ITEM 2.
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Managements Discussion and Analysis of Financial Condition and Results of Operations
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This
Quarterly Report on Form 10-Q should be read in conjunction with the more detailed and comprehensive disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2015. In addition, please read this section in
conjunction with our Consolidated Financial Statements and Notes to Consolidated Financial Statements contained herein.
FORWARD LOOKING
INFORMATION
Statements and financial analysis contained in this document that are based on other than historical data are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations or forecasts of future events and include, among others:
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statements with respect to the beliefs, plans, objectives, goals, guidelines, expectations, anticipations, and future financial condition, results of operations and performance of Financial Institutions, Inc. (the
Parent) and our subsidiaries (together, the Company, we, our or us); and
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statements preceded by, followed by or that include the words may, could, should, would, believe, anticipate, estimate,
expect, intend, plan, projects, or similar expressions.
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These forward-looking statements
are not guarantees of future performance, nor should they be relied upon as representing managements views as of any subsequent date. Forward-looking statements involve significant risks and uncertainties and actual results may differ
materially from those presented, either expressed or implied, in this document and our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, which we refer to as the Form 10-K, including, but not limited to, those presented in
the Managements Discussion and Analysis of Financial Condition and Results of Operations. Factors that might cause such differences include, but are not limited to:
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If we experience greater credit losses than anticipated, earnings may be adversely impacted;
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Our tax strategies and the value of our deferred tax assets could adversely affect our operating results and regulatory capital ratios;
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Geographic concentration may unfavorably impact our operations;
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We depend on the accuracy and completeness of information about or from customers and counterparties;
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Our insurance brokerage subsidiary is subject to risk related to the insurance industry;
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Our investment advisory and wealth management operations are subject to risk related to the financial services industry;
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Our inability to successfully implement our growth strategies;
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We are subject to environmental liability risk associated with our lending activities;
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Commercial real estate and business loans increase our exposure to credit risks;
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Our indirect lending involves risk elements in addition to normal credit risk;
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We accept deposits that do not have a fixed term and which may be withdrawn by the customer at any time for any reason;
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Any future FDIC insurance premium increases may adversely affect our earnings;
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We are highly regulated and may be adversely affected by changes in banking laws, regulations and regulatory practices;
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New or changing tax and accounting rules and interpretations could significantly impact our strategic initiatives, results of operations, cash flows, and financial condition;
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Legal and regulatory proceedings and related matters could adversely affect us and the banking industry in general;
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A breach in security of our or third party information systems, including the occurrence of a cyber incident or a deficiency in cyber security, may subject us to liability, result in a loss of customer business or
damage our brand image;
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We face competition in staying current with technological changes to compete and meet customer demands;
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We rely on other companies to provide key components of our business infrastructure;
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We use financial models for business planning purposes that may not adequately predict future results;
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We may not be able to attract and retain skilled people;
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Acquisitions may disrupt our business and dilute shareholder value;
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We are subject to interest rate risk;
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Our business may be adversely affected by conditions in the financial markets and economic conditions generally;
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The fiscal and monetary policies of the federal government and its agencies have a significant impact on our earnings;
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The soundness of other financial institutions could adversely affect us;
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The value of our goodwill and other intangible assets may decline in the future;
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A future proxy contest for the election of directors at our annual meeting or proposals arising out of shareholder initiatives could cause us to incur additional substantial costs and could negatively affect our
business;
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We operate in a highly competitive industry and market area;
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Severe weather, natural disasters, acts of war or terrorism, and other external events could significantly impact our business;
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- 35 -
MANAGEMENTS DISCUSSION AND ANALYSIS
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Liquidity is essential to our businesses;
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We may need to raise additional capital in the future and such capital may not be available on acceptable terms or at all;
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We rely on dividends from our subsidiaries for most of our revenue;
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We may not pay or may reduce the dividends on our common stock;
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We may issue debt and equity securities or securities convertible into equity securities, any of which may be senior to our common stock as to distributions and in liquidation, which could dilute our current
shareholders or negatively affect the value of our common stock;
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Our certificate of incorporation, our bylaws, and certain banking laws may have an anti-takeover effect; and
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The market price of our common stock may fluctuate significantly in response to a number of factors.
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We
caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, and advise readers that various factors, including those described above, could affect our financial performance and could cause our
actual results or circumstances for future periods to differ materially from those anticipated or projected. See also Item 1A. Risk Factors in the Form 10-K for further information. Except as required by law, we do not undertake, and
specifically disclaim any obligation to publicly release any revisions to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.
GENERAL
The Parent is a financial holding company
headquartered in New York State, providing banking and nonbanking financial services to individuals, municipalities and businesses primarily in our Western and Central New York footprint. The Company provides diversified financial services through
its subsidiaries, Five Star Bank, Scott Danahy Naylon, LLC (Scott Danahy Naylon) and Courier Capital, LLC (Courier Capital). The Company offers a broad array of deposit, lending and other financial services to individuals,
municipalities and businesses in Western and Central New York through its wholly-owned New York chartered banking subsidiary, Five Star Bank (the Bank). The Bank also has indirect lending network relationships with franchised automobile
dealers in the Capital District of New York and Northern and Central Pennsylvania. Scott Danahy Naylon provides a broad range of insurance services to personal and business clients across 44 states. Courier Capital, which we acquired on
January 5, 2016, provides customized investment management, investment consulting and retirement plan services to individuals, businesses, institutions, foundations and retirement plans across nine states.
Our primary sources of revenue are net interest income (interest earned on our loans and securities, net of interest paid on deposits and other funding
sources) and noninterest income, particularly fees and other revenue from insurance and financial services provided to customers or ancillary services tied to loans and deposits. Business volumes and pricing drive revenue potential, and tend to be
influenced by overall economic factors, including market interest rates, business spending, consumer confidence, economic growth, and competitive conditions within the marketplace. We are not able to predict market interest rate fluctuations with
certainty and our asset/liability management strategy may not prevent interest rate changes from having a material adverse effect on our results of operations and financial condition.
Our business strategy has been to maintain a community bank philosophy, which consists of focusing on and understanding the individualized banking needs of
individuals, municipalities and businesses of the local communities surrounding our primary service areas. We believe this focus allows us to be more responsive to our customers needs and provide a high level of personal service that
differentiates us from larger competitors, resulting in long-standing and broad-based banking relationships. Our core customers are primarily small to medium-sized businesses, individuals and community organizations, which prefer to build banking,
insurance and wealth management relationships with a community bank that combines high quality, competitively-priced products and services with personalized service. Because of our identity and origin as a locally-operated bank, we believe that our
level of personal service provides a competitive advantage over larger banks, which tend to consolidate decision-making authority outside local communities.
A key aspect of our current business strategy is to foster a community-oriented culture where our customers and employees establish long-standing and mutually
beneficial relationships. We believe that we are well-positioned to be a strong competitor within our market area because of our focus on community banking needs and customer service, our comprehensive suite of deposit, loan, insurance and wealth
management products typically found at larger banks, our highly experienced management team and our strategically located banking centers. We believe that the foregoing factors all help to grow our core deposits, which supports a central element of
our business strategy, namely the growth of a diversified and high-quality loan portfolio.
- 36 -
MANAGEMENTS DISCUSSION AND ANALYSIS
EXECUTIVE OVERVIEW
Summary of 2016 Third Quarter Results
Net income
increased $153 thousand or 2% to $8.5 million for the third quarter of 2016 compared to $8.3 million for the third quarter of 2015. Net income available to common shareholders for the third quarter of 2016 was $8.1 million, or $0.56 per diluted
share, compared with $8.0 million, or $0.56 per diluted share, for the third quarter of last year. Return on average common equity was 10.45% and return on average assets was 0.94% for the third quarter of 2016 compared to 11.60% and 0.99%,
respectively, for the third quarter of 2015.
Net interest income totaled $26.1 million in the third quarter of 2016, up from $24.1 million in the third
quarter of 2015. Average interest-earning assets were up $224.6 million, led by a $223.6 million increase in average loans in the third quarter of 2016 compared to the same quarter in 2015. The increase in average loans was attributable to organic
commercial, residential real estate and consumer indirect loan growth. Third quarter 2016 net interest margin was 3.23%, a slight increase from 3.20% reported in the third quarter of 2015.
The provision for loans losses was $2.0 million in the third quarter of 2016 compared to $754 thousand in the third quarter of 2015. Net charge-offs during
the recent quarter were $1.1 million, a $663 thousand decrease from the third quarter of 2015. Net charge-offs expressed as an annualized percentage of average loans outstanding were 0.20% during the third quarter of 2016 compared with 0.35% in the
third quarter of 2015. See the Allowance for Loan Losses and Non-Performing Assets and Potential Problem Loans sections of this Managements Discussion and Analysis for further discussion regarding the increase in the
provision for loan losses and the decrease in net charge-offs.
Noninterest income totaled $8.5 million in the third quarter of 2016, compared to $7.0
million in the third quarter of 2015. The higher noninterest income in the third quarter of 2016 compared to the same quarter last year is primarily a result of the investment advisory income from Courier Capital, which we acquired during January
2016. Included in the third quarter of 2016 and 2015 are net gains realized on investment securities totaling $426 thousand and $286 thousand, respectively. In addition, the third quarter of 2015 included $390 thousand of amortization of a tax
credit investment. The increases in insurance income and ATM and debit card income were offset by decreases in service charges on deposits and investments in limited partnerships when comparing the third quarter periods of 2016 and 2015.
Noninterest expense in the third quarter of 2016 totaled $20.6 million compared with $19.3 million in the third quarter of 2015. The increase in noninterest
expense reflects the addition of Courier Capital and our expansion initiatives, including the opening of financial solution centers in the Rochester market.
The regulatory Common equity Tier 1 ratio and Total risk-based capital ratio were 9.58%, and 12.98%, respectively, for the third quarter of 2016. See the
Liquidity and Capital Management section of this Managements Discussion and Analysis for further discussion regarding regulatory capital and the Basel III capital rules.
