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, 2001 Commission file number 0-11716 COMMUNITY BANK SYSTEM, INC. (Exact name of registrant as specified in its charter) DELAWARE 16-1213679 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5790 Widewaters Parkway, DeWitt, New York 13214 (Address of principal executive offices) (Zip Code) 315/445-2282 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common Stock, No par value - 7,981,840 shares outstanding as of May 10, 2001 INDEX COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES PART I. INFORMATION Item 1. Financial Statements (Unaudited) Consolidated balance sheets -- March 31, 2001, December 31, 2000 and March 31, 2000 Consolidated statements of income -- Three months ended March 31 2001and 2000 Consolidated statements of cash flows -- Three months ended March 31, 2001, and 2000 Consolidated statements of comprehensive income -- Three months ended March 31, 2001 and 2000 Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations Item 3. Quantative and Qualitative Disclosure about Market Risk (Included in Item 2) PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults upon Senior Securities Item 4. Submission of Matters to a Vote of Securities Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CONDITION March 31, December 31, March 31, 2001 2000 2000 - --------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $66,029,122 $59,304,276 $71,510,871 Federal funds sold 0 0 7,800,000 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL CASH AND CASH EQUIVALENTS 66,029,122 59,304,276 79,310,871 Investment securities U.S. Treasury 4,115,436 0 2,999,843 U.S. Government agencies and corporations 250,931,721 241,158,578 209,511,839 States and political subdivisions 169,284,865 140,003,434 123,889,874 Mortgage-backed securities 423,070,295 297,659,183 292,748,775 Federal Reserve Bank 2,293,950 2,293,950 2,293,950 Other securities 69,282,032 69,109,714 60,409,691 -------------------------------------------------------- Investment securities at cost 918,978,299 750,224,859 691,853,972 Market value adjustment on available for sale securities 19,721,921 11,923,183 (21,001,456) - --------------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENT SECURITIES 938,700,220 762,148,042 670,852,516 Loans 1,152,319,356 1,099,135,217 1,034,127,545 Less: Unearned discount 361,946 408,869 640,022 Reserve for possible loan losses 15,401,174 14,613,877 13,915,327 - --------------------------------------------------------------------------------------------------------------------------------- NET LOANS 1,136,556,236 1,084,112,471 1,019,572,196 Bank premises and equipment 29,162,787 26,862,758 25,637,373 Accrued interest receivable 18,992,309 18,478,042 15,008,802 Intangible assets 66,528,438 50,949,252 48,374,472 Other assets 22,432,174 20,780,571 24,846,480 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $2,278,401,286 $2,022,635,412 $1,883,602,710 ================================================================================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits Noninterest bearing $262,597,488 $258,004,313 $249,891,997 Interest bearing 1,337,387,465 1,199,725,229 1,170,892,557 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL DEPOSITS 1,599,984,953 1,457,729,542 1,420,784,554 Federal funds purchased 28,000,000 38,000,000 0 Short term borrowings 121,100,000 151,100,000 229,000,000 Long term borrowings 292,000,000 180,000,000 70,000,000 Company obligated mandatorily redeemable preferred securities of subsidiary, Community Capital Trust I holding solely junior Subordinated debentures of the Company 29,825,625 29,823,938 29,818,875 Accrued interest and other liabilities 35,556,481 26,606,217 21,580,718 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 2,106,467,059 1,883,259,697 1,771,184,147 - --------------------------------------------------------------------------------------------------------------------------------- Shareholders' equity: Common stock (7,978,940; 6,993,459; 7,093,059 7,978,940 7,641,559 7,641,159 Shares outstanding) Surplus 41,845,037 33,343,519 33,338,119 Undivided profits 110,659,096 108,349,087 98,592,247 Accumulated other comprehensive income (loss) 11,665,517 7,052,563 (12,422,361) Treasury stock (0; 648,100; 548,100; shares) 0 (17,006,288) (14,718,788) Shares issued under employee stock plan - unearned (214,363) (4,725) (11,813) - --------------------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 171,934,227 139,375,715 112,418,563 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,278,401,286 $2,022,635,412 $1,883,602,710 ================================================================================================================================= See notes to consolidated financial statements COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Three Months Ended Three Months Ended March 31, 2001 and 2000 March 31, 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Interest and fees on loans $25,364,956 $22,655,660 Interest and dividends on investments: U.S. Treasury 37,726 66,888 U.S. Government agencies and corporations 4,465,939 3,549,568 States and political subdivisions 1,883,536 1,609,808 Mortgage-backed securities 6,259,804 5,231,371 Other securities 1,237,818 1,021,077 Interest on federal funds sold 4,077 301,590 Interest on deposits at other banks 6,112 134,758 - ----------------------------------------------------------------------------------------------------------------------------- Total interest income 39,259,968 34,570,720 - ----------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Interest on deposits Savings 2,792,409 2,661,111 Time 11,616,360 8,509,698 Interest on federal funds purchased and term borrowings 5,634,713 4,846,692 Interest on mandatorily redeemable capital securities of subsidiary 732,938 732,938 - ----------------------------------------------------------------------------------------------------------------------------- Total interest expense 20,776,420 16,750,439 - ----------------------------------------------------------------------------------------------------------------------------- Net interest income 18,483,548 17,820,281 Less: Provision for possible loan losses 1,236,000 1,209,290 - ----------------------------------------------------------------------------------------------------------------------------- Net Interest income after provision for loan losses 17,247,548 16,610,991 - ----------------------------------------------------------------------------------------------------------------------------- OTHER INCOME: Fiduciary and investment services 656,149 645,580 Service charges on deposit accounts 1,970,581 1,770,399 Commissions on investment products 1,524,180 395,331 Other service charges, commissions and fees 1,256,792 1,286,623 Miscellaneous income (4,060) 44,519 Investment security gains (losses) 9,980 (212,236) - ----------------------------------------------------------------------------------------------------------------------------- Total other income 5,413,622 3,930,216 - ----------------------------------------------------------------------------------------------------------------------------- OTHER EXPENSES: Salaries and employee benefits 8,141,077 6,818,843 Occupancy expense, net 1,314,035 1,034,366 Equipment and furniture expense 953,738 911,485 Amortization of intangible assets 1,364,655 1,110,476 Other 4,516,868 3,487,675 - ----------------------------------------------------------------------------------------------------------------------------- Total other expenses 16,290,373 13,362,845 - ----------------------------------------------------------------------------------------------------------------------------- Income before income taxes and extraordinary item 6,370,797 7,178,362 Income taxes 1,911,339 2,153,750 - ----------------------------------------------------------------------------------------------------------------------------- NET INCOME $4,459,458 $5,024,612 ============================================================================================================================= EARNINGS PER SHARE - BASIC $0.58 $0.71 - DILUTED $0.57 $0.70 ============================================================================================================================= See notes to consolidated financial statements COMMUNITY BANK SYSTEM, INC. CONSOLIDATED STATEMENT OF CASH FLOWS Three Months Ended March 31, 2001 and 2000 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------- Operating Activities: Net income $4,459,458 $5,024,612 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 832,698 743,647 Amortization of intangible assets 1,364,655 1,110,476 Net amortization of security premiums and discounts 196,077 (32,163) Amortization of discount on loans (46,923) (80,338) Provision for loan losses 1,236,000 1,209,290 Provision for deferred taxes 417,992 (730,136) (Gain)\loss on sale of investment securities (9,980) 212,236 (Gain)\loss on sale of loans and