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FORM 10 - Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the nine months ended September 30, 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 - 12,966,591 shares
outstanding as of November 8, 2002
INDEX
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Condition --
September 30, 2002, December 31, 2001 and September 30, 2001
Consolidated Statements of Income --
Three and nine months ended September 30, 2002 and 2001
Consolidated Statement of Shareholders' Equity --
Nine months ended September 30, 2002
Consolidated Statements of Comprehensive Income --
Nine months ended September 30, 2002 and 2001
Consolidated Statements of Cash Flows --
Nine months ended September 30, 2002, and 2001
Notes to Consolidated Financial Statements -
September 30, 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)
September 30, December 31, September 30,
2002 2001 2001
- -----------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 103,178 $ 106,554 $ 85,579
Federal funds sold 0 0 0
- -----------------------------------------------------------------------------------------------------
Total cash and cash equivalents 103,178 106,554 85,579
Investment securities 1,356,863 1,148,182 1,050,856
Loans 1,779,440 1,732,870 1,564,806
Allowance for loan losses 24,080 23,901 21,083
- -----------------------------------------------------------------------------------------------------
Net loans 1,755,360 1,708,969 1,543,723
Premises and equipment, net 56,907 53,266 44,170
Accrued interest receivable 23,149 22,562 21,723
Core deposit intangibles, net 32,081 36,722 9,039
Goodwill, net 103,628 19,814 21,285
Other intangibles, net (see Note A) 85,806 36,672
- -----------------------------------------------------------------------------------------------------
Intangible assets, net 135,709 142,342 66,996
Other assets 37,426 28,958 31,303
- -----------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 3,468,592 $ 3,210,833 $ 2,844,350
=====================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits
Noninterest bearing $ 450,131 $ 447,544 $ 350,622
Interest bearing 2,101,604 2,098,426 1,737,484
- -----------------------------------------------------------------------------------------------------
Total deposits 2,551,735 2,545,970 2,088,106
Federal funds purchased 11,500 14,200 41,100
Borrowings 439,100 263,100 338,100
Company obligated mandatorily redeemable preferred
securities of subsidiaries, Community Capital/Statutory
Trust I-III, holding solely junior subordinated
debentures of the Company 77,361 77,819 77,805
Accrued interest and other liabilities 64,735 41,764 48,553
- -----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 3,144,431 2,942,853 2,593,664
- -----------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock no par $1.00 stated value
20,000,000 shares authorized; 12,962,549, 12,902,812
and 11,579,312 shares outstanding, respectively 12,963 12,903 11,579
Surplus 78,987 77,710 46,710
Undivided profits 188,604 170,472 169,127
Accumulated other comprehensive income 43,728 7,281 23,633
Shares issued under employee stock plan - unearned (121) (386) (363)
- -----------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 324,161 267,980 250,686
- -----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,468,592 $ 3,210,833 $ 2,844,350
=====================================================================================================
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)
Three Months Ended Nine Months Ended
September 30, September 30,
- -------------------------------------------------------------------------------------------------------
2002 2001 2002(1) 2001
- -------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $ 32,816 $32,635 $ 97,952 $ 99,408
Interest and dividends on investments:
Taxable 14,169 13,057 43,172 41,412
Nontaxable 4,530 2,726 12,389 7,302
Interest on federal funds and deposits with other banks 1 173 4 561
- -------------------------------------------------------------------------------------------------------
Total interest income 51,516 48,591 153,517 148,683
- -------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 13,099 17,689 42,110 56,606
Interest on federal funds purchased 156 84 392 733
Interest on short-term borrowings 674 752 1,289 5,425
Interest on madatorily redeemable preferred
securities of subsidiaries 1,439 1,452 4,336 2,918
Interest on long-term borrowings 3,751 4,805 11,387 12,973
- -------------------------------------------------------------------------------------------------------
Total interest expense 19,119 24,782 59,514 78,655
- -------------------------------------------------------------------------------------------------------
Net interest income 32,397 23,809 94,003 70,028
Less: provision for loan losses 2,278 1,579 7,180 4,320
- -------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 30,119 22,230 86,823 65,708
- -------------------------------------------------------------------------------------------------------
Other income:
Fiduciary and investment services 707 801 2,484 2,327
Service charges on deposit accounts 3,343 2,530 9,384 7,271
Commissions on investment products 1,336 1,498 5,249 4,668
Other service charges, commissions and fees 2,490 2,050 6,065 5,217
Other operating income (4) 102 (8) 104
Investment security gain, net 216 2,688 1,359 2,559
- -------------------------------------------------------------------------------------------------------
Total other income 8,088 9,669 24,533 22,146
- -------------------------------------------------------------------------------------------------------
Other expenses:
Salaries and employee benefits 12,020 9,879 36,411 30,321
Occupancy expense, net 1,781 1,464 6,179 4,554
Equipment and furniture expense 1,714 1,518 5,569 4,416
Amortization of intangible assets 1,597 1,541 4,641 4,542
Legal and professional fees 845 745 2,380 2,063
Data processing expenses 1,813 1,340 5,234 3,815
Acquisition and unusual expenses 0 631 700 6,117
Other 3,299 3,263 10,683 9,223
- -------------------------------------------------------------------------------------------------------
Total other expenses 23,069 20,381 71,797 65,051
- -------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary item 15,138 11,518 39,559 22,803
Income taxes 4,087 2,416 10,681 5,842
Income before extraordinary item 11,051 9,102 28,878 16,961
Extraordinary loss on early retirement of long
term borrowings, net of tax benefit of $1,077 0 2,659 0 2,659
- -------------------------------------------------------------------------------------------------------
NET INCOME $ 11,051 $ 6,443 $ 28,878 $ 14,302
=======================================================================================================
Earnings per share - Basic $ 0.85 $ 0.56 $ 2.23 $ 1.25
=======================================================================================================
Earnings per share - Diluted $ 0.84 $ 0.55 $ 2.19 $ 1.23
=======================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements. (1) The consolidated statements of income for the three months ended
March 31 and June 30, 2002 and the six months ended June 30, 2002 were restated
for the adoption of SFAS 147.
