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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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 (I.R.S. Employer
of incorporation) Identification No.)
5790 WIDEWATERS PARKWAY, DEWITT, NEW YORK 13214
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(315) 445-2282
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.25 Par Value
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during all
the preceding 12 months (or for such shorter period 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
----- -------
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing.
$115,992,923 based upon average selling price of $31.50 and 3,682,315 shares on
February 28, 1996
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
3,682,315 shares Common Stock $1.25 Par Value at February 28, 1996
DOCUMENTS INCORPORATED BY REFERENCE.
List hereunder the following documents if incorporated by reference and the
Part of the Form 10-K into which the document is incorporated: (1) Any annual
report to security holders; (2) Any proxy or information statement; and (3) Any
prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of
1933.
1. Definitive Proxy Statement for Annual Meeting of
Stockholders to be held on May 8, 1996 ............... Part III
Exhibit index on page 78.
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PART I
ITEM 1. BUSINESS
GENERAL
Community Bank System, Inc. ("Company") was incorporated on April 15, 1983,
under the Delaware General Corporation Law. Its principal office is located at
5790 Widewaters Parkway, DeWitt, New York 13214 and its telephone number is
(315) 445-2282. The Company became a bank holding company in 1984 with the
acquisition of The St. Lawrence National Bank ("St. Lawrence Bank") on February
3, 1984 and the First National Bank of Ovid (renamed Horizon Bank, N.A or
"Horizon Bank") on March 2, 1984. Also in 1984 the Company obtained a national
bank charter for its third wholly-owned subsidiary bank, The Exchange National
Bank ("Exchange Bank"), and on July 1, 1984 Exchange Bank acquired the deposits
and certain of the assets of three branches of the Bank of New York located in
southwestern New York. On September 30, 1987, the Company acquired The Nichols
National Bank ("Nichols Bank") located in Nichols, New York. On September 30,
1988, the Company acquired ComuniCorp, Inc., a one-bank holding company located
in Addison, New York, the parent company to Community National Bank ("Community
Bank"). On March 26, 1990, Community Bank opened the Corning Market Street
branch from the Company's acquisition of deposits and certain assets from Key
Bank of Central New York. On January 1, 1992, the Company's five banking
affiliates consolidated into a single, wholly-owned national banking subsidiary,
known as Community Bank, N.A. ("Bank"). On March 31, 1993, the Bank's marketing
representative office in Ottawa, Canada was closed. On June 3, 1994, the Company
acquired three branch offices in Canandaigua, Corning and Wellsville, New York
from the Resolution Trust Corporation. On October 28, 1994, the Company acquired
the Cato, New York branch of The Chase Manhattan Bank, N.A. On July 14, 1995,
the Company acquired 15 branch offices from The Chase Manhattan Bank, N.A.
located in Norwich, Watertown (two), Boonville, New Hartford, Utica,
Skaneateles, Geneva, Pulaski, Seneca Falls, Hammondsport, Canton, Newark (two),
and Penn Yan, New York ("Chase Branches"). On December 15, 1995, the Company
sold three of the Chase Branches, located in Norwich, New Hartford, and Utica,
to NBT Bank, N.A.
The Company had a wholly-owned data processing subsidiary, Northeastern
Computer Services, Inc. ("Northeastern"). Northeastern was acquired by the
Company from the St. Lawrence Bank on May 31, 1984 pursuant to a corporate
reorganization. Northeastern had previously been a wholly-owned subsidiary of
the St. Lawrence Bank and was the survivor of a merger with Lawban Computer
Systems, Inc., another wholly-owned subsidiary of the St. Lawrence Bank.
Northeastern's office was located at 6464 Ridings Road, Syracuse, New York. In
December 1991, the Company entered into a five year agreement with Mellon Bank,
N.A. to provide data processing services. On June 30, 1992, Northeastern ceased
operations and was dissolved.
The Company also had a wholly-owned mortgage banking subsidiary, Community
Financial Services, Inc. (CFSI), which was established in June 1986; it
commenced operation in January 1987. In July 1988, CFSI purchased Salt City
Mortgage Corp., a Syracuse-based mortgage broker. CFSI was dissolved in 1990.
2
The Company, through its Community Bank, N.A. subsidiary, provides banking
services through its two regional offices at 45-49 Court Street, Canton, New
York and 201 North Union Street, Olean, New York, as well as through 47 banking
offices in the counties of St. Lawrence, Jefferson, Lewis, Oneida, Cayuga,
Seneca, Ontario, Oswego, Wayne, Yates, Allegheny, Cattaraugus, Tioga, Steuben,
and Onondaga. The administrative office is located at 5790 Widewaters Parkway,
DeWitt, New York, in Onondaga County.
The Bank is a member of the Federal Reserve System and the Federal Home
Loan Bank of New York ("FHLB"), and its deposits are insured by the FDIC up to
applicable limits.
BANKING SERVICES
The Bank offers a range of commercial and retail banking services in each
of its market areas to business, individual, agricultural and government
customers.
Account Services. The Bank's account services include checking accounts,
negotiable orders of withdrawal ("NOW"), savings accounts, time deposit
accounts, and individual retirement accounts.
Lending Activities. The Bank's lending activities include residential and
farm loans, business lines of credit, working capital facilities, inventory and
dealer floor plans, as well as installment, commercial, term and student loans.
The Company's predominant focus on the retail borrower enables its loan
portfolio to be highly diversified. Nearly 70% of loans outstanding are oriented
to consumers borrowing on an installment and residential mortgage loan basis. In
addition, the typical loan to the Company's commercial business borrowers is
under $50,000, with less than one quarter of the commercial portfolio being in
loans in excess of $500,000.
Other Services. The Bank offers a range of trust services, including
personal trust, employee benefit trust, investment management, financial
planning and custodial services. In addition, through an affiliation with Prime
Vest, Inc., the Bank offers non-bank financial products including fixed- and
variable-rate annuities, mutual funds, and stock investments. The Bank also
offers safe deposit boxes, travelers checks, money orders, wire transfers,
collections, foreign exchange, drive-in facilities and twenty-four hour
depositories. Through an accounts receivable management program, the Bank
provides a service to qualifying businesses by purchasing accounts receivable on
a discounted basis.
COMPETITION
The Company, through the Bank, competes in three distinct banking markets
in the Northern ("Northern Market"), Finger Lakes ("Finger Lakes Market"), and
Southern Tier ("Southern Tier Market") regions of New York State. The Bank
considers its primary market areas in these regions to be the counties in which
it has banking facilities. Major competitors in these markets include local
branches of banks based in New York City, or Buffalo, New York, as well as local
independent banking and thrift institutions and federal credit unions. Other
competitors for deposits and loans within the Bank's market areas include
insurance companies, money market funds, consumer finance companies and
financing affiliates of consumer durable goods manufacturers. Lastly, personal
and corporate trust and investment counseling services in competition with the
Bank are offered by insurance companies, investment counseling firms and other
financial service firms and individuals.
3
The Bank is a community retail bank committed to the philosophy of serving
the financial needs of customers through its branch network, whose facilities
are generally located in small cities and villages within its three distinct
banking markets. The Company believes that the local character of business, the
Bank's knowledge of the customer and customer needs, and its comprehensive
retail and small business products, together with rapid decision-making at the
branch and regional level, enable the Bank to compete effectively.
Northern Market. Branches in the Northern Market compete for loans and
deposits in the four county primary market area of St. Lawrence, Jefferson,
Lewis, and Oneida Counties in Northern New York State. Within this market area,
the Bank maintains a market share(1) of 14.7%, including commercial banks,
credit unions, savings and loan associations and savings banks. The Bank
operates 21 customer facilities in this market and is ranked either first or
second in market share in 14 of the 16 towns where these offices are located.
The Bank also competes for loans where it has no banking facilities; this
secondary market area includes Franklin County.
Finger Lakes Market. In the Finger Lakes Market, the Bank operates 14
customer facilities competing for loans and deposits in the five-county primary
market area of Seneca, Oswego, Ontario, Wayne and Cayuga Counties. Within the
Finger Lakes Market area, the Bank maintains a market share(1) of approximately
4.4%, including commercial banks, credit unions, savings and loan associations
and savings banks. The Bank is ranked either first or second in market share in
seven of the ten Finger Lakes Market area towns where its offices are located.
Southern Tier Market. The Bank's Southern Tier Market consists of two
sub-markets, the Olean submarket and the Corning submarket.
Olean Submarket. The Olean Submarket competes for loans and deposits in the
primary market area of Cattaraugus and Allegany Counties in the Southern Tier of
New York State. Within this area, the Bank maintains a market share(1) of
approximately 14.0%, including commercial banks, credit unions, savings and loan
associations and savings banks. The Olean Submarket operates five office
locations, and the Bank is ranked either first or second in market share in
three of the four towns where these offices are located. The Bank also competes
for loans where it has no banking facilities; this secondary market area
includes Chautauqua County.
Corning Submarket. The Corning Submarket competes for loans and deposits in
the primary market area of Steuben, Yates and Tioga Counties in the Southern
Tier of New York State. Within this area, the Bank maintains a market share(1)
of approximately 6.4%, including commercial banks, credit unions, savings and
loan associations and savings banks. The Corning Submarket operates nine office
locations, and the Bank is ranked either first or second in market share in six
of the seven towns where these offices are located. The Bank also competes for
loans where it has no banking facilities; this secondary market area includes
Chemung and Schuyler Counties in New York State, and Tioga County in
Pennsylvania.
- -------------
(1) Deposit market share data as of June 30, 1995, as calculated by Sheshunoff
Information Services, Inc.
4
EMPLOYEES
As of December 31, 1995, the Bank employed 563 full-time equivalent
employees versus 440 at year-end 1994. The increase in full-time equivalent
employees since year-end 1994 primarily reflects 116 full-time equivalent (FTEs)
staff additions either formerly employed in the Chase branches or hired to
provide operational support or develop business in new markets. The Bank
provides a variety of employment benefits and considers its relationship with
its employees to be good.
CERTAIN REGULATORY CONSIDERATIONS
Bank holding companies and national banks are regulated by state and
federal law. The following is a summary of certain laws and regulations that
govern the Company and the Bank. To the extent that the following information
describes statutory or regulatory provisions, it is qualified in its entirety by
reference to the actual statutes and regulations thereunder.
BANK HOLDING COMPANY SUPERVISION
The Company is registered as a bank holding company under the Bank Holding
Company Act of 1956, as amended (the "BHCA") and as such is subject to
regulation by the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board"). As a bank holding company, the Company's activities and those
of its subsidiary are limited to the business of banking and activities closely
related or incidental to banking. Under Federal Reserve Board policy, a bank
holding company is expected to act as a source of financial strength to its
subsidiary banks and to make capital contributions to a troubled bank
subsidiary. The Federal Reserve Board may charge the bank holding company with
engaging in unsafe and unsound practices for failure to commit resources to a
subsidiary bank when required. A required capital injection may be called for at
a time when the Company does not have the resources to provide it. Any capital
loans by the Company to its subsidiary bank would be subordinate in right of
payment to depositors and to certain other indebtedness of such subsidiary
banks.
The BHCA requires the prior approval of the Federal Reserve Board in any
case where a bank holding company proposes to acquire direct or indirect
ownership or control of more than 5% of any class of the voting shares of, or
substantially all of the assets of, any bank (unless it owns a majority of such
bank's voting shares) or otherwise to control a bank or to merge or consolidate
with any other bank holding company. The BHCA also prohibits a bank holding
company, with certain exceptions, from acquiring more than 5% of the voting
shares of any company that is not a bank. The BHCA would prohibit the Federal
Reserve Board from approving an application from the Company to acquire shares
of a bank located outside of New York, unless such an acquisition is
specifically authorized by statute of the state in which the bank whose shares
are to be acquired is located.
However, the Riegal-Neal Interstate Banking and Efficiency Act of 1994
(enacted on September 29, 1994) provides that, among other things, substantially
all state law barriers to the acquisition of banks by out-of-state bank holding
companies will be eliminated effective September 29, 1995. The law will also
permit interstate branching by banks effective as of June 1, 1997, subject to
the ability of states to opt-out completely or to set an earlier effective date.
The Company anticipates that the effect of the new law may be to increase
competition within the markets where the Company operates, although the Company
cannot predict the effect to which competition will increase in such markets or
the timing of such increase.
5
OCC SUPERVISION
The Bank is supervised and regularly examined by the OCC. The various laws
and regulations administered by the OCC affect corporate practices such as
payment of dividends, incurring debt and acquisition of financial institutions
and other companies, and affect business practices, such as payment of interest
on deposits, the charging of interest on loans, types of business conducted and
location of offices. There are no regulatory orders or outstanding issues
resulting from regulatory examinations of the Bank.
LIMITS ON DIVIDENDS AND OTHER REVENUE SOURCES
The Company's ability to pay dividends to its shareholders is largely
dependent on the Bank's ability to pay dividends to the Company. In addition to
state law requirements and the capital requirements discussed below, the
circumstances under which the Bank may pay dividends are limited by federal
statutes, regulations and policies. For example, as a national bank, the Bank
must obtain the approval of the OCC for the payment of dividends if the total of
all dividends declared in any calendar year would exceed the total of the Bank's
net profits, as defined by applicable regulations, for that year, combined with
its retained net profits for the preceding two years. Furthermore, the Bank may
not pay a dividend in an amount greater than its undivided profits then on hand
after deducting its losses and bad debts, as defined by applicable regulations.
At December 31, 1995, the Bank had $20.4 million in undivided profits legally
available for the payment of dividends.
In addition, the Federal Reserve Board and the OCC are authorized to
determine under certain circumstances that the payment of dividends would be an
unsafe or unsound practice and to prohibit payment of such dividends. The
payment of dividends that deplete a bank's capital base could be deemed to
constitute such an unsafe or an unsound practice. The Federal Reserve Board has
indicated that banking organizations should generally pay dividends only out of
current operating earnings.
There are also statutory limits on the transfer of funds to the Company by
its banking subsidiary whether in the form of loans or other extensions of
credit, investments or asset purchases. Such transfers by the Bank to the
Company generally are limited in amount to 10% of the Bank's capital and
surplus, or 20% in the aggregate. Furthermore, such loans and extensions of
credit are required to be collateralized in specified amounts.
CAPITAL REQUIREMENTS
The Federal Reserve Board has established risk-based capital guidelines
which are applicable to bank holding companies. The guidelines established a
framework intended to make regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations and take off-balance
sheet exposures into explicit account in assessing capital adequacy. The Federal
Reserve Board guidelines define the components of capital, categorize assets
into different risk classes and include certain off-balance sheet items in the
calculation of risk-weighted assets. At least half of the total capital must be
comprised of common equity, retained earnings and a limited amount of perpetual
preferred stock, less goodwill ("Tier I capital"). Banking organizations that
are subject to the guidelines are required to maintain a ratio of Tier I capital
to risk-weighted assets of at least 4.00% and a ratio of total capital to
risk-weighted assets of at least 8.00%. The appropriate regulatory authority may
set higher capital requirements when an organization's particular circumstances
warrant. The remainder ("Tier 2 capital") may consist of a limited amount of
subordinated debt, limited-life preferred stock, certain other instruments and a
limited amount of loan and lease loss reserves.
6
The sum of Tier I capital and Tier 2 capital is "total risk-based capital." The
Company's Tier I and total risk-based capital ratios as of December 31, 1995
were 10.62% and 11.76%, respectively.
In addition, the Federal Reserve Board has established a minimum leverage
ratio of Tier I capital to quarterly average assets less goodwill ("Tier I
leverage ratio") of 3.00% for bank holding companies that meet certain specified
criteria, including that they have the highest regulatory rating. All other bank
holding companies are required to maintain a Tier I leverage ratio of 3.00% plus
an additional cushion of at least 100 to 200 basis points. The Company's Tier I
leverage ratio as of December 31, 1995 was 5.83%, which exceeded its regulatory
requirement of 4.00%. The guidelines also provide that banking organizations
experiencing internal growth or making acquisitions will be expected to maintain
strong capital positions substantially above the minimum supervisory levels,
without significant reliance on intangible assets. The Company is subject to the
same OCC capital requirements as those that apply to the Bank.
In February 1994, the federal banking agencies proposed amendments to their
respective risk-based capital requirements that would explicitly identify
concentration of credit risk and certain risks arising from nontraditional
activities, and the management of such risks, as important factors to consider
in assessing an institution's overall capital adequacy. The proposed amendments
do not, however, mandate any specific adjustments to the risk-based capital
calculations as a result of such factors. On August 24, 1994, the Federal
Reserve Board issued proposed amendments to its risk-based capital standards
that would increase the amount of capital required under such standards for
long-dated interest rate and exchange rate contracts and for derivative
contracts based on equity securities and indexes, precious metals (other than
gold) and other commodities. The proposed amendments would also permit banking
institutions to recognize the effect of bilateral netting arrangements in
calculating their exposure to derivative contracts for risk-based capital
purposes. The Company and the Bank do not expect that these proposals, if
adopted in their current form, would have a material effect on its financial
condition or results of operations.
FEDERAL DEPOSIT INSURANCE
CORPORATION IMPROVEMENT ACT OF 1991
In December 1991, Congress enacted the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), which substantially revised the
bank regulatory and funding provisions of the Federal Deposit Insurance Act and
made significant revisions to several other federal banking statutes. FDICIA
provides for, among other things, (i) a recapitalization of the Bank Insurance
Fund ("BIF") of the FDIC by increasing the FDIC's borrowing authority and
providing for adjustments in its assessment rates; (ii) annual on-site
examinations of federally-insured depository institutions by banking regulators;
(iii) publicly available annual financial condition and management reports for
financial institutions, including audits by independent accountants; (iv) the
establishment of uniform accounting standards by federal banking agencies; (v)
the establishment of a "prompt corrective action" system of regulatory
supervision and intervention, based on capitalization levels, with more scrutiny
and restrictions placed on depository institutions with lower levels of capital;
(vi) additional grounds for the appointment of a conservator or receiver; (vii)
a requirement that the FDIC use the least-cost method of resolving cases of
troubled institutions in order to keep the costs to insurance funds at a
minimum; (viii) more comprehensive regulation and examination of foreign banks;
(ix) consumer protection provisions including a Truth-in-Savings Act; (x) a
requirement that the FDIC establish a risk-based deposit insurance assessment
system; (xi) restrictions or prohibitions on accepting brokered deposits, except
for institutions which significantly exceed minimum capital requirements; and
(xii) certain additional limits on deposit insurance coverage.
7
FDICIA also provides for increased funding of the FDIC insurance fund
through a risk-related premium schedule for insured depository institutions.
Under this schedule, premiums for deposits insured by the BIF Fund range from
zero for the best-capitalized, healthiest institutions, to 0.27% for the weakest
institutions; the corresponding premiums for deposits insured by the Savings
Association Insurance Fund ("SAIF") are .23% and .31%, respectively. The Bank's
premium for the semi-annual assessment period beginning January 1, 1996, will be
zero for its BIF-insured deposits and .23% for its SAIF-insured deposits
(approximately $49.9 million in deposits).
FDICIA requires federal banking agencies to take "prompt corrective action"
with respect to banks that do not meet minimum capital requirements. FDICIA
establishes five capital tiers: "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." The following table sets forth the minimum capital ratios
that a bank must satisfy in order to be considered "well capitalized" or
"adequately capitalized" under Federal Reserve Board regulations:
Adequately Well
Capitalized Capitalized
----------- -----------
Total Risk-Based Capital Ratio ........ 8% 10%
Tier I Risk-Based Capital Ratio ....... 4% 6%
Tier I Leverage Ratio ................. 4% 5%
If a bank does not meet all of the minimum capital ratios necessary to be
considered "adequately capitalized," it will be considered "undercapitalized,"
"significantly undercapitalized," or "critically undercapitalized," depending
upon the amount of the shortfall in its capital. As of December 31, 1995, the
Bank's total risk-based capital ratio and Tier I risk-based capital ratio were
11.76% and 10.62%, respectively, and its Tier I leverage ratio as of such date
was 5.83%.
Notwithstanding the foregoing, if its principal federal regulator
determines that an "adequately capitalized" institution is in an unsafe or
unsound condition or is engaging in an unsafe or unsound practice, it may
require the institution to submit a corrective action plan, restrict its asset
growth and prohibit branching, new acquisitions and new lines of business. Among
other things, an institution's principal federal regulator may deem the
institution to be engaging in an unsafe or unsound practice if it receives a
less than satisfactory rating for asset quality, management, earnings or
liquidity in its most recent examination.
Possible sanctions for undercapitalized depository institutions include a
prohibition on the payment of dividends and a requirement that an institution
submit a capital restoration plan to its principal federal regulator. The
capital restoration plan of an undercapitalized bank will not be approved unless
the holding company that controls the bank guarantees the bank's performance.
The obligation of a controlling bank holding company to fund a capital
restoration plan is limited to the lesser of five percent (5%) of an
undercapitalized subsidiary's assets or the amount required to meet regulatory
capital requirements. If an undercapitalized depository institution fails to
submit or implement an acceptable capital restoration plan, it can be subjected
to more severe sanctions, including an order to sell sufficient voting stock to
become adequately capitalized. Critically undercapitalized institutions are
subject to the appointment of a receiver or conservator.
8
In addition, FDICIA requires regulators to impose new non-capital measures
of bank safety, such as loan underwriting standards and minimum earnings levels.
Regulators are also required to perform annual on-site bank examinations, place
limits on real estate lending by banks and tighten auditing requirements.
Many of the provisions of FDICIA will be implemented through the adoption
of regulations by the various federal banking agencies. Although the precise
effect of the legislation on the Company and the Bank therefore cannot be
assessed at this time, the Company does not anticipate that such regulations
will materially affect its operating results, financial condition or liquidity.
ITEM 2. PROPERTIES
The Company leases its administrative offices at 5790 Widewaters Parkway,
DeWitt, New York. The Bank owns its regional offices in Olean, New York and
Canton, New York. Of the Bank's 49 customer facilities, 44 are owned by the
Bank, and five are located on long-term leased premises.
