Back to GetFilings.com
================================================================================
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
---------
X FOR ANNUAL AND TRANSITIONAL REPORTS PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission file number 0-11716
[GRAPHIC OMITTED]
COMMUNITY BANK SYSTEM, INC.
(Exact name of registrant as specified in its charter)
Delaware 16-1213679
------------------------------- ---------------
(State or other jurisdiction of (I.R.S.Employer
incorporation) Identification No.)
5790 Widewaters Parkway, DeWitt, New York 13214-1883
- ----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(315) 445-2282
--------------
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, No Par
Securities registered pursuant to Section 12(g) of the Act:
None
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 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_____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [X]
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the common equity was sold, or the
average bid and asked prices of such common equity, as of a specified date
within 60 days prior to the date of filing.
$146,622,818 based upon average selling price of $20.673 and
7,092,479 shares on March 15, 2000.
---------------------------------------------------------------
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
7,092,479 shares of Common Stock, no par value, were and
outstanding on March 15, 2000.
-------------------------------------------------------------
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.
Definitive Proxy Statement for Annual Meeting of Shareholders to be held on
May 17, 2000 (the "Proxy Statement") is incorporated by reference in Part III of
this Annual Report on Form 10-K.
1
TABLE OF CONTENTS
PART I Page
Item 1. Business ....................................................... 3
Item 2. Properties ..................................................... 9
Item 3. Legal Proceedings .............................................. 9
Item 4. Submission of Matters to a Vote of Security Holders ............ 9
Item 4A. Executive Officers of the Registrant ...........................10
PART II
Item 5. Market for Registrant's Common Equity
and Related Shareholder Matters ................................11
Item 6. Selected Financial Data ........................................11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................13
Item 8. Financial Statements and Supplementary Data:
Community Bank System, Inc. and Subsidiaries:
Consolidated Statements of Financial Condition ...............42
Consolidated Statements of Income ............................43
Consolidated Statements of Changes in Shareholders' Equity ...44
Consolidated Statements of Cash Flows ........................45
Notes to Consolidated Financial Statements ...................46
Independent Auditor's Report .................................62
Two Year Selected Quarterly Data, 1999 and 1998 ................63
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ...........................................63
PART III
Item 10. Directors and Executive Officers of the Registrant .............63
Item 11. Executive Compensation .........................................64
Item 12. Security Ownership of Certain Beneficial Owners and Management..64
Item 13. Certain Relationships and Related Transactions .................64
PART IV
Item 14. Exhibits,Financial Statement Schedules,and Reports on Form 8-K..64
Signatures ................................................................66
2
Part I
This Annual Report on Form 10-K contains certain forward-looking statements with
respect to the financial condition, results of operations and business of the
Company. These forward-looking statements involve certain risks and
uncertainties. Factors that may cause actual results to differ materially from
those contemplated by such forward-looking statements are set forth herein under
the caption "Forward-Looking Statements."
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. At that time, the preexisting Canandaigua
branch office loans and deposits were transferred into the new facility. 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. On June 16, 1997
the Company acquired eight branches from Key Bank of New York located in Alfred,
Cassadaga, Clymer, Cuba, Gowanda, Ripley, Sherman, and Wellsville in
Southwestern New York State. On July 18, 1997 the Company acquired 12 branches
from Fleet Bank located in Old Forge, Boonville, Ogdensburg, St. Regis Falls,
Gateway Plaza, Watertown (2), Clayton, Lowville, Massena (2), and Gouverneur in
Northern and Central New York State. Seven of the former Fleet offices or
existing Bank offices in Watertown (2), Boonville, Ogdensburg, Gouverneur, and
Massena (2) have since been or are scheduled to be combined.
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. ("Mellon") to
provide data processing services (the agreement has since been renewed with the
subsequent acquiror of Mellon's data services, Fiserv, Inc., 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 the Bank and changed its name to CBNA
Treasury Management Corporation ("TMC"). TMC 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 ceased operations in 1990
and was renamed CFSI Close-Out Corp. in 1997.
In July 1996, the Company purchased Benefit Plans Administrators of Utica, New
York, a pension administration and consulting firm serving sponsors of defined
benefit and defined contribution plans.
On February 3, 1997, the Company formed a subsidiary business trust, Community
Capital Trust I, for the purpose of issuing preferred securities, which qualify
as Tier 1 capital. Concurrent with its formation, the trust issued $30,000,000
3
of 9.75% preferred securities in an exempt offering maturing in year 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.
On June 19, 1998, the Company formed a subsidiary of the Bank, Community
Financial Services, Inc., to offer selected insurance products through its own
agency.
On December 22, 1998, the Company formed a broker/dealer subsidiary of the Bank,
Community Investment Services Inc., which is fully implemented with ten
Financial Consultants available to provide investment advice and products to
customers.
On February 26, 1999, CBNA Preferred Funding Corp., a Real Estate Investment
Trust (REIT), was established as a subsidiary of the Bank to hold fixed rate
real estate mortgages that are serviced by the Bank.
On February 7, 2000, the Company announced its intention to acquire Elias Asset
Management, a nationally recognized firm that currently manages $700 million in
assets for individuals, corporate pension and profit sharing plans, and
foundations.
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 67 customer facilities in the eighteen counties of St. Lawrence,
Jefferson, Lewis, Oneida, Cayuga, Seneca, Ontario, Oswego, Wayne, Yates,
Allegany, Cattaraugus, Tioga, Steuben, Chautauqua, Franklin, Herkimer, 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 towns 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.
Unless the context otherwise provides, all references in this Annual Report on
Form 10-K to the "Company" shall mean, collectively, Community Bank System, Inc.
and its subsidiaries.
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"), money market accounts, 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. About 63% 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 $75,000, with nearly 80% of its customers representing about 25% of
commercial loans outstanding.
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, the Bank offers nonbank 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,
automatic teller machines (ATMs), 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.
Customers of the Bank also receive pension administration and consulting service
pertaining to their defined benefit and defined contribution plans from CBSI's
nonbank subsidiary, Benefit Plans Administrative Services, Inc. (BPA); BPA also
provides services to nonbank customers.
4
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
market areas in these regions to be the counties in which it has banking
facilities. Major competitors in these markets primarily include local branches
of banks based in Boston, Massachusetts, 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, other financial service firms, and individuals.
Northern Market. Branches in the Northern Market compete for loans and deposits
in the six county market area of St. Lawrence, Jefferson, Lewis, Franklin,
Herkimer, and Oneida Counties in Northern New York State. Within this market
area, the Bank maintains a market share(1) of 10.1% including commercial banks,
credit unions, savings and loan associations and savings banks. However, in its
three county primary market area (St. Lawrence, Jefferson, and Lewis), the Bank
has a 24.0% share. The Bank operates 27 customer facilities in this market and
is ranked either first or second in market share in 17 of the 20 towns where
these offices are located.
Finger Lakes Market. In the Finger Lakes Market, the Bank operates 14 customer
facilities competing for loans and deposits in the six-county 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 2.8%
including commercial banks, credit unions, savings and loan associations and
savings banks. However, the Bank's primary market within this region is Seneca
County, where the Bank has a 35.7% share. The Bank is ranked either first or
second in market share in six 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, Chautauqua, 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 16
office locations (including the Falconer branch opened in February 2000), and
the Bank is ranked either first or second in market share in 12 of the 14 towns
where these offices are located.
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 9.7% including commercial banks, credit unions, savings and loan
associations and savings banks. The Corning Submarket operates ten office
locations, and the Bank is ranked either first or second in market share in
seven of the eight 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, 1998, the most recent information
available, calculated by Sheshunoff Information Services, Inc.
5
The table below summarizes the Bank's deposits and market share by the eighteen
counties in which it has customer facilities. Market share is based on deposits
of all commercial banks, credit unions, savings and loan associations, and
savings banks.
Number of
CBNA Towns Where
Deposits Number of CBNA Has
6/30/98 Market CBNA 1st or 2nd Banking
County (000's) Share Facilities* Market Position Market
- ------------- ---------- ----------- ---------- ------------- -----------
Lewis $102,460 46.5 % 4 3 Northern
Seneca 98,771 35.7 5 3 Finger Lakes
St.Lawrence 309,762 28.7 14 9 Northern
Allegany 89,277 27.8 5 4 Olean
Cattaraugus 192,470 24.8 5 4 Olean
Yates 49,318 23.5 1 1 Corning
Jefferson 145,509 14.2 5 2 Northern
Steuben 88,650 7.7 7 5 Corning
Tioga 25,211 8.1 2 1 Corning
Ontario 63,350 6.9 3 0 Finger Lakes
Wayne 47,251 6.0 2 0 Finger Lakes
Herkimer 23,690 4.1 1 1 Northern
Oswego 39,107 4.1 2 2 Finger Lakes
Chautauqua 49,196 4.0 6 4 Olean
Franklin 15,775 3.4 1 1 Northern
Oneida 55,774 1.8 2 1 Northern
Cayuga 13,457 1.8 1 1 Finger Lakes
Onondaga 8,790 0.1 1 0 Finger Lakes
- ------------- ---------- ----------- ---------- ------------- -----------
18 $1,417,818 7.0 % 67 42 CBNA
Includes opening of 1982 E. Main St., Falconer, NY office and ATM in first
quarter 2000.
Employees
- ---------
As of December 31, 1999, the Bank employed 711 full-time equivalent employees
versus 718 at year-end 1998. 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 have historically been limited to the business of banking and
activities closely related or incidental to banking. On November 12, 1999,
however, the Gramm-Leachy-Bliley Act was signed into law which will, effective
March 12, 2000, relax the previous limitations and permit bank holding companies
to engage in a broader range of financial activities (see "Financial Services
Modernization Act" in the final section of this discussion for details).
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 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
6
are eliminated effective September 29, 1995. The law also permits 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
believes that the effect of the law has been to increase competition within the
markets where the Company operates, although the Company cannot quantify the
effect to which competition has increased in such markets or the timing of such
increases.
OCC Supervision
- ---------------
The Bank is supervised and regularly examined by the Office of the Comptroller
of the Currency (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, 1999, the Bank had $15.9 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, 1999 were 9.28% and 10.50%,
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, 1999 was 5.80%, 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.
7
The four federal banking agencies - the Board of Governors of the Federal
Reserve System, the Federal Deposit Insurance Corporation, the Office of the
Comptroller of the Currency, and the Office of Thrift Supervision - have
recently issued an interagency proposal which revises the risk-based capital
requirements for certain obligations related to securitized transactions. The
changes are intended to produce more consistent capital treatment for credit
risks associated with exposures arising from these types of transactions. The
proposal would amend the risk based capital requirements for asset-backed
securities as well as recourse obligations and direct credit substitutions. It
incorporates many of the industry comments received in response to an earlier
version published in November 1997. A consultative paper issued in June 1999 by
the Basel Committee on Banking Supervision considers a similar approach to that
contained in the current proposal. Public comment is requested by June 7, 2000.
If the proposal is adopted, the Bank does not believe it will 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 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:
Well Capitalized Adequately Capitalized
---------------- ----------------------
Total Risk-Based Capital Ratio 10% 8%
Tier I Risk-Based Capital Ratio 6% 4%
Tier I Leverage Ratio 5% 4%
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, 1999, the
Bank's total risk-based capital ratio and Tier I risk - based capital ratio were
10.61% and 9.39%, respectively, and its Tier I leverage ratio as of such date
was 5.86%. Notwithstanding the foregoing, if its principal federal regulator
determines that an "adequately capitalized" institution is in an unsafe or
unsound condition or is engaging in an unsafe or unsound practice, it may
require the institution to submit a corrective action plan; restrict its asset
growth; and prohibit branching, new acquisitions, and new lines of business.
Among other things, an institution's principal federal regulator may deem the
institution to be engaging in an unsafe or unsound practice if it receives a
less than satisfactory rating for asset quality, management, earnings, or
liquidity in its most recent examination.
Possible sanctions for undercapitalized depository institutions include a
prohibition on the payment of dividends and a requirement that an institution
submit a capital restoration plan to its principal federal regulator. The
capital restoration plan of an undercapitalized bank will not be approved unless
the holding company that controls the bank guarantees the bank's performance.
The obligation of a controlling bank holding company to fund a capital
restoration plan is limited to the lesser of five percent (5%) of an
undercapitalized subsidiary's assets or the amount required to meet regulatory
capital requirements. If an undercapitalized depository institution fails to
submit or implement an acceptable capital restoration plan, it can be subjected
to more severe sanctions, including an order to sell sufficient voting stock to
become adequately capitalized. Critically undercapitalized institutions are
subject to the appointment of a receiver or conservator.
8
In addition, FDICIA requires regulators to impose new noncapital 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.
Financial Services Modernization Act
- ------------------------------------
On November 12, 1999, the Gramm-Leach-Bliley Act was signed into law, repealing
provisions of the depression-era Glass-Steagall Act, which prohibited commercial
banks, securities firms, and insurance companies from affiliating with each
other and engaging in each other's businesses. The major provisions of the Act
took effect on March 12, 2000.
The Act creates a new type of financial services company called a "Financial
Holding Company:" (an "FHC"), a bank holding company with dramatically expanded
powers. FHCs may offer virtually any type of financial service, including
banking, securities underwriting, insurance (both agency and underwriting) and
merchant banking. The Federal Reserve serves as the primary "umbrella" regulator
of FHCs. Balanced against the attractiveness of these expanded powers are higher
standards for capital adequacy and management, with heavy penalties for
noncompliance.
Bank holding companies that wish to engage in expanded activities but do not
wish to become financial holding companies may elect to establish "financial
subsidiaries," which are subsidiaries of national banks with expanded powers.
The Act permits financial subsidiaries to engage in the same types of activities
permissible for nonbank subsidiaries of financial holding companies, with the
exception of merchant banking, insurance underwriting and real estate investment
and development. Merchant banking may be permitted after a five-year waiting
period under certain regulatory circumstances.
Implementing regulations under the Act have not yet been promulgated, and though
the Company cannot predict the full impact of the new legislation, there is
likely to be consolidation among financial services institutions and increased
competition for the Company. CBSI expects to remain a bank holding company for
the time being and access its options as circumstances change.
Item 2. Properties
- ------------------
The Company leases its administrative offices at 5790 Widewaters Parkway,
DeWitt, New York and the facility that houses Benefit Plans Administrative
Services in Utica, New York. The Bank owns its regional offices in Olean, New
York and Canton, New York. Of the Bank's remaining 67 customer facilities, 47
are owned by the Bank, and 20 are located in long-term leased premises.
Real property and related banking facilities owned by the Company at
December 31, 1999 had a net book value of $16.2 million and none of the
properties was subject to any encumbrances. For the year ended December 31,
1999, rental fees of $889,000 were paid on facilities leased by the Company for
its operations.
Item 3. Legal Proceedings
- -------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
Not applicable
9
Item 4A. Executive Officers of the Registrant
- ---------------------------------------------
The following table sets forth certain information about the 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 Director, President and Chief Executive
Age 57 Officer of the Company and the Bank
David G. Wallace Treasurer of the Company and Executive
Age 55 Vice President and Chief Financial
Officer of the Bank
Michael A. Patton President, Financial Services
Age 54
James A. Wears President, Banking
Age 50
Girard H. Mayer Chief Executive Officer,
Age 61 Benefit Plans Administrative Services,
Inc.
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.
David G. Wallace (Treasurer of the Company; Executive Vice President and Chief
Financial Officer of the Bank). Mr. Wallace became Vice President and Chief
Financial Officer of the Bank and Treasurer of the Company in November 1988 and
Senior Vice President and Chief Financial Officer of the Bank in August 1991. He
assumed his current position in February 2000.
Michael A. Patton (President, Financial Services). 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 Community Bank, N.A.,
he was named President, Southern Region. He assumed his current position in
February 2000.
James A. Wears (President, Banking). 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 President and Chief Executive Officer from January
1991 until January 1992. Following the January 1992 consolidation of the
Company's five subsidiary banks into Community Bank, N.A., Mr. Wears was named
President, Northern Region. He assumed his current position in February 2000.
Girard H. Mayer (Chief Executive Officer, Benefit Plans Administrative Services,
Inc.). Mr. Mayer assumed his present position in July 1996 when his company
(Benefit Plans Administrators) was purchased by Community Bank System, Inc.
10
Part II
Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters
- --------------------------------------------------------------------------------
The common stock has been trading on the New York Stock Exchange under the
symbol "CBU" since December 31, 1997. Prior to that, the common stock traded
over-the-counter on the NASDAQ National Market under the symbol "CBSI" beginning
on September 16, 1986. The following table sets forth the high and low prices
for the common stock, and the cash dividends declared with respect thereto, for
the periods indicated. The prices do not include retail mark-ups, mark-downs or
commissions. There were 7,092,259 shares of common stock outstanding on December
31, 1999 held by approximately 1,760 registered shareholders of record, and
approximately 2,190 shareholders whose shares are held in nominee name at
brokerage firms and other financial institutions.
COMMON STOCK PERFORMANCE
NYSE Symbol: CBU
Newspaper Listing: CmntyBkSys
Market (Bid) Price
High Low Closing Price Quarterly
Year/Qtr Price Price Amount %Change Dividend
- -------- ----- ----- ------ ------- --------
1999
4th $27.25 $22.81 $23.13 -15.5% $0.25
3rd $27.38 $24.63 $27.38 7.9% $0.25
2nd $26.00 $23.06 $25.38 6.6% $0.23
1st $27.81 $23.69 $23.81 -16.6% $0.23
1998
4th $30.50 $27.13 $29.31 2.6% $0.23
3rd $33.94 $24.81 $28.56 -8.8% $0.23
2nd $38.25 $29.69 $31.31 -7.9% $0.20
1st $35.88 $30.56 $34.00 8.6% $0.20
The Company has historically paid regular quarterly cash dividends on its common
stock, and declared a cash dividend of $0.25 per share for the first quarter of
2000. 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, 1999. The historical "Income Statement Data" and historical "End of
Period Balance Sheet Data" are derived from the audited financial statements.
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 Annual Report on Form 10-K.
