Change in interest rates | Calculated annualized increase (decrease) in projected net interest income at December 31, 20172019 (000’s omitted) | +200 basis points | ($3,734,000)$4,811 | +100 basis points | ($1,477,000)$3,257 | -100 basis points | ($6,931,000)4,232) | -150 basis points | ($8,009) |
The short term modeled net interest income (NII) decreases in rising rate environments from the flat rate scenario. The decrease is largely a result of assumed deposit and funding costs increasing faster than the repricing of corresponding assets. In the short term (year one) the assumed increase of deposit ratesincreases in the rising rate environment temporarily outweighsenvironments largely due to assumed higher rates on new loans, including variable and adjustable rate loans. These increases are partially offset by anticipated higher deposit costs. Over the benefit of earning asset yields increasing to higher levels. However, over a longer time period, (years two and beyond), the growth in NII improvescontinues to improve in theboth rising rate environments as lower yielding assets mature and are replaced at higher rates.
In the falling rate environment scenario,environments, the CompanyBank shows interest rate risk exposure to lower short term rates. Net interest income declines duringDuring the first twelve months, net interest income declines largely due to lower assumed rates on new loans, including adjustable and variable rate assets. Corresponding deposit rates are assumed to remain constant.Modestly lower funding costs associated with deposits and borrowings only partially offset the decrease in interest income.
The analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions: the nature and timing of interest rate levels (including yield curve shape), prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows, and other factors. While the assumptions are developed based upon reasonable economic and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences might change. Furthermore, the sensitivity analysis does not reflect actions that the ALCO might take in responding to or anticipating changes in interest rates.
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements and independent registered public accounting firm’s report of Community Bank System, Inc. are contained on pages 5860 through 104111 of this item.
· | Consolidated Statements of Condition, |
December 31, 20172019 and 20162018
· | Consolidated Statements of Income, |
Years ended December 31, 2017, 2016,2019, 2018, and 20152017
· | Consolidated Statements of Comprehensive Income, |
Years ended December 31, 2017, 2016,2019, 2018, and 20152017
· | Consolidated Statements of Changes in Shareholders' Equity, |
Years ended December 31, 2017, 2016,2019, 2018, and 20152017
· | Consolidated Statements of Cash Flows, |
Years ended December 31, 2017, 2016,2019, 2018, and 20152017
· | Notes to Consolidated Financial Statements, |
December 31, 20172019
· | Management’s Report on Internal Control Over Financial Reporting |
· | Report of Independent Registered Public Accounting Firm |
Selected Quarterly Selected Data (Unaudited) for 20172019 and 20162018 are contained on page 108. 115.
COMMUNITY BANK SYSTEM, INC. CONSOLIDATED CONSOLIDATED STATEMENTS OF CONDITION (In Thousands, Except Share Data)
| | December 31, | | | December 31, | | | | 2017 | | | 2016 | | | 2019 | | | 2018 | | Assets: | | | | | | | | | | | | | Cash and cash equivalents | | $ | 221,038 | | | $ | 173,857 | | | $ | 205,030 | | | $ | 211,834 | | | | | | | | | | | | Available-for-sale investment securities (cost of $3,007,148 and $2,706,863, respectively) | | | 3,031,088 | | | | 2,748,656 | | | | | | | | | | | | | Other securities, at cost | | | 50,291 | | | | 35,736 | | | | | | | | | | | | | Available-for-sale investment securities (cost of $3,011,551 and $2,952,278, respectively) | | | | 3,044,428 | | | | 2,936,049 | | Equity and other securities (cost of $42,965 and $44,678, respectively) | | | | 43,915 | | | | 45,609 | | Loans held for sale, at fair value | | | 461 | | | | 2,416 | | | | 0 | | | | 83 | | | | | | | | | | | | | | | | | | | Loans | | | 6,256,757 | | | | 4,948,562 | | | | 6,890,543 | | | | 6,281,121 | | Allowance for loan losses | | | (47,583 | ) | | | (47,233 | ) | | | (49,911 | ) | | | (49,284 | ) | Net loans | | | 6,209,174 | | | | 4,901,329 | | | | 6,840,632 | | | | 6,231,837 | | | | | | | | | | | | | | | | | | | Goodwill | | | 734,430 | | | | 465,142 | | | Goodwill, net | | | | 773,810 | | | | 733,503 | | Core deposit intangibles, net | | | 25,025 | | | | 7,107 | | | | 16,418 | | | | 18,596 | | Other intangibles, net | | | 65,633 | | | | 8,595 | | | | 46,695 | | | | 55,250 | | Intangible assets, net | | | 825,088 | | | | 480,844 | | | | 836,923 | | | | 807,349 | | | | | | | | | | | | | | | | | | | Premises and equipment, net | | | 123,393 | | | | 112,318 | | | | 164,638 | | | | 119,988 | | Accrued interest and fees receivable | | | 36,177 | | | | 31,093 | | | | 31,647 | | | | 31,048 | | Other assets | | | 249,488 | | | | 180,188 | | | | 243,082 | | | | 223,498 | | | | | | | | | | | | | | | | | | | Total assets | | $ | 10,746,198 | | | $ | 8,666,437 | | | $ | 11,410,295 | | | $ | 10,607,295 | | | | | | | | | | | | | | | | | | | Liabilities: | | | | | | | | | | | | | | | | | Noninterest-bearing deposits | | $ | 2,293,057 | | | $ | 1,646,039 | | | $ | 2,465,902 | | | $ | 2,312,816 | | Interest-bearing deposits | | | 6,151,363 | | | | 5,429,915 | | | | 6,529,065 | | | | 6,009,555 | | Total deposits | | | 8,444,420 | | | | 7,075,954 | | | | 8,994,967 | | | | 8,322,371 | | | | | | | | | | | | | | | | | | | Short-term borrowings | | | 24,000 | | | | 146,200 | | | Overnight Federal Home Loan Bank borrowings | | | | 8,300 | | | | 54,400 | | Securities sold under agreement to repurchase, short-term | | | 337,011 | | | | 0 | | | | 241,708 | | | | 259,367 | | Other long-term debt | | | 2,071 | | | | 0 | | | Other Federal Home Loan Bank borrowings | | | | 3,750 | | | | 1,976 | | Subordinated notes payable | | | | 13,795 | | | | 0 | | Subordinated debt held by unconsolidated subsidiary trusts | | | 122,814 | | | | 102,170 | | | | 77,320 | | | | 97,939 | | Accrued interest and other liabilities | | | 180,567 | | | | 144,013 | | | | 215,221 | | | | 157,459 | | Total liabilities | | | 9,110,883 | | | | 7,468,337 | | | | 9,555,061 | | | | 8,893,512 | | | | | | | | | | | | | | | | | | | Commitments and contingencies (See Note N) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Shareholders' equity: | | | | | | | | | | Shareholders’ equity: | | | | | | | | | | Preferred stock, $1.00 par value, 500,000 shares authorized, 0 shares issued | | | 0 | | | | 0 | | | | 0 | | | | 0 | | Common stock, $1.00 par value, 75,000,000 shares authorized; 51,263,841 and 44,950,352 shares issued, respectively | | | 51,264 | | | | 44,950 | | | Common stock, $1.00 par value, 75,000,000 shares authorized; 51,974,726 and 51,576,839 shares issued, respectively | | | | 51,975 | | | | 51,577 | | Additional paid-in capital | | | 894,879 | | | | 545,775 | | | | 927,337 | | | | 911,748 | | Retained earnings | | | 700,557 | | | | 614,692 | | | | 882,851 | | | | 795,563 | | Accumulated other comprehensive (loss)/income | | | (3,699 | ) | | | 7,843 | | | Treasury stock, at cost (567,764 shares including 237,494 shares held by deferred compensation arrangements at December 31, 2017, and 512,937 shares at December 31, 2016) | | | (21,014 | ) | | | (15,160 | ) | | Deferred compensation arrangements (237,494 shares at December 31, 2017) | | | 13,328 | | | | 0 | | | Total shareholders' equity | | | 1,635,315 | | | | 1,198,100 | | | Accumulated other comprehensive (loss) | | | | (10,226 | ) | | | (45,305 | ) | Treasury stock, at cost (180,803 shares including 179,548 shares held by deferred compensation arrangements at December 31, 2019, and 319,015 shares including 207,403 shares held by deferred compensation arrangements at December 31, 2018) | | | | (6,823 | ) | | | (11,528 | ) | Deferred compensation arrangements (179,548 shares at December 31, 2019 and 207,403 shares at December 31, 2018) | | | | 10,120 | | | | 11,728 | | Total shareholders’ equity | | | | 1,855,234 | | | | 1,713,783 | | | | | | | | | | | | | | | | | | | Total liabilities and shareholders' equity | | $ | 10,746,198 | | | $ | 8,666,437 | | | Total liabilities and shareholders’ equity | | | $ | 11,410,295 | | | $ | 10,607,295 | |
The accompanying notes are an integral part of the consolidated financial statements.
COMMUNITY BANK SYSTEM, INC. CONSOLIDATED CONSOLIDATED STATEMENTS OF INCOME (In Thousands, Except Per-Share Data)
| | Years Ended December 31, | | | Years Ended December 31, | | | | 2017 | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | | 2017 | | Interest income: | | | | | | | | | | | | | | | | | | | Interest and fees on loans | | $ | 253,949 | | | $ | 211,467 | | | $ | 187,743 | | | $ | 308,210 | | | $ | 286,165 | | | $ | 253,949 | | Interest and dividends on taxable investments | | | 60,159 | | | | 56,201 | | | | 52,871 | | | | 65,904 | | | | 63,504 | | | | 60,159 | | Interest and dividends on nontaxable investments | | | 15,347 | | | | 17,519 | | | | 19,008 | | | | 11,613 | | | | 13,064 | | | | 15,347 | | Total interest income | | | 329,455 | | | | 285,187 | | | | 259,622 | | | | 385,727 | | | | 362,733 | | | | 329,455 | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest expense: | | | | | | | | | | | | | | | | | | | | | | | | | Interest on deposits | | | 8,031 | | | | 7,325 | | | | 6,971 | | | | 20,460 | | | | 10,658 | | | | 8,031 | | Interest on borrowings | | | 1,845 | | | | 1,017 | | | | 1,694 | | | | 1,848 | | | | 2,343 | | | | 1,845 | | Interest on subordinated notes payable | | | | 346 | | | | 0 | | | | 0 | | Interest on subordinated debt held by unconsolidated subsidiary trusts | | | 3,904 | | | | 2,949 | | | | 2,537 | | | | 3,898 | | | | 4,677 | | | | 3,904 | | Total interest expense | | | 13,780 | | | | 11,291 | | | | 11,202 | | | | 26,552 | | | | 17,678 | | | | 13,780 | | | | | | | | | | | | | | | | | | | | | | | | | | | Net interest income | | | 315,675 | | | | 273,896 | | | | 248,420 | | | | 359,175 | | | | 345,055 | | | | 315,675 | | Provision for loan losses | | | 10,984 | | | | 8,076 | | | | 6,447 | | | | 8,430 | | | | 10,837 | | | | 10,984 | | Net interest income after provision for loan losses | | | 304,691 | | | | 265,820 | | | | 241,973 | | | | 350,745 | | | | 334,218 | | | | 304,691 | | | | | | | | | | | | | | | | | | | | | | | | | | | Noninterest revenues: | | | | | | | | | | | | | | | | | | | | | | | | | Deposit service fees | | | 67,896 | | | | 58,595 | | | | 52,747 | | | | 65,602 | | | | 70,384 | | | | 67,896 | | Other banking revenues | | | 5,466 | | | | 7,477 | | | | 4,960 | | | Other banking services | | | | 4,881 | | | | 4,968 | | | | 5,466 | | Employee benefit services | | | 80,830 | | | | 46,628 | | | | 45,388 | | | | 97,167 | | | | 92,279 | | | | 80,830 | | Insurance services | | | 26,150 | | | | 23,149 | | | | 3,352 | | | | 32,199 | | | | 30,317 | | | | 26,150 | | Wealth management services | | | 22,079 | | | | 19,776 | | | | 16,856 | | | | 25,869 | | | | 25,772 | | | | 22,079 | | Gain/(loss) on sales of investment securities, net | | | 2 | | | | 0 | | | | (4 | ) | | Unrealized gain on equity securities | | | | 19 | | | | 657 | | | | 0 | | Loss on debt extinguishment | | | | 0 | | | | (318 | ) | | | 0 | | Gain on sales of investment securities, net | | | | 4,882 | | | | 0 | | | | 2 | | Total noninterest revenues | | | 202,423 | | | | 155,625 | | | | 123,299 | | | | 230,619 | | | | 224,059 | | | | 202,423 | | | | | | | | | | | | | | | | | | | | | | | | | | | Noninterest expenses: | | | | | | | | | | | | | | | | | | | | | | | | | Salaries and employee benefits | | | 179,993 | | | | 151,647 | | | | 126,356 | | | | 219,916 | | | | 207,363 | | | | 186,903 | | Occupancy and equipment | | | 35,561 | | | | 30,078 | | | | 27,593 | | | | 39,850 | | | | 39,948 | | | | 35,561 | | Data processing and communications | | | 37,579 | | | | 34,501 | | | | 30,430 | | | | 41,407 | | | | 39,094 | | | | 37,579 | | Amortization of intangible assets | | | 16,941 | | | | 5,479 | | | | 3,663 | | | | 15,956 | | | | 18,155 | | | | 16,941 | | Legal and professional fees | | | 11,576 | | | | 8,455 | | | | 6,813 | | | | 10,783 | | | | 10,644 | | | | 11,576 | | Office supplies and postage | | | 7,506 | | | | 7,274 | | | | 6,476 | | | Business development and marketing | | | 9,994 | | | | 7,484 | | | | 7,204 | | | | 11,416 | | | | 9,383 | | | | 9,994 | | FDIC insurance premiums | | | 3,473 | | | | 3,671 | | | | 3,962 | | | Acquisition expenses | | | 25,986 | | | | 1,706 | | | | 7,037 | | | | 8,608 | | | | (769 | ) | | | 25,986 | | Other expenses | | | 18,540 | | | | 16,553 | | | | 13,521 | | | | 24,090 | | | | 21,471 | | | | 22,609 | | Total noninterest expenses | | | 347,149 | | | | 266,848 | | | | 233,055 | | | | 372,026 | | | | 345,289 | | | | 347,149 | | | | | | | | | | | | | | | | | | | | | | | | | | | Income before income taxes | | | 159,965 | | | | 154,597 | | | | 132,217 | | | | 209,338 | | | | 212,988 | | | | 159,965 | | Income taxes | | | 9,248 | | | | 50,785 | | | | 40,987 | | | | 40,275 | | | | 44,347 | | | | 9,248 | | Net income | | $ | 150,717 | | | $ | 103,812 | | | $ | 91,230 | | | $ | 169,063 | | | $ | 168,641 | | | $ | 150,717 | | | | | | | | | | | | | | | | | | | | | | | | | | | Basic earnings per share | | $ | 3.07 | | | $ | 2.34 | | | $ | 2.21 | | | $ | 3.26 | | | $ | 3.28 | | | $ | 3.07 | | Diluted earnings per share | | $ | 3.03 | | | $ | 2.32 | | | $ | 2.19 | | | $ | 3.23 | | | $ | 3.24 | | | $ | 3.03 | | Cash dividends declared per share | | $ | 1.32 | | | $ | 1.26 | | | $ | 1.22 | | |
The accompanying notes are an integral part of the consolidated financial statements.
COMMUNITY BANK SYSTEM, INC. CONSOLIDATED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In Thousands)
| | Years Ended December 31, | | | Years Ended December 31, | | | | 2017 | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | | 2017 | | | | | | | | | | | | | | | | | | | | | Pension and other post retirement obligations: | | | | | | | | | | | | | | | | | | | Amortization of actuarial (gains)/losses included in net periodic pension cost, gross | | $ | (707 | ) | | $ | 5,514 | | | $ | (7,236 | ) | | Amortization of actuarial losses included in net periodic pension cost, gross | | | $ | (2,563 | ) | | $ | (12,647 | ) | | $ | (707 | ) | Tax effect | | | 263 | | | | (2,108 | ) | | | 2,774 | | | | 605 | | | | 3,087 | | | | 263 | | Amortization of actuarial (gains)/losses included in net periodic pension cost, net | | | (444 | ) | | | 3,406 | | | | (4,462 | ) | | Amortization of actuarial losses included in net periodic pension cost, net | | | | (1,958 | ) | | | (9,560 | ) | | | (444 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Amortization of prior service cost included in net periodic pension cost, gross | | | (859 | ) | | | (136 | ) | | | (170 | ) | | | (115 | ) | | | (1,398 | ) | | | (859 | ) | Tax effect | | | 324 | | | | 52 | | | | 65 | | | | 28 | | | | 340 | | | | 324 | | Amortization of prior service cost included in net periodic pension cost, net | | | (535 | ) | | | (84 | ) | | | (105 | ) | | | (87 | ) | | | (1,058 | ) | | | (535 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Initial projected benefit obligation recognized upon plan adoption, gross | | | | 0 | | | | (775 | ) | | | 0 | | Tax effect | | | | 0 | | | | 189 | | | | 0 | | Initial projected benefit obligation recognized upon plan adoption, net | | | | 0 | | | | (586 | ) | | | 0 | | | | | | | | | | | | | | | | Unamortized actuarial gain due to plan merger, gross | | | 1,858 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 1,858 | | Tax Effect | | | (711 | ) | | | 0 | | | | 0 | | | Tax effect | | | | 0 | | | | 0 | | | | (711 | ) | Unamortized actuarial gain due to plan merger, net | | | 1,147 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 1,147 | | | | | | | | | | | | | | | | | | | | | | | | | | | Other comprehensive income/(loss) related to pension and other post retirement obligations, net of taxes | | | 168 | | | | 3,322 | | | | (4,567 | ) | | Other comprehensive (loss)/income related to pension and other post retirement obligations, net of taxes | | | | (2,045 | ) | | | (11,204 | ) | | | 168 | | | | | | | | | | | | | | | | | | | | | | | | | | | Unrealized (losses)/gains on securities: | | | | | | | | | | | | | | Net unrealized holding losses arising during period, gross | | | (17,851 | ) | | | (24,042 | ) | | | (9,209 | ) | | Unrealized gains/(losses) on available-for-sale securities: | | | | | | | | | | | | | | Net unrealized holding gains (losses) arising during period, gross | | | | 53,988 | | | | (39,894 | ) | | | (17,851 | ) | Tax effect | | | 6,787 | | | | 9,328 | | | | 2,289 | | | | (13,176 | ) | | | 9,700 | | | | 6,787 | | Net unrealized holding losses arising during period, net | | | (11,064 | ) | | | (14,714 | ) | | | (6,920 | ) | | Net unrealized holding gains (losses) arising during period, net | | | | 40,812 | | | | (30,194 | ) | | | (11,064 | ) | Reclassification of other comprehensive income due to change in accounting principle – equity securities | | | | 0 | | | | (208 | ) | | | 0 | | | | | | | | | | | | | | | | | | | | | | | | | | | Reclassification adjustment for net (gains)/losses included in net income, gross | | | (2 | ) | | | 0 | | | | 4 | | | Reclassification adjustment for net (gains) included in net income, gross | | | | (4,882 | ) | | | 0 | | | | (2 | ) | Tax effect | | | 1 | | | | 0 | | | | (2 | ) | | | 1,194 | | | | 0 | | | | 1 | | Reclassification adjustment for net gains/losses included in net income, net | | | (1 | ) | | | 0 | | | | 2 | | | Reclassification adjustment for net (gains) included in net income, net | | | | (3,688 | ) | | | 0 | | | | (1 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Other comprehensive (loss) related to unrealized (losses)/gains on available-for-sale securities, net of taxes | | | (11,065 | ) | | | (14,714 | ) | | | (6,918 | ) | | Other comprehensive gain (loss) related to unrealized gains/(losses) on available-for-sale securities, net of taxes | | | | 37,124 | | | | (30,402 | ) | | | (11,065 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Other comprehensive (loss), net of tax | | | (10,897 | ) | | | (11,392 | ) | | | (11,485 | ) | | Other comprehensive income (loss), net of tax | | | | 35,079 | | | | (41,606 | ) | | | (10,897 | ) | Net income | | | 150,717 | | | | 103,812 | | | | 91,230 | | | | 169,063 | | | | 168,641 | | | | 150,717 | | Comprehensive income | | $ | 139,820 | | | $ | 92,420 | | | $ | 79,745 | | | $ | 204,142 | | | $ | 127,035 | | | $ | 139,820 | |
| | As of December 31, | | | | 2017 | | | 2016 | | | 2015 | | Accumulated Other Comprehensive Income/(Loss) By Component: | | | | | | | | | | Unrealized loss for pension and other postretirement obligations | | $ | (28,677 | ) | | $ | (28,969 | ) | | $ | (34,347 | ) | Tax effect | | | 7,044 | | | | 11,008 | | | | 13,064 | | Net unrealized loss for pension and other postretirement obligations | | | (21,633 | ) | | | (17,961 | ) | | | (21,283 | ) | | | | | | | | | | | | | | Unrealized gain on available-for-sale securities | | | 23,940 | | | | 41,793 | | | | 65,835 | | Tax effect | | | (6,006 | ) | | | (15,989 | ) | | | (25,317 | ) | Net unrealized gain on available-for-sale securities | | | 17,934 | | | | 25,804 | | | | 40,518 | | | | | | | | | | | | | | | Accumulated other comprehensive (loss)/income | | $ | (3,699 | ) | | $ | 7,843 | | | $ | 19,235 | |
| | As of December 31, | | | | 2019 | | | 2018 | | | 2017 | | | | | | | | | | | | Accumulated Other Comprehensive Income/(Loss) By Component: | | | | | | | | | | Unrealized (loss) for pension and other postretirement obligations | | $ | (46,175 | ) | | $ | (43,497 | ) | | $ | (28,677 | ) | Tax effect | | | 11,293 | | | | 10,660 | | | | 7,044 | | Net unrealized (loss) for pension and other postretirement obligations | | | (34,882 | ) | | | (32,837 | ) | | | (21,633 | ) | | | | | | | | | | | | | | Unrealized gain (loss) on available-for-sale securities | | | 32,877 | | | | (16,229 | ) | | | 23,940 | | Tax effect | | | (8,221 | ) | | | 3,761 | | | | (6,006 | ) | Net unrealized gain (loss) on available-for-sale securities | | | 24,656 | | | | (12,468 | ) | | | 17,934 | | | | | | | | | | | | | | | Accumulated other comprehensive (loss) | | $ | (10,226 | ) | | $ | (45,305 | ) | | $ | (3,699 | ) |
The accompanying notes are an integral part of the consolidated financial statements.
COMMUNITY BANK SYSTEM, INC. CONSOLIDATED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'SHAREHOLDERS’ EQUITY Years ended December 31, 2015, 20162017, 2018 and 20172019 (In Thousands, Except Share Data)
| | Common Stock | | | | | | | | | Accumulated | | | | | | | | | | | | Common Stock | | | | | | | | | Accumulated | | | | | | | | | | | | | Shares Outstanding | | | Amount Issued | | | Additional Paid-in Capital | | | Retained Earnings | | | Other Comprehensive Income/(Loss) | | | Treasury Stock | | | Deferred Compensation Arrangements | | | Total | | | Shares Outstanding | | | Amount Issued | | | Additional Paid-in Capital | | | Retained Earnings | | | Other Comprehensive Income/(Loss) | | | Treasury Stock | | | Deferred Compensation Arrangements | | | Total | | Balance at December 31, 2014 | | | 40,747,721 | | | $ | 41,606 | | | $ | 409,984 | | | $ | 525,985 | | | $ | 30,720 | | | $ | (20,391 | ) | | $ | 0 | | | $ | 987,904 | | | Net income | | | | | | | | | | | | | | | 91,230 | | | | | | | | | | | | | | | | 91,230 | | | Other comprehensive income, net of tax | | | | | | | | | | | | | | | | | | | (11,485 | ) | | | | | | | | | | | (11,485 | ) | | Dividends declared: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Common, $1.22 per share | | | | | | | | | | | | | | | (50,624 | ) | | | | | | | | | | | | | | | (50,624 | ) | | Common stock issued under employee stock plan, including tax benefits of $2,297 | | | 458,817 | | | | 459 | | | | 9,315 | | | | | | | | | | | | | | | | | | | | 9,774 | | | Stock-based compensation | | | | | | | | | | | 4,201 | | | | | | | | | | | | | | | | | | | | 4,201 | | | Stock issued for acquisition | | | 2,377,329 | | | | 2,378 | | | | 99,824 | | | | | | | | | | | | | | | | | | | | 102,202 | | | Treasury stock purchased | | | (265,230 | ) | | | | | | | | | | | | | | | | | | | (9,126 | ) | | | | | | | (9,126 | ) | | Treasury stock issued to benefit plan | | | 456,223 | | | | | | | | 4,691 | | | | | | | | | | | | 11,880 | | | | | | | | 16,571 | | | Balance at December 31, 2015 | | | 43,774,860 | | | | 44,443 | | | | 528,015 | | | | 566,591 | | | | 19,235 | | | | (17,637 | ) | | | 0 | | | | 1,140,647 | | | Net income | | | | | | | | | | | | | | | 103,812 | | | | | | | | | | | | | | | | 103,812 | | | Other comprehensive loss, net of tax | | | | | | | | | | | | | | | | | | | (11,392 | ) | | | | | | | | | | | (11,392 | ) | | Dividends declared: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Common, $1.26 per share | | | | | | | | | | | | | | | (55,711 | ) | | | | | | | | | | | | | | | (55,711 | ) | | Common stock issued under employee stock plan, including tax benefits of $3,091 | | | 507,784 | | | | 507 | | | | 10,036 | | | | | | | | | | | | | | | | | | | | 10,543 | | | Stock-based compensation | | | | | | | | | | | 4,783 | | | | | | | | | | | | | | | | | | | | 4,783 | | | Treasury stock purchased | | | (67,826 | ) | | | | | | | | | | | | | | | | | | | (3,470 | ) | | | | | | | (3,470 | ) | | Treasury stock issued to benefit plan | | | 222,597 | | | | | | | | 2,941 | | | | | | | | | | | | 5,947 | | | | | | | | 8,888 | | | Balance at December 31, 2016 | | | 44,437,415 | | | | 44,950 | | | | 545,775 | | | | 614,692 | | | | 7,843 | | | | (15,160 | ) | | | 0 | | | | 1,198,100 | | | | 44,437,415 | | | $ | 44,950 | | | $ | 545,775 | | | $ | 614,692 | | | $ | 7,843 | | | $ | (15,160 | ) | | $ | 0 | | | $ | 1,198,100 | | Net income | | | | | | | | | | | | | | | 150,717 | | | | | | | | | | | | | | | | 150,717 | | | | | | | | | | | | | | | | 150,717 | | | | | | | | | | | | | | | | 150,717 | | Other comprehensive loss, net of tax | | | | | | | | | | | | | | | | | | | (10,897 | ) | | | | | | | | | | | (10,897 | ) | | | | | | | | | | | | | | | | | | | (10,897 | ) | | | | | | | | | | | (10,897 | ) | Reclassification related to tax effect of Tax Cuts and Jobs Act | | | | | | | | | | | | | | | 645 | | | | (645 | ) | | | | | | | | | | | 0 | | | | | | | | | | | | | | | | 645 | | | | (645 | ) | | | | | | | | | | | 0 | | Dividends declared: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Common, $1.32 per share | | | | | | | | | | | | | | | (65,497 | ) | | | | | | | | | | | | | | | (65,497 | ) | | | | | | | | | | | | | | | (65,497 | ) | | | | | | | | | | | | | | | (65,497 | ) | Common stock issued under employee stock plan | | | 264,640 | | | | 265 | | | | 4,298 | | | | | | | | | | | | | | | | | | | | 4,563 | | | Common stock issued under employee stock plans | | | | 264,640 | | | | 265 | | | | 4,298 | | | | | | | | | | | | | | | | | | | | 4,563 | | Stock-based compensation | | | | | | | | | | | 5,137 | | | | | | | | | | | | | | | | | | | | 5,137 | | | | | | | | | | | | 5,137 | | | | | | | | | | | | | | | | | | | | 5,137 | | Stock issued for acquisitions | | | 6,048,849 | | | | 6,049 | | | | 337,083 | | | | | | | | | | | | | | | | | | | | 343,132 | | | | 6,048,849 | | | | 6,049 | | | | 337,083 | | | | | | | | | | | | | | | | | | | | 343,132 | | Deferred compensation arrangements acquired | | | (179,003 | ) | | | | | | | | | | | | | | | | | | | (10,022 | ) | | | 10,022 | | | | 0 | | | | (179,003 | ) | | | | | | | | | | | | | | | | | | | (10,022 | ) | | | 10,022 | | | | 0 | | Treasury stock purchased | | | (58,491 | ) | | | | | | | | | | | | | | | | | | | (3,306 | ) | | | 3,306 | | | | 0 | | | | (58,491 | ) | | | | | | | | | | | | | | | | | | | (3,306 | ) | | | 3,306 | | | | 0 | | Treasury stock issued to benefit plan | | | 182,667 | | | | | | | | 2,586 | | | | | | | | | | | | 7,474 | | | | 0 | | | | 10,060 | | | | 182,667 | | | | | | | | 2,586 | | | | | | | | | | | | 7,474 | | | | | | | | 10,060 | | Balance at December 31, 2017 | | | 50,696,077 | | | $ | 51,264 | | | $ | 894,879 | | | $ | 700,557 | | | $ | (3,699 | ) | | $ | (21,014 | ) | | $ | 13,328 | | | $ | 1,635,315 | | | | 50,696,077 | | | | 51,264 | | | | 894,879 | | | | 700,557 | | | | (3,699 | ) | | | (21,014 | ) | | | 13,328 | | | | 1,635,315 | | Net income | | | | | | | | | | | | | | | | 168,641 | | | | | | | | | | | | | | | | 168,641 | | Other comprehensive loss, net of tax | | | | | | | | | | | | | | | | | | | | (41,398 | ) | | | | | | | | | | | (41,398 | ) | Cumulative effect of change in accounting principle – equity securities | | | | | | | | | | | | | | | | 208 | | | | (208 | ) | | | | | | | | | | | 0 | | Dividends declared: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Common, $1.44 per share | | | | | | | | | | | | | | | | (73,843 | ) | | | | | | | | | | | | | | | (73,843 | ) | Common stock issued under employee stock plans | | | | 312,998 | | | | 313 | | | | 6,130 | | | | | | | | | | | | | | | | | | | | 6,443 | | Stock-based compensation | | | | | | | | | | | | 6,064 | | | | | | | | | | | | | | | | | | | | 6,064 | | Distribution of stock under deferred compensation arrangements | | | | 35,233 | | | | | | | | | | | | | | | | | | | | 1,898 | | | | (1,898 | ) | | | 0 | | Treasury stock purchased | | | | (5,142 | ) | | | | | | | | | | | | | | | | | | | (298 | ) | | | 298 | | | | 0 | | Treasury stock issued to benefit plan | | | | 218,658 | | | | | | | | 4,675 | | | | | | | | | | | | 7,886 | | | | | | | | 12,561 | | Balance at December 31, 2018 | | | | 51,257,824 | | | | 51,577 | | | | 911,748 | | | | 795,563 | | | | (45,305 | ) | | | (11,528 | ) | | | 11,728 | | | | 1,713,783 | | Net income | | | | | | | | | | | | | | | | 169,063 | | | | | | | | | | | | | | | | 169,063 | | Other comprehensive income, net of tax | | | | | | | | | | | | | | | | | | | | 35,079 | | | | | | | | | | | | 35,079 | | Dividends declared: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Common, $1.58 per share | | | | | | | | | | | | | | | | (81,775 | ) | | | | | | | | | | | | | | | (81,775 | ) | Common stock issued under employee stock plans | | | | 397,887 | | | | 398 | | | | 6,517 | | | | | | | | | | | | | | | | | | | | 6,915 | | Stock-based compensation | | | | | | | | | | | | 5,285 | | | | | | | | | | | | | | | | | | | | 5,285 | | Distribution of stock under deferred compensation arrangements | | | | 32,431 | | | | | | | | 1,064 | | | | | | | | | | | | 830 | | | | (1,894 | ) | | | 0 | | Treasury stock purchased | | | | (4,576 | ) | | | | | | | | | | | | | | | | | | | (286 | ) | | | 286 | | | | 0 | | Treasury stock issued to benefit plan | | | | 110,357 | | | | | | | | 2,723 | | | | | | | | | | | | 4,161 | | | | | | | | 6,884 | | Balance at December 31, 2019 | | | | 51,793,923 | | | $ | 51,975 | | | $ | 927,337 | | | $ | 882,851 | | | $ | (10,226 | ) | | $ | (6,823 | ) | | $ | 10,120 | | | $ | 1,855,234 | |
The accompanying notes are an integral part of the consolidated financial statements.
