As
filed with the Securities and Exchange Commission on September 29,
2008
Registration No.
333-153403
|
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
S-3
AMENDMENT
NO. 1 TO
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
Community
Bank System, Inc.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
16-1213679
|
(State
or other jurisdiction of incorporation or organization)
|
|
(I.R.S.
Employer
Identification
Number)
|
5790
Widewaters Parkway
Dewitt,
New York 13214
(315)
445-2282
(Address,
including zip code, and telephone number, including area code, of registrant’s
principal executive offices)
Mark
E. Tryniski
President
and Chief Executive Officer
5790
Widewaters Parkway
Dewitt,
New York 13214
(315)
445-2282
(Name,
address, including zip code, and telephone number, including area code, of agent
for service)
Copies
to:
Ronald
C. Berger, Esq.
Bond,
Schoeneck & King, PLLC
One
Lincoln Center
Syracuse,
New York 13202
(315)
218-8000
|
John
J. Spidi, Esq.
James
C. Stewart, Esq.
Malizia
Spidi & Fisch, PC
901
New York Avenue, N.W., Suite 210 East
Washington,
D.C. 20001
(202)
434-4660
|
Approximate date of commencement of
proposed sale to the public: As soon as practicable after the
effective date of this Registration Statement.
If the
only securities being registered on this Form are being offered pursuant to
dividend or interest reinvestment plans, please check the following
box.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box.
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
If this
Form is a registration statement pursuant to General Instruction I.D. or a
post-effective amendment thereto that shall become effective upon filing with
the Commission pursuant to Rule 462(e) under the Securities Act, check the
following box.
If this
Form is a post-effective amendment to a registration statement filed pursuant to
General Instruction I.D. filed to register additional securities or additional
classes of securities pursuant to Rule 413(b) under the Securities Act, check
the following box.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
Accelerated
filer ý
Non-accelerated filer (Do not check if a smaller reporting
company) Smaller
reporting company
Calculation
of Registration Fee
Title
of each class of
securities
to be registered
|
Amount
to
be
registered (1)
|
Proposed
maximum offering price per unit (2)
|
Proposed
maximum
aggregate
offering price (2)
|
Amount
of Registration Fee (3)
|
Common
Stock ($1.00 par value)
|
1,955,000
|
$22.39
|
$43,772,450
|
$1,729.26
|
|
|
(1)
|
Includes
255,000 shares of Common Stock that the underwriters have the option to
purchase to cover over-allotments, if
any.
|
(2)
|
Estimated
solely for the purpose of calculating the registration fee in accordance
with Rule 457(c) under the Securities Act of 1933, based on the average of
the high and low sales prices of the registrant's common stock on
September 4, 2008, as reported on the New York Stock Exchange, of $22.66
and $22.11 respectively.
|
The
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
THE
INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED WITHOUT
NOTICE. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE
OFFER OR SALE IS NOT PERMITTED.
Subject
to completion, dated September 29, 2008
PROSPECTUS
1,700,000
SHARES
COMMUNITY
BANK SYSTEM, INC.
Common
Stock
__________________________________
We are
offering 1,700,000 shares of our common stock. Our common stock is
traded on the New York Stock Exchange under the symbol “CBU.” The
last reported sale price of our common stock on the New York Stock Exchange on
___________, 2008 was $_____ per share.
__________________________________
Investing
in our common stock involves risks. See “Risk Factors” beginning on
page 7.
__________________________________
|
PER SHARE
|
|
TOTAL
|
Public
offering price…………………………………………...
|
$
|
|
$
|
Underwriting
discount…………………………………………
|
|
|
|
Proceeds
to us, before expenses…………………….……….
|
$
|
|
$
|
We have
granted the underwriters an option to purchase up to an additional 255,000
shares of common stock to cover any over-allotments. The underwriters
can exercise this option at any time within thirty days after the
offering. The underwriters expect to deliver the shares of common
stock to investors on or about ____________, 2008.
__________________________________
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal
offense.
Shares
of our common stock are not deposits or accounts and are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
governmental agency.
__________________________________
Janney Montgomery
Scott LLC |
Raymond James
|
FTN
Midwest Securities Corp.
The date
of this prospectus is ______________, 2008
Community
Bank System, Inc.
Market
Area
[INSIDE
FRONT COVER]
˜ Administrative/Operations
Centers
¢ Community
Bank, N.A. New York Branches
æ First
Liberty Bank & Trust Pennsylvania Branches
Ø Financial
Services Locations
¢ RBS
Citizens Branches
(to be
acquired in pending transaction)
CERTAIN
PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF OUR COMMON
STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION
WITH THE OFFERING AND MAY BID FOR, AND PURCHASE, SHARES OF OUR COMMON STOCK IN
THE OPEN MARKET AND IMPOSE PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE “UNDERWRITING.” SUCH STABILIZING TRANSACTIONS, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
TABLE
OF CONTENTS
Summary............................................................................................................
|
1 |
Risk
Factors......................................................................................................
|
7 |
Forward-Looking
Statements.........................................................................
|
12 |
Use
of
Proceeds...............................................................................................
|
12 |
Price
Range of Our Common Stock and Dividend
Information.................
|
13 |
Dividend
Policy................................................................................................
|
13 |
Capitalization....................................................................................................
|
14 |
Pro
Forma Consolidated Statement of Financial
Condition.......................
|
15 |
Management's
Discussion and Analysis of Financial Condition and
Recent Results of
Operations......................................................................
|
17 |
Underwriting.....................................................................................................
|
32 |
Legal
Matters....................................................................................................
|
34 |
Experts...............................................................................................................
|
34 |
Incorporation
of Certain Documents by
Reference....................................
|
34 |
ABOUT
THIS PROSPECTUS
You
should read this prospectus, together with additional information described
under the heading “Where You Can Find More Information.”
You
should rely only on the information contained or incorporated by reference in
this prospectus. We have not, and the underwriters have not, authorized any
other person to provide you with different information. If anyone provides you
with different or inconsistent information, you should not rely on it. We are
not, and the underwriters are not, making an offer to sell these securities in
any jurisdiction where the offer or sale is not permitted. You should assume
that the information appearing in this prospectus and the documents incorporated
by reference is accurate only as of each of their respective dates. Our
business, financial condition, results of operations and prospects may have
changed since those dates.
All
references in this prospectus to “Community Bank System,” “we,” “us,”
“our” or similar references mean Community Bank System, Inc., and include
our consolidated subsidiaries where the context so requires. Currency amounts in
this prospectus are stated in U.S. dollars.
WHERE
YOU CAN FIND MORE INFORMATION
We are a
reporting company and file annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange Commission, or
the SEC. You may read and copy such materials at the public reference
facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549.
You may also obtain copies of such material from the SEC at prescribed rates for
the cost of copying by writing to the Public Reference Section of the SEC at the
same address. You may call the SEC at 1-800-SEC-0330 for more
information on the public reference rooms. You can also find our SEC
filings at the SEC's web site at www.sec.gov. You can also inspect
reports, proxy statements and other information about us at the offices of the
New York Stock Exchange, 11 Wall Street, New York, New York
10005. Our SEC filings can also be found on our website at
www.communitybankna.com.
SUMMARY
This
summary highlights selected information contained elsewhere, or incorporated by
reference, in this prospectus. This summary does not contain all of
the information that you should consider before making an investment
decision. This prospectus contains forward-looking statements, which
involve risks and uncertainties. Our results could differ materially
from those anticipated in these forward-looking statements as a result of
various factors, including those set forth in “Risk Factors” and elsewhere in
this prospectus. You should read the entire prospectus carefully,
including the risk factors on page 7 and documents incorporated by
reference.
Community
Bank System, Inc.
We are a
Delaware corporation headquartered in DeWitt, New York, and the parent company
of Community Bank, N.A. We are one of the largest community banks
headquartered in Upstate New York based on total assets at June 30,
2008. We operate 141 customer facilities and 118 ATMs stretching
diagonally from Northern New York to the Southern Tier of New York and west to
Lake Erie, as well as in five counties in Northeastern Pennsylvania where we
operate as First Liberty Bank & Trust. We were ranked either
first or second in deposit market share in 78 of the 112 towns in which we
operate, based on publicly available information as of the date of this
prospectus. At June 30, 2008, we had approximately $4.7 billion in
total assets, $3.2 billion in total deposits, $2.9 billion in total loans and
shareholders' equity of $484 million. Community Bank is a member of
the Federal Reserve System and the Federal Home Loan Bank System, and its
deposits are insured by the Federal Deposit Insurance Corporation, up to
applicable limits.
Our
business strategy is to operate as a profitable, diversified financial services
company providing a variety of banking and other financial services, with an
emphasis on consumer and residential mortgage lending and commercial business
loans to small and medium-sized businesses. As a result of
consolidation of small to medium-sized financial institutions and the deemphasis
on retail branch banking by larger bank holding companies in the markets we
serve, we believe there is a significant opportunity for a community-focused
bank to provide a full range of financial services to small and middle-market
commercial and retail customers. Our branches are located in small
towns and villages where competition is less intense. We emphasize
comprehensive retail and small business products and responsive, decentralized
decision-making which reflects our knowledge of our local markets and
customers.
Through
our subsidiaries, we offer a wide range of commercial and retail banking and
financial services to businesses, individuals, agricultural and government
customers. Our account services include checking, interest-bearing
checking, money market, savings, certificates of deposit and individual
retirement accounts. We also offer residential and farm loans,
business lines of credit, working capital facilities, inventory and dealer floor
plans, as well as installment, commercial, term and student
loans. Our lending focuses predominantly on consumer and small to
medium-sized business borrowers, which enables our loan portfolio to be highly
diversified.
Because
we believe that there is a significant potential market for financial services
and products, we offer a full range of services to satisfy our customers'
financial needs. In addition to traditional banking services and
products, we offer personal trust, employee benefit trust, benefits
administration and consulting, investment and insurance services to customers in
our banking markets as well as in other parts of the country. For the
year ended December 31, 2007, our total noninterest income, including income
from these financial services and products, was approximately $63.3 million, as
compared to $37.9 million for the year ended December 31, 2003.
Consistent
with our strategy to increase noninterest income, our wholly owned subsidiary
Benefit Plans Administrative Services, Inc. (BPAS) acquired Alliance Benefit
Group MidAtlantic (ABG) located in Philadelphia, Pennsylvania in July
2008. In May 2007, BPAS acquired Hand Benefits & Trust, Inc.
(HBT) located in Houston, Texas. ABG and HBT provide retirement plan
consulting, daily valuation administration, actuarial and ancillary support
services.
We have
also emphasized expansion of our banking business through business combinations
with other banks and the acquisition of assets and deposits. From
2003 through the current date, we have completed seven transactions, which added
28 branches, approximately $800 million in deposits and approximately $710
million in loans.
In
addition, we have pending an acquisition with RBS Citizens, National Association
(RBS Citizens) to acquire certain assets and liabilities associated with 18
branches in northern New York State with approximately $606 million in deposits
and approximately $116 million in loans as of July 31, 2008. We
expect to complete this acquisition in the fourth quarter of 2008. At
June 30, 2008, after giving pro forma effect to the ABG acquisition, RBS
Citizens acquisition and this offering, our total assets would have been
approximately $5.3 billion, our total loans would have been approximately $3.0
billion, our total deposits would have been approximately $3.9 billion, and our
branch network would have consisted of 159 customer facilities and 134
ATMs.
We are
subject to examination and regulation by the Board of Governors of the Federal
Reserve System, the Office of the Comptroller of the Currency, or the OCC, and
the Federal Deposit Insurance Corporation, or the FDIC. This
regulation is intended for the protection of our depositors, not our
stockholders.
Our
executive offices are located at 5790 Widewaters Parkway, DeWitt, New York
13214, and our phone number is (315) 445-2282. Our web site is
located at www.communitybankna.com. The information on our web site
is not a part of this prospectus.
Pending
Branch Acquisition
On June
24, 2008, we entered into a definitive agreement with RBS Citizens to acquire
certain loans and assets, and assume certain deposits, related to 18 RBS
Citizens branches located in northern New York State. Under this
agreement, we will acquire the facilities and equipment, including 16 ATMs, as
well as real estate and leases, associated with the operation of these
branches. The transaction is subject to receipt of requisite
regulatory approvals and certain other conditions, and is expected to close in
the fourth quarter of 2008. We are conducting this offering to raise
additional capital to support the RBS Citizens branch
acquisition. The consummation of the branch acquisition is not
subject to completion of this offering.
We view
this acquisition as a unique opportunity to grow our branch network in our
existing market areas, as well as to expand our services and market area into
contiguous markets in the Northern region of New York State. The
acquisition of the RBS Citizens branches provides us the opportunity to increase
our business substantially, without a significant increase in corporate
administrative overhead costs. Based on total deposits as of June 30,
2007 (the last date for which market share information on deposits is publicly
available), we expect the RBS Citizens acquisition to increase our total
deposits in the Northern region of New York by $554 million and our deposit
market share in that market from 6.4% to 10.4%. In Plattsburgh and
surrounding Clinton County (located on the border with Vermont and Canada), the
acquisition will increase our deposit market share to a market-leading 22.8%
with $292 million in total deposits. We believe that this transaction
will provide us with the benefits of acquiring a “whole-bank franchise” in the
market area, without the normal whole-bank acquisition costs and risks
associated with the integration of senior-level management that come with a
whole-bank acquisition.
At July
31, 2008, loans to be acquired under the agreement with RBS Citizens were
approximately $116 million and deposits to be assumed were approximately $606
million. Both amounts are subject to adjustments due to run-off or growth of
deposits and loans occurring in the ordinary course of business prior to the
closing date, and to adjustments in the loan amount based on type of loan and
credit quality standards under the agreement.
