-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U3uze29cGrCU5+XIRKF8uCbGZze4tGKV2eYKLa0kcQplaTbY890cOVBO+t6gN7vQ m3TxZ8ycb2KU83gA9bs/wQ== 0000723188-97-000006.txt : 19970403 0000723188-97-000006.hdr.sgml : 19970403 ACCESSION NUMBER: 0000723188-97-000006 CONFORMED SUBMISSION TYPE: 10-K CONFIRMING COPY: PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970402 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMUNITY BANK SYSTEM INC CENTRAL INDEX KEY: 0000723188 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 161213679 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-11716 FILM NUMBER: 00000000 BUSINESS ADDRESS: STREET 1: 5790 WIDEWATERS PKWY CITY: DEWITT STATE: NY ZIP: 13214 BUSINESS PHONE: 3154452282 MAIL ADDRESS: STREET 1: 5790 WIDEWATERS PARKWAY CITY: DEWITT STATE: NY ZIP: 13214 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 THIS DOCUMENT IS A COPY OF THE FORM 10-K FILED ON APRIL 1, 1997 PURSUANT TO A RULE 201 TEMPORARY HARDSHIP EXEMPTION 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, 1996 Commission file number 0-11716 COMMUNITY BANK SYSTEM, INC. (Exact name of registrant as specified in its charter) Delaware 16-1213679 (State or other jurisdiction of incorporation) (I.R.S. Employer 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, No 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. $172,920,026 based upon average selling price of $23.00 and 7,518,262 shares on March 25, 1997. (as adjusted for 2-for-1 stock split on March 13, 1997) Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. 7,518,262 shares Common Stock No Par Value at March 25, 1997 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 14, 1997 .........Part III Exhibit index on page 81 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 former 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 (the agreement has since been renewed for a term ending December 31, 2002). On June 30, 1992, Northeastern ceased operations. On January 17, 1997 all the outstanding shares of common stock of Northeastern were transferred from the Company to Community Bank, N.A. On that date, Northeastern became a wholly-owned subsidiary of CBNA and changed its name to CBNA Treasury Management Corporation. CBTM is now utilized by the Bank to manage its Treasury function including asset liability, investment portfolio, and liquidity management. 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. In July 1996, the Company purchased Benefit Plans Administrators of Utica, New York, a designer and administrator of qualified and nonqualified pension programs. The Company 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 49 customer facilities 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 community retail bank committed to the philosophy of serving the financial needs of customers in local communities. The Bank's branches are generally located in small cities and villages within its geographic market areas. The Company believes that the local character of business, knowledge of the customer and customer needs, and comprehensive retail and small business products, together with rapid decision-making at the branch and regional level, enable the Bank to compete effectively. 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 the making of 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 $60,000, with only 27% 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, Albany or Buffalo, New York, and Cleveland, Ohio, 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. The Bank is predominantly a retail bank committed to the philosophy of serving the financial needs of customers in the local communities it serves. The Bank's branches are generally located in small cities and villages within its geographic market areas. 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 7.7% 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 six-county primary market area of Seneca, Oswego, Ontario, Wayne, Onondaga, and Cayuga Counties. Within the Finger Lakes Market area, the Bank maintains a market share(1) of approximately 2.6% 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 eleven 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 14.2% 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 10.1% 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 all seven of the 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, 1996, as calculated by Sheshunoff Information Services, Inc. Employees As of December 31, 1996, the Bank employed 578 full-time equivalent employees versus 563 at year-end 1995. 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. 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, 1996, the Bank had $18.3 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. 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, 1996 were 10.70% and 11.83%, 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, 1996 was 5.88%, 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 (the "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. FDICIA also provides for increased funding of the FDIC insurance fund through a risk-related premium schedule for insured depository institutions. The Bank's premium (before adjustments) for the quarterly assessment period beginning January 1, 1996, will be 1.30 basis points for its BIF -insured deposits and 6.48 basis points for its SAIF-insured 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 Capitalized Well 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, 1996, the Bank's total risk-based capital ratio and Tier I risk-based capital ratio were 11.83% and 10.70%, respectively, and its Tier I leverage ratio as of such date was 5.88%. 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. 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, 1996 had a net book value of $16.8 million and none of the properties was subject to any encumbrances. For the year ended December 31, 1996, rental fees of $744,000 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 54 the Company and the Bank David G. Wallace Treasurer of the Company and Senior Vice Age 52 President and Chief Financial Officer of the Bank James A. Wears Regional President, Northern Region Age 47 of the Bank Michael A. Patton Regional President, Southern Region Age 51 of the Bank 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 3,737,406 shares of Common Stock outstanding on December 31, 1996 held by approximately 3,594 shareholders of record. COMMON STOCK PERFORMANCE NASDAQ Symbol: CBSI Newspaper Listing: CmuntyBkSys Market (Bid) Price High Low Closing Price Quarterly Year / Qtr ..... Price Price Amount % Change Dividend 1996 4th ........ $40.25 $34.00 $39.25 14.6% $0.36 3rd ........ $35.50 $30.75 $34.25 10.0% $0.36 2nd ........ $33.25 $30.50 $31.13 0.4% $0.33 1st ........ $32.75 $30.25 $31.00 -3.1% $0.33 1995 4th ........ $34.25 $31.00 $32.00 -5.2% $0.33 3rd ........ $36.75 $25.25 $33.75 32.4% $0.30 2nd ........ $29.00 $24.24 $25.50 -6.0% $0.30 1st ........ $27.75 $25.25 $27.13 3.4% $0.30 The Company has historically paid regular quarterly cash dividends on its Common Stock, and declared a cash dividend of $0.36 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 Trust 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, 1996. 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.
Years ended December 31, ------------------------------------------------------------------ 1996 1995 1994 1993 1992 ------------------------------------------------------------------ Income Statement Data: Interest income ......................................... $ 97,688 $ 83,387 $ 61,575 $ 54,642 $ 56,345 Interest expense ........................................ 42,422 36,307 22,130 17,733 21,608 ---------- ---------- ---------- ---------- ---------- Net interest income ..................................... 55,266 47,080 39,445 36,909 34,737 Provision for possible loan losses ...................... 2,897 1,765 1,702 1,506 2,727 ---------- ---------- ---------- ---------- ---------- Net interest income after provision for for possible loan losses .............................. 52,369 45,315 37,743 35,403 32,010 Non-interest income ..................................... 8,874 6,558 5,120 4,764 5,082 Non-interest expense .................................... 37,450 33,019 26,498 24,827 26,447 ---------- ---------- ---------- ---------- ---------- Income before income taxes .............................. 23,793 18,854 16,365 15,340 10,645 Provision for income taxes .............................. 9,660 7,384 6,256 5,765 3,139 ---------- ---------- ---------- ---------- ---------- Net income ......................................... $ 14,133 $ 11,470 $ 10,109 $ 9,575 $ 7,506 ========== ========== ========== ========== ========== End of Period Balance Sheet Data: Total Assets ............................................ $1,343,865 $1,152,045 $ 915,501 $ 713,053 $ 669,274 Net Loans ............................................... 652,474 560,151 483,079 417,871 362,356 Earning Assets .......................................... 1,231,058 1,034,183 861,599 671,415 625,342 Total Deposits .......................................... 1,027,213 1,016,946 679,638 588,315 557,915 Long-term debt .......................................... 100,000 25,550 550 592 139 Shareholders' equity .................................... 109,352 100,060 66,290 61,986 53,417 Average Balance Sheet Data: Total Assets ............................................ $1,251,826 $1,054,610 $ 808,948 $ 684,863 $ 650,804 Net Loans ............................................... 602,717 519,762 446,135 382,680 351,241 Earning Assets .......................................... 1,147,455 974,143 756,871 640,070 601,636 Total Deposits .......................................... 1,032,169 871,050 651,479 598,860 585,571 Long-term debt .......................................... 57,006 3,399 557 256 379 Shareholders' equity .................................... 103,398 84,231 64,033 57,298 50,868 Common Per Share Data: Net Income .............................................. $ 3.67 $ 3.41 $ 3.59 $ 3.43 $ 2.76 Cash dividend declared .................................. 1.38 1.23 1.14 1.04 0.90 Period-end book value - stated .......................... 28.06 25.97 23.78 22.55 19.81 Period-end book value - tangible ........................ 19.70 16.74 21.59 22.39 19.58 Common Outstanding Shares: Average during period ................................... 3,741,259 3,261,205 2,814,710 2,788,330 2,722,093 End of period ........................................... 3,737,203 3,679,625 2,788,150 2,748,318 2,696,760 Selected Ratios: Return on average total assets .......................... 1.13% 1.09% 1.25% 1.40% 1.15% Return on average shareholders' equity (ex. pref. stock) 13.88% 13.85% 15.79% 16.71% 14.76% Common Dividend payout ratio ............................ 37.27% 34.79% 31.24% 29.67% 32.26% Net interest margin (taxable equivalent basis) .......... 4.86% 4.88% 5.30% 5.90% 5.82% Noninterest income/average assets (ex. sec gains & losses 0.71% 0.64% 0.69% 0.70% 0.75% Efficiency ratio (taxable equivalent basis) ............. 58.00% 60.82% 57.94% 58.45% 65.48% Non-performing assets/period-end total loans and and other real estate owned .......................... 0.55% 0.47% 0.72% 0.73% 0.67% Allow for loan losses/period-end loans .................. 1.25% 1.25% 1.30% 1.37% 1.37% Allow for loan losses/period-end non-performing loans ... 285.58% 349.69% 192.79% 238.67% 310.05% Allow for loan losses/period-end non-performing assets .. 224.33% 267.40% 179.67% 186.06% 205.72% assetsassets Net charge-offs (recoveries)/average total loans ........ 0.29% 0.21% 0.25% 0.20% 0.59% Average net loans/average total deposits ................ 58.39% 59.67% 68.48% 63.90% 59.98% Period-end total shareholders' equity/period end assets . 8.14% 8.69% 7.24% 8.69% 7.98% Tier I capital to risk-adjusted assets .................. 10.70% 10.62% 12.43% 14.87% 13.13% Total risk-based capital to risk-adjusted assets ........ 11.83% 11.76% 13.68% 16.12% 14.37% Tier I leverage ratio ................................... 5.88% 5.83% 6.80% 8.46% 7.90% Ratio of earnings to fixed charges: Including interest on deposits ..................... 155.77% 151.63% 173.40% 185.75% 148.72% Excluding interest on deposits ..................... 478.68% 428.30% 500.78% 1753.02% 2233.27%
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 Prospectus. 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 On Average Average Reported Earnings Recurring Earnings Assets Equity Earnings Per Share - ------------------------------------------------------------------------------------------------------------------------------------ Year Amount % Change Amount % Change (%) (%) ($) Change ---- ------ -------- ------ -------- --- --- --- ------ 1996 $14.133 23.2% $14.009 17.4% 1.13% 13.88% $3.67 7.6% 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% 14.76% $2.76 102.9%
Net Income and Profitability Net income and earnings per share reached record highs for 1996 at $14.1 million and $3.67, respectively. Compared to 1995, net income rose 23.2% while earnings per share were up 7.6%, reflecting greater average shares outstanding 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 17% from last year to $14.0 million after removing the impact of certain one-time income and expense items and net gains/losses on the sale of investment securities and other assets. 1995's net income climbed 13.5% over the prior year to $11.5 million while earnings per share were down 5.0% to $3.41; core earnings rose at a 12% pace. These results reflect the third consecutive year in which acquisitions had an important impact on the Company's results. The contribution of the Chase branch purchase to improved profitability in 1996 was particularly demonstrated by loan growth in the former Chase markets, which enabled the Company to increase loans by 16.5% overall in contrast to a 10.4% growth rate in its other markets. On the other hand, part of the benefit of the Chase acquisition in 1995 was offset by approximately $775,000 in one-time expenses to integrate the purchase and subsequently sell in mid-December of that year the three former Chase branches not within CBSI's strategic 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. Also in 1996, the Company made its first non-bank acquisition in many years with the purchase of Benefit Plans Administrators (BPA) of Utica, NY, a pension administration and consulting firm, which contributed nearly $700,000 in incremental revenues since its early July acquisition date. 1996'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 17.1%, reflecting earning asset growth of $172 million on average or 17.7%. Growth in loans and investments was approximately equal at $83 million and $89 million, respectively. Eighty-six percent of earning asset growth or $149 million was funded with historically stable deposits of individuals, partnerships, and corporations; the balance was funded with borrowings, nearly half of which have original terms in excess of one year. The Company's net interest margin declined a slight two basis points on average to 4.86% or five basis points to 4.83% excluding favorable one-time items. O Noninterest income (excluding net losses on the sale of investment securities and other assets) was up 33.2% owing to continued strength in fiduciary and related services income (including the impact of BPA); higher fees from the sale of mutual funds; expanded revenues from merchant credit and check card processing; and greater overdraft fees, service charges, and commissions from an expanded customer base gained from the Chase branch purchase. Net gains on the sale of investment securities and other assets were $124,000 this year versus a net loss of $12,000 in 1995. O Overhead expense increased by 13.4%; excluding one-time costs of the Chase acquisition, growth was $5.2 million or 16.2%. Approximately 45% of the latter increase represents personnel costs, largely reflecting the full-year 1996 versus six-month 1995 effect 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. Lastly, the full-year effect of amortizing the intangible assets associated with the Chase transaction accounted for $1.16 million or over 22% of the adjusted overhead increase. O Loan loss provision expense rose 64%, raising the loan loss reserve to $8.1 million. The increase was driven by record loan growth of 16.5%, the objective to maintain the reserve to outstandings ratio at the 1.25% level established at the time of the Chase transaction, and coverage of higher net charge-offs. The ratio of net charge-offs to average loans outstanding rose to a still historically good .29%, largely due to actions taken in the fourth quarter which reduced nonperforming loans to .44% of outstandings, a level less than half the national peer bank norm at September 30, 1996. Coverage of reserves to nonperformers is ample in the opinion of management at 2.9 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 121 companies nationwide having $1 billion to $3 billion in assets based on data through September 30, 1996 as provided by the Federal Reserve System. Net income per dollar employed, or return on average assets, was up 4 basis points in 1996 to 1.13%, ranking in the peer normal 48th percentile. Shareholder return on equity, or net income as a percent of average equity, rose 3 basis points to 13.88%, equaling the 59th peer percentile. Underlying these modestly improved levels of profitability on an annual basis is a steady increase in quarterly performance measures for the four quarters following third quarter 1995, the first period reflecting the full impact of the Chase branch transaction and supporting capital raising. The initial earnings dilution resulting from those mid-1995 events was eliminated by third quarter 1996, when earnings per share reached a record high of $.99. Fourth quarter earnings per share was off $.04 from that pace to $.95 due to higher loan loss provision expense resulting from the intensive review of asset quality undertaken during the quarter as mentioned above. Moreover, tangible return on equity, which excludes the impact of writing down deposit acquisition premiums (goodwill) associated with purchase transactions, rose to 16.63% for the first nine months of 1996, ranking CBSI in the top quartile of the 29 bank regional peer group whose business strategy, markets, and asset quality closely matches CBSI. A growing number of bank analysts view this performance indicator as a better measure of a company's core profitability and value created for shareholders. It recognizes that there is no real economic difference between acquisitions accounted for on a pooling versus a purchase basis, and that since goodwill amortization is not a cash expense, cash earnings under either accounting method are essentially the same. 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, -------------------------------------------------- 1996 1995 1994 Percentage of net income to average total assets .............. 1.13% 1.09% 1.25% Percentage of net income to average shareholders equity ....... 13.88% 13.85% 15.79% Percentage of net income to average shareholders equity plus average preferred stock ........... 13.67% 13.62% 15.79% Percentage of dividends declared per common share to net income per common share .................. 37.27% 34.79% 31.24% Percentage of average shareholder's equity to average total assets .... 7.90% 7.61% 7.92% Percentage of average shareholder's equity plus average preferred stock to average total assets ........... 8.26% 7.99% 7.92%
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 (loans and investments) exceeds the cost of funds, primarily interest paid to the Company's depositors as well as interest on borrowings from the Federal Home Loan Bank of New York. 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.
