SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X FOR ANNUAL AND TRANSITIONAL REPORTS PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2000
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Commission file number 0-11716COMMUNITY BANK SYSTEM, INC.(Exact name of registrant as specified in its charter)
Delaware 16-1213679
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(State or other jurisdiction of incorporation) (I.R.S.Employer Identification No.)
5790 Widewaters Parkway, DeWitt, New York 13214-1883
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(Address of principal executive offices) (Zip Code)
(315) 445-2282
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Registrant's telephone number, including area codeSecurities registered pursuant to Section 12(b) of the Act:
Common Stock, No Par
Securities registered pursuant to Section 12(g) of the Act:
NoneIndicate 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 7,960,923shares 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 onMarch 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 (the "Proxy Statement") is incorporated by reference in Part
III of this Annual Report on Form 10-K.
TABLE OF CONTENTSPART I Page
Item 1. Business 3
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Item 2. Properties 9
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Item 3. Legal Proceedings 9
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Item 4. Submission of Matters to a Vote of Security Holders 9
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Item 4A. Executive Officers of the Registrant 10
------------------------------------PART IIItem 5. Market for Registrant's Common Equity
and Related Shareholder Matters 11
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Item 6. Selected Financial Data 11
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Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
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Item 8. Financial Statements and Supplementary Data:
Community Bank System, Inc. and Subsidiaries:
Consolidated Statements of Financial Condition 40
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Consolidated Statements of Income 41
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Consolidated Statements of Changes in Shareholders' Equity 42
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Consolidated Statements of Cash Flows 43
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Notes to Consolidated Financial Statements 44
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Report of Independent Accountants 60
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Two Year Selected Quarterly Data, 2000 and 1999 61
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Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure---------------------------------------------- 61PART IIIItem 10. Directors and Executive Officers of the Registrant 62
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Item 11. Executive Compensation 62
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Item 12. Security Ownership of Certain Beneficial Owners and Management 62
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Item 13. Certain Relationships and Related Transactions 62
--------------------------PART IVItem 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 63
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Signatures
------------------------------------------------------------------------- 64Part IThis Annual Report on Form 10-K contains certain forward-looking statements with
respect to the financial condition, results of operations and business of the
Company. These forward-looking statements involve certain risks and
uncertainties. Factors that may cause actual results to differ materially from
those contemplated by such forward-looking statements are set forth herein under
the caption "Forward-Looking Statements."Item 1. BusinessGENERALCommunity Bank System, Inc. ("Company") was incorporated on April 15, 1983,
under the Delaware General Corporation Law. Its principal office is located at
5790 Widewaters Parkway, DeWitt, New York 13214 and its telephone number is
(315) 445-2282. The Company became a bank holding company in 1984 with the
acquisition of The St. Lawrence National Bank ("St. Lawrence Bank") on February
3, 1984 and the First National Bank of Ovid (renamed Horizon Bank, N.A or
"Horizon Bank") on March 2, 1984. Also in 1984 the Company obtained a national
bank charter for its third wholly-owned subsidiary bank, The Exchange National
Bank ("Exchange Bank"), and on July 1, 1984 Exchange Bank acquired the deposits
and certain of the assets of three branches of the Bank of New York located in
Southwestern New York. On September 30, 1987, the Company acquired The Nichols
National Bank ("Nichols Bank") located in Nichols, New York. On September 30,
1988, the Company acquired ComuniCorp, Inc., a one-bank holding company located
in Addison, New York, the parent company to Community National Bank ("Community
Bank").
On March 26, 1990, Community Bank opened the Corning Market Street branch from
the Company's acquisition of deposits and certain assets from Key Bank of
Central New York. On January 1, 1992, the Company's five banking affiliates
consolidated into a single, wholly-owned national banking subsidiary, known as
Community Bank, N.A. ("Bank"). On March 31, 1993, the Bank's marketing
representative office in Ottawa, Canada was closed. On June 3, 1994, the Company
acquired three branch offices in Canandaigua, Corning and Wellsville, New York
from the Resolution Trust Corporation. At that time, the preexisting Canandaigua
branch office loans and deposits were transferred into the new facility. On
October 28, 1994, the Company acquired the Cato, New York branch of The Chase
Manhattan Bank, N.A. On July 14, 1995, the Company acquired 15 branch offices
from The Chase Manhattan Bank, N.A. located in Norwich, Watertown (two),
Boonville, New Hartford, Utica, Skaneateles, Geneva, Pulaski, Seneca Falls,
Hammondsport, Canton, Newark (two), and Penn Yan, New York ("Chase Branches").
On December 15, 1995, the Company sold three of the former Chase Branches,
located in Norwich, New Hartford, and Utica, to NBT Bank, N.A. On June 16, 1997
the Company acquired eight branches from Key Bank of New York located in Alfred,
Cassadaga, Clymer, Cuba, Gowanda, Ripley, Sherman, and Wellsville in
Southwestern New York State. On July 18, 1997 the Company acquired 12 branches
from Fleet Bank located in Old Forge, Boonville, Ogdensburg, St. Regis Falls,
Gateway Plaza, Watertown (2), Clayton, Lowville, Massena (2), and Gouverneur in
Northern and Central New York State. Seven of the former Fleet offices or
existing Bank offices in Watertown (2), Boonville, Ogdensburg, Gouverneur, and
Massena (2) have since been or are scheduled to be combined. On January 26,
2001, the Company purchased the Citizens National Bank of Malone, with its
offices in Brushton, Chateaugay, Hermon, and Malone (2) being administered from
the Bank's Northern Market operations and management center in Canton, NY.
The Company had a wholly-owned data processing subsidiary, Northeastern Computer
Services, Inc. ("Northeastern"). Northeastern was acquired by the Company from
The St. Lawrence Bank on May 31, 1984 pursuant to a corporate reorganization.
Northeastern had previously been a wholly-owned subsidiary of The St. Lawrence
Bank and was the survivor of a merger with Lawban Computer Systems, Inc.,
another wholly-owned subsidiary of the St. Lawrence Bank. Northeastern's office
was located at 6464 Ridings Road, Syracuse, New York. In December 1991, the
Company entered into a five year agreement with Mellon Bank, N.A. ("Mellon") to
provide data processing services. The agreement has twice been renewed with the
subsequent acquiror of Mellon's data services, Fiserv, Inc., for a term now
ending December 31, 2005. On June 30, 1992, Northeastern ceased operations. On
January 17, 1997 all the outstanding shares of common stock of Northeastern were
transferred from the Company to Community Bank, N.A. On that date, Northeastern
became a wholly-owned subsidiary of the Bank and changed its name to CBNA
Treasury Management Corporation ("TMC"). TMC is now utilized by the Bank to
manage its Treasury function, including asset/liability, investment portfolio,
and liquidity management.
The Company also had a wholly-owned mortgage banking subsidiary, Community
Financial Services, Inc.(CFSI), which was established in June 1986; it commenced
operation in January 1987. In July 1988, CFSI purchased Salt City Mortgage
Corp., a Syracuse-based mortgage broker. CFSI ceased operations in 1990 and was
renamed CFSI Close-Out Corp. in 1997.
On July 8, 1996, the Company acquired Benefit Plans Administrators (BPA) of
Utica, NY. The subsidiary was renamed Benefit Plans Administrative Services,
Inc., continuing as a pension administration and consulting firm serving
sponsors of defined benefit and defined contribution plans.
On February 3, 1997, the Company formed a subsidiary business trust, Community
Capital Trust I, for the purpose of issuing preferred securities, which qualify
as Tier 1 capital. Concurrent with its formation, the trust issued $30,000,000
of 9.75% preferred securities in an exempt offering maturing in year 2027 and
guaranteed by the Company. The entire net proceeds to the trust from the
offering were invested in junior subordinated obligations of the Company.
On June 19, 1998, the Company formed a subsidiary, Community Financial Services,
Inc. (CFSI), to offer selected insurance products through its own agency.
On December 22, 1998, the Company formed a broker-dealer subsidiary, Community
Investment Services, Inc. (CISI). The subsidiary became fully operational in
March 1999, with twelve Financial Consultants available to provide investment
advice and products to customers.
On February 26, 1999, CBNA Preferred Funding Corp., a Real Estate Investment
Trust (REIT), was established as a subsidiary of the Bank to hold fixed rate
real estate mortgages that are serviced by the Bank.
On April 3, 2000, the Company acquired Elias Asset Management, Inc., of
Williamsville, NY, a nationally recognized firm with $650 million in assets
under management for individuals, corporate pension and profit sharing plans,
and foundations.
On January 26, 2001, the Company acquired the Citizens National Bank of Malone,
an eighty-year-old commercial bank with $113 million in assets, $59 million in
loans, $90 million in deposits, and offices in Brushton, Chateaugay, Hermon, and
Malone, NY (2). Its five branches are now part of Community Bank, N.A., being
administered from the Bank's Northern Market operations and management center in
Canton, NY.
The Company provides banking services through its two regional offices at 45-49
Court Street, Canton, New York and 201 North Union Street, Olean, New York, as
well as through 72 customer facilities (including the five facilities acquired
from the Citizens National Bank of Malone on January 26, 2001) in the eighteen
counties of St. Lawrence, Jefferson, Lewis, Oneida, Cayuga, Seneca, Ontario,
Oswego, Wayne, Yates, Allegany, Cattaraugus, Tioga, Steuben, Chautauqua,
Franklin, Herkimer, and Onondaga. The administrative office is located at 5790
Widewaters Parkway, DeWitt, New York, in Onondaga County.
The Bank is a community retail bank committed to the philosophy of serving the
financial needs of customers in local communities. The Bank's branches are
generally located in small towns and villages within its geographic market
areas. The Company believes that the local character of business, knowledge of
the customer and customer needs, and comprehensive retail and small business
products, together with responsive decision-making at the branch and regional
level, enable the Bank to compete effectively. The Bank is a member of the
Federal Reserve System and the Federal Home Loan Bank of New York ("FHLB"), and
its deposits are insured by the FDIC up to applicable limits.
Unless the context otherwise provides, all references in this Annual Report on
Form 10-K to the "Company" shall mean, collectively, Community Bank System, Inc.
and its subsidiaries.Banking ServicesThe Bank offers a range of commercial and retail banking services in each of its
market areas to business, individual, agricultural and government customers.Account Services. The Bank's account services include checking accounts,
interest-checking accounts, money market accounts, savings accounts, time
deposit accounts, and individual retirement accounts.Lending Activities. The Bank's lending activities include the making of
residential and farm loans, business lines of credit, working capital
facilities, inventory and dealer floor plans, as well as installment,
commercial, term and student loans.
The Company's predominant focus on the retail borrower enables its loan
portfolio to be highly diversified. About 64% of loans outstanding are oriented
to consumers borrowing on an installment and residential mortgage loan basis. In
addition, the typical loan to the Company's commercial business borrowers is
under $75,000, with approximately 83% of its customers representing about 28% of
commercial loans outstanding.Other Services. The Bank offers a range of trust services, including personal
trust, employee benefit trust, investment management, financial planning and
custodial services. In addition, the Bank offers nonbank financial products
including fixed- and variable-rate annuities, mutual funds, and stock
investments. The Bank also offers safe deposit boxes, travelers checks, money
orders, wire transfers, collections, foreign exchange, drive-in facilities,
automatic teller machines (ATMs), and twenty-four hour depositories. Customers
of the Bank also receive pension administration and consulting service
pertaining to their defined benefit and defined contribution plans from CBSI's
nonbank subsidiary, Benefit Plans Administrative Services, Inc. (BPA); BPA also
provides services to nonbank customers.CompetitionThe Company, through the Bank, competes in three distinct banking markets in the
Northern ("Northern Market"), Finger Lakes ("Finger Lakes Market"), and Southern
Tier ("Southern Tier Market") regions of New York State. The Bank considers its
market areas in these regions to be the counties in which it has banking
facilities. Major competitors in these markets primarily include local branches
of banks based in Boston, Massachusetts; Albany or Buffalo, New York; and
Cleveland, Ohio, as well as local independent banking and thrift institutions
and federal credit unions. Other competitors for deposits and loans within the
Bank's market areas include insurance companies, money market funds, consumer
finance companies and financing affiliates of consumer durable goods
manufacturers. Lastly, personal and corporate trust and investment counseling
services in competition with the Bank are offered by insurance companies,
investment counseling firms, other financial service firms, and individuals.Northern Market. Branches in the Northern Market (including the five branches
comprising the former Citizens National Bank of Malone) compete for loans and
deposits in the six county market area of St. Lawrence, Jefferson, Lewis,
Franklin, Herkimer, and Oneida Counties in Northern New York State. Within this
market area, the Bank maintains a market share(1) of 10.7%, including commercial
banks, credit unions, savings and loan associations and savings banks. However,
in its four county primary market area (Franklin, Jefferson, Lewis, and St.
Lawrence), the Bank has a 22.2% share. The Bank operates 32 customer facilities
in this market and is ranked either first or second in market share in 21 of the
24 towns where these offices are located.Finger Lakes Market. In the Finger Lakes Market, the Bank operates 14 customer
facilities competing for loans and deposits in the six-county market area of
Seneca, Oswego, Ontario, Wayne, Onondaga, and Cayuga Counties. Within the Finger
Lakes Market area, the Bank maintains a market share (1) of approximately 2.6%,
including commercial banks, credit unions, savings and loan associations and
savings banks. However, the Bank's primary market within this region is Seneca
County, where the Bank has a 33.4% share. The Bank is ranked either first or
second in market share in six of the eleven Finger Lakes Market area towns where
its offices are located.Southern Tier Market. The Bank's Southern Tier Market consists of two
sub-markets, the Olean submarket and the Corning submarket.Olean Submarket. The Olean Submarket competes for loans and deposits in the
primary market area of Cattaraugus, Chautauqua, and Allegany Counties in the
Southern Tier of New York State. Within this area, the Bank maintains a market
share (1) of approximately 13.9%, including commercial banks, credit unions,
savings and loan associations and savings banks. The Olean Submarket operates 16
office locations and the Bank is ranked either first or second in market share
in 12 of the 14 towns where these offices are located.Corning Submarket. The Corning Submarket competes for loans and deposits in the
primary market area of Steuben, Yates and Tioga Counties in the Southern Tier of
New York State. Within this area, the Bank maintains a market share (1) of
approximately 9.9%, including commercial banks, credit unions, savings and loan
associations and savings banks. The Corning Submarket operates ten office
locations, and the Bank is ranked either first or second in market share in
seven of the eight towns where these offices are located. The Bank also competes
for loans where it has no banking facilities; this secondary market area
includes Chemung and Schuyler Counties in New York State, and Tioga County in
Pennsylvania.
