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 three months ended March 31, 2002 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 - 12,942,820 shares outstanding as of May 6, 2002
INDEX COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES Part I. Financial Information Item 1. Financial Statements (Unaudited) Consolidated Statements of Condition -- March 31, 2002, December 31, 2001 and March 31, 2001 Consolidated Statements of Income -- Three months ended March 31, 2002 and 2001 Consolidated Statement of Shareholders' Equity -- Three months ended March 31, 2002 Consolidated Statements of Comprehensive Income -- Three months ended March 31, 2002 and 2001 Consolidated Statements of Cash Flows -- Three months ended March 31, 2002, and 2001 Notes to Consolidated Financial Statements - March 31, 2002 Item 2. Management's Discussion and Analysis of Financial Condition 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
CONSOLIDATED STATEMENTS OF CONDITION (Unaudited) COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES (In Thousands, Except Share Data) <TABLE> <CAPTION> March 31, December 31, March 31, 2002 2001 2001 - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> ASSETS Cash and due from banks $ 92,115 $ 106,554 $ 110,552 Federal funds sold 0 0 0 - ------------------------------------------------------------------------------------------------------------------------------- Total cash and cash equivalents 92,115 106,554 110,552 Investment securities 1,297,471 1,148,182 1,091,704 Loans 1,724,400 1,732,870 1,572,683 Reserve for loan losses 24,010 23,901 20,917 - ------------------------------------------------------------------------------------------------------------------------------- Net loans 1,700,390 1,708,969 1,551,766 Premises and equipment, net 53,864 53,266 42,766 Accrued interest receivable 24,982 22,562 22,792 Core deposit intangibles, net 35,182 36,722 9,917 Goodwill, net 19,814 19,814 22,589 Other intangibles, net 83,228 85,806 38,212 - ------------------------------------------------------------------------------------------------------------------------------- Intangible assets, net 138,224 142,342 70,718 Other assets 38,168 28,958 31,890 - ------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 3,345,214 $ 3,210,833 $ 2,922,188 =============================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits Noninterest bearing $ 415,547 $ 447,544 $ 319,247 Interest bearing 2,121,435 2,098,426 1,795,543 - ------------------------------------------------------------------------------------------------------------------------------- Total deposits 2,536,982 2,545,970 2,114,790 Federal funds purchased 30,000 14,200 28,000 Borrowings 396,100 263,100 473,100 Company obligated mandatorily redeemable preferred securities of subsidiaries, Community Capital/Statutory Trust I-III, holding solely junior subordinated debentures of the Company 77,833 77,819 29,826 Accrued interest and other liabilities 33,331 41,764 40,242 - ------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 3,074,246 2,942,853 2,685,958 - ------------------------------------------------------------------------------------------------------------------------------- Shareholders' equity: Common stock no par $1.00 sates value 20,000,000 share authorized; 12,936,600, 12,902,812 and 11,544,378 shares outstanding, respectively 12,937 12,903 11,545 Surplus 78,684 77,710 45,717 Undivided profits 174,419 170,472 167,516 Accumulated other comprehensive income 5,226 7,281 11,666 Shares issued under employee stock plan - unearned (298) (386) (214) - ------------------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 270,968 267,980 236,230 - ------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHARHOLDERS' EQUITY $ 3,345,214 $ 3,210,833 $ 2,922,188 =============================================================================================================================== </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 3
CONSOLIDATED STATEMENTS OF INCOME (Unaudited) COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES (In Thousands, Except Per-Share Data) <TABLE> <CAPTION> Quarter Ended March 31, - ---------------------------------------------------------------------------------------------------- 2002 2001 - ---------------------------------------------------------------------------------------------------- <S> <C> <C> Interest income: Interest and fees on loans $33,058 $33,524 Interest and dividends on investments: Taxable 14,120 14,190 Nontaxable 3,598 2,076 Interest on federal funds and deposits with other banks 1 191 - ---------------------------------------------------------------------------------------------------- Total interest income 50,777 49,981 - ---------------------------------------------------------------------------------------------------- Interest expense: Interest on deposits 15,169 19,549 Interest on federal funds purchased 87 337 Interest on short-term borrowings 211 2,770 Interest on mandatorily redeemable preferred securities of subsidiaries 1,473 733 Interest on long-term borrowings 3,669 3,425 - ---------------------------------------------------------------------------------------------------- Total interest expense 20,609 26,814 - ---------------------------------------------------------------------------------------------------- Net interest income 30,168 23,167 Less: provision for loan losses 1,518 1,326 - ---------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 28,650 21,841 - ---------------------------------------------------------------------------------------------------- Other income: Fiduciary and investment services 878 830 Service charges on deposit accounts 2,921 2,129 Commissions on investment products 1,970 1,524 Other service charges, commissions and fees 1,912 1,540 Other operating income 54 3 Investment security gain, net 0 10 - ---------------------------------------------------------------------------------------------------- Total other income 7,735 6,036 - ---------------------------------------------------------------------------------------------------- Other expenses: Salaries and employee benefits 12,125 10,116 Occupancy expense, net 2,322 1,578 Equipment and furniture expense 1,871 1,355 Amortization of intangible assets 3,076 1,460 Legal and professional fees 853 627 Data processing expenses 1,679 1,187 Acquisition and unusual expenses 591 851 Other 3,666 2,769 - ---------------------------------------------------------------------------------------------------- Total other expenses 26,183 19,943 - ---------------------------------------------------------------------------------------------------- Income before income taxes 10,202 7,934 Income taxes 2,764 2,185 - ---------------------------------------------------------------------------------------------------- NET INCOME $ 7,438 $ 5,749 ==================================================================================================== Earnings per share - Basic $ 0.57 $ 0.51 ==================================================================================================== Earnings per share - Diluted $ 0.57 $ 0.50 ==================================================================================================== </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 4
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES Quarter Ended March 31, 2002 (In Thousands, Except Share Data) <TABLE> <CAPTION> Accumulated Shares Issued Common Stock Other Under Employee Shares Undivided Comprehensive Stock Plan Outstanding Amount Surplus Profits Income -Unearned Total - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> Balance at December 31, 2001 12,902,812 $12,903 $77,710 $ 170,472 $ 7,281 ($386) $ 267,980 Net income 7,438 7,438 Other comprehensive income, net of tax (2,055) (2,055) Dividends declared: Common, $.27 per share (3,491) (3,491) Common stock issued under employee stock plan 33,788 34 974 88 1,096 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at March 31, 2002 12,936,600 $12,937 $78,684 $ 174,419 $ 5,226 ($298) $ 270,968 =================================================================================================================================== </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES (In Thousands) <TABLE> <CAPTION> Quarter Ended March 31, - -------------------------------------------------------------------------------------------- 2002 2001 - -------------------------------------------------------------------------------------------- <S> <C> <C> Other comprehensive income, before tax: Change in minimum pension liability adjustment $ 4,919 $ 0 Unrealized (loss) gain on securities: Unrealized holding (losses) gains arising during period (8,484) 10,036 Reclassification adjustment for gains included in net income 0 (10) - -------------------------------------------------------------------------------------------- Other comprehensive (loss) income, before tax (3,565) 10,026 Income tax (expense) benefit related to other comprehensive (loss) income 1,510 (4,326) - -------------------------------------------------------------------------------------------- Other comprehensive (loss) income, net of tax (2,055) 5,700 Net income 7,438 5,749 - -------------------------------------------------------------------------------------------- Comprehensive income $ 5,383 $ 11,449 ============================================================================================ </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 6
