UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| ☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended September 30, 2018
OR
| ☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from to .
Commission File Number: 001-13695
(Exact name of registrant as specified in its charter)
|
Delaware
|
16‑1213679
|
|
|
(State or other jurisdiction of incorporation or organization)
|
(I.R.S. Employer 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)
|
NONE
|
|
(Former name, former address and former fiscal year, if changed since last report)
|
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 ☒ No ☐.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer
|
☒
|
Accelerated filer
|
☐ | |
|
Non-accelerated filer
|
☐ |
Smaller reporting company
|
☐. | |
|
Emerging growth company
|
☐. |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 51,186,421 shares of Common Stock,
$1.00 par value per share, were outstanding on October 31, 2018.
|
Part I.
|
Financial Information
|
Page
|
|
Item 1.
|
Financial Statements (Unaudited)
|
|
|
|
||
|
3
|
||
|
4
|
||
|
5
|
||
|
|
||
|
6
|
||
|
7
|
||
|
8
|
||
|
Item 2.
|
31
|
|
|
Item 3.
|
50
|
|
|
Item 4.
|
52
|
|
|
Part II.
|
Other Information
|
|
|
Item 1.
|
52
|
|
|
Item 1A.
|
52
|
|
|
Item 2.
|
52
|
|
|
Item 3.
|
52
|
|
|
Item 4.
|
52
|
|
|
Item 5.
|
52
|
|
|
Item 6.
|
53
|
|
Part I.
|
Financial Information
|
|
Item 1.
|
Financial Statements
|
COMMUNITY BANK SYSTEM, INC.
(In Thousands, Except Share Data)
|
September 30,
2018
|
December 31,
2017
|
|||||||
|
Assets:
|
||||||||
|
Cash and cash equivalents
|
$
|
256,838
|
$
|
221,038
|
||||
|
Available-for-sale investment securities (cost of $2,957,819 and $3,007,148, respectively)
|
2,904,779
|
3,031,088
|
||||||
|
Equity and other securities (cost of $42,281 and $50,291, respectively)
|
43,278
|
50,291
|
||||||
|
Loans held for sale, at fair value
|
0
|
461
|
||||||
|
Loans
|
6,300,888
|
6,256,757
|
||||||
|
Allowance for loan losses
|
(50,133
|
)
|
(47,583
|
)
|
||||
|
Net loans
|
6,250,755
|
6,209,174
|
||||||
|
Goodwill, net
|
733,479
|
734,430
|
||||||
|
Core deposit intangibles, net
|
20,112
|
25,025
|
||||||
|
Other intangibles, net
|
58,109
|
65,633
|
||||||
|
Intangible assets, net
|
811,700
|
825,088
|
||||||
|
Premises and equipment, net
|
120,273
|
123,393
|
||||||
|
Accrued interest and fees receivable
|
34,594
|
36,177
|
||||||
|
Other assets
|
237,350
|
249,488
|
||||||
|
Total assets
|
$
|
10,659,567
|
$
|
10,746,198
|
||||
|
Liabilities:
|
||||||||
|
Noninterest-bearing deposits
|
$
|
2,346,932
|
$
|
2,293,057
|
||||
|
Interest-bearing deposits
|
6,116,889
|
6,151,363
|
||||||
|
Total deposits
|
8,463,821
|
8,444,420
|
||||||
|
Short-term borrowings
|
0
|
24,000
|
||||||
|
Securities sold under agreement to repurchase, short-term
|
274,561
|
337,011
|
||||||
|
Other long-term debt
|
1,998
|
2,071
|
||||||
|
Subordinated debt held by unconsolidated subsidiary trusts
|
97,939
|
122,814
|
||||||
|
Accrued interest and other liabilities
|
152,903
|
180,567
|
||||||
|
Total liabilities
|
8,991,222
|
9,110,883
|
||||||
|
Commitments and contingencies (See Note J)
|
||||||||
|
Shareholders' equity:
|
||||||||
|
Preferred stock, $1.00 par value, 500,000 shares authorized, 0 shares issued
|
0
|
0
|
||||||
|
Common stock, $1.00 par value, 75,000,000 shares authorized; 51,547,253 and 51,263,841 shares issued,
respectively
|
51,547
|
51,264
|
||||||
|
Additional paid-in capital
|
907,690
|
894,879
|
||||||
|
Retained earnings
|
774,403
|
700,557
|
||||||
|
Accumulated other comprehensive loss
|
(62,142
|
)
|
(3,699
|
)
|
||||
|
Treasury stock, at cost (410,577 shares including 206,151 shares held by deferred compensation
arrangements at September 30, 2018, and 567,764 shares including 237,494 shares held by deferred compensation arrangements at December 31, 2017, respectively)
|
(14,803
|
)
|
(21,014
|
)
|
||||
|
Deferred compensation arrangements (206,151 and 237,494 shares, respectively)
|
11,650
|
13,328
|
||||||
|
Total shareholders' equity
|
1,668,345
|
1,635,315
|
||||||
|
Total liabilities and shareholders' equity
|
$
|
10,659,567
|
$
|
10,746,198
|
||||
The accompanying notes are an integral part of the consolidated financial statements.
COMMUNITY BANK SYSTEM, INC.
(In Thousands, Except Per-Share Data)
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
|
2018
|
2017
|
2018
|
2017
|
|||||||||||||
|
Interest income:
|
||||||||||||||||
|
Interest and fees on loans
|
$
|
72,256
|
$
|
69,498
|
$
|
212,849
|
$
|
184,233
|
||||||||
|
Interest and dividends on taxable investments
|
15,421
|
15,228
|
47,462
|
43,969
|
||||||||||||
|
Interest on nontaxable investments
|
3,226
|
3,761
|
10,001
|
11,665
|
||||||||||||
|
Total interest income
|
90,903
|
88,487
|
270,312
|
239,867
|
||||||||||||
|
Interest expense:
|
||||||||||||||||
|
Interest on deposits
|
2,764
|
2,123
|
7,277
|
5,918
|
||||||||||||
|
Interest on borrowings
|
796
|
902
|
1,722
|
1,443
|
||||||||||||
|
Interest on subordinated debt held by unconsolidated subsidiary trusts
|
1,145
|
1,067
|
3,645
|
2,808
|
||||||||||||
|
Total interest expense
|
4,705
|
4,092
|
12,644
|
10,169
|
||||||||||||
|
Net interest income
|
86,198
|
84,395
|
257,668
|
229,698
|
||||||||||||
|
Provision for loan losses
|
2,215
|
2,314
|
8,342
|
5,603
|
||||||||||||
|
Net interest income after provision for loan losses
|
83,983
|
82,081
|
249,326
|
224,095
|
||||||||||||
|
Noninterest revenues:
|
||||||||||||||||
|
Deposit service fees
|
16,127
|
18,419
|
54,268
|
49,781
|
||||||||||||
|
Other banking services
|
1,536
|
1,704
|
3,942
|
4,270
|
||||||||||||
|
Employee benefit services
|
23,265
|
20,767
|
68,813
|
58,618
|
||||||||||||
|
Insurance services
|
8,270
|
6,344
|
23,044
|
19,709
|
||||||||||||
|
Wealth management services
|
6,168
|
5,707
|
19,370
|
16,105
|
||||||||||||
|
Unrealized gain on equity securities
|
743
|
0
|
722
|
0
|
||||||||||||
|
Loss on debt extinguishment
|
(318
|
)
|
0
|
(318
|
)
|
0
|
||||||||||
|
Gain on sales of investment securities
|
0
|
0
|
0
|
2
|
||||||||||||
|
Total noninterest revenues
|
55,791
|
52,941
|
169,841
|
148,485
|
||||||||||||
|
Noninterest expenses:
|
||||||||||||||||
|
Salaries and employee benefits
|
51,062
|
48,426
|
155,323
|
137,897
|
||||||||||||
|
Occupancy and equipment
|
9,770
|
9,106
|
29,738
|
25,939
|
||||||||||||
|
Data processing and communications
|
10,509
|
9,313
|
29,463
|
28,229
|
||||||||||||
|
Amortization of intangible assets
|
4,427
|
4,949
|
13,780
|
11,980
|
||||||||||||
|
Legal and professional fees
|
2,522
|
2,764
|
8,047
|
7,796
|
||||||||||||
|
Business development and marketing
|
2,587
|
2,586
|
7,301
|
7,119
|
||||||||||||
|
Acquisition expenses
|
(832
|
)
|
580
|
(769
|
)
|
25,192
|
||||||||||
|
Other expenses
|
5,188
|
6,052
|
14,793
|
16,078
|
||||||||||||
|
Total noninterest expenses
|
85,233
|
83,776
|
257,676
|
260,230
|
||||||||||||
|
Income before income taxes
|
54,541
|
51,246
|
161,491
|
112,350
|
||||||||||||
|
Income taxes
|
11,435
|
16,003
|
33,673
|
33,659
|
||||||||||||
|
Net income
|
$
|
43,106
|
$
|
35,243
|
$
|
127,818
|
$
|
78,691
|
||||||||
|
Basic earnings per share
|
$
|
0.84
|
$
|
0.69
|
$
|
2.49
|
$
|
1.62
|
||||||||
|
Diluted earnings per share
|
$
|
0.83
|
$
|
0.68
|
$
|
2.46
|
$
|
1.60
|
||||||||
|
Cash dividends declared per share
|
$
|
0.38
|
$
|
0.34
|
$
|
1.06
|
$
|
0.98
|
||||||||
The accompanying notes are an integral part of the consolidated financial statements.