Real property and related banking facilities owned by the Company at
December 31, 1995 had a net book value of $16.9 million and none of the
properties was subject to any encumbrances. For the year ended December 31,
1995, rental fees of $537,371 were paid on facilities leased by the Bank for its
operations.
ITEM 3. LEGAL PROCEEDINGS
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information about the principal
executive officers of the Company and the Bank, each of whom is elected by the
Board of Directors and each of whom holds office at the discretion of the Board
of Directors.
NAME AND AGE POSITION
------------ --------
Sanford A. Belden President and Chief Executive Officer of
Age 53 the Company and the Bank
David G. Wallace Treasurer of the Company and Senior Vice
Age 51 President and Chief Financial Officer of
the Bank
James A. Wears Regional President, Northern Region
Age 46 of the Bank
Michael A. Patton Regional President, Southern Region
Age 50 of the Bank
9
SANFORD A. BELDEN (Director; President and Chief Executive Officer of the
Company and the Bank). Mr. Belden has been President and Chief Executive Officer
of the Company and the Bank since October 1, 1992. Mr. Belden was formerly
Manager, Eastern Region, Rabobank Nederland, New York, New York from 1990 to
1992 and prior thereto served as President, Community Banking for First Bank
System, Minneapolis, Minnesota, a multi-state bank holding company.
MICHAEL A. PATTON (Regional President, Southern Region of the Bank). Mr.
Patton was the President and Chief Executive Officer of The Exchange National
Bank, a former subsidiary of the Company, from 1984 until January 1992, when, in
connection with the consolidation of the Company's five subsidiary banks into
the Bank, he was named to his current position as Regional President for the
Southern Region of the Bank.
DAVID G. WALLACE (Treasurer of the Company; Senior Vice President and
Chief Financial Officer of the Bank). Mr. Wallace became Vice President and
Chief Financial Officer in November 1988, and has been Senior Vice President
and Chief Financial Officer since August 1991.
JAMES A. WEARS (Regional President, Northern Region of the Bank). Mr. Wears
served as Senior Vice President of The St. Lawrence National Bank, a former
subsidiary of the Company, from 1988 through January 1991, and as its President
and Chief Executive Officer from January 1991 until January 1992. Following the
January 1992 consolidation of the Company's five subsidiary banks into the Bank,
Mr. Wears was named to his current position as Regional President for the
Northern Region of the Bank.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Common Stock has been traded over-the-counter on the NASDAQ National
Market under the symbol "CBSI" since September 16, 1986. The following table
sets forth the high and low bid quotations for the Common Stock, and the cash
dividends declared with respect thereto, for the periods indicated. The
quotations represent bid prices between dealers, do not include retail mark-ups,
mark-downs or commissions, and do not necessarily represent actual transactions.
There were 3,682,315 shares of Common Stock outstanding on March 3, 1995 held by
approximately 1,877 shareholders of record.
10
Price Range Cash Dividend
----------------- Declared Per
High Low Share
------ ------ -------------
1995:
First Quarter ............. $27.75 $25.25 $0.30
Second Quarter ............ 29.00 24.25 0.30
Third Quarter ............. 36.75 25.25 0.30
Fourth Quarter ............ 34.25 31.00 0.33
-----
$1.23
=====
1994:
First Quarter ............. $30.75 $28.50 $0.27
Second Quarter ............ 30.50 28.50 0.27
Third Quarter ............. 31.75 29.00 0.30
Fourth Quarter ............ 31.75 25.75 0.30
-----
$1.14
=====
The Company has historically paid regular quarterly cash dividends on its
Common Stock, and declared a cash dividend of $0.33 per share for the first
quarter of 1996. The Board of Directors of the Company presently intends to
continue the payment of regular quarterly cash dividends on the Common Stock, as
well as to make payment of regularly scheduled dividends on the Preferred Stock
as and when due, subject to the Company's need for those funds. However, because
substantially all of the funds available for the payment of dividends by the
Company are derived from the Bank, future dividends will depend upon the
earnings of the Bank, its financial condition, its need for funds and applicable
governmental policies and regulations. See "Supervision and Regulation -- Limits
On Dividends and Other Payments."
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated historical financial
data of the Company as of and for each of the years in the five year period
ended December 31, 1995. The historical "Income Statement Data" and historical
"Statement of Condition Data" are derived from financial statements which have
been audited by Coopers & Lybrand L.L.P., independent public accountants. The
"Per Share Data", "Selected Ratios" and "Other Data" for all periods are
unaudited. All financial information in this table should be read in conjunction
with the information contained in "Capitalization," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and with the
Consolidated Financial Statements and the related notes thereto included
elsewhere in this Form.
11
--------------------------------------------------------------------
Years Ended December 31,
1995 1994 1993 1992 1991
--------------------------------------------------------------------
(Dollars in thousands, except per share data)
INCOME STATEMENT DATA:
Interest income ..................................... $ 83,387 $ 61,575 $ 54,642 $ 56,345 $ 59,364
Interest expense .................................... 36,307 22,130 17,733 21,608 29,838
Net interest income ................................. 47,080 39,445 36,909 34,737 29,526
Provision for possible loan losses .................. 1,765 1,702 1,506 2,727 2,516
Net interest income after provision for
possible loan losses .............................. 45,315 37,743 35,403 32,010 27,010
Non-interest income ................................. 6,558 5,120 4,764 5,082 4,623
Non-interest expense ................................ 33,019 26,498 24,827 26,447 26,665
Income before income taxes .......................... 18,854 16,365 15,340 10,645 4,968
Provision for income taxes .......................... 7,384 6,256 5,765 3,139 1,296
Net income .................................... $ 11,470 $ 10,109 $ 9,575 $ 7,506 $ 3,672
END OF PERIOD BALANCE SHEET DATA:
Total Assets ........................................ $1,152,045 $915,501 $713,053 $669,274 $634,492
Net Loans ........................................... 560,151 483,079 417,871 362,356 348,569
Earning Assets ...................................... 1,034,183 861,599 671,415 625,342 577,986
Total Deposits ...................................... 1,016,946 679,638 588,315 557,915 575,876
Long-term debt and Obligations Under
Capital Lease ..................................... 25,550 550 592 139 862
Shareholders' equity ................................ 100,060 66,290 61,986 53,417 48,244
AVERAGE BALANCE SHEET DATA:
Total Assets ........................................ $1,054,610 $808,948 $684,863 $650,804 $622,927
Net Loans ........................................... 519,762 446,135 382,680 351,241 352,921
Earning Assets ...................................... 974,143 756,871 640,070 601,636 576,323
Total Deposits ...................................... 871,050 651,479 598,860 585,571 566,447
Long-term debt ...................................... 3,399 557 256 379 924
Shareholders' equity ................................ 84,231 64,033 57,298 50,868 47,182
PER SHARE DATA:
Net Income .......................................... $3.41 $3.59 $3.43 $2.76 $1.36
Cash dividend declared .............................. 1.23 1.14 1.40 0.90 0.76
Period-end book value ............................... 25.97 23.78 22.55 19.81 17.93
Period-end tangible book value ...................... 16.74 21.59 22.39 19.58 17.58
OUTSTANDING SHARES:
Average during period ............................... 3,261,205 2,814,710 2,788,330 2,722,093 2,694,101
End of period ....................................... 3,679,625 2,788,150 2,748,318 2,696,760 2,690,260
SELECTED RATIOS:
Return on average total assets ....................... 1.09% 1.25% 1.40% 1.15% 0.59%
Return of average shareholders' equity ............... 13.85 15.79 16.71 14.69 7.78
Dividend payout ratio ................................ 34.79 31.24 29.67 32.26 55.74
Net interest margin (taxable equivalent basis) ....... 4.88 5.30 5.90 5.82 5.14
Noninterest income to average assets [excludes
security gains (losses)] ............................ 0.64 0.69 0.70 0.75 0.78
Efficiency ratio ..................................... 60.82 57.94 58.45 66.40 77.40
Non-performing assets to period-end total loans and
other real estate owned ............................. 0.47 0.72 0.73 0.67 1.56
Allowance for loan losses to period-end loans ........ 1.25 1.30 1.37 1.37 1.24
Allowance for loan losses to period-end
non-performing loans ................................ 349.69 192.79 238.67 310.05 185.40
Allowance for loan losses to period-end
non-performing assets ............................... 267.40 179.67 186.06 205.72 78.81
Net charge-offs (recoveries) to average total loans 0.21 0.25 0.20 0.59 0.51
Average net loans to average total deposits .......... 59.67 68.48 63.90 59.98 62.30
Period-end total shareholders' equity to
period end assets ................................... 8.69 7.24 8.69 7.98 7.60
Tier I capital to risk-adjusted assets ............... 10.62 12.43 14.87 13.13 13.01
Total capital to risk-adjusted assets ................ 11.76 13.68 16.12 14.37 13.96
Tier I capital leverage ratio ........................ 5.83 6.80 8.46 7.90 7.49
12
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to facilitate an understanding and
assessment of significant changes in trends related to the financial condition
of the Company and the results of its operations. The following discussion and
analysis should be read in conjunction with the Selected Consolidated Financial
Data and the Company's Consolidated Financial Statements and related notes
thereto appearing elsewhere in this Form 10-K. All references in the discussion
to financial condition and results of operations are to the consolidated
position and results of the Company and its subsidiaries taken as a whole.
RESULTS OF OPERATIONS
- --------------------------------------------------------- -------------------------------------------
NET INCOME TREND SHAREHOLDER RETURN TRENDS
($ MILLION) (REPORTED EARNINGS)
- --------------------------------------------------------- -------------------------------------------
RETURN ON RETURN
AVERAGE ON
REPORTED EARNINGS RECURRING EARNINGS ASSETS AVERAGE
EQUITY EARNINGS PER SHARE
---------------------------------------------- --------------------------------------------
Year Amount % Change Amount % Change (%) (%) ($) Change
---- ------ -------- -------- --------- --- --- --- ------
1995 $11.470 13.5% $11.929 12.1% 1.09% 13.85% $3.41 -5.0%
1994 $10.109 5.6% $10.640 14.2% 1.25% 15.79% $3.59 4.7%
1993 $ 9.575 27.6% $ 9.321 18.8% 1.40% 16.71% $3.43 24.3%
1992 $ 7.506 104.4% $ 7.846 38.1% 1.15% 14.69% $2.76 102.9%
1991 $ 3.672 74.4% $ 5.682 107.1% 0.59% 7.78% $1.36 74.4%
Net income for 1995 rose 13.5% over last year to an all-time high of $11.5
million. Earnings per share were $3.41, down 5.0% primarily due to the Company's
issuance of additional common and preferred stock in mid 1995. This issuance put
sufficient capital in place to facilitate the purchase of 15 branches from The
Chase Manhattan Bank, N.A. on July 14, 1995. Recurring or core earnings were up
over 12% from last year to $11.9 million after removing the impact of certain
nonoperating expenditures and net losses on the sale of investment securities
and other assets. 1994's results climbed slightly over the prior year -- net
income rose 5.6% to $10.1 million or $3.59 per share; core earnings rose at a
14% pace.
These results reflect the second consecutive year in which acquisitions had
an important impact on the Company's results. Approximately $775,000 in one-time
expenses was incurred this year associated with integrating the Chase purchase
and consummating the subsequent sale of three of these branches, including
related loans and deposits, to NBT Bank, N.A. on December 15, 1995; the
facilities sold were the only properties in the purchase package from Chase not
located in or adjacent to CBSI's existing market area. In 1994, when three
branches from the Resolution Trust Company and one from Chase were acquired,
nearly $425,000 in nonrecurring expenses was incurred to assimilate the
purchases. One-time expenses in the earlier years largely related to the
Company's operational and organizational consolidation of its five formerly
independent commercial banks into today's Community Bank, N.A., a decision
announced in the fall of 1990.
13
1995's improvement in net income over the prior year is explained by the
following major factors:
o Net interest income (full-tax equivalent basis) climbed 18.6%,
reflecting earning asset growth of $218 million on average or 28.9%.
As of the Chase branch acquisition date, earning assets rose
approximately $157 million or 17% after repayment of short-term
borrowings from the $383 million in deposits purchased. Earning asset
growth more than offset the impact of a 42 basis point decline in the
Company's net interest margin to 4.88%.
o Noninterest income (excluding net losses on the sale of investment
securities and other assets) was up 19.3% owing to continued strength
in fiduciary services income; higher fees from the sale of annuities
and mutual funds; and greater overdraft fees, service charges, and
commissions from an expanded customer base gained from acquisitions in
1994 as well as the Chase branch purchase. Net losses on the sale of
investment securities and other assets were $12,000 this year versus
$486,000 in 1994.
o Overhead expense increased by 24.6%; excluding one-time costs of the
Chase acquisition, growth was $5.7 million or 21.7%. Approximately 60%
of the latter increase reflected personnel costs, largely because of
the Chase branches and required operations center support as well as
selective additions in lending and financial product sales. A
significant balance of the nonpersonnel expense increase was also
related to the new branches and the cost of servicing their 25,000
customers (net of the branches sold to NBT Bank), in addition to
amortization of intangible assets associated with the Chase
transaction.
o Loan loss provision expense rose 3.7%, increasing the loan loss
reserve to $7.0 million or 1.25% of loans outstanding, a 5 basis point
decrease from one year earlier. Though loans rose a record 16.0%,
asset quality remained strong, with the net charge-off/average loans
ratio improving to .21% and nonperforming loans falling by over one
third to $2.0 million or .36% of loans outstanding. Consequently,
coverage of reserves to nonperformers is ample in the opinion of
management at 3.5 times.
The above combination of factors resulted in a level of profitability at or
above that of CBSI's peer bank holding companies; this group is comprised of 108
companies nationwide having $1 billion to $3 billion in assets based on data
through September 30, 1995 as provided by the Federal Reserve System. Net income
per dollar employed, or return on average assets, was 1.09%; though off 16 basis
points from the prior year's level, it nonetheless is in the peer normal 45th
percentile. Shareholder return on equity, or net income as a percent of average
equity, was reduced to 13.85%, or the 67th peer percentile.
These modestly lower levels of profitability reflect the half year impact
of the Chase acquisition, which at the outset increased the Company's deposit
base by 54%. By year end, approximately 116 full-time equivalent employees were
added, either formerly employed by Chase or hired to provide operational support
or develop business in the new markets. In addition, this early period of
assimilation included relatively high one-time implementation expenses as well
as the dampening impact on margins of the acquired branches' initially low 3.6%
loan to deposit ratio. As of year-end 1995, loans in the markets served by the
former Chase branches had more than doubled, increasing their loan to deposit
ratio to 7.5%.
14
RETURN ON AVERAGE ASSETS
Return on average assets, return on average equity, dividend payout and
equity to asset ratios for the years indicated are as follows:
--------------------------------------------------
At December 31,
1995 1994 1993
--------------------------------------------------
Percentage of net income to average total assets ............ 1.09% 1.25% 1.40%
Percentage of net income to average shareholders
equity .................................................... 13.85% 15.79% 16.71%
Percentage of net income to average shareholders
equity plus average preferred stock ....................... 13.62% 15.79% 16.71%
Percentage of dividends declared per common share to
net income per common share ............................... 35.90% 31.24% 29.67%
Percentage of average shareholder's equity to average
total assets .............................................. 7.61% 7.92% 8.37%
Percentage of average shareholder's equity plus
average preferred stock to average total assets ........... 7.99% 7.92% 8.37%
NET INTEREST INCOME
Net interest income is the Company's principal source of core operating
income for payment of overhead and possible loan losses. It is the amount that
interest and fees on earning assets exceeds the cost of funds, primarily
interest paid to the Company's depositors. Net interest margin is the difference
between the gross yield on earning assets and the cost of interest bearing funds
as a percentage of earning assets.
15
The following table sets forth certain information concerning average
interest earning assets and interest-bearing liabilities and the yields and
rates thereon. Interest income and resultant yield information in the table is
on a fully tax-equivalent basis for the three-year period ended December 31,
1995 using marginal federal income tax rates of 35%, 34%, and 34%, respectively.
Averages are computed on daily average balances for each month in the period
divided by the number of days in the period. Yields and amounts earned include
loan fees. Non-accrual loans have been included in interest-earnings for
purposes of these computations.
-------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
1995 1994 1993
-------------------------------------------------------------------------------------------
Average Average Average
Average Amount of Yield/Rate Average Amount of Yield/Rate Average Amount of Yield/Rate
Balance Interest Paid Balance Interest Paid Balance Interest Paid
(Dollars in thousands)
ASSETS
Interest-earning assets:
Federal funds sold and
securities purchased
under agreements to resell ....... $ 24,535 $ 1,422 5.79% $ 0 $ 0 0.00% $ 1,669 $ 53 3.18%
Time deposits in other banks ....... 0 0 0.00 25 1 4.59 146 20 13.70
Taxable investment securities ...... 414,154 30,955 7.47 287,892 19,444 6.75 228,661 16,550 7.24
Non-taxable investment securities .. 16,806 1,580 9.40 22,819 2,103 9.22 26,914 2,631 9.78
Loans (net of unearned discount) ... 519,762 49,928 9.61 446,135 40,699 9.12 382,680 36,236 9.47
Total interest-earning assets ... 975,257 83,885 8.60 756,871 62,247 8.23 640,070 55,490 8.67
Non-interest earning assets:
Cash and due from banks ............ 39,118 32,411 29,056
Premises and equipment ............. 13,840 10,335 10,673
Other assets ....................... 34,099 15,896 10,439
Less allowance for loan losses ..... (6,589) (5,860) (5,375)
Net unrealized gains/(losses) on
available for sale portfolio ..... (1,114) (705) 0
Total ........................... $1,054,611 $808,948 $684,863
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing liabilities
Savings deposits ................... $ 366,604 $ 9,730 2.65% $323,443 $ 8,249 2.55% $320,966 $ 8,677 2.70%
Time deposits ...................... 380,494 21,042 5.53 229,449 9,964 4.34 190,166 8,285 4.36
Term borrowings .................... 85,407 5,376 6.29 87,334 3,917 4.49 22,979 771 3.36
-------
3,399 159 4.67 0 0 0
---------- ------- ---- -------- ------- --------
Total interest-bearing
liabilities ...................... 835,904 36,307 4.34 640,226 22,130 3.46 534,111 17,733 3.32
Non-interest-bearing liabilities
Demand deposits .................... 123,952 98,587 87,728
Other liabilities .................. 10,526 6,102 5,726
Stockholders' equity ................ 84,229 64,033 57,298
---------- -------- --------
Total ........................ $1,054,611 $808,948 $684,863
========== ======== ========
Net interest earnings $47,578 $40,117 $37,757
======= ======= =======
Net yield on interest-earning
assets 4.88% 5.30% 5.90%
==== ==== ====
16
Net interest income may also be analyzed by segregating the volume and rate
components of interest income and interest expense. The following table sets
forth for the periods indicated a summary of the changes in net interest income
for each major category of interest-earning assets and interest-bearing
liabilities resulting from volume changes and rate changes:
------------------------------------------------------------------------------
1995 COMPARED TO 1994 1994 COMPARED TO 1993
------------------------------------------------------------------------------
Increase (Decrease) Due Increase (Decrease) Due
To Change In (1) To Change In (1)
Volume Rate Net Change Volume Rate Net Change
------------------------------------------------------------------------------
(In thousands)
------------------------------------------------------------------------------
Interest earned on:
Federal funds sold and securities
purchased under agreement to resell ..... $ 711 $ 711 $ 1,422 $ (27) $ (26) $ (53)
Time deposits in other banks ............. 0.5 0.5 1 (11) (8) (19)
Taxable investment securities ............ 9,259 2,252 11,511 4,070 (1,176) 2,894
Non-taxable investment securities ........ (565) 42 (523) (384) (144) (528)
Loans (net of unearned discount) ......... 6,962 2,267 9,229 5,840 (1,377) 4,463
Total interest-earning assets (2) ......... $18,721 $ 2,917 $21,638 $9,694 $(2,937) $6,757
======= ======= ======= ====== ======= ======
Interest paid on:
Savings deposits ........................ $ 1,145 $ 336 $1,481 $ 65 $ (493) $ (428)
Time deposits ........................... 7,821 3,257 11,078 1,717 (38) 1,679
Short-term borrowing .................... 745 1,648 2,393 2,812 334 3,146
Long-term debt .......................... (659) (116) (775) (6) 6 0
Total interest-bearing liabilities (2) .... $7,738 $ 6,439 $14,177 $3,627 $ 770 $4,397
======= ======= ======= ====== ======= ======
Net interest earnings (2) ................. $10,909 $(3,448) $ 7,461 $6,403 $(4,043) $2,360
======= ======= ======= ====== ======= ======
- -------------
(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of change in each.
(2) Changes due to volume and rate are computed from the respective changes in
average balances and rates of the totals; they are not a summation of the
changes of the components.
17
Net interest income (with nontaxable income converted to a full
tax-equivalent basis) totaled $47.6 million in 1995; this represents a $7.5
million or 18.6% increase from the prior year. Higher asset and liability
volumes had a positive impact on net interest income of $10.9 million, while
interest rate changes had a negative impact of $3.4 million. In 1994, net
interest income totaled $40.1 million, an increase of $2.4 million or 6.3% over
the prior year. Higher volumes accounted for $6.4 million of this increase while
interest rate changes negatively impacted margins by $4.0 million.
Greater average earning assets of $218 million helped contribute $21.6
million in additional gross interest income during 1995. Reflective of the Chase
branch acquisition, earning asset volumes were up 28.9% over 1994's figures, a
record for the Company since its formation in 1983. The 1995 increase surpasses
the previous year's record growth of $117 million or 18.2%.
Increases in investment outstandings, due primarily to the strategic use of
excess cash from the Chase branch deposit acquisition, accounted for $145
million or over 66% of 1995's average earning asset growth. Including the impact
of selected pre-investment strategies prior to the acquisition's closing date,
higher investment volumes produced an additional $12.4 million towards the
increase in gross interest income. Average investment yields improved by 52
basis points from 6.93% in 1994 to 7.45% in 1995. Through September 30, 1995,
the Company's investment yield was in the very favorable 94th peer bank
percentile.
