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 six months ended June 30, 1996
Commission file number 0-11716
COMMUNITY BANK SYSTEM, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 16-1213679
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5790 Widewaters Parkway, DeWitt, New York 13214
-------------------------------------------------
(Address of principal executive offices) (Zip Code)
315/445-2282
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
Common Stock, $1.25 par value -- 3,722,940 shares as of August 2, 1996.
INDEX
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
PART I. INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets --
June 30, 1996, December 31, 1995 and June 30, 1995
Consolidated statements of income --
Three months ended June 30, 1996 and 1995 and six months ended
June 30, 1996 and 1995
Consolidated statements of cash flows --
Six months ended June 30, 1996 and 1995
Item 2. Management Discussion and Analysis of Financial Conditions
and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Securities Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
- ---------------------------------------------------------------------------------------------------------------------------
June 30, December 31, June 30,
1996 1995 1995
----------- ---------- -----------
ASSETS
Cash and due from banks $49,431,125 $56,903,103 $33,621,493
Federal funds sold 0 6,000,000 0
TOTAL CASH AND CASH EQUIVALENTS 49,431,125 62,903,103 33,621,493
Investment securities
U.S. Treasury 7,994,396 8,524,661 16,583,546
U.S. Government agencies and corporations 300,184,753 226,972,372 195,924,488
States and political subdivisions 15,524,708 15,868,356 16,727,421
Mortgage-backed securities 229,385,267 195,188,655 177,260,887
Other securities 20,083,458 20,081,918 20,105,340
Federal Reserve Bank 1,395,750 1,395,750 569,600
TOTAL INVESTMENT SECURITIES 574,568,332 468,031,712 427,171,282
Loans 608,425,321 573,620,687 535,101,482
Less: Unearned discount 8,887,249 13,469,032 19,790,657
Reserve for possible loan losses 7,469,221 6,976,385 6,699,043
NET LOANS 592,068,851 553,175,270 508,611,782
Bank premises and equipment 16,591,326 16,935,856 11,345,213
Accrued interest receivable 10,255,332 9,150,503 7,556,960
Intangible assets 32,609,299 33,970,375 5,867,897
Other assets 7,677,080 7,878,194 8,269,409
TOTAL ASSETS $1,283,201,345 $1,152,045,013 $1,002,444,036
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing $144,252,061 $140,288,323 $110,036,877
Interest bearing 878,155,625 876,657,901 599,058,197
TOTAL DEPOSITS 1,022,407,686 1,016,946,224 709,095,074
Federal funds purchased and securities sold under
agreements to repurchase 45,800,000 0 33,200,000
Term borrowings 100,550,000 25,550,000 155,550,000
Accrued interest and other liabilities 11,097,699 9,488,540 8,639,877
TOTAL LIABILITIES 1,179,855,385 1,051,984,764 906,484,951
Shareholders' equity
Preferred stock $100 stated value 4,500,000 4,500,000 9,000,000
Common stock $1.25 par value 4,602,894 4,599,531 4,378,938
Surplus 33,095,986 32,955,273 29,058,240
Undivided profits 61,109,491 57,079,501 53,501,671
Unrealized gains (losses) on available for sale securities 62,948 977,457 22,810
Shares issued under employee stock plan - unearned (25,359) (51,513) (2,574)
TOTAL SHAREHOLDERS' EQUITY 103,345,960 100,060,249 95,959,085
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,283,201,345 $1,152,045,013 $1,002,444,036
See notes to consolidated financial statements
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- -----------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1996 1995 1996 1995
----------- ----------- ---------- -----------
INTEREST INCOME
Interest and fees on loans $13,834,997 $12,139,197 $27,314,520 $23,609,798
Interest and dividends on investments:
U.S. Treasury 155,601 301,681 315,625 598,522
U.S. Government agencies and corporations 5,235,752 3,582,587 9,748,464 6,961,544
States and political subdivisions 234,876 278,561 494,533 580,051
Mortgage-backed securities 3,870,276 2,996,565 7,446,461 5,962,079
Other securities 320,287 261,265 685,836 471,049
Interest on federal funds sold 12,213 0 334,719 32,777
Interest on deposits at other banks 0 0 0 0
23,664,002 19,559,856 46,340,158 38,215,820
INTEREST EXPENSE
Interest on deposits
Savings 2,486,199 2,025,258 5,043,971 4,027,753
Time 6,554,964 4,322,839 13,094,370 8,211,762
Interest on federal funds purchased, securities
sold under agreements to repurchase and
Term borrowings 1,032,591 2,639,906 1,406,690 4,978,936
10,073,754 8,988,003 19,545,031 17,218,451
NET INTEREST INCOME 13,590,248 10,571,853 26,795,127 20,997,369
Provision for possible loan losses 608,894 599,029 1,197,068 853,440
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 12,981,354 9,972,824 25,598,059 20,143,929
OTHER INCOME
Fiduciary services 374,131 347,170 797,296 687,106
Service charges on deposit accounts 1,018,915 703,646 1,992,778 1,365,405
Commissions on investment products 213,552 124,633 374,403 252,635
Other service charges, commissions and fees 381,826 296,350 772,723 505,445
Other operating income 12,859 52,268 17,119 110,526
Investment security gain (loss) 0 (149,750) 0 (149,750)
