FORM 10 - Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the nine months ended September 30, 2001 Commission file number 0-11716 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 (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 periods 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common Stock, No par value - 11,587,312 shares outstanding as of November 12, 2001
INDEX COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES Part I. Information Item 1. Financial Statements (Unaudited) Consolidated balance sheets -- September 30, 2001, December 31, 2000 and September 30, 2000 Consolidated statements of income -- Three and nine months ended September 30, 2001 and 2000 Consolidated statements of cash flows -- Nine months ended September 30, 2001 and 2000 Consolidated statements of comprehensive income -- Nine months ended September 30, 2001 and 2000 Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations Item 3. Quantative and Qualitative Disclosure about Market Risk Part II. Other Information Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults upon Senior Securities Item 4. Submission of Matters to a Vote of Securities Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CONDITION <TABLE> <CAPTION> September 30, December 31, September 30, 2001 2000 2000 - ------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> ASSETS Cash and due from banks $85,579 $76,456 $81,353 Federal funds sold 0 0 0 - ------------------------------------------------------------------------------------------------------------ TOTAL CASH AND CASH EQUIVALENTS 85,579 76,456 81,353 Investment securities U.S. Treasury 102 0 0 U.S. Government agencies and corporations 195,175 300,715 293,201 States and political subdivisions 246,640 169,461 181,517 Mortgage-backed securities 495,241 371,745 375,732 Federal Reserve Bank 3,323 2,536 2,536 Other securities 70,638 74,845 71,212 --------------------------------------------- Investment securities at cost 1,011,119 919,302 924,198 Market value adjustment on available for sale securities 39,737 10,278 (17,125) - ------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENT SECURITIES 1,050,856 929,580 907,073 Loans 1,565,055 1,516,286 1,497,581 Less: Unearned discount 249 409 478 Reserve for loan losses 21,083 20,035 20,107 - ------------------------------------------------------------------------------------------------------------ NET LOANS 1,543,723 1,495,842 1,476,996 Bank premises and equipment 44,170 40,941 40,674 Accrued interest receivable 21,723 21,873 21,253 Intangible assets 66,996 55,234 56,510 Other assets 31,303 30,747 36,382 - ------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $2,844,350 $2,650,673 $2,620,241 ============================================================================================================ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits Noninterest bearing $350,621 $316,163 $302,838 Interest bearing 1,737,484 1,632,395 1,649,464 - ------------------------------------------------------------------------------------------------------------ TOTAL DEPOSITS 2,088,105 1,948,558 1,952,302 Federal funds purchased 41,100 48,730 92,890 Short term borrowings 81,100 211,100 191,100 Long term borrowings 257,000 180,000 145,000 Company obligated mandatorily redeemable preferred securities of subsidiary, Community Capital Trust I, holding solely junior subordinated debentures of the Company 77,805 29,824 29,822 Accrued interest and other liabilities 48,553 30,670 26,920 - ------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES 2,593,663 2,448,882 2,438,034 - ------------------------------------------------------------------------------------------------------------ Shareholders' equity: Common stock (11,548,381; 10,559,897;10,559,497 shares outstanding) 11,579 11,208 11,208 Surplus 46,710 37,711 37,706 Undivided profits 169,127 163,917 160,770 Accumulated other comprehensive income 23,634 5,966 (10,464) Treasury stock (0; 648,100; 648,100; shares) 0 (17,006) (17,006) Shares issued under employee stock plan - unearned (363) (5) (7) - ------------------------------------------------------------------------------------------------------------ TOTAL SHAREHOLDERS' EQUITY 250,687 201,791 182,207 - ------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,844,350 $2,650,673 $2,620,241 ============================================================================================================ </TABLE> See notes to consolidated financial statements
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 - ---------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Interest Income: Interest and fees on loans $32,635 $33,330 $99,408 $96,186 Interest and dividends on investments: U.S. Treasury 10 1 94 110 U.S. Government agencies and corporations 4,013 5,002 13,905 14,284 States and political subdivisions 2,909 2,033 7,846 6,068 Mortgage-backed securities 7,677 6,435 23,139 19,568 Other securities 1,174 1,165 3,730 3,411 Interest on federal funds sold 171 114 184 447 Interest on deposits at other banks 2 14 376 168 - ---------------------------------------------------------------------------------------------------------- Total interest income 48,591 48,094 148,682 140,242 - ---------------------------------------------------------------------------------------------------------- Interest expense: Interest on deposits Savings 3,036 3,483 9,697 10,182 Time 14,654 14,836 46,909 40,809 Interest on federal funds purchased and term borrowings 5,641 6,704 19,130 19,270 Interest on mandatorily redeemable capital securities of subsidiary 1,452 733 2,918 2,199 - ---------------------------------------------------------------------------------------------------------- Total interest expense 24,783 25,756 78,654 72,460 - ---------------------------------------------------------------------------------------------------------- Net interest income 23,808 22,338 70,028 67,782 Less: Provision for loan losses 1,579 2,308 4,320 5,584 - ---------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 22,229 20,030 65,708 62,198 - ---------------------------------------------------------------------------------------------------------- Other income: Fiduciary and investment services 801 784 2,327 2,380 Service charges on deposit accounts 2,530 2,110 7,113 6,056 Commissions on investment products 1,498 1,513 4,668 3,392 Other service charges, commissions and fees 2,102 2,069 5,411 5,185 Miscellaneous income 40 47 108 105 Investment security gains (losses) 29 0 (100) (160) - ---------------------------------------------------------------------------------------------------------- Total other income 7,000 6,523 19,527 16,958 - ---------------------------------------------------------------------------------------------------------- Other expenses: Salaries and employee benefits 9,879 9,261 31,580 27,349 Occupancy expense, net 1,469 1,237 4,585 3,761 Equipment and furniture expense 1,556 1,340 4,473 3,898 Amortization of intangible assets 1,541 1,259 4,542 3,610 Acquisition expenses 631 0 6,117 0 Other 5,294 4,627 13,794 13,817 - ---------------------------------------------------------------------------------------------------------- Total other expenses 20,370 17,724 65,091 52,435 - ---------------------------------------------------------------------------------------------------------- Income before income taxes 8,859 8,829 20,144 26,721 Income taxes 2,416 2,529 5,842 7,628 - ---------------------------------------------------------------------------------------------------------- NET INCOME $6,443 $6,300 $14,302 $19,093 ========================================================================================================== Earnings per share - Basic $0.56 $0.60 $1.25 $1.79 - Diluted $0.55 $0.59 $1.23 $1.78 ========================================================================================================== </TABLE> See notes to consolidated financial statements
COMMUNITY BANK SYSTEM, INC. CONSOLIDATED STATEMENT OF CASH FLOWS For Nine Months Ended September 30, 2001 and 2000 <TABLE> <CAPTION> 2001 2000 - ----------------------------------------------------------------------------------------------------- <S> <C> <C> Operating Activities: Net income $14,302 $19,093 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 3,661 3,128 Amortization of intangible assets 4,542 3,610 Net amortization of security premiums and discounts 1,530 (112) Amortization of discount on loans (168) (243) Provision for loan losses 4,320 5,584 Benefit from deferred taxes (300) (1,229) Loss on sale of investment securities 100 159 Gain on sale of loans and other assets (101) (90) Change in interest receivable 1,160 (7,980) Change in other assets and other liabilities 2,517 1,746 - ----------------------------------------------------------------------------------------------------- Net cash provided by operating activities 31,563 23,667 - ----------------------------------------------------------------------------------------------------- Investing Activities: Proceeds from sales of investment securities 185,499 16,864 Proceeds from maturities of held to maturity investment securities 4,978 3,214 Proceeds from maturities of available-for-sale investment securities 169,099 41,926 Purchases of held to maturity investment securities (3,480) (3,254) Purchases of available-for-sale investment securities (403,512) (119,108) Net change in loans outstanding 6,051 (94,219) Premium paid on acquisition of business (3,046) (6,134) Cash received in stock acquisition 3,777 Capital expenditures (5,398) (4,262) Proceeds from sales of property and equipment 0 515 - ----------------------------------------------------------------------------------------------------- Net cash used by investing activities (46,032) (164,458) - ----------------------------------------------------------------------------------------------------- Financing Activities: Net change in demand deposits, NOW accounts, and savings accounts 46,121 14,867 Net change in certificates of deposit 5,755 92,734 Net change in federal funds purchased (7,630) 60,440 Net change in term borrowings (62,950) (62,976) Proceeds from junior subordinated debentures 49,450 0 Issuance of common stock 702 25 Treasury stock purchased 0 (2,288) Cash dividends paid (7,856) (7,409) - ----------------------------------------------------------------------------------------------------- Net cash provided by financing activities 23,592 95,394 - ----------------------------------------------------------------------------------------------------- Change in cash and cash equivalents 9,123 (45,397) Cash and cash equivalents at beginning of year 76,456 126,750 - ----------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD 85,579 81,353 ===================================================================================================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest $76,589 $67,264 ===================================================================================================== Cash paid for income taxes $6,142 $9,163 ===================================================================================================== SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES: Dividends declared and unpaid $3,124 $2,589 Gross change in unrealized gains on available-for-sale securities $29,459 $11,155 Common stock issued to affect acquisition (Note A) including treasury stock of 648,100 shares $25,228 $0 ===================================================================================================== </TABLE> See notes to consolidated financial statements.
