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 six months ended June 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 - 11,562,325 shares outstanding as of August 9, 2001
INDEX COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES PART I. INFORMATION Item 1. Financial Statements (Unaudited) Consolidated balance sheets -- June 30, 2001, December 31, 2000 and June 30, 2000 Consolidated statements of income -- Three and six months ended June 30 2001 and 2000 Consolidated statements of cash flows -- Six months ended June 30, 2001 and 2000 Consolidated statements of comprehensive income -- Six months ended June 30, 2001 and 2000 Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations Item 3. Quantitative 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 2
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CONDITION <TABLE> <CAPTION> June 30, December 31, June 30, 2001 2000 2000 - ------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> ASSETS Cash and due from banks $65,263,677 $76,455,526 $82,729,944 Federal funds sold 0 0 0 - ------------------------------------------------------------------------------------------------------------------------ TOTAL CASH AND CASH EQUIVALENTS 65,263,677 76,455,526 82,729,944 Investment securities U.S. Treasury 2,104,250 0 0 U.S. Government agencies and corporations 262,098,792 300,714,507 283,700,791 States and political subdivisions 232,044,906 169,460,694 163,426,034 Mortgage-backed securities 481,807,688 371,744,660 374,462,332 Federal Reserve Bank 3,322,607 2,536,250 2,536,250 Other securities 72,645,281 74,846,314 66,121,234 ---------------------------------------------------- Investment securities at cost 1,054,023,524 919,302,425 890,246,641 Market value adjustment on available for sale securities 18,125,355 10,277,605 (26,455,470) - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENT SECURITIES 1,072,148,879 929,580,030 863,791,171 Loans 1,569,375,182 1,516,285,897 1,498,348,901 Less: Unearned discount 298,795 408,869 1,229,888 Reserve for possible loan losses 20,860,221 20,035,156 19,964,300 - ------------------------------------------------------------------------------------------------------------------------ NET LOANS 1,548,216,166 1,495,841,872 1,477,154,713 Bank premises and equipment 43,019,740 40,941,167 40,287,414 Accrued interest receivable 22,532,882 21,872,851 19,662,660 Intangible assets 68,551,900 55,234,407 53,701,227 Other assets 31,956,059 30,746,672 38,852,184 - ------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $2,851,689,303 $2,650,672,525 $2,576,179,313 ======================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits Noninterest bearing $322,055,719 $316,162,626 $304,833,620 Interest bearing 1,729,328,952 1,632,395,284 1,586,864,339 - ------------------------------------------------------------------------------------------------------------------------ TOTAL DEPOSITS 2,051,384,671 1,948,557,910 1,891,697,959 Federal funds purchased 25,500,000 48,730,000 85,900,000 Short term borrowings 121,100,000 211,100,000 276,100,000 Long term borrowings 352,000,000 180,465,999 95,000,000 Company obligated mandatorily redeemable preferred securities of subsidiary, Community Capital Trust I holding solely junior subordinated debentures of the Company 29,827,313 29,823,938 29,820,563 Accrued interest and other liabilities 37,706,038 30,203,531 24,878,051 - ------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES 2,617,518,022 2,448,881,378 2,403,396,573 - ------------------------------------------------------------------------------------------------------------------------ Shareholders' equity: Common stock (11,548,381; 10,559,897; 10,559,497) 11,548,381 11,207,997 11,209,154 shares outstanding) Surplus 46,269,570 37,907,095 37,900,139 Undivided profits 165,808,017 163,916,756 156,981,905 Accumulated other comprehensive income 10,781,726 5,966,481 (16,096,551) Treasury stock (0; 682,159; 682,159 shares) 0 (17,202,457) (17,202,457) Shares issued under employee stock plan - unearned (236,413) (4,725) (9,450) - ------------------------------------------------------------------------------------------------------------------------ TOTAL SHAREHOLDERS' EQUITY 234,171,281 201,791,147 172,782,740 - ------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,851,689,303 $2,650,672,525 $2,576,179,313 ======================================================================================================================== </TABLE> See notes to consolidated financial statements 3
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> INTEREST INCOME: Interest and fees on loans $33,275,301 $31,952,983 $66,773,146 $62,789,235 Interest and dividends on investments: U.S. Treasury 45,725 33,244 84,318 108,569 U.S. Government agencies and corporations 4,624,590 4,844,611 9,892,767 9,282,154 States and political subdivisions 2,682,886 1,999,926 4,936,608 4,035,602 Mortgage-backed securities 8,092,686 6,542,133 15,461,521 13,133,002 Other securities 1,219,426 1,123,682 2,555,728 2,244,738 Interest on federal funds sold 9,135 31,340 13,212 332,930 Interest on deposits at other banks 186,766 11,720 373,995 154,225 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest income 50,136,515 46,539,639 100,091,295 92,080,455 - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST EXPENSE: Interest on deposits Savings 3,314,498 3,341,468 6,661,208 6,699,209 Time 16,052,197 13,459,032 32,254,605 25,972,931 Interest on federal funds purchased and term borrowings 6,956,958 6,332,388 13,489,275 12,566,308 Interest on mandatorily redeemable capital securities of subsidiary 732,937 732,937 1,465,875 1,465,875 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest expense 27,056,590 23,865,825 53,870,963 46,704,323 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income 23,079,925 22,673,814 46,220,332 45,376,132 Less: Provision for possible loan losses 1,415,000 1,886,710 2,741,000 3,276,000 - ------------------------------------------------------------------------------------------------------------------------------------ Net Interest income after provision for loan losses 21,664,925 20,787,104 43,479,332 42,100,132 - ------------------------------------------------------------------------------------------------------------------------------------ OTHER INCOME: Fiduciary and investment services 695,924 780,379 1,525,728 1,596,148 Service charges on deposit accounts 2,453,433 2,068,525 4,582,441 3,946,827 Commissions on investment products 1,645,854 1,483,958 3,170,034 1,879,289 Other service charges, commissions and fees 1,768,296 1,578,862 3,308,399 3,115,191 Miscellaneous income 66,432 8,851 69,079 58,205 Investment security gains (losses) (138,318) (45) (128,338) (159,675) - ------------------------------------------------------------------------------------------------------------------------------------ Total other income 6,491,621 5,920,530 12,527,343 10,435,985 - ------------------------------------------------------------------------------------------------------------------------------------ OTHER EXPENSES: Salaries and employee benefits 10,450,658 9,223,744 20,542,734 18,037,672 Occupancy expense, net 1,511,868 1,214,701 3,090,339 2,524,303 Equipment and furniture expense 1,543,430 1,282,402 2,898,400 2,557,260 Amortization of intangible assets 1,541,431 1,213,507 3,000,986 2,351,044 Acquisition expenses 4,635,530 0 5,486,778 0 Other 5,122,584 4,813,005 9,702,030 9,173,833 - ------------------------------------------------------------------------------------------------------------------------------------ Total other expenses 24,805,501 17,747,359 44,721,267 34,644,112 - ------------------------------------------------------------------------------------------------------------------------------------ Income before income taxes and extraordinary item 3,351,042 8,960,274 11,285,404 17,892,004 Income taxes 1,240,825 2,564,298 3,426,164 5,099,048 - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $2,110,217 $6,395,976 $7,859,240 $12,792,956 ==================================================================================================================================== EARNINGS PER SHARE - BASIC $0.18 $0.60 $0.69 $1.20 - DILUTED $0.18 $0.59 $0.68 $1.19 ==================================================================================================================================== </TABLE> See notes to consolidated financial statements 4