4
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES
Nine Months Ended September 30, 2002
(In Thousands, Except Share Data)
Accumulated Shares Issued
Common Stock Other Under Employee
Shares Undivided Comprehensive Stock Plan
Outstanding Amount Surplus Profits Income -Unearned Total
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 12,902,812 $12,903 $77,710 $ 170,472 $ 7,281 ($386) $ 267,980
Net income 28,878 28,878
Other comprehensive income, net of tax 36,447 36,447
Dividends declared:
Common, $.83 per share (10,746) (10,746)
Common stock issued under employee stock plan 59,737 60 1,277 265 1,602
- --------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2002 12,962,549 $12,963 $78,987 $ 188,604 $43,728 ($121) $ 324,161
================================================================================================================================
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)
Nine Months Ended
September 30,
2002 2001
- -----------------------------------------------------------------------------------
Other comprehensive income, before tax:
Change in minimum pension liability adjustment $ 4,919 $ 0
Unrealized gain on securities:
Unrealized holding gains arising during period 57,212 32,018
Reclassification adjustment for (gains) losses included
in net income (1,359) (2,559)
- -----------------------------------------------------------------------------------
Other comprehensive income, before tax 60,772 29,459
Income tax expense related to other comprehensive income (24,325) (11,791)
- -----------------------------------------------------------------------------------
Other comprehensive income, net of tax 36,447 17,668
Net income 28,878 14,302
- -----------------------------------------------------------------------------------
Comprehensive income $ 65,325 $ 31,970
===================================================================================
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)
Nine Months Ended
September 30,
- ------------------------------------------------------------------------------------
2002 2001
- ------------------------------------------------------------------------------------
Operating Activities:
Net income $ 28,878 $ 14,302
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation 4,868 3,661
Amortization of intangible assets 4,641 4,542
Net amortization of security premiums and discounts 3,081 1,528
Amortization of discount of loans (81) (160)
Amortization of unearned compensation and discount on
junior subordinated debentures 340 95
Provision for loan losses 7,180 4,320
Provision for deferred taxes 4,594 589
Gain on sale of investment securities (1,359) (2,559)
Loss (gain) on sale of loans and other assets 7 (97)
Change in interest receivable (587) 1,160
Change in other assets and other liabilities (9,416) 3,127
- ------------------------------------------------------------------------------------
Net cash provided by operating activities 42,146 30,508
- ------------------------------------------------------------------------------------
Investing Activities:
Proceeds from sales of investment securities 75,782 139,414
Proceeds from maturities of held-to-maturity
investment securities 3,862 4,978
Proceeds from maturities of available-for-sale
investment securities 129,790 169,072
Purchases of held-to-maturity investment securities (3,498) (3,480)
Purchases of available-for-sale investment securities (360,491) (354,823)
Net change in loans outstanding (53,483) 6,040
Premium paid on acquisition of business 0 (2,993)
Cash received in acquisition 0 3,777
Capital expenditures (6,560) (5,398)
- ------------------------------------------------------------------------------------
Net cash used by investing activities (214,598) (43,413)
- ------------------------------------------------------------------------------------
Financing Activities:
Net change in demand deposits, NOW accounts, and
savings accounts 49,952 46,456
Net change in certificates of deposit (44,187) 5,422
Net change in federal funds purchased (2,700) (7,630)
Net change in borrowings 175,500 (62,950)
Proceeds from issuance of redeemable preferred securities 0 47,967
Issuance of common stock 1,064 703
Cash dividends paid (10,469) (7,856)
Other financing activities (84) (84)
- ------------------------------------------------------------------------------------
Net cash provided by financing activities 169,076 22,027
- ------------------------------------------------------------------------------------
Change in cash and cash equivalents (3,376) 9,122
Cash and cash equivalents at beginning of year 106,554 76,456
- ------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 103,178 $ 85,579
====================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ 60,163 $ 77,345
Cash paid for income taxes $ 4,927 $ 6,142
====================================================================================
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING AND
INVESTING ACTIVITIES:
Dividends declared and unpaid $ 3,759 $ 3,124
Gross change in unrealized gains and (losses) on
available-for-sale securities $ 55,853 ($ 29,459)
Change in minimum pension liability adjustment ($ 4,919) $ 0
Bank acquisition:
Fair value of assets acquired $ 0 $ 123,948
Liabilities assumed $ 0 $ 98,720
Common stock issued, including treasury stock
of $0 and $17,006 $ 0 $ 25,228
====================================================================================
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)
September 30, 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 considered
necessary for fair presentation have been included. Operating results for the
three and nine month periods ended September 30, 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. The results of operations from this transaction
have been included in the Company's consolidated financial statements since the
acquisition date.
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 $4.919 million, which was recorded at December 31, 2001 as a charge
to shareholders' equity, net of tax, was reversed.
On October 1, 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 147 (SFAS 147), "Accounting for
Certain Acquisitions of Banking or Thrift Institutions." Under previous SFAS,
goodwill arising from branch acquisitions was classified as an "unidentifiable
intangible asset" and subject to regular amortization. SFAS 147 changes the
accounting for goodwill arising from branch acquisitions and allows the Company
to cease amortization on this goodwill and subject it to an annual impairment
test. In accordance with the provisions of SFAS 147, the Company has adopted
this Statement retroactive to January 1, 2002, with the impact of restatement on
previously issued Form 10Q's as of March 31, 2002 and June 30, 2002 contained
below.
8
Three Months Three Months Six Months
Ended March Ended June Ended June
($000s except for earnings-per-share amounts) 31, 2002 30, 2002 30, 2002
----------------------------------------
Net income as previously reported $ 7,438 $ 8,179 $ 15,617
Plus: branch goodwill amortization, net of tax 1,122 1,090 2,211
----------------------------------------
Net income as restated $ 8,560 $ 9,269 $ 17,828
Basic EPS as previously reported $ 0.57 $ 0.63 $ 1.21
Diluted EPS as previously reported $ 0.57 $ 0.62 $ 1.19
Basic EPS as restated $ 0.66 $ 0.71 $ 1.38
Diluted EPS as restated $ 0.65 $ 0.70 $ 1.36
Note B -- Critical Accounting Policies
Allowance for Loan Losses
The allowance 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 allowance 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.
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 and nine months ended
September 30, 2002.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses financial accounting and
reporting for costs associated with exit or disposal activities. This Statement
supersedes Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit and Activity
(including Certain Costs Incurred in a Restructuring)." The provisions of this
Statement are effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The Company is not
anticipating that this pronouncement will have a significant impact on the
financial condition or results of its operations.
See Notes A and D for discussion of recent accounting pronouncements regarding
goodwill and intangible assets.
9
Note C -- Earnings Per Share
Basic earnings per share are 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 dilutive effect of options is
calculated using the treasury stock method of accounting sanctioned by the FASB.
This calculation determines approximately how many more common shares would be
outstanding if all in-the-money (average market price is greater than the
exercise price) vested and unvested options outstanding were exercised and the
proceeds were used to repurchase common shares in the open market at the average
price for the applicable time period. The following is a reconciliation of basic
to diluted earnings per share for the three and nine months ended September 30,
2002 and 2001.
Per Share
(In thousands except per share data) Income Shares Amount
- ----------------------------------------------------------------------------------------------------
Quarter ended September 30, 2002 Net income $11,051
Basic EPS 11,051 12,985 $0.85
Effect of dilutive
securities:
Stock options 187
--------------------
Diluted EPS $11,051 13,172 $0.84
====================================================================================================
Quarter ended September 30, 2001 Net income $6,443
Basic EPS 6,443 11,591 $0.56
Effect of dilutive
securities:
Stock options 145
--------------------
Diluted EPS $6,443 11,736 $0.55
====================================================================================================
Nine months ended September 30, 2002 Net income $28,878
Basic EPS 28,878 12,966 $2.23
Effect of dilutive
securities:
Stock options 191
--------------------
Diluted EPS $28,878 13,157 $2.19
====================================================================================================
Nine months ended September 30, 2001 Net income $14,302
Basic EPS 14,302 11,483 $1.25
Effect of dilutive
securities:
Stock options 154
--------------------
Diluted EPS $14,302 11,637 $1.23
====================================================================================================
10
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
intangible 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 is no
longer being recorded in accordance with this statement. Core deposit
intangibles, net and other intangibles, net (primarily branch goodwill related
to branch acquisitions) will continue to be amortized. The adoption of this
pronouncement resulted in a reduction in amortization expense of $325,000 and
$975,000 for the quarter and nine months ended September 30, 2002, respectively.
