-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, tg/RvoU1/hNS1xKxA0yezA9YF6rz47An9uhgT5KpXQSFvUMxikucLfcEbxtjqzK9 m+QcQZM/Zon7rVV3/erWPQ== 0000723188-94-000007.txt : 19940901 0000723188-94-000007.hdr.sgml : 19940901 ACCESSION NUMBER: 0000723188-94-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940815 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMUNITY BANK SYSTEM INC CENTRAL INDEX KEY: 0000723188 STANDARD INDUSTRIAL CLASSIFICATION: 6022 IRS NUMBER: 161213679 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-11716 FILM NUMBER: 94544395 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-Q 1 FORM 10 - Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the six months ended June 30, 1994 Commission file number 0-11716 COMMUNITY BANK SYSTEM, INC. (Exact name of registrant as specified in its charter) DELAWARE 16-1213679 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 5790 Widewaters Parkway, Syracuse, New York 13214 (Address of principal executive offices) (Zip Code) 315/445-2282 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common Stock, $1.25 par value -- 2,770,150 shares as of August 12, 1994. INDEX COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated balance sheets -- June 30, 1994, December 31, 1993 and June 30, 1993. Consolidated statements of income -- Three months ended June 30, 1994 and 1993 and six months ended June 30, 1994 and 1993. Consolidated statements of cash flows -- six months ended June 30, 1994 and 1993. Item 2. Management Discussion and Analysis of Financial Conditions and Results of Operations PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults upon Senior Securities Item 4. Submission of Matters to a Vote of Securities Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K SIGNATURES
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CONDITION - - ---------------------------------------------------------------------------------------------------------- June 30, December 31, June 30, 1994 1993 1993 ASSETS Cash and due from banks $33,925,122 $27,422,278 $33,397,351 Interest bearing deposits with other banks 0 90,000 188,000 Federal funds sold 0 0 0 TOTAL CASH AND CASH EQUIVALENTS 33,925,122 27,512,278 33,585,351 Investment securities U.S. Treasury 27,173,746 27,797,096 28,211,303 U.S. Government agencies and corporations 100,397,674 86,615,555 89,223,964 States and political subdivisions 21,245,769 24,584,525 26,938,754 Mortgage-backed securities 153,484,605 108,319,876 105,305,626 Other securities 11,342,609 5,636,214 7,632,783 Federal Reserve Bank 551,550 500,350 500,350 TOTAL INVESTMENT SECURITIES 314,195,953 253,453,616 257,812,780 Loans 471,709,542 443,601,070 408,913,908 Less: Unearned discount 26,182,653 25,729,899 27,083,834 Reserve for possible loan losses 5,970,451 5,706,609 5,349,562 NET LOANS 439,556,438 412,164,562 376,480,512 Bank premises and equipment 9,676,990 10,045,782 10,052,528 Accrued interest receivable 5,163,945 4,538,769 5,069,011 Intangible assets 5,821,897 452,264 533,049 Other assets 9,531,975 4,885,244 6,787,413 TOTAL ASSETS $817,872,320 $713,052,515 $690,320,644 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest bearing $96,642,099 $88,644,788 $86,986,518 Interest bearing 579,050,131 499,670,455 514,781,722 TOTAL DEPOSITS 675,692,230 588,315,243 601,768,240 Federal funds purchased and securities sold under agreements to repurchase 32,500,000 57,000,000 16,500,000 Term borrowings 40,550,000 550,000 10,000,000 Obligations under capital lease 0 42,036 91,127 Accrued interest and other liabilities 5,313,157 5,158,809 4,907,091 TOTAL LIABILITIES 754,055,387 651,066,088 633,266,458 Shareholders' equity Preferred stock $1.00 par value 0 0 0 Common stock $1.25 par value 3,457,460 3,435,398 3,402,770 Surplus 14,617,429 14,374,149 14,040,468 Undivided profits 46,462,129 42,902,266 39,618,201 Unearned gains (losses) on available for sale securities (715,325) 1,280,466 0 Less: Shares issued under employee stock plan - unearned 4,760 5,852 7,253 TOTAL SHAREHOLDERS' EQUITY 63,816,933 61,986,427 57,054,186 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $817,872,320 $713,052,515 $690,320,644 See notes to consolidated financial statements
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME - - -------------------------------------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, INTEREST INCOME 1994 1993 1994 1993 Interest and fees on loans $10,092,535 $9,183,219 $19,635,779 $18,231,331 Interest and dividends on investments: U.S. Treasury 489,192 518,300 971,682 1,036,814 U.S. Government agencies and corporations 1,569,272 1,628,035 3,124,097 3,425,477 States and political subdivisions 361,721 456,800 732,618 918,515 Mortgage-backed securities 2,316,875 1,839,251 3,925,208 3,756,724 Other securities 108,307 174,334 263,202 431,267 Interest on federal funds sold 0 51,591 0 52,640 Interest on deposits at other banks 75 15,783 1,133 18,398 14,937,977 13,867,313 28,653,719 27,871,166 INTEREST EXPENSE Interest on deposits Savings 2,041,197 2,313,342 3,968,776 4,542,749 Time 2,203,747 2,140,825 4,203,063 4,185,179 Interest on federal funds purchased, securities sold under agreements to repurchase and Term borrowings 821,366 92,999 1,327,104 353,140 Interest on capital lease 128 1,594 629 3,542 5,066,438 4,548,760 9,499,572 9,084,610 NET INTEREST INCOME 9,871,539 9,318,553 19,154,147 18,786,556 Provision for possible loan losses 422,245 375,000 661,417 781,920 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 9,449,294 8,943,553 18,492,730 18,004,636 OTHER INCOME Fiduciary services 384,195 291,351 724,708 554,300 Service charges on deposit accounts 392,648 356,047 748,097 704,549 Other service charges, commissions and fees 325,433 206,096 621,115 437,601 Other operating income 38,750 14,442 71,276 53,997 Investment security gain (loss) 1,430 0 (1,695) 0 1,142,456 867,936 2,163,501 1,750,447 10,591,750 9,811,489 20,656,231 19,755,083 OTHER EXPENSES Salaries, wages and employee benefits 3,200,237 2,957,155 6,484,227 5,980,914 Occupancy expense of bank premises, net 488,328 433,142 1,021,616 920,890 Equipment and furniture expense 433,447 406,531 848,330 810,792 Other 2,216,925 2,152,880 4,241,014 4,382,468 6,338,937 5,949,708 12,595,187 12,095,064 INCOME BEFORE INCOME TAXES 4,252,813 3,861,781 8,061,044 7,660,019 Income taxes 1,604,000 1,433,000 3,012,000 2,852,443 NET INCOME $2,648,813 $2,428,781 $5,049,044 $4,807,576 Earnings per common share $0.94 $0.87 $1.80 $1.73 See notes to consolidated financial statements
COMMUNITY BANK SYSTEM, INC. CONSOLIDATED STATEMENT OF CASH FLOWS For Six Months Ended June 30, 1994 and 1993 Increase (Decrease) in Cash and Cash Equivalents 1994 1993 - - ---------------------------------------------------------------------------------------------------- Operating Activities: Net income $5,049,044 $4,807,576 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,092,070 726,138 Amortization of intangible assets (5,369,633) 80,784 Provision for loan losses 661,417 781,920 Provision for deferred taxes (123,064) 98,726 Loss on sale of investment securities 1,695 0 Gain on sale of assets 909 0 Change in interest receivable (625,176) 388,352 Change in interest payable and accrued expenses (1,199,198) (1,973,202) Change in unearned loan fees and costs 23,040 92,320 - - ---------------------------------------------------------------------------------------------------- Net Cash Provided By Operating Activities (488,895) 5,002,614 - - ---------------------------------------------------------------------------------------------------- Investing Activities: Proceeds from sales of investment securities 10,900,000 2,015,036 Proceeds from maturities of investment securities (11,722,208) 35,257,307 Purchases of investment securities (62,162,318) (32,096,682) Net change in loans outstanding (31,000,660) (21,157,200) Capital expenditures (724,187) (246,090) - - ---------------------------------------------------------------------------------------------------- Net Cash Used By Investing Activities (94,709,373) (16,227,629) - - ---------------------------------------------------------------------------------------------------- Financing Activities: Net change in demand deposits, NOW accounts, and savings accounts 39,940,357 33,612,536 Net change in certificates of deposit 47,436,630 10,241,026 Net change in term borrowings 15,500,000 (26,355,900) Payments on lease obligation (42,036) (47,656) Issuance of common stock 265,342 186,250 Cash dividends (1,489,181) (1,357,333) - - ---------------------------------------------------------------------------------------------------- Net Cash Provided By Financing Activities 101,611,112 16,278,923 - - ---------------------------------------------------------------------------------------------------- Change In Cash And Cash Equivalents 6,412,844 5,073,908 Cash and cash equivalents at beginning of year 27,512,278 28,511,443 - - ---------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR 33,925,122 33,585,351 ==================================================================================================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash Paid For Interest $9,355,532 $9,123,586 ==================================================================================================== Cash Paid For Income Taxes $3,149,463 $2,629,772 ==================================================================================================== SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES: None The accompanying notes are an integral part of the consolidated financial statements.
