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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] FOR ANNUAL AND TRANSITIONAL REPORTS PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
Commission file number 0-11716
[LOGO]
COMMUNITY BANK SYSTEM, INC.
(Exact name of registrant as specified in its charter)
Delaware 16-1213679
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
5790 Widewaters Parkway, DeWitt, New York 13214-1883
(Address of principal executive offices) (Zip Code)
(315) 445-2282
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, No Par
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during all the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [X]
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the common equity was sold, or the
average bid and asked prices of such common equity, as of a specified date
within 60 days prior to the date of filing.
$380,071,184 based upon average selling price of $29.42 and 12,918,803
shares on March 8, 2002.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
12,918,803 shares of Common Stock, no par value, were
outstanding on March 8, 2002.
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 15, 2002 (the "Proxy Statement") is incorporated by reference in Part III of
this Annual Report on Form 10-K.
TABLE OF CONTENTS
PART I Page
Item 1. Business 3
Item 2. Properties 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 4A. Executive Officers of the Registrant 11
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholders Matters 12
Item 6. Selected Financial Data 13
Item 7 and 7A. Management's Discussion and Analysis of Financial Condition and Results of
Operations and Quantitative and Qualitative Disclosures about Market Risk 15
Item 8. Financial Statements and Supplementary Data:
Community Bank System, Inc. and Subsidiaries:
Consolidated Statements of Financial Condition 41
Consolidated Statements of Income 42
Consolidated Statements of Changes in Shareholders' Equity 43
Consolidated Statements of Cash Flows 44
Notes to Consolidated Financial Statements 45
Report of Independent Accountants 64
Two Year Selected Quarterly Data, 2001 and 2000 65
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 65
PART III
Item 10. Directors and Executive Officers of the Registrant 66
Item 11. Executive Compensation 66
Item 12. Security Ownership of Certain Beneficial Owners and Management 66
Item 13. Certain Relationships and Related Transactions 66
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 67
Signatures 68
Part I
This Annual Report on Form 10-K contains certain forward-looking statements with
respect to the financial condition, results of operations and business of the
Company. These forward-looking statements involve certain risks and
uncertainties. Factors that may cause actual results to differ materially from
those contemplated by such forward-looking statements are set forth herein under
the caption "Forward-Looking Statements."
Item 1. Business
GENERAL
Community Bank System, Inc. ("Company") was incorporated on April 15, 1983,
under the Delaware General Corporation Law. Its principal office is located at
5790 Widewaters Parkway, DeWitt, New York 13214 and its telephone number is
(315) 445-2282. The Company became a bank holding company in 1984 with the
acquisition of The St. Lawrence National Bank ("St. Lawrence Bank") on February
3, 1984 and the First National Bank of Ovid (renamed Horizon Bank, N.A or
"Horizon Bank") on March 2, 1984. Also in 1984 the Company obtained a national
bank charter for its third wholly-owned subsidiary bank, The Exchange National
Bank ("Exchange Bank"), and on July 1, 1984 Exchange Bank acquired the deposits
and certain of the assets of three branches of the Bank of New York located in
Southwestern New York. On September 30, 1987, the Company acquired The Nichols
National Bank ("Nichols Bank") located in Nichols, New York. On September 30,
1988, the Company acquired ComuniCorp, Inc., a one-bank holding company located
in Addison, New York, the parent company to Community National Bank ("Community
Bank").
On March 26, 1990, Community Bank opened the Corning Market Street branch from
the Company's acquisition of deposits and certain assets from Key Bank of
Central New York. On January 1, 1992, the Company's five banking affiliates
consolidated into a single, wholly owned national banking subsidiary, known as
Community Bank, N.A. ("Bank"). On March 31, 1993, the Bank's marketing
representative office in Ottawa, Canada was closed. On June 3, 1994, the Company
acquired three branch offices in Canandaigua, Corning and Wellsville, New York
from the Resolution Trust Corporation. At that time, the preexisting Canandaigua
branch office loans and deposits were transferred into the new facility. On
October 28, 1994, the Company acquired the Cato, New York branch of The Chase
Manhattan Bank, N.A. On July 14, 1995, the Company acquired 15 branch offices
from The Chase Manhattan Bank, N.A. located in Norwich, Watertown (two),
Boonville, New Hartford, Utica, Skaneateles, Geneva, Pulaski, Seneca Falls,
Hammondsport, Canton, Newark (two), and Penn Yan, New York ("Chase Branches").
On December 15, 1995, the Company sold three of the former Chase Branches,
located in Norwich, New Hartford, and Utica, to NBT Bank, N.A. On June 16, 1997
the Company acquired eight branches from Key Bank of New York located in Alfred,
Cassadaga, Clymer, Cuba, Gowanda, Ripley, Sherman, and Wellsville in
Southwestern New York State. On July 18, 1997 the Company acquired 12 branches
from Fleet Bank located in Old Forge, Boonville, Ogdensburg, St. Regis Falls,
Gateway Plaza, Watertown (2), Clayton, Lowville, Massena (2), and Gouverneur in
Northern and Central New York State. Seven of the former Fleet offices or
existing Bank offices in Watertown (2), Boonville, Ogdensburg, Gouverneur, and
Massena (2) have since been combined. On January 26, 2001, the Company purchased
the Citizens National Bank of Malone, with its offices in Brushton, Chateaugay,
Hermon, and Malone (2) now being administered from the Bank's Northern Market
operations and management center in Canton, NY. On May 11, 2001, the Company
purchased First Liberty Bank Corp. First Liberty had 13 branches based in the
Scranton/Wilkes Barre area of Northeastern Pennsylvania. These branches are now
identified in the marketplace as "First Liberty Bank & Trust, a division of
Community Bank, N.A." On November 16, 2001, the Company purchased 36 branches
located in the Finger Lakes and Western New York Regions from FleetBoston
Financial. These branches now operate as Community Bank, N.A. offices; five have
since been closed or combined with other bank branches.
The Company had a wholly owned data processing subsidiary, Northeastern Computer
Services, Inc. ("Northeastern"). Northeastern was acquired by the Company from
The St. Lawrence Bank on May 31, 1984 pursuant to a corporate reorganization.
Northeastern had previously been a wholly owned subsidiary of The St. Lawrence
Bank and was the survivor of a merger with Lawban Computer Systems, Inc.,
another wholly-owned subsidiary of The St. Lawrence Bank. Northeastern's office
was located at 6464 Ridings Road, Syracuse, New York. In December 1991, the
Company entered into a five-year agreement with Mellon Bank, N.A. ("Mellon") to
provide data processing services. The agreement has twice been renewed with the
subsequent acquirer of Mellon's data services, Fiserv, Inc., for a term now
ending December 31, 2005. On June 30, 1992, Northeastern ceased operations. On
January 17, 1997 all the outstanding shares of common stock of Northeastern were
transferred from the Company to Community Bank, N.A. On that date, Northeastern
became a wholly owned subsidiary of the Bank and changed its name to CBNA
Treasury Management Corporation ("TMC"). TMC is now utilized by the Bank to
manage its Treasury function, including asset/liability, investment portfolio,
and liquidity management.
3
The Company also had a wholly-owned mortgage banking subsidiary, Community
Financial Services, Inc. (CFSI), which was established in June 1986; it
commenced operation in January 1987. In July 1988, CFSI purchased Salt City
Mortgage Corp., a Syracuse-based mortgage broker. CFSI ceased operations in 1990
and was renamed CFSI Close-Out Corp. in 1997.
On July 8, 1996, the Company acquired Benefit Plans Administrators (BPA) of
Utica, NY. The subsidiary was renamed Benefit Plans Administrative Services,
Inc., continuing as a pension administration and consulting firm serving
sponsors of defined benefit and defined contribution plans.
On February 3, 1997, the Company formed a subsidiary business trust, Community
Capital Trust I, for the purpose of issuing preferred securities, which qualify
as Tier 1 capital. Concurrent with its formation, the trust issued $30,000,000
of 9.75% preferred securities in an exempt offering maturing in year 2027 and
guaranteed by the Company. The entire net proceeds to the trust from the
offering were invested in junior subordinated obligations of the Company.
On June 19, 1998, the Company formed a subsidiary, Community Financial Services,
Inc. (CFSI), to offer selected insurance products through its own agency.
On December 22, 1998, the Company formed a broker-dealer subsidiary, Community
Investment Services, Inc. (CISI). The subsidiary became fully operational in
March 1999, with a growing number of 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 invest in real
estate mortgage assets originated by the Bank.
