FORM 10 - Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the three months ended March 31, 1995
Commission file number 0-11716
COMMUNITY BANK SYSTEM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 16-1213679
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5790 Widewaters Parkway, DeWitt, New York 13214
(Address of principal executive offices) (Zip Code)
315/445-2282
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter periods that the registrant was required to file such
reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No___
Indicate the number of shares outstanding of each of the issuer's
classes of
common stock, as of the latest practical date.
Common Stock, $1.25 par value -- 2,789,750 shares as of May 3, 1995.
INDEX
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets --
March 31, 1995, December 31, 1994 and March 31, 1994.
Consolidated statements of income --
Three months ended March 31, 1995 and 1994
Consolidated statements of cash flows --
Three months ended March 31, 1995 and 1994.
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
- - --------------------------------------------------------------------------------------------------------------------
March 31, December 31, March 31,
ASSETS 1995 1994 1994
Cash and due from banks $50,721,496 $30,522,189 $28,551,066
Interest bearing deposits with other banks 0 0 90,000
Federal funds sold 0 0 0
TOTAL CASH AND CASH EQUIVALENTS 50,721,496 30,522,189 28,641,066
Investment securities
U.S. Treasury 16,607,542 16,624,198 27,469,783
U.S. Government agencies and corporations 175,918,083 170,462,427 92,713,368
States and political subdivisions 17,761,948 20,777,354 23,806,800
Mortgage-backed securities 162,407,975 155,376,150 144,472,287
Other securities 13,930,297 14,727,925 6,500,539
Federal Reserve Bank 551,550 551,550 500,350
TOTAL INVESTMENT SECURITIES 387,177,395 378,519,604 295,463,127
Loans 519,252,700 510,738,775 451,449,946
Less: Unearned discount 23,871,714 27,659,684 24,979,937
Reserve for possible loan losses 6,423,564 6,281,109 5,707,451
NET LOANS 488,957,422 476,797,982 420,762,558
Bank premises and equipment 10,651,544 10,591,510 9,904,811
Accrued interest receivable 8,006,653 6,657,326 4,796,604
Intangible assets 5,987,253 6,106,608 412,800
Other assets 8,777,761 6,305,990 8,106,192
TOTAL ASSETS $960,279,524 $915,501,209 $768,087,158
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing $101,167,608 $103,006,969 $90,407,560
Interest bearing 621,212,656 576,630,655 531,810,494
TOTAL DEPOSITS 722,380,264 679,637,624 622,218,054
Federal funds purchased and securities sold under
agreements to repurchase 43,765,000 57,300,000 31,500,000
Term borrowings 115,550,000 105,550,000 45,550,000
Obligations under capital lease 0 0 16,938
Accrued interest and other liabilities 9,621,279 6,724,070 6,073,359
TOTAL LIABILITIES 891,316,543 849,211,694 705,358,351
Shareholders' equity
Preferred stock $1.00 par value 0 0 0
Common stock $1.25 par value 3,485,187 3,485,187 3,436,898
Surplus 14,885,100 14,885,096 14,386,731
Undivided profits 51,768,386 49,853,313 44,560,452
Unrealized gains (losses) on available for sale securities (1,172,571) (1,930,414) 350,032
Less: Shares issued under
employee stock plan - unearned 3,121 3,667 5,306
TOTAL SHAREHOLDERS' EQUITY 68,962,981 66,289,515 62,728,807
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $960,279,524 $915,501,209 $768,087,158
See notes to consolidated financial statements
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- - ----------------------------------------------------------------------------------------------
Three Months
March
INTEREST INCOME 1995 1994
Interest and fees on loans $11,470,601 $9,335,055
Interest and dividends on investments:
U.S. Treasury 296,841 482,490
U.S. Government agencies and corporations 3,378,957 1,554,825
States and political subdivisions 301,490 370,897
Mortgage-backed securities 2,965,514 1,608,333
Other securities 209,784 154,895
Interest on federal funds sold 32,777 0
Interest on deposits at other banks 0 1,058
18,655,964 13,507,553
INTEREST EXPENSE
Interest on deposits
Savings 2,002,495 1,927,579
Time 3,888,923 1,999,316
Interest on federal funds purchased, securities
sold under agreements to repurchase and
Term borrowings 2,339,030 505,738
Interest on capital lease 0 501
8,230,448 4,433,134
NET INTEREST INCOME 10,425,516 9,074,419
Provision for possible loan losses 254,411 239,172
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 10,171,105 8,835,247
OTHER INCOME
Fiduciary services 339,936 324,570
Service charges on deposit accounts 661,759 563,638
Other service charges, commissions and fees 337,097 311,625
Other operating income 58,258 32,526
Investment security gain (loss) 0 (3,125)
1,397,050 1,229,234
11,568,155 10,064,481
OTHER EXPENSES
Salaries, wages and employee benefits 3,711,283 3,283,990
Occupancy expense of bank premises, net 540,068 533,288
Equipment and furniture expense 426,158 414,883
Other 2,346,128 2,024,089
7,023,637 6,256,250
INCOME BEFORE INCOME TAXES 4,544,518 3,808,231
Income taxes 1,793,000 1,408,000
NET INCOME $2,751,518 $2,400,231
Earnings per common share $0.98 $0.85
See notes to consolidated financial statements
COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For Three Months Ended March 31, 1995 and 1994
Increase (Decrease) in Cash and Cash Equivalents
1995 1994
- - ----------------------------------------------------------------------------------------------------
Operating Activities:
Net income $2,751,518 $2,400,231
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation 359,012 372,510
Amortization of intangible assets 119,355 39,464
Provision for loan losses 254,411 239,172
Provision for deferred taxes (37,021) (114,101)
Loss on sale of investment securities 0 3,125
Gain on sale of Loans (15,506) 0
Loss on sale of assets (2,000) (185)
Change in interest receivable (1,349,327) (257,835)
Change in interest payable and accrued expenses 1,209,821 643,050
Change in unearned loan fees and costs (37,635) 2,280
- - ----------------------------------------------------------------------------------------------------
Net Cash Provided By Operating Activities 3,252,628 3,327,711
- - ----------------------------------------------------------------------------------------------------
Investing Activities:
Proceeds from sales of investment securities 0 10,900,000
Proceeds from maturities of investment securities (24,184,602) 7,733,056
Purchases of investment securities 17,133,295 (62,162,318)
Net change in loans outstanding (13,956,164) (11,088,057)
Capital expenditures (417,046) (231,354)
- - ----------------------------------------------------------------------------------------------------
Net Cash Used By Investing Activities (21,424,517) (54,848,673)
- - ----------------------------------------------------------------------------------------------------
Financing Activities:
Net change in demand deposits,
NOW accounts, and savings
accounts 579,180 23,741,781
Net change in certificates of deposit 42,163,460 10,161,030
Net change in term borrowings (3,535,000) 19,500,000
Payments on lease obligation 0 (25,098)
Issuance of common stock 0 14,082
Cash dividends (836,445) (742,045)
- - ----------------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 38,371,195 52,649,750
- - ----------------------------------------------------------------------------------------------------
Change In Cash And Cash Equivalents 20,199,307 1,128,788
Cash and cash equivalents at beginning of year 30,522,189 27,512,278
- - ----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR 50,721,496 28,641,066
====================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid For Interest $6,042,995 $4,154,416
====================================================================================================
Cash Paid For Income Taxes $474,503 $390,950
====================================================================================================
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)
March 1995
Note A -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with
instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for
fair presentation have been included. Operating results for the three
month period ended March 31, 1995 are not necessarily indicative of
the results that may be expected for the year ended December 31, 1995.