COMMUNITY BANK SYSTEM, INC. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For Nine Months Ended September 30, 2001 and 2000 <TABLE> <CAPTION> 2001 2000 - -------------------------------------------------------------------------------------------------------------- <S> <C> <C> Other comprehensive income, before tax: Unrealized gains on securities: Change in unrealized holding gains arising during period $ 29,359 $ 10,995 Less: Reclassification adjustment for losses included in net income 100 160 - -------------------------------------------------------------------------------------------------------------- Other comprehensive income, before tax 29,459 11,155 Income tax expense related to items of other comprehensive income (11,791) (4,465) - -------------------------------------------------------------------------------------------------------------- Other comprehensive income, net of tax 17,668 6,690 Plus: Net income 14,302 19,093 - -------------------------------------------------------------------------------------------------------------- Comprehensive income $ 31,970 $ 25,783 ============================================================================================================== </TABLE> See notes to consolidated financial statements
Community Bank System, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) September 30, 2001 Note A -- Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the nine-month period ending September 30, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. On January 29, 1997, Community Bank System, Inc. ("Company") formed a wholly owned subsidiary, Community Capital Trust I ("Trust"), a Delaware statutory business trust. The Trust has issued $30 million aggregate liquidation amount of 9.75% Company-Obligated Mandatorily Redeemable Preferred Securities representing undivided beneficial interests in the assets of the Trust. The Company borrowed the proceeds of the Preferred Securities from the Trust by issuing Junior Subordinated Debentures to the Trust having substantially similar terms as the Preferred Securities. The sole assets of the Trust on September 30, 2001 were $30,757,000 aggregate principal amount of the Company's Junior Subordinated Debentures, together with the related accrued interest receivable thereon. The Preferred Securities mature in 2027, and are treated as Tier 1 capital by the Federal Reserve Bank of New York. The guarantees issued by the Company for the Trust, together with the Company's obligations under the Trust Agreement, the Junior Subordinated Debentures and the Indenture under which the Junior Subordinated Debentures were issued, constitute a full and unconditional guarantee by the Company of the Preferred Securities issued by the Trust. On April 3, 2000, Community Bank System, Inc. acquired all the stock of Elias Asset Management, Inc. for cash of $6.5 million. In accordance with the stock purchase agreement, additional consideration will be paid if certain revenue targets are met over the next five years. This transaction was accounted for under the purchase method. On January 26, 2001, the Company acquired The Citizens National Bank of Malone, an eighty-year-old commercial bank, in a transaction valued at $25,228,000. 952,000 shares of common stock of the Company were issued to the shareholders of Citizens to effect the transaction. The Company purchased assets with a fair value of $110,137,000, assumed liabilities with the fair value of $98,681,000 and recorded other purchase accounting adjustments totaling $499,000. The excess of purchase price over fair value of assets acquired amounted to $13,273,000 and will be amortized over a fifteen year period. On May 11, 2001, the Company and First Liberty Bank Corp. ("First Liberty" or "FLIB") completed their merger, approved by their respective shareholders on April 23, 2001, in which the Company acquired all of the stock of FLIB and merged First Liberty Bank & Trust, FLIB's principal subsidiary, into Community Bank, N.A., the Company's banking subsidiary. First Liberty Bank & Trust will continue to operate under its present name in Pennsylvania as a division of Community Bank. Pursuant to the definitive agreement, each share of common stock of FLIB was exchanged on a tax-free basis for 0.56 shares of registered common stock of the Company. At the closing price of the Company's common stock on May 11 of $27.80, the shares of Company common stock received by FLIB shareholders have a value of $99.1 million, or $15.57 per share. The Company issued approximately 3,566,000 shares of its common stock in the transaction, which has been recorded under the pooling method of accounting.
Accordingly, the consolidated financial statements for the periods presented have been restated to include the combined results of operations, financial position and cash flows of the Company and First Liberty. Certain reclassifications were made to First Liberty's prior year financial statements to conform to the Company's presentation. On July 16, 2001, Community Bank System, Inc. formed a wholly-owned subsidiary, Community Capital Trust II, a Delaware business trust. The trust issued $25 million of 30 year floating rate Company-obligated Capital Securities of Community Capital Trust II Holding Solely Parent Debentures. The Company borrowed the proceeds of the Capital Securities from its Subsidiary by issuing Deeply Subordinated Junior Debentures having substantially similar terms. The Capital Securities mature in year 2031 and are treated as Tier 1 capital by the Federal Reserve Bank of New York. The Capital Securities are a pooled trust preferred fund of MM Community Funding I, Ltd, and are tied to the six month LIBOR plus 3.75% with a five year call provision. The coupon yield as of September 30, 2001 was 7.57%. The sole assets of the Trust on September 30, 2001 were $25,029,203 aggregate principal amount of the Company's Junior Subordinated Debentures, together with the related accrued interest receivable thereon. On July 31, 2001, Community Bank System, Inc. formed a wholly-owned subsidiary, Community Statutory Trust III, a Connecticut business trust. The trust issued $24.450 million of 30 year floating rate Company-obligated Capital Securities of Community Statutory Trust III Holding Solely Parent Debentures. The Company borrowed the proceeds of the Capital Securities from its Subsidiary by issuing Deeply Subordinated Junior Debentures having substantially similar terms. The Capital Securities mature in year 2031 and are treated as Tier 1 capital by the Federal Reserve Bank of New York. The Capital Securities are a pooled trust preferred fund of First Tennessee/KBW Pooled Trust Preferred Deal III, and are tied to the three month LIBOR plus 3.58% with a five year call provision. The coupon yield as of September 30, 2001 was 7.25%. The sole assets of the Trust on September 30, 2001 were $24,477,575 aggregate principal amount of the Company's Junior Subordinated Debentures, together with the related accrued interest receivable thereon.
Note B - Branch Acquisition On June 8, 2001, the Company and its wholly-owned banking subsidiary, Community Bank, signed an agreement to acquire 36 branches, with deposits of approximately $479 million and loans of approximately $181million as of September 30, 2001, from FleetBoston Financial (NYSE: FBF). The transaction has received regulatory approval and is scheduled to close in mid-November 2001. The branches, which are in the Southwestern and Finger Lakes regions of New York, will be merged into Community Bank's branch network. Note C - New Accounting Pronouncements In July 2001, the Financial Accounting Standards Board issued SFAS No.142, "Goodwill and Other Intangible Assets", which addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets". The statement will require, beginning January 1, 2002, that the Company subject goodwill and other intangible assets to an annual impairment analysis to assess the need to write down the balances and recognize an impairment loss. In addition, amortization of certain intangible assets will no longer be recorded upon adoption of this statement. The Company expects the adoption of this pronouncement will significantly reduce amortization expense.
Note D - Earnings Per Share Basic earnings per share is computed based on the weighted average shares outstanding. Diluted earnings per share is computed based on the weighted average shares outstanding adjusted for the dilutive effect of the assumed exercise of stock options during the year. The following is a reconciliation of basic to diluted earnings per share for the three and nine months ended September 30, 2001 and 2000. <TABLE> <CAPTION> For nine months ended September 30, 2001 Income Shares Per share amount - ----------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Net Income 14,302 Basic EPS 14,302 11,483 $ 1.25 Effect of dilutive securities: Stock options 15 ----------------------------- DILUTED EPS $14,302 11,637 $ 1.23 ===================================================================================================== - ----------------------------------------------------------------------------------------------------- For nine months ended September 30, 2000 Income Shares Per share amount - ----------------------------------------------------------------------------------------------------- Net Income Net Income 19,093 Basic EPS 19,093 10,644 $ 1.79 Effect of dilutive securities: Stock options 81 ----------------------------- DILUTED EPS $19,093 10,725 $ 1.78 ===================================================================================================== <CAPTION> - ----------------------------------------------------------------------------------------------------- For three months ended September 30, 2001 Income Shares Per share amount - ----------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Net Income 6,443 Basic EPS 6,443 11,591 $ 0.56 Effect of dilutive securities: Stock options 0 145 ----------------------------- DILUTED EPS $6,443 11,736 $ 0.55 ===================================================================================================== <CAPTION> - ----------------------------------------------------------------------------------------------------- For three months ended September 30, 2000 Income Shares Per share amount - ----------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Net Income Net Income 6,300 Basic EPS 6,300 10,584 $ 0.60 Effect of dilutive securities: Stock options 83 ----------------------------- DILUTED EPS $6,300 10,667 $ 0.59 ===================================================================================================== </TABLE>
Part 1. Financial Information Item 1. Financial Statements The information required by rule 10.01 of Regulation S-X is presented on the previous pages. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The purpose of the discussion is to present material changes in the Company's financial condition and results of operations during the three and nine months ended September 30, 2001 which are not otherwise apparent from the consolidated financial statements included in this report. When used in this report, the terms "CBSI" and "CBU" (the Company's ticker symbol on the New York Stock Exchange) means Community Bank System, Inc. and its subsidiaries on a consolidated basis, unless indicated otherwise.
