<PAGE> 1
FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION STATEMENT FILE NO. 333-48374
PROXY STATEMENT/PROSPECTUS SUPPLEMENT
December 8, 2000
[CITIZENS NATIONAL BANK LOGO]
To Our Shareholders:
On or about November 13, 2000, we mailed to you a notice of a special
meeting and proxy statement/prospectus dated November 9, 2000, relating to our
Special Meeting of Shareholders to be held on December 19, 2000, at 7:00 p.m.,
Eastern Time, at the Malone Lodge of Elks, 67 Elm Street, Malone, New York
12953. The Special Meeting was called for the purpose of voting on a proposal to
approve an Agreement and Plan of Merger with Community Bank System, Inc. and
Community Bank, N.A. THE SPECIAL MEETING IS STILL SCHEDULED TO BE HELD ON
DECEMBER 19, 2000 AT THE SAME TIME AND LOCATION. This document supplements our
November 9, 2000 proxy statement/prospectus.
After the mailing of the November 9, 2000 proxy statement/prospectus,
Community Bank System and First Liberty Bank Corp., a bank holding company with
its principal executive offices located in Jermyn, Pennsylvania, entered into an
Agreement and Plan of Merger, dated as of November 29, 2000. This merger
agreement contemplates that First Liberty will merge with and into Community
Bank System, subject to shareholder and regulatory approvals and other
conditions. This supplement will discuss the proposed merger of Community Bank
System and First Liberty and how it will impact the decision before you, as
Citizens National Bank shareholders, to approve the merger agreement between
Community Bank and Citizens National Bank.
As of the date of this supplement and after a review of the terms of
Community Bank System's proposed merger with First Liberty, your board of
directors continues to believe the merger between Community Bank and Citizens
National Bank to be in the best interests of our shareholders and continues to
unanimously support the merger.
As of December 1, 2000, we had received proxies from holders of
approximately 80% of the outstanding shares of Citizens National Bank common
stock, and approximately 78% of the outstanding shares had been voted in favor
of the merger agreement. The approval of the merger agreement requires the
affirmative vote of at least two-thirds of all of the outstanding shares of
Citizens National Bank common stock. Therefore, unless a substantial number of
the votes are changed, we expect that the merger agreement will be approved by
the Citizens National Bank shareholders and the merger will be completed.
We enclose a new proxy card respecting the merger between Community
Bank and Citizens National Bank. IF YOU HAVE ALREADY COMPLETED AND RETURNED THE
PROXY CARD WE SENT TO YOU WITH THE NOVEMBER 9, 2000 PROXY STATEMENT/PROSPECTUS
AND YOU DO NOT WISH TO CHANGE YOUR VOTE ON THE MERGER, YOU DO NOT NEED TO DO
ANYTHING. Your previously submitted proxy card will be voted as you have
directed. If, however, you wish to change your vote on the merger, please
complete the enclosed proxy card and return it to us promptly. If you have not
yet voted on the proposal to approve the merger agreement and wish to do so at
the present time, you may complete either the earlier proxy card or the enclosed
proxy card and return it in the accompanying postage-paid envelope. If you
attend the Special Meeting in person, you may revoke your proxy at the meeting
and vote in person.
We encourage you to read this entire document carefully. For more
information about the merger, please review the November 9, 2000 proxy
statement/prospectus that we previously sent to you and the merger agreement
attached as Annex A to that document.
On behalf of the board of directors, I thank you for your support and
urge you to vote FOR approval.
Sincerely,
/s/ Paul M. Cantwell, Jr.
Paul M. Cantwell, Jr.
President
------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE COMMUNITY BANK SYSTEM COMMON STOCK
TO BE ISSUED OR DETERMINED IF THE NOVEMBER 9, 2000 PROXY STATEMENT/PROSPECTUS OR
THIS SUPPLEMENT IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE SHARES OF COMMUNITY BANK SYSTEM COMMON STOCK TO BE ISSUED IN THE MERGER ARE
NOT SAVINGS OR DEPOSIT ACCOUNTS OR OTHER OBLIGATIONS OF ANY BANK, AND THEY ARE
NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
------------------------------
Proxy statement/prospectus supplement dated December 8, 2000.
First mailed to Citizens National Bank shareholders
on or about December 8, 2000.
<PAGE> 2
QUESTIONS AND ANSWERS ABOUT THIS SUPPLEMENT
Q: WHY DID I RECEIVE THIS SUPPLEMENT?
A: After we mailed the November 9, 2000 proxy statement/prospectus, Community
Bank System and First Liberty entered into a merger agreement on November 29,
2000. If the proposed merger between Community Bank and Citizens National Bank
is completed, you would receive shares of Community Bank System common stock and
become a stockholder of Community Bank System, unless you had properly exercised
your dissenters' rights. Because the Community Bank System - First Liberty
merger, if completed, would significantly change the size and scope of Community
Bank System and its business operations, we have determined to provide you
certain information concerning the merger between Community Bank System and
First Liberty to help you make an informed decision on how to vote on the
proposal to approve the merger agreement among Community Bank System, Community
Bank and Citizens National Bank. You should read this supplement in conjunction
with the November 9, 2000 proxy statement/prospectus.