COMMUNITY BANK SYSTEM, INC. CONSOLIDATED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands of Dollars) | | Years Ended December 31, | | | | 2017 | | | 2016 | | | 2015 | | Operating activities: | | | | | | | | | | Net income | | $ | 150,717 | | | $ | 103,812 | | | $ | 91,230 | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | Depreciation | | | 16,024 | | | | 14,398 | | | | 13,132 | | Amortization of intangible assets | | | 16,941 | | | | 5,479 | | | | 3,663 | | Net accretion on securities, loans and borrowings | | | (6,619 | ) | | | (4,405 | ) | | | (3,289 | ) | Stock-based compensation | | | 5,137 | | | | 4,783 | | | | 4,201 | | Provision for loan losses | | | 10,984 | | | | 8,076 | | | | 6,447 | | (Benefit)/provision for deferred income taxes | | | (28,692 | ) | | | 13,066 | | | | 10,716 | | Amortization of mortgage servicing rights | | | 499 | | | | 518 | | | | 409 | | Income from bank-owned life insurance policies | | | (1,586 | ) | | | (1,505 | ) | | | (1,086 | ) | (Gain)/loss on sales of investment securities, net | | | (2 | ) | | | 0 | | | | 4 | | Net loss/(gain) on sale of loans and other assets | | | 181 | | | | (837 | ) | | | (180 | ) | Change in other assets and liabilities | | | 26,090 | | | | (7,614 | ) | | | (5,681 | ) | Net cash provided by operating activities | | | 189,674 | | | | 135,771 | | | | 119,566 | | Investing activities: | | | | | | | | | | | | | Proceeds from sales of available-for-sale investment securities | | | 0 | | | | 0 | | | | 221,136 | | Proceeds from maturities of available-for-sale investment securities | | | 157,278 | | | | 109,638 | | | | 169,562 | | Proceeds from maturities of other securities | | | 30,116 | | | | 8,703 | | | | 1,790 | | Purchases of available-for-sale investment securities | | | (90,380 | ) | | | (65,966 | ) | | | (503,000 | ) | Purchases of other securities | | | (13,302 | ) | | | (4,612 | ) | | | 0 | | Net change in loans | | | 164,846 | | | | (159,871 | ) | | | (176,754 | ) | Cash (paid)/received for acquisition, net of cash acquired of $52,132, $0, and $81,772, respectively | | | (107,414 | ) | | | (575 | ) | | | 25,505 | | Settlement of bank owned life insurance policies | | | 1,779 | | | | 3,127 | | | | 0 | | Purchases of premises and equipment, net | | | (10,819 | ) | | | (12,442 | ) | | | (12,400 | ) | Real estate limited partnership investments | | | (733 | ) | | | 0 | | | | 0 | | Net cash provided by/(used in) investing activities | | | 131,371 | | | | (121,998 | ) | | | (274,161 | ) | Financing activities: | | | | | | | | | | | | | Net change in deposits | | | (79,940 | ) | | | 202,480 | | | | 238,969 | | Net change in borrowings, net of payments of $81,544, $0 and $0 | | | (144,809 | ) | | | (155,100 | ) | | | (36,700 | ) | Issuance of common stock | | | 4,563 | | | | 10,543 | | | | 9,774 | | Purchase of treasury stock | | | (3,306 | ) | | | (3,470 | ) | | | (9,126 | ) | Sale of treasury stock | | | 10,060 | | | | 8,888 | | | | 16,571 | | Increase in deferred compensation agreements | | | 3,306 | | | | 0 | | | | 0 | | Cash dividends paid | | | (62,305 | ) | | | (55,048 | ) | | | (49,273 | ) | Withholding taxes paid on share-based compensation | | | (1,433 | ) | | | (1,419 | ) | | | (806 | ) | Net cash (used in)/provided by financing activities | | | (273,864 | ) | | | 6,874 | | | | 169,409 | | Change in cash and cash equivalents | | | 47,181 | | | | 20,647 | | | | 14,814 | | Cash and cash equivalents at beginning of year | | | 173,857 | | | | 153,210 | | | | 138,396 | | Cash and cash equivalents at end of year | | $ | 221,038 | | | $ | 173,857 | | | $ | 153,210 | | Supplemental disclosures of cash flow information: | | | | | | | | | | | | | Cash paid for interest | | $ | 13,705 | | | $ | 11,268 | | | $ | 11,252 | | Cash paid for income taxes | | | 41,231 | | | | 32,239 | | | | 28,891 | | Supplemental disclosures of noncash financing and investing activities: | | | | | | | | | | | | | Dividends declared and unpaid | | | 17,460 | | | | 14,268 | | | | 13,605 | | Transfers from loans to other real estate | | | 3,518 | | | | 2,612 | | | | 3,943 | | Acquisitions: | | | | | | | | | | | | | Common stock issued | | | 343,132 | | | | 0 | | | | 102,202 | | Fair value of assets acquired, excluding acquired cash and intangibles | | | 1,961,246 | | | | 0 | | | | 675,025 | | Fair value of liabilities assumed | | | 1,871,685 | | | | 0 | | | | 700,574 | |
(In Thousands of Dollars)
| | Years Ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | Operating activities: | | | | | | | | | | Net income | | $ | 169,063 | | | $ | 168,641 | | | $ | 150,717 | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | Depreciation | | | 15,891 | | | | 15,749 | | | | 16,024 | | Amortization of intangible assets | | | 15,956 | | | | 18,155 | | | | 16,941 | | Net accretion on securities, loans and borrowings | | | (6,176 | ) | | | (9,404 | ) | | | (6,619 | ) | Stock-based compensation | | | 5,285 | | | | 6,064 | | | | 5,137 | | Provision for loan losses | | | 8,430 | | | | 10,837 | | | | 10,984 | | (Benefit)/provision for deferred income taxes | | | (2,302 | ) | | | 2,663 | | | | (28,692 | ) | Amortization of mortgage servicing rights | | | 378 | | | | 449 | | | | 499 | | Unrealized gain on equity securities | | | (19 | ) | | | (657 | ) | | | 0 | | Loss on debt extinguishment | | | 0 | | | | 318 | | | | 0 | | Income from bank-owned life insurance policies | | | (1,678 | ) | | | (1,579 | ) | | | (1,586 | ) | Gain on sales of investment securities, net | | | (4,882 | ) | | | 0 | | | | (2 | ) | Net loss/(gain) on sale of loans and other assets | | | 11 | | | | (80 | ) | | | 181 | | Change in other assets and liabilities | | | 2,545 | | | | 10,252 | | | | 26,090 | | Net cash provided by operating activities | | | 202,502 | | | | 221,408 | | | | 189,674 | | Investing activities: | | | | | | | | | | | | | Proceeds from sales of available-for-sale investment securities | | | 590,179 | | | | 0 | | | | 0 | | Proceeds from maturities, calls and paydowns of available-for-sale investment securities | | | 209,857 | | | | 140,784 | | | | 157,278 | | Proceeds from maturities and redemptions of other investment securities | | | 3,995 | | | | 5,867 | | | | 30,116 | | Purchases of available-for-sale investment securities | | | (810,122 | ) | | | (78,131 | ) | | | (90,380 | ) | Purchases of equity and other securities | | | (202 | ) | | | (31 | ) | | | (13,302 | ) | Net (increase) decrease in loans | | | (140,382 | ) | | | (35,414 | ) | | | 164,846 | | Cash paid for acquisition, net of cash acquired of $90,381, $16, and $52,132, respectively | | | (4,653 | ) | | | (1,737 | ) | | | (107,414 | ) | Settlement of bank owned life insurance policies | | | 1,597 | | | | 0 | | | | 1,779 | | Purchases of premises and equipment, net | | | (5,686 | ) | | | (12,646 | ) | | | (10,819 | ) | Real estate limited partnership investments | | | (1,637 | ) | | | (1,197 | ) | | | (733 | ) | Net cash (used in)/provided by investing activities | | | (157,054 | ) | | | 17,495 | | | | 131,371 | | Financing activities: | | | | | | | | | | | | | Net increase (decrease) in deposits | | | 104,435 | | | | (122,049 | ) | | | (79,940 | ) | Net decrease in borrowings, net of payments of $646, $95 and $81,544 | | | (64,405 | ) | | | (47,339 | ) | | | (144,809 | ) | Payments on subordinated debt held by unconsolidated subsidiary trusts | | | (22,681 | ) | | | (25,207 | ) | | | 0 | | Issuance of common stock | | | 6,915 | | | | 6,443 | | | | 4,563 | | Purchase of treasury stock | | | (286 | ) | | | (298 | ) | | | (3,306 | ) | Sale of treasury stock | | | 6,884 | | | | 12,561 | | | | 10,060 | | Increase in deferred compensation agreements | | | 286 | | | | 298 | | | | 3,306 | | Cash dividends paid | | | (80,241 | ) | | | (71,495 | ) | | | (62,305 | ) | Withholding taxes paid on share-based compensation | | | (3,159 | ) | | | (1,021 | ) | | | (1,433 | ) | Net cash used in financing activities | | | (52,252 | ) | | | (248,107 | ) | | | (273,864 | ) | Change in cash and cash equivalents | | | (6,804 | ) | | | (9,204 | ) | | | 47,181 | | Cash and cash equivalents at beginning of year | | | 211,834 | | | | 221,038 | | | | 173,857 | | Cash and cash equivalents at end of year | | $ | 205,030 | | | $ | 211,834 | | | $ | 221,038 | | Supplemental disclosures of cash flow information: | | | | | | | | | | | | | Cash paid for interest | | $ | 25,425 | | | $ | 17,926 | | | $ | 13,705 | | Cash paid for income taxes | | | 46,457 | | | | 30,266 | | | | 41,231 | | Supplemental disclosures of noncash financing and investing activities: | | | | | | | | | | | | | Dividends declared and unpaid | | | 21,342 | | | | 19,808 | | | | 17,460 | | Transfers from loans to other real estate | | | 2,522 | | | | 3,299 | | | | 3,518 | | Acquisitions: | | | | | | | | | | | | | Common stock issued | | | 0 | | | | 0 | | | | 343,132 | | Fair value of assets acquired, excluding acquired cash and intangibles | | | 548,856 | | | | 115 | | | | 1,961,246 | | Fair value of liabilities assumed | | | 589,733 | | | | 31 | | | | 1,870,449 | |
The accompanying notes are an integral part of the consolidated financial statements.
COMMUNITY BANK SYSTEM, INC.
NOTE A: | NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Nature of Operations Community Bank System, Inc. (the “Company”) is a registered financial holding company which wholly-owns two2 significant consolidated subsidiaries: Community Bank, N.A. (the “Bank” or “CBNA”), and Benefit Plans Administrative Services, Inc. (“BPAS”). As of December 31, 2017,2019, BPAS owns five5 subsidiaries: Benefit Plans Administrative Services, LLC (“BPA”), a provider of defined benefit contribution plan administration services; Northeast Retirement Services, LLC (“NRS”), a provider of institutional transfer agency, master recordkeeping services, fund administration, trust and retirement plan services; BPAS Actuarial & Pension Services, LLC (“BPAS-APS”), a provider of actuarial and benefit consulting services; BPAS Trust Company of Puerto Rico, a Puerto Rican trust company; and Hand Benefits & Trust Company (“HB&T”), a provider of collective investment fund administration and institutional trust services. NRS owns one1 subsidiary, Global Trust Company, Inc. (“GTC”), a non-depository trust company which provides fiduciary services for collective investment trusts and other products. HB&T owns one1 subsidiary, Hand Securities Inc. (“HSI”), an introducing broker-dealer. The Company also wholly-owns three1 unconsolidated subsidiary business truststrust formed for the purpose of issuing mandatorily-redeemable preferred securities which are considered Tier I capital under regulatory capital adequacy guidelines (see Note P).
As of December 31, 2017,2019, the Bank operated 225231 full service branches operating as Community Bank, N.A. throughout 3540 counties of Upstate New York, six6 counties of Northeastern Pennsylvania, 12 counties of Vermont and one1 county of Western Massachusetts, offering a range of commercial and retail banking services. The Bank owns the following operating subsidiaries: The Carta Group, Inc. (“Carta Group”), CBNA Preferred Funding Corporation (“PFC”), CBNA Treasury Management Corporation (“TMC”), Community Investment Services, Inc. (“CISI”), NOTCH Investment Fund, LLC (“NOTCH”), Nottingham Advisors, Inc. (“Nottingham”), OneGroup NY, Inc. (“OneGroup”), and Oneida Preferred Funding II LLC (“OPFC II”). OneGroup is a full-service insurance agency offering personal and commercial propertylines of insurance and other risk management products and services. NOTCH, PFC and OPFC II primarily act as investors in residential and commercial real estate activities. TMC provides cash management, investment, and treasury services to the Bank. CISI and Carta Group provide broker-dealer and investment advisory services. Nottingham provides asset management services to individuals, corporations, corporate pension and profit sharing plans, and foundations.
Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Variable Interest Entities (“VIE”) are legal entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the legal entities to finance its activities without additional subordinated financial support. VIEs may be required to be consolidated by a company if it is determined the company is the primary beneficiary of a VIE. The primary beneficiary of a VIE is the enterprise that has: (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (2) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits of the VIE that could potentially be significant to the VIE. The Company’s VIE’s are described in more detail in Note T to the consolidated financial statements.
Critical Accounting Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Critical accounting estimates include the allowance for loan losses, actuarial assumptions associated with the pension, post-retirement and other employee benefit plans, the provision for income taxes, investment valuation and other-than-temporary impairment, the carrying value of goodwill and other intangible assets, and acquired loan valuations.
Risk and Uncertainties In the normal course of its business, the Company encounters economic and regulatory risks. There are three3 main components of economic risk: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on different basis, from its interest-earning assets. The Company’s primary credit risk is the risk of default on the Company’s loan portfolio that results from the borrowers’ inability or unwillingness to make contractually required payments. Market risk reflects potential changes in the value of collateral underlying loans, the fair value of investment securities, and loans held for sale.
The Company is subject to regulations of various governmental agencies. These regulations can change significantly from period to period. The Company also undergoes periodic examinations by the regulatory agencies which may subject it to further changes with respect to asset valuations, amounts of required loan loss allowances, and operating restrictions resulting from the regulators’ judgments based on information available to them at the time of their examinations.
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 recognizesdetermined 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 an accruala time expended basis. CISIPayment 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 Carta Group recognizeasset 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 2 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 income when investmentrate. 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 soldalso available to customers. Nottingham providesexisting 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 brokerage firmsthe 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 clientsrevenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and recognizes income ratably overtherefore, does not experience significant contract balances. As of December 31, 2019, $26.8 million of accounts receivable, including $7.5 million of unbilled fee revenue, and $1.8 million of unearned revenue was recorded in the Consolidated Statements of Condition. As of December 31, 2018, $26.4 million of accounts receivable, including $7.8 million of unbilled fee revenue, and $2.2 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 period duringhad not been obtained (for example, sales commission). The Company utilizes the practical expedient method which service is performed. Revenueallows entities to immediately expense contract acquisition costs when the asset that would have resulted from BPA’s administration and recordkeeping services is recognized ratably overcapitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, the serviceCompany did not capitalize any contract period. Revenue from consulting and actuarial services is recognized when services are rendered. OneGroup recognizes commission revenue at the later of the effective date of the insurance policy, or the date on which the policy premium is billed to the customer. At that date, the earnings process has been completed and the impact of refunds for policy cancellations can be reasonably estimated to establish reserves. The reserve for policy cancellations is based upon historical cancellation experience adjusted for known circumstances. All intercompany revenue and expense among related entities are eliminated in consolidation.acquisition costs.
Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and highly liquid investments with original maturities of less than 90 days. The carrying amounts reported in the consolidated statementsConsolidated Statements of conditionCondition for cash and cash equivalents approximate those assets’ fair values. As of December 31, 2019 and 2018, cash and cash equivalents reported in the consolidated statements of condition included cash due from banks of $10.4 million and $15.0 million, respectively.
Investment Securities The Company can classify its investments in debt and equity securities as trading, held-to-maturity, available-for-sale, or available-for-sale.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 amortized cost.cost, which is adjusted for amortization of premiums and accretion of discounts. The Company did not use the held-to-maturity classification in 20162018 or 2017. Securities classified as available-for-sale2019. 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. None of the Company's investment securities have been classified as trading securities at December 31, 2017.2019. Equity securities with a readily determinable fair value are reported at fair value with net unrealized gains and losses recognized in the Consolidated Statement of Income. Certain equity securities that do not have a readily determinable fair value are stated at cost, andless 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”) and 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.
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.
Equity securities are also evaluated to determine whether the unrealized loss is expected to be recoverable based on whether evidence exists to support a realizable value equal to or greater than the amortized cost basis. If it is probable that the amortized cost basis will not be recovered, taking into consideration the estimated recovery period and the ability to hold the equity security until recovery, OTTI is recognized in earnings equal to the difference between the fair value and the amortized cost basis of the security.
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.
Loans Loans are stated at unpaid principal balances, net of unearned income. Mortgage loans held for sale are carried at fair value and are included in loans held for sale on the consolidated statements of condition. Fair values for variable rate loans that reprice frequently are based on carrying values. Fair values for fixed rate loans are estimated using discounted cash flows and interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The carrying amount of accrued interest approximates its fair value.
Interest on loans is accrued and credited to operations based upon the principal amount outstanding. Nonrefundable loan fees and related direct costs are deferred and included in the loan balances where they are amortized over the life of the loan as an adjustment to loan yield using the effective yield method. Premiums and discounts on purchased loans are amortized using the effective yield method over the life of the loans.
Acquired loans Acquired loans are initially recorded at their acquisition date fair values. The carryover of allowance for loan losses is prohibited as any credit losses in the loans are included in the determination of the fair value of the loans at the acquisition date. Fair values for acquired loans are based on a discounted cash flow methodology that involves assumptions and judgments as to credit risk, prepayment risk, liquidity risk, default rates, loss severity, payment speeds, collateral values and discount rate.
Acquired impaired loans 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 are accounted for as impaired loans under ASC 310-30. The excess of undiscounted cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loans using the interest method. The difference between contractually required payments at acquisition and the undiscounted cash flows expected to be collected at acquisition is referred to as the non-accretable discount. The non-accretable discount represents estimated future credit losses and other contractually required payments that the Company does not expect to collect. Subsequent decreases in expected cash flows are recognized as impairments through a charge to the provision for loan losses resulting in an increase in the allowance for loan losses. Subsequent improvements in expected cash flows result in a recovery of previously recorded allowance for loan losses or a reversal of a corresponding amount of the non-accretable discount, which the Company then reclassifies as an accretable discount that is recognized into interest income over the remaining life of the loans using the interest method.
Acquired loans that met the criteria for non-accrual of interest prior to acquisition may be considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if the Company can reasonably estimate the timing and amount of the expected cash flows on such loans and if the Company expects to fully collect the new carrying value of the loans. As such, the Company may no longer consider the loan to be non-accrual or non-performing and may accrue interest on these loans, including the impact of any accretable discount.
Acquired non-impaired loans Acquired loans that do not meet the requirements under ASC 310-30 are considered acquired non-impaired loans. The difference between the acquisition date fair value and the outstanding balance represents the fair value adjustment for a loan and includes both credit and interest rate considerations. Fair value adjustments may be discounts (or premiums) to a loan’s cost basis and are accreted (or amortized) to net interest income (or expense) over the loan’s remaining life in accordance with ASC 310-20. Fair value adjustments for revolving loans are accreted (or amortized) using a straight line method. Term loans are accreted (or amortized) using the constant effective yield method.
Subsequent to the purchase date, the methods used to estimate the allowance for loan losses for the acquired non-impaired loans is consistent with the policy described below. However, the Company compares the net realizable value of the loans to the carrying value, for loans collectively evaluated for impairment. The carrying value represents the net of the loan’s unpaid principal balance and the remaining purchase discount (or premium) that has yet to be accreted (or amortized) into interest income (or interest expense). When the carrying value exceeds the net realizable value, an allowance for loan losses is recognized.
Impaired and Other Nonaccrual Loans The Company places a loan on nonaccrual status when the loan becomes 90 days past due (or sooner, if management concludes collection is doubtful), except when, in the opinion of management, it is well-collateralized and in the process of collection. A loan may be placed on nonaccrual status earlier than ninety90 days past due if there is deterioration in the financial position of the borrower or if other conditions of the loan so warrant. When a loan is placed on nonaccrual status, uncollected accrued interest is reversed against interest income and the amortization of nonrefundable loan fees and related direct costs is discontinued. Interest income during the period the loan is on nonaccrual status is recorded on a cash basis after recovery of principal is reasonably assured. Nonaccrual loans are returned to accrual status when management determines that the borrower’s performance has improved and that both principal and interest are collectible. This generally requires a sustained period of timely principal and interest payments and a well-documented credit evaluation of the borrower’s financial condition.
A loan is considered modified in a troubled debt restructuring (“TDR”) when, due to a borrower’s financial difficulties, the Company makes a concession(s) to the borrower that it would not otherwise consider. These modifications may include, among others, an extension for the term of the loan, or granting a period when interest–only payments can be made with the principal payments and interest caught up over the remaining term of the loan or at maturity. Generally, a nonaccrual loan that has been modified in a TDR remains on nonaccrual status for a period of 12 months to demonstrate that the borrower is able to meet the terms of the modified loan. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains on nonaccrual status.
Regulatory guidance issued by the OCC requires certain loans that have been discharged in Chapter 7 bankruptcy to be reported as TDRs. In accordance with this guidance, loans that have been discharged in Chapter 7 bankruptcy but not reaffirmed by the borrower are classified as TDRs, irrespective of payment history or delinquency status, even if the repayment terms for the loan have not been otherwise modified and the Company’s lien position against the underlying collateral remains unchanged. Pursuant to that guidance, the Company records a charge-off equal to any portion of the carrying value that exceeds the net realizable value of the collateral.
Commercial loans greater than $0.5 million are evaluated individually for impairment. A loan is considered impaired, based on current information and events, if it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based upon the present value of expected future cash flows or the fair value of the collateral, if the loan is collateral-dependent.
The Company’s charge-off policy by loan type is as follows: ·● | Business lending loans are generally charged-off to the extent outstanding principal exceeds the fair value of estimated proceeds from collection efforts, including liquidation of collateral. The charge-off is recognized when the loss becomes reasonably quantifiable. |
·● | Consumer installment loans are generally charged-off to the extent outstanding principal exceeds the fair value of collateral, and are recognized by the end of the month in which the loan becomes 90 days past due. |
·● | Consumer mortgage and home equity loans are generally charged-off to the extent outstanding principal exceeds the fair value of the property, less estimated costs to sell, and are recognized when the loan becomes 180 days past due. |
Allowance for Loan Losses Management continually evaluates the credit quality of the Company’s loan portfolio, and performs a formal review of the adequacy of the allowance for loan losses on a quarterly basis. The allowance reflects management’s best estimate of probable losses inherent in the loan portfolio. Determination of the allowance is subjective in nature and requires significant estimates. The Company’s allowance methodology consists of two2 broad components - general and specific loan loss allocations.
The general loan loss allocation is composed of two2 calculations that are computed on five5 main loan segments: business lending, consumer direct, consumer indirect, home equity and consumer mortgage. The first calculation is quantitative and determines an allowance level based on the latest 36 months of historical net charge-off data for each loan class (commercial loans exclude balances with specific loan loss allocations). The second calculation is qualitative and takes into consideration eight8 qualitative environmental factors: levels and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards, and other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. A component of the qualitative calculation is the unallocated allowance for loan loss. The qualitative and quantitative calculations are added together to determine the general loan loss allocation. The specific loan loss allocation relates to individual commercial loans that are both greater than $0.5 million and in a nonaccruing status with respect to interest. Specific loan losses are based on discounted estimated cash flows, including any cash flows resulting from the conversion of collateral or collateral shortfalls. The allowance levels computed from the specific and general loan loss allocation methods are combined with unallocated allowances and allowances needed for acquired loans to derive the total required allowance for loan losses to be reflected on the Consolidated Statement of Condition. Loan losses are charged off against the allowance, while recoveries of amounts previously charged off are credited to the allowance. A provision for loan losses is charged to operations based on management’s periodic evaluation of factors previously mentioned.
Intangible Assets Intangible assets include core deposit intangibles, customer relationship intangibles and goodwill arising from acquisitions. Core deposit intangibles and customer relationship intangibles are amortized on either an accelerated or straight-line basis over periods ranging from seven to 20 years. The initial and ongoing carrying value of goodwill and other intangible assets is based upon discounted cash flow modeling techniques that require management to make estimates regarding the amount and timing of expected future cash flows. It also requires use of a discount rate that reflects the current return requirements of the market in relation to present risk-free interest rates, required equity market premiums, peer volatility indicators, and company-specific risk indicators.
The Company evaluates goodwill for impairment on an annual basis, or more often if events or circumstances indicate there may be impairment. The implied fair value of a reporting unit’s goodwill is compared to its carrying amount and the impairment loss is measured by the excess of the carrying value over fair value. The fair value of each reporting unit is compared to the carrying amount of that reporting unit in order to determine if impairment is indicated.
Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation. Computer software costs that are capitalized include only include external direct costs of obtaining and installing the software. The Company has not developed any internal use software. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Useful lives range from threetwo to 1020 years for equipment; three to seven years for software and hardware; and 10 to 40 years for building and building improvements. Land improvements are depreciated over 20 years and leasehold improvements are amortized over the shorter of the term of the respective lease plus any optional renewal periods that are reasonably assured or life of the asset. Maintenance and repairs are charged to expense as incurred.
The Company occupies certain offices and uses certain equipment under non-cancelable operating lease agreements. The Company determines if an arrangement is a lease at inception. The right-of-use assets associated with operating leases are recorded in premises and equipment in the Company’s consolidated statements of condition. The lease liabilities associated with operating leases are included in accrued interest and other liabilities in the Company’s consolidated statements of condition. Right-of-use assets represent the Company’s right to use the underlying assets for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the associated leases. Operating lease right-of-use assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. The Company uses interest rates on advances from the FHLB available at the time of commencement to determine the present value of lease payments. The operating lease right-of-use assets include any lease payments made at the time of commencement and exclude lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. Lease expense is recognized on a straight-line basis over the lease term and is included in occupancy and equipment expense in the Company’s consolidated statements of income.
The Company elected to account for lease and non-lease components separately, applies a portfolio approach to account for the lease right-of-use assets and liabilities for certain equipment leases and elected to exclude leases with a term of 12 months or less from the recognition and measurement policies described above.
Other Real Estate Other real estate owned is comprised of properties acquired through foreclosure, or by deed in lieu of foreclosure. These assets are carried at fair value less estimated costs of disposal. At foreclosure, if the fair value, less estimated costs to sell, of the real estate acquired is less than the Company’s recorded investment in the related loan, a write-down is recognized through a charge to the allowance for loan losses. Any subsequent reduction in value is recognized by a charge to income. Operating costs associated with the properties are charged to expense as incurred. At December 31, 20172019 and 2016,2018, other real estate amounted to $1.9totaled $1.3 million and $2.0$1.3 million, respectively, and is included in other assets.
Mortgage Servicing Rights Originated mortgage servicing rights are recorded at their fair value at the time of sale of the underlying loan, and are amortized in proportion to and over the period of estimated net servicing income or loss. The Company uses a valuation model that calculates the present value of future cash flows to determine the fair value of servicing rights. In using this valuation method, the Company incorporates assumptions that market participants would use in estimating future net servicing income, which includes estimates of the servicing cost per loan, the discount rate, and prepayment speeds. The carrying value of the originated mortgage servicing rights is included in other assets and is evaluated quarterly for impairment using these same market assumptions. The amount of impairment recognized is the amount by which the carrying value of the capitalized servicing rights for a stratum exceeds estimated fair value. Impairment is recognized through a valuation allowance.
Treasury Stock Repurchases of shares of the Company’s common stock are recorded at cost as a reduction of shareholders’ equity. Reissuance of shares of treasury stock is recorded at average cost.
Income Taxes The Company and its subsidiaries file a consolidated federal income tax return. Provisions for income taxes are based on taxes currently payable or refundable as well as deferred taxes that are based on temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. Deferred tax assets and liabilities are reported in the consolidated financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled.
Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority having full knowledge of all relevant information. A tax position meeting the more-likely-than-not recognition threshold should be measured at the largest amount of benefit for which the likelihood of realization upon ultimate settlement exceeds 50 percent. Should tax laws change or the taxing authorities determine that management’s assumptions were inappropriate, an adjustment may be required which could have a material effect on the Company’s results of operations. Investments in Real Estate Limited Partnerships The Company has investments in various real estate limited partnerships that acquire, develop, own and operate low and moderate-income housing. The Company’s ownership interest in these limited partnerships ranges from 5.00% to 99.99% as of December 31, 2017.2019. These investments are made directly in Low Income Housing Tax Credit, or LIHTC, partnerships formed by third parties. As a limited partner in these operating partnerships, we receivethe Company receives tax credits and tax deductions for losses incurred by the underlying properties.
The Company accounts for its ownership interest in LIHTC partnerships in accordance with Accounting Standards Update (“ASU”) 2014-01, Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects. The standard permits an entity to amortize the initial cost of the investment in proportion to the amount of the tax credits and other tax benefits received and recognize the net investment performance in the income statement as a component of income tax expense. The Company has unfunded commitments of $3.2$0.4 million at year-end related to qualified affordable housing project investments, which will be funded in 2018.2020. There were no0 impairment losses during the year resulting from the forfeiture or ineligibility of tax credits related to qualified affordable housing project investments.
Repurchase Agreements The Company sells certain securities under agreements to repurchase. These agreements are treated as collateralized financing transactions. These secured borrowings are reflected as liabilities in the accompanying consolidated statements of condition and are recorded at the amount of cash received in connection with the transaction. Short-term securities sold under agreements to repurchase generally mature within one day from the transaction date. Securities, generally U.S. government and federal agency securities, pledged as collateral under these financing arrangements can be repledged by the secured party. Additional collateral may be required based on the fair value of the underlying securities.
Retirement Benefits The Company provides defined benefit pension benefits to eligible employees and post-retirement health and life insurance benefits to certain eligible retirees. The Company also provides deferred compensation and supplemental executive retirement plans for selected current and former employees, officers, and directors. Expense under these plans is charged to current operations and consists of several components of net periodic benefit cost based on various actuarial assumptions regarding future experience under the plans, including discount rate, rate of future compensation increases and expected return on plan assets.
Derivative Financial Instruments and Hedging Activities The Company accounts for derivative financial instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (1) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment (“fair value hedge”), (2) a hedge of the exposure to variable cash flows of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), or (3) an instrument with no hedging designation (“stand-alone derivative”). For a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item, are recognized in current earnings as fair values change. For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transaction affects earnings. For both types of hedges, changes in the fair value of derivatives that are not highly effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, as noninterest income.revenues.
Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in noninterest income.revenues. Cash flows on hedges are classified in the consolidated statement of cash flow statement the same as the cash flows of the items being hedged.
The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and strategy for undertaking hedge transactions at the inception of the hedging relationship. This documentation includes linking the fair value or cash flow hedges to specific assets and liabilities on the statement of condition or to specific commitments or forecasted transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values or cash flows
When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded in noninterest income.revenues. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued, but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods which the hedged transactions will affect earnings. Assets Under Management or Administration Assets held in fiduciary or agency capacities for customers are not included in the accompanying consolidated statements of condition as they are not assets of the Company. All fees associated with providing asset management services are recorded on an accrual basis of accounting and are included in noninterest income.
Advertising Advertising costs amounting to approximately $5.7$7.1 million, $3.9$5.1 million and $3.6$5.7 million for the years ending December 31, 2017, 20162019, 2018 and 2015,2017, respectively, are nondirect response in nature and expensed as incurred.
Bank Owned Life Insurance The Company owns life insurance policies on certain current and former employees and directors where the Bank is the beneficiary. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value (“CSV”) adjusted for other charges or other amounts due that are probable at settlement. Increases in the CSV of the policies, as well as the death benefits received, net of any CSV, are recorded in noninterest income, and are not subject to income taxes.
Earnings Per Share Using the two-class method, basic earnings per common share is computed based upon net income available to common shareholders divided by the weighted average number of common shares outstanding during each period, which excludes the outstanding unvested restricted stock. Diluted earnings per share is computed using the weighted average number of common shares determined for the basic earnings per common share computation plus the dilutive effect of stock options using the treasury stock method. Stock options where the exercise price is greater than the average market price of common shares were not included in the computation of earnings per diluted share as they would have been anti-dilutive. Shares held in rabbi trusts related to deferred compensation plans are considered outstanding for purposes of computing earnings per share.
Stock-based Compensation Companies are required to measure and record compensation expense for stock options and other share-based payments on the instruments’ fair value on the date of grant. Stock-based compensation expense is recognized ratably over the requisite service period for all awards (see Note L).
Fair Values of Financial Instruments The Company determines fair values based on quoted market values where available or on estimates using present values or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments are excluded from this disclosure requirement. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The fair values of investment securities, loans, deposits, and borrowings have been disclosed in Note R.
Reclassifications Certain reclassifications have been made to prior years’ balances to conform to the current year presentation.
Recently Adopted Accounting Pronouncements
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718). The amendments simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, accounting for award forfeitures, and classification on the statement of cash flows. The amendments were effective for public business entities for the first interim and annual reporting periods beginning after December 15, 2016 and the Company adopted the amendments as of January 1, 2017. The new guidance requires entities to prospectively recognize all excess tax benefits and tax deficiencies related to share-based payment awards as income tax benefit or expense in the statement of income when the awards vest or are settled. Previously, income tax benefits (or deficiencies) were reported as increases (or decreases) to additional paid-in capital to the extent that those benefits were greater than (or less than) the income tax benefits recognized in earnings during the awards’ vesting periods. In addition, excess tax benefits and deficiencies are to be classified as an operating activity in the statement of cash flows, rather than a financing activity as required under prior accounting guidance. The new guidance also requires employee taxes paid when an employer withholds shares for withholding tax purposes to be classified as a financing activity in the statement of cash flows. The Company has elected to apply the changes in presentation on the consolidated statement of cash flows for excess tax benefits and deficiencies and employee taxes paid when an employer withholds shares on a retrospective basis. The Company has also elected to continue to incorporate estimated forfeitures in the accrual of compensation expense, and this election had no impact on the Company’s consolidated financial statements. For the year ended December 31, 2017, the effect on net income from excess tax benefits was $3.1 million, or approximately $0.06 per diluted common share.
In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The ASU required a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the reduction in the corporate income tax rate to 21% with the newly enacted Tax Cuts and Jobs Act. This guidance is effective for fiscal years beginning after December 15, 2018; however, the Company chose to early adopt the new standard for the year ended December 31, 2017, as allowed under the new standard. The amount of the reclassification for the Company was $0.6 million, as shown in the Consolidated Statement of Changes in Stockholder's Equity.
NewRecently 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. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This guidance is effective for the Company for annual and interim periods beginning after December 15, 2017. The Company has finalized its in-depth assessment and identified the revenue line items within the scope of this new guidance. Neither the new standard, nor any of the amendments, resulted in a material change from the Company’s current accounting for revenues because no changes in accounting were required for those financial instruments that were within scope of Topic 606. The Company adopted this guidance on January 1, 2018 and has elected to implement using the modified retrospective application, with the cumulative effect recorded as an adjustment to opening retained earnings at January 1, 2018. Due to immateriality, the Company will have no cumulative effect to record. The Company is still finalizing the changes to the related disclosures.
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. Early adoption is permitted for all companies in any interim or annual period. The Company has completed its evaluation of adoption of the new guidance on the Company’s consolidated financial statements and the impact was considered immaterial.
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 occupiesapproach, with 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.
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, including an allowance for debt securities. 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.
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.practical expedients available. The Company adopted this guidance on January 1, 2018. As this guidance only affects2019 using the cumulative-effect adjustment method. The cumulative-effect adjustment was not material. The Company elected several practical expedients available under the standard. The Company elected to not reassess whether any expired or existing contracts are or contain leases, to not reassess the classification within(operating or capital) of any expired or existing contracts, to not reassess initial direct costs for existing leases, and to use hindsight in determining the statementlease term. The Company has implemented processes and a lease accounting system to ensure adequate internal controls were in place to assess its contracts and enable proper accounting and reporting of cash flows, this ASU will not have a materialfinancial information upon adoption. The increase in total assets and total liabilities was $34.2 million. The impact on the Company’s consolidated financial statements.results of operations and cash flows was not material.
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 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 new 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. This ASU will not 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. The Company adopted this guidance on January 1, 2019 on a modified retrospective basis. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
New Accounting Pronouncements In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326) (“ASU No. 2016-13”). 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 methodology under existing guidance with a current expected credit loss (“CECL”) methodology 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. CECL simplifies the accounting model for purchased credit-impaired debt securities and loans and 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 new guidance is effective for the Company for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company has developed, refined and validated its CECL models that were run in parallel to its incurred loss model for the third and fourth quarters of 2019. The Company’s CECL models utilizes historical data, as well as current and expected economic conditions and forecasts. The development of these models required the evaluation of data requirements, a determination of loan segments, the determination of the model construct for each loan segment and the development of a qualitative framework. In addition, the Company evaluated its CECL models’ sensitivity to various model inputs and identified the key controls around model development and quarterly model operation. Management is currently in the process of finalizing the evaluation of key controls around the quarterly and annual financial statement disclosures of its CECL models. The Company adopted ASU No. 2016-13 on January 1, 2020 using a modified retrospective approach, and recorded a net cumulative-effect adjustment that increased retained earnings by $0.5 million. This adjustment was a result of a $0.7 million decrease in the allowance for loan losses and a $1.0 million adjustment to loans, partially offset by a $1.2 million increase in other liabilities related to the allowance for off-balance-sheet credit exposures. The adoption of ASU No. 2016-13 did not result in a material allowance for credit losses on the Company’s available-for-sale debt securities or its other instruments carried at amortized cost. The Company’s regulators will permit financial institutions to “phase-in” the impact of CECL on its regulatory capital ratios over 3 years with transitional relief of incremental capital requirements. The Company will not utilize the phased-in approach and will record the entire cumulative-effect adjustment against its regulatory capital at the time of adoption.
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. The Company adopted this guidance on January 1, 2020 and determined the adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurements (Topic 820). The updated guidance removed the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels of the fair value hierarchy, and the valuation processes for Level 3 fair value measurements. The updated guidance clarifies that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurements as of the reporting date. Further, the updated guidance requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and how the weighted average of significant unobservable inputs used to develop Level 3 fair value measurements was calculated. This new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted this guidance on January 1, 2020 and determined the adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-14, Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans (Subtopic 715-20). The updated guidance removed the requirements to identify amounts that are expected to be reclassified out of accumulated other comprehensive income and recognized as components of net periodic benefit cost in the next fiscal year, as well as the effects of a one-percentage-point change in assumed health care cost trend rates on service and interest cost and on the postretirement benefit obligation. The updated guidance added disclosure requirements for the weighted-average interest crediting rates for cash balance plans and other plans with interest crediting rates, and explanations for significant gains and losses related to changes in the benefit obligation for the period. This new guidance is effective retrospectively for fiscal years beginning after December 15, 2020 with early adoption permitted. The Company is currently evaluating the impacts the adoption of this guidance will have on the Company’s consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). The updated guidance simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740, and clarifying and amending existing guidance to improve consistent application. This new guidance is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted includingin any interim periods for which financial statements have not been issued. The Company is currently evaluating the impact the adoption in an interim period. This ASU is not expected toof this guidance will have a material impact on the Company’s consolidated financial statements.
NOTE B: ACQUISITIONS
Pending Acquisition – Steuben Trust Corporation On October 21, 2019, the Company announced that it had entered into a definitive agreement to acquire Steuben Trust Corporation (“Steuben”), parent company of Steuben Trust Company, a New York State chartered bank headquartered in Hornell, New York, for approximately $104.4 million in Company stock and cash. Steuben currently operates 14 branch locations in Western New York. The acquisition will extend the Company’s footprint into 2 new counties in Western New York State, and enhance the Company’s presence in 4 Western New York State counties in which it currently operates. The acquisition is expected to close during the second quarter of 2020, pending both customary regulatory and Steuben shareholder approval. The Company expects to incur certain one-time, transaction-related costs in 2020 in connection with the Steuben acquisition.
On September 18, 2019, the Company, through its subsidiary, CISI, completed its acquisition of certain assets of a practice engaged in the financial services business headquartered in Syracuse, New York. The Company paid $0.5 million in cash to acquire a customer list, and recorded a $0.5 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 July 12, 2019, the Company completed its merger with Kinderhook Bank Corp. (“Kinderhook”), parent company of The National Union Bank of Kinderhook, headquartered in Kinderhook, New York, for $93.4 million in cash. The merger added 11 branch locations across a 5 county area in the Capital District of Upstate New York. The merger resulted in the acquisition of $642.8 million of assets, including $479.9 million of loans and $39.8 million of investment securities, as well as $568.2 million of deposits and $40.3 million in goodwill. The effects of the acquired assets and liabilities have been included in the consolidated financial statements since that date. Revenues, excluding interest income on acquired investments, of approximately $10.6 million, and direct expenses, which may not include certain shared expenses, of approximately $4.7 million from Kinderhook were included in the consolidated income statement for the year ended December 31, 2019.
On January 2, 2019, the Company, through its subsidiary, CISI, completed its acquisition of certain assets of Wealth Resources Network, Inc. (“Wealth Resources”), a financial services business headquartered in Liverpool, New York. The Company paid $1.2 million in cash to acquire a customer list from Wealth Resources, 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 April 2, 2018, the Company, through its subsidiary, BPAS, acquired certain assets of HR Consultants (SA), LLC (“HR Consultants”), a provider of actuarial and benefit consulting services 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, 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, 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, $0.7$0.6 million of other liabilities, goodwill in the amount of $2.2$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,Wilkes-Barre, Pennsylvania. The Company agreed to paypaid $1.2 million in cash including a $0.2 million contingent payment based on certain customer retention objectives, 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 extendsextended the Company’s footprint into the Vermont and Western Massachusetts markets with the addition of 31 branch locations in Vermont and one1 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 $42.6$55.8 million and direct expenses, which may not include certain shared expenses, of approximately $19.9$29.4 million from Merchants were included in the consolidated income statement for the year ended December 31, 2017.2019. Revenues of approximately $61.2 million and direct expenses, which may not include certain shared expenses, of approximately $30.8 million from Merchants were included in the consolidated income statement for the year ended December 31, 2018.
