FORM 10 - Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the nine months ended September 30, 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 -- 2,775,150 shares as of November 14, 1994.
INDEX
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets --
September 30, 1994, December 31, 1993 and September 30, 1993.
Consolidated statements of income --
Three months ended September 30, 1994 and 1993 and
nine months ended September 30, 1994 and 1993.
Consolidated statements of cash flows --
Nine months ended September 30, 1994 and 1993.
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
SIGNATURES
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
- --------------------------------------------------------------------------------------------------------------------
September 30, December 31, September 30,
ASSETS 1994 1993 1993
Cash and due from banks $34,621,192 $27,422,278 $32,673,474
Interest bearing deposits with other banks 0 90,000 90,000
Federal funds sold 0 0 0
TOTAL CASH AND CASH EQUIVALENTS 34,621,192 27,512,278 32,763,474
Investment securities
U.S. Treasury 26,830,549 27,797,096 28,154,559
U.S. Government agencies and corporations 119,039,126 86,615,555 83,154,229
States and political subdivisions 22,165,620 24,584,525 27,612,407
Mortgage-backed securities 146,422,831 108,319,876 101,315,757
Other securities 9,892,776 5,636,214 5,895,584
Federal Reserve Bank 551,550 500,350 500,350
TOTAL INVESTMENT SECURITIES 324,902,452 253,453,616 246,632,886
Loans 497,167,677 443,601,070 423,695,698
Less: Unearned discount 27,688,142 25,729,899 26,561,221
Reserve for possible loan losses 6,042,109 5,706,609 5,704,786
NET LOANS 463,437,426 412,164,562 391,429,691
Bank premises and equipment 10,041,496 10,045,782 9,959,018
Accrued interest receivable 5,550,509 4,538,769 4,615,018
Intangible assets 5,704,218 452,264 492,656
Other assets 7,673,213 4,885,244 7,942,941
TOTAL ASSETS $851,930,506 $713,052,515 $693,835,684
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing $99,247,003 $88,644,788 $86,396,290
Interest bearing 588,669,619 499,670,455 511,299,920
TOTAL DEPOSITS 687,916,622 588,315,243 597,696,210
Federal funds purchased and securities sold under
agreements to repurchase 27,250,000 57,000,000 31,500,000
Term borrowings 65,550,000 550,000 550,000
Obligations under capital lease 0 42,036 66,764
Accrued interest and other liabilities 6,183,432 5,158,809 4,905,691
TOTAL LIABILITIES 786,900,054 651,066,088 634,718,665
Shareholders' equity
Preferred stock $1.00 par value 0 0 0
Common stock $1.25 par value 3,468,938 3,435,398 3,431,349
Surplus 14,684,876 14,374,149 14,349,906
Undivided profits 48,342,411 42,902,266 41,342,317
Unrealized gains (losses) on available for sale securities (1,461,560) 1,280,466 0
Less: Shares issued under
employee stock plan - unearned 4,213 5,852 6,553
TOTAL SHAREHOLDERS' EQUITY 65,030,452 61,986,427 59,117,019
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $851,930,506 $713,052,515 $693,835,684
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- ----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
INTEREST INCOME 1994 1993 1994 1993
Interest and fees on loans $10,696,303 $9,331,111 $30,332,082 $27,562,442
Interest and dividends on investments:
U.S. Treasury 485,941 510,991 1,457,623 1,547,805
U.S. Government agencies and corporations 1,934,444 1,772,801 5,058,541 5,198,278
States and political subdivisions 360,276 437,836 1,092,894 1,356,351
Mortgage-backed securities 2,489,464 1,735,727 6,414,672 5,492,451
Other securities 218,837 154,261 482,039 585,528
Interest on federal funds sold 0 120 0 52,760
Interest on deposits at other banks 0 1,772 1,133 20,170
16,185,265 13,944,619 44,838,984 41,815,785
INTEREST EXPENSE
Interest on deposits
Savings 2,218,044 2,125,026 6,186,820 6,667,775
Time 2,606,308 2,068,466 6,809,371 6,253,645
Interest on federal funds purchased, securities
sold under agreements to repurchase and
Term borrowings 903,279 204,251 2,230,383 557,391
Interest on capital lease 0 50 629 3,592
5,727,631 4,397,793 15,227,203 13,482,403
NET INTEREST INCOME 10,457,634 9,546,826 29,611,781 28,333,382
Provision for possible loan losses 315,088 464,336 976,505 1,246,256
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 10,142,546 9,082,490 28,635,276 27,087,126
OTHER INCOME
Fiduciary services 352,765 271,154 1,077,473 825,454
Service charges on deposit accounts 447,735 408,475 1,195,832 1,113,024
Other service charges, commissions and fees 518,452 452,145 1,139,567 899,872
Other operating income 47,371 42,512 118,647 86,384
Investment security gain (loss) 0 0 (1,695) 0
1,366,323 1,174,286 3,529,824 2,924,734
11,508,869 10,256,777 32,165,100 30,011,860
OTHER EXPENSES
Salaries, wages and employee benefits 3,333,273 2,938,684 9,817,500 8,919,598
Occupancy expense of bank premises, net 490,100 428,410 1,511,716 1,349,300
Equipment and furniture expense 438,997 423,324 1,287,327 1,234,116
Other 2,707,672 2,517,528 6,948,686 6,899,996
6,970,042 6,307,946 19,565,229 18,403,010
INCOME BEFORE INCOME TAXES 4,538,827 3,948,831 12,599,871 11,608,850
Income taxes 1,826,000 1,483,294 4,838,000 4,335,737
NET INCOME $2,712,827 $2,465,537 $7,761,871 $7,273,113
Earnings per common share $0.96 $0.88 $2.76 $2.61
COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For Nine Months Ended September 30, 1994 and 1993
Increase (Decrease) in Cash and Cash Equivalents
1994 1993
- ----------------------------------------------------------------------------------------------------
Operating Activities:
Net income $7,761,871 $7,273,113
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation 1,090,783 1,095,046
Amortization of intangible assets 227,046 121,177
Provision for loan losses 976,505 1,246,256
Provision for deferred taxes 100,171 (156,422)
Loss on sale of investment securities 1,695 0
Gain on sale of Loans (29,406) 0
Loss on sale of assets 394 0
Change in interest receivable (1,011,740) 842,345
Change in interest payable and accrued expenses (1,458,731) (2,538,648)
Change in unearned loan fees and costs 64,785 147,341
- ----------------------------------------------------------------------------------------------------
Net Cash Provided By Operating Activities 7,723,373 8,030,208
- ----------------------------------------------------------------------------------------------------
Investing Activities:
Proceeds from sales of investment securities 10,900,000 2,015,036
Proceeds from maturities of investment securities 38,137,975 77,928,194
Purchases of investment securities (123,097,045) (63,281,735)
Net change in loans outstanding (52,821,382) (37,267,311)
Capital expenditures (1,086,891) (521,488)
Premium paid for branch acquisitions (5,479,000)
- ----------------------------------------------------------------------------------------------------
Net Cash Used By Investing Activities (133,446,343) (21,127,304)
- ----------------------------------------------------------------------------------------------------
Financing Activities:
Net change in demand deposits,
NOW accounts, and savings
accounts 30,397,193 25,373,735
Net change in certificates of deposit 69,204,186 14,407,798
Net change in term borrowings 35,250,000 (20,785,900)
Payments on lease obligation (42,036) (72,019)
Issuance of common stock 344,267 524,267
Cash dividends (2,321,726) (2,098,754)
- ----------------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 132,831,884 17,349,126
- ----------------------------------------------------------------------------------------------------
Change In Cash And Cash Equivalents 7,108,914 4,252,031
Cash and cash equivalents at beginning of year 27,512,278 28,511,443
- ----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR 34,621,192 32,763,474
====================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid For Interest $14,818,510 $13,613,840
====================================================================================================
Cash Paid For Income Taxes $4,379,081 $5,452,622
====================================================================================================
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
None
The accompanying notes are an integral part of the consolidated financial
statements.