THROUGHOUT THIS SUPPLEMENT, WE WILL REFER TO THE PENDING MERGER BETWEEN
COMMUNITY BANK AND CITIZENS NATIONAL BANK AS THE "MERGER" AND THE RELATED MERGER
AGREEMENT AS THE "MERGER AGREEMENT." WE WILL REFER TO THE PROPOSED MERGER
BETWEEN COMMUNITY BANK SYSTEM AND FIRST LIBERTY AS THE "FIRST LIBERTY MERGER"
AND THE MERGER AGREEMENT FOR THAT TRANSACTION AS THE "FIRST LIBERTY MERGER
AGREEMENT."
Q: HAVE THE TERMS OF THE PROPOSED MERGER BETWEEN COMMUNITY BANK AND CITIZENS
NATIONAL BANK CHANGED?
A: No. The terms of the merger agreement remain the same. For a description of
the terms of the merger agreement and other information relating to the merger,
please see the November 9, 2000 proxy statement/prospectus previously sent to
you.
Q: COULD YOU TELL ME MORE ABOUT THE PROPOSED FIRST LIBERTY MERGER?
A: The First Liberty merger agreement provides for a merger of First Liberty
with and into Community Bank System, with Community Bank System continuing as
the surviving corporation. Following that merger, First Liberty Bank & Trust, a
Pennsylvania banking subsidiary of First Liberty, will merge with and into
Community Bank, with Community Bank being the continuing bank. If the First
Liberty merger is completed, each issued and outstanding share of First Liberty
common stock (other than shares for which dissenters' rights have properly been
exercised) will be converted into 0.56 of a share of Community Bank System
common stock and cash in lieu of fractional shares, if any. The parties intend
that this stock-for-stock merger be accounted for as a pooling of interests and
qualify as a tax-free exchange to shareholders of First Liberty. For further
details concerning the key terms of the proposed First Liberty merger, please
see "Proposed Merger between Community Bank System and First Liberty."
BECAUSE THE SPECIAL MEETING WILL PRECEDE THE FIRST LIBERTY MERGER, IF
YOU VOTE TO APPROVE THE MERGER AGREEMENT YOU MUST BE WILLING TO ACCEPT AN
OWNERSHIP INTEREST IN COMMUNITY BANK SYSTEM WITHOUT REGARD TO WHETHER THE FIRST
LIBERTY MERGER WILL BE SUCCESSFULLY COMPLETED.
Q: HAS THE BOARD OF DIRECTORS OF CITIZENS NATIONAL BANK CHANGED ITS
RECOMMENDATION CONCERNING THE MERGER?
A: No. At its meeting held on November 28, 2000, your board of directors
considered the terms of the proposed First Liberty merger and its effect on the
merger. At this meeting, the board unanimously confirmed its recommendation that
the Citizens National Bank shareholders vote in favor of approving the merger
agreement. For further details, please see "Recommendation of the Citizens
National Bank Board."
2
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Q: AT OUR SPECIAL MEETING, ARE WE GOING TO BE ASKED TO VOTE ON THE PROPOSED
FIRST LIBERTY MERGER?
A: No. Citizens National Bank is holding the Special Meeting so that you can
consider and vote upon the merger between Community Bank and Citizens National
Bank. You will not vote on the First Liberty merger at the Special Meeting. Only
at some time in the future will Community Bank System stockholders be requested
to consider and vote upon the First Liberty merger. Depending on the timing of
the closing of the merger in relation to the record date for the special meeting
of stockholders of Community Bank System to be called for the purpose of
approving the First Liberty merger agreement, you may or may not be able to vote
on the First Liberty merger as a stockholder of Community Bank System.
Q: MUST I RETURN ANOTHER PROXY CARD?
A: No. After you have carefully read this supplement, you do not need to do
anything if you have already returned your proxy card and do not wish to change
your vote on the merger. If, however, you have not yet voted on the merger and
you wish to vote now, or if you wish to change your vote on the merger, please
indicate on the enclosed proxy card how you want your shares to be voted, then
sign, date and mail it in the accompanying postage-paid envelope as soon as
possible, so that your shares may be represented and voted at the Special
Meeting. If you sign and send in your proxy and do not indicate how you want to
vote, your proxy will be counted as a vote in favor of the proposal.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: Yes. There are three ways for you to revoke your proxy and change your vote.
First, you may send a later-dated, signed proxy card before the Special Meeting.
Second, you may attend the Special Meeting in person and vote. Third, you may
revoke your proxy by filing a written revocation of the proxy with Secretary of
Citizens National Bank at its principal executive offices prior to the Special
Meeting. If you have instructed a broker to vote your shares, you must follow
directions received from your broker to change your vote.
WHO CAN HELP ANSWER YOUR QUESTIONS
If you want additional copies of this document, or if you want to ask
any questions about matters described in this supplement, you should contact:
Patricia Prue, Vice President/Cashier
or
Paul M. Cantwell, Jr., Chairman and President
The Citizens National Bank of Malone
6 Elm Street
Malone, New York 12953
Telephone: (518) 483-3400 (for Patricia Prue)
(518) 483-1511 (for Paul M. Cantwell, Jr.)