On April 3, 2000, the Company acquired Elias Asset Management, Inc., of
Williamsville, NY, a nationally recognized firm presently with $550 million in
assets under management for individuals, corporate pension and profit sharing
plans, and foundations.
On July 16, 2001, the Company formed a subsidiary business trust, Community
Capital Trust II, for the purpose of issuing preferred securities, which qualify
as Tier 1 capital. Concurrent with its formation, the trust issued $25,000,000
of pooled floating rate preferred securities (priced at 6 month LIBOR plus
3.75%) in an exempt offering maturing in year 2031 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 July 31, 2001, the Company formed a subsidiary business trust, Community
Statutory Trust III, for the purpose of issuing preferred securities, which
qualify as Tier 1 capital. Concurrent with its formation, the trust issued
$24,450,000 of pooled floating rate preferred securities (priced at 3 month
LIBOR plus 3.58%) in an exempt offering maturing in year 2031 and guaranteed by
the Company. The entire net proceeds to the trust from the offering were
invested in junior subordinated obligations of the Company.
The 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 119 customer facilities in the twenty two counties of New York
State - Allegany, Lewis, Cattaraugus, Seneca, St. Lawrence, Yates, Franklin,
Steuben, Chemung, Schuyler, Jefferson, Chautauqua, Tioga, Livingston, Ontario,
Wayne, Herkimer, Oswego, Cayuga, Oneida, Erie and Onondoga and in two counties
in Northern Pennsylvannia - Lackawanna and Luzerne. The administrative office is
located at 5790 Widewaters Parkway, DeWitt, New York, in Onondaga County.
The Bank is a community retail bank committed to the philosophy of serving the
financial needs of customers in local communities. The Bank's branches are
generally located in small towns and villages within its geographic market
areas. The Company believes that the local character of business, knowledge of
the customer and customer needs, and comprehensive retail and small business
products, together with responsive decision-making at the branch and regional
level, enable the Bank to compete effectively. The Bank is a member of the
Federal Reserve System and the Federal Home Loan Bank of New York ("FHLB"), and
its deposits are insured by the FDIC up to applicable limits.
Unless the context otherwise provides, all references in this Annual Report on
Form 10-K to the "Company" shall mean, collectively, Community Bank System, Inc.
and its subsidiaries.
Banking Services
The Bank offers a range of commercial and retail banking services in each of its
market areas to business, individual, agricultural and government customers.
4
Account Services. The Bank's account services include checking accounts,
interest-checking accounts, money market accounts, savings accounts, time
deposit accounts, and individual retirement accounts.
Lending Activities. The Bank's lending activities include the making of
residential, installment, student and farm loans, business lines of credit,
working capital facilities, special purpose term lending, equipment leasing
services (through a third party), and inventory and dealer floor plans.
The Company's predominant focus on the retail borrower results in a highly
diversified loan portfolio. About 63% of outstanding loans are provided 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 $100,000, representing 86% of our customers and 23% of our commercial
loans outstanding.
Other Services. The Bank offers a range of other financial services including
pension administration and consulting; asset management for individuals,
corporate pension and profit sharing plans, and foundations; personal trust
services including living, testamentary and charitable trusts, estate settlement
services, conservatorships and investment management services; and various
financial and insurance products including mutual funds, annuities, long-term
health care and other selected insurance products. 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.
Competition
The Company, through the Bank, competes in three distinct banking markets in the
Northern ("Northern Market"), Finger Lakes ("Finger Lakes Market"), and Southern
Tier ("Southern Tier Market") regions of New York State, as well as Northeastern
Pennsylvania. 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 10.4%, including commercial
banks, credit unions, savings and loan associations and savings banks. However,
in its four county primary market area (Franklin, Jefferson, Lewis, and St.
Lawrence), the Bank has a 21.4% share. The Bank operates 32 customer facilities
in this market and is ranked either first or second in market share in 21 of the
24 towns where these offices are located.
Finger Lakes Market. In the Finger Lakes Market, the Bank operates 20 customer
facilities competing for loans and deposits in the eight-county market area of
Seneca, Schuyler, Livingston, Oswego, Ontario, Wayne, Onondaga, and Cayuga
Counties. Within the Finger Lakes Market area, the Bank maintains a market share
(1) of approximately 3.3%, including commercial banks, credit unions, savings
and loan associations and savings banks. However, the Bank's primary market
within this region is Seneca County, where the Bank has a 33.3% share. The Bank
is ranked either first or second in market share in eleven of the seventeen
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, Chemung, Erie, and Allegany
Counties in the Southern Tier of New York State. Within this area, the Bank
maintains a market share (1) of approximately 3.6%, including commercial banks,
credit unions, savings and loan associations and savings banks. The Olean
Submarket operates 34 office locations and the Bank is ranked either first or
second in market share in 23 of the 28 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
5
approximately 15.9%, including commercial banks, credit unions, savings and loan
associations and savings banks. The Corning Submarket operates sixteen office
locations, and the Bank is ranked either first or second in market share in
eight of the twelve towns where these offices are located.
Northeastern Pennsylvania. In the Northeastern Pennsylvania Market, the Bank
operates 13 customer facilities competing for loans and deposits in the
two-county market area of Lackawanna and Luzerne Counties. Within the
Northeastern Pennsylvania Market area, the Bank maintains a market share (1) of
approximately 6.0%, including commercial banks, credit unions, savings and loan
associations and savings banks. The Bank is ranked either first or second in
market share in four of the ten towns where these offices are located.
The table below summarizes the Bank's deposits and market share by the
twenty-four 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 CBNA
6/30/00 Market Has 1st or 2nd Banking
County (000's)(1) Share Facilities ATM's Towns Market Position Market
- ---------------------------------------------------------------------------------------------
Allegany $ 180,249 52.2% 10 8 9 9 Olean
Lewis 79,077 40.1 4 1 3 3 Northern
Cattaraugus 286,288 35.5 10 7 8 7 Olean
Seneca 95,640 33.3 5 3 4 3 Finger Lakes
St. Lawrence 307,900 26.2 15 9 11 10 Northern
Yates 82,251 23.2 3 2 2 2 Corning
Franklin 103,403 21.3 5 3 4 4 Northern
Steuben 169,759 13.8 11 7 8 5 Corning
Lackawanna 488,504 13.4 11 13 8 4 PA
Chemung 14,883 13.2 1 1 1 0 Olean
Schuyler 14,397 12.8 1 1 1 1 Finger Lakes
Jefferson 133,439 12.7 5 5 4 2 Northern
Chautauqua 161,405 12.7 12 8 9 6 Olean
Tioga 32,118 9.6 2 2 2 1 Corning
Livingston 50,392 8.7 3 3 3 2 Finger Lakes
Ontario 72,372 6.8 4 4 3 1 Finger Lakes
Wayne 51,408 6.1 2 1 1 0 Finger Lakes
Herkimer 28,234 5.0 1 1 1 1 Northern
Oswego 42,755 4.3 2 2 2 2 Finger Lakes
Cayuga 25,148 3.2 2 1 2 2 Finger Lakes
Oneida 56,676 1.7 2 1 1 1 Northern
Luzerne 22,165 0.5 2 2 2 0 PA
Erie 18,534 0.1 1 0 1 1 Olean
Onondaga 7,908 0.1 1 1 1 0 Finger Lakes
- ---------------------------------------------------------------------------------------------
24 $2,524,905 5.4% 115 86 91 67 Total
=============================================================================================
(1) Deposit market share data as of June 30, 2000, the most recent information
available, calculated by Sheshunoff Information Services, Inc. Includes all
branches acquired from Citizens National Bank of Malone, First Liberty Bank
Corp. and FleetBoston during 2001.
Employees
As of December 31, 2001, the Company employed 1,115 full-time equivalent
employees, 1,016 providing banking services and 99 providing financial services.
At year-end 2000, there were 927 full-time equivalent employees, 847 providing
banking services and 80 providing financial services. The Company offers a
variety of employment benefits and considers its relationship with its employees
to be good.
6
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 March 12, 2000, however,
the Gramm-Leachy-Bliley Act took effect, relaxing the previous limitations and
permitting bank holding companies to engage in a broader range of financial
activities (see "Financial Services Modernization Act" in the final section of
this discussion for details).