The Company adopted FAS 114, "Accounting by Creditors for
Impairment of a Loan", on January 1, 1995. Under the new standard, a
loan is considered impaired, based on current information and events,
if it is probable that the Company will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. The measurement of impaired
loans is generally based on the present value of expected future cash
flows discounted at the historical effective interest rate, except
that all collateral-dependent loans are measured for impairment based
on the fair value of the collateral. No additional provision for
credit losses needed to be recognized as a result of the adoption of
FAS 114.
The adequacy of the allowance for credit losses is peridically
evaluated by the Company in order to maintain the allowance at a level
that is sufficient to absorb probable credit losses. Management's
evaluation of the adequacy of the allowance is based on a review of
the Company's historical loss experience, known and inherent risks in
the loan portfolio, including adverse circumstances that may affect
the ability of the borrower to repay interest and/or principal, the
estimated value of collateral, and an analysis of the levels and
trends of delinquencies, charge-offs, and the risk ratings of the
various loan catagories. Such factors as the level and trend of
interest rates and condition of the national and local economies are
also considered.
The allowance for credit losses is established through charges to
earnings in the form of a provision for credit loasses. Increases and
decreases in the allowance due to changes in the measurement of the
impaired loans are included in the provision for credit loansses.
Loans continue to be classified as impaired unless that are brought
fully current and the collection of scheduled interest and principal
is considered probable.
When a loan or portion of a loan is determined to be
uncollectible, the portion deemed uncollectible is charged against the
allowance and subsequent recoveries, if any, are credited to the
allowance.
At March 31, 1995, the recorded investment in loans for which
impairment has been recognized in accordance with FAS 114 totaled
$4,203,000 with a corresponding valuation allowance of $1,519,000.
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 three months ended March 31, 1995 which are not
otherwise apparent from the consolidated financial statements included
in these reports.
Earnings Performance Summary
Three Months Ended Change
3/31/95 3/31/94 Amount Percent
(000s)
Net Income $2,752 $2,400 $352 14.6%
Earnings per share $0.98 $0.85 $0.13 15.3%
Weighted average
shares outstanding 2,815 2,808 8 0.3%
Return on average assets 1.20% 1.33% -0.13% N/A
Average assets $929,778 $730,155 $199,623 27.3%
Return on average
shareholders' equity 16.62% 15.54% 1.08% N/A
Average shareholders' equity $67,151 $62,636 $4,514 7.2%
Percentage of average
shareholders' equity to
average assets 7.22% 8.58% -1.36% N/A
Net income for first quarter 1995 reached a record high of $2.75
million, up 14.6% over the comparable 1994 period. Earnings per share
rose 15.3% to $.98, also a record for the company.
These records reflect continued excellent loan growth, an
improved level of noninterest income, and enhanced utilization of
shareholder capital. As a result, return on shareholder equity rose
to 16.62%, up more than one percentage point from first quarter 1994.
In addition, dividends to shareholders were 11.1% higher than one year
earlier as a result of an increase approved last August to an
annualized payment of $1.20 per share.
Despite a narrower margin between earning asset yields and rates
paid on deposits, as reflected by the bank's 63 basis point reduction
in net interest margin from last year, CBSI's net interest income rose
a very satisfactory 14.9% (nominal) for the quarter. This increase
resulted from record loan growth of over 16% as well as 31% more in
investment securities. In particular, net growth in automobile
financing originated through dealers was very strong, up approximately
$37 million or 48% from one year earlier. Overall business lending
was nearly 14% higher while consumer mortgages increased almost 7%.
More than 40% of the $161 million growth in earning assets this
quarter was funded by the bank's four branch acquisitions in 1994,
with the balance from greater deposits held by municipalities and
borrowings from the Federal Home Loan Bank (FHLB). As discussed in
its recently released annual report, the company intends to repay
virtually all its FHLB borrowings with deposits to be assumed in its
pending acquisition of 15 branches from The Chase Manhattan Bank,
N.A., scheduled for closing during the third quarter of this year.
