cbna10k2009.htm
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended December 31,
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.) |
|
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|
5790 Widewaters Parkway, DeWitt, New
York |
|
13214-1883 |
(Address of
principal executive offices) |
|
(Zip
Code) |
(315)
445-2282
Registrant's
telephone number, including area code
Securities
registered pursuant of Section 12(b) of the Act:
Title of each class |
Name
of each exchange on which registered |
Common Stock,
Par Value $1.00 |
New York Stock
Exchange |
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes o No x .
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act. Yes o
No x
..
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 on
its corporate website every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T 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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this
chapter) is not contained herein, and will not be contained, to the best of the
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. 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 definition 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.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes
o. No x .
State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter $462,629,396
.
Indicate
the number of shares outstanding of each of the registrant's classes of common
stock, as of the latest practicable date.
33,028,016 shares of Common
Stock, $1.00 par value, were outstanding on February 28,
2010.
DOCUMENTS
INCORPORATED BY REFERENCE.
Portions
of Definitive Proxy Statement for Annual Meeting of Shareholders to be held on
April 28, 2010 (the “Proxy Statement”) is incorporated by reference in Part III
of this Annual Report on Form 10-K.
TABLE
OF CONTENTS
PART I |
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Page |
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Item |
1. |
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Business___________________________________________________________________________________ |
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3 |
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Item |
1A. |
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Risk
Factors________________________________________________________________________________ |
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8 |
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Item |
1B. |
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Unresolved
Staff
Comments_____________________________________________________________________ |
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11 |
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Item |
2. |
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Properties__________________________________________________________________________________ |
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11 |
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Item |
3. |
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Legal
Proceedings____________________________________________________________________________ |
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11 |
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Item |
4. |
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[ Reserved
]_________________________________________________________________________________ |
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11 |
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Item |
4A. |
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Executive
Officers of the
Registrant_______________________________________________________________ |
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12 |
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PART II |
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Item |
5. |
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Market for
Registrant's Common Equity, Related Stockholders Matters and Issuer
Purchases of Equity Securities____ |
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12 |
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Item |
6. |
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Selected
Financial
Data________________________________________________________________________ |
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15 |
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Item |
7. |
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations______________________ |
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16 |
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Item |
7A. |
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Quantitative
and Qualitative Disclosures about Market
Risk_____________________________________________ |
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42 |
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Item |
8. |
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Financial
Statements and Supplementary Data: |
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Consolidated Statements of
Condition___________________________________________________________ |
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45 |
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Consolidated Statements of
Income_____________________________________________________________ |
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46 |
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Consolidated Statements of Changes in Shareholders'
Equity__________________________________________ |
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47 |
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Consolidated Statements of Comprehensive
Income________________________________________________ |
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48 |
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Consolidated Statements of Cash
Flows_________________________________________________________ |
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49 |
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Notes to Consolidated Financial
Statements______________________________________________________ |
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50 |
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Report on Internal Control over Financial
Reporting_________________________________________________ |
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81 |
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Report of Independent Registered Public Accounting
Firm___________________________________________ |
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82 |
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Two Year
Selected Quarterly
Data________________________________________________________________ |
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83 |
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Item |
9. |
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Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure_____________________ |
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83 |
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Item |
9A. |
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Controls and
Procedures_______________________________________________________________________ |
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83 |
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Item |
9B. |
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Other
Information____________________________________________________________________________ |
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84 |
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PART III |
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Item |
10. |
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Directors, and
Executive Officers and Corporate
Governance____________________________________________ |
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84 |
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Item |
11. |
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Executive
Compensation_______________________________________________________________________ |
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84 |
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Item |
12. |
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters______________ |
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84 |
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Item |
13. |
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Certain
Relationships and Related Transactions, and Directors
Independence_______________________________ |
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84 |
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Item |
14. |
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Principal
Accounting Fees and
Services____________________________________________________________ |
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84 |
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PART IV |
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Item |
15. |
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Exhibits,
Financial Statement
Schedules____________________________________________________________ |
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85 |
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Signatures |
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__________________________________________________________________________________________ |
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88 |
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Part
I
This
Annual Report on Form 10-K contains certain forward-looking statements with
respect to the financial condition, results of operations and business of
Community Bank System, Inc. These forward-looking statements by their
nature address matters that involve certain risks and
uncertainties. Factors that may cause actual results to differ
materially from those contemplated by such forward-looking statements are set
forth herein under the caption “Forward-Looking Statements.”
Item 1.
Business
Community
Bank System, Inc. ("the Company") was incorporated on April 15, 1983, under
the Delaware General Corporation Law. Its principal office is located at
5790 Widewaters Parkway, DeWitt, New York 13214. The Company is a
single bank holding company which wholly-owns five subsidiaries: Community Bank,
N.A. (“the Bank” or “CBNA”), Benefit Plans Administrative Services, Inc.
(“BPAS”), CFSI Closeout Corp. (“CFSICC”), First of Jermyn Realty Company, Inc.
(“FJRC”) and Town & Country Agency LLC (“T&C”). BPAS owns
three subsidiaries, Benefit Plans Administrative Services LLC (“BPA”), a
provider of defined contribution plan administration services; Harbridge
Consulting Group LLC (“Harbridge”), a provider of actuarial and benefit
consulting services; and Hand Benefits & Trust Company (“HB&T”), a
provider of Collective Investment Fund administration and institutional trust
services. CFSICC, FJRC and T&C are inactive companies. The
Company also wholly-owns two unconsolidated subsidiary business trusts formed
for the purpose of issuing mandatorily redeemable preferred securities which are
considered Tier I capital under regulatory capital adequacy
guidelines.
The
Company maintains websites at communitybankna.com and
firstlibertybank.com. Annual reports on Form 10-K, quarterly reports
on Form 10-Q and current reports on Form 8-K, and amendments to those reports,
are available on the Company’s website free of charge as soon as reasonably
practicable after such reports or amendments are electronically filed with or
furnished to the Securities and Exchange Commission (“SEC”). The
information on the website is not part of this filing. Copies of all
documents filed with the SEC can also be obtained by visiting the SEC’s Public
Reference Room at 100 F Street, NE, Washington, DC 20549, by calling
the SEC at 1-800-SEC-0330 or by accessing the SEC’s website at
http://www.sec.gov.
The
Bank’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 Bank operates 147 customer facilities throughout 28
counties of Upstate New York, where it operates as Community Bank, N.A. and five
counties of Northeastern Pennsylvania, where it is known as First Liberty Bank
& Trust, offering a range of commercial and retail banking
services. The Bank owns the following subsidiaries: Community
Investment Services, Inc. (“CISI”), CBNA Treasury Management Corporation
(“TMC”), CBNA Preferred Funding Corporation (“PFC”), Nottingham Advisors, Inc.
(“Nottingham”), First Liberty Service Corp. (“FLSC”), Brilie Corporation
(“Brilie”) and CBNA Insurance Agency, Inc. (“CBNA Insurance”). CISI
provides broker-dealer and investment advisory services. TMC provides
cash management, investment, and treasury services to the Bank. PFC
primarily acts as an investor in residential real estate
loans. Nottingham provides asset management services to individuals,
corporate pension and profit sharing plans, and foundations. FLSC
provides banking-related services to the Pennsylvania branches of the Bank.
Brilie is an inactive company. CBNA Insurance is a full-service
insurance agency offering primarily property and casualty products.
Acquisition
History (2005-2009)
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%. 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 was a provider of retirement plan consulting, daily
valuation administration, actuarial and ancillary support services.
Hand Benefits & Trust,
Inc.
On May
18, 2007, BPAS, a whollyowned subsidiary of the Company, acquired Hand Benefits
& Trust, Inc. (“HB&T”) in an all cash transaction. HB&T
was a Houston, Texas based provider of employee benefit plan administration and
trust services.
TLNB Financial
Corporation
On June
1, 2007, the Company acquired TLNB Financial Corporation, parent company of
Tupper Lake National Bank (“TLNB”), in an all-cash transaction valued at
approximately $17.8 million. Based in Tupper Lake, NewYork, TLNB
operated five branches in the northeastern New York State cities of Tupper Lake,
Plattsburgh and Saranac Lake, as well as an insurance subsidiary, TLNB Insurance
Agency, Inc.
ONB
Corporation
On
December 1, 2006, the Company acquired ONB Corporation (“ONB”), the parent
company of Ontario National Bank, a federally-chartered national bank, in an
all-cash transaction valued at approximately $16 million. ONB
operated four branches in the villages of Clifton Springs, Phelps, and Palmyra,
New York.
ES&L Bancorp,
Inc.
On August
11, 2006, the Company acquired ES&L Bancorp, Inc. (“Elmira”), the parent
company of Elmira Savings and Loan, F.A., a federally-chartered thrift, in an
all-cash transaction valued at approximately $40 million. Elmira
operated two branches in the cities of Elmira and Ithaca, New York.
Services
The Bank
is a community bank committed to the philosophy of serving the financial needs
of customers in local communities. The Bank's branches are generally
located in smaller towns and cities within its geographic market areas of
Upstate New York and Northeastern Pennsylvania. The Company believes that the
local character of its business, knowledge of the customers and their needs, and
its comprehensive retail and business products, together with responsive
decision-making at the branch and regional levels, enable the Bank to compete
effectively in its geographic market. The Bank is a member of
the Federal Reserve System and the Federal Home Loan Bank of New York ("FHLB"),
and its deposits are insured by the Federal Deposit Insurance Corporation
(“FDIC”) up to applicable limits.
Competition
The
banking and financial services industry is highly competitive in the New York
and Pennsylvania markets. The Company competes actively for loans,
deposits and customers with other national and state banks, thrift institutions,
credit unions, retail brokerage firms, mortgage bankers, finance companies,
insurance companies, and other regulated and unregulated providers of financial
services. In order to compete with other financial service providers,
the Company stresses the community nature of its operations and the development
of profitable customer relationships across all lines of
business.
The table
below summarizes the Bank’s deposits and market share by the thirty-three
counties of New York and Pennsylvania in which it has customer
facilities. Market share is based on deposits of all commercial
banks, credit unions, savings and loan associations, and savings
banks.
|
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Number
of
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Towns
Where
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Deposits
as of
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Company
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6/30/2009
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Market
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Towns/
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Has
1st or 2nd
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County
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State
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(000's
omitted)
|
Share(1)
|
Facilities
|
ATM's
|
Cities
|
Market
Position
|
Franklin
|
NY
|
$253,090
|
54.3%
|
10
|
7
|
7
|
7
|
Hamilton
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NY
|
34,031
|
52.6%
|
2
|
0
|
2
|
2
|
Allegany
|
NY
|
196,769
|
48.6%
|
9
|
8
|
8
|
8
|
Lewis
|
NY
|
106,776
|
41.8%
|
4
|
3
|
3
|
3
|
Seneca
|
NY
|
159,368
|
39.8%
|
4
|
3
|
4
|
3
|
Cattaraugus
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NY
|
293,443
|
36.0%
|
10
|
8
|
7
|
6
|
St.
Lawrence
|
NY
|
361,109
|
30.8%
|
15
|
7
|
11
|
10
|
Yates
|
NY
|
70,491
|
26.9%
|
2
|
2
|
1
|
0
|
Wyoming
|
PA
|
87,635
|
25.7%
|
4
|
3
|
4
|
3
|
Essex
|
NY
|
117,396
|
23.9%
|
5
|
4
|
5
|
5
|
Steuben
|
NY
|
173,948
|
21.9%
|
8
|
7
|
7
|
4
|
Clinton
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NY
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239,041
|
19.6%
|
5
|
10
|
2
|
2
|
Chautauqua
|
NY
|
232,318
|
15.8%
|
12
|
11
|
10
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7
|
Jefferson
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NY
|
184,626
|
12.7%
|
5
|
5
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4
|
2
|
Schuyler
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NY
|
19,746
|
12.6%
|
1
|
1
|
1
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0
|
Livingston
|
NY
|
80,804
|
11.8%
|
3
|
4
|
3
|
3
|
Ontario
|
NY
|
149,753
|
9.3%
|
7
|
12
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6
|
4
|
Lackawanna
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PA
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421,800
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9.1%
|
12
|
12
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8
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4
|
Chemung
|
NY
|
90,175
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7.7%
|
2
|
2
|
1
|
0
|
Tioga
|
NY
|
30,782
|
7.3%
|
2
|
2
|
2
|
1
|
Wayne
|
NY
|
57,731
|
7.2%
|
2
|
4
|
2
|
1
|
Herkimer
|
NY
|
34,521
|
5.9%
|
1
|
1
|
1
|
1
|
Susquehanna
|
PA
|
25,682
|
4.1%
|
2
|
0
|
2
|
2
|
Luzerne
|
PA
|
224,388
|
3.9%
|
6
|
7
|
6
|
3
|
Cayuga
|
NY
|
34,990
|
3.9%
|
2
|
2
|
2
|
1
|
Washington
|
NY
|
22,290
|
3.8%
|
1
|
0
|
1
|
1
|
Oswego
|
NY
|
44,589
|
3.5%
|
2
|
2
|
2
|
2
|
Warren
|
NY
|
35,959
|
2.7%
|
1
|
1
|
1
|
1
|
|
|
3,783,251
|
11.8%
|
139
|
128
|
113
|
86
|
|
|
|
|
|
|
|
|
Bradford
|
PA
|
21,357
|
2.4%
|
2
|
2
|
2
|
1
|
Oneida
|
NY
|
56,309
|
1.8%
|
2
|
1
|
1
|
1
|
Tompkins
|
NY
|
8,055
|
0.5%
|
1
|
0
|
1
|
0
|
Onondaga
|
NY
|
13,521
|
0.2%
|
1
|
2
|
1
|
0
|
Erie
|
NY
|
39,496
|
0.1%
|
2
|
2
|
2
|
1
|
|
|
$3,921,989
|
4.9%
|
147
|
135
|
120
|
89
|
(1)
Deposit market share data as of June 30, 2009 the most recent information
available. Source: SNL Financial LLC
Employees
As of
December 31, 2009, the Company employed 1,595 full-time equivalent
employees. The Company offers a variety of employment benefits and
considers its relationship with its employees to be good.
Supervision
and Regulation
Bank
holding companies and national banks are regulated by state and federal
law. The following is a summary of certain laws and regulations that
govern the Company and the Bank. To the extent that the following
information describes statutory or regulatory provisions, it is qualified in its
entirety by reference to the actual statutes and regulations
thereunder.
Federal Bank Holding Company
Regulation
The
Company is registered under, and is subject to, the Bank Holding Company Act of
1956, as amended. This Act limits the type of companies that
Community Bank System, Inc. may acquire or organize and the activities in which
it or they may engage. In general, the Company and the Bank are
prohibited from engaging in or acquiring direct or indirect control of any
corporation engaged in non-banking activities unless such activities are so
closely related to banking as to be a proper incident thereto. In
addition, the Company must obtain the prior approval of the Board of Governors
of the Federal Reserve System (the “FRB”) to acquire control of any bank; to
acquire, with certain exceptions, more than five percent of the outstanding
voting stock of any other corporation; or to merge or consolidate with another
bank holding company. As a result of such laws and regulation, the
Company is restricted as to the types of business activities it may conduct and
the Bank is subject to limitations on, among others, the types of loans and the
amounts of loans it may make to any one borrower. The Financial
Modernization Act of 1999 created, among other things, the "financial holding
company", a new entity which may engage in a broader range of activities that
are "financial in nature", including insurance underwriting, securities
underwriting and merchant banking. Bank holding companies which are
well capitalized and well managed under regulatory standards may convert to
financial holding companies relatively easily through a notice filing with the
FRB, which acts as the "umbrella regulator" for such entities. The
Company may seek to become a financial holding company in the
future.
Federal Reserve
System
The
Company is required by the Board of Governors of the Federal Reserve System to
maintain cash reserves against its deposits. After exhausting other
sources of funds, the Company may seek borrowings from the Federal Reserve for
such purposes. Bank holding companies registered with the FRB are,
among other things, restricted from making direct investments in real
estate. Both the Company and the Bank are subject to extensive
supervision and regulation, which focus on, among other things, the protection
of depositors' funds.
The
Federal Reserve System also regulates the national supply of bank credit in
order to influence general economic conditions. These policies have a
significant influence on overall growth and distribution of loans, investments
and deposits, and affect the interest rates charged on loans or paid for
deposits.
Fluctuations
in interest rates, which may result from government fiscal policies and the
monetary policies of the Federal Reserve System, have a strong impact on the
income derived from loans and securities, and interest paid on deposits and
borrowings. While the Company and the Bank strive to model various
interest rate changes and adjust their strategies for such changes, the level of
earnings can be materially affected by economic circumstances beyond their
control.
The
Company and the Bank are subject to minimum capital requirements established,
respectively, by the FRB, the OCC (as defined below) and the Federal Deposit
Insurance Corporation (“FDIC”). For information on these capital
requirements and the Company’s and the Bank's capital ratios see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Capital" and Note P to the Financial Statements.
Office of Comptroller of the
Currency
The Bank
is supervised and regularly examined by the Office of the Comptroller of the
Currency (the “OCC”). The various laws and regulations administered
by the OCC affect corporate practices such as payment of dividends, incurring
debt, and acquisition of financial institutions and other
companies. It also affects business practices, such as payment of
interest on deposits, the charging of interest on loans, types of business
conducted and location of offices. There are no regulatory orders or
outstanding issues resulting from regulatory examinations of the
Bank.
Insurance of Deposit
Accounts
The Bank
is a member of the Deposit Insurance Fund (“DIF”), which is administered by the
FDIC. Deposit accounts at the Bank are insured by the FDIC, generally
up to a maximum of $100,000 for each separately insured depositor and up to a
maximum of $250,000 for self-directed retirement accounts. However,
the FDIC increased the deposit insurance available on all deposit accounts to
$250,000, effective until December 31, 2013. In addition, certain
noninterest-bearing transaction accounts maintained with financial institutions
participating in the FDIC’s Transaction Account Guarantee Program are fully
insured regardless of the dollar amount until June 30, 2010. The Bank
has opted to participate in the FDIC’s Transaction Account Guarantee
Program.
The FDIC
imposes an assessment against all depository institutions for deposit
insurance. This assessment is based on the risk category of the
institution and, prior to 2009, ranged from five to 43 basis points of the
institution’s deposits. On December 22, 2008, as a result of
decreases in the reserve ratio of the DIF, the FDIC published a final rule
raising the current deposit insurance assessment rates uniformly for all
institutions by seven basis points for the first quarter of 2009. On
May 22, 2009, the FDIC adopted a final rule imposing a five basis point special
assessment on each insured depository institution’s assets minus Tier 1 capital
as of June 30, 2009, payable on September 30, 2009. The Company’s
special assessment amounted to $2.5 million.
In the
fourth quarter of 2009, the FDIC adopted a rule that required insured depository
institutions to prepay their quarterly risk-based assessments for the fourth
quarter of 2009, and for all of 2010, 2011 and 2012, on December 30,
2009. For purposes of calculating the amount to prepay, the FDIC
required that institutions use their total base assessment rate in effect on
September 30, 2009 and increase that assessment base quarterly at a 5 percent
annual growth rate through the end of 2012. The FDIC also increased
annual assessment rates uniformly by three basis points beginning in
2011. The Company’s prepayment for 2010, 2011 and 2012 amounted to
$21.4 million.
Consumer Protection
Laws
In
connection with its lending activities, the Bank is subject to a number of
federal and state laws designed to protect borrowers and promote lending to
various sectors of the economy. These laws include the Equal Credit
Opportunity Act, the Fair Credit Reporting Act, the Fair and Accurate Credit
Transactions Act, the Truth in Lending Act, the Home Mortgage Disclosure
Act, the Real Estate Settlement Procedures Act, and various state law
counterparts.
In
addition, federal law contains extensive customer privacy protection
provisions. Under these provisions, a financial institution must
provide to its customers, at the inception of the customer relationship and
annually thereafter, the institution’s policies and procedures regarding the
handling of customers’ nonpublic personal financial
information. These provisions also provide that, except for certain
limited exceptions, a financial institution may not provide such personal
information to unaffiliated third parities unless the institution discloses to
the customer that such information may be provided and the customer is given the
opportunity to opt out of such disclosure.
USA Patriot
Act
The
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (“USA Patriot Act”) imposes
obligations on U.S. financial institutions, including banks and broker dealer
subsidiaries, to implement policies, procedures and controls which are
reasonably designed to detect and report instances of money laundering and the
financing of terrorism. In addition, provisions of the USA Patriot
Act require the federal financial institution regulatory agencies to consider
the effectiveness of a financial institution’s anti-money laundering activities
when reviewing bank mergers and bank holding company
acquisitions. The Company has approved policies and procedures that
are designed to be compliant with the USA Patriot Act.
Sarbanes-Oxley Act of
2002
The
Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) implemented a broad range
of corporate governance, accounting and reporting reforms for companies that
have securities registered under the Securities Exchange Act of 1934 as
amended. In particular, the Sarbanes-Oxley Act established, among
other things: (i) new requirements for audit and other key Board of Directors
committees involving independence, expertise levels, and specified
responsibilities; (ii) additional responsibilities regarding the oversight of
financial statements by the Chief Executive Officer and Chief Financial Officer
of the reporting company; (iii) the creation of an independent accounting
oversight board for the accounting industry; (iv) new standards for auditors and
the regulation of audits, including independence provisions which restrict
non-audit services that accountants may provide to their audit clients; (v)
increased disclosure and reporting obligations for the reporting company and its
directors and executive officers including accelerated reporting of company
stock transactions; (vi) a prohibition of personal loans to directors and
officers, except certain loans made by insured financial institutions on
nonpreferential terms and in compliance with other bank regulator requirements;
and (vii) a range of new and increased civil and criminal penalties for
fraud and other violation of the securities laws.
The Emergency Economic
Stabilization Act of 2008
On
October 3, 2008, The Emergency Economic Stabilization Act of 2008 (“EESA”) was
enacted that provides the U.S. Secretary of the Treasury with broad authority to
implement certain actions to help restore stability and liquidity to U.S.
markets. The EESA authorizes the U.S. Treasury to, among other
things, purchase up to $700 billion of mortgages, mortgage-backed securities and
certain other financial instruments from financial institutions for the purpose
of stabilizing and providing liquidity to the U.S. financial
markets. The Company did not originate or invest in sub-prime assets
and, therefore, does not expect to participate in the sale of any of our assets
into these programs. One of the provisions resulting from the
legislation is the Troubled Asset Relief Program Capital Purchase Program (“TARP
Capital Purchase Program”), which provides direct equity investment in perpetual
preferred stock by the U.S. Treasury Department in qualified financial
institutions. The program is voluntary and requires an institution to
comply with a number of restrictions and provisions, including limits on
executive compensation, stock redemptions, and declaration of
dividends. The Company chose not to participate in the TARP Capital
Purchase Program.
Item 1A. Risk
Factors
Community
Bank System, Inc. and its subsidiaries could be adversely impacted by various
risks and uncertainties, which are difficult to predict. The material
risks and uncertainties that management believes affect the Company are
described below. Adverse experience with these or other risks could
have a material impact on the Company’s financial condition and results of
operations.
Changes
in interest rates affect our profitability, assets and liabilities
The
Company’s income and cash flow depends to a great extent on the difference
between the interest earned on loans and investment securities, and the interest
paid on deposits and borrowings. Interest rates are highly sensitive
to many factors that are beyond the Company’s control, including general
economic conditions and polices of various governmental and regulatory agencies
and, in particular, the Federal Reserve. Changes in monetary policy,
including changes in interest rates, could influence not only the interest we
receive on loans and securities and the amount of interest we pay on deposits
and borrowings, but such changes could also affect (1) our ability to originate
loans and obtain deposits, which could reduce the amount of fee income
generated, (2) the fair value of our financial assets and liabilities and (3)
the average duration of our mortgage-backed securities portfolio. If
the interest rates paid on deposits and other borrowings increase at a faster
rate than the interest rates received on loans and other investments, our net
interest income could be adversely affected, which in turn could negatively
affect our earnings. Earnings could also be adversely affected if the
interest rates received on loans and other investments fall more quickly than
the interest rates paid on deposit and other borrowings. Although
management believes it has implemented effective asset and liability management
strategies to reduce the potential effects of changes in interest rates on the
result of operations, any substantial, unexpected, prolonged change in market
interest rates could have a material adverse effect on the financial condition
and results of operations.
Current
levels of market volatility are unprecedented
The
capital, credit and financial markets have experienced significant volatility
and disruption for the last two years. These conditions have had
significant adverse effects on our national and local economies, including
declining real estate values, a widespread tightening of the availability of
credit, illiquidity in certain securities markets, increasing loan
delinquencies, declining consumer confidence and spending, and a reduction of
manufacturing and service business activity. These conditions have
also adversely affected the stock market generally, and have contributed to
significant declines in the trading prices of stocks of financial
institutions. Management does not expect these difficult market
conditions to improve over the short term, and a continuation or worsening of
these conditions could exacerbate their adverse effects.
There
can be no assurance that the Emergency Economic Stabilization Act of 2008 and
the American Recovery and Reinvestment Act will stabilize the U.S. economy and
financial system
The U.S.
Congress enacted the Emergency Economic Stabilization Act of 2008 (“EESA”) in
response to the impact of the volatility and disruption in the capital and
credit markets on the financial sector. The U.S. Department of the
Treasury and the federal banking regulators are implementing a number of
programs under this legislation that are intended to address these
conditions. In addition, the U.S. Congress recently enacted the
American Recovery and Reinvestment Act (“ARRA”) in an effort to save and create
jobs, stimulate the U.S. economy and promote long-term growth and
stability. There can be no assurance that EESA or ARRA will achieve
their intended purposes. The failure of EESA or ARRA to achieve their
intended purposes could result in a continuation or worsening of current
economic and market conditions, and this could adversely effect the Company’s
financial condition, results of operations and/or the trading price of Company
stock.
Regional
economic factors may have an adverse impact on the Company’s
business
The
Company’s main markets are located in the states of New York and
Pennsylvania. The local economic conditions in these areas have a
significant impact on the demand for the Company’s products and services as well
as the ability of the Company’s customers to repay loans, the value of the
collateral securing loans and the stability of the Company’s deposit funding
sources. A prolonged economic downturn in these markets could
negatively impact the Company.
The
allowance for loan loss may be insufficient
The
Company’s business depends on the creditworthiness of its
customers. The Company periodically reviews the allowance for loan
losses for adequacy considering economic conditions and trends, collateral
values and credit quality indicators, including past charge-off experience and
levels of past due loans and nonperforming assets. There is no
certainty that the allowance for loan losses will be adequate over time to cover
credit losses in the portfolio because of unanticipated adverse changes in the
economy, market conditions or events adversely affecting specific customers,
industries or markets.
The
Company may be adversely affected by changes in banking laws, regulations and
regulatory practices
The
Company and its subsidiaries are subject to extensive state and federal
regulation, supervision and legislation that govern nearly every aspect of its
operations. The bank holding company is subject to regulation by the
FRB and the bank subsidiary is subject to regulation by the
OCC. These regulations affect deposit and lending practices, capital
levels and structure, investment practices, dividend policy and
growth. In addition, the non-bank subsidiaries are engaged in
providing investment management and insurance brokerage service, which
industries are also heavily regulated on both a state and federal
level. Changes to the regulatory laws governing these businesses
could affect the Company’s ability to deliver or expand its services and
adversely impact its operations and financial condition.
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.
FDIC
deposit insurance premiums have increased and may increase further in the
future
The
FDIC’s reserve fund has declined over the past year due to costs associated with
bank failures and is expected to continue to decline in the
future. In addition, the FDIC basic insurance coverage limit was
temporarily increased to $250,000 through December 31, 2013. These
increases have increased the aggregate amount of deposits that the FDIC insures
and thus have exposed the FDIC deposit insurance fund to potentially greater
losses. The FDIC has adopted a plan to restore the reserve fund to
the required level by increasing the deposit insurance assessment rates that it
currently charges to insured depository institutions. Any increase
will have an adverse impact on the Company’s results of operations in 2010 and
in future years, and if the FDIC is required to increase its deposit insurance
assessment rate beyond the levels currently contemplated, the adverse impact
will be greater.
Changes
in the equity markets could materially affect the level of assets under
management and the demand for other fee-based services
Economic
downturns could affect the volume of income from and demand for fee-based
services. Revenue from the wealth management and benefit plan
administration businesses depend in large part on the level of assets under
management and administration. Market volatility that leads customers
to liquidate investment, as well as lower asset values can reduce our level of
assets under management and administration and thereby decrease our investment
management and administration revenues.
Mortgage
banking income may experience significant volatility
Mortgage
banking income is highly influenced by the level and direction of mortgage
interest rates, and real estate and refinancing activity. In lower
interest rate environments, the demand for mortgage loans and refinancing
activity will tend to increase. This has the effect of increasing fee
income, but could adversely impact the estimated fair value of our mortgage
servicing rights as the rate of loan prepayments increase. In higher
interest rate environments, the demand for mortgage loans and refinancing
activity will generally be lower. This has the effect of decreasing
fee income.
The
Company depends on dividends from its banking subsidiary for cash revenues, but
those dividends are subject to restrictions
The
ability of the company to satisfy its obligations and pay cash dividends to its
shareholders is primarily dependent on the earnings of and dividends from the
subsidiary bank. However, payment of dividends by the bank subsidiary
is limited by dividend restrictions and capital requirements imposed by bank
regulations. As of December 31, 2009, the Bank had the capacity
to pay up to $5.3 million in dividends to the Company without regulatory
approval. The ability to pay dividends is also subject to the
continued payment of interest that the Company owes on its subordinated junior
debentures. As of December 31, 2009 the Company had $102 million of
subordinated junior debentures outstanding. The Company has the right
to defer payment of interest on the subordinated junior debentures for a period
not exceeding 20 quarters although the Company has not done so to
date. If the Company defers interest payments on the subordinated
junior debentures, it will be prohibited, subject to certain exceptions, from
paying cash dividends on the common stock until all deferred interest has been
paid and interest payments on the subordinated junior debentures
resumes.
The
risks presented by acquisitions could adversely affect our financial condition
and result of operations
The
business strategy of the Company includes growth through
acquisition. Any future acquisitions will be accompanied by the risks
commonly encountered in acquisitions. These risks include among other
things: the difficulty of integrating operations and personnel, the potential
disruption of our ongoing business, the inability of our management to maximize
our financial and strategic position, the inability to maintain uniform
standards, controls, procedures and policies, and the impairment of
relationships with employees and customers as a result of changes in ownership
and management.
The
Company may be required to record impairment charges related to goodwill, other
intangible assets and the investment portfolio
The
Company may be required to record impairment charges in respect to goodwill,
other intangible assets and the investment portfolio. Numerous
factors, including lack of liquidity for resale of certain investment
securities, absence of reliable pricing information for investment securities,
adverse changes in the business climate, adverse actions by regulators,
unanticipated changes in the competitive environment or a decision to change the
operations or dispose of an operating unit could have a negative effect on the
investment portfolio, goodwill or other intangible assets in future
periods.
During
2009 rating agencies imposed a number of downgrades and credit watches on
certain securities in the Company’s investment securities portfolio, which
contributed to the decline in fair value of such securities. Any
further downgrades and credit watches may contribute to additional declines in
the fair value of these securities. In addition, the measurement of
the fair value of these securities involves significant judgment due to the
complexity of the factors contributing to the measurement. Market
volatility makes measurement of the fair value even more difficult and
subjective. To the extent that any portion of the unrealized losses
in the investment portfolio is determined to be other than temporary, and the
loss is related to credit factors, the Company could be required to recognize a
charge to earnings in the quarter during which such determination is
made.
The
Company relies on third party service providers
The
Company relies on communication, information, operating and financial control
systems from third-party service providers. Any failure or
interruption or breach in security of these systems could result in failures or
interruptions in our customer relationship management, general ledger, deposit,
servicing and/or loan origination systems. While the Company has
policies and procedures designed to prevent or limit the effect of a failure,
interruption or security breach, there can be no assurance that any such
failures, interruptions or security breaches will not occur or, if they do
occur, that their impact can be adequately mitigated.
