UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
|_| 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
----------------------------------------------------------
[GRAPHIC]
COMMUNITY BANK SYSTEM, INC.
(Exact name of registrant as specified in its charter)
----------------------------------------------------------
Delaware 16-1213679
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5790 Widewaters Parkway, DeWitt, New York 13214-1883
(Address of principal executive offices) (Zip Code)
(315) 445-2282
Registrant's telephone number, including area code
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 |_|.
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_|
Indicate by check mark whether the registrant is shell company (as defined in
Rule 12b-2 of the Act). Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
29,881,458 shares of Common Stock, $1.00 par value,
were outstanding on May 5, 2006.
TABLE OF CONTENTS
Page
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Condition
March 31, 2006 and December 31, 2005 3
Consolidated Statements of Income
Three months ended March 31, 2006 and 2005 4
Consolidated Statement of Changes in Shareholders' Equity
Three months ended March 31, 2006 5
Consolidated Statements of Comprehensive Income
Three months ended March 31, 2006 and 2005 6
Consolidated Statements of Cash Flows
Three months ended March 31, 2006 and 2005 7
Notes to the Consolidated Financial Statements
March 31, 2006 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosure about Market Risk 25
Item 4. Controls and Procedures 26
Part II. Other Information
Item 1. Legal Proceedings 26
Item 1A. Risk Factors 26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Securities Holders 26
Item 5. Other Information 26
Item 6. Exhibits 27
2
Part 1. Financial Information
Item 1. Financial Statements
COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENTS OF CONDITION (Unaudited)
(In Thousands, Except Share Data)
March 31, December 31,
2006 2005
---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 121,795 $ 114,605
Available-for-sale investment securities, at fair value 1,162,799 1,160,612
Held-to-maturity investment securities (fair value of $138,918 and $139,512, respectively 144,242 142,505
---------------------------------------------------------------------------------------------------------------------------
Total investment securities 1,307,041 1,303,117
---------------------------------------------------------------------------------------------------------------------------
Loans 2,408,221 2,411,769
Allowance for loan losses (32,720) (32,581)
---------------------------------------------------------------------------------------------------------------------------
Net loans 2,375,501 2,379,188
---------------------------------------------------------------------------------------------------------------------------
Core deposit intangibles, net 26,745 28,147
Goodwill 195,195 195,195
Other intangibles, net 1,445 1,536
---------------------------------------------------------------------------------------------------------------------------
Intangible assets, net 223,385 224,878
---------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 64,852 65,175
Accrued interest receivable 25,601 25,216
Other assets 41,859 40,813
---------------------------------------------------------------------------------------------------------------------------
Total assets $4,160,034 $4,152,992
===========================================================================================================================
Liabilities:
Non-interest bearing deposits $ 598,837 $ 601,544
Interest bearing deposits 2,464,690 2,382,425
---------------------------------------------------------------------------------------------------------------------------
Total deposits 3,063,527 2,983,969
Federal funds purchased -- 36,300
Borrowings 506,241 536,288
Subordinated debt held by unconsolidated subsidiary trusts 80,517 80,502
Accrued interest and other liabilities 54,347 58,338
---------------------------------------------------------------------------------------------------------------------------
Total liabilities 3,704,632 3,695,397
---------------------------------------------------------------------------------------------------------------------------
Commitment and contingencies (See Note I)
Shareholders' equity:
Preferred stock $1.00 par value, 500,000 shares authorized, 0 shares issued -- --
Common stock, $1.00 par value, 50,000,000 shares authorized; 32,560 32,451
32,559,456 and 32,450,563 shares issued in 2006 and 2005, respectively
Additional paid-in capital 198,561 196,312
Retained earnings 280,588 276,809
Accumulated other comprehensive income 3,495 8,420
Treasury stock, at cost (2,651,836 and 2,493,711 shares, respectively) (59,595) (56,074)
Employee stock plan - unearned (207) (323)
---------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 455,402 457,595
---------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $4,160,034 $4,152,992
===========================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
3
COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In Thousands, Except Per-Share Data)
Three Months Ended
March 31,
------------------
2006 2005
----------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $38,328 $35,502
Interest and dividends on taxable investments 10,470 13,570
Interest and dividends on nontaxable investments 5,795 6,151
----------------------------------------------------------------------------------------------
Total interest income 54,593 55,223
----------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 13,021 9,179
Interest on short-term borrowings 1,458 2,926
Interest on subordinated debt held by unconsolidated subsidiary trusts 1,815 1,569
Interest on long-term borrowings 4,679 3,847
----------------------------------------------------------------------------------------------
Total interest expense 20,973 17,521
----------------------------------------------------------------------------------------------
Net interest income 33,620 37,702
Less: provision for loan losses 2,150 1,875
----------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 31,470 35,827
----------------------------------------------------------------------------------------------
Non-interest income:
Deposit service fees 6,674 6,077
Other banking services 476 525
Benefit plan administration, consulting and actuarial fees 3,381 2,850
Trust, investment and asset management fees 2,050 1,781
Gain on sales of investment securities -- 1,726
----------------------------------------------------------------------------------------------
Total non-interest income 12,581 12,959
----------------------------------------------------------------------------------------------
Operating expenses:
Salaries and employee benefits 16,782 16,166
Occupancy and equipment 4,759 4,590
Data processing and communications 3,231 3,306
Amortization of intangible assets 1,493 1,984
Legal and professional fees 1,283 1,183
Office supplies and postage 976 938
Business development and marketing 730 689
Acquisition expenses 0 41
Other 2,181 2,134
----------------------------------------------------------------------------------------------
Total operating expenses 31,435 31,031
----------------------------------------------------------------------------------------------
Income before income taxes 12,616 17,755
Income taxes 3,154 4,421
----------------------------------------------------------------------------------------------
Net income $ 9,462 $13,334
==============================================================================================
Basic earnings per share $ 0.32 $ 0.44
Diluted earnings per share $ 0.31 $ 0.43
Dividends declared per share $ 0.19 $ 0.18
The accompanying notes are an integral part of the consolidated financial
statements.
4
COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
Three Months Ended March 31, 2006
(In Thousands, Except Share Data)
Common Stock Accumulated
-------------------- Additional Other Employee
Shares Amount Paid-In Retained Comprehensive Treasury Stock Plan
Outstanding Issued Capital Earnings Income Stock -Unearned Total
---------------------------------------------------------------------------------------------
Balance at December 31, 2005 29,956,852 $32,451 $196,312 $ 276,809 $8,420 ($56,074) ($323) $457,595
Net income 9,462 9,462
Other comprehensive loss, net of tax (4,925) (4,925)
Dividends declared:
Common, $0.19 per share (5,683) (5,683)
Common stock issued under
employee stock plan,
including tax benefits of $892 108,893 109 2,249 116 2,474
Treasury stock purchased (158,125) (3,521) (3,521)
-----------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2006 29,907,620 $32,560 $198,561 $ 280,588 $3,495 ($59,595) ($207) $455,402
===================================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
5
COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In Thousands)
Three Months Ended
March 31,
--------------------
2006 2005
----------------------------------------------------------------------------------------
Other comprehensive loss, before tax:
Change in minimum pension liability adjustment ($118) $0
Unrealized losses on securities:
Unrealized holding losses arising during period (7,923) (18,719)
Reclassification adjustment for gains included in net income 0 (1,726)
----------------------------------------------------------------------------------------
Other comprehensive loss, before tax: (8,041) (20,445)
Income tax benefit related to other comprehensive loss 3,116 7,954
----------------------------------------------------------------------------------------
Other comprehensive loss, net of tax: (4,925) (12,491)
Net income 9,462 13,334
----------------------------------------------------------------------------------------
Comprehensive income $4,537 $843
========================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
6
COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
Three Months Ended
March 31,
---------------------
2006 2005
------------------------------------------------------------------------------------------------------------
Operating activities:
Net income $ 9,462 $ 13,334
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 2,190 2,063
Amortization of intangible assets 1,493 1,984
Net amortization of premiums and discounts on securities and loans 215 149
Amortization of unearned compensation and discount on subordinated debt 36 74
Provision for loan losses 2,150 1,875
Gain on investment securities and debt extinguishments 0 (1,726)
Gain on loans and other assets (23) (45)
Proceeds from the sale of loans held for sale 4,314 0
Origination of loans held for sale (4,291) 0
Excess tax benefits from share-based payment arrangements (169) 0
Change in other operating assets and liabilities (1,763) 1,148
------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 13,614 18,856
------------------------------------------------------------------------------------------------------------
Investing Activities:
Proceeds from sales of available-for-sale investment securities 14,342 61,524
Proceeds from maturities of held-to-maturity investment securities 709 2,013
Proceeds from maturities of available-for-sale investment securities 14,512 44,330
Purchases of held-to-maturity investment securities (2,482) (6,770)
Purchases of available-for-sale investment securities (39,148) (90,166)
Net decrease in loans outstanding 1,542 22,334
Capital expenditures (1,867) (1,915)
------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (12,392) 31,350
------------------------------------------------------------------------------------------------------------
Financing Activities:
Net change in demand deposits, NOW accounts and savings accounts 23,115 38,060
Net change in time deposits 56,443 9,742
Net change in federal funds purchased (36,300) (500)
Net change in short-term borrowings (40,000) (65,000)
Change in long-term borrowings (net of payments of $47 and $89) 9,953 (89)
Issuance of common stock 1,566 1,644
Purchase of treasury stock (3,521) (11,915)
Cash dividends paid (5,457) (5,514)
Tax benefits from share-based payment arrangements 169 0
------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 5,968 (33,572)
------------------------------------------------------------------------------------------------------------
Change in cash and cash equivalents 7,190 16,634
Cash and cash equivalents at beginning of period 114,605 118,405
------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $121,795 $135,039
============================================================================================================
Supplemental disclosures of cash flow information:
Cash paid for interest $ 21,144 $ 17,519
Cash paid for income taxes 39 0
Supplemental disclosures of non-cash financing and investing activities:
Dividends declared and unpaid 5,683 5,457
Gross change in unrealized gains on available-for-sale investment securities (7,923) (20,445)
The accompanying notes are an integral part of the consolidated financial
statements.