A 13.7% improvement in noninterest income for the quarter
reflected higher fees from the sale of annuities, mutual funds, and
employee benefit trust products as well as greater service charges and
commissions from an expanded customer base gained from 1994's
acquisitions. Overhead was up 12.3% for the quarter, with more than
half the increase reflecting personnel costs. Staff has been added
because of the newly acquired branches as well as to support business
development efforts. Other increases related to the new branches were
reflected in greater occupancy, FDIC insurance, and deposit intangible
amortization expense. Lastly, certain other costs were higher due to
activities in preparation for the acquisition of the Chase branches
and timing differences compared to first quarter 1994.
Asset quality remained good at the company. Net charge-offs were
very low at .09% of average loans, and nonperforming loans were down
slightly from the year-end 1994 level to .64% of loans outstanding.
These factors enabled loan loss provision expense to be nearly
unchanged from first quarter 1994 and still maintain the ratio of loan
loss reserves to loans outstanding at the year-end 1994 level of
1.30%. Though down from one year ago, the ratio of reserves to
nonperformers is considered ample by management at 2.0 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
first quarter 1995 increased $1.3 million (14.2%) over the same period
in 1994 to $10.6 million. Compared with fourth quarter 1994, there
was a $120,000 decline.
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, 1993
Amount $9,146 5.59% 8.36% 2.69% $649,680 62.2%
Change ($224) -0.20% -0.23% -0.12% 1.2% 0.6
March 31, 1994
Amount $9,251 5.51% 8.15% 2.72% $680,577 59.1%
Change $ 105 -0.07% -0.21% 0.03% 4.8% (3.2)
June 30, 1994
Amount $9,802 5.34% 8.10% 2.82% $736,720 59.1%
Change $ 552 -0.18% -0.06% 0.10% 8.2% 0.0
September 30, 1994
Amount $10,380 5.31% 8.23% 2.99% $776,195 59.1%
Change $ 578 -0.03% 0.14% 0.18% 5.4% 0.0
December 31, 1994
Amount $10,684 5.09% 8.39% 3.37% $832,113 56.1%
Change $ 304 -0.21% 0.15% 0.38% 7.2% (3.0)
March 31, 1995
Amount $10,564 4.88% 8.69% 3.90% $877,322 56.1%
Change ($120) -0.21% 0.30% 0.53% 5.4% 0.1
Change from
March 31, 1994 to
March 31, 1995
Amount $ 1,313 -0.63% 0.53% 1.18% $196,745 -2.9%
% Change 14.2% --- --- --- 28.9% ---
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 a premium on a called bonds of $297 on
October 10, 1993.
* May not foot due to rounding
From fourth quarter 1992 through mid-1994, margins have narrowed
because the yield on earning assets fell faster than the cost of funds
rate. Since mid-1994 the margin has continued to narrow as the bank's
cost of funds has increased at a faster pace than the earning asset
yield. More specifically, from fourth quarter 1992 to second quarter
1994, the cost of funds rate (total interest expense divided by total
deposits plus borrowings) was down only 28 basis points compared to a
110 basis point decline in earning asset yield. Since second quarter
1994, the cost of funds rate is up 108 BP largely due to an increasing
volume of higher cost borrowings versus lower cost deposits (whose
rate increases have lagged), while the yield on earning assets has
grown only 59 BPs (as lower yielding loans gradually mature or reprice
and are replaced with higher yields).
Comparing the quarter just ended to one year earlier, the net
interest margin narrowed by 63 basis points due to a 53 basis point
increase in the yield on earning assets compared to the cost of funds
rate increasing by 118 basis points (for the same reason outlined in
the preceding paragraph). However, the $196.7 million increase in
earning assets shown in the above table more than offsets the impact
of this shrinkage. Had margins remained constant, net interest income
would have increased by $2.6 million versus $1.3 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 second quarter 1994 acquisition of four
branches, about one-third of whose deposits was placed in the
investment portfolio.
Comparing first quarter 1995 to fourth quarter 1994 shows a 21 BP
decline in the net interest margin. The yield on earning assets
increased 30 basis points due to increased financial market rates and
prime rate increases in November 1994 and February 1995, while the
cost of funds rate rose 53 basis points because of a slight increase
in deposit rates plus fed funds increases (corresponding to prime
movements), which raised the rate on short-term borrowings. Despite
$45.2 million in earning asset growth, net interest income fell
$120,000 from the prior quarter due to the declining margin and two
fewer days (had the number of days been equal, net interest income
would have been over $100,000 higher than the prior quarter).
Despite its recent decrease, net interest margin has long been a
historical strength for CBSI, being in the top peer quartile based on
comparative data as of December 31, 1994. This performance is largely
the result of very high earning asset yields, being in the 80th to
90th percentile, versus cost of funds being slightly above norm in the
66th percentile.
Non-Interest Income
Non-interest income, including service charges, commissions,
overdraft fees, trust income and fees from other sources, totaled
approximately $1.4 million for the three months ended March 31, 1995,
up $168,000 (13.7%) from the same period last year.
Three Months Ended Change
3/31/95 3/31/94 Amount Percent
(000's)
Fiduciary services $ 340 $ 325 $ 15 4.7%
Service charges on $ 662 $ 564 $ 98 17.4%
deposit accounts
Annuity and mutual
fund sales $ 128 $ 16 $112 702.8%
Other service charges,
commissions, and fees $ 250 $ 328 ($78) -23.8%
Net gain (loss) on sale
of investments and
other assets $ 18 ($3) $ 20 695.4%
------- ------- ------- -------
Total noninterest income
- Amount $1,397 $1,229 $168 13.7%
- % of Average
assets 0.61% 0.68% -0.07% ---
As shown by the table above, income from service charges on
deposits is responsible for more than 58% of the total change from
first quarter 1994 versus the quarter just ended and is the result of
overdrafts and other fees associated with increased deposit accounts;
this improvement reflects the four branches purchased during the last
twelve months and efforts to reduce the number of waived charges.
