0000950123-01-507502.txt : 20011029
0000950123-01-507502.hdr.sgml : 20011029
ACCESSION NUMBER: 0000950123-01-507502
CONFORMED SUBMISSION TYPE: 10-K405/A
PUBLIC DOCUMENT COUNT: 1
CONFORMED PERIOD OF REPORT: 20001231
FILED AS OF DATE: 20011024
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: COMMUNITY BANK SYSTEM INC
CENTRAL INDEX KEY: 0000723188
STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021]
IRS NUMBER: 161213679
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K405/A
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-13695
FILM NUMBER: 1764923
BUSINESS ADDRESS:
STREET 1: 5790 WIDEWATERS PKWY
CITY: DEWITT
STATE: NY
ZIP: 13214
BUSINESS PHONE: 8007242262
MAIL ADDRESS:
STREET 1: 5790 WIDEWATERS PARKWAY
CITY: DEWITT
STATE: NY
ZIP: 13214
10-K405/A
1
y54141e10-k405a.txt
AMENDMENT NO. 1 TO FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[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, 2000
-----------------
Commission file number 0-11716
-------
COMMUNITY BANK SYSTEM, INC.
(Exact name of registrant as specified in its charter)
Delaware 16-1213679
--------------------------------------------- ---------------------------
(State or other jurisdiction of incorporation) (I.R.S. 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 ACT:
COMMON STOCK, NO PAR
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF 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.
$217,810,853 based upon average selling price of $27.36 and 7,960,923
---------------------------------------------------------------------
shares on March 14, 2001.
-------------------------
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
7,960,923 shares of Common Stock, no par value, were and outstanding on
-----------------------------------------------------------------------
March 14, 2001.
---------------
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 2, 2001 is incorporated by reference in Part III of this Annual
Report on Form 10-K.
EXPLANATORY NOTE: This Amendment to the Annual Report on Form 10-K of Community
Bank System, Inc. for the year ended December 31, 2000, is being filed to amend
Item 7 thereof as follows: (1) a new paragraph was inserted immediately
following the caption "Provision and Reserve for Loan Losses" (page 19); and (2)
the tables and the lead-in paragraphs thereto appearing under the caption
"Summary of Loan Loss Experience" were revised (page 22).
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," "CBU" 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 2000 of $20.3
million and $2.85, respectively. Compared to 1999, net income rose 15.2% while
earnings per share were up 17.8%. The Company's share repurchase program
continued to benefit earnings per share growth; since its inception in the fall
of 1998, 648,100 shares or 8.5% of shares outstanding have been bought back, the
most recent purchase having been made on June 19, 2000. Subsequent to year end,
the repurchased shares were reissued in conjunction with the acquisition of the
Citizens National Bank of Malone.
Cash earnings per share (diluted) also reached record levels in 2000, up 16% to
$3.23. Cash or tangible return on assets (ROA) for 2000 was 1.21% versus nominal
ROA at 1.06%. Tangible return on equity (ROE) for the year climbed 2.37
percentage points over 1999's level to 19.94%, exceeding nominal ROE by 2.38
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 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.
2000's recurring or core earnings were up 11.5% from last year to $20.4 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 2000'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 4.8% or $3.3
million due to a $207 million increase in average earning assets. Average
loans grew $105 million (11.0%) while average investments also grew $102
million (16.4%). The growth in earning assets was funded by $142 million
(64.4%) more in average borrowings and $54 million (4.0%) more in average
deposits. However, the net interest margin decreased by a significant 30
basis points to 4.29% on average.
o Total noninterest income increased by $5.5 million (35.5%) from 1999 to
$21.0 million. Financial services accounted for $4.3 million of the
improvement in noninterest income, with $3.1 million being attributable to
the purchase of Elias Asset Management (EAM) on April 3, 2000. Revenues
excluding net investment gains (losses) and the impact of branch properties
no longer in use were up nicely for the sixth consecutive year to
approximately $21.2 million in 2000, a $5.1 million (31.5%) improvement.
o Noninterest expense or overhead rose $3.3 million or 6.2% in 2000 compared
to $857,000 or 1.7% in 1999. Excluding the $2.1 million impact of the EAM
purchase, noninterest expense was up $1.1 million or 2.1% in
2
2000. The primary sources of the increase were personnel expense, up $1.2
million or 4.6%, with the balance largely residing in higher data
processing expense and greater depreciation and equipment expense. The bulk
of these latter increases reflect additional expenditures related to
conversion of the Company's check processing operations to image processing
during the second and third quarter of the year. Professional fees were
also lower.
o Loan loss provision expense rose $2.0 million or 39.8% over 1999's level.
The full year loan loss provision covered total actual net charge-offs by
1.20 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 increased 13
basis points in 2000 to .57%. The higher level of provision was in part due
to what management believes to be two isolated and unusual commercial loan
charge-offs in 2000. Nonperforming loans decreased during 2000 to .55% of
loans outstanding at year end compared to .57% one year earlier.
o The Company's combined effective federal and state tax rate decreased one
percentage point this year to 30.0% as a result of an increased proportion
of tax-exempt municipal investment holdings and continued effective tax
planning strategies.
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, 2000 (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 1.08% compared to
the peer norm of 1.11%. Shareholder return on equity (ROE) at 18.17% for the
same period ranked higher than the peer norm of 13.85%, placing it in the 80th
peer percentile. The Company's primary performance focus is on achieving returns
to shareholders and is better measured by ROE than ROA.
For the full year 2000, earnings per share (diluted) rose $.43 over 1999 to a
record $2.85. The first three-quarters of 2000 at $.70, $.72 and $.72 per share
exceeded the same 1999 quarters by $.20, $.17, and $.04, respectively. Fourth
quarter earnings per share at $.70 exceeded the same 1999 period by $.01.
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,
---------------------------------------------
2000 1999 1998
------- ------- -------
Percentage of net income to average total assets 1.06% 1.02% 0.94%
Percentage of net income to average shareholders equity 17.56% 15.22% 13.01%
Percentage of dividends declared per common share
to net income per common share 35.98% 39.05% 41.95%
Percentage of average shareholders' equity to average 6.04% 6.72% 7.24%
total assets
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, interest on capital market and bank borrowings, and
dividends paid 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 $76.4 million in 2000; this represents a $4.1 million or 5.7%
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 $9.1 million,
while interest rate changes had an unfavorable impact of $5.0 million.
3
With regard to the components of 2000's net interest income, greater average
earning assets of $207.1 million helped contribute $17.4 million of the $22.2
million or 17.3% rise in interest income; higher yields explain the remainder of
the increase. Average loans grew a total of $105.1 million in 2000, with the
most significant portion occurring in the first half of the year. Overall
interest and fees on loans climbed $11.8 million or 13.8% as a result of this
growth and a 22 basis point (BP) increase in loan yields to 9.20%, which was
caused by rising market rates during the latter part of 1999 and the first half
of 2000.
This rate environment also produced investment portfolio buying opportunities
resulting in a $102.1 million increase in average investments. Investment
interest income in 2000 was $10.4 million higher than the prior year as a result
of the higher outstandings as well as an increase in the average investment
yield from 6.88% to 7.35%. Rising market rates in the latter half of 1999 and
first half of 2000 increased the yield on new investments and were the primary
cause of the increase in average investment yield.
Through September 30, 2000, the Company's loan yield was in the favorable 66th
peer bank percentile while the investment yield was in the most favorable 96th
percentile. The average earning asset yield rose 30 basis points to 8.45% in
2000 because of the aforementioned increase in investment and loan yields,
partially offset by a reduced mix of loans to earning assets. The average ratio
of loans to earning assets decreased from 60.5% in 1999 to 59.4% in 2000 as a
consequence of increased investment opportunities and a slowing demand for new
automobile purchases.
Total average fundings (deposits and borrowings) grew by $196.5 million in 2000,
largely attributable to a $141.5 million increase in borrowings (used to fund
purchases of investment securities and approximately 1/3 of loan growth), and
$55.0 million more in deposits. Approximately 60% of the latter reflects higher
deposits from individuals, partnerships, and corporations, reflective of greater
checking account balances and our successful CD promotions, with the balance
from increased deposits of municipalities.
Higher average interest-bearing funds contributed $8.2 million of the $18.1
million total rise in interest expense, with the balance caused by an increase
in the average 2000 cost of funds, which as a percentage of earning assets rose
by 60 basis points (BPs) to 4.16%. The rate on interest bearing deposits rose 50
BPs to 4.27%, due largely to across-the-board increases in deposit rates
beginning in the middle of 1999 and continuing throughout most of 2000 and a 59
BP higher borrowing rate reflecting rising market rates. Overall, through
September 30, 2000, the Company's average cost of funds rate was slightly above
the peer norm in the 60th peer bank percentile, compared to being in the 45th
percentile through September 30, 1999.
The 50 BP increase in the rate on average interest bearing deposits from 1999 to
2000, in addition to the 59 BP increase in the average borrowed funds rate,
caused CBSI's net interest margin to decrease by 30 basis points from 4.59% in
1999 to 4.29% this year. The Company's net interest margin ranked in the
favorable 64th peer bank percentile through September 30, 2000, an improvement
from the 61th peer bank percentile through September 30, 1999.
4
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, 2000 and 1999.
