Washington, D.C. 20549
FORM 10-K
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
10-K
For the fiscal year ended December 31, 2019
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .to
.
(Exact name of registrant as specified in its charter)
| | |
Delaware | 16-1213679. | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| | |
5790 Widewaters Parkway, DeWitt, New York | 13214-1883 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (315) (315) 445-2282
Securities registered pursuant to Section 12(b) of the Act:
| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $1.00 par value per share | CBU | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐ .
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ .
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ .
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ .
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | |
| | | |
Large accelerated filer | ☒ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act Act.☐.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ . No ☒.
The aggregate market value of the common stock, $1.00 par value per share, held by non-affiliates of the registrant computed by reference to the closing price as of the close of business on June 30, 20192021 (the registrant’s most recently completed second fiscal quarter): $4,022,854,1973,341,455,914.
The number of shares of the common stock, $1.00 par value per share, outstanding as of the close of business on January 31, 2020:2022: 51,914,17553,864,500
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Definitive Proxy Statement for the Annual Meeting of the Shareholders to be held on May 15, 202018, 2022 (the “Proxy Statement”) is incorporated by reference in Part III of this Annual Report on Form 10-K.
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Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | 137 | |
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This Annual Report on Form 10-K contains certain forward-looking statements with respect to the financial condition, results of operations and business of Community Bank System, Inc. These forward-looking statements by their nature address matters that involve certain risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements are set forth herein under the caption “Forward-Looking Statements.”
Community Bank System, Inc. (the “Company”) was incorporated on April 15, 1983, under the Delaware General Corporation Law. Its principal office is located at 5790 Widewaters Parkway, DeWitt, New York 13214. The Company is a registered financial holding company which wholly-owns two significant subsidiaries: Community Bank, N.A. (the “Bank” or “CBNA”), and Benefit Plans Administrative Services, Inc. (“BPAS”). As of December 31, 2019,2021, BPAS owns five subsidiaries: Benefit Plans Administrative Services, LLC (“BPA”), a provider of defined contribution plan administration services; Northeast Retirement Services, LLC (“NRS”), a provider of institutional transfer agency, master recordkeeping services, fund administration, trust, and retirement plan services; BPAS Actuarial & Pension Services, LLC (“BPAS-APS”), a provider of actuarial and benefit consulting services; BPAS Trust Company of Puerto Rico, a Puerto Rican trust company; and Hand Benefits & Trust Company (“HB&T”), a provider of collective investment fund administration and institutional trust services. BPA owns one subsidiary, Fringe Benefits Design of Minnesota, Inc. (“FBD”), a provider of retirement plan administration and benefit consulting services. NRS owns one subsidiary, Global Trust Company, Inc. (“GTC”), a non-depository trust company which provides fiduciary services for collective investment trusts and other products. HB&T owns one subsidiary, Hand Securities, Inc. (“HSI”), an introducing broker-dealer. The Company also sponsors one unconsolidated subsidiary business trust formed for the purpose of issuing mandatorily-redeemable preferred securities which are considered Tier I capital under regulatory capital adequacy guidelines.
The Bank’s business philosophy is to operate as a diversified financial services enterprise providing a broad array of banking and other financial services to retail, commercial and municipal customers. As of December 31, 2019,2021, the Bank operates 231206 full-service branches and 12 drive-thru only locations operating as Community Bank, N.A. throughout 4042 counties of Upstate New York, six counties of Northeastern Pennsylvania, 12 counties of Vermont, and one county of Western Massachusetts, offering a range of commercial and retail banking services. The Bank owns the following operating subsidiaries: The Carta Group, Inc. (“Carta Group”), CBNA Preferred Funding Corporation (“PFC”), CBNA Treasury Management Corporation (“TMC”), Community Investment Services, Inc. (“CISI”), NOTCH Investment Fund, LLC (“NOTCH”), Nottingham Advisors, Inc. (“Nottingham”), OneGroup NY, Inc. (“OneGroup”), OneGroup Wealth Partners, Inc. (“Wealth Partners”) and Oneida Preferred Funding II LLC (“OPFC II”). OneGroup is a full-service insurance agency offering personal and commercial propertylines of insurance and other risk management products and services. NOTCH, PFC and OPFC II primarily act as investors in residential and commercial real estate activities. TMC provides cash management, investment, and treasury services to the Bank. CISI, and Carta Group and Wealth Partners provide broker-dealer and investment advisory services. Nottingham provides asset management services to individuals, corporations, corporate pension and profit sharing plans, and foundations.
The Company maintains a website at cbna.com. Annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, are available on the Company’s website free of charge as soon as reasonably practicable after such reports or amendments are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). The information posted on the website is not incorporated into or a part of this filing. Copies of all documents filed with the SEC can also be obtained by visiting the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549, by calling the SEC at 1-800-SEC-0330 or by accessing the SEC’s website at https://www.sec.gov.
Acquisition History (2015-2019)
Steuben Trust Corporation -Elmira Savings Bank – Pending Acquisition
On October 21, 2019,4, 2021, the Company announced that itthe Bank had entered into a definitivean agreement to acquire Elmira Savings Bank (“Elmira”), a twelve branch banking franchise headquartered in Elmira, New York, for $82.8 million in cash. The acquisition will enhance the Company’s presence in five counties in New York’s Southern Tier and Finger Lakes regions. Elmira had total assets of $632.2 million, total deposits of $541.0 million, and net loans of $458.6 million at December 31, 2021. The merger was approved by the shareholders of Elmira on December 14, 2021. The Company expects to complete the acquisition in the second quarter of 2022, subject to customary closing conditions, including required regulatory approval.
3
Thomas Gregory Associates Insurance Brokers, Inc.
On August 2, 2021, the Company, through its subsidiary OneGroup, completed its acquisition of certain assets of Thomas Gregory Associates Insurance Brokers, Inc. (“TGA”), a specialty-lines insurance broker based in the Boston, Massachusetts area for $13.1 million, including $11.6 million in cash and contingent consideration valued at $1.5 million. The Company recorded a $10.9 million customer list intangible asset and $2.2 million of goodwill in conjunction with the acquisition.
Fringe Benefits Design of Minnesota, Inc.
On July 1, 2021, the Company, through its subsidiary BPA, completed its acquisition of Fringe Benefits Design of Minnesota, Inc. (“FBD”), a provider of retirement plan administration and benefit consulting services with offices in Minnesota and South Dakota, for $16.7 million, including $15.3 million in cash and contingent consideration valued at $1.4 million. As of December 31, 2021, the contingent consideration is valued at $1.6 million, resulting in a $0.2 million acquisition-related contingent consideration adjustment recorded in the consolidated statements of income in 2021. The Company recorded a $14.0 million customer list intangible asset and $2.1 million of goodwill in conjunction with the acquisition.
NuVantage Insurance Corp.
On June 1, 2021, the Company, through its subsidiary OneGroup, completed its acquisition of certain assets of NuVantage Insurance Corp. (“NuVantage”), an insurance agency headquartered in Melbourne, Florida. The Company paid $2.9 million in cash and recorded a $1.4 million customer list intangible asset and $1.5 million of goodwill in conjunction with the acquisition.
Steuben Trust Corporation
On June 12, 2020, the Company completed its merger with Steuben Trust Corporation (“Steuben”), parent company of Steuben Trust Company, a New York State chartered bank headquartered in Hornell, New York, for approximately $104.4$98.6 million in Company stock and cash. Steuben currently operates 14 branch locationscash, comprised of $21.6 million in Western New York.cash and the issuance of 1.36 million shares of common stock. The acquisition will extendmerger extended the Company’s footprint into two new counties in Western New York State, and enhanceenhanced the Company’s presence in four Western New York State counties in which it currently operates. The acquisition is expected to close during the second quarter of 2020, pending both customary regulatory and Steuben shareholder approval. The Company expects to incur certain one-time, transaction-related costs in 2020 inhad already operated. In connection with the Steuben acquisition.
Financial Services Practice – Syracuse, NY
On September 18, 2019, the Company, through its subsidiary, CISI, completed its acquisition of certain assets of a practice engaged in the financial services business headquartered in Syracuse, New York. The Company paid $0.5 million in cash to acquire a customer list, and recorded a $0.5 million customer list intangible asset in conjunction with the acquisition.
Kinderhook Bank Corp.
On July 12, 2019, the Company completed its merger with Kinderhook Bank Corp. (“Kinderhook”), parent company of The National Union Bank of Kinderhook, headquartered in Kinderhook, New York, for $93.4 million in cash. The merger added 11 branch locations across a five county area in the Capital District of Upstate New York. The merger resulted in the acquisition of $642.8 million of assets, including $479.9 million of loans and $39.8 million of investment securities, as well as $568.2 million of deposits and $40.3$40.0 million in goodwill.
Wealth Resources Network, Inc.
On January 2, 2019, the Company, through its subsidiary, CISI, completed its acquisition of certain assets of Wealth Resources Network, Inc. (“Wealth Resources”), a financial services business headquartered in Liverpool, New York. The Company paid $1.2 million in cash to acquire a customer list from Wealth Resources, and recorded a $1.2 million customer list intangible asset in conjunction with the acquisition.
4
Services Inc.
Banking
The Bank is a community bank committed to the philosophy of serving the financial needs of customers in local communities. The Bank's branches are generally located in smaller towns and cities within its geographic market areas of Upstate New York, Northeastern Pennsylvania, Vermont and Western Massachusetts. The Company believes that the local character of its business, knowledge of the customers and their needs, and its comprehensive retail and business products, together with responsive decision-making at the branch, and regional levels and its digital banking service offerings, enable the Bank to compete effectively in its geographic market. The Bank is a member of the Federal Reserve System, the Federal Home Loan Bank of New York and the Federal Home Loan Bank of Boston (as a non-member bank) (collectively, referred to as “FHLB”), and its deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to applicable limits.
Employee Benefit Services
Through BPAS and its subsidiaries, the Company operates a national practice that provides employee benefit trust, collective investment fund, retirement plan administration, fund administration, transfer agency, actuarial, VEBA/HRA and health and welfare consulting services to a diverse array of clients spanning the United States and Puerto Rico.
Wealth Management
Through the Bank, itsBank’s trust department, CISI, Carta Group, Nottingham, and Nottingham,Wealth Partners, the Company provides wealth management, retirement planning, higher educational planning, fiduciary, risk management, trust services and personal financial planning services. The Company offers investment alternatives including stocks, bonds, mutual funds, insurance and advisory products.
Insurance Agency
Through OneGroup, the Company offers personal and commercial lines of insurance and other risk management products and services. In addition, OneGroup offers employee benefit related services. OneGroup represents many leading insurance companies.
Segment Information
The Company has identified three reportable operating business segments: Banking, Employee Benefit Services, and All Other. Included in the All Other segment are the smaller Wealth Management and Insurance operations. Information about the Company’s reportable business segments is included in Note U of the “Notes to Consolidated Financial Statements” filed herewith in Part II.
Competition
The banking and financial services industry is highly competitive in the New York, Pennsylvania, Vermont, and Massachusetts markets. The Company competes actively for loans, deposits, and financial services relationships with other national and state banks, thrift institutions, credit unions, retail brokerage firms, mortgage bankers, finance companies, including, financial technology companies, insurance agencies, and other regulated and unregulated providers of financial services. In order to compete with other financial service providers, the Company stresses the community nature of its operations and the development of profitable customer relationships across all lines of business.
The Company’s employee benefit trust and plan administration business competes on a national scale and provides geographic diversification for the Company. Certain lines of business are marketed primarily through unaffiliated financial advisors, while others are marketed directly to plan sponsors and fund companies. In order to compete with large national firms, the Company stresses its consultative approach to complex engagements.
The table below summarizes the Bank’s deposits and market share by the fifty-four61 counties of New York, Pennsylvania, Vermont, and Massachusetts in which it had customer facilities as of June 30, 2019.2021. Market share is based on deposits of all commercial banks, credit unions, savings and loan associations, and savings banks.
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| | | | | | | | | | | | | | | |
| | | | | | | | | | Number of | |||||
| | | | Deposits as of 6/30/2021(1) | | Market Share | | | | | | Towns/ | | Towns Where Company Has 1st or | |
County | | State | | (000's omitted) | | (1) | | Branches | | ATM's | | Cities | | Towns Where Position | |
Grand Isle |
| VT |
| $ | 52,321 |
| 100.00 | % | 1 |
| 1 |
| 1 |
| 1 |
Allegany |
| NY | |
| 601,552 |
| 79.36 | % | 10 |
| 14 |
| 9 |
| 9 |
Lewis |
| NY | |
| 265,837 |
| 71.48 | % | 4 |
| 4 |
| 3 |
| 3 |
Hamilton |
| NY | |
| 71,146 |
| 60.02 | % | 2 |
| 2 |
| 2 |
| 2 |
Franklin |
| NY | |
| 470,650 |
| 54.81 | % | 6 |
| 5 |
| 4 |
| 4 |
Madison |
| NY | |
| 487,528 |
| 41.28 | % | 6 |
| 8 |
| 5 |
| 5 |
Cattaraugus |
| NY | |
| 775,070 |
| 40.17 | % | 9 |
| 11 |
| 7 |
| 6 |
Otsego |
| NY | |
| 404,353 |
| 27.76 | % | 9 |
| 9 |
| 6 |
| 5 |
Saint Lawrence |
| NY | |
| 640,699 |
| 25.56 | % | 10 |
| 12 |
| 9 |
| 8 |
Seneca |
| NY | |
| 167,514 |
| 24.69 | % | 3 |
| 3 |
| 3 |
| 2 |
Schuyler |
| NY | |
| 63,626 |
| 23.44 | % | 1 |
| 1 |
| 1 |
| 1 |
Jefferson |
| NY | |
| 608,321 |
| 22.83 | % | 7 |
| 7 |
| 6 |
| 5 |
Yates |
| NY | |
| 125,549 |
| 22.27 | % | 3 |
| 2 |
| 2 |
| 1 |
Clinton |
| NY | |
| 507,678 |
| 22.24 | % | 3 |
| 6 |
| 2 |
| 2 |
Livingston |
| NY | |
| 271,370 |
| 21.07 | % | 5 |
| 8 |
| 5 |
| 4 |
Wyoming |
| PA | |
| 167,967 |
| 20.31 | % | 3 |
| 3 |
| 3 |
| 2 |
Chautauqua | | NY | | | 509,708 | | 19.24 | % | 11 | | 11 | | 10 | | 6 |
Columbia |
| NY | |
| 282,507 |
| 17.38 | % | 4 |
| 3 |
| 4 |
| 3 |
Essex |
| NY | |
| 175,779 |
| 15.93 | % | 4 |
| 4 |
| 4 |
| 3 |
Oswego |
| NY | |
| 269,670 |
| 13.63 | % | 4 |
| 5 |
| 4 |
| 2 |
Steuben |
| NY | |
| 496,905 |
| 11.93 | % | 10 |
| 11 |
| 9 |
| 7 |
Wayne |
| NY | |
| 181,780 |
| 11.32 | % | 3 |
| 4 |
| 2 |
| 2 |
Addison |
| VT | |
| 93,039 |
| 10.66 | % | 2 |
| 2 |
| 2 |
| 1 |
Ontario |
| NY | |
| 327,002 |
| 10.45 | % | 7 |
| 13 |
| 5 |
| 3 |
Caledonia |
| VT | |
| 79,518 |
| 9.06 | % | 2 |
| 2 |
| 2 |
| 1 |
Bennington |
| VT | |
| 100,540 |
| 9.01 | % | 2 |
| 4 |
| 2 |
| 0 |
Orange |
| VT | |
| 37,758 |
| 8.97 | % | 1 |
| 1 |
| 1 |
| 1 |
Herkimer |
| NY | |
| 71,341 |
| 8.48 | % | 1 |
| 1 |
| 1 |
| 1 |
Tioga |
| NY | |
| 44,947 |
| 8.29 | % | 2 |
| 2 |
| 2 |
| 1 |
Delaware |
| NY | |
| 138,633 |
| 7.86 | % | 4 |
| 4 |
| 4 |
| 3 |
Chittenden | | VT | | | 697,821 | | 7.44 | % | 9 | | 10 | | 7 | | 3 |
Rutland |
| VT | |
| 139,639 |
| 7.20 | % | 3 |
| 4 |
| 2 |
| 1 |
Luzerne |
| PA | |
| 575,994 |
| 6.61 | % | 9 |
| 13 |
| 8 |
| 4 |
Montgomery |
| NY | |
| 68,033 |
| 6.48 | % | 2 |
| 2 |
| 2 |
| 1 |
Franklin |
| VT | |
| 56,963 |
| 6.44 | % | 2 |
| 2 |
| 2 |
| 0 |
Chemung |
| NY | |
| 87,440 |
| 6.11 | % | 2 |
| 2 |
| 1 |
| 0 |
Lackawanna |
| PA | |
| 508,313 |
| 5.98 | % | 10 |
| 9 |
| 7 |
| 4 |
Susquehanna | | PA | | | 74,756 | | 5.65 | % | 2 | | 1 | | 2 | | 1 |
Carbon |
| PA | |
| 58,543 |
| 5.34 | % | 2 |
| 2 |
| 2 |
| 1 |
Fulton |
| NY | |
| 59,392 |
| 5.26 | % | 1 |
| 1 |
| 1 |
| 0 |
Windham |
| VT | |
| 67,258 |
| 4.89 | % | 2 |
| 3 |
| 2 |
| 1 |
Windsor |
| VT | |
| 86,002 |
| 4.75 | % | 2 |
| 2 |
| 2 |
| 0 |
Schoharie |
| NY | |
| 27,203 |
| 4.53 | % | 1 |
| 1 |
| 1 |
| 0 |
Washington |
| NY | |
| 40,695 |
| 4.31 | % | 1 |
| 1 |
| 1 |
| 1 |
Oneida |
| NY | |
| 319,969 |
| 3.81 | % | 6 |
| 8 |
| 5 |
| 4 |
Lamoille |
| VT | |
| 34,904 |
| 3.79 | % | 1 |
| 1 |
| 1 |
| 1 |
Cayuga |
| NY | |
| 57,200 |
| 3.23 | % | 2 |
| 2 |
| 2 |
| 1 |
Washington |
| VT | |
| 112,528 |
| 2.92 | % | 3 |
| 4 |
| 3 |
| 1 |
Bradford |
| PA | |
| 42,574 |
| 2.69 | % | 2 |
| 2 |
| 2 |
| 1 |
Chenango | | NY | | | 30,599 | | 2.38 | % | 2 | | 2 | | 1 | | 0 |
Rensselaer |
| NY | |
| 63,535 |
| 2.08 | % | 1 |
| 2 |
| 1 |
| 0 |
Onondaga |
| NY | |
| 337,305 |
| 2.00 | % | 4 |
| 5 |
| 4 |
| 1 |
Warren |
| NY | |
| 45,378 |
| 1.59 | % | 1 |
| 1 |
| 1 |
| 1 |
Wyoming | | NY | | | 23,775 | | 1.11 | % | 1 | | 1 | | 1 | | 0 |
Ulster |
| NY | |
| 59,597 |
| 1.03 | % | 1 |
| 1 |
| 1 |
| 1 |
Broome |
| NY | |
| 36,875 |
| 0.45 | % | 1 |
| 1 |
| 1 |
| 0 |
Albany |
| NY | |
| 90,990 |
| 0.33 | % | 3 |
| 7 |
| 3 |
| 0 |
Erie | | NY | | | 216,878 | | 0.32 | % | 5 | | 5 | | 4 | | 2 |
Hampden |
| MA | |
| 46,080 |
| 0.28 | % | 1 |
| 1 |
| 1 |
| 0 |
Tompkins |
| NY | |
| 5,683 |
| 0.14 | % | 1 |
| 0 |
| 1 |
| 0 |
Monroe | | NY | | | 7,157 | | 0.03 | % | 1 | | 0 | | 1 | | 0 |
| | | | $ | 12,569,387 |
| 4.47 | % | 223 |
| 259 |
| 193 |
| 124 |
(1) | Deposits and Market Share data as of June 30, 2021, the most recent information available from S&P Global Market Intelligence. Deposit amounts include $230.4 million of intercompany balances that are eliminated upon consolidation. |
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Number of | ||||||||||||||||||||||||
County | State | Deposits as of 6/30/2019(1) (000's omitted) | Market Share(1) | Branches | ATM's | Towns/ Cities | Towns Where Company Has 1st or 2nd Market Position | |||||||||||||||||
Grand Isle | VT | $ | 38,229 | 100.00 | % | 1 | 1 | 1 | 1 | |||||||||||||||
Lewis | NY | 193,316 | 70.95 | % | 4 | 4 | 3 | 3 | ||||||||||||||||
Hamilton | NY | 59,183 | 55.92 | % | 2 | 2 | 2 | 2 | ||||||||||||||||
Franklin | NY | 351,577 | 55.63 | % | 6 | 6 | 5 | 5 | ||||||||||||||||
Madison | NY | 399,052 | 47.14 | % | 8 | 8 | 5 | 5 | ||||||||||||||||
Allegany | NY | 301,879 | 44.05 | % | 9 | 10 | 8 | 8 | ||||||||||||||||
Cattaraugus | NY | 560,348 | 37.78 | % | 10 | 11 | 7 | 6 | ||||||||||||||||
Otsego | NY | 343,793 | 29.45 | % | 10 | 10 | 6 | 5 | ||||||||||||||||
Seneca | NY | 128,869 | 25.54 | % | 4 | 3 | 4 | 3 | ||||||||||||||||
Saint Lawrence | NY | 458,019 | 24.42 | % | 13 | 12 | 11 | 10 | ||||||||||||||||
Schuyler | NY | 53,512 | 22.95 | % | 1 | 1 | 1 | 1 | ||||||||||||||||
Yates | NY | 96,230 | 22.53 | % | 3 | 2 | 2 | 1 | ||||||||||||||||
Wyoming | PA | 146,007 | 21.37 | % | 4 | 4 | 4 | 3 | ||||||||||||||||
Clinton | NY | 363,824 | 21.35 | % | 4 | 7 | 2 | 2 | ||||||||||||||||
Jefferson | NY | 404,712 | 21.27 | % | 7 | 9 | 6 | 5 | ||||||||||||||||
Chautauqua | NY | 397,076 | 19.54 | % | 12 | 12 | 10 | 6 | ||||||||||||||||
Livingston | NY | 199,581 | 19.18 | % | 5 | 6 | 5 | 4 | ||||||||||||||||
Essex | NY | 126,558 | 14.83 | % | 5 | 5 | 4 | 3 | ||||||||||||||||
Orange | VT | 48,712 | 14.08 | % | 2 | 2 | 2 | 2 | ||||||||||||||||
Oswego | NY | 195,433 | 12.56 | % | 4 | 5 | 4 | 2 | ||||||||||||||||
Wayne | NY | 134,571 | 10.81 | % | 3 | 4 | 2 | 2 | ||||||||||||||||
Ontario | NY | 241,373 | 9.92 | % | 7 | 13 | 5 | 3 | ||||||||||||||||
Caledonia | VT | 64,197 | 9.70 | % | 2 | 2 | 2 | 1 | ||||||||||||||||
Bennington | VT | 77,325 | 9.12 | % | 2 | 4 | 2 | 0 | ||||||||||||||||
Addison | VT | 56,928 | 9.11 | % | 2 | 2 | 2 | 1 | ||||||||||||||||
Delaware | NY | 128,095 | 8.65 | % | 5 | 5 | 5 | 4 | ||||||||||||||||
Tioga | NY | 38,709 | 8.31 | % | 2 | 2 | 2 | 1 | ||||||||||||||||
Chittenden | VT | 515,512 | 7.50 | % | 9 | 10 | 6 | 4 | ||||||||||||||||
Rutland | VT | 106,041 | 7.32 | % | 3 | 4 | 2 | 1 | ||||||||||||||||
Franklin | VT | 47,188 | 7.30 | % | 2 | 2 | 2 | 1 | ||||||||||||||||
Herkimer | NY | 53,224 | 6.76 | % | 1 | 1 | 1 | 1 | ||||||||||||||||
Lackawanna | PA | 394,431 | 6.54 | % | 11 | 11 | 8 | 4 | ||||||||||||||||
Luzerne | PA | 449,879 | 6.54 | % | 10 | 14 | 8 | 4 | ||||||||||||||||
Susquehanna | PA | 59,522 | 6.44 | % | 2 | 1 | 2 | 1 | ||||||||||||||||
Steuben | NY | 190,635 | 6.04 | % | 8 | 8 | 7 | 3 | ||||||||||||||||
Chemung | NY | 66,162 | 5.85 | % | 2 | 2 | 1 | 0 | ||||||||||||||||
Lamoille | VT | 29,036 | 4.55 | % | 1 | 1 | 1 | 1 | ||||||||||||||||
Windham | VT | 47,329 | 4.47 | % | 2 | 3 | 2 | 1 | ||||||||||||||||
Schoharie | NY | 21,490 | 4.38 | % | 1 | 1 | 1 | 0 | ||||||||||||||||
Carbon | PA | 42,891 | 4.30 | % | 2 | 2 | 2 | 0 | ||||||||||||||||
Oneida | NY | 251,953 | 3.99 | % | 6 | 8 | 5 | 3 | ||||||||||||||||
Windsor | VT | 53,160 | 3.83 | % | 2 | 2 | 2 | 0 | ||||||||||||||||
Cayuga | NY | 44,746 | 3.79 | % | 2 | 2 | 2 | 1 | ||||||||||||||||
Washington | VT | 87,015 | 3.37 | % | 3 | 4 | 3 | 1 | ||||||||||||||||
Bradford | PA | 38,945 | 3.00 | % | 2 | 2 | 2 | 1 | ||||||||||||||||
Washington | NY | 20,951 | 2.80 | % | 1 | 0 | 1 | 1 | ||||||||||||||||
Chenango | NY | 23,990 | 2.29 | % | 2 | 2 | 1 | 0 | ||||||||||||||||
Onondaga | NY | 278,350 | 2.13 | % | 4 | 5 | 4 | 1 | ||||||||||||||||
Warren | NY | 36,971 | 1.78 | % | 1 | 1 | 1 | 1 | ||||||||||||||||
Ulster | NY | 27,662 | 0.63 | % | 1 | 1 | 1 | 1 | ||||||||||||||||
Broome | NY | 26,928 | 0.42 | % | 1 | 1 | 1 | 0 | ||||||||||||||||
Erie | NY | 145,933 | 0.32 | % | 4 | 4 | 3 | 2 | ||||||||||||||||
Hampden | MA | 31,703 | 0.25 | % | 1 | 1 | 1 | 0 | ||||||||||||||||
Tompkins | NY | 5,387 | 0.17 | % | 1 | 0 | 1 | 0 | ||||||||||||||||
$ | 8,704,142 | 5.49 | % | 222 | 245 | 183 | 122 |
Human Capital Resources
As of December 31, 2019,2021, the Company employed 2,752had 2,927 total employees, which included 2,728 full-time employees and 286199 part-time and temporary employees. Of the Company’s 2,927 employees, 2,268 are in the Banking segment (2,083 full-time employees and 185 part-time and temporary employees), 396 employees are in the Employee Benefit Services segment (388 full-time employees and 8 part-time and temporary employees), and 263 employees are in the All Other segment (257 full-time employees and 6 part-time and temporary employees). The Company considers its relationship with its employees to be good. The Company has not experienced any material employment-related issues or interruptions of services due to labor disagreements. None of the Company’s employees are represented by a labor union or are represented by a collective bargaining agreement.
Compensation and Benefits
The success and growth of the Company’s business is largely dependent on its ability to attract, develop, and retain a population of talented and high-performing employees with a diversity of background and skill sets at all levels of our organization. Accordingly, the Company strives to offer competitive salaries and benefits that are consistent with employee positions, skill levels, experience, and geographic location. The Company is proud to offer an array of incentive compensation in which all employees have an opportunity to earn various forms of supplemental pay as a reward for their overall contributions towards the Company’s financial objectives. Additionally, the Company offers a wellness program aimed at providing tools, resources, and encouragement to support its employees’ physical and mental well-being.
Growth and Development
The Company continues to broaden the scope of its talent development initiatives across its widening geographically diverse footprint in order to sustain a value-driven and growth-oriented environment where employees can perform at their peak and the next generation of leaders are prepared to lead. In 2021, the Company implemented a new HR operating system which includes several features to support talent development, enhanced performance management tools and other features that provide a more streamlined employee experience for various transactions. The Company offers an array of programs and continuing education dedicated to strengthen employee engagement, personal accountability, productivity, and emotional well-being including customized programs supporting an overall strategy of strong workforce planning, growth-focused coaching sessions, career-path roadmaps and curated learning resources. The Company is committed to enabling a varietyculture that celebrates talent sharing, career development and agility across the Company and generally posts all roles internally first before sharing them externally.
Culture and Diversity
The Company is committed to fostering a workforce in an inclusive environment that enhances the culture of employment benefitsshared identity, civility, dignity, and considers its relationshiprespect. The Company has a company-wide Culture and Diversity Council that supports this effort and provides strategic direction and advocacy for these initiatives. The Council’s members play a vital role in creating the Company’s culture and diversity initiatives and are comprised of employees from various areas of the Company’s business and geographic locations. The Council members, along with other employees who volunteer to act as “Council Ambassadors,” are responsible for advancing the Council’s message within their own network of employees. Their efforts demonstrate the Company’s commitment to creating a work environment where everyone feels welcomed, valued, and fully engaged to contribute their unique talents and transform that deeper understanding into the organization’s culture. The Culture and Diversity Council has developed a set of initiatives to increase focus on diversity, equity, and inclusion across the key areas of talent acquisition and retention; employee community service spotlights; senior leadership composition; a collaborative learning and development campaign centered on greater awareness of unconscious bias; and vendor selection monitoring.
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Engagement
The Company is committed to creating a world class workplace filled with highly satisfied and engaged employees. The Company believes that open and honest communication among employees, managers and executive leadership fosters an open and collaborative work environment where everyone can participate, develop and thrive. In 2021, the Company launched a Company-wide engagement process called “MyVoice” which was initiated with an engagement survey to gauge employee sentiment in areas like culture, career development, manager performance and inclusivity with 83% employee participation. The collective results from the survey highlighted that engagement, performance, and employee development are interlinked and interdependent. The Company’s primary objective in 2022 will be to equip managers with the tools to take daily responsibility for engagement and development by identifying and building individual team action plans from the engagement and performance data garnered from the survey results. These action plans will be created at the local level by having frequent, meaningful conversations with individuals on their teams to identify and then take ownership of improving the workplace experience for their team.
Health and Safety
As the COVID-19 events continued throughout 2021, the Company continued to implement various plans, strategies and protocols to protect its employees, customers and stakeholders, among other objectives. In order to be good.
Supervision and Regulation
General
The banking industry is highly regulated with numerous statutory and regulatory requirements that are designed primarily for the protection of depositors and the financial system, and not for the purpose of protecting shareholders.system. Set forth below is a description of the material laws and regulations applicable to the Company and the Bank. This summary is not complete and the reader should refer to these laws and regulations for more detailed information. The Company’s and the Bank’s failure to comply with applicable laws and regulations could result in a range of sanctions and administrative actions imposed upon the Company and/or the Bank, including restriction to merger and acquisition activity, the imposition of civil money penalties, formal agreements and cease and desist orders. Changes in applicable law or regulations, and in their interpretation and application by regulatory agencies, cannot be predicted, and may have a material effect on the Company’s business and results.
The Company and its subsidiaries are subject to the laws and regulations of the federal government and where applicable the states and jurisdictions in which they conduct business. The Company, as a bank holding company, is subject to extensive regulation, supervision and examination by the Board of Governors of the Federal Reserve System (“FRB”) as its primary federal regulator. The Bank is a nationally-chartered bank and is subject to extensive regulation, supervision and examination by the Office of the Comptroller of the Currency (“OCC”) as its primary federal regulator, and as to certain matters, the FRB, the Consumer Financial Protection Bureau (“CFPB”), and the Federal Deposit Insurance Corporation (“FDIC”).
The Company is also subject to the jurisdiction of the SEC and is subject to disclosure and regulatory requirements under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. The Company’s common stock is listed on the New York Stock Exchange (“NYSE”) and it is subject to NYSE’s rules for listed companies. Affiliated entities, including BPAS, GTC, HB&T, HSI, BPAS Trust Company of Puerto Rico,FBD, Nottingham, CISI, OneGroup, and Carta Group, and Wealth Partners are subject to the jurisdiction of certain state and federal regulators and self-regulatory organizations including, but not limited to, the SEC, the Texas Department of Banking, the State of Maine Bureau of Financial Institutions, the Financial Industry Regulatory Authority (“FINRA”), Puerto Rico Office of the Commissioner of Financial Institutions, the U.S. Department of Labor, and state securities and insurance regulators.
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Federal Bank Holding Company Regulation
The Company was a bank holding company under the Bank Holding Company Act of 1956, (the “BHC Act”), and became a financial holding company effective September 30, 2015. As a bank holding company that has elected to become a financial holding company, the Company can affiliate with securities firms and insurance companies and engage in other activities that are “financial in nature” or “incidental” or “complementary” to activities that are financial in nature, as long as it continues to meet the eligibility requirements for financial holding companies (including requirements that the financial holding company and its depository institution subsidiary maintain their status as “well capitalized” and “well managed”).
Generally, FRB approval is not required for the Company to acquire a company (other than a bank holding company, bank or savings association) engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the FRB. Prior notice to the FRB may be required, however, if the company to be acquired has total consolidated assets of $10 billion or more. Prior FRB approval is required before the Company may acquire the beneficial ownership or control of more than 5% of the voting shares or substantially all of the assets of a bank holding company, bank or savings association.
Because the Company is a financial holding company, if the Bank were to receive a rating under the Community Reinvestment Act of 1977, as amended (“CRA”), of less than Satisfactory, the Company will be prohibited, until the rating is raised to Satisfactory or better, from engaging in new activities or acquiring companies other than bank holding companies, banks or savings associations, except that the Company could engage in new activities, or acquire companies engaged in activities, that are considered “closely related to banking” under the BHC Act.Bank Holding Company Act of 1956, (the “BHC Act”). The Bank’s most recent CRA rating was “Satisfactory”. In addition, if the FRB determines that the Company or the Bank is not well capitalized or well managed, the Company would be required to enter into an agreement with the FRB to comply with all applicable capital and management requirements and may contain additional limitations or conditions. Until corrected, the Company could be prohibited from engaging in any new activity or acquiring companies engaged in activities that are not closely related to banking, absent prior FRB approval.
Federal Reserve System Regulation
Because the Company is a financial holding company, it is subject to regulatory capital requirements and required by the FRB to, among other things, maintain cash reserves against its deposits. Effective on March 26, 2020, the FRB reduced this cash reserve requirement to zero percent to help support lending to households and businesses as a result of the impacts of the COVID-19 pandemic. The Bank is under similar capital requirements administered by the OCC as discussed below. FRB policy has historically required a financial holding company to act as a source of financial and managerial strength to its subsidiary banks. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) codifies this historical policy as a statutory requirement. To the extent the Bank is in need of capital, the Company could be expected to provide additional capital, including borrowings from the FRB for such purpose. Both the Company and the Bank are subject to extensive supervision and regulation, which focus on, among other things, the protection of depositors’ funds.
The FRB also regulates the national supply of bank credit in order to influence general economic conditions. These policies have a significant influence on overall growth and distribution of loans, investments and deposits, and affect the interest rates charged on loans or paid for deposits.
Fluctuations in interest rates, which may result from government fiscal policies and the monetary policies of the FRB, have a strong impact on the income derived from loans and securities, and interest paid on deposits and borrowings. While the Company and the Bank strive to model various interest rate changes and adjust ourits strategies for such changes, the level of earnings can be materially affected by economic circumstances beyond ourits control.
The Office of the Comptroller of the Currency Regulation
The Bank is supervised and regularly examined by the OCC. The various laws and regulations administered by the OCC affect the Company’s practices such as payment of dividends, incurring debt, and acquisition of financial institutions and other companies. It also affects the Bank’s business practices, such as payment of interest on deposits, the charging of interest on loans, types of business conducted and the location of its offices. The OCC generally prohibits a depository institution from making any capital distributions, including the payment of a dividend, or paying any management fee to its parent holding company if the depository institution would become undercapitalized due to the payment. Undercapitalized institutions are subject to growth limitations and are required to submit a capital restoration plan to the OCC. The Bank is well capitalized under regulatory standards administered by the OCC. For additional information on our capital requirements see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Shareholders’ Equity” and Note P to the Financial Statements.