Community Bank System, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) June 1994 Note A -- BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the six month period ended June 30, 1994 are not necessarily indicative of the results that may be expected for the year ended December 31, 1994. Part 1. Financial Information Item 1. Financial Statements The information required by rule 10.01 of Regulation S-X is presented on the previous pages. Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations The purpose of the discussion is to present material changes in Community Bank System, Inc.'s financial condition and results of operations during the six months ended June 30, 1994 which are not otherwise apparent from the consolidated financial statements included in these reports. Earning Performance Summary Three Months Ended Change 6/30/94 6/30/93 Amount Percent (000's) Net Income $2,649 $2,429 $220 9.1% Earnings per share $0.94 $0.87 $0.07 8.0% Weighted average shares outstanding 2,811 2,783 28 1.0% Return on average assets 1.34% 1.42% -0.07% N/A Average assets $790,299 $687,364 $102,935 15.0% Return on average shareholders' equity 16.76% 17.43% -0.67% N/A Average shareholders' equity $63,404 $55,903 $7,501 13.4% Six Months Ended Change 6/30/94 6/30/93 Amount Percent (000's) Net Income $5,049 $4,808 $241 5.0% Earnings per share $1.80 $1.73 $0.07 3.8% Weighted average shares outstanding 2,809 2,775 34 1.2% Return on average assets 1.34% 1.43% -0.09% N/A Average assets $760,393 $678,973 $81,420 12.0% Return on average shareholders' equity 16.16% 17.62% -1.47% N/A Average shareholders' equity $63,022 $55,007 $8,016 14.6% * May not foot due to rounding Net Income for the second quarter of 1994 reached an all-time high of $2.6 million, up $220,000 (9.1%) from the comparable 1993 period. Compared to the first quarter of 1994, earnings climbed an even stronger 10.4%. Earnings per share at $.94 registered an 8.0% improvement over second quarter 1993, reflecting increased earnings slightly offset by 1.0% more in weighted average shares outstanding. Return on assets and return on shareholders equity remain above peer bank norms at 1.34% and 16.76%, respectively. Strong second quarter earnings brought 1994 year-to-date net income to $5.0 million, $241,000 (5.0%) over the first six months of 1993. Despite continued narrowing of net interest margins industry-wide, as reflected by the bank's half point reduction over last year, CBSI's net interest income rose a satisfactory 5.3% for the quarter. This increase resulted from strong loan growth of 16.7% as well as nearly 22% more in investment securities. A good portion of earning asset growth was funded by the company's recent acquisition of three former Columbia Banking FSA branches from the Resolution Trust Corporation. For the six months as a whole, net interest income was higher by 2.0%. Second quarter earnings also benefited from greater fee income, which included almost 32% more in trust-related fees as well as meaningful results from a program launched at the beginning of the year to sell fixed rate annuities through the bank's branch system. Overhead rose a relatively modest 6.5%, with about 60% of the increase reflecting personnel required to support business development efforts, staff the new branches, and service transaction volumes which have been building over the last twelve months. For the entire six month period, non-interest income rose nearly 24% over one year earlier while overhead was up 4.1%. Lastly, asset quality remains strong. Net charge-offs for the quarter were very modest at .15% of average loans, and non-performing loans were reduced from the year earlier level to a small .47% of loans outstanding. Consistent with 4.5% loan growth during the last three months, the quarter's provision for loan losses rose 12.6% over the same period last year, holding the ratio of loan loss reserve to loans constant at the March 31, 1994 level of 1.34%. Coverage of the reserve over nonperformers was ample at 2.8 times. The remainder of this report more fully discusses the balance sheet and earnings trends summarized above. Net Interest Income Net interest income is the difference between interest earned on loans and other investments and interest paid on deposits and other sources of funds. On a tax-equivalent basis, net interest income for second quarter 1994 increased $507,000 (5.3%) over the same period in 1993 to $10.0 million. Compared with first quarter 1994, there was a $584,000 improvement. The change in net interest income reflects both the change in net interest margin (yield on earning assets less cost of funds as a percentage of earning assets) and the change in earning asset levels. The table below shows these underlying dynamics. For the Quarter Net Net Yield on Cost Average Loans / Ended: Interest Interest Earning of Earning Earning (000's) Income Margin Assets Funds Assets Assets ------ ------ ------ ------ ------ ------ Amount and Change Period from Preceding Quarter End ------ ------ ------ ------ ------ ------ December 31, 1992 Amount $9,773 6.31% 9.36% 3.10% $615,682 57.9% Change N/A N/A N/A N/A N/A N/A March 31, 1993 Amount $9,529 6.16% 9.20% 3.01% $626,992 58.1% Change ($244) -0.15% -0.16% -0.09% 1.8% 0.1 June 30, 1993 Amount $9,536 5.97% 8.81% 2.91% $641,067 59.7% Change $6 -0.20% -0.39% -0.10% 2.2% 1.6 September 30, 1993 Amount $9,609 5.94% 8.74% 2.80% $642,270 61.7% Change $73 -0.03% -0.07% -0.11% 0.2% 2.0 December 31, 1993 Amount $9,383 5.73% 8.51% 2.69% $649,678 62.2% Change ($225) -0.21% -0.23% -0.12% 1.2% 0.6 March 31, 1994 Amount $9,458 5.62% 8.25% 2.72% $682,789 59.1% Change $75 -0.11% -0.26% 0.03% 5.1% (3.2) June 30, 1994 Amount $10,043 5.47% 8.23% 2.82% $736,418 58.6% Change $584 -0.15% -0.02% 0.10% 7.9% (0.4) Change from June 30, 1993 to June 30, 1994 Amount $507 -0.49% -0.58% -0.09% $95,351 -1.0% % Change 5.3% --- --- --- 14.9% --- For the Year Ended: (000's) June 30, 1993 Amount $19,065 6.06% 8.95% 2.96% $634,068 59.7% Change --- --- --- --- --- --- June 30, 1994 Amount $19,501 5.54% 8.24% 2.77% $709,751 58.6% Change $436 -0.52% -0.71% -0.19% 11.9% (1.0) Note: (a) All net interest income, margin, and earning asset yield figures are full-tax equivalent. (b) Net interest income, margin, and earning asset yield figures exclude premiums on called bonds of $158, $146, and $297 as of March 10, July 10, and October 10, 1993, respectively. * May not foot due to rounding Since the fourth quarter of 1992, margins have narrowed because the yield on earning assets has fallen faster than the rate on deposits. More specifically, the cost of funds rate (total interest expense divided by total deposits plus borrowings) is down only 28 basis points compared to a 113 basis point decline in earning asset yield. The latter reflects downward repricing of approximately $30 million in adjustable rate mortgages and continued steady runoff of high yielding loans and investments. Reductions in deposit rates have been relatively mild during this period, in contrast to more aggressive decreases in 1992, which contributed to a widening of net interest margin. Comparing the second quarter just ended to one year earlier, the net interest margin narrowed