3
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TABLE OF CONTENTS
Questions and Answers about this Supplement ........................... 2
Important ............................................................. 5
The Special Meeting of the Shareholders of Citizens National Bank ..... 5
Recommendation of the Citizens National Bank Board .................... 5
Update of Regulatory Approvals and Notice for the Merger .............. 6
Proposed Merger between Community Bank System and First Liberty ....... 6
A Warning about Forward-Looking Information ........................... 8
Selected Unaudited Pro Forma Financial Statements ..................... 8
4
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IMPORTANT
For a more comprehensive description of the terms of the merger
agreement, the merger and related transactions, we refer you to our discussion
of these matters contained in our proxy statement/prospectus, dated November 9,
2000, and a copy of the merger agreement attached to that document as Annex A.
You should read this supplement in conjunction with those documents.
THE SPECIAL MEETING OF THE SHAREHOLDERS OF CITIZENS NATIONAL BANK
As previously described in the November 9, 2000 notice of a special
meeting, Citizens National Bank will hold its Special Meeting of the
Shareholders on December 19, 2000 at 7:00 p.m., Eastern time, at the Malone
Lodge of Elks, 67 Elm Street, Malone, New York 13953. The date, time or location
of the Special Meeting has not been changed. At the Special Meeting, you will
vote upon a proposal to approve the merger agreement. You may also vote upon a
proposal to adjourn or postpone the Special Meeting for the purpose of, among
other things, allowing additional time for the solicitation of proxies to
approve the merger agreement.
As before, only holders of record of Citizens National Bank common
stock at the close of business on November 9, 2000, which is the record date for
the Special Meeting, will be entitled to vote at the Special Meeting and any
further adjournments of the meeting. You have one vote per share on any matter
that may properly come before the Special Meeting.
The presence in person or by proxy of the holders of a majority of the
shares of Citizens National Bank common stock outstanding on the record date
will constitute a quorum for the transaction of business at the Special Meeting.
Citizens National Bank will count abstentions and broker non-votes for purposes
of establishing the presence of a quorum at the Special Meeting. The approval of
the proposal to approve the merger agreement requires the affirmative vote of
two-thirds (2/3) of the shares of Citizens National Bank common stock
outstanding on the record date. This means that a failure to vote for approval
of the merger agreement would have the same effect as a vote against it.
Likewise, because broker non-votes and abstentions are not affirmative votes,
they will have the effect of a vote against the proposal to approve the merger
agreement.
Citizens National Bank will count the vote of all proxies received by
it since the mailing of the proxy materials dated November 9, 2000, if those
proxies have not since been validly revoked. As of December 1, 2000, Citizens
National Bank had received proxies from holders of approximately 80% of the
outstanding shares of Citizens National Bank common stock and approximately 78%
of the outstanding shares had been voted in favor of the merger agreement. The
approval of this merger agreement requires the affirmative vote of at least
two-thirds of all of the outstanding shares of Citizens National Bank common
stock. Therefore, unless a substantial number of the proxies are revoked, we
expect that the merger agreement will be approved by the Citizens National Bank
shareholders and the merger will be completed in January 2001.
RECOMMENDATION OF THE CITIZENS NATIONAL BANK BOARD
At the September 26, 2000 meeting of the board of directors of Citizens
National Bank, the board unanimously approved and adopted the merger agreement
and the transactions contemplated by it. On November 28, 2000, the board held a
special meeting to consider the First Liberty merger. At the invitation of the
board, Sanford A. Belden, President and Chief Executive Officer of Community
Bank System, attended this board meeting to present the proposed terms and
reasons for the First Liberty merger. The board discussed the impact, including
any potential adverse effects, of the First Liberty merger on the merger with
Citizens National Bank, with the participation of its outside counsel and
financial advisors. After considering the information, the board voted
unanimously to continue its recommendation that shareholders of Citizens
National Bank vote FOR approval of the merger agreement. The board continues to
believe that the merger is fair to and in your best interests as the Citizens
National Bank shareholders.
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BECAUSE THE SPECIAL MEETING WILL PRECEDE THE FIRST LIBERTY MERGER, IF
YOU VOTE TO APPROVE THE MERGER AGREEMENT YOU MUST BE WILLING TO ACCEPT AN
OWNERSHIP INTEREST IN COMMUNITY BANK SYSTEM WITHOUT REGARD TO WHETHER THE FIRST
LIBERTY MERGER WILL BE SUCCESSFULLY COMPLETED.
UPDATE OF REGULATORY APPROVALS AND NOTICE FOR THE MERGER
The merger is subject to approval by the Comptroller of Currency, which
has the primary jurisdiction over a merger between national banks such as
Community Bank and Citizens National Bank. On November 14, 2000, the Comptroller
of Currency approved Community Bank's application for the merger. This approval
expires if the merger is not completed within one year from the date of the
approval, unless the Comptroller of Currency grants an extension. The United
States Department of Justice did not comment adversely on the merger or
challenge the merger on antitrust grounds during the 15-day period following the
date of the approval by the Comptroller of the Currency, as it is permitted to
do under applicable law.