The
Company may be adversely affected by the soundness of other financial
institutions
The
Company owns common stock of Federal Home Loan Bank of New York (“FHLBNY”) in
order to qualify for membership in the FHLB system, which enables it to borrow
funds under the FHLBNY advance program. The carrying value of the
Company’s FHLBNY common stock was $38.4 million as of December 31,
2009. There are 12 branches of the FHLB, including New
York. Several members have warned that they have either breached
risk-based capital requirement or that they are close to breaching those
requirements. To conserve capital, some FHLB branches are suspending
dividends, cutting dividend payments, and not buying back excess FHLB stock that
members hold. FHLBNY has stated that they expect to be able to
continue to pay dividends, redeem excess capital stock, and provide
competitively priced advances in the future. The most severe problems
in FHLB have been at some of the other FHLB branches. Nonetheless,
the 12 FHLB branches are jointly liable for the consolidated obligations of the
FHLB system. To the extent that one FHLB branch cannot meet its
obligations to pay its share of the systems’ debt, other FHLB branches can be
called upon to make the payment.
The
Company continually encounters technological change and may have to continue to
invest in technological improvements
The
financial services industry is continually undergoing rapid technological change
with frequent introductions of new technology-driven products and
services. The effective use of technology increases efficiency and
enables financial institutions to better serve customers and to reduce
costs. The Company’s future success depends, in part, upon its
ability to address the needs of its customers by using technology to provide
products and services that will satisfy customer demands as well as to create
additional efficiencies in the Company’s operations. In late 2009,
the Company made a decision to change its core banking system from an
out-sourced, third-party provided system to an in-house, integrated solution
expected to be implemented by the third quarter of 2010. Although the
Company expects to benefit from the enhanced functionality and process
efficiencies of the new system, the planned conversion does include meaningful
execution risk.
Trading
activity in the Company’s common stock could result in material price
fluctuations
The
market price of the Company’s common stock may fluctuate significantly in
response to a number of other factors including, but not limited
to:
·
|
Changes
in securities analysts’ expectations of financial
performance
|
·
|
Volatility
of stock market prices and volumes
|
·
|
Incorrect
information or speculation
|
·
|
Changes
in industry valuations
|
·
|
Variations
in operating results from general
expectations
|
·
|
Actions
taken against the Company by various regulatory
agencies
|
·
|
Changes
in authoritative accounting guidance by the Financial Accounting Standards
Board or other regulatory agencies
|
·
|
Changes
in general domestic economic conditions such as inflation rates, tax
rates, unemployment rates, labor and healthcare cost trend rates,
recessions, and changing government policies, laws and
regulations
|
·
|
Severe
weather, natural disasters, acts of war or terrorism and other external
events
|
Readers
are cautioned that it is not possible to predict or identify all of the risks,
uncertainties and other factors that may affect future results and that the
above list should not be considered to be a complete list.
Item 1B. Unresolved Staff
Comments
None
Item
2. Properties
The
Company’s primary headquarters is located at 5790 Widewaters Parkway, Dewitt,
New York, which is leased. In addition, the Company has 168
properties located in the counties identified in the table on page 5, of which
101 are owned and 67 are under long-term lease arrangements. Real
property and related banking facilities owned by the Company at
December 31, 2009 had a net book value of $54.4 million and none of the
properties were subject to any material encumbrances. For the year
ended December 31, 2009, rental fees of $4.0 million were paid on
facilities leased by the Company for its operations. The Company
believes that its facilities are suitable and adequate for the Company’s current
operations.
Item 3. 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 4. [ Reserved
]
Item
4A. Executive
Officers of the Registrant
The
executive officers of the Company and the Bank who are elected by the Board of
Directors are as follows:
Name
|
Age
|
Position
|
Mark
E. Tryniski
|
49
|
Director,
President and Chief Executive Officer of the Company and the
Bank. Mr. Tryniski assumed his current position in August 2006.
He served as Executive Vice President and Chief Operating Officer from
March 2004 to July 2006 and as the Treasurer and Chief Financial Officer
from June 2003 to March 2004. He previously served as a partner in the
Syracuse office of PricewaterhouseCoopers LLP.
|
Scott
Kingsley
|
45
|
Executive
Vice President and Chief Financial Officer of the Company. Mr.
Kingsley joined the Company in August 2004 in his current
position. He served as Vice President and Chief Financial
Officer of Carlisle Engineered Products, Inc., a subsidiary of the
Carlisle Companies, Inc., from 1997 until joining the
Company.
|
Brian
D. Donahue
|
53
|
Executive
Vice President and Chief Banking Officer. Mr. Donahue assumed
his current position in August 2004. He served as the Bank’s
Chief Credit Officer from February 2000 to July 2004 and as the Senior
Lending Officer for the Southern Region of the Bank from 1992 until June
2004.
|
George
J. Getman
|
53
|
Executive
Vice President and General Counsel. Mr. Getman assumed his
current position in January 2008. Prior to joining the Company,
he was a member with Bond, Schoeneck & King, PLLC and served as
corporate counsel to the Company.
|
Part
II
Item 5. Market for the
Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
The
Company’s common stock has been trading on the New York Stock Exchange under the
symbol “CBU” since December 31, 1997. Prior to that, the common stock
traded over-the-counter on the NASDAQ National Market under the symbol “CBSI”
beginning on September 16, 1986. There were 32,800,308 shares of common stock
outstanding on December 31, 2009, held by approximately 3,509 registered
shareholders of record. The following table sets forth the high and low prices
for the common stock, and the cash dividends declared with respect thereto, for
the periods indicated. The prices do not include retail mark-ups,
mark-downs or commissions.
|
High
|
Low
|
Quarterly
|
Year
/ Qtr
|
Price
|
Price
|
Dividend
|
2009
|
|
|
|
4th
|
$20.00
|
$16.36
|
$0.22
|
3rd
|
$20.33
|
$13.78
|
$0.22
|
2nd
|
$20.06
|
$14.22
|
$0.22
|
1st
|
$24.55
|
$13.24
|
$0.22
|
|
|
|
|
2008
|
|
|
|
4th
|
$25.98
|
$19.00
|
$0.22
|
3rd
|
$33.00
|
$19.52
|
$0.22
|
2nd
|
$26.88
|
$20.50
|
$0.21
|
1st
|
$26.45
|
$17.91
|
$0.21
|
The
Company has historically paid regular quarterly cash dividends on its common
stock, and declared a cash dividend of $0.22 per share for the first quarter of
2010. The Board of Directors of the Company presently intends to
continue the payment of regular quarterly cash dividends on the common stock, as
well as to make payment of regularly scheduled dividends on the trust preferred
stock when due, subject to the Company's need for those
funds. However, because substantially all of the funds available for
the payment of dividends by the Company are derived from the Bank, future
dividends will depend upon the earnings of the Bank, its financial condition,
its need for funds and applicable governmental policies and
regulations.
The
following graph compares cumulative total shareholders returns on the Company’s
common stock over the last five fiscal years to the S&P 600 Commercial Banks
Index, the NASDAQ Bank Index, the S&P 500 Index, and the KBW Regional
Banking Index. Total return values were calculated as of December 31 of each
indicated year assuming a $100 investment on December 31, 2004 and reinvestment
of dividends.
The
following table provides information as of December 31, 2009 with respect to
shares of common stock that may be issued under the Company’s existing equity
compensation plans.
|
Number
of
|
|
|
|
Securities
to be
|
Weighted-average
|
Number
of
|
|
Issued
upon
|
Exercise
Price
|
Securities
|
|
Exercise
of
|
on
Outstanding
|
Remaining
|
|
Outstanding
Options,
|
Options,
Warrants
|
Available
for
|
Plan
Category
|
Warrants
and Rights (1)
|
and
Rights
|
Future
Issuance
|
Equity
compensation plans approved by security holders:
|
|
|
|
1994
Long-term Incentive Plan
|
1,016,467
|
$18.00
|
0
|
2004
Long-term Incentive Plan
|
2,240,356
|
$19.65
|
1,588,609
|
Total
|
3,256,823
|
$19.14
|
1,588,609
|
(1) The
number of securities includes unvested restricted stock issued of
174,008.
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 in
2009.
Item 6. Selected
Financial Data
The
following table sets forth selected consolidated historical financial data of
the Company as of and for each of the years in the five-year period ended
December 31, 2009. The historical information set forth under the
captions “Income Statement Data” and “Balance Sheet Data” is derived from the
audited financial statements while the information under the captions “Capital
and Related Ratios”, “Selected Performance Ratios” and “Asset Quality Ratios”
for all periods is unaudited. All financial information in this table
should be read in conjunction with the information contained in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
with the Consolidated Financial Statements and the related notes thereto
included elsewhere in this Annual Report on Form 10-K.
SELECTED
CONSOLIDATED FINANCIAL INFORMATION
|
Years
Ended December 31,
|
(In
thousands except per share data and ratios)
|
2009
|
2008
|
2007
|
2006
|
2005
|
Income
Statement Data:
|
|
|
|
|
|
Loan
interest income
|
$185,119
|
$186,833
|
$186,784
|
$167,113
|
$147,608
|
Investment
interest income
|
63,663
|
64,026
|
69,453
|
64,788
|
71,836
|
Interest
expense
|
83,282
|
102,352
|
120,263
|
97,092
|
75,572
|
Net
interest income
|
165,500
|
148,507
|
135,974
|
134,809
|
143,872
|
Provision
for loan losses
|
9,790
|
6,730
|
2,004
|
6,585
|
8,534
|
Noninterest
income
|
83,528
|
73,244
|
63,260
|
51,679
|
48,401
|
Gain
(loss) on investment securities & early retirement of long-term
borrowings
|
7
|
230
|
(9,974)
|
(2,403)
|
12,195
|
Special
charges/acquisition expenses
|
1,716
|
1,399
|
382
|
647
|
2,943
|
Noninterest
expenses
|
184,462
|
157,163
|
141,692
|
126,556
|
124,446
|
Income
before income taxes
|
53,067
|
56,689
|
45,182
|
50,297
|
68,545
|
Net
income
|
41,445
|
45,940
|
42,891
|
38,377
|
50,805
|
Diluted
earnings per share (1)
|
1.26
|
1.49
|
1.42
|
1.26
|
1.65
|
|
|
|
|
|
|
Balance
Sheet Data:
|
|
|
|
|
|
Cash
equivalents
|
$257,812
|
$112,181
|
$4,533
|
$104,231
|
$5,039
|
Investment
securities
|
1,487,127
|
1,395,011
|
1,391,872
|
1,229,271
|
1,303,117
|
Loans,
net of unearned discount
|
3,099,485
|
3,136,140
|
2,821,055
|
2,701,558
|
2,411,769
|
Allowance
for loan losses
|
(41,910)
|
(39,575)
|
(36,427)
|
(36,313)
|
(32,581)
|
Intangible
assets
|
317,671
|
328,624
|
256,216
|
246,136
|
224,878
|
Total
assets
|
5,402,813
|
5,174,552
|
4,697,502
|
4,497,797
|
4,152,529
|
Deposits
|
3,924,486
|
3,700,812
|
3,228,464
|
3,168,299
|
2,983,507
|
Borrowings
|
856,778
|
862,533
|
929,328
|
805,495
|
653,090
|
Shareholders’
equity
|
565,697
|
544,651
|
478,784
|
461,528
|
457,595
|
|
|
|
|
|
|
Capital
and Related Ratios:
|
|
|
|
|
|
Cash
dividend declared per share
|
$0.88
|
$0.86
|
$0.82
|
$0.78
|
$0.74
|
Book
value per share
|
17.25
|
16.69
|
16.16
|
15.37
|
15.28
|
Tangible
book value per share
|
8.09
|
6.62
|
7.51
|
7.17
|
7.77
|
Market
capitalization (in millions)
|
633
|
796
|
589
|
690
|
676
|
Tier
1 leverage ratio
|
7.39%
|
7.22%
|
7.77%
|
8.81%
|
7.57%
|
Total
risk-based capital to risk-adjusted assets
|
13.46%
|
12.53%
|
14.05%
|
15.47%
|
13.64%
|
Tangible
equity to tangible assets(3)
|
5.20%
|
4.74%
|
5.01%
|
5.07%
|
5.93%
|
Dividend
payout ratio
|
69.5%
|
57.3%
|
57.1%
|
60.7%
|
43.9%
|
Period
end common shares outstanding
|
32,800
|
32,633
|
29,635
|
30,020
|
29,957
|
Diluted
weighted-average shares outstanding
|
32,992
|
30,826
|
30,232
|
30,392
|
30,838
|
|
|
|
|
|
|
Selected
Performance Ratios:
|
|
|
|
|
|
Return
on average assets
|
0.78%
|
0.97%
|
0.93%
|
0.90%
|
1.19%
|
Return
on average equity
|
7.46%
|
9.23%
|
9.20%
|
8.36%
|
10.89%
|
Net
interest margin
|
3.80%
|
3.82%
|
3.64%
|
3.91%
|
4.17%
|
Noninterest
income/operating income (FTE)
|
31.6%
|
31.0%
|
26.1%
|
24.8%
|
27.7%
|
Efficiency
ratio(2)
|
65.4%
|
62.7%
|
63.3%
|
59.9%
|
56.8%
|
|
|
|
|
|
|
Asset
Quality Ratios:
|
|
|
|
|
|
Allowance
for loan losses/total loans
|
1.35%
|
1.26%
|
1.29%
|
1.34%
|
1.35%
|
Nonperforming
loans/total loans
|
0.61%
|
0.40%
|
0.32%
|
0.47%
|
0.55%
|
Allowance
for loan losses/nonperforming loans
|
222%
|
312%
|
410%
|
288%
|
245%
|
Net
charge-offs/average loans
|
0.24%
|
0.20%
|
0.10%
|
0.24%
|
0.33%
|
Loan
loss provision/net charge-offs
|
131%
|
117%
|
76%
|
108%
|
110%
|
|
(1)
Earnings per share amounts have been restated to reflect the effects of
ASC 260-10-65. |
|
(2)
Efficiency ratio excludes intangible amortization, gain (loss) on
investment securities & debt extinguishments, goodwill impairment, and
special charges/acquisition expenses. The efficiency ratio is not a
financial measurement required by accounting principles generally accepted
in the United States of America. However, the efficiency ratio
is used by management in its assessment of financial performance
specifically as it relates to non-interest expense control and also
believes such information is useful to investor in evaluating Company
performance.
|
|
(3)
The tangible equity to tangible asset ratio excludes goodwill and
identifiable intangible assets. The ratio is not a financial
measurement required by accounting principles generally accepted in the
United States of America. However, management believes such
information is useful to analyze the relative strength of the Company’s
capital position and is useful to investors in evaluating Company
performance.
|
Item
7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations
This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations (“MD&A”) primarily reviews the financial condition and results of
operations of Community Bank System, Inc. (“the Company”) for the past two
years, although in some circumstances a period longer than two years is covered
in order to comply with Securities and Exchange Commission disclosure
requirements or to more fully explain long-term trends. The following
discussion and analysis should be read in conjunction with the Selected
Consolidated Financial Information on page 15 and the Company’s Consolidated
Financial Statements and related notes that appear on pages 45 through
80. All references in the discussion to the financial condition and
results of operations are to the consolidated position and results of the
Company and its subsidiaries taken as a whole.
Unless
otherwise noted, all earnings per share (“EPS”) figures disclosed in the
MD&A refer to diluted EPS; interest income, net interest income and net
interest margin are presented on a fully tax-equivalent (“FTE”)
basis. The term “this year” and equivalent terms refer to results in
calendar year 2009, “last year” and equivalent terms refer to calendar year
2008, and all references to income statement results correspond to full-year
activity unless otherwise noted.
This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations contains certain forward-looking statements with respect to the
financial condition, results of operations and business of Community Bank
System, Inc. These forward-looking statements involve certain risks
and uncertainties. Factors that may cause actual results to differ
materially from those contemplated by such forward-looking statements are set
herein under the caption “Forward-Looking Statements” on page 41.
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 on 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 the critical accounting estimates
include:
·
|
Allowance
for loan losses – The allowance for loan losses reflects management’s best
estimate of probable loan losses in the Company’s loan portfolio.
Determination of the allowance for loan losses 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 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 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.
|
·
|
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, mortality rates, future health care
costs 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.
|
·
|
Intangible
assets – As a result of acquisitions, the Company has acquired goodwill
and identifiable intangible assets. Goodwill represents the
cost of acquired companies in excess of the fair value of net assets at
the acquisition date. Goodwill is evaluated at least annually,
or when business conditions suggest an impairment may have occurred and
will be reduced to its carrying value through a charge to earnings if
impairment exists. Core deposits and other identifiable
intangible assets are amortized to expense over their estimated useful
lives. The determination of whether or not impairment exists 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 them to select 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, all of which are
susceptible to change based on changes in economic conditions and other
factors. Future events or changes in the estimates used to
determine the carrying value of goodwill and identifiable intangible
assets could have a material impact on the Company’s results of
operations.
|
A summary
of the accounting policies used by management is disclosed in Note A, “Summary
of Significant Accounting Policies”, starting on page 50.
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 profitable loan and deposit volume using both organic and
acquisition strategies, (iii) increase the non-interest 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 to 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, performance of specific product lines, 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.
The
Company’s reported net income for the year of $41.4 million, or $1.26 per share,
was 9.8% below 2008’s reported earnings of $45.9 million, or $1.49 per
share. 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 deposits and
higher noninterest income. The 2009 results included a $3.1 million
non-cash charge for impairment of goodwill associated with the Company’s wealth
management businesses, a $6.9 million increase in FDIC assessments, as well as a
$1.4 million special charge related to the planned early termination of its core
banking system services contract in 2010. Excluding the
aforementioned items, as well as acquisition expenses in both years, a $1.7
million goodwill impairment charge and a one-time tax gain in 2008, the
Company’s 2009 full year results improved by $0.01 per share over
2008.
Loan net
charge-off, delinquency and nonperforming loan ratios rose and the provision for
loan losses increased versus 2008, but all these metrics remained favorable to
the Company’s peers and long-term historical levels. The Company
experienced year-over-year loan growth in the business lending portfolio with
small decreases in the consumer installment and consumer mortgage
portfolio. The investment portfolio, including cash equivalents,
increased from the prior year due to the net liquidity created from the
acquisition of Citizens’ branches in the fourth quarter of 2008, as well as
organic deposit growth. Average deposits increased in 2009 as
compared to 2008 as a result of the acquisition of Citizens’ branches as well as
organic growth in core product relationships, offset by a reduction in time
deposits. External borrowings decreased from the end of December 2008
as a portion of the net liquidity from the branch acquisition was used to
eliminate certain obligations.
Net Income and
Profitability
Net
income for 2009 was $41.4 million, a decrease of $4.5 million, or
9.8%, from 2008’s earnings of $45.9 million. Earnings per share for
2009 was $1.26 per share, down 15% from 2008’s earnings per
share. The 2009 results include a $3.1 million or $0.07 per share
non-cash charge for impairment of goodwill associated with the Company’s wealth
management business as well as a $1.4 million or $0.03 per share special charge
related to the planned early termination of its core banking system services
contract in 2010. Additionally, during 2009, FDIC insurance costs
increased $6.9 million or $0.16 per share. The Company’s 2008 results
included a $1.7 million or $0.04 per share goodwill impairment charge, $1.4
million or $0.03 per share of acquisition expenses related to the purchase of 18
branch-banking centers in northern New York State in November 2008 and ABG in
July 2008, as well as a $1.7 million or $0.05 per share benefit related to
settlement of certain previously unrecognized tax
positions. Excluding the aforementioned items, the Company’s 2009
full year results improved by $0.01 per share over 2008.
Net
income for 2008 was $45.9 million, up $3.0 million, or 7.1% from 2007’s earning
of $42.9 million. Earnings per share for 2008 was $1.49 per share, up
4.9% from 2007’s earnings per share. The 2008 results include a $1.7
million benefit related to a change in a position taken on certain previously
unrecognized tax positions, a $1.7 million pre-tax, non-cash charge for
impairment of goodwill associated with the Company’s wealth management business
and $1.4 million of acquisition expenses related to the purchase of
18 branch-banking centers in northern New York State from Citizens in November
and the purchase of ABG in July. The 2007 results include a $9.9
million, or $0.20 per share, pre-tax charge related to the early redemption of
$25 million of variable-rate, trust preferred obligations, as well as the
refinancing of $150 million of Federal Home Loan Bank advances into lower cost
instruments. The 2007 results also included a $6.9 million, or $0.23
per share, benefit related to the settlement and a related change in a position
taken on certain previously unrecognized tax positions.
Table
1: Condensed Income Statements
|
Years
Ended December 31,
|
(000’s
omitted, except per share data)
|
2009
|
2008
|
2007
|
2006
|
2005
|
Net
interest income
|
$165,500
|
$148,507
|
$135,974
|
$134,809
|
$143,872
|
Loan
loss provision
|
9,790
|
6,730
|
2,004
|
6,585
|
8,534
|
Noninterest
income
|
83,535
|
73,474
|
53,286
|
49,276
|
60,596
|
Operating
expenses
|
186,178
|
158,562
|
142,074
|
127,203
|
127,389
|
Income
before taxes
|
53,067
|
56,689
|
45,182
|
50,297
|
68,545
|
Income
taxes
|
11,622
|
10,749
|
2,291
|
11,920
|
17,740
|
Net
income
|
$41,445
|
$45,940
|
$42,891
|
$38,377
|
$50,805
|
|
|
|
|
|
|
Diluted
earnings per share
|
$1.26
|
$1.49
|
$1.42
|
$1.26
|
$1.65
|
The
primary factors explaining 2009 performance are discussed in detail in the
remaining sections of this document and are summarized as follows:
·
|
As
shown in Table 1 above, net interest income increased $17.0 million, or
11.4%, due to a $486 million increase in average earning assets partially
offset by a two-basis point decrease in the net interest
margin. Average loans grew $170 million or 5.8%, primarily due
to organic business lending, consumer installment and retail mortgage
growth as well as the addition of 18 branch banking centers in November
2008. The average book value of investments increased $92.6
million, or 7.1% in 2009. Short-term cash equivalents increased
$223 million as compared to 2008, reflective of the net liquidity
generated from the Citizens acquisition and organic deposit
growth. Average borrowings decreased $42.8 million or 4.7% as a
portion of the net liquidity from the Citizen acquisition was used to
eliminate certain borrowings.
|
·
|
The
loan loss provision of $9.8 million increased $3.1 million, or 46%, from
the prior year level. Net charge-offs of $7.5 million increased
by $1.7 million from 2008, increasing the net charge-off ratio (net
charge-offs / total average loans) to 0.24% for the year. The
Company’s asset quality remained strong as key metrics such as
nonperforming loans as a percentage of total loans, nonperforming assets
as a percentage of loans and other real estate owned, and delinquent loans
(30+ days through nonaccruing) as a percentage of total loans increased
but remained below the Company’s peers and long-term historical levels.
Additional information on trends and policy related to asset quality is
provided in the asset quality section on pages 32 through
35.
|
·
|
Noninterest
income for 2009 of $83.5 million increased by $10.1 million, or 14%, from
2008’s level, due both to organic growth and the two 2008
acquisitions. Fees from banking services were up $8.3 million
or 21%, primarily due to higher ATM and debit card related revenues,
incremental income from the acquired branches and increased activity in
the secondary mortgage banking business. Financial services
revenue was up $2.0 million, or 5.7% higher, mostly from growth
at the Company’s benefit trust, administration, and consulting business,
primarily as a result of the acquisition of
ABG.
|
·
|
Total
operating expenses increased $27.6 million or 17% in 2009 to $186.2
million. A significant portion of the increase was attributable
to incremental operating expenses related to the Citizens’ branches and
ABG acquisitions. Additionally, expenses were up due to
higher FDIC insurance premiums, higher personnel costs, higher pension
costs related to the underlying asset performance in 2008, higher volume
based processing costs, and increased expenses related to investments in
technology and facilities
infrastructure.
|
·
|
The
Company's combined effective federal and state income tax rate increased
2.9 percentage points in 2009 to 21.9%, reflective of the current mix of
non-taxable and fully taxable securities. This compares to
19.0% in 2008, which included a $1.7 million benefit related to the
settlement of certain previously unrecognized tax
positions.
|
Selected Profitability and
Other Measures
Return on
average assets, return on average equity, dividend payout and equity to asset
ratios for the years indicated are as follows:
Table
2: Selected Ratios
|
2009
|
2008
|
2007
|
Return
on average assets
|
0.78%
|
0.97%
|
0.93%
|
Return
on average equity
|
7.46%
|
9.23%
|
9.20%
|
Dividend
payout ratio
|
69.5%
|
57.3%
|
57.1%
|
Average
equity to average assets
|
10.44%
|
10.46%
|
10.14%
|
As
displayed in Table 2 above, the return on average assets decreased in 2009 as
compared to both 2008 and 2007. The decrease in comparison to both
years was a result of lower net income primarily due to higher provision for
loan losses and increased operating expenses in 2009 as compared to 2008 and
2007. Reported return on equity in 2009 was also lower than 2008 and
2007’s levels for similar reasons.
The
dividend payout ratio for 2009 was above 2008’s level due to dividends declared
increasing 9.6%, while net income declined 9.8%. The increase in
dividends declared was the result of a 2.3% increase in the dividend paid per
share as well as the additional 2.5 million shares issued through the common
equity offering in the fourth quarter of 2008. The dividend payout
ratio increased slightly in 2008 as compared to 2007 due to a 7.5% increase in
dividends declared as compared to the 7.1% growth in net income.
Net Interest
Income
Net
interest income is the amount that interest and fees on earning assets (loans
and investments) exceeds the cost of funds, which consists primarily of 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
disclosed in Table 3, net interest income (with nontaxable income converted to a
fully tax-equivalent basis) totaled $181.2 million in 2009, up $17.6 million, or
10.7%, from the prior year. A $486 million increase in average
interest-earning assets more than offset a $393 million increase in average
interest-bearing liabilities and a two basis point decrease in net interest
margin. As reflected in Table 4, the volume changes increased net
interest income by $18.4 million, while the lower net interest margin had a $0.9
million unfavorable impact.
The net
interest margin decreased two basis points from 3.82% in 2008 to 3.80% in
2009. This decrease was primarily attributable to a 66 basis point
decrease in earning-asset yields having a greater impact than 66-basis point
decrease in the cost of funds. The yield on loans decreased 41 basis
points in 2009, due to new volume coming on at lower yields in the current
low-rate environment than the loans maturing or being prepaid and variable and
adjustable rate loans repricing downward. The yield on investments,
including cash equivalents, decreased from 5.81% in 2008 to 4.73% in 2009,
mostly reflective of the net liquidity generated from the Citizens acquisition
and organic deposit growth that remained in cash earning low overnight
yields. 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 2009 in response to market
conditions. Additionally, the proportion of customer deposits in
higher cost time deposits has declined 7.9 percentage points over the last
twelve months, while the percentage of deposits in non-interest bearing and
lower cost checking accounts has increased.
The net
interest margin in 2008 was 3.82%, compared to 3.64% in 2007. This
18-basis point increase was primarily attributable to a 52-basis point decrease
in the cost of funds having a greater impact than the 34-basis point decrease in
earning-asset yields. The decreased cost of funds was reflective of
disciplined deposit pricing, in part due to the decreases in short-term market
rates in 2008, as well as planned reductions of time deposit
balances. Additionally, the rates on external borrowings decreased
throughout the year, as a result of the refinancing of $150 million of Federal
Home Loan Bank advances into lower cost instruments in the fourth quarter of
2007 and seven rate reductions by the Federal Reserve to the overnight federal
funds rates since the end of 2007. The yield on loans decreased 44
basis points in 2008, again due in part to the declining interest rates
throughout the market. The yield on investments decreased from 5.98%
in 2007 to 5.81% in 2008 as cash flows from the maturing of higher yielding
investments were used to fund loan growth rather than be reinvested at
unfavorable market rates in the first half of the year, as well as the steep
decline in yields earned on cash equivalents. In the second half of
the year, the Company purchased modestly lower yielding investments in advance
of the liquidity provided by the acquisition of the Citizens’ branches in
November 2008.
As shown
in Table 3, total interest income decreased by $1.5 million, or 0.6%, in 2009.
Table 4 reveals that higher average earning assets contributed a positive $28.5
million variance, offset by lower yields with a negative impact of $30.0
million. Average loans grew a total of $170.0 million in 2009, as a
result of $81.0 million from the acquisition of 18 Citizens branches in November
2008 as well as $89.1 million of organic growth in all portfolios: business
lending, consumer mortgage and consumer installment. Interest income
and fees declined $1.8 million in 2009 as compared to 2008, attributable to a
41-basis point decrease in loan yields, partially offset by higher average loan
balances. Total interest income decreased by $5.1 million, or 1.9% in
2008 from 2007’s level. Table 4 indicates that higher average earning
assets contributed a positive $9.2 million variance offset by lower yields with
a negative impact of $14.4 million. Average loans grew $191.0 million
in 2008 over 2007, as a result of $41.6 million from the acquisitions of 18
Citizens branches in November 2008 and TLNB in June 2007, as well as $149.3
million of organic growth in all portfolios. Interest and fees on
loans were consistent with 2007, comprised of higher average loan balances
offset by a 44-basis point decrease in loan yields.
Investment
interest income in 2009 of $78.9 million was $0.3 million, or 0.4%, higher than
the prior year as a result of a larger portfolio (positive $6.1 million impact),
partially offset by a 108-basis point decrease in the investment
yield. The increase in investments and cash equivalents was the
result of the net liquidity generated from the Citizens acquisition and organic
deposit growth. Investment interest income in 2008 of $78.5 million
was $5.1 million, or 6.1%, lower than the prior year as a result of a smaller
portfolio (negative $1.2 million impact) and a 17-basis point decrease in the
investment yield. The decrease in balances was a result of cash flows
from maturing investments being used to fund loan growth rather than be
reinvested at unfavorable market rates for most of the
year. Investment purchases were initiated in the third and fourth
quarters of 2008 in anticipation of the net liquidity that would be supplied by
the Citizens’ branch acquisition.
The
average earning asset yield declined 66 basis points to 5.54% in 2009 because of
the previously mentioned decreases in loan and investment yields. The
change in the earning-asset yield is primarily a result of variable and
adjustable-rate loans repricing downward and lower rates on 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 holding of lower yielding cash instruments,
as it maintains a liquid position in anticipation of improved investment
opportunities in future periods. The average earning asset yield
declined 34 basis points to 6.20% in 2008 from 6.54% in 2007 because of the
previously mentioned decrease in loan and investment yields. In 2008, the gap
between loan and investment yields decreased to 58 basis points as the yield on
the loan portfolio decreased 44 basis points while the yield on the investment
portfolio decreased a smaller 17 basis points reflective of the loan portfolio
having a significant proportion of variable and adjustable rate loans which
declined as the interest rates decreased throughout 2008, whereas the investment
portfolio was predominately comprised of fixed rate instruments.
Total
average funding (deposits and borrowings) in 2009 increased $498.5 million or
12%. Deposits increased $541.2 million, $474.2 million attributable
to the acquisitions of the 18 Citizens branches and a $67.0 million increase in
organic deposits. Consistent with the Company’s funding mix
objective, average core deposit balances increased $575.9 million, while time
deposits were allowed to decline $34.7 million over the year. Average
external borrowings decreased $42.8 million in 2009 as compared to the prior
year as a portion of the net liquidity from the branch acquisition was used to
eliminate short-term borrowings. In 2008, total average funding
increased $134.4 million or 3.3%. Average deposits increased $53.0
million, $102.8 million attributable to the acquisitions of the 18 Citizen
branches and TLNB offset by a $49.8 million decrease in organic
deposits. Average core deposit balances increased $150.5 million,
while time deposits were allowed to decline $97.5 million over the
year. Average external borrowings increased $81.4 million in 2008 as
compared to the prior year due primarily to the all-cash acquisitions of ABG,
TLNB and HB&T. However, year-end borrowings declined $66.8
million from the end of 2007 as a portion of the net liquidity from the branch
acquisition was used to eliminate short-term borrowings.
The cost
of funding, including the impact of non-interest checking deposits decreased 66
basis points during 2009 to 1.77% as compared to 2.43% for 2008. 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 2009 in response to market
conditions. Additionally, the proportion of customer deposit in
higher cost time deposits has declined 7.9 percentage points over the last
twelve months, while the percentage of deposits in non-interest bearing and
lower cost checking accounts has increased. The cost of funding
decreased 52 basis points during 2008 impacted by the decreases to short-term
rates by the Federal Reserve throughout the latter part of 2007 and all of
2008. Interest rates on deposit accounts were lowered throughout
2008, with decreases in all product offerings. Additionally, the
Company focused on expanding core account relationships while time deposit
balances were allowed to decline.