Under Federal Reserve Board policy, a bank holding company is expected to act as
a source of financial strength to its subsidiary banks and to make capital
contributions to a troubled bank subsidiary. The Federal Reserve Board may
charge the bank holding company with engaging in unsafe and unsound practices
for failure to commit resources to a subsidiary bank when required. A required
capital injection may be called for at a time when the Company does not have the
resources to provide it. Any capital loans by the Company to its subsidiary bank
would be subordinate in right of payment to depositors and to certain other
indebtedness of such subsidiary banks.
The BHCA requires the prior approval of the Federal Reserve Board in any case
where a bank holding company proposes to acquire direct or indirect ownership or
control of more than 5% of any class of the voting shares of, or substantially
all of the assets of, any bank (unless it owns a majority of such bank's voting
shares) or otherwise to control a bank or to merge or consolidate with any other
bank holding company. The BHCA also prohibits a bank holding company, with
certain exceptions, from acquiring more than 5% of the voting shares of any
company that is not a bank.
The Riegal-Neal Interstate Banking and Efficiency Act of 1994 (enacted on
September 29, 1994) provides that, among other things, substantially all state
law barriers to the acquisition of banks by out-of-state bank holding companies
are eliminated effective September 29, 1995. The law also permits interstate
branching by banks effective as of June 1, 1997, subject to the ability of
states to opt-out completely or to set an earlier effective date. The Company
believes that the effect of the law has been to increase competition within the
markets where the Company operates, although the Company cannot quantify the
effect to which competition has increased in such markets or the timing of such
increases.
OCC Supervision
The Bank is supervised and regularly examined by the Office of the Comptroller
of the Currency (OCC). The various laws and regulations administered by the OCC
affect corporate practices such as payment of dividends, incurring debt, and
acquisition of financial institutions and other companies. It also affects
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, 2001, the Bank had $26.6 million in undivided profits legally
available for the payment of dividends.
7
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 that 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, 2001 were 11.41% and 12.76%,
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, 2001 was 6.73%, which exceeded its regulatory
requirement of 4.00%. The guidelines also provide that banking organizations
experiencing internal growth or making acquisitions will be expected to maintain
strong capital positions substantially above the minimum supervisory levels,
without significant reliance on intangible assets. The Company is subject to the
same OCC capital requirements as those that apply to the Bank.
Federal Deposit Insurance Corporation Improvement Act of 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.
8
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, 2001, the
Bank's total risk-based capital ratio and Tier I risk - based capital ratio were
12.57% and 11.22%, respectively, and its Tier I leverage ratio as of such date
was 6.69%. Notwithstanding the foregoing, if its principal federal regulator
determines that an "adequately capitalized" institution is in an unsafe or
unsound condition or is engaging in an unsafe or unsound practice, it may
require the institution to submit a corrective action plan; restrict its asset
growth; and prohibit branching, new acquisitions, and new lines of business.
Among other things, an institution's principal federal regulator may deem the
institution to be engaging in an unsafe or unsound practice if it receives a
less than satisfactory rating for asset quality, management, earnings, or
liquidity in its most recent examination.
Possible sanctions for undercapitalized depository institutions include a
prohibition on the payment of dividends and a requirement that an institution
submit a capital restoration plan to its principal federal regulator. The
capital restoration plan of an undercapitalized bank will not be approved unless
the holding company that controls the bank guarantees the bank's performance.
The obligation of a controlling bank holding company to fund a capital
restoration plan is limited to the lesser of five percent (5%) of an
undercapitalized subsidiary's assets or the amount required to meet regulatory
capital requirements. If an undercapitalized depository institution fails to
submit or implement an acceptable capital restoration plan, it can be subjected
to more severe sanctions, including an order to sell sufficient voting stock to
become adequately capitalized. Critically undercapitalized institutions are
subject to the appointment of a receiver or conservator.
In addition, FDICIA requires regulators to impose new non-capital measures of
bank safety, such as loan underwriting standards and minimum earnings levels.
Regulators are also required to perform annual on-site bank examinations, place
limits on real estate lending by banks and tighten auditing requirements.
Financial Services Modernization Act
The Gramm-Leach-Bliley Act of 1999, effective March 11, 2000, repealed
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 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. CBSI expects to remain a bank holding company for the time
being and assess its options as circumstances change.
The Gramm-Leach Bliley Act also provides new privacy protections to consumers by
limiting the transfer and use by financial institutions of consumer's nonpublic,
personal information. The foregoing discussion is qualified in its entirety by
reference to the statutory provisions of the Gramm-Leach-Bliley Act and the
implementing regulations which have been or will be adopted by various
government agencies.
9
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 119 customer facilities, 86
are owned by the Bank, and 33 are located in long-term leased premises.
Real property and related banking facilities owned by the Company at December
31, 2001 had a net book value of $37.3 million and none of the properties was
subject to any encumbrances. For the year ended December 31, 2001, rental fees
of $1,319,000 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
10
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 59 Officer of the Company and the Bank
David G. Wallace Treasurer of the Company and Executive
Age 57 Vice President and Chief Financial
Officer of the Bank
Michael A. Patton President, Financial Services
Age 56
James A. Wears President, Banking
Age 52
David J. Elias President, Chief Executive Officer, and
Age 56 Chief Investment Officer,
Elias Asset Management, Inc.
Steven R. Tokach President, First Liberty Bank & Trust
Age 55
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. He was formerly Executive Vice
President, Cates Consulting Analysts, Inc. from 1987-1988, and previously held
senior financial planning and analysis positions at Syracuse Savings Bank and
Maryland National Bank.
Michael A. Patton (President, Financial Services). Mr. Patton was the President
and Chief Executive Officer of The Exchange National Bank, a former subsidiary
of the Company, from 1984 until January 1992, when, in connection with the
consolidation of the Company's five subsidiary banks into Community Bank, N.A.,
he was named President, Southern Region. He assumed his current position in
February 2000.
James A. Wears (President, Banking). Mr. Wears served as Senior Vice President
of the St. Lawrence National Bank, a former subsidiary of the Company, from 1988
through January 1991 and as President and Chief Executive Officer from January
1991 until January 1992. Following the January 1992 consolidation of the
Company's five subsidiary banks into Community Bank, N.A., Mr. Wears was named
President, Northern Region. He assumed his current position in February 2000.
David J. Elias (President, Chief Executive Officer, and Chief Investment
Officer, Elias Asset Management, Inc.). Mr. Elias assumed his present position
in April 2000, when his company, Elias Asset Management, Inc., was purchased by
Community Bank System, Inc.
Steven R. Tokach (President, First Liberty Bank & Trust). Mr. Tokach assumed his
position in May 2001, when First Liberty Bank Corp. was purchased by Community
Bank System, Inc. He was Executive Vice President of First Liberty Bank Corp.
and First Liberty Bank & Trust from 1994-2001, and from 1998-1993, served as
Vice President and Executive Vice President of Guaranty Bank, N.A. and First
Eastern Bank, respectively, both in Pennsylvania.
11
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 12,902,812 shares of common stock outstanding on
December 31, 2001, held by approximately 9,000 registered shareholders of record
and 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
Year/ High Low Closing Price Quarterly
Qtr Price Price Amount % Change Dividend
--- ----- ----- ------ -------- --------
2001
4th $ 27.80 $ 24.98 $ 26.20 $ -4.7% $ 0.27
3rd $ 29.85 $ 24.75 $ 27.50 $ -1.8% $ 0.27
2nd $ 28.94 $ 26.50 $ 28.00 $ -0.2% $ 0.27
1st $ 29.65 $ 25.15 $ 28.06 13.4% $ 0.27
2000
4th $ 25.94 $ 22.15 $ 24.75 $ -4.6% $ 0.27
3rd $ 26.03 $ 21.88 $ 25.94 $ 16.9% $ 0.27
2nd $ 24.13 $ 22.00 $ 22.19 $ -2.7% $ 0.25
1st $ 23.38 $ 20.25 $ 22.81 $ -1.4% $ 0.25
The Company has historically paid regular quarterly cash dividends on its common
stock, and declared a cash dividend of $0.27 per share for the first quarter of
2002. 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 "Certain Regulatory Considerations --
Limits On Dividends and Other Revenue Sources."
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, 2001. The historical "Income Statement Data" and historical
"Balance Sheet Data" are derived from the audited financial statements. The "Per
Share Data", "Common Outstanding Shares", "Selected Performance Ratios", "Asset
Quality Ratios" and "Capital Ratios" for all periods are unaudited. All
financial information in this table should be read in conjunction with the
information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations and Quantitative and Qualitative Disclosures
about Market Risk" and with the Consolidated Financial Statements and the
related notes thereto included elsewhere in this Annual Report on Form 10-K.