In October 2002, the FASB issued SFAS No. 147, "Accounting for Certain
Acquisitions of Banking and Thrift Institutions", which addresses financial
accounting and reporting for certain intangibles associated with branch
acquisitions. This statement removes acquisitions of financial institutions from
the scope of SFAS No. 72 and FASB Interpretation No. 9. It reclassifies as
goodwill certain "unidentified intangible assets" associated with the Company's
branch acquisitions dating as far back as 1994. Financial statements are
retroactively restated to January 1, 2002 to remove amortization recorded on
Other Intangible Assets. Previously, these intangible assets were subject to
being regularly amortized. As discussed above, under FASB 142, goodwill is not
required to be amortized, but as an asset, is periodically reviewed for
impairment. The adoption of this pronouncement resulted in a reduction in
amortization expense of approximately $1.5 million and $4.5 million for the
quarter and nine months ended September 30, 2002, respectively.
The proforma disclosures on net income and earnings per share of SFAS No. 142
and SFAS No. 147 for the quarter and nine months ended September 30, 2002 and
2001 are as follows:
($000s except for
earnings-per-share amounts) Quarter Ended Nine Months Ended
September 30, September 30,
------------------------------------------------
2002 2001 2002 2001
------------------------------------------------
Reported net income $ 11,051 $ 6,443 $ 28,878 $ 14,302
Add back: Goodwill amortization 660 1,931
------------------------------------------------
Adjusted net income $ 11,051 $ 7,103 $ 28,878 $ 16,233
================================================
Basic earnings per share:
Reported net income $ 0.85 $ 0.56 $ 2.23 $ 1.25
Add back: Goodwill amortization 0.05 0.16
------------------------------------------------
Adjusted net income $ 0.85 $ 0.61 $ 2.23 $ 1.41
================================================
Diluted earnings per share:
Reported net income $ 0.84 $ 0.55 $ 2.19 $ 1.23
Add back: Goodwill amortization 0.06 0.16
------------------------------------------------
Adjusted net income $ 0.84 $ 0.61 $ 2.19 $ 1.39
================================================
11
The gross carrying amount and accumulated amortization for each type of
intangible asset are as follows:
As of September 30, 2002 As of December 31, 2001
--------------------------------------------------------------------------------
Gross Net Gross Net
($000s) Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
--------------------------------------------------------------------------------
Amortized intangible assets:
Core deposit intangibles $47,218 ($15,137) $32,081 $47,218 ($10,496) $36,722
--------------------------------------------------------------------------------
Total amortized intangible assets 47,218 (15,137) 32,081 47,218 (10,496) 36,722
Unamortized intangible assets:
Goodwill 122,001 (18,373) 103,628 123,993 (18,373) 105,620
--------------------------------------------------------------------------------
Total intangible assets, net $169,219 ($33,510) $135,709 $171,211 ($28,869) $142,342
================================================================================
The decrease of $1,992 in the gross carrying value of goodwill pertains to the
FleetBoston acquisition, specifically an adjustment to fair value of the Bank
premises and equipment and reflecting deferred taxes on the allowance for loan
losses and conversion costs. The Company completed its goodwill impairment
analysis during 2002, and no adjustment was necessary.
The estimated aggregate amortization expense for each of the five succeeding
fiscal years ended December 31, is as follows:
2003 $4,970
2004 4,753
2005 4,079
2006 3,406
2007 3,406
12
Part 1. Financial Information
Item 1. Financial Statements
The information required by rule 10.01 of Regulation S-X is presented on the
previous pages.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The purpose of the discussion is to present material changes in Community Bank
System, Inc.'s financial condition and results of operations during the three
and nine months ended September 30, 2002 which are not otherwise apparent from
the consolidated financial statements included in these reports. When used in
this report, the term "CBSI" or "CBU" 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
June 30, 2002 as provided by the Federal Reserve System; the peer group is
comprised of 73 bank holding companies having $3 to $10 billion in assets.
13
COMMUNITY BANK SYSTEM, INC.
SUMMARY OF OPERATIONS
EARNINGS AND BALANCE SHEET RECAP
3RD QUARTER 2002 AND FULL YEAR COMPARISONS
----------------------------------------------------------------
000's Omitted Three Months Ended
----------------------------------------------------------------------------------------------------------------------
Line Sep 30, Sep 30, Change Change
No. 2002 2001 Amount Percent
----------------------------------------------------------------------------------------------------------------------
Earnings
------------------------------------------------------
1 Net interest income $32,397 $23,809 $8,588 36.1%
2 Loan loss provision 2,278 1,579 699 44.3%
3 Net interest income after provision for loan losses 30,119 22,230 7,889 35.5%
4a Financial services other income 3,689 3,688 1 0.0%
4b Banking services other income 4,183 3,293 890 27.0%
4c Investment security gain (loss) & debt extinguishment 216 29 187 644.8%
4d Total other income 8,088 7,010 1,078 15.4%
5a Financial services other expenses 2,500 2,560 (60) -2.3%
5b Banking services other expenses 18,972 15,649 3,323 21.2%
5c Intangible amortization 1,597 1,541 56 3.6%
5d Acquisition and unusual expense 0 631 (631) 0.0%
5e Total other expenses 23,069 20,381 2,688 13.2%
6 Income before taxes 15,138 8,859 6,279 70.9%
7 Income tax 4,087 2,416 1,671 69.2%
8a Net income $11,051 $6,443 $4,608 71.5%
8b Net income - Operating $11,051 $6,801 $4,250 62.5%
8c Net income - Cash $12,021 $7,451 $4,570 61.3%
8d Net income - Cash Operating $12,021 $7,809 $4,212 53.9%
9a Basic earnings per share $0.85 $0.56 $0.29 51.8%
9b Diluted earnings per share $0.84 $0.55 $0.29 52.7%
9c Diluted earnings per share-Operating $0.84 $0.58 $0.26 44.8%
9d Diluted earnings per share-Cash $0.91 $0.63 $0.28 44.4%
9e Diluted earnings per share-Cash Operating $0.91 $0.67 $0.24 35.8%
------------------------------------------------------================================================================
Balances At Period End
------------------------------------------------------
10 Loans $1,779,440 $1,564,806 $214,634 13.7%
11 Investments & other interest bearing accounts 1,284,695 1,011,354 273,341 27.0%
(excluding market value adjustment)
12 Earning assets 3,064,135 2,576,160 487,975 18.9%
13 Loan loss reserve 24,080 21,083 2,997 14.2%
14a Core deposit intangibles,net 32,081 9,039 23,042 254.9%
14b Goodwill & other intangibles, net 103,628 57,957 45,671 78.8%
14c Total intangible assets, net 135,709 66,996 68,713 102.6%