COMMUNITY BANK SYSTEM, INC. SUMMARY OF OPERATIONS EARNINGS AND BALANCE SHEET RECAP 3RD QUARTER 2001 AND FULL YEAR COMPARISONS <TABLE> <CAPTION> ----------------------------------------------------------------- 000's Omitted Three Months Ended ----------------------------------------------------------------- Line Sep 30, Sep 30, Change Change No. 2001 2000 Amount Percent <C> <S> <C> <C> <C> <C> ------------------------------------------------- Earnings ------------------------------------------------- 1 Net interest income $23,809 $22,338 $1,470 6.6% 2 Loan loss provision 1,579 2,308 (729) -31.6% 3 Net interest income after provision for loan losses 22,229 20,030 2,199 11.0% 4 Investment security gain (loss) & debt extinguishment 29 0 29 0.0% 5 Other income 6,971 6,523 448 6.9% 6a Other expense 18,198 16,465 1,733 10.5% 6b Acquisition expense 631 0 631 0.0% 7 Intangible amortization 1,541 1,259 283 22.5% 8 Inc before inc tax 8,858 8,829 29 0.3% 9 Income tax 2,416 2,529 (113) -4.5% 10a Net income $6,443 $6,300 $142 2.3% 10b Net income - Operating $6,801 $6,300 $500 7.9% 10c Net income - Cash $7,450 $7,046 $404 5.7% 10d Net income - Cash Operating $7,808 $7,046 $762 10.8% Earnings per share 11a Basic $0.56 $0.60 ($0.04) -6.6% 11b Diluted $0.55 $0.59 ($0.04) -7.1% 11c Diluted - Operating $0.58 $0.59 ($0.01) -1.9% 11d Diluted - Cash $0.63 $0.66 ($0.03) -3.9% 11e Diluted - Cash Operating $0.67 $0.66 $0.00 0.7% ================================================================= ------------------------------------------------- Balances At Period End ------------------------------------------------- 12 Loans 1,564,806 1,497,103 67,704 4.5% 13 Investments (excl. mkt val adj) 1,011,354 924,679 86,675 9.4% 14 Earning assets 2,576,160 2,421,782 154,378 6.4% 15 Loan loss reserve 21,083 20,107 977 4.9% 16a Intangible assets - Core deposits 9,039 10,775 (1,735) -16.1% 16b Intangible assets - Goodwill 57,957 45,735 12,222 26.7% 17 Total assets 2,844,350 2,620,241 224,109 8.6% 18 Deposits 2,088,106 1,952,302 135,804 7.0% 19a Borrowings - FHLB 379,200 428,990 (49,790) -11.6% 19b Borrowings - Trust Preferred & other 78,186 30,314 47,873 157.9% 20 Total equity $250,686 $182,206 $68,480 37.6% ================================================================= </TABLE>
<TABLE> <CAPTION> ----------------------------------------------------------------- 000's Omitted Nine Months Ended ----------------------------------------------------------------- Line Sep 30, Sep 30, Change Change No. 2001 2000 Amount Percent <C> <S> <C> <C> <C> <C> ------------------------------------------------- Earnings ------------------------------------------------- 1 Net interest income $70,029 $67,782 $2,247 3.3% 2 Loan loss provision 4,320 5,584 (1,264) -22.6% 3 Net interest income after provision for loan losses 65,708 62,198 3,511 5.6% 4 Investment security gain (loss) & debt extinguishment (100) (160) 60 -37.6% 5 Other income 19,627 17,118 2,509 14.7% 6a Other expense 54,432 48,825 5,607 11.5% 6b Acquisition expense 6,117 0 6,117 0.0% 7 Intangible amortization 4,542 3,610 933 25.8% 8 Inc before inc tax 20,144 26,721 (6,577) -24.6% 9 Income tax 5,842 7,628 (1,786) -23.4% 10a Net income $14,302 $19,093 ($4,791) -25.1% 10b Net income - Operating $18,000 $19,093 ($1,094) -5.7% 10c Net income - Cash $17,248 $21,231 ($3,983) -18.8% 10d Net income - Cash Operating $20,945 $21,231 ($286) -1.3% Earnings per share 11a Basic $1.25 $1.79 ($0.55) -30.6% 11b Diluted $1.23 $1.78 ($0.55) -31.0% 11c Diluted - Operating $1.55 $1.78 ($0.23) -13.1% 11d Diluted - Cash $1.48 $1.98 ($0.50) -25.1% 11e Diluted - Cash Operating $1.80 $1.98 ($0.18) -9.1% ================================================================= ------------------------------------------------- Balances At Period End ------------------------------------------------- 12 Loans 1,564,806 1,497,103 67,704 4.5% 13 Investments (excl. mkt val adj) 1,011,354 924,679 86,675 9.4% 14 Earning assets 2,576,160 2,421,782 154,378 6.4% 15 Loan loss reserve 21,083 20,107 977 4.9% 16a Intangible assets - Core deposits 9,039 10,775 (1,735) -16.1% 16b Intangible assets - Goodwill 57,957 45,735 12,222 26.7% 17 Total assets 2,844,350 2,620,241 224,109 8.6% 18 Deposits 2,088,106 1,952,302 135,804 7.0% 19a Borrowings - FHLB 379,200 428,990 (49,790) -11.6% 19b Borrowings - Trust Preferred & other 78,186 30,314 47,873 157.9% 20 Total equity $250,686 $182,206 $68,480 37.6% ================================================================= </TABLE>
<TABLE> <CAPTION> ----------------------------------------------------------------- 000's Omitted Three Months Ended ----------------------------------------------------------------- Line Sep 30, Jun 30, Change Change No. 2001 2001 Amount Percent <C> <S> <C> <C> <C> <C> ------------------------------------------------- Earnings ------------------------------------------------- 1 Net interest income $23,809 $23,054 $755 3.3% 2 Loan loss provision 1,579 1,415 164 11.6% 3 Net interest income after provision for loan losses 22,229 21,639 591 2.7% 4 Investment security gain (loss) & debt extinguishment 29 (138) 167 -120.8% 5 Other income 6,971 6,630 341 5.1% 6a Other expense 18,198 18,602 (404) -2.2% 6b Acquisition expense 631 4,636 (4,005) -86.4% 7 Intangible amortization 1,541 1,541 0 0.0% 8 Inc before inc tax 8,858 3,351 5,507 164.3% 9 Income tax 2,416 1,241 1,175 94.7% 10a Net income $6,443 $2,110 $4,333 205.3% 10b Net income - Operating $6,801 $4,949 $1,851 37.4% 10c Net income - Cash $7,450 $3,118 $4,333 139.0% 10d Net income - Cash Operating $7,808 $5,957 $1,851 31.1% Earnings per share 11a Basic $0.56 $0.18 $0.37 204.2% 11b Diluted $0.55 $0.18 $0.37 205.2% 11c Diluted - Operating $0.58 $0.42 $0.16 37.4% 11d Diluted - Cash $0.63 $0.27 $0.37 138.9% 11e Diluted - Cash Operating $0.67 $0.51 $0.16 31.0% ================================================================= ------------------------------------------------- Balances At Period End ------------------------------------------------- 12 Loans 1,564,806 1,569,076 (4,270) -0.3% 13 Investments (excl. mkt val adj) 1,011,354 1,054,382 (43,028) -4.1% 14 Earning assets 2,576,160 2,623,458 (47,298) -1.8% 15 Loan loss reserve 21,083 20,860 223 1.1% 16a Intangible assets - Core deposits 9,039 9,485 (446) -4.7% 16b Intangible assets - Goodwill 57,957 59,066 (1,110) -1.9% 17 Total assets 2,844,350 2,851,689 (7,339) -0.3% 18 Deposits 2,088,106 2,051,385 36,721 1.8% 19a Borrowings - FHLB 379,200 498,600 (119,400) -23.9% 19b Borrowings - Trust Preferred & other 78,186 30,237 47,949 158.6% 20 Total equity $250,686 $234,171 $16,515 7.1% ================================================================= </TABLE>
<TABLE> <CAPTION> ----------------------------------------------------------------- 000's Omitted Three Months Ended ----------------------------------------------------------------- Line Sep 30, Sep 30, Change Change No. 2001 2000 Amount Percent <C> <S> <C> <C> <C> <C> ------------------------------------------------- Profitability ------------------------------------------------- 21 Return on assets 0.90% 0.99% -0.09 %pts. 22 Return on equity 10.73% 14.68% -3.95 %pts. 22a Return on equity - operating 11.33% 14.68% -3.35 %pts. 23 Tangible return on assets 1.04% 1.11% -0.07 %pts. 24 Tangible return on equity 12.41% 16.42% -4.01 %pts. 24a Tangible return on equity - operating 13.01% 16.42% -3.41 %pts. 25 Net interest margin (FTE) 3.94% 3.94% 0.00 %pts. 26 Non interest income/ 21.3% 21.5% -0.2 %pts. operating income (FTE, excl sec gains & branch disp) 27 Efficiency ratio 55.6% 54.3% 1.3 %pts. (excl acquis. exp., 1-time items & intangible amortization) ================================================================= ------------------------------------------------- Capital ------------------------------------------------- 28 Tier I leverage ratio 8.72% 6.67% 2.05 %pts. 28b Tangible equity / assets 6.61% 4.90% 1.71 %pts. 29 Accum. other comp. Income $23,634 ($10,464) $34,097 -325.9% Common shares outstanding 30a Weighted average 11,736 10,667 1,069 10.0% 30b Period end 11,578 10,559 1,018 9.6% 31a Cash dividends declared per common share $0.27 $0.27 $0.00 0.0% 31b Common Stock Price $27.50 $25.94 $1.56 6.0% 31c Total Return - last 12 months 10.3% -1.1% 11.4% %pts. 32 Book value $21.65 $17.26 $4.40 25.5% 33 Tangible book value $15.87 $11.90 $3.96 33.3% ================================================================= ------------------------------------------------- Asset Quality Ratios ------------------------------------------------- 34 Loan loss reserve / loans outstanding 1.35% 1.34% 0.00 %pts. 35 Nonperforming loans / loans outstanding 0.54% 0.51% 0.04 %pts. 36 Loan loss reserve / nonperforming loans 247% 265% (18)%pts. 37 Net charge-offs / 0.33% 0.58% (0.25)%pts. average loans 38 Loan loss provision / 122% 107% 16 %pts. net charge-offs 39 Nonperforming assets / 0.67% 0.59% 0.07 %pts. loans outstanding + OREO ================================================================= </TABLE>
