UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A (Amendment #1)
|X| FOR ANNUAL AND TRANSITIONAL REPORTS PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
Commission file number 001-13695
[LOGO]
COMMUNITY BANK SYSTEM, INC.
(Exact name of registrant as specified in its charter)
New York Stock Exchange
(Name of Each Exchange on Which Registered)
Delaware 16-1213679
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
5790 Widewaters Parkway, DeWitt, New York 13214-1883
(Address of principal executive offices) (Zip Code)
(315) 445-2282
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $1.00 Par Value
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |X| No |_|.
The aggregate market value of the voting stock held by non-affiliates of the
registrant on June 30, 2004 determined using the closing price per share on that
date of $22.79, as reported on the New York Stock Exchange was approximately
$636,000,000.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
30,312,681 shares of Common Stock, $1.00 par value, were outstanding on
March 9, 2005.
DOCUMENTS INCORPORATED BY REFERENCE.
List hereunder the following documents if incorporated by reference and
the Part of the Form 10-K into which the document is incorporated: (1) any
annual report to security holders; (2) any proxy or information statement; and
(3) any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act
of 1933.
Portions of Definitive Proxy Statement for Annual Meeting of Shareholders
to be held on May 11, 2005 (the "Proxy Statement") is incorporated by reference
in Part III of this Annual Report on Form 10-K.
Exhibit Index is located on page 35 of 38
EXPLANATORY NOTE:
This Amendment No. 1 to the Annual Report on Form 10-K of Community Bank System,
Inc. for the year ended December 31, 2004 (the "Original Form 10-K"), is being
filed for the sole purpose of amending the date of the Management's Report on
Internal Control Over Financial Reporting from March 14, 2005 to March 11, 2005.
In accordance with Rule 12b-15 under the Securities and Exchange Act of 1934, as
amended (the "Exchange Act"), the complete text of Item 8 (Financial Statements
and Supplementary Data) of the Original Form 10-K, which Item contained the
Management's Report on Internal Control Over Financial Reporting, has been
restated in its entirety in this Amendment No. 1. Under Rule 12b-15, Community
Bank System, Inc. must also file updated certifications pursuant to Rule
13a-15(e)/15d-15(e) under the Exchange Act and 18 U.S.C. Section 1350 in
connection with this Amendment No. 1. The inclusion of these certifications and
the updated consent of PricewaterhouseCoopers LLP as exhibits to this Amendment
No. 1 also required the restatement of Item 15 (Exhibits, Financial Statement
Schedules and Reports on Form 8-K) of the Original Form 10-K.
The remainder of the Original Form 10-K is unchanged and is not reproduced in
this Amendment No. 1. This Amendment No. 1 speaks as of the filing date of the
Original Form 10-K and reflects only the changes discussed above. No other
information included in the Original Form 10-K has been modified or updated in
any way.
2
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements and independent auditor's
reports of Community Bank System, Inc. are contained in this item.
o Consolidated Statements of Condition,
December 31, 2004 and 2003
o Consolidated Statements of Income,
Years ended December 31, 2004, 2003, and 2002
o Consolidated Statements of Changes in Shareholders' Equity,
Years ended December 31, 2004, 2003, and 2002
o Consolidated Statements of Comprehensive Income,
Years ended December 31, 2004, 2003, and 2002
o Consolidated Statements of Cash Flows,
Years ended December 31, 2004, 2003, and 2002
o Notes to Consolidated Financial Statements,
December 31, 2004
o Management's Report on Internal Control over Financial Reporting
o Report of Independent Registered Public Accounting Firm
o Quarterly Selected Data (Unaudited) for 2004 and 2003
3
COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(In Thousands, Except Share Data)
December 31, December 31,
2004 2003
--------------------------------------------------------------------------------------------------------------------
Cash and due from banks $118,345 $103,923
Available-for-sale investment securities 1,446,695 1,190,882
Held-to-maturity investment securities 137,644 138,652
--------------------------------------------------------------------------------------------------------------------
Total investment securities (fair value of $1,582,873 and $1,327,120, respectively) 1,584,339 1,329,534
Loans 2,358,493 2,128,509
Allowance for loan losses 31,778 29,095
--------------------------------------------------------------------------------------------------------------------
Net loans 2,326,715 2,099,414
Core deposit intangibles, net 35,351 33,998
Goodwill 195,163 159,596
Other intangibles, net 1,986 2,517
--------------------------------------------------------------------------------------------------------------------
Intangible assets, net 232,500 196,111
Premises and equipment, net 63,510 61,705
Accrued interest receivable 27,947 25,851
Other assets 40,475 38,859
--------------------------------------------------------------------------------------------------------------------
Total assets $4,393,831 $3,855,397
====================================================================================================================
Liabilities:
Non-interest bearing deposits $567,106 $498,195
Interest bearing deposits 2,361,872 2,227,293
--------------------------------------------------------------------------------------------------------------------
Total deposits 2,928,978 2,725,488
Federal funds purchased 13,200 36,300
Borrowings 826,865 551,096
Subordinated debt held by unconsolidated subsidiary trusts 80,446 80,390
Accrued interest and other liabilities 69,714 57,295
--------------------------------------------------------------------------------------------------------------------
Total liabilities 3,919,203 3,450,569
--------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (See Note N)
Shareholders' equity:
Preferred stock $1.00 par value, 500,000 shares authorized, 0 shares issued
Common stock, $1.00 par value, 50,000,000 shares authorized;
32,041,591 and 28,746,612 shares issued in 2004 and 2003, respectively 32,042 28,747
Additional paid-in capital 190,769 130,066
Retained earnings 248,295 218,628
Accumulated other comprehensive income 34,200 35,958
Treasury stock, at cost (1,400,000 and 416,300 shares, respectively) (30,199) (8,490)
Employee stock plan - unearned (479) (81)
--------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 474,628 404,828
--------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $4,393,831 $3,855,397
====================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
4
COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per-Share Data)
Years Ended December 31,
---------------------------------
2004 2003 2002
-------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $137,077 $125,256 $130,860
Interest and dividends on taxable investments 52,744 47,047 57,133
Interest and dividends on non-taxable investments 22,974 18,826 17,100
-------------------------------------------------------------------------------------------------------------
Total interest income 212,795 191,129 205,093
-------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 34,587 38,288 53,878
Interest on short-term borrowings 7,242 2,685 2,586
Interest on subordinated debt held by unconsolidated subsidiary trusts 5,750 5,632 5,985
Interest on long-term borrowings 14,173 12,696 14,794
-------------------------------------------------------------------------------------------------------------
Total interest expense 61,752 59,301 77,243
-------------------------------------------------------------------------------------------------------------
Net interest income 151,043 131,828 127,850
Less: provision for loan losses 8,750 11,195 12,222
-------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 142,293 120,633 115,628
-------------------------------------------------------------------------------------------------------------
Non-interest income:
Deposit service fees 25,201 23,121 16,480
Other banking services 2,431 1,906 2,061
Trust, investment and asset management fees 7,443 6,682 8,003
Benefit plan administration, consulting and actuarial fees 9,298 6,220 3,845
Gain (loss) on investment securities & debt extinguishments 72 (2,698) 1,673
-------------------------------------------------------------------------------------------------------------
Total non-interest income 44,445 35,231 32,062
-------------------------------------------------------------------------------------------------------------
Operating expenses:
Salaries and employee benefits 61,146 53,164 47,864
Occupancy 10,177 9,297 8,154
Equipment and furniture 8,636 7,828 7,538
Amortization of intangible assets 7,414 5,093 5,953
Legal and professional fees 4,578 3,183 3,272
Data processing 7,737 6,800 6,574
Office supplies 2,232 1,996 2,321
Acquisition expenses 1,704 498 700
Other 16,275 14,852 12,910
-------------------------------------------------------------------------------------------------------------
Total operating expenses 119,899 102,711 95,286
-------------------------------------------------------------------------------------------------------------
Income before income taxes 66,839 53,153 52,404
Income taxes 16,643 12,773 13,887
-------------------------------------------------------------------------------------------------------------
Net income $50,196 $40,380 $38,517
=============================================================================================================
Basic earnings per share $1.68 $1.54 $1.48
Diluted earnings per share $1.64 $1.49 $1.46
Dividends declared per share $0.68 $0.61 $0.56
The accompanying notes are an integral part of the consolidated financial
statements.