(1) Deposit market share data as of June 30, 1999, the most recent information
available, calculated by Sheshunoff Information Services, Inc. Includes all five
branches of the former Citizens National Bank of Malone, acquired by the Company
on January 26, 2001.
The table below summarizes the Bank's deposits and market share by the eighteen
counties in which it has customer facilities. Market share is based on deposits
of all commercial banks, credit unions, savings and loan associations, and
savings banks.
Number of
CBNA Towns Where
Deposits Number of CBNA
6/30/99 Market CBNA Has 1st or 2nd Banking
County (000's) Share Facilities Market Position Market
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Lewis $82,347 40.7 % 4 3 Northern
Seneca 93,527 33.4 5 3 Finger Lakes
Allegany 90,117 27.2 5 4 Olean
St. Lawrence 305,064 27.1 15 10 Northern
Cattaraugus 184,667 23.5 5 4 Olean
Yates 49,232 22.4 1 1 Corning
Franklin 103,261 22.0 5 4 Northern
Jefferson 135,898 13.3 5 2 Northern
Tioga 30,194 9.5 2 1 Corning
Steuben 91,299 7.7 7 5 Corning
Wayne 48,395 6.2 2 0 Finger Lakes
Ontario 59,708 6.0 3 0 Finger Lakes
Herkimer 26,846 4.9 1 1 Northern
Chautauqua 50,279 4.1 6 4 Olean
Oswego 40,106 4.1 2 2 Finger Lakes
Oneida 56,587 1.7 2 1 Northern
Cayuga 12,907 1.7 1 1 Finger Lakes
Onondaga 8,498 0.1 1 0 Finger Lakes
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18 $1,468,932 7.1 % 72 46 CBNAEmployeesAs of December 31, 2000, the Company employed 716 full-time equivalent
employees, 642 providing banking services and 74 providing financial services.
At year-end 1999, there were 711 full-time equivalent employees, 651 providing
banking services and 60 providing financial services. The Company offers a
variety of employment benefits and considers its relationship with its employees
to be good.CERTAIN REGULATORY CONSIDERATIONSBank holding companies and national banks are regulated by state and federal
law. The following is a summary of certain laws and regulations that govern the
Company and the Bank. To the extent that the following information describes
statutory or regulatory provisions, it is qualified in its entirety by reference
to the actual statutes and regulations thereunder.Bank Holding Company SupervisionThe Company is registered as a bank holding company under the Bank Holding
Company Act of 1956, as amended (the "BHCA") and as such is subject to
regulation by the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board"). As a bank holding company, the Company's activities and those
of its subsidiary have historically been limited to the business of banking and
activities closely related or incidental to banking. On March 12, 2000, however,
the Gramm-Leachy-Bliley Act took effect, relaxing the previous limitations and
permitting bank holding companies to engage in a broader range of financial
activities (see "Financial Services Modernization Act" in the final section of
this discussion for details).
Under Federal Reserve Board policy, a bank holding company is expected to act as
a source of financial strength to its subsidiary banks and to make capital
contributions to a troubled bank subsidiary. The Federal Reserve Board may
charge the bank holding company with engaging in unsafe and unsound practices
for failure to commit resources to a subsidiary bank when required. A required
capital injection may be called for at a time when the Company does not have the
resources to provide it. Any capital loans by the Company to its subsidiary bank
would be subordinate in right of payment to depositors and to certain other
indebtedness of such subsidiary banks.
The BHCA requires the prior approval of the Federal Reserve Board in any case
where a bank holding company proposes to acquire direct or indirect ownership or
control of more than 5% of any class of the voting shares of, or substantially
all of the assets of, any bank (unless it owns a majority of such bank's voting
shares) or otherwise to control a bank or to merge or consolidate with any other
bank holding company. The BHCA also prohibits a bank holding company, with
certain exceptions, from acquiring more than 5% of the voting shares of any
company that is not a bank.
The Riegal-Neal Interstate Banking and Efficiency Act of 1994 (enacted on
September 29, 1994) provides that, among other things, substantially all state
law barriers to the acquisition of banks by out-of-state bank holding companies
are eliminated effective September 29, 1995. The law also permits interstate
branching by banks effective as of June 1, 1997, subject to the ability of
states to opt-out completely or to set an earlier effective date. The Company
believes that the effect of the law has been to increase competition within the
markets where the Company operates, although the Company cannot quantify the
effect to which competition has increased in such markets or the timing of such
increases.OCC SupervisionThe Bank is supervised and regularly examined by the Office of the Comptroller
of the Currency (OCC). The various laws and regulations administered by the OCC
affect corporate practices such as payment of dividends, incurring debt, and
acquisition of financial institutions and other companies, and affect business
practices, such as payment of interest on deposits, the charging of interest on
loans, types of business conducted and location of offices. There are no
regulatory orders or outstanding issues resulting from regulatory examinations
of the Bank.Limits on Dividends and Other Revenue SourcesThe Company's ability to pay dividends to its shareholders is largely dependent
on the Bank's ability to pay dividends to the Company. In addition to state law
requirements and the capital requirements discussed below, the circumstances
under which the Bank may pay dividends are limited by federal statutes,
regulations and policies. For example, as a national bank, the Bank must obtain
the approval of the OCC for the payment of dividends if the total of all
dividends declared in any calendar year would exceed the total of the Bank's net
profits, as defined by applicable regulations, for that year, combined with its
retained net profits for the preceding two years. Furthermore, the Bank may not
pay a dividend in an amount greater than its undivided profits then on hand
after deducting its losses and bad debts, as defined by applicable regulations.
At December 31, 2000, the Bank had $17.8 million in undivided profits legally
available for the payment of dividends.
In addition, the Federal Reserve Board and the OCC are authorized to determine
under certain circumstances that the payment of dividends would be an unsafe or
unsound practice and to prohibit payment of such dividends. The payment of
dividends that deplete a bank's capital base could be deemed to constitute such
an unsafe or an unsound practice. The Federal Reserve Board has indicated that
banking organizations should generally pay dividends only out of current
operating earnings.
There are also statutory limits on the transfer of funds to the Company by its
banking subsidiary whether in the form of loans or other extensions of credit,
investments or asset purchases. Such transfers by the Bank to the Company
generally are limited in amount to 10% of the Bank's capital and surplus, or 20%
in the aggregate. Furthermore, such loans and extensions of credit are required
to be collateralized in specified amounts.Capital RequirementsThe Federal Reserve Board has established risk-based capital guidelines which
are applicable to bank holding companies. The guidelines established a framework
intended to make regulatory capital requirements more sensitive to differences
in risk profiles among banking organizations and take off-balance sheet
exposures into explicit account in assessing capital adequacy. The Federal
Reserve Board guidelines define the components of capital, categorize assets
into different risk classes, and include certain off-balance sheet items in the
calculation of risk-weighted assets. At least half of the total capital must be
comprised of common equity, retained earnings and a limited amount of perpetual
preferred stock, less goodwill ("Tier I capital"). Banking organizations that
are subject to the guidelines are required to maintain a ratio of Tier I capital
to risk-weighted assets of at least 4.00% and a ratio of total capital to
risk-weighted assets of at least 8.00%. The appropriate regulatory authority may
set higher capital requirements when an organization's particular circumstances
warrant. The remainder ("Tier 2 capital") may consist of a limited amount of
subordinated debt, limited-life preferred stock, certain other instruments and a
limited amount of loan and lease loss reserves. The sum of Tier I capital and
Tier 2 capital is "total risk-based capital." The Company's Tier I and total
risk-based capital ratios as of December 31, 2000 were 9.06% and 10.25%,
respectively.
In addition, the Federal Reserve Board has established a minimum leverage ratio
of Tier I capital to quarterly average assets less goodwill ("Tier I leverage
ratio") of 3.00% for bank holding companies that meet certain specified
criteria, including that they have the highest regulatory rating. All other bank
holding companies are required to maintain a Tier I leverage ratio of 3.00% plus
an additional cushion of at least 100 to 200 basis points. The Company's Tier I
leverage ratio as of December 31, 2000 was 5.79%, which exceeded its regulatory
requirement of 4.00%. The guidelines also provide that banking organizations
experiencing internal growth or making acquisitions will be expected to maintain
strong capital positions substantially above the minimum supervisory levels,
without significant reliance on intangible assets. The Company is subject to the
same OCC capital requirements as those that apply to the Bank.Federal Deposit Insurance Corporation Improvement Act of 1991In December 1991, Congress enacted the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), which substantially revised the bank
regulatory and funding provisions of the Federal Deposit Insurance Act and made
significant revisions to several other federal banking statutes. FDICIA provides
for, among other things, (i) a recapitalization of the Bank Insurance Fund (the
"BIF") of the FDIC by increasing the FDIC's borrowing authority and providing
for adjustments in its assessment rates; (ii) annual on-site examinations of
federally-insured depository institutions by banking regulators; (iii) publicly
available annual financial condition and management reports for financial
institutions, including audits by independent accountants; (iv) the
establishment of uniform accounting standards by federal banking agencies; (v)
the establishment of a "prompt corrective action" system of regulatory
supervision and intervention, based on capitalization levels, with more scrutiny
and restrictions placed on depository institutions with lower levels of capital;
(vi) additional grounds for the appointment of a conservator or receiver; (vii)
a requirement that the FDIC use the least-cost method of resolving cases of
troubled institutions in order to keep the costs to insurance funds at a
minimum; (viii) more comprehensive regulation and examination of foreign banks;
(ix) consumer protection provisions including a Truth-in-Savings Act; (x) a
requirement that the FDIC establish a risk-based deposit insurance assessment
system; (xi) restrictions or prohibitions on accepting brokered deposits, except
for institutions which significantly exceed minimum capital requirements; and
(xii) certain additional limits on deposit insurance coverage.
FDICIA requires federal banking agencies to take "prompt corrective action" with
respect to banks that do not meet minimum capital requirements. FDICIA
establishes five capital tiers: "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." The following table sets forth the minimum capital ratios
that a bank must satisfy in order to be considered "well capitalized" or
"adequately capitalized" under Federal Reserve Board regulations:Well Capitalized   Adequately CapitalizedTotal Risk-Based Capital Ratio 10% 8%
Tier I Risk-Based Capital Ratio 6% 4%
Tier I Leverage Ratio 5% 4%
If a bank does not meet all of the minimum capital ratios necessary to be
considered "adequately capitalized," it will be considered "undercapitalized,"
"significantly undercapitalized," or "critically undercapitalized," depending
upon the amount of the shortfall in its capital. As of December 31, 2000, the
Bank's total risk-based capital ratio and Tier I risk - based capital ratio were
10.63% and 9.41%, respectively, and its Tier I leverage ratio as of such date
was 5.89%. Notwithstanding the foregoing, if its principal federal regulator
determines that an "adequately capitalized" institution is in an unsafe or
unsound condition or is engaging in an unsafe or unsound practice, it may
require the institution to submit a corrective action plan; restrict its asset
growth; and prohibit branching, new acquisitions, and new lines of business.
Among other things, an institution's principal federal regulator may deem the
institution to be engaging in an unsafe or unsound practice if it receives a
less than satisfactory rating for asset quality, management, earnings, or
liquidity in its most recent examination.
Possible sanctions for undercapitalized depository institutions include a
prohibition on the payment of dividends and a requirement that an institution
submit a capital restoration plan to its principal federal regulator. The
capital restoration plan of an undercapitalized bank will not be approved unless
the holding company that controls the bank guarantees the bank's performance.
The obligation of a controlling bank holding company to fund a capital
restoration plan is limited to the lesser of five percent (5%) of an
undercapitalized subsidiary's assets or the amount required to meet regulatory
capital requirements. If an undercapitalized depository institution fails to
submit or implement an acceptable capital restoration plan, it can be subjected
to more severe sanctions, including an order to sell sufficient voting stock to
become adequately capitalized. Critically undercapitalized institutions are
subject to the appointment of a receiver or conservator.
In addition, FDICIA requires regulators to impose new non-capital measures of
bank safety, such as loan underwriting standards and minimum earnings levels.
Regulators are also required to perform annual on-site bank examinations, place
limits on real estate lending by banks and tighten auditing requirements.Financial Services Modernization ActOn November 12, 1999, the Gramm-Leach-Bliley Act was signed into law, repealing
provisions of the depression-era Glass-Steagall Act, which prohibited commercial
banks, securities firms, and insurance companies from affiliating with each
other and engaging in each other's businesses. The major provisions of the Act
took effect on March 12, 2000.
The Act creates a new type of financial services company called a "Financial
Holding Company" (an "FHC"), a bank holding company with dramatically expanded
powers. FHCs may offer virtually any type of financial service, including
banking, securities underwriting, insurance (both agency and underwriting) and
merchant banking. The Federal Reserve serves as the primary "umbrella" regulator
of FHCs. Balanced against the attractiveness of these expanded powers are higher
standards for capital adequacy and management, with heavy penalties for
noncompliance.
Bank holding companies that wish to engage in expanded activities but do not
wish to become financial holding companies may elect to establish "financial
subsidiaries," which are subsidiaries of national banks with expanded powers.
The Act permits financial subsidiaries to engage in the same types of activities
permissible for nonbank subsidiaries of financial holding companies, with the
exception of merchant banking, insurance underwriting and real estate investment
and development. Merchant banking may be permitted after a five-year waiting
period under certain regulatory circumstances.
Implementing regulations under the Act have not yet been promulgated, and though
the Company cannot predict the full impact of the new legislation, there is
likely to be consolidation among financial services institutions and increased
competition for the Company. CBSI expects to remain a bank holding company for
the time being and access its options as circumstances change.Item 2. PropertiesThe Company leases its administrative offices at 5790 Widewaters Parkway,
DeWitt, New York and the facility that houses Benefit Plans Administrative
Services in Utica, New York. The Bank owns its regional offices in Olean, New
York and Canton, New York. Of the Bank's remaining 72 customer facilities
(including five branches added as a result of the Citizens National Bank of
Malone acquisition on January 26, 2001), 49 are owned by the Bank, and 23 are
located in long-term leased premises.