7
COMMUNITY BANK SYSTEM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2006
NOTE A: BASIS OF PRESENTATION
The interim financial data as of March 31, 2006 and for the three months ended
March 31, 2006 and March 31, 2005 is unaudited; however, in the opinion of the
Company, the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the results for the
interim periods. The results of operations for the interim periods are not
necessarily indicative of the results that may be expected for the full year or
any other interim period.
NOTE B: OTHER MATTERS
On April 21, 2006, the Company announced an agreement to acquire ES&L Bancorp,
Inc. (ES&L) in an all-cash transaction valued at approximately $39 million. ES&L
is the parent company of Elmira Savings and Loan, F.A., a federally chartered
thrift operating as a community bank. The company has two branches in the cities
of Elmira and Ithaca, as well as mortgage and title insurance subsidiaries, all
of which combine to total approximately $210 million in assets and $190 million
in loans. The acquisition is expected to close in August 2006.
On April 20, 2005, the Company announced a twenty-month authorization to
repurchase up to 1,500,000 of its outstanding shares. Through March 31, 2006,
the Company has repurchased against this authorization 751,836 shares at an
aggregate cost of $17.5 million and an average price per share of $23.25. The
repurchased shares will be used for general corporate purposes, including those
related to stock plan activities.
NOTE C: SIGNIFICANT ACCOUNTING POLICIES
Allowance for Loan Losses
Management continually evaluates the credit quality of the Company's loan
portfolio and performs a formal review of the adequacy of the allowance for loan
losses on a quarterly basis. The allowance reflects management's best estimate
of probable losses inherent in the loan portfolio. Determination of the
allowance is subjective in nature and requires significant estimates. The
Company's allowance methodology consists of two broad components, general and
specific loan loss allocations.
The general loan loss allocation is composed of two calculations that are
computed on four main loan segments: commercial, consumer direct, consumer
indirect and residential real estate. The first calculation determines an
allowance level based on the latest three 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 five major factors affecting the level of loan loss risk:
portfolio risk migration patterns (internal credit quality trends); the growth
of the segments of the loan portfolio; economic and business environment trends
in the Company's markets (includes review of bankruptcy, unemployment,
population, consumer spending and regulatory trends); industry, geographical and
product concentrations in the portfolio; and the perceived effectiveness of
managerial resources and lending practices and policies. 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 non-accruing status with respect to interest.
Specific losses are based on discounted estimated cash flows, including any cash
flows resulting from the conversion of collateral.
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.
Income Taxes
Provisions for income taxes are based on taxes currently payable or refundable,
and deferred taxes which are based on temporary differences between the tax
basis of assets and liabilities and their reported amounts in the financial
statements. Deferred tax assets and liabilities are reported in the financial
statements at currently enacted income tax rates applicable to the period in
which the deferred tax assets and liabilities are expected to be realized or
settled.
8
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 7 to 20 years. Goodwill is
evaluated at least annually for impairment. The carrying value of goodwill and
other intangible assets is based upon discounted cash flow modeling techniques
that require management to make estimates regarding the amount and timing of
expected future cash flows. It also requires use of a discount rate that
reflects the current return requirements of the market in relation to present
risk-free interest rates, required equity market premiums, and company-specific
risk indicators.
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.
NOTE D: STOCK BASED COMPENSATION
The Company has a long-term incentive program for directors, officers and
employees. Under this program, the Company authorized 4,024,000 shares of
Company common stock for the grant of incentive stock options, nonqualified
stock options, restricted stock awards, retroactive stock appreciation rights,
and offset options. The offset 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 Restricted Stock
------------------------------- ----------------------------------
Weighted Average Weighted Average
Exercise Price of Grant Date Fair
Outstanding Shares Outstanding Value of Shares
----------------------------------------------------------------------- ----------------------------------
December 31, 2004 2,400,932 $15.59 34,818 $23.07
----------------------------------------------------------------------- ----------------------------------
Granted 579,484 24.33 3,197 23.84
Exercised (417,824) 11.55 (16,921) 22.61
Forfeited (16,902) 17.86 0 0
----------------------------------------------------------------------- ----------------------------------
Outstanding at December 31, 2005 2,545,690 $18.23 21,094 23.56
----------------------------------------------------------------------- ----------------------------------
Granted 380,540 23.73 0 0
Exercised (121,113) 14.13 (7,545) 23.09
Forfeited (9,747) 21.86 (4,106) 24.35
----------------------------------------------------------------------- ----------------------------------
Outstanding at March 31, 2006 2,795,370 $19.14 9,443 $23.59
Exercisable at March 31, 2006 1,895,483 $17.47
======================================================================= ==================================
The weighted average remaining contractual term of outstanding and exercisable
stock options at March 31, 2006 is 7.2 years and 6.6 years, respectively. The
aggregate intrinsic value of outstanding and exercisable stock options at March
31, 2006 is $11.3 million and $10.3 million, respectively.
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
123(R), Share-Based Payment, on January 1, 2006 using the modified prospective
method. Under this method, awards that are granted, modified, or settled after
December 31, 2005, are measured and accounted for in accordance with SFAS No.
123(R). Also 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 under SFAS 123, Accounting for Stock-Based Compensation. Stock
based compensation expense is recognized ratably over the requisite service
period for all awards. Prior to the adoption of SFAS 123 (R), the Company
accounted for stock compensation under the intrinsic value method permitted by
Accounting Principles Board Opinion No 25, Accounting for Stock Issued to
Employees ("APB No. 25") and related interpretations. 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.
9
As a result of applying the provisions of SFAS 123(R) during the three months
ended March 31, 2006, the Company recognized stock-based compensation expense
related to incentive and non-qualified stock options of $626,000 and a related
income tax benefit of $135,000. Compensation expense related to restricted stock
recognized in the income statement for the three months ended March 31, 2006 and
March 31, 2005 was $16,000 and $57,000, respectively.
The following table illustrates the effect on net income and earnings per share
if the fair value based method established in FAS No. 123(R) had been applied in
2005:
(000's omitted except per share amounts) Three months ended
March 31, 2005
-------------------------------------------------------------------------------------
Net income, as reported $13,334
Plus: stock-based compensation expense as reported, net of tax 35
Less: stock-based compensation expense determined under
fair value method, net of tax (505)
-------------------------------------------------------------------------------------
Pro forma net income $12,864
=====================================================================================
Earnings per share:
As reported:
Basic $ 0.44
Diluted $ 0.43
Pro forma:
Basic $ 0.42
Diluted $ 0.41
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. These assumptions include:
Three months ended
-------------------------------------------------------------------------------------
March 31, 2006 March 31, 2005
-------------------------------------------------------------------------------------
Weighted-average expected life (in years) 7.78 7.76
Future dividend yield 3.00% 3.00%
Share price volatility 26.47% 26.78%
Weighted average risk-free interest rate 4.34% 4.17%
=====================================================================================
The weighted average grant date fair value of stock options granted during the
three months ended March 31, 2006 and 2005 was $6.12 and $6.37, respectively.