Courier Capital Acquisition
On January 5, 2016, we
completed the acquisition of Courier Capital Corporation, a registered investment advisory and wealth management firm with approximately $1.2 billion in assets under management. Consideration for the acquisition totaled $9.0 million and included
stock of $8.1 million and $918 thousand of cash. The acquisition also included $2.8 million of potential future payments of stock and $2.2 million of potential future cash bonuses contingent upon Courier Capital meeting certain EBITDA performance
targets through 2018. In addition, the Company purchased two pieces of real property in Buffalo and Jamestown, New York used by Courier Capital for total cash considerations of $1.3 million. As a result of the acquisition, we recorded goodwill of
$6.0 million and other intangible assets of $3.9 million. The goodwill is not expected to be deductible for income tax purposes. Courier Capital now operates as a subsidiary of the Parent and an affiliate of Five Star Bank and Scott Danahy Naylon.
- 37 -
MANAGEMENTS DISCUSSION AND ANALYSIS
2016 Outlook
We began 2016 in a strong financial condition and with positive momentum. We expect net interest income to increase in 2016. We anticipate an increase in
interest-earning assets as we remain focused on loan growth, which will be primarily funded through deposit gathering. However, the benefit to net interest income from increased interest-earning assets is expected to be partially offset by
slight downward pressure on net interest margin. We plan to maintain a disciplined approach to loan pricing, but asset yields remain under pressure due to the low interest rate environment and flattening of the yield curve, while the
opportunity for deposit repricing remains limited.
We expect our commercial loan portfolio to grow in a manner that is consistent with our strategic
initiatives and continued support of middle market small business lending. Automobile loan originations remained strong through the first nine months of 2016, reflecting the positive impact from our investment in building automotive dealer
relationships. The residential real estate portfolio, which includes both first and junior lien residential real estate related products, is expected to increase as we remain focused on the customer experience and our convenient application process.
We anticipate the increase in total loans during 2016 will modestly outpace growth in total deposits. This anticipated outcome reflects our continued
focus on targeting loyal relationship-based deposit customers rather than those that are more price sensitive. We expect to continue managing our overall cost of funds during 2016 using short-term borrowings, as well as our continued shift in
mix of deposits towards low- and no-cost demand deposits and money market deposit accounts.
Noninterest income during 2016 is expected to be higher than
2015, reflecting our continued efforts to increase both account and transaction-based fee income, coupled with the benefit of revenue from our fee-based subsidiaries, Scott Danahy Naylon and Courier Capital. We anticipate that the results of these
efforts will further reduce our reliance on traditional spread-based net interest income, as fee-based activities are a relatively stable revenue source during periods of changing interest rates.
Noninterest expense is expected to increase in 2016 with the addition of Courier Capital, coupled with higher operating costs associated with our revenue
enhancing initiatives to further accelerate our growth in the communities we serve, including the opening of additional financial solution centers.
We do
not expect significant changes in overall asset quality and allowance measurements.
The effective tax rate for 2016 is expected to be slightly higher
than it was in 2015, as the lower effective tax rate in 2015 was partly driven by historic tax credits claimed in 2015. However, our 2016 effective tax rate will continue to reflect the positive impacts of tax-exempt income (including the $911
thousand of non-taxable company owned life death benefit proceeds received in the first quarter of 2016), tax advantaged investments, the formation of our real estate investment trust in early 2014 and benefits from New York State tax law changes
that began going into effect during 2015.
- 38 -
MANAGEMENTS DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Net Interest Income and Net Interest Margin
Net interest
income is our primary source of revenue. Net interest income is the difference between interest income on interest-earning assets, such as loans and investment securities, and the interest expense on interest-bearing deposits and other borrowings
used to fund interest-earning and other assets or activities. Net interest income is affected by changes in interest rates and by the amount and composition of earning assets and interest-bearing liabilities, as well as the sensitivity of the
balance sheet to changes in interest rates, including characteristics such as the fixed or variable nature of the financial instruments, contractual maturities and repricing frequencies.
Interest rate spread and net interest margin are utilized to measure and explain changes in net interest income. Interest rate spread is the difference
between the yield on earning assets and the rate paid for interest-bearing liabilities that fund those assets. The net interest margin is expressed as the percentage of net interest income to average earning assets. The net interest margin exceeds
the interest rate spread because noninterest-bearing sources of funds (net free funds), principally noninterest-bearing demand deposits and stockholders equity, also support earning assets. To compare tax-exempt asset yields to
taxable yields, the yield on tax-exempt investment securities is computed on a taxable equivalent basis. Net interest income, interest rate spread, and net interest margin are discussed on a taxable equivalent basis.
The following table reconciles interest income per the consolidated statements of income to interest income adjusted to a fully taxable equivalent basis
(dollars in thousands):
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Three months ended
September 30,
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Nine months ended
September 30,
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2016
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2015
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2016
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2015
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Interest income per consolidated statements of income
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$
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29,360
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$
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27,007
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$
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85,241
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$
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77,963
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Adjustment to fully taxable equivalent basis
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789
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781
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2,367
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2,310
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Interest income adjusted to a fully taxable equivalent basis
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30,149
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27,788
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87,608
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80,273
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Interest expense per consolidated statements of income
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3,310
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2,876
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9,273
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7,281
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Net interest income on a taxable equivalent basis
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$
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26,839
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$
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24,912
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$
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78,335
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$
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72,992
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Analysis of Net Interest Income for the Three Month Periods ended September 30, 2016 and 2015
Net interest income on a taxable equivalent basis for the three months ended September 30, 2016, was $26.8 million, an increase of $1.9 million versus the
comparable quarter last year. The increase in net interest income was due to an increase in average interest-earning assets of $224.6 million or 7% compared to the third quarter of 2015.
The net interest margin for the third quarter of 2016 was 3.23%, three basis points higher than 3.20% for the same period in 2015. This comparable period
increase was a function of a one basis point increase in interest rate spread and a higher contribution from net free funds of two basis points (due principally to increases in average noninterest-bearing deposits and other net free funds). The
higher interest rate spread was a result of a five basis point increase in the yield on interest-earning assets, partially offset by a four basis point increase in the cost of average interest-bearing liabilities.
For the third quarter of 2016, the yield on average interest-earning assets of 3.62% was five basis points higher than the third quarter of 2015. Loan yields
increased two basis points to 4.18% when comparing the third quarter of 2016 to the same period in 2015. The yield on investment securities decreased two basis points during the third quarter of 2016 to 2.44%. Overall, the interest-earning asset
rate changes decreased interest income by $3 thousand during the third quarter of 2016.
Average interest-earning assets were $3.3 billion for the third
quarter of 2016, an increase of $224.6 million or 7% from the comparable quarter last year, with average loans up $223.6 million and average securities up $1.0 million. The growth in average loans reflected increases in most loan categories.
Commercial loans, in particular, were up $134.6 million or 16% from the third quarter of 2015. Residential real estate loans increased $46.5 million or 13% and consumer indirect loans increased $48.1 million or 7% when comparing the third quarter of
2016 with the same period in 2015. Loans represented 67.8% of average interest-earning assets during the third quarter of 2016 compared to 65.5% during the third quarter of 2015. The increase in the volume of average loans resulted in a $2.3 million
increase in interest income, coupled with a $64 thousand increase due to the favorable rate variance. Securities represented 32.2% of average interest-earning assets during the third quarter of 2016 compared to 34.5% during the third quarter of
2015. The increase in the volume of average securities resulted in a $19 thousand increase in interest income, which was more than offset by a $67 thousand decrease due to the unfavorable rate variance.
The cost of average interest-bearing liabilities of 0.51% in the third quarter of 2016 was four basis points higher than the third quarter of 2015. The cost
of average interest-bearing deposits increased two basis points to 0.39% and the cost of short-term borrowings increased 22 basis points to 0.63% in the third quarter of 2016 compared to the same quarter of 2015. The cost of long-term borrowings for
the third quarter of 2016 was 6.33% compared to 6.34% for the same quarter of 2015. Overall, interest-bearing liability rate and volume increases resulted in $434 thousand of higher interest expense.
- 39 -
MANAGEMENTS DISCUSSION AND ANALYSIS
Average interest-bearing liabilities of $2.6 billion in the third quarter of 2016 were $197.6 million or 8%
higher than the third quarter of 2015. On average, interest-bearing deposits grew $211.5 million, while noninterest-bearing demand deposits (a principal component of net free funds) were up $13.3 million. The increase in average deposits was due in
part to seasonal inflows of municipal deposits, successful business development efforts in retail banking, and an increase in deposits from our Certificate of Deposit Account Registry Service (CDARS) and Insured Cash Sweep
(ICS) programs. For further discussion of the CDARS and ICS programs, refer to the Funding Activities - Deposits section of this Managements Discussion and Analysis. Overall, interest-bearing deposit rate and volume
changes resulted in $275 thousand of higher interest expense during the third quarter of 2016. Average borrowings decreased $13.9 million compared to the third quarter of 2015. Overall, short and long-term borrowing rates and volume changes resulted
in $159 thousand of higher interest expense during the third quarter of 2016.
Analysis of Net Interest Income for the Nine Months ended
September 30, 2016 and 2015
Net interest income on a taxable equivalent basis for the first nine months of 2016 was $78.3 million compared to
$73.0 million for the same period last year. The increase in net interest income was due to an increase in average interest-earning assets of $257.5 million or 9% compared to the first nine months of 2015.
The net interest margin for the first nine months of 2016 was 3.24%, four basis points lower than 3.28% for the same period last year. This comparable period
decrease was a function of a six basis point decrease in interest rate spread to 3.13% during the first nine months of 2016, partially offset by a two basis point higher contribution from net free funds. The lower interest rate spread was a net
result of a seven basis point increase in the cost of interest-bearing liabilities, partially offset by a one basis point increase in the yield on interest-earning assets.