The remaining $74 million in average earning asset growth reflected
increased lending activity from both existing markets and those from the newly
acquired Chase branches. This growth in activity contributed an additional $9.2
million towards the increase in gross interest income. Because of the small
initial amount of loans purchased from Chase, the ratio of loans to earning
assets decreased this year. Average loan yields improved by 49 basis points from
9.12% in 1994 to 9.61% this year. Through September 30, 1995, the Company's loan
yield was in the favorable 67th peer bank percentile.
Average deposit and other funding liabilities grew by $221 million in 1995,
increasing total interest expense of the Company by an additional $14.2 million.
Nearly one quarter of this additional expense is traceable to higher average
rates paid on time deposits, whose costs closely track the movement of the
treasury yield curve. During 1995, time deposit rates averaged 5.53%, or 119
basis points higher than their 1994 average of 4.34%. In addition, interest
expense rose due to a growing mix of time deposits to total deposits, reflecting
movement of funds from savings and money market accounts as well as the fact
that the acquired Chase deposits contained a relatively higher portion of time
accounts.
Management was quite successful in 1995 in controlling the rising cost of
its interest bearing account base not directly priced relative to the treasury
yield curve. The average rate on savings (including interest checking) and money
market accounts increased by a combined total of only 10 basis points during
1995, rising from 2.55% in 1994 to 2.65% this year. This containment was able to
be accomplished without materially affecting total average deposits outstanding,
separate from the Chase branch acquisition. Largely because of the impact of the
Chase deposits, the portion of interest bearing funds which supports earning
assets rose slightly in 1995. Through September 30, 1995, the Company's average
cost of funds rate was in the 51st peer bank percentile.
18
Overall, CBSI's net interest margin declined from 5.30% in 1994 to 4.88% in
1995. This is attributable to a 79 basis point increase in the average cost of
funds as compared to a rise in the yield on earning assets of less than half
that amount. An increased mix of investment securities to earning assets largely
contributed to the decline in earning asset yields, as marketable securities
have historically had lower yields than most types of loans. Besides the impact
of increased time deposits costs, the average rate on cost of funds was
relatively higher during the first half of 1995, when more costly borrowings
were used to support investment growth prior to being replaced by the lower
priced Chase deposits. Despite the decline in the Company's net interest margin,
it ranks in the 61st peer bank percentile through September 30, 1995.
While the Company's net interest margin has historically been well above
the norm, the primary objective in recent years has been to maximize shareholder
returns through active utilization of tangible capital, which in the past has
involved various borrowing and investment strategies. Thus, as management
focuses on growing the earning asset base of the Company, a potential downward
change in margin may be considered secondary to increasing the future stream of
net interest income.
19
The two-year trend by quarter in net interest income, net interest margin
and related components is set forth as follows:
SUPPLEMENTARY SCHEDULE I
Components Of Net Interest Margin
- ------------------------------------------------------------------------------------------------------------------
Net Net Yield on Loans/
For the Quarter Ended: Interest Interest Earning Average Earning
(000's) Income Margin Assets Cost of Earning Assets at
(a) (b) (a) (b) (a) (b) Funds Assets Period End
- -----------------------------------------------------------------------------------------------------------------
Amount of Change From Preceding Quarter (c)
- -----------------------------------------------------------------------------------------------------------------
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 58.6%
Change $552 -0.18% -0.06% 0.10% 8.2% (0.4)
- -----------------------------------------------------------------------------------------------------------------
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% 0.5
- -----------------------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------------------
Change from Quarter Ended
December 31, 1994 to
December 31, 1995
Amount $2,783 -0.04% 0.21% 0.19% $226,397 -1.9%
Change 26.0% ----- ----- ----- 27.2% -----
- -----------------------------------------------------------------------------------------------------------------
For the Year Ended:
(000's)
December 31, 1994
Amount $40,117 5.30% 8.23% 3.00% $756,870 56.1%
December 31, 1995
Amount $47,578 4.88% 8.60% 3.78% $975,257 54.2%
Change 18.6% -0.43% 0.37% 0.79% 28.9% (1.9)
- -----------------------------------------------------------------------------------------------------------------
Note: (a) All net interest income, margin, and earning asset yield figures are full tax-equivalent.
(b) Net interest income, margin, and earning asset yield figures exclude premiums on bonds called on October 10,
1993.
(c) Totals and change calculations may not foot due to rounding.
20
NONINTEREST INCOME
The primary sources of noninterest income are recurring fees from core
banking operations and revenues from one-time events, defined as net
gains/losses from the sale of investments, loans, and miscellaneous assets. CBSI
presently has no active nonbanking subsidiaries. Its former mortgage banking and
data processing companies were closed in 1990 and 1992, respectively, as part of
the Company's restructuring plan to reduce overhead and eliminate unprofitable
functions.
- -------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME TREND
($ Million)
- -------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Non-Recurring Subsidiaries
Income Noninterest Income Non-interest Core Banking Noninterest Core Banking/
Income Income Average Assets
Year 000s % Change 000s 000s 000s % Change (%)
---- ---- -------- ---- ---- ---- -------- ---
1995 $6.558 28.3% ($0.012) $0.000 $6.568 17.2% 0.62%
1994 $5.120 7.4% ($0.486) $0.000 $5.606 17.6% 0.69%
1993 $4.764 -6.2% ($0.002) $0.000 $4.766 3.8% 0.70%
1992 $5.082 9.9% $0.300 $0.189 $4.593 7.9% 0.71%
1991 $4.624 -4.1% ($0.178) $0.546 $4.256 9.0% 0.68%
Core banking fees were up strongly for the second consecutive year to
approximately $6.6 million in 1995, a 17.2% improvement following a 17.6%
increase in 1994. This income source represented .62% of average assets,
slightly lower than 1994's level of .69%. The decrease in this ratio is
primarily because of nearly 30% more in average assets as a result of the Chase
branch acquisition, expanded borrowings in anticipation of the planned Chase
closing date in mid July, and the full year impact of the branch acquisitions in
June and October of 1994. Approximately $575,000 of 1995's noninterest income
resulted from fees generated by the 15 Chase branches; about 10% of that
improvement pertained to the three branches sold to NBT Bank in mid December.
Though progress has been steady in dollar terms over the last few years, strong
asset growth has placed noninterest income in the relatively low 24th peer
percentile compared to management's intermediate-term objective of becoming peer
normal at approximately .90% of average assets.
21
The following table sets forth selected detailed information by category of
non-interest income for the Company for the years indicated:
-----------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1995 1994 1993
---- ---- ----
(In thousands)
Fiduciary and investment services .............................. $1,447 $1,380 $1,113
Service charges on deposits .................................... 1,959 1,621 1,478
Overdraft fees ................................................. 1,367 971 901
Other service charges and fees ................................. 1,796 1,519 1,186
Other operating income ......................................... 141 131 101
Investment security gains (losses) ............................. (152) (502) (15)
Total ..................................................... $6,558 $5,120 $4,764
Total non-interest income [excluding investment security
gains (losses)] as a percentage of average assets .............. 0.64% 0.69% 0.70%
In light of management's objective, emphasis has been placed on a program
of continuous improvement in recurring noninterest income. These efforts have
resulted in new products, such as the Visa Debit card initiated this year
(allows customer access to deposited funds at any merchant accepting VISA),
secondary mortgage market sales/servicing beginning in 1994, and the sale of
mutual funds and annuities, a program also launched in 1994. The focus on growth
continues to drive efforts to increase fiduciary income, control waived fees,
and competitively price deposit service charges and commission-based services.
As a result of these efforts, in addition to the impact of the Chase
acquisition and the full year effect of the smaller 1994 acquisitions, fees from
core banking operations improved in several key areas in 1995:
o Fiduciary fees expanded to over $1.4 million, up 4.9% in 1995. This
improvement represents growth in fees from employee benefit trust
products of 24.3%, reflective of CBSI's attractive,
creatively-designed plans for construction, nonprofit, and other
specialty industries, both within and outside the Company's core
banking areas. Fees from personal trust services, however, decreased
2.9% as a result of trust assets being transferred into the special
investment products group, which is responsible for mutual funds and
annuity sales. A more focused program of business development planned
for 1996 is expected to strengthen future fiduciary income growth.
o Service charges on deposit accounts and overdraft fees increased to
$3.3 million in 1995, an excellent 28.3% growth rate versus 9.0% in
1994. The full year impact of 1994's acquisitions and 1995's Chase
acquisition explain most of this growth. The increase also reflects
favorable movement in CBSI's core deposit volumes and the
aforementioned emphasis on ensuring competitive pricing and reducing
waived fees.
22
o Merchant fees earned through the Company's Visa affiliation fell
approximately 60% in 1995 to $304,000, attributable to the loss of a
large vendor early in 1995. However, because of the low margin on the
lost vendor and continued improvement in the margins of the remaining
vendors, the direct margin (net of processing expense) rose over 15.1
percentage points to an all-time high of 34.7%.
o 1995 is the second year in which CBSI has offered annuities, mutual
funds, and other investment products through financial services
representatives (FSRs) located in selected geographic markets within
its branch network. Net commission income from this activity amounted
to almost $475,000 on asset sales of $22 million, more than triple the
1994 level of approximately $150,000 on sales of $7.1 million. The
number of FSR positions (staffed by registered representatives working
through PrimeVest Financial Services, Inc. of Saint Cloud, Minnesota)
increased by two during 1995 to seven as of year end. This line of
special investment products is anticipated to continue strong growth
in 1996, reflective of the full-year impact of an expanded sales staff
as well as the additional 25,000 new customers contributed by the
former Chase branches.
o General commissions and miscellaneous income at $1.0 million were up
more than 43% in 1995. The majority of this year's increase is
attributable to miscellaneous commissions on wire transfers, check
orders, travelers checks, utility payment fees, and other recurring
commissions that result from daily branch operations, as well as to
safe box rent increases, all primarily a consequence of the
acquisitions made over the past two years.
Nonrecurring other income reflected a loss of $12,000 in 1995 versus a loss
of $486,000 in 1994. This year's results were caused by a $152,000 loss on the
sale of $4.1 million in lower yielding investments being almost completely
offset by gains on the sale of student loans and mortgages sold in the secondary
market. The prior year's $502,000 investment loss resulted from the sale of $28
million in lower yielding securities. Benefits from incurring these investment
losses include potential reinvestment of the proceeds into higher yielding
assets (intended to increase net earnings over the average term to maturity of
the investments sold), a possible lowering of future reinvestment risk, and
reduction in market value exposure in the available for sale investment
portfolio.
23
The two-year trend by quarter in noninterest income and its primary
components is set forth in the following schedule:
SUPPLEMENTARY SCHEDULE II
Components of Noninterest Income
- ------------------------------------------------------------------------------------------------------------------------------
Other Service Net Gain Total
Service Annuity & Charges, (Loss) on Sale Noninterest Core Non I Inc
For the Quarter Ended: Fiduciary Charges on Mutual Commissions, of Investments Income % of Average
000S Services Deposits Fund Sales and Fees and Other Assets (Non I) Assets (a)
- ------------------------------------------------------------------------------------------------------------------------------
December 31, 1993
Amount 288 602 0 60 (12) 938 0.54%
- ------------------------------------------------------------------------------------------------------------------------------
March 31, 1994
Amount 325 564 16 327 (3) 1,229 0.68%
Change 12.8% -6.3% 0.0% 445.0% -75.0% 31.0% 0.14%
- ------------------------------------------------------------------------------------------------------------------------------
June 30, 1994
Amount 400 633 46 278 26 1,383 0.71%
Change 23.1% 12.2% 187.5% -15.0% -966.7% 12.5% 0.03%
- ------------------------------------------------------------------------------------------------------------------------------
September 30, 1994
Amount 353 694 16 546 4 1,613 0.77%
Change -11.8% 9.6% -65.2% 96.4% -84.6% 16.6% 0.06%
- ------------------------------------------------------------------------------------------------------------------------------
December 31, 1994
Amount 302 702 70 334 (513) 895 0.40%
Change -14.4% 1.2% 337.5% -38.8% -12925.0% -44.5% -0.37%
- ------------------------------------------------------------------------------------------------------------------------------
March 31, 1995
Amount 340 662 128 250 18 1,398 0.61%
Change 12.6% -5.7% 82.9% -25.1% -103.5% 56.2% 0.21%
- ------------------------------------------------------------------------------------------------------------------------------
June 30, 1995
Amount 347 704 125 255 (57) 1,374 0.57%
Change 2.1% 6.3% -2.3% 2.0% -416.7% -1.7% -0.04%
- ------------------------------------------------------------------------------------------------------------------------------
September 30, 1995
Amount 336 961 91 413 8 1,809 0.62%
Change -3.2% 36.5% -27.2% 62.0% -114.0% 31.7% 0.05%
- ------------------------------------------------------------------------------------------------------------------------------
December 31, 1995
Amount 424 1,000 130 404 20 1,978 0.67%
Change 26.2% 4.1% 42.9% -2.2% 150.0% 9.3% 0.05%
- ------------------------------------------------------------------------------------------------------------------------------
Change from Quarter
Ended
December 31, 1994 to
December 31, 1995
Amount .......... 122 298 60 70 533 1,083 0.27%
% Change ........ 40.4% 42.5% 85.7% 21.0% -103.9% 121.0% N/A
- ------------------------------------------------------------------------------------------------------------------------------
For the Year Ended:
(000s)
December 31, 1994
Amount .......... 1,380 2,593 148 1,485 (486) 5,120 0.63%
December 31, 1995
Amount .......... 1,447 3,326 473 1,323 (12) 6,557 0.62%
Change .......... 4.9% 28.3% 219.6% -10.9% -97.5% 28.1% -0.01%
- ------------------------------------------------------------------------------------------------------------------------------
Note: (a) Core noninterest income excludes net gain (loss) on sale of investments and other assets.
24
NON-INTEREST EXPENSE
The following table sets forth selected detailed information by category of
non-interest expenses of the Company for the years indicated:
---------------------------------
Year Ended December 31,
---------------------------------
1995 1994 1993
---- ---- ----
(In thousands)
Salary expense .................... $13,146 $10,564 $ 9,631
Payroll taxes and benefits ........ 3,611 2,534 2,321
Net occupancy expense ............. 2,608 2,043 1,814
Equipment expense ................. 1,992 1,697 1,642
Professional fees ................. 1,102 1,282 1,528
Data processing expense ........... 2,449 2,573 2,193
Amortization ...................... 1,686 355 166
Stationary and supplies ........... 1,231 739 696
Deposit insurance premiums ........ 925 1,390 1,317
Other ............................. 4,269 3,321 3,519
Total ..................... $33,019 $26,498 $24,827
Total operating expenses as a
percentage of average assets .... 3.13% 3.28% 3.63%
Efficiency ratio(1) ............... 60.82% 57.94% 58.45%
- ----------
(1) Non-interest expense to recurring operating income
Noninterest expense or overhead rose $6.5 million or 25% in 1995 to $33.0
million compared to a moderate 6.7% increase in the prior year. The primary
reasons for this year's increase are the one-time and recurring additions to
overhead associated with the acquisition of the Company's 13 new 1995
locations--12 former Chase branches (net of those sold to NBT Bank) plus one
former Fleet Bank facility in Olean, New York. Overhead growth also reflects the
full year impact of the 1994 branch acquisitions. As a percent of average
assets, this year's overhead at 3.13% was in the favorable 38th peer percentile,
an improvement from 3.28% or the 49th percentile in 1994.
In brief, approximately $5 million in additional expense was incurred in
1995 related to the new Chase branches, of which $775,000 was the nonrecurring
cost of operationally consummating the transaction. Second, approximately $2
million in expense was associated with the direct operation of the Chase
branches ($300,000 relate to branches sold to NBT Bank). Third, servicing the
25,000 former Chase customers required additional operational support in the
Company's regional processing centers and some limited incremental
administrative expense. And last, amortization of the intangible assets created
by the Chase transaction added about $1.2 million.
25
For CBSI as a whole, higher personnel expense accounted for 56% of 1995's
increase in overhead, with personnel costs being up 28% versus being 9.6% higher
in 1994. Salary expense increased by 24%, primarily reflective of 116 new
full-time equivalent (FTEs) staff additions either formerly employed by Chase or
hired to provide operational support or develop business in the new markets.
Additionally, the increase in salaries resulted from the full-year impact of the
four branches acquired in 1994, modest annual merit awards, staffing of the new
Olean branch facility, and continued strengthening of the lending and fiduciary
services functions. Total FTEs at year end 1995 were 563 versus 440 at year-end
1994. Payroll taxes and benefits rose 43% largely due to the additions to staff,
higher benefit costs per employee (including the impact of several large medical
claims), and severance expense associated with the Chase transaction.
Nonpersonnel expense rose almost $2.9 million or 21.4% this year as opposed
to a $525,000 or a 4.1% increase in 1994. Higher occupancy expense, supplies,
telephone, postage, and computer services resulted from the 16 new locations
(before the mid December sale of three locations) added in the last half of 1995
and the full-year impact of 1994's acquisitions. Amortization of intangible
assets rose as a result of the 8.25% premium paid on the deposits acquired from
Chase and the premiums paid on the prior year's acquisitions. Various other
increases related to inflation, internal volume growth, and acquisitions were
partially offset by lower credit card processing expense (caused by the loss of
a large vendor) and a reduction in the FDIC deposit insurance premium rate from
23 basis points to zero during the year.
The efficiency ratio is defined as overhead expense divided by recurring
operating income (full tax-equivalent net interest income plus noninterest
income, excluding net securities gains and losses); the lower the ratio, the
more efficient a bank is considered to be.
The sharp drop in the ratio from 77.4% in 1991 to 58.4% in 1993 resulted
from the restructuring of the Company into a single bank holding company. 1994's
flattening was caused by additional net overhead of the four branches acquired
that year, which added $75 million in deposits and only a de minimus amount of
related loans. The slight increase in the 1995 ratio to 60.8%, which represents
the favorable 39th peer percentile, reflects increased costs resulting from the
$383 million Chase deposit acquisition; as with the much smaller 1994
transactions, there has initially been a disproportionately smaller increase in
net interest income since practically all of the acquired deposits are funding
investments rather than higher yielding loans. Without the $775,000 in one-time
Chase implementation expenses, the efficiency ratio would have been 59.5% in
1995. Management has set an objective to bring this ratio downward to 55% within
the next three to five years.
While the Company's expense ratios have generally been favorable,
management maintains a heightened focus on controlling costs and eliminating
inefficiencies. Areas for improvement have been identified through detailed peer
comparisons, employee involvement, and targeted use of outside consultants. A
task force has been initiated to coordinate technology improvements that may
bring future expense savings (such as bringing automation to the branch customer
service functions and capturing information on optical disk instead of
microfiche). Further, line item expense monitoring on a regional basis has been
assigned to individual managers as a supplement to regular surveillance by the
corporate finance department. These efforts are intended to offset pressure from
inflation and higher transaction volumes and allow the Company to more fully
benefit from economies of scale as it continues to grow.
26
Effective January 1, 1997, Financial Accounting Standards Board Statement
No. 123, "Accounting for Stock-Based Compensation" will require a
fair-value-based approach to accounting for stock-based compensation plans.
Alternatively, the Statement allows for such plans to continue to be accounted
for in accordance with APB Opinion 25, with disclosure of proforma amounts
reflecting the difference between the costs charged to operations pursuant to
Opinion 25 and the compensation cost that would have been charged had Statement
No. 123 been applied. It is the Company's present intention to continue
accounting for stock-based compensation plans in accordance with APB 25.
Effective January 1, 1996, Financial Accounting Standards Board Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," establishes standards for measuring impairment of
long-lived assets, including certain identifiable intangible assets. Adoption of
this statement is not expected to have a significant effect on the Company's
financial statements.
27
The two year trend by quarter in noninterest expense and its primary
components is set forth as follows:
SUPPLEMENTARY SCHEDULE III
Components of Noninterest Expense
- ----------------------------------------------------------------------------------------------------------------------------------
Occupancy, Amortization Non All Total % of
For the Quarter Ended (c): Personnel Furniture, of Intangible Recurring Other Noninterest Average Efficiency
(000) Expense & Equipment Assets Expenses Expense Expense Assets Ratio
- ----------------------------------------------------------------------------------------------------------------------------------
(a) (b)
December 31, 1993
Amount 2,998 966 41 N/A 2,440 6,445 3.68% 60.4%
- ----------------------------------------------------------------------------------------------------------------------------------
March 31, 1994
Amount 3,284 948 41 0 1,983 6,256 3.44% 59.7%
Change 9.5% -1.9% 0.0% 0.0% -18.7% -2.9% -0.2% -0.7%
- ----------------------------------------------------------------------------------------------------------------------------------
June 30, 1994
Amount 3,200 922 71 28 2,118 6,339 3.25% 58.1%
Change -2.6% -2.7% 73.2% 0.0% 6.8% 1.3% -0.18% -1.6%
- ----------------------------------------------------------------------------------------------------------------------------------
September 30, 1994
Amount 3,333 929 119 162 2,427 6,970 3.34% 58.1%
Change 4.2% 0.8% 67.6% 478.6% 14.6% 10.0% 0.08% 0.0%
- ----------------------------------------------------------------------------------------------------------------------------------
December 31, 1994
Amount 3,281 941 125 238 2,347 6,932 3.11% 57.4%
Change -1.6% 1.3% 5.0% 46.9% -3.3% -0.5% -0.23% -0.7%
- ----------------------------------------------------------------------------------------------------------------------------------
March 31, 1995
Amount 3,711 966 120 38 2,189 7,024 3.06% 58.7%
Change 13.1% 2.7% -4.0% -84.0% -6.7% 1.3% -0.05% 1.3%
- ----------------------------------------------------------------------------------------------------------------------------------
June 30, 1995
Amount 3,600 1,012 120 71 2,328 7,131 2.98% 57.9%
Change -3.0% 4.8% 0.0% 86.8% 6.3% 1.5% -0.09% -0.8%
- ----------------------------------------------------------------------------------------------------------------------------------
September 30, 1995
Amount 4,561 1,222 710 510 2,226 9,229 3.17% 63.0%
Change 26.7% 20.8% 491.7% 618.3% -4.4% 29.4% 0.19% 5.1%
- ----------------------------------------------------------------------------------------------------------------------------------
December 31, 1995
Amount 4,884 1,400 735 157 2,459 9,635 3.27% 62.4%
Change 7.1% 14.6% 3.5% -69.2% 10.5% 4.4% 0.10% -0.6%
- ----------------------------------------------------------------------------------------------------------------------------------
Change from Quarter Ended
December 31, 1994 to
December 31, 1995
Amount 1,603 459 610 (81) 112 2,703 0.16% 5.0%
% Change 48.9% 48.8% 488.0% -34.0% 4.8% 39.0% 5.24% 8.7%
- ----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended:
(000s)
December 31, 1994
Amount 13,098 3,740 355 428 8,877 26,498 3.28% 57.9%
December 31, 1995
Amount 16,757 4,600 1,686 776 9,200 33,019 3.13% 60.8%
Change 27.9% 23.0% 374.9% 81.3% 3.6% 24.6% -0.14% 2.90%
- ----------------------------------------------------------------------------------------------------------------------------------
Note: (a) Includes non-recurring expenses related to acquisitions.