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Federal Home Loan Bank
The Bank is a member of the FHLB, which provides a central credit facility primarily for member institutions for home mortgage and neighborhood lending. The Bank is subject to the rules and requirements of the FHLB, including the purchase of shares of FHLB activity-based stock in the amount of 4.5% of the dollar amount of outstanding advances and FHLB capital stock in an amount equal to the greater of $1,000 or the sum of 0.15% of the mortgage-related assets held by the Bank based upon the previous year-end financial information. The Bank was in compliance with the rules and requirements of the FHLB at December 31, 2019.
Deposit Insurance
Deposits of the Bank are insured up to the applicable limits by the Deposit Insurance Fund (“DIF”) and are subject to deposit insurance assessments to maintain the DIF. The Dodd-Frank Act permanently increased the maximum amount of deposit insurance to $250,000 per deposit category, per depositor, per institution. A depository institution’s DIF assessment is calculated by multiplying its assessment rate by the assessment base, which is defined as the average consolidated total assets less the average tangible equity of the depository institution. The initial base assessment rate is based on its capital level and supervisory ratings (its “CAMELS ratings”), certain financial measures to assess an institution’s ability to withstand asset related stress and funding related stress and, in some cases, additional discretionary adjustments by the FDIC to reflect additional risk factors. The Bank’s adjusted average consolidated total assets for 4 consecutive quarters exceeded $10.0 billion in 2018, which resulted in a deposit insurance assessment is based on a large institution classification, rather than the small institution classification for years prior to 2018.
For large insured depository institutions, generally defined as those with at least $10 billion in total assets, the FDIC has eliminated risk categories when calculating the initial base assessment rates and now combine CAMELS ratings and financial measures into two scorecards to calculate assessment rates, one for most large insured depository institutions and another for highly complex insured depository institutions (which are generally those with more than $50 billion in total assets that are controlled by a parent company with more than $500 billion in total assets). Each scorecard has two components - a performance score and loss severity score, which are combined and converted to an initial assessment rate. The FDIC has the ability to adjust a large or highly complex insured depository institution’s total score by a maximum of 15 points, up or down, based upon significant risk factors that are not captured by the scorecard. Under the current assessment rate schedule, the initial base assessment rate for large and highly complex insured depository institutions ranges from three to 30 basis points, and the total base assessment rate, after applying the unsecured debt and brokered deposit adjustments, ranges from one and one-half to 40 basis points. The Bank’s FDIC insurance for 20192021 was based on an assessment rate of three basis points.
In October 2010, the FDIC adopted a DIF restoration plan to ensure that the fund reserve ratio reached 1.35% by September 30, 2020, as required by the Dodd-Frank Act. In September 2018, the DIF reserve ratio reached 1.36%, exceeding the required reserve ratio of 1.35% ahead of the September 30, 2020 deadline. Since the DIF reserve ratio remained above 1.35% in 2019, the Bank was permitted to offset its FDIC insurance assessments in 2019 with Small Bank Assessment Credits issued by the FDIC in January 2019. The Bank offset $1.5 million of FDIC insurance assessments in 2019 with Small Bank Assessment Credits. FDIC insurance expense net of Small Bank Assessment Credits in 20192021 totaled $1.4$4.1 million, compared to $3.2$2.7 million in 20182020 and $3.5$1.4 million in 2017.
Under the Federal Deposit Insurance Act, if the FDIC finds that an institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC, the FDIC may determine that such violation or unsafe or unsound practice or condition require the termination of deposit insurance.
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
On July 21, 2010, the Dodd-Frank Act was signed into law, which resulted in significant changes to the banking industry. As discussed further throughout this section, certain aspects of the Dodd-Frank Act are subject to implementing rules that have been taking effect over several years.
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The Dodd-Frank Act contains numerous provisions that affect all banks and bank holding companies and impacts how the Company and the Bank handle their operations. The Dodd-Frank Act requires various federal agencies, including those that regulate the Company and the Bank, to promulgate new rules and regulations and to conduct various studies and reports for Congress. The federal agencies have either completed or are in the process of completing these rules and regulations and have been given significant discretion in drafting such rules and regulations. Several of the provisions of the Dodd-Frank Act may have the consequence of increasing the Bank’s expenses, decreasing its revenues, and changing the activities in which it chooses to engage. The specific impact of the Dodd-Frank Act on the Company’s current activities or new financial activities the Company may consider in the future, the Company’s financial performance, and the markets in which the Company operates depends on the manner in which the relevant agencies continue to develop and implement the required rules and regulations and the reaction of market participants to these regulatory developments.
Pursuant to FRB regulations mandated by the Dodd-Frank Act, interchange fees on debit card transactions are limited to a maximum of $0.21 per transaction plus 5 basis points of the transaction amount. A debit card issuer may recover an additional one cent per transaction for fraud prevention purposes if the issuer complies with certain fraud-related requirements prescribed by the FRB. The FRB also adopted requirements in the final rule that issuers include two unaffiliated networks for routing debit transactions that are applicable to the Company and the Bank. The Company became subject to the interchange fee cap mandated by the Dodd-Frank Act beginning on July 1, 2018. As such, the fees the Company received on and after July 1, 2018 for an electronic debit transaction were capped at the statutory limit. Prior to July 1, 2018, the Company was exempt from the interchange fee cap under the "small issuer" exemption, which applies to any debit card issuer with total worldwide assets (including those of its affiliates) of less than $10 billion as of the end of the previous calendar year.
The Dodd-Frank Act established the CFPB and empowered it to exercise broad rulemaking, supervision, and enforcement authority for a wide range of consumer protection laws. Since the Company’sBank’s total consolidated assets exceed $10 billion, the CompanyBank is subject to the direct supervision of the CFPB. The CFPB has issued numerous regulations and amendments under which the Company and the Bank may continue to incur additional expense in connection with its ongoing compliance obligations. Significant recent CFPB developments that may affect operations and compliance costs include:
The final rules issued by the FRB, SEC, OCC, FDIC, and Commodity Futures Trading Commission implementing Section 619 of the Dodd-Frank Act (commonly known as the Volcker Rule) prohibit insured depository institutions and companies affiliated with insured depository institutions from engaging in short-term proprietary trading of certain securities, derivatives, commodity futures and options on these instruments, for their own account. The final rules also imposeimposes limits on banking entities’ investments in, and other relationships with, hedge funds or private equity funds.
On January 30, 2020, the five federal agencies proposed additional amendments to the Volcker Rule related to the restrictions on ownership interests and relationships with covered funds. The ultimate benefits or consequencesOn June 25, 2020, a final rule was finalized which modified the Volcker Rule by streamlining the covered funds portion of these amendments will depend on their final form, which the Company cannot predict.
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The ongoing effects of the Dodd-Frank Act, as well as the recent and possible future changes to the regulatory framework as a result of the Economic Growth Act and future proposals make it difficult to assess the overall financial impact of the Dodd-Frank Act and related regulatory developments on the Company and the banking industry. As a result, the Company cannot predict the ultimate impact of the Dodd-Frank Act on the Company or the Bank, including the extent to which it could increase costs or limit the Company’s ability to pursue business opportunities in an efficient manner, or otherwise adversely affect its business, financial condition and results of operations. Nor can the Company predict the impact or substance of other future legislation or regulation. However, it is expected that future legislation or regulation at a minimum will increase the Company’s and the Bank’s operating and compliance costs. As rules and regulations continue to be implemented or issued, the Company may need to dedicate additional resources to ensure compliance, which may increase its costs of operations and adversely impact itsthe Company’s earnings.
Capital Requirements
The Company and the Bank are required to comply with applicable capital adequacy standards established by the federal banking agencies. The risk-based capital standards that were applicable to the Company and the Bank through December 31, 2014 wereagencies (the “Capital Rules”) which are based on the 1988 Capital Accord, known as Basel I (“Basel I”), of the Basel Committee on Banking SupervisionSupervision’s (the “Basel Committee”). However, in July 2013, the FRB, the OCC and the FDIC approved final rules (the “Capital Rules”) establishing a new comprehensive capital framework for U.S. banking organizations. These rules went into effect for the Company and the Bank on January 1, 2015, subject to phase-in periods for certain components.
The Capital Rules, among other things: (i) introduces asthings, impose a capital measure called “Common Equity Tier 1,” (“CET1”), (ii) to which most deductions/adjustments to regulatory capital measures be made. In addition, the Capital Rules specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain specified revised requirements, (iii) defines CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital, and (iv) expands the scope of the deductions from and adjustments to capital as compared to existing regulations. Under the Capital Rules, the most common form of Additional Tier 1 capital is non-cumulative perpetual preferred stock, and the most common form of Tier 2 capital is subordinated notes and a portion of the allowance for loan and lease losses, in each case, subject to the Capital Rules specific requirements.
Under the Capital Rules, the minimum capital ratios as of January 1, 2016 are as follows:
● | 4.5% CET1 to total risk-weighted assets; |
● | 6.0% Tier 1 capital (CET1 plus Additional Tier 1 capital) to total risk-weighted assets; |
● | 8.0% Total capital (Tier 1 Capital plus Tier 2 capital) to total risk-weighted assets; |
● | 4.0% Tier 1 capital to total adjusted quarterly average assets (known as “leverage ratio”) |
The Capital Rules requiredrequire the Company and the Bank to maintain a “capital conservation buffer” composed entirely of CET1. When it was fully phased-in at the beginning of 2019, bankingBanking organizations wereare required to maintain a minimum capital conservation buffer of 2.5% (CET1 to Total risk-weighted assets), in addition to the minimum risk-based capital ratios. Therefore, to satisfy both the minimum risk-based capital ratios and the capital conservation buffer, a banking organization is required to maintain the following: (i) CET1 to total risk-weighted assets of at least 7%, (ii) Tier 1 capital to total risk-weighted assets of at least 8.5%, and (iii) Total capital (Tier 1 capital plus Tier 2 capital) to total risk-weighted assets of at least 10.5%. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions that do not maintain a capital conservation buffer of 2.5% or more will face constraints on dividends, common share repurchases and incentive compensation based on the amount of the shortfall.
The Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Under the general Basel I risk-based capital rules, the effects of accumulated other comprehensive income or loss items included in shareholders' equity (for example, marks-to-market of securities held in the available for sale portfolio) were reversed for the purposes of determining regulatory capital. Under the Capital Rules, the effects of certain accumulated other comprehensive income or loss items are not excluded;excluded for the purposes of determining regulatory capital; however, banks not using the advanced approach, including the Company and the Bank, were permitted to, and in the case of the Company and the Bank they did, make a one-time permanent election to continue to exclude these items.
Consistent with Section 171 of the Dodd-Frank Act, the Capital Rules allow certain bank holding companies to include certain hybrid securities, such as trust preferred securities, in Tier 1 capital if they had less than $15 billion in assets as of December 31, 2009 and the securities were issued before May 19, 2010. Accordingly, the trust preferred securities on the Company’s balance sheet will bewere included as Tier 1 capital while they are outstanding, unless the Company completes an acquisition of a depository institution holding company that did not meet this criteria, or are acquired by such an organization, after January 1, 2014, at which time they would be subject to the stated phase-out requirements of the Capital Rules and would be included as Tier 2 capital.
With respect to the Bank, the Capital Rules also reviserevised the prompt corrective action (“PCA”) regulations established pursuant to Section 38 of the Federal Deposit Insurance Act, by (i) introducing aestablishing the CET1 ratio requirement for each capital category other than critically undercapitalized, with the required CET1 ratio beingat 6.5% for well-capitalized status; (ii) increasingstatus and the minimum Tier 1 capital ratio requirement for each capital category, with the minimum Tier 1 capital ratioat 8.0% for well-capitalized status being 8.0%; and (iii) eliminating the current provision that allows certain highly-rated banking organizations to maintain a 3.0% leverage ratio and still be adequately capitalized.status. The Capital Rules do not change the Total risk-based PCA capital requirement for any capital category.
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The Capital Rules prescribe a standardized approach for risk weighted-assets that expands the risk-weight categories from the four Basel I-derived categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories, depending on the nature of the asset. The risk-weight categories generally range from 0% for U.S. government and agency securities, to 1,250% for certain securitized exposures, and result in higher risk weights for a variety of asset categories. The standardized approach requires financial institutions to transition assets that are 90 days or more past due or on nonaccrual from their original risk weight to 150 percent. Additionally, loans designated as high volatility commercial real estate (“HVCRE”) are assigned a risk-weighting of 150 percent.
Requirements to maintain higher levels of capital or to maintain higher levels of liquid assets could adversely impact the Company'sCompany’s net income and return on equity. The current requirements and the Company'sCompany’s actual capital levels are detailed in Note P of “Notes to Consolidated Financial Statements” filed in Part II, Item 8, “Financial Statements and Supplementary Data.”
Consumer Protection Laws
In connection with its banking activities, the Bank is subject to a number of federal and state laws designed to protect borrowers and promote lending to various sectors of the economy. These laws include but are not limited to the Equal Credit Opportunity Act, the Gramm-Leach-Bliley Act (“GLB Act”), the Fair Credit Reporting Act (“FCRA”), the Fair and Accurate Credit Transactions Act of 2003 (“FACT Act”), Electronic Funds Transfer Act, the Truth in Lending Act, the Home Mortgage Disclosure Act, the Dodd-Frank Act, the Real Estate Settlement Procedures Act, the Secure and Fair Enforcement for Mortgage Licensing Act (“SAFE”), the Servicemembers Civil Relief Act (“SCRA”), the Military Lending Act (“MLA”), and various state law counterparts.
The Dodd-Frank Act created the CFPB with broad powers to supervise and enforce consumer protection laws, including laws that apply to banks in order to prohibit unfair, deceptive or abusive acts or practices. The CFPB has examination authority over all banks and savings institutions with more than $10 billion in assets. The Dodd-Frank Act also weakens the federal preemption rules that are applicable to national banks and gives attorney generals for the states certain powers to enforce federal consumer protection laws. Further, under the Dodd-Frank Act, it is unlawful for any provider of consumer financial products or services to engage in any unfair, deceptive, or abusive acts or practices (“UDAAP”). A violation of the consumer protection and privacy laws, and in particular UDAAP, could have serious legal, financial, and reputational consequences.
The GLB Act requires all financial institutions to adopt privacy policies, restrict the sharing of nonpublic customer data with nonaffiliated parties and establishes procedures and practices to protect customer data from unauthorized access. In addition, the FCRA, as amended by the FACT Act, includes provisions affecting the Company, the Bank, and their affiliates, including provisions concerning obtaining consumer reports, furnishing information to consumer reporting agencies, maintaining a program to prevent identity theft, sharing of certain information among affiliated companies, and other provisions. The FACT Act requires persons subject to FCRA to notify their customers if they report negative information about them to a credit bureau or if they are granted credit on terms less favorable than those generally available. The FRB and the Federal Trade Commission have extensive rulemaking authority under the FACT Act, and the Company and the Bank are subject to the rules that have been created under the FACT Act, including rules regarding limitations on affiliate marketing and implementation of programs to identify, detect and mitigate certain identity theft red flags. The SCRA protects persons called to active military service and their dependents from undue hardship resulting from their military service, and the MLA extends specific protections if an accountholder, at the time of account opening, is a covered active duty member of the military or certain family members thereof. The SCRA applies to all debts incurred prior to the commencement of active duty and limits the amount of interest, including service and renewal charges and any other fees or charges (other than bona fide insurance) that are related to the obligation or liability. The MLA applies to certain consumer loans and extends specific protections if an accountholder, at the time of account opening, is a covered active duty member of the military or certain family members thereof. The Bank is also subject to data security standards and data breach notice requirements issued by the OCC and other regulatory agencies. The Bank has created policies and procedures to comply with these consumer protection requirements.
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The CFPB issued the final rules implementinghas implemented the ability-to-repay and qualified mortgage (QM) provisions of the Truth in Lending Act (the “QM Rule”). and has recently taken steps to modify the QM Rule. The ability-to-repay provision requires creditors to make reasonable, good faith determinations that borrowers are able to repay their mortgages before extending credit based on a number of factors and consideration of financial information about the borrower derived from reasonably reliable third-party documents. Under the Dodd-Frank Act and the QM Rule, loans meeting the definition of “qualified mortgage” are entitled to a presumption that the lender satisfied the ability-to-repay requirements. The presumption is a conclusive presumption/safe harbor for loans meeting the QM requirements, and a rebuttable presumption for higher-priced loans meeting the QM requirements. The definition of a “qualified mortgage” incorporates the statutory requirements, such as not allowing negative amortization or terms longer than 30 years. The QM Rule also adds an explicit maximum 43% debt-to-income ratio for borrowers if the loan is to meet the QM definition, though some mortgages that meet government-sponsored enterprises, Federal Housing Administration, and Veterans Administration underwriting guidelines may, for a period not to exceed seven years, meet the QM definition without being subject to the 43% debt-to-income limits. The Bank has created policies and procedures to comply with these consumer protection requirements.
USA Patriot Act
The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA Patriot Act”) imposes obligations on U.S. financial institutions, including banks and broker-dealer subsidiaries, to implement policies, procedures and controls which are reasonably designed to detect and report instances of money laundering and the financing of terrorism. In addition, provisions of the USA Patriot Act require the federal financial institution regulatory agencies to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing bank mergers and bank holding company acquisitions. The USA Patriot Act also encourages information-sharing among financial institutions, regulators, and law enforcement authorities by providing an exemption from the privacy provisions of the GLB Act for financial institutions that comply with the provision of the Act. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal, financial and reputational consequences for the institution. The Company has approved policies and procedures that are designed to comply with the USA Patriot Act and its regulations.
Office of Foreign Assets Control Regulation
The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others administrated by the Treasury’s Office of Foreign Assets Control (“OFAC”). The OFAC administered sanctions can take many different forms; however, they generally contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, entity or individual, including prohibitions against direct or indirect imports and exports and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments, or providing investment related advice or assistance; and (ii) a blocking of assets in which the government or specially designated nationals have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal, financial, and reputational consequences.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”) implemented a broad range of corporate governance, accounting and reporting reforms for companies that have securities registered under the Securities Exchange Act of 1934, as amended. In particular, the Sarbanes-Oxley Act established, among other things: (i) new requirements for audit and other key Board of Directors committees involving independence, expertise levels, and specified responsibilities; (ii) additional responsibilities regarding the oversight of financial statements by the Chief Executive Officer and Chief Financial Officer of the reporting company; (iii) the creation of an independent accounting oversight board for the accounting industry; (iv) new standards for auditors and the regulation of audits, including independence provisions which restrict non-audit services that accountants may provide to their audit clients; (v) increased disclosure and reporting obligations for the reporting company and its directors and executive officers including accelerated reporting of company stock transactions; (vi) a prohibition of personal loans to directors and officers, except certain loans made by insured financial institutions on non-preferential terms and in compliance with other bank regulator requirements; and (vii) a range of new and increased civil and criminal penalties for fraud and other violations of the securities laws.
Electronic Fund Transfer Act
Among other provisions, the federal banking rule under the Electronic Fund Transfer Act prohibits financial institutions from charging consumers fees for paying overdrafts on automated teller machines and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions. The rule does not govern overdraft fees on the payment of checks and certain other forms of bill payments.
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Community Reinvestment Act of 1977
Under the CRA, the Bank is required to help meet the credit needs of its communities, including low- and moderate-income neighborhoods. Although the Bank must follow the requirements of CRA, it does not limit the Bank’s discretion to develop products and services that are suitable for a particular community or establish lending requirements or programs. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibits discrimination in lending practices. The Bank’s failure to comply with the provisions of the CRA could, at a minimum, result in regulatory restrictions on its activities and the activities of the Company. The Bank’s failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions against it by its regulators as well as other federal regulatory agencies and the Department of Justice. The Bank’s latestmost recent CRA rating was “Satisfactory”.
The Bank Secrecy Act
The Bank Secrecy Act (“BSA”) requires all financial institutions, including banks and securities broker-dealers, to, among other things, establish a risk-based system of internal controls reasonably designed to prevent money laundering and the financing of terrorism. The BSA includes a variety of recordkeeping and reporting requirements (such as currency transaction and suspicious activity reporting), as well as due diligence/know-your-customer documentation requirements. The Company has established a bank secrecy act /anti-money laundering program and taken other appropriate measures in order to comply with BSA requirements.
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Information about Our Executive Officers
The executive officers of the Company and the Bank who are elected by the Board of Directors are as follows:
Name | Age | Position |
Mark E. Tryniski | 61 | Director, President and Chief Executive Officer. Mr. Tryniski assumed his current position in August 2006. He served as Executive Vice President and Chief Operating Officer from March 2004 to July 2006 and as the Treasurer and Chief Financial Officer from June 2003 to March 2004. He previously served as a partner in the Syracuse office of PricewaterhouseCoopers LLP. |
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Joseph E. Sutaris | 54 | Executive Vice President and Chief Financial Officer. Mr. Sutaris assumed his current position in June 2018. He served as Senior Vice President, Finance and Accounting from November 2017 to June 2018, as the Bank’s Director of Municipal Banking from September 2016 to November 2017 and as the Senior Vice President of the Central Region of the Bank from April 2011 to September 2016. Mr. Sutaris joined the Company in April 2011 as part of the acquisition of Wilber National Bank where he served as the Executive Vice President, Chief Financial Officer, Treasurer and Secretary. |
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George J. Getman | 65 | Executive Vice President and General Counsel. Mr. Getman assumed his current position in January 2008. Prior to joining the Company, he was a partner with Bond, Schoeneck & King, PLLC and served as corporate counsel to the Company. |
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Maureen Gillan-Myer | 54 | Executive Vice President and Chief Human Resources Officer. Ms. Gillan-Myer assumed her current position in October 2021. Prior to joining the Company, she served as the Chief Human Resources Officer of HSBC US from February 2016 through September 2021 and as its Senior Vice President- Talent Acquisition from May 2009 through February 2016. |
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Dimitar A. Karaivanov | 40 | Executive Vice President of Financial Services and Corporate Development. Mr. Karaivanov assumed his current position in June 2021. Prior to joining the Company, he served as Managing Director of Lazard Middle Market’s Financial Institutions Group from June 2018 through June 2021. Prior to Lazard, he was the Managing Director of RBC Capital Markets’ Financial Institutions Group from April 2011 through June 2018. |
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Jeffrey M. Levy | 60 | President, Commercial Banking. Mr. Levy assumed his current position in January 2022. He served as the Bank’s Senior Vice President, Commercial Banking Sales Executive from June 2021 to December 2021, as Senior Vice President, Regional President of Capital Region from June 2019 to June 2021, and as Senior Vice President, Commercial Banking Team Leader from January 2018 to June 2019. Prior to joining the Bank, he served as the Executive Vice President and President of Commercial Banking at NBT Bank, N.A. from December 2006 to August 2016. |
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Joseph F. Serbun | 61 | President, Retail Banking. Mr. Serbun assumed his current position in January 2022. He served as the Company’s and the Bank’s Executive Vice President and Chief Banking Officer from March 2020 to December 2021, as the Bank’s Executive Vice President and Chief Credit Officer from June 2018 to March 2020, as Senior Vice President and Chief Credit Officer from June 2010 to June 2018 and as Vice President and Commercial Team Leader of the Bank from January 2008 until June 2010. Prior to joining the Company, he served as Vice President at JPMorgan Chase Bank, N.A. |
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There are risks inherent in the Company’s business. The material risks and uncertainties that management believes affect the Company are described below. Adverse experience with these could have a material impact on the Company’s financial condition and results of operations.
Risks Related to the Company’s Business
Interest Rate Risk
Changes in interest rates affect our profitability, assets and liabilities.
The Company’s income and cash flow depends to a great extent on the difference between the interest earned on loans and investment securities, and the interest paid on deposits and borrowings. Interest rates are highly sensitive to many factors that are beyond the Company’s control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the FRB. Changes in monetary policy, including changes in interest rates, could influence not only the interest the Company receives on loans and securities and the amount of interest it pays on deposits and borrowings, but such changes could also affect (1) its ability to originate loans and obtain deposits, which could reduce the amount of fee income generated, (2) the fair value of its financial assets and liabilities, and (3) the average duration of the Company’s various categories of earning assets. Earnings could be adversely affected if the interest rates received on loans and investments fall more quickly than the interest rates paid on deposits and other borrowings. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, the Company’s net interest income could also be adversely affected, which in turn could negatively affect itsthe Company’s earnings. EarningsIncreases in interest rates would likely cause an increase in the unrealized loss position on certain investments, which could also be adversely affectednegatively affect the Company’s earnings if the interest rates received on loans and otherneed to liquidate these investments fall more quickly than the interest rates paid on deposits and other borrowings.arose. Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on the results of operations, any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on the financial condition and results of operations.
Reforms to and uncertainty regarding the London Interbank Offered Rate (“LIBOR”) may adversely affect LIBOR-based financial arrangements of the Company.
The Company has certain mortgage loans, hedging transactions, and floating-rate commercial loans that determine their applicable interest rate or payment amount by reference to LIBOR. The U.K. Financial Conduct Authority, which regulates LIBOR, has announced that it intends to stop persuadingwill no longer persuade or compellingcompel banks to submit rates for the calibration of LIBOR to the administratorcalculation of LIBOR after 2021. The announcement indicatesIn November 2020, it was announced that the continuationrate would continue to be published through June 2023. However, the FRB has urged banks to make the transition as soon as practicable and that no new contracts should include LIBOR after the original end date of LIBOR on the current basis will not be guaranteed afterDecember 31, 2021. At this time, no consensus exists
Regulators, industry groups and certain committees, such as to what rate or rates may become acceptable alternatives to LIBOR and it is not currently possible to predict the effect of any such alternatives on the value of LIBOR-based financial arrangements. The Federal Reserve Board, in conjunction with the Alternative Reference Rates Committee is considering replacing the U.S. dollar (“ARRC”) have, among other things, published recommended fallback language for LIBOR-linked financial instruments, identified recommended alternatives for certain LIBOR withrates, such as the Secured Overnight Financing Rate ("SOFR"(“SOFR”), a broad measure as the recommended alternative to LIBOR, and proposed implementations of the costrecommended alternatives in floating rate financial instruments. It is currently unknown the extent to which these recommendations and proposals will be broadly accepted, whether they will continue to evolve, and what the effect of borrowing cash overnight collateralized by Treasury securities. Whether or not SOFR attains traction as a LIBOR replacement tool remains in question. their implementation may be on the markets for floating-rate financial instruments.
Uncertainty as to the nature of alternative reference rates, and as to potential changes or other reforms to LIBOR, may adversely affect LIBOR rates and the value of LIBOR-based financial arrangements of the Company. TheWhile not expected to be material to the Company due to its insignificant exposure to LIBOR-based loans and financial instruments, the implementation of an alternative index or indices for the Company’s financial arrangements may result in the Company incurring expenses in effecting the transition, may result in reduced loan balances if borrowers do not accept the substitute index or indices and may result in disputes or litigation with customers over the appropriateness or comparability of the alternative index to LIBOR, which could have an adverse effect on the Company’s results of operations.
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Liquidity Risk
The Company must maintain adequate sources of funding and liquidity to meet regulatory expectations, support its operations and fund outstanding liabilities.
The Company liquidity and ability to fund and run its business could be materially adversely affected by a variety of conditions and factors, including financial and credit market disruptions and volatility, a lack of market or customer confidence in financial markets in general, or deposit competition based on interest rates, which may result in a loss of customer deposits or outflows of cash or collateral and/or adversely affect the Company’s ability to access capital markets on favorable terms. Other conditions and factors that could materially adversely affect the Company’s liquidity and funding include a lack of market or customer confidence in, or negative news about, the Company or the financial services industry generally which also may result in a loss of deposits and/or negatively affect the Company’s ability to access the capital markets; the loss of customer deposits to alternative investments; counterparty availability; interest rate fluctuations; general economic conditions; and the legal, regulatory, accounting and tax environments governing the Company’s funding transactions. Many of the foregoing conditions and factors may be caused by events over which the Company has little or no control. There can be no assurance that significant disruption and volatility in the financial markets will not occur in the future. Further, the Company’s customers may be adversely impacted by such conditions, which could have a negative impact on the Company’s business, financial condition and results of operations.
The Company is uncertain as to whether the relatively high levels of deposits in recent periods will be maintained, spent down, or increased further by additional inflows of funds associated with COVID-19 related government stimulus programs. If these deposits were to be spent down at levels exceeding expectations, or if the Company is unable to continue to fund assets through customer bank deposits or access funding sources on favorable terms, or if the Company suffers an increase in borrowing costs or otherwise fails to manage liquidity effectively, the Company’s liquidity, operating margins, financial condition and results of operations may be materially adversely affected.
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Credit and Lending Risk
The allowance for credit losses may be insufficient.
The Company’s business depends on the creditworthiness of its customers. The Company reviews the allowance for credit losses quarterly for adequacy considering historical credit loss experience, current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency levels, risk ratings as well as changes in macroeconomic conditions. If the Company’s assumptions prove to be incorrect, the Company’s allowance for credit losses may not be sufficient to cover losses inherent in the Company’s loan portfolio, resulting in additions to the allowance. Material additions to the allowance would materially decrease its net income. It is possible that over time the allowance for credit losses will be inadequate to cover credit losses in the portfolio because of unanticipated adverse changes in the economy, market conditions or events adversely affecting specific customers, industries or markets. On January 1, 2020, the Company adopted ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), also referred to as CECL. Under this new standard, the Company’s required allowance for credit losses may fluctuate more significantly from period to period due to changes in economic conditions, changes in the composition of the Company’s loan portfolios, changes in historical loss rates and changes in other credit factors, including the level of delinquent loans.
Mortgage banking income may experience significant volatility.
Mortgage banking income is highly influenced by the level and direction of mortgage interest rates, real estate and refinancing activity and elections made by the Company to sell or retain mortgage production. In lower interest rate environments, the demand for mortgage loans and refinancing activity will tend to increase. Increases in mortgage loan sales would have the effect of increasing fee income, but could adversely impact the estimated fair value of the Company’s mortgage servicing rights as the rate of loan prepayments increase. In higher interest rate environments, the demand for mortgage loans and refinancing activity will generally be lower. Decreases in mortgage loan sales would have the effect of decreasing fee income opportunities.
Legal, Regulatory, and Compliance Risk
The Company is or may become involved in lawsuits, legal proceedings, information-gathering requests, investigations, and proceedings by governmental agencies or other parties that may lead to adverse consequences.
As a participant in the financial services industry, many aspects of the Company’s business involve substantial risk of legal liability. The Company and its subsidiaries have been named or threatened to be named as defendants in various lawsuits arising from its or its subsidiaries’ business activities (and in some cases from the activities of acquired companies). In addition, the Company is, or may become, the subject of governmental and self-regulatory agency information-gathering requests, reviews, investigations and proceedings and other forms of regulatory inquiry by, including but not limited to, bank regulatory agencies, the SEC, the U.S. Department of Labor, state insurance regulators and law enforcement authorities. The results of such proceedings could lead to delays in or prohibition to acquire other companies, significant penalties, including monetary penalties, damages, adverse judgments, settlements, fines, injunctions, restrictions on the way in which the Company conducts its business, or reputational harm.
Although the Company establishes accruals for legal proceedings when information related to the loss contingencies represented by those matters indicates both that a loss is probable and that the amount of loss can be reasonably estimated, the Company does not have accruals for all legal proceedings where it faces a risk of loss. In addition, due to the inherent subjectivity of the assessments and unpredictability of the outcome of legal proceedings, amounts accrued may not represent the ultimate loss to the Company from the legal proceedings in question. Thus, the Company’s ultimate losses may be higher than the amounts accrued for legal loss contingencies, which could adversely affect the Company’s financial condition and results of operations.
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The Company operates in a highly regulated environment and may be adversely affected by changes in laws and regulations or the interpretation and examination of existing laws and regulations.
The Company and its subsidiaries are subject to extensive state and federal regulation, supervision and legislation that govern nearly every aspect of its operations. The Company, as a financial holding company, is subject to regulation by the FRB and its banking subsidiary is subject to regulation by the OCC. These regulations affect deposit and lending practices, capital levels and structure, investment practices, dividend policy, and growth. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of a bank, the classification of assets by a bank, and the adequacy of a bank’s allowance for credit losses. In addition, the non-bank subsidiaries are engaged in providing services including, but not limited to, retirement plan administration, fiduciary services to collective investment funds, investment management and insurance brokerage services, which industries are also heavily regulated at both a state and federal level.level, including by state banking and insurance agencies, the U.S. Department of Labor and the SEC. Such regulators govern the activities in which the Company and its subsidiaries may engage. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of a bank, the classification of assets by a bank and the adequacy of a bank’s allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation, interpretation or application, could have a material impact on the Company and its operations. Changes to the regulatory laws governing these businesses could affect the Company’s ability to deliver or expand its services and adversely impact its operating and financial condition.
The Dodd-Frank Act, as amended by the Economic Growth Act, instituted major changes to the banking and financial institutions regulatory regimes based upon the performance of, and ultimate government intervention in the financial services sector. The ongoing effects of the Dodd-Frank Act, as well as continued rule-making and possible future changes to the regulatory requirements, make it difficult to assessmay substantially impact the overall impact of the Dodd-Frank Act and related regulatory developments on the CompanyCompany’s and the Bank.Bank’s operations. The implications of the Dodd-Frank Act for the Company’s businesses continue to depend to a large extent on the implementation of the legislation by the FRB, the CFPB, and other agencies as well as how market practices and structures change in response to the requirements of such rule making. New initiatives and proposed rulemaking by the Dodd-Frank Act. All of these changesCFPB may significantly limit the fees the Company may charge for its services and such proposed rulemaking may have a material impact on the Company’s fee income. Changes in regulations could subject the Company, among other things, to additional costs for compliance and limit the types of financial services and products it can offer and/or increase the ability of non-banks to offer competing financial services and products.
The Company is also directly subject to the requirements of entities that set and interpret the accounting standards such as the Financial Accounting Standards Board, and indirectly subject to the actions and interpretations of the Public Company Accounting Oversight Board, which establishes auditing and related professional practice standards for registered public accounting firms and inspects registered firms to assess their compliance with certain laws, rules, and professional standards in public company audits. These regulations, along with the currently existing tax, accounting, securities, insurance, and monetary laws, regulations, rules, standards, policies and interpretations, control the methods by which financial institutions and their holding companies conduct business, engage in strategic and tax planning, implement strategic initiatives, and govern financial reporting.
The Company’s failure to comply with laws, regulations or policies could result in civil or criminal sanctions, restrictions to its business model, and money penalties by state and federal agencies, and/or reputation damage, which could have a material adverse effect on the Company’s business, financial condition and results of operations. See “Supervision and Regulation” for more information about the regulations to which the Company is subject.
The Company depends on dividends from its banking subsidiary for cash revenues to support common dividend payments and other uses, but those dividends are subject to restrictions.
The ability of the Company to satisfy its obligations and pay cash dividends to its shareholders is primarily dependent on the earnings of and dividends from the subsidiary bank. However, payment of dividends by the bank subsidiary is limited by dividend restrictions and capital requirements imposed by bank regulations.
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The Company’s total consolidated assets exceededexceed $10 billion and is therefore subject to additional regulation and increased supervision including the CFPB.
The Dodd-Frank Act imposes additional regulatory requirements on institutions with $10 billion or more in assets. TheSince 2017, when the Company is nowsurpassed the $10 billion threshold, the Company has become subject to changes, including but not limited to, the following: (1) supervision, examination and enforcement by the CFPB with respect to consumer financial protection laws, (2) a modified methodology for calculating FDIC insurance assessments and potentially higher assessment rates, (3) limitations on interchange fees for debit card transactions, (4) heightened compliance standards under the Volcker Rule, and (5) enhanced supervision as a larger financial institution. The imposition of these regulatory requirements and increased supervision may continue to require additional commitment of financial resources to regulatory compliance and may increase the Company’s cost of operations.
Basel III capital rules generally require insured depository institutions and their holding companies to hold more capital, which could limit our ability to pay dividends, engage in share repurchases and pay discretionary bonuses.
The Federal Reserve,FRB, the FDIC, and the OCC adopted final rules for the Basel III capital framework which substantially amended the regulatory risk-based capital rules applicable to the Company. The rules phased in over time and became fully effective in 2019. A capital conservation buffer was phased in over three years, ultimately resulting in a requirement of 2.5% on top of the common Tier 1, Tier 1 and total capital requirements, resulting in a required common Tier 1 equity ratio of 7%, a Tier 1 ratio of 8.5%, and a total capital ratio of 10.5%. Failure to satisfy any of these three capital requirements will result in limits on paying dividends, engaging in share repurchases and paying discretionary bonuses. These limitations will establish a maximum percentage of eligible retained income that could be utilized for such actions.
Increased regulation and stakeholder expectations related to Environmental, Social, and Governance factors could negatively affect our operating results.
There is increased public awareness and concern by investors, customers, and governmental and nongovernmental organizations on a variety of environmental, social, and sustainability matters. This increased awareness may include more restrictive or expansive environmental standards, more prescriptive reporting of environmental, social, and governance metrics, and other compliance requirements. The Company may face increased costs to address and report on these matters, which could have an adverse impact on the Company’s business.