Real property and related banking facilities owned by the Company at December
31, 2000 had a net book value of $16.7 million and none of the properties was
subject to any encumbrances. For the year ended December 31, 2000, rental fees
of $943,000 were paid on facilities leased by the Company for its operations.Item 3. Legal ProceedingsNot applicableItem 4. Submission of Matters to a Vote of Security HoldersNot applicableItem 4A. Executive Officers of the RegistrantThe following table sets forth certain information about the executive officers
of the Company and the Bank, each of whom is elected by the Board of Directors
and each of whom holds office at the discretion of the Board of Directors.Name and Age PositionSanford A. Belden Director, President and Chief
Age 58 Executive Officer of the Company
and the Bank
David G. Wallace Treasurer of the Company and
Age 56 Executive Vice President and
Chief Financial Officer of the Bank
Michael A. Patton President, Financial Services
Age 55
James A. Wears President, Banking
Age 51
David J. Elias President , Chief Executive
Age 55 Officer, and Chief Investment
Officer,
Elias Asset Management, Inc.Sanford A. Belden (Director, President and Chief Executive Officer of the
Company and the Bank). Mr. Belden has been President and Chief Executive Officer
of the Company and the Bank since October 1, 1992. Mr. Belden was formerly
Manager, Eastern Region, Rabobank Nederland, New York, New York from 1990 to
1992 and prior thereto served as President, Community Banking, for First Bank
System, Minneapolis, Minnesota, a multi-state bank holding company.David G. Wallace (Treasurer of the Company; Executive Vice President and Chief
Financial Officer of the Bank). Mr. Wallace became Vice President and Chief
Financial Officer of the Bank and Treasurer of the Company in November 1988 and
Senior Vice President and Chief Financial Officer of the Bank in August 1991. He
assumed his current position in February 2000.Michael A. Patton (President, Financial Services). Mr. Patton was the President
and Chief Executive Officer of The Exchange National Bank, a former subsidiary
of the Company, from 1984 until January 1992, when, in connection with the
consolidation of the Company's five subsidiary banks into Community Bank, N.A.,
he was named President, Southern Region. He assumed his current position in
February 2000.James A. Wears (President, Banking). Mr. Wears served as Senior Vice President
of the St. Lawrence National Bank, a former subsidiary of the Company, from 1988
through January 1991 and as President and Chief Executive Officer from January
1991 until January 1992. Following the January 1992 consolidation of the
Company's five subsidiary banks into Community Bank, N.A., Mr. Wears was named
President, Northern Region. He assumed his current position in February 2000.David J. Elias (President, Chief Executive Officer, and Chief Investment
Officer, Elias Asset Management, Inc.). Mr. Elias assumed his present position
in April 2000 when his company, Elias Asset Management, Inc., was purchased by
Community Bank System, Inc.Part IIItem 5. Market for the Registrant's Common Stock and Related Shareholder MattersThe common stock has been trading on the New York Stock Exchange under the
symbol "CBU" since December 31, 1997. Prior to that, the common stock traded
over-the-counter on the NASDAQ National Market under the symbol "CBSI" beginning
on September 16, 1986. The following table sets forth the high and low prices
for the common stock, and the cash dividends declared with respect thereto, for
the periods indicated. ___ The prices do not include retail mark-ups, mark-downs
or commissions. There were 6,993,459 shares of common stock outstanding on
December 31, 2000 held by approximately 1,866 registered shareholders of record,
and approximately 2,580 shareholders whose shares are held in nominee name at
brokerage firms and other financial institutions.
COMMON STOCK PERFORMANCE
NYSE Symbol: CBU
Newspaper Listing: CmntyBkSys
Market (Bid) Price
High Low Closing Price Quarterly
-----------------------------
Year / Price Price Amount % Change Dividend
Qtr
2000
4th $25.94 $22.15 $24.75 -4.6% $0.27
3rd $26.03 $21.88 $25.94 16.9% $0.27
2nd $24.13 $22.00 $22.19 -2.7% $0.25
1st $23.38 $20.25 $22.81 -1.4% $0.25
1999
4th $27.19 $22.81 $23.13 -15.5% $0.25
3rd $28.44 $24.38 $27.38 7.9% $0.25
2nd $28.00 $22.63 $25.38 6.6% $0.23
1st $32.63 $23.81 $23.81 -16.6% $0.23
The Company has historically paid regular quarterly cash dividends on its common
stock, and declared a cash dividend of $0.27 per share for the first quarter of
2001. The Board of Directors of the Company presently intends to continue the
payment of regular quarterly cash dividends on the common stock, as well as to
make payment of regularly scheduled dividends on the trust preferred stock as
and when due, subject to the Company's need for those funds. However, because
substantially all of the funds available for the payment of dividends by the
Company are derived from the Bank, future dividends will depend upon the
earnings of the Bank, its financial condition, its need for funds and applicable
governmental policies and regulations. See "Supervision and Regulation -- Limits
On Dividends and Other Payments."Item 6. Selected Financial DataThe following table sets forth selected consolidated historical financial data
of the Company as of and for each of the years in the five year period ended
December 31, 2000. The historical "Income Statement Data" and historical "End of
Period Balance Sheet Data" are derived from the audited financial statements.
The "Per Share Data", "Selected Ratios" and "Other Data" for all periods are
unaudited. All financial information in this table should be read in conjunction
with the information contained in "Capitalization," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and with the
Consolidated Financial Statements and the related notes thereto included
elsewhere in this Annual Report on Form 10-K.SELECTED CONSOLIDATED FINANCIAL INFORMATIONYears ended December 31,
--------------------------------------------------------------
2000 1999 1998 1997 1996
--------------------------------------------------------------Income Statement Data:Interest income $145,221 $123,888 $122,938 $117,628 $97,688
Interest expense 74,012 55,947 58,543 54,752 42,422
Net interest income (Excl. FTE) 71,209 67,941 64,395 62,876 55,266
Provision for possible loan losses 7,182 5,136 5,123 4,480 2,897
Net interest income after provision
for for possible loan losses 64,027 62,805 59,272 58,396 52,369
Non-interest income 20,989 15,487 17,040 11,808 8,874
Non-interest expense 55,989 52,734 51,876 45,799 37,450
Cumululative effect of change in 0 0 328 0 0
accounting principle
Income before income taxes 29,027 25,558 24,764 24,406 23,793
Provision for income taxes 8,708 7,923 9,036 8,844 9,660
Net income $20,319 $17,635 $15,728 $15,562 $14,133End of Period Balance Sheet Data:Total assets $2,022,635 $1,840,702 $1,680,689 $1,633,742 $1,343,865
Loans, net of unearned discount 1,098,726 1,009,223 917,220 843,212 652,474
Earning assets (Excl. MVA) 1,849,375 1,686,605 1,503,549 1,450,429 1,229,443
Total deposits 1,457,730 1,360,306 1,378,066 1,345,686 1,027,213
Long-term debt 180,000 70,000 70,000 25,000 100,000
Trust securities 29,824 29,817 29,810 29,804 0
Shareholders' equity 139,376 108,487 120,165 118,012 109,352Average Balance Sheet Data:Total assets $1,914,570 $1,723,242 $1,670,624 $1,491,920 $1,251,826
Loans, net of unearned discount 1,056,229 951,167 884,751 749,596 602,717
Earning assets (Excl. MVA) 1,779,473 1,572,356 1,512,175 1,363,703 1,147,455
Total deposits 1,424,238 1,369,270 1,396,700 1,213,793 1,032,169
Long-term debt 111,568 70,000 89,805 79,863 57,006
Trust securities 29,824 29,814 29,810 27,290 0
Shareholders' equity 115,731 115,876 120,936 110,689 103,398Common Per Share Data:Net income (diluted) $2.85 $2.42 $2.05 $2.02 $1.83
Cash dividend declared 1.04 0.96 0.86 0.76 0.69
Period-end book value - stated 19.93 15.30 16.47 15.56 14.03
Period-end book value - tangible 12.64 8.32 9.01 7.82 9.85
Common Outstanding Shares:
Average during period (Incl. common 7,102,123 7,213,394 7,670,711 7,676,326 7,482,518
stock equivalents)
End of period (Excl. common stock 6,993,459 7,092,259 7,296,453 7,586,512 7,474,406
equivalents)
Selected Ratios:
Return on average total assets 1.06% 1.02% 0.94% 1.04% 1.13%
Return on average shareholders' 17.56% 15.22% 13.01% 14.09% 13.88%
equity (Excl.
preferred stock)
Common dividend payout ratio 35.98% 39.05% 41.15% 37.30% 37.27%
Net interest margin (taxable 4.29% 4.59% 4.31% 4.64% 4.86%
equivalent basis)
Noninterest income to average assets 1.10% 0.90% 1.02% 0.79% 0.71%
Noninterest income to operating 21.70% 18.30% 19.00% 15.30% 13.60%
income
Efficiency ratio 52.60% 53.90% 58.50% 55.00% 53.40%
Non-performing loans to period-end 0.55% 0.57% 0.43% 0.49% 0.44%
total loans
Non-performing assets to period-end
total loans and
other real estate owned 0.65% 0.67% 0.56% 0.60% 0.55%
Allowance for loan losses to 1.33% 1.33% 1.36% 1.47% 1.25%
period-end loans
Allowance for loan losses to 240.40% 234.93% 312.12% 297.96% 285.58%
period-end non-performing loans
Allowance for loan losses to 205.80% 199.70% 234.60% 246.02% 224.33%
period-end non-performing
assets
Net charge-offs (recoveries) to 0.57% 0.44% 0.58% 0.50% 0.29%
average total loans
Average net loans to average total 74.16% 69.47% 63.35% 61.76% 58.39%
deposits
Period-end total shareholders' 6.89% 5.89% 7.15% 7.22% 8.14%
equity to period end assets
Tier I capital to risk-adjusted 9.06% 9.28% 9.24% 9.28% 10.70%
assets
Total risk-based capital to 10.25% 10.50% 10.49% 10.53% 11.83%
risk-adjusted assets
Tier I leverage ratio 5.79% 5.80% 5.71% 5.67% 5.88%Item 7. Management's Discussion and Analysis of Financial Condition and Results ofOperationsThis Management's Discussion and Analysis of Financial Condition and Results of
Operations contains certain forward-looking statements with respect to the
financial condition, results of operations and business of Community Bank
System, Inc. ("CBSI" or "the Company"). These forward-looking statements involve
certain risks and uncertainties. Factors that may cause actual results to differ
materially from those contemplated by such forward-looking statements are set
herein under the caption "Forward-Looking Statements."
The following discussion is intended to facilitate an understanding and
assessment of significant changes in trends related to the financial condition
of the Company and the results of its operations. The following discussion and
analysis should be read in conjunction with the Selected Consolidated Financial
Information and the Company's Consolidated Financial Statements and related
notes thereto appearing elsewhere in this Form 10-K. All references in the
discussion to financial condition and results of operations are to the
consolidated position and results of the Company and its subsidiaries taken as a
whole.Net Income and ProfitabilityNet 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 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 MeasuresReturn 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 17.56% 15.22% 13.01%
shareholders equity
Percentage of dividends declared per common
share 35.98% 39.05% 41.95%
to net income per common share
Percentage of average shareholders' equity to 6.04% 6.72% 7.24%
average total assetsNet Interest IncomeNet 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.
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.
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 Avg. Amt.of Avg. Avg. Amt.of Avg. Avg of Amt. Avg.
yields and rates) Balance Interest Yield/ Balance Interest Yield/ Balance Interest Yield/Rate
Rate Rate
Paid Paid 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 462 27 5.81% 129 5 4.24% 35 2 5.51%
other banks
Taxable investment 586,254 42,935 7.32% 521,912 35,519 6.81% 592,559 38,290 6.46%
securities
Nontaxable 26,546 9,610 7.59% 98,482 7,210 7.32% 29,402 2,308 7.85%
investment securities
Loans (net of 1,056,229 97,216 9.20% 951,167 85,408 8.98% 884,751 82,778 9.36%
unearned discount)
------------------- -------------------- --------------------
Total 1,779,473 150,369 8.45% 1,572,356 128,175 8.15% 1,512,175 123,674 8.18%
interest-earning assets
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 unrealizedgains/(losses)
on available-for-sale(18,893) (3,034) 5,376
portfolio
---------- ----------- -----------
Total $1,914,570 $1,723,242 1,670,642
========== =========== ===========
LIABILITIES AND
SHAREHOLDERS EQUITY:
Interest-bearing
liabailities
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 219,794 14,356 6.53% 119,830 6,278 5.24% 13,915 754 5.42%
borrowings
Long-term borrowings 141,392 9,452 6.68% 99,814 6,895 6.91% 119,615 8,120 6.79%
------------------- -------------------- --------------------
Total 1,537,499 74,013 4.81% 1,353,039 55,947 4.13% 1,315,233 58,544 4.45%
interest-bearing
liabilities
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 4.29% 4.59% 4.31%
interest-earning assets
======== ======== ========
Federal tax exemption on
nontaxable investment
securities and loans $5,147 $4,286 $736
included in interest
income
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 Increase (Decrease) Due to
Change In (1) Change In (1)
Net Net
Volume Rate Change Volume Rate Change
------ ---- ------ ------ ---- ------
Interest earned on:
Federal funds sold and
securities purchased under $541 $7 $548 ($238) ($25) ($263)
agreements to resell
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 $8,195 $9,871 $18,066 $1,648 ($4,245) ($2,597)
liabilities (2)
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.
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 615,650 11,444 7.39% 530,336 9,620 7.20%
securities
Nontaxable investment 128,618 2,400 7.42% 114,100 2,088 7.26%
securities
Loans (net of unearned 1,090,961 25,630 9.35% 997,212 22,684 9.02%
discount)
------------ --------- ------------ ---------
Total 1,835,940 $39,486 8.56% 1,644,312 $34,425 8.31%
interest-earning assets
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 (9,052) (16,235)
portfolio
----------- ------------
Total $1,983,294 $1,785,852
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabailities
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 1,587,059 20,316 5.09% 1,419,783 15,267 4.27%
interest-bearing
liabilities
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 4.15% 4.62%
interest-earning assets
========== ============
Federal tax exemption on
nontaxable investment
securities included in $1,282 $1,163
interest income
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 ($69) $44 ($25)
agreements to resell
Time deposits in other 2 2 4
banks
Taxable investment 1,557 267 1,824
securities
Nontaxable investment 265 47 312
securities
Loans (net of unearned 2,137 809 2,946
discounts)
Total interest-earning $4,022 $1,039 $5,060
assets (2)
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 $1,909 $3,140 $5,049
liabilities (2)
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 IncomeThe 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:
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%.
Theseproducts 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.
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
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.
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.
The following table sets forth selected information by category of noninterest
income for the Company for the years and quarters indicated.
-------------------------------------------------
(000's omitted) Years ended December 31, Quarters
ended
December 31,
----------------------------- -----------------
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.Noninterest ExpenseNoninterest 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.