(b) Efficiency ratio includes non-recurring expenses and amortization of intangible assets.
(c) Totals and change calculations may not foot due to rounding.
28
INCOME AND INCOME TAXES
Income before tax in 1995 was nearly $18.9 million, up 15.2% over the prior
year's amount, which was 6.7% higher than 1993's level. When pre-tax income is
recast as if all tax-exempt revenues were fully taxable on a federal basis,
1995's results rose by $2.3 million or 13.6%.
The main reasons for improved pre-tax earnings were the favorable $7.5
million increase in net interest income (full tax-equivalent basis), which
reflected the strong earning asset growth discussed previously, and a $1.4
million climb in noninterest income (including the change in net losses on the
sale of securities and other assets). These factors were partially offset by
$6.5 million more in overhead expense, including the aforementioned $5 million
in one-time and other expenses associated with the Chase branches, and $63,000
more in loan loss provision expense.
The Company's combined effective federal and state tax rate rose 100 basis
points this year to 39.2%. This rate has increased since 1993 largely as a
result of a decreasing proportion of tax-exempt municipal investment holdings.
More specifically, taxable earning assets have experienced a high rate of growth
compared to tax-exempt holdings, whose level has been flat to falling primarily
because of the less attractive nature of these investments.
CAPITAL
Shareholders' equity ended 1995 at $100.1 million, up over 50% from one
year earlier. Excluding the $2.9 million after-tax change in this year's market
value adjustment on available for sale investment securities, capital rose 45%.
In addition to the contribution of strong earnings (partially offset by
dividends paid to shareholders), the large increase in capital during 1995 can
be attributed to shares of common and preferred stock issued to facilitate the
Chase branch acquisition as indicated below. In total, $27.5 million in new
capital was raised. The resulting profile of CBSI's common shareholder base as
of September 30, 1995 reflects a net increase of 177 shareholders from year-end
1994, the bulk of which is associated with the mid-year common stock offering.
o On June 30, 1995, CBSI issued 710,000 shares of common stock ($24.25
per share) and 90,000 shares of 9% cumulative perpetual preferred
stock ($100 per share).
o Pursuant to an overallotment option granted to the underwriter,
112,500 shares of common stock were issued on July 10, 1995 along with
40,000 shares reserved for directors and employees ($24.25 per share).
o On November 15, 1995, CBSI repurchased half ($4.5 million or 45,000
shares) of its preferred stock at par value without any prepayment
penalty. The Company took this action in light of the success of its
common stock issuance and the demonstrated earnings contribution of
the Chase branch acquisition. The repurchase also eliminated a
relatively high cost funding source.
29
- --------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
SHAREHOLDER PROFILE
(AS OF DATE INDICATED OR MOST RECENT PRECEDING DATE)
- --------------------------------------------------------------------------------------------------------------------------------
9/30/95 12/31/94 Change
--------- --------- -------
Number of Shares Outstanding ......... 3,674,000 2,788,000 886,000
Number of Shareholders .............. 1,877 1,700 177
% Shares # of % Shares # of % Shares # of
Outstanding Shareholders Outstanding Shareholders Outstanding Shareholders
----------- ------------ ----------- ------------ ----------- -------------
Institutional Shares Held ............ 26.8% 14* 25.7% 19* 1.1% (5)
*Identifiable by Name
Other Significant Shareholdings
Insiders ........................... 5.2% 16 5.3% 16 -0.1% 0
Owners of 5% or More ............... 0.0% 0 0.0% 0 0.0% 0
CBSI's 401(k) and Pension
Plan ............................. 2.3% 293 2.2% 279 0.1% 14
(29% and 1% of Plan
dollars, excl. Insiders)
Total ......................... 7.4% 309 7.5% 295 -0.1% 14
Dividend Reinvestment Plan
Participation .................... 29.0% 544 30.0% 516 -1.0% 28
All Shares Held by Participants .. 7.2% N/A N/A
The ratio of tier I capital to assets (or tier I leverage ratio), the basic
measure for which regulators have established a 5% minimum to be considered
"well-capitalized," remains sound at 5.83%. This level compares to 6.80% a year
ago. The change reflects growth in assets resulting from the Chase acquisition
and the decision by management to limit the size of the Company's secondary
capital offering to that required to remain "well-capitalized." The total
capital to risk-weighted assets ratio is 11.76% as of year-end 1995, well above
the 6% minimum requirement for "well-capitalized" banks. The Company is
confident that capital levels are being prudently balanced between regulatory
and investor perspectives.
Cash dividends paid in 1995 of $3.9 million represented an increase of
26.2% over the prior year. This growth reflects the greater number of shares
outstanding (due to both the secondary offerings and the exercise of stock
options), payment of the preferred stock dividend, and a three cent per share
increase in quarterly common stock dividend in the fourth quarter of 1995 from
$.30 to $.33.
Raising the Company's expected annualized dividend to $1.32 per common
share represents management's confidence that earnings strength is sustainable
and that capital can be maintained at a satisfactory level. The dividend payout
ratio for the year was approximately 37%, or 35% excluding the preferred
dividend, and represents an increase from the 1994 level of 31%. The Company's
targeted payout range for dividends on common stock is 30-40%. Its payout ratio
has historically been strong relative to peers, averaging in the 60th-68th
percentile for 1992, 1993, and 1994. The 1995 peer payout ratio (including
preferred dividend) places the Company in the 64th peer percentile.
30
LOANS
The amounts of the Bank's loans outstanding (net of deferred loan fees or
costs) at the dates indicated are shown in the following table according to type
of loan:
--------------------------------------------------------------------------
At December 31,
--------------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(In thousands)
Real estate mortgages
Residential ............................ $204,224 $196,548 $177,059 $146,135 $121,982
Commercial loans secured by
real estate .......................... 43,939 34,677 31,851 23,411 14,270
Commercial real estate ................. 3,032 927 1,063 1,647 2,316
Farm ................................... 8,224 7,625 7,421 6,670 1,105
Total ............................... 259,419 239,777 217,394 177,863 139,673
Commercial, financial, and agricultural
Agricultural loans ..................... 17,969 13,295 11,564 10,152 16,664
Commercial loans ....................... 81,562 67,976 58,252 40,524 44,301
Total ............................... 99,531 81,271 69,816 50,676 60,965
Installment loans to individuals
Direct ................................. 57,646 58,371 58,963 64,486 74,848
Indirect ............................... 144,566 121,148 89,513 88,068 100,140
Student and other ...................... 10,268 8,690 6,337 6,492 3,353
Total ............................... 212,480 188,209 154,813 159,046 178,341
Other loans .............................. 2,190 1,482 1,578 3,778 4,419
-------- -------- -------- -------- --------
Gross loans .............................. 573,620 510,739 443,601 391,363 383,398
Less: Unearned discount .................. 13,469 27,660 25,730 29,007 34,829
Reserve for possible loan losses ... 6,976 6,281 5,706 4,982 4,312
-------- -------- -------- -------- --------
Net loans ................................ $553,175 $476,798 $412,165 $357,374 $344,257
The Company's predominant focus on the retail borrower enables its loan
portfolio to be highly diversified. Nearly 70% of loans outstanding are oriented
to consumers borrowing on an installment and residential mortgage loan basis. In
addition, the typical size loan to the variety of commercial businesses in the
Company's market areas is under $50,000, with less than one quarter of the
commercial portfolio being in loans in excess of $500,000. The portfolio
contains no credit card receivables. The overall yield on the portfolio is in
the attractive 67th peer percentile.
31
Loans outstanding, net of unearned discount, reached a record $560 million
as of year-end 1995, up over $77 million or 16.0% compared to twelve months
earlier. About one third of 1995's growth took place in the markets served by
the branches purchased from Chase at mid year; outstandings at these branches
have nearly doubled since the acquisition date to $24 million at year end. This
marks the third consecutive year in which growth has exceeded 15%; loans in 1994
rose a strong $65 million or 15.6% while the prior year's increase was $56
million or 15.3%. Loans have been on the rise since March 1992, some nine months
after the 1990 recession had statistically ended on the national level; net
growth beyond the Company's previous record high began in the second quarter of
1993.
The primary reasons for the Company's success over the last three years
vary by line of business, a construct which recombines the individual components
of the preceding table into four major segments:
o Expanded residential real estate lending, which grew rapidly through
year-end 1993, largely due to refinancing caused by the historically
low mortgage rate environment; growth slowed thereafter as rates began
to rise and the Company entered a program to sell certain originations
in the secondary mortgage market;
o A relatively steady increase in the 1993-1994 period in lending to
small and medium-sized businesses, with growth stepping up this year
because of the Chase branch acquisition;
o An increase in indirect installment lending in the spring of 1993
after a three and one-half year decline, with accelerated growth
beginning in the spring of 1994 as new car sales climbed nationwide;
strength continued in 1995, though demand began to moderate in the
fall of this year; and
o Relative flatness in general direct installment lending until the
spring of 1994, with mild improvement thereafter.
For 1995 as a whole, about 42% of the $77 million in total loan growth took
place in the consumer indirect area, slightly less than the 43% share achieved
on 1994's $65 million increase in total loans. The increase in business lending
was proportionately more significant in 1995 at 46% of total loan growth versus
28% in the prior year. The share of this year's increase from consumer mortgages
dropped sharply to 4% from nearly 24% of total growth in 1994. And consumer
direct loans accounted for 7% of 1995's rise, up from 5% in the prior year. The
improved relative contribution of both business lending and consumer direct
loans reflects the impact of the new Chase branch markets.
- ---------------------------------------------------------------------------------------------------------------------------------
NATURE OF LENDING
MIX AT QUARTER END
($ MILLION AND %)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Loans Consumer Mortgage Business Lending Consumer Indirect Consumer Direct
Year Amt. % Change Amt. % Total % Change Amt. % Total % Change Amt. % Total % Change Amt. % Total % Change
- ---- ---- -------- ---- ------- -------- ----- ------- -------- ---- ------- -------- ---- ------- --------
1995 $560 16.0% $147 26% 2.4% $174 31% 25.6% $135 24% 31.8% $104 19% 5.6%
1994 $483 15.6% $143 30% 12.2% $139 29% 15.1% $102 21% 37.9% $99 20% 3.4%
1993 $418 15.3% $128 30% 26.8% $120 29% 25.7% $74 18% 4.2% $96 23% 0.9%
1992 $362 4.0% $101 28% 21.5% $96 26% 13.6% $71 20% -10.8% $94 26% -6.5%
32
Demand for installment debt indirectly originated through automobile,
marine, and mobile home dealers continued to be strong in 1995 for the second
consecutive year. Outstandings ended 1995 nearly 32% or $33 million higher
compared to growth of 38% or $28 million in the prior year. Strength was
evidenced in both CBSI's Northern Region, where this type of lending has been
highly successful for a number of years, and in the Southern Region, where the
commitment to indirect lending was re-energized during 1993 with continued good
success since then. This portfolio segment, of which more than 93% relates to
automobile lending, constitutes over 24% of total loans outstanding, up from its
low of 18% at year-end 1993. Because the mix of automobiles is 42% new vehicles
versus 58% used, the overall portfolio yield is additionally attractive, with an
average maturity approximating 36 months.
The direct consumer lending activity has increased modestly over the last
three years. Outstandings rose 5.6% or $5.5 million versus 3.4% or $3.3 million
in 1994; about one third of this year's increase reflects the impact of the
Chase branch purchase. This line of business is comprised of conventional
installment loans (including some isolated installment lending to small
businesses), personal loans, student loans (which are sold once principle
amortization begins), and borrowing under variable rate home equity lines of
credit. Growth in installment lending and in personal lines of credit explains
this year's increase as opposed to in 1994, when home equity loans provided more
than half the improvement. Despite its dollar growth in 1995, the consumer
direct installment loan segment continued to trend downward, ending 1995 at 19%
of total loans outstanding. Management expects that the 25,000 households served
by the former Chase branches will have a positive impact on this line of
business.
The segment of the Company's loan portfolio committed to consumer
mortgages, which includes conventional residential lending as well as fixed rate
home equity lines of credit, accounts for $147 million or 26% of total loans
outstanding. The flattening of growth during the last two years reflects the
increase in mortgage rates from their historic lows in late 1993, though demand
began to improve in the summer of 1995 after rates started to soften. Growth has
also been muted because of a program which began in mid 1994 to sell selected
fixed rate originations in the secondary market. The purpose of this program,
which resulted in sales of $1.2 million in its first year and $4.3 million in
1995, is to develop a meaningful source of servicing income as well as to
provide an additional tool to manage interest rate risk. During 1995, the
Financial Accounting Standards Board issued statement No. 122, "Accounting for
Mortgage Servicing Rights," which requires recognition of the value of servicing
rights related to originated loans with servicing retained. Adoption of this
pronouncement effective January 1, 1996, is not expected to have a significant
effect of the Company's financial statements.
The combined total of general purpose business lending, dealer floor
planning, mortgages on commercial property, and farm loans (the latter two
categories totaling 5% of the Company's entire loan portfolio) is characterized
as the Company's business lending activity. At $174 million, this segment
represents 31% of loans outstanding at year end, having expanded its share by
five percentage points from when the Company's loan portfolio began its second
quarter 1992 upturn. This strength is largely attributable to borrowing by local
commercial businesses and automobile dealers, plus a recent increase in
agricultural lending. Outstandings climbed over $35 million or nearly 26% in
1995; excluding loans purchased from Chase and subsequent growth in these new
markets, outstandings rose $13 million or 9%. Comparative growth rates were 15%
for 1994 and an unusually high 26% in 1993, a year in which there were no
acquisitions.
33
About 90% of the Bank's commercial customers borrow less than $100,000,
which as a group constitutes almost 40% of commercial loans outstanding.
Borrowers needing up to $250,000 comprise about one quarter of loans
outstanding. Borrowings in the size ranges of $250,000-$500,000 and over
$500,000 constitute 13% and 23% of the portfolio, respectively.
The two year trend by quarter in loans by line of business is set forth as
follows:
SUPPLEMENTARY SCHEDULE IV
Loans by Line of Business
- ------------------------------------------------------------------------------------------------------------------------
For the Quarter Ended (a): Consumer Consumer Consumer Business Total Yield on
(000's) Direct Indirect Mortgages Loans Loans Loans
- ------------------------------------------------------------------------------------------------------------------------
Amount and Change From Preceding Quarter Quarterly
Average
- ------------------------------------------------------------------------------------------------------------------------
[AHG1] 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
- ------------------------------------------------------------------------------------------------------------------------
June 30, 1995
Amount ................................. $97,480 $127,439 $142,413 $147,978 $515,311 9.60%
Change ................................. -1.2% 11.9% 0.1% 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
- ------------------------------------------------------------------------------------------------------------------------
Change from December 31, 1994 to
December 31, 1995
Amount ................................. $5,540 $32,616 $3,424 $35,492 $77,073 0.39
Change ................................. 5.6% 31.8% 2.4% 25.6% 16.0% N/A
- ------------------------------------------------------------------------------------------------------------------------
Year-to-Date Average Outstandings
(000's)
December 31, 1994 ...................... $95,234 $85,829 $136,892 $128,180 $446,135 9.12%
December 31, 1995 ...................... $101,188 $122,765 $143,113 $152,695 $519,762 9.61%
Change - Amount ........................ $5,955 $36,936 $6,221 $24,516 $73,627 0.49%
-% .................. 6.3% 43.0% 4.5% 19.1% 16.5% N/A
- ------------------------------------------------------------------------------------------------------------------------
Loan Mix
December 31, 1994 ...................... 20.4% 21.2% 29.6% 28.7% 100.0%
December 31, 1995 ...................... 18.6% 24.1% 26.2% 31.1% 100.0%
Change ................................. -1.8% 2.9% -3.5% 2.4% --
- ------------------------------------------------------------------------------------------------------------------------
Note: (a) Totals and change calculations may not foot due to rounding.
34
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
The following table shows the amount of loans outstanding as of December
31, 1994 which, based on remaining scheduled repayments of principal, are due in
the periods indicated:
-----------------------------------------------------------------
At December 31, 1995
-----------------------------------------------------------------
Maturing
Maturing After One Maturing Total
in One Year But Within After Five Book
or Less Five Years Years Value
---------- ---------- ---------- -----
(In thousands)
Commercial, financial, and
agricultural .......................... $ 50,399 $ 30,464 $ 18,668 $ 99,531
Real estate - construction ................. 0 0 0 0
Real estate - mortgage ..................... 25,303 61,340 172,775 259,419
Installment ................................ 75,583 116,506 9,112 201,201
-------- -------- -------- --------
Total ............................. $151,286 $208,310 $200,555 $560,151
======== ======== ======== ========
The following table sets forth the sensitivity of the loan amounts due
after one year to changes in interest rates:
------------------------------
At December 31, 1995
------------------------------
Fixed Rate Variable Rate
Due after one year but within five
years ............................... $155,328 $52,982
Due after five years .................... 168,455 32,100
-------- -------
Total .......................... $323,784 $85,082
======== =======
35
NON-PERFORMING ASSETS/RISK ELEMENTS
The following table presents information concerning the aggregate
amount of non-performing assets:
-------------------------------------------------------
At December 31,
-------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(Dollars in thousands)
Loans accounted for on a non-accrual basis .............. $1,328 $2,396 $1,738 $ 881 $1,369
Accruing loans which are contractually past due
90 days or more as to principal or interest
payments .............................................. 667 862 653 726 957
------ ------ ------ ------ ------
Total non-performing loans .............................. 1,995 3,258 2,391 1,607 2,326
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 15 243 356 1,720
Other real estate ....................................... 614 223 433 459 1,426
------ ------ ------ ------ ------
Total non-performing assets ............................. $2,609 $3,496 $3,067 $2,422 $5,472
====== ====== ====== ====== ======
Ratio of allowance for loan losses to
period-end loans ...................................... 1.25% 1.30% 1.37% 1.37% 1.24%
Ratio of allowance for loan losses to
period-end non-performing loans ....................... 349.69% 192.79% 238.67% 310.05% 185.40%
Ratio of allowance for loan losses to
period-end non-performing assets ...................... 267.40% 179.67% 186.06% 205.72% 78.81%
Ratio of non-performing assets to period-end
total loans and other real estate owned ............... 0.47% 0.72% 0.73% 0.67% 1.56%
The impact of interest not recognized on non-accrual loans, and interest
income that would have been recorded if the restructured loans had been current
in accordance with their original terms, was immaterial. The Company's policy is
to place a loan on a non-accrual status and recognize income on a cash basis
when it is more than ninety days past due, except when in the opinion of
management it is well secured and in the process of collection.
Nonperforming loans, defined as nonaccruing loans plus accruing loans 90
days or more past due, ended 1995 at a very manageable $2.0 million. This level
is nearly $1.3 million lower than one year earlier, largely due to resolution of
a single public housing project where cost overruns delayed a take out by the
Farmers' Home Administration. Today's level is also lower than the $2.4 million
in nonperformers at year-end 1993, which was established following a critical
view of certain commercial credits taken by the then new CEO and lending
personnel added as a result of organizational turnover.
36
Consistent with the reduction in nonperforming loans is a significant
improvement in its ratio to total loans, which ended 1995 at .36%, down by
almost half from the .67% level of one year earlier. As of September 30, 1995,
when the nonperforming loan ratio stood at .33%, the Company's asset quality was
in the very strong 11th percentile compared to peers. The ratio of nonperforming
assets (which additionally include troubled debt restructurings and other real
estate) to total loans plus OREO is also highly favorable at .47%.
As of December 31, 1995 and for years then ended, the Bank had no loans
deemed to be impaired under FASB 114.
Total delinquencies, defined as loans 30 days or more past due and
nonaccruing, followed a saucer-shaped trend during 1995, ending the year at
1.31%, virtually unchanged from twelve months earlier and down from 1.58% at
year-end 1993. After a significant reduction in the second quarter as discussed
above, commercial delinquencies remained relatively constant, concluding 1995 at
a modest 1.32%. Past due installment loans dipped below 1.0% during spring of
this year, reaching 1.65% by year end. Real estate delinquencies fluctuated in
the .6-.8% range during most of the year, finishing at .91% in December.
As of September 30, 1995, when overall delinquencies were at 1.08%, the
Company ranked in the very favorable lowest peer quartile, consistent with
historically being better than the peer norm due to its reliable consumer
borrower base. Other factors contributing to successful underwriting,
collection, and credit monitoring include selective addition of experienced
lenders over the last several years, clear delineation of authority along with
newly adopted loan policies and procedures, regional loan servicing and
collection departments focused on taking prompt corrective action, and a
centralized loan review function which is given priority attention and has
monthly Board of Director accountability.