2,001,283 1,374,317 3,954,319 2,771,367
14,982,637 11,347,141 29,552,378 22,915,296
OTHER EXPENSES
Salaries, wages and employee benefits 4,679,705 3,599,908 9,383,436 7,311,191
Occupancy expense of bank premises, net 742,502 558,126 1,544,589 1,098,194
Equipment and furniture expense 567,638 453,749 1,141,156 879,907
Amortization of intangible assets 714,057 120,092 1,436,497 240,553
Other 2,355,060 2,399,276 4,804,881 4,624,943
9,058,962 7,131,151 18,310,559 14,154,788
INCOME BEFORE INCOME TAXES 5,923,675 4,215,990 11,241,819 8,760,508
Income taxes 2,399,000 1,645,000 4,579,000 3,438,000
NET INCOME $3,524,675 $2,570,990 $6,662,819 $5,322,508
Earnings per common share $0.92 $0.92 $1.74 $1.89
See notes to consolidated financial statements
COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For Six Months Ended June 30, 1996 and 1995
Increase (Decrease) in Cash and Cash Equivalents
1996 1995
- -------------------------------------------------------------------------------------------------
Operating Activities:
Net income $6,662,819 $5,322,508
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 967,313 721,641
Net amortization of intangible assets 1,396,414 238,711
Net accretion of security premiums and discounts (1,156,881) (690,431)
Provision for loan losses 1,197,068 853,440
Provision for deferred taxes 188,634 9,156
(Gain)\Loss on sale of investment securities 0 149,750
(Gain)\Loss on sale of loans (11,504) 108,542
(Gain)\Loss on sale of assets (5,616) 1,984
Change in interest receivable (1,104,829) (899,634)
Change in other assets and other liabilities 2,402,314 (845,812)
Change in unearned loan fees and costs (229,289) (69,904)
- --------------------------------------------------------------------------------------------------
Net Cash Provided By Operating Activities 10,306,443 4,899,951
- --------------------------------------------------------------------------------------------------
Investing Activities:
Proceeds from sales of investment securities 0 3,950,250
Proceeds from maturities of held to maturity investment securities 26,902,961 6,994,127
Proceeds from maturities of available for sale investment securities 21,717,612 3,788,999
Purchases of held to maturity investment securities (111,788,423) (40,596,601)
Purchases of available for sale investment securities (43,769,528) (18,946,433)
Net change in loans outstanding (39,849,856) (33,266,560)
Capital expenditures (622,947) (1,473,360)
Premium paid for branch acquisitions (29,558) 0
- --------------------------------------------------------------------------------------------------
Net Cash Used By Investing Activities (147,439,739) (79,549,578)
- --------------------------------------------------------------------------------------------------
Financing Activities:
Net change in demand deposits,
NOW accounts, and savings accounts 2,429,172 (5,934,267)
Net change in certificates of deposit 3,032,290 35,391,717
Net change in term borrowings 120,800,000 25,900,000
Issuance (retirement) of common and preferred stock 31,664 24,066,891
Cash dividends (2,631,808) (1,675,410)
- --------------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 123,661,318 77,748,931
- --------------------------------------------------------------------------------------------------
Change In Cash And Cash Equivalents (13,471,978) 3,099,304
Cash and cash equivalents at beginning of year 62,903,103 30,522,189
- --------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 49,431,125 33,621,493
==================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid For Interest $17,592,471 $15,738,173
==================================================================================================
Cash Paid For Income Taxes $4,371,911 $3,553,478
==================================================================================================
SUPPLEMENTAL DISCLOSURE OF NONCASH AND OTHER
INVESTING ACTIVITIES:
Dividends declared and unpaid 1,215,165 837,705
==================================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 1996
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for fair presentation have
been included. Operating results for the six month period ended June 30, 1996
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1996.
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
The information required by rule 10.01 of Regulation S-X is presented on
the previous pages.
Item 2. Management Discussion and Analysis of Financial Condition and of
Operations
The purpose of the discussion is to present material changes in Community
Bank System, Inc.'s financial condition and results of operations during the six
months ended June 30, 1996 which are not otherwise apparent from the
consolidated financial statements included in these reports. When used in this
report, the term "CBSI" means Community Bank System, Inc. and its subsidiaries
on a consolidated basis, unless indicated otherwise. Financial performance
comparisons to peer bank holding companies are based on data through March 31,
1996 as provided by the Federal Reserve System; the peer group is comprised of
107 bank holding companies having $1 to $3 billion in assets.