5
COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2002, 2003 and 2004
(In Thousands, Except Share Data)
Common Stock Accumulated
--------------------- Additional Other Employee
Shares Amount Paid-In Retained Comprehensive Treasury Stock Plan
Outstanding Issued Capital Earnings Income Stock -Unearned Total
---------------------------------------------------------------------------------------------
Balance at December 31,
2001, as previously reported 12,902,812 $12,903 $77,710 $170,472 $7,281 $0 ($386) $267,980
Two-for-one stock split 12,902,812 12,904 (12,904) 0
-----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31,
2001, as restated 25,805,624 25,807 64,806 170,472 7,281 0 (386) 267,980
Net income 38,517 38,517
Other comprehensive income,
net of tax 31,270 31,270
Dividends declared:
Common, $0.56 per share (14,506) (14,506)
Common stock issued under
employee stock plan,
including tax benefits of $219 151,484 151 1,273 353 1,777
-----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 25,957,108 $25,958 $66,079 $194,483 $38,551 $0 ($33) $325,038
Net income 40,380 40,380
Other comprehensive loss, net
of tax (2,593) (2,593)
Dividends declared:
Common, $0.61 per share (16,235) (16,235)
Common stock issued under
employee stock plan,
including tax benefits of $1,410 495,322 495 5,913 (48) 6,360
Stock issued for acquisition 2,294,182 2,294 58,074 60,368
Treasury stock purchased (416,300) (8,490) (8,490)
-----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 28,330,312 $28,747 $130,066 $218,628 $35,958 ($8,490) ($81) $404,828
Net income 50,196 50,196
Other comprehensive loss, net of
tax (1,758) (1,758)
Dividends declared:
Common, $0.68 per share (20,529) (20,529)
Common stock issued under
employee stock plan,
including tax benefits of $3,165 702,766 703 8,576 (398) 8,881
Stock and options issued for
acquisition 2,592,213 2,592 52,127 54,719
Treasury stock purchased (983,700) (21,709) (21,709)
-----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 30,641,591 $32,042 $190,769 $248,295 $34,200 ($30,199) ($479) $474,628
===================================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
6
COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
Years Ended December 31,
-------------------------------
2004 2003 2002
-------------------------------------------------------------------------------------------------------------
Other comprehensive (loss) income, before tax:
Change in minimum pension liability adjustment $0 $92 $4,919
Unrealized (losses) gains on securities:
Unrealized holding (losses) gains arising during period (3,031) (5,727) 49,796
Reclassification adjustment for (gains) losses included in net income (72) 54 (2,598)
-------------------------------------------------------------------------------------------------------------
Other comprehensive (loss) income, before tax (3,103) (5,581) 52,117
Income tax benefit (expense) related to other comprehensive (loss) income 1,345 2,988 (20,847)
-------------------------------------------------------------------------------------------------------------
Other comprehensive (loss) income, net of tax (1,758) (2,593) 31,270
Net income 50,196 40,380 38,517
-------------------------------------------------------------------------------------------------------------
Comprehensive income $48,438 $37,787 $69,787
=============================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
7
COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars, except Share Data)
Years Ended December 31,
----------------------------------
2004 2003 2002
----------------------------------------------------------------------------------------------------------------------------------
Operating activities:
Net income $50,196 $40,380 $38,517
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation 8,025 7,139 6,596
Amortization of intangible assets 7,414 5,093 5,953
Net amortization of premiums and discounts on securities and loans 1,392 2,303 3,256
Amortization of unearned compensation and discount on subordinated debt 439 172 443
Provision for loan losses 8,750 11,195 12,222
Provision for deferred taxes 1,286 898 4,458
(Gain) loss on investment securities and debt extinguishments (72) 2,698 (1,673)
Loss (gain) on loans and other assets 211 350 (28)
Proceeds from the sale of loans held for sale 0 67,482 9,103
Origination of loans held for sale 0 (61,036) (14,858)
Change in other operating assets and liabilities 7,823 (3,604) (11,815)
----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 85,464 73,070 52,174
----------------------------------------------------------------------------------------------------------------------------------
Investing activities:
Proceeds from sales of available-for-sale investment securities 51,889 41,227 96,294
Proceeds from maturities of held-to-maturity investment securities 4,852 5,229 4,521
Proceeds from maturities of available-for-sale investment securities 127,222 242,614 197,928
Purchases of held-to-maturity investment securities (3,991) (133,517) (4,577)
Purchases of available-for-sale investment securities (395,252) (141,658) (383,598)
Net increase in loans outstanding (26,278) (151,520) (77,906)
Cash received (paid) for acquisition, net of cash (paid) acquired of ($7,023), $23,986, $0 21,939 (9,630) 0
Capital expenditures (7,377) (8,322) (8,831)
----------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (226,996) (155,577) (176,169)
----------------------------------------------------------------------------------------------------------------------------------
Financing activities:
Net change in demand deposits, NOW accounts, and savings accounts 25,068 39,745 25,005
Net change in time deposits (66,203) (68,220) (65,619)
Net change in federal funds purchased (23,100) 3,300 18,800
Net change in short-term borrowings 87,328 147,356 202,976
Change in long-term borrowings (net of payments of $177, $30,000 and $252,000) 168,865 (30,000) (37,000)
Issuance of common stock 5,344 4,819 1,151
Purchase of treasury stock (21,709) (8,490) 0
Cash dividends paid (19,543) (15,466) (14,228)
Other financing activities (96) (145) (113)
----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 155,954 72,899 130,972
----------------------------------------------------------------------------------------------------------------------------------
Change in cash and cash equivalents 14,422 (9,608) 6,977
Cash and cash equivalents at beginning of year 103,923 113,531 106,554
----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $118,345 $103,923 $113,531
==================================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid for interest $59,644 $60,062 $79,250
Cash paid for income taxes $9,422 $13,095 $6,429
Supplemental disclosures of non-cash financing and investing activities:
Dividends declared and unpaid $5,515 $4,529 $3,760
Gross change in unrealized gains on available-for-sale investment securities ($3,103) ($5,673) $47,198
Acquisitions:
Fair value of assets acquired, excluding acquired cash and intangibles $258,416 $260,902 $0
Fair value of liabilities assumed $268,611 $257,532 $0
Common stock and options issued $54,719 $60,368 $0
The accompanying notes are an integral part of the consolidated financial
statements.
8
COMMUNITY BANK SYSTEM, INC.
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Community Bank System, Inc. is a single bank holding company which wholly-owns
four consolidated subsidiaries: Community Bank, N.A. (the Bank), Benefit Plans
Administrative Services, Inc. (BPAS), CFSI Closeout Corp. (CFSICC), and First of
Jermyn Realty Co. (FJRC). BPAS owns two subsidiaries, Benefit Plans
Administrative Services LLC and Harbridge Consulting Group LLC. BPAS provides
administration, consulting and actuarial services to sponsors of employee
benefit plans. CFSICC and FJRC are inactive companies.
The Bank operates 125 customer facilities throughout 22 counties of Upstate New
York and five counties of Northeastern Pennsylvania. The Bank owns the following
subsidiaries: 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). CISI
provides broker-dealer and investment advisory services. TMC operates the cash
management, investment, and treasury functions of the Bank. PFC primarily is an
investor in residential real estate loans. EAM provides asset management
services to individuals, corporate pension and profit sharing plans, and
foundations. FLSC provides banking-related services to the Pennsylvania branches
of the Bank.
The Company wholly-owns three unconsolidated subsidiary business trusts formed
for the purpose of issuing mandatorily redeemable preferred securities which are
considered Tier I capital under regulatory capital adequacy guidelines (see Note
H).
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All inter-company accounts and transactions have
been eliminated in consolidation. Certain prior period amounts have been
reclassified to conform with the current period presentation.
Critical Accounting 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.
Critical accounting estimates include the allowance for loan losses, actuarial
assumptions associated with the pension, post-retirement and other employee
benefit plans, the provision for income taxes, and the carrying value of
goodwill and other intangible assets.
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 basis, 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 regulations of various governmental 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 loan loss allowances, and operating restrictions resulting from the
regulators' judgements based on information available to them at the time of
their examinations.
Revenue Recognition
The Company recognizes income on an accrual basis. CISI recognizes fee income
when investment and insurance products are sold to customers. EAM provides asset
management services to brokerage firms and clients and recognizes income ratably
over the contract period during which service is performed. Revenue from BPA's
administration and recordkeeping services is recognized ratably over the service
contract period. Revenue from consulting and actuarial services is recognized
when services are rendered. All inter-company revenue and expense among related
entities are eliminated in consolidation.
9
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks and highly liquid investments with original
maturities of less than ninety days. 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. 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 has been classified as trading securities. Equity securities are
stated at cost and include restricted stock of the Federal Reserve Bank of New
York and Federal Home Loan Bank of New York. Investment securities are reviewed
regularly for other than temporary impairment. Where there is other than
temporary impairment, the carrying value of the investment security is reduced
to the estimated fair value, with the impairment loss recognized in the
consolidated statements of income as other expense.
The average cost method is used in determining the realized gains and losses on
sales of investment securities. 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.
Loans
Loans are stated at unpaid principal balances, net of unearned income. Mortgage
loans held for sale are carried at the lower of cost or fair value and are
included in loans as the balance of such loans was not significant. Fair values
for variable rate loans that reprice frequently 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. The carrying amount of accrued interest approximates
its fair value.
Interest on loans 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 interest method.
Non-refundable loan fees and related direct costs are included in the loan
balances and are deferred and amortized over the life of the loan as an
adjustment to loan yield using the effective interest method. Premiums and
discounts on purchased loans are amortized on an accelerated method over the
life of the loans.
Impaired and Other Nonaccrual Loans
The Company places a loan on nonaccrual status when the loan becomes ninety days
past due (or sooner, if management concludes collection is doubtful), except
when, in the opinion of management, it is well-collateralized and in the process
of collection. A loan may be placed on nonaccrual status earlier than ninety
days past due if there is deterioration in the financial position of the
borrower or if other conditions of the loan so warrant. When a loan is placed on
nonaccrual status, uncollected accrued interest is reversed against interest
income and the deferral and amortization of non-refundable loan fees and related
direct costs is discontinued. Interest income during the period the loan is on
nonaccrual status is recorded on a cash basis after recovery of principal is
reasonably assured. Nonaccrual loans are returned to accrual status when
management determines that the borrower's performance has improved and that both
principal and interest are collectible. This generally requires a sustained
period of timely principal and interest payments.
Commercial loans greater than $500,000 are evaluated individually for impairment
in accordance with FASB No. 114, "Accounting by Creditors for Impairment of a
Loan." A loan is considered impaired, based on current information and events,
if it is probable that the Company will be unable 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 upon
the present value of expected future cash flows or the fair value of the
collateral, if the loan is collateral-dependent.
The Company's charge-off policy by loan type is as follows:
o Commercial loans are generally charged-off to the extent outstanding
principal exceeds the fair value of estimated proceeds from collection
efforts, including liquidation of collateral. The charge-off is recognized
when the loss becomes reasonably quantifiable.
10
o Consumer installment loans are generally charged-off to the extent
outstanding principal balance exceeds the fair value of collateral, and
are recognized by the end of the month in which the loan becomes 120 days
past due.
o Loans secured by 1-4 family residential real estate are generally
charged-off to the extent outstanding principal exceeds the fair value of
the property, and are recognized when the loan becomes 180 days past due.
Allowance for Loan Losses
Management continually evaluates the credit quality of the Company's loan
portfolio, and performs a formal review of the adequacy of the allowance for
loan losses on a quarterly basis. The allowance reflects management's best
estimate of probable losses inherent in the loan portfolio. Determination of the
allowance is subjective in nature and requires significant estimates. The
Company's allowance methodology consists of two broad components, general and
specific loan loss allocations.
The general loan loss allocation is composed of two calculations that are
computed on four main loan segments: commercial, consumer direct, consumer
indirect and residential real estate. The first calculation determines an
allowance level based on the latest three years of historical net charge-off
data for each loan category (commercial loans exclude balances with specific
loan loss allocations). The second calculation is qualitative and takes into
consideration five major factors affecting the level of loan loss risk:
portfolio risk migration patterns (internal credit quality trends); the growth
of the segments of the loan portfolio; economic and business environment trends
in the Company's markets (includes review of bankruptcy, unemployment,
population, consumer spending and regulatory trends); industry, geographical and
product concentrations in the portfolio; and the perceived effectiveness of
managerial resources and lending practices and policies. These two calculations
are added together to determine the general loan loss allocation. The specific
loan loss allocation relates to individual commercial loans that are both
greater than $0.5 million and in a non-accruing status with respect to interest.
Specific losses are based on discounted estimated cash flows, including any cash
flows resulting from the conversion of collateral.
Loan losses are charged off against the allowance, while recoveries of amounts
previously charged off are credited to the allowance. A provision for loan loss
is charged to operations based on management's periodic evaluation of factors
previously mentioned.
Intangible Assets
Intangible assets include core deposit intangibles, customer relationship
intangibles and goodwill arising from acquisitions. Core deposit intangibles and
customer relationship intangibles are amortized on either an accelerated or
straight-line basis over periods ranging from 7 to 20 years. Goodwill is
evaluated at least annually for impairment. The carrying value of goodwill and
other intangible assets is based upon discounted cash flow modeling techniques
that require management to make estimates regarding the amount and timing of
expected future cash flows. It also requires use of a discount rate that
reflects the current return requirements of the market in relation to present
risk-free interest rates, required equity market premiums, and company-specific
risk indicators.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Computer software costs that are capitalized only include external direct costs
of obtaining and installing the software. The annual provision for depreciation
is computed using the straight-line method over the assets' estimated useful
lives. Maintenance and repairs are charged to expense as incurred.
Long-lived depreciable assets are evaluated periodically for impairment when
events or changes in circumstances indicate the carrying amount may not be
recoverable. Impairment exists when the expected undiscounted future cash flows
of a long-lived asset are less than its carrying value. In that event, the
Company recognizes a loss for the difference between the carrying amount and the
estimated fair value of the asset based on a quoted market price, if applicable,
or a discounted cash flow analysis. Impairment losses are recorded in other
expenses on the income statement.
