Community bank's earnings reach record high

DEWITT -- Community Bank System, Inc. (NASDAQ NMS:CBSI), a DeWitt-based bank holding company with $1.3 billion in assets, recorded a 25-percent gain over third-quarter 1995 net income, and a 29-percent gain on earnings per share, comparing the same periods.

The bank's net income for the nine months of 1996 also rose 25 percent, to $10.455 million. Earnings per share for those same nine months rose 3.8 percent, to $2.72. This smaller increase reflects the fact that 20 percent more shares were outstanding due to last year's common-stock issuance, subsequent to the acquisition of a dozen Chase branches with total deposits of $550 million.

What's behind the bank's success--in a slow market--and what are its plans for the future?

Sanford A. Belden, president and chief executive officer, explains the bank's growth strategy: "We intend to continue building as a full-service financial institution focused on smaller markets, in non-metropolitan areas. We like being in the smaller markets. and feel that we have really good coverage now in terms of branch deployment [since acquisition of the 12 Chase branches]." The bank's footprint now stretches from Potsdam in the North Country through the Finger Lakes and the Southern Tier to Olean in southwestern New York State--49 branches in 38 markets.

Decentralized

Community's modus operandi, as described by Belden, has been to be very decentralized. "We leave the decision-making with the managers in the market-from pricing products and services to making loan decisions." That way, they can focus on the unique needs of each particular market. That seems to be a viable working plan. Community for the fourth consecutive year has experienced a 15-percent-plus loan growth--a significant accomplishment in these economic times and in the Central New York market.

Belden claims, "It's largely a function of our ability to be very responsive, very customer focused, and very nimble in those marketplaces."

The 1995 deal with Chase was to buy 15 banks, but Community subsequently sold off three of them--in Utica, New Hartford, and Norwich--because they didn't fit into the bank's strategic footprint. Belden remarks, "NBT [the Norwich-based bank that purchased those branches] was happy to have them and we worked out a good arrangement."

The transaction had a major impact on Community's balance sheet, in that the bank brought on $385 million worth of deposits, to add to the $550 million in deposits it held at that time. To finance the transaction, Community made a secondary offering of common stock ($18.5 million) and preferred stock ($9 million).This maintained tangible capital, a regulatory necessity.

Broaden product base

Besides acquiring branches, the bank has sought to broaden its base of products and services. Belden adds, "A disproportionate share of our loan growth has been with small-business clients, so we were looking for a way to round out our services to those customers."

For the past four or five years Community has had a relationship with Benefit Plans Administrative Services, Inc. (BPA), a Utica-based administrator of defined-benefit and defined-contribution plans. "Barry Kublin [vice president at Community] had been doing plan-design and investment-management work with BPA for an increasing number of small businesses and nonprofits. There were about 70 different plans," explains Belden. "So we had a base of work with them, and the pension business was increasingly moving to a bundled product-service approach. Then, Jerry Maher [president of BPA] was at the point of thinking of what he was going to do down the road for business continuity--succession--to sustain the business and the opportunities for the people working for him and for his clients."

It was a natural marriage and has proved to be a happy one. Maher received Community Bank stock for BPA. "That's what he wanted, and we were delighted because we wanted him to have a vested interest in the success of the business," states Belden.

An additional advantage, Belden notes, is that "Community can work with BPA's clients on the banking side, and our bank clients can work with BPA on that side. It was an opportunity for us to get into more investment-management work."

BPA subsequently acquired KBM Management's defined-benefit administration business. KBM is a Syracuse-based employee-benefit-consulting and risk-management firm specializing in health and retirement plans. KBM will continue marketing and servicing its health and defined-contribution plans.

Belden explains that it was a "fairly modest line of business and we were able to take that on without adding anything to our overhead. We had the resources--the actuarial and administrative skills--to handle more defined-benefit plans."

For the past two years Community Bank has offered its small-business customers a service called "Business Manager," in which the bank handles the business's receivables. "We do their billing and collection," notes Belden. "We've done more of it in the North Country, but it's available throughout our franchise. And we've had good response. A lot of small businesses--for example, fuel-oil distributorships--find the service quite beneficial. We keep the accounting records, and we have people on staff who do collection work."

On the retail side, Community has a relationship with PrimeVest, a Minneapolis-based broker/dealer that specializes in third-party arrangements with banks. Belden says, "We have seven licensed individuals, representing PrimeVest and Community Bank, who are located in various branches. We've had this arrangement since 1994 and are just delighted with the program."

A concern with banks that offer broker services through third parties is that customers will assume that the investment funds offer a guaranteed return (because bank deposits are FDIC-insured). "We're very careful to disclose to people that these are not FDIC-insured products," asserts Belden. "We go to great lengths to make sure that they understand that. Of course, we start by qualifying each customer, and products are selected to be suitable for the client.

"It's interesting to observe," he continues, "that less than one-third of the money invested in these products comes out of our bank. Over two-thirds is money the client brings in from some other place. So there's been some shifting of funds from our deposits, but not as much as one might expect. What tends to happen is that these customers retain their bank deposits as a key part of their savings, and then add mutual funds and annuities as a way to meet different requirements."

History

Community Bank, N.A. began as the St. Lawrence National Bank in Canton. That bank was founded in 1870 and became the anchor of a network of banks. Over the years it made acquisitions, first in the North country, and then moving into the Southern Tier and the Finger Lakes area. The farthest west branch is the former Exchange al Bank in Olean, acquired from the Bank of New York.