Increases also occurred in fiduciary services attributable to
growth in employee benefit trust services. Personnel trust was
essentially flat (due to declines in periodic, less predictable estate
fees). Additionally, other service charges rose due to significant
growth in the sale of annuities and mutual funds (a program launched
through CBSI's branch network early in 1994) and the reinstatement of
a holiday extension program for installment loans. Growth was
partially offset by declining Visa merchant discount fees attributable
to loss of a large vendor.
Management recognizes that the company's level of non-interest
income must be improved, its ratio to average assets being .61% for
the quarter, or the first peer quartile (the 7 basis point decrease
from one year earlier reflects CBSI's strong asset growth). Progress
continues to be made to address this shortfall by maintaining
competitive and value-based service charges; selling fixed rate
annuities through our 36 customer facilities; offering full service
brokerage/financial planning products through dedicated sales
representatives in selected markets; and selling/servicing residential
mortgages (which began in mid-1994).
Non-Interest Expense
Non-interest expense or overhead for the three months ended March
31, 1995 increased by $767,000 (12.3%) over the same period last year
to $7.0 million. The table below summarizes the major components of
change.
Three Months Ended Change
3/31/95 3/31/94 Amount Percent
(000's)
Personnel Expense $3,711 $3,284 $427 13.0%
Occupancy, furniture, $ 966 $ 948 $ 18 1.9%
and equipment
Administrative and business $1,175 $ 963 $212 22.0%
development
All other expense $1,171 $1,061 $110 10.4%
------- ------- ------- -------
Total noninterest expense
- Amount $7,024 $6,256 $767 12.3%
- % of Average
assets 3.06% 3.47% -0.41% ---
Efficiency ratio 58.7% 59.7% -1.0% ---
Approximately 55% of the quarterly increase resides in personnel
expense, the primary reasons being modest annual merit awards and 43
additional full-time equivalent (FTE) positions, resulting in a total
of 440 employees as of March 31, 1995. These additions pertain to the
Columbia Savings branch acquisition (21 FTE); the acquisition of the
Chase Cato, New York branch in fourth quarter 1994; 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.
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 four new branches offset by
a milder 1994-95 winter (as compared to the prior winter).
Administrative expenses were up due to higher supplies and deposit
insurance (both increases due to branch acquisitions). Computer
services climbed due to an accounting change to reflect the external
servicing costs of the EBT function. 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. Finally, there were various other increases
related to inflation, volume growth and acquisitions.
The above increases were offset by lower advertising expense
(caused by more in-house ad creation and reduced rate associated
advertising) and reduced Visa processing expense, related to the loss
of a large vendor.
As a percentage of average assets, annualized overhead declined
satisfactorily from 3.47% in first quarter 1994 to 3.06% in first
quarter 1995; the latter level is now favorably below the peer norm
and is attributable to persistent cost control efforts as well as
asset growth (much of which was in the bank's investment portfolio,
which requires minimal overhead). CBSI's efficiency ratio (operating
expense divided by recurring operating income) decreased slightly in
the first quarter from 59.7% last year to 58.7% this year, nicely
below the peer bank average of 61.6% as of 12/31/94; the 1.0%
improvement is caused by a greater percentage of earnings resulting
from borrowing and investments rather than loans and deposits (which
consume more overhead).
Income and Income Taxes
Income before tax was approximately $4.5 million for the quarter
ended March 31, 1995, a $736,000 (19.3%) increase from the same period
last year. As shown by the table below, the increases in overhead
for the quarter are more than offset by greater net interest income
and higher non-interest income.
Three Months Ended Change
3/31/95 3/31/94 Amount Percent
(000's)
Net interest income $10,426 $9,074 $1,351 14.9%
Loan loss provision $ 254 $ 239 $ 15 6.4%
Net interest income $10,171 $8,835 $1,336 15.1%
after provision for
loan losses
Other income $ 1,397 $1,229 $ 168 13.7%
Other expense $ 7,024 $6,256 $ 767 12.3%
Income before $ 4,545 $3,808 $ 736 19.3%
income tax
Income tax $ 1,793 $1,408 $ 385 27.3%
Net income $ 2,752 $2,400 $ 351 14.6%
As a result of higher pre-tax income, YTD income taxes increased
by $385,000. CBSI's marginal tax rates are 35% federal and 9% state
(plus a 4.0% surcharge scheduled to be phased out over time). First
quarter 1995's effective tax rate of 39.5% is higher than first
quarter 1994's rate due to the decreasing proportion of tax-exempt
municipals. Compared to our peers, the company's effective tax rate 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
Three Months Ended Change
3/31/95 3/31/94 Amount Percent
Tier 1 leverage ratio 6.71% 8.08% -1.36% N/A
Tier 1 capital to 12.50 14.62 -2.12 N/A
risk asset ratio
Cash dividend declared $0.30 $0.27 $0.03 11.1%
per common share
Dividend payout 30.4% 30.9% -0.53% N/A
Book value per share:
Total $24.73 $22.81 $1.92 8.4%
Tangible 22.59 22.66 (0.08) (0.3)
The capital position of Community Bank System, Inc. continues to
be ample. As of March 31, 1995, the tier I leverage ratio of 6.71% [a
calculation monitored by the Office of the Controller of the Currency
(OCC)] was 136 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 $77 million in higher borrowings
to help fund loan and investment growth. The $1.2 million negative
after tax market value adjustment for the available-for-sale
investment portfolio is excluded from the calculation per the OCC's
definition.
Though below the peer norm of 7.79% as of December 31, 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 this 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 aforementioned reasons, the tier I risk-based
capital ratio as of March 31, 1995 was 12.5% or 212 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 $69.0 million as of March 31, 1995, $6.3
million (10.1%) higher than twelve months earlier. This increase is
attributable to dividends declared on common stock of $3.2 million
over the twelve months ended March 31, 1995 versus net income of $10.5
million during the same time frame. The remaining difference is due
to additional shares issued in exercise of incentive stock options and
changes in the market value adjustment. The higher YTD dividend shown
above reflects a 3 cent per share increase (11.1%) in the quarterly
dividend approved by the CBSI Board of Directors in August 1994, the
fourth dividend hike within three years. The YTD 1994 dividend
pay-out of 30.4% is at the low end of the company's targeted 30-40%
guideline.