The yield on interest-earning assets was 3.62% for the first nine months of 2016, one basis point higher than the same period last year. A decrease in the
yield on the loan portfolio during the period (down one basis point to 4.19%), was offset by an increase in the yield on the investment securities portfolio (up one basis point, to 2.47%). Overall, interest-earning asset rate changes reduced
interest income by $84 thousand during the first nine months of 2016, but that was more than offset by a favorable volume variance that increased interest income by $7.4 million, which collectively drove a $7.3 million increase in interest income.
The cost of interest-bearing liabilities of 0.49% for the first nine months of 2016 was seven basis points higher than the same period in 2015. Rates on
interest-bearing deposits were up two basis points to 0.37% for the first nine months of 2016 versus the same period in 2015. The cost of short-term borrowings for the first nine months of 2016 was 0.63% or 24 basis points higher than 0.39% for the
same period last year. The cost of long-term borrowings for the first nine months of 2016 was 6.33% compared to 6.25% for the first nine months of 2015 due to the issuance of subordinated notes in April 2015. Overall, interest-bearing liability rate
and volume increases resulted in $692 thousand and $1.3 million of higher interest expense, respectively.
Average interest-earning assets were $3.2
billion for the first nine months of 2016, an increase of $257.5 million or 9% from the comparable period last year, with average loans up $202.6 million and average securities up $54.9 million. The growth in average loans was comprised of increases
in most loan categories. Commercial loans, in particular, were up $143.7 million or 18% from the first nine months of 2015. Residential real estate loans increased $35.7 million or 10% and consumer indirect loans increased $28.0 million or 4%
when comparing the first nine months of 2016 with the same period in 2015. Loans represented 67.2% of average interest-earning assets during the first nine months of 2016 compared to 66.2% during the comparable period last year. The increase
in the volume of average loans resulted in a $6.4 million increase in interest income, which was partially offset by a $195 thousand decrease due to the unfavorable rate variance. Securities represented 32.8% of average interest-earning
assets during the first nine months of 2016 compared to 33.8% during the comparable period last year. The increase in the volume of average securities resulted in a $972 thousand increase in interest income, coupled with a $111 thousand increase due
to the favorable rate variance.
Average interest-bearing liabilities of $2.5 billion in the first nine months of 2016 were $196.9 million or 8% higher
than the first nine months of 2015. On average, interest-bearing deposits grew $201.1 million, while noninterest-bearing demand deposits were up $33.5 million and average short-term borrowings decreased $19.1 million. Average long-term
borrowings increased $14.9 million during the first nine months of 2016 due to the issuance of subordinated notes in April 2015.
- 40 -
MANAGEMENTS DISCUSSION AND ANALYSIS
The following table sets forth certain information relating to the consolidated balance sheets and reflects
the average yields earned on interest-earning assets, as well as the average rates paid on interest-bearing liabilities for the periods indicated (in thousands).
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Three months ended September 30,
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2016
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2015
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Average
Balance
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Interest
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Average
Rate
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Average
Balance
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Interest
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Average
Rate
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Interest-earning assets:
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Federal funds sold and interest-earning deposits
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$
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1
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$
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%
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$
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$
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%
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Investment securities
(1)
:
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Taxable
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773,037
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4,276
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2.21
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778,380
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4,347
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2.23
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Tax-exempt
(2)
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295,829
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2,254
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3.05
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289,435
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2,231
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3.09
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Total investment securities
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1,068,866
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6,530
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2.44
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1,067,815
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6,578
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2.46
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Loans:
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|
|
|
|
|
|
|
Commercial business
|
|
|
352,696
|
|
|
|
3,691
|
|
|
|
4.16
|
|
|
|
297,216
|
|
|
|
3,085
|
|
|
|
4.12
|
|
Commercial mortgage
|
|
|
625,003
|
|
|
|
7,261
|
|
|
|
4.62
|
|
|
|
545,875
|
|
|
|
6,210
|
|
|
|
4.51
|
|
Residential real estate loans
|
|
|
417,854
|
|
|
|
3,987
|
|
|
|
3.82
|
|
|
|
371,318
|
|
|
|
3,756
|
|
|
|
4.05
|
|
Residential real estate lines
|
|
|
123,312
|
|
|
|
1,165
|
|
|
|
3.76
|
|
|
|
127,826
|
|
|
|
1,172
|
|
|
|
3.64
|
|
Consumer indirect
|
|
|
711,948
|
|
|
|
6,987
|
|
|
|
3.90
|
|
|
|
663,884
|
|
|
|
6,436
|
|
|
|
3.85
|
|
Other consumer
|
|
|
17,548
|
|
|
|
528
|
|
|
|
11.97
|
|
|
|
18,680
|
|
|
|
551
|
|
|
|
11.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
2,248,361
|
|
|
|
23,619
|
|
|
|
4.18
|
|
|
|
2,024,799
|
|
|
|
21,210
|
|
|
|
4.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
3,317,228
|
|
|
|
30,149
|
|
|
|
3.62
|
|
|
|
3,092,614
|
|
|
|
27,788
|
|
|
|
3.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(29,314
|
)
|
|
|
|
|
|
|
|
|
|
|
(27,836
|
)
|
|
|
|
|
|
|
|
|
Other noninterest-earning assets
|
|
|
305,758
|
|
|
|
|
|
|
|
|
|
|
|
279,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,593,672
|
|
|
|
|
|
|
|
|
|
|
$
|
3,343,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand
|
|
$
|
547,545
|
|
|
$
|
206
|
|
|
|
0.15
|
%
|
|
$
|
516,448
|
|
|
$
|
199
|
|
|
|
0.15
|
%
|
Savings and money market
|
|
|
981,207
|
|
|
|
335
|
|
|
|
0.14
|
|
|
|
903,491
|
|
|
|
321
|
|
|
|
0.14
|
|
Time deposits
|
|
|
722,098
|
|
|
|
1,651
|
|
|
|
0.91
|
|
|
|
619,459
|
|
|
|
1,397
|
|
|
|
0.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
2,250,850
|
|
|
|
2,192
|
|
|
|
0.39
|
|
|
|
2,039,398
|
|
|
|
1,917
|
|
|
|
0.37
|
|
Short-term borrowings
|
|
|
315,122
|
|
|
|
500
|
|
|
|
0.63
|
|
|
|
329,050
|
|
|
|
342
|
|
|
|
0.41
|
|
Long-term borrowings
|
|
|
39,032
|
|
|
|
618
|
|
|
|
6.33
|
|
|
|
38,962
|
|
|
|
617
|
|
|
|
6.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings
|
|
|
354,154
|
|
|
|
1,118
|
|
|
|
1.26
|
|
|
|
368,012
|
|
|
|
959
|
|
|
|
1.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
2,605,004
|
|
|
|
3,310
|
|
|
|
0.51
|
|
|
|
2,407,410
|
|
|
|
2,876
|
|
|
|
0.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits
|
|
|
638,417
|
|
|
|
|
|
|
|
|
|
|
|
625,131
|
|
|
|
|
|
|
|
|
|
Other noninterest-bearing liabilities
|
|
|
24,387
|
|
|
|
|
|
|
|
|
|
|
|
22,032
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
325,864
|
|
|
|
|
|
|
|
|
|
|
|
289,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
3,593,672
|
|
|
|
|
|
|
|
|
|
|
$
|
3,343,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (tax-equivalent)
|
|
|
|
|
|
$
|
26,839
|
|
|
|
|
|
|
|
|
|
|
$
|
24,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
|
|
|
|
|
3.11
|
%
|
|
|
|
|
|
|
|
|
|
|
3.10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earning assets
|
|
$
|
712,224
|
|
|
|
|
|
|
|
|
|
|
$
|
685,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (tax-equivalent)
|
|
|
|
|
|
|
|
|
|
|
3.23
|
%
|
|
|
|
|
|
|
|
|
|
|
3.20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of average interest-earning assets to average interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
127.34
|
%
|
|
|
|
|
|
|
|
|
|
|
128.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Investment securities are shown at amortized cost.
|
(2)
|
The interest on tax-exempt securities is calculated on a tax equivalent basis assuming a Federal tax rate of 35%.