The Federal Reserve Board has confirmed with Community Bank that the
merger is not subject to the approval of the Federal Reserve Board under Section
3 of the Bank Holding Company Act of 1956.
PROPOSED MERGER BETWEEN COMMUNITY BANK SYSTEM AND FIRST LIBERTY
The following summary of the First Liberty merger agreement and the
related agreements are necessarily incomplete and is qualified in its entirety
by reference to copies of the agreements filed as exhibits to a Current Report
on Form 8-K, dated November 29, 2000, filed by Community Bank System with the
Securities and Exchange Commission on December 6, 2000. We encourage you to read
these agreements in their entirety. Please see "Where You Can Find More
Information" in the November 9, 2000 proxy statement/prospectus for directions
on how to obtain the agreements from the Securities and Exchange Commission or
Community Bank System.
On November 29, 2000, Community Bank System and First Liberty Bank
Corp., a Pennsylvania corporation, entered into an Agreement and Plan of Merger.
First Liberty, a bank holding company registered under the Bank Holding Company
Act, conducts its principal activities through its banking subsidiary, First
Liberty Bank & Trust, a Pennsylvania state-chartered commercial bank with trust
powers. First Liberty Bank engages in a full-service wholesale and retail
banking business from its 13 branches in Lackawanna and Luzerne Counties in
Northeastern Pennsylvania. At September 30, 2000, on a consolidated basis, First
Liberty had approximately $647 million in total assets, $497 million in total
deposits, $429 million in total net loans and shareholders' equity of $60
million. Information about First Liberty contained in this paragraph was
obtained from reports filed by First Liberty with the Securities and Exchange
Commission.
Under the First Liberty merger agreement, Community Bank System and
First Liberty will merge, with Community Bank System being the surviving
corporation. Following that merger, Community Bank System intends to merge First
Liberty Bank and Community Bank, with Community Bank being the continuing bank.
Community Bank System agreed, however, to continue to use the First Liberty Bank
& Trust name in the operations of the branches of First Liberty Bank for a
period of at least three years after the completion of the First Liberty merger,
absent any changed circumstances in the operations of Community Bank, subject to
any applicable regulatory approval and other legal requirements.
Shareholders of First Liberty will receive 0.56 of a share of Community
Bank System common stock for each share of First Liberty common stock they own,
or a total of approximately 3.6 million shares of Community Bank System common
stock. In addition, Community Bank System agreed to assume all stock options
outstanding under First Liberty's stock option plan. Based on the November 28,
2000, closing price of Community Bank System common stock of $24.30, as reported
on the New York Stock Exchange, and including the options to be assumed, the
transaction is valued at approximately $86.7 million.
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If the merger between Community Bank and Citizens National Bank is
completed, shareholders of Citizens National Bank would own approximately
952,000 shares of Community Bank System common stock, or approximately 12% of
the then issued and outstanding shares of Community Bank System common stock.
However, upon completion of the First Liberty merger and assuming that there is
no change in the ownership of Community Bank System common stock by former
shareholders of Citizens National Bank, those former shareholders would own
approximately 8% of the then issued and outstanding shares of Community Bank
System common stock, whereas shareholders of First Liberty would own
approximately 31%.
The First Liberty merger, which has been unanimously approved by the
respective boards of directors of Community Bank System and First Liberty, is
subject to the approval by each company's stockholders and by banking
regulators. The parties are working to close the First Liberty merger in the
second quarter of 2001, assuming that all of the conditions to closing are
satisfied. Community Bank System and First Liberty intend that the First Liberty
merger be accounted for as a pooling-of-interests and qualify as a tax-free
exchange for First Liberty shareholders.
In connection with the execution of the First Liberty merger agreement,
each director and executive officer of First Liberty has executed an agreement
to vote all of the shares of First Liberty common stock which he is entitled to
vote, in favor of the approval of the First Liberty merger agreement and the
related merger. According to First Liberty, its directors and executive officers
collectively owned approximately 2,182,042 shares of First Liberty, or
approximately 34% of the issued and outstanding shares of First Liberty common
stock, as of December 6, 2000. Under the articles of incorporation of First
Liberty, the shareholder approval of the First Liberty merger will require the
affirmative vote of a majority of the votes cast at the First Liberty
shareholders' meeting held for the purpose of considering the First Liberty
merger.
First Liberty has also provided Community Bank System a stock option to
acquire a number of shares of First Liberty common stock equal to 19.9% of the
issued and outstanding shares of First Liberty common stock. This option becomes
exercisable under certain circumstances involving First Liberty's takeover
transactions with third parties, acts of third parties or break-up of the First
Liberty merger agreement. During the period that the option is exercisable,
Community Bank System has the right to require First Liberty to repurchase the
option (or shares of First Liberty common stock issued upon exercise) for cash
at a price determined in accordance with the stock option agreement.