The 8.4% increase in book value per share from March 31, 1994
approximates the increase in total capital discussed above, slightly
offset by 1.4% more in shares outstanding largely because of the
impact of a higher stock price on valuing unexercised options.
Tangible book value per share declined slightly since first quarter
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, 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%
December 31, 1994
Amount $31.75 $25.75 $26.25 2,788,150 $0.30 146,706
Change 0.0% -11.2% -15.3% 0.5% 0.0% -21.5%
March 31, 1995
Amount $27.75 $25.25 $27.13 2,788,150 $0.30 343,668
Change -12.6% -1.9% 3.3% 0.0% 0.0% 134.3%
Change from
March 31, 1994 to
March 31, 1995
Amount ($3.00) ($3.25) ($2.13) 38,632 $0.03 214,739
% Change -9.8% -11.4% -7.3% 1.4% 11.1% 166.6%
Loans
Loans outstanding, net of unearned discount, were $495.2 million
as of March 31, 1995, a very favorable $68.8 million (16.1%) growth in
the prior 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. Strong growth in the last
year has been experienced in consumer indirect and business lending.
Additionally, reasonable growth has been felt in consumer direct and
consumer mortgages. All four types are more fully defined in the
company's 1994 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, 1993
Amount $95,502 $74,321 $127,618 $120,430 $417,871 9.15%
Change 0.4% 3.1% 6.2% 9.7% 5.2% (0.15)
March 31, 1994
Amount $92,908 $77,103 $133,085 $123,373 $426,470 9.02%
Change -2.7% 3.7% 4.3% 2.4% 2.1% (0.13)
June 30, 1994
Amount $93,768 $86,230 $138,349 $127,180 $445,527 9.07%
Change 0.9% 11.8% 4.0% 3.1% 4.5% 0.05
September 30, 1994
Amount $98,280 $94,464 $142,012 $134,724 $469,480 9.12%
Change 4.8% 9.5% 2.6% 5.9% 5.4% 0.05
December 31, 1994
Amount $98,777 $102,491 $143,137 $138,675 $483,079 9.26%
Change 0.5% 8.5% 0.8% 2.9% 2.9% 0.14
March 31, 1995
Amount $98,633 $113,895 $142,289 $140,477 $495,294 9.52%
Change -0.1% 11.1% -0.6% 1.3% 2.5% 0.26
Change from
March 31, 1994 to
March 31, 1995
Amount $5,725 $36,792 $9,204 $17,103 $68,824 0.51
Change 6.2% 47.7% 6.9% 13.9% 16.1% N/A
Loan mix
March 31, 1994 21.8% 18.1% 31.2% 28.9% 100.0%
March 31, 1995 19.9% 23.0% 28.7% 28.4% 100.0%
Change -1.9% 4.9% -2.5% -0.6% ---
* May not foot due to rounding
Greater than 50% of CBSI's loan growth in the last twelve months
came from the indirect lending portfolio (applications taken at dealer
locations), which grew 48%. This reflects both high automobile demand
industry-wide, which began in the spring of 1993, as well as greater
emphasis on this product line in CBSI's Southern Region. These
factors produced a strong 11.1% increase in the quarter just ended.
Approximately, 55% of the bank's indirect automobile loans are used
versus 45% new. About 7% of the consumer indirect portfolio consists
of mobile homes, and recreational and other vehicles.
Almost 25% of CBSI's loan growth in the last twelve months came
from the generally prime-based business lending portfolio, which grew
nearly 14%. Though a relatively low prime lending rate has encouraged
borrowing in the last year, 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 may have dampened demand a bit, as
evidenced by growth of 1.3% during the last three months (the lowest
since third quarter 1993).
The almost 7% increase in consumer mortgages since first quarter
1994 (or 13% of total loan growth) is attributable to the increasing
mortgage rate environment, the continued wind-down of the fixed rate
refinancing boom of the last two years, and a program to sell
mortgages in the secondary market implemented by CBSI in third quarter
1994. Volume fell slightly in the first quarter with $800,000 in
secondary market sales. Considering mortgage sales and normal
portfolio amortization, management anticipates little future growth
within this loan type.
Consumer direct loans have grown a favorable 6.2% since March 31,
1994. This category had been essentially flat since the end of 1992
after the accumulation and periodic sale of student loans is
considered. The line of business started to show small increases in
mid 1994 but has since leveled with a flat quarter for conventional
installment and direct personal lending. Borrowing under home equity
lines of credit has generally maintained steady growth, but fell
slightly in the last three months due to decreased demand which had
been absorbed with 1994's teaser rate promotion in conjunction with
increasing first quarter 1995 rates.
Loans at CBSI have now climbed for twelve consecutive quarters,
which compares very favorably to 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
fell in the last twelve months after a sharp increase in 1991-1993,
the indirect loan share is rising after a slide which started before
the 1990 recession and eased late in 1994. Although there has been
favorable growth in consumer mortgages and consumer direct, the loan
mix of each fell with stronger growth in other loan categories.
As discussed in the net interest income section of this report,
earning asset yields have grown 53 basis points over the last twelve
months. Despite a 281 basis point increase in the average prime rate
for the three months ending March 31, 1995 over the same period last
year, the loan yield has grown only 51 basis points. This has
resulted from the slow runoff of lower yielding loans and market
pressure keeping rates on many loan types relatively low.
Nonetheless, CBSI's predominantly retail loan mix and related pricing
objectives have maintained a very favorable overall loan yield, being
in the top peer quartile based on data as of December 31, 1994.
Loan Loss Provision and Reserve for Loan Losses
The provision for future loan losses was $254,000 for the three
months ended March 31, 1995, up $15,000 (6.4%) versus the same period
last year.