COMMUNITY BANK SYSTEM, INC. CONSOLIDATED STATEMENT OF CASH FLOWS <TABLE> <CAPTION> For Six Months Ended June 30, 2001 2000 - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Operating Activities: Net income $ 7,859,240 $ 12,792,956 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 2,439,770 2,157,684 Amortization of intangible assets 3,000,986 2,296,923 Net amortization of security premiums and discounts 894,284 (75,038) Amortization of discount on loans (110,074) (166,472) Provision for loan losses 2,741,000 3,276,000 Provision for deferred taxes (895,374) (973,557) (Gain)/loss on sale of investment securities 128,338 159,281 (Gain)/loss on sale of loans and other assets (66,004) (52,015) Change in interest receivable (660,031) (2,428,145) Change in other assets and other liabilities 3,813,467 (102,003) Change in unearned loan fees and costs (230,080) (494,086) - ----------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 18,915,523 16,391,528 - ----------------------------------------------------------------------------------------------------------------------- Investing Activities: Proceeds from sales of investment securities 58,125,562 16,863,958 Proceeds from maturities of held to maturity investment securities 2,414,786 1,721,352 Proceeds from maturities of available for sale investment securities 133,761,027 25,866,895 Purchases of held to maturity investment securities (5,435,389) (1,914,690) Purchases of available for sale investment securities (324,609,708) (87,389,759) Net change in loans outstanding (55,479,819) (72,617,262) Premium paid on acquisition of business (16,380,926) (6,379,853) Capital expenditures (4,534,910) (2,467,607) Proceeds from sales of property and equipment 0 442,963 Other investing activities 0 0 - ----------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (212,139,377) (125,874,003) - ----------------------------------------------------------------------------------------------------------------------- Financing Activities: Net change in demand deposits, NOW accounts, and savings accounts 44,341,929 7,761,538 Net change in certificates of deposit 58,484,832 39,410,493 Net change in federal funds purchased (23,230,000) 53,450,000 Net change in term borrowings 81,534,001 (27,950,000) Issuance (retirement) of common stock 8,633,189 25,333 Treasury stock (purchased)/redeemed 17,006,288 (2,287,500) Cash dividends (4,738,234) (4,947,102) - ----------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 182,032,005 65,462,762 - ----------------------------------------------------------------------------------------------------------------------- Change in cash and cash equivalents (11,191,849) (44,019,713) Cash and cash equivalents at beginning of year 76,455,526 126,749,657 - ----------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD 65,263,677 82,729,944 ======================================================================================================================= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest $ 50,318,625 $ 43,198,163 ======================================================================================================================= Cash paid for income taxes $ 4,321,538 $ 6,389,606 ======================================================================================================================= SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES: Dividends declared and unpaid $ 3,117,979 $ 2,461,315 Gross change in unrealized gains and (losses) on available-for-sale securities $ 7,847,750 $ 2,389,140 Common stock issued to effect acquisition (Note A) including treasury stock of 682,159 shares $ 25,228,000 $ 0 ======================================================================================================================= </TABLE> See notes to consolidated financial statements 5
COMMUNITY BANK SYSTEM, INC. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME <TABLE> <CAPTION> For Six Months Ended June 30, 2001 2000 - ------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Other comprehensive income (loss), before tax: Unrealized gains on securities: Change in unrealized holding gains (losses) arising during period $ 7,719,412 $ 2,229,465 Less: Reclassification adjustment for gains included in net income 128,338 159,675 - ------------------------------------------------------------------------------------------------------------------------ Other comprehensive income (loss), before tax 7,847,750 2,389,140 Income tax benefit related to items of other comprehensive income (3,032,505) (977,158) - ------------------------------------------------------------------------------------------------------------------------ Other comprehensive income (loss), net of tax 4,815,245 1,411,982 Plus: Net income 7,859,240 12,792,956 - ------------------------------------------------------------------------------------------------------------------------ Comprehensive income $ 12,674,485 $ 14,204,938 ======================================================================================================================== </TABLE> See notes to consolidated financial statements 6
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 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 six-month period ending June 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 June 30, 2001 were $32,011,763 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. 7
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. The results of operations for the separate companies and the combined amounts presented in the consolidated financial statements for the three months ended March 31, 2001, prior to the merger of the two companies, is as follows: <TABLE> <CAPTION> 1ST QTR 2001 ------------------------------------------------------------- 000's Omitted Community Bank First Liberty Line System, Inc. Bank Corp., Inc. Pro Forma No. Actual Actual Actual ---------------------------------------- ------------------------------------------------------------- Earnings ---------------------------------------- <S> <C> <C> <C> <C> 1 Net interest income $18,483 $4,654 $23,137 2 Loan loss provision 1,236 90 1,326 3 Net interest income after 17,247 4,564 21,811 provision for loan losses 4 Investment security 10 0 10 gain (loss) 5 Other income 5,404 625 6,029 6a Other expense 14,126 3,481 17,607 6b Acquisition expense 799 52 851 7 Intangible amortization 1,365 95 1,460 8 Inc before inc tax 6,371 1,561 7,932 9 Income tax 1,911 274 2,185 10a Net income - GAAP $4,459 $1,287 $5,747 10b Net income - GAAP Operating $4,888 $1,318 $6,206 10c Net income - Cash $5,334 $1,344 $6,677 10d Net income - Cash Operating $5,763 $1,374 $7,137 Earnings per share 11a Basic $0.58 $0.36 $0.51 11b Diluted - GAAP $0.57 $0.36 $0.50 11c Diluted - GAAP Operating $0.63 $0.37 $0.54 11d Diluted - Cash $0.68 $0.37 $0.58 11e Diluted - Cash Operating $0.74 $0.38 $0.62 ---------------------------------------- ======================================================== Balances at Period End ---------------------------------------- 12 Loans $1,151,957 $420,726 $1,572,683 13 Investments (excl. mkt val adj) 919,317 152,422 1,071,739 14 Earning assets 2,071,274 573,148 2,644,422 15 Loan loss reserve 15,401 5,516 20,917 16a Intangible assets - Core deposits 5,727 4,190 9,917 16b Intangible assets - Goodwill 60,801 0 60,801 17 Total assets 2,278,401 643,698 2,922,099 18 Deposits 1,599,985 514,783 2,114,768 19a Borrowings - FHLB 441,100 60,000 501,100 19b Borrowings - Trust Preferred & other 29,826 437 30,263 20 Total equity $ 171,934 $ 64,473 $ 236,407 </TABLE> 8