Community Bank System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
September 1994
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,
1994 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1994.
Part 1. Financial Information
Item 1. Financial Statements
The information required by rule 10.01 of Regulation S-X is
presented on the previous pages.
Item 2. Management Discussion and Analysis of Financial Condition and
Results of Operations
The purpose of the discussion is to present material changes in Community
Bank System, Inc.'s financial condition and results of operations during the
nine months ended September 30, 1994 which are not otherwise apparent from the
consolidated financial statements included in these reports.
Earnings Performance Summary
Three Months Ended Change
9/30/94 9/30/93 Amount Percent
(000's)
Net Income $2,713 $2,466 $247 10.0%
Earnings per share $0.96 $0.88 $0.08 9.1%
Weighted average
shares outstanding 2,819 2,793 26 0.9%
Return on average assets 1.30% 1.43% -0.13% N/A
Average assets $829,081 $686,388 $142,693 20.8%
Return on average
shareholders' equity 16.69% 16.87% -0.19% N/A
Average shareholders' equity $64,500 $57,977 $6,523 11.3%
Percentage of average shareholders'
equity to average assets 7.78% 8.45% -0.67% N/A
Nine Months Ended Change
9/30/94 9/30/93 Amount Percent
(000's)
Net Income $7,762 $7,273 $489 6.7%
Earnings per share $2.76 $2.61 $0.14 5.5%
Weighted average
shares outstanding 2,813 2,782 31 1.1%
Return on average assets 1.32% 1.43% -0.10% N/A
Average assets $783,541 $681,477 $102,064 15.0%
Return on average
shareholders' equity 16.34% 17.36% -1.02% N/A
Average shareholders' equity $63,520 $56,008 $7,513 13.4%
Percentage of average shareholders'
equity to average assets 8.11% 8.22% -0.11% N/A
* May not foot due to rounding
Net income for third quarter 1994 reached an all-time high of $2.713
million or $.96 per share, up 10.0% and 9.1%, respectively, over the comparable
1993 period. For the first nine months, earnings rose 6.7% over last year to
$2.76 per share. Year-to-date return on assets and return on equity remained
above peer bank norms at 1.32% and 16.34%, respectively.
Despite narrower net interest margins industry-wide, as reflected by the
bank's .6 percentage point reduction from last year, CBSI's net interest income
rose a very satisfactory 9.5% for the quarter. This increase resulted from
record loan growth of over 18% as well as nearly 32% more in investment
securities. Compared to the second quarter of this year, margins were
relatively stable, as the full impact of recent prime rate and other financial
market rate increases benefited our earning asset yields. For the nine months
as a whole, net interest income was higher by 4.5%.
Loan growth has been strong across three of the bank's four major product
lines. A very active demand for automobile financing resulted in 31% growth in
consumer indirect lending, while continued steady success in business lending
produced a 23% rise. Reflective of higher long term rates, residential mortgage
financing has slowed, but levels are nonetheless up 18%. Consumer direct
lending rose slightly, having been basically flat to declining for some time.
Third quarter earnings also benefited from over 16% more in fee income,
which included a 30% rise in trust-related fees as well as greater service
charges and commissions from an expanded customer base. Overhead was up 10.5%,
with the bulk of the increase reflecting personnel costs. Staff has been added
because of our three newly acquired branches from the Resolution Trust Company
(RTC) as well as to support business development efforts, including the hiring
of several financial service specialists to spearhead the annuity and mutual
funds program being implemented this year through the bank's branch system. For
the entire nine month period, noninterest income rose nearly 21% over one year
earlier while overhead was up only 6.3%.
Lastly, consistent with the company's record $6.0 million level of loan
loss reserves, the quarter's provision for loan losses was reduced by 32% over
the same period last year. Coverage of the reserve over nonperforming loans,
which were reduced from last year's level to a relatively small .55% of loans
outstanding, rose from a year ago to an ample 2.4 times.
The remainder of this report more fully discusses the balance sheet and
earnings trends summarized above.
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 third quarter 1994 increased
$1,020,000 (10.6%) over the same period in 1993 to $10.6 million. Compared with
second quarter 1994, there was a $586,000 improvement.
The change in net interest income reflects both the change in net interest
margin (yield on earning assets less cost of funds as a percentage of earning
assets) and the change in earning asset levels. The table below shows these
underlying dynamics.
For the Quarter Net Net Yield on Cost Average Loans /
Ended: Interest Interest Earning of Earning Earning
(000's) Income Margin Assets Funds Assets Assets
------ ------ ------ ------ ------ ------
Amount and Change Period
from Preceding Quarter End
------ ------ ------ ------ ------ ------
December 31, 1992
Amount $9,773 6.31% 9.36% 3.10% $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% 3.01% $626,992 58.1%
Change ($244) -0.15% -0.16% -0.09% 1.8% 0.1
June 30, 1993
Amount $9,536 5.97% 8.81% 2.91% $641,067 59.7%
Change $6 -0.20% -0.39% -0.10% 2.2% 1.6
September 30, 1993
Amount $9,609 5.94% 8.74% 2.80% $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% 2.69% $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% 2.72% $682,789 59.1%
Change $75 -0.11% -0.26% 0.03% 5.1% (3.2)
June 30, 1994
Amount $10,043 5.47% 8.23% 2.82% $736,418 58.6%
Change $584 -0.15% -0.02% 0.10% 7.9% (0.4)
September 30, 1994
Amount $10,629 5.44% 8.38% 2.99% $774,570 59.1%
Change $586 -0.03% 0.15% 0.18% 5.2% 0.5
Change from
September 30, 1993 to
September 30, 1994
Amount $1,020 -0.49% -0.36% 0.19% $132,300 -2.6%
% Change 10.6% --- --- --- 20.6% ---
For the Year
Ended:
(000's)
September 30, 1993
Amount $28,674 6.02% 8.85% 2.91% $636,832 61.7%
Change --- --- --- --- --- ---
September 30, 1994
Amount $30,130 5.51% 8.29% 2.85% $731,595 59.1%
Change $1,456 -0.51% -0.56% -0.06% 14.9% (2.6)
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
Since the fourth quarter of 1992, margins have narrowed because the yield
on earning assets has fallen faster than the rate on deposits. More
specifically, the cost of funds rate (total interest expense divided by total
deposits plus borrowings) is down only 11 basis points compared to a 98 basis
point decline in earning asset yield. The latter reflects downward repricing of
approximately $30 million in adjustable rate mortgages and runoff of high
yielding loans and investments. Reductions in deposit rates have been
relatively mild during this period, in contrast to more aggressive decreases in
1992, which contributed to a widening of net interest margin.