11
SELECTED CONSOLIDATED FINANCIAL INFORMATION
Years ended December 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
-----------------------------------------------------------------------
Income Statement Data:
Interest income $123,888 $122,938 $117,628 $97,688 $83,387
Interest expense 55,947 58,543 54,752 42,422 36,307
-----------------------------------------------------------------------
Net interest income (excl. FTE) 67,941 64,395 62,876 55,266 47,080
Provision for possible loan losses 5,136 5,123 4,480 2,897 1,765
-----------------------------------------------------------------------
Net interest income after provision for
for possible loan losses 62,805 59,272 58,396 52,369 45,315
Non-interest income 15,487 17,040 11,808 8,874 6,558
Non-interest expense 52,734 51,876 45,799 37,450 33,019
-----------------------------------------------------------------------
Cumululative effect of change in accounting principle 0 328 0 0 0
Income before income taxes 25,559 24,764 24,406 23,793 18,854
Provision for income taxes 7,923 9,036 8,844 9,660 7,384
=======================================================================
Net income $17,635 $15,728 $15,562 $14,133 $11,470
=======================================================================
End of Period Balance Sheet Data:
Total assets $1,840,702 $1,680,689 $1,633,742 $1,343,865 $1,152,045
Loans, net of unearned discount 1,009,223 917,220 843,212 652,474 560,151
Earning assets (incl. MVA) 1,664,110 1,510,760 1,455,139 1,231,058 1,034,183
Total deposits 1,360,306 1,378,066 1,345,686 1,027,213 1,016,946
Long-term borrowing 70,000 70,000 25,000 100,000 25,550
Trust securities 29,817 29,810 29,804 0 0
Shareholders' equity 108,487 120,165 118,012 109,352 100,060
Average Balance Sheet Data:
Total assets $1,723,631 $1,670,624 $1,491,920 $1,251,826 $1,054,610
Loans, net of unearned discount 951,167 884,751 749,596 602,717 519,762
Earning assets (excl. MVA) 1,572,356 1,512,175 1,363,703 1,147,455 975,257
Total deposits 1,369,269 1,396,700 1,213,793 1,032,169 871,050
Long-term borrowing 70,003 89,805 79,863 57,006 3,399
Trust securities 29,814 29,810 27,290 0 0
Shareholders' equity 115,876 120,936 110,689 103,398 84,231
Common Per Share Data:
Net income $2.42 $2.05 $2.02 $1.83 $1.70
Cash dividend declared 0.96 0.86 0.76 0.69 0.62
Period-end book value - stated 15.30 16.47 15.56 14.03 12.99
Period-end book value - tangible 8.32 9.01 7.82 9.85 8.37
Common Outstanding Shares:
Average during period (incl. common stock
equivalents) 7,213,394 7,670,711 7,676,326 7,482,518 6,522,410
End of period (excl. common stock equivalents) 7,092,259 7,296,453 7,586,512 7,474,406 7,358,450
Selected Ratios:
Return on average total assets 1.02% 0.94% 1.04% 1.13% 1.09%
Return on average shareholders' equity (excl.
preferred stock) 15.22% 13.01% 14.09% 13.88% 13.85%
Common dividend payout ratio 39.05% 41.15% 37.30% 37.27% 34.79%
Net interest margin (taxable equivalent basis) 4.46% 4.31% 4.64% 4.86% 4.88%
Noninterest income to average assets 0.90% 1.02% 0.79% 0.71% 0.64%
Noninterest income to operating income 18.70% 19.00% 15.30% 13.60% 12.10%
Efficiency ratio 55.20% 58.50% 55.00% 53.40% 56.70%
Non-performing loans to period-end total loans 0.57% 0.43% 0.49% 0.44% 0.36%
Non-performing assets to period-end total loans
and other real estate owned 0.67% 0.56% 0.60% 0.55% 0.47%
Allowance for loan losses to period-end loans 1.33% 1.36% 1.47% 1.25% 1.25%
Allowance for loan losses to period-end
non-performing loans 234.93% 312.12% 297.96% 285.58% 349.69%
Allowance for loan losses to period-end
non-performing assets 203.45% 240.74% 246.02% 224.33% 267.40%
Net charge-offs (recoveries) to average total loans 0.44% 0.58% 0.50% 0.29% 0.21%
Average net loans to average total deposits 69.47% 63.35% 61.76% 58.39% 59.67%
Period-end total shareholders' equity to period
end assets 5.89% 7.15% 7.22% 8.14% 8.69%
Tier I capital to risk-adjusted assets 9.28% 9.24% 9.28% 10.70% 10.62%
Total risk-based capital to risk-adjusted assets 10.50% 10.49% 10.53% 11.83% 11.76%
Tier I leverage ratio 5.80% 5.71% 5.67% 5.88% 5.83%
12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- -----------------------------------------------------------------------------
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains certain forward-looking statements with respect to the
financial condition, results of operations and business of Community Bank
System, Inc. ("CBSI" or "the Company"). These forward-looking statements involve
certain risks and uncertainties. Factors that may cause actual results to differ
materially from those contemplated by such forward-looking statements are set
herein under the caption "Forward-Looking Statements."
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
Information and the Company's Consolidated Financial Statements and related
notes thereto appearing elsewhere in this Form 10-K. All references in the
discussion to financial condition and results of operations are to the
consolidated position and results of the Company and its subsidiaries taken as a
whole.
Net Income and Profitability
- ----------------------------
Net income and diluted earnings per share reached record highs in 1999 of $17.6
million and $2.42, respectively. Compared to 1998, net income rose 12.1% while
earnings per share were up 18.0%. The Company's share repurchase program
continued to benefit earnings per share growth; since its inception in the fall
of 1998, 548,100 shares or 7.2% of shares outstanding have been bought back.
Cash earnings per share (diluted) also reached record levels in 1999, up 16% to
$2.79. Cash or tangible return on assets (ROA) for 1999 was 1.18% versus nominal
ROA at 1.02%. Tangible return on equity (ROE) for the year climbed 2.30
percentage points over 1998's level to 17.57%, exceeding nominal ROE by 2.35
percentage points for the same period and placing the Company's performance in
the top quartile of its regional peer banks. The difference between cash and
nominal results reflects the contribution of the Company's branch acquisitions
on an economic basis, which excludes the non-cash impact of amortizing the
premiums paid for the acquisitions. Many analysts and investors consider cash
results a better measure of core profitability and value created for
shareholders than nominal results.
1999's recurring or core earnings were up 24.5% from last year to $18.3 million
after removing the impact of one-time income and expense items. Items excluded
relate to investment gains and losses and expense associated with branch
properties no longer in use.
The primary factors explaining 1999's improvement are explained in detail in the
remaining sections of this document and are summarized as follows:
o Net interest income (full-tax equivalent basis) increased 5.5% or $3.5
million due to a $60 million increase in average earning assets. Average
loans grew $66 million (7.5%) while average investments went down $6.2
million (-1.0%). The growth in earning assets was funded by $86 million
(64.5%) more in average borrowings, offset by $27 million (2.0%) less in
average deposits. The net interest margin improved by a meaningful 15 basis
points to 4.46% on average.
o Total noninterest income decreased by 10.8% from 1998 to $15.5 million,
largely due to the Company taking selected investment losses in 1999 (when
there were economic opportunities to swap for higher yielding securities)
instead of recognizing investment gains as it did in 1998 (to maintain a
steady level of investment income based on a total return approach).
Revenues excluding net investment gains (losses) and the impact of branch
properties no longer in use were up nicely for the fifth consecutive year
to approximately $16.1 million in 1999, a $823,000 (5.4%) improvement.
o Noninterest expense or overhead rose $857,000 or 1.7% in 1999 compared to
$6.1 million or 13.3% in 1998. Unusual factors explaining 1999's small
increase include losses on fraudulent customer transactions related to a
floor plan dealer during the summer and approximately $506,000 in one-time
expenses incurred to dispose of acquired branch properties no longer in
use.
o Loan loss provision expense rose a minimal $13,000 or 0.3% over 1998's
level. The full year loan loss provision covered total actual net
charge-offs by 1.24 times, this margin serving as a precaution in the event
the Upstate New York economy weakens after its long sustained period of
relative economic health. Net charge-offs as a percent of average loans
decreased 14 basis points in 1999 to .44%. The unchanged level of provision
was in part made possible by significantly lower installment loan net
charge-offs, indicative of more conservative underwriting practices and
regular follow-up surveillance adopted during 1998. Nonperforming loans
increased during 1999 to .57% of loans outstanding at year-end compared to
.43 % one year earlier.
13
o The Company's combined effective federal and state tax rate decreased 550
basis points this year to 31.0%. The decrease resulted from improved tax
planning and by an increased proportion of tax-exempt municipal investment
holdings, which were an attractive value in 1999.
The above combination of factors resulted in a level of profitability which may
be compared to that of CBSI's peer bank holding companies. This group is
comprised of 155 companies nationwide having $1 billion to $3 billion in assets
based on data through September 30, 1999 (the most recently available
disclosure) as provided by the Federal Reserve System. Through year-to-date
September, the Company's return on average assets (ROA) was .99% compared to the
peer norm of 1.19%. Shareholder return on equity (ROE) at 14.32% for the same
period ranked higher than the peer norm of 13.84%, placing it in the 54th peer
percentile. The Company's primary performance focus is on achieving returns to
shareholders and is better measured by ROE than ROA.
Underlying the 1999 growth in earnings per share was steady improvement on a
quarterly basis. The first three quarters of 1999 at $.50, $.55 and $.68 per
share exceeded the same 1998 quarters by $.02, $.05, and $.12, respectively.
Fourth quarter earnings per share at $.69, a record high for the Company,
exceeded the same 1998 period by $.18.
Selected Profitability and Other Measures
- -----------------------------------------
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,
1999 1998 1997
------------------------------------------
Percentage of net income to
average total assets 1.02% 0.94% 1.04%
Percentage of net income to
average shareholders' equity 15.22% 13.01% 14.09%
Percentage of dividends declared
per common share to net income
per common share 39.05% 41.95% 37.30%
Percentage of average shareholders'
equity to average total assets 6.72% 7.24% 7.42%
Net Interest Income
- -------------------
Net interest income 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, a $4 million M&T Bank line of credit, and dividends on
the Company's $30 million in 9.75% trust preferred stock. 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.
Net interest income (with non-taxable income converted to a full tax-equivalent
basis) totaled $70.1 million in 1999; this represents a $5.0 million or 7.7%
increase over the prior year. The increase was due both to higher earning asset
volumes, which had a positive impact on net interest income of $2.6 million, and
interest rate changes, which had a favorable impact of $2.4 million.
With regard to the components of 1999's net interest income, greater average
earning assets of $60.2 million helped contribute to the $2.4 million or 2.0%
rise in interest income. Average loans grew a total of $66.4 million in 1999,
with the most significant portion occurring in the latter half of the year.
Overall interest and fees on loans grew $2.1 million or 2.5% as a result of this
growth and came despite a 44 basis point (BP) decrease in loan yields to 8.92%,
which was caused by declining market rates during 1998 and the first part of
1999.
14
This rate environment also produced limited investment portfolio buying
opportunities until mid-1999, resulting in a $6.2 million decrease in average
investments. Despite the lower outstandings, 1999's investment interest income
was slightly higher (.8% or $345,000) than the prior year due to an increase in
the average investment yield from 6.52% to 6.64%. Rising market rates in the
latter half of 1999, which both increased the yield on new investments and
decreased the amount of premium amortization of the Company's existing premium
collateralized mortgage obligations (CMOs), caused this increase in average
investment yield.
Loans ended 1999 at $1.009 billion, up $92 million or 10.0%. The average ratio
of loans to earning assets increased from 58.5% in 1998 to 60.5% in 1999 as a
consequence of strong business development efforts in the lending function and
the aforementioned decrease in average investments. Comparing year-end 1999 over
year-end 1998, however, investments were $66.9 million higher, reflective of
purchases during the more attractive rate environment beginning in mid-1999.
Through September 30, 1999, the Company's loan yield was in the favorable 67th
peer bank percentile while the investment yield was in the favorable 65th
percentile. The average earning asset yield fell 16 basis points to 8.02% in
1999 because of the aforementioned declining loan yield, partially offset by the
higher investment yield and the increased mix of loans to earning assets.
Total average fundings (deposits and borrowings) grew by $58.7 million in 1999,
largely attributable to a $105.9 million increase in short-term borrowings (in
part, related to cash raised for potential Year 2000 outflows), partially offset
by lower municipal time deposit levels.
Despite higher average fundings, interest expense decreased by $2.6 million due
to a drop in the average 1999 cost of funds, which as a percentage earning
assets was reduced by 31 BPs to 3.56%. The rate on interest bearing deposits
fell 43 BPs to 3.77%, due largely to across-the-board drops in deposit rates
beginning in the fall of 1998 and continuing into early 1999 and a 65 BP lower
borrowing rate reflecting declines in market rates. Overall, through September
30, 1999, the Company's average cost of funds rate fell favorably to the 45th
peer bank percentile, compared to being in the 55th percentile through September
30, 1998.
The 32 BP decline in the average cost of funds from 1998 to 1999, in contrast to
the 16 BP decline in the earning asset yield, caused CBSI's net interest margin
to increase by 15 basis points from 4.31% in 1998 to 4.46% this year. The
Company's net interest margin ranked in the 60th peer bank percentile through
September 30, 1999, which favorably compares to the 40th peer bank percentile
through September 30, 1998. For fourth quarter 1999, the net interest margin was
4.49% compared to 4.25% one year earlier. This can be attributed to a higher
earning asset yield (up 28 BPs) at 8.18%, with only a slight increase (up 3
BP's) in the rate on interest-bearing liabilities at 4.27%.
15
The following table sets forth certain information concerning average
interest-earning assets and interest-bearing liabilities and the yields and
rates thereon for the twelve month periods ended December 31, 1999 and 1998.
Interest income and resultant yield information in the tables are on a fully
tax-equivalent basis using a marginal federal income tax rate of 35%. Averages
are computed on daily average balances for each month in the period divided by
the number of days in the period. Yields and amounts earned include loan fees.
Nonaccrual loans have been included in interest earnings for purposes of these
computations.
Year Ended December 31,
----------------------------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------------------------
(000's omitted except yields Avg. Amt. of Avg. Avg. Amt.of Avg.
and rates) Balance Interest Yield/Rate Balance Interest Yield/Rate
Paid Paid
ASSETS:
----------------------------------------------------------------------------------------
Interest-earning assets:
Federal funds sold $586 $33 5.63% $5,428 $296 5.46%
Time deposits in other banks 209 1 0.63% 35 2 5.51%
Taxable investment securities 521,912 34,261 6.56% 592,559 38,290 6.46%
Nontaxable investment securities 98,482 6,946 7.05% 29,402 2,308 7.85%
Loans (net of unearned discount) 951,167 84,853 8.92% 884,751 82,778 9.36%
--------------- ------------ -------------- ----------
Total interest-earning assets 1,572,356 126,094 8.02% 1,512,175 123,674 8.18%
Noninterest earning assets
Cash and due from banks 62,399 57,913
Premises and equipment 24,747 24,412
Other assets 79,438 83,048
Less: Allowance for loan losses (12,693) (12,282)
Net unrealized gains/(losses) on
available-for-sale portfolio (3,035) 5,376
--------------- --------------
Total $1,723,212 $1,670,642
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities
Savings deposits $513,544 $11,108 2.16% $508,730 $12,155 2.39%
Time deposits 619,851 31,666 5.11% 672,972 37,514 5.57%
Short-term borrowings 119,830 6,278 5.24% 13,915 754 5.42%
Long-term borrowings 99,817 6,895 6.91% 119,615 8,120 6.79%
------------------------------ --------------------------
Total interest-bearing 1,353,042 55,947 4.13% 1,315,232 58,543 4.45%
liabilities
Noninterest bearing liabilities
Demand deposits 235,874 214,997
Other liabilities 18,420 19,477
Shareholders' equity 115,876 120,936
--------------- --------------
Total $1,723,212 $1,670,642
=============== ==============
Net interest earnings $70,147 $65,131
============ ==========
Net yield on interest-earning assets 4.46% 4.31%
============== =======
Federal tax exemption on nontaxable
investment securities included in
interest income $2,207 $736
16
As discussed above, the change in 1999's net interest income (full
tax-equivalent basis) may be analyzed by segregating the volume and rate
components of the changes in interest income and interest expense for each
underlying category.
--------------------------------------------- -------------------------------------------
1999 Compared to 1998 1998 Compared to 1997
--------------------------------------------- -------------------------------------------
Increase (Decrease) Due to Change In (1) Increase (Decrease) Due to Change In (1)
Net Net
(000's omitted) Volume Rate Change Volume Rate Change
Interest earned on:
Federal funds sold and securities
purchased under agreements to resell ($272) $9 ($263) ($694) $125 ($569)
Time deposits in other banks 2 (3) (1) - - -
Taxable investment securities (4,629) 600 (4,029) 807 (6,750) (5,943)
Nontaxable investment securities 4,895 (257) 4,638 1,026 (138) 888
Loans (net of unearned discounts) 6,035 (3,960) 2,075 12,666 (1,451) 11,215
Total interest-earning assets (2) $4,858 ($2,438) $2,420 $12,380 ($6,789) $5,591
Interest paid on:
Savings deposits $114 ($1,161) ($1,047) $1,551 ($367) $1,184
Time deposits (2,841) (3,007) (5,848) 4,136 (240) 3,896
Short-term borrowings 5,550 (26) 5,524 (1,692) (137) (1,829)
Long-term borrowings (1,365) 140 (1,225) 863 (321) 542
Total interest-bearing liabilities (2) $1,649 ($4,245) ($2,596) $5,383 ($1,590) $3,793
Net interest earnings (2) $2,641 $2,375 $5,016 $6,532 ($4,734) $1,798
(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute dollar
amounts of change in each.
(2) Changes due to volume and rate are computed from the respective changes in
average balances and rates of the totals; they are not a summation of the
changes of the components.
17
The following table sets forth certain information concerning average
interest-earning assets and interest-bearing liabilities and the yields and
rates thereon for the three month periods ended December 31, 1999 and 1998.
Interest income and resultant yield information in the tables are on a fully
tax-equivalent basis using a marginal federal income tax rate of 35%. Averages
are computed on daily average balances for each month in the period divided by
the number of days in the period. Yields and amounts earned include loan fees.
Nonaccrual loans have been included in interest earnings for purposes of these
computations.
Fourth Quarters Ended December 31,
----------------------------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------------------------
(000's omitted except yields Avg. Amt. of Avg. Avg. Amt. of Avg.
and rates) Balance Interest Yield/Rate Balance Interest Yield/Rate
Paid Paid
ASSETS:
----------------------------------------------------------------------------------------
Interest-earning assets:
Federal funds sold $2,013 $29 5.78% $1,533 $20 5.16%
Time deposits in other banks 651 0 0.00% 35 0 5.27%
Taxable investment securities 530,336 9,326 6.98% 545,987 7,827 5.69%
Nontaxable investment securities 114,100 1,991 6.92% 35,601 688 7.66%
Loans (net of unearned discount) 997,212 22,545 8.97% 912,334 21,227 9.23%
--------------- ------------ --------------- ------------
Total interest-earning assets 1,644,312 $33,891 8.18% 1,495,490 $29,762 7.90%
Noninterest earning assets
Cash and due from banks 68,289 60,148
Premises and equipment 25,431 25,028
Other assets 76,925 80,722
Less: Allowance for loan losses (12,870) (12,293)
Net unrealized gains/(losses)on
available-for-sale portfolio (16,235) 9,815
--------------- ---------------
Total $1,785,852 $1,658,910
=============== ===============
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Interest-bearing liabilities
Savings deposits $498,084 $2,715 2.16% $512,308 $2,778 2.15%
Time deposits 623,904 8,075 5.13% 643,305 8,829 5.44%
Short-term borrowings 197,979 2,733 5.48% 24,168 311 5.10%
Long-term borrowings 99,816 1,744 6.93% 107,853 1,833 6.74%
---------------------------- ----------------------------
Total interest-bearing 1,419,783 15,267 4.27% 1,287,634 13,751 4.24%
liabilities
Noninterest bearing liabilities
Demand deposits 239,619 226,924
Other liabilities 15,947 22,891
Shareholders' equity 110,503 121,461
--------------- ---------------
Total $1,785,852 $1,658,910
=============== ===============
Net interest earnings $18,624 $16,011
============ ============
Net yield on interest-earning assets 4.49% 4.25%
============== ==========
18
The changes in net interest income (full tax-equivalent basis) by volume and
rate component for fourth quarter 1999 versus fourth quarter 1998 are shown
below for each major category of interest-earning assets and interest-bearing
liabilities.
----------------------------------------
4th Quarter 1999 versus 4th Quarter 1998
----------------------------------------
Increase (Decrease) Due to Change In (1)
Net
Volume Rate Change
------ ---- ------
Interest earned on:
Federal funds sold and securities
purchased under agreements to resell $7 $2 $9
Time deposits in other banks 3 (3) 0
Taxable investment securities (1,412) 2,911 1,499
Nontaxable investment securities 1,750 (447) 1,303
Loans (net of unearned discounts) 4,666 (3,348) 1,318
Total interest-earning assets (2) $3,040 $1,089 $4,129
Interest paid on:
Savings deposits ($150) $87 ($63)
Time deposits (266) (488) (754)
Short-term borrowings 2,397 25 2,422
Long-term borrowings (361) 272 (89)
Total interest-bearing liabilities (2) $1,420 $96 $1,516
Net interest earnings (2) $1,652 $961 $2,613
(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.