<TABLE> <CAPTION> 1ST QTR 2001 ------------------------------------------------------------ 000's Omitted Community Bank First Liberty Line System, Inc. Bank Corp., Inc. Pro Forma No. Actual Actual Actual ------------------------------------------------------------ ---------------------------------------- Profitability ---------------------------------------- <S> <C> <C> <C> <C> 21 Return on assets 0.84% 0.82% 0.84% 22 Return on equity 11.43% 8.15% 10.53% 22a Return on equity - operating 12.64% 8.35% 11.36% 23 Tangible return on assets 1.01% 0.86% 0.97% 24 Tangible return on equity 13.68% 8.51% 12.23% 24a Tangible return on equity - operating 14.88% 8.70% 13.07% 25 Net interest margin (FTE) 4.09% 3.45% 3.95% 26 Non interest income/ 21.4% 11.2% 19.6% operating income (excl sec gains & branch disp) 27 Efficiency ratio 56.0% 62.6% 60.1% (excl acquis. Exp., 1-time items & intangible amortization) ---------------------------------------- ============================================================ Capital ---------------------------------------- 28 Tier I leverage ratio 6.00% 9.59% 6.83% 29 Accum. other comp. Income $11,666 $384 $12,050 Common shares outstanding 30a Weighted average 7,855 3,600 11,455 30b Period end 7,979 3,566 11,545 31 Cash dividends declared per common share $ 0.27 $0.11 $0.27 32 Book value $ 21.55 $18.08 $20.48 33 Tangible book value $ 13.21 $16.91 $14.35 ---------------------------------------- ============================================================ Asset Quality Ratios ---------------------------------------- 34 Loan loss reserve / 1.34% 1.31% 1.33% loans outstanding 35 Nonperforming loans / 0.91% 0.47% 0.67% loans outstanding 36 Loan loss reserve / 146% 280% 199% nonperforming loans 37 Net charge-offs / 0.44% 0.00% 0.32% average loans 38 Loan loss provision / 100% 1800% 108% net charge-offs 39 Nonperforming assets / 1.03% 0.53% 0.77% loans outstanding + OREO ---------------------------------------- Asset Quality Components ---------------------------------------- 40 Nonaccruing loans $ 5,807 $1,664 $ 7,471 41 90+ days delinquent 4,726 306 5,032 ------- ------ ------- 42 Tot nonperforming loans $10,533 $1,970 $12,503 43 Troubled debt restructurings $103 $0 $103 44 Other real estate 1,210 266 1,476 ------- ------ ------- 45 Tot nonperforming assets $11,846 $2,236 $14,082 46 Net Charge-Offs $ 1,236 $ 5 $ 1,241 </TABLE> 9
<TABLE> <CAPTION> 1ST QTR 2001 ----------------------------------------------------- 000's Omitted Community Bank First Liberty Line System, Inc. Bank Corp., Inc. Pro Forma No. Actual Actual Actual ----------------------------------------------------- ----------------------------------------------- Components of Net Interest Margin (FTE) ----------------------------------------------- <S> <C> <C> <C> <C> 47 Loan yield 9.12% 7.96% 8.81% 48 Investment yield 7.38% 6.89% 7.30% 49 Earning asset yield 8.38% 7.66% 8.22% 50 Interest bearing deposits rate 4.55% 4.92% 4.64% 51a Borrowed funds rate - FHLB 5.90% 5.93% 5.90% 51b Borrowed funds rate - Trust Preferred & other 9.83% 10.06% 9.82% 52 Cost of all interest bearing funds 4.95% 5.05% 4.92% 53 Cost of funds (includes DDA) 4.30% 4.32% 4.31% 54 Cost of funds / earning assets 4.29% 4.22% 4.27% 55 Net interest margin (FTE) 4.09% 3.45% 3.95% 56 Full tax equivalent adjustment $1,343 $283 $1,626 ----------------------------------------------- Average Balances for Period ----------------------------------------------- 57 Loans $1,135,742 $418,631 $1,554,373 58 Investments (excl. mkt val adj.) 828,407 161,928 990,335 59 Earning assets 1,964,149 580,559 2,544,708 60 Total assets 2,145,661 632,930 2,778,591 61 Deposits 1,542,050 505,108 2,047,158 62a Borrowings - FHLB 387,498 60,735 448,232 62b Borrowings - Trust preferred & other 29,825 437 30,262 63 Total equity $ 158,160 $ 64,044 $ 222,204 </TABLE> 10
NOTE B - SUBSEQUENT EVENTS 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 $484 million and loans of approximately $243 million, from FleetBoston Financial (NYSE: FBF). The transaction is subject to regulatory approval and is scheduled to close in early fourth quarter, 2001. The branches, which are in the Southwestern and Finger Lakes regions of New York, will be merged into Community Bank's branch network. 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 current implied coupon yield is 7.58%. 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 current implied coupon yield is 7.22%. 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. 11
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 six months ended June 30, 2001 and 2000. <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------ Per share For six months ended June 30, 2001 Income Shares amount - ------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> Net Income 7,859,240 Basic EPS 7,859,240 11,428,945 $ 0.69 Effect of dilutive securities: Stock options 0 158,746 --------------------------------- DILUTED EPS $7,859,240 11,587,691 $ 0.68 ================================================================================================================== - ------------------------------------------------------------------------------------------------------------------ Per share For six months ended June 30, 2000 Income Shares amount - ------------------------------------------------------------------------------------------------------------------ NET INCOME Net Income 12,792,956 Basic EPS 12,792,956 10,679,947 $ 1.20 Effect of dilutive securities: Stock options 0 79,623 --------------------------------- DILUTED EPS $12,792,956 10,759,570 $ 1.19 ================================================================================================================== - ------------------------------------------------------------------------------------------------------------------ Per share For three months ended June 30, 2001 Income Shares amount - ------------------------------------------------------------------------------------------------------------------ Net Income 2,110,217 Basic EPS 2,110,217 11,574,282 $ 0.18 Effect of dilutive securities: Stock options 0 157,530 --------------------------------- DILUTED EPS $2,110,217 11,731,812 $ 0.18 ================================================================================================================== - ------------------------------------------------------------------------------------------------------------------ Per share For three months ended June 30, 2000 Income Shares amount - ------------------------------------------------------------------------------------------------------------------ NET INCOME Net Income 6,395,976 Basic EPS 6,395,976 10,674,329 $ 0.60 Effect of dilutive securities: Stock options 0 83,349 --------------------------------- DILUTED EPS $6,395,976 10,757,678 $ 0.59 ================================================================================================================== </TABLE> 12
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 six months ended June 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. 13
COMMUNITY BANK SYSTEM, INC. SUMMARY OF OPERATIONS EARNINGS AND BALANCE SHEET RECAP 2ND QUARTER 2001 AND FULL YEAR COMPARISONS <TABLE> <CAPTION> 000s Omitted Three Months Ended -------------------------------------------------- Line --------------- Jun 30, Jun 30, Change Change No. Earnings 2001 2000 Amount Percent --- --------------- -------------------------------------------------- <S> <C> <C> <C> <C> <C> 1 Net interest income $23,080 $22,674 $406 1.8% 2 Loan loss provision 1,415 1,887 (472) -25.0% 3 Net interest income after 21,665 20,787 878 4.2% provision for loan losses 4 Investment security gain (loss) (138) 0 (138) 0.0% 5 Other income 6,630 5,921 709 12.0% 6a Other expense 18,629 16,533 2,096 12.7% 6b Acquisition related expense 4,636 0 4,636 0.0% 7 Intangible amortization 1,541 1,214 327 26.9% 8 Inc before inc tax 3,351 8,961 (5,610) -62.6% 9 Income tax 1,241 2,564 (1,323) -51.6% 10a Net income - GAAP $2,110 $6,397 ($4,287) -67.0% 10b Net income - GAAP Operating $4,950 $6,396 ($1,446) -22.6% 10c Net income - Cash $3,118 $7,115 ($3,997) -56.2% 10d Net income - Cash Operating $5,957 $7,115 ($1,158) -16.3% Earnings per share 11a Basic $0.18 $0.60 ($0.42) -70.0% 11b Diluted - GAAP $0.18 $0.59 ($0.41) -69.5% 11c Diluted - GAAP Operating $0.42 $0.59 ($0.17) -28.8% 11d Diluted - Cash $0.27 $0.66 ($0.39) -59.1% 11e Diluted - Cash Operating $0.51 $0.66 ($0.15) -23.0% ---------------------------------- ================================================== Balances At Period End ---------------------------------- 12 Loans $1,569,076 $1,497,119 $71,957 4.8% 13 Investments (excl. mkt val adj) 1,054,382 890,772 163,610 18.4% 14 Earning assets 2,623,458 2,387,891 235,567 9.9% 15 Loan loss reserve 20,860 19,964 896 4.5% 16a Intangible assets - Core Deposits 9,485 7,117 2,368 33.3% 16b Intangible assets - Goodwill 59,066 46,585 12,481 26.8% 17 Total assets 2,851,689 2,576,179 275,510 10.7% 18 Deposits 2,051,385 1,891,698 159,687 8.4% 19a Borrowings - FHLB 498,600 457,000 41,600 9.1% 19b Borrowings - Trust Preferred & other 30,237 30,337 (100) -0.3% 20 Total equity $234,171 $172,783 $61,388 35.5% <CAPTION> 000s Omitted Six Months Ended -------------------------------------------------- Line --------------- Jun 30, Jun 30, Change Change No. Earnings 2001 2000 Amount Percent --- --------------- -------------------------------------------------- <S> <C> <C> <C> <C> <C> 1 Net interest income $46,220 $45,376 $844 1.9% 2 Loan loss provision 2,741 3,276 (535) -16.3% 3 Net interest income after 43,479 42,100 1,379 3.3% provision for loan losses 4 Investment security gain (loss) (128) (160) 32 0.0% 5 Other income 12,655 10,596 2,059 19.4% 6a Other expense 36,233 32,293 3,940 12.2% 6b Acquisition related expense 5,487 0 5,487 0.0% 7 Intangible amortization 3,001 2,351 650 27.6% 8 Inc before inc tax 11,285 17,892 (6,607) -36.9% 9 Income tax 3,426 5,099 (1,673) -32.8% 10a Net income - GAAP $7,859 $12,793 ($4,934) -38.6% 10b Net income - GAAP Operating $11,199 $12,887 ($1,688) -13.1% 10c Net income - Cash $9,798 $14,185 ($4,387) -30.9% 10d Net income - Cash Operating $13,137 $14,280 ($1,143) -8.0% Earnings per share 11a Basic $0.69 $1.20 ($0.51) -42.5% 11b Diluted - GAAP $0.68 $1.19 ($0.51) -42.9% 11c Diluted - GAAP Operating $0.97 $1.19 ($0.23) -19.1% 11d Diluted - Cash $0.85 $1.31 ($0.46) -35.1% 11e Diluted - Cash Operating $1.13 $1.32 ($0.19) -14.3% ---------------------------------- ================================================= Balances At Period End ---------------------------------- 12 Loans $1,569,076 $1,497,119 $71,957 4.8% 13 Investments (excl. mkt val adj) 1,054,382 890,772 163,610 18.4% 14 Earning assets 2,623,458 2,387,891 235,567 9.9% 15 Loan loss reserve 20,860 19,964 896 4.5% 16a Intangible assets - Core Deposits 9,485 7,117 2,368 33.3% 16b Intangible assets - Goodwill 59,066 46,585 12,481 26.8% 17 Total assets 2,851,689 2,576,179 275,510 10.7% 18 Deposits 2,051,385 1,891,698 159,687 8.4% 19a Borrowings - FHLB 498,600 457,000 41,600 9.1% 19b Borrowings - Trust Preferred & other 30,237 30,337 (100) -0.3% 20 Total equity $234,171 $172,783 $61,388 35.5% <CAPTION> 000s Omitted Three Months Ended -------------------------------------------------- Line --------------- Jun 30, Mar 31, Change Change No. Earnings 2001 2000 Amount Percent --- --------------- -------------------------------------------------- <S> <C> <C> <C> <C> <C> 1 Net interest income $23,080 $23,137 ($57) -0.2% 2 Loan loss provision 1,415 1,326 89 6.7% 3 Net interest income after 21,665 21,811 (146) -0.7% provision for loan losses 4 Investment security gain (loss) (138) 10 (148) 0.0% 5 Other income 6,630 6,029 601 10.0% 6a Other expense 18,629 17,607 1,022 5.8% 6b Acquisition related expense 4,636 851 3,785 444.8% 7 Intangible amortization 1,541 1,460 81 5.5% 8 Inc before inc tax 3,351 7,932 (4,581) -57.8% 9 Income tax 1,241 2,185 (944) -43.2% 10a Net income - GAAP $2,110 $5,747 ($3,637) -63.3% 10b Net income - GAAP Operating $4,950 $6,206 ($1,256) -20.2% 10c Net income - Cash $3,118 $6,677 ($3,559) -53.3% 10d Net income - Cash Operating $5,957 $7,137 ($1,180) -16.5% Earnings per share 11a Basic $0.18 $0.51 ($0.33) -64.7% 11b Diluted - GAAP $0.18 $0.50 ($0.32) -64.0% 11c Diluted - GAAP Operating $0.42 $0.54 ($0.12) -22.1% 11d Diluted - Cash $0.27 $0.58 ($0.31) -53.4% 11e Diluted - Cash Operating $0.51 $0.62 ($0.12) -18.5% ---------------------------------- ================================================== Balances At Period End ---------------------------------- 12 Loans $1,569,076 $1,572,683 ($3,607) -0.2% 13 Investments (excl. mkt val adj) 1,054,382 1,071,739 (17,357) -1.6% 14 Earning assets 2,623,458 2,644,422 (20,964) -0.8% 15 Loan loss reserve 20,860 20,917 (57) -0.3% 16a Intangible assets - Core Deposits 9,485 9,917 (432) -4.4% 16b Intangible assets - Goodwill 59,066 60,801 (1,735) -2.9% 17 Total assets 2,851,689 2,922,099 (70,410) -2.4% 18 Deposits 2,051,385 2,114,768 (63,383) -3.0% 19a Borrowings - FHLB 498,600 501,100 (2,500) -0.5% 19b Borrowings - Trust Preferred & other 30,237 30,263 (26) -0.1% 20 Total equity 234,171 $236,407 ($2,236) -0.9% </TABLE> 14
COMMUNITY BANK SYSTEM, INC. SUMMARY OF OPERATIONS KEY RATIO RECAP 2ND QUARTER 2001 AND FULL YEAR COMPARISONS <TABLE> <CAPTION> 000s Omitted Three Months Ended --------------------------------------------------------------- Line ---------------- Jun 30, Jun 30, Change Change No. Profitability 2001 2000 Amount Percent --- ---------------- --------------------------------------------------------------- <S> <C> <C> <C> <C> <C> 21 Return on assets 0.29% 1.02% (0.73) %pts. --- 22 Return on equity 3.62% 15.24% (11.62) %pts. --- 22a Return on equity - operating 8.49% 15.24% (6.76) %pts. --- 23 Tangible return on assets 0.43% 1.14% (0.71) %pts. --- 24 Tangible return on equity 5.34% 16.96% (11.62) %pts. --- 24a Tangible return on equity - operating 10.21% 16.96% (6.74) %pts. --- 25 Net interest margin (FTE) 3.79% 4.14% (0.35) %pts. --- 26 Non interest income/ 21.0% 19.7% 1.3 %pts. --- operating income (excl sec gains & branch disp) 27 Efficiency ratio (excl one time items 56.1% 54.9% 1.2 %pts. --- & intangible amortization) -------- Capital -------- 28 Tier I leverage ratio 6.58% 6.62% (0.04) %pts. --- 29 Accumulated other Comp. income $10,782 ($16,097) $26,879 167.0% Common shares outstanding 30a Weighted average 11,732 10,792 940 8.7% 30b Period end 11,549 10,559 990 9.4% 31 Cash dividends declared per common share $0.27 $0.25 $0.02 8.0% 31a Common stock price $28.00 $22.19 $5.81 26.2% 31b Total return - last 12 months 31.5% (8.8)% 40.3 %pts. --- 32 Book value $20.28 $16.36 $3.92 24.0% 33 Tangible book value $14.34 $11.28 $3.06 27.1% --------------------- Asset Quality Ratios --------------------- 34 Loan loss reserve / loans outstanding 1.33% 1.33% 0.00 %pts. --- 35 Nonperforming loans / loans outstanding 0.71% 0.44% 0.27 %pts. --- 36 Loan loss reserve / nonperforming loans 187% 306% (119) %pts. --- 37 Net charge-offs / average loans 0.39% 0.31% 0.08 %pts. --- 38 Loan loss provision / net charge-offs 92% 168% (76) %pts. --- 39 Nonperforming assets / loans outstanding + OREO 0.84% 0.51% 0.33 %pts. --- <CAPTION> 000s Omitted Six Months Ended ------------------------------------------------------------- Line ---------------- Jun 30, Jun 30, Change Change No. Profitability 2001 2000 Amount Percent --- ---------------- ------------------------------------------------------------- <S> <C> <C> <C> <C> <C> 21 Return on assets 0.56% 1.02% (0.46) %pts. --- 22 Return on equity 6.95% 15.45% (8.50) %pts. --- 22a Return on equity - operating 9.90% 15.56% (5.66) %pts. --- 23 Tangible return on assets 0.70% 1.14% (0.44) %pts. --- 24 Tangible return on equity 8.66% 17.13% (8.47) %pts. --- 24a Tangible return on equity - operating 11.61% 17.24% (5.63) %pts. --- 25 Net interest margin (FTE) 3.87% 4.15% (0.28) %pts. --- 26 Non interest income/ 20.3% 18.0% 2.3 %pts. --- operating income (excl sec gains & branch disp) 27 Efficiency ratio (excl one time items 65.4% 54.8% 10.6 %pts. --- & intangible amortization) -------- Capital -------- 28 Tier I leverage ratio 6.58% 6.62% (0.04) %pts. --- 29 Accumulated other Comp. income $10,782 $5,966 $4,816 80.7% Common shares outstanding 30a Weighted average 11,588 10,794 794 7.4% 30b Period end 11,549 10,559 990 9.4% 31 Cash dividends declared per common share $0.54 $0.50 $0.04 8.0% 31a Common stock price $28.00 $22.19 $5.81 26.2% 31b Total return - last 12 months 31.5% (8.8)% 40.3 %pts. --- 32 Book value $20.28 $16.36 $3.92 24.0% 33 Tangible book value $14.34 $11.28 $3.06 27.1% --------------------- Asset Quality Ratios --------------------- 34 Loan loss reserve / loans outstanding 1.33% 1.33% 0.00 %pts. --- 35 Nonperforming loans / loans outstanding 0.71% 0.44% 0.27 %pts. --- 36 Loan loss