<TABLE> <CAPTION> ----------------------------------------------------------------- 000's Omitted Nine Months Ended ----------------------------------------------------------------- Line Sep 30, Sep 30, Change Change No. 2001 2000 Amount Percent <C> <S> <C> <C> <C> <C> ------------------------------------------------- Profitability ------------------------------------------------- 21 Return on assets 0.67% 1.01% -0.34 %pts. 22 Return on equity 8.30% 15.17% -6.87 %pts. 22a Return on equity - operating 10.44% 15.17% -4.72 %pts. 23 Tangible return on assets 0.81% 1.13% -0.32 %pts. 24 Tangible return on equity 10.01% 16.86% -6.86 %pts. 24a Tangible return on equity - operating 12.15% 16.86% -4.71 %pts. 25 Net interest margin (FTE) 3.88% 4.07% -0.18 %pts. 26 Non interest income/ 20.7% 19.2% 1.5 %pts. operating income (FTE, excl sec gains & branch disp) 27 Efficiency ratio 57.3% 54.7% 2.6 %pts. (excl acquis. exp., 1-time items & intangible amortization) ================================================================= ------------------------------------------------- Capital ------------------------------------------------- 28 Tier I leverage ratio 8.71% 6.71% 2.00 %pts. 28b Tangible equity / assets 6.61% 4.90% 1.71 %pts. 29 Accum. other comp. Income $23,634 ($10,464) $34,097 -325.9% Common shares outstanding 30a Weighted average 11,637 10,725 912 8.5% 30b Period end 11,578 10,559 1,018 9.6% 31a Cash dividends declared per common share $0.81 $0.77 $0.04 5.2% 31b Common Stock Price $27.50 $25.94 $1.56 6.0% 31c Total Return - last 12 months 10.3% -1.1% 11.4% %pts. 32 Book value $21.65 $17.26 $4.40 25.5% 33 Tangible book value $15.87 $11.90 $3.96 33.3% ================================================================= ------------------------------------------------- Asset Quality Ratios ------------------------------------------------- 34 Loan loss reserve / loans outstanding 1.35% 1.34% 0.00 %pts. 35 Nonperforming loans / loans outstanding 0.54% 0.51% 0.04 %pts. 36 Loan loss reserve / nonperforming loans 247% 265% (18)%pts. 37 Net charge-offs / 0.35% 0.37% (0.02)%pts. average loans 38 Loan loss provision / 106% 139% (33)%pts. net charge-offs 39 Nonperforming assets / 0.67% 0.59% 0.07 %pts. loans outstanding + OREO ================================================================= </TABLE>
<TABLE> <CAPTION> ----------------------------------------------------------------- 000's Omitted Three Months Ended ----------------------------------------------------------------- Line Sep 30, Jun 30, Change Change No. 2001 2001 Amount Percent <C> <S> <C> <C> <C> <C> ------------------------------------------------- Profitability ------------------------------------------------- 21 Return on assets 0.90% 0.29% 0.61 %pts. 22 Return on equity 10.73% 3.65% 7.08 %pts. 22a Return on equity - operating 11.33% 8.56% 2.77 %pts. 23 Tangible return on assets 1.04% 0.43% 0.61 %pts. 24 Tangible return on equity 12.41% 5.39% 7.02 %pts. 24a Tangible return on equity - operating 13.01% 10.30% 2.71 %pts. 25 Net interest margin (FTE) 3.94% 3.78% 0.16 %pts. 26 Non interest income/ 21.3% 21.1% 0.2 %pts. operating income (FTE, excl sec gains & branch disp) 27 Efficiency ratio 55.6% 59.1% -3.5 %pts. (excl acquis. exp., 1-time items & intangible amortization) ================================================================= ------------------------------------------------- Capital ------------------------------------------------- 28 Tier I leverage ratio 8.72% 6.57% 2.15 %pts. 28b Tangible equity / assets 6.61% 5.95% 0.66 %pts. 29 Accum. other comp. Income $23,634 $10,782 $12,852 119.2% Common shares outstanding 30a Weighted average 11,736 11,732 4 0.0% 30b Period end 11,578 11,549 29 0.2% 31a Cash dividends declared per common share $0.27 $0.27 $0.00 0.0% 31b Common Stock Price $27.50 $28.00 ($0.50) -1.8% 31c Total Return - last 12 months 10.3% 31.5% -21.2% %pts. 32 Book value $21.65 $20.28 $1.38 6.8% 33 Tangible book value $15.87 $14.34 $1.53 10.6% ================================================================= ------------------------------------------------- Asset Quality Ratios ------------------------------------------------- 34 Loan loss reserve / loans outstanding 1.35% 1.33% 0.02 %pts. 35 Nonperforming loans / loans outstanding 0.54% 0.71% (0.17)%pts. 36 Loan loss reserve / nonperforming loans 247% 187% 60 %pts. 37 Net charge-offs / 0.33% 0.39% (0.06)%pts. average loans 38 Loan loss provision / 122% 92% 30 %pts. net charge-offs 39 Nonperforming assets / 0.67% 0.84% (0.17)%pts. loans outstanding + OREO ================================================================= </TABLE>
<TABLE> <CAPTION> ------------------------------------------------------------------ 000's Omitted Three Months Ended ------------------------------------------------------------------ Line Sep 30, Sep 30, Change Change No. 2001 2000 Amount Percent <C> <S> <C> <C> <C> <C> ------------------------------------------------- Asset Quality Components ------------------------------------------------- 40 Nonaccruing loans $5,677 $5,784 -$107 -1.9% 41 90+ days delinquent 2,842 1,804 1,038 57.6% ----- ----- ----- ----- 42 Tot nonperforming loans $8,519 $7,588 $931 12.3% 43 Troubled debt restructurings $85 $129 -$44 -34.2% 44 Other real estate 1,835 1,191 644 54.1% ----- ----- --- ----- 45 Tot nonperforming assets $10,439 $8,907 $1,531 17.2% 46 Net Charge-Offs $1,293 $2,166 -$872 -40.3% ================================================================= ------------------------------------------------- Components of Net Interest Margin (FTE) ------------------------------------------------- 47 Loan yield 8.30% 8.97% (0.67)%pts. 48 Investment yield 6.86% 6.95% (0.10)%pts. 49 Earning asset yield 7.73% 8.20% (0.47)%pts. 50 Interest bearing deposits rate 4.06% 4.46% (0.40)%pts. 51a Borrowed funds rate - FHLB 5.40% 6.55% (1.14)%pts. 51b Borrowed funds rate - Trust Preferred & other 8.80% 9.84% (1.05)%pts. 52 Cost of all interest bearing funds 4.45% 4.95% (0.50)%pts. 53 Cost of funds (includes DDA) 3.85% 4.32% (0.47)%pts. 54 Cost of funds / earning assets 3.79% 4.26% (0.47)%pts. 55 Net interest margin (FTE) 3.94% 3.94% 0.00 %pts. 56 Full tax equivalent adjustment $1,935 $1,446 $490 33.9% ================================================================= ------------------------------------------------- Average Balances for Period ------------------------------------------------- 57 Loans $1,567,842 $1,485,595 $82,247 5.5% 58 Investments (excl. mkt val adj.) 1,025,375 917,552 107,823 11.8% 59 Earning assets 2,593,217 2,403,147 190,070 7.9% 60 Total assets 2,835,584 2,529,588 305,996 12.1% 61 Deposits 2,076,446 1,935,991 140,455 7.3% 62a Borrowings - FHLB 413,518 406,639 6,879 1.7% 62b Borrowings - Trust preferred & other 66,502 30,322 36,180 119.3% 63 Total equity $238,159 $170,706 $67,453 39.5% ================================================================= </TABLE>
<TABLE> <CAPTION> ----------------------------------------------------------------- 000's Omitted Nine Months Ended ----------------------------------------------------------------- Line Sep 30, Sep 30, Change Change No. 2001 2000 Amount Percent <C> <S> <C> <C> <C> <C> ------------------------------------------------- Asset Quality Components ------------------------------------------------- 40 Nonaccruing loans $5,677 $5,784 -$107 -1.9% 41 90+ days delinquent 2,842 1,804 1,038 57.6% ----- ----- ----- ----- 42 Tot nonperforming loans $8,519 $7,588 $931 12.3% 43 Troubled debt restructurings $85 $129 -$44 -34.2% 44 Other real estate 1,835 1,191 644 54.1% ----- ----- --- ----- 45 Tot nonperforming assets $10,439 $8,907 $1,531 17.2% 46 Net Charge-Offs $4,060 $4,005 $56 1.4% ================================================================= ------------------------------------------------- Components of Net Interest Margin (FTE) ------------------------------------------------- 47 Loan yield 8.57% 8.88% (0.31)%pts. 48 Investment yield 6.99% 6.99% 0.01 %pts. 49 Earning asset yield 7.94% 8.15% (0.21)%pts. 50 Interest bearing deposits rate 4.35% 4.24% 0.11 %pts. 51a Borrowed funds rate - FHLB 5.56% 6.26% (0.70)%pts. 51b Borrowed funds rate - Trust Preferred & other 9.26% 9.84% (0.58)%pts. 52 Cost of all interest bearing funds 4.69% 4.73% (0.04)%pts. 53 Cost of funds (includes DDA) 4.09% 4.13% (0.04)%pts. 54 Cost of funds / earning assets 4.06% 4.08% (0.03)%pts. 55 Net interest margin (FTE) 3.88% 4.07% (0.18)%pts. 56 Full tax equivalent adjustment $5,265 $4,348 $918 21.1% ================================================================= ------------------------------------------------- Average Balances for Period ------------------------------------------------- 57 Loans $1,558,611 $1,454,656 $103,954 7.1% 58 Investments (excl. mkt val adj.) 1,032,650 915,256 117,394 12.8% 59 Earning assets 2,591,261 2,369,913 221,348 9.3% 60 Total assets 2,837,812 2,513,640 324,172 12.9% 61 Deposits 2,068,995 1,903,876 165,119 8.7% 62a Borrowings - FHLB 459,404 410,136 49,269 12.0% 62b Borrowings - Trust preferred & other 42,472 30,345 12,127 40.0% 63 Total equity $230,465 $168,170 $62,295 37.0% ================================================================= </TABLE>