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,
------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------- ----------------------------- ------------------------------
(000's omitted except yields Avg. Avg Avg.
and rates) Yield/ Yield/ Yield/
Avg. Amt. of Rate Avg. Amt. of Rate Avg. Amt. of Rate
Balance Interest Paid Balance Interest Paid Balance Interest Paid
---------- --------- ------- ---------- -------- ------- ---------- ---------- -------
ASSETS:
Interest-earning assets:
Federal funds sold $ 9,982 $ 581 5.82% $ 666 $ 33 4.95% $ 5,428 $ 296 5.46%
Time deposits in other banks 462 27 5.81% 129 5 4.24% 35 2 5.51%
Taxable investment securities 586,254 42,935 7.32% 521,912 35,519 6.81% 592,559 38,290 6.46%
Nontaxable investment securities 126,546 9,610 7.59% 98,482 7,210 7.32% 29,402 2,308 7.85%
Loans (net of unearned discount) 1,056,229 97,216 9.20% 951,167 85,408 8.98% 884,751 82,778 9.36%
---------- -------- ---------- -------- ---------- --------
Total interest-earning assets 1,779,473 150,369 8.45% 1,572,356 128,175 8.15% 1,512,175 123,674 8.18%
Noninterest earning assets
Cash and due from banks 57,073 62,399 57,913
Premises and equipment 26,226 24,747 24,412
Other Assets 84,905 79,467 83,048
Less:allowance for loans (14,214) (12,693) (12,282)
Net unrealized gains/(losses)
on available-for-sale portfolio (18,893) (3,034) 5,376
---------- ---------- ----------
Total $1,914,570 $1,723,242 1,670,642
========== ========== ==========
LIABILITIES AND SHAREHOLDERS
EQUITY:
Interest-bearing liabilities
Savings deposits $ 487,766 $11,061 2.27% $ 513,544 $11,108 2.16% 508,731 $12,155 2.39%
Time deposits 688,547 39,144 5.69% 619,851 31,666 5.11% 672,972 37,515 5.57%
Short-term borrowings 219,794 14,356 6.53% 119,830 6,278 5.24% 13,915 754 5.42%
Long-term borrowings 141,392 9,452 6.68% 99,814 6,895 6.91% 119,615 8,120 6.79%
---------- ------- ---------- ------- ---------- -------
Total interest-bearing
liabilities 1,537,499 74,013 4.81% 1,353,039 55,947 4.13% 1,315,233 58,544 4.45%
Noninterest bearing liabilities
Demand deposits 247,925 235,875 214,997
Other liabilities 13,415 18,452 19,476
Shareholders' equity 115,731 115,876 120,936
---------- --------- ---------
Total $1,914,570 $1,723,242 $1,670,642
========== ========== ==========
Net interest earnings $76,356 $72,228 $65,130
======= ======= =======
Net yield on interest-earning
assets 4.29% 4.59% 4.31%
====== ====== ======
Federal tax exemption on
nontaxable investment
securities and loans included
in interest income $5,147 $4,286 $736
5
As discussed above, the change in 2000 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.
2000 Compared to 1999 1999 Compared to 1998
--------------------------------------- --------------------------------------
Increase (Decrease) Due to Change In(1) Increase (Decrease) Due to Change In(1)
Net Net
Volume Rate Change Volume Rate Change
--------- -------- -------- --------- ------- --------
Interest earned on:
Federal funds sold and securities
purchased under agreements to resell $ 541 $ 7 $ 548 $ (238) $ (25) $ (263)
Time deposits in other banks 19 3 21 4 (1) 3
Taxable investment securities 4,585 2,831 7,416 (4,733) 1,962 (2,771)
Nontaxable investment securities 2,122 278 2,400 5,068 (166) 4,902
Loans (net of unearned discounts) 9,626 2,182 11,808 6,051 (3,421) 2,630
Total interest-earning assets (2) $17,367 $ 4,826 $22,193 $ 4,907 $ (406) $ 4,501
Interest paid on:
Savings deposits $ (571) $ 524 $ (47) $ 114 $(1,161) $(1,047)
Time deposits 3,706 3,772 7,478 (2,841) (3,008) (5,849)
Short-term borrowings 6,234 1,844 8,078 5,550 (26) 5,524
Long-term borrowings 2,786 (229) 2,557 (1,366) 141 (1,225)
Total interest-bearing liabilities(2) $ 8,195 $ 9,871 $18,066 $ 1,648 $(4,245) $(2,597)
Net interest earnings (2) $ 9,096 $(4,969) $ 4,127 $ 2,657 $ 4,441 $ 7,098
(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.
6
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, 2000 and 1999.
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,
--------------------------------------------------------------------------------------
2000 1999
---------------------------------------- ------------------------------------------
(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 $ 241 $ 4 6.40% $ 2,331 $ 29 4.99%
Time deposits in other banks 470 8 6.57% 333 4 4.68%
Taxable investment securities 615,650 11,444 7.39% 530,336 9,620 7.20%
Nontaxable investment securities 128,618 2,400 7.42% 114,100 2,088 7.26%
Loans (net of unearned discount) 1,090,961 25,630 9.35% 997,212 22,684 9.02%
---------- ------- ---------- -------
Total interest-earning assets 1,835,940 $39,486 8.56% 1,644,312 $34,425 8.31%
Noninterest earning assets
Cash and due from banks 56,985 68,289
Premises and equipment 26,820 25,431
Other Assets 87,203 76,925
Less:allowance for loans (14,602) (12,870)
Net unrealized gains/(losses) on
available-for-sale portfolio (9,052) (16,235)
---------- ----------
Total $1,983,294 $1,785,852
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities
Savings deposits $ 482,387 $ 2,871 2.37% $ 498,084 $ 2,715 2.16%
Time deposits 719,399 10,991 6.08% 623,904 8,075 5.13%
Short-term borrowings 169,526 2,944 6.91% 197,979 2,733 5.48%
Long-term borrowings 215,747 3,510 6.47% 99,816 1,744 6.93%
---------- ------- ---------- -------
Total interest-bearing liabilities 1,587,059 20,316 5.09% 1,419,783 15,267 4.27%
Noninterest bearing liabilities
Demand deposits 253,199 239,619
Other liabilities 18,260 15,947
Shareholders' equity 124,776 110,503
---------- ----------
Total $1,983,294 $1,785,852
========== ==========
Net interest earnings $19,170 $19,158
Net yield on interest-earning assets 4.15% 4.62%
====== ======
Federal tax exemption on nontaxable
investment securities included in
interest income $1,282 $1,163
7
The changes in net interest income (full tax-equivalent basis) by volume and
rate component for fourth quarter 2000 versus fourth quarter 1999 are shown
below for each major category of interest-earning assets and interest-bearing
liabilities.
4th Quarter 2000 versus 4th Quarter 1999
---------------------------------------------
Increase (Decrease) Due to Change In (1)
Net
Volume Rate Change
------- ------- ------
Interest earned on:
Federal funds sold and securities
purchased under agreements to resell $ (69) $ 44 $ (25)
Time deposits in other banks 2 2 4
Taxable investment securities 1,557 267 1,824
Nontaxable investment securities 265 47 312
Loans (net of unearned discounts) 2,137 809 2,946
Total interest-earning assets(2) $ 4,022 $ 1,039 $5,060
Interest paid on:
Savings deposits $ (471) $ 627 $ 156
Time deposits 1,325 1,591 2,916
Short-term borrowings (1,936) 2,147 211
Long-term borrowings 2,539 (773) 1,766
Total interest-bearing liabilities(2) $ 1,909 $ 3,140 $5,049
Net interest earnings(2) $ 4,590 $(4,579) $ 11
(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, and mortgage banking
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 2000 increased by 35.5% to $21.0 million, largely
due to the addition of Elias Asset Management (EAM) in April. Combined revenues,
excluding investment gains and losses, were up strongly for the sixth
consecutive year to approximately $21.1 million in 2000, a $5.0 million or 31.0%
improvement over 1999.
Fees from the financial services segment of noninterest income rose 72.6% in
2000 to $10.1 million compared to 11.7% growth in the prior year. Over the last
five years, financial services revenues have climbed at a compound annual growth
rate of nearly 37%, and for 2000 as a whole, comprise over 48% of total
noninterest income, excluding net investment securities gains (losses). The
increase in 2000's growth rate largely reflects the previously mentioned EAM
acquisition, without which financial services revenues would have nonetheless
climbed 20%. Overall, financial services contributed $3.0 million or 10.5% of
the Company's pretax net income this year (before allocation of indirect
corporate expense) reflecting nearly a 30% return on revenue. In 1999, the net
income contribution was $1.8 million or 6.9%, with a return on revenue also of
30%.
Assets under management from the Company's several financial services businesses
reached $1.28 billion in 2000 compared to $583 million in the prior year,
largely reflective of the addition of Elias Asset Management. Revenues and
assets under management from these financial segments are as follows:
8
o Fees from personal trust services were $1.4 million, up 9.9% in 2000 as
compared to a 9.0% increase in 1999. Recurring trust fees (excluding
periodic estate fees) related to individual investment management accounts
and annual trust administration (together representing 89% of personal
trust income) grew a combined 5.9%. Personal trust assets under management
reached nearly $172 million by year end, up approximately .5% over the
prior twelve months.