Total
interest expense decreased by $19.1 million to $83.3 million in
2009. As shown in Table 4, lower interest rates on deposits,
partially offset by a slight increase in rates on external borrowings resulted
in $29.3 million of this decrease, while the higher deposit balance, partially
offset by the lower external borrowings balance accounted for an increase of
$10.2 million in interest expense. Interest expense as a percentage
of earning assets decreased by 64 basis points to 1.75%. The rate on
interest-bearing deposits decreased 86 basis points to 1.45%, due largely to
reductions of time deposit and money market rates throughout 2009 and the
previously discussed run off of higher rate deposit products. The
rate on external borrowings increased two basis points to
4.37%. Total interest expense decreased by $17.9 million to $102.4
million in 2008 as compared to 2007. Lower interest rates on deposit
and external borrowings accounted for $21.9 million of this decrease, while the
higher deposit and borrowings balances accounted for an increase of $4.0 million
in interest expense. The rate on interest-bearing deposits decreased
58 basis points to 2.31% and the rate on external borrowings decreased 84 basis
points to 4.35% in 2008.
The
following table sets forth information related to average interest-earning
assets and interest-bearing liabilities and their associated yields and rates
for the years ended December 31, 2009, 2008 and 2007. Interest income
and yields are on a fully tax-equivalent basis using marginal income tax rates
of 38.5% in 2009 and 2008, and 38.8% in 2007. Average
balances are computed by totaling 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.
|
Year
Ended December 31, 2009
|
|
Year
Ended December 31, 2008
|
|
Year
Ended December 31, 2007
|
|
|
|
Avg.
|
|
|
|
Avg.
|
|
|
|
Avg.
|
|
Average
|
|
Yield/Rate
|
|
Average
|
|
Yield/Rate
|
|
Average
|
|
Yield/Rate
|
(000's
omitted except yields and rates)
|
Balance
|
Interest
|
Paid
|
|
Balance
|
Interest
|
Paid
|
|
Balance
|
Interest
|
Paid
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$262,479
|
$682
|
0.26%
|
|
$39,452
|
$614
|
1.56%
|
|
$79,827
|
$4,019
|
5.03%
|
Taxable
investment securities (1)
|
848,963
|
40,481
|
4.77%
|
|
783,879
|
41,600
|
5.31%
|
|
830,276
|
46,048
|
5.55%
|
Nontaxable
investment securities
(1)
|
555,353
|
37,704
|
6.79%
|
|
527,805
|
36,327
|
6.88%
|
|
488,193
|
33,540
|
6.87%
|
Loans
(net of unearned discount)(2)
|
3,104,808
|
185,587
|
5.98%
|
|
2,934,790
|
187,399
|
6.39%
|
|
2,743,804
|
187,480
|
6.83%
|
Total
interest-earning assets
|
4,771,603
|
264,454
|
5.54%
|
|
4,285,926
|
265,940
|
6.20%
|
|
4,142,100
|
271,087
|
6.54%
|
Noninterest-earning
assets
|
546,595
|
|
|
|
472,157
|
|
|
|
455,123
|
|
|
Total
assets
|
$5,318,198
|
|
|
|
$4,758,083
|
|
|
|
$4,597,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Interest
checking, savings and money market deposits
|
$1,835,138
|
11,448
|
0.62%
|
|
$1,364,652
|
11,061
|
0.81%
|
|
$1,228,447
|
13,634
|
1.11%
|
Time
deposits
|
1,325,598
|
34,328
|
2.59%
|
|
1,360,275
|
52,019
|
3.82%
|
|
1,457,768
|
64,048
|
4.39%
|
Borrowings
|
859,155
|
37,506
|
4.37%
|
|
901,909
|
39,272
|
4.35%
|
|
820,546
|
42,581
|
5.19%
|
Total
interest-bearing liabilities
|
4,019,891
|
83,282
|
2.07%
|
|
3,626,836
|
102,352
|
2.82%
|
|
3,506,761
|
120,263
|
3.43%
|
Noninterest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
checking deposits
|
686,692
|
|
|
|
581,271
|
|
|
|
566,981
|
|
|
Other
liabilities
|
56,147
|
|
|
|
52,145
|
|
|
|
57,283
|
|
|
Shareholders'
equity
|
555,468
|
|
|
|
497,831
|
|
|
|
466,198
|
|
|
Total
liabilities and shareholders' equity
|
$5,318,198
|
|
|
|
$4,758,083
|
|
|
|
$4,597,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest earnings
|
|
$181,172
|
|
|
|
$163,588
|
|
|
|
$150,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest spread
|
|
|
3.47%
|
|
|
|
3.38%
|
|
|
|
3.11%
|
Net
interest margin on interest-earning assets
|
|
|
3.80%
|
|
|
|
3.82%
|
|
|
|
3.64%
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully
tax-equivalent adjustment
|
|
$15,672
|
|
|
|
$15,081
|
|
|
|
$14,850
|
|
|
(1)
Averages for investment securities are based on historical cost and the
yields do not give effect to changes in fair value that is reflected as a
component of shareholders’ equity and deferred
taxes.
|
|
(2) The impact of interest and fees not recognized on
nonaccrual loans was immaterial. |
As
discussed above, the 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
4: Rate/Volume
|
2009
Compared to 2008
|
|
2008
Compared to 2007
|
|
Increase
(Decrease) Due to Change in (1)
|
|
Increase
(Decrease) Due to Change in (1)
|
|
|
|
Net
|
|
|
|
Net
|
(000's
omitted)
|
Volume
|
Rate
|
Change
|
|
Volume
|
Rate
|
Change
|
Interest
earned on:
|
|
|
|
|
|
|
|
Cash
equivalents
|
$952
|
($884)
|
$68
|
|
($1,440)
|
($1,965)
|
($3,405)
|
Taxable
investment securities
|
3,296
|
(4,415)
|
(1,119)
|
|
(2,523)
|
(1,925)
|
(4,448)
|
Nontaxable
investment securities
|
1,876
|
(499)
|
1,377
|
|
2,742
|
45
|
2,787
|
Loans
(net of unearned discount)
|
10,526
|
(12,338)
|
(1,812)
|
|
12,609
|
(12,690)
|
(81)
|
Total
interest-earning assets
(2)
|
28,479
|
(29,965)
|
(1,486)
|
|
9,217
|
(14,364)
|
(5,147)
|
|
|
|
|
|
|
|
|
Interest
paid on:
|
|
|
|
|
|
|
|
Interest
checking, savings and money market deposits
|
3,286
|
(2,899)
|
387
|
|
1,393
|
(3,966)
|
(2,573)
|
Time
deposits
|
(1,295)
|
(16,396)
|
(17,691)
|
|
(4,094)
|
(7,935)
|
(12,029)
|
Borrowings
|
(2,401)
|
635
|
(1,766)
|
|
1,875
|
(5,184)
|
(3,309)
|
Total
interest-bearing liabilities (2)
|
10,238
|
(29,308)
|
(19,070)
|
|
4,000
|
(21,911)
|
(17,911)
|
|
|
|
|
|
|
|
|
Net
interest earnings (2)
|
18,444
|
(860)
|
17,584
|
|
5,342
|
7,422
|
12,764
|
|
(1)
The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of change in
each.
|
|
(2)
Changes due to volume and rate are computed from the respective changes in
average balances and
rates of the totals; they are not a summation of
the changes of the components.
|
Noninterest
Income
The
Company’s sources of noninterest income are of three primary types: 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 CBNA and First Liberty Bank and Trust); 2) employee benefit trust,
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 and services (performed by
CISI and CBNA Insurance), and asset management (performed by
Nottingham). Additionally, the Company has periodic transactions,
most often net gains (losses) from the sale of investment securities and
prepayment of debt instruments.
Table
5: Noninterest Income
|
Years
Ended December 31,
|
(000's
omitted except ratios)
|
2009
|
2008
|
2007
|
Deposit
service charges and fees
|
$29,819
|
$27,167
|
$24,178
|
Benefit
trust, administration, consulting and actuarial fees
|
27,771
|
25,788
|
19,700
|
Wealth
management services
|
8,631
|
8,648
|
8,264
|
Other
fees
|
4,457
|
5,181
|
5,561
|
Electronic
banking
|
8,904
|
5,693
|
4,595
|
Mortgage
banking
|
3,946
|
767
|
962
|
Subtotal
|
83,528
|
73,244
|
63,260
|
Gain
(loss) on investment securities & debt extinguishments
|
7
|
230
|
(9,974)
|
Total
noninterest income
|
$83,535
|
$73,474
|
$53,286
|
|
|
|
|
Noninterest
income/operating income (FTE)
|
31.6%
|
31.0%
|
26.1%
|
As
displayed in Table 5, noninterest income, excluding security gains and debt
extinguishments costs, increased by 14% to $83.5 million in 2009, largely as a
result of increased recurring banking service fees and debit card related
revenues (both organic and acquired) and increased activity in the secondary
mortgage banking business. Benefit trust, administration, consulting,
and actuarial revenues increased primarily as a result of the acquisition of
ABG. Total noninterest income, excluding security gains and debt
extinguishments costs, of $73.2 million for 2008 increased by 16% over 2007
largely as a result of increased recurring bank fees and both organic and
acquired growth in benefit trust, administration, consulting and actuarial
fees. The loss on the sale of investment securities and debt
extinguishments decreased $10.2 million in 2008 as 2007 included a one-time $9.9
million charge related to the early redemption of $25 million of variable-rate
trust preferred obligations, as well as the refinance of $150 million of Federal
Home Loan Bank advances into lower cost instruments with no corresponding loss
in 2008.
Noninterest
income as a percent of operating income (FTE basis) was 31.6% in 2009, up 0.6
percentage points from the prior year. This increase was primarily
driven by the aforementioned strong growth in recurring bank fees, and secondary
mortgage banking revenues. This ratio is considered an important
measure for determining the progress the Company is making on one of its primary
long-term strategies, which is the expansion of noninterest income in order to
diversify its revenue sources and reduce reliance on net interest margins that
may be more directly impacted by general interest rate and other market
conditions.
The
largest portion of the Company’s recurring noninterest income is the wide
variety of fees earned from general banking services, which reached $47.1
million in 2009, up 21% from the prior year. A major part of the
income growth was attributable to electronic banking fees, up $3.2 million, or
56%, over 2008’s level, due in large part to a concerted effort to increase the
penetration and utilization of consumer debit cards. Overdraft fees
were also up $2.6 million, or 13%, over 2008’s level, driven by core deposit
account growth. Mortgage banking revenue for the year was $3.9
million, an increase of $3.2 million as compared to 2008. Residential
mortgage banking income consist 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 $0.1 million in 2009 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 $177.8 million in 2009 as compared to
$3.7 million and $17.2 million during 2008 and 2007,
respectively. Residential mortgage loans held for sale
recorded at fair value at December 31, 2009 totaled $1.8 million. The
continuation of the level of revenue experienced in 2009 from mortgage banking
will be dependent on market conditions and the trend in long-term interest
rates.
Fees from
general banking services were $38.8 million in 2008, up $3.5 million or 10.0%
from 2007. A large portion of the income growth was attributable to
electronic banking fees, up $1.1 million, or 24% over 2007’s level and overdraft
fees, up $1.5 million, or 8.6% over 2007’s level.
As
disclosed in Table 5, noninterest income from financial services (including
revenues from benefit trust, administration, consulting and actuarial fees and
wealth management services) rose $2.0 million, or 5.7%, in 2009 to $36.4
million. Financial services revenue now comprises 44% of total
noninterest income, excluding net gains (losses) on the sale of investment
securities and debt extinguishments. BPAS generated revenue growth of
$2.0 million, or 7.7%, for the 2009 year, achieved primarily through the
acquisition of ABG in July 2008, partially offset by a decrease in asset-based
fees due to lower average financial market valuations in comparison to last
year. BPAS offers their clients daily valuation, actuarial and
employee benefit consulting services on a national basis from offices in Upstate
New York, Texas, and Pennsylvania. BPAS revenue of $25.8 million in
2008 was $6.1 million higher than 2007’s results, driven by the acquisition of
ABG in July 2008 and HB&T in May 2007, new product offerings and expanded
market coverage.
Wealth
management services revenue remained consistent with the prior year at $8.6
million. CISI revenue increased $0.4 million from 2008, while revenue
declined $0.2 million at both Nottingham and personal trust, primarily due to
significant declines in equity market valuations in late 2008 and early 2009, as
well as continued downward pressure on fee pricing due to competitive
conditions. Revenue at CBNA Insurance remained consistent with the
prior year. CBNA Insurance, acquired in June 2007 generated revenue
growth of $0.6 million in 2008. Revenue in personal trust increased
$0.1 million in 2008, while CISI and Nottingham revenue declined $0.2 million
and $0.1 million, respectively primarily due to the adverse conditions prevalent
throughout the financial markets.
Assets
under management and administration increased $2.5 billion during 2009 from $3.7
billion at year-end 2008. Market-driven gains in equity-based assets
were augmented by attraction of new client assets. BPA, in
particular, was successful at growing its asset base, as demonstrated by the
approximately $2.1 billion increase in its assets under administration during
2009. Assets under management and administration at the Company’s
financial services businesses declined during 2008 to $3.7 billion from $4.7
billion at the end of 2007 due to the significant declines in asset valuations
experienced in the financial markets during 2008. This more than
offset the new client assets attracted during the year.
In the
fourth quarter of 2007, the Company incurred a $2.1 million charge related to
the early redemption of its $25 million, variable-rate trust preferred
obligations, which included a premium call provision at
6.15%. Additionally, the Company incurred a $7.8 million charge to
refinance $150 million of Federal Home Loan Bank advances into similar duration,
lower cost instruments.
Operating
Expenses
As shown
in Table 6, operating expenses increased $27.6 million, or 17%, in 2009 to
$186.2 million, primarily due to the two acquisitions completed in 2008, as well
as higher FDIC insurance premiums, a higher goodwill impairment charge related
to one of the wealth management businesses, and higher employee compensation and
benefit expenses, and volume-based processing costs. Operating
expenses in 2008 increased $16.5 million or 11.6% from 2007 primarily due to the
four acquisitions completed in 2008 and 2007, as well as a goodwill impairment
charge on the wealth management businesses, and higher merit-based personnel
expenses, FDIC insurance premiums, and volume-based processing
costs. Operating expenses for 2009 as a percent of average assets
were 3.50%, up 17 basis points from 3.33% in 2008. This ratio was negatively
impacted by the non-recurring charges and the additional $6.9 million of FDIC
expense in the current year.
The
efficiency ratio, a performance measurement tool widely used by banks, is
defined by the Company as operating expenses (excluding special
charges/acquisition expenses, goodwill impairment and intangible amortization)
divided by operating income (fully tax-equivalent net interest income plus
noninterest income, excluding net securities and debt gains and
losses). Lower ratios are often correlated to higher
efficiency. The efficiency ratio for 2009 was 2.7 percentage points
higher than the 62.7% ratio for 2008 due to a 16.6% increase in operating
expenses having a greater impact than a 10.7% increase in net interest income
and a 13.7% increase in noninterest income (excluding net securities gains and
debt extinguishments costs). The significant increase in FDIC
premiums with no corresponding income generation was the primary reason for the
decline in the efficiency ratio for 2009. In 2008 the efficiency
ratio improved 0.6 percentage points to 62.7% due to an 8.5% increase in net
interest income and a 16% increase in noninterest income (excluding net
securities gains and debt extinguishments costs) having a greater impact than a
9.7% increase in operating expenses. In addition, the efficiency
ratios for both periods were adversely affected by the growing proportion of
financial services activities, which due to the differing nature of their
business, carry high efficiency ratios.
Table
6: Operating Expenses
|
Years
Ended December 31,
|
(000's
omitted)
|
2009
|
2008
|
2007
|
Salaries
and employee benefits
|
$92,690
|
$82,962
|
$75,714
|
Occupancy
and equipment
|
23,185
|
21,256
|
18,961
|
Customer
processing and communications
|
20,684
|
16,831
|
15,691
|
Amortization
of intangible assets
|
8,170
|
6,906
|
6,269
|
Legal
and professional fees
|
5,240
|
4,565
|
4,987
|
Office
supplies and postage
|
5,243
|
5,077
|
4,303
|
Business
development and marketing
|
6,086
|
5,288
|
5,420
|
Foreclosed
property
|
1,299
|
509
|
382
|
Goodwill
impairment
|
3,079
|
1,745
|
0
|
FDIC
insurance premiums
|
8,610
|
1,678
|
435
|
Special
charges/acquisition expenses
|
1,716
|
1,399
|
382
|
Other
|
10,176
|
10,346
|
9,530
|
Total
operating expenses
|
$186,178
|
$158,562
|
$142,074
|
|
|
|
|
Operating
expenses/average assets
|
3.50%
|
3.33%
|
3.09%
|
Efficiency
ratio
|
65.4%
|
62.7%
|
63.3%
|
Salaries
and benefits increased $9.7 million or 11.7% in 2009, of which approximately 50%
was the result of the two acquisitions in the last two
years. Additionally, approximately $1.8 million of the increase can
be attributed to annual merit increases, $0.9 million to higher medical costs,
$3.3 million to retirement costs primarily related to the underlying asset
performance in 2008, partially offset by a $0.9 million decrease in incentive
compensation. Salaries and benefits increased $7.2 million or 9.6% in
2008 of which approximately 40% was the result of the four acquisitions in the
prior two years. Additionally, approximately $2.3 million
of the increase can be attributed to annual merit increase, $0.7 million to
higher medical costs and the remaining growth to increased headcount, excluding
acquisitions. Total full-time equivalent staff at the end of 2009 was
1,595, compared to 1,615 at December 31, 2008 and 1,453 at the end of
2007.
Medical
expenses increased $1.3 million or 23% in 2009 primarily due to a greater number
of covered employees as well as increases in the cost of medical
care. Medical expenses increased $0.7 million in 2008, or 14%, due to
a general rise in the cost of medical care, administration and insurance, as
well as a greater number of covered employees. Additional vision and
dental coverage was added in 2007 at an incremental cost of $0.2 million to
bring the Company’s benefit offerings more closely in line with
peers. Qualified and nonqualified pension expense increased $3.3
million in 2009 primarily due to the underlying asset valuation decline in 2008
as a result of market conditions. Qualified and nonqualified pension
expense decreased $1.7 million in 2008 primarily due to an increase in the
discount rate utilized to calculate the pension expense as well as increased
returns on assets contributed to the plan in 2007 and 2008. The three
assumptions that have the largest impact on the calculation of annual pension
expense are the discount rate utilized, the rate applied to future compensation
increases and the expected rate of return on plan assets. See Note K
to the financial statements for further information concerning the pension
plan. The Company’s contribution to the 401(k) Employee Stock
Ownership Plan increased $0.7 million in 2008 primarily due to a half percentage
point increase in the Company’s matching contribution, as well as an increase in
employee participation.
Total
non-personnel operating expenses, excluding one-time special charges/acquisition
expenses and goodwill impairment, increased $16.2 million or 22% in
2009. As displayed in Table 6, this was largely caused by higher FDIC
insurance premiums (up $6.9 million), customer processing and communication
expense (up $3.9 million), occupancy and equipment expense (up $1.9 million),
amortization of intangible assets (up $1.3 million), business development and
marketing (up $0.8 million), foreclosed property expenses (up $0.8 million), and
legal and professional (up $0.7 million). During 2007 and the first
half of 2008, FDIC premiums were met through the application of a credit balance
created in prior years. This credit balance was depleted in the
second quarter and resulted in higher FDIC premiums in the third and fourth
quarters of 2008. 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 that are expected to remain at similar levels during
2010. 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. 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. A
portion of the increase in data processing and communications costs reflects the
Company’s continued investments in strategic technology initiatives and
enhancement of its service offerings. A majority of the remaining
increase in non-personnel operating costs is attributable to $3.8 million of
expenses added as a result of the two acquisitions in 2008.
The
Company continually evaluates all aspects of its operating expense structure and
is diligent about identifying opportunities to improve operating
efficiencies. Over the last two years, the Company has consolidated
several of its branch offices. This realignment will reduce
market overlap and further strengthen its branch network, and reflects
management’s focus on achieving long-term performance improvements through
proactive strategic decision making.
Total
non-personnel operating expense, excluding one-time acquisition expenses and
goodwill impairment, increased $6.5 million or 9.8% in 2008. As
displayed in Table 6, this was largely caused by higher occupancy and equipment
expense (up $2.3 million),
FDIC
insurance premiums (up $1.2 million), customer processing and communication
expense (up $1.1 million), office supplies and postage (up $0.8 million), other
expenses (up $0.8 million), and amortization of intangible assets (up $0.6
million).
Special
charges/acquisition expense totaled $1.7 million in 2009, an increase of $0.3
million from 2008, and were comprised of a $1.4 million charge related to the
planned early termination of its core banking system services contract in 2010
as well as $0.3 million of acquisition expenses related to the Citizens
transaction in late 2008. Special charges/acquisition expenses
totaled $1.4 million in 2008 and $0.4 million in 2007 and in both years all of
it relates solely to acquisitions. In 2009 and 2008 the Company
recorded a $3.1 million and $1.7 million, respectively, non-cash
goodwill impairment charge in its wealth management businesses, a result of
equity market valuation declines, changes in customer asset mixes and pricing
compression related to the competitive environment.
Income
Taxes
The
Company estimates its income tax expense based on the amount it expects to owe
the respective tax authorities, plus the impact of deferred tax
items. Taxes are discussed in more detail in Note I of the
Consolidated Financial Statements beginning on page 63. Accrued taxes
represent the net estimated amount due or to be received from taxing
authorities. In estimating accrued taxes, management assesses the
relative merits and risks of the appropriate tax treatment of transactions
taking into account statutory, judicial and regulatory guidance in the context
of the Company’s tax position. If the final resolution of taxes
payable differs from its estimates due to regulatory determination or
legislative or judicial actions, adjustments to tax expense may be
required.
The
effective tax rate for 2009 increased 2.9 percentage points to 21.9%, reflecting
the current mix of non-taxable and fully taxable investment securities and the
impact of a $3.1 million goodwill impairment charge. The effective
tax rate for 2008 increased 13.9 percentage points to 19.0%. There
were two notable items during 2008, which impacted the effective tax rate for
the year. Upon settlement of open tax years with certain taxing
authorities, the Company recorded $1.7 million of previously unrecognized tax
benefits, as compared to a $6.9 million benefit recognized in
2007. Additionally, the Company recorded a non-cash goodwill
impairment charge related to its wealth management businesses, reducing pre-tax
net income. The effective tax rate for 2007 of 5.1% was the result of
the aforementioned $6.9 million benefit related to the settlement and a related
change in a position taken on certain previously unrecognized tax positions and
a higher proportion of tax exempt income, due in part to the higher debt
restructuring charges in 2007.
Capital
Shareholders’
equity ended 2009 at $565.7 million, up $21.0 million, or 3.9%, from one year
earlier. This increase reflects net income of $41.4 million, $2.0
million from the issuance of shares through employee stock plans, $2.3 million
from stock based compensation and a $4.1 million increase in other comprehensive
income. These increases were partially offset by common stock
dividends declared of $28.8 million. The change in other
comprehensive income is comprised of a $7.7 million benefit based on the funded
status of the Company’s employee retirement plans, a $1.0 million increase in
the fair value of interest rate swaps designated as a cash flow hedges and a
$4.6 million decrease in the market value adjustment (“MVA”, represents the
after-tax, unrealized change in value of available-for-sale securities in the
Company’s investment portfolio). The benefit from the funded status
of the Company’s employee retirement plans is primarily the result of
terminating the Company’s post-retirement medical program for current and future
employees. Remaining plan participants will include only existing
retirees, or those active and eligible employees who retire prior to December
31, 2010. This change was accounted for as a negative plan amendment
and was recognized in accumulated other comprehensive income in the fourth
quarter of 2009. Excluding accumulated other comprehensive income in
both 2009 and 2008, capital rose by $17.0 million, or 3.0%. Shares
outstanding increased by 167,000 during the year added through employee stock
plans.
Shareholders’
equity ended 2008 at $544.7 million, up $65.9 million, or 13.8%, from one year
earlier. This increase reflects net income of $45.9 million, $8.3
million from the issuance of shares through employee stock plans, $2.0 million
from stock based compensation and $49.5 million from a public common stock
offering. These increases were partially offset by common stock
dividends declared of $26.3 million and a $13.6 million decrease in other
comprehensive income. The other comprehensive income is comprised of
a $2.4 million increase in the market value adjustment (“MVA”, represents the
after-tax, unrealized change in value of available-for-sale securities in the
Company’s investment portfolio), a $13.2 million charge based on the funded
status of the Company’s employee retirement plans, and a $2.8 million decrease
in the fair value of interest rate swaps designated as a cash flow
hedges. Excluding accumulated other comprehensive income in both 2008
and 2007, capital rose by $79.4 million, or 17%. Shares outstanding
increased by 2,999,000 during 2008, comprised of 2,530,000 added through the
common stock offering in the fourth quarter and 469,000 added through employee
stock plans.
The
Company’s ratio of Tier 1 capital to assets (or tier 1 leverage ratio), the
basic measure for which regulators have established a 5% minimum for an
institution to be considered “well-capitalized,” increased 17 basis points at
year-end 2009 to 7.39%. This was primarily the result of a 9.0% increase in Tier
1 capital primarily from net income generation and reduction of intangible asset
levels, offset by a smaller 6.5% increase in fourth quarter average net assets
(excludes investment market value adjustment, intangible assets and related
deferred tax assets and disallowed mortgage service rights) due mostly to the
acquisition of the Citizens branches and organic deposit growth. The
tangible equity/tangible assets ratio was 5.20% at the end of 2009 versus 4.74%
one year earlier. The increase was due to the increase in common
shareholders equity and reduction of intangible assets having a proportionally
greater impact on tangible equity than the growth in tangible
assets. The Company manages organic and acquired growth in a manner
that enables it to continue to build upon its strong capital base, and maintain
the Company’s ability to take advantage of future strategic growth
opportunities.
Cash
dividends declared on common stock in 2009 of $28.8 million represented an
increase of 9.6% over the prior year. This growth was mostly a result
of the 2.5 million shares issued in the common equity offering completed in the
fourth quarter of 2008, as well as dividends per share of $0.88 for 2009
increasing from $0.86 in 2008, a result of quarterly dividends per share being
raised from $0.21 to $0.22 (+4.8%) in the third quarter of 2008. The
dividend payout ratio for this year was 69.5% compared to 57.3% in 2008, and
57.1% in 2007. In 2009 dividends paid increased 9.6% while net income
decreased 9.8%. In 2008 the increase in dividends paid was slightly
larger than the 7.1% increase in net income.
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 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 as a percentage of
total assets); and second, a projection of subsequent cash availability over an
additional 60 days. As of December 31, 2009, this ratio was 16.5% and
16.4% for the respective time periods, excluding the Company's capacity to
borrow additional funds from the Federal Home Loan Bank and other sources, as
compared to the internal policy that requires a minimum of 7.5%. At
December 31, 2009 there is $287 million in additional Federal Home Loan Bank
borrowing capacity based on the Company’s year-end collateral
levels. Additionally, the Company has $16 million in unused capacity
at the Federal Reserve Bank and $100 million in unused capacity from unsecured
lines of credit with other correspondent banks.
In
addition to the 30 and 90-day basic surplus/deficit model, longer-term liquidity
over a minimum of five years is measured and a liquidity analysis projecting
sources and uses of funds is prepared. To measure longer-term
liquidity, a baseline projection of loan and deposit growth for five years is
made to reflect how liquidity levels could change over time. This
five-year measure reflects ample liquidity for loan and other asset growth over
the next five years.
Though
remote, the possibility of a funding crisis exists at all financial
institutions. Accordingly, management has addressed this issue by
formulating a Liquidity Contingency Plan, which has been reviewed and approved
by both the Board of Directors and the Company’s Asset/Liability Management
Committee. The plan addresses those actions the Company would take in
response to both a short-term and long-term funding crisis.
A
short-term funding crisis would most likely result from a shock to the financial
system, either internal or external, which disrupts orderly short-term funding
operations. Such a crisis should be temporary in nature and would not
involve a change in credit ratings. A long-term funding crisis would
most likely be the result of drastic credit deterioration at the
Company. Management believes that both circumstances have been fully
addressed through detailed action plans and the establishment of trigger points
for monitoring such events.
Intangible
Assets
The
changes in intangible assets by reporting segment for the year ended December
31, 2009 are summarized as follows:
Table
7: Intangible Assets
|
Balance
at
|
Additions/
|
|
|
Balance
at
|
(000’s
omitted)
|
December
31, 2008
|
Reclass
|
Amortization
|
Impairment
|
December
31, 2009
|
Banking
Segment
|
|
|
|
|
|
Goodwill
|
$287,964
|
($552)
|
$0
|
$0
|
$287,412
|
Other
intangibles
|
152
|
0
|
107
|
0
|
45
|
Core
deposit intangibles
|
22,340
|
662
|
7,069
|
0
|
15,933
|
Total
|
$310,456
|
$110
|
$7,176
|
$0
|
$303,390
|
Other
Segment
|
|
|
|
|
|
Goodwill
|
$13,185
|
$174
|
$0
|
$3,079
|
$10,280
|
Other
intangibles
|
4,983
|
12
|
994
|
0
|
4,001
|
Total
|
$18,168
|
$186
|
$994
|
$3,079
|
$14,281
|
Intangible
assets at the end of 2009 totaled $317.7 million, a decrease of $11.0 million
from the prior year-end due to $8.2 million of amortization during the year and
the $3.1 million charge taken for impairment of goodwill associated with one of
the Company’s wealth management businesses, partially offset by $0.3 million of
additional intangible assets arising from adjustments to the intangible assets
from prior acquisitions of Citizens and HB&T.
Intangible
assets consist of goodwill, core deposit value and customer relationships
arising from acquisitions. Goodwill represents the excess cost of an
acquisition over the fair value of the net assets acquired. Goodwill
at December 31, 2009 amounted to $298 million, comprised of $288 million related
to banking acquisitions and $10 million arising from the acquisition of
financial services businesses. Goodwill is subjected to periodic
impairment analysis to determine whether the carrying value of the acquired net
assets exceeds their fair value, which would necessitate a write-down of the
goodwill. The Company completed its goodwill impairment analyses
during the first quarters of 2009 and 2008 and no adjustments were necessary on
the whole bank and BPAS. The impairment analysis was 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 the selection 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. Management believes that there is a low probability
of future impairment with regard to the goodwill associated with whole-bank,
branch and BPAS acquisitions.
The
performance of Nottingham (previously Elias Asset Management) weakened
subsequent to its acquisition in 2000 as a result of changes in market and
competitive conditions. Its operating performance stabilized in 2006
and improved in 2007 and early 2008, however, the significant declines in the
average equity market valuations experienced in 2008 and into 2009, as well as
changes in its mix of assets under management resulted in meaningful revenue
declines. In connection with its on-going forecasting and planning
analyses, management determined that triggering events had occurred in both the
fourth quarter of 2008 and again in the fourth quarter of 2009, and therefore
the Nottingham goodwill was tested for impairment in both
periods. Based on the goodwill valuation performed in the
fourth quarters of both 2008 and 2009 the Company recognized impairment charges
and wrote down the carrying value of the goodwill by $1.7 million in 2008 and
$3.1 million in 2009. Additional declines in Nottingham’s projected
operating results may cause future impairment to its remaining $2.5 million
goodwill balance.
Core
deposit intangibles represent the value of non-time deposits acquired in excess
of funding that could have been purchased in the capital
markets. Core deposit intangibles are amortized on either an
accelerated or straight-line basis over periods ranging from seven to twenty
years. The recognition of customer relationship intangibles arose due
to the acquisitions of ABG, HB&T and Harbridge. These assets were
determined based on a methodology that calculates the present value of the
projected future net income derived from the acquired customer
base. These assets are being amortized on an accelerated basis over
periods ranging from ten to twelve years.