Unrecognized stock based compensation expense related to non-vested stock
options totaled $5.0million at March 31, 2006, which will be recognized as
expense over the next five years. The weighted average period over which this
unrecognized expense is expected to be recognized is 1.9 years. The total fair
value of shares vested during the three months ended March 31, 2006 and 2005 was
$1.4 million and $1.7 million, respectively.
During the three months ended March 31, 2006 and 2005, proceeds from stock
option exercises totaled $1.7 million and $1.8 million and the related windfall
tax benefits from exercise were approximately $169,000 and $503,000,
respectively. During the three months ended March 31, 2006 and 2005, 121,113
shares and 184,378 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 the
three months ended March 31, 2006 and 2005 were $1.0 million and $2.5 million,
respectively.
10
NOTE E: 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 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 (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 1,388,800 anti-dilutive stock options outstanding for
the three months ended March 31, 2006 compared to 838,424 anti-dilutive stock
options outstanding for the three months ended March 31, 2005. The following is
a reconciliation of basic to diluted earnings per share for the three months
ended March 31, 2006 and 2005.
Per Share
(000's omitted, except per share data) Income Shares Amount
--------------------------------------------------------------------------------
Three Months Ended March 31, 2006
Basic EPS $ 9,462 30,023 $ 0.32
Stock options 456
-------------------------------------------------------------------
Diluted EPS $ 9,462 30,479 $ 0.31
===================================================================
Three Months Ended March 31, 2005
Basic EPS $13,334 30,580 $ 0.44
Stock options 612
-------------------------------------------------------------------
Diluted EPS $13,334 31,192 $ 0.43
===================================================================
NOTE F: INTANGIBLE ASSETS
The gross carrying amount and accumulated amortization for each type of
intangible asset are as follows:
As of March 31, 2006 As of December 31, 2005
----------------------------------------- ------------------------------------------
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 $ 63,161 ($36,416) $ 26,745 $ 63,161 ($35,014) $ 28,147
Other intangibles 2,750 (1,305) 1,445 2,750 (1,214) 1,536
----------------------------------- ----------------------------------------- ------------------------------------------
Total amortizing intangibles 65,911 (37,721) 28,190 65,911 (36,228) 29,683
Non-amortizing intangible assets:
Goodwill 195,195 0 195,195 195,195 0 195,195
----------------------------------- ----------------------------------------- ------------------------------------------
Total intangible assets, net $261,106 ($37,721) $223,385 $261,106 ($36,228) $224,878
=================================== ========================================= ==========================================
No goodwill impairment adjustments were recognized in 2006 or 2005. The
estimated aggregate amortization expense for each of the succeeding fiscal years
ended December 31 is as follows:
(000's omitted) Amount
-----------------------------
Apr-Dec 2006 $4,451
2007 5,569
2008 5,262
2009 4,777
2010 2,965
Thereafter 5,166
----------------- ---------
Total $28,190
================= =========
11
NOTE G: MANDATORILY REDEEMABLE PREFERRED SECURITIES
The Company sponsors three business trusts, Community Capital Trust I, Community
Capital Trust II, and Community Statutory Trust III, 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 or quarterly
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 Par Maturity
Date Amount Interest Rate Date Call Provision Call Price
-----------------------------------------------------------------------------------------------------------------------------------
I 2/3/1997 $30 million 9.75% 2/03/2027 10 year beginning 2007 104.5400% declining to par
in 2017
II 7/16/2001 $25 million 6 month LIBOR plus 3.75% (8.56%) 7/16/2031 5 year beginning 2006 107.6875% declining to par
in 2011
III 7/31/2001 $24.5 million 3 month LIBOR plus 3.58% (8.25%) 7/31/2031 5 year beginning 2006 107.5000% declining to par
in 2011
===================================================================================================================================
NOTE H: BENEFIT PLANS
The Company provides defined benefit pension benefits and post-retirement health
and life insurance benefits to eligible employees. The Company also provides
supplemental pension retirement benefits for several current and former key
employees. The Company accrues for the estimated cost of these benefits through
charges to expense during the years that employees earn these benefits. The net
periodic benefit cost for the three months ended March 31 is as follows:
Pension Benefits Post-retirement Benefits
-------------------- ------------------------
(000's omitted) 2006 2005 2006 2005
----------------------------------------------------------------------------------------
Service cost $ 748 $ 652 $ 134 $ 110
Interest cost 660 645 121 104
Expected return on plan assets (827) (878) 0 0
Net amortization and deferral 315 305 29 19
Amortization of prior service cost (43) 29 27 28
Amortization of transition obligation 0 0 10 10
----------------------------------------------------------------------------------------
Net periodic benefit cost $ 853 $ 753 $ 321 $ 271
========================================================================================
The Company is not required for regulatory purposes to make a contribution to
its defined benefit pension plan.
NOTE I: COMMITMENTS, CONTINGENT LIABILITIES AND RESTRICTIONS
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments consist primarily of commitments to extend credit
and standby letters of credit. Commitments to extend credit are agreements to
lend to customers, generally having fixed expiration dates or other termination
clauses that may require payment of a fee. These commitments consist principally
of unused commercial and consumer credit lines. Standby letters of credit
generally are contingent upon the failure of the customer to perform according
to the terms of an underlying contract with a third party. The credit risks
associated with commitments to extend credit and standby letters of credit are
essentially the same as that involved with extending loans to customers and are
subject to normal credit policies. Collateral may be obtained based on
management's assessment of the customer's creditworthiness.
The contract amount of commitment and contingencies are as follows:
(000's omitted) March 31, December 31,
2006 2005
---------------------------------------------------------
Commitments to extend credit $420,321 $434,640
Standby letters of credit 24,458 25,638
---------------------------------------------------------
Total $444,779 $460,278
=========================================================
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") primarily reviews the financial condition and results of
operations of Community Bank System, Inc. ("the Company" or "CBSI") as of and
for the three months ended March 31, 2006 and 2005, although in some
circumstances the fourth quarter of 2005 is also discussed in order to more
fully explain recent trends. The following discussion and analysis should be
read in conjunction with the Company's Consolidated Financial Statements and
related notes that appear on pages 3 through 12. All references in the
discussion to the financial condition and results of operations are to those of
the Company and its subsidiaries taken as a whole.
Unless otherwise noted, the term "this year" refers to results in calendar year
2006, "first quarter" refers to the quarter ended March 31, 2006, earnings per
share ("EPS") figures refer to diluted EPS, and net interest income and net
interest margin are presented on a fully tax-equivalent ("FTE") basis.
This MD&A contains certain forward-looking statements with respect to the
financial condition, results of operations and business of the Company. These
forward-looking statements involve certain risks and uncertainties. Factors that
may cause actual results to differ materially from those proposed by such
forward-looking statements are set herein under the caption, "Forward-Looking
Statements," on page 24.
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, 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 critical accounting estimates include:
o Allowance for loan losses - The allowance for loan losses reflects
management's best estimate of probable losses inherent in the loan
portfolio. Determination of the allowance is inherently subjective. It
requires significant estimates including the amounts and timing of
expected future cash flows on impaired loans and the amount of estimated
losses on pools of homogeneous loans which is based on historical loss
experience and consideration of current economic trends, all of which may
be susceptible to significant change.
o Actuarial assumptions associated with pension, post-retirement and other
employee benefit plans - These assumptions include discount rate, rate of
future compensation increases and expected return on plan assets.
o 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 judgements 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.
o Carrying value of goodwill and other intangible assets - The carrying
value of goodwill and other intangible assets is based upon discounted
cash flow modeling techniques that require management to make estimates
regarding the amount and timing of expected future cash flows. It also
requires use of a discount rate that reflects the current return
requirements of the market in relation to present risk-free interest
rates, required equity market premiums, and company-specific risk
indicators.
A summary of the accounting policies used by management is disclosed in Note A,
"Summary of Significant Accounting Policies" on pages 44-49 of the most recent
Form 10-K (fiscal year ended December 31, 2005).