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES (In Thousands) <TABLE> <CAPTION> Quarter Ended March 31, - ---------------------------------------------------------------------------------------------------------------------- 2002 2001 - ---------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Operating Activities: Net income $7,438 $5,749 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 1,453 1,217 Amortization of intangible assets 3,076 1,460 Net amortization of security premiums and discounts 1,181 214 Amortization of discount of loans (35) (47) Amortization of unearned compensation and discount on junior subordinated debentures 133 4 Provision for loan losses 1,518 1,326 Provision (benefit) for deferred taxes 716 (423) Gain on sale of investment securities 0 (10) (Gain) loss on sale of loans and other assets (6) 5 Change in interest receivable (2,420) 91 Change in other assets and other liabilities (10,627) 3,156 - ---------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 2,427 12,742 - ---------------------------------------------------------------------------------------------------------------------- Investing Activities: Proceeds from sales of investment securities 8,350 8,048 Proceeds from maturities of held-to-maturity investment securities 1,239 1,239 Proceeds from maturities of available-for-sale investment securities 42,849 19,986 Purchases of held-to-maturity investment securities (1,138) (421) Purchases of available-for-sale investment securities (210,254) (135,207) Net change in loans outstanding 7,095 789 Premium paid on acquisition of business 0 (3,633) Cash received in acquisitions 0 3,777 Capital expenditures (2,044) (1,563) - ---------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (153,903) (106,985) - ---------------------------------------------------------------------------------------------------------------------- Financing Activities: Net change in demand deposits, NOW accounts, and savings accounts 17,453 4,613 Net change in certificates of deposit (26,441) 73,949 Net change in federal funds purchased 15,800 (20,730) Net change in term borrowings 133,000 72,050 Issuance of common stock 735 374 Cash dividends paid (3,482) (1,889) Other financing activities (28) (28) - ---------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 137,037 128,339 - ---------------------------------------------------------------------------------------------------------------------- Change in cash and cash equivalents (14,439) 34,096 Cash and cash equivalents at beginning of year 106,554 76,456 - ---------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $92,115 $110,552 ====================================================================================================================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest $21,443 $24,656 Cash paid for income taxes $607 $429 ====================================================================================================================== SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING AND INVESTING ACTIVITIES: Dividends declared and unpaid $3,491 $2,149 Gross change in unrealized gains and (losses) on available-for-sale securities ($8,484) ($10,026) Change in minimum pension liability adjustment ($4,919) $0 Bank acquisition: Fair value of asset acquired $0 $123,948 Liabilities assumed $0 $98,720 Common stock issued, including treasury stock of $0 and $17,006 $0 $25,228 ====================================================================================================================== </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 7
Community Bank System, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) March 31, 2002 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 three-month period ended March 31, 2002 are not necessarily indicative of the results that may be expected for the year ended December 31, 2002. On November 16, 2001, the Company acquired 36 branches from FleetBoston Financial Corporation with $470 million in deposits and $177 million in loans. The branches are located in Southwestern and Finger Lakes Regions of New York. The results of the 36 branch operations have been included in the consolidated financial statements since that date. On May 11, 2001, the Company completed its acquisition of the $648-million-asset First Liberty Bank Corp. ("First Liberty"). Pursuant to the terms of the merger, each share of First Liberty stock was exchanged for .56 shares of the Company's common stock, which amounted to approximately 3.6 million shares. The merger constituted a tax-free reorganization and has been accounted for as a pooling of interests under Accounting Principles Board Opinion No. 16. 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. On January 26, 2001, the Company acquired the $111-million-asset Citizens National Bank of Malone, an eighty-year old commercial bank with five branches throughout Franklin and St. Lawrence counties in New York State. The Company issued 952,000 shares of its common stock to the former shareholders at a cost of $26.50 per share. All of the 648,100 shares held in the Company's treasury were issued in this transaction. During the first quarter of 2002, the Company made a contribution of $5.0 million to its defined benefit pension plan. At March 31, 2002, an updated actuarial valuation was performed which showed that plan assets exceeded the accumulated benefit obligation. As a result, the additional minimum pension liability of $5.016 million, which was recorded at December 31, 2001 as a charge to shareholders' equity, net of tax, was reversed. Note B -- Significant Accounting Pronouncements Reserve for Loan Losses The reserve for loan losses reflects management's best estimate of probable loan losses in the Company's loan portfolio, considering evaluations of individual credits and concentrations of credit risk, changes in the quality of the credit portfolio, levels of nonaccrual loans, current economic conditions, changes in the size and character of the credit risks and other pertinent factors. The reserve is increased by provisions charged to expense and reduced by net charge-offs. A loan is considered impaired, based on current information and events, if it is probable that the Bank will not be able to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. 8
New Accounting Pronouncements In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of, including long-term customer relationships of a financial institution, such as core deposit intangibles. This Statement supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," however, this Statement retains the fundamental provisions of Statement 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. Effective January 1, 2002, the Company adopted this pronouncement which had no impact on the financial condition or results of operations for the quarter ending March 31, 2002. Note C -- 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 months ended March 31, 2002 and 2001. <TABLE> <CAPTION> ($000's except for per share amounts) Per Share Income Shares Amount - --------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Quarter ended March 31, 2002 Net income $7,438 Basic EPS 7,438 12,940 $0.57 Effect of dilutive securities: Stock options 153 ---------------- Diluted EPS $7,438 13,093 $0.57 ============================================================================================= Quarter ended March 31, 2001 Net income $5,749 Basic EPS 5,749 11,281 $0.51 Effect of dilutive securities: Stock options 159 ---------------- Diluted EPS $5,749 11,440 $0.50 ============================================================================================= </TABLE> Note D -- Intangible Assets Effective January 1, 2002, the Company adopted Financial Accounting Standards Board (FASB) SFAS No. 142, "Goodwill and Other Intangible Assets", which addresses financial accounting and reporting for acquired goodwill and other intangibles assets and supercedes APB Opinion No. 17, "Intangible Assets". The statement requires 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 goodwill will no longer be recorded upon adoption of this statement. Core deposit intangibles, net and other intangibles (primarily branch goodwill), net related to branch acquisitions will continue to be amortized. The adoption of this pronouncement resulted in a reduction in amortization expense of $325,000 for the quarter ended March 31, 2002. 9
The proforma disclosures on net income and earnings per share of the adopted of SFAS No. 142 for the quarter ended March 31, 2001 are as follows: Quarter Ended ($000's except for earnings-per-share amounts) March 31, 2002 2001 - -------------------------------------------------------------------------------- Reported net income $7,438 $5,749 Add back: Goodwill amortization 257 ------ Adjusted net income $7,438 $6,006 ================================================================================ Basic earnings per share: Reported net income $0.57 $0.51 Goodwill amortization 0.02 ------ Adjusted net income $0.57 $0.53 ================================================================================ Diluted earnings per share: Reported net income $0.57 $0.50 Goodwill amortization 0.02 ------ Adjusted net income $0.57 $0.52 ================================================================================ The gross carrying amount and accumulated amortization for each type of intangible asset are as follows: <TABLE> <CAPTION> (000's omitted) As of March 31, 2002 As of December 31, 2001 ----------------------------------------------------------------------------- Gross Net Gross Net Carrying Accumulated Carrying Carrying Accumulated Carrying Amount Amortization Amount Amount Amortization Amount - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Amortized intangible assets: Core deposit intangibles $47,218 ($12,036) $35,182 $47,218 ($10,496) $36,722 Other intangibles 101,676 (18,448) 83,228 102,718 (16,912) 85,806 - --------------------------------------------------------------------------------------------------------------------------- Total amortized intangible assets 148,894 (30,484) 118,410 149,936 (27,408) 122,528 Unamortized intangible assets: Goodwill 19,814 0 19,814 21,275 (1,461) 19,814 - --------------------------------------------------------------------------------------------------------------------------- Total intangible assets, net $168,708 ($30,484) $138,224 $171,211 ($28,869) $142,342 =========================================================================================================================== </TABLE> The estimated aggregate amortization expense for each of the five succeeding fiscal years ended December 31, is as follows: 2003 $11,229 2004 11,012 2005 10,338 2006 9,664 2007 9,664 There were no changes in the gross carrying value of goodwill for the quarter ended March 31, 2002. As of March 31, 2002, the Company has not tested the goodwill for impairment. The analysis will be completed by June 30, 2002, and any necessary adjustments will be reflected in the consolidated financial statements. 10
