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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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X FOR ANNUAL AND TRANSITIONAL REPORTS PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission file number 0-11716
[GRAPHIC OMITTED]
COMMUNITY BANK SYSTEM, INC.
(Exact name of registrant as specified in its charter)
Delaware 16-1213679
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(State or other jurisdiction of (I.R.S.Employer
incorporation) 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 code
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, No Par
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during all the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No_____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [X]
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the common equity was sold, or the
average bid and asked prices of such common equity, as of a specified date
within 60 days prior to the date of filing.
$146,622,818 based upon average selling price of $20.673 and
7,092,479 shares on March 15, 2000.
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Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
7,092,479 shares of Common Stock, no par value, were and
outstanding on March 15, 2000.
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DOCUMENTS INCORPORATED BY REFERENCE.
List hereunder the following documents if incorporated by reference and the
Part of the Form 10-K into which the document is incorporated: (1) any annual
report to security holders; (2) any proxy or information statement; and (3) any
prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of
1933.
Definitive Proxy Statement for Annual Meeting of Shareholders to be held on
May 17, 2000 (the "Proxy Statement") is incorporated by reference in Part III of
this Annual Report on Form 10-K.
1
TABLE OF CONTENTS
PART I Page
Item 1. Business ....................................................... 3
Item 2. Properties ..................................................... 9
Item 3. Legal Proceedings .............................................. 9
Item 4. Submission of Matters to a Vote of Security Holders ............ 9
Item 4A. Executive Officers of the Registrant ...........................10
PART II
Item 5. Market for Registrant's Common Equity
and Related Shareholder Matters ................................11
Item 6. Selected Financial Data ........................................11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................13
Item 8. Financial Statements and Supplementary Data:
Community Bank System, Inc. and Subsidiaries:
Consolidated Statements of Financial Condition ...............42
Consolidated Statements of Income ............................43
Consolidated Statements of Changes in Shareholders' Equity ...44
Consolidated Statements of Cash Flows ........................45
Notes to Consolidated Financial Statements ...................46
Independent Auditor's Report .................................62
Two Year Selected Quarterly Data, 1999 and 1998 ................63
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ...........................................63
PART III
Item 10. Directors and Executive Officers of the Registrant .............63
Item 11. Executive Compensation .........................................64
Item 12. Security Ownership of Certain Beneficial Owners and Management..64
Item 13. Certain Relationships and Related Transactions .................64
PART IV
Item 14. Exhibits,Financial Statement Schedules,and Reports on Form 8-K..64
Signatures ................................................................66
2
Part I
This Annual Report on Form 10-K contains certain forward-looking statements with
respect to the financial condition, results of operations and business of the
Company. These forward-looking statements involve certain risks and
uncertainties. Factors that may cause actual results to differ materially from
those contemplated by such forward-looking statements are set forth herein under
the caption "Forward-Looking Statements."
Item 1. Business
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GENERAL
Community Bank System, Inc.("Company") was incorporated on April 15, 1983,
under the Delaware General Corporation Law. Its principal office is located at
5790 Widewaters Parkway, DeWitt, New York 13214 and its telephone number is
(315) 445-2282. The Company became a bank holding company in 1984 with the
acquisition of The St. Lawrence National Bank ("St. Lawrence Bank") on February
3, 1984 and the First National Bank of Ovid (renamed Horizon Bank, N.A or
"Horizon Bank") on March 2, 1984. Also in 1984 the Company obtained a national
bank charter for its third wholly-owned subsidiary bank, The Exchange National
Bank ("Exchange Bank"), and on July 1, 1984 Exchange Bank acquired the deposits
and certain of the assets of three branches of the Bank of New York located in
Southwestern New York. On September 30, 1987, the Company acquired The Nichols
National Bank ("Nichols Bank") located in Nichols, New York. On September 30,
1988, the Company acquired ComuniCorp, Inc., a one-bank holding company located
in Addison, New York, the parent company to Community National Bank ("Community
Bank").
On March 26, 1990, Community Bank opened the Corning Market Street branch from
the Company's acquisition of deposits and certain assets from Key Bank of
Central New York. On January 1, 1992, the Company's five banking affiliates
consolidated into a single, wholly-owned national banking subsidiary, known as
Community Bank, N.A. ("Bank"). On March 31, 1993, the Bank's marketing
representative office in Ottawa, Canada was closed. On June 3, 1994, the Company
acquired three branch offices in Canandaigua, Corning and Wellsville, New York
from the Resolution Trust Corporation. At that time, the preexisting Canandaigua
branch office loans and deposits were transferred into the new facility. On
October 28, 1994, the Company acquired the Cato, New York branch of The Chase
Manhattan Bank, N.A. On July 14, 1995, the Company acquired 15 branch offices
from The Chase Manhattan Bank, N.A. located in Norwich, Watertown (two),
Boonville, New Hartford, Utica, Skaneateles, Geneva, Pulaski, Seneca Falls,
Hammondsport, Canton, Newark (two), and Penn Yan, New York ("Chase Branches").
On December 15, 1995, the Company sold three of the former Chase Branches,
located in Norwich, New Hartford, and Utica, to NBT Bank, N.A. On June 16, 1997
the Company acquired eight branches from Key Bank of New York located in Alfred,
Cassadaga, Clymer, Cuba, Gowanda, Ripley, Sherman, and Wellsville in
Southwestern New York State. On July 18, 1997 the Company acquired 12 branches
from Fleet Bank located in Old Forge, Boonville, Ogdensburg, St. Regis Falls,
Gateway Plaza, Watertown (2), Clayton, Lowville, Massena (2), and Gouverneur in
Northern and Central New York State. Seven of the former Fleet offices or
existing Bank offices in Watertown (2), Boonville, Ogdensburg, Gouverneur, and
Massena (2) have since been or are scheduled to be combined.
The Company had a wholly-owned data processing subsidiary, Northeastern Computer
Services, Inc. ("Northeastern"). Northeastern was acquired by the Company from
The St. Lawrence Bank on May 31, 1984 pursuant to a corporate reorganization.
Northeastern had previously been a wholly-owned subsidiary of The St. Lawrence
Bank and was the survivor of a merger with Lawban Computer Systems, Inc.,
another wholly-owned subsidiary of the St. Lawrence Bank. Northeastern's office
was located at 6464 Ridings Road, Syracuse, New York. In December 1991, the
Company entered into a five year agreement with Mellon Bank, N.A. ("Mellon") to
provide data processing services (the agreement has since been renewed with the
subsequent acquiror of Mellon's data services, Fiserv, Inc., for a term ending
December 31, 2002). On June 30, 1992, Northeastern ceased operations. On January
17, 1997 all the outstanding shares of common stock of Northeastern were
transferred from the Company to Community Bank, N.A. On that date, Northeastern
became a wholly-owned subsidiary of the Bank and changed its name to CBNA
Treasury Management Corporation ("TMC"). TMC is now utilized by the Bank to
manage its Treasury function, including asset/liability, investment portfolio,
and liquidity management.
The Company also had a wholly-owned mortgage banking subsidiary, Community
Financial Services, Inc. (CFSI), which was established in June 1986; it
commenced operation in January 1987. In July 1988, CFSI purchased Salt City
Mortgage Corp., a Syracuse-based mortgage broker. CFSI ceased operations in 1990
and was renamed CFSI Close-Out Corp. in 1997.
In July 1996, the Company purchased Benefit Plans Administrators of Utica, New
York, a pension administration and consulting firm serving sponsors of defined
benefit and defined contribution plans.
On February 3, 1997, the Company formed a subsidiary business trust, Community
Capital Trust I, for the purpose of issuing preferred securities, which qualify
as Tier 1 capital. Concurrent with its formation, the trust issued $30,000,000
3
of 9.75% preferred securities in an exempt offering maturing in year 2027 and
guaranteed by the Company. The entire net proceeds to the trust from the
offering were invested in junior subordinated obligations of the Company.
On June 19, 1998, the Company formed a subsidiary of the Bank, Community
Financial Services, Inc., to offer selected insurance products through its own
agency.
On December 22, 1998, the Company formed a broker/dealer subsidiary of the Bank,
Community Investment Services Inc., which is fully implemented with ten
Financial Consultants available to provide investment advice and products to
customers.
On February 26, 1999, CBNA Preferred Funding Corp., a Real Estate Investment
Trust (REIT), was established as a subsidiary of the Bank to hold fixed rate
real estate mortgages that are serviced by the Bank.
On February 7, 2000, the Company announced its intention to acquire Elias Asset
Management, a nationally recognized firm that currently manages $700 million in
assets for individuals, corporate pension and profit sharing plans, and
foundations.
The Company provides banking services through its two regional offices at 45-49
Court Street, Canton, New York and 201 North Union Street, Olean, New York, as
well as through 67 customer facilities in the eighteen counties of St. Lawrence,
Jefferson, Lewis, Oneida, Cayuga, Seneca, Ontario, Oswego, Wayne, Yates,
Allegany, Cattaraugus, Tioga, Steuben, Chautauqua, Franklin, Herkimer, and
Onondaga. The administrative office is located at 5790 Widewaters Parkway,
DeWitt, New York, in Onondaga County.
The Bank is a community retail bank committed to the philosophy of serving the
financial needs of customers in local communities. The Bank's branches are
generally located in small towns and villages within its geographic market
areas. The Company believes that the local character of business, knowledge of
the customer and customer needs, and comprehensive retail and small business
products, together with rapid decision-making at the branch and regional level,
enable the Bank to compete effectively. The Bank is a member of the Federal
Reserve System and the Federal Home Loan Bank of New York ("FHLB"), and its
deposits are insured by the FDIC up to applicable limits.
Unless the context otherwise provides, all references in this Annual Report on
Form 10-K to the "Company" shall mean, collectively, Community Bank System, Inc.
and its subsidiaries.
Banking Services
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The Bank offers a range of commercial and retail banking services in each of its
market areas to business, individual, agricultural and government customers.
Account Services. The Bank's account services include checking accounts,
negotiable orders of withdrawal ("NOW"), money market accounts, savings
accounts, time deposit accounts, and individual retirement accounts.
Lending Activities. The Bank's lending activities include the making of
residential and farm loans, business lines of credit, working capital
facilities, inventory and dealer floor plans, as well as installment,
commercial, term and student loans.