by 49 basis points due to a 58 basis point decline in the yield on earning assets while the cost of funds rate decreased by only 9 basis points. However, the $95.4 million increase in earning assets shown in the above table more than offset the impact of this shrinkage. Had margins remained constant, net interest income would have increased by over $1.4 million versus $507,000 actually realized. Net interest income is also less than it would have been because the mix of earning assets has moved toward a greater share in investments, which have a lower overall yield than loans. Despite very satisfactory loan growth, the loans to earning asset ratio has declined since the fourth quarter of 1993 as the result of improved investment opportunities funded with short-term borrowings and the recent acquisition of the three Columbia branches. Comparing second quarter 1994 to first quarter 1994 shows a continued decline in the net interest margin. However, the yield on earning assets remained essentially constant (the decline has slowed due to increased financial market rates) while the cost of funds rate rose 10 BP because of a higher federal funds rate (raising short-term borrowing costs). The net interest margin would have been 5.42% or 5 basis points lower had it not been for a $10 million (12%) increase in demand deposits. Despite its recent decrease, net interest margin has long been a historical strength for CBSI, being slightly above the norm in the 86th peer percentile based on comparative data as of March 31, 1994. This performance is largely the result of very high earning asset yields, being in the 92nd percentile, versus cost of funds being slightly above norm in the 62nd percentile. Non-Interest Income Non-interest income, including service charges, commissions, fees, trust income and income from other sources, totaled approximately $1.1 million for the three months ended June 30, 1994, up $275,000 (31.6%) from the same period last year. This brings 1994 YTD non-interest income to $2.2 million, up 23.6% from the same 1993 period. Three Months Ended Change 6/30/94 6/30/93 Amount Percent (000's) Fiduciary services $384 $291 $93 31.9% Service charges on $393 $356 $37 10.3% deposit accounts Other service charges, $339 $219 $121 55.3% commissions, and fees Net gain (loss) on sale $26 $2 $24 1226.9% of investments and other assets ---------- ---------- -------------------- Total noninterest income - Amount $1,142 $868 $275 31.6% - % of Average assets 0.58% 0.51% 0.07% --- Six Months Ended Change 6/30/94 6/30/93 Amount Percent (000's) Fiduciary services $725 $554 $170 30.8% Service charges on $748 $705 $44 6.2% deposit accounts Other service charges, $668 $482 $186 38.6% commissions, and fees Net gain (loss) on sale $23 $10 $13 128.9% of investments and other assets ---------- ---------- -------------------- Total noninterest income - Amount $2,164 $1,750 $413 23.6% - % of Average assets 0.57% 0.52% 0.05% --- * May not foot due to rounding As shown by the table above, income from fiduciary services accounts for a third of the total change and is the result of increases in personal trust fees, up 29% as a result of new business and more timely billing, and in employee benefit trust revenue, up 35% largely reflecting an accounting change to more accurately identify EBT gross revenue and external servicing costs. Additionally, $53,000 was earned in commissions on the sale of fixed rate annuities, a program launched through CBSI's branch network early in 1994. Increases also occurred in deposit service charges and other commissions, attributable both to a larger number of demand deposit accounts and selected adjustments in CBSI's fee schedule. Lastly, a $24,000 gain was realized in June on the periodic loan sale to Sallie Mae of loans which become out-of-school. Management recognizes that the company's level of non-interest income is unsatisfactory, its ratio to average assets being .58% for the quarter or approximately half the peer norm. As noted above, progress is being made addressing this shortfall by maintaining competitive and value-based service charges; selling fixed rate annuities through our 34 customer facilities; offering full service brokerage/financial planning products through dedicated sales representatives in selective markets; and selling/servicing residential mortgages, the first such transaction being with the Federal National Mortgage Association shortly after the end of the second quarter. While only minimal benefit will be realized in 1994, income from these new products is expected to be a significant source of earnings in future years. Non-Interest Expense Non-interest expense or overhead for the three months ended June 30, 1994 increased by $389,000 (6.5%) over the same period last year to $6.3 million, bringing the YTD total up 4.1% over last year to $12.6 million. The table below summarizes the major components of change. Three Months Ended Change 6/30/94 6/30/93 Amount Percent (000's) Personnel Expense $3,200 $2,957 $243 8.2% Occupancy, furniture, $922 $840 $82 9.8% and equipment Administrative and business $1,118 $1,063 $55 5.1% development All other expense $1,099 $1,090 $9 0.9% ---------- ---------- -------------------- Total noninterest expense - Amount $6,339 $5,950 $389 6.5% - % of Average assets 3.22% 3.47% -0.25% --- Efficiency ratio 56.7% 57.2% -0.5% --- Six Months Ended Change 6/30/94 6/30/93 Amount Percent (000's) Personnel Expense $6,484 $5,981 $503 8.4% Occupancy, furniture, $1,870 $1,732 $138 8.0% and equipment Administrative and business $2,081 $2,188 ($107) -4.9% development All other expense $2,160 $2,195 ($35) -1.6% ---------- ---------- -------------------- Total noninterest expense - Amount $12,595 $12,095 $500 4.1% - % of Average assets 3.34% 3.59% -0.25% --- Efficiency ratio 58.1% 57.7% 0.5% --- * May not foot due to rounding Better than 60% of the quarterly increase results from salary and benefit increases caused by modest annual merit awards and 33 additional full time equivalent positions, resulting in a total of 429 employees as of June 30, 1994. These additions pertain to the Columbia branch acquisition (21 FTE); the opening of a denovo branch in Waddington, New York late in 1993 (formerly a Jefferson National Bank branch prior to being closed by the FDIC); expanded business development efforts in the lending and fiduciary services functions; and the need to service the bank's increased transaction volumes over the last twelve months. The remainder of the quarter's overhead increase compared to the same quarter last year is spread over a number of expense categories. Higher occupancy expense resulted from the harsh winter and the new Waddington branch property. Administrative expenses were up due to the timing of postage payments and increases in various volume and acquisition-related expenses. Computer services climbed due to an accounting change to reflect the external servicing costs of the employee benefit trust function. Finally, the amortization of intangibles rose due to the acquisition of the Columbia branches, whose $5.5 million premium (or 8.6% of deposits assumed) added approximately $365,000 per annum over the prescribed 15 year amortization