Greater focus on business development, including pro-active integration of
its major referral sources--the Company's twelve 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 $3.0 million in 2000 compared to $2.6 million in
1999, a 15.7% increase. Retirement plan assets reached nearly $267 million
at year-end 2000, up 16.3% over 12 months earlier.
During 2000, BPA formed marketing alliances with several mutual fund
companies and third party brokers. These relationships contributed to a
700% increase in sales activity in the fourth quarter over the same period
in 1999. The Company's market continues to grow from a local base to plan
sponsors situated in the urban centers of New York State and beyond.
Twenty-five percent of all new account activity in 2000 involved defined
contribution administration and custodial services for companies in Puerto
Rico.
BPA/EBT supports defined benefit 401(k), 403(b)(7), 457, ESOP and other
forms of daily valuation defined contribution plans, enhancing these
products with voice response and transactional web services.
o 2000 is the seventh year in which CBSI has offered mutual funds, annuities,
and other investment products through Financial Consultants (FCs) situated
in various locations throughout the Bank's branch network. Commission
income from this source grew 41% in 2000 to $1.8 million, compared to
nominal growth in 1999 of 6.5%.
These products and services have been delivered since March of 1999 through
the Company's own broker-dealer, Community Investment Services, Inc.
(CISI), having been previously been provided in partnership with a third
party which guided the Company in becoming established in the business
beginning in mid-1994, PrimeVest Financial Services, Inc. of Saint Cloud,
Minnesota. In late 1999 and in the fall of 2000, CISI established two
stand-alone brokerage offices in Lockport and Jamestown, NY, respectively.
These offices are staffed with professionals attracted from larger
brokerage companies, who have brought much of their books of business to
CISI.
During the last five years, commission income from the sale of mutual funds
and related products have grown at an annual compound growth rate of over
30%. Assets under management of CISI reached $220 million by year-end 2000,
up $37 million or 20% over the prior twelve months.
9
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 life insurance subsidiary through
which the creditor life insurance is written, plus commissions generated by
the sale of insurance products through the Company's Financial Consultants,
amounted to $845,000 in 2000, up 16.1% over last year. The latter insurance
products are distributed through Community Financial Services, Inc. (CFSI),
established in mid-1998 with a focus on the sale of long-term health care
and other selected insurance vehicles.
o Lastly, revenues from Elias Asset Management (EAM), purchased on April 3,
2000, reached $3.09 million this year, up from $2.46 million or nearly 26%
from the comparable nine month period in 1999 when EAM was an
independently-owned company. Its customer base is approximately 52%
individuals, followed by 22% corporations, and 26% largely for trusts,
foundations, endowments, and estates. Despite unfavorable market conditions
during the year, as reflected by a 9.1% decrease in the Standard & Poor's
500 index, total assets under management ended 2000 at $624 million, down
4.3%. This reflects net new business of $56 million compared to $99 million
in 1999, when the S&P index rose 21.0%.
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 2000 contributed 9.1% of noninterest income, excluding net
investment securities gains (losses). Total revenues were $1.93 million, up 4.9%
from $1.84 million in 1999, largely due to increased electronic product revenues
as discussed below. Over the last five years, specialty product revenues have
grown at an annual compound growth rate of nearly 36%.
o Fees earned from electronic products reached $1.6 million this year, up 16%
from 1999. This increase was primarily due to the Company's Visa(TM)
affiliation, which rose to $1.1 million, reflecting continued growth of
Visa Check Card revenues (climbing 29%) and ATM surcharge income,
increasing 7% to $474,000. Visa merchant discount fees fell 3.3% in 2000.
o Mortgage banking fees were $293,000 in 2000, down from $403,000 in the
prior year. The primary reason for the decrease was the sharp reduction in
loans sold to $9.2 million from $37.0 million in 1999, when the purchase
money mortgage and refinancing market was much more favorable. This change
is reflected in a reduction in the incremental increase in mortgage
servicing rights from $239,000 in 1999 to $33,000 this year, partially
offset by gains on loans sold of $39,000 this year versus a loss of $29,000
last year. Loan servicing fees were $221,000 in 2000, up 14.5% from the
previous year on a serviced loan portfolio of approximately $90 million,
consisting of about 1,521 loans.
o Thirdly, the Company established a relationship in 1999 with a national,
third-party leasing company, Synergy Resources of Bloomington, Minnesota,
which pays referral commissions on leases booked for CBNA customers.
Revenues, largely from small equipment leases, were $41,000 this year, down
from 1999's level of $59,000. Customers may submit applications by
telephone, fax, or the Internet.
The second and previously largest segment of the Company's recurring noninterest
income is the wide variety of fees earned from general banking services, which
reached $9.0 million in 2000, up 7.9% from the prior year. This segment
contributed 43% 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 CBNA's branch network. However, the Company's branch
acquisitions beginning in 1994 have resulted in a five-year annual compound
growth rate in these revenues of nearly 17%.
o Service charges on deposit accounts and overdraft fees increased to $7.2
million in 2000, a 9.0% growth rate compared to a 5.6% growth rate in 1999.
This year's improvement reflects a $630,000 increase in overdraft fees,
reflective of the full-year impact of price increases which took place in
the fourth quarter of 1999.
o General commissions and miscellaneous income at $1.9 million were up 4.2%
in 2000. This increase is attributable to approximately $71,000 more in
Canadian exchange revenues and $45,000 additional earnings on a service in
conjunction with SEI Investments, which "sweeps" the excess checking
account deposits of commercial customers into an interest-bearing overnight
investment instrument.
10
Income from periodic transactions in 2000 largely includes $212,000 in losses
taken on $11.6 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 losses of $638,000 million last
year on a combined $14.6 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 2000 were $111,000 compared to $47,000 in
the prior year; this was largely due to gains on the sale of branch property and
other miscellaneous assets in the normal course of business.
Noninterest income, excluding transactions related to investment securities and
disposal of branch properties, as a percent of operating income was 21.7% in
2000, an increase of 3.4 percentage points from the prior year. Since 1994, this
ratio has risen 9.7 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, 2000, this ratio increased to the 58th
peer percentile, up from the 47th percentile in 1999.
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; in
addition, 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.
11
The following table sets forth selected information by category of noninterest
income for the Company for the years and quarters indicated.
Years ended December 31, Quarters ended
(000's omitted) December 31,
---------------------------------- ------------------
2000 1999 1998 2000 1999
------- ------- ------- ------ ------
Personal trust $ 1,418 $ 1,290 $ 1,183 $ 410 $ 328
EBT/BPA 2,992 2,586 2,333 777 594
Elias Asset Management 3,091 0 0 1,052 0
Insurance 845 728 518 92 83
Other investment products 1,788 1,268 1,222 468 346
------- ------- ------- ------ ------
Total financial services 10,134 5,872 5,256 2,799 1,351
Electronic banking 1,595 1,379 1,140 386 407
Mortgage banking 293 403 737 58 36
Commercial leasing 41 59 0 9 14
------- ------- ------- ------ ------
Total specialty products 1,929 1,841 1,877 453 457
Deposit service charges 3,331 3,373 3,246 827 851
Overdraft fees 3,827 3,197 2,975 971 841
Commissions 1,869 1,795 1,473 469 408
------- ------- ------- ------ ------
General banking services 9,027 8,365 7,694 2,267 2,100
Miscellaneous revenue 30 47 473 3 (12)
------- ------- ------- ------ ------
Total noninterest income excl.
security gains/losses 21,120 16,125 15,300 5,522 3,896
Security gains/losses (a) (212) (638) 2,287 0 (416)
Disposition of branch properties 81 0 (219) 81 0
------- ------- ------- ------ ------
Total noninterest income 20,989 15,487 17,368 5,603 3,480
Noninterest income as a percentage of
operating income (excludes net securities
gains (losses) and disposal of
branch properties) 21.7% 18.3% 19.0% 22.4% 16.9%
(a) includes $327,000 of investment gains on securities sold upon adoption of
FAS 133 in third quarter 1998.
12
NONINTEREST EXPENSE
Noninterest expense or overhead rose $3.3 million or 6.2% in 2000 compared to
$857,000 or 1.7% in 1999. Excluding the $2.1 million impact of the April
purchase of Elias Asset Management (EAM), noninterest expense was up $1.1
million or 2.1% in 2000. This year's overhead of $56.0 million as a percent of
average assets was 2.92%, down from 3.06% in 1999; however, the ratio remains in
the peer normal 50th 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 2.68% in
2000 compared to 2.95% for peers.
For CBSI as a whole, higher personnel expense accounted for over 75% of 2000's
increase in overhead, with personnel costs being up 9.3% as a result of the EAM
acquisition versus rising 2.5% in 1999. The remainder of the increases in
salary, benefit, and payroll tax expenses reflect modest annual merit awards for
employees. Total full-time equivalent staff at year-end 2000 was 701 versus 711
at year-end 1999, down as the result of attrition and several cost saving
initiatives during the year. These initiatives included consolidation of the
Company's collection, indirect installment loan approval, mortgage servicing,
and first-day deposit operations functions, all of which were previously
performed in each of the Canton and Olean, NY operations or administrative
centers.