Noninterest Income
- ------------------
The Company's sources of noninterest income are of four primary types: financial
services, comprised of personal trust, employee benefit trust, investment, and
insurance products; specialty products, largely electronic products and mortgage
banking and servicing activities; general banking services related to loans,
deposits and other activities typically provided through the branch network; and
periodic transactions, most often net gains/losses from the sale of investments
or other occasional events.
Total noninterest income in 1999 decreased by 10.8% to $15.5 million, largely
due to the lack of the prior year's $2.3 million in investment gains (including
a pretax $328,000 realized upon adoption of FAS 133) compared to 1999's $638,000
in investment losses. Revenues excluding net investment gains (losses) and the
impact of branch properties no longer in use were up nicely for the fifth
consecutive year to approximately $16.1 million in 1999, a $823,000 (5.4%)
improvement.
Fees from the financial services segment of noninterest income rose 11.7% in
1999 to $5.9 million compared to 20.0% growth in the prior year. Over the last
five years, financial services revenues have climbed at a compound annual growth
rate of nearly 28%, and now comprise over 36% on total noninterest income
excluding net investment securities gains (losses). The reduction in 1999's
growth rate largely reflects a slower rate of increase in the sale of mutual
fund products due to several factors discussed below, which management believes
to be temporary. The specific performance of the Company's several financial
services businesses is as follows:
19
o Fees from personal trust services were $1.3 million, up 9.0% in 1999 as
compared to a 2.9% increase in 1998. Recurring trust fees (which excludes
periodic estate fees) related to individual investment management accounts
and annual trust administration (together representing 81% of personal
trust income) grew a combined 12.1%. Personal trust assets under management
reached over $170 million by year end, up 1.7% over the prior twelve
months. Greater focus on business development, including pro-active
integration of its major referral sources--the Company's ten Financial
Consultants, its Benefit Plans Administrative Services subsidiary, its
newly acquired asset management subsidiary, Elias Asset Management, Inc.
(see below), and the CBNA branch network--is expected to accelerate future
fiduciary income growth.
o Revenue from record keeping and consulting services provided by Benefits
Plans Administrative Services, Inc. (acquired in July 1996), combined with
investment management services through the Bank's employee benefits trust
division (EBT), totaled $2.6 million in 1999 compared to $2.3 million in
1998, an 11.0% increase. Retirement plan assets, reflecting more than 350
plan sponsors, reached nearly $230 million at year-end 1999, up almost 36%
over 12 months earlier. BPA/EBT supports defined benefit, 403(b), 457,
401(k), ESOP and other forms of defined contribution plans, enhancing these
products with voice response and transactional web services. BPA has been
endorsed by several trade organizations and mutual fund companies; thus,
its market continues to grow from a local base to plan sponsors located in
the urban centers of New York State and beyond.
o 1999 is the sixth year in which CBSI has offered mutual funds, annuities,
and other investment products through Financial Consultants (FCs) located
in various locations throughout the Bank's branch network. Commission
income from this source grew 3.8% in 1999 to $1.3 million, down from over
22% growth in 1998. Reasons for the reduced growth include greater
attractiveness of the Bank's own fixed income products (C.D.s) due to
1999's rising interest rates beginning in the late spring of 1999 (upon
which no commission income is earned); some lag in sales as the Bank
implemented in the spring its own more cost-effective broker/dealer
subsidiary, Community Investment Services, Inc. (CISI); and reluctance of
some customers to invest toward the end of 1999 in light of Year 2000
concerns. A dedicated CISI office was established in the late fall in
Lockport, New York, with its two new Financial Consultants bringing the
bank-wide total to ten FCs. In addition, our newly established insurance
agency, Community Financial Services, Inc. (CFSI), has expanded the product
capabilities of the Financial Consultants by adding long-term health care
and other selected insurance products to their offerings. Revenues from
CFSI were nominal in 1999.
o Community Bank has long been in the business of selling creditor life and
disability insurance to installment and mortgage loan customers through its
branch system. Revenues from this activity, including the Bank's annual
dividend from the New York State Bankers insurance subsidiary through which
the insurance is written, plus commissions generated by the Company's
Financial Consultants, amounted to $728,000 in 1999, up 40% over last year.
A very significant contribution to the Company's future growth in financial
services income is the acquisition announced in February 2000 of Elias Asset
Management (EAM), based in Williamsville, New York, a suburb of Buffalo. This
transaction significantly expands our financial services capabilities and is
expected to close during the second quarter of the year. Founded in 1981, EAM is
a nationally recognized investment advisory firm with over $700 million in
assets under management, comprised of more than 900 accounts with individuals,
foundations, and corporate pension and profit-sharing plans.
By acquiring EAM, the Company is merging the strengths of two organizations that
have successfully worked together since 1986 in various trust department and
pension management capacities, satisfying customer preferences for an even
greater range of services. The decision to acquire EAM is consistent with the
direction of the financial services industry toward more diversified and broadly
based companies - a trend that will accelerate as a result of Financial
Modernization legislation (see brief discussion in the "Certain Regulatory
Considerations" section of this Form 10-K in Item 1. "Business"). Operating as a
separate, independent subsidiary, EAM and its existing clients will benefit from
additional resources that will enable EAM to maintain its high quality
reputation, while adding valuable personnel and enhanced services. As of
year-end 1999, approximately 50% of EAM's $3.2 million in revenues was derived
from individuals, with nearly 25% from corporate pension and thrift plans, and
the remainder from foundations and charitable trusts.
In addition to its financial services businesses, another segment of the
Company's noninterest income is its specialty products, which largely include
electronic products and mortgage banking and servicing activities. These
activities in 1999 contributed 12% of noninterest income excluding net
investment securities gains (losses). Total revenues were $1.84 million, down
slightly from $1.88 million in 1998, primarily due to reduced mortgage banking
revenues as discussed below. Over the last five years, specialty product
revenues have grown at an annual compound growth rate of nearly 18%.
20
o Fees earned from electronic products reached $1.38 million this year, up
21% from 1998. This increase was primarily due to income from the Company's
Visa affiliation, which rose to $937,000, reflecting continued growth of
Visa Check Card revenues (climbing 33%) and Visa merchant discount fees (up
25%). ATM surcharge income rose 8.1% to $442,000.
o Mortgage banking fees were $403,000 in 1999, down from $737,000 in the
prior year. The primary reasons for the decrease were the disproportionate
impact of recognizing the value of the Company's mortgage servicing rights
in 1998 and the fact that secondary market mortgages were sold at a slight
loss this year versus a $235,000 gain in 1998's more favorable financial
market environment. Loan servicing fees more than doubled in 1999 to
$195,000 on a serviced loan portfolio of $89 million, consisting of about
1,475 loans.
o Lastly, the Company established a relationship this year with a national,
third-party leasing company, Synergy Resources of Bloomington, Minnesota,
which pays referral commissions on leases booked for CBNA customers.
Revenues were $59,000, largely from small equipment leases. Customers may
submit applications by telephone, fax, or the Internet.
The third and largest segment of the Company's recurring noninterest income is
the wide variety of fees earned from general banking services, which reached
$8.4 million in 1999, up 8.7% from the prior year. This segment contributed 52%
of noninterest income excluding net investment securities gains (losses). The
increase in these revenues is generally in the single digit range because they
are largely dependent on deposit growth and expansion of services provided
through the branch network. However, CBSI's branch acquisitions beginning in
1994 have resulted in a five year annual compound growth rate in these revenues
of nearly 22%.
o Service charges on deposit accounts and overdraft fees increased to $6.57
million in 1999, a 5.6% growth rate compared to a 27% growth rate in 1998.
Last year's faster growth rate reflects the full-year impact of the
Company's mid-1997 branch acquisitions.
o General commissions and miscellaneous income at $1.8 million were up 22% in
1999. This increase is attributable to approximately 13% more in
miscellaneous service fees and a swing in Canadian exchange revenue from a
loss in 1998 to a slightly positive level this year.
Income from periodic transactions in 1999 largely includes $638,000 in losses
taken on $14.6 million in investment sales, with the net proceeds reinvested at
higher yields to achieve greater resulting cash flows than had the securities
been held to maturity. This amount compares to gains of $2.3 million last year
on a combined $86 million in investment sales. The investment gains and losses
taken over the last two years are illustrative of the Company's active
management of its investment portfolio to achieve a desirable total return and a
targeted level of combined interest income and securities gains/losses across
financial market cycles.
Other amounts of periodic income in 1999 were a small $46,000 compared to
$253,000 in the prior year; the latter was the combined result of a gain on life
insurance and an asset sold, partially offset by losses on the sale of former
acquired branch properties.
Noninterest income, excluding transactions related to investment securities and
disposal of branch properties, as a percent of operating income was 18.7% in
1999, a decrease of .3 percentage points from the prior year. Excluding the
impact of mortgage servicing rights and gains/losses on the sale of secondary
product in both years, the ratio would have been up .1 percentage point, the
increase being limited by the Company's record growth in net interest income.
Since 1994, the percentage has risen 6.7 percentage points from 12.0%, resulting
from a focused effort to raise product revenues less susceptible to interest
rate fluctuation. Compared to peers as of September 30, 1999, this ratio
remained in the 47th peer percentile.
In light of management's ongoing objective to grow noninterest income,
opportunities to develop new fee-based products are actively pursued, including
newly permitted activities under the 1999 Financial Modernization Act, and
emphasis continues on the collection of fees (minimizing limitation on waived
fees) for providing quality service. In an effort to focus on and accelerate
growth of the Company's financial service businesses, Michael A. Patton, who has
headed for many years the Bank's trust department and Financial Consultant
activities along with general banking activities in the Southern Region, was
named President, Financial Services, in February 2000.
21
The following table sets forth selected information by category of noninterest
income for the Company for the years and quarters indicated.
---------------------------------------------
(000's omitted) Years ended December 31, Quarters ended
December 31,
---------------------------------------------
1999 1998 1997 1999 1998
---- ---- ---- ---- ----
Personal trust $1,290 $1,183 $1,150 $328 $323
EBT/BPA 2,586 2,333 1,824 595 572
Insurance 728 518 405 82 90
Other investment products 1,268 1,222 1,002 346 313
---------------------------------------------
Total financial services 5,872 5,257 4,380 1,351 1,298
Electronic banking 1,379 1,140 675 407 313
Mortgage banking 403 737 241 36 484
Commercial leasing 59 0 0 14 0
---------------------------------------------
Total specialty products 1,841 1,877 915 457 796
Deposit service charges 3,373 3,246 2,709 852 808
Overdraft fees 3,197 2,975 2,186 841 824
Commissions 1,795 1,473 1,440 408 327
---------------------------------------------
General banking services 8,365 7,694 6,335 2,101 1,960
Miscellaneous revenue 46 473 191 (12) 11
---------------------------------------------
Total noninterest income
excl. security gains/losses 16,124 15,301 11,822 3,897 4,066
Security gains/losses (a) (638) 2,287 (14) (415) 562
Disposition of branch properties 0 (219) 0 0 (151)
---------------------------------------------
Total noninterest income $15,487 $17,368 $11,808 $3,481 $4,476
Noninterest income as a
percentage of operating income
(excludes net securities
gains/losses and disposal of
branch properties) 18.7% 19.0% 15.3% 17.3% 20.3%
(a) includes $328,000 of investment gains on securities sold upon adoption of
FAS 133 in third quarter 1998.
22
Noninterest Expense
- -------------------
Noninterest expense or overhead rose $857,000 or 1.7% in 1999 compared to $6.1
million or 13.3% in 1998, which reflected the full-year impact of the Company's
mid-1997 acquisitions of a combined 20 branches from Key Bank, N.A. and Fleet
Bank. This year's overhead of $52.7 million as a percent of average assets was
3.06%, a slight decrease from 3.11% in 1998; however, the ratio remains in the
peer normal 57th percentile. Excluding amortization of intangible assets, which
is a significant non-cash expense for the Company and virtually non-existent for
its peer group, CBSI's noninterest expense ratio was 2.79% in 1999 compared to
3.02% for peers. Non-interest expense for fourth quarter 1999 was $13.0 million,
unchanged compared to the same 1998 period.
For CBSI as a whole, higher personnel expense accounted for over 74% of 1999's
increase in overhead, with personnel costs being up 2.5% versus being 12.2%
higher in 1998 as a result of acquisitions. Salary, benefit, and payroll tax
expense increased primarily because of modest annual merit awards for employees.
Total full-time equivalent staff at year-end 1999 was 711 versus 718 at year-end
1998, down as the result of attrition.
Nonpersonnel expense rose $219,000 or 0.8% this year as opposed to a $3.3
million or 14.3% increase in 1998. This was largely caused by losses on
fraudulent customer transactions related to a floor plan dealer during the
summer and write-downs of leases on former branch properties closed due to
duplicate facilities within the same proximity. In addition, the increased
expense can be explained by set up costs of the Company's newly formed Real
Estate Investment Trust (REIT) and more aggressive 1999 advertising. These
unfavorable items were partially offset by a reduction in delivery costs of
mutual funds and other related products as a result of the creation of the
Company's own broker/dealer subsidiary, lower supplies expense in part
reflecting an improved system of control, and reduced occupancy expense due to
the full year impact of the disposition of former branch properties in 1998.
The efficiency ratio is defined at two levels. The nominal ratio is total
overhead expense divided by operating income (full tax-equivalent net interest
income plus noninterest income, excluding net securities gains and losses). The
adjusted or recurring efficiency ratio additionally excludes one-time expense
and intangible amortization (a non-cash expense) as well as all one-time
noninterest income; over the last five years, these one-time items have related
to the disposal of branch properties. The lower the ratio, the more efficient a
bank is considered to be.
In 1999, the nominal efficiency ratio decreased 3.5 percentage points to 61.1%
while the recurring ratio decreased 3.3 percentage points to 55.2%. Management
believes it is more meaningful to use the recurring ratio to compare to national
norms, because as mentioned above, most of the Company's peers do not have
intangible expense to the significance that CBSI has. On that basis, CBSI's
ratio is more favorable than the national peer bank holding company median of
60.8% based on data available as of September 30, 1999. The improvement in the
1999 efficiency ratio is a function of several factors: an increase in net
interest margin due to a lower cost of funds and reduced premium amortization on
the Company's CMO securities, growth in earning assets, steady progress in
developing more sources of noninterest income, and persistent control of
overhead expense.
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, targeted use of
outside consultants, and review of productivity-enhancing technology. These
combined efforts are intended to offset pressure from future price increases and
higher transaction volumes and enable the Company to more fully benefit from
economies of scale as it continues to grow. Specifically, the Bank benefited
more fully in 1999 from the spring 1998 installation of frame relay to lower the
cost of data communications, the creation of a broker/dealer subsidiary during
first quarter 1999 which brought down the expense of delivering mutual funds and
related products, and the overhead savings following disposition of acquired
branch properties in 1998.
23
The following table sets forth information by category of noninterest expense of
the Company for the years and quarters indicated.
(000's omitted) Years ended Quarters ended
December 31, December 31,
-----------------------------------------------------------
1999 1998 1997 1999 1998
---- ---- ---- ---- ----
Personnel expense $26,388 $25,750 $22,945 $6,654 $6,407
Net occupancy expense 3,919 4,056 3,426 936 940
Equipment expense 3,465 3,501 2,728 888 892
Professional fees 1,937 2,142 1,616 404 677
Data processing expense 3,955 3,928 3,584 1,078 940
Amortization of intangibles 4,615 4,640 3,787 1,149 873
Stationary and supplies 1,218 1,344 1,749 307 293
Deposit insurance premiums 183 189 140 46 46
Other 7,053 6,326 5,823 1,599 1,990
----------------------------------------------------
Total $52,733 $51,876 $45,799 $13,061 $13,058
====================================================
Total operating expense as
a percentage of average
assets 3.06% 3.11% 3.07% 2.90% 3.12%
Efficiency ratio (1) 55.2% 58.5% 55.0% 52.9% 58.3%
(1) Noninterest expense excluding nonrecurring items and amortization of deposit
intangibles divided by operating income excluding all nonrecurring items.
Income and Income Taxes
- -----------------------
Income before tax in 1999 was $25.6 million, up 4.6% over the prior year's
amount, which excluded the impact of FAS 133 accounting for selected securities
gains. When income is recast as if all tax-exempt revenues were fully taxable on
a federal basis, and all securities gains are stated on a pretax basis, 1999's
results rose by $2.3 million or 8.9% before tax.
The main reasons for improved pretax earnings were the favorable $5.0 million
increase in net interest income (full tax-equivalent basis) related to strong
earning asset growth (up 4.0% or $60.2 million on average) and a $823,000 climb
in recurring noninterest income. These factors were partially offset by a modest
$857,000 (1.5%) increase in overhead expense (largely relating to merit pay
increases and selected vendor price adjustments) and the lack of the prior
year's $2.3 million in investment gains as compared to 1999's $638,000 in
investment losses (see "Investments" section of this Form 10-K). Loan loss
provision expense was held virtually constant at the 1998 level.
The Company's combined effective federal and state tax rate decreased 550 basis
points this year to 31.0%. The decrease resulted from effective tax planning,
which was additionally benefited in 1999 by an organizational change in the
first quarter, as well as increased purchases of tax-exempt municipal
investments during the year.
Capital
- -------
Shareholders' equity ended 1999 at $108.5 million, down 9.8% from one year
earlier, primarily reflective of the after-tax market value adjustment (MVA) of
the Bank's available-for-sale investments, dividends paid to shareholders, and
221,500 shares of CBSI common stock that was repurchased during 1999 (548,100 or
7.2% of shares outstanding since the fall of 1998). This stock repurchase
program reflects the Company's belief that its common stock is an excellent
investment and that the financial markets are not fully valuing its strong
banking franchise. These capital outflows are partially offset by the
contribution of earnings. Excluding the MVA in both 1998 and 1999, capital rose
by $5.7 million or 4.9%. Shares outstanding fell by over 200,000 during 1999 due
to the aforementioned repurchase of stock partially offset by the exercise of
stock options.
24
Despite the repurchase of stock, 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 5.80% and compares
to 5.71% one year ago. The total capital to risk-weighted assets ratio of 10.50%
as of year-end 1999 was above the 10% 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 1999 of $6.9 million represented an
increase of 6.4% over the prior year. This growth largely reflects a two cent
per share increase in the quarterly common stock dividend beginning in the third
quarter of 1999 from $.23 to $.25. Nineteen ninety-nine is the eighth
consecutive year of dividend increases, which have resulted in a 12.3% compound
annual growth rate over that time period.
Raising the Company's expected annualized dividend to $1.00 per common share
reflects management's confidence that earnings strength is sustainable and that
capital can be maintained at a satisfactory level. The dividend pay out ratio
for the year was approximately 39%, slightly lower than the 1998 level of 41%.
However, this level is at the higher end of the Company's targeted pay out range
for dividends on common stock of 30-40%. Its pay out ratio has historically been
strong relative to peers, ranging from the 60th to 77th percentile from 1993
through 1998, including preferred dividends. The 1999 peer pay out ratio
remained high in the 70th peer percentile.
