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