UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 Washington, D.C. 20549

 

	☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended March 31, 2016
		OR
	☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from                       to                                           .

 

 (Exact name of registrant as specified in its charter)

 

Delaware		16‑1213679
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
5790 Widewaters Parkway, DeWitt, New York		13214-1883
(Address of principal executive offices)		(Zip Code)

	(315) 445‑2282
	(Registrant's telephone number, including area code)
	NONE
	(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  ☒    No ☐.

Indicate by check mark whether the registrant has submitted electronically and posted to its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ☒    No ☐.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☒	Accelerated filer ☐	Non-accelerated filer ☐	Smaller reporting company ☐
	(Do not check if a smaller reporting company)

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

44,111,656 shares of Common Stock, $1.00 par value per share, were outstanding on April 30, 2016.

TABLE OF CONTENTS

Part I.	Financial Information	Page
Item 1.	Financial Statements (Unaudited)
	Consolidated Statements of Condition
	March 31, 2016 and December 31, 2015_________________________________________________________________	3
	Consolidated Statements of Income
	Three months ended March 31, 2016 and 2015___________________________________________________________	4
	Consolidated Statements of Comprehensive Income
	Three months ended March 31, 2016 and 2015___________________________________________________________	5
	Consolidated Statement of Changes in Shareholders' Equity
	Three months ended March 31, 2016__________________________________________________________________	6
	Consolidated Statements of Cash Flows
	Three months ended March 31, 2016 and 2015___________________________________________________________	7
	Notes to the Consolidated Financial Statements
	March 31, 2016__________________________________________________________________________________	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations_________________________	26
Item 3.	Quantitative and Qualitative Disclosures about Market Risk________________________________________________	40
Item 4.	Controls and Procedures___________________________________________________________________________	41
Part II.	Other Information
Item 1.	Legal Proceedings________________________________________________________________________________	42
Item 1A.	Risk Factors____________________________________________________________________________________	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds________________________________________________	42
Item 3.	Defaults Upon Senior Securities_____________________________________________________________________	42
Item 4.	Mine Safety Disclosures___________________________________________________________________________	43
Item 5.	Other Information________________________________________________________________________________	43
Item 6.	Exhibits________________________________________________________________________________________	43

Part I.   Financial Information

Item 1.  Financial Statements

COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENTS OF CONDITION (Unaudited)
(In Thousands, Except Share Data)
		March 31,				December 31,
		2016				2015
Assets:
Cash and cash equivalents		$	138,513			$	153,210
Available-for-sale investment securities (cost of $2,737,644 and $2,742,278, respectively)			2,870,736				2,808,113
Other securities, at cost			32,142				39,827
Loans held for sale, at fair value			339				932
Loans			4,821,172				4,801,375
Allowance for loan losses			(45,596	)			(45,401	)
Net loans			4,775,576				4,755,974
Goodwill, net			465,142				463,252
Core deposit intangibles, net			9,069				9,789
Other intangibles, net			10,670				11,105
Intangible assets, net			484,881				484,146
Premises and equipment, net			113,481				114,434
Accrued interest and fees receivable			29,830				25,904
Other assets			170,403				170,129
Total assets		$	8,615,901			$	8,552,669
Liabilities:
Noninterest-bearing deposits		$	1,533,085			$	1,499,616
Interest-bearing deposits			5,585,977				5,373,858
Total deposits			7,119,062				6,873,474
Borrowings			33,700				301,300
Subordinated debt held by unconsolidated subsidiary trusts			102,152				102,146
Accrued interest and other liabilities			160,322				135,102
Total liabilities			7,415,236				7,412,022
Commitments and contingencies (See Note J)
Shareholders' equity:
Preferred stock, $1.00 par value, 500,000 shares authorized, 0 shares issued			0				0
Common stock, $1.00 par value, 75,000,000 shares authorized; 44,598,341 and 44,442,568 shares issued, respectively			44,598				44,443
Additional paid-in capital			531,357				528,015
Retained earnings			577,384				566,591
Accumulated other comprehensive income			61,287				19,235
Treasury stock, at cost (528,562 and 667,708 shares, respectively)			(13,961	)			(17,637	)
Total shareholders' equity			1,200,665				1,140,647
Total liabilities and shareholders' equity		$	8,615,901			$	8,552,669

The accompanying notes are an integral part of the consolidated financial statements.