The Company's predominant focus on the retail borrower enables its loan
portfolio to be highly diversified. About 63% of loans outstanding are oriented
to consumers borrowing on an installment and residential mortgage loan basis. In
addition, the typical loan to the Company's commercial business borrowers is
under $75,000, with nearly 80% of its customers representing about 25% of
commercial loans outstanding.
Other Services. The Bank offers a range of trust services, including personal
trust, employee benefit trust, investment management, financial planning and
custodial services. In addition, the Bank offers nonbank financial products
including fixed- and variable-rate annuities, mutual funds, and stock
investments. The Bank also offers safe deposit boxes, travelers checks, money
orders, wire transfers, collections, foreign exchange, drive-in facilities,
automatic teller machines (ATMs), and twenty-four hour depositories. Through an
accounts receivable management program, the Bank provides a service to
qualifying businesses by purchasing accounts receivable on a discounted basis.
Customers of the Bank also receive pension administration and consulting service
pertaining to their defined benefit and defined contribution plans from CBSI's
nonbank subsidiary, Benefit Plans Administrative Services, Inc. (BPA); BPA also
provides services to nonbank customers.
4
Competition
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The Company, through the Bank, competes in three distinct banking markets in the
Northern ("Northern Market"), Finger Lakes ("Finger Lakes Market"), and Southern
Tier ("Southern Tier Market") regions of New York State. The Bank considers its
market areas in these regions to be the counties in which it has banking
facilities. Major competitors in these markets primarily include local branches
of banks based in Boston, Massachusetts, Albany or Buffalo, New York, and
Cleveland, Ohio, as well as local independent banking and thrift institutions
and federal credit unions. Other competitors for deposits and loans within the
Bank's market areas include insurance companies, money market funds, consumer
finance companies and financing affiliates of consumer durable goods
manufacturers. Lastly, personal and corporate trust and investment counseling
services in competition with the Bank are offered by insurance companies,
investment counseling firms, other financial service firms, and individuals.
Northern Market. Branches in the Northern Market compete for loans and deposits
in the six county market area of St. Lawrence, Jefferson, Lewis, Franklin,
Herkimer, and Oneida Counties in Northern New York State. Within this market
area, the Bank maintains a market share(1) of 10.1% including commercial banks,
credit unions, savings and loan associations and savings banks. However, in its
three county primary market area (St. Lawrence, Jefferson, and Lewis), the Bank
has a 24.0% share. The Bank operates 27 customer facilities in this market and
is ranked either first or second in market share in 17 of the 20 towns where
these offices are located.
Finger Lakes Market. In the Finger Lakes Market, the Bank operates 14 customer
facilities competing for loans and deposits in the six-county market area of
Seneca, Oswego, Ontario, Wayne, Onondaga, and Cayuga Counties. Within the Finger
Lakes Market area, the Bank maintains a market share (1) of approximately 2.8%
including commercial banks, credit unions, savings and loan associations and
savings banks. However, the Bank's primary market within this region is Seneca
County, where the Bank has a 35.7% share. The Bank is ranked either first or
second in market share in six of the eleven Finger Lakes Market area towns where
its offices are located.
Southern Tier Market. The Bank's Southern Tier Market consists of two
sub-markets, the Olean submarket and the Corning submarket.
Olean Submarket. The Olean Submarket competes for loans and deposits in the
primary market area of Cattaraugus, Chautauqua, and Allegany Counties in the
Southern Tier of New York State. Within this area, the Bank maintains a market
share (1) of approximately 14.2% including commercial banks, credit unions,
savings and loan associations and savings banks. The Olean Submarket operates 16
office locations (including the Falconer branch opened in February 2000), and
the Bank is ranked either first or second in market share in 12 of the 14 towns
where these offices are located.
Corning Submarket. The Corning Submarket competes for loans and deposits in the
primary market area of Steuben, Yates and Tioga Counties in the Southern Tier of
New York State. Within this area, the Bank maintains a market share (1) of
approximately 9.7% including commercial banks, credit unions, savings and loan
associations and savings banks. The Corning Submarket operates ten office
locations, and the Bank is ranked either first or second in market share in
seven of the eight towns where these offices are located. The Bank also competes
for loans where it has no banking facilities; this secondary market area
includes Chemung and Schuyler Counties in New York State, and Tioga County in
Pennsylvania.
(1) Deposit market share data as of June 30, 1998, the most recent information
available, calculated by Sheshunoff Information Services, Inc.
5
The table below summarizes the Bank's deposits and market share by the eighteen
counties in which it has customer facilities. Market share is based on deposits
of all commercial banks, credit unions, savings and loan associations, and
savings banks.
Number of
CBNA Towns Where
Deposits Number of CBNA Has
6/30/98 Market CBNA 1st or 2nd Banking
County (000's) Share Facilities* Market Position Market
- ------------- ---------- ----------- ---------- ------------- -----------
Lewis $102,460 46.5 % 4 3 Northern
Seneca 98,771 35.7 5 3 Finger Lakes
St.Lawrence 309,762 28.7 14 9 Northern
Allegany 89,277 27.8 5 4 Olean
Cattaraugus 192,470 24.8 5 4 Olean
Yates 49,318 23.5 1 1 Corning
Jefferson 145,509 14.2 5 2 Northern
Steuben 88,650 7.7 7 5 Corning
Tioga 25,211 8.1 2 1 Corning
Ontario 63,350 6.9 3 0 Finger Lakes
Wayne 47,251 6.0 2 0 Finger Lakes
Herkimer 23,690 4.1 1 1 Northern
Oswego 39,107 4.1 2 2 Finger Lakes
Chautauqua 49,196 4.0 6 4 Olean
Franklin 15,775 3.4 1 1 Northern
Oneida 55,774 1.8 2 1 Northern
Cayuga 13,457 1.8 1 1 Finger Lakes
Onondaga 8,790 0.1 1 0 Finger Lakes
- ------------- ---------- ----------- ---------- ------------- -----------
18 $1,417,818 7.0 % 67 42 CBNA
Includes opening of 1982 E. Main St., Falconer, NY office and ATM in first
quarter 2000.
Employees
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As of December 31, 1999, the Bank employed 711 full-time equivalent employees
versus 718 at year-end 1998. The Bank provides a variety of employment benefits
and considers its relationship with its employees to be good.
CERTAIN REGULATORY CONSIDERATIONS
Bank holding companies and national banks are regulated by state and federal
law. The following is a summary of certain laws and regulations that govern the
Company and the Bank. To the extent that the following information describes
statutory or regulatory provisions, it is qualified in its entirety by reference
to the actual statutes and regulations thereunder.
Bank Holding Company Supervision
- --------------------------------
The Company is registered as a bank holding company under the Bank Holding
Company Act of 1956, as amended (the "BHCA") and as such is subject to
regulation by the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board"). As a bank holding company, the Company's activities and those
of its subsidiary have historically been limited to the business of banking and
activities closely related or incidental to banking. On November 12, 1999,
however, the Gramm-Leachy-Bliley Act was signed into law which will, effective
March 12, 2000, relax the previous limitations and permit bank holding companies
to engage in a broader range of financial activities (see "Financial Services
Modernization Act" in the final section of this discussion for details).
Under Federal Reserve Board policy, a bank holding company is expected to act as
a source of financial strength to its subsidiary banks and to make capital
contributions to a troubled bank subsidiary. The Federal Reserve Board may
charge the bank holding company with engaging in unsafe and unsound practices
for failure to commit resources to a subsidiary bank when required. A required
capital injection may be called for at a time when the Company does not have the
resources to provide it. Any capital loans by the Company to its subsidiary bank
would be subordinate in right of payment to depositors and to certain other
indebtedness of such subsidiary banks.
The BHCA requires the prior approval of the Federal Reserve Board in any case
where a bank holding company proposes to acquire direct or indirect ownership or
control of more than 5% of any class of the voting shares of, or substantially
all of the assets of, any bank (unless it owns a majority of such bank's voting
shares) or otherwise to control a bank or to merge or consolidate with any other
bank holding company. The BHCA also prohibits a bank holding company, with
certain exceptions, from acquiring more than 5% of the voting shares of any
company that is not a bank.
The Riegal-Neal Interstate Banking and Efficiency Act of 1994 (enacted on
September 29, 1994) provides that, among other things, substantially all state
law barriers to the acquisition of banks by out-of-state bank holding companies
6
are eliminated effective September 29, 1995. The law also permits interstate
branching by banks effective as of June 1, 1997, subject to the ability of
states to opt-out completely or to set an earlier effective date. The Company
believes that the effect of the law has been to increase competition within the
markets where the Company operates, although the Company cannot quantify the
effect to which competition has increased in such markets or the timing of such
increases.
OCC Supervision
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The Bank is supervised and regularly examined by the Office of the Comptroller
of the Currency (OCC). The various laws and regulations administered by the OCC
affect corporate practices such as payment of dividends, incurring debt, and
acquisition of financial institutions and other companies, and affect business
practices, such as payment of interest on deposits, the charging of interest on
loans, types of business conducted and location of offices. There are no
regulatory orders or outstanding issues resulting from regulatory examinations
of the Bank.
Limits on Dividends and Other Revenue Sources
- ---------------------------------------------
The Company's ability to pay dividends to its shareholders is largely dependent
on the Bank's ability to pay dividends to the Company. In addition to state law
requirements and the capital requirements discussed below, the circumstances
under which the Bank may pay dividends are limited by federal statutes,
regulations and policies. For example, as a national bank, the Bank must obtain
the approval of the OCC for the payment of dividends if the total of all
dividends declared in any calendar year would exceed the total of the Bank's net
profits, as defined by applicable regulations, for that year, combined with its
retained net profits for the preceding two years. Furthermore, the Bank may not
pay a dividend in an amount greater than its undivided profits then on hand
after deducting its losses and bad debts, as defined by applicable regulations.
At December 31, 1999, the Bank had $15.9 million in undivided profits legally
available for the payment of dividends.
In addition, the Federal Reserve Board and the OCC are authorized to determine
under certain circumstances that the payment of dividends would be an unsafe or
unsound practice and to prohibit payment of such dividends. The payment of
dividends that deplete a bank's capital base could be deemed to constitute such
an unsafe or an unsound practice. The Federal Reserve Board has indicated that
banking organizations should generally pay dividends only out of current
operating earnings.