Other Real Estate
Properties acquired through foreclosure, or by deed in lieu of foreclosure, are
carried at the lower of the unpaid loan balance or fair value less estimated
costs of disposal. Subsequent changes in value are reported as adjustments to
the carrying amount, not to exceed the initial carrying value of the asset at
the time of transfer. Changes in value subsequent to transfer are recorded in
operating expenses on the income statement. Gains or losses not previously
recognized resulting from the sale of other real estate are recognized as an
expense on the date of sale. At December 31, 2004 and 2003, other real estate,
included in other assets, amounted to $1,645,000 and $1,077,000, respectively.
11
Mortgage Servicing Rights
Originated mortgage servicing rights are recorded at their allocated fair value
at the time of sale of the underlying loan, and are amortized in proportion to
and over the period of estimated net servicing income or loss. The Company 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 Company incorporates assumptions that market participants would use in
estimating future net servicing income, which includes estimates of the
servicing cost 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.
Deposits
The fair value of deposit obligations are based on current market rates for
alternative funding sources, principally the Federal Home Loan Bank of New York.
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 and interest rates currently being offered
on similar borrowings.
Since the Company considers debt extinguishments to be a component of its
interest rate risk management, any related gains or losses are not deemed
extraordinary and are presented in the non-interest income section of the
consolidated statements of income.
Treasury Stock
On June 9, 2003, the Company announced a twelve-month authorization to
repurchase up to 1,400,000 of its outstanding shares in open market or privately
negotiated transactions. As of December 31, 2004, the Company has repurchased
all of the shares at an aggregate cost of $30,199,000 or $21.57 per share. The
repurchases were for general corporate purposes, including those related to
acquisition and stock plan activities.
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.
Retirement Benefits
The Company provides defined benefit pension benefits and post-retirement health
and life insurance benefits to eligible employees. The Company also provides
deferred compensation and supplemental executive retirement plans for selected
current and former employees and officers. Expense under these plans is charged
to current operations and consists of several components of net periodic benefit
cost based on various actuarial assumptions regarding future experience under
the plans, including discount rate, rate of future compensation increases and
expected return on plan assets.
Assets Under Management or Administration
Assets held in fiduciary or agency capacities for customers are not included in
the accompanying consolidated statements of condition as they are not assets of
the Company. Substantially all fees associated with providing asset management
services are recorded on an accrual basis of accounting and are included in
non-interest income. Assets under management or administration at December 31,
2004 and 2003 were $2,102,000,000 and $1,807,000,000, respectively.
Earnings Per Share
Basic earnings per share are computed based on the weighted-average common
shares outstanding for the period. Diluted earnings per share are based on the
weighted-average shares outstanding adjusted for the dilutive effect of the
assumed exercise of stock options during the year. The dilutive effect of
options is calculated using the treasury stock method of accounting. The
treasury stock method determines the number of common shares that would be
outstanding if all the dilutive options (average market price is greater than
the exercise price) were exercised and the proceeds were used to repurchase
common shares in the open market at the average market price for the applicable
time period.
12
At a special meeting of the shareholders held on March 26, 2004, the
shareholders approved an amendment to the certificate of incorporation of the
Company to increase the number of authorized shares of common stock to 50
million. This amendment was effected in connection with the previously announced
two-for-one stock split of the Company's common stock. The stock split was
effected in the form of a 100 percent stock dividend, and was paid on April 12,
2004 to shareholders of record on March 17, 2004. Accordingly, all share, option
and per-share amounts have been adjusted in the consolidated financial
statements to reflect the stock split.
Stock-Based Compensation
The Company accounts for stock-based awards issued to directors, officers and
key employees using the intrinsic value method. This method requires that
compensation expense be recognized to the extent that the fair value of the
underlying stock exceeds the exercise price of the stock award at the grant
date. The Company generally does not recognize compensation expense related to
stock awards because the stock awards generally have fixed terms and exercise
prices that are equal to or greater than the fair value of the Company's common
stock at the grant date.
SFAS 123, "Accounting for Stock-Based Compensation," requires companies that use
the "intrinsic value method" to account for stock compensation plans to provide
pro forma disclosures of the net income and earnings per share effect of stock
options using the "fair value method." Under this method, the fair value of the
option on the date of grant is recognized ratably as compensation expense over
the vesting period of the option.
Management estimated the fair value of options granted using the Black-Scholes
option-pricing model. This model was originally developed to estimate the fair
value of exchange-traded equity options, which (unlike employee stock options)
have no vesting period or transferability restrictions. As a result, the
Black-Scholes model is not necessarily a precise indicator of the value of an
option, but it is commonly used for this purpose. The Black-Scholes model
requires several assumptions, which management developed based on historical
trends and current market observations. These assumptions include:
2004 2003 2002
----------------------------------------------------------------------------------------
Weighted-average expected life (in years) 7.33-7.43 7.55-8.76 6.74
Future dividend yield 3.00% 3.00% 3.00%
Share price volatility 26.88%-27.02% 25.59%-27.58% 27.82%
Weighted average risk-free interest rate 4.02%-4.45% 3.82%-4.03% 3.81%-5.16%
========================================================================================
If these assumptions are not accurate, the estimated fair value used to derive
the information presented in the following table also will be inaccurate.
Moreover, the model assumes that the estimated fair value of an option is
amortized over the option's vesting period and would be included in salaries and
employee benefits on the income statement.
The pro forma impact of applying the fair value method of accounting for the
periods shown below may not be indicative of the pro forma impact in future
years.
(000's omitted except per share amounts) 2004 2003 2002
---------------------------------------------------------------------------------------------------------------
Net income, as reported $50,196 $40,380 $38,517
Stock-based compensation expense included in net income, as reported 228 64 216
Stock-based compensation expense determined under fair value method, net of tax (886) (738) (555)
---------------------------------------------------------------------------------------------------------------
Pro forma net income $49,538 $39,706 $38,178
===============================================================================================================
Earnings per share:
As reported:
Basic $1.68 $1.54 $1.48
Diluted $1.64 $1.49 $1.46
Pro forma:
Basic $1.66 $1.51 $1.47
Diluted $1.61 $1.47 $1.45
13
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. SFAS 107, "Disclosures about Fair Value of Financial Instruments,"
excludes certain financial instruments and all non-financial 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.
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board revised SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS 123R establishes accounting
requirements for share-based compensation to employees and carries forward prior
guidance on accounting for awards to non-employees. The provisions of this
statement will become effective July 1, 2005 for all equity awards granted after
the effective date. SFAS 123R requires an entity to recognize compensation
expense based on an estimate of the number of awards expected to actually vest,
exclusive of awards expected to be forfeited. Management does not expect the
impact of the adoption of this pronouncement to be materially different from the
pro forma impacts disclosed under SFAS No. 123.
NOTE B: ACQUISITIONS
Dansville Branch Acquisition
On December 3, 2004, the Company completed the purchase of a branch office in
Dansville, N.Y. from HSBC Bank USA, N.A with deposits of $32.6 million.
First Heritage Bank
On May 14, 2004, the Company acquired First Heritage Bank ("Heritage"), a
closely held bank headquartered in Wilkes-Barre, PA with three branches in
Luzerne County, Pennsylvania. First Heritage's three branches operate as part of
First Liberty Bank & Trust, a division of Community Bank, N.A. Consideration
included 2,592,213 shares of common stock with a fair value of $52 million,
employee stock options with a fair value of $3.0 million, and $7.0 million of
cash (including capitalized acquisition costs of $1.0 million).
Grange National Banc Corp.
On November 24, 2003, the Company acquired Grange National Banc Corp.
("Grange"), a $280 million-asset bank holding company based in Tunkhannock, Pa.
Grange's 12 branches operate as part of First Liberty Bank & Trust, a division
of Community Bank, N.A. The Company issued 2,294,182 shares of its common stock
to certain of the former shareholders at a cost of $23.97 per share. The
remaining shareholders received $21.25 in cash or approximately $20.9 million.
In addition, Grange stock options representing $5.4 million of fair value were
exchanged for options of the Company.
Peoples Bankcorp Inc.
On September 5, 2003, the Company acquired Peoples Bankcorp, Inc. ("Peoples"), a
$29-million-asset savings and loan holding company based in Ogdensburg, New
York. Peoples' single branch is being operated as a branch of the Bank's network
of branches in Northern New York.
Harbridge Consulting Group
On July 31, 2003, the Company acquired PricewaterhouseCoopers' Upstate New York
Global Human Resource Solutions consulting group. This practice was renamed
Harbridge Consulting Group ("Harbridge") and is a leading provider of retirement
and employee benefits consulting services throughout Upstate New York, and is
complementary to Benefit Plans Administrative Services, LLC., the Company's
defined contribution plan administration subsidiary.
14
Acquisition Expenses
The Company incurred certain expenses in connection with the above acquisitions.
The following table shows the components of acquisition expenses that are
presented in the consolidated statements of income for the years ended December
31:
(000's omitted) 2004 2003 2002
--------------------------------------------------------------------------------
Severance and employee benefits $1,044 $0 $97
Legal and professional fees 491 213 455
Data processing 130 191 16
Other 39 94 132
--------------------------------------------------------------------------------
Total $1,704 $498 $700
================================================================================
NOTE C: INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities as of
December 31 are as follows:
2004 2003
---------------------------------------------- ----------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
(000's omitted) Cost Gains Losses Value Cost Gains Losses Value
---------------------------------------------------------------------------------- ----------------------------------------------
Held-to-Maturity Portfolio:
U.S. treasury and agency
securities $127,490 $356 $1,940 $125,906 $127,635 $235 $2,867 $125,003
Obligations of state and 12 21
political subdivisions 6,576 120 2 6,694 7,459 218 0 7,677
Other securities 3,578 0 0 3,578 3,558 0 0 3,558
---------------------------------------------------------------------------------- ----------------------------------------------
Total held-to-maturity portfolio 137,644 476 1,942 136,178 138,652 453 2,867 136,238
Available-for-Sale Portfolio:
U.S. treasury and agency
securities 630,058 20,917 208 650,767 456,913 22,638 97 479,454
Obligations of state and
political subdivisions 545,698 27,899 46 573,551 443,930 26,291 11 470,210
Corporate securities 40,443 3,460 5 43,898 27,712 2,539 0 30,251
Collateralized mortgage
obligations 70,986 1,680 222 72,444 89,566 3,987 1 93,552
Mortgage-backed securities 50,347 2,351 34 52,664 76,628 3,668 119 80,177
---------------------------------------------------------------------------------- ----------------------------------------------
Sub-total 1,337,532 56,307 515 1,393,324 1,094,749 59,123 228 1,153,644
Equity securities 53,371 0 0 53,371 37,238 0 0 37,238
---------------------------------------------------------------------------------- ----------------------------------------------
Total available-for-sale portfolio 1,390,903 $56,307 $515 $1,446,695 1,131,987 $59,123 $228 $1,190,882
Net unrealized gain on available-
for-sale portfolio 55,792 0 58,895 0
---------------------------------------------- ---------- ---------- ----------
Total $1,584,339 $1,582,873 $1,329,534 $1,327,120
============================================== ========== ========== ==========
15
A summary of investment securities as of December 31, 2004 that have been in a
continuous unrealized loss position for less than or greater than twelve months
is as follows:
Less than 12 Months 12 Months or Longer Total
--------------------------------------------- -------------------
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
(000's omitted) Value Losses Value Losses Value Losses
-------------------------------------------------------------------------------------------------- -------------------
Held-to-Maturity Portfolio:
U.S. treasury and agency securities $0 $0 $88,060 ($1,940) 88,060 (1,940)
Obligations of state and political subdivisions 1,567 (2) 0 0 1,567 (2)
-------------------------------------------------------------------------------------------------- -------------------
Total held-to-maturity portfolio $1,567 ($2) $88,060 ($1,940) $89,627 ($1,942)
================================================================================================== ===================
Available-for-Sale Portfolio:
U.S. treasury and agency securities $22,633 ($208) $0 $0 $22,633 ($208)
Obligations of state and political subdivisions 7,731 (46) 0 0 7,731 (46)
Corporate securities 1,061 (5) 0 0 1,061 (5)
Collateralized mortgage obligations 7,915 (222) 0 0 7,915 (222)
Mortgage-backed securities 950 (17) 1,197 (17) 2,147 (34)
-------------------------------------------------------------------------------------------------- -------------------
Total available-for-sale portfolio $40,290 ($498) $1,197 ($17) $41,487 ($515)
================================================================================================== ===================
Management does not believe any individual unrealized loss as of December 31,
2004 represents an other than temporary impairment. The unrealized losses
reported for the agency and mortgage-backed securities relate primarily to
securities issued by FHLB, FNMA and FHLMC and are currently rated AAA by Moody's
Investor Services and Standards & Poor. The unrealized losses in the portfolios
are primarily attributable to changes in interest rates. The Company has both
the intent and ability to hold these securities for the time necessary to
recover the amortized cost. The unrealized losses of $3,095,000 as of December
31, 2003 were less than 12 months old.