Loans
The
Company’s loans outstanding, by type, as of December 31 are as
follows:
Table
8: Loans Outstanding
(000's
omitted)
|
2009
|
2008
|
2007
|
2006
|
2005
|
Consumer
mortgage
|
$1,028,805
|
$1,062,943
|
$977,553
|
$912,505
|
$815,463
|
Business
lending
|
1,082,753
|
1,058,846
|
984,780
|
960,034
|
819,605
|
Consumer
installment
|
987,927
|
1,014,351
|
858,722
|
829,019
|
776,701
|
Gross
loans
|
3,099,485
|
3,136,140
|
2,821,055
|
2,701,558
|
2,411,769
|
Allowance
for loan losses
|
41,910
|
39,575
|
36,427
|
36,313
|
32,581
|
Loans,
net of allowance for loan losses
|
$3,057,575
|
$3,096,565
|
$2,784,628
|
$2,665,245
|
$2,379,188
|
As
disclosed in Table 8 above, gross loans outstanding of $3.1 billion as of
year-end 2009 declined slightly compared to December 31, 2008. The
business lending portfolio grew $23.9 million or 2.3% as compared to year end
2008. The consumer mortgage portfolio declined $34.1 million,
reflective of the Company’s decision to not portfolio lower rate, longer-term
assets, but instead sell such originations in 2009 in the secondary
market. Residential mortgage loans sold to investors, primarily
Fannie Mae, totaled $177.8 million in 2009, as compared to $3.7 million during
2008. The consumer installment portfolio was down $26.4 million or
2.6%, reflective of the lower demand in the automotive industry, as well as
lower home equity outstandings related to the lower long-term mortgage
rates.
The
compounded annual growth rate (“CAGR”) for the Company’s total loan portfolio
between 2005 and 2009 was 6.5% comprised of approximately 3.3% organic growth,
with the remainder coming from acquisitions. The greatest overall
expansion occurred in the business lending segment, which grew at a 7.2% CAGR
(including the impact of acquisitions) over that time frame. Consumer
installment loans consist of home equity and personal loans as well as
borrowings originated in automobile, marine and recreational vehicle
dealerships. The consumer mortgage segment grew at a compounded
annual growth rate of 6.0% from 2005 to 2009 including
acquisitions. The consumer mortgage growth was primarily driven by
robust mortgage refinancing volumes over the last five years, as well as the
acquisition of consumer-oriented banks and branches in that time
period. The consumer installment segment grew at a compounded annual
growth rate of 6.2% from 2005 to 2009.
The
weighting of the components of the Company’s loan portfolio enables it to be
highly diversified. Approximately 65% of loans outstanding at the end
of 2009 were made to consumers borrowing on an installment, line of credit or
residential mortgage loan basis. The business lending portfolio is
also broadly diversified by industry type as demonstrated by the following
distributions at year-end 2009: commercial real estate (26%), healthcare (10%),
general services (9%), retail trade (7%), construction (6%), agriculture (8%),
manufacturing (7%), motor vehicle and parts dealers (4%), restaurant &
lodging (8%), and wholesale trade (4%). A variety of other industries
with less than a 4% share of the total portfolio comprise the remaining
11%.
The
consumer mortgage portion of the Company’s loan portfolio is comprised of fixed
(97%) and adjustable rate (3%) residential lending and includes no subprime,
Alt-A, or other higher risk products. Consumer mortgages decreased
$34.1 million or 3.2% in 2009. During the year ended December 31,
2009, the Company originated $179.5 million of residential mortgages for sale to
others, principally Fannie Mae. Longer-term, fixed rate residential
mortgages sold to investors totaled $177.8 million during
2009. Consumer mortgage volume has been strong over the last few
years due to a decline in long-term interest rates and comparatively stable
valuations in the Company’s primary markets. The Company’s solid
performance during a tumultuous period in the overall industry is a reflection
of 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.
The
combined total of general-purpose business lending, including
agricultural-related and dealer floor plans, as well as mortgages on commercial
property is characterized as the Company’s business lending
activity. The business-lending portfolio increased $23.9 million or
2.3% in 2009. Customer demand has softened somewhat due to economic
conditions, but this has been offset to some extent by reduced competition from
certain competitors due to their restriction of lending activities as a result
of asset quality, liquidity or capital issues. 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 business segment.
Consumer
installment loans, both those originated directly (such as personal installment
and home equity loans and lines of credit), and indirectly (originated
predominantly in automobile, marine and recreational vehicle dealerships),
declined $26.4 million or 2.6% from one year ago. 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
both new and used vehicle sales in 2009 adversely impacted the Company’s ability
to generate the same level of new loan volume it has in previous
years. The Company is focused on maintaining the solid profitability
produced by its in-market and contiguous market indirect portfolio, while
continuing to pursue its disciplined, long-term approach to expanding its dealer
network. It is expected that improved economic conditions in the
future will enable the Company to produce indirect loan growth more in line with
longer-term historical experience.
The
following table shows the maturities and type of interest rates for business and
construction loans as of December 31, 2009:
Table
9: Maturity Distribution of Business and Construction Loans (1)
(000's
omitted)
|
Maturing
in One Year or Less
|
Maturing
After One but Within Five Years
|
Maturing
After Five Years
|
Commercial,
financial and agricultural
|
$374,889
|
$547,996
|
$127,189
|
Real
estate – construction
|
32,679
|
-
|
-
|
Total
|
$407,568
|
$547,996
|
$127,189
|
|
|
|
|
Fixed
or predetermined interest rates
|
$176,659
|
$339,255
|
$50,735
|
Floating
or adjustable interest rates
|
230,909
|
208,741
|
76,454
|
Total
|
$407,568
|
$547,996
|
$127,189
|
(1) Scheduled
repayments are reported in the maturity category in which the payment is
due.
Asset
Quality
The
following table presents information concerning nonperforming assets as of
December 31:
Table
10: Nonperforming Assets
(000's
omitted)
|
2009
|
2008
|
2007
|
2006
|
2005
|
Nonaccrual
loans
|
|
|
|
|
|
Business
lending
|
$11,207
|
$6,730
|
$3,358
|
$6,580
|
$8,610
|
Consumer
installment
|
980
|
892
|
922
|
927
|
715
|
Consumer
mortgage
|
4,077
|
3,500
|
2,860
|
2,600
|
1,532
|
Total
nonaccrual loans
|
16,264
|
11,122
|
7,140
|
10,107
|
10,857
|
Accruing
loans 90+ days delinquent
|
|
|
|
|
|
Business
lending
|
662
|
71
|
329
|
298
|
154
|
Consumer
installment
|
197
|
90
|
108
|
195
|
99
|
Consumer
mortgage
|
891
|
392
|
185
|
714
|
822
|
Total
accruing loans 90+ days delinquent
|
1,750
|
553
|
622
|
1,207
|
1,075
|
Restructured
loans
|
|
|
|
|
|
Business
lending
|
896
|
1,004
|
1,126
|
1,275
|
1,375
|
Nonperforming
loans
|
|
|
|
|
|
Business
lending
|
12,765
|
7,805
|
4,813
|
8,153
|
10,139
|
Consumer
installment
|
1,177
|
982
|
1,030
|
1,122
|
814
|
Consumer
mortgage
|
4,968
|
3,892
|
3,045
|
3,314
|
2,354
|
Total
nonperforming loans
|
18,910
|
12,679
|
8,888
|
12,589
|
13,307
|
|
|
|
|
|
|
Other
real estate (OREO)
|
1,429
|
1,059
|
1,007
|
1,838
|
1,048
|
Total
nonperforming assets
|
$20,339
|
$13,738
|
$9,895
|
$14,427
|
$14,355
|
|
|
|
|
|
|
Allowance
for loan losses / total loans
|
1.35%
|
1.26%
|
1.29%
|
1.34%
|
1.35%
|
Allowance
for loan losses / nonperforming loans
|
222%
|
312%
|
410%
|
288%
|
245%
|
Nonperforming
loans / total loans
|
0.61%
|
0.40%
|
0.32%
|
0.47%
|
0.55%
|
Nonperforming
assets / total loans and other real estate
|
0.66%
|
0.44%
|
0.35%
|
0.53%
|
0.59%
|
Delinquent
loans (30 days old to nonaccruing) to total loans
|
1.48%
|
1.43%
|
1.10%
|
1.33%
|
1.46%
|
Loan
loss provision to net charge-offs
|
131%
|
117%
|
76%
|
108%
|
110%
|
The
Company places a loan on nonaccrual status when the loan becomes ninety days
past due or sooner, if management concludes collection of interest is doubtful,
except when, in the opinion of management, it is well-collateralized and in the
process of collection. As shown in Table 10 above, nonperforming
loans, defined as nonaccruing loans, accruing loans 90 days or more past due and
restructured loans ended 2009 at $18.9 million, up approximately $6.2 million
from one year earlier. The ratio of nonperforming loans to total
loans increased 21 basis points from the prior year to 0.61%. The
ratio of nonperforming assets (which includes other real estate owned, or
“OREO”, in addition to nonperforming loans) to total loans plus OREO increased
to 0.66% at year-end 2009, up 22 basis points from one year
earlier. The Company’s success at keeping these ratios at favorable
levels despite deteriorating economic conditions was the result of continued
focus on maintaining strict underwriting standards, and enhanced collection and
recovery efforts. Had nonaccrual loans for the year ended December
31, 2009 been current in accordance with their original terms, additional
interest income of approximately $1.0 million would have been
recorded. At year-end 2009, the Company was managing 18 OREO
properties with a value of $1.4 million, as compared to 18 OREO properties with
a value of $1.1 million a year earlier. No single property has a
carrying value in excess of $300,000. This trend also reflects the
low level of foreclosure activity in the Company’s markets and its specific
portfolio in comparison to national markets.
Approximately
17% of the increase from December 2008 to December 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. An additional 80% of the
increase in nonperforming loans from December 2008 to December 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
222% at the end of 2009 compared to 312% at year-end 2008 and 410% at December
31, 2007, 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
at least 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.
Total
delinquencies, defined as loans 30 days or more past due or in nonaccrual
status, finished the current year at 1.48% of total loans outstanding versus
1.43% at the end of 2008. As of year-end 2009, total delinquency
ratios for commercial loans, consumer loans, and real estate mortgages were
1.66%, 1.23%, and 1.53%, respectively. These measures were 1.73%,
1.27% and 1.28%, respectively, as of December 31, 2008. Delinquency
levels, particularly in the 30 to 89 days category, tend to be somewhat volatile
due to their measurement at a point in time, and therefore management believes
that it is useful to evaluate this ratio over a longer period. The
average quarter-end delinquency ratio for total loans in 2009 was 1.45%, as
compared to an average of 1.20% in 2008 and 1.04% in 2007 reflective of the
underlying economic conditions during those time periods.
The
changes in the allowance for loan losses for the last five years is as
follows:
Table
11: Allowance for Loan Losses Activity
|
Years
Ended December 31,
|
(000's
omitted except for ratios)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|
|
|
|
|
|
Allowance
for loan losses at beginning of period
|
$39,575
|
$36,427
|
$36,313
|
$32,581
|
$31,778
|
Charge-offs:
|
|
|
|
|
|
Business
lending
|
3,324
|
2,516
|
1,088
|
3,787
|
2,639
|
Consumer
mortgage
|
498
|
235
|
387
|
344
|
522
|
Consumer
installment
|
7,338
|
6,325
|
4,965
|
5,902
|
8,071
|
Total
charge-offs
|
11,160
|
9,076
|
6,440
|
10,033
|
11,232
|
Recoveries:
|
|
|
|
|
|
Business
lending
|
374
|
478
|
844
|
930
|
730
|
Consumer
mortgage
|
28
|
184
|
86
|
107
|
142
|
Consumer
installment
|
3,303
|
2,675
|
2,873
|
2,925
|
2,629
|
Total
recoveries
|
3,705
|
3,337
|
3,803
|
3,962
|
3,501
|
|
|
|
|
|
|
Net
charge-offs
|
7,455
|
5,739
|
2,637
|
6,071
|
7,731
|
Provision
for loan losses
|
9,790
|
6,730
|
2,004
|
6,585
|
8,534
|
Allowance
on acquired loans (1)
|
0
|
2,157
|
747
|
3,218
|
0
|
Allowance
for loan losses at end of period
|
$41,910
|
$39,575
|
$36,427
|
$36,313
|
$32,581
|
|
|
|
|
|
|
Amount
of loans outstanding at end of period
|
$3,099,485
|
$3,136,140
|
$2,821,055
|
$2,701,558
|
$2,411,769
|
Daily
average amount of loans
|
3,104,808
|
2,934,790
|
2,743,804
|
2,514,173
|
2,374,832
|
|
|
|
|
|
|
Net
charge-offs / average loans outstanding
|
0.24%
|
0.20%
|
0.10%
|
0.24%
|
0.33%
|
(1)
|
This
addition is attributable to loans acquired from Citizens in 2008, TLNB in
2007, Elmira and ONB in 2006.
|
As
displayed in Table 11 above, total net charge-offs in 2009 were $7.5 million, up
$1.7 million from the prior year, due to higher levels of charge-offs in all
portfolios; business lending, consumer installment and consumer
mortgage. Net charge-offs in 2008 were $3.1 million higher than
2007’s level, principally due to higher levels of charge-offs in the business
lending and consumer installment portfolios, partially offset by a decrease in
the consumer mortgage portfolio.
Due to
the significant increases in average loan balances over time due to acquisition
and organic growth, management believes that net charge-offs as a percent of
average loans (“net charge-off ratio”) offers a more meaningful representation
of asset quality trends. The net charge-off ratio for 2009 was up
four basis points from 2008 and 14 basis points from 2007’s historically low
level of 0.10%. Gross charge-offs as a percentage of average loans
was 0.36% in 2009 as compared to 0.31% in 2008 and 0.23% in
2007. Continued strong recovery efforts were evidenced by recoveries
of $3.7 million in 2009, representing 37% of average gross charge-offs for the
latest two years, compared to 43% in 2008 and 46% in 2007.
Business
loan net charge-offs increased in 2009, totaling $3.0 million or 0.28% of
average business loans outstanding versus $2.0 million or 0.20% in 2008,
reflective of the general deterioration in economic
conditions. Consumer installment loan net charge-offs increased to
$4.0 million this year from $3.7 million in 2008, with a net charge-off ratio of
0.40% in both years. Consumer mortgage net charge-offs increased $0.4
million to $0.5 million in 2009, and the net charge-off ratio increased four
basis points to 0.05%.
Management
continually evaluates the credit quality of the Company’s loan portfolio and
conducts a formal review of the allowance for loan losses adequacy on a
quarterly basis. The two primary components of the loan review
process that are used to determine proper allowance levels are specific and
general loan loss allocations. Measurement of specific loan loss
allocations is typically based on expected future cash flows, collateral values
and other factors that may impact the borrower’s ability to
pay. Impaired loans greater than $0.5 million are evaluated for
specific loan loss allocations. Consumer mortgages and consumer
installment loans are considered smaller balance homogeneous loans and are
evaluated collectively. The Company considers a loan to be impaired
when, based on current information and events, it is probable that the Company
will be unable to collect all amounts according to the contractual terms of the
loan agreement or the loan is delinquent 90 days or more.
The
second component of the allowance establishment process, general loan loss
allocations, is composed of two calculations that are computed on the four main
loan segments: business lending, consumer direct, consumer indirect and
residential real estate. The first calculation determines an allowance level
based on the latest eight 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. The allowance levels computed from the specific and
general loan loss allocation methods are combined with unallocated allowances,
if any, to derive the required allowance for loan losses to be reflected on the
Consolidated Statement of Condition. As it has in prior periods, the
Company strives to refine and enhance its loss evaluation and estimation
processes continually. In 2009, the Company developed and utilized
more granular historical loss factors on a portfolio specific basis, as well as
enhanced its use of both Company specific and macro economic qualitative
factors. These enhancements did not result in a significant change to
the determined reserve levels.
The loan
loss provision is calculated by subtracting the previous period allowance for
loan losses, net of the interim period net charge-offs, from the current
required allowance level. This provision is then recorded in the
income statement for that period. Members of senior management and the Audit
Committee of the Board of Directors review the adequacy of the allowance for
loan losses quarterly. Management is committed to continually
improving the credit assessment and risk management capabilities of the Company
and has dedicated the resources necessary to ensure advancement in this critical
area of operations.
The
allowance for loan losses increased to $41.9 million at year-end 2009 from $39.6
million at the end of 2008. The $2.3 million increase was primarily
due to the higher levels of delinquent and nonperforming loans. The
allowance level was also impacted by the decreased proportion of low-risk
consumer mortgage and home equity loans in the overall loan portfolio, as a
result of the sale of a majority of the consumer mortgages originated in 2009, a
decline in home equity balances and organic growth in business
loans. The ratio of the allowance for loan losses to total loans
increased nine basis points to 1.35% for year-end 2009 as compared to 1.26% for
2008 and 1.29% for 2007. Management believes the year-end 2009
allowance for loan losses to be adequate in light of the probable losses
inherent in the Company’s loan portfolio.
The loan
loss provision of $9.8 million in 2009 increased by $3.1 million as a result of
management’s assessment of the probable losses in the loan portfolio, as
discussed above. The loan loss provision as a percentage of average
loans was 0.32% in 2009 as compared to 0.23% in 2008 and 0.07% in
2007. The loan loss provision was 131% of net charge-offs this year
versus 117% in 2008 and 76% in 2007, reflective of assessed risk in the
portfolio rising at a faster pace than realized losses.
The
following table sets forth the allocation of the allowance for loan losses by
loan category as of the dates indicated, as well as the percentage of loans in
each category to total loans. This allocation is based on
management’s assessment, as of a given point in time, of the risk
characteristics of each of the component parts of the total loan portfolio and
is subject to changes when the risk factors of each component part
change. The allocation is not indicative of either the specific
amounts of the loan categories in which future charge-offs may be taken, nor
should it be taken as an indicator of future loss trends. The
allocation of the allowance to each category does not restrict the use of the
allowance to absorb losses in any category.
Table
12: Allowance for Loan Losses by Loan Type
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
Loan
|
|
|
Loan
|
|
|
Loan
|
|
|
Loan
|
|
|
Loan
|
(000's
omitted except for ratios)
|
|
Allowance
|
Mix
|
|
Allowance
|
Mix
|
|
Allowance
|
Mix
|
|
Allowance
|
Mix
|
|
Allowance
|
Mix
|
Consumer
mortgage
|
|
$1,127
|
33.2%
|
|
$3,298
|
33.9%
|
|
$3,843
|
34.7%
|
|
$3,519
|
33.8%
|
|
$2,991
|
33.8%
|
Business
lending
|
|
23,577
|
34.9%
|
|
18,750
|
33.8%
|
|
17,284
|
34.9%
|
|
17,700
|
35.5%
|
|
15,917
|
34.0%
|
Consumer
installment
|
|
14,038
|
31.9%
|
|
12,226
|
32.3%
|
|
8,260
|
30.4%
|
|
10,258
|
30.7%
|
|
12,005
|
32.2%
|
Unallocated
|
|
3,168
|
|
|
5,301
|
|
|
7,040
|
|
|
4,836
|
|
|
1,668
|
|
Total
|
|
$41,910
|
100.0%
|
|
$39,575
|
100.0%
|
|
$36,427
|
100.0%
|
|
$36,313
|
100.0%
|
|
$32,581
|
100.0%
|
As
demonstrated in Table 12 above and discussed previously, business lending by its
nature carries higher credit risk than consumer mortgage or consumer installment
loans, and as a result a disproportionate amount of the allowance for loan
losses is deemed necessary for this portfolio. As in prior years, the
unallocated allowance is maintained for inherent losses in the portfolio not
reflected in the historical loss ratios, model imprecision, and for acquired
loan portfolios in the process of being fully integrated at
year-end. The unallocated allowance decreased from $7.0 million in
2007 to $5.3 million in 2008 to $3.2 million in 2009. The declines in
the unallocated portion of the allowance, as well as changes in year-over-year
allowance allocations reflect management’s continued refinement of its loss
estimation techniques. However, given the inherent imprecision in the
many estimates used in the determination of the allocated portion of the
allowance, management deliberately remained cautious and conservative in
establishing the overall allowance for loan losses. Management
considers the allocated and unallocated portions of the allowance for loan
losses to be prudent and reasonable. Furthermore, the Company’s
allowance is general in nature and is available to absorb losses from any loan
category.
Funding
Sources
The
Company utilizes a variety of funding sources to support the earning asset base
as well as to achieve targeted growth objectives. Overall funding is
comprised of three primary sources that possess a variety of maturity,
stability, and price characteristics: deposits of individuals, partnerships and
corporations (IPC deposits), collateralized municipal deposits (public funds),
and external borrowings.
The
average daily amount of deposits and the average rate paid on each of the
following deposit categories are summarized below for the years
indicated:
Table
13: Average Deposits
|
|
2009
|
|
2008
|
|
2007
|
|
|
Average
|
Average
|
|
Average
|
Average
|
|
Average
|
Average
|
(000's
omitted, except rates)
|
|
Balance
|
Rate
Paid
|
|
Balance
|
Rate
Paid
|
|
Balance
|
Rate
Paid
|
Noninterest
checking deposits
|
|
$686,692
|
0.00%
|
|
$581,271
|
0.00%
|
|
$566,981
|
0.00%
|
Interest
checking deposits
|
|
642,572
|
0.28%
|
|
508,076
|
0.43%
|
|
440,855
|
0.58%
|
Regular
savings deposits
|
|
481,655
|
0.26%
|
|
458,270
|
0.44%
|
|
457,681
|
0.83%
|
Money
market deposits
|
|
710,911
|
1.18%
|
|
398,306
|
1.72%
|
|
329,911
|
2.20%
|
Time
deposits
|
|
1,325,598
|
2.59%
|
|
1,360,275
|
3.82%
|
|
1,457,768
|
4.39%
|
Total
deposits
|
|
$3,847,428
|
1.19%
|
|
$3,306,198
|
1.91%
|
|
$3,253,196
|
2.39%
|
As
displayed in Table 13 above, total average deposits for 2009 equaled $3.85
billion, up $541.2 million or 16% from the prior year. Excluding the
average deposits acquired from the Citizens branch acquisition, average deposits
increased $67.0 million or 2.1%. Consistent with the Company’s
focus on expanding core account relationships and reducing higher cost time
deposits, average core deposit balances, excluding the Citizens acquisition,
grew $257.5 million or 14% as compared to 2008 while time deposits were allowed
to decline $190.5 million or 14%. Average deposits in 2008 were up
$53.0 million or 1.6% from 2007. Excluding the average deposits
acquired from the Citizens branch and TLNB acquisitions, average deposits
decreased $49.8 million or 1.6%.
The
Company’s funding composition continues to benefit from a high level of
non-public deposits, which reached an all-time high in 2009 with an average
balance of $3.53 billion, an increase of $450.5 million or 15% over the
comparable 2008 period. The Citizens branch acquisition accounted for
$421.9 million of additional non-public deposits. Non-public,
non-time deposits are frequently considered to be a bank’s most attractive
source of funding because they are generally stable, do not need to be
collateralized, have a relatively low cost, and provide a strong customer base
for which a variety of loan, deposit and other financial service-related
products can be sold.
Full-year
average deposits of local municipalities increased $90.8 million or 40% during
2009, with the Citizens branch acquisition accounting for $52.4 million of the
growth in municipal deposits and the remaining increase derived from organic
deposit growth. Municipal deposit balances tend to be more volatile
than non-public deposits because they are heavily impacted by the seasonality of
tax collection and fiscal spending patterns, as well as the longer-term
financial position of the local government entities, which can change
significantly from year to year. The Company is required to
collateralize all local government deposits in excess of FDIC coverage with
marketable securities from its investment portfolio. Because of this
stipulation, as well as the competitive bidding nature of this product,
management considers municipal time deposit funding to be similar to external
borrowings and thus prices these products on a consistent basis.
The mix
of average deposits in 2009 changed in comparison to 2008. The
weighting of non-time (interest checking, noninterest checking, savings and
money market accounts) increased from their 2008 levels, while time deposits’
weighting decreased. This change in deposit mix reflects the
Company’s focus on expanding core account relationships and reducing higher cost
time deposits. The average balance for time deposit accounts
decreased from 38.8% of the total deposits in 2008 to 30.9% of total deposits
this year. Average core deposit balances increased from 61.2% of the
total deposits in 2008 to 69.1% of total deposits this year. This
shift in mix, combined with lower average interest rates in all interest-bearing
deposit product categories caused the cost of interest bearing deposits to
decline to 1.45% in 2009, as compared to 2.31% in 2008 and 2.89% in
2007.
The
remaining maturities of time deposits in amounts of $100,000 or more outstanding
as of December 31 are as follows:
Table
14: Time Deposit > $100,000 Maturities
(000's
omitted)
|
2009
|
2008
|
Less
than three months
|
$65,788
|
$114,842
|
Three
months to six months
|
62,629
|
82,037
|
Six
months to one year
|
66,849
|
67,924
|
Over
one year
|
55,162
|
64,516
|
Total
|
$250,428
|
$329,319
|
External
borrowings are defined as funding sources available on a national market basis,
generally requiring some form of collateralization. Borrowing sources
for the Company include the Federal Home Loan Bank of New York and Federal
Reserve Bank of New York, as well as access to the repurchase market through
established relationships with primary market security dealers. The
Company also had approximately $102 million in fixed and floating-rate
subordinated debt outstanding at the end of 2009 that is held by unconsolidated
subsidiary trusts. In the first quarter of 2008, the Company elected
to redeem early $25 million of variable-rate trust preferred
securities. The Company also elected to redeem early $30 million of
fixed-rate trust preferred securities in January 2007. In December
2006, the Company completed a sale of $75 million of trust preferred
securities. The securities mature on December 15, 2036 and carry an
annual rate equal to the three-month LIBOR rate plus 1.65%. The
Company used the net proceeds of the offering for general corporate purposes
including the early call of the $30 million of fixed-rate trust preferred
securities. At the time of the offering, the Company also entered
into an interest rate swap agreement to convert the variable rate trust
preferred securities into a fixed rate obligation for a term of five years at a
fixed rate of 6.43%.
As shown
in Table 15 at year-end 2009 external borrowings totaled $856.8 million, a
decrease of $5.8 million from 2008. External borrowings averaged
$859.2 million or 18% of total funding sources for all of 2009 as compared to
$901.9 million or 21% of total funding sources for 2008. The decrease
in this ratio was primarily attributable to the net liquidity from the Citizen
branch acquisition and strong organic deposit growth throughout the year was
used to eliminate short-term borrowings.
As
displayed in Table 3 on page 22, the overall mix of funding has shifted in
2009. The percentage of funding derived from deposits increased to
82% in 2009 from 79% in 2008 and 80% in 2007. Average FHLB borrowings
decreased slightly during 2009, while average deposits increased from both the
Citizen acquisition and organic growth. Average FHLB borrowings
increased during 2008 in order to supplement the funding of strong organic loan
growth and provide temporary financing for investment purchases made in advance
of the significant amount of liquidity that was provided by the Citizens branch
acquisition. In addition, drastically lower short-term external
borrowing rates in the latter part of 2008 made this funding alternative more
attractive in comparison to other sources such as time deposits, a very
different environment than that experienced in 2006 and 2007. In
2007, the Company took advantage of improving spreads between short-term
convertible advances and certain short-term investment
opportunities. This strategy not only produced positive net interest
income, but it also served to demonstrate the Company’s ability to freely access
liquidity sources despite tightened credit market conditions. At
December 31, 2009 average external borrowings declined $42.8 million from the
end of the prior year, as a portion of the new liquidity from the branch
acquisition was used to eliminate short-term obligations.
The
following table summarizes the outstanding balance of borrowings of the Company
as of December 31:
Table
15: Borrowings
(000's
omitted, except rates)
|
2009
|
2008
|
2007
|
Federal
funds purchased
|
$0
|
$0
|
$27,285
|
Federal
Home Loan Bank advances
|
754,739
|
760,471
|
774,193
|
Commercial
loans sold with recourse
|
10
|
36
|
52
|
Capital
lease obligation
|
30
|
51
|
74
|
Subordinated
debt held by unconsolidated subsidiary trusts
|
101,999
|
101,975
|
127,724
|
Balance
at end of period
|
$856,778
|
$862,533
|
$929,328
|
|
|
|
|
Daily
average during the year
|
$859,155
|
$901,909
|
$820,546
|
Maximum
month-end balance
|
$862,466
|
$1,080,663
|
$948,466
|
Weighted-average
rate during the year
|
4.37%
|
4.35%
|
5.19%
|
Weighted-average
year-end rate
|
3.88%
|
4.13%
|
4.58%
|
The
following table shows the contractual maturities of various obligations as of
December 31, 2009:
Table
16: Maturities of Contractual Obligations
|
|
Maturing
|
Maturing
|
|
|
|
Maturing
|
After
One
|
After
Three
|
|
|
|
Within
|
Year
but
|
Years
but
|
Maturing
|
|
|
One
Year
|
Within
|
Within
|
After
|
|
(000's
omitted)
|
Or
Less
|
Three
Years
|
Five
Years
|
Five
Years
|
Total
|
Federal
Home Loan Bank advances
|
$26,125
|
$0
|
$614
|
$728,000
|
$754,739
|
Subordinated
debt held by unconsolidated subsidiary trusts
|
0
|
0
|
0
|
101,999
|
101,999
|
Commercial
loans sold with recourse
|
0
|
0
|
30
|
0
|
30
|
Purchase
obligations, primarily premises and equipment
|
4,300
|
0
|
0
|
0
|
4,300
|
Capital
lease obligation
|
0
|
10
|
0
|
0
|
10
|
Operating
leases
|
4,039
|
6,571
|
3,748
|
4,886
|
19,244
|
Unrecognized
tax benefits
|
552
|
0
|
156
|
0
|
708
|
Total
|
$35,016
|
$6,581
|
$4,548
|
$834,885
|
$881,030
|
Financial Instruments with
Off-Balance Sheet Risk
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 fair value of these
commitments is immaterial for disclosure.
The
contract amount of these off-balance sheet financial instruments as of December
31 is as follows:
Table
17: Off-Balance Sheet Financial Instruments
(000's
omitted)
|
2009
|
2008
|
Commitments
to extend credit
|
$573,179
|
$523,017
|
Standby
letters of credit
|
19,121
|
13,209
|
Total
|
$592,300
|
$536,226
|
Investments
The
objective of the Company’s investment portfolio is to hold low-risk,
high-quality earning assets that provide favorable returns and provide another
effective tool to actively manage its asset/liability position in order to
maximize future net interest income opportunities. This must be
accomplished within the following constraints: (a) implementing certain interest
rate risk management strategies which achieve a relatively stable level of net
interest income; (b) providing both the regulatory and operational liquidity
necessary to conduct day-to-day business activities; (c) considering
investment risk-weights as determined by the regulatory risk-based capital
guidelines; and (d) generating a favorable return without undue compromise of
the other requirements.
The book
value of the Company’s investment portfolio increased $99.4 million
to $1.474 billion at year-end 2009. Average investment
balances including cash equivalents (book value basis) for 2009 increased $315.7
million or 23% versus the prior year. Investment interest income in
2009 was $0.3 million or 0.4% higher than the prior year as a result of the
higher average balances in the portfolio, partially offset by a 108-basis point
decrease in the average investment yield from 5.81% to 4.73%. This
was primarily due to increased holdings of lower yielding cash instruments as
the Company maintains a liquid position in anticipation of improved investment
opportunities in future periods.
In 2008
cash flows from maturing investments were used to fund loan growth rather than
be reinvested at unfavorable market rates in the first half of the
year. In the latter half of the year, the Company took advantage of
favorable market conditions to purchase investments in advance of the liquidity
provided by the Citizens branch acquisition in November
2008. Throughout 2009, cash equivalents remained above historical
levels, as the Company maintained the liquidity provided in the Citizens
acquisition and organic deposit growth in anticipation of improved investment
opportunities in future periods. A portion of the liquidity generated
was deployed during 2009 through the purchase of $463.7 million of securities,
principally GNMA mortgage-backed, obligations of state and political
subdivisions and U.S. Treasury Notes.
Other
than the pooled trust preferred securities discussed below, the investment
portfolio has limited credit risk due to the composition continuing to heavily
favor U.S. Agency debentures, U.S. Agency mortgage-backed pass-throughs, U.S.
Agency CMOs and municipal bonds. The U.S. Agency debentures, U.S.
Agency mortgage-backed pass-throughs and U.S. Agency CMOs are all AAA-rated
(highest possible rating). The majority of the municipal bonds are
AA-rated. The portfolio does not include any private label mortgage
backed securities (MBSs) or private label collateralized mortgage obligations
(CMOs). 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.