There are also statutory limits on the transfer of funds to the Company by its
banking subsidiary whether in the form of loans or other extensions of credit,
investments or asset purchases. Such transfers by the Bank to the Company
generally are limited in amount to 10% of the Bank's capital and surplus, or 20%
in the aggregate. Furthermore, such loans and extensions of credit are required
to be collateralized in specified amounts.
Capital Requirements
- --------------------
The Federal Reserve Board has established risk-based capital guidelines which
are applicable to bank holding companies. The guidelines established a framework
intended to make regulatory capital requirements more sensitive to differences
in risk profiles among banking organizations and take off-balance sheet
exposures into explicit account in assessing capital adequacy. The Federal
Reserve Board guidelines define the components of capital, categorize assets
into different risk classes and include certain off-balance sheet items in the
calculation of risk-weighted assets. At least half of the total capital must be
comprised of common equity, retained earnings and a limited amount of perpetual
preferred stock, less goodwill ("Tier I capital"). Banking organizations that
are subject to the guidelines are required to maintain a ratio of Tier I capital
to risk-weighted assets of at least 4.00% and a ratio of total capital to
risk-weighted assets of at least 8.00%. The appropriate regulatory authority may
set higher capital requirements when an organization's particular circumstances
warrant. The remainder ("Tier 2 capital") may consist of a limited amount of
subordinated debt, limited-life preferred stock, certain other instruments and a
limited amount of loan and lease loss reserves. The sum of Tier I capital and
Tier 2 capital is "total risk-based capital." The Company's Tier I and total
risk-based capital ratios as of December 31, 1999 were 9.28% and 10.50%,
respectively.
In addition, the Federal Reserve Board has established a minimum leverage ratio
of Tier I capital to quarterly average assets less goodwill ("Tier I leverage
ratio") of 3.00% for bank holding companies that meet certain specified
criteria, including that they have the highest regulatory rating. All other bank
holding companies are required to maintain a Tier I leverage ratio of 3.00% plus
an additional cushion of at least 100 to 200 basis points. The Company's Tier I
leverage ratio as of December 31, 1999 was 5.80%, which exceeded its regulatory
requirement of 4.00%. The guidelines also provide that banking organizations
experiencing internal growth or making acquisitions will be expected to maintain
strong capital positions substantially above the minimum supervisory levels,
without significant reliance on intangible assets. The Company is subject to the
same OCC capital requirements as those that apply to the Bank.
7
The four federal banking agencies - the Board of Governors of the Federal
Reserve System, the Federal Deposit Insurance Corporation, the Office of the
Comptroller of the Currency, and the Office of Thrift Supervision - have
recently issued an interagency proposal which revises the risk-based capital
requirements for certain obligations related to securitized transactions. The
changes are intended to produce more consistent capital treatment for credit
risks associated with exposures arising from these types of transactions. The
proposal would amend the risk based capital requirements for asset-backed
securities as well as recourse obligations and direct credit substitutions. It
incorporates many of the industry comments received in response to an earlier
version published in November 1997. A consultative paper issued in June 1999 by
the Basel Committee on Banking Supervision considers a similar approach to that
contained in the current proposal. Public comment is requested by June 7, 2000.
If the proposal is adopted, the Bank does not believe it will have a material
effect on its financial condition or results of operations.
Federal Deposit Insurance Corporation Improvement Act of 1991
- -------------------------------------------------------------
In December 1991, Congress enacted the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), which substantially revised the bank
regulatory and funding provisions of the Federal Deposit Insurance Act and made
significant revisions to several other federal banking statutes. FDICIA provides
for, among other things, (i) a recapitalization of the Bank Insurance Fund (the
"BIF") of the FDIC by increasing the FDIC's borrowing authority and providing
for adjustments in its assessment rates; (ii) annual on-site examinations of
federally-insured depository institutions by banking regulators; (iii) publicly
available annual financial condition and management reports for financial
institutions, including audits by independent accountants; (iv) the
establishment of uniform accounting standards by federal banking agencies; (v)
the establishment of a "prompt corrective action" system of regulatory
supervision and intervention, based on capitalization levels, with more scrutiny
and restrictions placed on depository institutions with lower levels of capital;
(vi) additional grounds for the appointment of a conservator or receiver; (vii)
a requirement that the FDIC use the least-cost method of resolving cases of
troubled institutions in order to keep the costs to insurance funds at a
minimum; (viii) more comprehensive regulation and examination of foreign banks;
(ix) consumer protection provisions including a Truth-in-Savings Act; (x) a
requirement that the FDIC establish a risk-based deposit insurance assessment
system; (xi) restrictions or prohibitions on accepting brokered deposits, except
for institutions which significantly exceed minimum capital requirements; and
(xii) certain additional limits on deposit insurance coverage.
FDICIA requires federal banking agencies to take "prompt corrective action" with
respect to banks that do not meet minimum capital requirements. FDICIA
establishes five capital tiers: "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." The following table sets forth the minimum capital ratios
that a bank must satisfy in order to be considered "well capitalized" or
"adequately capitalized" under Federal Reserve Board regulations:
Well Capitalized Adequately Capitalized
---------------- ----------------------
Total Risk-Based Capital Ratio 10% 8%
Tier I Risk-Based Capital Ratio 6% 4%
Tier I Leverage Ratio 5% 4%
If a bank does not meet all of the minimum capital ratios necessary to be
considered "adequately capitalized," it will be considered "undercapitalized,"
"significantly undercapitalized," or "critically undercapitalized," depending
upon the amount of the shortfall in its capital. As of December 31, 1999, the
Bank's total risk-based capital ratio and Tier I risk - based capital ratio were
10.61% and 9.39%, respectively, and its Tier I leverage ratio as of such date
was 5.86%. Notwithstanding the foregoing, if its principal federal regulator
determines that an "adequately capitalized" institution is in an unsafe or
unsound condition or is engaging in an unsafe or unsound practice, it may
require the institution to submit a corrective action plan; restrict its asset
growth; and prohibit branching, new acquisitions, and new lines of business.
Among other things, an institution's principal federal regulator may deem the
institution to be engaging in an unsafe or unsound practice if it receives a
less than satisfactory rating for asset quality, management, earnings, or
liquidity in its most recent examination.
Possible sanctions for undercapitalized depository institutions include a
prohibition on the payment of dividends and a requirement that an institution
submit a capital restoration plan to its principal federal regulator. The
capital restoration plan of an undercapitalized bank will not be approved unless
the holding company that controls the bank guarantees the bank's performance.
The obligation of a controlling bank holding company to fund a capital
restoration plan is limited to the lesser of five percent (5%) of an
undercapitalized subsidiary's assets or the amount required to meet regulatory
capital requirements. If an undercapitalized depository institution fails to
submit or implement an acceptable capital restoration plan, it can be subjected
to more severe sanctions, including an order to sell sufficient voting stock to
become adequately capitalized. Critically undercapitalized institutions are
subject to the appointment of a receiver or conservator.
8
In addition, FDICIA requires regulators to impose new noncapital measures of
bank safety, such as loan underwriting standards and minimum earnings levels.
Regulators are also required to perform annual on-site bank examinations, place
limits on real estate lending by banks and tighten auditing requirements.
Financial Services Modernization Act
- ------------------------------------
On November 12, 1999, the Gramm-Leach-Bliley Act was signed into law, repealing
provisions of the depression-era Glass-Steagall Act, which prohibited commercial
banks, securities firms, and insurance companies from affiliating with each
other and engaging in each other's businesses. The major provisions of the Act
took effect on March 12, 2000.
The Act creates a new type of financial services company called a "Financial
Holding Company:" (an "FHC"), a bank holding company with dramatically expanded
powers. FHCs may offer virtually any type of financial service, including
banking, securities underwriting, insurance (both agency and underwriting) and
merchant banking. The Federal Reserve serves as the primary "umbrella" regulator
of FHCs. Balanced against the attractiveness of these expanded powers are higher
standards for capital adequacy and management, with heavy penalties for
noncompliance.
Bank holding companies that wish to engage in expanded activities but do not
wish to become financial holding companies may elect to establish "financial
subsidiaries," which are subsidiaries of national banks with expanded powers.
The Act permits financial subsidiaries to engage in the same types of activities
permissible for nonbank subsidiaries of financial holding companies, with the
exception of merchant banking, insurance underwriting and real estate investment
and development. Merchant banking may be permitted after a five-year waiting
period under certain regulatory circumstances.
Implementing regulations under the Act have not yet been promulgated, and though
the Company cannot predict the full impact of the new legislation, there is
likely to be consolidation among financial services institutions and increased
competition for the Company. CBSI expects to remain a bank holding company for
the time being and access its options as circumstances change.
Item 2. Properties
- ------------------
The Company leases its administrative offices at 5790 Widewaters Parkway,
DeWitt, New York and the facility that houses Benefit Plans Administrative
Services in Utica, New York. The Bank owns its regional offices in Olean, New
York and Canton, New York. Of the Bank's remaining 67 customer facilities, 47
are owned by the Bank, and 20 are located in long-term leased premises.
Real property and related banking facilities owned by the Company at
December 31, 1999 had a net book value of $16.2 million and none of the
properties was subject to any encumbrances. For the year ended December 31,
1999, rental fees of $889,000 were paid on facilities leased by the Company for
its operations.
Item 3. Legal Proceedings
- -------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
Not applicable
9
Item 4A. Executive Officers of the Registrant
- ---------------------------------------------
The following table sets forth certain information about the executive officers
of the Company and the Bank, each of whom is elected by the Board of Directors
and each of whom holds office at the discretion of the Board of Directors.
Name and Age Position
------------ --------
Sanford A. Belden Director, President and Chief Executive
Age 57 Officer of the Company and the Bank
David G. Wallace Treasurer of the Company and Executive
Age 55 Vice President and Chief Financial
Officer of the Bank
Michael A. Patton President, Financial Services
Age 54
James A. Wears President, Banking
Age 50
Girard H. Mayer Chief Executive Officer,
Age 61 Benefit Plans Administrative Services,
Inc.