--------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------- Year Ended December 31, 1996 1995 1994 --------------------------------------------------------------------------------------------- Average Average Average Average Amount of Yield/Rate Average Amount Yield/Rate Average Amount of Yield/Rate Balance Interest Paid Balance Interest Paid Balance Interest Paid ASSETS Interest-earning assets: Federal funds sold $6,318 $336 5.32% $24,535 $1,422 5.79% $0 $0 0.00% Time Deposits in other banks 0 0 0.00 0 0 0.00 25 1 4.59 Taxable investment securities 521,668 39,410 7.55 414,154 30,955 7.47 287,892 19,444 6.75 Non-taxable investment securities 16,752 1,473 8.79 16,806 1,580 9.40 22,819 2,103 9.22 Loans (net of unearned discount) 602,717 56,932 9.45 519,762 49,928 9.61 446,135 40,699 9.12 -------- ------- ----- -------- ------- ----- -------- ------- ---- Total Interest-earning assets 1,147,455 98,151 8.55 975,257 83,885 8.60 756,871 62,247 8.22 Non-Interest Earning Assets: Cash and due from banks 43,251 39,118 32,411 Premises and equipment 16,848 13,840 10,335 Other assets 50,626 34,099 15,896 Less allowance for loan losses (7,418) (6,589) (5,860) Net unrealized gains/(losses) on available for sale portfolio 1,063 (1,114) (705) ------ ------- ----- Total $1,251,825 $1,054,611 $808,948 LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities Savings Deposits $406,925 $9,953 2.45% $366,604 $9,730 2.65% $323,443 $8,249 2.55% Time Deposits 481,250 26,430 5.49 380,494 21,042 5.53 229,449 9,964 4.34 Short term borrowing 46,535 2,620 5.63 85,407 5,376 6.29 87,334 3,917 4.49 Long term borrowing 57,006 3,419 6.00 3,399 159 4.67 0 0 0.00 Total interest - bearing 991,716 42,422 4.28 835,904 36,307 4.34 640,226 22,130 3.46 liabilities Non-interest-bearing liabilities Demand deposits 143,995 123,952 98,587 Other liabilities 12,717 10,526 6,102 Stockholders' equity 103,398 84,229 64,033 -------- ------- ------ Total $1,251,826 $1,054,611 $808,948 Net interest earnings 55,729 47,578 40,117 ------- ------- ------ Net yield on interest-earning assets 4.86% 4.88% 5.30%
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:
-------------------------------------------------------------------------------------- 1996 Compared to 1995 1995 Compared to 1994 -------------------------------------------------------------------------------------- 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 (979) (107) (1,086) 711 711 1,422 Time deposits in other banks 0 0 0 0.5 0.5 1 Taxable investment securities 8,120 335 8,455 9,259 2,252 11,511 Non-taxable investment securities (5) (102) (107) (565) 42 (523) Loans (net of unearned discount) 7,852 (845) 7,007 6,962 2,267 9,229 ------ ----- ------ ------ ------ ------ Total interest-earning assets (2) 14,854 (585) 14,269 18,721 2,917 21,638 ======= ===== ======= ======= ====== ======= Interest paid on: Savings deposits 1,002 (779) 223 1,145 336 1,481 Time deposits 5,541 (153) 5,388 7,821 3,257 11,078 Short-term borrowings (2,239) (517) (2,756) 745 1,648 2,393 Long-term debt 3,202 58 3,260 (659) (116) (775) ------ --- ------ Total interest bearing liabilities (2) 6,627 (512) 6,115 7,738 6,439 14,177 ====== ===== ====== ====== ====== ====== Net interest earnings (2) 8,350 (196) 8,154 10,909 (3,448) 7,461 ====== ===== ====== ======= ======= ===== (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.
Net interest income (with non-taxable income converted to a full tax-equivalent basis) totaled $55.7 million in 1996; this represents an $8.2 million or 17.1% increase from the prior year. The increase was entirely due to higher earning asset volumes, which had a positive impact on net interest income of $8.4 million, while interest rate changes had a negative impact of only $253,000. In contrast, interest rate changes in 1995 had a negative impact of $3.4 million versus higher earning asset volumes having an even more positive impact of $10.9 million. Combining these components, 1995's net interest income rose $7.5 million or 18.6% over the prior year to $47.6 million. Fourth quarter 1996 net interest income was up 6.6% from the same quarter last year despite a 35 basis point lower margin at 4.70%. The reduction in margin reflects continued competitive pressure on loan yields and more importantly, a higher cost of funds reflecting the bank's strategy to expand its funding base through a mix of selected certificate of deposit promotions of maturities over one year and greater borrowings. With regard to the interest income component of 1996's net interest income, greater average earning assets of $172 million helped contribute $14.3 million or 17.0% more in additional gross interest income. More specifically, higher investment volumes and yields accounted for $7.3 million of the increase in interest income while growth in loans contributed $7.0 million. Reflective of the Chase branch acquisition in mid 1995, last year's earning asset volumes were up $218 million or 28.9% over 1994's figures. Nearly half or $83 million in 1996's average earning asset growth resulted from increased lending activity in existing and new markets and the full-year impact of loans initially acquired at the Chase branches. The remaining $89 million of growth is explained by an increase in investment outstandings; this reflects both the strategic use of leveraging when favorable buying opportunities existed and the full year impact of investments purchased from funds provided by the 1995 Chase branch acquisition. The ratio of loans to earning assets decreased slightly this year as a consequence of the aforementioned investment strategy. Despite a 56 basis point decline in the average prime rate from 1995 to 1996, average loan yields declined only 16 basis points from 9.61% in 1995 to 9.45% this year. This relative stability reflects CBSI's effective management of a mix of variable and fixed rate product within its loan portfolio. Through September 30, 1996, the Company's loan yield was in the favorable 70th peer bank percentile. In addition to strong investment growth, the average investment yield improved by 12 basis points from 7.45% in 1995 to 7.57% in 1996. Excluding a favorable one-time accounting change and discount income earned as a result of a bond being called, the 1996 average investment yield would have been 7.47% or slightly higher than the 1995 yield. Through September 30, 1996, the Company's investment yield was in the very favorable 95th peer bank percentile. The total of average deposits and borrowings grew by $176 million in 1996, partially causing the $6.1 million increase in total interest expense. Over 88% of this additional expense is due to interest paid on time deposits, whose costs closely track the movement of the treasury yield curve. During 1996, time deposit rates averaged 5.49%, or 4 basis points lower than their 1995 average. However, interest expense rose due to a growing mix of time deposits, reflecting movement of funds from savings and money market accounts, promotional rates on 18 and 30 month certificates of deposit, as well as the fact that the acquired Chase deposits contained a relatively higher proportion of time accounts. Management was successful in 1996 in decreasing the 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 decreased by a total of 20 basis points during 1996, falling from 2.65% in 1995 to 2.45% this year. Largely because of the full impact of the Chase deposits, the portion of interest bearing funds which supports earning assets rose slightly in 1996 to 86.4%. Through September 30, 1996, the Company's average cost of funds rate improved to the favorable 42nd peer bank percentile, as compared to being in the 51st percentile through September 30, 1995. Overall, CBSI's net interest margin remained relatively stable in 1996, declining only two basis points, from 4.88% in 1995 to 4.86% this year. o The average earning asset yield decreased five basis points to 8.55% because of the aforementioned decrease in average loan yield and an increased mix of investment securities to earning assets, as marketable securities have historically had lower yields than most types of loans. This was partially offset by higher investment yields. o The decline in the average earning asset yield compares to a favorable three basis point decline in the average cost of funds to 3.69% in 1996. This was caused by a significant decrease in the rate paid on savings and money market accounts and a modest decrease in the rate paid on time deposits. o Partially offsetting these rate decreases was an increased mix of time deposits and a 133 basis point increase in the average cost of long-term borrowings from 4.67% in 1995 to 6.00% in 1996, due in part to the Company's strategy of borrowing further out on the yield curve in order to minimize longer term risk in a rising rate environment. Average long-term borrowings necessary to fund the continued steady loan growth along with CBSI's targeted investment strategy accounted for nearly one-third of the total increase in average liabilities. Despite the decline in the Company's net interest margin, it ranks in the favorable 63rd peer bank percentile through September 30, 1996. 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. Thus, as management focuses on growing the earning asset base of the Company, a potential downward change in margin resulting from leverage strategies to take advantage of favorable investment opportunities may be considered secondary to increasing the future stream of net interest income. 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
- ---------------------------------------------------------------------------------------------------------- For the Quarter Net Net Yield on Cost of Average Loans / Ended: Interest Interest Earning Funds Earning Earning (000's) Income Margin Assets Assets Assets at (a) (a) (a) Period End - ---------------------------------------------------------------------------------------------------------- Amount and Change from Preceding Quarter (b) - ---------------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------------- March 31, 1996 Amount $13,325 5.04% 8.62% 3.59% $1,063,977 53.4% Change ($142) -0.01% 0.02% 0.02% 0.5% (0.7) - ---------------------------------------------------------------------------------------------------------- June 30, 1996 Amount $13,698 4.90% 8.51% 3.64% $1,124,059 51.1% Change $373 -0.14% -0.11% 0.05% 5.6% (2.4) - ---------------------------------------------------------------------------------------------------------- September 30, 1996 Amount $14,355 4.82% 8.55% 3.78% $1,185,913 51.3% Change $656 -0.09% 0.04% 0.14% 5.5% 0.2 - ---------------------------------------------------------------------------------------------------------- December 31, 1996 Amount $14,350 4.70% 8.55% 3.91% $1,214,708 53.0% Change ($5) -0.12% 0.00% 0.13% 2.4% 1.7 - ---------------------------------------------------------------------------------------------------------- Change from Quarter Ended December 31, 1995 to December 31, 1996 Amount $883 -0.35% -0.05% 0.35% $156,198 -1.2% % Change 6.6% --- --- --- 14.8% --- - ---------------------------------------------------------------------------------------------------------- For the Year Ended (000's) December 31, 1995 Amount $47,578 4.88% 8.60% 3.78% $975,257 54.2% December 31, 1996 Amount $55,728 4.86% 8.55% 3.70% $1,147,455 53.0% Change 17.1% -0.02% -0.05% -0.08% 17.7% -1.2% - ---------------------------------------------------------------------------------------------------------- Note: (a) All net interest income, margin, and earning asset yield figures are full tax-equivalent. (b) Totals and change calculations may not foot due to rounding.
Noninterest Income The Company's sources of noninterest income are recurring fees from core banking operations (including personal trust income) and revenues from one-time events, defined as net gains/losses from the sale of investments, loans, and miscellaneous assets. Beginning in July 1996, recurring fees were importantly augmented by CBSI's acquisition of Benefit Plans Administrators (BPA) of Utica, New York. This firm provides record keeping and consulting services for sponsors of defined benefit and defined contribution plans as well as offers investment management products for small to medium sized businesses and not-for-profits through its affiliation with the CBNA Trust Department. The following table sets forth information by category of non-interest income for the Company for the years indicated:
NON INTEREST INCOME TREND ($ million) TOTAL NONINT NONRECURRING SUBSIDIARIES CORE BANKING CORE BANKING / INCOME NONINT INCOME NONINT NONINT INCOME AVERAGE ASSETS INCOME (INCL. BPA) Year 000's % Change 000's 000's 000's % Change (%) 1996 $8.874 35.3% $0.124 $0.689 $8.750 33.2% 0.70% 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%
Core banking fees (excluding BPA) were up strongly for the third consecutive year to approximately $8.8 million in 1996, a 33% improvement following a 17.2% increase in 1995 and a 17.6% increase in 1994. Included in this year's growth is approximately $565,000 more in fees due to the full year impact of the former Chase branches and $689,000 in fee income from a half year of BPA operations (shown as subsidiary income in the above table). Without the impact of the new branches or BPA, total non-interest income rose by 15.8%. Core banking fees (including BPA) represented .70% of average assets, a meaningful eight basis points higher than 1995's level in light of an 18.7% increase in average assets reflective of strong loan and investment growth. Though progress in growing noninterest income has been steady in dollar terms over the last few years, strong asset growth has placed the noninterest income/assets ratio in the relatively low 28th peer percentile. Management's intermediate-term objective is to achieve a peer normal ratio of .90% based on an analysis of 125 publicly-traded commercial banks in the U.S. with assets of $750 million to $1.75 billion. Noninterest income in fourth quarter 1996 climbed 24% over the same period last year. More than two thirds of the growth reflects the contribution of BPA. The core banking income/assets ratio for the quarter reached .73%. The following table sets forth selected detailed information by category of non-interest income for the Company for the years indicated.
Years ended December 31, 1996 1995 1994 ------- ------- ------- (In thousands) Fiduciary and investment services .............$ 1,523 $ 1,447 $ 1,380 Service charges on deposits ................... 2,259 1,959 1,621 Overdraft fees ................................ 1,778 1,367 971 Other service charges and fees ................ 2,501 1,796 1,519 Other operating income ........................ 781 141 131 Investment security gains (losses) ............ 32 (152) (502) Total ...................$ 8,874 $ 6,558 $ 5,120 Total non-interest income [excluding investment security gains (losses)] as a percentage of average assets ............. .71% .64% .69%
In light of management's objective to grow noninterest income, opportunities to develop new fee-based products are actively pursued and the collection of fees for providing quality service is emphasized. These efforts have resulted in new products such as the Visa Check Card initiated in 1995, secondary mortgage market sales/servicing beginning in 1994, the offering of mutual funds and annuities launched in 1994, and the aforementioned BPA products. In early 1997, a cash management product for commercial businesses is expected to be launched. The focus on growth has also continued 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 benefits provided by the BPA acquisition, fees from core banking operations improved in several key areas in 1996. o Fees from personal trust services expanded to almost $1.1 million, up 14.3% in 1996, primarily reflecting a greater level of estate fees. Continued focus on business development, including an expanded referral program, is expected to strengthen future fiduciary income growth. o Service charges on deposit accounts and overdraft fees increased to $4.0 million in 1996, a 21.4% growth rate versus 28.3% in 1995. The increase reflects the full year impact of higher overdraft fees and commissions from an expanded customer base gained from 1995's Chase acquisition and the above emphasis on ensuring competitive pricing and reducing waived fees. o Fees earned through the Company's Visa affiliation rose approximately 37% in 1996 to $417,000, attributable to continued growth of the new Visa Check Card product (which tripled from 1995 to 1996) and a 21.1% increase in Visa merchant discount fees. The direct margin on merchant discount fees (net of processing expense) rose 2.8 percentage points from 29.0% in 1995 to 31.8% in 1996. o 1996 is the third year in which CBSI has offered annuities, mutual funds, and other investment products through financial services representatives (FSR's) located in seven selected geographic markets within the Bank's branch network. These individuals are registered representatives working through PrimeVest Financial Services, Inc. of Saint Cloud, Minnesota. Net commission income from this activity in 1996 amounted to $782,000 on asset sales of $24.8 million, more than one and a half times the 1995 level of $473,000 on sales of $20.1 million. This line of special investment products is anticipated to continue to have strong growth in the future. o General commissions and miscellaneous income at $1.3 million were up more than 27% in 1996. The majority of this year's increase is attributable to the full year impact of fees generated by the Chase branches. Nonrecurring other income reflected a gain of $124,000 in 1996 versus a loss of $12,000 in 1995. This year's results were largely caused by gains on the sale of student loans and mortgages sold in the secondary market. 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
- ------------------------------------------------------------------------------------------------------------------------------------ For the Quarter Other Net Gain Total Service Ended: Service Annuity & Charges, (Loss) on Noninterest Core Non I Sale of Inc (000's) Fiduciary Charges on Mutual Commissions, Investments Income % of Average and Services Deposits Fund Sales and Fees Other Assets (Non I) Assets (a) - ------------------------------------------------------------------------------------------------------------------------------------ December 31, 1994 Amount 302 702 70 334 (513) 895 0.40% Change -14.4% 1.2% 337.5% -38.8% -12925.5% -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 336 691 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% - ------------------------------------------------------------------------------------------------------------------------------------ March 31, 1996 Amount 423 974 161 391 4 1,953 0.17% Change -0.2% -2.6% 23.7% -3.2% -78.7% -1.3% -0.50% - ------------------------------------------------------------------------------------------------------------------------------------ June 30, 1996 Amount 374 1,019 214 382 13 2,001 0.16% Change -11.6% 4.6% 32.8% -2.3% 201.9% 2.5% 0.00% - ------------------------------------------------------------------------------------------------------------------------------------ September 30, 1996 Amount 307 1,042 194 854 43 2,440 0.19% Change -18.0% 2.3% -9.1% 123.7% 233.1% 21.9% 0.02% - ------------------------------------------------------------------------------------------------------------------------------------ December 31, 1996 Amount 419 1,002 214 782 64 2,481 0.18% Change 36.6% -3.8% 10.2% -8.5% 49.9% 1.7% 0.00% - ------------------------------------------------------------------------------------------------------------------------------------ Change from Quarter Ended December 31, 1995 to December 31, 1996 Amount (5) 2 84 378 44 503 -0.49% % Change -1.2% 0.2% 64.4% 93.5% 221.1% 25.4% N/A - ------------------------------------------------------------------------------------------------------------------------------------ For the Year Ended (000's) December 31, 1995 Amount 1,447 3,326 473 1,323 12 6,557 0.62% December 31, 1996 Amount 1,523 4,037 782 2,408 124 8,874 0.70% Change 5.2% 21.4% 65.4% 82.0% 934.8% 35.3% 0.08% - ------------------------------------------------------------------------------------------------------------------------------------ Note: (a) Core noninterest income excludes net gain (loss) on sale of investments and other assets.