reserve / nonperforming loans 187% 306% (119) %pts. --- 37 Net charge-offs / average loans 0.36% 0.25% 0.11 %pts. --- 38 Loan loss provision / net charge-offs 99% 178% (79) %pts. --- 39 Nonperforming assets / loans outstanding + OREO 0.84% 0.51% 0.33 %pts. --- <CAPTION> 000s Omitted Three Months Ended -------------------------------------------------------------- Line ---------------- Jun 30, Mar 31, Change Change No. Profitability 2001 2000 Amount Percent --- ---------------- -------------------------------------------------------------- <S> <C> <C> <C> <C> <C> 21 Return on assets 0.29% 0.84% (0.55) %pts. --- 22 Return on equity 3.62% 10.53% (6.91) %pts. --- 22a Return on equity - operating 8.49% 11.36% (2.88) %pts. --- 23 Tangible return on assets 0.43% 0.97% (0.54) %pts. --- 24 Tangible return on equity 5.34% 12.23% (6.89) %pts. --- 24a Tangible return on equity - operating 10.21% 13.07% (2.85) %pts. --- 25 Net interest margin (FTE) 3.79% 3.95% (0.16) %pts. --- 26 Non interest income/ 21.0% 19.6% 1.4 %pts. --- operating income (excl sec gains & branch disp) 27 Efficiency ratio (excl one time items 56.1% 60.1% (4.0) %pts. --- & intangible amortization) -------- Capital -------- 28 Tier I leverage ratio 6.58% 6.83% (0.25) %pts. --- 29 Accumulated other Comp. income $10,782 $12,050 ($1,268) -10.5% Common shares outstanding 30a Weighted average 11,732 11,455 277 2.4% 30b Period end 11,549 11,545 4 0.0% 31 Cash dividends declared per common share $0.27 $0.27 $0.00 0.0% 31a Common stock price $28.00 $28.06 ($0.06) -0.2% 31b Total return - last 12 months 31.5% 28.4% 3.1 %pts. --- 32 Book value $20.28 $20.48 ($0.20) -1.0% 33 Tangible book value $14.34 $14.35 ($0.01) -0.1% --------------------- Asset Quality Ratios --------------------- 34 Loan loss reserve / loans outstanding 1.33% 1.33% 0.00 %pts. --- 35 Nonperforming loans / loans outstanding 0.71% 0.67% 0.04 %pts. --- 36 Loan loss reserve / nonperforming loans 187% 199% (12) %pts. --- 37 Net charge-offs / average loans 0.39% 0.32% 0.07 %pts. --- 38 Loan loss provision / net charge-offs 92% 108% (16) %pts. --- 39 Nonperforming assets / loans outstanding + OREO 0.84% 0.77% 0.07 %pts. --- </TABLE> 15
COMMUNITY BANK SYSTEM, INC. SUMMARY OF OPERATIONS KEY RATIO RECAP 2ND QUARTER 2001 AND FULL YEAR COMPARISONS <TABLE> <CAPTION> 000s Omitted Three Months Ended --------------------------------------------------------------- Line ------------------------- Jun 30, Jun 30, Change Change No. Asset Quality Components 2001 2000 Amount Percent --- ------------------------- --------------------------------------------------------------- <S> <C> <C> <C> <C> <C> 40 Nonaccruing loans $5,291 $5,298 ($7) -0.1% 41 90+ days delinquent 5,856 1,216 4,640 381.6% ------- ------ ------ ------ 42 Tot nonperforming loans $11,147 $6,514 $4,633 71.1% 43 Troubled debt restructurings 110 142 (32) -22.5% 44 Other real estate 1,938 1,038 900 86.7% ------- ------ ------ ------ 45 Tot nonperforming assets $13,195 $7,694 $5,501 71.5% 46 Net Charge-Offs 1,531 1,121 410 36.6% ----------------------------------- Components of Net Interest Margin ----------------------------------- 47 Loan yield 8.57% 8.85% (0.27) %pts. --- --- 48 Investment yield 6.93% 7.78% (0.85) %pts. --- --- 49 Earning asset yield 7.91% 8.22% (0.31) %pts. --- --- 50 Interest bearing deposits rate 4.41% 4.28% 0.13 %pts. --- --- 51a Borrowed funds rate - FHLB 5.39% 6.23% (0.84) %pts. --- --- 51b Borrowed funds rate - Trust Preferred & other 9.83% 10.01% (0.18) %pts. --- --- 52 Cost of all interest bearing funds 4.70% 4.76% (0.06) %pts. --- --- 53 Cost of funds (includes DDA) 4.13% 4.11% 0.02 %pts. --- --- 54 Cost of funds / earning assets 4.12% 4.09% 0.03 %pts. --- --- 55 Net interest margin (FTE) 3.79% 4.14% (0.35) %pts. --- --- 56 Full tax equivalent adjustment $1,806 $1,486 $320 21.5% ----------------------------- Average Balances for Period ----------------------------- 57 Loans $1,572,265 $1,466,110 $106,155 7.2% 58 Investments (excl. mkt val adj.) 1,061,428 883,069 178,359 20.2% 59 Earning assets 2,633,693 2,349,179 284,514 12.1% 60 Total assets 2,893,193 2,517,979 375,214 14.9% 61 Deposits 2,083,160 1,896,853 186,307 9.8% 62a Borrowings - FHLB 516,858 406,877 109,981 27.0% 62b Borrowings - Trust preferred & other 30,244 30,345 (101) -0.3% 63 Total equity $233,959 $168,757 $65,202 38.6% <CAPTION> 000s Omitted Six Months Ended ------------------------------------------------------------- Line ------------------------- Jun 30, Jun 30, Change Change No. Asset Quality Components 2001 2000 Amount Percent --- ------------------------- ------------------------------------------------------------- <S> <C> <C> <C> <C> <C> 40 Nonaccruing loans $5,291 $5,298 ($7) -0.1% 41 90+ days delinquent 5,856 1,216 4,640 381.6% ------- ------ ------ ------ 42 Tot nonperforming loans $11,147 $6,514 $4,633 71.1% 43 Troubled debt restructurings 110 142 (32) -22.5% 44 Other real estate 1,938 1,038 900 86.7% ------- ------ ------ ------ 45 Tot nonperforming assets $13,195 $7,694 $5,501 71.5% 46 Net Charge-Offs 2,772 1,840 932 50.7% ----------------------------------- Components of Net Interest Margin ----------------------------------- 47 Loan yield 8.69% 8.78% (0.09) %pts. --- --- 48 Investment yield 7.10% 7.75% (0.65) %pts. --- --- 49 Earning asset yield 8.06% 8.16% (0.10) %pts. --- --- 50 Interest bearing deposits rate 4.62% 4.19% 0.43 %pts. --- --- 51a Borrowed funds rate - FHLB 5.63% 6.12% (0.49) %pts. --- --- 51b Borrowed funds rate - Trust Preferred & other 9.83% 9.83% (0.00) %pts. --- --- 52 Cost of all interest bearing funds 4.91% 4.67% 0.24 %pts. --- --- 53 Cost of funds (includes DDA) 4.30% 4.03% 0.27 %pts. --- --- 54 Cost of funds / earning assets 4.28% 4.01% 0.27 %pts. --- --- 55 Net interest margin (FTE) 3.87% 4.15% (0.28) %pts. --- --- 56 Full tax equivalent adjustment $3,432 $2,968 $464 15.6% ----------------------------- Average Balances for Period ----------------------------- 57 Loans $1,563,362 $1,451,833 $111,529 7.7% 58 Investments (excl. mkt val adj.) 1,026,078 889,928 136,150 15.3% 59 Earning assets 2,589,440 2,341,761 247,679 10.6% 60 Total assets 2,836,197 2,511,415 324,782 12.9% 61 Deposits 2,065,208 1,887,313 177,895 9.4% 62a Borrowings - FHLB 482,727 412,195 70,532 17.1% 62b Borrowings - Trust preferred & other 30,259 30,358 (99) -0.3% 63 Total equity $228,114 $166,547 $61,567 37.0% <CAPTION> 000s Omitted Three Months Ended --------------------------------------------------------- Line ------------------------- Jun 30, Mar 31, Change Change No. Asset Quality Components 2001 2001 Amount Percent --- ------------------------- --------------------------------------------------------- <S> <C> <C> <C> <C> <C> 40 Nonaccruing loans $5,291 $7,471 ($2,180) -29.2% 41 90+ days delinquent 5,856 5,032 824 16.4% ------- ------ ------ ------ 42 Tot nonperforming loans $11,147 $12,503 ($1,356) -10.8% 43 Troubled debt restructurings 110 103 7 6.8% 44 Other real estate 1,938 1,476 462 31.3% ------- ------ ------ ------ 45 Tot nonperforming assets $13,195 $14,082 ($887) -6.3% 46 Net Charge-Offs 1,531 1,241 290 23.4% ----------------------------------- Components of Net Interest Margin ----------------------------------- 47 Loan yield 8.57% 8.81% (0.24) %pts. --- 48 Investment yield 6.93% 7.30% (0.37) %pts. --- 49 Earning asset yield 7.91% 8.22% (0.31) %pts. --- 50 Interest bearing deposits rate 4.41% 4.64% (0.23) %pts. --- 51a Borrowed funds rate - FHLB 5.39% 5.90% (0.51) %pts. --- 51b Borrowed funds rate - Trust Preferred & other 9.83% 9.82% 0.01 %pts. --- 52 Cost of all interest bearing funds 4.70% 4.92% (0.22) %pts. --- 53 Cost of funds (includes DDA) 4.13% 4.31% (0.18) %pts. --- 54 Cost of funds / earning assets 4.12% 4.27% (0.15) %pts. --- 55 Net interest margin (FTE) 3.79% 3.95% (0.16) %pts. --- 56 Full tax equivalent adjustment $1,806 $1,626 $180 11.1% ---------------------------- Average Balances for Period ---------------------------- 57 Loans $1,572,265 $1,554,373 $17,892 1.2% 58 Investments (excl. mkt val adj.) 1,061,428 990,335 71,093 7.2% 59 Earning assets 2,633,693 2,544,708 88,985 3.5% 60 Total assets 2,893,193 2,778,591 114,602 4.1% 61 Deposits 2,083,160 2,047,158 36,002 1.8% 62a Borrowings - FHLB 516,858 448,232 68,626 15.3% 62b Borrowings - Trust preferred & other 30,244 30,262 (18) -0.1% 63 Total equity $233,959 $222,204 $11,755 5.3% </TABLE> 16