Comparing the third quarter just ended to one year earlier, the net
interest margin (excluding prior year premiums on bonds called) narrowed by 49
basis points due to a 36 basis point decline in the yield on earning assets
while the cost of funds rate increased by 19 basis points. However, the $132.3
million increase in earning assets shown in the above table more than offset the
impact of this shrinkage. Had margins remained constant, net interest income
would have increased by over $2.0 million versus $1.0 million actually realized.
Net interest income is also less than it would have been because since
third quarter 1993, the mix of earning assets has moved toward a greater share
in investments, which have a lower overall yield than loans. This change in mix
as measured by the loans to earning asset ratio is the result of improved
investment opportunities funded with short-term borrowings and the recent
assumption from the RTC of $62 million in deposit liabilities of three Columbia
Banking FSA branches in CBSI's Southern Region.
Comparing third quarter 1994 to second quarter 1994 shows a slight decline
in the net interest margin. The yield on earning assets increased 15 basis
points (due to increased financial market rates and an increase in the prime
rate) while the cost of funds rate rose 18 basis points because of a higher
federal funds rate (raising short-term borrowing costs) and slight increases in
deposit rates.
Despite its recent decrease, net interest margin has long been a historical
strength for CBSI, being well above the norm in the 86th peer percentile based
on comparative data as of June 30, 1994. This performance is largely the result
of very high earning asset yields, being in the 92nd percentile, versus cost of
funds being slightly above norm in the 61st percentile.
Non-Interest Income
Non-interest income, including service charges, commissions, fees, trust
income and income from other sources, totaled approximately $1.4 million for the
three months ended September 30, 1994, up $192,000 (16.4%) from the same period
last year. This brings 1994 YTD non-interest income to $3.5 million, up 20.7%
from the same 1993 period.
Three Months Ended Change
9/30/94 9/30/93 Amount Percent
(000's)
Fiduciary services $353 $271 $82 30.1%
Service charges on $448 $408 $39 9.6%
deposit accounts
Other service charges, $562 $495 $67 13.6%
commissions, and fees
Net gain (loss) on sale $4 $0 $4 0.0%
of investments and
other assets
---------- ---------- --------------------
Total noninterest income
- Amount $1,366 $1,174 $192 16.4%
- % of Average
assets 0.65% 0.68% -0.02% ---
Nine Months Ended Change
9/30/94 9/30/93 Amount Percent
(000's)
Fiduciary services $1,077 $825 $252 30.5%
Service charges on $1,196 $1,113 $83 7.4%
deposit accounts
Other service charges, $1,229 $976 $253 25.9%
commissions, and fees
Net gain (loss) on sale $27 $10 $17 169.8%
of investments and
other assets
---------- ---------- --------------------
Total noninterest income
- Amount $3,530 $2,925 $605 20.7%
- % of Average
assets 0.60% 0.57% 0.03% ---
* May not foot due to rounding
As shown by the table above, income from fiduciary services accounts for
almost 43% of the total change from third quarter 1993 to the quarter just ended
and is the result of increases in personal trust fees, up 11% primarily as a
result of new business, and in employee benefit trust (EBT) revenue, up 47%.
While the relatively new EBT new product line continues to grow steadily, the
recent surge largely reflects an accounting change to more accurately identify
gross revenue and subcontracted servicing expense.
Increases also occurred in deposit service charges and other commissions,
attributable to a larger number of demand deposit accounts, an improved dividend
from the New York State Bankers Association's captive insurance subsidiary, and
selected adjustments in CBSI's fee schedule. Additionally, a small amount was
earned in commissions on the sale of annuities and mutual funds, a program
launched through CBSI's branch network early in 1994.
Management recognizes that the company's level of non-interest income is
unsatisfactory, its ratio to average assets being .65% for the quarter or
approximately half the peer norm (the 3 basis point decrease from one year
earlier reflects CBSI's strong asset growth). As noted above, progress is being
made to address this shortfall by maintaining competitive and value-based
service charges; selling fixed rate annuities through our 35 customer
facilities; offering full service brokerage/financial planning products through
dedicated sales representatives in selected markets; and selling/servicing
residential mortgages, the first such transaction being with the Federal
National Mortgage Association in July 1994. While only minimal benefit will be
realized in 1994, income from these new products is expected to be a significant
source of non-interest income in future years.
Non-Interest Expense
Non-interest expense or overhead for the three months ended September 30,
1994 increased by $662,000 (10.5%) over the same period last year to $7.0
million, bringing the YTD total up 6.3% over last year to $19.6 million. The
table below summarizes the major components of change.
Three Months Ended Change
9/30/94 9/30/93 Amount Percent
(000's)
Personnel Expense $3,333 $2,939 $395 13.4%
Occupancy, furniture, $929 $852 $77 9.1%
and equipment
Administrative and business $1,092 $1,021 $71 7.0%
development
All other expense $1,616 $1,497 $119 7.9%
---------- ---------- --------------------
Total noninterest expense
- Amount $6,970 $6,308 $662 10.5%
- % of Average
assets 3.34% 3.65% -0.31% ---
Efficiency ratio 58.1% 57.7% 0.4% ---
Nine Months Ended Change
9/30/94 9/30/93 Amount Percent
(000's)
Personnel Expense $9,818 $8,920 $898 10.1%
Occupancy, furniture, $2,799 $2,583 $216 8.3%
and equipment
Administrative and business $3,173 $3,208 ($35) -1.1%
development
All other expense $3,776 $3,692 $84 2.3%
---------- ---------- --------------------
Total noninterest expense
- Amount $19,565 $18,403 $1,162 6.3%
- % of Average
assets 3.34% 3.61% -0.27% ---
Efficiency ratio 58.1% 57.7% 0.4% ---
* May not foot due to rounding
Almost 60% of the quarterly increase resides in personnel expense, the
primary reason being 35 additional full-time equivalent (FTE) positions,
resulting in a total of 428 employees as of September 30, 1994. These additions
pertain to the Columbia Savings branch acquisition (21 FTE); the December 1993
opening of a denovo branch in Waddington, New York late in 1993 (formerly a
Jefferson National Bank branch prior to being closed by the FDIC); expanded
business development efforts in the lending and fiduciary services functions;
and the need to service the bank's increased transaction volumes over the last
twelve months. Other factors underlying the personnel expense increase are
modest annual merit awards, higher pension expense, and the lack of a 1993
favorable adjustment to CBSI's self-insured medical plan.
The remainder of the quarter's overhead increase compared to the same
quarter last year is spread over a number of expense categories. Higher
occupancy expense resulted from the new Waddington branch property, the three
acquired branches from Columbia, and a one time equipment purchase.
Administrative expenses were up due to higher deposit insurance (Columbia branch
acquisition) and increases in various volume and acquisition-related expenses.
Computer services climbed due to an accounting change to reflect the external
servicing costs of the EBT function as well as temporary processing fees and
conversion costs related to the acquisition. Finally, the amortization of
intangibles rose $78,000 primarily due to the acquisition of the Columbia
branches, whose $5.5 million premium (or 8.6% of the deposits assumed) added
approximately $365,000 per annum over the prescribed 15 year amortization
period.
