cbna10q3rdqtr2009.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended September 30,
2009
o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from
to
.
Commission
File Number 001-13695
|
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 No.) |
|
|
|
5790
Widewaters Parkway, DeWitt, New York |
|
13214-1883 |
(Address of
principal executive offices) |
|
(Zip
Code) |
(315)
445-2282 |
(Registrant's
telephone number, including area code) |
|
NONE |
(Former name,
former address and former fiscal year, if changed since last
report) |
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o.
Indicate
by check mark whether the registrant has submitted electronically and posted to
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes o No
o .
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 o |
Accelerated
filer x |
Non-accelerated
filer o |
Smaller
reporting company o. |
|
|
(Do not check
if a smaller reporting company) |
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o . No x .
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
32,742,778 shares of Common
Stock, $1.00 par value, were outstanding on October 31,
2009.
TABLE
OF CONTENTS
|
|
|
|
|
Page |
|
|
|
|
|
|
Part I. |
|
Financial
Information |
|
|
|
|
|
|
|
|
Item
1. |
|
Financial Statements
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Condition |
|
|
|
|
|
September 30,
2009 and December 31,
2008_____________________________________________________________________________________ |
|
3 |
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Income |
|
|
|
|
|
Three
and nine months ended September 30, 2009 and
2008________________________________________________________________________ |
|
4 |
|
|
|
|
|
|
|
|
|
Consolidated
Statement of Changes in Shareholders’ Equity |
|
|
|
|
|
Nine
months ended September 30,
2009_______________________________________________________________________________________ |
|
5 |
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Comprehensive Income |
|
|
|
|
|
Three
and nine months ended September 30, 2009 and
2008________________________________________________________________________ |
|
6 |
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows |
|
|
|
|
|
Nine
months ended September 30, 2009 and
2008________________________________________________________________________________ |
|
7 |
|
|
|
|
|
|
|
|
|
Notes
to the Consolidated Financial Statements |
|
|
|
|
|
September
30,
2009______________________________________________________________________________________________________ |
|
8 |
|
|
|
|
|
|
Item
2. |
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations___________________________________________________ |
|
22 |
|
|
|
|
|
|
Item
3. |
|
Quantitative
and Qualitative Disclosures about Market
Risk__________________________________________________________________________ |
|
39 |
|
|
|
|
|
|
Item
4. |
|
Controls and
Procedures_____________________________________________________________________________________________________ |
|
40 |
|
|
|
|
|
|
Part II. |
|
Other
Information |
|
|
|
|
|
|
|
|
Item
1. |
|
Legal
Proceedings__________________________________________________________________________________________________________ |
|
40 |
|
|
|
|
|
|
Item
1A. |
|
Risk
Factors______________________________________________________________________________________________________________ |
|
40 |
|
|
|
|
|
|
Item
2. |
|
Unregistered
Sales of Equity Securities and Use of
Proceeds__________________________________________________________________________ |
|
41 |
|
|
|
|
|
|
Item
3. |
|
Defaults Upon
Senior
Securities_______________________________________________________________________________________________ |
|
41 |
|
|
|
|
|
|
Item
4. |
|
Submission of
Matters to a Vote of Securities
Holders______________________________________________________________________________ |
|
41 |
|
|
|
|
|
|
Item
5. |
|
Other
Information__________________________________________________________________________________________________________ |
|
41 |
|
|
|
|
|
|
Item
6. |
|
Exhibits__________________________________________________________________________________________________________________ |
|
41 |
Part
I. Financial Information
Item
1. Financial Statements
|
|
|
|
September
30,
|
December
31,
|
|
2009
|
2008
|
Cash
and cash equivalents
|
$361,734
|
$213,753
|
|
|
|
Available-for-sale
investment securities, at fair value
|
1,214,521
|
1,317,217
|
Held-to-maturity
investment securities
|
283,305
|
77,794
|
Total
investment securities (fair value of $1,506,677 and $1,397,589,
respectively)
|
1,497,826
|
1,395,011
|
|
|
|
Loans
held for sale
|
519
|
-
|
|
|
|
Loans
|
3,087,093
|
3,136,140
|
Allowance
for loan losses
|
(41,072)
|
(39,575)
|
Net
loans
|
3,046,021
|
3,096,565
|
|
|
|
Goodwill
|
300,758
|
301,149
|
Core
deposit intangibles, net
|
17,603
|
22,340
|
Other
intangibles, net
|
4,300
|
5,135
|
Intangible
assets, net
|
322,661
|
328,624
|
|
|
|
Premises
and equipment, net
|
74,654
|
73,294
|
Accrued
interest receivable
|
26,472
|
26,077
|
Other
assets
|
48,208
|
41,228
|
Total
assets
|
$5,378,095
|
$5,174,552
|
|
|
|
Liabilities:
|
|
|
Noninterest-bearing
deposits
|
$708,051
|
$638,558
|
Interest-bearing
deposits
|
3,180,194
|
3,062,254
|
Total
deposits
|
3,888,245
|
3,700,812
|
|
|
|
Borrowings
|
756,442
|
760,558
|
Subordinated
debt held by unconsolidated subsidiary trusts
|
101,993
|
101,975
|
Accrued
interest and other liabilities
|
65,515
|
66,556
|
Total
liabilities
|
4,812,195
|
4,629,901
|
|
|
|
Commitments
and contingencies (See Note I)
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
Preferred
stock $1.00 par value, 500,000 shares authorized, 0 shares
issued
|
-
|
-
|
Common
stock, $1.00 par value, 50,000,000 shares authorized;
|
33,575
|
33,468
|
33,574,989
and 33,468,215 shares issued at September 30, 2009 and December 31, 2008,
respectively
|
|
|
Additional
paid-in capital
|
214,977
|
212,400
|
Retained
earnings
|
340,380
|
329,914
|
Accumulated
other comprehensive loss
|
(4,765)
|
(12,864)
|
Treasury
stock, at cost (834,811 shares)
|
(18,267)
|
(18,267)
|
Total
shareholders' equity
|
565,900
|
544,651
|
|
|
|
Total
liabilities and shareholders' equity
|
$5,378,095
|
$5,174,552
|
The
accompanying notes are an integral part of the consolidated financial
statements.
COMMUNITY
BANK SYSTEM, INC.
CONSOLIDATED
STATEMENTS OF INCOME (Unaudited)
(In
Thousands, Except Per-Share Data)
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
September
30,
|
|
September
30,
|
|
|
2009
|
2008
|
|
2009
|
2008
|
Interest
income:
|
|
|
|
|
|
|
Interest
and fees on loans
|
$46,067
|
$46,731
|
|
$138,992
|
$138,937
|
|
Interest
and dividends on taxable investments
|
9,849
|
9,539
|
|
30,082
|
29,888
|
|
Interest
and dividends on nontaxable investments
|
5,972
|
5,544
|
|
17,868
|
17,210
|
|
Total
interest income
|
61,888
|
61,814
|
|
186,942
|
186,035
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
Interest
on deposits
|
10,612
|
14,761
|
|
36,269
|
48,495
|
|
Interest
on borrowings
|
7,899
|
8,302
|
|
23,471
|
24,224
|
|
Interest
on subordinated debt held by unconsolidated subsidiary
trusts
|
1,525
|
1,678
|
|
4,650
|
5,205
|
|
Total
interest expense
|
20,036
|
24,741
|
|
64,390
|
77,924
|
|
|
|
|
|
|
|
Net
interest income
|
41,852
|
37,073
|
|
122,552
|
108,111
|
Less: provision
for loan losses
|
2,375
|
1,985
|
|
7,200
|
4,335
|
Net
interest income after provision for loan losses
|
39,477
|
35,088
|
|
115,352
|
103,776
|
|
|
|
|
|
|
|
Noninterest
income:
|
|
|
|
|
|
|
Deposit
service fees
|
10,991
|
9,039
|
|
30,247
|
26,205
|
|
Mortgage
banking and other services
|
895
|
1,179
|
|
4,738
|
2,318
|
|
Benefit
plan administration, consulting and actuarial fees
|
6,969
|
6,931
|
|
20,575
|
19,176
|
|
Trust,
investment and asset management fees
|
1,951
|
2,234
|
|
6,251
|
6,721
|
|
Gain
on investment securities
|
7
|
0
|
|
7
|
230
|
Total
noninterest income
|
20,813
|
19,383
|
|
61,818
|
54,650
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
Salaries
and employee benefits
|
23,166
|
21,130
|
|
69,282
|
61,288
|
|
Occupancy
and equipment
|
5,533
|
5,305
|
|
17,448
|
16,067
|
|
Data
processing and communications
|
5,328
|
4,284
|
|
15,349
|
12,369
|
|
Amortization
of intangible assets
|
2,026
|
1,727
|
|
6,234
|
4,903
|
|
Legal
and professional fees
|
1,367
|
1,095
|
|
3,969
|
3,295
|
|
Office
supplies and postage
|
1,245
|
1,260
|
|
4,092
|
3,775
|
|
Business
development and marketing
|
1,469
|
1,174
|
|
4,818
|
4,003
|
|
FDIC
insurance premiums
|
1,670
|
665
|
|
7,066
|
1,051
|
|
Other
|
2,307
|
2,616
|
|
7,737
|
7,834
|
|
Total
operating expenses
|
44,111
|
39,256
|
|
135,995
|
114,585
|
|
|
|
|
|
|
|
Income
before income taxes
|
16,179
|
15,215
|
|
41,175
|
43,841
|
Income
taxes
|
3,724
|
3,429
|
|
9,100
|
9,870
|
Net
income
|
$12,455
|
$11,786
|
|
$32,075
|
$33,971
|
|
|
|
|
|
|
|
Basic
earnings per share
|
$0.38
|
$0.39
|
|
$0.98
|
$1.13
|
Diluted
earnings per share
|
$0.38
|
$0.39
|
|
$0.97
|
$1.12
|
Dividends
declared per share
|
$0.22
|
$0.22
|
|
$0.66
|
$0.64
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
|
|
|
|
|
|
COMMUNITY
BANK SYSTEM, INC.
CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
Nine
Months Ended September 30, 2009
(In
Thousands, Except Share Data)
|
|
|
|
|
Accumulated
|
|
|
|
Common
Stock
|
Additional
|
|
Other
|
|
|
|
Shares
|
Amount
|
Paid-In
|
Retained
|
Comprehensive
|
Treasury
|
|
|
Outstanding
|
Issued
|
Capital
|
Earnings
|
Loss
|
Stock
|
Total
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
32,633,404
|
$33,468
|
$212,400
|
$329,914
|
($12,864)
|
($18,267)
|
$544,651
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
32,075
|
|
|
32,075
|
|
|
|
|
|
|
|
|
Other
comprehensive income, net of tax
|
|
|
|
|
8,099
|
|
8,099
|
|
|
|
|
|
|
|
|
Dividends
declared:
|
|
|
|
|
|
|
|
Common,
$0.66 per share
|
|
|
|
(21,609)
|
|
|
(21,609)
|
|
|
|
|
|
|
|
|
Common
stock issued under
|
|
|
|
|
|
|
|
Stock
plan, including
|
|
|
|
|
|
|
|
tax
benefits of $82
|
106,774
|
107
|
1,070
|
|
|
|
1,177
|
|
|
|
|
|
|
|
|
Stock
options earned
|
|
|
1,507
|
|
|
|
1,507
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2009
|
32,740,178
|
$33,575
|
$214,977
|
$340,380
|
($4,765)
|
($18,267)
|
$565,900
|
The
accompanying notes are an integral part of the consolidated financial
statements.
COMMUNITY
BANK SYSTEM, INC.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In
Thousands)
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
September
30,
|
|
September
30,
|
|
|
2009
|
2008
|
|
2009
|
2008
|
|
|
|
|
|
|
|
Other
comprehensive income (loss), before tax:
|
|
|
|
|
|
|
Change
in pension liabilities
|
|
$3
|
$200
|
|
$1,779
|
$254
|
Change
in unrealized gains (losses) on derivative instruments used in cash flow
hedges
|
(112)
|
(305)
|
|
1,069
|
(231)
|
Unrealized
(losses) gains on securities:
|
|
|
|
|
|
|
Unrealized
holding gains (losses) arising during period
|
|
14,388
|
(15,185)
|
|
9,786
|
(32,186)
|
Reclassification
adjustment for gains included in net income
|
|
(7)
|
0
|
|
(7)
|
(230)
|
Other
comprehensive income (loss), before tax:
|
|
14,272
|
(15,290)
|
|
12,627
|
(32,393)
|
Income
tax (expense) benefit related to other comprehensive (loss)
income
|
|
(4,846)
|
5,754
|
|
(4,528)
|
12,234
|
Other
comprehensive income (loss), net of tax:
|
|
9,426
|
(9,536)
|
|
8,099
|
(20,159)
|
Net
income
|
|
12,455
|
11,786
|
|
32,075
|
33,971
|
Comprehensive
income
|
|
$21,881
|
$2,250
|
|
$40,174
|
$13,812
|
The
accompanying notes are an integral part of the consolidated financial
statements.
COMMUNITY
BANK SYSTEM, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited)
(In
Thousands)
|
Nine
Months Ended
September
30,
|
|
2009
|
2008
|
Operating
activities:
|
|
|
Net
income
|
$32,075
|
$33,971
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
Depreciation
|
7,696
|
7,023
|
Amortization
of intangible assets
|
6,234
|
4,903
|
Net
accretion of premiums and discounts on securities, loans and
borrowings
|
1,020
|
(498)
|
Stock-based
compensation
|
2,298
|
2,000
|
Provision
for loan losses
|
7,200
|
4,335
|
Provision
for deferred taxes
|
4,143
|
3,343
|
Amortization
of mortgage servicing rights
|
547
|
521
|
Bank-owned
life insurance income
|
(348)
|
(364)
|
Gain
on investment securities and debt extinguishments
|
(7)
|
(230)
|
Net
gain on sale of other assets
|
(950)
|
(4)
|
Net
change in loans originated for sale
|
(519)
|
0
|
Change
in other operating assets and liabilities
|
(13,510)
|
(21,245)
|
Net
cash provided by operating activities
|
45,879
|
33,755
|
Investing
activities:
|
|
|
Proceeds
from sales of available-for-sale investment securities
|
216
|
43,678
|
Proceeds
from maturities of held-to-maturity investment securities
|
72,735
|
43,214
|
Proceeds
from maturities of available-for-sale investment
securities
|
199,631
|
257,608
|
Purchases
of held-to-maturity investment securities
|
(279,358)
|
(8,640)
|
Purchases
of available-for-sale investment securities
|
(87,256)
|
(259,438)
|
Net
decrease (increase) in loans outstanding
|
43,345
|
(186,321)
|
Cash
paid for acquisition (net of cash acquired of $0 and
$200)
|
(332)
|
(5,558)
|
Expenditures
for intangibles
|
0
|
(322)
|
Capital
expenditures
|
(9,079)
|
(7,143)
|
Net
cash used in investing activities
|
(60,098)
|
(122,922)
|
Financing
activities:
|
|
|
Net
change in non-interest checking, interest checking and savings
accounts
|
358,811
|
107,161
|
Net
change in time deposits
|
(171,378)
|
(109,232)
|
Net
change in short-term borrowings
|
(3,873)
|
90,642
|
Change
in long-term borrowings (including payments of $243 and
$601)
|
(243)
|
9,399
|
Payment
on subordinated debt held by unconsolidated subsidiary
trusts
|
0
|
(25,773)
|
Issuance
of common stock
|
386
|
7,606
|
Cash
dividends paid
|
(21,585)
|
(18,776)
|
Tax
benefits from share-based payment arrangements
|
82
|
912
|
Net
cash provided by financing activities
|
162,200
|
61,939
|
Change
in cash and cash equivalents
|
147,981
|
(27,228)
|
Cash
and cash equivalents at beginning of period
|
213,753
|
130,823
|
Cash
and cash equivalents at end of period
|
$361,734
|
$103,595
|
Supplemental
disclosures of cash flow information:
|
|
|
Cash
paid for interest
|
$64,824
|
$78,431
|
Cash
paid for income taxes
|
2,085
|
9,381
|
Supplemental
disclosures of noncash financing and investing activities:
|
|
|
Dividends
declared and unpaid
|
7,203
|
6,590
|
Transfers
from loans to other real estate
|
1,599
|
764
|
The
accompanying notes are an integral part of the consolidated financial
statements.
COMMUNITY
BANK SYSTEM, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September
30, 2009
NOTE
A: BASIS OF PRESENTATION
The
interim financial data as of September 30, 2009 and for the three and nine
months ended September 30, 2009 and 2008 is unaudited; however, in the opinion
of the Company, the interim data includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the results for
the interim periods. The results of operations for the interim
periods are not necessarily indicative of the results that may be expected for
the full year or any other interim period.
NOTE
B: ACQUISITION AND OTHER MATTERS
Citizens
Branches Acquisition
On
November 7, 2008, the Company acquired 18 branch-banking centers in northern New
York from Citizens Financial Group, Inc. (“Citizens”) in an all cash
transaction. The Company acquired approximately $109 million in loans
and $565 million in deposits at a blended deposit premium of 13%. The
results of operations for the 18 branches acquired from Citizens have been
included in the consolidated financial statements since that date. In
support of the transaction, the Company issued approximately $50 million of
equity capital in the form of common stock in October 2008.
Alliance
Benefit Group MidAtlantic
On July
7, 2008, Benefit Plans Administrative Services, Inc. (“BPAS”), a wholly owned
subsidiary of the Company, acquired the Philadelphia division of Alliance
Benefit Group MidAtlantic (“ABG”) from BenefitStreet, Inc. in an all cash
transaction. ABG provides retirement plan consulting, daily valuation
administration, actuarial and ancillary support services. The results
of ABG’s operations have been included in the consolidated financial statements
since that date.