The net carrying amount of core deposit intangibles, other intangibles and goodwill as of March 31, 2002 by acquisition is as follows: <TABLE> <CAPTION> (000's omitted) Next 12 Net Months' Acquisition # of Carrying Amortization Date Branches Amount Expense ------------------------------------------------ <S> <C> <C> <C> <C> Core deposit intangibles: FleetBoston Financial 11/16/01 36 $26,992 $3,929 Mellon Bank 06/07/00 2 3,621 271 First Liberty 01/01/97 2 189 108 ChaseManhattan Bank 07/14/95 15 4,380 1,348 -------------------- $35,182 $5,656 ==================== Other intangible assets: Fleet Boston Financial ** 11/16/01 36 $48,097 $4,947 Fleet Bank 07/18/97 12 12,028 1,174 Key Bank 06/16/97 8 9,219 907 ChaseManhattan Bank ** 07/14/95 15 11,000 601 ChaseManhattan Bank 10/28/94 1 266 35 Resolution Trust Corporation 06/03/94 3 2,618 365 -------------------- $83,228 $8,029 ==================== Goodwill: Citizens National Bank of Malone 01/26/01 $12,475 $ 0 Elias Asset Management 04/03/00 7,339 0 -------------------- $19,814 $ 0 ==================== </TABLE> ** The FASB is expected to issue an exposure draft in the second quarter of 2002 regarding the reconsideration of certain provisions of SFAS No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions." Specifically, if a Company separately identified a core deposit intangible asset from "Statement 72 goodwill," the FASB may consider this goodwill under SFAS No. 142. Thus, the Company would cease amortization of the "Statement 72 goodwill." On an annual basis, the resulting reduction in amortization would be $5.548 million or $3.370 million after-tax (assuming a 39.3% marginal tax rate.) Based on average shares outstanding for first quarter 2002, the annual impact on earnings per share (diluted) would be an increase of $0.26. 11
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 Community Bank System, Inc.'s financial condition and results of operations during the three months ended March 31, 2002 which are not otherwise apparent from the consolidated financial statements included in these reports. When used in this report, the term "CBSI" means Community Bank System, Inc. and its subsidiaries on a consolidated basis, unless indicated otherwise. Financial performance comparisons to peer bank holding companies are based on data through December 31, 2001 as provided by the Federal Reserve System; the peer group is comprised of 68 bank holding companies having $3 to $10 billion in assets. 12
COMMUNITY BANK SYSTEM, INC. SUMMARY OF OPERATIONS EARNINGS AND BALANCE SHEET RECAP 1ST QUARTER 2002 AND PRIOR QUARTER COMPARISONS <TABLE> <CAPTION> ------------------------------------------------ 000's Omitted Three Months Ended ------------------------------------------------ Line Mar 31, Mar 31, Change Change No. 2002 2001 Amount Percent --------------------------------------- Earnings --------------------------------------- <S> <C> <C> <C> <C> <C> 1 Net interest income $30,168 $23,167 $7,001 30.2% 2 Loan loss provision 1,518 1,326 192 14.5% 3 Net interest income after provision for loan losses 28,650 21,841 6,809 31.2% 4 Investment security gain (loss) & debt extinguishment 0 10 (10) 0.0% 5 Other income 7,735 6,026 1,709 28.4% 6a Other expense 22,516 17,632 4,884 27.7% 6b Acquisition and unusual expense 591 851 (260) -30.6% 7 Intangible amortization 3,076 1,460 1,616 110.7% 8 Inc before inc tax 10,202 7,934 2,268 28.6% 9 Income tax 2,764 2,185 579 26.5% 10a Net income $7,438 $5,749 $1,689 29.4% 10b Net income - Operating $7,797 $6,250 $1,547 24.8% 10c Net income - Cash $9,306 $6,681 $2,625 39.3% 10d Net income - Cash Operating $9,665 $7,182 $2,483 34.6% Earnings per share 11a Basic $0.57 $0.51 $0.06 11.8% 11b Diluted $0.57 $0.50 $0.07 14.0% 11c Diluted - Operating $0.60 $0.54 $0.06 11.1% 11d Diluted - Cash $0.71 $0.58 $0.13 22.4% 11e Diluted - Cash Operating $0.74 $0.63 $0.11 17.5% ---------------------------------------================================================ Balances At Period End --------------------------------------- 12 Loans 1,724,400 1,572,683 151,717 9.6% 13 Investments (excl. mkt val adj) 1,289,002 1,071,739 217,263 20.3% 14 Earning assets 3,013,402 2,644,422 368,980 14.0% 15 Loan loss reserve 24,010 20,917 3,093 14.8% 16a Intangible assets - Core deposits 35,182 9,917 25,265 254.8% 16b Intangible assets - Goodwill 103,042 60,801 42,241 69.5% 17 Total assets 3,345,214 2,922,188 423,026 14.5% 18 Deposits 2,536,982 2,114,790 422,192 20.0% 19a Borrowings - FHLB 426,100 501,100 (75,000) -15.0% 19b Borrowings - Trust Preferred 77,833 29,826 48,007 161.0% 20 Total equity $270,968 $236,230 $34,738 14.7% ================================================ </TABLE> 13
<TABLE> <CAPTION> ------------------------------------------------ 000's Omitted Three Months Ended ------------------------------------------------ Line Mar 31, Dec 31, Change Change No. 2002 2001 Amount Percent --------------------------------------- Earnings --------------------------------------- <S> <C> <C> <C> <C> <C> 1 Net interest income $30,168 $26,626 $3,542 13.3% 2 Loan loss provision 1,518 2,777 (1,259) -45.3% 3 Net interest income after provision for loan losses 28,650 23,849 4,801 20.1% 4 Investment security gain (loss) & debt extinguishment 0 (13) 13 0.0% 5 Other income 7,735 6,911 824 11.9% 6a Other expense 22,516 19,765 2,751 13.9% 6b Acquisition and unusual expense 591 2,046 (1,455) -71.1% 7 Intangible amortization 3,076 2,137 939 43.9% 8 Inc before inc tax 10,202 6,799 3,403 50.1% 9 Income tax 2,764 1,972 792 40.2% 10a Net income $7,438 $4,827 $2,611 54.1% 10b Net income - Operating $7,797 $6,052 $1,745 28.8% 10c Net income - Cash $9,306 $6,225 $3,081 49.5% 10d Net income - Cash Operating $9,665 $7,450 $2,215 29.7% Earnings per share 11a Basic $0.57 $0.39 $0.18 46.2% 11b Diluted $0.57 $0.39 $0.18 46.2% 11c Diluted - Operating $0.60 $0.49 $0.11 22.4% 11d Diluted - Cash $0.71 $0.50 $0.21 42.0% 11e Diluted - Cash Operating $0.74 $0.60 $0.14 23.3% ---------------------------------------================================================ Balances At Period End --------------------------------------- 12 Loans 1,724,400 1,732,870 (8,470) -0.5% 13 Investments (excl. mkt val adj) 1,289,002 1,131,074 157,928 14.0% 14 Earning assets 3,013,402 2,863,944 149,458 5.2% 15 Loan loss reserve 24,010 23,901 109 0.5% 16a Intangible assets - Core deposits 35,182 36,722 (1,540) -4.2% 16b Intangible assets - Goodwill 103,042 105,620 (2,578) -2.4% 17 Total assets 3,345,214 3,210,833 134,381 4.2% 18 Deposits 2,536,982 2,545,970 (8,988) -0.4% 19a Borrowings - FHLB 426,100 277,300 148,800 53.7% 19b Borrowings - Trust Preferred 77,833 77,819 14 0.0% 20 Total equity $270,968 $267,980 $2,988 1.1% ================================================ </TABLE> 14
<TABLE> <CAPTION> ------------------------------------------------ 000's Omitted Three Months Ended ------------------------------------------------ Line Dec 31, Sep 30, Change Change No. 2001 2001 Amount Percent --------------------------------------- Earnings --------------------------------------- <S> <C> <C> <C> <C> <C> 1 Net interest income $26,626 $23,809 $2,817 11.8% 2 Loan loss provision 2,777 1,579 1,198 75.9% 3 Net interest income after provision for loan losses 23,849 22,230 1,619 7.3% 4 Investment security gain (loss) & debt extinguishment (13) 29 (42) -144.8% 5 Other income 6,911 6,971 (60) -0.9% 6a Other expense 19,765 18,198 1,567 8.6% 6b Acquisition and unusual expense 2,046 631 1,415 224.2% 7 Intangible amortization 2,137 1,541 596 38.7% 8 Inc before inc tax 6,799 8,860 (2,061) -23.3% 9 Income tax 1,972 2,416 (444) -18.4% 10a Net income $4,827 $6,444 ($1,617) -25.1% 10b Net income - Operating $6,052 $6,802 ($750) -11.0% 10c Net income - Cash $6,225 $7,452 ($1,227) -16.5% 10d Net income - Cash Operating $7,450 $7,810 ($360) -4.6% Earnings per share 11a Basic $0.39 $0.56 ($0.17) -30.4% 11b Diluted $0.39 $0.55 ($0.16) -29.1% 11c Diluted - Operating $0.49 $0.58 ($0.09) -15.5% 11d Diluted - Cash $0.50 $0.64 ($0.14) -21.9% 11e Diluted - Cash Operating $0.60 $0.67 ($0.07) -10.4% ---------------------------------------================================================ Balances At Period End --------------------------------------- 12 Loans 1,732,870 1,564,806 168,064 10.7% 13 Investments (excl. mkt val adj) 1,131,074 1,011,354 119,720 11.8% 14 Earning assets 2,863,944 2,576,160 287,784 11.2% 15 Loan loss reserve 23,901 21,083 2,818 13.4% 16a Intangible assets - Core deposits 36,722 9,039 27,683 306.3% 16b Intangible assets - Goodwill 105,620 57,957 47,663 82.2% 17 Total assets 3,210,833 2,844,350 366,483 12.9% 18 Deposits 2,545,970 2,088,106 457,864 21.9% 19a Borrowings - FHLB 277,300 379,200 (101,900) -26.9% 19b Borrowings - Trust Preferred 77,819 77,805 14 0.0% 20 Total equity $267,980 $250,686 $17,294 6.9% ================================================ </TABLE> 15