The amortized cost and estimated fair value of debt securities at December 31,
2004, 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 Fair Carrying Fair
(000's omitted) Value Value Value Value
----------------------------------------------------------------- -----------------------
Due in one year or less $4,387 $4,395 $5,263 $5,414
Due after one through five years 1,959 2,044 55,927 57,916
Due after five years through ten years 99,596 98,533 712,168 736,972
Due after ten years 31,702 31,206 442,841 467,914
----------------------------------------------------------------- -----------------------
Sub-total 137,644 136,178 1,216,199 1,268,216
Collateralized mortgage obligations 0 0 70,986 72,444
Mortgage-backed securities 0 0 50,347 52,664
----------------------------------------------------------------- -----------------------
Total $137,644 $136,178 $1,337,532 $1,393,324
================================================================= =======================
Cash flow information on investment securities for the years ended December 31
is as follows:
(000's omitted) 2004 2003 2002
-----------------------------------------------------------------------------------------------------
Proceeds from the sales of investment securities $51,889 $41,227 $96,294
Gross gains on sales of investment securities 187 11 2,593
Gross losses on sales of investment securities 115 65 0
Proceeds from the sales of mortgage-backed securities and CMO's 3,679 20,823 56,451
Proceeds from the maturities of mortgage-backed securities and CMO's 51,652 204,746 174,524
Purchases of mortgage-backed securities and CMO's $10,915 $27,092 $25,664
Investment securities with a carrying value of $699,806,000 and $563,341,000 at
December 31, 2004 and 2003, respectively, were pledged to collateralize certain
deposits and borrowings.
16
NOTE D: LOANS
Major classifications of loans at December 31 are summarized as follows:
(000's omitted) 2004 2003
--------------------------------------------------------------------------------
Consumer mortgage $801,412 $739,593
Business lending 831,244 689,436
Consumer direct and indirect 725,885 699,562
--------------------------------------------------------------------------------
Gross loans 2,358,541 2,128,591
Unearned discount 48 82
--------------------------------------------------------------------------------
Net loans 2,358,493 2,128,509
Allowance for loan losses 31,778 29,095
--------------------------------------------------------------------------------
Loans, net of allowance for loan losses $2,326,715 $2,099,414
================================================================================
The estimated fair value of loans at December 31, 2004 and 2003 was $2.4 billion
and $2.1 billion, respectively. Non-accrual loans of $11,798,000 and $11,940,000
and accruing loans ninety days past due of $1,158,000 and $1,307,000 at December
31, 2004 and 2003, respectively, are included in net loans.
Changes in loans to directors and officers and other related parties for the
years ended December 31 are summarized as follows:
(000's omitted) 2004 2003
--------------------------------------------------------------
Balance at beginning of year $14,838 $15,735
New loans 9,796 3,313
Payments (1,481) (4,210)
--------------------------------------------------------------
Balance at end of year $23,153 $14,838
==============================================================
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 $107,155,000, $126,324,000, and $103,663,000 at
December 31, 2004, 2003, and 2002, respectively. Custodial escrow balances
maintained in connection with the foregoing loan servicing, and included in
demand deposits, were approximately and $813,000 and $773,000 at December 31,
2004 and 2003, respectively. At December 31, 2004 and 2003, mortgage servicing
rights, included in other assets, amounted to $459,000 and $456,000
respectively.
Changes in the allowance for loan losses for the years ended December 31 are
summarized as follows:
(000's omitted) 2004 2003 2002
-------------------------------------------------------------------------------
Balance at beginning of year $29,095 $26,331 $23,901
Provision for loan losses 8,750 11,195 12,222
Reserve on acquired loans 2,357 1,832 0
Charge offs (11,780) (13,111) (12,015)
Recoveries 3,356 2,848 2,223
-------------------------------------------------------------------------------
Balance at end of year $31,778 $29,095 $26,331
===============================================================================
As of December 31, 2004 and 2003, the Company had impaired loans of $2,271,000
and $5,682,000, respectively. The specifically allocated allowance for loan loss
recognized on these impaired loans was $900,000 and $1,825,000 at December 31,
2004 and 2003, respectively. For the years ended December 31, 2004 and 2003 the
Company had average impaired loans of $2,399,000 and $7,100,000. There was no
interest income recognized on these loans in 2004 or 2003.
17
NOTE E: PREMISES AND EQUIPMENT
Premises and equipment consist of the following at December 31:
(000's omitted) 2004 2003
-------------------------------------------------------------------
Land and land improvements $9,340 $8,616
Bank premises owned 57,519 53,560
Equipment and construction in progress 46,010 42,146
-------------------------------------------------------------------
Premises and equipment, gross 112,869 104,322
Less: Accumulated depreciation (49,359) (42,617)
-------------------------------------------------------------------
Premises and equipment, net $63,510 $61,705
===================================================================
NOTE F: INTANGIBLE ASSETS
The gross carrying amount and accumulated amortization for each type of
intangible asset are as follows:
As of December 31, 2004 As of December 31, 2003
------------------------------------- -------------------------------------
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
(000's omitted) Amount Amortization Amount Amount Amortization Amount
------------------------------------ ------------------------------------- -------------------------------------
Amortizing intangible assets:
Core deposit intangibles $63,691 ($28,340) $35,351 $55,455 ($21,457) $33,998
Other intangibles 2,750 (764) 1,986 2,750 (233) 2,517
------------------------------------ ------------------------------------- -------------------------------------
Total amortizing intangibles 66,441 (29,104) 37,337 58,205 (21,690) 36,515
Non-amortizing intangible assets:
Goodwill 195,163 0 195,163 159,596 0 159,596
------------------------------------ ------------------------------------- -------------------------------------
Total intangible assets, net $261,604 ($29,104) $232,500 $217,801 ($21,690) $196,111
==================================== ===================================== =====================================
The increases in the gross carrying amount of core deposit intangibles and
goodwill relate to the 2004 acquisition of First Heritage Bank ($30,946,000 in
goodwill), a branch acquisition in Dansville, NY ($4,191,000 in goodwill) and
$430,000 of goodwill adjustments mainly related to adjusting certain real
property from the 2003 acquisitions to fair value. No goodwill impairment
adjustments were recognized in 2004 and 2003.
The estimated aggregate amortization expense for each of the five succeeding
fiscal years ended December 31 is as follows:
2005 $7,243
2006 6,047
2007 5,657
2008 5,335
2009 4,836
Thereafter 8,219
------------------------------
Total $37,337
==============================
NOTE G: DEPOSITS
Deposits consist of the following at December 31:
(000's omitted) 2004 2003
-----------------------------------------------------------
Demand $567,106 $498,195
Interest checking 313,639 294,563
Savings 536,460 470,166
Money market 321,461 288,212
Time 1,190,312 1,174,352
-----------------------------------------------------------
Total deposits $2,928,978 $2,725,488
===========================================================
The estimated fair value of deposits at December 31, 2004 and 2003 was
approximately $2.7 billion and $2.5 billion, respectively.
18
At December 31, 2004 and 2003, time certificates of deposit in denominations of
$100,000 and greater totaled $179,534,000 and $168,241,000 respectively. The
approximate maturities of time deposits at December 31, 2004 are as follows:
(000's omitted) Amount
----------------------------------
2005 $920,488
2006 132,051
2007 78,405
2008 30,727
2009 28,053
Thereafter 588
----------------------------------
Total $1,190,312
==================================
NOTE H: BORROWINGS
Outstanding borrowings at December 31 are as follows:
(000's omitted) 2004 2003
-----------------------------------------------------------------------------------
Short-term borrowings:
Federal funds purchased $13,200 $36,300
Federal Home Loan Bank advances 636,000 361,000
Commercial loans sold with recourse 74 0
Capital lease obligations 0 96
-----------------------------------------------------------------------------------
Total short-term borrowings 649,274 397,396
Long-term borrowings:
Federal Home Loan Bank advances 190,000 190,000
Commercial loans sold with recourse 791 0
Subordinated debt held by unconsolidated subsidiary trusts,
net of discount of $1,463 and $1,519 80,446 80,390
-----------------------------------------------------------------------------------
Total long-term borrowings 271,237 270,390
-----------------------------------------------------------------------------------
Total borrowings $920,511 $667,786
===================================================================================
The weighted-average interest rates on short-term borrowings for the years ended
December 31, 2004 and 2003 were 1.64% and 1.26%, respectively. Federal Home Loan
Bank advances are collateralized by a blanket lien on the Company's residential
real estate loan portfolio and various investment securities.
19
Long-term borrowings at December 31, 2004 have maturity dates as follows:
Weighted
(000's omitted, except rate) Amount Average Rate
-------------------------------------------------------------
October 3, 2007 $236 3.00%
January 23, 2008 (callable) 10,000 5.44%
January 28, 2008 (callable) 5,000 5.48%
April 14, 2010 (callable) 25,000 6.35%
September 27, 2010 (callable) 50,000 5.88%
October 12, 2010 (callable) 50,000 5.84%
November 1, 2010 (callable) 50,000 5.77%
October 30, 2012 258 3.00%
October 16, 2013 193 3.00%
November 23, 2014 56 2.75%
November 29, 2014 48 3.00%
February 3, 2027 (callable) 30,779 9.75%
July 16, 2031 (callable) 25,110 5.38%
July 31, 2031 (callable) 24,557 5.12%
----------------------------------------------------------
Total $271,237 6.19%
==========================================================
The estimated fair value of long-term borrowings at December 31, 2004 and 2003
was approximately $319.0 million and $314.0 million, respectively.
In December 2003, the Company prepaid $25.0 million of Federal Home Loan Bank
("FHLB") advances with maturity dates ranging from January 30, 2008 to February
4, 2008 and a weighted-average rate of 5.31%. In December 2002, the Company
prepaid $11.0 million of FHLB advances with maturity dates ranging from December
15, 2003 to December 31, 2004 and a weighted-average rate of 6.17%. As a result
of these prepayments, the Company incurred penalties of $2.6 million in 2003 and
$925,000 in 2002. These penalties have been reflected in the consolidated
statements of income as gain (loss) on investment securities and debt
extinguishments.
