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ACQUISITIONS | 12 Months Ended
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Dec. 31, 2017
ACQUISITIONS [Abstract] |
ACQUISITIONS |
NOTE B: | ACQUISITIONS
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 million of other liabilities, goodwill in the amount of $2.2 million and other intangible assets of $1.6 million. The effects of the acquired assets and liabilities have been included in the consolidated financial statements since that date. On November 17, 2017, the Company, through its subsidiary, CISI, completed its acquisition of certain assets of Northeast Capital Management, Inc. (“NECM”), a financial services business headquartered in Wilkes Barre, Pennsylvania. The Company agreed to pay $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 extends the Company’s footprint into the Vermont and Western Massachusetts markets with the addition of 31 branch locations in Vermont and one location in Massachusetts. This transaction resulted in the acquisition of $2.0 billion of assets, including $1.49 billion of loans and $370.6 million of investment securities, as well as $1.45 billion of deposits and $189.0 million in goodwill. The effects of the acquired assets and liabilities have been included in the consolidated financial statements since that date. Revenues of approximately $42.6 million and direct expenses, which may not include certain shared expenses, of approximately $19.9 million from Merchants were included in the consolidated income statement for the year ended December 31, 2017. 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 strengthen and complement 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 million deferred tax liability associated with the customer list intangible, and $76.4 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 million and expenses of $21.5 million from NRS were included in the consolidated statement of income for the year ended December 31, 2017. 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'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 second quarter of 2017, the carrying amount of other assets decreased by $2.7 million and other liabilities decreased by $2.4 million as a result of a reclassification of amounts from other assets into other liabilities, and an adjustment to other liabilities as a result of updated information not available at the time of acquisition. Goodwill associated with the NRS acquisition increased $0.3 million during the second quarter as a result of these changes in fair value. During the third quarter of 2017, the carrying amount of investments increased by $0.2 million as a result of updated information not available at the time of acquisition, the carrying amount of loans decreased $0.6 million as a result of an adjustment to the valuation of acquired impaired loans, the carrying amount of premises and equipment increased $3.6 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. Goodwill associated with the NRS and Merchants acquisitions decreased $0.1 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. The above referenced acquisitions expanded the Company’s geographical presence in New York, Pennsylvania, Vermont, and Western Massachusetts and management expects that the Company will benefit from greater geographic diversity and the advantages of other synergistic business development opportunities. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed after considering the measurement period adjustments described above:
|  | 2017 |  |  | 2016 |  |  | 2015 |
(000s omitted) |  | NRS |  |  | Merchants |  |  | Other (1) |  |  | Total |  |  | WJL |  |  | Oneida |
Consideration paid : |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash (2) |  | $ | 70,073 |  |  | $ | 82,898 |  |  | $ | 6,775 |  |  | $ | 159,746 |  |  | $ | 575 |  |  | $ | 56,266 |
Community Bank System, Inc. common stock |  |  | 78,483 |  |  |  | 262,254 |  |  |  | 2,395 |  |  |  | 343,132 |  |  |  | 0 |  |  |  | 102,202 |
Total net consideration paid |  |  | 148,556 |  |  |  | 345,152 |  |  |  | 9,170 |  |  |  | 502,878 |  |  |  | 575 |  |  |  | 158,468 |
Recognized amounts of identifiable assets acquired and liabilities assumed: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  |  | 11,063 |  |  |  | 40,730 |  |  |  | 339 |  |  |  | 52,132 |  |  |  | 0 |  |  |  | 81,772 |
