Upstate New York's Community Bank System Inc. has turned down an unsolicited buyout offer for about $112 million, according to a source familiar with the details.

Schenectady-based Trustco Bank Corp NY sent a merger proposal last month to the $916 million-asset company for about $40 a share or 1.7 times its Dec. 31 book value, the source said, but no formal offer was made.

The DeWitt-based Community Bank rejected the advance from $1.9 billion- asset Trustco and soon instituted a shareholder rights plan. Trustco received the letter declining its proposal a couple of days after the rights plan was adopted, the source said.

Sanford A. Belden, president and chief executive of Community, said "nobona fide offers" were received by the bank, but he declined to comment about any unofficial offers.

Trustco senior vice president William F. Terry said the company routinely reviews a number of "prospective opportunities," but he too wouldn't comment on the rumored offer.

Under Community's shareholder rights plan, the board has issued rights to shareholders allowing them to purchase $170 worth of common stock for $85 if any entity acquires 15% or more of Community Bank's stock without negotiating with the board of directors.

The rumor has surfaced at a time when several shareholders, both private and institutional, have complained about Community Bank System's management. Investor Thomas Humphreys, director of research at Shadwell Partners, even wrote bank management last December that "shareholders would be best served not by acquisitions but instead by the sale of the company."

Last week three shareholders sued Community, seeking to block its acquisition of 15 Chase Manhattan branches with $455 million of deposits.

The shareholders are arguing that the $37.5 million deposit premium is too high and will drain the bank's capital and cut book value and earnings per share.

Since a 1992 corporate consolidation of five subsidiaries into one bank, Community has used several branch and bank acquisitions to build a 36- branch network throughout central New York State. Last year, the company posted record income of $10.1 million.

But in mid-January, the company was stopped cold in its bid to acquire $6.5 million-asset First National Bank of Hermon. The company was outbid by Citizens National Bank of Malone despite a $73-a-share cash offer. Community's October letter of intent was allowed to expire on Jan. 15, according to Roger J. Woods, president and chief executive of First National.

Two days later, First National signed a letter of intent to be acquired by Citizens for $85 a share in cash. Hermon and Citizens signed a formal agreement March 30.

Trustco's unsuccessful attempt at acquiring Community Bank System is the second time that it has been spurned in an effort to buy another community institution. A year ago, Arrow Financial Corp. of Glens Falls rejected an offer that was rumored to be a stock exchange worth about $20 a share.

That was about twice Arrow's book value and 13 times then-estimated 1994 earnings, according to a research report from First Albany Corp.

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