The Company sponsors three business trusts, Community Capital Trust I, Community
Capital Trust II, and Community Statutory Trust III, of which 100% of the common
stock is owned by the Company. The trusts were formed for the purpose of issuing
company-obligated mandatorily redeemable preferred securities to third-party
investors and investing the proceeds from the sale of such preferred securities
solely in junior subordinated debt securities of the Company. The debentures
held by each trust are the sole assets of that trust. Distributions on the
preferred securities issued by each trust are payable semi-annually at a rate
per annum equal to the interest rate being earned by the trust on the debentures
held by that trust. The preferred securities are subject to mandatory
redemption, in whole or in part, upon repayment of the debentures. The Company
has entered into agreements which, taken collectively, fully and unconditionally
guarantee the preferred securities subject to the terms of each of the
guarantees. The terms of the preferred securities of each trust are as follows:
Issuance Interest Maturity Call Call
Date Amount Rate Date Provision Price
------------------------------------------------------------------------------------------------------------------------------------
I 2/3/1997 30,000 9.75% 2/03/2027 10 year beginning 2007 104.5400% declining to par in 2017
II 7/16/2001 25,000 6 month LIBOR plus 3.75% (5.74%) 7/16/2031 5 year beginning 2006 107.6875% declining to par in 2011
III 7/31/2001 24,450 3 month LIBOR plus 3.58% (5.74%) 7/31/2031 5 year beginning 2006 107.5000% declining to par in 2011
====================================================================================================================================
In the fourth quarter 2003, as a result of applying the provisions of FIN 46,
the Company de-consolidated these subsidiary trusts from its financial
statements. The de-consolidation of the net assets and results of operations of
the trusts had an immaterial impact on the Company's financial statements. The
Company continues to be obligated to repay the debentures held by the trusts and
guarantees repayment of the preferred securities issued by the trusts. The
preferred securities held by the trusts qualify as Tier I capital for the
Company under Federal Reserve Board guidelines.
20
NOTE I: INCOME TAXES
The provision for income taxes for the years ended December 31 is as follows:
(000's omitted) 2004 2003 2002
--------------------------------------------------------------
Current:
Federal $14,677 $11,534 $9,268
State 680 341 161
Deferred:
Federal 1,229 758 3,764
State 57 140 694
--------------------------------------------------------------
Total income taxes $16,643 $12,773 $13,887
==============================================================
Components of the net deferred tax liability, included in other
assets/liabilities, as of December 31 are as follows:
(000's omitted) 2004 2003
--------------------------------------------------------------
Allowance for loan losses $10,644 $10,537
Employee and director benefits 2,599 2,118
Other 1,478 1,501
--------------------------------------------------------------
Deferred tax asset 14,721 14,156
--------------------------------------------------------------
Investment securities 23,273 24,216
Intangible assets 8,145 4,910
Loan origination costs 3,998 3,324
Depreciation 5,264 3,526
Pension 531 1,586
Mortgage servicing rights 177 178
--------------------------------------------------------------
Deferred tax liability 41,388 37,740
--------------------------------------------------------------
Net deferred tax liability ($26,667) ($23,584)
==============================================================
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.
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:
2004 2003 2002
------------------------------------------------------------------------------
Federal statutory income tax rate 35.0% 35.0% 35.0%
Increase (reduction) in taxes resulting from:
Tax-exempt interest (11.3%) (11.2%) (9.9%)
State income taxes, net of federal benefit 0.6% 0.1% 0.6%
Other 0.6% 0.1% 0.8%
------------------------------------------------------------------------------
Effective income tax rate 24.9% 24.0% 26.5%
==============================================================================
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 addition 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, 2004, the Bank
had approximately $27,758,000 in undivided profits legally available for the
payments of dividends.
21
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 is 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
Pension and post-retirement plans The Company provides defined benefit pension
and other post-retirement health and life insurance benefits to qualified
employees and retirees. Using a measurement date of December 31, the following
table shows the funded status of the Company's plans reconciled with amounts
reported in the Company's consolidated statements of condition:
Pension Benefits Post-retirement Benefits
------------------------- -------------------------
(000's omitted) 2004 2003 2004 2003
------------------------------------------------------------------------------ -------------------------
Change in benefit obligation:
Benefit obligation at the beginning of year $42,739 $34,864 $5,083 $4,159
Service cost 2,557 1,831 311 275
Interest cost 2,433 2,157 325 260
Participant contributions 0 0 227 186
Plan amendment/acquisition (881) 493 95 220
Other loss 0 1,218 0 0
Deferred actuarial loss 2,209 3,521 902 391
Benefits paid (1,444) (1,345) (573) (408)
------------------------------------------------------------------------------ -------------------------
Benefit obligation at end of year 47,613 42,739 6,370 5,083
------------------------------------------------------------------------------ -------------------------
Change in plan assets:
Fair value of plan assets at beginning of year 36,784 29,133 0 0
Actual return of plan assets 3,907 6,815 0 0
Participant contributions 0 0 227 186
Employer contributions 2,500 2,181 346 222
Benefits paid (1,444) (1,345) (573) (408)
------------------------------------------------------------------------------ -------------------------
Fair value of plan assets at end of year 41,747 36,784 0 0
------------------------------------------------------------------------------ -------------------------
Unfunded status (5,866) (5,955) (6,370) (5,083)
Unrecognized actuarial loss 14,454 14,057 1,480 615
Unrecognized prior service (benefit) cost (783) 899 331 361
Unrecognized transition liability 0 0 328 369
------------------------------------------------------------------------------ -------------------------
Prepaid (accrued) benefit cost $7,805 $9,001 ($4,231) ($3,738)
============================================================================== =========================
In 2004, the Company amended its defined benefit pension plan to allow for a
cash balance option. Participants in the plan as of December 31, 2003 were given
an option to continue to have their benefits calculated under the traditional
plan formula or have their benefits determined as an account balance under a
cash balance formula. All new participants to the plan will automatically
participate in the cash balance option. In addition, the plan was amended to
provide for the payment of certain benefits formerly accrued and payable under
the Deferred Compensation Plan for Certain Executive Employees.
The Company has unfunded supplemental pension plans for certain key executives.
The projected benefit obligation and accrued benefit cost included in the
preceding table related to these plans was $3,128,000 and $2,798,000 for 2004
and $2,606,000 and $2,245,000 for 2003, respectively. The accumulated benefit
obligation for the defined benefit pension was $40,659,000 and $35,025,000 as of
December 31, 2004 and 2003, respectively.
22
The weighted-average assumptions used to determine the benefit obligations as of
December 31 are as follows:
Pension Benefits Post-retirement Benefits
---------------------- ------------------------
2004 2003 2004 2003
--------------------------------- ----------------------- -----------------------
Discount rate 5.60% 5.90% 5.60% 5.90%
Expected return on plan assets 8.75% 8.75% 0.00% 0.00%
Rate of compensation increase 4.00% 4.00% 0.00% 0.00%
================================= ======================= =======================
The net periodic benefit cost as of December 31 is as follows:
Pension Benefits Post-retirement Benefits
------------------------------ ------------------------------
(000's omitted) 2004 2003 2002 2004 2003 2002
----------------------------------------------- ------------------------------ ------------------------------
Service cost $2,557 $1,831 $1,415 $311 $275 $159
Interest cost 2,433 2,157 1,926 325 260 241
Expected return on plan assets (3,160) (2,567) (2,268) 0 0 0
Net amortization and deferral 1,066 1,142 403 37 8 0
Amortization of prior service cost 155 129 131 30 30 30
Amortization of transition (asset) obligation 0 (4) (19) 41 41 41
Other expense 0 1,218 0 0 0 0
----------------------------------------------- ------------------------------ ------------------------------
Net periodic benefit cost $3,051 $3,906 $1,588 $744 $614 $471
=============================================== ============================== ==============================
Other expense represents a $1.2 million adjustment recorded in the fourth
quarter of 2003 to reflect the proper actuarial impact of indexing salary levels
associated with certain benefits frozen in 1988. The weighted-average
assumptions used to determine the net periodic pension cost for the years ended
December 31 are as follows:
Pension Benefits Post-retirement Benefits
--------------------------- --------------------------
2004 2003 2002 2004 2003 2002
-------------------------------- --------------------------- --------------------------
Discount rate 5.90% 6.10% 6.75% 5.90% 6.10% 6.75%
Expected return on plan assets 8.75% 9.00% 9.00% 0.00% 0.00% 0.00%
Rate of compensation increase 4.00% 4.00% 4.00% 0.00% 0.00% 0.00%
================================ =========================== ==========================
The amount of benefit payments that are expected to be paid over the next ten
years are as follows:
Pension Post-retirement
(000's omitted) Benefits Benefits
----------------------------------------------------
2005 $2,866 $289
2006 2,666 308
2007 3,278 332
2008 4,607 350
2009 3,302 383
2010-2014 $21,541 $2,577
====================================================
The payments reflect future service and are based on various assumptions
including retirement age and form of payment (lump-sum versus annuity). Actual
results may differ from these estimates.
The expected long-term rate of return was estimated by taking into consideration
asset allocation, reviewing historical returns on type of assets held and
current economic factors. The asset allocation for the defined benefit pension
plan as of December 31, by asset category, is as follows:
2004 2003
-----------------------------------------
Equity securities 69% 70%
Debt securities 19% 20%
Cash 12% 10%
-----------------------------------------
Total 100% 100%
=========================================
23
Plan assets include $2,571,000 (6%) and $2,230,000 (6%) of Community Bank
System, Inc. stock at December 31, 2004 and 2003, respectively.
The investment objective for the defined benefit pension plan is to achieve an
average annual total return over a five-year period equal to the assumed rate of
return used in the actuarial calculations. At a minimum performance level, the
portfolio should earn the return obtainable on high quality intermediate-term
bonds. The Company's perspective regarding portfolio assets combines both
preservation of capital and moderate risk-taking. Asset allocation favors
equities, with a target allocation of approximately 75% equity securities, 20%
fixed income securities and 5% cash. No more than 10% of the portfolio can be in
stock of the Company. Due to the volatility in the market, the target allocation
is not always desirable and asset allocations will fluctuate between acceptable
ranges. Prohibited transactions include purchase of securities on margin,
uncovered call options, short sale transactions, and use of real estate,
unlisted limited partnerships, derivative products or venture capital loans as
fixed income investment vehicles.
The Company makes contributions to its funded qualified pension plan as required
by government regulation or as deemed appropriate by management after
considering the fair value of plan assets, expected return on such assets, and
the value of the accumulated benefit obligation. Based upon current information,
the Company does not expect to make contributions to the funded qualified
pension plan in 2005. The Company funds the payment of benefit obligations for
the supplemental pension and post-retirement plans because such plans do not
hold assets for investment.
The assumed health care cost trend rate used in the post-retirement health plan
at December 31,2004 was 9.0% for medical costs and 13.0% for prescription drugs.
The rate to which the cost trend rate is assumed to decline (the ultimate trend
rate) and the year that the rate reaches the ultimate trend rate is 5.0% and
2013, respectively.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A one-percentage-point increase in the trend
rate would increase the service and interest cost components by $35,000 and
increase the benefit obligation by $264,000. A one-percentage-point decrease in
the trend rate would decrease the service and interest cost components by $8,000
and decrease the benefit obligation by $141,000.