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 NRS and its subsidiary 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, will strengthenstrengthens and complementcomplements 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 $24.2$23.0 million deferred tax liability associated with the customer list intangible, and $76.4$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 $31.5$44.0 million and expenses of $21.5$23.9 million from NRS were included in the consolidated statement of income for the year ended December 31, 2017.2019. Revenues of $40.6 million and expenses of $24.6 million from NRS were included in the consolidated statement of income for the year ended December 31, 2018.
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 and liabilities have been included in the consolidated financial statements since that date.
On January 4, 2016, the Company, through its subsidiary, CBNA Insurance Agency, Inc. (“CBNA Insurance”), completed its acquisition of WJL Agencies Inc. doing business as The Clark Insurance Agencies (“WJL”), an insurance agency operating in Canton, New York. The Company paid $0.6 million in cash for the intangible assets of the company. Goodwill in the amount of $0.3 million and intangible assets in the amount of $0.3 million were recorded 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 August 19, 2016, the Company merged together its insurance subsidiaries and as of that date, the activities of CBNA Insurance were merged into OneGroup.
On December 4, 2015, the Company completed its acquisition of Oneida Financial Corp. (“Oneida”), parent company of Oneida Savings Bank, headquartered in Oneida, New York for $158.5 million in Company stock and cash, comprised of $56.3 million of cash and the issuance of 2.38 million common shares. Upon the completion of the merger, the Bank added 12 branch locations in Oneida and Madison counties and approximately $769.4 million of assets, including approximately $399.4 million of loans and $225.7 million of investment securities, along with $699.2 million of deposits. Through the acquisition of Oneida, the Company acquired OneGroup and Oneida Wealth Management, Inc. (“OWM”) as wholly-owned subsidiaries primarily engaged in offering insurance and investment advisory services. These subsidiaries complement the Company’s other non-banking financial services businesses. The effects of the acquired assets and liabilities have been included in the consolidated financial statements since that date. On April 22, 2016, the activities of OWM were merged into CISI.
The assets and liabilities assumed in the acquisitions were recorded at their estimated fair values based on management'smanagement’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 secondfirst quarter of 2017,2018, the carrying amount of other assetsliabilities associated with the NRS acquisition decreased by $2.7 million and other liabilities decreased by $2.4$1.2 million as a result of a reclassification of amounts from other assets into other liabilities, and 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 NRSGBR acquisition increased $0.3decreased $0.09 million during the second quarter as a result of these changes in fair value.this adjustment. During the thirdfourth quarter of 2017,2018, the carrying amount of investmentsother liabilities associated with the GBR acquisition increased by $0.2$0.02 million as a result of updated information not available at the time of acquisition. Goodwill associated with the GBR acquisition increased $0.02 million as a result of this adjustment.During the fourth quarter of 2019, associated with the Kinderhook acquisition, the carrying amount of deposits increased by $0.08 million, loans decreased $0.6by $0.05 million, as a result of an adjustment to the valuation of acquired impaired loans, the carrying amount of premisesother liabilities increased by $0.04 million, other assets decreased by $0.04 million, and equipmentaccrued interest and fees receivable increased $3.6by $0.01 million as a result of updated appraisal information not available at the time of acquisition, and the value of other assets and other liabilities increased $5.5 million and $6.6 million, respectively, as a result of adjustments to accrued income taxes, deferred taxes and certain tax credit arrangements that were recorded on a provisional basis.acquisition. Goodwill associated with the NRS and Merchants acquisitions decreased $0.1Kinderhook acquisition increased by $0.2 million and $2.0 million during the third quarter, respectively, as a result of these changes in fair value estimates. During the fourth quarter of 2017, the carrying amount of loans decreased $0.5 million as a result of an adjustment to the valuation of acquired impaired loans and the value of other assets and other liabilities decreased $0.3 million and $0.02 million, respectively, as a result of adjustments to deferred taxes and certain tax credit arrangements. Goodwill associated with the Merchants acquisition increased $0.8 million during the fourth quarter as a result of these changes in fair value estimates.adjustments.
The above referenced acquisitions generally 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:
| | 2017 | | | 2016 | | | 2015 | | | | | | 2019 | | | | | | 2018 | | | 2017 | | (000s omitted) | | NRS | | | Merchants | | | Other (1) | | | Total | | | WJL | | | Oneida | | | Kinderhook | | | Other (1) | | | Total | | | Other (2) | | | NRS | | | Merchants | | | Other (3) | | | Total | | Consideration paid : | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash (2) | | $ | 70,073 | | | $ | 82,898 | | | $ | 6,775 | | | $ | 159,746 | | | $ | 575 | | | $ | 56,266 | | | $ | 93,384 | | | $ | 1,650 | | | $ | 95,034 | | | $ | 1,753 | | | $ | 70,073 | | | $ | 82,898 | | | $ | 6,775 | | | $ | 159,746 | | Community Bank System, Inc. common stock | | | 78,483 | | | | 262,254 | | | | 2,395 | | | | 343,132 | | | | 0 | | | | 102,202 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 78,483 | | | | 262,254 | | | | 2,395 | | | | 343,132 | | Total net consideration paid | | | 148,556 | | | | 345,152 | | | | 9,170 | | | | 502,878 | | | | 575 | | | | 158,468 | | | | 93,384 | | | | 1,650 | | | | 95,034 | | | | 1,753 | | | | 148,556 | | | | 345,152 | | | | 9,170 | | | | 502,878 | | Recognized amounts of identifiable assets acquired and liabilities assumed: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | | 11,063 | | | | 40,730 | | | | 339 | | | | 52,132 | | | | 0 | | | | 81,772 | | | | 90,381 | | | | 0 | | | | 90,381 | | | | 16 | | | | 11,063 | | | | 40,730 | | | | 339 | | | | 52,132 | | Investment securities | | | 20,294 | | | | 370,648 | | | | 0 | | | | 390,942 | | | | 0 | | | | 225,729 | | | | 39,770 | | | | 0 | | | | 39,770 | | | | 0 | | | | 20,294 | | | | 370,648 | | | | 0 | | | | 390,942 | | Loans | | | 0 | | | | 1,488,157 | | | | 0 | | | | 1,488,157 | | | | 0 | | | | 399,422 | | | | 479,877 | | | | 0 | | | | 479,877 | | | | 0 | | | | 0 | | | | 1,488,157 | | | | 0 | | | | 1,488,157 | | Premises and equipment | | | 411 | | | | 16,608 | | | | 27 | | | | 17,046 | | | | 0 | | | | 22,212 | | | | 13,970 | | | | 0 | | | | 13,970 | | | | 10 | | | | 411 | | | | 16,608 | | | | 27 | | | | 17,046 | | Accrued interest receivable | | | 72 | | | | 4,773 | | | | 0 | | | | 4,845 | | | | 0 | | | | 1,133 | | | Accrued interest and fees receivable | | | | 1,130 | | | | 0 | | | | 1,130 | | | | 0 | | | | 72 | | | | 4,773 | | | | 0 | | | | 4,845 | | Other assets | | | 8,088 | | | | 51,585 | | | | 583 | | | | 60,256 | | | | 0 | | | | 26,529 | | | | 14,109 | | | | 0 | | | | 14,109 | | | | 105 | | | | 8,088 | | | | 51,585 | | | | 583 | | | | 60,256 | | Core deposit intangibles | | | 0 | | | | 23,214 | | | | 0 | | | | 23,214 | | | | 0 | | | | 2,570 | | | | 3,573 | | | | 0 | | | | 3,573 | | | | 0 | | | | 0 | | | | 23,214 | | | | 0 | | | | 23,214 | | Other intangibles | | | 60,200 | | | | 2,857 | | | | 5,626 | | | | 68,683 | | | | 288 | | | | 9,994 | | | | 0 | | | | 1,650 | | | | 1,650 | | | | 1,343 | | | | 60,200 | | | | 2,857 | | | | 5,626 | | | | 68,683 | | Deposits | | | 0 | | | | (1,448,406 | ) | | | 0 | | | | (1,448,406 | ) | | | 0 | | | | (699,241 | ) | | | (568,161 | ) | | | 0 | | | | (568,161 | ) | | | 0 | | | | 0 | | | | (1,448,406 | ) | | | 0 | | | | (1,448,406 | ) | Other liabilities | | | (28,002 | ) | | | (11,750 | ) | | | (1,217 | ) | | | (40,969 | ) | | | 0 | | | | (1,333 | ) | | | (3,259 | ) | | | 0 | | | | (3,259 | ) | | | (31 | ) | | | (26,828 | ) | | | (11,750 | ) | | | (1,155 | ) | | | (39,733 | ) | Short-term advances | | | 0 | | | | (80,000 | ) | | | 0 | | | | (80,000 | ) | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (80,000 | ) | | | 0 | | | | (80,000 | ) | Securities sold under agreement to repurchase, short-term | | | 0 | | | | (278,076 | ) | | | 0 | | | | (278,076 | ) | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (278,076 | ) | | | 0 | | | | (278,076 | ) | Long-term debt | | | 0 | | | | (3,615 | ) | | | 0 | | | | (3,615 | ) | | | 0 | | | | 0 | | | Other Federal Home Loan Bank borrowings | | | | (2,420 | ) | | | 0 | | | | (2,420 | ) | | | 0 | | | | 0 | | | | (3,615 | ) | | | 0 | | | | (3,615 | ) | Subordinated notes payable | | | | (13,831 | ) | | | 0 | | | | (13,831 | ) | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | Subordinated debt held by unconsolidated subsidiary trusts | | | 0 | | | | (20,619 | ) | | | 0 | | | | (20,619 | ) | | | 0 | | | | 0 | | | | (2,062 | ) | | | 0 | | | | (2,062 | ) | | | 0 | | | | 0 | | | | (20,619 | ) | | | 0 | | | | (20,619 | ) | Total identifiable assets, net | | | 72,126 | | | | 156,106 | | | | 5,358 | | | | 233,590 | | | | 288 | | | | 68,787 | | | | 53,077 | | | | 1,650 | | | | 54,727 | | | | 1,443 | | | | 73,300 | | | | 156,106 | | | | 5,420 | | | | 234,826 | | Goodwill | | $ | 76,430 | | | $ | 189,046 | | | $ | 3,812 | | | $ | 269,288 | | | $ | 287 | | | $ | 89,681 | | | $ | 40,307 | | | $ | 0 | | | $ | 40,307 | | | $ | 310 | | | $ | 75,256 | | | $ | 189,046 | | | $ | 3,750 | | | $ | 268,052 | |
(1) Includes amounts related to both acquisitions completed by CISI in 2019. (2)Includes amounts related to the Penna, Styles Bridges and HR Consultants acquisitions. (3)Includes amounts related to the BAS, Dryfoos, NECM and GBR acquisitions. (2) Includes NECM $0.2 million contingent cash payment consideration.
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 Kinderhook at the date of acquisition:
| | Acquired | | | Acquired | | | Total | | | | Impaired | | | Non-impaired | | | Acquired | | (000s omitted) | | Loans | | | Loans | | | Loans | | Contractually required principal and interest at acquisition | | $ | 13,350 | | | $ | 636,384 | | | $ | 649,734 | | Contractual cash flows not expected to be collected | | | (4,176 | ) | | | (5,472 | ) | | | (9,648 | ) | Expected cash flows at acquisition | | | 9,174 | | | | 630,912 | | | | 640,086 | | Interest component of expected cash flows | | | (551 | ) | | | (159,658 | ) | | | (160,209 | ) | Fair value of acquired loans | | $ | 8,623 | | | $ | 471,254 | | | $ | 479,877 | |
The following is a summary of the loans acquired from Merchants at the date of acquisition:
| | | Acquired | | | Acquired | | | Total | | | | | Impaired | | | Non-impaired | | | Acquired | | (000s omitted) | | Acquired Impaired Loans | | | Acquired Non-impaired Loans | | | Total Acquired Loans | | | Loans | | | Loans | | | Loans | | Contractually required principal and interest at acquisition | | $ | 15,454 | | | $ | 1,872,574 | | | $ | 1,888,028 | | | $ | 15,454 | | | $ | 1,872,574 | | | $ | 1,888,028 | | Contractual cash flows not expected to be collected | | | (5,385 | ) | | | (14,753 | ) | | | (20,138 | ) | | | (5,385 | ) | | | (14,753 | ) | | | (20,138 | ) | Expected cash flows at acquisition | | | 10,069 | | | | 1,857,821 | | | | 1,867,890 | | | | 10,069 | | | | 1,857,821 | | | | 1,867,890 | | Interest component of expected cash flows | | | (793 | ) | | | (378,940 | ) | | | (379,733 | ) | | | (793 | ) | | | (378,940 | ) | | | (379,733 | ) | Fair value of acquired loans | | $ | 9,276 | | | $ | 1,478,881 | | | $ | 1,488,157 | | | $ | 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 fair value of subordinated notes payable was estimated using discounted cash flows and interest rates being offered on similar securities. Subordinated notes payable assumed with the Kinderhook acquisition included $3.0 million of subordinated notes with a fixed interest rate of 6.0% maturing in February 2028 and $10.0 million of subordinated notes with a fixed interest rate of 6.375% maturing in November 2025.
The core deposit intangibles and other intangibles related to theboth acquisitions completed by CISI in 2019, Kinderhook, Penna, Styles Bridges, HR Consultants, Merchants, Dryfoos, BAS, WJLNECM, and OneidaGBR 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 MerchantsKinderhook and OneidaMerchants acquisitions, the Employee Benefit Services segment for NRS, and All Other segments for the Penna, Dryfoos, BAS, and WJLGBR acquisitions. Goodwill arising from the Kinderhook, Merchants, NRS, GBR and OneidaGBR acquisitions is not deductible for tax purposes. Goodwill arising from the Penna, Dryfoos, BAS, and WJLGBR acquisitions is deductible for tax purposes.
Direct costs related to the acquisitions were expensed as incurred. Merger and acquisition integration-related expenses (recoveries) amount to $8.6 million, $(0.8) million and $26.0 million $1.7 millionduring 2019, 2018 and $7.0 million during 2017, 2016 and 2015, respectively, and have been separately stated in the consolidated statements of income.
Supplemental Pro Forma Financial Information (Unaudited) The following unaudited condensed pro forma information assumes the Kinderhook acquisition had been completed as of January 1, 2018 for the year ended December 31, 2019 and December 31, 2018 and the Merchants and NRS acquisitions had been completed as of January 1, 2016 for the year ended December 31, 2017 and December 31, 2016. The pro forma information does not include amounts related to the two acquisitions completed by CISI in 2019, Penna, Styles Bridges, HR Consultants, BAS, Dryfoos, NECM and GBR as the amounts were immaterial. The table below has been prepared for comparative purposes only and is not necessarily indicative of the actual results that would have been attained had the acquisitions occurred as of the beginning of the year presented, nor is it indicative of the Company’s future results. Furthermore, the unaudited pro forma information does not reflect management’s estimate of any revenue-enhancing opportunities nor anticipated cost savings that may have occurred as a result of the integration and consolidation of the acquisitions.
The pro forma information set forth below reflects the historical results of Kinderhook, Merchants, and NRS combined with the Company’s consolidated statement of income with adjustments related to (a) certain purchase accounting fair value adjustments and (b) amortization of customer lists and core deposit intangibles. Acquisition expenses related to the Kinderhook transaction totaling $8.0 million for the year ended December 31, 2019 were included in the pro forma information as if they were incurred in 2018. Acquisition expenses related to the Merchants and NRS transactions totaling $25.7$25.7 million for the year ended December 31, 2017 were included in the pro forma information as if they were incurred in 2016.
| | Pro Forma (Unaudited) Year Ended December 31, | | | Pro Forma (Unaudited) Year Ended December 31, | | (000’s omitted) | | 2017 | | | 2016 | | | 2019 | | | 2018 | | | 2017 | | | 2016 | | Total revenue, net of interest expense | | $ | 546,977 | | | $ | 536,183 | | | $ | 602,817 | | | $ | 594,174 | | | $ | 546,977 | | | $ | 536,183 | | Net income | | | 176,257 | | | | 109,186 | | | | 178,427 | | | | 167,914 | | | | 176,257 | | | | 109,186 | |
74NOTE C: INVESTMENT SECURITIES
NOTE C: | INVESTMENT SECURITIES |
The amortized cost and estimated fair value of investment securities as of December 31 are as follows:
| | 2017 | | | 2016 | | | 2019 | | | 2018 | | (000's omitted) | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Estimated Fair Value | | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Estimated Fair Value | | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Estimated Fair Value | | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Estimated Fair Value | | Available-for-Sale Portfolio: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | U.S. Treasury and agency securities | | $ | 2,043,023 | | | $ | 15,886 | | | $ | 4,838 | | | $ | 2,054,071 | | | $ | 1,876,358 | | | $ | 28,522 | | | $ | 2,118 | | | $ | 1,902,762 | | | $ | 2,030,060 | | | $ | 21,674 | | | $ | 7,975 | | | $ | 2,043,759 | | | $ | 2,036,474 | | | $ | 2,190 | | | $ | 14,911 | | | $ | 2,023,753 | | Obligations of state and political subdivisions | | | 514,949 | | | | 14,064 | | | | 57 | | | | 528,956 | | | | 582,655 | | | | 13,389 | | | | 1,054 | | | | 594,990 | | | | 497,852 | | | | 14,382 | | | | 26 | | | | 512,208 | | | | 453,640 | | | | 6,563 | | | | 1,049 | | | | 459,154 | | Government agency mortgage-backed securities | | | 358,180 | | | | 3,121 | | | | 3,763 | | | | 357,538 | | | | 232,657 | | | | 5,040 | | | | 2,467 | | | | 235,230 | | | | 428,491 | | | | 5,478 | | | | 1,107 | | | | 432,862 | | | | 390,234 | | | | 1,526 | | | | 9,283 | | | | 382,477 | | Corporate debt securities | | | 2,648 | | | | 0 | | | | 25 | | | | 2,623 | | | | 5,716 | | | | 2 | | | | 31 | | | | 5,687 | | | | 2,527 | | | | 1 | | | | 0 | | | | 2,528 | | | | 2,588 | | | | 0 | | | | 42 | | | | 2,546 | | Government agency collateralized mortgage obligations | | | 88,097 | | | | 155 | | | | 878 | | | | 87,374 | | | | 9,225 | | | | 310 | | | | 0 | | | | 9,535 | | | | 52,621 | | | | 482 | | | | 32 | | | | 53,071 | | | | 69,342 | | | | 60 | | | | 1,283 | | | | 68,119 | | Marketable equity securities | | | 251 | | | | 275 | | | | 0 | | | | 526 | | | | 252 | | | | 200 | | | | 0 | | | | 452 | | | Total available-for-sale portfolio | | $ | 3,007,148 | | | $ | 33,501 | | | $ | 9,561 | | | $ | 3,031,088 | | | $ | 2,706,863 | | | $ | 47,463 | | | $ | 5,670 | | | $ | 2,748,656 | | | $ | 3,011,551 | | | $ | 42,017 | | | $ | 9,140 | | | $ | 3,044,428 | | | $ | 2,952,278 | | | $ | 10,339 | | | $ | 26,568 | | | $ | 2,936,049 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other Securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Equity and other Securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Equity securities, at fair value | | | $ | 251 | | | $ | 200 | | | $ | 0 | | | $ | 451 | | | $ | 251 | | | $ | 200 | | | $ | 19 | | | $ | 432 | | Federal Home Loan Bank common stock | | $ | 9,896 | | | | | | | | | | | $ | 9,896 | | | $ | 12,191 | | | | | | | | | | | $ | 12,191 | | | | 7,246 | | | | 0 | | | | 0 | | | | 7,246 | | | | 8,768 | | | | 0 | | | | 0 | | | | 8,768 | | Federal Reserve Bank common stock | | | 30,690 | | | | | | | | | | | | 30,690 | | | | 19,781 | | | | | | | | | | | | 19,781 | | | | 30,922 | | | | 0 | | | | 0 | | | | 30,922 | | | | 30,690 | | | | 0 | | | | 0 | | | | 30,690 | | Certificates of deposit | | | 3,865 | | | | | | | | | | | | 3,865 | | | | 0 | | | | | | | | | | | | 0 | | | Other equity securities | | | 5,840 | | | | | | | | | | | | 5,840 | | | | 3,764 | | | | | | | | | | | | 3,764 | | | Total other securities | | $ | 50,291 | | | | | | | | | | | $ | 50,291 | | | $ | 35,736 | | | | | | | | | | | $ | 35,736 | | | Other equity securities, at adjusted cost | | | | 4,546 | | | | 750 | | | | 0 | | | | 5,296 | | | | 4,969 | | | | 750 | | | | 0 | | | | 5,719 | | Total equity and other securities | | | $ | 42,965 | | | $ | 950 | | | $ | 0 | | | $ | 43,915 | | | $ | 44,678 | | | $ | 950 | | | $ | 19 | | | $ | 45,609 | |
A summary of investment securities that have been in a continuous unrealized loss position for less than or greater than twelve months is as follows:
As of December 31, 20172019 | | | | | Less than 12 Months | | | | | | 12 Months or Longer | | | | | | Total | | | 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 | | | | # | | | 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 | | | | 12 | | | $ | 592,678 | | | $ | 7,970 | | | | 5 | | | $ | 25,998 | | | $ | 5 | | | | 17 | | | $ | 618,676 | | | $ | 7,975 | | Obligations of state and political subdivisions | | | 45 | | | | 23,432 | | | | 57 | | | | 0 | | | | 0 | | | | 0 | | | | 45 | | | | 23,432 | | | | 57 | | | | 21 | | | | 22,716 | | | | 26 | | | | 0 | | | | 0 | | | | 0 | | | | 21 | | | | 22,716 | | | | 26 | | Government agency mortgage-backed securities | | | 120 | | | | 185,716 | | | | 1,433 | | | | 55 | | | | 75,712 | | | | 2,330 | | | | 175 | | | | 261,428 | | | | 3,763 | | | | 50 | | | | 89,237 | | | | 341 | | | | 52 | | | | 52,975 | | | | 766 | | | | 102 | | | | 142,212 | | | | 1,107 | | 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 | | | | 5 | | | | 5,971 | | | | 14 | | | | 5 | | | | 4,405 | | | | 18 | | | | 10 | | | | 10,376 | | | | 32 | | Total available-for-sale investment portfolio | | | 249 | | | $ | 991,521 | | | $ | 7,231 | | | | 56 | | | $ | 75,713 | | | $ | 2,330 | | | | 305 | | | $ | 1,067,234 | | | $ | 9,561 | | | | 88 | | | $ | 710,602 | | | $ | 8,351 | | | | 62 | | | $ | 83,378 | | | $ | 789 | | | | 150 | | | $ | 793,980 | | | $ | 9,140 | |
As of December 31, 2016
| | | | | 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 | | | 13 | | | $ | 449,242 | | | $ | 2,118 | | | | 0 | | | $ | 0 | | | $ | 0 | | | | 13 | | | $ | 449,242 | | | $ | 2,118 | | Obligations of state and political subdivisions | | | 197 | | | | 102,106 | | | | 1,054 | | | | 0 | | | | 0 | | | | 0 | | | | 197 | | | | 102,106 | | | | 1,054 | | Government agency mortgage-backed securities | | | 57 | | | | 83,862 | | | | 1,637 | | | | 15 | | | | 21,788 | | | | 830 | | | | 72 | | | | 105,650 | | | | 2,467 | | Corporate debt securities | | | 1 | | | | 2,677 | | | | 31 | | | | 0 | | | | 0 | | | | 0 | | | | 1 | | | | 2,677 | | | | 31 | | Government agency collateralized mortgage obligations | | | 0 | | | | 0 | | | | 0 | | | | 2 | | | | 2 | | | | 0 | | | | 2 | | | | 2 | | | | 0 | | Total available-for-sale investment portfolio | | | 268 | | | $ | 637,887 | | | $ | 4,840 | | | | 17 | | | $ | 21,790 | | | $ | 830 | | | | 285 | | | $ | 659,677 | | | $ | 5,670 | |
As of December 31, 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 | | | 7 | | | $ | 473,082 | | | $ | 682 | | | | 64 | | | $ | 1,213,276 | | | $ | 14,229 | | | | 71 | | | $ | 1,686,358 | | | | 14,911 | | Obligations of state and political subdivisions | | | 118 | | | | 55,671 | | | | 216 | | | | 97 | | | | 51,753 | | | | 833 | | | | 215 | | | | 107,424 | | | | 1,049 | | Government agency mortgage-backed securities | | | 43 | | | | 47,708 | | | | 258 | | | | 181 | | | | 253,931 | | | | 9,025 | | | | 224 | | | | 301,639 | | | | 9,283 | | Corporate debt securities | | | 0 | | | | 0 | | | | 0 | | | | 1 | | | | 2,546 | | | | 42 | | | | 1 | | | | 2,546 | | | | 42 | | Government agency collateralized mortgage obligations | | | 1 | | | | 66 | | | | 0 | | | | 41 | | | | 63,112 | | | | 1,283 | | | | 42 | | | | 63,178 | | | | 1,283 | | Total available-for-sale investment portfolio | | | 169 | | | $ | 576,527 | | | $ | 1,156 | | | | 384 | | | $ | 1,584,618 | | | $ | 25,412 | | | | 553 | | | $ | 2,161,145 | | | $ | 26,568 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Equity and other Securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Equity securities, at fair value | | | 1 | | | $ | 82 | | | $ | 19 | | | | 0 | | | $ | 0 | | | $ | 0 | | | | 1 | | | $ | 82 | | | $ | 19 | | Total equity and other securities | | | 1 | | | $ | 82 | | | $ | 19 | | | | 0 | | | $ | 0 | | | $ | 0 | | | | 1 | | | $ | 82 | | | $ | 19 | |
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 December 31, 20172019 represents OTTI.
The amortized cost and estimated fair value of debt securities at December 31, 2017,2019, 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 | | | Available-for-Sale | | (000's omitted) | | Amortized Cost | | | Fair Value | | | Amortized Cost | | | Fair Value | | Due in one year or less | | $ | 45,966 | | | $ | 46,042 | | | $ | 677,169 | | | $ | 680,805 | | Due after one through five years | | | 1,565,423 | | | | 1,572,634 | | | | 905,531 | | | | 925,987 | | Due after five years through ten years | | | 758,742 | | | | 769,828 | | | | 453,320 | | | | 456,833 | | Due after ten years | | | 190,489 | | | | 197,146 | | | | 494,419 | | | | 494,870 | | Subtotal | | | 2,560,620 | | | | 2,585,650 | | | | 2,530,439 | | | | 2,558,495 | | Government agency mortgage-backed securities | | | 358,180 | | | | 357,538 | | | | 428,491 | | | | 432,862 | | Government agency collateralized mortgage obligations | | | 88,097 | | | | 87,374 | | | | 52,621 | | | | 53,071 | | Total | | $ | 3,006,897 | | | $ | 3,030,562 | | | $ | 3,011,551 | | | $ | 3,044,428 | |
Investment securities with a carrying value of $1.530$1.471 billion and $1.865$1.447 billion at December 31, 20172019 and 2016,2018, respectively, were pledged to collateralize certain deposits and borrowings. As of December 31, 2017, securitiesSecurities pledged to collateralize certain deposits and borrowings included $473.2$502.8 million and $492.4 million of U.S. Treasury securities that were pledged as collateral for securities sold under agreement to repurchase.repurchase at December 31, 2019, and 2018, respectively. All securities sold under agreement to repurchase as of December 31, 20172019 and 2018 have an overnight and continuous maturity.
During 2019, the Company sold $590.2 million of U.S. Treasury and agency securities, recognizing $5.0 million of gross realized gains and $0.1 million of gross realized losses. The proceeds from these sales were reinvested primarily in U.S. Treasury and agency securities at higher net yields as of December 31, 2019.
NOTE D: 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 agricultural-related and dealer floor plans, as well as mortgages on commercial property. |
| ·● | 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 at December 31 are summarized as follows:
(000's omitted) | | 2017 | | | 2016 | | | (000’s omitted) | | | 2019 | | | 2018 | | Business lending | | | $ | 2,775,876 | | | $ | 2,396,977 | | Consumer mortgage | | $ | 2,220,298 | | | $ | 1,819,701 | | | | 2,430,902 | | | | 2,235,408 | | Business lending | | | 2,424,223 | | | | 1,490,076 | | | Consumer indirect | | | 1,011,978 | | | | 1,044,972 | | | | 1,113,062 | | | | 1,083,207 | | Consumer direct | | | 179,929 | | | | 191,815 | | | | 184,378 | | | | 178,820 | | Home equity | | | 420,329 | | | | 401,998 | | | | 386,325 | | | | 386,709 | | Gross loans, including deferred origination costs | | | 6,256,757 | | | | 4,948,562 | | | | 6,890,543 | | | | 6,281,121 | | Allowance for loan losses | | | (47,583 | ) | | | (47,233 | ) | | | (49,911 | ) | | | (49,284 | ) | Loans, net of allowance for loan losses | | $ | 6,209,174 | | | $ | 4,901,329 | | | $ | 6,840,632 | | | $ | 6,231,837 | |
The Company had approximately $25.3$32.3 million and $22.8$28.4 million of net deferred loan origination costs included in gross loans as of December 31, 20172019 and 2016,2018, respectively.
Certain directors and executive officers of the Company, as well as associates of such persons, are loan customers. Loans to these individuals were made in the ordinary course of business under normal credit terms and do not have more than a normal risk of collection. Following is a summary of the aggregate amount of such loans during 20172019 and 2016.2018.