Seventy-seven
percent of the investment portfolio was classified as available-for-sale at
year-end 2009 versus 94% at the end of 2008 due to the purchase of $369.4
million of securities that were categorized as held to maturity. The
net pre-tax market value gain over book value for the available-for-sale
portfolio as of December 31, 2009 was $12.7 million, down $7.3 million from one
year earlier. This decrease is indicative of the interest rate
movements and changing spreads during the respective time periods and the
changes in the size and composition of the portfolio.
The
following table sets forth the amortized cost and market value for the Company's
investment securities portfolio:
Table
18: Investment Securities
|
|
2009
|
|
2008
|
|
2007
|
|
|
Amortized
|
|
|
Amortized
|
|
|
Amortized
|
|
|
|
Cost/Book
|
Fair
|
|
Cost/Book
|
Fair
|
|
Cost/Book
|
Fair
|
(000's
omitted)
|
|
Value
|
Value
|
|
Value
|
Value
|
|
Value
|
Value
|
Held-to-Maturity
Portfolio:
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury and agency securities
|
|
$153,761
|
$155,408
|
|
$61,910
|
$64,268
|
|
$127,055
|
$127,382
|
Government
agency mortgage-backed securities
|
|
112,162
|
114,125
|
|
0
|
0
|
|
0
|
0
|
Obligations
of state and political subdivisions
|
|
69,939
|
71,325
|
|
15,784
|
16,004
|
|
6,207
|
6,289
|
Other
securities
|
|
74
|
74
|
|
101
|
101
|
|
76
|
76
|
Total
held-to-maturity portfolio
|
|
335,936
|
340,932
|
|
77,795
|
80,373
|
|
133,338
|
133,747
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale
Portfolio:
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury and agency securities
|
|
302,430
|
321,740
|
|
382,301
|
411,783
|
|
432,832
|
438,526
|
Obligations
of state and political subdivisions
|
|
462,161
|
475,410
|
|
538,008
|
547,939
|
|
532,431
|
543,963
|
Corporate
debt securities
|
|
35,561
|
37,117
|
|
35,596
|
35,152
|
|
40,457
|
40,270
|
Government
agency collateralized mortgage obligations
|
|
10,917
|
11,484
|
|
25,464
|
25,700
|
|
34,451
|
34,512
|
Pooled
trust preferred securities
|
|
71,002
|
44,014
|
|
72,535
|
49,865
|
|
73,089
|
72,300
|
Government
agency mortgage-backed securities
|
|
201,361
|
206,407
|
|
188,560
|
192,054
|
|
72,655
|
73,525
|
Marketable
equity securities
|
|
379
|
375
|
|
393
|
393
|
|
407
|
407
|
Available-for-sale
portfolio
|
|
1,083,811
|
1,096,547
|
|
1,242,857
|
1,262,886
|
|
1,186,322
|
1,203,503
|
Net
unrealized gain on available-for-sale portfolio
|
|
12,736
|
0
|
|
20,029
|
0
|
|
17,181
|
0
|
Total
available-for-sale portfolio
|
|
1,096,547
|
1,096,547
|
|
1,262,886
|
1,262,886
|
|
1,203,503
|
1,203,503
|
Other
Securities:
|
|
|
|
|
|
|
|
|
|
Federal
Home Loan Bank common stock
|
|
38,410
|
38,410
|
|
38,056
|
38,056
|
|
39,770
|
39,770
|
Federal
Reserve Bank common stock
|
|
12,378
|
12,378
|
|
12,383
|
12,383
|
|
10,582
|
10,582
|
Other
equity securities
|
|
3,856
|
3,856
|
|
3,891
|
3,891
|
|
4,679
|
4,679
|
Total
other securities
|
|
54,644
|
54,644
|
|
54,330
|
54,330
|
|
55,031
|
55,031
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$1,487,127
|
$1,492,123
|
|
$1,395,011
|
$1,397,589
|
|
$1,391,872
|
$1,392,281
|
Included
in the available-for-sale portfolio, as detailed in Table 18, are pooled trust
preferred, class A-1 securities with a current par value of $72.7 million and
unrealized losses of $27.0 million at December 31, 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 33% - 41% of the underlying
collateral would have to be in deferral or default concurrently to result in the
non-receipt of contractual cash flows. The market for these
securities at December 31, 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 consider these investments to be other-than temporarily
impaired as of December 31, 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. A detailed review of the pooled trust
preferred securities was completed. This review included an analysis
of collateral reports, a cash flow analysis, including varying degrees of
projected deferral/default scenarios, and a review of various financial ratios
of the underlying issuers. Based on the analysis performed,
significant further deferral/defaults and further erosion in other underlying
performance conditions would have to exist before the Company would incur a
loss. Therefore, the Company determined an other than temporary
impairment did not exist at December 31, 2009. To date, the Company
has received all scheduled principal and interest payments and expects to fully
collect all future contractual principal and interest payments. The
Company does not intend to sell the underlying securities. These
securities represent less than 1% of the Company’s average earning assets for
the year ending December 31, 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
19: Pooled Trust Preferred Securities as of December 31, 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 12/31/09
|
|
$22,986
|
|
$23,606
|
|
$24,409
|
Fair
value at 12/31/09
|
|
14,102
|
|
14,514
|
|
15,398
|
Unrealized
loss at 12/31/09
|
|
$8,884
|
|
$9,092
|
|
$9,011
|
Rating
(Moody’s/Fitch/S&P)
|
|
(Ba1/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
|
|
25.0%
|
|
21.2%
|
|
16.1%
|
Excess
subordination
|
|
30.2%
|
|
35.2%
|
|
38.6%
|
The
following table sets forth as of December 31, 2009, the maturities of investment
securities and the weighted-average yields of such securities, which have been
calculated on the cost basis, weighted for scheduled maturity of each
security:
Table
20: Maturities of Investment Securities
|
|
Maturing
|
Maturing
|
|
|
|
Maturing
|
After
One
|
After
Five
|
|
Total
|
|
Within
|
Year
but
|
Years
but
|
Maturing
|
Amortized
|
|
One
Year
|
Within
|
Within
|
After
|
Cost/Book
|
(000's
omitted, except rates)
|
or
Less
|
Five
Years
|
Ten
Years
|
Ten
Years
|
Value
|
Held-to-Maturity
Portfolio:
|
|
|
|
|
|
U.S.
Treasury and agency securities
|
$0
|
$47,399
|
$106,362
|
$0
|
$153,761
|
Mortgage-backed
securities(2)
|
0
|
0
|
0
|
112,162
|
112,162
|
Obligations
of state and political subdivisions
|
14,303
|
1,307
|
1,263
|
53,066
|
69,939
|
Other
securities
|
0
|
44
|
30
|
0
|
74
|
Held-to-maturity
portfolio
|
$14,303
|
$48,750
|
$107,655
|
$165,228
|
$335,936
|
|
|
|
|
|
|
Weighted-average
yield (1)
|
3.37%
|
3.38%
|
3.46%
|
3.07%
|
3.25%
|
|
|
|
|
|
|
Available-for-Sale
Portfolio:
|
|
|
|
|
|
U.S.
Treasury and agency securities
|
$14,447
|
$80,687
|
$155,672
|
$51,624
|
$302,430
|
Obligations
of state and political subdivisions
|
24,034
|
136,265
|
160,596
|
141,266
|
462,161
|
Pooled
trust preferred
|
0
|
0
|
0
|
71,002
|
71,002
|
Corporate
debt securities
|
9,998
|
15,581
|
9,982
|
0
|
35,561
|
Collateralized
mortgage obligations (2)
|
2,004
|
0
|
8,003
|
910
|
10,917
|
Mortgage-backed
securities (2)
|
20
|
156
|
5,140
|
196,045
|
201,361
|
Available-for-sale
portfolio
|
$50,503
|
$232,689
|
$339,393
|
$460,847
|
$1,083,432
|
|
|
|
|
|
|
Weighted-average
yield (1)
|
4.07%
|
4.30%
|
4.80%
|
4.40%
|
4.49%
|
|
(1)
Weighted-average yields are an arithmetic computation of income (not fully
tax-equivalent adjusted) divided by average balance; they may differ from
the yield to maturity, which considers the time value of
money.
|
|
(2)
Mortgage-backed securities and collateralized mortgage obligations are
listed based on the contractual maturity. Actual maturities
will differ from contractual maturities because borrowers may have the
right to call or prepay certain obligations with or without
penalties.
|
Impact of Inflation and
Changing Prices
The
Company’s financial statements have been prepared in terms of historical
dollars, without considering changes in the relative purchasing power of money
over time due to inflation. Unlike most industrial companies,
virtually all of the assets and liabilities of a financial institution are
monetary in nature. As a result, interest rates have a more
significant impact on a financial institution's performance than the effect of
general levels of inflation. Interest rates do not necessarily move
in the same direction or in the same magnitude as the prices of goods and
services. Notwithstanding this, inflation can directly affect the
value of loan collateral, in particular real estate.
New Accounting
Pronouncements
See “New Accounting
Pronouncements” Section of Note A of the notes to the consolidated
financial statements on page 55 for additional accounting
pronouncements.
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
features, pricing and quality) compared to competing products and
services; (6) changes in consumer spending, borrowing and savings
habits; (7) technological changes; (8) the implementation of the new
core processing system; (9) any acquisitions or mergers that might be
considered or consummated by the Company and the costs and factors associated
therewith; (10) the ability to maintain and increase market share and
control expenses; (11) 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; (12) changes in the Company’s organization, compensation and
benefit plans and in the availability of, and compensation levels for, employees
in its geographic markets; (13) the costs and effects of litigation
and of any adverse outcome in such litigation; (14) other risk factors outlined
in the Company’s filings with the Securities and Exchange Commission from time
to time; and (15) the success of the Company at managing the risks of the
foregoing.
The
foregoing list of important factors is not exclusive. Such
forward-looking statements speak only as of the date on which they are made and
the Company does not undertake any obligation to update any forward-looking
statement, whether written or oral, to reflect events or circumstances after the
date on which such statement is made. If the Company does update or
correct one or more forward-looking statements, investors and others should not
conclude that the Company will make additional updates or corrections with
respect thereto or with respect to other forward-looking
statements.
Item
7A. Quantitative and Qualitative Disclosures about Market
Risk
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 starting on page 32. 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. Other than the pooled trust preferred securities discussed
beginning on page 39, the Company has a minimal amount of credit risk in the
remainder of its investment portfolio because over three quarters of the
remaining fixed-income securities in the portfolio are AA or higher
rated. The Company does not have any material foreign currency
exchange rate risk exposure. 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 Board of
Directors. The Board of Directors delegates responsibility for
carrying out the policies to the Loan Asset/Liability Committee (“ALCO”), which
meets each month. The committee 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.
Asset/Liability
Management
The
primary objective of the Company’s asset/liability management process is to
maximize earnings and return on capital within acceptable levels of
risk. 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 that enable it to identify and quantify sources of
interest rate risk in varying rate environments. The primary tools
used by the Company in managing interest rate risk are the income simulation
model and economic value of equity modeling.
Interest
Rate Risk
Interest
rate risk (“IRR”) can result from: the timing differences in the
maturity/repricing of an institution's assets, liabilities, and off-balance
sheet contracts; the effect of embedded options, such as loan prepayments,
interest rate caps/floors, and deposit withdrawals; and differences in the
behavior of lending and funding rates, sometimes referred to as basis
risk. An example of basis risk would occur if floating rate assets
and liabilities, with otherwise identical repricing characteristics, were based
on market indexes that were imperfectly correlated.
Given the
potential types and differing related characteristics of IRR, it is important
that the Company maintain an appropriate process and set of measurement tools
that enable it to identify and quantify its primary sources of
IRR. The Company also recognizes that effective management of IRR
includes an understanding of when potential adverse changes in interest rates
will flow through the income statement. Accordingly, the Company will
manage its position so that it monitors its exposure to net interest income over
both a one year planning horizon and a longer-term strategic
horizon.
It is the
Company’s objective to manage its exposure to interest rate risk, bearing in
mind that it will always be in the business of taking on rate risk and that rate
risk immunization is not possible. Also, it is recognized that as
exposure to interest rate risk is reduced, so too may net interest margin be
reduced.
Income
Simulation
Income
simulation is tested on a wide variety of balance sheet and treasury yield curve
scenarios. The simulation projects changes in net interest income,
which are caused by the effect of changes in interest rates. The
model requires management to make assumptions about how the balance sheet is
likely to evolve through time in different interest rate
environments. Loan and deposit growth rate assumptions are derived
from management's outlook, as are the assumptions used for new loan yields and
deposit rates. Loan prepayment speeds are based on a combination of
current industry averages and internal historical
prepayments. Balance sheet and yield curve assumptions are analyzed
and reviewed by the ALCO Committee regularly.
The
following table reflects the Company's one-year net interest income sensitivity,
using December 31, 2009 asset and liability levels as a starting
point.
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, generally
reflecting 10%-65% of the movement of 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
|
Calculated
increase (decrease) in Projected
|
|
Net
Interest Income at December 31
|
Changes
in Interest Rates
|
2009
|
2008
|
+200
basis points
|
$5,757,000
|
$2,261,000
|
0
basis points (normalized yield curve)
|
($3,139,000)
|
($2,735,000)
|
In the
2009 and 2008 models, the rising rate environment reflects an increase in net
interest income (“NII”) from a flat rate environment while there is interest
rate risk exposure if rates were to move to a historical normalized yield
curve. The increase in a rising rate environment is largely due to
slower investment cash flows, a higher reinvestment rate and 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.
For the
2009 and 2008 models, the Bank continues to show interest rate risk exposure if
the yield curve shifts to a normalized level despite Fed Funds trading at a
range of 0 – 25 basis points. In the 0 basis point model (normalized
yield curve), longer-term rates are lowered to levels more consistent with
historical norms. In this model, net interest income declines during
the first twelve months as investment cash flows increase, assets reprice to
lower rates and corresponding liabilities are assumed to remain
constant. Despite Federal Funds trading near 0%, the Company believes
long-term treasury rates could potentially fall further, and thus, the
(normalized 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 including: the nature and timing
of interest rate levels (including yield curve shape); prepayments on loans and
securities; deposit decay rates; pricing decisions on loans and deposits;
reinvestment/replacement of asset and liability cash flows; and 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.
Management
uses a “value of equity” model to supplement the modeling technique described
above. Those supplemental analyses are based on discounted cash flows
associated with on and off-balance sheet financial instruments. Such
analyses are modeled to reflect changes in interest rates and shifts in the
maturity curve of interest rates and provide management with a long-term
interest rate risk metric.
Item 8. Financial
Statements and Supplementary Data
The
following consolidated financial statements and independent auditor’s reports of
Community Bank System, Inc. are contained on pages 45 through 82 of this
item.
·
|
Consolidated
Statements of Condition,
|
December
31, 2009 and 2008
·
|
Consolidated
Statements of Income,
|
Years
ended December 31, 2009, 2008, and 2007
·
|
Consolidated
Statements of Changes in Shareholders'
Equity,
|
Years
ended December 31, 2009, 2008, and 2007
·
|
Consolidated
Statements of Comprehensive Income,
|
Years
ended December 31, 2009, 2008, and 2007
·
|
Consolidated
Statements of Cash Flows,
|
Years
ended December 31, 2009, 2008, and 2007
·
|
Notes
to Consolidated Financial
Statements,
|
December
31, 2009
·
|
Management’s
Report on Internal Control Over Financial
Reporting
|
·
|
Report
of Independent Registered Public Accounting
Firm
|
Quarterly
Selected Data (Unaudited) for 2009 and 2008 are contained on page
83.
COMMUNITY
BANK SYSTEM, INC.
CONSOLIDATED
STATEMENTS OF CONDITION
(In
Thousands, Except Share Data)
|
December
31,
|
|
2009
|
2008
|
Assets:
|
|
|
Cash
and cash equivalents
|
$361,876
|
$213,753
|
|
|
|
Available-for-sale
investment securities (cost of $1,083,811 and $1,242,857
respectively)
|
1,096,547
|
1,262,886
|
Held-to-maturity
investment securities (fair value of $340,932 and $80,373)
|
335,936
|
77,795
|
Other
securities, at cost
|
54,644
|
54,330
|
Total
investment securities
|
1,487,127
|
1,395,011
|
|
|
|
Loans
held for sale
|
1,779
|
-
|
|
|
|
Loans
|
3,099,485
|
3,136,140
|
Allowance
for loan losses
|
(41,910)
|
(39,575)
|
Net
loans
|
3,057,575
|
3,096,565
|
|
|
|
Core
deposit intangibles, net
|
15,933
|
22,340
|
Goodwill
|
297,692
|
301,149
|
Other
intangibles, net
|
4,046
|
5,135
|
Intangible
assets, net
|
317,671
|
328,624
|
|
|
|
Premises
and equipment, net
|
76,896
|
73,294
|
Accrued
interest receivable
|
25,139
|
26,077
|
Other
assets
|
74,750
|
41,228
|
|
|
|
Total
assets
|
$5,402,813
|
$5,174,552
|
|
|
|
Liabilities:
|
|
|
Noninterest-bearing
deposits
|
$736,816
|
$638,558
|
Interest-bearing
deposits
|
3,187,670
|
3,062,254
|
Total
deposits
|
3,924,486
|
3,700,812
|
|
|
|
Borrowings
|
754,779
|
760,558
|
Subordinated
debt held by unconsolidated subsidiary trusts
|
101,999
|
101,975
|
Accrued
interest and other liabilities
|
55,852
|
66,556
|
Total
liabilities
|
4,837,116
|
4,629,901
|
|
|
|
Commitments
and contingencies (See Note N)
|
|
|
|
|
|
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; 33,630,700
and
|
33,631
|
33,468
|
33,468,215
shares issued, respectively
|
|
|
Additional
paid-in capital
|
216,481
|
212,400
|
Retained
earnings
|
342,539
|
329,914
|
Accumulated
other comprehensive loss
|
(8,784)
|
(12,864)
|
Treasury
stock, at cost (830,392 and 834,811 shares, respectively)
|
(18,170)
|
(18,267)
|
Total
shareholders' equity
|
565,697
|
544,651
|
|
|
|
Total
liabilities and shareholders' equity
|
$5,402,813
|
$5,174,552
|
The
accompanying notes are an integral part of the consolidated financial
statements.
COMMUNITY
BANK SYSTEM, INC.
CONSOLIDATED
STATEMENTS OF INCOME
(In
Thousands, Except Per-Share Data)
|
Years
Ended December 31,
|
|
2009
|
2008
|
2007
|
Interest
income:
|
|
|
|
Interest
and fees on loans
|
$185,119
|
$186,833
|
$186,784
|
Interest
and dividends on taxable investments
|
40,030
|
41,022
|
48,032
|
Interest
and dividends on nontaxable investments
|
23,633
|
23,004
|
21,421
|
Total
interest income
|
248,782
|
250,859
|
256,237
|
|
|
|
|
Interest
expense:
|
|
|
|
Interest
on deposits
|
45,776
|
63,080
|
77,682
|
Interest
on borrowings
|
31,353
|
32,368
|
32,645
|
Interest
on subordinated debt held by unconsolidated subsidiary
trusts
|
6,153
|
6,904
|
9,936
|
Total
interest expense
|
83,282
|
102,352
|
120,263
|
|
|
|
|
Net
interest income
|
165,500
|
148,507
|
135,974
|
Less: provision
for loan losses
|
9,790
|
6,730
|
2,004
|
Net
interest income after provision for loan losses
|
155,710
|
141,777
|
133,970
|
|
|
|
|
Noninterest
income:
|
|
|
|
Deposit
service fees
|
41,285
|
35,598
|
32,012
|
Other
banking services
|
5,841
|
3,210
|
3,284
|
Benefit
trust, administration, consulting and actuarial fees
|
27,771
|
25,788
|
19,700
|
Trust,
investment and asset management fees
|
8,631
|
8,648
|
8,264
|
Gain
(loss) on investment securities and debt extinguishments
|
7
|
230
|
(9,974)
|
Total
noninterest income
|
83,535
|
73,474
|
53,286
|
|
|
|
|
Operating
expenses:
|
|
|
|
Salaries
and employee benefits
|
92,690
|
82,962
|
75,714
|
Occupancy
and equipment
|
23,185
|
21,256
|
18,961
|
Data
processing and communications
|
20,684
|
16,831
|
15,691
|
Amortization
of intangible assets
|
8,170
|
6,906
|
6,269
|
Legal
and professional fees
|
5,240
|
4,565
|
4,987
|
Office
supplies and postage
|
5,243
|
5,077
|
4,303
|
Business
development and marketing
|
6,086
|
5,288
|
5,420
|
FDIC
insurance premiums
|
8,610
|
1,678
|
435
|
Goodwill
impairment
|
3,079
|
1,745
|
0
|
Special
charges/acquisition expenses
|
1,716
|
1,399
|
382
|
Other
|
11,475
|
10,855
|
9,912
|
Total
operating expenses
|
186,178
|
158,562
|
142,074
|
|
|
|
|
Income
before income taxes
|
53,067
|
56,689
|
45,182
|
Income
taxes
|
11,622
|
10,749
|
2,291
|
Net
income
|
$41,445
|
$45,940
|
$42,891
|
|
|
|
|
Basic
earnings per share
|
$1.26
|
$1.50
|
$1.43
|
Diluted
earnings per share
|
$1.26
|
$1.49
|
$1.42
|
Cash
dividends declared per share
|
$0.88
|
$0.86
|
$0.82
|
The
accompanying notes are an integral part of the consolidated financial
statements.
COMMUNITY
BANK SYSTEM, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years
ended December 31, 2007, 2008 and 2009
(In
Thousands, Except Share Data)
|
|
|
|
Accumulated |
|
|
|
Common
Stock |
Additional |
|
Other |
|
|
|
Shares
|
Amount
|
Paid-In
|
Retained
|
Comprehensive
|
Treasury
|
|
|
Outstanding
|
Issued
|
Capital
|
Earnings
|
(Loss)/Income
|
Stock
|
Total
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
30,020,159
|
$32,773
|
$203,197
|
$291,871
|
($4,697)
|
($61,616)
|
$461,528
|
Net
income
|
|
|
|
42,891
|
|
|
42,891
|
Other
comprehensive income, net of tax
|
|
|
|
|
5,399
|
|
5,399
|
Dividends
declared:
|
|
|
|
|
|
|
|
Common, $0.82 per share
|
|
|
|
(24,481)
|
|
|
(24,481)
|
Common
stock issued under employee stock plan, including
tax benefits of $409
|
226,224
|
227
|
3,055
|
|
|
|
3,282
|
Stock-based
compensation
|
|
|
2,177
|
|
|
|
2,177
|
Treasury
stock purchased
|
(611,650)
|
|
|
|
|
(12,012)
|
(12,012)
|
Balance
at December 31, 2007
|
29,634,733
|
$33,000
|
$208,429
|
$310,281
|
$702
|
($73,628)
|
478,784
|
Net
income
|
|
|
|
45,940
|
|
|
45,940
|
Other
comprehensive income, net of tax
|
|
|
|
|
(13,566)
|
|
(13,566)
|
Dividends
declared:
|
|
|
|
|
|
|
|
Common, $0.86 per share
|
|
|
|
(26,307)
|
|
|
(26,307)
|
Common
stock issued under employee stock plan, including
tax benefits of $926
|
468,671
|
468
|
7,846
|
|
|
|
8,314
|
Stock-based
compensation
|
|
|
2,035
|
|
|
|
2,035
|
Common
stock issuance
|
2,530,000
|
|
(5,910)
|
|
|
55,361
|
49,451
|
Balance
at December 31, 2008
|
32,633,404
|
$33,468
|
$212,400
|
$329,914
|
($12,864)
|
($18,267)
|
544,651
|
Net
income
|
|
|
|
41,445
|
|
|
41,445
|
Other
comprehensive income, net of tax
|
|
|
|
|
4,080
|
|
4,080
|
Dividends
declared:
|
|
|
|
|
|
|
|
Common, $0.88 per share
|
|
|
|
(28,820)
|
|
|
(28,820)
|
Common
stock issued under employee stock plan, including
tax benefits of $213
|
166,904
|
163
|
1,819
|
|
|
97
|
2,079
|
Stock-based
compensation
|
|
|
2,262
|
|
|
|
2,262
|
Balance
at December 31, 2009
|
32,800,308
|
$33,631
|
$216,481
|
$342,539
|
($8,784)
|
($18,170)
|
$565,697
|
The
accompanying notes are an integral part of the consolidated financial
statements.
COMMUNITY
BANK SYSTEM, INC.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
(In
Thousands)
|
Years
Ended December 31,
|
|
2009
|
2008
|
2007
|
Change
in accumulated unrealized gains (losses) for pension and
other postretirement obligations
|
$12,434
|
($21,503)
|
$2,005
|
Change
in unrealized gains and (losses) on derivative instruments used in cash
flow hedging relationships
|
1,628
|
(4,476)
|
(2,994)
|
Unrealized
(losses) gains on securities:
|
|
|
|
Unrealized
holding (losses) gains arising during period
|
(7,286)
|
3,077
|
9,376
|
Reclassification
adjustment for (gains) losses included in net income
|
(7)
|
(230)
|
22
|
Other
comprehensive gain (loss), before tax
|
6,769
|
(23,132)
|
8,409
|
Income
tax (expense) benefit related to other comprehensive loss
|
(2,689)
|
9,566
|
(3,010)
|
Other
comprehensive gain (loss) income, net of tax
|
4,080
|
(13,566)
|
5,399
|
Net
income
|
41,445
|
45,940
|
42,891
|
Comprehensive
income
|
$45,525
|
$32,374
|
$48,290
|
The accompanying notes are an integral
part of the consolidated financial statements.
COMMUNITY
BANK SYSTEM, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
Thousands of Dollars)
|
Years
Ended December 31,
|
|
2009
|
2008
|
2007
|
Operating
activities:
|
|
|
|
Net
income
|
$41,445
|
$45,940
|
$42,891
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
Depreciation
|
10,299
|
9,463
|
9,323
|
Amortization
of intangible assets
|
8,170
|
6,906
|
6,269
|
Impairment
of goodwill
|
3,079
|
1,745
|
0
|
Net
amortization(accretion) of premiums & discounts on securities, loans
and borrowings
|
2,141
|
(926)
|
(6,938)
|
Stock-based
compensation
|
2,262
|
2,035
|
2,177
|
Provision
for loan losses
|
9,790
|
6,730
|
2,004
|
Provision
for deferred income taxes
|
3,434
|
3,999
|
742
|
Amortization
of mortgage servicing rights
|
731
|
660
|
802
|
Income
on bank-owned life insurance policies
|
(476)
|
(637)
|
(451)
|
(Gain)/loss
on investment securities and debt extinguishments
|
(7)
|
(230)
|
9,955
|
Net
gain on sale of loans and other assets
|
(1,098)
|
(75)
|
(118)
|
Net
change in loans originated for sale
|
1,092
|
51
|
120
|
Change
in other operating assets and liabilities
|
(37,566)
|
(19,158)
|
(14,760)
|
Net
cash provided by operating activities
|
43,296
|
56,503
|
52,016
|
Investing
activities:
|
|
|
|
Proceeds
from sales of available-for-sale investment securities
|
27
|
21,613
|
1,219
|
Proceeds
from sales of other securities
|
0
|
816
|
268
|
Proceeds
from maturities of held-to-maturity investment securities
|
108,927
|
70,192
|
12,315
|
Proceeds
from maturities of available-for-sale investment
securities
|
253,629
|
324,888
|
564,351
|
Purchases
of held-to-maturity investment securities
|
(369,374)
|
(14,794)
|
(4,780)
|
Purchases
of available-for-sale investment securities
|
(94,339)
|
(401,727)
|
(683,609)
|
Purchases
of other securities
|
(390)
|
(102)
|
(7,179)
|
Net
decrease/(increase) in loans
|
29,200
|
(210,031)
|
(66,610)
|
Cash
(paid)/received for acquisitions, net of cash acquired of $0, $2,610, and
$21,873
|
(358)
|
372,779
|
(12,499)
|
Capital
expenditures
|
(13,894)
|
(10,997)
|
(9,777)
|
Net
cash provided by/(used in) by investing activities
|
(86,572)
|
152,637
|
(206,301)
|
Financing
activities:
|
|
|
|
Net
change in noninterest checking, checking, and savings
accounts
|
491,821
|
66,090
|
10,379
|
Net
change in time deposits
|
(268,147)
|
(158,790)
|
(34,334)
|
Net
change in borrowings (net of payments of $298, $799 and
$150,845)
|
(5,779)
|
(66,834)
|
118,907
|
Cash
paid for extinguishment of debt
|
0
|
0
|
(9,344)
|
Issuance
of common stock
|
2,079
|
57,765
|
3,282
|
Purchase
of treasury stock
|
0
|
0
|
(12,012)
|
Cash
dividends paid
|
(28,788)
|
(25,367)
|
(24,231)
|
Tax
benefits from share-based payment arrangements
|
213
|
926
|
409
|
Net
cash provided by/(used in) financing activities
|
191,399
|
(126,210)
|
53,076
|
Change
in cash and cash equivalents
|
148,123
|
82,930
|
(101,209)
|
Cash
and cash equivalents at beginning of year
|
213,753
|
130,823
|
232,032
|
Cash
and cash equivalents at end of year
|
$361,876
|
$213,753
|
$130,823
|
Supplemental
disclosures of cash flow information:
|
|
|
|
Cash
paid for interest
|
$85,011
|
$104,396
|
$122,071
|
Cash
paid for income taxes
|
5,434
|
9,855
|
8,985
|
Supplemental
disclosures of noncash financing and investing activities:
|
|
|
|
Dividends
declared and unpaid
|
7,211
|
7,179
|
6,239
|
Transfers
from loans to other real estate
|
2,373
|
1,284
|
1,608
|
Acquisitions:
|
|
|
|
Fair
value of assets acquired, excluding acquired cash and
intangibles
|
63
|
111,836
|
87,910
|
Fair
value of liabilities assumed
|
0
|
565,674
|
91,665
|
The
accompanying notes are an integral part of the consolidated financial
statements.
COMMUNITY
BANK SYSTEM, INC.
Nature
of Operations
Community
Bank System, Inc. (the “Company”) is a single bank holding company which
wholly-owns five consolidated subsidiaries: Community Bank, N.A. (the “Bank”),
Benefit Plans Administrative Services, Inc. (“BPAS”), CFSI Closeout Corp.
(“CFSICC”), First of Jermyn Realty Co. (“FJRC”), and Town & Country Agency
LLC (“T&C”). BPAS owns three subsidiaries, Benefit Plans
Administrative Services LLC, Harbridge Consulting Group LLC, and Hand Benefits
& Trust, Inc. (“HB&T”), which owns two subsidiaries Hand Securities Inc.
(“HSI”), and Flex Corporation (“Flex”). BPAS provides administration,
consulting and actuarial services to sponsors of employee benefit
plans. CFSICC, FJRC and T&C are inactive companies. The
Company also wholly-owns two unconsolidated subsidiary business trusts formed
for the purpose of issuing mandatorily redeemable preferred securities which are
considered Tier I capital under regulatory capital adequacy
guidelines (see Note P).
The Bank
operates 147 customer facilities throughout 28 counties of Upstate New York,
where it operates as Community Bank, N.A. and five counties of Northeastern
Pennsylvania, where it is known as First Liberty Bank & Trust, offering a
range of commercial and retail banking services. The Bank owns the
following subsidiaries: Community Investment Services, Inc. (“CISI”), CBNA
Treasury Management Corporation (“TMC”), CBNA Preferred Funding Corporation
(“PFC”), Nottingham Advisors, Inc. (“Nottingham”), First Liberty Service Corp.
(“FLSC”), Brilie Corporation (“Brilie”) and CBNA Insurance Agency (“CBNA
Insurance”). CISI provides broker-dealer and investment advisory
services. TMC provides cash management, investment, and treasury
services to the Bank. PFC primarily is an investor in residential
real estate loans. Nottingham provides asset management services to
individuals, corporate pension and profit sharing plans, and
foundations. FLSC provides banking-related services to the
Pennsylvania branches of the Bank. CBNA Insurance is a full
service insurance agency offering primarily property and casualty
products.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All inter-company accounts and
transactions have been eliminated in consolidation. Certain prior
period amounts have been reclassified to conform to the current period
presentation.