period. The above increases were offset by reduced use of outside consultants for bank and branch acquisition analysis, lower relocation expenses related to new hires/transferred employees, and less profit and loss expense due to a reduced need to write down repossessed property. It should be noted that the overall effect of the Columbia branch acquisition was minimal as the transaction did not occur until late in the second quarter just ended. As a percentage of average assets, annualized overhead declined satisfactorily from 3.47% in the second quarter of 1993 to 3.22% in the second quarter of 1994, a level now favorably below the peer norm. CBSI's efficiency ratio (recurring expense divided by recurring operating income) decreased slightly in the second quarter from 57.2% last year to 56.7% this year (the peer bank average is 61.8% as of 12/31/93); this improvement reflects higher net interest income and other income. Income and Income Taxes Income before tax was approximately $4.3 million for the quarter ended June 30, 1994, a $391,000 (10.1%) increase from the same period last year, bringing the YTD total to $8.1 million or 5.2% more than in 1993. As shown by the table below, the increases in overhead and loan loss provision for the quarter are more than offset by improvement in net interest income and non-interest income. Three Months Ended Change 6/30/94 6/30/93 Amount Percent (000's) Net interest income $9,872 $9,319 $553 5.9% Loan loss provision $422 $375 $47 12.6% Net interest income $9,449 $8,944 $506 5.7% after provision for loan losses Other income $1,142 $868 $275 31.6% Other expense $6,339 $5,950 $389 6.5% Income before $4,253 $3,862 $391 10.1% income tax Income tax $1,604 $1,433 $171 11.9% Net income $2,649 $2,429 $220 9.1% Six Months Ended Change 6/30/94 6/30/93 Amount Percent (000's) Net interest income $19,154 $18,787 $368 2.0% Loan loss provision $661 $782 ($121) -15.4% Net interest income $18,493 $18,005 $488 2.7% after provision for loan losses Other income $2,164 $1,750 $413 23.6% Other expense $12,595 $12,095 $500 4.1% Income before $8,061 $7,660 $401 5.2% income tax Income tax $3,012 $2,852 $160 5.6% Net income $5,049 $4,808 $241 5.0% * May not foot due to rounding As a result of higher pre-tax income, YTD income taxes increased by $160,000, with the effective tax rate being essentially unchanged. CBSI's marginal tax rates are 35% federal (up from 34% prior to passing the Omnibus Budget Reconciliation Act of 1993) and 9% state (plus a 15% surcharge scheduled to be phased out over time). Compared to our peers, the company's effective tax rate at 37.4% is unfavorable because of New York State's very high tax level as well as tax exempt security holdings being slightly below the norm. Capital Six Months Ended Change 6/30/94 6/30/93 Amount Percent Tier 1 leverage ratio 7.14% 8.19% -1.05% N/A Tier 1 capital to 13.09 14.89 (1.80) N/A risk asset ratio Cash dividend declared $0.54 $0.50 $0.04 8.0% per common share Dividend payout 29.5% 28.2% 1.30% N/A Book value per share: Total $23.07 $20.96 $2.11 10.1% : Tangible 20.97 20.76 0.20 1.0 The capital position of Community Bank System, Inc. continues to be ample. As of June 30, 1994, the tier I capital to assets ratio of 7.14% was 105 basis points lower than one year earlier; this significant decrease is the result of the $5.5 million intangible from the Columbia Savings deposit acquisition, $46 million higher borrowings to help fund loan and investment growth, and a $715,000 negative after tax market value adjustment for the available for sale investment portfolio (as required by SFAS 115). Though below the peer norm of 7.96% as of March 31, 1994, CBSI's tier I leverage ratio is well above the 5% minimum required to be a "well-capitalized" bank as defined by the FDIC. Management's objective is to maintain the tier I ratio in the 7% range, adequate for regulatory requirements with sufficient capacity for potential branch acquisitions and leverage strategies. As a result of the fore-mentioned reasons, the tier I risk-based capital ratio as of June 30, 1994 was 13.09% or 180 basis points lower than it was one year ago. This compares to an 6% "well-capitalized" regulatory minimum. To the degree that earning asset growth results from investment purchases, this risk- based ratio is more favorable since investments have a lower risk component than most loans. Total capital reached $63.8 million as of June 30, 1994, $6.8 million (11.9%) higher than twelve months earlier. This increase is attributable to dividends declared on common stock of $3.0 million over the twelve months ended June 30, 1994 versus net income of $9.8 million during the same time frame. The higher first half dividend shown above reflects a 2 cent per share increase (8%) in the quarterly dividend approved by the CBSI Board of Directors last August, the third dividend hike within two years. The YTD 1994 dividend pay-out of 29.5% is slightly below the company's targeted 30-40% guideline. The 10.1% increase in book value per share from June 30, 1993 approximates the increase in total capital discussed above, slightly offset by 1.6% more in shares outstanding largely because of the impact of a higher stock price on valuing unexercised options. Tangible book value per share is slightly (1%) higher than a year ago, but has decreased 7.5% since the first quarter of 1994 due to the intangible resulting from the acquisition of the three Columbia branches. The common shares of Community Bank System, Inc. are traded in the NASDAQ National Market System under the symbol CBSI. Stock price activity, numbers of shares outstanding, cash dividends declared and share volume traded are shown below. For the Quarter Market Market Market # of Cash Share Ended: Price Price Price Shares Dividend Volume High Low Close Outstanding Declared Traded ------ ------ ------ ------ ------ ------ Amount and Change from Preceding Quarter ------ ------ ------ ------ ------ ------ December 31, 1992 Amount $25.00 $20.00 $23.75 2,696,760 $0.25 89,000 Change N/A N/A N/A N/A N/A N/A March 31, 1993 Amount $30.75 $23.00 $29.00 2,709,816 $0.25 315,000 Change 23.0% 15.0% 22.1% 0.5% 0.0% 253.9% June 30, 1993 Amount $30.00 $25.00 $27.00 2,722,216 $0.25 299,000 Change -2.4% 8.7% -6.9% 0.5% 0.0% -5.1% September 30, 1993 Amount $30.00 $26.00 $30.00 2,745,079 $0.27 467,000 Change 0.0% 4.0% 11.1% 0.8% 8.0% 56.2% December 31, 1993 Amount $30.50 $27.88 $28.50 2,748,318 $0.27 253,000 Change 1.7% 7.2% -5.0% 0.1% 0.0% -45.8% March 31, 1994 Amount $30.75 $28.50 $29.25 2,749,518 $0.27 128,929 Change 0.8% 2.2% 2.6% 0.0% 0.0% -49.0% June 30, 1994 Amount $30.50 $28.50 $30.50 2,765,968 $0.27 253,665 Change -0.8% 0.0% 4.3% 0.6% 0.0% 96.7% Change from June 30, 1993 to June 30, 1994 Amount $0.50 $3.50 $3.50 43,752 $0.02 (45,335) % Change 1.7% 14.0% 13.0% 1.6% 8.0% -15.2% Loans Loans outstanding, net of unearned discount, were $445.5 million as of June 30, 1994, a very favorable $63.7 million (16.7%) increase in the last twelve months. As shown in the table below, CBSI is predominantly a retail bank, with over 70% of its outstandings spread across three basic consumer loan types. These types are more fully defined in the company's 1993 annual report.