Nonpersonnel expense rose $809,000 or 3.1% this year as opposed to a $219,000 or
0.8% increase in 1999. This was largely caused by increases in data processing,
up $495,000 or 12.5%; depreciation on equipment, up $170,000 or 5.8%; and office
supplies, up $178,000 or 14.6%. These increases were partially offset by lower
professional fees, down $41,000 or 2.1%. The bulk of the increase in data
processing relates to an accounting classification change that now considers
processing charges related to the Company's broker-dealer as a separate expense
versus previously applying it against revenue. Depreciation on equipment rose
due to the full year impact of purchases of new computers (replacements because
of required Year 2000 upgrades), installation of check reader/sorters for the
Olean and Canton, NY operations centers, and conversion to an image-based check
processing system for the Northern Markets of the Company in mid-2000.
Implementation of the image system for the Southern Markets followed later in
the year, and depreciation on this phase will begin in 2001. Most of the
remaining increases in these non-personnel areas reflects additional
expenditures--some one-time--related to the conversion of the Company's check
processing operations to image processing.
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 2000, the nominal efficiency ratio decreased 2.3 percentage points to 57.4%
while the recurring ratio decreased 1.3 percentage points to 52.6%. 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 peer bank ratio of 60.6% based on data
available as of September 30, 2000. The improvement in the 2000 efficiency ratio
is a function of several factors: an increase in net interest income due to
higher earning assets and reduced premium amortization on the Company's CMO
securities, steady progress in developing more sources of noninterest income
(cost recovery and penalty fees on the banking side of the business having the
greatest impact on the ratio), and persistent control of overhead expense.
Excluding the Company's financial services businesses, which by their nature
carry a higher efficiency ratio (67.9% in 2000), the efficiency ratio was 50.8%
for the year.
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 for
the entirety of 2000 from the creation of its broker-dealer subsidiary during
the first quarter of 1999, which brought down the expense of processing mutual
funds and related products, and partially in 2000 from the overhead savings from
the aforementioned conversion of the Company's check processing operations to
image during the second and third quarter of this year. Also contributing to
better productivity and control during 2000 were consolidation of the Company's
collection, indirect installment loan approval, mortgage servicing, and
first-day deposit operations functions, all of which were previously performed
in each of the Canton and Olean, NY operations or administrative centers.
13
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 December 31, Quarters ended
December 31,
------------------------------------ ----------------------
2000 1999 1998 2000 1999
-------- -------- -------- -------- --------
Personnel expense $28,834 $26,388 $25,750 $7,456 $6,654
Net occupancy expense 3,959 3,919 4,056 1,006 936
Equipment expense 3,677 3,465 3,501 906 888
Professional fees 1,896 1,937 2,142 458 404
Data processing expense 4,450 3,955 3,928 1,089 1,078
Amortization of intangibles 4,670 4,615 4,640 1,187 1,149
Stationary and supplies 1,396 1,218 1,344 333 307
Deposit insurance premiums 278 183 189 69 46
Other 6,829 7,053 6,326 1,726 1,599
------- ------- ------- ------- -------
Total noninterest expense $55,989 $52,733 $51,876 $14,230 $13,061
Total operating expenses as a
percentage of average assets 2.92% 3.06% 3.11% 2.85% 2.90%
Efficiency ratio (1) 52.6% 53.9% 58.5% 52.8% 51.7%
(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 2000 was $29.0 million, up 13.6% over the prior year's
amount. When income is recast as if all tax-exempt revenues were fully taxable
on a federal basis, 2000's results rose by $4.3 million or 14.5% to $34.2
million before tax.
The main reasons for improved pretax earnings were the favorable $4.1 million
increase in net interest income (full tax-equivalent basis) related to strong
earning asset growth (up 13.2% or $207.1 million on average), a $5.1 million or
31.5% climb in noninterest income, excluding net securities gains (losses), and
a $426,000 reduction in securities losses compared to the prior year (see
Investments section of this report). These factors were partially offset by a
$3.3 million (6.2%) increase in overhead expense (largely relating to the Elias
Asset Management acquisition), and a $2.0 million increase (39.8%) in loan loss
provision expense as a result of two unusual and isolated commercial loans that
were written down during the last half of 2000.
The Company's combined effective federal and state tax rate decreased one
percentage point this year to 30.0%. The decrease resulted from effective tax
planning, principally because of increased purchases of tax-exempt municipal
investments and other income during the year.
CAPITAL
Shareholders' equity ended 2000 at $139.4 million, up 28% from one year earlier.
This improvement reflects earnings for the year and the positive change in
market value adjustment (MVA) of the Bank's available-for-sale investments,
offset by dividends paid to shareholders and the cost of repurchasing 100,000
shares of CBU common stock during 2000. The Company's stock buy-back program,
under which 648,100 shares have been acquired as Treasury stock, representing
8.5% of the shares outstanding prior to the inception of the program in late
summer 1998, reflects the
14
Company's belief that its common stock is an excellent investment and that the
financial markets are not fully valuing its strong banking franchise. Excluding
the MVA and purchase of Treasury stock in both 1999 and 2000, capital rose by
$13.0 million or 9.6%. Shares outstanding fell by 99,000 during the year due to
the aforementioned repurchase of stock offset by the exercise of stock options.
Subsequent to year end, the repurchased shares were reissued in conjunction with
the acquisition of the Citizens National Bank of Malone.
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 5.79%, virtually
unchanged from one year ago. The total capital to risk-weighted assets ratio
decreased 33 basis points during 2000 to 10.25% as of year end compared to 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 2000 of $7.3 million represented an
increase of 6.2% 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 2000 from $.25 to $.27. This marks the ninth consecutive year of
dividend increases, which have resulted in an 11.8% compound annual growth rate
over that time period.
Raising the Company's expected annualized dividend to $1.08 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 36.0% compared to 39.0% and 41.2% in 1999 and 1998,
respectively, now at the mid-point 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. During the 1995-1998 period, the pay-out, including
preferred dividends, ranged from the 66th to 74th percentile. For 2000 and 1999,
the ratio has been in the 58th and 61st peer percentile, respectively.
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,
---------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ---------- ---------- ----------
Real estate mortgages:
Residential $ 379,040 $ 334,104 $266,841 $278,912 $225,088
Commercial loans secured by real estate 135,545 120,926 124,828 85,962 56,959
Farm 19,850 17,652 12,486 10,434 8,296
---------- ---------- -------- -------- --------
Total 534,435 472,682 404,155 375,308 290,343
Commercial, financial, and agricultural:
Agricultural 26,489 27,722 22,691 23,894 21,689
Commercial and financial 181,877 171,660 168,984 138,067 99,445
---------- ---------- -------- -------- --------
Total 208,366 199,382 191,675 161,961 121,134
Installment loans to individuals:
Direct 113,353 112,698 105,480 89,138 62,176
Indirect 227,645 221,593 205,159 198,853 171,583
Student and other 1,131 1,545 6,477 10,880 9,635
---------- ---------- -------- -------- --------
Total 342,129 335,836 317,116 298,871 243,394
Other Loans 14,205 2,043 5,581 8,887 3,496
---------- ---------- -------- -------- --------
Gross Loans 1,099,135 1,009,943 918,527 845,027 658,367
Less: Unearned discounts 409 720 1,307 1,815 5,893
---------- ---------- -------- -------- --------
Net loans 1,098,726 1,009,223 917,220 843,212 652,474
Reserve for possible loan losses 14,614 13,421 12,441 12,434 8,128
---------- ---------- -------- -------- --------
Loans, net of loan loss reserve $1,084,112 $995,802 $904,779 $830,778 $644,346
15
Loans outstanding, net of unearned discount, reached a record $1,099 million as
of year-end 2000, up over $89.5 million or 8.9% compared to twelve months
earlier. About 27% of 2000's growth came from 20 branches acquired in mid-1997
from Key Bank, N.A. and Fleet Bank, with a like amount coming from the 12
branches (net of three subsequently sold) purchased from Chase Manhattan Bank in
mid-1995. Thus, more than half of the Company's loan growth in 2000 reflected
the markets opened by its strategic branch acquisitions over the last six years.
Loan growth in 1999 was $92.0 million or 10.0% compared to $74.0 million or 8.8%
in 1998.
The Company's predominant focus on the retail borrower enables its loan
portfolio to be highly diversified. Approximately 64% 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 approximately 83% of our customers representing
about 28% of commercial loans outstanding. Slightly over thirty-five percent of
our commercial portfolio 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 66th 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 2000 loan
growth relates to new business generated in markets where acquired branches are
located. The increase in business lending accounted for 36% of the $90 million
in total loan growth in 2000 versus 44% of 1999's $92 million increase. An
increase in consumer direct loans contributed 14% toward total growth this year
versus 16% in 1999. Consumer indirect loans accounted for 7% of this year's
increase, down from 18% in the prior year. The decrease in direct and indirect
consumer loans reflects softening demand in the automotive industry. Lastly, the
share of this year's total loan increase for consumer mortgages was 43%, up from
1999's share of 22%, reflective of the even greater success of the Company's
no-closing cost product. The following more fully discusses the underlying
reasons for these changes by each of the Company's four major lending activities
or lines of business.
