0000950123-01-507500.txt : 20011029 0000950123-01-507500.hdr.sgml : 20011029 ACCESSION NUMBER: 0000950123-01-507500 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010831 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20011024 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMUNITY BANK SYSTEM INC CENTRAL INDEX KEY: 0000723188 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 161213679 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-13695 FILM NUMBER: 1764922 BUSINESS ADDRESS: STREET 1: 5790 WIDEWATERS PKWY CITY: DEWITT STATE: NY ZIP: 13214 BUSINESS PHONE: 8007242262 MAIL ADDRESS: STREET 1: 5790 WIDEWATERS PARKWAY CITY: DEWITT STATE: NY ZIP: 13214 8-K/A 1 y54149a1e8-ka.txt COMMUNITY BANK SYSTEM, INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------- FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): August 31, 2001 COMMUNITY BANK SYSTEM, INC. --------------------------- (Exact name of registrant as specified in its charter) Delaware 0-11716 16-1213679 ---------------------------- ----------------------- ---------------- (State or Other Jurisdiction (Commission File Number) (I.R.S. Employer of Incorporation) Identification No.) 5790 Widewaters Parkway, DeWitt, New York 13214 13214 ----------------------------------------------- --------- (Address of Principal Executive Offices) (Zip code) --------------------------------- (Former Name or Former Address, if Changed Since Last Report) EXPLANATORY NOTE: This Amendment to the Current Report on Form 8-K of Community Bank System, Inc., dated August 31, 2001, is being filed to amend Exhibits 99.1 (Restated Financial Statements) and 99.2 (Management's Discussion and Analysis of Financial Condition and Results of Operations) thereto as follows: (1) in Exhibit 99.1, the paragraph under the caption "Nature of Operations" was revised (page F-9); (2) in Exhibit 99.1, the caption that now reads "Interest on Loans and Reserve for Loan Losses" and the third paragraph under the caption were revised (page F-11); (3) in Exhibit 99.2, various tables were inserted to provide certain Guide III information (pages 2-13); (4) in Exhibit 99.2, the paragraph immediately after the table setting forth the sensitivity of the loan amounts due after one year to charges in interest rates under the caption "Financial Condition--Loans" was revised (page 4); (5) in Exhibit 99.2, the fourth and sixth paragraphs under the caption "Operating Results--Net Interest Income" were revised (pages 7 and 8); (6) in Exhibit 99.2, the fourth paragraph under the caption "Operating Results--Other Expenses" was revised (page 11); and (7) in Exhibit 99.2, new third and fourth paragraphs were inserted under the caption "Liquidity" (page 14). ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. (c) Exhibits.
Exhibit No. Description ----------- ----------- 99.1 Restated Consolidated Financial Statements of Community Bank System, Inc. as of December 31, 1999 and 2000, and for each of the years in the three-year period ended December 31, 2000, as amended 99.2 Management's Discussion and Analysis of Financial Condition and Results of Operations, as amended 99.3 Consent of PricewaterhouseCoopers LLP 99.4 Consent of KPMG LLP
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. COMMUNITY BANK SYSTEM, INC. By: /s/ David G. Wallace ---------------------------------------- Name: David G. Wallace Title: Treasurer EX-99.1 3 y54149a1ex99-1.txt RESTATED CONSOLIDATED FINANCIAL STATEMENTS EXHIBIT 99.1 COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Accountants........................... F-2 Independent Auditors' Report................................ F-3 Consolidated Statements of Condition as of December 31, 1999 and 2000.................................................. F-4 Consolidated Statements of Income for the years ended December 31, 1998, 1999, and 2000......................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1999 and 2000.......................... F-6 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998, 1999 and 2000.............. F-7 Notes to Consolidated Financial Statements.................. F-9
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders Community Bank System, Inc. Dewitt, New York In our opinion, based on our audits and the report of other auditors, the accompanying consolidated balance sheets and the related consolidated statements of income, changes in shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Community Bank System, Inc. and its subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of First Liberty Bank Corp., a wholly owned subsidiary, which statements reflect total assets of $627,873,000 and $653,275,000 as of December 31, 2000 and 1999, respectively, and net interest income of $19,087,000, $20,016,000 and $19,692,000 for each of the three years in the period ended December 31, 2000. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for First Liberty Bank Corp., is based solely on the report of the other auditors. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. /s/ PRICEWATERHOUSECOOPERS LLP Syracuse, New York January 26, 2001, except for the pooling of interests with First Liberty Bank Corp. described in Note A and the information in Note R as to which the date is August 10, 2001 F-2 INDEPENDENT AUDITORS' REPORT The Board of Directors First Liberty Bank Corp.: We have audited the consolidated balance sheets of First Liberty Bank Corp. and subsidiaries (the "Company") as of December 31, 2000 and 1999, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the years in the three year period ended December 31, 2000 (not included herein). Those consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on those consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Liberty Bank Corp. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Philadelphia, Pennsylvania January 29, 2001 F-3 COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31, DECEMBER 31, 2000 1999 ------------ ------------ (IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA) ASSETS Cash and due from banks..................................... $ 76,456 $ 102,550 Federal funds sold.......................................... 0 24,200 ---------- ---------- Total cash and cash equivalents............................. 76,456 126,750 Investment securities (approximate fair value of $929,680 and $816,637)......... 929,581 816,596 Loans....................................................... 1,515,877 1,425,773 Reserve for possible loan losses.......................... 20,035 18,528 ---------- ---------- Net loans................................................... 1,495,842 1,407,245 Premises and equipment, net................................. 40,941 39,940 Accrued interest receivable................................. 21,873 17,565 Intangible assets, net...................................... 55,234 54,150 Other assets................................................ 30,746 31,731 ---------- ---------- Total Assets........................................... $2,650,673 $2,493,977 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits Noninterest bearing.................................... $ 316,162 $ 274,515 Interest bearing....................................... 1,632,395 1,570,237 ---------- ---------- Total Deposits.............................................. 1,948,557 1,844,752 Federal funds purchased................................... 48,730 32,450 Borrowings................................................ 391,100 399,000 Company obligated mandatorily redeemable preferred securities of subsidiary, Community Capital Trust I holding solely junior subordinated debentures of the Company................................................ 29,824 29,817 Accrued interest and other liabilities.................... 30,671 22,253 ---------- ---------- Total Liabilities...................................... 2,448,882 2,328,272 ---------- ---------- Shareholders' equity: Common stock no par $1.00 stated value for 2000 and 1999; 20,000,000 shares authorized; 10,559,897 and 10,657,770 shares outstanding for 2000 and 1999, respectively..... 11,208 11,206 Surplus................................................... 37,711 37,682 Undivided profits......................................... 163,917 149,131 Accumulated other comprehensive income.................... 5,966 (17,581) Treasury stock, at cost (648,100 and 548,100 shares for 2000 and 1999, respectively)........................... (17,006) (14,719) Shares issued under employee stock plan -- unearned....... (5) (14) ---------- ---------- Total Shareholders' Equity............................. 201,791 165,705 Total Liabilities and Shareholders' Equity........ $2,650,673 $2,493,977 ========== ==========
The accompanying notes are an integral part of the consolidated financial statements F-4 COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, -------------------------------------- 2000 1999 1998 ---------- ---------- ---------- (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) INTEREST INCOME: Interest and fees on loans............................... $130,079 $115,580 $113,083 Interest and dividends on investments: Taxable............................................... 50,556 43,158 46,743 Nontaxable............................................ 8,168 7,159 3,931 Interest on federal funds sold and deposits with other banks................................................. 633 550 1,546 -------- -------- -------- Total interest income...................................... 189,436 166,447 165,303 INTEREST EXPENSE: Interest on deposits..................................... 69,921 61,902 69,503 Interest on federal funds purchased...................... 3,410 1,637 598 Interest on short term borrowings........................ 13,448 4,946 157 Interest on mandatorily redeemable preferred securities of subsidiary......................................... 2,932 2,932 2,932 Interest on long term borrowings......................... 9,429 7,073 8,026 -------- -------- -------- Total interest expense..................................... 99,140 78,490 81,216 -------- -------- -------- Net interest income........................................ 90,296 87,957 84,087 Less: Provision for loan losses.......................... 7,722 5,856 5,663 -------- -------- -------- Net interest income after provision for loan losses........ 82,574 82,101 78,424 -------- -------- -------- OTHER INCOME: Fiduciary and investment services........................ 3,251 3,010 2,418 Service charges, commissions and fees.................... 19,173 14,207 12,964 Investment security gains (losses)....................... (159) (413) 2,006 Other operating income................................... 855 926 1,430 -------- -------- -------- Total other income......................................... 23,120 17,730 18,818 -------- -------- -------- OTHER EXPENSE: Salaries and benefits.................................... 36,577 33,600 32,830 Net occupancy and equipment expense...................... 10,307 9,846 10,012 Amortization of intangible assets........................ 4,891 4,723 4,748 Other Expense............................................ 19,017 18,556 19,645 -------- -------- -------- Total other expenses....................................... 70,792 66,725 67,235 -------- -------- -------- Income before income taxes................................. 34,902 33,106 30,007 Income taxes............................................... 10,003 9,444 10,472 -------- -------- -------- Income before change in accounting......................... 24,899 23,662 19,535 Cumulative effect of change in accounting principle, net of taxes of $134 in 1998 (note C)........................... 194 -------- -------- -------- Net Income................................................. $ 24,899 $ 23,662 $ 19,729 ======== ======== ======== Earnings per common share -- basic......................... $ 2.34 $ 2.20 $ 1.78 ======== ======== ======== Earnings per common share -- diluted....................... $ 2.32 $ 2.18 $ 1.75 ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements F-5 COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR TWELVE MONTHS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998 --------- --------- --------- (IN THOUSANDS OF DOLLARS) OPERATING ACTIVITIES: Net income................................................ $ 24,899 $ 23,662 $ 19,729 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation............................................ 4,072 3,784 3,677 Amortization of intangible assets....................... 5,050 4,995 5,020 Net amortization of security premiums and discounts..... 439 3,720 6,923 Amortization of discount on loans....................... (311) (587) 1,443 Provision for loan losses............................... 7,722 5,856 5,663 Provision (benefits) for deferred taxes................. 412 (586) 129 (Gain)/Loss on sale of investment securities............ 159 413 (2,334) (Gain)/loss on sale of loans and other assets........... (236) (202) 163 Change in interest receivable........................... (4,308) (2,903) 2,100 Change in other assets and other liabilities............ (6,419) 315 2,550 --------- --------- --------- Net cash provided by operating activities................... 31,479 38,467 45,063 --------- --------- --------- INVESTING ACTIVITIES: Proceeds from sales of investment securities.............. 16,811 34,433 97,284 Proceeds from maturities of held to maturity investment securities.............................................. 3,727 2,771 55,077 Proceeds from maturities of available for sale investment securities.............................................. 51,799 227,072 261,335 Purchases of held to maturity investment securities....... (4,035) (3,775) (26,251) Purchases of available for sale investment securities..... (142,671) (328,223) (382,032) Net change in loans outstanding........................... (96,220) (137,390) (96,264) Premium paid on acquisition of business................... (6,134) -- -- Capital expenditures...................................... (5,437) (9,003) (6,983) Proceeds from sales of property and equipment............. 133 133 752 Other investing activities................................ 426 635 846 --------- --------- --------- Net cash provided by investing activities................... (181,601) (213,347) (96,236) --------- --------- --------- FINANCING ACTIVITIES: Net change in demand deposits, NOW accounts, and savings accounts................................................ 9,236 (46,092) 68,477 Net change in certificates of deposit..................... 94,569 16,178 (24,299) Net change in federal funds purchased..................... 16,280 (7,250) (5,300) Net change in term borrowings............................. (7,900) 249,000 30,000 Issuance (retirement) of common stock..................... 29 396 1,048 Treasury stock purchased.................................. (2,287) (5,567) (9,152) Cash dividends............................................ (9,998) (9,463) (8,491) Other financing activities................................ (101) (93) (84) --------- --------- --------- Net cash provided by financing activities................... 99,828 197,109 52,199 --------- --------- --------- Change in cash and cash equivalents......................... (50,294) 22,229 1,026 Cash and cash equivalents at beginning of the year........ 126,750 104,521 103,495 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 76,456 $ 126,750 $ 104,521 ========= ========= ========= Supplemental Disclosures of Cash Flow Information: Cash paid for interest.................................... $ 97,326 $ 75,884 $ 79,534 Cash paid for income taxes................................ $ 9,876 $ 8,983 $ 11,380 ========= ========= ========= Supplemental Disclosure of Noncash Financing and Investing Activities: Dividends declared and unpaid............................. $ 1,888 $ 1,773 $ 1,678 Gross change in unrealized gains/losses on available-for-sale securities........................... $ 39,212 $ (37,332) $ 3,942 ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements F-6 COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SHARES COMMON STOCK ACCUMULATED ISSUED UNDER --------------------- OTHER EMPLOYEE SHARES UNDIVIDED TREASURY COMPREHENSIVE COMPREHENSIVE STOCK PLAN - OUTSTANDING AMOUNT SURPLUS PROFITS STOCK INCOME INCOME UNEARNED TOTAL ----------- ------- ------- --------- -------- ------------- ------------- ------------ -------- (IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA) Balance at January 1, 1998....... 11,130,023 $11,130 $35,995 $123,949 $ -- $ 2,612 $ (91) $173,595 Net income -- 1998............... 19,729 $ 19,729 19,729 Other comprehensive income, -------- before tax: Unrealized gains on securities: Unrealized holding gains arising during period.... 6,276 Reclassification adjustment for gains included in net income............... (2,334) Other comprehensive income, -------- before tax................... 3,942 Income tax expense related to other comprehensive income... (1,507) Other comprehensive income, -------- net of tax................... 2,435 2,435 2,435 -------- Comprehensive income........... $ 22,164 ======== Common dividends declared........ (8,652) (8,652) Common stock issued under employee stock plan............ 52,541 53 1,000 65 1,118 Treasury stock purchased......... (326,600) (9,152) (9,152) ---------- ------- ------- -------- -------- ------- -------- ------- -------- Balance at December 31, 1998..... 10,855,964 $11,183 $36,995 $135,026 $ (9,152) $ 5,047 $ (26) $179,073 Net income -- 1999............... 23,662 $ 23,662 23,662 Other comprehensive loss, before tax: Unrealized losses on securities: Unrealized holding losses arising during period.... (37,745) Reclassification adjustment for losses included in net income............... 413 ------- Other comprehensive loss, before tax................... (37,332) Income tax benefit related to other comprehensive income... 14,704 ------- Other comprehensive loss, net of tax................... (22,628) (22,628) (22,628) ------- Comprehensive income........... $ 1,034 Common dividends declared........ (9,557) (9,557) Common stock issued under employee stock plan............ 23,306 23 687 12 722 Treasury stock purchased......... (221,500) (5,567) (5,567) ---------- ------- ------- -------- -------- ------- -------- ------- --------