13
Executive Summary
The Company's business philosophy is to operate as a community bank with local
decision-making, principally in non-metropolitan markets, providing a broad
array of banking and financial services to retail, commercial and municipal
customers.
The Company's core operating objectives are: (i) grow the branch network,
primarily through a disciplined acquisition strategy, and certain selective de
novo expansions, (ii) build high-quality, profitable loan and deposit portfolios
using both organic and acquisition strategies, (iii) increase the 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, non-interest income, operating expenses, asset
quality, loan and deposit growth, capital management, performance of individual
banking and financial services units, liquidity and interest rate sensitivity,
enhancements to customer products and services, technology enhancements, market
share, peer comparisons, and the performance of acquisition and integration
activities.
Net income for the first quarter of 2006 was $9.5 million, a decrease of $3.9
million as compared to the first quarter of 2005, driven by a higher cost of
funds, lower investment interest income, stock option expense as a result of the
adoption of Statement of Financial Accounting Standard (FAS) 123R, Share-Based
Payments, and the absence of gains on the sale of investment securities recorded
in the first quarter of 2005. These were partially offset by higher loan
interest income, higher non-interest income, (excluding gains on sales of
investment securities), and lower recurring operating expenses, excluding stock
option expense. Cash earnings per share (which excludes the after-tax effect of
the amortization of intangibles assets and acquisition-related market value
adjustments) were $0.35 versus $0.47 for the prior year's first quarter.
Asset quality remained stable in the first quarter of 2006 in comparison to the
same period last year, with reductions in non-performing loan and delinquent
loan ratios and a net charge-off ratio slightly below the average for the
previous eight quarters. The Company experienced year-over-year loan growth in
all portfolios; consumer installment, consumer mortgage and business lending.
The size of the investment portfolio was below that of first quarter of the
prior year as the Company repositioned its balance sheet in 2005 by selling
certain securities in its investment portfolio and used the proceeds to pay off
variable and short-term borrowings. Total deposits increased in the first
quarter of 2006 as compared to December 31, 2005 and the first quarter of 2005.
Borrowings, principally overnight borrowings and other short-term instruments,
decreased during the same time periods.
The Company announced in April 2006 it had entered into an agreement to acquire
ES&L Bancorp, Inc. (ES&L), a $210 million asset bank based in Elmira, New York,
in an all-cash transaction valued at approximately $39 million.
Net Income and Profitability
As shown in Table 2, earnings per share for the first quarter of $0.31 were
$0.12 lower than the EPS generated in the same period of last year. Net income
for the quarter of $9.5 million was 29% lower than the first quarter of 2005.
Net interest income for the first quarter of $33.6 million was down $4.1 million
or 10.8% from the comparable prior year period. First quarter non-interest
income, including securities gains, was $12.6 million, down $0.4 million (2.9%)
from the first quarter 2005. Operating expenses of $31.4 million for the quarter
were up 1.3% from the comparable prior year period. Excluding the impact of
adopting FASB 123R, Accounting for Stock Based Compensation, operating expenses
for the first quarter decreased 0.7% from the prior year.
In addition to the earnings results presented above in accordance with generally
accepted accounting principles ("GAAP"), the Company provides cash earnings per
share, which excludes the after-tax effect of the amortization of intangible
assets and the market value adjustments on net assets acquired in mergers.
Management believes that this information helps investors better understand the
effect of acquisition activity in reported results. Cash earnings per share for
the first quarter of 2006 was $0.35, down 26% from the $0.47 earned in the first
quarter of 2005.
As reflected in Table 2, the primary reasons for lower earnings for the quarter
were lower net interest income and non-interest income including securities
gains, and slightly higher loan loss provision and operating expenses. The
decrease in net interest income for the quarter was due to a higher cost of
funds and lower average investment balances, partially offset by organic loan
growth. The decrease in non-interest income was due to $1.7 million of gains on
the sale of securities recognized in the first quarter of 2005, with no
corresponding gain in the first quarter of 2006. Excluding security gains,
non-interest income increased due to a strong performance by the employee
benefits consulting and plan administration business and higher banking service
fees. The increase in total loans outstanding and additional allocations for
specific loans were the primary reasons for the increase in loan loss provision.
Excluding stock option costs, operating expenses decreased primarily due to
reductions in the amortization of intangibles, legal and professional costs and
foreclosed property costs, partially offset by increased occupancy and equipment
costs and business development and marketing costs.
14
A reconciliation of GAAP-based earnings results to cash-based earnings results
and a condensed income statement are as follows:
Table 1: Reconciliation of GAAP Net Income to Cash Net Income
Three Months Ended
March 31,
---------------------
(000's omitted) 2006 2005
--------------------------------------------- ---------------------
Net income $ 9,462 $13,334
After-tax cash adjustments:
Amortization of premium on net
assets acquired in merger 205 (27)
Amortization of intangible assets 1,120 1,490
--------------------------------------------- ---------------------
Net income - cash $10,787 $14,797
============================================= =====================
Table 2: Summary Income Statements
Three Months Ended
March 31,
---------------------
(000's omitted, except per share data) 2006 2005
--------------------------------------------- ---------------------
Net interest income $33,620 $37,702
Provision for loan losses 2,150 1,875
Non-interest income including security gains 12,581 12,959
Operating expenses 31,435 31,031
--------------------------------------------- ---------------------
Income before taxes 12,616 17,755
Income taxes 3,154 4,421
--------------------------------------------- ---------------------
Net income $ 9,462 $13,334
============================================= =====================
Diluted earnings per share $ 0.31 $ 0.43
Diluted earnings per share - cash (1) $ 0.35 $ 0.47
(1) Cash earnings are reconciled to GAAP net income in Table 1.
Net Interest Income
Net interest income is the amount by which interest and fees on earning assets
(loans, investments and cash) exceed the cost of funds, primarily interest paid
to the Company's depositors and interest on external borrowings. Net interest
margin is the difference between the gross yield on earning assets and the cost
of interest-bearing funds as a percentage of earning assets.
As shown in Table 3, net interest income (with non-taxable income converted to a
fully tax-equivalent basis) for first quarter 2006 was $37.1 million, down $4.4
million or 10.6% from the same period last year. A $168 million decrease in
interest earning assets and a 28-basis point decrease in the net interest margin
more than offset a $216 million decrease in average interest-bearing
liabilities. As reflected in Table 4, the volume and net interest margin changes
mentioned above adversely impacted net interest income by $1.8 million and $2.6
million, respectively, for the first quarter of 2006 as compared to the first
quarter of 2005.
Higher first quarter average loan balances were attributable to $58.5 million of
organic loan growth since the first quarter of 2005, driven principally by
growth of consumer installment and consumer mortgage loans. Average investments
for the first quarter were $227 million less than the first quarter of 2005 due
principally to the sales made throughout 2005. Total average deposits were up
$31.6 million or 1.1% for the quarter as compared to the previous year as a
result of growth in public fund balances. Cash flows from the investment sales
were used to pay down external borrowings throughout 2005, resulting in average
quarterly borrowings being $243 million lower in the first quarter of 2006 in
comparison to the first quarter of 2005.
The net interest margin of 4.06% for the first quarter dropped 28 basis points
versus the same period in the prior year. This decline was primarily
attributable to an increases in the cost of funds (up 49 basis points), due
principally to the effect of the eight rate hikes (25 basis points each) by the
Federal Reserve since last March, while earning assets yields increased at a
much slower rate (up 18 basis points). The change in the earning-asset yield was
driven by a 33 basis point increase in loan yields, partially offset by an
investment yield decline of nine basis points quarter over quarter. The decrease
in investment yields was the result of the sale and maturity of
15
certain higher yielding investments from the portfolio. In 2005, the Company
decided to sell certain securities and not fully reinvest cash flows from
maturing securities in a flat yield environment, in order to take advantage of
market conditions to shorten the average life of the portfolio, improve its
interest-rate sensitivity profile in a rising-rate environment, and maximize the
expected total return.
