, 1993 7.30% 2.6 104.8% N/A $0
December 31, 1993 6.58% 2.3 103.7% $2,164 ($15)
March 31, 1994 6.71% 3.3 101.7% $592 ($3)
Change from
March 31, 1993 to
March 31, 1994 -1.04% 0.6 -3.5% N/A ($3)
Note: (a) Yield on average investments calculated on a full-tax equivalent
basis. Excludes premiums on called bonds of $158, $146, and
$297 as of March 10, July 10, and October 10, 1993, respectively.
(b) Based on earliest redemption date.
* May not foot due to rounding
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 16, 1994 /s/ Sanford A. Belden
Sanford A. Belden, President
and Chief Executive
officer
Date: May 16, 1994 /s/ David G. Wallace
David G. Wallace, Senior
Vice President and Chief
Financial Officer