F-7 COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SHARES ACCUMULATED ISSUED COMMON STOCK OTHER UNDER -------------------- COMPRE- COMPRE- EMPLOYEE - SHARES UNDIVIDED TREASURY HENSIVE HENSIVE STOCK PLAN OUTSTANDING AMOUNT SURPLUS PROFITS STOCK INCOME INCOME UNEARNED TOTAL ----------- ------- ------- --------- -------- -------- ------------ ------------ -------- (IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA) Balance at December 31, 1999.... 10,657,770 $11,206 $37,682 $149,131 $(14,719) $(17,581) $ (14) $165,705 Net income -- 2000.............. 24,899 $ 24,899 24,899 Other comprehensive income, -------- before tax: Unrealized gains on securities: Unrealized holding gains arising during period... 39,053 Reclassification adjustment for losses included in net income.. 159 -------- Other comprehensive income, before tax.................. 39,212 Income tax expense related to other comprehensive income.. (15,665) -------- Other comprehensive income, net of tax.................. 23,547 23,547 23,547 -------- Comprehensive income.......... $ 48,446 ======== Common dividends declared....... (10,113) (10,113) Common stock issued under employee stock plan........... 2,127 2 29 9 40 Treasury stock purchased........ (100,000) (2,287) (2,287) ---------- ------- ------- -------- -------- -------- -------- ------- -------- BALANCE AT DECEMBER 31, 2000.... 10,559,897 $11,208 $37,711 $163,917 $(17,006) $ 5,966 $ (5) $201,791 ========== ======= ======= ======== ======== ======== ======== ======= ========
The accompanying notes are an integral part of the consolidated financial statements F-8 COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AND SHARE DATA) NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Combination On May 11, 2001, Community Bank System, Inc. (the "Company") completed its acquisition of 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. Certain reclassifications were made to First Liberty's prior year financial statements to conform to the Company's presentation. Results of operations for the separate companies and the combined amounts presented in the consolidated financial statements follow:
FOR THE TWELVE MONTHS ENDED DECEMBER 31, ----------------------------- 2000 1999 1998 ------- ------- ------- NET INTEREST INCOME: Community Bank System, Inc. .......................... $71,209 $67,941 $64,395 First Liberty Bank Corp. ............................. 19,087 20,016 19,692 ------- ------- ------- Combined.............................................. $90,296 $87,957 $84,087 ======= ======= ======= NET INCOME: Community Bank System, Inc. .......................... $20,319 $17,635 $15,728 First Liberty Bank Corp. ............................. 4,580 6,027 4,001 ------- ------- ------- Combined.............................................. $24,899 $23,662 $19,729 ======= ======= =======
Nature of Operations Community Bank System, Inc. is a one bank holding company which wholly-owns five subsidiaries, Community Bank, N.A. (the Bank), Community Capital Trust I, II, Community Statutory Trust III, subsidiary business trusts, and Benefit Plans Administrative Services, Inc. (BPA). Community Capital Trust I was formed for the purpose of issuing mandatorily redeemable convertible securities which are considered Tier I capital under regulatory capital adequacy requirements (see Note P). In July 2001, Community Capital Trust II and Community Statutory Trust III were formed to issue Company obligated pooled capital securities which are considered Tier I capital under regulatory capital adequacy requirements. BPA, located in Utica, New York, provides pension administration and consulting services to sponsors of defined benefit and defined contribution plans throughout New York State. The Bank operates 89 customer facilities throughout Northern New York, the Finger Lakes Region, the Southern Tier, Southwestern New York and Northern Pennsylvania, and owns the following subsidiaries: Community Financial Services, Inc. (CFSI), Community Investment Services, Inc. (CISI), CBNA Treasury Management Corporation (TMC), CBNA Preferred Funding Corporation (PFC), Elias Asset Management, Inc. (EAM) and First Liberty Service Corp. (FLSC). CFSI offers insurance investment products and CISI provides broker-dealer and investment advisory services. TMC operates the cash management, investment, and treasury functions of the Bank and PFC primarily engages in investing of residential and commercial real estate loans. EAM, located in Williamsville, New York, provides asset management services to the general public (see Note B). FLSC, an independent contractor, provides banking related services to the Pennsylvania branches of the Bank. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. F-9 COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AND SHARE DATA) Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Risk and Uncertainties In the normal course of its business, the Company encounters economic and regulatory risks. There are three main components of economic risk: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on different bases from its interest-earning assets. The Company's primary credit risk is the risk of default on the Company's loan portfolio that results from the borrowers' inability or unwillingness to make contractually required payments. Market risk reflects potential changes in the value of collateral underlying loans, the fair value of investment securities and loans held for sale. The Company is subject to the regulations of various government agencies. These regulations can and do change significantly from period to period. The Company also undergoes periodic examinations by the regulatory agencies which may subject it to further changes with respect to asset valuations, amounts of required loss allowances, and operating restrictions resulting from the regulators' judgments based on information available to them at the time of their examinations. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Generally, federal funds are sold for one-day periods. The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets' fair values. Investment Securities The Company has classified its investments in debt and equity securities as held-to-maturity or available-for-sale. Held-to-maturity securities are those for which the Company has the positive intent and ability to hold to maturity, and are reported at cost, which is adjusted for amortization of premiums and accretion of discounts. Debt securities not classified as held to maturity are classified as available-for-sale and are reported at fair market value with net unrealized gains and losses reflected as a separate component of shareholders' equity, net of applicable income taxes. None of the Company's investment securities have been classified as trading securities. Equity securities are stated at cost and include stock of the Federal Reserve Bank of New York and Federal Home Loan Bank of New York. The average cost method is used in determining the realized gains and losses on sales of investment securities, which are reported under other income as investment security gains (losses). Premiums and discounts on securities are amortized and accreted, respectively, on a systematic basis over the period to maturity, estimated life, or earliest call date of the related security. Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. F-10 COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AND SHARE DATA) Loans Loans are stated at unpaid principal balances. Fair values for variable rate loans that reprice frequently, with no significant credit risk, are based on carrying values. Fair values for fixed rate loans are estimated using discounted cash flows and interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Mortgage loans held for sale are carried at the lower of cost or market and are included in loans as the balance of such loans was not significant. The carrying amount of accrued interest approximates its fair value. Interest on Loans and Reserve for Loan Losses Interest on commercial loans and mortgages is accrued and credited to operations based upon the principal amount outstanding. Unearned discount on installment loans is recognized as income over the term of the loan, principally by the actuarial method. Non-refundable loan fees and related direct costs are deferred and amortized over the life of the loan as an adjustment to loan yield using the effective interest method. The Bank places a loan on nonaccrual status and recognizes income on a cash basis when it is more than ninety days past due (or sooner, if management concludes collection of interest is doubtful), except when, in the opinion of management, it is well-collateralized and in the process of collection. The reserve for loan losses reflects management's best estimate of probable loan losses in the Company's loan portfolio, considering evaluations of individual credits and concentrations of credit risk, changes in the quality of the credit portfolio, levels of nonaccrual loans, current economic conditions, changes in the size and character of the credit risks and other pertinent factors. The reserve is increased by provisions charged to expense and reduced by net charge-offs. A loan is considered impaired, based on current information and events, if it is probable that the Bank will not be able to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation. The annual provision for depreciation is computed using the straight-line method in amounts sufficient to recognize the cost of depreciable assets over their estimated useful lives. Maintenance and repairs are charged to expense as incurred. Other Real Estate Properties acquired through foreclosure, or by deed in lieu of foreclosure, are carried at the lower of the unpaid loan balance plus settlement costs, or fair value less estimated costs of disposal. At December 31, 2000 and 1999, other real estate, included in other assets, amounted to $1,293 and $1,442, respectively. Intangible Assets Intangible assets represent principally core deposit value and goodwill arising from acquisitions. The Company periodically reviews the carrying value of intangible assets using fair value methodologies. Core deposit intangibles are being amortized principally on an accelerated basis over ten years and goodwill is being amortized on a straight-line basis over 15 to 25 years. F-11 COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AND SHARE DATA) Mortgage Servicing Rights Originated mortgage servicing rights are recorded at their fair value at the time of transfer and are amortized in proportion to and over the period of estimated net servicing income or loss. The Bank uses a valuation model that calculates the present value of future cash flows to determine the fair value of servicing rights. In using this valuation method, the Bank incorporated assumptions that market participants would use in estimating future net servicing income, which included estimates of the cost of servicing per loan, the discount rate, and prepayment speeds. The carrying value of the originated mortgage servicing rights is periodically evaluated for impairment using these same market assumptions. At December 31, 2000 and 1999, mortgage servicing rights, included in other assets, amounted to approximately $526 and $577, respectively. Deposits The fair values disclosed for demand and savings deposits are equal to the carrying amounts at the reporting date. The carrying amounts for variable rate money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed rate certificates of deposit are estimated using discounted cash flows and interest rates currently being offered on similar certificates. The carrying value of accrued interest approximates fair value. Borrowings The carrying amounts of federal funds purchased and short-term borrowings approximate their fair values. Fair values for long-term borrowings are estimated using discounted cash flows at interest rates currently being offered on similar borrowings. Income Taxes Provisions for income taxes are based on taxes currently payable or refundable, and deferred taxes which are based on temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are reported in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. Trust Department Assets Assets held in fiduciary or agency capacities for customers are not included in the accompanying consolidated statements of condition, since such items are not assets of the Company. Fees associated with providing trust management services are recorded on cash basis of income recognition and are included in other income. Earnings Per Share Basic earnings per share are computed on the basis of actual weighted average common shares outstanding for the period. Diluted earnings per share reflect the dilutive effect of outstanding common stock equivalents. Treasury Stock Treasury stock purchases are recorded at cost. During 2000 and 1999, the Company purchased 100,000 and 221,500 shares of treasury stock at an average cost of $22.88 and $25.13, respectively. The Company purchases treasury stock primarily in order to have shares available for issuance under the incentive stock option, restricted stock awards and non-qualified stock option plan and for other strategic purposes. F-12 COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AND SHARE DATA) Fair Values of Financial Instruments The Company determines fair values based on quoted market values where available or on estimates using present values or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Statement Financial Accounting Standard No. 107, "Disclosures about Fair Value of Financial Instruments," excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The fair values of investment securities, loans, deposits, and borrowings have been disclosed in footnotes C, D, G, and H, respectively. 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 derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Upon adoption of the SFAS, the Company transferred investment securities from held-to-maturity to available-for-sale (see Note C). As a result, securities previously classified as held-to-maturity were sold during the year and investment securities gains of approximately $194,000, net of tax, resulting from the sale have been reported as a cumulative effect of a change in accounting principle. The Company has no outstanding derivative financial instruments and, accordingly, adoption of SFAS 133 had no other affect on the Company's financial statements. Subsequent Event On January 26, 2001, the Company acquired 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 acquisition is being accounted for under the purchase method of accounting. The Company purchased assets with a fair value of $110,137, assumed liabilities with a fair value of $98,681 and recorded other purchase accounting adjustments of $499. The resulting goodwill of $13,273 will be amortized over a fifteen year period. NOTE B: ACQUISITION Elias Asset Management, Inc. On April 3, 2000, Community Bank System, Inc. acquired all the stock of Elias Asset Management, Inc. (EAM) for cash of $6.5 million. EAM, based in Williamsville, NY, is a nationally recognized firm with $650 million in assets under management for individuals, corporate pension and profit sharing plans, and foundations. In accordance with the stock purchase agreement, additional consideration will be paid if certain performance targets are met over a five-year period. This transaction was accounted for under the purchase method, and the Company recognized $6.1 million of goodwill, which is being amortized over 20 years. F-13 COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AND SHARE DATA) NOTE C: INVESTMENT SECURITIES The amortized cost and estimated fair values of investments in securities as of December 31 are as follows:
2000 1999 ----------------------------------------------- ----------------------------------------------- GROSS GROSS ESTIMATED GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE --------- ---------- ---------- --------- --------- ---------- ---------- --------- HELD TO MATURITY Obligations of states and political subdivisions..... $ 5,351 $ 100 $ -- $ 5,451 $ 5,042 $ 44 $ 2 $ 5,084 -------- ------- ------ -------- -------- ------ ------- -------- Totals................... 5,351 100 0 5,451 5,042 44 2 5,084 ======== ======= ====== ======== ======== ====== ======= ======== AVAILABLE FOR SALE U.S. Treasury securities and obligations of U.S. government corporations and agencies................... 300,714 11,477 843 311,348 237,640 40 7,374 230,306 Obligations of states and political subdivisions..... 164,110 3,348 1,849 165,609 154,129 360 10,147 144,342 Corporate Securities......... 44,862 1,153 1,113 44,902 36,164 0 2,815 33,349 Mortgage-backed securities... 371,745 3,612 5,508 369,849 380,293 1,806 10,807 371,292 Totals................... 881,431 19,590 9,313 891,708 808,226 2,206 31,143 779,289 Equity securities............ 32,522 0 0 32,522 32,265 0 0 32,265 -------- ------- ------ -------- -------- ------ ------- -------- Totals................... 913,953 19,590 9,313 924,230 840,491 2,206 31,143 811,554 ======== ======= ====== ======== ======== ====== ======= ======== Net unrealized gain/(loss) on Available for Sale......... 10,277 (28,937) ======== ======== GRAND TOTAL CARRYING VALUE... 929,581 816,596 ======== ========
The amortized cost and estimated fair value of debt securities at December 31, 2000, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
HELD TO MATURITY AVAILABLE FOR SALE ----------------------- ----------------------- CARRYING EST. MARKET CARRYING EST. MARKET VALUE VALUE VALUE VALUE -------- ----------- -------- ----------- Due in one year or less................. $3,504 $3,518 $ 72,930 $ 73,695 Due after one through five years........ 1,582 1,637 48,586 48,292 Due after five years through ten years................................. 247 275 192,574 200,649 Due after ten years..................... 18 21 195,596 199,223 ------ ------ -------- -------- Total................................... 5,351 5,451 509,686 521,859 Mortgage-backed securities.............. 0 0 371,745 369,849 ------ ------ -------- -------- Total................................... $5,351 $5,451 $881,431 $891,708 ====== ====== ======== ========
Proceeds from sales of investments in debt securities during 2000, 1999, and 1998 were $16,864, $34,158, and $95,784, respectively. Gross gains of approximately $53, $562, and $2,151 for 2000, 1999, and 1998, respectively, and gross losses of $212, $974, and $145 in 2000, 1999, and 1998, respectively, were realized on those sales. Investment securities with a carrying value of $609,330 and $500,887 at December 31, 2000 and 1999, respectively, were pledged to collateralize deposits and borrowings. F-14 COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AND SHARE DATA) Pursuant to the adoption of Statement of Financial Accounting Standards No. 133, "Accounting for Derivatives Instruments and Hedging Activities," in 1998, the Company transferred investment securities having an amortized cost of $277,092 and net unrealized gains of $7,677 from held-to-maturity to available- for-sale. The Company subsequently sold a portion of those investments with an amortized cost of $17,424 within the same quarter; accordingly, the realized gain of $194, net of tax, has been reported as a cumulative effect of a change in accounting principle. NOTE D: LOANS Major classifications of loans at December 31 are summarized as follows:
2000 1999 ---------- ---------- Real estate mortgages: Residential............................................... $ 583,904 $ 545,558 Commercial................................................ 233,908 219,734 Farm...................................................... 20,472 18,324 Agricultural loans.......................................... 26,522 27,757 Commercial loans............................................ 237,560 219,727 Installment loans to individuals............................ 382,096 372,133 Other loans................................................. 27,117 20,142 ---------- ---------- 1,511,579 1,423,375 Unearned interest, and deferred loan fees and costs, net.... 4,298 2,398 Reserve for possible loan losses............................ (20,035) (18,528) ---------- ---------- Net loans................................................. $1,495,842 $1,407,245 ---------- ----------
The estimated fair value of loans receivable at December 31, 2000 and 1999 was $1,483,487 and $1,432,141, respectively. Non-accrual loans of $5,473 and $6,112 at December 31, 2000 and 1999, respectively, are included in net loans. If non-accrual loans had been accruing interest at their originally contracted terms, interest income on these loans would have amounted to $377 and $343 in 2000 and 1999, respectively. Loans to directors and officers or other related parties were approximately $19,017 and $17,657 at December 31, 2000 and 1999, respectively. Mortgage loans serviced for others are not included in the accompanying consolidated statements of condition. The unpaid principal balances of mortgage loans serviced for others were $101,254 and $95,099 at December 31, 2000 and 1999, respectively. Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in demand deposits, were approximately $670 and $650 at December 31, 2000 and 1999, respectively. F-15 COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AND SHARE DATA) Changes in the reserve for possible loan losses for the years ended December 31 are summarized as follows:
2000 1999 1998 ------- ------- ------- Balance at beginning of year.......................... $18,528 $17,059 $16,996 Provision charged to expense.......................... 7,722 5,856 5,663 Loans charged off..................................... (7,481) (5,963) (6,874) Recoveries............................................ 1,266 1,576 1,274 ------- ------- ------- Balance at end of year.............................. $20,035 $18,528 $17,059 ------- ------- -------
NOTE E: PREMISES AND EQUIPMENT Premises and equipment consist of the following at December 31:
2000 1999 ------- ------- Land and land improvements.................................. $16,463 $16,023 Premises owned.............................................. 27,432 26,796 Equipment................................................... 29,550 26,789 ------- ------- Premises and equipment gross.............................. $73,445 $69,608 Less: Allowance for depreciation............................ 32,504 29,668 ------- ------- Premises and equipment, net............................ $40,941 $39,940 ======= =======
NOTE F: INTANGIBLE ASSETS Intangible assets consist of the following at December 31:
2000 1999 -------- -------- Goodwill.................................................... $ 63,179 $ 52,760 Core deposit and other intangibles.......................... 18,719 19,100 -------- -------- Intangible assets, gross.................................. 77,614 71,860 -------- -------- Less: Accumulated amortization.............................. (22,380) (17,710) -------- -------- Intangible assets, net................................. $ 55,234 $ 54,150 ======== ========
NOTE G: DEPOSITS Deposits by type consist of the following at December 31:
2000 1999 ---------- ---------- Demand...................................................... $ 342,291 $ 297,789 Savings..................................................... 577,164 612,501 Time........................................................ 1,029,102 934,462 ---------- ---------- Total deposits......................................... $1,948,557 $1,844,752 ========== ==========
The estimated fair value of deposits at December 31, 2000 and 1999 was approximately $1,944,871 and $1,843,799 respectively. F-16 COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AND SHARE DATA) At December 31, 2000 and 1999, time certificates of deposit in denominations of $100 and greater totaled $210,663 and $176,018, respectively. The approximate maturities of time deposits at December 31 are as follows:
MATURITY 2000 1999 -------- ---------- -------- Three months or less........................................ $ 83,651 $ 99,295 Over three months through twelve months..................... 719,730 591,430 Over one year through three years........................... 190,689 211,852 Over three years............................................ 35,032 31,885 ---------- -------- Total.................................................. $1,029,102 $934,462 ========== ========
NOTE H: BORROWINGS Outstanding borrowings at December 31 are as follows:
2000 1999 -------- -------- Short-term borrowings: Federal funds purchased................................... $ 48,730 $ 32,450 Federal Home Loan Bank advances........................... 145,000 250,000 Other short-term borrowings............................... 6,100 4,000 -------- -------- 199,830 286,450 Long-term borrowings: Federal Home Loan Bank advances........................... 240,000 145,000 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures of the Company, net of discount of $176 and $183............................................. 29,824 29,817 -------- -------- Total Borrowings....................................... $469,654 $461,267 ======== ========
Federal Home Loan Bank advances are secured by a blanket lien on the Company's residential real estate loan portfolio and mortgage-backed securities portfolio. Long-term borrowings at December 31, 2000 have maturity dates as follows:
WEIGHTED AVERAGE RATE AMOUNT ------------ -------- December 17, 2002.................................... 6.20% $ 10,000 February 10, 2003.................................... 5.52% 5,000 December 3, 2004..................................... 6.16% 10,000 January 23, 2008..................................... 5.44% 10,000 January 28, 2008..................................... 5.48% 5,000 January 30, 2008..................................... 5.27% 20,000 February 4, 2008..................................... 5.45% 5,000 April 14, 2010....................................... 6.35% 25,000 September 27, 2010................................... 5.88% 50,000 October 12, 2010..................................... 5.84% 50,000 November 1, 2010..................................... 5.82% 20,000
F-17 COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AND SHARE DATA)
WEIGHTED AVERAGE RATE AMOUNT ------------ -------- November 1, 2010..................................... 5.60% 20,000 November 1, 2010..................................... 6.02% 10,000 January 30, 2027..................................... 9.75% 29,824 ---- -------- 6.06% $269,824 ==== ========
The estimated fair value of long term borrowings at December 31, 2000 and 1999 was $271,894 and $174,664, respectively. NOTE I: INCOME TAXES The provision (benefit) for income taxes for the years ended December 31 is as follows:
2000 1999 1998 ------- ------ ------- Current: Federal.............................................. $ 9,049 $9,499 $ 9,581 State................................................ 542 531 762 Deferred: Federal.............................................. 357 (425) 44 State................................................ 55 (161) 85 ------- ------ ------- Total income taxes................................ $10,003 $9,444 $10,472 ======= ====== =======
Components of the net deferred tax asset/liability, included in other assets/liabilities, as of December 31 are as follows:
2000 1999 ------- ------- Investment securities....................................... $10,755 Allowance for loan losses................................... $ 7,237 6,194 Employee benefits........................................... 1,873 1,835 Amortization of intangibles................................. 465 411 Other....................................................... 1,521 1,702 ------- ------- Total deferred tax asset............................... $11,096 $20,897 ======= ======= Investment securities....................................... 5,293 Deferred loan fees.......................................... 1,913 1,264 Depreciation................................................ 1,317 960 Mortgage servicing rights................................... 213 236 ------- ------- Total deferred tax liability........................... 8,736 2,460 ======= ======= Net deferred tax asset/(liability)..................... $ 2,360 $18,437 ======= =======
The Company has determined that no valuation allowance is necessary as it is more likely than not that deferred tax assets will be realized through carryback of future deductions to taxable income in prior years, future reversals of existing temporary differences, and through future taxable income. F-18 COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AND SHARE DATA) A reconciliation of the differences between the federal statutory income tax rate and the effective tax rate for the years ended December 31 is shown in the following table:
2000 1999 1998 ---- ---- ---- Federal statutory income tax rate........................... 35.0% 35.0% 35.0% Increase (reduction) in taxes resulting from: Tax-exempt interest....................................... (9.5) (8.4) (8.0) State income taxes, net of federal benefit................ 1.1 0.6 1.9 Other..................................................... 2.1 1.3 6.0 ---- ---- ---- Effective income tax rate (including tax effect of accounting change)........................................ 28.7% 28.5% 34.9% ---- ---- ----
NOTE J: LIMITS ON DIVIDENDS AND OTHER REVENUE SOURCES The Company's ability to pay dividends to its shareholders is largely dependent on the Bank's ability to pay dividends to the Company. In additional to state law requirements and the capital requirements discussed below, the circumstances under which the Bank may pay dividends are limited by federal statutes, regulations, and policies. For example, as a national bank, the Bank must obtain the approval of the Office of the Comptroller of the Currency (OCC) for payments of dividends if the total of all dividends declared in any calendar year would exceed the total of the Bank's net profits, as defined by applicable regulations, for that year, combined with its retained net profits for the preceding two years. Furthermore, the Bank may not pay a dividend in an amount greater than its undivided profits then on hand after deducting its losses and bad debts, as defined by applicable regulations. At December 31, 2000, the Bank had approximately $26,983 in undivided profits legally available for the payments of dividends. In addition, the Federal Reserve Board and the OCC are authorized to determine under certain circumstances that the payment of dividends would be an unsafe or unsound practice and to prohibit payment of such dividends. The Federal Reserve Board has indicated that banking organizations should generally pay dividends only out of current operating earnings. There are also statutory limits on the transfer of funds to the Company by its banking subsidiary, whether in the form of loans or other extensions of credit, investments or assets purchases. Such transfer by the Bank to the Company generally are limited in amount to 10% of the Bank's capital and surplus, or 20% in the aggregate. Furthermore, such loans and extensions of credit are required to be collateralized in specific amounts. NOTE K: BENEFIT PLANS The Company has noncontributory defined benefit pension plans covering the majority of its employees and retirees. The Company also provides health and life insurance benefits for eligible retired employees and dependents. F-19 COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AND SHARE DATA) The following table shows the funded status of the Plans reconciled with amounts reported in the Company's consolidated balance sheets, and the assumptions used in determining the actuarial present value of the benefit obligations:
PENSION BENEFITS POSTRETIREMENT BENEFITS -------------------------- ------------------------ 2000 1999 2000 1999 ----------- ----------- ---------- ---------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at the beginning of year.......................... $ 20,613 $ 21,985 $ 1,997 $ 2,693 Service cost....................... 1,125 1,184 134 104 Interest cost...................... 1,530 1,326 138 129 Deferred actuarial (gain) loss..... 1,069 (3,158) 7 (833) Benefits paid...................... (878) (724) (128) (96) ----------- ----------- ------- ------- Benefit obligation at end of year.......................... 23,459 20,613 2,148 1,997 =========== =========== ======= ======= CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year................ 22,605 20,621 Actual return of plan assets....... (516) 2,411 Company contributions.............. 823 297 Benefits paid...................... (878) (724) ----------- ----------- Fair value of plan assets at end of year............................. 22,034 22,605 =========== =========== Funded (unfunded) status........... (1,425) 1,992 (2,149) (1,997) Unrecognized actuarial (gain) loss............................. 2,875 (898) (155) (163) Unrecognized prior service (benefit) cost................... (545) (584) Unrecognized transition asset...... (42) (60) Unrecognized portion of net obligation at transition......... 492 533 ----------- ----------- ------- ------- Prepaid (accrued) benefit cost..... $ 863 $ 450 $(1,812) $(1,627) =========== =========== ======= ======= WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31 Discount rate...................... 7.0% - 7.5% 7.0% - 7.5% 7.0% 7.0% Expected return on plan assets..... 8.5% - 9.0% 8.5% - 9.0% Rate of compensation increase...... 3.0% - 4.0% 3.0% - 4.0%
F-20 COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AND SHARE DATA)
PENSION BENEFITS POSTRETIREMENT BENEFITS --------------------------- ------------------------ 2000 1999 1998 2000 1999 1998 ------- ------- ------- ------ ------ ------ COMPONENTS OF NET PERIODIC BENEFIT COST Service cost....................... $ 1,125 $ 1,184 $ 886 $134 $104 $102 Interest cost...................... 1,530 1,326 1,234 138 129 170 Actual return on plan assets....... 645 (1,637) (1,376) Net amortization and deferral...... (1,892) 518 454 Amortization of prior service cost............................. (24) (24) (6) 19 Amortization of unrecognized net loss............................. (4) (4) Amortization of accumulated gain... (28) Expected Return on Plans Assets.... (951) (724) (638) Amortization of transition obligation....................... 3 3 3 41 41 61 ------- ------- ------- ---- ---- ---- Net periodic benefit cost..... $ 408 $ 646 $ 557 $313 $270 $348 ======= ======= ======= ==== ==== ====
The defined benefit pension plan maintained by Community Bank is authorized to invest up to 10% of the fair value of its total assets in common stock of Community Bank System, Inc. At December 31, 2000 and 1999, the plan holds 46,500 and 43,378 shares, respectively, of the sponsor Company common stock. Health care cost assumptions have no effect on the amounts reported for the health care plans, since the plan changed to a fixed dollar employee contribution plan in 1999. The Company also has an Employee Savings and Retirement Plan, which is administered by the Trust Department of Community Bank, N. A. The Employee Savings and Retirement Plan includes Section 401(k) and Thrift provisions as defined under the Internal Revenue Code. Company contributions to the trust amounted to $838, $830, and $848 in 2000, 1999, and 1998, respectively. The Company has deferred compensation agreements with its President and Chief Executive Officer and several former executives and officers whereby monthly payments are to be provided upon retirement over periods ranging from ten to 25 years. Expense recognized during 2000, 1999, and 1998 related to these arrangements amounted to approximately $328, $367, and $258, respectively. The Company has recorded a liability of $1,985 and $1,713 at December 31, 2000 and 1999, respectively. The Company has a Stock Balance Plan for nonemployee directors who have completed six months of service. The Plan is a nonqualified, noncontributory defined benefit plan. The Plan provides benefits for periods of service prior to January 1, 1996 based on a predetermined formula. Amounts credited to participant accounts for all creditable service after January 1, 1996 are based on performance of the Company's stock. Participants become fully vested after six years of service. Benefits are payable in the form of stock of the Company on the first of the month following the later of a participant's disassociation from the Board or attainment of age 70. Unrecognized prior service cost of $435 at December 31, 2000 is being amortized over 8 years. Expense related to the Plan recognized in 2000, 1999, and 1998, approximated $9, $20, and $19, respectively. The accrued pension liability was approximately $349 and $367 at December 31, 2000 and 1999, respectively. The net periodic pension cost was calculated using discount rates of 7.0% in 2000 and 1999. The Company maintains for certain of its executive officers and directors (participants), a Supplemental Plan which provides that the participants share in the rights to the death benefits of a split-dollar life insurance policy and provides for additional compensation to the participants, equal to any income tax consequences related to the Supplemental Plan until retirement. To fund the annual premium on the split-dollar policy and mitigate the obligations under this Plan, the Company has purchased an additional bank owned life insurance (BOLI) policy on the participants' lives. The amount of the BOLI policy has been calculated so that the projected increases in its cash surrender value will substantially offset the Company's expense related to the F-21 COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AND SHARE DATA) split-dollar policy. At December 31, 2000, the Company had $4,678 in cash surrender value of life insurance. The split-dollar policy is designed to provide the participants, upon attaining retirement age, with projected annual after-tax distributions. The amount of the benefit obligation for certain participants is increased or decreased each year by an amount equal to the annual BOLI policy earnings less the Company's cost of funds. At December 31, 2000, the recorded liability related to this portion of the Supplemental Plan is $135. In addition, a separate benefit obligation for certain other participants consist of deferred compensation increased by interest rates established in the Supplemental Plan. These rates range from 11% to 12%. At December 31, 2000, the accrued liability for these participants is $292. The expense for the Supplemental Plan was $163, $75, and $44 for 2000, 1999, and 1998, respectively. NOTE L: STOCK-BASED COMPENSATION PLANS The Company has long-term, stock-based incentive compensation programs for directors, officers, and key employees, including incentive stock options (ISO's), restricted stock awards (RSA's), nonqualified stock options (NQSO's), warrants, retroactive stock appreciation rights, and discounted options. The Company has authorized the grant of options for up to 1,139,336 shares of the Company's common stock. All options granted have ten-year terms and vest and become fully exercisable at the end of five years of continued employment. Activity in these plans for 2000, 1999, and 1998 was as follows:
WEIGHTED AVERAGE OPTIONS RANGE OF OPTION SHARES EXERCISE PRICE OUTSTANDING PRICE PER SHARE EXERCISABLE SHARES OUTSTANDING ----------- --------------- ----------- ------------------ OUTSTANDING AT DECEMBER 31, 1997... 379,597 5.87 - 19.13 202,200 14.62 Granted.......................... 231,311 31.31 - 35.31 Exercised/(Cancelled), net....... (77,155) 8.00 - 31.31 OUTSTANDING AT DECEMBER 31, 1998... 533,753 5.87 - 35.31 360,246 24.70 Granted.......................... 130,379 25.38 - 29.31 Exercised/(Cancelled), net....... (34,117) 12.13 - 19.13 Forfeited........................ (1,085) OUTSTANDING AT DECEMBER 31, 1999... 628,930 5.87 - 35.31 424,692 25.08 Granted.......................... 150,491 23.13 Exercised/(Cancelled), net....... (2,777) 13.13 - 35.31 Forfeited........................ (2,218) OUTSTANDING AT DECEMBER 31, 2000... 774,426 5.87 - 35.31 542,703 24.57
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," provides for a fair-value-based method of accounting for stock compensation plans with employees and others. Alternatively, the statement allows that entities may continue to account for stock-based compensation plans in accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," with disclosure of pro forma amounts reflecting the difference between cost charged to operations pursuant to APB No. 25 and compensation cost that would have been charged to operations had SFAS No. 123 been applied. The Company has elected to continue following APB No. 25 in F-22 COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AND SHARE DATA) accounting for its stock-based compensation plans. Application of the fair-value based accounting provision of SFAS No. 123 results in the following pro forma amounts of net income and earnings per share:
2000 1999 1998 ------- ------- ------- Net Income: As reported......................................... $24,899 $23,662 $19,729 Pro forma........................................... 24,240 23,111 17,963 Earnings per share: As reported: Basic............................................ $ 2.34 $ 2.20 $ 1.78 Diluted.......................................... 2.32 2.18 1.75 Pro forma: Basic............................................ 2.28 2.15 1.62 Diluted.......................................... 2.26 2.13 1.60
The fair value of these options was estimated at the date of grant using a Black-Scholes options pricing model with the following weighted average assumptions for 2000, 1999 and 1998: risk-free interest rates by grant ranging from 4.65% to 6.93% during 2000, 4.65% to 5.78% during 1999, and 5.55% to 5.67% during 1998; dividend yields of 3.00% during 2000, 1999 and 1998; volatility factors of the expected market price of the Company's common stock of 29.15% for 2000, 30.78% for 1999 and 44.06% for 1998; and a weighted-average expected life of the option of 7.11 years in 2000, 6.70 for 1999, and 8.27 for 1998. For the purposes of proforma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Therefore, the preceding results are not likely to be representative of the effects on reported net income for future years due to additional years of vesting. At December 31, 2000 the weighted average information for outstanding and exercisable options is as follows:
OPTIONS OUTSTANDING ----------------------------------------- OPTIONS EXERCISABLE WEIGHTED AVERAGE -------------------------- RANGE OF ------------------------------- WEIGHTED AVERAGE EXERCISE PRICE SHARES EXERCISE PRICE REMAINING LIFE SHARES EXERCISE PRICE -------------- ------- -------------- -------------- ------- ---------------- (YEARS) $ 5.87 - $ 7.06 2,000 $ 6.75 1.0 2,000 $ 6.75 $ 7.06 - $10.59 15,200 $ 7.50 1.9 15,200 $ 7.50 $10.59 - $14.13 42,838 $12.78 4.4 39,638 $12.83 $14.13 - $17.66 119,684 $15.37 4.7 108,127 $15.30 $17.66 - $21.19 88,563 $19.13 6.0 74,257 $19.13 $21.19 - $24.72 149,303 $23.13 9.0 48,564 $23.13 $24.72 - $28.25 3,102 $25.66 8.4 1,326 $25.51 $28.25 - $31.78 207,490 $30.11 7.6 107,345 $30.21 $31.78 - $35.31 146,246 $34.81 11.5 146,246 $34.81 ------- ------ ---- ------- ------ Total/Average 774,426 $24.57 7.8 542,703 $24.33 ======= ====== ==== ======= ======
Directors of the Company may elect to defer all or a portion of their director fees until a certain distribution date pursuant to a Deferred Compensation Plan. The administrator has established an account for each participating director and credits to such account the number of shares of Company common stock which would have been purchased with the director fees and shares equal to the amount of dividends which F-23 COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AND SHARE DATA) would have been received. On the distribution date, the director shall be entitled to receive either shares of the Company common stock equal to the number of shares accumulated or at the Company's election, cash equal to the fair value of the number of shares accumulated. There were 25,539 and 19,614 shares credited to participant accounts at December 31, 2000 and 1999, respectively, for which a liability of approximately $769 and $638 was accrued and approximately $130 and $146 was recognized as expense. NOTE M: 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 following is a reconciliation of basic to diluted earnings per share for the years ended December 31:
PER SHARE INCOME SHARES AMOUNT ------- ------ --------- 2000 Net Income............................................. $24,899 Basic EPS.............................................. 24,899 10,629 $2.34 Effect of dilutive securities: Stock options....................................... 108 ------- ------ Diluted EPS............................................ $24,899 10,737 $2.32 ======= ====== ===== 1999 Net Income............................................. $23,662 Basic EPS.............................................. 23,662 10,755 $2.20 Effect of dilutive securities: Stock options....................................... 106 ------- ------ Diluted EPS............................................ $23,662 10,861 $2.18 ======= ====== ===== 1998 Net Income............................................. $19,729 Basic EPS.............................................. 19,729 11,111 $1.78 Effect of dilutive securities: Stock options....................................... 149 ------- ------ Diluted EPS............................................ $19,729 11,260 $1.75 ======= ====== =====
NOTE N: COMMITMENTS, CONTINGENT LIABILITIES AND RESTRICTIONS The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist primarily of commitments to extend credit, which involve, to varying degrees, elements of credit risk in excess of the amount recognized in the statement of condition. The contract amount of those commitments to extend credit reflects the extent of involvement the Company has in this particular class of financial instrument. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of the instrument. The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments. F-24 COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AND SHARE DATA) Financial instruments whose contract amounts represent credit risk are as follows at December 31:
2000 1999 -------- -------- Letters of Credit........................................... $ 18,682 $ 21,238 Commitments to make or purchase loans or to extend credit on lines of credit........................................... 226,285 256,577 -------- -------- Total.................................................. $244,967 $277,815 ======== ========
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluated each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the customer. Collateral held varies but may include residential real estate, income-producing commercial properties, and personal property. The Company has unused lines of credit totaling $3,900 and $6,000 at December 31, 2000 and 1999, respectively. The Company has additional unused borrowing capacity through collateralized transactions with the Federal Home Loan Bank. The Company is required to maintain a reserve balance, as established by the Federal Reserve Bank of New York. The required average total reserve for the 14-day maintenance period ended December 31, 2000 was $20,060, of which $2,000 was required to be on deposit with the Federal Reserve Bank of New York. The remaining $18,060 was represented by cash on hand. NOTE O: LEASES The Company leases buildings and office space under agreements that expire in various years. Rental expense included in operating expenses amounted to $1,014, $991 and $1,132 in 2000, 1999 and 1998, respectively. The future minimum rental commitments as of December 31, 2000 for all noncancelable leases are as follows: Year Ending December 31: 2001...................................................... $1,039 2002...................................................... 1,015 2003...................................................... 817 2004...................................................... 740 2005...................................................... 495 Thereafter................................................ 1,833 ------ $5,939 ======
F-25 COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AND SHARE DATA) NOTE P: REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2000 and December 31, 1999, that the Bank meets all capital adequacy requirements to which it is subject and is "well capitalized" under the regulatory framework of prompt corrective action. To be categorized as "well capitalized," the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table.