The
estimated purchase price allocation of the assets acquired and liabilities
assumed in the purchase of Citizens and ABG, collectively, including capitalized
acquisition costs, is as follows:
(000’s
omitted)
|
|
Cash
and cash equivalents
|
$ 2,610
|
Loans,
net of allowance for loan losses
|
108,633
|
Premises
and equipment, net
|
2,717
|
Other
assets
|
1,091
|
Core
deposit intangibles
|
9,209
|
Customer
list intangible
|
3,592
|
Goodwill
|
67,493
|
Total
assets acquired
|
195,345
|
Deposits
|
565,045
|
Borrowings
|
14
|
Other
liabilities
|
938
|
Total
liabilities assumed
|
565,997
|
Net
liabilities assumed
|
$ 370,652
|
Stock
Repurchase Program
On July
22, 2009, the Company announced an authorization to repurchase up to 1,000,000
of its outstanding shares in open market transactions or privately negotiated
transactions in accordance with securities laws and regulations through December
31, 2011. Any repurchased shares will be used for general corporate
purposes, including those related to stock plan activities. The
timing and extent of repurchases will depend on market conditions and other
corporate considerations as determined at the Company’s
discretion. There were no treasury stock purchases during the first
nine months of 2009.
NOTE
C: ACCOUNTING POLICIES
Critical
Accounting Policies
Allowance
for Loan Losses
Management
continually evaluates the credit quality of the Company’s loan portfolio and
performs a formal review of the adequacy of the allowance for loan losses on a
quarterly basis. The allowance reflects management’s best estimate of
probable losses inherent in the loan portfolio. Determination of the
allowance is subjective in nature and requires significant
estimates. The Company’s allowance methodology consists of two
broad components - general and specific loan loss allocations.
The
general loan loss allocation is composed of two calculations that are computed
on five main loan categories: commercial, consumer direct, consumer indirect,
home equity and residential real estate. The first calculation
determines an allowance level based on the latest seven years of historical net
charge-off data for each loan category (commercial loans exclude balances with
specific loan loss allocations). The second calculation is
qualitative and takes into consideration eight qualitative environmental
factors: levels and trends in delinquencies and impaired loans;
levels of and trends in charge-offs and recoveries; trends in volume and terms
of loans; effects of any changes in risk selection and underwriting standards,
and other changes in lending policies, procedure, and practices; experience,
ability, and depth of lending management and other relevant staff; national and
local economic trends and conditions; industry condition; and effects of changes
in credit concentrations. These two calculations are added together
to determine the general loan loss allocation. The specific loan loss
allocation relates to individual commercial loans that are both greater than
$0.5 million and in a nonaccruing status with respect to
interest. Specific losses are based on discounted estimated cash
flows, including any cash flows resulting from the conversion of collateral or
collateral shortfalls. The allowance levels computed from the
specific and general loan loss allocation methods are combined with unallocated
reserves, if any, to derive the required allowance for loan loss to be reflected
on the Consolidated Statement of Condition.
Loan
losses are charged off against the allowance, while recoveries of amounts
previously charged off are credited to the allowance. A provision for
loan loss is charged to operations based on management’s periodic evaluation of
the factors previously mentioned.
Investment
Securities
The
Company has classified its investments in debt and equity securities as
held-to-maturity or available-for-sale. Held-to-maturity securities
are those for which the Company has the positive intent and ability to hold to
maturity, and are reported at cost, which is adjusted for amortization of
premiums and accretion of discounts. Securities not classified as
held-to-maturity are classified as available-for-sale and are reported at fair
market value with net unrealized gains and losses reflected as a separate
component of shareholders' equity, net of applicable income
taxes. None of the Company's investment securities have been
classified as trading securities at September 30, 2009. Certain
equity securities are stated at cost and include restricted stock of the Federal
Reserve Bank of New York and Federal Home Loan Bank of New York.
Fair
values for investment securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments, or a discounted cash
flow model using market estimates of interest rates and volatility.
Investment
securities are reviewed regularly for other-than-temporary
impairment. An unrealized loss is generally deemed to be
other-than-temporary and a credit loss is deemed to exist if the present value
of the expected future cash flows is less than the amortized cost basis of the
debt security. The credit loss component of an other-than-temporary
impairment write-down is recorded in earnings, while the remaining portion of
the impairment loss is recognized in other comprehensive income (loss), provided
the Company does not intend to sell the underlying debt security and it is more
likely than not that the Company will not be required to sell the debt security
prior to recovery. In determining whether a credit loss
exists and the period over which the fair value of the debt security is expected
to recover management considers the following factors: the length of time and
extent that fair value has been less than cost, the financial condition and near
term prospects of the issuer, any external credit ratings, the level of excess
cash flows generated from the underlying collateral supporting the principal and
interest payments of the debt securities, the level of credit enhancement
provided by the structure and the Company’s ability and intent to hold the
security for a period sufficient to allow for any anticipated recovery in fair
value.
The
specific identification method is used in determining the realized gains and
losses on sales of investment securities and other-than-temporary impairment
charges. Premiums and discounts on securities are amortized and
accreted, respectively, on a systematic basis over the period to maturity or
estimated life of the related security. Purchases and sales of
securities are recognized on a trade date basis.
Income
Taxes
Provisions
for income taxes are based on taxes currently payable or refundable, and
deferred taxes which are based on temporary differences between the tax basis of
assets and liabilities and their reported amounts in the financial
statements. Deferred tax assets and liabilities are reported in the
financial statements at currently enacted income tax rates applicable to the
period in which the deferred tax assets and liabilities are expected to be
realized or settled.
Intangible
Assets
Intangible
assets include core deposit intangibles, customer relationship intangibles and
goodwill arising from acquisitions. Core deposit intangibles and
customer relationship intangibles are amortized on either an accelerated or
straight-line basis over periods ranging from 8 to 20 years. The
carrying value of goodwill and other intangible assets is based upon discounted
cash flow modeling techniques that require management to make estimates
regarding the amount and timing of expected future cash flows. It
also requires use of a discount rate that reflects the current return
requirements of the market in relation to present risk-free interest rates,
required equity market premiums, and company-specific risk
indicators.
The
Company evaluates goodwill for impairment on an annual basis, or more often if
events or circumstances indicate there may be impairment. The fair
value of each reporting unit is compared to the carrying amount of that
reporting unit in order to determine if impairment is indicated. If
so, the implied fair value of the reporting units’ goodwill is compared to its
carrying amount and the impairment loss is measured by the excess of the
carrying value over fair value.
Retirement
Benefits
The
Company provides defined benefit pension benefits and post-retirement health and
life insurance benefits to eligible employees. The Company also
provides deferred compensation and supplemental executive retirement plans for
selected current and former employees and officers. Expense under
these plans is charged to current operations and consists of several components
of net periodic benefit cost based on various actuarial assumptions regarding
future experience under the plans, including, but not limited to, discount rate,
rate of future compensation increases and expected return on plan
assets.
Subsequent
Events
Companies
are required to evaluate events and transactions that occur after the balance
sheet date but before the date the financial statements are issued, or available
to be issued in the case of non-public entities. They must recognize
in the financial statements the effect of all events or transactions that
provide additional evidence of conditions that existed at the balance sheet
date, including the estimates inherent in the financial preparation
process. Entities shall not recognize the impact of events or
transactions that provide evidence about conditions that did not exist at the
balance sheet date but arose after that date. The Company has
evaluated subsequent events through the time of filing these financial
statements with the SEC on November 5, 2009
New
Accounting Pronouncements
In June
2009, the FASB issued new guidance related to the accounting and disclosures for
transfers of financial assets. It established a new “participating
interest” definition that must be met for transfers of portions of financial
assets to be eligible for sale accounting, clarifies and amends the
derecognition criteria for a transfer to be accounted for as a sale, and changes
the amount that can be recognized as a gain or loss on a transfer accounted for
as a sale when beneficial interests are received by the transferor. Enhanced
disclosures are also required to provide information about transfers of
financial assets and a transferor’s continuing involvement with transferred
financial assets. The guidance must be applied as of the beginning of an
entity’s first annual reporting period that begins after November 15, 2009,
for interim periods within that first annual reporting period, and for interim
and annual reporting periods thereafter. Earlier application is prohibited. The
Company is currently evaluating this new guidance.
In June
2009, the FASB issued guidance related to financial companies involved with
variable interest entities. Companies are now required to
qualitatively assess the determination of the primary beneficiary of a variable
interest entity (“VIE”) based on whether the entity (1) has the power to
direct the activities of a VIE that most significantly impact the entity’s
economic performance and (2) has the obligation to absorb losses of the
entity or the right to receive benefits from the entity that could potentially
be significant to the VIE. Also required is an ongoing reconsideration of the
primary beneficiary, as well as amendments regarding the events that trigger a
reassessment of whether an entity is a VIE. Enhanced disclosures are also
required to provide information about an enterprise’s involvement in a VIE. The
guidance shall be effective as of the beginning of each reporting entity’s first
annual reporting period that begins after November 15, 2009, for interim
periods within that first annual reporting period, and for interim and annual
reporting periods thereafter. Earlier application is prohibited. The Company is
currently evaluating this new guidance.
In
December 2008, the FASB issued changes to employers’ disclosures regarding
postretirement benefit plan assets. The guidance effects an
employer’s disclosures about plan assets of a defined benefit pension or other
postretirement plan on investment policies and strategies, major categories of
plan assets, inputs and valuation techniques used to measure the fair value of
plan assets and significant concentrations of risk within plan assets. This
guidance shall be effective for fiscal years ending after December 15,
2009, with earlier application permitted. Upon initial application, the
provisions of this guidance are not required for earlier periods that are
presented for comparative purposes. The Company is currently evaluating the
disclosure requirements of this new guidance.
In August
2009, the FASB issued new accounting guidance to provide clarification on
measuring liabilities at fair value when a quoted price in an active market is
not available. This guidance became effective as of October 1,
2009. It had no material impact on our consolidated financial
statements.
NOTE
D: INVESTMENT SECURITIES
The
amortized cost and estimated fair value of investment securities as of September
30, 2009 and December 31, 2008 are as follows:
|
September
30, 2009
|
|
December
31, 2008
|
|
|
Gross
|
Gross
|
Estimated
|
|
|
Gross
|
Gross
|
Estimated
|
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
(000's
omitted)
|
Cost
|
Gains
|
Losses
|
Value
|
|
Cost
|
Gains
|
Losses
|
Value
|
Held-to-Maturity
Portfolio:
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury and agency securities
|
$70,315
|
$2,675
|
$0
|
$72,990
|
|
$61,910
|
$2,358
|
$0
|
$64,268
|
Obligations
of state and political subdivisions
|
69,910
|
3,679
|
0
|
73,589
|
|
15,784
|
220
|
0
|
16,004
|
Government
guaranteed mortgage-backed securities
|
143,000
|
2,497
|
0
|
145,497
|
|
0
|
0
|
0
|
0
|
Other
securities
|
80
|
0
|
0
|
80
|
|
100
|
0
|
0
|
100
|
Total
held-to-maturity portfolio
|
283,305
|
$8,851
|
$0
|
292,156
|
|
77,794
|
$2,578
|
$0
|
80,372
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale
Portfolio:
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury and agency securities
|
312,429
|
$25,108
|
$13
|
337,524
|
|
382,301
|
$29,482
|
$0
|
411,783
|
Obligations
of state and political subdivisions
|
499,050
|
22,588
|
834
|
520,804
|
|
538,008
|
13,537
|
3,606
|
547,939
|
Corporate
debt securities
|
35,569
|
1,711
|
0
|
37,280
|
|
35,596
|
333
|
777
|
35,152
|
Collateralized
mortgage obligations
|
11,214
|
548
|
0
|
11,762
|
|
25,464
|
236
|
0
|
25,700
|
Pooled
trust preferred securities
|
71,377
|
0
|
25,957
|
45,420
|
|
72,535
|
0
|
22,670
|
49,865
|
Government
guaranteed mortgage-backed securities
|
199,974
|
7,131
|
468
|
206,637
|
|
188,560
|
4,234
|
740
|
192,054
|
Subtotal
|
1,129,613
|
57,086
|
27,272
|
1,159,427
|
|
1,242,464
|
47,822
|
27,793
|
1,262,493
|
Federal
Home Loan Bank of NY stock
|
38,491
|
0
|
0
|
38,491
|
|
38,056
|
0
|
0
|
38,056
|
Federal
Reserve Bank stock
|
12,378
|
0
|
0
|
12,378
|
|
12,383
|
0
|
0
|
12,383
|
Other
equity securities
|
4,231
|
1
|
7
|
4,225
|
|
4,285
|
0
|
0
|
4,285
|
Total
available-for-sale portfolio
|
1,184,713
|
$57,087
|
$27,279
|
1,214,521
|
|
1,297,188
|
$47,822
|
$27,793
|
1,317,217
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized gain on
available-for-sale
portfolio
|
29,808
|
|
|
0
|
|
20,029
|
|
|
0
|
Total
|
$
1,497,826
|
|
|
$1,506,677
|
|
$1,395,011
|
|
|
$1,397,589
|
A summary
of investment securities that have been in a continuous unrealized loss position
for less than or greater than twelve months is as follows:
As of September 30,
2009
|
|
Less
than 12 Months
|
|
12
Months or Longer
|
|
Total
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Gross
|
|
|
Fair
|
Unrealized
|
|
Fair
|
Unrealized
|
|
Fair
|
Unrealized
|
(000's
omitted)
|
|
Value
|
Losses
|
|
Value
|
Losses
|
|
Value
|
Losses
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale
Portfolio:
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury and agency securities
|
|
$989
|
$13
|
|
$0
|
$0
|
|
$989
|
$13
|
Obligations
of state and political subdivisions
|
|
15,552
|
166
|
|
6,673
|
302
|
|
22,225
|
468
|
Pooled
trust preferred securities
|
|
0
|
0
|
|
45,420
|
25,957
|
|
45,420
|
25,957
|
Government
guaranteed mortgage-backed securities
|
|
5,166
|
23
|
|
4,223
|
811
|
|
9,389
|
834
|
Other
equity securities
|
|
10
|
7
|
|
0
|
0
|
|
10
|
7
|
Total
available-for-sale portfolio
|
|
$21,717
|
$209
|
|
$56,316
|
$27,070
|
|
$78,033
|
$27,279
|
As of December 31,
2008
|
|
Less
than 12 Months |
|
12
Months or Longer |
|
Total |
|
|
|
Gross
|
|
|
Gross
|
|
|
Gross
|
|
|
Fair
|
Unrealized
|
|
Fair
|
Unrealized
|
|
Fair
|
Unrealized
|
(000's
omitted)
|
|
Value
|
Losses
|
|
Value
|
Losses
|
|
Value
|
Losses
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale
Portfolio:
|
|
|
|
|
|
|
|
|
|
Obligations
of state and political subdivisions
|
|
$61,879
|
$3,127
|
|
$7,419
|
$479
|
|
$69,298
|
$3,606
|
Corporate
debt securities
|
|
10,897
|
680
|
|
1,903
|
97
|
|
12,800
|
777
|
Pooled
trust preferred securities
|
|
0
|
0
|
|
49,865
|
22,670
|
|
49,865
|
22,670
|
Government
guaranteed mortgage-backed securities
|
|
24,897
|
738
|
|
338
|
2
|
|
25,235
|
740
|
Total
available-for-sale portfolio
|
|
$97,673
|
$4,545
|
|
$59,525
|
$23,248
|
|
$157,198
|
$27,793
|
Included
in the available for sale portfolio are pooled trust preferred, class A-1
securities with a current par value of $73.1 million and unrealized losses of
$26.0 million at September 30, 2009. The underlying collateral of
these assets are principally trust-preferred securities of smaller regional
banks and insurance companies. The Company’s securities are in the
super-senior cash flow tranche of the investment pools. All other
tranches in these pools will incur losses before this tranche is
impacted. An additional 38% - 43% of the underlying collateral would
have to be in deferral or default concurrently to result in an expectation of
non-receipt of contractual cash flows. The market for these
securities at September 30, 2009 is not active and markets for similar
securities are also not active. The inactivity was evidenced first by
a significant widening of the bid-ask spread in the brokered markets in which
these securities trade and then by a significant decrease in the volume of
trades relative to historical levels. The fair value of these
securities was determined using a discounted cash flow model that incorporated
market estimates of interest rates and volatility, as well as, observable quoted
prices for similar assets in markets that have not been active. These
assumptions have a significant effect on the reported fair
values. The use of different assumptions, as well as changes in
market conditions, could result in materially different fair
values. The Company does not intend to sell the underlying
security. It is not more likely than not that the Company will be
required to sell the debt security prior to recovery and does not consider these
investments to be other-than-temporarily impaired as of September 30,
2009. In determining if unrealized losses are other-than-temporary,
management considers the following factors: the length of time and extent that
fair value has been less than cost, the financial condition and near term
prospects of the issuers, any external credit ratings, the level of excess cash
flows generated from the underlying collateral supporting the principal and
interest payments of the debt securities, the level of credit enhancement
provided by the structure, and the Company’s ability and intent to hold the
security for a period sufficient to allow for any anticipated recovery in fair
value. To date, the Company has received all scheduled principal and
interest payments and expects to fully collect all future contractual principal
and interest payments. Subsequent changes in market or credit
conditions could change those evaluations.
Management
does not believe any individual unrealized loss as of September 30, 2009
represents an other-than-temporary impairment. The unrealized losses
reported pertaining to government guaranteed mortgage-backed securities relate
primarily to securities issued by GNMA, FNMA and FHLMC, who are currently rated
AAA by Moody’s Investor Services and Standard & Poor’s and are guaranteed by
the U.S. government. The obligations of state and political
subdivisions are general purpose debt obligations of various states and
political subdivisions. The unrealized losses in the portfolios are
primarily attributable to changes in interest rates. The Company does
not intend to sell these securities, nor is it more likely than not that the
Company will be required to sell these securities prior to recovery of the
amortized cost.