401(k) Employee Stock Ownership Plan
The Company has a 401(k) Employee Stock Ownership Plan in which employees can
contribute from 1% to 90% of eligible compensation, with up to 6% being eligible
for matching contributions in the form of Company common stock. The Plan also
permits the Company to distribute a discretionary profit-sharing component in
the form of Company common stock to all participants except certain executive
employees. The expense recognized under this plan for the years ended December
31, 2004, 2003 and 2002 was $1,583,000, $1,309,000 and $1,026,000, respectively.
Deferred Compensation Plan for Certain Executive Employees
The Company has a Deferred Compensation Plan for Certain Executive Employees in
which participants may contribute up to 15% of their eligible compensation less
any amounts contributed to the 401(k) Employee Stock Ownership Plan. Any
discretionary profit-sharing amounts that the executive receives from the
Company must be contributed to the Deferred Compensation Plan in the form of
Company common stock. The expense recognized under this plan for the years ended
December 31, 2004, 2003 and 2002 was $159,000, $119,000 and $68,000,
respectively.
Other Deferred Compensation Arrangements
In addition to the supplemental pension plans for certain executives, the
Company has nonqualified deferred compensation for several former directors,
officers, and key employees. All benefits provided under these plans are
unfunded and payments to plan participants are made by the Company. At December
31, 2004 and 2003, the Company has recorded a liability of $5,373,000 and
$3,775,000, respectively. The expense recognized under these plans for the years
ended December 31, 2004, 2003, and 2002 was $1,727,000, $947,000 and $398,000,
respectively.
Deferred Compensation Plan for Directors
Directors may defer all or a portion of their director fees under the Deferred
Compensation Plan for Directors. Under this plan, there is a separate account
for each participating director which is credited with the amount of shares
which could have been purchased with the director's fees as well as any
dividends on such shares. On the distribution date, the director will receive
common stock equal to the accumulated share balance in his account. As of
December 31, 2004 and 2003, there were 65,090 and 56,901 shares credited to the
participants' accounts, for which a liability of $1,097,000 and $894,000 was
accrued, respectively. The expense recognized under the plan for the years ended
December 31, 2004, 2003 and 2002, was $206,000, $113,000, and $106,000,
respectively.
Director Stock Balance Plan
The Company has a Stock Balance Plan for non-employee directors who have
completed six months of service. The Plan is a nonqualified, noncontributory
defined benefit plan. The Plan provides benefits for service prior to January 1,
1996 based on a predetermined formula and benefits for service after January 1,
1996 based on the performance of the Company's common stock. Participants become
fully vested after six years of service. The directors can elect to receive
offset stock options that
24
may reduce the Company's liability under the Plan. These options vest
immediately and expire one year after the date the director retires or two years
in the event of death. Benefits are payable in the form of cash and/or Company
stock (as elected by the director) on January 1st of the year after the director
retires from the Board. As of December 31, 2004 and 2003, the accrued pension
liability was $287,000 and $251,000, respectively. The expense recognized under
this plan for the years ended December 31, 2004, 2003 and 2002, was $36,000,
$38,000 and $69,000, respectively. The expense and related liability were
calculated using a dividend rate of 3.00%, stock price appreciation of 6.00%,
and a discount rate of 5.6% for 2004, 5.9% for 2003, and 6.10% for 2002.
NOTE L: STOCK-BASED COMPENSATION PLANS
The Company has a long-term incentive program for directors, officers, and key
employees. Under this program the Company authorized 4,024,000 shares of Company
common stock for the grant of incentive stock options, restricted stock awards,
nonqualified stock options, retroactive stock appreciation rights, and offset
options to its Stock Balance Plan (see Note K). The offset options vest and
become exercisable immediately and expire one year after the date the director
retires or two years in the event of death. The remaining options have a
ten-year term. They vest and become exercisable on a grant-by-grant basis,
ranging from immediate vesting to ratably over a five-year period. Option
activity in this plan is as follows:
Weighted
Average
Exercise Price
Options of Shares Shares
Outstanding Outstanding Exercisable
--------------------------------------------------------------------------------
December 31, 2001 1,901,488 $12.67 1,300,700
Granted 413,404 13.20
Exercised (173,286) 8.94
Forfeited (4,278) 12.62
--------------------------------------------------------------------------------
December 31, 2002 2,137,328 $13.07 1,411,006
--------------------------------------------------------------------------------
Granted 843,138 10.89
Exercised (545,158) 10.99
Forfeited (7,826) 14.22
--------------------------------------------------------------------------------
December 31, 2003 2,427,482 $12.78 1,519,893
================================================================================
Granted 669,139 18.37
Exercised (685,143) 8.35
Forfeited (10,546) 16.13
--------------------------------------------------------------------------------
December 31, 2004 2,400,932 $15.59 1,383,369
================================================================================
Approximately 222,000 and 390,000 options were exchanged in 2004 and 2003 in
connection with the Heritage and Grange acquisitions, respectively.
25
At December 31, 2004 the range of exercise prices and other information relating
to the Company's stock options is as follows:
Options Outstanding Options Exercisable
------------------------------------ -------------------
Weighted Weighted Weighted
Average Average Average
Range of Exercise Remaining Exercise
Exercise Price Shares Price Life (years) Shares Price
--------------------------------------------------------- -------------------
$3.65 - $5.15 76,044 $4.12 1.7 76,044 $4.12
$5.15 - $7.72 40,716 6.77 0.8 40,716 6.77
$7.72 - $10.30 69,516 9.13 3.3 69,516 9.13
$10.30 - $12.87 520,454 12.12 5.6 374,419 12.09
$12.87 - $15.44 452,121 13.57 6.1 275,261 13.86
$15.44 - $18.02 782,979 16.32 7.2 489,283 16.71
$18.02 - $20.59 15,000 18.96 8.4 3,000 18.96
$20.59 - $23.17 19,008 22.62 9.4 4,008 22.95
$23.17 - $24.15 425,094 24.15 9.1 51,122 24.15
-------------------------------------------------------------------------------
Total / Average 2,400,932 $15.59 6.6 1,383,369 $13.83
===============================================================================
Information concerning the grants of stock options and restricted stock is as
follows:
Weighted
Weighted Average
Awards Average Grant Date
Granted Exercise Price Fair Value
--------------------------------------------------------------------------------
2004:
Option price = fair market value 446,860 $24.09 $6.05
Option price < fair market value 222,279 $6.87 $13.28
Restricted stock 32,418 $23.76 $23.76
2003:
Option price = fair market value 449,476 $15.78 $4.12
Option price < fair market value 393,662 $5.31 $13.73
Restricted stock 8,000 $19.12 $19.12
2002:
Option price = fair market value 373,404 $13.20 $3.59
Option price < fair market value 40,000 $13.18 $4.33
================================================================================
The Company used the Black-Scholes option-pricing model to estimate the weighted
average grant date fair value. The assumptions used in the model are disclosed
in Note A - Stock Based Compensation. Compensation expense related to restricted
stock recognized in the income statement for the years ended December 31, 2004,
2003, and 2002 was $372,000, $105,000 and $353,000, respectively.
On February 21, 1995, the Company adopted a Stockholder Protection Rights
Agreement. Under the Plan, each stockholder received one right, representing the
right to purchase one share of common stock for $42.50 for each share of stock
owned. All of the rights expire on February 21, 2005, but the Company may redeem
the rights earlier for $.005 per right, subject to certain limitations. Rights
will become exercisable if a person or group acquires 15% or more of the
Company's outstanding shares. Until that time, the rights will trade with the
common stock; any transfer of common stock will also constitute a transfer of
the associated right. If the rights become exercisable, they will begin to trade
apart from the common stock. If one of a number of "flip-in events" occurs, each
right will entitle the holder to purchase common stock having a market value
equivalent of two times the exercise price. In January 2005, the Board of
Directors voted to permit the agreement to expire in February 2005.
26
NOTE M: EARNINGS PER SHARE
The following is a reconciliation of basic to diluted earnings per share for the
years ended December 31:
Per Share
(000's omitted, except per share data) Income Shares Amount
--------------------------------------------------------------------------------
Year Ended December 31,2004
Basic EPS $50,196 29,916 $1.68
Stock options 754
-------------------------------------------------------------------
Diluted EPS $50,196 30,670 $1.64
===================================================================
Year Ended December 31,2003
Basic EPS $40,380 26,299 $1.54
Stock options 736
-------------------------------------------------------------------
Diluted EPS $40,380 27,035 $1.49
===================================================================
Year Ended December 31,2002
Basic EPS $38,517 25,946 $1.48
Stock options 388
-------------------------------------------------------------------
Diluted EPS $38,517 26,334 $1.46
===================================================================
There were 424,594, 0 and 469,744 anti-dilutive stock options outstanding for
the years ended December 31, 2004, 2003 and 2002, respectively.
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
and standby letters of credit. Commitments to extend credit are agreements to
lend to customers, generally having fixed expiration dates or other termination
clauses that may require payment of a fee. These commitments consist principally
of unused commercial and consumer credit lines. Standby letters of credit
generally are contingent upon the failure of the customer to perform according
to the terms of an underlying contract with a third party. The credit risks
associated with commitments to extend credit and standby letters of credit are
essentially the same as that involved with extending loans to customers and are
subject to normal credit policies. Collateral may be obtained based on
management's assessment of the customer's creditworthiness. The fair value of
these commitments is immaterial for disclosure in accordance with FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others". The
contract amount of commitment and contingencies is as follows:
(000's omitted) 2004 2003
------------------------------------------------------------
Commitments to extend credit $429,751 $315,898
Standby letters of credit 22,948 19,163
------------------------------------------------------------
Total $452,699 $335,061
============================================================
The fair value of these financial instruments approximates carrying value.
The Company has unused lines of credit of $47,000,000 at December 31, 2004. The
Company has unused borrowing capacity of approximately $134,492,000 through
collateralized transactions with the Federal Home Loan Bank and $11,325,000
through collateralized transactions with the Federal Reserve 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 of December 23, 2004 through January 5, 2005 was
$58,779,000 of which $2,000,000 was required to be on deposit with the Federal
Reserve Bank of New York. The remaining $56,779,000 was represented by cash on
hand.
27
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
$2,486,000, $1,940,000 and $1,896,000 in 2004, 2003 and 2002, respectively. The
future minimum rental commitments as of December 31, 2004 for all non-cancelable
operating leases are as follows:
2005 $2,204
2006 2,022
2007 1,788
2008 1,280
2009 1,002
Thereafter 4,374
----------------------------
Total $12,670
============================
NOTE P: REGULATORY MATTERS
The Company and the Bank are 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 Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Company's and the Bank's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Company's and 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 Company and Bank to maintain minimum total core capital to risk
weighted assets of 8%, and tier I capital to risk weighted assets and tier I
capital to average assets of 4%. Management believes, as of December 31, 2004,
that the Company and Bank meet all capital adequacy requirements to which they
are subject.