Non-Interest Expense The following table sets forth information by category of non-interest expenses of the Company for the years indicated: ------------------------------------------------ Years ended December 31, ------------------------------------------------ 1996 1995 1994 ----- ---- ---- (In thousands) Salary expense $15,342 $13,146 $10,564 Payroll taxes and benefits 3,905 3,611 2,534 Net occupancy expense 3,073 2,608 2,043 Equipment expense 2,318 1,992 1,697 Professional fees 1,119 1,102 1,282 Data processing expense 2,975 2,449 2,573 Amortization 2,729 1,686 355 Stationary and supplies 951 1,231 739 Deposit insurance premiums 368 925 1,390 Other 4,670 4,269 3,321 ------ ------ ----- Total $37,450 $33,019 $26,498 ======== ======== ======= Total operating expenses as a percentage of average assets 2.99% 3.13% 3.28% Efficiency ratio (1) 58.00% 60.82% 57.94% (1) Non-interest expense to recurring operating income Noninterest expense or overhead rose $4.4 million or 13.4% in 1996 to $37.4 million compared to a 25% increase in the prior year. The primary reason for this year's increase is $2.1 million more in expenses related to the full year impact of the Company's mid-1995 purchase of 13 new branches--12 former Chase branches (net of three sold to NBT Bank, N.A. in December 1995) plus one former Fleet Bank facility purchased in Olean, New York. Overhead growth also reflects the additions associated with the acquisition of Benefit Plans Administrators in July 1996. In brief, approximately $660,000 in additional expense was incurred related to BPA, of which $458,000 or almost 70% was personnel expense. Without the impact of the new branches and BPA, noninterest expense rose 5.2%. As a percent of average assets, this year's overhead at 2.99% improved from 3.13% in 1995, moving up to the favorable 38th peer percentile. Overhead was down 1.9% in fourth quarter 1996 compared to third quarter 1996, entirely explained by the absence of the $263,000 one-time assessment imposed on the Bank on September 30 to build the Savings Association Insurance Fund (SAIF). Fourth quarter 1996 overhead was 1.6% lower than the same quarter last year. For CBSI as a whole, higher personnel expense accounted for over 56% of 1996's increase in overhead, with personnel costs being up 14.8% versus being 28% higher in 1995. Salary expense increased by 16.7%, primarily reflective of staffing the 13 new branches in 1995 and 23 new full-time equivalents (FTE's) associated with BPA in 1996, along with modest annual merit awards. Total FTEs at year-end 1996 were 578 versus 563 at year-end 1995. Payroll taxes and benefits rose 13.7% largely due to the additions to staff, offset by a slightly lower benefit cost per employee. Non-personnel expense rose $1.9 million or 11.9% this year as opposed to a $2.9 million or a 21.4% increase in 1995. Higher occupancy expense, depreciation on equipment, telephone, courier and armored car expense, postage, and computer services resulted from the full year impact of the 13 new locations added in the last half of 1995. Amortization of intangible assets doubled to $1.7 million in 1996 as a result of the 8.25% premium paid on the deposits acquired from Chase in the previous year. Various other increases related to inflation, internal volume growth, the SAIF insurance assessment, and a directors stock-based retirement plan were partially offset by reduced office supplies, education and seminar costs; sharply lower FDIC insurance expense; and the absence of one-time items related to the Chase branch acquisition. 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 1992 to 1993 resulted from the restructuring of the Company into a single bank holding company. 1994's improvement was limited by the additional net overhead of four branches acquired that year. The slight increase in the 1995 ratio to 60.8% reflects increased costs resulting from the $383 million Chase deposit acquisition; as with the much smaller 1994 transactions, there had initially been a disproportionately smaller increase in net interest income since practically all of the acquired deposits funded investments rather than higher yielding loans. In 1996, the efficiency ratio improved by 2.8 percentage points to 58.0%, which compares favorably to the national peer bank median of 60.9% based on data available as of September 30, 1996. The ratio is now better than the level prior to the Chase transaction, and excluding the amortization of intangibles, is an even more meaningful 5.1% lower at 52.3% based on fourth quarter 1996 results. This progress reflects a combination of strong loan growth, continued focus on strict expense control, and leveraging CBSI's capital through the Chase acquisition and subsequent selected capital market borrowing. Management has set an objective to bring this ratio (inclusive of intangibles amortization) downward to 55% within the next two to four 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, a bank-wide program of employee involvement, and targeted use of outside consultants. As an example, the transition from microfiche to optical disk for capturing information was completed in 1996, resulting in significant expense savings. Also initiated this year was a program of regional line item expense monitoring by selected managers; this new control mechanism serves as a supplement to regular surveillance by the corporate finance department and has heightened awareness and responsibility for overhead management. These combined efforts are intended to offset pressure from inflation and higher transaction volumes and enable the Company to more fully benefit from economies of scale as it continues to grow. 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
- ------------------------------------------------------------------------------------------------------------------------------------ For the Quarter Occupancy Amortization Non All Total % of Ended: (c) Personnel Furniture, of Intangible Recurring Other Noninterest Average Efficiency (000's) Expense & Equipment Assets Expenses Expense Expense Assets Ratio - ------------------------------------------------------------------------------------------------------------------------------------ (a) (b) 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% -0.08% -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% - ------------------------------------------------------------------------------------------------------------------------------------ March 31, 1996 Amount 4,704 1,376 702 0 2,470 9,252 0.79% 60.6% Change -3.7% -1.7% -4.4% -100.0% 0.4% -4.0% -2.48% -1.8% - ------------------------------------------------------------------------------------------------------------------------------------ June 30, 1996 Amount 4,680 1,310 694 0 2,375 9,059 0.74% 57.7% Change -0.5% -4.8% -1.2% 0.0% -3.8% -2.1% -0.05% -2.9% - ------------------------------------------------------------------------------------------------------------------------------------ September 30, 1996 Amount 4,956 1,332 687 0 2,684 9,659 0.75% 57.5% Change 5.9% 1.7% -1.0% 0.0% 13.0% 6.6% 0.01% -0.2% - ------------------------------------------------------------------------------------------------------------------------------------ December 31, 1996 Amount 4,908 1,374 646 0 2,553 9,480 0.72% 56.4% Change -1.0% 3.2% -1.0% 0.0% -6.2% -1.8% -0.03% -1.1% - ------------------------------------------------------------------------------------------------------------------------------------ Change from Quarter Ended December 31, 1995 to December 31, 1996 Amount 24 (26) 54 (157) 59 (155) -2.55% -6.00% % Change 0.5% -1.9% -7.4% -100.0% 2.4% -1.6% -78.0% -9.6% - ------------------------------------------------------------------------------------------------------------------------------------ For the Year Ended (000's) December 31, 1995 Amount 16,757 4,600 1,686 776 9,200 33,019 3.13% 60.8% December 31, 1996 Amount 19,247 5,392 2,729 0 10,082 37,450 3.00% 58.0% Change 14.9% 17.2% 61.9% 0.0% 9.6% 13.4% -0.13% -2.80% - ------------------------------------------------------------------------------------------------------------------------------------ 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.
Income and Income Taxes Income before tax in 1996 was nearly $23.8 million, up 26.2% over the prior year's amount. When pre-tax income is recast as if all tax-exempt revenues were fully taxable on a federal basis, 1996's results rose by $4.9 million or 25.3%. The main reasons for improved pre-tax earnings were the favorable $8.2 million increase in net interest income (full tax-equivalent basis), which reflected the strong earning asset growth discussed previously, and a $2.3 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 $4.4 million more in overhead expense, and $1.1 million more in loan loss provision expense, consistent with CBSI's strong loan growth, so that the ratio of loan loss reserves to loans outstanding was maintained at 1.25%. The Company's combined effective federal and state tax rate rose 140 basis points this year to 40.6%. The rate increased because of a decreasing proportion of tax-exempt municipal investment holdings and additional taxes and interest resulting from an IRS tax audit of the years 1990 to 1993. Capital Shareholders' equity ended 1996 at $109.4 million, up over 9% from one year earlier, primarily reflective of the contribution of strong earnings less dividends paid to shareholders. The $29,600 after-tax decrease in this year's market value adjustment (MVA) on available-for-sale investment securities had little impact on capital but compares to a $2.9 million after-tax increase in MVA in 1995. Shares outstanding increased by nearly 58,000 during 1996 due to the exercise of stock options and 40,625 shares of common stock (valued at $31.25 per share) issued to acquire BPA.
COMMON STOCK SHAREHOLDER PROFILE (AS OF DATE INDICATED OR MOST RECENT PRECEDING DATE) 12/31/96 12/31/95 Change Number of Shares Outstanding 3,737,000 3,679,000 58,000 Number of Shareholders 3,594 3,677 (83) % Shares # of % Shares # of % Shares # of Outstanding Shareholders Outstanding Shareholders Outstanding Shareholders --------------------------------------------------------------------------------------------- Institutional Shares Held 35.6% 22* 28.4% 26* 7.2% (4)* * Identifiable by Name Other Significant Shareholdings Insiders** 5.7% 14 5.1% 14 0.6% 0 Owners of 5% or More 0.0% 0 0.0% 0 0.0% 0 CBSI's 401(k), excl. Insiders 2.1% 359 2.2% 359 -0.1% 0 (20.8% and 22.4% of Plan Dollars) CBSI's Pension Plan 0.7% 1 0.6% 1 0.1% 0 ---- -- ---- -- ---- - (11.2% and 6.9% of Plan Dollars) Total Other Shareholdings 8.5% 374 7.9% 374 0.6% 0 Dividend Reinvestment Plan Participation 15.5% 558 14.9% 548 0.6% 10 All Shares Held by Participants 7.0% 7.1% -0.1%
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 5.88%. This level compares to 5.89% a year ago. Despite higher capital produced by this year's strong earnings, the increase in the 1996 tier I ratio was limited by asset growth resulting, in part, from the strategic use of leveraging via financial market borrowings when favorable investment opportunities existed. The total capital to risk-weighted assets ratio of 11.83% as of year-end 1996 was 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 declared on common stock in 1996 of $5.1 million represented an increase of 28.2% over the prior year. This growth reflects the full-year impact of shares issued to support the 1995 Chase acquisition, shares issued for the BPA acquisition, the exercise of stock options, and a three cent per share increase in quarterly common stock dividend in the third quarter of 1996 from $.33 to $.36. Dividends declared on CBSI's preferred stock in 1996 were $405,000 compared to $253,000 in the prior year, reflecting a different average level of principle outstanding for the two periods; in December 1995, half of the original $9.0 million issue was repurchased at no premium to CBSI. Raising the Company's expected annualized dividend to $1.44 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 39%, or 36% excluding the preferred dividend, and represents an increase from the 1995 levels of 37% and 35%, respectively. 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 from 1993 through 1995. The 1996 peer payout ratio (including preferred dividend) raised the Company to the 77th peer percentile. On January 29,1997, CBSI announced the placement of $30 million of fixed rate capital securities through Community Capital Trust I, a newly formed Delaware business trust, controlled by CBSI. The 9.75% Capital Securities, Series A of Community Capital Trust I were priced at 99.325% of par to yield 9.82%. Cash distributions will be payable semi-annually on January 31 and July 31, beginning July 31, 1997. The 9.75% Capital Securities are rated Investment Grade ("BBB-") by Thomson BankWatch. The proceeds from the issuance will be used for general corporate purposes, including the redemption of CBSI's outstanding preferred stock. The issuance of these capital securities will further enhance the Company's capital position and reduce the cost of capital. Had these capital securities been issued on December 31, 1996, the Company's tier I leverage ratio would have been 7.75%.