TO BE WELL CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUALS ADEQUACY PURPOSES ACTION PROVISIONS ----------------- ----------------- ----------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO -------- ----- -------- ----- -------- ----- AS OF DECEMBER 31, 2000 Total Core Capital (to Risk Weighted Assets)........ $189,903 12.08% $125,790 8.0% $157,237 10.0% Tier I Capital (to Risk Weighted Assets)........ $170,415 10.84% $ 62,867 4.0% $ 94,300 6.0% Tier I Capital (to Average Assets).............. $170,415 6.75% $100,963 4.0% $126,204 5.0% AS OF DECEMBER 31, 1999 Total Core Capital (to Risk Weighted Assets)........ $182,440 12.26% $119,043 8.0% $148,804 10.0% Tier I Capital (to Risk Weighted Assets)........ $164,113 11.03% $ 59,522 4.0% $ 89,283 6.0% Tier I Capital (to Average Assets).............. $164,113 6.83% $ 96,105 4.0% $120,131 5.0%
F-26 COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AND SHARE DATA) NOTE Q: PARENT COMPANY STATEMENTS CONDENSED BALANCE SHEETS
DECEMBER 31, DECEMBER 31, 2000 1999 ----------------- ----------------- ASSETS: Cash and cash equivalents................................ $ 323 $ 673 Investment securities.................................... 895 820 Investment in and advances to subsidiaries............... 239,683 202,015 Other assets............................................. 1,295 294 -------- -------- Total assets.......................................... $242,196 $203,802 ======== ======== LIABILITIES: Accrued interest and other liabilities................... $ 3,552 $ 3,352 Borrowings............................................... 36,852 34,745 Shareholders' equity....................................... 201,792 165,705 -------- -------- Total liabilities and shareholders' equity............ $242,196 $203,802 ======== ========
The accompanying notes are an integral part of the consolidated financial statements CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, ----------------------------- 2000 1999 1998 ------- ------- ------- Dividends from subsidiaries................................. $14,046 $23,139 $13,632 Interest on investments and deposits........................ 40 40 40 Gain on sale of assets...................................... 150 ------- ------- ------- Total revenues......................................... 14,086 23,179 13,822 ======= ======= ======= Expenses: Interest on long term notes and debentures................ 3,450 3,025 3,022 Other Expenses............................................ 25 19 10 ------- ------- ------- Total expenses......................................... 3,475 3,044 3,032 ======= ======= ======= Income before tax benefit and equity in undistributed net income of subsidiaries.................................... 10,611 20,135 10,790 Income tax benefit.......................................... 1,000 900 1,035 ------- ------- ------- Income before equity in undistributed net income subsidiaries.............................................. 11,611 21,035 11,825 Equity in undistributed net income of subsidiary banks...... 13,288 2,627 7,904 ------- ------- ------- Net Income.................................................. $24,899 $23,662 $19,729 ======= ======= =======
The accompanying notes are an integral part of the consolidated financial statements F-27 COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AND SHARE DATA) STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND NONCASH ACTIVITIES
YEARS ENDED DECEMBER 31, ------------------------------- 2000 1999 1998 -------- -------- ------- OPERATING ACTIVITIES: Net income................................................ $ 24,899 $ 23,662 $19,729 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiaries..... (13,288) (2,627) (7,904) Net change other assets and accrued liabilities........ (1,162) 702 (230) -------- -------- ------- Net Cash Provided By Operating Activities................... 10,449 21,737 11,595 -------- -------- ------- INVESTING ACTIVITIES: Purchase of available for sale investment securities...... (74) (178) (115) Capital contributions to subsidiaries..................... (569) (4,847) (1,336) -------- -------- ------- Net Cash Used in Investing Activities....................... (643) (5,025) (1,451) -------- -------- ------- FINANCING ACTIVITIES: Net change in loans to subsidiaries....................... (7,360) 7,360 Net change in term borrowings............................. 2,100 4,000 Issuance (retirement) of common stock..................... 29 396 1,048 Repurchase of treasury stock.............................. (2,288) (5,567) (9,152) Cash dividends............................................ (9,997) (9,463) (8,490) -------- -------- ------- Net Cash Provided (Used) By Financing Activities............ (10,156) (17,994) (9,234) -------- -------- ------- Change In Cash and Cash Equivalents......................... (350) (1,282) 910 Cash and cash equivalents at beginning of year............ 673 1,955 1,045 -------- -------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 323 $ 673 $ 1,955 ======== ======== ======= Supplemental Disclosures of Cash Flow Information: Cash Paid For Interest.................................... $ 3,439 $ 3,022 $ 3,022 ======== ======== ======= Supplemental Disclosures of Noncash Financing Activities: Dividends declared and unpaid............................. $ 1,888 $ 1,773 $ 1,678 ======== ======== =======
The accompanying notes are an integral part of the consolidated financial statements On February 3, 1997, the Company formed a subsidiary business trust, Community Capital Trust I (Trust), for the purpose of issuing preferred securities which qualify as Tier I capital (see Note P). Concurrent with its formation, the Trust issued $30,000,000 of 9.75%-preferred securities in an exempt offering. The preferred securities are non-voting, mandatorily redeemable in 2027, and guaranteed by the Company. The entire net proceeds to the Trust from the offering were invested in junior subordinated obligations of the Company. The costs related to the issuance of these securities are capitalized and amortized over the life of the period to redemption on a straight-line basis. On February 21, 1995, the Company adopted a Stockholder Protection Rights Agreement and declared a dividend of one right for each outstanding share of common stock. The rights can only be exercised when an individual or group has acquired or attempts to acquire 15% or more of the Company's common stock, if such F-28 COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AND SHARE DATA) action the Board of Directors believes is not in the best interest of the stockholders. Each right then entitles the holder to acquire common stock having a market value equivalent to two times the stated exercise price. The rights expire in February 2005 and may be redeemed by the Company in whole at a price of $.01 per right. NOTE R: SUBSEQUENT EVENTS On June 8, 2001, the Company signed an agreement to acquire 36 branches, with deposits of approximately $484,000 and loans of approximately $243,000, from FleetBoston Financial. The transaction is subject to regulatory approval and is scheduled to close in early fourth quarter 2001. The branches, which are in the Southwestern and Finger Lakes regions of New York, will be merged into the Company's branch network. On July 16, 2001, the Company formed a wholly-owned subsidiary, Community Capital Trust II, a Delaware business trust. The trust issued $25,000 of 30 year floating rate Company-obligated Capital Securities of Community Capital Trust II Holding Solely Parent Debentures. The Company borrowed the proceeds of the Capital Securities from its Subsidiary by issuing Deeply Subordinated Junior Debentures having substantially similar terms. The Capital Securities mature in year 2031 and are treated as Tier 1 capital by the Federal Reserve Bank of New York. The Capital Securities are a pooled trust preferred fund of MM Community Funding I, Ltd, and are tied to the six month LIBOR plus 3.75% with a five year call provision. The current implied coupon yields 7.57%. On July 31, 2001, the Company a wholly-owned subsidiary, Community Statutory Trust III, a Connecticut business trust. The trust issued $24,450 of 30 year floating rate Company-obligated pooled Capital Securities of Community Statutory Trust III Holding Solely Parent Debentures. The Company borrowed the proceeds of the Capital Securities from its Subsidiary by issuing Deeply Subordinated Junior Debentures having substantially similar terms. The Capital Securities mature in year 2031 and are treated as Tier 1 capital by the Federal Reserve Bank of New York. The Capital Securities are a pooled trust preferred fund of First Tennessee/KBW Pooled Trust Preferred Deal III, and are tied to the three month LIBOR plus 3.75% with a five year call provision. The current implied coupon yields 7.29%. In July 2001, the Financial Accounting Standards Board issued SFAS No. 142, "Goodwill and Other Intangible Assets", which addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets". The statement will require, beginning January 1, 2002, that the Company subject goodwill and other intangible assets to an annual impairment analysis to assess the need to write down the balances and recognize an impairment loss. In addition, amortization of certain intangible assets will no longer be recorded upon adoption of this statement. The Company expects that adoption of this pronouncement will reduce annual amortization expense by approximately $4,300. F-29 EX-99.2 4 y54149a1ex99-2.txt MANAGEMENT'S DISCUSSION & ANALYSIS EXHIBIT 99.2 This Management's Discussion and Analysis of Financial Condition and Results of Operations contains certain forward-looking statements with respect to the financial condition, results of operations and business of Community Bank System, Inc. ("CBSI" or "the Company"). These forward-looking statements involve certain risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements are set herein under the caption "Forward-Looking Statements." The historical information discussed below has been retroactively restated for all periods presented, pursuant to the pooling-of-interest method of accounting, to reflect the combined results of operations and financial position of the Company and First Liberty Bank Corp., which was acquired on May 11, 2001. The following discussion is intended to facilitate an understanding and assessment of significant changes in trends related to the financial condition of the Company and the results of its operations. The following discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and related notes thereto attached as Exhibit 99.1 to this Current Report on Form 8-K. All references in the discussion to financial condition and results of operations are to the consolidated position and results of the Company and its subsidiaries taken as a whole. FINANCIAL CONDITION Total assets at December 31, 2000 increased $156.7 million, or 6.3%, to $2.65 billion from $2.49 billion at December 31, 1999. The growth was primarily due to increases in investments (up $113.0 million) and loans (up $90.1 million), which were offset by a decrease in cash and money market investments. Investments. Investments at December 31, 2000 were $929.6 million, an increase of $113.0 million or 13.9% from the December 31, 1999 level of $816.6 million. Of this change, $63.1 million resulted from purchases primarily concentrated in U.S. Agency Debentures and AA rated and insured municipal bonds. The remaining $39.2 million is reflected as an increase in the unrealized market value of the Company's available-for-sale portfolio. The stated objective of the Company's investment portfolio is to prudently provide a degree of low-risk, quality assets to the balance sheet. This must be accomplished within the constraints of: (a) absorbing funds when loan demand is low and infusing funds when demand is high; (b) implementing certain interest rate risk management strategies which achieve a relatively stable level of net interest income; (c) providing both the regulatory and operational liquidity necessary to conduct day-to-day business activities; (d) considering investment risk-weights as determined by the regulatory risk-based capital guidelines; and (e) generating a favorable return without undue compromise of the other requirements. 1 The following table sets forth the amortized cost and market value for the Company's held-to-maturity and available-for-sale investment securities portfolios.
AT DECEMBER 31, ------------------------------------------------------------------ 2000 1999 1998 -------------------- -------------------- -------------------- AMORTIZED AMORTIZED AMORTIZED COST/BOOK MARKET COST/BOOK MARKET COST/BOOK MARKET VALUE VALUE VALUE VALUE VALUE VALUE --------- -------- --------- -------- --------- -------- (000's omitted) HELD-TO-MATURITY Obligations of states and political subdivisions $ 5,351 $ 5,451 $ 5,042 $ 5,084 $ 4,038 $ 4,107 --------- -------- --------- -------- --------- -------- Total Held-to-Maturity $ 5,351 $ 5,451 $ 5,042 $ 5,084 $ 4,038 $ 4,107 ========= ======== ========= ======== ======== ======== AVAILABLE-FOR-SALE U.S. treasury securities and obligations of U.S. government corporations and agencies $300,714 $311,348 $237,640 $230,306 $189,572 $195,096 Obligations of states and political subdivisions 164,110 165,609 154,129 144,342 58,289 59,585 Corporate securities 44,862 44,902 36,164 33,349 9,153 9,382 Mortgage-backed securities 371,745 369,849 380,293 371,292 401,148 401,951 Equity securities(1) 30,228 30,228 30,091 30,091 25,322 25,322 Federal Reserve Bank common stock 2,294 2,294 2,174 2,174 2,174 2,174 --------- -------- --------- -------- --------- -------- Total Available-for-Sale $913,953 $924,230 $840,491 $811,554 $685,658 $693,510 --------- -------- --------- -------- --------- -------- Net unrealized gains/(losses) on available for sale portfolio 10,277 (28,937) 7,852 --------- --------- --------- Grand Total Carrying Value $929,581 $816,596 $697,548 ========= ========= =========
(1) Includes $23,059 of FHLB common stock at December 31, 2000, 1999 and 1998, respectively. The following table sets forth as of December 31, 2000, the maturities of investment securities and the weighted-average yields of such securities, which have been calculated on the cost basis, weighted for scheduled maturity of each security, and adjusted to a fully tax equivalent basis.
AT DECEMBER 31, 2000 ------------------------------------------------------------- AMOUNT AMOUNT AMOUNT MATURING MATURING MATURING AFTER ONE AFTER FIVE AMOUNT TOTAL WITHIN YEAR BUT YEARS BUT MATURING COST ONE YEAR WITHIN WITHIN AFTER BOOK OR LESS FIVE YEARS TEN YEARS TEN YEARS VALUE --------- ---------- ---------- --------- ------- (000's omitted) HELD-TO-MATURITY PORTFOLIO Obligations of states and political subdivisions $ 3,504 $ 1,582 $ 247 $ 18 $ 5,351 --------- -------- --------- -------- -------- Total Held-to-Maturity Portfolio Value $ 3,504 $ 1,582 $ 247 $ 18 $ 5,351 ========= ======== ========= ======== ======== Weighted Average Yield for Year(1) 7.7% 7.9% 8.3% 9.0% 7.8% AVAILABLE-FOR-SALE PORTFOLIO U.S. treasury securities and obligations of U.S. government corporations and agencies $ 61,855 $ 39,576 $166,687 $ 32,596 $300,714 Mortgage-backed securities 42,245 135,832 78,059 115,609 371,745 Obligations of states and political subdivisions 2,412 8,279 35,838 117,581 164,110 Other 3,023 795 2,000 39,044 44,862 --------- -------- --------- -------- -------- Total Available-for-Sale Portfolio Value $109,535 $184,482 $282,584 $304,830 $881,431 ========= ======== ========= ======== ======== Weighted Average Yield for Year(1) 7.0% 7.2% 7.0% 7.2% 7.0%
(1) Weighted average yields on the tax-exempt obligations have been computed on a fully tax-equivalent basis. These yields are an arithmetic computation of accrued income divided by average balance; they may differ from the yield to maturity, which considers the time value of money. 2 Loans. Loans outstanding, net of unearned discount, reached $1.52 billion as of year-end 2000, up $90.1 million or 6.3% compared to twelve months earlier. 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.