12
SELECTED CONSOLIDATED FINANCIAL INFORMATION
In Thousands except share and per share data Years Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Income Statement Data:
Interest income $197,850 $189,574 $166,490 $165,303 $158,944
Interest expense 101,195 99,141 78,490 81,216 76,327
Net interest income 96,655 90,433 88,000 84,087 82,617
Provision for loan losses 7,097 7,722 5,856 5,663 5,080
Net interest income after provision for loan losses 89,558 82,711 82,144 78,424 77,537
Non-interest income 26,537 23,284 18,153 16,812 14,057
Security gains (losses) 2,546 (159) (413) 2,006 (205)
Non-interest expense 74,196 65,643 62,055 61,389 56,223
Amortization expense 6,679 4,891 4,723 4,748 3,903
Acquisition and unusual expenses 8,164 400 -- 1,098 --
Income before income taxes 29,602 34,902 33,106 30,007 31,263
Provision for income taxes 8,891 10,003 9,444 10,472 10,581
Net income before cumulative effect of change in
accounting principle and/or extraordinary
loss on early retirement of long term borrowings 20,711 24,899 23,662 19,535 20,682
Cumulative effect of change in accounting principle -- -- -- 194 --
Extraordinary loss on early retirement of long term
borrowings 1,582 -- -- -- --
Net income $19,129 $24,899 $23,662 $19,729 $20,682
Net income - Operating (1) $24,052 $25,136 $23,662 $20,378 $20,682
Net income - Cash (2) $23,474 $27,795 $26,480 $22,562 $23,015
Net income - Cash Operating (3) $28,397 $28,032 $26,480 $23,211 $23,015
Balance Sheet Data:
Total assets $3,210,833 $2,650,673 $2,493,977 $2,296,059 $2,218,793
Loans, net of unearned discount 1,732,870 1,515,877 1,425,773 1,293,135 1,203,806
Earning assets (Excl. MVA) 2,863,944 2,435,604 2,295,871 2,079,876 1,996,113
Intangible assets 142,342 55,234 54,150 54,438 58,672
Total deposits 2,545,970 1,948,557 1,844,752 1,874,666 1,830,488
Long term borrowings 231,000 240,000 145,567 155,470 100,744
Trust preferred securities 77,819 29,824 29,817 29,810 29,804
Shareholders' equity 267,980 201,791 165,705 179,073 173,596
Common Per Share Data:
Net income (diluted) $1.62 $2.32 $2.18 $1.75 $1.84
Net income - operating (1) (diluted) 2.03 2.34 2.18 1.81 1.84
Net income - cash (2) (diluted) 1.99 2.59 2.44 2.00 2.05
Net income - cash operating (3) (diluted) 2.40 2.61 2.44 2.06 2.05
Cash dividend declared 1.08 1.04 0.96 0.86 0.76
Book value - stated 20.77 19.11 15.55 16.50 15.62
Book value - tangible 9.74 13.88 10.47 11.02 9.85
Common Outstanding Shares:
Average during period (Incl. common stock equivalents) 11,824,589 10,737,000 10,861,000 11,260,000 11,238,714
End of period (Excl. common stock equivalents) 12,902,812 10,559,897 10,657,770 10,855,964 11,130.023
Selected Performance Ratios:
Return on average total assets 0.66% 0.97% 1.00% 0.87% 1.00%
Return on average total assets - operating (1) 0.83% 0.98% 1.00% 0.90% 1.00%
Return on average total assets - cash (2) 0.81% 1.09% 1.12% 0.99% 1.11%
Return on average total assets - cash operating (3) 0.98% 1.10% 1.12% 1.02% 1.11%
Return on average common shareholders' equity 7.99% 14.27% 13.56% 11.11% 12.61%
Return on average common shareholders' equity -
operating (1) 10.05% 14.40% 13.56% 11.47% 12.61%
Return on average common shareholders' equity - cash (2) 9.81% 15.93% 15.18% 12.70% 14.03%
Return on average common shareholders' equity - cash
operating (3) 11.86% 16.06% 15.18% 13.07% 14.03%
Common dividend payout ratio 65.7% 40.6% 40.4% 44.9% 38.0%
Net interest margin (taxable equivalent basis) 3.97% 4.06% 4.32% 4.14% 4.40%
Noninterest income to operating income (taxable equivalent basis
and excludes security gains/losses and branch
dispositions) 20.3% 19.3% 16.2% 16.3% 14.3%
Efficiency ratio (4) 57.0% 54.6% 55.5% 59.7% 57.2%
Loans, net of unearned discount, to deposits at period
end 68.1% 77.8% 77.3% 69.0% 65.8%
Asset Quality Ratios:
Non-performing loans to total loans 0.53% 0.49% 0.51% 0.48% 0.50%
Non-performing assets to total loans and other real
estate owned 0.61% 0.58% 0.62% 0.62% 0.66%
Non-performing assets to total assets 0.33% 0.33% 0.36% 0.35% 0.36%
Allowance for loan losses to loans 1.38% 1.32% 1.30% 1.32% 1.41%
Allowance for loan losses to non-performing loans 262.6% 270.6% 253.4% 276.4% 280.0%
Net charge-offs (recoveries) to average total loans 0.42% 0.42% 0.33% 0.45% 0.43%
Capital Ratios:
Total shareholders' equity to total assets 8.35% 7.61% 6.64% 7.80% 7.82%
Tangible equity to tangible assets 4.09% 5.65% 4.57% 5.56% 5.32%
Tier I capital to risk-adjusted assets 11.41% 10.49% 10.87% 10.18% 10.10%
Total risk-based capital to risk-adjusted assets 12.76% 11.70% 12.10% 11.43% 11.33%
Tier I leverage ratio 6.73% 6.67% 6.76% 6.27% 6.16%
(1) Operating adjusted amounts and ratios exclude the after tax effect of
acquisition expenses, net security gains / (losses) for 2001 only and
extraordinary loss, and, accordingly, are not presented in accordance with
Generally Accepted Accounting Principles (GAAP).
(2) Cash adjusted amounts and ratios exclude the after tax effects of
amortization expenses and, accordingly, are not presented in accordance
with GAAP.
(3) Cash operating adjusted amounts and ratios exclude the after tax effect of
acquisition expenses, net security gains / (losses) for 2001 only,
extraordinary loss, and amortization expenses and, accordingly, are not
presented in accordance with GAAP.
(4) Efficiency ratio excludes acquisition expenses and amortization expense.