Net charge-offs for the quarter were $112,000 (a very modest .09%
of loans), down from $238,000 a year ago due a slight decline in gross
charge offs and recoveries of two large commercial loans. CBSI's net
charge offs are slightly above the peer norm, being in the 59th
percentile as of December 31, 1994.
3 Months 3 Months 12 Months 12 Months 12 Months
(000s or % Ratios) Mar 31, Mar 31, Dec 31, Dec 31, Dec 31,
1995 1994 1994 1993 1992
- - ---------- ---- ---- ---- ---- ----
Net Charge-offs $112 $238 $1,128 $782 $2,057
Net Charge-offs/Ave Loans 0.09% 0.23% 0.25% 0.20% 0.59%
Gross Charge-offs $298 $338 $1,616 $1,410 $2,601
Gross Charge-offs/Ave Loans 0.25% 0.33% 0.36% 0.37% 0.74%
Recoveries $186 $99 $488 $628 $545
Recoveries/Prior year 46.6% 28.6% 34.6% 24.2% 8.5%
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 1.30%.
Despite the ratio's decline, the reserve reached a new high at quarter
end of $6.4 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 cover
the level of non-performing loans by approximately two times or more
since the company's restructuring as a single bank. Today's coverage
of loan loss reserves over non-performers is favorable at 202%.
Included in this coverage is an ample 12% in reserves to absorb
general, unforeseen losses.
3 Months 3 Months 12 Months 12 Months 12 Months
(000's or % Ratios) Mar 31, Mar 31, Dec 31, Dec 31, Dec 31,
1995 1994 1994 1993 1992
- - ---------- ---- ---- ---- ---- ----
Non-Performing Loans $3,183 $2,509 $3,257 $2,391 $1,606
Non-Performing Loans/Loans 0.64% 0.59% 0.67% 0.57% 0.44%
Loan Loss Allowance $6,424 $5,707 $6,281 $5,707 $4,982
Loan Loss Allowance/Loans 1.30% 1.34% 1.30% 1.37% 1.37%
Loan Loss Allowance/ 202% 227% 193% 239% 310%
Non-Performing Loans
Loan Loss Provision $254 $239 $1,702 $1,506 $2,727
Loan Loss Provision/ 227% 100% 151% 193% 133%
Net Charge-offs
Non-performing loans increased 27% from twelve months earlier to
$3.2 million as of the most recent quarter end attributable to one
large commercial loan for which corrective action is being taken.
Also up from the March 31, 1994 level was the ratio of non-performers
to loans outstanding to .64%; the slightly higher level at December
31, 1994 was in the peer normal 45th percentile.
The ratio of loan loss provision to net charge offs for the most
recent quarter end was 227%, well above the 100% ratio twelve months
earlier due the objective to maintain the ratio of loan loss allowance
to total loans at 1.30%.
The following table reflects the detail on non-performing and
restructured loan levels. The ratio of non-performing assets to total
assets was .36% as of March 31, 1995, down 5 basis points from a year
ago. There is no troubled debt restructuring as of the most recent
quarter end versus a year earlier at $228,000; the change reflects
being paid out of previously restructured commercial loans. The ratio
of nonperforming assets to loans plus OREO remains with the company's
objective of .75%.
3 Months 3 Months 12 Months 12 Months 12 Months
(000's or % Ratios) Mar 31, Mar 31, Dec 31, Dec 31, Dec 31,
1995 1994 1994 1993 1992
- - ---------- ---- ---- ---- ---- ----
Loans accounted for on a $2,448 $1,971 $2,396 $1,738 $881
non-accrual basis
Accruing loans which are
contractually past due
90 days or more as to
principal and interest
payments $735 $538 $861 $653 $726
Loans which are "troubled
debt restructurings" as
defined in Statement of
Financial Accounting
Standards No. 15
"Accounting by Debtors
and Creditors for
Troubled Debt
Restructurings $0 $228 $15 $243 $356
Other Real Estate (OREO) $235 $375 $223 $433 $459
----- ----- ----- ----- -----
Total Non-Performing Assets $3,418 $3,112 $3,495 $3,067 $2,422
Total Non-Performing Assets/ 0.36% 0.41% 0.38% 0.43% 0.36%
Total Assets
Total Non-Performing Assets/
Total Loans and OREO .69% .73% .72% .73% .67%
* May not foot due to rounding
Total delinquencies at $6.1 million (loans greater than 30 days
past due plus nonaccruals) declined slightly from one year earlier,
and the ratio to total loans at 1.18% remained favorable to peer norms
and improved from prior periods. The reason for the dollar decrease
is improved installment loan collection efforts. Installment and real
estate delinquencies decreased slightly.
Delinquencies 3 Months 3 Months 12 Months 12 Months 12 Months
30 days - Non-accruing Mar 31, Mar 31, Dec 31, Dec 31, Dec 31,
(000's or % Ratios) 1995 1994 1994 1993 1992
- - ---------- ---- ---- ---- ---- ----
Total Delinquencies $6,127 $6,304 $6,765 $7,004 $6,894
Ratio to Total Loans 1.18% 1.40% 1.32% 1.58% 1.76%
Time & Demand $3,181 $2,798 $3,107 $2,633 $1,758
Ratio to Time & Demand 2.17% 2.16% 2.14% 2.07% 1.72%
Installment $1,858 $2,282 $2,664 $3,156 $4,026
Ratio to Installment 0.94% 1.45% 1.41% 2.01% 2.53%
Real Estate $1,088 $1,225 $994 $1,214 $1,110
Ratio to Real Estate 0.62% 0.74% 0.56% 0.76% 0.85%
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 8.4 percentage points from a year ago to 80.0%,
reflecting borrowings as an increased source of funding in order to
achieve management's balance sheet leverage objectives. Average
earning assets have increased $196.7 million over the last twelve
months, while average deposits have grown only $100.5 million.