The First Liberty merger agreement provides that three of the current
directors of First Liberty, namely Saul Kaplan, Peter A. Sabia and Harold
Kaplan, will serve on the board of directors of Community Bank System after the
completion of the First Liberty merger. Subject to certain limitations,
Community Bank System also agreed to cause its board of directors to re-nominate
the same individuals for at least one additional three-year term after the
expiration of their initial terms and to recommend their re-election by the
Community Bank System stockholders. The First Liberty merger agreement also
provides that the designees of First Liberty will also serve on the board of
directors of Community Bank for so long as they serve on the Community Bank
System board. If the merger is completed, Paul M. Cantwell, Jr., President of
Citizens National Bank, will also serve as a director of Community Bank System
and Community Bank.
Following the completion of the First Liberty merger, Community Bank
System will establish a nine-member advisory board, consisting of eight members
of the current board of directors of First Liberty and Sanford A. Belden,
President and Chief Executive Officer of Community Bank System, to advise on
matters relating to the markets formerly served by First Liberty.
It is a condition to closing that each of Steven R. Tokach and Joseph
R. Solfanelli, officers of First Liberty, enters into an employment agreement
with Community Bank System and Community Bank, pursuant to which Mr. Tokach will
serve as President and Chief Executive Officer of the division of Community Bank
operating in the market areas in Pennsylvania previously served by the First
Liberty Bank, and Mr. Solfanelli will serve as Executive Vice President and
Chief Legal Officer of that division. Similarly, it is a condition to closing
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<PAGE> 8
that William M. Davis, President of First Liberty, enters into a consulting
agreement with Community Bank, pursuant to which he will serve as a consultant
to assist in the integration of the two companies and to promote the business of
Community Bank in the market areas formerly served by First Liberty.
A WARNING ABOUT FORWARD-LOOKING INFORMATION
Community Bank System and Citizens National Bank have each made
forward-looking statements in this supplement and in certain documents that we
refer to in this supplement. These forward-looking statements are subject to
risks and uncertainties. These statements are based on the beliefs and
assumptions of each respective company's management, and on information
currently available to that management. Forward-looking statements include
statements preceded by, followed by or that include the words "will,"
"believes," "expects," "anticipates," "intends," "plans," "estimates" or similar
expressions.
Although Community Bank System and Citizens National Bank believe these
forward-looking statements are reasonable, you should not place undue reliance
on the forward-looking statements, which are based on current expectations.
Actual results may differ materially from those expressed in our forward-looking
statements.
Forward-looking statements are not guarantees of performance. They
involve risks, uncertainties and assumptions. The future results of Community
Bank System following completion of the merger and/or the First Liberty merger
may differ materially from those expressed in these forward-looking statements.
You should note that many factors, some of which are discussed under "Risk
Factors" in the November 9, 2000 proxy statement/prospectus, may affect these
results and are beyond our ability to control or predict. For those statements,
Community Bank System and Citizens National Bank claim the protection of the
safe harbor contained in the Private Securities Litigation Reform Act of 1995.
SELECTED UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following selected unaudited pro forma financial statements present
the combined financial condition of Community Bank System, Citizens National
Bank and First Liberty as of September 30, 2000, assuming that the merger and
the First Liberty merger had occurred as of September 30, 2000, after giving
effect to certain pro forma adjustments described in the accompanying notes. The
selected unaudited pro forma financial statements also present the combined
historical results of operations of Community Bank System and First Liberty as
if the First Liberty merger had been consummated as of the first day of the
periods presented. You should recognize that the pro forma statements of income
contained below do not give effect to the proposed merger with Citizens National
Bank.
The unaudited pro forma financial statements as of September 30, 2000,
and for the nine months ended September 30, 2000, were prepared from the
unaudited financial statements included in the Quarterly Reports on Form 10-Q
for the quarter ended September 30, 2000 of Community Bank System and First
Liberty. A portion of the unaudited pro forma statement of condition as of
September 30, 2000 was also prepared from the unaudited financial statements of
Citizens National Bank as of September 30, 2000. The unaudited pro forma
statements of income for the years ended December 31, 1999, 1998 and 1997 were
prepared from the audited financial statements of Community Bank System and
First Liberty (Commission File No. 000-13312) in their Annual Reports on Forms
10-K and 10-K/A, respectively, for the year ended December 31, 1999.
The merger with Citizens National Bank is to be accounted for using the
purchase method of accounting, which is described in the November 9, 2000 proxy
statement/prospectus. Under the terms of the merger, Citizens National Bank will
be merged into Community Bank, a subsidiary of Community Bank System. In the
transaction, Community Bank System would issue approximately 952,000 shares of
its common stock in exchange for all of the Citizens National Bank common stock
issued and outstanding. Of the approximately 952,000 shares of Community Bank
System common stock to be issued, 648,100 shares will be issued from
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<PAGE> 9
Community Bank System's treasury stock holdings and the remaining 303,900 shares
will be issued from the authorized but unissued shares of Community Bank System
common stock. Community Bank System will reissue all of its treasury stock in
this transaction.