For the Quarter Consumer Consumer Consumer Business Total Yield on Ended: Direct Indirect Mortgages Lending Loans Loans (000's) ------ ------ ------ ------ ------ ------ Amount and Change Quarterly from Preceding Quarter Average ------ ------ ------ ------ ------ ------ December 31, 1992 Amount $94,608 $71,314 $100,656 $95,779 $362,356 10.35% Change N/A N/A N/A N/A N/A N/A March 31, 1993 Amount $92,005 $68,650 $105,577 $101,234 $367,467 10.07% Change -2.8% -3.7% 4.9% 5.7% 1.4% (0.28) June 30, 1993 Amount $90,296 $71,123 $111,873 $108,537 $381,830 9.88% Change -1.9% 3.6% 6.0% 7.2% 3.9% (0.19) September 30, 1993 Amount $95,102 $72,120 $120,124 $109,788 $397,134 9.54% Change 5.3% 1.4% 7.4% 1.2% 4.0% (0.34) December 31, 1993 Amount $95,502 $74,321 $127,618 $120,430 $417,871 9.38% Change 0.4% 3.1% 6.2% 9.7% 5.2% (0.16) March 31, 1994 Amount $92,908 $77,103 $133,085 $123,373 $426,470 9.22% Change -2.7% 3.7% 4.3% 2.4% 2.1% (0.16) June 30, 1994 Amount $93,768 $86,230 $138,349 $127,180 $445,527 9.29% Change 0.9% 11.8% 4.0% 3.1% 4.5% 0.07 Change from June 30, 1993 to June 30, 1994 Amount $3,472 $15,107 $26,475 $18,643 $63,697 (0.59) Change 3.8% 21.2% 23.7% 17.2% 16.7% N/A Loan mix June 30, 1993 23.6% 18.6% 29.3% 28.4% 100.0% June 30, 1994 21.0% 19.4% 31.1% 28.5% 100.0% Change -2.6% 0.7% 1.8% 0.1% ---
* May not foot due to rounding Greater than 40% of loan growth in the last twelve months resulted from consumer mortgages. The near 24% increase in that line of business is attributable to the attractive mortgage rate environment and the resulting fixed rate refinancing boom during 1993. While growth during the second quarter of 1994 has slowed with higher interest rates, consumer mortgages rose an acceptable 4.0% from the preceding quarter. CBSI's generally prime-based commercial loan portfolio climbed over 17% from a year ago; though a relatively low prime lending rate has encouraged borrowing, small and medium sized companies have been additionally receptive to CBSI's responsive and personalized service. Experienced lending officers who have joined the bank in the last two years have also enhanced commercial loan growth. While the recent increases in the prime rate may have dampened demand a bit, as evidenced by growth of 3.1% during the last three months, expansion of the business lending portfolio remains good. Growth of 21% during the last twelve months in indirect consumer loans (applications taken at dealer locations) reflects both high automobile demand industry-wide, which began in the spring of last year, as well as greater emphasis on this product line in CBNA's Southern Region. These factors on top of a normally strong buying season produced a vigorous 11.8% increase in the quarter just ended. Approximately, 58% of the bank's indirect automobile loans are used versus 42% new. About 9% of the consumer indirect portfolio consists of mobile homes and recreational and other vehicles. Consumer direct loans have grown 3.8% since June 30, 1993, but have essentially been flat since the end of 1992. The accumulation and periodic sale of student loans caused some fluctuation during this period. The positive growth trend in home equity loans (which are included in this product line as an alternative to direct personal loans) has barely offset run off in the installment and other personal loan components of this category. Loans at CBSI have now climbed for nine consecutive quarters, which compares very favorably against the banking industry in general. The change in loan portfolio mix by type over the last year is shown at the bottom of the above table. The resulting mix echoes the trend of the previous several years of more consumer mortgages and commercial loans; the indirect loan share began to turn up in the first quarter of this year after a slide which started before the 1990 recession. There continues to be a decreasing direct consumer loan presence. As discussed in the net interest income section of this report, earning asset yields have fallen 58 basis points over the last twelve months. The loan yield has fallen 59 basis points. Nonetheless, CBSI's predominantly retail loan mix and related pricing objectives have maintained a very favorable overall loan yield, being in the 90th peer percentile as of March 31, 1994. Loan Loss Provision and Reserve for Loan Losses The provision for future loan losses was $422,000 for the three months ended June 30, 1994, up $47,000 (12.6%) versus the same period last year. Net charge-offs for the quarter were a very low $159,000 (.15% of loans), up a bit from $90,000 a year ago due to fewer recoveries. The primary reason for the higher provision was to maintain the ratio of loan loss reserve to total loans at the first quarter's 1.34% level, a strategy management considers prudent in light of strong loan growth. As a result, the reserve reached a new high at quarter end of $6.0 million. As the table below shows, 1994's YTD net charge offs are reduced from the prior year's level due to lower gross charge offs, partially offset by lower recoveries. CBSI's general experience has been at or slightly better than the peer norm, being in the 60th percentile as of March 31, 1994. 3 Months 3 Months 6 Months 6 Months 12 Months (000's or % Ratios) June 30 June 30 June 30 June 30 Dec 31, 1994 1993 1994 1993 1993 - - ---------- ---- ---- ---- ---- ---- Net Charge-offs $159 $90 $398 $415 $782 Net Charge-offs/Ave Loans 0.15% 0.10% 0.19% 0.23% 0.20% Gross Charge-offs $282 $261 $620 $749 $1,410 Gross Charge-offs/Ave Loans 0.26% 0.28% 0.29% 0.41% 0.37% Recoveries $123 $171 $222 $334 $628 Recoveries/Prior year 35.0% 26.3% 31.8% 25.9% 24.2% gross charge offs Non-performing loans remained at a manageable level as of the most recent quarter end at $2.1 million, down $273,000 from twelve months earlier. The major reason for the decrease was pay-outs on several large commercial loan non- performers. Also down from the June 30, 1993 level was the ratio of non- performers to loans outstanding to .47%; the slightly higher level at March 31, 1994 was in the favorable the 32nd percentile. The ratio of loan loss provision to net charge offs for the most recent quarter end was 265%, well below the 417% ratio twelve months earlier when the reserve was being built more aggressively. Nonetheless, today's coverage of loan loss reserves over non-performers is stronger at 282% than a year earlier. Moreover, CBNA's regulators recently concurred that reserves were very adequate. 