|
- 41 -
MANAGEMENTS DISCUSSION AND ANALYSIS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Rate
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Average
Rate
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and interest-earning deposits
|
|
$
|
129
|
|
|
$
|
1
|
|
|
|
0.61
|
%
|
|
$
|
50
|
|
|
$
|
|
|
|
|
0.30
|
%
|
Investment securities
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
763,796
|
|
|
|
12,800
|
|
|
|
2.23
|
|
|
|
717,330
|
|
|
|
11,879
|
|
|
|
2.21
|
|
Tax-exempt
(2)
|
|
|
293,476
|
|
|
|
6,763
|
|
|
|
3.07
|
|
|
|
285,031
|
|
|
|
6,601
|
|
|
|
3.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
1,057,272
|
|
|
|
19,563
|
|
|
|
2.47
|
|
|
|
1,002,361
|
|
|
|
18,480
|
|
|
|
2.46
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
|
|
332,985
|
|
|
|
10,396
|
|
|
|
4.17
|
|
|
|
282,307
|
|
|
|
8,731
|
|
|
|
4.13
|
|
Commercial mortgage
|
|
|
604,577
|
|
|
|
20,846
|
|
|
|
4.61
|
|
|
|
511,545
|
|
|
|
17,584
|
|
|
|
4.60
|
|
Residential real estate loans
|
|
|
397,327
|
|
|
|
11,669
|
|
|
|
3.92
|
|
|
|
361,598
|
|
|
|
11,175
|
|
|
|
4.12
|
|
Residential real estate lines
|
|
|
125,273
|
|
|
|
3,555
|
|
|
|
3.79
|
|
|
|
128,807
|
|
|
|
3,506
|
|
|
|
3.64
|
|
Consumer indirect
|
|
|
691,343
|
|
|
|
20,009
|
|
|
|
3.87
|
|
|
|
663,286
|
|
|
|
19,143
|
|
|
|
3.86
|
|
Other consumer
|
|
|
17,678
|
|
|
|
1,569
|
|
|
|
11.85
|
|
|
|
19,084
|
|
|
|
1,654
|
|
|
|
11.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
2,169,183
|
|
|
|
68,044
|
|
|
|
4.19
|
|
|
|
1,966,627
|
|
|
|
61,793
|
|
|
|
4.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
3,226,584
|
|
|
|
87,608
|
|
|
|
3.62
|
|
|
|
2,969,038
|
|
|
|
80,273
|
|
|
|
3.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(28,423
|
)
|
|
|
|
|
|
|
|
|
|
|
(27,881
|
)
|
|
|
|
|
|
|
|
|
Other noninterest-earning assets
|
|
|
304,467
|
|
|
|
|
|
|
|
|
|
|
|
300,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,502,628
|
|
|
|
|
|
|
|
|
|
|
$
|
3,241,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand
|
|
$
|
566,419
|
|
|
$
|
617
|
|
|
|
0.15
|
%
|
|
$
|
543,045
|
|
|
$
|
552
|
|
|
|
0.14
|
%
|
Savings and money market
|
|
|
988,224
|
|
|
|
989
|
|
|
|
0.13
|
|
|
|
891,039
|
|
|
|
827
|
|
|
|
0.12
|
|
Time deposits
|
|
|
693,153
|
|
|
|
4,631
|
|
|
|
0.89
|
|
|
|
612,637
|
|
|
|
3,985
|
|
|
|
0.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
2,247,796
|
|
|
|
6,237
|
|
|
|
0.37
|
|
|
|
2,046,721
|
|
|
|
5,364
|
|
|
|
0.35
|
|
Short-term borrowings
|
|
|
250,329
|
|
|
|
1,183
|
|
|
|
0.63
|
|
|
|
269,415
|
|
|
|
785
|
|
|
|
0.39
|
|
Long-term borrowings
|
|
|
39,015
|
|
|
|
1,853
|
|
|
|
6.33
|
|
|
|
24,148
|
|
|
|
1,132
|
|
|
|
6.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings
|
|
|
289,344
|
|
|
|
3,036
|
|
|
|
1.40
|
|
|
|
293,563
|
|
|
|
1,917
|
|
|
|
0.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
2,537,140
|
|
|
|
9,273
|
|
|
|
0.49
|
|
|
|
2,340,284
|
|
|
|
7,281
|
|
|
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits
|
|
|
626,018
|
|
|
|
|
|
|
|
|
|
|
|
592,564
|
|
|
|
|
|
|
|
|
|
Other noninterest-bearing liabilities
|
|
|
22,032
|
|
|
|
|
|
|
|
|
|
|
|
21,603
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
317,438
|
|
|
|
|
|
|
|
|
|
|
|
287,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
3,502,628
|
|
|
|
|
|
|
|
|
|
|
$
|
3,241,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (tax-equivalent)
|
|
|
|
|
|
$
|
78,335
|
|
|
|
|
|
|
|
|
|
|
$
|
72,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
|
|
|
|
|
3.13
|
%
|
|
|
|
|
|
|
|
|
|
|
3.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earning assets
|
|
$
|
689,444
|
|
|
|
|
|
|
|
|
|
|
$
|
628,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (tax-equivalent)
|
|
|
|
|
|
|
|
|
|
|
3.24
|
%
|
|
|
|
|
|
|
|
|
|
|
3.28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of average interest-earning assets to average interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
127.17
|
%
|
|
|
|
|
|
|
|
|
|
|
126.87
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Investment securities are shown at amortized cost.
|
(2)
|
The interest on tax-exempt securities is calculated on a tax equivalent basis assuming a Federal tax rate of 35%.
|
- 42 -
MANAGEMENTS DISCUSSION AND ANALYSIS
The following table presents, on a tax equivalent basis, the relative contribution of changes in volumes and
changes in rates to changes in net interest income for the periods indicated. The change in interest income not solely due to changes in volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30, 2016 vs. 2015
|
|
|
September 30, 2016 vs. 2015
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and interest-earning deposits
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
1
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
(30
|
)
|
|
|
(41
|
)
|
|
|
(71
|
)
|
|
|
777
|
|
|
|
144
|
|
|
|
921
|
|
Tax-exempt
|
|
|
49
|
|
|
|
(26
|
)
|
|
|
23
|
|
|
|
195
|
|
|
|
(33
|
)
|
|
|
162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
19
|
|
|
|
(67
|
)
|
|
|
(48
|
)
|
|
|
972
|
|
|
|
111
|
|
|
|
1,083
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
|
|
581
|
|
|
|
25
|
|
|
|
606
|
|
|
|
1,581
|
|
|
|
84
|
|
|
|
1,665
|
|
Commercial mortgage
|
|
|
917
|
|
|
|
134
|
|
|
|
1,051
|
|
|
|
3,208
|
|
|
|
54
|
|
|
|
3,262
|
|
Residential real estate loans
|
|
|
452
|
|
|
|
(221
|
)
|
|
|
231
|
|
|
|
1,067
|
|
|
|
(573
|
)
|
|
|
494
|
|
Residential real estate lines
|
|
|
(42
|
)
|
|
|
35
|
|
|
|
(7
|
)
|
|
|
(98
|
)
|
|
|
147
|
|
|
|
49
|
|
Consumer indirect
|
|
|
471
|
|
|
|
80
|
|
|
|
551
|
|
|
|
812
|
|
|
|
54
|
|
|
|
866
|
|
Other consumer
|
|
|
(34
|
)
|
|
|
11
|
|
|
|
(23
|
)
|
|
|
(124
|
)
|
|
|
39
|
|
|
|
(85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
2,345
|
|
|
|
64
|
|
|
|
2,409
|
|
|
|
6,446
|
|
|
|
(195
|
)
|
|
|
6,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
2,364
|
|
|
|
(3
|
)
|
|
|
2,361
|
|
|
|
7,419
|
|
|
|
(84
|
)
|
|
|
7,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand
|
|
|
12
|
|
|
|
(5
|
)
|
|
|
7
|
|
|
|
24
|
|
|
|
41
|
|
|
|
65
|
|
Savings and money market
|
|
|
27
|
|
|
|
(13
|
)
|
|
|
14
|
|
|
|
94
|
|
|
|
68
|
|
|
|
162
|
|
Time deposits
|
|
|
235
|
|
|
|
19
|
|
|
|
254
|
|
|
|
536
|
|
|
|
110
|
|
|
|
646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
274
|
|
|
|
1
|
|
|
|
275
|
|
|
|
654
|
|
|
|
219
|
|
|
|
873
|
|
Short-term borrowings
|
|
|
(15
|
)
|
|
|
173
|
|
|
|
158
|
|
|
|
(60
|
)
|
|
|
458
|
|
|
|
398
|
|
Long-term borrowings
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
706
|
|
|
|
15
|
|
|
|
721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings
|
|
|
(14
|
)
|
|
|
173
|
|
|
|
159
|
|
|
|
646
|
|
|
|
473
|
|
|
|
1,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
260
|
|
|
|
174
|
|
|
|
434
|
|
|
|
1,300
|
|
|
|
692
|
|
|
|
1,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
2,104
|
|
|
$
|
(177
|
)
|
|
$
|
1,927
|
|
|
$
|
6,119
|
|
|
$
|
(776
|
)
|
|
$
|
5,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Loan Losses
The provision for loan losses is based upon credit loss experience, growth or contraction of specific segments of the loan portfolio, and the estimate of
losses inherent in the current loan portfolio. The provision for loan losses for the three and nine month periods ended September 30, 2016 were $2.0 million and $6.3 million, respectively, compared to $754 thousand and $4.8 million for the
corresponding periods in 2015.
See the Allowance for Loan Losses and Non-Performing Assets and Potential Problem Loans sections
of this Managements Discussion and Analysis for further discussion.
- 43 -
MANAGEMENTS DISCUSSION AND ANALYSIS
Noninterest Income
The following table details the major categories of noninterest income for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Service charges on deposits
|
|
$
|
1,913
|
|
|
$
|
2,037
|
|
|
$
|
5,392
|
|
|
$
|
5,880
|
|
Insurance income
|
|
|
1,407
|
|
|
|
1,265
|
|
|
|
4,262
|
|
|
|
3,930
|
|
ATM and debit card
|
|
|
1,441
|
|
|
|
1,297
|
|
|
|
4,187
|
|
|
|
3,773
|
|
Investment advisory
|
|
|
1,326
|
|
|
|
523
|
|
|
|
3,934
|
|
|
|
1,551
|
|
Company owned life insurance
|
|
|
486
|
|
|
|
488
|
|
|
|
2,340
|
|
|
|
1,448
|
|
Investments in limited partnerships
|
|
|
161
|
|
|
|
336
|
|
|
|
253
|
|
|
|
865
|
|
Loan servicing
|
|
|
104
|
|
|
|
153
|
|
|
|
332
|
|
|
|
416
|
|
Net gain on sale of loans held for sale
|
|
|
46
|
|
|
|
53
|
|
|
|
202
|
|
|
|
161
|
|
Net gain on investment securities
|
|
|
426
|
|
|
|
286
|
|
|
|
2,426
|
|
|
|
1,348
|
|
Net gain on other assets
|
|
|
199
|
|
|
|
|
|
|
|
285
|
|
|
|
20
|
|
Amortization of tax credit investment
|
|
|
|
|
|
|
(390
|
)
|
|
|
|
|
|
|
(390
|
)
|
Other
|
|
|
1,030
|
|
|
|
957
|
|
|
|
3,059
|
|
|
|
2,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
$
|
8,539
|
|
|
$
|
7,005
|
|
|
$
|
26,672
|
|
|
$
|
21,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts for the nine months ended September 30, 2016 decreased $488 thousand, or 8%, compared
to the same period in 2015. The decrease was primarily due to a decrease in the amount of checking account overdraft activity.