As of December 31, 2004 and 2003, the most recent notification from the Office
of the Comptroller of the Currency categorized the Company and Bank as "well
capitalized" under the regulatory framework for prompt corrective action. To be
categorized as "well capitalized," the Company and Bank must maintain minimum
total core capital to risk weighted assets of 10%, tier I capital to risk
weighted assets of 6% and tier I capital to average assets of 5%. There are no
conditions or events since that notification that management believes have
changed the institution's category. In addition, there were no significant
capital requirements imposed or agreed to during the regulatory approval process
of any of our acquisitions.
The capital ratios and amounts of the Company and the Bank as of December 31 are
presented below:
2004 2003
--------------------- ---------------------
(000's omitted) Company Bank Company Bank
-------------------------------------------- --------------------- ---------------------
Tier 1 capital to average assets
Amount $284,928 $276,654 $249,641 $245,809
Ratio 6.94% 6.74% 7.26% 7.28%
Minimum required amount $164,229 $164,069 $137,607 $134,977
Tier 1 capital to risk weighted assets
Amount $284,928 $276,654 $249,641 $245,809
Ratio 11.93% 11.61% 11.76% 11.63%
Minimum required amount $95,536 $95,337 $84,916 $84,576
Total core capital to risk weighted assets
Amount $314,783 $306,447 $276,177 $272,339
Ratio 13.18% 12.86% 13.01% 12.88%
Minimum required amount $191,072 $190,675 $169,831 $169,151
28
NOTE Q: PARENT COMPANY STATEMENTS
The condensed balance sheets of the parent company at December 31 is as follows:
(000's omitted) 2004 2003
--------------------------------------------------------------------------------
Assets:
Cash $11,772 $24,429
Investment securities 2,885 2,885
Investment in and advances to subsidiaries 548,781 482,407
Other assets 3,562 3,023
--------------------------------------------------------------------------------
Total assets $567,000 $512,744
================================================================================
Liabilities and shareholders' equity:
Accrued interest and other liabilities $8,926 $7,526
Borrowings 83,446 100,390
Shareholders' equity 474,628 404,828
--------------------------------------------------------------------------------
Total liabilities and shareholders' equity $567,000 $512,744
================================================================================
The condensed statements of income of the parent company for the years ended
December 31 is as follows:
(000's omitted) 2004 2003 2002
--------------------------------------------------------------------------------------
Revenues:
Dividends from subsidiaries $41,500 $42,771 $29,587
Interest on investments 179 6 10
Other income 28 0 0
--------------------------------------------------------------------------------------
Total revenues 41,707 42,777 29,597
--------------------------------------------------------------------------------------
Expenses:
Interest on long term notes and debentures 6,061 5,765 6,112
Other expenses 13 84 9
--------------------------------------------------------------------------------------
Total expenses 6,074 5,849 6,121
--------------------------------------------------------------------------------------
Income before tax benefit and equity in undistributed
net income of subsidiaries 35,633 36,928 23,476
Income tax benefit 1,461 1,364 1,572
--------------------------------------------------------------------------------------
Income before equity in undistributed net income
of subsidiaries 37,094 38,292 25,048
Equity in undistributed net income of subsidiaries 13,102 2,088 13,469
--------------------------------------------------------------------------------------
Net income $50,196 $40,380 $38,517
======================================================================================
29
The statements of cash flows of the parent company for the years ended December
31 is as follows:
(000's omitted) 2004 2003 2002
------------------------------------------------------------------------------------------------------------------------
Operating activities:
Net income $50,196 $40,380 $38,517
Adjustments to reconcile net income to net cash provided by operating activities
Equity in undistributed net income of subsidiaries (13,102) (2,088) (13,469)
Net change in other assets and other liabilities 3,157 1,633 (886)
------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 40,251 39,925 24,162
------------------------------------------------------------------------------------------------------------------------
Investing activities:
Purchase of investment securities 0 (227) (76)
Capital contributions to subsidiaries 0 (33,131) (831)
------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities 0 (33,358) (907)
------------------------------------------------------------------------------------------------------------------------
Financing activities:
Net change in borrowings (17,000) 20,000 (6,100)
Issuance of common stock 5,344 4,819 1,151
Purchase of treasury stock (21,709) (8,490) 0
Cash dividends paid (19,543) (15,466) (14,228)
------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by financing activities (52,908) 863 (19,177)
------------------------------------------------------------------------------------------------------------------------
Change in cash and cash equivalents (12,657) 7,430 4,078
Cash and cash equivalents at beginning of year 24,429 16,999 12,921
------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $11,772 $24,429 $16,999
========================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid for interest $5,943 $5,841 $6,412
Supplemental disclosures of non-cash financing activities
Dividends declared and unpaid $5,515 $4,529 $3,760
30
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule
13a - 15(f). Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under the framework in Internal Control -
Integrated Framework, our management concluded that our internal control over
financial reporting was effective as of December 31, 2004.
Our management's assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2004 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report which is included herein.
Community Bank System, Inc.
Date: March 11, 2005
/s/ Sanford A. Belden
---------------------------
Sanford A. Belden,
President, Chief Executive Officer and Director
/s/ Scott A. Kingsley
------------------------
Scott A. Kingsley,
Treasurer and Chief Financial Officer
31
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Community Bank System, Inc.
We have completed an integrated audit of Community Bank System, Inc.'s 2004
consolidated financial statements and of its internal control over financial
reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.
Consolidated financial statements
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Community Bank System, Inc. and its subsidiaries at December 31, 2004 and 2003,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2004 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 conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
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 of financial statements 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 provide a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management's assessment, included in Management's Report
on Internal Control Over Financial Reporting appearing under Item 8, that the
Company maintained effective internal control over financial reporting as of
December 31, 2004 based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control - Integrated Framework
issued by the COSO. The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Syracuse, New York
March 11, 2005
32
TWO YEAR SELECTED QUARTERLY DATA (Unaudited)
2004 Results 4th 3rd 2nd 1st
(000's omitted, except per share data) Quarter Quarter Quarter Quarter Total
----------------------------------------------------------------------------------------------------------------------
Net interest income $ 38,575 $ 39,057 $ 37,457 $ 35,954 $151,043
Provision for loan losses 2,100 2,300 2,300 2,050 8,750
----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 36,475 36,757 35,157 33,904 142,293
Non-interest income 10,832 12,164 10,919 10,530 44,445
Operating expenses 30,442 29,926 29,775 29,756 119,899
----------------------------------------------------------------------------------------------------------------------
Income before income taxes 16,865 18,995 16,301 14,678 66,839
Income taxes 4,199 4,761 4,160 3,523 16,643
----------------------------------------------------------------------------------------------------------------------
Net income $ 12,666 $ 14,234 $ 12,141 $ 11,155 $ 50,196
======================================================================================================================
Basic earnings per share $ 0.41 $ 0.47 $ 0.41 $ 0.39 $ 1.68
Diluted earnings per share $ 0.40 $ 0.45 $ 0.40 $ 0.38 $ 1.64
======================================================================================================================
2003 Results 4th 3rd 2nd 1st
(000's omitted, except per share data) Quarter Quarter Quarter Quarter Total
----------------------------------------------------------------------------------------------------------------------
Net interest income $ 34,703 $ 32,539 $ 32,102 $ 32,484 $131,828
Provision for loan losses 3,093 2,029 2,673 3,400 11,195
----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 31,610 30,510 29,429 29,084 120,633
Non-interest income 7,698 9,779 8,947 8,807 35,231
Operating expenses 27,879 25,206 25,179 24,447 102,711
----------------------------------------------------------------------------------------------------------------------
Income before income taxes 11,429 15,083 13,197 13,444 53,153
Income taxes 2,759 3,354 3,165 3,495 12,773
----------------------------------------------------------------------------------------------------------------------
Net income $ 8,670 $ 11,729 $ 10,032 $ 9,949 $ 40,380
======================================================================================================================
Basic earnings per share $ 0.32 $ 0.45 $ 0.38 $ 0.38 $ 1.54
Diluted earnings per share $ 0.31 $ 0.44 $ 0.38 $ 0.38 $ 1.49
======================================================================================================================
33
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
COMMUNITY BANK SYSTEM, INC.
By: /s/ Sanford A. Belden
-------------------------
Sanford A. Belden
President, Chief Executive Officer and Director
May 11, 2005
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 11th day of May 2005.
/s/ James A. Gabriel
-----------------------------
James A. Gabriel, Director and
Chairman of the Board of Directors
/s/ Scott A. Kingsley
-----------------------------
Scott A. Kingsley
Treasurer and Chief Financial Officer
Directors:
/s/ Brian R. Ace
-----------------------------
Brian R. Ace, Director
/s/ John M. Burgess
-----------------------------
John M. Burgess, Director
/s/ Paul M. Cantwell, Jr.
-----------------------------
Paul M. Cantwell, Jr., Director
/s/ William M. Dempsey
-----------------------------
William M. Dempsey, Director
/s/ Nicholas A. DiCerbo
-----------------------------
Nicholas A. DiCerbo, Director
/s/ Lee T. Hirschey
-----------------------------
Lee T. Hirschey, Director
/s/ Harold S. Kaplan
-----------------------------
Harold S. Kaplan, Director
/s/ Saul Kaplan
-----------------------------
Saul Kaplan, Director
/s/ Charles E. Parente
-----------------------------
Charles E. Parente, Director
/s/ David C. Patterson
-----------------------------
David C. Patterson, Director
/s/ Peter A. Sabia
-----------------------------
Peter A. Sabia, Director
/s/ Sally A. Steele
-----------------------------
Sally A. Steele, Director
34
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
A. Documents Filed
1. The following consolidated financial statements of Community Bank
System, Inc. and subsidiaries are included in Item 8:
- Consolidated Statements of Condition,
December 31, 2004 and 2003
- Consolidated Statements of Income,
Years ended December 31, 2004, 2003, and 2002
- Consolidated Statements of Changes in Shareholders' Equity,
Years ended December 31, 2004, 2003, and 2002
- Consolidated Statements of Comprehensive Income,
Years ended December 31, 2004, 2003, and 2002
- Consolidated Statement of Cash Flows,
Years ended December 31, 2004, 2003, and 2002
- Notes to Consolidated Financial Statements,
December 31, 2004
- Report of Independent Registered Public Accounting Firm
- Quarterly selected data,
Years ended December 31, 2004 and 2003 (unaudited)
2. Schedules are omitted since the required information is either not
applicable or shown elsewhere in the financial statements.
3. The exhibits filed as part of this report and exhibits incorporated
herein by reference to other documents are listed below:
2.1 Agreement and Plan of Merger, dated January 6, 2004 and amended
March 11, 2004, by and among Community Bank System, Inc., Community
Bank, N.A., and First Heritage Bank. Incorporated by reference to
Annex A to the proxy statement/prospectus included in Registration
Statement on Form S-4 filed on March 12, 2004, as amended
(Registration No. 333-113581).
2.2 Amended and Restated Agreement and Plan of Merger, dated June 7,
2003, by and between Community Bank System, Inc. and Grange National
Banc Corp. Incorporated by reference to Annex A to the proxy
statement/prospectus included in the Registration Statement on Form
S-4 filed on August 20, 2003, as amended (Registration No.
333-107949).
2.3 Agreement and Plan of Merger, dated May 6, 2003, by and among
the Registrant, PB Acquisition Corp. and Peoples Bankcorp, Inc.
Incorporated by reference to Exhibit 2.1 to the Current Report on
Form 8-K of the Registrant filed on May 8, 2003 (Registration No.
001-13695).
2.4 Agreement and Plan of Merger, dated November 29, 2000, by and
between Community Bank System, Inc. and First Liberty Bank Corp.