I. EARNINGS PERFORMANCE SUMMARY
Three Months Ended Change
6/30/96 6/30/95 Amount Percent
--------- --------- -------- -------
(000's)
Net Income $3,525 $2,571 $954 37.1%
Earnings per share $0.92 $0.92 $0.00 0.0%
Weighted average
shares outstanding 3,714 2,814 900 32.0%
Return on average assets 1.16% 1.07% 0.08% N/A
Average assets $1,227,101 $961,237 $265,864 27.7%
Return on average
shareholders' equity 14.13% 14.66% -0.53% N/A
Average shareholders' equity $101,974 $70,390 $31,584 44.9%
Percentage of average
shareholders' equity to
average assets 8.31% 7.32% 0.99% N/A
- ----------
* May not foot due to rounding
A. NET INCOME TREND
Net income for the second quarter and first six months of 1996 reached a
record high of $3.525 million and $6.663 million, up 37% and 25%, respectively,
over the comparable 1995 periods. Compared to first quarter 1996 earnings, the
second quarter grew $387,000 or 12.3%.
Earnings per share for the second quarter were $.92, up $.10 from the first
quarter of this year and equal to second quarter 1995's results. These results
were achieved despite the issuance of 862,500 additional common shares in late
June and early July of 1995, which increased common shares outstanding by
approximately 32% in anticipation of financing the company's mid-July purchase
of 15 branches from The Chase Manhattan Bank, N.A. For the first half of 1996,
earnings per share were $1.74, down 7.9% from a year earlier, reflecting the
increased shares outstanding and the all-time earnings per share high of $.98
achieved in first quarter 1995.
The $.92 per share, compares very favorably to $.82 per share in the first
quarter of this year, $.80 per share in fourth quarter 1995, and $.77 in third
quarter 1995, when results were first felt from the Chase branch acquisition.
Return on shareholder equity continued its steady improvement from third
quarter 1995 to 14.13%. After removing the impact of intangible assets and
related amortization, two relatively large non-cash items, tangible return on
tangible equity (a ratio focusing on cash generating power) was 23.97% for the
second quarter, up over 7.5 percentage points from a year earlier. The
improvement reflects success in leveraging our capital through the acquisition
of the former Chase branches and profitably integrating them into our
organization. In addition, our efforts to expand noninterest income and increase
productivity continue to have a positive impact.
B. BALANCE SHEET TRENDS
Loans outstanding increased 4.0% during the quarter, up from 2.9% growth
during the January to March 1996 period. Over the last twelve months, loans have
risen by 16.3%, marking the beginning of a fourth consecutive year in which loan
growth has exceeded 15% or more. More than one third of the $84 million in loan
growth was originated in the markets served by the former Chase branches.
Excluding their impact, loans would have risen by 7.9%, highlighting the
strategic contribution of the new branches to CBSI's success.
The primary components of the $39.4 million increase in loans since year
end 1995 are the bank's business lending products (up $14.7 million); indirect
consumer loans (up $14.1 million), predominantly reflecting automobile financing
through an established dealer network; and consumer mortgages (up $9.0 million,
net of $3.6 million in originations sold service-retained in the secondary
market). Increases continue to be modest in the consumer direct loan product
line (up $1.6 million, including variable-rate home equity products). The
portfolio contains no credit card receivables.
Investments totaled $574.6 million for the quarter just ended, up $72.3
million (14.4%) from March 31, 1996 and up $100.6 million (21.2%) from year-end
1995. The second quarter increase is attributable to favorable buying
opportunities funded by capital market borrowings, which became an attractive
strategy as rates rose beginning in mid-March. Since June 30, 1995, there has
been $147.4 million (34.5%) in investment growth.
Total deposits have decreased 3.5% since March 31, 1996 to $1.02 billion,
largely the result of seasonal outflows of municipal deposits caused in part by
New York State budget delays (non-municipal deposits were essentially
unchanged). During the last twelve months, total deposits have risen $313
million or 44%, largely the result of deposits acquired in the July 1995 Chase
branch acquisition.
C. INCOME STATEMENT TRENDS
Second quarter net interest income rose a strong 29% or $3.0 million versus
the same period last year. Earning asset growth of approximately 25%, reflecting
the Chase branch acquisition (net of pre-investing a share of the anticipated
proceeds) and the mid-1995 capital raising. In addition, the net interest margin
improved by 16 basis points to 4.90%, largely due to a lower overall rate paid
on interest-bearing funds.
Compared to first quarter 1996, net interest income increased $385,000,
accounting for nearly two-thirds of the rise in pretax income. Earning assets
climbed more than $95 million, over three quarters of which reflected the
aforementioned investment portfolio growth. The net interest margin narrowed by
14 basis points, caused by a slightly lower earning asset yield and higher
borrowing costs.
Noninterest income in second quarter 1996 climbed 31% over the same period
last year. The over $475,000 improvement largely reflects expanded fiduciary
income, higher fees from the sale of annuities and mutual funds, and increased
Visa merchant and debit card fees, as well as greater overdraft fees, service
charges and commissions from an expanded customer base gained from last year's
Chase branch purchase. For the first half of this year, noninterest income rose
35% versus the comparable 1995 period. However, when noninterest income is
expressed as a percentage of assets, the bank remains low relative to peers
being in the 25th percentile (unchanged from one year earlier). This lack of
change is the result of the significant asset growth over the last year
resulting primarily from investments (which do not generate fee income).