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, ------------------------------------------------------------- 1996 1995 1994 1993 1992 ----- ---- ---- ---- ---- (In Thousands of Dollars) Real estate mortgages Residential $225,088 $204,224 $196,548 $177,059 $146,135 Commercial loans secured by real estate 56,112 43,939 34,677 31,851 23,411 Commercial real estate 847 3,032 927 1,063 1,647 Farm 8,296 8,224 7,625 7,421 6,670 Total 290,343 259,419 239,777 217,394 177,863 Commercial, financial, and agricultural Agricultural loans 21,689 17,969 13,295 11,564 10,152 Commercial loans 99,445 81,562 67,976 58,252 40,524 Total 121,134 99,531 81,271 69,816 50,676 Installment loans to individuals Direct 62,176 57,646 58,371 58,963 64,486 Indirect 171,583 144,566 121,148 89,513 88,068 Student & Other 9,635 10,268 8,690 6,337 6,492 Total 243,394 212,480 188,209 154,813 159,046 Other Loans 3,496 2,190 1,482 1,578 3,778 ------ ------ ------ ------ ----- Gross loans 658,367 573,620 510,739 443,601 391,363 Less: Unearned discount 5,893 13,469 27,660 25,730 29,007 Reserve for possible loan losses 8,128 6,976 6,281 5,706 4,982 ------ ------ ------ ------ ----- Net loans $644,346 $553,175 $476,798 $412,165 $357,374
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. Additionally, the typical size loan to the variety of commercial businesses in the Company's market areas is under $60,000, with only 27% 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 70th peer percentile. Loans outstanding, net of unearned discount, reached a record $652 million as of year-end 1996, up over $92 million or 16.5% compared to twelve months earlier. About 40% of 1996's growth took place in the markets served by the branches purchased from Chase at mid-year 1995; outstandings at these branches have risen from $12 million at the July 1995 acquisition date to nearly $61 million at year-end 1996. This marks the fourth consecutive year in which total loan growth has exceeded 15%; loans in 1995 rose a strong $77 million or 16.0% while the prior year's increase was $65 million or 15.6%. Loans have been on the rise since March 1992, some nine months after the 1990 recession had statistically ended on the national level. During fourth quarter 1996, loans outstanding increased by $25.8 million or 4.1%, significantly better than the $15.2 million or 2.8% growth during fourth quarter 1995 but slightly below the third quarter 1996 pace. Comparing the components of loan growth in 1996 versus 1995, the increase in business lending was slightly less this year at 40% of $92 million in total loan growth versus 46% of 1995's $77 million increase. About 36% of 1996's loan growth took place in the consumer indirect area compared to the 43% share in 1995. Consumer direct loans accounted for 20% of this year's increase, up sharply from 7% in the prior year; $13 million of the $18 million increase in 1996 reflects fixed rate home equity loans formerly categorized as consumer mortgages. Lastly, the share of this year's total loan increase from consumer mortgages remained unchanged at 1995's level of 5%. The following discusses the underlying reasons for these changes by each of the Company's four major lending activities or lines of business. The combined total of general purpose business lending, dealer floor plans, mortgages on commercial property, and farm loans (the latter three categories totaling 20% of the commercial loan portfolio) is characterized as the Company's business lending activity. At $211 million, this segment represents 32% of loans outstanding at year end, having expanded its share by three percentage points since year-end 1993. This relatively high mix compared to the bank's other loan types is largely attributable to borrowing by local commercial businesses. Outstandings climbed over $37 million or 21% in 1996. Comparative growth rates were 26% for 1995 and 15% in 1994. This year's growth resulted from strong business development efforts, the aforementioned contribution of the 12 former Chase branches (accounting for a $21 million increase in commercial loans), and the addition of a number of experienced commercial lenders over the last few years. Almost 90% of the Bank's total number of commercial loans have balances less than $100,000, which as a group constitutes approximately 37% of commercial loan outstandings. Commercial loans up to $250,000 comprise another quarter of loans outstanding while loans in the size range of $250,000-$500,000 amount to 12%. Loans with balances greater than $500,000 represent 27% of the portfolio; about 8 percentage points of this segment represents floor plan loans to automobile dealers. Demand for installment debt indirectly originated through automobile, marine, and mobile home dealers continued to be very active in 1996 for the third consecutive year. Outstandings ended 1996 nearly 24% or $33 million higher compared to growth of 32% or $33 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 and has continued with success since then. This portfolio segment, of which more than 92% relates to automobile lending (65% used vehicles versus 35% new), constitutes over 26% of total loans outstanding, up from its low of 18% at year-end 1993. The segment of the Company's loan portfolio committed to consumer mortgages includes both fixed and adjustable rate residential lending. It accounts for $152 million or 23% of total loans outstanding. The modest growth during the last two years ($5 million or 3.5% in 1996, and $3.4 million or 2.4% in 1995), reflects 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, $4.3 million in 1995 and $7.2 million this year, is to develop a meaningful source of servicing income as well as to provide an additional tool to manage interest rate risk. The consumer mortgage line of business as of year-end 1996 is $13.0 million lower as a result of reclassifying CBNA's relatively new and fast growing fixed rate home equity line of credit product to the direct consumer lending activity. Had this reclassification not occurred, the 1996 mortgage portfolio growth would have been $18 million or 12% higher than 1995. The direct consumer lending activity has increased modestly over the last four years. 1996 outstandings rose 17.4% or $18 million (up 4.8% or $5 million before the reclassification mentioned above) versus 5.6% or $5 million in 1995. This line of business is comprised of conventional installment loans (including some isolated installment lending to small businesses), personal loans, student loans (which are sold once principle amortization begins), and borrowing under variable and now fixed rate home equity lines of credit. With the exception of the latter category, growth has occurred only in the installment loan category, with a slight pick-up in the last two years due to an apparent movement in consumer preference toward this form of simplified fixed-rate borrowing. The consumer direct segment as a percent of total loans trended downward from 1993 to 1995; despite the recent stronger dollar increase, 1996's portfolio share is essentially equal to 1995's level of 19% of total loans outstanding.
NATURE OF LENDING Mix at Year End ($ million and %) - -------------------------------------------------------------------------------------------------------------------------- Total Loans Consumer Mortgage Business Lending Consumer Indirect Consumer Direct - -------------------------------------------------------------------------------------------------------------------------- Year 000's % Change 000's % Total % Change 000's % Total % Change 000's % Total % Change 000's % Total % Change - ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 1996 $652 16.5% $152 23% 3.2% $211 32% 21.3% $168 26% 24.2% $122 19% 17.4% 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%
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: * Consumer Consumer Consumer Business Total Yield on (000's) Direct Indirect Mortgages Loans Loans Loans - --------------------------------------------------------------------------------------------------------------------- Amount and Change From Preceding Quarter Quarterly Average - --------------------------------------------------------------------------------------------------------------------- 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% 4.0% 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% 2.0% 1.6% 5.6% 2.8% 0.02 - --------------------------------------------------------------------------------------------------------------------- March 31, 1996 Amount 105,759 138,821 150,301 181,614 576,495 9.52% Change 1.4% 2.7% 2.6% 4.3% 2.9% -0.13 - --------------------------------------------------------------------------------------------------------------------- June 30, 1996 Amount 105,895 149,197 155,579 188,868 599,538 9.44% Change 0.1% 7.5% 3.5% 4.0% 4.0% -0.08 - --------------------------------------------------------------------------------------------------------------------- September 30, 1996 Amount 109,137 159,996 161,388 196,171 626,693 9.36% Change 3.1% 7.2% 3.7% 3.9% 4.5% -0.08 - --------------------------------------------------------------------------------------------------------------------- December 31, 1996 Amount 122,087 167,629 151,691 211,068 652,474 9.46% Change 11.9% 4.8% -6.0% 7.6% 4.1% 0.10 - --------------------------------------------------------------------------------------------------------------------- Change from December 31, 1995 to December 31, 1996 Amount 17,770 32,522 5,130 36,901 92,322 (0) % Change 17.0% 24.1% 3.5% 21.2% 16.5% -2.0% - --------------------------------------------------------------------------------------------------------------------- Year-to-Date Average Outstandings (000's) December 31, 1995 $101,188 $122,765 $143,113 $152,695 $519,762 9.61% December 31, 1996 $110,367 $148,778 $153,433 $190,139 $602,717 9.45% Change - Amount 9,179 26,013 10,320 37,444 82,955 -0.16% -% 9.1% 21.2% 7.2% 24.5% 16.0% N/A - --------------------------------------------------------------------------------------------------------------------- Loan Mix December 31, 1995 19.5% 23.6% 27.5% 29.4% 100.0% December 31, 1996 18.3% 24.7% 25.5% 31.5% 100.0% Change -1.2% 1.1% -2.1% 2.2% ----- - --------------------------------------------------------------------------------------------------------------------- Note: (a) Totals and change calculations may not foot due to rounding.
Maturities and Sensitivities of Loans to Changes in Interest Rates The following table shows the amount of loans outstanding as of December 31, 1996 which, based on remaining scheduled repayments of principal, are due in the periods indicated:
-------------------------------------------------------------------------- At December 31, 1996 -------------------------------------------------------------------------- Maturing Maturing in After One But Maturing One Year or Within Five After Five Total Book Less Years Years Value (In thousands) Commercial, financial, and agricultural $51,649 $42,513 $26,972 $121,134 Real estate - construction 0 0 0 0 Real estate - mortgage 25,774 62,506 202,063 290,343 Installment 88,927 140,168 11,902 240,997 ------- -------- ------- ------- TOTAL $166,350 $245,187 $240,937 $652,474 ========= ========= ========= ========
The following table sets forth the sensitivity of the loan amounts due after one year to changes in interest rates: ---------------------------------------- At December 31, 1996 ---------------------------------------- Fixed Rate Variable Rate Due after one year but within five years $203,972 $41,215 Due after five years 209,114 31,822 -------- ------ TOTAL $413,086 $73,037 ========= ======= Non-Performing Assets/Risk Elements The following table presents information concerning the aggregate amount of non-performing assets:
------------------------------------------------------------------ At December 31, ------------------------------------------------------------------ 1996 1995 1994 1993 1992 ----- ---- ---- ---- ---- (Dollars in thousands) Loans accounted for on a non-accrual basis $2,023 $1,328 $2,396 $1,738 $881 Accruing loans which are contractually past due 90 days or more as to principal or interest payments 823 667 862 653 726 ---- ---- ---- ---- ---- Total non-performing loans 2,846 1,995 3,258 2,391 1,607 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" 32 0 15 243 356 Other real estate 746 614 223 433 459 ---- ---- ---- ---- --- Total non-performing assets $3,624 $2,609 $3,496 $3,067 $2,422 ====== ======= ======= ======= ====== Ratio of allowance for loan losses to period-end loans 1.25% 1.25% 1.30% 1.37% 1.37% Ratio of allowance for loan losses to period-end non-performing loans 285.58% 349.69% 192.79% 238.67% 310.05% Ratio of allowance for loan losses to period-end non-performing assets 224.27% 267.40% 179.67% 186.06% 205.72% Ratio of non-performing assets to period-end total loans and other real estate owned 0.55% 0.47% 0.72% 0.73% 0.67%
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. Provision and Reserve for Loan Losses Nonperforming loans, defined as nonaccruing loans plus accruing loans 90 days or more past due, ended 1996 at a favorable $2.8 million. This level is approximately $800,000 higher than one year earlier, primarily due to increased but manageable levels of non-accruing commercial and mortgage loans. Accordingly, the ratio of nonperforming loans to total loans rose slightly to .44% versus .36% one year earlier. As of September 30, 1996, when the nonperforming loan ratio stood at .51%, the Company's asset quality was in the favorable 21st percentile compared to peers. The ratio of nonperforming assets (which additionally include troubled debt restructuring and other real estate) to total loans plus OREO is also favorable at .55%. Total delinquencies, defined as loans 30 days or more past due and nonaccruing, have trended slightly higher as a percent of total loans over the last two years, generally fluctuating within a range of 1.1% to 1.3% in 1995 versus 1.2% to 1.4% in 1996; a brief seasonal or event-related spike outside these ranges occurred during both periods. Though commercial loan delinquencies have followed a modest down-trend over the 24 month period, installment loan delinquencies exhibited a slight up-trend, averaging 1.66% for the last six months of 1996 versus 1.45% for the same prior year period. Real estate delinquencies, though fluctuating less than installment loans, have shown a similar slight upward tendency, moving generally within a range of .9% to 1.05% in 1996 as compared with .6% to .8% in 1995. As of year-end 1996, total delinquencies for commercial loans, installment loans, and real estate mortgages were 1.17%, 2.12%, and .96% , respectively. These measures compare favorably to delinquencies of peer bank holding companies as of September 30, 1996 of 2.69%, 2.24%, and 2.23%, respectively. Management strives to maintain its total and component category delinquencies below a 2% internal guideline, and is comfortable that this objective continues to be realistic. As of September 30, 1996, when overall delinquencies were at 1.31%, 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, loan servicing on a regionally-focused level, 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. 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) 1996 1995 1994 1993 1992 ----- ---- ---- ---- ---- Amount of loans outstanding at end of period $658,367 $573,620 $510,739 $443,601 $391,363 ========= ========= ========= ========= ======== Daily average amount of loans (net of unearned discounts) $602,717 $519,762 $446,135 $382,680 $351,034 ========= ========= ========= ========= ======== Balance of allowance for possible loan losses at beginning of period 6,976 6,281 5,706 4,982 4,312 Loans charged off: Commercial, financial, and agricultural 324 454 502 236 951 Real estate construction 0 0 0 0 0 Real estate mortgage 26 48 41 19 92 Installment 2,108 1,256 1,072 1,155 1,558 ------ ------ ------ ------ ----- TOTAL LOANS CHARGED OFF 2,458 1,758 1,615 1,410 2,601 Recoveries of loans previously charged off: Commercial, financial, and agricultural 224 213 38 85 25 Real estate construction 0 0 0 0 0 Real estate mortgage 1 27 1 1 0 Installment 488 448 449 542 519 ---- ---- ---- ---- --- TOTAL RECOVERIES 713 688 488 628 544 Net loans charged off 1,745 1,070 1,127 782 2,057 ------ ------ ------ ---- ----- Additions to allowance charged to expense (1) 2,897 1,765 1,702 1,506 2,727 ------ ------ ------ ------ ----- Balance at end of period 8,128 6,976 6,281 5,706 4,982 ====== ====== ====== ====== ===== Ratio of net chargeoffs to average loans outstanding 0.29% 0.21% 0.25% 0.20% 0.59%
(1) The additions to the allowance during 1992 through 1996 were determined using actual loan loss experience and future projected loan losses and other factors affecting the estimate of possible loan losses. Another measure of the Company's strong asset quality is a low net charge-offs record, which for the fourth consecutive year was below .30% of average loans. As a result of higher installment loan charge-offs, gross charge-offs rose 39.8% to $2.5 million, or .41% of average loans outstanding versus .34% in 1995. This year's recoveries rose to an all-time record in dollar amount to $713,000, while down slightly from 1995's record high in percentage terms to 40.8% of prior year gross charge-offs. As a result, net charge-offs at $1.7 million represented an acceptable .29% ratio to average loans. As of September 30, 1996, the net charge-off ratio was slightly better than the peer norm. A timely charge-off policy and relatively low nonperforming loans have enabled the Company to carry a reserve for loan losses well below peers. As a percent of total loans, the loss reserve ratio has remained flat at 1.25% since mid-1995 when the former Chase branches were acquired. Though the reserve ratio is presently in the modest 29th peer percentile, coverage over nonperforming loans as of September 30, 1996 was well above the norm in the 73rd percentile; management believes the year-end level at 286% to be ample. The Company's small business loan orientation has historically reduced the likelihood of large, single borrower charge-offs. Another measure of comfort to management is that after conservative allocation by specific customer and loan type, over 11% of loan loss reserves remains available for absorbing general, unforeseen loan losses. The annual loan loss provision has characteristically been well in excess of net charge-offs, which have had coverage of over 1.3 times since 1990; this year's coverage exceeded almost 1.7 times. This practice has enabled a steady increase in the loan loss reserve level, which rose by almost $1.2 million or 16.5% to an all-time high of $8.1 million at year-end 1996. As a percentage of average loans, the annual loan loss provision was above the peer norm in the 67th percentile as of September 30, 1996. For full year 1996, the loss provision ratio was .48%, having remained in a tight .36% to .39% range during the prior three year period. This upward movement reflects the need to cover 1996's higher net charge-offs and maintain pace with record loan growth so that the loss reserve ratio is maintained at the targeted 1.25% level. 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, 1996 1995 1994 1993 1992 ----------------------------------------------------------------------------------------------------------------- Percent of Percent of Percent of Percent of Percent of Loans in Loans in Loans in Loans in Loans in Each Each Each Each Each Amount of Category to Amount of Category to Amount of Category to Amount of Category to Amount of Category to Allowance Total Loans Allowance Total Loans Allowance Total Loans Allowance Total Loans Allowance Total Loans --------- ----------- --------- ----------- --------- ----------- --------- ----------- --------- ----------- (Dollars in thousands) Commercial, financial, & agricultural $2,668 18.40% $2,035 17.35% $1,832 15.91% $3,464 15.74% $1,864 12.95% Real estate - construction 0 0.00% 0 0.00% 0 0.00% 0 0.00% 0 0.00% Real estate - mortgage 2,234 44.10% 2,255 45.23% 2,222 46.95% 341 49.01% 220 45.45% Installment 2,309 37.50% 1,527 37.42% 1,422 37.14% 1,342 35.25% 1,400 41.60% Unallocated 917 N/A 1,159 N/A 805 N/A 559 N/A 1,498 N/A Total $8,128 100.00% $6,976 100.00% $6,281 100.00% $5,706 100.00% $4,982 100.00%