Operational Risk
The Company continually encounters technological change and the failure to understand and adapt to these changes could have a negative impact on the business.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. The Company's future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in the Company's operations. Many of the Company's competitors have substantially greater resources to invest in technological improvements. The Company may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers and the costs of this technology may negatively impact the Company’s results of operations. Failure to successfully keep pace with technological changes affecting the financial services industry could have a material adverse impact on the Company's financial condition and results of operations.
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The Company is exposed to fraud in many aspects of the services and products that it provides.
The Company offers a wide variety of products and services. When account credentials and other access tools are not adequately protected by its customers, risks and potential costs may increase. As (a) sales of services and products expand, (b) those who are committing fraud become more sophisticated and more determined, and (c) services and product offerings expand, the Company's operational losses could increase.
The Company is subject to a variety of operational risks, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, which may adversely affect the Company’s business and results of operations.
The Company is exposed to many types of operational risks, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, unauthorized transactions by employees, or operational errors, including clerical or record keeping errors or those resulting from faulty or disabled computer or telecommunications systems or disclosure of confidential proprietary information of its customers. Negative public opinion can result from actual or alleged conduct in any number of activities, including lending practices, sales practices, customer treatment, corporate governance and acquisitions and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect the Company’s ability to attract and keep customers and can expose the Company to litigation and regulatory action. Actual or alleged conduct by the Company can result in negative public opinion about its business.
If personal, nonpublic, confidential, or proprietary information of customers in the Company’s possession were to be mishandled or misused, the Company could suffer significant regulatory consequences, reputational damage, and financial loss. Such mishandling or misuse could include, for example, if such information were erroneously provided to parties who are not permitted to have the information, either by fault of its systems, employees, or counterparties, or where such information is intercepted or otherwise inappropriately taken by third parties.
Because the nature of the financial services business involves a high volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully rectified. The Company’s necessary dependence upon automated systems to record and process transactions and the large transaction volumes may further increase the risk that technical flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. Further, the significant value of money managed and administered may result in larger exposures. The Company also may be subject to disruptions of its operating systems arising from events that are wholly or partially beyond its control (for example, computer viruses or electrical or telecommunications outages), which may give rise to disruption of service to customers and to financial loss or liability. The Company is further exposed to the risk that external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees) and to the risk that business continuity and data security systems prove to be inadequate. The occurrence of any of these risks could result in a diminished ability to operate the Company’s business, potential liability to clients, reputational damage, and regulatory intervention, which could adversely affect our business, financial condition, and results of operations, perhaps materially.
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The Company’s information systems may experience an interruption or security breach and expose the Company to additional operational, compliance, cybersecurity and legal risks.
The Company relies heavily on existing and emerging communications and information systems to conduct its business. TheDespite the Company’s security measures and business continuity plans, the Company and its vendors may be the subject of sophisticated and targeted attacks intended to obtain unauthorized access to assets or confidential information, destroy data, disable or degrade service, or sabotage systems, often through the introduction of computer viruses or malware, ransomware, phishing attacks, cyber-attacks, or breaches due to errors or malfeasance by employees, contractors and other means.others who have access to or obtain unauthorized access to the Company’s systems and networks. The methods used to obtain unauthorized access, disable or degrade service or sabotage systems are constantly evolving and may be difficult to anticipate or to detect for long periods of time. The constantly changing nature of the threats means that the Company may not be able to prevent all data security breaches or misuse of data. Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Company’s online banking system, its general ledger, and its deposit and loan servicing and origination systems or other systems. Furthermore, if personal, confidential or proprietary information of customers or clients in the Company’s or vendors’ possession were to be mishandled or misused, the Company could suffer significant regulatory consequences, reputational damage and financial loss. Such mishandling or misuse could include circumstances where, for example, such information was erroneously provided to parties who are not permitted to have the information, either by fault of the Company’s systems, employees, or counterparties, or where such information was intercepted or otherwise inappropriately taken by third parties. The Company has policies and procedures designed to prevent or limit the effect of the possible failure, interruption or security breach of its information systems; however, any such failure, interruption or security breach could adversely affect the Company’s business and results of operations through loss of assets or by requiring it to expend significant resources to correct the defect, as well as exposing the Company to customer dissatisfaction and civil litigation, regulatory fines or penalties or losses not covered by insurance.
Evolving data security and privacy requirements could increase the Company’s costs and expose it to additional operational, compliance, and legal risks.
The Company’s business requires the secure processing and storage of sensitive information relating to its customers, employees, business partners, and others. However, like any financial institution operating in today’s digital business environment, the Company is subject to threats to the security of its networks and data, as described above. These threats continue to increase as the frequency, intensity and sophistication of attempted attacks and intrusions increase around the world. In response to these threats there has been heightened legislative and regulatory focus on data privacy and cybersecurity in the U.S. and the European Union and as a result, the Company must comply with an evolving set of legal requirements in this area, including substantive cybersecurity standards as well as requirements for notifying regulators and affected individuals in the event of a data security incident. This regulatory environment is increasingly challenging and may present material obligations and risks to the Company’s business, including significantly expanded compliance burdens, costs and enforcement risks.
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The Company relies on third party vendors, which could expose the Company to additional cybersecurity risks.
Third party vendors provide key components of the Company’s business infrastructure, including certain data processing and information services. On behalf of the Company, third parties may transmit confidential, propriety information. Although the Company requires third party providers to maintain certain levels of information security, such providers may remain vulnerable to breaches, unauthorized access, misuse, computer viruses, or other malicious attacks that could ultimately compromise sensitive information.information or result in funds being transferred. While the Company may contractually limit liability in connection with attacks against third party providers, the Company remains exposed to the risk of loss associated with such vendors. In addition, a number of the Company’s vendors are large national entities with dominant market presence in their respective fields. Their services could prove difficult to replace in a timely manner if a failure or other service interruption were to occur. Failures of certain vendors to provide contracted services could adversely affect the Company’s ability to deliver products and services to customers and cause the Company to incur significant expense.
The Company's ability to attract and retain qualified employees is critical to the success of its business, and failure to do so may have a materially adverse effect on the Company's performance.
The Company’s employees are its most important resource, and in many areas of the financial services industry, competition for qualified personnel is intense and certain of the Company’s competitors have directly targeted its employees, including competitors who are outside of our geographic footprint offering work from home opportunities. The imposition on the Company or its employees of certain existing and proposed restrictions or taxes on executive compensation may adversely affect the Company’s ability to attract and retain qualified senior management and employees. The Company’s business could be adversely impacted by increases in labor costs, including wages and benefits, triggered by regulatory actions regarding wages; increased health care and workers’ compensation insurance costs; increased costs of other benefits necessary to attract and retain high quality employees with the right skill sets; and increased wages, benefits and costs related to inflationary and other pressure on wages now being experienced. If the Company provides inadequate succession planning or is unable to continue to retain and attract qualified employees, the Company’s performance, including its competitive position, could have a materially adverse effect.
External and Market-Related Risk
Regional economic factors may have an adverse impact on the Company's business.
The Company's main markets are located in the states of New York, Pennsylvania, Vermont and Massachusetts. Most of the Company's customers are individuals and small and medium-sized businesses which are dependent upon the regional economy. Accordingly, the local economic conditions in these areas have a significant impact on the demand for the Company's products and services as well as the ability of the Company's customers to repay loans, the value of the collateral securing loans and the stability of the Company's deposit funding sources. A prolonged economic downturn in these markets could negatively impact the Company.
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The financial services industry is highly competitive and creates competitive pressures that could adversely affect the Company’s revenue and profitability.
The financial services industry in which the Company operates is highly competitive. The Company competes not only with commercial and other banks and thrifts, but also with insurance companies, mutual funds, hedge funds, securities brokerage firms and other companies offering financial services in the U.S., globally and over the Internet. The Company competes on the basis of several factors, including capital, access to capital, revenue generation, quality customer service, products, services, transaction execution, innovation, reputation and price. Over time, certain sectors of the financial services industry have become more concentrated, as institutions involved in a broad range of financial services have been acquired by or merged into other firms. These developments could result in the Company’s competitors gaining greater capital and other resources, such as a broader range of products and services and geographic diversity. The Company may experience pricing pressures as a result of these factors and as some of its competitors seek to increase market share by reducing prices or paying higher rates of interest on deposits. Finally, technological change is influencing how individuals and firms conduct their financial affairs and changing the delivery channels for financial services, with the result that the Company may have to contend with a broader range of competitors including many that are not located within the geographic footprint of its banking office network.
The Company may be adversely affected by the soundness of other financial institutions.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. The Company has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry. Many of these transactions expose the Company to credit risk in the event of a default by a counterparty or client. In addition, credit risk may be exacerbated when the collateral held by the Company cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to the Company. Any such losses could have a material adverse effect on the Company's financial condition and results of operations.
Conditions in the insurance market could adversely affect the Company’s earnings.
Revenue from insurance fees and commissions could be negatively affected by fluctuating premiums in the insurance markets or other factors beyond the Company’s control. Other factors that affect insurance revenue are the profitability and growth of the Company’s clients, the renewal rate of the current insurance policies, continued development of new product and services as well as access to new markets. The Company’s insurance revenues and profitability may also be adversely affected by new laws and regulatory developments impacting the healthcare and insurance markets.
Changes in the equity markets could materially affect the level of assets under management and the demand for other fee-based services.
Economic downturns could affect the volume of income from and demand for fee-based services. Revenue from the wealth management and employee benefit trust businesses depends in large part on the level of assets under management and administration. Market volatility and the potential to lead customers to liquidate investments, as well as lower asset values, can reduce the level of assets under management and administration and thereby decrease the Company’s investment management and employee benefit trust revenues.
Financial services companies depend on the accuracy and completeness of information about customers and counterparties.
In deciding whether to extend credit or enter into other transactions, the Company may experience significant volatility.
25
The Company may be required to record impairment charges related to goodwill, other intangible assets and the investment portfolio.
The Company may be required to record impairment charges in respect to goodwill, other intangible assets and the investment portfolio. Numerous factors, including lack of liquidity for resale of certain investment securities, absence of reliable pricing information for investment securities, the economic condition of state and local municipalities, adverse changes in the business climate, adverse actions by regulators, unanticipated changes in the competitive environment or a decision to change the operations or dispose of an operating unit could have a negative effect on the investment portfolio, goodwill or other intangible assets in future periods.
The Company’s financial statements are based, in part, on assumptions and estimates, which, if incorrect or conditions change, could cause unexpected losses in the future.
Pursuant to accounting principles generally accepted in the United States, the Company is required to use certain assumptions and estimates in preparing its financial statements, including in determining credit loss reserves, mortgage repurchase liability and reserves related to litigation, among other items. Certain of the Company’s financial instruments, including available-for-sale securities and certain loans, among other items, require a determination of their fair value in order to prepare the Company’s financial statements. Where quoted market prices are not available, the Company may make fair value determinations based on internally developed models or other means which ultimately rely to some degree on management judgment. Some of these and other assets and liabilities may have no direct observable price levels, making their valuation particularly subjective, as they are based on significant estimation and judgment. In addition, sudden illiquidity in markets or declines in prices of certain loans and securities may make it more difficult to value certain balance sheet items, which may lead to the possibility that such valuations will be subject to further change or adjustment. If assumptions or estimates underlying the Company’s financial statements are incorrect, it may experience material losses.
Risk Related to extend credit or enter into other transactions, the Company may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports and other financial information. The Company may also rely on representations of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports or other informationAcquisition Activity
Acquisition activity could have a material adverse impact on business and, in turn,adversely affect the Company’s financial condition and resultsresult of operations.
The Company is exposed to fraud in many aspectsbusiness strategy of the servicesCompany includes growth through acquisition. Recently completed and products that it provides.
A portion of the Company’s loan portfolio was acquired primarily through whole-bank acquisitions and was not underwritten by the Company cannot be realized upon or is liquidated at prices not sufficient to recover the full amountorigination.
At December 31, 2021, 14% of the loan portfolio was acquired and was not underwritten by the Company at origination, and therefore is not necessarily reflective of the Company’s historical credit or derivative exposurerisk experience. The Company performed extensive credit due diligence prior to each acquisition and marked the Company. Anyloans to fair value upon acquisition, with such fair valuation considering expected credit losses that existed at the time of acquisition. However, there is a risk that credit losses could be larger than currently anticipated, thus adversely affecting earnings.
26
Risks Related to COVID-19
The COVID-19 pandemic has had, and may continue to have, a material adverse effect on the Company’s financial conditionbusinesses and results of operations.
Since COVID-19 was declared a global pandemic by governmental agencies or other parties that may lead to adverse consequences.
The Company has experienced, and could continue to experience, a shortage of labor for branch associates and administrative positions, including due to concerns around and illnesses arising from COVID-19 and its subsidiaries have been named or threatenedvarious variants and other factors, which could decrease the pool of available qualified talent for key functions. Such labor shortages could be further exacerbated by expanded federal, state and local COVID-19 vaccination requirements. In addition, the Company’s wages and benefits programs may be insufficient to attract and retain the best talent especially in a rising wage market.
With respect to the Company’s loan portfolios, COVID-19 related business shutdowns and slowdowns, limitations on commercial activity and financial transactions, variability in unemployment, increased inflation, increased commercial property vacancy rates, reduced profitability and ability for property owners to make mortgage payments, overall economic and financial market instability, and decreased consumer confidence, may negatively impact customers and cause the Company’s customers to be named as defendants in various lawsuits arising from its unable to make scheduled loan payments. The Company instituted a deferral program which granted customers impacted by COVID-19 deferrals of loan principal and/or its subsidiaries’ business activities (and in some cases frominterest payments provided that such customers met certain requirements. While certain deferrals are still ongoing, it is difficult to assess whether a customer will be able to perform under the activitiesoriginal terms of acquired companies). In addition, from timethe loan once the extended deferral period expires. New deferrals may be warranted if situations worsen. Once these deferrals expire, it may become apparent that more customers than expected are unable to time,perform and the Company is, or may become,be required to classify these loans as nonaccrual, make additional provisions for credit losses and net charge-offs. If these deferrals were not effective in mitigating the subjecteffect of governmental and self-regulatory agency information-gathering requests, reviews, investigations and proceedings and other forms of regulatory inquiry, including by bank regulatory agencies, the SEC and law enforcement authorities. The results of such proceedings could lead to delays in or prohibition to acquire other companies, significant penalties, including monetary penalties, damages, adverse judgments, settlements, fines, injunctions, restrictionsCOVID-19 on the way in which the Company conducts its business, or reputational harm.
In addition, the Company continually encounters technological changehas participated as a lender in the first and second rounds of funding for the Small Business Administration’s Paycheck Protection Program (“PPP”). There are heightened concerns associated with processing the initial and follow-up loan applications and the failurerelated forgiveness applications which expose the Company to understand and adaptrisks relating to these changes could have a negative impact onnoncompliance with the business.
In addition, the pandemic has also increased the likelihood that federal and services or be successful in marketing these products and services to its customers. Failure to successfully keep pace with technological changes affectingstate taxes may increase as a result of the financial services industryeffects of the pandemic on governmental budgets, which could have a material adverse impact onreduce the Company’s financial condition and results of operations.
General Risks
Trading activity in the Company’s common stock could result in material price fluctuations.
The market price of the Company’s common stock may fluctuate significantly in response to a number of other factors including, but not limited to:
• | Changes in securities analysts’ expectations of financial performance; |
• | Volatility of stock market prices and volumes; |
• | Incorrect information or speculation; |
• | Changes in industry valuations; |
• | Variations in operating results from general expectations; |
• | Actions taken against the Company by various regulatory agencies; |
27
• | Changes in authoritative accounting guidance by the Financial Accounting Standards Board or other regulatory agencies; |
• | Changes in general domestic economic conditions such as inflation rates, tax rates, unemployment rates, oil prices, labor and healthcare cost trend rates, recessions, and changing government policies, laws and regulations; and |
• | Severe weather, natural disasters, acts of war or terrorism and other external events. |
Item 1B. Unresolved Staff Comments
None
The Company’s primary headquarters are located at 5790 Widewaters Parkway, Dewitt, New York, which is leased. In addition, the Company has 273266 properties, of which 165167 are owned and 10899 are under lease arrangements. With respect to the Banking segment, the Company operates 231206 full-service branches, 12 drive-thru only facilities and 1118 facilities for back office banking operations. With respect to the Employee Benefit Services segment, the Company operates 1112 customer service facilities and one facility for back office operations, all of which are leased. With respect to the All Other segment, the Company operates 2017 customer service facilities, all16 of which are leased. Some properties contain tenant leases or subleases.
Real property and related banking facilities owned by the Company at December 31, 20192021 had a net book value of $83.9$96.6 million and none of the properties were subject to any material encumbrances. For the year ended December 31, 2019,2021, the Company paid $8.8$8.9 million of rental fees for facilities leased for its operations. Effective January 1, 2019, the Company adopted new lease accounting guidance in accordance with Accounting Standards Update 2016-02, Leases (Topic 842) that requires recognition of a liability associated with future payments under lease agreements and a right-of-use asset representing the right to use the underlying assets. The adoption of this new guidance resulted in the recognition of a lease liability of $34.2 million and corresponding right-of-use asset of $34.2 million. As of December 31, 2019, the lease liability and corresponding right-of-use asset were $40.9 million and $39.9 million, respectively. See the “New Accounting Pronouncements” Section of Note A on page 74 of the Notes to the Consolidated Financial Statements for further information about this guidance. The Company believes that its facilities are suitable and adequate for the Company’s current operations.
The Company and its subsidiaries are subject in the normal course of business to various pending and threatened legal proceedings in which claims for monetary damages are asserted. As of December 31, 2019,2021, management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against the Company or its subsidiaries will be material to the Company’s consolidated financial position. On at least a quarterly basis, the Company assesses its liabilities and contingencies in connection with such legal proceedings. For those matters where it is probable that the Company will incur losses and the amounts of the losses can be reasonably estimated, the Company records an expense and corresponding liability in its consolidated financial statements. To the extent the pending or threatened litigation could result in exposure in excess of that liability, the amount of such excess is not currently estimable. The range of reasonably possible losses for matters where an exposure is not currently estimable or considered probable, beyond the existing recorded liabilities, is believed to be between $0 and $1 million in the aggregate. AlthoughThis estimated range is based on information currently available to the Company and involves elements of judgment and significant uncertainties. Information on current legal proceedings is set forth in Note N to the consolidated financial statements included under Part II, Item 8. The Company does not believe that the outcome of pending or threatened litigation will be material to the Company’s consolidated financial position, it cannot rule out the possibility that such outcomes will be material to the consolidated results of operations for a particular reporting period in the future.
Not Applicable
Part II
Item 5. Market for the Registrant'sRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s common stock has been trading on the New York Stock Exchange under the symbol “CBU” since December 31, 1997. Prior to that, the common stock traded over-the-counter on the NASDAQ National Market under the symbol “CBSI” beginning on September 16, 1986. There were 51,891,67853,864,500 shares of common stock outstanding on January 31, 2020,2022, held by approximately 3,7663,794 registered shareholders of record. The following table sets forth the high and low closing prices for the common stock, and the cash dividends declared with respect thereto, for the periods indicated. The prices do not include retail mark-ups, mark-downs or commissions.
Year / Qtr | High Price | Low Price | Quarterly Dividend | |||||||||
2019 | ||||||||||||
4th | $ | 71.07 | $ | 60.09 | $ | 0.41 | ||||||
3rd | $ | 66.12 | $ | 59.51 | $ | 0.41 | ||||||
2nd | $ | 67.47 | $ | 61.10 | $ | 0.38 | ||||||
1st | $ | 64.92 | $ | 56.94 | $ | 0.38 | ||||||
2018 | ||||||||||||
4th | $ | 65.66 | $ | 54.72 | $ | 0.38 | ||||||
3rd | $ | 66.52 | $ | 60.04 | $ | 0.38 | ||||||
2nd | $ | 61.98 | $ | 52.61 | $ | 0.34 | ||||||
1st | $ | 57.00 | $ | 51.22 | $ | 0.34 | ||||||
The Company has historically paid regular quarterly cash dividends on its common stock, and declared a cash dividend of $0.41$0.43 per share for the first quarter of 2020.2022. The Board of Directors of the Company presently intends to continue the payment of regular quarterly cash dividends on the common stock, as well as to make payment of regularly scheduled dividends on the trust preferred stock when due, subject to the Company's need for those funds.stock. However, because the substantial majority of the funds available for the payment of dividends by the Company are derived from the subsidiary Bank, future dividends will depend largely upon the earnings of the Bank, its financial condition, its need for funds and applicable governmental policies and regulations.
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The following graph compares cumulative total shareholders returns on the Company’s common stock over the last five fiscal years to the S&P 600 Commercial Banks Index, the NASDAQ Bank Index, the S&P 500 Index, and the KBW Regional Banking Index. Total return values were calculated as of December 31 of each indicated year assuming a $100 investment on December 31, 20142016 and reinvestment of dividends.
29
Equity Compensation Plan Information
The following table provides information as of December 31, 20192021 with respect to shares of common stock that may be issued under the Company’s existing equity compensation plans.
| | | | | | | |
|
| |
| | |
| Number of Securities |
| | Number of | | | | | Remaining Available |
| | Securities to be | | | | | For Future Issuance |
| | Issued upon | | Weighted-average | | Under Equity | |
| | Exercise of | | Exercise Price | | Compensation Plans | |
| | Outstanding | | of Outstanding | | (excluding securities | |
| | Options, Warrants | | Options, Warrants | | reflected in the first | |
Plan Category | | and Rights (1) | | and Rights | | column) | |
Equity compensation plans approved by security holders: |
|
|
| |
|
|
|
2004 Long-term Incentive Plan |
| 198,073 | | $ | 31.66 |
| 0 |
2014 Long-term Incentive Plan |
| 1,371,900 | |
| 46.93 |
| 616,540 |
Equity compensation plans not approved by security holders |
| 0 | |
| 0 |
| 0 |
Total |
| 1,569,973 | | $ | 45.00 |
| 616,540 |
(1) | The number of securities includes 177,268 shares of unvested restricted stock. |
Plan Category | Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights (1) | Weighted-average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available For Future Issuance Under Equity Compensation Plans (excluding securities reflected in the first column) | |||||||||
Equity compensation plans approved by security holders: | ||||||||||||
2004 Long-term Incentive Plan | 486,940 | $ | 30.98 | 52,900 | ||||||||
2014 Long-term Incentive Plan | 1,212,842 | 40.62 | 1,105,625 | |||||||||
Equity compensation plans not approved by security holders | 0 | 0 | 0 | |||||||||
Total | 1,699,782 | $ | 37.86 | 1,158,525 |
Stock Repurchase Program
At its December 2018 meeting, the Board approved a stock repurchase program authorizing the repurchase, at the discretion of senior management, of up to 2,500,000 shares of the Company’s common stock, in accordance with securities laws and regulations, during a twelve-month period starting January 1, 2019. There were no treasury stock purchases made under this authorization in 2019. At its December 20192020 meeting, the Board approved a new stock repurchase program authorizing the repurchase, at the discretion of senior management, of up to 2,600,0002,680,000 shares of the Company’s common stock, in accordance with securities and banking laws and regulations, during athe twelve-month period starting January 1, 2020.2021. There were 67,500 shares of treasury stock purchases made under this authorization in 2021. At its December 2021 meeting, the Board approved a new stock repurchase program authorizing the repurchase, at the discretion of senior management, of up to 2,697,000 shares of the Company’s common stock, in accordance with securities and banking laws and regulations, during the twelve-month period starting January 1, 2022. Any repurchased shares will be used for general corporate purposes, including those related to stock plan activities. The timing and extent of repurchases will depend on market conditions and other corporate considerations as determined at the Company’s discretion.
The following table presents stock purchases made during the fourth quarter of 2019:
Issuer Purchases of Equity Securities
Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares That May Yet be Purchased Under the Plans or Programs | |||||||||
October 1-31, 2019 (1) | 1,187 | $ | 61.64 | 0 | 2,500,000 | ||||||||
November 1-30, 2019 | 0 | 0.00 | 0 | 2,500,000 | |||||||||
December 1-31, 2019 | 0 | 0.00 | 0 | 2,500,000 | |||||||||
Total | 1,187 | $ | 61.64 |
| | | | | | | | | |
|
| |
| | |
| |
| |
| | | | | | | | | |
| | Total | | | | | Total Number of Shares | | |
| | Number of | | Average | | Purchased as Part of | | Maximum Number of Shares | |
| | Shares | | Price Paid | | Publicly Announced | | That May Yet be Purchased | |
Period | | Purchased | | Per Share | | Plans or Programs | | Under the Plans or Programs | |
October 1-31, 2021 (1) |
| 872 | | $ | 71.95 |
| 0 |
| 2,680,000 |
November 1-30, 2021 |
| 0 | |
| 0.00 |
| 0 |
| 2,680,000 |
December 1-31, 2021 |
| 67,500 | |
| 71.91 |
| 67,500 |
| 2,612,500 |
Total |
| 68,372 | | $ | 71.91 |
|
|
|
|
(1) | Included in the common shares repurchased were 872 shares acquired by the Company in connection with administration of a deferred compensation plan. These shares were not repurchased as part of the publicly announced repurchase plan described above. |
Item 6. Selected Financial Data[Reserved]
30
Years Ended December 31, | |||||
(In thousands except per share data and ratios) | 2019 | 2018 | 2017 | 2016 | 2015 |
Income Statement Data: | |||||
Loan interest income | $308,210 | $286,165 | $253,949 | $211,467 | $187,743 |
Investment interest income | 77,517 | 76,568 | 75,506 | 73,720 | 71,879 |
Interest expense | 26,552 | 17,678 | 13,780 | 11,291 | 11,202 |
Net interest income | 359,175 | 345,055 | 315,675 | 273,896 | 248,420 |
Provision for loan losses | 8,430 | 10,837 | 10,984 | 8,076 | 6,447 |
Noninterest income | 225,718 | 223,720 | 202,421 | 155,625 | 123,303 |
Gain (loss) on investment securities & loss on debt extinguishment, net | 4,901 | 339 | 2 | 0 | (4) |
Acquisition expenses and litigation settlement | 8,608 | (769) | 25,986 | 1,706 | 7,037 |
Other noninterest expenses | 363,418 | 346,058 | 321,163 | 265,142 | 226,018 |
Income before income taxes | 209,338 | 212,988 | 159,965 | 154,597 | 132,217 |
Net income | 169,063 | 168,641 | 150,717 | 103,812 | 91,230 |
Diluted earnings per share | 3.23 | 3.24 | 3.03 | 2.32 | 2.19 |
Balance Sheet Data: | |||||
Cash equivalents | $43,243 | $29,083 | $19,652 | $24,243 | $21,931 |
Investment securities | 3,088,343 | 2,981,658 | 3,081,379 | 2,784,392 | 2,847,940 |
Loans | 6,890,543 | 6,281,121 | 6,256,757 | 4,948,562 | 4,801,375 |
Allowance for loan losses | (49,911) | (49,284) | (47,583) | (47,233) | (45,401) |
Intangible assets | 836,923 | 807,349 | 825,088 | 480,844 | 484,146 |
Total assets | 11,410,295 | 10,607,295 | 10,746,198 | 8,666,437 | 8,552,669 |
Deposits | 8,994,967 | 8,322,371 | 8,444,420 | 7,075,954 | 6,873,474 |
Borrowings | 344,873 | 413,682 | 485,896 | 248,370 | 403,446 |
Shareholders’ equity | 1,855,234 | 1,713,783 | 1,635,315 | 1,198,100 | 1,140,647 |
Capital and Related Ratios: | |||||
Cash dividends declared per share | $1.58 | $1.44 | $1.32 | $1.26 | $1.22 |
Book value per share | 35.82 | 33.43 | 32.26 | 26.96 | 26.06 |
Tangible book value per share (1) | 20.52 | 18.59 | 16.94 | 17.12 | 15.90 |
Market capitalization (in millions) | 3,674 | 2,988 | 2,725 | 2,746 | 1,748 |
Tier 1 leverage ratio | 10.80% | 11.08% | 10.00% | 10.55% | 10.32% |
Total risk-based capital to risk-adjusted assets | 17.99% | 19.06% | 17.45% | 19.10% | 18.08% |
Tangible equity to tangible assets (1) | 10.01% | 9.68% | 8.61% | 9.24% | 8.59% |
Dividend payout ratio | 48.4% | 43.8% | 43.5% | 53.7% | 55.5% |
Period end common shares outstanding | 51,794 | 51,258 | 50,696 | 44,437 | 43,775 |
Diluted weighted-average shares outstanding | 52,370 | 51,975 | 49,665 | 44,720 | 41,605 |
Selected Performance Ratios: | |||||
Return on average assets | 1.53% | 1.58% | 1.49% | 1.20% | 1.17% |
Return on average equity | 9.42% | 10.20% | 10.21% | 8.57% | 8.87% |
Net interest margin | 3.76% | 3.73% | 3.69% | 3.71% | 3.73% |
Noninterest revenues/operating revenues (FTE) (2) | 38.7% | 39.6% | 38.8% | 35.5% | 32.3% |
Efficiency ratio (3) | 59.6% | 58.0% | 58.3% | 59.6% | 58.2% |
Asset Quality Ratios: | |||||
Allowance for loan losses/total loans | 0.72% | 0.78% | 0.76% | 0.95% | 0.95% |
Nonperforming loans/total loans | 0.35% | 0.40% | 0.44% | 0.48% | 0.50% |
Allowance for loan losses/nonperforming loans | 206% | 197% | 173% | 199% | 190% |
Loan loss provision/net charge-offs | 108% | 119% | 103% | 129% | 101% |
Net charge-offs/average loans | 0.12% | 0.15% | 0.18% | 0.13% | 0.15% |
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) primarily reviews the financial condition and results of operations of the Company for the past two years, although in some circumstances a period longer than two years is covered in order to comply with SEC disclosure requirements or to more fully explain long-term trends. The following discussion and analysis should be read in conjunction with the Selected Consolidated Financial Information beginning on page 26 and the Company’s Consolidated Financial Statements and related notes that appear on pages 6070 through 111.133. All references in the discussion to the financial condition and results of operations refer to the consolidated position and results of the Company and its subsidiaries taken as a whole.
Unless otherwise noted, all earnings per share (“EPS”) figures disclosed in the MD&A refer to diluted EPS; interest income, net interest income, and net interest margin are presented on a fully tax-equivalent (“FTE”) basis, which is a non-GAAP measure. The term “this year” and equivalent terms refer to results in calendar year 2019,2021, “last year” and equivalent terms refer to calendar year 2018,2020, and all references to income statement results correspond to full-year activity unless otherwise noted.
This MD&A contains certain forward-looking statements with respect to the financial condition, results of operations, and business of the Company. These forward-looking statements involve certain risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements are set herein under the caption “Forward-Looking Statements” on page 54.
Critical Accounting Policies
As a result of the complex and dynamic nature of the Company’s business, management must exercise judgment in selecting and applying the most appropriate accounting policies for its various areas of operations. The policy decision process not only ensures compliance with the current accounting principles generally accepted in the United States of America (“GAAP”), but also reflects management’s discretion with regard to choosing the most suitable methodology for reporting the Company’s financial performance. It is management’s opinion that the accounting estimates covering certain aspects of the business have more significance than others due to the relative importance of those areas to overall performance, or the level of subjectivity in the selection process. These estimates affect the reported amounts of assets and liabilities as well as disclosures of revenues and expenses during the reporting period. Actual results could meaningfully differ from these estimates. Management believes that the critical accounting estimates include the allowance for loancredit losses, actuarial assumptions associated with the pension, post-retirement and other employee benefit plans, the provision for income taxes, investment valuation, and other-than-temporary impairment, the carrying value of goodwill and other intangible assets, and acquired loan valuations. A summary of the accounting policies used by management is disclosed in Note A, “Summary of Significant Accounting Policies”, starting on page 65.
Supplemental Reporting of Non-GAAP Results of Operations
The Company also provides supplemental reporting of its results on an “operating,” “adjusted net”“adjusted” or “tangible” basis, from which it excludes the after-tax effect of amortization of core deposit and other intangible assets (and the related goodwill, core deposit intangible and other intangible asset balances, net of applicable deferred tax amounts), accretion on non-impairednon-PCD purchased loans, acquisition expenses, acquisition-related provision for credit losses, acquisition-related contingent consideration adjustments, the unrealized gain (loss) on equity securities, lossnet gain on sale of investments, litigation accrual expenses and the gain on debt extinguishment. Although these items are non-GAAP measures, the Company’s management believes this information helps investors and analysts measure underlying core performance and improves comparability to other organizations that have not engaged in acquisitions. In addition, the Company provides supplemental reporting for “adjusted pre-tax, pre-provision net revenues,” which excludes the provision for credit losses, acquisition expenses, acquisition-related contingent consideration adjustments, net gain on sale of investments, unrealized gain (loss) on equity securities, gain on debt extinguishment and the one-time benefitlitigation accrual expenses from the revaluation ofincome before income taxes. Although adjusted pre-tax, pre-provision net deferred tax liabilities. Although “adjusted net income” as defined by the Companyrevenue is a non-GAAP measure, the Company’s management believes this information helps investors understandand analysts measure and compare the effectCompany’s performance through a credit cycle by excluding the volatility in the provision for credit losses associated with the adoption of acquisitionsCECL and other non-recurring activitythe economic uncertainty caused by the COVID-19 pandemic. Diluted adjusted net earnings per share, a non-GAAP measure, were $3.64 in its reported results.2021, up $0.27, or 8.0%, from 2020 and up $0.20, or 5.8%, from 2019. Adjusted pre-tax, pre-provision net revenue per share, a non-GAAP measure, was $4.28 in 2021, up $0.02, or 0.5%, from 2020 and up $0.05, or 1.2%, from 2019. Reconciliations of GAAP amounts with corresponding non-GAAP amounts are presented in Table 20.16.
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Executive Summary
The Company’s business philosophy is to operate as a diversified financial services enterprise providing a broad array of banking and other financial services to retail, commercial and municipal customers. The Company’s banking subsidiary is Community Bank, N.A. (the “Bank” or “CBNA”). The Company also provides employee benefit and trust related services via itsCompany’s Benefit Plans Administrative Services, Inc. (“BPAS”) subsidiary is a leading provider of employee benefits administration, trust services, collective investment fund administration and actuarial consulting services to customers on a national scale. In addition, the Company offers comprehensive financial planning, insurance and wealth management services through its Community Bank Wealth Management Group and insurance-related services.
The Company’s core operating objectives are: (i) growoptimize the branch network and digital banking delivery systems, primarily through a disciplined acquisition strategy,strategies and certain selective de novo expansions,divestitures/consolidations, (ii) build profitable loan and deposit volume using both organic and acquisition strategies, (iii) manage an investment securities portfolio to complement the Company’s loan and deposit strategies and optimize interest rate risk, yield and liquidity, (iv) increase the noninterest component of total revenues through development of banking-related fee income, growth in existing financial services business units, and the acquisition of additional financial services and banking businesses, and (v) utilize technology to deliver customer-responsive products and services and improve efficiencies.
Significant factors reviewed by management to evaluate achievement of the Company’s operating objectives and its operating results and financial condition include, but are not limited to: net income and earnings per share; return on assets and equity; components of net interest margin; noninterest revenues; noninterest expenses; asset quality; loan and deposit growth; capital management; performance of individual banking and financial services units; performance of specific product lines and customers; liquidity and interest rate sensitivity; enhancements to customer products and services and their underlying performance characteristics; technology advancements; market share; peer comparisons; and the performance of recently acquired businesses.
On October 21, 2019,4, 2021, the Company announced that itthe Bank had entered into a definitivean agreement to acquire Elmira Savings Bank (“Elmira”), a twelve branch banking franchise headquartered in Elmira, New York, for $82.8 million in cash. The acquisition will enhance the Company’s presence in five counties in New York’s Southern Tier and Finger Lakes regions. Elmira had total assets of $632.2 million, total deposits of $541.0 million, and net loans of $458.6 million at December 31, 2021. The merger was approved by the shareholders of Elmira on December 14, 2021. The Company expects to complete the acquisition in the second quarter of 2022, subject to customary closing conditions, including required regulatory approval.
On August 2, 2021, the Company, through its subsidiary OneGroup, completed its acquisition of certain assets of Thomas Gregory Associates Insurance Brokers, Inc. (“TGA”), a specialty-lines insurance broker based in the Boston, Massachusetts area for $13.1 million, including $11.6 million in cash and contingent consideration valued at $1.5 million. The Company recorded a $10.9 million customer list intangible asset and $2.2 million of goodwill in conjunction with the acquisition.