<TABLE> <CAPTION> ------------------------------------------------ 000's Omitted Three Months Ended ------------------------------------------------ Line Mar 31, Mar 31, Change Change No. 2002 2001 Amount Percent --------------------------------------- Profitability --------------------------------------- <S> <C> <C> <C> <C> <C> 21 Return on assets 0.92% 0.84% 0.08 %pts. 22 Return on equity 10.97% 10.52% 0.45 %pts. 22a Return on equity - operating 11.50% 11.43% 0.07 %pts. 23 Tangible return on assets 1.15% 0.98% 0.17 %pts. 24 Tangible return on equity 13.73% 12.22% 1.51 %pts. 24a Tangible return on equity - 14.26% 13.14% 1.12 %pts. operating 25 Net interest margin (FTE) 4.52% 3.94% 0.58 %pts. 26 Non interest income/ 18.3% 19.6% (1.3) %pts. operating income (FTE, excl sec gains & branch disp) 27 Efficiency ratio 56.3% 57.3% (1.0) %pts. (excl acquis. exp., 1-time items & intangible amortization) ---------------------------------------================================================ Capital --------------------------------------- 28 Tier I leverage ratio 6.55% 6.83% (0.28) %pts. 28b Tangible equity / assets 4.14% 5.80% (1.66) %pts. 29 Accum. other comp. Income $5,226 $11,666 ($6,440) -55.2% Common shares outstanding 30a Weighted average 13,093 11,440 1,653 14.4% 30b Period end 12,937 11,545 1,392 12.1% 31a Cash dividends declared per common share $0.27 $0.27 $0.00 0.0% 31b Common Stock Price $30.15 $28.06 $2.09 7.4% 31c Total Return - last 12 months 11.7% 31.5% (19.8) %pts. 32 Book value $20.95 $20.46 $0.49 2.4% 33 Tangible book value $10.26 $14.34 ($4.08) -28.5% ---------------------------------------================================================ Asset Quality Ratios --------------------------------------- 34 Loan loss reserve/ loans outstanding 1.39% 1.33% 0.06 %pts. 35 Nonperforming loans/ loans outstanding 0.68% 0.80% (0.12) %pts. 36 Loan loss reserve/ nonperforming loans 205% 167% 38 %pts. 37 Net charge-offs/ 0.33% 0.32% 0.01 %pts. average loans 38 Loan loss provision/ 108% 108% 0 %pts. net charge-offs 39 Nonperforming assets/ 0.77% 0.89% (0.12) %pts. loans outstanding + OREO ================================================ </TABLE> 16
<TABLE> <CAPTION> ------------------------------------------------ 000's Omitted Three Months Ended ------------------------------------------------ Line Mar 31, Dec 31, Change Change No. 2002 2001 Amount Percent --------------------------------------- Profitability --------------------------------------- <S> <C> <C> <C> <C> <C> 21 Return on assets 0.92% 0.63% 0.29 %pts. 22 Return on equity 10.97% 7.21% 3.76 %pts. 22a Return on equity - operating 11.50% 9.03% 2.47 %pts. 23 Tangible return on assets 1.15% 0.81% 0.34 %pts. 24 Tangible return on equity 13.73% 9.29% 4.44 %pts. 24a Tangible return on equity - 14.26% 11.12% 3.14 %pts. operating 25 Net interest margin (FTE) 4.52% 4.20% 0.32 %pts. 26 Non interest income/ 18.3% 19.9% (1.6) %pts. operating income (FTE, excl sec gains & branch disp) 27 Efficiency ratio 56.3% 54.6% 1.7 %pts. (excl acquis. exp., 1-time items & intangible amortization) ---------------------------------------================================================ Capital --------------------------------------- 28 Tier I leverage ratio 6.55% 6.73% (0.18) %pts. 28b Tangible equity / assets 4.14% 4.09% 0.05 %pts. 29 Accum. other comp. Income $5,226 $7,281 ($2,055) -28.2% Common shares outstanding 30a Weighted average 13,093 12,358 735 5.9% 30b Period end 12,937 12,903 34 0.3% 31a Cash dividends declared per common share $0.27 $0.27 $0.00 0.0% 31b Common Stock Price $30.15 $26.20 $3.95 15.1% 31c Total Return - last 12 months 11.7% 10.0% 1.7 %pts. 32 Book value $20.95 $20.77 $0.18 0.9% 33 Tangible book value $10.26 $9.74 $0.52 5.3% ---------------------------------------================================================ Asset Quality Ratios --------------------------------------- 34 Loan loss reserve/ loans outstanding 1.39% 1.38% 0.01 %pts. 35 Nonperforming loans/ loans outstanding 0.68% 0.53% 0.15 %pts. 36 Loan loss reserve/ nonperforming loans 205% 263% (58) %pts. 37 Net charge-offs/ 0.33% 0.61% (0.28) %pts. average loans 38 Loan loss provision/ 108% 110% (2) %pts. net charge-offs 39 Nonperforming assets/ 0.77% 0.61% 0.16 %pts. loans outstanding + OREO ================================================ </TABLE> 17
<TABLE> <CAPTION> ------------------------------------------------ 000's Omitted Three Months Ended ------------------------------------------------ Line Dec 31, Sep 30, Change Change No. 2001 2001 Amount Percent --------------------------------------- Profitability --------------------------------------- <S> <C> <C> <C> <C> <C> 21 Return on assets 0.63% 0.90% (0.27) %pts. 22 Return on equity 7.21% 10.73% (3.52) %pts. 22a Return on equity - operating 9.03% 11.33% (2.30) %pts. 23 Tangible return on assets 0.81% 1.04% (0.23) %pts. 24 Tangible return on equity 9.29% 12.41% (3.12) %pts. 24a Tangible return on equity - 11.12% 13.01% (1.89) %pts. operating 25 Net interest margin (FTE) 4.20% 3.94% 0.26 %pts. 26 Non interest income/ 19.9% 21.3% (1.4) %pts. operating income (FTE, excl sec gains & branch disp) 27 Efficiency ratio 54.6% 55.6% (1.0) %pts. (excl acquis. exp., 1-time items & intangible amortization) ---------------------------------------================================================ Capital --------------------------------------- 28 Tier I leverage ratio 6.73% 8.72% (1.99) %pts. 28b Tangible equity / assets 4.09% 6.61% (2.52) %pts. 29 Accum. other comp. Income $7,281 $23,634 ($16,353) -69.2% Common shares outstanding 30a Weighted average 12,358 11,732 626 5.3% 30b Period end 12,903 11,549 1,354 11.7% 31a Cash dividends declared per common share $0.27 $0.27 $0.00 0.0% 31b Common Stock Price $26.20 $27.50 ($1.30) -4.7% 31c Total Return - last 12 months 10.0% 10.3% (0.3) %pts. 32 Book value $20.77 $21.71 ($0.94) -4.3% 33 Tangible book value $9.74 $15.91 ($6.17) -38.8% ---------------------------------------================================================ Asset Quality Ratios --------------------------------------- 34 Loan loss reserve/ loans outstanding 1.38% 1.35% 0.03 %pts. 35 Nonperforming loans/ loans outstanding 0.53% 0.54% (0.01) %pts. 36 Loan loss reserve/ nonperforming loans 263% 247% 16 %pts. 37 Net charge-offs/ 0.61% 0.34% 0.27 %pts. average loans 38 Loan loss provision/ 110% 116% (6) %pts. net charge-offs 39 Nonperforming assets/ 0.61% 0.67% (0.06) %pts. loans outstanding + OREO ================================================= </TABLE> 18
<TABLE> <CAPTION> ------------------------------------------------- 000's Omitted Three Months Ended ------------------------------------------------- Line Mar 31, Mar 31, Change Change No. 2002 2001 Amount Percent -------------------------------------- Asset Quality Components -------------------------------------- <S> <C> <C> <C> <C> <C> 40 Nonaccruing loans $8,519 $7,471 $1,048 14.0% 41 90+ days delinquent $3,167 $5,032 ($1,865) -37.1% ------ ------ ------- ----- 42 Tot nonperforming loans $11,686 $12,503 ($817) -6.5% 43 Troubled debt restructurings $76 $103 ($27) -26.2% 44 Other real estate $1,460 $1,476 ($16) -1.1% ------ ------ ---- ---- 45 Tot nonperforming assets $13,222 $14,082 ($860) -6.1% 46 Net Charge-Offs $1,409 $1,231 $178 14.5% --------------------------------------================================================= Components of Net Interest Margin (FTE) -------------------------------------- 47 Loan yield 7.76% 8.80% (1.04) %pts. 48 Investment yield 6.81% 7.30% (0.49) %pts. 49 Earning asset yield 7.37% 8.21% (0.84) %pts. 50 Interest bearing deposits rate 2.91% 4.57% (1.66) %pts. 51a Borrowed funds rate - FHLB 4.67% 5.90% (1.23) %pts. 51b Borrowed funds rate - Trust 7.59% 9.83% (2.24) %pts. Preferred & other 52 Cost of all interest bearing funds 3.29% 4.92% (1.63) %pts. 53 Cost of funds (includes DDA) 2.82% 4.31% (1.49) %pts. 54 Cost of funds/earning assets 2.85% 4.27% (1.42) %pts. 55 Net interest margin (FTE) 4.52% 3.94% 0.58 %pts. 56 Full tax equivalent adjustment $2,529 $1,541 $988 64.1% --------------------------------------================================================= Average Balances for Period -------------------------------------- 57 Loans $1,733,863 $1,553,824 $180,039 11.6% 58 Investments (excl. mkt val adj.) 1,198,261 990,334 207,927 21.0% 59 Earning assets 2,932,124 2,544,158 387,966 15.2% 60 Total assets 3,284,441 2,778,351 506,090 18.2% 61 Deposits 2,544,733 2,047,060 497,673 24.3% 62a Borrowings - FHLB 343,513 448,220 (104,707) -23.4% 62b Borrowings - Trust preferred & 78,160 30,272 47,888 158.2% other 63 Total equity $274,882 $221,666 $53,216 24.0% ================================================= </TABLE> 19
<TABLE> <CAPTION> ------------------------------------------------- 000's Omitted Three Months Ended ------------------------------------------------- Line Mar 31, Dec 31, Change Change No. 2002 2001 Amount Percent -------------------------------------- Asset Quality Components -------------------------------------- <S> <C> <C> <C> <C> <C> 40 Nonaccruing loans $8,519 $7,186 $1,333 18.5% 41 90+ days delinquent $3,167 $1,914 $1,253 65.5% ------ ------ ------ ----- 42 Tot nonperforming loans $11,686 $9,100 $2,586 28.4% 43 Troubled debt restructurings $76 $75 $1 1.3% 44 Other real estate $1,460 $1,427 $33 2.3% ------ ------ --- --- 45 Tot nonperforming assets $13,222 $10,602 $2,620 24.7% 46 Net Charge-Offs $1,409 $2,524 ($1,115) -44.2% --------------------------------------================================================= Components of Net Interest Margin (FTE) -------------------------------------- 47 Loan yield 7.76% 7.90% (0.14) %pts. 48 Investment yield 6.81% 6.87% (0.06) %pts. 49 Earning asset yield 7.37% 7.49% (0.12) %pts. 50 Interest bearing deposits rate 2.91% 3.44% (0.53) %pts. 51a Borrowed funds rate - FHLB 4.67% 5.07% (0.40) %pts. 51b Borrowed funds rate - Trust 7.59% 8.35% (0.76) %pts. Preferred & other 52 Cost of all interest bearing funds 3.29% 3.84% (0.55) %pts. 53 Cost of funds (includes DDA) 2.82% 3.29% (0.47) %pts. 54 Cost of funds/earning assets 2.85% 3.30% (0.45) %pts. 55 Net interest margin (FTE) 4.52% 4.20% 0.32 %pts. 56 Full tax equivalent adjustment $2,529 $2,065 $464 22.5% --------------------------------------================================================= Average Balances for Period -------------------------------------- 57 Loans $1,733,863 $1,646,921 $86,942 5.3% 58 Investments (excl. mkt val adj.) 1,198,261 1,066,357 131,904 12.4% 59 Earning assets 2,932,124 2,713,278 218,846 8.1% 60 Total assets 3,284,441 3,031,017 253,424 8.4% 61 Deposits 2,544,733 2,299,565 245,168 10.7% 62a Borrowings - FHLB 343,513 340,786 2,727 0.8% 62b Borrowings - Trust preferred & 78,160 78,174 (14) 0.0% other 63 Total equity $274,882 $265,787 $9,095 3.4% ================================================= </TABLE> 20