<TABLE> <CAPTION> ----------------------------------------------------------------- 000's Omitted Three Months Ended ----------------------------------------------------------------- Line Sep 30, Jun 30, Change Change No. 2001 2001 Amount Percent <C> <S> <C> <C> <C> <C> ------------------------------------------------- Asset Quality Components ------------------------------------------------- 40 Nonaccruing loans $5,677 $5,291 $386 7.3% 41 90+ days delinquent 2,842 5,856 -3,013 -51.5% ----- ----- ------ ------ 42 Tot nonperforming loans $8,519 $11,147 -$2,628 -23.6% 43 Troubled debt restructurings $85 $110 -$25 -22.9% 44 Other real estate 1,835 1,938 -103 -5.3% ----- ----- ---- ----- 45 Tot nonperforming assets $10,439 $13,195 -$2,756 -20.9% 46 Net Charge-Offs $1,293 $1,531 -$238 -15.5% ================================================================= ------------------------------------------------- Components of Net Interest Margin (FTE) ------------------------------------------------- 47 Loan yield 8.30% 8.55% (0.25)%pts. 48 Investment yield 6.86% 6.94% (0.08)%pts. 49 Earning asset yield 7.73% 7.90% (0.17)%pts. 50 Interest bearing deposits rate 4.06% 4.41% (0.36)%pts. 51a Borrowed funds rate - FHLB 5.40% 5.39% 0.01 %pts. 51b Borrowed funds rate - Trust Preferred & other 8.80% 9.83% (1.03)%pts. 52 Cost of all interest bearing funds 4.45% 4.70% (0.26)%pts. 53 Cost of funds (includes DDA) 3.85% 4.13% (0.28)%pts. 54 Cost of funds / earning assets 3.79% 4.12% (0.33)%pts. 55 Net interest margin (FTE) 3.94% 3.78% 0.16 %pts. 56 Full tax equivalent adjustment $1,935 $1,791 $145 8.1% ============================================================= ------------------------------------------------- Average Balances for Period ------------------------------------------------- 57 Loans $1,567,842 $1,567,313 $529 0.0% 58 Investments (excl. mkt val adj.) 1,025,375 1,068,554 (43,179) -4.0% 59 Earning assets 2,593,217 2,635,867 (42,650) -1.6% 60 Total assets 2,835,584 2,899,474 (63,890) -2.2% 61 Deposits 2,076,446 2,083,160 (6,714) -0.3% 62a Borrowings - FHLB 413,518 516,856 (103,339) -20.0% 62b Borrowings - Trust preferred & other 66,502 30,246 36,256 119.9% 63 Total equity $238,159 $231,990 $6,169 2.7% ================================================================= </TABLE>
Management's Discussion and Analysis of Recent Developments Results of Operations Net income for the third quarter 2001 was $6.4 million, an increase of $142,000 or 2.3% from the same period last year. Earnings per share (diluted) for the quarter were $0.55, down $0.04 or 7.1% from third quarter 2000, reflective of a greater number of shares outstanding due to the January 26, 2001 acquisition of Citizens. For the first nine months of 2001, net income was $14.3 million, a decrease of 25% from the comparable period in the prior year, while earnings per share (diluted) were $1.23, a 31% decrease over the same period in 2000. Results of operations for the three months ended September 30, 2001 include $602,000 and $6.2 million, respectively, in net one-time acquisition expenses and related securities gains/losses associated with our May 11, 2001 merger with First Liberty and our planned acquisition of FleetBoston branches scheduled to close in fourth quarter 2001. When those nonrecurring expenses are excluded, operating earnings for third quarter 2001 were $6.8 million, an increase of 7.9% from the same period last year, while per share (diluted) results were $0.58, down $0.01 or 1.2%, over the same periods. Compared to the second quarter 2001, operating earnings and earnings per share were each up 37% in the three months ended September 30, 2001. For the first nine months of 2001, operating earnings were $18.0 million and $1.55 per share, reductions of 5.7% and 13.1%, respectively, over the comparable period in 2000. Cash operating earnings for the third quarter 2001 were $7.8 million, an increase of 10.8% from the same period last year. This performance measure excludes intangible amortization expenses, which is a non-cash expenditure, as well as net one-time acquisition costs and related securities gains/losses. Cash operating earnings per share (diluted) for the quarter ended September 30, 2001 were $0.67, as compared to $0.66 for the same quarter in 2000. Compared to second quarter 2001, cash operating earnings and cash operating earnings per share (diluted) were up 31% each in the third quarter of 2001. For the first nine months, cash operating earnings were $20.9 million, down 1.3% from the comparable period in 2000, while cash operating earnings per share (diluted) were $1.80, a decrease of 9.1% from the comparable prior year period. Noninterest income (excluding securities transactions) exceeded third quarter 2000 and second quarter 2001 by 6.9% and 5.1%, respectively, rising to $7.0 million. This improvement reflects higher revenues from the sale of financial services products, with the bulk of the increase compared to second quarter 2001 due to the Company's annual dividend from its creditor life insurance program through the New York State Bankers Association. The ratio of noninterest income to operating income was 21.3%, up slightly from the linked 2001 quarter. For the first nine months of the year, other income climbed 14.7% or $2.5 million to $19.6 million, particularly reflective of the Company's April 3, 2000 purchase of Elias Asset Management (EAM), growth in pension administration and broker-dealer fees, and higher service charge and deposit fees. Net interest income for third quarter 2001 rose by 6.6% over the same period last year to $23.8 million, an increase of $755,000 over second quarter 2001, the largest linked quarter increase in two years. This improvement reflects restoration of the net interest margin to the third quarter 2000 level of 3.94%, reversing a steady decrease since then. The rise in net interest margin was caused by an accelerated decrease in the Company's cost of funds due to downward deposit repricing consistent with lower financial market interest rates. For the first nine months of the year, net interest income rose by 3.3% over the 2000 period to $70.0 million, with the net interest margin averaging 3.88% versus 4.07% in the prior year. The Company's efficiency ratio, excluding intangible amortization, net securities gains/losses, and one-time acquisition-related expenses, decreased 3.5 percentage points from the second quarter to 55.6%, moving back toward the 54.3% level of one year ago. Excluding intangible amortization and acquisition expenses related to First Liberty and the planned FleetBoston branch
transaction, overhead was down by $404,000 or 2.2% from second quarter 2001 to $18.2 million. The bulk of this reduction reflects the additional impact of the First Liberty cost take-outs implemented in mid-second quarter. The efficiency ratio also improved because of increased noninterest income and better margins, which caused operating income (full tax-equivalent) to rise by 4.0% to $32.7 million. For the first nine months of the year, the Company's efficiency ratio was 57.3%, 2.6 percentage points higher than in 2000. This increase reflects growth in operating income (full tax-equivalent) of 6.4% to $94.9 million versus an 11.5% increase in noninterest expense, excluding intangible amortization and acquisition costs, to $54.4 million. Loan loss provision expense for third quarter 2001 decreased $729,000 or 32% from the same period last year to $1.6 million, mirroring a 40% decrease in net charge-offs. Compared to second quarter 2001, the provision rose $164,000 or 12%, increasing the loan loss reserve to a level sufficient to absorb the probable losses within the portfolio at September 30, 2001. Net charge-offs for the third quarter were $1.3 million, a 16% reduction from the linked quarter level. For the first nine months of the year, loan loss provision expense decreased $1.3 million or 23% to $4.3 million. Net charge-offs as a percent of average loans outstanding were 0.35% and 0.37% for the 2001 and 2000 periods, respectively. Provision for income taxes for third quarter 2001 versus the same quarter last year decreased $113,000 compared to a $29,000 increase in income before tax. This reflects an adjustment in the third quarter tax rate such that the year-to-date effective rate was reduced to 29.0% from the 30.4% rate through June 30, 2001. The reduction was caused by continued implementation of various tax strategies, principally increased purchases of tax-exempt municipal investments. For the nine months ended September 30, 2001, provision for taxes decreased $1.8 million or 23% from the comparable prior year period, while GAAP income before tax was lower by $6.6 million or 25%. The effective tax rate for the same 2000 period was 28.6%. Financial Condition Earning assets at September 30, 2001 were $2.6 billion, a decrease of 1.8% from 90 days earlier. The Bank's investment portfolio, which comprises 39% of earning assets, decreased $43 million during the period to $1.0 billion. This reduction occurred largely because the bank did not immediately replace $38 million in investment sales late in the quarter, the gain from which was used to offset the penalty to prepay $95 million in term borrowings in anticipation of the FleetBoston branch deposits. Compared to September 30, 2000, earning assets rose $154 million or 6.4% while investments increased $87 million or 9.4%. The purchase of Citizens Bank accounts for approximately $104 million and $46 million, respectively, of these increases. Influenced by the softening economy, loans decreased $4.1 million (-0.3%) during third quarter 2001 to $1.6 billion. The primary reasons for the decrease are a slowing in commercial loan demand (outstandings off $6.5 million), partially due to seasonal reduction in automobile floor plan financing, and run-off of residential portfolio mortgages (off $5.6 million). Consumer installment loans rose $8.0 million over the last 90 days because of growth in direct loans and elimination of run-off in indirect loans that had been occurring since September 30 of last year. Over the last twelve months, total loans have risen $68 million or 4.5%, including $54 million related to the company's acquisition of Citizens Bank in January. The allowance for loan losses was $21.1 million at September 30, 2001, up 5.2% from nine months earlier. Allowance for loan losses represents the amount available for probable credit losses in the Company's loan portfolio as estimated by management. Specific reserves are determined through review of impaired loans, nonperforming loans and certain performing loans designated as problems. General reserves are determined through a quarterly disciplined analysis of the portfolio. This analysis results in the identification and quantification of loss factors for each group of loans, adjusted for relevant environmental factors (e.g. industry, geographic, economic and political factors). The risk profile and experience of existing portfolio, along with growth, concentrations and management resources are also considered. Nonperforming loans were reduced by $2.6 million