The above increases were offset by lower legal fees, reduced Visa
processing expense, and the absence of restructuring costs related to the
closing of the Ottawa, Ontario Canada office.
As a percentage of average assets, annualized overhead declined
satisfactorily from 3.65% in the third quarter of 1993 to 3.34% in the third
quarter of 1994; the latter level is now favorably below the peer norm and is
attributable to persistent cost control efforts as well as asset growth. CBSI's
efficiency ratio (recurring expense divided by recurring operating income)
increased slightly in the third quarter from 57.7% last year to 58.1% this year,
still nicely below the peer bank average of 61.9% as of 6/30/94; the .4%
increase is the result of the higher intangible from the Columbia branch
acquisition.
Income and Income Taxes
Income before tax was approximately $4.5 million for the quarter ended
September 30, 1994, a $590,000 (14.9%) increase from the same period last year,
bringing the YTD total to $12.6 million or 8.5% more than in 1993. As shown by
the table below, the increases in overhead for both the quarter and year-to-date
are more than offset by greater net interest income and higher non-interest
income. A lower loan loss provision in both periods accounted for about 25% of
the improvement in pretax income.
Three Months Ended Change
9/30/94 9/30/93 Amount Percent
(000's)
Net interest income $10,458 $9,547 $911 9.5%
Loan loss provision $315 $464 ($149) -32.1%
Net interest income $10,143 $9,082 $1,060 11.7%
after provision for
loan losses
Other income $1,366 $1,174 $192 16.4%
Other expense $6,970 $6,308 $662 10.5%
Income before $4,539 $3,949 $590 14.9%
income tax
Income tax $1,826 $1,483 $343 23.1%
Net income $2,713 $2,466 $247 10.0%
Nine Months Ended Change
9/30/94 9/30/93 Amount Percent
(000's)
Net interest income $29,612 $28,333 $1,278 4.5%
Loan loss provision $977 $1,246 ($270) -21.6%
Net interest income $28,635 $27,087 $1,548 5.7%
after provision for
loan losses
Other income $3,530 $2,925 $605 20.7%
Other expense $19,565 $18,403 $1,162 6.3%
Income before $12,600 $11,609 $991 8.5%
income tax
Income tax $4,838 $4,336 $502 11.6%
Net income $7,762 $7,273 $489 6.7%
* May not foot due to rounding
As a result of higher pre-tax income, YTD income taxes increased by
$502,000. CBSI's marginal tax rates are 35% federal (up from 34% prior to
passing the Omnibus Budget Reconciliation Act of 1993) and 9% state (plus a
12.5% surcharge scheduled to be phased out over time). Compared to our peers,
the company's effective tax rate at 38.4% is unfavorable because of New York
State's very high tax level as well as tax exempt security holdings being
slightly below the norm.
Capital
Nine Months Ended Change
9/30/94 9/30/93 Amount Percent
Tier 1 leverage ratio 7.17% 8.46% -1.29% N/A
Tier 1 capital to 12.92 15.14 (2.22) N/A
risk asset ratio
Cash dividend declared $0.84 $0.77 $0.07 9.1%
per common share
Dividend payout 29.9% 28.9% 1.06% N/A
Book value per share: Total $23.43 $21.54 $1.90 8.8%
: Tangible 21.38 21.36 0.02 0.1
The capital position of Community Bank System, Inc. continues to be ample.
As of September 30, 1994, the tier I capital to assets ratio of 7.17% (a
calculation monitored by the Office of the Controller of the Currency) was 129
basis points lower than one year earlier. The decrease in the ratio is the
combined result of the $5.5 million intangible from the Columbia branch
acquisition, which added approximately $58 million in deposits after run-off,
and $61 million in higher borrowings to help fund loan and investment growth.
Though below the peer norm of 8.01% as of June 30, 1994, CBSI's tier I
leverage ratio is well above the 5% minimum required to be a "well-capitalized"
bank as defined by the FDIC. Management's objective is to maintain the tier I
ratio in the 6.5-7% range, adequate for regulatory requirements with sufficient
capacity for potential branch acquisitions and leverage strategies.
As a result of the fore-mentioned reasons, the tier I risk-based capital
ratio as of September 30, 1994 was 12.92% or 222 basis points lower than it was
one year ago. This compares to a 6% "well-capitalized" regulatory minimum. To
the degree that earning asset growth results from investment purchases, this
risk-based ratio is more favorable than the nominal leverage ratio since
investments have a lower risk component than most loans.
Total capital reached $65.0 million as of September 30, 1994, $5.9 million
(10.0%) higher than twelve months earlier. This increase is attributable to
dividends declared on common stock of $3.1 million over the twelve months ended
September 30, 1994 versus net income of $10.1 million during the same time
frame. In addition, adoption of SFAS 115 as of year-end 1993 added a
$1.5 million negative after tax market value adjustment for the available for
sale investment portfolio. The remaining difference is due to additional shares
issued in exercise of incentive stock options. The above reflects a three cent
per share increase (11.1%) in the quarterly dividend approved by the CBSI Board
of Directors in August, the fourth dividend hike within three years. The YTD
1994 dividend pay-out of 29.9% is at the low end of the company's targeted
30-40% guideline.
The 8.8% increase in book value per share from September 30, 1993
approximates the increase in total capital discussed above, slightly offset by
1.1% more in shares outstanding largely because of the impact of a higher stock
price on valuing unexercised options. Tangible book value per share is
virtually unchanged from a year ago, and has decreased 5.7% (or $1.29) since the
first quarter of 1994 due to the intangible resulting from the acquisition of
the three Columbia Savings branches.
The common shares of Community Bank System, Inc. are traded in the NASDAQ
National Market System under the symbol CBSI. Stock price activity, numbers of
shares outstanding, cash dividends declared and share volume traded are shown
below.