other assets (1,520) (44,519) Change in interest receivable (514,267) (840,734) Change in other assets and other liabilities 4,293,555 3,240,847 Change in unearned loan fees and costs (216,060) (199,472) - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 12,011,685 9,613,746 - ----------------------------------------------------------------------------------------------------------------------------- Investing Activities: Proceeds from sales of investment securities 8,057,675 11,519,958 Proceeds from maturities of held to maturity investment securities 1,239,877 580,423 Proceeds from maturities of available for sale investment securities 20,014,425 6,876,115 Purchases of held to maturity investment securities (4,472,742) (1,030,225) Purchases of available for sale investment securities (193,778,772) (57,165,315) Net change in loans outstanding (54,186,443) (24,646,593) Capital expenditures (3,148,796) (1,013,779) Proceeds from sales of property and equipment 0 132,963 - ----------------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (226,274,776) (64,746,453) - ----------------------------------------------------------------------------------------------------------------------------- Financing Activities: Net change in demand deposits, NOW accounts, and savings accounts 62,281,022 13,720,808 Net change in certificates of deposit 79,974,389 46,757,762 Net change in federal funds purchased (10,000,000) 0 Net change in term borrowings 82,000,000 (25,000,000) Issuance (retirement) of common and preferred stock 8,620,760 11,333 Cash dividends (1,888,234) (1,772,982) - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 220,987,937 33,716,921 - ----------------------------------------------------------------------------------------------------------------------------- Change in cash and cash equivalents 6,724,846 (21,415,786) Cash and cash equivalents at beginning of year 59,304,276 100,726,657 - ----------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD 66,029,122 79,310,871 ============================================================================================================================= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest $18,334,128 $14,625,337 ============================================================================================================================= Cash paid for income taxes $429,331 $465,373 ============================================================================================================================= SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES: Dividends declared and unpaid $2,149,449 $1,773,202 Gross change in unrealized gains and (losses) on Available-for-sale securities $7,798,739 $1,125,961 Common stock issued to affect acquisition (See Note A) including treasury stock of 648,100 $25,228,000 $0.00 Shares ============================================================================================================================= The accompanying notes are an integral part of the consolidated financial statements. COMMUNITY BANK SYSTEM, INC. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Three Months Ended March 31, 2001 and 2000 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss), before tax: Unrealized gains on securities: Change in unrealized holding gains (losses) arising during period $7,808,719 $913,725 Less: Reclassification adjustment for gains included in net income (9,980) 212,236 - ----------------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss), before tax 7,798,739 1,125,961 Income tax benefit related to items of other comprehensive income (3,185,785) (459,955) - ----------------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss), net of tax 4,612,954 666,006 Plus: Net income 4,459,458 5,024,612 - ----------------------------------------------------------------------------------------------------------------------------- Comprehensive income $9,072,412 $5,690,618 ============================================================================================================================= See notes to consolidated financial statements COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 2001 NOTE A -- BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the three-month period ended March 31, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. On January 29, 1997, Community Bank System, Inc. ("Company") formed a wholly owned subsidiary, Community Capital Trust I ("Trust"), a Delaware statutory business trust. The Trust has issued $30 million aggregate liquidation amount of 9.75% Company-Obligated Mandatorily Redeemable Preferred Securities representing undivided beneficial interests in the assets of the Trust. The Company borrowed the proceeds of the Preferred Securities from the Trust by issuing Junior Subordinated Debentures to the Trust having substantially similar terms as the Preferred Securities. The sole assets of the Trust on September 30, 2000 were $31,252,830 aggregate principal amount of the Company's Junior Subordinated Debentures, together with the related accrued interest receivable thereon. The Preferred Securities mature in 2027, and are treated as Tier 1 capital by the Federal Reserve Bank of New York. The guarantees issued by the Company for the Trust, together with the Company's obligations under the Trust Agreement, the Junior Subordinated Debentures and the Indenture under which the Junior Subordinated Debentures were issued, constitute a full and unconditional guarantee by the Company of the Preferred Securities issued by the Trust. On April 3, 2000, Community Bank System, Inc. acquired all the stock of Elias Asset Management, Inc. for cash of $6.5 million. In accordance with the stock purchase agreement, additional consideration will be paid if certain revenue targets are met over the next five years. This transaction was accounted for under the purchase method. On January 26, 2001, the Company acquired the Citizens National Bank of Malone, an eighty-year-old commercial bank, in a transaction valued at $25,228,000. 952,000 shares of Community Bank System, Inc. was issued to the shareholders of Citizens to affect the transaction. The Company purchased assets with a fair value of $110,137,000, assumed liabilities with the fair value of $98,681,000 and recorded other purchase accounting adjustments totaling $499,000. The excess of purchase price over fair value of assets acquired amounted to $13,273,000 and will be amortized over a fifteen year period. On May 14, 2001, Community Bank System, Inc. and First Liberty Bank Corp. (NASDAQ-OTC: FLIB) completed their agreement to merge, approved by their respective shareholders on April 23, 2001, in which CBU acquired all of the stock of FLIB and merged First Liberty Bank & Trust, FLIB's principal subsidiary, into Community Bank, N.A., CBU's banking subsidiary. First Liberty will continue to operate under its present name in Pennsylvania as a division of Community Bank. CBU had $2.3 billion in assets prior to the merger, and FLIB was a $644-million-asset bank holding company headquartered in Jermyn, Pennsylvania. At $2.9 billion in assets, the combined company is now the second-largest banking franchise headquartered in Upstate New York and has a market value in excess of $320 million. Pursuant to the definitive agreement, each share of FLIB was exchanged on a tax-free basis for 0.56 shares of registered common stock of CBU. At CBU's closing price on May 11 of $27.80, the shares of CBU received by FLIB shareholders have a value of $99.1 million, or $15.57 per share. Based on CBU's current annualized quarterly dividend, FLIB shareholders will realize a 37% increase in cash dividends per share. CBU issued approximately 3,566,000 shares in the transaction, which has been recorded under the pooling method of accounting. 