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:
As of December 31,
-------------------------------------------------------------------------------
(000's omitted) 1999 1998 1997 1996 1995
-------------------------------------------------------------------------------
Real estate mortgages:
Residential $334,104 $266,841 $278,912 $225,088 $204,224
Commercial loans secured by real estate 120,926 124,828 85,962 56,959 46,971
Farm 17,652 12,486 10,434 8,296 8,224
-------------------------------------------------------------------------------
Total 472,682 404,155 375,308 290,343 259,419
Commercial, financial, and agricultural
Agricultural 27,722 22,691 23,894 21,689 17,969
Commercial and financial 171,660 168,984 138,067 99,445 81,562
-------------------------------------------------------------------------------
Total 199,382 191,675 161,961 121,134 99,531
Installment loans to individuals:
Direct 112,698 105,480 89,138 62,176 57,646
Indirect 221,593 205,159 198,853 171,583 144,566
Student and other 1,545 6,477 10,880 9,635 10,268
-------------------------------------------------------------------------------
Total 335,836 317,116 298,871 243,394 212,480
Other Loans 2,043 5,581 8,887 3,496 2,190
-------------------------------------------------------------------------------
Gross Loans 1,009,943 918,527 845,027 658,367 573,620
Less: Unearned discounts 720 1,307 1,815 5,893 13,469
-------------------------------------------------------------------------------
Net loans 1,009,223 917,220 843,212 652,474 560,151
Reserve for possible loan losses 13,421 12,441 12,434 8,128 6,976
-------------------------------------------------------------------------------
Loans, net of loan loss reserve $995,802 $904,779 $830,778 $644,346 $553,175
Loans outstanding, net of unearned discount, reached a record $1.009 million as
of year-end 1999, up over $92 million or 10.0% compared to twelve months
earlier. This marks the seventh consecutive year of double digit loan growth
with the exception of 1998, when loan growth was held to 8.8% due to a minimal
increase in installment lending, in part reflecting adoption of more
conservative underwriting practices. About 34% of 1999's growth came from 20
branches acquired in mid-1997 from Key Bank, N.A. and Fleet Bank, with combined
year-end 1999 loans outstanding of $154 million. Including approximately $37
million in mortgages sold on the secondary market, net loan generation in 1999
was nearly $129 million, 13.8% more than last year and the highest generation in
the Company's history.
25
The Company's predominant focus on the retail borrower enables its loan
portfolio to be highly diversified. Approximately 63% of loans outstanding are
oriented to consumers borrowing on an installment and residential mortgage loan
basis. Over the last several years, the growth rate of CBSI's commercial
business loans has exceeded that of loans to individuals, and this sector
exhibits a high degree of diversification as well. Loans are typically for
amounts under $75,000, with nearly 80% of our customers representing about 25%
of commercial loans outstanding. Only thirty-three percent of our commercial
portfolio--about 115 customers, including 25 automobile dealers is comprised of
loans in excess of $500,000. The portfolio contains no credit card receivables.
The overall yield on the portfolio is in the attractive 67th peer percentile.
The "Nature of Lending" table below recasts the Company's loan portfolio into
four major lines of business. As previously discussed, much of the 1999 loan
growth relates to acquired branch locations and resulting market opportunities.
The increase in business lending accounted for 44% of the $92 million in total
loan growth in 1999 versus 51% of 1998's $74 million increase. The increase in
consumer direct loans contributed 16% toward total growth this year versus a
reduction of 6% in 1998. Consumer indirect loans accounted for 18% of this
year's increase, up from 8% in the prior year. Lastly, the share of this year's
total loan increase for consumer mortgages was 21%, down from 1998's share of
48% reflective of that year's highly favorable interest rate environment for
home mortgage refinancing. The following more fully discusses the underlying
reasons for these changes by each of the Company's four major lending activities
or lines of business.
NATURE OF LENDING
Mix at Year End
($ 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
1999 1,009 10.0% 219 22% 10.1% 366 36% 12.5% 221 22% 8.3% 203 20% 8.1%
1998 917 8.8% 199 22% 21.6% 326 36% 13.0% 204 22% 2.6% 188 20% -2.3%
1997 843 29.2% 164 19% 7.8% 288 34% 36.7% 199 24% 18.6% 192 23% 57.5%
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%
The combined total of general purpose business lending, dealer floor plans,
mortgages on commercial property, and farm loans is characterized as the
Company's business lending activity. At $366 million, this segment represents
36% of loans outstanding at year end, having steadily expanded its share by
eight percentage points since year-end 1994. Outstandings climbed over $40
million or 12.5% in 1999 compared to a 13% growth rate for 1998. Growth in the
past two years has resulted from persistent business development efforts and the
contributions of new lenders who joined the Bank coincident with or as part of
1997's acquisitions.
Demand for installment debt indirectly originated through automobile, marine,
and mobile home dealers rose in 1998. Outstandings ended the year 8.3% or $17
million higher, primarily resulting from growth in the Bank's Southern Region.
This compares to growth of 2.6% or $5.5 million in 1998. This portfolio segment,
of which 91% relates to automobile lending (71% of the vehicles are used versus
29% are new), constitutes 22% of total loans outstanding, equal to 1998's share
but down from its peak of 26% in 1996.
The segment of the Company's loan portfolio committed to consumer mortgages
includes both fixed and adjustable rate residential lending. It accounts for
$219 million or 22% of total loans outstanding. Growth during the last two years
($19.5 million or 10.1% in 1999 and $35.8 million or 21.6% in 1998) is
attributable to the nationwide refinancing boom as well as promotion, especially
in the Bank's Northern Region, of this vehicle as a way for consumers to
term-out higher cost credit card debt. Portfolio growth is lower than it could
have been due to a program which began in mid-1994 to sell selected fixed rate
originations in the secondary market. The purpose of this program, with sales of
$14.0 million in 1997, $39.3 million in 1998 and $37.0 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.
26
The direct consumer lending activity increased this year after a slight decrease
in 1998. 1999's outstandings rose 8.1% or $15 million, in part reflective of a
promotion largely in the Bank's Southern Region, versus a decrease of 2.3% or $5
million in 1998. 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 repayment begins),
and borrowing under variable and fixed rate home equity lines of credit. The
consumer direct segment as a percent of total loans remained essentially
unchanged at 20% in 1999 after a decrease in the portfolio share in 1998. The
portfolio share decrease in 1998 (2.3 percentage points) is partially explained
by consumer borrowing being refinanced as mortgage debt in overall mortgage
refinancing activity, as discussed above.
Maturities and Sensitivities of Loans to Changes in Interest Rates
- ------------------------------------------------------------------
The following table shows the amount of loans outstanding as of December 31,
1999, which, based on remaining scheduled payments of principal, are due in the
periods indicated:
---------------------------------------------------------------------
At December 31, 1999
---------------------------------------------------------------------
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 $82,892 $84,508 $31,982 $199,382
Real estate - construction 0 0 0 0
Real estate - mortgage 105,633 39,233 327,816 472,682
Installment 61,419 245,747 29,993 337,159
------ ------- ------ -------
TOTAL $249,944 $369,488 $389,791 $1,009,223
======== ======== ======== ==========
The following table sets forth the sensitivity of the loan amounts due after
one year to changes in interest rates:
---------------------------------
At December 31, 1999
---------------------------------
Fixed Rate Variable Rate
Due after one year but within $ 264,362 $105,127
five years
Due after five years 347,840 41,950
------- ------
TOTAL $ 612,202 $ 147,077
========== =========
27
Nonperforming Assets/Risk Elements
- ----------------------------------
The following table presents information concerning the aggregate amount of
nonperforming assets:
As of December 31,
-----------------------------------------
(000's omitted) 1999 1998 1997 1996 1995
-----------------------------------------
Loans accounted for on a
nonaccrual basis 4,666 2,473 1,385 2,023 1,328
Accruing loans which are contractually
past due 90 days or more as to
principal or interest payments 1,047 1,513 2,788 823 667
----- ----- ----- --- ---
Total nonperforming loans 5,713 3,986 4,173 2,846 1,995
Loans which are "troubled debt
restructurings" as defined in Statement
of Financial Accounting Standards
No. 15 "Accounting by Debtors and
Creditors for Trouble Debt 122 134 0 32 0
Restructurings"
Other real estate 884 1,182 881 746 614
--- ----- --- --- ---
Total nonperforming assets 6,719 5,302 5,054 3,624 2,609
Ratio of allowance for loan losses to
period-end loans 1.33% 1.36% 1.47% 1.25% 1.25%
Ratio of allowance for loan losses to
period-end nonperforming loans 234.9% 312.0% 298.0% 285.6% 394.7%
Ratio of allowance for loan losses to
period-end nonperforming assets 199.7% 234.6% 246.0% 224.3% 267.4%
Ratio of nonperforming assets to period-end
total loans and other real estate owned 0.67% 0.56% 0.60% 0.55% 0.47%
The impact of interest not recognized on nonaccrual 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 nonaccrual 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 1999 at $5.7 million. This level is approximately $1.7
million or 43% higher than one year earlier, solely attributable to the
delinquency of a large commercial customer in the Bank's Northern Region in the
fourth quarter. The customer experienced start-up problems with a new piece of
equipment, thus causing a delay in projected higher cash flow. The equipment is
now operative, and the associated $1.9 million loan is fully backed by
collateral and a small specific assignment of loan loss reserve; nonetheless,
management continues to monitor this situation carefully. Accordingly, the ratio
of nonperforming loans to total loans has risen 14 basis points from twelve
months earlier to .57%. Excluding the aforementioned delinquency, nonperforming
loans would have decreased by $190,000 or 4.8% to $3.8 million. As of
September 30, 1999, when the nonperforming loan ratio stood at .42%, the
Company's asset quality was in the favorable 34th percentile compared to peers.
The ratio of nonperforming assets (which additionally include troubled debt
restructuring and other real estate) to total loans plus OREO increased to .67%,
up 11 basis points from one year earlier.
Total delinquencies, defined as loans 30 days or more past due and nonaccruing,
improved nicely in 1999 to finish the year at 1.32% as a percent of total loans
outstanding compared to 1.40% in 1998. This ratio has remained in the 1.30% to
1.50% band for the last 21 months, well within the Company's internal guideline
of 2.0%. As of year-end 1999, total delinquencies for commercial loans,
installment loans, and real estate mortgages were 2.01%, 1.62%, and 0.68%,
respectively. These measures compare favorably to median delinquencies of peer
bank holding companies as of September 30, 1999 of 2.09%, 1.94%, and 1.40%,
respectively.
28
As of September 30, 1999, when overall delinquencies were at 1.35%, the Company
ranked better than the peer norm, being in the favorable 47th peer percentile.
Factors contributing to successful underwriting, collection, and credit
monitoring include selective addition of experienced lenders over the last
several years, loan servicing placed at the regional 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.
Net charge-offs for 1999 were lower by $958,000 or 19%, finishing the year at an
improved $4.2 million or .44% of average loans compared to $5.2 million and .58%
last year. As a result of lower installment loan charge-offs in 1999, total
gross charge-offs fell 13.3% to $5.3 million, or .56% of average loans
outstanding versus .69% in 1998. This year's recoveries rose to an all-time
record in dollar amount of $1,131,000, while down as a percentage of prior year
gross charge-offs to 18.5% from 22.1% in 1998. As of September 30, 1999, the
Bank's total net charge-off ratio was in the 87th peer percentile based on the
peer norm of .21%. Significant progress in lowering net charge offs to more
satisfactory levels is evidenced by a fourth quarter 1999 ratio of .38% compared
to .55% one year earlier.
This year's reduction in installment loan net charge-offs of $1.2 million is
indicative of more conservative underwriting practices and follow-up
surveillance adopted during 1998; installment net charge-offs averaged 1.03%
this year versus 1.45% last year. Commercial loan charge-offs were up by
$352,000 in 1999 due to three specific commercial loans written down during the
second and third quarters; the resulting net charge-off ratio rose from .16% to
a still low .24% of commercial loans outstanding. The full year loan loss
provision covered total actual net charge-offs by 1.24 times, this margin
serving as a precaution in the event the Upstate New York economy weakens after
its long sustained period of relative economic health.
Management continually evaluates loan loss reserve adequacy from a variety of
perspectives, including projected overall economic conditions for the coming
year, concentration of the loan portfolio by industry and loan type, and
individual customer condition. The loan loss reserve was increased to $13.4
million versus $12.4 million in 1998; as a percent of total loans, the loss
reserve ratio decreased to 1.33% at year-end 1999 from 1.36% at year-end 1998.
The slight decrease in the ratio is consistent with the target established
following assumption of $87 million in loans associated with 20 branches
acquired from Key and Fleet Bank in mid 1997. The reserve ratio is presently at
the peer median, being in the 50th peer percentile, and coverage of
nonperforming loans as of September 30, 1999 was well above the norm in the 67th
percentile; management believes the year-end coverage at 235% to be ample. It
should be noted that the dollars in the reserve are more than the Bank's actual
combined losses of the last three years. Another measure of comfort to
management is that after conservative allocation by specific customer and loan
type, almost 8% of loan loss reserve remains available for absorbing general,
unforeseen loan losses.
As a percentage of average loans, the annual loan loss provision was well above
the peer norm in the 87th percentile as of September 30, 1999. Despite a
reduction in the loss provision ratio from .58% in 1998 to .54% this year, the
Company increased coverage of the provision over net charge-offs from 1.0 times
to 1.24 times. Due to lower net charge-offs in 1999 as discussed above, loan
loss provision expense increased by only $13,000 in 1999. This compares to an
increase of $643,000 and $1.6 million in 1998 and 1997, respectively.
29
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)
1999 1998 1997 1996 1995
Amount of loans outstanding at end of period $1,009,943 $918,527 $845,027 $658,367 $573,620
-------------- ------------- -------------- ------------- ------------
Daily average amount of loans (net of
unearned discounts) $951,167 $884,751 $749,596 $602,717 $519,762
-------------- ------------- -------------- ------------- ------------
Balance of allowance for possible loan losses
at beginning of period $12,441 $12,434 $8,128 $6,976 $6,281
Loans charged off:
Commercial, financial, and agricultural 980 698 418 324 454
Real estate construction 0 0 0 0 0
Real estate mortgage 52 24 25 26 48
Installment 4,256 5,375 4,006 2,108 1,256
-------------- ------------- -------------- ------------- ------------
TOTAL LOANS CHARGED OFF 5,288 6,097 4,449 2,458 1,758
Recoveries of loans previously charged off:
Commercial, financial, and agricultural 147 200 185 224 213
Real estate construction 0 0 0 0 0
Real estate mortgage 5 4 1 1 27
Installment 980 777 541 488 448
-------------- ------------- -------------- ------------- ------------
TOTAL RECOVERIES 1,132 981 727 713 688
Net loans charged off 4,156 5,116 3,722 1,745 1,070
-------------- ------------- -------------- ------------- ------------
Additions to allowance charged to expense(1) 5,136 5,123 4,480 2,897 1,765
-------------- ------------- -------------- ------------- ------------
Reserves on acquired loans (2) 0 0 3,548 0 0
-------------- ------------- -------------- ------------- ------------
Balance at end of period $13,421 $12,441 $12,434 $8,128 $6,976
-------------- ------------- -------------- ------------- ------------
Ratio of net charge-offs to average loans
outstanding 0.44% 0.58% 0.50% 0.29% 0.21%
(1) The additions to the allowance during 1995 through 1999 were determined
using actual loan loss experience and future projected loan losses and other
factors affecting the estimate of possible loan losses.
(2) This reserve addition is attributable to loans purchased from Key Bank and
Fleet Bank in association with the purchases of branch offices during 1997.
30
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,
1999 1998 1997 1996 1995
---------------------- ---------------------- ---------------------- ---------------------- ----------------------
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
--------- ----------- --------- ----------- --------- ----------- --------- ----------- --------- -----------
Commercial,
financial, &
agricultural $3,786 19.8% $4,502 19.7% $4,136 19.2% $2,668 18.4% $2,035 17.4%
Real estate -
construction 0 0.0% 0 0.0% 0 0.0% 0 0.0% 0 0.0%
Real estate -
mortgage 1,285 46.8% 2,210 43.4% 2,026 44.4% 2,234 44.1% 2,255 45.2%
Installment 7,285 33.4% 4,525 36.9% 4,461 36.4% 2,309 37.5% 1,527 37.4%
Unallocated 1,065 N/A 1,096 N/A 1,811 N/A 917 N/A 1,159 N/A
Y2K credit risk
allocation 0 N/A 108 N/A 0 N/A 0 N/A 0 N/A
--------------------------------------------------------------------------------------------------------------------
Total $13,421 100.0% $12,441 100.0% $12,434 100.0% $8,128 100.0% $6,976 100.0%
Funding Sources
- ---------------
Typical of most commercial banking institutions today is the need to rely on a
variety of funding sources to support the earning asset base as well as to
achieve targeted growth objectives. There are three primary sources of funding
that comprise CBSI's overall funding matrix, which considers maturity,
stability, and price: deposits of individuals, partnerships and corporations
(IPC deposits); collateralized municipal deposits; and capital market
borrowings.
- -------------------------------------------------------------------------------------------------------
Sources of Funds
Average 4th Quarter Balances
($ Million)
- -------------------------------------------------------------------------------------------------------
Year IPC Deposits Public Funds Capital Borrowings Total Funds Sources
------------------ ------------------ ------------------- -------------------
Amount %Total Amount %Total Amount %Total Amount %Change
------ ------ ------ ------ ------ ------ ------ -------
1999 $1,212 73.1% $149 9.0% $298 18.0% $1,659 9.5%
1998 1,194 78.8 189 12.5 132 8.7 1,515 4.4
1997 1,190 82.0 163 11.2 98 6.7 1,451 21.4
1996 903 75.6 124 10.4 168 14.1 1,195 13.4
1995 921 86.8 128 12.6 6 0.6 1,054 29.6
The Company's funding matrix continues to benefit from a high level of IPC
deposits, which reached an all-time record for a fourth quarter average of
$1.212 billion, an increase of $18 million or 1.5% from the comparable 1998
period. IPC deposits are frequently considered to be a bank's most attractive
source of funding because they are generally stable, do not need to be
collateralized, have a 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.
31
The mix of CBSI's IPC deposits has changed over the last five years as measured
by the trend of fourth quarter average balances. The time deposit share grew
steadily, from 38% of deposits in 1994 to 49% in 1997, reflecting consumer
movement away from immediately available, lower earning savings and money market
accounts; in addition, there is a relatively high mix of time deposits in the
branches that have been acquired over the last few years. After a slight
reduction in time deposit mix in 1998 to 46%, 1999's mix increased slightly to
47% as a result of a $13 million or 2.4% increase in average fourth quarter
outstandings. Excluding time accounts, fourth quarter IPC deposits were up by $5
million or .8% in 1999; a $15 million or 7.6% increase in demand deposits more
than offset slight reductions in other IPC categories.
Deposits of local municipalities decreased $40 million or 21% during the past
year, with balances for fourth quarter 1999 averaging $149 million versus $189
million for the same 1998 quarter. 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. Consequently, levels of
municipal deposits fluctuate throughout the year depending on how competitive
pricing compares to the aforementioned borrowing rates. It should be noted that
utilization of municipal deposits has generally been decreasing since 1994 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, Federal
Reserve Bank of New York, as well as access to the national repurchase agreement
market through established relationships with primary market security dealers.