The
amortized cost and estimated fair value of debt securities at September 30,
2009, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
|
|
Held-to-Maturity
|
|
Available-for-Sale
|
|
|
Carrying
|
Fair
|
|
Carrying
|
Fair
|
(000's
omitted)
|
|
Value
|
Value
|
|
Value
|
Value
|
Due
in one year or less
|
|
$16,666
|
$16,821
|
|
$54,637
|
$55,466
|
Due
after one through five years
|
|
48,896
|
50,250
|
|
234,260
|
247,953
|
Due
after five years through ten years
|
|
23,087
|
24,526
|
|
354,677
|
377,875
|
Due
after ten years
|
|
51,576
|
54,982
|
|
274,851
|
259,733
|
Subtotal
|
|
140,225
|
146,579
|
|
918,425
|
941,027
|
Collateralized
mortgage obligations
|
|
0
|
0
|
|
11,214
|
11,762
|
Mortgage-backed
securities
|
|
143,080
|
145,577
|
|
199,974
|
206,637
|
Total
|
|
$283,305
|
$292,156
|
|
$1,129,613
|
$1,159,426
|
Cash flow
information on investment securities for the nine months ended September 30 is
as follows:
(000's
omitted)
|
2009
|
2008
|
Proceeds
from the sales of available-for-sale investment securities
|
$216
|
$43,678
|
Gross
gains on sales of investment securities
|
7
|
550
|
Gross
losses on sales of investment securities
|
0
|
320
|
NOTE
E: INTANGIBLE ASSETS
The gross
carrying amount and accumulated amortization for each type of intangible asset
are as follows:
|
|
As
of September 30, 2009
|
|
As
of December 31, 2008
|
|
|
Gross
|
|
Net
|
|
Gross
|
|
Net
|
|
|
Carrying
|
Accumulated
|
Carrying
|
|
Carrying
|
Accumulated
|
Carrying
|
(000's
omitted)
|
|
Amount
|
Amortization
|
Amount
|
|
Amount
|
Amortization
|
Amount
|
Amortizing
intangible assets:
|
|
|
|
|
|
|
|
|
Core
deposit intangibles
|
|
$60,595
|
($42,992)
|
$17,603
|
|
$59,933
|
($37,593)
|
$22,340
|
Other
intangibles
|
|
7,882
|
(3,582)
|
4,300
|
|
7,882
|
(2,747)
|
5,135
|
Total
amortizing intangibles
|
|
68,477
|
(46,574)
|
21,903
|
|
67,815
|
(40,340)
|
27,475
|
Non-amortizing
intangible assets:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
300,758
|
0
|
300,758
|
|
301,149
|
0
|
301,149
|
Total
intangible assets, net
|
|
$369,235
|
($46,574)
|
$322,661
|
|
$368,964
|
($40,340)
|
$328,624
|
No
goodwill impairment adjustment was recognized in the third quarter of 2009. The
estimated aggregate amortization expense for each of the succeeding fiscal years
ended December 31 is as follows:
(000's
omitted)
|
|
Amount
|
Oct-Dec
2009
|
|
$1,936
|
2010
|
|
5,955
|
2011
|
|
3,485
|
2012
|
|
2,899
|
2013
|
|
2,259
|
Thereafter
|
|
5,369
|
Total
|
|
$21,903
|
NOTE
F: MANDATORILY REDEEMABLE PREFERRED SECURITIES
The
Company sponsors two business trusts, Community Statutory Trust III and
Community Capital Trust IV (“Trust IV”), of which 100% of the common stock is
owned by the Company. The trusts were formed for the purpose of
issuing company-obligated mandatorily redeemable preferred securities to
third-party investors and investing the proceeds from the sale of such preferred
securities solely in junior subordinated debt securities of the
Company. The debentures held by each trust are the sole assets of
that trust. Distributions on the preferred securities issued by each
trust are payable quarterly at a rate per annum equal to the interest rate being
earned by the trust on the debentures held by that trust and are recorded as
interest expense in the consolidated financial statements. The
preferred securities are subject to mandatory redemption, in whole or in part,
upon repayment of the debentures. The Company has entered into
agreements which, taken collectively, fully and unconditionally guarantee the
preferred securities subject to the terms of each of the
guarantees. The terms of the preferred securities of each trust are
as follows:
|
Issuance
|
Par
|
|
Maturity
|
|
|
Trust
|
Date
|
Amount
|
Interest
Rate
|
Date
|
Call
Provision
|
Call
Price
|
III
|
7/31/2001
|
$24.5
million
|
3
month LIBOR plus 3.58% (4.07%)
|
7/31/2031
|
5
year beginning 2006
|
103.00%
declining to par in 2011
|
IV
|
12/8/2006
|
$75
million
|
3
month LIBOR plus 1.65% (1.95%)
|
12/15/2036
|
5
year beginning 2012
|
Par
|
Upon the
issuance of Trust IV, the Company entered into an interest rate swap agreement
to convert the variable rate trust preferred securities into a fixed rate
security for a term of five years at a fixed rate of
6.43%. Additional interest expense of $806,000 and $2,035,000 was
recognized based on the interest rate swap agreement for the three and nine
months ended September 30, 2009, respectively, compared to $382,000 and $760,000
for the three and nine months ended September 30, 2008.
NOTE
G: BENEFIT PLANS
The
Company provides defined benefit pension benefits and post-retirement health and
life insurance benefits to eligible employees. The Company also provides
supplemental pension retirement benefits for several current and former key
employees. During the first quarter, the Company made a contribution
to its defined benefit pension plan of $15.0 million. No other
contributions are required in 2009. The Company accrues for the
estimated cost of these benefits through charges to expense during the years
that employees earn these benefits. The net periodic benefit cost for
the three and nine months ended September 30 is as follows:
|
Pension
Benefits |
|
Post-retirement
Benefits |
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
September
30,
|
|
September
30,
|
|
September
30,
|
|
September
30,
|
(000's
omitted)
|
2009
|
2008
|
|
2009
|
2008
|
|
2009
|
2008
|
|
2009
|
2008
|
Service
cost
|
$878
|
$780
|
|
$2,622
|
$2,339
|
|
$111
|
$174
|
|
$510
|
$524
|
Interest
cost
|
905
|
819
|
|
2,741
|
2,457
|
|
105
|
150
|
|
413
|
450
|
Expected
return on plan assets
|
(1,172)
|
(1,117)
|
|
(3,515)
|
(3,352)
|
|
0
|
0
|
|
0
|
0
|
Amortization
of unrecognized net loss
|
682
|
164
|
|
2,059
|
494
|
|
(9)
|
25
|
|
21
|
75
|
Amortization
of prior service cost
|
(27)
|
(27)
|
|
(88)
|
(82)
|
|
13
|
27
|
|
40
|
82
|
Amortization
of transition obligation
|
0
|
0
|
|
0
|
0
|
|
10
|
11
|
|
31
|
31
|
Net
periodic benefit cost
|
$1,266
|
$619
|
|
$3,819
|
$1,856
|
|
$230
|
$387
|
|
$1,015
|
$1,162
|
NOTE
H: EARNINGS PER SHARE
Basic
earnings per share are computed based on the weighted-average common shares
outstanding for the period. Diluted earnings per share are based on
the weighted-average shares outstanding adjusted for the dilutive effect of
restricted stock and the assumed exercise of stock options during the
year. The dilutive effect of options is calculated using the treasury
stock method of accounting. The treasury stock method determines the
number of common shares that would be outstanding if all the dilutive options
(those where the average market price is greater than the exercise price) were
exercised and the proceeds were used to repurchase common shares in the open
market at the average market price for the applicable time
period. There were approximately 2.5 million weighted-average
anti-dilutive stock options outstanding at September 30, 2009 compared to
approximately 1.1 million weighted-average anti-dilutive stock options
outstanding at September 30, 2008 that were not included in the computation
below. The following is a reconciliation of basic to diluted earnings
per share for the three and nine months ended September 30, 2009 and
2008.
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
(000's
omitted, except per share data)
|
2009
|
2008
|
|
2009
|
2008
|
Net
income
|
$12,455
|
$11,786
|
|
$32,075
|
$33,971
|
Income
attributable to unvested stock-based compensation awards
|
(67)
|
(48)
|
|
(165)
|
(133)
|
Income
available to common shareholders
|
$12,388
|
11,738
|
|
$31,910
|
$33,838
|
|
|
|
|
|
|
Weighted-average
common shares outstanding –basic
|
32,674
|
29,924
|
|
32,663
|
29,843
|
Basic
earnings per share
|
$0.38
|
$0.39
|
|
$0.98
|
$1.13
|
|
|
|
|
|
|
Net
income
|
$12,455
|
$11,786
|
|
$32,075
|
$33,971
|
Income
attributable to unvested stock-based compensation awards
|
(67)
|
(48)
|
|
(165)
|
(133)
|
Income
available to common shareholders
|
$12,388
|
$11,738
|
|
$31,910
|
$33,838
|
|
|
|
|
|
|
Weighted-average
common shares outstanding
|
32,674
|
29,924
|
|
32,663
|
29,843
|
Assumed
exercise of stock options
|
147
|
330
|
|
122
|
336
|
Weighted-average
shares – diluted
|
32,821
|
30,254
|
|
32,785
|
30,179
|
Diluted
earnings per share
|
$0.38
|
$0.39
|
|
$0.97
|
$1.12
|
NOTE
I: COMMITMENTS, CONTINGENT LIABILITIES AND RESTRICTIONS
The
Company is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its
customers. These financial instruments consist primarily of
commitments to extend credit and standby letters of
credit. Commitments to extend credit are agreements to lend to
customers, generally having fixed expiration dates or other termination clauses
that may require payment of a fee. These commitments consist
principally of unused commercial and consumer credit lines. Standby
letters of credit generally are contingent upon the failure of the customer to
perform according to the terms of an underlying contract with a third
party. The credit risks associated with commitments to extend credit
and standby letters of credit are essentially the same as that involved with
extending loans to customers and are subject to normal credit
policies. Collateral may be obtained based on management’s assessment
of the customer’s creditworthiness.
The
contract amount of commitments and contingencies are as follows:
(000's
omitted)
|
September
30,
2009
|
December
31,
2008
|
Commitments
to extend credit
|
$556,510
|
$523,017
|
Standby
letters of credit
|
19,763
|
13,209
|
Total
|
$576,273
|
$536,226
|
NOTE
J: FAIR VALUE
Accounting
literature allows entities an irrevocable option to measure certain financial
assets and financial liabilities at fair value. Unrealized gains and
losses on items for which the fair value option has been elected are reported in
earnings. The Company has elected to value loans held for sale at
fair value in order to more closely match the gains and losses associated with
loans held for sale with the gains and losses on forward sales
contracts. Accordingly the impact on the valuation will be recognized
in the Company’s consolidated statement of income. All mortgage loans
held for sale are current and in performing status.
Fair
value, establishes a framework for measuring fair value and expands disclosure
about such fair value instruments. It defines fair value as the price
that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date (exit
price). Inputs used to measure fair value are classified into the
following hierarchy:
· |
Level 1
– |
Quoted prices in
active markets for identical assets or liabilities. |
· |
Level 2
– |
Quoted prices in
active markets for similar assets or liabilities, or quoted prices for
identical or similar assets or liabilities in markets that are not active,
or inputs other than quoted prices that are observable for the asset or
liability. |
· |
Level 3
– |
Significant
valuation assumptions not readily observable in a
market. |
A
financial instrument’s categorization within the valuation hierarchy is based
upon the lowest level of input that is significant to the fair value
measurement. The following tables set forth the Company’s
financial assets and liabilities that were accounted for at fair value on a
recurring basis:
|
September
30, 2009
|
(000's
omitted)
|
Level
1
|
Level
2
|
Level
3
|
Total
Fair Value
|
Available-for-sale
investment securities:
|
|
|
|
|
U.S. Treasury and agency securities
|
$989
|
$336,535
|
$0
|
$337,524
|
Obligations of state and political subdivisions
|
0
|
520,804
|
0
|
520,804
|
Government guaranteed mortgage-backed securities
|
0
|
206,619
|
0
|
206,619
|
Corporate debt securities
|
0
|
37,280
|
0
|
37,280
|
Collateralized mortgage obligations
|
0
|
11,762
|
0
|
11,762
|
Pooled trust preferred securities
|
0
|
0
|
45,420
|
45,420
|
Other equity securities
|
28
|
0
|
4,215
|
4,243
|
Total
available-for-sale investment securities
|
1,017
|
1,113,000
|
49,635
|
1,163,652
|
Forward
sales contracts
|
0
|
(73)
|
0
|
(73)
|
Commitments
to originate real estate loans for sale
|
0
|
0
|
180
|
180
|
Mortgage
loans held for sale
|
0
|
519
|
0
|
519
|
Interest
rate swap
|
0
|
(5,652)
|
0
|
(5,652)
|
Total
|
$1,017
|
$1,107,794
|
$49,815
|
$1,158,626
|
|
December
31, 2008
|
(000's
omitted)
|
Level
1
|
Level
2
|
Level
3
|
Total
Fair Value
|
Available-for-sale
investment securities:
|
|
|
|
|
U.S. Treasury and agency securities
|
$1,007
|
$410,776
|
$0
|
$411,783
|
Obligations of state and political subdivisions
|
0
|
547,939
|
0
|
547,939
|
Government guaranteed mortgage-backed securities
|
0
|
192,054
|
0
|
192,054
|
Corporate debt securities
|
0
|
35,152
|
0
|
35,152
|
Collateralized mortgage obligations
|
0
|
25,700
|
0
|
25,700
|
Pooled trust preferred securities
|
0
|
0
|
49,865
|
49,865
|
Other equity securities
|
28
|
0
|
4,257
|
4,285
|
Total
available-for-sale investment securities
|
1,035
|
1,211,621
|
54,122
|
1,266,778
|
Interest
rate swap
|
0
|
(6,721)
|
0
|
(6,721)
|
Total
|
$1,035
|
$1,204,900
|
$54,122
|
$1,260,057
|
The
valuation techniques used to measure fair value for the items in the table above
are as follows:
·
|
Available
for sale investment securities – The fair value of available-for-sale
investment securities is based upon quoted prices, if
available. If quoted prices are not available, fair values are
measured using quoted market prices for similar securities or model-based
valuation techniques. Level 1 securities include U.S. Treasury
securities that are traded by dealers or brokers in active
over-the-counter markets. Level 2 securities include U.S.
agency securities, mortgage-backed securities issued by
government-sponsored entities, municipal securities and corporate debt
securities that are valued by reference to prices for similar securities
or through model-based techniques in which all significant inputs are
observable. Securities classified as Level 3 include pooled
trust preferred securities in less liquid markets. The value of
these instruments is determined using pricing models or similar techniques
as well as significant judgment or
estimation.
|
·
|
Mortgage
loans held for sale – Mortgage loans held for sale are carried at fair
value, which is determined using quoted secondary-market prices of loans
with similar characteristics and, as such, have been classified as a Level
2 valuation. The unpaid principal value of mortgage loans held
for sale at September 30, 2009 is $0.5 million. The unrealized
gain on mortgage loans held for sale of $14,000 was recognized in mortgage
banking and other income in the consolidated statement of income for the
quarter ended September 30, 2009.
|
·
|
Forward
sales contracts – The Company enters into forward sales contracts to sell
certain residential real estate loans. Such commitments are
considered to be derivative financial instruments and, therefore, are
carried at estimated fair value in the other asset or other liability
section of the consolidated balance sheet. The fair value of
these forward sales contracts is primarily measured by obtaining pricing
from certain government-sponsored entities. The pricing is
derived from market observable inputs that can generally be verified and
do not typically involve significant judgment by the Company and,
therefore, are classified as Level 2 in the fair value
hierarchy.
|
·
|
Commitments
to originate real estate loans for sale – The Company enters into various
commitments to originate residential real estate loans for
sale. Such commitments are considered to be derivative
financial instruments and, therefore, are carried at estimated fair value
in the other asset or other liability section of the consolidated balance
sheet. The estimated fair value of these commitments is
determined using quoted secondary market prices obtained from certain
government-sponsored entities. Additionally, accounting
guidance requires the expected net future cash flows related to the
associated servicing of the loan to be included in the fair value
measurement of the derivative. The expected net future cash
flows are based on a valuation model that calculates the present value of
estimated net servicing income. The valuation model
incorporates assumptions that market participants would use in estimating
future net servicing income. Such assumptions include estimates
of the cost of servicing loans, appropriate discount rate and prepayment
speeds. The determination of expected net cash flows is
considered a significant unobservable input contributing to the Level 3
classification of commitments to originate real estate loans for
sale.
|
·
|
Interest
rate swap – The Company utilizes interest rate swap agreements to modify
the repricing characteristics of certain of its interest-bearing
liabilities. The fair value of these interest rate swaps traded
in over-the-counter markets where quoted market prices are not readily
available, are measured using models for which the significant assumptions
such as yield curves and option volatilities are market observable and,
therefore, classified as Level 2 in the fair value
hierarchy.