Sanford A. Belden (Director, President and Chief Executive Officer of the
Company and the Bank). Mr. Belden has been President and Chief Executive Officer
of the Company and the Bank since October 1, 1992. Mr. Belden was formerly
Manager, Eastern Region, Rabobank Nederland, New York, New York from 1990 to
1992 and prior thereto served as President, Community Banking, for First Bank
System, Minneapolis, Minnesota, a multi-state bank holding company.
David G. Wallace (Treasurer of the Company; Executive Vice President and Chief
Financial Officer of the Bank). Mr. Wallace became Vice President and Chief
Financial Officer of the Bank and Treasurer of the Company in November 1988 and
Senior Vice President and Chief Financial Officer of the Bank in August 1991. He
assumed his current position in February 2000.
Michael A. Patton (President, Financial Services). Mr. Patton was the President
and Chief Executive Officer of The Exchange National Bank, a former subsidiary
of the Company, from 1984 until January 1992, when, in connection with the
consolidation of the Company's five subsidiary banks into Community Bank, N.A.,
he was named President, Southern Region. He assumed his current position in
February 2000.
James A. Wears (President, Banking). Mr. Wears served as Senior Vice President
of the St. Lawrence National Bank, a former subsidiary of the Company, from 1988
through January 1991 and as President and Chief Executive Officer from January
1991 until January 1992. Following the January 1992 consolidation of the
Company's five subsidiary banks into Community Bank, N.A., Mr. Wears was named
President, Northern Region. He assumed his current position in February 2000.
Girard H. Mayer (Chief Executive Officer, Benefit Plans Administrative Services,
Inc.). Mr. Mayer assumed his present position in July 1996 when his company
(Benefit Plans Administrators) was purchased by Community Bank System, Inc.
10
Part II
Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters
- --------------------------------------------------------------------------------
The common stock has been trading on the New York Stock Exchange under the
symbol "CBU" since December 31, 1997. Prior to that, the common stock traded
over-the-counter on the NASDAQ National Market under the symbol "CBSI" beginning
on September 16, 1986. The following table sets forth the high and low prices
for the common stock, and the cash dividends declared with respect thereto, for
the periods indicated. The prices do not include retail mark-ups, mark-downs or
commissions. There were 7,092,259 shares of common stock outstanding on December
31, 1999 held by approximately 1,760 registered shareholders of record, and
approximately 2,190 shareholders whose shares are held in nominee name at
brokerage firms and other financial institutions.
COMMON STOCK PERFORMANCE
NYSE Symbol: CBU
Newspaper Listing: CmntyBkSys
Market (Bid) Price
High Low Closing Price Quarterly
Year/Qtr Price Price Amount %Change Dividend
- -------- ----- ----- ------ ------- --------
1999
4th $27.25 $22.81 $23.13 -15.5% $0.25
3rd $27.38 $24.63 $27.38 7.9% $0.25
2nd $26.00 $23.06 $25.38 6.6% $0.23
1st $27.81 $23.69 $23.81 -16.6% $0.23
1998
4th $30.50 $27.13 $29.31 2.6% $0.23
3rd $33.94 $24.81 $28.56 -8.8% $0.23
2nd $38.25 $29.69 $31.31 -7.9% $0.20
1st $35.88 $30.56 $34.00 8.6% $0.20
The Company has historically paid regular quarterly cash dividends on its common
stock, and declared a cash dividend of $0.25 per share for the first quarter of
2000. The Board of Directors of the Company presently intends to continue the
payment of regular quarterly cash dividends on the common stock, as well as to
make payment of regularly scheduled dividends on the trust preferred stock as
and when due, subject to the Company's need for those funds. However, because
substantially all of the funds available for the payment of dividends by the
Company are derived from the Bank, future dividends will depend upon the
earnings of the Bank, its financial condition, its need for funds and applicable
governmental policies and regulations. See "Supervision and Regulation -- Limits
On Dividends and Other Payments."
Item 6. Selected Financial Data
- -------------------------------
The following table sets forth selected consolidated historical financial data
of the Company as of and for each of the years in the five year period ended
December 31, 1999. The historical "Income Statement Data" and historical "End of
Period Balance Sheet Data" are derived from the audited financial statements.
The "Per Share Data", "Selected Ratios" and "Other Data" for all periods are
unaudited. All financial information in this table should be read in conjunction
with the information contained in "Capitalization," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and with the
Consolidated Financial Statements and the related notes thereto included
elsewhere in this Annual Report on Form 10-K.
11
SELECTED CONSOLIDATED FINANCIAL INFORMATION
Years ended December 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
-----------------------------------------------------------------------
Income Statement Data:
Interest income $123,888 $122,938 $117,628 $97,688 $83,387
Interest expense 55,947 58,543 54,752 42,422 36,307
-----------------------------------------------------------------------
Net interest income (excl. FTE) 67,941 64,395 62,876 55,266 47,080
Provision for possible loan losses 5,136 5,123 4,480 2,897 1,765
-----------------------------------------------------------------------
Net interest income after provision for
for possible loan losses 62,805 59,272 58,396 52,369 45,315
Non-interest income 15,487 17,040 11,808 8,874 6,558
Non-interest expense 52,734 51,876 45,799 37,450 33,019
-----------------------------------------------------------------------
Cumululative effect of change in accounting principle 0 328 0 0 0
Income before income taxes 25,559 24,764 24,406 23,793 18,854
Provision for income taxes 7,923 9,036 8,844 9,660 7,384
=======================================================================
Net income $17,635 $15,728 $15,562 $14,133 $11,470
=======================================================================
End of Period Balance Sheet Data:
Total assets $1,840,702 $1,680,689 $1,633,742 $1,343,865 $1,152,045
Loans, net of unearned discount 1,009,223 917,220 843,212 652,474 560,151
Earning assets (incl. MVA) 1,664,110 1,510,760 1,455,139 1,231,058 1,034,183
Total deposits 1,360,306 1,378,066 1,345,686 1,027,213 1,016,946
Long-term borrowing 70,000 70,000 25,000 100,000 25,550
Trust securities 29,817 29,810 29,804 0 0
Shareholders' equity 108,487 120,165 118,012 109,352 100,060
Average Balance Sheet Data:
Total assets $1,723,631 $1,670,624 $1,491,920 $1,251,826 $1,054,610
Loans, net of unearned discount 951,167 884,751 749,596 602,717 519,762
Earning assets (excl. MVA) 1,572,356 1,512,175 1,363,703 1,147,455 975,257
Total deposits 1,369,269 1,396,700 1,213,793 1,032,169 871,050
Long-term borrowing 70,003 89,805 79,863 57,006 3,399
Trust securities 29,814 29,810 27,290 0 0
Shareholders' equity 115,876 120,936 110,689 103,398 84,231
Common Per Share Data:
Net income $2.42 $2.05 $2.02 $1.83 $1.70
Cash dividend declared 0.96 0.86 0.76 0.69 0.62
Period-end book value - stated 15.30 16.47 15.56 14.03 12.99
Period-end book value - tangible 8.32 9.01 7.82 9.85 8.37
Common Outstanding Shares:
Average during period (incl. common stock
equivalents) 7,213,394 7,670,711 7,676,326 7,482,518 6,522,410
End of period (excl. common stock equivalents) 7,092,259 7,296,453 7,586,512 7,474,406 7,358,450
Selected Ratios:
Return on average total assets 1.02% 0.94% 1.04% 1.13% 1.09%
Return on average shareholders' equity (excl.
preferred stock) 15.22% 13.01% 14.09% 13.88% 13.85%
Common dividend payout ratio 39.05% 41.15% 37.30% 37.27% 34.79%
Net interest margin (taxable equivalent basis) 4.46% 4.31% 4.64% 4.86% 4.88%
Noninterest income to average assets 0.90% 1.02% 0.79% 0.71% 0.64%
Noninterest income to operating income 18.70% 19.00% 15.30% 13.60% 12.10%
Efficiency ratio 55.20% 58.50% 55.00% 53.40% 56.70%
Non-performing loans to period-end total loans 0.57% 0.43% 0.49% 0.44% 0.36%
Non-performing assets to period-end total loans
and other real estate owned 0.67% 0.56% 0.60% 0.55% 0.47%
Allowance for loan losses to period-end loans 1.33% 1.36% 1.47% 1.25% 1.25%
Allowance for loan losses to period-end
non-performing loans 234.93% 312.12% 297.96% 285.58% 349.69%
Allowance for loan losses to period-end
non-performing assets 203.45% 240.74% 246.02% 224.33% 267.40%
Net charge-offs (recoveries) to average total loans 0.44% 0.58% 0.50% 0.29% 0.21%
Average net loans to average total deposits 69.47% 63.35% 61.76% 58.39% 59.67%
Period-end total shareholders' equity to period
end assets 5.89% 7.15% 7.22% 8.14% 8.69%
Tier I capital to risk-adjusted assets 9.28% 9.24% 9.28% 10.70% 10.62%
Total risk-based capital to risk-adjusted assets 10.50% 10.49% 10.53% 11.83% 11.76%
Tier I leverage ratio 5.80% 5.71% 5.67% 5.88% 5.83%
12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- -----------------------------------------------------------------------------
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains certain forward-looking statements with respect to the
financial condition, results of operations and business of Community Bank
System, Inc. ("CBSI" or "the Company"). These forward-looking statements involve
certain risks and uncertainties. Factors that may cause actual results to differ
materially from those contemplated by such forward-looking statements are set
herein under the caption "Forward-Looking Statements."
The following discussion is intended to facilitate an understanding and
assessment of significant changes in trends related to the financial condition
of the Company and the results of its operations. The following discussion and
analysis should be read in conjunction with the Selected Consolidated Financial
Information and the Company's Consolidated Financial Statements and related
notes thereto appearing elsewhere in this Form 10-K. All references in the
discussion to financial condition and results of operations are to the
consolidated position and results of the Company and its subsidiaries taken as a
whole.
Net Income and Profitability
- ----------------------------
Net income and diluted earnings per share reached record highs in 1999 of $17.6
million and $2.42, respectively. Compared to 1998, net income rose 12.1% while
earnings per share were up 18.0%. The Company's share repurchase program
continued to benefit earnings per share growth; since its inception in the fall
of 1998, 548,100 shares or 7.2% of shares outstanding have been bought back.