The table below displays the components of total deposits
including volume and rate trends over the last six 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, 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 88.4%
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 87.5%
Yield / Rate ---- 2.64% 2.62% 4.24% 2.82%
December 31, 1994
Amount $104,427 $248,710 $68,067 $262,359 $683,564 82.1%
Yield / Rate ---- 2.56% 2.67% 4.77% 3.03%
March 31, 1995
Amount $102,850 $237,540 $66,035 $295,808 $702,233 80.0%
Yield / Rate ---- 2.63% 2.83% 5.33% 3.40%
Change in quarterly
average outstandings
& yield / rate
March 31, 1994 to
March 31, 1995
Amount $10,328 ($3,582) ($5,968) $99,708 $100,486 -8.4%
% Change 11.2% -1.5% -8.3% 50.8% 16.7%
Change (% pts) ---- 0.14 0.31 1.20 0.76
Deposit Mix
March 31, 1994 15.4% 40.1% 12.0% 32.6% 100.0%
March 31, 1995 14.6% 33.8% 9.4% 42.1% 100.0%
Change -0.7% -6.2% -2.6% 9.5% ----
* May not foot due to rounding
Average total deposits for the quarter were 16.7% higher than the
comparable 1994 period. As shown by the table, virtually all of the
deposit growth was in time deposits (up $99.7 million), with the
remainder split between $10.3 million in demand deposit growth and
declines in savings and money markets. The major reasons for the
total deposit increase are the $62.4 million Columbia Banking, FSA
deposit acquisition late in the second quarter 1994, the Chase Cato
branch acquisition in fourth quarter 1994, and an expanded business
customer base consistent with increases in commercial loans.
The deposit mix has changed slightly since first quarter 1994.
Time deposits have increased with the recent upturn in financial
market rates as funds shifted back from temporarily being parked in
savings and money market accounts. Additionally, the time deposit mix
expanded with the high proportion of time deposits in the acquired
Columbia branches and CBNA bidding more aggressively early in first
quarter 1995 on public fund CD's which had more favorable rates than
short term borrowings.
While borrowing costs have risen with the recent movement in the
federal funds rate (see table in the following section), the above
table shows that the average rates on interest bearing deposits have
lagged this increase. As of December 31, 1994, CBSI's average rate on
interest bearing deposits was in the 53rd peer percentile.
After having steadily fallen for a number of quarters, the
average rate on total deposits appears to have bottomed out in second
quarter 1994 and has increased since then. The 37 basis point rise in
average cost of deposits during the quarter is attributable to the
increasing IPC deposit rates and more aggressive municipal time
deposit bidding (which has since come down with New York State funds
being paid out to many school districts).
Liquidity and Borrowing Position
Liquidity involves the ability to raise funds, to support asset
growth, to meet requirements for deposit withdrawals, to maintain
reserve requirements, and to 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 March 31, 1995 is considered by
management to be adequate. In the event of a liquidity crisis, over
$83 million (essentially short term assets minus short term
liabilities) or 8.7% of assets could be converted into cash within a
30-day time period. This puts the liquidity position 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 7.1% as of this
quarter end. This longer period encompasses continued service to loan
customers and normal loan and deposit flows anticipating viability of
the institution after coping with the initial crisis. The 90-day
ratio is temporarily lower than the policy minimum because of
anticipated outflows of public funds over the next 90 days and high
levels of securities pledged to municipal deposit accounts (both
related to the timing of state school district funding). 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 in the last decade.
The following table shows the trend of loans, investments, large
liability certificates of deposit and other borrowings over the last
six quarters.
For the Quarter Average Average Ave Core Ave CDs Average Interest
Ended: Loans Investments Deposits >$100,000 Borrowings Bearing
(000's) (a) (b)
Liabilities
------ ------ ------ ------ ------ ------
Amount and Average Yield / Rate
------ ------ ------ ------ ------ ------
December 31, 1993
Amount $404,944 $244,735 $576,448 $24,693 $26,394 $535,834
Yield / Rate 9.15% 6.58% 2.64% 3.35% 3.16% 3.15%
March 31, 1994
Amount $419,874 $260,703 $576,613 $25,134 $58,850 $568,074
Yield / Rate 9.02% 6.77% 2.60% 3.72% 3.49% 3.16%
June 30, 1994
Amount $435,678 $301,042 $605,653 $34,548 $81,048 $625,117
Yield / Rate 9.07% 6.68% 2.60% 3.67% 4.07% 3.25%
September 30, 1994
Amount $454,383 $321,811 $644,302 $34,899 $79,676 $657,767
Yield / Rate 9.12% 6.98% 2.74% 4.33% 4.50% 3.45%
December 31, 1994
Amount $473,920 $358,193 $642,190 $41,374 $129,074 $708,211
Yield / Rate 9.26% 7.23% 2.91% 4.78% 5.18% 3.87%
March 31, 1995
Amount $488,436 $388,886 $644,375 $57,858 $153,625 $753,008
Yield / Rate 9.52% 7.64% 3.18% 5.89% 6.17% 4.43%
Change in quarterly
average outstandings
& yield / rate from
March 31, 1994 to
March 31, 1995
Amount $68,562 $128,183 $67,761 $32,724 $94,775 $184,933
% Change 16.3% 49.2% 11.8% 130.2% 161.0% 32.6%
Change (%pts) 0.51 0.87 0.58 2.18 2.69 1.27
Note:(a) Net interest income, margin, and earning asset yield figures
exclude a premium on a called bonds of $297 on October 10, 1993.
(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 first quarter 1995 averaged $153.6 million
compared to $58.9 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 $40
million as of quarter end.
CBNA's Federal Home Loan Bank borrowings are currently comprised
of 90 day terms or less, with 27% at the currently manageable
overnight 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.
The company intends to repay virtually all of its FHLB borrowings
with deposits to be assumed in its pending acquisition of 15 branches
from The Chase Manhattan Bank, N.A. scheduled for closing during the
third quarter of this year. This is the main reason behind
management's decision to maintain a short-term borrowing position.