Insurance income increased
$332 thousand, or 8%, to $4.3 million for the first nine months of 2016 compared to $3.9 million for the first nine months of 2015, reflecting successful business development efforts.
Investment advisory income increased to $3.9 million in the first nine months of 2016 compared to $1.6 million in the first nine months of 2015, reflecting
the contribution from Courier Capital which was acquired early in January of 2016 as part of our strategy to diversify our business lines and increase noninterest income through additional fee-based services.
Income from company owned life insurance increased to $2.3 million in the first nine months of 2016 compared to $1.4 million in the same period in 2015, as
the first quarter of 2016 included $911 thousand of death benefit proceeds.
We have investments in limited partnerships, primarily small business
investment companies, and account for these investments under the equity method. Income from investments in limited partnerships was $253 thousand and $865 thousand for the nine months ended September 30, 2016 and 2015, respectively. The income
from these equity method investments fluctuates based on the performance of the underlying investments.
During the first nine months of 2016, we
recognized net gains on investment securities totaling $2.4 million from the sale of 24 agency securities and nine mortgage backed securities. The amount and timing of net gains on investment securities is dependent on a number of factors, including
our prudent efforts to realize gains while managing duration, premium and credit risk.
During the third quarter of 2015, the Company recognized $390
thousand of amortization of a historic tax investment in a community-based project. The amortization was included in noninterest income, recorded as contra-income, with an offsetting tax benefit that reduced income tax expense.
- 44 -
MANAGEMENTS DISCUSSION AND ANALYSIS
Noninterest Expense
The following table details the major categories of noninterest expense for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Salaries and employee benefits
|
|
$
|
11,325
|
|
|
$
|
10,278
|
|
|
$
|
33,757
|
|
|
$
|
31,107
|
|
Occupancy and equipment
|
|
|
3,617
|
|
|
|
3,417
|
|
|
|
10,906
|
|
|
|
10,491
|
|
Professional services
|
|
|
956
|
|
|
|
1,064
|
|
|
|
5,236
|
|
|
|
2,898
|
|
Computer and data processing
|
|
|
832
|
|
|
|
779
|
|
|
|
2,549
|
|
|
|
2,291
|
|
Supplies and postage
|
|
|
490
|
|
|
|
540
|
|
|
|
1,548
|
|
|
|
1,611
|
|
FDIC assessments
|
|
|
406
|
|
|
|
444
|
|
|
|
1,283
|
|
|
|
1,277
|
|
Advertising and promotions
|
|
|
214
|
|
|
|
312
|
|
|
|
938
|
|
|
|
789
|
|
Other
|
|
|
2,778
|
|
|
|
2,484
|
|
|
|
7,739
|
|
|
|
7,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
$
|
20,618
|
|
|
$
|
19,318
|
|
|
$
|
63,956
|
|
|
$
|
57,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits expense increased by $2.7 million or 9% in the first nine months of 2016 compared to the same
period in 2015, reflecting the addition of Courier Capital as well as additional personnel to support organic growth as part of our expansion initiatives.
Occupancy and equipment expense increased by $415 thousand to $10.9 million when comparing the first nine months of 2016 to the same period in 2015. The
incremental expenses reflect the addition of Courier Capital and our expansion initiatives, including the opening of financial solution centers in the Rochester market.
Professional services increased $2.3 million when comparing the first nine months of 2016 to the same period in 2015. The current year includes approximately
$2.1 million of professional services associated with the proxy contest.
Computer and data processing expense increased $258 thousand, or 11%, when
comparing the first nine months of 2016 to the first nine months of 2015. Primarily due to information technology projects to maintain and improve our infrastructure.
Advertising and promotions expense was $938 thousand for the nine month period ended September 30, 2016 compared to $789 thousand for the same time
period in 2015. The increase was due to advertising campaigns implemented during the current year to build recognition of our brand in the Rochester and Buffalo markets.
Other noninterest expense was $7.7 million in the first nine months of 2016 compared to $7.1 million in the first nine months of 2015. Other noninterest
expense for the first nine months ended September 30, 2016 included an increase of $291 thousand in intangible asset amortization associated with the Courier Capital acquisition.
Our efficiency ratio for the nine months ended September 30, 2016 was 61.94% compared with 60.56% for the first nine months of 2015. The increase in the
efficiency ratio is primarily a result of the higher level of noninterest expense associated with the aforementioned proxy contest. The efficiency ratio is calculated by dividing total noninterest expense, excluding other real estate expense and
amortization of intangible assets, by net revenue, defined as the sum of tax-equivalent net interest income and noninterest income before net gains on investment securities and proceeds from company owned life insurance. An increase in the
efficiency ratio indicates that more resources are being utilized to generate the same volume of income, while a decrease indicates a more efficient allocation of resources.
Income Taxes
For the nine months ended
September 30, 2016 and 2015, we recorded income tax expense of $9.2 million and $8.4 million, respectively. The effective tax rates for the year-to-date periods in 2016 and 2015 were 28.3% and 27.9%, respectively. Effective tax rates are
impacted by items of income and expense that are not subject to federal or state taxation. Our effective tax rates reflect the impact of these items, which include, but are not limited to, interest income from tax-exempt securities and earnings on
company owned life insurance. In addition, our effective tax rate reflects the New York State tax savings generated by our real estate investment trust.
In March 2014, the New York legislature approved changes in the state tax law that will be phased-in over two years, beginning in 2015. The primary changes
that impact us include the repeal of the Article 32 franchise tax on banking corporations (Article 32) for 2015, expanded nexus standards for 2015 and a reduction in the corporate tax rate for 2016. The repeal of Article 32 and the
expanded nexus standards lowered our taxable income apportioned to New York to approximately 85% in both 2016 and 2015. In addition, our New York state income tax rate was reduced from 7.1% to 6.5% during the first nine months of 2016.
- 45 -
MANAGEMENTS DISCUSSION AND ANALYSIS
ANALYSIS OF FINANCIAL CONDITION
INVESTING ACTIVITIES
Investment Securities
The following table sets forth selected information regarding the composition of our investment securities portfolio as of the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities Portfolio Composition
|
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
Securities available for sale (AFS):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies and government-sponsored enterprise securities
|
|
$
|
175,134
|
|
|
$
|
180,637
|
|
|
$
|
260,748
|
|
|
$
|
260,863
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
|
|
368,929
|
|
|
|
377,847
|
|
|
|
282,873
|
|
|
|
282,505
|
|
Non-Agency mortgage-backed securities
|
|
|
|
|
|
|
816
|
|
|
|
|
|
|
|
809
|
|
Asset-backed securities
|
|
|
|
|
|
|
195
|
|
|
|
|
|
|
|
218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AFS securities
|
|
|
544,063
|
|
|
|
559,495
|
|
|
|
543,621
|
|
|
|
544,395
|
|
Securities held to maturity (HTM):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions
|
|
|
300,922
|
|
|
|
309,013
|
|
|
|
294,423
|
|
|
|
300,981
|
|
Mortgage-backed securities
|
|
|
227,786
|
|
|
|
229,617
|
|
|
|
191,294
|
|
|
|
189,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total HTM securities
|
|
|
528,708
|
|
|
|
538,630
|
|
|
|
485,717
|
|
|
|
490,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
$
|
1,072,771
|
|
|
$
|
1,098,125
|
|
|
$
|
1,029,338
|
|
|
$
|
1,034,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The AFS investment securities portfolio increased $15.1 million or 3%, from $544.4 million at December 31, 2015 to $559.5
million at September 30, 2016. The AFS portfolio had net unrealized gains totaling $15.4 million and $774 thousand at September 30, 2016 and December 31, 2015, respectively. The unrealized gains in the AFS portfolio were predominantly
caused by changes in market interest rates. The fair value of most of the investment securities in the AFS portfolio fluctuates as market interest rates change.
Impairment Assessment
We review investment securities on
an ongoing basis for the presence of other than temporary impairment (OTTI) and perform formal reviews quarterly. Declines in the fair value of HTM and AFS below their cost that are deemed to be other than temporary are reflected in
earnings as realized losses to the extent the impairment is related to credit losses or the security is intended to be sold or will be required to be sold. The amount of the impairment related to non-credit related factors is recognized in other
comprehensive income. Evaluating whether the impairment of a debt security is other than temporary involves assessing the intent to sell the debt security or the likelihood of being required to sell the security before the recovery of its amortized
cost basis. In determining whether the OTTI includes a credit loss, we use our best estimate of the present value of cash flows expected to be collected from the debt security considering factors such as: the length of time and the extent to which
the fair value has been less than the amortized cost basis, adverse conditions specifically related to the security, an industry, or a geographic area, the historical and implied volatility of the fair value of the security, the payment structure of
the debt security and the likelihood of the issuer being able to make payments that increase in the future, failure of the issuer of the security to make scheduled interest or principal payments, any changes to the rating of the security by a rating
agency, and recoveries or additional declines in fair value subsequent to the balance sheet date. The assessment of whether OTTI exists involves a high degree of subjectivity and judgment and is based on the information available to management at a
point in time. There were no securities deemed to be other-than-temporarily impaired during the nine month periods ended September 30, 2016 and 2015.