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 2.92% 3.06% 3.11% 2.85% 2.90%
as a percentage of average assets
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 TaxesIncome 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.CapitalShareholders' 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 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 74thpercentile. For 2000 and 1999, the ratio has been in the 58th and
61st peer percentile, respectively.LoansThe 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 135,545 120,926 124,828 85,962 56,959
real estate
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 14,614 13,421 12,441 12,434 8,128
loan losses
-----------------------------------------------------------------
Loans, net of loan loss reserve $1,084,112 $995,802 $904,779 $830,778 $644,346
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 DirectYear 000's Change% 000's TotalChange 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 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
Direct Indirect Mortgages Lending Loans
---------- ----------- ------------ ----------- -----------
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 108,553 227,645 53 5,878 342,129
individuals
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 $1,098,726Maturities and Sensitivities of Loans to Changes in Interest RatesThe 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
Due after five years 357,490 149,493
-------- -------
TOTAL $416,851 $530,295
========= ========Nonperforming Assets/Risk ElementsThe 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 4,423 4,666 2,473 1,385 2,023
basis
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 116 122 134 0 32
Restructurings"
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 1.33% 1.33% 1.36% 1.47% 1.25%
period-end loans
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 LossesNonperforming 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 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%.
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.Summary of Loan Loss ExperienceThe following table summarizes loan balances at the end of each period indicated
and the daily average amount of loans. Also summarized are changes in the
allowance for possible loan losses arising from loans charged off, recoveries on
loans previously charged off, and additions to the allowance which have been
charged to expenses.
As of Decebmer 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 $1,056,229 $951,167 $884,751 $749,596 $602,717
unearned discounts) --------- --------- -------- --------- --------
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
(1)
Reserves on acquired loans (2) 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 0.57% 0.44% 0.58% 0.50% 0.29%
outstanding
(1) The additions to the allowance during 1996 through 2000 were determined
using actual loan loss experience and future projected loan losses and other
factors affecting the estimate of possible loan losses.
(2) This reserve addition is attributable to loans purchased from Key Bank and
Fleet Bank in association with the purchases of branch offices during 1997.
The allowance for possible loan losses has been allocated according to the
amount deemed to be reasonably necessary to provide for the possibility of
losses being incurred within the following categories of loans at the dates
indicated.
As of December 31,
--------------------- ------------------- ------------------- ------------------ ---------------------
2000 1999 1998 1997 1996
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
of of of of of of of of of of
Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
in in in in in
Each Each Each Each Each
Category Category Category Category Category
to to to to to
Total Total Total Total Total
Loans Loans Loans Loans Loans
-----------------------------------------------------------------------------------------------------
Commercial,
financial,
&
agricultural $4,331 19.0% $3,786 19.8% $4,502 19.7% $4,136 19.2% $2,668 18.4%
Real
estate-
0 0.0% 0 0.0% 0 0.0% 0 0.0% 0 0.0%
construction
Real
estate -
mortgage 1,818 48.6% 1,285 46.8% 2,210 43.4% 2,026 44.4% 2,234 44.1%
Installment 7,877 32.4% 7,285 33.4% 4,525 36.9% 4,461 36.4% 2,309 37.5%
Unallocated 588 N/A 1,065 N/A 1,204 N/A 1,811 N/A 917 N/A
--- --- ----- --- ----- --- ----- --- --- ---
Total $14,614 100.0% $13,421 100.0% $12,441 100.0% $12,434 100.0% $8,128 100.0%Funding SourcesTypical of most commercial banking institutions today is the need to rely on a
variety of funding sources to support the earning asset base as well as to
achieve targeted growth objectives. There are three primary sources of funding
that comprise CBSI's overall funding matrix, which considers maturity,
stability, and price: deposits of individuals, partnerships and corporations
(IPC deposits); collateralized municipal deposits; and capital market
borrowings.
- - ---------------------------------------------------------------------------------------------------------
Sources of Funds
Average 4th Quarter Balances
($ Million)
- - ---------------------------------------------------------------------------------------------------------
Year IPC Deposits Public Funds Capital Total Funds Sources
Borrowings
---------------------- -------------------- -------------------- ------------------------
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 73.1 149 9.0 298 18.0 1,659 9.5
1998 1,194 78.8 189 12.5 132 8.7 1,515 4.4
1997 1,190 82.0 163 11.2 98 6.7 1,451 21.4
1996 903 75.6 124 10.4 168 14.1 1,195 13.4
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 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 $247,925 0.00% $235,874 0.00% $214,997 0.00%
deposits
Interest-bearing demand 136,962 0.81% 148,489 0.89% 145,141 1.18%
deposits
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 $254,000 $64,700
261,100
Weighted average rate during the year 6.53% 5.24% 5.42%
Year-end average rate 6.49% 5.60% 5.46%InvestmentsThe 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.
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.Investment SecuritiesThe 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 $241,159 $252,381 $177,097 $171,793 $170,464 $175,866
agencies
Obligations of states
and political 134,653 136,181 118,223 110,125 40,591 41,329
subdivisions
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 11,923 (22,127) 7,246
------- -------- -----
sale portfolio
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.
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 3,504 1,582 247 18 5,351
subdivisions
Other 0 0 0 0 0
----------- ----------- ----------- ----------- ----------
Total Held-to-Maturity $3,504 $1,582 $247 $18 $5,351
Portfolio Value
=========== =========== =========== =========== ==========
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 514 7,766 29,959 96,414 134,653
subdivisions
Other 3,023 545 2,000 39,044 44,612
----------- ----------- ----------- ----------- ----------
Total Available-for-Sale $100,762 $139,003 $263,164 $215,153 $718,082
Portfolio Value
=========== =========== =========== =========== ==========
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 RiskMarket 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. 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.LiquidityDue 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.GAP REPORTCOMMUNITY 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 49-60 Over 60
($000's) Days Days Days Days Days Months Months Months Months Months TOTAL
- - --------------------------------------------------------------------------------------------------------------------------------ASSETS:Due from banks - - - - - - - - - 58,880 58,880
Money Market Inv 424 - - - - - - - - - 424
Fixed Rate Debentures - - - 6,822 49,551 - 10,479 23,346 43,575 107,386 241,159
Municipals 316 247 487 1,427 1,466 1,317 457 1,459 6,529 126,223 139,928
Fixed Rate Mortgage - - - - - - - - - - -
Backed 2,185 1,920 2,395 10,162 20,684 31,658 33,340 26,418 18,141 125,992 272,895
Floating Rate Mortgage - - - - - - - - - - -
Backed 24,844 - - - - - - - - - 24,844
Other Investments - - - - 3,023 545 - 3,721 - 64,115 71,404
- - --------------------------------------------------------------------------------------------------------------------------------TOTAL INVESTMENTS 27,769 2,167 2,882 18,411 74,724 33,520 44,276 54,944 68,245 482,596 809,534
- - --------------------------------------------------------------------------------------------------------------------------------
Mortgages:
Adjustable Rate 204 221 2,206 3,923 10,009 1,978 - - - - 18,541
Fixed Rate 5,107 5,178 5,101 14,739 27,116 45,838 36,378 28,736 22,495 74,886 265,574
Variable Home Equity39,028 6,329 294 3,418 4,444 - - - - - 53,513
Commercial Variable 225,271 - - - - - - - - - 225,271
Other Commercial 41,638 5,093 5,131 15,618 32,280 62,422 16,360 - - (239) 178,303
Installment, Net 9,110 9,559 9,597 28,804 54,591 94,011 68,769 43,699 17,155 22,230 357,525
- - --------------------------------------------------------------------------------------------------------------------------------TOTAL LOANS 320,358 26,380 22,329 66,502 128,440 204,249 121,507 72,435 39,650 96,877 1,098,727
Loan Loss Reserve - - - - - - - - - (14,614) (14,614)
Other Assets - - - - - - - - - 128,988 128,988
- - --------------------------------------------------------------------------------------------------------------------------------TOTAL ASSETS 348,127 28,547 25,211 84,913 203,164 237,769 165,783 127,379 107,895 693,847 2,022,635
AVERAGE YIELD 9.81% 9.14% 8.71% 8.68% 8.35% 8.72% 8.50% 8.10% 7.91% 4.66% 7.38%
================================================================================================================================LIABILITIES AND CAPTIAL:Demand Deposits - - - - - - - - - 258,004 258,004
Savings / NOW 1,354 1,354 1,354 4,063 18,542 16,253 - - - 314,234 357,154
Money Markets - - - 84,154 27,852 - - - - - 112,006
CD's / IRA / Other 73,903 54,490 41,660 149,099 276,635 106,178 15,463 6,430 5,364 1,344 730,566
- - --------------------------------------------------------------------------------------------------------------------------------TOTAL DEPOSITS 75,257 55,844 43,014 237,316 323,029 122,431 15,463 6,430 5,364 573,582 1,457,730
Short Term Borrowings 133,000 50,000 - - - - - - - - 183,000
Term Borrowing 6,100 - - - - 10,000 5,000 - - 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 214,357 105,844 43,014 237,316 323,029 132,431 20,463 6,430 5,364 934,387 2,022,635
AVERAGE RATE 6.26% 5.81% 5.49% 5.15% 5.87% 5.84% 5.64% 5.28% 5.91% 1.95% 4.00%
================================================================================================================================
GAP 133,770 (77,297) (17,803) (152,403) (119,865) 105,338 145,320 120,949 102,531 (240,540)
CUMULATIVE GAP 133,770 56,473 38,670 (113,733) (233,598) (128,260) 17,060 138,009 240,540 -
CUMULATIVE GAP /
TOTAL ASSETS 6.7% 2.8% 1.9% -5.7% -11.7% -6.4% 0.9% 6.9% 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.Effects of InflationThe 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 StatementsThis 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 PronouncementsIn 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.Subsequent EventsACQUISITION OF THE CITIZENS NATIONAL BANK OF MALONE, BASED IN MALONE, NEW YORKOn 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, PENNSYLVANIAOn 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.Item 8, Financial Statements and Supplementary DataThe following consolidated financial statements and independent accountant's
reports of Community Bank System, Inc. and subsidiaries are contained on pages
40 through 61 of this item.
- - - Consolidated Statements of Condition--
December 31, 2000 and 1999
- - - Consolidated Statements of Income - Years ended December 31, 2000, 1999, and
1998
- - - Consolidated Statements of Changes in Shareholders' Equity - Years ended
December 31, 2000, 1999, and 1998
- - - Consolidated Statements of Cash Flows - Years ended December 31, 2000, 1999,
and 1998
- - - Notes to Consolidated Financial Statements -
December 31, 2000
- - - Report of Independent Accountants
Quarterly Selected Data (Unaudited) for 2000 and 1999 are contained on page 61.