 

 

COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In Thousands, Except Per-Share Data)
		Three Months Ended
		March 31,
		2016				2015
Interest income:
Interest and fees on loans		$	51,650			$	45,591
Interest and dividends on taxable investments			13,596				12,060
Interest on nontaxable investments			4,510				4,803
Total interest income			69,756				62,454
Interest expense:
Interest on deposits			1,894				1,800
Interest on borrowings			287				200
Interest on subordinated debt held by unconsolidated subsidiary trusts			694				614
Total interest expense			2,875				2,614
Net interest income			66,881				59,840
Provision for loan losses			1,341				623
Net interest income after provision for loan losses			65,540				59,217
Noninterest revenues:
Deposit service fees			13,734				12,470
Other banking services			1,579				1,055
Employee benefit services			12,011				11,075
Insurance revenues			5,841				399
Wealth management services			5,116				4,047
Total noninterest revenues			38,281				29,046
Noninterest expenses:
Salaries and employee benefits			39,138				31,029
Occupancy and equipment			7,663				7,395
Data processing and communications			8,412				6,990
Amortization of intangible assets			1,442				919
Legal and professional fees			2,516				1,746
Office supplies and postage			1,778				1,580
Business development and marketing			2,013				1,564
FDIC insurance premiums			1,101				989
Acquisition expenses			77				395
Other expenses			3,529				3,341
Total noninterest expenses			67,669				55,948
Income before income taxes			36,152				32,315
Income taxes			11,749				10,018
Net income		$	24,403			$	22,297
Basic earnings per share		$	0.55			$	0.55
Diluted earnings per share		$	0.55			$	0.54
Cash dividends declared per share		$	0.31			$	0.30

The accompanying notes are an integral part of the consolidated financial statements.

COMMUNITY BANK SYSTEM, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(In Thousands)

 

		Three Months Ended
		March 31,
		2016				2015
Pension and other post-retirement obligations:
Amortization of actuarial losses included in net periodic pension cost, gross		$	375			$	363
Tax effect			(144	)			(140	)
Amortization of actuarial losses included in net periodic pension cost, net			231				223
Amortization of prior service cost included in net periodic pension cost, gross			(34	)			(43	)
Tax effect			13				16
Amortization of prior service cost included in net periodic pension cost, net			(21	)			(27	)
Other comprehensive income related to pension and other post-retirement    obligations, net of taxes			210				196
Unrealized gains on available-for-sale securities:
Net unrealized holding gains arising during period, gross			67,257				31,389
Tax effect			(25,415	)			(13,372	)
Net unrealized holding gains arising during period, net			41,842				18,017
Other comprehensive income related to unrealized gains on    available-for-sale securities, net of taxes			41,842				18,017
Other comprehensive income, net of tax			42,052				18,213
Net income			24,403				22,297
Comprehensive income		$	66,455			$	40,510

		As of
		March 31, 2016				December 31, 2015
Accumulated Other Comprehensive Income By Component:
Unrealized loss for pension and other post-retirement obligations		$	(34,006	)		$	(34,347	)
Tax effect			12,933				13,064
Net unrealized loss for pension and other post-retirement obligations			(21,073	)			(21,283	)
Unrealized gain on available-for-sale securities			133,092				65,835
Tax effect			(50,732	)			(25,317	)
Net unrealized gain on available-for-sale securities			82,360				40,518
Accumulated other comprehensive income		$	61,287			$	19,235

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

COMMUNITY BANK SYSTEM, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)

Three months ended March 31, 2016

(In Thousands, Except Share Data)

																		Accumulated
		Common Stock								Additional								Other
		Shares				Amount				Paid-In				Retained				Comprehensive				Treasury
		Outstanding				Issued				Capital				Earnings				Income				Stock				Total
Balance at December 31, 2015			43,774,860			$	44,443			$	528,015			$	566,591			$	19,235			$	(17,637	)		$	1,140,647
Net income															24,403												24,403
Other comprehensive income, net of tax																			42,052								42,052
Cash dividends declared:
Common, $0.31 per share															(13,610	)											(13,610	)
Common stock issued under
employee stock plan,
including tax benefits of $594			155,773				155				777																932
Stock-based compensation											1,219																1,219
Treasury stock issued to benefit plan			139,146								1,346												3,676				5,022
Balance at March 31, 2016			44,069,779			$	44,598			$	531,357			$	577,384			$	61,287			$	(13,961	)		$	1,200,665

 

The accompanying notes are an integral part of the consolidated financial statements.