The first quarter cost of funds increased 49 basis points due to a 51 basis
point increase in deposit costs and a 124 basis point increase in the average
interest rate paid on external borrowings. Interest rates on selected categories
of deposit accounts were raised throughout 2005 and the first quarter of 2006 in
response to the increased rates by the Federal Reserve. Additionally, customers
continued to transfer funds from lower rate interest accounts to higher yielding
money market and time deposit accounts. Short-term borrowing rates increased 89
basis points and long-term rates increased 62 basis points as compared to the
first quarter of 2005. The increase in the borrowing rates is mostly
attributable to the rate increases by the Federal Reserve. Additionally, the
long-term rate was impacted by the approximately 190 basis point increase in the
LIBOR (London Interbank Offered Rates), from which the interest rate on the
majority of the mandatorily redeemable preferred securities is based.
Table 3 below set forth information related to average interest-earning assets
and interest-bearing liabilities and their associated yields and rates for the
periods indicated. Interest income and yields are on a fully tax-equivalent
basis using marginal income tax rates of 38.4% in 2006 and 38.6% in 2005.
Average balances are computed by summing 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 non-accrual loans and
loans held for sale.
Table 3: Quarterly Average Balance Sheet
Three Months Ended Three Months Ended
(000's omitted except yields and rates) March 31, 2006 March 31, 2005
------------------------------------------------------------------------------------------------------------------------------------
Avg. Avg.
Average Yield/Rate Average Yield/Rate
Balance Interest Paid Balance Interest Paid
------------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Time deposits in other banks $ 1,093 $ 10 3.71% $ 914 $ 4 1.77%
Taxable investment securities (1) 780,395 10,841 5.63% 972,048 13,913 5.80%
Non-taxable investment securities (1) 522,112 8,774 6.82% 557,600 9,492 6.90%
Loans (net of unearned discount) 2,400,926 38,432 6.49% 2,342,401 35,591 6.16%
---------------------- ----------------------
Total interest-earning assets 3,704,526 58,057 6.36% 3,872,963 59,000 6.18%
------- -------
Non-interest earning assets 440,315 507,023
---------- ----------
Total assets $4,144,841 $4,379,986
========== ==========
Interest-bearing liabilities:
Interest checking, savings and money market deposits $1,126,716 $ 2,513 0.90% $1,184,402 $ 1,952 0.67%
Time deposits 1,283,632 10,508 3.32% 1,199,075 7,227 2.44%
Short-term borrowings 163,940 1,458 3.61% 436,180 2,926 2.72%
Long-term borrowings 468,884 6,494 5.62% 439,244 5,416 5.00%
---------------------- ----------------------
Total interest-bearing liabilities 3,043,172 20,973 2.80% 3,258,901 17,521 2.18%
------- -------
Non-interest bearing liabilities:
Demand deposits 589,407 584,669
Other liabilities 54,099 64,840
Shareholders' equity 458,163 471,576
---------- ----------
Total liabilities and shareholders' equity $4,144,841 $4,379,986
========== ==========
Net interest earnings $37,084 $41,479
======= =======
Net interest spread 3.56% 4.00%
Net interest margin on interest-earnings assets 4.06% 4.34%
Fully tax-equivalent adjustment $ 3,464 $ 3,777
(1) Averages for investment securities are based on historical cost basis and
the yields do not give effect to changes in fair value that is reflected
as a component of shareholders' equity and deferred taxes.
16
As discussed above and disclosed in Table 4 below, the quarterly change in net
interest income (fully tax-equivalent basis) may be analyzed by segregating the
volume and rate components of the changes in interest income and interest
expense for each underlying category.
Table 4: Rate/Volume
1st Quarter 2006 versus 1st Quarter 2005
Increase (Decrease) Due to Change in (1)
------------------------------------------
Net
(000's omitted) Volume Rate Change
------------------------------------------
Interest earned on:
Time deposits in other banks $ 1 $ 5 $ 6
Taxable investment securities (2,673) (399) (3,072)
Non-taxable investment securities (597) (121) (718)
Loans (net of unearned discount) 904 1,937 2,841
Total interest-earning assets (2) (2,611) 1,668 (943)
Interest paid on:
Interest checking, savings and money market deposits (99) 660 561
Time deposits 540 2,741 3,281
Short-term borrowings (2,217) 749 (1,468)
Long-term borrowings 381 697 1,078
Total interest-bearing liabilities (2) (1,222) 4,674 3,452
Net interest earnings (2) (1,757) (2,638) (4,395)
(1) The change in interest due to both rate and volume has been allocated in
proportion to the relationship of the absolute dollar amounts of change in
each.
(2) Changes due to volume and rate are computed from the respective changes in
average balances and rates and are not a summation of the changes of the
components.
17
Non-interest Income
The Company's sources of non-interest income are of three primary types: general
banking services related to loans, deposits and other core customer activities
typically provided through the branch network; employee benefit plan
administration, actuarial and consulting services (BPA-Harbridge), trust
services, investment and insurance products (Community Investment Services, Inc.
or CISI) and asset management (Elias Asset Management or EAM); and periodic
transactions, most often net gains (losses) from the sale of investment
securities and prepayment of term debt.
Table 5: Non-interest Income
Three Months Ended
March 31,
------------------------
(000's omitted) 2006 2005
------------------------------------------------------------ ------------------------
Deposit service charges and fees $ 6,674 $ 6,077
Benefit plan administration, consulting and actuarial fees 3,381 2,850
Trust, investment and asset management fees 2,050 1,781
Other banking services 290 360
Mortgage banking 186 165
------------------------------------------------------------ ------------------------
Subtotal 12,581 11,233
Gain on sales of investment securities 0 1,726
------------------------------------------------------------ ------------------------
Total non-interest income $12,581 $12,959
============================================================ ========================
Non-interest income/total income (FTE) 25.3% 23.8%
As displayed in Table 5, non-interest income (excluding securities gains) was
$12.6 million in the first quarter, an increase of $1.3 million or 12.0% from
one year earlier. General recurring banking fees of $7.2 million were up $0.5
million or 8.3% compared to the first quarter of 2005, driven by several revenue
enhancement initiatives put into place during 2005. Offsetting these increases,
was a decrease in gain on the sale of investment securities of $1.7 million for
the quarter, as the Company took advantage of market conditions to sell certain
securities in the first quarter of 2005 in order to shorten the average length
of the portfolio and maximize their expected total return. Strong performance at
BPA-Harbridge generated revenue growth of $0.5 million (19%) for the quarter,
achieved primarily through enhanced service offerings to both new and existing
clients. First quarter revenue for trust services was up $0.2 million or 43%
versus the prior year primarily as a result of the generation of estate
settlement fees. The $0.1 million or 16% revenue growth at CISI can be
attributable to the addition of new financial consultants as well as higher
sales of fixed annuity products, which become more attractive as interest rates
rise. In comparison to the first quarter of the prior year, EAM revenues were
down slightly due to softer demand for their investment products.
The ratio of non-interest income to total income (FTE basis) was 25.3% for the
quarter as compared to 23.8% for the comparable period in 2005. Excluding net
security gains, the ratio of non-interest income to total income (FTE basis) was
25.3% for the first quarter of 2006, as compared to 21.3% for the comparable
period in 2005. This improvement is a function of rising non-interest income
(excluding net security gains) combined with lower net interest income and a
reduction of investment portfolio levels.
18
Operating Expenses
Table 6 below sets forth the quarterly results of the major operating expense
categories for the current and prior year, as well as efficiency ratios (defined
below), a standard measure of overhead utilization used in the banking industry.
Table 6: Operating Expenses
Three Months Ended March 31,
------------------------------
(000's omitted) 2006 2005
---------------------------------------- ------------------------------
Salaries and employee benefits $16,398 $16,166
Stock option expense 626 0
Occupancy and equipment 4,759 4,590
Data processing and communications 3,231 3,306
Amortization of intangible assets 1,493 1,984
Legal and professional fees 1,041 1,183
Office supplies and postage 976 938
Business development and marketing 730 689
Acquisition expenses 0 41
Other 2,181 2,134
---------------------------------------- ------------------------------
Total operating expenses $31,435 $31,031
======================================== ==============================
Operating expenses/average assets 3.08% 2.87%
Efficiency ratio 60.3% 55.0%
As shown in Table 6, first quarter 2006 operating expenses were $31.4 million,
up $0.4 million or 1.3% from the prior year level. Excluding the effect of
adopting FASB 123R, Share-Based Payments, operating expenses decreased $0.2
million or 0.7% from $31.0 million in the first quarter of 2005 to $30.8 million
in this year's first quarter. The decrease was primarily attributable to a $0.5
million reduction in the amortization of intangible assets, and a $0.1 million
reduction in legal and professional expenses, partially offset by a $0.2 million
or 1.8% increase in salaries and a $0.2 million increase in occupancy related
costs.