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 43.9% 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
Assets
(000's) ------ ------ ------ ------ ------ ------
Amount and Change (Period
from Preceding Quarter End)
------ ------ ------ ------ ------
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 40.9%
Change 6.1% 6.2% -10.8% 67.7% 6.3% (0.0)
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% 0.0
December 31, 1994
Amount $187,087 $155,376 $20,777 $15,279 $378,520 43.9%
Change 28.3% 6.1% -6.3% 46.3% 16.5% 3.0
March 31, 1995
Amount $192,526 $162,408 $17,762 $14,482 $387,177 43.9%
Change 2.9% 4.5% -14.5% -5.2% 2.3% (0.1)
Change from
March 31, 1994 to
March 31, 1995
Amount $72,342 $17,936 ($6,045) $7,391 $91,624 2.9%
Change 60.2% 12.4% -25.4% 104.2% 31.0% ---
Investment Mix
March 31, 1994 40.7% 48.9% 8.1% 2.4% 100.0%
March 31, 1995 49.7% 41.9% 4.6% 3.7% 100.0%
Change 9.1% -6.9% -3.5% 1.3% ---
Note: (a) Includes CMOs and pass-throughs
(b) Includes Money Market Investments, Federal Home Loan Bank, and other
* May not foot due to rounding
Investments totaled $387 million for the quarter just ended, up
$92 million (31.0%) from twelve months prior. This increase is
attributable to (a) the previously mentioned strategy of increasing
net interest income by growing earning asset levels when favorable
investment opportunities are available and (b) deposits acquired via
four new branches in the last twelve months.
As rates were rising in the first and second quarters in 1994,
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 second quarter 1994, as rates began to
level (and fall slightly in first quarter 1995), call protection
investments were purchased.
Thus, from March 1994 to March 1995 there is less growth in
mortgage backed securities (12.4%) to $162.4 million than in call
protection U.S. Governments (60.2%) to $192.5 million.
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 increased FHLB borrowing levels.
Over the last twelve months, the investment portfolio mix has
shifted such that there are increased proportions of U.S. Government
securities (50% as of March 31, 1995) and other investments (Federal
Home Loan Bank stock), while a decreasing proportion of tax exempt and
mortgage backed securities.
The average fully taxable equivalent yield in the last year has
increased from 6.77% to 7.64% as the result of lower yielding
investments running off and taking advantage of increased market
rates. As of December 31, 1994, CBSI's overall investment yield is in
the highly favorable 88th percentile.
The average portfolio life based on earliest redemption date has
increased from 3.3 years on March 31, 1994 to 3.9 years attributable
to the increasing mix of investments with call protection features.
Although interest rates have risen dramatically since March of
1994, little change in the market value of the bank's investment
portfolio has occurred. Portfolio appreciaion dropped slightly from
101.7% of book value one year ago to 100.5% of book value as of March
31, 1995.
Management, although keenly aware of how interest rate volatility
may change the market value of its investments, continues to place an
overriding emphasis on the future earnings stream of its portfolio;
thus, its decision to classify the majority of new investment
purchases as held-to-maturity.
The held-to-maturity portfolio (78% of the total investments)
amounted to $302 million as of March 31, 1994. Average time to
maturity of these securities, based on the earliest redemption date,
was 3.5 years, reflecting the increasing mix of call protection
investments. The portfolio recorded a market value appreciation of
$3.9 million or 1.3% above book value for the quarter just ended.
As of the most recent quarter end, $72 million or 22% 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 to manage 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 chose to place in its AFS portfolio
all collateralized mortgage obligations and most publicly traded
securities with a stated final maturity or call date of two years or
less. As of March 31, 1995, the AFS portfolio average maturity based
on earliest redemption date was 5.5 years, and the pre-tax market
value adjustment was a negative $2.0 million or (2.8%) 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 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
(000s) Yield (Years) Book Total Adjustment Gains /
(a) (b) Portfolio (Pretax) (Losses)
-------- -------- -------- -------- -------- --------
December 31, 1993 6.58% 2.3 103.7% 50.0% $2,164 ($15)
March 31, 1994 6.77% 3.3 101.7% 41.8% $592 ($3)
June 30, 1994 6.68% 2.9 99.5% 38.5% ($1,209) $0
September 30, 1994 6.98% 2.6 98.5% 36.0% ($2,470) $0
December 31, 1994 7.23% 3.6 97.8% 22.8% ($3,263) ($499)
March 31, 1995 7.64% 3.9 100.5% 21.8% ($1,982) $0
Change from
March 31, 1994 to
March 31, 1995 0.87% 0.6 -1.2% -20.0% ($2,573) $3
Note: (a) Net interest income, margin, and earning asset yield
figures exclude a premium on a called bonds of $297 on October 10,
1993.
(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 2/27/95.
Item 5. Other Information.
Stockholder Protection Rights Agreement
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: _______________________ _________________________________
Sanford A. Belden, President and
Chief Executive Officer
Date: _______________________ _________________________________
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
March 31, March 31,
1995 1994
Primary Earnings Per Share
Net Income 2,751,518 2,400,231
---------- ---------
Income applicable
to common stock 2,751,518 2,400,231
========== =========
Weighted average number
of common shares 2,788,150 2,748,905
Add: Shares issuable from
assumed exercise of
incentive stock options 27,227 58,746
--------- ---------
Weighted average number of
common shares - adjusted 2,815,377 2,807,651
========= =========
Primary earnings per share $0.98 $0.85
========= =========
Fully Diluted Earnings Per Share
Net Income 2,751,518 2,400,231
========= =========
Weighted average number of
common shares - adjusted 2,818,963 2,807,651
Add: Equivalent number of
common shares assuming
conversion of preferred
--------- ---------
Weighted average number of
common shares - adjusted 2,818,963 2,807,651
========= =========
Fully diluted earnings per share $0.98 $0.85
========= =========