Variable
Interest Entities (“VIE”) are required to be consolidated by a
company if that company is subject to a majority of the risk of loss or receives
a majority of the entity’s residual returns or both. The Company’s
wholly-owned subsidiaries, Community Capital Trusts III and IV, are VIEs for
which the Company is not the primary beneficiary. Accordingly, the
accounts of these entities are not included in the Company’s consolidated
financial statements.
Critical
Accounting Estimates in the Preparation of Financial Statements
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Critical accounting estimates include the allowance for
loan losses, actuarial assumptions associated with the pension, post-retirement
and other employee benefit plans, the provision for income taxes, investment
valuation and other-than-temporary impairment, and the carrying value of
goodwill and other intangible assets.
Risk
and Uncertainties
In the
normal course of its business, the Company encounters economic and regulatory
risks. There are three main components of economic risk: interest
rate risk, credit risk and market risk. The Company is subject to
interest rate risk to the degree that its interest-bearing liabilities mature or
reprice at different speeds, or on different basis, from its interest-earning
assets. The Company’s primary credit risk is the risk of default on
the Company’s loan portfolio that results from the borrowers’ inability or
unwillingness to make contractually required payments. Market risk
reflects potential changes in the value of collateral underlying loans, the fair
value of investment securities, and loans held for sale.
The
Company is subject to regulations of various governmental
agencies. These regulations can and do change significantly from
period to period. The Company also undergoes periodic examinations by
the regulatory agencies which may subject it to further changes with respect to
asset valuations, amounts of required loan loss allowances, and operating
restrictions resulting from the regulators’ judgments based on information
available to them at the time of their examinations.
Revenue
Recognition
The
Company recognizes income on an accrual basis. CISI recognizes fee income when
investment and insurance products are sold to customers. Nottingham
provides asset management services to brokerage firms and clients and recognizes
income ratably over the contract period during which service is
performed. Revenue from BPA’s administration and recordkeeping
services is recognized ratably over the service contract
period. Revenue from consulting and actuarial services is recognized
when services are rendered. CBNA Insurance recognizes commission
revenue at the later of the effective date of the insurance policy, or the date
on which the policy premium is billed to the customer. At that date,
the earnings process has been completed and the impact of refunds for policy
cancellations can be reasonably estimated to establish reserves. The reserve for
policy cancellations is based upon historical cancellation experience adjusted
for known circumstances. All intercompany revenue and expense among related
entities are eliminated in consolidation.
Cash
and Cash Equivalents
For
purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks and highly liquid investments with original
maturities of less than ninety days. The carrying amounts reported in
the balance sheet for cash and cash equivalents approximate those assets’ fair
values.
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 December 31, 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 upon quoted market prices, where
available. If quoted market prices are not available, fair values are
based upon 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. If an equity security is deemed other-than-temporarily
impaired, the full impairment is considered credit related and a charge to
earnings would be recorded.
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.
Derivative
Financial Instruments
The
Company utilizes interest rate swap agreements, considered to be cash flow
hedges, as part of the management of interest rate risk to modify the repricing
characteristics of certain portions of its portfolios of interest-bearing
liabilities. These derivative instruments are required to be carried at fair
value on the balance sheet.
Cash flow
hedges are accounted for by recording the fair value of the derivative
instrument on the balance sheet as either a freestanding asset or liability,
with a corresponding offset recorded in other comprehensive income within
shareholders’ equity, net of income tax effect. Amounts are
reclassified from other comprehensive income to the income statement in the
period or periods the hedged transaction affects earnings. Derivative
gains and losses not effective in hedging the expected cash flows of the hedged
item are recognized immediately in the income statement. At the
hedge’s inception and at least quarterly thereafter, a formal assessment is
performed to determine the effectiveness of the cash flow hedge. If
it is determined that a derivative instrument has not been or will not continue
to be highly effective as a hedge, hedge accounting is
discontinued.
Loans
Loans are
stated at unpaid principal balances, net of unearned income. Mortgage
loans held for sale are carried at fair value and are included in loans held for
sale. 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 carrying
amount of accrued interest approximates its fair value.
Interest
on loans is accrued and credited to operations based upon the principal amount
outstanding. Nonrefundable loan fees and related direct costs are
included in the loan balances and are deferred and amortized over the life of
the loan as an adjustment to loan yield using the effective yield
method. Premiums and discounts on purchased loans are amortized using
the effective yield method over the life of the loans.
Impaired
and Other Nonaccrual Loans
The
Company places a loan on nonaccrual status when the loan becomes ninety days
past due (or sooner, if management concludes collection is doubtful), except
when, in the opinion of management, it is well-collateralized and in the process
of collection. A loan may be placed on nonaccrual status earlier than
ninety days past due if there is deterioration in the financial position of the
borrower or if other conditions of the loan so warrant. When a loan is placed on
nonaccrual status, uncollected accrued interest is reversed against interest
income and the deferral and amortization of nonrefundable loan fees and related
direct costs is discontinued. Interest income during the period the loan is on
nonaccrual status is recorded on a cash basis after recovery of principal is
reasonably assured. Nonaccrual loans are returned to accrual status when
management determines that the borrower’s performance has improved and that both
principal and interest are collectible. This generally requires a
sustained period of timely principal and interest payments.
Commercial
loans greater than $0.5 million are evaluated individually for
impairment. A loan is considered impaired, based on current
information and events, if it is probable that the Company will be unable to
collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. The measurement of
impaired loans is generally based upon the present value of expected future cash
flows or the fair value of the collateral, if the loan is
collateral-dependent.
The
Company’s charge-off policy by loan type is as follows:
·
|
Commercial
loans are generally charged-off to the extent outstanding principal
exceeds the fair value of estimated proceeds from collection efforts,
including liquidation of collateral. The charge-off is
recognized when the loss becomes reasonably
quantifiable.
|
·
|
Consumer
installment loans are generally charged-off to the extent outstanding
principal balance exceeds the fair value of collateral, and are recognized
by the end of the month in which the loan becomes 120 days past
due.
|
·
|
Loans
secured by 1-4 family residential real estate are generally charged-off to
the extent outstanding principal exceeds the fair value of the property,
and are recognized when the loan becomes 180 days past
due.
|
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 incurred 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 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
allowances, if any, to derive the required allowance for loan losses to be
reflected on the Consolidated Statement of Condition. As it has in
prior periods, the Company strives to refine and enhance its loss evaluation and
estimation processes continually. In 2009, the Company developed and
utilized more granular historical loss factors on a portfolio specific basis, as
well as enhanced its use of both Company specific and macro economic qualitative
factors. These enhancements did not result in a significant change to
the determined reserve levels.
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
factors previously mentioned.
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 initial and ongoing 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.
Premises
and Equipment
Premises
and equipment are stated at cost less accumulated
depreciation. Computer software costs that are capitalized only
include external direct costs of obtaining and installing the
software. The Company has not developed any internal use
software. Depreciation is calculated using the straight-line method
over the estimated useful lives of the assets. Useful lives range
from five to ten years for equipment; three to five years for software and
hardware; and 10 to 40 years for building and building
improvements. Land improvements are depreciated over 15 years and
leasehold improvements are amortized over the shorter of the term of the
respective lease plus any optional renewal periods that are reasonably assured
or life of the asset. Maintenance and repairs are charged to expense as
incurred.
Other
Real Estate
Other
real estate owned is comprised of properties acquired through foreclosure, or by
deed in lieu of foreclosure. These assets are carried at the lower of
cost or fair value less estimated costs of disposal. At foreclosure,
if the fair value, less estimated costs to sell, of the real estate acquired is
less than the Company’s recorded investment in the related loan, a write-down is
recognized through a charge to the allowance for loan losses. Any
subsequent reduction in value is recognized by a charge to
income. Operating costs associated with the properties are charged to
expense as incurred. At December 31, 2009 and 2008, other real
estate, included in other assets, amounted to $1.4 million and $1.1 million,
respectively.
Mortgage
Servicing Rights
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 or loss. The Company uses a
valuation model that calculates the present value of future cash flows to
determine the fair value of servicing rights. In using this valuation
method, the Company incorporates assumptions that market participants would use
in estimating future net servicing income, which includes estimates of the
servicing cost per loan, the discount rate, and prepayment
speeds. The carrying value of the originated mortgage servicing
rights is evaluated quarterly for impairment using these same market
assumptions.
Treasury
Stock
Repurchases
of shares of the Company’s common stock are recorded at cost as a reduction of
shareholders’ equity. Reissuance of shares of treasury stock is
recorded at average cost.
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.
Income
Taxes
The
Company and its subsidiaries file a consolidated federal income tax
return. Provisions for income taxes are based on taxes currently
payable or refundable as well as deferred taxes that 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.
Benefits
from tax positions should be recognized in the financial statements only when it
is more likely than not that the tax position will be sustained upon examination
by the appropriate taxing authority having full knowledge of all relevant
information. A tax position meeting the more-likely-than-not recognition
threshold should be measured at the largest amount of benefit for which the
likelihood of realization upon ultimate settlement exceeds 50
percent.
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 discount rate, rate of future
compensation increases and expected return on plan assets.
Assets
Under Management or Administration
Assets
held in fiduciary or agency capacities for customers are not included in the
accompanying consolidated statements of condition as they are not assets of the
Company. All fees associated with providing asset management services
are recorded on an accrual basis of accounting and are included in noninterest
income.
Advertising
Advertising
costs amounting to approximately $2.7 million, $2.2 million and $2.4 million for
the years ending December 31, 2009, 2008 and 2007, respectively, are nondirect
response in nature and expensed as incurred.
Earnings
Per Share
Effective
January 1, 2009, the Company adopted new authoritative accounting guidance under
ASC 260, Earnings Per
Share, which provides that unvested share-based payment awards that
contain nonforfeitable rights to dividends are participating securities and
shall be included in the computation of earnings per share pursuant to the
two-class method. The Company has determined that its unvested
restricted stock awards are participating securities. Accordingly,
effective January 1, 2009, earnings per common share is computed using the
two-class method prescribed by ASC 260. All previously reported
earnings per share data has been retroactively adjusted to conform to the new
computation method, resulting in minimal changes.
Using the
two-class method, basic earnings per common share is computed based upon net
income available to common shareholders divided by the weighted average number
of common shares outstanding during each period, which exclude the outstanding
unvested restricted stock. Diluted earnings per share is computed
using the weighted average number of common shares determined for the basic
earnings per common share computation plus the dilutive effect of stock options
using the treasury stock method. Stock options where the exercised
price was greater than the average market price of common shares were not
included in the computation of earnings per diluted share as they would have
been antidilutive.
Stock-based
Compensation
Companies
are required to measure and record compensation expense for stock options and
other share-based payments on the instruments’ fair value on the date of
grant. The Company uses the modified prospective
method. Under this method, expense is recognized for awards that are
granted, modified, or settled after December 31, 2005, as well as for unvested
awards that were granted prior to January 1, 2006. Stock-based
compensation expense is recognized ratably over the requisite service period for
all awards (see Note L).
Fair
Values of Financial Instruments
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 this
disclosure requirement. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company. The
fair values of investment securities, loans, deposits, and borrowings have been
disclosed in footnote R.
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 and noted no subsequent events requiring financial
statement recognition or disclosure.
New
Accounting Pronouncements
In
January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06,
Improving Disclosures About Fair Value Measurements, which adds disclosure
requirements about transfers into and out of Levels 1, 2 and 3, clarifies
existing fair value disclosure requirements about the appropriate level of
disaggregation, and clarifies that a description of the valuation technique and
inputs used to measure fair value is required for recurring, nonrecurring and
Level 2 and 3 fair value measurements. These provisions are effective
for reporting periods ending March 31, 2010 and will not impact the Company’s
consolidated financial statements.
In June
2009, the Financial Accounting Standards Board (“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 adoption of this guidance
will not impact the Company’s consolidated financial statements.
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 adoption of
this guidance will not impact the Company’s consolidated financial
statements.
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
and did not have a material impact on the Company’s consolidated financial
statements.
NOTE
B: ACQUISITIONS
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, BPAS 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.
Hand
Benefits & Trust, Inc.
On May
18, 2007, BPAS acquired HB&T, a Houston, Texas based provider of employee
benefit plan administration and trust services, in an all cash
transaction. The results of HB&T’s operations have been included
in the consolidated financial statements since that date.
TLNB
Financial Corporation
On June
1, 2007, the Company acquired TLNB Financial Corporation, parent company of
Tupper Lake National Bank (“TLNB”), in an all-cash transaction valued at
approximately $17.6 million. Based in Tupper Lake, NewYork, TLNB
operated five branches in the northeastern New York State cities of Tupper Lake,
Plattsburgh and Saranac Lake, as well as an insurance subsidiary, TLNB Insurance
Agency, Inc. The results of TLNB’s operations have been included in
the consolidated financial statements since that date.
2008
Acquisition Summary
The
purchase price allocation of the assets acquired and liabilities assumed,
including capitalized acquisition costs, for the acquisitions of Citizens and
ABG, and minor adjustments to the intangible assets from prior acquisitions 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
|
The
amortized cost and estimated fair value of investment securities as of December
31 are as follows:
|
2009
|
|
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
|
$153,761
|
$2,185
|
$538
|
$155,408
|
|
$61,910
|
$2,358
|
$0
|
$64,268
|
Government
agency mortgage-backed securities
|
112,162
|
1,963
|
0
|
114,125
|
|
0
|
0
|
0
|
0
|
Obligations
of state and political subdivisions
|
69,939
|
3,459
|
110
|
71,325
|
|
15,784
|
220
|
0
|
16,004
|
Other
securities
|
74
|
0
|
0
|
74
|
|
101
|
0
|
0
|
101
|
Total
held-to-maturity portfolio
|
335,936
|
$7,607
|
$648
|
340,932
|
|
77,795
|
$2,578
|
$0
|
80,373
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale
Portfolio:
|
|
|
|
|
|
|
|
|
|
U.S.
treasury and agency securities
|
302,430
|
$19,339
|
$29
|
321,740
|
|
382,301
|
$29,482
|
$0
|
411,783
|
Obligations
of state and political subdivisions
|
462,161
|
15,132
|
1,883
|
475,410
|
|
538,008
|
13,537
|
3,606
|
547,939
|
Corporate
debt securities
|
35,561
|
1,556
|
0
|
37,117
|
|
35,596
|
333
|
777
|
35,152
|
Government
agency collateralized mortgage obligations
|
10,917
|
567
|
0
|
11,484
|
|
25,464
|
236
|
0
|
25,700
|
Pooled
trust preferred securities
|
71,002
|
0
|
26,987
|
44,014
|
|
72,535
|
0
|
22,670
|
49,865
|
Government
agency mortgage-backed securities
|
201,361
|
6,088
|
1,041
|
206,407
|
|
188,560
|
4,234
|
740
|
192,054
|
Marketable
equity securities
|
379
|
2
|
6
|
375
|
|
393
|
0
|
0
|
393
|
Subtotal
|
1,083,811
|
42,684
|
29,946
|
1,096,547
|
|
1,242,857
|
47,822
|
27,793
|
1,262,886
|
Net
unrealized gain on
available-for-sale
portfolio
|
12,736
|
|
|
–
|
|
20,029
|
|
|
–
|
Total
available-for-sale portfolio
|
1,096,547
|
$42,684
|
$29,946
|
1,096,547
|
|
1,262,886
|
$47,822
|
$27,793
|
1,262,886
|
Other
Securities:
|
|
|
|
|
|
|
|
|
|
Federal
Home Loan Bank
|
38,410
|
|
|
38,410
|
|
38,056
|
|
|
38,056
|
Federal
Reserve Bank
|
12,378
|
|
|
12,378
|
|
12,383
|
|
|
12,383
|
Other
equity securities
|
3,856
|
|
|
3,856
|
|
3,891
|
|
|
3,891
|
Total
other securities
|
54,644
|
|
|
54,644
|
|
54,330
|
|
|
54,330
|
|
|
|
|
|
|
|
|
|
|
Total
|
$1,487,127
|
|
|
$1,492,123
|
|
$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 December 31,
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
|
|
|
|
|
|
|
|
|
|
|
Held-to-Maturity
Portfolio:
|
|
|
|
|
|
|
|
|
|
U.S.
treasury and agency securities
|
|
$67,435
|
$538
|
|
$0
|
$0
|
|
$67,435
|
$538
|
Obligations
of state and political subdivisions
|
|
10,408
|
110
|
|
0
|
0
|
|
10,408
|
110
|
Total
available-for-sale portfolio
|
|
77,843
|
648
|
|
0
|
0
|
|
77,843
|
648
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale
Portfolio:
|
|
|
|
|
|
|
|
|
|
Obligations
of state and political subdivisions
|
|
31,179
|
854
|
|
4,074
|
1,029
|
|
35,253
|
1,883
|
U.S.
treasury and agency securities
|
|
973
|
29
|
|
0
|
0
|
|
973
|
29
|
Pooled
trust preferred securities
|
|
0
|
0
|
|
44,014
|
26,987
|
|
44,014
|
26,987
|
Government
agency mortgage-backed securities
|
|
32,636
|
522
|
|
6,403
|
519
|
|
39,039
|
1,041
|
Marketable
equity securities
|
|
19
|
6
|
|
0
|
0
|
|
19
|
6
|
Total
available-for-sale portfolio
|
|
64,807
|
1,411
|
|
54,491
|
28,535
|
|
119,298
|
29,946
|
|
|
|
|
|
|
|
|
|
|
Total
investment portfolio
|
|
$142,650
|
$2,059
|
|
$54,491
|
$28,535
|
|
$197,141
|
$30,594
|
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
|
$3,126
|
|
$7,419
|
$479
|
|
$69,298
|
$3,605
|
Corporate
debt securities
|
|
10,897
|
681
|
|
1,903
|
97
|
|
12,800
|
778
|
Pooled
trust preferred securities
|
|
0
|
0
|
|
49,865
|
22,670
|
|
49,865
|
22,670
|
Government
agency 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 $72.7 million and unrealized losses of
$27.0 million at December 31, 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 33% - 41% of the underlying collateral would
have to be in deferral or default concurrently to result in thenon-receipt of
contractual cash flows.
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. A detailed review
of the pooled trust preferred securities was completed. This review
included an analysis of collateral reports, a cash flow analysis, including
varying degrees of projected deferral/default scenarios, and a review of various
financial ratios of the underlying issuers. Based on the analysis
performed, significant further deferral/defaults and further erosion in other
underlying performance conditions would have to exist before the Company would
incur a loss. Therefore, the Company determined an other than
temporary impairment did not exist at December 31, 2009. To date, the
Company has received all scheduled principal and interest payments and expects
to fully collect all future contractual principal and interest payments. The
Company does not intend to sell the underlying
security. Subsequent changes in market or credit conditions
could change those evaluations.
Management
does not believe any individual unrealized loss as of December 31, 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 December 31, 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
|
|
$14,303
|
$14,513
|
|
$47,476
|
$48,037
|
Due
after one through five years
|
|
48,750
|
49,815
|
|
232,533
|
245,007
|
Due
after five years through ten years
|
|
107,655
|
108,360
|
|
327,253
|
343,830
|
Due
after ten years
|
|
53,066
|
54,119
|
|
263,892
|
241,407
|
Subtotal
|
|
223,774
|
226,807
|
|
871,154
|
878,281
|
Collateralized
mortgage obligations
|
|
0
|
0
|
|
10,917
|
11,484
|
Mortgage-backed
securities
|
|
112,162
|
114,125
|
|
201,361
|
206,407
|
Total
|
|
$335,936
|
$340,932
|
|
$1,083,432
|
$1,096,172
|
Cash flow
information on investment securities for the years ended December 31 is as
follows:
(000's
omitted)
|
2009
|
2008
|
2007
|
Proceeds
from the sales of investment securities
|
$297
|
$21,667
|
$15,900
|
Gross
gains on sales of investment securities
|
7
|
559
|
22
|
Gross
losses on sales of investment securities
|
0
|
329
|
0
|
Proceeds
from the maturities of mortgage-backed securities and
CMO's
|
101,176
|
25,742
|
23,198
|
Purchases
of mortgage-backed securities and CMO's
|
214,275
|
132,505
|
10,923
|
Investment
securities with a carrying value of $810.8 million and $719.8 million at
December 31, 2009 and 2008, respectively, were pledged to collateralize certain
deposits and borrowings.
NOTE
D: LOANS
Major
classifications of loans at December 31 are summarized as follows:
(000's
omitted)
|
2009
|
2008
|
Consumer
mortgage
|
$1,028,805
|
$1,062,943
|
Business
lending
|
1,082,753
|
1,058,846
|
Consumer
installment
|
987,927
|
1,014,351
|
Gross
loans, net of deferred origination costs
|
3,099,485
|
3,136,140
|
Allowance
for loan losses
|
41,910
|
39,575
|
Loans,
net of allowance for loan losses
|
$3,057,575
|
$3,096,565
|
Nonaccrual
loans of $17.2 million and $12.1 million and accruing loans ninety days past due
of $1.8 million and $0.6 million at December 31, 2009 and 2008, respectively,
are included in net loans. The Company had approximately $12.0
million and $13.2 million of net deferred loan origination costs as of December
31, 2009 and 2008, respectively.
Changes
in loans to directors and officers and other related parties for the years ended
December 31 are summarized as follows:
(000's
omitted)
|
2009
|
2008
|
Balance
at beginning of year
|
$23,169
|
$24,419
|
New
loans
|
9,216
|
42
|
Payments
|
(4,096)
|
(1,292)
|
Balance
at end of year
|
$28,289
|
$23,169
|
Under
certain circumstances, the Company sells consumer mortgage loans in the
secondary market and typically retains the right to service the loans
sold. Upon sale, a mortgage servicing right (“MSR”) is established,
which represents the then current fair value of future net cash flows expected
to be realized for performing the servicing activities. The Company
stratifies these assets based on predominant risk characteristics, namely
expected term of the underlying financial instruments, and uses a valuation
model that calculates the present value of future cash flows to determine the
fair value of servicing rights. MSRs are
carried at the lower of the initial capitalized amount, net of accumulated
amortization or fair value. Mortgage loans serviced for others are
not included in the accompanying consolidated statements of
condition.
The
following table summarizes the changes in carrying value of MSRs and the
associated valuation allowance:
(000’s
omitted)
|
2009
|
2008
|
Balance
at beginning of period
|
$1,346
|
$2,045
|
Additions
|
1,936
|
2
|
Sales
|
0
|
(42)
|
Amortization
|
(731)
|
(659)
|
Carrying
value before valuation allowance at end of period
|
2,551
|
1,346
|
Valuation
allowance balance at beginning of period
|
0
|
0
|
Impairment
charges
|
(330)
|
0
|
Impairment
recoveries
|
250
|
0
|
Valuation
allowance balance at end of period
|
(80)
|
0
|
Net
carrying value at end of period
|
$2,471
|
$1,346
|
Fair
value of MSRs at end of period
|
$2,835
|
$2,817
|
Unpaid
principal balance of loans serviced for others
|
$452,211
|
$354,016
|
The
following table summarizes the key economic assumptions used to estimate the
value of the MSRs at December 31:
|
2009
|
2008
|
Weighted-average
contractual life (in years)
|
20.4
|
19.5
|
Weighted-average
constant prepayment rate (CPR)
|
11.96%
|
6.86%
|
Weighted-average
discount rate
|
5.24%
|
3.34%
|
|
|
|
The
following table summarizes the key economic assumptions used to estimate the
fair value of MSRs capitalized during the year:
|
2009
|
2008
|
Weighted-average
contractual life (in years)
|
23.5
|
29.75
|
Weighted-average
constant prepayment rate (CPR)
|
6.43%
|
10.60%
|
Weighted-average
discount rate
|
4.51%
|
5.12%
|
|
|
|
Custodial
escrow balances maintained in connection with the foregoing loans serviced for
others, and included in noninterest deposits, were approximately $6.0 million
and $5.5 million at December 31, 2009 and 2008, respectively.
Changes
in the allowance for loan losses for the years ended December 31 are summarized
as follows:
(000's
omitted)
|
2009
|
2008
|
2007
|
Balance
at beginning of year
|
$39,575
|
$36,427
|
$36,313
|
Provision
for loan losses
|
9,790
|
6,730
|
2,004
|
Allowance
on acquired loans
|
0
|
2,157
|
747
|
Charge-offs
|
(11,160)
|
(9,076)
|
(6,440)
|
Recoveries
|
3,705
|
3,337
|
3,803
|
Balance
at end of year
|
$41,910
|
$39,575
|
$36,427
|
As of
December 31, 2009 and 2008, the Company had impaired loans of $8,483,000 and
$3,608,000, respectively. The specifically allocated allowance for
loan losses recognized on these impaired loans was $1,389,000 and $470,000 at
December 31, 2009 and 2008, respectively. For the years ended
December 31, 2009 and 2008 the Company had average impaired loans of
approximately $9,606,000 and $2,701,000. Interest income recognized
on these loans in 2009 and 2008 was $247,000 and $0,
respectively. Included in total impaired loans at December 31, 2009
and 2008 were $0.9 million and $1.0 million of troubled debt restructured
loans.
NOTE
E: PREMISES AND EQUIPMENT
Premises
and equipment consist of the following at December 31:
(000's
omitted)
|
2009
|
2008
|
Land
and land improvements
|
$13,631
|
$12,044
|
Bank
premises owned
|
74,649
|
70,998
|
Equipment
and construction in progress
|
69,160
|
63,080
|
Premises
and equipment, gross
|
157,440
|
146,122
|
Less: Accumulated
depreciation
|
(80,544)
|
(72,828)
|
Premises
and equipment, net
|
$76,896
|
$73,294
|
The gross
carrying amount and accumulated amortization for each type of identifiable
intangible asset are as follows:
|
|
As
of December 31, 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
|
($44,662)
|
$15,933
|
|
$59,933
|
($37,593)
|
$22,340
|
Other
intangibles
|
|
7,894
|
(3,848)
|
4,046
|
|
7,882
|
(2,747)
|
5,135
|
Total
amortizing intangibles
|
|
68,489
|
(48,510)
|
19,979
|
|
67,815
|
(40,340)
|
27,475
|
Shown
below are the components of the Company’s goodwill at December 31, 2009 and
2008:
|
Year
Ended
|
|
Year
Ended
|
|
Year
Ended
|
(000’s
omitted)
|
December
31, 2007
|
Activity
|
December
31, 2008
|
Activity
|
December
31, 2009
|
Goodwill
|
$234,449
|
$68,445
|
$302,894
|
$(378)
|
$302,516
|
Accumulated
impairment
|
0
|
(1,745)
|
(1,745)
|
(3,079)
|
(4,824)
|
Goodwill,
net
|
$234,449
|
$66,700
|
$301,149
|
$(3,457)
|
$297,692
|
|
|
|
|
|
|
The
performance of Nottingham (previously Elias Asset Management) weakened
subsequent to its acquisition in 2000 as a result of adverse market
conditions. Its operating performance stabilized in 2006 and improved
in 2007 and early 2008, however, significant declines in the equity markets
experienced in 2008 and 2009 as well as changes in its mix of assets under
management resulted in meaningful revenue declines. In connection
with its on-going forecasting and planning analyses, management determined that
triggering events had occurred in both the fourth quarter of 2008 and again in
the fourth quarter of 2009 and therefore the Nottingham goodwill was tested for
impairment in both periods. Based on the goodwill valuations
performed internally in the fourth quarter of 2008 and 2009, which were expected
future cash flows based, the Company recognized an impairment charge and wrote
down the carrying value of the goodwill by $1.7 million in 2008 and $3.1 million
in 2009. Additional declines in Nottingham’s projected
operating results may cause future impairment to its remaining goodwill
balance.
The
changes in the gross carrying amount of intangible assets relate to the 2008
acquisitions of Citizens and ABG, as well as minor adjustments from prior
acquisitions. The estimated aggregate amortization expense for each
of the five succeeding fiscal years ended December 31 is as
follows:
2010
|
$5,958
|
2011
|
3,487
|
2012
|
2,901
|
2013
|
2,260
|
2014
|
1,703
|
Thereafter
|
3,670
|
Total
|
$19,979
|
Deposits
consist of the following at December 31:
(000's
omitted)
|
2009
|
2008
|
Noninterest
checking
|
$736,816
|
$638,558
|
Interest
checking
|
690,830
|
597,445
|
Savings
|
496,907
|
464,626
|
Money
market
|
842,174
|
574,278
|
Time
|
1,157,759
|
1,425,905
|
Total
deposits
|
$3,924,486
|
$3,700,812
|
At
December 31, 2009 and 2008, time certificates of deposit in denominations of
$100,000 and greater totaled $250.4 million and $329.3 million
respectively. The approximate maturities of time deposits at December
31, 2009 are as follows:
(000's
omitted)
|
Amount
|
2010
|
$904,488
|
2011
|
95,572
|
2012
|
96,577
|
2013
|
37,303
|
2014
|
23,223
|
Thereafter
|
596
|
Total
|
$1,157,759
|
Outstanding
borrowings at December 31 are as follows:
(000's
omitted)
|
2009
|
2008
|
Federal
Home Loan Bank advances
|
$754,739
|
$760,471
|
Commercial
loans sold with recourse
|
10
|
36
|
Capital
lease obligation
|
30
|
51
|
Subordinated
debt held by unconsolidated subsidiary trusts,
|
|
|
net
of discount of $528 and $552
|
101,999
|
101,975
|
Total
borrowings
|
$856,778
|
$862,533
|
The
weighted-average interest rate on borrowings for the years ended December 31,
2009 and 2008 were 4.37% and 4.35%, respectively. Federal Home Loan
Bank advances are collateralized by a blanket lien on the Company's residential
real estate loan portfolio and various investment securities.
Borrowings
at December 31, 2009 have contractual maturity dates as follows:
(000's
omitted, except rate)
|
Carrying
Value
|
Weighted
-average Rate
|
January
17, 2013
|
$614
|
4.00%
|
July
15, 2012
|
10
|
4.30%
|
November
23, 2014
|
30
|
2.75%
|
October
11, 2016 (Callable)
|
25,000
|
4.62%
|
January
25, 2018 (Callable)
|
10,000
|
2.73%
|
January
19, 2010
|
45
|
3.35%
|
February
18, 2010
|
80
|
3.26%
|
April
14, 2010 (Callable)
|
25,000
|
6.35%
|
November
18, 2010
|
1,000
|
5.09%
|
June
22, 2015 (Callable)
|
50,000
|
3.62%
|
October
14, 2015 (Callable)
|
15,000
|
3.95%
|
November
10, 2015 (Callable)
|
75,000
|
4.24%
|
January
27, 2016 (Callable)
|
10,000
|
3.98%
|
May
19, 2016 (Callable)
|
100,000
|
4.72%
|
August
8, 2016 (Callable)
|
60,000
|
4.28%
|
October
11, 2016 (Callable)
|
25,000
|
4.35%
|
July
31, 2017 (Callable)
|
100,000
|
4.03%
|
July
31, 2017 (Callable)
|
50,000
|
4.05%
|
July
31, 2017 (Callable)
|
50,000
|
4.04%
|
December
21, 2017 (Callable)
|
31,600
|
3.16%
|
December
21, 2017 (Callable)
|
126,400
|
3.40%
|
July
31, 2031
|
24,679
|
3.86%
|
December
15, 2036
|
77,320
|
1.90%
|
Total
|
$856,778
|
3.88%
|
Instruments
noted above as callable are Federal Home Loan Bank advances. These
advances have characteristics that include an initial lockout period, followed
by a quarterly call option at the discretion of the Federal Home Loan
Bank.
The
Company sponsors two business trusts, Community Statutory Trust III and
Community Capital 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 semi-annually at a
rate per annum equal to the interest rate being earned by the trust on the
debentures held by that trust. 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
|
|
Interest
|
Maturity
|
Call
|
Call
|
|
Date
|
Amount
|
Rate
|
Date
|
Provision
|
Price
|
III
|
7/31/2001
|
24,450
|
3
month LIBOR plus 3.58% (3.86%)
|
7/31/2031
|
5
year beginning 2006
|
103.0%
declining to par in 2011
|
IV
|
12/8/2006
|
75,000
|
3
month LIBOR plus 1.65% (1.90%)
|
12/15/2036
|
5
year beginning 2012
|
Par
|
On
December 8, 2006, the Company established Community Capital Trust IV, which
completed the sale of $75 million of trust preferred securities. At
the time of the offering, the Company also entered into an interest rate swap
agreement to convert the variable rate trust preferred securities into fixed
rate securities for a term of five years at a fixed rate of
6.43%. Additional interest expense of $2.9 million and $1.2 million
was recognized due to the interest rate swap agreement as of December 31, 2009
and 2008, respectively.