COMMUNITY BANK SYSTEM, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In Thousands)

 

 

The accompanying notes are an integral part of the consolidated financial statements.

COMMUNITY BANK SYSTEM, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

MARCH 31, 2016

NOTE A:  BASIS OF PRESENTATION

The interim financial data as of and for the three months ended March 31, 2016 is unaudited; however, in the opinion of Community Bank System, Inc. (the "Company"), the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods in conformity with generally accepted accounting principles ("GAAP").  The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other interim period.

NOTE B:  ACQUISITIONS

The assets and liabilities assumed in the acquisitions were recorded at their estimated fair values based on management's best estimates using information available at the dates of the acquisition, and were subject to adjustment based on updated information not available at the time of acquisition.  During the first quarter of 2016, the carrying amount of other assets decreased by $0.9 million and other liabilities increased by $0.7 million as a result of adjustments made to fair value estimates recorded for the Oneida acquisition. Other assets decreased as a result of new information obtained related to the fair value calculation of loans partially offset by a decrease in the fair value adjustment made to accounts receivable for uncollectible accounts as actual cash receipts exceeded anticipated cash receipts.  Other liabilities increased as a result of updated information related to deferred taxes.  Goodwill increased $1.6 million as a result of these changes in fair value estimates.

The above referenced acquisitions expanded the Company's geographical presence in New York 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:

(000s omitted)		2016				2015
Consideration paid :
Cash		$	575			$	56,266
Community Bank System, Inc. common stock			0				102,202
Total net consideration paid			575				158,468
Recognized amounts of identifiable assets acquired and liabilities assumed:
Cash and cash equivalents			0				81,772
Investment securities			0				225,729
Loans			0				399,422
Premises and equipment			0				22,212
Accrued interest receivable			0				1,133
Other assets			0				26,529
Core deposit intangibles			0				2,570
Other intangibles			288				9,994
Deposits			0				(699,241	)
Other liabilities			0				(1,333	)
Total identifiable assets, net			288				68,787
Goodwill		$	287			$	89,681

 

 

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 an estimated 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 Oneida at the date of acquisition:

		Acquired				Acquired				Total
		Impaired				Non-impaired				Acquired
(000s omitted)		Loans				Loans				Loans
Contractually required principal and interest at acquisition		$	5,138			$	484,937			$	490,075
Contractual cash flows not expected to be collected			(1,977	)			(4,833	)			(6,810	)
Expected cash flows at acquisition			3,161				480,104				483,265
Interest component of expected cash flows			(341	)			(83,502	)			(83,843	)
Fair value of acquired loans		$	2,820			$	396,602			$	399,422

The fair value of checking, savings and money market deposit accounts acquired were assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand.  Certificate of deposit accounts were valued at the present value of the certificates' expected contractual payments discounted at market rates for similar certificates.

The core deposit intangibles and other intangibles related to the Oneida acquisition and the other intangibles related to WJL 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 and All Other segments for the Oneida acquisition and the All Other Segment for WJL.  Goodwill arising from the Oneida acquisition is not deductible for tax purposes.  Goodwill arising from the WJL acquisition is deductible for tax purposes

Direct costs related to the acquisitions were expensed as incurred.  Merger and acquisition integration-related expenses amount to $0.1 million and $0.4 million during the three months ended March 31, 2016 and 2015, respectively, and have been separately stated in the Consolidated Statements of Income.

Supplemental Pro Forma Financial Information

(000's omitted)		Pro Forma (Unaudited) Three Months Ended March 31, 2015
Total revenue, net of interest expense		$	102,943
Net income			24,298

NOTE C:  ACCOUNTING POLICIES

The accounting policies of the Company, as applied in the consolidated interim financial statements presented herein, are substantially the same as those followed on an annual basis as presented on pages 56 through 61 of the Annual Report on Form 10-K for the year ended December 31, 2015 filed with the Securities and Exchange Commission ("SEC") on February 29, 2016.