Incorporated by reference to Exhibit No. 2.1 to the Current Report
on Form 8-K filed on December 20, 2000 (Registration No. 001-13695).
2.5 Agreement regarding the Agreement and Plan of Merger, dated
September 26, 2000, by and between Community Bank, N.A. and The
Citizens National Bank of Malone. Incorporated by reference to
Exhibit No. 10.1 to the Registration Statement on Form S-4 filed on
October 20, 2000 (Registration No. 333-48374).
35
2.6 Purchase and Assumption Agreement, dated December 6, 1994, by
and between Community Bank System, Inc. and The Chase Manhattan
Bank, N.A. Incorporated by reference to Exhibit No. 10.01 to the
Registration Statement on Form S-2 filed on April 11, 1995
(Registration No. 033-58539).
3.1 Certificate of Amendment of Certificate of Incorporation of
Community Bank System, Inc. Incorporated by reference to Exhibit No.
3.1 to the Quarterly Report on Form 10-Q filed on May 5, 2004
(Registration No. 001-13695).
3.2 Bylaws of Community Bank System, Inc., as amended. Incorporated
by reference to Exhibit No. 3.2 to the Registration Statement on
Form S-4 filed on October 20, 2000 (Registration No. 333-48374).
4.1 Junior Subordinated Deferrable Interest Debentures, dated as
February 3, 1997, by and between Community Bank System, Inc. and The
Chase Manhattan Bank. Incorporated by reference to Exhibit No. 4.1
to the Registration Statement on Form S-4 filed on June 25, 1997
(Registration No. 333-30045).
4.2 Amended and Restated Declaration of Trust of Community Capital
Trust I, dated as February 3, 1997, by and between Community Bank
System, Inc. and The Chase Manhattan Bank. Incorporated by reference
to Exhibit No. 4.5 to the Registration Statement on Form S-4 filed
on June 25, 1997 (Registration No. 333-30045).
4.3 Form of Common Stock Certificate. Incorporated by reference to
Exhibit No. 4.1 to the Amendment No. 1 to the Registration Statement
on Form S-3 filed on October 24, 2001 (Registration No. 333-68866).
10.1 Employment Agreement, effective March 1, 2004, by and between
Community Bank System, Inc. and Sanford A. Belden. Incorporated by
reference to Exhibit No. 10.1 to the Annual Report on Form 10-K
filed on March 12, 2004 (Registration No. 001-13695). **
10.2 Post-2004 Supplemental Retirement Agreement, effective January
1, 2005, by and between Community Bank System, Inc., Community Bank
N.A. and Sanford Belden. Incorporated by reference to Exhibit No.
10.2 to the Annual Report on Form 10-K filed on March 15, 2005
(Registration No. 001-13695). **
10.3 Pre-2005 Supplemental Retirement Agreement, effective December
31, 2004, by and between Community Bank System, Inc., Community Bank
N.A. and Sanford Belden. Incorporated by reference to Exhibit No.
10.2 to the Annual Report on Form 10-K filed on March 15, 2005
(Registration No. 001-13695). **
10.4 Employment Agreement, effective March 8, 2004, by and between
Community Bank System, Inc. and Mark E. Tryniski. Incorporated by
reference to Exhibit No. 10.4 to the Annual Report on Form 10-K
filed on March 12, 2004 (Registration No. 001-13695). **
10.5 Supplemental Retirement Plan Agreement, effective July 1, 2003,
by and between Community Bank System Inc. and Mark E. Tryniski.
Incorporated by reference to Exhibit No. 10.5 to the Annual Report
on Form 10-K filed on March 12, 2004 (Registration No. 001-13695).
**
10.6 Employment Agreement, effective August 2, 2004, by and between
Community Bank System, Inc., Community Bank, N.A. and Scott A.
Kingsley. Incorporated by reference to Exhibit No. 10.3 to the
Quarterly Report on Form 10-Q filed on August 4, 2004 (Registration
No. 001-13695). **
10.7 Supplemental Retirement Plan Agreement, effective August 2,
2004, by and between Community Bank System Inc. and Scott A.
Kingsley. Incorporated by reference to Exhibit No. 10.4 to the
Quarterly Report on Form 10-Q filed on August 4, 2004 (Registration
No. 001-13695). **
10.8 Agreement dated December 23, 2002, by and between Community
Bank System, Inc., Community Bank N.A. and David G. Wallace.
Incorporated by reference to Exhibit 10.2 to the Annual Report on
Form 10-K filed on March 23, 2003 (Registration No. 001-13695). **
10.9 Employment Agreement, effective August 1, 2004, by and between
Community Bank System, Inc., Community Bank, N.A. and Brian D.
Donahue. Incorporated by reference to Exhibit No. 10.1 to the
Quarterly Report on Form 10-Q filed on November 8, 2004
(Registration No. 001-13695). **
10.10 Employment Agreement, effective March 20, 2003, by and between
Community Bank System, Inc. and Michael A. Patton. Incorporated by
reference to Exhibit No. 10.8 to the Annual Report on Form 10-K
filed on March 12, 2004 (Registration No. 001-13695). **
36
10.11 Supplemental Retirement Plan Agreement, effective February 1,
2004, by and between Community Bank System Inc. and Michael A.
Patton. Incorporated by reference to Exhibit No. 10.9 to the Annual
Report on Form 10-K filed on March 12, 2004 (Registration No.
001-13695). **
10.12 Employment Agreement, effective March 20, 2003, by and between
Community Bank System, Inc. and James A. Wears. Incorporated by
reference to Exhibit No. 10.6 to the Annual Report on Form 10-K
filed on March 12, 2004 (Registration No. 001-13695). **
10.13 Supplemental Retirement Plan Agreement, effective February 1,
2004, by and between Community Bank System Inc. and James A. Wears.
Incorporated by reference to Exhibit No. 10.7 to the Annual Report
on Form 10-K filed on March 12, 2004 (Registration No. 001-13695).
**
10.14 Employment Agreement, effective November 21, 2003, by and
between Community Bank System, Inc. and Thomas A. McCullough.
Incorporated by reference to Exhibit No. 10.10 to the Annual Report
on Form 10-K filed on March 12, 2004 (Registration No. 001-13695).
**
10.15 Supplemental Retirement Plan Agreement, effective March 26,
2003, by and between Community Bank System Inc. and Thomas
McCullough. Incorporated by reference to Exhibit No. 10.11 to the
Annual Report on Form 10-K filed on March 12, 2004 (Registration No.
001-13695). **
10.16 Employment Agreement, effective May 1, 2004, by and between
Community Bank System, Inc., Community Bank N.A. and Steven R.
Tokach. Incorporated by reference to Exhibit No. 10.2 to the
Quarterly Report on Form 10-Q filed on August 4, 2004 (Registration
No. 001-13695). **
10.17 Employment Agreement, effective September 1, 2002, by and
between Community Bank System, Inc., Community Bank N.A. and Timothy
J. Baker. Incorporated by reference to Exhibit No. 10.2 to the
Quarterly Report on Form 10-Q filed on November 8, 2004
(Registration No. 001-13695). **
10.18 Change of Control Agreement, effective November 30, 2001 by
and between Community Bank System, Inc., Community Bank N.A. and W.
Valen McDaniel. Incorporated by reference to Exhibit No. 10.2 to the
Annual Report on Form 10-K filed on March 15, 2005 (Registration No.
001-13695). **
10.19 Employment Agreement, effective September 1, 2002, by and
between Community Bank System, Inc., Community Bank N.A. and Joseph
J. Lemchak. Incorporated by reference to Exhibit No. 10.4 to the
Quarterly Report on Form 10-Q filed on November 8, 2004
(Registration No. 001-13695). **
10.20 Employment Agreement, effective October 1, 2004, by and
between Community Bank System, Inc., Community Bank N.A. and J.
David Clark. Incorporated by reference to Exhibit No. 10.3 to the
Quarterly Report on Form 10-Q filed on November 8, 2004
(Registration No. 001-13695). **
10.21 Employment Agreement, effective May 15, 2004, by and between
Community Bank System, Inc., Community Bank N.A. and Robert P.
Matley. Incorporated by reference to Exhibit No. 10.2 to the Annual
Report on Form 10-K filed on March 15, 2005 (Registration No.
001-13695). **
10.22 Change of Control Agreement, effective August 20, 2002 by and
between Community Bank System, Inc., Community Bank N.A. and J.
Michael Wilson. Incorporated by reference to Exhibit No. 10.2 to the
Annual Report on Form 10-K filed on March 15, 2005 (Registration No.
001-13695). **
10.23 Employment Agreement, effective April 3, 2000, by and between
Community Bank System, Inc. and David J. Elias. Incorporated by
reference to Exhibit No. 10.12 to the Annual Report on Form 10-K
filed on March 12, 2004 (Registration No. 001-13695). **
10.24 2004 Long-Term Incentive Compensation Program. Incorporated by
reference to Appendix A to the Definitive Proxy Statement on
Schedule 14A filed on April 15, 2004 (Registration No. 001-13695).
**
10.25 Stock Balance Plan for Directors, as amended. Incorporated by
reference to Annex I to the Definitive Proxy Statement on Schedule
14A filed on March 31, 1998 (Registration No. 001-13695). **
10.26 Deferred Compensation Plan for Directors, as amended.
Incorporated by reference to Annex I to the Definitive Proxy
Statement on Schedule 14A filed on March 31, 1998 (Registration No.
001-13695). **
10.27 Community Bank System, Inc. Pension Plan Amended and Restated
as of January 1, 2004. Incorporated by reference to Exhibit No. 10.2
to the Annual Report on Form 10-K filed on March 15, 2005
(Registration No. 001-13695). **
37
21.1 Subsidiaries of Community Bank System, Inc.
Jurisdiction of
Name Incorporation
---- ---------------
Community Bank, N.A New York
Community Capital Trust I Delaware
Community Capital Trust II Delaware
Community Statutory Trust III Connecticut
Community Financial Services, Inc. New York
Benefit Plans Administrative Services, Inc. New York
Benefit Plans Administrative Services LLC New York
Harbridge Consulting Group LLC New York
CBNA Treasury Management Corporation New York
Community Investment Services, Inc. New York
CBNA Preferred Funding Corp. Delaware
CFSI Close-Out Corp. New York
Elias Asset Management, Inc. Delaware
First Liberty Service Corporation Delaware
First of Jermyn Realty Co. Delaware
23.1 Consent of PricewaterhouseCoopers LLP. *
31.1 Certification of Sanford A. Belden, President and Chief
Executive Officer of the Registrant, pursuant to Rule 13a-15(e) or
Rule 15d-15(e) under the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
31.2 Certification of Scott A. Kingsley, Treasurer and Chief
Financial Officer of the Registrant, pursuant to Rule 13a-15(e) or
Rule 15d-15(e) under the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
32.1 Certification of Sanford A. Belden, President and Chief
Executive Officer of the Registrant, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. *
32.2 Certification of Scott A. Kingsley, Treasurer and Chief
Financial Officer of the Registrant, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. *
* Filed herewith
**Denotes management contract or compensatory plan or arrangement
B. Reports on Form 8-K
o Form 8-K related to quarterly earnings press release was filed
on January 25, 2005.
o Form 8-K related to quarterly earnings press release was filed
on October 25, 2004.
C. Not applicable
38