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 diuluted earnings per share for the three months ended March 31, 2001 and 2000: - ------------------------------------------------------------------------------------------------------------------------------ For three months ended March 31, 2001 Income Shares Per share amount - ------------------------------------------------------------------------------------------------------------------------------ Net Income $4,459,458 Basic EPS 4,459,458 7,715,113 $ 0.58 Effect of dilutive securities: Stock options 0 139,690 --------------------------------------------- DILUTED EPS $4,459,458 7,854,803 $ 0.57 ============================================================================================================================== - ------------------------------------------------------------------------------------------------------------------------------ For three months ended March 31, 2000 Income Shares Per share amount - ------------------------------------------------------------------------------------------------------------------------------ NET INCOME Net Income $5,024,612 Basic EPS 5,024,612 7,092,527 $ 0.71 Effect of dilutive securities: Stock options 0 88,452 --------------------------------------------- DILUTED EPS $5,024,612 7,180,979 $ 0.70 ============================================================================================================================== 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 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, 2001 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, 2000 as provided by the Federal Reserve System; the peer group is comprised of 172 bank holding companies having $1 to $3 billion in assets. COMMUNITY BANK SYSTEM, INC. Page 9 of 11 SUMMARY OF OPERATIONS EARNINGS AND BALANCE SHEET RECAP 1ST QUARTER 2001 AND PRIOR QUARTER COMPARISONS 000s Omitted Three Months Ended Three Months Ended Three Months Ended Line --------------- Mar 31, Mar 31, Change Change Mar 31, Dec 31, Change Change Dec 31, Sep 30, Change Change No. Earnings 2001 2000 Amount Percent 2001 2000 Amount Percent 2000 2000 Amount Percent --------------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- 1 Net interest income $18,483 $17,820 $663 3.7% $18,483 $17,886 $597 3.3% $17,886 $17,579 $307 1.7% 2 Loan loss provision 1,236 1,209 27 2.2% 1,236 2,138 (902) -42.2% 2,138 2,128 10 0.5% 3 Net interest income after 17,247 16,611 636 3.8% 17,247 15,748 1,499 9.5% 15,748 15,451 297 1.9% provision for loan losses 4 Investment security gain (loss) 10 (212) 222 104.7% 10 0 10 0.0% 0 0 0 0.0% 5 Other income 5,404 4,142 1,262 30.5% 5,404 5,603 (199) -3.6% 5,603 5,957 (354) -5.9% 6a Other expense 14,126 12,253 1,873 15.3% 14,126 13,043 1,083 8.3% 13,043 12,894 149 1.2% 6b Acquisition related expense 799 0 799 0.0% 799 0 799 0.0% 0 0 0 0.0% 7 Intangible amortization 1,365 1,110 255 23.0% 1,365 1,187 178 15.0% 1,187 1,187 0 0.0% 8 Inc before inc tax 6,371 7,178 (807) -11.2% 6,371 7,121 (750) -10.5% 7,121 7,327 (206) -2.8% 9 Income tax 1,911 2,154 (243) -11.3% 1,911 2,136 (225) -10.5% 2,136 2,198 (62) -2.8% 10 Net income $4,460 $5,024 ($564) -11.2% $4,460 $4,985 ($525) -10.5% $4,985 $5,129 ($144) -2.8% Earnings per share 11a Basic $0.58 $0.71 ($0.13) -18.3% $0.58 $0.71 ($0.13) -18.3% $0.71 $0.73 ($0.02) -2.7% 11b Diluted $0.57 $0.70 ($0.13) -18.6% $0.57 $0.70 ($0.13) -18.6% $0.70 $0.72 ($0.02) -2.8% ===== ===== ====== ==== ===== ===== ====== ==== ===== ===== ====== === ---------------------------------- Balances At Period End ---------------------------------- 12 Loans $1,151,957 $1,033,488 $118,469 11.5% $1,151,957 $1,098,726 $53,231 4.8% $1,098,726 $1,081,531 $17,195 1.6% 13 Investments (excl. mkt val adj) 919,317 692,300 227,017 32.8% 919,317 750,649 168,668 22.5% 750,649 732,173 18,476 2.5% 14 Earning assets 2,071,275 1,725,787 345,488 20.0% 2,071,275 1,849,375 221,900 12.0% 1,849,375 1,813,704 35,671 2.0% 15 Loan loss reserve 15,401 13,915 1,486 10.7% 15,401 14,614 787 5.4% 14,614 14,614 0 0.0% 16 Intangible assets 66,528 48,374 18,154 37.5% 66,528 50,949 15,579 30.6% 50,949 52,136 (1,187) -2.3% 17 Total assets 2,278,401 1,883,603 394,798 21.0% 2,278,401 2,022,635 255,766 12.6% 2,022,635 1,973,581 49,054 2.5% 18 Deposits 1,599,985 1,420,785 179,200 12.6% 1,599,985 1,457,730 142,255 9.8% 1,457,730 1,455,391 2,339 0.2% 19 Borrowings 470,926 328,819 142,107 43.2% 470,926 398,924 72,002 18.0% 398,924 372,922 26,002 7.0% 20 Total equity $171,934 $112,419 $59,515 52.9% $171,934 139,376 $32,558 23.4% 139,376 $121,976 $17,400 14.3% COMMUNITY BANK SYSTEM, INC. Page 11 of 11 SUMMARY OF OPERATIONS KEY RATIO RECAP 1ST QUARTER 2001 AND PRIOR QUARTER COMPARISONS 000s Omitted Three Months Ended Three Months Ended Three Months Ended Line ---------------- Mar 31, Mar 31, Change Change Mar 31, Dec 31, Change Change Dec 31, Sep 30, Change Change No. Profitability 2001 2000 Amount Percent 2001 2000 Amount Percent 2000 2000 Amount Percent ---------------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- 21 Return on assets 0.84% 1.09% (0.25)%pts. --- 0.84% 1.00% (0.16)%pts. --- 1.00% 1.06% (0.06)%pts. --- 22 Return on equity 11.43% 18.52% (7.09)%pts. --- 11.43% 15.89% (4.46)%pts. --- 15.89% 17.31% (1.42)%pts. --- 23 Cash net income $5,334 $5,681 ($347) -6.1% $5,334 $5,687 ($353) -6.2% $5,687 $5,830 ($143) -2.5% 24 Cash earnings per share (diluted) $0.68 $0.79 ($0.11) -13.9% $0.68 $0.80 ($0.12) -15.0% $0.80 $0.82 ($0.02) -2.4% 25 Tangible return on assets 1.01% 1.23% (0.22)%pts. --- 1.01% 1.14% (0.13)%pts. --- 1.14% 1.20% (0.06)%pts. --- 26 Tangible return on equity 13.68% 20.94% (7.26)%pts. --- 13.68% 18.13% (4.45)%pts. --- 18.13% 19.68% (1.55)%pts. --- 27 Net interest margin 4.09% 4.43% (0.34)%pts. --- 4.09% 4.15% (0.06)%pts. --- 4.15% 4.19% (0.04)%pts. --- 28 Non interest income/ 21.4% 17.8% 3.6 %pts. --- 21.4% 22.4% (1.0)%pts. --- 22.4% 24.0% (1.6)%pts. --- operating income (excl sec gains & branch disp) 29 Efficiency ratio (excl one time items 59.1% 52.7% 6.4 %pts. --- 59.1% 52.8% 6.3 %pts. --- 52.8% 51.9% 0.9 %pts. --- & intangible amortization) ----------- Capital ----------- 30 Tier I leverage ratio 6.00% 5.80% 0.20 %pts. --- 6.00% 5.79% 0.21 %pts. --- 5.79% 5.65% 0.14 %pts. --- 31 Accumulated other Comp. income $11,666 ($12,422) $24,088 193.9% $11,666 $7,053 $4,613 65.4% $7,053 ($7,242) $14,295 197.4% Common shares outstanding 32a Weighted average 7,855 7,181 674 9.4% 7,855 7,102 753 10.6% 7,102 7,090 12 0.2% 32b Period end 7,979 7,093 886 12.5% 7,979 6,993 986 14.1% 6,993 6,993 0 0.0% 33 Cash dividends declared per common share $0.27 $0.25 $0.02 8.0% $0.27 $0.27 $0.00 0.0% $0.27 $0.27 $0.00 0.0% 34a Common stock price $28.06 $22.81 $5.25 23.0% $28.06 $24.75 $3.31 13.4% $24.75 $25.94 ($1.19) -4.6% 34b Total return - last 12 months 28.4% (0.3)% 28.7 %pts. --- 28.4% 11.8% 16.6 %pts. --- 11.8% (1.1)% 12.9 %pts. --- 35a Book value $21.55 $15.85 $5.70 36.0% $21.55 $19.93 $1.62 8.1% $19.93 $17.44 $2.49 14.3% 35b Tangible book value $13.21 $9.03 $4.18 46.3% $13.21 $12.64 $0.57 4.5% $12.64 $9.99 $2.65 26.5% ----------------------------- Asset Quality Ratios ----------------------------- 36 Loan loss reserve / loans outstanding 1.34% 1.35% (0.01)%pts. --- 1.34% 1.33% 0.01 %pts. --- 1.33% 1.35% (0.02)%pts. --- 37 Nonperforming loans / loans outstanding 0.91% 0.57% 0.34 %pts. --- 0.91% 0.55% 0.36 %pts. --- 0.55% 0.58% (0.03)%pts. --- 38 Loan loss reserve / nonperforming loans 146% 235% (89)%pts. --- 146% 240% (94)%pts. --- 240% 235% 5 %pts. --- 39 Net charge-offs / average loans 0.44% 0.28% 0.16 %pts. --- 0.44% 0.78% (0.34)%pts. --- 0.78% 0.79% (0.01)%pts. --- 40 Loan loss provision / net charge-offs 100% 169% (69)%pts. --- 100% 100% 0 %pts. --- 100% 101% (1)%pts. --- 41 Nonperforming assets / loans outstanding + OREO 1.03% 0.69% 0.34 %pts. --- 1.03% 0.65% 0.38 %pts. --- 0.65% 0.66% (0.01)%pts. --- COMMUNITY BANK SYSTEM, INC. Page 11 of 11 SUMMARY OF OPERATIONS KEY RATIO RECAP 1ST QUARTER 2001 AND PRIOR QUARTER COMPARISONS 000s Omitted Three Months Ended Three Months Ended Three Months Ended Line --------------------------------- Mar 31, Mar 31, Change Change Mar 31, Dec 31, Change Change Dec 31, Sep 30, Change Change No. Asset Quality Components 2001 2000 Amount Percent 2001 2000 Amount Percent 2000 2000 Amount Percent --------------------------------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- 42 Nonaccruing loans $5,807 $5,320 $487 9.2% $5,807 $4,423 $1,384 31.3% $4,423 $4,718 ($295) -6.3% 43 90+ days delinquent 4,726 592 4,134 698.3% 4,726 1,655 3,071 185.6% 1,655 1,502 153 10.2% 44 Tot nonperforming loans $10,533 $5,912 $4,621 78.2% $10,533 $6,078 $4,455 73.3% $6,078 $6,220 ($142) -2.3% 45 Troubled debt restructurings 103 130 (27) -20.8% 103 116 (13) -11.2% 116 129 (13) -10.1% 46 Other real estate 1,210 1,050 160 15.2% 1,210 906 304 33.6% 906 760 146 19.2% 47 Tot nonperforming assets $11,846 $7,092 $4,754 67.0% $11,846 $7,100 $4,746 66.8% $7,100 $7,109 ($9) -0.1% 48 Net Charge-Offs 1,236 715 521 72.9% 1,236 2,137 (901) -42.2% 2,137 2,117 20 0.9% --------------------------------- Components of Net Interest Margin --------------------------------- 49 Loan yield 9.12% 9.02% 0.10 %pts. --- 9.12% 9.35% (0.23)%pts. --- 9.35% 9.27% 0.08 %pts. --- 50 Investment yield 7.38% 7.32% 0.06 %pts. --- 7.38% 7.40% (0.02)%pts. --- 7.40% 7.30% 0.10 %pts. --- 51 Earning asset yield 8.38% 8.32% 0.06 %pts. --- 8.38% 8.56% (0.18)%pts. --- 8.56% 8.47% 0.09 %pts. --- 52 Interest bearing deposits rate 4.55% 3.92% 0.63 %pts. --- 4.55% 4.59% (0.04)%pts. --- 4.59% 4.42% 0.17 %pts. --- 53 Borrowed funds rate 6.19% 6.36% (0.17)%pts. --- 6.19% 6.66% (0.47)%pts. --- 6.66% 6.79% (0.13)%pts. --- 54 Cost of all interest bearing funds 4.95% 4.50% 0.45 %pts. --- 4.95% 5.09% (0.14)%pts. --- 5.09% 4.97% 0.12 %pts. --- 55 Cost of funds (includes DDA) 4.30% 3.87% 0.43 %pts. --- 4.30% 4.39% (0.09)%pts. --- 4.39% 4.27% 0.12 %pts. --- 56 Cost of funds / earning assets 4.29% 3.89% 0.40 %pts. --- 4.29% 4.40% (0.11)%pts. --- 4.40% 4.29% 0.11 %pts. --- 57 Net interest margin 4.09% 4.43% (0.34)%pts. --- 4.09% 4.15% (0.06)%pts. --- 4.15% 4.19% (0.04)%pts. --- 58 Full tax equivalent adjustment $1,343 $1,283 $60 4.7% $1,343 $1,282 $61 4.8% $1,282 $1,296 ($14) -1.1% --------------------------------- Average Balances for Period --------------------------------- 59 Loans $1,135,742 $1,017,566 $118,176 11.6% $1,135,742 $1,090,961 $44,781 4.1% $1,090,961 $1,070,150 $20,811 1.9% 60 Investments (excl. mkt val adj.) 828,407 715,531 112,876 15.8% 828,407 744,979 83,428 11.2% 744,979 722,707 22,272 3.1% 61 Earning assets 1,964,149 1,733,097 231,052 13.3% 1,964,149 1,835,940 128,209 7.0% 1,835,940 1,792,857 43,083 2.4% 62 Total assets 2,145,661 1,859,693 285,968 15.4% 2,145,661 1,983,294 162,367 8.2% 1,983,294 1,931,980 51,314 2.7% 63 Deposits 1,542,050 1,388,181 153,869 11.1% 1,542,050 1,454,985 87,065 6.0% 1,454,985 1,442,063 12,922 0.9% 64 Borrowings 417,322 352,762 64,560 18.3% 417,322 385,273 32,049 8.3% 385,273 357,730 27,543 7.7% 65 Total equity $158,160 $109,144 $49,016 44.9% $158,160 $124,776 $33,384 26.8% $124,776 $117,858 $6,918 5.9% Cash earnings for first quarter 2001 were $5.33 million, a decrease of 6.1% from the same period last year. Cash earnings per share (diluted) for the quarter were $.68, down 13.9% from the prior year's level of $.79, reflective of greater shares outstanding due to the January 26, 2001 acquisition of $112-million-asset Citizens National Bank of Malone (NY). Excluding one-time expenses related to the Citizens acquisition and the planned May 11 merger with $647-million-asset First Liberty Bank Corp., cash earnings rose 2.3% from the prior year to $5.81 million while earnings per share decreased 6.3% to $.74. Tangible return on equity, adjusted for acquisition-related expenses, was 14.90% while adjusted tangible return on assets was 1.10%. Net income reported on a GAAP basis for first quarter 2001 was $4.46 million, a decrease of 11.2% from the same period last year. Earnings per share (diluted) for the quarter was $.57, down 18.6% from 2000's level of $.70. Excluding acquisition-related expenses, net income was off 1.8% from the prior year to $4.93 million while earnings per share decreased 10.0% to $.63. FIRST QUARTER PERFORMANCE HIGHLIGHTS During the first quarter, CBU focused on assimilating the Citizens National Bank acquisition and prepared to assimilate the larger First Liberty Bank Corp. combination. CBU is moving aggressively to streamline operations to maximize back office efficiency, as demonstrated by First Liberty's recent announcement that it will reduce its work force by 64 employees in anticipation of the merger. Despite a continued softening economy this quarter, mortgages increased and commercial loan levels remained unchanged, although consumer borrowing did slow somewhat. Interest margins stabilized after a year-long decline, revenues from financial services and most banking products were maintained, and asset quality, as measured by net charge-offs, improved over the last six months of 2000. o Noninterest income (excluding securities transactions) exceeded first quarter 2000 by over 30%, with financial services products spearheading that progress due to the purchase of Elias Asset Management (EAM) on April 3, 2000; the ratio of noninterest income to operating income rose a strong 3.6 percentage points to 21.4%. Compared to fourth quarter 2000, noninterest income was down 3.6%, reflecting a decrease in revenues from merchant credit card processing. o Net interest income for the three months rose by 3.3% or $597,000 compared to fourth quarter 2000. Though nearly all of that increase resulted from higher earning assets due to the Citizens Bank acquisition and implementation of a planned investment strategy associated with the First Liberty acquisition, margins have stabilized following four consecutive quarters of decreases. o Loans climbed over $53 million during the quarter, bringing the total increase during the last twelve months to $118 million or 11.5%. Excluding $59 million in loans related to the Citizens Bank acquisition, outstandings have decreased $5.5 million since year end because of continued reduced consumer demand for installment loans, mirroring the softening economy. o Net charge-offs at $1.2 million were down by over 42% from the fourth quarter level, reflective of a significant reduction in commercial charge-off levels from the last half of 2000 and continued good results for consumer installment loans. This enabled a $902,000 reduction in loan loss provision expense from the fourth quarter and virtually no change from first quarter last year. Nonperforming loans increased $4.5 million from year end, to .91% of loans outstanding, as the result of a 90-day delinquency by a significant commercial loan customer. Subsequent to quarter end, this customer has made payments which have eliminated its 90-day delinquency and decreased the nonperforming loan ratio to .59%. o The Company's efficiency ratio, excluding one-time acquisition and related expenses, increased to 55.9%, largely reflecting an increase in overhead expense due to the five acquired Citizens branches. Though the planned overhead reduction targets for these branches have been realized, actions to increase their revenue contribution have not fully taken effect. The efficiency ratio also reflects the Company's relatively modest net interest income growth as well as the costs associated with CBU's growing financial services businesses, which have a higher efficiency ratio by their nature. o Assets under management exceeded $1.18 billion as of quarter end - nearly twice the level of a year earlier - reflective of growth in retirement plan trusts and assets originated through CBU's broker-dealer, as well as the purchase of EAM. The acquisition of The Citizens National Bank of Malone (CNB) was completed on January 26, 2001, with consolidation into Community Bank, N.A.'s Northern New York franchise. This acquisition adds 10,000 new households and gives Community Bank the leading deposit market share - at 22 % - in Franklin County. The acquisition was consummated using purchase accounting treatment and the reissue of the Company's Treasury shares, enabling the proposed merger with First Liberty Bank Corp. (FLIB) to be completed using favorable pooling accounting rules. o In mid-March, CBU and pending merger partner First Liberty jointly announced a reduction in FLIB's workforce of 64 employees as part of streamlining operations and administrative functions. With the expected realignment of FLIB branch staff following the consolidation, as well as other strategies in process, the expense reduction goal of $3.2 million set last November appears realistic. Also during the first quarter, over $145 million in new investments was added to CBU's balance sheet at a spread of approximately 125 basis points, representing a significant portion of the planned investment leverage strategy of the combined entity. Lastly, shareholders of both companies gave overwhelming approval of the agreement and plan to merge at simultaneous meetings held on April 23, 2001. NONINTEREST INCOME GROWTH LED BY FINANCIAL SERVICES As previously highlighted, first quarter noninterest income (excluding net securities gains/losses) rose a substantial $1.26 million or 30% compared to one year earlier due to the acquisition of EAM. Without EAM, growth in financial services would have been $160,000 or 9.9% while overall noninterest income would have risen $215,000 or 5.2%. Growth in fees from the sale of banking products was muted because the Bank's long-standing processor of credit card transactions exited the business, subsequently replaced by a more established but lower commission-paying vendor. Compared to fourth quarter 2000, financial services revenues were essentially unchanged while recurring banking service fees were off $135,000 or 5.0% due to the credit card contract. The fourth quarter included a modest gain on the sale of branch properties compared with none during the first quarter. For the twelve months ended March 31, 2001, financial services comprised $11.3 million or 50% of noninterest income. EAM was the largest contributor of revenues at $4.1 million (18% of noninterest income). Next was the Company's BPA/EBT business, which provides investment management, pension administration and consulting services, which produced fees of $3.1 million (14%). Revenues from broker-dealer Community Investment Services, Inc. (CISI) were $1.8 million (8%), followed by the Bank's well-established personal trust business, with gross income of $1.4 million (6%). Lastly, commissions/dividends from the sale of insurance products through the Bank's branch network and or through the Bank's insurance subsidiary, Community Financial Services, Inc. (CFSI), contributed $.9 million in revenues (4%). Total assets under management at $1.18 billion were down 3.3% from one year earlier (including EAM on a pro forma basis), and off 8.1% from year-end 2000 due to an unusually unfavorable equity market in the first quarter 2001. This latter decrease, which reflects continued net growth in new business, compares to