during the third quarter to $8.5 million, reflective of $3.9 million in related commercial loans that had been 90 days delinquent being brought more current. Compared to year-end 2000, nonperformers are $1.1 million (15%) higher. The nonperforming loan/outstandings ratio at quarter end improved 17 basis points from the mid-year level to .54%, though remains five basis points higher than at December 30, 2000. The ratio of allowance for loan losses to nonperforming loans was 2.47 times based on a 1.35% ratio to loans outstanding as of September 30, 2001; both ratios improved over the last 90 days. At year-end 2000, the loan loss allowance was 1.32% of outstanding loans while the allowance equaled 2.71 times nonperformers. Mortgage loans originated and sold in the secondary market increased for the fourth straight quarter to $14.6 million as the refinancing pace quickened. Sales for the year-to-date were $32.1 million compared to $9.5 million for all of 2000, with mortgage banking and servicing fees up 44%. The serviced loan portfolio stood at $113 million as of quarter end, up 25% from one year earlier. Deposits rose $37 million (1.8%) over the 90 day period to $2.1 billion. Deposits of individuals, partnerships and corporations, generally considered a bank's core deposits, were up 2.5% while public fund deposits, which are more directly impacted by seasonal and capital market factors, decreased 2.1%. Total borrowings were reduced by $71 million during the third quarter to $458 million, which included the addition of approximately $50 million in floating rate Trust Preferred securities in July to finance the fourth quarter FleetBoston branch purchase. Compared to September 30, 2000, deposits rose $136 million or 7%, with approximately $86 million of this increase contributed by Citizens Bank. Borrowings were virtually unchanged from one year ago. Shareholders' equity rose $16.5 million during third quarter 2001 to $250.7 million as a result of earnings, net of dividends paid, and a $12.9 million increase in other comprehensive income. The latter reflects the positive impact of the current falling rate environment on the unrealized gain, net of taxes, on securities held for sale, which essentially represents the entirety of the company's investment portfolio. Compared to September 30, 2000, shareholders' equity has risen 38% or $69 million, $31 million of which reflects higher comprehensive income; in addition to earnings, net of dividends paid, approximately $25 million in capital was issued in the Citizens Bank purchase. MISCELLANEOUS ITEMS Liquidity Due to the potential for unexpected fluctuations in deposits and loans, active management of the Company's liquidity is critical. In order to respond to these circumstances, a variety of balance sheet funding sources is in place, largely using collateralized borrowings through the Federal Home Loan Bank, the Federal Reserve, and major brokerage firms. 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 relationship within 30 days between liquid assets and short-term liabilities which are vulnerable to nonreplacement; and second, a projection of subsequent cash availability over an additional 60 days. The minimum policy level of liquidity under the Basic Surplus/Deficit approach is 7.5% of total assets for both the 30 and 90-day time horizons. As of September 30, 2001, this ratio was 14.7% and 15.0%, respectively, excluding the Company's capacity to borrow additional funds from the Federal Home Loan Bank.
Effects of Inflation The financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles in the United States, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Virtually all of the assets and liabilities of the Company are monetary in nature. As a result, interest rate changes have a more significant impact on the Company's performance than general levels of inflation. 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 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; and (13) the success of the Company at managing the risks of the foregoing. The foregoing list of important factors is not exclusive. Such forward-looking statements speak only as of the date on which they are made and the Company does not undertake any obligation to update any forward-looking statement, whether written or oral, to reflect events or circumstances after the date on which such statement is made. If the Company does update or correct one or more forward-looking statements, investors and others should not conclude that the Company will make additional updates or corrections with respect thereto or with respect to other forward-looking statements.
SUPPLEMENTAL SCHEDULES A) The following table sets forth certain information concerning average interest-earning assets and interest-bearing liabilities and the yields and rates thereon. Interest income and resultant yield information in the tables are on a fully tax-equivalent basis using a marginal federal income tax rate of 35%. Averages are computed on daily average balances for each month in the period divided by the number of days in the period. Yields and amounts earned include loan fees. Nonaccrual loans have been included in interest earnings for purposes of these computations. <TABLE> <CAPTION> For the Nine Months Ended September 30, -------------------------------------------------------------------------------- 2001 2000 -------------------------------------------------------------------------------- (000's omitted except yields Avg. Amt. Of Avg. Avg. Amt. of Avg. and rates) Balance Interest Yield/Rate Balance Interest Yield/Rate Paid Paid ASSETS: -------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Interest-earning assets: Federal funds sold $6,108 $184 4.03% $10,242 $447 5.82% Time deposits in other banks 320 376 157.16% 3,471 168 6.47% Taxable investment securities 820,696 42,429 6.91% 727,059 38,444 7.06% Nontaxable investment securities 205,526 11,028 7.17% 174,484 8,823 6.75% Loans (net of unearned discount) 1,558,611 99,930 8.57% 1,454,656 96,708 8.88% ----------- --------------------- ------------ --------------------- Total interest-earning assets 2,591,261 $153,947 7.94% 2,369,913 $144,590 8.15% Noninterest earning assets Cash and due from banks 86,024 70,643 Premises and equipment 43,309 40,457 Other Assets 120,924 81,010 Less:allowance for loans (20,795) (19,394) Net unrealized gains/(losses) on 0 available-for-sale portfolio 17,089 (28,989) ---------- ---------- Total $2,837,812 $2,513,640 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing liabailities Savings deposits $644,566 $9,697 2.01% $623,716 $10,182 2.18% Time deposits 1,096,536 46,908 5.72% 982,409 40,809 5.55% Short-term borrowings 161,313 6,157 5.10% 323,530 15,488 6.39% Long-term borrowings 340,563 15,891 6.24% 116,951 5,981 6.83% ---------------------------------- ----------------------------------- Total interest-bearing 2,242,978 78,654 4.69% 2,046,606 72,460 4.73% liabilities Noninterest bearing liabilities Demand deposits 327,893 297,751 Other liabilities 36,476 1,113 Shareholders' equity 230,465 168,170 ----------- ------------ Total $2,837,812 $2,513,640 =========== ============ Net interest earnings $75,293 $72,130 ========== =========== Net yield on interest-earning assets 3.88% 4.07% =========== ========== Federal tax exemption on nontaxable $5,265 $4,348 investment securities included in interest income </TABLE>
B) The change in net interest income may be analyzed by segregating the volume and rate components of the changes in interest income and interest expense for each underlying category. The volume and rate components of interest income and interest expense for each underlying category are as follows: ---------------------------------------- YTD 2001 versus YTD 2000 ---------------------------------------- Increase (Decrease) Due to Change In (1) Net Volume Rate Change Interest earned on: Federal funds sold and securities purchased under agreements to resell ($149) ($113) ($262) Time deposits in other banks (385) 593 208 Taxable investment securities 5,299 (1,314) 3,985 Nontaxable investment securities 1,634 570 2,205 Loans (net of unearned discounts) 8,205 (4,984) 3,222 ----------------------------------- Total interest-earning assets (2) $15,059 ($5,702) $9,357 Interest paid on: Savings deposits $490 ($974) ($485) Time deposits 4,822 1,277 6,099 Short-term borrowings (6,652) (2,679) (9,330) Long-term borrowings 10,806 (895) 9,910 ----------------------------------- Total interest-bearing liabilities (2) $7,217 ($1,023) $6,194 ----------------------------------- Net interest earnings (2) $4,288 ($1,125) $3,163 =================================== (1) The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of change in each. (2) Changes due to volume and rate are computed from the respective changes in average balances and rates of the totals; they are not a summation of the changes of the components.