COMMUNITY BANK SYSTEM, INC.
(In Thousands)
|
Three Months
Ended
September 30,
|
Nine Months
Ended
September 30,
|
|||||||||||||||
|
2018
|
2017
|
2018
|
2017
|
|||||||||||||
|
Pension
and other post retirement obligations:
|
||||||||||||||||
|
Amortization of actuarial losses included in net periodic pension cost, gross
|
$
|
304
|
$
|
150
|
$
|
910
|
$
|
625
|
||||||||
|
Tax effect
|
(74
|
)
|
(57
|
)
|
(221
|
)
|
(240
|
)
|
||||||||
|
Amortization of actuarial losses included in net periodic pension cost, net
|
230
|
93
|
689
|
385
|
||||||||||||
|
Amortization of prior service cost included in net periodic pension cost, gross
|
(105
|
)
|
(32
|
)
|
(359
|
)
|
(91
|
)
|
||||||||
|
Tax effect
|
25
|
12
|
87
|
35
|
||||||||||||
|
Amortization of prior service cost included in net periodic pension cost, net
|
(80
|
)
|
(20
|
)
|
(272
|
)
|
(56
|
)
|
||||||||
|
Initial projected benefit obligation recognized upon plan adoption, gross (See Note H)
|
(775
|
)
|
0
|
(775
|
)
|
0
|
||||||||||
|
Tax effect
|
189
|
0
|
189
|
0
|
||||||||||||
|
Initial projected benefit obligation recognized upon plan adoption, net
|
(586
|
)
|
0
|
(586
|
)
|
0
|
||||||||||
|
Unamortized actuarial gain due to plan merger, gross (See Note H)
|
0
|
0
|
0
|
1,858
|
||||||||||||
|
Tax effect
|
0
|
0
|
0
|
(710
|
)
|
|||||||||||
|
Unamortized actuarial gain due to plan merger, net
|
0
|
0
|
0
|
1,148
|
||||||||||||
|
Other comprehensive (loss) income related to pension and other post retirement obligations, net of taxes
|
(436
|
)
|
73
|
(169
|
)
|
1,477
|
||||||||||
|
Unrealized
(losses) gains on available-for-sale securities:
|
||||||||||||||||
|
Net unrealized holding (losses)/gains arising during period, gross
|
(20,094
|
)
|
(2,490
|
)
|
(76,705
|
)
|
11,163
|
|||||||||
|
Tax effect
|
4,879
|
952
|
18,639
|
(4,306
|
)
|
|||||||||||
|
Net unrealized holding (losses)/gains arising during period, net
|
(15,215
|
)
|
(1,538
|
)
|
(58,066
|
)
|
6,857
|
|||||||||
|
Reclassification of other comprehensive income due to change in accounting principle – equity securities
|
0
|
0
|
(208
|
)
|
0
|
|||||||||||
|
Other comprehensive (loss)/income related to unrealized (losses)/gains on available-for-sale securities,
net of taxes
|
(15,215
|
)
|
(1,538
|
)
|
(58,274
|
)
|
6,857
|
|||||||||
|
Other comprehensive (loss)/income, net of tax
|
(15,651
|
)
|
(1,465
|
)
|
(58,443
|
)
|
8,334
|
|||||||||
|
Net income
|
43,106
|
35,243
|
127,818
|
78,691
|
||||||||||||
|
Comprehensive income
|
$
|
27,455
|
$
|
33,778
|
$
|
69,375
|
$
|
87,025
|
||||||||
|
As of
|
||||||||
|
September 30,
2018
|
December 31,
2017
|
|||||||
|
Accumulated
Other Comprehensive Loss By Component:
|
||||||||
|
Unrealized loss for pension and other post-retirement obligations
|
$
|
(28,901
|
)
|
$
|
(28,677
|
)
|
||
|
Tax effect
|
7,099
|
7,044
|
||||||
|
Net unrealized loss for pension and other post-retirement obligations
|
(21,802
|
)
|
(21,633
|
)
|
||||
|
Unrealized (loss) gain on available-for-sale securities
|
(53,040
|
)
|
23,940
|
|||||
|
Tax effect
|
12,908
|
(6,006
|
)
|
|||||
|
Reclassification of other comprehensive income due to change in accounting principle – equity securities
|
(208
|
)
|
0
|
|||||
|
Net unrealized (loss) gain on available-for-sale securities
|
(40,340
|
)
|
17,934
|
|||||
|
Accumulated other comprehensive loss
|
$
|
(62,142
|
)
|
$
|
(3,699
|
)
|
||
The accompanying notes are an integral part of the consolidated financial statements.
COMMUNITY BANK SYSTEM, INC.