Recent
Developments
Summary
of developments since June 30, 2008
Results during the two-month period
ended August 31, 2008 reflect similar trends as those experienced during the
first six months of 2008. At August 31, 2008 the Company had total
assets of $4.75 billion, deposits of $3.25 billion and stockholders’ equity of
$487 million. Some of the financial highlights for the two-month
period ended August 31, 2008 include the following:
·
|
The
Company’s tax equivalent net interest rate margin remained at the 3.79%
level reported for the six months ended June 30,
2008.
|
·
|
Consistent
with historical trends, we experienced seasonally strong loan growth of
$65.4 million for the two months ended August 31, 2008, including net
growth in all loan types.
|
·
|
Nonperforming
loans declined to $11.2 million or 0.37% of total loans at August 31,
2008, from $11.5 million and 0.39% of total loans at June 30,
2008. At August 31, 2008, the allowance for credit losses
represented 1.25% of total loans and 334% of nonperforming loans as
compared to 1.27% and 324% as of June 30, 2008,
respectively.
|
·
|
The
net market value gain over book value of our available for sale securities
portfolio, which contains no FNMA or FHLMC common or preferred stock,
increased $2.6 million since June 30, 2008. Based on our
analysis, we have determined that any unrealized losses are
temporary. We have the ability and intent to hold our
investment securities currently in an unrealized loss position to
recovery.
|
·
|
Total
deposit balances remained virtually unchanged from June 30, 2008 to August
31, 2008. However, our efforts to better position our funding
mix resulted in an additional $45.0 million of growth in core accounts
offset by a $45.2 million decline in higher-cost time deposit
accounts.
|
·
|
At
August 31, 2008, total borrowings increased $88.5 million, primarily in
short-term instruments which were utilized to fund our incremental loan
growth as well as an additional $33.7 million of net investment securities
purchases.
|
·
|
All
capital ratios of Community Bank, N.A. continue to remain above
well-capitalized levels.
|
The
Offering
Issuer..…………………………………………
|
Community
Bank System, Inc.
|
|
|
Common
stock outstanding before this offering.………………………………………
|
30,049,521
shares
|
Common
stock
offered…………..……………...................................................................
|
1,700,000
shares
|
Common
stock to be outstanding after this
offering......................................................
|
31,749,521
shares
|
Estimated
net proceeds to Community Bank System………………………………….
|
Approximately
$____ million
|
Use
of
proceeds………………………………....................................................................
|
To
support the acquisition of 18 branches from RBS Citizens See
“Use of Proceeds.”
|
Dividends
on common
stock…………………..................................................................
|
$0.21
per quarter – first and second quarter 2008
$0.22
per quarter – third quarter 2008
|
New
York Stock Exchange
symbol…………....................................................................
|
CBU
|
The
number of shares of our common stock to be outstanding after this offering is
based on the number of shares outstanding as of September 25, 2008 and excludes
the following:
·
|
2,733,923
shares of common stock issuable upon exercise of outstanding stock options
with a weighted average exercise price of approximately $20.30 per share;
and
|
·
|
2,188,372
shares of common stock reserved for future grants under our stock option
plans.
|
·
|
255,000
shares subject to the over-allotment
option.
|
Unless
otherwise expressly stated or the context otherwise requires, all information in
this prospectus assumes the underwriters’ over-allotment option will not be
exercised. For more information regarding the over-allotment option,
see the “Underwriting” section beginning on page 32 of this
prospectus.
Risk
Factors
Prospective
investors should carefully consider the matters set forth under “Risk Factors”
beginning on page 7.
Selected
Consolidated Financial Data
The table
below presents summary consolidated financial information of Community Bank
System, Inc. You should read this information together with the information
incorporated by reference in this prospectus, including our consolidated
financial statements and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included in our Annual Reports on
Form 10-K for the years ended December 31, 2007, 2006, 2005, 2004 and
2003 and our Quarterly Report on Form 10-Q for the periods ended June 30,
2008 and 2007. We prepared the summary historical financial data using audited
consolidated financial statements for each of the years in the five-year period
ended December 31, 2007 and our unaudited financial statements for the
six-month periods ended June 30, 2008 and 2007. In the opinion of
management, the unaudited interim financial data reflects all adjustments,
consisting only of normal and recurring adjustments, necessary for a fair
presentation of our results of operations and financial condition for the six
months ended June 30, 2008 and 2007. Operating results for the six months ended
June 30, 2008 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2008. See “Where You Can Find More
Information” for a description of how to obtain a copy of the documents
incorporated by reference into this prospectus.
We
acquired HBT on May 18, 2007, TLNB Financial Corporation, the parent company of
Tupper Lake National Bank (TLNB), on June 1, 2007, ONB Corporation, the parent
company of Ontario National Bank (ONB), on December 1, 2006, ES&L Bancorp,
Inc., the parent company of Elmira Savings and Loan, F.A. (Elmira) on August 11,
2006, one branch from HSBC Bank USA, N.A. on December 3, 2004, First Heritage
Bank on May 14, 2004, Grange National Banc Corp. on November 24, 2003, Peoples
Bankcorp Inc. on September 5, 2003 and the Upstate New York Global Human
Resource Solutions consulting group from PricewaterhouseCoopers on July 31,
2003. Each of these acquisitions was accounted for as a purchase and,
accordingly, the results of operations of the acquired businesses are included
in the information below since the dates of acquisition.
|
At
or for the Six Months
|
|
|
At
or for the
|
|
|
Ended
June 30,
|
|
|
Years
Ended December 31,
|
|
(In
000’s except per share data and ratios)
|
2008
|
2007
|
|
2007
|
2006
|
2005
|
2004
|
2003
|
Income
Statement Data:
|
|
|
|
|
|
|
|
|
Loan
interest income
|
$92,206
|
$91,025
|
|
$186,784
|
$167,113
|
$147,608
|
$137,077
|
$125,256
|
Investment
interest income
|
32,015
|
33,789
|
|
69,453
|
64,788
|
71,836
|
75,770
|
65,915
|
Interest
expense
|
53,183
|
58,109
|
|
120,263
|
97,092
|
75,572
|
61,752
|
59,301
|
Net
interest income
|
71,038
|
66,705
|
|
135,974
|
134,809
|
143,872
|
151,095
|
131,870
|
Provision
for loan losses
|
2,350
|
614
|
|
2,004
|
6,585
|
8,534
|
8,750
|
11,195
|
Noninterest
income
|
35,037
|
28,505
|
|
63,260
|
51,679
|
48,401
|
44,321
|
37,887
|
Gain
(loss) on investment securities & early retirement of long-term
borrowings
|
230
|
(8)
|
|
(9,974)
|
(2,403)
|
12,195
|
72
|
(2,698)
|
Special
charges/acquisition expenses
|
5
|
274
|
|
382
|
647
|
2,943
|
1,704
|
498
|
Noninterest
expenses
|
75,324
|
67,777
|
|
141,692
|
126,556
|
124,446
|
118,195
|
102,213
|
Income
before income taxes
|
28,626
|
26,537
|
|
45,182
|
50,297
|
68,545
|
66,839
|
53,153
|
Net
income
|
22,185
|
20,015
|
|
42,891
|
38,377
|
50,805
|
50,196
|
40,380
|
Diluted
earnings per share (1)
|
$0.74
|
$0.66
|
|
$1.42
|
$1.26
|
$1.65
|
$1.64
|
$1.49
|
Diluted
earnings per share – cash (1)
(3)
|
$0.83
|
$0.75
|
|
$1.62
|
$1.47
|
$1.84
|
$1.81
|
$1.64
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
Investment
securities
|
$1,258,792
|
$1,219,360
|
|
$1,391,872
|
$1,229,271
|
$1,303,117
|
$1,584,633
|
$1,329,645
|
Loans
|
2,922,243
|
2,767,176
|
|
2,821,055
|
2,701,558
|
2,411,769
|
2,358,420
|
2,128,446
|
Allowance
for loan losses
|
(37,128)
|
(36,690)
|
|
(36,427)
|
(36,313)
|
(32,581)
|
(31,778)
|
(29,095)
|
Intangible
assets
|
253,752
|
258,110
|
|
256,216
|
246,136
|
224,878
|
232,500
|
196,111
|
Total
assets
|
4,657,783
|
4,583,149
|
|
4,697,502
|
4,497,797
|
4,152,529
|
4,393,295
|
3,854,984
|
Deposits
|
3,247,348
|
3,364,577
|
|
3,228,464
|
3,168,299
|
2,983,507
|
2,927,524
|
2,723,950
|
Borrowings
|
874,609
|
704,245
|
|
929,328
|
805,495
|
653,090
|
920,511
|
667,786
|
Shareholders’
equity
|
$483,648
|
$459,624
|
|
$478,784
|
$461,528
|
$457,595
|
$474,628
|
$404,828
|
|
|
|
|
|
|
|
|
|
Capital
and Related Ratios:
|
|
|
|
|
|
|
|
|
Cash
dividend declared per share (1)
|
$0.42
|
$0.40
|
|
$0.82
|
$0.78
|
$0.74
|
$0.68
|
$0.61
|
Book
value per share (1)
|
16.16
|
15.39
|
|
16.16
|
15.37
|
15.28
|
15.49
|
14.29
|
Tangible
book value per share (1)
|
7.68
|
6.75
|
|
7.51
|
7.17
|
7.77
|
7.90
|
7.37
|
Market
capitalization (in millions)
|
617
|
598
|
|
589
|
690
|
676
|
866
|
694
|
Tier
1 leverage ratio
|
7.75%
|
7.87%
|
|
7.77%
|
8.81%
|
7.57%
|
6.94%
|
7.26%
|
Total
risk based capital to risk adjusted assets
|
13.48%
|
14.02%
|
|
14.05%
|
15.47%
|
13.64%
|
13.18%
|
13.01%
|
Tangible
equity to tangible assets
|
5.22%
|
4.66%
|
|
5.01%
|
5.07%
|
5.93%
|
5.82%
|
5.70%
|
Dividend
payout ratio
|
56.5%
|
60.0%
|
|
57.1%
|
60.7%
|
43.9%
|
40.9%
|
40.2%
|
Period
end common shares outstanding (1)
|
29,935
|
29,873
|
|
29,635
|
30,020
|
29,957
|
30,642
|
28,330
|
Diluted
weighted-average shares outstanding (1)
|
30,154
|
30,471
|
|
30,232
|
30,392
|
30,838
|
30,670
|
27,035
|
|
|
|
|
|
|
|
|
|
Selected
Performance Ratios:
|
|
|
|
|
|
|
|
|
Return
on average assets
|
0.96%
|
0.90%
|
|
0.93%
|
0.90%
|
1.19%
|
1.20%
|
1.16%
|
Return
on average equity
|
9.18%
|
8.68%
|
|
9.20%
|
8.36%
|
10.89%
|
11.39%
|
11.78%
|
Net
interest margin
|
3.79%
|
3.69%
|
|
3.64%
|
3.91%
|
4.17%
|
4.45%
|
4.68%
|
Noninterest
income/operating income
(4)
|
30.8%
|
27.7%
|
|
26.1%
|
24.8%
|
27.7%
|
21.1%
|
19.6%
|
Efficiency
ratio(2)
|
63.4%
|
63.0%
|
|
63.3%
|
59.9%
|
56.8%
|
52.8%
|
53.4%
|
|
|
|
|
|
|
|
|
|
Asset
Quality Ratios:
|
|
|
|
|
|
|
|
|
Allowance
for loan loss/total loans
|
1.27%
|
1.33%
|
|
1.29%
|
1.34%
|
1.35%
|
1.35%
|
1.37%
|
Nonperforming
loans/total loans
|
0.39%
|
0.36%
|
|
0.32%
|
0.47%
|
0.55%
|
0.55%
|
0.62%
|
Allowance
for loan loss/nonperforming loans
|
324%
|
368%
|
|
410%
|
288%
|
245%
|
245%
|
219%
|
Net
charge-offs/average loans
|
0.12%
|
0.07%
|
|
0.10%
|
0.24%
|
0.33%
|
0.37%
|
0.54%
|
Loan
loss provision/net charge-offs
|
142%
|
62%
|
|
76%
|
108%
|
110%
|
104%
|
109%
|
(1) All
share and share-based amounts reflect the two-for-one stock split effected as a
100% stock dividend on April 12, 2004.
(2)
Efficiency ratio is calculated by dividing operating expenses less amortization
of intangibles and special charges/acquisition expenses by noninterest income
excluding (loss) gain on investment securities and debt extinguishment and net
interest income on a fully taxable equivalent basis.
(3) Cash
earnings exclude the after tax effect of the amortization of market value
adjustments on net assets acquired in mergers and the amortization of intangible
assets. Such earnings are reconciled to GAAP net income in either
Table 1 or Table 2 of the applicable Forms 10-Q or 10-K.
(4)
Operating income includes noninterest income excluding (loss) gain on investment
securities and debt extinguishment and net interest income on a fully taxable
equivalent basis.
RISK
FACTORS
You
should carefully consider the risks described below before investing in our
common stock. If any of the following risks actually occur, our
business could be harmed. This could cause the price of our stock to
decline, and you may lose part or all of your investment. This
prospectus contains forward-looking statements that involve risks and
uncertainties, including statements about our future plans, objectives,
intentions and expectations. Many factors, including those described
below, could cause actual results to differ materially from those discussed in
forward-looking statements.
Changes
in interest rates affect our profitability and assets.
Changes
in prevailing interest rates may hurt our business. Although we
have diversified our revenue sources, we derive our income mainly from the
difference or “spread” between the interest earned on loans, securities and
other interest-earning assets, and interest paid on deposits, borrowings and
other interest-bearing liabilities. In general, the larger the
spread, the more we earn. Interest rates are highly sensitive
to many factors that are beyond our control, including general economic
conditions and policies of various governmental and regulatory agencies and, in
particular, the Federal Reserve. Changes in monetary policy,
including changes in interest rates, could influence not only the interest we
receive on loans and securities and the amount of interest we pay on deposits
and borrowings, but such changes could also affect (1) our ability to originate
loans and obtain deposits, which could reduce the amount of fee income
generated, (2) the fair value of our financial assets and liabilities and (3)
the average duration of our mortgage-backed securities portfolio. If
the interest rates paid on deposits and other borrowings increase at a faster
rate than the interest rates received on loans and other investments, our net
interest income could be adversely affected, which in turn could negatively
affect our earnings. Earnings could also be adversely affected if the
interest rates received on loans and other investments fall more quickly than
the interest rates paid on deposit and other borrowings.