AS OF DECEMBER 31, ------------------ 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (000's omitted) Real estate mortgages: Residential $ 579,562 $ 543,195 $ 453,307 $ 451,633 $ 403,249 Commercial loans secured by real estate 243,429 225,822 200,435 165,813 133,871 Farm 20,472 18,324 13,205 11,195 9,097 ---------- ---------- ---------- ---------- ---------- Total 843,463 787,341 666,947 628,641 546,217 Commercial, financial, and agricultural: Agricultural 26,523 27,758 22,737 23,999 21,747 Commercial and financial 237,462 219,600 227,932 188,680 129,302 ---------- ---------- ---------- ---------- ---------- Total 263,985 247,358 250,669 212,679 151,049 Installment loans to individuals 395,226 390,450 365,141 348,823 296,566 Other Loans 14,205 2,043 12,626 16,608 8,158 ---------- ---------- ---------- ---------- ---------- Gross Loans 1,516,879 1,427,192 1,295,383 1,206,751 1,001,990 Less: Unearned discounts 1,002 1,419 2,248 2,945 7,040 ---------- ---------- ---------- ---------- ---------- Net loans 1,515,877 1,425,773 1,293,135 1,203,806 994,950 Reserve for loan losses 20,035 18,528 17,059 16,996 13,145 ---------- ---------- ---------- ---------- ---------- Loans, net of reserve for loan losses $1,495,842 $1,407,245 $1,276,076 $1,186,810 $ 981,805
The table below recasts the Company's loan portfolio into four major lines of business.
NATURE OF LENDING MIX AT YEAR END ($ Millions) TOTAL LOANS CONSUMER MORTGAGE BUSINESS LENDING CONSUMER INDIRECT CONSUMER DIRECT ----------- ----------------- ---------------- ----------------- --------------- Change Total Change Total Change Total Change Total Change Year $ % $ % % $ % % $ % % $ % % ---- - - - - - - - - - - - - - - 2000 1,516 6.3% 459 30.3% 7.2% 562 37.1% 8.1% 241 15.9% 3.4% 254 16.8% 3.7% 1999 1,426 10.3% 428 30.0% 10.9% 520 36.5% 12.9% 233 16.3% 10.4% 245 17.2% 4.3% 1998 1,293 7.4% 386 29.9% 14.7% 461 35.7% 9.9% 211 16.3% 1.9% 235 18.2% -2.5% 1997 1,204 21.0% 337 28.0% 2.1% 419 34.8% 31.9% 207 17.2% 19.7% 241 20.0% 38.5% 1996 995 330 33.1% 318 32.0% 173 17.4% 174 17.5%
The following table shows the amount of loans outstanding as of December 31, 2000, which, based on remaining scheduled payments of principal, are due in the periods indicated.
AT DECEMBER 31, 2000 ------------------------------------------------------------------- Maturing in Maturing After Maturing One Year or One But Within After Five Total Book Less Five Years Years Value ---- ---------- ----- ----- (000's omitted) Commercial, financial, and agricultural $ 78,818 $ 85,525 $ 73,119 $ 237,462 Real estate - mortgage 64,646 100,345 688,024 853,015 Installment 28,819 330,386 67,197 426,402 -------- -------- -------- ---------- TOTAL $172,283 $516,256 $828,340 $1,516,879 ======== ======== ======== ==========
3 The following table sets forth the sensitivity of the loan amounts due after one year to changes in interest rates.
-------------------- AT DECEMBER 31, 2000 -------------------- FIXED RATE VARIABLE RATE ---------- ------------- (000's omitted) Due after one year but within five years $127,705 $388,551 Due after five years 591,240 237,100 -------- -------- TOTAL $718,945 $625,651 ======== ========
The Company's predominant focus on the retail borrower enables its loan portfolio to be highly diversified, with approximately 61% of loans outstanding to consumers borrowing on an installment and residential mortgage loan basis. Over the last several years, the growth rate of the Company's commercial business loans has exceeded that of loans to individuals, and this sector exhibits a high degree of diversification as well. The increase in business lending, consumer mortgages, consumer installment loans was 47%, 34% and 19%, respectively, of the $90.1 million in total loan growth in 2000. Growth in business lending (up 8.1%) has continued as a result of persistent business development efforts and the contributions of new lenders who joined the Company from larger banking institutions. Growth in consumer mortgages (up 7.2%) is attributable to the attractiveness of the Bank's no-closing cost mortgage product both for home purchase or refinancing as well as being a vehicle for consumers to term-out higher cost credit card debt. Growth in installment lending (up 3.6%) reflects the impact of the slowing economy in the latter half of the year. 4 Nonperforming loans, defined as nonaccruing loans plus accruing loans 90 days or more past due, ended 2000 at $7.4 million, a 1.2% increase from one year earlier. The ratio of nonperforming loans to total loans fell 3 basis points from twelve months earlier to .49%. The ratio of nonperforming assets (which additionally include troubled debt restructuring and other real estate) to total assets decreased to .33%, down 3 basis points from one year earlier. Net charge-offs for 2000 were higher by $1.8 million or 42%, finishing the year at $6.2 million or .42% of average loans compared to $4.4 million and .33% last year. Problem loans during the past year have been dominated by two commercial credits. The first loan has been written down by $1.5 million to the liquidation value of its underlying assets. The other loan was secured by fraudulent receivables discovered in the third quarter, and the lack of successful litigation since then has dictated that the entire $1.0 million balance be written off. The following table presents information concerning the aggregate amount of nonperforming assets.
AS OF DECEMBER 31, ------------------ 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (000's omitted) Loans accounted for on a nonaccrual basis $ 5,473 $ 6,112 $ 4,213 $ 2,992 $ 6,472 Accruing loans which are contractually past due 90 days or more as to principal or interest payments 1,930 1,201 1,958 3,078 1,536 ------- ------- ------- ------- ------- Total nonperforming loans 7,403 7,313 6,171 6,070 8,008 Loans which are "troubled debt restructurings" as defined in FASB No. 15 "Accounting by Debtors and Creditors for Troubled Debt Restructurings" 116 122 134 0 32 Other real estate 1,293 1,442 1,661 1,834 934 ------- ------- ------- ------- ------- Total nonperforming assets $ 8,812 $ 8,877 $ 7,966 $ 7,904 $ 8,974 ======= ======= ======= ======= ======= ------- ------- ------- ------- ------- Reserve for Loan Losses $20,035 $18,528 $17,059 $16,996 $13,145 ------- ------- ------- ------- ------- Ratio of allowance for loan losses to period-end loans 1.3% 1.3% 1.3% 1.4% 1.3% Ratio of allowance for loan losses to period-end nonperforming loans 270.6% 253.3% 276.3% 280.9% 153.8% Ratio of allowance for loan losses to period-end nonperforming assets 227.4% 208.7% 214.0% 215.6% 136.9%
The following table summarizes loan balances at the end of each period indicated and the daily average amount of loans. Also summarized are changes in the allowance for loan losses arising from loans charged off, recoveries on loans previously charged off, and additions to the allowance which have been charged to expenses.
AS OF DECEMBER 31, ------------------ 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (000's omitted) Amount of loans outstanding at end of period $1,515,877 $1,425,773 $1,293,135 $1,203,806 $ 994,950 ---------- ---------- ---------- ---------- ---------- Daily average amount of loans (net of unearned discounts) $1,484,945 $1,343,652 $1,257,059 $1,101,263 $ 920,085 ---------- ---------- ---------- ---------- ---------- Balance of allowance for loan losses at beginning of period $ 18,528 $ 17,059 $ 16,996 $ 13,145 $ 11,763 Loans charged off: Commercial, financial, and agricultural 3,273 1,218 1,011 733 654 Real estate mortgage 246 272 280 846 392 Installment 3,961 4,474 5,583 4,177 2,177 ---------- ---------- ---------- ---------- ---------- TOTAL LOANS CHARGED OFF 7,480 5,964 6,874 5,756 3,223 Recoveries of loans previously charged off: Commercial, financial, and agricultural 148 526 432 374 322 Real estate mortgage 103 30 32 36 49 Installment 1,014 1,021 810 569 504 ---------- ---------- ---------- ---------- ---------- TOTAL RECOVERIES 1,265 1,577 1,274 979 875 Net loans charged off 6,215 4,387 5,600 4,777 2,348 Additions to allowance charged to expense 7,722 5,856 5,663 5,080 3,730 Reserves on acquired loans(1) -- -- -- 3,548 -- Balance at end of period $ 20,035 $ 18,528 $ 17,059 $ 16,996 $ 13,145 ========== ========== ========== ========== ========== Ratio of net charge-offs to average loans outstanding 0.4% 0.3% 0.5% 0.4% 0.3%
5 (1) This reserve addition is attributable to loans purchased from Key Bank and Fleet Bank in association with the purchases of branch offices during 1997. The allowance for loan losses allocation is as follows.
AT DECEMBER 31, --------------- 2000 1999 1998 ---- ---- ---- Percent of Percent of Percent of Loans in Each Loans in Each Loans in Each Amount of Category to Amount of Category to Amount of Category to Allowance Total Loans Allowance Total Loans Allowance Total Loans --------- ----------- --------- ----------- --------- ----------- (000's omitted, except percentages) Commercial, financial, and agricultural $ 5,666 17.4% $ 4,839 17.3% $ 5,698 19.4% Real estate - mortgage 3,355 55.6% 2,944 55.2% 3,494 51.5% Installment 8,162 27.0% 7,474 27.5% 4,663 29.2% Unallocated 2,852 3,271 3,204 ----- ----- ----- Total $ 20,035 100.0% $ 18,528 100.0% $ 17,059 100.0%
1997 1996 ---- ---- Percent of Percent of Loans in Each Loans in Each Amount of Category to Amount of Category to Allowance Total Loans Allowance Total Loans --------- ----------- --------- ----------- (000's omitted, except percentages) Commercial, financial, and agricultural $ 5,070 17.6% $ 3,669 15.1% Real estate - mortgage 3,450 52.1% 4,132 54.5% Installment 4,703 30.3% 2,519 30.4% Unallocated 3,773 2,825 ----- ----- Total $ 16,996 100.0% $ 13,145 100.0%
Total liabilities at December 31, 2000, increased $120.6 million or 5.2% to $2.4 billion from $2.3 billion at December 31, 1999. Deposits. Total deposits at December 31, 2000 were $1.9 billion, an increase of $103.8 million or 5.6% from the December 31, 1999 level of $1.8 billion. Time deposits increased $94.6 million or 10.0%, reflective of the Company's successful targeted C.D programs which were started in the spring of 1999. Growth in time deposits also reflects consumer movement away from immediately available, lower earning savings accounts, which have declined steadily during the past several years. Borrowings. Total borrowings at December 31, 2000 were $469.7 million, an increase of $8.4 million or 1.8%, from the December 31, 1999 level of $461.3 million. Short-term borrowings at December 31, 2000 and 1999 were $199.8 million and $286.5 million, respectively. Long term borrowings at December 31, 2000 and 1999 were $269.8 million and $174.8 million, respectively, and include $29.8 million of Company obligated mandatorily redeemable preferred securities. The shift in long-term and short-term borrowings represents a move during the last half of the year to convert higher cost short-term funding to cheaper long-term funding, taking advantage of the inverted Treasury yield curve. Shareholders' Equity. Shareholders' equity ended 2000 at $201.8 million, up 22% from one year earlier. This improvement reflects earnings for the year and the positive change in market value adjustment (MVA) of the Company's available-for-sale investments, offset by dividends paid to shareholders and the cost of repurchasing 100,000 shares of common stock during 2000. Excluding the MVA and purchase of Treasury stock in both 1999 and 2000, equity rose by $14.8 million or 10.0%. Subsequent to year end, the repurchased shares were reissued in conjunction with the acquisition of The Citizens National Bank of Malone. 6 OPERATING RESULTS General. Net income and diluted earnings per share for 2000 was $24.9 million and $2.32, respectively. Compared to 1999, net income rose 5.2% while earnings per share was up 6.4%. The Company's share repurchase program continued to benefit earnings per share growth; since its inception in the fall of 1998, 648,100 shares or 6.1% of shares outstanding have been bought back. Subsequent to year-end, the repurchased shares were reissued in conjunction with the acquisition of The Citizens National Bank of Malone. Cash earnings per share (diluted) for 2000, was $2.60 up 5.7%. Cash or tangible return on assets (ROA) for 2000 was 1.09% versus nominal ROA at .97%. Tangible return on equity (ROE) for the year was 15.98%, exceeding nominal ROE by 1.71 percentage points for the same period. The difference between cash and nominal results reflects the contribution of the Company's acquisitions on an economic basis, which excludes the non cash impact of amortizing the premiums paid for the acquisitions. Many analysts and investors consider cash results a better measure of core profitability and value created for shareholders than nominal results. Net income and diluted earnings per share for 1999 was $23.7 million and $2.18, respectively. Compared to 1998, net income rose $3.9 million and 19.9%, while earnings per share was up 24.6%. Net Interest Income. Net interest income is the amount that interest and fees on earning assets (loans and investments) exceeds the cost of funds, primarily interest paid to the Company's depositors, interest on capital market and bank borrowings, and dividends paid on the Company's $30 million in 9.75% trust preferred stock. Net interest margin is the difference between the gross yield on earning assets and the cost of interest bearing funds as a percentage of earning assets. Net interest income for 2000 (with non-taxable income converted to a full tax-equivalent basis) totaled $96.7 million in 2000; this represents a $3.1 million or 3.3% increase over the prior year. This increase was due to higher earning asset volumes, which had a positive impact on net interest income, while interest rate changes had an unfavorable impact. Net interest income increased due to greater average earning assets of $224.2 million. Average loans grew a total of $141.3 million in 2000, with the most significant portion occurring in the first half of the year. Overall interest and fees on loans climbed $14.5 million or 12.5% as a result of this growth and an increase in loan yields, which was caused by rising market rates during the latter part of 1999 and the first half of 2000. This rate environment also produced investment portfolio buying opportunities resulting in a $74.8 million increase in average investments. Investment interest income in 2000 was $8.4 million higher than the prior year as a result of the higher outstandings as well as an increase in the average investment yields. Rising market rates in the latter half of 1999 and first half of 2000 increased the yield on new investments and were the primary cause of the increase in average investment yield. Total average fundings (deposits and borrowings) grew by $203.4 million in 2000, largely attributable to a $166.3 million increase in borrowings (used to fund purchases of investment securities and approximately one-third of loan growth), and $39.8 million in deposits. The latter reflects higher deposits from individuals, partnerships, and corporations, reflective of greater checking account balances and our successful CD promotions, with the balance from increased deposits of municipalities. Higher average interest-bearing funds contributed approximately one-half of the total rise in interest 7 expense, with the remainder caused by an increase in the average 2000 cost of funds. The rate on interest bearing deposits rose 43 BPs to 4.33%, due largely to across-the-board increases in deposit rates beginning in the middle of 1999 and continuing throughout most of 2000, and a 63 BP higher borrowing rate, also reflecting rising market rates. Net interest income for 1999 (with non-taxable income converted to a full tax-equivalent basis) totaled $93.6 million; this represents a $3.6 million or 4.0% increase from 1998. This increase was due to a $81.1 million increase in average earning assets. The growth in earning assets was funded by $96.6 million (50.0%) more in average borrowings, offset by $17.0 million (1.0%) less in average deposits. The following table sets forth certain information concerning average interest-earning assets and interest-bearing liabilities and the yields and rates thereon for the twelve month periods ended December 31, 2000, 1999 and 1998. Interest income and resultant yield information in the tables are on a fully tax-equivalent basis. 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.