3 Months 3 Months 6 Months 6 Months 12 Months (000's or % Ratios) June 30 June 30 June 30 June 30 Dec 31, 1994 1993 1994 1993 1993 - - ---------- ---- ---- ---- ---- ---- Non-Performing Loans $2,114 $2,387 $2,114 $2,387 $2,391 Non-Performing Loans/Loans 0.47% 0.63% 0.47% 0.63% 0.57% Loan Loss Allowance $5,970 $5,350 $5,970 $5,350 $5,707 Loan Loss Allowance/Loans 1.34% 1.40% 1.34% 1.40% 1.37% Loan Loss Allowance/ 282% 224% 282% 224% 239% Non-Performing Loans Loan Loss Provision $422 $375 $661 $782 $1,506 Loan Loss Provision/ 265% 417% 166% 189% 193% Net Charge-offs The following table reflects the detail on non-performing and restructured loan levels. The ratio of non-performing assets to total assets was .31% as of June 30, 1994, down 16 basis points from a year ago. Troubled debt restructuring declined significantly to only $39,000 compared to three months earlier at $228,000 and a year earlier at $301,000; the change reflects being paid out of a previously restructured commercial loan. 6 Months 6 Months 12 Months 12 Months 12 Months (000's or % Ratios) June 30 June 30 Dec 31, Dec 31, Dec 31, 1994 1993 1993 1992 1991 - - ---------- ---- ---- ---- ---- ---- Loans accounted for on a $1,550 $1,731 $1,738 $881 $1,369 non-accrual basis Accruing loans which are contractually past due 90 days or more as to principal and interest payments $564 $656 $653 $726 $957 Loans which are "troubled debt restructurings" as defined in Statement of Financial Accounting Standards No. 15 "Accounting by Debtors and Creditors for Troubled Debt Restructurings $39 $301 $243 $356 $1,720 Other Real Estate $390 $589 $433 $459 $1,426 ----- ----- ----- ----- ----- Total Non-Performing Assets $2,543 $3,277 $3,067 $2,422 $5,472 Total Non-Performing Assets/ 0.31% 0.47% 0.43% 0.36% 0.86% Total Assets * May not foot due to rounding Delinquencies for loans greater than 30 days past due plus nonaccruing loans as of June 30, 1994 have declined across all major loan categories from the prior twelve months as reflected in the following table. The major reasons for the decreases are improved collection efforts and non-performing loan payouts. Delinquencies 6 Months 6 Months 12 Months 12 Months 12 Months 30 days - Non-accruing June 30 June 30 Dec 31, Dec 31, Dec 31, (000's or % Ratios) 1994 1993 1993 1992 1991 - - ---------- ---- ---- ---- ---- ---- Total Delinquencies $5,605 $6,103 $7,004 $6,894 $9,928 Ratio to Total Loans 1.19% 1.49% 1.58% 1.76% 2.62% Time & Demand $2,299 $2,176 $2,633 $1,758 $2,908 Ratio to Time & Demand 1.71% 1.91% 2.07% 1.72% 3.21% Installment $2,330 $2,484 $3,156 $4,026 $5,803 Ratio to Installment 1.40% 1.62% 2.01% 2.53% 3.24% Real Estate $976 $1,444 $1,214 $1,110 $1,217 Ratio to Real Estate 0.57% 1.02% 0.76% 0.85% 1.11% Note: Ratios to Gross Loans * May not foot due to rounding Deposits Deposits are the primary source of funding for loans and investments as measured by the deposits to earning asset ratio. This ratio is down 8.9 percentage points from a year ago to 86.9%, reflecting borrowings as an increased source of funding in order to achieve management's balance sheet leverage objectives. Earning assets have increased $95.4 million over the last twelve months, while deposits have grown $25.7 million. Third quarter 1994 deposit growth will be substantially higher when the full impact of the recent Columbia Banking acquisition is realized. The table below displays the components of total deposits and volume and rate trends over the last seven quarters.
For the Quarter Average Average Average Average Average Average Ended: Demand Savings Money Time Total Deposits/ (000's) Market Deposits Earning ------ ------ ------ ------ ------ Assets Amount and Average Rate ------ ------ ------ ------ ------ ------ December 31, 1992 Amount $86,323 $226,541 $78,579 $191,046 $582,489 94.6% Yield / Rate ---- 3.05% 2.82% 4.73% 3.11% March 31, 1993 Amount $84,744 $237,060 $78,189 $182,275 $582,268 92.9% Yield / Rate ---- 2.91% 2.73% 4.55% 2.98% June 30, 1993 Amount $85,818 $251,997 $81,296 $195,382 $614,493 95.9% Yield / Rate ---- 2.85% 2.72% 4.44% 2.94% September 30, 1993 Amount $88,563 $240,831 $78,329 $189,625 $597,350 93.0% Yield / Rate ---- 2.68% 2.64% 4.38% 2.82% December 31, 1993 Amount $91,701 $241,030 $75,144 $193,265 $601,141 92.5% Yield / Rate ---- 2.53% 2.50% 4.17% 2.67% March 31, 1994 Amount $92,522 $241,123 $72,003 $196,099 $601,747 88.1% Yield / Rate ---- 2.49% 2.52% 4.13% 2.65% June 30, 1994 Amount $96,131 $252,259 $77,514 $214,297 $640,200 86.9% Yield / Rate ---- 2.49% 2.47% 4.12% 2.66% Change in quarterly average outstandings & yield / rate June 30, 1993 to June 30, 1994 Amount $10,312 $262 ($3,782) $18,915 $25,707 -8.9% % Change 12.0% 0.1% -4.7% 9.7% 4.2% Change (% pts) ---- (0.36) (0.24) (0.32) (0.28) Deposit Mix June 30, 1993 14.0% 41.0% 13.2% 31.8% 100.0% June 30, 1994 15.0% 39.4% 12.1% 33.5% 100.0% Change 1.1% -1.6% -1.1% 1.7% ---- Year-to-date average outstandings: (000's) June 30, 1993 Amount $85,284 $244,570 $79,751 $188,865 $598,469 94.4% Yield / Rate ---- 2.88% 2.73% 4.50% 2.96% ---- June 30, 1994 Amount $94,337 $246,722 $74,773 $205,248 $621,080 87.5% Yield / Rate ---- 2.49% 2.49% 4.13% 2.65% ---- Change in YTD average outstandings & yield / rate from June 30, 1993 to June 30, 1994 Amount $9,052 $2,152 ($4,977) $16,384 $22,610 (6.9) % Change 10.6% 0.9% -6.2% 8.7% 3.8% ---- Change (%pts) ---- (0.39) (0.23) (0.37) (0.30)
* May not foot due to rounding Average total deposits for the quarter were 4.2% higher than the comparable 1993 period. Nineteen million dollars (75%) of this growth was in time deposits and $10 million in demand deposits. This was offset slightly by a decrease in money market accounts. The major reasons for the increase are the $62.4 million Columbia Banking FSA deposit acquisition late in the quarter, the Waddington denovo branch, an expanded business customer base consistent with record increases in commercial loans, the spring 1993 closing of the Jefferson National Bank in CBNA's Northern Region, and the sale of the former Manufacturer's Hanover branches in the Southern Region. The deposit mix has changed slightly since the second quarter of 1993. Time deposits have increased with the recent up turn in financial market rates; the bank has chosen to promote longer term personal C.D.s aggressively as part of its overall asset/liability management strategy to lengthen its funding structure. Additionally, municipal time deposits have moved toward more historical levels since higher rates have decreased the temporary parking of public funds in money market and savings accounts. While borrowing costs have risen with the recent movement in the federal funds rate, the above table shows that the average rates on interest bearing deposits have lagged or been flat for the last two quarters. The time deposit trend also reflects run-off of C.D.s at higher rates than currently being offered. As of March 31, 1994, CBSI's average rate on interest bearing deposits was in the 59th percentile. Liquidity and Borrowing Position Liquidity involves the ability to raise funds to support asset growth, meet requirements for deposit withdrawals, maintain reserve requirements and otherwise sustain operations. This is accomplished through maturities of loans and investments, deposit growth, and access to sources of funds other than local deposits (such as borrowings from the Federal Home Loan Bank, selling securities under agreements to repurchase, and various other sources). All of these factors are considered by management in evaluating the bank's liquidity requirements and position assessment. The bank's liquidity level as of June 30, 1994 is deemed by management to be adequate. In the event of a liquidity crisis, over $113 million (essentially short term assets minus short term liabilities) or 13.9% of assets could be converted into cash within a 30 day time period. This puts the liquidity position well above the bank's 7.5% policy minimum. The same policy minimum applies to projections over a 90-day period, for which the actual ratio was 10.2% as of this quarter end. This longer period encompasses continued service to loan customers and normal deposit outflows anticipating viability of the institution after coping with the initial crisis. While this liquidity approach and related measures have been practiced by leading banks for a number of years, they have recently been validated by the New England banking crises. The following table shows the trend of loans, investments, large liability certificates of deposit and other borrowings over the last five quarters.