SUMMARY AND INTRODUCTION Results for the three months ended June 30, 2001 include the effects of the Company's May 11, 2001 merger with $647-million-asset First Liberty Bank Corp of Jermyn, P.A. All historical information has been retroactively restated to reflect this acquisition on a pooling-of-interest method of accounting. The Company's January 26, 2001 acquisition of the $112-million-asset Citizens National Bank of Malone (NY) was a purchase accounting transaction, and, accordingly, there is no restatement of historical information. Cash operating earnings for second quarter 2001 were $6.0 million, a decrease of 16% from the same period last year. This performance measure, which excludes amortization expense as well as one-time acquisition costs and related securities losses, is considered by Company management to be the best indicator of recurring earnings and is consistent with the banking industry's growing recognition of the importance of cash earnings. Cash operating earnings per share (diluted) for the quarter were $0.51, down 23% from the prior year's level of $0.66, reflective of greater shares outstanding due to the First Liberty merger as well as the Citizens Bank acquisition. Compared to first quarter 2001, cash operating earnings and cash operating earnings per share (diluted) decreased 17% and 19%, respectively. For the first six months of 2001, cash operating earnings were $13.1 million, down 8% from the comparable period in 2000, while cash operating earnings per share were $1.13, off 14% from the same period prior year. GAAP net income, including $4.8 million in one-time acquisition expenses and related securities losses, was $2.1 million for second quarter 2001, a decrease of $4.3 million or 67% from the same period last year. GAAP earnings per share (diluted) for the quarter were $0.18, down $0.41 or 70%. For the first half of 2001, when one-time expenses totaled $5.6 million, GAAP net income was $7.9 million, off 39% from the prior year, while GAAP earnings per share (diluted) were $0.68, off 43%. SECOND QUARTER PERFORMANCE HIGHLIGHTS o Noninterest income (excluding securities transactions) for second quarter 2001 exceeded the comparable quarter last year by 12%. Overdraft fees, reflective of a pricing increase during second quarter 2001 and the contribution of the Citizens Bank acquisition, accounted for over 41% of the increase. Financial services revenues generated approximately 27% of the improvement. The ratio of noninterest income to operating income rose 1.3 percentage points to 21.0%. For the first half of the year, other income climbed over 19%, particularly reflective of the April 3, 2000 purchase of Elias Asset Management (EAM). Compared to first quarter 2001, noninterest income rose 10.0%, marked by improved revenues from the Company's broker-dealer, Community Investment Services, Inc. (CISI) (up 54%), and higher general banking fees (up 14%). o Net interest income for second quarter 2001 rose by 1.8% over the same period last year on 12.1% greater average earning assets. This reflects a 35 basis-point-compression in net interest margin to 3.79%, primarily caused by loan and deposit pricing driven by the 275 and 173 basis-point-decreases in the prime and one year Treasury rates, respectively, during the first half of this year. Because of the nature of the Company's balance sheet, earning asset yields have adjusted more quickly than the steady but slower rate decreases on consumer deposits outstanding. The 16 basis-point-gap between the reduction in yields and cost of funds in the second quarter compared to the first quarter is expected to narrow in future quarters. 17
o Noninterest expense for the three months ended June 30, 2001, rose by $7.1 million (40%) over the same period last year. One-time expenses related to the Citizens and First Liberty acquisitions totaled $4.6 million or 66% of the increase. The bulk of these latter expenses relate to consulting fees, severance, and write-down of obsolete software. Excluding one-time items and intangible amortization, noninterest expenses would have been $18.6 million (up $2.1 million or 12.7% over the second quarter of 2000). Costs added by the five former Citizens branches were $440,000. Approximately half the benefit of a projected $3.2 million in annual cost reductions following the consummation of the First Liberty acquisition was reflected in the quarter. The balance of these savings is expected to be realized before year end. Besides readily identifiable acquisition expenses as defined above, there was a variety of miscellaneous start up costs and adjustments to accrued liabilities related to First Liberty, which are not expected in subsequent quarters. Included in those adjustments were additional second quarter taxes of approximately $236,000, which brought the year-to date effective tax rate to 30%, the rate expected for 2001 as a whole. o Despite the softening economy, loans at $1.57 billion decreased by $3.6 million or .2% during the three months ended June 30, 2001. Real estate outstandings rose $4.4 million, largely due to continued success of Community Bank's "no-closing-cost" residential mortgage program. Commercial loans increased $800,000 during the same period compared to a $8.8 million reduction in installment loans. The latter reduction occurred because new business was inadequate to offset the high cash flow from maturing installment loans, which have relatively short lives. Over the last twelve months, total loans have risen approximately $72 million or 4.8%, including $59 million related to the Company's acquisition of Citizens Bank in January. Mortgage loans originated and sold in the secondary market were $13.1 million in the second quarter, up substantially from the first quarter 2001 activity of $4.4 million. The serviced loan portfolio stood at $101 million as of quarter end, up 12% from one year earlier. o Investments reached $1.054 billion at June 30, 2001, up over $164 million (18%) from one year earlier. This increase is a result of the Citizens Bank acquisition in January 2001 and planned securities leverage strategy in anticipation of the First Liberty transaction. Capital market borrowing increased approximately $42 million, with the bulk of the $236 million in earning asset growth over the last twelve months being funded by higher deposit levels. o Deposits at June 30, 2001 were $2.051 billion, an increase of $160 million (8.4%), compared to a year ago. On average, second quarter deposits rose 9.8% ($186 million) over the same quarter last year. Deposits of individuals, partnerships, and corporations, which exclude the more volatile public funds deposits, rose 12.3% ($205 million); deposits from Citizens Bank account for $79 million of this increase. The primary reason for deposit growth appears to relate to consumer preference for guaranteed returns on certificate of deposit products versus stock market equities as well as less attention by customers to managing down their checking account balances due to the low interest rate environment. o Net charge-offs for the three months ended June 30, 2001 were $1.53 million, up $300,000 or 23% over first quarter 2001. The primary component of this increase was $485,000 in charge-offs due to several installment loans discovered in the late spring to be fraudulent. For the first six months of the year, the net charge-offs/average loans ratio was .36%, 11 basis points above the same 2000 period, but comparable to or more favorable than the averages for full-year 1999 and 1998 of .33% and .45%, respectively. Nonperforming assets at June 30, 2001 decreased 6.3% from the March 31 level and are $5.5 million or 72% higher than one year earlier. The primary reasons for the increase are the 90-day delinquency ($3.9 million) of a significant commercial loan customer and $900,000 more in foreclosed property. The nonperforming loan ratio at quarter end was .71% versus .44% for the same period last year. Loan loss reserve coverage was 1.87 times based on a 1.33% ratio to loans outstanding; this compares to 306% coverage and a 1.33% reserve ratio at June 30, 2000. 18