Funding Sources Typical of most commercial banking institutions today is the need to rely on a variety of funding sources to support its earning asset base as well as to achieve targeted growth objectives. There are three primary sources of funding that comprise CBSI's overall funding matrix, which considers maturity, stability, and price: deposits of individuals, partnerships and corporations (IPC deposits); collateralized municipal deposits; and capital market borrowings. - ------------------------------------------------------------------------------------------------------------------ Sources of Funds Average 4th Quarter Balances ($ Million) - ------------------------------------------------------------------------------------------------------------------
Total Funds Year IPC Deposits Public Funds Capital Borrowings Sources Amount % Total Amount % Total Amount % Total Amount ------ ------- ------ ------- ------ ------- ------ 1996 $903 75.6% $124 10.4% $168 14.1% $1,195 1995 $921 87.4% $128 12.1% $6 5.0% $1,055 1994 $583 71.7% $101 12.4% $129 15.9% $813
The Company's funding matrix continues to benefit from a high level of IPC deposits, which reached an all-time fourth-quarter high of $903 million, up $18 million or 2% from the comparable 1995 period. IPC deposits are generally considered to be a bank's most attractive source of funding because of their general stability and relatively low cost, and because they represent a working customer base with the potential to be cross-sold a variety of loan, deposit and other financial service-related products. Strongly impacting the Company's IPC funding source was the Chase branch deposit acquisition consummated in July 1995. Following initial deposit attrition of a modest 4.5% through year-end 1995, steady acclimation of this new customer base within the Company helped eliminate any further erosion of this funding source during 1996. Based on year-end 1996 figures, total Chase IPC deposits were virtually the same as one year earlier. The mix of CBSI's IPC deposits has changed over the last four years. The steady growth in time deposit share, from 35% of deposits in 1993 to 47% this year, 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 as suggested by the seven percentage point growth in time deposit share in 1995. In 1996, CBSI implemented a strategy to gain new time deposits as well as lengthen existing deposit maturities to improve its interest sensitivity profile by offering an attractive 18 and 30 month certificate of deposit product. More than $113 million in deposits were obtained, of which in excess of 15% represented new funds to the Bank. Deposits of local municipalities remained basically unchanged during the past year, with balances for fourth quarter 1996 averaging $124 million versus $128 million for the same quarter in 1995. 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. Utilization of municipal deposits has been decreasing over the last three years as a percent of total funding sources. 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 averaged $168 million or 14% of total funding sources for fourth quarter 1996 compared to $6 million or .6% of total funding sources for the same period in 1995, which followed repayment of previous borrowing levels with the net proceeds from the Chase branch purchase. Continued growth in balance sheet assets during 1996 was largely responsible for the need to rebuild borrowings to the current level of 14% of total sources. As of December 31, 1996, half or $100 million of borrowings had original terms of one year or more. - ------------------------------------------------------------------------------------------------------------------------------------ Core Deposit Mix Average 4th Quarter Balances ($ Million) - ------------------------------------------------------------------------------------------------------------------------------------
Year Demand Deposits Interest Checking Regular Savings Money Market Time Deposits Total Core Amount % Total Amount % Total Amount % Total Amount % Total Amount % Total Deposits ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- -------- 1996 $131 14.5% $80 8.9% $216 23.9% $42 4.7% $434 48.1% $903 1995 $129 14.0% $83 9.0% $241 26.0% $53 6.0% $415 45.0% $921 1994 $93 16.0% $49 9.0% $167 29.0% $45 8.0% $229 38.0% $583
The average daily amount of deposits and the average rate paid on each of the following deposit categories is summarized below for the years indicated:
Years ended December 31, ------------------------------------------------------------------------------------ 1996 1995 1994 ------------------------------------------------------------------------------------ Average Average Average Average Average Average Balance Rate Paid Balance Rate Paid Balance Rate Paid ($ thousand) Non-interest-bearing demand deposits $143,995 N/A $123,952 N/A $98,587 N/A Interest-bearing demand deposits 100,278 1.40% 83,812 1.66% 65,805 1.68% Regular savings deposits 241,199 2.87% 211,867 3.01% 183,881 2.85% Money market deposits 65,448 2.48% 70,925 2.77% 73,757 2.57% Time deposits 481,250 5.49% 380,494 5.53% 229,449 4.34% -------- ------ -------- ------- -------- ------ Total average daily amount of domestic deposits $1,032,170 3.52% $871,050 3.53% $651,479 2.79%
The remaining maturities of time deposits in amounts of $100,000 or more outstanding at December 31, 1996 and 1995 are summarized below: ------------------------------------------ At December 31, ($ thousands) ------------------------------------------ 1996 1995 Less than three months $47,556 $42,639 Three months to six months 9,944 13,574 Six months to one year 7,856 9,169 Over one years 3,558 5,859 ------ ------ $68,914 $71,241 ======== ======= Borrowings The following table summarizes the outstanding balances of short-term borrowings of the Company for the years indicated: At December 31, --------------------------------- 1996 1995 1994 ---- ---- ---- (Dollars in Thousands) Federal funds purchased $31,800 $0 $57,300 Term borrowings at banks (original term) 90 days or less 0 0 80,000 1 year 65,000 0 25,000 ---------- --------- ---------- Balance at end of period $96,800 $0 $162,300 ========== ========= ========== Daily Average during the year $46,535 $85,407 $86,777 Maximum month-end balance $96,800 $188,200 $163,700 Weighted average rate during the year 5.63% 6.29% 4.48% Year-end average rate 6.07% 0.00% 5.44% 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 (000's) Loans (a) (b) Borrowings Liabilities - --------------------------------------------------------------------------------------------------------------------------- Amount and Average Yield/Rate - --------------------------------------------------------------------------------------------------------------------------- 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% - --------------------------------------------------------------------------------------------------------------------------- March 31, 1996 Amount $569,267 $494,710 $884,358 $151,235 $26,143 $920,046 Yield/Rate 9.52% 7.57% 3.57% 3.29% 5.76% 4.14% - --------------------------------------------------------------------------------------------------------------------------- June 30, 1996 Amount $589,407 $534,653 $893,135 $146,136 $73,858 $969,902 Yield/Rate 9.44% 7.48% 3.52% 3.39% 5.62% 4.18% - --------------------------------------------------------------------------------------------------------------------------- September 30, 1996 Amount $611,922 $573,991 $900,950 $125,771 $144,987 $1,027,016 Yield/Rate 9.36% 7.69% 3.54% 3.14% 5.83% 4.31% - --------------------------------------------------------------------------------------------------------------------------- December 31, 1996 Amount $639,764 $574,944 $903,111 $124,097 $168,011 $1,048,880 Yield/Rate 9.46% 7.53% 3.62% 3.26% 5.94% 4.45% - --------------------------------------------------------------------------------------------------------------------------- Change in Quarterly Average from December 31, 1995 to December 31, 1996 Outstandings: Amount $89,284 $66,913 ($18,000) ($3,529) $162,407 $139,536 % Change 16.22% 13.17% -1.95% -2.76% 2898.05% 15.34% Yield/Rate: Change (% pts) -0.19 0.08 0.02 0.02 0.55 0.32 - --------------------------------------------------------------------------------------------------------------------------- Year-to-Date Average Outstandings 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% December 31, 1996 - Amount $602,717 $544,738 $895,435 $136,745 $103,541 $991,726 Yield/Rate 9.45% 7.56% 3.56% 3.28% 5.83% 4.28% - --------------------------------------------------------------------------------------------------------------------------- Change in YTD Averages from December 31, 1995 to December 31, 1996 Outstandings: Amount $82,955 $89,243 $148,597 $12,533 $14,735 $155,822 % Change 15.96% 19.59% 19.90% 10.09% 16.59% 18.64% Yield/Rate: Change (% pts) -0.16 0.10 0.01 -0.15 -0.40 -0.06 - --------------------------------------------------------------------------------------------------------------------------- Note: (a) Defined as total deposits minus municipal deposits; includes CDs > $100,000 for individuals and businesses. (b) Rate includes impact of noninterest bearing transaction accounts. (c) Totals and change calculations may not foot due to rounding.
Investments and Asset/Liability Management The primary objective of CBSI's investment portfolio is to prudently provide a degree of low-risk, quality assets to the balance sheet. This must be accomplished within the constraints of: (a) absorbing funds when loan demand is low and infusing funds when demand is high; (b) implementing certain interest rate risk management strategies which achieve a relatively stable level of net interest income; (c) providing both the regulatory and operational liquidity necessary to conduct day-to-day business activities; (d) considering investment risk-weights as determined by regulatory risk-based capital guidelines; and (e) generating a favorable return without undo compromise of other requirements.
INVESTMENT PORTFOLIO MIX At Year End, Excludes Money Market Instruments ($ Million) - ------------------------------------------------------------------------------------------------------------------------------------ Invest/ Total State and Political Earning Investments Mortgage-Backed U.S. Governments Subdivisions Other Assets - ------------------------------------------------------------------------------------------------------------------------------------ Year Amount % Change Amount % Change % Total Amount % Change % Total Amount % Change % Total Amount % Change % Total (%) - ---- ------ -------- ------ -------- ------- ------ -------- ------- ------ -------- ------- ------ -------- ------- ----- 1996 $578 23.5% $250 28.2% 43% $288 22.6% 50% $18 12.5% 3% $22 0.0% 4% 47.0% 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%
Consistent with the Company's long-standing practice, all investment strategies implemented during 1996 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. Throughout 1996, the balance sheet of the Bank exhibited a structurally asset sensitive profile, in large part due to the continuing influence of the Chase branch deposit acquisition consummated early in the third quarter of 1995. This profile is illustrated by the year-end gap maturity matrix which follows the liquidity section of this analysis. As a result, investment strategies pursued during the past year were primarily designed to manage this asset sensitive interest rate risk exposure, with a focus on improving the relative performance of net interest income in both rising and falling interest rate environments. Among these strategies was the use of incremental capital market borrowings when favorable investment buying opportunities existed. Examples of investment purchases in 1996 include fixed rate U.S callable agency debentures with 3 to 5 years of initial call protection, as well as longer-dated U.S. agency collateralized mortgage obligations (CMOs). The result of these investment strategies was a $105 million or 22% increase in CBSI's investment portfolio in 1996 to $578 million; this compares to an $89 million or 23% increase in the prior year. As a consequence of the Company's branch acquisition strategy beginning in 1994, which initially has provided a very high level of acquired deposits relative to loans, the ratio of investments to earning assets has steadily increased, ending 1996 at 47.0% or 1.5 percentage points greater than the prior year end. The composition of the portfolio throughout the period has heavily favored U.S. Governments and U.S. Agency mortgage-backed obligations, achieving effective use of regulatory risk-based capital. As of year-end 1996, these two security types (excluding Federal Home Loan Bank stock and Federal Reserve Bank stock) accounted for 97% of total portfolio investments versus 96% in the prior year. The average life of the portfolio, including the exercise of embedded call options, decreased to 3.0 years as of December 31, 1996. As of year-end 1995 and 1994, the average life of the portfolio stood at 4.5 years and 3.5 years, respectively. Callable bond investment strategies pursued during 1995 and 1994 were largely responsible for this decline in average life. In addition to strong investment growth, the average investment yield improved by 12 basis points from 7.45% in 1995 to 7.57% in 1996. However, this improvement in part resulted from favorable nonrecurring income, largely in the third quarter, amounting to $344,000. This event coincided with the one-time assessment imposed on the Bank in the same quarter to build the Savings Association Insurance Fund (SAIF). Additionally, a $221,000 discount was taken into income when a $2.8 million bond was called early in 1996; this resulted from the generally accepted accounting requirement to accrue a bond discount over the contractual life of the instrument rather than assuming it will be called. Without these two items, the 1996 average investment yield would have been 7.47% or slightly higher than the 1995 yield. The December 1996 portfolio yield averaged 7.57% compared to 7.56% for the same month one year prior. Through September 30, 1996, reflecting the bulk of the 1996 non-recurring investment income, the Company's investment yield was in the very favorable 95th peer bank percentile. For the six months ended June 30, 1996, which included the bond discount impact, the investment yield was in the 96th peer percentile. Net gains on the sale of securities were $32,000 in 1996 versus losses of $152,000 in 1995. Gains and losses incurred by the portfolio are the result of normal investment management activity, which focuses on improving long-term portfolio earnings and profitability. The following table sets forth the amortized cost and market value for the Company's held-to-maturity investment securities portfolio:
At December 31, 1996 1995 1994 ------------------------------------------------------------------------------------------ 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 agencies $248,264 $254,437 $202,802 $212,415 $154,672 $154,367 Obligations of states and political subdivisions 17,796 18,292 15,409 16,077 17,304 17,772 Corporate securities 2 2 2 2 2 2 Mortgage-backed securities 103,795 105,765 97,593 99,848 120,178 115,613 -------- -------- ------- ------- -------- ------- Total $369,857 $378,496 $315,806 $328,342 $292,156 $287,754 ========= ========= ========= ========= ========= ========
The following table sets forth the amortized cost and market value for the Company's available-for-sale investment portfolio: At December 31, 1996 1995 1994 ------------------------------------------------------------------------------------ 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 agencies $39,684 $40,005 $32,334 $32,695 $33,691 $32,415 Obligations of states and political subdivisions 437 452 435 459 3,432 3,472 Corporate securities 0 0 0 73 567 568 Mortgage-backed securities 145,276 146,555 96,326 97,595 37,235 35,198 Equity securities (1) 20,282 20,282 20,070 20,008 14,149 14,158 Federal Reserve Bank common stock 1,403 1,403 1,396 1,396 552 552 ------ ------ ------ ------ ---- --- Total $207,082 $208,697 $150,561 $152,226 $89,626 $86,363 ========= ========= ========= ========= ======== ======= Net unrealized gains/(losses) on available-for-sale portfolio 1,614 1,665 (3,262) ------ ------ ------- Total Carrying Value $578,553 $468,032 $378,520 ========= ========= ======== (1) Includes $19,709; $19,678; and $13,805 FHLB common stock at December 31, 1996, 1995 and 1994, respectively.
The following table sets forth as of December 31, 1996, 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, 1996 Amount Amount Amount Maturing Maturing Maturing After One After Five Amount Total Within Year but Years but Maturing Cost One Year Within Within After Book or Less Five Years Ten Years Ten Years Value -------------------------------------------------------------------------------- Held-to-Maturity Portfolio U.S. Treasury and other U.S. government agencies $0 $9,534 $216,228 $22,497 $248,259 Mortgage-backed securities 0 4,324 34,468 65,002 103,794 States and political subdivisions 9,875 7,048 873 0 17,796 Other 0 7 0 0 7 -------------------------------------------------------------------------------- Total Held-to-Maturity Portfolio Value $9,875 $20,913 $251,569 $87,499 $369,856 ================================================================================ Weighted Average Yield for Year (1) 5.07% 7.75% 7.82% 7.85% 7.75% Available-for-Sale Portfolio U.S. Treasury and other U.S. government agencies $0 $6,012 $23,386 $10,287 $39,685 Mortgage-backed securities 2,007 4,272 22,157 116,840 145,276 States and political subdivisions 250 187 0 0 437 Other 0 0 0 0 0 -------------------------------------------------------------------------------- Total Available-for-Sale Portfolio Value $2,257 $10,471 $45,543 $127,127 $185,398 ================================================================================ Weighted Average Yield for Year (1) 8.68% 6.32% 7.31% 7.20% 7.20%
(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. 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 1996, this ratio was 17.3% and 16.1%, respectively. 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, 1996: GAP REPORT As of December 31, 1996 (COMMUNITY BANK SYSTEM, INC.)