<TABLE> <CAPTION> ------------------------------------------------- 000's Omitted Three Months Ended ------------------------------------------------- Line Dec 31, Sep 30, Change Change No. 2002 2001 Amount Percent -------------------------------------- Asset Quality Components -------------------------------------- <S> <C> <C> <C> <C> <C> 40 Nonaccruing loans $7,186 $5,677 $1,509 26.6% 41 90+ days delinquent $1,914 $2,842 ($928) -32.7% ------ ------ ----- ----- 42 Tot nonperforming loans $9,100 $8,519 $581 6.8% 43 Troubled debt restructurings $75 $85 ($10) -11.8% 44 Other real estate $1,427 $1,835 ($408) -22.2% ------ ------ ----- ----- 45 Tot nonperforming assets $10,602 $10,439 $163 1.6% 46 Net Charge-Offs $2,524 $1,356 $1,168 86.1% --------------------------------------================================================= Components of Net Interest Margin (FTE) -------------------------------------- 47 Loan yield 7.90% 8.30% (0.40) %pts. 48 Investment yield 6.87% 6.86% 0.01 %pts. 49 Earning asset yield 7.49% 7.73% (0.24) %pts. 50 Interest bearing deposits rate 3.44% 4.06% (0.62) %pts. 51a Borrowed funds rate - FHLB 5.07% 5.40% (0.33) %pts. 51b Borrowed funds rate - Trust 8.35% 8.80% (0.45) %pts. Preferred & other 52 Cost of all interest bearing funds 3.84% 4.45% (0.61) %pts. 53 Cost of funds (includes DDA) 3.29% 3.85% (0.56) %pts. 54 Cost of funds/earning assets 3.30% 3.79% (0.49) %pts. 55 Net interest margin (FTE) 4.20% 3.94% 0.26 %pts. 56 Full tax equivalent adjustment $2,065 $1,935 $130 6.7% --------------------------------------================================================= Average Balances for Period -------------------------------------- 57 Loans $1,646,921 $1,567,842 $79,079 5.0% 58 Investments (excl. mkt val adj.) 1,066,357 1,025,375 40,982 4.0% 59 Earning assets 2,713,278 2,593,217 120,061 4.6% 60 Total assets 3,031,017 2,835,584 195,433 6.9% 61 Deposits 2,299,565 2,076,446 223,119 10.7% 62a Borrowings - FHLB 340,786 413,518 (72,732) -17.6% 62b Borrowings - Trust preferred & 78,174 66,502 11,672 17.6% other 63 Total equity $265,787 $238,159 $27,628 11.6% ================================================= </TABLE> 21
Results of Operations Net income for first quarter 2002 was $7.4 million, an increase of 29% from the same period last year and an all-time high for the Company. Earnings per share (diluted) for the quarter rose 14% to $0.57, reflecting an increase in average shares outstanding of 14%. The Company issued an additional 952,000 common shares in connection with its January 2001 whole-bank purchase and 1.309 million in fourth quarter 2001 to support the mid-November purchase of 36 branches in Western New York from FleetBoston Financial (NYSE: FBF). Operating earnings, which exclude acquisition and unusual expenses and net securities transactions, were $7.8 million for first quarter 2002, up 25% from the same period in the prior year. These costs, which totaled $591,000 in the first quarter of this year versus $851,000 for the comparable 2001 quarter, were associated with the Company's three acquisitions in January, May, and November of last year, which collectively added $1.2 billion in assets and increased its branch network by 70% to 119 locations. Operating earnings per share (diluted) were $0.60, an increase of $0.06 or 11.1%. Effective January 1, 2002, the Company adopted SFAS 142, "Goodwill and Other Intangible Assets," which eliminated the requirement to regularly amortize approximately $19.8 million in goodwill related to certain of its acquisitions. Annual amortization expense was thus reduced by approximately $1.3 million; $.015 of the increase in earnings per share (diluted) this quarter reflects the impact of this adoption. Cash operating earnings for first quarter 2002 were $9.7 million, an increase of 35% from the same period last year and an all-time high for the Company. Cash operating earnings additionally excludes intangible amortization expense, a non-cash item which an increasing number of analysts believes obscures the underlying value of a company's earnings stream. Cash operating earnings per share (diluted) for the quarter were $0.74, up 17% from the prior year's level of $0.63. This quarter's cash operating earnings per share also exceeded by 10% the third quarter 2001 high of the last two years of $0.67. The primary reasons for improved first quarter earnings compared to the same period last year are a 30% increase in net interest income, caused by both better margins and expanded earning assets, and a 28% rise in noninterest income. The resulting higher operating income more than offset greater overhead and intangible amortization due to the acquisition of the former FleetBoston branches in mid-November 2001. Earnings increased over fourth quarter 2001 partially for the same reasons, though net interest and noninterest income were up a lesser 13% and 12%, respectively. In addition, loan loss provision expense was down by 45% and the effective tax rate was reduced by two percentage points. First Quarter Performance Highlights Net Interest Income Net interest income for first quarter 2002 rose to $30.2 million, 30% over the same period last year. The improvement reflects the contribution of the former FleetBoston branches, which added $164 million in commercial and consumer loans and $503 million in low-cost core deposits as of March 31. Core deposits in these branches have increased over 5% since acquisition date. Results also benefited from a full quarter's worth of $105 million in earning assets from the January 26, 2001 purchase of the Citizens National Bank of Malone. Even more important, the net interest margin climbed to 4.52%, up 58 basis points from the first quarter 2001 level of 3.94%. In response to continued rapid Federal Reserve rate reductions, the margin fell further in 2001 to a low point in the second quarter of 3.78%, meaning that it has now widened by 74 basis points since then. o The rise in margin reflects a slower decrease in earning asset yields than in the cost of funds. Approximately 33% of earning assets reprice within one year versus 62% of interest-bearing liabilities (excluding interest checking). Maturing certificates of deposit 22
continued to reprice downward by over 200 basis points on average during the quarter, consistent with lower financial market interest rates. The rate on total borrowings was reduced by 47 basis points compared to fourth quarter 2001. o Earning assets were 14% higher than one year earlier, comprised of $152 million more in loans and $217 million more in securities. Over the last 90 days, loans decreased by .5% or $8.5 million while investments rose 14% or $158 million. The latter increase, which was funded by short-term borrowings, reflected attractive buying opportunities both as to gross yield and as a spread over borrowings, and represents an earnings strategy intended to supplement the present shortfall in loan growth. o Growth in first quarter average earning assets of $388 million compared to one year earlier was largely funded by an increase in average retail and commercial deposits of $585 million, a planned decrease in more volatile public funds deposits of $79 million, and a decrease in average borrowings of $105 million. Total borrowings as a percent of earning assets ended the quarter at 17% versus 12% at year end, following the closing of the FleetBoston transaction, and 20% as of March 31, 2001. Noninterest Income Noninterest income (excluding securities transactions) reached $7.7 million in the first quarter, an increase of $1.7 million or 28% from one year earlier. It rose nearly 12% from the fourth quarter 2001 level, during which the 36 acquired FleetBoston branches were contributing for only half the period. Financial services revenues at $3.6 million were $653,000 higher (up nearly 22%) compared to both the first quarter and fourth quarter of 2001. The primary source of improvement was commissions from the sale of investment products through the Company's broker-dealer, Community Investment Services, Inc. (CISI). The number of financial consultants has been steadily climbing and a new branch referral program is showing good signs of success; as a result, revenues were nearly 150% higher than in first quarter 2001 and over 100% higher than in the fourth quarter. Greater contribution from the Company's other financial services providers varied when compared to the same quarter last year or the linked quarter. o Pension administration and consulting fees from the Company's Benefit Plans Administrative Services subsidiary were 24% higher than in first quarter 2001, owing to substantial new business booked in the latter half of the year; first quarter revenues were essentially flat compared to fourth quarter 2001. o Revenues from the Bank's personal trust department were virtually unchanged from last year's first and fourth quarters, despite the challenging equity markets. Its business is diversified by a mix of equity and fixed income assets under management, estate settlement services, securities custody, and other fiduciary activities. o Fees from the Company's investment management subsidiary, Elias Asset Management (EAM), were off 26% and 5% for the comparable and linked quarters, respectively. Because of its primary focus on management of equity investments, EAM's revenues are more affected by the currently volatile equity markets than the Bank's trust department. o And commissions from the sale of insurance products, which have been a relatively small contributor with the exception of the annual dividend from the Company's creditor life underwriter in the third quarter of each year, rose 85% from one year earlier and 63% over the linked quarter. This reflects CISI's expanded sale of fixed income annuity products, which have gained in popularity as an investment vehicle in the present equity market environment. 23