o The Company's efficiency ratio, excluding intangible amortization, net securities losses, and one-time acquisition-related expenses, increased to 56.1% for the second quarter of 2001 versus 54.9% for the same period last year. Besides what the Company believes to be a temporarily higher level of miscellaneous expenses not readily isolated as one-time acquisition costs, the increase in the efficiency ratio also reflects the Company's relatively modest operating income growth (up 4.8%) due to the slowing economy. In addition, costs associated with the Company's growing financial services businesses have a higher efficiency ratio by their nature. o Assets under management exceeded $1.36 billion as of quarter end, unchanged from the March 31, 2001 level, despite the volatility of the equity markets. Growth was strongest in retirement plan trusts generated by CBU's Benefit Plans Administrative Services subsidiary as well as assets originated through Community Investment Services. Revenue streams from these businesses along with the stability of the Company's personal trust products more than offset present softness in the growth-oriented investment management assets of the Elias Asset Management (EAM) subsidiary. Second quarter revenues from EAM were unchanged from the same period last year due to the favorable impact of new business on its fee structure. Compared to June 30, 2000, including an estimate for discretionary assets managed by the First Liberty trust department, assets under management are approximately 2% higher. 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 June 30, 2001, this ratio was 14.6% and 14.3%, 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. 19
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. 20
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> Second Quarter Ended June 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 --------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> ASSETS: Interest-earning assets: Federal funds sold $889 $9 4.17% $2,092 $31 6.02% Time deposits in other banks 338 187 223.89% 486 12 9.69% Taxable investment securities 857,346 14,165 6.70% 731,909 12,601 6.92% Nontaxable investment securities 209,980 3,970 7.67% 173,146 3,137 7.29% Loans (net of unearned discount) 1,567,313 33,585 8.69% 1,453,060 32,277 8.93% ---------- ------- ---------- ------- Total interest-earning assets 2,635,867 $51,916 7.99% 2,360,693 $48,058 8.19% Noninterest earning assets Cash and due from banks 103,769 65,213 Premises and equipment 43,773 40,223 Other Assets 122,347 101,991 Less: allowance for loans (20,887) (19,390) Net unrealized gains/(losses) on 0 available-for-sale portfolio 16,570 (32,782) ---------- ---------- Total $2,901,438 $2,515,948 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing liabilities Savings deposits $643,536 $3,314 2.09% $621,324 $3,341 2.16% Time deposits 1,116,305 16,052 5.83% 979,675 13,459 5.53% Short-term borrowings 193,208 2,215 4.65% 315,448 4,958 6.32% Long-term borrowings 353,894 5,475 6.27% 121,774 2,108 6.96% ---------- ------- ---------- ------- Total interest-bearing 2,306,943 27,056 4.76% 2,038,221 23,866 4.71% liabilities Noninterest bearing liabilities Demand deposits 323,311 295,650 Other liabilities 37,225 13,320 Shareholders' equity 233,959 168,757 ---------- ---------- Total $2,901,438 $2,515,948 ========== ========== Net interest earnings $24,860 $24,192 ======= ======= Net yield on interest-earning assets 3.82% 4.12% ====== ==== Federal tax exemption on nontaxable investment securities included in interest income $1,806 $1,485 </TABLE> 21
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: <TABLE> <CAPTION> ------------------------------------------------- 2nd Quarter 2001 versus 2nd Quarter 2000 ------------------------------------------------- Increase (Decrease) Due to Change In (1) Net Volume Rate Change ------ ---- ------ <S> <C> <C> <C> Interest earned on: Federal funds sold and securities Purchased under agreements to resell ($14) ($8) ($22) Time deposits in other banks (26) 201 175 Taxable investment securities 4,070 (2,505) 1,565 Nontaxable investment securities 669 164 833 Loans (net of unearned discounts) 6,229 (4,921) 1,308 Total interest-earning assets (2) $10,995 ($7,137) $3,858 Interest paid on: Savings deposits $457 ($485) ($27) Time deposits 1,856 737 2,593 Short-term borrowings (1,630) (1,112) (2,743) Long-term borrowings 4,792 (1,425) 3,367 Total interest-bearing liabilities (2) $2,966 $224 $3,190 Net interest earnings (2) $5,415 ($4,747) $668 </TABLE> - ---------- (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. 22
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 $4.636 million and $5.487 million for second quarter and six 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> Three Months Ended June 30, Six Months Ended June 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> Personnel expense 10,451 9,224 1,227 13.3% 20,543 18,038 2,505 13.9% Net occupancy expense 1,512 1,214 298 24.5% 3,090 2,524 566 22.4% Equipment expense 1,543 1,282 261 20.4% 2,899 2,557 342 13.4% Professional fees 718 718 0 0.0% 1,258 1,350 (92) (6.8)% Data processing expense 1,394 1,378 16 1.2% 2,787 2,664 123 4.6% Amortization 1,541 1,213 328 27.0% 3,001 2,351 650 27.6% Stationary and supplies 549 479 70 14.6% 872 767 105 13.7% Deposit insurance premiums 62 93 (31) -33.3% 158 190 (32) -16.8% Acquisition expense 4,636 0 4,636 -- 5,487 0 5,487 -- Disposition of branch properties 8 7 1 14.3% 15 14 1 0.1 Other 2,391 2,138 253 11.8% 4,610 4,191 419 10.0% --------------------------------------- -------------------------------------- Total 24,805 17,746 7,059 39.8% 44,720 34,646 10,074 29.1% Total operating expenses as a percentage of average assets 2.80% 2.83% -0.03% pts 2.79% 2.77% 0.02% pts Efficiency ratio 56.1% 54.9% 1.2% pts 65.4% 54.8% 10.6% pts (excl one time items & intang. amort) </TABLE> 23
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> (000's omitted) As of June 30, ---------------------------------------------------------- Change Change 2001 2000 Amount Percent ---------------------------------------------------------- <S> <C> <C> <C> <C> <C> Real estate mortgages: Residential $ 607,180 $ 561,137 $ 46,043 8.2% Commercial loans secured by real estate 264,519 242,911 21,608 8.9% Farm 20,755 19,417 1,338 6.9% ------------------------------------------ Total 892,454 823,465 68,989 8.4% Commercial, financial, and agricultural Agricultural 26,738 27,935 (1,197) (4.3)% Commercial and financial 236,897 236,243 654 0.3% ------------------------------------------ Total 263,635 264,178 (543) -0.2% Installment loans to individuals: Direct 158,984 156,741 2,243 1.4% Indirect 223,057 223,408 (351) (0.2)% Student and other 1,563 1,997 (434) (21.7)% ------------------------------------------ Total 383,604 382,146 1,458 0.4% Other Loans 29,682 28,561 1,121 3.9% ------------------------------------------ Gross Loans 1,569,375 1,498,350 71,025 4.7% ------------------------------------------ Less: Unearned discounts 299 1,230 (931) (75.7)% ------------------------------------------ Net loans 1,569,076 1,497,120 71,956 4.8% Reserve for possible loan losses 20,860 19,964 896 4.5% ------------------------------------------ Loans net of loan loss reserve $ 1,548,216 $ 1,477,156 $ 71,060 4.8% =========================================== </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 June 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 $125,671 $ -- $445,563 $ 35,946 $ 607,180 Commercial 58 -- 3,073 261,388 264,519 Farm 35 -- 20,720 20,755 Agricultural loans 629 -- 26,109 26,738 Commercial loans 2,304 4 234,589 236,897 Installment loans to individuals 132,882 249,852 120 750 383,604 Other loans 3,930 -- 25,752 29,682 -------- -------- -------- -------- ---------- -- Total loans 265,509 249,852 448,760 605,254 1,569,375 -- Unearned Discounts (299) -- -- -- (299) -------- -------- -------- -------- ---------- -- Net Loans $265,210 $249,852 $448,760 $605,254 $1,569,076 ======== ======== ======== ======== ========== </TABLE> 24