37
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes loan balances at the end of each period
indicated and the daily average amount of loans. Also summarized are changes in
the allowance for possible loan losses arising from loans charged off and
recoveries on loans previously charged off and additions to the allowance which
have been charged to expenses.
----------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------
(Dollars in thousands)
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Amount of loans outstanding at end
of period .................................. $573,620 $510,739 $443,601 $391,363 $383,398
======== ======== ======== ======== ========
Daily average amount of loans
(net of unearned discounts) ................. $519,762 $446,135 $382,680 $351,034 $352,960
======== ======== ======== ======== ========
Balance of allowance for possible
loan losses at beginning of period ......... $ 6,281 $ 5,706 $ 4,982 $ 4,312 $ 3,607
Loans charged off:
Commercial, financial, and agricultural ... 454 502 236 951 244
Real estate construction .................. 0 0 0 0 0
Real estate mortgage ...................... 48 41 19 92 41
Installment ............................... 1,256 1,072 1,155 1,558 1,983
----- ----- ----- ----- -----
Total loans charged off .............. 1,758 1,615 1,410 2,601 2,268
Recoveries of loans previously charged off:
Commercial, financial, and agricultural ... 213 38 85 25 28
Real estate construction .................. 0 0 0 0 0
Real estate mortgage ...................... 27 1 1 0 0
Installment ............................... 448 449 542 519 429
------ ------ ------ ------ ------
Total recoveries ..................... 688 488 628 544 457
------ ------ ------ ------ ------
Net loans charged off ....................... 1,070 1,127 782 2,057 1,811
------ ------ ------ ------ ------
Additions to allowance charged to expense (1) 1,765 1,702 1,506 2,727 2,516
------ ------ ------ ------ ------
Balance at end of period .................... $6,976 $6,281 $5,706 $4,982 $4,312
====== ====== ====== ====== ======
Ratio of net charge-offs to average loans
outstanding ................................ 0.21% 0.25% 0.20% 0.59% 0.51%
(1) The additions to the allowance during 1991 through 1995 were determined
using actual loan loss experience and future projected loan losses and other
factors affecting the estimate of possible loan losses.
Besides its favorable delinquency and nonperforming asset levels, another
measure of the Company's strong asset quality is a low net charge-offs record,
which for the third consecutive year was better than its historically acceptable
norm. Gross charge-offs rose a relatively small 8.8% to $1.8 million, or .34% of
average loans outstanding versus .36% in 1994. In addition, this year's
recoveries were an all-time record both in dollar amount and in relation to
prior year gross charge-offs. As a result, net charge-offs at $1.1 million
represented a very acceptable .21% ratio to average loans. Since the banking
industry in general has benefited from very favorable credit loss experience,
the net charge-off ratio approximates the peer norm.
38
A timely charge-off policy and relatively low nonperforming loans have
enabled the Company to carry a reserve for loan losses well below peers, but
sufficient in the event of an economic downturn. In addition, the Company's
small business loan orientation reduces the likelihood of large, single borrower
charge-offs.
As a percent of total loans, the loss reserve ratio was 1.25%, down
slightly from the 1992-1994 levels when major building of the ratio took place.
Though the reserve ratio is presently in the relatively low 27th peer
percentile, coverage over nonperforming loans as of September 30, 1995 was well
above the norm in the 83rd percentile; management considers the year-end level
at 350% to be ample. Another measure of comfort to management is that after
conservative allocation by specific customer and loan type, over 16% of loan
loss reserves remains available for absorbing general, unforeseen loan losses,
up from 13% at year-end 1994.
The annual loan loss provision has characteristically been well in excess
of net charge-offs, being covered by over 1.3 times since 1990; this year's
coverage exceeded 1.6 times. This practice has enabled a steady increase in the
loan loss reserve level, which rose by almost $700,000 or 11% to an all-time
high of $7.0 million at year-end 1995. Compared to average loans, the annual
loan loss provision has been slightly above the peer norm.
The allowance for possible loan losses has been allocated according to the
amount deemed to be reasonably necessary to provide for the possibility of
losses being incurred within the following categories of loans at the dates
indicated:
----------------------------------------------------------------------------------------------------------------------
At December 31,
1995 1994 1993 1992 1991
----------------------------------------------------------------------------------------------------------------------
Percent of Percent of Percent of
Loans in Loans in Loans in Percent of
Each Each Each Percent of Loans in
Category Category Category Loans in Each Each
Amount of to Total Amount of to Total Amount of to Total Amount of Category to Amount of Category to
Allowance Loans Allowance Loans Allowance Loans Allowance Total Loans Allowance Total Loans
---------- ---------- ---------- ---------- --------- ----------- --------- ------------- --------- -----------
Commercial,
financial,&
agricultural $2,035 17.35% $1,832 15.91% $3,464 15.74% $1,864 12.95% $1,241 15.45%
Real
estate --
construction 0 0.00% 0 0.00% 0 0.00% 0 0.00% 0 0.00%
Real
estate --
mortgage 2,255 45.23% 2,222 46.95% 341 49.01% 220 45.45% 130 37.16%
Installment 1,527 37.42% 1,422 37.14% 1,342 35.25% 1,400 41.60% 2,015 47.39%
Unallocated 1,159 N/A 805 N/A 559 N/A 1,498 N/A 926 N/A
Total $6,976 100.00% $6,281 100.00% $5,706 100.00% $4,982 100.00% $4,312 100.00%
FUNDING SOURCES
Typical of most commercial banking institutions today is the need to rely
on a variety of funding sources to support its earning asset base as well as to
achieve targeted growth objectives. There are three primary sources of funding
that comprise CBSI's overall funding matrix, which considers maturity,
stability, and price: deposits of individuals, partnerships, and corporations
(IPC deposits); collateralized municipal deposits; and capital market
borrowings.
39
- ----------------------------------------------------------------------------------------------------------------
SOURCES OF FUNDS
AVERAGE 4TH QUARTER BALANCES
($ MILLION)
- ----------------------------------------------------------------------------------------------------------------
Total
Funds
IPC Deposits Public Funds Capital Borrowings Sources
Amount % Total Amount % Total Amount % Total Amount
------ ------- ------ ------- ------ ------- ------
1995 $921 87.4% $128 12.1% $6 5.0% $1,055
1994 $583 71.7% $101 12.4% $129 15.9% $813
1993 $499 79.6% $102 16.2% $26 4.2% $627
The Company's key funding matrix was positively impacted by the Chase
branch acquisition completed in July 1995. As a result of this purchase, IPC
deposits on average for fourth quarter 1995 accounted for over 87% of all
funding, up significantly from 72% for the comparable 1994 period. IPC deposits
are generally considered the most attractive source of funding for a bank
because of their general stability and relatively low cost, and because they
provide management with a working customer base from which to cross-sell a
variety of loan, deposit, and other financial services related products.
Although IPC deposit outstandings averaged $921 million during the fourth
quarter of 1995, $364 million of this average were deposits purchased from the
Chase branch acquisition. Without this acquisition, fourth quarter average IPC
outstandings would have been $557 million, or a 4.5% decrease from 1994 fourth
quarter outstandings of $583 million. This level of performance met management's
expectations, given the nonaggressive deposit pricing strategy for 1995;
expected deposit inflows from the Chase branch acquisition heavily influenced
this pricing objective.
Deposits of local municipalities accounted for 12.1% of total CBSI funding
during the fourth quarter of 1995, down slightly from its 12.4% position as of
the fourth quarter of 1994. Under New York State Municipal Law, the Company is
required to collateralize all local government deposits with marketable
securities from its investment portfolio. Because of this stipulation,
management considers this source of funding to be equivalent to capital market
borrowings. As such, CBSI endeavors to price these deposits at or below
alternative capital market borrowing rates.
Capital market borrowings are defined as funding sources available on a
national market basis, generally requiring some form of collateralization.
Borrowing sources for the Company include the Federal Home Loan Bank of New
York, as well as access to the national repurchase agreement market through
established relationships with primary market security dealers. Capital market
borrowings declined from 15.9% of total funding sources in 1994 to 5.0% as of
fourth quarter 1995. This decline in outstandings was largely the result of
management's decision to repay all short-term borrowings with deposit inflows
from the Chase branch acquisition. On average, capital market borrowings in 1995
at $89 million were virtually unchanged from 1994's level.
The mix of CBSI's IPC deposits has changed over the last three years. The
steady growth in time deposit mix reflects consumer movement away from
immediately available, lower earning savings and money market accounts; in
addition, the former Chase deposits contained a relatively higher proportion of
time deposits.
40
- ------------------------------------------------------------------------------------------------------------------------
CORE DEPOSIT MIX
AVERAGE 4TH QUARTER BALANCES
($ MILLION)
- -------------------------------------------------------------------------------------------------------------------------
Demand Deposits Interest Checking Regular Savings Money Market Time Deposits Total Core
Amount % Total Amount % Total Amount % Total Amount % Total Amount % Total Deposits
------ ------- ------ ------- ------ ------- ------ ------- ------ ------- --------
1995 $129 14% $83 9% $241 26% $53 6% $415 45% $921
1994 $ 93 16% $49 9% $167 29% $45 8% $229 38% $583
1993 $ 82 16% $45 9% $155 31% $45 9% $172 35% $499
The average daily amount of deposits and the average rate paid on each of
the following deposit categories is summarized below for the years indicated:
---------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
1995 1994 1993
---------------------------------------------------------------------
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
-------- --------- ------- --------- ------- ---------
(Dollars in thousands)
Non-interest-bearing demand deposits ................ $123,952 N/A $ 98,587 N/A $ 87,728 N/A
Interest-bearing demand deposits .................... 83,812 1.66% 65,805 1.68% 63,607 1.88%
Regular savings deposits ............................ 211,867 3.01 183,881 2.85 179,128 3.03
Money market deposits ............................... 70,925 2.77 73,757 2.57 78,231 2.63
Time deposits ....................................... 380,494 5.53 229,449 4.34 190,166 4.36
------- ------- -------
Total average daily
amount of domestic deposits ......................... $871,050 3.53% $651,479 2.80% $598,860 2.83%
The remaining maturities of time deposits in amounts of $100,000 or more
outstanding at December 31, 1995 and 1994 are summarized below:
-------------------------
AT DECEMBER 31,
(IN THOUSANDS)
-------------------------
1995 1994
------- -------
Less than three months ................... $42,639 $29,963
Three months to six months ............... 13,574 9,983
Six months to one year ................... 9,169 4,248
Over one year ............................ 5,859 3,589
------- -------
$71,241 $47,783
41
BORROWING
The following table summarizes the outstanding balances of short-term
borrowings of the Company for the years indicated:
---------------------------------
AT DECEMBER 31,
---------------------------------
1995 1994 1993
-------- -------- -------
(Dollars in thousands)
Federal funds purchased ................... $ 0 $57,300 $57,000
Term borrowing at banks (original term)
90 days or less ......................... 0 80,000 0
1 year .................................. 0 25,000 0
-------- -------- -------
Balance at end of period .............. $ 0 $162,300 $57,000
======== ======== =======
Daily average during the year ............. $85,407 $86,777 $22,892
Maximum month-end balance ................. $188,200 $163,700 $57,000
Weighted-average rate during the year ..... 6.29% 4.48% 3.35%
Year-end average rate ..................... 0.00% 5.44% 3.00%
42
The two year trend by quarter in funding sources and related cost is set
forth as follows:
SUPPLEMENTARY SCHEDULE V
EARNING ASSETS AND FUNDING SOURCES
- -------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Average Core Municipal Capital Interest
For the Quarter Ended (d): Average Investments Deposits Deposits Market Bearing
(000s) Loans (a) (b) (c) Borrowings Liabilities
- -------------------------------------------------------------------------------------------------------------------------
Amount and Average Yield/Rate
- -------------------------------------------------------------------------------------------------------------------------
December 31, 1993
Amount ............................. $404,944 $244,735 $499,478 $101,663 $26,394 $535,834
Yield/Rate ......................... 9.15% 6.58% 2.73% 2.37% 3.16% 3.15%
- -------------------------------------------------------------------------------------------------------------------------
March 31, 1994
Amount ............................. $419,874 $260,703 $497,406 $104,341 $58,850 $568,074
Yield/Rate ......................... 9.02% 6.77% 2.72% 2.30% 3.49% 3.16%
- ------------------------------------------------------------------------------------------------------------------------
June 30, 1994
Amount ............................. $435,,678 $301,042 $522,051 $118,149 $81,048 $625,117
Yield/Rate ......................... 9.07% 6.68% 2.73% 2.37% 4.07% 3.25%
- ------------------------------------------------------------------------------------------------------------------------
September 30, 1994
Amount ............................. $454,383 $321,811 $576,869 $102,332 $79,676 $657,767
Yield/Rate ......................... 9.12% 6.98% 2.85% 2.66% 4.50% 3.45%
- ------------------------------------------------------------------------------------------------------------------------
December 31, 1994
Amount ............................. $473,920 $358,193 $583,055 $100,509 $129,074 $708,211
Yield/Rate ......................... 9.26% 7.23% 3.05% 2.89% 5.18% 3.87%
- ------------------------------------------------------------------------------------------------------------------------
March 31, 1995
Amount ............................. $488,436 $388,886 $581,033 $121,200 $153,625 $753,008
Yield/Rate ......................... 9.52% 7.64% 3.38% 3.51% 6.17% 4.43%
- ------------------------------------------------------------------------------------------------------------------------
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%
- ------------------------------------------------------------------------------------------------------------------------
Change in Quarterly Averages
from December 31, 1994 to
December 31, 1995
Outstandings: Amount ............... $76,560 $149,838 $338,056 $27,117 ($123,470) $201,133
%Change ......................... 16.2% 41.8% 58.0% 27.0% -95.7% 28.4%
Yield/Rate: Change (%pts) .......... 0.39 0.22 0.54 0.36 0.21 0.26
Year-to-Date Average Outstandings
December 31, 1994 - Amount ......... $446,135 $310,736 $545,167 $106,311 $87,334 $640,226
9.12% 6.93% 2.84% 2.55% 4.48% 3.46%
Yield/Rate .......
- ------------------------------------------------------------------------------------------------------------------------
December 31, 1995 - Amount ......... $519,762 $455,495 $746,838 $124,212 $88,806 $835,904
Yield/Rate ....... 9.61% 7.46% 3.55% 3.43% 6.23% 4.34%
- ------------------------------------------------------------------------------------------------------------------------
Change in YTD Averages from
December 31, 1994 to
December 31, 1995
Outstandings: Amount ............... $73,627 $144,760 $201,671 $17,900 $1,472 $195,679
%Change ........... 16.5% 46.6% 37.0% 16.8% 1.7% 30.6%
Yield/Rate: Change (%pts) .......... 0.48 0.52 0.71 0.88 1.75 0.89
- ------------------------------------------------------------------------------------------------------------------------
Note: (a) Yield on average investments calculated on a full-tax equivalent basis. Excludes premiums on bonds called
on October 10, 1993.
(b) Defined as total deposits minus municipal deposits; includes CDs > $100,000 for individuals and businesses.
(c) Rate includes impact of noninterest bearing transaction accounts.
(d) Totals and change calculations may not foot due to rounding.
43
INVESTMENTS AND ASSET/LIABILITY MANAGEMENT
The primary objective of CBSI's investment portfolio is to prudently
provide a degree of low-risk, quality assets to the balance sheet. This must be
accomplished within the constraints of: (a) absorbing funds when loan demand is
low and infusing funds when demand is high; (b) implementing certain interest
rate risk management strategies which achieve a relatively stable level of net
interest income; (c) providing both the regulatory and operational liquidity
necessary to conduct day-to-day business activities; (d) considering investment
risk-weights as determined by regulatory risk-based capital guidelines; and (e)
generating a favorable return without undue compromise of other requirements.
- --------------------------------------------------------------------------------------------------------------------------------
INVESTMENT PORTFOLIO MIX
AT YEAR END, EXCLUDES MONEY MARKET INSTRUMENTS
($ MILLION)
- --------------------------------------------------------------------------------------------------------------------------------
Invest/
Total States and Political Earning
Investments Mortgage-Backed U.S. Governments Subdivisions Other Assets
------------- ---------------------- --------------------- ---------------------- --------------------- -------
Year Amt. % Change Amt. % Change % Total Amt. % Change % Total Amt. % Change % Total Amt. % Change % Total (%)
---- ---- -------- ---- -------- ------- ---- -------- ------- ---- -------- ------- ---- -------- ------ ---
1995 $468 23.7% $195 25.6% 42% $235 25.9% 50% $16 -23.3% 3% $22 41.3% 5% 45.5%
1994 $379 49.3% $156 43.4% 41% $187 63.5% 49% $21 -15.9% 5% $15 149.0% 5% 43.9%
1993 $253 -3.6% $108 -8.1% 43% $114 7.1% 45% $25 -12.0% 10% $6 -39.4% 2% 37.7%
1992 $263 15.0% $118 28.4% 45% $107 16.0% 41% $28 -11.7% 11% $10 -22.1% 3% 42.0%
1991 $229 18.3% $92 103.0% 40% $92 6.0% 40% $32 -28.4% 14% $13 -22.9% 6% 39.5%
Growth in investments during 1995 was largely influenced by the need to
strategically utilize excess cash from the Chase branch acquisition.
Consequently, average portfolio outstandings grew by nearly 47% during 1995,
compared to an increase of 21% in 1994. Primarily because of investments made as
a result of the 1994 branch acquisitions and the strategy to pre-invest certain
of the anticipated Chase branch deposits, growth in investments as measured by
year-end outstandings was greater in 1994 than in 1995.
Consistent with the Company's long-standing practice, all investment
strategies implemented during 1995 were developed in conjunction with CBSI's
asset/liability position, with particular attention given to interest rate risk
(IRR) of the entire balance sheet, not just that associated with incremental
investment decisions. In order to effectively manage IRR, both a short-term
tactical and longer-term strategic horizon are considered.
As a result of the Chase branch deposit acquisition, the asset/liability
profile underwent a dramatic, though fully anticipated, repositioning in 1995.
The high level of 1994 year-end liability sensitivity was eliminated as all
short-term borrowings were replaced by longer-term core deposits from the branch
purchase. Beginning in mid 1995, the balance sheet reflected a structurally
asset-sensitive position, as measured by CBSI's Gap Maturity Matrix. The
year-end matrix and supporting data are displayed at the end of this section.
This new balance sheet profile afforded management the opportunity to
extend the duration of certain investment purchases made in 1995, a move
primarily aimed at reducing the Company's exposure to falling interest rates.
This strategy was largely accomplished by the purchase of longer-dated, fixed
rate callable U.S. government agency issues and discounted, fixed rate
mortgage-backed securities. The timing of this strategy was largely limited to
the first two quarters of 1995.
44
As the yield curve began to flatten in the second half of 1995, the appeal
of longer-term, fixed-rate investments began to wane due to the potentially high
degree of market value volatility such securities might experience over their
expected lifetime. This concern prompted management to focus on a more defensive
investment strategy for the remainder of 1995.
The majority of securities purchased by CBSI during the second half of 1995
were floating rate U.S. government agency collateralized mortgage-backed
obligations or CMOs. These instruments featured discount margin spreads of
between 110 and 115 basis points above the one-month LIBOR rate, adjusted
monthly. As with most floating rate instruments, these bonds were subject to
life-time yield caps, which ranged between 9.50% to 10.00%.
The composition of the portfolio continues to heavily favor U.S.
governments and agency mortgage-backed obligations, resulting in effective use
of regulatory risk-based capital. As of year-end 1995, these two security types
(excluding Federal Home Loan Bank stock and Federal Reserve Bank stock)
accounted for 96% of total portfolio investments, up from a level of 81% five
years earlier.
The average life of the portfolio, including the exercise of embedded call
options, extended to 4.5 years as of December 31, 1995. As of year-end 1994 and
1993, the average life of the portfolio stood at 3.5 years and 2.3 years,
respectively. The investment strategies pursued during 1994 and 1995 were
largely responsible for this extension.
Average investment yields for the year increased to 7.45% from 6.95% in
1994. The December 1995 portfolio yield averaged 7.55% compared to 7.30% for the
same month one year prior. Through September 30, 1995, the Company's investment
yield was in the very favorable 94th peer bank percentile.
During the fourth quarter of 1995, management chose to reclassify
approximately $40 million of held to maturity investments as available for sale,
under a special one-time adjustment window granted by the Financial Accounting
Standards Board on October 18, 1995. Securities which were moved as a result of
this opportunity included $22 million in floating rate investments and $18
million in mortgage-backed securities with current face values of under $1
million. While these securities are now eligible for sale due to their change in
accounting treatment, management has no immediate plan to exercise this option
given the current interest rate environment.
Net losses on the sale of securities were $152,000 in 1995, versus $502,000
in 1994 and $15,000 in 1993. Losses incurred resulted from normal investment
management activity, which focuses on improving long-term portfolio earnings and
profitability.
45
The following table sets forth the amortized cost and market value for the
Company's held to maturity investment securities portfolio:
--------------------------------------------------------------------------------------
AT DECEMBER 31,
1995 1994 1993
--------------------------------------------------------------------------------------
Amortized Amortized
Cost/Book Market Cost/Book Market Amortized Market
Value Value Value Value Cost/Book Value Value
-------- ------ --------- ------ --------------- ------
U.S. Treasury securities
and obligations of U.S.
Government corporations
and agencies ................... $202,802 $212,415 $154,672 $154,367 $ 53,995 $ 57,984
Obligations of states and
political subdivisions ......... 15,409 16,077 17,304 17,772 17,164 18,522
Corporate securities .............. 2 2 2 2 2 2
Mortgage-backed securities ........ 97,593 99,848 120,178 115,613 54,686 56,464
-------- -------- -------- -------- -------- --------
Total ............................. $315,806 $328,342 $292,156 $287,754 $125,847 $132,972
======== ======== ======== ======== ======== ========
The following table sets forth the amortized cost and market value for the
Company's available for sale investment portfolio:
------------------------------------------------------------------------------------
AT DECEMBER 31,
1995 1994 1993
-------------------------------- -------------------------- ------------------------
Amortized Amortized Amortized
Cost/Book Market Cost/Book Market Cost/Book Market
Value Value Value Value Value Value
--------- ------ ---------- ------ ---------- ------
(in thousands)
U.S. Treasury securities
and obligations of U.S.