Overhead was up 27% this quarter compared to the second quarter in 1995.
Approximately 56% of the $1.9 million increase reflected personnel costs,
primarily because of acquisition of the Chase branches and required operational
support, annual merit awards and selective additions in lending and financial
product sales. A significant balance of the non-personnel expense increase was
also related to the new branches and the cost of servicing their 25,000
customers, in addition to the amortization of intangible assets associated with
the Chase transaction (31% of the increase). As a percentage of average assets,
annualized overhead is essentially at the peer norm.
Compared to first quarter 1996, overhead was lower by 2.1% or more than
$194,000, which accounted for nearly one-third of the rise in pretax income.
First quarter 1996 overhead was below the fourth quarter 1995 level by 4.0% or
$383,000. These reductions in overhead are explained by the absence of one-time
Chase-related acquisition expenses, selected seasonal factors, and an
intensified focus on strict expense control in 1996. As a result of this and
expanding the bank's investment portfolio (which requires little overhead), the
company's efficiency ratio (overhead compared to recurring operating income)
improved from the fourth quarter level by 4.7 percentage points to 57.7%, which
compares favorably to the peer bank median of 59.0% based on data available
through year-end 1995. The ratio is now slightly better than the level prior to
the Chase transaction, and excluding the amortization of intangibles, is an even
more meaningful 4.2 percentage points lower at 53.2%.
Primarily as a result of higher pretax income, YTD 1996 income taxes
increased by $1.1 million over the same 1995 period. CBSI's marginal tax rates
are 35% federal and 9% state (plus a 2.5% surcharge scheduled to be phased out
over time).
The company is currently under examination by the Internal Revenue Service
in connection with tax years 1990 to 1993, and has received certain notices of
proposed adjustments. The company intends to vigorously defend its position with
respect to these proposed adjustments and believes ultimate resolution will not
have a material impact on the financial statements. However, approximately
$82,000 was provided in the first six months of 1996 to cover the proposed
adjustments (in addition to provisions made in 1995), and as a result, YTD
1996's effective tax rate was 40.7% as compared to second quarter 1995's rate of
39.2%.
D. ASSET QUALITY TREND
Asset quality remains strong at the company. Net charge-offs for the second
quarter were .22% of average loans, an improvement from both second quarter 1995
as well as first quarter 1996. Nonperforming loans continue to be monitored
closely and managed conservatively, ending the quarter at $2.8 million, a
$780,000 increase over the year-end 1995 level, largely due to a higher but
still manageable level of nonaccruing commercial loans and real estate loan
delinquencies. As a result, the ratio of nonperforming loans to loans
outstanding rose 10 basis points during the first half of the year to .46% at
quarter end, still less than half the peer median of .97% at March 31, 1996.
Loan loss provision expense was virtually unchanged in the second quarter
compared to the first quarter of this year, still sufficient to amply exceed net
charge-offs and maintain the ratio of loan loss reserves to loans outstanding at
1.25%. Coverage of the reserve over nonperforming loans is considered strong by
management at 2.7 times.
E. CAPITAL AND OTHER TRENDS
As of June 30, 1996, the tier I leverage ratio was 5.65% versus 9.04%
twelve months earlier. The high level of tier I capital a year ago resulted from
710,000 shares of common stock ($17.2 million) and 90,000 ($9.0 million) shares
in preferred stock issued on June 30, 1996 to raise capital for the Chase branch
purchase that occurred July 14, 1995. The decrease in the ratio is attributable
to the acquired Chase deposits and associated intangibles, partially offset by
favorable earnings during the last 12 months and continued amortization of
intangibles. The present ratio also includes the impact of 152,500 in additional
shares of common stock issued in July 1995 and the impact of redeeming (in
November 1995) 45,000 shares ($4.5 million) in preferred stock. The ratio is
still well above the 5% minimum required to be a "well-capitalized" bank as
defined by the FDIC. Compared to first quarter 1996, the ratio fell 10 BP due to
strong investment growth funded with capital market borrowings.
As a result of the aforementioned reasons, the tier I risk-based capital
ratio as of June 30, 1996 was 10.61%, or 551 basis points lower than it was as
of June 30, 1995. This compares to a 6% "well-capitalized" regulatory minimum.
Book value per share increased 6.6% from September 30, 1995 (the first
quarter which included the Chase branches) to $26.84 as of the end of the most
recent quarter, while tangible book value per share has risen nicely to $17.99,
up 20.6% over the same period.
The bank's liquidity level is extremely favorable as of June 30, 1996. In
the event of a liquidity crisis, over $240 million (essentially short term
assets minus short term liabilities) or 19% of assets could be converted into
cash within a 30-day time period. Over a 90 day time period, 18% of assets could
be converted to cash.