Nine months ended September 30, 2018
(In Thousands, Except Share Data)
|
Additional
Paid-In
Capital
|
Retained
Earnings
|
Accumulated
Other
Comprehensive
Loss
|
Treasury
Stock
|
Deferred
Compensation
Arrangements
|
Total
|
|||||||||||||||||||||||||||
|
Common Stock
|
||||||||||||||||||||||||||||||||
|
Shares
Outstanding
|
Amount
Issued
|
|||||||||||||||||||||||||||||||
|
Balance at December 31, 2017
|
50,696,077
|
$
|
51,264
|
$
|
894,879
|
$
|
700,557
|
$
|
(3,699
|
)
|
$
|
(21,014
|
)
|
$
|
13,328
|
$
|
1,635,315
|
|||||||||||||||
|
Net income
|
127,818
|
127,818
|
||||||||||||||||||||||||||||||
|
Other comprehensive loss, net of tax
|
(58,235
|
)
|
(58,235
|
)
|
||||||||||||||||||||||||||||
|
Cumulative effect of change in accounting principle – equity securities
|
208
|
(208
|
)
|
0
|
||||||||||||||||||||||||||||
|
Cash dividends declared:
Common, $1.06 per share
|
(54,180
|
)
|
(54,180
|
)
|
||||||||||||||||||||||||||||
|
Common stock issued under employee stock ownership plan
|
283,412
|
283
|
5,511
|
5,794
|
||||||||||||||||||||||||||||
|
Stock-based compensation
|
4,607
|
4,607
|
||||||||||||||||||||||||||||||
|
Distribution of stock under deferred compensation arrangements
|
35,233
|
1,898
|
(1,898
|
)
|
0
|
|||||||||||||||||||||||||||
|
Treasury stock issued to benefit plans, net
|
121,954
|
2,693
|
4,313
|
220
|
7,226
|
|||||||||||||||||||||||||||
|
Balance at September 30, 2018
|
51,136,676
|
$
|
51,547
|
$
|
907,690
|
$
|
774,403
|
$
|
(62,142
|
)
|
$
|
(14,803
|
)
|
$
|
11,650
|
$
|
1,668,345
|
|||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
COMMUNITY BANK SYSTEM, INC.
(In Thousands)
|
Nine Months Ended
September 30, |
||||||||
|
2018
|
2017
|
|||||||
|
Operating activities:
|
||||||||
|
Net income
|
$
|
127,818
|
$
|
78,691
|
||||
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
||||||||
|
Depreciation
|
11,854
|
12,026
|
||||||
|
Amortization of intangible assets
|
13,780
|
11,980
|
||||||
|
Net accretion on securities, loans and borrowings
|
(7,141
|
)
|
(4,412
|
)
|
||||
|
Stock-based compensation
|
4,607
|
3,985
|
||||||
|
Provision for loan losses
|
8,342
|
5,603
|
||||||
|
Amortization of mortgage servicing rights
|
340
|
374
|
||||||
|
Unrealized gain on equity securities
|
(722
|
)
|
0
|
|||||
|
Loss on debt extinguishment
|
318
|
0
|
||||||
|
Income from bank-owned life insurance policies
|
(1,177
|
)
|
(1,170
|
)
|
||||
|
Net (gain) loss on sale of loans and other assets
|
(207
|
)
|
155
|
|||||
|
Change in other assets and other liabilities
|
8,769
|
31,624
|
||||||
|
Net cash provided by operating activities
|
166,581
|
138,856
|
||||||
|
Investing activities:
|
||||||||
|
Proceeds from maturities of available-for-sale investment securities
|
102,549
|
110,160
|
||||||
|
Proceeds from maturities of other investment securities
|
8,292
|
28,580
|
||||||
|
Purchases of available-for-sale investment securities
|
(47,495
|
)
|
(59,425
|
)
|
||||
|
Purchases of other securities
|
(31
|
)
|
(12,434
|
)
|
||||
|
Net (increase) decrease in loans
|
(51,170
|
)
|
120,029
|
|||||
|
Cash paid for acquisitions, net of cash acquired of $16 and $51,793, respectively
|
(1,737
|
)
|
(105,402
|
)
|
||||
|
Settlement of bank-owned life insurance policies
|
0
|
1,779
|
||||||
|
Purchases of premises and equipment, net
|
(8,903
|
)
|
(7,701
|
)
|
||||
|
Net cash provided by investing activities
|
1,505
|
75,586
|
||||||
|
Financing activities:
|
||||||||
|
Net increase in deposits
|
19,401
|
81,630
|
||||||
|
Net decrease in borrowings
|
(86,523
|
)
|
(193,602
|
)
|
||||
|
Payments on subordinated debt held by unconsolidated subsidiary trusts
|
(25,207
|
)
|
0
|
|||||
|
Issuance of common stock
|
5,794
|
3,740
|
||||||
|
Purchases of treasury stock
|
(220
|
)
|
(3,226
|
)
|
||||
|
Sales of treasury stock
|
7,226
|
7,861
|
||||||
|
Increase in deferred compensation arrangements
|
220
|
3,226
|
||||||
|
Cash dividends paid
|
(52,006
|
)
|
(45,059
|
)
|
||||
|
Withholding taxes paid on share-based compensation
|
(971
|
)
|
(1,389
|
)
|
||||
|
Net cash used in financing activities
|
(132,286
|
)
|
(146,819
|
)
|
||||
|
Change in cash and cash equivalents
|
35,800
|
67,623
|
||||||
|
Cash and cash equivalents at beginning of period
|
221,038
|
173,857
|
||||||
|
Cash and cash equivalents at end of period
|
$
|
256,838
|
$
|
241,480
|
||||
|
Supplemental disclosures of cash flow information:
|
||||||||
|
Cash paid for interest
|
$
|
12,870
|
$
|
10,092
|
||||
|
Cash paid for income taxes
|
20,674
|
33,187
|
||||||
|
Supplemental disclosures of noncash financing and investing activities:
|
||||||||
|
Dividends declared and unpaid
|
19,634
|
17,412
|
||||||
|
Transfers from loans to other real estate
|
2,426
|
2,470
|
||||||
|
Acquisitions:
|
||||||||
|
Common stock issued
|
0
|
340,737
|
||||||
|
Fair value of assets acquired, excluding acquired cash and intangibles
|
115
|
1,960,922
|
||||||
|
Fair value of liabilities assumed
|
31
|
1,869,854
|
||||||
The accompanying notes are an integral part of the consolidated financial statements.
COMMUNITY BANK SYSTEM, INC.
SEPTEMBER 30, 2018
|
NOTE A:
|
BASIS OF PRESENTATION
|
The interim financial data as of and for the three and nine months ended September 30, 2018 is unaudited; however, in the opinion of Community Bank System, Inc.
(the “Company”), the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods in conformity with generally accepted accounting principles (“GAAP”).
The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period.
|
NOTE B:
|
ACQUISITIONS
|
On April 2, 2018, the Company, through its subsidiary, Benefit Plans Administrative Services, Inc. (“BPAS”), acquired certain assets of HR Consultants (SA), LLC
(“HR Consultants”), a benefits consulting group headquartered in Puerto Rico. The Company paid $0.3 million in cash to acquire the assets of HR Consultants and recorded intangible assets of $0.3 million in conjunction with the acquisition. The
effects of the acquired assets have been included in the consolidated financial statements since that date.
On January 2, 2018, the Company, through its subsidiary, OneGroup NY, Inc. (“OneGroup”), completed its acquisition of certain assets of Penna & Associates
Agency, Inc. (“Penna”), an insurance agency headquartered in Johnson City, New York. The Company paid $0.8 million in cash to acquire the assets of Penna, and recorded goodwill in the amount of $0.3 million and a customer list intangible asset of
$0.3 million in conjunction with the acquisition. The effects of the acquired assets have been included in the consolidated financial statements since that date.
On January 2, 2018, the Company, through its subsidiary, Community Investment Services, Inc. (“CISI”), completed its acquisition of certain assets of Styles
Bridges Associates (“Styles Bridges”), a financial services business headquartered in Canton, New York. The Company paid $0.7 million in cash to acquire a customer list from Styles Bridges, and recorded a $0.7 million customer list intangible asset
in conjunction with the acquisition. The effects of the acquired assets have been included in the consolidated financial statements since that date.