Although
management believes it has implemented effective asset and liability management
strategies to reduce the potential effects of changes in interest rates on the
result of our operations, any substantial, unexpected, prolonged change in
market interest rates could have a material adverse effect on our financial
condition and results of operations.
Some
of our borrowers do not repay their loans, and losses from loan defaults may
exceed the reserve we establish for that purpose, which may have an adverse
effect on our business.
Some
borrowers do not repay loans that we make to them. This risk is
inherent in the banking business. If a significant amount of loans
were not repaid, it would have an adverse effect on our earnings and overall
financial condition. Like all financial institutions, we maintain a
reserve for loan losses to provide for loan defaults and
nonperformance. The allowance for loan losses reflects our
management's best estimate of probable losses in the loan portfolio at the
relevant balance sheet date. This evaluation is primarily based upon
a review of our and the banking industry's historical loan loss experience,
known risks contained in the loan portfolio, composition and growth of the loan
portfolio, and economic factors. However, the determination of an
appropriate level of loan loss allowance is an inherently difficult process and
is based on numerous assumptions. As a result, our reserve for loan losses may
not be adequate to cover actual losses, and future provisions for loan losses
may adversely affect our earnings.
We
depend on the accuracy and completeness of information furnished by others about
customers and counterparties.
In
deciding whether to extend credit or enter into other transactions, we often
rely on information furnished by or on behalf of customers and counterparties,
including financial statements, credit reports and other financial
information. We may also rely on representations of those customers,
counterparties or other third parties, such as independent auditors, as to the
accuracy and completeness of that information. Reliance on inaccurate
or misleading financial statements, credit reports or other financial
information could have a material adverse effect on our business and, in turn,
our financial condition and results of operations.
The
allowance for loan losses may be insufficient.
Although
we try to maintain diversification within our loan portfolio in order to
minimize the effect of economic conditions within a particular industry,
management also maintains an allowance for loan losses, which is a reserve
established through a provision for loan losses charged to expense, to absorb
credit losses inherent in the entire loan portfolio. The appropriate
level of the allowance is based on management’s quarterly analysis of the loan
portfolio and represents an amount that management deems adequate to provide for
inherent losses, including collective impairment. Among other
considerations in establishing the allowance for loan losses, management
considers economic conditions reflected within industry segments, and historical
losses that are inherent in the loan portfolio. The determination of
the appropriate level of the allowance for loan losses inherently involves a
high degree of subjectivity and requires management to make significant
estimates of current credit risks and future trends, all of which may undergo
material changes. Changes in economic conditions affecting borrowers,
new information regarding existing loans, identification of additional problem
loans and other factors, both within and outside of our control, may require an
increase in the allowance for loan losses.
We
may fail to implement our acquisitions successfully, achieve savings and realize
the other anticipated benefits from the acquisitions because of difficulties in
integrating our business operations.
We
recently acquired ABG, an employee benefit administration and consulting company
based in Philadelphia, Pennsylvania. We have also entered into a
definitive agreement to purchase 18 branches in northern New York State from RBS
Citizens, which acquisition we expect to complete in the fourth quarter of
2008. The integration of the acquired companies or branches following
an acquisition will be complex and time-consuming and will present us with
challenges. As a result, we may not be able to operate the combined
company as effectively as we expect. We may also fail to achieve the
anticipated potential benefits of the acquisitions as quickly or as cost
effectively as we anticipate or may not be able to achieve those benefits at
all. Specifically, we will face significant challenges integrating
the companies' organizations, procedures and operations in a timely and
efficient manner and retaining key personnel. In addition, our
management will have to dedicate substantial effort to integrating the acquired
companies and branches and, therefore, its focus and resources may be diverted
from other strategic opportunities and from operational
matters. There may also be undisclosed liabilities that we assume
with the acquired business.
Regional
economic factors may have an adverse impact on our business.
Substantially
all of our business is with customers in our market areas in New York and
Pennsylvania. Our market areas are generally slow-growing,
non-metropolitan cities and towns. Most of our customers are
individuals and small and medium- sized businesses which are dependent upon the
regional economy. Adverse changes in economic and business conditions
in our markets could adversely affect our borrowers, their ability to repay
their loans and to borrow additional funds or buy financial services and
products from us, and consequently our financial condition and
performance.
We
face strong competition from other banks and financial institutions, which can
hurt our business.
We
conduct our banking operations in a number of competitive local
markets. In those markets, we compete against commercial banks,
savings banks, savings and loans associations, credit unions, mortgage banks,
brokerage firms, investment advisory firms, insurance companies and other
financial institutions. Many of these entities are larger
organizations with significantly greater financial, management and other
resources than we have, and they offer the same or similar banking or financial
services that we offer in our markets. Moreover, new and existing
competitors may expand their business in or into our
markets. Increased competition in our markets may result in a
reduction in loans, deposits and other sources of our
revenues. Ultimately, we may not be able to compete successfully
against current and future competitors.
We
may face risks with respect to future acquisitions.
Since
2000, we have significantly grown our business through the acquisition of both
branches and entire financial institutions. When we attempt to expand
our business through mergers or acquisitions, we seek partners that are
culturally similar to us, have experienced management and possess either
significant market presence or have potential for improved profitability through
economies of scale or expanded services. Acquiring other banks,
businesses or branches involves various risks commonly associated with
acquisitions, including, among other things:
·
|
the
time and costs associated with identifying and evaluating potential
acquisition and merger partners;
|
·
|
inaccuracies
in the estimates and judgments used to evaluate credit, operations,
management and market risks with respect to the target
institution;
|
·
|
our
ability to finance an acquisition and possible dilution to our existing
stockholders;
|
·
|
the
diversion of our managements’ attention to the negotiation of a
transaction;
|
·
|
the
incurrence of an impairment of goodwill associated with an acquisition and
adverse effects on our results of
operations;
|
·
|
entry
into new markets where we lack experience;
and
|
·
|
risks
associated with integrating the operations and personnel of the acquired
business.
|
Although
we have no current intentions regarding new acquisitions other than the pending
acquisition of the RBS Citizens branches, we expect to continue to evaluate
attractive acquisition opportunities. Acquisitions typically involve
the payment of a premium over book and market values, and, therefore, some
dilution of our tangible book value and net income per common share may occur in
connection with any future transaction. Furthermore, failure to
realize the expected revenue increases, cost savings, increase in geographic or
product presence and/or other projected benefits from an acquisition could have
a material adverse effect on our financial condition and result of
operations.
We
depend on dividends from our banking subsidiary for cash revenues, but those
dividends are subject to restrictions.
Our
ability to satisfy our obligations and pay cash dividends to our stockholders is
primarily dependent on the earnings of and dividends from the subsidiary
bank. However, payment of dividends by the bank subsidiary is limited
by dividend restrictions and capital requirements imposed by bank
regulations. As of December 31, 2007, Community Bank, N.A. had the
capacity to pay up to $2.5 million in dividends to us without regulatory
approval.
Our
ability to pay dividends is also subject to our continued payment of interest
that we owe on our subordinated junior debentures. As of the date of
this prospectus, we have $102 million of subordinated junior debentures
outstanding. We have the right to defer payment of interest on the
subordinated junior debentures for a period not exceeding 20 quarters although
we have not done so to date. If we defer interest payments on the
subordinated junior debentures, we will be prohibited, subject to certain
exceptions, from paying cash dividends on our common stock until we pay all
deferred interest and resume interest payments on the subordinated junior
debentures. See “Dividend Policy.”
Our
proposed branch acquisition will decrease our tangible book value.
In
accordance with our agreement with RBS Citizens, we have agreed to pay a premium
over the book value of the deposits and loans we will acquire in the RBS
Citizens acquisition. This premium will decrease the tangible book
value of our common stock in the approximate amount of $1.79 per share to $5.89
per share as of June 30, 2008, on a pro forma basis after giving effect to this
offering and the RBS Citizens acquisition. At June 30, 2008, the
tangible book value of our common stock was $7.68 per share. While we
believe that our common stock trades primarily on the basis of earnings per
share and growth in earnings per share, this tangible book value dilution may
adversely affect the trading price of our stock as our stock may trade, in part,
on the basis of our tangible book value per share.
We
may be required to record impairment charges in respect of our goodwill, other
intangible assets and investment portfolio.
As of
June 30, 2008, we had approximately $253.8 million in intangible assets
including $234.7 million in goodwill and $1.1 billion in available-for-sale
investment securities. In the event our intangible assets are
determined to be impaired, we will be required to record a charge against
income. We may also be required to record impairment charges on our
investment securities if they suffer a decline in value that is considered
other-than-temporary. We test our goodwill and intangible assets for
impairment at least annually and more frequently when events or circumstances
indicate that impairment may have occurred. Numerous factors,
including lack of liquidity for resales of certain investment securities,
absence of reliable pricing information for investment securities, adverse
changes in the business climate, adverse actions by regulators, unanticipated
changes in the competitive environment or a decision to change our operations or
dispose of an operating unit could have a negative effect on our investment
portfolio, goodwill or other intangible assets in future periods. If
an impairment charge is significant enough to result in negative net income for
the period, it could affect the ability of our bank subsidiary to upstream
dividends to us, which could have a material adverse effect on our liquidity and
our ability to pay dividends to stockholders and could also negatively impact
our regulatory capital ratios and result in us not being classified as “well
capitalized” for regulatory purposes.
Our
indirect automobile lending program involves credit risks.
A
significant portion of our lending involves the purchase of consumer automobile
sales contracts from new and used automobile dealers primarily located in
Upstate New York and Northeastern Pennsylvania. As of June 30, 2008,
we had approximately $470.8 million of indirect loans
outstanding. While these loans have higher yields than many of our
other lending products, they involve significant risks in addition to normal
credit risk. Potential risk elements associated with indirect lending
include, among other risks present in all lending, difficulty in monitoring the
collateral, and limited personal contact with the borrower as the result of
indirect lending through dealers. While our indirect automobile loans
are secured, they are secured by depreciating assets and characterized by loan
to value ratios that could result in our not recovering the full value of an
outstanding loan on repossession of the automobile.
Diversification in types of financial
services may adversely affect our financial performance.
As part
of our business strategy, we may further diversify our lines of business into
areas that are not traditionally associated with the banking business. As a
result, we would need to manage the development of new business lines in which
we have not previously participated. Each new business line would require the
investment of additional capital and the significant involvement of our senior
management to develop and integrate the service subsidiaries with our
traditional banking operations. We can offer no assurances that we will be able
to develop and integrate new services without adversely affecting our financial
performance.
As a
result of our diversification, we have grown more reliant on non-interest income
for profitability. Our diversification efforts have focused on
financial services businesses that generally provide steady fee and commission
income but do not generate the interest-earning assets that contribute to net
interest income. In the event the fee income from our non-bank
businesses should decline, our continued profitability may depend on our ability
to reduce non-interest expense to a level that our revenue can support or to
find other non-interest revenue streams to replace that income.
We may be adversely affected by
changes in banking laws, regulations, and regulatory practices. Such changes
would affect our ability to offer new products and services, obtain financing,
receive dividends from our bank subsidiary, attract deposits, or make loans at
satisfactory spreads. Such changes may also result in the imposition of
additional costs.
The banking industry is heavily
regulated, and such regulations are intended primarily for the protection of
depositors and the federal deposit insurance funds, not shareholders or holders
of subordinated debt. As a bank holding company, we are subject to regulation by
the Federal Reserve Board and our bank subsidiary is subject to regulation by
the OCC. These regulations affect lending practices, capital structure,
investment practices, dividend policy and growth. In addition, we have non-bank
operating subsidiaries from which we derive income. Certain of these
non-bank subsidiaries engage in providing investment management and insurance
brokerage services, which industries are also heavily regulated on both a state
and federal level. In addition, changes in laws, regulations and regulatory
practices affecting the financial services industry could subject us to
additional costs, limit the types of financial services and products we may
offer and/or increase the ability of non-banks to offer competing financial
services and products, among other things. Failure to comply with laws,
regulations or policies could result in sanctions by regulatory agencies, civil
money penalties and/or reputation damage, which could have a material adverse
effect on our business, financial condition and results of operations. While we
have policies and procedures designed to prevent any such violations, there can
be no assurance that such violations will not occur.
The
market price and trading volume of our common stock may be
volatile.
The
trading volume in our common stock may fluctuate and cause significant price
variations to occur. Recently, the stock market generally has
experienced extreme price and volume fluctuations, and general economic and
political conditions and industry factors, such as economic slowdowns and
recessions, interest rate changes or credit loss trends, could also cause our
stock price to decrease regardless of operating results. If the
market price of our common stock declines significantly, you may be unable to
resell your shares at or above the public offering price. We cannot
assure you that the market price of our common stock will not fluctuate or
decline significantly in the future.
FORWARD-LOOKING
STATEMENTS
This
document contains or incorporates by reference a number of forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 regarding our financial
condition, results of operations, earnings outlook and business prospects. You
can find many of these statements by looking for words such as “will,” “may,”
“should,” “expects,” “projects,” “anticipates,” “believes,” “intends,”
“estimates,” “strategy,” “plan,” “potential,” “possible” and other similar
expressions.
The
forward-looking statements involve certain risks and uncertainties. We cannot
predict the results or actual effects of our plans and strategies, which are
inherently uncertain. Accordingly, actual results may differ materially from
those expressed in, or implied by, the forward-looking statements. Some of the
factors that may cause our actual results or earnings to differ materially from
those contemplated by the forward-looking statements include, but are not
limited to, those discussed under “Risk Factors” and those discussed in our SEC
filings that are incorporated herein by reference, including future
filings.
Because
these forward-looking statements are subject to assumptions and uncertainties,
actual results may differ materially from those expressed or implied by these
forward-looking statements. You are cautioned not to place undue reliance on
these statements, which speak only as of the date of this document or the date
of any document incorporated by reference in this document. Except to the extent
required by applicable law or regulation, we undertake no obligation to update
these forward-looking statements to reflect events or circumstances after the
date of this document or to reflect the occurrence of unanticipated
events.
You
should refer to our periodic and current reports filed with the SEC (and
incorporated by reference herein) for further information on other factors that
could cause actual results to be significantly different from those expressed or
implied by these forward-looking statements. See above under the caption “Where
You Can Find More Information” in this prospectus.