Cash earnings per share (diluted) also reached record levels in 1999, up 16% to
$2.79. Cash or tangible return on assets (ROA) for 1999 was 1.18% versus nominal
ROA at 1.02%. Tangible return on equity (ROE) for the year climbed 2.30
percentage points over 1998's level to 17.57%, exceeding nominal ROE by 2.35
percentage points for the same period and placing the Company's performance in
the top quartile of its regional peer banks. The difference between cash and
nominal results reflects the contribution of the Company's branch acquisitions
on an economic basis, which excludes the non-cash impact of amortizing the
premiums paid for the acquisitions. Many analysts and investors consider cash
results a better measure of core profitability and value created for
shareholders than nominal results.
1999's recurring or core earnings were up 24.5% from last year to $18.3 million
after removing the impact of one-time income and expense items. Items excluded
relate to investment gains and losses and expense associated with branch
properties no longer in use.
The primary factors explaining 1999's improvement are explained in detail in the
remaining sections of this document and are summarized as follows:
o Net interest income (full-tax equivalent basis) increased 5.5% or $3.5
million due to a $60 million increase in average earning assets. Average
loans grew $66 million (7.5%) while average investments went down $6.2
million (-1.0%). The growth in earning assets was funded by $86 million
(64.5%) more in average borrowings, offset by $27 million (2.0%) less in
average deposits. The net interest margin improved by a meaningful 15 basis
points to 4.46% on average.
o Total noninterest income decreased by 10.8% from 1998 to $15.5 million,
largely due to the Company taking selected investment losses in 1999 (when
there were economic opportunities to swap for higher yielding securities)
instead of recognizing investment gains as it did in 1998 (to maintain a
steady level of investment income based on a total return approach).
Revenues excluding net investment gains (losses) and the impact of branch
properties no longer in use were up nicely for the fifth consecutive year
to approximately $16.1 million in 1999, a $823,000 (5.4%) improvement.
o Noninterest expense or overhead rose $857,000 or 1.7% in 1999 compared to
$6.1 million or 13.3% in 1998. Unusual factors explaining 1999's small
increase include losses on fraudulent customer transactions related to a
floor plan dealer during the summer and approximately $506,000 in one-time
expenses incurred to dispose of acquired branch properties no longer in
use.
o Loan loss provision expense rose a minimal $13,000 or 0.3% over 1998's
level. The full year loan loss provision covered total actual net
charge-offs by 1.24 times, this margin serving as a precaution in the event
the Upstate New York economy weakens after its long sustained period of
relative economic health. Net charge-offs as a percent of average loans
decreased 14 basis points in 1999 to .44%. The unchanged level of provision
was in part made possible by significantly lower installment loan net
charge-offs, indicative of more conservative underwriting practices and
regular follow-up surveillance adopted during 1998. Nonperforming loans
increased during 1999 to .57% of loans outstanding at year-end compared to
.43 % one year earlier.
13
o The Company's combined effective federal and state tax rate decreased 550
basis points this year to 31.0%. The decrease resulted from improved tax
planning and by an increased proportion of tax-exempt municipal investment
holdings, which were an attractive value in 1999.
The above combination of factors resulted in a level of profitability which may
be compared to that of CBSI's peer bank holding companies. This group is
comprised of 155 companies nationwide having $1 billion to $3 billion in assets
based on data through September 30, 1999 (the most recently available
disclosure) as provided by the Federal Reserve System. Through year-to-date
September, the Company's return on average assets (ROA) was .99% compared to the
peer norm of 1.19%. Shareholder return on equity (ROE) at 14.32% for the same
period ranked higher than the peer norm of 13.84%, placing it in the 54th peer
percentile. The Company's primary performance focus is on achieving returns to
shareholders and is better measured by ROE than ROA.
Underlying the 1999 growth in earnings per share was steady improvement on a
quarterly basis. The first three quarters of 1999 at $.50, $.55 and $.68 per
share exceeded the same 1998 quarters by $.02, $.05, and $.12, respectively.
Fourth quarter earnings per share at $.69, a record high for the Company,
exceeded the same 1998 period by $.18.
Selected Profitability and Other Measures
- -----------------------------------------
Return on average assets, return on average equity, dividend payout and equity
to asset ratios for the years indicated are as follows:
At December 31,
1999 1998 1997
------------------------------------------
Percentage of net income to
average total assets 1.02% 0.94% 1.04%
Percentage of net income to
average shareholders' equity 15.22% 13.01% 14.09%
Percentage of dividends declared
per common share to net income
per common share 39.05% 41.95% 37.30%
Percentage of average shareholders'
equity to average total assets 6.72% 7.24% 7.42%
Net Interest Income
- -------------------
Net interest income is the amount that interest and fees on earning assets
(loans and investments) exceeds the cost of funds, primarily interest paid to
the Company's depositors as well as interest on borrowings from the Federal Home
Loan Bank of New York, a $4 million M&T Bank line of credit, and dividends on
the Company's $30 million in 9.75% trust preferred stock. Net interest margin is
the difference between the gross yield on earning assets and the cost of
interest bearing funds as a percentage of earning assets.
Net interest income (with non-taxable income converted to a full tax-equivalent
basis) totaled $70.1 million in 1999; this represents a $5.0 million or 7.7%
increase over the prior year. The increase was due both to higher earning asset
volumes, which had a positive impact on net interest income of $2.6 million, and
interest rate changes, which had a favorable impact of $2.4 million.
With regard to the components of 1999's net interest income, greater average
earning assets of $60.2 million helped contribute to the $2.4 million or 2.0%
rise in interest income. Average loans grew a total of $66.4 million in 1999,
with the most significant portion occurring in the latter half of the year.
Overall interest and fees on loans grew $2.1 million or 2.5% as a result of this
growth and came despite a 44 basis point (BP) decrease in loan yields to 8.92%,
which was caused by declining market rates during 1998 and the first part of
1999.
14
This rate environment also produced limited investment portfolio buying
opportunities until mid-1999, resulting in a $6.2 million decrease in average
investments. Despite the lower outstandings, 1999's investment interest income
was slightly higher (.8% or $345,000) than the prior year due to an increase in
the average investment yield from 6.52% to 6.64%. Rising market rates in the
latter half of 1999, which both increased the yield on new investments and
decreased the amount of premium amortization of the Company's existing premium
collateralized mortgage obligations (CMOs), caused this increase in average
investment yield.
Loans ended 1999 at $1.009 billion, up $92 million or 10.0%. The average ratio
of loans to earning assets increased from 58.5% in 1998 to 60.5% in 1999 as a
consequence of strong business development efforts in the lending function and
the aforementioned decrease in average investments. Comparing year-end 1999 over
year-end 1998, however, investments were $66.9 million higher, reflective of
purchases during the more attractive rate environment beginning in mid-1999.
Through September 30, 1999, the Company's loan yield was in the favorable 67th
peer bank percentile while the investment yield was in the favorable 65th
percentile. The average earning asset yield fell 16 basis points to 8.02% in
1999 because of the aforementioned declining loan yield, partially offset by the
higher investment yield and the increased mix of loans to earning assets.
Total average fundings (deposits and borrowings) grew by $58.7 million in 1999,
largely attributable to a $105.9 million increase in short-term borrowings (in
part, related to cash raised for potential Year 2000 outflows), partially offset
by lower municipal time deposit levels.
Despite higher average fundings, interest expense decreased by $2.6 million due
to a drop in the average 1999 cost of funds, which as a percentage earning
assets was reduced by 31 BPs to 3.56%. The rate on interest bearing deposits
fell 43 BPs to 3.77%, due largely to across-the-board drops in deposit rates
beginning in the fall of 1998 and continuing into early 1999 and a 65 BP lower
borrowing rate reflecting declines in market rates. Overall, through September
30, 1999, the Company's average cost of funds rate fell favorably to the 45th
peer bank percentile, compared to being in the 55th percentile through September
30, 1998.
The 32 BP decline in the average cost of funds from 1998 to 1999, in contrast to
the 16 BP decline in the earning asset yield, caused CBSI's net interest margin
to increase by 15 basis points from 4.31% in 1998 to 4.46% this year. The
Company's net interest margin ranked in the 60th peer bank percentile through
September 30, 1999, which favorably compares to the 40th peer bank percentile
through September 30, 1998. For fourth quarter 1999, the net interest margin was
4.49% compared to 4.25% one year earlier. This can be attributed to a higher
earning asset yield (up 28 BPs) at 8.18%, with only a slight increase (up 3
BP's) in the rate on interest-bearing liabilities at 4.27%.
15
The following table sets forth certain information concerning average
interest-earning assets and interest-bearing liabilities and the yields and
rates thereon for the twelve month periods ended December 31, 1999 and 1998.
Interest income and resultant yield information in the tables are on a fully
tax-equivalent basis using a marginal federal income tax rate of 35%. Averages
are computed on daily average balances for each month in the period divided by
the number of days in the period. Yields and amounts earned include loan fees.
Nonaccrual loans have been included in interest earnings for purposes of these
computations.
Year Ended December 31,
----------------------------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------------------------
(000's omitted except yields Avg. Amt. of Avg. Avg. Amt.of Avg.
and rates) Balance Interest Yield/Rate Balance Interest Yield/Rate
Paid Paid
ASSETS:
----------------------------------------------------------------------------------------
Interest-earning assets:
Federal funds sold $586 $33 5.63% $5,428 $296 5.46%
Time deposits in other banks 209 1 0.63% 35 2 5.51%
Taxable investment securities 521,912 34,261 6.56% 592,559 38,290 6.46%
Nontaxable investment securities 98,482 6,946 7.05% 29,402 2,308 7.85%
Loans (net of unearned discount) 951,167 84,853 8.92% 884,751 82,778 9.36%
--------------- ------------ -------------- ----------
Total interest-earning assets 1,572,356 126,094 8.02% 1,512,175 123,674 8.18%
Noninterest earning assets
Cash and due from banks 62,399 57,913
Premises and equipment 24,747 24,412
Other assets 79,438 83,048
Less: Allowance for loan losses (12,693) (12,282)
Net unrealized gains/(losses) on
available-for-sale portfolio (3,035) 5,376
--------------- --------------
Total $1,723,212 $1,670,642
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities
Savings deposits $513,544 $11,108 2.16% $508,730 $12,155 2.39%
Time deposits 619,851 31,666 5.11% 672,972 37,514 5.57%
Short-term borrowings 119,830 6,278 5.24% 13,915 754 5.42%
Long-term borrowings 99,817 6,895 6.91% 119,615 8,120 6.79%
------------------------------ --------------------------
Total interest-bearing 1,353,042 55,947 4.13% 1,315,232 58,543 4.45%
liabilities
Noninterest bearing liabilities
Demand deposits 235,874 214,997
Other liabilities 18,420 19,477
Shareholders' equity 115,876 120,936
--------------- --------------
Total $1,723,212 $1,670,642
=============== ==============
Net interest earnings $70,147 $65,131
============ ==========
Net yield on interest-earning assets 4.46% 4.31%
============== =======
Federal tax exemption on nontaxable
investment securities included in
interest income $2,207 $736
16
As discussed above, the change in 1999's net interest income (full
tax-equivalent basis) may be analyzed by segregating the volume and rate
components of the changes in interest income and interest expense for each
underlying category.