Volumes Daily 1-30 31-60 61-90 91-180 181-360 13-24 25-36 37-60 Over 60 ($000's) Floating Days Days Days Days Days Months Months Months Months Total - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS: Due from banks 52,535 52,504 Money Market Investments 0 Fixed Rate Debentures 12,846 73,425 35,933 120,544 16,535 22,514 281,797 Floating Rate Debentures 6,012 6,012 Fixed Rate Mortgage Backed 2,283 2,254 2,224 6,501 12,711 25,190 21,204 27,250 86,262 185,879 Floating Rate Mortgage Backed 64,270 64,270 Other Investments 399 1,239 3,998 389 1,790 2,260 3,205 2,071 2,007 23,237 40,595 - ------------------------------------------------------------------------------------------------------------------------------------ Total Investments 399 73,804 6,252 2,613 21,137 88,396 64,328 143,819 45,792 132,013 578,553 - ------------------------------------------------------------------------------------------------------------------------------------ Mortgages: Adjustable Rate 1,698 1,829 4,262 6,728 17,637 32,154 Fixed Rate 2,263 2,228 2,280 6,538 12,428 22,438 19,681 32,282 33,351 133,489 Variable Home Equity 31,975 31,975 Commercial Variable 136,477 11,918 148,395 Other Commercial 2,453 2,472 2,491 7,587 15,702 30,327 7,951 (353) 68,630 Installment, Net 7,911 6,760 6,973 20,324 38,979 69,084 52,838 29,782 5,178 237,829 - ------------------------------------------------------------------------------------------------------------------------------------ Total Loans 182,777 13,289 16,006 41,177 84,746 121,849 80,470 62,064 50,094 652,472 Loan Loss Reserve (8,127) (8,127) Other Assets 68,432 68,432 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS 399 256,581 19,541 18,619 62,314 173,142 186,177 224,289 107,856 294,947 1,343,865 AVERAGE YIELD 5.77% 8.76% 8.03% 8.68% 8.59% 8.57% 8.73% 8.28% 8.26% 4.42% 7.64% ==================================================================================================================================== LIABILITIES AND CAPITAL Demand Deposits 144,352 144,352 Savings / NOW 1,345 1,345 1,345 4,035 21,851 16,140 285,766 331,827 Money Markets 38,753 16,966 55,719 CD's / IRA /Other 56,709 31,808 27,559 70,920 138,610 102,800 45,723 20,435 751 495,315 - ------------------------------------------------------------------------------------------------------------------------------------ Total Deposits 58,054 33,153 28,904 113,708 177,427 118,940 45,723 20,435 430,869 1,027,213 Fed Funds 31,800 31,800 Term Funds 65,000 25,000 25,000 35,000 15,000 165,000 Other Liabilities 10,499 10,499 Capital 109,353 109,353 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND CAPITAL 89,854 33,153 93,904 138,708 202,427 153,940 45,723 35,435 550,721 1,343,865 AVERAGE RATE 5.26% 5.16% 5.49% 4.60% 4.96% 5.57% 6.07% 6.09% 1.25% 3.60% ==================================================================================================================================== GAP 399 166,727 (13,612)(75,285) (76,394) (29,285) 32,237 178,566 72,421 (255,774) CUMULATIVE GAP 399 167,126 153,514 78,229 1,835 (27,450) 4,787 183,353 255,774 0 CUMULATIVE GAP / TOTAL ASSETS 0.12% 0.11% 0.06% 0.00% -0.02% 0.00% 0.14% 0.19% 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.
GAP MATURITY MATRIX As of December 31, 1996 (COMMUNITY BANK SYSTEMS, 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 - ------------------------------------------------------------------------------------------------------------------------------------ 294,947 107,856 224,289 186,177 173,142 62,314 18,619 19,541 256,581 399 1,343,865 Liabilities 4.42% 8.26% 8.28% 8.73% 8.57% 8.59% 8.68% 8.03% 8.76% 5.77% 7.64% - ------------------------------------------------------------------------------------------------------------------------------------ >60 550,721 294,947 107,856 147,918 550,721 Months 1.25% 3.17% 7.01% 7.03% 4.96% 37-60 35,435 35,435 35,435 Months 6.09% 2.19% 2.19% 25-36 45,723 40,936 4,787 45,723 Months 6.07% 2.21% 2.66% 2.26% 13-24 153,940 153,940 153,940 Months 5.57% 3.16% 3.16% 181-360 202,427 27,450 173,142 1,835 202,427 Days 4.96% 3.77% 3.61% 3.64% 3.63% 91-180 138,708 60,479 18,619 19,541 40,069 138,708 Days 4.60% 4.00% 4.08% 3.43% 4.17% 3.98% 61-90 93,904 93,904 93,904 Days 5.49% 3.28% 3.28% 31-60 33,153 33,153 33,153 Days 5.16% 3.60% 3.60% 1-30 89,854 89,455 399 89,854 Days 5.26% 3.51% 0.51% 3.50% Daily - ------------------------------------------------------------------------------------------------------------------------------------ Totals 1,343,865 294,947 107,856 224,289 186,177 173,142 62,314 18,619 19,541 256,581 399 1,343,865 Net Interest Margin 3.60% 3.17% 7.01% 5.39% 3.24% 3.61% 3.99% 4.08% 3.43% 3.54% 0.51% 4.04% - ------------------------------------------------------------------------------------------------------------------------------------ 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
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. Impact of New Accounting Pronouncements Effective January 1, 1996, Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation" requires 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. The Company has elected 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. The adoption of this statement did not have a significant effect on the Company's financial statements. Effective January 1, 1997, Financial Accounting Standards Board No. 128 "Earnings Per Share" changes the reporting requirements previously found in APB 15 "Earnings Per Share" and makes them comparable to International EPS standards. It replaces the presentation of Primary EPS with Basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures. Basic EPS excludes dilution of common stock equivalents. The adoption of FASB No. 128 "EPS" is not expected to have a significant effect on EPS as previously reported. Subsequent Events Effective January 2, 1997, the Company adopted FASB 128 "Earnings Per Share". On January 17, 1997 the common shares of Northeastern Computer Services were transferred from the Company to Community Bank, N.A. as its wholly owned subsidiary and renamed CBNA Treasury Management Corporation. This subsidiary manages the treasury function of the Bank. On January 29,1997, CBSI announced the placement of $30 million of fixed rate capital securities through Community Capital Trust I, a newly formed Delaware business trust, controlled by CBSI. The 9.75% Capital Securities, Series A of Community Capital Trust I were priced at 99.325% of par to yield 9.82%. Cash distributions will be payable semi-annually on January 31 and July 31, beginning July 31, 1997. The 9.75% Capital Securities are rated Investment Grade ("BBB-") by Thomson BankWatch. On February 11, 1997, the Company entered into an agreement with KeyBank National Association (New York) to acquire eight branches in Western New York with deposits approximating $161 million and loans approximating $24 million. This acquisition is subject to regulatory approval and is expected to close in June 1997. On February 19, 1997 shareholders approved a two-for-one stock split. Shareholders of record at the close of business on February 10, 1997 were issued one additional share of common stock for each share already held distributed on or about March 12, 1997. On March 10, 1997, the Company redeemed the remaining portion or $4.5 million of its 9% Cumulative Perpetual Preferred Stock. On March 24, 1997, the Company entered into an agreement with Fleet Financial Group to acquire twelve branches in Northern New York with deposits approximating $182 million and loans approximating $70 million. This acquisition is subject to regulatory approval and is expected to close in June 1997. 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 56 through 79 of this item. - - Consolidated Statements of Condition -- December, 31, 1996 and 1995 - - Consolidated Statements of Income -- Years ended December 31, 1996, 1995, and 1994 - - Consolidated Statements of Changes in Shareholders' Equity -- Years ended December 31, 1996, 1995, and 1994 - - Consolidated Statement of Cash Flows -- Years ended December 31, 1996, 1995, and 1994 - - Notes to Consolidated Financial Statements -- December 31, 1996 - - Auditors' report Quarterly Selected Data (Unaudited) are contained on page 80
CONSOLIDATED STATEMENTS OF CONDITION COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES December 31, December 31, 1996 1995 ASSETS Cash and due from banks $52,534,726 $56,903,103 Federal funds sold 6,000,000 --------- Total cash and cash equivalents 52,534,726 62,903,103 Investment securities (approximate fair value of $587,193,000 and $480,568,000) 578,553,291 468,031,712 Loans 652,473,875 560,151,655 Reserve for possible loan losses 8,127,752 6,976,385 ---------- --------- Net loans 644,346,123 553,175,270 Premises and equipment,net 16,782,034 16,935,856 Accrued interest receivable 10,790,071 9,150,503 Intangible assets,net 31,241,489 33,970,375 Other assets 9,616,928 7,878,194 ---------- --------- TOTAL ASSETS $1,343,864,662 $1,152,045,013 --------------- -------------- LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits Noninterest bearing $144,351,214 $140,288,323 Interest bearing 882,862,042 876,657,901 ------------ ----------- Total deposits 1,027,213,256 1,016,946,224 Federal funds purchased 31,800,000 0 Borrowings 165,000,000 25,550,000 Accrued interest and other liabilities 10,499,179 9,488,540 ----------- --------- Total liabilities 1,234,512,435 1,051,984,764 -------------- ------------- Shareholders' equity: Preferred stock $1 par, $100 stated value 500,000 shares authorized 45,000 shares issued and outstanding 4,500,000 4,500,000 Common stock $1.25 par value; 5,000,000 shares authorized, 3,737,203 and 3,679,625 shares issued and outstanding 4,671,504 4,599,531 Surplus 33,584,773 32,955,273 Undivided profits 65,691,025 57,079,501 Unrealized net gains on available for sale securities 947,853 977,457 Shares issued under employee stock plan-unearned (42,928) (51,513) -------- -------- Total shareholders' equity 109,352,227 100,060,249 ------------ ----------- $1,343,864,662 $1,152,045,013 --------------- --------------
The accompanying notes are an integral part of the consolidated financial statements. CONSOLIDATED STATEMENTS OF INCOME COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
Years Ended December 31 1996 1995 1994 Interest income: Interest and fees on loans $56,931,658 $49,927,725 $40,699,073 Interest and dividends on investments: U.S. Treasury 493,117 993,238 1,800,534 U.S. government agencies and corporations 21,169,844 15,699,390 8,078,065 States and political subdivisions 1,010,860 1,082,381 1,427,476 Mortgage-backed securities 16,074,631 13,081,731 8,922,926 Other securities 1,672,300 1,180,775 645,828 Interest on federal funds sold and deposits with other banks 336,002 1,421,785 1,133 Total interest income 97,688,412 83,387,025 61,575,035 Interest expense: Interest on deposits 36,383,486 30,772,056 18,213,046 Interest on federal funds purchased 1,152,922 1,118,220 1,622,142 Interest on short-term borrowings 1,465,894 4,257,866 1,360,406 Interest on long-term borrowings 3,420,155 158,756 934,154 Total interest expense 42,422,457 36,306,898 22,129,748 Net interest income 55,265,955 47,080,127 39,445,287 Less: Provision for possible loan losses 2,897,068 1,765,148 1,702,466 Net interest income after provision for loan losses 52,368,887 45,314,979 37,742,821 Other income: Fiduciary and investment services 1,522,653 1,446,898 1,379,566 Service charges on deposit accounts 4,037,150 3,326,274 2,593,282 Commissions on investment products 782,178 473,101 0 Other service charges, commissions and fees 1,719,251 1,323,026 1,519,043 Other operating income 780,834 140,720 130,822 Investment security gains (losses) 32,394 (152,375) (502,343) Total other income 8,874,460 6,557,644 5,120,370 Other expenses: Salaries and employee benefits 19,247,336 16,756,706 13,098,207 Occupancy expense, net 3,073,107 2,608,104 2,042,571 Equipment and furniture expense 2,318,489 1,991,541 1,697,230 Amortization of intangible assets 2,728,886 1,569,478 350,569 Other 10,082,166 10,092,890 9,309,091 Total other expenses 37,449,984 33,018,719 26,497,668 Income before income taxes 23,793,363 18,853,904 16,365,523 Income taxes 9,660,319 7,384,000 6,256,305 NET INCOME $14,133,044 $11,469,904 $10,109,218 Earnings per share $3.67 $3.41 $3.59
The accompanying notes are an integral part of the consolidated financial statements. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES Years ended December 31, 1994, 1995 and 1996
Common Shares Unrealized Issued Net Gains (Losses) Under on Available Preferred Common Stock Undivided Stock Plans For Sale Stock Shares Amount Surplus Profits -Unearned Securities Total Balance at January 1, 1994 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 stock plans 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 stock plans 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 Net income - 1996 14,133,044 14,133,044 Cash dividends: Preferred, $9.00 per share (405,000) (405,000) Common, $ 1.38 per share (5,116,520) (5,116,520) Common stock issued under stock plans 16,953 21,192 554,817 8,585 584,594 Common stock issued in business combination (see Note B) 40,625 50,781 74,683 125,464 Market value adjustment on available for sale investments (29,604) (29,604) Balance at December 31, 1996 $4,500,000 3,737,203 $4,671,504 $33,584,773 $65,691,025 ($42,928) $947,853 $109,352,227
The accompanying notes are an integral part of the consolidated financial statements. CONSOLIDATED STATEMENT OF CASH FLOWS COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES Years ended December 31, 1996, 1995, and 1994 Increase (Decrease) in Cash and Cash Equivalents
Years Ended December 31 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Operating Activities: Net income $14,133,044 $11,469,904 $10,109,218 Adjustments to reconcile net incoome to net cash provided by operating activities: Depreciation 1,948,619 1,618,205 1,434,356 Net amortization of intangible assets 2,728,886 1,569,477 350,569 Net accretion of security premiums and discounts (1,690,528) (1,422,859) (511,974) Provision for loan losses 2,897,068 1,765,148 1,702,466 Provision for deferred taxes (1,840,573) (99,586) (454,968) (Gain)\Loss on sale of investment securities (32,394) 152,375 502,343 (Gain)\Loss on sale of assets (91,780) (140,720) (16,814) Change in interest receivable (1,639,568) (2,493,177) (2,118,557) Change in other assets and other liabilities 1,254,964 (679,527) 2,200,801 Change in unearned loan fees and costs (659,412) (225,949) 76,510 - ------------------------------------------------------------------------------------------------------------------------------------ Net Cash Provided by Operating Activities 17,008,326 11,513,291 13,273,950 - ------------------------------------------------------------------------------------------------------------------------------------ Investing Activities: Proceeds from sales of available for sale investment securities 15,803,016 4,125,000 29,240,847 Proceeds from maturities of held to maturity investment securities 77,849,167 35,575,390 36,579,872 Proceeds from maturities of available for sale investment securities 27,014,893 28,579,113 27,695,203 Purchases of held to maturity investment securities (130,151,635) (97,175,179) (201,943,283) Purchases of available for sale investment securities (99,364,521) (54,418,605) (22,055,530) Net change in loans outstanding (93,336,338) (77,769,646) (65,860,765) Capital expenditures (1,775,188) (8,831,705) (1,992,834) Proceeds from sales of capital assets 0 939,922 0 Premium paid for branch acquisitions 0 (29,621,013) (6,004,913) - ------------------------------------------------------------------------------------------------------------------------------------ Net Cash Used By Investing Activities (203,960,606) (198,596,723) (204,341,403) - ------------------------------------------------------------------------------------------------------------------------------------ Financing Activities: Net change in demand deposits, NOW accounts and savings accounts (22,671,180) 145,537,725 11,755,827 Net change in certificates of deposit 32,938,212 191,770,875 79,566,554 Proceeds from term borrowings 171,800,000 25,000,000 105,300,000 Payments on term borrowings (550,000) (162,300,000) 0 Payment on lease obligation 0 0 (42,036) Issuance of common and preferred stock 457,142 23,321,763 560,456 Cash dividends (5,390,271) (3,866,017) (3,063,437) - ------------------------------------------------------------------------------------------------------------------------------------ Net Cash Provided by Financing Activities 176,583,903 219,464,346 194,077,364 - ------------------------------------------------------------------------------------------------------------------------------------ Change in Cash and Cash Equivalents (10,368,377) 32,380,914 3,009,911 Cash and cash equivalents at beginning of year 62,903,103 30,522,189 27,512,278 - ------------------------------------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $52,534,726 $62,903,103 $30,522,189 ==================================================================================================================================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest $42,090,983 $35,002,244 $21,369,189 ==================================================================================================================================== Cash Paid for Income Taxes $10,654,673 $7,635,999 $5,945,320 ==================================================================================================================================== SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES: Dividends declared and unpaid $1,345,393 $1,214,144 $836,445 Gross change in unrealized net gains and (losses) on available for sale securities ($50,424) $4,927,345 ($5,426,535) ====================================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Community Bank System, Inc. (the Company) is a one bank holding company which owns two active operating subsidiaries, Community Bank, N.A. (the Bank) and Benefit Plan Administrative Services, Inc. (BPA), as well as two other non-active subsidiaries. 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. BPA, located in Utica, New York, provides pension administration and actuarial services to various customers throughout New York State. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, the Bank, BPA, 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, which is 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 has 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 as 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. 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. 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 1995 financial statements 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. 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, 1996 and 1995, other real estate, included in other assets, amounted to $745,504 and $614,478, 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 (3,741,259 in 1996; 3,261,205 in 1995; 2,814,710 in 1994). 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. The Company determines fair values based on quoted market values where available or 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. Reclassification Certain amounts from 1995 and 1994 have been reclassified to conform to the current year's presentation. NOTE B: ACQUISITIONS AND DIVESTITURES In July 1996, the Company acquired all of the outstanding shares of common stock of Benefit Plan Administrators, Inc., a pension administration and actuarial firm, in exchange for 40,625 shares of the Company's common stock. The transaction was accounted for as a pooling of interests, and, accordingly, the consolidated financial statements for 1996 include the accounts of Benefit Plan Administrators. Consolidated financial statements of prior periods presented were not restated as the effect on those periods is not significant. 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 10 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. The above branch 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 proforma basis are not presented since historical financial information for the branches acquired is not available. ================================================================================ NOTE C: INVESTMENT SECURITIES The amortized cost and estimated fair values of investments in securities as of December 31 are as follows:
1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Gross Gross Estimated Gross Gross Estimated Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair Held to Maturity Cost Gains Losses Value Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------------------------------------ U.S. Treasury securities and obligations of U.S. government corporations and agencies $248,264,441 $6,210,000 $37,000 $254,437,000 $202,802,118 $9,663,000 $50,000 $212,415,000 Obligations of states and political subdivisions 17,795,714 499,000 3,000 18,292,000 15,408,820 693,000 24,000 16,078,000 Corporate Securities 1,500 500 0 2,000 1,500 0 0 2,000 Mortgage-backed securities 103,794,817 2,184,000 214,000 105,765,000 97,593,366 2,444,000 189,000 99,848,000 ------------ ---------- -------- ------------ ----------- ---------- -------- ---------- TOTALS $369,856,472 $8,893,500 $254,000 $378,496,000 $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 $39,684,493 $527,326 $207,137 $40,004,682 $32,334,410 $488,211 $127,706 $32,694,915 Obligations of states and political subdivisions 436,856 15,574 0 452,430 435,420 24,116 0 459,536 Mortgage-backed securities 145,276,186 1,853,074 574,405 146,554,855 96,325,428 1,411,690 141,829 97,595,289 ------------ ---------- -------- ------------ ----------- ---------- -------- ---------- TOTALS $185,397,535 $2,395,974 $781,542 $187,011,967 $129,095,258 $1,924,017 $269,535 $130,749,740 Federal Home Loan Bank and other equity securities 20,282,002 0 0 20,282,002 20,070,044 10,373 0 20,080,417 Federal Reserve Bank common stock 1,402,850 0 0 1,402,850 1,395,750 0 0 1,395,750 ---------- -- -- ---------- ---------- -- -- --------- TOTALS $207,082,387 $2,395,974 $781,542 $208,696,819 $150,561,052 $1,934,390 $269,535 $152,225,907 - ------------------------------------------------------------------------------------------------------------------------------------ Net unrealized gain/(loss) on Available for Sale 1,614,432 1,664,856 - ------------------------------------------------------------------------------------------------------------------------------------ GRAND TOTAL CARRYING VALUE $578,553,291 $468,031,712 ============= ============
The amortized cost and estimated fair value of debt securities at December 31, 1996, 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 (FIGURES IN DOLLARS) Value Value Value Value - ---------------------------------------------------------------------------------------------------------------- Due in one year or less $9,874,790 $9,922,000 $250,120 $251,640 Due after one through five years 16,588,691 17,942,000 6,198,339 6,161,150 Due after five years through ten 217,100,880 221,914,000 23,385,545 23,699,480 years Due after ten years 22,497,294 22,953,000 10,287,345 10,344,842 --------------------------------------------------------------------------- TOTAL 266,061,655 272,731,000 40,121,349 40,457,112 Mortgage-backed securities 103,794,817 105,765,000 145,276,186 146,554,855 --------------------------------------------------------------------------- TOTAL $369,856,472 $378,496,000 $185,397,535 $187,011,967
Proceeds from sales of investments in debt securities during 1996, 1995, and 1994 were $12,940,000, $3,950,000 and $29,241,000, respectively. Gross gains of approximately $32,000 and $258,000 for 1996 and 1994 respectively, and gross losses of $150,000 and $761,000 in 1995 and 1994, respectively, were realized on those sales. Investment securities with a carrying value of $304,022,444 and $202,204,782 at December 31, 1996 and 1995, respectively, were pledged to collateralize deposits and borrowings. NOTE D: LOANS Major Classifications of Loans at December 31, are summarized as follows: 1996 1995 Real estate mortgages: Residential $225,087,777 $204,225,091 Commercial 56,958,511 46,970,983 Farm 8,295,934 8,223,806 Agricultural loans 21,688,695 17,968,900 Commercial loans 99,445,415 81,562,024 Installment loans to individuals 243,394,056 212,479,749 Other loans 3,496,176 2,190,134 --------------------------------- 658,366,564 573,620,687 Less: Unearned discount (5,892,689) (13,469,032) Reserve for possible loan losses (8,127,752) (6,976,385) --------------------------------- Net loans $644,346,123 $553,175,270 The estimated fair value of loans receivable at December 31, 1996 and 1995 was approximately $662,000,000 and $565,000,000, respectively. Changes in the reserve for possible loan losses for the years ended December 31 are summarized below: - -------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- Balance at the beginning of year $6,976,385 $6,281,109 $5,706,609 Provision charged to expense 2,897,068 1,765,148 1,702,466 Loans charged off (2,458,651) (1,757,584) (1,615,712) Recoveries 712,950 687,712 487,746 --------------------------------- ------------ Balance at end of year $8,127,752 $6,976,385 $6,281,109 ================================================================================ As of December 31, 1996 and 1995 the Company's impaired loans for which specific valuation allowances were recorded were not significant. NOTE E: PREMISES AND EQUIPMENT Premises and equipment consist of the following at December 31: - -------------------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------------------- Land and land improvements $3,715,154 $3,527,773 Bank premises owned 16,026,615 15,761,996 Equipment 12,378,636 10,747,882 ------------------ ----------------- Premises and equipment gross 32,120,405 30,037,651 Less: Allowance for depreciation 15,338,371 13,101,795 ------------------ ----------------- Premises and equipment, net $16,782,034 $16,935,856 ================================================================================ NOTE F: INTANGIBLE ASSETS Intangible assets consist of the following at December 31: - -------------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------------- - -------------------------------------------------------------------------- Core deposit intangible $15,007,907 $15,007,907 Goodwill and other intangibles 21,591,942 21,591,942 --------------------------------------- Intangible assets, gross 36,599,849 36,599,849 Less: Accumulated amortization (5,358,360) (2,629,474) --------------------------------------- Intangible assets, net $31,241,489 $33,970,375 ========================================================================== NOTE G: DEPOSITS Deposits by type at December 31 are as follows: ------------------------------------------------------------------- 1996 1995 ------------------------------------------------------------------- Demand $144,351,215 $140,288,323 Savings 387,545,639 414,279,708 Time 495,316,402 462,378,193 ----------------------------------------- Total Deposits $1,027,213,256 $1,016,946,224 =================================================================== The estimated fair values of deposits at December 31, 1996 and 1995 were approximately $1,027,000,000 and $1,019,000,000 respectively. At December 31, 1996 and 1995, time certificates of deposit in denominations of $100,000 and greater totaled $68,914,112 and $71,241,034, respectively. NOTE H: BORROWINGS At December 31, 1996 and 1995, outstanding borrowings were as follows: - -------------------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------------------- Short-term borrowings: Federal funds purchased $31,800,000 $0 Federal Home Loan Bank advances 65,000,000 0 ----------- --------- 96,800,000 0 Long-term borrowings: Federal Home Loan Bank advances 100,000,000 25,550,000 (Current portion of $50,000,000 and $25,550,000 in 1996 and 1995, respectively) --------------------------------- $196,800,000 $25,550,000 ================================================================================ Federal Home Loan Bank advances are secured by a blanket lien on the Company's residential real estate loan portfolio and mortgage-backed securities portfolio. Borrowings at December 31, 1996 have maturity dates as follows: Weighted Average Rate January 2, 1997 7.38% $31,800,000 March 17, 1997 5.60% 30,000,000 March 24, 1997 5.62% 10,000,000 March 27, 1997 5.68% 25,000,000 June 13, 1997 5.99% 25,000,000 September 25, 1997 6.17% 25,000,000 July 22, 1998 6.50% 25,000,000 December 14, 1998 5.69% 10,000,000 December 13, 2000 5.86% 15,000,000 ----- ---------- 6.16% $196,800,000 NOTE I: INCOME TAXES The Company follows an asset-liability approach to recognizing the tax effects of temporary differences between tax and financial reporting. The provision (benefit) for income taxes for the years ended December 31 is as follows: - ------------------------------------------------------------------------ 1996 1995 1994 - ------------------------------------------------------------------------ Current: Federal $8,909,495 $5,658,251 $4,993,505 State 2,591,397 1,825,335 1,717,768 Deferred: Federal (1,426,394) (76,248) (341,226) State (414,179) (23,338) (113,742) --------- -------- --------- Total income taxes $9,660,319 $7,384,000 $6,256,305 ======================================================================== Components of the net deferred tax asset, included in other assets, as of December 31 are as follows: - -------------------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------------------- Allowance for loan losses $3,331,971 $2,880,201 Deferred net loan fees 0 205,529 Post Retirement and other reserves 606,481 489,727 Pension 348,537 340,199 Amortization of Intangibles 184,239 45,805 Other 166,950 43,212 ----------- ---------- Total deferred tax asset $4,638,178 $4,004,673 ----------- ---------- Investment securities 901,553 2,155,552 Depreciation and Other 91,965 65,853 Total deferred tax liability $993,518 $2,221,405 ----------- ---------- Net deferred tax asset $3,644,660 $1,783,268 ================================================================================ The Company has determined that no valuation allowance is necessary as it is more likely than not deferred tax assets will be realized through carryback of future deductions to taxable income in prior years, future reversals of existing temporary differences and future taxable income. 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: - -------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- Federal statutory income tax rate 35.0% 35.0% 35.0% Increase (reduction) in taxes resulting from: Tax-exempt interest (1.3) (1.8) (2.8) State income taxes, net of federal benefit 5.8 6.2 6.4 Other 1.1 (0.2) (0.4) ---- ----- ----- Effective income tax rate 40.6% 39.2% 38.2% Note J: LIMITS ON DIVIDENDS AND OTHER RESTRICTIONS NOTE J: LIMITS ON DIVIDENDS AND OTHER RESTRICTIONS 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 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, 1996, the bank had approximately $18,259,000 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: BENEFIT PLANS 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. The net periodic pension cost and acturial assumptions for the years ended December 31 were as follows:
- -------------------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------------------- Service cost-benefits earned during the year $281,318 $197,695 $227,005 Interest cost on projected benefit obligation 596,266 551,207 513,981 Actual return on plan assets (1,257,927) (1,424,112) 164,442 Administrative expenses 123,625 73,162 101,695 Net amortization and deferral 507,801 837,321 (884,693) -------- -------- --------- Net periodic pension cost $251,083 $235,273 $122,430 ============================================================================================ Discount rate 7.25% 7.0% 8.0% Expected long term rate of return on assets 9.0% 9.0% 9.0% Rate of increase in compensation levels 4.0% 4.0% 4.0% ============================================================================================
The following table presents a reconciliation of the plan's funded status at December 31: - ------------------------------------------------------------------------------- 1996 1995 - ------------------------------------------------------------------------------- Acturial present value of benefit obligations: Vested $7,386,006 $7,321,438 Nonvested 105,342 84,983 -------- ------- Accumulated benefit obligation $7,491,348 $7,406,421 =============================================================================== - ------------------------------------------------------------------------------ 1996 1995 - ------------------------------------------------------------------------------ Projected benefit obligation ($8,893,253) ($8,460,066) Plan assets at fair value 9,095,755 7,971,084 ---------- --------- Plan assets in excess of projected benefit obligation 202,502 (488,982) Unrecognized net loss/(gain) from past experience different from that assumed and effects of changes in assumptions 872,861 1,427,866 Unrecognized prior service cost, being recognized over 17 years (293,937) (309,127) Unrecognized net asset at date of adoption, being recognized over 17 years (159,026) (181,274) --------- -------- Prepaid pension cost included in other assets $622,400 $448,483 ============================================================================== The increase in the discount rate from 7% to 7.25% decreased the projected benefit obligation at December 31, 1996 by $287,907. The entire amount of unrecognized gains and losses is amortized over the average remaining service lives of the participants on a straight-line basis. 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, 1996 and 1995, the plan held 26,064 and 23,064 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 50% of the first 6% of employee contributions. Company contributions to the trust amounted to $598,998, $522,680, and $460,459 in 1996, 1995, and 1994, respectively. The Company has deferred compensation agreements with its President and Chief Executive Officer and several former executives and officers whereby monthly payments are to be provided upon retirement over periods ranging from 10 to 25 years. Expenses recognized in 1996 and 1995 relating to these agreements amounted to approximately $377,000 and $369,000, respectively. Effective January 1, 1996, the Board approved a Stock Balance Plan for non-employee directors who have completed six months of service. The Plan is a non-qualified, non-contributory deferred compensation plan. The Plan provides benefits for periods of service prior to January 1, 1996 based on a predetermined formula. Amounts credited to participant accounts for all creditable service after January 1, 1996 are based on performance of the Company's stock. Participants become fully vested after six years of service. Benefits are payable in the form of an annuity on the first of the month following the later of a participant's disassociation from the Board or attainment of age 70. Unrecognized prior service cost of $628,206 is being amortized over 20 years. Expense related to the plan recognized in 1996 approximated $150,000. 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. The cost of postretirement benefits is 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 includes the following components: 1996 1995 1994 Service cost $111,252 $80,600 $73,200 Amortization of transition obligation over 20.1 years 61,200 61,200 61,200 Amortization of prior service cost 10,200 5,100 0 Amortization of unrecognized net loss over 19.3 years 16,985 13,400 21,800 Interest on APBO less interest on expected benefit payments 164,656 163,800 156,300 Net periodic postretirement benefit cost $364,293 $324,100 $312,500 A 10 percent annual rate of increase in the per capita costs of covered health care benefits was assumed for 1996, 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 increase the accumulated postretirement benefit obligation as of January 1, 1996 by $103,800 and increase the aggregate service cost and interest components of net periodic postretirement benefit cost for 1996 by $14,400. Discount rates of 7.25% and 7.5% in 1996 and 1995, respectively, were used to determine the accumulated postretirement benefit obligation. The following sets forth the funded status of the plan as of December 31: 1996 1995 Accumulated Postretirement Benefit Obligation (APBO): Retirees $837,825 $1,069,400 Fully eligible active plan participants 153,558 118,600 Other active plan participants 1,420,035 1,403,400 Total APBO 2,411,418 2,591,400 Plan assets at fair value 0 0 Accumulated postretirement benefits (2,411,418) (2,591,400) obligation in excess of plan assets Unrecognized prior service cost 126,100 136,300 Unrecognized portion of net obligation at transition 985,700 1,046,900 Unrecognized net loss 466,523 760,100 Accrued postretirement benefit cost $(833,095) $(648,100) NOTE M: STOCK OPTION PLANS The Company has long-term stock-based incentive compensation programs for directors, officers and key employees including incentive stock options (ISO's), restricted stock awards (RSA's), non-qualified stock options (NQSO's), warrants, retroactive stock appreciation rights, and discounted options. The Company has authorized the grant of options for up to 605,000 shares of the Company's common stock. All options granted have 10 year terms and vest and become fully exercisable at the end of 5 years of continued employment. Activity in these plans for 1996, 1995, and 1994 was as follows:
Options Range Of Shares Weighted Outstanding Option Exercisable Average Price Exercise Price Per Share Shares Outstanding Outstanding at December 31, 1993 153,690 $11.74 - $30.25 105,540 Granted 14,150 28.50 Exercised (42,800 13.50 - 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 13.50 - 38.25 61,570 $22.02 Granted 87,150 32.00 - 38.25 35.59 Granted at a discount 8,000 24.25 24.25 Exercised/canceled (18,000) 15.50 - 26.25 23.10 Forfeited (1,600) 15.50 15.50 Outstanding at December 31, 1996 195,690 $13.50 - $38.25 84,230 $28.80
The Company granted 8,000 discounted options in 1996 and recognized compensation expense of approximately $13,000. Restricted stock awarded in 1996 and 1995 amounted to 1,500 and 3,950 shares, respectively. Total expense is 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 1996, 1995, and 1994 was $92,047, $77,618, and $2,185, respectively. There were 181,150; 102,750; and 130,000 shares available for future grants or awards under the various programs described above at December 31, 1996, 1995, and 1994, respectively. Directors may elect to defer all or a portion of their director fees until a certain distribution date pursuant to a Deferred Compensation Plan. The administrator has established an account for each participating director and credits to such account the number of shares of Company common stock which would have been purchased with the director fees and shares equal to the amount of dividends which would have been received. On the distribution date, the director shall be entitled to receive either shares of Company common stock equal to the number of shares accumulated or at the Company's election, cash equal to the fair value of the number of shares accumulated. There were 4,554 shares credited to participant accounts at December 31, 1996 for which a liability of approximately $179,000 was accrued and approximately $36,000 was recognized as expense. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," effective for 1996, 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 Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees", with disclosure of pro forma amounts reflecting the difference between cost charged to operations pursuant to APB No. 25 and compensation cost that would have been charged to operations had Statement No. 123 been applied. The Company has elected to continue following APB No. 25 in accounting for its stock-based compensation plans. Application of the fair-value-based accounting provision of Statement No. 123 results in the following pro forma amounts of net income and earnings per share: 1996 1995 Net income: As reported $14,133,044 $11,469,904 Pro forma 13,699,412 11,363,333 Earnings Per Share: As reported $3.67 $3.41 Pro forma primary earnings per share 3.66 3.48 The fair value for these options was estimated at the date of grant using a Black-Scholes options pricing model with the following weighted average assumptions for 1996 and 1995: risk-free interest rates of 5.75%; dividend yields of 3.95%; volatility factors of the expected market price of the Company's common stock of 48.21%; and a weighted-average expected life of the option of 7.13 years. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Therefore, the following results are not likely to be representative of the effects on reported net income for future years due to additional years of vesting. The weighted-average fair value per share for options granted during 1996 for those options whose exercise price equals market price is $13.79 and $14.19 for options whose exercise price is less than market price on grant date. At December 31, 1996 the weighted average information for outstanding and exercisable shares is as follows:
Shares Outstanding Shares Exercisable Range of Shares Weighted Average Shares Weighted Average Excercise Outstanding Excercise Remaining Outstanding Exercise Price Price Life (years) Price $13.50-$15.00 27,090 $15.45 3.27 25,090 $15.48 $24.25-$26.25 65,900 $25.32 6.95 29,980 $25.15 $28.50-$30.25 15,150 $28.57 6.37 6,410 $28.63 $32.00-$32.25 37,450 $32.00 9.00 9,760 $32.00 $38.25 50,100 $38.25 9.96 12,990 $38.25
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 the Company has 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. 1996 1995 Financial instruments whose contract amounts represent credit risk at December 31: Letters of Credit $843,000 $733,000 Commitments to make or purchase loans or to extend credit on lines of credit 94,730,000 92,999,000 ---------- ---------- Total $95,573,000 $93,732,000 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 unsecured lines of credit totaling $0 and $110,164,000 at December 31, 1996 and 1995, respectively. The Company has additional unused borrowing capacity through collateralized transactions with the Federal Home Loan Bank. 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, 1996 was $14,131,000 of which $159,000 was required to be on deposit with the Federal Reserve Bank of New York. The remainder, $13,972,000, was represented by cash on hand. NOTE O: LEASES Rental expense included in operating expenses amounted to $740,398, $630,459, and $502,312 in 1996, 1995, and 1994, respectively. Future minimum rental commitments as of December 31, 1996 for all noncancelable operating leases are as follows: Years ending December 31: Building Equipment Total 1997 $586,902 $20,124 $607,026 1998 491,144 18,447 509,591 1999 272,474 0 272,474 2000 224,732 0 224,732 2001 212,876 0 212,876 Thereafter 1,113,346 0 1,113,346 NOTE P: REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory-and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgements by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1996, that the Bank meets all capital adequacy requirements to which it is subject and is "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well capitalized," the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table.
To Be "Well Capitalized" For Capital Under Prompt Adequacy Corrective Action Actual Purposes Provisoins Amount Ratio Amount Ratio Amount Ratio As of December 31, 1996: Total Core Capital $85,291 11.8% $57,675 8.0% $72,094 10.0% (to Risk Weighted Assets) Tier I Capital $77,163 10.7% $28,838 4.0% $43,256 6.0% (to Risk Weighted Assets) Tier I Capital $77,163 6.2% $49,918 4.0% $62,398 5.0% (to Average Assets) As of December 31, 1995: Total Core Capital $72,089 11.8% $49,030 8.0% $61,288 10.0% (to Risk Weighted Assets) Tier I Capital $65,113 10.6% $24,515 4.0% $36,773 6.0% (to Risk Weighted Assets) Tier I Capital $65,113 6.3% $41,351 4.0% $51,689 5.0% (to Average Assets)
Note Q: 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 1996 1995 - --------------------------------------------------------------------- Assets: Cash and cash equivalents $1,089,623 $527,382 Investment securities 500,000 329,715 Investment in and advances to subsidiaries 109,613,349 100,441,826 Other assets 2,111 3,157 ----------- ----------- Total assets $111,205,083 $101,302,080 ===================================================================== Liabilities: Accrued liabilities $1,852,856 $1,241,831 Shareholders' equity 109,352,227 100,060,249 ----------- ----------- Total liabilities and shareholders' equity $111,205,083 $101,302,080 ===================================================================== - -------------------------------------------------------------------------------- CONDENSED STATEMENTS OF INCOME - -------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- Dividends from subsidiaries $5,521,520 $8,743,717 $3,160,414 Interest on investments and deposits 20,006 6,376 6,465 ----------- ----------- ----------- Total revenues 5,541,526 8,750,093 3,166,879 ----------- ----------- ----------- Expenses: Interest on short term borrowing 0 0 2,243 Other expenses 2,005 1,700 2,374 ----------- ----------- ----------- Total expenses 2,005 1,700 4,617 ----------- ----------- ----------- Income before tax benefit and equity in undistributed net income of subsidiaries 5,539,521 8,748,393 3,162,262 Income tax expense 0 0 (706) ----------- ----------- ----------- Income before equity in undistributed net income of subsidiaries 5,539,521 8,748,393 3,161,556 Equity in undistributed net income: Subsidiary banks 8,593,523 2,721,511 6,949,905 Bank-related subsidiaries 0 0 (2,243) ----------- ----------- ----------- Net income $14,133,044 $11,469,904 $10,109,218 ================================================================================ NOTE Q: PARENT COMPANY STATEMENTS (Continued) ================================================================================ STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------------------------------------------------- Increase (Decrease) in Cash, Cash Equivalents and Noncash Activities
Years Ended December 31 1996 1995 1994 ------------------------------------------------------ Operating Activities: Net income $14,133,044 $11,469,904 $10,109,218 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiaries (8,593,523) (2,721,511) (6,946,956) Net change other assets and accrued liablities 14,840 98,029 4,185 - -------------------------------------------------------------------------------------------------------------------------- Net Cash Provided By Operating Activities 5,554,361 8,846,422 3,166,447 - -------------------------------------------------------------------------------------------------------------------------- Investing Activities: Purchases of available for sale investment securities (502,812) (6,218) (7,191) Sale of available for sale investment securities 322,154 25,000 0 Capital contributions to subsidiaries (378,334) (28,516,591) - -------------------------------------------------------------------------------------------------------------------------- Net Cash Used By Investing Activities (558,992) (28,497,809) (7,191) - -------------------------------------------------------------------------------------------------------------------------- Financing Activities: Net change in loans to subsidiaries 500,000 Issuance of common and preferred stock 457,143 23,321,762 560,457 Cash dividends (5,390,271) (3,866,017) (3,158,171) - -------------------------------------------------------------------------------------------------------------------------- Net Cash Provided (Used) By Financing Activities (4,433,128) 19,455,745 (2,597,714) - -------------------------------------------------------------------------------------------------------------------------- Change In Cash And Cash Equivalents 562,241 (195,642) 561,542 Cash and cash equivalents at beginning of year 527,382 723,024 161,482 - -------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $1,089,623 $527,382 $723,024 ========================================================================================================================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash Paid For Interest $0 $0 $2,243 ========================================================================================================================== SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES: Dividends declared and unpaid $1,345,393 $1,214,144 $836,445 ==========================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. NOTE Q: 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 in 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 Stockholder 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. On December 18, 1996 the Board of Directors authorized a two-for-one stock split, subject to shareholder approval of an increase in the number of authorized shares of common stock. Accordingly, the Board of Directors has recommended that action be taken by shareholders to amend the Company's Certificate of Incorporation to increase the number of authorized shares of common stock from 5,000,000 to 20,000,000 shares and to convert to no par value common stock. The stock split will be effected by means of a stock dividend to be payable on or about March 12, 1997 to shareholders of record on February 10, 1997. NOTE R: SUBSEQUENT EVENTS On February 3, 1997, the Company formed a subsidiary business trust for the purpose of issuing preferred securities which quality as Tier I capital (see Note P). Concurrent with its formation, the trust issued $30,000,000 of 9.75% preferred securities in an exempt offering. The preferred securities are non-voting, mandatorily redeemable in 2027, and guaranteed by the Company. The entire net proceeds to the trust from the offering were invested in junior subordinated obligations of the Company. Proceeds will be used to redeem $4,500,000 of the Company's Series A preferred stock and for other general corporate purposes. On February 11, 1997, the Company entered into an agreement with KeyBank National Association (New York) to acquire eight branches in Western New York with deposits approximating $161,000,000. This acquisition is subject to regulatory approval and is expected to close in June 1997. Coopers & Lybrand L.L.P. a professional services firm 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, 1996 and 1995 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, 1996. 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, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. Syracuse, New York January 24, 1997 (except for Note R as to which the date is February 11, 1997) Two-Year Selected Quarterly Data
1996 RESULTS 1st 2nd 3rd 4th (Dollars in Thousands) Quarter Quarter Quarter Quarter Total Net interest income $13,205 $13,590 $14,238 $14,233 $55,266 Provision for loan losses 588 609 630 1,070 2,897 Net interest income after ------ ------ ------ ------ ------ provision for loan losses 12,617 12,981 13,608 13,163 52,369 Total other income 1,953 2,001 2,440 2,481 8,874 Total other expenses 9,252 9,059 9,659 9,480 37,450 ------ ------ ------ ------ ------ Income before income tax 5,318 5,924 6,388 6,163 23,793 Income tax 2,180 2,399 2,596 2,485 9,660 ------ ------ ------ ------ ------ Net income $3,138 $3,525 $3,792 $3,678 $14,133 Earnings per share * $0.82 $0.92 $0.99 $0.95 $ 3.67 ============================================================================================================= 1995 RESULTS 1st 2nd 3rd 4th (Dollars in Thousands) 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 $0.8 $3.41 ============================================================================================================= * 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.
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, 1996 and 1995 - - Consolidated Statements of Income -- Years ended December 31, 1996, 1995, and 1994 - - Consolidated Statements of Changes in Stockholders' Equity -- Years ended December 31, 1996, 1995, and 1994 - - Consolidated Statement of Cash Flows -- Years ended December 31, 1996, 1995, and 1994 - - Notes to Consolidated Financial Statements -- December 31, 1996 - - Auditors' report - - Quarterly selected data -- Years ended December 31, 1996 and 1995 (unaudited) 2. Schedules are omitted since the required information is either not applicable or shown elsewhere in the financial statements. 3. Listing of Exhibits (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 - Benefit Plan Administrative 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 1996 (c) See Exhibit 14(a)(3) above. (d) See Exhibit 14(a)(2) above 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 19, 1997 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 19th day of March 1997. Name Title Chairman of the Board of Directors /s/ Dr. Earl W. MacArthur 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/ Lee T. Hirschey /s/ James A. Gabriel - --------------------------- --------------------------- Hirschey, Director James A. Gabriel, Director /s/ William N. Sloan /s/ David C. Patterson - --------------------------- --------------------------- William N. Sloan, Director David C. Patterson, Director /s/ Hugh G. Zimmer - --------------------------- Hugh G. Zimmer, Director EX-11 2 EARNING PER SHARE COMPUTATION Community Bank System, Inc. Statement re Earnings Per Share Computation Exhibit 11 Three Months Ended Year Ended December 31, December 31, 1996 1995 1996 1995 --------- --------- --------- ------ Primary Earnings Per Share Net Income 3,677,991 3,116,887 14,133,044 11,469,905 Dividends on preferred shares (101,250) (151,875) (405,000) (354,375) --------- --------- --------- --------- Income applicable to common stock 3,576,741 2,965,012 13,728,044 11,115,530 ========= ========= ========== ========== Weighted average number of common shares 3,728,789 3,675,921 3,741,259 3,261,205 Add: Shares issuable from assumed exercise of incentive stock options 49,577 36,848 37,653 32,561 ------ ------ ------ ------ Weighted average number of common shares - adjusted 3,778,366 3,712,769 3,741,259 3,261,205 ========= ========= ========= ========= Primary earnings per share $0.95 $0.80 $3.67 $3.41 ===== ===== ===== ===== Fully Diluted Earnings Per Share Income applicable to common stock 3,576,741 2,965,012 13,278,044 11,115,530 ========= ========= ========== ========== Weighted average number of common shares - adjusted 3,782,869 3,712,769 3,759,051 3,271,305 Add: Equivalent number of common shares assuming conversion of preferred Weighted average number of common shares - adjusted 3,782,869 3,712,769 3,759,051 3,271,305 ========= ========= ========= ========= Fully diluted earnings per share $0.95 $0.80 $3.65 $3.40 ===== ===== ===== ===== EX-27 3 ARTICLE 9 FDS FOR 10-K
9 1,000 YEAR DEC-31-1996 DEC-31-1996 52,535 0 0 0 208,697 369,856 378,496 652,474 8,128 1,343,865 1,027,214 96,800 10,499 100,000 0 4,500 4,672 100,180 1,343,865 56,932 40,420 336 97,688 36,383 6,039 55,266 2,897 32 37,450 23,793 23,793 0 0 14,133 3.67 3.65 4.86 2,023 823 32 0 6,976 2,458 713 8,128 8,128 0 917
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