Financial services revenues comprised 47% of total noninterest income for the quarter versus 50% one year earlier. This decrease was caused by the unusually large 34% increase in general banking fees, primarily from the Company's 2001 FleetBoston branch acquisition, which overshadowed the still strong 22% increase in financial services revenues. General banking revenues were $4.1 million for the quarter, up 34% over the same period last year because of the contribution of the acquired FleetBoston branches, largely in deposit service charges and overdraft fees. Other components of banking fees and their related change compared to first quarter 2001 are as follows: o Electronic banking revenues nearly doubled, partially due to a system change in the recognition of merchant discount fees. o Mortgage banking fees were up 50% due to heavy refinancing activity during 2001. The serviced loan portfolio ended the quarter at $114 million, a 24% increase over one year earlier. o General commissions were unchanged for the period. They were down when adjusted for a prior period processing error. o Excluding the two system-related items mentioned above, first quarter general revenues rose 24% compared to the same quarter last year. Compared to fourth quarter 2001, general banking revenues rose approximately 7%, but were off 5% after elimination of the system differences. The primary reasons for the decrease reflect waiving of certain overdraft fees during the initial conversion of acquired customer accounts and lower mortgage banking fees due to placement of secondary market eligible mortgages in the Bank's loan portfolio as opposed to the prior historical practice of selling them. The ratio of noninterest income to operating income was 18.3% for the quarter, down 1.3 and 1.6 percentage points from the first and fourth quarters of last year, respectively. In part, the decreases reflect the unusually large increases (32% and 14% from first quarter and fourth quarter 2001, respectively) in net interest income (FTE) caused by higher earning assets and improved margins. In addition, the added revenues from cross selling financial services to the 2001 acquired customer base have not yet been fully realized. Loans Loans ended the first quarter at $1.724 billion, up $152 million or 9.6% from March 31, 2001. The improvement reflects the contribution of the acquired FleetBoston branch loans, without which outstandings would have decreased by approximately $13 million or 0.8%. Compared to December 31, 2001, loans were off $8.5 million or 0.5%. o Commercial loans decreased $6 million during the last 90 days. General paydowns more than offset increased automobile dealer floor plan and agricultural borrowings. With the FleetBoston acquisition conversion now complete and added personnel in place in the First Liberty and former FleetBoston branch markets, new business calling efforts have been accelerated. Commercial loan outstandings at quarter end were $638 million (37% of total loans outstanding) compared to $604 million twelve months earlier, an increase of $34 million or 6%. o Consumer direct loans decreased approximately $19 million during the quarter. Demand continues to be insufficient to offset regular repayments. The Company's seasonal marketing program is now underway, with 120,000 mailers to Bank customers sent during the latter part of March through mid-April, and branch personnel anticipate favorable customer response. Consumer direct loans ended the quarter at $377 million (22% of total loans outstanding), up $108 million or 40% since March 31, 2001. 24
o Consumer indirect loans, largely borrowing originated in automobile dealer showrooms, rose $5 million during the first quarter. New originating dealers have been added in the Company's Pennsylvania franchise, and cut-rate new car financing by national captives has brought in additional customer traffic for late-model, used vehicles. Overall, used vehicles constitute 76% of CBU's indirect loans outstanding. Indirect loans at quarter end were $253 million (15% of total loans outstanding), an increase of $2 million or .7% from twelve months earlier. o Consumer mortgages rose $12 million over the last 90 days, the largest quarterly increase in outstandings in 18 months. This rise largely reflects the Company's strategy, implemented during fourth quarter 2001 to book all secondary-market-eligible loans in portfolio, made possible because of the increase in core deposit funding from the FleetBoston branch acquisition. Competitors have recently aggressively undercut the pricing on our no-closing-cost mortgage product, resulting in reduced growth from that product in our bank compared to last year. Over the last twelve months, consumer mortgages have increased $7 million or 1.7% to $456 million (26% of total loans outstanding). Asset Quality Asset quality as of March 31, 2002 improved from one year ago. Loan loss reserves were increased by $3.1 million or 15% to $24 million, while nonperforming loans (nonaccruals plus 90 days past due) were down $817,000 or 7% to $11.7 million. Regular bottom-up review of the portfolio necessitated only a slight increase in the loan loss reserve during the first quarter, though nonperformers have risen $2.6 million. o As a percent of loans outstanding, nonperformers were .68% versus .80% one year earlier. Coverage of the reserve over nonperformers was 205%, compared to 167% coverage at March 31, 2001. At December 31, 2001, the Company's coverage of 263% exceeded the peer median of 201%; also better than peers was the nonperforming loan/outstandings ratio, which was 0.53% at that time versus the median of 0.94%. The change in nonperforming loan ratio and reserve coverage since year end reflects a single $3.2 million commercial loan becoming nonaccruing. A specific allocation within the loan loss reserve has been established, and its adequacy is being monitored on a regular basis. o Net charge-offs for the first quarter were $1.4 million, 14% higher than $1.2 million recognized one year earlier. They remain in the norm of $1.3-$1.5 million for the middle quarters of 2001, well below $2.5 million taken in the fourth quarter of the year. As a percent of average loans outstanding, net charge-offs were virtually unchanged from one year earlier at 0.33%. Installment loan net charge-offs were 0.83% of related average outstandings, the lowest they have been since third quarter 2000. Commercial net charge-offs were 0.32% of related outstandings; while slightly higher than 0.25% one year ago, the ratio is less than half that of the fourth quarter of 2001. Combined mortgage and home equity net charge-offs reflected a net recovery this quarter compared to 0.04% of related outstandings for all of 2001. Loan loss provision expense covered net charge-offs by 108% as it did in first quarter 2001. o Delinquent loans as a percent of total outstandings decreased 30 basis points during the last 90 days to 1.73%. This compares to an abnormally low level of 1.29% one year earlier; with that exception, the range since year-end 2000 has been 1.84%-1.96%. Overhead and Efficiency The Company's efficiency ratio, which excludes intangible amortization, net securities gains/losses, acquisition costs, and unusual expenses, was 56.3% for first quarter 2002, a 1.0 percentage-point improvement from the comparable 2001 quarter and a 1.7 percentage-point increase from fourth quarter 2001. 25
o These results reflect the full impact of the combined $3.2 million in First Liberty cost savings implemented in mid-second quarter 2001 and the benefit of streamlining our operations functions by eliminating duplicate loan and deposit processing units in Canton and Olean, NY. However, because of the surge in volumes being processed as a result of the former FleetBoston branches, part-time and overtime costs in these functions rose from mid-November through March, simultaneous with higher full-time staffing. Personnel have gained valuable experience in handling this expanded work, guided by carefully selected consultants who have redesigned workflows and installed efficient procedures. This latter project was substantially completed by March 31, with nearly a full quarter's benefit of their work expected in second quarter 2002. o The first quarter efficiency ratio also includes the full-quarter impact of all acquired FleetBoston branch employees and related equipment, occupancy, supplies, and other associated expenses, compared to fourth quarter 2001 being affected beginning in mid-November. Data processing expense also rose due to an annual contractual increase as well as a negotiated deferral of extra charges due to 2001's acquisitions until this time. o Relative stability in the efficiency ratio for the time being was maintained because of increased noninterest income, rising margins, and higher earning assets from acquisitions and investment leverage strategies, all of which drove operating income up by 11.8% this quarter versus the fourth quarter in 2001. o Acquisition and unusual expenses, which are excluded from the efficiency ratio calculation, were $591,000 in the first quarter, down $260,000 from the same period last year (which included Citizens National Bank acquisition costs) and $1.5 million less than in the fourth quarter (mostly FleetBoston acquisition-related expenses). The largest items comprising this quarter's non-recurring costs include $97,000 in severance expense for First Liberty; $347,000 in professional and consulting fees for our operations centers; and $61,000 in check replacement costs for former FleetBoston customers. Little additional acquisition and unusual costs related to 2001's acquisitions is expected this year. o The efficiency ratios for first quarter 2002 and the linked quarter have also been adjusted for various fluctuations caused by system or other factors that misrepresent the common definition of productivity. Expenses were adjusted by +$61,000 and -$215,000, respectively, while fee income was adjusted by -$392,000 and +$287,000, respectively. 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, adequate sources of both on- and off-balance sheet funding are in place. CBSI'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 March 31, 2001, this ratio was 16.5% and 15.8%, respectively, excluding the Company's capacity to borrow additional funds from the Federal Home Loan Bank. 26