(000's omitted) | | 2017 | | | 2016 | | | (000’s omitted) | | | 2019 | | | 2018 | | Balance at beginning of year | | $ | 10,950 | | | $ | 11,337 | | | $ | 20,661 | | | $ | 22,344 | | New loans | | | 16,617 | | | | 4,959 | | | | 5,720 | | | | 2,600 | | Payments | | | (5,223 | ) | | | (5,346 | ) | | | (8,895 | ) | | | (4,283 | ) | Balance at end of year | | $ | 22,344 | | | $ | 10,950 | | | $ | 17,486 | | | $ | 20,661 | |
Acquired loans Acquired loans are recorded at fair value as of the date of purchase with no allowance for loan loss. The outstanding principal balance and the related carrying amount of acquired loans included in the Consolidated Statement of Condition at December 31 are as follows:
(000's omitted) | | 2017 | | | 2016 | | | (000’s omitted) | | | 2019 | | | 2018 | | Credit impaired acquired loans: | | | | | | | | | | | | | Outstanding principal balance | | $ | 13,242 | | | $ | 6,354 | | | $ | 16,200 | | | $ | 6,936 | | Carrying amount | | | 10,115 | | | | 5,553 | | | | 11,797 | | | | 5,446 | | | | | | | | | | | | | | | | | | | Non-impaired acquired loans: | | | | | | | | | | | | | | | | | Outstanding principal balance | | | 1,658,780 | | | | 497,308 | | | | 1,448,046 | | | | 1,271,584 | | Carrying amount | | | 1,626,979 | | | | 489,807 | | | | 1,428,154 | | | | 1,247,691 | | | | | | | | | | | | | | | | | | | Total acquired loans: | | | | | | | | | | | | | | | | | Outstanding principal balance | | | 1,672,022 | | | | 503,662 | | | | 1,464,246 | | | | 1,278,520 | | Carrying amount | | | 1,637,094 | | | | 495,360 | | | | 1,439,951 | | | | 1,253,137 | |
The outstanding balance related to credit impaired acquired loans was $13.4$17.1 million and $6.6$7.4 million at December 31, 20172019 and 2016,2018, respectively. The changes in the accretable discount related to the credit impaired acquired loans are as follows:
(000's omitted) | | 2017 | | | 2016 | | | (000’s omitted) | | | 2019 | | | 2018 | | Balance at beginning of year | | $ | 498 | | | $ | 810 | | | $ | 437 | | | $ | 976 | | Merchants acquisition | | | 793 | | | | 0 | | | Kinderhook acquisition | | | | 551 | | | | 0 | | Accretion recognized | | | (905 | ) | | | (455 | ) | | | (493 | ) | | | (783 | ) | Net reclassification to accretable from nonaccretable | | | 590 | | | | 143 | | | Net reclassification from non-accretable to accretable | | | | 138 | | | | 244 | | Balance at end of year | | $ | 976 | | | $ | 498 | | | $ | 633 | | | $ | 437 | |
Credit Quality Management monitors the credit quality of its loan portfolio on an ongoing basis. Measurement of delinquency and past due status are based on the contractual terms of each loan. Past due loans are reviewed on a monthly basis to identify loans for non-accrual status. The following is an aged analysis of the Company’s past due loans by class as of December 31, 2017:2019:
Legacy Loans (excludes loans acquired after January 1, 2009)
(000’s omitted) | | Past Due 30 - 89 days | | | 90+ Days Past Due and Still Accruing | | | Nonaccrual | | | Total Past Due | | | Current | | | Total Loans | | | Past Due 30 - 89 days | | | 90+ Days Past Due and Still Accruing | | | Nonaccrual | | | Total Past Due | | | Current | | | Total Loans | | Business lending | | | $ | 3,936 | | | $ | 126 | | | $ | 3,840 | | | $ | 7,902 | | | $ | 1,848,683 | | | $ | 1,856,585 | | Consumer mortgage | | $ | 13,564 | | | $ | 1,500 | | | $ | 10,722 | | | $ | 25,786 | | | $ | 1,728,823 | | | $ | 1,754,609 | | | | 10,990 | | | | 2,052 | | | | 10,131 | | | | 23,173 | | | | 1,973,543 | | | | 1,996,716 | | Business lending | | | 2,283 | | | | 571 | | | | 3,944 | | | | 6,798 | | | | 1,369,801 | | | | 1,376,599 | | | Consumer indirect | | | 14,197 | | | | 295 | | | | 0 | | | | 14,492 | | | | 977,344 | | | | 991,836 | | | | 12,673 | | | | 125 | | | | 0 | | | | 12,798 | | | | 1,094,510 | | | | 1,107,308 | | Consumer direct | | | 1,875 | | | | 48 | | | | 0 | | | | 1,923 | | | | 172,556 | | | | 174,479 | | | | 1,455 | | | | 76 | | | | 0 | | | | 1,531 | | | | 174,445 | | | | 175,976 | | Home equity | | | 1,116 | | | | 94 | | | | 1,354 | | | | 2,564 | | | | 319,576 | | | | 322,140 | | | | 1,508 | | | | 328 | | | | 1,444 | | | | 3,280 | | | | 310,727 | | | | 314,007 | | Total | | $ | 33,035 | | | $ | 2,508 | | | $ | 16,020 | | | $ | 51,563 | | | $ | 4,568,100 | | | $ | 4,619,663 | | | $ | 30,562 | | | $ | 2,707 | | | $ | 15,415 | | | $ | 48,684 | | | $ | 5,401,908 | | | $ | 5,450,592 | |
Acquired Loans (includes loans acquired after January 1, 2009)
(000’s omitted) | | Past Due 30 - 89 days | | | 90+ Days Past Due and Still Accruing | | | Nonaccrual | | | Total Past Due | | | Acquired Impaired(1) | | | Current | | | Total Loans | | | Past Due 30 - 89 days | | | 90+ Days Past Due and Still Accruing | | | Nonaccrual | | | Total Past Due | | | Acquired Impaired(1) | | | Current | | | Total Loans | | Business lending | | | $ | 8,518 | | | $ | 2,173 | | | $ | 570 | | | $ | 11,261 | | | $ | 11,797 | | | $ | 896,233 | | | $ | 919,291 | | Consumer mortgage | | $ | 2,603 | | | $ | 26 | | | $ | 3,066 | | | $ | 5,695 | | | $ | 0 | | | $ | 459,994 | | | $ | 465,689 | | | | 890 | | | | 277 | | | | 2,386 | | | | 3,553 | | | | 0 | | | | 430,633 | | | | 434,186 | | Business lending | | | 4,661 | | | | 0 | | | | 4,328 | | | | 8,989 | | | | 10,115 | | | | 1,028,520 | | | | 1,047,624 | | | Consumer indirect | | | 245 | | | | 8 | | | | 0 | | | | 253 | | | | 0 | | | | 19,889 | | | | 20,142 | | | | 79 | | | | 31 | | | | 0 | | | | 110 | | | | 0 | | | | 5,644 | | | | 5,754 | | Consumer direct | | | 100 | | | | 0 | | | | 0 | | | | 100 | | | | 0 | | | | 5,350 | | | | 5,450 | | | | 59 | | | | 0 | | | | 52 | | | | 111 | | | | 0 | | | | 8,291 | | | | 8,402 | | Home equity | | | 634 | | | | 170 | | | | 1,326 | | | | 2,130 | | | | 0 | | | | 96,059 | | | | 98,189 | | | | 744 | | | | 238 | | | | 412 | | | | 1,394 | | | | 0 | | | | 70,924 | | | | 72,318 | | Total | | $ | 8,243 | | | $ | 204 | | | $ | 8,720 | | | $ | 17,167 | | | $ | 10,115 | | | $ | 1,609,812 | | | $ | 1,637,094 | | | $ | 10,290 | | | $ | 2,719 | | | $ | 3,420 | | | $ | 16,429 | | | $ | 11,797 | | | $ | 1,411,725 | | | $ | 1,439,951 | |
(1) | Acquired impaired loans were not classified as nonperforming assets as the loans are considered to be performing under ASC 310-30. As a result interest income, through the accretion of the difference between the carrying amount of the loans and the expected cashflows, is being recognized on all acquired impaired loans. |
The following is an aged analysis of the Company’s past due loans by class as of December 31, 2016:2018:
Legacy Loans (excludes loans acquired after January 1, 2009)
(000’s omitted) | | Past Due 30 - 89 days | | | 90+ Days Past Due and Still Accruing | | | Nonaccrual | | | Total Past Due | | | Current | | | Total Loans | | | Past Due 30 - 89 days | | | 90+ Days Past Due and Still Accruing | | | Nonaccrual | | | Total Past Due | | | Current | | | Total Loans | | Business lending | | | $ | 5,261 | | | $ | 179 | | | $ | 4,872 | | | $ | 10,312 | | | $ | 1,608,515 | | | $ | 1,618,827 | | Consumer mortgage | | $ | 11,379 | | | $ | 1,180 | | | $ | 11,352 | | | $ | 23,911 | | | $ | 1,635,849 | | | $ | 1,659,760 | | | | 12,468 | | | | 1,393 | | | | 9,872 | | | | 23,733 | | | | 1,824,717 | | | | 1,848,450 | | Business lending | | | 3,921 | | | | 145 | | | | 3,811 | | | | 7,877 | | | | 1,269,789 | | | | 1,277,666 | | | Consumer indirect | | | 13,883 | | | | 166 | | | | 0 | | | | 14,049 | | | | 1,000,776 | | | | 1,014,825 | | | | 14,609 | | | | 258 | | | | 0 | | | | 14,867 | | | | 1,057,525 | | | | 1,072,392 | | Consumer direct | | | 1,549 | | | | 58 | | | | 0 | | | | 1,607 | | | | 180,315 | | | | 181,922 | | | | 1,778 | | | | 48 | | | | 0 | | | | 1,826 | | | | 173,948 | | | | 175,774 | | Home equity | | | 1,250 | | | | 414 | | | | 1,437 | | | | 3,101 | | | | 315,928 | | | | 319,029 | | | | 983 | | | | 228 | | | | 1,438 | | | | 2,649 | | | | 309,892 | | | | 312,541 | | Total | | $ | 31,982 | | | $ | 1,963 | | | $ | 16,600 | | | $ | 50,545 | | | $ | 4,402,657 | | | $ | 4,453,202 | | | $ | 35,099 | | | $ | 2,106 | | | $ | 16,182 | | | $ | 53,387 | | | $ | 4,974,597 | | | $ | 5,027,984 | |
Acquired Loans (includes loans acquired after January 1, 2009)
(000’s omitted) | | Past Due 30 - 89 days | | | 90+ Days Past Due and Still Accruing | | | Nonaccrual | | | Total Past Due | | | Acquired Impaired(1) | | | Current | | | Total Loans | | | Past Due 30 - 89 days | | | 90+ Days Past Due and Still Accruing | | | Nonaccrual | | | Total Past Due | | | Acquired Impaired(1) | | | Current | | | Total Loans | | Business lending | | | $ | 974 | | | $ | 0 | | | $ | 3,498 | | | $ | 4,472 | | | $ | 5,446 | | | $ | 768,232 | | | $ | 778,150 | | Consumer mortgage | | $ | 1,539 | | | $ | 205 | | | $ | 2,332 | | | $ | 4,076 | | | $ | 0 | | | $ | 155,865 | | | $ | 159,941 | | | | 841 | | | | 232 | | | | 2,390 | | | | 3,463 | | | | 0 | | | | 383,495 | | | | 386,958 | | Business lending | | | 528 | | | | 0 | | | | 1,252 | | | | 1,780 | | | | 5,553 | | | | 205,077 | | | | 212,410 | | | Consumer indirect | | | 231 | | | | 3 | | | | 0 | | | | 234 | | | | 0 | | | | 29,913 | | | | 30,147 | | | | 78 | | | | 34 | | | | 0 | | | | 112 | | | | 0 | | | | 10,703 | | | | 10,815 | | Consumer direct | | | 231 | | | | 0 | | | | 0 | | | | 231 | | | | 0 | | | | 9,662 | | | | 9,893 | | | | 115 | | | | 4 | | | | 0 | | | | 119 | | | | 0 | | | | 2,927 | | | | 3,046 | | Home equity | | | 778 | | | | 905 | | | | 435 | | | | 2,118 | | | | 0 | | | | 80,851 | | | | 82,969 | | | | 613 | | | | 79 | | | | 474 | | | | 1,166 | | | | 0 | | | | 73,002 | | | | 74,168 | | Total | | $ | 3,307 | | | $ | 1,113 | | | $ | 4,019 | | | $ | 8,439 | | | $ | 5,553 | | | $ | 481,368 | | | $ | 495,360 | | | $ | 2,621 | | | $ | 349 | | | $ | 6,362 | | | $ | 9,332 | | | $ | 5,446 | | | $ | 1,238,359 | | | $ | 1,253,137 | |
(1) | Acquired impaired loans were not classified as nonperforming assets as the loans are considered to be performing under ASC 310-30. As a result interest income, through the accretion of the difference between the carrying amount of the loans and the expected cashflows, is being recognized on all acquired impaired loans. |
The Company uses several credit quality indicators to assess credit risk in an ongoing manner. The Company’s primary credit quality indicator for its business lending portfolio is an internal credit risk rating system that categorizes loans as “pass”, “special mention”, “classified”, or “doubtful”. Credit risk ratings are applied individually to those classes of loans that have significant or unique credit characteristics that benefit from a case-by-case evaluation. In general, the following are the definitions of the Company’s credit quality indicators:
Pass | The condition of the borrower and the performance of the loans are satisfactory or better. | | |
Special Mention | The condition of the borrower has deteriorated although the loan performs as agreed. | | |
Classified | The condition of the borrower has significantly deteriorated and the performance of the loan could further deteriorate if deficiencies are not corrected. | | |
Doubtful | The condition of the borrower has deteriorated to the point that collection of the balance is improbable based on current facts and conditions. |
The following table shows the amount of business lending loans by credit quality category:
| | December 31, 2017 | | | December 31, 2016 | | | December 31, 2019 | | | December 31, 2018 | | (000’s omitted) | | Legacy | | | Acquired | | | Total | | | Legacy | | | Acquired | | | Total | | | Legacy | | | Acquired | | | Total | | | Legacy | | | Acquired | | | Total | | Pass | | $ | 1,170,156 | | | $ | 963,981 | | | $ | 2,134,137 | | | $ | 1,051,005 | | | $ | 162,165 | | | $ | 1,213,170 | | | $ | 1,655,280 | | | $ | 832,693 | | | $ | 2,487,973 | | | $ | 1,439,337 | | | $ | 702,493 | | | $ | 2,141,830 | | Special mention | | | 129,076 | | | | 37,321 | | | | 166,397 | | | | 135,602 | | | | 29,690 | | | | 165,292 | | | | 98,953 | | | | 45,324 | | | | 144,277 | | | | 105,065 | | | | 40,107 | | | | 145,172 | | Classified | | | 77,367 | | | | 34,628 | | | | 111,995 | | | | 90,585 | | | | 15,002 | | | | 105,587 | | | | 102,352 | | | | 29,477 | | | | 131,829 | | | | 74,425 | | | | 28,525 | | | | 102,950 | | Doubtful | | | 0 | | | | 1,579 | | | | 1,579 | | | | 474 | | | | 0 | | | | 474 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 1,579 | | | | 1,579 | | Acquired impaired | | | 0 | | | | 10,115 | | | | 10,115 | | | | 0 | | | | 5,553 | | | | 5,553 | | | | 0 | | | | 11,797 | | | | 11,797 | | | | 0 | | | | 5,446 | | | | 5,446 | | Total | | $ | 1,376,599 | | | $ | 1,047,624 | | | $ | 2,424,223 | | | $ | 1,277,666 | | | $ | 212,410 | | | $ | 1,490,076 | | | $ | 1,856,585 | | | $ | 919,291 | | | $ | 2,775,876 | | | $ | 1,618,827 | | | $ | 778,150 | | | $ | 2,396,977 | |
All other loans are underwritten and structured using standardized criteria and characteristics, primarily payment performance, and are normally risk rated and monitored collectively on a monthly basis. These are typically loans to individuals in the consumer categories and are delineated as either performing or nonperforming. Performing loans include current, 30 – 89 days past due and acquired impaired loans. Nonperforming loans include 90+ days past due and still accruing and nonaccrual loans. The following tables detail the balances in all loan categories except for business lending at December 31, 2017:2019:
Legacy loans (excludes loans acquired after January 1, 2009)
(000’s omitted) | | Consumer Mortgage | | | Consumer Indirect | | | Consumer Direct | | | Home Equity | | | Total | | | Consumer Mortgage | | | Consumer Indirect | | | Consumer Direct | | | Home Equity | | | Total | | Performing | | $ | 1,742,387 | | | $ | 991,541 | | | $ | 174,431 | | | $ | 320,692 | | | $ | 3,229,051 | | | $ | 1,984,533 | | | $ | 1,107,183 | | | $ | 175,900 | | | $ | 312,235 | | | $ | 3,579,851 | | Nonperforming | | | 12,222 | | | | 295 | | | | 48 | | | | 1,448 | | | | 14,013 | | | | 12,183 | | | | 125 | | | | 76 | | | | 1,772 | | | | 14,156 | | Total | | $ | 1,754,609 | | | $ | 991,836 | | | $ | 174,479 | | | $ | 322,140 | | | $ | 3,243,064 | | | $ | 1,996,716 | | | $ | 1,107,308 | | | $ | 175,976 | | | $ | 314,007 | | | $ | 3,594,007 | |
Acquired loans (includes loans acquired after January 1, 2009) (000’s omitted) | | Consumer Mortgage | | | Consumer Indirect | | | Consumer Direct | | | Home Equity | | | Total | | Performing | | $ | 431,523 | | | $ | 5,723 | | | $ | 8,350 | | | $ | 71,668 | | | $ | 517,264 | | Nonperforming | | | 2,663 | | | | 31 | | | | 52 | | | | 650 | | | | 3,396 | | Total | | $ | 434,186 | | | $ | 5,754 | | | $ | 8,402 | | | $ | 72,318 | | | $ | 520,660 | |
Acquired loans (includes loans acquired after January 1, 2009)
(000’s omitted) | | Consumer Mortgage | | | Consumer Indirect | | | Consumer Direct | | | Home Equity | | | Total | | Performing | | $ | 462,597 | | | $ | 20,134 | | | $ | 5,450 | | | $ | 96,693 | | | $ | 584,874 | | Nonperforming | | | 3,092 | | | | 8 | | | | 0 | | | | 1,496 | | | | 4,596 | | Total | | $ | 465,689 | | | $ | 20,142 | | | $ | 5,450 | | | $ | 98,189 | | | $ | 589,470 | |
The following table details the balances in all other loan categories at December 31, 2016:2018:
Legacy loans (excludes loans acquired after January 1, 2009)
(000’s omitted) | | Consumer Mortgage | | | Consumer Indirect | | | Consumer Direct | | | Home Equity | | | Total | | | Consumer Mortgage | | | Consumer Indirect | | | Consumer Direct | | | Home Equity | | | Total | | Performing | | $ | 1,647,228 | | | $ | 1,014,659 | | | $ | 181,864 | | | $ | 317,178 | | | $ | 3,160,929 | | | $ | 1,837,185 | | | $ | 1,072,134 | | | $ | 175,726 | | | $ | 310,875 | | | $ | 3,395,920 | | Nonperforming | | | 12,532 | | | | 166 | | | | 58 | | | | 1,851 | | | | 14,607 | | | | 11,265 | | | | 258 | | | | 48 | | | | 1,666 | | | | 13,237 | | Total | | $ | 1,659,760 | | | $ | 1,014,825 | | | $ | 181,922 | | | $ | 319,029 | | | $ | 3,175,536 | | | $ | 1,848,450 | | | $ | 1,072,392 | | | $ | 175,774 | | | $ | 312,541 | | | $ | 3,409,157 | |
Acquired loans (includes loans acquired after January 1, 2009)
(000’s omitted) | | Consumer Mortgage | | | Consumer Indirect | | | Consumer Direct | | | Home Equity | | | Total | | | Consumer Mortgage | | | Consumer Indirect | | | Consumer Direct | | | Home Equity | | | Total | | Performing | | $ | 157,404 | | | $ | 30,144 | | | $ | 9,893 | | | $ | 81,629 | | | $ | 279,070 | | | $ | 384,336 | | | $ | 10,781 | | | $ | 3,042 | | | $ | 73,615 | | | $ | 471,774 | | Nonperforming | | | 2,537 | | | | 3 | | | | 0 | | | | 1,340 | | | | 3,880 | | | | 2,622 | | | | 34 | | | | 4 | | | | 553 | | | | 3,213 | | Total | | $ | 159,941 | | | $ | 30,147 | | | $ | 9,893 | | | $ | 82,969 | | | $ | 282,950 | | | $ | 386,958 | | | $ | 10,815 | | | $ | 3,046 | | | $ | 74,168 | | | $ | 474,987 | |
All loan classes are collectively evaluated for impairment except business lending, as described in Note A. A summary of individually evaluated impaired loans as of December 31, 20172019 and 20162018 is as follows:
(000’s omitted) | | 2017 | | | 2016 | | | 2019 | | | 2018 | | Loans with allowance allocation | | $ | 5,125 | | | $ | 1,109 | | | $ | 0 | | | $ | 3,956 | | Loans without allowance allocation | | | 884 | | | | 556 | | | | 1,414 | | | | 2,230 | | Carrying balance | | | 6,009 | | | | 1,665 | | | | 1,414 | | | | 6,186 | | Contractual balance | | | 9,165 | | | | 3,340 | | | | 2,944 | | | | 12,078 | | Specifically allocated allowance | | | 804 | | | | 477 | | | | 0 | | | | 956 | | Average impaired loans | | | 9,517 | | | | 4,683 | | | | 5,078 | | | | 7,618 | | Interest income recognized | | | 0 | | | | 0 | | | | 0 | | �� | | 0 | |
In the course of working with borrowers, the Company may choose to restructure the contractual terms of certain loans. In this scenario, the Company attempts to work-out an alternative payment schedule with the borrower in order to optimize collectability of the loan. Any loans that are modified are reviewed by the Company to identify if a troubled debt restructuring (“TDR”)TDR has occurred, which is when, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial standing and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two. With regard to determination of the amount of the allowance for loan losses, troubled debt restructured loans are considered to be impaired. As a result, the determination of the amount of allowance for loan losses related to impaired loans for each portfolio segment within TDRs is the same as detailed previously.
In accordance with clarified guidance issued by the OCC, loans that have been discharged in Chapter 7 bankruptcy but not reaffirmed by the borrower, are classified as TDRs, irrespective of payment history or delinquency status, even if the repayment terms for the loan have not been otherwise modified. The Company’s lien position against the underlying collateral remains unchanged. Pursuant to that guidance, the Company records a charge-off equal to any portion of the carrying value that exceeds the net realizable value of the collateral. The amount of loss incurred in 2017, 20162019, 2018 and 20152017 was immaterial.
TDRs less than $0.5 million are collectively included in the general loan loss allocation and the qualitative review, if necessary. Commercial loans greater than $0.5 million are individually evaluated for impairment, and if necessary, a specific allocation of the allowance for loan losses is provided.
Information regarding TDRs as of December 31, 20172019 and December 31, 20162018 is as follows
| | December 31, 2017 | | | December 31, 2016 | | | December 31, 2019 | | | December 31, 2018 | | (000’s omitted) | | Nonaccrual | | | Accruing | | | Total | | | Nonaccrual | | | Accruing | | | Total | | | Nonaccrual | | | Accruing | | | Total | | | Nonaccrual | | | Accruing | | | Total | | | | | # | | | Amount | | | | # | | | Amount | | | | # | | | Amount | | | | # | | | Amount | | | | # | | | Amount | | | | # | | | Amount | | | | # | | | Amount | | | | # | | | Amount | | | | # | | | Amount | | | | # | | | Amount | | | | # | | | Amount | | | | # | | | Amount | | Business lending | | | | 8 | | | $ | 681 | | | | 3 | | | $ | 201 | | | | 11 | | | $ | 882 | | | | 4 | | | $ | 162 | | | | 2 | | | $ | 165 | | | | 6 | | | $ | 327 | | Consumer mortgage | | | 51 | | | $ | 2,265 | | | | 44 | | | $ | 1,750 | | | | 95 | | | $ | 4,015 | | | | 36 | | | $ | 1,520 | | | | 45 | | | $ | 1,956 | | | | 81 | | | $ | 3,476 | | | | 59 | | | | 2,638 | | | | 47 | | | | 1,892 | | | | 106 | | | | 4,530 | | | | 46 | | | | 1,986 | | | | 46 | | | | 1,769 | | | | 92 | | | | 3,755 | | Business lending | | | 8 | | | | 218 | | | | 7 | | | | 501 | | | | 15 | | | | 719 | | | | 6 | | | | 91 | | | | 5 | | | | 690 | | | | 11 | | | | 781 | | | Consumer indirect | | | 0 | | | | 0 | | | | 71 | | | | 883 | | | | 71 | | | | 883 | | | | 0 | | | | 0 | | | | 78 | | | | 771 | | | | 78 | | | | 771 | | | | 0 | | | | 0 | | | | 84 | | | | 941 | | | | 84 | | | | 941 | | | | 0 | | | | 0 | | | | 77 | | | | 857 | | | | 77 | | | | 857 | | Consumer direct | | | 0 | | | | 0 | | | | 25 | | | | 69 | | | | 25 | | | | 69 | | | | 0 | | | | 0 | | | | 23 | | | | 65 | | | | 23 | | | | 65 | | | | 0 | | | | 0 | | | | 23 | | | | 101 | | | | 23 | | | | 101 | | | | 0 | | | | 0 | | | | 22 | | | | 71 | | | | 22 | | | | 71 | | Home equity | | | 13 | | | | 245 | | | | 7 | | | | 204 | | | | 20 | | | | 449 | | | | 14 | | | | 221 | | | | 7 | | | | 216 | | | | 21 | | | | 437 | | | | 13 | | | | 290 | | | | 11 | | | | 238 | | | | 24 | | | | 528 | | | | 12 | | | | 240 | | | | 9 | | | | 275 | | | | 21 | | | | 515 | | Total | | | 72 | | | $ | 2,728 | | | | 154 | | | $ | 3,407 | | | | 226 | | | $ | 6,135 | | | | 56 | | | $ | 1,832 | | | | 158 | | | $ | 3,698 | | | | 214 | | | $ | 5,530 | | | | 80 | | | $ | 3,609 | | | | 168 | | | $ | 3,373 | | | | 248 | | | $ | 6,982 | | | | 62 | | | $ | 2,388 | | | | 156 | | | $ | 3,137 | | | | 218 | | | $ | 5,525 | |
The following table presents information related to loans modified in a TDR during the years ended December 31, 20172019 and 2016.2018. Of the loans noted in the table below, all consumer mortgage loans for the years ended December 31, 20172019 and December 31, 2016,2018, were modified due to a Chapter 7 bankruptcy as described previously. The financial effects of these restructurings were immaterial.
| | December 31, 2017 | | | December 31, 2016 | | | December 31, 2019 | | | December 31, 2018 | | (000’s omitted) | | | # | | | Amount | | | | # | | | Amount | | | | # | | | Amount | | | | # | | | Amount | | Business lending | | | | 6 | | | $ | 685 | | | | 2 | | | $ | 103 | | Consumer mortgage | | | 23 | | | $ | 1,254 | | | | 9 | | | $ | 597 | | | | 22 | | | | 1,519 | | | | 9 | | | | 470 | | Business lending | | | 8 | | | | 412 | | | | 0 | | | | 0 | | | Consumer indirect | | | 33 | | | | 490 | | | | 33 | | | | 459 | | | | 33 | | | | 364 | | | | 32 | | | | 320 | | Consumer direct | | | 6 | | | | 17 | | | | 3 | | | | 51 | | | | 6 | | | | 49 | | | | 6 | | | | 24 | | Home equity | | | 4 | | | | 95 | | | | 3 | | | | 50 | | | | 6 | | | | 181 | | | | 3 | | | | 118 | | Total | | | 74 | | | $ | 2,268 | | | | 48 | | | $ | 1,157 | | | | 73 | | | $ | 2,798 | | | | 52 | | | $ | 1,035 | |
Allowance for Loan Losses
The allowance for loan losses is general in nature and is available to absorb losses from any loan type despite the analysis below. The following presents by class the activity in the allowance for loan losses:
(000’s omitted) | | Consumer Mortgage | | | Business Lending | | | Consumer Indirect | | | Consumer Direct | | | Home Equity | | | Unallocated | | | Acquired Impaired | | | Total | | | Business Lending | | | Consumer Mortgage | | | Consumer Indirect | | | Consumer Direct | | | Home Equity | | | Unallocated | | | Acquired Impaired | | | Total | | Balance at December 31, 2014 | | $ | 10,286 | | | $ | 15,787 | | | $ | 11,544 | | | $ | 3,083 | | | $ | 2,701 | | | $ | 1,767 | | | $ | 173 | | | $ | 45,341 | | | Charge-offs | | | (1,374 | ) | | | (2,146 | ) | | | (6,714 | ) | | | (1,490 | ) | | | (244 | ) | | | 0 | | | | (103 | ) | | | (12,071 | ) | | Recoveries | | | 80 | | | | 877 | | | | 3,943 | | | | 722 | | | | 62 | | | | 0 | | | | 0 | | | | 5,684 | | | Provision | | | 1,206 | | | | 1,231 | | | | 3,649 | | | | 682 | | | | 147 | | | | (566 | ) | | | 98 | | | | 6,447 | | | Balance at December 31, 2015 | | | 10,198 | | | | 15,749 | | | | 12,422 | | | | 2,997 | | | | 2,666 | | | | 1,201 | | | | 168 | | | | 45,401 | | | Charge-offs | | | (647 | ) | | | (1,872 | ) | | | (7,643 | ) | | | (1,706 | ) | | | (218 | ) | | | 0 | | | | (97 | ) | | | (12,183 | ) | | Recoveries | | | 115 | | | | 616 | | | | 4,168 | | | | 901 | | | | 139 | | | | 0 | | | | 0 | | | | 5,939 | | | Provision | | | 428 | | | | 2,727 | | | | 4,835 | | | | 787 | | | | (188 | ) | | | (550 | ) | | | 37 | | | | 8,076 | | | Balance at December 31, 2016 | | | 10,094 | | | | 17,220 | | | | 13,782 | | | | 2,979 | | | | 2,399 | | | | 651 | | | | 108 | | | | 47,233 | | | $ | 17,220 | | | $ | 10,094 | | | $ | 13,782 | | | $ | 2,979 | | | $ | 2,399 | | | $ | 651 | | | $ | 108 | | | $ | 47,233 | | Charge-offs | | | (707 | ) | | | (4,959 | ) | | | (8,456 | ) | | | (2,081 | ) | | | (284 | ) | | | 0 | | | | (270 | ) | | | (16,757 | ) | | | (4,959 | ) | | | (707 | ) | | | (8,456 | ) | | | (2,081 | ) | | | (284 | ) | | | 0 | | | | (270 | ) | | | (16,757 | ) | Recoveries | | | 50 | | | | 656 | | | | 4,516 | | | | 849 | | | | 52 | | | | 0 | | | | 0 | | | | 6,123 | | | | 656 | | | | 50 | | | | 4,516 | | | | 849 | | | | 52 | | | | 0 | | | | 0 | | | | 6,123 | | Provision | | | 1,028 | | | | 4,340 | | | | 3,626 | | | | 1,292 | | | | (60 | ) | | | 449 | | | | 309 | | | | 10,984 | | | | 4,340 | | | | 1,028 | | | | 3,626 | | | | 1,292 | | | | (60 | ) | | | 449 | | | | 309 | | | | 10,984 | | Balance at December 31, 2017 | | $ | 10,465 | | | $ | 17,257 | | | $ | 13,468 | | | $ | 3,039 | | | $ | 2,107 | | | $ | 1,100 | | | $ | 147 | | | $ | 47,583 | | | | 17,257 | | | | 10,465 | | | | 13,468 | | | | 3,039 | | | | 2,107 | | | | 1,100 | | | | 147 | | | | 47,583 | | Charge-offs | | | | (3,566 | ) | | | (836 | ) | | | (8,382 | ) | | | (1,777 | ) | | | (544 | ) | | | 0 | | | | (381 | ) | | | (15,486 | ) | Recoveries | | | | 485 | | | | 136 | | | | 4,874 | | | | 807 | | | | 48 | | | | 0 | | | | 0 | | | | 6,350 | | Provision | | | | 4,346 | | | | 359 | | | | 4,406 | | | | 1,026 | | | | 533 | | | | (100 | ) | | | 267 | | | | 10,837 | | Balance at December 31, 2018 | | | | 18,522 | | | | 10,124 | | | | 14,366 | | | | 3,095 | | | | 2,144 | | | | 1,000 | | | | 33 | | | | 49,284 | | Charge-offs | | | | (2,334 | ) | | | (1,372 | ) | | | (7,631 | ) | | | (1,945 | ) | | | (445 | ) | | | 0 | | | | 0 | | | | (13,727 | ) | Recoveries | | | | 826 | | | | 60 | | | | 4,180 | | | | 710 | | | | 148 | | | | 0 | | | | 0 | | | | 5,924 | | Provision | | | | 2,412 | | | | 1,457 | | | | 2,797 | | | | 1,395 | | | | 282 | | | | (43 | ) | | | 130 | | | | 8,430 | | Balance at December 31, 2019 | | | $ | 19,426 | | | $ | 10,269 | | | $ | 13,712 | | | $ | 3,255 | | | $ | 2,129 | | | $ | 957 | | | $ | 163 | | | $ | 49,911 | |
NOTE E: | PREMISES AND EQUIPMENT |
NOTE E: PREMISES AND EQUIPMENT
Premises and equipment consist of the following at December 31:
(000's omitted) | | 2017 | | | 2016 | | | (000’s omitted) | | | 2019 | | | 2018 | | Land and land improvements | | $ | 23,869 | | | $ | 22,585 | | | $ | 26,301 | | | $ | 24,340 | | Bank premises | | | 131,647 | | | | 116,663 | | | | 141,905 | | | | 133,259 | | Equipment and construction in progress | | | 86,059 | | | | 80,527 | | | | 89,819 | | | | 89,950 | | Operating lease right-of-use assets | | | | 39,895 | | | | 0 | | Premises and equipment, gross | | | 241,575 | | | | 219,775 | | | | 297,920 | | | | 247,549 | | Accumulated depreciation | | | (118,182 | ) | | | (107,457 | ) | | | (133,282 | ) | | | (127,561 | ) | Premises and equipment, net | | $ | 123,393 | | | $ | 112,318 | | | $ | 164,638 | | | $ | 119,988 | |
NOTE F: | GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS |
NOTE F: GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
The gross carrying amount and accumulated amortization for each type of identifiable intangible asset are as follows:
| | December 31, 2017 | | | December 31, 2016 | | | December 31, 2019 | | | December 31, 2018 | | (000's omitted) | | Gross Carrying Amount | | | Accumulated Amortization | | | Net Carrying Amount | | | Gross Carrying Amount | | | Accumulated Amortization | | | Net Carrying Amount | | | (000’s omitted) | | | Gross Carrying Amount | | | Accumulated Amortization | | | Net Carrying Amount | | | Gross Carrying Amount | | | Accumulated Amortization | | | Net Carrying Amount | | Amortizing intangible assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Core deposit intangibles | | $ | 62,902 | | | $ | (37,877 | ) | | $ | 25,025 | | | $ | 39,688 | | | $ | (32,581 | ) | | $ | 7,107 | | | $ | 66,475 | | | $ | (50,057 | ) | | $ | 16,418 | | | $ | 62,902 | | | $ | (44,306 | ) | | $ | 18,596 | | Other intangibles | | | 86,535 | | | | (20,902 | ) | | | 65,633 | | | | 17,853 | | | | (9,258 | ) | | | 8,595 | | | | 89,266 | | | | (42,571 | ) | | | 46,695 | | | | 87,616 | | | | (32,366 | ) | | | 55,250 | | Total amortizing intangibles | | $ | 149,437 | | | $ | (58,779 | ) | | $ | 90,658 | | | $ | 57,541 | | | $ | (41,839 | ) | | $ | 15,702 | | | $ | 155,741 | | | $ | (92,628 | ) | | $ | 63,113 | | | $ | 150,518 | | | $ | (76,672 | ) | | $ | 73,846 | |
The estimated aggregate amortization expense for each of the five succeeding fiscal years ended December 31 is as follows:
2018 | | $ | 17,872 | | | 2019 | | | 15,033 | | | 2020 | | | 12,497 | | | $ | 13,800 | | 2021 | | | 10,665 | | | | 11,786 | | 2022 | | | 9,165 | | | | 10,105 | | 2023 | | | | 8,457 | | 2024 | | | | 7,041 | | Thereafter | | | 25,426 | | | | 11,924 | | Total | | $ | 90,658 | | | $ | 63,113 | |
Shown below are the components of the Company’s goodwill at December 31, 20172019, 2018 and 2016:2017:
(000’s omitted) | | Year Ended December 31, 2015 | | | Activity | | | Year Ended December 31, 2016 | | | Activity | | | Year Ended December 31, 2017 | | | Year Ended December 31, 2017 | | | Activity | | | Year Ended December 31, 2018 | | | Activity | | | Year Ended December 31, 2019 | | Goodwill | | $ | 468,076 | | | $ | 1,890 | | | $ | 469,966 | | | $ | 269,288 | | | $ | 739,254 | | | $ | 739,254 | | | $ | (927 | ) | | $ | 738,327 | | | $ | 40,307 | | | $ | 778,634 | | Accumulated impairment | | | (4,824 | ) | | | 0 | | | | (4,824 | ) | | | 0 | | | | (4,824 | ) | | | (4,824 | ) | | | 0 | | | | (4,824 | ) | | | 0 | | | | (4,824 | ) | Goodwill, net | | $ | 463,252 | | | $ | 1,890 | | | $ | 465,142 | | | $ | 269,288 | | | $ | 734,430 | | | $ | 734,430 | | | $ | (927 | ) | | $ | 733,503 | | | $ | 40,307 | | | $ | 773,810 | |
During the first quarter of 2017,2019, the Company performed its annual internal valuation of goodwill and impairment analysis by comparing the fair value of each reporting unit to its carrying value. Results of the valuations indicate there was no goodwill impairment.
Mortgage Servicing Rights Under certain circumstances, the Company sells consumer residential mortgage loans in the secondary market and typically retains the right to service the loans sold. Generally, the Company’s residential mortgage loans sold to third parties are sold on a non-recourse basis. Upon sale, a mortgage servicing right (“MSR”) is established, which represents the current fair value of future net cash flows expected to be realized for performing the servicing activities. The Company stratifies these assets based on predominant risk characteristics, namely expected term of the underlying financial instruments, and uses a valuation model that calculates the present value of future cash flows to determine the fair value of servicing rights. MSRs are recorded in other assets at the lower of the initial capitalized amount, net of accumulated amortization or fair value. Mortgage loans serviced for others are not included in the accompanying consolidated statements of condition.
The following table summarizes the changes in carrying value of MSRs and the associated valuation allowance:
(000’s omitted) | | 2017 | | | 2016 | | | 2019 | | | 2018 | | Carrying value before valuation allowance at beginning of period | | $ | 1,435 | | | $ | 1,472 | | | $ | 1,137 | | | $ | 1,358 | | Additions | | | 358 | | | | 481 | | | | 17 | | | | 228 | | Merchants acquisition | | | 64 | | | | 0 | | | Kinderhook acquisition | | | | 196 | | | | 0 | | Amortization | | | (499 | ) | | | (518 | ) | | | (378 | ) | | | (449 | ) | Carrying value before valuation allowance at end of period | | | 1,358 | | | | 1,435 | | | | 972 | | | | 1,137 | | Valuation allowance balance at beginning of period | | | 0 | | | | 0 | | | | 0 | | | | 0 | | Impairment charges | | | 0 | | | | (226 | ) | | | (326 | ) | | | 0 | | Impairment recoveries | | | 0 | | | | 226 | | | | 28 | | | | 0 | | Valuation allowance balance at end of period | | | 0 | | | | 0 | | | | (298 | ) | | | 0 | | Net carrying value at end of period | | $ | 1,358 | | | $ | 1,435 | | | $ | 674 | | | $ | 1,137 | | Fair value of MSRs at end of period | | $ | 2,473 | | | $ | 1,928 | | | $ | 1,362 | | | $ | 2,397 | | Principal balance of loans sold during the year | | $ | 32,937 | | | $ | 45,852 | | | $ | 2,204 | | | $ | 18,228 | | Principal balance of loans serviced for others | | $ | 358,518 | | | $ | 365,374 | | | $ | 294,093 | | | $ | 333,862 | | Custodial escrow balances maintained in connection with loans serviced for others | | $ | 5,363 | | | $ | 5,603 | | | $ | 4,596 | | | $ | 4,982 | |
The following table summarizes the key economic assumptions used to estimate the value of the MSRs at December 31:
| | 2017 | | | 2016 | | | 2019 | | | 2018 | | Weighted-average contractual life (in years) | | | 21.3 | | | | 20.8 | | | | 20.9 | | | | 21.4 | | Weighted-average constant prepayment rate (CPR) | | | 11.1 | % | | | 15.1 | % | | | 18.7 | % | | | 9.3 | % | Weighted-average discount rate | | | 3.3 | % | | | 3.5 | % | | | 3.0 | % | | | 3.6 | % |
NOTE G: DEPOSITS
Deposits recorded in the consolidated statements of condition consist of the following at December 31:
(000's omitted) | | 2017 | | | 2016 | | | (000’s omitted) | | | 2019 | | | 2018 | | Noninterest checking | | $ | 2,293,057 | | | $ | 1,646,039 | | | $ | 2,465,902 | | | $ | 2,312,816 | | Interest checking | | | 1,830,914 | | | | 1,644,029 | | | | 2,138,348 | | | | 1,920,545 | | Savings | | | 1,421,512 | | | | 1,303,851 | | | | 1,538,203 | | | | 1,448,208 | | Money market | | | 2,124,633 | | | | 1,778,907 | | | | 1,916,385 | | | | 1,901,262 | | Time | | | 774,304 | | | | 703,128 | | | | 936,129 | | | | 739,540 | | Total deposits | | $ | 8,444,420 | | | $ | 7,075,954 | | | $ | 8,994,967 | | | $ | 8,322,371 | |
Interest on deposits recorded in the consolidated statements of income consists of the following at December 31:
(000’s omitted) | | 2019 | | | 2018 | | | 2017 | | Interest on interest checking | | $ | 3,678 | | | $ | 1,796 | | | $ | 1,032 | | Interest on savings | | | 942 | | | | 858 | | | | 841 | | Interest on money market | | | 5,836 | | | | 3,638 | | | | 2,981 | | Interest on time | | | 10,004 | | | | 4,366 | | | | 3,177 | | Total interest on deposits | | $ | 20,460 | | | $ | 10,658 | | | $ | 8,031 | |
The approximate maturities of time deposits at December 31, 20172019 are as follows:
(000's omitted) | | All Accounts | | | Accounts $250,000 or Greater | | | 2018 | | $ | 545,389 | | | $ | 51,875 | | | 2019 | | | 100,833 | | | | 5,958 | | | (000’s omitted) | | | All Accounts | | | Accounts $250,000 or Greater | | 2020 | | | 59,849 | | | | 7,445 | | | $ | 505,008 | | | $ | 73,893 | | 2021 | | | 34,582 | | | | 1,807 | | | | 162,729 | | | | 23,356 | | 2022 | | | 33,400 | | | | 601 | | | | 84,028 | | | | 7,297 | | 2023 | | | | 87,907 | | | | 5,719 | | 2024 | | | | 96,439 | | | | 20,252 | | Thereafter | | | 251 | | | | 0 | | | | 18 | | | | 0 | | Total | | $ | 774,304 | | | $ | 67,686 | | | $ | 936,129 | | | $ | 130,517 | |
NOTE H: BORROWINGS
Outstanding borrowings at December 31 are as follows:
(000's omitted) | | 2017 | | | 2016 | | FHLB overnight advance | | $ | 24,000 | | | $ | 146,200 | | Subordinated debt held by unconsolidated subsidiary trusts, | | | | | | | | | net of discount of $332 and $357, respectively | | | 122,814 | | | | 102,170 | | Securities sold under agreement to repurchase, short term | | | 337,011 | | | | 0 | | FHLB Long term advances | | | 2,071 | | | | 0 | | Total borrowings | | $ | 485,896 | | | $ | 248,370 | |
(000’s omitted) | | 2019 | | | 2018 | | Overnight FHLB borrowings | | $ | 8,300 | | | $ | 54,400 | | Subordinated notes payable, net of premium of $795 and $0, respectively | | | 13,795 | | | | 0 | | Subordinated debt held by unconsolidated subsidiary trusts | | | 77,320 | | | | 97,939 | | Securities sold under agreement to repurchase, short term | | | 241,708 | | | | 259,367 | | Other FHLB borrowings | | | 3,750 | | | | 1,976 | | Total borrowings | | $ | 344,873 | | | $ | 413,682 | |
FHLB advances are collateralized by a blanket lien on the Company'sCompany’s residential real estate loan portfolio and various investment securities.