13
TWO YEAR SELECTED QUARTER DATA
2001 RESULTS 1st 2nd 3rd 4th
(Dollars in Thousands) Quarter Quarter Quarter(1) Quarter Total
- -------------------------------------------------------------------------------------------------------------
Net interest income $ 23,141 $ 23,080 $ 23,808 $ 26,626 $ 96,655
Provision for loan losses 1,326 1,415 1,579 2,777 7,097
- -------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 21,815 21,665 22,229 23,849 89,558
Non-interest income 6,025 6,630 6,971 6,911 26,537
Security gains (losses) 9 (138) 2,688 (13) 2,546
Non-interest expense 17,604 18,629 18,198 19,765 74,196
Amortization expense 1,460 1,541 1,541 2,137 6,679
Acquisition and unusual expenses 851 4,636 631 2,046 8,164
- -------------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary item 7,934 3,351 11,518 6,799 29,602
Provision for income taxes 2,185 1,241 3,493 1,972 8,891
- -------------------------------------------------------------------------------------------------------------
Income before extraordinary item 5,749 2,110 8,025 4,827 20,711
Extraordinary loss on early retirement of long term
borrowings, net of tax benefit of $1,077 0 0 1,582 0 1,582
- -------------------------------------------------------------------------------------------------------------
Net income $ 5,749 $ 2,110 $ 6,443 $ 4,827 $ 19,129
=============================================================================================================
Net income - operating $ 6,250 $ 4,950 $ 6,801 $ 6,052 $ 24,052
Net income - cash $ 6,681 $ 3,118 $ 7,450 $ 6,225 $ 23,474
Net income - cash operating $ 7,182 $ 5,957 $ 7,808 $ 7,450 $ 28,397
Basic income per share $ 0.51 $ 0.18 $ 0.56 $ 0.39 $ 1.64
Diluted income per share:
Net income $ 0.50 $ 0.18 $ 0.55 $ 0.39 $ 1.62
Net income - operating $ 0.54 $ 0.42 $ 0.58 $ 0.49 $ 2.03
Net income - cash $ 0.58 $ 0.27 $ 0.63 $ 0.50 $ 1.99
Net income - cash operating $ 0.63 $ 0.51 $ 0.67 $ 0.60 $ 2.40
=============================================================================================================
2000 RESULTS 1st 2nd 3rd 4th
(Dollars in Thousands) Quarter Quarter Quarter(1) Quarter Total
- -------------------------------------------------------------------------------------------------------------
Net interest income $ 22,769 $ 22,674 $ 22,338 $ 22,652 $ 90,433
Provision for loan losses 1,389 1,887 2,308 2,138 7,722
- -------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 21,380 20,787 20,030 20,514 82,711
Non-interest income 4,673 5,921 6,523 6,167 23,284
Security losses (159) 0 0 0 (159)
Non-interest expense 15,836 16,534 16,465 16,808 65,643
Amortization expense 1,137 1,214 1,259 1,281 4,891
Acquisition and unusual expenses 0 0 0 400 400
- -------------------------------------------------------------------------------------------------------------
Income before income taxes 8,921 8,960 8,829 8,192 34,902
Income taxes 2,535 2,564 2,529 2,375 10,003
- -------------------------------------------------------------------------------------------------------------
Net income $ 6,386 $ 6,396 $ 6,300 $ 5,817 $ 24,899
=============================================================================================================
Net income - operating $ 6,388 $ 6,396 $ 6,300 $ 6,052 $ 25,136
Net income - cash $ 7,058 $ 7,115 $ 7,046 $ 6,576 $ 27,795
Net income - cash operating $ 7,061 $ 7,115 $ 7,046 $ 6,811 $ 28,032
Basic income per share
Diluted income per share: $ 0.60 $ 0.60 $ 0.60 $ 0.55 $ 2.34
Net income $ 0.60 $ 0.59 $ 0.59 $ 0.54 $ 2.32
Net income - operating $ 0.59 $ 0.59 $ 0.59 $ 0.57 $ 2.34
Net income - cash $ 0.66 $ 0.66 $ 0.66 $ 0.62 $ 2.59
Net income - cash operating $ 0.66 $ 0.66 $ 0.66 $ 0.64 $ 2.61
=============================================================================================================
(1) The 3rd quarter 10Q previously netted reported prepayment penalties of
$2,659 incurred on the early retirement of long-term borrowings against
investment security gain (loss), net. The 3rd quarter information has been
restated to reflect these penalties as an extraordinary loss, net of tax benefit
in accordance with generally accepted accounting principles. The effect of this
restatement was to increase amounts previously reported for other income by
$2,659, decrease income before extraordinary item by $834 and increase basic and
diluted earnings per share before extraordinary item by $.13. There was no
impact on net income as previously reported, nor any effect on cash flows or
financial condition.
14
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations and Quantitative and Qualitative Disclosures about Market Risk
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. All financial results reflect the 2001 acquisition of First Liberty Bank
Corp. ("First Liberty") in accordance with pooling of interest accounting,
unless otherwise noted. Lastly, all references to "peer banks", unless otherwise
noted, pertain to a group of 172 companies nationwide having $1 billion to $3
billion in assets based on data through September 30, 2001 (the most recently
available disclosure) as provided by the Federal Reserve System.
Net Income and Profitability
Net income and earnings per share (diluted) for the year ended December 31, 2001
were $19.1 million and $1.62, off 23% and 30%, respectively, from the prior
year. These results include $8.3 million in nonrecurring items associated with
the company's three 2001 acquisitions in January, May, and November, which added
$1.2 billion in assets and increased its branch network by 70% to 119 locations.
Included in these nonrecurring items are acquisition and other unusual costs as
well as net security gains and loss on early retirement of long-term debt.
2001's operating earnings, which exclude all nonrecurring items, were $24.1
million (down 4.3%), while operating earnings per share (diluted) were $2.03
(off 13.2% on 10.1% more average shares outstanding).
Cash operating earnings reached an all-time high in 2001 of $28.4 million, up
1.3% from 2000's level. In addition to deducting nonrecurring items, cash
operating earnings exclude the amortization of intangible assets, which
represent premiums paid on acquisitions.
Cash operating earnings per share (diluted) for all of 2001 were $2.40, a
decrease of 8.0% from 2000. These results reflect an additional 952,000 common
shares issued in connection with the company's January whole-bank purchase and
1.309 million issued in the fourth quarter to support the mid-November purchase
of 36 branches in Western New York from FleetBoston Financial (NYSE: FBF).
Cash operating return on assets (ROA) for 2001 was 0.98% versus nominal
operating ROA at 0.83%. Cash operating return on equity (ROE) for the year was
11.86% versus nominal operating ROE at 10.05%. The difference between cash and
nominal results reflects the contribution of the company's acquisitions on an
economic basis, which excludes the non-cash impact of amortizing the premiums
paid for the acquisitions. Many analysts and investors consider cash results a
better measure of core profitability and value created for shareholders than
nominal results.
The primary factors explaining 2001 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 7.4% or $7.1
million due to a $237 million increase in average earning assets. Average
loans grew $96 million (6.5%) while average investments rose $141 million
(15.7%). The growth in earning assets was funded by $209 million (10.9%)
more in average deposits and $34 million (7.6%) more in average borrowings.
Net interest margin decreased by 9 basis points to 3.97% on average,
largely reflective of the impact of rapidly falling financial market
interest rates during much of the year, which caused lower margins during
the first half of 2001.
o Total noninterest income increased by $3.3 million (14.3%) from 2000 to
$26.4 million. Financial services accounted for $1.8 million of the
improvement in noninterest income, with approximately $860,000 being
attributable to increased revenues from BPA (the company's pension
administration and consulting business) and nearly $660,000 attributable to
the full year impact of the purchase of Elias Asset Management (EAM) on
April 3, 2000. Revenues excluding net investment gains (losses) and the
impact of branch properties no longer in use were
15
up nicely for the seventh consecutive year to approximately $26.5 million
in 2001, a $3.3 million (14.0%) improvement.
o Noninterest expense or overhead rose $18.1 million or 25.5% in 2001 to
$89.0 million. Acquisition and other one-time expenses and intangible
amortization accounted for 54% of the increase, or $7.8 and $1.9 million,
respectively. While day-to-day overhead expense rose due to the company's
three 2001 acquisitions, more than $3.2 million in expense reductions was
realized on an annualized basis beginning in the third quarter of the year
as a result of aggressive cost cutting and efficiency improvement
strategies.
o Loan loss provision expense fell $625,000 or 8.1% from 2000's level. The
full year loan loss provision covered total actual net charge-offs by 1.08
times. Net charge-offs as a percent of average loans remained flat in 2001
at .42%. The lower level of provision was in part due to the 2000 level
being elevated by two isolated and unusual commercial loan charge-offs.
Nonperforming loans increased during 2001 to .53% of loans outstanding at
year end compared to .49% one year earlier, reflective of the weak economy.
o The company's combined effective federal and state tax rate decreased one
percentage point this year to 29.0% as a result of an increased proportion
of tax-exempt municipal investment holdings and continued effective tax
planning strategies.
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
------------------------
2001 2000 1999
------------------------
Percentage of net income to average total assets 0.66% 0.97% 1.00%
Percentage of net income-operating to average total assets 0.83% 0.98% 1.00%
Percentage of net income to average shareholders' equity 7.99% 14.27% 13.56%
Percentage of net income-operating to average shareholders' equity 10.05% 14.40% 13.56%
Percentage of dividends declared per common share to net income per share 65.7% 40.6% 40.4%
Percentage of dividends declared per common share to net income-operating per share 52.3% 40.2% 40.4%
Percentage of average shareholders' equity to average total assets 8.29% 6.83% 7.41%
Net Interest Income
Net interest income is the amount that interest and fees on earning assets
(loans and investments) exceeds the cost of funds, primarily interest paid to
the company's depositors, interest on capital market borrowings, and dividends
paid on the company's 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 $104.0 million in 2001; this represents a $7.1 million or 7.4%
increase over the prior year. The increase was due to higher earning asset
volumes, which had a positive impact on net interest income of $9.4 million,
while interest rate changes had an offsetting impact of $2.3 million.
Gross interest income on loans and investments grew by $9.2 million or 4.7% in
2001 as a result of greater average earning assets of $236.8 million, which
contributed $18.8 million, partially offset by $9.6 million related to lower
rates. Average loans grew a total of $95.9 million in 2001, with the most
significant portions occurring as a result of the January acquisition of $59
million in loans from Citizens National Bank of Malone and the November
acquisition of $177 million associated with the FleetBoston branches. Overall
interest and fees on loans climbed $1.3 million or 1.0% as a result of this
growth, partially offset by a 46 basis point (BP) decrease in loan yields to
8.39%, which was caused by falling capital market rates.