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. 27
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> First Quarter Ended March 31, ---------------------------------------------------------------------------- (000's omitted except yields and rates) 2002 2001 ---------------------------------------------------------------------------- Average Average Average Amount Yield/Rate Average Amount Yield/Rate Balance of Interest Paid Balance of Interest Paid ---------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> ASSETS Interest-earning assets: Federal funds sold $ 0 $ 0 0.00% $ 324 $ 4 5.01% Time deposits in other banks 357 1 1.14% 384 187 NA Taxable investment securities 898,231 14,428 6.51% 820,573 14,481 7.16% Nontaxable investment securities 299,673 5,687 7.70% 169,053 3,152 7.56% Loans (net of unearned discount) 1,733,863 33,190 7.76% 1,553,824 33,698 8.80% ----------------------- ----------------------- Total interest-earning assets 2,932,124 53,306 7.37% 2,544,158 51,522 8.21% Noninterest earning assets: Cash and due from banks 99,356 83,934 Premises and equipment 53,799 42,425 Other assets 196,329 117,296 Reserve for loan losses (23,915) (20,664) Net unrealized gains on available-for-sale portfolio 26,748 11,202 ----------- ----------- Total assets $ 3,284,441 $ 2,778,351 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing liabilities: Savings deposits $ 959,169 $ 3,195 1.35% $ 638,345 $ 3,347 2.13% Time deposits 1,157,663 11,974 4.19% 1,094,678 16,202 6.00% Short-term borrowings 59,958 298 2.02% 208,910 3,107 6.03% Long-term borrowings 361,715 5,142 5.77% 269,582 4,158 6.26% ----------------------- ----------------------- Total interest-bearing liabilities 2,538,505 20,609 3.29% 2,211,515 26,814 4.92% Noninterest bearing liabilities: Demand deposits 427,901 314,037 Other liabilities 43,153 31,133 Shareholders' equity 274,882 221,666 ----------- ----------- Total liabilities and shareholders' equity $ 3,284,441 $ 2,778,351 =========== =========== Net interest earnings $32,697 $24,708 ======= ======= Net yield on interest-earning assets 4.52% 3.94% Federal tax exemption on nontaxable investment securities and loans included in interest income $ 2,529 $ 1,541 </TABLE> 28
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> - ---------------------------------------------------------------------------------------- 1st Quarter 2002 versus 1st Quarter 2001 Increase (Decrease) Due to Change in (1) ---------------------------------------- Net (000's omitted) Volume Rate Change - ---------------------------------------------------------------------------------------- <S> <C> <C> <C> Interest earned on: Federal funds sold ($2) ($2) ($4) Time deposits in other banks (12) (174) (186) Taxable investment securities 5,385 (5,438) (53) Nontaxable investment securities 2,478 57 2,535 Loans (net of unearned discount) 15,683 (16,191) (508) Total interest-earning assets (2) 26,650 (24,866) 1,784 Interest paid on: Savings deposits 5,649 (5,801) (152) Time deposits 5,670 (9,898) (4,228) Short-term borrowings (1,453) (1,356) (2,809) Long-term borrowings 2,950 (1,966) 984 Total interest-bearing liabilities (2) 20,298 (26,503) (6,205) Net interest earnings (2) $4,051 $3,938 $7,989 </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. 29
C) The following table sets forth information by category of noninterest expenses of the Company for the periods indicated. <TABLE> <CAPTION> --------------------------------------------------------------------------------------------- Quarters Ended March 31, Quarters Ended --------------------------------------------------------------------------------------------- Change Change March 31, December 31, Change Change (000's omitted) 2002 2001 Amount Percent 2002 2001 Amount Percent - ---------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Personnel expense $12,125 $10,116 $ 2,009 19.9% $12,125 $10,724 $ 1,401 13.1% Net occupancy expense 2,322 1,578 744 47.1% 2,322 1,568 754 48.1% Equipment expense 1,871 1,355 516 38.1% 1,871 1,659 212 12.8% Legal and professional fees 853 627 226 36.0% 853 797 56 7.0% Data processing expense 1,679 1,187 492 41.4% 1,679 1,306 373 28.6% Amortization of intangibles 3,076 1,460 1,616 110.7% 3,076 2,137 939 43.9% Stationary and supplies 688 354 334 94.4% 688 591 97 16.4% Foreclosed property expense 328 162 166 102.5% 328 308 20 6.5% Deposit insurance premiums 122 72 50 69.4% 122 92 30 32.6% Acquisition and unusual expenses 591 851 (260) -30.6% 591 2,046 (1,455) -71.1% Other 2,528 2,181 347 15.9% 2,528 2,720 (192) -7.1% - ---------------------------------------------------------------------------------------------------------------------------------- Total noninterest expense $26,183 $19,943 $ 6,240 31.3% $26,183 $23,948 $ 2,235 9.3% ================================================================================================================================== Total operating expenses as a percentage of average assets 3.23% 2.91% 0.32% 3.23% 3.13% 0.10% Efficiency ratio (1) 56.3% 57.3% -1.1% 56.3% 54.6% 1.7% </TABLE> (1) Noninterest expense excluding nonrecurring items, amortization of deposit intangibles, and certain adjustments as disclosed in the "Overhead and Efficiency" section of the MD&A, divided by operating income excluding all nonrecurring items. 30
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 March 31, --------------------------------------------------- Change Change (000's omitted) 2002 2001 Amount Percent - ------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Real estate mortgages: Residential $ 713,289 $ 612,823 $ 100,466 16.4% Commercial loans secured by real estate 269,282 259,695 9,587 3.7% Farm 21,289 21,038 251 1.2% - ------------------------------------------------------------------------------------------------- Total 1,003,860 893,556 110,304 12.3% Commercial, financial, and agricultural: Commercial and financial 268,296 244,562 23,734 9.7% Agricultural 25,291 26,405 (1,114) -4.2% - ------------------------------------------------------------------------------------------------- Total 293,587 270,967 22,620 8.3% Installment loans to individuals 398,561 382,713 15,848 4.1% Other loans 28,575 26,393 2,182 8.3% - ------------------------------------------------------------------------------------------------- Gross loans 1,724,583 1,573,629 150,954 9.6% Less: unearned discount 183 946 (763) -80.7% - ------------------------------------------------------------------------------------------------- Net loans 1,724,400 1,572,683 151,717 9.6% Reserve for loan losses 24,010 20,917 3,093 14.8% - ------------------------------------------------------------------------------------------------- Loans, net of reserve for loan losses $1,700,390 $1,551,766 $ 148,624 9.6% ================================================================================================= </TABLE> E) The following table reconciles the differences between the line of business loan breakdown reflected in the narrative of this report and on Table D as compared to regulatory reporting definitions reflected on the Call Report. <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------- Line of Business as of March 31, 2002 ---------------------------------------------------------------------- Consumer Consumer Consumer Business Total (000's omitted) Direct Indirect Mortgages Lending Loans - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Regulatory Reporting Categories: Loans secured by real estate: Residential $224,930 $453,165 $ 35,194 $ 713,289 Commercial 52 2,254 266,976 269,282 Farm 34 21,255 21,289 Agricultural loans 463 24,828 25,291 Commercial loans 10,795 257,501 268,296 Installment loans to individuals 138,569 253,575 103 6,314 398,561 Other loans 2,619 25,956 28,575 - ------------------------------------------------------------------------------------------------------------- Total loans 377,462 253,575 455,522 638,024 1,724,583 Unearned discount 183 183 - ------------------------------------------------------------------------------------------------------------- Net loans $377,279 $253,575 $455,522 $638,024 $1,724,400 ============================================================================================================= </TABLE> 31
F) The following table presents information concerning the aggregate amount of nonperforming assets: <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------ As of March 31, ----------------------------------------------------- Change Change (000's omitted) 2002 2001 Amount Percent - ------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Loans accounted for on a nonaccrual basis $8,519 $7,471 $1,048 14.0% Accruing loans which are contractually past due 90 days or more as to principal or interest payments 3,167 5,032 (1,865) -37.1% - ------------------------------------------------------------------------------------------------------------------ Total nonperforming loans 11,686 12,503 (817) -6.5% Loans which are "troubled debt restructurings" as defined in FASB No. 15 "Accounting by Debtors and Creditors for Troubled Debt Restructurings" 76 103 (27) -26.2% Other real estate 1,460 1,476 (16) -1.1% - ------------------------------------------------------------------------------------------------------------------ Total non performing assets $13,222 $14,082 ($860) -6.1% ================================================================================================================== Ratio of allowance for loan losses to period-end loans 1.39% 1.33% 0.06% Ratio of allowance for loan losses to period-end nonperforming loans 205.5% 167.3% 38.2% Ratio of allowance for loan losses to period-end nonperforming assets 181.6% 148.5% 33.1% Ratio of nonperforming loans to period-end loans 0.68% 0.80% -0.12% Ratio of nonperforming assets to period-end total loans and other real estate 0.77% 0.89% -0.12% </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. 32