NATURE OF LENDING
MIX AT YEAR END
($ 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
$ % $ % % $ % % $ % % $ % %
------- ------- ----- ----- ------ ----- ----- ------ ----- ----- ------ ----- ----- ------
2000 1,099 8.9% 258 23% 17.7% 398 36% 8.7% 228 21% 3.2% 215 20% 5.8%
1999 1,009 10.0% 219 22% 10.1% 366 36% 12.5% 221 22% 8.3% 203 20% 8.1%
1998 917 8.7% 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%
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 $398 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 $31
million or 9% in 2000 compared to a 13% growth rate for 1999 and 1998. Growth in
the past three years has resulted from persistent business development efforts
and the contributions of new lenders who joined the Bank often from larger
banking institutions, frequently bringing their books of business with them over
time. The portfolio is broadly diversified by industry type, reflective of the
nature of the Company's markets. The largest share is service businesses (24%),
followed by finance/insurance/real estate (14%), retail trade and
agriculture/forestry/fishing (each at 13%), manufacturing and dealer floor plans
(each at 9%), and miscellaneous industries (18%).
Demand for installment debt indirectly originated through automobile, marine,
and mobile home dealers increased modestly in 2000. Outstandings ended the year
3% or $6 million higher, primarily resulting from growth in the Bank's Southern
Region. This compares to growth of 8% or $17 million in 1999. This portfolio
segment, of which 90% relates to automobile lending (72% of the vehicles are
used versus 28% new), constitutes 21% of total loans outstanding, down only
slightly from 1999, but down from its peak of 26% in 1996. A slowdown in
automobile sales during the latter half of 2000 primarily explains the reduction
in growth versus 1999.
The segment of the Company's loan portfolio committed to consumer mortgages is
predominantly fixed (93%) versus adjustable rate (7%) residential lending. It
accounts for $258 million or 23% of total loans outstanding. Growth during the
last two years ($38.8 million or 17.7% in 2000 and $19.5 million or 9.8% in
1999) is attributable to the attractiveness of the Bank's no-closing cost
mortgage product both for home purchase or refinancing as well as being a
vehicle for consumers to term-out higher cost credit card debt. Portfolio growth
is lower than it could have been due to a program
16
which began in mid-1994 to sell selected fixed rate originations in the
secondary market. The purpose of this program, with sales of $39.3 million in
1998, $37.0 million in 1999 and $9.5 million this year, is to develop a
meaningful source of servicing income as well as to provide an additional tool
to manage interest rate risk.
The direct consumer lending activity increased 6.1% or $12 million in 2000.
1999's outstandings rose 8.0% or $15 million, in part reflective of an
aggressive promotion largely in the Bank's Southern Region, versus a decrease of
2.5% 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 was 20%,
equal to the 1999 portfolio share.
The following table reconciles the differences between the line of business loan
breakdown reflected above as compared to regulatory reporting definitions
reflected on the Call Report and the table at the beginning of this section.
Line of Business as of December 31, 2000
-------------------------------------------------------------------------------------
Consumer Consumer Consumer Business Total Loans
Direct Indirect Mortgages Lending
------------- ------------- --------------- --------------- -------------
Regulatory Reporting Categories
Loans secured by real estate
Residential $ 91,205 $ - $257,415 $ 30,420 $ 379,040
Commercial 28 $ - 298 135,219 135,545
Farm 35 - 19,815 19,850
Agricultural loans 533 - 25,956 26,489
Commercial loans 12,299 - 169,578 181,877
Installment loans to individuals 108,553 227,645 53 5,878 342,129
Other loans 2,769 - 11,436 14,205
-------- -------- -------- -------- ----------
Total loans 215,422 227,645 257,766 398,302 1,099,135
Unearned Discounts (409) - - (409)
--------- -------- -------- -------- ----------
Net Loans $215,013 $227,645 $257,766 $398,302 $1,098,726
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
The following table shows the amount of loans outstanding as of December 31,
2000, which, based on remaining scheduled payments of principal, are due in the
periods indicated:
At December 31, 2000
-------------------------------------------------------------------
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 $ 72,942 $ 70,577 $ 64,847 $ 208,366
agricultural
Real estate - construction 0 0 0 0
Real estate - mortgage 53,732 77,090 403,613 534,435
Installment 24,906 292,496 38,523 355,925
-------- -------- -------- ----------
TOTAL $151,580 $440,163 $506,983 $1,098,726
======== ======== ======== ==========
The following table sets forth the sensitivity of the loan amounts due after one
year to changes in interest rates.
At December 31, 2000
---------------------------------------
Fixed Rate Variable Rate
------------- --------------
Due after one year but within five years $ 59,361 $380,802
17
Due after five years 357,490 149,493
-------- --------
TOTAL $416,851 $530,295
========= ========
18
NONPERFORMING ASSETS/RISK ELEMENTS
The following table presents information concerning the aggregate amount of
nonperforming assets:
As of December 31,
----------------------------------------------------------
(000's omitted) 2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Loans accounted for on a nonaccrual basis 4,423 4,666 2,473 1,385 2,023
Accruing loans which are contractually
past due 90 days or more as to
principal or interest payments 1,655 1,047 1,513 2,788 823
------ ------ ------ ------ -----
Total nonperforming loans 6,078 5,713 3,986 4,173 2,846
Loans which are "troubled debt
restructurings" as defined in Statement
of Financial Accounting Standards No. 15
"Accounting by Debtors and Creditors for
Troubled Debt Restructurings" 116 122 134 0 32
Other Real Estate 906 884 1,182 881 746
------ ------ ------ ------ -----
Total nonperforming assets 7,100 6,719 5,302 5,054 3,624
Ratio of allowance for loan losses to
period-end loans 1.33% 1.33% 1.36% 1.47% 1.25%
Ratio of allowance for loan losses to
period-end nonperforming loans 240.4% 234.9% 312.0% 298.0% 285.6%
Ratio of allowance for loan losses to
period-end nonperforming assets 205.8% 199.7% 234.6% 246.0% 224.3%
Ratio of nonperforming assets to period-end
total loans and other real estate owned 0.65% 0.67% 0.56% 0.60% 0.55%
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
Reserve for loan losses represents the amount available for probable credit
losses in the Company's loan portfolio as estimated by management. Specific
reserves are determined through review of impaired loans, nonperforming loans
and certain performing loans designated as problems. General reserves are
determined through a quarterly disciplined analysis of the portfolio. This
analysis results in the identification and quantification of loss factors for
each group of loans, adjusted for relevant environmental factors (e.g. industry,
geographic, economic and political factors). The risk profile and experience of
existing portfolio, along with growth, concentrations and management resources
are also considered. The reserve for loan losses reflects management's best
estimate of probable loan losses at December 31, 2000.
Nonperforming loans, defined as nonaccruing loans plus accruing loans 90 days or
more past due, ended 2000 at $6.1 million. This level is approximately $365,000
or 6% higher than one year earlier, primarily due to increases in residential
mortgage and installment loan 90-day delinquencies, partially offset by an
improvement in commercial and installment nonaccruals. The ratio of
nonperforming loans to total loans fell 2 basis points from twelve months
earlier to .55%. As of September 30, 2000, when the nonperforming loan ratio
stood at .58%, the Company's asset quality was in the 50th percentile compared
to peers. The ratio of nonperforming assets (which additionally include troubled
debt restructuring and other real estate) to total loans plus OREO decreased to
.65%, down 2 basis points from one year earlier.
Total delinquencies, defined as loans 30 days or more past due and nonaccruing,
finished the year at 2.03% as a percent of total loans outstanding compared to
1.32% in 1999, with most of the increase taking place during the last
19
three to six months. As of year-end 2000, total delinquencies for commercial
loans, installment loans, and real estate mortgages were 2.75%, 2.11%, and
1.10%, respectively. These measures compare to delinquencies of peer bank
holding companies as of September 30, 2000 of 2.08%, 1.70%, and 1.26%,
respectively. As of September 30, 2000, the delinquency ratio was slightly
higher than the norm at 1.65% versus 1.58%. The Company's collection function,
which was centralized in mid-2000 to improve its productivity and effectiveness,
is striving to reverse this trend and bring delinquencies back within the
Company's internal guideline of less than 2.0%.
20
Problem loans during the last nine months have been dominated by two commercial
credits. The first loan has been written down by $1.47 million to the
liquidation value of its assets; second and third quarter write-downs had been
based on the sale value of the firm as a going concern. The other loan was
secured by fraudulent receivables discovered in the third quarter, and after an
initial write-down at that time, the lack of successful litigation since then
has dictated that the entire $1.02 million balance be written off. These
situations are considered by management to be unusual and isolated, and without
them, commercial net charge-offs would have been limited to $635,000, a $214,000
improvement from 1999. The limited asset-based program through which this latter
loan was administered is being terminated. Commercial loan net charge-offs as a
whole were $3.1 million or .80% of average outstandings, or $635,000 and .16%,
respectively, excluding the above two problem credits; these results compare to
$849,000 and .24% in 1999.
Consumer installment net charge-offs were down for the second consecutive year,
ending 2000 at $2.85 million and .82% of average loans outstanding, down 13% and
21 basis points, respectively. Mortgage net charge-offs were de minimums.
In total, net charge-offs for 2000 were higher by $1.8 million or 44%, finishing
the year at $6.0 million or .57% of average loans compared to $4.2 million and
.44% last year. Gross charge-offs rose 33.6% to $7.1 million, or .67% of average
loans outstanding versus .56% in 1999. This year's recoveries declined slightly
to $1.1 million, but rose as a percentage of prior year gross charge-offs to
20.4% from 18.5% in 1999. As of September 30, 2000, the Bank's total net
charge-off ratio was in the 90th peer percentile based on the peer norm of .17%.