CONSOLIDATED STATEMENTS OF CONDITION
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
December 31, December 31,
2000 1999
- - -----------------------------------------------------------------------------------------------ASSETSCash and due from banks $59,304,276 $76,526,657
Federal funds sold 0 24,200,000
- - -----------------------------------------------------------------------------------------------
Total cash and cash equivalents 59,304,276 100,726,657
Investment securities
(approximate fair value of $762,248,000 and 762,148,042 630,687,585
$630,729,252)
Loans 1,098,726,348 1,009,222,515
Reserve for possible loan losses 14,613,877 13,420,610
- - -----------------------------------------------------------------------------------------------
Net loans 1,084,112,471 995,801,905
Premises and equipment, net 26,862,758 25,508,863
Accrued interest receivable 18,478,042 14,168,068
Intangible assets, net 50,949,252 49,484,949
Other assets 20,780,571 24,323,539
- - -----------------------------------------------------------------------------------------------TOTAL ASSETS $2,022,635,412 $1,840,701,566
===============================================================================================LIABILITIES AND SHAREHOLDERS' EQUITYLiabilities:
Deposits
Noninterest bearing $258,004,313 $225,012,768
Interest bearing 1,199,725,229 1,135,293,216
- - -----------------------------------------------------------------------------------------------
Total deposits 1,457,729,542 1,360,305,984
Federal funds purchased 38,000,000 0
Borrowings 331,100,000 324,000,000
Company obligated mandatorily redeemable
preferred securities
of subsidiary Community Capital Trust 1
holding solely junior
subordinated debentures of the company 29,823,938 29,817,188
Accrued interest and other liabilities 26,606,217 18,090,941
- - -----------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,883,259,697 1,732,214,113
- - -----------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock no par $1.00 stated value for
2000 and 1999;
20,000,000 shares authorized; 6,993,459 and
7,092,259 shares
outstanding for 2000 and 1999, respectively 7,641,559 7,640,359
Surplus 33,343,519 33,327,586
Undivided profits 108,349,087 95,340,837
Accumulated other comprehensive income 7,052,563 (13,088,367)
Treasury stock, at cost (648,100 and 548,100 shares
for 2000 and
1999, respectively) (17,006,288) (14,718,787)
Shares issued under employee stock plan - (4,725) (14,175)
unearned
- - -----------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 139,375,715 108,487,453TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,022,635,412 $1,840,701,566
===============================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF INCOME
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
Years Ended December 31,
- - -----------------------------------------------------------------------------------------------------
2000 1999 1998Interest income:Interest and fees on loans $96,524,921 $84,853,208 $82,778,201 $
Interest and dividends on investments:
U.S. Treasury 99,229 270,681 269,408
U.S. Government agencies and corporations 15,887,808 12,287,617 16,340,308
States and political subdivisions 6,623,617 5,001,876 1,571,670
Mortgage-backed securities 21,182,642 17,925,398 19,588,820
Other securities 4,295,185 3,510,586 2,091,495
Interest on federal funds sold and deposits with 607,490 38,488 298,175
other banks
- - -----------------------------------------------------------------------------------------------------
Total interest income 145,220,892 123,887,854 122,938,077Interest expense:Interest on deposits 50,204,754 42,773,861 49,668,906
Interest on federal funds purchased 907,519 1,330,890 597,355
Interest on short-term borrowings 13,448,491 4,946,617 156,607
Interest on mandatorily redeemable preferred 2,931,750 2,931,750 2,931,750
securities of subsidiary
Interest on long-term borrowings 6,519,906 3,963,611 5,188,535
- - -----------------------------------------------------------------------------------------------------
Total interest expense 74,012,420 55,946,729 58,543,153
- - -----------------------------------------------------------------------------------------------------
Net interest income 71,208,472 67,941,125 64,394,924
Less: Provision for possible loan losses 7,181,700 5,136,068 5,122,596
- - -----------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 64,026,772 62,805,057 59,272,328
- - -----------------------------------------------------------------------------------------------------Other income:Fiduciary and investment services 2,548,805 2,344,496 1,921,766
Service charges on deposit accounts 7,631,065 7,012,704 6,630,004
Commissions on investment products 4,924,413 1,288,083 1,222,328
Other service charges, commissions and fees 5,913,866 5,223,396 4,412,523
Other operating income 183,067 255,639 893,924
Investment security gain (loss) (212,281) (637,654) 1,959,384
- - -----------------------------------------------------------------------------------------------------
Total other income 20,988,935 15,486,664 17,039,929
- - -----------------------------------------------------------------------------------------------------Other expenses:Salaries and employee benefits 28,834,429 26,387,554 25,749,840
Occupancy expense, net 3,958,678 3,919,378 4,085,818
Equipment and furniture expense 3,677,487 3,465,330 3,500,841
Amortization of intangible assets 4,670,046 4,614,514 4,639,536
Legal and professional fees 1,896,206 1,936,668 1,666,017
Computer services expenses 2,570,614 2,389,138 2,334,104
Other 10,381,568 10,020,488 9,899,793
- - -----------------------------------------------------------------------------------------------------
Total other expenses 55,989,028 52,733,070 51,875,949
- - -----------------------------------------------------------------------------------------------------
Income before income taxes 29,026,679 25,558,651 24,436,308
Income taxes 8,708,104 7,923,182 8,901,945
- - -----------------------------------------------------------------------------------------------------
Income before change in accounting 20,318,575 17,635,469 15,534,363
Cumulative effect of change in accounting principal,
net of taxes of $133,883 in 1998 (note C) 0 0 193,860
- - -----------------------------------------------------------------------------------------------------NET INCOME $20,318,575 $17,635,469 $15,728,223
=====================================================================================================
Earnings per common share - basic $2.88 $2.45 $2.08
=====================================================================================================
Earnings per common share - diluted $2.85 $2.42 $2.05=====================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
Years ended December 31, 1998, 1999 and 2000
Common
Shares
Issued
Accumulated Under
Common Stock Other Employee
-----------------------------------
Shares Undivided Treasury Comprehensive Comprehensive Stock Plan
Outstanding Amount Surplus Profits Stock Income Income - Unearned
Total
- - -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
- - -------------------
Balance at December 31, 1997 $7,586,512 $7,586,512 $32,401,331 $75,335,527 $2,778,913 ($90,300)
$118,011,983
Net income - 1998 15,728,223 $15,728,223
15,728,223
------------------
Other comprehensive income, before tax:
Unrealized gains on securities:
Unrealized holding gains arising during period 4,822,654
0
Reclassification adjustment for gains included
in net income (2,287,127)
------------------
Other comprehensive income, before tax: 2,535,527
Income tax expense related to other comprehensive income (1,028,697)
------------------
Other comprehensive income, net of tax 1,506,830 1,506,830
1,506,830
------------------
Comprehensive income $17,235,053
==================
Dividends declared:
Common, $.86 per share (6,472,503)
(6,472,503)
Common stock issued under
employee stock plan 36,541 36,541 441,441 64,909
542,891
Treasury stock purchased (326,600) (9,151,956)
(9,151,956)
- - -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
- - -------------------
Balance at December 31, 1998 7,296,453 $7,623,053 $32,842,772 $84,591,247 ($9,151,956) $4,285,743 ($25,391)
$120,165,468
Net income - 1999 17,635,469 $17,635,469
17,635,469
------------------
Other comprehensive loss, before tax:
Unrealized losses on securities:
Unrealized holding losses arising during period (30,010,621)
0
Reclassification adjustment for losses included
in net income 637,654
------------------
Other comprehensive loss, before tax: (29,372,967)
Income tax benefit related to other comprehensive income 11,998,857
------------------
Other comprehensive loss, net of tax (17,374,110) (17,374,110)
(17,374,110)
------------------
Comprehensive income $261,359
==================
Dividends declared:
Common, $.96 per share (6,885,879)
(6,885,879)
Common stock issued under employee stock plan 17,306 17,306 484,814 11,216
513,336
Treasury stock purchased (221,500) (5,566,831)
(5,566,831)
- - -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
- - -------------------
Balance at December 31, 1999 7,092,259 $7,640,359 $33,327,586 $95,340,837 ($14,718,787) ($13,088,367) ($14,175)
108,487,453
Net income - 2000 20,318,575 $20,318,575
20,318,575
------------------
Other comprehensive income, before tax:
Unrealized gains on securities:
Unrealized holding gains arising during period 33,838,319
0
Reclassification adjustment for losses included
in net income 212,281
------------------
Other comprehensive income, before tax: 34,050,600
Income tax expense related to other comprehensive income (13,909,670)
------------------
Other comprehensive income, net of tax 20,140,930 20,140,930
20,140,930
------------------
Comprehensive income $40,459,505
==================
Dividends declared:
Common, $1.04 per share (7,310,325)
(7,310,325)
Common stock issued under employee stock plan 1,200 1,200 15,933 9,450
26,583
Treasury stock purchased (100,000) (2,287,501)
(2,287,501)
- - -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
- - -------------------
Balance at December 31, 2000 6,993,459 $7,641,559 $33,343,519 $108,349,087 ($17,006,288) $7,052,563 ($4,725)
$139,375,715
===============================================================================================================================================================================================================================================
===================
The accompanying notes are an intergral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
For Twelve Months Ended December 31, 2000, 1999, and 1998
2000 1999 1998
- - -------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $20,318,575 $17,635,469 $15,728,223
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 3,110,891 2,941,441 2,822,990
Amortization of intangible assets 4,670,046 4,614,513 4,639,536
Net amortization of security premiums and 438,604 3,719,956 6,922,686
discounts
Amortization of discount on loans (311,491) (586,746) 1,443,122
Provision for loan losses 7,181,700 5,136,068 5,122,596
Provision (benefits) for deferred taxes 251,474 (730,136) 383,806
(Gain)/loss on sale of investment securities 212,281 637,654 (2,287,127)
(Gain)/loss on sale of loans and other assets (176,069) (161,285) (102,847)
Change in interest receivable (4,309,974) (1,792,734) 1,017,484
Change in other assets and other liabilities (2,201,951) 910,590 2,269,036
Change in unearned loan fees and costs (1,649,528) (1,328,952) (1,551,770)
- - -------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 27,534,558 30,995,838 36,407,735
- - -------------------------------------------------------------------------------------------------------------
Investing Activities:
Proceeds from sales of investment securities 11,519,958 13,915,420 87,188,668
Proceeds from maturities of held to maturity 3,726,679 2,771,314 55,077,029
investment securities
Proceeds from maturities of available for sale 33,467,572 171,894,104 110,430,351
investment securities
Purchases of held to maturity investment securities (4,035,076) (3,775,571) (7,943,215)
Purchases of available for sale investment securities (142,739,875) (255,683,661) (228,500,654)
Net change in loans outstanding (93,458,733) (94,033,913) (78,779,935)
Premium paid on acquisition of business (6,134,349) 0 0
Capital expenditures (4,494,194) (3,753,697) (4,935,714)
Proceeds from sales of property and equipment 132,963 132,963 752,235
Other investing activities 0 0 0
- - -------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (202,015,055) (168,533,041) (66,711,235)
- - -------------------------------------------------------------------------------------------------------------
Financing Activities:
Net change in demand deposits, NOW accounts, and (610,522) (28,505,058) 61,508,239
savings accounts
Net change in certificates of deposit 98,034,080 10,745,464 (29,128,619)
Net change in federal funds purchased 38,000,000 (34,700,000) (10,300,000)
Net change in term borrowings 7,100,000 224,000,000 20,000,000
Issuance (retirement) of common and preferred stock 17,133 187,928 474,451
Treasury stock purchased (2,287,501) (5,566,831) (9,151,956)
Cash dividends (7,195,074) (6,791,081) (6,311,580)
- - -------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 133,058,116 159,370,422 27,090,535
- - -------------------------------------------------------------------------------------------------------------
Change in cash and cash equivalents (41,422,381) 21,833,219 (3,212,965)
Cash and cash equivalents at beginning of year 100,726,657 78,893,438 82,106,403
- - -------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $59,304,276 100,726,657 78,893,438
=============================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $72,776,130 $56,577,891 $56,791,512
=============================================================================================================
Cash paid for income taxes $8,546,611 $7,681,112 $9,938,377
=============================================================================================================
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
AND INVESTING ACTIVITIES:
Dividends declared and unpaid $1,888,234 $1,772,982 $1,678,184
Gross change in unrealized gains/losses on
available-for-sale securities $34,050,600 ($29,372,967) $2,547,473
=============================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESNature of OperationsCommunity Bank System, Inc. (the Company) is a one bank holding company which
wholly-owns three subsidiaries, Community Bank, N.A. (the Bank), Community
Capital Trust I, a subsidiary business trust, and Benefit Plans Administrative
Services, Inc. (BPA). Community Capital Trust I was formed for the purpose of
issuing mandatorily redeemable convertible securities which are considered Tier
I capital under regulatory capital adequacy requirements (see Note Q). BPA,
located in Utica, New York, provides pension administration and consulting
services to sponsors of defined benefit and defined contribution plans
throughout New York State. The Bank operates 67 customer facilities throughout
Northern New York, the Finger Lakes Region, the Southern Tier, and Southwestern
New York and owns two banking related subsidiaries, Community Financial
Services, Inc. (CFSI), and Community Investment Services, Inc. (CISI). CFSI
offers insurance investment products and CISI provides broker-dealer and
investment advisory services. In addition, the Bank owns three non-banking
subsidiaries, CBNA Treasury Management Corporation (TMC), CBNA Preferred Funding
Corporation (PFC), and Elias Asset Management, Inc. (EAM). TMC operates the cash
management, investment, and treasury functions of the Bank and PFC primarily
engages in investing of residential and commercial real estate loans. EAM,
located in Williamsville, New York, provides asset management services to the
general public (see Note B).Principles of ConsolidationThe consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All intercompany accounts and transactions have
been eliminated in consolidation.Use of Estimates in the Preparation of Financial StatementsThe preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.Cash and Cash EquivalentsFor purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks and federal funds sold. Generally, federal funds
are sold for one-day periods.
The carrying amounts reported in the balance sheet for cash and cash equivalents
approximate those assets' fair values.Investment SecuritiesThe Company has classified its investments in debt and equity securities as
held-to-maturity or available-for-sale. Held-to-maturity securities are those
for which the Company has the positive intent and ability to hold to maturity,
and are reported at cost, which is adjusted for amortization of premiums and
accretion of discounts. Debt securities not classified as held to maturity are
classified as available-for-sale and are reported at fair market value with net
unrealized gains and losses reflected as a separate component of shareholders'
equity, net of applicable income taxes. None of the Company's investment
securities have been classified as trading securities. Equity securities are
stated at cost and include stock of the Federal Reserve Bank of New York and
Federal Home Loan Bank of New York.
The average cost method is used in determining the realized gains and losses on
sales of investment securities, which are reported under other income as
investment security gains (losses). Premiums and discounts on securities are
amortized and accreted, respectively, on a systematic basis over the period to
maturity, estimated life, or earliest call date of the related security.
Fair values for investment securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments.LoansLoans are stated at unpaid principal balances. Fair values for variable rate
loans that reprice frequently, with no significant credit risk, are based on
carrying values. Fair values for fixed rate loans are estimated using discounted
cash flows and interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. Mortgage loans held for sale are
carried at the lower of cost or market and are included in loans as the balance
of such loans was not significant. The carrying amount of accrued interest
approximates its fair value.Interest on Loans and Reserve for Possible Loan LossesInterest on commercial loans and mortgages is accrued and credited to operations
based upon the principal amount outstanding. Unearned discount on installment
loans is recognized as income over the term of the loan, principally by the
actuarial method. Non-refundable loan fees and related direct costs are deferred
and amortized over the life of the loan as an adjustment to loan yield using the
effective interest method.
The Bank places a loan on nonaccrual status and recognizes income on a cash
basis when it is more than ninety days past due (or sooner, if management
concludes collection of interest is doubtful), except when, in the opinion of
management, it is well-collateralized and in the process of collection.
The reserve for possible loan losses is maintained at a level considered
adequate to provide for potential loan losses. The reserve is increased by
provisions charged to expense and reduced by net charge-offs. The level of the
reserve is based on management's evaluation of potential losses in the loan
portfolio, as well as prevailing economic conditions. A loan is considered
impaired, based current information and events, if it is probable that the Bank
will not be able to collect the scheduled payments of principal or interest when
due according to the contractual terms of the loan agreement. The measurement of
impaired loans is generally based on the present value of expected future cash
flows discounted at the historical effective interest rate, except that all
collateral-dependent loans are measured for impairment based on the fair value
of the collateral.Premises and EquipmentPremises and equipment are stated at cost less accumulated depreciation. The
annual provision for depreciation is computed using the straight-line method in
amounts sufficient to recognize the cost of depreciable assets over their
estimated useful lives. Maintenance and repairs are charged to expense as
incurred.Other Real EstateProperties acquired through foreclosure, or by deed in lieu of foreclosure, are
carried at the lower of the unpaid loan balance plus settlement costs, or fair
value less estimated costs of disposal. At December 31, 2000 and 1999, other
real estate, included in other assets, amounted to $906,384 and $883,919,
respectively.Intangible AssetsIntangible assets represent core deposit value and goodwill arising from
acquisitions. The Company periodically reviews the carrying value of intangible
assets using fair value methodologies.