For the Quarter Market Market Market # of Cash Share
Ended: Price Price Price Shares Dividend Volume
High Low Close Outstanding Declared Traded
------ ------ ------ ------ ------ ------
Amount and Change
from Preceding Quarter
------ ------ ------ ------ ------ ------
December 31, 1992
Amount $25.00 $20.00 $23.75 2,696,760 $0.25 89,000
Change N/A N/A N/A N/A N/A N/A
March 31, 1993
Amount $30.75 $23.00 $29.00 2,709,816 $0.25 315,000
Change 23.0% 15.0% 22.1% 0.5% 0.0% 253.9%
June 30, 1993
Amount $30.00 $25.00 $27.00 2,722,216 $0.25 299,000
Change -2.4% 8.7% -6.9% 0.5% 0.0% -5.1%
September 30, 1993
Amount $30.00 $26.00 $30.00 2,745,079 $0.27 467,000
Change 0.0% 4.0% 11.1% 0.8% 8.0% 56.2%
December 31, 1993
Amount $30.50 $27.88 $28.50 2,748,318 $0.27 253,000
Change 1.7% 7.2% -5.0% 0.1% 0.0% -45.8%
March 31, 1994
Amount $30.75 $28.50 $29.25 2,749,518 $0.27 128,929
Change 0.8% 2.2% 2.6% 0.0% 0.0% -49.0%
June 30, 1994
Amount $30.50 $28.50 $30.50 2,765,968 $0.27 253,665
Change -0.8% 0.0% 4.3% 0.6% 0.0% 96.7%
September 30, 1994
Amount $31.75 $29.00 $31.00 2,775,150 $0.30 186,797
Change 4.1% 1.8% 1.6% 0.3% 11.1% -26.4%
Change from
September 30, 1993 to
September 30, 1994
Amount $1.75 $3.00 $1.00 30,071 $0.03 (280,203)
% Change 5.8% 11.5% 3.3% 1.1% 11.1% -60.0%
Loans
Loans outstanding, net of unearned discount, were $469.5 million as of
September 30, 1994, a very favorable $72.3 million (18.2%) increase in the last
twelve months. As shown in the table below, CBSI is predominantly a retail
bank, with over 70% of its outstandings spread across three basic consumer loan
types. Growth in the last year has been fairly evenly spread across the
consumer indirect, consumer mortgage, and business lending product lines. All
four 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)
June 30, 1994
Amount $93,768 $86,230 $138,349 $127,180 $445,527 9.29%
Change 0.9% 11.8% 4.0% 3.1% 4.5% 0.07
September 30, 1994
Amount $98,280 $94,464 $142,012 $134,724 $469,480 9.34%
Change 4.8% 9.5% 2.6% 5.9% 5.4% 0.05
Change from
September 30, 1993 to
September 30, 1994
Amount $3,178 $22,344 $21,888 $24,936 $72,346 (0.20)
Change 3.3% 31.0% 18.2% 22.7% 18.2% N/A
Loan mix
September 30, 1993 23.9% 18.2% 30.2% 27.6% 100.0%
September 30, 1994 20.9% 20.1% 30.2% 28.7% 100.0%
Change -3.0% 2.0% 0.0% 1.1% ---
* May not foot due to rounding
More than 34% of CBSI's loan growth in the last twelve months came from the
generally prime-based business lending portfolio, which grew nearly 23%. Though
a relatively low prime lending rate has encouraged borrowing, small and medium
sized companies have also been receptive to CBSI's responsive and personalized
service. In addition, experienced lending officers who have joined the bank in
the last two years have enhanced commercial loan growth. The recent increases
in the prime rate have not appeared to dampen demand, as evidenced by favorable
growth of 5.9% during the last three months.
The over 18% increase in consumer mortgages since third quarter 1993 (or
30% of total loan growth) is attributable to the moderately favorable mortgage
rate environment and the winding down of the fixed rate refinancing boom of the
last two years. Growth during the third quarter of 1994 has slowed with higher
interest rates as consumer mortgages rose only 2.6% over the preceding quarter--
the lowest quarterly increase in the last seven quarters. Sales of mortgages in
the secondary market, a program implemented early in the quarter, reduced
outstandings growth by approximately $325,000.
Growth of 31% during the last twelve months in indirect consumer loans
(applications taken at dealer locations) reflects both high automobile demand
industry-wide, which began in the spring of last year, as well as greater
emphasis on this product line in CBSI's Southern Region. These factors produced
a strong 9.5% increase in the quarter just ended. Approximately, 60% of the
bank's indirect automobile loans are used versus 40% new. About 6% of the
consumer indirect portfolio consists of mobile homes, and recreational and other
vehicles. Indirect loans account for 31% of total loan growth since September
30, 1993.
Consumer direct loans have grown a modest 3.3% since September 30, 1993.
Having been essentially flat since the end of 1992 after the accumulation and
periodic sale of student loans is considered, this line of business started to
show small increases earlier this year in conventional instalment and direct
personal lending as the economy strengthened. Borrowing under home equity lines
of credit has maintained gradual, steady growth.
Loans at CBSI have now climbed for ten consecutive quarters, which compares
very favorably against the banking industry in general. The change in loan
portfolio mix by type over the last year is shown at the bottom of the above
table. While the mix of consumer mortgages has stabilized in the last twelve
months after a sharp increase in 1991-1993, the commercial loan share continues
to rise. And after a slide which started before the 1990 recession, the
indirect loan share began to turn up in the first quarter of this year.
Although improvement is reflected in the last three months, there continues to
be a decreasing direct consumer loan presence.
As discussed in the net interest income section of this report, earning
asset yields have fallen 36 basis points over the last twelve months. Despite a
151 basis point increase in the average prime rate for the three months ending
September 30, 1994 over the same period last year, the loan yield has fallen 20
basis points. This has resulted from continued runoff of higher yielding loans
and market pressure keeping new indirect loan rates relatively low.
Nonetheless, CBSI's predominantly retail loan mix and related pricing objectives
have maintained a very favorable overall loan yield, being in the 88th peer
percentile as of June 30, 1994.
Loan Loss Provision and Reserve for Loan Losses
The provision for future loan losses was $315,000 for the three months
ended September 30, 1994, down $149,000 (32.1%) versus the same period last
year. At $977,000 for the first nine months, the provision is $270,000 or 21.6%
lower.
Net charge-offs for the quarter were $243,000 (a modest .21% of loans), up
from $109,000 a year ago due a 25% increase in gross charge offs and fewer
recoveries. 1994's YTD gross charge- offs were reduced from the prior year's
level, but lower recoveries more than offset this improvement. CBSI's net
charge offs are slightly above the peer norm, being in the 57th percentile as of
June 30, 1994.
3 Months 3 Months 9 Months 9 Months 12 Months
(000's or % Ratios) Sept 30, Sept 30, Sept 30, Sept 30, Dec 31,
1994 1993 1994 1993 1993
- ---------- ---- ---- ---- ---- ----
Net Charge-offs $243 $109 $641 $524 $782
Net Charge-offs/Ave Loans 0.21% 0.11% 0.20% 0.19% 0.20%
Gross Charge-offs $375 $300 $995 $1,048 $1,410
Gross Charge-offs/Ave Loans 0.33% 0.31% 0.30% 0.37% 0.37%
Recoveries $132 $191 $354 $525 $628
Recoveries/Prior year 37.0% 29.1% 33.6% 27.0% 24.2%
gross charge offs
The lower provision along with strong loan growth discussed above caused
the ratio of loan loss reserve to total loans to fall to 1.29%. Despite the
ratio's decline, the reserve reached a new high at quarter end of $6.0 million.
Management believes that having a loan loss reserve ratio in the neighborhood of
1.25% is consistent with CBSI's credit quality, which has enabled the reserve
for loan losses to be more than twice the level of non-performing loans since
the company's restructuring as a single bank.
3 Months 3 Months 9 Months 9 Months 12 Months
(000's or % Ratios) Sept 30, Sept 30, Sept 30, Sept 30, Dec 31,
1994 1993 1994 1993 1993
- ---------- ---- ---- ---- ---- ----
Non-Performing Loans $2,560 $2,602 $2,560 $2,602 $2,391
Non-Performing Loans/Loans 0.55% 0.66% 0.55% 0.66% 0.57%
Loan Loss Allowance $6,042 $5,705 $6,042 $5,705 $5,707
Loan Loss Allowance/Loans 1.29% 1.44% 1.29% 1.44% 1.37%
Loan Loss Allowance/ 236% 219% 236% 219% 239%
Non-Performing Loans
Loan Loss Provision $315 $464 $977 $1,246 $1,506
Loan Loss Provision/ 129% 426% 152% 238% 193%
Net Charge-offs
Non-performing loans remained at a manageable level as of the most recent
quarter end at $2.6 million, down slightly from twelve months earlier. Also
down from the September 30, 1993 level was the ratio of non-performers to loans
outstanding to .55%; the slightly lower level at June 30, 1994 was in the very
favorable 25th percentile.