an 11.8% decrease in the Standard & Poor's 500 index. Revenues from a variety of banking services constituted the balance of noninterest income ($11.1 million or 50%) for the 12 months ending March 31, 2001. General banking fees made up $9.3 million (41% of noninterest income). Electronic banking fees from VISA(TM)and ATM transactions contributed $1.5 million (7%), while mortgage banking and other revenues added $.3 million (2%). At quarter end, the mortgage servicing portfolio stood at approximately $92 million, with mortgage servicing rights valued at $512,000. Secondary market sales for the past 12 months were $10.9 million, with first quarter 2001 sales at $4.4 million being substantially stronger than the preceding five quarters, due to improved demand caused by falling interest rates since year end. Noninterest income as a percent of operating income increased a significant 3.6 percentage points during the last four quarters to 21.4%, excluding transactions related to investment securities and disposal of branch properties. Compared to fourth quarter 2000, the ratio was down by one percentage point, reflecting financial service revenues being flat and electronic banking fees down while net interest income rose 3.3%. For first quarter 2001, CBU's financial services businesses, including the sale of insurance related to installment and mortgage loans originated through the Bank's branch network, contributed $688,000 in pretax income (prior to allocation of corporate overhead), or 9.6% of Company-wide results excluding acquisition-related expenses. Pretax return on revenue exceeded 24% while the efficiency ratio for financial services (excluding intangible amortization) was approximately 72%. COMPRESSION ON NET INTEREST MARGIN STABILIZES The decline in net interest margin, which began in the first quarter of last year, stabilized this quarter. Though the reported margin of 4.09% was down six basis points from fourth quarter 2000, results reflected both the impact of the $145 million investment leverage in anticipation of the First Liberty merger and the Company's installment loan holiday extension program. Excluding these factors, the first quarter net interest margin was 4.17% compared to 4.09% in the fourth quarter and 4.43% for the comparable quarter last year. Based on data for fourth quarter 2000, the Bank's net interest margin is in the favorable 65th peer percentile. The cost of interest-bearing liabilities averaged 4.95% for the last 90 days, down 14 basis points from fourth quarter 2000 and the first decrease since second quarter 1999. The three half-point reductions in the Federal Funds rate between January 3rd and March 20th had a strongly positive impact on funding costs. Rates were lower in virtually all deposit categories, with a three basis point drop in average time deposits outstanding having a significant impact. The rate on renewing public fund C.D.'s has been less than that of maturing C.D.'s since year end while a similar reversal in pricing spread for retail and corporate time deposits began in mid-February. Rates on borrowed funds improved even more dramatically, down 47 basis points compared to fourth quarter 2000. The overall yield on earning assets decreased 18 basis points on average compared to fourth quarter 2000, comprised of a 23 basis-point lower loan portfolio yield and a two basis-point decrease in investment portfolio yield. The latter is the result of a $169 million or 23% expansion of the portfolio via assumption of $46 million in securities from the Citizens acquisition and purchases related to the planned First Liberty investment leverage; this latter strategy is intended to maintain the combined investment portfolio at approximately the same portion of earning assets as CBU's mix prior to the merger. The decrease in loan yield reflects the fixed/variable rate mix of the loan portfolio (approximately 34% variable within 90 days), continued pressure on loan pricing, and a slight change in mix toward commercial and mortgage loans. Compared to first quarter 2000, the $118 million increase in average loans has been totally funded by growth in average deposits, with $36 million in deposits available to support nearly one third of the growth in the securities portfolio. Consumer and business deposits (IPC) rose $125 million (10.4%), and deposits of local municipalities climbed nearly $28 million (their time deposits generally being a lower cost alternative to capital market borrowing). Of the IPC deposit increase, there was an 8.7% ($18 million) rise in demand deposits. Excluding the impact of the Citizens acquisition, average IPC deposits for the quarter rose $69 million or 5.7% over one year earlier while public fund deposits were $23 million higher. Average capital market borrowings for the first quarter were $417 million, up $65 million or 18% from one year earlier compared to a $113 million or 16% rise in investments outstanding. Since year end, borrowings have increased $72 million to support $169 million in investment growth. The ratio of average borrowings to total funds sources in the first quarter was 21%, one percentage point higher than one year earlier. At quarter end, the borrowed funds ratio was 23%. LOAN PORTFOLIO EXPANDS DUE TO CITIZENS ACQUISITION Loans rose $53 million during the last three months to $1.152 billion - $118 million, or 11.5%, higher than one year earlier. Excluding the $59 million in loans from the Citizens Bank acquisition, loans dipped during the last 90 days by $5.5 million, reflective of the nation-wide softening in the economy. The decrease in loans (excluding Citizens) during the first quarter reflected a slowdown in consumer installment borrowing, largely for automobiles, which began in fourth quarter 2000. Consumer direct loans (including home equity loans) were off $4.3 million compared to a modest $799,000 rise during fourth quarter 2000; outstandings, including $9.4 million from Citizens, are up $14.3 million or 6.9% since March 31, 2000 to $220 million. Indirect consumer installment loans (mainly automobile financing), which have been slowing since last fall, decreased $6.1 million during the last 90 days following a $4.4 million dip in the preceding quarter; outstandings, including $1.5 million from Citizens, are virtually unchanged from a year ago at $223 million. As a mix of total loans outstanding, consumer direct and consumer indirect loans are each 19%, down a combined three percentage points from March 31, 2000. Business lending (excluding Citizens) was unchanged from year-end 2000, following an $8.0 million increase in the fourth quarter and a $2.2 million dip in the third quarter. Outstandings, including $19.9 million acquired from Citizens, rose to $418 million as of March 31, 2001, up $38 million or 9.9% since the same period one year ago. This growth is net of an abnormally high $3.6 million in commercial charge-offs during the last 12 months as well as the impact of closing down the Company's limited asset-based lending program for small businesses, which was off $4.0 million. Business lending represents 36.3% of total loans outstanding, slightly lower than the 36.8% mix at March 31, 2000. Consumer mortgages was the one segment of the portfolio that showed growth during the quarter, up $4.9 million, excluding $28 million in loans acquired from Citizens. This improvement matched the increase in first quarter 2000, and brings total growth over the last 12 months to $67 million or nearly 30% to $291 million in outstandings. Borrowers continue to use this vehicle (in most cases, the Bank pays all closing costs in exchange for a higher interest rate) to term out portions of their consumer debt, resulting in an increased mix of consumer mortgages held in portfolio to 25% from under 22% a year earlier. As previously discussed, loans originated for sale and sold in the secondary market were $4.4 million this quarter, their best performance since third quarter 1999 due to lower interest rates; originations and sales were $10.9 million during the last 12 months. UNDERLYING ASSET QUALITY REMAINS SOLID Nonperforming loans ended the quarter at $10.5 million or .91% of loans outstanding, up $4.6 million and 36 basis points, respectively, from one year ago, with virtually all of the increase coming since December 31, 2000. The primary reason for the $4.5 million change since year end is that $3.8 million of a $5.1 million commercial loan relationship became 90 days delinquent during the quarter along with several relatively small real estate loans becoming nonaccruing. However, the commercial loan customer which caused this change has made payments subsequent to March 31 which have eliminated its 90-day delinquency, resulting in a .59% nonperforming loan ratio. The Company's nonperforming loan ratio as of December 31, 2000 was .55%, 13 basis points better than the peer norm of .68% based on the most recently available data. The ratio of loan loss reserves to loans outstanding ended the quarter at 