16
Despite a falling rate environment, the 2001 steepening yield curve allowed for
widening spreads over cost of funds on investment transactions. This situation
created favorable opportunities to expand the company's investment portfolio,
which increased $147 million on average (excluding Federal Funds sold) during
the year. Two primary components of this expansion were a $140 million
securities strategy made possible by First Liberty's ample capital position and
additional purchases of $120 million from the excess cash provided by
FleetBoston branch acquisition. Investment interest income in 2001 was $7.9
million or 12.4% higher than the prior year as a result of the higher
outstandings, partially offset by a decrease in the average investment yield
from 7.18% to 6.96%. The large volume of growth in 2001 being put on at
declining market rates was the primary cause of the change in average investment
yield.
The average earning asset yield fell 39 basis points to 7.83% in 2001 because of
the aforementioned decrease in investment and loan yields and a reduced mix of
loans to earning assets, which decreased on average from 62.3% in 2000 to 60.3%
in 2001. This decline in loan mix is a consequence of favorable investment
opportunities outlined above as well as a slight reduction in loans outstanding
excluding the Citizens and FleetBoston branch acquisitions.
Total average fundings (deposits and borrowings) grew by $243.0 million in 2001,
largely attributable to a $209 million increase in deposits related primarily to
acquisitions and $12.7 million more in capital market borrowings. In addition to
capital market borrowing largely from the Federal Home loan Bank of New York,
the bank has approximately $78 million in trust preferred borrowings
outstanding, $50 million of which are floating rate offerings completed in July
to help finance the FleetBoston branch purchase.
Total interest expense increased by $2.1 million in 2001. Higher average
interest-bearing funds contributed $9.4 million in additional interest expense,
with lower market rates offsetting this by $7.3 million. Interest expense as a
percentage of earning assets, fell by 30 basis points (BPs) to 3.86%. The rate
on interest bearing deposits fell 23 BPs to 4.10% due largely to steady declines
in deposit rates throughout 2001. The borrowing rate on capital market
borrowings declined 83 BPs because of lower market rates and a higher mix of
short-term funding taken on in advance of the FleetBoston branch acquisition.
CBSI's net interest margin decreased by 9 basis points from 4.06% in 2000 to
3.97% this year as the 23 BP decrease in the rate on average interest bearing
deposits from 2000 to 2001, in addition to the 83 BP decrease in the average
borrowed funds rate, were not enough to offset the 39 BP drop in the earning
asset yield. By the third quarter of the year, however, margins turned up after
steadily falling since third quarter 2000, as downward repricing of the
company's certificates of deposits continued while the decrease in earning asset
yield moderated. The company's net interest margin ranked in the favorable 53rd
peer bank percentile through September 30, 2001.
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 twelve month periods ended December 31, 2001, 2000 and
1999. Interest income and resultant yield information in the tables are on a
fully tax-equivalent basis using a marginal federal income tax rate of 35%.
Averages are computed on daily average balances for each month in the period
divided by the number of days in the period. Yields and amounts earned include
loan fees. Nonaccrual loans have been included in interest earnings for purposes
of these computations.
Year Ended December 31,
-------------------------------------------------------------------------------------
2001 2000 1999
-------------------------------------------------------------------------------------
(000's omitted except yields Avg. Amt. of Avg. Avg. Amt. of Avg. Avg. Amt. of Avg.
and rates) Balance Interest Yield/ Balance Interest Yield/ Balance Interest Yield/
Rate Rate Rate
Paid Paid Paid
-------------------------------------------------------------------------------------
ASSETS:
Interest-earning assets:
Federal funds sold $4,568 $171 3.74% $7,728 $452 5.85% $2,198 $106 4.82%
Time deposits in other banks 306 379 N/A 3,147 183 5.82% 9,888 444 4.49%
Taxable investment securities 820,705 56,165 6.84% 732,490 52,026 7.10% 674,028 43,683 6.48%
Nontaxable investment 215,567 15,759 7.31% 156,885 11,957 7.62% 140,594 10,496 7.47%
securities
Loans (net of unearned 1,580,870 132,706 8.39% 1,484,945 131,373 8.85% 1,343,652 117,431 8.74%
discount) ------------------- ------------------- -------------------
Total interest-earning 2,622,016 205,180 7.83% 2,385,195 195,991 8.22% 2,170,360 172,160 7.93%
assets
Noninterest earning assets 264,496 171,443 185,725
---------- ---------- ----------
Total $2,886,512 $2,556,638 $2,356,085
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities
Savings deposits $683,088 $12,783 1.87% $622,164 $13,784 2.22% $654,794 $14,250 2.18%
Time deposits 1,100,850 60,380 5.48% 991,754 56,137 5.66% 933,687 47,652 5.10%
Short-term borrowings 141,772 6,738 4.75% 258,985 16,859 6.51% 125,433 6,584 5.25%
Long-term borrowings 339,205 21,294 6.28% 188,120 12,361 6.57% 155,373 10,004 6.44%
------------------- ------------------- -------------------
Total interest-bearing 2,264,915 101,195 4.47% 2,061,023 99,141 4.81% 1,869,287 78,490 4.20%
Liabilities
Noninterest-bearing liabilities
Demand deposits 343,173 304,107 289,749
Other liabilities 39,056 17,010 22,570
Shareholders' equity 239,368 174,498 174,479
---------- ---------- ----------
Total $2,886,512 $2,556,638 $2,356,085
========== ========== ==========
Net interest earnings $103,985 $96,850 $93,670
======== ======= =======
Net yield on interest-earning assets 3.97% 4.06% 4.32%
Federal tax exemption on nontaxable $7,330 $6,417 $5,670
investment securitie included in
interest income
18
As discussed above, the change in 2001 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.
------------------------------------------------------------------
2001 Compared to 2000 2000 Compared to 1999
------------------------------------------------------------------
Increase(Decrease) Due to Increase(Decrease) Due to
Change in (1) Change in (1)
Net Net
Volume Rate Change Volume Rate Change
------ ---- ------ ------ ---- ------
Interest earned on:
Federal funds sold ($149) ($132) ($281) $319 $27 $346
Time deposits in other banks (308) 504 196 (365) 104 (261)
Taxable investment securities 6,090 (1,951) 4,139 3,961 4,382 8,343
Nontaxable investment securities 4,308 (506) 3,802 1,238 223 1,461
Loans(net of unearned discounts) 8,244 (6,911) 1,333 9,293 4,649 13,942
Total interest-earning assets(2) $18,833 ($9,644) $9,189 $17,490 $6,341 $23,831
Interest paid on:
Savings deposits $1,269 ($2,270) ($1,001) ($720) $254 ($466)
Time deposits 6,026 (1,783) 4,243 3,081 5,404 8,485
Short-term borrowings (6,340) (3,781) (10,121) 8,384 1,891 10,275
Long-term borrowings 9,508 (575) 8,933 2,148 209 2,357
Total interest-bearing liabilities(2) $9,402 ($7,348) $2,054 $8,535 $12,116 $20,651
Net interest earnings(2) $9,435 ($2,300) $7,135 $8,929 ($5,749) $3,180
(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.
19
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, 2001 and 2000.