As shown by the statement of cash flows preceding the Management Discussion
and Analysis, the bank's cash and cash equivalents grew $6.1 million during the
quarter to $49.4 million as of June 30, 1996, a level $15.8 million higher than
one year earlier. Net cash provided by operating activities was $10.3 million
reflecting favorable earnings. Financing activities provided cash of $123.7
million, of which investing activities utilized $147.4 million due to investment
purchases and maturities, the premium paid on the acquisition, and loan growth.
II. SUPPLEMENTAL INFORMATION TO EARNINGS PERFORMANCE SUMMARY
The following sections of this report discuss more fully certain of the
balance sheet and earnings trends summarized above.
A. NET INTEREST INCOME
The change in net interest income reflects changes in net interest margin
and earning asset levels.
On a tax-equivalent basis, net interest income for second quarter 1996
increased $3.0 million (28.0%) over the same 1995 period to $13.7 million. This
reflects a $219.6 million increase (24.3%) in average earning assets due to the
Chase acquisition and a 16 basis point increase in the net interest margin,
largely due to a lower cost of funds resulting from using the Chase deposits to
pay down higher cost borrowings.
Compared with first quarter 1996, there was a $373,000 increase in net
interest income. The change is attributable earning asset growth, partially
offset by a 14 BP lower net interest margin.
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
------ ------ ------ ----- ------ ------
Period
Amount and Change from Preceding Quarter End
------ ------ ------ ----- ------ ------
June 30, 1995
Amount $10,699 4.74% 8.73% 4.09% $ 904,478 54.7%
Change $135 -0.14% 0.04% 0.19% 3.1% (1.5)
September 30, 1995
Amount $12,849 4.82% 8.43% 3.66% $1,057,820 50.7%
Change $2,150 0.07% -0.30% -0.43% 17.0% (3.9)
December 31, 1995
Amount $13,467 5.05% 8.60% 3.56% $1,058,510 54.2%
Change $618 0.23% 0.17% -0.09% 0.1% 3.4
March 31, 1996
Amount $13,325 5.04% 8.62% 3.59% $1,063,977 53.4%
Change ($142) -0.01% 0.02% 0.02% 0.5% (0.7)
June 30, 1996
Amount $13,698 4.90% 8.51% 3.64% $1,124,059 51.1%
Change $373 -0.14% -0.11% 0.05% 5.6% (2.4)
Change from
June 30, 1995 to
June 30, 1996
Amount $ 2,999 0.16% -0.22% -0.45% $219,581 ($0)
% Change 28.0% --- --- --- 24.3% ---
Note: (a) All net interest income, margin, and earning asset yield figures are
full-tax equivalent.
- ----------
* May not foot due to rounding
Despite the high proportion of investments (whose yields are relatively low
compared to loans) in the bank's assets (being in the 84th peer percentile), the
net interest margin is in the favorable 74th peer percentile as of March 31,
1996. This is attributable to high earning asset yields being in the favorable
76th percentile and a low cost of funds being in the 37th percentile.
B. CAPITAL
The common shares of Community Bank System, Inc. are traded in the NASDAQ
National Market System under the symbol CBSI. Stock price activity, numbers of
shares outstanding, cash dividends declared and share volume traded are shown
below.
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
------ ----- ------ ----------- -------- ------
June 30, 1995
Amount $29.00 $24.25 $25.50 3,503,150 $0.30 1,945,143
Change 4.5% -4.0% -6.0% 25.6% 0.0% 873.3%
September 30, 1995
Amount $36.50 $25.25 $33.75 3,674,325 $0.30 2,664,957
Change 25.9% 4.1% 32.4% 4.9% 0.0% 37.0%
December 31, 1995
Amount $34.25 $31.00 $32.00 3,679,625 $0.33 629,130
Change -6.2% 22.8% -5.2% 0.1% 10.0% -76.4%
March 31, 1996
Amount $32.75 $30.25 $31.00 3,682,315 $0.33 316,309
Change -4.4% -2.4% -3.1% 0.1% 0.0% -49.7%
June 30, 1996
Amount $32.50 $30.75 $31.13 3,682,315 $0.33 447,194
Change -0.8% 1.7% 0.4% 0.0% 0.0% 41.4%
Change from
June 30, 1995 to
June 30, 1996
Amount $3.50 $6.50 $5.63 $179,165 $0.03 (1,497,949)
% Change 12.1% 26.8% 22.1% 5.1% 10.0% -77.0%
CBSI's stock closed second quarter 1996 at $31.13, over 22% higher than one
year earlier when it closed at $25.50 (the same day 710,000 shares of common
stock and 90,000 shares of preferred stock were issued). The volume of shares
traded at 447,000 was 77% less than during second quarter 1995, when trading was
unusually high related to the company's planned common stock issuance and market
speculation regarding the Chase transaction.
The cash dividend shown above reflects a 3 cent (10%) per share increase in
the quarterly dividend per common share that was effective in fourth quarter
1995. This was the fifth dividend increase within four years. The 1996 common
dividend payout of 36.5% has increased from the same 1995 period but remains
within the company's targeted 30-40% guideline.