|
The
changes in Level 3 assets measured at fair value on a recurring basis are
summarized in the following tables:
|
Three
Months Ended September 30,
|
|
2009
|
|
2008
|
(000's
omitted)
|
Pooled
trust preferred
securities
|
Other
equity securities
|
Commitments
to originate
real
estate
loans
for sale
|
Total
|
|
Pooled
trust preferred
securities
|
Other
equity securities
|
Commitments
to originate real estate
loans
for sale
|
Total
|
Beginning
balance
|
$54,561
|
$4,245
|
$142
|
$58,948
|
|
$61,982
|
$4,258
|
$0
|
$66,240
|
Total
gains included in earnings
|
28
|
0
|
0
|
28
|
|
20
|
0
|
0
|
20
|
Total
losses included in other comprehensive income
|
(8,705)
|
0
|
0
|
(8,705)
|
|
(11,503)
|
0
|
0
|
(11,503)
|
Purchases
|
0
|
12
|
0
|
12
|
|
0
|
0
|
0
|
0
|
Sales/calls/principal
reductions
|
(464)
|
(42)
|
0
|
(506)
|
|
(174)
|
(2)
|
0
|
(176)
|
Commitments
to originate real estate loans held for sale, net
|
0
|
0
|
38
|
38
|
|
0
|
0
|
0
|
0
|
Ending
balance
|
$45,420
|
$4,215
|
$180
|
$49,815
|
|
$50,325
|
$4,256
|
$0
|
$54,581
|
|
Nine
Months Ended September 30,
|
|
2009
|
|
2008
|
(000's
omitted)
|
Pooled
trust preferred
securities
|
Other
equity securities
|
Commitments
to
originate
real
estate
loans
for sale
|
Total
|
|
Pooled
trust preferred
securities
|
Other
equity securities
|
Commitments
to
originate
real
estate
loans
for sale
|
Total
|
Beginning
balance
|
$49,865
|
$4,261
|
$0
|
$54,126
|
|
$72,300
|
$5,054
|
$0
|
$77,354
|
Total
gains (losses) included in earnings
|
81
|
0
|
0
|
81
|
|
58
|
(14)
|
0
|
44
|
Total
losses included in other comprehensive income
|
(3,286)
|
0
|
0
|
(3,286)
|
|
(21,652)
|
0
|
0
|
(21,652)
|
Purchases
|
0
|
54
|
0
|
54
|
|
0
|
34
|
0
|
34
|
Sales/calls/principal
reductions
|
(1,240)
|
(100)
|
0
|
(1,340)
|
|
(381)
|
(818)
|
0
|
(1,199)
|
Commitments
to originate real estate loans held for sale, net
|
0
|
0
|
180
|
180
|
|
0
|
0
|
0
|
0
|
Ending
balance
|
$45,420
|
$4,215
|
$180
|
$49,815
|
|
$50,325
|
4,256
|
$0
|
$54,581
|
Assets
and liabilities measured on a non-recurring basis:
|
September
30, 2009
|
|
December
31, 2008
|
(000's
omitted)
|
Level
1
|
Level
2
|
Level
3
|
Total
Fair Value
|
|
Level
1
|
Level
2
|
Level
3
|
Total
Fair Value
|
Impaired
loans
|
$0
|
$0
|
$2,650
|
$2,650
|
|
$0
|
$0
|
$850
|
$850
|
Goodwill
|
n/a
|
n/a
|
n/a
|
n/a
|
|
0
|
0
|
5,579
|
5,579
|
Mortgage
servicing rights
|
0
|
0
|
1,376
|
1,376
|
|
n/a
|
n/a
|
n/a
|
n/a
|
Total
|
$0
|
$0
|
$4,026
|
$4,026
|
|
$0
|
$0
|
$6,429
|
$6,429
|
Originated
mortgage servicing rights are recorded at their fair value at the time of sale
of the underlying loan, and are amortized in proportion to and over the period
of estimated net servicing income. In accordance with GAAP, the
Company must record impairment charges, on a nonrecurring basis, when the
carrying value of certain strata exceed their estimated fair
value. The fair value of mortgage servicing rights is based on a
valuation model incorporating inputs that market participants would use in
estimating future net servicing income. Such inputs include estimates
of the cost of servicing loans, appropriate discount rate and prepayment
speeds. The amount of impairment recognized is the amount by which
the carrying value of the capitalized servicing rights for a stratum exceed
estimated fair value. Impairment is recognized through a valuation
allowance. Due primarily to an increase in the cost of servicing and
an increase in the expected prepayment speed of the Company’s sold loan
portfolio with servicing retained, the fair value of the Company’s mortgage
servicing rights declined during the three quarters of 2009. As a
result of this decline, the Company established a valuation allowance of $0.3
million at September 30, 2009. These inputs are
considered to be unobservable and contribute to the Level 3 classification of
mortgage servicing rights.
Loans are
generally not recorded at fair value on a recurring
basis. Periodically, the Company records nonrecurring adjustment to
the carrying value of loans based on fair value measurements for partial
charge-offs of the uncollectible portions of those
loans. Nonrecurring adjustments also include certain impairment
amounts for collateral-dependent loans calculated when establishing the
allowance for credit losses. Such amounts are generally based on the fair value
of the underlying collateral supporting the loan and, as a result, the carrying
value of the loan less the calculated valuation amount does not necessarily
represent the fair value of the loan. Real estate collateral is typically valued
using independent appraisals or other indications of value based on recent
comparable sales of similar properties or assumptions generally observable in
the marketplace, adjusted based on non-observable inputs and the related
nonrecurring fair value measurement adjustments and have generally been
classified as Level 3. Estimates of fair value used for other collateral
supporting commercial loans generally are based on assumptions not observable in
the marketplace and, therefore, such valuations have been classified as Level
3.
The
Company evaluates goodwill for impairment on an annual basis, or more often if
events or circumstances indicate there may be impairment. The fair
value of each reporting unit is compared to the carrying amount of that
reporting unit in order to determine if impairment is indicated. If
so, the implied fair value of the reporting units’ goodwill is compared to its
carrying amount and the impairment loss is measured by the excess of the
carrying value of the goodwill over fair value of the goodwill. In
such situations, the Company performs a discounted cash flow modeling technique
that requires management to make estimates regarding the amount and timing of
expected future cash flows of the assets and liabilities of the reporting unit
that enable the Company to calculate the implied fair value of the
goodwill. It also requires use of a discount rate that reflects the
current return requirement of the market in relation to present risk-free
interest rates, required equity market premiums and company-specific risk
indicators. As a result of the significant declines the equity
markets experienced in 2008, management determined a triggering event had
occurred and the goodwill associated with Nottingham Advisors, one of the
Company’s wealth management businesses, was tested for impairment during the
fourth quarter of 2008. Based on the goodwill valuation performed in
the fourth quarter of 2008 using Level 3 inputs, the Company recognized an
impairment charge and wrote down the carrying value of the goodwill by $1.7
million to $5.6 million.
The
Company determines fair values based on quoted market values where available or
on estimates using present values or other valuation
techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not
be realized in immediate settlement of the instrument. Certain
financial instruments and all nonfinancial instruments are excluded from fair
value disclosure requirements. Accordingly, the aggregate fair value
amounts presented do not represent the underlying value of the
Company. The fair value of investment securities has been disclosed
in footnote D. The carrying amounts and estimated fair values of the
Company’s other financial instruments at September 30, 2009 and December 31,
2008 are as follows:
|
|
September
30, 2009
|
|
December
31, 2008
|
|
|
Carrying
|
Fair
|
|
Carrying
|
Fair
|
(000's
omitted)
|
|
Value
|
Value
|
|
Value
|
Value
|
Financial
assets:
|
|
|
|
|
|
|
Net
loans
|
|
$3,046,021
|
$3,075,321
|
|
$3,096,565
|
$3,135,832
|
Financial
liabilities:
|
|
|
|
|
|
|
Deposits
|
|
3,888,245
|
3,905,998
|
|
3,700,812
|
3,719,557
|
Borrowings
|
|
756,442
|
838,745
|
|
760,558
|
869,162
|
Subordinated
debt held by unconsolidated subsidiary trusts
|
|
101,993
|
76,486
|
|
101,975
|
61,409
|
The
following is a further description of the principal valuation methods used by
the Company to estimate the fair values of its financial
instruments.
Loans –
Fair values for variable rate loans that reprice frequently are based on
carrying values. Fair values for fixed rate loans are estimated using
discounted cash flows and interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. The allowance
for loan losses is considered a reasonable discount for credit
risk.
Deposits
– The fair value of demand deposits, interest-bearing checking deposits, savings
accounts and money market deposits is the amount payable on demand at the
reporting date. The fair value of time deposit obligations are based
on current market rates for similar products.
Borrowings
- Fair values for long-term borrowings are estimated using discounted cash flows
and interest rates currently being offered on similar borrowings.
Subordinated
debt held by unconsolidated subsidiary trusts - The fair value of subordinated
debt held by unconsolidated subsidiary trusts are estimated using discounted
cash flows and interest rates currently being offered on similar
securities.
Other
financial assets and liabilities – Cash and cash equivalents, accrued interest
receivable and accrued interest payable have fair values which approximate the
respective carrying values because the instruments are payable on demand or have
short-term maturities and present relatively low credit risk and interest rate
risk.
NOTE
K: SEGMENT INFORMATION
Operating
segments are components of an enterprise, which are evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and assess
performance. The Company’s chief operating decision maker is the
President and Chief Executive Officer of the Company. The Company has identified
“Banking” as its reportable operating business segment. The Banking
segment provides full-service banking to consumers, businesses and governmental
units in northern, central and western New York as well as northeastern
Pennsylvania.
Immaterial
operating segments of the Company’s operations, which do not have similar
characteristics to the banking segment and do not meet the quantitative
thresholds requiring disclosure, are included in the “Other”
category. Revenues derived from these segments includes
administration, consulting and actuarial services provided to sponsors of
employee benefit plans, broker-dealer and investment advisory services, asset
management services to individuals, corporate pension and profit sharing plans,
trust services and insurance commissions from various insurance related products
and services. The accounting policies used in the disclosure of
business segments are the same as those described in the summary of significant
accounting policies (See Note A, Summary of Significant Accounting
Policies of the most recent Form 10-K for the year ended December 31,
2008 filed with the SEC on March 13, 2009).
Information
about reportable segments and reconciliation of the information to the
consolidated financial statements follows:
|
For
the Three Months Ended
|
|
September
30, 2009
|
|
September
30, 2008
|
(000's
omitted)
|
Banking
|
Other
|
Consolidated
Total
|
|
Banking
|
Other
|
Consolidated
Total
|
|
|
|
|
|
|
|
|
Net
interest income
|
$41,825
|
$27
|
$41,852
|
|
$37,022
|
$51
|
$37,073
|
Provision
for loan losses
|
2,375
|
0
|
2,375
|
|
1,985
|
0
|
1,985
|
Noninterest
income excluding gain on investment securities and debt
extinguishments
|
11,567
|
9,239
|
20,806
|
|
9,775
|
9,608
|
19,383
|
Gain
on investment securities
|
7
|
0
|
7
|
|
0
|
0
|
0
|
Amortization
of intangible assets
|
1,787
|
239
|
2,026
|
|
1,438
|
289
|
1,727
|
Other
operating expenses
|
34,143
|
7,942
|
42,085
|
|
30,051
|
7,478
|
37,529
|
Income
before income taxes
|
$15,094
|
$1,085
|
$16,179
|
|
$13,323
|
$1,892
|
$15,215
|
|
For
the Nine Months Ended
|
|
September
30, 2009
|
|
September
30, 2008
|
|
Banking
|
Other
|
Consolidated
Total
|
|
Banking
|
Other
|
Consolidated
Total
|
Net
interest income
|
$122,499
|
$53
|
$122,552
|
|
$107,930
|
$181
|
$108,111
|
Provision
for loan losses
|
7,200
|
0
|
7,200
|
|
4,335
|
0
|
4,335
|
Noninterest
income excluding gain on investment securities and debt
extinguishments
|
34,000
|
27,811
|
61,811
|
|
27,158
|
27,262
|
54,420
|
Gain
on investment securities
|
7
|
0
|
7
|
|
230
|
0
|
230
|
Amortization
of intangible assets
|
5,479
|
755
|
6,234
|
|
4,394
|
509
|
4,903
|
Other
operating expenses
|
105,625
|
24,136
|
129,761
|
|
88,507
|
21,175
|
109,682
|
Income
before income taxes
|
$38,202
|
$2,973
|
$ 41,175
|
|
$38,082
|
$5,759
|
$ 43,841
|
|
|
|
|
|
|
|
|
Assets
|
$5,337,472
|
$40,623
|
$5,378,095
|
|
$4,722,300
|
$44,219
|
$4,766,519
|
Goodwill
|
$287,411
|
$13,347
|
$300,758
|
|
$221,361
|
$14,362
|
$235,723
|
NOTE
L: DERIVATIVE INSTRUMENTS
The
Company is party to derivative financial instruments in the normal course of its
business to meet the financing needs of its customers and to manage its own
exposure to fluctuations in interest rates. These financial
instruments have been limited to interest rate swap agreements, commitments to
originate real estate loans held for sale and forward sales
commitments. The Company does not hold or issue derivative financial
instruments for trading or other speculative purposes.
The
Company enters into forward sales commitments for the future delivery of
residential mortgage loans, and interest rate lock commitments to fund loans at
a specified interest rate. The forward sales commitments are utilized
to reduce interest rate risk associated with interest rate lock commitments and
loans held for sale. Changes in the estimated fair value of the
forward sales commitments and interest rate lock commitments subsequent to
inception are based on changes in the fair value of the underlying loan
resulting from the fulfillment of the commitment and changes in the probability
that the loan will fund within the terms of the commitment, which is affected
primarily by changes in interest rates and the passage of time. At
inception and during the life of the interest rate lock commitment, the Company
includes the expected net future cash flows related to the associated servicing
of the loan as part of the fair value measurement of the interest rate lock
commitments. These derivatives are recorded at fair
value.
The
Company utilizes interest rate swap agreements as part of the management of
interest rate risk to modify the repricing characteristics of certain of its
borrowings. The interest rate swap has been designated as a
qualifying cash flow hedge. See further details of interest rate swap
agreements in Note H to the consolidated financial statements as of December 31,
2008.
The
following table presents the Company’s derivative financial instruments, their
estimated fair values, and balance sheet location as of September 30,
2009:
|
As
of September 30, 2009
|
|
|
Asset
Derivatives
|
|
Liability
Derivatives
|
|
(000's
omitted)
|
Location
|
Notional
|
Fair
Value
|
|
Location
|
Notional
|
Fair
Value
|
|
Derivatives
designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Interest
rate swap agreement
|
|
|
|
|
Other
liabilities
|
($75,000)
|
($5,652)
|
|
Derivatives
not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Commitments
to originate real estate loans for sale
|
Other
assets
|
$8,004
|
$180
|
|
|
|
|
|
Forward
sales contracts
|
|
|
|
|
Other
liabilities
|
($5,886)
|
(73)
|
|
Total
derivatives
|
|
|
$180
|
|
|
|
($5,725)
|
|
The
following table presents the Company’s derivative financial instruments and the
location of the net gain or loss recognized in the statement of income for the
three and nine months ended September 30, 2009:
|
|
|
Gain/(Loss)
Recognized in the Statement of Income
|
(000's
omitted)
|
Location
|
|
Three
Months Ending September 30, 2009
|
|
Nine
Months Ending September 30, 2009
|
Interest
rate swap agreement
|
Interest
on subordinated debt held by unconsolidated subsidiary
trusts
|
|
($806)
|
|
($2,035)
|
Interest
rate lock commitments
|
Mortgage
banking and other services
|
|
38
|
|
180
|
Forward
sales commitments
|
Mortgage
banking and other services
|
|
(247)
|
|
(73)
|
Total
|
|
|
($1,015)
|
|
($1,928)
|
The
amount of gain (loss) recognized during the three and nine months ended
September 30, 2009 in other comprehensive income related to the interest rate
swap accounted for as a hedging instrument was approximately ($69,000) and
$658,000, respectively. The amount of loss reclassified from
accumulated other comprehensive income into income (effective portion) amounted
to $806,000 and $2,035,000 for the three and nine months ending September 30,
2009, respectively, and is located in interest expense on subordinated debt held
by unconsolidated trusts.
Item
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
Introduction
This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations (“MD&A”) primarily reviews the financial condition and results of
operations of Community Bank System, Inc. (the “Company” or “CBSI”) as of and
for the three and nine months ended September 30, 2009 and 2008, although in
some circumstances the second quarter of 2009 is also discussed in order to more
fully explain recent trends. The following discussion and analysis
should be read in conjunction with the Company's Consolidated Financial
Statements and related notes that appear on pages 3 through 21. All
references in the discussion to the financial condition and results of
operations are to those of the Company and its subsidiaries taken as a
whole.
Unless
otherwise noted, the term “this year” refers to results in calendar year 2009,
“third quarter” refers to the quarter ended September 30, 2009, earnings per
share (“EPS”) figures refer to diluted EPS, and net interest income and net
interest margin are presented on a fully tax-equivalent (“FTE”)
basis.
This
MD&A contains certain forward-looking statements with respect to the
financial condition, results of operations and business of the
Company. These forward-looking statements involve certain risks and
uncertainties. Factors that may cause actual results to differ
materially from those proposed by such forward-looking statements are set herein
under the caption, “Forward-Looking Statements,” on page 38.