YEAR ENDED DECEMBER 31, 2000 1999 ---------------------------- ----------------------------- Avg. Amt. of Avg. Avg. Amt. of Avg. Balance Interest Yield/Rate Balance Interest Yield/Rate Paid Paid ------- -------- ---------- ------- -------- ---------- (000's omitted except yields and rates) ASSETS: Interest-earning assets: Federal funds sold $ 9,982 $ 581 5.82% $ 2,198 $ 106 4.82% Time deposits in other banks 893 53 5.94% 9,888 444 4.49% Taxable investment securities 732,490 52,026 7.10% 674,028 44,682 6.63% Nontaxable investment securities 156,885 11,949 7.62% 140,594 10,478 7.45% Loans (net of unearned discount) 1,484,945 131,245 8.84% 1,343,652 116,408 8.66% --------- ------- --------- ------- Total interest-earning assets 2,385,195 195,854 8.21% 2,170,360 172,118 7.93% Noninterest earning assets 171,443 185,725 ------- ------- Total $2,556,638 $2,356,085 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing liabilities Savings deposits $ 625,502 $ 13,784 2.20% $ 658,064 $ 14,250 2.17% Time deposits 988,416 56,137 5.68% 930,417 47,652 5.12% Short-term borrowings 258,985 16,859 6.51% 125,433 6,584 5.25% Long-term borrowings 188,120 12,361 6.57% 155,373 10,004 6.44% ------- ------ ------- ------ Total interest-bearing liabilities 2,061,023 99,141 4.81% 1,869,287 78,490 4.20% Noninterest bearing liabilities Demand deposits 304,107 289,749 Other liabilities 17,010 22,570 Shareholders' equity 174,498 174,479 ---------- ---------- Total $2,556,638 $2,356,085 ========== ========== Net interest earnings $ 96,713 $ 93,628 ======== ======== Net yield on interest-earning assets 4.05% 4.31% ==== ==== Federal tax exemption on nontaxable investment securities included and loans included in interest income $ 6,417 $ 5,670
8
1998 ---------------------------------- Avg. Amt. of Avg. Balance Interest Yield/Rate Paid ------- -------- ---------- (000's omitted except yields and rates) ASSETS: Interest-earning assets: Federal funds sold $ 16,642 $ 902 5.42% Time deposits in other banks 11,320 644 5.69% Taxable investment securities 733,033 46,743 6.38% Nontaxable investment securities 75,948 5,882 7.74% Loans (net of unearned discount) 1,252,373 113,129 9.03% --------- ------- Total interest-earning assets 2,089,316 167,300 8.01% Noninterest earning assets 187,510 ------- Total $2,276,826 ========== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing liabilities Savings deposits $ 657,750 $ 15,687 2.38% Time deposits 972,090 53,817 5.54% Short-term borrowings 13,945 755 5.41% Long-term borrowings 170,345 10,958 6.43% ------- ------ Total interest-bearing liabilities 1,814,130 81,217 4.48% Noninterest bearing liabilities Demand deposits 265,419 Other liabilities 19,673 Shareholders' equity 177,604 ---------- Total $2,276,826 ========== Net interest earnings $ 86,083 ======== Net yield on interest-earning assets 4.12% ==== Federal tax exemption on nontaxable investment securities included and loans included in interest income $1,997
The change in 2000 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.
2000 COMPARED TO 1999 1999 COMPARED TO 1998 --------------------- --------------------- Increase (Decrease) Due to Change In(1) Increase (Decrease) Due to Change In (1) Net Net Volume Rate Change Volume Rate Change ------ ---- ------ ------ ---- ------ (000's omitted) Interest earned on: Federal funds sold and securities purchased under agreements to resell $ 449 $ 26 $ 475 $ (706) $ (90) $ (796) Time deposits in other banks (500) 109 (391) (75) (125) -200 Taxable investment securities 4,027 3,317 7,344 (3,862) 1,801 -2061 Nontaxable investment securities 1,237 234 1,471 4,826 (230) 4596 Loans (net of unearned discounts) 12,448 2,389 14,837 8,029 (4,750) 3279 Total interest-earning assets (2) $ 17,482 $ 6,254 $ 23,736 $ 6,440 $ (1,622) $ 4,818 Interest paid on: Savings deposits $ (714) $ 248 $ (466) $ 7 $ (1,444) $(1,437) Time deposits 3,088 5,397 8,485 (2,244) (3,921) -6165 Short-term borrowings 8,384 1,891 10,275 5,853 (24) 5829 Long-term borrowings 2,148 209 2,357 (964) 10 -954 Total interest-bearing liabilities (2) 8,535 12,116 20,651 2,419 (5,146) -2727 Net interest earnings (2) $ 1,264 $ 1,821 $ 3,085 $ 4,910 $ 2,635 $ 7,545
(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. 9 Provision for Loan Losses. Provision for loan losses rose $1.9 million or 31.9% over 1999's level. The full year provision for loan loss covered total actual net charge-offs by 1.25 times, this margin serving as a precaution in the event the economy weakens after its long sustained period of relative economic health. Net charge-offs as a percent of average loans increased 9 basis points in 2000 to .42%. The higher level of provision was in part due to what management believes to be two isolated and unusual commercial loan charge-offs in 2000. Nonperforming loans decreased during 2000 to .49% of loans outstanding at year end compared to .52% one year earlier. Provision for loan losses was $5.9 million for 1999, an increase of 3.4% over 1998's level. The ratio of allowance for loan losses to loans remained consistent at 1.32% for the years-ending 1999 and 1998. The ratio of net charge-offs to average loans for 1999 was .33%, an improvement of 12 basis points from 1998. Other Income. The Company's sources of other income are of four primary types: financial services, comprised of personal trust, employee benefit trust, investment, and insurance products; specialty products, largely electronic, and mortgage banking activities; general banking services related to loans, deposits and other activities typically provided through the branch network; and periodic transactions, most often net gains (losses) from the sale of investments or other occasional events. Total other income of $23.1 million for 2000, increased by $5.4 million or 30.4% when compared to 1999. Financial services accounted for $4.3 million of the improvement in noninterest income, with $3.1 million being attributable to the purchase of Elias Asset Management (EAM) on April 3, 2000. Revenues, excluding net investment gains (losses) and the impact of branch properties no longer in use, were up for the sixth consecutive year to approximately $21.2 million in 2000, a $5.1 million improvement. Fees from the financial services segment of noninterest income rose 65.7% in 2000 to $10.8 million compared to 13.7% growth in the prior year. Over the last five years, financial services revenues have climbed at a compound annual growth rate greater than 30%, and for 2000 as a whole, comprise over 45% of total noninterest income. The increase in 2000's growth rate largely reflects the previously mentioned EAM acquisition, without which financial services revenues would have nonetheless climbed 18%. Assets under management from the Company's several financial services businesses exceeded $1.4 billion in 2000 compared to over $700 million in the prior year, largely reflective of the addition of Elias Asset Management. Fees earned from general banking services, which reached $9.7 million in 2000, were up 7.6% from the prior year. This segment contributed 43% of noninterest income. The increase in these revenues is generally in the single digit range because they are largely dependent on deposit growth and expansion of services provided through the Company's branch network. 10 In light of management's ongoing objective to grow noninterest income, opportunities to develop new fee-based products are actively pursued, including newly permitted activities under the 1999 Financial Modernization Act; in addition, emphasis continues on the collection of fees (minimizing limitation on waived fees) for providing quality service. In an effort to focus on and accelerate growth of the Company's financial service businesses, Michael A. Patton, who has headed for many years the Bank's trust department and Financial Consultant activities along with general banking activities in the Southern Region, was named President, Financial Services, in February 2000. Total other income of in 1999 was $17.7 million, a decrease of $1.1 million from 1998, largely due to the Company taking selected investment losses in 1999 (when there were economic opportunities to purchase higher yielding securities) instead of recognizing investment gains as it did in 1998. Excluding net investment gains/(losses), other income increased $1.3 million or 7.9% to $18.1 million. Financial services revenue and fees from general banking services contributed equally to the overall increase in other income, excluding net investment gains/(losses). The following table sets forth selected information by category of noninterest income for the Company for the years indicated.
YEARS ENDED DECEMBER 31, ------------------------ 2000 1999 1998 ---- ---- ---- (000's omitted) Personal trust $ 2,120 $ 1,956 $ 1,679 EBT/BPA 2,992 2,586 2,333 Elias Asset Management 3,091 -- -- Insurance 845 728 518 Other investment products 1,788 1,268 1,222 ======== ======== ======== Total financial services 10,836 6,538 5,752 Electronic banking 1,595 1,379 1,140 Mortgage banking 293 403 737 Commercial leasing 41 59 -- ======== ======== ======== Total specialty products 1,929 1,841 1,877 Deposit service charges 3,642 3,674 3,554 Overdraft fees 4,220 3,579 3,366 Commissions 1,869 1,795 1,473 ======== ======== ======== Total general banking services 9,731 9,048 8,393 Miscellaneous revenue 702 717 1,009 ======== ======== ======== Total noninterest income excluding security gains/losses 23,198 18,144 17,031 Security gains/losses (159) (413) 2,006 Disposition of branch properties 81 -- (219) ======== ======== ======== Total noninterest income $ 23,120 $ 17,731 $ 18,818 Non-interest income as a percentage of operating income (excludes net securities gain/losses and disposal of branch properties) 17.8% 15.7% 15.1%
Other Expenses. Noninterest expense or overhead rose $4.1 million or 6.1% in 2000. Excluding the $2.1 million impact of the EAM purchase in April, noninterest expense was up $2.0 million or 3.0% in 2000, This year's overhead of $70.8 million as a percent of average assets was 2.77%, down from 2.83% in 1999. The primary source of the increase was personnel expense, which was up $3.0 million or 9.0% and accounted for over 70% of 2000's increase in overhead, with personnel costs being up approximately 6.5% as a result of the EAM acquisition. The remainder of the increases in salary, benefit, and payroll tax expenses reflect modest annual merit awards for employees. Several cost saving initiatives were undertaken during 2000, which included consolidation of the Company's collection, indirect installment loan approval, mortgage servicing, and first-day deposit operations functions, all of which were previously performed in each of the Canton and Olean, NY operations or administrative centers. The remainder of the increase is primarily due to higher data processing, depreciation and equipment expense. The majority of these increases reflect additional expenditures related to conversion of the Company's check processing operations to image processing during the second and third quarter of the year. The 2000 efficiency ratio (excluding amortization of intangibles, one-time expense, and net securities gains/(losses)) at 54.6% has remained consistent with 1999; however, a significant improvement has occurred from the 1998 level of 59.7%. While the Company's expense ratios have generally been favorable, management maintains a heightened focus on controlling costs and eliminating inefficiencies. Specifically, the Company should benefit from overhead savings from the aforementioned conversion of the Company's check processing operations to image during the second and third quarter of 2000. Improved productivity resulting from consolidation of the Company's collection, indirect installment loan approval, mortgage servicing, and first-day deposit operations functions, all of which were previously performed in each of the Canton and Olean, NY operations or administrative centers, is expected to be fully reflected in 2001's results. 11 Other expense decreased $510,000 or .8% to $66.7 million in 1999. During 1998, there was approximately $1.1 million in acquisition related costs which increased other expenses. The absence of these costs in 1999, was offset by a $770,000 increase in personnel costs. The following table sets forth information by category of noninterest expense of the Company for the years indicated.