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 Quarter Ended December 31,
---------------------------------------------------------
2001 2000
---------------------------------------------------------
(000's omitted except yields Avg. Amt. of Avg. Avg. Amt. of Avg.
and rates) Balance Interest Yield/ Balance Interest Yield/
Rate Rate
Paid Paid
---------------------------------------------------------
ASSETS:
Interest-earning assets:
Federal funds sold $0 $0 0.00% $241 $4 6.60%
Time deposits in other banks 227 (10) -17.48% 470 14 11.85%
Taxable investment securities 820,771 13,880 6.71% 766,415 13,630 7.07%
Nontaxable investment securities 245,359 4,584 7.41% 162,609 2,970 7.27%
Loans (net of unearned discount) 1,646,921 32,779 7.90% 1,521,593 34,314 8.97%
------------------- -------------------
Total interest-earning 2,713,278 51,233 7.49% 2,451,328 50,932 8.27%
assets
Noninterest earning assets
Cash and due from banks 99,394 71,426
Premises and equipment 47,827 40,914
Other assets 154,603 91,987
Less: allowance for loans (21,669) (20,088)
Net unrealized gains (losses) on
available-for-sale portfolio 37,584 (13,016)
---------- ----------
Total $3,031,017 $2,622,551
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities
Savings deposits $797,399 $3,086 1.54% $617,555 $3,502 2.26%
Time deposits 1,113,653 13,472 4.80% 1,019,658 15,427 6.02%
Short-term borrowings 83,786 581 2.75% 250,395 4,227 6.72%
Long-term borrowings 335,174 5,403 6.40% 216,222 3,523 6.48%
------------------- -------------------
Total interest-bearing 2,330,012 22,542 3.84% 2,103,830 26,679 5.05%
Liabilities
Noninterest-bearing liabilities
Demand deposits 388,512 312,466
Other liabilities 76,706 20,336
Shareholders' equity 265,787 185,919
---------- ----------
Total $3,031,017 $2,622,551
========== ==========
Net interest earnings $28,691 $24,253
======= =======
Net yield on interest-earning assets 4.20% 3.94%
Federal tax exemption on nontaxable
investment securities included in
interest income $2,065 $1,601
20
The changes in net interest income (full tax-equivalent basis) by volume and
rate component for fourth quarter 2001 versus fourth quarter 2000 are shown
below for each major category of interest-earning assets and interest-bearing
liabilities.
---------------------------------------------
4th Quarter 2001 Compared to 4th Quarter 2000
---------------------------------------------
Increase(Decrease) Due to Change in (1)
Net
Volume Rate Change
------ ---- ------
Interest earned on:
Federal funds sold ($2) ($2) ($4)
Time deposits in other banks (4) (20) (24)
Taxable investment securities 3,387 (3,137) 250
Nontaxable investment securities 1,614 0 1,614
Loans (net of unearned discounts) 12,702 (14,237) (1,535)
Total interest-earning assets(2) $20,390 ($20,089) $301
Interest paid on:
Savings deposits (416) (0) (416)
Time deposits 7,166 (9,121) (1,955)
Short-term borrowings (1,932) (1,714) (3,646)
Long-term borrowings 2,201 (321) 1,880
Total interest-bearing liabilities(2) $14,529 ($18,666) ($4,137)
Net interest earnings(2) $2,746 $1,692 $4,438
(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 three primary types: general
banking services related to loans, deposits and other core customer activities
typically provided through the branch network; financial services, comprised of
personal trust, employee benefit trust, investment, and insurance products; and
periodic transactions, most often net gains (losses) from the sale of
investments or other occasional events.
Total noninterest income in 2001 increased by 25.8% to $29.1 million, largely
due to gains on the sale of investments, increased revenues from the company's
Benefits Plans Administrative Services subsidiary (BPA), and increased overdraft
fees. Combined revenues, excluding transactions related to investment securities
and disposal of branch properties, were up strongly for the seventh consecutive
year to approximately $26.5 million in 2001, a $3.3 million or 14.0% improvement
over 2000. Noninterest income, excluding transactions related to investment
securities and disposal of branch properties, as a percent of operating income
was 20.3% in 2001, an increase of one percentage point from the prior year.
The largest segment of the company's recurring noninterest income is the wide
variety of fees earned from general banking services, which reached $13.8
million in 2001, up 11.8% from the prior year. This segment contributed 52% of
noninterest income, excluding net investment securities gains (losses) and
disposal of branch properties. Highlighting this increase was a large rise in
service charges on deposit accounts and overdraft fees, which increased by $1.8
million, a 24% growth rate over $7.6 million in 2000. This reflects the
company's 2001 acquisitions, including a fee schedule
21
increase in the First Liberty market. Offsetting this increase was a decline of
$387,000 in revenue from electronic banking products due to a change in the
company's VISATM affiliation.
Mortgage banking fees were up strongly at $653,000 in 2001, an increase from
$340,000 in the prior year. The primary reason for the increase was the sharp
rise in loans sold on the secondary market to $43.6 million from $9.5 million in
2000, as driven by a decline in capital market rates. This change is reflected
in an increase in mortgage servicing rights from $526,201 in 2000 to $567,013
this year. Loan servicing fees (a component of mortgage banking income) were
$312,000 in 2001, up 30.5% from the previous year on a serviced loan portfolio
of approximately $120 million, consisting of 2,007 loans.
Fees from the financial services segment of noninterest income rose $1.8 million
or 16.9% in 2001 to $12.7 million. As a whole, financial services now comprise
48% of total noninterest income, excluding net investment securities gains
(losses). Strength in revenue from record keeping and consulting services
provided by EBT/BPA (our pension administration business working in concert with
the bank's employee benefit trust service), offset a reduction in personal trust
revenues, that was caused by lower estate fees (which periodically fluctuate)
and transfer of mutual fund sales commissions now being earned through the
company's broker-dealer, Community Investment Services, Inc. (CISI). Growth in
CISI revenues was consistent with an expanded force of financial consultants,
which numbered 20 at year end, including four in the recently acquired (and
formerly underserved) First Liberty franchise. The rise in revenues at
investment manager Elias Asset Management reflects the full year impact of the
firm, which was acquired in second quarter 2000. Lastly, commissions from
insurance products increased slightly due to greater sales by financial
consultants and a higher dividend from the underwriter of CBSI's creditor life
insurance products.
Assets under management from the company's several financial services businesses
dipped slightly to $1.39 billion in 2001 compared to $1.42 billion in the prior
year, largely reflective of reduced equity market levels. Overall, financial
services contributed $2.8 million or 9.3% of the company's pretax net income
this year (before allocation of indirect corporate expense), reflecting nearly a
22% return on revenue. In 2000, the net income contribution was $2.9 million or
8.3%, with a return on revenue of almost 27%. The decrease in earnings and
return on revenue was caused by front-end recruiting payments to new financial
consultants and reduced fees on products tied to equity assets under management.
Lastly, income from periodic transactions in 2001 largely includes $2.5 million
in gains taken on $118.7 million in investment sales, with the net proceeds used
to pre-pay $95.0 million in high-cost FHLB borrowings at a $2.7 million premium.
This amount compares to losses of $159,000 last year. 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.
22
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,
- -----------------------------------------------------------------------------------------------------
2001 2000 1999 2001 2000
---- ---- ---- ---- ----
Personal trust $ 1,821 $ 2,120 $ 1,956 $ 413 $ 591
EBT/BPA 3,927 2,992 2,586 1,130 777
Elias Asset Management 3,713 3,091 0 815 1,052
Insurance 1,043 845 730 115 92
Other investment products 2,164 1,788 1,268 523 468
- -----------------------------------------------------------------------------------------------------
Total financial services 12,668 10,836 6,540 2,996 2,980
Electronic banking 1,469 1,857 1,585 416 461
Mortgage banking 653 340 453 290 88
Commercial leasing 34 41 59 1 9
Deposit service charges 4,183 4,036 4,056 1,121 1,016
Overdraft fees 5,183 3,827 3,197 1,542 971
Commissions 2,259 2,231 2,206 461 557
- -----------------------------------------------------------------------------------------------------
General banking services 13,781 12,332 11,556 3,831 3,102
Miscellaneous revenue 13 35 57 9 4
- -----------------------------------------------------------------------------------------------------
Total noninterest income excluding
investment security gain (loss), net 26,462 23,203 18,153 6,836 6,086
Investment security gain (loss), net 2,546 (159) (413) (13) 0
Disposition of branch properties 75 81 0 75 81
- -----------------------------------------------------------------------------------------------------
Total noninterest income $ 29,083 $ 23,125 $ 17,740 $ 6,898 $ 6,167
=====================================================================================================
Non-interest income as a percentage of
operating Income (excludes investment
security gain (loss), net and disposal of
branch properties) 20.3% 19.3% 16.2% 19.2% 20.1%
Noninterest Expense
Noninterest expense or overhead rose $18.1 million or 25.5% in 2001. Excluding
acquisition expenses related to Citizens National Bank of Malone (CNB), First
Liberty (FLIB), and FleetBoston branches, noninterest expense was up $10.0
million or 14.1% in 2001. This year's overhead of $89.0 million as a percent of
average assets was 3.08%, up from 2.77% in 2000. 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
2.85% in 2001 compared to 2.98% for peers.
For CBSI as a whole, higher personnel expense accounted for 32% of 2001's
increase in overhead, with personnel costs up 15.7% as a result of the three
acquisitions. The remainder of the increases in salary, benefit, and payroll tax
expense reflect modest annual merit awards for employees. Total full-time
equivalent staff at year-end 2001 was 1,115 versus 927 at year-end 2000, up as
the result of the 2001 acquisitions and their related impact on selected back
office and administrative staffing.