Critical Accounting Policies

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 Accounting Standards Codification ("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 credit 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 loans 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 are 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 into interest income.  When the carrying value exceeds the net realizable value, an allowance for loan loss is recognized.

Allowance for Loan Losses

Management continually evaluates the credit quality of the Company's loan portfolio, and performs a formal review of the adequacy of the allowance for loan losses on a quarterly basis.  The allowance reflects management's best estimate of probable losses inherent in the loan portfolio.  Determination of the allowance is subjective in nature and requires significant estimates.   The Company's allowance methodology consists of two broad components - general and specific loan loss allocations.

The general loan loss allocation is composed of two calculations that are computed on five 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 eight qualitative environmental factors:  levels of 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.

Investment Securities

The Company can classify its investments in debt and equity securities as held-to-maturity, available-for-sale, or trading.  Held-to-maturity securities are those for which the Company has the positive intent and ability to hold until maturity, and are reported at cost, which is adjusted for amortization of premiums and accretion of discounts.  Securities classified as available-for-sale 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 March 31, 2016.  Certain equity securities are stated at cost and include restricted stock of the Federal Reserve Bank of New York ("Federal Reserve") and Federal Home Loan Bank of New York ("FHLB").

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.

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.

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.

New 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 prospectively for the Company for annual and interim periods beginning after December 15, 2017.  The Company is currently evaluating the effect the guidance will have on the Company's consolidated financial statements.

In January 2016, the FASB issued ASU 2016-1, 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 is currently evaluating the effect the guidance will have on the Company's consolidated financial statements.

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 is currently evaluating the effect the guidance will have on the Company's consolidated financial statements.

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 and classification on the statement of cash flows.  The new guidance requires all excess tax benefits and tax deficiencies be recognized as income tax expense or benefit in the income statement.  The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. This guidance requires certain amendments to be applied through a cumulative-effect adjustment to equity as of the beginning of the fiscal period in which the guidance is adopted while other amendments are required to be applied retrospectively or prospectively.  This ASU is effective for fiscal periods beginning after December 15, 2016, and interim periods within those annual periods.  Early adoption is permitted for any entity in any interim or annual period.   The Company is currently evaluating the effect the guidance will have on the Company's consolidated financial statements.

NOTE D:  INVESTMENT SECURITIES

The amortized cost and estimated fair value of investment securities as of March 31, 2016 and December 31, 2015 are as follows:

		March 31, 2016																December 31, 2015
						Gross				Gross												Gross				Gross
		Amortized				Unrealized				Unrealized				Fair				Amortized				Unrealized				Unrealized				Fair
(000's omitted)		Cost				Gains				Losses				Value				Cost				Gains				Losses				Value
Available-for-Sale Portfolio:
U.S. Treasury and agency securities		$	1,868,429			$	95,114			$	0			$	1,963,543			$	1,866,819			$	35,186			$	2,027			$	1,899,978
Obligations of state and political subdivisions			632,114				30,283				5				662,392				640,455				26,487				59				666,883
Government agency mortgage-backed securities			208,300				7,500				529				215,271				205,220				6,906				1,261				210,865
Corporate debt securities			16,639				55				10				16,684				16,672				66				58				16,680
Government agency collateralized mortgage obligations			11,911				525				0				12,436				12,862				446				0				13,308
Marketable equity securities			251				178				19				410				250				163				14				399
Total available-for-sale portfolio		$	2,737,644			$	133,655			$	563			$	2,870,736			$	2,742,278			$	69,254			$	3,419			$	2,808,113
Other Securities:
Federal Home Loan Bank common stock			7,258												7,258			$	19,317											$	19,317
Federal Reserve Bank common stock			20,663												20,663				16,050												16,050
Other equity securities			4,221												4,221				4,460												4,460
Total other securities		$	32,142											$	32,142			$	39,827											$	39,827

A summary of investment securities that have been in a continuous unrealized loss position is as follows:

		Less than 12 Months												12 Months or Longer												Total
										Gross												Gross												Gross
						Fair				Unrealized								Fair				Unrealized								Fair				Unrealized
(000's omitted)			#			Value				Losses					#			Value				Losses					#			Value				Losses
Available-for-Sale Portfolio:
Obligations of state and political subdivisions			1			$	72			$	0				2			$	755			$	5				3			$	827			$	5
Government agency mortgage-backed securities			9				6,470				17				19				30,167				512				28				36,637				529
Corporate debt securities			0				0				0				1				2,743				10				1				2,743				10
Government agency collateralized mortgage obligations			0				0				0				2				3				0				2				3				0
Marketable equity securities			1				82				19				0				0				0				1				82				19
Total available-for-sale/investment portfolio			11			$	6,624			$	36				24			$	33,668			$	527				35			$	40,292			$	563

		Less than 12 Months												12 Months or Longer												Total
										Gross												Gross												Gross
						Fair				Unrealized								Fair				Unrealized								Fair				Unrealized
(000's omitted)			#			Value				Losses					#			Value				Losses					#			Value				Losses
Available-for-Sale Portfolio:
U.S. Treasury and agency obligations			9			$	353,844			$	2,027				0			$	0			$	0				9			$	353,844			$	2,027
Obligations of state and political subdivisions			18				8,804				34				2				735				25				20				9,539				59
Government agency mortgage-backed securities			17				24,178				161				19				30,103				1,100				36				54,281				1,261
Corporate debt securities			1				3,024				0				1				2,710				58				2				5,734				58
Government agency collateralized mortgage obligations			0				0				0				2				3				0				2				3				0
Marketable equity securities			1				87				14				0				0				0				1				87				14
Total available-for-sale/investment portfolio			46			$	389,937			$	2,236				24			$	33,551			$	1,183				70			$	423,488			$	3,419

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 the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA"), and the Federal Home Loan Corporation ("FHLMC"), 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 March 31, 2016 represents OTTI.

The amortized cost and estimated fair value of debt securities at March 31, 2016, 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
		Amortized				Fair
(000's omitted)		Cost				Value
Due in one year or less		$	42,379			$	42,646
Due after one through five years			732,229				765,044
Due after five years through ten years			1,515,627				1,594,586
Due after ten years			226,947				240,343
Subtotal			2,517,182				2,642,619
Government agency mortgage-backed securities			208,300				215,271
Government agency collateralized mortgage obligations			11,911				12,436
Total		$	2,737,393			$	2,870,326

NOTE E:  LOANS

The segments of the Company's loan portfolio are disaggregated into the following classes that allow management to monitor risk and performance:

·	Consumer mortgages consist primarily of fixed rate residential instruments, typically 10 – 30 years in contractual term, secured by first liens on real property.

·	Business lending is comprised of general purpose commercial and industrial loans including, but not limited to, agricultural-related and dealer floor plans, as well as mortgages on commercial properties.

·	Consumer indirect consists primarily of installment loans originated through selected dealerships and are secured by automobiles, marine and other recreational vehicles.

·	Consumer direct consists of all other loans to consumers such as personal installment loans and lines of credit.

·	Home equity products are consumer purpose installment loans or lines of credit most often secured by a first or second lien position on residential real estate with terms up to 30 years.

The balances of these classes are summarized as follows:

		March 31,				December 31,
(000's omitted)		2016				2015
Consumer mortgage		$	1,777,792			$	1,769,754
Business lending			1,509,421				1,497,271
Consumer indirect			941,151				935,760
Consumer direct			189,535				195,076
Home equity			403,273				403,514
Gross loans, including deferred origination costs			4,821,172				4,801,375
Allowance for loan losses			(45,596	)			(45,401	)
Loans, net of allowance for loan losses		$	4,775,576			$	4,755,974

The outstanding balance related to credit impaired acquired loans was $8.3 million and $8.5 million at March 31, 2016 and December 31, 2015, respectively.  The changes in the accretable discount related to the credit impaired acquired loans are as follows:

(000's omitted)
Balance at December 31, 2015		$	810
Accretion recognized, year-to-date			(140	)
Net reclassification to accretable from non-accretable			43
Balance at March 31, 2016		$	713

 

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 March 31, 2016:

Legacy Loans (excludes loans acquired after January 1, 2009)