We
estimate that the net proceeds from the sale of the 1,700,000 shares of common
stock that we are offering at the public offering price of $_____ per share will
be approximately $____ million after deducting underwriting discounts and
commissions and estimated offering expenses payable by us. If the
underwriters exercise their over-allotment option in full, we estimate that our
net proceeds from this offering will be approximately $____
million.
The
purpose of this offering is to raise additional capital to support the RBS
Citizens branch acquisition and to enable us to remain in the highest category
of capital adequacy for federal bank regulatory purposes. We expect
to contribute the net proceeds of this offering to Community Bank to be used for
these purposes.
PRICE
RANGE OF OUR COMMON STOCK AND DIVIDEND INFORMATION
Our
common stock is traded on the New York Stock Exchange under the symbol
CBU. The following table sets forth for the periods indicated the
high and low sale prices for our common stock, as reported on the New York Stock
Exchange, and the dividends declared per share on our common stock.
|
High
|
Low
|
Cash
Dividends Declared Per Share
|
|
|
|
|
Year
Ending December 31, 2008
|
|
|
|
Third
Quarter (through September 25, 2008). . . . . . .
|
$ 33.00
|
$19.52
|
$0.22
|
Second
Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
|
26.88
|
20.50
|
0.21
|
First
Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.
|
26.45
|
17.91
|
0.21
|
|
|
|
|
Year
Ended December 31, 2007
|
|
|
|
Fourth
Quarter ……………………………… . . . . . . .
|
$21.85
|
$17.70
|
$0.21
|
Third
Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
..
|
21.69
|
16.61
|
0.21
|
Second
Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.
|
21.38
|
19.63
|
0.20
|
First
Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.
|
23.63
|
19.64
|
0.20
|
|
|
|
|
Year
Ended December 31, 2006
|
|
|
|
Fourth
Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . .
|
$25.11
|
$21.79
|
$0.20
|
Third
Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.
|
22.84
|
19.45
|
0.20
|
Second
Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.
|
22.38
|
18.75
|
0.19
|
First
Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.
|
24.31
|
20.64
|
0.19
|
On
September 25, 2008, the last reported sale price of our common stock on the New
York Stock Exchange was $25.08. As of September 25, 2008, there were
30,049,521 shares of our common stock outstanding, held by approximately 3,536
holders of record.
DIVIDEND
POLICY
We have
historically paid regular quarterly cash dividends on our common stock, and our
board of directors presently intends to continue the payment of regular
quarterly cash dividends, subject to the need for those funds for debt service
and other purposes. However, because substantially all of the funds
available for the payment of dividends are derived from Community Bank, future
dividends will depend upon the earnings of Community Bank, its financial
condition and its need for funds.
Moreover,
there are a number of federal banking policies and regulations that would
restrict our ability to pay dividends. In particular, because
Community Bank is a depository institution whose deposits are insured by the
FDIC, it may not pay dividends or distribute capital assets if it is in default
on any assessment due the FDIC. Also, as a national bank, Community
Bank is subject to OCC regulations which impose certain minimum capital
requirements that would affect the amount of cash available for distribution to
us. Lastly, under Federal Reserve policy, we are required to maintain
adequate regulatory capital, are expected to serve as a source of financial
strength to Community Bank and to commit resources to support Community
Bank. These policies and regulations may have the effect of reducing
the amount of dividends that we can declare to our stockholders.
CAPITALIZATION
The
following table provides (i) our capitalization as of June 30, 2008, (ii) our
capitalization as adjusted to give effect to this offering, (iii) our
capitalization on a pro forma basis to give effect to the proposed acquisition
of 18 bank branches from RBS Citizens and the ABG acquisition, and (iv) our
actual and pro forma capital ratios.
|
As
of June 30, 2008
|
|
|
|
As
Adjusted
|
|
CBSI
Historical
|
|
Common
Stock Offering (1)
|
|
Common
Stock Offering
and
Acquisitions (2)
|
|
(Dollars
in Thousands)
|
Company
obligated mandatorily redeemable preferred securities of
subsidiary holding solely junior subordinated debentures of the
Company...
|
$
101,963
|
|
$ 101,963
|
|
$ 101,963
|
SHAREHOLDERS’
EQUITY
Common
stock, $1.00 par value; 50,000,000 shares authorized;
33,299,520
shares outstanding
historical).................................................................................
|
33,300
|
|
35,000
|
|
35,000
|
Additional
paid-in
capital.................................................................................................
|
213,970
|
|
251,434
|
|
251,434
|
Retained
earnings..............................................................................................................
|
319,927
|
|
319,927
|
|
319,927
|
Accumulated
other comprehensive
loss.......................................................................
|
(9,921)
|
|
(9,921)
|
|
(9,921)
|
Treasury
stock, at cost (3,364,811
shares).....................................................................
|
(73,628)
|
|
(73,628)
|
|
(73,628)
|
Total
Shareholders’
Equity..............................................................................................
|
483,648
|
|
522,812
|
|
522,812
|
Total
Capitalization...........................................................................................................
|
$585,611
|
|
$624,775
|
|
$624,775
|
COMPANY
CAPITAL RATIOS (3):
Tier
1 risk-based capital
ratio..........................................................................
|
11.98%
|
|
13.36%
|
|
10.10
%
|
Total
risk-based capital
ratio..........................................................................
|
13.23%
|
|
14.61%
|
|
11.35
%
|
Leverage
ratio...................................................................................................
|
7.75%
|
|
8.65%
|
|
5.98
%
|
|
|
|
|
|
|
_________________________________
|
|
|
|
|
|
(1)
|
Assumes
the sale of approximately 1,700,000 shares issued at a price of $24.54 per
share (average close price for latest 10 trading days ended September 23,
2008) less underwriting discounts and commissions of approximately $2.3
million and estimated expenses related to the offering of approximately
$0.3 million.
|
(2)
|
Reflects
the sale of common stock and consummation of the ABG acquisition and the
RBS Citizens branch acquisition.
|
(3)
|
The
capital ratios, as adjusted, are computed including the total estimated
net proceeds from the sale of the common stock, in a manner consistent
with regulatory guidelines.
|
PRO
FORMA CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
June
30, 2008
The table
below contains our unaudited pro forma consolidated financial condition,
assuming that this offering and the acquisitions of ABG and the RBS Citizens
branches were all completed on June 30, 2008. The information
contained in the table should be read in conjunction with the audited financial
statements and notes included in our Annual Report on Form 10-K for the year
ended December 31, 2007, and the unaudited financial statements and notes
included in our Quarterly Report on Form 10-Q for the quarter ended June 30,
2008, which are incorporated by reference in this prospectus. This
information has been prepared by us, is unaudited and may not be indicative of
actual results.
|
|
|
|
|
Common
|
|
RBS
Citizens
|
|
|
|
CBSI
|
|
ABG
|
|
Stock
Offering
|
|
Branch
Acquisition
|
|
CBSI
Pro
|
(Dollars
in thousands) |
Historical
|
|
acquisition
(1)
|
|
(2)
|
|
(3)
(4)
|
|
Forma
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash
and cash
equivalents ........................................................
|
$123,233
|
|
|
|
$39,164
|
|
$410,783
|
|
$573,180
|
Investment
securities...................................................................
|
1,258,792
|
|
($5,079)
|
|
|
|
|
|
1,253,713
|
Loans..............................................................................................
|
2,922,243
|
|
|
|
|
|
115,843
|
|
3,038,086
|
Allowance
for loan
losses...........................................................
|
(37,128)
|
|
|
|
|
|
(1,471)
|
|
(38,599)
|
Premises
and equipment,
net......................................................
|
69,556
|
|
57
|
|
|
|
2,730
|
|
72,343
|
Intangible
assets,
net...................................................................
|
253,752
|
|
4,974
|
|
|
|
77,904
|
|
336,630
|
Other
assets...................................................................................
|
67,335
|
|
500
|
|
|
|
291
|
|
68,126
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS...................................................................................
|
$4,657,783
|
|
$452
|
|
$39,164
|
|
$606,080
|
|
$5,303,479
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing..................................................................
|
$584,752
|
|
|
|
|
|
97,058
|
|
681,810
|
Interest-bearing.........................................................................
|
2,662,596
|
|
|
|
|
|
508,582
|
|
3,171,178
|
Total
Deposits...............................................................................
|
3,247,348
|
|
|
|
|
|
605,640
|
|
3,852,988
|
|
|
|
|
|
|
|
|
|
|
Borrowings.....................................................................................
|
772,646
|
|
|
|
|
|
|
|
772,646
|
Subordinated
debt held by unconsolidated subsidiary trusts...
|
101,963
|
|
|
|
|
|
|
|
101,963
|
Accrued
interest and other
liabilities..............................................
|
52,178
|
|
452
|
|
|
|
440
|
|
53,070
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES............................................................................
|
4,174,135
|
|
452
|
|
|
|
606,080
|
|
4,780,667
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
|
|
|
|
|
|
|
Common
stock................................................................................
|
33,300
|
|
|
|
1,700
|
|
|
|
35,000
|
Additional
paid-in
capital.............................................................
|
213,970
|
|
|
|
37,464
|
|
|
|
251,434
|
Retained
earnings..........................................................................
|
319,927
|
|
|
|
|
|
|
|
319,927
|
Accumulated
other comprehensive
loss........................................
|
(9,921)
|
|
|
|
|
|
|
|
(9,921)
|
Treasury
stock....................................................................................
|
(73,628)
|
|
|
|
|
|
|
|
(73,628)
|
|
|
|
|
|
|
|
|
|
|
TOTAL
SHAREHOLDERS’
EQUITY..................................................
|
483,648
|
|
|
|
39,164
|
|
|
|
522,812
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY...............
|
$4,657,783
|
|
$452
|
|
$39,164
|
|
$606,080
|
|
$5,303,479
|
_________________________
(1)
|
Reflects
July 2008 acquisition of ABG, a provider of retirement plan administration
and consulting services.
|
(2)
|
Assumes
the sale of approximately 1,700,000 shares issued at a price of $24.54 per
share (average close price for latest 10 trading days ended September 23,
2008) less underwriting discounts and commissions of approximately $2.3
million and estimated expenses related to the offering of approximately
$0.3 million.
|
(3)
|
Reflects
RBS Citizens branch acquisition, including $77.9 million excess of
purchase price over the fair value of net assets acquired. All
information is as of July 31, 2008. With the
additional funds available from the securities offerings and from the net
deposits assumed in the RBS Citizens branch acquisition, we intend to
increase the amount of investment securities held by approximately $411
million, which will correspondingly reduce cash by approximately $411
million.
|
(4)
|
The
actual amounts of loans to be acquired, and deposits to be assumed, under
the agreement with RBS Citizens are subject to certain adjustments
contemplated by the agreement. As of July 31, 2008, RBS
Citizens loans to be acquired by us were approximately $116 million and
RBS Citizens deposits to be assumed by us were approximately $606
million. As a result of the additional intangible asset created
by the RBS Citizens acquisition, pro forma tangible book value per share
will decrease to $5.89 from $7.68 as of June 30,
2008.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RECENT RESULTS OF
OPERATIONS
The
following discussion of our financial condition and results of operations should
be read in conjunction with our consolidated financial statements incorporated
by reference in this prospectus. This discussion contains
forward-looking statements, which involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in the forward-looking statements as a result of certain factors,
including but not limited to those discussed in “Risk Factors” and elsewhere in
this prospectus. The May 18, 2007 acquisition of HBT and the June 1,
2007 acquisition of TLNB have been accounted for as
purchases. Accordingly, the results of operations of HBT and TLNB are
included in the information below since the date of acquisition.
Net
Income and Profitability
As shown
in Table 1, diluted earnings per share for the second quarter and June
year-to-date of $0.37 and $0.74, respectively, were $0.03 and $0.08 higher than
the diluted earnings per share generated in the same periods of last
year. Net income for the quarter of $11.3 million was up 9.0% over
the second quarter of 2007 and net income of $22.2 million for the first six
months of 2008 increased 10.8% from the amount earned in the first half of
2007. As compared to the first quarter of 2008, net income
increased $0.4 million or 3.6% and diluted earnings per share
increased $0.01 or 2.8%.
Second
quarter net interest income of $35.4 million was up $2.1 million or 6.3% from
the comparable prior year period, and net interest income for the first six
months of 2008 increased $4.3 million or 6.5% over the first half of
2007. The current quarter’s provision for loan losses increased $1.2
million as compared to the second quarter of 2007 and increased $1.7 million for
the first six months of 2008 as compared to the same period of 2007, reflective
of organic loan growth in the quarter. Second quarter noninterest
income, excluding securities gains and losses, was $17.7 million, up $2.7
million or 18% from the second quarter of 2007, while YTD noninterest income of
$35.0 million increased $6.5 million or 23% from the prior year
level. Operating expenses of $37.0 million for the quarter and $68.1
million for the first six months of 2008 were up $2.8 million or 8.3% and $7.3
million or 10.7% respectively, from the comparable prior year
periods. A significant portion of the increase was attributable to
the acquisitions of TLNB and HBT during the second quarter of 2007.
In
addition to the earnings results presented above in accordance with generally
accepted accounting principles (GAAP), Community Bank System provides cash
earnings per share, which excludes the after-tax effect of the amortization of
intangible assets and acquisition-related market value
adjustments. Management believes that this information helps
investors better understand the impact of acquisition activity on reported
results. Cash earnings per share for the second quarter and the first
six months of 2008 were $0.42 and $0.83, respectively, up 7.7% and 10.7% from
the $0.39 and $0.75 earned in the comparable periods of 2007.
As
reflected in Table 1, the primary reasons for improved earnings over the prior
year were higher noninterest income and net interest income, partially offset by
higher operating expenses and loan loss provision. Net interest
income for the second quarter and year-to-date period increased as compared to
the comparable periods of 2007 as a result of higher net interest margins as
well as acquired and organic loan growth. Excluding security gains
and losses, noninterest income increased due to a strong performance by our
employee benefits consulting and plan administration business, as a result of
significant organic growth and the acquisition of HBT, as well as higher banking
service fees, including account fees and debit card related
revenues. An increase in total loans and higher net charge-offs were
the primary reasons for the increase in the loan loss
provision. Operating expenses increased for the quarter and
year-to-date periods, primarily due to costs associated with the two
acquisitions in the last year, as well as higher business development and
volume-based processing costs, increased facility-based utilities and
maintenance costs, and higher personnel expenses. As compared to the
first quarter of 2008, operating expenses decreased $1.4 million or 3.7%,
reflective of seasonally lower occupancy, professional and personnel-related
costs.