Core deposit intangibles are being amortized principally on an accelerated basis
over ten years. Goodwill is being amortized on a straight-line basis over 15 to
25 years.Mortgage Servicing RightsOriginated mortgage servicing rights are recorded at their fair value at the
time of transfer and are amortized in proportion to and over the period of
estimated net servicing income or loss. The Bank uses a valuation model that
calculates the present value of future cash flows to determine the fair value of
servicing rights. In using this valuation method, the Bank incorporated
assumptions that market participants would use in estimating future net
servicing income, which included estimates of the cost of servicing per loan,
the discount rate, and prepayment speeds. The carrying value of the originated
mortgage servicing rights is periodically evaluated for impairment using these
same market assumptions. At December 31, 2000 and 1999, mortgage servicing
rights, included in other assets, amounted to approximately $526,201 and
$577,457, respectively.DepositsThe fair values disclosed for demand and savings deposits are equal to the
carrying amounts at the reporting date. The carrying amounts for variable rate
money market accounts and certificates of deposit approximate their fair values
at the reporting date. Fair values for fixed rate certificates of deposit are
estimated using discounted cash flows and interest rates currently being offered
on similar certificates. The carrying value of accrued interest approximates
fair value.BorrowingsThe carrying amounts of federal funds purchased and short-term borrowings
approximate their fair values. Fair values for long-term borrowings are
estimated using discounted cash flows and interest rates currently being offered
on similar borrowings.Income TaxesProvisions for income taxes are based on taxes currently payable or refundable,
and deferred taxes which are based on temporary differences between the tax
basis of assets and liabilities and their reported amounts in the financial
statements. Deferred tax assets and liabilities are reported in the financial
statements at currently enacted income tax rates applicable to the period in
which the deferred tax assets and liabilities are expected to be realized or
settled.Trust Department AssetsAssets held in fiduciary or agency capacities for customers are not included in
the accompanying consolidated statements of condition, since such items are not
assets of the Company. Fees associated with providing trust management services
are recorded on cash basis of income recognition and are included in other
income.Earnings Per ShareBasic earnings per share is computed on the basis of actual weighted average
common shares outstanding for the period. Diluted earnings per share reflects
the dilutive effect of outstanding common stock equivalents.Treasury StockTreasury stock purchases are recorded at cost. During 2000 and 1999, the Company
purchased 100,000 and 221,500 shares of treasury stock at an average cost of
$22.88 and $25.13, respectively. The Company purchases treasury stock primarily
in order to have shares available for issuance under the incentive stock option,
restricted stock awards and non-qualified stock option plan and for other
strategic purposes.Fair Values of Financial InstrumentsThe Company determines fair values based on quoted market values where available
or on estimates using present values or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of the
instrument. Statement Financial Accounting Standard No. 107, "Disclosures about
Fair Value of Financial Instruments," excludes certain financial instruments and
all nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
The fair values of investment securities, loans, deposits, and borrowings have
been disclosed in footnotes C, D, G, and H, respectively.Accounting PronouncementsIn 1998, the Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires an entity to
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. Upon adoption of the SFAS, the
Company transferred investment securities from held-to-maturity to
available-for-sale (see Note C). As a result, securities previously classified
as held-to-maturity were sold during the year and investment securities gains of
approximately $194,000, net of tax, resulting from the sale have been reported
as a cumulative effect of a change in accounting principle. The Company has no
outstanding derivative financial instruments and, accordingly, adoption of SFAS
133 had no other affect on the Company's financial statements.Subsequent EventsOn January 26, 2001, the Company acquired Citizens National Bank of Malone, an
eighty-year-old commercial bank with five branches throughout Franklin and St.
Lawrence counties in New York State. The Company issued 952,000 shares of its
common stock to the former shareholders at a cost of $26.50 per share. All of
the 648,100 shares held in the Company's treasury were issued in this
transaction. The acquisition is being accounted for under the purchase method of
accounting. The Company purchased assets with a fair value of $109,965,000,
assumed liabilities with a fair value of $98,681,000 and recorded goodwill of
$13,944,000.
The Company announced its first strategic partnership outside New York State
with the signing on November 29, 2000 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
and Trust will be merged into Community Bank, N.A. (CBNA), operating under its
present name in Pennsylvania as a division of CBNA. Subject to shareholder and
regulatory approvals, the transaction is expected to close in second quarter
2001.NOTE B: ACQUISITIONSElias Asset Management, Inc.On April 3, 2000, Community Bank System, Inc. acquired all the stock of Elias
Asset Management, Inc. (EAM) for cash of $6.5 million. EAM, based in
Williamsville, NY, is a nationally recognized firm with $650 million in assets
under management for individuals, corporate pension and profit sharing plans,
and foundations. In accordance with the stock purchase agreement, additional
consideration will be paid if certain performance targets are met over a five
year period. This transaction was accounted for under the purchase method, and
the Company recognized $6.1 million of goodwill, which is being amortized over
20 years.NOTE C: INVESTMENT SECURITIESThe amortized cost and estimated fair values of investments in securities as of
December 31 are as follows:
2000 1999
- - --------------------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Held to Maturity Cost Gains Losses Value Cost Gains Losses Value
- - --------------------------------------------------------------------------------------------------------------------------------------
Obligations of
states and political
subdivisions $5,350,574 $100,349 $139 $5,450,784 $5,042,178 $44,647 $2,978 $5,083,847
----------- --------- ----- ----------- ----------- -------- ------- ----------
TOTALS 5,350,574 100,349 139 5,450,784 5,042,178 44,647 2,978 5,083,847
- - --------------------------------------------------------------------------------------------------------------------------------------
Available for Sale
- - --------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies 241,158,578 11,476,840 254,418 252,381,000 177,096,926 39,872 5,343,701 171,793,097
Obligations of
states and political
subdivisions 134,652,859 3,348,027 1,819,886 136,181,000 118,223,430 360,414 8,458,684 110,125,160
Corporate Securities 44,611,837 1,152,672 1,112,509 44,652,000 35,914,206 0 2,815,011 33,099,195
Mortgage-backed securities 297,659,183 3,612,686 4,480,229 296,791,640 290,000,398 1,805,835 7,716,143 284,090,090
------------- --------- ---------- ------------ ------------ ---------- ---------- -----------
TOTALS 718,082,457 19,590,225 7,667,042 730,005,640 621,234,960 2,206,121 24,333,539 599,107,542
Equity securities 26,791,827 0 0 26,791,827 26,537,863 0 0 26,537,863
----------- -- -- ----------- ----------- -- -- ----------
TOTALS 744,874,284 19,590,225 7,667,042 756,797,467 647,772,823 2,206,121 24,333,539 625,645,405
- - --------------------------------------------------------------------------------------------------------------------------------------
Net unrealized gain/(loss) on
Available for Sale 11,923,184 (22,127,416)
- - --------------------------------------------------------------------------------------------------------------------------------------
GRAND TOTAL
CARRYING VALUE 762,148,042 630,687,585
======================================================================================================================================
The amortized cost and estimated fair value of debt securities at December 31,
2000, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Held to Maturity Available for Sale
Carrying Est. Market Carrying Est.Market
Value Value Value Value
- - ---------------------------------------------------------------------------------
Due in one year or less $3,503,930 $3,518,200 $59,679,726 $60,531,542
Due after one through 1,581,421 1,636,720 8,789,622 8,854,670
five years
Due after five years 247,129 275,030 187,928,283 196,052,022
through ten years
Due after ten years 18,094 20,834 164,025,643 167,775,766
----------------------------------------------------
TOTAL 5,350,574 5,450,784 420,423,274 433,214,000
Mortgage-backed 0 0 297,659,183 296,791,640
securities
----------------------------------------------------
TOTAL $5,350,574 $5,450,784 $718,082,457 $730,005,640
=================================================================================
Proceeds from sales of investments in debt securities during 2000, 1999, and
1998 were $11,520,000, $13,640,000, and $85,689,000, respectively. Gross gains
of approximately $0, $276,642, and $2,287,000 for 2000, 1999, and 1998,
respectively, and gross losses of $212,281, $914,000, and $0 in 2000, 1999, and
1998, respectively, were realized on those sales.
Investment securities with a carrying value of $562, 952,000, $457,512,000 and
$324,565,708 at December 31, 2000, 1999, and 1998, respectively, were pledged to
collateralize deposits and borrowings.
Pursuant to the adoption of Statement of Financial Accounting Standards No. 133,
"Accounting for Derivatives Instruments and Hedging Activities," in 1998, the
Company transferred investment securities having an amortized cost of
$216,797,000 and net unrealized gains of $6,952,000 from held-to-maturity to
available-for-sale. The Company subsequently sold a portion of those investments
with an amortized cost of $17,424,000 within the same quarter; accordingly, the
realized gain of $193,860, net of tax, has been reported as a cumulative effect
of a change in accounting principle.NOTE D: LOANSMajor classifications of loans at December 31 are summarized as follows:
2000 1999
- - -----------------------------------------------------------------------------------------
Real estate mortgages:
Residential 383,381,468 $336,466,553
Commercial 126,024,057 114,838,282
Farm 19,850,358 17,652,220
Agricultural loans 26,488,434 27,721,431
Commercial loans 181,974,604 171,787,084
Installment loans to individuals 341,910,320 329,275,510
Other loans 14,205,564 8,384,602
---------------------------------
1,093,834,805 1,006,125,682
Less : Unearned interest, and deferred loan fees 4,891,543 3,096,833
and costs, net
Reserve for possible loan losses (14,613,877) (13,420,610)
---------------------------------
Net loans $1,084,112,471 $995,801,905
=========================================================================================
The estimated fair value of loans receivable at December 31, 2000 and 1999 was
$1,078,000,000 and $991,000,000, respectively.
Non-accrual loans of $4,423,000 and $4,666,000 at December 31, 2000 and 1999,
respectively, are included in net loans. If non-accrual loans had been accruing
interest at their originally contracted terms, interest income on these loans
would have amounted to $271,488 and $189,346 in 2000 and 1999, respectively.
Loans to directors and officers or other related parties were approximately
$12,032,957 and $12,453,983 at December 31, 2000 and 1999, respectively.
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of condition. The unpaid principal balances of mortgage
loans serviced for others was $89,732,353 and $88,700,053 at December 31, 2000
and 1999, respectively.
Custodial escrow balances maintained in connection with the foregoing loan
servicing, and included in demand deposits, were approximately $670,483 and
$650,420 at December 31, 2000 and 1999, respectively.
Changes in the reserve for possible loan losses for the years ended December 31
are summarized as follows:
----------------------------------------------
2000 1999 1998
----------------------------------------------
Balance at beginning of year $13,420,610 $12,441,255 $12,433,812
Reserves on acquired loans 0 0 0
Provision charged to expense 7,181,700 5,136,068 5,122,596
Loans charged off (7,065,735) (5,287,623) (6,096,561)
Recoveries 1,077,302 1,130,910 981,408
---------- ---------- -------
Balance at end of year $14,613,877 $13,420,610 $12,441,255
===========================================================================
As of December 31, 2000, 1999 and 1998, the Company's impaired loans for which
specific valuation allowances were recorded were not significant.NOTE E: PREMISES AND EQUIPMENTPremises and equipment consist of the following at December 31:
- - ---------------------------------------------------------------------
2000 1999
- - ---------------------------------------------------------------------
Land and land improvements $3,161,163 $3,074,848
Bank premises owned
25,695,110 25,076,326
Equipment
22,153,588 19,529,121
-----------------------------
Premises and equipment gross
$51,009,860 47,680,295
Less: Allowance for depreciation
24,147,103 22,171,432
-----------------------------
Premises and equipment, net $26,862,758 $25,508,863
=====================================================================NOTE F: INTANGIBLE ASSETSIntangible assets consist of the following at December 31:
- - -----------------------------------------------------------------------------------------
2000 1999
- - -----------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------
Core deposit intangible $14,434,507 $14,434,507
Goodwill and other intangibles 58,894,746 52,760,397
---------------------- -----------------------
Intangible assets, gross 73,329,253 67,194,904
---------------------- -----------------------
Less: Accumulated amortization (22,380,001) (17,709,955)
---------------------- -----------------------
Intangible assets, net $50,949,252 $49,484,949
=========================================================================================NOTE G: DEPOSITSDeposits by type at December 31 are as follows:
- - -----------------------------------------------------------------------------------------
2000 1999
- - -----------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------
Demand 258,004,313 225,012,767
Savings 469,162,934 502,765,002
Time 730,562,296 632,528,215
Total Deposits 1,457,729,542 1,360,305,984
=========================================================================================
The estimated fair values of deposits at December 31, 2000 and 1999 were
approximately $1,455,000 and $1,357,000, respectively.
At December 31, 2000 and 1999, time certificates of deposit in denominations of
$100,000 and greater totaled $156,172,243 and $112,397,283, respectively.
The approximate maturities of time deposits at December 31 are as follows:
- - -----------------------------------------------------------------------------------------
Maturity 2000 1999
- - -----------------------------------------------------------------------------------------
One year or less 596,432,829 455,381,669
One to two years 106,177,653 132,756,822
Two to three years 15,463,112 25,793,504
Three to four years 6,429,817 12,287,767
Four to five years 5,363,512 5,393,330
Over five years 695,373 915,123
---------------- ---------------------
Total 730,562,296 632,528,215
=========================================================================================NOTE H: BORROWINGSAt December 31, 2000 and 1999, outstanding borrowings were as follows:
- - -----------------------------------------------------------------------------------------
2000 1999
- - -----------------------------------------------------------------------------------------
Short-term borrowings:
Federal funds purchased 38,000,000 $0
Federal Home Loan Bank Advances 145,000,000 250,000,000
Other short-term borrowings 6,100,000 4,000,000
-------------- -------------------
189,100,000 254,000,000
Long-term borrowings:
Federal Home Loan Bank Advances 180,000,000 70,000,000
Company obligated mandatorily redeemable
preferred securities
of subsidiary trust holding solely junior
subordinated debentures
of the Company, net of discount of $176,063 29,823,938 29,817,187
and $182,813 ----------- ----------
$398,923,938 $353,817,187
=========================================================================================
Federal Home Loan Bank advances are secured by a blanket lien on the Company's
residential real estate loan portfolio and mortgage-backed securities portfolio.
Long-term borrowings at December 31, 2000 have maturity dates as follows:
Weighted
Average Rate Amount
December 17, 2002 6.20% 10,000,000
February 10, 2003 5.52% 5,000,000
January 23, 2008 5.44% 10,000,000
January 28, 2008 5.48% 5,000,000
January 30, 2008 5.27% 20,000,000
February 4, 2008 5.45% 5,000,000
April 14, 2010 6.35% 25,000,000
September 27, 2010 5.88% 50,000,000
October 12, 2010 5.84% 50,000,000
January 30, 2027 9.75% 29,823,938
----- ----------
6.38% $209,823,938
==========================================================================
The estimated fair value of long term borrowings at December 31, 2000 and 1999
was $214,000,000 and $99,097,000, respectively.NOTE I: INCOME TAXESThe provision (benefit) for income taxes for the years ended December 31 is as
follows:
- - ----------------------------------------------------------------------------------------------------
2000 1999 1998
- - ----------------------------------------------------------------------------------------------------
Current:
Federal $7,914,753 $8,122,791 $7,889,187
State 541,877 530,527 762,835
Deferred:
Federal 196,457 (569,274) 299,246
State 55,017 (160,862) 84,560
---------- -------- ------
Total income taxes $8,708,104 $7,923,182 $9,035,828
====================================================================================================
Components of the net deferred tax asset/liability, included in other
assets/liabilities, as of December 31 are as follows:
- - -----------------------------------------------------------------------------
2000 1999
- - -----------------------------------------------------------------------------
Investment securities $0 $8,441,513
Allowance for loan losses 5,804,137 4,985,174
Postretirement and other reserves 955,792 975,669
Pension 512,195 444,811
Amortization of Intangibles 312,658 352,237
Other 1,339,496 1,328,233
------------------------------
Total deferred tax asset 8,924,278 16,527,637
------------------------------
Investment securities 5,853,237 0
Deferred loan fees 2,127,978 1,539,808
Depreciation 970,924 831,933
Mortgage Servcing Rights 213,269 235,883
------------------------------
Total deferred tax liability 9,165,408 2,607,624
------------------------------
Net deferred tax asset/liability $(241,130) $13,920,013
=============================================================================
The Company has determined that no valuation allowance is necessary as it is
more likely than not that deferred tax assets will be realized through carryback
of future deductions to taxable income in prior years, future reversals of
existing temporary differences, and through future taxable income.