Critical Accounting
Policies
As a
result of the complex and dynamic nature of the Company’s business, management
must exercise judgment in selecting and applying the most appropriate accounting
policies for its various areas of operations. The policy decision
process not only ensures compliance with the latest generally accepted
accounting principles (“GAAP”), but also reflects management’s discretion with
regard to choosing the most suitable methodology for reporting the Company’s
financial performance. It is management’s opinion that the accounting
estimates covering certain aspects of the business have more significance than
others due to the relative importance of those areas to overall performance, or
the level of subjectivity in the selection process. These estimates
affect the reported amounts of assets and liabilities and disclosures of
revenues and expenses during the reporting period. Actual results
could differ from those estimates. Management believes that critical
accounting estimates include:
·
|
Allowance
for loan losses - The allowance for loan losses reflects management’s best
estimate of probable losses inherent in the loan
portfolio. Determination of the allowance is inherently
subjective. It requires significant estimates including the
amounts and timing of expected future cash flows on impaired loans and the
amount of estimated losses on pools of homogeneous loans which is based on
historical loss experience and consideration of current economic and
portfolio trends, all of which may be susceptible to significant
change.
|
·
|
Investment
securities - Investment securities are classified as held-to-maturity,
available-for-sale, or trading. The appropriate classification
is based partially on the Company’s ability to hold the securities to
maturity and largely on management’s intentions with respect to either
holding or selling the securities. The classification of
investment securities is significant since it directly impacts the
accounting for unrealized gains and losses on
securities. Unrealized gains and losses on available-for-sale
securities are recorded in accumulated other comprehensive income or loss,
as a separate component of shareholders’ equity and do not affect earnings
until realized. The fair values of the investment securities
are generally determined by reference to quoted market prices, where
available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments, or a
discounted cash flow model using market estimates of interest rates and
volatility. Investment securities with significant declines in
fair value are evaluated to determine whether they should be considered
other-than–temporarily impaired. An unrealized loss is
generally deemed to be other-than-temporary and a credit loss is deemed to
exist if the present value of the expected future cash flows is less than
the amortized cost basis of the debt security. The credit loss
component of an other-than-temporary impairment write-down is recorded in
earnings, while the remaining portion of the impairment loss is recognized
in other comprehensive income (loss), provided the Company does not intend
to sell the underlying debt security and it is not more likely than not
that the Company will be required to sell the debt security prior to
recovery.
|
·
|
Actuarial
assumptions associated with pension, post-retirement and other employee
benefit plans - These assumptions include discount rate, rate of future
compensation increases and expected return on plan
assets.
|
·
|
Provision
for income taxes - The Company is subject to examinations from various
taxing authorities. Such examinations may result in challenges
to the tax return treatment applied by the Company to specific
transactions. Management believes that the assumptions and
judgments used to record tax related assets or liabilities have been
appropriate. Should tax laws change or the taxing authorities
determine that management’s assumptions were inappropriate, an adjustment
may be required which could have a material effect on the Company’s
results of operations.
|
·
|
Carrying
value of goodwill and other intangible assets - The carrying value of
goodwill and other intangible assets is based upon discounted cash flow
modeling techniques that require management to make estimates regarding
the amount and timing of expected future cash flows. It also
requires use of a discount rate that reflects the current return
requirements of the market in relation to present risk-free interest
rates, required equity market premiums and company-specific risk
indicators.
|
A summary
of the accounting policies used by management is disclosed in Note A, “Summary
of Significant Accounting Policies” on pages
49-54 of the most recent Form 10-K (fiscal year ended December 31, 2008) filed
with the Securities and Exchange Commission on March 13, 2009.
Executive
Summary
The
Company’s business philosophy is to operate as a community bank with local
decision-making, principally in non-metropolitan markets, providing a broad
array of banking and financial services to retail, commercial and municipal
customers.
The
Company’s core operating objectives are: (i) grow the branch network, primarily
through a disciplined acquisition strategy, and certain selective de novo
expansions, (ii) build high-quality, profitable loan and deposit portfolios
using both organic and acquisition strategies, (iii) increase the noninterest
income component of total revenues through development of banking-related fee
income, growth in existing financial services business units, and the
acquisition of additional financial services and banking businesses, and (iv)
utilize technology to deliver customer-responsive products and services and
reduce operating costs.
Significant
factors management reviews to evaluate achievement of the Company’s operating
objectives and its operating results and financial condition include, but are
not limited to: net income and earnings per share, return on assets and equity,
net interest margins, noninterest income, operating expenses, asset quality,
loan and deposit growth, capital management, performance of individual banking
and financial services units, liquidity and interest rate sensitivity,
enhancements to customer products and services, technology advancements, market
share, peer comparisons, and the performance of acquisition and integration
activities.
On
November 7, 2008, the Company acquired 18 branch-banking centers in northern New
York from Citizens Financial Group, Inc. (“Citizens”) in an all cash
transaction. The Company acquired approximately $109 million in loans
and $565 million in deposits at a blended deposit premium of 13%. The
results of operations for the 18 branches acquired from Citizens have been
included in the consolidated financial statements since that date. In
support of the transaction, the Company raised approximately $50 million of
equity capital in the form of common stock in October 2008.
On July
7, 2008, Benefit Plans Administrative Services, Inc. (“BPAS”), a wholly owned
subsidiary of the company, acquired the Philadelphia division of Alliance
Benefit Group MidAtlantic (“ABG”) from BenefitStreet, Inc. in an all cash
transaction. ABG provides retirement plan consulting, daily valuation
administration, actuarial and ancillary support services. The results
of ABG’s operations have been included in the consolidated financial statements
since that date.
Third
quarter and September year-to-date 2009 net income of $12.5 million and $32.1
million, respectively, was $0.7 million or 5.7% higher and $1.9 million or 5.6%
lower than the respective prior year periods. Earnings per share were
$0.38 and $0.97 for the three and nine months ended September 30, 2009,
respectively, a decrease of $0.01 and $0.15, from the equivalent prior year
periods. Higher operating expenses, principally from acquisitions
completed in 2008, significantly higher FDIC insurance assessments, and higher
loan loss provisions were partially offset by higher net interest income
generated through organic and acquired growth of both loans and core deposits,
and higher noninterest income. Third quarter and year-to-date 2009
results included the incurrence of an additional $1.0 million and $6.0 million,
respectively, of FDIC-insurance related assessments, or $0.02 and $0.14 per
share, respectively, above the three and nine month periods of
2008. Excluding these additional assessments, earnings per share for
the quarter were $0.01 higher than the reported results from last year’s third
quarter.
Asset
quality in the third quarter of 2009 remained stable, and favorable as compared
to peer financial organizations. Loan charge-offs declined from both
the third quarter of 2008, as well as the previous quarters of
2009. Nonperforming loan and delinquency ratios and the provision for
loan losses were up versus the third quarter of 2008, but they continue to be
below long-term historical levels. The Company experienced
year-over-year loan growth in the consumer installment and business lending
portfolios, due to organic and acquired growth. The investment
portfolio, including cash equivalents, increased as compared to both the third
quarter of 2008 and June 30, 2009 due to the net liquidity created from the
acquisition of Citizens in the fourth quarter of 2008 and organic deposit
growth. Average deposits increased in the third quarter of 2009 as
compared to both the second quarter of 2009 and the third quarter of 2008,
reflective of the Citizens acquisition and organic growth in core
deposits. External borrowings decreased from the third quarter of
2008 and remained consistent with the second quarter of 2009.
Net Income and
Profitability
As shown
in Table 1, net income for the third quarter of $12.5 million increased $0.7
million or 5.7% versus the third quarter of 2008. September
year-to-date net income of $32.1 million declined $1.9 million or 5.6% as
compared to the first nine months of 2008. Earnings per share for the
third quarter and September year-to-date periods of $0.38 and $0.97,
respectively, declined 2.6% and 13.4% versus the comparable periods of
2008. As compared to the second quarter of 2009, net income increased
$3.3 million or 36% and earnings per share increased $0.10 or 36%.
Third
quarter net interest income of $41.9 million was up $4.8 million or 13% from the
comparable prior year period and net interest income for the first nine months
of 2009 increased $14.4 million or 13% over the first nine months of
2008. The current quarter’s provision for loan losses increased $0.4
million as compared to the third quarter of 2008 and increased $2.9 million for
the first nine months of 2009 as compared to the same period of 2008, reflective
of a continued higher level of net charge-offs and the general deteriorating
economic conditions. Third quarter noninterest income, excluding
securities gains and losses, was $20.8 million, up $1.4 million or 7.3% from the
third quarter of 2008, while year-to-date noninterest income of $61.8 million
increased $7.4 million or 14% from the prior year level. Operating
expenses of $44.1 million for the quarter and $136.0 million for the first nine
months of 2009 were up $4.9 million or 12% and $21.4 million or 19%,
respectively, from the comparable prior year periods. A significant
portion of the increase was attributable to the acquisitions of ABG and Citizens
during the third and fourth quarters of 2008, as well as higher FDIC insurance
assessments due to significant increases in premium rates and the special
assessment in the second quarter of 2009, as well as an increase in pension
costs.
As
reflected in Table 1, the primary reasons for higher earnings in the quarter
were higher noninterest income and net interest income partially offset by
higher operating expenses and loan loss provision. Earnings per share
declined slightly due to the higher number of shares outstanding which was
mostly driven by the equity offering in the fourth quarter of
2008. For the nine months ended September 30, 2009, the primary
reason for lower earnings were higher operating expenses and loan loss
provision, partially offset by higher net interest income and noninterest
income. Net interest income for the third quarter and year-to-date
period increased as compared to the comparable periods of 2008 as a result of
acquired and organic loan growth and increased levels of investments including
cash equivalents, partially offset by a lower net interest
margin. Excluding security gains and losses, noninterest income
increased due to increased activity in the secondary mortgage banking business,
growth in the Company’s employee benefits consulting and plan administration
business, mostly as a result of the acquisition of ABG, as well as higher
banking service fees and debit card related revenues from the acquired
branches. Higher net charge-offs and generally unfavorable economic
trends were the primary reasons for the increase in 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 FDIC insurance assessments and
higher pension costs related to the underlying asset performance in
2008.
A
condensed income statement is as follows:
Table
1: Summary Income Statements
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
September
30,
|
|
September
30,
|
(000's
omitted, except per share data)
|
|
2009
|
2008
|
|
2009
|
2008
|
Net
interest income
|
|
$41,852
|
$37,073
|
|
$122,552
|
$108,111
|
Provision
for loan losses
|
|
2,375
|
1,985
|
|
7,200
|
4,335
|
Noninterest
income excluding security gains/losses
|
|
20,806
|
19,383
|
|
61,811
|
54,420
|
Gain
on sales of investment securities
|
|
7
|
0
|
|
7
|
230
|
Operating
expenses
|
|
44,111
|
39,256
|
|
135,995
|
114,585
|
Income
before taxes
|
|
16,179
|
15,215
|
|
41,175
|
43,841
|
Income
taxes
|
|
3,724
|
3,429
|
|
9,100
|
9,870
|
Net
income
|
|
$12,455
|
$11,786
|
|
$32,075
|
$33,971
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$0.38
|
$0.39
|
|
$0.97
|
$1.12
|
Net Interest
Income
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 the Company's 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 2a, net interest income (with nontaxable income converted to a fully
tax-equivalent basis) for the third quarter of 2009 was $45.8 million, a $5.1
million increase from the same period last year. A $554 million
increase in third quarter interest-earning assets versus the prior year had a
greater impact than the $438 million increase in average interest-bearing
liabilities and a four-basis point decrease in the net interest
margin. As reflected in Table 3, the volume increase from interest
bearing assets and the rate decrease on interest bearing liabilities had a $15.5
million favorable impact on net interest income, while the volume increase from
interest bearing liabilities and rate decrease on interest bearing assets had a
$10.4 million unfavorable impact on net interest income. The
lower yields on interest bearing assets had a greater unfavorable impact on net
interest margin than the decrease in the cost of
funding. September YTD net interest income of $134.4 million
increased $15.0 million or 13% from the year-earlier period. A $560
million increase in interest bearing assets more than offset a $462 million
increase in interest bearing liabilities and a two-basis point decrease in the
net interest margin. The increase in interest earning assets and the
lower rate on interest bearing liabilities had a $47.5 million favorable impact
that was partially offset by a $32.5 million unfavorable impact from the
decrease in the rate on interest bearing assets and the increase in
interest-bearing liability balances.
Higher
third quarter and September year-to-date average loan balances were attributable
to $111 million of loans acquired in the Citizens acquisition and organic growth
in the business lending and consumer installment portfolios. As
compared to the second quarter of 2009, average loans declined $22.8 million
primarily from continued principal amortization in the Company’s consumer
mortgage and home equity portfolios, combined with its decision to sell the
majority of its longer-term, lower rate mortgage originations in the quarter and
year-to-date periods. Average investments and cash equivalents for
the third quarter and YTD periods were $435 million and $336 million higher than
the respective periods of 2008, reflective of the net liquidity generated from
the Citizens acquisition and organic deposit growth. In comparison to
the prior year, total average deposits were up $624 million or 19% for the
quarter primarily as a result of the November 2008 acquisition of Citizens,
which included $565 million of deposits at the date of
acquisition. On an organic basis, average interest bearing deposits
for the third quarter increased $59 million from the third quarter of
2008. Organic growth in average noninterest bearing deposits was $47
million over the third quarter of 2008. Quarterly average borrowings
decreased $67.9 million as compared to the third quarter of 2008 as a portion of
the net liquidity from the branch acquisition was used to eliminate short-term
borrowings.
The net
interest margin of 3.78% for both the third quarter and year-to-date periods
decreased four basis points and two basis points, respectively, versus the same
periods in the prior year. The decline was primarily attributable to
a 69-basis point decrease in the earning asset yield for both the quarter and
year-to-date periods, as compared to the prior year periods. The
decrease in the earning asset yield is due to a 123-basis point and 108-basis
point decline in the investment yields for the third quarter and YTD periods,
respectively and a 35-basis point and 46-basis point decline in the loan yields
for the third quarter and YTD periods, respectively, as compared to the like
periods of 2008. The change in the earning-asset yield is
primarily a result of variable and adjustable-rate loans repricing downward and
lower rates on fixed rate new loan volume due to the decline in interest rates
to levels below those prevalent in prior years, as well as the Company’s
increased holdings of lower yielding cash instruments as it maintains a liquid
position in anticipation of improved investment opportunities in future
periods.
Partially
offsetting these declines was a 68-basis point and a 69-basis point decline in
the cost of funds for the quarter and year-to-date periods, respectively, as
compared to the same periods of 2008. The third quarter cost of funds
decreased 68 basis points versus the prior year quarter due to a 88-basis point
decrease in interest-bearing deposit rates and a seven-basis point decrease in
the average interest rate paid on external borrowings. The decreased
cost of funds was reflective of disciplined deposit pricing, whereby interest
rates on selected categories of deposit accounts were lowered throughout 2008
and the first nine months of 2009 in response to market
conditions. Additionally, the proportion of customer deposits in
higher cost time deposits has declined 7.0 percentage points over the last
twelve months, while the percentage of deposits in non-interest bearing and
lower cost checking accounts has increased. The rate paid on
long-term borrowings was impacted by the approximately 230 basis point decrease
in the three-month LIBOR (London Interbank Offered Rates) over the last twelve
months, from which the interest rate on $25 million of the mandatorily
redeemable preferred securities is based.
Tables 2a
and 2b 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 38.46% in 2009 and
38.49% in 2008. 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
2a: Quarterly Average Balance Sheet
|
Three
Months Ended
|
|
Three
Months Ended
|
|
September
30, 2009
|
|
September
30, 2008
|
|
|
|
Avg.
|
|
|
|
Avg.
|
|
Average
|
|
Yield/Rate
|
|
Average
|
|
Yield/Rate
|
(000's omitted except yields
and rates)
|
Balance
|
Interest
|
Paid
|
|
Balance
|
Interest
|
Paid
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
Cash
equivalents
|
$292,545
|
$200
|
0.27%
|
|
$4,320
|
$24
|
2.18%
|
Taxable
investment securities (1)
|
864,478
|
9,914
|
4.55%
|
|
766,582
|
9,811
|
5.09%
|
Nontaxable
investment securities
(1)
|
560,615
|
9,532
|
6.75%
|
|
511,299
|
8,758
|
6.81%
|
Loans
(net of unearned discount)
|
3,082,495
|
46,183
|
5.94%
|
|
2,963,504
|
46,866
|
6.29%
|
Total
interest-earning assets
|
4,800,133
|
65,829
|
5.44%
|
|
4,245,705
|
65,459
|
6.13%
|
Noninterest-earning
assets
|
549,629
|
|
|
|
466,718
|
|
|
Total
assets
|
$5,349,762
|
|
|
|
$4,712,423
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
Interest
checking, savings and money market deposits
|
$1,873,536
|
2,702
|
0.57%
|
|
$1,348,288
|
2,691
|
0.79%
|
Time
deposits
|
1,290,860
|
7,910
|
2.43%
|
|
1,310,393
|
12,070
|
3.66%
|
Short-term
borrowings
|
593,385
|
6,415
|
4.29%
|
|
477,139
|
4,644
|
3.87%
|
Long-term
borrowings
|
265,120
|
3,009
|
4.50%
|
|
449,292
|
5,336
|
4.72%
|
Total
interest-bearing liabilities
|
4,022,901
|
20,036
|
1.98%
|
|
3,585,112
|
24,741
|
2.75%
|
Noninterest-bearing
liabilities:
|
|
|
|
|
|
|
|
Demand
deposits
|
708,430
|
|
|
|
590,098
|
|
|
Other
liabilities
|
58,669
|
|
|
|
49,964
|
|
|
Shareholders'
equity
|
559,762
|
|
|
|
487,249
|
|
|
Total
liabilities and shareholders' equity
|
$5,349,762
|
|
|
|
$4,712,423
|
|
|
|
|
|
|
|
|
|
|
Net
interest earnings
|
|
$45,793
|
|
|
|
$40,718
|
|
Net
interest spread
|
|
|
3.46%
|
|
|
|
3.38%
|
Net
interest margin on interest-earnings assets
|
|
|
3.78%
|
|
|
|
3.82%
|
|
|
|
|
|
|
|
|
Fully
tax-equivalent adjustment
|
|
$3,941
|
|
|
|
$3,645
|
|
(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
2b: Year-to-Date Average Balance Sheet
|
Nine
Months Ended
|
|
Nine
Months Ended
|
|
September
30, 2009
|
|
September
30, 2008
|
|
|
|
Avg.
|
|
|
|
Avg.