--------------------------------------------- -------------------------------------------
1999 Compared to 1998 1998 Compared to 1997
--------------------------------------------- -------------------------------------------
Increase (Decrease) Due to Change In (1) Increase (Decrease) Due to Change In (1)
Net Net
(000's omitted) Volume Rate Change Volume Rate Change
Interest earned on:
Federal funds sold and securities
purchased under agreements to resell ($272) $9 ($263) ($694) $125 ($569)
Time deposits in other banks 2 (3) (1) - - -
Taxable investment securities (4,629) 600 (4,029) 807 (6,750) (5,943)
Nontaxable investment securities 4,895 (257) 4,638 1,026 (138) 888
Loans (net of unearned discounts) 6,035 (3,960) 2,075 12,666 (1,451) 11,215
Total interest-earning assets (2) $4,858 ($2,438) $2,420 $12,380 ($6,789) $5,591
Interest paid on:
Savings deposits $114 ($1,161) ($1,047) $1,551 ($367) $1,184
Time deposits (2,841) (3,007) (5,848) 4,136 (240) 3,896
Short-term borrowings 5,550 (26) 5,524 (1,692) (137) (1,829)
Long-term borrowings (1,365) 140 (1,225) 863 (321) 542
Total interest-bearing liabilities (2) $1,649 ($4,245) ($2,596) $5,383 ($1,590) $3,793
Net interest earnings (2) $2,641 $2,375 $5,016 $6,532 ($4,734) $1,798
(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute dollar
amounts of change in each.
(2) Changes due to volume and rate are computed from the respective changes in
average balances and rates of the totals; they are not a summation of the
changes of the components.
17
The following table sets forth certain information concerning average
interest-earning assets and interest-bearing liabilities and the yields and
rates thereon for the three month periods ended December 31, 1999 and 1998.
Interest income and resultant yield information in the tables are on a fully
tax-equivalent basis using a marginal federal income tax rate of 35%. Averages
are computed on daily average balances for each month in the period divided by
the number of days in the period. Yields and amounts earned include loan fees.
Nonaccrual loans have been included in interest earnings for purposes of these
computations.
Fourth Quarters Ended December 31,
----------------------------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------------------------
(000's omitted except yields Avg. Amt. of Avg. Avg. Amt. of Avg.
and rates) Balance Interest Yield/Rate Balance Interest Yield/Rate
Paid Paid
ASSETS:
----------------------------------------------------------------------------------------
Interest-earning assets:
Federal funds sold $2,013 $29 5.78% $1,533 $20 5.16%
Time deposits in other banks 651 0 0.00% 35 0 5.27%
Taxable investment securities 530,336 9,326 6.98% 545,987 7,827 5.69%
Nontaxable investment securities 114,100 1,991 6.92% 35,601 688 7.66%
Loans (net of unearned discount) 997,212 22,545 8.97% 912,334 21,227 9.23%
--------------- ------------ --------------- ------------
Total interest-earning assets 1,644,312 $33,891 8.18% 1,495,490 $29,762 7.90%
Noninterest earning assets
Cash and due from banks 68,289 60,148
Premises and equipment 25,431 25,028
Other assets 76,925 80,722
Less: Allowance for loan losses (12,870) (12,293)
Net unrealized gains/(losses)on
available-for-sale portfolio (16,235) 9,815
--------------- ---------------
Total $1,785,852 $1,658,910
=============== ===============
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Interest-bearing liabilities
Savings deposits $498,084 $2,715 2.16% $512,308 $2,778 2.15%
Time deposits 623,904 8,075 5.13% 643,305 8,829 5.44%
Short-term borrowings 197,979 2,733 5.48% 24,168 311 5.10%
Long-term borrowings 99,816 1,744 6.93% 107,853 1,833 6.74%
---------------------------- ----------------------------
Total interest-bearing 1,419,783 15,267 4.27% 1,287,634 13,751 4.24%
liabilities
Noninterest bearing liabilities
Demand deposits 239,619 226,924
Other liabilities 15,947 22,891
Shareholders' equity 110,503 121,461
--------------- ---------------
Total $1,785,852 $1,658,910
=============== ===============
Net interest earnings $18,624 $16,011
============ ============
Net yield on interest-earning assets 4.49% 4.25%
============== ==========
18
The changes in net interest income (full tax-equivalent basis) by volume and
rate component for fourth quarter 1999 versus fourth quarter 1998 are shown
below for each major category of interest-earning assets and interest-bearing
liabilities.
----------------------------------------
4th Quarter 1999 versus 4th Quarter 1998
----------------------------------------
Increase (Decrease) Due to Change In (1)
Net
Volume Rate Change
------ ---- ------
Interest earned on:
Federal funds sold and securities
purchased under agreements to resell $7 $2 $9
Time deposits in other banks 3 (3) 0
Taxable investment securities (1,412) 2,911 1,499
Nontaxable investment securities 1,750 (447) 1,303
Loans (net of unearned discounts) 4,666 (3,348) 1,318
Total interest-earning assets (2) $3,040 $1,089 $4,129
Interest paid on:
Savings deposits ($150) $87 ($63)
Time deposits (266) (488) (754)
Short-term borrowings 2,397 25 2,422
Long-term borrowings (361) 272 (89)
Total interest-bearing liabilities (2) $1,420 $96 $1,516
Net interest earnings (2) $1,652 $961 $2,613
(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute dollar
amounts of change in each.
(2) Changes due to volume and rate are computed from the respective changes in
average balances and rates of the totals; they are not a summation of the
changes of the components.
Noninterest Income
- ------------------
The Company's sources of noninterest income are of four primary types: financial
services, comprised of personal trust, employee benefit trust, investment, and
insurance products; specialty products, largely electronic products and mortgage
banking and servicing activities; general banking services related to loans,
deposits and other activities typically provided through the branch network; and
periodic transactions, most often net gains/losses from the sale of investments
or other occasional events.
Total noninterest income in 1999 decreased by 10.8% to $15.5 million, largely
due to the lack of the prior year's $2.3 million in investment gains (including
a pretax $328,000 realized upon adoption of FAS 133) compared to 1999's $638,000
in investment losses. Revenues excluding net investment gains (losses) and the
impact of branch properties no longer in use were up nicely for the fifth
consecutive year to approximately $16.1 million in 1999, a $823,000 (5.4%)
improvement.
Fees from the financial services segment of noninterest income rose 11.7% in
1999 to $5.9 million compared to 20.0% growth in the prior year. Over the last
five years, financial services revenues have climbed at a compound annual growth
rate of nearly 28%, and now comprise over 36% on total noninterest income
excluding net investment securities gains (losses). The reduction in 1999's
growth rate largely reflects a slower rate of increase in the sale of mutual
fund products due to several factors discussed below, which management believes
to be temporary. The specific performance of the Company's several financial
services businesses is as follows:
19
o Fees from personal trust services were $1.3 million, up 9.0% in 1999 as
compared to a 2.9% increase in 1998. Recurring trust fees (which excludes
periodic estate fees) related to individual investment management accounts
and annual trust administration (together representing 81% of personal
trust income) grew a combined 12.1%. Personal trust assets under management
reached over $170 million by year end, up 1.7% over the prior twelve
months. Greater focus on business development, including pro-active
integration of its major referral sources--the Company's ten Financial
Consultants, its Benefit Plans Administrative Services subsidiary, its
newly acquired asset management subsidiary, Elias Asset Management, Inc.
(see below), and the CBNA branch network--is expected to accelerate future
fiduciary income growth.
o Revenue from record keeping and consulting services provided by Benefits
Plans Administrative Services, Inc. (acquired in July 1996), combined with
investment management services through the Bank's employee benefits trust
division (EBT), totaled $2.6 million in 1999 compared to $2.3 million in
1998, an 11.0% increase. Retirement plan assets, reflecting more than 350
plan sponsors, reached nearly $230 million at year-end 1999, up almost 36%
over 12 months earlier. BPA/EBT supports defined benefit, 403(b), 457,
401(k), ESOP and other forms of defined contribution plans, enhancing these
products with voice response and transactional web services. BPA has been
endorsed by several trade organizations and mutual fund companies; thus,
its market continues to grow from a local base to plan sponsors located in
the urban centers of New York State and beyond.
o 1999 is the sixth year in which CBSI has offered mutual funds, annuities,
and other investment products through Financial Consultants (FCs) located
in various locations throughout the Bank's branch network. Commission
income from this source grew 3.8% in 1999 to $1.3 million, down from over
22% growth in 1998. Reasons for the reduced growth include greater
attractiveness of the Bank's own fixed income products (C.D.s) due to
1999's rising interest rates beginning in the late spring of 1999 (upon
which no commission income is earned); some lag in sales as the Bank
implemented in the spring its own more cost-effective broker/dealer
subsidiary, Community Investment Services, Inc. (CISI); and reluctance of
some customers to invest toward the end of 1999 in light of Year 2000
concerns. A dedicated CISI office was established in the late fall in
Lockport, New York, with its two new Financial Consultants bringing the
bank-wide total to ten FCs. In addition, our newly established insurance
agency, Community Financial Services, Inc. (CFSI), has expanded the product
capabilities of the Financial Consultants by adding long-term health care
and other selected insurance products to their offerings. Revenues from
CFSI were nominal in 1999.
o Community Bank has long been in the business of selling creditor life and
disability insurance to installment and mortgage loan customers through its
branch system. Revenues from this activity, including the Bank's annual
dividend from the New York State Bankers insurance subsidiary through which
the insurance is written, plus commissions generated by the Company's
Financial Consultants, amounted to $728,000 in 1999, up 40% over last year.