On July 1, 2021, the Company, through its subsidiary Benefit Plans Administrative Services, LLC, completed its acquisition of Fringe Benefits Design of Minnesota, Inc. (“FBD”), a provider of retirement plan administration and benefit consulting services with offices in Minnesota and South Dakota, for $16.7 million, including $15.3 million in cash and contingent consideration valued at $1.4 million. As of December 31, 2021, the contingent consideration is valued at $1.6 million, resulting in a $0.2 million acquisition-related contingent consideration adjustment recorded in the consolidated statements of income in 2021. The Company recorded a $14.0 million customer list intangible asset and $2.1 million of goodwill in conjunction with the acquisition.
On June 1, 2021, the Company, through its subsidiary OneGroup, completed its acquisition of certain assets of NuVantage Insurance Corp. (“NuVantage”), an insurance agency headquartered in Melbourne, Florida. The Company paid $2.9 million in cash and recorded a $1.4 million customer list intangible asset and $1.5 million of goodwill in conjunction with the acquisition.
On June 12, 2020, the Company completed its merger with Steuben Trust Corporation (“Steuben”), parent company of Steuben Trust Company, a New York State chartered bank headquartered in Hornell, New York, for approximately $104.4$98.6 million in Company stock and cash. Steuben currently operates 14 branch locationscash, comprised of $21.6 million in Western New York.cash and the issuance of 1.36 million shares of common stock. The acquisition will extendmerger extended the Company’s footprint into two new counties in Western New York State, and enhanceenhanced the Company’s presence in four Western New York State counties in which it currently operates. The acquisition is expected to close during the second quarter of 2020, pending both customary regulatory and Steuben shareholder approval. The Company expects to incur certain one-time, transaction-related costs in 2020 inhad already operated. In connection with the Steuben acquisition.merger, the Company added 11 full-service offices to its branch service network and acquired $607.8 million of assets, including $339.7 million of loans and $180.5 million of investment securities, as well as $516.3 million of deposits. Goodwill of $20.0 million, a $2.9 million core deposit intangible asset and a $1.2 million customer list intangible asset were recognized as a result of the merger.
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On September 18, 2019, the Company, through its subsidiary, Community Investment Services, Inc. (“CISI”), completed its acquisition of certain assets of a practice engaged in the financial services business headquartered in Syracuse, New York. The Company paid $0.5 million in cash to acquire a customer list, and recorded a $0.5 million customer list intangible asset in conjunction with the acquisition.
On July 12, 2019, the Company completed its merger with Kinderhook Bank Corp. (“Kinderhook”), parent company of The National Union Bank of Kinderhook, headquartered in Kinderhook, New York, for $93.4 million in cash. The merger added 11 branch locations across a five county area in the Capital District of Upstate New York. The merger resulted in the acquisition of $642.8 million of assets, including $479.9 million of loans and $39.8 million of investment securities, as well as $568.2 million of deposits and $40.3deposits. Goodwill of $40.0 million in goodwill.
On January 2, 2019, the Company, through its subsidiary, CISI, completed its acquisition of certain assets of Wealth Resources Network, Inc. (“Wealth Resources”), a financial services business headquartered in Liverpool, New York. The Company paid $1.2 million in cash to acquire a customer list from Wealth Resources, and recorded a $1.2 million customer list intangible asset in conjunction with the acquisition.
The Company reported net income of $169.1$189.7 million for the year ended December 31, 20192021 that was 0.3%$25.0 million, or 15.2%, above the prior year, while earnings per share of $3.23$3.48 for the year was 0.3% below$0.40, or 13.0%, above the prior year. The increase in net income and earnings per share was due in part to the expanded business activities fromdecrease in provision for credit losses, which included $3.1 million of acquisition-related provision for credit losses associated with the Kinderhook acquisition completedof Steuben in 2020, with the remaining decrease largely attributable to steady improvements in the third quarter of 2019. Contributingeconomic outlook and the loan portfolio’s asset quality profile during 2021. Other factors resulting in the increases to the increase in net income wasand earnings per share were higher noninterest revenues, an increase in net interest income, a decrease in the provision for loan losses, an increaseacquisition-related expenses and a decrease in gain on sales of investment securities, higher noninterest revenues and lower income taxes.litigation accrual expenses. Partially offsetting these items were higher noninterest expenses, including a full year of the expanded business activities from the Steuben acquisition completed in the second quarter of 2020 and the three financial services businesses acquired in 2021, an increase in acquisition expenses, an increaseincome taxes, a decrease in noninterest expensesgain on debt extinguishment and an increase in weighted average diluted shares outstanding attributable to the full year’s impact of shares issued in connection with the Steuben acquisition in 2020 and administration of the Company’s 401(k) plan and employee stock plan.plans. Net income adjusted to exclude acquisition expenses, gain on sales of investment securities,acquisition-related provision for credit losses, acquisition-related contingent consideration adjustment, unrealized gain (loss) on equity securities, losslitigation accrual, gain on debt extinguishment, amortization of intangibles, and acquired non-impairednon-PCD loan accretion (“Adjusted Net Income”), a non-GAAP measure, increased $4.1$18.1 million, or 2.3%10.0%, compared to the prior year. Earnings per share adjusted to exclude acquisition expenses, gain on sales of investment securities,acquisition-related provision for credit losses, acquisition-related contingent consideration adjustment, unrealized gain (loss) on equity securities, losslitigation accrual, gain on debt extinguishment, amortization of intangibles, and acquired non-impairednon-PCD loan accretion (“Adjusted Earnings Per Share”), a non-GAAP measure, of $3.44$3.64 increased $0.05,$0.27, or 1.5%8.0%, compared to the prior year. See Table 2016 for Reconciliation of GAAP to Non-GAAP Measures.
The Company experienced year-over-year growth in average interest-earning assets and average deposits, primarily reflective of large net inflows of funds from government stimulus programs, the Kinderhook acquisition completed in July 2019. Average deposits increased in 2019 as compared to 2018, reflective of organic growthPaycheck Protection Program (“PPP”) loan originations and the full year impact from the acquisition of Steuben in the Kinderhook acquisition.second quarter of 2020. Average external borrowings in 20192021 decreased from 20182020 reflective of a decreasedecreases in average subordinated debt held by unconsolidated subsidiary trusts, average subordinated notes payable and average Federal Home Loan Bank of New York (“FHLB”) borrowings, partially offset by an increase in average securities sold under an agreement to repurchase (“customer repurchase agreements”) as well as a decrease in overnight borrowings and a decrease in subordinated debt held by unconsolidated subsidiary trusts.. The decrease in average subordinated debt held by unconsolidated subsidiary trusts iswas primarily due to the redemption of $77.3 million of trust preferred subordinated debt held by MBVT StatutoryCommunity Capital Trust IIV (“MBVT I”CCT IV”) and, an unconsolidated subsidiary trust, during the first quarter of 2021. The decrease in average subordinated notes payable was primarily driven by the redemption of $10.4 million of subordinated notes payable acquired from the Kinderhook Capital Trust (“KCT”)acquisition, during the thirdfourth quarter of 2019, partially offset by subordinated debt acquired2020.
Asset quality remained strong and generally improved throughout 2021, with the Kinderhook transaction. Asset quality in 2019 remained stable and favorable in comparisonupgrade of several large business loans from nonaccrual to accruing status contributing to the end of 2018, with nonperforming loanand delinquency ratios the delinquency ratio and theimproving from 2020 levels. The full year net charge-off ratio at December 31, 2019 allwas also favorable and improved from one year earlier.
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Net Income and Profitability
Net income for 20192021 was $169.1$189.7 million, an increase of $0.4$25.0 million, or 0.3%15.2%, from 2018’s earnings.2020’s net income. Earnings per share for 20192021 was $3.23, down $0.01,$3.48, up $0.40, or 0.3%13.0%, from 2018’s2020’s results. Net income and earnings per share for 20192021 were impacted by $8.6$0.7 million of acquisition expenses related to the pending Elmira Savings Bank acquisition and the three financial services acquisitions completed in 2021, $0.2 million of acquisition-related contingent consideration adjustment related to the FBD acquisition and a $0.1 million adjustment to litigation accrual expenses in 2021, while the Company incurred $4.9 million of acquisition expenses primarily related to the KinderhookSteuben acquisition, while the Company recovered $0.8$3.1 million of vendor contract termination chargesacquisition-related provision for credit losses related to the Steuben acquisition and $3.0 million of litigation accrual expenses in 2018 that were initially recorded as an acquisition expense in the second quarter of 2017.2020. Adjusted Net Income, a non-GAAP measure, increased $4.1$18.1 million, or 2.3%10.0%, compared to the prior year. Adjusted Earningsyear, while adjusted pre-tax, pre-provision net revenue, a non-GAAP measure, increased $5.5 million, or 2.4%, compared to 2020. Diluted adjusted net earnings per Shareshare, a non-GAAP measure, of $3.44$3.64 increased $0.05,$0.27, or 1.5%8.0%, compared to the prior year.year, while adjusted pre-tax, pre-provision net revenue per share, a non-GAAP measure, of $4.28 increased $0.02, or 0.5%, compared to 2020. See Table 2016 for Reconciliation of GAAP to Non-GAAP Measures.
Net income for 20182020 was $168.6$164.7 million, an increasea decrease of $17.9$4.4 million, or 11.9%2.6%, from 2017’s earnings, while2019’s earnings. Earnings per share for 2020 was $3.08, down $0.15, or 4.6%, from 2019’s results. Net income and earnings per share for 2018 was $3.24, up $0.21, or 6.9%. The 2018 results included the aforementioned $0.82020 were impacted by $4.9 million recovery of vendor contract termination charges, while the 2017 results included $26.0 million, or $0.37 per share, of acquisition expenses primarily related to the MerchantsSteuben acquisition, $3.1 million of acquisition-related provision for credit losses related to the Steuben acquisition and NRS acquisitions.$3.0 million of litigation accrual expenses, while the Company incurred $8.6 million of acquisition expenses in 2019 primarily related to the Kinderhook acquisition and recorded $4.9 million in net gains on the sales of investment securities in 2019. 2020 Adjusted Net Income, a non-GAAP measure, increased $0.2 million, or 0.1%, and Adjusted Earnings per Shareshare, a non-GAAP measure, of $3.39 in 2018 increased $0.59,$3.37 decreased $0.07, or 21.1%2.0%, compared to the prior year.year, respectively. See Table 2016 for Reconciliation of GAAP to Non-GAAP Measures.
Table 1: Condensed Income Statements
| | | | | | | | | |
| | Years Ended December 31, | |||||||
(000’s omitted, except per share data) | | 2021 |
| 2020 |
| 2019 | |||
Net interest income | | $ | 374,412 |
| $ | 368,403 |
| $ | 359,175 |
Provision for credit losses | |
| (8,839) | |
| 14,212 | |
| 8,430 |
Gain on sales of investment securities, net | |
| 0 | |
| 0 | |
| 4,882 |
Unrealized gain (loss) on equity securities | |
| 17 | |
| (6) | |
| 19 |
Gain on debt extinguishment | |
| 0 | |
| 421 | |
| 0 |
Noninterest revenue | |
| 246,218 | |
| 228,004 | |
| 225,718 |
Acquisition expenses | |
| 701 | |
| 4,933 | |
| 8,608 |
Litigation accrual | | | (100) | | | 2,950 | | | 0 |
Acquisition-related contingent consideration adjustment | | | 200 | | | 0 | | | 0 |
Other noninterest expenses | |
| 387,337 | |
| 368,651 | |
| 363,418 |
Income before taxes | |
| 241,348 | |
| 206,076 | |
| 209,338 |
Income taxes | |
| 51,654 | |
| 41,400 | |
| 40,275 |
Net income | | $ | 189,694 | | $ | 164,676 | | $ | 169,063 |
| | | | | | | | | |
Diluted weighted average common shares outstanding | |
| 54,527 | |
| 53,487 | |
| 52,370 |
Diluted earnings per share | | $ | 3.48 | | $ | 3.08 | | $ | 3.23 |
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Years Ended December 31, | |||||
(000’s omitted, except per share data) | 2019 | 2018 | 2017 | 2016 | 2015 |
Net interest income | $359,175 | $345,055 | $315,675 | $273,896 | $248,420 |
Provision for loan losses | 8,430 | 10,837 | 10,984 | 8,076 | 6,447 |
Gain/(Loss) on sales of investment securities, net | 4,882 | 0 | 2 | 0 | (4) |
Unrealized gain on equity securities | 19 | 657 | 0 | 0 | 0 |
Loss on debt extinguishment | 0 | (318) | 0 | 0 | 0 |
Noninterest revenue | 225,718 | 223,720 | 202,421 | 155,625 | 123,303 |
Acquisition expenses and litigation settlement | 8,608 | (769) | 25,986 | 1,706 | 7,037 |
Other noninterest expenses | 363,418 | 346,058 | 321,163 | 265,142 | 226,018 |
Income before taxes | 209,338 | 212,988 | 159,965 | 154,597 | 132,217 |
Income taxes | 40,275 | 44,347 | 9,248 | 50,785 | 40,987 |
Net income | $169,063 | $168,641 | $150,717 | $103,812 | $91,230 |
Diluted weighted average common shares outstanding | 52,370 | 51,975 | 49,665 | 44,720 | 41,605 |
Diluted earnings per share | $3.23 | $3.24 | $3.03 | $2.32 | $2.19 |
The Company operates in three business segments: Banking, Employee Benefit Services and All Other. The bankingBanking segment provides a wide array of lending and depository-related products and services to individuals, businesses and municipal enterprises. In addition to these general intermediation services, the Banking segment provides treasury management solutions and payment processing services. Employee Benefit Services, consisting of BPAS and its subsidiaries, provides the following on a national basis: employee benefitretirement plans, health & welfare plans, fund administration, institutional trust services;services, collective investment fund; fund administration, transfer agency; retirement plan andfunds, VEBA/HRA and health savings account plan administration services;115 trusts, fiduciary services, actuarial services;& pension services, and healthcare consulting services. BPAS services more than 3,8004,200 benefit plans with approximately 450,000510,000 plan participants and holds more than $89.3$110 billion in employee benefit trust assets.assets and $1.3 trillion in fund administration. In addition, BPAS employs 370396 professionals locatedserving clients in 18 states,every U.S. state plus the Commonwealth of Puerto Rico, and occupies 1113 offices located in New York, Pennsylvania, Massachusetts, New York, New Jersey, Pennsylvania, Texas, Minnesota, South Dakota and Puerto Rico. The All Other segment is comprised of wealth management and insurance services. Wealth management activities include trust services provided by the personal trust unit of CBNA, investment products and services provided by CISI, and The Carta Group, Inc. (“The Carta Group”) and OneGroup Wealth Partners, Inc. (“Wealth Partners”), andas well as asset advisory servicesmanagement provided by Nottingham Advisors, Inc. (“Nottingham”). The insurance services activities include the offerings of personal and commercial propertylines of insurance and other risk management products and services provided by OneGroup NY, Inc. (“OneGroup”).OneGroup. For additional financial information on the Company’s segments, refer to Note U – Segment Information in the Notes to Consolidated Financial Statements.
The primary factors explaining 20192021 earnings performance are discussed in the remaining sections of this document and are summarized by segment as follows:
BANKING
• | Net interest income increased |
• | The 58. |
• | Banking noninterest revenue, excluding unrealized gain (loss) on equity securities and gain on debt extinguishment, of $67.9 million for 2021 decreased by $1.3 million from 2020’s level. The decrease was primarily driven by decreases in mortgage banking revenues as the Company is currently holding the majority of its new consumer mortgage production in portfolio due to a change in its strategy, and a decline in deposit service charges and fees and other banking revenues including decreases in overdraft fees in part due to the higher average deposit balances resulting from government stimulus program inflows. This was partially offset by an increase in debit interchange and ATM fees, reflective of increased transaction activity including the impact of a full year of activity resulting from the addition of new deposit relationships from the Steuben acquisition in 2020. The Company recognized $0.4 million in gain on debt extinguishment in 2020. |
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• | Banking noninterest expenses, including acquisition and litigation accrual expenses, increased $4.5 million, or 1.7%, in 2021 reflective of an increase in merit and incentive-related employee wages, higher payroll taxes including increases in state-related unemployment taxes and higher employee benefit-related expenses including significant increases in employee medical benefit costs. Other factors included an increase in data processing and communications expenses due to the implementation of new customer-facing digital technologies and back office systems, along with a general increase in the level of business activities as compared to the low 2020 levels resulting from the COVID-19 pandemic, partially offset by the absence of the one-time litigation accrual expenses incurred in 2020 and a decline in acquisition expenses. Excluding acquisition and litigation accrual expenses, banking noninterest expenses increased $11.9 million, or 4.6%, reflective of a full year of business activity from the Steuben acquisition as well as the other factors discussed above. |
EMPLOYEE BENEFIT SERVICES
● | Employee benefit services noninterest revenue for 2021 of $116.6 million increased $13.2 million, or 12.7%, from the prior year level, primarily related to increases in employee benefit trust and custodial fees due in part to higher asset-based revenues, as well as incremental revenues from the acquisition of FBD during the third quarter of 2021. |
● | Employee benefit services noninterest expenses for 2021 totaled $70.7 million. This represented an increase from 2020 of $4.3 million, or 6.4%, and was primarily attributable to an increase in personnel costs associated with the aforementioned acquisition of FBD and the continued buildout of resources to support an expanding revenue base, along with a general increase in the level of business activities as compared to the diminished levels in 2020 as a result of the COVID-19 pandemic. Excluding acquisition-related expenses, employee benefit services noninterest expenses increased $4.0 million, or 6.1%. |
ALL OTHER (WEALTH MANAGEMENT AND INSURANCE SERVICES)
● | Wealth management and insurance services noninterest revenue for 2021 was $68.8 million; an increase of $7.2 million, or 11.7%, from the prior year level. The increase was due to incremental revenues from the acquisitions of NuVantage and TGA in 2021, along with organic growth in both businesses. |
● | Wealth management and insurance services noninterest expenses of $53.7 million increased $3.8 million, or 7.5%, from 2020 primarily due to increased personnel costs associated with the aforementioned acquisitions and the continued buildout of resources to support an expanding revenue base, along with a general increase in the level of business activities as compared to the subdued levels in 2020 resulting from the COVID-19 pandemic. |
Selected Profitability and Other Measures
Return on average assets, return on average equity, dividend payout and equity to asset ratios for the years indicated are as follows:
Table 2: Selected Ratios
| | | | | | | |
|
| 2021 |
| 2020 |
| 2019 |
|
Return on average assets |
| 1.28 | % | 1.28 | % | 1.53 | % |
Return on average equity |
| 9.19 | % | 8.13 | % | 9.42 | % |
Dividend payout ratio |
| 48.3 | % | 53.7 | % | 48.4 | % |
Average equity to average assets |
| 13.91 | % | 15.71 | % | 16.25 | % |
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2019 | 2018 | 2017 | ||||||||||
Return on average assets | 1.53 | % | 1.58 | % | 1.49 | % | ||||||
Return on average equity | 9.42 | % | 10.20 | % | 10.21 | % | ||||||
Dividend payout ratio | 48.4 | % | 43.8 | % | 43.5 | % | ||||||
Average equity to average assets | 16.25 | % | 15.50 | % | 14.63 | % |
As displayed in Table 2, the 20192021 return on average assets ratio decreased five basis pointswas consistent and the return on average equity ratio decreased 78increased 106 basis points as compared to 2018.2020. The stable return on average assets was the result of an increase in net income that was impacted by a $23.1 million decrease in provision for credit losses, offset by an increase in average assets, primarily related to continued net inflows of deposits, including those associated with additional stimulus payments and a second round of PPP lending. The return on average equity ratio increased in 2021 as net income increased impacted by the aforementioned provision for credit losses, while average equity increased at a lesser rate, primarily related to earnings retention and the full year impact of shares issued in connection with the Steuben acquisition in 2020, partially offset by decreases in the market value of the Company’s available-for-sale investments due to higher market interest rates. The return on average assets ratio in 2020 decreased 25 basis points, while the return on average equity ratio decreased 129 basis points as compared to 2019. The decrease in return on average assets was primarily the result of an increase in average assets, primarily related to large net inflows of funds from government stimulus programs, PPP loan originations and the acquisitions of Kinderhook acquisition, which outpacedin the increasethird quarter of 2019 and Steuben in the second quarter of 2020, and a decrease in net income that was impacted by $8.6a $5.8 million increase in acquisitionprovision for credit losses, a $4.9 million decrease in net gains on sales of investment securities and $3.0 million of litigation accrual expenses incurred in 2019.2020. The return on average equity ratio decreased in 2020 as compared to 2019 as the increase in average equity outpacedincreased, primarily related to shares issued in connection with the Steuben acquisition and increases in the market value of the Company’s available-for-sale investments, while net income that wasdecreased impacted by the aforementioned acquisition expenses. The return on average assets ratio in 2018 increased nine basis points, while the return on average equity ratio decreased one basis point as compared to 2017. The increase in return on average assets was primarily the result of an increase in net income, reflective of a full year of activities from the Merchantsprovision for credit losses, litigation accrual expenses and NRS transactions, which outpaced the increase in average assets. The return on average equity ratio decreased slightly in 2018 as the increase in average equity due primarily to the impact of the shares issued for the Merchants and NRS acquisitions and earnings retention slightly outpaced the increase in net income.lower security gains. The return on average assets adjusted to exclude acquisition expenses, gain on sales of investment securities,acquisition-related provision for credit losses, acquisition-related contingent consideration adjustments, unrealized gain (loss) on equity securities, lossgain on debt extinguishment, amortization of intangibles, litigation accrual expenses and acquired non-impairednon-PCD loan accretion (“adjusted return on average assets”), a non-GAAP measure, decreased twosix basis points to 1.63%1.34% in 2019,2021, as compared to 1.65%1.40% in 2018.2020. The return on average equity adjusted to exclude acquisition expenses, gain on sales of investment securities,acquisition-related provision for credit losses, acquisition-related contingent consideration adjustments, unrealized gain (loss) on equity securities, lossgain on debt extinguishment, amortization of intangibles, litigation accrual expenses and acquired non-impairednon-PCD loan accretion decreased 61(“adjusted return on average equity”), a non-GAAP measure, increased 71 basis points to 10.03%9.60% in 2019,2021, from 10.64%8.89% in 2018.2020. See Table 2016 for Reconciliation of GAAP to Non-GAAP Measures.
The dividend payout ratio for 2019 increased 4.6%2021 of 48.3% decreased from 201853.7% in 2020 as the 10.7%there was a 15.2% increase in net income and a 3.5% increase in dividends declared from 2018 was higher than the 0.3% increase in net income.declared. The increase in dividends declared in 20192021 was a result of a 9.7%2.4% increase in the dividends declared per share and the issuance of shares in connection with the administration of the Company’s 401(k) plan and employee stock plan.plans. The dividend payout ratio for 20182020 of 53.7% increased 0.3% from 201748.4% in 2019 as the 12.7%there was an 8.2% increase in dividends declared from 2017 was modestly higher than the 11.9% increase2019 and a 2.6% decrease in net income. The increase in dividends declared in 20182020 was a result of a 9.1%5.1% increase in the dividends declared per share and the issuance of shares in connection with the Steuben acquisition and administration of the Company’s 401(k) plan and employee stock plan.
The average equity to average assets ratio continued to increasedecreased in 20192021 as the growth in assets outpaced the growth in common shareholders’ equity outpaced the growth in assets.equity. During 2019,2021, average assets increased 15.0% while average equity increased 8.5% whilea lesser 1.8%, in part due to a significant decline the after-tax market value adjustment on available-for-sale investments. In 2020, the average equity to average assets increased at a rate of 3.5%. In 2018ratio decreased as average equity rose 12.0%12.9% and average assets grew 5.7%16.8% in comparison to 2017.
Net Interest Income
Net interest income is the amount by which interest and fees on earning assets (loans, investments and cash equivalents) exceeds the cost of funds, which consists primarily of interest paid to the Company's depositors and interest on borrowings. Net interest margin is the difference between the yield on interest earning assets and the cost of interest-bearing liabilities as a percentage of earning assets.
As disclosed in Table 3, net interest income (with nontaxable income converted to a fully tax-equivalent basis) totaled $363.2$377.8 million in 2019,2021, an increase of $13.8$5.5 million, or 3.9%1.5%, from the prior year. The increase is a result of a $295.4 million,$2.04 billion, or 3.2%17.9%, increase in average interest-earning assets and an 11a 12 basis point increasedecrease in the average rate on interest-bearing liabilities, partially offset by a 54 basis point decrease in the average yield on interest-earning assets partially offset byand a $97.5 million$1.21 billion increase in average interest-bearing liabilities and a 13 basis point increase in the average rate on interest-bearing liabilities. As reflected in Table 4, the favorable impact of the increase in interest-earning assets ($11.864.6 million) and increasedecrease in the yieldrate on interest-bearing liabilities ($10.910.8 million) was partially offset by the unfavorable impact of the decrease in the average yield on interest-earning assets ($67.0 million) and the increase in interest-bearing liabilities ($0.32.9 million) and the higher rate on interest-bearing liabilities ($8.6 million).
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The 20192021 net interest margin increased threedecreased 46 basis points to 3.76%2.82% from 3.73%3.28% reported in 2018.2020. The increasedecrease was attributable to an 11a 54 basis point increasedecrease in the earning-assetinterest-earning asset yield partially offset by a 1312 basis point increasedecrease in the cost of interest-bearing liabilities.liabilities primarily due to the impact of lower market rates during 2021 resulting from the economic impacts of the COVID-19 pandemic. The 4.73%4.22% yield on loans increased 15in 2021 decreased 12 basis points in 2019 as compared to 4.58%4.34% in 2018, including2020 primarily due to the impact of lower market rates during 2021 resulting from the aforementioned economic impacts of the COVID-19 pandemic and a $1.5 million decrease in acquired loan accretion associated withaccretion. Included in the Kinderhook acquisition.loan yield was the impact of $18.7 million in PPP-related interest income, including the recognition of $15.8 million of deferred loan fees as compared to $9.5 million in PPP-related interest income, including the recognition of $6.0 million of deferred loan fees in 2020. The yield on investments, including cash equivalents, of 2.58%1.35% in 20192021 was consistent with 2018. The yield on investments included the impact of the sale of $590.2 million of available-for-sale Treasury securities in the second quarter of 2019 with subsequent reinvestment of the proceeds occurring primarily in the fourth quarter. The proceeds from the sale of securities in the second quarter were held in interest-earning cash until more attractive reinvestment options became available in the fourth quarter.55 basis points lower than 2020. The cost of interest-bearing liabilities was 0.40%0.15% during 20192021 as compared to 0.27% for 2018.2020. The increaseddecreased cost reflects the 10seven basis point increasedecrease in the average rate paid on deposits and the 1479 basis point higherlower average rate paid on borrowings in 2019.
The 2020 net interest margin in 2018 increased fourdecreased 48 basis points to 3.73%3.28% from 3.69%3.76% reported in 2017.2019. The increasedecrease was attributable to an eighta 57 basis point increasedecrease in the earning-assetinterest-earning asset yield partially offset by a five13 basis point increasedecrease in the cost of interest-bearing liabilities.liabilities primarily due to the impact of lower market rates during 2020 that were impacted by the economic impacts of the COVID-19 pandemic. The 4.58%4.34% yield on loans increased 19in 2020 decreased 39 basis points in 2018 as compared to 4.39%4.73% in 2017,2019, including the impact of incremental acquired loan accretion, onprimarily due to the Merchants portfolio.decline in market rates during 2020 resulting from the aforementioned economic impacts of the COVID-19 pandemic. The yield on investments, including cash equivalents, decreased from 2.79%of 1.90% in 2017 to 2.58% in 2018. This2020 was 68 basis points lower yield on investments is reflective of maturing higher rate investments being replaced with lower-yielding securities and interest-earning cash, as well as the result of a lower fully tax-equivalent adjustment due to the lower federal tax rate associated with the Tax Cuts and Jobs Act.than 2019. The cost of interest-bearing liabilities was 0.27% during 20182020 as compared to 0.22%0.40% for 2017.2019. The increaseddecreased cost reflects the threeseven basis point increasedecrease in the average rate paid on deposits and the 2159 basis point higherlower average rate paid on borrowings in 2018.
As shown in Table 3, total FTE-basis interest income increaseddecreased by $22.7$2.4 million, or 6.2%0.6%, in 20192021 in comparison to 2018.2020. Table 4 indicates that a higher average earning-assetinterest-earning asset balance created $11.8$64.6 million of incremental interest income and a higherwhile the lower yield on earning assets had a favorablean unfavorable impact of $10.9$67.0 million on interest income. Average loans increased $278.9$51.2 million, or 4.5%0.7%, in 2019.2021. This increase was primarily due to acquired growth fromdriven by increases in the Kinderhook acquisition, which accounted for $217.6 millionaverage balance of the growth.consumer indirect, business lending and consumer mortgage portfolios, partially offset by decreases in the average balance of the consumer direct and home equity portfolios. FTE-basis loan interest income and fees increased $22.1decreased $6.6 million, or 7.7%2.1%, in 20192021 as compared to 2018,2020, attributable to a 12 basis point decrease in the loan yield primarily due to the impact of lower market rates during 2021, partially offset by the higher average loan balances and a 15 basis point$9.2 million increase in the loan yield.
Investment interest income (FTE basis) in 20192021 was $0.6$4.2 million, or 0.7%5.4%, higher than the prior year as a result of a $16.6 million$1.98 billion increase in the average book basis balance of investments, (including cash equivalents) and an average investment yield of 2.58% that was consistent with the prior year. The higher average investment book balance is inclusive of the $37.7 million of available-for-sale securities and $2.1 million of equity and other securities acquired with the Kinderhook transaction.
Total FTE-basis interest income increased by $3.5 million, or 0.9%, in 2020 in comparison to 2019. Table 4 indicates that a higher average interest-earning asset balance created $63.0 million of incremental interest income and a lower yield on earning assets had an unfavorable impact of $59.5 million on interest income. Average loans increased $722.4 million, or 11.0%, in 2020. This increase was primarily due to the origination of PPP loans and acquired growth from the Steuben and Kinderhook acquisitions. FTE-basis loan interest income and fees increased $6.4 million, or 2.1%, in 2020 as compared to 2019, attributable to the higher average balances partially offset by a 39 basis point decrease in the loan yield primarily due to the impact of lower market rates during 2020. Investment interest income (FTE basis) in 2020 was $2.9 million, or 3.6%, lower than the prior year as a result of a 68 basis point decrease in average investment yield, partially offset by a $972.2 million increase in the average book basis balance of investments, including cash equivalents. The lower average investment yield in 2020 was reflective of deposit inflows and cash flows from higher rate maturing instruments in the investment portfolio being reinvested at lower market interest rates or held in low-rate interest-earning cash. The higher average investment book balance is inclusive of the $179.7 million of available-for-sale securities and $0.8 million of equity and other securities acquired with the Steuben transaction.
38
Total interest expense increaseddecreased by $8.9$7.9 million, or 50.2%37.7%, to $26.6$13.0 million in 2019.2021 from $20.9 million in 2020. As shown in Table 4, higherlower interest rates on interest-bearing liabilities resulted in an increasea decrease in interest expense of $8.6$10.8 million, while higher deposit balances resulted in a $0.3$2.9 million increase in interest expense. Interest expense as a percentage of average earning assets for 2019 increased2021 decreased eight basis points to 0.27%0.10%. The rate on interest-bearing deposits of 0.32%0.14% was 15nine basis points higherlower than 2018,2020, primarily due to an increasea decrease in certain product rates in response to changes in market interest rates during 2018 and 2019.the year. The rate on borrowings increased 14decreased 79 basis points to 1.86%0.48% in 2021, primarily due to the decrease in the proportion of subordinated debt held by unconsolidated subsidiary trusts resulting from the redemption of $77.3 million of trust preferred subordinated debt carrying a floating rate of 3-month LIBOR plus 1.65% in the first quarter of 2021. Total average funding balances (deposits and borrowings) in 2021 increased $1.93 billion, or 18.1%. Average deposits increased $1.97 billion, driven by large net inflows of funds from government stimulus and PPP programs. Average non-time deposit balances increased $1.95 billion and accounted for 92.2% of total average deposits compared to 90.9% in 2020, due largely to the aforementioned net inflows of funds from government stimulus programs primarily being held in non-time accounts in the low interest rate environment. Average time deposits increased $21.6 million year-over-year and represented 7.8% of total average deposits for 2021 compared to 9.1% in 2020. Average external borrowings decreased $35.8 million in 2021 as compared to 2020, due to decreases in average subordinated debt held by unconsolidated subsidiary trusts of $62.4 million, average subordinated notes payable of $9.2 million and average FHLB borrowings of $6.7 million, partially offset by an increase in average customer repurchase agreements of $42.5 million. The decrease in average subordinated debt held by unconsolidated subsidiary trusts was due to the redemption of $77.3 million of trust preferred subordinated debt as discussed previously and the decrease in average subordinated notes payable was due to the redemption of $10.4 million of subordinated notes payable assumed from the Kinderhook acquisition in the fourth quarter of 2020.
Total interest expense decreased by $5.7 million, or 21.4%, to $20.9 million in 2020 from $26.6 million in 2019. As shown in Table 4, lower interest rates on interest-bearing liabilities resulted in a decrease in interest expense of $9.2 million, while higher deposit balances resulted in a $3.5 million increase in interest expense. Interest expense as a percentage of average earning assets for 2020 decreased nine basis points to 0.18%. The rate on interest-bearing deposits of 0.23% was nine basis points lower than 2019, primarily due to a decrease in certain product rates in response to changes in market interest rates during the increaseyear. The rate on borrowings decreased 59 basis points to 1.27% in 2020, primarily due to the decrease in the average variable rate paid on subordinated debt held by unconsolidated subsidiary trusts and overnight borrowings.customer repurchase agreements. Total average funding balances (deposits and borrowings) in 20192020 increased $196.1 million,$1.60 billion, or 2.2%17.6%. Average deposits increased $277.1 million, with $260.0 million$1.60 billion, driven by large net inflows of the increasefunds from government stimulus programs and acquired growth from the KinderhookSteuben acquisition. Average non-time (“core”) deposit balances increased $184.9 million$1.51 billion and accounted for 90.3%90.9% of total average deposits compared to 91.1%90.3% in 2018,2019, due to the aforementioned net inflows of funds from government stimulus programs and the addition of $185.9$419.8 million in corenon-time deposit balances with the Kinderhook acquisition, partially offset by a $1.0 million decrease in legacy deposits.Steuben acquisition. Average time deposits increased by $92.2$92.8 million year-over-year, including $74.1$96.4 million in average time deposits from the KinderhookSteuben acquisition. Average time deposits represented 9.7%9.1% of total average deposits for 20192020 compared to 8.9%9.7% in 2018.2019. Average external borrowings decreased $81.0$3.2 million in 20192020 as compared to 2018,2019, due to a decrease in average customer repurchase agreements of $42.6 million, a decrease in subordinated debt held by unconsolidated subsidiary trusts of $20.1$14.4 million, and a decrease in FHLB borrowings, partially offset by an increase in average subordinated notes payable of $6.5$6.0 million, associated with subordinated notes acquiredan increase in the Kinderhook transaction.average customer repurchase agreements of $4.0 million and an increase in average FHLB borrowings of $1.2 million. The decrease in average subordinated debt held by unconsolidated subsidiary trusts is due to the redemption of trust preferred debt held by MBVT Statutory Trust I and the KCTKinderhook Capital Trust during the third quarter of 2019 for a total of $22.7 million, partially offset by a partial year of subordinated debt acquiredassumed with the Kinderhook transaction.
The following table sets forth information related to average interest-earning assets and interest-bearing liabilities and their associated yields and rates for the years ended December 31, 2019, 20182021 and 2017.2020. Interest income and yields are on a fully tax-equivalent basis using marginal income tax rates of 24.3% and 24.0% in 2019, 24.4% in 20182021 and 37.7% in 2017.2020, respectively. Average balances are computed by totaling the daily ending balances in a period and dividing by the number of days in that period. Loan interest income and yields include loan fees and acquired loan accretion. Average loan balances include acquired loan purchase discounts and premiums, nonaccrual loans and loans held for sale.