A
condensed income statement and a reconciliation of GAAP-based earnings results
to cash-based earnings results are as follows:
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
June
30,
|
|
June
30,
|
(000's
omitted, except per share data)
|
|
2008
|
2007
|
|
2008
|
2007
|
Net
interest income
|
|
$35,440
|
$33,338
|
|
$71,038
|
$66,705
|
Provision
for loan losses
|
|
1,570
|
414
|
|
2,350
|
614
|
Noninterest
income excluding security losses
|
|
17,706
|
15,026
|
|
35,037
|
28,505
|
(Loss)
gain on sales of investment securities
|
|
(57)
|
(8)
|
|
230
|
(8)
|
Operating
expenses
|
|
36,955
|
34,132
|
|
75,329
|
68,051
|
Income
before taxes
|
|
14,564
|
13,810
|
|
28,626
|
26,537
|
Income
taxes
|
|
3,277
|
3,451
|
|
6,441
|
6,522
|
Net
income
|
|
$11,287
|
$10,359
|
|
$22,185
|
$20,015
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$0.37
|
$0.34
|
|
$0.74
|
$0.66
|
Table
2: Reconciliation of GAAP Net Income to Cash Net Income (Non-GAAP
measure)
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
June
30,
|
|
June
30,
|
(000’s
omitted)
|
|
2008
|
2007
|
|
2008
|
2007
|
Net
income
|
|
$11,287
|
$10,359
|
|
$22,185
|
$20,015
|
After-tax
cash adjustments:
|
|
|
|
|
|
|
Amortization
of market value adjustments
|
|
|
|
|
|
|
on
net assets acquired in business combinations
|
|
149
|
175
|
|
305
|
354
|
Amortization
of intangible assets
|
|
1,274
|
1,185
|
|
2,461
|
2,335
|
Net
income – cash
|
|
$12,710
|
$11,719
|
|
$24,951
|
$22,704
|
|
|
|
|
|
|
|
Diluted
earnings per share – cash
|
|
$0.42
|
$0.39
|
|
$0.83
|
$0.75
|
Net
interest income is the amount by which interest and fees on earning assets
(loans, investments and cash) exceed the cost of funds, primarily interest paid
to our depositors and interest on external borrowings. 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.
As shown in Table 3a, net interest
income (with nontaxable income converted to a fully tax-equivalent basis) for
the second quarter of 2008 was $39.2 million, a $2.1 million increase from the
same period last year. A $90.4 million increase in interest-earning
assets and a 14 basis point increase in the net interest margin versus the prior
year offset a $73.7 million increase in average interest-bearing
liabilities. As reflected in Table 4, the rate decreases from
interest bearing liabilities and the volume increases in interest earning assets
had a $6.4 million favorable impact on net interest income, while the decrease
in rate on interest bearing assets and higher interest bearing liability
balances had a $4.3 million unfavorable impact on net interest
income. June 2008 YTD net interest income of $78.7 million increased
$4.4 million or 6.0% from the year earlier period. A $116.8 million
increase in interest bearing assets and a 10 basis point increase in the net
interest margin more than offset a $110.3 million increase in interest bearing
liabilities. The increase in interest earning assets and the lower
rate on interest bearing liabilities had a $10.5 million favorable impact that
was partially offset by a $6.1 million unfavorable impact from the decrease in
rate on interest bearing assets and the increase in interest bearing liability
balances.
Higher
second quarter and June YTD average loan balances were attributable to $119.3
million of quarterly average organic loan growth since the second quarter of
2007, driven by growth in all portfolios: consumer installment, consumer
mortgage and business lending. The remaining contribution to the
increase in the average second quarter loan balance was the $38.0 million of
loan growth due to the TLNB acquisition. Average investments and cash
equivalents for the second quarter and YTD periods were $66.9 million and $30.6
million lower than the respective periods of 2007, primarily due to cash flows
from maturing investments being used to fund loan growth. In
comparison to the prior year, total average deposits declined $45.9 million or
1.4% and $2.7 million or 0.1% for the quarter and YTD periods,
respectively. Consistent with our objectives, core deposit products
increased $97 million or 5.5% since the second quarter of 2007, while time
deposits were allowed to decline $142 million during the same
timeframe. Quarterly average deposits from the TLNB acquisition
were $68 million, an increase of $41.9 million from the second quarter of
2007. Quarterly and YTD average borrowings increased $125.4 million
and $117.9 million as compared to the second quarter and first six months of
2007, respectively, primarily due to the all-cash acquisitions of TLNB and HBT,
partially offset by the redemption of $25 million of fixed rate trust preferred
securities in the first quarter of 2008.
The net
interest margin of 3.78% for the second quarter and 3.79% for the year to date
period increased 14 basis points and 10 basis points, respectively, versus the
same periods in the prior year. The improvement was primarily
attributable to a 48 basis point and a 33 basis point decrease in the cost of
funds for the quarter and year-to-date periods, respectively, as compared to the
prior year periods. The decrease in the cost of funds is due to a 54 basis point
and 34 basis point decrease in the rate paid on interest bearing deposits for
the second quarter and YTD periods, respectively, and the restructuring
of $175 million of external borrowings that were replaced with lower
cost instruments in late 2007 and early 2008. Partially offsetting
these improvements was a 33 basis point and 23 basis point decline in earning
assets yields for the quarter and YTD periods, respectively, as compared to the
comparable periods of 2007. The change in earning-asset yields was
driven by a 41 basis point and 29 basis point decrease in loan yields for the
quarter and YTD periods, respectively, and a 21 basis point and 12 basis point
decline in the investment yields for the quarter and YTD periods, respectively,
mostly as a result of variable and adjustable-rate assets repricing downward due
to the decline in short-term fed funds and other indexed rates.
The
second quarter cost of funds decreased 48 basis points versus the prior year’s
quarter due to an 86 basis point decrease in the average interest rate paid on
external borrowings and a 54 basis point decrease on interest-bearing deposits
rates. The decrease in the external borrowing rate is due to the
restructuring of $150 million of FHLB advances in December 2007 and the
redemption of $25 million of variable rate, trust-preferred securities in
January 2008. Additionally, the long-term rate was impacted by the
approximately 250 basis point decrease in the three month LIBOR (London
Interbank Offered Rate) over the last twelve months, from which the interest
rate on $25 million of the mandatorily redeemable preferred securities is
based. Interest rates on selected categories of deposit accounts were
lowered throughout the second half of 2007 and the first half of 2008 in
response to market conditions. Additionally, the proportion of
customer deposits in higher cost time deposits has declined 3.6 percentage
points over the last twelve months, while the percentage of deposits in lower
cost checking and savings accounts increased.
Tables 3a
and 3b below set forth information related to average interest-earning assets
and interest-bearing liabilities and their associated yields and rates for the
periods indicated. Interest income and yields are on a fully
tax-equivalent basis using marginal income tax rates of 38.49% in 2008 and
38.75% in 2007. Average balances are computed by accumulating the
daily ending balances in a period and dividing by the number of days in that
period. Loan yields and amounts earned include loan
fees. Average loan balances include nonaccrual loans and loans held
for sale.
Table
3a: Quarterly Average Balance Sheet
|
Three
Months Ended
|
|
Three
Months Ended
|
(000's
omitted except yields and rates)
|
June
30, 2008
|
|
June
30, 2007
|
|
|
|
Avg.
|
|
|
|
Avg.
|
|
Average
|
|
Yield/Rate
|
|
Average
|
|
Yield/Rate
|
|
Balance
|
Interest
|
Paid
|
|
Balance
|
Interest
|
Paid
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
Cash
equivalents
|
$29,138
|
$140
|
1.93%
|
|
$87,554
|
$1,148
|
5.26%
|
Taxable
investment securities (1)
|
750,820
|
9,775
|
5.24%
|
|
797,807
|
11,214
|
5.64%
|
Nontaxable
investment securities
(1)
|
524,454
|
9,063
|
6.95%
|
|
485,922
|
8,355
|
6.90%
|
Loans
(net of unearned discount)
|
2,869,338
|
45,837
|
6.43%
|
|
2,712,021
|
46,262
|
6.84%
|
Total
interest-earning assets
|
4,173,750
|
64,815
|
6.25%
|
|
4,083,304
|
66,979
|
6.58%
|
Noninterest-earning
assets
|
466,196
|
|
|
|
453,044
|
|
|
Total
assets
|
$4,639,946
|
|
|
|
$4,536,348
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
Interest
checking, savings and money market deposits
|
$1,304,146
|
2,519
|
0.78%
|
|
$1,213,419
|
3,435
|
1.14%
|
Time
deposits
|
1,362,278
|
13,520
|
3.99%
|
|
1,504,716
|
16,657
|
4.44%
|
Short-term
borrowings
|
420,392
|
4,258
|
4.07%
|
|
154,799
|
1,622
|
4.20%
|
Long-term
borrowings
|
449,474
|
5,333
|
4.77%
|
|
589,686
|
8,204
|
5.58%
|
Total
interest-bearing liabilities
|
3,536,290
|
25,630
|
2.92%
|
|
3,462,620
|
29,918
|
3.47%
|
Noninterest-bearing
liabilities:
|
|
|
|
|
|
|
|
Demand
deposits
|
563,045
|
|
|
|
557,195
|
|
|
Other
liabilities
|
51,167
|
|
|
|
50,881
|
|
|
Shareholders'
equity
|
489,444
|
|
|
|
465,652
|
|
|
Total
liabilities and shareholders' equity
|
$4,639,946
|
|
|
|
$4,536,348
|
|
|
|
|
|
|
|
|
|
|
Net
interest earnings
|
|
$39,185
|
|
|
|
$37,061
|
|
Net
interest spread
|
|
|
3.33%
|
|
|
|
3.11%
|
Net
interest margin on interest-earnings assets
|
|
|
3.78%
|
|
|
|
3.64%
|
|
|
|
|
|
|
|
|
Fully
tax-equivalent adjustment
|
|
$3,745
|
|
|
|
$3,723
|
|
(1)
Averages for investment securities are based on historical cost basis and the
yields do not give effect to changes in fair value that is reflected as a
component of shareholders’ equity and deferred taxes.
Table
3b: Year-to-Date Average Balance Sheet
|
Six
Months Ended
|
|
Six
Months Ended
|
(000's
omitted except yields and rates)
|
June
30, 2008
|
|
June
30, 2007
|
|
|
|
Avg.
|
|
|
|
Avg.
|
|
Average
|
|
Yield/Rate
|
|
Average
|
|
Yield/Rate
|
|
Balance
|
Interest
|
Paid
|
|
Balance
|
Interest
|
Paid
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
Cash
equivalents
|
$36,933
|
$458
|
2.49%
|
|
$95,012
|
$2,478
|
5.26%
|
Taxable
investment securities (1)
|
757,527
|
20,492
|
5.44%
|
|
769,712
|
21,493
|
5.63%
|
Nontaxable
investment securities
(1)
|
532,724
|
18,396
|
6.94%
|
|
493,058
|
16,994
|
6.95%
|
Loans
(net of unearned discount)
|
2,845,719
|
92,509
|
6.54%
|
|
2,698,369
|
91,367
|
6.83%
|
Total
interest-earning assets
|
4,172,903
|
131,855
|
6.35%
|
|
4,056,151
|
132,332
|
6.58%
|
Noninterest-earning
assets
|
468,079
|
|
|
|
446,830
|
|
|
Total
assets
|
$4,640,982
|
|
|
|
$4,502,981
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
Interest
checking, savings and money market deposits
|
$1,282,540
|
5,234
|
0.82%
|
|
$1,205,843
|
6,775
|
1.13%
|
Time
deposits
|
1,380,464
|
28,499
|
4.15%
|
|
1,464,725
|
31,437
|
4.33%
|
Short-term
borrowings
|
423,254
|
8,678
|
4.12%
|
|
157,108
|
3,259
|
4.18%
|
Long-term
borrowings
|
453,326
|
10,772
|
4.78%
|
|
601,589
|
16,638
|
5.58%
|
Total
interest-bearing liabilities
|
3,539,584
|
53,183
|
3.02%
|
|
3,429,265
|
58,109
|
3.42%
|
Noninterest-bearing
liabilities:
|
|
|
|
|
|
|
|
Demand
deposits
|
559,486
|
|
|
|
554,655
|
|
|
Other
liabilities
|
55,815
|
|
|
|
53,920
|
|
|
Shareholders'
equity
|
486,097
|
|
|
|
465,141
|
|
|
Total
liabilities and shareholders' equity
|
$4,640,982
|
|
|
|
$4,502,981
|
|
|
|
|
|
|
|
|
|
|
Net
interest earnings
|
|
$78,672
|
|
|
|
$74,223
|
|
Net
interest spread
|
|
|
3.33%
|
|
|
|
3.16%
|
Net
interest margin on interest-earnings assets
|
|
|
3.79%
|
|
|
|
3.69%
|
|
|
|
|
|
|
|
|
Fully
tax-equivalent adjustment
|
|
$7,634
|
|
|
|
$7,518
|
|
(1)
Averages for investment securities are based on historical cost basis and the
yields do not give effect to changes in fair value that is reflected as a
component of shareholders’ equity and deferred taxes.
As
discussed above and disclosed in Table 4 below, the quarterly change in net
interest income (on a fully 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.