Also considered as borrowings are the $30 million in 9.75% Company-Obligated
Mandatorily Redeemable Preferred Securities issued to support 1997's
acquisitions and a $4 million advance on a $10 million M&T Bank line of credit
tied to the 90 day LIBOR rate (issued in late December 1999). Capital market
borrowings averaged $298 million or 18% of total funding sources for fourth
quarter 1999 compared to $132 million or 9% of total funding sources for the
same period in 1998. As of December 31, 1999, more than 78% or $250 million of
capital market borrowings (excluding the aforementioned line of credit and Trust
Preferred securities) had original terms of one year or less. The short-term
borrowings at year-end reflected the need for the Company to remain in a highly
liquid position in preparation for potential Year 2000 (Y2K) cash outflows.
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,
1999 1998 1997
-------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
Non-interest-bearing demand deposits $235,874 0.00% $214,997 0.00% $170,989 0.00%
Interest-bearing demand deposits 148,489 0.89% 145,141 1.18% 119,769 1.38%
Regular savings deposits 255,947 2.50% 264,370 2.79% 247,330 2.91%
Money market deposits 109,108 3.10% 99,219 3.08% 76,567 2.76%
Time deposits 619,851 5.11% 672,972 5.57% 599,136 5.61%
------- ------- -------
Total average daily
amount of domestic deposits $1,369,269 3.12% $1,396,699 3.55% $1,213,791 3.67%
The remaining maturities of time deposits in amounts of $100,000 or more outstanding
at December 31, 1999 and 1998 are summarized below:
-------------------------------------
At December 31,
-------------------------------------
(000's omitted) 1999 1998
Less than three months 53,798 $42,770
Three months to six months 28,644 24,451
Six months to one year 18,338 15,508
Over one years 11,618 8,961
------ -----
Total $112,398 $91,690
======== =======
32
The following table summarizes the outstanding balance of short-term borrowings
of the Company for the years indicated.
At December 31,
------------------------------------
(000's omitted) 1999 1998 1997
------------------------------------
Federal funds purchased $0 $34,700 $45,000
Term borrowings at banks (original term)
90 days or less 129,000 30,000 20,000
Over 90 days 125,000 0 0
----------- ----------- -----------
Balance at end of period $254,000 $64,700 $65,000
=========== =========== ===========
Daily average during the year $119,830 $13,915 $45,008
Maximum month-end balance $254,000 $64,700 $128,000
Weighted average rate during the year 5.24% 5.42% 5.74%
Year-end average rate 5.60% 5.46% 6.63%
Investments
- -----------
The stated objective of CBSI's investment portfolio is to prudently provide a
degree of low-risk, quality assets to the balance sheet. This must be
accomplished within the constraints of: (a) absorbing funds when loan demand is
low and infusing funds when demand is high; (b) implementing certain interest
rate risk management strategies which achieve a relatively stable level of net
interest income; (c) providing both the regulatory and operational liquidity
necessary to conduct day-to-day business activities; (d) considering investment
risk-weights as determined by regulatory risk-based capital guidelines; and (e)
generating a favorable return without undue compromise of other requirements.
Since 1997, the Company has utilized total return as its primary methodology for
managing investment portfolio assets. Under this analytical method, the Company
seeks to maximize shareholder value through both interest income and market
value appreciation.
Based on balance sheet simulation work completed throughout 1999, the Bank's net
interest margin exposure continued to point towards risk to falling interest
rates. Much of this exposure could be explained by examining the strong growth
in floating rate commercial loan assets and management's ability to the hold
core IPC deposit rates low in the face of rising interest rates. While such
strategies benefit the Bank's net interest margin nicely in a rising interest
rate environment, they do begin to expose the Bank to some risk should rates
begin to fall over the next few years.
The reversal of falling interest rates in mid 1999 provided the Bank with a
strategic opportunity to not only increase net interest income but also address
its falling interest rate risk concerns. This was accomplished by extending the
maturity and call protection of new investment purchases made throughout the
year. Such purchases were evenly balanced between long-term AAA rated municipal
bonds and callable agency bonds with a minimum of four years of call protection.
For the year, new purchases totaled $244 million with a weighted average life to
first call date of 8.20 years and a weighted average life to maturity of 10.65
years. This compares to purchases of $219 million in 1998 with a weighted
average life to first call date of 8.03 years and a weighted average life to
maturity of 9.79 years.
The increase in interest rates also significantly reduced the prepayment
exposure found in the Bank's premium collateralized mortgage obligation (CMO)
portfolio. Premium CMOs, for purposes of this discussion, are defined as those
securities with an original purchase price of $102.5 or higher. Under general
accounting standards, any premium paid for mortgage-related bonds is required to
be amortized to par using a constant yield methodology. As mortgage prepayments
decreased throughout the second half of the year, the monthly premium
amortization associated with these bonds also decreased, thus boosting the
overall investment portfolio yield in 1999.
The average portfolio yield, excluding money market investments, rose to 6.64%
in 1999 from 6.53% in the prior year. In the fourth quarter of 1999, the
portfolio yield averaged 7.02% versus 5.86% for the same time period in 1998.
The fourth quarter 1998 figure reflects the height of the premium CMO
prepayments which the Bank experienced during that year.
In the third and fourth quarters of 1999, the Bank embarked upon a municipal tax
loss strategy whereby low coupon municipal notes were swapped for higher
yielding long-term municipal bonds. This strategy resulted in net investment
losses for the year of $638,000 on sales of $14.6 million. In 1998, gains of
$2.29 million (including $328,000 pretax realized upon adoption of FAS 133,
reported as an after-tax change in accounting) were recognized on a combined $86
million in investment sales. Sales for the prior year were part of a deleverage
strategy that helped provide the Bank with an opportunity to repurchase 326,600
shares of common stock in the late summer and early fall of that year.
33
The composition of the portfolio continues to heavily favor U.S. Agency
Debentures, U.S. Agency mortgage-backed pass-throughs, U.S. Agency CMOs, and AAA
rated and insured municipal bonds. As of year-end 1999, these four security
types (excluding Federal Home Loan Bank stock and Federal Reserve Bank stock)
accounted for a combined 94% of total portfolio investments (28%, 8%, 38% and
20%, respectively), down slightly from 98% in the prior year.
As stated previously, the Bank's interest rate simulation work pointed towards
the need to increase call protection within the overall balance sheet structure
of the organization. This was most readily accomplished by extending the average
life of the portfolio through purchases made throughout the year as discussed
above. Aiding in this task, though to a much lesser extent, was the slowdown
experienced from prepayments within the fixed rate portion of the CMO portfolio.
As a result, the average life of the portfolio stood at 8.51 years as of
year-end 1999, up from 2.68 years as of the prior year-end.
34
Investment Securities
- ---------------------
The following table sets forth the amortized cost and market value for the
Company's held-to-maturity investment securities portfolio:
At December 31,
----------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------
Amortized Amortized Amortized
Cost/Book Market Cost/Book Market Cost/Book Market
Value Value Value Value Value Value
U.S. Treasury securities and
obligations of U.S.
Government corporations
and agencies $0 $0 $0 $0 $164,199 $168,799
Obligations of states
and political subdivisions 5,042 5,084 4,038 4,107 10,221 10,575
Corporate securities 0 0 0 0 3,091 3,201
Mortgage-backed securities 0 0 0 0 86,148 88,838
--------------------------------------------------------------------
Total $5,042 $5,084 $4,038 $4,107 $263,659 $271,413
====================================================================
The following table sets forth the amortized cost and market value for the
Company's available-for-sale investment portfolio and grand total carrying value
for both portfolios.
At December 31,
---------------------------------------------------------------------------
1999 1998 1997
---------------------------------------------------------------------------
Amortized Amortized Amortized
Cost/Book Market Cost/Book Market Cost/Book Market
Value Value Value Value Value Value
----- ----- ----- ----- ----- -----
(In thousands) (In thousands) (In thousands)
U.S. Treasury securities and
obligations of U.S.
Government corporations
and agencies $177,097 $171,793 $170,464 $175,866 $82,027 $84,730
Obligations of states
and political 118,223 110,125 40,591 41,329 9,960 10,310
subdivisions
Corporate securities 35,914 33,099 9,153 9,382 0 0
Mortgage-backed
securities 290,000 284,090 336,090 336,967 225,692 227,350
Equity securities (1) 24,364 24,364 23,784 23,784 23,669 23,669
Federal Reserve
Bank common stock 2,174 2,174 2,174 2,174 2,174 2,174
----- ----- ----- ----- ----- -----
Total $647,772 $625,645 $582,256 $589,502 $343,523 $348,233
======== ======== ======== ======== ======== ========
Net unrealized gains/(losses)
on available-for-sale portfolio (22,127) 7,246 4,710
------- ----- -----
Grand total carrying $630,687 $593,540 $611,892
value
===========================================================================
(1) Includes $23,059 in FHLB common stock at December 31, 1999, 1998, and 1997,respectively.
35
The following table sets forth as of December 31, 1999, the maturities of
investment securities and the weighted-average yields of such securities, which
have been calculated on the basis cost, weighted for scheduled maturity of each
security, and adjusted to a fully tax-equivalent basis:
At December 31, 1999
-------------------------------------------------------------
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 $0 $0 $0 $0
Mortgage-backed securities 0 0 0 0 0
States and political subdivisions 3,220 1,623 181 18 5,042
Other 0 0 0 0 0
------ ------ ------ ------ ------
Total Held-to-Maturity Portfolio Value $3,220 $1,623 $181 $18 $5,042
====== ====== ====== ====== ======
Weighted Average Yield for Year (1) 6.40% 7.32% 8.26% 8.80% 6.77%
Available-for-Sale Portfolio
- ----------------------------
U.S. Treasury and other
U.S.government agencies $2,999 $472 $132,149 $41,477 $177,097
Mortgage-backed securities 3,577 151,394 91,803 43,227 290,001
States and political subdivisions 840 2,083 17,709 97,591 118,223
Other 0 544 5,051 30,319 35,914
------ ------ ------ ------ ------
Total Available-for-Sale Portfolio Value $7,416 $154,493 $246,712 $212,614 $621,235
====== ======= ======= ======= =======
Weighted Average Yield for Year (1) 7.86% 7.54% 7.04% 6.88% 7.12%
(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.
Interest Rate Risk
- ------------------
Market risk is the risk of loss in a financial instrument arising from adverse
changes in market rates/prices such as interest rates, foreign currency exchange
rates, commodity prices, and equity prices. The Company's primary market risk
exposure is interest rate risk. The ongoing monitoring and management of this
risk, over both a short-term tactical and longer-term strategic time horizon, is
an important component of the Company's asset/liability management process,
which is governed by policies established by its Board of Directors, which
reviews and approves them annually. The Board of Directors delegates
responsibility for carrying out the asset/liability management policies to the
Asset/Liability Committee (ALCO). In this capacity, ALCO develops guidelines and
strategies impacting the Company's asset/liability management related activities
based upon estimated market risk sensitivity, policy limits, and overall market
interest-related level and trends.
36
As the Company does not believe it is possible to reliably predict future
interest rate movements, it has maintained an appropriate process and set of
measurement tools which enable it to identify and quantify sources of interest
rate risk. The primary tool used by the Company in managing interest rate risk
is income simulation. The analysis begins by measuring the impact of differences
in maturity and repricing of all balance sheet positions. Such work is further
augmented by adjusting for prepayment and embedded option risk found naturally
in certain asset and liability classes. Finally, balance sheet growth and
funding expectations are added to the analysis in order to reflect the strategic
initiatives set forth by the Company.
Changes in net interest income are reviewed after subjecting the balance sheet
to an array of Treasury yield curve possibilities, including an up or down 200
basis point movement (BP) in rates from current levels. While such an aggressive
movement in rates provides management with good insight as to how the Company's
profit margins may perform under extreme market conditions, results from a more
modest 100 BP shift in interest rates are used as a basis to conduct day-to-day
business decisions.
Historically with increases in the yield curve, income simulations have shown
that the Bank's net interest income tended to be higher than in flat rate
environments. This was caused by the Bank's structural asset sensitivity (which
by definition indicates that earning assets would mature or reprice sooner than
a corresponding liability) and because loan and investment rates tended to
closely track prime or movement in various Treasurys while funding costs
(largely deposits) generally moved upward at a much slower pace.
Conversely, the same factors that widened simulated margins in a rising rate
environment created risk in a falling rate environment.
The mid-1999 reversal of falling interest rates provided the Bank with a
strategic opportunity to not only increase net interest income but also address
its falling interest rate risk concerns. This was accomplished by extending the
maturity and call protection of new investment purchases made throughout the
year (as further explained in the "Investments" section of this document) and by
making the strategic decision to keep the bulk of the Bank's borrowing position
short (terms of 180 days or less as opposed to longer term borrowings).
As a result, if there were no growth in the balance sheet, simulation results
now show the Bank to be better off as rates fall. The following reflects the
Company's one-year net interest income sensitivity based on asset and liability
levels on December 31, 1999, assuming no growth in the balance sheet, and
assuming 200 BP movements over a twelve month period in the prime rate, federal
funds rate and the entire Treasury yield curve:
REGULATORY MODEL
------------------------------------------------------------------------
Rate Change Dollar Change Percent of Flat Rate
In Basis Points (in 000s) Net Interest Income
--------------- --------- -------------------
+ 200 bp $(1,663) (2.3%)
- 200 bp $ 436 .1%
A second simulation was performed based on what the Company believes to be
conservative levels of balance sheet growth (8% for loans, 2% for deposits and
necessary increases in borrowings, with no growth in investment or any other
major portions of the balance sheet), along with 100 BP movements over a twelve
month period in the prime rate and federal funds rate, and a yield curve moving
closer to historical spreads to fed funds. Under this set of assumptions, the
Bank is able to better take advantage of rising rates as earning assets mature
or reprice and are replaced at higher yields (with the opposite occurring as
rates fall). Thus, given the second set of assumptions, the risk of rate changes
of the magnitude tested appears to be somewhat negated.
The following reflects the Company's one-year net interest income sensitivity
analysis based on asset and liability levels on December 31, 1999 assuming the
aforementioned balance sheet growth and yield curve changes:
MANAGEMENT MODEL
------------------------------------------------------------------------
Rate Change Dollar Change Percent of Flat Rate
In Basis Points (in 000s) Net Interest Income
--------------- ------------- -------------------
+ 100 bp $ 13 .02%
- 100 bp $ (365) (.49%)
37
The preceding interest rate risk analyses do not represent a Company forecast
and should not be relied upon as being indicative of expected operating results.
These hypothetical estimates are based upon numerous assumptions including: the
nature and timing of interest rate levels including yield curve shape,
prepayments on loans and securities, deposit decay rates, pricing decisions on
loans and deposits, reinvestment/replacement of asset and liability cashflows,
and others. While the assumptions are developed based upon current economic and
local market conditions, the Company cannot make any assurances as to the
predictive nature of these assumptions, including how customer preferences or
competitor influences might change. Furthermore, the sensitivity analyses do not
reflect actions that ALCO might take in responding to or anticipating changes in
interest rates.
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 availability 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 1999, this ratio
was 17.3% and 20.6%, respectively, excluding the Company's capacity to borrow
additional funds from the Federal Home Loan Bank.
38
GAP REPORT
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
as of December 31, 1999
Volumes 1-30 31-60 60-90 91-180 181-360 13-24 25-36 37-48 49-60 Over 60
($000's) Days Days Days Days Days Months Months Months Months Months TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Due from banks - - - - - - - - - 76,159 76,159
Money Market Inv 24,567 24,567
Fixed Rate Debentures 3,039 - 55,423 - 9,834 9,684 93,347 171,327
Municipals 241 232 102 1,836 1,651 1,157 1,228 352 1,021 107,347 115,167
Fixed Rate Mortgage
Backed 2,173 2,008 1,973 5,148 8,885 24,308 19,438 19,414 25,268 150,413 259,027
Floating Rate Mortgage
Backed 25,063 - - - - - - - - - 25,063
Other Investments 466 - - - - - 49 - 492 59,096 60,103
- ---------------------------------------------------------------------------------------------------------------------------------
Total Investments 52,510 2,240 2,075 10,023 10,536 80,888 20,715 29,600 36,465 486,362 731,414
- ---------------------------------------------------------------------------------------------------------------------------------
Mortgages: -
Adjustable Rate 4,073 418 2,842 5,070 10,020 - - - - - 22,423
Fixed Rate 3,067 3,178 3,151 9,232 17,503 31,497 27,129 23,284 19,771 80,647 218,459
Variable Home Equit 35,493 8,016 290 3,386 5,553 - - - - - 52,738
Commercial Variabl 224,701 - - - - - - - - - 224,701
Other Commercial 9,437 7,442 7,763 21,438 34,653 62,923 3,879 - - (755) 146,780
Installment, Net 8,334 8,946 9,039 26,994 52,379 92,836 71,712 45,503 11,350 17,029 344,122
- ---------------------------------------------------------------------------------------------------------------------------------
Total Loans 285,105 28,000 23,085 66,120 120,108 187,256 102,720 68,787 31,121 96,921 1,009,223
Loan Loss Reserve - - - - - - - - - (13,421) (13,421)
Other Assets - - - - - - - - - 113,486 113,486
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 337,615 30,240 25,160 76,143 130,644 268,144 123,435 98,387 67,586 683,348 1,840,702
Average Yield 8.80% 8.91% 8.74% 8.57% 8.64% 8.40% 8.65% 8.22% 8.29% 4.92% 7.22%
=================================================================================================================================
Liabilities and Captial:
Demand Deposits - - - - - - - - - 225,013 225,013
Savings / NOW 1,492 1,492 1,492 4,475 23,865 17,900 - - - 348,914 399,630
Money Markets - - - 71,080 32,055 - - - - - 103,135
CD's / IRA / Other 57,565 46,882 38,407 155,554 155,410 132,755 25,793 12,287 5,395 2,480 632,528
- ---------------------------------------------------------------------------------------------------------------------------------
Total Deposits 59,057 48,374 39,899 231,109 211,330 150,655 25,793 12,287 5,395 576,407 1,360,306
Short Term Borrowings - 100,000 25,000 129,000 - - - - - - 254,000
Term Borrowing - - - - 15,000 - 10,000 5,000 - 40,000 70,000
Trust Securities - - - - - - - - - 29,817 29,817
Other Liabilities - - - - - - - - - 18,092 18,092
Capital - - - - - - - - - 108,487 108,487
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES
AND CAPITAL 59,057 148,374 64,899 360,109 226,330 150,655 35,793 17,287 5,395 772,803 1,840,702
AVERAGE RATE 4.79% 5.23% 5.15% 4.93% 4.57% 5.03% 5.85% 5.47% 5.00% 1.50% 3.50%
=================================================================================================================================
GAP 278,558 (118,134) (39,739) (283,966) (95,686) 117,489 87,642 81,100 62,191 (89,455)
CUMULATIVE GAP 278,558 160,424 120,685 163,281) (258,967) (141,479) (53,836) 27,264 89,455 (0)
CUMULATIVE GAP /
TOTAL ASSETS 15.13% 8.72% 6.56% -8.87% -14.07% -7.69% -2.92% 1.48% 4.86%
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 181-360 days.
Totals may not foot due to rounding.
39
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 general levels of inflation.
Forward-Looking Statements
- --------------------------
This document contains comments or information that constitute forward-looking
statements (within the meaning of the Private Securities Litigation Reform Act
of 1995), which involve significant risks and uncertainties. Actual results may
differ materially from the results discussed in the forward-looking statements.
Moreover, the Company's plans, objectives and intentions are subject to change
based on various factors (some of which are beyond the Company's control).