On December 4, 2017, the Company, through its subsidiary, OneGroup, completed its acquisition of Gordon B. Roberts Agency, Inc. (“GBR”), an insurance agency
headquartered in Oneonta, New York for $3.7 million in Company stock and cash, comprised of $1.35 million in cash and the issuance of 0.04 million shares of common stock. The transaction resulted in the acquisition of $0.6 million of assets, $0.6
million of other liabilities, goodwill in the amount of $2.1 million and other intangible assets of $1.6 million. The effects of the acquired assets and liabilities have been included in the consolidated financial statements since that date.
On November 17, 2017, the Company, through its subsidiary, CISI, completed its acquisition of certain assets of Northeast Capital Management, Inc. (“NECM”),
a financial services business headquartered in Wilkes Barre, Pennsylvania. The Company paid $1.2 million in cash to acquire a customer list from NECM, and recorded a $1.2 million customer list intangible asset in conjunction with the acquisition.
The effects of the acquired assets have been included in the consolidated financial statements since that date.
On May 12, 2017, the Company completed its acquisition of Merchants Bancshares, Inc. (“Merchants”), parent company of Merchants Bank, headquartered in South
Burlington, Vermont, for $345.2 million in Company stock and cash, comprised of $82.9 million in cash and the issuance of 4.68 million shares of common stock. The acquisition extends the Company’s footprint into the Vermont and Western Massachusetts
markets with the addition of 31 branch locations in Vermont and one location in Massachusetts. This transaction resulted in the acquisition of $2.0 billion of assets, including $1.49 billion of loans and $370.6 million of investment securities, as
well as $1.45 billion of deposits and $189.0 million in goodwill. The effects of the acquired assets and liabilities have been included in the consolidated financial statements since that date. Revenues of approximately $14.7 million and $46.8
million from Merchants were included in the consolidated income statement for the three and nine months ended September 30, 2018, respectively. Direct expenses, which may not include certain shared expenses, of approximately $7.4 million and $22.7
million from Merchants were included in the consolidated income statement for the three and nine months ended September 30, 2018, respectively. Revenues of approximately $16.8 million and $25.8 million from Merchants were included in the
consolidated income statement for the three and nine months ended September 30, 2017, respectively. Direct expenses, which may not include certain shared expenses, of approximately $7.5 million and $11.5 million from Merchants were included in the
consolidated income statement for the three and nine months ended September 30, 2017, respectively.
On March 1, 2017, the Company, through its subsidiary, OneGroup, completed its acquisition of certain assets of Dryfoos Insurance Agency, Inc. (“Dryfoos”), an
insurance agency headquartered in Hazleton, Pennsylvania. The Company paid $3.0 million in cash to acquire the assets of Dryfoos, and recorded goodwill in the amount of $1.7 million and other intangible assets of $1.7 million in conjunction with the
acquisition. The effects of the acquired assets and liabilities have been included in the consolidated financial statements since that date.
On February 3, 2017, the Company completed its acquisition of Northeast Retirement Services, Inc. (“NRS”) and its subsidiary Global Trust Company (“GTC”),
headquartered in Woburn, Massachusetts, for $148.6 million in Company stock and cash. NRS was a privately held corporation focused on providing institutional transfer agency, master recordkeeping services, custom target date fund administration,
trust product administration and customized reporting services to institutional clients. Its wholly-owned subsidiary, GTC, is chartered in the State of Maine as a non-depository trust company and provides fiduciary services for collective investment
trusts and other products. The acquisition of NRS and GTC, hereafter referred to collectively as NRS, strengthens and complements the Company’s existing employee benefit services businesses. Upon the completion of the merger, NRS became a
wholly-owned subsidiary of BPAS and operates as Northeast Retirement Services, LLC, a Delaware limited liability company. This transaction resulted in the acquisition of $36.1 million in net tangible assets, principally cash and certificates of
deposit, $60.2 million in customer list intangibles that will be amortized using the 150% declining balance method over 10 years, a $23.0 million deferred tax liability associated with the customer list intangible, and $75.3 million in goodwill. The
effects of the acquired assets and liabilities have been included in the consolidated financial statements since that date. Revenues of $10.3 million and $30.1 million from NRS were included in the consolidated statements of income for the three and
nine months ended September 30, 2018, respectively. Expenses of $6.1 million and $18.1 million from NRS were included in the consolidated statements of income for the three and nine months ended September 30, 2018, respectively. Revenues of $8.7
million and $22.1 million from NRS were included in the consolidated income statement for the three and nine months ended September 30, 2017, respectively. Expenses of $5.8 million and $15.1 million from NRS were included in the consolidated income
statement for the three and nine months ended September 30, 2017, respectively.
On January 1, 2017, the Company, through its subsidiary, OneGroup, acquired certain assets of Benefits Advisory Service, Inc. (“BAS”), a benefits consulting
group headquartered in Forest Hills, New York. The Company paid $1.2 million in cash to acquire the assets of BAS and recorded intangible assets of $1.2 million in conjunction with the acquisition. The effects of the acquired assets have been
included in the consolidated financial statements since that date.
The assets and liabilities assumed in the acquisitions were recorded at their estimated fair values based on management's best estimates using information
available at the dates of the acquisition, and were subject to adjustment based on updated information not available at the time of acquisition. During the first quarter of 2018, the carrying amount of other liabilities associated with the NRS
acquisition decreased by $1.2 million as a result of an adjustment to deferred taxes. Goodwill associated with the NRS acquisition decreased $1.2 million as a result of this adjustment. During the second quarter of 2018, the carrying amount of
other liabilities associated with the GBR acquisition decreased by $0.09 million as a result of updated information not available at the time of acquisition. Goodwill associated with the GBR acquisition decreased $0.09 million as a result of this
adjustment.
The above referenced acquisitions expanded the Company’s geographical presence in New York, Pennsylvania, Vermont, and Western Massachusetts and management
expects that the Company will benefit from greater geographic diversity and the advantages of other synergistic business development opportunities.