The full year loan loss provision covered total actual net charge-offs by 1.20
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 $14.6
million versus $13.4 million in 1999; as a percent of total loans, the loss
reserve ratio remained constant at 1.33% for year-end 2000. The reserve ratio is
slightly above the peer median, being in the 54th peer percentile, and coverage
of nonperforming loans as of September 30, 2000 was above the norm in the 53rd
percentile; management believes the year-end coverage at 240% to be ample.
As a percentage of average loans, the annual loan loss provision was well above
the peer norm in the 91st percentile as of September 30, 2000. The loss
provision ratio increased from .54% in 1999 to .68% this year. Due to higher net
charge-offs in 2000 as discussed above, loan loss provision expense increased by
$2.1 million in 2000. This compares to an increase of $13,000 and $643,000 in
1999 and 1998, respectively. Loan loss provision expense covered net charge-offs
by 120% versus 124% in 1999.
21
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 probable loan losses arising from loans charged off, recoveries on
loans previously charged off, and additions to the allowance which have been
charged to expenses.
As of December 31,
-------------------------------------------------------------------
(000's omitted) 2000 1999 1998 1997 1996
---------- ---------- -------- -------- --------
Amount of loans outstanding at end of period $1,099,135 $1,009,943 $918,527 $845,027 $658,367
---------- ---------- -------- -------- --------
Daily average amount of loans (net of unearned
discounts) $1,056,229 $ 951,167 $884,751 $749,596 $602,717
---------- ---------- -------- -------- --------
Balance of allowance for possible loan losses at
beginning of period $ 13,421 $ 12,441 $ 12,434 $ 8,128 $ 6,976
Loans charged off:
Commercial, financial, and agricultural 3,224 980 698 418 324
Real estate construction 0 0 0 0 0
Real estate mortgage 16 52 24 25 26
Installment 3,825 4,256 5,375 4,006 2,108
---------- ---------- -------- -------- --------
TOTAL LOANS CHARGED OFF 7,065 5,288 6,097 4,449 2,458
Recoveries of loans previously charged off:
Commercial, financial, and agricultural 96 147 200 185 224
Real estate construction 0 0 0 0 0
Real estate mortgage 6 5 4 1 1
Installment 974 980 777 541 488
---------- ---------- -------- -------- --------
TOTAL RECOVERIES 1,076 1,132 981 727 713
Net loans charged off 5,989 4,156 5,116 3,722 1,745
---------- ---------- -------- -------- --------
Additions to allowance charged to expense 7,182 5,136 5,123 4,480 2,897
Reserves on acquired loans (1) 0 0 0 3,548 0
Balance at end of period $ 14,614 $ 13,421 $ 12,441 $ 12,434 $ 8,128
---------- ---------- -------- -------- --------
Ratio of net charge-offs to average loans outstanding 0.57% 0.44% 0.58% 0.50% 0.29%
(1) This reserve addition is attributable to loans purchased from Key Bank and
Fleet Bank in association with the purchases of branch offices during 1997.
The allowance for loan losses allocation is as follows:
As of December 31,
----------------------------------------------------------------------------------------------------------
2000 1999 1998 1997
------------------------- ------------------------- ------------------------- -------------------------
Amount of Percent of Amount of Percent of Amount of Percent of Amount of Percent of
Allowance Loans Allowance Loans Allowance Loans Allowance Loans
in Each in Each in Each in Each
Category Category Category Category
to Total to Total to Total to Total
Loans Loans Loans Loans
----------- ------------ ----------- ------------ ----------- ------------ ----------- ------------
Commercial,
financial,
& Agricultural $ 4,331 19.0% $ 3,786 19.8% $ 4,502 19.7% $ 4,136 19.2%
Real estate -
Construction 0 0.0% 0 0.0% 0 0.0% 0 0.0%
Real estate -
Mortgage 1,818 48.6% 1,285 46.8% 2,210 43.4% 2,026 44.4%
Installment 7,877 32.4% 7,285 33.4% 4,525 36.9% 4,461 36.4%
Unallocated 588 N/A 1,065 N/A 1,204 N/A 1,811 N/A
------- ------ ------- ------ ------- ------ ------- ------
Total $14,614 100.0% $13,421 100.0% $12,441 100.0% $12,434 100.0%
As of December 31,
-------------------------
1996
-------------------------
Amount of Percent of
Allowance Loans
in Each
Category
to Total
Loans
----------- ------------
Commercial,
financial,
& Agricultural $2,668 18.4%
Real estate -
Construction 0 0.0%
Real estate -
Mortgage 2,234 44.1%
Installment 2,309 37.5%
Unallocated 917 N/A
------ ------
Total $8,128 100.0%
22
FUNDING SOURCES
Typical of most commercial banking institutions today is the need to rely on a
variety of funding sources to support the earning asset base as well as to
achieve targeted growth objectives. There are three primary sources of funding
that comprise CBSI's overall funding matrix, which considers maturity,
stability, and price: deposits of individuals, partnerships and corporations
(IPC deposits); collateralized municipal deposits; and capital market
borrowings.
Sources of Funds
Average 4th Quarter Balances
($ Million)
-------------------------------------------------------------------------------------------------------
Year IPC Deposits Public Funds Capital Borrowings Total Funds Sources
----------------------- --------------------- ---------------------- ----------------------
Amount % Total Amount % Total Amount % Total Amount % Change
---------- ---------- ---------- --------- --------- --------- --------- ----------
2000 $1,274 69.2% $181 9.8% $385 21.0% $1,840 10.9%
1999 1,212 149 298 1,659
73.1 9.0 18.0 9.5
1998 1,194 78.8 189 12.5 132 1,515 4.4
8.7
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
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
$1.274 billion, an increase of $62 million or 5.1% from the comparable 1999
period. This is the strongest dollar and percentage improvement in IPC deposits
in the last five years, excluding the impact of branch acquisitions, reflective
of excellent time deposit growth. 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. During the
1996-2000 period, overall consumer and business deposits have increased at a
compound annual growth rate of 7.6% per annum.
The mix of CBSI's IPC deposits has changed modestly over the last five years as
measured by the trend of fourth quarter average balances. The time deposit share
has fluctuated within the narrow range of 47% to 49%. Compared to the prior
year, 2000's mix increased by 1% to 49% as a result of a $58 million or 10.3%
increase, reflective of the Company's successful targeted C.D. programs. Since
their inception in the spring of 1999, these promotions have attracted over $96
million in new money, or 28% of the promotions. Growth in time deposits also
reflects consumer movement away from immediately available, lower earning
savings accounts, which have declined steadily during the five year period from
24% of IPC deposits to the 17% level in 2000. A portion of these savings
outflows may have been directed to higher yielding money market accounts, which
have grown from 5% of IPC deposits in 1996 to 7% today. Lastly, while interest
checking accounts have remained virtually constant at 9% over the last five
years, the mix of regular checking accounts (demand deposits) has increased
nicely from 14% in 1996 to 18% today. Excluding time accounts, IPC deposits were
up by $3.4 million or .5% in 2000; a $13 million or 5.8% increase in demand
deposits and a $13 million or 16.7% increase in money markets more than offset
reductions in other IPC categories.
Deposits of local municipalities increased $32 million or 22% during the past
year, with balances for fourth quarter 2000 averaging $181 million versus $149
million for the same 1999 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
generally, utilization of municipal deposits has been flat to down over the last
five years as a percent of total funding sources.
Capital market borrowings are defined as funding sources available on a national
market basis, generally requiring some form of collateralization. Borrowing
sources for the Company include the Federal Home Loan Bank of New York, 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 advances under a $10 million line of credit tied to the 90 day
libor rate with a large regional commercial bank. Capital market
23
borrowings averaged $385 million or 21% of total funding sources for fourth
quarter 2000 compared to $298 million or 18% of total funding sources for the
same period in 1999. As of December 31, 2000, 50% or $183 million of capital
market borrowings (excluding the aforementioned line of credit and Trust
Preferred securities) had original terms of one year or less. The balance of
long-term and short-term borrowings represents a move during the last half of
the year to convert higher cost short-term funding to cheaper long-term funding,
taking advantage of the inverted Treasury yield curve.
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,
---------------------------------------------------------------------------------
2000 1999 1998
----------------------- ------------------------ ------------------------
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
--------- --------- --------- --------- ---------- ---------
Non-interest-bearing demand deposits $ 247,925 0.00% $ 235,874 0.00% $ 214,997 0.00%
Interest-bearing demand deposits 136,962 0.81% 148,489 0.89% 145,141 1.18%
Regular savings deposits 241,754 2.50% 255,947 2.50% 264,370 2.79%
Money market deposits 109,050 3.59% 109,108 3.10% 99,219 3.08%
Time deposits 688,547 5.69% 619,851 5.11% 672,972 5.57%
---------- ----------
Total average daily
amount of domestic deposits $1,424,238 3.53% $1,369,269 3.12% $1,396,699 3.55%
The remaining maturities of time deposits in amounts of $100,000 or more
outstanding at December 31, 2000 and 1999 are summarized below:
At December 31,
-----------------------------------
(000's omitted) 2000 1999
-----------------------------------
Less than three months $ 73,157 $ 53,798
Three months to six months 40,117 28,644
Six months to one year 30,688 18,338
Over one years 12,210 11,618
-------- --------
$156,172 $112,398
======== ========
The following table summarizes the outstanding balance of short-term borrowings
of the Company for the years indicated.