Factors that could cause actual results to differ from those discussed in the
forward-looking statements include: (1) risks related to credit quality,
interest rate sensitivity and liquidity; (2) the strength of the U.S. economy in
general and the strength of the local economies where the Company conducts its
business; (3) the effect of, and changes in, monetary and fiscal policies and
laws, including interest rate policies of the Board of Governors of the Federal
Reserve System; (4) inflation, interest rate, market and monetary fluctuations;
(5) the timely development of new products and services and customer perception
of the overall value thereof (including features, pricing and quality) compared
to competing products and services; (6) changes in consumer spending, borrowing
and savings habits; (7) technological changes; (8) any acquisitions or mergers
that might be considered by the Company and the costs and factors associated
therewith; (9) the ability to maintain and increase market share and control
expenses; (10) the effect of changes in laws and regulations (including laws and
regulations concerning taxes, banking, securities and insurance) and accounting
principles generally accepted in the United States; (11) changes in the
Company's organization, compensation and benefit plans and in the availability
of, and compensation levels for, employees in its geographic markets; (12) the
costs and effects of litigation and of any adverse outcome in such litigation;
and (13) the success of the Company at managing the risks of the foregoing.
The foregoing list of important factors is not exclusive. Such forward-looking
statements speak only as of the date on which they are made and the Company does
not undertake any obligation to update any forward-looking statement, whether
written or oral, to reflect events or circumstances after the date on which such
statement is made. If the Company does update or correct one or more
forward-looking statements, investors and others should not conclude that the
Company will make additional updates or corrections with respect thereto or with
respect to other forward-looking statements.
Year 2000
- ---------
The Year 2000 issue is the result of computer programs being written using two
digits rather the four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions or engage in normal
business activities.
Based on its assessment, the Company determined that the majority of its
processing systems are outsourced to industry standard vendors. The Company,
through its Year 2000 Committee, has identified critical vendors and processes
and have put in place monitoring and measuring techniques to assure its critical
vendors are complying with the Federal Financial Institutions Examining Council
guidelines for Year 2000 compliance. In brief, the Company's loan, deposit and
general ledger systems are outsourced to Fiserv, Inc.; the investment accounting
is outsourced to First Tennessee Bank; ATM processing is outsourced to U. S.
Bank Network Services; and the trust account system employs Sungard software.
The Company is subject to quarterly reviews by the Office of the Comptroller of
the Currency (OCC), including Year 2000 compliance.
The Company completed formal communications with all of its significant
suppliers and large customers to determine the status of Year 2000 compliance
and if appropriate contingency plans and business resumption plans were in place
in the unlikely event the vendor or customer should experience a Year 2000
compliant failure.
The Company has utilized both internal and external resources to reprogram or
replace, test and validate the software for Year 2000 modifications. The Company
has spent $686,888 for overall Year 2000 upgrades and equipment along with an
additional estimated labor cost of $400,000. The expenditures included but were
not limited to: upgrades to Item Processing software and hardware, PC software
and hardware, NCR ATM's, third party reviews of outsourcing vendors, proxy
testing, the cost of service vendor mailings, follow-up testing, customer
awareness efforts and commercial customer risk assessments.
40
The Company completed all renovations on critical systems prior to the roll-over
to Year 2000, including modifications to existing software and conversions to
new software. As a result, the Year 2000 issue had no impact on the Company's
operation. As a further precaution, cash reserves in the branches were
maintained well above normal year end levels, but there was no activity that was
out of the ordinary. Large cash reserves were then shipped out of the branches
during the week of January 3rd, and cash levels are now back to normal operating
levels.
As a result of a supportive Senior Management Team, an energetic Y2K Committee
and a cooperative staff company-wide, CBSI's Y2K transition was smooth and
uneventful. Roll-over weekend went very well with only a couple of minor issues,
which were resolved on January 1 or January 3rd. All subsidiaries, departments
and branches of the Company participated in Event Weekend testing, and all was
in order for reopening on January 3rd.
As of the date of this filing, the Company has not incurred any significant
business interruption as a result of the Year 2000 issue. The Company will
continue to monitor the issue throughout 2000 and expeditiously remediate any
issues that may arise. Based on the Company's readiness efforts, the Company
does not reasonably foresee any material Year 2000 issues, and therefore, costs
associated with any potential issues are not expected to have a material adverse
effect on either the financial condition or operating capacity of the Company.
New Accounting Pronouncements
- -----------------------------
In 1998, the Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement requires an entity to
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. Upon adoption of the SFAS the
Company transferred investment securities from held-to-maturity to
available-for-sale (see Note C). As a result, securities previously classified
as held-to-maturity were sold during the year and investment securities gains of
approximately $194,000, net of tax, resulting from the sale have been reported
as a cumulative effect of change in accounting principle. The Company has no
outstanding derivative financial instruments and, accordingly, adoption of SFAS
133 had no other effect on the Company's financial statements.
In October 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." This statement requires that
after the securitization of a mortgage loan held for sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed securities or
other retained interests based on its ability and intent to sell or hold those
investments. SFAS No. 134 is effective for the first fiscal quarter beginning
after December 15, 1998 and accordingly, would apply to the Company for the
quarter ending March 31, 1999. The Company has not engaged in the securitization
of its mortgage loans held for sale and does not expect to do so in the
foreseeable future. Therefore, this pronouncement is not expected to have a
material impact on the financial statements of the Company.
The following consolidated financial statements and auditor's reports of
Community Bank System, Inc. and subsidiaries are contained on pages 42 through
63 of this item.
Item 8. Financial Statements and Supplementary Data
- ---------------------------------------------------
- - Consolidated Statements of Condition-
December 31, 1999 and 1998
- - Consolidated Statements of Income -
Years ended December 31, 1999, 1998, and 1997
- - Consolidated Statements of Changes in Shareholders' Equity -
Years ended December 31, 1999, 1998, and 1997
- - Consolidated Statements of Cash Flows -
Years ended December 31, 1999, 1998, and 1997
- - Notes to Consolidated Financial Statements -
December 31, 1999
- - Auditor's Report
Quarterly Selected Data (Unaudited) for 1999 and 1998 are contained on page 62.
41
CONSOLIDATED STATEMENTS OF CONDITION
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
December 31, December 31,
1999 1998
- --------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 76,526,657 $ 78,893,438
Federal funds sold 24,200,000 0
- --------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 100,726,657 78,893,438
Investment securities
(approximate fair value of $630,729,252 and $593,605,000) 630,687,585 593,539,767
Loans 1,009,222,515 917,220,120
Reserve for possible loan losses 13,420,610 12,441,255
- --------------------------------------------------------------------------------------------------------
Net loans 995,801,905 904,778,865
Premises and equipment, net 25,508,863 24,877,782
Accrued interest receivable 14,168,068 12,375,334
Intangible assets, net 49,484,949 54,438,219
Other assets 24,323,539 11,785,296
- --------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,840,701,566 $ 1,680,688,701
========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits
Noninterest bearing $ 225,012,768 $ 249,863,649
Interest bearing 1,135,293,216 1,128,201,929
- --------------------------------------------------------------------------------------------------------
Total deposits 1,360,305,984 1,378,065,578
Federal funds purchased 0 34,700,000
Borrowings 324,000,000 100,000,000
Company obligated mandatorily redeemable preferred securities
of subsidiary Community Capital Trust 1 holding solely junior
subordinated debentures of the company 29,817,188 29,810,438
Accrued interest and other liabilities 18,090,941 17,947,217
- --------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,732,214,113 1,560,523,233
- --------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock no par $1.00 stated value for 1999 and 1998;
20,000,000 shares authorized; 7,092,259 and 7,296,453 shares
outstanding for 1999 and 1998,respectively 7,640,359 7,623,053
Surplus 33,327,586 32,842,772
Undivided profits 95,340,837 84,591,247
Accumulated other comprehensive income (13,088,367) 4,285,743
Treasury stock, at cost (548,100 and 326,600 shares for 1999
and 1998, respectively) (14,718,787) (9,151,956)
Shares issued under employee stock plan - unearned (14,175) (25,391)
- --------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 108,487,453 120,165,468
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,840,701,566 $ 1,680,688,701
========================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
42
CONSOLIDATED STATEMENTS OF INCOME
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $ 84,853,208 $ 82,778,201 $ 71,562,755
Interest and dividends on investments:
U.S. Treasury 270,681 269,408 269,240
U.S. Government agencies and corporations 12,287,617 16,340,308 23,767,244
States and political subdivisions 5,001,876 1,571,670 964,917
Mortgage-backed securities 17,925,398 19,588,820 18,317,165
Other securities 3,510,586 2,091,495 1,879,799
Interest on federal funds sold and deposits with other banks 38,488 298,175 867,046
- -----------------------------------------------------------------------------------------------------------------------
Total interest income 123,887,854 122,938,077 117,628,166
- -----------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 42,773,861 49,668,906 44,590,208
Interest on federal funds purchased 1,330,890 597,355 698,859
Interest on short-term borrowings 4,946,617 156,607 1,884,314
Interest on mandatorily redeemable preferred securities of subsidiary 2,931,750 2,931,750 2,671,188
Interest on long-term borrowings 3,963,611 5,188,535 4,907,182
- -----------------------------------------------------------------------------------------------------------------------
Total interest expense 55,946,729 58,543,153 54,751,751
- -----------------------------------------------------------------------------------------------------------------------
Net interest income 67,941,125 64,394,924 62,876,415
Less: Provision for possible loan losses 5,136,068 5,122,596 4,480,000
- -----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 62,805,057 59,272,328 58,396,415
- -----------------------------------------------------------------------------------------------------------------------
Other income:
Fiduciary and investment services 2,344,496 1,921,766 1,725,084
Service charges on deposit accounts 7,012,704 6,630,004 5,054,542
Commissions on investment products 1,288,083 1,222,328 1,001,588
Other service charges, commissions and fees 5,223,396 4,412,523 2,397,375
Other operating income 255,639 893,924 1,643,151
Investment security gain (loss) (637,654) 1,959,384 (13,881)
- -----------------------------------------------------------------------------------------------------------------------
Total other income 15,486,664 17,039,929 11,807,859
- -----------------------------------------------------------------------------------------------------------------------
Other expenses:
Salaries and employee benefits 26,387,554 25,749,840 22,944,801
Occupancy expense, net 3,919,378 4,085,818 3,426,189
Equipment and furniture expense 3,465,330 3,500,841 2,727,739
Amortization of intangible assets 4,614,514 4,639,536 3,702,850
Legal and professional fees 1,936,668 1,666,017 1,616,227
Computer services expenses 2,389,138 2,334,104 2,095,395
Other 10,020,488 9,899,793 9,285,440
- -----------------------------------------------------------------------------------------------------------------------
Total other expenses 52,733,070 51,875,949 45,798,641
- -----------------------------------------------------------------------------------------------------------------------
Income before income taxes 25,558,651 24,436,308 24,405,633
Income taxes 7,923,182 8,901,945 8,844,127
- -----------------------------------------------------------------------------------------------------------------------
Income before change in accounting 17,635,469 15,534,363 15,561,506
Cumulative effect of change in accounting principle,
net of taxes of $133,883 in 1998 (note C) 0 193,860 0
- -----------------------------------------------------------------------------------------------------------------------
NET INCOME $ 17,635,469 15,728,223 15,561,506
=======================================================================================================================
Earnings per common share - basic $2.45 $2.08 $2.05
=======================================================================================================================
Earnings per common share - diluted $2.42 $2.05 $2.02
=======================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
43
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
Years ended December 31, 1997, 1998 and 1999
Common Stock
------------
Preferred Shares Undivided
Stock Oustanding Amount Surplus Profits
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1997 $4,500,000 7,474,406 $4,671,504 $33,584,773 $65,691,025
Net income - 1997 15,561,506
Other comprehensive income, before tax:
Unrealized gains on securities:
Unrealized holding gains arising during period
Less: reclassification adjustment for gains included
in net income
Other comprehensive income, before tax:
Income tax expense related to other comprehensive income
Other comprehensive income, net of tax
Comprehensive income
Dividends declared:
Preferred, $9.00 per share (180,000)
Common, $0.76 per share (5,737,004)
Preferred stock redeemed (4,500,000) (180,000)
Common stock issued under
employee stock plan 112,106 95,660 1,815,906
Change in par value 0 2,819,348 (2,819,348)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $0 $7,586,512 $7,586,512 $32,401,331 $75,335,527
Net income - 1998 15,728,223
Other comprehensive income, before tax:
Unrealized gains on securities:
Unrealized holding gains arising during period
Less: reclassification adjustment for gains included
in net income
Other comprehensive income, before tax:
Income tax expense related to other comprehensive income
Other comprehensive income, net of tax
Comprehensive income
Dividends declared:
Common, $.86 per share (6,472,503)
Common stock issued under
employee stock plan 36,541 36,541 441,441
Treasury stock purchased (326,600)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $0 7,296,453 $7,623,053 $32,842,772 $84,591,247
Net income - 1999 17,635,469
Other comprehensive income, before tax:
Unrealized losses on securities:
Unrealized holding losses arising during period
Less: reclassification adjustment for losses included
in net income
Other comprehensive loss, before tax:
Income tax benefit related to other comprehensive income
Other comprehensive income, net of tax
Comprehensive income
Dividends declared:
Common, $.96 per share (6,885,879)
Common stock issued under employee stock plan 17,306 17,306 484,814
Treasury stock purchased (221,500)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $0 7,092,259 $7,640,359 $33,327,586 $95,340,838
====================================================================================================================================
44 A
Common Shares
Accumulated Issued Under
Other Employee
Treasury Comprehensive Comprehensive Stock Plan
Stock Income Income Unearned Total
Balance at January 1, 1997 $947,853 ($42,928) $109,352,227
Net income - 1997 15,561,506 15,561,506
Other comprehensive income, before tax:
Unrealized gains on securities:
Unrealized holding gains arising during period 3,081,709 0
Less: reclassification adjustment for gains included
in net income 13,881
------
Other comprehensive income, before tax: 3,095,590
---------
Income tax expense related to other comprehensive income (1,264,530)
-----------
Other comprehensive income, net of tax 1,831,060 1,831,060 1,831,060
---------
Comprehensive income $17,392,566
===========
Dividends declared:
Preferred, $9.00 per share (180,000)
Common, $0.76 per share (5,737,004)
Preferred stock redeemed (4,680,000)
Common stock issued under
employee stock plan (47,372) 1,864,194
Change in par value 0
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $2,778,913 ($90,300) $118,011,983
Net income - 1998 $15,728,223 15,728,223
-----------
Other comprehensive income, before tax:
Unrealized gains on securities:
Unrealized holding gains arising during period 4,822,654 0
Less: reclassification adjustment for gains included
in net income (2,287,127)
-----------
Other comprehensive income, before tax: 2,535,527
Income tax expense related to other comprehensive income (1,028,697)
-----------
Other comprehensive income, net of tax 1,506,830 1,506,830 1,506,830
---------
Comprehensive income $17,235,053
===========
Dividends declared:
Common, $.86 per share (6,472,503)
Common stock issued under
employee stock plan 64,909 542,891
Treasury stock purchased (9,151,956) (9,151,956)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $(9,151,956) $4,285,743 ($25,391) $120,165,468
Net income - 1999 $17,635,469 17,635,469
-----------
Other comprehensive income, before tax:
Unrealized losses on securities:
Unrealized holding losses arising during period (30,010,621)
Less: reclassification adjustment for losses included
in net income 637,654
-------
Other comprehensive loss, before tax: 29,372,967)
Income tax benefit related to other comprehensive income 11,998,857
----------
Other comprehensive income, net of tax (17,374,110) (17,374,110) (17,374,110)
------------
Comprehensive income $261,359
========
Dividends declared:
Common, $.96 per share (6,885,879)
Common stock issued under employee stock plan 11,216 513,336
Treasury stock purchased (5,566,831) (5,566,831)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $(14,718,787) ($13,088,367) ($14,175) 108,487,453
====================================================================================================================================
The accompanying notes are an intergral part of the consolidated financial statements.
44 B
CONSOLIDATED STATEMENTS OF CASH FLOWS
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
For Twelve Months Ended December 31, 1999, 1998, and 1997
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 17,635,469 $ 15,728,223 $ 15,561,506
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 2,941,441 2,822,990 2,130,434
Amortization of intangible assets 4,614,513 4,639,536 3,702,850
Net amortization of security premiums and discounts 3,719,956 6,922,686 8,005
Amortization of discount on loans (586,746) 1,443,122 3,142,460
Provision for loan losses 5,136,068 5,122,596 4,480,000
Provision for deferred taxes 730,136 383,806 (223,394)
(Gain)/loss on sale of investment securities 637,654 (2,287,127) 13,881
(Gain)/loss on sale of loans and other assets (161,285) (102,847) (158,033)
Change in interest receivable (1,792,734) 1,017,484 (2,602,746)
Change in other assets and other liabilities 910,590 2,269,036 (1,391,786)
Change in unearned loan fees and costs (1,328,952) (1,551,770) (883,108)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 30,995,838 36,407,735 23,780,069
- ----------------------------------------------------------------------------------------------------------------------
Investing Activities:
Proceeds from sales of investment securities 13,915,420 87,188,668 51,916,026
Proceeds from maturities of held to maturity
investment securities 2,771,314 55,077,029 114,946,856
Proceeds from maturities of available for
sale investment securities 171,894,104 110,430,351 13,507,367
Purchases of held to maturity investment securities (3,775,571) (7,943,215) (7,989,300)
Purchases of available for sale investment securities (255,683,661) (228,500,654) (202,645,932)
Net change in loans outstanding (94,033,913) (78,779,935) (103,025,001)
Capital expenditures (3,753,697) (4,935,714) (9,042,922)
Proceeds from sales of property and equipment 132,963 752,235 0
Loans purchased in branch acquisition 0 0 (86,800,537)
Premium paid for branch acquisitions 0 0 (31,133,116)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (168,533,041) (66,711,235) (260,266,559)
- ----------------------------------------------------------------------------------------------------------------------
Financing Activities:
Net change in demand deposits, NOW accounts,
and savings accounts (28,505,058) 61,508,239 (6,835,157)
Net change in certificates of deposit 10,745,464 (29,128,619) 15,967,588
Net change in federal funds purchased (34,700,000) (10,300,000) 13,200,000
Net change in term borrowings 224,000,000 20,000,000 (85,000,000)
Issuance (retirement) of common and
preferred stock 187,928 474,451 (3,451,047)
Treasury stock purchased (5,566,831) (9,151,956) 0
Cash dividends (6,791,081) (6,311,580) (5,745,135)
Deposits assumed in branch acquisitions 0 0 309,340,271
Issuance of mandatorily redeemable capital 0 0 29,803,688
securities of subsidiary
Debt issuance costs 0 0 (1,222,041)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 159,370,422 27,090,535 266,058,167
- ----------------------------------------------------------------------------------------------------------------------
Change in cash and cash equivalents 21,833,219 (3,212,965) 29,571,677
Cash and cash equivalents at beginning of year 78,893,438 82,106,403 52,534,726
- ----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 100,726,657 78,893,438 82,106,403
======================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest $56,577,891 $56,791,512 $52,235,280
======================================================================================================================
Cash paid for income taxes $7,681,112 $9,938,377 $9,716,995
======================================================================================================================
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
AND INVESTING ACTIVITIES:
Dividends declared and unpaid $1,772,982 $1,678,184 $1,517,262
Gross change in unrealized gains and ($29,372,967) $2,547,473 $3,095,590
(losses) on available-for-sale securities
======================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
45
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
wholly-owns three subsidiaries, Community Bank, N.A. (the Bank), Community
Capital Trust I, a subsidiary business trust, and Benefit Plans Administrative
Services, Inc. (BPA). BPA, located in Utica, New York, provides pension
administration and consulting services to sponsors of defined benefit and
defined contribution plans throughout New York State. The Bank operates 67
customer facilities throughout Northern New York, the Finger Lakes Region, the
Southern Tier, and Southwestern New York and owns two banking related
subsidiaries, Community Financial Services, Inc. (CFSI), and Community
Investment Services, Inc. (CISI). CFSI offers insurance investment products and
CISI provides broker/dealer and investment advisory services. In addition, the
Bank owns two nonbanking subsidiaries, CBNA Treasury Management Corporation
(TMC) and CBNA Preferred Funding Corporation (PFC). TMC operates the cash
management, investment, and treasury functions of the Bank, and PFC invests in
residential real estate loans as a real estate investment trust. In early 1997,
Community Capital Trust I was formed for the purpose of issuing mandatorily
redeemable convertible securities, which are considered Tier I capital under
regulatory capital adequacy requirements (see Note Q).