A reconciliation of the differences between the federal statutory income tax
rate and the effective tax rate for the years ended December 31 is shown in the
following table:
- - ------------------------------------------------------------------------------------------------
2000 1999 1998
- - ------------------------------------------------------------------------------------------------
Federal statutory income tax rate 35.0% 35.0% 35.0%
Increase (reduction) in taxes resulting from:
Tax-exempt interest (6.8) (6.3) (1.9)
State income taxes, net of federal benefit 1.1 0.6 1.9
Other 0.7 1.7 1.5
--- ---- ---
Effective income tax rate (including tax effect of 30.0% 31.0% 36.5%
accounting change)
================================================================================================NOTE J: LIMITS ON DIVIDENDS AND OTHER REVENUE SOURCESThe Company's ability to pay dividends to its shareholders is largely dependent
on the Bank's ability to pay dividends to the Company. In additional to state
law requirements and the capital requirements discussed below, the circumstances
under which the Bank may pay dividends are limited by federal statutes,
regulations, and policies. For example, as a national bank, the Bank must obtain
the approval of the Office of the Comptroller of the Currency (OCC) for payments
of dividends if the total of all dividends declared in any calendar year would
exceed the total of the Bank's net profits, as defined by applicable
regulations, for that year, combined with its retained net profits for the
preceding two years. Furthermore, the Bank may not pay a dividend in an amount
greater than its undivided profits then on hand after deducting its losses and
bad debts, as defined by applicable regulations. At December 31, 2000, the Bank
had approximately $17,849,000 in undivided profits legally available for the
payments of dividends.
In addition, the Federal Reserve Board and the OCC are authorized to determine
under certain circumstances that the payment of dividends would be an unsafe or
unsound practice and to prohibit payment of such dividends. The Federal Reserve
Board has indicated that banking organizations should generally pay dividends
only out of current operating earnings.
There are also statutory limits on the transfer of funds to the Company by its
banking subsidiary, whether in the form of loans or other extensions of credit,
investments or assets purchases. Such transfer by the Bank to the Company
generally are limited in amount to 10% of the Bank's capital and surplus, or 20%
in the aggregate. Furthermore, such loans and extensions of credit are required
to be collateralized in specific amounts.NOTE K: BENEFIT PLANSThe Company has a noncontributory defined benefit pension plan covering the
majority of its employees and retirees. The Company also provides health and
life insurance benefits for eligible retired employees and dependents.
The following table shows the funded status of the Company's Plans reconciled
with amounts reported in the Company's consolidated balance sheets, and the
assumptions used in determining the actuarial present value of the benefit
obligations:
Pension Benefits Postretirement Benefits
------------------------------------------------------------
2000 1999 2000 1999
------------------------------------------------------------
Change in benefit obligation
Benefit obligation at the beginning of
year $11,931,624 $12,482,616 $1,996,775 $2,693,122
Service cost 732,541 607,015 133,650 103,520
Interest cost 931,899 755,791 138,228 129,518
Deferred actuarial (gain) loss 1,636,216 (1,405,526) 7,819 (833,444)
Benefits paid (605,792) (508,272) (127,973) (95,941)
------------------------------------------------------------
Benefit obligation at end of year 14,626,488 11,931,624 2,148,499 1,996,775
- - ---------------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning
of year 13,582,931 12,157,001
Actual return of plan assets (644,309) 1,637,354
Company contributions 489,549 296,848
Benefits paid (605,792) (508,272)
------------------------------------------------------------
Fair value of plan assets at end of year 12,822,379 13,582,931 -
- - ---------------------------------------------------------------------------------------------------------
Funded (unfunded) status (1,804,109) 1,651,307 (2,148,499) (1,996,775)
Unrecognized actuarial (gain) loss 3,372,590 (117,742) (155,186) (163,005)
Unrecognized prior service (benefit) cost (233,177) (248,367) - -
Unrecognized transition asset (70,034) (92,282)
Unrecognized portion of net obligation
at transition 492,108 533,117
------------------------------------------------------------
Prepaid (accrued) benefit cost $1,265,270 $1,192,916 $(1,811,577) $(1,626,663)
=========================================================================================================
Weighted-average assumptions as of
December 31
Discount rate 7.00% 7.00% 7.00% 7.00%
Expected return on plan assets 9.00% 9.00%
Rate of compensation increase 4.00% 4.00%
=========================================================================================================
Pension Benefits Postretirement Benefits
----------------------------------------------------------------------
2000 1999 1998 2000 1999 1998
- - ---------------------------------------------------------------------------------------------------------
Components of net periodic benefit cost
Service cost $732,541 $607,015 $462,548 $133,650 $103,520 $101,734
Interest cost 931,899 755,791 677,664 138,228 129,518 170,270
Actual return on plan assets 644,309 (1,637,354) (1,376,137)
Net amortization and deferral (1,891,554) 518,453 454,474
Amortization of prior service cost - - 18,610
Amortization of unrecognized net loss - (4,325) (3,679)
Amortization of transition obligation 41,009 41,009 61,200
----------------------------------------------------------------------
Net periodic benefit cost $417,195 $243,905 $218,549 $312,877 $269,722 $348,135
=========================================================================================================
The defined benefit pension plan is authorized to invest up to 10% of the fair
value of its total assets in common stock of Community Bank System, Inc. At
December 31, 2000 and 1999, the plan holds 46,500 and 43,378 shares,
respectively, of the sponsor company common stock.
Health care cost assumptions have no effect on the amounts reported for the
health care plans, since the plan changed to a fixed dollar employee
contribution plan in 1999.
The Company also has an Employee Savings and Retirement Plan, which is
administered by the Trust Department of Community Bank, N. A. The Employee
Savings and Retirement Plan includes Section 401(k) and Thrift provisions as
defined under the Internal Revenue Code. Company contributions to the trust
amounted to $838,000, $830,000, and $848,000 in 2000, 1999, and 1998,
respectively.
The Company has deferred compensation agreements with its President and Chief
Executive Officer and several former executives and officers whereby monthly
payments are to be provided upon retirement over periods ranging from ten to 25
years. Expense recognized during 2000, 1999, and 1998 related to these
arrangements amounted to approximately $328,000, $367,000, and $258,000,
respectively. The Company has recorded a liability of $1,985,000 and $1,713,000
at December 31, 2000 and 1999, respectively.
The Company has a Stock Balance Plan for nonemployee directors who have
completed six months of service. The Plan is a nonqualified, noncontributory
defined benefit plan. The Plan provides benefits for periods of service prior to
January 1, 1996 based on a predetermined formula. Amounts credited to
participant accounts for all creditable service after January 1, 1996 are based
on performance of the Company's stock. Participants become fully vested after
six years of service. Benefits are payable in the form of stock of the Company
on the first of the month following the later of a participant's disassociation
from the Board or attainment of age 70. Unrecognized prior service cost of
$435,425 at December 31, 2000 is being amortized over 8 years. Expense related
to the Plan recognized in 2000, 1999, and 1998, approximated $9,000, $20,000,
and $19,000, respectively. The accrued pension liability was approximately
$349,000 and $367,000 at December 31, 2000 and 1999, respectively. The net
periodic pension cost was calculated using discount rates of 7.0% in 2000 and
1999.NOTE L: STOCK-BASED COMPENSATION PLANSThe Company has long-term, stock-based incentive compensation programs for
directors, officers, and key employees, including incentive stock options
(ISO's), restricted stock awards (RSA's), nonqualified stock options (NQSO's),
warrants, retroactive stock appreciation rights, and discounted options. The
Company has authorized the grant of options for up to 985,000 shares of the
Company's common stock. All options granted have ten year terms and vest and
become fully exercisable at the end of five years of continued employment.
Activity in these plans for 2000, 1999, and 1998 was as follows:
- - -----------------------------------------------------------------------------------------------------
Options Range of Shares Weighted
Outstanding Option Excersiable Average
Price Exercise
Price
Per Share Shares
Outstanding
- - -----------------------------------------------------------------------------------------------------
Outstanding at December 293,030 5.87 - 19.13 129,765 14.54
31, 1997
Granted 231,311 31.31 - 35.31
Exercised / (Cancelled),net (45,573) 8.00 - 31.31
Forfeited 0
Outstanding at December 478,768 5.87 - 35.31 305,261 25.82
31, 1998
Granted 130,379 25.38 - 29.31
Exercised / (Cancelled),net (23,793) 12.13 - 19.13
Forfeited (1,085)
Outstanding at December 584,269 5.87 - 35.31 380,031 25.86
31, 1999
Granted 150,491 23.13
Exercised / (Cancelled),net (1,850) 13.13 - 35.31
Forfeited (2,218)
Outstanding at December 730,692 5.87 - 35.31 498,969 25.15
31, 2000
There were 254,308, 370,095 and 500,289 shares available for future grants or
awards under the various programs described above at December 31, 2000, 1999,
and 1998, respectively.
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," provides for a fair-value-based method of accounting
for stock compensation plans with employees and others. Alternatively, the
statement allows that entities may continue to account for stock-based
compensation plans in accordance with Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees," with disclosure of pro forma
amounts reflecting the difference between cost charged to operations pursuant to
APB No. 25 and compensation cost that would have been charged to operations had
SFAS No. 123 been applied. The Company has elected to continue following APB No.
25 in accounting for its stock-based compensation plans. Application of the
fair-value based accounting provision of SFAS No. 123 results in the following
pro forma amounts of net income and earnings per share:
- - ------------------------------------- --------------- ------------------ --------------- ----------------
2000 1999 1998
- - ------------------------------------- --------------- ------------------ ---------------- ---------------
Net Income:
As reported $20,318,576 $17,635,469 $15,728,222
Pro forma
19,660,475 17,084,216 14,005,208
Earnings per share:
As reported:
Basic $2.88 $2.45 $2.08
Diluted
2.85 2.42 2.05
Pro forma:
Basic
2.78 2.38 1.86
Diluted
2.76 2.34 1.83
=========================================================================================================
The fair value of these options was estimated at the date of grant using a
Black-Scholes options pricing model with the following weighted average
assumptions for 2000, 1999 and 1998: risk-free interest rates by grant ranging
from 4.65% to 6.93% during 2000, 4.65% to 5.78% during 1999, and 5.55% to 5.67%
during 1998; dividend yields of 3.00% during 2000, 1999 and 1998; volatility
factors of the expected market price of the Company's common stock of 29.15% for
2000, 30.78% for 1999 and 44.06% for 1998; and a weighted-average expected life
of the option of 7.11 years in 2000, 6.70 for 1999, and 8.27 for 1998.
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Therefore, the
preceding results are not likely to be representative of the effects on reported
net income for future years due to additional years of vesting. At December 31,
2000 the weighted average information for outstanding and exercisable shares is
as follows:
- - ----------------------------------------------------------------------------------------------
Shares Outstanding Shares Exercisable
Weighted
Range of Shares Weighted Average Shares Average
-----------------------------
Exercise Outstanding Exercise Remaining Outstanding Exercise
Price Price Life Price
(years)
- - ----------------------------------------------------------------------------------------------
$5.87 - $7.06 2,000 $6.75 1.0 2,000 $6.75
$7.06 - $10.59 15,200 $7.50 1.9 15,200 $7.50
$10.59 - $14.13 42,838 $12.78 4.4 39,638 $12.83
$14.13 - $17.66 75,950 $15.63 4.6 64,393 $15.56
$17.66 - $21.19 88,563 $19.13 6.0 74,257 $19.13
$21.19 - $24.72 149,303 $23.13 9.0 48,564 $23.13
$24.72 - $28.25 3,102 $25.66 8.4 1,326 $25.51
$28.25 - $31.78 207,490 $30.11 7.6 107,345 $30.21
$31.78 - $35.31 146,246 $34.81 11.5 146,246 $34.81
- - ----------------------------------------------------------------------------------------------
Total / Average 730,692 $25.22 7.8 498,969 $25.15
==============================================================================================
Directors may elect to defer all or a portion of their director fees until a
certain distribution date pursuant to a Deferred Compensation Plan. The
administrator has established an account for each participating director and
credits to such account the number of shares of Company common stock which would
have been purchased with the director fees and shares equal to the amount of
dividends which would have been received. On the distribution date, the director
shall be entitled to receive either shares of the Company common stock equal to
the number of shares accumulated or at the Company's election, cash equal to the
fair value of the number of shares accumulated. There were 25,539 and 19,614
shares credited to participant accounts at December 31, 2000 and 1999,
respectively, for which a liability of approximately $769,000 and $638,000 was
accrued and approximately $130,000 and $146,000 was recognized as expense.NOTE M: EARNINGS PER SHAREBasic earnings per share is computed based on the weighted average shares
outstanding. Diluted earnings per share is computed based on the weighted
average shares outstanding adjusted for the dilutive effect of the assumed
exercise of stock options during the year. The following is a reconciliation of
basic to diluted earnings per share for the years ended December 31:
- - ----------------------------------------------------------------------------------------------------
Income Shares Per Share Amount
- - ----------------------------------------------------------------------------------------------------
2000 Net Income $20,318,575
Basic EPS 20,318,575 7,063,051 $2.88
Effect of dilutive securities:
Stock options 0 72,762
------------------------------
Diluted EPS $20,318,575 7,135,813 $2.85
====================================================================================================
1999 Net Income $17,635,649
Basic EPS 17,635,649 7,188,626 $2.45
Effect of dilutive securities:
Stock options 0 106,625
------------------------------
Diluted EPS $17,635,649 7,295,251 $2.42
====================================================================================================
1998 Net Income $15,728,223
Basic EPS 15,728,223 7,544,938 $2.08
Effect of dilutive securities:
Stock options 0 125,773
------------------------------
Diluted EPS $15,728,223 7,670,711 $2.05
====================================================================================================NOTE N: COMMITMENTS, CONTINGENT LIABILITIES AND RESTRICTIONSThe Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments consist primarily of commitments to extend credit,
which involve, to varying degrees, elements of credit risk in excess of the
amount recognized in the statement of condition. The contract amount of those
commitments to extend credit reflects the extent of involvement the Company has
in this particular class of financial instrument. The Company's exposure to
credit loss in the event of nonperformance by the other party to the financial
instrument for commitments to extend credit is represented by the contractual
amount of the instrument. The Company uses the same credit policies in making
commitments as it does for on-balance-sheet instruments.