The following table summarizes the estimated fair value of the assets acquired and liabilities assumed after considering the measurement period adjustments
described above:
|
2018
|
2017
|
|||||||||||||||||||
|
(000s omitted)
|
Other (1)
|
NRS
|
Merchants
|
Other (2)
|
Total
|
|||||||||||||||
|
Consideration paid :
|
||||||||||||||||||||
|
Cash
|
$
|
1,753
|
$
|
70,073
|
$
|
82,898
|
$
|
6,775
|
$
|
159,746
|
||||||||||
|
Community Bank System, Inc. common stock
|
0
|
78,483
|
262,254
|
2,395
|
343,132
|
|||||||||||||||
|
Total net consideration paid
|
1,753
|
148,556
|
345,152
|
9,170
|
502,878
|
|||||||||||||||
|
Recognized amounts of identifiable assets acquired and liabilities assumed:
|
||||||||||||||||||||
|
Cash and cash equivalents
|
16
|
11,063
|
40,730
|
339
|
52,132
|
|||||||||||||||
|
Investment securities
|
0
|
20,294
|
370,648
|
0
|
390,942
|
|||||||||||||||
|
Loans
|
0
|
0
|
1,488,157
|
0
|
1,488,157
|
|||||||||||||||
|
Premises and equipment
|
10
|
411
|
16,608
|
27
|
17,046
|
|||||||||||||||
|
Accrued interest receivable
|
0
|
72
|
4,773
|
0
|
4,845
|
|||||||||||||||
|
Other assets
|
105
|
8,088
|
51,585
|
583
|
60,256
|
|||||||||||||||
|
Core deposit intangibles
|
0
|
0
|
23,214
|
0
|
23,214
|
|||||||||||||||
|
Other intangibles
|
1,343
|
60,200
|
2,857
|
5,626
|
68,683
|
|||||||||||||||
|
Deposits
|
0
|
0
|
(1,448,406
|
)
|
0
|
(1,448,406
|
)
|
|||||||||||||
|
Other liabilities
|
(31
|
)
|
(26,828
|
)
|
(11,750
|
)
|
(1,131
|
)
|
(39,709
|
)
|
||||||||||
|
Short-term advances
|
0
|
0
|
(80,000
|
)
|
0
|
(80,000
|
)
|
|||||||||||||
|
Securities sold under agreement to repurchase, short-term
|
0
|
0
|
(278,076
|
)
|
0
|
(278,076
|
)
|
|||||||||||||
|
Long-term debt
|
0
|
0
|
(3,615
|
)
|
0
|
(3,615
|
)
|
|||||||||||||
|
Subordinated debt held by unconsolidated subsidiary trusts
|
0
|
0
|
(20,619
|
)
|
0
|
(20,619
|
)
|
|||||||||||||
|
Total identifiable assets, net
|
1,443
|
73,300
|
156,106
|
5,444
|
234,850
|
|||||||||||||||
|
Goodwill
|
$
|
310
|
$
|
75,256
|
$
|
189,046
|
$
|
3,726
|
$
|
268,028
|
||||||||||
(1) Includes amounts related to the Penna, Styles Bridges and HR Consultants acquisitions.
(2) Includes amounts related to the BAS, Dryfoos, NECM and GBR acquisitions.
Acquired loans that have evidence of deterioration in credit quality since origination and for which it is probable, at acquisition, that the Company will be
unable to collect all contractually required payments were aggregated by comparable characteristics and recorded at fair value without a carryover of the related allowance for loan losses. Cash flows for each loan were determined using an estimate
of credit losses and rate of prepayments. Projected monthly cash flows were then discounted to present value using a market-based discount rate. The excess of the undiscounted expected cash flows over the estimated fair value is referred to as the
“accretable yield” and is recognized into interest income over the remaining lives of the acquired loans.
The following is a summary of the loans acquired from Merchants at the date of acquisition:
|
(000s omitted)
|
Acquired
Impaired
Loans |
Acquired
Non-impaired |
Total
Acquired |
|||||||||
|
Contractually required principal and interest at acquisition
|
$
|
15,454
|
$
|
1,872,574
|
$
|
1,888,028
|
||||||
|
Contractual cash flows not expected to be collected
|
(5,385
|
)
|
(14,753
|
)
|
(20,138
|
)
|
||||||
|
Expected cash flows at acquisition
|
10,069
|
1,857,821
|
1,867,890
|
|||||||||
|
Interest component of expected cash flows
|
(793
|
)
|
(378,940
|
)
|
(379,733
|
)
|
||||||
|
Fair value of acquired loans
|
$
|
9,276
|
$
|
1,478,881
|
$
|
1,488,157
|
||||||
The fair value of checking, savings and money market deposit accounts acquired were assumed to approximate the carrying value as these accounts have no stated
maturity and are payable on demand. Certificate of deposit accounts were valued at the present value of the certificates’ expected contractual payments discounted at market rates for similar certificates.
The core deposit intangibles and other intangibles related to the HR Consultants, Penna, Styles Bridges, GBR, NECM, Merchants, Dryfoos, and BAS acquisitions are
being amortized using an accelerated method over their estimated useful life of eight years. The goodwill, which is not amortized for book purposes, was assigned to the Banking segment for the Merchants acquisition, the Employee Benefit Services
segment for NRS, and All Other segments for the Penna, GBR, and Dryfoos acquisitions. Goodwill arising from the Merchants, NRS and GBR acquisitions is not deductible for tax purposes. Goodwill arising from the Penna and Dryfoos acquisitions is
deductible for tax purposes.
Direct costs related to the acquisitions were expensed as incurred. During the three and nine months ended September 30, 2018, the
Company recognized merger and acquisition integration-related recoveries in the amount of $0.8 million due to an adjustment of contract termination expenses related to the Merchants acquisition that have been separately stated in the Consolidated
Statements of Income. Merger and acquisition integration-related expenses amount to $0.6 million and $25.2 million during the three and nine months ended September 30, 2017 and have been separately stated in the Consolidated Statements of Income.
|
NOTE C:
|
ACCOUNTING POLICIES
|
The accounting policies of the Company, as applied in the consolidated interim financial statements presented herein, are substantially
the same as those followed on an annual basis as presented on pages 63 through 71 of the Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission (“SEC”) on March 1, 2018.
Investment Securities
The Company can classify its investments in debt securities as held-to-maturity, available-for-sale, or trading. Held-to-maturity securities are those for
which the Company has the positive intent and ability to hold until maturity, and are reported at cost, which is adjusted for amortization of premiums and accretion of discounts. Available-for-sale debt securities are reported at fair value with net
unrealized gains and losses reflected as a separate component of shareholders' equity, net of applicable income taxes. Equity securities with a readily determinable fair value are reported at fair value with net unrealized gains and losses
recognized in the consolidated statements of income. None of the Company's investment securities have been classified as trading securities at September 30, 2018. Certain equity securities that do not have a readily determinable fair value are
stated at cost, less impairment, adjusted for observable price changes in orderly transactions for identical or similar investments of the same issuer. These securities include restricted stock of the Federal Reserve Bank of New York (“Federal
Reserve”), the Federal Home Loan Bank of New York and the Federal Home Loan Bank of Boston (collectively referred to as “FHLB”), as well as other equity securities. During the third quarter of 2018, the Company adjusted the carrying value of an
equity security without a readily determinable fair value based on observable price changes for identical investments of the same issuer. This adjustment resulted in a $0.8 million unrealized gain on equity securities.
Fair values for investment securities are based upon quoted market prices, where available. If quoted market prices are not available, fair values are based
upon quoted market prices of comparable instruments, or a discounted cash flow model using market estimates of interest rates and volatility.
The Company conducts an assessment of all securities in an unrealized loss position to
determine if other-than-temporary impairment (“OTTI”) exists on a quarterly basis. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. The OTTI assessment considers the security
structure, recent security collateral performance metrics, if applicable, external credit ratings, failure of the issuer to make scheduled interest or principal payments, judgment about, and expectations of, future performance, and relevant
independent industry research, analysis and forecasts. The severity of the impairment and the length of time the security has been impaired is also considered in the assessment. The assessment of whether an OTTI decline exists is performed on each
security, regardless of the classification of the security as available-for-sale or held-to-maturity and involves a high degree of subjectivity and judgment that is based on the information available to management at a point in time.