For the Quarter Average Average Ave Core Ave CD's Average Interest Ended: Loans Investments Deposits >$100,000 Borrowings Bearing (000's) (a) (b) Liabilities ------ ------ ------ ------ ------ ------ Amount and Average Yield / Rate ------ ------ ------ ------ ------ ------ December 31, 1992 Amount $358,494 $257,188 $553,565 $28,924 $20,580 $516,746 Yield / Rate 10.35% 7.96% 3.10% 3.36% 2.74% 3.61% March 31, 1993 Amount $364,386 $262,606 $561,322 $20,945 $28,340 $525,864 Yield / Rate 10.07% 7.75% 2.96% 3.38% 3.75% 3.50% June 30, 1993 Amount $372,749 $268,318 $590,523 $23,971 $12,138 $540,813 Yield / Rate 9.88% 7.33% 2.89% 3.29% 3.13% 3.37% September 30, 1993 Amount $388,137 $254,134 $579,514 $17,836 $25,043 $533,829 Yield / Rate 9.54% 7.30% 2.76% 3.55% 3.24% 3.27% December 31, 1993 Amount $404,944 $244,733 $576,448 $24,693 $26,394 $535,834 Yield / Rate 9.38% 6.58% 2.64% 3.35% 3.16% 3.15% March 31, 1994 Amount $419,874 $262,915 $576,613 $25,133 $58,850 $568,074 Yield / Rate 9.22% 6.71% 2.60% 3.72% 3.49% 3.16% June 30, 1994 Amount $435,678 $300,740 $605,653 $34,548 $81,048 $625,117 Yield / Rate 9.29% 6.69% 2.60% 3.67% 4.07% 3.25% Change in quarterly average outstandings & yield / rate from June 30, 1993 to June 30, 1994 Amount $62,930 $32,421 $15,130 $10,577 $68,910 $84,304 % Change 16.9% 12.1% 2.6% 44.1% 567.7% 15.6% Change (%pts) (0.59) (0.64) (0.29) 0.38 0.94 (0.12) Year-to-date average outstandings: (000's) June 30, 1993 Amount $368,591 $265,478 $576,003 $22,466 $20,194 $533,380 Yield / Rate 9.97% 7.54% 2.93% 3.33% 3.44% 3.44% June 30, 1994 Amount $427,820 $281,932 $591,213 $29,867 $70,010 596,753 Yield / Rate 9.26% 6.70% 2.60% 3.69% 3.82% 3.21% Change in YTD average outstandings & yield / rate from June 30, 1993 to June 30, 1994 Amount $59,229 $16,454 $15,210 $7,400 $49,816 $63,374 % Change 16.1% 6.2% 2.6% 32.9% 246.7% 11.9% Change (%pts) (0.71) (0.84) (0.33) 0.36 0.39 (0.23)
Note: (a) Yield on average investments calculated on a full-tax equivalent basis. Excludes premiums on called bonds of $158, $146, and $297 as of March 10, July 10, and October 10, 1993, respectively. (b) Defined as total deposits minus CD's > $100,000. Rate includes impact of non-interest bearing transaction accounts. * May not foot due to rounding Borrowings for second quarter 1994 averaged $81.0 million as compared to $12.1 million a year earlier. This resulted from CBNA's strategy to increase net interest income by expanding earning assets as long as loan and investment opportunities are attractive and non-deposit funding sources are sufficient. As discussed in the capital section of this report, this strategy is being executed within the guideline of maintaining the tier I leverage ratio in the 7% range. In addition, borrowings are constrained by an internal guideline not to exceed 50% of assets eligible to collateralize borrowings. This would provide for unused borrowing capacity of $77 million as of quarter end in the event of an unforeseen liquidity or other need. CBNA's Federal Home Loan Bank borrowings are comprised of primarily 90 day terms or less, with the bulk at the currently favorable overnight rate. Twenty million dollars represents a one year term borrowing at a low fixed rate. The bank's asset/liability management committee monitors the trade-off between raising funds through retail deposits versus large liability certificates of deposit and other borrowings. Management uses borrowings and certificates of deposit interchangeably according to the more cost effective option for the maturity of funds desired. On a short-term basis, borrowings also cushion fluctuations in deposits; the bank services a large municipal deposit base that varies with seasonal cash requirements and revenue flows. The average borrowing rate for the quarter just ended at 4.07% is higher than the average rate on C.D.s greater than $100,000 for the first time in over two years (first quarter 1993 had prior period adjustment). Until recently, it had been more cost effective to borrow in the national financial markets. While CD rates lagged the second quarter's increase in the federal funds rate, Federal Home Loan bank borrowing rates increased in lock-step. Investments and Asset/Liability Management The level and composition of Community Bank System, Inc.'s investment portfolio is designed to balance the constraints of liquidity, interest rate risk, capital and credit risk while providing an acceptable rate of return. In meeting that objective, the portfolio at quarter end comprises 41.4% of earning assets and contributes a substantial steady stream of interest income using high quality securities with relatively short maturities. As shown by the table below, the bank's investments consist primarily of U.S. treasury securities, mortgage-backed securities (including U.S. agencies and collateralized mortgage obligations), and tax-exempt obligations of state and political subdivisions. All investment strategies are developed in conjunction with the bank's asset/liability position, with particular attention given to managing interest rate risk.