The Company continued to aggressively manage all aspects of its operating
expense structure in the first quarter of 2006, resulting in operating expenses
that were essentially flat with the year earlier period. The Company recently
announced that it will consolidate two of its Pennsylvania branch offices into
nearby sister branches. This realignment will reduce inefficiencies and further
strengthen its branch network, and reflects management's dedication to achieving
long-term performance improvements through proactive strategic decision-making.
The Company's efficiency ratio (recurring operating expense excluding intangible
amortization divided by the sum of net interest income (FTE) and recurring
non-interest income) was 60.3% for the first quarter, 5.3 percentage points
above the comparable quarter of 2005. This resulted from operating expenses (as
described above) increasing 3.2% primarily due to stock option expense, while
recurring operating income decreased 5.8% due to 10.6% lower net interest
income, more than offsetting a 12.0% increase in non-interest income excluding
security gains. The efficiency ratio for the first quarter of 2006, excluding
stock option expense was 59.0%, as compared to 55.0% in the comparable first
quarter of 2005.
Income Taxes
The first quarter effective income tax rate was 25.0%, comparable to the 24.9%
effective tax rate in the first quarter of 2005.
19
Investments
As reflected in Table 7 below, the carrying value of investments (including
unrealized gains on available-for-sale securities) was $1.31 billion at the end
of the first quarter, an increase of $3.9 million and a decrease of $248 million
from December 31, 2005 and March 31, 2005, respectively. The book value
(excluding unrealized gains) of investments was up $11.8 million from year-end
2005 and down $218 million versus March 31, 2005. The decrease in the portfolio
from the first quarter of the prior year was the result of the decision to sell
certain securities and not fully reinvest cash flows from these sales and from
contractual maturities to take advantage of market conditions to shorten the
average life of the portfolio and maximize the expected total return. As a
result, the expected life-to-maturity of the portfolio was reduced to just over
five years at the end of the current quarter. The overall mix of securities
within the portfolio over the last year has remained relatively consistent, with
a small increase in the proportion of obligations of state and political
subdivisions and mortgage-backed securities, and a corresponding decrease in the
proportion of U.S. treasury and agency securities. The change in the carrying
value of investments is impacted by the amount of net unrealized gains in the
available for sale portfolio at a point in time. Net unrealized gains decreased
by $7.9 million and $29.6 million since December 31, 2005 and March 31, 2005,
respectively. This fluctuation is indicative of the interest rate movements
during the respective time periods and the reduction in the size of the
portfolio. In addition, the decrease in net unrealized gains from one year ago
was impacted by the sale of $193 million of securities over the last 12 months,
which generated realized pre-tax gains of $10.5 million.
Table 7: Investments
March 31, 2006 December 31, 2005 March 31, 2005
----------------------- ----------------------- -----------------------
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 $ 127,309 $ 122,011 $ 127,345 $ 124,326 $ 127,454 $ 124,544
Obligations of state and political subdivisions 7,445 7,419 5,709 5,735 5,430 5,508
Other securities 9,488 9,488 9,451 9,451 9,480 9,480
--------------------------------------------------- ----------------------- ----------------------- -----------------------
Total held-to-maturity portfolio 144,242 138,918 142,505 139,512 142,364 139,532
--------------------------------------------------- ----------------------- ----------------------- -----------------------
Available-for-Sale Portfolio:
U.S. treasury and agency securities 419,808 415,366 420,062 420,808 587,299 596,442
Obligations of state and political subdivisions 518,680 531,316 519,661 532,708 563,994 585,094
Corporate securities 35,709 34,728 35,744 35,559 40,375 43,236
Collateralized mortgage obligations 67,858 66,944 78,708 78,466 87,591 88,366
Mortgage-backed securities 78,212 77,700 53,021 53,365 47,310 48,778
--------------------------------------------------- ----------------------- ----------------------- -----------------------
Sub-total 1,120,267 1,126,054 1,107,196 1,120,906 1,326,569 1,361,916
Equity securities 36,745 36,745 39,706 39,706 50,549 50,549
--------------------------------------------------- ----------------------- ----------------------- -----------------------
Total available-for-sale portfolio 1,157,012 1,162,799 1,146,902 1,160,612 1,377,118 1,412,465
Net unrealized gain on available-for-sale portfolio 5,787 0 13,710 0 35,347 0
--------------------------------------------------- ----------------------- ----------------------- -----------------------
Total $1,307,041 $1,301,717 $1,303,117 $1,300,124 $1,554,829 $1,551,997
=================================================== ======================= ======================= =======================
20
Loans
As shown in Table 8, loans ended the first quarter at $2.41 billion, consistent
with year-end 2005 and up $74 million (3.2%) versus one year earlier. The
business lending portfolio increased in the first quarter, while small declines
were incurred in the consumer mortgage and consumer installment portfolios. As
compared to one year earlier, all portfolios have demonstrated growth.
Consistent with prior years, the Company experienced softness within our lending
portfolio in the first quarter, due principally to seasonal (weather-related)
trends and demands. The first quarter 2006 decline was limited to $3.5 million
as compared to the $24 and $23 million declines in the first quarter of 2005 and
2004, respectively.
Table 8: Loans
(000's omitted) March 31 2006 December 31, 2005 March 31, 2005
---------------------- ---------------------- ---------------------- ----------------------
Consumer mortgage $ 814,885 33.8% $ 815,463 33.8% $ 801,600 34.3%
Business lending 820,722 34.1% 819,605 34.0% 816,616 35.0%
Consumer installment 772,614 32.1% 776,701 32.2% 716,124 30.7%
---------------------- ---------------------- ---------------------- ----------------------
Total loans $2,408,221 100.0% $2,411,769 100.0% $2,334,340 100.0%
====================== ====================== ====================== ======================
Total consumer mortgages decreased $0.6 million in the first quarter of 2006 and
increased $13.3 million over the last twelve months, even though the Company
continued selling certain new mortgage originations into the secondary market
for the second consecutive quarter. Consumer mortgage growth has slowed over the
last few quarters as interest rates have risen and demand lessoned after a
prolonged period of elevated activity driven by historically low interest rates.
Business lending increased $1.1 million in the first quarter of 2006 and
increased $4.1 million versus one year ago. Consumer installment loans,
including borrowings originated in automobile, marine and recreational vehicle
dealerships as well as branch originated home equity and installment loans, rose
$56 million (7.9%) on a year-over-year basis and decreased $4.1 million (0.5%)
in the first three months of 2006. Continued moderate interest rates (by
historical standards), aggressive dealer and manufacturer incentives on new
vehicles, and enhanced business development efforts have helped drive strong
growth in this segment year-over-year in all our markets.
Asset Quality
Table 9 below exhibits the major components of non-performing loans and assets
and key asset quality metrics for the periods ending March 31, 2006 and 2005 and
December 31, 2005.
Table 9: Non-performing Assets
March 31, December 31, March 31,
(000's omitted) 2006 2005 2005
--------------------------------------------------------------- ----------- ------------ ------------
Non-accrual loans $12,351 $10,857 $13,433
Accruing loans 90+ days delinquent 1,213 1,075 1,255
Restructured loans 1,350 1,375 0
--------------------------------------------------------------- ----------- ------------ ------------
Total non-performing loans 14,914 13,307 14,688
Other real estate (OREO) 1,613 1,048 1,444
--------------------------------------------------------------- ----------- ------------ ------------
Total non-performing assets $16,527 $14,355 $16,132
=============================================================== =========== ============ ============
Allowance for loan losses to total loans 1.36% 1.35% 1.37%
Allowance for loan losses to non-performing loans 219% 245% 217%
Non-performing loans to total loans 0.62% 0.55% 0.63%
Non-performing assets to total loans and other real estate 0.69% 0.59% 0.69%
Delinquent loans (30 days old to non-accruing) to total loans 1.26% 1.46% 1.35%
Net charge-offs to average loans outstanding (quarterly) 0.34% 0.35% 0.30%
Loan loss provision to net charge-offs (quarterly) 107% 106% 107%
As displayed in Table 9, non-performing assets at March 31, 2006 were $16.5
million, an increase of $2.2 million versus year-end 2005 and a $0.4 million
increase as compared to the level at the end of the first quarter 2005. Most of
the increase over the last three months in non-performing loans was due to two
commercial relationships moving to non-accrual status. The increase in total
non-performing assets from the prior year was 2.4%, well below the 3.2% increase
in the loan portfolio over the same period. Other real estate increased $0.2
million from one-year ago and increased $0.6 million from year-end 2005, a
result of the Company managing 20 properties at March 31, 2006 as compared to 15
OREO properties at the end of 2005. No one property has a carrying value in
excess of $350,000.