At December 31,
-----------------------------------------------
(000's omitted) 2000 1999 1998
---------- ---------- ----------
Federal funds purchased $ 38,000 $ 0 $34,700
Term borrowings at banks (original term)
90 days or less 151,100 129,000 30,000
Over 90 days 0 125,000 0
-------- -------- -------
Balance at end of period $189,100 $254,000 $64,700
======== ======== =======
Daily average during the year $219,794 $119,830 $13,915
Maximum month-end balance 261,100 $254,000 $64,700
Weighted average rate during the year 6.53% 5.24% 5.42%
Year-end average rate 6.49% 5.60% 5.46%
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 the regulatory risk-based capital guidelines; and
(e) generating a favorable return without undue compromise of the other
requirements.
24
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.
In the first quarter of 2000, the Bank's balance sheet simulation work pointed
towards an exposure to falling interest rates. Growth in floating rate
commercial loan assets as well as management's ability to hold rates low on core
deposits in the face of rising interest rates contributed to this risk profile.
To balance this exposure, management continued on its 1999 course of extending
the maturity and call protection of new investments made throughout the year.
Despite long-term interest rates falling by more than 100 basis points over the
course of 2000, the weighted average life of the portfolio stood at 7.37 years
on December 31, 2000 versus 8.51 years in the prior period.
The average portfolio yield, calculated on a fully-tax equivalent basis and
excluding money market investments, rose to 7.37% in 1999 from 6.89% in the
prior year. In the fourth quarter of 2000, the portfolio yield averaged 7.40%
versus 7.21% for the same period in 1999.
Because nearly all of the Bank's investments are classified as available-for
sale, any broad change in market value has a significant impact on book equity.
As of year-end 2000, the net market value gain over book value was $11.9 million
versus a loss of $22.1 million as of year-end 1999. This positive change of
$34.0 million added $20.1 million to book equity, or $2.88 per share outstanding
as of December 31, 2000.
Beginning in late 1999 and continuing into 2000, the Bank sold low coupon
municipal notes and purchased higher yielding long-term municipal bonds. This
municipal tax loss strategy resulted in net investment losses for the year of
$212,000 on sales of $11.6 million. In 1999, losses were $638,000 on sales of
$15.3 million.
The composition of the portfolio continues to heavily favor U.S. Agency
Debentures, U.S. Agency mortgage-backed pass-throughs, U.S. Agency CMO's and AAA
rated and insured municipal bonds. As of year-end 2000, these four security
types (excluding Federal Home Loan Bank stock and Federal Reserve Bank stock)
accounted for a combined 91% of total portfolio investments (33%, 6%, 33% and
19% respectively), down slightly from 94% in the prior year.
25
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,
---------------------------------------------------------------------------
2000 1999 1998
---------------------- --------------------- --------------------
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 $ 0 $ 0
Obligations of states
and political subdivisions 5,351 5,451 5,042 5,084 4,038 4,107
Corporate securities 0 0 0 0 0 0
Mortgage-backed
Securities 0 0 0 0 0 0
------ ------ ------ ------ ------ ------
Total $5,351 $5,451 $5,042 $5,084 $4,038 $4,107
====== ====== ====== ====== ====== ======
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,
---------------------------------------------------------------------------
2000 1999 1998
---------------------- --------------------- --------------------
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 $241,159 $252,381 $177,097 $171,793 $170,464 $175,866
Obligations of states
and political subdivisions 134,653 136,181 118,223 110,125 40,591 41,329
Corporate securities 44,612 44,652 35,914 33,099 9,153 9,382
Mortgage-backed
Securities 297,659 296,792 290,000 284,090 336,090 336,967
Equity securities (1) 24,497 24,497 24,364 24,364 23,784 23,784
Federal Reserve
Bank common stock 2,294 2,294 2,174 2,174 2,174 2,174
-------- -------- -------- -------- -------- --------
Total $744,874 $756,797 $647,772 $625,645 $582,256 $589,502
======== ========= ======== ======== ======== ========
Net unrealized gains/(losses)
on available for sale portfolio 11,923 (22,127) 7,246
-------- -------- --------
Total Carrying Value $762,148 $630,687 $593,540
======== ======== ========
(1) Includes $23,059 in FHLB common stock at December 31, 2000, 1999, and 1998,
respectively.
26
The following table sets forth as of December 31, 2000, 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, 2000
--------------------------------------------------------------------
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
Held-to-Maturity Portfolio or Less Five Years Ten Years Ten Years Value
-------------------------- ----------- ------------ ---------- ---------- -------
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 3,504 1,582 247 18 5,351
Other 0 0 0 0 0
------- ------ -------- -------- --------
Total Held-to-Maturity Portfolio Value $ 3,504 $ 1,582 $ 247 $ 18 $ 5,351
======= ====== ======== ======== ========
Weighted Average Yield for Year(1) 7.69% 7.85% 8.27% 8.96% 7.77%
Available-for-Sale Portfolio
U.S. Treasury and other
U.S. government agencies $ 56,142 $ 479 $155,969 $ 28,568 $241,158
Mortgage-backed securities 41,083 130,213 75,236 51,127 297,659
States and political subdivisions 514 7,766 29,959 96,414 134,653
Other 3,023 545 2,000 39,044 44,612
-------- -------- -------- -------- --------
Total Available-for-Sale Portfolio Value $100,762 $139,003 $263,164 $215,153 $718,082
======== ======== ======== ======== ========
Weighted Average Yield for Year(1) 7.15% 7.60% 7.09% 7.34% 7.27%
(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.
MARKET RISK/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 and reviewed
and approved annually. The Board of Directors delegates responsibility for
carrying out the asset/liability management policies to the Asset/Liability
Management Committee (ALCO). In this capacity, ALCO develops guidelines and
strategies impacting the Company's asset/liability management activities based
upon estimated market risk sensitivity, policy limits, and overall market
interest rate-related level and trends.
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 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.
27
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 (BP) movement in rates from current levels. While such an aggressive
movement in rates provides management with good insight as to how the Company's
net interest income may perform under extreme market conditions, results from a
more modest shift in interest rates are used as a basis to conduct day-to-day
business decisions.
The following reflects the Company's one-year net interest income sensitivity
based on asset and liability levels on December 31, 2000, assuming no growth in
the balance sheet, and assuming a 200 basis point instantaneous rate shock 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 000's) Net Interest Income
+ 200 bp $(1,542) (2.2%)
- 200 bp $ 646 0.9%
A second simulation was performed based on what the Company believes to be
conservative levels of balance sheet growth--high single digit growth in loans,
low single digit growth in deposits, and necessary increases in borrowings, with
no growth in investments or any other major portions of the balance sheet--
along with 200 BP movements over a twelve month period in the prime rate,
federal funds rate, and a Treasury yield curve moving closer to historical
spreads to fed funds. Under this set of assumptions, the Bank's net interest
income is showing a mild level of sensitivity to rising interest rates. In a
falling interest rate environment, net interest income is slightly better than
if rates were unchanged as a result of balance sheet strategies implemented
throughout 2000.
MANAGEMENT MODEL
------------------------------------------------------------------------------
Rate Change Dollar Change Percent of Flat Rate
In Basis Points (in 000's) Net Interest Income
+ 200 bp $(1,642) (2.3%)
- 200 bp $1,549 2.2%
The preceding interest rate risk analysis does 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 cash flows,
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 analysis does
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 2000, this
ratio was 13.6% and 12.8%, respectively, excluding the Company's capacity to
borrow additional funds from the Federal Home Loan Bank.