|
|
Average
|
|
Yield/Rate
|
|
Average
|
|
Yield/Rate
|
(000's omitted except yields
and rates)
|
Balance
|
Interest
|
Paid
|
|
Balance
|
Interest
|
Paid
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
Cash
equivalents
|
$254,935
|
$499
|
0.26%
|
|
$25,983
|
$482
|
2.48%
|
Taxable
investment securities (1)
|
833,708
|
30,445
|
4.88%
|
|
760,567
|
30,303
|
5.32%
|
Nontaxable
investment securities
(1)
|
559,417
|
28,489
|
6.81%
|
|
525,530
|
27,154
|
6.90%
|
Loans
(net of unearned discount)
|
3,109,210
|
139,340
|
5.99%
|
|
2,885,267
|
139,375
|
6.45%
|
Total
interest-earning assets
|
4,757,270
|
198,773
|
5.59%
|
|
4,197,347
|
197,314
|
6.28%
|
Noninterest-earning
assets
|
542,579
|
|
|
|
467,623
|
|
|
Total
assets
|
$5,299,849
|
|
|
|
$4,664,970
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
Interest
checking, savings and money market deposits
|
$1,789,844
|
8,616
|
0.64%
|
|
$1,304,616
|
7,926
|
0.81%
|
Time
deposits
|
1,367,146
|
27,653
|
2.70%
|
|
1,356,937
|
40,569
|
3.99%
|
Short-term
borrowings
|
555,126
|
17,691
|
4.26%
|
|
441,347
|
13,321
|
4.03%
|
Long-term
borrowings
|
304,608
|
10,430
|
4.58%
|
|
451,971
|
16,108
|
4.76%
|
Total
interest-bearing liabilities
|
4,016,724
|
64,390
|
2.14%
|
|
3,554,871
|
77,924
|
2.93%
|
Noninterest-bearing
liabilities:
|
|
|
|
|
|
|
|
Demand
deposits
|
677,323
|
|
|
|
569,764
|
|
|
Other
liabilities
|
53,753
|
|
|
|
53,851
|
|
|
Shareholders'
equity
|
552,049
|
|
|
|
486,484
|
|
|
Total
liabilities and shareholders' equity
|
$5,299,849
|
|
|
|
$4,664,970
|
|
|
|
|
|
|
|
|
|
|
Net
interest earnings
|
|
$134,383
|
|
|
|
$119,390
|
|
Net
interest spread
|
|
|
3.45%
|
|
|
|
3.35%
|
Net
interest margin on interest-earnings assets
|
|
|
3.78%
|
|
|
|
3.80%
|
|
|
|
|
|
|
|
|
Fully
tax-equivalent adjustment
|
|
$11,831
|
|
|
|
$11,279
|
|
(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 3 below, the quarterly change in net
interest income (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
3: Rate/Volume
|
3rd
Quarter 2009 versus 3rd
Quarter 2008
|
|
Nine
Months Ended September 30, 2009 versus September 30,
2008
|
|
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
|
$215
|
($39)
|
$176
|
|
$798
|
($781)
|
$17
|
Taxable
investment securities
|
1,181
|
(1,079)
|
102
|
|
2,783
|
(2,641)
|
142
|
Nontaxable
investment securities
|
840
|
(65)
|
775
|
|
1,729
|
(395)
|
1,334
|
Loans
(net of unearned discount)
|
1,839
|
(2,522)
|
(683)
|
|
10,413
|
(10,448)
|
(35)
|
Total
interest-earning assets
(2)
|
8,036
|
(7,666)
|
370
|
|
24,725
|
(23,267)
|
1,458
|
|
|
|
|
|
|
|
|
Interest
paid on:
|
|
|
|
|
|
|
|
Interest
checking, savings and money market deposits
|
879
|
(868)
|
11
|
|
2,555
|
(1,865)
|
690
|
Time
deposits
|
(177)
|
(3,983)
|
(4,160)
|
|
303
|
(13,219)
|
(12,916)
|
Short-term
borrowings
|
1,217
|
554
|
1,771
|
|
3,593
|
777
|
4,370
|
Long-term
borrowings
|
(2,099)
|
(228)
|
(2,327)
|
|
(5,068)
|
(610)
|
(5,678)
|
Total
interest-bearing liabilities (2)
|
2,765
|
(7,470)
|
(4,705)
|
|
9,237
|
(22,771)
|
(13,534)
|
|
|
|
|
|
|
|
|
Net
interest earnings (2)
|
5,290
|
(215)
|
5,075
|
|
15,820
|
(828)
|
14,992
|
(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.
Noninterest
Income
The
Company’s 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
(performed by Community Bank, N.A. (“CBNA”) and First Liberty Bank and Trust);
2) employee benefit plan administration, actuarial and consulting services
(performed by BPAS); and 3) wealth management services, comprised of trust
services (performed by the trust unit within CBNA), investment and insurance
products (performed by Community Investment Services, Inc. and CBNA Insurance
Agency, Inc.) and asset management (performed by Nottingham Advisors or
Nottingham). Additionally, the Company has periodic transactions,
most often net gains (losses) from the sale of investment securities and
prepayment of debt instruments.
Table
4: Noninterest Income
|
|
Three
Months Ended
|
|
Nine
months Ended
|
|
|
September
30,
|
|
September
30,
|
(000's
omitted)
|
|
2009
|
2008
|
|
2009
|
2008
|
Deposit
service fees
|
|
$10,991
|
$9,039
|
|
$30,247
|
$26,205
|
Benefit
plan administration, consulting and actuarial fees
|
|
6,969
|
6,931
|
|
20,575
|
19,176
|
Wealth
management services
|
|
1,951
|
2,234
|
|
6,251
|
6,721
|
Other
banking services
|
|
669
|
975
|
|
1,536
|
1,720
|
Mortgage
banking
|
|
226
|
204
|
|
3,202
|
598
|
Subtotal
|
|
20,806
|
19,383
|
|
61,811
|
54,420
|
Gain
on sales of investment securities
|
|
7
|
0
|
|
7
|
230
|
Total
noninterest income
|
|
$20,813
|
$19,383
|
|
$61,818
|
$54,650
|
|
|
|
|
|
|
|
Noninterest
income/total income (FTE)
|
|
31.2%
|
32.3%
|
|
31.5%
|
31.3%
|
As
displayed in Table 4, noninterest income (excluding securities gains) was $20.8
million in the third quarter and $61.8 million for the first nine months of
2009. This represents an increase of $1.4 million or 7.3% for the
quarter and $7.4 million or 14% for the YTD period in comparison to one year
earlier. A significant portion of the year-to-date growth was
attributable to higher residential mortgage banking revenues, which grew by $2.6
million for the first nine months of 2009 in comparison to the year earlier
period. Mortgage banking revenues for the quarter were consistent
with the prior year, as the demand for mortgage products slowed in the third
quarter. Residential mortgage banking income totaled $0.2 million and
$3.2 million for the third quarter and year-to-date periods of 2009,
respectively. Residential mortgage banking income consists of
realized gains or losses from the sale of residential mortgage loans and the
origination of mortgage loan servicing rights, unrealized gains and losses on
residential mortgage loans held for sale and related commitments, mortgage loan
servicing fees and other mortgage loan-related fee income. Included
in mortgage banking income is an impairment charge of $0.2 million for the third
quarter of 2009 and $0.3 million for the year-to-date period for the fair value
of the mortgage servicing rights due primarily to an increase in the cost of
servicing the loan and an increase in the expected prepayment speed of the
Company’s sold loan portfolio with servicing retained. Residential
mortgage loans sold to investors, primarily Fannie Mae, totaled $22.7 million in
the third quarter of 2009 and $165.4 million for the first nine months of 2009
as compared to $1.2 million and $2.3 million for the respective periods of
2008. Residential mortgage loans held for sale recorded
at fair value at September 30, 2009 totaled $0.5 million. The
continuation of the level of revenue experienced in the first six months of 2009
from mortgage banking will be dependent on market conditions and the trend in
long-term interest rates.
General
recurring banking fees of $11.7 million and $31.8 million for the third quarter
and first nine months of 2009 were up $1.6 million or 16% and $3.9 million or
14%, respectively, as compared to the prior year periods, driven by organic core
deposit account growth, higher electronic banking related revenues, and
incremental income generated from the acquired Citizens
branches. Third quarter other banking services revenues included $0.3
million of annual dividends from pooled credit life and disability insurance
programs, which were $0.4 million below the same period of
2008. Benefit plan administration, consulting and actuarial fees were
consistent for the quarter and increased $1.4 million for the nine months ended
September 30, 2009 as compared to the prior year periods which was driven by the
acquisition of ABG in mid July 2008, partially offset by a decrease in
asset-based fees due to the overall decline in the financial market valuations
over the last year. Wealth management services revenue decreased $0.3
million or 13% for the third quarter and $0.5 million or 7.0 % for the first
nine months in comparison to the prior year, primarily attributable to the
adverse conditions prevalent throughout the financial markets and weakened
demand for some of the Company’s higher margin products.
The ratio
of noninterest income to total income (FTE basis) was 31.2% for the quarter and
31.5% for the year-to-date period versus 32.3% and 31.3% for the comparable
periods in 2008. The improvement for the year-to-date period is a
function of increased noninterest income, primarily mortgage banking and
acquisition related, combined with proportionally smaller increases in net
interest income, mostly due to net interest margin contraction. The third
quarter year-over-year decline in the pooled insurance dividend and wealth
management income caused the noninterest income to total income ratio to
fall.
Operating
Expenses
Table 5
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 commonly used in the
banking industry.
Table
5: Operating Expenses
|
|
Three
Months Ended
|
|
Nine
months Ended
|
|
|
September
30,
|
|
September
30,
|
(000's
omitted)
|
|
2009
|
2008
|
|
2009
|
2008
|
Salaries
and employee benefits
|
|
$23,166
|
$21,130
|
|
$69,282
|
$61,288
|
Occupancy
and equipment
|
|
5,533
|
5,305
|
|
17,448
|
16,067
|
Data
processing and communications
|
|
5,328
|
4,284
|
|
15,349
|
12,369
|
Amortization
of intangible assets
|
|
2,026
|
1,727
|
|
6,234
|
4,903
|
Legal
and professional fees
|
|
1,367
|
1,095
|
|
3,969
|
3,295
|
Office
supplies and postage
|
|
1,245
|
1,260
|
|
4,092
|
3,775
|
Business
development and marketing
|
|
1,469
|
1,174
|
|
4,818
|
4,003
|
FDIC
insurance premiums
|
|
1,670
|
665
|
|
7,066
|
1,051
|
Other
|
|
2,307
|
2,616
|
|
7,737
|
7,834
|
Total
operating expenses
|
|
$44,111
|
$39,256
|
|
$135,995
|
$114,585
|
|
|
|
|
|
|
|
Operating
expenses/average assets
|
|
3.27%
|
3.31%
|
|
3.36%
|
3.28%
|
Efficiency
ratio
|
|
63.2%
|
62.4%
|
|
64.7%
|
63.1%
|
As shown
in Table 5, third quarter 2009 operating expenses were $44.1 million, up $4.9
million or 12% from the prior year level. Year-to-date operating
expenses of $136.0 million rose $21.4 million or 19% compared to the same period
in 2008. A significant portion of the increase for the year-to-date
period was attributable to incremental operating expenses related to the ABG and
Citizens acquisitions. For the quarter, a significant portion of the
increase can be attributable to the Citizens
acquisition. Additionally, the increase in operating expenses was due
to an increased level of FDIC-insurance assessments ($1.0 million for
the quarter, $6.0 million YTD), higher retirement costs primarily related to the
underlying asset performance in 2008 ($0.6 million for the quarter, $2.3 million
YTD), higher volume-based data processing and communication costs ($1.0 million
for the quarter, $3.0 million YTD), and increased amortization of intangibles
related to the two acquisitions completed in the last year ($0.3
million for the quarter, $1.3 million YTD). During 2007 and the first
half of 2008, FDIC premiums were principally met through the application of a
credit balance created in prior years. This credit balance was
depleted in the second quarter of 2008 and resulted in higher FDIC premiums in
subsequent quarters. Additionally, the FDIC’s reserve fund has
declined over the past year due to costs associated with recent bank failures
and is expected to continue to decline in the future. In late 2008,
the FDIC basic insurance coverage limit was temporarily increased to $250,000
through December 31, 2009 (on May 20, 2009 this was extended until December 31,
2013). These actions have resulted in significant increases in the
FDIC assessment rates (240% above the first quarter of 2008) that are expected
to remain at similar levels during the remainder of 2009. The Company
is also participating in the FDIC’s Temporary Liquidity Guarantee Program
(“TLGP”) that provides unlimited coverage for transaction deposit accounts and
for which a supplemental 10-basis point premium is assessed. In the
second quarter of 2009, the FDIC assessed an emergency special assessment equal
to five basis points on a bank’s assets less Tier 1 capital. This
amounted to $2.5 million of additional premiums recognized in June
2009. The final rule also permits the FDIC to levy additional
five-basis point special assessments if needed in the third and fourth quarters
of 2009. No additional assessments were levied in the third
quarter. Several expense category increases continue to be impacted
by the Company’s investment in strategic technology and business development
initiatives to grow and enhance its service offerings.
The
Company’s efficiency ratio (recurring operating expenses excluding intangible
amortization, acquisition expenses and the special FDIC assessment divided by
the sum of net interest income (FTE) and recurring noninterest income) was 63.2%
for the third quarter, 0.8 percentage points above the comparable quarter of
2008. This resulted from operating expenses (as described above)
increasing 12.3% primarily due to the acquisitions in the last year and the
increased levels of FDIC premium and pension related expense, while recurring
operating income increased at a slower rate of 10.8% due to a $5.1 million or
12.5% increase in net interest income and $1.4 million or 7.4% increase in
noninterest income excluding security gains year over year. The
efficiency ratio of 64.7% for the first nine months of 2009 was up 1.6
percentage points from a year earlier due to core operating expenses increasing
15.7% while recurring operating income increased at a slower rate of
12.9%. Operating expenses, excluding acquisition expenses and the
special $2.5 million FDIC assessment, as a percentage of average assets
decreased four basis points for the quarter and increased eight basis points for
the year-to-date period, as operating expenses increased 13% and 16%,
respectively, while average assets increased 14%, during the same time
periods. The increased level of FDIC premiums and pension related
costs, which do not enhance revenue growth, impacted both ratios.
Income
Taxes
The third
quarter effective income tax rate was 23.0%, compared to the 22.5% effective tax
rate in the third quarter of 2008. The higher effective tax rate for
2009 was principally a result of a higher proportion of income being generated
from fully taxable sources. The year-to-date effective tax rate was
22.1% as compared to the 22.5% for the first nine months of 2008. The
lower effective tax rate for the year-to-date period was principally a result of
a higher proportion of pre-tax income being generated from tax-exempt securities
and loans.
Investments
As
reflected in Table 6 below, the carrying value of investments (including
unrealized gains on available-for-sale securities) was $1.50 billion at the end
of the third quarter, an increase of $102.8 million from December 31, 2008 and
an increase of $214.1 million from September 30, 2008,
respectively. The book value (excluding unrealized gains) of
investments increased $93.0 million from December 31, 2008 and $169.0 million
from September 30, 2008, respectively. During the fourth quarter of
2008 and continuing into the first nine months of 2009, the Company invested a
portion of the net liquidity received in the Citizens acquisition into
mortgage-backed securities. The overall mix of securities within the
portfolio over the last year has changed, with an increase in the proportion of
mortgage-backed securities and a decrease in the proportion of U.S. Treasury and
agency securities and small decreases in all other security
categories. The change in the carrying value of investments is
impacted by the amount of net unrealized gains in the available-for-sale
portfolio at a point in time. At September 30, 2009, the portfolio
had a $29.8 million net unrealized gain, an increase of $9.8 million from the
unrealized gain at December 31, 2008 and an increase of $45.0 million from the
unrealized loss at September 30, 2008. This fluctuation is indicative
of the liquidity risk associated with the pooled trust preferred securities,
interest rate movements during the respective time periods and the changes in
the size and composition of the portfolio.
Table
6: Investments
|
|
September
30, 2009 |
|
December
31, 2008 |
|
September
30, 2008 |
|
|
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
|
|
$70,315
|
$72,990
|
|
$61,910
|
$64,268
|
|
$86,947
|
$85,829
|
Government
guaranteed mortgage-backed securities
|
|
143,000
|
145,497
|
|
0
|
0
|
|
0
|
0
|
Obligations
of state and political subdivisions
|
|
69,910
|
73,589
|
|
15,784
|
16,004
|
|
11,608
|
11,637
|
Other
securities
|
|
80
|
80
|
|
100
|
100
|
|
101
|
101
|
Total
held-to-maturity portfolio
|
|
283,305
|
292,156
|
|
77,794
|
80,372
|
|
98,656
|
97,567
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale
Portfolio:
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury and agency securities
|
|
312,429
|
337,524
|
|
382,301
|
411,783
|
|
318,834
|
322,299
|
Obligations
of state and political subdivisions
|
|
499,050
|
520,804
|
|
538,008
|
547,939
|
|
508,608
|
514,109
|
Corporate
debt securities
|
|
35,569
|
37,280
|
|
35,596
|
35,152
|
|
35,605
|
34,376
|
Collateralized
mortgage obligations
|
|
11,214
|
11,762
|
|
25,464
|
25,700
|
|
27,599
|
27,729
|
Pooled
trust preferred securities
|
|
71,377
|
45,420
|
|
72,535
|
49,865
|
|
72,766
|
50,325
|
Government
guaranteed mortgage-backed securities
|
|
199,974
|
206,637
|
|
188,560
|
192,054
|
|
177,668
|
177,007
|
Subtotal
|
|
1,129,613
|
1,159,427
|
|
1,242,464
|
1,262,493
|
|
1,141,080
|
1,125,845
|
Equity
securities
|
|
55,100
|
55,094
|
|
54,724
|
54,724
|
|
59,275
|
59,275
|
Total
available-for-sale portfolio
|
|
1,184,713
|
1,214,521
|
|
1,297,188
|
1,317,217
|
|
1,200,355
|
1,185,120
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized gain on available-for-sale portfolio
|
|
29,808
|
0
|
|
20,029
|
0
|
|
(15,235)
|
0
|
Total
|
|
$1,497,826
|
$1,506,677
|
|
$1,395,011
|
$1,397,589
|
|
$1,283,776
|
$1,282,687
|
Included
in the available-for-sale portfolio, as detailed in Table 6, are pooled trust
preferred, class A-1 securities with a current par value of $73.1 million and
unrealized losses of $26.0 million at September 30, 2009. The
underlying collateral of these assets is principally trust-preferred securities
of smaller regional banks and insurance companies. The Company’s
securities are in the super senior cash flow tranche of the investment
pools. All other tranches in these pools will incur losses before
this tranche is impacted. An additional 38% - 43% of the underlying
collateral would have to be in deferral or default concurrently to result in an
expectation of non-receipt of contractual cash flows. The market for
these securities at September 30, 2009 is not active and markets for similar
securities are also not active. The inactivity was evidenced first by
a significant widening of the bid-ask spread in the brokered markets in which
these securities trade and then by a significant decrease in the volume of
trades relative to historical levels. The fair value of these
securities was determined using a discounted cash flow model that incorporated
market estimates of interest rates and volatility, as well as, observable quoted
prices for similar assets in markets that have not been active. These
assumptions may have a significant effect on the reported fair
values.