- - --------------------------------------------------------------------------------------------------------
2000 1999
- - --------------------------------------------------------------------------------------------------------
Financial instruments whose contract
amounts represent credit risk at December 31:
Letters of Credit 16,513,902 17,498,107
Commitments to make or
purchase loans or to extend credit
on lines of credit 197,325,501 201,401,741
------------------ ------------------
Total $213,839,403 $218,899,848
========================================================================================================
The fair value of these financial instruments is not significant.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluated each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on management's
credit evaluation of the customer. Collateral held varies but may include
residential real estate, income-producing commercial properties, and personal
property. The Company has unused lines of credit totaling $3,900,000 and
$6,000,000 at December 31, 2000 and 1999, respectively. The Company has
additional unused borrowing capacity through collateralized transactions with
the Federal Home Loan Bank.
The Company is required to maintain a reserve balance, as established by the
Federal Reserve Bank of New York. The required average total reserve for the
14-day maintenance period ended December 31, 2000 was $20,060,000, of which
$2,000,000 was required to be on deposit with the Federal Reserve Bank of New
York. The remaining $18,060,000 was represented by cash on hand.NOTE O: LEASESThe Company leases buildings and office space under agreements that expire in
various years. Rental expense included in operating expenses amounted to
$1,014,020, $991,103 and $1,132,000 in 2000, 1999 and 1998, respectively. The
future minimum rental commitments as of December 31, 2000 for all
noncancelleable operating leases are as follows:
Year ending
December 31:
================================
2001 $883,910
2002 860,082
2003 661,941
2004 636,765
2005 495,163
Thereafter 1,832,702
---------------
$5,370,563
================================NOTE P: REGULATORY MATTERSThe Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 2000 and December
31, 1999, that the Bank meets all capital adequacy requirements to which it is
subject and is "well capitalized" under the regulatory framework of prompt
corrective action. To be categorized as "well capitalized," the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the following table.
- - ---------------------------------------------------------------------------------------------------
To Be Well
Capitalized
Under
For Capital Prompt
Corrective
Actual Adequacy Purposes Action
Provisions
- - ---------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- - ---------------------------------------------------------------------------------------------------
As of December 31, 2000:
Total Core Capital
(to Risk Weighted Assets) $125,812 10.63% $98,218 8.0% $122,772 10.0%
Tier I Capital
(to Risk Weighted Assets) $111,198 9.41% $49,109 4.0% $73,663 6.0%
Tier I Capital
(to Average Assets) $111,198 5.89% $76,817 4.0% $96,021 5.0%
As of December 31, 1999:
Total Core Capital
(to Risk Weighted Assets) $116,257 10.61% $87,864 8.0% $109,836 10.0%
Tier I Capital
(to Risk Weighted Assets) $102,836 9.39% $43,932 4.0% $65,902 6.0%
Tier I Capital
(to Average Assets) $102,836 5.86% $70,340 4.0% $87,925 5.0%
===================================================================================================NOTE Q: PARENT COMPANY STATEMENTS- - --------------------------------------------------------------------------------
CONDENSED BALANCE SHEETS
- - --------------------------------------------------------------------------------
December 31 December 31
2000 1999
- - --------------------------------------------------------------------------------
Assets:
Cash and cash equivalents 307,791 519,259
Investment securities 894,675 820,211
Investment in and advances
to subsidiaries 177,439,295 145,116,096
Other assets 1,138,332 129,489
-------------- ------------------
Total assets 179,780,093 146,585,055
================================================================================
Liabilities:
Due to subsidiary - -
Accrued interest and other liabilities 3,552,440 3,352,414
Borrowings 36,851,938 34,745,188
Shareholders' equity 139,375,715 108,487,453
Total liabilities and
shareholders' equity 179,780,093 146,585,055
================================================================================
- - -------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME
- - -------------------------------------------------------------------------------------------------------
Years Ended December 31
2000 1999 1998
- - -------------------------------------------------------------------------------------------------------
Dividends from subsidiaries 11,244,455 20,466,894 11,462,202
Interest on investments
and deposits 40,000 40,000 40,000
Gain on sale of assets - - 150,000
--------------- ------------------ --------------------
Total revenues 11,284,455 20,506,894 11,652,202
--------------- ------------------ --------------------
Expenses:
Interest on long term
notes and debentures 3,449,732 3,024,977 3,022,485
Other Expenses 14,202 7,774 2,750
--------------- ------------------ --------------------
Total expenses 3,463,934 3,032,751 3,025,235
--------------- ------------------ --------------------
Income before tax benefit and
equity in undistributed net
income of subsidiaries 7,820,521 17,474,143 8,626,967
Income tax benefit 1,000,036 899,704 1,034,861
--------------- ------------------ --------------------
Income before equity in
undistributed net income
subsidiaries 8,820,557 18,373,847 9,661,828
Equity in undistributed
net income:
Subsidiary banks 11,498,018 (738,378) 6,066,395
Bank-related subsidiaries
--------------- ------------------ --------------------
Net Income 20,318,575 17,635,469 15,728,223
=======================================================================================================
On February 3, 1997, the Company formed a subsidiary business trust, Community
Capital Trust I (Trust), for the purpose of issuing preferred securities which
qualify as Tier I capital (see Note P). Concurrent with its formation, the Trust
issued $30,000,000 of 9.75% preferred securities in an exempt offering. The
preferred securities are non-voting, mandatorily redeemable in 2027, and
guaranteed by the Company. The entire net proceeds to the Trust from the
offering were invested in junior subordinated obligations of the Company. The
costs related to the issuance of these securities are capitalized and amortized
over the life of the period to redemption on a straight-line basis.NOTE Q: PARENT COMPANY STATEMENTS (Continued)===================================================================================================
STATEMENTS OF CASH FLOWS
- - ---------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash, Cash Equivalents, and
Noncash Activities
Years Ended December 31
2000 1999 1998
- - ---------------------------------------------------------------------------------------------------
Operating Activities:
Net income $20,318,575 $17,635,469 $15,728,223
Adjustments to reconcile
net income to net cash
provided by operating activities:
Equity in undistributed
net income
of subsidiaries (11,498,018)
738,378 (6,066,395)
Net change other assets
and accrued liabilities (1,023,119) 694,498 (237,012)
- - ---------------------------------------------------------------------------------------------------
Net Cash Provided By
Operating Activities 7,797,438 19,068,345 9,424,816
- - ---------------------------------------------------------------------------------------------------
Investing Activities:
Purchase of available for
sale investment securities (74,464) (178,365) (114,617)
Sale of available for sale
investment securities
Capital contributions
to subsidiaries (569,000) (4,793,001) (602,264)
- - ---------------------------------------------------------------------------------------------------
Net Cash Used By
Investing Activities (643,464) (4,971,366) (716,881)
- - ---------------------------------------------------------------------------------------------------
Financing Activities:
Net change in loans
to subsidiaries - (7,360,338) 7,360,338
Proceeds from issuance of short term
debt 2,100,000 4,000,000 -
Proceeds from issuance of junior
subordinated debentures to
subsidiary - - -
Issuance (retirement) of common
and preferred stock 17,133 187,928 474,450
Repurchase of treasury stock (2,287,501) (5,566,831) (9,151,956)
Cash dividends (7,195,074) (6,791,082) (6,311,580)
- - ---------------------------------------------------------------------------------------------------
Net Cash Provided (Used)
By Financing Activities (7,365,442) (15,530,323) (7,628,748)
- - ---------------------------------------------------------------------------------------------------
Change In Cash
And Cash Equivalents: (211,468) (1,433,344) 1,079,187
Cash and cash equivalents
at beginning of year 519,259 1,952,603 873,416
- - ---------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR 307,791 519,259 1,952,603
===================================================================================================
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION:
Cash Paid For Interest 3,439,398 3,022,231 3,022,485
===================================================================================================
SUPPLEMENTAL DISCLOSURES
OF NONCASH FINANCING ACTIVITIES:
Dividends declared
and unpaid $1,888,234 $1,772,982 $1,678,184
===================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
On February 21, 1995, the Company adopted a Stockholder Protection Rights
Agreement and declared a dividend of one right for each outstanding share of
common stock. The rights can only be exercised when an individual or group has
acquired or attempts to acquire 15% or more of the Company's common stock, if
such action the Board of Directors believes is not in the best interest of the
stockholders. Each right then entitles the holder to acquire common stock having
a market value equivalent to two times the stated exercise price. The rights
expire in February 2005 and may be redeemed by the Company in whole at a price
of $.01 per right.
Pricewaterhouse Coopers LLP
a professional services firm
Board of Directors and Shareholders
Community Bank System, Inc.
In our opinion, the accompanying consolidated statements of condition and the
related consolidated statements of income, changes in shareholders' equity and
of cash flows present fairly, in all material respects, the financial position
of Community Bank System, Inc. and Subsidiaries at December 31, 2000 and 1999,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2000, in conformity with accounting
principals generally accepted in the United State of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principals
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ Pricewaterhouse Coopers LLP
Syracuse, New York
January 26, 2001
TWO YEAR SELECTED QUARTERLY DATA
2000 RESULTS 1st 2nd 3rd 4th
(Dollars in Thousands) Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
Net interest income $17,820 $17,924 $17,578 $17,886 $71,208
Provision for loan 1,209 1,707 2,128 2,138 $7,182
losses
--------------- -------------- -------------- --------------- --------------
Net interest income
after
provision for loan 16,611 16,217 15,450 15,748 64,026
losses
Total other income 3,930 5,500 5,956 5,603 $20,989
Total other expense 13,363 14,315 14,081 14,230 $55,989
--------------- -------------- -------------- --------------- --------------
Income before income 7,178 7,402 7,121 29,026
taxes 7,325
Income taxes 2,154 2,220 2,198 2,136 $8,708
--------------- -------------- -------------- --------------- --------------
Net income $5,024 $5,182 $5,127 $4,985 $20,318
=============== ============== ============== =============== ==============
Earnings per share - $0.71 $0.73 $0.73 $0.71 $2.88
Basic
Earnings per share - $0.70 $0.72 $0.72 $0.70 $2.84
Diluted
========================================================================================================
1999 RESULTS 1st 2nd 3rd 4th
(Dollars in Thousands) Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
Net interest income $15,872 $16,519 $17,554 $17,996 $67,941
Provision for loan 1,169 1,421 1,099 1,447 $5,136
losses
--------------- -------------- -------------- --------------- --------------
Net interest income
after
provision for loan 14,703 15,098 16,455 16,549 62,805
losses
Total other income 4,103 3,880 4,022 3,482 15,487
Total other expense 13,219 13,188 13,266 13,061 52,734
--------------- -------------- -------------- --------------- --------------
Income before income 5,587 5,790 7,211 6,970 25,558
taxes
Income taxes 1,899 1,742 2,309 1,973 $7,923
--------------- -------------- -------------- --------------- --------------
Net income $3,688 $4,048 $4,902 $4,997 $17,635
=============== ============== ============== =============== ==============
Earnings per share - $0.51 $0.56 $0.69 $0.70 $2.45
Basic
Earnings per share - $0.50 $0.55 $0.68 $0.69 $2.42
Diluted
========================================================================================================Item 9. Changes in and Disagreements with Accounting and Financial DisclosureNonePart IIIItem 10. Directors and Executive Officers of the RegistrantThe information concerning Directors of the Company required by this Item 10 is
incorporated herein by reference to the section entitled "Nominees for Director
and Directors Continuing in Office" in the Company's Proxy Statement. The
Information concerning executive officers of the Company required by this Item
10 is incorporated by reference to Item 4A of this Annual Report on Form 10-K .Item 11. Executive CompensationThe information required by this Item 11 is incorporated herein by reference to
the section entitled "Compensation of Executive Officers" in the Company's Proxy
Statement.Item 12. Security Ownership of Certain Beneficial Owners and ManagementThe information required by this Item 12 is incorporated herein by reference to
the sections entitled "Nominees for Director and Directors Continuing in Office"
and "Security Ownership of Certain Beneficial Owners" in the Company's Proxy
Statement to be filed with respect to its 2001 annual shareholders meeting.Item 13. Certain Relationships and Related TransactionsThe information required by this Item 13 is incorporated herein by reference to
the section entitled "Transactions with Management" in the Company's Proxy
Statement. Part IVItem 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-KA. Documents Filed
1. The following consolidated financial statements of Community Bank
System, Inc. and subsidiaries are included in Item 8:
- Consolidated Statements of Condition --
December 31, 2000 and 1999
- Consolidated Statements of Income -- Years ended December 31, 2000,
1999, and 1998
- Consolidated Statements of Changes in Shareholders' Equity -- Years
ended December 31, 2000, 1999, and 1998
- Consolidated Statement of Cash Flows -- Years ended December 31, 2000,
1999, and 1998
- Notes to Consolidated Financial Statements --
December 31, 2000
- Independent Accountant's Report
- Quarterly selected data --
Years ended December 31, 2000 and 1999 (unaudited)
2. Schedules are omitted since the required information is either not
applicable or shown elsewhere in the financial statements.
3. Listing of Exhibits
(21) List of the Company's Subsidiaries
Subsidiaries of the CompanyName Jurisdiction of IncorporationCommunity Bank, N.A. New York
Community Capital Trust I Delaware
Community Financial Services, Inc. New York
Benefit Plan Administrative Services, Inc. New York
CBNA Treasury Management Corporation New York
Community Investment Services, Inc. New York
CBNA Preferred Funding Corp. Delaware
CFSI Close-Out Corp. New York
Elias Asset Management, Inc. Delaware
(27)Financial Data Schedule
B. Reports on Form 8-K
None
C. See Exhibit 14(a)(3) above.
D. See Exhibit 14(a)(2) above
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
COMMUNITY BANK SYSTEM, INC.
By: /s/ Sanford A. Belden
Sanford A. Belden
President, Chief Executive Officer and Director
March 21, 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 21st day of March 2001.Name/s/ James A. GabrielJames A. Gabriel, Director
Chairman of the Board of Directors
and Director/s/ David G. WallaceDavid G. Wallace
Treasurer
Directors:/s/ John M. BurgessJohn M. Burgess, Director/s/ Paul M. Cantwell, Jr.Paul M. Cantwell, Jr., Director/s/ William M. DempseyWilliam M. Dempsey, Director/s/ Nicholas A. DiCerboNicholas A. DiCerbo, Director/s/ Lee T. HirscheyLee T. Hirschey, Director/s/ David C. PattersonDavid C. Patterson, Director/s/ William N. SloanWilliam N. Sloan, Director