For the Quarter U.S. Mtg-Backs Tax Other Total Invests / Ended: Gov'ts (a) Exempts (b) Investments Earning Assets (000's) ------ ------ ------ ------ ------ ------ Amount and Change (Period from Preceding Quarter End) ------ ------ ------ ------ ------ ------ December 31, 1992 Amount $106,797 $116,487 $27,940 $11,762 $262,986 42.1% Change N/A N/A N/A N/A N/A N/A March 31, 1993 Amount $120,475 $107,659 $27,797 $9,506 $265,437 41.9% Change 12.8% -7.6% -0.5% -19.2% 0.9% (0.1) June 30, 1993 Amount $117,435 $105,787 $26,939 $7,840 $258,001 40.3% Change -2.5% -1.7% -3.1% -17.5% -2.8% (1.6) September 30, 1993 Amount $111,309 $101,248 $27,612 $6,554 $246,723 38.3% Change -5.2% -4.3% 2.5% -16.4% -4.4% (2.0) December 31, 1993 Amount $114,413 $107,567 $24,585 $6,980 $253,544 37.8% Change 2.8% 6.2% -11.0% 6.5% 2.8% (0.6) March 31, 1994 Amount $120,183 $144,284 $23,807 $7,279 $295,553 40.9% Change 5.0% 34.1% -3.2% 4.3% 16.6% 3.2 June 30, 1994 Amount $127,571 $149,475 $21,246 $15,904 $314,196 41.4% Change 6.1% 3.6% -10.8% 118.5% 6.3% 0.4 Change from June 30, 1993 to June 30, 1994 Amount $10,136 $43,688 ($5,693) $8,064 $56,195 1.0% Change 8.6% 41.3% -21.1% 102.9% 21.8% --- Investment Mix June 30, 1993 45.5% 41.0% 10.4% 3.0% 100.0% June 30, 1994 40.6% 47.6% 6.8% 5.1% 100.0% Change -4.9% 6.6% -3.7% 2.0% --- Note: (a) Includes CMO's and pass-through's (b) Includes Money Market Investments, Federal Home Loan Bank, and other stock
* May not foot due to rounding Investments totaled $314 million for the quarter just ended, up $56 million (21.8%) from twelve months prior. This increase (largely in the first six months of 1994) is attributable to the previously mentioned strategy of increasing net interest income by growing earning asset levels when favorable investment opportunities are available. As rates were rising in the first quarter of 1994 and early second quarter, cash flow producing investments (such as 15 year seasoned mortgage backed securities) were purchased to provide an expected flow of funds for reinvestment at higher rates later on. Thus, significant growth (34.1%) was seen from December 1993 to March 1994 in mortgage backed securities. In the middle of the second quarter, as rates began to level, call protection investments were purchased. Thus, from March 1994 to June 1994, there is less growth in mortgage backed securities (3.6%) than in call protection U.S. Governments (6.1%). As the result of these first and second quarter purchases, mortgage backed securities grew to $149.5 million, up $43.7 million (41.3%) from June 30, 1993, while U.S. government securities grew to $127.6 million, up $10.1 million (8.6%) over the same period. Additional growth in investments resulted from more than doubling the bank's Federal Home Loan Bank stock level (reflected in other investments) as required by the increased borrowing levels. Thus, the investment portfolio mix has shifted such that there are increased proportions of mortgage backed securities (47.6% as of June 30, 1994) and other investments (Federal Home Loan Bank stock), while a decreasing proportion of tax exempt and U.S. government securities. The average fully taxable equivalent yield in the last year has decreased from 7.33% to 6.69% as higher yielding investments have run off. Nonetheless, as of March 31, 1994 CBSI's overall investment yield is in the highly favorable 85th percentile. As rates in the financial markets increased in the first two quarters of 1994, the downward trend in the average investment yield stabilized. The average portfolio life based on earliest redemption date has extended slightly in the last twelve months to 2.9 years, reflecting the desire to take advantage of higher yields further out on the yield curve. Consistent with the recent rise in financial market rates, the portfolio's market value appreciation decreased from $12.1 million or 4.9% of book value one year ago to a $1.6 million loss or (.5%) of book value as of June 30, 1994. As of the most recent quarter end, $122 million or 38.5% of the investment portfolio is classified as available for sale in accordance with SFAS No. 115, which was adopted as of year-end 1993. The most common criteria for placing securities in the AFS portfolio is the need to sell securities for liquidity needs and in the management of interest rate risk. However, CBSI's liquidity position does not rely on security sales, and interest rate risk is managed at the time of investment purchase rather than after the fact. To be conservative, the bank has chosen to place in its AFS portfolio all collateralized mortgage obligations and publicly traded securities with a stated final maturity or call date of two years or less. As of June 30, 1994 the AFS portfolio average maturity based on earliest redemption date was 1.9 years and the pre-tax market value adjustment was negative $1.2 million or (1.1%) of book value. The available for sale portfolio has been decreasing since the adoption of SFAS 115; since that time, all new purchases have been classified as held to maturity. The held to maturity portfolio (61.5% of the total investments) amounted to $189.2 million as of June 30, 1994. Average time to maturity of these securities based on the earliest redemption date was 3.5 years, reflecting a high (but slowing) rate of prepayments on mortgage backed holdings. The portfolio recorded a market value loss of $404,000 or .3% below book value for the quarter just ended. The following table displays several of the underlying investment portfolio statistical measures discussed above on a quarterly basis since December 31, 1992.
For the Quarter Portfolio Portfolio Portfolio AFS AFS Market Net Ended: Average Maturity Market / Portfolio/ Value Realized (000's) Yield (Years) Book Total Adjustment Gains / (a) (b) Portfolio (Pretax) (Losses) -------- -------- -------- -------- -------- -------- December 31, 1992 7.96% 2.7 103.9% N/A N/A $0 March 31, 1993 7.75% 2.7 105.2% N/A N/A $0 June 30, 1993 7.33% 2.5 104.9% N/A N/A $0 September 30, 1993 7.30% 2.6 104.8% N/A N/A $0 December 31, 1993 6.58% 2.3 103.7% 50.0% $2,164 ($15) March 31, 1994 6.71% 3.3 101.7% 41.8% $592 ($3) June 30, 1994 6.69% 2.9 99.5% 38.5% ($1,209) $0 Change from June 30, 1993 to June 30, 1994 -0.64% 0.4 -5.4% N/A N/A $0
Note: (a) Yield on average investments calculated on a full-tax equivalent basis. Excludes premiums on called bonds of $158, $146, and $297 as of March 10, July 10, and October 10, 1993, respectively. (b) Based on earliest redemption date. * May not foot due to rounding Part II. Other Information Item 6. Exhibits and Reports on Form 8-K a) Exhibits required by Item 601 of Regulation S-K: (11) Statement re Computation of earnings per share b) Reports on Form 8-K: Filed on 8/15/94. Item 5. Other Information. News release: Community Bank, N.A. acquires three branches of former Columbia Banking FSA from Resolution Trust Corporation on June 3, 1994. SIGNATURES Pursuant to the requirements of The Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Community Bank System, Inc. Date: August 15, 1994 /s/ Sanford A. Belden ______________________________ Sanford A. Belden, President and Chief Executive Officer Date: August 15, 1994 /s/ David G. Wallace ___________________________ David G. Wallace, Senior Vice President and Chief Financial Officer Community Bank System, Inc. Statement re Earnings Per Share Computation Exhibit 11 Three Months Ended Six Months Ended June 30, June 30, 1994 1993 1994 1993 Primary Earnings Per Share Net Income 2,648,813 2,428,781 5,049,044 4,807,576 ---------- --------- --------- --------- Income applicable to common stock 2,648,813 2,428,781 5,049,044 4,807,576 ========== ========= ========= ========= Weighted average number of common shares 2,758,969 2,717,338 2,753,965 2,709,641 Add: Shares issuable from assumed exercise of incentive stock options 51,778 65,355 55,235 65,745 --------- --------- --------- --------- Weighted average number of common shares - adjusted 2,810,747 2,782,693 2,809,200 2,775,386 ========= ========= ========= ========= Primary earnings per share $0.94 $0.87 $1.80 $1.73 ===== ===== ===== ===== Fully Diluted Earnings Per Share Net Income 2,648,813 2,428,781 5,049,044 4,807,576 ========= ========= ========= ========= Weighted average number of common shares - adjusted 2,814,895 2,782,693 2,812,389 2,778,651 Add: Equivalent number of common shares assuming conversion of preferred --------- --------- --------- --------- Weighted average number of common shares - adjusted 2,814,895 2,782,693 2,812,389 2,778,651 ========= ========= ========= ========= Fully diluted earnings per share $0.94 $0.87 $1.80 $1.73 ===== ===== ===== ===== -----END PRIVACY-ENHANCED MESSAGE-----