Investment securities |  |  | 20,294 |  |  |  | 370,648 |  |  |  | 0 |  |  |  | 390,942 |  |  |  | 0 |  |  |  | 225,729 |
Loans |  |  | 0 |  |  |  | 1,488,157 |  |  |  | 0 |  |  |  | 1,488,157 |  |  |  | 0 |  |  |  | 399,422 |
Premises and equipment |  |  | 411 |  |  |  | 16,608 |  |  |  | 27 |  |  |  | 17,046 |  |  |  | 0 |  |  |  | 22,212 |
Accrued interest receivable |  |  | 72 |  |  |  | 4,773 |  |  |  | 0 |  |  |  | 4,845 |  |  |  | 0 |  |  |  | 1,133 |
Other assets |  |  | 8,088 |  |  |  | 51,585 |  |  |  | 583 |  |  |  | 60,256 |  |  |  | 0 |  |  |  | 26,529 |
Core deposit intangibles |  |  | 0 |  |  |  | 23,214 |  |  |  | 0 |  |  |  | 23,214 |  |  |  | 0 |  |  |  | 2,570 |
Other intangibles |  |  | 60,200 |  |  |  | 2,857 |  |  |  | 5,626 |  |  |  | 68,683 |  |  |  | 288 |  |  |  | 9,994 |
Deposits |  |  | 0 |  |  |  | (1,448,406 | ) |  |  | 0 |  |  |  | (1,448,406 | ) |  |  | 0 |  |  |  | (699,241 | )
Other liabilities |  |  | (28,002 | ) |  |  | (11,750 | ) |  |  | (1,217 | ) |  |  | (40,969 | ) |  |  | 0 |  |  |  | (1,333 | )
Short-term advances |  |  | 0 |  |  |  | (80,000 | ) |  |  | 0 |  |  |  | (80,000 | ) |  |  | 0 |  |  |  | 0 |
Securities sold under agreement to repurchase, short-term |  |  | 0 |  |  |  | (278,076 | ) |  |  | 0 |  |  |  | (278,076 | ) |  |  | 0 |  |  |  | 0 |
Long-term debt |  |  | 0 |  |  |  | (3,615 | ) |  |  | 0 |  |  |  | (3,615 | ) |  |  | 0 |  |  |  | 0 |
Subordinated debt held by unconsolidated subsidiary trusts |  |  | 0 |  |  |  | (20,619 | ) |  |  | 0 |  |  |  | (20,619 | ) |  |  | 0 |  |  |  | 0 |
Total identifiable assets, net |  |  | 72,126 |  |  |  | 156,106 |  |  |  | 5,358 |  |  |  | 233,590 |  |  |  | 288 |  |  |  | 68,787 |
Goodwill |  | $ | 76,430 |  |  | $ | 189,046 |  |  | $ | 3,812 |  |  | $ | 269,288 |  |  | $ | 287 |  |  | $ | 89,681 |
(1) 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 Merchants at the date of acquisition:
(000s omitted) |  | Acquired Impaired Loans |  |  | Acquired Non-impaired Loans |  |  | Total Acquired Loans |
Contractually required principal and interest at acquisition |  | $ | 15,454 |  |  | $ | 1,872,574 |  |  | $ | 1,888,028 |
Contractual cash flows not expected to be collected |  |  | (5,385 | ) |  |  | (14,753 | ) |  |  | (20,138 | )
Expected cash flows at acquisition |  |  | 10,069 |  |  |  | 1,857,821 |  |  |  | 1,867,890 |
Interest component of expected cash flows |  |  | (793 | ) |  |  | (378,940 | ) |  |  | (379,733 | )
Fair value of acquired loans |  | $ | 9,276 |  |  | $ | 1,478,881 |  |  | $ | 1,488,157 |
The fair value of checking, savings and money market deposit accounts acquired were assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. Certificate of deposit accounts were valued at the present value of the certificates’ expected contractual payments discounted at market rates for similar certificates. The core deposit intangibles and other intangibles related to the Merchants, Dryfoos, BAS, WJL and Oneida acquisitions are being amortized using an accelerated method over their estimated useful life of eight years. The goodwill, which is not amortized for book purposes, was assigned to the Banking segment for the Merchants and Oneida acquisitions, the Employee Benefit Services segment for NRS, and All Other segments for the Dryfoos, BAS, and WJL acquisitions. Goodwill arising from the Merchants, NRS, GBR and Oneida acquisitions is not deductible for tax purposes. Goodwill arising from the Dryfoos, BAS and WJL acquisitions is deductible for tax purposes. Direct costs related to the acquisitions were expensed as incurred. Merger and acquisition integration-related expenses amount to $26.0 million, $1.7 million 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 The following unaudited condensed pro forma information assumes 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 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 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 Merchants and NRS transactions totaling $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, |
(000’s omitted) |  | 2017 |  |  | 2016 |
Total revenue, net of interest expense |  | $ | 546,977 |  |  | $ | 536,183 |
Net income |  |  | 176,257 |  |  |  | 109,186 |

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