C) The following table sets forth information by category of noninterest expenses of the Company for the periods indicated. One-time acquisition costs in 2001, which were $631,000 and $6.117 million for third quarter and nine months, respectively, are identified as a separate line item. In addition, the comparisons reflect the purchase accounting treatment of The Citizens National Bank of Malone, acquired on January 26, 2001, and Elias Asset Management, acquired on April 3, 2000. <TABLE> <CAPTION> (000's omitted) Three Months Ended September 30, Nine Months Ended September 30, --------------------------------------- --------------------------------------- Change Change Change Change 2001 2000 Amount Percent 2001 2000 Amount Percent --------------------------------------- --------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Personnel expense $9,879 $9,261 $619 6.7% $31,580 $27,349 $4,231 15.5% Net occupancy expense 1,469 1,237 232 18.8% 4,585 3,761 824 21.9% Equipment expense 1,556 1,340 215 16.1% 4,473 3,898 575 14.7% Professional fees 1,222 599 623 104.0% 4,558 2,015 2,543 126.2% Data processing expense 1,711 1,368 342 25.0% 4,664 3,986 679 17.0% Intangible amortization 1,541 1,259 283 22.5% 4,542 3,610 933 25.8% Stationary and supplies 562 497 65 13.2% 1,667 1,264 404 31.9% Deposit insurance premiums 97 71 26 36.5% 255 209 45 21.7% Acquisition expense 631 0 631 0.0% 6,117 0 6,117 0.0% Disposition of branch properties 5 8 (3) -40.7% 20 22 (3) -11.3% Other 1,698 2,085 (386) -18.5% 2,630 6,320 (3,691) -58.4% --------------------------------------- --------------------------------------- Total $20,371 $17,724 $2,647 14.9% $65,092 $52,435 $12,657 24.1% Total operating expenses as a percentage of average assets 2.76% 2.79% -0.03% pts. 2.78% 2.79% -0.01% pts. Efficency ratio (excl one time items & intang. amort) 55.6% 54.3% 1.3% pts. 57.3% 54.7% 2.6% pts. </TABLE>
D) The amounts of the Company's loans outstanding (net of deferred loan fees or costs) at the dates indicated are shown in the following table according to type of loan: <TABLE> <CAPTION> As of September 30, (000's omitted) -------------------------------------------------- Change Change 2001 2000 Amount Percent -------------------------------------------------- <S> <C> <C> <C> <C> Real estate mortgages: Residential $ 599,079 $ 561,137 $ 37,942 6.8% Commercial loans secured by real estate 263,130 242,911 20,219 8.3% Farm 21,507 19,417 2,090 10.8% -------------------------------------------------- Total 883,716 823,465 60,251 7.3% Commercial, financial, and agricultural Agricultural 25,829 27,935 (2,106) -7.5% Commercial and financial 236,205 236,243 (38) 0.0% -------------------------------------------------- Total 262,034 264,178 (2,144) -0.8% Installment loans to individuals: Direct 136,022 156,741 (20,719) -13.2% Indirect 249,945 223,408 26,537 11.9% Student and other 896 1,997 (1,101) -55.1% -------------------------------------------------- Total 386,863 382,146 4,717 1.2% Other Loans 32,442 27,792 4,650 16.7% -------------------------------------------------- Gross Loans 1,565,055 1,497,581 67,474 4.5% -------------------------------------------------- Less: Unearned discounts 249 478 (229) -47.9% -------------------------------------------------- Net loans 1,564,806 1,497,103 67,703 4.5% Reserve for loan losses 21,083 20,107 976 4.9% -------------------------------------------------- Loans, net of loan loss reserve $ 1,543,723 $ 1,476,996 $ 66,727 4.5% ================================================== </TABLE> E) The following table reconciles the differences between the line of business loan breakdown defined in the Company's Annual Report and the loan breakdown in Table D, which is based on regulatory reporting definitions reflected in the OCC Call Report. <TABLE> <CAPTION> Line of Business as of September 30, 2001 ------------------------------------------------------- ----------- Consumer Consumer Consumer Business Total Direct Indirect Mortgages Lending Loans ----------- ------------ ------------ ----------- ----------- <S> <C> <C> <C> <C> <C> Regulatory Reporting Categories Loans secured by real estate Residential $123,360 $0 $440,076 $35,643 $599,079 Commercial 56 0 3,017 260,057 263,130 Farm 34 0 21,473 21,507 Agricultural loans 573 0 25,256 25,829 Commercial loans 6,437 9 229,759 236,205 Installment loans to individuals 133,386 249,944 104 3,429 386,863 Other loans 9,555 0 22,887 32,442 -------- -------- -------- -------- ---------- Total loans 273,401 249,944 443,206 598,504 1,565,055 Unearned Discounts (249) 0 0 0 (249) -------- -------- -------- -------- ---------- Net Loans $273,152 $249,944 $443,206 $598,504 $1,564,806 </TABLE>
F) The following table presents information concerning the aggregate amount of nonperforming assets: As of September 30, <TABLE> <CAPTION> (000's omitted) ------------------------------------------------ Change Change 2001 2000 Amount Percent ------------------------------------------------ <S> <C> <C> <C> <C> Loans accounted for on a nonaccrual basis 5,677 5,784 (107) -1.8% Accruing loans which are contractually past due 90 days or more as to principal or interest payments 2,842 1,804 1,038 57.5% ------ ----- ------ ---- Total nonperforming loans 8,519 7,588 931 12.3% Loans which are "troubled debt restructurings" as defined in Statement of Financial Accounting Standards No. 15 "Accounting by Debtors and Creditors for Troubled Debt 85 129 (44) (34.1)% Restructurings" Other real estate 1,835 1,191 644 54.1% ------ ----- ------ ---- Total nonperforming assets 10,439 8,908 1,531 17.2% Ratio of allowance for loan losses to period-end loans 1.35% 1.34% 0.01 % pts --- Ratio of allowance for loan losses to period-end nonperforming loans 247.5% 265.0% (17.5) % pts --- Ratio of allowance for loan losses to period-end nonperforming assets 202.0% 225.7% (23.7) % pts --- Ratio of nonperforming assets to period-end total loans and other real estate owned 0.67% 0.59% 0.08 % pts --- </TABLE> The impact of interest not recognized on nonaccrual loans, and interest income that would have been recorded if the restructured loans had been current in accordance with their original terms, was immaterial. The Company's policy is to place a loan on a nonaccrual status and recognize income on a cash basis when it is more than ninety days past due, except when in the opinion of management it is well secured and in the process of collection.
G) The following table summarizes loan balances at the end of each period indicated and the daily average amount of loans. Also summarized are changes in the allowance for possible loan losses arising from loans charged off and recoveries on loans previously charged off and additions to the allowance, which have been charged to expenses. <TABLE> <CAPTION> Three Months Ended September 30, Nine Months Ended September 30, (000's omitted) ---------------------------------------- ----------------------------------------- Change Change Change Change 2001 2000 Amount Percent 2001 2000 Amount Percent ---------------------------------------- ----------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Amount of loans outstanding at end of period (gross of unearned discount) 1,565,055 1,497,581 67,474 4.5% 1,565,055 1,497,581 67,474 4.5% Daily average amount of loans (net 1,567,842 1,485,595 82,247 5.5% 1,558,611 1,454,656 103,955 7.1% of unearned discount) Balance of allowance for loan losses at beginning of period 20,860 19,964 896 4.5% 20,035 18,528 1,507 8.1% Loans charged off: Commercial, financial, and agricultural 127 1,710 (1,583) -92.6% 1,015 2,211 (1,196) -54.1% Real estate construction 0 0 0 0.0% 0 0 0 0.0% Real estate mortgage 21 (45) 66 -146.7% 117 87 30 34.5% Installment 1,613 838 775 92.5% 4,443 2,659 1,784 67.1% ---------------------------------------- ----------------------------------------- Total loans charged off 1,761 2,503 (742) -29.6% 5,575 4,957 618 12.5% Recoveries of loans previously charged off: Commercial, financial, and agricultural 27 79 (52) (65.8)% 259 159 100 62.9% Real estate construction 0 0 0 0.0% 0 0 0 0.0% Real estate mortgage 4 28 (24) -85.7% 55 68 (13) -19.1% Installment 374 231 143 61.9% 1,202 725 477 65.8% ---------------------------------------- ----------------------------------------- Total recoveries 405 338 67 19.8% 1,516 952 564 59.2% Net loans charged off 1,356 2,165 (809) -37.4% 4,059 4,005 54 1.3% Additions to allowance charged to Expense 1,579 2,308 (729) -31.6% 4,320 5,584 (1,264) -22.6% Reserves on acquired loans (1) 0 0 0 0.0% 787 0 787 0.0% Balance at end of period 21,083 20,107 976 4.9% 21,083 20,107 976 4.9% Ratio of net chargeoffs to average loans Outstanding 0.33% 0.58% -0.24% ------ 0.35% 0.37% -0.02% ------ </TABLE> (1) These reserve additions are attributable to loans purchased from Citizens National Bank of Malone in association with the purchases of branch offices during 2001.