The ratio of loan loss provision to net charge offs for the most recent
quarter end was 129%, well below the 426% ratio twelve months earlier when the
reserve was being built more aggressively and net charge-offs were extremely
low. Nonetheless, today's coverage of loan loss reserves over non-performers is
favorable at 236%. Included in this is coverage is an ample 15% in reserves to
absorb general, unforeseen losses.
The following table reflects the detail on non-performing and restructured
loan levels. The ratio of non-performing assets to total assets was .34% as of
September 30, 1994, down 17 basis points from a year ago. Troubled debt
restructuring declined significantly to only $31,000 compared to a year earlier
at $290,000; the change reflects being paid out of a previously restructured
commercial loan.
9 Months 9 Months 12 Months 12 Months 12 Months
(000's or % Ratios) Sept 30, Sept 30, Dec 31, Dec 31, Dec 31,
1994 1993 1993 1992 1991
- ---------- ---- ---- ---- ---- ----
Loans accounted for on a $1,737 $1,926 $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 $823 $676 $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
Restructurings $31 $290 $243 $356 $1,720
Other Real Estate $302 $649 $433 $459 $1,426
----- ----- ----- ----- -----
Total Non-Performing Assets $2,893 $3,541 $3,067 $2,422 $5,472
Total Non-Performing Assets/ 0.34% 0.51% 0.43% 0.36% 0.86%
Total Assets
* May not foot due to rounding
Total delinquencies at $7.5 million (loans greater than 30 days past due
plus nonaccruals) climbed 21% from one year earlier, though the ratio to total
loans at 1.5% remained favorable to peer norms and improved from prior periods.
The reason for the dollar increase is a single past due commercial loan in the
time and demand category, for which corrective action is being taken.
Installment and real estate delinquencies increased slightly; however, the ratio
of delinquencies to total loans in both categories declined due to loan growth.
Delinquencies 9 Months 9 Months 12 Months 12 Months 12 Months
30 days - Non-accruing Sept 30, Sept 30, Dec 31, Dec 31, Dec 31,
(000's or % Ratios) 1994 1993 1993 1992 1991
- ---------- ---- ---- ---- ---- ----
Total Delinquencies $7,459 $6,171 $7,004 $6,894 $9,928
Ratio to Total Loans 1.50% 1.46% 1.58% 1.76% 2.62%
Time & Demand $3,851 $2,711 $2,633 $1,758 $2,908
Ratio to Time & Demand 2.70% 2.32% 2.07% 1.72% 3.21%
Installment $2,467 $2,458 $3,156 $4,026 $5,803
Ratio to Installment 1.37% 1.58% 2.01% 2.53% 3.24%
Real Estate $1,141 $1,002 $1,214 $1,110 $1,217
Ratio to Real Estate 0.65% 0.66% 0.76% 0.85% 1.11%
Note: Ratios to Gross Loans
* May not foot due to rounding
Deposits
Deposits are the primary source of funding for loans and investments as
measured by the deposits to earning asset ratio. This ratio is down 5.3
percentage points from a year ago to 87.7%, reflecting borrowings as an
increased source of funding in order to achieve management's balance sheet
leverage objectives. Earning assets have increased $103.3 million over the last
twelve months, while deposits have grown $81.9 million. Third quarter 1994
deposit growth was substantially higher with the full impact of the June 1994
Columbia Banking branch acquisitions.
The table below displays the components of total deposits and volume and
rate trends over the last eight 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 ---- 2.81% 2.69% 4.39% 2.91%
September 30, 1993
Amount $88,563 $240,831 $78,329 $189,625 $597,350 93.0%
Yield / Rate ---- 2.65% 2.61% 4.33% 2.79%
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%
June 30, 1994
Amount $96,131 $252,259 $77,514 $214,297 $640,200 86.9%
Yield / Rate ---- 2.49% 2.47% 4.12% 2.66%
September 30, 1994
Amount $101,110 $256,496 $77,446 $244,149 $679,201 87.7%
Yield / Rate ---- 2.64% 2.62% 4.24% 2.82%
Change in quartely average
outstandings & yield / rate
September 30, 1993 to
September 30, 1994
Amount $12,546 $15,665 ($884) $54,523 $81,851 -5.3%
% Change 14.2% 6.5% -1.1% 28.8% 13.7%
Change (% pts) ---- (0.01) 0.01 (0.09) 0.03
Deposit Mix
September 30, 1993 14.8% 40.3% 13.1% 31.7% 100.0%
September 30, 1994 14.9% 37.8% 11.4% 35.9% 100.0%
Change 0.1% -2.6% -1.7% 4.2% ----
Year-to-date average
outstandings: (000's)
September 30, 1993
Amount $86,389 $243,310 $79,272 $189,121 $598,092 93.9%
Yield / Rate ---- 2.79% 2.68% 4.42% 2.89% ----
September 30, 1994
Amount $96,619 $250,016 $75,674 $218,358 $640,666 87.6%
Yield / Rate ---- 2.54% 2.54% 4.17% 2.71% ----
Change in YTD average
outstandings & yield / rate
from September 30, 1993 to
September 30, 1994
.
Amount $10,230 $6,706 ($3,598) $29,237 $42,574 (6.3)
% Change 11.8% 2.8% -4.5% 15.5% 7.1% ----
Change (%pts) ---- (0.25) (0.14) (0.25) (0.18)
* May not foot due to rounding
Average total deposits for the quarter were 13.7% higher than the
comparable 1993 period. As shown by the table, more than two-thirds of total
deposit growth was in time deposits (up $54.5 million), with the balance split
roughly between savings and demand accounts; money market deposits were flat.
The major reasons for the increase are the $62.4 million Columbia Banking FSA
deposit acquisition late in the second quarter, the Waddington denovo branch, an
expanded business customer base consistent with record increases in commercial
loans, the spring 1993 closing of the Jefferson National Bank in CBSI's Northern
Region, and the sale of the former Manufacturer's Hanover branches in the
Southern Region.
The deposit mix has changed slightly since the third quarter of 1993. Time
deposits have increased with the recent upturn in financial market rates and the
high proportion of time deposits in the acquired Columbia deposits; the bank has
chosen to promote longer term personal C.D.s aggressively as part of its overall
asset/liability management strategy to lengthen its funding structure.
Additionally, municipal time deposits have moved toward more historical levels
since higher rates have decreased the temporary parking of public funds in money
market and savings accounts.
While borrowing costs have risen with the recent movement in the federal
funds rate, the above table shows that the average rates on interest bearing
deposits lagged or were flat for the first two quarters of 1994 and have
increased only slightly in the third quarter to a level almost equal to that of
third quarter 1993. As of June 30, 1994, CBSI's average rate on interest
bearing deposits was in the 54th peer percentile.