C. LOANS
Loans outstanding, net of unearned discount, reached a record $599.5
million as of June 30, 1996, a very favorable $ 84.2 million (16.3%) growth in
the last twelve months. Outstandings have now climbed for seventeen consecutive
quarters. As shown in the table below, CBNA is predominantly a retail bank, with
almost 70% of its outstandings spread across three basic consumer loan types.
For the Quarter Consumer Consumer Consumer Business Total Yield on
Ended: Direct Indirect Mortgages Lending Loans Loans
------ -------- --------- ------- ----- -----
(000's) Quarterly
Amount and Change from Preceding Quarter Average
------ -------- --------- ------- ----- -----
June 30, 1995
Amount $ 97,480 $127,439 $142,413 $147,978 $515,311 9.60%
Change -1.2% 11.9% 0.0% 5.3% 4.0% 0.08
September 30, 1995
Amount $103,316 $132,509 $144,206 $164,960 $544,991 9.63%
Change 6.0% 11.5% 1.3% 11.5% 5.8% 0.03
December 31, 1995
Amount $104,317 $135,107 $146,561 $174,167 $560,152 9.65%
Change 1.0% 5.6% 1.6% 5.6% 2.8% 0.02
March 31, 1996
Amount $105,759 $138,821 $150,301 $181,614 $576,495 9.52%
Change 1.4% 2.7% 2.6% 4.3% 2.9% (0.13)
June 30, 1996
Amount $105,895 $149,197 $155,579 $188,868 $599,538 9.44%
Change 0.1% 7.5% 3.5% 4.0% 4.0% (0.08)
Change from
June 30, 1995 to
June 30, 1996
Amount
Change $8,415 $21,757 $13,166 $40,889 $84,227 -0.16%
8.6% 17.1% 9.2% 27.6% 16.3% N/A
Loan mix
June 30, 1995 to 18.9% 24.7% 27.6% 28.7% 100.0%
June 30, 1996 17.7% 24.9% 25.9% 31.5% 100.0%
Change -1.3% 0.2% -1.7% 2.8% ---
- ----------
* May not foot due to rounding
Included in loan growth over the past year is the favorable impact of the
Chase branch purchase, which initially contributed $12.8 million in largely
commercial loans. Since that time, loans at these branch locations have
increased by almost 240% to $43.4 million.
Almost 50% of the bank's loan growth in the last twelve months came from
the generally prime-based business lending portfolio, which increased 27.6%.
Approximately a quarter of this growth came from commercial loans acquired at
acquisition of the 12 retained Chase branches.
More than 25% of the bank's loan growth in the last twelve months came from
the indirect lending portfolio (applications taken at dealer locations), which
grew 17.1%. This reflects good automobile demand industry-wide, as well as
continued greater emphasis on this product line in the bank's Southern Region.
The remaining growth over this period resulted from a 9.2% increase in
consumer mortgages and an 8.6% growth in consumer direct loans (applications
taken at branch locations).
Despite a 75 BP decrease in the average prime rate, the average loan yield
for the quarter just ended is only 16 BP lower than the same quarter a year ago.
This is attributable to significant growth in the higher yielding commercial
loans (although yields are lower than a year ago), a reduced mix of mortgage
loans, and a slightly increased installment loan rate.
The 8 basis point decrease in the loan yield since first quarter 1996 is
partially the result of the full impact of a 25 BP drop in the prime rate in
February 1996.
D. ASSET QUALITY
The following table reflects the detail of non-performing and restructured loan
levels. The ratio of non-performing assets to total assets was .25% as of June
30, 1996, up 6 basis points from a year ago. There is no troubled debt
restructuring. OREO for all periods is recorded at the lower of cost or market
less estimate cost to sell. The ratio of nonperforming assets to loans plus OREO
at .54% remains better than the company's internal goal of less than .75%
(000's or % Ratios) June 30, June 30, Dec 31,
1996 1995 1995
-------- -------- ---------
Loans accounted for on a
non-accrual basis $1,848 $1,310 $1,328
Accruing loans which are
contractually past due
90 days or more as to
principal and interest
payments $927 $301 $667
Loans which are "troubled
debt restructurings" as
defined in Statement of
Financial Accounting
Standards No. 15
"Accounting by Debtors
and Creditors for
Troubled Debt
Restructurings $0 $0 $0
Other Real Estate (OREO) $476 $299 $614
Total Non-Performing Assets $3,251 $1,910 $2,609
Total Non-Performing Assets/ 0.32% 0.19% 0.23%
Total Assets
Total Non-Performing Assets/ 0.54% 0.37% 0.47%
Total Loans & OREO
Loan Loss Allowance / 230% 351% 267%
Non-Performing Assets
- ----------
* May not foot due to rounding
E. DEPOSITS
The table below displays the components of total deposits including volume
and rate trends over the last five quarters.