15 Total assets 3,468,592 2,844,350 624,242 21.9%
16 Deposits 2,551,735 2,088,106 463,629 22.2%
17a FHLB borrowings 450,600 379,200 71,400 18.8%
17b Trust preferred borrowings 77,361 77,805 (444) -0.6%
17c Total borrowings 527,961 457,005 70,956 15.5%
18 Total shareholders' equity 324,161 250,686 73,475 29.3%
19 Assets under management $1,267,289 $1,237,554 $29.735 2.4%
================================================================
14
----------------------------------------------------------------
000's Omitted Nine Months Ended
----------------------------------------------------------------------------------------------------------------------
Line Six Months Ended June 30, 2002 Restated for SFAS 147 Sep 30, Sep 30, Change Change
No. 2002 2001 Amount Percent
----------------------------------------------------------------------------------------------------------------------
Earnings
------------------------------------------------------
1 Net interest income $94,003 $70,028 $23,975 34.2%
2 Loan loss provision 7,180 4,320 2,860 66.2%
3 Net interest income after provision for loan losses 86,823 65,708 21,115 32.1%
4a Financial services other income 10,881 9,672 1,209 12.5%
4b Banking services other income 12,293 9,915 2,378 24.0%
4c Investment security gain (loss) & debt extinguishment 1,359 (100) 1,459 -1459.0%
4d Total other income 24,533 19,487 5,046 25.9%
5a Financial services other expenses 7,870 7,492 378 5.0%
5b Banking services other expenses 58,586 46,900 11,686 24.9%
5c Intangible amortization 4,641 4,542 99 2.2%
5d Acquisition and unusual expense 700 6,117 (5,417) -88.6%
5e Total other expenses 71,797 65,051 6,746 10.4%
6 Income before taxes 39,559 20,144 19,415 96.4%
7 Income tax 10,681 5,842 4,839 82.8%
8a Net income $28,878 $14,302 $14,576 101.9%
8b Net income - Operating $29,303 $18,000 $11,303 62.8%
8c Net income - Cash $31,697 $17,247 $14,450 83.8%
8d Net income - Cash Operating $32,122 $20,945 $11,177 53.4%
9a Basic earnings per share $2.23 $1.25 $0.98 78.4%
9b Diluted earnings per share $2.19 $1.23 $0.96 78.0%
9c Diluted earnings per share-Operating $2.23 $1.55 $0.68 43.9%
9d Diluted earnings per share-Cash $2.41 $1.48 $0.93 62.8%
9e Diluted earnings per share-Cash Operating $2.44 $1.80 $0.64 35.6%
------------------------------------------------------================================================================
Balances At Period End
------------------------------------------------------
10 Loans $1,779,440 $1,564,806 $214,634 13.7%
11 Investments & other interest bearing accounts 1,284,695 1,011,354 273,341 27.0%
(excluding market value adjustment)
12 Earning assets 3,064,135 2,576,160 487,975 18.9%
13 Loan loss reserve 24,080 21,083 2,997 14.2%
14a Core deposit intangibles,net 32,081 9,039 23,042 254.9%
14b Goodwill & other intangibles, net 103,628 57,957 45,671 78.8%
14c Total intangible assets, net 135,709 66,996 68,713 102.6%
15 Total assets 3,468,592 2,844,350 624,242 21.9%
16 Deposits 2,551,735 2,088,106 463,629 22.2%
17a FHLB borrowings 450,600 379,200 71,400 18.8%
17b Trust preferred borrowings 77,361 77,805 (444) -0.6%
17c Total borrowings 527,961 457,005 70,956 15.5%
18 Total shareholders' equity 324,161 250,686 73,475 29.3%
19 Assets under management $1,267,289 $1,237,554 $29.735 2.4%
================================================================
15
----------------------------------------------------------------
000's Omitted Three Months Ended
----------------------------------------------------------------------------------------------------------------------
Line Three Months Ended June 30, 2002 Restated for SFAS 147 Sep 30, Jun 30, Change Change
No. ------------------------------------------------------ 2002 2002 Amount Percent
- --------------------------------------------------------------------------------------------------------------------------------
Earnings
------------------------------------------------------
1 Net interest income $32,397 $31,438 $959 3.1%
2 Loan loss provision 2,278 3,385 (1,107) -32.7%
3 Net interest income after provision for loan losses 30,119 28,053 2,066 7.4%
4a Financial services other income 3,689 3,550 139 3.9%
4b Banking services other income 4,183 4,017 166 4.1%
4c Investment security gain (loss) & debt extinguishment 216 1,144 (928) -81.1%
4d Total other income 8,088 8,711 (623) -7.2%
5a Financial services other expenses 2,500 2,645 (145) -5.5%
5b Banking services other expenses 18,972 19,822 (850) -4.3%
5c Intangible amortization 1,597 1,504 93 6.2%
5d Acquisition and unusual expense 0 108 (108) 0.0%
5e Total other expenses 23,069 24,079 (1,010) -4.2%
6 Income before taxes 15,138 12,685 2,453 19.3%
7 Income tax 4,087 3,416 671 19.6%
8a Net income $11,051 $9,269 $1,782 19.2%
8b Net income - Operating $11,051 $9,335 $1,716 18.4%
8c Net income - Cash $12,021 $10,182 $1,839 18.1%
8d Net income - Cash Operating $12,021 $10,248 $1,773 17.3%
9a Basic earnings per share $0.85 $0.71 $0.14 19.7%
9b Diluted earnings per share $0.84 $0.70 $0.14 20.0%
9c Diluted earnings per share-Operating $0.84 $0.71 $0.13 18.3%
9d Diluted earnings per share-Cash $0.91 $0.77 $0.14 18.2%
9e Diluted earnings per share-Cash Operating $0.91 $0.78 $0.13 16.7%
------------------------------------------------------================================================================
Balances At Period End
------------------------------------------------------
10 Loans $1,779,440 $1,751,184 $28,256 1.6%
11 Investments & other interest bearing accounts 1,284,695 1,281,724 2,971 0.2%
(excluding market value adjustment)
12 Earning assets 3,064,135 3,032,908 31,227 1.0%
13 Loan loss reserve 24,080 23,883 197 0.8%
14a Core deposit intangibles,net 32,081 33,678 (1,597) -4.7%
14b Goodwill & other intangibles, net 103,628 102,602 1,026 1.0%
14c Total intangible assets, net 135,709 136,280 (571) -0.4%
15 Total assets 3,468,592 3,408,893 59,699 1.8%
16 Deposits 2,551,735 2,513,261 38,474 1.5%
17a FHLB borrowings 450,600 472,200 (21,600) -4.6%
17b Trust preferred borrowings 77,361 77,347 14 0.0%
17c Total borrowings 527,961 549,547 (21,586) -3.9%
18 Total shareholders' equity 324,161 298,529 25,632 8.6%
19 Assets under management $1,267,289 $1,370,346 ($103,057) -7.5%
================================================================
16
----------------------------------------------------------------
000's Omitted Three Months Ended
----------------------------------------------------------------------------------------------------------------------
Line Sep 30, Sep 30, Change Change
No. 2002 2001 Amount Percent
----------------------------------------------------------------------------------------------------------------------
Profitability
------------------------------------------------------
20 Return on assets 1.28% 0.90% 0.38 %pts.
21a Return on equity 14.56% 10.73% 3.83 %pts.
21b Return on equity - operating 14.56% 11.33% 3.23 %pts.
22 Tangible return on assets 1.39% 1.04% 0.35 %pts.
23a Tangible return on equity 15.84% 12.41% 3.43 %pts.
23b Tangible return on equity - operating 15.84% 13.01% 2.83 %pts.