Borrowings at December 31, 20172019 have contractual maturity dates as follows:
(000's omitted, except rate) | | Carrying Value | | | Weighted-average Rate at December 31, 2017 | | | January 2, 2018 | | $ | 361,011 | | | | 0.54 | % | | (000’s omitted, except rate) | | | Carrying Value | | | Weighted-average Rate at December 31, 2019 | | January 2, 2020 | | | $ | 250,008 | | | | 0.82 | % | June 15, 2020 | | | | 1,000 | | | | 1.75 | % | February 8, 2021 | | | | 675 | | | | 1.45 | % | February 8, 2023 | | | | 190 | | | | 1.79 | % | July 3, 2023 | | | 601 | | | | 2.25 | % | | | 549 | | | | 2.25 | % | October 23, 2023 | | | 515 | | | | 1.50 | % | | | 455 | | | | 1.50 | % | October 1, 2025 | | | 329 | | | | 1.50 | % | | | 302 | | | | 1.50 | % | November 18, 2025 | | | | 10,467 | | | | 6.38 | % | February 28, 2028 | | | | 3,328 | | | | 6.00 | % | March 1, 2029 | | | 626 | | | | 2.50 | % | | | 579 | | | | 2.50 | % | July 31, 2031 | | | 24,875 | | | | 4.96 | % | | December 15, 2034 | | | 20,619 | | | | 3.54 | % | | December 15, 2036 | | | 77,320 | | | | 3.24 | % | | | 77,320 | | | | 3.54 | % | Total | | $ | 485,896 | | | | 1.34 | % | | $ | 344,873 | | | | 1.65 | % |
The weighted-average interest rate on borrowings for the years ended December 31, 20172019 and 20162018 was 1.51%1.86% and 1.46%1.72%, respectively.
TheAs of December 31, 2019, the Company sponsors three1 business trusts, Community Statutory Trust III (“CST III”),trust, Community Capital Trust IV (“CCT IV”) and MBVT Statutory Trust I (“MBVT I”), of which 100% of the common stock is owned by the Company. The Company previously sponsored MBVT Statutory Trust I (“MBVT I”) and Kinderhook Capital Trust (“KCT”) until September 16,2019 when the Company exercised its right to redeem all of the MBVT I and KCT debentures and associated preferred securities for a total of $20.6 million and $2.1 million, respectively. The common stock of MBVT Statutory Trust I was acquired in the Merchants Bancshares, Inc. (“Merchants”) acquisition and the common stock of KCT was acquired in the Kinderhook Bank Corp. (“Kinderhook”) acquisition. The Company previously sponsored Community Statutory Trust III (“CST III”) until July 31,2018 when the Company exercised its right to redeem all of the CST III debentures and associated preferred securities for a total of $25.2 million. The trusts were formed for the purpose of issuing company-obligated mandatorily redeemable preferred securities to third-partythird-party investors and investing the proceeds from the sale of such preferred securities solely in junior subordinated debt securities of the Company. The debentures held by each trust are the sole assets of such trust. Distributions on the preferred securities issued by each trust are payable quarterly at a rate per annum equal to the interest rate being earned by the trust on the debentures held by that trust and are recorded as interest expense in the consolidated financial statements. The preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the debentures. The Company has entered into agreements which, taken collectively, fully and unconditionally guarantee the preferred securities subject to the terms of each of the guarantees. TheAs of December 31,2019, the terms of the preferred securities of each trustCCT IV are as follows:
Trust | Issuance Date | Par Amount | Interest Rate | Maturity Date | Call Price | CST III | 7/31/2001 | $24.5 million | 3 month LIBOR plus 3.58% (4.96%) | 7/31/2031 | Par | CCT IV | 12/8/2006 | $75.0 million | 3 month LIBOR plus 1.65% (3.24%(3.54%) | 12/15/2036 | Par | MBVT I | 12/15/2004 | $20.6 million | 3 month LIBOR plus 1.95% (3.54%) | 12/15/2034 | Par |
NOTE I: INCOME TAXES
The provision for income taxes for the years ended December 31 is as follows:
(000's omitted) | | 2017 | | | 2016 | | | 2015 | | | (000’s omitted) | | | 2019 | | | 2018 | | | 2017 | | Current: | | | | | | | | | | | | | | | | | | | Federal | | $ | 31,152 | | | $ | 32,829 | | | $ | 27,663 | | | $ | 34,804 | | | $ | 32,504 | | | $ | 31,152 | | State and other | | | 6,788 | | | | 4,890 | | | | 2,608 | | | | 7,773 | | | | 9,180 | | | | 6,788 | | Deferred: | | | | | | | | | | | | | | | | | | | | | | | | | Federal | | | (28,146 | ) | | | 11,444 | | | | 9,604 | | | | (699 | ) | | | 2,122 | | | | (28,146 | ) | State and other | | | (546 | ) | | | 1,622 | | | | 1,112 | | | | (1,603 | ) | | | 541 | | | | (546 | ) | Provision for income taxes | | $ | 9,248 | | | $ | 50,785 | | | $ | 40,987 | | | $ | 40,275 | | | $ | 44,347 | | | $ | 9,248 | |
Components of the net deferred tax liability, included in other liabilities, as of December 31 are as follows:
(000’s omitted) | | 2019 | | | 2018 | | Allowance for loan losses | | $ | 12,059 | | | $ | 12,131 | | Employee benefits | | | 5,393 | | | | 4,479 | | Operating lease liabilities | | | 9,801 | | | | 0 | | Other, net | | | 837 | | | | 541 | | Deferred tax asset | | | 28,090 | | | | 17,151 | | | | | | | | | | | Investment securities | | | 21,547 | | | | 14,451 | | Goodwill and intangibles | | | 39,189 | | | | 39,540 | | Operating lease right-of-use assets | | | 9,566 | | | | 0 | | Loan origination costs | | | 7,639 | | | | 6,851 | | Depreciation | | | 2,736 | | | | 3,098 | | Mortgage servicing rights | | | 162 | | | | 277 | | Pension | | | 13,769 | | | | 11,078 | | Deferred tax liability | | | 94,608 | | | | 75,295 | | Net deferred tax liability | | $ | (66,518 | ) | | $ | (58,144 | ) |
(000's omitted) | | 2017 | | | 2016 | | Allowance for loan losses | | $ | 11,675 | | | $ | 18,366 | | Employee benefits | | | 4,216 | | | | 6,311 | | Debt extinguishment | | | 0 | | | | 299 | | Other, net | | | 0 | | | | 5,202 | | Deferred tax asset | | | 15,891 | | | | 30,178 | | | | | | | | | | | Investment securities | | | 22,690 | | | | 32,839 | | Tax-deductible goodwill | | | 39,154 | | | | 43,504 | | Loan origination costs | | | 6,109 | | | | 8,228 | | Depreciation | | | 2,372 | | | | 71 | | Mortgage servicing rights | | | 330 | | | | 548 | | Pension | | | 13,228 | | | | 18,194 | | Other, net | | | 542 | | | | 0 | | Deferred tax liability | | | 84,425 | | | | 103,384 | | Net deferred tax liability | | $ | (68,534 | ) | | $ | (73,206 | ) |
The Company has determined that no valuation allowance is necessary as it is more likely than not that the gross deferred tax assets will be realized through carryback of future deductions to taxable income in prior years, future reversals of existing temporary differences and through future taxable income.
A reconciliation of the differences between the federal statutory income tax rate and the effective tax rate for the years ended December 31 is shown in the following table:
| | 2017 | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | | 2017 | | Federal statutory income tax rate | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | | | 21.0 | % | | | 21.0 | % | | | 35.0 | % | Increase (reduction) in taxes resulting from: | | | | | | | | | | | | | | | | | | | | | | | | | Tax-exempt interest | | | (3.8 | ) | | | (4.0 | ) | | | (5.0 | ) | | | (1.5 | ) | | | (1.6 | ) | | | (3.8 | ) | State income taxes, net of federal benefit | | | 2.5 | | | | 2.7 | | | | 1.8 | | | | 2.5 | | | | 3.4 | | | | 2.5 | | Stock-based compensation | | | (2.0 | ) | | | 0 | | | | 0 | | | | (1.6 | ) | | | (0.9 | ) | | | (2.0 | ) | Federal deferred tax revaluation adjustment | | | (23.7 | ) | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (23.7 | ) | Federal tax credits | | | | (1.3 | ) | | | (1.4 | ) | | | (1.5 | ) | Other, net | | | (2.2 | ) | | | (0.9 | ) | | | (0.8 | ) | | | 0.1 | | | | 0.3 | | | | (0.7 | ) | Effective income tax rate | | | 5.8 | % | | | 32.8 | % | | | 31.0 | % | | | 19.2 | % | | | 20.8 | % | | | 5.8 | % |
A reconciliation of the unrecognized tax benefits for the years ended December 31 is shown in the following table:
(000’s omitted) | | 2017 | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | | 2017 | | Unrecognized tax benefits at beginning of year | | $ | 92 | | | $ | 127 | | | $ | 162 | | | $ | 0 | | | $ | 24 | | | $ | 92 | | Changes related to: | | | | | | | | | | | | | | | | | | | | | | | | | Lapse of statutes of limitations | | | (68 | ) | | | (35 | ) | | | (35 | ) | | | 0 | | | | (24 | ) | | | (68 | ) | Unrecognized tax benefits at end of year | | $ | 24 | | | $ | 92 | | | $ | 127 | | | $ | 0 | | | $ | 0 | | | $ | 24 | |
As of December 31, 2017, the total2019, there was 0 amount of material unrecognized tax benefits that would impact the Company’s effective tax rate if recognized is $0.02 million.recognized. It is reasonably possible that the amount of unrecognized tax benefits could change in the next twelve months as a result of various examinations and expiration of statutes of limitations on prior tax returns.
The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as part of income taxes in the consolidated statement of income. The accrued interest related to tax positions was immaterial.
The Company’s federal and state income tax returns are routinely subject to examination from various governmental taxing authorities. Such examinations may result in challenges to the tax return treatment applied by the Company to specific transactions. Management believes that the assumptions and judgment used to record tax-related assets or liabilities have been appropriate. Future examinations by taxing authorities of the Company’s federal or state tax returns could have a material impact on the Company’s results of operations. The Company’s federal income tax returns for years after 20132015 may still be examined by the Internal Revenue Service. New York State income tax returns for years after 20122015 may still be examined by the New York Department of Taxation and Finance. The Company is currently under examination by the New York Department of Taxation and Finance in connection with tax years 2015 to 2017, and has not received any notices of proposed adjustments. It is not possible to estimate, if and when those examinations may be completed.
On December 22, 2017, H.R.1, referred to as the “Tax Cuts and Jobs Act,” was signed into law. Among other things, the Tax Cuts and Jobs Act permanently lowerslowered the corporate tax rate to 21% from the existing maximum rate of 35%, effective for tax years including or commencing January 1, 2018. ASC 740, Income Taxes, requires existing deferred tax assets and liabilities to be measured at the enacted tax rate expected to be applied when the temporary differences are to be realized or settled. Thus, as of the date of enactment, deferred taxes were re-measured based upon the new 21% tax rate. Prior to the change in tax rate, the Company had recorded net deferred tax liabilities based on a marginal tax rate of 37.70%. The change in tax rate resulted in a decrease in the marginal tax rate to 24.29% and a deferred tax benefit of $38.0 million from the write-down of the net deferred tax liabilities. The effect of this change in tax law was recorded as a component of the income tax provision including those deferred assets and liabilities that were established through a financial statement component other than continuing operations.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provided guidance on reporting accounting impacts of the recently enacted tax reform legislation. In SAB 118, it is noted that reporting companies may be unable to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act by the time financial statements are issued for the reporting period in which the Tax Cuts and Jobs Act was enacted (the “Enactment Period”). SAB 118 provides guidance for the scenarios in which a company does not have the necessary information available, prepared or analyzed to complete the accounting for certain income tax effects when it issues financial statements covering the Enactment Period. In those cases, SAB 118 would permit the company to provide “reasonable estimates” for the income tax effects of the Tax Cuts and Jobs Act and to report those effects as “provisional amounts” in its financial statements during a limited “measurement period.”
NOTE J: LIMITS ON DIVIDENDS AND OTHER REVENUE SOURCES Based on the review of its deferred tax assets and liabilities, the Company notes that the accounting for the enactment of the Tax Cuts and Jobs Act is complete and the effects have been appropriately reflected in the consolidated statement of condition as of December 31, 2017 and the consolidated statement of income for the year ended December 31, 2017.
NOTE J: | LIMITS ON DIVIDENDS AND OTHER REVENUE SOURCES |
The Company’s ability to pay dividends to its shareholders is largely dependent on the Bank’s ability to pay dividends to the Company. In addition to the capital requirements discussed below, the circumstances under which the Bank may pay dividends are limited by federal statutes, regulations, and policies. For example, as a national bank, the Bank must obtain the approval of the Office of the Comptroller of the Currency (“OCC”) for payments of dividends if the total of all dividends declared in any calendar year would exceed the total of the Bank’s net profits, as defined by applicable regulations, for that year, combined with its retained net profits for the preceding two years. Furthermore, the Bank may not pay a dividend in an amount greater than its undivided profits then on hand after deducting its losses and bad debts, as defined by applicable regulations. At December 31, 2017,2019, the Bank had approximately $69.0$119.3 million in undivided profits legally available for the payment of dividends.
In addition, the Board of Governors of the Federal Reserve System (“FRB”) and the OCC are authorized to determine under certain circumstances that the payment of dividends would be an unsafe or unsound practice and to prohibit payment of such dividends. The FRB has indicated that banking organizations should generally pay dividends only out of current operating earnings.
There are also statutory limits on the transfer of funds to the Company by its banking subsidiary, whether in the form of loans or other extensions of credit, investments or assets purchases. Such transfer by the Bank to the Company generally is limited in amount to 10% of the Bank’s capital and surplus, or 20% in the aggregate. Furthermore, such loans and extensions of credit are required to be collateralized in specific amounts.
NOTE K: BENEFIT PLANS
Pension and post-retirement plans The Company provides a qualified defined benefit pension to eligible employees and retirees, other post-retirement health and life insurance benefits to certain retirees, an unfunded supplemental pension plan for certain key executives, and an unfunded stock balance plan for certain of its nonemployee directors. Using a measurement date of December 31, the following table shows the funded status of the Company'sCompany’s plans reconciled with amounts reported in the Company'sCompany’s consolidated statements of condition:
| | Pension Benefits | | | Post-retirement Benefits | | | Pension Benefits | | | Post-retirement Benefits | | (000's omitted) | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | (000’s omitted) | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | Change in benefit obligation: | | | | | | | | | | | | | | | | | | | | | | | | | Benefit obligation at the beginning of year | | $ | 127,084 | | | $ | 127,134 | | | $ | 1,806 | | | $ | 1,918 | | | $ | 144,211 | | | $ | 147,450 | | | $ | 1,657 | | | $ | 1,785 | | Service cost | | | 4,181 | | | | 4,106 | | | | 0 | | | | 0 | | | | 5,081 | | | | 4,561 | | | | 0 | | | | 0 | | Interest cost | | | 5,717 | | | | 5,624 | | | | 76 | | | | 82 | | | | 6,264 | | | | 5,676 | | | | 70 | | | | 69 | | Plan amendment / acquisition | | | 11,646 | | | | 22 | | | | 0 | | | | 0 | | | | 0 | | | | 883 | | | | 0 | | | | 0 | | Participant contributions | | | 0 | | | | 0 | | | | 467 | | | | 516 | | | | 0 | | | | 0 | | | | 35 | | | | 479 | | Deferred actuarial loss/(gain) | | | 8,978 | | | | (1,628 | ) | | | 245 | | | | 174 | | | Deferred actuarial (gain)/loss | | | | 16,292 | | | | (4,177 | ) | | | 87 | | | | 191 | | Benefits paid | | | (10,156 | ) | | | (8,174 | ) | | | (809 | ) | | | (884 | ) | | | (9,764 | ) | | | (10,182 | ) | | | (172 | ) | | | (867 | ) | Benefit obligation at end of year | | | 147,450 | | | | 127,084 | | | | 1,785 | | | | 1,806 | | | | 162,084 | | | | 144,211 | | | | 1,677 | | | | 1,657 | | Change in plan assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fair value of plan assets at beginning of year | | | 180,400 | | | | 172,026 | | | | 0 | | | | 0 | | | | 203,672 | | | | 217,107 | | | | 0 | | | | 0 | | Actual return of plan assets | | | 22,954 | | | | 14,402 | | | | 0 | | | | 0 | | | | 25,522 | | | | (3,858 | ) | | | 0 | | | | 0 | | Participant contributions | | | 0 | | | | 0 | | | | 467 | | | | 516 | | | | 0 | | | | 0 | | | | 35 | | | | 479 | | Employer contributions | | | 9,839 | | | | 2,146 | | | | 342 | | | | 368 | | | | 7,893 | | | | 605 | | | | 137 | | | | 388 | | Plan acquisition | | | 14,070 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | Benefits paid | | | (10,156 | ) | | | (8,174 | ) | | | (809 | ) | | | (884 | ) | | | (9,764 | ) | | | (10,182 | ) | | | (172 | ) | | | (867 | ) | Fair value of plan assets at end of year | | | 217,107 | | | | 180,400 | | | | 0 | | | | 0 | | | | 227,323 | | | | 203,672 | | | | 0 | | | | 0 | | Over/(Under) funded status at year end | | $ | 69,657 | | | $ | 53,316 | | | $ | (1,785 | ) | | $ | (1,806 | ) | | $ | 65,239 | | | $ | 59,461 | | | $ | (1,677 | ) | | $ | (1,657 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amounts recognized in the consolidated statement of condition were: | Amounts recognized in the consolidated statement of condition were: | | Amounts recognized in the consolidated statement of condition were: | | Other assets | | $ | 81,000 | | | $ | 64,709 | | | $ | 0 | | | $ | 0 | | | $ | 81,930 | | | $ | 72,659 | | | $ | 0 | | | $ | 0 | | Other liabilities | | | (11,343 | ) | | | (11,393 | ) | | | (1,785 | ) | | | (1,806 | ) | | | (16,691 | ) | | | (13,198 | ) | | | (1,677 | ) | | | (1,657 | ) | Amounts recognized in accumulated other comprehensive income (loss) (“AOCI”) were: | | | Amounts recognized in accumulated other comprehensive loss/(income) (“AOCI”) were: | | Amounts recognized in accumulated other comprehensive loss/(income) (“AOCI”) were: | | Net loss | | $ | 26,935 | | | $ | 28,323 | | | $ | 420 | | | $ | 183 | | | $ | 41,924 | | | $ | 39,410 | | | $ | 641 | | | $ | 592 | | Net prior service cost (credit) | | | 2,944 | | | | 2,264 | | | | (1,622 | ) | | | (1,801 | ) | | | 4,875 | | | | 4,939 | | | | (1,265 | ) | | | (1,444 | ) | Pre-tax AOCI | | | 29,879 | | | | 30,587 | | | | (1,202 | ) | | | (1,618 | ) | | | 46,799 | | | | 44,349 | | | | (624 | ) | | | (852 | ) | Taxes | | | (7,340 | ) | | | (11,622 | ) | | | 296 | | | | 614 | | | | (11,448 | ) | | | (10,870 | ) | | | 155 | | | | 210 | | AOCI at year end | | $ | 22,539 | | | $ | 18,965 | | | $ | (906 | ) | | $ | (1,004 | ) | | $ | 35,351 | | | $ | 33,479 | | | $ | (469 | ) | | $ | (642 | ) |
The benefit obligation for the defined benefit pension plan was $136.1$145.4 million and $115.7$131.0 million as of December 31, 20172019 and 2016,2018, respectively, and the fair value of plan assets as of December 31, 20172019 and 20162018 was $217.1$227.3 million and $180.4$203.7 million, respectively. Effective May 12, 2017,The defined benefit pension plan was amended effective December 31, 2018 to transfer certain obligations from the Merchants Bank PensionCompany’s non-qualified supplemental pension plan and Restoration Plan was merged(as defined below) into the Community Bank System, Inc. Pension Plan and the combined plan was revalued resulting in an additional unamortized actuarial gain of approximately $1.9 million, due primarily to a gain on plan assets that was partially offset by a decrease in the discount rate from 4.50% to 4.40% as of the valuation date.qualified defined benefit pension plan.
The Company has unfunded supplemental pension plans for certain key active and retired executives. The projected benefit obligation for the unfunded supplemental pension plan for certain key executives was $11.3$16.4 million and $13.2 million for 20172019 and 2016.2018, respectively. The Company also has an unfunded stock balance plan for certain of its nonemployee directors. The projected benefit obligation for the unfunded stock balance plan was $0.1 million for 20172019 and 2016.2018. The plan was frozen effective December 31, 2009.
Effective June 1, 2018, the Company adopted the Community Bank System, Inc. Restoration Plan (“Restoration Plan”). The Restoration Plan is a non-qualified deferred compensation plan for certain employees whose benefits under tax-qualified retirement plans are restricted by the Internal Revenue Code Section 401(a)(17) limitation on compensation. Adoption of the plan resulted in an unfunded initial projected benefit obligation of approximately $0.8 million. The Restoration Plan was amended effective December 31, 2018 to transfer certain obligations into the Company’s qualified defined benefit pension plan. The projected benefit obligation for the unfunded Restoration Plan was $0.3 million for 2019 and $0.1 million for 2018, respectively.
Effective December 31, 2009, the Company terminated its post-retirement medical program for current and future employees. Remaining plan participants will include only existing retirees as of December 31, 2010. This change was accounted for as a negative plan amendment and a $3.5 million, net of income taxes, benefit for prior service was recognized in AOCI in 2009. This negative plan amendment is being amortized over the expected benefit utilization period of remaining plan participants. Amounts recognized in accumulated other comprehensive income, net of tax, for the year ended December 31, are as follows:
| | Pension Benefits | | | Post-retirement Benefits | | | Pension Benefits | | | Post-retirement Benefits | | (000's omitted) | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | (000’s omitted) | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | Prior service cost/(credit) | | $ | 424 | | | $ | (26 | ) | | $ | 111 | | | $ | 110 | | | $ | (49 | ) | | $ | 1,509 | | | $ | 136 | | | $ | 135 | | Net (gain) loss | | | (851 | ) | | | (3,517 | ) | | | 148 | | | | 111 | | | | 1,920 | | | | 9,431 | | | | 38 | | | | 129 | | Total | | $ | (427 | ) | | $ | (3,543 | ) | | $ | 259 | | | $ | 221 | | | $ | 1,871 | | | $ | 10,940 | | | $ | 174 | | | $ | 264 | |
The estimated costs, net of tax, that will be amortized from accumulated other comprehensive (income) loss into net periodic (income) cost over the next fiscal year are as follows:
(000's omitted) | | Pension Benefits | | | Post-retirement Benefits | | | (000’s omitted) | | | Pension Benefits | | | Post-retirement Benefits | | Prior service credit | | $ | (330 | ) | | $ | (179 | ) | | $ | 241 | | | $ | (179 | ) | Net loss | | | 1,054 | | | | 18 | | | | 3,212 | | | | 40 | | Total | | $ | 724 | | | $ | (161 | ) | | $ | 3,453 | | | $ | (139 | ) |
The weighted-average assumptions used to determine the benefit obligations as of December 31 are as follows:
| | Pension Benefits | | | Post-retirement Benefits | | | Pension Benefits | | | Post-retirement Benefits | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | Discount rate | | | 4.00 | % | | | 4.50 | % | | | 4.00 | % | | | 4.40 | % | | | 3.50 | % | | | 4.50 | % | | | 3.60 | % | | | 4.45 | % | Expected return on plan assets | | | 7.00 | % | | | 7.00 | % | | | N/A | | | | N/A | | | | 7.00 | % | | | 7.00 | % | | | N/A | | | | N/A | | Rate of compensation increase | | | 3.50 | % | | | 3.50 | % | | | N/A | | | | N/A | | | | 3.50 | % | | | 3.50 | % | | | N/A | | | | N/A | |
The net periodic benefit cost as of December 31 is as follows:
| | Pension Benefits | | | Post-retirement Benefits | | | Pension Benefits | | | Post-retirement Benefits | | (000's omitted) | | 2017 | | | 2016 | | | 2015 | | | 2017 | | | 2016 | | | 2015 | | | (000’s omitted) | | | 2019 | | | 2018 | | | 2017 | | | 2019 | | | 2018 | | | 2017 | | Service cost | | $ | 4,181 | | | $ | 4,106 | | | $ | 3,324 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 5,081 | | | $ | 4,561 | | | $ | 4,181 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | Interest cost | | | 5,717 | | | | 5,624 | | | | 5,506 | | | | 76 | | | | 82 | | | | 87 | | | | 6,264 | | | | 5,676 | | | | 5,717 | | | | 70 | | | | 69 | | | | 76 | | Expected return on plan assets | | | (13,354 | ) | | | (11,842 | ) | | | (12,169 | ) | | | 0 | | | | 0 | | | | 0 | | | | (14,311 | ) | | | (14,820 | ) | | | (13,354 | ) | | | 0 | | | | 0 | | | | 0 | | Plan amendment | | | 0 | | | | 20 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 13 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | Amortization of unrecognized net loss/(gain) | | | 767 | | | | 1,508 | | | | 1,466 | | | | 8 | | | | (5 | ) | | | (13 | ) | | | 2,568 | | | | 1,193 | | | | 767 | | | | 38 | | | | 21 | | | | 8 | | Amortization of prior service cost | | | 55 | | | | 43 | | | | 8 | | | | (179 | ) | | | (179 | ) | | | (179 | ) | | | 64 | | | | (293 | ) | | | 55 | | | | (179 | ) | | | (179 | ) | | | (179 | ) | Net periodic (benefit) | | $ | (2,634 | ) | | $ | (541 | ) | | $ | (1,865 | ) | | $ | (95 | ) | | $ | (102 | ) | | $ | (105 | ) | | $ | (334 | ) | | $ | (3,670 | ) | | $ | (2,634 | ) | | $ | (71 | ) | | $ | (89 | ) | | $ | (95 | ) |
Prior service costs in which all or almost all of the plan’s participants are fully eligible for benefits under the plan are amortized on a straight-line basis over the expected future working years of all active plan participants. Unrecognized gains or losses are amortized using the “corridor approach”, which is the minimum amortization required. Under the corridor approach, the net gain or loss in excess of 10 percent of the greater of the projected benefit obligation or the market-related value of the assets is amortized on a straight-line basis over the expected future working years of all active plan participants.
The weighted-average assumptions used to determine the net periodic pension cost for the years ended December 31 are as follows:
| | Pension Benefits | | | Post-retirement Benefits | | | Pension Benefits | | | Post-retirement Benefits | | | | 2017 | | | 2016 | | | 2015 | | | 2017 | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | | 2017 | | | 2019 | | | 2018 | | | 2017 | | Discount rate | | | 4.40 | % | | | 4.70 | % | | | 4.50 | % | | | 4.40 | % | | | 4.70 | % | | | 4.50 | % | | | 4.50 | % | | | 4.00 | % | | | 4.40 | % | | | 4.45 | % | | | 4.00 | % | | | 4.40 | % | Expected return on plan assets | | | 7.00 | % | | | 7.00 | % | | | 7.00 | % | | | N/A | | | | N/A | | | | N/A | | | | 7.00 | % | | | 7.00 | % | | | 7.00 | % | | | N/A | | | | N/A | | | | N/A | | Rate of compensation increase | | | 3.50 | % | | | 3.50 | % | | | 3.50 | % | | | N/A | | | | N/A | | | | N/A | | | | 3.50 | % | | | 3.50 | % | | | 3.50 | % | | | N/A | | | | N/A | | | | N/A | |
The amount of benefit payments that are expected to be paid over the next ten years are as follows:
(000's omitted) | | Pension Benefits | | | Post-retirement Benefits | | 2018 | | $ | 8,702 | | | $ | 145 | | 2019 | | | 9,163 | | | | 142 | | 2020 | | | 9,404 | | | | 139 | | 2021 | | | 9,943 | | | | 136 | | 2022 | | | 10,378 | | | | 133 | | 2023-2027 | | | 56,064 | | | | 618 | |
(000’s omitted) | | Pension Benefits | | | Post-retirement Benefits | | 2020 | | $ | 9,947 | | | $ | 179 | | 2021 | | | 10,713 | | | | 135 | | 2022 | | | 10,913 | | | | 132 | | 2023 | | | 11,455 | | | | 129 | | 2024 | | | 11,762 | | | | 126 | | 2025-2029 | | | 59,503 | | | | 572 | |
The payments reflect future service and are based on various assumptions including retirement age and form of payment (lump-sum versus annuity). Actual results may differ from these estimates.
The assumed discount rate is used to reflect the time value of future benefit obligations. The discount rate was determined based upon the yield on high-quality fixed income investments expected to be available during the period to maturity of the pension benefits. This rate is sensitive to changes in interest rates. A decrease in the discount rate would increase the Company’s obligation and future expense while an increase would have the opposite effect. The expected long-term rate of return was estimated by taking into consideration asset allocation, reviewing historical returns on the type of assets held and current economic factors. Based on the Company’s anticipation of future experience under the defined benefit pension plan, the mortality tables used to determine future benefit obligations under the plan were updated as of December 31, 20172019 to the RP-2014 Mortality Table for annuitantsemployees and non-annuitants,healthy annuitants, adjusted backward to 2006 with Scale MP-2014, and then adjusted for mortality improvements with the Scale MP-2016MP-2018 mortality improvement scale on a fully generational basis. The appropriateness of the assumptions isare reviewed annually.
Plan Assets The investment objective for the defined benefit pension plan is to achieve an average annual total return over a five-year period equal to the assumed rate of return used in the actuarial calculations. At a minimum performance level, the portfolio should earn the return obtainable on high quality intermediate-term bonds. The Company’s perspective regarding portfolio assets combines both preservation of capital and moderate risk-taking. Asset allocation favors equities,fixed income securities, with a target allocation of approximately 60% equity securities and 40% fixed income securities and money market funds. Due to the volatility in the market, the target allocation is not always desirable and asset allocations will fluctuate between acceptable ranges. Prohibited transactions include purchase of securities on margin, uncovered call options, and short sale transactions.
The fair values of the Company’s defined benefit pension plan assets at December 31, 20172019 by asset category are as follows:
Asset category (000’s omitted) | | Quoted Prices in Active Markets for Identical Assets Level 1 | | | Significant Observable Inputs Level 2 | | | Significant Unobservable Inputs Level 3 | | | Total | | | Quoted Prices in Active Markets for Identical Assets Level 1 | | | Significant Observable Inputs Level 2 | | | Significant Unobservable Inputs Level 3 | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | Money Market Accounts | | $ | 0 | | | $ | 10,381 | | | $ | 0 | | | $ | 10,381 | | | Cash equivalents | | | $ | 3,983 | | | $ | 0 | | | $ | 0 | | | $ | 3,983 | | Equity securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | U.S. large-cap | | | 53,154 | | | | 0 | | | | 0 | | | | 53,154 | | | | 50,301 | | | | 0 | | | | 0 | | | | 50,301 | | U.S mid/small cap | | | 26,309 | | | | 0 | | | | 0 | | | | 26,309 | | | | 10,408 | | | | 0 | | | | 0 | | | | 10,408 | | CBU stock | | | 8,344 | | | | 0 | | | | 0 | | | | 8,344 | | | | 6,522 | | | | 0 | | | | 0 | | | | 6,522 | | International | | | 47,723 | | | | 0 | | | | 0 | | | | 47,723 | | | | 37,990 | | | | 0 | | | | 0 | | | | 37,990 | | | | | 135,530 | | | | 0 | | | | 0 | | | | 135,530 | | | | 105,221 | | | | 0 | | | | 0 | | | | 105,221 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fixed income securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Government securities | | | 13,929 | | | | 9,686 | | | | 0 | | | | 23,615 | | | | 73,698 | | | | 8,341 | | | | 0 | | | | 82,039 | | Investment grade bonds | | | 19,278 | | | | 0 | | | | 0 | | | | 19,278 | | | | 12,884 | | | | 0 | | | | 0 | | | | 12,884 | | High yield(a) | | | 16,297 | | | | 0 | | | | 0 | | | | 16,297 | | | | 6,770 | | | | 0 | | | | 0 | | | | 6,770 | | | | | 49,504 | | | | 9,686 | | | | 0 | | | | 59,190 | | | | 93,352 | | | | 8,341 | | | | 0 | | | | 101,693 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other investments (b) | | | 11,302 | | | | 73 | | | | 0 | | | | 11,375 | | | | 15,856 | | | | 82 | | | | 0 | | | | 15,938 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total (c) | | $ | 196,336 | | | $ | 20,140 | | | $ | 0 | | | $ | 216,476 | | | $ | 218,412 | | | $ | 8,423 | | | $ | 0 | | | $ | 226,835 | |
The fair values of the Company’s defined benefit pension plan assets at December 31, 20162018 by asset category are as follows:
Asset category (000’s omitted) | | Quoted Prices in Active Markets for Identical Assets Level 1 | | | Significant Observable Inputs Level 2 | | | Significant Unobservable Inputs Level 3 | | | Total | | | Quoted Prices in Active Markets for Identical Assets Level 1 | | | Significant Observable Inputs Level 2 | | | Significant Unobservable Inputs Level 3 | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | Money Market Accounts | | $ | 103 | | | $ | 8,048 | | | $ | 0 | | | $ | 8,151 | | | Cash equivalents | | | $ | 4,856 | | | $ | 0 | | | $ | 0 | | | $ | 4,856 | | Equity securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | U.S. large-cap | | | 43,235 | | | | 0 | | | | 0 | | | | 43,235 | | | | 39,122 | | | | 0 | | | | 0 | | | | 39,122 | | U.S mid/small cap | | | 19,032 | | | | 0 | | | | 0 | | | | 19,032 | | | | 9,881 | | | | 0 | | | | 0 | | | | 9,881 | | CBU stock | | | 7,417 | | | | 0 | | | | 0 | | | | 7,417 | | | | 7,692 | | | | 0 | | | | 0 | | | | 7,692 | | International | | | 27,064 | | | | 0 | | | | 0 | | | | 27,064 | | | | 32,506 | | | | 0 | | | | 0 | | | | 32,506 | | | | | 96,748 | | | | 0 | | | | 0 | | | | 96,748 | | | | 89,201 | | | | 0 | | | | 0 | | | | 89,201 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fixed income securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Government securities | | | 25,375 | | | | 5,863 | | | | 0 | | | | 31,238 | | | | 64,417 | | | | 11,370 | | | | 0 | | | | 75,787 | | Investment grade bonds | | | 15,253 | | | | 0 | | | | 0 | | | | 15,253 | | | | 12,054 | | | | 0 | | | | 0 | | | | 12,054 | | High yield(a) | | | 16,615 | | | | 0 | | | | 0 | | | | 16,615 | | | | 6,712 | | | | 0 | | | | 0 | | | | 6,712 | | | | | 57,243 | | | | 5,863 | | | | 0 | | | | 63,106 | | | | 83,183 | | | | 11,370 | | | | 0 | | | | 94,553 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other investments (b) | | | 12,023 | | | | 58 | | | | 0 | | | | 12,081 | | | | 14,267 | | | | 66 | | | | 0 | | | | 14,333 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total (c) | | $ | 166,117 | | | $ | 13,969 | | | $ | 0 | | | $ | 180,086 | | | $ | 191,507 | | | $ | 11,436 | | | $ | 0 | | | $ | 202,943 | |
(a) | This category is exchange-traded funds representing a diversified index of high yield corporate bonds. |
(b) | This category is comprised of exchange-traded funds and mutual funds holding non-traditional investment classes including private equity funds and alternative exchange funds. |
(c) | Excludes dividends and interest receivable totaling $0.6$0.5 million and $0.3$0.7 million at December 31, 20172019 and 2016,2018, respectively. |
The valuation techniques used to measure fair value for the items in the table above are as follows:
| ·● | Money market funds - Managed portfolios, including commercial paper and other fixed income securities issued by U.S. and foreign corporations, asset-backed commercial paper, U.S. government securities, obligations of foreign governments and U.S. and foreign banks, which are valued at the closing price reported on the market on which the underlying securities are traded. |
| ·● | Equity securities and other investments – Mutual funds, equity securities and common stock of the Company which are valued at the quoted market price of shares held at year-end. |
| ·● | Fixed income securities - U.S. Treasuries, municipal bonds and notes, government sponsored entities, and corporate debt valued at the closing price reported on the active market on which the individual securities are traded or for municipal bonds and notes based on quoted prices for similar assets in the active market. |
The Company makes contributions to its funded qualified pension plan as required by government regulation or as deemed appropriate by management after considering the fair value of plan assets, expected return on such assets, and the value of the accumulated benefit obligation. The Company made a $2.0 million contribution to the Merchants Bank Pension Plan in 2017. The Company made a $7.2$7.3 million contribution to its defined benefit pension plan in 2017. 2019.The Company funds the payment of benefit obligations for the supplemental pension and post-retirement plans because such plans do not hold assets for investment.