Government corporations and ........... $32,334 $32,695 $33,691 $32,415 $ 58,722 $ 60,418
agencies
Obligations of states and political ...... 435 459
subdivisions .......................... 3,432 3,472 7,194 7,420
Corporate securities ..................... 0 73 567 568 1,109 1,153
Mortgage-backed securities ............... 96,326 97,595 37,235 35,198 53,177 53,362
Equity securities(1) ..................... 20,070 20,008 14,149 14,158 4,740 4,753
Federal Reserve Bank common stock ........ 1,396 1,396 552 552 500 500
-------- -------- -------- ------- -------- --------
Totals ................................... $150,561 $152,226 $ 89,626 $86,363 $125,442 $127,606
-------- ======== -------- ------- -------- ========
Net unrealized gains/(losses) on
available for sale portfolio .......... 1,665 (3,262) 2,164
-------- -------- --------
Total carrying value ..................... $468,032 $378,520 $253,453
======== ======== ========
- ------------
(1) Includes $19,678, $19,678, $13,805, $13,805, $4,396 and $4,396 of FHLB
common stock at December 31, 1995, 1994 and 1993, respectively.
46
The following table sets forth as of December 31, 1995, the maturities of
investment securities and the weighted-average yields of such securities, which
have been calculated on the basis of the cost, weighted for scheduled maturity
of each security, and adjusted to a fully tax-equivalent basis:
------------------------------------------------------------------------------------------
AT DECEMBER 31, 1995
------------------------------------------------------------------------------------------
Amount Maturing Amount Maturing
Amount Maturing After One Year After Five Years Amount
Within One But Within But Within Maturing After Total Cost
Year or Less Five Years Ten Years Ten Years Book Value
------------ ---------- --------- --------- ----------
Held to Maturity Portfolio
U.S. Treasury and other
U.S. government agencies .... $3,793 $ 9,229 $179,780 $ 10,000 $202,802
Mortgage-backed securities .... 0 4,006 1,074 92,513 97,593
States and political
subdivisions ................ 4,734 9,342 1,333 0 15,409
Other ......................... 0 2 0 0 2
------ ------- -------- -------- --------
Total investment securities ... $8,527 $22,579 $182,187 $102,513 $315,806
====== ======= ======== ======== ========
Weighted-average yield for
year (1) .................... 7.15% 7.73% 7.36% 7.65% 7.47%
Available for Sale Portfolio
U.S. Treasury and other
U.S. government agencies .... $ 0 $ 6,017 $ 21,323 $4,995 $32,335
Mortgage-backed securities .... 0 8,110 11,505 76,710 96,325
States and political
subdivisions ................ 0 251 184 0 435
Other ......................... 0 0 0 0 0
------ ------- -------- ------- --------
Total investment securities ... $ 0 $14,378 $ 33,012 $ 81,705 $129,095
====== ======= ======== ======== ========
Weighted-average yield for
Year (1) .................... 7.54% 6.87% 6.91% 7.17% 7.07%
- ----------
(1) Weighted-average yields on the tax-exempt obligations have been computed on
a fully tax-equivalent basis assuming a marginal federal tax rate of 35%.
These yields are an arithmetic computation of accrued income divided by
average balance; they may differ from the yield to maturity, which
considers the time value of money.
A tool known as a Gap Maturity Matrix is used to isolate interest rate
sensitivity or repricing mismatches between assets and liabilities. The diagonal
bank on the matrix indicates basic matching of asset/liability repricing and
maturity opportunities. Outstandings shown above the band are assets subject to
repricing more quickly than their supporting liabilities (asset sensitivity).
Outstandings shown below the band are liabilities subject to repricing more
quickly than the assets which they support (liability sensitivity).
47
The following Gap Report and its representation in the Gap Maturity Matrix
set forth information concerning interest rate sensitivity of the Company's
consolidated assets and liabilities as of December 31, 1995:
GAP REPORT
AS OF DECEMBER 31, 1995
(COMMUNITY BANK SYSTEM, INC.)
Volumes Daily 1-30 31-60 61-90 91-180 181-360 13-24 25-36 37-60 Over 60
($000s) Floating Days Days Days Days Days Months Months Months Months Total
-------- ---- ---- ---- ---- ---- ------ ------ ------ ------ -----
ASSETS:
Due from banks ........... 56,902 56,902
Money Market Investments . 6,000 6,000
Fixed Rate Debentures .... 5,963 540 794 16,156 45,372 90,171 33,907 39,705 14,581 247,189
Floating Rate Debentures . 6,017 6,017
Fixed Rate Mortgage
Backed ............... 3,194 3,115 3,042 8,745 15,504 25,970 21,238 28,102 28,269 137,179
Floating Rate Mortgage
Backed ............... 52,819 52,819
Other Investments 24,826 24,826
- -----------------------------------------------------------------------------------------------------------------------------
Total
Investments.. 73,993 3,655 3,836 24,901 60,876 116,141 55,145 67,807 124,578 474,030
- -----------------------------------------------------------------------------------------------------------------------------
Mortgages:
Adjustable Rate 2,275 1,920 4,597 5,703 15,232 29,727
Fixed Rate .... 2,602 2,558 2,516 7,301 13,552 9,284 8,303 18,909 4,979 120,004
Home Equity ... 31,221 31,221
Commercial Variable 124,242 124,242
Other Commercial ... 1,849 1,864 1,879 5,726 11,870 23,473 7,993 (180) 54,474
Installment, Net ... 8,419 8,402 8,382 25,047 49,629 93,764 2,273 4,571 200,487
- -----------------------------------------------------------------------------------------------------------------------------
Total Loans ........ 170,608 14,744 17,374 43,777 90,283 126,521 18,569 18,909 59,370 560,155
Loan Loss Reserve .. (6,976) (6,976)
Other Assets ....... 67,934 67,934
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS ....... 244,601 18,399 21,210 68,678 151,159 242,662 73,714 86,716 244,906 1,152,045
AVERAGE YIELD ...... 8.96% 8.83% 8.63% 8.61% 8.34% 8.02% 7.68% 4.08%
8.90% 7.64%
=============================================================================================================================
LIABILITIES AND CAPITAL
Demand Deposits 140,289 140,289
Savings / NOW ...... 1,456 1,456 1,456 4,368 24,856 17,472 296,722 347,786
Money Markets ...... 46,694 19,805 66,499
CD's / IRA /Other .. 34,684 86,108 30,736 86,671 108,309 60,122 21,015 31,391 3,343 462,379
- -----------------------------------------------------------------------------------------------------------------------------
Total Deposits 36,140 87,564 32,192 137,733 152,970 77,594 21,015 31,391 440,354 1,016,953
Term Funds ......... 550 10,000 15,000 25,550
Other Liabilities .. 9,487 9,487
Capital ............ 100,055 100,055
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES ........ 36,140 87,564 32,192 137,733 77,594 31,015 46,391 549,896 1,152,045
AND CAPITAL .............. 153,520
AVERAGE RATE ............. 5.33% 5.61% 6.06% 5.67% 1.38%
4.51% 4.58% 5.00% 6.15% 3.31%
GAP ................ 208,461 (69,165) (10,982)(69,055) (2,361) 165,068 42,699 40,325 304,990)
CUMULATIVE GAP ..... 208,461 139,296 128,314 59,259 56,898 221,966 264,665
304,990
CUMULATIVE GAP
/TOTAL ASSETS ...... 0.18% 0.12% 0.11% 0.055 0.05% 0.19% 0.23% 0.26%
- -----------------------------------------------------------------------------------------------------------------------------
NOTE: IPC = Accounts of individuals, partnerships, and corporations.
Public = Accounts of U.S. government, state, and local municipalities.
85% of IPC Savings are treated as core (60 months). 100% of Public Fund Savings are treated as 181-360 days.
95% of IPC Money Markets are treated as core (91-180 days). 100% of Public Fund Money Markets are treated as
181-360 days.
15% of IPC Savings are spread over 24 months, and 5% of IPC Money
Markets are in 181 to 360 days. Totals may not foot due to rounding.
48
GAP MATURITY MATRIX
AS OF DECEMBER 31, 1995
(COMMUNITY BANK SYSTEM, INC.)
USES OF FUNDS
OUTSTANDINGS ($000'S) AND YIELDS (%) BY REPRICING INTERVAL (DAYS OR MONTHS)
- ------------------------------------------------------------------------------------------------------------------------------------
Assets >60 37-60 25-36 13-24 181-360 91-180 61-90 31-60 1-30 Daily Totals
Months Months Months Months Days Days Days Days Days
- ------------------------------------------------------------------------------------------------------------------------------------
244,906 86,716 73,714 242,662 151,159 68,678 21,210 18,399 244,601 1,152,045
Liabilities 4.08% 7.68% 8.02% 8.90% 8.34% 8.61% 8.63% 8.83% 8.96% 7.64%
- ------------------------------------------------------------------------------------------------------------------------------------
>60 549,896 244,906 86,716 73,714 144,560 549,896
Months 1.38% 2.71% 6.30% 6.64% 7.53% 5.075
37-60 46,391 46,391 46,391
Months 6.15% 2.76% 2.76%
25-36 31,015 31,015 31,015
Months 5.67% 3.23% 3.23%
13-24 77,594 26,696 56,898 77,594
Months 5.00% 3.90% 3.34% 3 49%
181-360 153,520 94,261 59,259 153,520
Days 4.58% 3.76% 4.03% 3.86%
91-180 137,733 9,419 21,210 18,399 88,705 137,733
Days 4.51% 4.10% 4.12% 4.31% 4.45% 4.35%
61-90 32,192 32,192 32,192
Days 6.06% 2.90% 2.90%
31-60 87,564 87,564 87,564
Days 5.61% 3.34% 3.34%
1-30 36,140 36,140 36,140
Days 5.33% 3.63% 3.63%
Daily
- ------------------------------------------------------------------------------------------------------------------------------------
Totals 1,152,045 244,906 86,716 73,714 242,662 151,159 68,678 21,210 18,399 244,601 1,152,045
Net
Interest
Margin 3.31% 2.71% 6.30% 6.64% 5.76% 3.60% 4.04% 4.12% 4.31% 3.73% 4.34%
- ------------------------------------------------------------------------------------------------------------------------------------
Note: IPC = Accounts of individuals, partnerships, and corporations.
Public = Accounts of U.S. government, state, and local municipalities.
85% of IPC Savings are treated as core (>60 months). 100% of Public Funds Savings are treated as 181-360 days.
95% of IPC Money Markets are treated as core (91-180 days). 100% of Public Fund Money Markets are treated as 181-360 days.
15% of IPC Savings are spread over 24 months, and 5% of IPC Money Markets are in 181 to 360 days.
Totals may not foot due to rounding.
Copyright Darling Consulting Group, Inc. 1988, 1989, 1990
49
LIQUIDITY
Due to the potential for unexpected fluctuations in deposits and loans,
active management of the Company's liquidity is critical. In order to respond to
these circumstances, adequate sources of both on-and off-balance sheet funding
are in place.
CBSI's primary approach to measuring liquidity is known as the Basic
Surplus/Deficit model. It is used to calculate liquidity over two time periods:
first, the relationship within 30 days between liquid assets and short-term
liabilities which are vulnerable to nonreplacement; and second, a projection of
subsequent cash flow funding needs over an additional 60 days. The minimum
policy level of liquidity under the Basic Surplus/Deficit approach is 7.5% of
total assets for both the 30 and 90 day time horizons. As of year-end 1995, this
ratio was a conservative 19.9% and 21.3%, respectively.
EFFECTS OF INFLATION
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation.
Virtually all of the assets and liabilities of the Company are monetary in
nature. As a result, interest rate changes have a more significant impact on the
Company's performance than the effects of general levels of inflation.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements and auditor's reports of
Community Bank System, Inc. and subsidiaries are contained on pages 51 through
76 of this item.
-- Consolidated Statements of Condition--
December, 31, 1995 and 1994
-- Consolidated Statements of Income--
Years ended December 31, 1995, 1994, and 1993
-- Consolidated Statements of Changes in Stockholders' Equity--
Years ended December 31, 1995, 1994, and 1993
-- Consolidated Statement of Cash Flows--
Years ended December 31, 1995, 1994, and 1993
-- Notes to Consolidated Financial Statements--
December 31, 1995
-- Auditors' report
Quarterly Selected Data (Unaudited) are contained on page 77.
50
CONSOLIDATED STATEMENTS OF CONDITION
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
December 31, December 31,
1995 1994
- -------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 56,903,103 $ 30,522,189
Federal funds sold 6,000,000 0
- -------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 62,903,103 30,522,189
Investment securities (approximate
market value of $480,568,000
and $374,117,000) 468,031,712 378,519,604
Loans 573,620,687 510,738,775
Less: Unearned discount 13,469,032 27,659,684
Reserve for possible
loan losses 6,976,385 6,281,109
- -------------------------------------------------------------------------------------------------------------------------
Net loans 553,175,270 476,797,982
Premises and equipment,net 16,935,856 10,591,510
Accrued interest receivable 9,150,503 6,657,326
Intangible assets,net 33,970,375 6,106,608
Other assets 7,878,194 6,305,990
- -------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,152,045,013 $915,501,209
=========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits
Noninterest bearing $ 140,288,323 $103,006,969
Interest bearing 876,657,901 576,630,655
- -------------------------------------------------------------------------------------------------------------------------
Total deposits 1,016,946,224 679,637,624
Federal funds purchased 0 57,300,000
Borrowings 25,550,000 105,550,000
Accrued interest and
other liabilities 9,488,540 6,724,070
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,051,984,764 849,211,694
- -------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock $1 par, $100 stated
value, 500,000 shares authorized
45,000 shares issued and
outstanding 4,500,000 0
Common stock $1.25 par value;
5,000,000 shares authorized,
3,679,625 and 2,788,150 shares
issued and outstanding 4,599,531 3,485,187
Surplus 32,955,273 14,885,096
Undivided profits 57,079,501 49,853,313
Unrealized net gains (losses) on
available for sale securities 977,457 (1,930,414)
Shares issued under
employee stock plan-unearned (51,513) (3,667)
- -------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 100,060,249 66,289,515
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,152,045,013 $915,501,209
=========================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
51
CONSOLIDATED STATEMENTS OF INCOME
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
Years Ended December 31
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans ......................................... $49,927,725 $40,699,073 $36,235,800
Interest and dividends on investments:
U.S. Treasury ................................................... 993,238 1,800,534 2,041,156
U.S. government agencies and corporations ....................... 15,699,390 8,078,065 6,981,414
States and political subdivisions ............................... 1,082,381 1,427,476 1,783,253
Mortgage-backed securities ...................................... 13,081,731 8,922,926 6,831,166
Other securities ................................................ 1,180,775 645,828 696,693
Interest on federal funds sold and deposits with other banks ....... 1,421,785 1,133 73,085
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income ........................................... 83,387,025 61,575,035 54,642,567
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits ............................................... 30,772,056 18,213,046 16,961,993
Interest on federal funds purchased ................................ 1,118,220 1,622,142 477,875
Interest on borrowings ............................................. 4,416,622 2,294,560 293,471
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense .......................................... 36,306,898 22,129,748 17,733,339
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income ............................................ 47,080,127 39,445,287 36,909,228
Less: Provision for possible loan losses ............................. 1,765,148 1,702,466 1,506,131
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses .............. 45,314,979 37,742,821 35,403,097
- ------------------------------------------------------------------------------------------------------------------------------------
Other income:
Fiduciary and investment services .................................. 1,446,898 1,379,566 1,113,217
Service charges on deposit accounts ................................ 3,326,274 2,593,282 2,379,405
Other service charges, commissions and fees ........................ 1,796,127 1,519,043 1,185,642
Other operating income ............................................. 140,720 130,822 101,008
Investment security gains (losses) ................................. (152,375) (502,343) (15,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Total other income ............................................... 6,557,644 5,120,370 4,764,272
- ------------------------------------------------------------------------------------------------------------------------------------
Other expenses:
Salaries and employee benefits ..................................... 16,756,706 13,098,207 11,951,973
Occupancy expense, net ............................................. 2,608,104 2,042,571 1,813,773
Equipment and furniture expense .................................... 1,991,541 1,697,230 1,641,750
Other .............................................................. 11,662,368 9,659,660 9,419,692
- ------------------------------------------------------------------------------------------------------------------------------------
Total other expenses ................................................. 33,018,719 26,497,668 24,827,188
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes ........................................... 18,853,904 16,365,523 15,340,181
Income taxes ......................................................... 7,384,000 6,256,305 5,765,407
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME ....................................................... $11,469,904 $10,109,218 $9,574,774
====================================================================================================================================
Earnings per share ................................................... $3.41 $3.59 $3.43
====================================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
52
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Common
Shares Unrealized
Issued Net Gains
Under (Losses)
Common Stock Employee on Available
Preferred ------------------- Undivided Stock Plan For Sale
Stock Shares Amount Surplus Profits --Unearned Securities Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
January 1, 1993 2,696,760 $3,370,950 $13,880,113 $36,167,958 ($2,113) $0 $53,416,908
Net income - 1993 9,574,774 9,574,774
Cash dividends:
Common, $1.04 (2,840,466) (2,840,466)
per share
Common stock
issued under
employee stock
plan 51,558 64,448 494,036 (3,739) 554,745
Market value
adjustment on
available for
sale investments 1,280,466 1,280,466
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1993 2,748,318 $3,435,398 $14,374,149 $42,902,266 ($5,852) $1,280,466 $61,986,427
Net income - 1994 10,109,218 10,109,218
Cash dividends:
Common, $1.14
per share (3,158,171) (3,158,171)
Common stock
issued under
employee stock
plan 39,832 49,789 510,947 2,185 562,921
Market value
adjustment on
available for
sale investments (3,210,880) (3,210,880)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1994 2,788,150 $3,485,187 $14,885,096 $49,853,313 ($3,667) $1,930,414) $66,289,515
Net income - 1995 11,469,904 11,469,904
Cash dividends:
Preferred,
$9.00 per
share (253,125) (253,125)
Common, $1.23
per share (3,990,591) (3,990,591)
Issuance of
preferred stock $9,000,000 9,000,000
Repurchase of
preferred stock (4,500,000) (4,500,000)
Issuance of
common stock 862,500 1,078,125 17,364,533 18,442,658
Common stock
issued under
employee stock
plan 28,975 36,219 705,644 (47,846) 694,017
Market value
adjustment on
available for
sale investments 2,907,871 2,907,871
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1995 $4,500,000 3,679,625 $4,599,531 $32,955,273 $57,079,501 ($51,513) $977,457 $100,060,249
====================================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
53
COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- ------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income ............................................................. $ 11,469,904 $ 10,109,218 $ 9,574,774
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation ....................................................... 1,618,205 1,434,356 1,467,370
Net amortization of intangible assets .............................. 1,569,477 350,569 161,569
Net accretion of security premiums and discounts ................... (1,422,859) (511,974) (515,161)
Provision for loan losses .......................................... 1,765,148 1,702,466 1,506,131
Provision for deferred taxes ....................................... (99,586) (454,968) (409,081)
(Gain) Loss on sale of investment securities ....................... 152,375 502,343 15,000
(Gain) Loss on sale of loans ....................................... (111,423) (29,564) 0
Change in interest receivable ...................................... (2,493,177) (2,118,557) 918,594
Change in other assets and other liabilities ....................... (708,824) 2,213,551 (309,512)
Change in unearned loan fees and costs ............................. (225,949) 76,510 169,022
- ------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided By Operating Activities ................................ 11,513,291 13,273,950 12,578,706
- ------------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Proceeds from sales of available for sale investment securities ........ 4,125,000 29,240,847 3,000,000
Proceeds from maturities of held to maturity investment securities ..... 35,575,390 36,579,872 0
Proceeds from maturities of available for sale investment securities ... 28,579,113 27,695,203 111,504,503
Purchases of held to maturity investment securities .................... (97,175,179) (201,943,283) 0
Purchases of available for sale investment securities .................. (54,418,605) (22,055,530) (103,379,889)
Net change in loans outstanding ........................................ (77,769,646) (65,860,765) (56,466,193)
Capital expenditures ................................................... (8,831,705) (1,992,834) (984,675)
Proceeds from sales of capital assets .................................. 939,922 0 17,122
Premium paid for branch acquisitions ................................... (29,621,013) (6,004,913) 0
- ------------------------------------------------------------------------------------------------------------------------------
Net Cash Used By Investing Activities .................................... (198,596,723) (204,341,403) (46,309,132)
- ------------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Net change in demand deposits,
NOW accounts, and savings accounts ................................... 145,537,725 11,755,827 18,213,745
Net change in certificates of deposit .................................. 191,770,875 79,566,554 12,186,820
Net change in term borrowings .......................................... (137,300,000) 105,300,000 4,714,100
Payments on lease obligation 0 (42,036) (96,747)
Issuance (retirement) of common and preferred stock .................... 23,321,763 560,456 553,809
Cash dividends ......................................................... (3,866,017) (3,063,437) (2,840,466)
- ------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities ................................ 219,464,346 194,077,364 32,731,261
- ------------------------------------------------------------------------------------------------------------------------------
Change In Cash And Cash Equivalents ...................................... 32,380,914 3,009,911 (999,165)
Cash and cash equivalents at beginning of year ......................... 30,522,189 27,512,278 28,511,443
- ------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................... $ 62,903,103 $ 30,522,189 $ 27,512,278
==============================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid For Interest ................................................... $ 35,002,244 $ 21,369,189 $ 18,063,232
==============================================================================================================================
Cash Paid For Income Taxes ............................................... $ 7,635,999 $ 5,945,320 $ 7,143,311
==============================================================================================================================
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND
INVESTING ACTIVITIES:
Dividends declared and unpaid ............................................ $ 1,214,444 $ 836,445 $ 741,711
Gross change in unrealized net gains and (losses)
on available for sale securities ......................................... $ 4,927,345 ($ 5,426,535) $ 2,164,046
==============================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
54
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Community Bank System, Inc. (the Company) is a one bank holding company
whose sole active operating subsidiary, Community Bank, N.A. (the Bank),
operates 49 customer facilities throughout Northern New York, the Finger Lakes
Region, the Southern Tier, and Southwestern New York. The Bank provides
individual, business, agricultural and government customers with a complete
range of banking services, including qualified retirement plan administration,
investment management, and personal trust services; retail and commercial loan
and deposit products; and non-deposit annuities and investment products.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, the Bank and a currently inactive nonbanking
subsidiary. All intercompany accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks and federal funds sold. Generally, federal
funds are sold for one-day periods.