1.34%, up one basis point from year end. Coverage over nonperformers decreased by 94 percentage points to 146%, but with the improvement in the single large commercial loan noted above, coverage is today restored to 228%. Total delinquencies (30 days or more past due plus nonaccruals) were 1.75%, down from an unusually high 2.03% reading at year end, but above the 1.30% -1.50% norm for the 18 months ended June 30, 2000. Installment loan delinquencies were 1.47% at quarter end, the best they have been for nine months and at the norm for the preceding 18-month period. The Company's collection function, which was centralized in mid-2000 to improve its productivity and effectiveness, continues to be vigilant in keeping total delinquencies within CBU's guideline of less than 2.0%. Net charge-offs for the quarter were $1.24 million, $521,000 more than first quarter 2000. To put these fluctuations in perspective, the current level of net charge-offs compares favorably to average quarterly levels of $1.04 million in 1999 and $1.28 million in 1998. In addition, net charge-offs as a percent of average loans outstanding were .44% for the three months just ended versus ratios for 2000, 1999, and 1998 of .57%, .44%, and .58%, respectively. The underlying trend during this period was a steady reduction in installment loan write-offs against gradually increasing but manageable commercial write-downs. Net charge-offs to average outstandings for commercial and installment loans for first quarter 2000 were .41% and .91%, respectively. For all of 2000, 1999, and 1998, the commercial loan ratio was .80%, .25%, and .16%, respectively, while the installment loan ratio was .82%, 1.04%, and 1.45%, respectively. Loan loss provision expense has equally matched net charge-offs for the last three consecutive quarters. The first quarter 2001 provision virtually matched that of the same quarter last year, having no impact on the change in earnings. Compared to fourth quarter last year, the current provision is lower by $902,000, offsetting more than half the reduction in pretax earnings. EFFICIENCY RATIO RISES, REFLECTING ACQUISITION ACTIVITY The Company's first quarter efficiency ratio (overhead less intangible amortization compared to net interest plus recurring other income) rose a substantial 6.4 percentage points from the first quarter 2000 level to 59.1%. Excluding one-time acquisition expenses plus overtime of operations personnel, the ratio increased by 3.2 percentage points to 55.9%. The rise reflects the increase in overhead expense due to the five acquired Citizens branches, which is disproportionate at this time to their revenue contribution. In addition, financial services businesses, whose expansion at the Company continues to be robust, characteristically have a higher efficiency ratio. Lastly, net interest income growth has been a relatively modest 3.7%. For first quarter 2001, overhead (before intangible amortization) rose $2.7 million or 21.8% over the prior year's level. Excluding the expenses of Elias Asset Management, which was acquired following first quarter 2000, the overhead of the Citizens branches added in first quarter 2001, and one-time expenses related to the Citizens and First Liberty acquisitions, overhead was up $836,000 or 6.8%. Nearly the entirety of this latter increase represents personnel expense, up $723,000 or 10.6%, reflective of annual merit increases, selective additions to staff in certain operations and lending functions, and higher medical and pension expense. The balance of the increase largely resides in higher occupancy and equipment expense and in higher supplies expense; depreciation expense rose due to the capital expenditures related to conversion of the Company's check processing operations to image processing, and paper costs increased substantially. 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. INTEREST RATE RISK Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates/prices such as interest rates, foreign currency exchange rates, commodity prices, and equity prices. The Company's primary market risk exposure is interest rate risk. The ongoing monitoring and management of this risk, over both a short-term tactical and longer-term strategic time horizon, is an important component of the Company's asset/liability management process, which is governed by policies established by its Board of Directors and reviewed and approved annually. The Board of Directors delegates responsibility for carrying out the asset/liability management policies to the Asset/Liability Management Committee (ALCO). In this capacity, ALCO develops guidelines and strategies impacting the Company's asset/liability management activities based upon estimated market risk sensitivity, policy limits, and overall market interest rate-related level and trends. As the Company does not believe it is possible to reliably predict future interest rate movements, it has maintained an appropriate process and set of measurement tools which enable it to identify and quantify sources of interest rate risk. The primary tool used by the Company in managing interest rate risk is income simulation. The analysis begins by measuring the impact of differences in maturity and repricing 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, including an up or down 200 basis point (BP) movement in rates from current levels. While such an aggressive movement in rates provides management with good insight as to how the Company's net interest income may perform under extreme market conditions, results from a more modest shift in interest rates are used as a basis to conduct day-to-day business decisions. The following reflects the Company's one-year net interest income sensitivity based on asset and liability levels on March 31, 2001, assuming no growth in the balance sheet, and assuming a 200 basis point instantaneous rate shock in the prime rate, federal funds rate and the entire Treasury yield curve. REGULATORY MODEL - -------------------- ------------------ ----------------------- Rate Change Dollar Change Percent of Flat Rate - -------------------- ------------------ ----------------------- IN BASIS POINTS (IN 000'S) NET INTEREST INCOME - -------------------- ------------------ ----------------------- - -------------------- ------------------ ----------------------- +200 bp $(2,160) -2.7% - -------------------- ------------------ ----------------------- - -------------------- ------------------ ----------------------- -200 bp $1,639 2.1% - -------------------- ------------------ ----------------------- - -------------------- ------------------ ----------------------- A second simulation was performed based on what the Company believes to be conservative levels of balance sheet growth--high single digit growth in loans, low single digit growth in deposits, and necessary increases in borrowings, with slight growth in investments and no growth in any other major portions of the balance sheet-- along with 200 BP movements over a twelve month period in the prime rate, federal funds rate, and a Treasury yield curve moving closer to historical spreads to fed funds. Under this set of assumptions, the Bank's net interest income is showing a mild level of sensitivity to rising interest rates. In a falling interest rate environment, net interest income is slightly better than if rates were unchanged. MANAGEMENT MODEL - -------------------- ------------------ ----------------------- Rate Change Dollar Change Percent of Flat Rate - -------------------- ------------------ ----------------------- IN BASIS POINTS (IN 000'S) NET INTEREST INCOME - -------------------- ------------------ ----------------------- - -------------------- ------------------ ----------------------- +200 bp $(1,778) -2.2% - -------------------- ------------------ ----------------------- - -------------------- ------------------ ----------------------- -200 bp $1,268 1.6% - -------------------- ------------------ ----------------------- - -------------------- ------------------ ----------------------- The preceding interest rate risk analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including: the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows, and others. While the assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences might change. Furthermore, the sensitivity analysis does not reflect actions that ALCO might take in responding to or anticipating changes in interest rates. NEW ACCOUNTING PRONOUNCEMENTS In 1998, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement requires an entity to recognize all derivative as either assets or liabilities in the balance sheet and measure those instruments at fair value. The Company has no outstanding derivative financial instruments and, accordingly, adoption of SFAS 133 had no other affect on the Company's financial statements. EFFECTS OF INFLATION The financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles in the United States, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Virtually