39
Table 3: Average Balance Sheet
Year Ended December 31, 2019 | Year Ended December 31, 2018 | Year Ended December 31, 2017 | |||||||||
(000's omitted except yields and rates) | Average Balance | Interest | Avg. Yield/Rate Paid | Average Balance | Interest | Avg. Yield/Rate Paid | Average Balance | Interest | Avg. Yield/Rate Paid | ||
Interest-earning assets: | |||||||||||
Cash equivalents | $408,343 | $8,473 | 2.07% | $78,888 | $1,322 | 1.68% | $38,545 | $385 | 1.00% | ||
Taxable investment securities (1) | 2,300,454 | 57,431 | 2.50% | 2,577,695 | 62,182 | 2.41% | 2,440,215 | 59,774 | 2.45% | ||
Nontaxable investment securities (1) | 412,121 | 14,684 | 3.56% | 447,772 | 16,526 | 3.69% | 517,408 | 23,499 | 4.54% | ||
Loans (net of unearned discount)(2) | 6,542,716 | 309,148 | 4.73% | 6,263,843 | 287,048 | 4.58% | 5,818,367 | 255,212 | 4.39% | ||
Total interest-earning assets | 9,663,634 | 389,736 | 4.03% | 9,368,198 | 367,078 | 3.92% | 8,814,535 | 338,870 | 3.84% | ||
Noninterest-earning assets | 1,379,539 | 1,297,011 | 1,274,680 | ||||||||
Total assets | $11,043,173 | $10,665,209 | $10,089,215 | ||||||||
Interest-bearing liabilities: | |||||||||||
Interest checking, savings and money market deposits | $5,489,307 | 10,456 | 0.19% | $5,403,013 | 6,292 | 0.12% | $5,237,282 | 4,854 | 0.09% | ||
Time deposits | 843,024 | 10,004 | 1.19% | 750,814 | 4,366 | 0.58% | 765,666 | 3,177 | 0.41% | ||
Repurchase agreements | 218,733 | 1,615 | 0.74% | 261,358 | 1,597 | 0.61% | 172,395 | 739 | 0.43% | ||
FHLB borrowings | 9,622 | 233 | 2.42% | 34,374 | 746 | 2.17% | 92,307 | 1,106 | 1.20% | ||
Subordinated notes payable | 6,467 | 346 | 5.35% | 0 | 0 | 0.00% | 0 | 0 | 0.00% | ||
Subordinated debt held by unconsolidated subsidiary trusts | 92,262 | 3,898 | 4.22% | 112,322 | 4,677 | 4.16% | 115,231 | 3,904 | 3.39% | ||
Total interest-bearing liabilities | 6,659,415 | 26,552 | 0.40% | 6,561,881 | 17,678 | 0.27% | 6,382,881 | 13,780 | 0.22% | ||
Noninterest-bearing liabilities: | |||||||||||
Noninterest checking deposits | 2,401,413 | 2,302,806 | 2,048,414 | ||||||||
Other liabilities | 187,628 | 147,141 | 182,159 | ||||||||
Shareholders' equity | 1,794,717 | 1,653,381 | 1,475,761 | ||||||||
Total liabilities and shareholders' equity | $11,043,173 | $10,665,209 | $10,089,215 | ||||||||
Net interest earnings | $363,184 | $349,400 | $325,090 | ||||||||
Net interest spread | 3.63% | 3.65% | 3.62% | ||||||||
Net interest margin on interest-earning assets | 3.76% | 3.73% | 3.69% | ||||||||
Fully tax-equivalent adjustment | $4,009 | $4,345 | $9,415 |
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2021 | | Year Ended December 31, 2020 | | ||||||||||||
| | Average | | | | | Avg. | | Average | | | | | Avg. | | ||
(000's omitted except yields and rates) |
| Balance |
| Interest |
| Paid |
| Balance |
| Interest |
| Paid |
| ||||
Interest-earning assets: | |
| |
|
| |
|
|
|
| |
|
| |
|
|
|
Cash equivalents | | $ | 1,909,212 | | $ | 2,465 |
| 0.13 | % | $ | 831,438 | | $ | 1,070 |
| 0.13 | % |
Taxable investment securities (1) | |
| 3,761,709 | |
| 66,143 |
| 1.76 | % |
| 2,806,587 | |
| 61,468 |
| 2.19 | % |
Nontaxable investment securities (1) | |
| 406,184 | |
| 13,229 |
| 3.26 | % |
| 455,048 | |
| 15,121 |
| 3.32 | % |
Loans (net of unearned discount)(2) | |
| 7,316,278 | |
| 308,976 |
| 4.22 | % |
| 7,265,089 | |
| 315,558 |
| 4.34 | % |
Total interest-earning assets | |
| 13,393,383 | |
| 390,813 |
| 2.92 | % |
| 11,358,162 | |
| 393,217 |
| 3.46 | % |
Noninterest-earning assets | |
| 1,441,642 | |
| |
| | |
| 1,538,337 | |
| |
| | |
Total assets | | $ | 14,835,025 | |
| |
| | | $ | 12,896,499 | |
| |
| | |
| | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | |
| | |
| |
| | |
| | |
| |
| | |
Interest checking, savings and money market deposits | | $ | 7,595,682 | |
| 3,133 |
| 0.04 | % | $ | 6,371,406 | |
| 5,532 |
| 0.09 | % |
Time deposits | |
| 957,429 | |
| 8,498 |
| 0.89 | % |
| 935,809 | |
| 11,229 |
| 1.20 | % |
Repurchase agreements | |
| 265,288 | |
| 841 |
| 0.32 | % |
| 222,738 | |
| 1,359 |
| 0.61 | % |
FHLB borrowings | |
| 4,114 | |
| 89 |
| 2.16 | % |
| 10,822 | |
| 210 |
| 1.94 | % |
Subordinated notes payable | |
| 3,291 | |
| 154 |
| 4.67 | % |
| 12,505 | |
| 670 |
| 5.36 | % |
Subordinated debt held by unconsolidated subsidiary trusts | |
| 15,464 | |
| 293 |
| 1.89 | % |
| 77,850 | |
| 1,875 |
| 2.41 | % |
Total interest-bearing liabilities | |
| 8,841,268 | |
| 13,008 |
| 0.15 | % |
| 7,631,130 | |
| 20,875 |
| 0.27 | % |
Noninterest-bearing liabilities: | |
| | |
| |
| | |
| | |
| |
| | |
Noninterest checking deposits | |
| 3,748,577 | |
| |
| | |
| 3,024,763 | |
| |
| | |
Other liabilities | |
| 181,075 | |
| |
| | |
| 213,937 | |
| |
| | |
Shareholders' equity | |
| 2,064,105 | |
| |
| | |
| 2,026,669 | |
| |
| | |
Total liabilities and shareholders' equity | | $ | 14,835,025 | |
| |
| | | $ | 12,896,499 | |
| |
| | |
| | | | | | | | | | | | | | | | | |
Net interest earnings | |
|
| | $ | 377,805 |
| | |
|
| | $ | 372,342 |
| | |
| | | | | | | | | | | | | | | | | |
Net interest spread | |
|
| |
| |
| 2.77 | % |
|
| |
| |
| 3.19 | % |
Net interest margin on interest-earning assets | |
|
| |
| |
| 2.82 | % |
|
| |
| |
| 3.28 | % |
| | | | | | | | | | | | | | | | | |
Fully tax-equivalent adjustment (3) | |
|
| | $ | 3,393 |
|
| |
|
| | $ | 3,939 |
|
| |
(1) | Averages for investment securities are based on historical cost and the yields do not give effect to changes in fair value that is reflected as a component of noninterest-earning assets, shareholders’ equity and deferred taxes. |
(2) | Includes nonaccrual loans. The |
(3) | The fully-tax equivalent adjustment represents taxes that would have been paid had nontaxable investment securities and loans been taxable. The adjustment attempts to enhance the comparability of the performance of assets that have different tax liabilities. |
40
As discussed above, the change in net interest income (fully tax-equivalent basis) may be analyzed by segregating the volume and rate components of the changes in interest income and interest expense for each underlying category.
Table 4: Rate/Volume
2019 Compared to 2018 | 2018 Compared to 2017 | ||||||
Increase (Decrease) Due to Change in (1) | Increase (Decrease) Due to Change in (1) | ||||||
(000's omitted) | Volume | Rate | Net Change | Volume | Rate | Net Change | |
Interest earned on: | |||||||
Cash equivalents | $6,765 | $386 | $7,151 | $569 | $368 | $937 | |
Taxable investment securities | (6,864) | 2,113 | (4,751) | 3,327 | (919) | 2,408 | |
Nontaxable investment securities | (1,284) | (558) | (1,842) | (2,915) | (4,058) | (6,973) | |
Loans (net of unearned discount) | 13,013 | 9,087 | 22,100 | 20,092 | 11,744 | 31,836 | |
Total interest-earning assets (2) | 11,752 | 10,906 | 22,658 | 21,598 | 6,610 | 28,208 | |
Interest paid on: | |||||||
Interest checking, savings and money market deposits | 102 | 4,062 | 4,164 | 158 | 1,280 | 1,438 | |
Time deposits | 595 | 5,043 | 5,638 | (63) | 1,252 | 1,189 | |
Repurchase agreements | (284) | 302 | 18 | 676 | 182 | 858 | |
FHLB borrowings | (591) | 78 | (513) | (940) | 580 | (360) | |
Subordinated notes payable | 346 | 0 | 346 | 0 | 0 | 0 | |
Subordinated debt held by unconsolidated subsidiary trusts | (847) | 68 | (779) | (101) | 874 | 773 | |
Total interest-bearing liabilities (2) | 266 | 8,608 | 8,874 | 396 | 3,502 | 3,898 | |
Net interest earnings (2) | $11,087 | $2,697 | $13,784 | $20,614 | $3,696 | $24,310 |
| | | | | | | | | | | | | | | | | | |
| | 2021 Compared to 2020 | | 2020 Compared to 2019 | ||||||||||||||
| | Increase (Decrease) Due to Change in (1) | |
| Increase (Decrease) Due to Change in (1) | |||||||||||||
(000's omitted) |
| Volume |
| Rate |
| Net Change |
| Volume |
| Rate |
| Net Change | ||||||
Interest earned on: | | |
|
| |
|
| |
| | |
|
| |
|
| |
|
Cash equivalents | | $ | 1,392 | | $ | 3 | | $ | 1,395 | | $ | 4,456 | | $ | (11,859) | | $ | (7,403) |
Taxable investment securities | |
| 18,307 | |
| (13,632) | |
| 4,675 | |
| 11,640 | |
| (7,603) | |
| 4,037 |
Nontaxable investment securities | |
| (1,596) | |
| (296) | |
| (1,892) | |
| 1,467 | |
| (1,030) | |
| 437 |
Loans (net of unearned discount) | |
| 2,211 | |
| (8,793) | |
| (6,582) | |
| 32,541 | |
| (26,131) | |
| 6,410 |
Total interest-earning assets (2) | |
| 64,561 | |
| (66,965) | |
| (2,404) | |
| 62,987 | |
| (59,506) | |
| 3,481 |
| | | | | | | | | | | | | | | | | | |
Interest paid on: | |
| | |
| | |
| | |
| | |
| | |
| |
Interest checking, savings and money market deposits | |
| 913 | |
| (3,312) | |
| (2,399) | |
| 1,472 | |
| (6,396) | |
| (4,924) |
Time deposits | |
| 254 | |
| (2,985) | |
| (2,731) | |
| 1,112 | |
| 113 | |
| 1,225 |
Repurchase agreements | |
| 224 | |
| (742) | |
| (518) | |
| 29 | |
| (285) | |
| (256) |
FHLB borrowings | |
| (143) | |
| 22 | |
| (121) | |
| 27 | |
| (50) | |
| (23) |
Subordinated notes payable | |
| (439) | |
| (77) | |
| (516) | |
| 324 | |
| 0 | |
| 324 |
Subordinated debt held by unconsolidated subsidiary trusts | |
| (1,248) | |
| (334) | |
| (1,582) | |
| (539) | |
| (1,484) | |
| (2,023) |
Total interest-bearing liabilities (2) | |
| 2,932 | |
| (10,799) | |
| (7,867) | |
| 3,489 | |
| (9,166) | |
| (5,677) |
| | | | | | | | | | | | | | | | | | |
Net interest earnings (2) | | $ | 61,486 | | $ | (56,023) | | $ | 5,463 | | $ | 58,978 | | $ | (49,820) | | $ | 9,158 |
(1) | The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of such change in each component. |
(2) | Changes due to volume and rate are computed from the respective changes in average balances and rates of the totals; they are not a summation of the changes of the components. |
Noninterest Revenues
The Company’s sources of noninterest revenues are of four primary types: 1) general banking services related to loans, including mortgage banking, deposits and other core customer activities typically provided through the branch network and electronicdigital banking channels (performed by CBNA); 2) employee benefit trust, collective investment fund, transfer agency, actuarial and benefit plan administration services (performed by BPAS and its subsidiaries); 3) wealth management services, comprised of personal trust services (performed by the trust unit within CBNA), broker-dealer and investment advisory products and services (performed by CISI, Wealth Partners and The Carta Group) and asset management services (performed by Nottingham); and 4) insurance and risk management products and services (performed by OneGroup). Additionally, the Company has other transactions,periodically generates noninterest revenues from investing and borrowing activities, including unrealized gains or lossesgain (loss) on equity securities, realized gains or losses from the sale of investment securities and lossgains or losses on debt extinguishment.
41
Table 5: Noninterest Revenues
Years Ended December 31, | |||
(000's omitted except ratios) | 2019 | 2018 | 2017 |
Employee benefit services | $97,167 | $92,279 | $80,830 |
Deposit service charges and fees | 36,978 | 38,445 | 33,729 |
Debit interchange and ATM fees | 21,750 | 26,748 | 29,722 |
Insurance services | 32,199 | 30,317 | 26,150 |
Wealth management services | 25,869 | 25,772 | 22,079 |
Other banking revenues | 11,755 | 10,159 | 9,911 |
Subtotal | 225,718 | 223,720 | 202,421 |
Unrealized gain on equity securities | 19 | 657 | 0 |
Loss on debt extinguishment | 0 | (318) | 0 |
Gain on sales of investment securities, net | 4,882 | 0 | 2 |
Total noninterest revenues | $230,619 | $224,059 | $202,423 |
Noninterest revenues/operating revenues (FTE basis) (1) | 38.7% | 39.6% | 38.8% |
| | | | | | | | | | |
| | Years Ended December 31, | | |||||||
(000's omitted except ratios) |
| 2021 |
| 2020 | | 2019 | | |||
Employee benefit services | | $ | 114,328 | | $ | 101,329 | | $ | 97,167 | |
Deposit service charges and fees | |
| 28,721 | |
| 28,729 | |
| 36,978 | |
Mortgage banking | | | 1,772 | | | 5,301 | | | 523 | |
Debit interchange and ATM fees | |
| 25,657 | |
| 23,409 | |
| 21,750 | |
Insurance services | |
| 33,992 | |
| 32,372 | |
| 32,199 | |
Wealth management services | |
| 33,240 | |
| 27,879 | |
| 25,869 | |
Other banking revenues | |
| 8,508 | |
| 8,985 | |
| 11,232 | |
Subtotal | |
| 246,218 | | | 228,004 | | | 225,718 | |
Unrealized gain (loss) on equity securities | |
| 17 | |
| (6) | |
| 19 | |
Gain on debt extinguishment | |
| 0 | |
| 421 | |
| 0 | |
Gain on sales of investment securities, net | |
| 0 | |
| 0 | |
| 4,882 | |
Total noninterest revenues | | $ | 246,235 | | $ | 228,419 | | $ | 230,619 | |
| | | | | | | | | | |
Noninterest revenues/operating revenues (FTE basis) (1) | |
| 39.7 | % |
| 38.3 | % | | 38.7 | % |
(1) | For purposes of this ratio noninterest revenues excludes unrealized gain or loss on equity securities, |
As displayed in Table 5, total noninterest revenues, excluding unrealized gain (loss) on equity securities and gain on debt extinguishment, increased $18.2 million, or 8.0%, to $246.2 million in 2021 as compared to 2020. The increase was comprised of increases in employee benefit services revenues, wealth management and insurance services revenues, and debit interchange and ATM fees, partially offset by decreases in mortgage banking revenues, other banking revenues and deposit service charges and fees. Noninterest revenues, excluding unrealized gain on equity securities, gain on debt extinguishment and gain on the sale of investment securities, and loss on debt extinguishment, increased $2.0by $2.3 million, or 0.9%1.0%, to $225.7$228.0 million in 20192020 as compared to 2018.2019. The increase was comprised of an increase in mortgage banking revenues, growth in revenue from the Company’s employee benefit services businesses, an increase in wealth management and insurance services revenue and an increase in other banking revenues,debit interchange and ATM fees, partially offset by a decrease in debit card-related revenue related to Durbin amendment mandated debit interchange price restrictions. Noninterest revenues, excluding unrealized gain on equity securities, loss on debt extinguishmentdeposit service charges and gain on the sale of investment securities, increased by $21.3 million, or 10.5%, to $223.7 million in 2018 as compared to 2017. The increase was comprised of growth in revenue from the Company’s employee benefit services businesses, primarily from a full year of activity associated with the NRS acquisitionfees and organic growth, an increase in wealth management and insurance services revenue and an increase in other banking revenues, partially offset by a decrease in debit card-related revenue related to Durbin amendment mandated debit interchange price restrictions.
Noninterest revenues as a percent of operating revenues (FTE basis) were 38.7%39.7% in 2019, down 0.9%2021, up from 38.3% in the prior year. The current year decreaseincrease was due to an 8.0% increase in noninterest revenues mentioned above, while adjusted net interest income (FTE basis) increased 1.5% driven by significant earnings asset growth that was mostly offset by a lower net interest margin. The decrease in this ratio from 38.7% in 2019 to 38.3% in 2020 was driven by the 4.6%2.5% increase in adjusted net interest income (FTE basis), driven by significant earnings asset growth, while noninterest revenues increased by the 0.9%1.0% mentioned above. The 0.8% increase in this ratio from 2017 to 2018 was driven by a 10.5% increase in noninterest revenues mentioned above, while net interest income increased 7.0%.
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A significant portion of the Company’s recurring noninterest revenue is comprised of the wide variety of fees earned from general banking services provided through the branch network, electronicdigital banking channels, mortgage banking and other banking revenues,services, which totaled $70.5$64.7 million in 2019,2021, a decrease of $4.9$1.8 million, or 6.4%2.7%, from the prior year. The decrease was primarily driven by a decrease in debit card-related revenuemortgage banking revenues as the Company is currently holding the majority of its new consumer mortgage production in portfolio due to a change in its strategy, and declines in deposit service charges and fees and other banking revenues including a reduction in overdraft fees in part due to the impact of Durbin amendment mandated debit interchange price restrictions that were effective beginning in the third quarter of 2018,higher average deposit balances resulting from government stimulus program inflows. This was partially offset by an increase in debit interchange and ATM fees, reflective of increased transaction activity including the impact of a full year of activity resulting from the addition of new deposit relationships from the Steuben acquisition in 2020. Fees from general banking services were $66.4 million in 2020, a decrease of $4.1 million, or 5.8%, from 2019. The decrease was primarily driven by decreases in deposit services charges and fees and other banking revenues due to a precipitous drop in deposit transaction activity as a result of the COVID-19 pandemic, partially offset by an increase in mortgage banking revenues, reflective of the Company’s decision to sell certain secondary market eligible residential mortgage loans during 2020 and the benefit derived from interest rate movements. In addition, debit interchange and ATM fees increased, reflective of the addition of new deposit relationships from the Kinderhook acquisition. Fees from general banking services were $75.4 million in 2018, an increase of $2.0 million, or 2.7%, from 2017. The increase was primarily driven by the addition of new deposit relationships from the Merchants acquisition, offset by a decrease of approximately $7.1 million in debit card-related revenue due to the impact of Durbin amendment mandated debit interchange price restrictions that were effective beginning in the third quarter of 2018.
As disclosed in Table 5, noninterest revenue from financial services (revenues from employee benefit services, wealth management services and insurance services) increased $6.9$20.0 million, or 4.6%12.4%, in 20192021 to $155.2$181.6 million. In 2019,2021, financial services revenue accounted for 67%74% of total noninterest revenues, as compared to 66%71% in 2018.2020. Employee benefit services generated revenue of $97.2$114.3 million in 20192021 that reflected growth of $4.9$13.0 million, or 5.3%12.8%, primarily related to increases in employee benefit trust and custodial fees, as well as incremental revenues from the acquisition of FBD during the third quarter of 2021. Employee benefit services generated revenue of $101.3 million in 2020 that reflected growth of $4.2 million, or 4.3%, over 2019 revenues primarily due to organic increases in the number of supported plansplan administration, recordkeeping and related participant levels. Employee benefit services revenue in 2018 of $92.3 million reflected growth of $11.4 million, or 14.2%, driven primarily by a full year of activity from NRS.
Wealth management and insurance services revenues increased $2.0$7.0 million, or 3.3%11.6%, in 20192021 due primarily to ana $5.4 million increase in OneGroup revenue.wealth management services revenues primarily driven by increases in investment management and trust services revenues due to the addition of new relationships, higher equity market valuations and a $1.6 million increase in insurance services revenues attributable to incremental revenues from the acquisitions of TGA during the third quarter of 2021 and NuVantage during the second quarter of 2021 as well as organic expansion. Wealth management and insurance services revenuerevenues increased $7.9$2.2 million, or 16.3%3.8%, in 20182020 from the prior year due to revenue growth from OneGroup, which represented $4.2a $2.0 million of the increase, an increase in revenue from CISI of $2.2wealth management services revenues and a $0.2 million and an increase in personal trust revenue of $1.5 million.
Employee benefit trust assets increased $14.9$13.4 billion to $89.3$120.3 billion for the employee benefit services segment in 20192021 as compared to 20182020 due primarily to organic growth in the collective investment trust business.business and market appreciation. Assets under management increased $793.8$887.6 million to $6.6$8.5 billion for the wealth management businesses at year end 20192021 as compared to one year earlier due to organic growth.growth and market appreciation. Trust assets within the Company’s employee benefit services segment increased $11.5$17.7 billion to $74.4$107.0 billion at the end of 20182020 as compared to 20172019 due primarily to organic growth in the collective investment trust business.business and market appreciation. Assets under management withwithin the Company’s wealth management services segment decreased $667.9 millionincreased to $5.8$7.7 billion at the end of 2018 as compared2020, up $1.1 billion from year-end 2019 due to year-end 2017 dueorganic growth and market appreciation.
The Company expects to re-evaluate its deposit offerings and associated deposit services charges and fees in part2022 and is uncertain to whether any resulting modifications will have a general decline in overall market valuations late in 2018.material impact to banking noninterest revenues. The pending Elmira acquisition is expected to provide incremental deposit service charges and fees revenue and debit interchange and ATM fees revenue once completed.
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Noninterest Expenses
As shown in Table 6, noninterest expenses of $372.0$388.1 million in 20192021 were $26.7$11.6 million, or 7.7%3.1%, higher than 2018,2020, primarily reflective of an increase in salaries and employee benefits driven by increases in merit and incentive-related employee compensation, higher payroll taxes, including increases in state-related unemployment taxes, higher employee benefit-related expenses, including significant increases in employee medical benefit costs, and staffing increases due to recent acquisitions. Other factors included an increase in data processing and communications expenses associated with the $8.6 millionimplementation of new customer-facing digital technologies and back office systems, and an increase in one-timeother expenses incurred in 2019 relateddue to the Kinderhook acquisitiongeneral increase in the level of business activities, including increases in professional fees and travel-related expenses, partially offset by a decrease in acquisition-related expenses and a decrease in litigation accrual expenses. Noninterest expenses in 2020 increased $4.5 million, or 1.2%, from 2019 to $376.5 million, primarily reflective of an increase in salaries and employee benefits driven by merit-related increases in employee wages and a net increase in full-time equivalent employees between the periods, an increase in data processing and communications expenses associated with the implementation of new customer-facing digital technologies and back office systems, the additional expenses associated with operating an expanded branch network subsequent to the Kinderhook transaction. Noninterest expenses in 2018 decreased $1.9 million, or 0.5%, from 2017 to $345.3 million, primarily reflective ofand Steuben transactions and the $26.0$3.0 million in one-time litigation accrual expenses incurred in 2017 related2020, partially offset by lower acquisition-related expenses and a decline in other expenses due to the Merchants and NRS acquisitions, offset bygeneral decrease in the expenses associated with operating an expanded branch network and otherlevel of business activities acquired withas a result of the Merchants and NRS transactions for a full year.
Operating expenses (excluding acquisition expenses, acquisition-related contingent consideration adjustment, litigation accrual and amortization of intangible assets) as a percent of average assets for 20192021 was 3.15%2.52%, an increasea decrease of eight23 basis points from 3.07%2.75% in 20182020 and 1363 basis points higherlower than the 3.02%3.15% in 2017.2019. The increasedecrease in this ratio for 2021 was due to a 5.3% increase in operating expenses (excluding acquisition expenses, acquisition-related contingent consideration adjustment, litigation accrual and amortization of intangible assets), while average assets grew by 15.0% due primarily to large net inflows of funds related to government stimulus programs and PPP loan originations. The decrease in this ratio for 2020 from 2019 was due to a 6.0%2.0% increase in operating expenses primarily a result(excluding acquisition expenses, acquisition-related contingent consideration adjustment, litigation accrual and amortization of expanded operations from the Kinderhook acquisition,intangible assets), while average assets grew by 3.5%16.8% due primarily to large net assetsinflows of funds related to government stimulus programs, PPP loan originations and intangibles from the Kinderhook acquisitionacquisitions of Steuben and organic growth. The increase in this ratio for 2018 was due to a 7.8% increase in operating expenses, primarily a result of a full year of expanded operations from the Merchants and NRS acquisitions, while average assets grew by 5.7% due primarily to a full year of acquired net assets and intangibles from the Merchants and NRS transactions.
The efficiency ratio, a non-GAAP measure, a performance measurement tool widely used by banks, is defined by the Company as operating expenses (excluding acquisition expenses, acquisition-related contingent consideration adjustment, litigation accrual and amortization of intangible amortization)assets) divided by operating revenue (fully tax-equivalent net interest income plus noninterest revenue, excluding acquired non-impairednon-PCD loan accretion, unrealized gain (loss) on equity securities, net gain on sales of investment securities and insurance-related recoveries)gain on debt extinguishment). Lower ratios are correlate to higher operating efficiency. In 2019, theThe 2021 efficiency ratio of 60.2% was 1.6%0.6% higher than 2018the 2020 efficiency ratio of 59.6% as the 6.0%5.3% increase in operating expenses, as defined above, grew at a slightly faster pace than the 3.1%4.2% increase in operating revenue, comprised of a 4.6%1.5% increase in adjusted net interest income and an 8.0% increase in adjusted noninterest revenue. The 2020 efficiency ratio of 59.6% was consistent with 2019 as the 2.1% increase in operating revenue, comprised of a 2.8% increase in adjusted net interest income and a 0.9%1.0% increase in adjusted noninterest revenue, as defined above. The ratio for 2018 was 0.3% below 2017 as the 8.4% increase in operating revenue, comprised of a 7.0% increase in adjusted net interest income and a 10.5% increase in noninterest revenue, as defined above, grew at a slightly faster pace than the 7.8%2.0% increase in operating expenses.expenses, as defined above. See Table 2014 for Reconciliation of GAAP to Non-GAAP Measures.
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Table 6: Noninterest Expenses
Years Ended December 31, | |||
(000's omitted) | 2019 | 2018 | 2017 |
Salaries and employee benefits(1) | $219,916 | $207,363 | $186,903 |
Occupancy and equipment | 39,850 | 39,948 | 35,561 |
Data processing and communications | 41,407 | 39,094 | 37,579 |
Amortization of intangible assets | 15,956 | 18,155 | 16,941 |
Legal and professional fees | 10,783 | 10,644 | 11,576 |
Business development and marketing | 11,416 | 9,383 | 9,994 |
Acquisition expenses | 8,608 | (769) | 25,986 |
Other | 24,090 | 21,471 | 22,609 |
Total noninterest expenses | $372,026 | $345,289 | $347,149 |
Operating expenses(2) /average assets | 3.15% | 3.07% | 3.02% |
Efficiency ratio(3) | 59.6% | 58.0% | 58.3% |
| | | | | | | | | | |
| | Years Ended December 31, | | |||||||
(000's omitted) | | 2021 |
| 2020 | | 2019 | | |||
Salaries and employee benefits |
| $ | 241,501 |
| $ | 228,384 |
| $ | 219,916 |
|
Occupancy and equipment | |
| 41,240 | |
| 40,732 | | | 39,850 | |
Data processing and communications | |
| 51,003 | |
| 45,755 | | | 41,407 | |
Amortization of intangible assets | |
| 14,051 | |
| 14,297 | | | 15,956 | |
Legal and professional fees | |
| 11,723 | |
| 11,605 | | | 10,783 | |
Business development and marketing | |
| 9,319 | |
| 9,463 | | | 11,416 | |
Litigation accrual | | | (100) | | | 2,950 | | | 0 | |
Acquisition expenses | |
| 701 | |
| 4,933 | | | 8,608 | |
Acquisition-related contingent consideration adjustment | | | 200 | | | 0 | | | 0 | |
Other | |
| 18,500 | |
| 18,415 | | | 24,090 | |
Total noninterest expenses | | $ | 388,138 | | $ | 376,534 | | $ | 372,026 | |
Operating expenses(1) /average assets | |
| 2.52 | % |
| 2.75 | % | | 3.15 | % |
Efficiency ratio(2) | |
| 60.2 | % |
| 59.6 | % | | 59.6 | % |
(1) |
Operating expenses are total noninterest expenses excluding acquisition expenses, acquisition-related contingent consideration adjustment, litigation accrual, and amortization of intangible assets. See Table |
Efficiency ratio, a non-GAAP measure, is calculated as operating expenses as defined in footnote |
Salaries and employee benefits increased $20.5$13.1 million, or 10.9%5.7%, in 2018,2021, driven by increases in merit and incentive-related employee compensation, higher payroll taxes, including increases in state-related unemployment taxes and higher employee benefit-related expenses including significant increases in employee medical benefit costs. Salaries and employee benefits increased $8.5 million, or 3.9%, in 2020 from 2019, driven by merit-related increases in employee wages and a net increase in full-time equivalent employees between the periods, due to both the impact of annual merit increases, a full year of expenses related to the employees from the MerchantsKinderhook acquisition in May 2017, a full year of expenses related toearly third quarter 2019 and the employees from the NRSSteuben acquisition in February 2017, higher incentive compensation, an increasethe second quarter of 2020, but were partially offset by lower employee benefit expenses primarily associated with a decrease in retirement plan costs and higher severance expense.employee medical expenses due to reduced provider utilization. Total full-time equivalent staff at the end of 20192021 was 2,7632,743 compared to 2,6752,829 at December 31, 20182020 and 2,6172,763 at the end of 2017. The increase in retirement plan expense in 2019 and 2018 is primarily due to the increase in service cost associated with an increase in the number of employees participating in the plan combined with an increase in eligible compensation associated with merit increases and increases in incentive compensation.2019. See Note K to the financial statements for further information about the pension plan.
Total non-personnel, noninterest expenses, excluding one-time acquisitionacquisition-related and litigation accrual expenses, increased $4.8$5.6 million, or 3.5%4.0%, in 2019, mostly2021, reflective of a partial yearthe general increase in the level of the additional costs associated with the acquired Kinderhook business activities. Increases in data processing and communications, occupancy and equipment, legal and professional fees business development and marketing and other expenses were partially offset by a decreasedecreases in occupancy and equipment and amortization of intangible assets.assets and business development and marketing. The increase in data processing and communications expenses was primarily due to the implementation of new customer-facing digital technologies and back office systems. Occupancy and equipment increased due to the Steuben acquisition and inflationary pressures, partially offset by the effects of branch consolidations undertaken in 2021. Legal and professional fees and other expenses, including travel and entertainment, were up during 2021 as compared to 2020 as the general amount of business activities increased to levels more consistent with pre-pandemic conditions. Total non-personnel, noninterest expenses, excluding one-time acquisition and litigation accrual expenses, increased $4.4decreased $3.2 million, or 3.3%2.3%, in 2018, mostly2020 from 2019, reflective of the general decrease in the level of business activities as a full yearresult of the additional costs associated with the acquired MerchantsCOVID-19 pandemic. Decreases in other expenses, business development and NRS business activities. Increases in occupancy and equipment, data processing and communications,marketing, and amortization of intangible assets all primarily a result of the additional costs associated with a full year of expanded business activities from the Merchants and NRS acquisitions, were partially offset by a decreaseincreases in data processing and communications, occupancy and equipment and legal and professional fees,fees. Other expenses and business development and marketing decreased and other expenses.were most heavily impacted by the diminished level of business activities that resulted from the COVID-19 pandemic, including travel and entertainment. The increase in data processing and communications expenses was due to the Steuben acquisition and the implementation of new customer-facing digital technologies and back office systems during 2020.
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Acquisition-related expenses for 2021 totaled $0.9 million, including $0.6 million associated with the pending Elmira acquisition, $0.1 million associated with the financial services acquisitions completed in 2021 and a $0.2 million acquisition-related contingent consideration adjustment associated with the FBD acquisition. Acquisition expenses for 2020 totaled $4.9 million, including $4.7 million associated with the Steuben acquisition and $0.2 million associated with the Kinderhook acquisition. Acquisition expenses for 2019 totaled $8.6 million, including $8.0 million associated with the Kinderhook acquisition and $0.6 million associated with the Steuben acquisition. During 2018,
The Company recorded $3.0 million in litigation accrual in 2020 related to a settlement of a purported class action lawsuit regarding the Bank’s deposit account terms and overdraft disclosures. The settlement was approved for $2.9 million which was paid in the third quarter of 2021, resulting in a $0.1 million adjustment to the Company’s litigation accrual in 2021.
While the Company recovered $0.8 millionremains focused on managing operating expense growth, the Company expects operating expenses to increase modestly in 2022 as compared to 2021 due to the continued resumption of vendor contract termination chargescertain marketing and business and employee development endeavors that were suspended due to the COVID-19 pandemic, higher wage and benefit costs, inflationary pressures, continued investment in the implementation of new customer-facing digital technologies and back office systems, and incremental expenses associated with operating an expanded branch network as a result of the Merchantspending Elmira acquisition which were recorded as an acquisition expense during the second quarter of 2017. Acquisition expenses for 2017 totaled $26.0 million, including $24.6 million associated with the Merchants acquisition, $1.2 million associated with the NRS acquisition and $0.2 related to all other acquisitions.
Income Taxes
The Company estimates its income tax expense based on the amount it expects to owe the respective taxing authorities, plus the impact of deferred tax items. Taxes are discussed in more detail in Note I of the Consolidated Financial Statements beginning on page 90.108. Accrued taxes represent the net estimated amount due or to be received from taxing authorities. In estimating accrued taxes, management assesses the relative merits and risks of the appropriate tax treatment of transactions, taking into account statutory, judicial and regulatory guidance in the context of the Company’s tax position. If the final resolution of taxes payable differs from its estimates due to regulatory determination or legislative or judicial actions, adjustments to tax expense may be required.
Income Taxes, requires deferred tax assets and liabilities to be measured at the enacted tax rate expected to be applied when the temporary differences are to be realized or settled. Thus, as of the December 22, 2017 date of enactment, deferred taxes were re-measured based upon the new 21% tax rate. Prior to the change in tax rate in 2017, the Company had recorded net deferred tax liabilities based on a marginal tax rate of 37.70%. The change in tax rate resulted in a decrease in the marginal tax rate to 24.29% and a deferred tax benefit of $38.0 million from the write-down of the net deferred tax liabilities in the fourth quarter of 2017. The effect of this change in tax law was recorded as a component of the income tax provision including those deferred assets and liabilities that were established through a financial statement component other than continuing operations.
Shareholders’ Equity
Shareholders’ equity ended 20192021 at $1.86$2.10 billion, up $141.5down $3.3 million, or 8.3%0.2%, from the end of 2018.2020. This increasedecrease reflects a $112.7 million decrease in accumulated other comprehensive income, common stock dividends declared of $91.6 million and common stock repurchased of $4.8 million. These decreases were partially offset by net income of $169.1$189.7 million, $6.9$9.8 million from the issuance of shares through the employee stock plans $6.9 million for treasury stock issued to the Company’s 401(k) plan, $5.3and $6.3 million from stock-based compensation and a $35.1 million increase in accumulated other comprehensive income. These increases were partially offset by common stock dividends declared of $81.8 million.compensation. The change in accumulated other comprehensive income was comprised of a $37.1$126.1 million increasedecrease due to changes in the unrealized gains and losses in the Company’s available-for-sale investment portfolio, partially offset by a $2.0positive $13.4 million adjustment in the overfunded status of the Company’s employee retirement plans. Excluding accumulated other comprehensive income in both 20192021 and 2018,2020, shareholders’ equity increased by $106.4$109.4 million, or 6.0%5.4%. Shares outstanding increased by 0.50.3 million during the year due to share issuances under the employee stock plan,plans and deferred compensation arrangements, and to the Company’s 401(k) plan.partially offset by 0.1 million shares repurchased during 2021.