Tupper Lake National Bank (“TLNB”), acquired in 2007, participated in the Pentegra Defined Benefit Plan for Financial Institutions (“Pentegra DB Plan”), a multi-employer tax qualified defined benefit pension plan. The identification number and plan number of the Pentegra DB Plan are 13-5645888 and 333, respectively. All employees of TLNB who met minimum service requirements participated in the plan. As of June 30, 2016, the Pentegra DB Plan had total assets of $3.3 billion, actuarial present value of accumulated benefits of $4.8 billion and was at least 80 percent funded. The assets of the multi-employer plan may be used to satisfy obligations of any of the employers participating in the plan. As a result, contributions made by the Company may be used to provide benefits to participants of other participating employers. Contributions for 2017, 2016 and 2015 were approximately $0.1 million, $0.05 million, and $0.03 million, respectively. Contributions made by the Company to the Pentegra DB Plan do not represent more than 5% of contributions made to the Pentegra DB Plan.
The assumed health care cost trend rate used in the post-retirement health plan at December 31, 2017 was 7.25% for the pre-65 participants and 5.00% for the post-65 participants for medical costs and 10.5% for prescription drugs. The rate to which the cost trend rate is assumed to decline (the ultimate trend rate) and the year that the rate reaches the ultimate trend rate is 3.89% and 2075, respectively.
Assumed health care cost trend rates impact the amounts reported for the health care plan. A one-percentage-point increase or decrease in the trend rate would increase the service and interest cost components by nominal amounts.
401(k) Employee Stock Ownership Plan The Company has a 401(k) Employee Stock Ownership Plan in which employees can contribute from 1% to 90% of eligible compensation, with the first 3% being eligible for a 100% matching contribution in the form of Company common stock and the next 3% being eligible for a 50% matching contributions in the form of Company common stock. The expense recognized under this plan for the years ended December 31, 2019, 2018 and 2017 2016 and 2015 was $5.3$6.1 million, $4.3$5.9 million, and $3.6$5.3 million, respectively. Effective January 1, 2010, the defined benefit pension plan was modified to a new plan design that includes an interest credit contribution to be made to the 401(k) plan. The expense recognized for this interest credit contribution for the years ended December 31, 2019, 2018, and 2017 2016,was $1.1 million, $0.9 million, and 2015 was $0.8 million, $0.7 million, and $1.1 million, respectively.
The Company acquired The Merchants Bank 401(k) ESOP Plan with the Merchants acquisition and The Gordon B. Roberts 401(k) Plan with the GBR acquisition. Effective January 1, 2018, The Merchants Bank 401(k) ESOP Plan and The Gordon B. Roberts 401(k) Plan were merged into and became part of the Community Bank System, Inc. 401(k) Employee Stock Ownership Plan.
Other Deferred Compensation Arrangements In addition to the supplemental pension plans for certain executives, the Company has nonqualified deferred compensation arrangements for several former directors, officers and key employees. All benefits provided under these plans are unfunded and payments to plan participants are made by the Company. At December 31, 20172019 and 2016,2018, the Company has recorded a liability of $3.1$2.6 million and $3.2$2.8 million, respectively. The expense recognized under these plans for the years ended December 31, 2017, 2016,2019, 2018, and 20152017 was approximately $0.3$0.2 million, $0.03$0.08 million, and $0.1$0.3 million, respectively.
Deferred Compensation Plans for Directors Directors of the Company may defer all or a portion of their director fees under the Deferred Compensation Plan for Directors. Under this plan, there is a separate account for each participating director which is credited with the amount of shares that could have been purchased with the director’s fees as well as any dividends on such shares. On the distribution date, the director will receive common stock equal to the accumulated share balance in their account. As of December 31, 20172019 and 2016,2018, there were 150,110151,519 and 154,013151,977 shares credited to the participants’ accounts, for which a liability of $4.2$4.9 million and $4.0$4.6 million was accrued, respectively. The expense recognized under the plan for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, was $0.2 million, $0.2 million, and $0.2 million, respectively.
The Company acquired deferred compensation plans for certain non-employee directors and trustees of Merchants. Under the terms of these acquired deferred compensation plans, participating directors could elect to have all, or a specified percentage, of their Merchants director’s fees for a given year paid in the form of cash or deferred in the form of restricted shares of Merchants’ common stock. Directors who elected to have their compensation deferred were credited with a number of shares of Merchants’ common stock equal in value to the amount of fees deferred. These shares were converted to shares of Company stock in connection with the acquisition and are held in a rabbi trust. The shares held in the rabbi trust are considered outstanding for purposes of computing earnings per share. The participating director may not sell, transfer or otherwise dispose of these shares prior to distribution. With respect to shares of common stock issued or otherwise transferred to a participating director, the participating director has the right to receive dividends or other distributions thereon.
NOTE L: | STOCK-BASED COMPENSATION PLANS |
NOTE L: STOCK-BASED COMPENSATION PLANS
The Company has a long-term incentive program for directors, officers and employees. Under this program, the Company initially authorized four4 million shares of Company common stock for the grant of incentive stock options, nonqualified stock options, restricted stock awards, and retroactive stock appreciation rights. The long-term incentive program was amended effective May 25, 2011, May 14, 2014 and May 17, 2017 to authorize an additional 900,000 shares, 1,000,000 shares and 1,000,000 shares of Company common stock, respectively, for the grant of incentive stock options, nonqualified stock options, restricted stock awards, and retroactive stock appreciation rights. As of December 31, 2017,2019, the Company has authorization to grant up to approximately 1.71.2 million additional shares of Company common stock for these instruments. The nonqualified (offset) stock options in its Director’s Stock Balance Plan vest and become exercisable immediately and expire one year after the date the director retires or two years in the event of death. The remaining options have a ten-year term, and vest and become exercisable on a grant-by-grant basis, ranging from immediate vesting to ratably over a five-year period. Activity in this long-term incentive program is as follows:
| | Stock Options | | Stock Options | | | Outstanding | | | Weighted- average Exercise Price of Shares | | Outstanding | | Weighted- average Exercise Price of Shares | Outstanding at December 31, 2015 | | | 1,969,301 | | | $ | 28.15 | | | Outstanding at December 31, 2017 | | | 1,708,296 | | $ | 34.57 | Granted | | | 330,383 | | | | 38.02 | | | 213,504 | | | 55.92 | Exercised | | | (525,298 | ) | | | 25.12 | | | (268,004) | | | 27.94 | Forfeited | | | (18,394 | ) | | | 34.47 | | | (9,435) | | | 45.54 | Outstanding at December 31, 2016 | | | 1,755,992 | | | | 30.85 | | | Outstanding at December 31, 2018 | | | 1,644,361 | | | 38.36 | Granted | | | 197,943 | | | | 57.02 | | | 199,110 | | | 59.41 | Exercised | | | (238,499 | ) | | | 25.72 | | | (331,315) | | | 30.42 | Forfeited | | | (7,140 | ) | | | 37.47 | | | (9,162) | | | 51.29 | Outstanding at December 31, 2017 | | | 1,708,296 | | | | 34.57 | | | Exercisable at December 31, 2017 | | | 1,015,823 | | | $ | 29.57 | | | Outstanding at December 31, 2019 | | | 1,502,994 | | | 42.82 | Exercisable at December 31, 2019 | | | 929,120 | | $ | 36.73 |
The following table summarizes the information about stock options outstanding under the Company’s stock option plan at December 31, 2017:2019:
| | | Options outstanding | | | Options exercisable | | Range of Exercise Price | | | Shares | | | Weighted- average Exercise Price | | | Weighted- average Remaining Life (years) | | | Shares | | | Weighted average Exercise Price | | $ | 0.00 – $18.00 | | | | 24,736 | | | $ | 17.82 | | | | 1.31 | | | | 24,736 | | | $ | 17.82 | | $ | 18.001 – $28.00 | | | | 314,511 | | | | 22.23 | | | | 2.93 | | | | 314,511 | | | | 22.23 | | $ | 28.001 – $29.00 | | | | 171,083 | | | | 28.78 | | | | 4.22 | | | | 171,083 | | | | 28.78 | | $ | 29.001 – $30.00 | | | | 228,668 | | | | 29.79 | | | | 5.20 | | | | 176,843 | | | | 29.79 | | $ | 30.001 – $40.00 | | | | 771,781 | | | | 37.09 | | | | 7.28 | | | | 317,005 | | | | 37.06 | | $ | 40.001 – $60.00 | | | | 197,517 | | | | 57.02 | | | | 9.14 | | | | 11,645 | | | | 57.12 | | TOTAL | | | | 1,708,296 | | | $ | 34.57 | | | | 6.02 | | | | 1,015,823 | | | $ | 29.57 | |
| | Options outstanding | | Options exercisable | | Range of Exercise Price | | Shares | | Weighted- average Exercise Price | | Weighted- average Remaining Life (years) | | Shares | | Weighted- average Exercise Price | | $0.00 – $28.00 | | | 96,324 | | $ | 79.25 | | | 3.36 | | | 96,324 | | $ | 24.26 | | $28.001 – $29.00 | | | 97,492 | | | 28.78 | | | 2.22 | | | 97,492 | | | 28.78 | | $29.001 – $30.00 | | | 141,501 | | | 29.79 | | | 3.21 | | | 141,501 | | | 29.79 | | $30.001 – $40.00 | | | 594,156 | | | 37.09 | | | 5.38 | | | 453,418 | | | 37.05 | | $40.001 – $60.00 | | | 573,521 | | | 57.47 | | | 8.24 | | | 140,385 | | | 56.76 | | TOTAL | | | 1,502,994 | | $ | 42.82 | | | 5.93 | | | 929,120 | | $ | 36.73 | |
The weighted-average remaining contractual term of outstanding and exercisable stock options at December 31, 20172019 is 6.025.93 years and 4.854.77 years, respectively. The aggregate intrinsic value of outstanding and exercisable stock options at December 31, 20172019 is $33.4$42.3 million and $24.6$31.8 million, respectively.
The Company recognized stock-based compensation expense related to non-qualified stock options of $2.2 million, $2.2$2.6 million and $1.8$2.2 million for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively. A related income tax benefit was recognized of $0.8$0.5 million, $0.8$0.6 million and $0.7$0.8 million for the 2017, 20162019, 2018 and 20152017 years, respectively. Compensation expense related to restricted stock vesting recognized in the income statement for 2017, 20162019, 2018 and 20152017 was approximately $2.8 million, $3.2 million and $2.7 million, $2.4 million and $2.2 million, respectively.
Management estimated the fair value of options granted using the Black-Scholes option-pricing model. This model was originally developed to estimate the fair value of exchange-traded equity options, which (unlike employee stock options) have no vesting period or transferability restrictions. As a result, the Black-Scholes model is not necessarily a precise indicator of the value of an option, but it is commonly used for this purpose. The Black-Scholes model requires several assumptions, which management developed based on historical trends and current market observations.
| | 2017 | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | | 2017 | | Weighted-average Fair Value of Options Granted | | $ | 12.78 | | | $ | 7.90 | | | $ | 7.48 | | | $ | 14.16 | | | $ | 13.44 | | | $ | 12.78 | | Assumptions: | | | | | | | | | | | | | | | | | | | | | | | | | Weighted-average expected life (in years) | | | 6.50 | | | | 6.50 | | | | 6.50 | | | | 6.50 | | | | 6.50 | | | | 6.50 | | Future dividend yield | | | 3.19 | % | | | 3.43 | % | | | 3.40 | % | | | 2.73 | % | | | 2.91 | % | | | 3.19 | % | Share price volatility | | | 29.71 | % | | | 30.00 | % | | | 30.34 | % | | | 29.31 | % | | | 29.44 | % | | | 29.71 | % | Weighted-average risk-free interest rate | | | 2.31 | % | | | 1.72 | % | | | 1.73 | % | | | 2.44 | % | | | 2.82 | % | | | 2.31 | % |
Unrecognized stock-based compensation expense related to non-vested stock options totaled $4.6$5.1 million at December 31, 2017.2019. The weighted-average period over which this unrecognized expense would be recognized is 3.23.3 years. The total fair value of stock options vested during 2019, 2018, and 2017 2016,were $2.4 million, $2.3 million and 2015 were $2.2 million, $2.1 million and $1.9 million, respectively.
During the 12 months ended December 31, 20172019 and 2016,2018, proceeds from stock option exercises totaled $7.7$11.3 million and $12.0$9.4 million, respectively, and the related tax benefits from exercise were approximately $2.3 million and $2.7$1.6 million, respectively. During the twelve months ended December 31, 20172019 and 2016,2018, approximately 0.20.3 million and 0.4 million shares respectively, were issued in connection with stock option exercises each year. The total intrinsic value of options exercised during 2019, 2018 and 2017 2016 and 2015 were $7.6$11.6 million, $10.3$8.4 million and $7.6 million, respectively.
A summary of the status of the Company’s unvested restricted stock awards as of December 31, 2017,2019, and changes during the twelve months ended December 31, 20172019 and 2016,2018, is presented below:
| | Restricted Shares | | | Weighted-average grant date fair value | | Restricted Shares | | Weighted-average grant date fair value | Unvested at December 31, 2015 | | | 246,311 | | | $ | 27.85 | | | Unvested at December 31, 2017 | | 230,873 | | $ | 34.06 | Awards | | | 148,240 | | | | 27.04 | | 50,133 | | | 55.92 | Forfeitures | | | (42,394 | ) | | | 17.49 | | (3,429) | | | 34.95 | Vestings | | | (98,327 | ) | | | 25.64 | | (56,514) | | | 39.40 | Unvested at December 31, 2016 | | | 253,830 | | | | 29.98 | | | Unvested at December 31, 2018 | | 221,063 | | | 37.72 | Awards | | | 46,428 | | | | 57.02 | | 108,556 | | | 42.53 | Forfeitures | | | (4,863 | ) | | | 24.78 | | (2,365) | | | 52.47 | Vestings | | | (64,522 | ) | | | 33.69 | | (130,466) | | | 29.71 | Unvested at December 31, 2017 | | | 230,873 | | | $ | 34.06 | | | Unvested at December 31, 2019 | | 196,788 | | $ | 45.58 |
Unrecognized stock-based compensation expense related to unvested restricted stock totaled $5.7$6.6 million at December 31, 2017,2019, which will be recognized as expense over the next five years. The weighted-average period over which this unrecognized expense would be recognized is 4.34.7 years. The total fair value of restricted stock vested during 2019, 2018, and 2017 2016,were $3.8 million, $2.3 million and 2015 were $2.2 million, $2.5 million and $1.7 million, respectively.
NOTE M: | EARNINGS PER SHARE |
NOTE M: EARNINGS PER SHARE
The two class method is used in the calculations of basic and diluted earnings per share. Under the two class method, earnings available to common shareholders for the period are allocated between common shareholders and participating securities according to dividends declared and participation rights in undistributed earnings. The Company has determined that all of its outstanding non-vested stock awards are participating securities as of December 31, 2017.2019.
Basic earnings per share are computed based on the weighted-average of the common shares outstanding for the period. Diluted earnings per share are based on the weighted-average of the shares outstanding and the assumed exercise of stock options during the year. The dilutive effect of options is calculated using the treasury stock method of accounting. The treasury stock method determines the number of common shares that would be outstanding if all the dilutive options (those where the average market price is greater than the exercise price) were exercised and the proceeds were used to repurchase common shares in the open market at the average market price for the applicable time period. There were approximately 0.20.5 million, 0.30.4 million and 0.30.2 million weighted-average anti-dilutive stock options outstanding at December 31, 2017, 20162019, 2018 and 2015,2017, respectively, which were not included in the computation below.
The following is a reconciliation of basic to diluted earnings per share for the years ended December 31, 2017, 20162019, 2018 and 2015.2017.
(000's omitted, except per share data) | | 2017 | | | 2016 | | | 2015 | | | (000’s omitted, except per share data) | | | 2019 | | | 2018 | | | 2017 | | Net income | | $ | 150,717 | | | $ | 103,812 | | | $ | 91,230 | | | $ | 169,063 | | | $ | 168,641 | | | $ | 150,717 | | Income attributable to unvested stock-based compensation awards | | | (597 | ) | | | (550 | ) | | | (453 | ) | | | (400 | ) | | | (744 | ) | | | (597 | ) | Income available to common shareholders | | $ | 150,120 | | | $ | 103,262 | | | $ | 90,777 | | | $ | 168,663 | | | $ | 167,897 | | | $ | 150,120 | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted-average common shares outstanding - basic | | | 48,843 | | | | 44,091 | | | | 40,996 | | | | 51,732 | | | | 51,165 | | | | 48,843 | | | | | | | | | | | | | | | | | | | | | | | | | | | Basic earnings per share | | $ | 3.07 | | | $ | 2.34 | | | $ | 2.21 | | | $ | 3.26 | | | $ | 3.28 | | | $ | 3.07 | | | | | | | | | | | | | | | | | | | | | | | | | | | Net income | | $ | 150,717 | | | $ | 103,812 | | | $ | 91,230 | | | $ | 169,063 | | | $ | 168,641 | | | $ | 150,717 | | Income attributable to unvested stock-based compensation awards | | | (597 | ) | | | (550 | ) | | | (453 | ) | | | (400 | ) | | | (744 | ) | | | (597 | ) | Income available to common shareholders | | $ | 150,120 | | | $ | 103,262 | | | $ | 90,777 | | | $ | 168,663 | | | $ | 167,897 | | | $ | 150,120 | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted-average common shares outstanding | | | 48,843 | | | | 44,091 | | | | 40,996 | | | | 51,732 | | | | 51,165 | | | | 48,843 | | Assumed exercise of stock options | | | 627 | | | | 394 | | | | 405 | | | | 516 | | | | 583 | | | | 627 | | Weighted-average common shares outstanding – diluted | | | 49,470 | | | | 44,485 | | | | 41,401 | | | | 52,248 | | | | 51,748 | | | | 49,470 | | | | | | | | | | | | | | | | | | | | | | | | | | | Diluted earnings per share | | $ | 3.03 | | | $ | 2.32 | | | $ | 2.19 | | | $ | 3.23 | | | $ | 3.24 | | | $ | 3.03 | | Cash dividends declared per share | | $ | 1.32 | | | $ | 1.26 | | | $ | 1.22 | | | $ | 1.58 | | | $ | 1.44 | | | $ | 1.32 | |
Stock Repurchase Program At its December 20162018 meeting, the Company’s Board of Directors (the “Board”) approved a stock repurchase program authorizing the repurchase of up to 2.22.5 million shares of the Company’s common stock in accordance with securities laws and regulations, through December 31, 2017.2019. At its December 20172019 meeting, the Board approved a similar program for 2018,2020, authorizing the repurchase of up to 2.52.6 million shares of the Company’s common stock through December 31, 2018.2020. Any repurchased shares will be used for general corporate purposes, including those related to stock plan activities. The timing and extent of repurchases will depend on market conditions and other corporate considerations as determined at the Company’s discretion. There were no0 stock repurchases pursuant to the announced plans in 20172019 or 2016. During 2015, the Company repurchased approximately 0.3 million shares of its common stock in open market transactions.2018.
NOTE N: | NOTE N: COMMITMENTS, CONTINGENT LIABILITIES AND RESTRICTIONS |
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist primarily of commitments to extend credit and standby letters of credit. Commitments to extend credit are agreements to lend to customers, generally having fixed expiration dates or other termination clauses that may require payment of a fee. These commitments consist principally of unused commercial and consumer credit lines. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of an underlying contract with a third party. The credit risks associated with commitments to extend credit and standby letters of credit are essentially the same as that involved with extending loans to customers and are subject to the Company’s normal credit policies. Collateral may be obtained based on management’s assessment of the customer’s creditworthiness. The fair value of the standby letters of credit is immaterial for disclosure.
The contract amounts of commitments and contingencies are as follows at December 31:
(000's omitted) | | 2017 | | | 2016 | | | (000’s omitted) | | | 2019 | | | 2018 | | Commitments to extend credit | | $ | 1,080,004 | | | $ | 773,442 | | | $ | 1,143,780 | | | $ | 1,134,576 | | Standby letters of credit | | | 23,782 | | | | 22,656 | | | | 37,872 | | | | 33,169 | | Total | | $ | 1,103,786 | | | $ | 796,098 | | | $ | 1,181,652 | | | $ | 1,167,745 | |
The Bank has unused lines of credit of $25.0 million at December 31, 2017.2019. The Bank has unused borrowing capacity of approximately $1.68$1.80 billion through collateralized transactions with the FHLB and $22.9$25.1 million through collateralized transactions with the Federal Reserve.
The Company is required to maintain a reserve balance, as established by the Federal Reserve.FRB. The required average total reserve for the 14-day maintenance period of December 21, 201719, 2019 through January 3, 20181, 2020 was $84.8 $100.3 million, with $73.2$77.2 million represented by cash on hand and the remaining $11.6$23.1 million was required to be on deposit with the Federal Reserve.
The Company and its subsidiaries are subject in the normal course of business to various pending and threatened legal proceedings in which claims for monetary damages are asserted. As of December 31, 2017,2019, management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against the Company or its subsidiaries will be material to the Company’s consolidated financial position. On at least a quarterly basis the Company assesses its liabilities and contingencies in connection with such legal proceedings. For those matters where it is probable that the Company will incur losses and the amounts of the losses can be reasonably estimated, the Company records an expense and corresponding liability in its consolidated financial statements. To the extent the pending or threatened litigation could result in exposure in excess of that liability, the amount of such excess is not currently estimable. The range of reasonably possible losses for matters where an exposure is not currently estimable or considered probable, beyond the existing recorded liabilities, is believed to be between $0 and $1 million in the aggregate. Although the Company does not believe that the outcome of pending litigation will be material to the Company’s consolidated financial position, it cannot rule out the possibility that such outcomes will be material to the consolidated results of operations for a particular reporting period in the future. NOTE O: LEASES
The Company has operating leases buildings,for certain offices and certain equipment. These leases have remaining terms that range from less than one year to 15 years. Options to extend the leases range from a single extension option of one year to multiple extension options for up to 40 years. Certain agreements include an option to terminate the lease within one year.
The components of lease expense are as follows:
(000’s omitted) | | 2019 | | Operating lease cost | | $ | 8,724 | | Variable lease cost | | | 18 | | Short-term lease cost (1) | | | 240 | | Total lease cost | | $ | 8,982 | |
(1) | Short-term lease cost includes the cost of leases with terms of twelve months or less, excluding leases with terms of one month or less. |
Supplemental cash flow information related to leases is as follows:
(000’s omitted) | | 2019 | | Cash paid for amounts included in the measurement of lease liabilities: | | | | Operating cash outflows for operating leases | | $ | 7,938 | | | | | | | Right-of-use assets obtained in exchange for lease obligations: | | | | | Operating leases | | | 14,145 | |
Supplemental balance sheet information related to leases is as follows:
(000’s omitted, except lease term and discount rate) | | 2019 | | Operating leases | | | | Operating lease right-of-use assets | | $ | 39,895 | | | | | | | Operating lease liabilities | | | 40,913 | | | | | | | Weighted average remaining lease term | | | | | Operating leases | | 6.6 years | | | | | | | Weighted average discount rate | | | | | Operating leases | | | 2.95 | % |
Maturities of lease liabilities as of December 31, 2019 are as follows:
(000’s omitted) | | Operating Leases | | 2020 | | $ | 9,396 | | 2021 | | | 7,952 | | 2022 | | | 6,664 | | 2023 | | | 5,695 | | 2024 | | | 4,565 | | Thereafter | | | 11,150 | | Total lease payments | | | 45,422 | | Less imputed interest | | | (4,509 | ) | Total | | $ | 40,913 | |
Included in the Company’s operating leases are related party leases where BPAS APS and OneGroup, subsidiaries of the Company, lease office space from 706 North Clinton, LLC. (“706 North Clinton”), an entity the Company holds a 50% membership interest in through its subsidiary OPFC II. As of December 31, 2019, the operating lease right-of-use assets and equipment under agreementsoperating lease liabilities associated with these related party leases total $4.9 million and $4.9 million, respectively. As of December 31, 2019, the weighted average remaining lease term and weighted average discount rate for the Company’s related party leases are 10.0 years and 3.67%, respectively. The maturities of the Company’s related party lease liabilities as of December 31, 2019 are as follows:
(000’s omitted) | | 706 North Clinton, LLC | | 2020 | | $ | 591 | | 2021 | | | 591 | | 2022 | | | 591 | | 2023 | | | 591 | | 2024 | | | 591 | | Thereafter | | | 2,946 | | Total lease payments | | | 5,901 | | Less imputed interest | | | (964 | ) | Total | | $ | 4,937 | |
As of December 31,2019, the Company has one additional operating lease for office space that expirehas not yet commenced with a lease term of 5 years. The Company anticipates that the operating lease will commence during the second quarter of 2020. Upon commencement, lease right-of-use assets and lease liabilities of approximately $0.6 million will be recorded in various years. the consolidated statements of condition.
Rental expense included in operating expenses amounted to $9.0 million and $7.3 million $5.8 millionin 2018 and $5.4 million in 2017, 2016 and 2015, respectively. The future minimum rental commitments as of December 31, 20172018 for all non-cancelable operating leases are as follows:
2018 | | $ | 9,189 | | | 2019 | | | 8,194 | | | $ | 8,452 | | 2020 | | | 6,603 | | | | 7,262 | | 2021 | | | 5,164 | | | | 5,673 | | 2022 | | | 4,101 | | | | 4,411 | | 2023 | | | | 2,621 | | Thereafter | | | 8,623 | | | | 10,390 | | Total | | $ | 41,874 | | | $ | 38,809 | |
NOTE P: | REGULATORY MATTERS |
NOTE P: REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Management believes, as of December 31, 2017,2019, that the Company and Bank meet all applicable capital adequacy requirements.
Basel III Transitional rules became effective for the Company on January 1, 2015 with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Beginning in 2016, the Company and the Bank are required to maintain a “capital conservation buffer,” composed entirely of common equity Tier 1 capital, in addition to minimum risk-based capital ratios. The required capital conservation buffer is 1.25%2.50% for 20172019 and 0.625%1.875% for 2016. 2018. Therefore, to satisfy both the minimum risk-based capital ratios and the capital conservation buffer in 2017,2019, the Company and the Bank must maintain: (i) Common equity Tier 1 capital to total risk-weighted assets of at least 5.75%7.0%, (ii) Tier 1 capital to total risk-weighted assets of at least 7.25%8.5%, and (iii) Total capital (Tier 1 capital plus Tier 2 capital) to total risk-weighted assets of at least 9.25%10.5%. To satisfy both the minimum risk-based capital ratios and the capital conservation buffer in 2016,2018, the Company and the Bank must maintain: (i) Common equity Tier 1 capital to total risk-weighted assets of at least 5.125%6.375%, (ii) Tier 1 capital to total risk-weighted assets of at least 6.625%7.875%, and (iii) Total capital (Tier 1 capital plus Tier 2 capital) to total risk-weighted assets of at least 8.625%9.875%. As of December 31, 20172019 and 2016,2018, the amounts, ratios and requirements for the Company are presented below calculated under the Basel III Standardized Transitional Approach. As of December 31, 2017,2019, the OCC categorized the Company and Bank as “well capitalized” under the regulatory framework for prompt corrective action. 95
| | Actual | | | For capital adequacy purposes | | | For capital adequacy purposes plus Capital Conservation Buffer | | | To be well-capitalized under prompt corrective action | | (000’s omitted) | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | | Community Bank System, Inc.: | | | | | | | | | | | | | | | | | | | | | | | | | 2019 | | | | | | | | | | | | | | | | | | | | | | | | | Tier 1 Leverage ratio | | $ | 1,148,336 | | | | 10.80 | % | | $ | 425,431 | | | | 4.00 | % | | | | | | | | $ | 531,788 | | | | 5.00 | % | Tier 1 risk-based capital | | | 1,148,336 | | | | 17.23 | % | | | 399,834 | | | | 6.00 | % | | $ | 566,432 | | | | 8.50 | % | | | 533,112 | | | | 8.00 | % | Total risk-based capital | | | 1,198,724 | | | | 17.99 | % | | | 533,112 | | | | 8.00 | % | | | 699,710 | | | | 10.50 | % | | | 666,390 | | | | 10.00 | % | Common equity tier 1 capital | | | 1,073,281 | | | | 16.11 | % | | | 299,876 | | | | 4.50 | % | | | 466,473 | | | | 7.00 | % | | | 433,154 | | | | 6.50 | % | 2018 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Tier 1 Leverage ratio | | $ | 1,093,166 | | | | 11.08 | % | | $ | 394,700 | | | | 4.00 | % | | | | | | | | | | $ | 493,375 | | | | 5.00 | % | Tier 1 risk-based capital | | | 1,093,166 | | | | 18.23 | % | | | 359,747 | | | | 6.00 | % | | $ | 472,168 | | | | 7.875 | % | | | 479,662 | | | | 8.00 | % | Total risk-based capital | | | 1,142,927 | | | | 19.06 | % | | | 479,662 | | | | 8.00 | % | | | 592,083 | | | | 9.875 | % | | | 599,578 | | | | 10.00 | % | Common equity tier 1 capital | | | 998,111 | | | | 16.65 | % | | | 269,810 | | | | 4.50 | % | | | 382,231 | | | | 6.375 | % | | | 389,726 | | | | 6.50 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Community Bank, N.A.: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2019 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Tier 1 Leverage ratio | | $ | 910,364 | | | | 8.61 | % | | $ | 422,882 | | | | 4.00 | % | | | | | | | | | | $ | 528,603 | | | | 5.00 | % | Tier 1 risk-based capital | | | 910,364 | | | | 13.79 | % | | | 396,064 | | | | 6.00 | % | | $ | 561,091 | | | | 8.50 | % | | | 528,086 | | | | 8.00 | % | Total risk-based capital | | | 960,752 | | | | 14.55 | % | | | 528,086 | | | | 8.00 | % | | | 693,113 | | | | 10.50 | % | | | 660,107 | | | | 10.00 | % | Common equity tier 1 capital | | | 910,309 | | | | 13.79 | % | | | 297,048 | | | | 4.50 | % | | | 462,075 | | | | 7.00 | % | | | 429,070 | | | | 6.50 | % | 2018 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Tier 1 Leverage ratio | | $ | 912,995 | | | | 9.32 | % | | $ | 391,953 | | | | 4.00 | % | | | | | | | | | | $ | 489,941 | | | | 5.00 | % | Tier 1 risk-based capital | | | 912,995 | | | | 15.35 | % | | | 356,973 | | | | 6.00 | % | | $ | 468,527 | | | | 7.875 | % | | | 475,964 | | | | 8.00 | % | Total risk-based capital | | | 962,756 | | | | 16.18 | % | | | 475,964 | | | | 8.00 | % | | | 587,518 | | | | 9.875 | % | | | 594,955 | | | | 10.00 | % | Common equity tier 1 capital | | | 912,940 | | | | 15.35 | % | | | 267,730 | | | | 4.50 | % | | | 379,284 | | | | 6.375 | % | | | 386,721 | | | | 6.50 | % |
| | Actual | | | For capital adequacy purposes | | | For capital adequacy purposes plus Capital Conservation Buffer | | | To be well-capitalized under prompt corrective action | | (000’s omitted) | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | | Community Bank System, Inc.: | | | | | | | | | | | | | | | | | | | | | | | | | 2017 | | | | | | | | | | | | | | | | | | | | | | | | | Tier 1 Leverage ratio | | $ | 995,860 | | | | 10.00 | % | | $ | 398,183 | | | | 4.00 | % | | | | | | | | $ | 497,729 | | | | 5.00 | % | Tier 1 risk-based capital | | | 995,860 | | | | 16.64 | % | | | 358,988 | | | | 6.00 | % | | $ | 433,777 | | | | 7.25 | % | | | 478,651 | | | | 8.00 | % | Total risk-based capital | | | 1,043,910 | | | | 17.45 | % | | | 478,651 | | | | 8.00 | % | | | 553,440 | | | | 9.25 | % | | | 598,314 | | | | 10.00 | % | Common equity tier 1 capital | | | 876,685 | | | | 14.65 | % | | | 269,241 | | | | 4.50 | % | | | 344,030 | | | | 5.75 | % | | | 388,904 | | | | 6.50 | % |
2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Tier 1 Leverage ratio | | $ | 858,347 | | | | 10.55 | % | | $ | 325,438 | | | | 4.00 | % | | | | | | | | | | $ | 406,798 | | | | 5.00 | % | Tier 1 risk-based capital | | | 858,347 | | | | 18.10 | % | | | 284,583 | | | | 6.00 | % | | $ | 314,228 | | | | 6.625 | % | | | 379,445 | | | | 8.00 | % | Total risk-based capital | | | 905,996 | | | | 19.10 | % | | | 379,445 | | | | 8.00 | % | | | 409,089 | | | | 8.625 | % | | | 474,306 | | | | 10.00 | % | Common equity tier 1 capital | | | 759,199 | | | | 16.01 | % | | | 213,438 | | | | 4.50 | % | | | 243,082 | | | | 5.125 | % | | | 308,299 | | | | 6.50 | % |
Community Bank, N.A.: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Tier 1 Leverage ratio | | $ | 859,538 | | | | 8.71 | % | | $ | 394,981 | | | | 4.00 | % | | | | | | | | | | $ | 493,726 | | | | 5.00 | % | Tier 1 risk-based capital | | | 859,538 | | | | 14.50 | % | | | 355,641 | | | | 6.00 | % | | $ | 429,733 | | | | 7.25 | % | | | 474,188 | | | | 8.00 | % | Total risk-based capital | | | 907,588 | | | | 15.31 | % | | | 474,188 | | | | 8.00 | % | | | 548,280 | | | | 9.25 | % | | | 592,736 | | | | 10.00 | % | Common equity tier 1 capital | | | 859,483 | | | | 14.50 | % | | | 266,731 | | | | 4.50 | % | | | 340,823 | | | | 5.75 | % | | | 385,278 | | | | 6.50 | % |
2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Tier 1 Leverage ratio | | $ | 672,633 | | | | 8.30 | % | | $ | 324,080 | | | | 4.00 | % | | | | | | | | | | $ | 405,099 | | | | 5.00 | % | Tier 1 risk-based capital | | | 672,633 | | | | 14.28 | % | | | 282,662 | | | | 6.00 | % | | $ | 312,106 | | | | 6.625 | % | | | 376,883 | | | | 8.00 | % | Total risk-based capital | | | 720,282 | | | | 15.29 | % | | | 376,883 | | | | 8.00 | % | | | 406,327 | | | | 8.625 | % | | | 471,104 | | | | 10.00 | % | Common equity tier 1 capital | | | 672,578 | | | | 14.28 | % | | | 211,997 | | | | 4.50 | % | | | 241,441 | | | | 5.125 | % | | | 306,217 | | | | 6.50 | % |
NOTE Q: | NOTE Q: PARENT COMPANY STATEMENTS |
The condensed statements of condition of the parent company, Community Bank System, Inc., at December 31 are as follows:
(000's omitted) | | 2017 | | | 2016 | | | 2019 | | | 2018 | | Assets: | | | | | | | | | | | | | Cash and cash equivalents | | $ | 84,460 | | | $ | 151,127 | | | $ | 180,663 | | | $ | 116,133 | | Investment securities | | | 4,322 | | | | 3,628 | | | | 2,853 | | | | 3,452 | | Investment in and advances to: | | | | | | | | | | | | | | | | | Bank subsidiary | | | 1,511,780 | | | | 1,116,554 | | | | 1,594,790 | | | | 1,522,109 | | Non-bank subsidiaries | | | 169,341 | | | | 35,566 | | | | 180,487 | | | | 182,617 | | Other assets | | | 9,150 | | | | 10,345 | | | | 12,406 | | | | 8,957 | | Total assets | | $ | 1,779,053 | | | $ | 1,317,220 | | | $ | 1,971,199 | | | $ | 1,833,268 | | | | | | | | | | | | | | | | | | | Liabilities and shareholders' equity: | | | | | | | | | | | | | | | | | Accrued interest and other liabilities | | $ | 20,924 | | | $ | 16,950 | | | $ | 24,850 | | | $ | 21,546 | | Borrowings | | | 122,814 | | | | 102,170 | | | | 91,115 | | | | 97,939 | | Shareholders' equity | | | 1,635,315 | | | | 1,198,100 | | | | 1,855,234 | | | | 1,713,783 | | Total liabilities and shareholders' equity | | $ | 1,779,053 | | | $ | 1,317,220 | | | $ | 1,971,199 | | | $ | 1,833,268 | |
The condensed statements of income of the parent company for the years ended December 31 is as follows:
(000's omitted) | | 2017 | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | | 2017 | | Revenues: | | | | | | | | | | | | | | | | | | | Dividends from subsidiaries: | | | | | | | | | | | | | | | | | | | Bank subsidiary | | $ | 91,000 | | | $ | 89,000 | | | $ | 70,000 | | | $ | 115,000 | | | $ | 98,000 | | | $ | 91,000 | | Non-bank subsidiaries | | | 35,500 | | | | 1,750 | | | | 6,000 | | | | 27,600 | | | | 9,250 | | | | 35,500 | | Interest and dividends on investments | | | 133 | | | | 102 | | | | 94 | | | | 134 | | | | 161 | | | | 133 | | Total revenues | | | 126,633 | | | | 90,852 | | | | 76,094 | | | | 142,734 | | | | 107,411 | | | | 126,633 | | Expenses: | | | | | | | | | | | | | | | | | | | | | | | | | Interest on borrowings | | | 3,904 | | | | 2,949 | | | | 2,537 | | | | 4,244 | | | | 4,677 | | | | 3,904 | | Acquisition expenses | | | 91 | | | | 429 | | | | 0 | | | | 1,248 | | | | 0 | | | | 91 | | Loss on debt prepayment | | | | 0 | | | | 318 | | | | 0 | | Other expenses | | | 26 | | | | 11 | | | | 19 | | | | 477 | | | | 131 | | | | 26 | | Total expenses | | | 4,021 | | | | 3,389 | | | | 2,556 | | | | 5,969 | | | | 5,126 | | | | 4,021 | | | | | | | | | | | | | | | | | | | | | | | | | | | Income before tax benefit and equity in undistributed net income of subsidiaries | | | 122,612 | | | | 87,463 | �� | | | 73,538 | | | | 136,765 | | | | 102,285 | | | | 122,612 | | Income tax benefit/(expense) | | | 1,930 | | | | 866 | | | | (572 | ) | | Income tax benefit | | | | 4,545 | | | | 1,330 | | | | 1,930 | | Income before equity in undistributed net income of subsidiaries | | | 124,542 | | | | 88,329 | | | | 72,966 | | | | 141,310 | | | | 103,615 | | | | 124,542 | | Equity in undistributed net income of subsidiaries | | | 26,175 | | | | 15,483 | | | | 18,264 | | | | 27,753 | | | | 65,026 | | | | 26,175 | | Net income | | $ | 150,717 | | | $ | 103,812 | | | $ | 91,230 | | | $ | 169,063 | | | $ | 168,641 | | | $ | 150,717 | | Other comprehensive (loss), net of tax: | | | | | | | | | | | | | | Changes in other comprehensive income/(loss) related to pension and other post retirement obligations | | | 168 | | | | 3,322 | | | | (4,567 | ) | | Changes in other comprehensive loss related to unrealized losses on available-for-sale securities | | | (11,065 | ) | | | (14,714 | ) | | | (6,918 | ) | | Other comprehensive loss | | | (10,897 | ) | | | (11,392 | ) | | | (11,485 | ) | | Other comprehensive income/(loss), net of tax: | | | | | | | | | | | | | | Changes in other comprehensive (loss)/income related to pension and other post retirement obligations | | | | (2,045 | ) | | | (11,204 | ) | | | 168 | | Changes in other comprehensive income/(loss) related to unrealized losses on available-for-sale securities | | | | 37,124 | | | | (30,402 | ) | | | (11,065 | ) | Other comprehensive income/(loss) | | | | 35,079 | | | | (41,606 | ) | | | (10,897 | ) | Comprehensive income | | $ | 139,820 | | | $ | 92,420 | | | $ | 79,745 | | | $ | 204,142 | | | $ | 127,035 | | | $ | 139,820 | |
The statements of cash flows of the parent company for the years ended December 31 is as follows:
(000's omitted) | | 2017 | | | 2016 | | | 2015 | | | 2019 | | | 2018 | | | 2017 | | Operating activities: | | | | | | | | | | | | | | | | | | | Net income | | $ | 150,717 | | | $ | 103,812 | | | $ | 91,230 | | | $ | 169,063 | | | $ | 168,641 | | | $ | 150,717 | | Adjustments to reconcile net income to net cash provided by operating activities | | | | | | | | | | | | | | | | | | | | | | | | | Equity in undistributed net income of subsidiaries | | | (26,175 | ) | | | (15,483 | ) | | | (18,264 | ) | | | (27,753 | ) | | | (65,026 | ) | | | (26,175 | ) | Net change in other assets and other liabilities | | | 1,870 | | | | (215 | ) | | | (27 | ) | | | 86 | | | | (1,084 | ) | | | 1,870 | | Net cash provided by operating activities | | | 126,412 | | | | 88,114 | | | | 72,939 | | | | 141,396 | | | | 102,531 | | | | 126,412 | | Investing activities: | | | | | | | | | | | | | | | | | | | | | | | | | Proceeds from sale of investment securities | | | 0 | | | | 0 | | | | 0 | | | Cash (paid)/received for acquisitions, net of cash acquired of $150,534, $0, and $81,772, respectively | | | (139,471 | ) | | | 0 | | | | 25,505 | | | Capital contributions to subsidiaries | | | (11,063 | ) | | | 0 | | | | (80,231 | ) | | Net cash used in investing activities | | | (150,534 | ) | | | 0 | | | | (54,726 | ) | | Proceeds from redemption of investment securities | | | | 0 | | | | 776 | | | | 0 | | Cash paid for acquisitions, net of cash acquired of $1,328, $0, and $150,534, respectively | | | | (92,056 | ) | | | 0 | | | | (139,471 | ) | Return of capital from/(capital contributions to) | | | | 100,680 | | | | 0 | | | | (11,063 | ) | Net cash provided by/(used in) investing activities | | | | 8,624 | | | | 776 | | | | (150,534 | ) | Financing activities: | | | | | | | | | | | | | | | | | | | | | | | | | Repayment of advances from subsidiaries | | | | (1,652 | ) | | | 0 | | | | 0 | | Repayment of borrowings | | | | (22,681 | ) | | | (25,207 | ) | | | 0 | | Issuance of common stock | | | 9,700 | | | | 15,326 | | | | 13,975 | | | | 12,200 | | | | 12,507 | | | | 9,700 | | Purchase of treasury stock | | | (3,306 | ) | | | (3,470 | ) | | | (9,126 | ) | | | (286 | ) | | | (298 | ) | | | (3,306 | ) | Sale of treasury stock | | | 10,060 | | | | 8,888 | | | | 16,571 | | | | 6,884 | | | | 12,561 | | | | 10,060 | | Increase in deferred compensation arrangements | | | 3,306 | | | | 0 | | | | 0 | | | | 286 | | | | 298 | | | | 3,306 | | Cash dividends paid | | | (62,305 | ) | | | (55,048 | ) | | | (49,273 | ) | | | (80,241 | ) | | | (71,495 | ) | | | (62,305 | ) | Net cash used in financing activities | | | (42,545 | ) | | | (34,304 | ) | | | (27,853 | ) | | | (85,490 | ) | | | (71,634 | ) | | | (42,545 | ) | Change in cash and cash equivalents | | | (66,667 | ) | | | 53,810 | | | | (9,640 | ) | | | 64,530 | | | | 31,673 | | | | (66,667 | ) | Cash and cash equivalents at beginning of year | | | 151,127 | | | | 97,317 | | | | 106,957 | | | | 116,133 | | | | 84,460 | | | | 151,127 | | Cash and cash equivalents at end of year | | $ | 84,460 | | | $ | 151,127 | | | $ | 97,317 | | | $ | 180,663 | | | $ | 116,133 | | | $ | 84,460 | | | | | | | | | | | | | | | | | | | | | | | | | | | Supplemental disclosures of cash flow information: | | | | | | | | | | | | | | | | | | | | | | | | | Cash paid for interest | | $ | 3,826 | | | $ | 2,909 | | | $ | 2,523 | | | $ | 4,306 | | | $ | 4,857 | | | $ | 3,826 | | Supplemental disclosures of noncash financing activities | | | | | | | | | | | | | | | | | | | | | | | | | Dividends declared and unpaid | | $ | 17,460 | | | $ | 14,268 | | | $ | 13,605 | | | $ | 21,342 | | | $ | 19,808 | | | $ | 17,460 | | Advances from subsidiaries | | | | 1,691 | | | | 0 | | | | 0 | | Capital contributions to subsidiaries | | | 513,769 | | | | 0 | | | | 76,461 | | | | 0 | | | | 0 | | | | 513,769 | | Common stock issued for acquisition | | | 343,132 | | | | 0 | | | | 102,202 | | | | 0 | | | | 0 | | | | 343,132 | |
NOTE R: FAIR VALUE
Accounting standards allow entities an irrevocable option to measure certain financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. The Company has elected to value mortgage loans held for sale at fair value in order to more closely match the gains and losses associated with loans held for sale with the gains and losses on forward sales contracts. Accordingly, the impact on the valuation will be recognized in the Company’s consolidated statement of income. All mortgage loans held for sale are current and in performing status.