A very significant contribution to the Company's future growth in financial
services income is the acquisition announced in February 2000 of Elias Asset
Management (EAM), based in Williamsville, New York, a suburb of Buffalo. This
transaction significantly expands our financial services capabilities and is
expected to close during the second quarter of the year. Founded in 1981, EAM is
a nationally recognized investment advisory firm with over $700 million in
assets under management, comprised of more than 900 accounts with individuals,
foundations, and corporate pension and profit-sharing plans.
By acquiring EAM, the Company is merging the strengths of two organizations that
have successfully worked together since 1986 in various trust department and
pension management capacities, satisfying customer preferences for an even
greater range of services. The decision to acquire EAM is consistent with the
direction of the financial services industry toward more diversified and broadly
based companies - a trend that will accelerate as a result of Financial
Modernization legislation (see brief discussion in the "Certain Regulatory
Considerations" section of this Form 10-K in Item 1. "Business"). Operating as a
separate, independent subsidiary, EAM and its existing clients will benefit from
additional resources that will enable EAM to maintain its high quality
reputation, while adding valuable personnel and enhanced services. As of
year-end 1999, approximately 50% of EAM's $3.2 million in revenues was derived
from individuals, with nearly 25% from corporate pension and thrift plans, and
the remainder from foundations and charitable trusts.
In addition to its financial services businesses, another segment of the
Company's noninterest income is its specialty products, which largely include
electronic products and mortgage banking and servicing activities. These
activities in 1999 contributed 12% of noninterest income excluding net
investment securities gains (losses). Total revenues were $1.84 million, down
slightly from $1.88 million in 1998, primarily due to reduced mortgage banking
revenues as discussed below. Over the last five years, specialty product
revenues have grown at an annual compound growth rate of nearly 18%.
20
o Fees earned from electronic products reached $1.38 million this year, up
21% from 1998. This increase was primarily due to income from the Company's
Visa affiliation, which rose to $937,000, reflecting continued growth of
Visa Check Card revenues (climbing 33%) and Visa merchant discount fees (up
25%). ATM surcharge income rose 8.1% to $442,000.
o Mortgage banking fees were $403,000 in 1999, down from $737,000 in the
prior year. The primary reasons for the decrease were the disproportionate
impact of recognizing the value of the Company's mortgage servicing rights
in 1998 and the fact that secondary market mortgages were sold at a slight
loss this year versus a $235,000 gain in 1998's more favorable financial
market environment. Loan servicing fees more than doubled in 1999 to
$195,000 on a serviced loan portfolio of $89 million, consisting of about
1,475 loans.
o Lastly, the Company established a relationship this year with a national,
third-party leasing company, Synergy Resources of Bloomington, Minnesota,
which pays referral commissions on leases booked for CBNA customers.
Revenues were $59,000, largely from small equipment leases. Customers may
submit applications by telephone, fax, or the Internet.
The third and largest segment of the Company's recurring noninterest income is
the wide variety of fees earned from general banking services, which reached
$8.4 million in 1999, up 8.7% from the prior year. This segment contributed 52%
of noninterest income excluding net investment securities gains (losses). The
increase in these revenues is generally in the single digit range because they
are largely dependent on deposit growth and expansion of services provided
through the branch network. However, CBSI's branch acquisitions beginning in
1994 have resulted in a five year annual compound growth rate in these revenues
of nearly 22%.
o Service charges on deposit accounts and overdraft fees increased to $6.57
million in 1999, a 5.6% growth rate compared to a 27% growth rate in 1998.
Last year's faster growth rate reflects the full-year impact of the
Company's mid-1997 branch acquisitions.
o General commissions and miscellaneous income at $1.8 million were up 22% in
1999. This increase is attributable to approximately 13% more in
miscellaneous service fees and a swing in Canadian exchange revenue from a
loss in 1998 to a slightly positive level this year.
Income from periodic transactions in 1999 largely includes $638,000 in losses
taken on $14.6 million in investment sales, with the net proceeds reinvested at
higher yields to achieve greater resulting cash flows than had the securities
been held to maturity. This amount compares to gains of $2.3 million last year
on a combined $86 million in investment sales. The investment gains and losses
taken over the last two years are illustrative of the Company's active
management of its investment portfolio to achieve a desirable total return and a
targeted level of combined interest income and securities gains/losses across
financial market cycles.
Other amounts of periodic income in 1999 were a small $46,000 compared to
$253,000 in the prior year; the latter was the combined result of a gain on life
insurance and an asset sold, partially offset by losses on the sale of former
acquired branch properties.
Noninterest income, excluding transactions related to investment securities and
disposal of branch properties, as a percent of operating income was 18.7% in
1999, a decrease of .3 percentage points from the prior year. Excluding the
impact of mortgage servicing rights and gains/losses on the sale of secondary
product in both years, the ratio would have been up .1 percentage point, the
increase being limited by the Company's record growth in net interest income.
Since 1994, the percentage has risen 6.7 percentage points from 12.0%, resulting
from a focused effort to raise product revenues less susceptible to interest
rate fluctuation. Compared to peers as of September 30, 1999, this ratio
remained in the 47th peer percentile.
In light of management's ongoing objective to grow noninterest income,
opportunities to develop new fee-based products are actively pursued, including
newly permitted activities under the 1999 Financial Modernization Act, and
emphasis continues on the collection of fees (minimizing limitation on waived
fees) for providing quality service. In an effort to focus on and accelerate
growth of the Company's financial service businesses, Michael A. Patton, who has
headed for many years the Bank's trust department and Financial Consultant
activities along with general banking activities in the Southern Region, was
named President, Financial Services, in February 2000.
21
The following table sets forth selected information by category of noninterest
income for the Company for the years and quarters indicated.
---------------------------------------------
(000's omitted) Years ended December 31, Quarters ended
December 31,
---------------------------------------------
1999 1998 1997 1999 1998
---- ---- ---- ---- ----
Personal trust $1,290 $1,183 $1,150 $328 $323
EBT/BPA 2,586 2,333 1,824 595 572
Insurance 728 518 405 82 90
Other investment products 1,268 1,222 1,002 346 313
---------------------------------------------
Total financial services 5,872 5,257 4,380 1,351 1,298
Electronic banking 1,379 1,140 675 407 313
Mortgage banking 403 737 241 36 484
Commercial leasing 59 0 0 14 0
---------------------------------------------
Total specialty products 1,841 1,877 915 457 796
Deposit service charges 3,373 3,246 2,709 852 808
Overdraft fees 3,197 2,975 2,186 841 824
Commissions 1,795 1,473 1,440 408 327
---------------------------------------------
General banking services 8,365 7,694 6,335 2,101 1,960
Miscellaneous revenue 46 473 191 (12) 11
---------------------------------------------
Total noninterest income
excl. security gains/losses 16,124 15,301 11,822 3,897 4,066
Security gains/losses (a) (638) 2,287 (14) (415) 562
Disposition of branch properties 0 (219) 0 0 (151)
---------------------------------------------
Total noninterest income $15,487 $17,368 $11,808 $3,481 $4,476
Noninterest income as a
percentage of operating income
(excludes net securities
gains/losses and disposal of
branch properties) 18.7% 19.0% 15.3% 17.3% 20.3%
(a) includes $328,000 of investment gains on securities sold upon adoption of
FAS 133 in third quarter 1998.
22
Noninterest Expense
- -------------------
Noninterest expense or overhead rose $857,000 or 1.7% in 1999 compared to $6.1
million or 13.3% in 1998, which reflected the full-year impact of the Company's
mid-1997 acquisitions of a combined 20 branches from Key Bank, N.A. and Fleet
Bank. This year's overhead of $52.7 million as a percent of average assets was
3.06%, a slight decrease from 3.11% in 1998; however, the ratio remains in the
peer normal 57th percentile. Excluding amortization of intangible assets, which
is a significant non-cash expense for the Company and virtually non-existent for
its peer group, CBSI's noninterest expense ratio was 2.79% in 1999 compared to
3.02% for peers. Non-interest expense for fourth quarter 1999 was $13.0 million,
unchanged compared to the same 1998 period.
For CBSI as a whole, higher personnel expense accounted for over 74% of 1999's
increase in overhead, with personnel costs being up 2.5% versus being 12.2%
higher in 1998 as a result of acquisitions. Salary, benefit, and payroll tax
expense increased primarily because of modest annual merit awards for employees.
Total full-time equivalent staff at year-end 1999 was 711 versus 718 at year-end
1998, down as the result of attrition.
Nonpersonnel expense rose $219,000 or 0.8% this year as opposed to a $3.3
million or 14.3% increase in 1998. This was largely caused by losses on
fraudulent customer transactions related to a floor plan dealer during the
summer and write-downs of leases on former branch properties closed due to
duplicate facilities within the same proximity. In addition, the increased
expense can be explained by set up costs of the Company's newly formed Real
Estate Investment Trust (REIT) and more aggressive 1999 advertising. These
unfavorable items were partially offset by a reduction in delivery costs of
mutual funds and other related products as a result of the creation of the
Company's own broker/dealer subsidiary, lower supplies expense in part
reflecting an improved system of control, and reduced occupancy expense due to
the full year impact of the disposition of former branch properties in 1998.
The efficiency ratio is defined at two levels. The nominal ratio is total
overhead expense divided by operating income (full tax-equivalent net interest
income plus noninterest income, excluding net securities gains and losses). The
adjusted or recurring efficiency ratio additionally excludes one-time expense
and intangible amortization (a non-cash expense) as well as all one-time
noninterest income; over the last five years, these one-time items have related
to the disposal of branch properties. The lower the ratio, the more efficient a
bank is considered to be.
In 1999, the nominal efficiency ratio decreased 3.5 percentage points to 61.1%
while the recurring ratio decreased 3.3 percentage points to 55.2%. Management
believes it is more meaningful to use the recurring ratio to compare to national
norms, because as mentioned above, most of the Company's peers do not have
intangible expense to the significance that CBSI has. On that basis, CBSI's
ratio is more favorable than the national peer bank holding company median of
60.8% based on data available as of September 30, 1999. The improvement in the
1999 efficiency ratio is a function of several factors: an increase in net
interest margin due to a lower cost of funds and reduced premium amortization on
the Company's CMO securities, growth in earning assets, steady progress in
developing more sources of noninterest income, and persistent control of
overhead expense.