24 Net interest margin (FTE) 4.61% 3.94% 0.67 %pts.
25 Non interest income/operating income (FTE) 18.2% 21.3% (3.1) %pts.
(excluding net security gains & branch disposition)
26 Efficiency ratio 49.7% 55.6% (5.9) %pts.
(excluding acquisition & unusual expenses
& intangible amortization)
------------------------------------------------------================================================================
Capital
------------------------------------------------------
27 Tier I leverage ratio 6.87% 8.72% (1.85) %pts.
28 Tangible equity / assets 5.65% 6.61% (0.96) %pts.
29 Accumulated other comprehensive income $43,728 $23,633 $20,095 85.0%
30 Diluted weighted average common shares outstanding 13,172 11,736 1,436 12.2%
31 Period end common shares outstanding 12,963 11,579 1,384 12.0%
32 Cash dividends declared per common share $0.29 $0.27 $0.02 7.4%
33 Common stock price $29.63 $27.50 $2.13 7.7%
34 Total return - last 12 months 11.8% 10.3% 1.5 %pts.
35 Book value $25.01 $21.65 $3.36 15.5%
36 Tangible book value $14.54 $15.86 ($1.32) -8.3%
------------------------------------------------------================================================================
Asset Quality Ratios
------------------------------------------------------
37 Loan loss reserve / 1.35% 1.35% 0.00 %pts.
loans outstanding
38 Nonperforming loans / 0.69% 0.54% 0.15 %pts.
loans outstanding
39 Loan loss reserve / 197% 247% (50) %pts.
nonperforming loans
40 Net charge-offs / 0.47% 0.34% 0.13 %pts.
average loans
41 Loan loss provision / 110% 116% (6) %pts.
net charge-offs
42 Nonperforming assets / 0.75% 0.67% 0.08 %pts.
loans outstanding + OREO
================================================================
17
----------------------------------------------------------------
000's Omitted Nine Months Ended
----------------------------------------------------------------------------------------------------------------------
Line Six Months Ended June 30, 2002 Restated for SFAS 147 Sep 30, Sep 30, Change Change
No. 2002 2001 Amount Percent
----------------------------------------------------------------------------------------------------------------------
Profitability
------------------------------------------------------
20 Return on assets 1.15% 0.67% 0.48 %pts.
21a Return on equity 13.50% 8.30% 5.20 %pts.
21b Return on equity - operating 13.70% 10.44% 3.26 %pts.
22 Tangible return on assets 1.26% 0.81% 0.45 %pts.
23a Tangible return on equity 14.82% 10.01% 4.81 %pts.
23b Tangible return on equity - operating 15.01% 12.15% 2.86 %pts.
24 Net interest margin (FTE) 4.56% 3.88% 0.68 %pts.
25 Non interest income/operating income (FTE) 18.1% 20.6% (2.5) %pts.
(excluding net security gains & branch disposition)
26 Efficiency ratio 52.9% 57.3% (4.4) %pts.
(excluding acquisition & unusual expenses
& intangible amortization)
------------------------------------------------------================================================================
Capital
------------------------------------------------------
27 Tier I leverage ratio 6.87% 8.72% (1.85) %pts.
28 Tangible equity / assets 5.65% 6.61% (0.96) %pts.
29 Accumulated other comprehensive income $43,728 $23,633 $20,095 85.0%
30 Diluted weighted average common shares outstanding 13,157 11,637 1,520 13.1%
31 Period end common shares outstanding 12,963 11,579 1,384 12.0%
32 Cash dividends declared per common share $0.83 $0.81 $0.02 2.5%
33 Common stock price $29.63 $27.50 $2.13 7.7%
34 Total return - last 12 months 11.8% 10.3% 1.5 %pts.
35 Book value $25.01 $21.65 $3.36 15.5%
36 Tangible book value $14.54 $15.86 ($1.32) -8.3%
------------------------------------------------------================================================================
Asset Quality Ratios
------------------------------------------------------
37 Loan loss reserve / 1.35% 1.35% 0.00 %pts.
loans outstanding
38 Nonperforming loans / 0.69% 0.54% 0.15 %pts.
loans outstanding
39 Loan loss reserve / 197% 247% (50) %pts.
nonperforming loans
40 Net charge-offs / 0.54% 0.35% 0.19 %pts.
average loans
41 Loan loss provision / 103% 106% (3) %pts.
net charge-offs
42 Nonperforming assets / 0.75% 0.67% 0.08 %pts.
loans outstanding + OREO
================================================================
18
----------------------------------------------------------------
000's Omitted Three Months Ended
----------------------------------------------------------------------------------------------------------------------
Line Three Months Ended June 30, 2002 Restated for SFAS 147 Sep 30, Jun 30, Change Change
No. 2002 2002 Amount Percent
----------------------------------------------------------------------------------------------------------------------
Profitability
------------------------------------------------------
20 Return on assets 1.28% 1.10% 0.18 %pts.
21a Return on equity 14.56% 13.21% 1.35 %pts.
21b Return on equity - operating 14.56% 13.30% 1.26 %pts.
22 Tangible return on assets 1.39% 1.20% 0.19 %pts.
23a Tangible return on equity 15.84% 14.51% 1.33 %pts.
23b Tangible return on equity - operating 15.84% 14.61% 1.23 %pts.
24 Net interest margin (FTE) 4.61% 4.54% 0.07 %pts.
25 Non interest income/operating income (FTE) 18.2% 17.9% 0.3 %pts.
(excluding net security gains & branch disposition)
26 Efficiency ratio 49.7% 53.0% (3.3) %pts.
(excluding acquisition & unusual expenses
& intangible amortization)
------------------------------------------------------================================================================
Capital
------------------------------------------------------
27 Tier I leverage ratio 6.87% 6.66% 0.21 %pts.
28 Tangible equity / assets 5.65% 4.96% 0.69 %pts.
29 Accumulated other comprehensive income $43,728 $25,546 $18,182 71.2%
30 Diluted weighted average common shares outstanding 13,172 13,194 (22) -0.2%
31 Period end common shares outstanding 12,963 12,959 4 0.0%
32 Cash dividends declared per common share $0.29 $0.27 $0.02 7.4%
33 Common stock price $29.63 $32.25 ($2.62) -8.1%
34 Total return - last 12 months 11.8% 19.6% (7.8) %pts.
35 Book value $25.01 $23.04 $1.97 8.6%
36 Tangible book value $14.54 $12.52 $2.02 16.1%
------------------------------------------------------================================================================
Asset Quality Ratios
------------------------------------------------------
37 Loan loss reserve / 1.35% 1.36% (0.01) %pts.
loans outstanding
38 Nonperforming loans / 0.69% 0.64% 0.05 %pts.
loans outstanding
39 Loan loss reserve / 197% 214% (17) %pts.
nonperforming loans
40 Net charge-offs / 0.47% 0.81% (0.34) %pts.
average loans
41 Loan loss provision / 110% 96% 14 %pts.
net charge-offs
42 Nonperforming assets / 0.75% 0.74% 0.01 %pts.
loans outstanding + OREO
==================================================================
19
----------------------------------------------------------------
000's Omitted Three Months Ended
----------------------------------------------------------------------------------------------------------------------
Line Sep 30, Sep 30, Change Change
No. 2002 2001 Amount Percent
------------------------------------------------------================================================================
Asset Quality Components
------------------------------------------------------
43 Nonaccruing loans $10,928 $5,677 $5,251 92.5%
44 90+ days delinquent 1,289 2,842 (1,553) -54.6%
45 Total nonperforming loans 12,217 8,519 3,698 43.4%
46 Troubled debt restructurings 46 85 (39) -45.9%
47 Other real estate 1,033 1,835 (802) -43.7%
48 Total nonperforming assets 13,296 10,439 2,857 27.4%
49 Net charge-offs $2,080 $1,356 $724 53.4%
------------------------------------------------------================================================================
Components of Net Interest Margin (FTE)