The 2009 provision for
income taxes includes $.7 million of non-recurring state tax expense for a NYS
license fee. The provision for income taxes includes a $1.7
million benefit in 2008 and a $6.9 million benefit in 2007, related to the
settlement and a related change in a position taken on certain previously
unrecognized tax positions. The provision for income taxes for the
years ended December 31 is as follows:
(000's
omitted)
|
2009
|
2008
|
2007
|
Current:
|
|
|
|
Federal
|
$6,400
|
$9,382
|
$9,257
|
State
and other
|
1,788
|
(2,632)
|
(7,708)
|
Deferred:
|
|
|
|
Federal
|
3,929
|
3,438
|
152
|
State
and other
|
(495)
|
561
|
590
|
Provision
for income taxes
|
$11,622
|
$10,749
|
$2,291
|
Components
of the net deferred tax asset (liability), included in other liabilities, as of
December 31 are as follows:
(000's
omitted)
|
2009
|
2008
|
Allowance
for loan losses
|
$16,183
|
$15,221
|
Employee
benefits
|
5,286
|
6,463
|
Pension
|
1,115
|
7,239
|
Interest
rate swap
|
1,959
|
2,585
|
Debt
extinguishment
|
2,408
|
2,709
|
Other
|
1,858
|
294
|
Deferred
tax asset
|
28,809
|
34,511
|
|
|
|
Investment
securities
|
7,810
|
10,119
|
Intangible
assets
|
14,064
|
12,899
|
Loan
origination costs
|
4,776
|
5,190
|
Depreciation
|
3,589
|
4,336
|
Mortgage
servicing rights
|
951
|
518
|
Prepaid
FDIC insurance
|
2,253
|
0
|
Deferred
tax liability
|
33,443
|
33,062
|
Net
deferred tax (liability) asset
|
($4,634)
|
$1,449
|
The
Company has determined that no valuation allowance is necessary as it is more
likely than not that the gross deferred tax assets will be realized through
carryback of future deductions to taxable income in prior years, future
reversals of existing temporary differences, and through future taxable
income.
A
reconciliation of the differences between the federal statutory income tax rate
and the effective tax rate for the years ended December 31 is shown in the
following table:
|
2009
|
2008
|
2007
|
Federal
statutory income tax rate
|
35.0%
|
35.0%
|
35.0%
|
Increase
(reduction) in taxes resulting from:
|
|
|
|
Tax-exempt
interest
|
(14.1)
|
(12.7)
|
(14.6)
|
State
income taxes, net of federal benefit
|
1.7
|
(2.3)
|
(15.7)
|
Other
|
(0.7)
|
(1.0)
|
0.4
|
Effective
income tax rate
|
21.9%
|
19.0%
|
5.1%
|
A
reconciliation of the unrecognized tax benefits for the years ended December 31
is shown in the following table:
(000’s
omitted)
|
2009
|
2008
|
2007
|
Unrecognized
tax benefits at beginning of year
|
$856
|
$2,701
|
$9,235
|
Changes
related to:
|
|
|
|
Positions
taken during the current year
|
79
|
77
|
288
|
Positions
taken during a prior period
|
0
|
(1,400)
|
(5,141)
|
Settlements
with taxing authorities
|
0
|
(225)
|
(1,366)
|
Lapse
of statutes of limitation
|
(227)
|
(297)
|
(315)
|
Unrecognized
tax benefits at end of year
|
$708
|
$ 856
|
$2,701
|
|
|
|
|
As of
December 31, 2009, the total amount of unrecognized tax benefits that would
impact the Company’s effective tax rate if recognized is $0.7
million. The Company’s policy is to recognize interest and penalties
related to unrecognized tax benefits in income taxes in the consolidated
statement of income. The accrued interest related to tax positions
was approximately $0.2 million at December 31, 2009 and 2008.
The
Company’s federal and state income tax returns are routinely subject to
examination from various governmental 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 judgment used to record tax-related assets or liabilities have
been appropriate. Future examinations by taxing authorities of the
Company’s federal or state tax returns could have a material impact on the
Company’s results of operations. The Company’s federal income tax
returns for years after 2005 may still be examined by the Internal Revenue
Service. New York State income tax examinations are underway for
years 2005 through 2007. It is not possible to estimate when those
examinations may be completed.
It is
reasonably possible that the amount of unrecognized tax benefits could change in
the next twelve months as a result of the New York State examination and
expiration of statutes of limitations on prior tax returns. The
estimated range of change in unrecognized tax benefits is estimated to be
between $0.2 million and $0.5 million.
The
Company’s ability to pay dividends to its shareholders is largely dependent on
the Bank’s ability to pay dividends to the Company. In addition to
state law requirements and the capital requirements discussed below, the
circumstances under which the Bank may pay dividends are limited by federal
statutes, regulations, and policies. For example, as a national bank,
the Bank must obtain the approval of the Office of the Comptroller of the
Currency (OCC) for payments of dividends if the total of all dividends declared
in any calendar year would exceed the total of the Bank’s net profits, as
defined by applicable regulations, for that year, combined with its retained net
profits for the preceding two years. Furthermore, the Bank may not
pay a dividend in an amount greater than its undivided profits then on hand
after deducting its losses and bad debts, as defined by applicable
regulations. At December 31, 2009, the Bank had approximately
$5,291,000 in undivided profits legally available for the payments of
dividends.
In
addition, the Federal Reserve Board and the OCC are authorized to determine
under certain circumstances that the payment of dividends would be an unsafe or
unsound practice and to prohibit payment of such dividends. The
Federal Reserve Board has indicated that banking organizations should generally
pay dividends only out of current operating earnings.
There are
also statutory limits on the transfer of funds to the Company by its banking
subsidiary, whether in the form of loans or other extensions of credit,
investments or assets purchases. Such transfer by the Bank to the
Company generally is limited in amount to 10% of the Bank’s capital and surplus,
or 20% in the aggregate. Furthermore, such loans and extensions of
credit are required to be collateralized in specific amounts.
NOTE
K: BENEFIT PLANS
Pension
and post-retirement plans
The
Company provides a qualified defined benefit pension and other post-retirement
health and life insurance benefits to qualified employees and retirees, an
unfunded supplemental pension plan for certain key executives, and an unfunded
stock balance plan for certain of its nonemployee directors. Using a
measurement date of December 31, the following table shows the funded status of
the Company's plans reconciled with amounts reported in the Company's
consolidated statements of condition:
|
|
Pension
Benefits
|
|
Post-retirement
Benefits
|
(000's
omitted)
|
|
2009
|
2008
|
|
2009
|
2008
|
Change
in benefit obligation:
|
|
|
|
|
|
|
Benefit
obligation at the beginning of year
|
|
$60,355
|
$56,528
|
|
$10,464
|
$9,827
|
Service
cost
|
|
3,496
|
3,288
|
|
575
|
691
|
Interest
cost
|
|
3,530
|
3,298
|
|
494
|
600
|
Participant
contributions
|
|
0
|
0
|
|
442
|
572
|
Plan
amendment/merger
|
|
(596)
|
25
|
|
(5,826)
|
(354)
|
Deferred
actuarial loss (gain)
|
|
6,808
|
1,737
|
|
(818)
|
(6)
|
Benefits
paid
|
|
(3,771)
|
(4,142)
|
|
(882)
|
(866)
|
Benefit
obligation at end of year
|
|
69,822
|
60,734
|
|
4,449
|
10,464
|
Change
in plan assets:
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
49,205
|
59,000
|
|
0
|
0
|
Actual
return of plan assets
|
|
13,676
|
(15,715)
|
|
0
|
0
|
Participant
contributions
|
|
0
|
0
|
|
442
|
572
|
Employer
contributions
|
|
15,518
|
10,063
|
|
440
|
294
|
Plan
merger
|
|
0
|
0
|
|
0
|
0
|
Transfer
of deferred compensation balances
|
|
0
|
0
|
|
0
|
0
|
Benefits
paid
|
|
(3,771)
|
(4,142)
|
|
(882)
|
(866)
|
Fair
value of plan assets at end of year
|
|
74,628
|
49,206
|
|
0
|
0
|
Funded
status at year end
|
|
$4,806
|
($11,528)
|
|
($4,449)
|
($10,464)
|
|
|
|
|
|
|
|
Amounts
recognized in the consolidated balance sheet were:
|
|
|
|
|
|
|
Other
assets
|
|
$11,292
|
$0
|
|
$0
|
$0
|
Other
liabilities
|
|
($6,486)
|
($11,528)
|
|
($4,449)
|
($10,464)
|
|
|
|
|
|
|
|
Amounts
recognized in accumulated other comprehensive income (“AOCI”)
were:
|
|
|
|
|
|
|
Net
(gain) loss
|
|
$28,651
|
$33,933
|
|
$1,056
|
$1,875
|
Net
prior service (credit) cost
|
|
(980)
|
(567)
|
|
(5,454)
|
302
|
Net
transition obligation
|
|
0
|
0
|
|
0
|
164
|
Pre-tax
adjustment to AOCI
|
|
27,671
|
33,366
|
|
(4,398)
|
2,341
|
Taxes
|
|
(10,661)
|
(12,851)
|
|
1,686
|
(906)
|
Net
adjustment to AOCI
|
|
$17,010
|
$20,515
|
|
($2,712)
|
$1,435
|
The
benefit obligation for the defined benefit pension plan was $63.3 million
and $55.2 million as of December 31, 2009 and 2008 respectively and
the fair value of plan assets as of December 31, 2009 and 2008 was $74.6 million
and $49.2 million respectively. The Company has unfunded supplemental
pension plans for certain key active and retired executives. The
projected benefit obligation for the unfunded supplemental pension plan for
certain key executives was $5.7 million for 2009 and $4.8 million for 2008,
respectively. The Company also has an unfunded stock balance plan for
certain of its nonemployee directors. The projected benefit
obligation for the unfunded stock balance plan was $0.8 million for 2009 and
$0.8 million for 2008 respectively. The plan was frozen effective
December 31, 2009.
Effective
December 31, 2009, the Company terminated its post-retirement medical program
for current and future employees. Remaining plan participants will
include only existing retirees, or those active and eligible employees who
retire prior to December 31, 2010. This change was accounted for as a
negative plan amendment and a $3.5 million, net of income tax, benefit for prior
service was recognized in AOCI in 2009. This negative plan amendment
will be amortized over the expected benefit utilization period of remaining plan
participants.
Amounts
recognized in accumulated other comprehensive income, net of tax, for the year
ended December 31, are as follows:
|
|
Pension
Benefits
|
|
Post-retirement
Benefits
|
(000's
omitted)
|
|
2009
|
2008
|
|
2009
|
2008
|
Prior
service cost
|
|
($254)
|
$219
|
|
($3,543)
|
($283)
|
Transition
obligation
|
|
0
|
0
|
|
(101)
|
(25)
|
Net
(gain) or loss
|
|
(3,250)
|
13,420
|
|
(504)
|
(81)
|
Total
|
|
($3,504)
|
$13,639
|
|
($4,148)
|
($389)
|
The
estimated costs, net of tax, that will be amortized from accumulated other
comprehensive (income) loss into net periodic (income) cost over the next fiscal
year are as follows:
|
|
Pension
|
Post-retirement
|
(000's
omitted)
|
|
Benefits
|
Benefits
|
Prior
service cost
|
|
($189)
|
($1,058)
|
Net
(gain) or loss
|
|
2,306
|
36
|
Total
|
|
$2,117
|
($1,022)
|
The
weighted-average assumptions used to determine the benefit obligations as of
December 31 are as follows:
|
|
Pension
Benefits
|
|
Post-retirement
Benefits
|
|
|
2009
|
2008
|
|
2009
|
2008
|
Discount
rate
|
|
5.60%
|
6.10%
|
|
5.15%
|
6.10%
|
Expected
return on plan assets
|
|
7.50%
|
8.00%
|
|
N/A
|
N/A
|
Rate
of compensation increase
|
|
4.00%
|
4.00%
|
|
N/A
|
N/A
|
The net
periodic benefit cost as of December 31 is as follows:
|
|
Pension
Benefits
|
|
Post-retirement
Benefits
|
(000's
omitted)
|
|
2009
|
2008
|
2007
|
|
2009
|
2008
|
2007
|
Service
cost
|
|
$3,496
|
$3,133
|
$3,186
|
|
$575
|
$691
|
$593
|
Interest
cost
|
|
3,530
|
3,318
|
3,014
|
|
494
|
600
|
523
|
Expected
return on plan assets
|
|
(4,686)
|
(4,817)
|
(4,340)
|
|
0
|
0
|
0
|
Amortization
of unrecognized net loss
|
|
2,761
|
598
|
1,101
|
|
0
|
93
|
118
|
Amortization
of prior service cost
|
|
(123)
|
(169)
|
(69)
|
|
54
|
105
|
110
|
Amortization
of transition (asset) obligation
|
|
0
|
0
|
0
|
|
41
|
41
|
41
|
Net
periodic benefit cost
|
|
$4,978
|
$2,063
|
$2,892
|
|
$1,164
|
$1,530
|
$1,385
|
Prior
service costs in which all or almost all of the plan’s participants are fully
eligible for benefits under the plan are amortized on a straight-line basis over
the expected future working years of all active plan
participants. Prior service costs associated with transferring
individual nonqualified plans are amortized on a straight-line basis over a
three-year period. Unrecognized gains or losses are amortized using
the “corridor approach”, which is the minimum amortization required. Under the
corridor approach, the net gain or loss in excess of 10 percent of the
greater of the projected benefit obligation or the market-related value of the
assets is amortized on a straight-line basis over the expected future working
years of all active plan participants.
The
weighted-average assumptions used to determine the net periodic pension cost for
the years ended December 31 are as follows:
|
|
Pension
Benefits
|
|
Post-retirement
Benefits
|
|
|
2009
|
2008
|
2007
|
|
2009
|
2008
|
2007
|
Discount
rate
|
|
6.10%
|
6.10%
|
5.60%
|
|
6.10%
|
6.10%
|
5.60%
|
Expected
return on plan assets
|
|
8.00%
|
8.00%
|
8.00%
|
|
N/A
|
N/A
|
N/A
|
Rate
of compensation increase
|
|
4.00%
|
4.00%
|
4.00%
|
|
N/A
|
N/A
|
N/A
|
The
amount of benefit payments that are expected to be paid over the next ten years
are as follows:
|
Pension
|
Post-retirement
|
(000's
omitted)
|
Benefits
|
Benefits
|
2010
|
$4,189
|
$599
|
2011
|
4,666
|
643
|
2012
|
4,892
|
522
|
2013
|
5,394
|
447
|
2014
|
5,811
|
370
|
2015-2019
|
29,524
|
1,293
|
The
payments reflect future service and are based on various assumptions including
retirement age and form of payment (lump-sum versus annuity). Actual results may
differ from these estimates.
The
assumed discount rate is used to reflect the time value of future benefit
obligations. The discount rate was determined based upon the yield on
high-quality fixed income investments expected to be available during the period
to maturity of the pension benefits. This rate is sensitive to
changes in interest rates. A decrease in the discount rate would
increase the Company’s obligation and future expense while an increase would
have the opposite effect. The expected long-term rate of return
was estimated by taking into consideration asset allocation, reviewing
historical returns on the type of assets held and current economic
factors. The appropriateness of the assumptions is reviewed
annually.
Plan
Assets
The
investment objective for the defined benefit pension plan is to achieve an
average annual total return over a five-year period equal to the assumed rate of
return used in the actuarial calculations. At a minimum performance
level, the portfolio should earn the return obtainable on high quality
intermediate-term bonds. The Company’s perspective regarding
portfolio assets combines both preservation of capital and moderate
risk-taking. Asset allocation favors equities, with a target
allocation of approximately 60% equity securities and 40% fixed income
securities. In order to diversify the risk within the pension
portfolio, the pension committee authorized the purchase of up to 15% of the
assets may be in alternative investments, which are primarily hedge
funds. No more than 10% of the portfolio can be in stock of the
Company. Due to the volatility in the market, the target allocation
is not always desirable and asset allocations will fluctuate between acceptable
ranges. Prohibited transactions include purchase of securities on
margin, uncovered call options, and short sale transactions.
The fair
values of the Company’s defined benefit pension plan assets at December 31, 2009
by asset category are as follows:
Asset
category (000’s omitted)
|
Quoted
Prices in Active Markets for Identical Assets Level 1
|
Significant
Observable Inputs
Level
2
|
Significant
Unobservable Inputs
Level
3
|
Total
|
|
|
|
|
|
Cash
|
$1,460
|
$0
|
$0
|
$1,460
|
Equity
securities:
|
|
|
|
|
U.S.
large-cap
|
17,058
|
0
|
0
|
17,058
|
U.S
mid/small cap
|
6,296
|
0
|
0
|
6,296
|
CBSI
stock
|
5,610
|
0
|
0
|
5,610
|
International
|
15,628
|
0
|
0
|
15,628
|
Global (a)
|
4,314
|
0
|
0
|
4,314
|
Commodities
(b)
|
3,720
|
0
|
0
|
3,720
|
|
52,626
|
0
|
0
|
52,626
|
|
|
|
|
|
Fixed
income securities:
|
|
|
|
|
Government
securities
|
6,244
|
0
|
0
|
6,244
|
Investment
grade bonds
|
0
|
9,235
|
0
|
9,235
|
High
yield(c)
|
0
|
2,453
|
0
|
2,453
|
|
6,244
|
11,688
|
0
|
17,932
|
|
|
|
|
|
Other
types of investments:
|
|
|
|
|
Alternative
investments (d)
|
0
|
2,263
|
48
|
2,311
|
|
|
|
|
|
Total
(e)
|
$60,330
|
$13,951
|
$48
|
$74,329
|
(a)
|
This
category includes securities that invest approximately 50% in U.S. equity
securities and 50% international equity
securities.
|
(b)
|
This
category includes investments in exchange traded funds reflecting the
performance of an underlying commodity
index.
|
(c)
|
This
category is exchange traded funds representing a diversified index of high
yield corporate bonds
|
(d)
|
This
category is comprised of non-traditional investments classes including
hedge funds, private equity funds, fund of funds,
and
structured notes.
|
(e)
|
Excludes
dividends and interest receivable totaling
$299,000
|
The
Company makes contributions to its funded qualified pension plan as required by
government regulation or as deemed appropriate by management after considering
the fair value of plan assets, expected return on such assets, and the value of
the accumulated benefit obligation. The Company made a contribution
to its defined benefit pension plan of $15 million during the first quarter of
2009 and also made a contribution of $15 million during the first quarter of
2010. The Company funds the payment of benefit obligations for the
supplemental pension and post-retirement plans because such plans do not hold
assets for investment.
TLNB
participated in a multi-employer tax qualified defined benefit pension
plan. All employees of TLNB who met minimum service requirements
participated in the plan. Contributions for 2009, 2008 and 2007 were
$21,000, $35,000 and $57,000, respectively.
The
assumed health care cost trend rate used in the post-retirement health plan at
December 31, 2009 was 9.00% for the pre-65 participants and 7.00% for the
post-65 participants for medical costs and 10.00% for prescription
drugs. The rate to which the cost trend rate is assumed to decline
(the ultimate trend rate) and the year that the rate reaches the ultimate trend
rate is 5.0% and 2017, respectively.
Assumed
health care cost trend rates have a significant effect on the amounts reported
for the health care plan. A one-percentage-point increase in the
trend rate would increase the service and interest cost components by $56,000
and increase the benefit obligation by $234,000. A
one-percentage-point decrease in the trend rate would decrease the service and
interest cost components by $51,000 and decrease the benefit obligation by
$221,000.
401(k)
Employee Stock Ownership Plan
The
Company has a 401(k) Employee Stock Ownership Plan in which employees can
contribute from 1% to 90% of eligible compensation, with the first 1% being
eligible for a 100% matching contribution in the form of Company common stock
and the next 5% being eligible for a 50% matching contributions in the form of
Company common stock. The Plan also permits the Company to distribute a
discretionary profit-sharing component in the form of Company common stock to
all participants except certain executive employees. The expense
recognized under this plan for the years ended December 31, 2009, 2008 and 2007
was $2,342,000, $2,395,000, and $1,821,000, respectively.
Deferred
Compensation Plan for Certain Executive Employees
The
Company has a Deferred Compensation Plan for Certain Executive Employees in
which participants may contribute up to 15% of their eligible compensation less
any amounts contributed to the 401(k) Employee Stock Ownership
Plan. Any discretionary profit-sharing amounts that the executive
receives from the Company must be contributed to the Deferred Compensation
Plan. The expense recognized under this plan for the years ended
December 31, 2009, 2008 and 2007 was $67,000, $59,000, and $58,000,
respectively.
Other
Deferred Compensation Arrangements
In
addition to the supplemental pension plans for certain executives, the Company
has nonqualified deferred compensation arrangements for several former
directors, officers and key employees. All benefits provided under
these plans are unfunded and payments to plan participants are made by the
Company. At December 31, 2009 and 2008, the Company has recorded a
liability of $6,258,000 and $6,103,000, respectively. The expense
recognized under these plans for the years ended December 31, 2009, 2008, and
2007 was $616,000, $6,000, and $673,000, respectively.
Deferred
Compensation Plan for Directors
Directors
may defer all or a portion of their director fees under the Deferred
Compensation Plan for Directors. Under this plan, there is a separate
account for each participating director which is credited with the amount of
shares which could have been purchased with the director’s fees as well as any
dividends on such shares. On the distribution date, the director will
receive common stock equal to the accumulated share balance in his
account. As of December 31, 2009 and 2008 there were 121,005 and
98,957 shares credited to the participants’ accounts, for which a liability of
$2,288,000 and $1,914,000 was accrued, respectively. The expense
recognized under the plan for the years ended December 31, 2009, 2008 and 2007,
was $497,000, $404,000, and $256,000, respectively.
The
Company has a long-term incentive program for directors, officers and
employees. Under this program, the Company authorized 4,000,000
shares of Company common stock for the grant of incentive stock options,
nonqualified stock options, restricted stock awards, retroactive stock
appreciation rights. As of December 31, 2009, the Company has
authorization to grant up to 1,588,609 additional shares of Company common stock
for these instruments. The nonqualified (offset) stock options in its
Director’s Stock Balance Plan vest and become exercisable immediately and expire
one year after the date the director retires or two years in the event of
death. The remaining options have a ten-year term, and vest and
become exercisable on a grant-by-grant basis, ranging from immediate vesting to
ratably over a five-year period.
Activity
in this long-term incentive program is as follows:
|
Stock
Options
|
|
|
Weighted-average
|
|
|
Exercise
Price of
|
|
Outstanding
|
Shares
|
Outstanding
at December 31, 2007
|
2,721,279
|
$20.22
|
Granted
|
363,991
|
18.19
|
Exercised
|
(388,491)
|
17.50
|
Forfeited
|
(30,526)
|
16.93
|
Outstanding
at December 31, 2008
|
2,666,253
|
20.38
|
Granted
|
524,187
|
18.01
|
Exercised
|
(86,556)
|
11.59
|
Forfeited
|
(21,069)
|
21.20
|
Outstanding
at December 31, 2009
|
3,082,815
|
$20.22
|
Exercisable
at December 31, 2009
|
1,984,089
|
$20.40
|
The
following table summarizes the information about stock options outstanding under
the Company’s stock option plan at December 31, 2009:
|
Options
outstanding
|
|
Options
exercisable
|
Range
of Exercise Price
|
Shares
|
Weighted
-average
Exercise
Price
|
Weighted- average
Remaining
Life (years)
|
|
Shares
|
Weighted
-average
Exercise
Price
|
$0.00
– $10.328
|
4,400
|
$9.37
|
.25
|
|
4,400
|
$9.37
|
$10.328
– $12.910
|
139,452
|
12.37
|
1.00
|
|
139,452
|
12.37
|
$12.910
– $15.492
|
152,868
|
13.13
|
2.03
|
|
152,868
|
13.13
|
$15.492
– $18.074
|
504,073
|
16.79
|
6.00
|
|
357,566
|
16.37
|
$18.074
– $20.656
|
755,108
|
18.13
|
8.43
|
|
178,396
|
18.22
|
$20.656
– $23.238
|
485,934
|
22.95
|
7.41
|
|
268,715
|
22.96
|
$23.238
– $25.820
|
1,040,980
|
24.24
|
5.04
|
|
882,692
|
24.27
|
TOTAL
|
3,082,815
|
20.22
|
6.06
|
|
1,984,089
|
$20.40
|
The
weighted-average remaining contractual term of outstanding and exercisable stock
options at December 31, 2009 is 6.1 years and 5.0 years,
respectively. The aggregate intrinsic value of outstanding and
exercisable stock options at December 31, 2009 is $4.1 million and $3.2 million,
respectively.
The
Company accounts for stock-based compensation awards that are granted, modified,
or settled after December 31, 2005 using the modified prospective
method. Under this method, expense is recognized for unvested awards
that were granted prior to January 1, 2006, based upon the fair value determined
at the grant date.
Stock-based compensation expense is recognized ratably over the requisite
service period for all awards. Prior to January 1, 2006, the Company
accounted for stock compensation under the intrinsic
value. Accordingly, the Company previously recognized no compensation
cost for employee stock options that were granted with an exercise price equal
to the market value of the underlying common stock on the date of
grant.
The
Company recognized stock-based compensation expense related to incentive and
non-qualified stock options of $2.3 million, $2.0 million and $2.2 million for
the years ended December 31, 2009, 2008 and 2007, respectively. A
related income tax benefit was recognized of $809,000, $525,000 and $472,000 for
the 2009, 2008 and 2007 years, respectively. Compensation expense
related to restricted stock vesting recognized in the income statement for 2009,
2008 and 2007 was $838,000, $585,000 and $300,000, respectively.
Management
estimated the fair value of options granted using the Black-Scholes
option-pricing model. This model was originally developed to estimate
the fair value of exchange-traded equity options, which (unlike employee stock
options) have no vesting period or transferability restrictions. As a
result, the Black-Scholes model is not necessarily a precise indicator of the
value of an option, but it is commonly used for this purpose. The
Black-Scholes model requires several assumptions, which management developed
based on historical trends and current market observations.
|
2009
|
2008
|
2007
|
Weighted-average
Fair Value of Options Granted
|
$5.56
|
$4.48
|
$6.14
|
Assumptions:
|
|
|
|
Weighted-average
expected life (in years)
|
7.68
|
7.74
|
7.89
|
Future
dividend yield
|
3.00%
|
3.00%
|
3.00%
|
Share
price volatility
|
32.03%
|
26.85%
|
26.15%
|
Weighted-average
risk-free interest rate
|
3.66%
|
3.70%
|
4.87%
|
Unrecognized
stock-based compensation expense related to non-vested stock options totaled
$3.0 million at December 31, 2009, which will be recognized as expense over the
next five years. The weighted-average period over which this
unrecognized expense would be recognized is 3.0 years. The total fair
value of shares vested during 2009, 2008, and 2007 were $1.7 million, $1.6
million and $1.9 million, respectively.
During
the twelve months ended December 31, 2009 and 2008, proceeds from stock option
exercises totaled $1.0 million and $6.8 million, respectively, and the related
windfall tax benefits from exercise were approximately $213,000 and $927,000,
respectively. During the twelve months ended December 31, 2009
and 2008, 81,330 and 388,491 shares, respectively, were issued in connection
with stock option exercise. All shares issued were new shares issued
from available authorized shares. The total intrinsic value of
options exercised during 2009, 2008 and 2007 were $0.6 million, $3.0 million and
$1.2 million, respectively.
A summary
of the status of the Company’s unvested stock awards as of December 31,
2009, and changes during the twelve months ended December 31, 2009 and
2008, is presented below:
|
Restricted
Shares
|
Weighted-average
grant
date fair value
|
Unvested
at December 31, 2007
|
57,240
|
$22.73
|
Awards
|
83,914
|
18.31
|
Cancellations
|
(2,555)
|
19.14
|
Vestings
|
(16,423)
|
22.96
|
Unvested
at December 31, 2008
|
122,176
|
$19.74
|
Awards
|
84,262
|
18.08
|
Cancellations
|
(2,604)
|
19.00
|
Vestings
|
(29,826)
|
19.99
|
Unvested
at December 31, 2009
|
174,008
|
$18.90
|
NOTE
M: 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 2.4 million, 1.5 million and 1.7
million weighted-average anti-dilutive stock options outstanding at December 31,
2009, 2008 and 2007, respectively, that were not included in the computation
below.
The
following is a reconciliation of basic to diluted earnings per share for the
years ended December 31, 2009, 2008 and 2007.
(000's
omitted, except per share data)
|
2009
|
2008
|
2007
|
Net
income
|
$41,445
|
$45,940
|
$42,891
|
Income
attributable to unvested stock-based compensation awards
|
(215)
|
(179)
|
(74)
|
Income
available to common shareholders
|
$41,230
|
$45,761
|
$42,817
|
|
|
|
|
Weighted-average
common shares outstanding - basic
|
32,673
|
30,496
|
29,918
|
Basic
earnings per share
|
$1.26
|
$1.50
|
$1.43
|
|
|
|
|
Net
income
|
$41,445
|
$45,940
|
$42,891
|
Income
attributable to unvested stock-based compensation awards
|
(215)
|
(179)
|
(74)
|
Income
available to common shareholders
|
$41,230
|
$45,761
|
$42,817
|
|
|
|
|
Weighted-average
common shares outstanding
|
32,673
|
30,496
|
29,918
|
Assumed
exercise of stock options
|
148
|
310
|
309
|
Weighted-average
shares – diluted
|
32,821
|
30,806
|
30,227
|
Diluted
earnings per share
|
$1.26
|
$1.49
|
$1.42
|
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 fair value of the standby
letters of credit is immaterial for disclosure. The contract
amount of commitment and contingencies is as follows:
(000's
omitted)
|
2009
|
2008
|
Commitments
to extend credit
|
$573,179
|
$523,017
|
Standby
letters of credit
|
19,121
|
13,209
|
Total
|
$592,300
|
$536,226
|
The
Company has unused lines of credit of $100.0 million at December 31,
2009. The Company has unused borrowing capacity of approximately
$286.6 million through collateralized transactions with the Federal Home Loan
Bank and $15.6 million through collateralized transactions with the Federal
Reserve Bank.
The
Company is required to maintain a reserve balance, as established by the Federal
Reserve Bank of New York. The required average total reserve for the
14-day maintenance period of December 31, 2009 through January 13, 2010 was
$51.2 million of which $2.0 million was required to be on deposit with the
Federal Reserve Bank of New York. The remaining $49.2 million was
represented by cash on hand.
The
Company leases buildings and office space under agreements that expire in
various years. Rental expense included in operating expenses amounted
to $4.0 million, $3.6 million and $3.0 million in 2009, 2008 and 2007,
respectively. The future minimum rental commitments as of December
31, 2009 for all noncancelable operating leases are as follows:
2010
|
$4,039
|
2011
|
3,520
|
2012
|
3,051
|
2013
|
2,554
|
2014
|
1,194
|
Thereafter
|
4,886
|
Total
|
$19,244
|
The
Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company’s financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Company’s and the Bank’s assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Company’s and the Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative
measures established by regulation to ensure capital adequacy require the
Company and Bank to maintain minimum total core capital to risk-weighted assets
of 8%, and Tier I capital to risk-weighted assets and Tier I capital to average
assets of 4%. Management believes, as of December 31, 2009, that the
Company and Bank meet all capital adequacy requirements to which they are
subject.
As of
December 31, 2009 and 2008, the most recent notification from the Office of the
Comptroller of the Currency (“OCC”) categorized the Company and Bank
as “well capitalized” under the regulatory framework for prompt corrective
action. To be categorized as “well capitalized,” the Company and Bank
must maintain minimum total core capital to risk-weighted assets of 10%, Tier I
capital to risk-weighted assets of 6% and Tier I capital to average assets of
5%. There are no conditions or events since that notification that
management believes have changed the institution’s category. Except
in connection with the regulatory approval of the Citizens branch acquisition in
November 2008 by the OCC, there were no significant capital requirements imposed
or agreed to during the regulatory approval process of any of our
acquisitions. In connection with the Citizens acquisition, the Bank
agreed to an approval condition to maintain capital at the “well-capitalized”
level.