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Shareholders’ equity ended 20182020 at $1.71$2.10 billion, up $78.5$248.9 million, or 4.8%13.4%, from the end of 2017.2019. This increase reflects net income of $168.6$164.7 million, $6.4$76.9 million from the issuance of shares as consideration for the Steuben acquisition, $15.8 million from the issuance of shares through the employee stock plan, $12.6plans, $6.4 million from stock-based compensation, $1.1 million from the implementation of ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), also referred to as CECL, on January 1, 2020, $0.1 million for treasury stock issued to the Company’s 401(k) plan and $6.1a $72.3 million from stock-based compensation.increase in accumulated other comprehensive income. These increases were partially offset by common stock dividends declared of $73.8 million and a $41.4 million decrease in accumulated other comprehensive income.$88.5 million. The change in accumulated other comprehensive income was comprised of a $30.2$66.3 million decreaseincrease due to changes in the unrealized gains and losses in the Company’s available-for-sale investment portfolio and an $11.2a positive $6.0 million net declineadjustment in the overfunded status of the Company’s employee retirement plans. Excluding accumulated other comprehensive income in both 20182020 and 2017,2019, shareholders’ equity roseincreased by $120.1$176.6 million, or 7.3%9.5%. Shares outstanding increased by 0.61.8 million during the year due to the issuance of 1.4 million shares of common stock as consideration for the Steuben acquisition and share issuances under the employee stock plan, deferred compensation arrangements and to the Company’s 401(k) plan.
The Company’s ratio of ending tier 1 capital to adjusted quarterly average assets (or tier 1 leverage ratio), thea primary measure for which regulators have established a 5% minimum for an institution to be considered “well-capitalized,” decreased 0.28%1.07 percentage points from the prior year to end the year at 10.80%9.09%. This was the result of an increase of 7.8%13.1% in average adjusted net assets (excludes investment market value adjustment and a portion of intangible assets net of related deferred tax liabilities), driven by significant deposit inflows related to government stimulus programs, while tier 1 capital increased by 5.0%1.3% from the prior year.year, including the impact of the first quarter of 2021 redemption of $77.3 million of trust preferred subordinated debt held by Community Capital Trust IV, an unconsolidated subsidiary trust, which qualified as tier 1 capital. For additional financial information on the Company’s regulatory capital, refer to Note P – Regulatory Matters in the Notes to Consolidated Financial Statements. The tangible equity-to-tangible assets ratio, (aa non-GAAP measure)measure, was 10.01%8.69% at the end of 20192021 versus 9.68%9.92% one year earlier (Seeearlier. See Table 2016 for Reconciliation of GAAP to Non-GAAP Measures).Measures. The increasedecrease was due to tangible common shareholders’ equity increasingdecreasing by 11.6%1.6% from the prior year primarily due to a $126.1 million decline in the after-tax market value adjustment on the Company’s available-for-sale investment securities portfolio due to higher market interest rates, while tangible assets increased at a lesser 7.8%12.2% from the prior year. The Company manages organic and acquired growth in a manner that enables it to continue to maintain and grow its capital base and maintain its ability to take advantage of future strategic growth opportunities.
Cash dividends declared on common stock in 20192021 of $81.8$91.6 million represented an increase of 10.7%3.5% over the prior year. This growth was a result of a $0.04 increase in dividends per share for the year and the increase in outstanding shares as noted above and a $0.14 increase in dividends per share for the year.above. Dividends per share for 20192021 of $1.58$1.70 represents a 9.7%2.4% increase from $1.44$1.66 in 2018,2020, a result of quarterly dividends per share increasing from $0.34$0.41 to $0.38,$0.42, or 11.8%, during the third quarter of 2018 and from $0.38 to $0.41, or 7.9%2.4%, in the third quarter of 2019.2020 and from $0.42 to $0.43, or 2.4%, in the third quarter of 2021. The 20192021 increase in quarterly dividends marked the 2729th consecutive year of dividend increases for the Company. The dividend payout ratio for this year was 48.4%48.3% compared to 43.8%53.7% in 2018,2020, and 43.5%48.4% in 2017.2019. The dividend payout ratio decreased during 2021 because net income increased during 2019 because15.2% while dividends declared increased 10.7% while net income increased 0.3%3.5% from 2018. The payout ratio increased during 2018 because dividends declared increased 12.7% while net income increased 11.9% from 2017.
Liquidity
Liquidity risk is a measure of the Company’s ability to raise cash when needed at a reasonable cost and minimize any loss. The Company maintains appropriate liquidity levels in both normal operating environments as well as stressed environments. The Company must be capable of meeting all obligations to its customers at any time and, therefore, the active management of its liquidity position remains an important management objective. The Bank has appointed the Asset Liability Committee (“ALCO”) to manage liquidity risk using policy guidelines and limits on indicators of potential liquidity risk. The indicators are monitored using a scorecard with three risk level limits. These risk indicators measure core liquidity and funding needs, capital at risk and change in available funding sources. The risk indicators are monitored using such statisticsmetrics as the core basic surplus ratio, unencumbered securities to average assets, free loan collateral to average assets, loans to deposits, deposits to total funding and borrowings to total funding ratios.
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Given the uncertain nature of the Company’s customers' demands, as well as the Company's desire to take advantage of earnings enhancement opportunities, the Company must have adequate sources of on and off-balance sheet funds available that can be utilized in time of need. Accordingly, in addition to the liquidity provided by balance sheet cash flows, liquidity must be supplemented with additional sources such as credit lines from correspondent banks and borrowings from the FHLB and the Federal Reserve Bank of New York (“Federal Reserve”). Other funding alternatives may also be appropriate from time to time, including wholesale and retail repurchase agreements, large certificates of deposit and the brokered CD market. The primary source of non-deposit funds is FHLB overnight advances, of which there were $8.3 millionno outstanding borrowings at December 31, 2019.
The Company’s primary sources of liquidity are its liquid assets, as well as unencumbered loans and securities that can be used to collateralize additional funding. At December 31, 2019,2021, the Bank had $205.0 million$1.88 billion of cash and cash equivalents of which $43.2 million$1.72 billion are interest-earning deposits held at the Federal Reserve, FHLB and other correspondent banks. The Company also had $1.8$1.71 billion in unused FHLB borrowing capacity based on the Company’s quarter-end loan collateral levels.levels and maintained $247.7 million of funding availability at the Federal Reserve’s discount window. Additionally, the Company has $1.7$2.80 billion of unencumbered securities that could be pledged at the FHLB or Federal Reserve to obtain additional funding. There iswas $25.0 million available in unsecured lines of credit with other correspondent banks.
The Company’s primary approach to measuring short-term liquidity is known as the Basic Surplus/Deficit model. It is used to calculate liquidity over two time periods: first, the amount of cash that could be made available within 30 days (calculated as liquid assets less short-term liabilities as a percentage of average assets); and second, a projection of subsequent cash availability over an additional 60 days. As of December 31, 2019,2021, this ratio was 13.9%26.6% for 30-daysboth 30 and 13.9% for 90-days,90 days, excluding the Company's capacity to borrow additional funds from the Federal Home Loan Bank of New York (“FHLB”)FHLB and other sources. This is considered to be a sufficient amount of liquidity based on the Company’s internal policy requirement of 7.5%.
A sources and uses statement is used by the Company to measure intermediate liquidity risk over the next twelve months. As of December 31, 2019,2021, there is more than enough liquidity available during the next year to cover projected cash outflows. In addition, stress tests on the cash flows are performed in various scenarios ranging from high probability events with a low impact on the liquidity position to low probability events with a high impact on the liquidity position. The results of the stress tests as of December 31, 20192021 indicate the Company has sufficient sources of funds for the next year in all simulated stressed scenarios.
To measure longer-term liquidity, a baseline projection of loan and deposit growth for five years is made to reflect how liquidity levels could change over time. This five-year measure reflects ample liquidity for loan and other asset growth over the next five years.
Though remote, the possibility of a funding crisis exists at all financial institutions. Accordingly, management has addressed this issue by formulating a Liquidity Contingency Plan, which has been reviewed and approved by both the Company’s Board of Directors (the “Board”) and the Company’s ALCO. The plan addresses the actions that the Company would take in response to both a short-term and long-term funding crisis.
A short-term funding crisis would most likely result from a shock to the financial system, either internal or external, which disrupts orderly short-term funding operations. Such a crisis would likely be temporary in nature and would not involve a change in credit ratings. A long-term funding crisis would most likely be the result of drastic credit deterioration at the Company. Management believes that both potential circumstances have been fully addressed through detailed action plans and the establishment of trigger points for monitoring such events.
48
Intangible Assets
The changes in intangible assets by reporting segment for the year ended December 31, 20192021 are summarized as follows:
Table 7: Intangible Assets
(000’s omitted) | Balance at December 31, 2018 | Additions / Adjustments | Amortization | Impairment | Balance at December 31, 2019 | |||||||||||||||
Banking Segment | ||||||||||||||||||||
Goodwill | $ | 629,916 | $ | 40,307 | $ | 0 | $ | 0 | $ | 670,223 | ||||||||||
Core deposit intangibles | 18,596 | 3,573 | 5,751 | 0 | 16,418 | |||||||||||||||
Total Banking Segment | 648,512 | 43,880 | 5,751 | 0 | 686,641 | |||||||||||||||
Employee Benefit Services Segment | ||||||||||||||||||||
Goodwill | 83,275 | 0 | 0 | 0 | 83,275 | |||||||||||||||
Other intangibles | 44,545 | 0 | 6,770 | 0 | 37,775 | |||||||||||||||
Total Employee Benefit Services Segment | 127,820 | 0 | 6,770 | 0 | 121,050 | |||||||||||||||
All Other Segment | ||||||||||||||||||||
Goodwill | 20,312 | 0 | 0 | 0 | 20,312 | |||||||||||||||
Other intangibles | 10,705 | 1,650 | 3,435 | 0 | 8,920 | |||||||||||||||
Total All Other Segment | 31,017 | 1,650 | 3,435 | 0 | 29,232 | |||||||||||||||
Total | $ | 807,349 | $ | 45,530 | $ | 15,956 | $ | 0 | $ | 836,923 |
| | | | | | | | | | | | | | | |
|
| Balance at |
| Additions / |
| | |
| | |
| Balance at | |||
(000’s omitted) | | December 31, 2020 | | Adjustments | | Amortization | | Impairment | | December 31, 2021 | |||||
Banking Segment |
| |
|
| |
|
| |
|
| |
|
| |
|
Goodwill | | $ | 690,121 | | $ | (253) | | $ | 0 | | $ | 0 | | $ | 689,868 |
Core deposit intangibles | |
| 13,831 | |
| 0 | |
| 4,744 | |
| 0 | |
| 9,087 |
Total Banking Segment | |
| 703,952 | |
| (253) | |
| 4,744 | |
| 0 | |
| 698,955 |
Employee Benefit Services Segment | |
| | |
| | |
| | |
|
| |
| |
Goodwill | |
| 83,275 | |
| 2,046 | |
| 0 | |
| 0 | |
| 85,321 |
Other intangibles | |
| 32,051 | |
| 14,000 | |
| 6,033 | |
| 0 | |
| 40,018 |
Total Employee Benefit Services Segment | |
| 115,326 | |
| 16,046 | |
| 6,033 | |
| 0 | |
| 125,339 |
All Other Segment | |
| | |
| | |
| | |
|
| |
| |
Goodwill | |
| 20,312 | |
| 3,608 | |
| 0 | |
| 0 | |
| 23,920 |
Other intangibles | |
| 7,058 | |
| 12,337 | |
| 3,274 | |
| 0 | |
| 16,121 |
Total All Other Segment | |
| 27,370 | |
| 15,945 | |
| 3,274 | |
| 0 | |
| 40,041 |
| | | | | | | | | | | | | | | |
Total | | $ | 846,648 | | $ | 31,738 | | $ | 14,051 | | $ | 0 | | $ | 864,335 |
Intangible assets at the end of 20192021 totaled $836.9$864.3 million, an increase of $29.6$17.7 million from the prior year due to the addition of $40.3$5.4 million of goodwill $3.6 million of core deposit intangibles and $1.7$26.3 million of other intangibles arising from acquisition activity, partially offset by $16.0$14.0 million of amortization during the year. The additional goodwill and core depositother intangibles recorded in 20192021 resulted from the Kinderhook acquisition,NuVantage, TGA and the other intangibles recorded resultedFBD acquisitions and a $0.3 million adjustment to goodwill from the two financial services acquisitions completed by CISISteuben acquisition that occurred in 2019.2020. Goodwill represents the excess cost of an acquisition over the fair value of the net assets acquired. Goodwill at December 31, 20192021 totaled $773.8$799.1 million, comprised of $670.2$689.9 million related to banking acquisitions and $103.6$109.2 million arising from the acquisition of financial services businesses. Goodwill is subject to periodic impairment analysis to determine whether the carrying value of the identified businesses exceeds their fair value, which would necessitate a write-down of goodwill. The Company completed its goodwill impairment analyses during the first quartersas of 2019 and 2018December 31, 2021 and no adjustments were necessary for the banking or financial services businesses. The impairment analyses were based upon discounted cash flow modeling techniques that require management to make estimates regarding the amount and timing of expected future cash flows. It also requires the selection of discount rates that reflect the current return characteristics of the market in relation to present risk-free interest rates, estimated equity market premiums and company-specific performance and risk indicators. Furthermore, during 2021 and 2020, the Company performed quarterly qualitative analyses of goodwill impairment and performed a quantitative assessment of its insurance subsidiary included in the All Other segment during the fourth quarter of 2020 and concluded no adjustments were necessary for the banking or financial services businesses. The qualitative analyses performed in 2021 and 2020 included assessments of macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, other relevant entity-specific events and changes in share price. The Company expects to conduct qualitative and quantitative goodwill impairment analyses for all applicable business entities for the 2022 operating period. Management believes that there is a low probability of future impairment with regard to the goodwill associated with its whole-bank, branch and financial services business acquisitions.
49
Core deposit intangibles represent the value of acquired non-time deposits in excess of funding that could have been obtained in the capital markets. Core deposit intangibles are amortized on either an accelerated or straight-line basis over periods ranging from seven to twenty years. The recognition of customer relationship intangibles was determined based on a methodology that calculates the present value of the projected future net income derived from the acquired customer base. These customer relationship intangibles are being amortized on an accelerated basis over periods ranging from eight to twelve years.
Loans
(000's omitted) | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
Business lending | $ | 2,775,876 | $ | 2,396,977 | $ | 2,424,223 | $ | 1,490,076 | $ | 1,497,271 | ||||||||||
Consumer mortgage | 2,430,902 | 2,235,408 | 2,220,298 | 1,819,701 | 1,769,754 | |||||||||||||||
Consumer indirect | 1,113,062 | 1,083,207 | 1,011,978 | 1,044,972 | 935,760 | |||||||||||||||
Consumer direct | 184,378 | 178,820 | 179,929 | 191,815 | 195,076 | |||||||||||||||
Home equity | 386,325 | 386,709 | 420,329 | 401,998 | 403,514 | |||||||||||||||
Gross loans | 6,890,543 | 6,281,121 | 6,256,757 | 4,948,562 | 4,801,375 | |||||||||||||||
Allowance for loan losses | (49,911 | ) | (49,284 | ) | (47,583 | ) | (47,233 | ) | (45,401 | ) | ||||||||||
Loans, net of allowance for loan losses | $ | 6,840,632 | $ | 6,231,837 | $ | 6,209,174 | $ | 4,901,329 | $ | 4,755,974 | ||||||||||
Daily average of total gross loans | $ | 6,542,716 | $ | 6,263,843 | $ | 5,818,367 | $ | 4,881,905 | $ | 4,288,091 |
Gross loans outstanding of $6.89$7.37 billion as of December 31, 2019 increased $609.42021 decreased $42.3 million, or 9.7%0.6%, compared to December 31, 2018,2020, reflecting decreases in business lending, due primarily to forgiveness of PPP loans, and home equity portfolios, partially offset by increases in the consumer indirect, consumer mortgage, and consumer direct portfolios. Excluding PPP loans, gross loans outstanding increased $334.5 million, or 4.8%, compared to December 31, 2020. The non-PPP loan growth in the loan portfolio during 2021 was primarily attributable to the organic origination of consumer mortgages and consumer indirect loans. Gross loans outstanding of $7.42 billion as of December 31, 2020 increased $525.4 million, or 7.6%, compared to December 31, 2019, reflecting growth in the business lending consumer mortgage, consumer indirect and consumer direct portfolios, partially offset by a slight decrease in the home equity portfolio. The growth in the loan portfolio was primarily attributable to the Kinderhook acquisition combined with organic growth. Excluding loans acquired from Kinderhook, loans increased $159.7 million, or 2.5%. Gross loans outstanding of $6.28 billion as of December 31, 2018 increased $24.4 million, or 0.4%, compared to December 31, 2017, reflecting growth in the consumer mortgage and consumer indirect portfolios, partially offset by decreases in the business lending, home equityconsumer indirect, consumer direct, and consumer directmortgage portfolios.
The compounded annual growth rate (“CAGR”) for the Company’s total loan portfolio between 20142016 and 20192021 was 10.2%, with approximately 11% of the total growth for the period attributable to organic growth and 89% attributable to acquired balances.8.3%. The greatest overall expansion occurred in business loans, which grew at a 17.1%15.6% CAGR driven mostly by acquisitions during the five year period.period and PPP loan originations in 2020 and 2021. The consumer mortgage portfolio grew at a compounded annual growth rate of 8.5%7.0% from 20142016 to 2019.2021. The consumer installment segment, including indirect and direct loans, grew at a CAGR of 5.0%1.7%. The home equity lending segment grewdeclined at a compounded annual growth rate of 2.4%0.2% from 20142016 to 2019,2021, including the impact from acquisitions.
The weighting of the components of the Company’s loan portfolio enables it to be highly diversified. Approximately 60%58% of loans outstanding at the end of 20192021 were made to consumers borrowing on an installment, line of credit or residential mortgage loan basis. The business lending portfolio is also broadly diversified by industry type as demonstrated by the following distributions at year-end 2019:2021: commercial real estate (41%(45%), restaurant & lodging (10%), general services (8%(9%), healthcare (6%), retail trade (8%), healthcare (6%), manufacturing (6%), construction (4%(3%), agriculture (3%), wholesale trade (3%) and motor vehicle and parts dealers (3%). A variety of other industries with less than a 3% share of the total portfolio comprise the remaining 8%9%.
The combined total of general-purpose business lending to commercial, industrial, non-profit and municipal customers, mortgages on commercial property and vehicle dealer floor plan financing is characterized as the Company’s business lending activity. The business lending portfolio increased $378.9decreased $364.2 million, or 15.8%10.6%, in 20192021 primarily due to the forgiveness of PPP loans by the SBA. Excluding PPP loans, the business lending portfolio increased $12.7 million, or 0.4%, between December 31, 2020 and December 31, 2021. The business lending portfolio increased $664.2 million, or 23.9%, between December 31, 2019 and December 31, 2020 due to the origination of PPP loans and loans acquired in the Kinderhook transaction and organic growth.Steuben transaction. Excluding loans from the KinderhookSteuben acquisition, the portfolio increased $67.7$410.7 million, or 2.8%. The portfolio decreased $27.2 million, or 1.1%14.8%, in 2018 as contractual and unscheduled principal reductions outpaced organic loan originations.2020. Highly competitive conditions for business lending continue to prevail in both the smalldigital marketplace and middle market commercial segmentsgeographic regions in which the Company primarily operates. The Company strives to generate growth in its business portfolio in a manner that adheres to its goals of maintaining strong asset quality and producing profitable margins. The Company continues to invest in additional personnel, technology, and business development resources to further strengthen its capabilities in this important product category.
50
The following table shows the maturities and type of interest rates for business and construction loans as of December 31, 2019:
Table 9:8: Maturity Distribution of Business and Construction Loans (1)
(000's omitted) | Maturing in One Year or Less | Maturing After One but Within Five Years | Maturing After Five Years | Total |
Commercial, financial and agricultural | $277,442 | $618,034 | $1,739,646 | $2,635,122 |
Real estate – construction | 63,155 | 37,526 | 43,923 | 144,604 |
Total | $340,597 | $655,560 | $1,783,569 | $2,779,726 |
Fixed interest rates | $84,106 | $381,253 | $734,660 | $1,200,019 |
Floating or adjustable interest rates | 256,491 | 274,307 | 1,048,909 | 1,579,707 |
Total | $340,597 | $655,560 | $1,783,569 | $2,779,726 |
| | | | | | | | | | | | | | | |
| | Maturing in | | Maturing After | | Maturing After | | | | | | | |||
| | One Year or | | One but Within | | Five but Within | | Maturing After | | | | ||||
(000’s omitted) |
| Less |
| Five Years |
| Fifteen Years |
| Fifteen Years |
| Total | |||||
Business lending | | | | | | | | | | | | | | | |
Fixed interest rates | | $ | 262,194 | | $ | 591,273 | | $ | 714,121 | | $ | 3,154 | | $ | 1,570,742 |
Floating or adjustable interest rates | | | 401,055 | | | 582,609 | | | 483,404 | | | 38,094 | | | 1,505,162 |
Total | | $ | 663,249 | | $ | 1,173,882 | | $ | 1,197,525 | | $ | 41,248 | | $ | 3,075,904 |
| | | | | | | | | | | | | | | |
Consumer mortgage | | | | | | | | | | | | | | | |
Fixed interest rates | | $ | 195,997 | | $ | 694,722 | | $ | 1,094,953 | | $ | 548,757 | | $ | 2,534,429 |
Floating or adjustable interest rates | | | 2,989 | | | 9,690 | | | 7,827 | | | 1,179 | | | 21,685 |
Total | | $ | 198,986 | | $ | 704,412 | | $ | 1,102,780 | | $ | 549,936 | | $ | 2,556,114 |
| | | | | | | | | | | | | | | |
Consumer indirect | | | | | | | | | | | | | | | |
Fixed interest rates | | $ | 277,455 | | $ | 804,393 | | $ | 107,822 | | $ | 79 | | $ | 1,189,749 |
| | | | | | | | | | | | | | | |
Consumer direct | | | | | | | | | | | | | | | |
Fixed interest rates | | $ | 49,118 | | $ | 92,365 | | $ | 11,758 | | $ | 71 | | $ | 153,312 |
Floating or adjustable interest rates | | | 59 | | | 25 | | | 415 | | | 0 | | | 499 |
Total | | $ | 49,177 | | $ | 92,390 | | $ | 12,173 | | $ | 71 | | $ | 153,811 |
| | | | | | | | | | | | | | | |
Home equity | | | | | | | | | | | | | | | |
Fixed interest rates | | $ | 24,554 | | $ | 87,867 | | $ | 100,234 | | $ | 12,045 | | $ | 224,700 |
Floating or adjustable interest rates | |
| 2,256 | |
| 6,940 | |
| 26,697 | |
| 137,468 | |
| 173,361 |
Total | | $ | 26,810 | | $ | 94,807 | | $ | 126,931 | | $ | 149,513 | | $ | 398,061 |
(1) | Scheduled repayments are reported in the maturity category in which the payment is due. |
The Company participated in both rounds of the PPP, a specialized low-interest loan program funded by the U.S. Treasury Department and administered by the SBA, including lending pursuant to the 2020 Coronavirus Aid, Relief, and Security Act’s (“CARES Act”), now known as first draw loans. In addition, the Company participated in the 2021 Consolidated Appropriations Act’s (“CAA”) PPP loan program, now known as second draw loans. As of December 31, 2021, the Company’s business lending portfolio included 32 first draw PPP loans with a total balance of $10.7 million and 690 second draw PPP loans with a total balance of $77.2 million. This compares to 3,417 first draw PPP loans with a total balance of $470.7 million at December 31, 2020.
51
The consumer mortgage loans include no exposure to high-risk mortgage products and are comprised of fixed (98%(99%) and adjustable rate (2%(1%) residential lending. Consumer mortgages increased $195.5$154.6 million, or 8.7%6.4%, inbetween the end of 2020 and 2021, driven by low market rates and strong housing demand and includes the impact of selling $20.1 million of consumer mortgage production to the secondary market. Consumer mortgages decreased $29.4 million, or 1.2%, between the end of 2019 and 2020, including $115.2$26.7 million of loans acquired with the Kinderhook acquisition. In 2018,Steuben acquisition and the impact of selling $79.7 million of consumer mortgages increased $15.1 million, or 0.7%. The Company’s solid performance is a reflectionmortgage production to the secondary market. With the precipitous drop in mortgage interest rates during the latter half of the attractivenessfirst quarter of its product offerings2020, coupled with strong housing prices and its abilitydemand in the Company’s primary markets, the Company experienced large volumes of mortgage refinance and origination activity in 2021 and 2020 and intense competition in the marketplace to successfully meet customer needs. Market interest rates,capture this business. Interest rate levels, secondary market premiums, expected duration and the Company’s overall interest rate sensitivity profileALCO strategies continue to be the most significant factors in determining whether the Company chooses to retain, versus sell and service, portions of its new consumer mortgage generation.production. The Company is currently holding primarily allthe majority of its new consumer mortgage production in portfolio due to current market conditions. Home equity loans decreased $0.4$1.8 million, or 0.1%0.4%, from the end of 2018,during 2021, while home equity loans increased $13.5 million, or 3.5%, during 2020, including $16.1$39.6 million of home equity loans acquired with the KinderhookSteuben transaction. The Company continues to experience a low level of utilization ofpaydowns in its home equity loans.
Consumer installment loans, both those originated directly in the branches (referred to as “consumer direct”) and indirectly in automobile, marine, and recreational vehicle dealerships (referred to as “consumer indirect”), increased $35.4$169.0 million, or 2.8%14.4%, from one year ago. Excluding the $7.3ago, including a $167.9 million increase in consumer indirect loans and $1.1 million increase in consumer direct loans, fromdue in large part to increased demand driven by low market interest rates, competitive pricing offered by the Kinderhook acquisition, the portfolio increased $28.1Company and higher consumer disposable income because of government stimulus programs and tight labor markets. During 2020, consumer installment loans decreased $122.9 million, or 2.2%9.5%, including $19.9 million of consumer installment loans acquired with the Steuben transaction. Strained supplies in 2019.all categories, while not impactful enough thus far may stunt growth opportunities and continue to cause elevated collateral values in all indirect collateral categories. Although the consumer indirect loan market is highly competitive, the Company is focused on maintaining the solid profitability produced by itsa profitable, in-market and contiguous market indirect portfolio, while continuing to pursue its disciplined, long-term approach to expandingthe expansion of its dealer network. Consumer direct loans provide attractive returns, and the Company is committed to providing competitive market offerings to its customers in this important loan category. Despite the strong competition the Company faces from the financing subsidiaries of vehicle manufacturers and other financial intermediaries, the Company will continue to strive to grow these key portfolios through varying market conditions over the long term.
The ultimate impact the COVID-19 pandemic will have on loan demand and the Company’s loan balances for 2022 remains uncertain at this time. The Company’s business lending balances will be unfavorably impacted as first draw and second draw PPP loans continue to be forgiven by the SBA. The Company anticipates assisting the majority of its PPP borrowers with forgiveness requests during the first and second quarters of 2022. The longer-term implications that COVID-19 will have on business lending loan demand are presently difficult to predict.
52
Asset Quality
(000's omitted) | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
Nonaccrual loans | ||||||||||||||||||||
Business lending | $ | 4,410 | $ | 8,370 | $ | 8,272 | $ | 5,063 | $ | 6,567 | ||||||||||
Consumer mortgage | 12,517 | 12,262 | 13,788 | 13,684 | 12,790 | |||||||||||||||
Consumer indirect | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Consumer direct | 52 | 0 | 0 | 0 | 15 | |||||||||||||||
Home equity | 1,856 | 1,912 | 2,680 | 1,872 | 2,356 | |||||||||||||||
Total nonaccrual loans | 18,835 | 22,544 | 24,740 | 20,619 | 21,728 | |||||||||||||||
Accruing loans 90+ days delinquent | ||||||||||||||||||||
Business lending | 2,299 | 179 | 571 | 145 | 126 | |||||||||||||||
Consumer mortgage | 2,329 | 1,625 | 1,526 | 1,385 | 1,805 | |||||||||||||||
Consumer indirect | 156 | 292 | 303 | 169 | 102 | |||||||||||||||
Consumer direct | 76 | 52 | 48 | 58 | 51 | |||||||||||||||
Home equity | 566 | 307 | 264 | 1,319 | 111 | |||||||||||||||
Total accruing loans 90+ days delinquent | 5,426 | 2,455 | 2,712 | 3,076 | 2,195 | |||||||||||||||
Nonperforming loans | ||||||||||||||||||||
Business lending | 6,709 | 8,549 | 8,843 | 5,208 | 6,693 | |||||||||||||||
Consumer mortgage | 14,846 | 13,887 | 15,314 | 15,069 | 14,595 | |||||||||||||||
Consumer indirect | 156 | 292 | 303 | 169 | 102 | |||||||||||||||
Consumer direct | 128 | 52 | 48 | 58 | 66 | |||||||||||||||
Home equity | 2,422 | 2,219 | 2,944 | 3,191 | 2,467 | |||||||||||||||
Total nonperforming loans | 24,261 | 24,999 | 27,452 | 23,695 | 23,923 | |||||||||||||||
Other real estate (OREO) | 1,270 | 1,320 | 1,915 | 1,966 | 2,088 | |||||||||||||||
Total nonperforming assets | $ | 25,531 | $ | 26,319 | $ | 29,367 | $ | 25,661 | $ | 26,011 | ||||||||||
Nonperforming loans / total loans | 0.35 | % | 0.40 | % | 0.44 | % | 0.48 | % | 0.50 | % | ||||||||||
Legacy nonperforming loans / legacy total loans (1) | 0.33 | % | 0.36 | % | 0.40 | % | 0.42 | % | 0.49 | % | ||||||||||
Nonperforming assets / total loans and other real estate | 0.37 | % | 0.42 | % | 0.47 | % | 0.52 | % | 0.54 | % | ||||||||||
Delinquent loans (30 days old to nonaccruing) to total loans | 0.94 | % | 1.00 | % | 1.10 | % | 1.19 | % | 1.16 | % | ||||||||||
Loan loss provision to net charge-offs | 108 | % | 119 | % | 103 | % | 129 | % | 101 | % | ||||||||||
Legacy loan loss provision to net charge-offs (1) | 109 | % | 125 | % | 96 | % | 130 | % | 86 | % |
The Company places a loan on nonaccrual status when the loan becomes 90 days past due, or sooner if management concludes collection of interest is doubtful, except when, in the opinion of management, it is well-collateralized and in the process of collection. As shown in Table 10 above, nonperformingNonperforming loans, defined as nonaccruing loans and accruing loans 90 days or more past due, ended 20192021 at $24.3$45.5 million. This represents a decrease of $0.7$31.4 million from the $25.0$76.9 million in nonperforming loans at the end of 2018.2020. The decrease in nonperforming loans was driven by the upgrade of several large business loans from nonaccrual status to accruing status during the fourth quarter of 2021. During the fourth quarter of 2020, several commercial borrowers, which primarily operate in the hospitality, travel and entertainment industries, requested extended loan repayment forbearance due to the continued pandemic-related financial hardship they were experiencing. Although the Company’s management granted these forbearance requests, it also reclassified the majority of these loan relationships from accruing to nonaccrual status, unless the borrower clearly demonstrated current repayment capacity or sufficient cash reserves to service their pre-forbearance payment obligations. Several borrowers in this group successfully restored all past due payments to current status, resumed their pre-forbearance payment obligations for a period of at least six months and demonstrated sufficient repayment capacity and cash reserves to be reclassified to accruing status during the fourth quarter of 2021. The ratio of nonperforming loans to total loans at December 31, 20192021 decreased five42 basis points from the prior year to 0.35%. Excluding acquired loans, the ratio of nonperforming loans to total loans at the end of 2019 was down three basis points from the prior year to 0.33%0.62%. The ratio of nonperforming assets (which includes other real estate owned, or “OREO”, in addition to nonperforming loans) to total loans plus OREO decreased to 0.37%0.63% at year-end 2019,2021, down five42 basis points from one year earlier. The Company’s success at keeping these ratios at favorable levels throughout varying economic conditions is the result of continued focus on maintaining strict underwriting standards, early problem recognition, and effective collection and recovery efforts. At December 31, 2019,2021, OREO consisted of 16two residential properties with a total value of $1.0$0.1 million and twoone commercial real estate property with a total value of $0.6 million. This compares to five residential properties with a total value of $0.3 million. This compares to 18 residential propertiesmillion and one commercial real estate property with a total value of $1.3$0.6 million at December 31, 2018.
Consistent with industry regulatory guidance, borrowers that were otherwise current on loan payments and granted COVID-19 related financial hardship payment deferrals were reported as current loans throughout the first 180 days of the deferral period. Borrowers that were delinquent in their payments to the consumer mortgage portfolio. Collateral values of residential properties within the Company’s market area have generally increased over the past several years. Additionally, economic conditions, including lower unemployment levels, have positively impacted consumersBank prior to requesting a COVID-19 related financial hardship payment deferral were reviewed on a case-by-case basis for troubled debt restructure classification and resulted in more favorable nonperforming mortgage ratios in 2018 and 2019. loan status.
Approximately 28%53% of the nonperforming loans at December 31, 20192021 are related to the business lending portfolio, which is comprised of business loans broadly diversified by industry type. The level of nonperforming business loans decreased from the prior year due primarily to the payoffupgrade of one nonperforming commercial creditseveral large business loans from nonaccrual status to accruing status during the fourth quarter of 2019.2021, as described previously. Approximately 40% of nonperforming loans at December 31, 2021 are related to the consumer mortgage portfolio. Collateral values of residential properties within the Company’s market area have generally remained stable or have increased over the past several years. Additionally, strong economic conditions prior to COVID-19, including lower unemployment levels, positively impacted consumers and had resulted in more favorable nonperforming consumer mortgage ratios. While there was a modest increase in nonperforming loans in the consumer mortgage portfolio as compared to one year earlier, economic conditions impacted by COVID-19, including increased unemployment rates, travel restrictions and state government shutdowns of certain business activities, as well as COVID-19 related delays in foreclosure processes have improved over the past few quarters. The Company will continue to closely monitor the impact that economic conditions associated with the COVID-19 pandemic could have on its level of delinquent loans, nonperforming assets and ultimately credit-related losses, and proactively engage with our customers to strive to limit the potential losses. The remaining 11% percent7% of nonperforming loans relate to consumer installment and home equity loans.loans, with home equity non-performing loan levels being driven by the same factors identified for consumer mortgages. Nonperforming loan levels in these categories have decreased slightly as compared to one year earlier. The allowance for loancredit losses to nonperforming loans ratio, a general measure of coverage adequacy, was 206%110% at the end of 20192021 compared to 197%79% at year-end 20182020 and 173%206% at December 31, 2017. Excluding acquired2019. The increase in this ratio from one year ago was primarily driven by the decrease in nonperforming business loans the ratioas mentioned previously.
53
The Company’s senior management, special asset officers and lenders review all delinquent and nonaccrual loans and OREO regularly in order to identify deteriorating situations, monitor known problem credits and discuss any needed changes to collection efforts, if warranted. Based on the group’s consensus, a relationship may be assigned a special assets officer or other senior lending officer to review the loan, meet with the borrowers, assess the collateral and recommend an action plan. This plan could include foreclosure, restructuring loans, issuing demand letters or other actions. The Company’s larger criticized credits are also reviewed on a quarterly basis by senior credit administration management, special assets officers and commercial lending management to monitor their status and discuss relationship management plans. Commercial lending management reviews the criticized business loan portfolio on a monthly basis.
Total delinquencies, defined as loans 30 days or more past due or in nonaccrual status, finished the current year at 0.94%1.00% of total loans outstanding, compared to 1.00%1.50% at the end of 2018.2020. While there were decreases in the delinquent loan levels in all portfolios as compared to one year ago, the overall decrease was primarily driven by the aforementioned upgrade of several large business loans from nonaccrual status to accruing status during the fourth quarter of 2021. Consistent with industry regulatory guidance, borrowers that were otherwise current on loan payments and granted COVID-19 related financial hardship payment deferrals were reported as current loans throughout the first 180 days of the deferral period and this arrangement expired for most deferrals in the third quarter of 2020. As of year-end 2019,2021, delinquency ratios for business lending, consumer installment loans, consumer mortgages and home equity loans were 0.69%0.97%, 0.78%, 1.12%, 1.10%, and 1.21%1.15%, respectively. These ratios compare to the year-end 20182020 delinquency rates for business lending, consumer installment loans, consumer mortgages and home equity loans of 0.62%1.76%, 1.34%1.24%, 1.22%1.30%, and 1.21%1.28%, respectively. The Company believes the decreases in delinquent loan levels has been partially attributable to the extraordinary Federal and State Government financial assistance provided to consumers throughout the pandemic, as well as the funding support to business customers who participated in PPP lending. Delinquency levels, particularly in the 30 to 89 days category, tend to be somewhat volatile due to their seasonal characteristics and measurement at a point in time, and therefore management believes that it is useful to evaluate this ratio over a longer time period. The average quarter-end delinquency ratio for total loans in 20192021 was 0.89%1.20%, as compared to an average of 0.96%1.03% in 2018,2020, and 1.02%0.89% in 2017,2019, reflective of management’s continued focusthe adverse impact that COVID-19 had on maintaining strict underwriting standards, as well ascertain customers in 2020 and 2021 and the effective utilizationreclassification of its collection capabilities.