The carrying amounts reported in the balance sheet for cash and cash
equivalents approximate those assets' fair values.
INVESTMENT SECURITIES
The Company has classified its investments in debt and equity securities as
held to maturity or available for sale. Held to maturity securities are those
for which the Company has the positive intent and ability to hold to maturity,
and are reported at cost, adjusted for amortization of premiums and accretion of
discounts. Debt securities not classified as held to maturity are classified as
available for sale and are reported at fair market value with net unrealized
gains and losses reflected as a separate component of shareholders' equity, net
of applicable income taxes. None of the Company's investment securities have
been classified as trading securities.
The average cost method is used in determining the realized gains and
losses on sales of investment securities, which are reported under other
income-investment security gains (losses).
Fair values for investment securities are based on quoted market prices,
where available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
55
LOANS
Loans are stated at unpaid principal balances. Fair values for variable
rate loans that reprice frequently, with no significant credit risk, are based
on carrying values. Fair values for fixed rate loans are estimated using
discounted cash flows and interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. The carrying amount of
accrued interest approximates its fair value.
During 1995, the Financial Accounting Standards Board issued Statement No.
122, "Accounting for Mortgage Servicing Rights," which allows for recognition of
the value of servicing rights related to originated loans sold with servicing
rights retained. Adoption of this pronouncement, effective January 1, 1996, is
not expected to have a significant effect on the Company's financial statements.
INTEREST ON LOANS AND RESERVE FOR POSSIBLE LOAN LOSSES
Interest on commercial loans and mortgages is accrued and credited to
operations based upon the principal amount outstanding. Unearned discount on
installment loans is recognized as income over the term of the loan, principally
by the actuarial method. Nonrefundable loan fees and related direct costs are
deferred and amortized over the life of the loan as an adjustment to loan yield
using the effective interest method.
The Bank places a loan on nonaccrual status and recognizes income on a cash
basis when it is more than ninety days past due (or sooner, if management
concludes collection of interest is doubtful), except, when in the opinion of
management, it is well-collateralized and in the process of collection.
The reserve for possible loan losses is maintained at a level considered
adequate to provide for potential loan losses. The reserve is increased by
provisions charged to expense and reduced by net charge-offs. The level of the
reserve is based on management's evaluation of potential losses in the loan
portfolio, as well as prevailing economic conditions.
Effective January 1, 1995, the Bank adopted Statement of Financial
Accounting Standard No. 114, "Accounting by Creditors for Impairment of a Loan."
Under this standard, a loan is considered impaired, based current information
and events, if it is probable that the Bank will not be able 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.
Adoption of this pronouncement had no effect on the Bank's financial statements
for 1995.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
The annual provision for depreciation is computed using the straight-line method
in amounts sufficient to recognize the cost of depreciable assets over their
estimated useful lives. Maintenance and repairs are charged to expense as
incurred.
56
OTHER REAL ESTATE
Properties acquired through foreclosure, or by deed in lieu of foreclosure,
are carried at the lower of the unpaid loan balance plus settlement costs, or
fair value less estimated costs of disposal. At December 31, 1995 and 1994,
other real estate, included in other assets, amounted to $614,478 and $222,855,
respectively.
INTANGIBLE ASSETS
Intangible assets represent core deposit value and goodwill arising from
acquisitions. The Company periodically reviews the carrying value of intangible
assets using fair value methodologies. Core deposit intangibles are being
amortized principally on an accelerated basis over ten years. Goodwill is being
amortized on a straight-line basis over 15 to 25 years.
DEPOSITS
The fair values disclosed for demand and savings deposits are equal to the
carrying amounts at the reporting date. The carrying amounts for variable rate
money market accounts and certificates of deposit approximate their fair values
at the reporting date. Fair values for fixed rate certificates of deposit are
estimated using discounted cash flows and interest rates currently being offered
on similar certificates. The carrying value of accrued interest approximates
fair value.
BORROWINGS
The carrying amounts of federal funds purchased and borrowings approximate
their fair values.
EARNINGS PER SHARE
Earnings per share are computed on the basis of weighted average common and
common equivalent shares outstanding throughout each year (3,261,205 in 1995;
2,814,710 in 1994; 2,722,093 in 1993).
FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standard No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosure of fair value of
information on financial instruments, whether or not recognized in the balance
sheet, for which it is practicable to estimate that value. In cases where quoted
market prices are not available, fair values are based on estimates using
present values or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not
be realized in immediate settlement of the instrument. Statement No. 107
excludes certain financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Company.
The fair values of investment securities, loans and deposits have been
disclosed in footnotes C, D, and G, respectively.
57
RECLASSIFICATION
Certain amounts from 1994 and 1993 have been reclassified to conform to
the current year's presentation.
NOTE B: BRANCH ACQUISITIONS AND DIVESTITURES
In July 1995, the Company acquired certain assets and assumed certain
liabilities relating to 15 branch offices of the Chase Manhattan Bank, N.A.
located in the Northern, Central, and Finger Lakes regions of New York State. In
December 1995, the Company sold the assets and liabilities of 3 of these
branches to another banking entity. A summary of this acquisition and
divestiture activity is as follows:
Acquisition Divestiture
------------ -------------
Cash received (paid) .......................... $330,229,952 ($37,707,788)
Loans acquired (divested) ..................... 13,954,164 (1,118,758)
Property and equipment acquired (divested) .... 5,133,354 (741,500)
Other assets and liabilities acquired
(divested), net ............................. 1,247,553 (124,406)
Purchase (divestiture) price allocated to:
Core deposit value .......................... 16,375,717 (1,941,210)
Goodwill .................................... 15,635,610 (917,463)
------------ ------------
Deposit liabilities assumed (divested) ........ $382,576,350 ($42,551,125)
============ ============
Net core deposit value and goodwill arising from these transactions is
being amortized over ten years on an accelerated basis, and over 25 years on a
straight-line basis, respectively.
In 1994, the Company acquired three branches from the Resolution Trust
Corporation (formerly owned by Columbia Savings FSA) and the Cato, New York
branch from the Chase Manhattan Bank, N.A. In connection with these
acquisitions, the Company assumed $75,000,000 in deposit liabilities and
received cash and other assets of $69,000,000. The deposit premium of $6,000,000
is being amortized on a straight-line basis over 15 years.
All of the above transactions have been recorded under the purchase method
of accounting, and accordingly, the operating results of the branches acquired
have been included in the Company's consolidated financial statements from the
date of acquisition. Results of operations on a pro-forma basis are not
presented since historical financial information for the branches acquired is
not available.
58
NOTE C: INVESTMENTS SECURITIES
The amortized cost and estimated fair values of investments in securities
as of December 31, as follows:
- --------------------------------------------------------------------------------------------------------------------------
1995
---------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
HELD TO MATURITY Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $202,802,118 $ 9,663,000 $ 50,000 $212,415,000
Obligations of
states and political
subdivisions 15,408,820 693,000 24,000 16,078,000
Corporate Securities 1,500 0 0 2,000
Mortgage-backed securities 97,593,366 2,444,000 189,000 99,848,000
- --------------------------------------------------------------------------------------------------------------------------
TOTALS $315,805,804 $12,800,000 $263,000 $328,343,000
- --------------------------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE
- --------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 32,334,410 $488,211 $127,706 $ 32,694,915
Obligations of
states and political
subdivisions 435,420 24,116 0 459,536
Corporate Securities 0 0 0 0
Mortgage-backed securities 96,325,428 1,411,690 141,829 97,595,289
- --------------------------------------------------------------------------------------------------------------------------
TOTALS $129,095,258 $ 1,924,017 $269,535 $130,749,740
- --------------------------------------------------------------------------------------------------------------------------
Marketable equity securities 20,070,044 10,373 0 20,080,417
Federal Reserve
Bank common stock 1,395,750 0 0 1,395,750
- --------------------------------------------------------------------------------------------------------------------------
TOTALS $150,561,052 $ 1,934,390 $269,535 $152,225,907
Net unrealized gain/(losse) on
Available for Sale 1,664,856
- --------------------------------------------------------------------------------------------------------------------------
GRAND TOTAL
CARRYING VALUE $468,031,712
==========================================================================================================================
59
1994
------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Held To Maturity Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $154,672,076 $2,151,000 $2,456,000 $154,367,000
Obligations of
states and political
subdivisions ................................... 17,304,828 499,000 31,000 17,772,000
Corporate Securities ................................ 1,500 2,000
Mortgage-backed securities .......................... 120,177,983 290,000 4,855,000 115,614,000
----------------------------------------------------------------
TOTALS .............................................. $292,156,387 $2,940,000 $7,342,000 $287,755,000
----------------------------------------------------------------
AVAILABLE FOR SALE
----------------------------------------------------------------
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies ...................... $ 33,691,405 $53,101 $1,329,958 $32,414,548
Obligations of
states and political
subdivisions ................................... 3,432,127 40,398 3,472,525
Corporate Securities ................................ 566,756 1,093 567,849
Mortgage-backed securities .......................... 37,235,168 18,070 2,055,070 35,198,168
----------------------------------------------------------------
TOTALS .............................................. $ 74,925,456 $112,662 $3,385,028 $ 71,653,090
----------------------------------------------------------------
Marketable equity securities ........................ 14,148,700 9,877 14,158,577
Federal Reserve
Bank common stock .............................. 551,550 551,550
----------------------------------------------------------------
TOTALS .............................................. $ 89,625,706 $122,539 $3,385,028 $ 86,363,217
Net unrealized gain/(losses) on
Available for Sale ............................. (3,262,489)
----------------------------------------------------------------
GRAND TOTAL
CARRYING VALUE ...................................... $378,519,604
============
60
The amortized cost and estimated fair value of debt securities at December
31, 1995, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
Held To Maturity Available For Sale
------------------------------ ----------------------------
Carrying Est. Market Carrying Est. Market
Value Value Value Value
-------- ----------- -------- -----------
(FIGURES IN DOLLARS)
Due in one year or less $ 8,526,674 $ 8,601,787 $ 0 $ 0
Due after one through five years 18,572,873 20,482,980 6,268,040 6,180,885
Due after five years through ten years 181,112,891 188,931,909 21,506,826 21,942,378
Due after ten years 10,000,000 10,477,120 4,994,964 5,031,187
------------ ------------ ------------ ------------
218,212,439 228,493,796 32,769,830 33,154,451
Mortgage-backed securities 97,593,366 99,848,239 96,325,428 97,595,289
------------ ------------ ------------ ------------
TOTAL $315,805,804 $328,342,035 $129,095,258 $130,749,740
============ ============ ============ ============
Proceeds from sales of investments in debt securities during 1995, 1994,
and 1993 were $3,950,000, $29,241,000 and $3,000,000, respectively. Gross gains
of approximately $258,000 for 1994 and gross losses of $150,000, $761,000, and
$15,000 were realized on those sales in 1995, 1994, and 1993 respectively.
Investment securities with a carrying value of $202,204,782 and
$199,032,705 at December 31, 1995 and 1994, respectively, were pledged to
collateralize deposits and securities sold under agreements to repurchase and
for other purposes required by law.
In December 1995, the Company transferred investment securities having an
amortized cost of $39,640,740 and net unrealized gains of $832,020 from held to
maturity to available for sale. These transfers were made pursuant to the FASB's
"Implementation Guide to Statement 115" and the Company's prevailing financial
management objectives.
NOTE D: LOANS
Major Classifications of Loans at December 31, are summarized as follows:
1995 1994
---- ----
Real estate mortgages:
Residential ............................. $204,225,091 $196,547,718
Commercial .............................. 46,970,983 35,603,929
Farm .................................... 8,223,806 7,624,577
Agricultural loans ........................ 17,968,900 13,295,398
Commercial loans .......................... 81,562,024 67,975,882
Installment loans to individuals .......... 212,479,749 188,209,205
Other loans ............................... 2,190,134 1,482,066
------------ ------------
573,620,687 510,738,775
Less: Unearned discount .................. (13,469,032) (27,659,684)
Reserve for possible loan losses ... (6,976,385) (6,281,109)
------------ ------------
Net loans ........................... $553,175,270 $476,797,982
============ ============
61
The estimated fair value of loans receivable at December 31, 1995 and 1994
was $565,000,000 and $474,000,000, respectively.
Changes in the reserve for possible loan losses for the years ended
December 31 are summarized below:
1995 1994 1993
---- ---- ----
Balance at the beginning of year ..... $6,281,109 $5,706,609 $4,982,451
Provision charged to expense ......... 1,765,148 1,702,466 1,506,131
Loans charged off .................... (1,757,584) (1,615,712) (1,410,390)
Recoveries ........................... 687,712 487,746 628,417
---------- ---------- ----------
Balance at end of year ............... $6,976,385 $6,281,109 $5,706,609
========== ========== ==========
As of December 31, 1995, the Bank had no impaired loans for which specific
valuation allowances were recorded.
NOTE E: PREMISES AND EQUIPMENT
Premises and equipment consist of the following at December 31:
1995 1994
---- ----
Land and land improvements ................. $ 3,527,773 $ 2,253,625
Bank premises owned ........................ 15,761,996 11,998,034
Equipment .................................. 10,747,882 7,923,757
----------- -----------
Premises and equipment gross ......... 30,037,651 22,175,416
Less: Allowance for depreciation .......... 13,101,795 11,583,906
----------- -----------
Premises and equipment net ........... $16,935,856 $10,591,510
=========== ===========
NOTE F: INTANGIBLE ASSETS
Intangible assets consist of the following at December 31:
1995 1994
---- ----
Core deposit intangible .................... $15,007,907 $ 573,400
Goodwill and other intangibles ............. 21,591,942 6,593,203
----------- -----------
Intangible assets, gross .............. 36,599,849 7,166,603
Less: Accumulated amortization ............ (2,629,474) (1,059,995)
----------- -----------
Intangible assets, net ................. $33,970,375 $ 6,106,608
=========== ===========
62
NOTE G: DEPOSITS
Deposits by type at December 31 are as follows:
1995 1994
---- ----
Demand ............................. $ 140,288,323 $103,006,969
Savings ............................ 414,279,708 306,023,336
Time ............................... 462,378,193 270,607,319
-------------- ------------
Total Deposits................... $1,016,946,224 $679,637,624
============== ============
The estimated fair values of deposits at December 31, 1995 and 1994 were
approximately $1,019,000,000 and $677,087,000, respectively.
At December 31, 1995 and 1994, time certificates of deposit in
denominations of $100,000 and greater totaled $71,241,000 and $47,783,000.
NOTE H: BORROWINGS
At December 31, 1995 and 1994, outstanding borrowings were as follows:
1995 1994
----- -----
Short-term borrowings:
Federal funds purchased .............. $ 0 $ 57,300,000
Federal Home Loan Bank advances ...... 0 105,000,000
----------- ------------
0 162,300,000
Federal Home Loan Bank Advances ...... 25,550,000 550,000
----------- ------------
$25,550,000 $162,850,000
=========== ============
Federal Home Loan Bank advances are secured by a blanket lien on the
Company's residential real estate loan portfolio.
Advances at December 31, 1995 have maturity dates as follows:
Weighted
Average Rate
------------
September 10, 1996 ........................ 4.54% $ 550,000
December 14, 1998 ......................... 5.69% 10,000,000
December 10, 2000 ......................... 5.86% 15,000,000
----- -----------
5.76% $25,550,000
63
NOTE I: INCOME TAXES
Effective January 1, 1993 the Company adopted the provisions of SFAS No.
109, "Accounting for Income Taxes," which requires an asset-liability approach
to recognizing the tax effects of temporary differences between tax and
financial reporting. In prior years, the Company accounted for the tax effects
of timing differences between tax and financial reporting using Accounting
Principle Board Opinion Number 11. This change had no significant affect on the
1993 consolidated financial statements.
The provision (benefit) for the income taxes for the years ended December
31 is as follows: consolidated financial statements.
1995 1994 1993
---------- ---------- ---------
Current:
Federal .............. $5,658,251 $4,993,505 $4,542,509
State ................ 1,825,335 1,717,768 1,631,979
Deferred:
Federal .............. (76,248) (341,226) (305,383)
State ................ (23,338) (113,742) (103,698)
---------- ---------- ----------
Total income taxes $7,384,000 $6,256,305 $5,765,407
========== ========== ==========
Components of the net deferred tax asset, included in other assets, as of
December 31 are as follows:
1995 1994
----------- ----------
Allowance for loan losses ...... $2,880,201 $2,555,480
Deferred net loan fees ......... 205,529 294,470
Post Retirement and other
reserves ...................... 578,744 176,197
Pension ........................ 340,199 354,562
Investment securities .......... 0 388,683
----------- ----------
Total deferred tax asset ....... $4,004,673 $3,769,392
Investment securities .......... 2,155,552 0
Depreciation ................... 65,853 66,238
----------- ----------
Total deferred tax liability ... $2,221,405 $ 66,238
----------- ----------
Net deferred tax asset ......... $1,783,268 $3,703,154
=========== ==========
The Company has determined that no valuation allowance is necessary as it
is more likely than not that deferred tax assets will be realized through
carryback to taxable income in prior years, future reversals of existing
temporary differences, and through future taxable income.
64
A reconciliation of the differences between the federal statutory income
tax rate and the effective tax rate for the years ended December 31 is shown in
the following table:
1995 1994 1993
------ ------ ------
Federal statutory income tax rate .................. 35.0% 35.0% 35.0%
Increase (reduction) in taxes resulting from:
Tax-exempt interest ............................... (1.8) (2.8) (3.8)
State income taxes, net of federal benefit ........ 6.2 6.4 6.5
Alternative minimum tax
Other ............................................. (0.2) (0.4) (0.1)
----- ----- -----
Effective income tax rate .......................... 39.2% 38.2% 37.6%
===== ===== =====
NOTE J: LIMITS ON DIVIDENDS AND OTHER RESTRICTIONS
The Company's ability to pays dividends to its shareholders is largely
dependent on the Bank's ability to pay dividends to the Company. In addition to
state law requirements and the capital requirements discussed below, the
circumstances under which the Bank may pay dividends are limited by federal
statutes, regulations and policies. For example, as a national bank, the Bank
must obtain the approval of the Office of the Comptroller of Currency (OCC ) for
payment of dividends if the total of all dividends declared in any calendar year
would exceed the total of the Bank's net profits as defined by applicable
regulations, for that year, combined with its retained net profits for the
preceding two years. Furthermore, the Bank may not pay a dividend in an amount
greater than its undivided profits then on hand after deducting its losses and
bad debts, as defined by applicable regulations. At December 31, 1995, the bank
had approximately $20,432,000 in undivided profits legally available for the
payment of dividends.
In addition, the Federal Reserve Board and the OCC are authorized to
determine under certain circumstances that the payment of dividends would be an
unsafe or unsound practice and to prohibit payment of such dividends. The
payment of dividends that deplete a bank's capital base could be deemed to
constitute such an unsafe or an unsound practice. The Federal Reserve Board has
indicated that banking organizations should generally pay dividends only out of
current operating earnings.
There are also statutory limits on the transfer of funds to the Company by
its banking subsidiary whether in the form of loans or other extensions of
credit, investments or asset purchases. Such transfers by the Bank to the
Company generally are limited in amount to 10% of the Bank's capital and
surplus, or 20% in the aggregate. Furthermore, such loans and extensions of
credit are required to be collateralized in specific amounts.
NOTE K: PENSION PLAN
The Company has a noncontributory pension plan for all eligible employees;
it is administered by the Trust Department of Community Bank, N.A. under the
direction of an appointed retirement board. The policy of the Company is to fund
the plan to the extent of its maximum tax deductibility.
65
The net periodic pension cost and actuarial assumptions for the years ended
December 31 were as follows:
1995 1994 1993
--------- ---------- ---------
Service cost benefits earned during
the year ................................. $197,695 $227,005 $199,848
Interest cost on projected benefit
obligation ............................... 551,207 513,981 477,913
Actual return on plan assets .............. (1,424,112) 164,442 (684,572)
Administrative expenses ................... 73,162 101,695 85,971
Net amortization and deferral ............. 837,321 (884,693) (204)
---------- -------- --------
Net periodic pension cost ............. $235,273 $122,430 $ 78,956
========== ======== ========
Discount rate ............................. 7.0% 8.0% 7.0%
Expected long term rate of return ......... 9.0% 9.0% 9.0%
Rate of increase in compensation .......... 4.0% 4.0% 4.0%
The entire amount of unrecognized gains and losses is amortized over the
average remaining service lives of the participants on a straight-line basis.