all of the assets and liabilities of the Company are monetary in nature. As a result, interest rate changes have a more significant impact on the Company's performance than general levels of inflation. FORWARD-LOOKING STATEMENTS This document contains comments or information that constitute forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995), which involve significant risks and uncertainties. Actual results may differ materially from the results discussed in the forward-looking statements. Moreover, the Company's plans, objectives and intentions are subject to change based on various factors (some of which are beyond the Company's control). Factors that could cause actual results to differ from those discussed in the forward-looking statements include: (1) risks related to credit quality, interest rate sensitivity and liquidity; (2) the strength of the U.S. economy in general and the strength of the local economies where the Company conducts its business; (3) the effect of, and changes in, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; (4) inflation, interest rate, market and monetary fluctuations; (5) the timely development of new products and services and customer perception of the overall value thereof (including features, pricing and quality) compared to competing products and services; (6) changes in consumer spending, borrowing and savings habits; (7) technological changes; (8) any acquisitions or mergers that might be considered by the Company and the costs and factors associated therewith; (9) the ability to maintain and increase market share and control expenses; (10) the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) and accounting principles generally accepted in the United States; (11) changes in the Company's organization, compensation and benefit plans and in the availability of, and compensation levels for, employees in its geographic markets; (12) the costs and effects of litigation and of any adverse outcome in such litigation; and (13) the success of the Company at managing the risks of the foregoing. The foregoing list of important factors is not exclusive. Such forward-looking statements speak only as of the date on which they are made and the Company does not undertake any obligation to update any forward-looking statement, whether written or oral, to reflect events or circumstances after the date on which such statement is made. If the Company does update or correct one or more forward-looking statements, investors and others should not conclude that the Company will make additional updates or corrections with respect thereto or with respect to other forward-looking statements. SUPPLEMENTAL SCHEDULES A) The following table sets forth certain information concerning average interest-earning assets and interest-bearing liabilities and the yields and rates thereon. Interest income and resultant yield information in the tables are on a fully tax-equivalent basis using a marginal federal income tax rate of 35%. Averages are computed on daily average balances for each month in the period divided by the number of days in the period. Yields and amounts earned include loan fees. Nonaccrual loans have been included in interest earnings for purposes of these computations. First Quarter Ended March 31, ----------------------------------------------------------------------------------- 2001 2000 ----------------------------------------------------------------------------------- (000's omitted except yields Avg. Amt. Of Avg. Avg. Amt. of Avg. And rates) Balance Interest Yield/Rate Balance Interest Yield/Rate Paid Paid ASSETS: ----------------------------------------------------------------------------------- Interest-earning assets: Federal funds sold $324 $4 5.10% $30,782 $432 5.64% Time deposits in other banks 384 6 6.46% 369 5 5.01% Taxable investment securities 688,036 12,469 7.35% 562,269 10,210 7.30% Nontaxable investment securities 139,663 2,586 7.51% 122,111 2,379 7.84% Loans (net of unearned discount) 1,135,742 25,538 9.12% 1,017,566 22,829 9.02% -------------- ------------ -------------- ------------ Total interest-earning assets 1,964,149 $40,603 8.38% 1,733,097 $35,855 8.32% Noninterest earning assets Cash and due from banks 56,219 60,006 Premises and equipment 28,615 25,609 Other Assets 99,991 78,555 Less:allowance for loans (15,195) (13,509) Net unrealized gains/(losses) on available-for-sale portfolio 11,882 (24,065) -------------- -------------- Total $2,145,661 $1,859,693 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing liabailities Savings deposits $506,129 $2,793 2.24% $493,653 $2,662 2.17% Time deposits 778,292 11,616 6.05% 651,866 8,510 5.25% Short-term borrowings 148,186 2,220 6.08% 252,944 3,895 6.19% Long-term borrowings 269,136 4,148 6.25% 99,818 1,685 6.79% ---------------------------- ---------------------------- Total interest-bearing 1,701,743 20,777 4.95% 1,498,281 16,752 4.50% liabilities Noninterest bearing liabilities Demand deposits 257,629 242,662 Other liabilities 28,129 9,606 Shareholders' equity 158,160 109,144 -------------- -------------- Total $2,145,661 $1,859,693 ============== ============== Net interest earnings $19,826 $19,103 ============ ============ Net yield on interest-earning assets 4.09% 4.43% ============ =========== Federal tax exemption on nontaxable investment securities included in interest income $1,343 $1,283 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: ------------------------------------------------------------------------------- 1st Quarter 2001 versus 1st Quarter 2000 ------------------------------------------------------------------------------- Increase (Decrease) Due to Change In (1) Net VOLUME RATE CHANGE ------ ---- ------ Interest earned on: Federal funds sold and securities purchased under agreements to resell ($390) ($38) ($428) Time deposits in other banks 0 1 2 Taxable investment securities 2,197 62 2,259 Nontaxable investment securities 779 (572) 207 Loans (net of unearned discounts) 2,482 227 2,709 Total interest-earning assets (2) $4,493 $255 $4,748 Interest paid on: Savings deposits $58 $73 $131 Time deposits 1,737 1,368 3,106 Short-term borrowings (1,602) (73) (1,675) Long-term borrowings 3,381 (918) 2,463 Total interest-bearing liabilities (2) $2,307 $1,718 $4,025 Net interest earnings (2) $4,276 ($3,553) $723 (1) The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of change in each. (2) Changes due to volume and rate are computed from the respective changes in average balances and rates of the totals; they are not a summation of the changes of the components. C) The following table sets forth information by category of noninterest expenses of the Company for the periods indicated. Three Months Ended March 31, (000's omitted) --------------------------------------------------------------------------------------- Change Change 2001 2000 Amount Percent --------------------------------------------------------------------------------------- Personnel expense 8,141 6,819 1,322 19.4% Net occupancy expense 1,314 1,034 280 27.1% Equipment expense 954 911 43 4.7% Professional fees 997 465 532 114.4% Data processing expense 1,203 1,055 148 14.0% Amortization 1,365 1,110 255 23.0% Stationary and supplies 424 235 189 80.4% Deposit insurance premiums 72 70 2 2.9% Disposition of branch 7 7 0 0.0% properties Other 1,813 1,657 156 9.4% --------------------------------------------------------------------------------------- Total 16,290 13,363 2,927 21.9% Total operating expenses as a percentage of average assets 3.08% 2.89% 0.19% Pts Efficiency ratio 59.1% 52.7% 6.4% Pts (excl one time items & intang. amort) 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: (000's omitted) As of March 31, Change Change 2001 2000 Amount Percent -------------------------------------------------------------------------- Real estate mortgages: Residential $ 414,824 $ 341,965 $ 72,859 21.3% Commercial loans secured by real estate 144,602 122,878 21,724 17.7% Farm 20,429 17,533 2,896 16.5% ----------------------------------------------------------- Total 579,855 482,376 97,479 20.2% Commercial, financial, and agricultural Agricultural 26,376 28,025 (1,649) (5.9)% Commercial and financial 190,193 181,664 8,529 4.7% ----------------------------------------------------------- Total 216,569 209,689 6,880 3.3% Installment loans to individuals: Direct 118,814 108,154 10,660 9.9% Indirect 223,057 223,408 (351) (0.2)% Student and other 1,563 1,997 (434) (21.7)% ----------------------------------------------------------- Total 343,434 333,559 9,875 3.0% Other Loans 12,461 8,504 3,957 46.5% ----------------------------------------------------------- Gross Loans 1,152,319 1,034,128 118,191 11.4% ----------------------------------------------------------- Less: Unearned discounts 362 640 (278) (43.4)% ----------------------------------------------------------- Net loans 1,151,957 1,033,488 118,469 11.5% Reserve for possible loan Losses 15,401 13,915 1,486 