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. 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 accounting principles
generally accepted in the United States 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 have been classified as trading securities. Equity securities are
stated at cost and include stock of the Federal Reserve Bank of New York and
Federal Home Loan Bank of New York.
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). Premiums and discounts on securities are
amortized and accreted, respectively, on a systematic basis over the period to
maturity, estimated life, or earliest call date of the related security.
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.
46
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. Mortgage loans held for sale are
carried at the lower of cost or market and are included in loans as the balance
of such loans was not significant. 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. Non-refundable 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. 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.
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, 1999 and 1998, other
real estate, included in other assets, amounted to $883,919 and $1,181,926,
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.
47
Mortgage Servicing Rights
Originated mortgage servicing rights are recorded at their fair value at the
time of transfer and are amortized in proportion to and over the period of
estimated net servicing income or loss. The Bank uses a valuation model that
calculates the present value of future cash flows to determine the fair value of
servicing rights. In using this valuation method, the Bank incorporated
assumptions that market participants would use in estimating future net
servicing income, which included estimates of the cost of servicing per loan,
the discount rate, and prepayment speeds. The carrying value of the originated
mortgage servicing rights is periodically evaluated for impairment using these
same market assumptions. At December 31, 1999 and 1998, mortgage servicing
rights, included in other assets, amounted to approximately $577,457 and
$406,000, respectively.
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.
Income Taxes
Provisions for income taxes are based on taxes currently payable or refundable,
and deferred taxes which are based on temporary differences between the tax
basis of assets and liabilities and their reported amounts in the financial
statements. Deferred tax assets and liabilities are reported in the financial
statements at currently enacted income tax rates applicable to the period in
which the deferred tax assets and liabilities are expected to be realized or
settled.
Earnings Per Share and Stock Split
Basic earnings per share is computed on the basis of actual weighted average
common shares outstanding for the period. Diluted earnings per share reflects
the dilutive effect of outstanding common stock equivalents.
On March 12, 1997, a two-for-one split of the Company's common stock was
effected in the form of a stock dividend of one share of common stock for each
share of common stock outstanding at the close of business on February 10, 1997.
The number of authorized shares of common stock was increased from 5,000,000 to
20,000,000 pursuant to shareholder approval. All share and per share data of
prior periods has been restated, where required, to retroactively reflect the
stock split.
During 1997, the par value of the Company's common stock was changed from $1.25
par to no par $1.00 stated value per share.
Treasury Stock
Treasury stock purchases are recorded at cost. During 1999 and 1998, the Company
purchased 221,500 and 326,600 shares of treasury stock at an average cost of
$25.13 and $28.02, respectively. This stock repurchase program reflects the
Company's belief that its common stock is an investment and that the financial
markets are not fully valuing its strong banking franchise.
48
Fair Values of Financial Instruments
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 Financial Accounting Standard No. 107, "Disclosures about
Fair Value of Financial Instruments," 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.
In 1998, the Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires an entity to
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. Upon adoption of the SFAS the
Company transferred investment securities from held-to-maturity to
available-for-sale (see Note C). As a result, securities previously classified
as held-to-maturity were sold during the year and investment securities gains of
approximately $194,000, net of tax, resulting from the sale have been reported
as a cumulative effect of a change in accounting principal. The Company has no
outstanding derivative financial instruments and, accordingly, adoption of SFAS
133 had no other affect on the Company's financial statements.
NOTE B: BRANCH ACQUISITIONS
During 1997, the Company acquired certain assets and assumed certain liabilities
relating to eight branch offices of Key Bank, N.A. located in Southwestern New
York State and 12 branch offices of Fleet Bank located in Northern and Central
New York State.
A summary of these acquisitions and the divestiture activity is as follows:
Acquisitions
---------------------------------
Key Bank Fleet Bank
(6/16/97) (7/18/97)
---------------------------------
Cash received (paid) $110,752,957 $76,516,971
Loans acquired (divested) 24,093,903 62,706,634
Property and equipment acquired (divested) 1,836,405 2,438,645
Other assets and (liabilities) 34,323 (172,683)
acquired (divested), net
Purchase price allocated to goodwill 13,563,861 17,569,255
---------------------------------
Deposit liabilities assumed (divested) $150,281,449 $159,058,822
===========================================================================
Goodwill arising from these transactions is being amortized over a period of 15
years on a straight-line basis.
The transactions above 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.
49
NOTE C: INVESTMENT SECURITIES
The amortized cost and estimated fair values of investments in securities as of December 31 are as follows:
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
Obligations of
states and political
subdivisions $5,042,178 $44,647 $2,978 $5,083,847 $4,037,920 $65,448 $0 $4,103,368
---------- ------- ------ ---------- ---------- ------- -- ----------
TOTALS 5,042,178 44,647 2,978 5,083,847 4,037,920 65,448 0 4,103,368
- ------------------------------------------------------------------------------------------------------------------------------------
Available for Sale
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies 177,096,928 39,872 5,343,701 171,793,099 170,464,535 5,417,176 15,398 175,866,313
Obligations of
states and political
subdivisions 118,223,430 360,414 8,458,684 110,125,160 40,590,647 937,758 199,217 41,329,188
Corporate Securities 35,914,206 0 2,815,011 33,099,195 9,152,685 232,308 3,228 9,381,765
Mortgage-backed securities 290,000,398 1,805,835 7,716,143 284,090,090 336,090,433 3,360,728 2,484,578 336,966,583
----------- --------- --------- ----------- ----------- --------- --------- -----------
TOTALS 621,234,962 2,206,121 24,333,539 599,107,544 556,298,300 9,947,970 2,702,421 563,543,849
Equity securities 26,537,863 0 0 26,537,863 25,957,998 0 0 25,957,998
---------- - - ---------- ---------- - - ----------
TOTALS 647,772,825 2,206,121 24,333,539 625,645,407 582,256,298 9,947,970 2,702,421 589,501,847
- ------------------------------------------------------------------------------------------------------------------------------------
Net unrealized gain/(loss) on
Available for Sale (22,127,418) 7,245,549
- ------------------------------------------------------------------------------------------------------------------------------------
GRAND TOTAL
CARRYING VALUE $ 630,687,585 $593,539,767
====================================================================================================================================
The amortized cost and estimated fair value of debt securities at December 31,
1999, 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
Est. Market Est. Market
Cost Value Cost Value
----------------------------------------------------------------------------------------------------------------
Due in one year or less $3,219,815 $3,227,163 $3,839,949 $3,889,961
Due after one through five years 1,622,874 1,644,253 7,121,848 7,463,664
Due after five years through ten years 181,394 193,286 150,042,434 145,012,769
Due after ten years 18,095 19,145 170,230,333 158,651,060
--------------------------------------------------------------------
TOTAL 5,042,178 5,083,847 331,234,564 315,017,454
Mortgage-backed securities 0 0 290,000,398 284,090,090
--------------------------------------------------------------------
TOTAL $5,042,178 $5,083,847 $621,234,962 $599,107,544
=================================================================================================================
Proceeds from sales of investments in debt securities during 1999, 1998, and
1997 were $13,915,000, $87,189,000, and $51,916,000, respectively. Gross gains
of approximately $7,000, $2,287,000, and $283,000 for 1999, 1998, and 1997,
respectively, and gross losses of $914,000, $0, and $297,000 in 1999, 1998, and
1997, respectively, were realized on those sales.
Investment securities with a carrying value of $457,512,000, $324,565,708 and
$320,953,967 at December 31, 1999, 1998, and 1997, respectively, were pledged to
collateralze deposits and borrowings.
Pursuant to the adoption of Statement of Financial Accounting Standards No. 133,
"Accounting for Derivatives Instruments and Hedging Activities," in 1998, the
Company transferred investment securities having an amortized cost of
$216,797,000 and net unrealized gains of $6,952,000 from held-to-maturity to
available-for-sale. The Company subsequently sold a portion of those investments
with an amortized cost of $17,424,400, within the same quarter. Accordingly, the
realized gain of $193,860, net of tax, has been reported as a cumulative effect
of a change in accounting principle.
50
NOTE D: LOANS
Major classifications of loans at December 31 are summarized as follows:
1999 1998
- --------------------------------------------------------------------------------------------
Real estate mortgages:
Residential $336,466,553 $314,782,271
Commercial 114,838,282 101,286,004
Farm 17,652,220 12,491,763
Agricultural loans 27,721,431 24,143,691
Commercial loans 171,787,084 152,822,499
Installment loans to individuals 329,275,510 301,803,189
Other loans 8,384,602 8,705,823
-----------------------------------
1,006,125,682 916,035,240
Less : Unearned interest, and deferred loan fees and 3,096,833 1,184,880
costs, net
Reserve for possible loan losses (13,420,610) (12,441,255)
-----------------------------------
Net loans $995,801,905 $904,778,865
============================================================================================
The estimated fair value of loans receivable at December 31, 1999 and 1998 was
$991,000,000 and $848,000,000, respectively.
Non-accrual loans of $4,589,000 and $2,473,000 at December 31, 1999 and 1998,
respectively, are included in net loans. If non-accrual loans had been accruing
interest at their originally contracted terms, interest income on these loans
would have amounted to $189,346 and $174,405 in 1999 and 1998, respectively.
Loans to directors and officers or other related parties were approximately
$2,330,000 and $2,336,000 at December 31, 1999 and 1998, respectively. During
1999, new loans to such parties amounted to $980,000 and repayments amounted to
$986,000.
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of condition. The unpaid principal balances of mortgage
loans serviced for others was $88,700,053 and $58,825,355 at December 31, 1999
and 1998, respectively.
Custodial escrow balances maintained in connection with the foregoing loan
servicing, and included in demand deposits, were approximately $650,420 and
$427,349 at December 31, 1999 and 1998, respectively.
Changes in the reserve for possible loan losses for the years ended December 31
are summarized as follows:
--------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------
Balance at beginning of year $12,441,255 $12,433,812 $8,127,752
Reserves on acquired loans 0 0 3,547,641
Provision charged to expense 5,136,068 5,122,596 4,480,000
Loans charged off (5,287,623) (6,096,561) (4,448,281)
Recoveries 1,130,910 981,408 726,700
--------------------------------------------------------
Balance at end of year $13,420,610 $12,441,255 $12,433,812
===========================================================================================
As of December 31, 1999, 1998 and 1997, 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:
- ------------------------------------------------------------
1999 1998
- ------------------------------------------------------------
Land and land improvements $ 3,074,848 3,056,589
Bank premises owned 25,076,326 22,851,189
Equipment 19,529,121 18,706,427
------------------------
Premises and equipment,gross 47,680,295 44,614,205
Less: Allowance fo depreciation 22,171,432 19,736,423
------------------------
Premises and equipment, net $25,508,863 24,877,782
51
NOTE F: INTANGIBLE ASSETS
Intangible assets consist of the following at December 31:
- ---------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------
Core deposit intangible $ 14,434,507 $ 14,434,507
Goodwill and other intangibles 52,760,397 52,760,397
------------------- -------------------
Intangible assets,gross 67,194,904 67,194,904
------------------- -------------------
Less: Accumulated amortization (17,709,955) (13,162,685)
------------------- -------------------
Intangible assets, net $ 49,484,949 $ 54,032,219
===========================================================================
NOTE G: DEPOSITS
Deposits by type at December 31 are as follows:
- ---------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------
Demand $225,012,767 $249,863,649
Savings 502,765,002 506,419,177
Time 632,528,215 621,782,752
----------- -----------
Total Deposits $1,360,305,984 $1,378,065,578
The estimated fair values of deposits at December 31, 1999 and 1998 were
approximately $1,357,000 and $1,387,000, respectively.
At December 31, 1999 and 1998, time certificates of deposit in denominations of
$100,000 and greater totaled $112,397,283 and $91,689,939, respectively.
The approximate maturities of time deposits at December 31 are as follows:
- ---------------------------------------------------------------------------
Maturity 1999 1998
- ---------------------------------------------------------------------------
One year or less $455,381,669 497,600,234
One to two years 132,756,822 76,588,398
Two to three years 25,793,504 26,443,032
Three to four years 12,287,767 11,840,172
Four to five years 5,393,330 8,395,567
Over five years 915,123 915,549
------------ -----------
$632,528,215 $621,782,952
===========================================================================
NOTE H: BORROWINGS
At December 31, 1999 and 1998, outstanding borrowings were as follows:
- ---------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------
Short-term borrowings:
Federal funds purchased $34,700,000
Federal Home Loan Bank Advances $250,000,000 30,000,000
Other short-term borrowings 4,000,000 0
------------- ---------------
254,000,000 64,700,000
Long term borrowings:
Federal Home Loan Bank Advances 70,000,000 70,000,000
Company obligated mandatory
redeemable preferred securities
of subsidiary trust holding solely
junior subordinated debentures
of the Company, net of discount
of$182,813 and $189,562 29,817,188 29,810,438
------------- ---------------
$353,817,188 $164,510,438
===========================================================================
52
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.
Long-term borrowings at December 31, 1999 have maturity dates as follows:
Weighted
Average Rate Amount
------------ ------
February 13, 2000 5.86% $ 15,000,000
December 17, 2002 6.20% 10,000,000
February 10, 2003 5.52% 5,000,000
January 23, 2008 5.44% 10,000,000
January 28, 2008 5.48% 5,000,000
January 30, 2008 5.27% 20,000,000
February 4, 2008 5.45% 5,000,000
January 30, 2027 9.75% 29,817,188
---- ----------
6.84% $ 99,817,188
==============================================================
NOTE I: INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31 is as
follows:
- -------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------
Current:
Federal $8,122,791 $7,889,187 $8,071,488
State 530,527 762,835 996,033
Deferred:
Federal (569,274) 299,246 (174,176)
State (160,862) 84,560 (49,218)
-------- ------ -------
Total income taxes $7,923,182 $9,035,828 $8,844,127
===============================================================================
Components of the net deferred tax asset, included in other assets, as of
December 31 are as follows:
- -----------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------
Investment securities $8,441,513 -
Allowance for loan losses 4,985,174 $3,950,235
Postretirement and other reserves 975,669 758,068
Pension 444,811 309,462
Amortization of intangibles 352,237 334,550
Other 1,328,233 641,287
--------------------------
Total deferred tax asset 16,527,637 5,993,602
--------------------------
Investment securities - 3,248,258
Deferred loan fees 1,539,808 996,932
Depreciation 831,933 557,393
Mortgage servicing rights 235,883 -
--------------------------
Total deferred tax liability 2,607,624 4,802,583
--------------------------
Net deferred tax asset $13,920,013 $1,191,019
The Company has determined that no valuation allowance is necessary as it is
more likely than not that deferred tax assets will be realized through carryback
of future deductions to taxable income in prior years, future reversals of
existing temporary differences, and through 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:
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Federal statutory income tax rate 35.0% 35.0% 35.0%
Increase (reduction) in taxes resulting from:
Tax-exempt interest (6.3) (1.9) (1.2)
State income taxes, net of federal benefit 0.6 1.9 2.4
Other 1.7 1.5 0.0
--- --- ---
Effective income tax rate (inlcuding tax 31.0% 36.5% 36.2%
effect of accounting change)
================================================================================
53
NOTE J: 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 additional 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 the Currency (OCC) for payments
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, 1999, the Bank
had approximately $15,887,000 in undivided profits legally available for the
payments 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 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.
54
NOTE K: BENEFIT PLANS
The Company has a noncontributory defined benefit pension plan covering the
majority of its employees and retirees. The Company also provides health and
life insurance benefits for eligible retired employees and dependents.
The following table shows the Company's Plans' funded status reconciled with
amounts reported in the Company's consolidated balance sheets, and the
assumptions used in determining the actuarial present value of the benefit
obligations:
Pension Benefits Postretirement Benefits
---------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
Change in benefit obligation
Benefit obligation at the beginning of year $12,482,616 $9,775,164 $2,693,122 $2,963,555
Service cost 607,015 462,548 103,520 101,734
Interest cost 755,791 677,664 129,518 170,270
Deferred actuarial (gain) loss (1,405,526) 2,060,111 (833,444) (452,500)
Benefits paid (508,272) (492,871) (95,941) (89,937)
--------------------------------------------------------
Benefit obligation at end of year 11,931,624 12,482,616 1,996,775 2,693,122
- --------------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of year 12,157,001 10,689,215 - -
Actual return of plan assets 1,637,354 1,376,137 - -
Company contributions 296,848 584,520 - -
Benefits paid (508,272) (492,871) - -
--------------------------------------------------------
Fair value of plan assets at end of year 13,582,931 12,157,001 - -
- --------------------------------------------------------------------------------------------------------
Funded (unfunded) status 1,651,307 (325,615) (1,996,775) (2,693,122)
Unrecognized actuarial (gain) loss (117,742) 1,843,675 (163,005) 116,495
Unrecognized prior service(benefit) cost (248,367) (263,557) - 260,445
Unrecognized net asset at date of adoption (92,282) (114,530)
Unrecognized portion of net obligation at transition 533,117 863,300
--------------------------------------------------------
Prepaid (accrued) benefit cost $1,192,916 $ 1,139,973 $(1,626,663) $(1,452,882)
========================================================================================================
Weighted-average assumptions as of December 31
Discount rate 7.00% 6.50% 7.00% 6.50%
Expected return on plan assets 9.00% 9.00% - -
Rate of compensation increase 4.00% 4.00% - -
========================================================================================================
The increase in the discount rate from 6.5% to 7.0% decreased the projected
benefit obligation of the pension plan at December 31, 1999 by $810,000. The
change in mortality tables used to calculate the projected benefit obligation
decreased such obligation approximately $918,000 in 1999. During 1999, the Plan
changed to a fixed dollar employer contribution plan; as a result, trends in
health care costs have no effect on the amounts reported for health care plans.
- -----------------------------------------------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
----------------- ------------------------
1999 1998 1997 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
Components of net periodic benefit cost
Service cost $607,015 $462,548 $353,762 $103,520 $101,734 $125,779
Interest cost 755,791 677,664 631,010 129,518 170,270 195,508
Actual return on plan assets (1,637,354) (1,376,137) (1,688,816)
Net amortization and deferral 518,453 454,474 916,794
Amortization of prior service cost - 18,610 18,610
Amortization of unrecognized net loss (4,325) (3,679) 14,948
Amortization of transition obligation 41,009 61,200 61,200
-------------------------------------------------------------------------------
Net periodic benefit cost $243,905 $218,549 $212,750 $269,722 $348,135 $416,045
=======================================================================================================================
The defined benefit pension 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, 1999 and 1998, the plan holds 43,378 and 35,828 shares,
respectively, of the sponsor company common stock.
55
- ----------------------------------------------------------------------
1% Point 1% Point
Increase Decrease
- ----------------------------------------------------------------------
Effect on total of service and interest $58,088 $48,525
cost components
Effect on postretirement benefit obligation $451,340 $383,466
======================================================================
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 included Section 401(k) and Thrift provisions as
defined under the Internal Revenue Code. Company contributions to the trust
amounted to $440,000, $647,000, and $791,000 in 1999, 1998, and 1997,
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 ten to 25
years. Expense recognized during 1999, 1998, and 1997 related to these
arrangements amounted to approximately $367,000, $258,000, and $257,000,
respectively.