The First Liberty merger is to be accounted for using the pooling of
interests method of accounting. Under this method of accounting, the recorded
assets, liabilities, stockholders' equity, income and expense of Community Bank
System and First Liberty are combined and reflected at their historical amounts.
In the merger, First Liberty will be merged into Community Bank System, which
will issue approximately 3,566,000 shares of its common stock in exchange for
all of the issued and outstanding shares of First Liberty common stock. First
Liberty's 60,820 shares of treasury stock will be retired and not be converted
to shares of Community Bank System common stock in this merger.
Community Bank System expects to incur significant one-time merger
charges in connection with the merger and the First Liberty merger. In addition,
Community Bank System expects to achieve revenue enhancements and cost
reductions after the completion of transaction. These charges, revenue
enhancements and cost reductions are not reflected in the selected pro forma
financial statements. These unaudited selected pro forma financial statements do
not purport to represent what the results of operations or financial position of
Community Bank System would actually have been if the mergers had in fact
occurred on such dates or to project the results of operations or financial
position of Community Bank System for any future period or date. These financial
statements should be read in connection with, and are qualified by reference to,
the consolidated financial statements and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included in Community Bank
System's and First Liberty's Annual Reports on Form 10-K and 10-K/A,
respectively, for the year ended December 31, 1999, and their Quarterly Reports
on Form 10-Q for the nine months ended September 30, 2000, all of which have
been filed with the Securities and Exchange Commission. You can obtain a copy of
these reports by following the directions in "Where You Can Find More
Information" in the November 9, 2000 proxy statement/prospectus.
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PRO FORMA CONSOLIDATED STATEMENTS OF CONDITION
AS OF SEPTEMBER 30, 2000
(Dollars in Thousands)
<TABLE>
<CAPTION>
Pro Forma
Consolidated
Pro Forma Community Bank
Community Pro Forma System
Citizens Pro Forma Bank System Pooling Citizens
Community National Purchase Citizens First Adjust- National Bank
Bank System Bank Adjustments National Bank Liberty ments First Liberty
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 66,643 $ 5,105 $ 71,748 $ 14,243 $ 85,991
Investment securities: 719,929 47,896 $ (1,122)(a) 766,703 169,266 935,969
Loans, net of unearned discount 1,081,531 60,069 (593)(a) 1,141,007 434,479 1,575,486
Less: Reserve for possible loan
losses (14,614) (486) (544)(b) (15,644) (5,493) (21,137)
Intangible assets 52,136 0 13,655 (c) 65,791 4,374 70,165
All other assets 67,955 3,894 784 (d) 72,633 29,792 102,425
------------------------------------ -------------------------------------------------------
Total assets $ 1,973,580 $116,478 $ 12,180 $ 2,102,238 $646,661 $ -- $ 2,748,899
==================================== =======================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 1,455,391 $ 95,053 $ (194)(e) $ 1,550,250 $496,962 $ -- $ 2,047,212
Borrowings 343,100 7,850 -- 350,950 86,381 437,331
Company obligated mandatorily
redeemable preferred securities
of a subsidiary, Community Capital
Trust I, holding solely junior
subordinated debentures of
Community Bank System 29,822 0 -- (f) 29,822 0 29,822
Accrued interest and other
liabilities 23,291 899 355 24,545 3,088 27,633
------------------------------------ -------------------------------------------------------
Total liabilities 1,851,604 103,802 161 1,955,567 586,431 0 2,541,998
Shareholders' equity
Common stock 7,641 350 (46)(g) 7,945 2,009 1,557 (k) 11,511
Surplus 33,338 350 7,035 (h) 40,723 6,121 (1,753)(l) 45,091
Undivided profits 105,252 12,170 (12,170)(h) 105,252 55,517 160,769
Accumulated other comprehensive
income (7,249) (194) 194 (i) (7,249) (3,221) (10,470)
Treasury stock at cost (17,006) 0 17,006 (j) -- (196) 196 (m) --
------------------------------------ -------------------------------------------------------
Total shareholders equity 121,976 12,676 12,019 146,671 60,230 0 206,901
------------------------------------ -------------------------------------------------------
Total liabilities and capital $ 1,973,580 $116,478 $ 12,180 $ 2,102,238 $646,661 $ -- $ 2,748,899
============================================================================================
</TABLE>
(a) Adjustments to book values of Citizens National Bank's investments and
loans to reflect fair market values of these portfolios.
(b) Reserve for loan losses for Citizens National Bank was increased to
1.35% of loans outstanding to conform with the policies and procedures
of Community Bank System.
(c) Goodwill represents excess purchase price over fair value of underlying
net assets. Amortization period is 15 years.
(d) Deferred tax asset arising from purchase price allocations to assets
and liabilities purchased and assumed.
(e) Adjustment to book value of Citizen National Bank's time deposits to
reflect fair market values of these portfolios.
(f) Liability established for the future payment of severance and contract
termination costs.
(g) Pro forma purchase adjustment of $(46 thousand) in legal capital of
Citizens National Bank results from the elimination of $350 thousand of
legal capital of Citizens National Bank plus the issuance of 303,900
shares of Community Bank common stock with $304 thousand in stated
value from the authorized but unissued shares.