- 46 -
MANAGEMENTS DISCUSSION AND ANALYSIS
LENDING ACTIVITIES
The following table sets forth selected information regarding the composition of our loan portfolio as of the dates indicated (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Portfolio Composition
|
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
Amount
|
|
|
% of
Total
|
|
|
Amount
|
|
|
% of
Total
|
|
Commercial business
|
|
$
|
350,588
|
|
|
|
15.3
|
%
|
|
$
|
313,758
|
|
|
|
15.0
|
%
|
Commercial mortgage
|
|
|
636,338
|
|
|
|
27.9
|
|
|
|
566,101
|
|
|
|
27.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
986,926
|
|
|
|
43.2
|
|
|
|
879,859
|
|
|
|
42.2
|
|
Residential real estate loans
|
|
|
425,882
|
|
|
|
18.7
|
|
|
|
381,074
|
|
|
|
18.3
|
|
Residential real estate lines
|
|
|
123,663
|
|
|
|
5.4
|
|
|
|
127,347
|
|
|
|
6.1
|
|
Consumer indirect
|
|
|
729,644
|
|
|
|
31.9
|
|
|
|
676,940
|
|
|
|
32.5
|
|
Other consumer
|
|
|
17,879
|
|
|
|
0.8
|
|
|
|
18,542
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer
|
|
|
1,297,068
|
|
|
|
56.8
|
|
|
|
1,203,903
|
|
|
|
57.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
2,283,994
|
|
|
|
100.0
|
%
|
|
|
2,083,762
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Allowance for loan losses
|
|
|
29,350
|
|
|
|
|
|
|
|
27,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net
|
|
$
|
2,254,644
|
|
|
|
|
|
|
$
|
2,056,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans increased $200.2 million to $2.3 billion at September 30, 2016 from $2.1 billion at December 31, 2015.
The increase in loans was attributable to organic growth, primarily in the commercial, residential real estate and consumer indirect loan portfolios.
Commercial loans increased $107.1 million and represented 43.2% of total loans as of September 30, 2016, a result of our continued commercial business
development efforts.
Residential real estate loans increased $44.8 million and represented 18.7% of total loans as of September 30, 2016. The growth
in 2016 reflects the results of a successful spring loan campaign.
The consumer indirect portfolio totaled $729.6 million and represented 31.9% of total
loans as of September 30, 2016. During the first nine months of 2016, we originated $265.2 million in indirect auto loans with a mix of approximately 43% new auto and 57% used auto. During the first nine months of 2015, we originated $218.1
million in indirect auto loans with a mix of approximately 40% new auto and 60% used auto. Our origination volumes and mix of new and used vehicles financed fluctuate depending on general market conditions.
Loans Held for Sale and Loan Servicing Rights
Loans held
for sale (not included in the loan portfolio composition table) were entirely comprised of residential real estate mortgages and totaled $844 thousand and $1.4 million as of September 30, 2016 and December 31, 2015, respectively.
We sell certain qualifying newly originated or refinanced residential real estate mortgages on the secondary market. Residential real estate mortgages
serviced for others, which are not included in the consolidated statements of financial condition, amounted to $179.3 million and $196.0 million as of September 30, 2016 and December 31, 2015, respectively.
- 47 -
MANAGEMENTS DISCUSSION AND ANALYSIS
Allowance for Loan Losses
The following table sets forth an analysis of the activity in the allowance for loan losses for the periods indicated (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Loss Analysis
|
|
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Balance as of beginning of period
|
|
$
|
28,525
|
|
|
$
|
27,500
|
|
|
$
|
27,085
|
|
|
$
|
27,637
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
|
|
44
|
|
|
|
106
|
|
|
|
688
|
|
|
|
1,260
|
|
Commercial mortgage
|
|
|
156
|
|
|
|
56
|
|
|
|
168
|
|
|
|
866
|
|
Residential real estate loans
|
|
|
78
|
|
|
|
80
|
|
|
|
258
|
|
|
|
277
|
|
Residential real estate lines
|
|
|
8
|
|
|
|
55
|
|
|
|
59
|
|
|
|
173
|
|
Consumer indirect
|
|
|
2,056
|
|
|
|
2,380
|
|
|
|
6,452
|
|
|
|
6,643
|
|
Other consumer
|
|
|
158
|
|
|
|
239
|
|
|
|
434
|
|
|
|
652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
|
2,500
|
|
|
|
2,916
|
|
|
|
8,059
|
|
|
|
9,871
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business
|
|
|
75
|
|
|
|
38
|
|
|
|
244
|
|
|
|
172
|
|
Commercial mortgage
|
|
|
29
|
|
|
|
44
|
|
|
|
40
|
|
|
|
140
|
|
Residential real estate loans
|
|
|
17
|
|
|
|
43
|
|
|
|
142
|
|
|
|
104
|
|
Residential real estate lines
|
|
|
4
|
|
|
|
25
|
|
|
|
11
|
|
|
|
29
|
|
Consumer indirect
|
|
|
1,160
|
|
|
|
905
|
|
|
|
3,324
|
|
|
|
3,206
|
|
Other consumer
|
|
|
79
|
|
|
|
62
|
|
|
|
282
|
|
|
|
255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
1,364
|
|
|
|
1,117
|
|
|
|
4,043
|
|
|
|
3,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
1,136
|
|
|
|
1,799
|
|
|
|
4,016
|
|
|
|
5,965
|
|
Provision for loan losses
|
|
|
1,961
|
|
|
|
754
|
|
|
|
6,281
|
|
|
|
4,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
29,350
|
|
|
$
|
26,455
|
|
|
$
|
29,350
|
|
|
$
|
26,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan charge-offs to average loans (annualized)
|
|
|
0.20
|
%
|
|
|
0.35
|
%
|
|
|
0.25
|
%
|
|
|
0.41
|
%
|
Allowance for loan losses to total loans
|
|
|
1.29
|
%
|
|
|
1.30
|
%
|
|
|
1.29
|
%
|
|
|
1.30
|
%
|
Allowance for loan losses to non-performing loans
|
|
|
481
|
%
|
|
|
311
|
%
|
|
|
481
|
%
|
|
|
311
|
%
|
The allowance for loan losses represents the estimated amount of probable credit losses inherent in our loan portfolio. We
perform periodic, systematic reviews of the loan portfolio to estimate probable losses in the respective loan portfolios. In addition, we regularly evaluate prevailing economic and business conditions, industry concentrations, changes in the size
and characteristics of the portfolio and other pertinent factors. The process we use to determine the overall allowance for loan losses is based on this analysis. Based on this analysis, we believe the allowance for loan losses is adequate as of
September 30, 2016.
Assessing the adequacy of the allowance for loan losses involves substantial uncertainties and is based upon managements
evaluation of the amounts required to meet estimated charge-offs in the loan portfolio after weighing a variety of factors, including the risk-profile of our loan products and customers.
The adequacy of the allowance for loan losses is subject to ongoing management review. While management evaluates currently available information in
establishing the allowance for loan losses, future adjustments to the allowance may be necessary if conditions differ substantially from the assumptions used in making the evaluations. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review a financial institutions allowance for loan losses. Such agencies may require the financial institution to increase the allowance based on their judgments about information available to them at
the time of their examination.
Net charge-offs of $1.1 million in the third quarter of 2016 represented 0.20% of average loans on an annualized basis
compared to $1.8 million or 0.35% in the third quarter of 2015. For the nine months ended September 30, 2016, net charge-offs of $4.0 million represented 0.25% of average loans on an annualized basis, compared to $6.0 million or 0.41% of
average loans for the same period in 2015. The first quarter of 2015 included charge-offs for two commercial loan relationships totaling $1.7 million. The allowance for loan losses was $29.4 million at September 30, 2016, compared with $27.1
million at December 31, 2015. The ratio of the allowance for loan losses to total loans was 1.29% at September 30, 2016 and 1.30% at December 31, 2015. The ratio of allowance for loan losses to non-performing loans was 481% at
September 30, 2016, compared with 321% at December 31, 2015.
- 48 -
MANAGEMENTS DISCUSSION AND ANALYSIS
Non-Performing Assets and Potential Problem Loans
The table below sets forth the amounts and categories of our non-performing assets at the dates indicated (in thousands).
|
|
|
|
|
|
|
|
|
|
|
Non-Performing Assets
|
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
Commercial business
|
|
$
|
2,157
|
|
|
$
|
3,922
|
|
Commercial mortgage
|
|
|
1,345
|
|
|
|
947
|
|
Residential real estate loans
|
|
|
1,239
|
|
|
|
1,848
|
|
Residential real estate lines
|
|
|
274
|
|
|
|
235
|
|
Consumer indirect
|
|
|
1,077
|
|
|
|
1,467
|
|
Other consumer
|
|
|
1
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
Total nonaccrual loans
|
|
|
6,093
|
|
|
|
8,432
|
|
Accruing loans or consumer overdrafts 90 days or more delinquent
|
|
|
8
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
6,101
|
|
|
|
8,440
|
|
Foreclosed assets
|
|
|
294
|
|
|
|
163
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
6,395
|
|
|
$
|
8,603
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans
|
|
|
0.27
|
%
|
|
|
0.41
|
%
|
Non-performing assets to total assets
|
|
|
0.17
|
%
|
|
|
0.25
|
%
|
Changes in the level of nonaccrual loans typically represent increases for loans that reach a specified past due status,
offset by reductions for loans that are charged-off, paid down, sold, transferred to foreclosed real estate, or are no longer classified as nonaccrual because they have returned to accrual status. Activity in nonaccrual loans for the three and nine
months ended September 30, 2016 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months
|
|
|
Nine months
|
|
|
|
ended
|
|
|
ended
|
|
|
|
September 30, 2016
|
|
|
September 30, 2016
|
|
Nonaccrual loans, beginning of period
|
|
$
|
6,545
|
|
|
$
|
8,432
|
|
Additions
|
|
|
3,547
|
|
|
|
12,903
|
|
Payments
|
|
|
(1,247
|
)
|
|
|
(6,031
|
)
|
Charge-offs
|
|
|
(2,401
|
)
|
|
|
(7,824
|
)
|
Returned to accruing status
|
|
|
(282
|
)
|
|
|
(944
|
)
|
Transferred to other real estate or repossessed assets
|
|
|
(69
|
)
|
|
|
(443
|
)
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans, end of period
|
|
$
|
6,093
|
|
|
$
|
6,093
|
|
|
|
|
|
|
|
|
|
|
Non-performing assets include non-performing loans and foreclosed assets. Non-performing assets at September 30, 2016
were $6.4 million, a decrease of $2.2 million from $8.6 million at December 31, 2015. The primary component of non-performing assets is non-performing loans, which were $6.1 million or 0.27% of total loans at September 30, 2016, compared
with $8.4 million or 0.41% of total loans at December 31, 2015.