21
Non-performing loans were 0.62% of total loans outstanding at the end of the
first quarter, slightly below the 0.63% at March 31, 2005 and above the 0.55% at
year-end 2005. The allowance for loan losses to non-performing loans ratio, a
general measure of coverage adequacy, was 219% at the end of the first quarter
compared to 245% at year-end 2005 and 217% at March 31, 2005.
Delinquent loans (30 days through non-accruing) as a percent of total loans was
1.26% at the end of the first quarter, substantially below the 1.46% at year-end
2005 and nine basis points below the 1.35% delinquency ratio at March 31, 2005.
Real estate and installment loan delinquency ratios at the end of the first
quarter improved in comparison to both of the earlier periods. Commercial loan
delinquency ratios increased slightly from both the first and fourth quarters of
2005. The delinquency level at the end of the current quarter was 20 basis
points below the Company's average of 1.46% over the previous eight quarters.
Table 10: Allowance for Loan Losses Activity
Three Months Ended March 31,
-----------------------------
(000's omitted) 2006 2005
--------------------------------------------------- -----------------------------
Allowance for loan losses at beginning of period $32,581 $31,778
Charge-offs:
Business lending 1,355 707
Consumer mortgage 35 23
Consumer installment 1,625 1,715
--------------------------------------------------- -----------------------------
Total charge-offs 3,015 2,445
Recoveries:
Business lending 114 41
Consumer mortgage 58 7
Consumer installment 832 642
--------------------------------------------------- -----------------------------
Total recoveries 1,004 690
--------------------------------------------------- -----------------------------
Net charge-offs 2,011 1,755
Provision for loan losses 2,150 1,875
--------------------------------------------------- -----------------------------
Allowance for loan losses at end of period $32,720 $31,898
=================================================== =============================
Net charge-offs to average loans outstanding:
Business lending 0.62% 0.33%
Consumer mortgage -0.01% 0.01%
Consumer installment 0.42% 0.61%
Total loans 0.34% 0.30%
As displayed in Table 10, net charge-offs during the first quarter were $2.0
million, $0.3 million higher than the equivalent 2005 period. The consumer
mortgage and consumer installment portfolios experienced decreased levels of
charge-offs, while business lending charge-offs increased. The net charge-off
ratio (net charge-offs as a percentage of average loans outstanding) for the
first quarter was 0.34%, four basis points higher than the comparable quarter of
2005, and one basis point lower than average charge-off ratio for the previous
eight quarters.
The business lending net charge-off ratio increased 29 basis points to 0.62%,
the consumer installment net charge-off ratio improved by 19 basis points to
0.42%, while consumer mortgages experienced a small net recovery for the first
quarter of 2006 as compared to a 0.01% net charge-off ratio in the comparable
period of 2005. The increase in business lending charge-offs was adversely
impacted by one commercial relationship .
A required loan loss allowance of $32.7 million was determined as of March 31,
2006, necessitating a $2.2 million loan loss provision for the quarter, compared
to $1.9 million one year earlier. The first quarter 2006 loan loss provision was
$0.1 million higher than net charge-offs. The allowance for loan losses rose
$0.8 million or 2.6% over the last 12 months, while the loan portfolio grew
3.2%. Consequently, the ratio of allowance for loan loss to loans outstanding
decreased from 1.37% at the end of last year's first quarter to 1.36%, which was
slightly higher than the 1.35% level reported at December 31, 2005.
22
Deposits
As shown in Table 11, average deposits of $3.0 billion in the first quarter were
up $20.6 million compared to fourth quarter 2005 and increased $31.6 million
versus the same quarter of last year. The mix of average deposits changed
slightly in the first quarter of 2006. The weightings of time deposits increased
from their fourth quarter levels, while demand, interest checking, savings and
money market deposit weightings decreased. As interest rates have risen since
June 2004, time deposits have continued to attract more funds, as evidenced by
their 3.6% increase in the current quarter versus fourth quarter 2005. This
shift in mix, combined with increasing interest rates on money market and time
deposit accounts increased the quarterly cost of interest bearing deposits from
2.02% in the last quarter of 2005 to 2.19% in the most recent quarter, well
above the 1.56% for the quarter ended March 31, 2005.
Average first quarter IPC (individuals and businesses) deposits decreased $26.9
million or 1.0% versus the quarter ended December 31, 2005, and were down $4.4
million or 0.2% compared to the year earlier period. Average public funds have
increased $47.5 million or 25% and $36.0 million or 18% over the same periods. A
decrease in IPC deposits and an inflow of public fund deposits in the first
quarter is a typical seasonal fluctuation in our markets, as payment of local
property taxes tends to shift funds from one category to the other.
Table 11: Quarterly Average Deposits
March 31, December 31, March 31,
(000's omitted) 2006 2005 2005
--------------------------- ------------- ------------- -------------
Demand deposits $ 589,407 $ 596,508 $ 584,669
Interest checking deposits 299,637 307,738 310,546
Savings deposits 475,970 484,908 534,951
Money market deposits 351,108 351,029 338,904
Time deposits 1,283,632 1,238,945 1,199,076
--------------------------- ------------- ------------- -------------
Total deposits $2,999,754 $2,979,128 $2,968,146
=========================== ============= ============= =============
IPC deposits $2,759,111 $2,785,967 $2,763,523
Public fund deposits 240,643 193,161 204,623
--------------------------- ------------- ------------- -------------
Total deposits $2,999,754 $2,979,128 $2,968,146
=========================== ============= ============= =============
Borrowings
At the end of the first quarter, borrowings of $587 million were down $66.3
million from December 31, 2005 and down $268 million versus the end of the first
quarter 2005. The reduction in borrowings over the last twelve months was
principally the result of the decision to use a portion of the cash flows from
the sales and maturities of investments to reduce debt levels in the current
flat yield curve environment.
Shareholders' Equity
On April 20, 2005, the Company announced that its Board of Directors had
authorized a stock repurchase program to acquire up to 1,500,000 of its shares,
or approximately 5% of its outstanding common stock. The shares may be
repurchased from time to time, in open market or privately negotiated
transactions over the course of the subsequent 20 months. All reacquired shares
will become treasury shares and will be used for general corporate purposes.
Through March 31, 2006, the Company has repurchased 751,836 shares at an
aggregate cost of $17.5 million.
Total shareholders' equity of $455 million at the end of the first quarter was a
decrease of $2.2 million from the balance at December 31, 2005. This change
consisted of a decrease in the after-tax market value adjustment on the
available-for-sale investment portfolio of $4.9 million, dividends declared of
$5.7 million and treasury stock purchases of $3.5 million, partially offset by
net income of $9.5 million and $2.4 million from shares issued under the
employee stock plan. Over the past 12 months total shareholders' equity
decreased by $5.0 million, as dividends declared, treasury stock purchases, and
a lower market value adjustment more than offset net income and increases from
shares issued under the employee stock plan.
23
The Company's Tier I leverage ratio, a primary measure of regulatory capital for
which 5% is the requirement to be "well-capitalized," was 7.68% at the end of
the first quarter, up 11 basis points from year-end 2005 and 85 basis points
higher than its level one year ago. These increases were primarily the result of
a decrease in average assets excluding intangibles and market value adjustments,
while shareholders equity excluding intangibles and market value adjustments
increased, mostly due to reductions in the investment portfolio. The tangible
equity-to-assets ratio of 5.89% increased 32 basis points versus March 31, 2005,
for similar reasons and decreased 3 basis points versus year-end 2005 due to
treasury share purchases and a decline in the market value adjustment having a
greater impact on this ratio than lower asset levels.
The dividend payout ratio (dividends declared divided by net income) for the
first three months of 2006 was 60.1%, up from 40.9% in the first quarter of
2005. The ratio increased because dividends declared increased 4.2%, while net
income including securities gains decreased 29.0%. The expansion of dividends
declared was caused by the dividend per share being raised 5.6% in August 2005,
from $0.18 to $0.19, offset by a 1.4% decrease in the number of shares
outstanding.