------------------------------------------------------
50 Loan yield 7.45% 8.30% (0.85) %pts.
51 Investment yield 6.58% 6.86% (0.28) %pts.
52 Earning asset yield 7.08% 7.73% (0.65) %pts.
53 Interest bearing deposits rate 2.48% 4.06% (1.58) %pts.
54 Borrowed funds rate - FHLB 3.87% 5.40% (1.53) %pts.
55 Borrowed funds rate - Trust preferred & other 7.47% 8.80% (1.33) %pts.
56 Cost of all interest bearing funds 2.87% 4.45% (1.58) %pts.
57 Cost of funds (includes DDA) 2.46% 3.85% (1.39) %pts.
58 Cost of funds / earning assets 2.47% 3.79% (1.32) %pts.
59 Net interest margin (FTE) 4.61% 3.94% 0.67 %pts.
60 Full tax equivalent adjustment $3,229 $1,935 $1,294 66.9%
------------------------------------------------------================================================================
Average Balances for Period
------------------------------------------------------
61 Loans $1,763,855 $1,567,842 $196,013 12.5%
62 Investments & other interest bearing accounts 1,302,928 1,025,375 277,553 27.1%
(excluding market value adjustment)
63 Earning assets 3,066,783 2,593,217 473,566 18.3%
64 Total assets 3,438,076 2,835,584 602,492 21.2%
65 Deposits 2,542,233 2,076,447 465,786 22.4%
66 FHLB borrowings 468,563 413,518 55,045 13.3%
67 Trust preferred & other borrowings 77,632 66,502 11,130 16.7%
68 Total borrowings 546,195 480,020 66,175 13.8%
69 Total shareholders' equity $301,148 $238,159 $62,989 26.4%
================================================================
20
----------------------------------------------------------------
000's Omitted Nine Months Ended
----------------------------------------------------------------------------------------------------------------------
Line Six Months Ended June 30, 2002 Restated for SFAS 147 Sep 30, Sep 30, Change Change
No. 2002 2001 Amount Percent
----------------------------------------------------------------------------------------------------------------------
Asset Quality Components
------------------------------------------------------
43 Nonaccruing loans $10,928 $5,677 $5,251 92.5%
44 90+ days delinquent 1,289 2,842 (1,553) -54.6%
45 Total nonperforming loans 12,217 8,519 3,698 43.4%
46 Troubled debt restructurings 46 85 (39) -45.9%
47 Other real estate 1,033 1,835 (802) -43.7%
48 Total nonperforming assets 13,296 10,439 2,857 27.4%
49 Net charge-offs $7,001 $4,059 $2,942 72.5%
------------------------------------------------------================================================================
Components of Net Interest Margin (FTE)
------------------------------------------------------
50 Loan yield 7.55% 8.57% (1.02) %pts.
51 Investment yield 6.72% 6.99% (0.27) %pts.
52 Earning asset yield 7.20% 7.94% (0.74) %pts.
53 Interest bearing deposits rate 2.67% 4.35% (1.68) %pts.
54 Borrowed funds rate - FHLB 4.14% 5.56% (1.42) %pts.
55 Borrowed funds rate - Trust preferred & other 7.48% 9.26% (1.78) %pts.
56 Cost of all interest bearing funds 3.05% 4.69% (1.64) %pts.
57 Cost of funds (includes DDA) 2.61% 4.09% (1.48) %pts.
58 Cost of funds / earning assets 2.64% 4.06% (1.42) %pts.
59 Net interest margin (FTE) 4.56% 3.88% 0.68 %pts.
60 Full tax equivalent adjustment $8,744 $5,265 $3,479 66.1%
------------------------------------------------------================================================================
Average Balances for Period
------------------------------------------------------
61 Loans $1,746,719 $1,558,611 $188,108 12.1%
62 Investments & other interest bearing accounts 1,266,375 1,032,650 233,725 22.6%
(excluding market value adjustment)
63 Earning assets 3,013,094 2,591,261 421,833 16.3%
64 Total assets 3,371,805 2,837,812 533,993 18.8%
65 Deposits 2,544,079 2,068,995 475,084 23.0%
66 FHLB borrowings 420,895 459,404 (38,509) -8.4%
67 Trust preferred & other borrowings 77,864 42,472 35,392 83.3%
68 Total borrowings 498,759 501,876 (3,117) -0.6%
69 Total shareholders' equity $286,053 $230,465 $55,588 24.1%
==================================================================
21
----------------------------------------------------------------
000's Omitted Three Months Ended
--------------------------------------------------------------------------------------------------------------------------
Line Three Months Ended June 30, 2002 Restated for SFAS 147 Sep 30, Jun 30, Change Change
No. 2002 2002 Amount Percent
--------------------------------------------------------------------------------------------------------------------------
Asset Quality Components
----------------------------------------------------------
43 Nonaccruing loans $10,928 $10,029 $899 9.0%
44 90+ days delinquent 1,289 1,141 148 13.0%
45 Total nonperforming loans 12,217 11,170 1,047 9.4%
46 Troubled debt restructurings 46 59 (13) -22.0%
47 Other real estate 1,033 1,671 (638) -38.2%
48 Total nonperforming assets 13,296 12,900 396 3.1%
49 Net charge-offs $2,080 $3,512 ($1,432) -40.8%
----------------------------------------------------------================================================================
Components of Net Interest Margin (FTE)
----------------------------------------------------------
50 Loan yield 7.45% 7.43% 0.02 %pts.
51 Investment yield 6.58% 6.78% (0.20) %pts.
52 Earning asset yield 7.08% 7.15% (0.07) %pts.
53 Interest bearing deposits rate 2.48% 2.63% (0.15) %pts.
54 Borrowed funds rate - FHLB 3.87% 4.03% (0.16) %pts.
55 Borrowed funds rate - Trust preferred & other 7.47% 7.37% 0.10 %pts.
56 Cost of all interest bearing funds 2.87% 3.01% (0.14) %pts.
57 Cost of funds (includes DDA) 2.46% 2.58% (0.12) %pts.
58 Cost of funds / earning assets 2.47% 2.61% (0.14) %pts.
59 Net interest margin (FTE) 4.61% 4.54% 0.07 %pts.
60 Full tax equivalent adjustment $3,229 $2,986 $243 8.1%
----------------------------------------------------------================================================================
Average Balances for Period
----------------------------------------------------------
61 Loans $1,763,855 $1,742,110 $21,745 1.2%
62 Investments & other interest bearing accounts 1,302,928 1,296,787 6,141 0.5%
(excluding market value adjustment)
63 Earning assets 3,066,783 3,038,897 27,886 0.9%
64 Total assets 3,438,076 3,390,665 47,411 1.4%
65 Deposits 2,542,233 2,545,301 (3,068) -0.1%
66 FHLB borrowings 468,563 449,235 19,328 4.3%
67 Trust preferred & other borrowings 77,632 77,805 (173) -0.2%
68 Total borrowings 546,195 527,040 19,155 3.6%
69 Total shareholders' equity $301,148 $281,436 $19,712 7.0%
==================================================================
22
Results of Operations
Overview:
Third quarter 2002 net income was $11.1 million, up $4.6 million or 72% from the
same period last year. There were no non-recurring acquisition and other costs
this quarter versus $631,000 one year earlier. For the first nine months, net
income was $28.9 million, up 101.9% over last year. Earnings per share (diluted)
for the third quarter were $0.84, up 53% over the same 2001 period, while
earnings per share (diluted) for the first nine months were $2.19, up 78%.
These results include the benefit of adopting SFAS 147, an accounting standard
that eliminates the regular amortization of goodwill related to the Company's
branch acquisitions. This adoption increased third quarter and year-to-date
earnings per share by $0.07 and $0.21, respectively. Without this benefit, third
quarter earnings per share would have risen 40% and nine-month results would
have been up by 61%. The primary reasons for these substantial increases are
better earning asset margins over cost of funds and the improved contribution of
the Company's three 2001 acquisitions. Together, these transactions added $1.2
billion in assets and expanded the Company's branch network by 70% as of
year-end 2001.
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 and $0.045
for the first nine months reflects the impact of this adoption. The Company
completed its goodwill impairment analysis during 2002, and no adjustment was
necessary.