Nonpersonnel expense rose $12.3 million or 36.0% in 2001. Excluding
acquisition-related expenses, nonpersonnel expense rose $5.7 million or 16.6% in
2001. This was largely caused by increases in intangible amortization, up $1.8
million or 36.5%; occupancy expense, up $1.0 million or 20.4%; equipment
expense, up $851,000 or 16.3%; and data processing, up $729,000 or 13.7%. The
increase in intangible amortization was due to the Citizens and FleetBoston
acquisitions and a full year of the Elias Asset Management acquisition.
Occupancy expenses increased largely due to the impact of the Citizens branches
acquired in January and the Fleet branches acquired in November of 2001. Higher
equipment expenses were related to higher service contract costs and
depreciation expense due to the additional number of branches in 2001. Increases
in data processing relates to higher Fiserv processing fees, data line charges
and check processing expenses.
23
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 income items have
related to the disposal of branch properties. The lower the ratio, the more
efficient a bank is considered to be.
In 2001, the recurring efficiency ratio increased 2.3 percentage points to
56.9%. Management believes it is more meaningful to use the recurring ratio to
compare to national norms, because as mentioned above, most of the company's
peers do not have intangible expense to the significance that CBSI has. On that
basis, CBSI's ratio is more favorable than the peer bank ratio of 62.8% based on
data available as of September 30, 2001. These results only partially reflect
the full year impact of the $3.2 million in annual cost savings implemented in
mid second quarter 2001 in the First Liberty market, including the associated
benefit of streamlining our operations functions by eliminating duplicate loan
and deposit processing units in Canton and Olean, NY. However, because of the
surge in volumes being processed as a result of the former FleetBoston branches,
fourth quarter 2001 part-time and overtime costs were some $105,000 higher than
in the same period a year earlier, representing a .3% lag in lowering the
efficiency ratio. As experience in handling this additional work is gained,
improvement in the efficiency ratio is expected.
By the nature of the company's financial services businesses, the efficiency
ratio of those activities was 75.3% in 2001 compared to 71.4% in the prior year.
The efficiency ratio of the company's banking activities was 54.9% this year
compared to 52.9% in 2000. As discussed above, the efficiency ratio is expected
to improve for both businesses in 2002.
Acquisition and unusual expenses, which are excluded from the recurring
efficiency ratio calculation, totaled $8.2 million in 2001. The largest items
comprising the 2001 expenditures include $1.5 million in severance expense for
First Liberty; $3.2 million in professional and consulting fees; $1.3 million in
postage, printing, and check replacement costs; $1.3 million in data processing
conversion costs and obsolete software write-offs; and $.9 million in a wide
variety of other nonrecurring expenses.
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.
24
The following table sets forth information by category of noninterest expense of
the company for the years and quarters indicated.
- ----------------------------------------------------------------------------------
(000's omitted) Years ended December 31, Quarters ended
December 31,
- ----------------------------------------------------------------------------------
2001 2000 1999 2001 2000
---- ---- ---- ---- ----
Personnel expense $41,045 $36,743 $33,693 $10,724 $ 9,394
Net occupancy expense 6,122 5,084 4,871 1,568 1,316
Equipment expense 6,075 5,224 4,932 1,659 1,326
Legal and professional fees 2,304 2,336 2,426 680 572
Data processing expense 4,436 4,526 4,125 1,161 1,109
Amortization of intangibles 6,679 4,891 4,723 2,137 1,281
Stationary and supplies 1,995 1,711 1,802 591 447
Deposit insurance premiums 346 278 183 92 69
Acquisition and unusual expenses 8,164 400 0 2,046 398
Other 11,873 9,741 10,023 3,290 2,577
- ----------------------------------------------------------------------------------
Total noninterest expense $89,039 $70,934 $66,778 $23,948 $18,489
==================================================================================
Total operating expenses as
a percentage of average assets 3.08% 2.77% 2.83% 3.13% 2.80%
Efficiency ratio (1) 56.9% 54.6% 55.5% 55.6% 55.4%
(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 taxes and extraordinary item in 2001 was $29.6 million, down 15.2%
over the prior year's amount. When income is recast as if all tax-exempt
revenues were fully taxable on a federal basis, 2001's results fell by $4.4
million or 10.6% to $36.9 million before tax.
The main reasons for the decline in pretax earnings were the $8.2 million in
acquisition and unusual expenses, partially offset by $2.5 million in net
investment security gains associated with the company's three 2001 acquisitions
in January, May, and November. Favorable increases in net interest income, up
$7.1 million or 7.4% (full tax-equivalent basis) related to strong earning asset
growth (up 9.9% or $236.8 million on average), and a $3.3 million or 14.0% climb
in noninterest income, excluding net securities gains (losses), helped partially
offset a portion of the acquisition related expenses.
The company's combined effective federal and state tax rate decreased one
percentage point this year to 29.0%. The decrease resulted from effective tax
planning, principally because of increased purchases of tax-exempt municipal
investments and other earning asset strategies during the year.
Capital
Shareholders' equity ended 2001 at $268 million, up 33% from one year earlier.
This improvement reflects earnings for the year, the positive change in market
value adjustment (MVA) of the bank's available-for-sale investments, an
additional 952,000 in common shares issued in conjunction with the company's
January whole bank purchase of Citizens National Bank of Malone, and 1.3 million
shares issued in the fourth quarter of 2001 to support the mid-November purchase
of 36 branches from FleetBoston Financial, offset by dividends paid to
shareholders. Excluding the MVA in both 2000 and 2001, capital rose by $61.8
million or 31.6%. Shares outstanding grew by 2.3 million during the year due to
the aforementioned issuance of stock and the exercise of stock options.
25
The company's 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," increased slightly from one year ago to 6.73%.
This reflects the combined impact of the additional shares of common stock and
approximately $50 million in floating rate trust preferred stock raised to
support the FleetBoston branch acquisition, which more than offset greater
intangibles resulting from acquisitions. The total capital to risk-weighted
assets ratio increased 106 BPs during 2001 to 12.76% as of year-end compared to
the 10% minimum requirement for "well-capitalized" banks. The tangible
equity/tangible assets ratio ended the year at 4.09% versus 5.65% at December
31, 2000. The company is confident that capital levels are being prudently
balanced between regulatory and investor perspectives.
Cash dividends declared on common stock in 2001 of $12.6 million represented an
increase of 24.3% over the prior year. This growth largely reflects the
aforementioned increase in the number of shares. The quarterly dividend per
share at $.27 remained unchanged from the level established in third quarter
2000.
CBSI's dividend payout ratio for the year was 65.7% compared to 40.6% in 2000,
temporarily higher than the company's targeted payout range for dividends on
common stock of 30-40%. Its payout ratio has historically been strong relative
to peers, and for 2001, the ratio was in the 95th peer percentile. The large
increase in the payout ratio reflects maintenance of the dividend despite the
23.2% decrease in net income from the prior year, which was largely due to
one-time acquisition expense.
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) 2001 2000 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
Real estate mortgages:
Residential $ 712,550 $ 579,562 $ 543,195 $ 453,307 $ 451,633
Commercial loans secured by real
estate 272,157 243,429 225,822 200,435 165,813
Farm 20,851 20,472 18,324 13,205 11,195
- ---------------------------------------------------------------------------------------------------------
Total 1,005,558 843,463 787,341 666,947 628,641
Commercial, financial, and agricultural:
Agricultural 25,191 26,523 27,758 22,737 23,999
Commercial and financial 274,734 237,462 219,600 227,932 188,680
- ---------------------------------------------------------------------------------------------------------
Total 299,925 263,985 247,358 250,669 212,679
Installment loans to individuals 399,368 395,226 390,450 365,141 348,823
Other loans 28,237 14,205 2,043 12,626 16,608
- ---------------------------------------------------------------------------------------------------------
Gross loans 1,733,088 1,516,879 1,427,192 1,295,383 1,206,751
Less: Unearned discount 218 1,002 1,419 2,248 2,945
- ---------------------------------------------------------------------------------------------------------
Net loans 1,732,870 1,515,877 1,425,773 1,293,135 1,203,806
Reserve for loan losses 23,901 20,035 18,528 17,059 16,996
- ---------------------------------------------------------------------------------------------------------
Loans, net of reserve for loan losses $1,708,969 $1,495,842 $1,407,245 $1,276,076 $1,186,810
===