After having steadily fallen for a number of quarters, the average rate on
total deposits appears to have bottomed out in the first six months of this
year. The 16 basis point rise in average cost of deposits during the quarter
just ended places the rate essentially unchanged from third quarter 1993 at
2.82%. Had it not been for the substantial $12.5 million in demand deposit
growth, the average rate would have been 5 basis points higher.
Liquidity and Borrowing Position
Liquidity involves the ability to raise funds to support asset growth, meet
requirements for deposit withdrawals, 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 local
deposits (such as borrowings from the Federal Home Loan Bank, selling securities
under agreements to repurchase, and various other sources). All of these
factors are considered by management in evaluating the bank's liquidity
requirements and position assessment.
The bank's liquidity level as of September 30, 1994 is considered by
management to be adequate. In the event of a liquidity crisis, over $129
million (essentially short term assets minus short term liabilities) or 15.2% of
assets could be converted into cash within a 30 day time period. This puts the
liquidity position well above the bank's 7.5% policy minimum. The same policy
minimum applies to projections over a 90-day period, for which the actual ratio
was 14.0% as of this quarter end. This longer period encompasses continued
service to loan customers and normal deposit flows anticipating viability of the
institution after coping with the initial crisis. While this liquidity approach
and related measures have been practiced by leading banks for a number of years,
they have recently been validated by the New England banking crises.
The following table shows the trend of loans, investments, large liability
certificates of deposit and other borrowings over the last seven quarters.
For the Quarter Average Average Ave Core Ave CD's Average Interest
Ended: Loans Investments Deposits >$100,000 Borrowings Bearing
(000's) (a) (b) Liabilities
------ ------ ------ ------ ------ ------
Amount and Average Yield / Rate
------ ------ ------ ------ ------ ------
December 31, 1992
Amount $358,494 $257,188 $553,565 $28,924 $20,580 $516,746
Yield / Rate 10.35% 7.96% 3.10% 3.36% 2.74% 3.61%
March 31, 1993
Amount $364,386 $262,606 $561,322 $20,945 $28,340 $525,864
Yield / Rate 10.07% 7.75% 2.96% 3.38% 3.75% 3.50%
June 30, 1993
Amount $372,749 $268,318 $590,523 $23,971 $12,138 $540,813
Yield / Rate 9.88% 7.33% 2.89% 3.29% 3.13% 3.37%
September 30, 1993
Amount $388,137 $254,134 $579,514 $17,836 $25,043 $533,829
Yield / Rate 9.54% 7.30% 2.76% 3.55% 3.24% 3.27%
December 31, 1993
Amount $404,944 $244,733 $576,448 $24,693 $26,394 $535,834
Yield / Rate 9.38% 6.58% 2.64% 3.35% 3.16% 3.15%
March 31, 1994
Amount $419,874 $262,915 $576,613 $25,133 $58,850 $568,074
Yield / Rate 9.22% 6.71% 2.60% 3.72% 3.49% 3.16%
June 30, 1994
Amount $435,678 $300,740 $605,653 $34,548 $81,048 $625,117
Yield / Rate 9.29% 6.69% 2.60% 3.67% 4.07% 3.25%
September 30, 1994
Amount $454,383 $320,187 $644,302 $34,899 $79,676 $657,767
Yield / Rate 9.34% 7.01% 2.74% 4.33% 4.50% 3.45%
Change in quarterly average
outstandings & yield / rate
from September 30, 1993 to
September 30, 1994
Amount $66,247 $66,053 $64,788 $17,062 $54,633 $123,937
% Change 17.1% 26.0% 11.2% 95.7% 218.2% 23.2%
Change (%pts) (0.20) (0.29) (0.03) 0.78 1.26 0.19
Year-to-date average
outstandings: (000's)
September 30, 1993
Amount $375,177 $261,655 $577,186 $20,906 $21,828 $533,531
Yield / Rate 9.82% 7.46% 2.87% 3.41% 3.37% 3.38%
September 30, 1994
Amount $436,771 $294,824 $609,104 $31,562 $73,267 617,315
Yield / Rate 9.28% 6.81% 2.65% 3.93% 4.07% 3.30%
Change in YTD average
outstandings & yield / rate
from September 30, 1993 to
September 30, 1994
Amount $61,594 $33,169 $31,918 $10,656 $51,439 $83,783
% Change 16.4% 12.7% 5.5% 51.0% 235.7% 15.7%
Change (%pts) (0.53) (0.64) (0.22) 0.52 0.70 (0.08)
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
Borrowings for third quarter 1994 averaged $79.7 million as compared to
$25.0 million a year earlier. This resulted from CBSI's strategy to increase
net interest income by expanding earning assets as long as loan and investment
opportunities are attractive and non-deposit funding sources are sufficient. As
discussed in the capital section of this report, this strategy is being executed
within the guideline of maintaining the tier I leverage ratio in the 6.5-7%
range. In addition, borrowings are constrained by an internal guideline not to
exceed 50% of assets eligible to collateralize borrowings. This would provide
for unused borrowing capacity of $102 million as of quarter end in the event of
an unforeseen liquidity crisis or other need.
CBNA's Federal Home Loan Bank borrowings are comprised of primarily 90 day
terms or less, with the bulk at the currently manageable overnight rate. Twenty
million dollars represents a one year term borrowing at a low fixed rate. The
bank's asset/liability management committee monitors the trade-off between
raising funds through retail deposits versus large liability certificates of
deposit and other borrowings. Management uses borrowings and certificates of
deposit interchangeably according to the more cost effective option for the
maturity of funds desired. On a short-term basis, borrowings also cushion
fluctuations in deposits; the bank services a large municipal deposit base that
varies with seasonal cash requirements and revenue flows.
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 at quarter end comprised 40.9% of earning
assets and contributes a substantial steady stream of interest income using high
quality securities with relatively short maturities.
As shown by the table below, the bank's investments consist primarily of
U.S. treasury securities, mortgage-backed securities (including U.S. agencies
and collateralized mortgage obligations), and tax-exempt obligations of state
and political subdivisions. All investment strategies are developed in
conjunction with the bank's asset/liability position, with particular attention
given to managing interest rate risk.