Accounting standards establish a framework for measuring fair value and require certain disclosures about such fair value instruments. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e. exit price). Inputs used to measure fair value are classified into the following hierarchy:
● | Level 1 – Quoted prices in active markets for identical assets or liabilities. |
·● | Level 2 – Quoted prices in active markets for similar assets or liabilities, or quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability. |
·● | Level 3 – Significant valuation assumptions not readily observable in a market. |
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following tables set forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis. There were no transfers between any of the levels for the periods presented.
| | December 31, 2017 | | | December 31, 2019 | | (000's omitted) | | Level 1 | | | Level 2 | | | Level 3 | | | Total Fair Value | | | (000’s omitted) | | | Level 1 | | | Level 2 | | | Level 3 | | | Total Fair Value | | Available-for-sale investment securities: | | | | | | | | | | | | | | | | | | | | | | | | | U.S. Treasury and agency securities | | $ | 1,909,290 | | | $ | 144,781 | | | $ | 0 | | | $ | 2,054,071 | | | $ | 1,878,705 | | | $ | 165,054 | | | $ | 0 | | | $ | 2,043,759 | | Obligations of state and political subdivisions | | | 0 | | | | 528,956 | | | | 0 | | | | 528,956 | | | | 0 | | | | 512,208 | | | | 0 | | | | 512,208 | | Government agency mortgage-backed securities | | | 0 | | | | 357,538 | | | | 0 | | | | 357,538 | | | | 0 | | | | 432,862 | | | | 0 | | | | 432,862 | | Corporate debt securities | | | 0 | | | | 2,623 | | | | 0 | | | | 2,623 | | | | 0 | | | | 2,528 | | | | 0 | | | | 2,528 | | Government agency collateralized mortgage obligations | | | 0 | | | | 87,374 | | | | 0 | | | | 87,374 | | | | 0 | | | | 53,071 | | | | 0 | | | | 53,071 | | Marketable equity securities | | | 526 | | | | 0 | | | | 0 | | | | 526 | | | Total available-for-sale investment securities | | | 1,909,816 | | | | 1,121,272 | | | | 0 | | | | 3,031,088 | | | | 1,878,705 | | | | 1,165,723 | | | | 0 | | | | 3,044,428 | | Mortgage loans held for sale | | | 0 | | | | 461 | | | | 0 | | | | 461 | | | Commitments to originate real estate loans for sale | | | 0 | | | | 0 | | | | 89 | | | | 89 | | | Forward sales commitments | | | 0 | | | | 4 | | | | 0 | | | | 4 | | | Equity securities | | | | 451 | | | | 0 | | | | 0 | | | | 451 | | Interest rate swap agreements asset | | | 0 | | | | 1,064 | | | | 0 | | | | 1,064 | | | | 0 | | | | 851 | | | | 0 | | | | 851 | | Interest rate swap agreements liability | | | 0 | | | | (904 | ) | | | 0 | | | | (904 | ) | | | 0 | | | | (586 | ) | | | 0 | | | | (586 | ) | Total | | $ | 1,909,816 | | | $ | 1,121,897 | | | $ | 89 | | | $ | 3,031,802 | | | $ | 1,879,156 | | | $ | 1,165,988 | | | $ | 0 | | | $ | 3,045,144 | |
| | December 31, 2016 | | | December 31, 2018 | | (000's omitted) | | Level 1 | | | Level 2 | | | Level 3 | | | Total Fair Value | | | (000’s omitted) | | | Level 1 | | | Level 2 | | | Level 3 | | | Total Fair Value | | Available-for-sale investment securities: | | | | | | | | | | | | | | | | | | | | | | | | | U.S. Treasury and agency securities | | $ | 1,902,762 | | | $ | 0 | | | $ | 0 | | | $ | 1,902,762 | | | $ | 1,896,931 | | | $ | 126,822 | | | $ | 0 | | | $ | 2,023,753 | | Obligations of state and political subdivisions | | | 0 | | | | 594,990 | | | | 0 | | | | 594,990 | | | | 0 | | | | 459,154 | | �� | | 0 | | | | 459,154 | | Government agency mortgage-backed securities | | | 0 | | | | 235,230 | | | | 0 | | | | 235,230 | | | | 0 | | | | 382,477 | | | | 0 | | | | 382,477 | | Corporate debt securities | | | 0 | | | | 5,687 | | | | 0 | | | | 5,687 | | | | 0 | | | | 2,546 | | | | 0 | | | | 2,546 | | Government agency collateralized mortgage obligations | | | 0 | | | | 9,535 | | | | 0 | | | | 9,535 | | | | 0 | | | | 68,119 | | | | 0 | | | | 68,119 | | Marketable equity securities | | | 452 | | | | 0 | | | | 0 | | | | 452 | | | Total available-for-sale investment securities | | | 1,903,214 | | | | 845,442 | | | | 0 | | | | 2,748,656 | | | | 1,896,931 | | | | 1,039,118 | | | | 0 | | | | 2,936,049 | | Equity securities | | | | 432 | | | | 0 | | | | 0 | | | | 432 | | Mortgage loans held for sale | | | 0 | | | | 2,416 | | | | 0 | | | | 2,416 | | | | 0 | | | | 83 | | | | 0 | | | | 83 | | Commitments to originate real estate loans for sale | | | 0 | | | | 0 | | | | 54 | | | | 54 | | | Forward sales commitments | | | 0 | | | | 3 | | | | 0 | | | | 3 | | | Interest rate swap agreements asset | | | | 0 | | | | 793 | | | | 0 | | | | 793 | | Interest rate swap agreements liability | | | | 0 | | | | (742 | ) | | | 0 | | | | (742 | ) | Total | | $ | 1,903,214 | | | $ | 847,861 | | | $ | 54 | | | $ | 2,751,129 | | | $ | 1,897,363 | | | $ | 1,039,252 | | | $ | 0 | | | $ | 2,936,615 | |
The valuation techniques used to measure fair value for the items in the table above are as follows:
| ·● | Available for sale investment securities – The fair value of available-for-sale investment securities is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using quoted market prices for similar securities or model-based valuation techniques. Level 1 securities include U.S. Treasury obligations and marketable equity securities that are traded by dealers or brokers in active over-the-counter markets. Level 2 securities include U.S. agency securities, mortgage-backed securities issued by government-sponsored entities, municipal securities and corporate debt securities that are valued by reference to prices for similar securities or through model-based techniques in which all significant inputs, such as reported trades, trade execution data, LIBOR swap yield curve, market prepayment speeds, credit information, market spreads, and security’s terms and conditions, are observable. See Note C for further disclosure of the fair value of investment securities. |
| ·● | Mortgage loans held for sale – Mortgage loans held for sale are carried at fair value, which is determined using quoted secondary-marketsecondary-market prices of loans with similar characteristics and, as such, have been classified as a Level 2 valuation. The unpaid principal value ofThere were 0 mortgage loans held for sale at December 31, 2017 is approximately $0.5 million.2019. The unrealized gain on mortgage loans held for sale of approximately $13,000 was recognized in other banking services revenues in the Consolidated Statement of Income for the year ended December 31, 2017.2019 and was immaterial. |
| ·● | Forward sales commitments – The Company enters into forward sales commitments to sell certain residential real estate loans. Such commitments are considered to be derivative financial instruments and, therefore, are carried at estimated fair value in the other asset or other liability section of the consolidated statement of condition. The fair value of these forward sales commitments is primarily measured by obtaining pricing from certain government-sponsored entities and reflects the underlying price the entity would pay the Company for an immediate sale on these mortgages. As such, these instruments are classified as Level 2 in the fair value hierarchy. |
| ·● | Commitments to originate real estate loans for sale – The Company enters into various commitments to originate residential real estate loans for sale. Such commitments are considered to be derivative financial instruments and, therefore, are carried at estimated fair value in the other asset or other liability section of the consolidated statement of condition. The estimated fair value of these commitments is determined using quoted secondary market prices obtained from certain government-sponsored entities. Additionally, accounting guidance requires the expected net future cash flows related to the associated servicing of the loan to be included in the fair value measurement of the derivative. The expected net future cash flows are based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income. Such assumptions include estimates of the cost of servicing loans, appropriate discount rate and prepayment speeds. The determination of expected net cash flows is considered a significant unobservable input contributing to the Level 3 classification of commitments to originate real estate loans for sale. |
| ·● | Interest rate swap agreements – The interest rate swaps are reported at their fair value utilizing Level 2 inputs from third parties. The fair value of our interest rate swaps are determined using prices obtained from a third party advisor. The fair value measurement of the interest rate swap is determined by netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on the expectation of future interest rates derived from observed market interest rate curves. |
The changes in Level 3 assets measured at fair value on a recurring basis are immaterial.
Assets and liabilities measured on a non-recurring basis:
| | December 31, 2017 | | | December 31, 2016 | | | December 31, 2019 | | | December 31, 2018 | | (000's omitted) | | Level 1 | | | Level 2 | | | Level 3 | | | Total Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | | | Total Fair Value | | | (000’s omitted) | | | Level 1 | | | Level 2 | | | Level 3 | | | Total Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | | | Total Fair Value | | Impaired loans | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 633 | | | $ | 633 | | | $ | 0 | | | $ | 0 | | | $ | 848 | | | $ | 848 | | | $ | 0 | | | $ | 0 | | | $ | 1,102 | | | $ | 1,102 | | Other real estate owned | | | 0 | | | | 0 | | | | 1,915 | | | | 1,915 | | | | 0 | | | | 0 | | | | 1,966 | | | | 1,966 | | | | 0 | | | | 0 | | | | 1,270 | | | | 1,270 | | | | 0 | | | | 0 | | | | 1,320 | | | | 1,320 | | Mortgage servicing rights | | | | 0 | | | | 0 | | | | 56 | | | | 56 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | Total | | $ | 0 | | | $ | 0 | | | $ | 1,915 | | | $ | 1,915 | | | $ | 0 | | | $ | 0 | | | $ | 2,599 | | | $ | 2,599 | | | $ | 0 | | | $ | 0 | | | $ | 2,174 | | | $ | 2,174 | | | $ | 0 | | | $ | 0 | | | $ | 2,422 | | | $ | 2,422 | |
Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Nonrecurring adjustments also include certain impairment amounts for collateral-dependent loans calculated when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuation amount does not necessarily represent the fair value of the loan. Real estate collateral is typically valued using independent appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace, adjusted for non-observable inputs. Thus, the resulting nonrecurring fair value measurements are generally classified as Level 3. Estimates of fair value used for other collateral supporting commercial loans generally are based on assumptions not observable in the marketplace and, therefore, such valuations classify as Level 3. Other real estate owned (“OREO”) is valued at the time the loan is foreclosed upon and the asset is transferred to OREO. The value is based primarily on third party appraisals, less estimated costs to sell. The appraisals are sometimes further discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the customer and customer’s business. Such discounts are significant, ranging from 9% to 99% 86%at December 31, 2017,2019, and result in a Level 3 classification of the inputs for determining fair value. OREO is reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above. The Company recovers the carrying value of OREO through the sale of the property. The ability to affect future sales prices is subject to market conditions and factors beyond the Company’s control and may impact the estimated fair value of a property.
Originated mortgage servicing rights are recorded at their fair value at the time of sale of the underlying loan, and are amortized in proportion to and over the estimated period of net servicing income. The fair value of mortgage servicing rights is based on a valuation model incorporating inputs that market participants would use in estimating future net servicing income. Such inputs include estimates of the cost of servicing loans, appropriate discount rate, and prepayment speeds and are considered to be unobservable and contribute to the Level 3 classification of mortgage servicing rights. In accordance with GAAP, the Company must record impairment charges, on a nonrecurring basis, when the carrying value of a stratum exceeds its estimated fair value. Impairment is recognized through a valuation allowance. There is noa valuation allowance of approximately $0.3 millionat December 31, 2017 as the fair value of mortgage servicing rights of approximately $2.5 million exceeded the carrying value of approximately $1.4 million.2019.
The Company evaluates goodwill for impairment on an annual basis, or more often if events or circumstances indicate there may be impairment. The fair value of each reporting unit is compared to the carrying amount of that reporting unit in order to determine if impairment is indicated. If so, the implied fair value of the reporting unit’s goodwill is compared to its carrying amount and the impairment loss is measured by the excess of the carrying value of the goodwill over fair value of the goodwill. In such situations, the Company performs a discounted cash flow modeling technique that requires management to make estimates regarding the amount and timing of expected future cash flows of the assets and liabilities of the reporting unit that enable the Company to calculate the implied fair value of the goodwill. It also requires use of a discount rate that reflects the current return expectation of the market in relation to present risk-free interest rates, expected equity market premiums, peer volatility indicators and company-specific risk indicators. The Company did not recognize an impairment charge during 20172019 or 2016.2018.
The significant unobservable inputs used in the determination of fair value of assets classified as Level 3 on a recurring or non-recurring basis as of December 31, 20172019 are as follows:
(000's omitted) | | Fair Value | | Valuation Technique | | Significant Unobservable Inputs | | Significant Unobservable Input Range (Weighted Average) | | | | | | | | | | | | Other real estate owned | | $ | 1,915 | | Fair value of collateral | | Estimated cost of disposal/market adjustment | | | 9.0% - 99.0% (38.5 | %) | Commitments to originate real estate loans for sale | | | 89 | | Discounted cash flow | | Embedded servicing value | | | 1 | % |
(000’s omitted) | | Fair Value | | Valuation Technique | Significant Unobservable Inputs | | Significant Unobservable Input Range (Weighted Average) | | | | | | | | | | | Impaired loans | | $ | 848 | | Fair value of collateral | Estimated cost of disposal/market adjustment | | | 9.0% - 35.0% (27.9 | %) | Other real estate owned | | | 1,270 | | Fair value of collateral | Estimated cost of disposal/market adjustment | | | 9.0% - 85.7% (37.1 | %) | Mortgage servicing rights | | | 56 | | Discounted cash flow | Weighted average constant prepayment rate | | | 52.8 | % | | | | | | | Weighted average discount rate | | | 3.00 | % | | | | | | | Adequate compensation | | $7/loan | | | | | | | | | | | | |
The significant unobservable inputs used in the determination of fair value of assets classified as Level 3 on a recurring or non-recurring basis as of December 31, 20162018 are as follows:
(000's omitted) | | Fair Value | | Valuation Technique | | Significant Unobservable Inputs | | Significant Unobservable Input Range (Weighted Average) | | | (000’s omitted) | | | Fair Value | | Valuation Technique | Significant Unobservable Inputs | | Significant Unobservable Input Range (Weighted Average) | | | | | | | | | | | | | | | | | | Impaired loans | | | $ | 1,102 | | Fair value of collateral | Estimated cost of disposal/market adjustment | | | 9.0% - 35.4% (28.8 | %) | Other real estate owned | | $ | 1,966 | | Fair value of collateral | | Estimated cost of disposal/market adjustment | | | 9.0% - 97.0% (29.6 | %) | | | 1,320 | | Fair value of collateral | Estimated cost of disposal/market adjustment | | | 9.0% - 69.3% (23.8 | %) | Impaired loans | | | 633 | | Fair value of collateral | | Estimated cost of disposal/market adjustment | | | 15.0% - 50.0% (36.5 | %) | | Commitments to originate real estate loans for sale | | | 54 | | Discounted cash flow | | Embedded servicing value | | | 1 | % | |
The Company determines fair values based on quoted market values, where available, estimates of present values, or other valuation techniques. Those techniques are significantly affected by the assumptions used, including, but not limited to, the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may not be realized in immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments are excluded from fair value disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The carrying amounts and estimated fair values of the Company’s other financial instruments that are not accounted for at fair value at December 31, 20172019 and 20162018 are as follows:
| | December 31, 2017 | | | December 31, 2016 | | | December 31, 2019 | | | December 31, 2018 | | (000's omitted) | | Carrying Value | | | Fair Value | | | Carrying Value | | | Fair Value | | | (000’s omitted) | | | Carrying Value | | | Fair Value | | | Carrying Value | | | Fair Value | | Financial assets: | | | | | | | | | | | | | | | | | | | | | | | | | Net loans | | $ | 6,209,174 | | | $ | 6,244,941 | | | $ | 4,901,329 | | | | 4,935,140 | | | $ | 6,840,632 | | | $ | 7,028,663 | | | $ | 6,231,837 | | | $ | 6,247,939 | | Financial liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits | | | 8,444,420 | | | | 8,431,481 | | | | 7,075,954 | | | | 7,071,191 | | | | 8,994,967 | | | | 8,997,551 | | | | 8,322,371 | | | | 8,308,765 | | Short-term borrowings | | | 24,000 | | | | 24,000 | | | | 146,200 | | | | 146,200 | | | Overnight Federal Home Loan Bank borrowings | | | | 8,300 | | | | 8,300 | | | | 54,400 | | | | 54,400 | | Securities sold under agreement to repurchase, short-term | | | 337,011 | | | | 337,011 | | | | 0 | | | | 0 | | | | 241,708 | | | | 241,708 | | | | 259,367 | | | | 259,367 | | Other long-term debt | | | 2,071 | | | | 2,021 | | | | 0 | | | | 0 | | | Other Federal Home Loan Bank borrowings | | | | 3,750 | | | | 3,755 | | | | 1,976 | | | | 1,921 | | Subordinated notes payable | | | | 13,795 | | | | 13,795 | | | | 0 | | | | 0 | | Subordinated debt held by unconsolidated subsidiary trusts | | | 122,814 | | | | 122,814 | | | | 102,170 | | | | 90,144 | | | | 77,320 | | | | 77,320 | | | | 97,939 | | | | 97,939 | |
The following is a further description of the principal valuation methods used by the Company to estimate the fair values of its financial instruments.
Loans have been classified as a Level 3 valuation. Fair values for variable rate loans that reprice frequently are based on carrying values. Fair values for fixed rate loans are estimated using discounted cash flows and interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.
Deposits have been classified as a Level 2 valuation. The fair value of demand deposits, interest-bearing checking deposits, savings accounts and money market deposits is the amount payable on demand at the reporting date. The fair value of time deposit obligations are based on current market rates for similar products.
Borrowings and subordinated debt held by unconsolidated subsidiary trusts have been classified as a Level 2 valuation. The fair value of FHLB overnight advances and securities sold under agreement to repurchase, short-term, is the amount payable on demand at the reporting date. Fair values for long-term borrowings and subordinated debt held by unconsolidated subsidiary trusts are estimated using discounted cash flows and interest rates currently being offered on similar securities. The difference between the carrying values of long-term borrowings and subordinated debt held by unconsolidated subsidiary trusts, and their fair values, are not material as of the reporting dates.
Other financial assets and liabilities – Cash and cash equivalents have been classified as a Level 1 valuation, while accrued interest receivable and accrued interest payable have been classified as a Level 2 valuation. The fair values of each approximate the respective carrying values because the instruments are payable on demand or have short-term maturities and present relatively low credit risk and interest rate risk.
NOTE S: | DERIVATIVE INSTRUMENTS |
NOTE S: DERIVATIVE INSTRUMENTS
The Company is party to derivative financial instruments in the normal course of its business to meet the financing needs of its customers and to manage its own exposure to fluctuations in interest rates. These financial instruments have been limited to interest rate swap agreements, commitments to originate real estate loans held for sale and forward sales commitments. The Company does not hold or issue derivative financial instruments for trading or other speculative purposes.
The Company enters into forward sales commitments for the future delivery of residential mortgage loans, and interest rate lock commitments to fund loans at a specified interest rate. The forward sales commitments are utilized to reduce interest rate risk associated with interest rate lock commitments and loans held for sale. Changes in the estimated fair value of the forward sales commitments and interest rate lock commitments subsequent to inception are based on changes in the fair value of the underlying loan resulting from the fulfillment of the commitment and changes in the probability that the loan will fund within the terms of the commitment, which is affected primarily by changes in interest rates and the passage of time. At inception and during the life of the interest rate lock commitment, the Company includes the expected net future cash flows related to the associated servicing of the loan as part of the fair value measurement of the interest rate lock commitments. These derivatives are recorded at fair value, which were immaterial at December 31, 2017.2019 and December 31,2018. The effect of the changes to these derivatives for the yearyears then ended was also immaterial. The Company acquired interest rate swaps from the Merchants acquisitionin 2017 with notional amounts with certain commercial customers which totaled $38.9$16.4 million at December 31, 2017.2019 and $37.0 million at December 31,2018. In order to minimize the Company’s risk, these customer derivatives (pay floating/receive fixed swaps) have been offset with essentially matching interest rate swaps (pay fixed/receive floating swaps) with the Company’s counterparty totaling $38.9 million. The$16.4 million at December 31,2019 and $37.0 million at December 31,2018. At December 31,2019, the weighted average receive rate of these interest rate swaps was 3.38%3.72%, the weighted average pay rate was 3.84%4.39% and the weighted average maturity was 6.56.1 years. The fair valuesAt December 31,2018, the weighted average receive rate of $0.9 millionthese interest rate swaps was 4.34%, the weighted average pay rate was 3.84% and $0.9 million were reflected in other assets and other liabilities, respectively, in the accompanying consolidated statement of condition at December 31, 2017.weighted average maturity was 5.5 years. Hedge accounting has not been applied for these derivatives. Since the terms of the swaps with ourthe customer and the other financial institution offset each other, with the only difference being counterparty credit risk, changes in the fair value of the underlying derivative contracts are not materially different and do not significantly impact our results of operations. The Company also acquired interest rate swaps from the Merchants acquisitionin 2017 with notional amounts totaling $7.0$6.2 million at December 31, 20172019 and $6.6 million at December 31,2018 that were designated as fair value hedges of certain fixed rate loans with municipalities.municipalities which are recorded in loans in the consolidated statements of condition. At December 31, 2017,2019, the weighted average receive rate of these interest rate swaps was 2.30%2.47%, the weighted average pay rate was 3.11% and the weighted average maturity was 15.513.5 years. At December 31,2018, the weighted average receive rate of these interest rate swaps was 2.92%, the weighted average pay rate was 3.11% and the weighted average maturity was 14.5 years. The Company includes the gain or loss on the hedged items in interest and fees on loans, the same line item as the offsetting gain or loss on the related interest rate swaps. The effects of fair value accounting in the consolidated statements of $0.2 million atincome for the year ended December 31, 2017, was reflected2019 is immaterial.
As of December 31,2019, the following amounts were recorded in the consolidated statement of condition related to cumulative basis adjustments for fair value hedges:
(000’s omitted) | | | | | | | Line Item in the Consolidated Statement of Condition in Which the Hedged Item Is Included | | Carrying Amount of the Hedged Assets | | | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets | | | December 31, 2019 | | | December 31, 2019 | | Loans | | $ | 6,390 | | | $ | (265 | ) |
Fair values of derivative instruments as a reduction to loans and an increase to other assets. The ineffective portion of the interest swaps was immaterial andDecember 31,2019 are as such, amounts are not recognized in earnings.follows:
(000’s omitted) | | | | | | | | | December 31, 2019 | | | Derivative Assets | | Derivative Liabilities | | Consolidated Statement of Condition Location | | Fair Value | | Consolidated Statement of Condition Location | | Fair Value | | Derivatives designated as hedging instruments under Subtopic 815-20 | | | | | | | | | Interest rate swaps | Other assets | | $ | 265 | | | | | | | | | | | | | | | | Derivatives not designated as hedging instruments under Subtopic 815-20 | | | | | | | | | | Interest rate swaps | Other assets | | | 586 | | Accrued interest and other liabilities | | $ | 586 | | Total derivatives | | | $ | 851 | | | | $ | 586 | |
The Company assessed its counterparty risk at December 31, 20172019 and determined any credit risk inherent in our derivative contracts was not material. Information about the fair value of derivative financial instruments can be found in Note R to these consolidated financial statements.
NOTE T: | VARIABLE INTEREST ENTITIES |
NOTE T: VARIABLE INTEREST ENTITIES
The Company’s wholly-owned subsidiaries, Community Statutory Trust III, Community Capital Trustsubsidiary CCT IV and MBVT Statutory Trust I, are VIEsis a VIE for which the Company is not the primary beneficiary. Accordingly, the accounts of these entitiesthis entity are not included in the Company’s consolidated financial statements. See further information regarding Community Statutory Trust III, Community Capital TrustCCT IV and MBVT Statutory Trust I in Note H: Borrowings.
In connection with the Company’s acquisition of Oneida Financial Corp, the Company acquired OPFC II which holds a 50% membership interest in 706 North Clinton, LLC (“706 North Clinton”), an entity formed for the purpose of acquiring and rehabilitating real property. The real property held by 706 North Clinton is principally occupied by subsidiaries of the Company. The Company analyzed the operating agreement and capital structure of 706 North Clinton and determined that it was the primary beneficiary and therefore should consolidate 706 North Clinton in its financial statements. This conclusion was based on the determination that the Company has a de facto agency relationship because of the financing arrangement between the other member of 706 North Clinton and the Bank which provides OPFC II with both the power to direct the activities of 706 North Clinton and the obligation to absorb any losses of 706 North Clinton.
The carrying amount of the assets and liabilities of 706 North Clinton and the classification of these assets and liabilities in the Company’s consolidated statements of condition at December 31 is as follows:
(000's omitted) | | 2017 | | | 2016 | | | (000’s omitted) | | | 2019 | | | 2018 | | Cash and cash equivalents | | $ | 74 | | | $ | 30 | | | $ | 138 | | | $ | 104 | | Premises and equipment, net | | | 6,266 | | | | 6,429 | | | | 5,945 | | | | 6,109 | | Other assets | | | 5 | | | | 0 | | | | 42 | | | | 33 | | Total assets | | $ | 6,345 | | | $ | 6,459 | | | $ | 6,125 | | | $ | 6,246 | | Accrued interest and other liabilities / Total liabilities | | $ | 0 | | | $ | 1 | | | $ | 1 | | | $ | 0 | |
In addition to the assets and liabilities of 706 North Clinton, the minority interest in 706 North Clinton of $3.2$3.1 million at December 31, 20172019 is included in the Company’s consolidated statement of condition. The creditors of 706 North Clinton do not have a claim on the general assets of the Company. The Company’s maximum loss exposure net of minority interest in 706 North Clinton is approximately $4.7$4.5 million as of December 31, 2017,2019, including a $1.5$1.4 million loss exposure related to the financing agreement between the other member of 706 North Clinton and the Bank.
NOTE U: | SEGMENT INFORMATION |
NOTE U: SEGMENT INFORMATION
Operating segments are components of an enterprise, which are evaluated regularly by the “chief operating decision maker” in deciding how to allocate resources and assess performance. The Company’s chief operating decision maker is the President and Chief Executive Officer of the Company. The Company has identified Banking, Employee Benefit Services and All Other as its reportable operating business segments. CBNA operates the Banking segment that provides full-service banking to consumers, businesses, and governmental units in Upstate New York as well as Northeastern Pennsylvania, Vermont and Western Massachusetts. Employee Benefit Services, which includes operating subsidiaries of BPAS, BPAS-APS, BPAS Trust Company of Puerto Rico, NRS and HB&T, provides employee benefit trust, collective investment fund, retirement plan administration, fund administration, transfer agency, actuarial, VEBA/HRA, and health and welfare consulting services. The All Other segment is comprised of;of: (a) wealth management services including trust services provided by the personal trust unit within the Bank, broker-dealer and investment advisory services provided by CISI and The Carta Group, and asset management provided by Nottingham,Nottingham; and (b) full-service insurance, risk management and employee benefit services provided by OneGroup. The accounting policies used in the disclosure of business segments are the same as those described in the summary of significant accounting policies (See Note A).