The primary reasons for improved third quarter earnings compared to the same
period last year are a 36% increase in net interest income and a 15% rise in
noninterest income. The resulting higher operating income more than offset a
higher loan loss provision (reflective of a $724,000 or 53% increase in net
charge-offs) and increased overhead resulting from the acquisition of the former
FleetBoston branches in mid-November 2001. Year-to-date earnings were up versus
the comparable period last year for primarily the same reasons.
Proforma:
Performance as measured by operating earnings, which exclude expenses and
securities transactions related to acquisitions, is considered by some
securities analysts to be a more accurate reflection of the underlying core
earnings strength of a company. CBU's operating earnings per share (diluted) for
the third quarter were $0.84, up 45% from the prior year's level of $0.58, while
operating earnings per share (diluted) for the nine months were $2.23, up 44%.
Excluding the benefit of adopting SFAS 147, third quarter operating earnings per
share would have risen 33% to $0.77, and nine-month results would have been up
by 30% to $2.02.
CBU has also historically reported its performance using another measure of
earnings power--cash earnings. Now that SFAS 147 has been adopted, this metric
has been redefined to exclude from earnings the expense of regularly amortizing
core deposit intangibles (CDI). CDI represents the premium the Company has paid
for deposits acquired in excess of the cost incurred had the funds been
purchased in the capital markets. Amortization of CDI is a non-cash expense, and
adding it back (tax-adjusted) to reported earnings creates the cash earnings
metric. Cash earnings are believed to be a better measure of a Company's ability
to build capital, fund expansion, and pay shareholder dividends. CBU's cash
operating earnings per share (diluted) for the third quarter were $0.91, up 36%
from the prior year, while cash operating earnings per share (diluted) for the
nine months were $2.44, also up 36%.
23
Net Interest Income
Net interest income for third quarter 2002 rose to $32.4 million, 36% over the
same period last year. The improvement largely reflects improved margins and
higher earning asset levels. In particular, the market served by the former
FleetBoston branches contributed $172 million in commercial and consumer loans
and $504 million in low-cost core deposits as of September 30. While net run-off
of loans in that new market has approximated 3% since acquisition date, core
deposits have risen over 5%. The quarter also benefited from a build-up of the
investment portfolio earlier in the year and a $47 million increase in loans
outstanding over the past nine months. The net interest margin was 4.61%, up 67
basis points from the year-earlier level of 3.94%. The margin's low point was in
second quarter 2001 at 3.78%; it then widened for three consecutive quarters,
and has essentially leveled off during the last two quarters.
o The rise in margin reflects a slower decrease in earning asset yields than
in the cost of funds. Approximately 34% of earning assets reprice within
one year. Of total interest-bearing liabilities, 55% are regularly
repriced (maturing C.D.s, money market accounts, and certain borrowings)
and another 25% are repriced periodically (interest checking and savings).
Maturing certificates of deposit continued to reprice downward by 68 basis
points on average during the quarter, slowing from the 91- and
212-basis-point pace of the second and first quarter 2002, consistent with
lower financial market interest rates. The rate on total capital market
borrowings was reduced by 15 basis points during the third quarter. The
difference between the net interest spread of earning assets over
liabilities and the net interest margin has narrowed over the last four
quarters, primarily as a result of an increased proportion of
interest-bearing liabilities.
o Earning assets were 19% higher than one year earlier, comprised of $215
million more in loans and $273 million more in securities. Over the last
90 days, earning assets rose $31 million; loans increased by $28 million
while investments rose by $3 million. Growth in third quarter average
assets of $602 million compared to one year earlier was largely funded by
an increase in average retail and commercial deposits of $484 million, a
planned decrease in more volatile public fund deposits of $18 million, and
an increase in average borrowings of $66 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 18% as of
September 30, 2001.
o The $3 million increase in investment securities this quarter reflects
partial reinvestment of proceeds from $52 million in securities sales
during the second quarter, which generated $1.1 million in gains.
Approximately $216,000 in gains was recognized in the third quarter on the
sale of $9.7 million in corporate bonds whose credit outlook had fallen to
the low end of policy guidelines. Investment portfolio purchases for the
third quarter were $57 million, down sharply from $86 million in the
second quarter and $199 million in the first. The purchases in the first
and second quarter, which were funded by short-term borrowings, reflected
attractive buying opportunities at that time both as to gross yield and as
a spread over borrowings, and represented an earnings strategy intended to
supplement the projected shortfall in loan growth compared to the
Company's initial 2002 goals. Since that purchase strategy was
implemented, gross yields on securities with the combination of maturity,
market value exposure, and interest rate characteristics that fit our
investment criteria have been diminishing.
o Third quarter net interest income exceeded the second quarter 2002 level
by $959,000, primarily reflective of loans booked in the last 90 days and
the investment securities adjustment noted above. An additional $336,000
in accrued income on a collateralized mortgage obligation was booked in
the third quarter. Had this entry not occurred, the third quarter net
interest margin would have been 4.57%, virtually the same as the 4.56%
margin in the second quarter as adjusted for reversal of certain loan
income and accretion of discount on a called investment security.
24
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 earning assets for
purposes of these computations.
Three Months Ended September 30,
---------------------------------------------------------------------
(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
---------------------------------------------------------------------
ASSETS
Interest-earning assets:
Federal funds sold $ 0 $ 0 0.00% $ 16,928 $ 171 4.01%
Time deposits in other banks 839 1 0.47% 278 2 2.85%
Taxable investment securities 910,937 14,506 6.32% 784,524 13,348 6.75%
Nontaxable investment securities 391,152 7,108 7.21% 223,645 4,197 7.45%
Loans (net of unearned discount) 1,763,855 33,131 7.45% 1,567,842 32,808 8.30%
---------------------- --------------------
Total interest-earning assets 3,066,783 54,746 7.08% 2,593,217 50,526 7.73%
Noninterest earning assets:
Cash and due from banks 99,251 70,246
Premises and equipment 57,036 43,714
Other assets 195,759 125,876
Reserve for loan losses (23,900) (20,831)
Net unrealized gains on available-for-sale
portfolio 43,147 23,362
----------- ----------
Total assets $ 3,438,076 $2,835,584
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings deposits $ 968,345 2,843 1.16% $ 651,672 3,036 1.85%
Time deposits 1,126,585 10,257 3.61% 1,078,799 14,653 5.39%
Short-term borrowings 173,954 830 1.89% 83,203 836 3.99%
Long-term borrowings 372,241 5,190 5.53% 396,817 6,257 6.26%
---------------------- --------------------
Total interest-bearing liabilities 2,641,125 19,120 2.87% 2,210,491 24,782 4.45%
Noninterest bearing liabilities:
Demand deposits 447,303 345,976
Other liabilities 48,500 40,958
Shareholders' equity 301,148 238,159
----------- ----------
Total liabilities and shareholders' equity $ 3,438,076 $2,835,584
=========== ==========
Net interest earnings $35,626 $25,744
======= =======
Net interest spread 4.21% 3.28%
Net interest margin on interest-earning assets 4.61% 3.94%
Federal tax exemption on nontaxable investment
Securities and loans included in interest income $ 3,229 $ 1,935
25
The change in net interest income (fully tax-equivalent basis) 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:
- -------------------------------------------------------------------------------
3rd Quarter 2002 versus 3rd Quarter 2001
Increase (Decrease) Due to Change in (1)
---------------------------------------
Net
(000's omitted) Volume Rate Change
- -------------------------------------------------------------------------------
Interest earned on:
Federal funds sold ($86) ($86) ($171)
Time deposits in other banks 2 (3) (1)
Taxable investment securities 2,052 (894) 1,158
Nontaxable investment securities 3,048 (137) 2,911
Loans (net of unearned discount) 3,871 (3,548) 323
Total interest-earning assets (2) 8,697 (4,477) 4,220
Interest paid on:
Savings deposits 1,166 (1,359) (193)
Time deposits 624 (5,020) (4,396)
Short-term borrowings 589 (595) (6)
Long-term borrowings (372) (695) (1,067)
Total interest-bearing liabilities (2) 4,221 (9,883) (5,662)
Net interest earnings (2) $ 5,115 $ 4,767 $ 9,882
(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.