The
capital ratios and amounts of the Company and the Bank as of December 31 are
presented below:
|
|
2009
|
|
2008
|
(000's
omitted)
|
|
Company
|
Bank
|
|
Company
|
Bank
|
Tier
1 capital to average assets
|
|
|
|
|
|
|
Amount
|
|
$372,777
|
$308,658
|
|
$342,071
|
$288,612
|
Ratio
|
|
7.39%
|
6.13%
|
|
7.22%
|
6.11%
|
Minimum
required amount
|
|
$201,856
|
$201,307
|
|
$189,452
|
$188,917
|
Tier
1 capital to risk-weighted assets
|
|
|
|
|
|
|
Amount
|
|
$372,777
|
$308,658
|
|
$342,071
|
$288,612
|
Ratio
|
|
12.21%
|
10.07%
|
|
11.28%
|
9.55%
|
Minimum
required amount
|
|
$122,127
|
$122,619
|
|
$121,304
|
$120,830
|
|
|
|
|
|
|
|
Total
core capital to risk-weighted assets
|
|
|
|
|
|
|
Amount
|
|
$410,992
|
$347,025
|
|
$380,003
|
$326,397
|
Ratio
|
|
13.46%
|
11.32%
|
|
12.53%
|
10.81%
|
Minimum
required amount
|
|
$244,254
|
$245,238
|
|
$242,609
|
$241,660
|
NOTE
Q: PARENT COMPANY STATEMENTS
The
condensed balance sheets of the parent company at December 31 is as
follows:
(000's
omitted)
|
2009
|
2008
|
Assets:
|
|
|
Cash
and cash equivalents
|
$57,097
|
$46,704
|
Investment
securities
|
3,470
|
3,489
|
Investment
in and advances to subsidiaries
|
614,646
|
603,751
|
Other
assets
|
6,618
|
8,298
|
Total
assets
|
$681,831
|
$662,242
|
|
|
|
Liabilities
and shareholders' equity:
|
|
|
Accrued
interest and other liabilities
|
$14,135
|
$15,616
|
Borrowings
|
101,999
|
101,975
|
Shareholders'
equity
|
565,697
|
544,651
|
Total
liabilities and shareholders' equity
|
$681,831
|
$662,242
|
The
condensed statements of income of the parent company for the years ended
December 31 is as follows:
(000's
omitted)
|
2009
|
2008
|
2007
|
Revenues:
|
|
|
|
Dividends
from subsidiaries
|
$36,000
|
$44,000
|
$43,000
|
Interest
and dividends on investments
|
656
|
246
|
385
|
Gain
on sale of fixed assets
|
0
|
0
|
26
|
Other
income
|
45
|
26
|
11
|
Total
revenues
|
36,701
|
44,272
|
43,422
|
|
|
|
|
Expenses:
|
|
|
|
Interest
on long-term notes and debentures
|
6,153
|
6,904
|
9,973
|
Loss
on early debt extinguishments
|
0
|
0
|
2,128
|
Other
expenses
|
101
|
106
|
100
|
Total
expenses
|
6,254
|
7,010
|
12,201
|
|
|
|
|
Income
before tax benefit and equity in undistributed
|
|
|
|
net
income of subsidiaries
|
30,447
|
37,262
|
31,221
|
Income
tax benefit
|
1,529
|
3,874
|
12,629
|
Income
before equity in undistributed net income (loss)
|
|
|
|
of
subsidiaries
|
31,976
|
41,136
|
43,850
|
Equity
in undistributed net income (loss) of subsidiaries
|
9,469
|
4,804
|
(959)
|
Net
income
|
$41,445
|
$45,940
|
$42,891
|
The
statements of cash flows of the parent company for the years ended December 31
is as follows:
(000's
omitted)
|
2009
|
2008
|
2007
|
Operating
activities:
|
|
|
|
Net
income
|
$41,445
|
$45,940
|
$42,891
|
Gain
on sale of fixed assets and investment securities |
(7)
|
(558)
|
(24)
|
Adjustments
to reconcile net income to net cash provided by operating
activities |
|
|
|
Equity
in undistributed net (income) loss of subsidiaries
|
(9,469)
|
(4,804)
|
959
|
Net
change in other assets and other liabilities
|
4,421
|
7,670
|
(10,483)
|
Net
cash provided by operating activities
|
36,390
|
48,248
|
33,343
|
Investing
activities:
|
|
|
|
Purchase
of investment securities
|
0
|
0
|
0
|
Proceeds
from sale of investment securities
|
26
|
816
|
1,009
|
Proceeds
from sale of fixed assets
|
0
|
0
|
180
|
Repayments
from/(advances to) subsidiaries
|
1,656
|
(1,820)
|
(1,600)
|
Capital
contributions to subsidiaries
|
0
|
(59,839)
|
0
|
Net
cash provided by/(used in) investing activities
|
1,682
|
(60,843)
|
(411)
|
Financing
activities:
|
|
|
|
Net
change in long-term borrowings
|
0
|
(25,774)
|
(30,928)
|
Issuance
of common stock
|
1,110
|
59,212
|
4,713
|
Purchase
of treasury stock
|
0
|
0
|
(12,012)
|
Cash
dividends paid
|
(28,789)
|
(25,367)
|
(24,231)
|
Net
cash (used in)/ provided by financing activities
|
(27,679)
|
8,071
|
(62,458)
|
Change
in cash and cash equivalents
|
10,393
|
(4,524)
|
(29,526)
|
Cash
and cash equivalents at beginning of year
|
46,704
|
51,228
|
80,754
|
Cash
and cash equivalents at end of year
|
$57,097
|
$46,704
|
$51,228
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
Cash
paid for interest
|
$6,283
|
$8,019
|
$11,903
|
Supplemental
disclosures of noncash financing activities
|
|
|
|
Dividends
declared and unpaid
|
$7,211
|
$7,179
|
$6,239
|
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 mortgage 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 assets 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:
|
December
31, 2009
|
(000's
omitted)
|
Level
1
|
Level
2
|
Level
3
|
Total
Fair Value
|
Available-for-sale
investment securities:
|
|
|
|
|
U.S.
Treasury and agency securities
|
$973
|
$320,767
|
$0
|
$321,740
|
Obligations
of state and political subdivisions
|
0
|
475,410
|
0
|
475,410
|
Government
agency mortgage-backed securities
|
0
|
206,407
|
0
|
206,407
|
Corporate
debt securities
|
0
|
37,117
|
0
|
37,117
|
Government
agency collateralized mortgage obligations
|
0
|
11,484
|
0
|
11,484
|
Pooled
trust preferred securities
|
0
|
0
|
44,014
|
44,014
|
Marketable
equity securities
|
375
|
0
|
0
|
375
|
Total
available-for-sale investment securities
|
1,348
|
1,051,185
|
44,014
|
1,096,547
|
Forward
sales contracts
|
0
|
119
|
0
|
119
|
Commitments
to originate real estate loans for sale
|
0
|
0
|
31
|
31
|
Mortgage
loans held for sale
|
0
|
1,779
|
0
|
1,779
|
Interest
rate swap
|
0
|
(5,093)
|
0
|
(5,093)
|
Total
|
$1,348
|
$1,047,990
|
$44,045
|
$1,093,383
|
|
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
agency mortgage-backed securities
|
0
|
192,054
|
0
|
192,054
|
Corporate
debt securities
|
0
|
35,152
|
0
|
35,152
|
Government
agency collateralized mortgage obligations
|
0
|
25,700
|
0
|
25,700
|
Pooled
trust preferred securities
|
0
|
0
|
49,865
|
49,865
|
Marketable
equity securities
|
393
|
0
|
0
|
393
|
Total
available-for-sale investment securities
|
1,400
|
1,211,621
|
49,865
|
1,262,886
|
Interest
rate swap
|
0
|
(6,721)
|
0
|
(6,721)
|
Total
|
$1,400
|
$1,204,900
|
$49,865
|
$1,256,165
|
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. The fair value of the pooled trust
preferred securities was determined using valuations provided by two third
parties based on discounted cash flow modeling
techniques. These models 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.
|
·
|
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 December 31, 2009 is $1.8 million. The unrealized
gain on mortgage loans held for sale of $24,000 was recognized in mortgage
banking and other income in the consolidated statement of income for the
year ended December 31, 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:
|
Year
Ended December 31,
|
|
|
2009
|
|
2008
|
(000's
omitted)
|
Pooled
trust preferred securities
|
Commitments
to originate real estate
loans
for sale
|
Total
|
|
Pooled
trust preferred securities
|
|
Beginning
balance
|
$49,866
|
$0
|
$49,866
|
|
$72,300
|
|
Total
income included in earnings
|
107
|
(593)
|
(486)
|
|
82
|
|
Total
losses included in other comprehensive income
|
(4,317)
|
0
|
(4,317)
|
|
(21,881)
|
|
Sales/calls/principal
reductions
|
(1,642)
|
0
|
(1,642)
|
|
(635)
|
|
Commitments
to originate real estate loans held for sale, net
|
0
|
624
|
624
|
|
0
|
|
Ending
balance
|
$44,014
|
$31
|
$44,045
|
|
$49,866
|
|
Assets
and liabilities measured on a non-recurring basis:
|
December
31, 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
|
$5,771
|
$5,771
|
|
$0
|
$0
|
$850
|
$850
|
Goodwill
|
0
|
0
|
2,500
|
2,500
|
|
0
|
0
|
5,579
|
5,579
|
Mortgage
servicing rights
|
0
|
0
|
1,608
|
1,608
|
|
n/a
|
n/a
|
n/a
|
n/a
|
Total
|
$0
|
$0
|
$9,879
|
$9,879
|
|
$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. These inputs are considered to be unobservable and contribute
to the Level 3 classification of mortgage servicing rights. 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.
Loans are
generally not recorded at fair value on a recurring
basis. Periodically, the Company records nonrecurring adjustments 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 and 2009, management determined triggering events
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 2009 and 2008. Based on those goodwill valuation
performed using Level 3 inputs, the Company recognized an impairment charge and
wrote down the carrying value of the goodwill by $3.1 and $1.7 million,
respectively, to $2.5 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 Note C.
The
carrying amounts and estimated fair values of the Company’s other financial
instruments at December 31, 2009 and 2008 are as follows:
|
|
December
31, 2009
|
|
December
31, 2008
|
|
|
Carrying
|
Fair
|
|
Carrying
|
Fair
|
(000's
omitted)
|
|
Value
|
Value
|
|
Value
|
Value
|
Financial
assets:
|
|
|
|
|
|
|
Net
loans
|
|
$3,099,485
|
$3,089,287
|
|
$3,096,565
|
$3,135,832
|
Financial
liabilities:
|
|
|
|
|
|
|
Deposits
|
|
3,924,486
|
3,939,951
|
|
3,700,812
|
3,719,557
|
Borrowings
|
|
754,779
|
821,987
|
|
760,558
|
869,162
|
Subordinated
debt held by unconsolidated subsidiary trusts
|
|
101,999
|
84,431
|
|
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
S: 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.
The
following table presents the Company’s derivative financial instruments, their
estimated fair values, and balance sheet location as of December 31,
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
|
($5,093)
|
|
Derivatives
not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Commitments
to originate real estate loans for sale
|
Other
assets
|
$8,476
|
$31
|
|
|
|
|
|
Forward
sales contracts
|
Other
assets
|
7,593
|
119
|
|
|
|
|
|
Total
derivatives
|
|
|
$150
|
|
|
|
($5,093)
|
|
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
year ended December 31, 2009:
(000's
omitted)
|
Location
|
|
Gain/(loss)
recognized in the Statement of Income for the Year Ending
December
31, 2009
|
Interest
rate swap agreement
|
Interest
on subordinated debt held by unconsolidated subsidiary
trusts
|
|
($2,895)
|
Interest
rate lock commitments
|
Mortgage
banking and other services
|
|
31
|
Forward
sales commitments
|
Mortgage
banking and other services
|
|
119
|
Total
|
|
|
($2,745)
|
The
amount of gain (loss) recognized during the year ended December 31, 2009 in
other comprehensive income related to the interest rate swap accounted for as a
hedging instrument was approximately $1,002,000. The amount of loss
reclassified from accumulated other comprehensive income into income (effective
portion) amounted to approximately $2,895,000 for the year ended December 31,
2009 and is located in interest expense on subordinated debt held by
unconsolidated trusts.
NOTE
T: 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 Northern
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 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).
Information
about reportable segments and reconciliation of the information to the
consolidated financial statements follows:
(000's
omitted)
|
Banking
|
Other
|
Consolidated
Total
|
2009
|
|
|
|
Net
interest income
|
$165,413
|
$87
|
$165,500
|
Provision
for loan losses
|
9,790
|
0
|
9,790
|
Noninterest
income excluding loss on investment securities and debt
extinguishments
|
45,276
|
38,252
|
83,528
|
Gain
on investment securities and debt extinguishments
|
7
|
0
|
7
|
Amortization
of intangible assets
|
7,176
|
994
|
8,170
|
Goodwill
impairment
|
0
|
3,079
|
3,079
|
Other
operating expenses
|
143,808
|
31,121
|
174,929
|
Income
before income taxes
|
$49,922
|
$3,145
|
$53,067
|
Assets
|
$5,377,591
|
$25,222
|
$5,402,813
|
Goodwill
|
$287,412
|
$10,280
|
$297,692
|
|
|
|
|
2008
|
|
|
|
Net
interest income
|
$148,348
|
$159
|
$148,507
|
Provision
for loan losses
|
6,730
|
0
|
6,730
|
Noninterest
income excluding loss on investment securities and debt
extinguishments
|
37,625
|
35,619
|
73,244
|
Loss
on investment securities and debt extinguishments
|
230
|
0
|
230
|
Amortization
of intangible assets
|
6,143
|
763
|
6,906
|
Goodwill
impairment
|
0
|
1,745
|
1,745
|
Other
operating expenses
|
121,954
|
27,957
|
149,911
|
Income
before income taxes
|
$51,376
|
$5,313
|
$56,689
|
Assets
|
$5,148,939
|
$25,613
|
$5,174,552
|
Goodwill
|
$287,964
|
$13,185
|
$301,149
|
|
|
|
|
2007
|
|
|
|
Net
interest income
|
$135,530
|
$444
|
$135,974
|
Provision
for loan losses
|
2,004
|
0
|
2,004
|
Noninterest
income excluding gain on investment securities and debt
extinguishments
|
34,952
|
28,308
|
63,260
|
Loss
on investment securities and debt extinguishments
|
(9,972)
|
(2)
|
(9,974)
|
Amortization
of intangible assets
|
5,917
|
352
|
6,269
|
Other
operating expenses
|
113,379
|
22,426
|
135,805
|
Income
before income taxes
|
$39,210
|
$5,972
|
$45,182
|
Assets
|
$4,676,129
|
$21,373
|
$4,697,502
|
Goodwill
|
$221,224
|
$13,225
|
$234,449
|
Report
on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule
13a – 15(f). Under the supervision and with the participation of our
management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation management concluded that our
internal control over financial reporting was effective as of December 31,
2009.
The
consolidated financial statements of the Company have been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm
that was engaged to express an opinion as to the fairness of presentation of
such financial statements. PricewaterhouseCoopers LLP was also
engaged to assess the effectiveness of the Company’s internal control over
financial reporting. The report of PricewaterhouseCoopers LLP follows
this report.
Community
Bank System, Inc.
By: /s/ Mark E.
Tryniski
Mark E.
Tryniski,
President,
Chief Executive Officer and Director
By: /s/
Scott Kingsley
Scott
Kingsley,
Treasurer
and Chief Financial Officer
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors of
Community
Bank System, Inc.
In our
opinion, the consolidated statements of condition and the related consolidated
statements of income, changes in shareholders' equity, comprehensive income, and
cash flows present fairly, in all material respects, the financial position of
Community Bank System, Inc. and its subsidiaries (the "Company") at December 31,
2009 and 2008, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2009 in conformity with
accounting principles generally accepted in the United States of
America. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2009, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company's management is responsible
for these financial statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Report on
Internal Control Over Financial Reporting. Our responsibility is to
express opinions on these financial statements and on the Company's internal
control over financial reporting based on our integrated audits. We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/PricewaterhouseCoopers
LLP
Buffalo, New
York
March 11,
2010
TWO
YEAR SELECTED QUARTERLY DATA (Unaudited)
2009
Results
|
4th
|
3rd
|
2nd
|
1st
|
|
(000's
omitted, except per share data)
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Total
|
Net
interest income
|
$42,948
|
$41,852
|
$40,514
|
$40,186
|
$165,500
|
Provision
for loan losses
|
2,590
|
2,375
|
2,015
|
2,810
|
9,790
|
Net
interest income after provision for loan losses
|
40,358
|
39,477
|
38,499
|
37,376
|
155,710
|
Noninterest
income
|
21,717
|
20,813
|
20,649
|
20,356
|
83,535
|
Operating
expenses
|
50,183
|
44,111
|
47,483
|
44,401
|
186,178
|
Income
before income taxes
|
11,892
|
16,179
|
11,665
|
13,331
|
53,067
|
Income
taxes
|
2,522
|
3,724
|
2,510
|
2,866
|
11,622
|
Net
income
|
$9,370
|
$12,455
|
$9,155
|
$10,465
|
$41,445
|
|
|
|
|
|
|
Basic
earnings per share
|
$0.29
|
$0.38
|
$0.28
|
$0.32
|
$1.26
|
Diluted
earnings per share
|
$0.28
|
$0.38
|
$0.28
|
$0.32
|
$1.26
|
|
|
|
|
|
|
2008
Results
|
4th
|
3rd
|
2nd
|
1st
|
|
(000's
omitted, except per share data)
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Total
|
Net
interest income
|
$40,396
|
$37,073
|
$35,440
|
$35,598
|
$148,507
|
Provision
for loan losses
|
2,395
|
1,985
|
1,570
|
780
|
6,730
|
Net
interest income after provision for loan losses
|
38,001
|
35,088
|
33,870
|
34,818
|
141,777
|
Noninterest
income
|
18,824
|
19,383
|
17,649
|
17,618
|
73,474
|
Operating
expenses
|
43,977
|
39,256
|
36,955
|
38,374
|
158,562
|
Income
before income taxes
|
12,848
|
15,215
|
14,564
|
14,062
|
56,689
|
Income
taxes
|
879
|
3,429
|
3,277
|
3,164
|
10,749
|
Net
income
|
$11,969
|
$11,786
|
$11,287
|
$10,898
|
$45,940
|
|
|
|
|
|
|
Basic
earnings per share
|
$0.37
|
$0.39
|
$0.38
|
$0.37
|
$1.50
|
Diluted
earnings per share
|
$0.37
|
$0.39
|
$0.37
|
$0.36
|
$1.49
|
Item 9. Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure
None
Item 9A. Controls and
Procedures
Evaluation
of Disclosure Controls and Procedures
Under the
supervision and with the participation of our management, including our chief
executive officer and chief financial officer, we conducted an evaluation of our
disclosure controls and procedures, as such term is defined under Rule 13a -
15(e) under the Securities Exchange Act of 1934. as amended. Based
upon this evaluation, our chief executive officer and our chief financial
officer concluded that our disclosure controls and procedures were effective as
of the end of the period covered by this annual report.
Management’s
Annual Report on Internal Control over Financial Reporting
Management’s
annual report on internal control over financial reporting is included under the
heading “Report on Internal Control Over Financial Reporting” at Item 8 of this
Annual Report on Form 10-K.
Attestation
Report of the Registered Public Accounting Firm
The
attestation report of the Company’s registered public accounting firm is
included under the heading “Report of the Independent Registered Public
Accounting Firm” at Item 8 of this Annual Report on Form 10-K.
Changes
in Internal Control over Financial Reporting
The
Company continually assesses the adequacy of its internal control over financial
reporting and enhances its controls in response to internal control assessments,
and internal and external audit and regulatory recommendations. No
change in internal control over financial reporting during the quarter ended
December 31, 2009 or through the date of this Annual Report on Form 10-K have
materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate due to changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Item 9B. Other
Information
None
Part
III
Item 10.
Directors, Executive Officers and Corporate
Governance
The
information concerning the Directors of the Company required by this Item 10 is
incorporated herein by reference to the sections entitled “Nominees for Director
and Directors Continuing in Office” in the Company’s Definitive Proxy Statement
for its 2010 Annual Meeting of Stockholders, which will be filed with the
Securities and Exchange Commission on or about March 26, 2010 (the “Proxy
Statement”). The information concerning executive officers of the
Company required by this Item 10 is presented in Item 4A of this Annual Report
on Form 10-K. Disclosure of compliance with Section 16(a) of the
Securities Exchange Act of 1934, as amended, by the Company’s directors and
executive officers is incorporated by reference to the section entitled “Section
16(a) Beneficial Ownership Reporting Compliance” in the Proxy
Statement. In addition, information concerning Audit Committee and
Audit Committee Financial Expert is included in the Proxy Statement under the
caption “Audit Committee Report” and is incorporated herein by
reference.
The
Company has adopted a code of ethics that applies to its principal executive
officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. The text of the
code of ethics is posted on the Company’s website at www.communitybankna.com,
and is available free of charge in print to any person who requests it. The
Company intends to satisfy the requirements under Item 5.05 of Form 8-K
regarding an amendment to, or a waiver from, the code of ethics that relates to
certain elements thereof, by posting such information on its website referenced
above.
Item 11. Executive
Compensation
The
information required by this Item 11 is incorporated herein by reference to the
section entitled “Compensation of Executive Officers” in the Company’s Proxy
Statement.
Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The
information required by this Item 12 is incorporated herein by reference to the
section entitled “Nominees for Director and Directors Continuing in Office” in
the Company’s Proxy Statement.
Item 13. Certain
Relationships and Related Transactions and Director
Independence
The
information required by this Item 13 is incorporated herein by reference to the
sections entitled “Corporate Governance” and “Transactions with Related Parties”
in the Company’s Proxy Statement.
Item
14. Principal Accounting Fees and Services
The
information required by this Item 14 is incorporated herein by reference to the
section entitled “Audit Fees” in the Company’s Proxy Statement.
Part
IV
Item 15. Exhibits,
Financial Statement Schedules
(a) Documents
filed as part of this report
(1) All financial
statements. The following consolidated financial statements of
Community Bank System, Inc. and subsidiaries are included in Item
8:
- Consolidated
Statements of Condition,
December
31, 2009 and 2008
- Consolidated
Statements of Income,
Years
ended December 31, 2009, 2008, and 2007
- Consolidated
Statements of Changes in Shareholders' Equity,
Years
ended December 31, 2009, 2008, and 2007
- Consolidated
Statements of Comprehensive Income,
Years
ended December 31, 2009, 2008, and 2007
- Consolidated
Statement of Cash Flows,
Years
ended December 31, 2009, 2008, and 2007
- Notes to
Consolidated Financial Statements,
December
31, 2009
- Report
of Independent Registered Public Accounting Firm
- Quarterly
selected data,
Years
ended December 31, 2009 and 2008 (unaudited)
(2) Financial statement
schedules. Schedules are omitted since the required
information is either not applicable or shown elsewhere in the financial
statements.
(3) Exhibits. The
exhibits filed as part of this report and exhibits incorporated herein by
reference to other documents are listed below:
|
2.1 Agreement
and Plan of Merger, dated August 2, 2006, by and among Community Bank
System, Inc., Seneca Acquisition Corp. and ONB
Corporation. Incorporated by reference to Exhibit 2.2 to the
Quarterly Report on Form 10-Q filed on November 8, 2006 (Registration No.
001-13695). |
|
|
|
2.2 Agreement
and Plan of Merger dated April 20, 2006, by and among Community Bank
System, Inc., ESL Acquisition Corp., and ES&L Bancorp,
Inc. Incorporated by reference to Exhibit 2.1 to the Form 8-K
filed on April 25, 2006 (Registration No. 001-13695). |
|
|
|
2.3 Purchase
and Assumption Agreement, dated June 24, 2008, by and among RBS Citizens,
NA., Community Bank System, Inc., and Community Bank,
N.A. Incorporated by reference to Exhibit 2.1 to the Form 8-K
filed on June 26, 2008 (Registration No. 001-13695). |
|
|
|
3.1
Certificate of Incorporation of Community Bank System, Inc., as
amended. Incorporated by reference to Exhibit No. 3.1 to the
Registration Statement on Form S-4 filed on October 20, 2000 (Registration
No. 333-48374). |
|
|
|
3.2
Certificate of Amendment of Certificate of Incorporation of Community Bank
System, Inc. Incorporated by reference to Exhibit No. 3.1 to the Quarterly
Report on Form 10-Q filed on May 5, 2004 (Registration No.
001-13695). |
|
|
|
3.3 Bylaws
of Community Bank System, Inc., amended July 18,
2007. Incorporated by reference to Exhibit 3.2 to the Form 8-K
filed on July 24, 2007. (Registration No. 001-13695). |
|
|
|
4.1 Form of Common
Stock Certificate. Incorporated by reference to Exhibit No. 4.1
to the Amendment No. 1 to the Registration Statement on Form S-3 filed on
September 29, 2008 (Registration No. 333-153403). |
|
|
|
10.1 Supplemental
Retirement Plan Agreement, effective as of December 31, 2008, by and among
Community Bank, N.A., Community Bank System, Inc. and Mark E.
Tryniski. Incorporated by reference to Exhibit No. 10.2 to the
Current Report on Form 8-K filed on March 19, 2009 (Registration No.
001-13695).** |
|
|
|
10.2 Indenture dated
as of December 8, 2006, between Community Bank System, Inc. and Wilmington
Trust Company, as trustee. Incorporated by reference to Exhibit
No. 4.1 to the Form 8-K filed on December 12, 2006 (Registration No.
001-13695). |
|
|
|
10.3 Amended
and Restated Declaration of Trust dated as of December 8, 2006, among
Community Bank System, Inc., as sponsor, Wilmington Trust Company, as
Delaware trustee, Wilmington Trust Company, as institutional trustee, and
Mark E. Tryniski, Scott A. Kingsley, and Joseph J. Lemchak as
administrators. Incorporated by reference to Exhibit 10.1 to
the Form 8-K filed on December 12, 2006 (Registration No.
001-13695). |
|
|
|
10.4 Guarantee
Agreement dated as of December 8, 2006, between Community Bank System,
Inc., as guarantor, and Wilmington Trust Company, as guarantee
trustee. Incorporated by reference to Exhibit 10.1 to the Form
8-K filed on December 12, 2006 (Registration No. 001-13695). |
|
|
|
10.5 Employment
Agreement, March 18, 2009, by and between Community Bank System, Inc.,
Community Bank, N.A. and Mark E. Tryniski. Incorporated by reference to
Exhibit No. 10.1 to the Current Report on Form 8-K filed on March 19, 2009
(Registration No. 001-13695). ** |
|
|
|
10.6
Post-2004 Supplemental Retirement Agreement, effective January 1, 2005, by
and between Community Bank System, Inc., Community Bank, N.A. and Sanford
Belden. Incorporated by reference to Exhibit No. 10.2 to the
Annual Report on Form 10-K filed on March 15, 2005 (Registration No.
001-13695). ** |
|
|
|
10.7 Pre-2005
Supplemental Retirement Agreement, effective December 31, 2004, by and
between Community Bank System, Inc., Community Bank, N.A. and Sanford
Belden. Incorporated by reference to Exhibit No. 10.3 to the
Annual Report on Form 10-K filed on March 15, 2005 (Registration No.
001-13695).** |
|
|
|
10.8
Supplemental Retirement Plan Agreement, effective September 29, 2009, by
and between Community Bank System Inc., Community Bank, N.A., and Scott A.
Kingsley. Incorporated by reference to Exhibit No. 10.1
to the Current Report on Form 8-K filed on October 1, 2009 (Registration
No. 001-13695). ** |
|
|
|
10.9
Employment Agreement, effective January 29, 2010, by and between Community
Bank System, Inc., Community Bank N.A. and Brian D.
Donahue. Incorporated by reference to Exhibit No. 10.1 to
the Current Report on Form 8-K filed on February 3, 2010 (Registration No.
001-13695). ** |
|
|
|
10.10
Supplemental Retirement Plan Agreement, effective March 26, 2003, by and
between Community Bank System Inc. and Thomas
McCullough. Incorporated by reference to Exhibit No.
10.11 to the Annual Report on Form 10-K filed on March 12, 2004
(Registration No. 001-13695). ** |
|
|
|
10.11
2004 Long-Term Incentive Compensation Program. Incorporated by
reference to Appendix A to the Definitive Proxy Statement on Schedule 14A
filed on April 15, 2004 (Registration No. 001-13695).
** |
|
|
|
10.12
Stock Balance Plan for Directors, as amended. Incorporated by
reference to Annex I to the Definitive Proxy Statement on Schedule 14A
filed on March 31, 1998 (Registration No. 001-13695).
** |
|
|
|
10.13
Deferred Compensation Plan for Directors, as
amended. Incorporated by reference to Annex I to the Definitive
Proxy Statement on Schedule 14A filed on March 31, 1998 (Registration No.
001-13695). ** |
|
|
|
10.14
Community Bank System, Inc. Pension Plan Amended and Restated as of
January 1, 2004. Incorporated by reference to Exhibit No. 10.27
to the Annual Report on Form 10-K filed on March 15, 2005 (Registration
No. 001-13695). ** |
|
|
|
10.15
Amendment #1 to the Community Bank System, Inc. Pension Plan, as amended
and restated as of January 1, 2004 (“Plan”). Incorporated by
reference to Exhibit No. 10.27 to the Annual Report on Form 10-K filed on
March 15, 2005 (Registration No.
001-13695). ** |
|
|
|
10.16
Amendment #1 to the Deferred Compensation Plan For Certain Executive
Employees of Community Bank System, Inc., as amended and restated as of
January 1, 2002. Incorporated by reference to Exhibit No. 10.33
to the Annual Report on Form 10-K filed on March 15, 2005 (Registration
No. 001-13695). ** |
|
|
|
10.17
Employment Agreement, dated January 1, 2008, by and among Community Bank
System, Inc., Community Bank N.A. and George J.
Getman. Incorporated by reference to Exhibit No. 10.1 to
the Quarterly Report on Form 10-Q filed on May 8, 2008 (Registration No.
001-13695). ** |
|
|
|
10.18
Employment Agreement, dated April 4, 2008, by and among Community Bank
System, Inc., Community Bank N.A. and Scott
Kingsley. Incorporated by reference to Exhibit No. 10.1
to the Form 8-K filed on April 9, 2008 (Registration No. 001-13695).
** |
|
|
|
10.19
Supplemental Retirement Plan Agreement, effective April 9, 2009, by and
among Community Bank System, Inc., Community Bank, N.A. and George J.
Getman. Incorporated by reference to Exhibit 10.1 to the Form
8-K filed on April 14, 2009 (Registration No. 001-13695).
** |
|
|
|
14.1
Community Bank System, Inc., Code of Ethics. Incorporated by
reference to Exhibit No. 1 to the Annual Report on Form 10-K filed on
March 15, 2005 (Registration No. 001-13695). |
|
|
|
21.1 Subsidiaries
of Registrant. * |
|
|
|
23.1
Consent of PricewaterhouseCoopers LLP. * |
|
|
|
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. ***
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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. *** |
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* Filed
herewith
**
Denotes management contract or compensatory plan or arrangement
***
Furnished herewith.
B. Not
applicable
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
COMMUNITY
BANK SYSTEM, INC.
By: /s/ Mark E.
Tryniski
Mark E. Tryniski
President and Chief Executive Officer
March 11, 2010
Pursuant
to the requirements of the Securities and Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities indicated on the 11th day of March
2010.
/s/ Mark E.
Tryniski
Mark E. Tryniski
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Scott
Kingsley
Scott Kingsley
Treasurer and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
Directors:
/s/ Brian R.
Ace
Brian R. Ace, Director
/s/ Paul M.
Cantwell, Jr.
Paul M. Cantwell, Jr., Director and
Chairman of the Board of Directors
/s/ Nicholas A.
DiCerbo
Nicholas A. DiCerbo, Director
/s/ James A.
Gabriel
James A. Gabriel, Director
/s/ James W.
Gibson, Jr.
James W. Gibson, Jr., Director
/s/ Charles E.
Parente
Charles E. Parente,
Director
/s/ David C.
Patterson
David C. Patterson,
Director
/s/ Sally A.
Steele
Sally A. Steele, Director
/s/ James A.
Wilson
James A. Wilson, Director