Information about reportable segments and reconciliation of the information to the consolidated financial statements follows:
(000’s omitted) | | Banking | | | Employee Benefit Services | | | All Other | | | Eliminations | | | Consolidated Total | | 2019 | | | | | | | | | | | | | | | | Net interest income | | $ | 358,334 | | | $ | 665 | | | $ | 176 | | | $ | 0 | | | $ | 359,175 | | Provision for loan losses | | | 8,430 | | | | 0 | | | | 0 | | | | 0 | | | | 8,430 | | Noninterest revenue | | | 75,067 | | | | 99,483 | | | | 59,075 | | | | (3,006 | ) | | | 230,619 | | Amortization of intangible assets | | | 5,751 | | | | 6,770 | | | | 3,435 | | | | 0 | | | | 15,956 | | Acquisition expenses | | | 8,608 | | | | 0 | | | | 0 | | | | 0 | | | | 8,608 | | Other operating expenses | | | 245,870 | | | | 59,428 | | | | 45,170 | | | | (3,006 | ) | | | 347,462 | | Income before income taxes | | $ | 164,742 | | | $ | 33,950 | | | $ | 10,646 | | | $ | 0 | | | $ | 209,338 | | Assets | | $ | 11,225,509 | | | $ | 209,690 | | | $ | 76,351 | | | $ | (101,255 | ) | | $ | 11,410,295 | | Goodwill | | $ | 670,223 | | | $ | 83,275 | | | $ | 20,312 | | | $ | 0 | | | $ | 773,810 | | Core deposit intangibles & Other intangibles | | $ | 16,418 | | | $ | 37,775 | | | $ | 8,920 | | | $ | 0 | | | $ | 63,113 | | | | | | | | | | | | | | | | | | | | | | | 2018 | | | | | | | | | | | | | | | | | | | | | Net interest income | | $ | 344,551 | | | $ | 376 | | | $ | 128 | | | $ | 0 | | | $ | 345,055 | | Provision for loan losses | | | 10,837 | | | | 0 | | | | 0 | | | | 0 | | | | 10,837 | | Noninterest revenue | | | 75,399 | | | | 94,449 | | | | 57,204 | | | | (2,993 | ) | | | 224,059 | | Amortization of intangible assets | | | 6,429 | | | | 8,015 | | | | 3,711 | | | | 0 | | | | 18,155 | | Acquisition expenses | | | (782 | ) | | | 7 | | | | 6 | | | | 0 | | | | (769 | ) | Other operating expenses | | | 231,362 | | | | 56,275 | | | | 43,259 | | | | (2,993 | ) | | | 327,903 | | Income before income taxes | | $ | 172,104 | | | $ | 30,528 | | | $ | 10,356 | | | $ | 0 | | | $ | 212,988 | | Assets | | $ | 10,397,623 | | | $ | 207,460 | | | $ | 68,288 | | | $ | (66,076 | ) | | $ | 10,607,295 | | Goodwill | | $ | 629,916 | | | $ | 83,275 | | | $ | 20,312 | | | $ | 0 | | | $ | 733,503 | | Core deposit intangibles & Other intangibles | | $ | 18,596 | | | $ | 44,545 | | | $ | 10,705 | | | $ | 0 | | | $ | 73,846 | | 2017 | | | | | | | | | | | | | | | | | | | | | Net interest income | | $ | 315,025 | | | $ | 396 | | | $ | 254 | | | $ | 0 | | | $ | 315,675 | | Provision for loan losses | | | 10,984 | | | | 0 | | | | 0 | | | | 0 | | | | 10,984 | | Noninterest revenue | | | 73,337 | | | | 82,743 | | | | 49,201 | | | | (2,858 | ) | | | 202,423 | | Amortization of intangible assets | �� | | 5,296 | | | | 8,578 | | | | 3,067 | | | | 0 | | | | 16,941 | | Acquisition expenses | | | 24,549 | | | | 1,194 | | | | 243 | | | | 0 | | | | 25,986 | | Other operating expenses | | | 218,608 | | | | 51,138 | | | | 37,334 | | | | (2,858 | ) | | | 304,222 | | Income before income taxes | | $ | 128,925 | | | $ | 22,229 | | | $ | 8,811 | | | $ | 0 | | | $ | 159,965 | | Assets | | $ | 10,505,919 | | | $ | 203,369 | | | | 66,548 | | | $ | (29,638 | ) | | $ | 10,746,198 | | Goodwill | | $ | 629,916 | | | $ | 84,449 | | | $ | 20,065 | | | $ | 0 | | | $ | 734,430 | | Core deposit intangibles & Other intangibles | | $ | 25,025 | | | $ | 52,288 | | | $ | 13,345 | | | $ | 0 | | | $ | 90,658 | |
(000's omitted) | | Banking | | | Employee Benefit Services | | | All Other | | | Eliminations | | | Consolidated Total | | 2017 | | | | | | | | | | | | | | | | Net interest income | | $ | 315,025 | | | $ | 396 | | | $ | 254 | | | $ | 0 | | | $ | 315,675 | | Provision for loan losses | | | 10,984 | | | | 0 | | | | 0 | | | | 0 | | | | 10,984 | | Noninterest income | | | 73,337 | | | | 82,743 | | | | 49,201 | | | | (2,858 | ) | | | 202,423 | | Amortization of intangible assets | | | 5,296 | | | | 8,578 | | | | 3,067 | | | | 0 | | | | 16,941 | | Acquisition expenses | | | 24,549 | | | | 1,194 | | | | 243 | | | | 0 | | | | 25,986 | | Other operating expenses | | | 218,608 | | | | 51,138 | | | | 37,334 | | | | (2,858 | ) | | | 304,222 | | Income before income taxes | | $ | 128,925 | | | $ | 22,229 | | | $ | 8,811 | | | $ | 0 | | | $ | 159,965 | | Assets | | $ | 10,505,919 | | | $ | 203,369 | | | $ | 66,548 | | | $ | (29,638 | ) | | $ | 10,746,198 | | Goodwill | | $ | 629,916 | | | $ | 84,449 | | | $ | 20,065 | | | $ | 0 | | | $ | 734,430 | | | | | | | | | | | | | | | | | | | | | | | 2016 | | | | | | | | | | | | | | | | | | | | | Net interest income | | $ | 273,542 | | | $ | 162 | | | $ | 192 | | | $ | 0 | | | $ | 273,896 | | Provision for loan losses | | | 8,076 | | | | 0 | | | | 0 | | | | 0 | | | | 8,076 | | Noninterest income | | | 66,059 | | | | 48,261 | | | | 43,747 | | | | (2,442 | ) | | | 155,625 | | Amortization of intangible assets | | | 2,682 | | | | 420 | | | | 2,377 | | | | 0 | | | | 5,479 | | Acquisition expenses | | | 1,005 | | | | 445 | | | | 256 | | | | 0 | | | | 1,706 | | Other operating expenses | | | 190,263 | | | | 36,892 | | | | 34,950 | | | | (2,442 | ) | | | 259,663 | | Income before income taxes | | $ | 137,575 | | | $ | 10,666 | | | $ | 6,356 | | | $ | 0 | | | $ | 154,597 | | Assets | | $ | 8,598,057 | | | $ | 38,742 | | | $ | 71,428 | | | $ | (41,790 | ) | | $ | 8,666,437 | | Goodwill | | $ | 440,870 | | | $ | 8,019 | | | $ | 16,253 | | | $ | 0 | | | $ | 465,142 | | | | | | | | | | | | | | | | | | | | | | | 2015 | | | | | | | | | | | | | | | | | | | | | Net interest income | | $ | 248,167 | | | $ | 132 | | | $ | 121 | | | $ | 0 | | | $ | 248,420 | | Provision for loan losses | | | 6,447 | | | | 0 | | | | 0 | | | | 0 | | | | 6,447 | | Noninterest income | | | 57,704 | | | | 46,784 | | | | 20,967 | | | | (2,156 | ) | | | 123,299 | | Amortization of intangible assets | | | 2,803 | | | | 515 | | | | 345 | | | | 0 | | | | 3,663 | | Acquisition expenses | | | 6,947 | | | | 21 | | | | 69 | | | | 0 | | | | 7,037 | | Other operating expenses | | | 174,918 | | | | 35,197 | | | | 14,396 | | | | (2,156 | ) | | | 222,355 | | Income before income taxes | | $ | 114,756 | | | $ | 11,183 | | | $ | 6,278 | | | $ | 0 | | | $ | 132,217 | | Assets | | $ | 8,513,228 | | | $ | 35,011 | | | $ | 70,067 | | | $ | (65,637 | ) | | $ | 8,552,669 | | Goodwill | | $ | 439,052 | | | $ | 8,019 | | | $ | 16,181 | | | $ | 0 | | | $ | 463,252 | |
NOTE V: SUBSEQUENT EVENTS
Companies are required to evaluate events and transactions that occur after the balance sheet date but before the date the financial statements are issued, or available to be issued in the case of non-public entities. They must recognize in the financial statements the effect of all events or transactions that provide additional evidence of conditions that existed at the balance sheet date, including the estimates inherent in the financial preparation process. Entities do not recognize the impact of events or transactions that provide evidence about conditions that did not exist at the balance sheet date but arose after that date.
Such events and transactions were evaluated through the date these consolidated financial statements were available to be issued. Based upon this evaluation, it was determined that no subsequent events occurred that required recognition or disclosure in the consolidated financial statements.
Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2017.2019.
The consolidated financial statements of the Company have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm that was engaged to express an opinion as to the fairness of presentation of such financial statements. PricewaterhouseCoopers LLP was also engaged to audit the effectiveness of the Company’s internal control over financial reporting. The report of PricewaterhouseCoopers LLP follows this report.
Community Bank System, Inc.
By: /s/ Mark E. Tryniski Mark E. Tryniski, President, Chief Executive Officer and Director
By: /s/ Scott KingsleyJoseph E. Sutaris Scott Kingsley,Joseph E. Sutaris,
Treasurer and Chief Financial Officer
Report of Independent Registered Public Accounting Firm
To theBoard of Directors and Shareholders of Community Bank System, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statements of condition of Community Bank System, Inc. and its subsidiaries (the “Company”) as of December 31, 20172019 and 2016,2018, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017,2019, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2017,2019 based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20172019 and 2016, 2018, and the results of theirits operations and theirits cash flows for each of the three years in the period ended December 31, 20172019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report on Internal Control overOver Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Loan Losses – Qualitative Calculation for Consumer Mortgage & Consumer Indirect Classes
As described in Notes A and D to the consolidated financial statements, the Company’s allowance for loan losses on the Consumer Mortgage class and the Consumer Indirect class was $10.3 million and $13.7 million, respectively, as of December 31, 2019. The Company’s allowance for loan losses methodology consists of two components – the general and the specific loan loss allocations. As disclosed by management, the general loan loss allocation is composed of two calculations. The first calculation is quantitative and determines an allowance based on the latest 36 months of historical net charge-off data for each loan class. The second calculation is qualitative and takes into consideration eight qualitative environmental factors, which include levels and trends in delinquencies and impaired loans and levels of and trends in charge-offs and recoveries.
The principal considerations for our determination that performing procedures relating to the qualitative calculation for the allowance for loan losses on the Consumer Mortgage and Consumer Indirect classes is a critical audit matter are (i) there was significant judgment and estimation by management in determining the impact of levels and trends in delinquencies and impaired loans and levels of and trends in charge-offs and recoveries used in the qualitative calculation on the allowance for loan losses for the Consumer Mortgage and Consumer Indirect classes, which in turn led to significant auditor subjectivity in performing procedures relating to the qualitative calculation; (ii) significant audit effort was necessary in performing procedures relating to the qualitative calculation; (iii) a high degree of auditor judgment was necessary to evaluate the audit evidence obtained relating to levels and trends in delinquencies and impaired loans and levels of and trends in charge-offs and recoveries used in the qualitative calculation for the Consumer Mortgage and Consumer Indirect classes; and (iv) the audit effort involved the use of professionals with specialized skill and knowledge to assist in evaluating the audit evidence obtained from these procedures.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the allowance for loan losses, including controls over the qualitative calculation. These procedures also included, among others, testing management’s process for determining the allowance for loan losses, including testing the completeness and accuracy of significant data inputs used in the estimate; involvement of professionals with specialized skill and knowledge to assist in evaluating the appropriateness of management’s methodology relating to the qualitative calculation and in evaluating the reasonableness of the impact of (i) levels and trends in delinquencies and impaired loans and (ii) levels of and trends in charge-offs and recoveries used in the qualitative calculation on the allowance for loan losses for the Consumer Mortgage and Consumer Indirect classes.
/s/PricewaterhouseCoopers LLP Buffalo, New York March 1, 20182, 2020
We have served as the Company’s auditor since 1984.
TWO YEAR SELECTED QUARTERLY DATA (Unaudited)
2017 Results (000's omitted, except per share data) | | 4th Quarter | | | 3rd Quarter | | | 2nd Quarter | | | 1st Quarter | | | Total | | | 2019 Results | | | 4th | | | 3rd | | | 2nd | | | 1st | | | | | (000's omitted, except per share data) | | | Quarter | | | Quarter | | | Quarter | | | Quarter | | | Total | | Net interest income | | $ | 85,977 | | | $ | 84,395 | | | $ | 78,029 | | | $ | 67,274 | | | $ | 315,675 | | | $ | 92,740 | | | $ | 91,276 | | | $ | 88,300 | | | $ | 86,859 | | | $ | 359,175 | | Provision for loan losses | | | 5,381 | | | | 2,314 | | | | 1,461 | | | | 1,828 | | | | 10,984 | | | | 2,857 | | | | 1,751 | | | | 1,400 | | | | 2,422 | | | | 8,430 | | Net interest income after provision for loan losses | | | 80,596 | | | | 82,081 | | | | 76,568 | | | | 65,446 | | | | 304,691 | | | | 89,883 | | | | 89,525 | | | | 86,900 | | | | 84,437 | | | | 350,745 | | Noninterest income | | | 53,938 | | | | 52,941 | | | | 51,226 | | | | 44,318 | | | | 202,423 | | | | 57,123 | | | | 57,094 | | | | 60,706 | | | | 55,696 | | | | 230,619 | | Noninterest expenses | | | 86,919 | | | | 83,776 | | | | 102,879 | | | | 73,575 | | | | 347,149 | | | | 95,269 | | | | 96,929 | | | | 91,176 | | | | 88,652 | | | | 372,026 | | Income before income taxes | | | 47,615 | | | | 51,246 | | | | 24,915 | | | | 36,189 | | | | 159,965 | | | | 51,737 | | | | 49,690 | | | | 56,430 | | | | 51,481 | | | | 209,338 | | Income taxes | | | (24,411 | ) | | | 16,003 | | | | 7,724 | | | | 9,932 | | | | 9,248 | | | | 8,853 | | | | 10,472 | | | | 11,415 | | | | 9,535 | | | | 40,275 | | Net income | | $ | 72,026 | | | $ | 35,243 | | | $ | 17,191 | | | $ | 26,257 | | | $ | 150,717 | | | $ | 42,884 | | | $ | 39,218 | | | $ | 45,015 | | | $ | 41,946 | | | $ | 169,063 | | | | | | | | | | | | | | | | | | | | | | | | Basic earnings per share | | $ | 1.41 | | | $ | 0.69 | | | $ | 0.35 | | | $ | 0.58 | | | $ | 3.07 | | | $ | 0.82 | | | $ | 0.76 | | | $ | 0.87 | | | $ | 0.81 | | | $ | 3.26 | | Diluted earnings per share | | $ | 1.40 | | | $ | 0.68 | | | $ | 0.35 | | | $ | 0.57 | | | $ | 3.03 | | | $ | 0.82 | | | $ | 0.75 | | | $ | 0.86 | | | $ | 0.80 | | | $ | 3.23 | |
2016 Results (000's omitted, except per share data) | | 4th Quarter | | | 3rd Quarter | | | 2nd Quarter | | | 1st Quarter | | | Total | | | 2018 Results | | | 4th | | | 3rd | | | 2nd | | | 1st | | | | | (000's omitted, except per share data) | | | Quarter | | | Quarter | | | Quarter | | | Quarter | | | Total | | Net interest income | | $ | 70,246 | | | $ | 68,463 | | | $ | 68,306 | | | $ | 66,881 | | | $ | 273,896 | | | $ | 87,387 | | | $ | 86,198 | | | $ | 86,846 | | | $ | 84,624 | | | $ | 345,055 | | Provision for loan losses | | | 2,640 | | | | 1,790 | | | | 2,305 | | | | 1,341 | | | | 8,076 | | | | 2,495 | | | | 2,215 | | | | 2,448 | | | | 3,679 | | | | 10,837 | | Net interest income after provision for loan losses | | | 67,606 | | | | 66,673 | | | | 66,001 | | | | 65,540 | | | | 265,820 | | | | 84,892 | | | | 83,983 | | | | 84,398 | | | | 80,945 | | | | 334,218 | | Noninterest income | | | 38,620 | | | | 39,952 | | | | 38,772 | | | | 38,281 | | | | 155,625 | | | | 54,218 | | | | 55,791 | | | | 56,559 | | | | 57,491 | | | | 224,059 | | Noninterest expenses | | | 66,597 | | | | 66,226 | | | | 66,356 | | | | 67,669 | | | | 266,848 | | | | 87,613 | | | | 85,233 | | | | 86,112 | | | | 86,331 | | | | 345,289 | | Income before income taxes | | | 39,629 | | | | 40,399 | | | | 38,417 | | | | 36,152 | | | | 154,597 | | | | 51,497 | | | | 54,541 | | | | 54,845 | | | | 52,105 | | | | 212,988 | | Income taxes | | | 13,237 | | | | 13,239 | | | | 12,560 | | | | 11,749 | | | | 50,785 | | | | 10,674 | | | | 11,435 | | | | 10,239 | | | | 11,999 | | | | 44,347 | | Net income | | $ | 26,392 | | | $ | 27,160 | | | $ | 25,857 | | | $ | 24,403 | | | $ | 103,812 | | | $ | 40,823 | | | $ | 43,106 | | | $ | 44,606 | | | $ | 40,106 | | | $ | 168,641 | | | | | | | | | | | | | | | | | | | | | | | | Basic earnings per share | | $ | 0.59 | | | $ | 0.61 | | | $ | 0.58 | | | $ | 0.55 | | | $ | 2.34 | | | $ | 0.79 | | | $ | 0.84 | | | $ | 0.87 | | | $ | 0.78 | | | $ | 3.28 | | Diluted earnings per share | | $ | 0.59 | | | $ | 0.61 | | | $ | 0.58 | | | $ | 0.55 | | | $ | 2.32 | | | $ | 0.78 | | | $ | 0.83 | | | $ | 0.86 | | | $ | 0.78 | | | $ | 3.24 | |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures The Company maintains disclosure controls and procedures, as defined in Rule 13a -15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, as amended, designed to: (i) record, process, summarize, and report within the time periods specified in the SEC’s rules and forms, and (ii) accumulate and communicate to management, including the principal executive and principal financial officers, as appropriate, to allow timely decisions regarding disclosure. Based on evaluation of the Company’s disclosure controls and procedures, with the participation of the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), the CEO and CFO have concluded that, as of the end of the period covered by this Annual Report on Form 10-K, these disclosure controls and procedures were effective as of December 31, 2017.2019.
Management’s Annual Report on Internal Control over Financial Reporting Management’s annual report on internal control over financial reporting is included under the heading “Report on Internal Control Over Financial Reporting” at Item 8 of this Annual Report on Form 10-K.
Report of the Registered Public Accounting Firm The report of the Company’s registered public accounting firm is included under the heading “Report of the Independent Registered Public Accounting Firm” at Item 8 of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting The Company continually assesses the adequacy of its internal control over financial reporting and enhances its controls in response to internal control assessments, and internal and external audit and regulatory recommendations. No change in internal control over financial reporting during the quarter ended December 31, 20172019 has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Item 9B. Other Information
None Part III
Item 10. Directors, Executive Officers and Corporate Governance
The information concerning the Directors of the Company required by this Item 10 is incorporated herein by reference to the sections entitled “Nominees for Director and Directors Continuing in Office”“Proposal One: Election of Directors” in the Company’s Definitive Proxy Statement for its 20182020 Annual Meeting of Shareholders, which will be filed with the SEC on or about March 29, 2018April 1, 2020 (the “Proxy Statement”). The information concerning executive officers of the Company required by this Item 10 is presented in Item 4A of this Annual Report on Form 10-K. Disclosure of compliance with Section 16(a) ofInformation concerning the Securities Exchange Act of 1934, as amended, by the Company’s directors and executive officers is incorporated by reference to the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement. In addition, information concerning Audit Committee and the Audit Committee Financial ExpertExperts is included in the Proxy Statement under the caption “Audit Committee Report” and is incorporated herein by reference.
The Company has adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The text of the code of ethics is posted on the Company’s website at www.communitybankna.comwww.cbna.com, and is available free of charge in print to any person who requests it. The Company intends to satisfy the requirements under Item 5.05 of Form 8-K regarding an amendment to, or a waiver from, the code of ethics that relates to certain elements thereof, by posting such information on its website referenced above.
Item 11. Executive Compensation
The information required by this Item 11 is incorporated herein by reference to the sectionsections entitled “Compensation of Executive Officers”Discussion and Analysis,” “Compensation Committee Report,” “Compensation Committee Interlocks and Insider Reporting,” and “Executive Compensation Disclosure Tables” in the Company’s Proxy Statement.
IItemtem 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item 12403 of Regulation S-K is incorporated herein by reference to the section entitled “Nominees for Director“Security Ownership of Certain Beneficial Owners, Directors and Directors Continuing in Office”Executive Officers” in the Company’s Proxy Statement. The information required by Item 201(d) of Regulation S-K concerning equity compensation plans is presented under the caption “Equity Compensation Plan Information” on page 25 of this Annual Report on Form 10-K.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required by this Item 13 is incorporated herein by reference to the sections entitled “Corporate Governance” and “Transactions with Related Parties” in the Company’s Proxy Statement.
Item 14. Principal Accounting Fees and Services
The information required by this Item 14 is incorporated herein by reference to the section entitled “Audit Fees”“Fees Paid to PricewaterhouseCoopers LLP” in the Company’s Proxy Statement.
Part IV
Item 15. Exhibits, Financial Statement Schedules
(a) Documents filed as part of this report
(1)All financial statements. The following consolidated financial statements of Community Bank System, Inc. and subsidiaries are included in Item 8:
| ‑ | Consolidated Statements of Condition,
December 31, 2017 and 2016
|
| ‑ | Consolidated Statements of Income,
Years ended December 31, 2017, 2016, and 2015
|
| - | Consolidated Statements of Condition, |
December 31, 2019 and 2018
| - | Consolidated Statements of Income, |
Years ended December 31, 2019, 2018, and 2017
| - | Consolidated Statements of Comprehensive Income, Years ended December 31, 2017, 2016, and 2015
|
Years ended December 31, 2019, 2018, and 2017
| ‑- | Consolidated Statements of Changes in Shareholders' Equity, Years ended December 31, 2017, 2016, and 2015
|
Years ended December 31, 2019, 2018, and 2017
| ‑- | Consolidated Statement of Cash Flows, Years ended December 31, 2017, 2016, and 2015
|
Years ended December 31, 2019, 2018, and 2017
| ‑- | Notes to Consolidated Financial Statements, December 31, 2017
|
December 31, 2019
| ‑- | Report of Independent Registered Public Accounting Firm |
| ‑- | Quarterly selected data, Years ended December 31, 2017 and 2016 (unaudited)
|
Years ended December 31, 2019 and 2018 (unaudited)
(2)Financial statement schedules. Schedules are omitted since the required information is either not applicable or shown elsewhere in the financial statements.
(3)Exhibits. The exhibits filed as part of this report and exhibits incorporated herein by reference to other documents are listed below:
| | Assignment, Purchase and Assumption Agreement, dated as of January 19, 2012, by and among Community Bank, N.A. and First Niagara Bank, N.A. Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed on January 20, 2012 (Registration No. 001-13695). | | | | | | Purchase and Assumption Agreement, dated as of January 19, 2012, by and among Community Bank, N.A. and First Niagara Bank, N.A. Incorporated by reference to Exhibit 2.2 to the Current Report on Form 8-K filed on January 20, 2012 (Registration No. 001-13695). | | | | | | Assignment, Purchase and Assumption Agreement, dated as of January 19, 2012, by and between Community Bank, N.A. and First Niagara Bank, N.A., as amended as restated as of July 19, 2012. Incorporated by reference to Exhibit No. 99.1 to the Current Report on Form 8-K filed on July 24, 2012 (Registration No. 001-13695). | | | | | | Amendment No. 1 to Purchase and Assumption Agreement, dated as of September 6, 2012, by and among Community Bank, N.A. and First Niagara Bank, N.A. Incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K filed on September 13, 2012 (Registration No. 001-13695). | | | | | | Purchase and Assumption Agreement, dated as of July 23, 2013, by and between Community Bank, N.A. and Bank of America, N.A. Incorporated by reference to Exhibit No. 2.1 to the Current Report on Form 8-K filed on July 26, 2013 (Registration No. 001-13695). | | | | | | Agreement and Plan of Merger, dated as of February 24, 2015, by and between Community Bank System, Inc. and Oneida Financial Corp. Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed on February 25, 2015 (Registration No. 001-13695). |
| | Agreement and Plan of Merger, dated as of October 22, 2016, by and between Community Bank System, Inc. and Merchants Bancshares, Inc. Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed on October 27, 2016 (Registration No. 001-13695). | | | | | | Agreement and Plan of Merger, dated as of December 2, 2016, by and among Community Bank System, Inc., Northeast Retirement Services, Inc., Cohiba Merger Sub, LLC and Shareholder Representative Services LLC. Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed on December 8, 2016 (Registration No. 001-13695). | | | | Agreement and Plan of Merger, dated as of January 21, 2019, by and among Community Bank System, Inc., VB Merger Sub Inc., and Kinderhook Bank Corp. Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed on January 25, 2019 (Registration No. 001-13695). | | | | Agreement and Plan of Merger, dated as of October 18, 2019, by and between Community Bank System, Inc. and Steuben Trust Corporation. Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed on October 24, 2019 (Registration No. 001-13695). | | | | Certificate of Incorporation of Community Bank System, Inc., as amended. Incorporated by reference to Exhibit No. 3.1 to the Registration Statement on Form S-4 filed on October 20, 2000 (Registration No. 333-48374). | | | | | | Certificate of Amendment of Certificate of Incorporation of Community Bank System, Inc. Incorporated by reference to Exhibit No. 3.1 to the Quarterly Report on Form 10-Q filed on May 7, 2004 (Registration No. 001-13695). | | | | | | Certificate of Amendment of Certificate of Incorporation of Community Bank System, Inc. Incorporated by reference to Exhibit No. 3.1 to the Quarterly Report on Form 10-Q filed on August 9, 2013 (Registration No. 001-13695). | | | | | | Bylaws of Community Bank System, Inc., amended July 18, 2007. Incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed on July 24, 2007 (Registration No. 001-13695). | | | | | | Form of Common Stock Certificate. Incorporated by reference to Exhibit No. 4.1 to the Amendment No. 1 to the Registration Statement on Form S-3 filed on September 29, 2008 (Registration No. 333-153403). | | | | | | Registration Rights Agreement, dated February 3, 2017, by and among Community Bank System, Inc. and the individuals and entities set forth on Schedule 1 thereto. Incorporated by reference to Exhibit No. 10.1 to the Registration Statement on Form S-3 filed on February 3, 2017 (Registration No. 333-215894). | | | | | | Form of Replacement Organizers’ Warrant to purchase Community Bank System, Inc. Common Stock. Incorporated by reference to Exhibit No. 4.1 to the Current Report on Form 8-K filed on May 18, 2017 (Registration No. 001-13695).(2) | | | | | | First Supplemental Indenture, dated as of May 12, 2017, by and among Wilmington Trust Company, Community Bank System, Inc., and Merchants Bancshares, Inc. Incorporated by reference to Exhibit No. 4.2 to the Current Report on Form 8-K filed on May 18, 2017 (Registration No. 001-13695).(2) | | | | Description of Community Bank System, Inc.’s securities registered pursuant to Section 12 of the Securities Exchange Act. | | | | Indenture, dated as of December 8, 2006, between Community Bank System, Inc. and Wilmington Trust Company, as trustee. Incorporated by reference to Exhibit No. 4.1 to the Current Report on Form 8-K filed on December 12, 2006 (Registration No. 001-13695). |
| | | | | Amended and Restated Declaration of Trust, dated as of December 8, 2006, among Community Bank System, Inc., as sponsor, Wilmington Trust Company, as Delaware trustee, Wilmington Trust Company, as institutional trustee, and Mark E. Tryniski, Scott A. Kingsley, and Joseph J. Lemchak as administrators. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on December 12, 2006 (Registration No. 001-13695). | | | | | | Guarantee Agreement, dated as of December 8, 2006, between Community Bank System, Inc., as guarantor, and Wilmington Trust Company, as guarantee trustee. Incorporated by reference to Exhibit 10.2 to the Form 8-K filed on December 12, 2006 (Registration No. 001-13695). | | | | | | Employment Agreement, dated as of January 5, 2018, by and between Community Bank System, Inc., Community Bank, N.A., and Mark E. Tryniski. Incorporated by reference to Exhibit No. 10.1 to the Current Report on Form 8-K filed on January 5, 2018 (Registration No. 001-13695).(2) |
| | | Supplemental Retirement Plan Agreement, effective as of December 31, 2008, by and among Community Bank, N.A., Community Bank System, Inc., and Mark E. Tryniski. Incorporated by reference to Exhibit No. 10.2 to the Current Report on Form 8-K filed on March 19, 2009 (Registration No. 001-13695).(2) | | | | | | Amendment to Supplemental Retirement Plan Agreement, dated January 5, 2018, by and among Community Bank System, Inc., Community Bank, N.A. and Mark E. Tryniski. Incorporated by reference to Exhibit No. 10.2 to the Current Report on Form 8-K filed on January 5, 2018 (Registration No. 001-13695).(2) | | | | | | Employment Agreement, dated as of January1, 2017,January 1, 2020, by and among Community Bank System, Inc., Community Bank N.A., and Scott Kingsley. Incorporated by reference to Exhibit No. 10.1 to the Current Report on Form 8-K filed on January 6, 20177, 2020 (Registration No. 001-13695).(2) | | | | | | Supplemental Retirement Plan Agreement, effective September 29, 2009, by and between Community Bank System Inc., Community Bank, N.A., and Scott Kingsley. Incorporated by reference to Exhibit No. 10.1 to the Current Report on Form 8-K filed on October 1, 2009 (Registration No. 001-13695).(2) | | | | | | Employment Agreement, dated as of March 11, 2016, by and between Community Bank System, Inc., Community Bank N.A., and Brian D. Donahue. Incorporated by reference to Exhibit No. 10.1 to the Current Report on Form 8-K filed on March 16, 2016 (Registration No. 001-13695).(2)
| | | | | | Supplemental Retirement Plan Agreement, dated as of October 18, 2013, by and between Community Bank System Inc., Community Bank, N.A., and Brian D. Donahue. Incorporated by reference to Exhibit No. 10.2 to the Current Report on Form 8-K filed on October 23, 2013 (Registration No. 001-13695).(2) | | | | | | Employment Agreement, dated as of January1, 2017,January 1, 2020, by and among Community Bank System, Inc., Community Bank N.A., and George J. Getman. Incorporated by reference to Exhibit No. 10.2 to the Current Report on Form 8-K filed on January 6, 20177, 2020 (Registration No. 001-13695).(2) | | | | | | Supplemental Retirement Plan Agreement, dated as of October 18, 2013, by and among Community Bank System, Inc., Community Bank, N.A., and George J. Getman. Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed on October 23, 2013 (Registration No. 001-13695).(2) | | | | | | Employment Agreement, dated as of March 11, 2016, by and among Community Bank System, Inc., Community Bank N.A., and Joseph F. Serbun. Incorporated by reference to Exhibit No. 10.2 to the Current Report on Form 8-K filed on March 16, 2016 (Registration No. 001-13695).(2) | | | | | Employment Agreement, dated January 4, 2019, by and among Community Bank System, Inc., Community Bank, N.A. and Joseph F. Serbun. Incorporated by reference to Exhibit No. 10.1 to the Current Report on Form 8-K filed on January 8, 2019 (Registration No. 001-13695). (2) |
| Pre-2005Employment Agreement, dated as of May 21, 2018, by and between Community Bank System, Inc., Community Bank, N.A., and Joseph E. Sutaris. Incorporated by reference to Exhibit No. 10.2 to the Current Report on Form 8-K filed on May 21, 2018 (Registration No. 001-13695). (2)
| | | | Pre-2005 Supplemental Retirement Agreement, effective December 31, 2004, by and between Community Bank System, Inc., Community Bank, N.A., and Sanford Belden. Incorporated by reference to Exhibit No. 10.3 to the Annual Report on Form 10-K filed on March 15, 2005 (Registration No. 001-13695).(2) | | | | | | Post-2004 Supplemental Retirement Agreement, effective January 1, 2005, by and between Community Bank System, Inc., Community Bank, N.A., and Sanford Belden. Incorporated by reference to Exhibit No. 10.2 to the Annual Report on Form 10-K filed on March 15, 2005 (Registration No. 001-13695).(2) | | | | | | Supplemental Retirement Plan Agreement, effective March 26, 2003, by and between Community Bank System Inc. and Thomas McCullough. Incorporated by reference to Exhibit No. 10.11 to the Annual Report on Form 10-K filed on March 12, 2004 (Registration No. 001-13695).(2) | | | | | | 2004 Long-Term Incentive Compensation Program, as amended. Incorporated by reference to Exhibit No.No. 99.1 to the Registration Statement on Form S-8 filed on December 19, 2012 (Registration No. 001-13695).(2) | | | | | | 2014 Long-TermLong-Term Incentive Plan, as amended. Incorporated by reference to Exhibit No. 10.1 to the Current Report on Form 8-K filed on May 2, 2017 (Registration No. 001-13695).(2) |
| | | Stock Balance Plan for Directors, as amended. Incorporated by reference to Annex I to the Definitive Proxy Statement on Schedule 14A filed on March 31, 1998 (Registration No. 001-13695).(2) | | | | | | Community Bank System, Inc. Deferred Compensation Plan for Directors. Incorporated by reference to Exhibit No. 99.1 to the Registration Statement on Form S-8 filed on June 30, 2017 (Registration No. 333-219098). (2) | | | | | | Community Bank System, Inc. Pension Plan Amended and Restated as of January 1, 2004. Incorporated by reference to Exhibit No. 10.27 to the Annual Report on Form 10-K filed on March 15, 2005 (Registration No. 001-13695).(2) | | | | | | Amendment #1 to the Community Bank System, Inc. Pension Plan, as amended and restated as of January 1, 2004 (“Plan”). Incorporated by reference to Exhibit No. 10.27 to the Annual Report on Form 10-K filed on March 15, 2005 (Registration No. 001-13695).(2) | | | | | | Community Bank System, Inc. 401(k) Employee Stock Ownership Plan, dated as of December 20, 2011. Incorporated by reference to Exhibit 4.5 to the Registration Statement on Form S-8 filed on December 20, 2013 (Registration No. 001-13695).(2) | | | | | | Merchants Bancshares, Inc. and Subsidiaries Amended and Restated 1996 Compensation Plan for Non-Employee Directors. Incorporated by reference to Exhibit 10.3 to Merchants Bancshares, Inc.’s Annual Report on Form 10-K filed with the Commission on March 15, 2011.(2) | | | | | | Merchants Bancshares, Inc. and Subsidiaries Amended and Restated 2008 Compensation Plan for Non-Employee Directors and Trustees. Incorporated by reference to Exhibit 10.4 to Merchants Bancshares, Inc.’s Annual Report on Form 10-K filed with the Commission on March 15, 2011.(2) | | | | | | Merchants Bank Amended and Restated Deferred Compensation Plan for Directors. Incorporated by reference to Exhibit 10.7 to Merchants Bancshares, Inc.’s Annual Report on Form 10-K filed with the Commission on March 15, 2011.(2) |
| | | | | Merchants Bank Salary Continuation Plan. Incorporated by reference to Exhibit 10.9 to Merchants Bancshares, Inc.’s Annual Report on Form 10-K filed with the Commission on March 15, 2011.(2) | | | | Community Bank System, Inc. Restoration Plan, effective June 1, 2018. Incorporated by reference to Exhibit No. 10.4 to the Current Report on Form 8-K filed on May 21, 2018 (Registration No. 001-13695). (2) | | | | Subsidiaries of Registrant.(1) | | | | | | Consent of PricewaterhouseCoopers LLP.(1) | | | | | | Certification of Mark E. Tryniski, President and Chief Executive Officer of the Registrant, pursuant to Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(1) | | | | | | Certification of Scott Kingsley,Joseph E. Sutaris, Treasurer and Chief Financial Officer of the Registrant, pursuant to Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(1) | | | | | | Certification of Mark E. Tryniski, President and Chief Executive Officer of the Registrant, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(3) |
| | | Certification of Scott Kingsley,Joseph E. Sutaris, Treasurer and Chief Financial Officer of the Registrant, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(3) | | | 101.INS | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. (4) | | 101 | 101.SCH | Inline XBRL Taxonomy Extension Schema Document (4) | | | 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document (4) | | | 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document (4) | | | 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document (4) | | | 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document (4) | | | 104 | Cover Page Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statements of Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of ChangesData File (formatted as inline XBRL and contained in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements tagged as blocks of text and in detail.Exhibit 101) (4) |
(2) | (2)Denotes management contract or compensatory plan or arrangement. |
(3) | (3)Furnished herewith. |
(4) | (4)XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections. |
B. Not applicable.
C. Not applicable.
Item 16. Form 10-K Summary
None
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
COMMUNITY BANK SYSTEM, INC.
By: /s/ Mark E. Tryniski Mark E. Tryniski President and Chief Executive Officer March 1, 20182, 2020
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 12stnd day of March 2018.2020.
By: /s/ Mark E. Tryniski Mark E. Tryniski President, Chief Executive Officer and Director (Principal Executive Officer)
By: /s/ Scott KingsleyJoseph E. Sutaris Scott KingsleyJoseph E. Sutaris
Treasurer and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
Directors:
/s/ Brian R. Ace | /s/ John Parente | Brian R. Ace, Director | John Parente, Director | | | /s/ Mark J. Bolus | /s/ Raymond C. Pecor, III | Brian R. Ace,Mark J. Bolus, Director | Raymond C. Pecor, III, Director | | | /s/ Mark J. Bolus Jeffrey L. Davis | /s/ Sally A. Steele | Mark J. Bolus,Jeffrey L. Davis, Director | Sally A. Steele, Director and Chair of the | | Board of Directors | | | /s/ Jeffrey L. Davis Neil E. Fesette | /s/ Eric E. Stickels | Jeffrey L. Davis,Neil E. Fesette, Director | Eric E. Stickels, Director | | | /s/ Neil E. Fesette Michael R. Kallet | /s/ John F. Whipple, Jr. | Neil E. Fesette,Michael R. Kallet, Director | John F. Whipple Jr., Director | | | /s/ Michael R. Kallet Kerrie D. MacPherson | | Michael R. Kallet, Director | | | | /s/ John Parente
| | John Parente,Kerrie D. MacPherson, Director | |
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