Table
4: Rate/Volume
|
2nd
Quarter 2008 versus 2nd
Quarter 2007
|
|
Six
Months Ended June 30, 2008 versus June 30, 2007
|
|
Increase
(Decrease) Due to Change in (1)
|
|
Increase
(Decrease) Due to Change in (1)
|
|
|
Volume
|
Rate
|
Net
Change
|
|
Volume
|
Rate
|
Net
Change
|
|
(000's
omitted)
|
|
|
|
|
|
|
|
|
Interest
earned on:
|
|
|
|
|
|
|
|
|
Cash
equivalents
|
($517)
|
($491)
|
($1,008)
|
|
($1,088)
|
($932)
|
($2,020)
|
|
Taxable
investment securities
|
(639)
|
(800)
|
(1,439)
|
|
(336)
|
(665)
|
(1,001)
|
|
Nontaxable
investment securities
|
666
|
42
|
708
|
|
1,370
|
32
|
1,402
|
|
Loans
(net of unearned discount)
|
2,601
|
(3,026)
|
(425)
|
|
4,874
|
(3,732)
|
1,142
|
|
Total
interest-earning assets
(2)
|
1,461
|
(3,625)
|
(2,164)
|
|
3,752
|
(4,229)
|
(477)
|
|
|
|
|
|
|
|
|
|
|
Interest
paid on:
|
|
|
|
|
|
|
|
|
Interest
checking, savings and money market deposits
|
241
|
(1,157)
|
(916)
|
|
409
|
(1,950)
|
(1,541)
|
|
Time
deposits
|
(1,499)
|
(1,638)
|
(3,137)
|
|
(1,767)
|
(1,171)
|
(2,938)
|
|
Short-term
borrowings
|
2,692
|
(56)
|
2,636
|
|
5,457
|
(38)
|
5,419
|
|
Long-term
borrowings
|
(1,773)
|
(1,098)
|
(2,871)
|
|
(3,733)
|
(2,133)
|
(5,866)
|
|
Total
interest-bearing liabilities (2)
|
625
|
(4,913)
|
(4,288)
|
|
1,822
|
(6,748)
|
(4,926)
|
|
|
|
|
|
|
|
|
|
|
Net
interest earnings (2)
|
$832
|
$1,292
|
$2,124
|
|
$2,168
|
$2,281
|
$4,449
|
|
(1) The
change in interest due to both rate and volume has been allocated in proportion
to the relationship of the absolute dollar amounts of such change in each
component.
(2)
Changes due to volume and rate are computed from the respective changes in
average balances and
rates and are not a summation of the changes of the components.
Our
sources of noninterest income are of three primary types: 1) general banking
services related to loans, deposits and other core customer activities typically
provided through the branch network and electronic banking channels; 2) employee
benefit plan administration, actuarial and consulting services (performed by
BPA-Harbridge and HBT); and 3) wealth management services, comprised of trust
services (performed by the trust unit within Community Bank, N.A.), investment
and insurance products (performed by Community Investment Services, Inc. or CISI
and CBNA Insurance Agency, Inc.) and asset management (performed by Nottingham
Advisors or Nottingham). Additionally, Community Bank System has
periodic transactions, most often net gains (losses) from the sale of investment
securities and prepayment of debt instruments.
Table
5: Noninterest Income
|
|
Three
Months Ended
|
|
Six
months Ended
|
|
|
June
30,
|
|
June
30,
|
(000's
omitted)
|
|
2008
|
2007
|
|
2008
|
2007
|
Deposit
service fees
|
|
$8,910
|
$7,825
|
|
$17,171
|
$14,802
|
Benefit
plan administration, consulting and actuarial fees
|
|
5,933
|
4,767
|
|
12,245
|
8,739
|
Wealth
management services
|
|
2,324
|
2,009
|
|
4,487
|
3,869
|
Other
banking services
|
|
367
|
256
|
|
740
|
669
|
Mortgage
banking
|
|
172
|
169
|
|
394
|
426
|
Subtotal
|
|
17,706
|
15,026
|
|
35,037
|
28,505
|
(Loss)/gain
on sales of investment securities
|
|
(57)
|
(8)
|
|
230
|
(8)
|
Total
noninterest income
|
|
$17,649
|
$15,018
|
|
$35,267
|
$28,497
|
|
|
|
|
|
|
|
Noninterest
income/total income (FTE)
|
|
31.1%
|
28.9%
|
|
30.8%
|
27.7%
|
As displayed in Table 5, noninterest
income (excluding securities gains and losses) was $17.7 million in the second
quarter and $35.0 million for the first half of 2008. This represents
an increase of $2.7 million or 18% for the quarter, and $6.5 million or 23% for
the YTD period in comparison to one year earlier. A significant
portion of the growth was attributable to higher benefit plan administration,
consulting and actuarial fees, primarily due to the acquisition of HBT in mid
May 2007. The remainder of the increase was due to organic growth
generated from new clients along with enhanced product offerings to both new and
existing customers. Second quarter and YTD wealth management services
revenue increased $0.3 million or 16% and $0.6 million or 16%, respectively, a
majority of which was attributable to acquired insurance agency
revenues.
General recurring banking fees of $9.4
million and $18.3 million for the second quarter and first six months of 2008
were up $1.2 million or 14.5% and $2.4 million or 15.1%, respectively, as
compared to the prior year periods. The increase was driven by
organic core deposit account growth, higher electronic-banking revenues,
including card-related activity, and incremental income generated from acquired
branches.
The ratio of noninterest income to
total income (FTE basis) was 31.1% for the quarter and 30.8% for the
year-to-date period versus 28.9% and 27.7% for the comparable periods in
2007. This improvement is a function of increased noninterest banking
and financial services income (excluding net security gains), combined with
proportionally smaller increases in net interest income.
Table 6
below sets forth the quarterly results of the major operating expense categories
for the current and prior year, as well as efficiency ratios (defined below), a
standard measure of expense utilization effectiveness used in the banking
industry.
Table
6: Operating Expenses
|
|
Three
Months Ended
|
|
Six
months Ended
|
|
|
June
30,
|
|
June
30,
|
(000's
omitted)
|
|
2008
|
2007
|
|
2008
|
2007
|
Salaries
and employee benefits
|
|
$19,772
|
$18,386
|
|
$40,158
|
$36,672
|
Occupancy
and equipment
|
|
5,189
|
4,559
|
|
10,762
|
9,225
|
Data
processing and communications
|
|
4,100
|
3,808
|
|
8,085
|
7,373
|
Amortization
of intangible assets
|
|
1,645
|
1,581
|
|
3,176
|
3,096
|
Legal
and professional fees
|
|
902
|
1,054
|
|
2,200
|
2,241
|
Office
supplies and postage
|
|
1,237
|
1,008
|
|
2,515
|
2,054
|
Business
development and marketing
|
|
1,507
|
1,538
|
|
2,829
|
2,488
|
Other
|
|
2,603
|
2,198
|
|
5,604
|
4,902
|
Total
operating expenses
|
|
$36,955
|
$34,132
|
|
$75,329
|
$68,051
|
|
|
|
|
|
|
|
Operating
expenses/average assets
|
|
3.20%
|
3.02%
|
|
3.26%
|
3.05%
|
Efficiency
ratio
|
|
62.1%
|
62.2%
|
|
63.4%
|
63.0%
|
As shown
in Table 6, second quarter 2008 operating expenses were $37.0 million, up $2.8
million or 8.3% from the prior year level. Year-to-date operating
expenses of $75.3 million rose $7.3 million or 10.7% compared to the same period
in 2007. A significant portion of the increase was attributable to
incremental operating expenses related to the TLNB and HBT
acquisitions. Additionally, the increase in operating expenses can be
attributed to annual merit and other personnel related costs ($0.7 million for
the quarter, $1.6 million for YTD), higher facility-based utility and
maintenance costs ($0.5 million for the quarter, $1.1 million YTD), higher
volume-based data processing and communication costs ($0.2 million for the
quarter, $0.4 million YTD), and an increased level of business development and
marketing expenses ($0.4 million for the YTD period). A portion of
the increase in data processing and communications costs, as well as the
increase in business development and marketing expenses, reflects our continued
investment in strategic technology and business development initiatives to grow
and enhance its service offerings.
Our
efficiency ratio (recurring operating expenses excluding intangible amortization
and acquisition expenses divided by the sum of net interest income (FTE) and
recurring noninterest income) was 62.1% for the second quarter, slightly below
the comparable quarter of 2007. This resulted from operating expenses
(as described above) increasing 9.0% primarily due to the acquisitions in the
last year, while recurring operating income increased at a slightly faster rate
of 9.2%. The efficiency ratio of 63.4% for the first half of 2008 was
up 0.4 percentage points from a year earlier due to core operating expenses
increasing 11.5% while recurring operating income increased at a slower rate of
10.8%. In both periods, the efficiency ratios were adversely
affected by the growing proportion of financial services activities, which, due
to the differing nature of their business carry high efficiency
ratios. Operating expenses as a percentage of average assets
increased 18 basis points and 21 basis points for the quarter and year to date
periods, respectively, as operating expenses increased 8.3% and 10.7%,
respectively, while average assets increased 2.3% and 3.1%, respectively, during
the same time periods. This ratio was impacted by the comparatively
higher growth rates of the financial services businesses, which are less
asset-intensive and have higher efficiency ratio attributes.
The
second quarter effective income tax rate was 22.5%, compared to the 25.0%
effective tax rate in the second quarter of 2007. The year to date
effective tax rate was 22.5% as compared to the 24.6% for the first half of
2007. The lower effective tax rate for 2008 was principally a
result of a higher proportion of income being generated from tax-exempt
securities and loans.
As
reflected in Table 7 below, the carrying value of investments (including
unrealized gains on available-for-sale securities) was $1.26 billion at the end
of the second quarter, a decrease of $133.1 million from December 31, 2007 and
an increase of $39.4 million from June 30, 2007. The book value
(excluding unrealized gains and losses) of investments decreased $115.8 million
from December 31, 2007 and increased $35.2 million from June 30,
2007. The short-term agency securities purchased during the third
quarter of 2007 matured during the fourth quarter of 2007 and the first quarter
of 2008. Cash flows from these securities provided an opportunity to
invest in municipal and certain mortgage-backed securities that improved our
interest rate sensitivity position. The overall mix of securities within
the portfolio over the last year has changed, with an increase in the proportion
of obligations of state and political subdivisions and mortgage-backed
securities, the addition of asset-backed securities and a decrease in U.S.
Treasury and Agency, collateralized mortgage obligations and corporate
securities. The change in the carrying value of investments is
impacted by the amount of net unrealized gains and losses in the available for
sale portfolio at a point in time. At June 30, 2008, the portfolio
had a $0.1 million net unrealized loss, a decrease of $17.2 million from the
unrealized gain at December 31, 2007 and an improvement of $4.2 million from the
unrealized loss at June 30, 2007. This fluctuation is indicative of
the interest rate movements during the respective time periods and the changes
in the size and composition of the portfolio.
Included
in the available for sale portfolio are asset-backed securities with a current
par value of $74.8 million and unrealized losses of $12.8 million at June 30,
2008. The underlying collateral of these assets are principally
trust-preferred securities of community banks. We have the intent and
ability to hold these securities to recovery and do not consider these
investments to be other-than temporarily impaired as of June 30, 2008. Other
than temporary impairment assessments are based on an evaluation of both current
and future market and credit conditions as of June 30,
2008. Subsequent changes in market or credit conditions could change
those evaluations.
Table
7: Investments
|
|
June
30, 2008
|
|
December
31, 2007
|
|
June
30, 2007
|
|
|
|
Amortized
|
|
|
Amortized
|
|
|
Amortized
|
|
|
|
|
Cost/Book
|
Fair
|
|
Cost/Book
|
Fair
|
|
Cost/Book
|
Fair
|
|
(000's
omitted)
|
|
Value
|
Value
|
|
Value
|
Value
|
|
Value
|
Value
|
|
Held-to-Maturity
Portfolio:
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury and Agency securities
|
|
$126,983
|
$126,800
|
|
$127,055
|
$127,382
|
|
$127,127
|
$122,376
|
|
Obligations
of state and political subdivisions
|
|
7,978
|
8,042
|
|
6,207
|
6,289
|
|
5,296
|
5,301
|
|
Other
securities
|
|
3,206
|
3,206
|
|
3,988
|
3,988
|
|
4,000
|
4,000
|
|
Total
held-to-maturity portfolio
|
|
138,167
|
138,048
|
|
137,250
|
137,659
|
|
136,423
|
131,677
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale
Portfolio:
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury and Agency securities
|
|
245,971
|
250,800
|
|
432,832
|
438,526
|
|
414,868
|
410,397
|
|
Obligations
of state and political subdivisions
|
|
515,893
|
523,835
|
|
532,431
|
543,963
|
|
479,600
|
482,719
|
|
Corporate
securities
|
|
35,613
|
35,349
|
|
40,457
|
40,270
|
|
40,527
|
39,533
|
|
Collateralized
mortgage obligations
|
|
29,978
|
30,243
|
|
34,451
|
34,512
|
|
38,483
|
37,934
|
|
Asset-backed
securities
|
|
72,920
|
61,981
|
|
73,089
|
72,300
|
|
0
|
0
|
|
Mortgage-backed
securities
|
|
169,923
|
168,040
|
|
72,655
|
73,525
|
|
72,076
|
70,698
|
|
Subtotal
|
|
1,070,298
|
1,070,248
|
|
1,185,915
|
1,203,096
|
|
1,045,554
|
1,041,281
|
|
Equity
securities
|
|
50,377
|
50,377
|
|
51,526
|
51,526
|
|
41,656
|
41,656
|
|
Total
available-for-sale portfolio
|
|
1,120,675
|
1,120,625
|
|
1,237,441
|
1,254,622
|
|
1,087,210
|
1,082,937
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized (loss) gain on available-for-sale portfolio
|
|
(50)
|
0
|
|
17,181
|
0
|
|
(4,273)
|
0
|
|
Total
|
|
$1,258,792
|
$1,258,673
|
|
$1,391,872
|
$1,392,281
|
|
$1,219,360
|
$1,214,614
|
|
As shown in Table 8, loans ended the
second quarter at $2.92 billion, up $101.2 million or 3.6% from year-end 2007
and up $155.1 million or 5.6% versus one year earlier. On an organic
basis, average loans were up $119.3 million versus one year earlier, with solid
growth in all portfolios; consumer mortgage, consumer installment and business
lending. All three portfolios also grew during the second quarter,
with increases of $12.7 million in the business lending portfolio, $27.3 million
in the consumer mortgage portfolio, and $44.5 million in the consumer
installment portfolio.