An OTTI loss must be recognized for a debt security in an unrealized loss position if there is
intent to sell the security or it is more likely than not the Company will be required to sell the security prior to recovery of its amortized cost basis. In this situation, the amount of loss recognized in income is equal to the difference between
the fair value and the amortized cost basis of the security. Even if management does not have the intent, and it is not more likely than not that the Company will be required to sell the securities, an evaluation of the expected cash flows to be
received is performed to determine if a credit loss has occurred. For debt securities, a critical component of the evaluation for OTTI is the identification of credit-impaired securities, where the Company does not expect to receive cash flows
sufficient to recover the entire amortized cost basis of the security. In the event of a credit loss, only the amount of impairment associated with the credit loss would be recognized in income. The portion of the unrealized loss relating to other
factors, such as liquidity conditions in the market or changes in market interest rates, is recorded in accumulated other comprehensive loss.
The specific identification method is used in determining the realized gains and losses on sales of investment securities and OTTI charges. Premiums and
discounts on securities are amortized and accreted, respectively, on the interest method basis over the period to maturity or estimated life of the related security. Purchases and sales of securities are recognized on a trade date basis.
Revenue Recognition
On January 1, 2018, the Company adopted ASU No. 2014-09 Revenue from
Contracts with Customers (Topic 606) and all subsequent ASUs that modified Topic 606. The implementation of the new standard did not have a material impact on the measurement or recognition of revenue; as such, a cumulative effect
adjustment to opening retained earnings was not deemed necessary. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with
our historic accounting under Topic 605.
Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income
streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of the newly adopted guidance. Topic 606 is applicable to the Company’s noninterest revenue streams
including its deposit related fees, electronic payment interchange fees, merchant income, trust, asset management and other wealth management revenues, insurance commissions and benefit plan services income. However, the recognition of these revenue
streams did not change significantly upon adoption of Topic 606. Noninterest revenue streams in-scope of Topic 606 are discussed below.
Deposit Service Fees
Deposit service fees consist of account activity fees, monthly service fees, check orders, debit and credit card income, ATM fees, Merchant services income and
other revenues from processing wire transfers, bill pay service, cashier’s checks and foreign exchange. Debit and credit card income is primarily comprised of interchange fees earned at the time the Company’s debit and credit cards are processed
through card payment networks such as Visa. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to
process their debit and credit card transactions, in addition to account management fees. The Company’s performance obligation for deposit service fees is generally satisfied, and the related revenue recognized, when the services are rendered or the
transaction has been completed. Payment for deposit service fees is typically received at the time it is assessed through a direct charge to customers’ accounts or on a monthly basis. Deposit service fees revenue primarily relates to the Company’s
Banking operating segment.
Other Banking Services
Other banking services consists of other recurring revenue streams such as commissions from sales of credit life insurance, safe deposit box rental fees,
mortgage banking income, bank owned life insurance income and other miscellaneous revenue streams. Commissions from the sale of credit life insurance are recognized at the time of sale of the policies. Safe deposit box rental fees are charged to the
customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance
obligation. Mortgage banking income and bank owned life insurance income are not within the scope of Topic 606. Other banking services revenue primarily relates to the Company’s Banking operating segment.
Employee Benefit Services
Employee benefit services income consists of revenue received from retirement plan services, collective investment fund services, fund administration, transfer
agency, consulting and actuarial services. The Company’s performance obligation that relates to plan services are satisfied over time and the resulting fees are recognized monthly or quarterly, based upon the market value of the assets under
management and the applicable fee rate or on a time expended basis. Payment is generally received a few days after month end or quarter end. The Company does not earn performance-based incentives. Transactional services such as consulting services,
mailings, or other ad hoc services are provided to existing trust and asset management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time
(i.e., as incurred). Payment is received shortly after services are rendered. Employee benefit services revenue primarily relates to the Company’s Employee Benefit Services operating segment.
Insurance Services
Insurance services primarily consists of commissions received on insurance product sales and consulting services. The Company acts in the capacity of a broker
or agent between the Company’s customer and the insurance carrier. The Company’s performance obligation related to insurance sales for both property and casualty insurance and employee benefit plans is generally satisfied upon the later of the
issuance or effective date of the policy. The Company’s performance obligation related to consulting services is considered transactional in nature and is generally satisfied when the services have been completed and related revenue recognized at a
point in time. Payment is received at the time services are rendered. The Company earns performance based incentives, commonly known as contingency payments, which usually are based on certain criteria established by the insurance carrier such as
premium volume, growth and insured loss ratios. Contingent payments are accrued for based upon management’s expectations for the year. Commission expense associated with sales of insurance products is expensed as incurred. Insurance services
revenue primarily relates to the Company’s All Other operating segment.
Wealth Management Services
Wealth management services income is primarily comprised of fees earned from the management and administration of trusts and other customer assets. The
Company generally has two types of performance obligations related to these services. The Company’s performance obligation that relates to advisory and administration services are satisfied over time and the resulting fees are recognized monthly,
based upon the market value of the assets under management and the applicable fee rate. Payment is generally received soon after month end or quarter end through a direct charge to customers’ accounts. The Company does not earn performance-based
incentives. Transactional services such as tax return preparation services, purchases and sales of investments and insurance products are also available to existing trust and asset management customers. The Company’s performance obligation for these
transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e. as incurred). Payment is generally received on a monthly basis. Wealth management services revenue primarily relates to the Company’s All
Other operating segment.
Contract Balances
A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or
before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s
noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company
satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of September 30, 2018, $26.9
million of accounts receivable, including $7.9 million of unbilled fee revenue, and $2.9 million of unearned revenue was recorded in the Consolidated Statements of Condition. As of December 31, 2017, $29.8 million of accounts receivable, including
$6.5 million of unbilled fee revenue, and $3.9 million of unearned revenue was recorded in the Consolidated Statements of Condition.
Contract Acquisition Costs
In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of
obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract
had not been obtained (for example, sales commission). The Company utilizes the practical expedient method which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs
would have been amortized in one year or less. Upon adoption of Topic 606, the Company did not capitalize any contract acquisition costs.
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with
Customers (Topic 606). This new guidance supersedes the revenue recognition requirements in ASC 605, Revenue Recognition, and is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in
an amount that reflects consideration to which the entity expects to be entitled in exchange for those goods and services. In doing so, companies generally will be required to use more judgment and make more estimates than under prior guidance.
These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. Since the
guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other GAAP, the new guidance did not have a material impact on revenue most closely associated with financial
instruments, including interest income, interest expense and mortgage banking income. The Company completed a comprehensive assessment of the revenue streams and reviewed related contracts potentially affected by the ASU for all segments of its
business. Based on this assessment, the Company concluded that ASU 2014-09 did not materially change the manner in which the Company recognized revenue for these revenue streams. The Company also completed its evaluation of certain costs related to
these revenue streams to determine whether such costs should be presented as expenses or contra-revenue (i.e. gross versus net) and timing of compensatory payments to producers. Based on the Company’s evaluation, it was determined that changes in
the presentation of expenses and timing of the recognition of compensation expense did not materially affect noninterest income or expense. The Company adopted this guidance on January 1, 2018 utilizing the modified retrospective approach. Since
there was no net income impact upon adoption of the new guidance, a cumulative effect adjustment to opening retained earnings was not deemed necessary.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments -
Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This guidance addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The primary
focus of this guidance is to supersede the guidance to classify equity securities with readily determinable fair values into different categories (trading or available-for-sale) and requires equity securities to be measured at fair value with changes
in the fair value recognized through net income. This guidance requires adoption through a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. This ASU is effective for fiscal years beginning after
December 15, 2017, including interim periods within those fiscal years. The Company adopted this guidance on January 1, 2018. The impact of the adoption of this guidance resulted in
the reclassification of $0.2 million of other comprehensive income to retained earnings. See the Consolidated Statements of Comprehensive Income and Consolidated Statement of Changes in Shareholders’ Equity.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows
(Topic 230). The amendments provide guidance on the following eight specific cash flow issues: 1) debt prepayment or debt extinguishment costs; 2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest
rates that are insignificant in relation to the effective interest rate of the borrowing; 3) contingent consideration payments made after a business combination; 4) proceeds from the settlement of insurance claims; 5) proceeds from the settlement of
corporate-owned life insurance policies, including bank-owned life insurance policies; 6) distributions received from equity method investees; 7) beneficial interests in securitization transactions; and 8) separately identifiable cash flows and
application of the predominance principle. This ASU is effective for fiscal years beginning after December 31, 2017, including interim periods within those fiscal years. The Company adopted this guidance on January 1, 2018 on a retrospective basis.