The Company has a Stock Balance Plan for nonemployee directors who have
completed six months of service. The Plan is a nonqualified, noncontributory
defined benefit 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 stock of the Company
on the first of the month following the later of a participant's disassociation
from the Board or attainment of age 70. In the event of a change in control or
other occurrences, as defined, participants have the right to receive a
distribution of common stock equal to the number of shares credited to the
participant. Unrecognized prior service cost of $549,633 is being amortized over
10 years. Expense related to the Plan recognized in 1999, 1998, and 1997
approximated $220,000, $190,000, and $203,000, respectively. The accrued pension
liability was approximately $367,000 and $455,000 at December 31, 1999 and 1998,
respectively. The net periodic pension cost was calculated using discount rates
of 7.0% and 6.5% for 1999 and 1998, respectively.
NOTE L: STOCK-BASED COMPENSATION 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), nonqualified 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 ten year terms and vest and
become fully exercisable at the end of five years of continued employment.
Activity in these plans for 1999, 1998, and 1997 was as follows:
- -----------------------------------------------------------------------------------------------
Options Range of Shares Weighted
Outstanding Option Excersiable Average
Price Exercise Price
Per Share Shares
Outstanding
- -----------------------------------------------------------------------------------------------
Outstanding at December 31, 1996 397,630 6.75 - 19.13 168,460 14.20
Granted 5,700 27.25
Granted at a discount 0
Exercised/cancelled (110,300) 7.5 - 16.125 11.56
Forfeited 0
Outstanding at 293,030 5.87 - 19.13 129,765 14.54
December 31, 1997
Granted 231,311 31.31 - 34.81
Exercised/cancelled (45,573) 8.00 - 33.31 15.18
Forfeited 0
Outstanding at December 31, 1998 478,768 6.75 - 34.81 305,261 25.82
Granted 130,379 25.38 - 29.31
Exercised/cancelled (23,793) 12.13 - 19.13
Forfeited (1,085)
Outstanding at December 31, 1999 584,269 6.75 - 34.81
===========================================================
56
The Company granted 8,000 discounted options in 1996 and recognized compensation
expense of approximately $13,000. Restricted stock awarded in 1998 and 1997
amounted to 100 and 5,700 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 1999, 1998, and 1997 was $24,015,
$81,241, and $145,753, respectively. There were 370,995, 500,289 and 356,600
shares available for future grants or awards under the various programs
described above at December 31, 1999, 1998, and 1997, 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 the 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 4,960 and 2,636
shares credited to participant accounts at December 31, 1999 and 1998,
respectively, for which a liability of approximately $638,000 and $492,000 was
accrued and approximately $146,000 and $122,045 was recognized as expense.
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," provides for 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
SFAS 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 SFAS No. 123 results in the following
pro forma amounts of net income and earnings per share:
- -----------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------
Net income:
As reported $17,635,469 $15,728,222
Pro forma 17,084,216 14,005,208
Earnings per share:
As reported $2.42 $2.08
Pro forma basic earnings per share 2.34 1.83
=======================================================================
The fair value of these options was estimated at the date of grant using a
Black-Scholes options pricing model with the following weighted average
assumptions for 1999, 1998 and 1997: risk-free interest rates by grant ranging
from 4.65% to 5.78% during 1999, 5.55% to 5.67% during 1998, and 5.48% to 7.83%
during 1997; dividend yields of 3.00% during 1999, 1998 and 1997; volatility
factors of the expected market price of the Company's common stock of 30.78% for
1999, 44.06% for 1998 and 45.93% for 1997; and a weighted-average expected life
of the option of 6.70 years in 1999, 8.27 for 1998, and 7.18 for 1997.
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Therefore, the
preceding results are not likely to be representative of the effects on reported
net income for future years due to additional years of vesting. At December 31,
1999 the weighted average information for outstanding and exercisable shares is
as follows:
- ------------------------------------------------------------------------------------------------------------------
Shares Outstanding Shares Exercisable
Weighted Average Weighted
Range of Shares ----------------------------------- Shares Average
Exercise Outstanding Exercise Remaining Outstanding Exercise
Price Price Life (years) Price
- ------------------------------------------------------------------------------------------------------------------
$ 3.5314- $ 7.0625 2,000 $6.75 2.0 2,000 $6.75
$ 7.0626- $10.5938 15,200 $7.50 2.9 15,200 $7.50
$10.5939- $14.1250 43,348 $12.78 5.4 27,788 $12.82
$14.1251- $17.6563 77,240 $15.63 5.6 54,128 $15.47
$17.6564- $21.1875 88,563 $19.13 7.0 59,279 $19.13
$24.7189- $28.2500 3,102 $25.66 9.4 0 $0.00
$28.2501- $31.7813 208,520 $30.10 8.6 75,390 $30.27
$31.7814- $35.3125 146,296 $34.81 12.5 146,246 $34.81
- ------------------------------------------------------------------------------------------------------------------
Total / Average 584,269 $25.73 8.5 380,031 $25.86
==================================================================================================================
57
NOTE M: EARNINGS PER SHARE
Basic earnings per share is computed based on the weighted average shares
outstanding. Diluted earnings per share is computed based on the weighted
average shares outstanding adjusted for the dilutive effect of the assumed
exercise of stock options during the year. The following is a reconciliation of
basic to diluted earnings per share for the years ended December 31:
- --------------------------------------------------------------------------------
Income Shares Per Share Amount
- --------------------------------------------------------------------------------
1999 Net Income $17,635,649
Basic EPS 17,635,649 7,188,626 $2.45
Effect of dilutive securities:
Stock options 0 106,625
- -------
Diluted EPS $17,635,649 7,295,251 $2.42
================================================================================
1998 Net Income $15,728,223
Basic EPS 15,728,223 7,544,938 $2.08
Effect of dilutive securities:
Stock options 0 125,773
- -------
Diluted EPS $15,728,223 7,670,711 $2.05
================================================================================
1997 Net Income $15,561,506
Less: Preferred stock
dividends (78,750)
-------
Basic EPS 15,482,756 7,537,043 $2.05
Effect of dilutive securities:
Stock options 0 139,283
- -------
Diluted EPS $15,482,756 7,676,326 $2.02
================================================================================
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.
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Financial instruments whose contract
amounts represent credit risk at December 31: 17,498,107 3,745,000
Letters of credit
Commitments to make or purchase loans
or to extend credit on lines of credit 201,401,741 176,857,000
---------------- -------------
Total $218,899,848 $180,602,000
================================================================================
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 has unused lines of credit totaling $6,000,000
and $73,859,534 at December 31, 1999 and 1998, respectively. The Company has
additional unused borrowing capacity through collateralized transactions with
the Federal Home Loan Bank.
58
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, 1999 was $21,211,000, of which
$2,000,000 was required to be on deposit with the Federal Reserve Bank of New
York. The remaining $19,211,000 was represented by cash on hand.
NOTE O: LEASES
The Company leases buildings and office space under agreements that expire in
various years. Rental expense included in operating expenses amounted to
$991,103, $1,132,000 and $913,306 in 1999, 1998 and 1997, respectively. The
future minimum rental commitments as of December 31, 1999 for all
noncancelleable operating leases are as follows:
Years ending
December 31:
===================================================
2000 $757,278
2001 666,896
2002 510,357
2003 502,370
2004 362,857
Thereafter 1,835,457
===================================================
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 judgments 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, 1998 and 1997, that
the Bank meets all capital adequacy requirements to which it is subject and is
"well capitalized" under the regulatory framework of 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 Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
- ------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------
As of December 31,1999:
Total Core Capital
(to Risk Weighted Assets) $116,257 10.61% $87,864 8.0% $93,087 10.0%
Tier I Capital
(to Risk Weighted Assets) $102,836 9.39% $43,932 4.0% $55,852 6.0%
Tier I Capital
(to Average Assets) $102,836 5.86% $70,340 4.0% $87,925 5.0%
As of December 31, 1998:
Total Core Capital
(to Risk Weighted Assets) $103,693 10.74% $80,321 8.0% $100,402 10.0%
Tier I Capital
(to Risk Weighted Assets) $91,252 9.49% $40,161 4.0% $60,241 6.0%
Tier I Capital
(to Average Assets) $91,252 5.92% $63,889 4.0% $79,861 5.0%
================================================================================================
59
NOTE Q: PARENT COMPANY STATEMENTS
- ------------------------------------------------------------------------------
CONDENSED BALANCE SHEETS
- ------------------------------------------------------------------------------
December 31 December 31
1999 1998
- ------------------------------------------------------------------------------
Assets:
Cash and cash equivalents 519,259 1,952,603
Investment securities 820,211 641,846
Investment in and advances
to subsidiaries 145,116,096 158,467,480
Other assets 129,489 278,795
------------ --------------
Total assets 146,585,055 161,340,724
==============================================================================
Liabilities:
Due to subsidiary - 7,360,338
Accrued interest and other liabilities 3,352,414 3,076,480
Borrowings 34,745,188 30,738,438
Shareholders' equity 108,487,453 120,165,468
------------ -------------
Total liabilities and
shareholders' equity 146,585,055 161,340,724
==============================================================================
- --------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------------
Years Ended December 31
1999 1998 1997
- --------------------------------------------------------------------------------------
Dividends from subsidiaries 20,466,894 11,462,202 7,646,993
Interest on investments
and deposits 40,000 40,000 50,368
Gain on sale of assets - 150,000
------------ -------------- ------------
Total revenues 20,506,894 11,652,202 7,697,361
------------ -------------- ------------
Expenses:
Interest on long term
notes and debentures 3,024,977 3,022,485 2,753,370
Other Expenses 7,774 2,750 2,250
------------ -------------- ------------
Total expenses 3,032,751 3,025,235 2,755,620
------------ -------------- ------------
Income before tax benefit and
equity in undistributed net
income of subsidiaries 17,474,143 8,626,967 4,941,741
Income tax expense 899,704 1,034,861 980,331
------------ -------------- ------------
Income before equity in
undistributed net income
subsidiaries 18,373,847 9,661,828 5,922,072
Equity in undistributed
net income:
Subsidiary bank and
related subsidiaries (738,378) 6,066,395 9,639,434
------------ -------------- ------------
Net Income
17,635,469 15,728,223 15,561,506
================================================ ============== ==============
On February 3, 1997, the Company formed a subsidiary business trust, Community
Capital Trust I (Trust), for the purpose of issuing preferred securities which
qualify 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. The
costs related to the issuance of these securities are capitalized and amortized
over the life of the period to redemption on a straight-line basis. Net proceeds
were used to repurchase the 45,000 shares of preferred stock outstanding from a
1995 offering and for other corporate purposes. The preferred stock was
repurchased at a value of $104 per share plus accrued dividends on the date the
Trust was formed.
60
NOTE Q: PARENT COMPANY STATEMENTS (Continued)
================================================================================
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Increase (Decrease) in Cash, Cash
Equivalents, and Noncash Activities
Years Ended December 31
1999 1998 1997
- --------------------------------------------------------------------------------
Operating Activities:
Net income
17,635,469 15,728,223 15,561,506
Adjustments to reconcile
net income to net cash
provided by operating activities:
Equity in undistributed
net income
of subsidiaries 738,378 (6,066,395) (9,639,435)
Net change other assets
and accrued liabilities 694,498 (237,012) 240,777
- --------------------------------------------------------------------------------
Net Cash Provided By
Operating Activities 19,068,345 9,424,816 6,162,848
- --------------------------------------------------------------------------------
Investing Activities:
Purchase of available for
sale investment securities (178,365) (114,617) (27,229)
Sale of available for sale
investment securities
Capital contributions
to subsidiaries (4,793,001) (602,264) (27,374,880)
- --------------------------------------------------------------------------------
Net Cash Used By
Investing Activities (4,971,366) (716,881) (27,402,109)
- --------------------------------------------------------------------------------
Financing Activities:
Net change in loans
to subsidiaries (7,360,338) 7,360,338 (500,000)
Proceeds from issuance of
short term debt 4,000,000
Proceeds from issuance of
junior subordinated debentures to
subsidiary 30,719,236
Issuance (retirement) of common
and preferred stock 187,928 474,450 (3,451,047)
Repurchase of treasury stock (5,566,831) (9,151,956)
Cash dividends (6,791,082) (6,311,580) (5,745,135)
- --------------------------------------------------------------------------------
Net Cash Provided (Used)
By Financing Activities (15,530,323) (7,628,748) 21,023,054
- --------------------------------------------------------------------------------
Change In Cash
And Cash Equivalents: (1,433,344) 1,079,187 (216,207)
Cash and cash equivalents
at beginning of year 1,952,603 873,416 562,241
================================================================================
CASH AND CASH EQUIVALENTS
AT END OF YEAR 519,259 1,952,603 346,034
================================================================================
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION:
Cash Paid For Interest 3,022,231 3,022,485 1,497,175
================================================================================
SUPPLEMENTAL DISCLOSURES
OF NONCASH FINANCING ACTIVITIES:
Dividends declared
and unpaid 1,772,982 1,678,184 1,517,262
================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
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 the
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.
61
PricewaterhouseCoopers LLP
One Lincoln Center
Syracuse NY 13202-9972
Telephone (315) 474 8541
Facsimile (315) 473 1385
Report of Independent Accountants
To the Board of Directors and Shareholders
Community Bank System, Inc.
DeWitt, New York
In our opinion, the accompanying consolidated statements of condition and the
related consolidated statements of income, changes in stockholders' equity and
of cash flows present fairly, in all material respects, the financial position
of Community Bank System, Inc. and Subsidiaries at December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. 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 of these statements in accordance with auditing standards
generally accepted in the United States, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Syracuse, New York
January 30, 2000
62
TWO YEAR SELECTED QUARTERLY DATA
1999 RESULTS 1st 2nd 3rd 4th
(Dollars in Thousands) Quarter Quarter Quarter Quarter Total
- ---------------------- ------- ------- ------- ------- -----
Net interest income $ 15,872 $ 16,519 $ 17,554 $ 17,996 $ 67,941
Provision for loan losses 1,169 1,421 1,099 1,447 5,136
---------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 14,703 15,098 16,455 16,549 62,805
Total other income 4,103 3,880 4,022 3,482 15,487
Total other expense 13,219 13,188 13,266 13,061 52,734
---------------------------------------------------------------------------------------------
Income before income taxes 5,587 5,790 7,211 6,970 25,558
Income taxes 1,899 1,742 2,309 1,973 7,923
================== ================== ================= ================== ==================
Net income $ 3,688 $ 4,048 $ 4,902 $ 4,997 $ 17,635
================== ================== ================= ================== ==================
Earnings per share - Basic $ 0.51 $ 0.56 $ 0.69 $ 0.70 $ 2.45
Earnings per share - Diluted $ 0.50 $ 0.55 $ 0.68 $ 0.69 $ 2.42
---------------------------------------------------------------------------------------------
1998 RESULTS 1st 2nd 3rd 4th
(Dollars in Thousands) Quarter Quarter Quarter Quarter Total
- ---------------------- ------- ------- ------- ------- -----
Net interest income $ 16,169 $ 15,922 $ 16,513 $ 15,791 64,395
Provision for loan losses 1,371 1,303 1,177 1,272 5,123
---------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 14,798 14,619 15,336 14,519 59,272
Total other income 3,681 4,683 4,392 4,476 17,232
Total other expense 12,662 13,166 12,988 13,058 51,874
---------------------------------------------------------------------------------------------
Income before income taxes 5,817 6,136 6,740 5,937 24,630
Income taxes 2,129 2,234 2,374 2,165 8,902
================== ================== ================= ================== ==================
Net income $ 3,688 $ 3,902 $ 4,366 $ 3,772 $ 15,728
================== ================== ================= ================== ==================
Earnings per share - Basic $ 0.49 $ 0.51 $ 0.57 $ 0.53 $ 2.08
Earnings per share - Diluted $ 0.48 $ 0.50 $ 0.56 $ 0.51 $ 2.05
Item 9. Changes in and Disagreements with Accounting and Financial Disclosure
- -----------------------------------------------------------------------------
None
Part III
Item 10. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------
The information concerning Directors of the Company required by this Item 10 is
incorporated herein by reference to the section entitled "Nominees for Director
and Directors Continuing in Office" in the Company's Proxy Statement. The
Information concerning executive officers of the Company required by this Item
10 is incorporated by reference to Item 4A of this Annual Report on Form 10-K .
63
Item 11. Executive Compensation
- -------------------------------
The information required by this Item 11 is incorporated herein by reference to
the section entitled "Compensation of Executive Officers" in the Company's Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information required by this Item 12 is incorporated herein by reference to
the section entitled "Nominees for Director and Directors Continuing in Office"
in the Company's Proxy Statement.
The following table sets forth information with respect to persons known to the
Company to own beneficially more than 5% of the outstanding shares of the
Company's common stock as of March 27, 2000.
Number of Shares
Name & Address of Beneficial Owner Beneficially Owned Percent of Class
- ---------------------------------- ------------------- ----------------
Perkins, Wolf, McDonnell & Company 473,600 * 6.7%
53 West Jackson Boulevard
Suite 722
Chicago, Illinois 60604
* Based solely on information contained in Schedule 13G filed with the
Securities and Exchange Commission on February 11, 2000, Perkins,
Wolf, McDonnell & Company has indicated that it is an investment
advisory firm having shared voting and dispositive power (but not sole
voting or dispositive power) with respect to all shares listed.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this Item 13 is incorporated herein by reference to
the section entitled "Transactions with Management" in the Company's 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, 1999 and 1998
- Consolidated Statements of Income --
Years ended December 31, 1999, 1998, and 1997
- Consolidated Statements of Changes in Shareholders' Equity --
Years ended December 31, 1999, 1998, and 1997
- Consolidated Statement of Cash Flows --
Years ended December 31, 1999, 1998, and 1997
- Notes to Consolidated Financial Statements --
December 31, 1999
- Auditor's report
- Quarterly selected data --
Years ended December 31, 1999 and 1998 (unaudited)
2. Schedules are omitted since the required information is either not
applicable or shown elsewhere in the financial statements.
64
3. Listing of Exhibits
(10) Material Contracts: Employment agreement dated January 1, 1997 between
Company and Mr. Belden, as amended and restated October 31, 1999.
Supplemental Retirement Plan Aggreement dated April 1, 1997 between
Company and Mr. Belden, as amended and restated October 31, 1999.
(21) List of the Company's Subsidiaries
(27) Financial Data Schedule
B. Reports on Form 8-K
None
C. See Exhibit 14(a)(3) above.
D. See Exhibit 14(a)(2) above
65
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 17, 2000
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 17th day of March 2000.
Name
/s/ James A. Gabriel
- --------------------
James A. Gabriel, Director
Chairman of the Board of Directors
and Director
/s/ David G. Wallace
- --------------------
David G. Wallace
Treasurer
Directors:
/s/ John M. Burgess
- -------------------
John M. Burgess, Director
/s/ Richard C. Cummings
- -----------------------
Richard C. Cummings, Director
/s/ William M. Dempsey
- ----------------------
William M. Dempsey, Director
/s/ Nicholas A. DiCerbo
- -----------------------
Nicholas A. DiCerbo, Director
/s/ Lee T. Hirschey
- -------------------
Lee T. Hirschey, Director
/s/ David C. Patterson
- ----------------------
David C. Patterson, Director
/s/ William N. Sloan
- --------------------
William N. Sloan, Director
66