Table
8: Loans
(000's
omitted) |
|
June 30,2008
|
|
December
31, 2007
|
|
June
30, 2007
|
|
Business
lending
|
|
$1,011,137
|
34.6%
|
|
$984,780
|
34.9%
|
|
$988,886
|
35.7%
|
|
Consumer
mortgage
|
|
1,015,114
|
34.7%
|
|
977,553
|
34.7%
|
|
948,430
|
34.3%
|
|
Consumer
installment
|
|
895,992
|
30.7%
|
|
858,722
|
30.4%
|
|
829,860
|
30.0%
|
|
Total
loans
|
|
$2,922,243
|
100.0%
|
|
$2,821,055
|
100.0%
|
|
$2,767,176
|
100.0%
|
|
Business
lending increased $26.4 million in the first six months of 2008 and increased
$22.3 million versus one year ago. We continue to face competitive
conditions in most of its markets and we maintain our commitment to generating
growth in our business portfolio in a manner that adheres to its twin goals of
maintaining strong asset quality and producing profitable margins. We
have continued to invest in additional personnel, technology and business
development resources to further strengthen our capabilities in this key
business segment.
Consumer
mortgages increased $66.7 million year-over-year and $37.6 million in the first
six months of 2008. Consumer mortgage growth has been strong over the
last few quarters despite softening demand in the overall market. The
consumer real estate portfolio does not include exposure to subprime, Alt-A, or
other higher-risk mortgage products.
Consumer
installment loans, including borrowings originated in automobile, marine and
recreational vehicle dealerships, as well as branch originated home equity and
installment loans, increased $37.3 million in the first six months of 2008 and
increased $66.1 million on a year-over-year basis. Declines in
manufacturer production and industry sale projections indicate continued
weakness in the new vehicle market which has created demand in late model used
and program car inventories, segments in which we are an active
participant. Aggressive business development efforts have created
opportunities to strategically expand our share of the market, helping drive
productive growth in this portfolio.
Table 9
below exhibits the major components of nonperforming loans and assets and key
asset quality metrics for the periods ending June 30, 2008 and 2007 and December
31, 2007.
Table
9: Nonperforming Assets
|
|
June
30,
|
|
December
31,
|
|
June
30,
|
(000's
omitted)
|
|
2008
|
|
2007
|
|
2007
|
Nonaccrual
loans
|
|
$10,016
|
|
$7,140
|
|
$8,003
|
Accruing
loans 90+ days delinquent
|
|
370
|
|
622
|
|
778
|
Restructured
loans
|
|
1,064
|
|
1,126
|
|
1,189
|
Total
nonperforming loans
|
|
11,450
|
|
8,888
|
|
9,970
|
Other
real estate owned (OREO)
|
|
637
|
|
1,007
|
|
1,411
|
Total
nonperforming assets
|
|
$12,087
|
|
$9,895
|
|
$11,381
|
|
|
|
|
|
|
|
Allowance
for loan losses to total loans
|
|
1.27%
|
|
1.29%
|
|
1.33%
|
Allowance
for loan losses to nonperforming loans
|
|
324%
|
|
410%
|
|
368%
|
Nonperforming
loans to total loans
|
|
0.39%
|
|
0.32%
|
|
0.36%
|
Nonperforming
assets to total loans and other real estate
|
|
0.41%
|
|
0.35%
|
|
0.41%
|
Delinquent
loans (30 days past due to nonaccruing) to total loans
|
|
1.13%
|
|
1.10%
|
|
0.95%
|
Net
charge-offs to average loans outstanding (quarterly)
|
|
0.12%
|
|
0.13%
|
|
0.05%
|
Loan
loss provision to net charge-offs (quarterly)
|
|
180%
|
|
98%
|
|
114%
|
As
displayed in Table 9, nonperforming assets at June 30, 2008 were $12.1 million,
an increase of $0.7 million versus one year earlier and a $2.2 million increase
as compared to the level at the end of 2007. Nonperforming loan
ratios increased slightly during the second quarter of 2008, but remain at or
near historically low levels, reflective of disciplined credit management and
relatively stable economic conditions in our markets over the past few
years. Other real estate owned (OREO) decreased $0.4 million and $0.8
million from year-end 2007 and one-year ago, respectively, a result
of managing of 14 OREO properties at June 30, 2008 as compared to 20 OREO
properties at June 30, 2007. No single property has a carrying value
in excess of $200,000.
Nonperforming
loans were 0.39% of total loans outstanding at the end of the second quarter,
seven basis points higher than the level at December 31, 2007 and three basis
points higher than the 0.36% at June 30, 2007. The allowance for loan
losses to nonperforming loans ratio, a general measure of coverage adequacy, was
324% at the end of the second quarter compared to 410% at year-end 2007 and 368%
at June 30, 2007.
Delinquent
loans (30 days through nonaccruing) as a percent of total loans was 1.13% at the
end of the second quarter, slightly higher than the 1.10% at year-end 2007 and
the 0.95% at June 30, 2007. The commercial loan delinquency ratio at
the end of the second quarter increased in comparison to December 31, 2007 and
June 30, 2007. The delinquency rate for real estate loans decreased
as compared to the December 31, 2007 and increased as compared to June 30,
2007. The consumer installment loan delinquency rate decreased as
compared to both December 31, 2007 and June 30, 2007. The delinquency
levels at the end of the current quarter remain favorable and are only slightly
above our average of 1.11% over the previous eight quarters.
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
June
30,
|
|
June
30,
|
(000's
omitted)
|
|
2008
|
2007
|
|
2008
|
2007
|
Allowance
for loan losses at beginning of period
|
|
$36,428
|
$35,891
|
|
$36,427
|
$36,313
|
Charge-offs:
|
|
|
|
|
|
|
Business
lending
|
|
406
|
295
|
|
684
|
535
|
Consumer
mortgage
|
|
62
|
45
|
|
114
|
280
|
Consumer
installment
|
|
1,305
|
1,251
|
|
2,653
|
2,412
|
Total
charge-offs
|
|
1,773
|
1,591
|
|
3,451
|
3,227
|
Recoveries:
|
|
|
|
|
|
|
Business
lending
|
|
168
|
389
|
|
341
|
646
|
Consumer
mortgage
|
|
9
|
20
|
|
55
|
21
|
Consumer
installment
|
|
726
|
820
|
|
1,405
|
1,576
|
Total
recoveries
|
|
903
|
1,229
|
|
1,801
|
2,243
|
|
|
|
|
|
|
|
Net
charge-offs
|
|
870
|
362
|
|
1,650
|
984
|
Provision
for loans losses
|
|
1,570
|
414
|
|
2,350
|
614
|
Allowance
for acquired loans
|
|
0
|
747
|
|
0
|
747
|
Allowance
for loan losses at end of period
|
|
$37,128
|
$36,690
|
|
$37,128
|
$36,690
|
|
|
|
|
|
|
|
Net
charge-offs to average loans outstanding:
|
|
|
|
|
|
|
Business
lending
|
|
0.10%
|
-0.04%
|
|
0.07%
|
-0.02%
|
Consumer
mortgage
|
|
0.02%
|
0.01%
|
|
0.01%
|
0.06%
|
Consumer
installment
|
|
0.27%
|
0.21%
|
|
0.29%
|
0.21%
|
Total
loans
|
|
0.12%
|
0.05%
|
|
0.12%
|
0.07%
|
As
displayed in Table 10, net charge-offs during the second quarter were $0.9
million, $0.5 million higher than the equivalent 2007 period. All
portfolios, consumer installment, business lending, and consumer mortgage
experienced small increases in the level of charge-offs as compared to the
historical low levels experienced in the second quarter of 2007. The
net charge-off ratio (net charge-offs as a percentage of average loans
outstanding) for the second quarter was 0.12%, seven basis points higher than
the comparable quarter of 2007 and two basis points below the average charge-off
ratio for the previous eight quarters. Net charge-offs and the
corresponding net charge-off ratios continue to be below the average net
charge-off levels of the past several years.
All
portfolios experienced slightly higher net charge off ratios for the second
quarter of 2008 as compared to the second quarter of 2007. For
the six months ended June 30, 2008 the net charge off ratio improved five basis
points for the consumer mortgage portfolio, while the business lending and
consumer installment charge off ratios were higher by nine and eight basis
points, respectively.
A loan
loss allowance of $37.1 million was determined as of June 30, 2008,
necessitating a $1.6 million loan loss provision for the quarter, compared to
$0.4 million one year earlier, driven by the growth in the loan portfolio during
the second quarter. The allowance for loan losses rose $0.4 million
or 1.2% over the last 12 months, less than the 5.6% growth in the loan portfolio
over the same period. Contributing to the changes were the favorable
charge-off, nonperforming and delinquency trends experienced over the last
twelve months. This contributed to the ratio of allowance for loan
loss to loans outstanding declining to 1.27% at the end of the second quarter,
six basis points below its level at June 30, 2007 and two basis points lower
than the level at December 31, 2007. The decrease was also slightly
impacted by the increased proportion of low-risk consumer mortgage and home
equity loans in the overall loan portfolio, as a result of both organic and
acquired growth.
Deposits
As shown
in Table 11, average deposits of $3.2 billion in the second quarter were down
$45.9 million or 1.4% compared to the second quarter of 2007 and decreased $12.7
million or 0.4% versus the fourth quarter of last year. Excluding the
impact of the TLNB acquisition, average deposits decreased $87.7 million or 2.7%
as compared to the second quarter of 2007. Consistent with our focus
on expanding core account relationships and reducing higher cost time deposits,
core product relationships grew $96.6 million or 5.5% as compared to the second
quarter of 2007 while time deposits were allowed to decline $142.4 million or
9.5%. Interest checking account balances are above the
prior year levels primarily as a result of the continued success of new product
initiatives that commenced in the second quarter of 2006. This shift
in mix, combined with our ability to reduce rates due to market conditions,
resulted in the quarterly cost of interest-bearing deposits declining from 3.0%
in the second quarter of 2007 to 2.4% in the most recent quarter.
Average
second quarter non-public fund deposits were down $18.9 million or 0.6% compared
to the year earlier period and decreased $22.6 million or 0.7% versus the fourth
quarter of 2007. Excluding time deposits, non-public deposits for the
second quarter were up $98.3 million or 6.1% as compared to the second quarter
of 2007. Average public funds have increased $9.9 million or 5.1%
from the fourth quarter of 2007 and decreased $26.9 million or 11.6%
from the second quarter of 2007. We continue to focus heavily on
growing our core deposits through enhanced marketing and training programs and
new product offerings introduced during the past two years. The
success of these efforts is demonstrated by the solid organic core deposit
growth generated over the past year, with second quarter average balances
increasing $68.4 million or 3.9% versus one year earlier.
Table
11: Quarterly Average Deposits
|
|
June
30,
|
|
December
31,
|
|
June
30,
|
(000's
omitted)
|
|
2008
|
|
2007
|
|
2007
|
Demand
deposits
|
|
$563,045
|
|
$574,266
|
|
$557,195
|
Interest
checking deposits
|
|
485,113
|
|
464,996
|
|
430,038
|
Savings
deposits
|
|
458,556
|
|
451,148
|
|
459,514
|
Money
market deposits
|
|
360,477
|
|
329,566
|
|
323,867
|
Time
deposits
|
|
1,362,278
|
|
1,422,159
|
|
1,504,716
|
Total
deposits
|
|
$3,229,469
|
|
$3,242,135
|
|
$3,275,330
|
|
|
|
|
|
|
|
Non-public
fund deposits
|
|
$3,023,407
|
|
$3,046,018
|
|
$3,042,325
|
Public
fund deposits
|
|
206,062
|
|
196,117
|
|
233,005
|
Total
deposits
|
|
$3,229,469
|
|
$3,242,135
|
|
$3,275,330
|
Borrowings
of $874.6 million at the end of the second quarter, decreased $54.7 million from
December 31, 2007 and were up $170.4 million versus the end of the second
quarter of 2007. Borrowings were up from one year ago primarily due
to the need to supplement the funding of strong loan growth and selected
investment purchases. The decline in borrowings during the first six
months of 2008 was mostly attributable to a planned reduction of short-term
investments and substantial core deposit balance growth. In December
2007, we refinanced $150 million of its fixed rate FHLB advances, replacing them
with lower cost instruments with similar remaining duration and conducted an
early redemption of $25 million of its variable rate, trust-preferred securities
in January 2008. These restructuring strategies helped reduce our
interest expense on external borrowings and consequently improved our net
interest margin in the first six months of 2008.
On April
20, 2005, we announced a twenty-month authorization to repurchase up to 1.5
million of our outstanding shares in open market or privately negotiated
transactions. On December 20, 2006, we extended the program through
December 31, 2008 and announced an additional two-year authorization to
repurchase up to 900,000 of its outstanding shares in open market or privately
negotiated transactions. All reacquired shares will become treasury
shares and will be used for general corporate purposes, including those related
to employee and director stock plan activities. Through June 30,
2008, we had repurchased 1,464,811 shares at an aggregate cost of $31.5 million
under this program.
Total
shareholders’ equity of $483.6 million at the end of the second quarter
increased $4.9 million from the balance at December 31, 2007. This
change consisted of net income of $22.2 million, $4.7 million from shares issued
under the employee stock plan, and $1.1 million from employee stock
options earned, partially offset by dividends declared of $12.5 million and a
$10.6 million decrease in other comprehensive income. The other
comprehensive loss is comprised of a $10.7 million decrease in the after-tax
market value adjustment on the available-for-sale investment portfolio,
partially offset by a $45,000 increase in the after-tax market value adjustment
on the interest rate swap and a $33,000 adjustment to the funded status of our
retirement plans. Over the past 12 months total shareholders’ equity
increased by $24.0 million, as net income, positive contributions from shares
issued under the employee stock plan, and a higher market value adjustment more
than offset dividends declared, treasury stock purchases, and the funded status
of our defined benefit pension and other postretirement plans.