H) The following table sets forth information by category of noninterest income for the Company for the periods indicated. In addition, the comparisons reflect the acquisitions of The Citizens National Bank of Malone on January 26, 2001, and Elias Asset Management on April 3, 2000. <TABLE> <CAPTION> (000's omitted) Three Months Ended September 30, Nine Months Ended September 30, ---------------------------------- ------------------------------------- Change Change Change Change 2001 2000 Amount Percent 2001 2000 Amount Percent ---------------------------------- ------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Personal Trust 472 501 (29) -5.7% 1,408 1,530 (122) -8.0% EBT/BPA 1,031 727 304 41.8% 2,797 2,216 582 26.3% Elias Asset Management 904 1,105 (201) -18.2% 2,898 2,039 859 42.1% Insurance 718 550 168 30.6% 928 753 176 23.3% Other Investment Products 563 394 169 42.9% 1,641 1,320 321 24.3% ---------------------------------- ------------------------------------- Total Financial Services 3,689 3,277 411 12.5% 9,673 7,857 1,816 23.1% Total Electronic Banking 353 533 (180) -33.7% 1,053 1,394 (341) -24.4% Total Mortgage Banking 86 82 4 4.3% 364 253 111 43.8% Commercial Leasing 13 6 7 110.2% 34 32 2 4.6% ---------------------------------- ------------------------------------- Other Specialty Products 452 622 (169) -27.3% 1,451 1,679 (228) -13.6% Deposit Service Charges 1,064 952 112 11.8% 3,062 2,817 245 8.7% Overdraft Fees 1,310 1,015 295 29.0% 3,641 2,856 785 27.5% Commissions 439 634 (195) -30.7% 1,796 1,878 (81) -4.3% ---------------------------------- ------------------------------------- General Banking Services 2,813 2,601 212 8.1% 8,499 7,550 949 12.6% Miscellaneous Revenue 17 23 (6) -24.6% 4 32 (28) -87.4% ---------------------------------- ------------------------------------- Total Noninterest Income 6,971 6,523 448 6.9% 19,627 17,118 2,509 14.7% (excl Security Gains/Losses) Security Gains/Losses 29 0 29 0.0% (100) (160) 60 -37.6% Disposition of branch properties 0 0 0 0.0% 0 0 0 0.0% ---------------------------------- ------------------------------------- Total Noninterest Income 7,000 6,523 477 7.3% 19,527 16,958 2,569 15.1% Noninterest income as a percentage of operating income (excl securities gains/losses & disposal of branch properties) 21.3% 21.5% (0.2) %pts. 20.7% 19.2% 1.5 %pts. </TABLE>
I) The following table reconciles differences between the line of business noninterest income breakdown reflected in the Company's Annual Report and breakdown in Table H, which is based on regulatory reporting definitions reflected in the OCC Call Report. Noninterest Income for the nine months ended September 30, 2001 Regulatory Reporting Categories <TABLE> <CAPTION> Noninterest Income Fiduciary Other Service and Service Charges Commissions on Charges, Other Investment (000's omitted) Investment on Deposits Investment Commissions Operating Securities Services Products and Fees Income Gains Total <S> <C> <C> <C> <C> <C> <C> <C> Personal trust $1,408 $1,408 EBT/BPA 919 1,879 2,798 Elias Asset Management 2,898 2,898 Insurance 129 799 928 Other investment products 1,641 1,641 -------- -------- -------- -------- ------ -------- --------- Total financial services 2,327 0 4,668 2,678 0 0 9,673 Electronic banking 410 643 1,053 Mortgage banking 259 105 364 Commercial leasing 34 34 -------- -------- -------- -------- ------ -------- --------- Total specialty products 0 410 0 936 105 0 1,451 Deposit service charges 3,062 3,062 Overdraft fees 3,641 3,641 Commissions 1,796 1,796 -------- -------- -------- -------- ------ -------- --------- General banking services 0 6,703 0 1,796 0 0 8,499 Miscellaneous revenue 4 4 -------- -------- -------- -------- ------ -------- --------- Total noninterest income (excl security losses) $2,327 $7,113 $4,668 $5,410 $109 $0 $19,627 Security losses (100) (100) Disposition of branch 0 0 properties -------- -------- -------- -------- ------ -------- --------- Total noninterest income $2,327 $7,113 $4,668 $5,410 $109 ($100) $19,527 ======== ======== ======== ======== ====== ======== ========= </TABLE>
Item 3. Quantitative and Qualitative Disclosure about Market Risk Interest Rate Risk Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates/prices such as interest rates, foreign currency exchange rates, commodity prices, and equity prices. The Company's primary market risk exposure is interest rate risk. The ongoing monitoring and management of this risk, over both a short-term tactical and longer-term strategic time horizon, is an important component of the Company's asset/liability management process, which is governed by policies established by its Board of Directors and reviewed and approved annually. The Board of Directors delegates responsibility for carrying out the asset/liability management policies to the Asset/Liability Management Committee (ALCO). In this capacity, ALCO develops guidelines and strategies impacting the Company's asset/liability management activities based upon estimated market risk sensitivity, policy limits, and overall market interest rate-related level and trends. 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. The primary tool used by the Company in managing interest rate risk is income simulation. The analysis begins by measuring the impact of differences in maturity and repricing of each balance sheet position. Such work is further augmented by adjusting for prepayment and embedded option risk found naturally in certain asset and liability classes. Finally, balance sheet growth and funding expectations are added to the analysis in order to reflect the strategic initiatives set forth by the Company. Changes in net interest income are reviewed after subjecting the balance sheet to an array of Treasury yield curve possibilities, including an up or down 200 basis point (BP) movement in rates from current levels. While such an aggressive movement in rates provides management with good insight as to how the Company's net interest income may perform under extreme market conditions, results from a more modest shift in interest rates are used as a basis to conduct day-to-day business decisions. The following reflects the Company's one-year net interest income sensitivity based on asset and liability levels on September 30, 2001, assuming no growth in the balance sheet, and assuming a 200 basis point instantaneous rate change in the prime rate, federal funds rate and the entire Treasury yield curve. Regulatory Model - --------------------------------------------------------------------- Net Interest Income - --------------------------------------------------------------------- Rate Change Dollar Change Percent of Flat Rate - --------------------------------------------------------------------- In Basis Points (in 000's) Net Interest Income - --------------------------------------------------------------------- - --------------------------------------------------------------------- +200 bp $2,753 2.7% ------- ------ ---- - --------------------------------------------------------------------- -200 bp $(1,736) -1.7% ------- -------- ----- - --------------------------------------------------------------------- - ---------------------------------------------------------------------
A second simulation was performed based on what the Company believes to be conservative levels of balance sheet growth along with 200 BP movements over a twelve month period in the prime rate, federal funds rate, and a Treasury yield curve moving closer to historical spreads to fed funds. Management Model - --------------------------------------------------------------------- Net Interest Income - --------------------------------------------------------------------- Rate Change Dollar Change Percent of Flat Rate - --------------------------------------------------------------------- In Basis Points (in 000's) Net Interest Income - --------------------------------------------------------------------- - --------------------------------------------------------------------- +200 bp $3,809 3.7% ------- ------ ---- - --------------------------------------------------------------------- -200 bp $(786) -.8% ------- ------ ---- - --------------------------------------------------------------------- - --------------------------------------------------------------------- The preceding interest rate risk analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including: the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows, and others. 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.
Part II. Other Information Item 1. Legal Proceedings. Not Applicable Item 2. Changes in Securities. Not Applicable Item 3. Defaults Upon Senior Securities. Not Applicable. Item 4. Submission of Matters to a Vote of Securities Holders. The annual meeting of stockholders of the Company was held on May 2, 2001 (the "Annual Meeting"). Holders of Common Stock were entitled to elect three directors. On all matters that came before the Annual Meeting, holders of Common Stock were entitled to one vote for each share held. Proxies for 6,934,175 of the 7,960,923 shares of Common Stock entitled to vote were received in connection with the Annual Meeting. The following table sets forth the names of the three persons elected at the Annual Meeting to serve as directors until the 2004 annual meeting of stockholders of the Company, and the number of votes cast for, withheld and non-votes with respect to each person. Name of Director For Withheld Non-Votes ---------------- --- -------- --------- John M. Burgess 6,546,087 388,087 1 Nicholas A. DiCerbo 6,544,570 389,603 2 James A. Gabriel 6,546,236 387,937 2 Other directors whose terms of office continued after the Annual Meeting are as follows: Sanford A. Belden, Paul M. Cantwell, Jr., William M. Dempsey, Lee T. Hirschey, David C. Patterson, Peter A. Sabia and William N. Sloan. The following table sets forth the other proposal submitted to the stockholders for approval at the Annual Meeting and the tabulation of the votes with respect to such proposal. Proposal For Against Abstentions Non-Votes -------- --- ------- ----------- --------- Approval of an amendment to 3,506,737 1,766,476 269,891 1,391,071 the Company's 1994 Long-Term Incentive Compensation Program Item 5. Other Information. Not Applicable. Item 6. Exhibits and Reports on Form 8-K a) Exhibits required by Item 601 of Regulation S-K: b) Reports on Form 8-K: Filed May 29, 2001 and amended on July 25, 2001, to report the consummation of the merger between CBSI and First Liberty Bank Corp. Filed August 31, 2001 and amended on October 24, 2001, to report the restated Consolidated Financial Statements and Management's Discussion and Analysis.
SIGNATURES Pursuant to the requirements of The Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Community Bank System, Inc. Date: November 14, 2001 /s/ Sanford A. Belden ----------------------------------- Sanford A. Belden, President and Chief Executive Officer Date: November 14, 2001 /s/ David G. Wallace ----------------------------------- David G. Wallace, Treasurer Chief Financial Officer