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 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> - ------------------------------------------------------------------------------------------------------------------------------ Quarter Ended March 31, ------------------------------------------------------------ Change Change (000's omitted) 2002 2001 Amount Percent - ------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Amount of loans outstanding at end of period $1,724,400 $1,572,683 $151,717 9.6% Daily average amount of loans (net of unearned discount) 1,733,863 1,553,824 180,039 11.6% Balance of allowance for loan losses at beginning of period 23,901 20,035 3,866 19.3% Loans charged off: Commercial, financial, and agricultural 582 419 163 38.9% Real estate 0 62 (62) -100.0% Installment 1,486 1,249 237 19.0% - ------------------------------------------------------------------------------------------------------------------------------ Total loans charged off 2,068 1,730 338 19.5% Recoveries of loan previously charged off: Commercial, financial and agricultural 62 55 7 12.7% Real estate 103 13 90 692.3% Installment 494 431 63 14.6% - ------------------------------------------------------------------------------------------------------------------------------ Total recoveries 659 499 160 32.1% - ------------------------------------------------------------------------------------------------------------------------------ Net loans charged off 1,409 1,231 178 14.5% Provision for loan losses 1,518 1,326 192 14.5% Reserve on acquired loans (1) 0 787 (787) -100.0% Balance of allowance for loan losses at end of period $24,010 $20,917 $3,093 14.8% - ------------------------------------------------------------------------------------------------------------------------------ Ratio of net charge-offs to average loans outstanding 0.33% 0.32% 0.01% ============================================================================================================================== </TABLE> (1) This reserve addition is attributable to loans purchased from Citizens National Bank of Malone. 33
H) The following table sets forth information by category of noninterest income for the Company for the periods indicated. <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------------------- Quarters Ended March 31, Quarters Ended ------------------------------------------------------------------------------- Change Change March 31, December 31, Change Change (000's omitted) 2002 2001 Amount Percent 2002 2001 Amount Percent - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Personal trust $514 $529 ($15) -2.8% $514 $413 $101 24.5% EBT/BPA 1,102 888 214 24.1% 1,102 1,130 (28) -2.5% Elias Asset Management 777 1,047 (270) -25.8% 777 815 (38) -4.7% Insurance 187 101 86 85.1% 187 115 72 62.6% Other investment products 1,061 425 636 149.6% 1,061 523 538 102.9% - --------------------------------------------------------------------------------------------------------------------------- Total financial services 3,641 2,990 651 21.8% 3,641 2,996 645 21.5% Electronic banking 606 305 301 98.7% 606 416 190 45.7% Mortgage banking 120 80 40 50.0% 120 290 (170) -58.6% Commercial leasing 3 4 (1) -25.0% 3 1 2 200.0% Deposit service charges 1,313 988 325 32.9% 1,313 1,121 192 17.1% Overdraft fees 1,431 1,040 391 37.6% 1,431 1,542 (111) -7.2% Commissions 614 635 (21) -3.3% 614 461 153 33.2% Total general banking services 4,087 3,052 1,035 33.9% 4,087 3,831 256 6.7% - --------------------------------------------------------------------------------------------------------------------------- Miscellaneous revenue 7 (16) 23 -143.8% 7 9 (2) -22.2% - --------------------------------------------------------------------------------------------------------------------------- Total noninterest income excluding investment security gain (loss), net and disposition of branch properties 7,735 6,026 1,709 28.4% 7,735 6,836 899 13.2% Investment security gain (loss), net 0 10 (10) -100% 0 (13) 13 -100% Disposition of branch properties 0 0 0 0% 0 75 (75) -100% - --------------------------------------------------------------------------------------------------------------------------- Total noninterest income $7,735 $6,036 $1,699 28.1% $7,735 $6,898 $837 12.1% =========================================================================================================================== Noninterest income as a percentage of operating income (excludes investment security gain (loss), net and other timing adjustments) 18.3% 19.6% -1.3% 18.3% 19.9% -1.6% </TABLE> 34
I) The following table reconciles differences between the line of business noninterest income breakdown reflected in the narrative of this report and on table H as compared to regulatory reporting definitions, reflected on the Call Report. <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------------------------ Quarter Ended March 31, 2002 Regulatory Reporting Categories ---------------------------------------------------------------------------------------------- Other Service Fiduciary and Service Charges Commissions Charges, Other Investment Total Investment on Deposit on Investment Commissions Operating Security Gain Other (000's omitted) Services Accounts Products and Fees Income (Loss), net Income - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> Personal trust $514 $ 514 EBT/BPA 364 738 1,102 Elias Asset Management 777 777 Insurance 132 55 187 Other investment products 1,061 1,061 - ------------------------------------------------------------------------------------------------------------------------------------ Total financial services 878 0 1,970 793 0 0 3,641 Electronic banking 177 429 606 Mortgage banking 73 47 120 Commercial leasing 3 3 Deposit service charges 1,313 1,313 Overdraft fees 1,431 1,431 Commissions 614 614 - ------------------------------------------------------------------------------------------------------------------------------------ Total general banking services 0 2,921 0 1,119 47 0 4,087 Miscellaneous revenue 7 7 - ------------------------------------------------------------------------------------------------------------------------------------ Total noninterest income excluding Investment security gain (loss), net 878 2,921 1,970 1,912 54 0 7,735 Investment security gain (loss), net 0 0 - ------------------------------------------------------------------------------------------------------------------------------------ Total noninterest income $878 $2,921 $1,970 $1,912 $54 $0 $7,735 ==================================================================================================================================== </TABLE> 35
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 or 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 in varying environments. 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 all balance sheet positions. 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. The following reflects the Company's one-year net interest income sensitivity based on approximate asset and liability levels on March 31, 2002, assuming no growth in the balance sheet, and assuming a 200 basis point instantaneous upward rate shock in the prime rate, federal funds rate and the entire Treasury yield curve and a similar 150 basis point instantaneous downward rate shock. Regulatory Model <TABLE> <CAPTION> Rate Change Net Interest Income Net Interest Income In Basis Points Dollar Change During First 12 Months Percent Change from Flat Rates ------------------------------------------------------------------------------------------ <S> <C> <C> <C> +200 bp ($1.3 million) (1.0%) -150 bp ($2.6 million) (2.0%) </TABLE> Given the steepness in slope of the treasury yield curve as of March 31, 2002, a second group of simulations was performed based on what the Company believes to be conservative levels of balance sheet growth. These levels include no growth in the Company's securities portfolio, flat loan levels until mid-year, and low single digit loan growth thereafter. Under this set of assumptions, were the slope of the yield curve to change, holding short rates constant while flattening long-term rates over the next 12 months, the net interest margin is projected to narrow modestly (simulation B). However, if short term rates were to increase 200 basis points over the next 12 months (holding long-term rates constant), margins are projected to be relatively unchanged (simulation A). Management Model <TABLE> <CAPTION> Rate Change Net Interest Income Net Interest Income In Basis Points Dollar Change During First 12 Months Percent Change from Flat Rates -------------------------------------------------------------------------------------------------- <S> <C> <C> A) Increasing Short Term Rates ($445,000) (.3%) B) Reducing Longer Term Rates ($4.0 million) (3.1%) </TABLE> 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 36
(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. 37
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. Not Applicable. 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: (21) Subsidiaries of the registrant - Community Bank, N.A., State of New York - Community Financial Services, Inc., State of New York - Community Capital Trust I, State of Delaware - Community Capital Trust II, State of Delaware - Community Statutory Trust III, State of Connecticut - Benefit Plans Administrative Services, Inc., State of New York - CBNA Treasury Management Corporation, State of New York - Community Investment Services, Inc., State of New York - CBNA Preferred Funding Corporation, State of Delaware - Elias Asset Management, Inc., State of Delaware - CFSI Close-Out Corp., State of New York - First Liberty Service Corporation, State of Delaware b) Reports on Form 8-K: Not Applicable. 38
SIGNATURES Pursuant to the requirements of The Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Community Bank System, Inc. Date: May 14, 2002 /s/ Sanford A. Belden ---------------------------------------- Sanford A. Belden, President and Chief Executive Officer Date: May 14, 2002 /s/ David G. Wallace ---------------------------------------- David G. Wallace, Treasurer and Chief Financial Officer 39