		Past Due				90+ Days Past
			30 – 89			Due and								Total
(000's omitted)		Days				Still Accruing				Nonaccrual				Past Due				Current				Total Loans
Consumer mortgage		$	8,452			$	1,214			$	11,642			$	21,308			$	1,574,883			$	1,596,191
Business lending			2,560				46				6,417				9,023				1,245,975				1,254,998
Consumer indirect			7,793				183				0				7,976				892,160				900,136
Consumer direct			858				53				1				912				173,868				174,780
Home equity			724				341				1,985				3,050				301,148				304,198
Total		$	20,387			$	1,837			$	20,045			$	42,269			$	4,188,034			$	4,230,303

Acquired Loans (includes loans acquired after January 1, 2009)

		Past Due				90+ Days Past
			30 – 89			Due and								Total				Acquired
(000's omitted)		Days				Still Accruing				Nonaccrual				Past Due				Impaired(1)				Current				Total Loans
Consumer mortgage		$	1,098			$	342			$	1,884			$	3,324			$	0			$	178,277			$	181,601
Business lending			129				0				1,420				1,549				7,174				245,700				254,423
Consumer indirect			126				0				0				126				0				40,889				41,015
Consumer direct			122				6				13				141				0				14,614				14,755
Home equity			425				142				403				970				0				98,105				99,075
Total		$	1,900			$	490			$	3,720			$	6,110			$	7,174			$	577,585			$	590,869

 

(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, 2015:

Legacy Loans (excludes loans acquired after January 1, 2009)

		Past Due				90+ Days Past
			30 – 89			Due and								Total
(000's omitted)		Days				Still Accruing				Nonaccrual				Past Due				Current				Total Loans
Consumer mortgage		$	10,482			$	1,411			$	11,394			$	23,287			$	1,558,171			$	1,581,458
Business lending			4,442				126				5,381				9,949				1,223,679				1,233,628
Consumer indirect			11,575				102				0				11,677				878,662				890,339
Consumer direct			1,414				51				1				1,466				176,585				178,051
Home equity			1,093				111				2,029				3,233				297,012				300,245
Total		$	29,006			$	1,801			$	18,805			$	49,612			$	4,134,109			$	4,183,721

Acquired Loans (includes loans acquired after January 1, 2009)

		Past Due				90+ Days Past
			30 – 89			Due and								Total				Acquired
(000's omitted)		Days				Still Accruing				Nonaccrual				Past Due				Impaired(1)				Current				Total Loans
Consumer mortgage		$	1,373			$	394			$	1,396			$	3,163			$	0			$	185,133			$	188,296
Business lending			535				0				1,186				1,721				7,299				254,623				263,643
Consumer indirect			245				0				0				245				0				45,176				45,421
Consumer direct			140				0				14				154				0				16,871				17,025
Home equity			636				0				327				963				0				102,306				103,269
Total		$	2,929			$	394			$	2,923			$	6,246			$	7,299			$	604,109			$	617,654

 

(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:

		March 31, 2016												December 31, 2015
(000's omitted)		Legacy				Acquired				Total				Legacy				Acquired				Total
Pass		$	1,049,441			$	202,571			$	1,252,012			$	1,048,364			$	219,374			$	1,267,738
Special mention			133,939				27,315				161,254				124,768				20,007				144,775
Classified			71,528				17,363				88,891				60,181				16,963				77,144
Doubtful			90				0				90				315				0				315
Acquired impaired			0				7,174				7,174				0				7,299				7,299
Total		$	1,254,998			$	254,423			$	1,509,421			$	1,233,628			$	263,643			$	1,497,271

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 loans classified as current as well as those classified as 30 - 89 days past due.  Nonperforming loans include 90+ days past due and still accruing and nonaccrual loans. The following table details the balances in all other loan categories at March 31, 2016:

Legacy Loans (excludes loans acquired after January 1, 2009)

		Consumer				Consumer				Consumer				Home
(000's omitted)		Mortgage				Indirect				Direct				Equity				Total
Performing		$	1,583,335			$	899,953			$	174,726			$	301,872			$	2,959,886
Nonperforming			12,856				183				54				2,326				15,419
Total		$	1,596,191			$	900,136			$	174,780			$	304,198			$	2,975,305