The use
of different assumptions, as well as changes in market conditions, could result
in materially different fair values. The Company does not intend to
sell the underlying security and it is not more likely than not that the Company
will be required to sell the debt security prior to recovery. The
Company does not consider these investments to be other-than temporarily
impaired as of September 30, 2009. In determining if unrealized
losses are other-than-temporary, management considers the following factors: the
length of time and extent that fair value has been less than cost, the financial
condition and near term prospects of the issuers, any external credit ratings,
the level of excess cash flows generated from the underlying collateral
supporting the principal and interest payments of the debt securities, the level
of credit enhancement provided by the structure, and the Company’s ability and
intent to hold the security for a period sufficient to allow for any anticipated
recovery in fair value. To date, the Company has received all
scheduled principal and interest payments and expects to fully collect all
future contractual principal and interest payments. These securities
represent less than 1% of the Company’s average earning assets for the quarter
ending September 30, 2009 and, thus, are not relied upon for meeting the daily
liquidity needs of the Company. Subsequent changes in market or
credit conditions could change those evaluations.
Table
7: Pooled Trust Preferred Securities as of September 30, 2009
(000’s
omitted)
|
|
PreTSL
XXVI
|
|
PreTSL
XXVII
|
|
PreTSL
XXVIII
|
|
|
|
|
|
|
|
Single
issuer or pooled
|
|
Pooled
|
|
Pooled
|
|
Pooled
|
Class
|
|
A-1
|
|
A-1
|
|
A-1
|
Book
value at 9/30/09
|
|
$23,141
|
|
$23,728
|
|
$24,508
|
Fair
value at 9/30/09
|
|
14,483
|
|
14,640
|
|
16,297
|
Unrealized
loss at 9/30/09
|
|
$8,658
|
|
$9,088
|
|
$8,211
|
Rating
(Moody’s/Fitch/S&P)
|
|
(A1/A/BB)
|
|
(A3/AA/BBB-)
|
|
(A3/A/BBB-)
|
Number
of depository institutions/companies in issuance
|
|
64/74
|
|
42/49
|
|
45/56
|
Deferrals
and defaults as a percentage of collateral
|
|
20.0%
|
|
20.0%
|
|
13.3%
|
Excess
subordination
|
|
34.1%
|
|
35.8%
|
|
40.3%
|
Loans
As shown
in Table 8, loans ended the third quarter at $3.09 billion, down $49.0 million
(1.6%) from year-end 2008 and up $83.1 million (2.8%) versus one year
earlier. The Citizens branches added approximately $111 million of
loans to the portfolio in November 2008. Excluding the impact of the
Citizens acquisition, loans decreased $27.7 million or 0.9% from the third
quarter of 2008 with organic growth in the business lending portfolios and a
decrease in the consumer mortgage and consumer installment
portfolios. During the third quarter of 2009 loans declined slightly,
comprised of a reduction in the business lending portfolio ($10.0 million),
partially offset by an increases in the consumer installment portfolio ($3.0
million) and consumer mortgage portfolio ($2.5 million), despite the sale of
$22.7 million of mortgage loans in the secondary market during the third
quarter.
Table
8: Loans
(000's
omitted) |
|
September
30, 2009
|
|
December
31, 2008
|
|
September
30, 2008
|
Business
lending
|
|
$1,068,456
|
34.6%
|
|
$1,058,846
|
33.8%
|
|
$1,028,400
|
34.2%
|
Consumer
mortgage
|
|
1,017,153
|
32.9%
|
|
1,062,943
|
33.9%
|
|
1,039,530
|
34.6%
|
Consumer
installment
|
|
1,001,484
|
32.5%
|
|
1,014,351
|
32.3%
|
|
936,100
|
31.2%
|
Total
loans
|
|
$3,087,093
|
100.0%
|
|
$3,136,140
|
100.0%
|
|
$3,004,030
|
100.0%
|
Business
lending increased $9.6 million in the first nine months of 2009 and increased
$40.1 million versus one year ago. Excluding the impact of the
Citizens acquisition, business lending increased $13.9 million over the last
year. The intensity of competition the Company faces in certain of
its markets has eased somewhat due to a portion of the banks reducing their
lending participation due to the liquidity and capital restraints they may be
facing. Demand levels have declined in the current economic
environment. The Company maintains its commitment to generating
growth in its business portfolio in a manner that adheres to its twin goals of
maintaining strong asset quality and producing profitable
margins. The Company has continued to invest in additional personnel,
technology and business development resources to further strengthen its
capabilities in this key line of business.
Consumer
mortgages decreased $22.4 million year-over-year and $45.8 million in the first
nine months of 2009. Excluding the impact of the Citizens
acquisition, consumer mortgages decreased $35.4 million over the past twelve
months. During the third quarter and first nine months of 2009, the
Company originated $23.2 million and $165.9 million, respectively of residential
mortgages for sale to others, principally Fannie Mae. Longer-term
fixed rate residential mortgages sold to investors totaled $22.7 million in the
third quarter of 2009 and $165.4 million in the first nine months of
2009. Consumer mortgage volume has been strong over the last few
quarters due to a decline in long-term interest rates and comparatively stable
valuations in its primary markets. The consumer real estate portfolio
does not include exposure to subprime, Alt-A, or other higher-risk mortgage
products. The Company’s solid performance during a tumultuous period
in the overall industry is a testament to the stable, low-risk profile of its
portfolio and its ability to successfully meet customer needs at a time when
some national mortgage lenders are restricting their lending activities in many
of the Company’s markets. Interest rates and expected duration
continue to be the most significant factors in determining whether the Company
chooses to retain, versus sell and service, portions of its new mortgage
production.
Consumer
installment loans, including borrowings originated in automobile, marine and
recreational vehicle dealerships, as well as branch originated home equity and
installment loans, decreased $12.9 million in the first nine months of 2009 and
increased $65.4 million on a year-over-year basis. Excluding the
impact of the Citizens acquisition, consumer installment lending decreased $6.3
million for the year-over-year period. The origination and
utilization of consumer installment and home equity loans has faced somewhat
softer demand in recent months due to lower consumer spending and deleveraging
activities in response to weaker economic conditions. Declines in
manufacturer production and industry sale projections indicate continued
weakness in the new vehicle market which has created a demand in late model used
and program car inventories, segments in which the Company is an active
participant. Past business development efforts have created
opportunities to strategically expand the Company’s share of the market, helping
drive productive growth in this portfolio. The Company is focused on
maintaining the solid profitability produced by its in-market and contiguous
indirect portfolio, while continuing to pursue its long-term steady approach to
expanding its dealer network.
Asset
Quality
Table 9
below exhibits the major components of nonperforming loans and assets and key
asset quality metrics for the periods ending September 30, 2009 and 2008 and
December 31, 2008.
Table
9: Nonperforming Assets
|
|
September
30,
|
|
December
31,
|
|
September
30,
|
(000's
omitted)
|
|
2009
|
|
2008
|
|
2008
|
Nonaccrual
loans
|
|
|
|
|
|
|
Business
lending
|
|
$6,908
|
|
$6,730
|
|
$5,571
|
Consumer
installment
|
|
829
|
|
892
|
|
829
|
Consumer
mortgage
|
|
4,429
|
|
3,500
|
|
3,063
|
Total
nonaccrual loans
|
|
12,166
|
|
11,122
|
|
9,463
|
Accruing
loans 90+ days delinquent
|
|
|
|
|
|
|
Business
lending
|
|
3,969
|
|
71
|
|
491
|
Consumer
installment
|
|
21
|
|
90
|
|
63
|
Consumer
mortgage
|
|
670
|
|
392
|
|
464
|
Total
accruing loans 90+ days delinquent
|
|
4,660
|
|
553
|
|
1,018
|
Restructured
loans
|
|
|
|
|
|
|
Business
lending
|
|
914
|
|
1,004
|
|
1,033
|
Nonperforming
loans
|
|
|
|
|
|
|
Business
lending
|
|
11,791
|
|
7,805
|
|
7,095
|
Consumer
installment
|
|
850
|
|
982
|
|
892
|
Consumer
mortgage
|
|
5,099
|
|
3,892
|
|
3,527
|
Total
nonperforming loans
|
|
17,740
|
|
12,679
|
|
11,514
|
|
|
|
|
|
|
|
Other
real estate (OREO)
|
|
1,309
|
|
1,059
|
|
837
|
Total
nonperforming assets
|
|
$19,049
|
|
$13,738
|
|
$12,351
|
|
|
|
|
|
|
|
Allowance
for loan losses to total loans
|
|
1.33%
|
|
1.26%
|
|
1.25%
|
Allowance
for loan losses to nonperforming loans
|
|
232%
|
|
312%
|
|
325%
|
Nonperforming
loans to total loans
|
|
0.57%
|
|
0.40%
|
|
0.38%
|
Nonperforming
assets to total loans and other real estate
|
|
0.62%
|
|
0.44%
|
|
0.41%
|
Delinquent
loans (30 days old to nonaccruing) to total loans
|
|
1.51%
|
|
1.43%
|
|
1.26%
|
Net
charge-offs (annualized) to quarterly average loans
outstanding
|
|
0.21%
|
|
0.30%
|
|
0.23%
|
Loan
loss provision to net charge-offs (quarterly)
|
|
145%
|
|
100%
|
|
117%
|
As
displayed in Table 9, nonperforming assets at September 30, 2009 were $19.0
million, a $5.3 million increase versus the level at the end of 2008 and an
increase of $6.7 million as compared to the very favorable level one year
earlier. Other real estate owned (“OREO”) increased $0.5 million from
one-year ago and increased $0.3 million from year-end 2008, a result of the
Company managing 17 OREO properties at September 30, 2009 as compared to 15 OREO
properties at September 30, 2008. No single property has a carrying
value in excess of $300,000. Nonperforming loans were 0.57% of total
loans outstanding at the end of the third quarter, 17 and 19 basis points higher
than the levels at December 31, 2008 and September 30, 2008,
respectively. The increase in nonperforming loans includes one
commercial relationship of $3.3 million which was more than 90 days past due at
September 30, 2009.
Approximately
25% of the increase from September 2008 to September 2009 in nonperforming loans
is related to the consumer mortgage portfolio. Collateral values of
residential properties within the Company’s market area are not experiencing the
significant declines in values that other parts of the country have
encountered. However, the economic slowdown, increased unemployment
levels and the resulting pressure on consumers and businesses alike have
resulted in higher nonperforming levels. The remaining 75% of the
increase in nonperforming loans from September 2008 to September 2009 is related
to the business lending portfolio which is comprised of business loans broadly
diversified by industry type. With the economic downturn, certain
business’ financial performance and position have deteriorated and consequently
the level of non-accrual loans has risen. The allowance for loan
losses to nonperforming loans ratio, a general measure of coverage adequacy, was
232% at the end of the third quarter compared, to 312% at year-end 2008 and 325%
at September 30, 2008, reflective of the higher level of nonperforming
loans.
Members
of senior management, special asset officers, and lenders review all delinquent
and nonaccrual loans and OREO regularly, in order to identify deteriorating
situations, monitor known problem credits and discuss any needed changes to
collection efforts, if warranted. Based on the groups consensus, a
relationship may be assigned a special assets officer or other senior lending
officer to review the loan, meet with the borrowers, assess the collateral and
recommend an action plan. This plan could include foreclosure,
restructuring the loans, issuing demand letters, or other
actions. The Company’s larger criticized credits are also reviewed on
a quarterly basis by senior credit administration, special assets and commercial
lending management to monitor their status and discuss relationship management
plans. Commercial lending management reviews the entire criticized
loan portfolio on a monthly basis.
Delinquent
loans (30 days through nonaccruing) as a percent of total loans was 1.51% at the
end of the third quarter, eight basis points above the 1.43% at year-end 2008
and 25 basis points higher than the very favorable level of 1.26% at September
30, 2008. The commercial loan and real estate delinquency ratios at
the end of the third quarter increased in comparison to both December 31, 2008
and September 30, 2008. The delinquency rate for installment loans
decreased as compared to the December 31, 2008 and increased slightly as
compared to September 30, 2008. The Company’s success at keeping the
non-performing and delinquency ratios at favorable levels despite deteriorating
economic conditions was the result of its continued focus on maintaining strict
underwriting standards, as well as effective utilization of its collection and
recovery capabilities.
Table
10: Allowance for Loan Losses Activity
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
September
30,
|
|
September
30,
|
(000's
omitted)
|
|
2009
|
2008
|
|
2009
|
2008
|
Allowance
for loan losses at beginning of period
|
|
$40,330
|
$37,128
|
|
$39,575
|
$36,427
|
Charge-offs:
|
|
|
|
|
|
|
Business
lending
|
|
503
|
761
|
|
2,445
|
1,444
|
Consumer
mortgage
|
|
94
|
46
|
|
378
|
160
|
Consumer
installment
|
|
1,951
|
1,744
|
|
5,653
|
4,397
|
Total
charge-offs
|
|
2,548
|
2,551
|
|
8,476
|
6,001
|
Recoveries:
|
|
|
|
|
|
|
Business
lending
|
|
101
|
59
|
|
259
|
400
|
Consumer
mortgage
|
|
22
|
101
|
|
28
|
156
|
Consumer
installment
|
|
792
|
691
|
|
2,486
|
2,096
|
Total
recoveries
|
|
915
|
851
|
|
2,773
|
2,652
|
|
|
|
|
|
|
|
Net
charge-offs
|
|
1,633
|
1,700
|
|
5,703
|
3,349
|
Provision
for loans losses
|
|
2,375
|
1,985
|
|
7,200
|
4,335
|
Allowance
for loan losses at end of period
|
|
$41,072
|
$37,413
|
|
$41,072
|
$37,413
|
|
|
|
|
|
|
|
Net
charge-offs to average loans outstanding:
|
|
|
|
|
|
|
Business
lending
|
|
0.15%
|
0.27%
|
|
0.27%
|
0.14%
|
Consumer
mortgage
|
|
0.03%
|
-0.02%
|
|
0.05%
|
0.00%
|
Consumer
installment
|
|
0.46%
|
0.46%
|
|
0.42%
|
0.35%
|
Total
loans
|
|
0.21%
|
0.23%
|
|
0.25%
|
0.16%
|
As
displayed in Table 10, net charge-offs during the first nine months of 2009 were
$5.7 million, $2.4 million higher than the equivalent 2008
period. For the third quarter, net charge-offs were slightly lower
than the third quarter of 2008. For the year-to-date period,
all portfolios, business lending, consumer mortgage and consumer installment
have experienced increases in the level of charge-offs as compared to the
historical low levels experienced in 2008. During the third quarter
of 2009, business lending charge-offs were lower than the comparable 2008
period. The net charge-off ratio (net charge-offs as a percentage of
average loans outstanding) for the third quarter was 0.21%, two basis points
lower than the comparable quarter of 2008. Net charge-offs and the
corresponding net charge-off ratios continue to be below average long-term
historical levels. The year-to-date net charge-off ratio of 0.25%
compares to 0.16% for the year earlier period.
The
consumer mortgage portfolio experienced a net charge-off ratio of 0.03% for the
quarter, versus a net recovery of 0.02% in the previous year. The
business lending net charge-off ratios for the third quarter of 0.15% declined
12 basis points versus the prior year level. The consumer installment
charge-off ratio for the third quarter remained consistent with the third
quarter of 2008. As compared to the second quarter of 2009, the
business lending and the consumer mortgage charge-off ratios improved by 13
basis points and five basis points, respectively, while the consumer installment
portfolio charge-off ratio was higher by 15 basis points. For
the nine months ended September 30, 2009, the net charge off ratio increased for
all three portfolios in comparison to the same period last year.
For the
quarter ended September 30, 2009, a $2.4 million loan loss provision was
recorded compared to $2.0 million for the third quarter of 2008. The
third quarter 2009 loan loss provision was $0.7 million higher than the level of
net charge-offs, due mostly to higher levels of nonperforming loans and greater
qualitative risk factors attributable to the portfolio due to deteriorating
economic conditions. The allowance for loan losses of $41.1 million
as of September 30, 2009 rose $3.7 million or 9.8% over the last 12 months,
which exceeds the 2.8% growth in the loan portfolio. Contributing to
the changes was the deteriorating charge-off, nonperforming and delinquency
trends experienced over the last twelve months. The ratio of
allowance for loan loss to loans outstanding increased seven basis points to
1.33% for the third quarter-end, as compared to the level at December 31, 2008
and increased eight basis points from the level at September 30,
2008. The increase was also slightly impacted by the decreased
proportion of low-risk consumer mortgage loans in the overall loan portfolio, a
result of the recent selling of new mortgage originations and organic and
acquired growth in other loan portfolios.