Approximately $2.4 million, or 40%, of the $6.1 million in non-performing loans as
of September 30, 2016 were current with respect to payment of principal and interest, but were classified as non-accruing because repayment in full of principal and/or interest was uncertain. Included in nonaccrual loans are troubled debt
restructurings (TDRs) of $1.9 million and $2.4 million at September 30, 2016 and December 31, 2015, respectively. We had no TDRs that were accruing interest as of September 30, 2016 or December 31, 2015.
Foreclosed assets consist of real property formerly pledged as collateral for loans, which we have acquired through foreclosure proceedings or acceptance of a
deed in lieu of foreclosure. Foreclosed asset holdings represented five properties totaling $294 thousand at September 30, 2016 and four properties totaling $163 thousand at December 31, 2015.
Potential problem loans are loans that are currently performing, but information known about possible credit problems of the borrowers causes us to have
concern as to the ability of such borrowers to comply with the present loan payment terms and may result in disclosure of such loans as nonperforming at some time in the future. These loans remain in a performing status due to a variety of factors,
including payment history, the value of collateral supporting the credits, and/or personal or government guarantees. We consider loans classified as substandard, which continue to accrue interest, to be potential problem loans. We identified $12.2
million and $12.1 million in loans that continued to accrue interest which were classified as substandard as of September 30, 2016 and December 31, 2015, respectively.
- 49 -
MANAGEMENTS DISCUSSION AND ANALYSIS
FUNDING ACTIVITIES
Deposits
The following table summarizes the composition
of our deposits at the dates indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit Composition
|
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
Amount
|
|
|
% of
Total
|
|
|
Amount
|
|
|
% of
Total
|
|
Noninterest-bearing demand
|
|
$
|
657,624
|
|
|
|
21.5
|
%
|
|
$
|
641,972
|
|
|
|
23.5
|
%
|
Interest-bearing demand
|
|
|
629,413
|
|
|
|
20.5
|
|
|
|
523,366
|
|
|
|
19.2
|
|
Savings and money market
|
|
|
1,052,224
|
|
|
|
34.4
|
|
|
|
928,175
|
|
|
|
34.0
|
|
Time deposits < $250,000
|
|
|
606,129
|
|
|
|
19.7
|
|
|
|
545,044
|
|
|
|
19.9
|
|
Time deposits of $250,000 or more
|
|
|
117,967
|
|
|
|
3.9
|
|
|
|
91,974
|
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
3,063,357
|
|
|
|
100.0
|
%
|
|
$
|
2,730,531
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We offer a variety of deposit products designed to attract and retain customers, with the primary focus on building and
expanding long-term relationships. At September 30, 2016, total deposits were $3.1 billion, representing an increase of $332.8 million for the year. Time deposits were approximately 24% of total deposits at September 30, 2016 and 23% at
December 31, 2015.
Nonpublic deposits, the largest component of our funding sources, totaled $1.9 billion and $1.8 billion at September 30,
2016 and December 31, 2015, respectively, and represented 61% and 66% of total deposits as of the end of each period, respectively. We have managed this segment of funding through a strategy of competitive pricing that minimizes the number of
customer relationships that have only a single service high cost deposit account.
As an additional source of funding, we offer a variety of public
(municipal) deposit products to various public entities, including the towns, villages, counties and school districts within our market. Public deposits generally range from 20% to 30% of our total deposits. There is a high degree of seasonality in
this component of funding, because the level of deposits varies with the seasonal cash flows for these public customers. We maintain the necessary levels of short-term liquid assets to accommodate the seasonality associated with public deposits.
Total public deposits were $892.0 million and $675.7 million at September 30, 2016 and December 31, 2015, respectively, and represented 29% and 25% of total deposits as of the end of each period, respectively. The increase in public
deposits during 2016 was due to a combination of seasonality and successful business development efforts.
We had no traditional brokered deposits at
September 30, 2016 or December 31, 2015; however, we do participate in the CDARS and ICS programs, which enable depositors to receive FDIC insurance coverage for deposits otherwise exceeding the maximum insurable amount. CDARS and ICS
deposits are considered brokered deposits for regulatory reporting purposes. Through these programs, deposits in excess of the maximum insurable amount are placed with multiple participating financial institutions. Reciprocal CDARS deposits and ICS
deposits totaled $160.2 million and $145.8 million, respectively, at September 30, 2016, compared to $92.9 million and $146.6, respectively, at December 31, 2015.
Borrowings
The Company classifies borrowings as
short-term or long-term in accordance with the original terms of the applicable agreement. Outstanding borrowings consisted of the following as of the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Short-term borrowings - Short-term FHLB borrowings
|
|
$
|
230,200
|
|
|
$
|
293,100
|
|
Long-term borrowings - Subordinated notes
|
|
|
39,043
|
|
|
|
38,990
|
|
|
|
|
|
|
|
|
|
|
Total borrowings
|
|
$
|
269,243
|
|
|
$
|
332,090
|
|
|
|
|
|
|
|
|
|
|
Short-term Borrowings
We have credit capacity with the FHLB and can borrow through facilities that include amortizing and term advances or repurchase agreements. We had
approximately $125 million of immediate credit capacity with the FHLB as of September 30, 2016. We had approximately $523 million in secured borrowing capacity at the Federal Reserve Bank (FRB) discount window, none of which was
outstanding at September 30, 2016. The FHLB and FRB credit capacity are collateralized by securities from our investment portfolio and certain qualifying loans. We had approximately $140 million of credit available under unsecured federal funds
purchased lines with various banks as of September 30, 2016. Additionally, we had approximately $138 million of unencumbered liquid securities available for pledging.
- 50 -
MANAGEMENTS DISCUSSION AND ANALYSIS
Federal funds purchased are short-term borrowings that typically mature within one to ninety days. Short-term
repurchase agreements are secured overnight borrowings with customers. Short-term FHLB borrowings have original maturities of up to one year and include overnight borrowings which we typically utilize to address short-term funding needs as they
arise. Short-term FHLB borrowings at September 30, 2016 consisted of $70.2 million in overnight borrowings and $160.0 million in short-term advances. Short-term FHLB borrowings at December 31, 2015 consisted of $116.8 million in overnight
borrowings and $176.3 million in short-term advances.
The Parent has a revolving line of credit with a commercial bank allowing borrowings up to $20.0
million in total as an additional source of working capital. At September 30, 2016, no amounts have been drawn on the line of credit.
Long-term Borrowings
On April 15, 2015, we
issued $40.0 million of Subordinated Notes in a registered public offering. The Subordinated Notes bear interest at a fixed rate of 6.0% per year, payable semi-annually, for the first 10 years. From April 15, 2025 to the April 15,
2030 maturity date, the interest rate will reset quarterly to an annual interest rate equal to the then current three-month London Interbank Offered Rate (LIBOR) plus 3.944%, payable quarterly. The Subordinated Notes are redeemable by us
at any quarterly interest payment date beginning on April 15, 2025 to maturity at par, plus accrued and unpaid interest. Proceeds, net of debt issuance costs of $1.1 million, were $38.9 million. The Subordinated Notes qualify as Tier 2 capital
for regulatory purposes.
LIQUIDITY AND CAPITAL MANAGEMENT
Liquidity
The objective of maintaining adequate liquidity
is to assure that we meet our financial obligations. These obligations include the withdrawal of deposits on demand or at their contractual maturity, the repayment of matured borrowings, the ability to fund new and existing loan commitments and the
ability to take advantage of new business opportunities. We achieve liquidity by maintaining a strong base of core customer funds, maturing short-term assets, our ability to sell or pledge securities, lines-of-credit, and access to the financial and
capital markets.
We manage liquidity for the Bank by the monitoring of anticipated changes in loans, the investment portfolio, core deposits and
wholesale funds. The strength of the Banks liquidity position is a result of its base of core customer deposits. These core deposits are supplemented by wholesale funding sources that include credit lines with the other banking institutions,
the FHLB and the FRB. The primary source of our non-deposit borrowings is FHLB advances, of which we had $230.2 million outstanding at September 30, 2016. In addition to this amount, we have additional collateralized wholesale borrowing
capacity of approximately $788 million from various funding sources which include the FHLB, Federal Reserve Bank, and commercial banks that we can use to fund lending activities, liquidity needs, and/or to adjust and manage our asset and liability
position.
The Parents funding requirements consist primarily of dividends to shareholders, debt service, income taxes, operating expenses, funding
of nonbank subsidiaries, repurchases of our stock, and acquisitions. The Parent obtains funding to meet obligations from dividends received from the Bank, net taxes collected from subsidiaries included in the federal consolidated tax return, and the
issuance of debt and equity securities. In addition, the Parent maintains a revolving line of credit with a commercial bank for an aggregate amount of up to $20.0 million, all of which was available at September 30, 2016. The line of credit has
a one year term and matures in May 2017. Funds drawn would be used for general corporate purposes and backup liquidity.
Cash and cash equivalents were
$110.7 million as of September 30, 2016, up $50.6 million from $60.1 million as of December 31, 2015. Net cash provided by operating activities totaled $37.4 million and the principal source of operating activity cash flow was net income
adjusted for noncash income and expense items. Net cash used in investing activities totaled $247.9 million, which included outflows of $204.7 million for net loan originations and $41.1 million from net investment securities transactions. Net cash
provided by financing activities of $261.1 million was attributed to a $332.8 million increase in deposits, partially offset by a $62.9 million decrease in short-term borrowings and $9.7 million in dividend payments.
Capital Management
We actively manage capital,
commensurate with our risk profile, to enhance shareholder value. We also seek to maintain capital levels for the Company, and/or the Bank specifically, at amounts in excess of the regulatory well-capitalized thresholds. Periodically, we
may respond to market conditions by implementing changes to our overall balance sheet positioning to manage our capital position.
Banks and financial
holding companies are subject to various regulatory capital requirements administered by state and federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions
by regulators that, if undertaken, could have a direct material impact on our consolidated financial statements. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.