A holding company was formed in 1984, and the headquarters were moved to DeWitt in 1986, with operations centers in Canton and Olean. Then, in 1992, the five banks in the holding company merged into a single charter called Community Bank, N.A.

When Belden joined the bank in October 1992, there were about $650 million in assets. Today, the bank assets total $1.3 billion. During the four-year period, Community acquired from the Resolution Trust Company three former Columbia branches in Canandaigua, Corning, and Wellsville.

Then Community purchased a former branch in Waddington from the FDIC. Belden remarks, "That was a nice little deal, even though there were no deposits." In ]994 the bank acquired a Chase branch in Cato, and that was the precursor of the 15 branches it bought from Chase, of which it subsequently divested itself of three.

The bank's geography, according to Belden, "is pretty much set. There are lots and lots of opportunities to fill in there--which we'd like to do, but on a more modest scale than we did with Chase. We are always interested in selected opportunities."

Sanford Belden grew up on the family farm in the Berkshires--Hatfield, Mass.--a farm that had been in his family since the 1600s. He received his bachelor's, master's, and doctoral degrees from Purdue University. Belden began his professional life as a professor at Cornell, teaching business management in Cornell's Agricultural Economics Department. From the academic life he moved into banking, first with the Farm Credit system in Springfield, Mass.; then with First Bank in Minneapolis. Before coming to Community in 1992, Belden was with an international Dutch bank, Rabobank, in New York City, where he managed its corporate and middle-market business in the eastern U.S.

Electronic banking

Expansion of the bank's electronic-banking capabilities is another direction Community is taking. "There's not quite as much rush to do that in our market as in the urban areas," says Belden, "but it's still important to our customers. We now have telephone banking and a debit-card product. We're really delighted with the response to our telephone banking; we're up to over 10,000 inquiries a month."

He continues, "In the last four years we've doubled the number of ATMs we've deployed. Many of those came with Chase. And we've invested in some backroom productivity-enhancement products as well. For all of this we have an excellent partner. FiServe is the largest outsourcer of data-processing for commercial banks in this country, and we've been with them for five years."

Although the bank is enhancing its electronic-banking capabilities, it does not view it as a substitute for branch banking. "Our electronic-banking services give our customers more access to our bank, for transactions. We are increasingly using branch personnel for selling and for helping people reach their financial objectives."

Community has no plans to reduce employment. "We did have a reduction when we consolidated in the early '90s. We sold off a couple of subsidiary businesses. But since then we've been adding employees on a very disciplined basis. We added a number of people in the branches with our Chase acquisitions. Part of our agreement with Chase was to take all of their people and keep them for at least a year, which we were delighted to do, because the key to being successful in our business is to have people who are well grounded and well anchored in their market."

Much emphasis has been placed on training of branch personnel. "We have a full-time sales coach who goes around to the branches," explains Belden. To illustrate the bank's emphasis on selling, Belden relates that Community has recorded 15,000 outbound calls from branches this year to customers and prospects. "We're concentrating on building skills in our people to do consultative selling. The people in our business are the key to our success--they're the ones who interact with our customers. We have people who have been with us in their markets for a longtime. We've got a stable, reliable, well known work force, and that's what really helps to differentiate us from other banks."

Commercial vs. savings

All of the banks Community has acquired have been commercial, except for the three branches bought from RTC and two former Chase branches in Watertown. Belden comments, "I'm glad the thrift deposit insurance issue was resolved, and our annual insurance rate for those deposits is now comparable to the rate on our commercial bank deposits. There have been some discussions in Congress to merge the charters [commercial and savings]. You see evidence of that happening, as with Cayuga Savings, shifting to a commercial bank charter."

Belden says, "The predominant reason we did the Chase deal is because we were reasonably convinced that opportunities in our existing markets had reached an optimum level, and we were looking for new markets, new growth, new earnings per share. And we've gotten that out of the Chase branches. Our loan growth through the third quarter, had it not been for Chase, would have been in the nine-percent range, instead of 15 percent."

The key to earning in any bank, says Belden, is good quality assets. "There are a lot of very well-run freestanding commercial banks left in upstate New York. Our industry in general is quite healthy and enjoys good profitability."

Certainly the credit unions are strong competitors. "They have an enormous advantage," says Belden. "They don't have to pay taxes. They don't have CRA [Community Reinvestment Act]. There is a deficit-reduction issue here as well, because tax revenue is not being collected from them--particularly the larger credit unions, which for all intents and purposes are operating like banks, not according to the original intention for which credit unions were formed. Actually," he points out, "credit-union customers enjoy higher incomes than do bank customers. Taxes ought to be collected on all that economic activity."

Community Bank's policy on stock ownership is to encourage board members and senior officers to become stockholders, and to offer stock to employees through 401(k)s. Belden estimates that insiders and employees own about 7.5 percent of the bank's stock. He comments, "With our officers and directors, we've oriented compensation to stock ownership, and I think we've positioned ourselves very well to align the interests of the management and the board with the interests of the shareholders."

Many upstate New York banks complain that they have more assets than they can use. Belden doesn't think that Community has this problem. "When we took on the Chase branches, we started with $385 million in deposits and $14 million in loans. We do share the view of many banks in this area, though, that it's hard to find good quality loan opportunities. Growth in this market is not indigenous to this area right now. We're working with the MDA [Metropolitan Development Authority] and others to try to rectify the situation. We work very hard to generate quality loans. That's where our dispersion works to our advantage, because we're so distributed throughout the state and we can reach out into these different markets." He concludes, "We're continuously on the lookout for opportunities to increase our returns to our shareholders."

Copyright Central New York Business Journal Nov 25, 1996
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