(h) Pro forma purchase adjustment to Citizens National Bank's surplus of
$6.1 million arises from the excess of the fair value of the 952,000
shares of Community Bank System common stock issued in the merger over
the sum of the cost of the 648,100 shares of treasury stock reissued in
the merger, the amount of Citizens National Bank's surplus eliminated,
and the stated value of 303,900 shares of Community Bank System common
stock issued from the authorized but unissued shares.
(i) Elimination of retained earnings and accumulated other comprehensive
income in the merger with Citizens National Bank.
(j) Reissuance of all of Community Bank System's 648,100 shares of treasury
stock in the merger with Citizens National Bank.
10
<PAGE> 11
(k) Issuance of 3,566,000 shares of Community Bank System common stock in
exchange for 6,368,460 shares of First Liberty common stock after the
retirement of 60,820 shares of First Liberty's treasury stock.
(l) Adjustment of $1.8 million to surplus of First Liberty in the First
Liberty merger resulting from the increase in legal capital of $1.557
million, net of retirement of treasury stock of $196 thousand.
(m) 60,820 shares of treasury stock of First Liberty will be retired upon
consummation of First Liberty merger. No shares of Community Bank
System will be issued in exchange for these treasury shares.
11
<PAGE> 12
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR NINE MONTHS ENDED SEPTEMBER 30, 2000
(Dollars in Thousands)
<TABLE>
<CAPTION>
Pro Forma
Consolidated
Pro Forma Community Bank
Community Pooling System
Bank System First Liberty Adjustments First Liberty
------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans $ 71,068 $ 25,015 $96,083
Interest and dividends on investments 35,950 8,099 44,049
-----------------------------------------------------------------------------------------------------------------------------------
Total interest income 107,018 33,114 0 140,132
-----------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 36,342 14,649 50,991
Interest on borrowings 17,353 4,116 21,469
-----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 53,695 18,765 0 72,460
-----------------------------------------------------------------------------------------------------------------------------------
Net interest income 53,323 14,349 0 67,672
Less: Provision for possible loan losses 5,044 540 5,584
-----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 48,279 13,809 0 62,088
-----------------------------------------------------------------------------------------------------------------------------------
Other income:
Fiduciary and investment income 1,858 522 2,380
Service charges on deposit accounts 5,708 516 6,224
Commissions on investment products 3,392 0 3,392
Other service charges, commissions and fees 4,639 479 5,118
Investment security gains (losses) (212) 53 (159)
-----------------------------------------------------------------------------------------------------------------------------------
Total other income 15,385 1,570 0 16,955
-----------------------------------------------------------------------------------------------------------------------------------
Other expenses:
Salary and employee benefits 21,378 5,912 27,290
Occupancy expense, net and equipment & furniture expense 5,724 1,941 7,665
Amortization of intangible assets 3,483 126 3,609
Other 11,175 2,593 13,768
-----------------------------------------------------------------------------------------------------------------------------------
Total other expenses 41,760 10,572 0 52,332
-----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 21,904 4,807 0 26,711
Income taxes 6,572 1,056 0 7,628
-----------------------------------------------------------------------------------------------------------------------------------
Net income $ 15,332 $3,751 $ -- $ 19,083
===================================================================================================================================
Earnings per share: Basic $2.17 $0.59 $1.80
Diluted $2.14 $0.59 $1.79
===================================================================================================================================
Dividends per share $0.77 $0.33 $0.71
===================================================================================================================================
</TABLE>
12
<PAGE> 13
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR TWELVE MONTHS ENDED DECEMBER 31, 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
Pro Forma
Consolidated
Pro Forma Community Bank
Community Bank Pooling System
System First Liberty Adjustments First Liberty
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans $ 84,853 $30,727 $115,580
Interest and dividends on investments 39,035 11,832 50,867
-----------------------------------------------------------------------------------------------------------------------------------
Total interest income 123,888 42,559 0 166,447
-----------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 42,774 19,128 61,902
Interest on borrowings 13,173 3,415 16,588
-----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 55,947 22,543 0 78,490
-----------------------------------------------------------------------------------------------------------------------------------
Net interest income 67,941 20,016 0 87,957
Less: Provision for possible loan losses 5,136 720 5,856
-----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 62,805 19,296 0 82,101
-----------------------------------------------------------------------------------------------------------------------------------
Other income:
Fiduciary and investment income 2,344 666 3,010
Service charges on deposit accounts 7,013 683 7,696
Commissions on investment products 1,288 0 1,288
Other service charges, commissions and fees 5,479 670 6,149
Investment security gains (losses) (638) 225 (413)
-----------------------------------------------------------------------------------------------------------------------------------
Total other income 15,486 2,244 0 17,730
-----------------------------------------------------------------------------------------------------------------------------------
Other expenses:
Salary and employee benefits 26,388 7,212 33,600
Occupancy expense, net and equipment & furniture expense 7,384 2,462 9,846
Amortization of intangible assets 4,615 61 4,676
Other 14,346 4,257 18,603
-----------------------------------------------------------------------------------------------------------------------------------
Total other expenses 52,733 13,992 0 66,725
-----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 25,558 7,548 0 33,106
Income taxes 7,923 1,521 0 9,444
-----------------------------------------------------------------------------------------------------------------------------------