Deposits
As shown
in Table 11, average deposits of $3.9 billion in the third quarter were up
$624.0 million compared to third quarter 2008 and $343.6 million versus the
fourth quarter of last year. Excluding the impact of the Citizens
acquisition, average deposits increased $59.4 million as compared to the third
quarter of the prior year. The mix of average deposits changed since
the third quarter of 2008. The weightings of non-time (interest
checking, non-interest checking, savings and money markets accounts) have
increased from their year-ago levels, while the proportion of time deposits
decreased. This change in deposit mix reflects the Company’s focus on
expanding core account relationships and reducing higher cost time deposit
balances, as well as the deposit profile of the acquired Citizens
branches. This shift in mix, combined with the Company’s ability to
reduce rates due to market conditions, resulted in the quarterly cost of
interest-bearing deposits declining from 2.21% in the third quarter of 2008 to
1.33% in the most recent quarter. The Company continues to focus
heavily on growing its core (non-time) deposits through enhanced marketing and
training programs and new product offerings introduced over the last few
years.
Average
third quarter non-public fund deposits were up $313 million or 9.6% versus the
fourth quarter of 2008 and $538 million or 18% compared to the year earlier
period. Average public funds have increased $31 million or 12% from
the fourth quarter of 2008 and $86 million or 40% from the third quarter of
2008.
Table
11: Quarterly Average Deposits
|
|
September
30,
|
|
December
31,
|
|
September
30,
|
(000's
omitted)
|
|
2009
|
|
2008
|
|
2008
|
Demand
deposits
|
|
$708,430
|
|
$615,540
|
|
$590,098
|
Interest
checking deposits
|
|
654,788
|
|
571,540
|
|
501,223
|
Savings
deposits
|
|
487,738
|
|
463,797
|
|
457,742
|
Money
market deposits
|
|
731,010
|
|
508,119
|
|
389,323
|
Time
deposits
|
|
1,290,860
|
|
1,370,215
|
|
1,310,393
|
Total
deposits
|
|
$3,872,826
|
|
$3,529,211
|
|
$3,248,779
|
|
|
|
|
|
|
|
Non-public
fund deposits
|
|
$3,573,723
|
|
$3,261,115
|
|
$3,035,463
|
Public
fund deposits
|
|
299,103
|
|
268,096
|
|
213,316
|
Total
deposits
|
|
$3,872,826
|
|
$3,529,211
|
|
$3,248,779
|
Borrowings
At the
end of the third quarter, borrowings of $858.4 million decreased $4.1 million
from December 31, 2008 and $145.2 million versus the end of the third quarter of
2008 as a portion of the net funding provided by the Citizens acquisition was
used to eliminate short-term obligations. The cost of funds on total
borrowings in the third quarter of 4.36% was seven basis points below that of
the year earlier period. This decline was mostly attributable to
lower rates paid on the variable rate portion of trust preferred
securities.
Shareholders’
Equity
Total
shareholders’ equity of $565.9 million at the end of the third quarter increased
$21.2 million from the balance at December 31, 2008. This change
consisted of net income of $32.1 million, $1.1 million from shares issued under
the employee stock plan, $1.5 million from employee stock options earned and an
$8.1 million increase in other comprehensive income, partially offset by
dividends declared of $21.6 million The change in other
comprehensive loss was comprised of a $6.3 million increase in the after-tax
market value adjustment on the available for sale investment portfolio, a
positive $1.1 million adjustment to the funded status of the Company’s
retirement plans, and a $0.7 million increase in the after-tax market value
adjustment on the interest rate swap. Over the past 12 months, total
shareholders’ equity increased by $82.8 million, as net income and positive
contributions from a common stock offering, shares issued under the employee
stock option plan, and a higher market value adjustment on investments, more
than offset dividends declared, and the change in the funded status of the
Company’s defined benefit pension and other postretirement plans.
The
Company’s Tier I leverage ratio, a primary measure of regulatory capital for
which 5% is the requirement to be “well-capitalized,” was 7.27% at the end of
the third quarter, up five basis points from year-end 2008 and 46 basis points
lower than its level one year ago. The increase in the Tier I
leverage ratio compared to December 31, 2008 is the result of the shareholders’
equity excluding intangibles and other comprehensive income items increasing at
a slightly faster pace than average assets excluding
intangibles. Tier I decreased as compared to the prior’s year third
quarter due to intangibles from acquisitions having a greater impact than
capital creating activities, as average assets excluding intangibles and the
market value adjustment increased 12.7% while shareholders’ equity, excluding
intangibles and the market value adjustment, increased at a lesser 5.9%
rate. The tangible equity-to-assets ratio of 5.15% increased 41 basis
points from December 31, 2008 and decreased 16 basis points versus September 30,
2008. The decline from the year earlier period was primarily due to
the intangible and total assets added as a result of the acquisition of ABG and
Citizens, having a proportionally greater impact on the ratio than the common
equity offering and other capital generating sources discussed
above. The increase in the tangible equity ratio from the prior
year-end was mostly attributable to an increase in investment market value and
higher retained earnings.
The
dividend payout ratio (dividends declared divided by net income) for the first
nine months of 2009 was 67.4%, up from 56.3% for the first nine months of
2008. The ratio increased because net income declined 5.6% while
dividends declared increased 13.0%. The Company’s quarterly dividend
increased because there were 2.6 million more shares outstanding primarily due
to the common stock offering in the fourth quarter of
2008. Additionally, the quarterly dividend was raised 4.8% in August
2008, from $0.21 to $0.22.
Liquidity
Liquidity
risk is measured by the Company’s ability to raise cash when needed at a
reasonable cost and minimize any loss. The Company must be capable of meeting
all obligations to its customers at any time and, therefore, the active
management of its liquidity position is critical. Given the uncertain
nature of our customers' demands as well as the Company's desire to take
advantage of earnings enhancement opportunities, the Company must have available
adequate sources of on and off-balance sheet funds that can be acquired in time
of need. Accordingly, in addition to the liquidity provided by
balance sheet cash flows, liquidity must be supplemented with additional sources
such as credit lines from correspondent banks, the Federal Home Loan Bank
(“FHLB”), and the Federal Reserve Bank. Other funding alternatives
may also be appropriate from time to time, including wholesale and retail
repurchase agreements, large certificates of deposit, and brokered CD
relationships.
The
Company's primary approach to measuring liquidity is known as the Basic
Surplus/Deficit model. It is used to calculate liquidity over two
time periods: first, the amount of cash that could be made available within 30
days (calculated as liquid assets less short-term liabilities); and second, a
projection of subsequent cash availability over an additional 60
days. The minimum policy level of liquidity under the Basic
Surplus/Deficit approach is 7.5% of total assets for both the 30 and 90-day time
horizons. As of September 30, 2009, this ratio was 16.4% for 30 days
and 16.4% for 90 days, excluding the Company's capacity to borrow additional
funds from the FHLB.
To
measure longer-term liquidity, a baseline projection of loan and deposit growth
for five years is made to reflect how current liquidity levels could change over
time. This five-year measure reflects adequate liquidity to fund loan and other
asset growth over the next five years.
Forward-Looking
Statements
This
document contains comments or information that constitute forward-looking
statements (within the meaning of the Private Securities Litigation Reform Act
of 1995), which involve significant risks and uncertainties. Actual
results may differ materially from the results discussed in the forward-looking
statements. Moreover, the Company’s plans, objectives and intentions
are subject to change based on various factors (some of which are beyond the
Company’s control). Factors that could cause actual results to differ
from those discussed in the forward-looking statements include: (1)
risks related to credit quality, interest rate sensitivity and
liquidity; (2) the strength of the U.S. economy in general and the
strength of the local economies where the Company conducts its
business; (3) the effect of, and changes in, monetary and fiscal
policies and laws, including interest rate policies of the Board of Governors of
the Federal Reserve System; (4) inflation, interest rate, market and
monetary fluctuations; (5) the timely development of new products and
services and customer perception of the overall value thereof (including, but
not limited to, features, pricing and quality) compared to competing products
and services; (6) changes in consumer spending, borrowing and savings
habits; (7) technological changes; (8) any acquisitions or
mergers that might be considered or consummated by the Company and the costs and
factors associated therewith; (9) the ability to maintain and
increase market share and control expenses; (10) the effect of
changes in laws and regulations (including laws and regulations concerning
taxes, banking, securities and insurance) and accounting principles generally
accepted in the United States; (11) changes in the Company’s
organization, compensation and benefit plans and in the availability of, and
compensation levels for, employees in its geographic markets; (12)
the costs and effects of litigation and of any adverse outcome in such
litigation; (13) other risk factors outlined in the Company’s filings with the
Securities and Exchange Commission from time to time; and (14) the success of
the Company at managing the risks of the foregoing.
The
foregoing list of important factors is not all-inclusive. Such
forward-looking statements speak only as of the date on which they are made and
the Company does not undertake any obligation to update any forward-looking
statement, whether written or oral, to reflect events or circumstances after the
date on which such statement is made. If the Company does update or
correct one or more forward-looking statements, investors and others should not
conclude that the Company would make additional updates or corrections with
respect thereto or with respect to other forward-looking
statements.
Item
3. Quantitative and Qualitative Disclosures about Market Risk
Market
risk is the risk of loss in a financial instrument arising from adverse changes
in market rates, prices or credit risk. Credit risk associated with
the Company's loan portfolio has been previously discussed in the asset quality
section of Management's Discussion and Analysis of Financial Condition and
Results of Operations. Management believes that the tax risk of the
Company's municipal investments associated with potential future changes in
statutory, judicial and regulatory actions is minimal. The Company
has an minimal amount of credit risk in its investment portfolio because
essentially all of the fixed-income securities in the portfolio are AA or higher
rated. Therefore, almost all the market risk in the investment
portfolio is related to interest rates.
The
ongoing monitoring and management of both interest rate risk and liquidity, in
the short and long term time horizons is an important component of the Company's
asset/liability management process, which is governed by limits established in
the policies reviewed and approved annually by the Company’s Board of
Directors. The Board of Directors delegates responsibility for
carrying out the policies to the Asset/Liability Committee (“ALCO”) which meets
each month and is made up of the Company's senior management as well as regional
and line-of-business managers who oversee specific earning asset classes and
various funding sources. As the Company does not believe it is
possible to reliably predict future interest rate movements, it has maintained
an appropriate process and set of measurement tools, which enable it to identify
and quantify sources of interest rate risk in varying rate
environments. The primary tool used by the Company in managing
interest rate risk is income simulation.
While a
wide variety of strategic balance sheet and treasury yield curve scenarios are
tested on an ongoing basis, the following reflects the Company's projected net
interest income sensitivity over the subsequent twelve months based
on:
·
|
Asset
and liability levels using September 30, 2009 as a starting
point.
|
·
|
There
are assumed to be conservative levels of balance sheet growth—low to mid
single digit growth in loans and deposits, while using the cashflows from
investment contractual maturities and prepayments to repay short-term
capital market borrowings or reinvested in securities or cash
equivalents.
|
·
|
The
prime rate and federal funds rates are assumed to move up 200 basis points
over a 12-month period while moving the long end of the treasury curve to
spreads over federal funds that are more consistent with historical
norms. Deposit rates are assumed to move in a manner that
reflects the historical relationship between deposit rate movement and
changes in the federal funds rate.
|
·
|
Cash
flows are based on contractual maturity, optionality, and amortization
schedules along with applicable prepayments derived from internal
historical data and external
sources.
|
Net
Interest Income Sensitivity Model
Change
in interest rates
|
Calculated
annualized increase (decrease) in projected net interest income at
September 30, 2009 |
+200
basis points
|
5,628,000
|
0
basis points (normalized yield curve)
|
(4,094,000)
|
The
modeled net interest income (NII) reflects an increase in a rising rate
environment from a flat rate scenario as well as interest rate risk exposure to
falling rates despite the Federal Funds trading at a range of 0 – 25 basis
points. The increase in a rising rate environment is largely due to
slower investment cash flows, a higher reinvestment rate, the repricing of
assets to higher rates offset by the increase of liability
rates. Over a longer time period the growth in NII improves
significantly in a rising rate environment as lower yielding assets mature and
are replaced at higher rates.
In the 0
basis point model, the current yield curve shifts to a normalized level based on
historical spreads to the federal funds rate. The decrease in NII is
largely due to faster investment cash flows and assets repricing to lower rates
as corresponding liabilities are held at current levels. Despite Fed
Funds trading near 0%, the Company believes treasury rates could potentially
fall further, and thus, the (normal yield curve) model tests the impact of this
lower treasury rate scenario.
The
analysis does not represent a Company forecast and should not be relied upon as
being indicative of expected operating results. These hypothetical
estimates are based upon numerous assumptions: the nature and timing of interest
rate levels (including yield curve shape), prepayments on loans and securities,
deposit decay rates, pricing decisions on loans and deposits,
reinvestment/replacement of asset and liability cash flows, and other
factors. While the assumptions are developed based upon current
economic and local market conditions, the Company cannot make any assurances as
to the predictive nature of these assumptions, including how customer
preferences or competitor influences might change. Furthermore, the
sensitivity analysis does not reflect actions that ALCO might take in responding
to or anticipating changes in interest rates.
Item
4. Controls and Procedures
The
Company maintains disclosure controls and procedures, as defined in Rule 13a –
15(e) under the Securities Exchange Act of 1934, designed to: (i) record,
process, summarize, and report within the time periods specified in the
Securities and Exchange Commission’s (“SEC”) rules and forms, and (ii)
accumulate and communicate to management, including the principal executive and
principal financial officers, as appropriate, to allow timely decisions
regarding disclosure. Based on management’s evaluation of the
Company’s disclosure controls and procedures, with the participation of the
Chief Executive Officer and the Chief Financial Officer, it has concluded that,
as of the end of the period covered by this Quarterly Report on Form 10-Q, these
disclosure controls and procedures were effective as of September 30,
2009.
There
have been no changes in the Company’s internal controls over financial reporting
in connection with the evaluation referenced in the paragraph above that
occurred during the Company’s last fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the Company’s internal control
over financial reporting.
Part
II. Other Information
Item
1. Legal Proceedings
The
Company and its subsidiaries are subject in the normal course of business to
various pending and threatened legal proceedings in which claims for monetary
damages are asserted. Management, after consultation with legal
counsel, does not anticipate that the aggregate liability, if any, arising out
of litigation pending against the Company or its subsidiaries will have a
material effect on the Company’s consolidated financial position or results of
operations.
Item
1A. Risk Factors
There has
not been any material change in the risk factors disclosure from that contained
in the Company’s 2008 Form 10-K for the fiscal year ended December 31, 2008
(filed with the SEC on March 13, 2009). In addition, given the
current market and industry conditions, we cannot predict the effect on our
operations of recent legislative and regulatory initiatives that have been
enacted or proposed in response to the financial crisis.
The
federal government has adopted the Emergency Economic Stabilization Act of 2008
(“EESA”) and the American Recovery and Reinvestment Act of 2009
(“ARRA”). With authority granted under these laws, the U.S. Treasury
Department has proposed a financial stability plan that is intended to enhance
bank capital levels; temporarily increase the limits on federal deposit
insurance; and to offer various forms of economic stimulus, including assistance
for homeowners to restructure and lower mortgage payments on qualifying
loans.
In
addition to the EESA and ARRA, there is the potential for new federal or state
laws and regulations regarding lending and funding practices and liquidity
standards, and financial institution regulatory agencies are expected to be
aggressive in responding to concerns and trends identified in
examinations. Negative developments in the financial services
industry and the impact of recently enacted or new legislation in response to
those developments could negatively impact our operations by restricting our
business operations, increasing costs, limiting the types of financial services
and products we may offer including restrictions on associated fee revenue, such
as overdraft fees and interchange fees, and otherwise adversely impact our
financial performance. Among other things legislation is pending in
Congress to create a new consumer protection agency and authorize greater
supervisory powers for the Federal Reserve Board. We cannot predict
the full impact on our operations and financial condition of the various
legislative and regulatory reform initiatives.
Item
2. Unregistered Sales of Equity Securities
and Use of Proceeds
a)
Not applicable.
b)
Not applicable.
c)
|
On
July 22, 2009, the Company announced an authorization to repurchase up to
1,000,000 of its outstanding shares in open market transactions or
privately negotiated transactions in accordance with securities laws and
regulations through December 31, 2011. Any repurchased shares
will be used for general corporate purposes, including those related to
stock plan activities. The timing and extent of repurchases
will depend on market conditions and other corporate considerations as
determined at the Company’s discretion. The following table
shows treasury stock purchases during the third quarter of
2009.
|
|
Number
of
|
Average
Price
|
Total
Number of Shares
|
Maximum
Number of Shares
|
|
Shares
|
Paid
|
Purchased
as Part of Publicly
|
That
May Yet Be Purchased
|
|
Purchased
|
Per
share
|
Announced
Plans or Programs
|
Under
the Plans or Programs
|
July
2009
|
0
|
$0
|
0
|
1,000,000
|
August
2009
|
0
|
0
|
0
|
1,000,000
|
September
2009
|
0
|
0
|
0
|
1,000,000
|
Total
|
0
|
$0
|
0
|
|
Item
3. Defaults Upon Senior
Securities
Not
applicable.
Item
4. Submission of Matters to a Vote of
Security Holders
There
were no matters submitted to a vote of the shareholders during the quarter
ending September 30, 2009.
Item
5. Other Information
Not
applicable.
Item
6. Exhibits
Exhibit
No. Description
31.1
|
Certification
of Mark E. Tryniski, President and Chief Executive Officer of the
Registrant, pursuant to Rule 13a-15(e) or Rule 15d-15(e) under the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
31.2
|
Certification
of Scott Kingsley, Treasurer and Chief Financial Officer of the
Registrant, pursuant to Rule 13a-15(e) or Rule 15d-15(e) under the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
32.1
|
Certification
of Mark E. Tryniski, President and Chief Executive Officer of the
Registrant, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
|
32.2
|
Certification
of Scott Kingsley, Treasurer and Chief Financial Officer of the
Registrant, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
|
Signatures
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Community
Bank System, Inc.
Date: November
5, 2009 |
/s/ Mark E.
Tryniski |
|
Mark E.
Tryniski, President and Chief Executive Officer |
|
|
Date: November
5, 2009 |
/s/ Scott
Kingsley |
|
Scott
Kingsley, Treasurer and Chief Financial
Officer |