Liquidity
Management of the Company's liquidity is critical due to the potential for
unexpected fluctuations in deposits and loans. Adequate sources of both on and
off-balance sheet funding are in place to effectively respond to such unexpected
fluctuations.
The Company's primary approach to measuring liquidity is known as the Basic
Surplus/Deficit model. It is used to calculate liquidity over two time periods:
first, the amount of cash that could be made available within 30 days
(calculated as liquid assets less short-term liabilities); and second, a
projection of subsequent cash availability over an additional 60 days. The
minimum policy level of liquidity under the Basic Surplus/Deficit approach is
7.5% of total assets for both the 30 and 90-day time horizons. As of March 31,
2006, this ratio was 15.0% for 30 days and 14.9% for 90 days, excluding the
Company's capacity to borrow additional funds from the Federal Home Loan Bank.
To measure longer-term liquidity, a baseline projection of loan and deposit
growth for five years is made to reflect how current liquidity levels could
change over time. This five-year measure reflects adequate liquidity to fund
loan and other asset growth over the next five years.
Forward-Looking Statements
This document contains comments or information that constitute forward-looking
statements (within the meaning of the Private Securities Litigation Reform Act
of 1995), which involve significant risks and uncertainties. Actual results may
differ materially from the results discussed in the forward-looking statements.
Moreover, the Company's plans, objectives and intentions are subject to change
based on various factors (some of which are beyond the Company's control).
Factors that could cause actual results to differ from those discussed in the
forward-looking statements include: (1) risks related to credit quality,
interest rate sensitivity and liquidity; (2) the strength of the U.S. economy in
general and the strength of the local economies where the Company conducts its
business; (3) the effect of, and changes in, monetary and fiscal policies and
laws, including interest rate policies of the Board of Governors of the Federal
Reserve System; (4) inflation, interest rate, market and monetary fluctuations;
(5) the timely development of new products and services and customer perception
of the overall value thereof (including features, pricing and quality) compared
to competing products and services; (6) changes in consumer spending, borrowing
and savings habits; (7) technological changes; (8) any acquisitions or mergers
that might be considered or consummated by the Company and the costs and factors
associated therewith; (9) the ability to maintain and increase market share and
control expenses; (10) the effect of changes in laws and regulations (including
laws and regulations concerning taxes, banking, securities and insurance) and
accounting principles generally accepted in the United States; (11) changes in
the Company's organization, compensation and benefit plans and in the
availability of, and compensation levels for, employees in its geographic
markets; (12) the costs and effects of litigation and of any adverse outcome in
such litigation; (13) other risk factors outlined in the Company's filings with
the Securities and Exchange Commission from time to time; and (14) the success
of the Company at managing the risks of the foregoing.
The foregoing list of important factors is not all-inclusive. Such
forward-looking statements speak only as of the date on which they are made and
the Company does not undertake any obligation to update any forward-looking
statement, whether written or oral, to reflect events or circumstances after the
date on which such statement is made. If the Company does update or correct one
or more forward-looking statements, investors and others should not conclude
that the Company would make additional updates or corrections with respect
thereto or with respect to other forward-looking statements.
24
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Market risk is the risk of loss in a financial instrument arising from adverse
changes in market rates, prices or credit risk. Credit risk associated with the
Company's loan portfolio has been previously discussed in the asset quality
section of Management's Discussion and Analysis of Financial Condition and
Results of Operations. Management believes that the tax risk of the Company's
municipal investments associated with potential future changes in statutory,
judicial and regulatory actions is minimal. The Company has an insignificant
amount of credit risk in its investment portfolio because essentially all of the
fixed-income securities in the portfolio are AAA-rated (highest possible
rating). 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 Asset/Liability Committee (ALCO) which meets each month and is
made up of the Company's senior management as well as regional and
line-of-business managers who oversee specific earning asset classes and various
funding sources. As the Company does not believe it is possible to reliably
predict future interest rate movements, it has maintained an appropriate process
and set of measurement tools, which enable it to identify and quantify sources
of interest rate risk in varying rate environments. The primary tool used by the
Company in managing interest rate risk is income simulation.
While a wide variety of strategic balance sheet and treasury yield curve
scenarios are tested on an ongoing basis, the following reflects the Company's
one-year net interest income sensitivity based on:
o Asset and liability levels using March 31, 2006 as a starting point.
o There are assumed to be conservative levels of balance sheet growth--low
to mid single digit growth in loans and deposits, while using the
cashflows from investment contractual maturities and prepayments to repay
short-term capital market borrowings.
o The prime rate and federal funds rates are assumed to move up 200 basis
points and down 100 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.
o 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 annualized
increase (decrease) in
Change in interest projected net interest income
rates at March 31, 2006
-------------------------------------------------------
+ 200 basis points (0.4%)
- 100 basis points (0.4%)
The modeled net interest income remains neutral to changes in interest rates
over a 12-month period. Over a longer time period, however, the growth in net
interest income improves in a rising rate environment as a result of lower
yielding earning assets running off and being replaced at increased rates.
The analysis does not represent a Company forecast and should not be relied upon
as being indicative of expected operating results. These hypothetical estimates
are based upon numerous assumptions: the nature and timing of interest rate
levels (including yield curve shape), prepayments on loans and securities,
deposit decay rates, pricing decisions on loans and deposits,
reinvestment/replacement of asset and liability cash flows, and other factors.
While the assumptions are developed based upon current economic and local market
conditions, the Company cannot make any assurances as to the predictive nature
of these assumptions, including how customer preferences or competitor
influences might change. Furthermore, the sensitivity analysis does not reflect
actions that ALCO might take in responding to or anticipating changes in
interest rates.
25
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures, as defined in Rule 13a
- 15(e) under the Securities Exchange Act of 1934, designed to ensure that it is
able to collect the information it is required to disclose in the reports that
are filed with the Securities and Exchange Commission, (SEC), and to process,
summarize and disclose this information within the time periods specified in the
rules of the SEC. Based on management's evaluation of the Company's disclosure
controls and procedures, with the participation of the Chief Executive Officer
and the Chief Financial Officer, it has concluded that, as of the end of the
period covered by this Quarterly Report on Form 10-Q, these disclosure controls
and procedures were effective as of March 31, 2006.
There have been no changes in the Company's internal controls over financial
reporting in connection with the evaluation referenced in the paragraph above
that occurred during the Company's last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings.
The Company and its subsidiaries are subject in the normal course of business to
various pending and threatened legal proceedings in which claims for monetary
damages are asserted. Management, after consultation with legal counsel, does
not anticipate that the aggregate liability, if any, arising out of litigation
pending against the Company or its subsidiaries will have a material effect on
the Company's consolidated financial position or results of operations.
Item 1A. Risk Factors
There has not been any material change in the risk factors disclosure from that
contained in the Company's 2005 Form 10-K for the fiscal year ended December 31,
2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On April 20, 2005, the Company announced a twenty-month authorization to
repurchase up to 1,500,000 of its outstanding shares in open market or privately
negotiated transactions. These repurchases will be for general corporate
purposes, including those related to stock plan activities. The following table
shows treasury stock purchases during the first quarter 2006.
Number of Average Price Total Number of Shares Maximum Number of Shares
Shares Paid Purchased as part of Publicly that May yet be Purchased
Purchased Per share Announced Plans or Programs Under the Plans or Programs
---------------------------------------------------------------------------------------------------------------
January 2006 0 $ 0.00 593,711 906,289
February 2006 98,825 22.84 692,536 807,464
March 2006 59,300 21.29 751,836 748,164
---------------------------------------------------------------------------------------------------------------
Total 158,125 $22.26 751,836 748,164
===============================================================================================================
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Securities Holders.
There were no matters submitted to a vote of the shareholders during the quarter
ending March 31, 2006.
Item 5. Other Information.
Not applicable
26
Item 6. Exhibits
Exhibit No. Description
----------- -----------
2.1 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.
31.1 Certification of Sanford A. Belden, 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 A. 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 Sanford A. Belden, President and Chief
Executive Officer of the Registrant, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Scott A. 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
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Community Bank System, Inc.
Date: May 9, 2006
/s/ Sanford A. Belden
---------------------
Sanford A. Belden, President, Chief
Executive Officer and Director
Date: May 9, 2006 /s/ Scott A. Kingsley
---------------------
Scott A. Kingsley, Treasurer and Chief
Financial Officer
28