66
The following table presents a reconciliation of the plan's funded status
at December 31:
1995 1994
---------- ---------
Actuarial present value of benefit obligations:
Vested ........................................ $7,321,438 $5,924,223
Nonvested ..................................... 84,983 28,389
---------- ----------
Accumulated benefit obligation ..................... $7,406,421 $5,952,612
========== ==========
1995 1994
---------- ---------
Projected benefit obligation ....................... ($8,460,066) ($6,888,795)
Plan assets at fair value .......................... 7,971,084 6,996,892
---------- ----------
Plan assets in excess of projected benefit
obligation ........................................ (488,982) 108,097
Unrecognized net loss (gain) from past experience
different from that assumed and effects of
changes in assumptions ............................ 1,427,866 1,049,638
Unrecognized prior service cost, being
recognized over 17 year .......................... (309,127) (324,317)
Unrecognized net asset at date of adoption,
being recognized over 17 years .................... (181,274) (203,517)
---------- ----------
Prepaid pension cost included in other assets ...... $448,483 $629,901
========== ==========
The decrease in the discount rate from 8% to 7% increased the projected
benefit obligation at December 31, 1995 by $1,571,271.
Plan assets consist primarily of listed stocks, governmental securities and
cash equivalents. The plan is authorized to invest up to 10% of the fair value
of its total assets in common stock of Community Bank System, Inc. At December
31, 1995 and 1994, the plan holds 23,064 and 1,160 shares, respectively, of the
sponsor company common stock.
The Company also has an Employee Savings and Retirement Plan, which is
administered by the Trust Department of Community Bank, N.A. The Employee
Savings and Retirement Plan includes Section 401(k) and Thrift provisions as
defined under the Internal Revenue Code. The provisions permit employees to
contribute up to 15% of their total compensation on a pre-tax or post-tax basis.
The Company matches amounts to 50% of the first 6% contributed. Company
contributions to the trust amounted to $522,680, $460,459, and $361,827 in 1995,
1994, and 1993, respectively.
67
The Company has a deferred compensation agreement with its President and
Chief Executive Officer whereby monthly payments will be provided upon
retirement over a period of fifteen years. Expenses incurred during 1995 related
to the agreement amounted to $55,000.
NOTE L: POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides health and life insurance benefits for eligible
retired employees and their dependents An employee becomes eligible for these
benefits by satisfying plan provisions which include certain age and/or service
requirements. Medical benefits are based on years of service at retirement, with
forty years of service being required in order to be fully eligible for
benefits. The medical plans pay a stated percentage of medical expenses reduced
by deductibles and other coverages. The Medicare supplement policy provides for
a $100,000 maximum lifetime benefit. Generally, life insurance benefits are
equal to $5,000.
Effective January 1, 1993 the Company adopted Statement of Financial
Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits
Other than Pensions." This statement requires that the cost of postretirement
benefits be accrued for during the service lives of employees. The Company
elected the prospective transition approach and is amortizing the transition
obligation over a 20-year period.
Net periodic postretirement benefit cost for the years ended December 31
include the following components:
1995 1994 1993
--------- -------- --------
Service cost ..................... $ 80,600 $ 73,200 $ 89,900
Amortization of transition
obligation over 20.1 years ...... 61,200 61,200 102,000
Amortization of prior service
Cost ............................ 5,100 0 0
Amortization of unrecognized
net loss over 19.3 years ........ 13,400 21,800 0
Interest on APBO less interest
on expected benefit payments .... 163,800 156,300 180,500
--------- -------- --------
Net periodic postretirement
benefit cost .................... $324,100 $312,500 $372,400
========= ======== ========
68
A 10.5 percent annual rate of increase in the per capita costs of covered
health care benefits was assumed for 1995, gradually decreasing to 5.5 percent
by the year 2051. Increasing the assumed health care cost trend rates by one
percentage point each year would decrease the accumulated postretirement benefit
obligation as of December 31, 1995 by $543,300 and decrease the aggregate
service cost and interest components of net periodic postretirement benefit cost
for 1995 by $28,400. Discount rates of 7% and 8% in 1995 and 1994, respectively,
were used to determine the accumulated post-retirement benefit obligation. The
following sets forth the funded status of the plan as of December 31:
1995 1994
----------- -----------
Accumulated Postretirement Benefit
Obligation (APBO):
Retirees .......................... $1,069,400 $1,047,500
Fully eligible active plan
participants ................. 118,600 97,400
Other active plan participants .... 1,403,400 885,800
----------- ----------
Total APBO ........................ 2,591,400 2,030,700
Plan assets at fair value ............ 0 0
----------- ----------
Accumulated postretirement benefits
obligation in excess of
plan assets ......................... (2,591,400) (2,030,700)
Unrecognized prior service cost ...... 136,300 0
Unrecognized portion of net
obligation at transition ............ 1,046,900 1,108,100
Unrecognized net loss ................ 760,100 458,500
--------- -----------
Accrued postretirement benefit cost .. ($648,100) ($464,100)
========= ===========
A plan amendment effective January 1, 1994 limited the Company's expense to
a maximum of $2,500 per person for medical coverage. This decreased the APBO at
January 1, 1994 by approximately $779,000, reducing the remaining unrecognized
transition obligation and decreasing the annual expense by approximately
$41,000.
NOTE M: INCENTIVE COMPENSATION
The Company has long-term incentive compensation programs for officers and
key employees including incentive stock options (ISOs), restricted stock awards,
nonqualified stock options (NQSOs) and warrants, and retroactive stock
appreciation rights.
Incentive stock options and warrants are granted at a price which is not
less than market value at the time of the grant and are exerciseable within ten
years, but no earlier than one year from the date of the grant, at dates
specified by the Board of Directors of the Company. Retroactive stock
appreciation rights may be granted with respect to both ISOs and NQSOs.
69
Information with respect to stock options and warrants under the above
plans is as follows:
NUMBER
NUMBER OPTION PRICE OF SHARES
OF SHARES PER SHARE EXERCISABLE
----------- ------------- -----------
Outstanding at December 31, 1992 .. 219,490 11.74-25.00 159,990
Granted ............................ 1,000 29.00-30.25
Exercised .......................... (66,800) 11.74-18.25
Outstanding at December 31, 1993 ... 153,690 11.74-30.25 105,540
Granted ............................ 14,150 28.50
Exercised .......................... (42,800) 15.50-16.63
Outstanding at December 31, 1994 ... 125,040 15.50-30.25 74,840
Granted ............................ 23,300 26.25-32.25
Exercised .......................... (25,800) 15.50
Forfeited .......................... (2,400) 11.74
Outstanding at December 31, 1995 ... 120,140 15.50-32.25 61,570
The program also provides for issuance of stock under a restricted stock
award plan subject to forfeiture terms as designated by the Board of Directors
of the Company. Stock issued under this plan is subject to restrictions as to
continuous employment and/or achievement of pre-established financial objectives
during the forfeiture period. Restricted stockholders have dividend and voting
rights during the forfeiture period.
Restricted stock awarded in 1995, 1994, and 1993 amounted to 3,950, 0, and
200 shares, respectively. Total expense is determined based on the market value
of the stock at the date of grant and is being accrued over the period the
restrictions lapse. Expense in 1995, 1994, and 1993 was $77,618, $2,185 and
$2,186, respectively.
There were 102,750, 130,000 and 46,909 shares available for future grants
or awards under the various programs described above at December 31, 1995, 1994
and 1993, respectively.
Effective January 1, 1996, the Board has approved a Stock-Based
Compensation Plan and a Stock Option Plan for non-employee Directors of the
Company who have completed at least six months of service as Director. The
Stock-Based Compensation plan credits participants' accounts with an amount
payable in the form of an annuity the first of the month following the later of
a participant's dissociation from the Board or the participant's attainment of
age 55. Participants become fully vested after 6 years of service. Amounts
credited to participants' accounts are based on the performance of the Company's
stock. The Stock Option Plan, pending stockholder approval, provides eligible
non-employee directors with annual stock option grants at the December 31 market
value of the stock.
In October of 1995, the Financial Accounting Standards Board issued
Statement No.123, "Accounting for Stock-Based Compensation," which establishes a
fair-value-based method of accounting for stock compensation plans with
employees and others. Alternatively, the statement allows that entities may
continue to account for stock-based compensation plans in accordance with APB
Opinion 25, with disclosure of pro forma amounts reflecting the difference
between the cost charged to operations pursuant to Opinion 25 and compensation
cost that would have been charged to operations had SFAS No. 123 been applied.
70
It is the Company's intention to continue accounting for stock-based
compensation plans in accordance with APB 25.
NOTE N: COMMITMENTS, CONTINGENT LIABILITIES AND RESTRICTIONS
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments consist primarily of commitments to extend credit,
which involve, to varying degrees, elements of credit risk in excess of the
amount recognized in the statement of condition. The contract amount of those
commitments to extend credit reflects the extent of involvement of the Company
in this particular class of financial instrument. The Company's exposure to
credit loss in the event of nonperformance by the other party to the financial
instrument for commitments to extend credit is represented by the contractual
amount of the instrument. The Company uses the same credit policies in making
commitments as it does for on-balance-sheet instruments.
1995 1994
--------- ---------
Financial instruments whose contract
amounts represent credit risk at
December 31:
Letters of Credit ................... $733,000 $507,000
Commitments to make or purchase
loans or to extend credit on lines
of credit .......................... 92,999,000 61,525,000
----------- -----------
Total ............................ $93,732,000 $62,032,000
=========== ===========
The fair value of these financial instruments is not significant.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since some of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the customer. Collateral held varies but may
include residential real estate, income-producing commercial properties, and
personal property.
The Company had unused lines of credit totaling $110,164,000 and
$62,031,000 at December 31, 1995 and 1994, respectively.
The Company is required to maintain a reserve balance, as established by
the Federal Reserve Bank of New York. The required average total reserve for the
14-day maintenance period ended December 31, 1995 was $24,981,000 of which
$12,254,000 was required to be on deposit with the Federal Reserve Bank of New
York. The remainder, $12,727,000, was represented by cash on hand.
71
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 the ultimate resolution will
not have a material affect on the financial statements.
NOTE O: LEASES
Rental expense included in operating expenses amounted to $630,459,
$502,312, and $474,863 in 1995, 1994 and 1993, respectively.
The future minimum rental commitments as of December 31, 1995 for all
noncancelable operating leases are as follows:
-----------------------------------------------------------------------------
YEARS ENDING DECEMBER 31: BUILDING EQUIPMENT TOTAL
-----------------------------------------------------------------------------
1996 .................... $533,166 $20,124 $553,290
1997 .................... 485,960 20,124 506,084
1998 .................... 437,659 18,447 456,106
1999 .................... 225,613 225,613
2000 .................... 177,673 177,673
Thereafter .............. 1,030,007 1,030,007
72
NOTE P: PARENT COMPANY STATEMENTS
The following are the condensed balance sheets, statements of income and
statements of cash flows for the Parent Company:
- --------------------------------------------------------------------------------
CONDENSED BALANCE SHEETS
- --------------------------------------------------------------------------------
December 31
1995 1994
- --------------------------------------------------------------------------------
Assets:
Cash and cash equivalents ..................... $527,382 $ $723,024
Investment securities (approximate market
value of $348,000 and $337,000) ............. 329,715 348,001
Investment in and advances to subsidiaries .... 100,441,826 66,058,804
Other assets .................................. 3,157 375
------------ -----------
Total assets ................................. $101,302,080 $67,130,204
================================================================================
Liabilities:
Accrued liabilities ........................... $ 1,241,831 $ 840,689
Shareholders' equity .......................... 100,060,249 66,289,515
------------ -----------
Total liabilities and shareholders' equity .. $101,302,080 $67,130,204
================================================================================
CONDENSED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------
Dividends from subsidiaries ...... $8,743,717 $3,160,414 $3,310,544
Interest on investments and
deposits ........................ 6,376 6,465 6,220
----------- ----------- ----------
Total revenues ................. 8,750,093 3,166,879 3,316,764
----------- ----------- ----------
Expenses:
Interest on short term
borrowings .................... 0 2,243 0
Other expenses ................. 1,700 2,374 1,279
----------- ----------- ----------
Total expenses ................. 1,700 4,617 1,279
----------- ----------- ----------
Income before tax benefit and
equity in undistributed net
income of subsidiaries .......... 8,748,393 3,162,262 3,315,485
Income tax benefit (expense) ..... 0 (706) (1,857)
----------- ----------- ----------
Income before equity in
undistributed net income
of subsidiaries ................. 8,748,393 3,161,556 3,313,628
Equity in undistributed net
income:
Subsidiary banks ............... 2,721,511 6,949,905 6,731,475
Bank-related subsidiaries ...... 0 (2,243) (470,329)
----------- ----------- ----------
Net income ..................... $11,469,904 $10,109,218 $9,574,774
================================================================================
73
NOTE P: PARENT COMPANY STATEMENTS (CONTINUED)
=====================================================================================================================
STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash, Cash Equivalents and Noncash Activities
Years Ended December 31
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income ...................................................... $11,469,904 $10,109,218 $9,574,774
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization .................................................... 77,617 2,185 2,186
Equity in undistributed net income of subsidiaries .............. (2,721,511) (6,946,956) (6,259,289)
Net change in accrued expenses .................................. 20,412 2,000 100,679
- ---------------------------------------------------------------------------------------------------------------------
Net Cash Provided By Operating Activities ......................... 8,846,422 3,166,447 3,418,350
- ---------------------------------------------------------------------------------------------------------------------
Investing Activities:
Purchases of investment securities .............................. (6,218) (7,191) (5,120)
Sale of investment securities ................................... 25,000
Capital contributions to subsidiaries ............................. (28,516,591) (1,152,730)
- ---------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used)
By Investing Activities ....................................... (28,497,809) (7,191) (1,157,850)
- ---------------------------------------------------------------------------------------------------------------------
Financing Activities:
Net change in loans to subsidiaries ............................. (66,548)
Issuance (retirement) of capital stock .......................... 23,321,762 560,457 553,809
Cash dividends .................................................. (3,866,017) (3,158,171) (2,840,466)
- ---------------------------------------------------------------------------------------------------------------------
Net Cash (Used) By Financing Activities ........................... 19,455,745 (2,597,714) (2,353,205)
- ---------------------------------------------------------------------------------------------------------------------
Change In Cash And Cash Equivalents (195,642) 561,542 (92,705)
Cash and cash equivalents at beginning of year .................. 723,024 161,482 254,187
- ---------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR .......................... $527,382 $723,024 $161,482
=====================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid For Interest ............................................ $2,243
=====================================================================================================================
Cash Paid For Income Taxes
=====================================================================================================================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Gross change in unrealized net gains and (losses) on
available for sale securities .................................... $4,927,345 ($5,426,534) $2,164,046
=====================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
74
NOTE P: PARENT COMPANY STATEMENTS (CONTINUED)
In conjunction with the 1995 branch acquisition (see Note B), the Company
issued 862,500 shares of common stock during the period of June 30, 1995 to July
10, 1995 at $24.25 per share, raising net proceeds of approximately $18.5
million. Concurrent with the common stock offering, the Company also issued
90,000 shares of preferred stock at $100 per share.
At the Company's option, 45,000 shares of preferred stock were repurchased
at the stated value of $100 per share plus accrued dividends on November 15,
1995. Total dividends paid on preferred stock in 1995 were $253,125.
Cash dividends on the preferred stock are cumulative from the date of
issuance and are payable semi-annually in arrears at the rate of 9% per annum.
The preferred stock has no preemptive rights and is not convertible. In certain
events, holders will have the right to elect two members to the Board of
Directors.
On or after January 1, 1996, the preferred stock is redeemable ratably at
the option of the Company for cash, in whole or in part, at any time and from
time to time, at declining redemption prices from $105 at 1996 to $100 after the
year 2000, plus accrued and implied dividends without interest.
In the event of liquidation of the Company, the holders of the outstanding
preferred stock will be entitled to receive $100 per share plus accrued
dividends prior to the issuance of assets to common shareholders.
On February 21, 1995, the Company adopted a Stockholders Protection Rights
Agreement and declared a dividend of one right for each outstanding share of
common stock. The rights can only be exercised when an individual or group has
acquired or attempts to acquire 15% or more of the Company's common stock, if
such action the Board of Directors believes is not in the best interest of
stockholders. Each right then entitles the holder to acquire common stock having
a market value equivalent to two times the stated exercise price. The rights
expire in February 2005 and may be redeemed by the Company in whole at a price
of $.01 per right.
75
COOPERS & LYBRAND, L.L.P. CERTIFIED PUBLIC ACCOUNTANTS
BOARD OF DIRECTORS AND SHAREHOLDERS
COMMUNITY BANK SYSTEM, INC.
We have audited the accompanying consolidated statements of condition of
Community Bank System, Inc. and Subsidiaries as of December 31, 1995 and 1994
and the related consolidated statements of income, changes in shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial condition of Community Bank
System, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
As further discussed in the notes to the consolidated financial statements,
the Company changed its method of accounting for post-retirement benefits other
than pensions, income taxes, and investments in 1993.
/s/ COOPERS & LYBRAND L.L.P.
- ---------------------------------
Coopers & Lybrand L.L.P.
Syracuse, New York
January 26, 1996
76
TWO-YEAR SELECTED QUARTERLY DATA
- -------------------------------------------------------------------------------------------------------------------------
1995 RESULTS
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- -------------------------------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
- -------------------------------------------------------------------------------------------------------------------------
Net interest income .................................. $10,426 $10,572 $12,734 13,348 $47,080
Provision for loan losses ............................ 255 599 275 636 1,765
------- ------- ------- ------- -------
Net interest income after
provision for loan losses .......................... 10,171 9,973 12,459 12,712 45,315
Total other income ................................... 1,397 1,374 1,809 1,978 6,558
Total other expenses ................................. 7,024 7,131 9,229 9,635 33,019
------- ------- ------- ------- -------
Income before income tax ............................. 4,544 4,216 5,039 5,055 18,854
Income tax ........................................... 1,793 1,645 2,008 1,938 7,384
------- ------- ------- ------- -------
Net income ........................................... $2,751 $2,571 $3,031 $3,117 $11,470
Earnings per share* .................................. $0.98 $0.92 $0.77 $0.80 $3.41
=========================================================================================================================
1994 RESULTS
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- -------------------------------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
- -------------------------------------------------------------------------------------------------------------------------
Net interest income .................................. $9,074 $9,631 $10,212 $10,528 $39,445
Provision for loan losses ............................ 239 422 316 725 1,702
------- ------- ------- ------- -------
Net interest income after provision for loan losses .. 8,835 9,209 9,896 9,803 37,743
Total other income ................................... 1,229 1,383 1,613 895 5,120
Total other expenses ................................. 6,256 6,339 6,970 6,933 26,498
------- ------- ------- ------- -------
Income before income tax ............................. 3,808 4,253 4,539 3,765 16,365
Income tax ........................................... 1,408 1,604 1,826 1,418 6,256
------- ------- ------- ------- -------
Net income ........................................... $2,400 $2,649 $2,713 $2,347 $10,109
Earnings per share * ................................. $0.85 $0.94 $0.96 $0.83 $3.59
* The sum of the quarterly earnings per share figures will not equal total
earnings per share as a result of preferred stock dividends and differences
between average common shares outstanding for each quarter and the full year.
77
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
- ------- ----------------------------------------------------
None
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
This item is incorporated by reference from the registrant's definitive
Proxy Statement. Information concerning executive officers is included in Part I
after Item 4 of this Form 10-K Annual Report.
ITEM 11. EXECUTIVE COMPENSATION
- -------- ----------------------
This item is incorporated by reference from the registrant's definitive
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------- --------------------------------------------------------------
This item is incorporated by reference from the registrant's definitive
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
This item is incorporated by reference from the registrant's definitive
Proxy Statement.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- -------- ----------------------------------------------------------------
(a) Documents Filed
1. The following consolidated financial statements of Community Bank
System, Inc. and subsidiaries are included in Item 8:
- Consolidated Statements of Condition --
December, 31, 1995 and 1994
- Consolidated Statements of Income --
Years ended December 31, 1995, 1994, and 1993
- Consolidated Statements of Changes in Stockholders' Equity -Years
ended December 31, 1995, 1994, and 1993
- Consolidated Statement of Cash Flows --
Years ended December 31, 1995, 1994, and 1993
- Notes to Consolidated Financial Statements --
78
December 31, 1995
- Auditors' report
- Quarterly selected data --
Years ended December 31, 1995 and 1994 (unaudited)
2. Schedules are omitted since the required information is either not
applicable or shown elsewhere in the financial statements.
3. Listing of Exhibits
(10) (a) Material Contracts: Employment agreement dated
January 1, 1995 between the Company and Mr. Belden previously filed
with the Commission on June 8, 1995 as exhibit 10 to the Company's
quarterly report on Form 10-Q/A and incorporated herein by reference.
(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) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of 1995.
(c) See Exhibit 14(a)(3) above.
(d) See Exhibit 14(a)(2) above
79
SIGNATURES
Pursuant to the requirements of Section 13 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.
By: /s/ SANFORD A. BELDEN
---------------------------------------------------
Sanford A. Belden
President, Chief Executive Officer and Director
March 20, 1996
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 15th day of March 1995.
NAME TITLE
---- -----
/s/ DR. EARL W. MACARTHUR Chairman of the Board of Directors
- ------------------------------- and Director
Dr. Earl W. MacArthur
/s/ DAVID G. WALLACE Treasurer
- -------------------------------
David G. Wallace
DIRECTORS:
/s/ JOHN M. BURGESS /s/ RICHARD C. CUMMINGS
- ------------------------------- ------------------------------------
John M. Burgess, Director Richard C. Cummings, Director
/s/ WILLIAM M. DEMPSEY /s/ NICHOLAS A. DICERBO
- ------------------------------- ------------------------------------
William M. Dempsey, Director Nicholas A. DiCerbo, Director
/s/ BENJAMIN FRANKLIN /s/ JAMES A. GABRIEL
- ------------------------------- ------------------------------------
Benjamin Franklin, Director James A. Gabriel, Director
/s/ LEE T. HIRSCHEY /s/ DAVID C. PATTERSON
- ------------------------------- ------------------------------------
Lee T. Hirschey, Director David C. Patterson, Director
/s/ WILLIAM N. SLOAN /s/ WILLIAM D. STALDER
- ------------------------------- ------------------------------------
William N. Sloan, Director William D. Stalder, Director
/s/ HUGH G. ZIMMER
- -------------------------------
Hugh G. Zimmer, Director
80