F) The following table presents information concerning the aggregate amount of nonperforming assets: <TABLE> <CAPTION> (000's omitted) As of June 30, --------------------------------------- Change Change 2001 2000 Amount Percent --------------------------------------- <S> <C> <C> <C> <C> Loans accounted for on a nonaccrual basis $5,291 $5,298 $ (7) -0.1% Accruing loans which are contractually Past due 90 days or more as to principal or interest payments 5,856 1,216 4,640 381.6% ------ ------ ------ ------ Total nonperforming loans 11,147 6,514 4,633 71.1% Loans which are "troubled debt restructurings" as defined in Statement of Financial Accounting Standards No. 15 "Accounting by Debtors and creditors for Troubled Debt Restructurings" 110 142 (32) (22.5)% Other Real Estate 1,938 1,038 900 86.7% ------ ------ ---- ----- Total nonperforming assets $13,195 $7,694 $5,501 71.5% Ratio of allowance for loan losses to period-end loans 1.33% 1.33% 0.00 % pts -- Ratio of allowance for loan losses to period-end nonperforming loans 187.1% 306.0% (118.9) % pts -- Ratio of allowance for loan losses to period-end nonperforming assets 158.1% 259.5% (101.4) % pts -- Ratio of nonperforming assets to period-end total loans and other real estate owned 0.84% 0.51% 0.33 % 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. 25
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> (000's omitted) Three Months Ended June 30, Six Months Ended June 30, ----------------------------------------- ---------------------------------------- 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) 1,569,375 1,498,349 71,026 4.7% 1,569,375 1,498,349 71,026 4.7% Daily average amount of loans (net 1,572,265 1,466,110 06,155 7.2% 1,563,362 1,451,833 111,529 7.7% of unearned discount) Balance of allowance for possible loan losses at beginning of period 20,917 19,198 1,719 9.0% 20,035 18,528 1,507 8.1% Loans charged off: Commercial, financial, and agricultural 470 449 21 4.7% 888 501 387 77.2% Real estate construction 0 0 0 0.0% 0 0 0 0.0% Real estate mortgage 35 109 (74) -67.9% 96 132 (36) -27.3% Installment 1,580 842 738 87.6% 2,830 1,821 1,009 55.4% ----------------------------------------- ---------------------------------------- Total loans charged off 2,085 1,400 685 48.9% 3,814 2,454 1,360 55.4% Recoveries of loans previously charged off: Commercial, financial, and agricultural 177 40 137 3.4 232 80 152 190.0% Real estate construction 0 0 0 0.0% 0 0 0 0.0% Real estate mortgage 38 1 37 3700.0% 51 40 11 27.5% Installment 398 238 160 67.2% 828 494 334 67.6% ----------------------------------------- ---------------------------------------- Total recoveries 613 279 334 119.7% 1,111 614 497 80.9% Net loans charged off 1,472 1,121 351 31.3% 2,703 1,840 863 46.9% Additions to allowance charged to Expense 1,415 1,887 (472) -25.0% 2,741 3,276 (535) -16.3% Reserves on acquired loans (1) 0 0 0 0.0% 787 0 787 0.0% Balance at end of period 20,860 19,964 896 4.5% 20,860 19,964 896 4.5% Ratio of net chargeoffs to average loans Outstanding 0.39% 0.31% 0.08% -- 0.36% 0.25% 0.00 -- </TABLE> - ---------- (1) These reserve additions are attributable to loans acquired in association with the purchases of Citizens National Bank of Malone branch offices during 2001. 26
(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 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 June 30, Six Months Ended June 30, ------------------------------------ --------------------------------------- 2001 2000 Change Change 2001 2000 Change Change Amount Percent Amount Percent ------------------------------------ --------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Personal trust $ 407 $ 488 $ (81) (16.6)% $ 936 $1,029 $ (93) (9.0)% EBT/BPA 878 745 133 17.9% 1,766 1,488 278 18.7% Elias Asset Management 947 934 13 -- 1,994 934 1,060 -- Insurance 109 100 9 0.1% 210 203 7 0.0 Other investment products 653 534 119 22.3% 1,078 927 151 16.3% ------------------------------------ --------------------------------------- Total financial services $2,994 $2,801 $ 193 6.9% $5,984 $4,581 $1,403 30.6% Electronic banking $ 395 $ 454 $ (59) (13.0)% $ 700 $ 861 $(161) (18.7)% Mortgage banking 198 57 141 2.5% 279 172 107 0.6% Commercial leasing 17 9 8 0.9% 21 26 (5) (19.2)% ------------------------------------ --------------------------------------- Total specialty products $ 610 $ 520 $ 90 0.2% $1,000 $1,059 $ (59) (5.6)% Deposit service charges $1,010 $ 945 $ 65 6.9% $1,998 $1,865 $ 133 7.1% Overdraft fees 1,291 993 298 30.0% 2,331 1,841 490 26.6% Commissions 722 649 73 11.2% 1,357 1,243 114 9.2% ------------------------------------ --------------------------------------- General banking services $3,023 $2,587 $ 436 16.9% $5,686 $4,949 $ 737 14.9% Miscellaneous revenue 13 12 1 8.3% (13) 8 (21) -262.5% ------------------------------------ --------------------------------------- Total noninterest income (excl security gains/losses) $6,640 $5,920 $ 720 12.2% $12,657 $10,597 $2,060 19.4% Security gains/losses (138) 0 (138) 0 (128) (160) 32 (20.0)% Disposition of branch properties (10) 0 (10) -- 0 0 0 -- ------------------------------------ --------------------------------------- Total noninterest income $6,492 $5,920 $572 9.7% $12,529 $10,437 $2,092 20.0% Noninterest income as a percentage of operating income (excl securities gains/losses & disposal of branch properties) 21.0% 19.7% 1.3 %pts. -- 20.3% 18.0% 2.3 %pts. -- </TABLE> 27
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 six months ended June 30, 2001 Regulatory Reporting Categories <TABLE> <CAPTION> Noninterest Income Other Service Fiduciary and Service Commissions on Charges, Other Investment (000's omitted) Investment Charges Investment Commissions Operating Securities Services on Deposits Products and Fees Income Gains Total ------------- ----------- -------------- ------------- --------- ---------- -------- <S> <C> <C> <C> <C> <C> <C> <C> Personal trust $ 936 $ 936 EBT/BPA 590 $ 1,176 1,766 Elias Asset Management $ 1,994 1,994 Insurance 98 112 210 Other investment products 1,078 1,078 ----------------------------------------------------------------------------------------------- Total financial services 1,526 -- 3,170 1,288 -- -- 5,984 Electronic banking 253 447 700 Mortgage banking 195 $ 84 279 Commercial leasing 21 21 ----------------------------------------------------------------------------------------------- Total specialty products -- 253 -- 663 84 -- 1,000 Deposit service charges 1,998 1,998 Overdraft fees 2,331 2,331 Commissions 1,357 1,357 ----------------------------------------------------------------------------------------------- General banking services -- 4,329 -- 1,357 -- -- 5,686 Miscellaneous revenue (13) (13) ----------------------------------------------------------------------------------------------- Total noninterest income (excl security gains/losses) $ 1,526 $ 4,582 $ 3,170 $ 3,308 $ 71 -- $12,657 Security gains/losses (128) (128) Disposition of branch properties -- -- ----------------------------------------------------------------------------------------------- Total noninterest income $ 1,526 $ 4,582 $ 3,170 $ 3,308 $ 71 $ (128) $12,529 =============================================================================================== </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. 28
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 June 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 $(3,953) -3.8% -200 bp $(4,972) -4.8% A second simulation was performed based on what the Company believes to be conservative levels of balance sheet growth--approximately 6% growth in loans, 4% growth in investments, 3% growth in deposits, necessary increases in borrowings to support earning asset grown, with no growth in any other major portions of the balance sheet--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 $(1,440) -1.4% -200 bp $(957) -.9% 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. 29
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. 30
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: August 17, 2001 /s/ SANFORD A. BELDEN -------------------------------- Sanford A. Belden, President and Chief Executive Officer Date: August 17, 2001 /s/ DAVID G. WALLACE --------------------------------- David G. Wallace, Treasurer Chief Financial Officer 31