Loans are considered modified in a troubled debt restructuring (“TDR”) when, due to a borrower’s financial difficulties, the Company makes one or more concessions to the borrower that it would not otherwise consider. These modifications primarily include, among others, an extension of the term of the loan or granting a period with reduced or no principal and/or interest payments, which can be recaptured through payments made over the remaining term of the loan or at maturity. Historically, the Company has created very few TDRs. Regulatory guidance by the OCC requires certain loans that have been discharged in Chapter 7 bankruptcy to be reported as TDRs. In accordance with this guidance, loans that have been discharged in Chapter 7 bankruptcy but not reaffirmed by the borrower are classified as TDRs, irrespective of payment history or delinquency status, even if the repayment terms for the loan have not been otherwise modified and the Company’s lien position against the underlying collateral remains unchanged. Pursuant to that guidance, the Company records a charge-off equal to any portion of the carrying value that exceeds the assessed net realizable value of the collateral. As of December 31, 2019,2021, the Company had 8081 loans totaling $3.6$3.9 million considered to be nonaccruing TDRs and 168151 loans totaling $3.4$4.3 million considered to be accruing TDRs. This compares to 6273 loans totaling $2.4$3.2 million considered to be nonaccruing TDRs and 156174 loans totaling $3.1$3.8 million considered to be accruing TDRs at December 31, 2018.2020. Consistent with industry regulatory guidance, borrowers that were otherwise current on loan payments and granted COVID-19 related financial hardship payment deferrals were reported as current loans throughout the first 180 days of the deferral period and were not classified as TDRs. Borrowers that were delinquent in their payments to the Bank prior to requesting a COVID-19 related financial hardship payment deferral were reviewed on a case-by-case basis for TDR classification and nonperforming loan status.
Prediction of future delinquency and credit loss performance is extremely difficult given the uncertainties centering around the evolution of the virus, the efficacy of vaccination programs, the related pace of the full resumption of business activities, and the trajectory of the economic recovery as government assistance programs are phased out. Due to the Company’s continued focus on maintaining safe and sound underwriting standards and the effective utilization of its collection capabilities, the Company expects that its credit performance will eventually return to levels consistent with its average long-term historical results once public health, government intervention and economic conditions return to a more normalized state.
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Allowance for credit losses and loan lossesnet charge-off ratios for the last fivepast two years are as follows:
Table 11: Allowance for9: Loan Losses Activity
Years Ended December 31, | |||||
(000's omitted except for ratios) | 2019 | 2018 | 2017 | 2016 | 2015 |
Allowance for loan losses at beginning of period | $49,284 | $47,583 | $47,233 | $45,401 | $45,341 |
Charge-offs: | |||||
Business lending | 2,334 | 3,947 | 5,229 | 1,969 | 2,249 |
Consumer mortgage | 1,372 | 836 | 707 | 647 | 1,374 |
Consumer indirect | 7,631 | 8,382 | 8,456 | 7,643 | 6,714 |
Consumer direct | 1,945 | 1,777 | 2,081 | 1,706 | 1,490 |
Home equity | 445 | 544 | 284 | 218 | 244 |
Total charge-offs | 13,727 | 15,486 | 16,757 | 12,183 | 12,071 |
Recoveries: | |||||
Business lending | 826 | 485 | 656 | 616 | 877 |
Consumer mortgage | 60 | 136 | 50 | 115 | 80 |
Consumer indirect | 4,180 | 4,874 | 4,516 | 4,168 | 3,943 |
Consumer direct | 710 | 807 | 849 | 901 | 722 |
Home equity | 148 | 48 | 52 | 139 | 62 |
Total recoveries | 5,924 | 6,350 | 6,123 | 5,939 | 5,684 |
Net charge-offs | 7,803 | 9,136 | 10,634 | 6,244 | 6,387 |
Provision for loan losses | 8,300 | 10,570 | 10,675 | 8,039 | 6,349 |
Provision for acquired impaired loans | 130 | 267 | 309 | 37 | 98 |
Allowance for loan losses at end of period | $49,911 | $49,284 | $47,583 | $47,233 | $45,401 |
Allowance for loan losses / total loans | 0.72% | 0.78% | 0.76% | 0.95% | 0.95% |
Allowance for legacy loan losses / total legacy loans (1) | 0.87% | 0.93% | 0.98% | 1.02% | 1.05% |
Allowance for loan losses / nonperforming loans | 206% | 197% | 173% | 199% | 190% |
Allowance for legacy loans / nonperforming legacy loans (1) | 262% | 256% | 244% | 245% | 212% |
Net charge-offs to average loans outstanding: | |||||
Business lending | 0.06% | 0.14% | 0.22% | 0.09% | 0.11% |
Consumer mortgage | 0.06% | 0.03% | 0.03% | 0.03% | 0.08% |
Consumer indirect | 0.32% | 0.33% | 0.38% | 0.35% | 0.33% |
Consumer direct | 0.66% | 0.52% | 0.65% | 0.40% | 0.41% |
Home equity | 0.08% | 0.12% | 0.06% | 0.02% | 0.05% |
Total loans | 0.12% | 0.15% | 0.18% | 0.13% | 0.15% |
| | | | | |
| | Years Ended |
| ||
| | December 31, |
| ||
| | 2021 | | 2020 |
|
Allowance for credit losses/total loans |
| 0.68 | % | 0.82 | % |
Allowance for credit losses/nonperforming loans |
| 110 | % | 79 | % |
Nonaccrual loans/total loans |
| 0.57 | % | 0.98 | % |
Allowance for credit losses/nonaccrual loans |
| 120 | % | 83 | % |
Net charge-offs to average loans outstanding: |
|
|
|
| |
Business lending |
| 0.03 | % | 0.02 | % |
Consumer mortgage |
| 0.01 | % | 0.03 | % |
Consumer indirect |
| 0.07 | % | 0.23 | % |
Consumer direct |
| 0.27 | % | 0.50 | % |
Home equity |
| 0.03 | % | 0.04 | % |
Total loans |
| 0.04 | % | 0.07 | % |
Total net charge-offs in 20192021 were $7.8$2.8 million, $1.3$2.1 million less than the prior year due to a decrease in net charge-offs in all four of the business lending,Company’s consumer indirect and home equity portfolios, partially offset by an increase in net charge-offs in the consumer mortgage and consumer direct portfolios.business lending portfolio. Net charge-offs in 20182020 were $1.5$2.8 million less than 20172019 due to a decrease in net charge-offs in all five of the business lending, consumer indirect and consumer direct portfolios, partially offset by an increase in net charge-offs in the home equity and consumer mortgageCompany’s portfolios.
Due to the significant increases in average loan balances over time as a result of acquisitions and organic growth, management believes that net charge-offs as a percent of average loans (“net charge-off ratio”) offers the most meaningful representation of charge-off trends. The total net charge-off ratio of 0.12%0.04% for 20192021 was three basis points lower than the 0.15%0.07% ratio from 2018,2020, and sixeight basis points lower than the 0.18%0.12% ratio from 2017.2019. Gross charge-offs as a percentage of average loans waswere 0.12% in 2021, as compared to 0.15% in 2020, and 0.21% in 2019, as compared to 0.25% in 2018, and 0.29% in 2017, evidence of management’s continued focus on maintaining strictconservative underwriting standards. Recoveries were $5.9$6.1 million in 2019,2021, representing 41%62% of average gross charge-offs for the latest two years, compared to 39%47% in 20182020 and 42%41% in 2017.
Business loan net charge-offs decreasedincreased in 2019,2021, totaling $1.5$1.1 million, or 0.06%0.03% of average business loans outstanding, compared to $3.5$0.8 million, or 0.14%0.02% of the average outstanding balance in 2018.2020, but the business loan net charge-off amount and ratio in 2021 remained well below historical levels. Consumer installment loan net charge-offs increaseddecreased to $4.7$1.3 million this year from $4.5$3.3 million in 2018,2020, with a net charge-off ratio of 0.37%0.10% in 20192021 and 0.36%0.27% in 2018.2020. The dollar amount of consumer mortgage net charge-offs increaseddecreased to $1.3$0.3 million in 20192021 compared to $0.7 million in 2018,2020, with a net charge-off ratio of 0.06%0.01% in 20192021 compared to 0.03% in 2018.2020. Home equity net charge-offs of $0.1 million decreased $0.2$0.1 million in 20192021 and the net charge-off ratio decreased fourone basis pointspoint to 0.08%0.03%.
Management continually evaluates the credit quality of the Company’s loan portfolio and conducts a formal review of the adequacy of the allowance for loancredit losses on a quarterly basis. The two primary components of the loan review process that are used to determine proper allowance levels are specificcollectively evaluated and generalindividually assessed loan loss allocations. Measurement of specificindividually assessed loan loss allocations is typically based on expected future cash flows, collateral values and other factors that may impact the borrower’s ability to repay. Impaired loansLoans with outstanding balances that are greater than $0.5 million are evaluatedindividually assessed for specific loan loss allocations. Consumer mortgages, consumer installment and home equity loans are considered smaller balance homogeneous loans and are evaluated collectively. The Company considers a loan to be impairedindividually assessed when, based on current information and events, it is probable that the Company will be unable to collect all principal and interest according to the contractual terms of the loan agreement or the loan is delinquent 90 days or more.
55
Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, acquired loans, delinquency levels, risk ratings or term of loans as well as changes in macroeconomic conditions, such as changes in unemployment rates, property values such as home prices, commercial real estate prices and automobile prices, gross domestic product, recession probability and other relevant factors. The second componentsegments of the Company’s loan portfolio are disaggregated into classes that allow management to monitor risk and performance. The allowance establishment process, general loan loss allocations,for credit losses is composedmeasured on a collective (pool) basis when similar risk characteristics exist, including collateral type, credit ratings/scores, size, duration, interest rate structure, industry, geography, origination vintage and payment structure. In addition to these risk characteristics, the Company considers the portion of two calculations that are computed onacquired loans to the five main loan segments: business lending, consumer mortgage, consumer indirect, consumer direct, and home equity. The first calculation determines an allowance level based onoverall segment balance, the latest 36 months of historical net charge-off data for each loan category (business loans exclude balances with specific loan loss allocations). The second calculation is qualitative and takes into consideration eight qualitative environmental factors: levels and trendschange in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends inthe volume and terms of loans; effects of any changesoriginations, differences between the losses incurred in the period used for quantitative modeling and a longer timeframe that includes the previous recession, as well as recent delinquency, charge-off and risk selection and underwriting standards, and other changes in lending policies, procedure, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economicrating trends and conditions; industry conditions; and effects of changes incompared to historical time periods. The Company measures the allowance for credit concentrations.losses using either the cumulative loss rate method, the line loss method, or the vintage loss rate method, dependent on the loan portfolio class. The allowance levels computed from the specificcollectively evaluated and generalindividually assessed loan loss allocation methods are combined with unallocated allowances, if any, to derive the required allowance for loancredit losses to be reflected on the Consolidated Statementconsolidated statements of Condition. This allowance methodology was replaced with a new approach beginning with the Company’s adoption of ASU No. 2016-13, condition.
Financial Instruments – Credit Losses (Topic 326) on January 1, 2020. This new accounting guidance replaces the incurred loss methodology under existing guidance with a current expectedThe provision for credit loss methodology, also known as CECL.
Acquired loans are recordedreviewed at their acquisition date fair valuesto determine whether they have experienced a more-than-insignificant credit deterioration since origination. Loans that meet that definition according to the Company’s policy are referred to as purchased credit deteriorated (“PCD”) loans. PCD loans are initially recorded at the amount paid. An allowance for credit losses is determined using the same methodology as other loans. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and therefore,allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are excludedrecorded as provision for (or reversal of) credit losses. During 2020, the Company recorded $0.7 million of initial allowance for credit losses on PCD loans from the calculation of loan loss reserves as of the acquisition date. To the extent there is a decrease in the present value of cash flows from the acquired impaired loans after the date of acquisition, the Company records a provision for potential losses. During the years ended December 31, 2019 and 2018, an additional provision for loan losses related to acquired impaired loans of $0.1 million and $0.3 million was recorded, respectively.
For acquired loans that are not deemed impairedPCD at acquisition (non-PCD), a fair value adjustment is recorded that includes both credit and interest rate considerations. A provision for credit losses is also recorded at acquisition for the credit considerations on non-PCD loans. Subsequent to the purchase date, the methods utilized to estimate the required allowance for loancredit losses for these loans is similar toare the same as originated loans however,and subsequent changes to the Company records aallowance for credit losses are recorded as provision for loan losses only when the required allowance exceeds any remaining purchased discounts.(or reversal of) credit losses. During 2019,2020, the Company recorded a$3.0 million of initial acquisition-related provision for loancredit losses on acquired non-impairedrelated to loans from the Steuben acquisition.
As of $0.9 million. For 2018,December 31, 2021, the Company recorded a provision for loan losses on acquired non-impaired loans of $1.9 million, of which $1.1 millionnet purchase discount related to the partial charge-off$1.02 billion of a single commercial relationship. Duringremaining non-PCD loan balances acquired from Steuben Trust Company in 2020, The National Union Bank of Kinderhook in 2019, Merchants Bank in 2017, the Company recorded a provision for loan losses on acquired non-impaired loansOneida Savings Bank in 2015, HSBC Bank USA, N.A. in 2012, First Niagara Bank, N.A. in 2012, and Wilber National Bank in 2011 was approximately $8.0 million, or 0.78% of $4.5 million, with approximately $3.1 million related to the partial charge-off of a single commercial relationship in the fourth quarter.
The allowance for loancredit losses increaseddecreased to $49.9 million at the end of 20192021 from $49.3$60.9 million as of year-end 2018.2020. The $0.6$11.0 million decrease was driven by an $8.2 million non-acquisition-related net benefit in the provision for credit losses related to loans, $19.1 million lower than the prior year’s non-acquisition-related provision for credit losses of $10.9 million, reflective of the continued release of reserves in the first three quarters of 2021 as the economic outlook and the loan portfolio’s asset quality profile both steadily improved during that time, and $2.8 million of net charge-offs.
56
During the first three quarters of 2021, economic forecasts improved significantly due to the state of the post-vaccine economic recovery, which, in combination with elevated real estate and vehicle collateral values, significant declines in pandemic-related payment deferrals and improvements in the loan portfolio’s asset quality profile drove the Company to reduce its allowance for credit losses during the first three quarters of 2021, resulting in net benefits recorded in the provision for credit losses for the first three quarters of the year. Although economic forecasts remained generally stable during the fourth quarter of 2021 despite the rapid spread of the COVID Omicron variant, the Company’s allowance for credit losses increased $0.4 million, resulting in a $2.2 million provision for credit losses in the fourth quarter based in part on a $165.3 million increase was primarily duein non-PPP loans outstanding during the quarter.
During the first two quarters of 2020, financial conditions deteriorated rapidly as state and local governments shut down a substantial portion of business activities in the Company’s markets and unemployment levels spiked. These conditions drove the Company to changesbuild its allowance for credit losses during the first two quarters of 2020 to account for expected life of loan losses in asset quality metrics and the composition of the loan portfolio. TheDuring the third quarter of 2020, the economic outlook remained unclear as markets were uncertain as to the efficacy, approval and roll-out of a COVID-19 vaccine and the Company continued to build its allowance for legacy loan losses increased $0.6 million, whilecredit losses. During the fourth quarter of 2020, with a greater than anticipated decline in actual unemployment levels, as well as the Federal Government’s approval of a COVID-19 vaccine and Congress’ approval of additional federal stimulus funding, the near-term economic forecast improved significantly driving an improvement in the economic outlook and as a result, a reduction in the Company’s allowance for acquiredcredit losses during the fourth quarter of 2020. During the fourth quarter of 2020, the Company recorded a net benefit in the provision for credit losses driven by several factors, including a $2.0 million reversal of a previously recorded allowance for credit loss on a purchased credit deteriorated loan, losses was consistent witha significant improvement in the prior year. economic outlook and a substantial decrease in loans under COVID-19 related forbearance agreements, offset, in part, by a substantial, but anticipated, increase in nonperforming assets and the related specific impairment reserves on a portion of those nonperforming assets.
The ratio of the allowance for loancredit losses to total loans of 0.72%0.68% for year-end 20192021 decreased six14 basis points from the 0.78%0.82% ratio for 2018year-end 2020, and was down four basis points from the 0.76%0.72% ratio for 2017,year-end 2019, due in part to acquired growth inthe aforementioned steady improvement of the economic outlook and the loan portfolio. The ratioportfolio’s asset quality during 2021, partially offset by non-PPP loan growth of allowance for legacy loan losses to total legacy loans decreased six basis points to 0.87% for 2019 as compared 2018.$334.5 million, or 4.8%, during 2021. Management believes the year-end 20192021 allowance for loancredit losses to be adequate in light of the probable losses inherent in the Company’s loan portfolio.
The following table sets forth the allocation of the allowance for loancredit losses by loan category as of the end of the years indicated, as well as the proportional share of each category iscategory’s loan balance to total loans. This allocation is based on management’s assessment, as of a given point in time, of the risk characteristics of each of the component parts of the total loan portfolio and is subject to changes when the risk factors of each component part change. The allocation is not indicative of either the specific amounts of the loan categories in which future charge-offs may be taken, nor should it be taken as an indicator of future loss trends. The allocation of the allowance to each category does not restrict the use of the allowance to absorb losses in any category.
Table 12:10: Allowance for LoanCredit Losses by Loan Type
| | | | | | | | | | | |
|
| 2021 |
| 2020 |
| ||||||
(000’s omitted except for ratios) |
| | Allowance |
| Loan Mix |
| | Allowance |
| Loan Mix |
|
Business lending | | $ | 21,021 |
| 41.2 | % | $ | 28,190 |
| 45.8 | % |
Consumer mortgage | |
| 10,017 |
| 34.7 | % |
| 10,672 |
| 32.4 | % |
Consumer indirect | |
| 11,737 |
| 16.1 | % |
| 13,696 |
| 13.8 | % |
Consumer direct | |
| 2,306 |
| 2.1 | % |
| 3,207 |
| 2.0 | % |
Home equity | |
| 1,814 |
| 5.4 | % |
| 2,222 |
| 5.4 | % |
PCD loans | | | 1,974 | | 0.5 | % | | 1,882 | | 0.6 | % |
Unallocated | |
| 1,000 |
| 0.0 | % |
| 1,000 |
| 0.0 | % |
Total | | $ | 49,869 |
| 100.0 | % | $ | 60,869 |
| 100.0 | % |
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2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||
(000's omitted except for ratios) | Allowance | Loan Mix | Allowance | Loan Mix | Allowance | Loan Mix | Allowance | Loan Mix | Allowance | Loan Mix | |||||
Business lending | $19,426 | 40.1% | $18,522 | 38.1% | $17,257 | 38.5% | $17,220 | 30.0% | $15,749 | 31.0% | |||||
Consumer mortgage | 10,269 | 35.3% | 10,124 | 35.6% | 10,465 | 35.5% | 10,094 | 36.8% | 10,198 | 36.8% | |||||
Consumer indirect | 13,712 | 16.1% | 14,366 | 17.2% | 13,468 | 16.2% | 13,782 | 21.1% | 12,422 | 19.5% | |||||
Consumer direct | 3,255 | 2.7% | 3,095 | 2.8% | 3,039 | 2.9% | 2,979 | 3.9% | 2,997 | 4.1% | |||||
Home equity | 2,129 | 5.6% | 2,144 | 6.2% | 2,107 | 6.7% | 2,399 | 8.1% | 2,666 | 8.4% | |||||
Acquired impaired loans | 163 | 0.2% | 33 | 0.1% | 147 | 0.2% | 108 | 0.1% | 168 | 0.2% | |||||
Unallocated | 957 | 1,000 | 1,100 | 651 | 1,201 | ||||||||||
Total | $49,911 | 100.0% | $49,284 | 100.0% | $47,583 | 100.0% | $47,233 | 100.0% | $45,401 | 100.0% |
As demonstrated in Table 1210 above and discussed previously, business lending and consumer installment by their nature carry higher credit risk than residential real estate, and as a result these loans carry allowance for loancredit losses that cover a higher percentage of their total portfolio balances. The unallocated allowance is maintained for potential inherent losses in the portfoliospecific portfolios that are not reflected in the historical loss ratios,captured due to model imprecision, and for acquired loan portfolios in the process of being fully integrated at year-end.imprecision. The unallocated allowance of $1.0 million at year-end 20192021 was consistent with December 31, 2018.2020. The changes in year-over-year allowance allocations reflect management’s continued refinement of its loss estimation techniques. However, given the inherent imprecision in the many estimates used in the determination of the allocated portion of the allowance, management remained conservative in establishingthe approaches used to establish the overall allowance for loancredit losses. Management considers the allocated and unallocated portions of the allowance for loancredit losses to be prudent and reasonable. Furthermore, the Company’s allowance for loancredit losses is general in nature and is available to absorb losses from any loan category.
Funding Sources
The Company utilizes a variety of funding sources to support the earning-assetinterest-earning asset base as well as to achieve targeted growth objectives. Overall funding is comprised of three primary sources that possess a variety of maturity, stability, and price characteristics; deposits of individuals, partnerships and corporations (nonpublic deposits), municipal deposits that are collateralized for amounts not covered by FDIC insurance (public funds), and external borrowings. The average daily amount of deposits and the average rate paid on each of the following deposit categories are summarized below for the years indicated:
Table 13:11: Average Deposits
2019 | 2018 | 2017 | |||||||
(000's omitted, except rates) | Average Balance | Average Rate Paid | Average Balance | Average Rate Paid | Average Balance | Average Rate Paid | |||
Noninterest checking deposits | $2,401,413 | 0.00% | $2,302,806 | 0.00% | $2,048,414 | 0.00% | |||
Interest checking deposits | 2,048,142 | 0.18% | 1,898,118 | 0.09% | 1,782,668 | 0.06% | |||
Savings deposits | 1,507,728 | 0.06% | 1,458,676 | 0.06% | 1,385,386 | 0.06% | |||
Money market deposits | 1,933,437 | 0.30% | 2,046,219 | 0.18% | 2,069,228 | 0.14% | |||
Time deposits | 843,024 | 1.19% | 750,814 | 0.58% | 765,666 | 0.41% | |||
Total deposits | $8,733,744 | 0.23% | $8,456,633 | 0.13% | $8,051,362 | 0.10% |
| | | | | | | | | | | |
|
| 2021 |
| 2020 |
| ||||||
| | | Average | | Average | | | Average | | Average | |
(000’s omitted, except rates) |
| | Balance |
| Rate Paid |
| | Balance |
| Rate Paid |
|
Noninterest checking deposits | | $ | 3,748,577 |
| 0.00 | % | $ | 3,024,763 |
| 0.00 | % |
Interest checking deposits | |
| 3,130,079 |
| 0.04 | % |
| 2,536,958 |
| 0.09 | % |
Savings deposits | |
| 2,152,191 |
| 0.03 | % |
| 1,755,935 |
| 0.04 | % |
Money market deposits | |
| 2,313,412 |
| 0.06 | % |
| 2,078,513 |
| 0.13 | % |
Time deposits | |
| 957,429 |
| 0.89 | % |
| 935,809 |
| 1.20 | % |
Total deposits | | $ | 12,301,688 |
| 0.09 | % | $ | 10,331,978 |
| 0.16 | % |
As displayed in Table 13,11, average total deposits in 20192021 increased $277.1 million,$1.97 billion, or 3.3%19.1%, from the prior year comprised of a $184.9 million,$1.95 billion, or 2.4%20.7%, increase in non-time (“core”) deposits, and a $92.2$21.6 million, or 12.3%2.3%, increase in time deposits. Excluding the impactThe increase in average deposits was primarily due to continued net inflows of the Kinderhook acquisition, average total deposits, increased $17.1 million, or 0.2%, as compared to 2018. Average core deposit balances, excluding deposits acquired in the Kinderhook acquisition, decreased $1.0 million as compared to 2018,including those associated with additional stimulus payments and time deposits, excluding the impacta second round of Kinderhook acquired balances, increased $18.1 million, or 2.4%.PPP lending. The cost of deposits, including the impact of non-interest checking deposits, increased 10deposit balances, decreased seven basis points from 0.13%0.16% in 20182020 to 0.23%0.09% in 2019.
Total average deposits for 2018 equaled $8.462020 increased $1.60 billion, up $405.3 million, or 5.0%18.3%, from 20172019 comprised of a $420.1 million,$1.51 billion, or 5.8%19.1%, increase in corenon-time deposits, and a $14.8$92.8 million, or 1.9%11.0%, decreaseincrease in time deposits. ExcludingThe increase in average deposits was primarily due to large net inflows of funds from government stimulus programs and the impactacquisition of Steuben. The Company acquired $516.3 million of deposits from the MerchantsSteuben acquisition, average total deposits decreased $23.3including $96.5 million or 0.3%, as compared to 2017. Average core deposit balances, excluding deposits acquired in the Merchants acquisition, grew $27.8 million, or 0.4%, as compared to 2017, whileof time deposits excluding the impactand $419.8 million of Merchants acquired balances, declined $51.1 million, or 7.8%.non-time deposits. The cost of deposits, including the impact of non-interest checking deposits, increased threedeposit balances, decreased seven basis points from 0.10%0.23% in 20172019 to 0.13%0.16% in 2018.
Nonpublic, corenon-time deposits are frequently considered to be a bank’s most attractive source of funding because they are generally stable, do not need to be collateralized, carry a relatively low rate, generate solid fee income, and provide a strong customer base for which a variety of loan, deposit and other financial service-related products can be cross-sold. The Company’s funding composition continues to benefit from a high level of nonpublic deposits, which reached an all-time high in 20192021 with an average balance of $7.74$10.78 billion, an increase of $313.0 million,$1.62 billion, or 4.2%17.6%, over the comparable 20182020 period. Excluding the impactThe Company continues to focus on expanding its core deposit relationship base through its competitive product offerings and high quality customer service.
58
Full-year average public fund deposits decreased $35.9increased $354.4 million, or 3.5%30.3%, during 20192021 to $995.0 million. Excluding the impact of the Kinderhook acquisition, average public fund deposits decreased $56.1 million, or 5.4%, during 2019.$1.52 billion, impacted by federal and state stimulus program-related support to municipalities to cover COVID-19 expenditures and investments that cover multi-year timeframes. Public fund deposit balances tend to be more volatile than nonpublic deposits because they are heavily impacted by the seasonality of tax collection and fiscal spending patterns, as well as the longer-term financial position of the local government entities, which can change from year to year. However, the Company has many strong, long-standing relationships with municipal entities throughout its markets and the diversified corenon-time deposits held by these customers have provided an attractive and comparatively stable funding source over an extended time period. The Company is required to collateralize certain local governmentmunicipal deposits in excess of FDIC coverage with marketable securities from its investment portfolio. Due to this stipulation, as well as the competitive bidding nature of municipal time deposits, management considers this funding source to share some of the same attributes ofas borrowings.
The mix of average deposits iswas largely consistent with the prior year. CoreNon-time deposits (noninterest checking, interest checking, savings and money markets) representrepresented approximately 90%92% of the Company’s average deposit funding base versus 91% last year, while non-core time deposits represent approximately 10%8% of total average deposits.deposits compared to 9% in 2020. The cost of interest-bearing deposits of 0.32%0.14% in 20192021 was 15nine basis points higherlower than the 0.17%0.23% cost of interest-bearing deposits in 2018.2020. The total cost of deposit funding, which includes noninterest-bearing deposits, was 0.23%0.09% in 2019,2021, a 10seven basis point increasedecrease from the prior year.
The Company is uncertain as to whether the relatively high levels of deposits in recent periods will be maintained, spent down, or increased further by additional inflows of funds associated with COVID-19 related government stimulus programs.
The remaining maturities of time deposits in amounts of $250,000 or more (the FDIC insurance limit) outstanding as of December 31 are as follows:
Table 14:12: Maturity of Time Deposits $250,000 or More
(000's omitted) | 2019 | 2018 | ||||||
Less than three months | $ | 30,306 | $ | 9,621 | ||||
Three months to six months | 25,028 | 15,032 | ||||||
Six months to one year | 18,559 | 16,307 | ||||||
Over one year | 56,624 | 28,660 | ||||||
Total | $ | 130,517 | $ | 69,620 |
| | | | | | | |
(000’s omitted) |
| 2021 |
| 2020 |
| ||
Less than three months | | $ | 61,129 | | $ | 74,132 | |
Three months to six months | |
| 40,934 | |
| 12,420 | |
Six months to one year | |
| 84,584 | |
| 54,335 | |
Over one year | |
| 50,113 | |
| 38,719 | |
Total | | $ | 236,760 | | $ | 179,606 | |
The total amount of deposits that exceeded the $250,000 insured limit provided by the FDIC was approximately $4.31 billion and $3.41 billion at December 31, 2021 and 2020, respectively. This estimate is based on the determination of known deposit account relationships of each depositor and the insurance guidelines provided by the FDIC.
Borrowing sources for the Company include the FHLB, Federal Reserve, and other correspondent banks, as well as access to the brokered CD and repurchase markets through established relationships with business and municipal customers and primary market security dealers. The Company also had $77.3 million in floating-rate subordinated debt that is held by unconsolidated subsidiary trusts and $13.8$3.3 million in fixed-rate subordinated notes acquired with the Kinderhook acquisition outstanding at the end of 2019.
As shown in Table 15,13, year-end 20192021 borrowings totaled $344.9$329.9 million, a decrease of $68.8$41.4 million from the $413.7$371.3 million outstanding at the end of 20182020 primarily due to the redemption of the$77.3 million of trust preferred subordinated debt held by MBVT I,CCT IV, an unconsolidated subsidiary trust, during 2019,the first quarter of 2021 and a decrease in other FHLB borrowings of $4.8 million, partially offset by a $40.7 million increase in securities sold under an agreement to repurchase (“customer repurchase agreements”) and a decrease in FHLB overnight borrowings, partially offset by subordinated notes and other FHLB borrowings acquired in the Kinderhook transaction.. Borrowings averaged $327.1$288.2 million, or 3.6%2.3% of total funding sources for 2019,2021, as compared to $408.1$323.9 million, or 4.6%3.0% of total funding sources for 2018. As shown in Table 16, at2020. At the end of 20192021, the Company had $264.1$324.7 million, or 60%98% of borrowings,contractual obligations, that had remaining terms of one year or less as compared to 76%69% of borrowingscontractual obligations maturing within one year at December 31, 2018.2020.
59
As displayed in Table 3 on page 34,40, the percentage of funding from deposits in 20192021 was slightly higher than the level in 20182020 primarily due in part to the redemptioncontinued net inflows of subordinated debt, a decrease in average customer repurchase agreementsdeposits, including those associated with additional stimulus payments and a decrease in overnight borrowings.second round of PPP lending. The percentage of average funding derived from deposits was 96.4%97.7% in 20192021 as compared to 95.4%97.0% in 20182020 and 95.5%96.4% in 2017.2019. During 2019,2021, average deposits increased 3.3%19.1%, while average borrowings decreased 19.8%11.0%.
The following table summarizes the outstanding balance of borrowings of the Company as of December 31:
Table 15:13: Borrowings
(000's omitted, except rates) | 2019 | 2018 | 2017 | |||||||||
FHLB overnight advance | $ | 8,300 | $ | 54,400 | $ | 24,000 | ||||||
Securities sold under agreement to repurchase, short term | 241,708 | 259,367 | 337,011 | |||||||||
Other Federal Home Loan Bank borrowings | 3,750 | 1,976 | 2,071 | |||||||||
Subordinated notes payable (1) | 13,795 | 0 | 0 | |||||||||
Subordinated debt held by unconsolidated subsidiary trusts | 77,320 | 97,939 | 122,814 | |||||||||
Balance at end of period | $ | 344,873 | $ | 413,682 | $ | 485,896 | ||||||
Daily average during the year | $ | 327,084 | $ | 408,054 | $ | 379,933 | ||||||
Maximum month-end balance | $ | 351,863 | $ | 457,469 | $ | 576,791 | ||||||
Weighted-average rate during the year | 1.86 | % | 1.72 | % | 1.51 | % | ||||||
Weighted-average year-end rate | 1.65 | % | 1.84 | % | 1.34 | % |
| | | | | | |
(000’s omitted) |
| 2021 |
| 2020 | ||
Securities sold under agreement to repurchase, short term | | $ | 324,720 | | $ | 284,008 |
Other Federal Home Loan Bank borrowings | |
| 1,888 | |
| 6,658 |
Subordinated notes payable (1) | |
| 3,277 | |
| 3,303 |
Subordinated debt held by unconsolidated subsidiary trusts | |
| 0 | |
| 77,320 |
Balance at end of period | | $ | 329,885 | | $ | 371,289 |
(1) | Subordinated notes payable for |
(000's omitted) | Maturing Within One Year or Less | Maturing After One Year but Within Three Years | Maturing After Three Years but Within Five Years | Maturing After Five Years | Total | |||||||||||||||
FHLB overnight advance | $ | 8,300 | $ | 0 | $ | 0 | $ | 0 | $ | 8,300 | ||||||||||
Securities sold under agreement to repurchase, short term | 241,708 | 0 | 0 | 0 | 241,708 | |||||||||||||||
Other Federal Home Loan Bank borrowings | 1,000 | 675 | 1,194 | 881 | 3,750 | |||||||||||||||
Subordinated notes payable | 0 | 0 | 0 | 13,000 | 13,000 | |||||||||||||||
Subordinated debt held by unconsolidated subsidiary trusts | 0 | 0 | 0 | 77,320 | 77,320 | |||||||||||||||
Interest on borrowings | 3,651 | 7,290 | 7,264 | 34,042 | 52,247 | |||||||||||||||
Operating leases | 9,396 | 14,616 | 10,260 | 11,150 | 45,422 | |||||||||||||||
Total | $ | 264,055 | $ | 22,581 | $ | 18,718 | $ | 136,393 | $ | 441,747 |
Financial Instruments with Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist primarily of commitments to extend credit and standby letters of credit. Commitments to extend credit are agreements to lend to customers, generally having fixed expiration dates or other termination clauses that may require payment of a fee. These commitments consist principally of unused commercial and consumer credit lines. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of an underlying contract with a third party. The credit risks associated with commitments to extend credit and standby letters of credit are essentially the same as that involved with extending loans to customers and are subject to normalstandard credit policies. Collateral may be required based on management’s assessment of the customer’s creditworthiness. The fair value of these commitmentsthe standby letters of credit is considered immaterial for disclosure purposes.
(000's omitted) | 2019 | 2018 | ||||||
Commitments to extend credit | $ | 1,143,780 | $ | 1,134,576 | ||||
Standby letters of credit | 37,872 | 33,169 | ||||||
Total | $ | 1,181,652 | $ | 1,167,745 |
Investments
The objective of the Company’s investment portfolio is to hold low-risk, high-quality earning assets that provide favorable returns and provide another effective tool to actively manage its earning asset/funding liability position in order to maximize future net interest income opportunities. This must be accomplished within the following constraints: (a) implementing certain interest rate risk management strategies which achieve a relatively stable level of net interest income; (b) providing both the regulatory and operational liquidity necessary to conduct day-to-day business activities; (c) considering investment risk-weights as determined by the regulatory risk-based capital guidelines; and (d) generating a favorable return without undue compromise of the other requirements.
The carrying value of the Company’s investment portfolio ended 20192021 at $3.09$4.98 billion, an increase of $106.7 million,$1.38 billion, or 3.6%38.5%, from the end of 2018.2020. The book value (excluding unrealized gains and losses) of the portfolio increased $57.6 million$1.55 billion, or 44.6%, from December 31, 2018.2020. The net unrealized gainloss on the portfolio was $33.8$44.9 million as of December 31, 2019.2021. During 2019,2021, the Company purchased $98.6$1.81 billion of U.S. Treasury and agency securities with an average yield of 1.32%, $109.6 million of government agency mortgage-backed securities with an average yield of 2.93%1.78%, $111.3$42.3 million of obligations of state and political subdivisions with an average fully tax-equivalent yield of 3.31%, $542.22.42% and $5.0 million in U.S. Treasuryof corporate debt securities with an average yield of 1.98%3.25%. These additions were offset by $426.7 million of investment maturities, calls, and $58.0principal payments and net accretion on investment securities of $12.2 million in 2021. The effective duration of the securities portfolio was 7.5 years at the end of 2021, as compared to 7.7 years at year end 2020.