YEARS ENDED DECEMBER 31, ------------------------ 2000 1999 1998 ---- ---- ---- (000's omitted) Personnel expense $36,576 $33,600 $32,830 Net occupancy expense 5,314 5,175 5,293 Equipment expense 4,993 4,671 4,690 Professional fees 1,896 1,937 2,142 Data processing expense 4,687 4,307 4,578 Amortization of intangibles 4,891 4,723 4,748 Stationary and supplies 1,396 1,218 1,344 Deposit insurance premiums 278 183 189 Other 10,761 10,911 11,421 ------- ------- ------- Total noninterest expense $70,792 $66,725 $67,235 Total operating expenses as a percentage of average assets 2.8% 2.8% 3.0% Efficiency ratio 59.0% 59.7% 65.3%
Income Taxes. The Company's combined effective federal and state tax rate in 2000 remained nearly unchanged at 28.7% as a result of continued effective tax planning strategies. From 1998 to 1999, there was a significant decrease in the Company's effective tax rate from 34.9%, as a result of an organizational change and increased purchases of tax-exempt municipal investment securities. CAPITAL A strong capital position is important to the continued profitability of the Company and promotes depositor and investor confidence. The Company's capital consists of shareholders' equity, which provides a basis for future growth and expansion and also provides a buffer against unexpected losses. Shareholders' equity increased $36.1 million to $201.8 million at December 31, 2000. In addition, the Company issued in 1997 $29.8 million in trust preferred securities (see "Funding Sources" below) which are a form of long term debt that constitutes Tier I capital, the highest level of regulatory capital. Despite the total cost to repurchase 648,100 shares of stock, including 100,000 shares in the current year, the ratio of tier I capital to assets, the basic measure for which regulators have established a 5% minimum to be considered "well-capitalized," remains sound at 6.75%, and virtually unchanged from one year ago. The total core capital to risk-weighted assets ratio decreased 18 basis points during 2000 to 12.08% as of year-end compared to the 10% minimum requirement for "well-capitalized" banks. The Company is confident that capital levels are being prudently balanced between regulatory and investor perspectives. During 2000, the Company raised its expected annualized dividend to $1.08 per common share reflecting management's confidence that earnings strength is sustainable and that capital can be maintained at a satisfactory level. FUNDING SOURCES Typical of most commercial banking institutions today is the need to rely on a variety of funding sources to support the earning asset base as well as to achieve targeted growth objectives. There are three primary sources of funding that comprise CBSI's overall funding matrix, which considers maturity, stability, and price: deposits of individuals, partnerships and corporations (IPC deposits); collateralized municipal deposits; and capital market borrowings. 12 The Company's funding matrix continues to benefit from a high level of IPC deposits which are frequently considered to be a bank's most attractive source of funding because they are generally stable, do not need to be collateralized, have a relatively low cost, and because they represent a working customer base with the potential to be cross-sold a variety of loan, deposit and other financial service-related products. Capital market borrowings are defined as funding sources available on a national market basis, generally requiring some form of collateralization. Borrowing sources for the Company include the Federal Home Loan Bank of New York and Pittsburgh, Federal Reserve Bank of New York, as well as access to the national repurchase agreement market through established relationships with primary market security dealers. Also considered as borrowings are the $30 million in 9.75% Company-Obligated Mandatorily Redeemable Preferred Securities issued to support 1997's acquisitions and advances under a $10 million line of credit tied to the 90 day libor rate with a large regional commercial bank. In addition, the Company continues to have access to subordinated debt markets. The average daily amount of deposits and the average rate paid on each of the following deposit categories is summarized below for the years indicated.
YEARS ENDED DECEMBER 31, ------------------------ 2000 1999 1998 ---- ---- ---- Average Average Average Average Average Average Balance Rate Paid Balance Rate Paid Balance Rate Paid ------- --------- ------- --------- ------- --------- (000's omitted, except rates) Non-interest-bearing demand deposits $ 304,107 0.0% $ 289,748 0.0% $ 265,419 0.0% Interest-bearing demand deposits 162,065 0.9% 240,412 1.1% 239,721 1.4% Regular savings deposits 331,987 2.4% 347,870 2.4% 358,950 2.7% Money market deposits 128,112 3.4% 136,396 2.9% 124,053 3.0% Time deposits 991,754 5.7% 933,687 5.1% 977,312 5.5% ---------- --- ---------- --- ---------- --- Total average daily amount of domestic deposits $1,918,025 3.6% $1,948,113 3.2% $1,965,455 3.6% ========== === ========== === ========== ===
The remaining maturities of time deposits in amounts of $100,000 or more outstanding at December 31, 2000 and 1999 are summarized below.
AT DECEMBER 31, --------------- 2000 1999 ---- ---- (000's omitted) Less than three months $ 91,226 $ 80,171 Three months to six months 52,618 44,433 Six months to one year 40,234 28,432 Over one years 26,585 22,978 -------- -------- Totals $210,663 $176,014 ======== ========
The following table summarizes the outstanding balance of short-term borrowings of the Company for the years indicated.
DECEMBER 31, ------------ 2000 1999 1998 ---- ---- ---- (000's omitted) Federal funds purchased $ 48,730 $ 32,450 $ 39,700 Term borrowings at banks (original term) 90 days or less 151,100 129,000 30,000 Over 90 days 60,000 200,000 50,000 -------- -------- -------- Balance at end of period $259,830 $361,450 $119,700 ======== ======== ======== Daily average during the year $305,200 $180,382 $ 63,976 Maximum month-end balance $396,990 $361,450 $119,700 Weighted average rate during the year 6.5% 5.3% 5.5% Year-end average rate 7.2% 5.6% 5.3%
13 MARKET RISK/INTEREST RATE RISK Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates/prices such as interest rates, foreign currency exchange rates, commodity prices, and equity prices. The Company's primary market risk exposure is interest rate risk. The ongoing monitoring and management of this risk, over both a short-term tactical and longer-term strategic time horizon, is an important component of the Company's asset/liability management process, which is governed by policies established by its Board of Directors and reviewed and approved annually. The Board of Directors delegates responsibility for carrying out the asset/liability management policies to the Asset/Liability Management Committee (ALCO). In this capacity, ALCO develops guidelines and strategies impacting the Company's asset/liability management activities based upon estimated market risk sensitivity, policy limits, and overall market interest rate-related level and trends. As the Company does not believe it is possible to reliably predict future interest rate movements, it has maintained an appropriate process and set of measurement tools which enable it to identify and quantify sources of interest rate risk. The primary tool used by the Company in managing interest rate risk is income simulation. The analysis begins by measuring the impact of differences in maturity and repricing 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. LIQUIDITY Liquidity involves the Company's ability to raise funds to support asset growth, meet deposit withdrawal and other borrowing needs, maintain reserve requirements and otherwise operate the Company on an ongoing basis. To adjust for the effects of a changing interest rate environment and deposit structure, the Company's management monitors its liquidity requirements through its asset/liability management program. This program, along with other management analysis, enables the Company to meet its cash flow requirements and adapt to the changing needs of individual customers and the requirements of regulatory agencies. Among the sources of asset liquidity are cash and due from banks, Federal Funds sold, securities available for sale, mortgage loans available for sale, and funds received from the repayment of loans and the maturing of investments. In addition to these sources of liquidity and loan repayments, the Company has unused borrowing capacity through collateralized transactions with the Federal Home Loan Bank of New York and Pittsburgh. On a monthly basis, management updates a rolling 90-day forecast of the liquidity positions to assess the Company's overall short-term liquidity needs. On a quarterly basis, the Company expands this evaluation by modeling its liquidity requirements over a three-year time horizon. Incorporated into these forecasts are annual loan and deposit growth projections, as well as borrowings under lines of credit from sources such as the Federal Home Loan Bank of New York, should the need arises. Rather than matching the maturity of a specific assets with a specific borrowing, the Company enters into its borrowing commitments based on the overall needs of the Company. Such decisions are driven by the interest rate risk position of the Company, as well as its strategic outlook for loan and deposit generation. Through the use of these and other sources, management believes the Company has adequate liquidity in both the short-term and the long-term to carry out the Company's growth and profitability strategies. EFFECTS OF INFLATION The financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles, 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. SUBSEQUENT EVENTS ACQUISITION OF THE CITIZENS NATIONAL BANK OF MALONE, BASED IN MALONE, NEW YORK On January 26, 2001, the Company acquired the Citizens National Bank of Malone (CNB), an eighty-year-old commercial bank with $113 million in assets, $59 million in loans, and $90 million in deposits. Stockholders of Citizens Bank received 1.70 shares of registered common stock of the Company, resulting in the issuance of 952,000 shares in the transaction (including 648,100 of treasury shares), which was recorded using the purchase method of accounting. 14 CNB's four offices in Franklin County--Brushton, Chateaugay, and two in Malone -- have the top deposit market share in their respective towns, resulting in the Company now in a virtual tie for the number one market share in Franklin County at 22.0%. CNB's fifth office is in Hermon; it is the only banking facility in the town, further strengthening the Company's long-standing number one market share in St. Lawrence County at 27.1%. These five branches are now being administered from the Company's Northern Market operations and management center in Canton, NY. ACQUISITION OF FIRST LIBERTY BANK CORP., BASED IN JERMYN, PENNSYLVANIA On November 29, 2000, the Company announced its first strategic partnership outside of New York State with the signing of a definitive agreement with First Liberty Bank Corp. (NASDAQ-OTC: FLIB), a $647 million asset commercial bank based in Jermyn, Pennsylvania, to acquire all the stock of First Liberty. First Liberty will be merged into Community Bank, N.A. (CBNA), operating under its present name in Pennsylvania as a division of CBNA. First Liberty has the second largest deposit market share, at 17%, in Lackawanna County, where 11 of its 13 branches are located; the remaining offices are located in Lucerne County. On May 11, 2001, the Company completed its acquisition of 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 as of and for the years ended 2000, 1999 and 1998 have been restated to include the combined results of operations, financial position and cash flows of the Company and First Liberty. PENDING ACQUISITION OF THIRTY SIX FLEETBOSTON BRANCHES On June 8, 2001, the Company signed an agreement to acquire 36 branches, with deposits of approximately $484,000 and loans of approximately $243,000, from FleetBoston Financial. The transaction is subject to regulatory approval and is scheduled to close in early fourth quarter 2001. The branches, which are in the Southwestern and Finger Lakes regions of New York, will be merged into the Company's branch network. ISSUANCE OF POOLED TRUST PREFERRED SECURITIES On July 16, 2001, the Company formed a wholly-owned subsidiary, Community Capital Trust II, a Delaware business trust. The trust issued $25,000 of 30 year floating rate Company-obligated Capital Securities of Community Capital Trust II Holding Solely Parent Debentures. The Company borrowed the proceeds of the Capital Securities from its Subsidiary by issuing Deeply Subordinated Junior Debentures having substantially similar terms. The Capital Securities mature in year 2031 and are treated as Tier 1 capital by the Federal Reserve Bank of New York. The Capital Securities are a pooled trust preferred fund of MM Community Funding I, Ltd, and are tied to the six month LIBOR plus 3.75% with a five year call provision. The current implied coupon yields 7.57%. On July 31, 2001, the Company a wholly-owned subsidiary, Community Statutory Trust III, a Connecticut business trust. The trust issued $24,450 of 30 year floating rate Company-obligated pooled Capital Securities of Community Statutory Trust III Holding Solely Parent Debentures. The Company borrowed the proceeds of the Capital Securities from its Subsidiary by issuing Deeply Subordinated Junior Debentures having substantially similar terms. The Capital Securities mature in year 2031 and are treated as Tier 1 capital by the Federal Reserve Bank of New York. The Capital Securities are a pooled trust preferred fund of First Tennessee/KBW Pooled Trust Preferred Deal III, and are tied to the three-month LIBOR plus 3.75% with a five-year call provision. The current implied coupon yields 7.29%. NEW ACCOUNTING PRONOUNCEMENTS In 1998, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The statement requires an entity to recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Upon adoption of the SFAS the Company transferred investment securities from held-to-maturity to available-for-sale (see Note C). As a result, securities previously classified as held-to-maturity were sold during the year and investment securities gains of approximately $194,000, net of tax, resulting from the sale have been reported as a cumulative effect of change in accounting principle. The Company has no outstanding derivative financial instruments and, accordingly, adoption of SFAS 133 had no other effect on the Company's financial statements. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities - a Replacement of SFAS No. 125". This statement revises the accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities. Under the financial components approach, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after March 31, 2001 and accordingly would apply to the Company for the quarter ended June 30, 2001. The provisions of this statement are not expected to have a significant change on the Company's current accounting for transfers and servicing of financial assets. 15 In July 2001, the Financial Accounting Standards Board issued SFAS No. 142, "Goodwill and Other Intangible Assets", which addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets". The statement will require, beginning January 1, 2002, that the Company subject goodwill and other intangible assets to an annual impairment analysis to assess the need to write down the balances and recognize an impairment loss. In addition, amortization of certain intangible assets will no longer be recorded upon adoption of this statement. The Company expects that adoption of this pronouncement will reduce annual amortization expense by approximately $4.3 million. 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. 16 EX-99.3 5 y54149a1ex99-3.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-40808) and S-8 (Nos. 333-61916, 333-61672, 333-17011, 333-16635, 033-60607) of Community Bank System, Inc. of our report dated January 26, 2001, except for the pooling of interests with First Liberty Bank Corp. described in Note A and the information in Note R as to which the date is August 10, 2001, relating to the financial statements, which appear in this Form 8-K/A. /s/ PricewaterhouseCoopers LLP Syracuse, New York October 23, 2001 EX-99.4 6 y54149a1ex99-4.txt CONSENT OF KPMG LLP EXHIBIT 99.4 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Community Bank System, Inc. We consent to the incorporation by reference in the registration statement (No. 333-40808) on Form S-3, and the registration statements (Nos. 333-61916, 333-61672, 333-17011, 333-16635 and 033-60607) on Form S-8 of our report dated January 29, 2001 relating to the consolidated balance sheets of First Liberty Bank Corp. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the years in the three year period ended December 31, 2000, which report is included herein. /s/ KPMG LLP Philadelphia, Pennsylvania October 24, 2001