- 51 -
MANAGEMENTS DISCUSSION AND ANALYSIS
Shareholders equity was $326.3 million at September 30, 2016, an increase of $32.5 million from
$293.8 million at December 31, 2015. Net income for the year and stock issued for the acquisition of Courier Capital increased shareholders equity by $23.2 million and $8.1 million, respectively, which were partially offset by common and
preferred stock dividends declared of $9.8 million. Accumulated other comprehensive loss included in shareholders equity decreased $9.4 million during the first nine months of 2016 due primarily to higher net unrealized gains on securities
available for sale.
The FRB and FDIC have adopted a system using risk-based capital guidelines to evaluate the capital adequacy of banks and bank holding
companies. The final rules implementing the Basel Committee on Banking Supervisions (BCBS) capital guidelines for U.S. banks became effective for the Company on January 1, 2015, with full compliance with all of the final
requirements phased in over a multi-year schedule, to be fully phased-in by January 1, 2019. As of September 30, 2016, the Companys capital levels remained characterized as well-capitalized under the new rules.
The following table reflects the ratios and their components (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Common shareholders equity
|
|
$
|
308,931
|
|
|
$
|
276,504
|
|
Less: Goodwill and other intangible assets, net of deferred tax liabilities
|
|
|
68,954
|
|
|
|
61,217
|
|
Net unrealized gain (loss) on investment securities
(1)
|
|
|
8,252
|
|
|
|
(696
|
)
|
Net periodic pension & postretirement benefits plan adjustments
|
|
|
(10,213
|
)
|
|
|
(10,631
|
)
|
Other
|
|
|
|
|
|
|
201
|
|
|
|
|
|
|
|
|
|
|
Common equity Tier 1 (CET1) capital
|
|
|
241,938
|
|
|
|
226,413
|
|
Plus: Preferred stock
|
|
|
17,340
|
|
|
|
17,340
|
|
Less: Other
|
|
|
|
|
|
|
301
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital
|
|
|
259,278
|
|
|
|
243,452
|
|
Plus: Qualifying allowance for loan losses
|
|
|
29,350
|
|
|
|
27,085
|
|
Subordinated Notes
|
|
|
39,043
|
|
|
|
38,990
|
|
|
|
|
|
|
|
|
|
|
Total regulatory capital
|
|
$
|
327,671
|
|
|
$
|
309,527
|
|
|
|
|
|
|
|
|
|
|
Adjusted average total assets (for leverage capital purposes)
|
|
$
|
3,507,511
|
|
|
$
|
3,287,646
|
|
|
|
|
|
|
|
|
|
|
Total risk-weighted assets
|
|
$
|
2,524,622
|
|
|
$
|
2,318,536
|
|
|
|
|
|
|
|
|
|
|
Regulatory Capital Ratios
|
|
|
|
|
|
|
|
|
Tier 1 leverage (Tier 1 capital to adjusted average assets)
|
|
|
7.39
|
%
|
|
|
7.41
|
%
|
CET1 capital (CET1 capital to total risk-weighted assets)
|
|
|
9.58
|
|
|
|
9.77
|
|
Tier 1 capital (Tier 1 capital to total risk-weighted assets)
|
|
|
10.27
|
|
|
|
10.50
|
|
Total risk-based capital (Total regulatory capital to total risk-weighted assets)
|
|
|
12.98
|
|
|
|
13.35
|
|
(1)
|
Includes unrealized gains and losses related to the Companys reclassification of available for sale investment securities to the held to maturity category.
|
Basel III Capital Rules
The BCBS rules include a new
common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, increase the minimum Tier 1 capital to risk-weighted assets ratio from 4.0% to 6.0%, require a minimum total capital to risk-weighted assets ratio of 8.0%, and require a
minimum Tier 1 leverage ratio of 4.0%. A new capital conservation buffer is also established above the regulatory minimum capital requirements, effectively increasing the minimum required risk-weighted asset ratios. This capital conservation buffer
is being phased-in beginning on January 1, 2016 at 0.625% of risk-weighted assets and will increase each subsequent year by an additional 0.625% until reaching its final level of 2.5% on January 1, 2019. Banking institutions with a capital
conservation buffer below the minimum level will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. The Basel III Capital Rules also provide for a countercyclical capital buffer that
is applicable to only certain covered institutions and does not have any current applicability to the Company or the Bank. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules. The final rules
also revised the definition and calculation of Tier 1 capital, total capital, and risk-weighted assets.
- 52 -
MANAGEMENTS DISCUSSION AND ANALYSIS
The following table presents actual and required capital ratios as of September 30, 2016 and
December 31, 2015 for the Company and the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of those dates based on the phase-in provisions of the Basel III
Capital Rules and the minimum required capital levels as of January 1, 2019 when the Basel III Capital Rules have been fully phased-in. Capital levels required to be considered well capitalized are based upon prompt corrective action
regulations, as amended to reflect the changes under the Basel III Capital Rules (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Capital
|
|
|
Minimum Capital
|
|
|
Required to be
|
|
|
|
|
|
|
|
|
|
Required Basel III
|
|
|
Required Basel III
|
|
|
Considered Well
|
|
|
|
Actual
|
|
|
Phase-in Schedule
|
|
|
Fully Phased-in
|
|
|
Capitalized
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
259,277
|
|
|
|
7.39
|
%
|
|
$
|
140,300
|
|
|
|
4.00
|
%
|
|
$
|
140,300
|
|
|
|
4.00
|
%
|
|
$
|
175,376
|
|
|
|
5.00
|
%
|
Bank
|
|
|
280,547
|
|
|
|
8.01
|
|
|
|
140,088
|
|
|
|
4.00
|
|
|
|
140,088
|
|
|
|
4.00
|
|
|
|
175,110
|
|
|
|
5.00
|
|
CET1 capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
241,937
|
|
|
|
9.58
|
|
|
|
129,387
|
|
|
|
5.13
|
|
|
|
176,724
|
|
|
|
7.00
|
|
|
|
164,100
|
|
|
|
6.50
|
|
Bank
|
|
|
280,547
|
|
|
|
11.16
|
|
|
|
128,831
|
|
|
|
5.13
|
|
|
|
175,965
|
|
|
|
7.00
|
|
|
|
163,396
|
|
|
|
6.50
|
|
Tier 1 capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
259,277
|
|
|
|
10.27
|
|
|
|
167,256
|
|
|
|
6.63
|
|
|
|
214,593
|
|
|
|
8.50
|
|
|
|
201,970
|
|
|
|
8.00
|
|
Bank
|
|
|
280,547
|
|
|
|
11.16
|
|
|
|
166,538
|
|
|
|
6.63
|
|
|
|
213,671
|
|
|
|
8.50
|
|
|
|
201,102
|
|
|
|
8.00
|
|
Total capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
327,670
|
|
|
|
12.98
|
|
|
|
217,749
|
|
|
|
8.63
|
|
|
|
265,085
|
|
|
|
10.50
|
|
|
|
252,462
|
|
|
|
10.00
|
|
Bank
|
|
|
309,897
|
|
|
|
12.33
|
|
|
|
216,813
|
|
|
|
8.63
|
|
|
|
263,947
|
|
|
|
10.50
|
|
|
|
251,378
|
|
|
|
10.00
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
243,452
|
|
|
|
7.41
|
%
|
|
$
|
131,506
|
|
|
|
4.00
|
%
|
|
$
|
131,506
|
|
|
|
4.00
|
%
|
|
$
|
164,382
|
|
|
|
5.00
|
%
|
Bank
|
|
|
265,487
|
|
|
|
8.09
|
|
|
|
131,188
|
|
|
|
4.00
|
|
|
|
131,188
|
|
|
|
4.00
|
|
|
|
163,985
|
|
|
|
5.00
|
|
CET1 capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
226,413
|
|
|
|
9.77
|
|
|
|
104,334
|
|
|
|
4.50
|
|
|
|
162,297
|
|
|
|
7.00
|
|
|
|
150,705
|
|
|
|
6.50
|
|
Bank
|
|
|
265,487
|
|
|
|
11.49
|
|
|
|
103,971
|
|
|
|
4.50
|
|
|
|
161,733
|
|
|
|
7.00
|
|
|
|
150,180
|
|
|
|
6.50
|
|
Tier 1 capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
243,452
|
|
|
|
10.50
|
|
|
|
139,112
|
|
|
|
6.00
|
|
|
|
197,076
|
|
|
|
8.50
|
|
|
|
185,483
|
|
|
|
8.00
|
|
Bank
|
|
|
265,487
|
|
|
|
11.49
|
|
|
|
138,628
|
|
|
|
6.00
|
|
|
|
196,389
|
|
|
|
8.50
|
|
|
|
184,837
|
|
|
|
8.00
|
|
Total capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
309,527
|
|
|
|
13.35
|
|
|
|
185,483
|
|
|
|
8.00
|
|
|
|
243,446
|
|
|
|
10.50
|
|
|
|
231,854
|
|
|
|
10.00
|
|
Bank
|
|
|
292,572
|
|
|
|
12.66
|
|
|
|
184,837
|
|
|
|
8.00
|
|
|
|
242,599
|
|
|
|
10.50
|
|
|
|
231,046
|
|
|
|
10.00
|
|
Dividend Restrictions
In
the ordinary course of business we are dependent upon dividends from the Bank to provide funds for the payment of dividends to shareholders and to provide for other cash requirements. Banking regulations may limit the amount of dividends that may be
paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels. Approval is also required if dividends declared exceed the net profits
for that year combined with the retained net profits for the preceding two years.
Off-Balance Sheet Arrangements
With the exception of obligations in connection with our irrevocable loan commitments, operating leases and limited partnership investments as of
September 30, 2016, we had no other off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to investors. For additional information on off-balance sheet arrangements, see Note 11, Commitments and Contingencies, in the notes to the accompanying consolidated financial
statements.
- 53 -