26
Noninterest Income
The following table sets forth information for noninterest income by category
for the periods indicated:
Three Months Ended September 30, Nine Months Ended Sept. 30,
---------------------------------------------------------------------------------
Change from 3Q '01 Change from 2Q '02
------------------ ------------------ Change Change
(000's omitted) 2002 Amount Percent Amount Percent 2002 Amount Percent
- -----------------------------------------------------------------------------------------------------------------------------------
Personal trust $ 376 ($96) -20.3% ($64) -14.5% $1,330 ($78) -5.5%
EBT/BPA 1,123 92 8.9% 28 2.6% 3,321 524 18.7%
Elias Asset Management 627 (277) -30.6% (158) -20.1% 2,190 (708) -24.4%
CISI 709 115 19.4% (449) -38.8% 3,059 1,289 72.8%
Insurance - CBNA 854 167 24.3% 782 1086.1% 981 182 22.8%
- -----------------------------------------------------------------------------------------------------------------------------------
Total financial services 3,689 1 0.0% 139 3.9% 10,881 1,209 12.5%
Electronic banking 618 265 75.1% 72 13.2% 1,770 717 68.1%
Mortgage banking (47) (133) -154.7% (113) -171.2% 138 (226) -62.1%
Commercial leasing 1 (12) -92.3% (4) -80.0% 9 (25) -73.5%
Deposit service charges 1,371 307 28.9% 39 2.9% 4,017 797 24.8%
Overdraft fees 1,736 426 32.5% 154 9.7% 4,750 1,109 30.5%
Commissions 510 60 13.3% 10 2.0% 1,624 25 1.6%
Miscellaneous revenue (6) (23) -135.3% 8 -57.1% (15) (19) -475.0%
- -----------------------------------------------------------------------------------------------------------------------------------
Total general banking services 4,183 890 27.0% 166 4.1% 12,293 2,378 24.0%
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest income excluding
Investment security gain (loss), net
and disposition of branch properties 7,872 891 12.8% 305 4.0% 23,174 3,587 18.3%
Investment security gain (loss), net 216 (2,472) -92.0% (928) -81.1% 1,359 (1,200) -46.9%
Disposition of branch properties 0 0 0.0% 0 0.0% 0 0 0.0%
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest income $ 8,088 ($1,581) -16.4% ($623) -7.2% $ 24,533 $ 2,387 10.8%
===================================================================================================================================
Noninterest income as a percentage of operating
income (excludes investment security gain
(loss), net and other timing adjustments) 18.2% -3.1% 0.3% 18.1% -2.5%
Third quarter financial services revenue at $3.7 million was unchanged compared
to third quarter last year, but up $139,000 or 3.9% from the second quarter 2002
level.
o The primary source of improvement over the linked quarter and maintenance
of the year ago level was receipt of the Company's annual dividend on its
creditor life insurance program managed by a subsidiary of the New York
Bankers Association. The dividend reached an all-time high of $750,000
compared to $617,000 one year earlier. Compared to third quarter 2001,
growth in the creditor life dividend and in revenues from the Company's
Benefit Plans Administrative Services (BPA) subsidiary (up 9% due to a
steady rise in plan sponsors) and broker-dealer, Community Investment
Services, Inc. (CISI, up 19%) equally offset reductions of 20% from
personal trust and 31% at Elias Asset Management. The success of CISI
reflects an expanded number of financial consultants and a significant
increase in branch referrals to the consultants. Third quarter 2002
financial services revenue was above second quarter 2002 due to the record
dividend. Significant third quarter declines at CISI, personal trust and
Elias were mostly a result of unfavorable equity market conditions. CISI
was also adversely affected by substantial reductions in the interest
rates being offered on annuity products for which they act as agent.
o Financial services revenue comprised 47% of total recurring noninterest
income for the quarter versus 53% one year earlier. The decrease was
caused by increased overdraft and deposit service charge income from the
former FleetBoston accounts acquired in mid-
27
November 2001; in contrast, the financial services accounts held by the
FleetBoston customers were not offered as part of the acquisition package.
o Assets under management were $1.267 billion as of quarter end, a 7.5%
reduction from the June 30, 2002 level. This decrease reflects a
double-digit reduction in assets under management at EAM, which
historically has invested in large capitalization growth stocks, partially
offset by lesser decreases in the Bank's personal trust department and
broker-dealer, reflective of the more balanced nature of their portfolios.
In contrast, strong new business generation at BPA resulted in an increase
in assets under management of $11.7 million or 3.2%. Compared to September
30, 2001, assets under management are higher by $30 million or 2.4%,
reflective of growth at BPA and personal trust, a very respectable figure
when compared to many broad market indicators, including a 22% decline in
the Standard & Poor's 500 equity market index.
General banking revenues were $4.2 million for the quarter, up 27% or $890,000
over the same period last year and up 4.1% or $166,000 from second quarter 2002.
o A primary reason for the improvement over prior year was the contribution
of the acquired FleetBoston branches, largely in deposit service charges
and overdraft fees. Bank-wide these items rose a combined 31% or $733,000
compared to third quarter 2001. While deposit service charges were up
slightly over second quarter 2002, overdraft fees increased 9.7% or
$154,000 due to an increase in the customer insufficient funds charge and
higher volumes, which in part reflected a better collection rate.
o Electronic banking revenues climbed 75% or $265,000 in the quarter
compared to one year earlier, mirroring the higher customer base due to
2001's acquisitions and greater product usage, and increased 13% or
$72,000 over the second quarter 2002 level.
o Mortgage banking fees were slightly negative for the quarter because of a
$115,000 write-down of mortgage servicing rights (approximately 21% of the
value at June 30, 2002) due to accelerated mortgage prepayments caused by
record refinancing. The rights are presently 0.39% of the $104 million
serviced portfolio outstanding, which has been running down because of
prepayments and the decision to suspend sale of secondary market-eligible
production as of late fall last year. Fees from servicing mortgages
previously sold on the secondary market are a relatively minor activity
for the Company at this time.
The ratio of noninterest income to operating income (FTE) was 18.2% for third
quarter 2002, down 3.1 percentage points from the same period last year. In
part, the decreases reflect the unusually large 38% increase in net interest
income (FTE) caused by higher earning assets and improved margins. In addition,
the added revenues from cross selling financial services from the 2001
acquisitions have not yet been fully realized. The ratio rose a slight 0.3% from
second quarter 2002 because of the annual receipt of the Company's creditor life
insurance dividend. The Company remains committed to its long-standing objective
of increasing noninterest income and its proportionate share of operating
revenues.
28
The following table reconciles differences between the line of business
noninterest income breakdown and regulatory reporting definitions as reflected
on the Call Report.
Nine Months Ended September 30, 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
- ----------------------------------------------------------------------------------------------------------------------------------