The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-07, Compensation – Retirement
Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This guidance requires the service cost component of net periodic pension and postretirement benefit costs to be
presented separately from other components of net benefit cost in the statement of income. This ASU is effective for the Company for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company
adopted this guidance on January 1, 2018 and applied the guidance on a modified retrospective basis for the presentation of other components of net periodic benefit cost in the Consolidated Statements of Income. The impact of the adoption of this
guidance resulted in the reclassification of net periodic benefit income of $1.9 million and $5.1 million from salaries and employee benefits to other expenses in the Consolidated Statements of Income for the three and nine months ended September 30,
2017, respectively.
New Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).
This new guidance supersedes the lease requirements in Topic 840, Leases and is based on the principle that a lessee should recognize in the statement of
financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The accounting applied by a lessor is largely unchanged from that applied
under the previous guidance. In addition, the guidance requires an entity to separate the lease components from the nonlease components in a contract. The ASU requires disclosures about the amount, timing, and judgments related to a reporting
entity’s accounting for leases and related cash flows. The standard is required to be applied to all leases in existence as of the date of adoption using a modified retrospective transition approach. This guidance is effective for fiscal years
beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted for all companies in any interim or annual period. The Company occupies certain offices and uses certain equipment under
non-cancelable operating lease agreements, which currently are not reflected in its consolidated statement of condition. The Company expects to recognize lease liabilities and right of use assets associated with these lease agreements; however, the
extent of the impact on the Company’s consolidated financial statements is currently under evaluation. The Company is in the process of a system implementation to facilitate the change in accounting.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments –
Credit Losses (Topic 326). This new guidance significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. This ASU will
replace the “incurred loss” model under existing guidance with an “expected loss” model for instruments measured at amortized cost, and require entities to record allowances for available-for-sale debt securities rather than reduce the carrying
amount, as they do today under the other-than-temporary impairment model. This ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. This guidance requires adoption through a cumulative-effect adjustment
to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption
is permitted for all companies as of fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact the guidance will have on the Company’s consolidated financial
statements, and expects a change in the allowance for loan losses resulting from the change to expected losses for the estimated life of the financial asset. The amount of the change in the allowance for loan losses resulting from the new guidance
will be impacted by the portfolio composition and asset quality at the adoption date, as well as economic conditions and forecasts at the time of adoption. Implementation efforts include evaluation of data requirements, segmentation of the Company’s
loan portfolio, guidance interpretation and consideration of relevant internal processes and controls.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and
Other (Topic 350). The amendments simplify how an entity is required to test goodwill for impairment by eliminating the requirement to measure a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with
the carrying amount of that goodwill. Instead, an entity will perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and recognize an impairment charge for the amount by which the carrying
amount of the reporting unit exceeds its fair value. Impairment loss recognized under this new guidance will be limited to the goodwill allocated to the reporting unit. This ASU is effective prospectively for the Company for annual or interim
goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. This ASU is not expected to have a material
impact on the Company’s consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging
(Topic 815): Targeted Improvements to Accounting for Hedging Activities. This new guidance amends current guidance to better align hedge accounting with risk management activities and reduce the complexity involved in applying hedge
accounting. Under this new guidance, the concept of hedge ineffectiveness will be eliminated. Ineffective income generated by cash flow and net investment hedges will be recognized in the same financial reporting period and income statement line
item as effective income, so as to reflect the full cost of hedging at one time and in one place. Ineffective income generated by fair value hedges will continue to be reflected in current period earnings; however, it will be recognized in the same
income statement line item as effective income. The guidance will also allow any contractually specified variable rate to be designated as the hedged risk in a cash flow hedge. With respect to fair value hedges of interest rate risk, the guidance
will allow changes in the fair value of the hedged item to be calculated solely using changes in the benchmark interest rate component of the instrument’s total contractual coupon cash flows. This ASU is effective for the Company for fiscal years
beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. This ASU is not expected to have a material impact on the Company’s consolidated financial
statements.
|
NOTE D:
|
INVESTMENT SECURITIES
|
The amortized cost and estimated fair value of investment securities as of September 30, 2018 and December 31, 2017 are as follows:
|
September 30, 2018
|
December 31, 2017
|
|||||||||||||||||||||||||||||||
|
(000's omitted)
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
||||||||||||||||||||||||
|
Available-for-Sale Portfolio:
|
||||||||||||||||||||||||||||||||
|
U.S. Treasury and agency securities
|
$
|
2,039,086
|
$
|
0
|
$
|
40,991
|
$
|
1,998,095
|
$
|
2,043,023
|
$
|
15,886
|
$
|
4,838
|
$
|
2,054,071
|
||||||||||||||||
|
Obligations of state and political subdivisions
|
473,048
|
5,250
|
2,933
|
475,365
|
514,949
|
14,064
|
57
|
528,956
|
||||||||||||||||||||||||
|
Government agency mortgage-backed securities
|
369,970
|
1,297
|
13,204
|
358,063
|
358,180
|
3,121
|
3,763
|
357,538
|
||||||||||||||||||||||||
|
Corporate debt securities
|
2,603
|
0
|
53
|
2,550
|
2,648
|
0
|
25
|
2,623
|
||||||||||||||||||||||||
|
Government agency collateralized mortgage obligations
|
73,112
|
25
|
2,431
|
70,706
|
88,097
|
155
|
878
|
87,374
|