Average
For the Quarter Average Average Deposits/
Ended: Average Average Money Average Total Earning
(000's) Demand Savings Market Time Deposits Assets
-------- ------- ------ ------- -------- ---------
Amount and Average Rate
-------- ------- ------ ------- -------- ---------
June 30, 1995
Amount $104,882 $233,875 $63,308 $310,756 $712,820 78.8%
Yield / Rate ---- 2.68% 2.94% 5.58% 3.57%
September 30, 1995
Amount $142,413 $345,812 $79,542 $447,253 $1,015,020 96.0%
Yield / Rate ---- 2.68% 2.72% 5.55% 3.57%
4.16%
December 31, 1995
Amount $144,997 $363,553 $74,627 $465,560 $1,048,737 99.1%
Yield / Rate ---- 2.54% 2.62% 5.60% 3.55%
March 31, 1996
Amount $141,690 $347,589 $70,753 $475,561 $1,035,593 97.3%
Yield / Rate ---- 2.46% 2.48% 5.53% 3.53%
June 30, 1996
Amount $143,227 $347,462 $63,224 $485,358 $1,039,270 92.5%
Yield / Rate ---- 2.43% 2.46% 5.43% 3.50%
Change in
quarterly average
outstandings & yield / rate
June 30, 1995 to
June 30, 1996
Amount $38,345 $113,587 ($84) $174,602 $326,450 $0
% Change 36.6% 48.6% -0.1% 56.2% 45.8% 17.3%
Change (% pts) ---- -0.25 -0.48 -0.15 -0.07 0.00
Deposit Mix
June 30, 1995 to 14.7% 32.8% 8.9% 43.6% 100.0%
June 30, 1996 13.8% 33.4% 6.1% 46.7% 100.0%
Change -0.9% 0.6% -2.8% 3.1% ----
- ----------
* May not foot due to rounding
There was a 45.8% increase in average deposits from second quarter 1995 to
the quarter just ended. Of this growth, almost 54% was in time deposits (up $175
million), with the remainder split between $38 million in demand deposit growth
and $114 million in savings growth. Money market deposits remained essentially
flat. The major reason for the total deposit increase was the $383 million in
deposits from the 15 Chase branches acquired in third quarter 1995, less $43
million in deposits associated with the three former Chase branches sold to NBT
Bank in mid-December.
Despite material interest rate decreases from second quarter 1995 to
second quarter 1996 in all individual deposit categories, with average Fed Funds
moving down 75 BP during this period, the average total deposit rate moved down
only 7 BP attributable to an expanding mix of higher cost time deposits. This
higher mix reflects the impact of the acquired Chase deposits as well as a
strategy to attract additional time deposits competitively priced with capital
market borrowings.
F. LIQUIDITY AND BORROWING POSITION
The following table shows the trend of major earning assets and funding
sources over the last five quarters.
For the Quarter Average Average Ave Core Ave rate Average Interest
Ended: Loans Investments Deposits Municipal Capital Markets Bearing
(000's) (a) (b) Deposits Borrowings Liabilities
------- ----------- -------- --------- --------------- -----------
Amount and Average Yield / Rate
------- ----------- -------- --------- --------------- -----------
June 30, 1995
Amount $507,159 $397,319 $587,592 $125,228 $169,277 $777,216
Yield / Rate 9.60% 7.62% 3.55% 3.66% 6.26% 4.64%
September 30, 1995
Amount $532,156 $525,664 $892,283 $122,737 $29,002 $901,609
Yield / Rate 9.63% 7.21% 3.61% 3.30% 6.56% 4.23%
December 31, 1995
Amount $550,480 $508,031 $921,111 $127,626 $5,604 $909,344
Yield / Rate 9.65% 7.45% 3.60% 3.24% 5.39% 4.13%
March 31, 1996
Amount $569,267 $494,710 $884,358 $151,235 $26,143 $920,046
Yield / Rate 9.52% 7.57% 3.57% 3.29% 5.76% 4.14%
June 30, 1996
Amount $589,407 $534,653 $893,135 $146,136 $73,858 $969,902
Yield / Rate 9.44% 7.48% 3.52% 3.39% 5.62% 4.18%
Change in
quarterly average
outstandings & yield / rate
from June 30, 1996 to
June 30, 1996
Amount $82,248 $137,333 $305,542 $20,908 ($95,420) $192,685
% Change 16.2% 34.6% 52.0% 16.7% -56.4% 24.8%
Change (%pts) -0.16 -0.14 -0.04 -0.27 -0.63 -0.46
Note (a) Yield on average investments calculated on a full-tax equivalent basis.
(b) Defined as total deposits minus municipal deposits; includes CDs
(greater than) $100,000 for individuals and businesses.
- ---------
* May not foot due to rounding
Borrowings for second quarter 1996 averaged $73.9 million compared to
$169.3 million for second quarter 1995. This decrease resulted from borrowings
being virtually paid off with the acquired Chase deposits and capital issued
from the end of June through mid-July 1995. Borrowing levels have increased
in the most recent quarter to fund investment opportunities resulting from
favorable market conditions.