Our Tier
I leverage ratio, a primary measure of regulatory capital for which 5% is the
requirement to be “well-capitalized,” was 7.75% at the end of the second
quarter, down two basis points from year-end 2007 and 12 basis points lower than
its level one year ago. The decrease in the Tier I leverage ratio
compared to December 31, 2007 is primarily the result of the early call of $25
million of variable-rate trust preferred securities in the first
quarter. The decrease in the Tier I ratio, as compared to the prior
year second quarter, is the result of a 0.8% increase in Tier I capital
(includes shareholders equity and trust preferred securities and excludes
intangibles and the market value adjustment), combined with a larger 2.3%
increase in average assets excluding intangibles and the market value
adjustment. The primary drivers of the year-over-year changes were
treasury share purchases, the redemption of trust-preferred securities and two
acquisitions that increased both asset and intangible levels. The
tangible equity-to-assets ratio of 5.22% increased 21 basis points versus
December 31, 2007 and increased 56 basis points versus June 30, 2007, due to
shareholders’ equity excluding intangible assets growing at a faster pace than
assets excluding intangibles.
The
dividend payout ratio (dividends declared divided by net income) for the first
six months of 2008 was 56.5%, down from 60.0% for the first six months of
2007. The ratio decreased because net income increased 10.8% while
dividends declared increased at a lesser 4.5%. The expansion of
dividends declared was caused by the dividend per share being raised 5.0% in
August 2007, from $0.20 to $0.21, and a slight increase in the number of shares
outstanding. On a cash earnings basis, the dividend payout ratio was
50.3% for the first six months of 2008 as compared to 52.9% for the first six
months of 2007.
UNDERWRITING
Janney
Montgomery Scott LLC, Raymond James & Associates, Inc., and FTN Midwest
Securities Corp. are the representatives of the underwriters. Subject
to the terms and conditions of the underwriting agreement, the underwriters have
agreed to purchase, and we have agreed to sell to the underwriters, the number
of shares of common stock set forth opposite the name of the underwriters at the
public offering price less the underwriting discount on the cover page of the
prospectus.
Underwriter
|
Number
of Shares
|
|
|
Janney
Montgomery Scott LLC . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . .
|
|
Raymond
James & Associates, Inc. . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . .
|
|
FTN
Midwest Securities Corp. . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . .
|
|
|
|
|
|
Total . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. .
|
1,700,000
|
The
underwriting agreement provides that the obligations of the underwriters to
purchase the shares of common stock that are being offered are subject to
approval of legal matters by counsel and to other conditions. Each
underwriter is obligated to purchase all of the shares being offered (other than
those covered by the over-allotment option described below) if it purchases any
of the shares.
The
underwriters propose to offer some of the shares directly to the public at the
public offering price set forth on the cover page of this prospectus and some of
the shares to certain dealers at the public offering price less a concession not
in excess of $_______ per share. The underwriters may allow, and the
dealers may reallow, a concession not in excess of $_______ per share on sales
to other dealers. After the public offering, the offering price and
other selling terms may be changed by the underwriters.
We have
granted to the underwriters an option, exercisable for up to 30 days after the
date of the underwriting agreement, to purchase up to an additional 255,000
shares of common stock at the public offering price set forth on the cover page
less underwriting discounts and commissions. To the extent that the
underwriters exercise this option, we will be obligated to sell that amount of
shares of common stock to the underwriters. The underwriters may
exercise this option only to cover over-allotments made in connection with this
offering. If purchased, the underwriters will offer the additional
shares of common stock on the same terms as those on which the 1,700,000 shares
of common stock are being offered.
The
following table shows the per share and total underwriting discount to be paid
to the underwriters by us. These amounts are shown assuming both no
exercise and full exercise of the underwriters' option to purchase additional
shares:
|
No Exercise
|
Full
Exercise
|
|
|
|
Per
share underwriting discounts and commissions . . . . . . . . . .
.
|
$ ____
|
$ ____
|
Total
underwriting discounts and commissions to be paid by us .
|
________
|
$__________
|
We
estimate that the total expenses of the offering, excluding the underwriting
discount and commissions, will be approximately $0.3
million. Expenses of the offering, excluding underwriting discount
and commissions, include the SEC filing fee, printing expenses, transfer agent
and registration fees, listing fees, professional fees and other miscellaneous
fees.
In
connection with the offering, the underwriters may purchase and sell shares of
our common stock in the open market. These transactions may include
over-allotment, syndicate covering transactions and stabilizing
transactions. Over-allotment involves syndicate sales of shares of
common stock in excess of the number of shares of common stock to be purchased
by the underwriters in the offering, which creates a syndicate short
position. Syndicate covering transactions involve purchases of shares
of common stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Stabilizing transactions
consist of bids or purchases of shares of common stock made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.
The
underwriters may also impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when the
shares of common stock originally sold by that syndicate member are purchased in
a stabilizing transaction or syndicate covering transaction to cover syndicate
short positions. The imposition of a penalty bid may have an effect
on the price of the common stock to the extent that it may discourage resales of
the common stock.
Any of
these transactions may cause the price of the common stock to be higher than it
would otherwise be in the absence of the transactions. These
transactions, if commenced, may be discontinued at any time.
We have
agreed to indemnify the underwriters against certain liabilities, including
liabilities under the Securities Act of 1933.
We have
agreed not to offer, sell, contract to sell, grant options to purchase, or
otherwise dispose of any shares of our common stock or securities exchangeable
for or convertible into our common stock for a period of 120 days after the date
of this prospectus, subject to certain exceptions, without the prior consent of
the representatives of the underwriters. Our directors and officers
have agreed not to, directly or indirectly, sell, hedge, or otherwise dispose of
any shares of common stock, options to acquire shares of common stock, or
securities exchangeable for or convertible into shares of common stock, for a
period of 120 days after the date of this prospectus without the prior written
consent of the representatives of the underwriters. The
representatives of the underwriters may, in their sole discretion and at any
time without notice, release all or any portion of the securities subject to
these lock-up agreements.
Janney
Montgomery Scott has in the past, and may in the future, perform various
services for us, including investment banking services, for which they have or
may receive customary fees. FTN Midwest Securities Corp and its
affiliates FTN Financial Securities Corp. and FTN Financial Capital Markets, a
division of First Tennessee Bank NA, have in the past, and may in the future,
provided investment banking and fixed income capital markets services for us,
including sales, trading and pricing information related to pooled trust
preferred securities, for which they have or may receive customary
fees.
LEGAL
MATTERS
The
validity of the issuance of the common stock offered hereby will be passed upon
for us by Bond, Schoeneck & King, PLLC, Syracuse, New
York. Certain legal matters in connection with this offering will be
passed upon for the underwriters by Malizia Spidi & Fisch, PC, Washington,
D.C.
EXPERTS
The
financial statements and management’s assessment of the effectiveness of
internal control over financial reporting (which is included in Management’s
Report on Internal Control over Financial Reporting) incorporated in this
Prospectus by reference to the Annual Report on Form 10-K for the year ended
December 31, 2007 have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, an independent registered public accounting firm,
given on the authority of said firm as experts in auditing and
accounting.
INCORPORATION
OF CERTAIN DOCUMENTS BY REFERENCE
The SEC
allows us to “incorporate by reference” information that we file with them,
which means that we can disclose important information to you by referring you
to those documents. The information incorporated by reference is an
important part of this prospectus, and information that we file later with the
SEC will automatically update and supersede this information. We
incorporate by reference the documents listed below and any future filings we
will make with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934 after the date of this prospectus and prior to the
termination of this offering:
·
|
Annual
Report on Form 10-K for the year ended December 31, 2007 filed on March
13, 2008;
|
·
|
Quarterly
Report on Form 10-Q for the quarter ended March 31, 2008 filed on May 8,
2008;
|
·
|
Quarterly
Report on Form 10-Q for the quarter ended June 30, 2008 filed on August 7,
2008;
|
·
|
Current
Reports on Form 8-K filed January 18, 2008, April 9, 2008, April 25, 2008,
June 26, 2008, July 11, 2008 and July 23, 2008 (other than information
furnished under Items 2.02 and 7.01 of any Current Report on Form 8-K,
including the related exhibits, that is not deemed to be filed with the
SEC); and
|
·
|
The
description of the common stock is contained in our Registration Statement
on Form 8-A filed on December 9,
1997.
|
Our SEC
file number for these filings is 1-13695. You may request a copy of
these filings at no cost to you, by writing or telephoning us at the following
address:
Community
Bank System, Inc.
5790
Widewaters Parkway
DeWitt,
New York 13214
(315)
445-7313
Attention:
Donna J. Drengel, Corporate Secretary
__________________________________
YOU
SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH INFORMATION THAT IS
DIFFERENT. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES
OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THIS PROSPECTUS MAY ONLY BE USED WHERE IT IS LEGAL TO SELL
THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE
ACCURATE ON THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF
THIS PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
__________________________________
1,700,000
SHARES
COMMUNITY
BANK SYSTEM, INC.
COMMON
STOCK
__________________________________
PROSPECTUS
__________________________________
Janney
Montgomery Scott LLC
Raymond
James
FTN
Midwest Securities Corp.
__________,
2008
__________________________________
PART
II
INFORMATION
NOT REQUIRED IN THE PROSPECTUS
Item
14. Other
Expenses of Issuance and Distribution
The
expenses in connection with the issuance and distribution of the securities
being registered hereby, other than underwriting discounts and commissions, are
as follows:
Securities
and Exchange Commission Registration Fee
|
$ 1,730
|
FINRA
Filing Fee*
|
5,000
|
New
York Stock Exchange Additional Listing Fee*
|
9,385
|
Legal
Fees*
|
60,000
|
Accounting
Fees*
|
85,000
|
Transfer
Agent and Registrar*
|
10,000
|
Printing,
Postage and Handling Expenses*
|
55,000
|
Miscellaneous
Expenses*
|
33,885
|
|
|
Total
|
$260,000
|
_____________________________
* Estimated
Item
15. Indemnification
of Officers and Directors
Section
145 of the Delaware General Corporation Law authorizes a corporation to
indemnify any director, officer, employee or other agent of the
corporation.
The
Registrant’s By-laws provide indemnity to the Registrant’s directors and
officers in such capacity or as directors or officers of a wholly-owned
subsidiary of the Registrant for liability resulting from judgments, fines,
expenses or settlement amounts actually and reasonably incurred in connection
with any action brought against such person in such capacity to the fullest
extent and in the manner set forth in and permitted by the Delaware General
Corporation Law, and any other applicable law, as from time to time in
effect. Under Delaware law and the By-laws, no indemnification may be
provided for any person with respect to any matter as to which he or she shall
have been adjudicated in any proceeding not to have acted in good faith in the
reasonable belief that his or her action was in the best interests of the
Registrant or of such subsidiary.
In
addition, as permitted under Delaware law, the Registrant maintains liability
insurance covering directors and officers of the Registrant and its
subsidiaries.
Item
16. Exhibits
The
following exhibits are filed as part of this Registration
Statement:
Exhibit Number
|
Description of Exhibit
|
|
|
1.1
|
Proposed
Form of Underwriting Agreement*
|
4.1
|
Specimen
Certificate of Common Stock*
|
5.1
|
Opinion
of Bond, Schoeneck & King, PLLC*
|
23.1
|
Consent
of PricewaterhouseCoopers LLP **
|
23.2
|
Consent
of Bond, Schoeneck & King, PLLC (included in Exhibit
5.1)*
|
24.1
|
Power
of Attorney (included in signature
page)*
|
____________________________
*
Previously filed
** Filed
herewith
Item
17. Undertakings
(a) The
undersigned Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Registrant’s
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan’s annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(b) Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) The
undersigned Registrant hereby undertakes that:
(1) For
purposes of determining any liability under the Securities Act of 1933, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For
the purpose of determining any liability under the Securities Act of 1933, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the Registrant certifies that
it has reasonable grounds to believe that it meets all of the requirements for
filing on Form S-3 and has duly caused this Pre-Effective Amendment No. 1 to the
Registration Statement to be signed on its behalf by the undersigned thereunto
duly authorized, in the Town of DeWitt, State of New York, on this 29th day of
September, 2008.
|
COMMUNITY
BANK SYSTEM, INC.
|
|
|
|
By: /s/ Mark E. Tryniski
|
|
Name: Mark
E. Tryniski
|
|
Title: President
and Chief Executive Officer
|
Pursuant
to the requirements of the Securities Act of 1933, the Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated.
Signature
|
Title
|
Date
|
|
|
|
/s/ Mark E. Tryniski
|
Director,
President and Chief
|
September
29, 2008
|
Mark
E. Tryniski
|
Executive
Officer (Principal Executive Officer |
|
|
|
|
/s/ Scott A. Kingsley
|
Treasurer
and Chief Financial
|
September
29, 2008
|
Scott
A. Kingsley
|
Officer
(Principal Financial Officer and Principal Accounting Officer) |
|
|
|
|
*
|
Director
|
September
29, 2008
|
Brian
R. Ace
|
|
|
|
|
|
*
|
Director
|
September
29, 2008
|
Paul
M. Cantwell, Jr.
|
|
|
|
|
|
*
|
Director
|
September
29, 2008
|
William
M. Dempsey
|
|
|
|
|
|
*
|
Director
|
September
29, 2008
|
Nicholas
A. DiCerbo
|
|
|
|
|
|
*
|
Director
|
September
29, 2008
|
James
A. Gabriel
|
|
|
|
|
|
*
|
Director
|
September
29, 2008
|
Charles
E. Parente
|
|
|
|
|
|
*
|
Director
|
September
29, 2008
|
David
C. Patterson
|
|
|
|
|
|
*
|
Director
|
September
29, 2008
|
Sally
A. Steele
|
|
|
|
|
|
|
|
|
*By:
/s/ Mark E. Tryniski |
|
|
Mark
E. Tryniski
Attorney-in-Fact,
pursuant to Power of
Attorney
dated September 9, 2008
|
|
|
EXHIBIT
INDEX
Exhibit No.
|
Description
|
|
|
1.1
|
Proposed
Form of Underwriting Agreement*
|
4.1
|
Specimen
Certificate of Common Stock*
|
5.1
|
Opinion
of Bond, Schoeneck & King, PLLC*
|
23.1
|
Consent
of PricewaterhouseCoopers LLP **
|
23.2
|
Consent
of Bond, Schoeneck & King, PLLC (included in Exhibit
5.1)*
|
24.1
|
Power
of Attorney (included in signature page)*
|
|
|
|
|
|
|
*
Previously filed
|
|
**
Filed herewith
|
|