28
GAP REPORT
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
as of December 31, 2000
Volumes 1-30 31-60 60-90 91-180 181-360 13-24 25-36 37-48
($000's) Days Days Days Days Days Months Months Months
------------------------ -------- --------- --------- --------- ----------- ---------- ---------- ---------
ASSETS:
Due from banks - - - - - - - -
Money Market Inv 424 - - - - - - -
Fixed Rate Debentures - - - 6,822 49,551 - 10,479 23,346
Municipals 316 247 487 1,427 1,466 1,317 457 1,459
Fixed Rate Mortgage - - - - - - - -
Backed 2,185 1,920 2,395 10,162 20,684 31,658 33,340 26,418
Floating Rate Mortgage - - - - - - - -
Backed 24,844 - - - - - - -
Other Investments - - - - 3,023 545 - 3,721
------- ------ ------ ------- ------- ------- ------- -------
TOTAL INVESTMENTS 27,769 2,167 2,882 18,411 74,724 33,520 44,276 54,944
------- ------ ------ ------- ------- ------- ------- -------
Mortgages:
Adjustable Rate 204 221 2,206 3,923 10,009 1,978 - -
Fixed Rate 5,107 5,178 5,101 14,739 27,116 45,838 36,378 28,736
Variable Home Equity 39,028 6,329 294 3,418 4,444 - - -
Commercial Variable 225,271 - - - - - - -
Other Commercial 41,638 5,093 5,131 15,618 32,280 62,422 16,360 -
Installment, Net 9,110 9,559 9,597 28,804 54,591 94,011 68,769 43,699
------- ------ ------ ------- ------- ------- ------- -------
TOTAL LOANS 320,358 26,380 22,329 66,502 128,440 204,249 121,507 72,435
Loan Loss Reserve - - - - - - - -
Other Assets - - - - - - - -
------- ------ ------ ------- ------- ------- ------- -------
TOTAL ASSETS 348,127 28,547 25,211 84,913 203,164 237,769 165,783 127,379
AVERAGE YIELD 9.81% 9.14% 8.71% 8.68% 8.35% 8.72% 8.50% 8.10%
======= ====== ====== ======= ======= ======= ======= =======
LIABILITIES AND CAPTIAL:
Demand Deposits - - - - - - - -
Savings / NOW 1,354 1,354 1,354 4,063 18,542 16,253 - -
Money Markets - - - 84,154 27,852 - - -
CD's / IRA / Other 73,903 54,490 41,660 149,099 276,635 106,178 15,463 6,430
------- ------ ------ ------- ------- ------- ------- -------
TOTAL DEPOSITS 75,257 55,844 43,014 237,316 323,029 122,431 15,463 6,430
Short Term Borrowings 133,000 50,000 - - - - - -
Term Borrowing 6,100 - - - - 10,000 5,000 -
Trust Securities - - - - - - - -
Other Liabilities - - - - - - - -
Capital - - - - - - - -
------- ------ ------ ------- ------- ------- ------- -------
TOTAL LIABILITIES
AND CAPITAL 214,357 105,844 43,014 237,316 323,029 132,431 20,463 6,430
AVERAGE RATE 6.26% 5.81% 5.49% 5.15% 5.87% 5.84% 5.64% 5.28%
======= ====== ====== ======= ======= ======= ======= =======
GAP 133,770 (77,297) (17,803) (152,403) (119,865) 105,338 145,320 120,949
CUMULATIVE GAP 133,770 56,473 38,670 (113,733) (233,598) (128,260) 17,060 138,009
CUMULATIVE GAP/
TOTAL ASSETS 6.7% 2.8% 1.9% -5.7% -11.7% -6.4% 0.9% 6.9%
Volumes 49-60 Over 60
($000's) Months Months TOTAL
------------------------ --------- ---------- -----------
ASSETS:
Due from banks - 58,880 58,880
Money Market Inv - - 424
Fixed Rate Debentures 43,575 107,386 241,159
Municipals 6,529 126,223 139,928
Fixed Rate Mortgage - - -
Backed 18,141 125,992 272,895
Floating Rate Mortgage - - -
Backed - - 24,844
Other Investments - 64,115 71,404
------- ------- ---------
TOTAL INVESTMENTS 68,245 482,596 809,534
------- ------- ---------
Mortgages:
Adjustable Rate - - 18,541
Fixed Rate 22,495 74,886 265,574
Variable Home Equity - - 53,513
Commercial Variable - - 225,271
Other Commercial - (239) 178,303
Installment, Net 17,155 22,230 357,525
------- ------- ---------
TOTAL LOANS 39,650 96,877 1,098,727
Loan Loss Reserve - (14,614) (14,614)
Other Assets - 128,988 128,988
------- ------- ---------
TOTAL ASSETS 107,895 693,847 2,022,635
AVERAGE YIELD 7.91% 4.66% 7.38%
======= ======= =========
LIABILITIES AND CAPTIAL:
Demand Deposits - 258,004 258,004
Savings / NOW - 314,234 357,154
Money Markets - - 112,006
CD's / IRA / Other 5,364 1,344 730,566
------- ------- ---------
TOTAL DEPOSITS 5,364 573,582 1,457,730
Short Term Borrowings - - 183,000
Term Borrowing - 165,000 186,100
Trust Securities - 29,824 29,824
Other Liabilities - 26,603 26,603
Capital - 139,378 139,378
------- ------- ---------
TOTAL LIABILITIES
AND CAPITAL 5,364 934,387 2,022,635
AVERAGE RATE 5.91% 1.95% 4.00%
======= ======= =========
GAP 102,531 (240,540)
CUMULATIVE GAP 240,540 -
CUMULATIVE GAP/
TOTAL ASSETS 12.0% 0.0%
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.
29
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.
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 September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities - a Replacement
of SFAS No. 125". This statement revises the accounting and reporting standards
for transfers and servicing of financial assets and extinguishment of
liabilities. Under the financial components approach, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. SFAS No. 140 is effective for
transfers and servicing of financial assets and extinguishment of liabilities
occurring after March 31, 2001 and accordingly would apply to the Company for
the quarter ended June 30, 2001. The provisions of this statement are not
expected to have a significant change on the Company's current accounting for
transfers and servicing of financial assets.
30
SUBSEQUENT EVENTS
ACQUISITION OF THE CITIZENS NATIONAL BANK OF MALONE, BASED IN MALONE, NEW YORK
On January 26, 2001, the Company acquired the Citizens National Bank of Malone
(CNB), an eighty-year-old commercial bank with $113 million in assets, $59
million in loans, and $90 million in deposits. Stockholders of Citizens Bank
received 1.70 shares of registered common stock of Community Bank System, Inc.
(NYSE: CBU), resulting in the issuance of 952,000 shares in the transaction,
which was recorded using the purchase method of accounting. Paul M. Cantwell,
Jr., former Chairman and President of Citizens, has become a member of the CBU
Board of Directors. Mr. Cantwell will also remain actively involved in Citizens'
market areas as a part-time consultant for a period of five years.
CNB's four offices in Franklin County--Brushton, Chateaugay, and two in
Malone--have the top deposit market share in their respective towns, resulting
in the Bank now in a virtual tie for the number one market share in Franklin
County at 22.0%. CNB's fifth office is in Hermon; it is the only banking
facility in the town, further strengthening the Bank's long-standing number one
market share in St. Lawrence County at 27.1%. These five branches are now being
administered from the Bank's Northern Market operations and management center in
Canton, NY.
PROPOSED ACQUISITION OF FIRST LIBERTY BANK CORP., BASED IN JERMYN, PENNSYLVANIA
On November 29, 2000, the Company announced its first strategic partnership
outside of New York State with the signing of a definitive agreement with First
Liberty Bank Corp. (NASDAQ-OTC: FLIB), a $647 million asset commercial bank
based in Jermyn, Pennsylvania, to acquire all the stock of FLIB. First Liberty
Bank & Trust will be merged into Community Bank, N.A. (CBNA), operating under
its present name in Pennsylvania as a division of CBNA. First Liberty has the
second largest deposit market share, at 17%, in Lackawanna County, where 11 of
its 13 branches are located; the remaining offices are located in Lucerne
County.
At CBU's closing price on November 28, 2000 of $24.30, the shares of CBU to be
received by FLIB shareholders would have a value of $86.7 million, or $13.61 per
share, representing a price to book value of 144% and a price/trailing earnings
ratio of 17.7 times. Based on CBU's current annualized quarterly dividend, FLIB
shareholders would realize a 37% increase in cash dividends per share. CBU will
issue approximately 3,566,000 shares in the transaction, which will be recorded
under the pooling method of accounting.
Pending approval by shareholders of both FLIB and CBU, and after regulatory
review and the satisfaction of other contingencies, the transaction is expected
to close in second quarter 2001. At that time, Saul Kaplan, Peter A. Sabia and
Harold S. Kaplan, FLIB's three largest shareholders, will become members of the
CBU Board of Directors. William M. Davis will remain as CEO of the Pennsylvania
division of Community Bank, N.A. FLIB has agreed not to solicit or pursue other
transactions, and the parties have executed an agreement providing CBU with an
option to acquire 19.9 percent of FLIB under certain conditions.
31
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this amendment 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
Date: October 24, 2001
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 24th day of October 2001.
/s/ Sanford A. Belden
------------------------------------------------------
Sanford A. Belden, Director, President
and Chief Executive Officer (Principal Executive Officer)
/s/ David G. Wallace
------------------------------------------------------
David G. Wallace
Treasurer (Principal Financial Officer)
/s/ Charles M. Ertel
------------------------------------------------------
Charles M. Ertel
Assistant Treasurer (Principal Accounting Officer)
/s/ John M. Burgess
------------------------------------------------------
John M. Burgess, Director
/s/ Paul M. Cantwell, Jr.
------------------------------------------------------
Paul M. Cantwell, Jr., Director
/s/ William M. Dempsey
------------------------------------------------------
William M. Dempsey, Director
/s/ Nicholas A. DiCerbo
------------------------------------------------------
Nicholas A. DiCerbo, Director
/s/ James A. Gabriel
------------------------------------------------------
James A. Gabriel, Director and
Chairman of the Board of Directors
/s/ Lee T. Hirschey
------------------------------------------------------
Lee T. Hirschey, Director
/s/ Harold Kaplan
------------------------------------------------------
Harold Kaplan, Director
/s/ Saul Kaplan
------------------------------------------------------
Saul Kaplan, Director
/s/ David C. Patterson
------------------------------------------------------
David C. Patterson, Director
/s/ Peter A. Sabia
------------------------------------------------------
Peter A. Sabia, Director
32
/s/ William N. Sloan
------------------------------------------------------
William N. Sloan, Director
33