G. INVESTMENTS AND ASSET/LIABILITY MANAGEMENT
The investment portfolio at quarter end comprised 48.9% of earning assets,
up from 45.3% on June 30, 1995, increasing through a combination of floating and
fixed rate investment purchases. As a result, the investment portfolio has grown
by $147.4 million or 34.5% during the last twelve months.
As shown by the table below, the bank's investments consist primarily of
U.S. treasury securities, mortgage-backed securities (including U.S. agencies
and collateralized mortgage obligations), and tax-exempt obligations of state
and political subdivisions. As of the most recent quarter end, 17.4% of the
bank's entire portfolio was invested in agency-guaranteed collateralized
mortgage obligations (CMOs). The portfolio does not contain any Principal Only
(PO), Interest Only (IO), or Inverse Floater Traunches.
For the Quarter U.S. Mtg-Backs Tax Other Total Invests /
Ended: Gov'ts (a) Exempts (b) Investments Earning
(000's) (c) Assets
------ --------- ------- ----- ----------- ----------
Amount and Change (Period
from Preceding Quarter End)
------ --------- ------- ----- ----------- ----------
June 30, 1995
Amount $212,290 $177,500 $16,702 $20,664 $427,156 45.3%
Change 9.8% 8.5% -5.8% 42.8% 9.8% 1.5
September 30, 1995
Amount $244,887 $200,644 $15,609 $68,065 $529,205 49.3%
Change 15.4% 13.0% -6.5% 229.4% 23.9% 3.9
December 31, 1995
Amount $235,137 $193,919 $15,844 $27,467 $472,367 45.8%
Change -4.0% -3.4% 1.5% -59.6% -10.7% (3.4)
March 31, 1996
Amount $250,033 $213,031 $16,642 $21,468 $501,174 46.6%
Change 6.3% 9.9% 5.0% -21.8% 6.1% 0.7
June 30, 1996
Amount $308,641 $228,843 $15,508 $21,469 $574,461 48.9%
Change 23.4% 7.4% -6.8% 0.0% 14.6% 2.4
Change from
June 30, 1995 to
June 30, 1996
Amount $96,351 $51,343 ($1,194) $805 $147,305 3.6%
Change 45.4% 28.9% -7.1% 3.9% 34.5% ---
Investment Mix
June 30, 1995 to 49.7% 41.6% 3.9% 4.8% 100.0%
June 30, 1996 53.7% 39.8% 2.7% 3.7% 100.0%
Change 4.0% -1.7% -1.2% -1.1% ---
Note: (a) Includes CMO's and pass through's
(b) Includes Money Market Investments, Federal Home Loan Bank, and other
stock
(c) Excludes market value adjustment
- ---------
* May not foot due to rounding
The average fully taxable equivalent yield in the last year has decreased
14 basis points to 7.48% on average for second quarter 1996 versus second
quarter 1995; this reduction resulted from falling market rates in the third and
fourth quarters of 1995 and much of the first quarter of 1996. The 9 basis point
decrease in the portfolio rate in second quarter 1996 compared to first quarter
1996 is entirely caused by the lack of a $221,000 bond discount taken into
income in the first quarter as a result of a security being called.
The portfolio market value decreased from 103.3% of book value one year ago
to 100.4% of book value as of June 30, 1996 due to increased market rates.
The average portfolio life based on earliest redemption date increased from
4.0 years on June 30, 1995 to 5.3 years on June 30, 1996, largely attributable
to buying selected longer term floating rate investments (move with 1 month
LIBOR and 3 month T-Bill) structured to minimize interest rate risk.
As of the most recent quarter end, 30.1% of the investment portfolio was
classified as available-for-sale (AFS) in accordance with SFAS No. 115, with the
remainder (69.9%) as held-to-maturity. The pretax market value adjustment of the
AFS portfolio was a favorable $107,000 as compared to $39,000 a year earlier.
H. SUBSEQUENT EVENTS
On April 29, 1996, Community Bank System, Inc. (CBSI) and Benefit Plans
Administrators (BPA), an independent third party administrator of defined
benefit and defined contribution plans located in Utica, NY, announced that they
signed a definitive agreement under which BPA would be a wholly-owned subsidiary
of CBSI. The transaction was completed July 8, 1996. BPA's revenues for its most
recent fiscal year end were $1.3 million.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Not Applicable
Item 2. Changes in Securities.
Not Applicable
Item 3. Defaults Upon Senior Securities.
Not Applicable.
Item 4. Submission of Matters to a Vote of Securities Holders.
Not Applicable.
Item 5. Other Information.
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits required by Item 601 of Regulation S-K:
(11) Statement re Computation of earnings per share
(21) Subsidiaries of the registrant
- Community Bank, National Association, State of New York
- Northeastern Computer Services, Inc., State of New York
- Community Financial Services, Inc., State of New York
b) No reports on Form 8-K were filed during second quarter 1996.
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: August 9, 1996 /s/ SANFORD A. BELDEN
--------------------------------------
Sanford A. Belden, President and
Chief Executive Officer
Date: August 9, 1996 /s/ DAVID G. WALLACE
--------------------------------------
David G. Wallace, Senior Vice President
Chief Financial Officer