While the Company's expense ratios have generally been favorable, management
maintains a heightened focus on controlling costs and eliminating
inefficiencies. Areas for improvement have been identified through detailed peer
comparisons, a bank-wide program of employee involvement, targeted use of
outside consultants, and review of productivity-enhancing technology. These
combined efforts are intended to offset pressure from future price increases and
higher transaction volumes and enable the Company to more fully benefit from
economies of scale as it continues to grow. Specifically, the Bank benefited
more fully in 1999 from the spring 1998 installation of frame relay to lower the
cost of data communications, the creation of a broker/dealer subsidiary during
first quarter 1999 which brought down the expense of delivering mutual funds and
related products, and the overhead savings following disposition of acquired
branch properties in 1998.
23
The following table sets forth information by category of noninterest expense of
the Company for the years and quarters indicated.
(000's omitted) Years ended Quarters ended
December 31, December 31,
-----------------------------------------------------------
1999 1998 1997 1999 1998
---- ---- ---- ---- ----
Personnel expense $26,388 $25,750 $22,945 $6,654 $6,407
Net occupancy expense 3,919 4,056 3,426 936 940
Equipment expense 3,465 3,501 2,728 888 892
Professional fees 1,937 2,142 1,616 404 677
Data processing expense 3,955 3,928 3,584 1,078 940
Amortization of intangibles 4,615 4,640 3,787 1,149 873
Stationary and supplies 1,218 1,344 1,749 307 293
Deposit insurance premiums 183 189 140 46 46
Other 7,053 6,326 5,823 1,599 1,990
----------------------------------------------------
Total $52,733 $51,876 $45,799 $13,061 $13,058
====================================================
Total operating expense as
a percentage of average
assets 3.06% 3.11% 3.07% 2.90% 3.12%
Efficiency ratio (1) 55.2% 58.5% 55.0% 52.9% 58.3%
(1) Noninterest expense excluding nonrecurring items and amortization of deposit
intangibles divided by operating income excluding all nonrecurring items.
Income and Income Taxes
- -----------------------
Income before tax in 1999 was $25.6 million, up 4.6% over the prior year's
amount, which excluded the impact of FAS 133 accounting for selected securities
gains. When income is recast as if all tax-exempt revenues were fully taxable on
a federal basis, and all securities gains are stated on a pretax basis, 1999's
results rose by $2.3 million or 8.9% before tax.
The main reasons for improved pretax earnings were the favorable $5.0 million
increase in net interest income (full tax-equivalent basis) related to strong
earning asset growth (up 4.0% or $60.2 million on average) and a $823,000 climb
in recurring noninterest income. These factors were partially offset by a modest
$857,000 (1.5%) increase in overhead expense (largely relating to merit pay
increases and selected vendor price adjustments) and the lack of the prior
year's $2.3 million in investment gains as compared to 1999's $638,000 in
investment losses (see "Investments" section of this Form 10-K). Loan loss
provision expense was held virtually constant at the 1998 level.
The Company's combined effective federal and state tax rate decreased 550 basis
points this year to 31.0%. The decrease resulted from effective tax planning,
which was additionally benefited in 1999 by an organizational change in the
first quarter, as well as increased purchases of tax-exempt municipal
investments during the year.
Capital
- -------
Shareholders' equity ended 1999 at $108.5 million, down 9.8% from one year
earlier, primarily reflective of the after-tax market value adjustment (MVA) of
the Bank's available-for-sale investments, dividends paid to shareholders, and
221,500 shares of CBSI common stock that was repurchased during 1999 (548,100 or
7.2% of shares outstanding since the fall of 1998). This stock repurchase
program reflects the Company's belief that its common stock is an excellent
investment and that the financial markets are not fully valuing its strong
banking franchise. These capital outflows are partially offset by the
contribution of earnings. Excluding the MVA in both 1998 and 1999, capital rose
by $5.7 million or 4.9%. Shares outstanding fell by over 200,000 during 1999 due
to the aforementioned repurchase of stock partially offset by the exercise of
stock options.
24
Despite the repurchase of stock, the ratio of tier I capital to assets (or tier
I leverage ratio), the basic measure for which regulators have established a 5%
minimum to be considered "well-capitalized," remains sound at 5.80% and compares
to 5.71% one year ago. The total capital to risk-weighted assets ratio of 10.50%
as of year-end 1999 was above the 10% minimum requirement for "well-capitalized"
banks. The Company is confident that capital levels are being prudently balanced
between regulatory and investor perspectives.
Cash dividends declared on common stock in 1999 of $6.9 million represented an
increase of 6.4% over the prior year. This growth largely reflects a two cent
per share increase in the quarterly common stock dividend beginning in the third
quarter of 1999 from $.23 to $.25. Nineteen ninety-nine is the eighth
consecutive year of dividend increases, which have resulted in a 12.3% compound
annual growth rate over that time period.
Raising the Company's expected annualized dividend to $1.00 per common share
reflects management's confidence that earnings strength is sustainable and that
capital can be maintained at a satisfactory level. The dividend pay out ratio
for the year was approximately 39%, slightly lower than the 1998 level of 41%.
However, this level is at the higher end of the Company's targeted pay out range
for dividends on common stock of 30-40%. Its pay out ratio has historically been
strong relative to peers, ranging from the 60th to 77th percentile from 1993
through 1998, including preferred dividends. The 1999 peer pay out ratio
remained high in the 70th peer percentile.
Loans
- -----
The amounts of the Bank's loans outstanding (net of deferred loan fees or costs)
at the dates indicated are shown in the following table according to type of
loan:
As of December 31,
-------------------------------------------------------------------------------
(000's omitted) 1999 1998 1997 1996 1995
-------------------------------------------------------------------------------
Real estate mortgages:
Residential $334,104 $266,841 $278,912 $225,088 $204,224
Commercial loans secured by real estate 120,926 124,828 85,962 56,959 46,971
Farm 17,652 12,486 10,434 8,296 8,224
-------------------------------------------------------------------------------
Total 472,682 404,155 375,308 290,343 259,419
Commercial, financial, and agricultural
Agricultural 27,722 22,691 23,894 21,689 17,969
Commercial and financial 171,660 168,984 138,067 99,445 81,562
-------------------------------------------------------------------------------
Total 199,382 191,675 161,961 121,134 99,531
Installment loans to individuals:
Direct 112,698 105,480 89,138 62,176 57,646
Indirect 221,593 205,159 198,853 171,583 144,566
Student and other 1,545 6,477 10,880 9,635 10,268
-------------------------------------------------------------------------------
Total 335,836 317,116 298,871 243,394 212,480
Other Loans 2,043 5,581 8,887 3,496 2,190
-------------------------------------------------------------------------------
Gross Loans 1,009,943 918,527 845,027 658,367 573,620
Less: Unearned discounts 720 1,307 1,815 5,893 13,469
-------------------------------------------------------------------------------
Net loans 1,009,223 917,220 843,212 652,474 560,151
Reserve for possible loan losses 13,421 12,441 12,434 8,128 6,976
-------------------------------------------------------------------------------
Loans, net of loan loss reserve $995,802 $904,779 $830,778 $644,346 $553,175
Loans outstanding, net of unearned discount, reached a record $1.009 million as
of year-end 1999, up over $92 million or 10.0% compared to twelve months
earlier. This marks the seventh consecutive year of double digit loan growth
with the exception of 1998, when loan growth was held to 8.8% due to a minimal
increase in installment lending, in part reflecting adoption of more
conservative underwriting practices. About 34% of 1999's growth came from 20
branches acquired in mid-1997 from Key Bank, N.A. and Fleet Bank, with combined
year-end 1999 loans outstanding of $154 million. Including approximately $37
million in mortgages sold on the secondary market, net loan generation in 1999
was nearly $129 million, 13.8% more than last year and the highest generation in
the Company's history.
25
The Company's predominant focus on the retail borrower enables its loan
portfolio to be highly diversified. Approximately 63% of loans outstanding are
oriented to consumers borrowing on an installment and residential mortgage loan
basis. Over the last several years, the growth rate of CBSI's commercial
business loans has exceeded that of loans to individuals, and this sector
exhibits a high degree of diversification as well. Loans are typically for
amounts under $75,000, with nearly 80% of our customers representing about 25%
of commercial loans outstanding. Only thirty-three percent of our commercial
portfolio--about 115 customers, including 25 automobile dealers is comprised of
loans in excess of $500,000. The portfolio contains no credit card receivables.
The overall yield on the portfolio is in the attractive 67th peer percentile.
The "Nature of Lending" table below recasts the Company's loan portfolio into
four major lines of business. As previously discussed, much of the 1999 loan
growth relates to acquired branch locations and resulting market opportunities.
The increase in business lending accounted for 44% of the $92 million in total
loan growth in 1999 versus 51% of 1998's $74 million increase. The increase in
consumer direct loans contributed 16% toward total growth this year versus a
reduction of 6% in 1998. Consumer indirect loans accounted for 18% of this
year's increase, up from 8% in the prior year. Lastly, the share of this year's
total loan increase for consumer mortgages was 21%, down from 1998's share of
48% reflective of that year's highly favorable interest rate environment for
home mortgage refinancing. The following more fully discusses the underlying
reasons for these changes by each of the Company's four major lending activities
or lines of business.
NATURE OF LENDING
Mix at Year End
($ million and %)
Total Loans Consumer Mortgage Business Lending Consumer Indirect Consumer Direct
----------- ----------------- ---------------- ----------------- ---------------
Year 000's %Change 000's %Total %Change 000's %Total %Change 000's %Total %Change 000's %Total %Change
1999 1,009 10.0% 219 22% 10.1% 366 36% 12.5% 221 22% 8.3% 203 20% 8.1%
1998 917 8.8% 199 22% 21.6% 326 36% 13.0% 204 22% 2.6% 188 20% -2.3%
1997 843 29.2% 164 19% 7.8% 288 34% 36.7% 199 24% 18.6% 192 23% 5