||||||||||||||||||||||||
|
Marketable equity securities
|
0
|
0
|
0
|
0
|
251
|
275
|
0
|
526
|
||||||||||||||||||||||||
|
Total available-for-sale portfolio
|
$
|
2,957,819
|
$
|
6,572
|
$
|
59,612
|
$
|
2,904,779
|
$
|
3,007,148
|
$
|
33,501
|
$
|
9,561
|
$
|
3,031,088
|
||||||||||||||||
|
Equity and other Securities:
|
||||||||||||||||||||||||||||||||
|
Equity securities, at fair value
|
$
|
251
|
$
|
247
|
$
|
0
|
$
|
498
|
$
|
0
|
$
|
0
|
$
|
0
|
$
|
0
|
||||||||||||||||
|
Federal Home Loan Bank common stock
|
6,343
|
0
|
0
|
6,343
|
9,896
|
0
|
0
|
9,896
|
||||||||||||||||||||||||
|
Federal Reserve Bank common stock
|
30,690
|
0
|
0
|
30,690
|
30,690
|
0
|
0
|
30,690
|
||||||||||||||||||||||||
|
Certificates of deposit
|
0
|
0
|
0
|
0
|
3,865
|
0
|
0
|
3,865
|
||||||||||||||||||||||||
|
Other equity securities, at cost
|
4,997
|
750
|
0
|
5,747
|
5,840
|
0
|
0
|
5,840
|
||||||||||||||||||||||||
|
Total equity and other securities
|
$
|
42,281
|
$
|
997
|
$
|
0
|
$
|
43,278
|
$
|
50,291
|
$
|
0
|
$
|
0
|
$
|
50,291
|
||||||||||||||||
A summary of investment securities that have been in a continuous unrealized loss position is as follows:
As of September 30, 2018
|
Less than 12 Months
|
12 Months or Longer
|
Total
|
||||||||||||||||||||||||||||||||||
|
(000's omitted)
|
#
|
Fair
Value
|
Gross
Unrealized
Losses
|
#
|
Fair
Value
|
Gross
Unrealized
Losses
|
#
|
Fair
Value
|
Gross
Unrealized
Losses
|
|||||||||||||||||||||||||||
|
Available-for-Sale Portfolio:
|
||||||||||||||||||||||||||||||||||||
|
U.S. Treasury and agency securities
|
50
|
$
|
1,633,859
|
$
|
30,625
|
32
|
$
|
364,236
|
$
|
10,366
|
82
|
$
|
1,998,095
|
$
|
40,991
|
|||||||||||||||||||||
|
Obligations of state and political subdivisions
|
333
|
171,781
|
2,619
|
9
|
5,913
|
314
|
342
|
177,694
|
2,933
|
|||||||||||||||||||||||||||
|
Government agency mortgage-backed securities
|
89
|
128,752
|
3,783
|
136
|
178,871
|
9,421
|
225
|
307,623
|
13,204
|
|||||||||||||||||||||||||||
|
Corporate debt securities
|
0
|
0
|
0
|
1
|
2,550
|
53
|
1
|
2,550
|
53
|
|||||||||||||||||||||||||||
|
Government agency collateralized mortgage obligations
|
12
|
8,371
|
199
|
36
|
59,825
|
2,232
|
48
|
68,196
|
2,431
|
|||||||||||||||||||||||||||
|
Total available-for-sale investment portfolio
|
484
|
$
|
1,942,763
|
$
|
37,226
|
214
|
$
|
611,395
|
$
|
22,386
|
698
|
$
|
2,554,158
|
$
|
59,612
|
|||||||||||||||||||||
As of December 31, 2017
|
Less than 12 Months
|
12 Months or Longer
|
Total
|
||||||||||||||||||||||||||||||||||
|
(000's omitted)
|
#
|
Fair
Value
|
Gross
Unrealized
Losses
|
#
|
Fair
Value
|
Gross
Unrealized
Losses
|
#
|
Fair
Value
|
Gross
Unrealized
Losses
|
|||||||||||||||||||||||||||
|
Available-for-Sale Portfolio:
|
||||||||||||||||||||||||||||||||||||
|
U.S. Treasury and agency securities
|
44
|
$
|
699,709
|
$
|
4,838
|
0
|
$
|
0
|
$
|
0
|
44
|
$
|
699,709
|
$
|
4,838
|
|||||||||||||||||||||
|
Obligations of state and political subdivisions
|
45
|
23,432
|
57
|
0
|
0
|
0
|
45
|
23,432
|
57
|
|||||||||||||||||||||||||||
|
Government agency mortgage-backed securities
|
120
|
185,716
|
1,433
|
55
|
75,712
|
2,330
|
175
|
261,428
|
3,763
|
|||||||||||||||||||||||||||
|
Corporate debt securities
|
1
|
2,623
|
25
|
0
|
0
|
0
|
1
|
2,623
|
25
|
|||||||||||||||||||||||||||
|
Government agency collateralized mortgage obligations
|
39
|
80,041
|
878
|
1
|
1
|
0
|
40
|
80,042
|
878
|
|||||||||||||||||||||||||||
|
Total available-for-sale investment portfolio
|
249
|
$
|
991,521
|
$
|
7,231
|
56
|
$
|
75,713
|
$
|
2,330
|
305
|
$
|
1,067,234
|
$
|
9,561
|
|||||||||||||||||||||
The unrealized losses reported pertaining to securities issued by the U.S. government and its sponsored entities, include treasuries, agencies, and
mortgage-backed securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac, which are currently rated AAA by Moody’s Investor Services, AA+ by Standard & Poor’s and are guaranteed by the U.S. government. The majority of the obligations of state
and political subdivisions and corporations carry a credit rating of A or better. Additionally, a majority of the obligations of state and political subdivisions carry a secondary level of credit enhancement. The Company does not intend to sell
these securities, nor is it more likely than not that the Company will be required to sell these securities prior to recovery of the amortized cost. The unrealized losses in the portfolios are primarily attributable to changes in interest rates. As
such, management does not believe any individual unrealized loss as of September 30, 2018 represents OTTI.
The amortized cost and estimated fair value of debt securities at September 30, 2018, 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. Securities not due at a single maturity date are shown separately.
|
Available-for-Sale
|
||||||||
|
(000's omitted)
|
Amortized
Cost
|
Fair
Value
|
||||||
|
Due in one year or less
|
$
|
61,112
|
$
|
60,985
|
||||
|
Due after one through five years
|
2,020,525
|
1,985,501
|
||||||
|
Due after five years through ten years
|
274,222
|
270,449
|
||||||
|
Due after ten years
|
158,878
|
159,075
|
||||||
|
Subtotal
|
2,514,737
|
2,476,010
|
||||||
|
Government agency mortgage-backed securities
|
369,970
|
358,063
|
||||||
|
Government agency collateralized mortgage obligations
|
73,112
|
70,706
|
||||||
|
Total
|
$
|
2,957,819
|
$
|
2,904,779
|
||||
As of September 30, 2018, $289.0 million of U.S. Treasury securities were pledged as collateral for securities sold under agreement to repurchase. All
securities sold under agreement to repurchase as of September 30, 2018 have an overnight and continuous maturity.
|
NOTE E:
|
LOANS
|
The segments of the Company’s loan portfolio are disaggregated into the following classes that allow management to monitor risk and performance:
| · |
Consumer mortgages consist primarily of fixed rate residential instruments, typically 10 – 30 years in contractual term, secured by first liens on real property.
|
| · |
Business lending is comprised of general purpose commercial and industrial loans including, but not limited to, municipal lending, agricultural-related and dealer floor
plans, as well as mortgages on commercial properties.
|
| · |
Consumer indirect consists primarily of installment loans originated through selected dealerships and are secured by automobiles, marine and other recreational vehicles.
|
| · |
Consumer direct consists of all other loans to consumers such as personal installment loans and lines of credit.
|
| · |
Home equity products are consumer purpose installment loans or lines of credit most often secured by a first or second lien position on residential real estate with terms up
to 30 years.
|
The balances of these classes are summarized as follows:
|
(000's omitted)
|
September 30,
2018
|
December 31,
2017
|
||||||
|
Business lending
|
$
|
2,403,624
|
$
|
2,424,223
|
||||
|
Consumer mortgage
|
2,220,022
|
2,220,298
|
||||||
|
Consumer indirect
|
1,098,943
|
1,011,978
|
||||||
|
Consumer direct
|
184,349
|
179,929
|
||||||
|
Home equity
|
393,950
|
420,329
|
||||||
|
Gross loans, including deferred origination costs
|
6,300,888
|
6,256,757
|
||||||
|
Allowance for loan losses
|
(50,133
|
)
|
||||||