For the Quarter U.S. Mtg-Backs Tax Other Total Invests /
Ended: Gov'ts (a) Exempts (b) Investments Earning
(000's) ------ ------ ------ ------ ------ Assets
Amount and Change
from Preceding Quarter (Period
------ ------ ------ ------ ------ End)
December 31, 1992
Amount $106,797 $117,931 $27,940 $10,319 $262,986 42.1%
Change N/A N/A N/A N/A N/A N/A
March 31, 1993
Amount $120,475 $107,948 $27,797 $9,217 $265,437 41.9%
Change 12.8% -8.5% -0.5% -10.7% 0.9% (0.1)
June 30, 1993
Amount $117,435 $105,306 $26,939 $8,321 $258,001 40.3%
Change -2.5% -2.4% -3.1% -9.7% -2.8% (1.6)
September 30, 1993
Amount $111,309 $101,316 $27,612 $6,486 $246,723 38.3%
Change -5.2% -3.8% 2.5% -22.1% -4.4% (2.0)
December 31, 1993
Amount $114,413 $108,320 $24,585 $6,227 $253,544 37.8%
Change 2.8% 6.9% -11.0% -4.0% 2.8% (0.6)
March 31, 1994
Amount $120,183 $144,472 $23,807 $7,091 $295,553 40.9%
Change 5.0% 33.4% -3.2% 13.9% 16.6% 3.2
June 30, 1994
Amount $127,571 $153,485 $21,246 $11,894 $314,196 41.4%
Change 6.1% 6.2% -10.8% 67.7% 6.3% 0.4
September 30, 1994
Amount $145,870 $146,423 $22,166 $10,444 $324,902 40.9%
Change 14.3% -4.6% 4.3% -12.2% 3.4% (0.5)
Change from
September 30, 1993 to
September 30, 1994
Amount $34,561 $45,107 ($5,447) $3,958 $78,180 2.6%
Change 31.0% 44.5% -19.7% 61.0% 31.7% ---
Investment Mix
September 30, 1993 45.1% 41.1% 11.2% 2.6% 100.0%
September 30, 1994 44.9% 45.1% 6.8% 3.2% 100.0%
Change -0.2% 4.0% -4.4% 0.6% ---
Note: (a) Includes CMO's and pass through's
(b) Includes Money Market Investments, Federal Home Loan Bank, and
other stock
* May not foot due to rounding
Investments totaled $325 million for the quarter just ended, up $78 million
(31.7%) from twelve months prior. This increase, which largely began in first
quarter 1994, is attributable to the previously mentioned strategy of increasing
net interest income by growing earning asset levels when favorable investment
opportunities are available.
As rates were rising in the first quarter of 1994 and early second quarter,
cash flow producing investments (such as 15 year seasoned mortgage backed
securities) were purchased to provide an expected flow of funds for reinvestment
at higher rates later on. Thus, significant growth (34%) was seen from December
1993 to March 1994 in mortgage backed securities. In the middle of the second
quarter, as rates began to level, call protection investments were purchased.
Thus, from March 1994 to September 1994, there is less growth in mortgage backed
securities (1.3%) than in call protection U.S. Governments (21%).
As the result of the 1994 purchases, mortgage backed securities grew to
$146.2 million, up $44.9 million (44%) from September 30, 1993, while U.S.
government securities grew to $145.8 million, up $34.6 million (31%) over the
same period. Additional growth in investments resulted from significant
increases in the bank's Federal Home Loan Bank stock level (reflected in other
investments) as required by the increased borrowing levels.
Over the last twelve months, the investment portfolio mix has shifted such
that there are increased proportions of mortgage backed securities (45% as of
September 30, 1994) and other investments (Federal Home Loan Bank stock), while
a decreasing proportion of tax exempt and U.S. government securities.
The average fully taxable equivalent yield in the last year has decreased
from 7.30% to 7.01% as higher yielding investments have run off. Nonetheless,
as of June 30, 1994 CBSI's overall investment yield is in the highly favorable
84th percentile. As rates in the financial markets increased in 1994, the
downward trend in the average investment yield stabilized in the first and
second quarters and has since begun to increase in the third quarter.
The average portfolio life based on earliest redemption date has remained
unchanged from September 30, 1993 at 2.6 years. Consistent with the recent rise
in financial market rates, the portfolio's market value appreciation decreased
from $12.3 million or 5.1% of book value one year ago to a $4.7 million loss or
(1.5%) of book value as of September 30, 1994.
As of the most recent quarter end, $117 million or 36% of the investment
portfolio is classified as available for sale 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
needs and in the management of interest rate risk. However, CBSI's liquidity
position does not rely on security sales, and interest rate risk is managed at
the time of investment purchase rather than after the fact.
To be conservative, 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 September 30, 1994 the
AFS portfolio average maturity based on earliest redemption date was 2.1 years
and the pre-tax market value adjustment was a negative $2.5 million or (2.3%) of
book value. The available for sale portfolio has been decreasing since the
adoption of SFAS 115; since that time, all new purchases have been classified as
held to maturity.
The held to maturity portfolio (64% of the total investments) amounted to
$207 million as of September 30, 1994. Average time to maturity of these
securities based on the earliest redemption date was 2.8 years, reflecting a
high (but slowing) rate of prepayments on mortgage backed holdings. The
portfolio recorded a market value loss of $2.2 million or 1% below book value
for the quarter just ended.
The following table 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 AFS Market Net
Ended: Average Maturity Market / Portfolio / Value Realized
(000's) Yield (Years) Book Total Adjustment Gains /
(a) (b) Portfolio (Pretax) (Losses)
-------- -------- -------- -------- -------- --------
December 31, 1992 7.96% 2.7 103.9% N/A N/A $0
March 31, 1993 7.75% 2.7 105.2% N/A N/A $0
June 30, 1993 7.33% 2.5 104.9% N/A N/A $0
September 30, 1993 7.30% 2.6 105.1% N/A N/A $0
December 31, 1993 6.58% 2.3 103.7% 50.0% $2,164 ($15)
March 31, 1994 6.71% 3.3 101.7% 41.8% $592 ($3)
June 30, 1994 6.69% 2.9 99.5% 38.5% ($1,209) $0
September 30, 1994 7.01% 2.6 98.5% 36.0% ($2,470) $0
Change from
September 30, 1993 to
September 30, 1994 -0.29% 0.0 -6.6% 36.0% ($2,470) $0
Note: (a) Yield on average investments calculated on a full-tax equivalent
basis. Excludes premiums on called bonds of $158, $146, and
$297 as of March 10, July 10, and October 10, 1993, respectively.
(b) Based on earliest redemption date.
* May not foot due to rounding
Part II. Other Information
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
b) Reports on Form 8-K: Filed on 8/15/94.
Item 5. Other Information. News release:
Community Bank, N.A. acquires three branches of
former Columbia Banking FSA from Resolution
Trust Corporation on June 3, 1994.
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: _______________________ __/s/ Sanford A. Belden__________
Sanford A. Belden, President and
Chief Executive Officer
Date: _______________________ __/s/ David G. Wallace___________
David G. Wallace, Senior
Vice President and
Chief Financial Officer
Community Bank System, Inc.
Statement re Earnings Per Share Computation
Exhibit 11
Three Months Ended Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
Primary Earnings Per Share
Net Income 2,712,827 2,465,537 7,761,871 7,273,113
---------- --------- --------- ---------
Income applicable
to common stock 2,712,827 2,465,537 7,761,871 7,273,113
========== ========= ========= =========
Weighted average number
of common shares 2,770,727 2,731,113 2,759,612 2,716,877
Add: Shares issuable from
assumed exercise of
incentive stock options 48,561 61,860 53,050 64,770
--------- --------- --------- ---------
Weighted average number of
common shares - adjusted 2,819,288 2,792,973 2,812,662 2,781,647
========= ========= ========= =========
Primary earnings per share $0.96 $0.88 $2.76 $2.61
===== ===== ===== =====
Fully Diluted Earnings Per Share
Net Income 2,712,827 2,465,537 7,761,871 7,273,113
========= ========= ========= =========
Weighted average number of
common shares - adjusted 2,821,068 2,799,097 2,816,418 2,794,098
Add: Equivalent number of
common shares assuming
conversion of preferred
--------- --------- --------- ---------
Weighted average number of
common shares - adjusted 2,821,068 2,799,097 2,816,418 2,794,098
========= ========= ========= =========
Fully diluted earnings per share $0.96 $0.88 $2.76 $2.60
===== ===== ===== =====