10.7% ----------------------------------------------------------- Loans net of loan loss reserve $ 1,136,556 $ 1,019,573 $ 116,983 11.5% =========================================================== 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. Line of Business as of March 31, 2001 -------------------------------------------------------------------- -------------------- Consumer Consumer Consumer Business Total Direct Indirect Mortgages Lending Loans --------------- --------------- --------------- --------------- -------------------- REGULATORY REPORTING CATEGORIES - ------------------------------- Loans secured by real estate Residential $92,877 $- $289,764 $32,183 $414,824 Commercial 26 - 749 143,827 144,602 Farm 35 - 20,394 20,429 Agricultural loans 568 - 25,808 26,376 Commercial loans 11,343 - 178,850 190,193 Installment loans to individuals 114,664 223,057 81 5,632 343,434 Other loans 987 - 11,474 12,461 --------------- --------------- --------------- --------------- -------------------- - Total loans 220,500 223,057 290,594 418,168 1,152,319 - Unearned Discounts (362) - - - (362) --------------- --------------- --------------- --------------- -------------------- - Net Loans $220,138 $223,057 $290,594 $418,168 $1,151,957 F) The following table presents information concerning the aggregate amount of nonperforming assets: As of March 31, (000's omitted) -------------------------------------------------------------------------- Change Change 2001 2000 Amount Percent -------------------------------------------------------------------------- Loans accounted for on a nonaccrual basis 5,807 5,320 487 9.2% Accruing loans which are contractually past due 90 days or more as to principal or interest payments 4,726 592 4,134 698.3% ------ ---- ------ ------ Total nonperforming loans 10,533 5,912 4,621 78.2% Loans which are "troubled debt restructurings" as defined in Statement of Financial Accounting Standards No. 15 "Accounting by Debtors and Creditors for Troubled Debt Restructurings" 103 130 (27) (20.8)% Other Real Estate 1,210 1,050 160 15.2% ------ ------ ---- ----- Total nonperforming assets 11,846 7,092 4,754 67.0% Ratio of allowance for loan losses to period-end loans 1.34% 1.35% (0.01) % pts --- Ratio of allowance for loan losses to period-end nonperforming loans 146.2% 235.4% (89.1) % pts --- Ratio of allowance for loan losses to period-end nonperforming assets 130.0% 196.2% (66.2) % pts --- Ratio of nonperforming assets to period-end total loans and other real estate owned 1.03% 0.69% 0.34 % pts --- The impact of interest not recognized on nonaccrual loans, and interest income that would have been recorded if the restructured loans had been current in accordance with their original terms, was immaterial. The Company's policy is to place a loan on a nonaccrual status and recognize income on a cash basis when it is more than ninety days past due, except when in the opinion of management it is well secured and in the process of collection. G) The following table summarizes loan balances at the end of each period indicated and the daily average amount of loans. Also summarized are changes in the allowance for possible loan losses arising from loans charged off and recoveries on loans previously charged off and additions to the allowance, which have been charged to expenses. Three Months Ended March 31, (000's omitted) ------------------------------------------------------------------------------- Change Change 2001 2000 Amount Percent ------------------------------------------------------------------------------- Amount of loans outstanding at end of period (gross of unearned discount) 1,152,319 1,034,128 118,191 11.4% Daily average amount of loans (net 1,135,742 1,017,566 118,176 11.6% of unearned discount) Balance of allowance for possible loan losses at beginning of period 14,614 13,421 1,193 8.9% Loans charged off: Commercial, financial, and agricultural 418 52 366 703.8% Real estate construction 0 0 0 0.0% Real estate mortgage 31 11 20 181.8% Installment 1,237 930 307 33.0% ------------------------------------------------------------------------------- Total loans charged off 1,686 993 693 69.8% Recoveries of loans previously charged off: Commercial, financial, and agricultural 27 29 (2) (6.9)% Real estate construction 0 0 0 0.0% Real estate mortgage 1 1 0 0.0% Installment 422 248 174 70.2% ------------------------------------------------------------------------------- Total recoveries 450 278 172 61.9% Net loans charged off 1,236 715 521 72.9% Additions to allowance charged to expense 1,236 1,209 27 2.2% Reserves on acquired loans (1) 787 0 787 0.0% Balance at end of period 15,401 13,915 1,486 10.7% Ratio of net chargeoffs to average loans outstanding 0.44% 0.28% 0.16% ------ (1) These reserve additions are attributable to loans acquired in connection with the acquisition of Citizens National Bank of Malone. H) The following table sets forth information by category of noninterest income for the Company for the periods indicated. (000's omitted) Three Months Ended March 31, ----------------------------------------------------------- 2001 2000 Change Change Amount Percent ----------------------------------------------------------- Personal trust 355 370 (15) (4.1)% EBT/BPA 888 743 145 19.5% Elias Asset Management 1,047 0 1,047 - Insurance 101 103 (2) (1.9)% Other investment products 425 393 32 8.1% ----------------------------------------------------------- Total financial services 2,816 1,609 1,207 75.0% Electronic banking 232 358 (126) (35.2)% Mortgage banking 69 109 (40) (36.7)% Commercial leasing 4 17 (13) (76.5)% ----------------------------------------------------------- Total specialty products 305 484 (179) (37.0)% Deposit service charges 843 821 22 2.7% Overdraft fees 1,040 848 192 22.6% Commissions 416 389 27 6.9% ----------------------------------------------------------- General banking services 2,299 2,058 241 11.7% Miscellaneous revenue (16) (9) (7) 77.8% ----------------------------------------------------------- Total noninterest income (excl security gains/losses) 5,404 4,142 1,262 30.5% Security gains/losses 10 (212) 222 (104.7)% Disposition of branch properties 0 0 0 - ----------------------------------------------------------- Total noninterest income 5,414 3,930 1,484 37.8% Noninterest income as a percentage of operating income (excl securities gains/losses & disposal of branch properties) 21.4% 17.8% 3.6 %pts. --- 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. NONINTEREST INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2001 ------------------------------------------------------------ REGULATORY REPORTING CATEGORIES ------------------------------- Other Service Fiduciary Service Commissions Charges, Other Investment and Charges on (000's Investment on Investment Commissions Operating Securities omitted) Deposits Services Products and Fees Income Gains Total Personal $ 355 $ trust 355 EBT/BPA 301 587 888 Elias Asset Management 1,047 1,047 Insurance 52 49 101 Other investment products 425 425 ------------ ----------- ----------- ------------ ------------ ------------ ----------- Total financial services 656 1,524 636 2,816 - - - Electronic banking 87 145 232 Mortgage banking 56 13 69 Commercial leasing 4 4 ------------ ----------- ----------- ------------ ------------ ------------ ----------- Total specialty products 87 205 13 305 - - - Deposit service charges 843 843 Overdraft 1,040 1,040 fees Commissions 416 416 ------------ ----------- ----------- ------------ ------------ ------------ ----------- General banking services 1,883 416 2,299 - - - - Miscellaneous revenue (16) (16) ------------ ----------- ----------- ------------ ------------ ------------ ----------- Total noninterest income (excl security gains/losses) 656 1,970 1,524 1,257 (3) 5,404 - Security gains/losses 10 10 Disposition of branch properties - - ------------ ----------- ----------- ------------ ------------ ------------ ----------- Total noninterest income $ 656 $ $ $ $ (3) $ 10 $ 1,970 1,524 1,257 5,414 ============ =========== =========== ============ ============ ============ =========== 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, National Association, State of New York - Community Financial Services, Inc., State of New York - Community Capital Trust I, State of Delaware - 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 b) Reports on Form 8-K: Filed February 13, 2001 Item 5: Other Events. Exhibit 99.1, press release dated January 29, 2001; Citizens National and Community Bank Complete Merger 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 15, 2001 /S/ SANFORD A. BELDEN --------------------------------------- Sanford A. Belden, President and Chief Executive Officer Date: May 15, 2001 /S/ DAVID G. WALLACE --------------------------------------- David G. Wallace, Treasurer Chief Financial Officer
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10-Q Filing
Community Financial System (CBU) 10-Q2001 Q1 Quarterly report
Filed: 15 May 01, 12:00am