Net income $ 17,635 $ 6,027 $ -- $ 23,662
===================================================================================================================================
Earnings per share: Basic $2.45 $0.95 $2.20
Diluted $2.42 $0.94 $2.17
===================================================================================================================================
Dividends per share $0.96 $0.42 $0.89
===================================================================================================================================
</TABLE>
13
<PAGE> 14
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR TWELVE MONTHS ENDED DECEMBER 31, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
Pro Forma
Consolidated
Pro Forma Community Bank
Community Bank Pooling System
System First Liberty Adjustments First Liberty
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans $82,778 $30,305 $113,083
Interest and dividends on investments: 40,160 12,060 52,220
-----------------------------------------------------------------------------------------------------------------------------------
Total interest income 122,938 42,365 0 165,303
-----------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 49,669 19,834 69,503
Interest on borrowings 8,874 2,839 11,713
-----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 58,543 22,673 0 81,216
-----------------------------------------------------------------------------------------------------------------------------------
Net interest income 64,395 19,692 0 84,087
Less: Provision for possible loan losses 5,123 540 5,663
-----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 59,272 19,152 0 78,424
-----------------------------------------------------------------------------------------------------------------------------------
Other income:
Fiduciary and investment income 1,922 496 2,418
Service charges on deposit accounts 6,630 699 7,329
Commissions on investment products 1,222 0 1,222
Other service charges, commissions and fees 5,307 536 5,843
Investment security gains (losses) 1,959 47 2,006
-----------------------------------------------------------------------------------------------------------------------------------
Total other income 17,040 1,778 0 18,818
-----------------------------------------------------------------------------------------------------------------------------------
Other expenses:
Salary and employee benefits 25,750 7,080 32,830
Occupancy expense, net and equipment & furniture expense 7,587 2,426 10,013
Amortization of intangible assets 4,640 61 4,701
Other 13,899 5,792 19,691
-----------------------------------------------------------------------------------------------------------------------------------
Total other expenses 51,876 15,359 0 67,235
-----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 24,436 5,571 0 30,007
Income taxes 8,902 1,570 0 10,472
-----------------------------------------------------------------------------------------------------------------------------------
Income before change in accounting 15,534 4,001 -- 19,535
Cumulative effect of change in accounting principle, net of taxes 194 0 194
-----------------------------------------------------------------------------------------------------------------------------------
Net income $15,728 $4,001 $ -- $19,729
===================================================================================================================================
Earnings per share: Basic $2.08 $0.63 $1.78
Diluted $2.05 $0.63 $1.76
===================================================================================================================================
Dividends per share $0.86 $0.35 $0.78
===================================================================================================================================
</TABLE>
14
<PAGE> 15
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR TWELVE MONTHS ENDED DECEMBER 31, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
Pro Forma
Consolidated
Pro Forma Community Bank
Community Bank Pooling System
System First Liberty Adjustments First Liberty
------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans $ 71,563 $29,350 $100,913
Interest and dividends on investments 46,065 11,966 58,031
-----------------------------------------------------------------------------------------------------------------------------------
Total interest income 117,628 41,316 0 158,944
-----------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 44,590 19,294 63,884
Interest on borrowings 10,162 2,281 12,443
-----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 54,752 21,575 0 76,327
-----------------------------------------------------------------------------------------------------------------------------------
Net interest income 62,876 19,741 0 82,617
Less: Provision for possible loan losses 4,480 600 5,080
-----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 58,396 19,141 0 77,537
-----------------------------------------------------------------------------------------------------------------------------------
Other income:
Fiduciary and investment income 1,725 402 2,127
Service charges on deposit accounts 5,055 807 5,862
Commissions on investment products 1,002 0 1,002
Other service charges, commissions and fees 4,040 1,026 5,066
Investment security gains (losses) (14) (191) (205)
-----------------------------------------------------------------------------------------------------------------------------------
Total other income 11,808 2,044 0 13,852
-----------------------------------------------------------------------------------------------------------------------------------
Other expenses:
Salary and employee benefits 22,945 7,460 30,405
Occupancy expense, net and equipment & furniture expense 6,154 2,198 8,352
Amortization of intangible assets 3,703 61 3,764
Other 12,996 4,609 17,605
-----------------------------------------------------------------------------------------------------------------------------------
Total other expenses 45,798 14,328 0 60,126
-----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 24,406 6,857 0 31,263
Income taxes 8,844 1,737 10,581
-----------------------------------------------------------------------------------------------------------------------------------
Net income $ 15,562 $5,120 $ -- $ 20,682
===================================================================================================================================
Earnings per share: Basic $ 2.05 $0.81 $1.87
Diluted $ 2.02 $0.80 $1.84
===================================================================================================================================
Dividends per share $ 0.76 $0.35 $0.72
===================================================================================================================================
</TABLE>
15