60
The carrying value of the Company’s investment portfolio increased $507.0 million, or 16.4%, during 2020 to end the year at $3.60 billion. The book value of the portfolio increased $419.8 million from December 31, 2019. The net unrealized gain on the portfolio was $121.1 million as of December 31, 2020. During 2020, the Company purchased $984.2 million of U.S. Treasury and agency securities with an average yield of 2.40%1.38%, $116.3 million of government agency mortgage-backed securities with an average yield of 1.97%, $11.3 million of obligations of state and political subdivisions with an average yield of 3.37% and $3.0 million of corporate debt securities with an average yield of 5.38%. The Company also acquired $37.7$179.7 million of available-for-sale securities and $2.1$0.8 million of equity and other securities as part of the KinderhookSteuben transaction. These additions were offset by $209.9$886.1 million of investment maturities, calls, and principal payments in 2019, and the sale of $590.2 million of available-for-sale Treasury securities with a remaining maturity of less than five years and a 2.09% yield to maturity. The sale ofnet accretion on investment securities of $7.2 million in the second quarter of 2019 resulted in a $4.9 million net realized gain.2020. The effective duration of the securities portfolio was 4.37.7 years at the end of 2019,2020, as compared to 2.74.3 years at year end 2018.
The investment portfolio has limited credit risk due to the composition continuing to be heavily favorweighted towards U.S. Treasury debentures, U.S. Agency mortgage-backed pass-throughs (MBS), U.S. Agency CMOscollateralized mortgage obligations (CMOs) and municipal bonds. The U.S. Treasury debentures, U.S. Agency mortgage-backed pass-throughs and U.S. Agency CMOs are all rated AAA (highest possible rating) by Moody’s and AA+ by Standard and Poor’s. The majority of the municipal bonds are rated A or higher. The portfolio does not include any private label mortgage-backed securities (MBS)MBS or private label collateralized mortgage obligations.CMOs. The overall mix of securities within the portfolio over the last year has changed modestly,due to the significant investment purchases made during 2021, with a decreasean increase in the proportion of U.S. Treasury and agency securities, and collateralized mortgage obligations,a small increase in the proportion of corporate debt securities, while the proportion of government agency MBS, obligations of state and political subdivisions, and government agency mortgage-backedCMOs and equity securities increased.decreased.
61
The net pre-tax unrealized market value gainloss on the investment portfolio as of December 31, 20192021 was $33.8$44.9 million, as compared to ana net unrealized lossgain of $15.3$121.1 million one year earlier. This increasedecrease is indicative of market interest rate movementsincreases over the period and modest changes in the composition of the portfolio.
The following table sets forth the amortized cost and marketfair value for the Company's investment securities portfolio:
Table 18:14: Investment Securities
2019 | 2018 | 2017 | |||||||
(000's omitted) | Amortized Cost/Book Value | Fair Value | Amortized Cost/Book Value | Fair Value | Amortized Cost/Book Value | Fair Value | |||
Available-for-Sale Portfolio: | |||||||||
U.S. Treasury and agency securities | $2,030,060 | $2,043,759 | $2,036,474 | $2,023,753 | $2,043,023 | $2,054,071 | |||
Obligations of state and political subdivisions | 497,852 | 512,208 | 453,640 | 459,154 | 514,949 | 528,956 | |||
Government agency mortgage-backed securities | 428,491 | 432,862 | 390,234 | 382,477 | 358,180 | 357,538 | |||
Corporate debt securities | 2,527 | 2,528 | 2,588 | 2,546 | 2,648 | 2,623 | |||
Government agency collateralized mortgage obligations | 52,621 | 53,071 | 69,342 | 68,119 | 88,097 | 87,374 | |||
Marketable equity securities | 0 | 0 | 0 | 0 | 251 | 526 | |||
Total available-for-sale portfolio | 3,011,551 | 3,044,428 | 2,952,278 | 2,936,049 | 3,007,148 | 3,031,088 | |||
Equity and other Securities: | |||||||||
Equity securities, at fair value | 251 | 451 | 251 | 432 | 0 | 0 | |||
Federal Home Loan Bank common stock | 7,246 | 7,246 | 8,768 | 8,768 | 9,896 | 9,896 | |||
Federal Reserve Bank common stock | 30,922 | 30,922 | 30,690 | 30,690 | 30,690 | 30,690 | |||
Certificates of deposit | 0 | 0 | 0 | 0 | 3,865 | 3,865 | |||
Other equity securities, at adjusted cost | 4,546 | 5,296 | 4,969 | 5,719 | 5,840 | 5,840 | |||
Total equity and other securities | 42,965 | 43,915 | 44,678 | 45,609 | 50,291 | 50,291 | |||
Total investments | $3,054,516 | $3,088,343 | $2,996,956 | $2,981,658 | $3,057,439 | $3,081,379 |
| | | | | | | |
|
| |
| |
| ||
(000's omitted) | | 2021 | | 2020 | | ||
Available-for-Sale Portfolio: | | |
|
| |
|
|
U.S. Treasury and agency securities | | $ | 3,998,564 | | $ | 2,501,382 | |
Obligations of state and political subdivisions | |
| 430,289 | |
| 475,660 | |
Government agency mortgage-backed securities | |
| 477,056 | |
| 522,638 | |
Corporate debt securities | |
| 7,962 | |
| 4,635 | |
Government agency collateralized mortgage obligations | |
| 20,339 | |
| 43,577 | |
Total available-for-sale portfolio | | | 4,934,210 | |
| 3,547,892 | |
| |
| | |
| | |
Equity and other Securities: | |
| | | | | |
Equity securities, at fair value | |
| 463 | |
| 445 | |
Federal Home Loan Bank common stock | |
| 7,188 | |
| 7,468 | |
Federal Reserve Bank common stock | |
| 33,916 | |
| 33,916 | |
Other equity securities, at adjusted cost | | | 3,312 | | | 5,626 | |
Total equity and other securities | |
| 44,879 | |
| 47,455 | |
| | | | | | | |
Total investments | | $ | 4,979,089 | | $ | 3,595,347 | |
The following table sets forth as of December 31, 2019,2021 the maturitiesweighted-average yield of investment debt securities by maturity date and the weighted-average yields of such securities, which have been calculated on the cost basis, weighted for scheduled maturity of each security:
Table 19: Maturities15: Weighted-Average Yield of Investment Debt Securities
(000's omitted, except rates) | Maturing Within One Year or Less | Maturing After One Year But Within Five Years | Maturing After Five Years But Within Ten Years | Maturing After Ten Years | Total Amortized Cost/Book Value | |||||||||||||||
Available-for-Sale Portfolio: | ||||||||||||||||||||
U.S. Treasury and agency securities | $ | 637,729 | $ | 780,808 | $ | 330,484 | $ | 281,039 | $ | 2,030,060 | ||||||||||
Obligations of state and political subdivisions | 36,913 | 124,723 | 122,836 | 213,380 | 497,852 | |||||||||||||||
Government agency mortgage-backed securities (2) | 27 | 11,651 | 26,569 | 390,244 | 428,491 | |||||||||||||||
Corporate debt securities | 2,527 | 0 | 0 | 0 | 2,527 | |||||||||||||||
Government agency collateralized mortgage obligations (2) | 0 | 73 | 3,056 | 49,492 | 52,621 | |||||||||||||||
Available-for-sale portfolio | $ | 677,196 | $ | 917,255 | $ | 482,945 | $ | 934,155 | $ | 3,011,551 | ||||||||||
Weighted-average yield (1) | 2.21 | % | 2.46 | % | 2.05 | % | 2.73 | % | 2.42 | % |
| | | | | | | | | | | | |
| | | | Maturing | | Maturing After | | | | Total | | |
| | Maturing | | After One Year | | Five Years But | | Maturing | | Amortized | | |
| | Within One | | But Within | | Within Ten | | After | | Cost/Book | | |
|
| Year or Less |
| Five Years |
| Years |
| Ten Years |
| Value | | |
U.S. Treasury and agency securities |
| 2.17 | % | 1.99 | % | 1.40 | % | 1.57 | % | $ | 4,064,624 | |
Obligations of state and political subdivisions |
| 2.36 | % | 2.12 | % | 2.35 | % | 2.73 | % |
| 413,019 | |
Government agency mortgage-backed securities |
| 1.00 | % | 2.36 | % | 1.26 | % | 1.94 | % |
| 474,506 | |
Corporate debt securities |
| 0.00 | % | 0.00 | % | 4.05 | % | 0.00 | % |
| 8,000 | |
Government agency collateralized mortgage obligations |
| 0.00 | % | 1.96 | % | 1.48 | % | 2.53 | % |
| 19,953 | |
(1) | Weighted-average yields are an arithmetic computation of income (not fully tax-equivalent adjusted) divided by book balance; they may differ from the yield to maturity, which considers the time value of money. |
62
Impact of Inflation and Changing Prices
The Company’s financial statements have been prepared in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effect of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. Notwithstanding this, inflation can directly affect the value of loan collateral, real estate and automobiles in particular.
New Accounting Pronouncements
See “New“New Accounting Pronouncements”Pronouncements” Section of Note A of the notes to the consolidated financial statements on page 7488 for recently issued accounting pronouncements applicable to the Company that have not yet been adopted.
63
Forward-Looking Statements
This report including management’s discussion and analysis of financial condition and results of operations, contains comments or information that constitute forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995), which involve significant risks and uncertainties. Forward-looking statements often use words such as “anticipate,” “could,” “target,” “expect,” “estimate,” “intend,” “plan,” “goal,” “forecast,” “believe,” or other words of similar meaning. These statements are not guaranteesbased on the current beliefs and expectations of future performancethe Company’s management and involve certainare subject to significant risks uncertainties and assumptions which are difficult to predict; therefore, actualuncertainties. Actual results may differ materially from the results discussed in the forward-looking statements. Moreover, the Company’s plans, objectives and intentions are subject to change based on various factors (some of which are beyond the Company’s control).
The foregoing list of important factors is not all-inclusive. SuchFor more information about factors that could cause actual results to differ materially from the Company’s expectations, refer to “Item 1A Risk Factors” above. Any forward-looking statements speak only as of the date on which they are made and the Company does not undertake any obligation to update any forward-looking statement, whether written or oral, to reflect events or circumstances after the date on which such statement is made. If the Company does update or correct one or more forward-looking statements, investors and others should not conclude that the Company will make additional updates or corrections with respect thereto or with respect to other forward-looking statements.
64
Reconciliation of GAAP to Non-GAAP Measures
Table 20:16: GAAP to Non-GAAP Reconciliations
| | | | | | | | | | |
(000's omitted) |
| 2021 |
| 2020 |
| 2019 |
| |||
Income statement data | | | | | | | | | | |
Pre-tax, pre-provision net revenue |
| |
|
| |
|
| |
|
|
Net income (GAAP) | | $ | 189,694 | | $ | 164,676 | | $ | 169,063 | |
Income taxes | |
| 51,654 | |
| 41,400 | |
| 40,275 | |
Income before income taxes | |
| 241,348 | |
| 206,076 | |
| 209,338 | |
Provision for credit losses | |
| (8,839) | |
| 14,212 | |
| 8,430 | |
Pre-tax, pre-provision net revenue (non-GAAP) | |
| 232,509 | |
| 220,288 | |
| 217,768 | |
Acquisition expenses | |
| 701 | |
| 4,933 | |
| 8,608 | |
Acquisition-related contingent consideration adjustment | | | 200 | | | 0 | | | 0 | |
Gain on sale of investments, net | |
| 0 | |
| 0 | |
| (4,882) | |
Unrealized (gain) loss on equity securities | |
| (17) | |
| 6 | |
| (19) | |
Litigation accrual | |
| (100) | |
| 2,950 | |
| 0 | |
Gain on debt extinguishment | |
| 0 | |
| (421) | |
| 0 | |
Adjusted pre-tax, pre-provision net revenue (non-GAAP) | | $ | 233,293 | | $ | 227,756 | | $ | 221,475 | |
| | | | | | | | | | |
Pre-tax, pre-provision net revenue per share | |
|
| |
|
| |
|
| |
Diluted earnings per share (GAAP) | | $ | 3.48 | | $ | 3.08 | | $ | 3.23 | |
Income taxes | |
| 0.95 | |
| 0.77 | |
| 0.77 | |
Income before income taxes | |
| 4.43 | |
| 3.85 | |
| 4.00 | |
Provision for credit losses | |
| (0.16) | |
| 0.27 | |
| 0.16 | |
Pre-tax, pre-provision net revenue per share (non-GAAP) | |
| 4.27 | |
| 4.12 | |
| 4.16 | |
Acquisition expenses | |
| 0.01 | |
| 0.09 | |
| 0.16 | |
Acquisition-related contingent consideration adjustment | | | 0.00 | | | 0.00 | | | 0.00 | |
Gain on sale of investments, net | |
| 0.00 | |
| 0.00 | |
| (0.09) | |
Unrealized (gain) loss on equity securities | |
| 0.00 | |
| 0.00 | |
| 0.00 | |
Litigation accrual | |
| 0.00 | |
| 0.06 | |
| 0.00 | |
Gain on debt extinguishment | |
| 0.00 | |
| (0.01) | |
| 0.00 | |
Adjusted pre-tax, pre-provision net revenue per share (non-GAAP) | | $ | 4.28 | | $ | 4.26 | | $ | 4.23 | |
65
(000's omitted) | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
Income statement data | ||||||||||||||||||||
Net income | ||||||||||||||||||||
Net income (GAAP) | $ | 169,063 | $ | 168,641 | $ | 150,717 | $ | 103,812 | $ | 91,230 | ||||||||||
Acquisition expenses | 8,608 | (769 | ) | 25,986 | 1,706 | 7,037 | ||||||||||||||
Tax effect of acquisition expenses | (1,656 | ) | 160 | (7,677 | ) | (560 | ) | (2,182 | ) | |||||||||||
Tax Cuts and Jobs Act deferred impact | 0 | 0 | (38,010 | ) | 0 | 0 | ||||||||||||||
Subtotal (non-GAAP) | 176,015 | 168,032 | 131,016 | 104,958 | 96,085 | |||||||||||||||
(Gain)/loss on sales of investment securities, net | (4,882 | ) | 0 | (2 | ) | 0 | 4 | |||||||||||||
Tax effect of (gain)/loss on sales of investment securities, net | 939 | 0 | 1 | 0 | (1 | ) | ||||||||||||||
Subtotal (non-GAAP) | 172,072 | 168,032 | 131,015 | 104,958 | 96,088 | |||||||||||||||
Unrealized gain on equity securities | (19 | ) | (657 | ) | 0 | 0 | 0 | |||||||||||||
Tax effect of unrealized gain on equity securities | 4 | 137 | 0 | 0 | 0 | |||||||||||||||
Subtotal (non-GAAP) | 172,057 | 167,512 | 131,015 | 104,958 | 96,088 | |||||||||||||||
Loss on debt extinguishment | 0 | 318 | 0 | 0 | 0 | |||||||||||||||
Tax effect of loss on debt extinguishment | 0 | (66 | ) | 0 | 0 | 0 | ||||||||||||||
Operating net income (non-GAAP) | 172,057 | 167,764 | 131,015 | 104,958 | 96,088 | |||||||||||||||
Amortization of intangibles | 15,956 | 18,155 | 16,941 | 5,479 | 3,663 | |||||||||||||||
Tax effect of amortization of intangibles | (3,070 | ) | (3,780 | ) | (5,005 | ) | (1,800 | ) | (1,135 | ) | ||||||||||
Subtotal (non-GAAP) | 184,943 | 182,139 | 142,951 | 108,637 | 98,616 | |||||||||||||||
Acquired non-impaired loan accretion | (6,167 | ) | (7,921 | ) | (5,888 | ) | (2,868 | ) | (2,256 | ) | ||||||||||
Tax effect of acquired non-impaired loan accretion | 1,186 | 1,649 | 1,739 | 942 | 700 | |||||||||||||||
Adjusted net income (non-GAAP) | $ | 179,962 | $ | 175,867 | $ | 138,802 | $ | 106,711 | $ | 97,060 |
Return on average assets | ||||||||||||||||||||
Adjusted net income (non-GAAP) | $ | 179,962 | $ | 175,867 | $ | 138,802 | $ | 106,711 | $ | 97,060 | ||||||||||
Average total assets | 11,043,173 | 10,665,209 | 10,089,215 | 8,660,067 | 7,814,564 | |||||||||||||||
Adjusted return on average assets (non-GAAP) | 1.63 | % | 1.65 | % | 1.38 | % | 1.23 | % | 1.24 | % |
Return on average equity | ||||||||||||||||||||
Adjusted net income (non-GAAP) | $ | 179,962 | $ | 175,867 | $ | 138,802 | $ | 106,711 | $ | 97,060 | ||||||||||
Average total equity | 1,794,717 | 1,653,381 | 1,475,761 | 1,211,520 | 1,028,038 | |||||||||||||||
Adjusted return on average equity (non-GAAP) | 10.03 | % | 10.64 | % | 9.41 | % | 8.81 | % | 9.44 | % |
| | | | | | | | | | |
(000's omitted) |
| 2021 |
| 2020 |
| 2019 |
| |||
Net income |
| |
|
| |
|
| |
|
|
Net income (GAAP) | | $ | 189,694 | | $ | 164,676 | | $ | 169,063 | |
Acquisition expenses | |
| 701 | |
| 4,933 | |
| 8,608 | |
Tax effect of acquisition expenses | | | (150) | | | (991) | | | (1,656) | |
Subtotal (non-GAAP) | | | 190,245 | | | 168,618 | | | 176,015 | |
Acquisition-related contingent consideration adjustment | | | 200 | | | 0 | | | 0 | |
Tax effect of acquisition-related contingent consideration adjustment | |
| (43) | |
| 0 | |
| 0 | |
Subtotal (non-GAAP) | |
| 190,402 | |
| 168,618 | |
| 176,015 | |
Acquisition-related provision for credit losses | | | 0 | | | 3,061 | | | 0 | |
Tax effect of acquisition-related provision for credit losses | | | 0 | | | (615) | | | 0 | |
Subtotal (non-GAAP) | | | 190,402 | | | 171,064 | | | 176,015 | |
Gain on sales of investment securities, net | | | 0 | | | 0 | | | (4,882) | |
Tax effect of gain on sales of investment securities, net | | | 0 | | | 0 | | | 939 | |
Subtotal (non-GAAP) | |
| 190,402 | |
| 171,064 | |
| 172,072 | |
Unrealized (gain) loss on equity securities | |
| (17) | |
| 6 | |
| (19) | |
Tax effect of unrealized (gain) loss on equity securities | |
| 4 | |
| (1) | |
| 4 | |
Subtotal (non-GAAP) | | | 190,389 | | | 171,069 | | | 172,057 | |
Litigation accrual | | | (100) | | | 2,950 | | | 0 | |
Tax effect of litigation accrual | | | 21 | | | (593) | | | 0 | |
Subtotal (non-GAAP) | |
| 190,310 | |
| 173,426 | |
| 172,057 | |
Gain on debt extinguishment | |
| 0 | |
| (421) | |
| 0 | |
Tax effect of gain on debt extinguishment | |
| 0 | |
| 85 | |
| 0 | |
Operating net income (non-GAAP) | |
| 190,310 | |
| 173,090 | |
| 172,057 | |
Amortization of intangibles | |
| 14,051 | |
| 14,297 | |
| 15,956 | |
Tax effect of amortization of intangibles | |
| (3,007) | |
| (2,872) | |
| (3,070) | |
Subtotal (non-GAAP) | |
| 201,354 | |
| 184,515 | |
| 184,943 | |
Acquired non-PCD loan accretion | |
| (3,989) | |
| (5,491) | |
| (6,167) | |
Tax effect of acquired non-PCD loan accretion | |
| 854 | |
| 1,103 | |
| 1,186 | |
Adjusted net income (non-GAAP) | | $ | 198,219 | | $ | 180,127 | | $ | 179,962 | |
| | | | | | | | | | |
Return on average assets | |
| | |
|
| |
|
| |
Adjusted net income (non-GAAP) | | $ | 198,219 | | $ | 180,127 | | $ | 179,962 | |
Average total assets | |
| 14,835,025 | |
| 12,896,499 | |
| 11,043,173 | |
Adjusted return on average assets (non-GAAP) | |
| 1.34 | % |
| 1.40 | % |
| 1.63 | % |
| | | | | | | | | | |
Return on average equity | |
| | |
|
| |
|
| |
Adjusted net income (non-GAAP) | | $ | 198,219 | | $ | 180,127 | | $ | 179,962 | |
Average total equity | |
| 2,064,105 | |
| 2,026,669 | |
| 1,794,717 | |
Adjusted return on average equity (non-GAAP) | |
| 9.60 | % |
| 8.89 | % |
| 10.03 | % |
66
(000's omitted) | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
Income statement data (continued) | ||||||||||||||||||||
Earnings per common share | ||||||||||||||||||||
Diluted earnings per share (GAAP) | $ | 3.23 | $ | 3.24 | $ | 3.03 | $ | 2.32 | $ | 2.19 | ||||||||||
Acquisition expenses | 0.16 | (0.01 | ) | 0.52 | 0.04 | 0.17 | ||||||||||||||
Tax effect of acquisition expenses | (0.03 | ) | 0.00 | (0.15 | ) | (0.01 | ) | (0.05 | ) | |||||||||||
Tax Cuts and Jobs Act deferred impact | 0.00 | 0.00 | (0.76 | ) | 0.00 | 0.00 | ||||||||||||||
Subtotal (non-GAAP) | 3.36 | 3.23 | 2.64 | 2.35 | 2.31 | |||||||||||||||
(Gain)/loss on sales of investment securities, net | (0.09 | ) | 0.00 | 0.00 | 0.00 | 0.00 | ||||||||||||||
Tax effect of (gain)/loss on sales of investment securities, net | 0.02 | 0.00 | 0.00 | 0.00 | 0.00 | |||||||||||||||
Subtotal (non-GAAP) | 3.29 | 3.23 | 2.64 | 2.35 | 2.31 | |||||||||||||||
Unrealized gain on equity securities | 0.00 | (0.01 | ) | 0.00 | 0.00 | 0.00 | ||||||||||||||
Tax effect of unrealized gain on equity securities | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | |||||||||||||||
Subtotal (non-GAAP) | 3.29 | 3.22 | 2.64 | 2.35 | 2.31 | |||||||||||||||
Loss on debt extinguishment | 0.00 | 0.01 | 0.00 | 0.00 | 0.00 | |||||||||||||||
Tax effect of loss on debt extinguishment | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | |||||||||||||||
Operating earnings per share (non-GAAP) | 3.29 | 3.23 | 2.64 | 2.35 | 2.31 | |||||||||||||||
Amortization of intangibles | 0.31 | 0.35 | 0.34 | 0.12 | 0.09 | |||||||||||||||
Tax effect of amortization of intangibles | (0.06 | ) | (0.07 | ) | (0.10 | ) | (0.04 | ) | (0.03 | ) | ||||||||||
Subtotal (non-GAAP) | 3.54 | 3.51 | 2.88 | 2.43 | 2.37 | |||||||||||||||
Acquired non-impaired loan accretion | (0.12 | ) | (0.15 | ) | (0.12 | ) | (0.06 | ) | (0.05 | ) | ||||||||||
Tax effect of acquired non-impaired loan accretion | 0.02 | 0.03 | 0.04 | 0.02 | 0.01 | |||||||||||||||
Diluted adjusted net earnings per share (non-GAAP) | $ | 3.44 | $ | 3.39 | $ | 2.80 | $ | 2.39 | $ | 2.33 |
Noninterest operating expenses | ||||||||||||||||||||
Noninterest expenses (GAAP) | $ | 372,026 | $ | 345,289 | $ | 347,149 | $ | 266,848 | $ | 233,055 | ||||||||||
Amortization of intangibles | (15,956 | ) | (18,155 | ) | (16,941 | ) | (5,479 | ) | (3,663 | ) | ||||||||||
Acquisition expenses | (8,608 | ) | 769 | (25,986 | ) | (1,706 | ) | (7,037 | ) | |||||||||||
Total operating expenses (non-GAAP) | $ | 347,462 | $ | 327,903 | $ | 304,222 | $ | 259,663 | $ | 222,355 |
Efficiency ratio | ||||||||||||||||||||
Operating expenses (non-GAAP) - numerator | $ | 347,462 | $ | 327,903 | $ | 304,222 | $ | 259,663 | $ | 222,355 | ||||||||||
Fully tax-equivalent net interest income | $ | 363,184 | $ | 349,400 | $ | 325,090 | $ | 283,857 | $ | 260,824 | ||||||||||
Noninterest revenues | 230,619 | 224,059 | 202,423 | 155,625 | 123,299 | |||||||||||||||
Acquired non-impaired loan accretion | (6,167 | ) | (7,921 | ) | (5,888 | ) | (2,868 | ) | (2,256 | ) | ||||||||||
Insurance-related recovery | 0 | 0 | 0 | (950 | ) | 0 | ||||||||||||||
(Gain)/loss on sales of investment securities, net | (4,882 | ) | 0 | (2 | ) | 0 | 4 | |||||||||||||
Unrealized gain on equity securities | (19 | ) | (657 | ) | 0 | 0 | 0 | |||||||||||||
Loss on debt extinguishment | 0 | 318 | 0 | 0 | 0 | |||||||||||||||
Operating revenues (non-GAAP) - denominator | $ | 582,735 | $ | 565,199 | $ | 521,623 | $ | 435,664 | $ | 381,871 | ||||||||||
Efficiency ratio (non-GAAP) | 59.6 | % | 58.0 | % | 58.3 | % | 59.6 | % | 58.2 | % |
| | | | | | | | | | |
(000's omitted) |
| 2021 |
| 2020 |
| 2019 |
| |||
Income statement data (continued) |
| |
|
| |
|
| |
|
|
Earnings per common share |
| |
|
| |
|
| |
|
|
Diluted earnings per share (GAAP) | | $ | 3.48 | | $ | 3.08 | | $ | 3.23 | |
Acquisition expenses | |
| 0.01 | |
| 0.09 | |
| 0.16 | |
Tax effect of acquisition expenses | |
| 0.00 | |
| (0.02) | |
| (0.03) | |
Subtotal (non-GAAP) | |
| 3.49 | |
| 3.15 | |
| 3.36 | |
Acquisition-related contingent consideration adjustment | |
| 0.00 | |
| 0.00 | |
| 0.00 | |
Tax effect of acquisition-related contingent consideration adjustment | |
| 0.00 | |
| 0.00 | |
| 0.00 | |
Subtotal (non-GAAP) | |
| 3.49 | |
| 3.15 | |
| 3.36 | |
Acquisition-related provision for credit losses | |
| 0.00 | |
| 0.06 | |
| 0.00 | |
Tax effect of acquisition-related provision for credit losses | |
| 0.00 | |
| (0.01) | |
| 0.00 | |
Subtotal (non-GAAP) | | | 3.49 | | | 3.20 | | | 3.36 | |
Gain on sales of investment securities, net | |
| 0.00 | |
| 0.00 | |
| (0.09) | |
Tax effect of gain on sales of investment securities, net | |
| 0.00 | |
| 0.00 | |
| 0.02 | |
Subtotal (non-GAAP) | | | 3.49 | | | 3.20 | | | 3.29 | |
Unrealized (gain) loss on equity securities | | | 0.00 | | | 0.00 | | | 0.00 | |
Tax effect of unrealized (gain) loss on equity securities | | | 0.00 | | | 0.00 | | | 0.00 | |
Subtotal (non-GAAP) | |
| 3.49 | |
| 3.20 | |
| 3.29 | |
Litigation accrual | |
| 0.00 | |
| 0.06 | |
| 0.00 | |
Tax effect of litigation accrual | |
| 0.00 | |
| (0.01) | |
| 0.00 | |
Subtotal (non-GAAP) | | | 3.49 | | | 3.25 | | | 3.29 | |
Gain on debt extinguishment | | | 0.00 | | | (0.01) | | | 0.00 | |
Tax effect of gain on debt extinguishment | | | 0.00 | | | 0.00 | | | 0.00 | |
Operating earnings per share (non-GAAP) | |
| 3.49 | |
| 3.24 | |
| 3.29 | |
Amortization of intangibles | |
| 0.26 | |
| 0.26 | |
| 0.31 | |
Tax effect of amortization of intangibles | |
| (0.06) | |
| (0.05) | |
| (0.06) | |
Subtotal (non-GAAP) | |
| 3.69 | |
| 3.45 | |
| 3.54 | |
Acquired non-PCD loan accretion | |
| (0.07) | |
| (0.10) | |
| (0.12) | |
Tax effect of acquired non-PCD loan accretion | |
| 0.02 | |
| 0.02 | |
| 0.02 | |
Diluted adjusted net earnings per share (non-GAAP) | | $ | 3.64 | | $ | 3.37 | | $ | 3.44 | |
| | | | | | | | | | |
Noninterest operating expenses | |
|
| |
|
| |
|
| |
Noninterest expenses (GAAP) | | $ | 388,138 | | $ | 376,534 | | $ | 372,026 | |
Amortization of intangibles | |
| (14,051) | |
| (14,297) | |
| (15,956) | |
Acquisition-related contingent consideration adjustment | | | (200) | | | 0 | | | 0 | |
Acquisition expenses | |
| (701) | |
| (4,933) | |
| (8,608) | |
Litigation accrual | | | 100 | | | (2,950) | | | 0 | |
Total adjusted noninterest expenses (non-GAAP) | | $ | 373,286 | | $ | 354,354 | | $ | 347,462 | |
| | | | | | | | | | |
Efficiency ratio | |
|
| |
|
| |
|
| |
Operating expenses (non-GAAP) - numerator | | $ | 373,286 | | $ | 354,354 | | $ | 347,462 | |
Fully tax-equivalent net interest income | | $ | 377,805 | | $ | 372,342 | | $ | 363,184 | |
Noninterest revenues | |
| 246,235 | |
| 228,419 | |
| 230,619 | |
Acquired non-PCD loan accretion | |
| (3,989) | |
| (5,491) | |
| (6,167) | |
Gain on sales of investment securities, net | |
| 0 | |
| 0 | |
| (4,882) | |
Unrealized (gain) loss on equity securities | |
| (17) | |
| 6 | |
| (19) | |
Gain on debt extinguishment | |
| 0 | |
| (421) | |
| 0 | |
Operating revenues (non-GAAP) - denominator | | $ | 620,034 | | $ | 594,855 | | $ | 582,735 | |
Efficiency ratio (non-GAAP) | |
| 60.2 | % |
| 59.6 | % |
| 59.6 | % |
67
(000's omitted) | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
Balance sheet data | ||||||||||||||||||||
Total assets | ||||||||||||||||||||
Total assets (GAAP) | $ | 11,410,295 | $ | 10,607,295 | $ | 10,746,198 | $ | 8,666,437 | $ | 8,552,669 | ||||||||||
Intangible assets | (836,923 | ) | (807,349 | ) | (825,088 | ) | (480,844 | ) | (484,146 | ) | ||||||||||
Deferred taxes on intangible assets | 44,742 | 46,370 | 48,419 | 43,504 | 39,724 | |||||||||||||||
Total tangible assets (non-GAAP) | $ | 10,618,114 | $ | 9,846,316 | $ | 9,969,529 | $ | 8,229,097 | $ | 8,108,247 |
Total common equity | ||||||||||||||||||||
Shareholders' Equity (GAAP) | $ | 1,855,234 | $ | 1,713,783 | $ | 1,635,315 | $ | 1,198,100 | $ | 1,140,647 | ||||||||||
Intangible assets | (836,923 | ) | (807,349 | ) | (825,088 | ) | (480,844 | ) | (484,146 | ) | ||||||||||
Deferred taxes on intangible assets | 44,742 | 46,370 | 48,419 | 43,504 | 39,724 | |||||||||||||||
Total tangible common equity (non-GAAP) | $ | 1,063,053 | $ | 952,804 | $ | 858,646 | $ | 760,760 | $ | 696,225 |
Net tangible equity-to-assets ratio | ||||||||||||||||||||
Total tangible common equity (non-GAAP) - numerator | $ | 1,063,053 | $ | 952,804 | $ | 858,646 | $ | 760,760 | $ | 696,225 | ||||||||||
Total tangible assets (non-GAAP) - denominator | $ | 10,618,114 | $ | 9,846,316 | $ | 9,969,529 | $ | 8,229,097 | $ | 8,108,247 | ||||||||||
Net tangible equity-to-assets ratio (non-GAAP) | 10.01 | % | 9.68 | % | 8.61 | % | 9.24 | % | 8.59 | % |
| | | | | | | | | | |
(000's omitted) | | 2021 | | 2020 | | 2019 |
| |||
Balance sheet data | | | | | | | | | |
|
Total assets | | | | | | | | | |
|
Total assets (GAAP) | | $ | 15,552,657 | | $ | 13,931,094 | | $ | 11,410,295 | |
Intangible assets | |
| (864,335) | |
| (846,648) | |
| (836,923) | |
Deferred taxes on intangible assets | |
| 44,160 | |
| 44,370 | |
| 44,742 | |
Total tangible assets (non-GAAP) | | $ | 14,732,482 | | $ | 13,128,816 | | $ | 10,618,114 | |
| | | | | | | | | | |
Total common equity | |
| | |
| | |
| | |
Shareholders' equity (GAAP) | | $ | 2,100,807 | | $ | 2,104,107 | | $ | 1,855,234 | |
Intangible assets | |
| (864,335) | |
| (846,648) | |
| (836,923) | |
Deferred taxes on intangible assets | |
| 44,160 | |
| 44,370 | |
| 44,742 | |
Total tangible common equity (non-GAAP) | | $ | 1,280,632 | | $ | 1,301,829 | | $ | 1,063,053 | |
| | | | | | | | | | |
Net tangible equity-to-assets ratio | |
| | |
| | |
| | |
Total tangible common equity (non-GAAP) - numerator | | $ | 1,280,632 | | $ | 1,301,829 | | $ | 1,063,053 | |
Total tangible assets (non-GAAP) - denominator | | $ | 14,732,482 | | $ | 13,128,816 | | $ | 10,618,114 | |
Net tangible equity-to-assets ratio (non-GAAP) | |
| 8.69 | % |
| 9.92 | % |
| 10.01 | % |
Item 7A.Quantitative and Qualitative Disclosures about Market Risk
|
The ongoing monitoring and management of both interest rate risk and liquidity in the short and long term time horizons is an important component of the Company's asset/liability management process, which is governed by limitsguidelines established in the policies reviewed and approved annually by the Company’s Board. The Board delegates responsibility for carrying out the policies to the ALCO, which meets each month. The committee is made up of the Company's senior management as well as regional and line-of-business managers who oversee specific earning asset classes and various funding sources. As the Company does not believe it is possible to reliably predict future interest rate movements, it has maintained an appropriate process and set of measurement tools, which enables it to identify and quantify sources of interest rate risk in varying rate environments. The primary tool used by the Company in managing interest rate risk is income simulation.
While a wide variety of strategic balance sheet and treasury yield curve scenarios are tested on an ongoing basis, the following reflects the Company's estimated net interest income (“NII”) sensitivity over the subsequent twelve months based on:
Asset and liability levels using December 31, |
● | Pending acquisitions are excluded from this model. |
● | The model assumes the Company’s average deposit balances will increase approximately 2.0% over the next twelve months. |
● | The model assumes the Company’s average earning asset balances will increase approximately 2.8% over the next twelve months. |
68
● | As of |
Net Interest Income Sensitivity Model
| | | |
| | Calculated annualized increase | |
| | (decrease) in projected net interest | |
| | income at December 31, 2021 | |
Interest rate scenario |
| (000’s omitted) | |
+200 basis points | | $ | 5,822 |
+100 basis points | | $ | 1,551 |
-100 basis points | | $ | (5,768) |
Projected NII over the 12-month forecast period increases in the rising rate environments largely due to higher rates earned on significant levels of cash equivalents, investment purchases, and assumed higher rates on new loans, including variable and adjustable rate loans. These increases are partially offset by anticipated higherincreases in deposit and borrowing costs. Over the longer time period, the growth in NII continues to improve in both rising rate environments as lower yielding assets mature and are replaced at higher rates.
In the falling rate environments,-100 basis points scenario, the BankCompany shows interest rate risk exposure to lower short term rates.rates on terms of one month and greater. During the first twelve months, net interest income declines largely due to lower assumed rates on investment purchases and new loans, including adjustable and variable rate assets. Modestly lower funding costs associated with deposits and borrowings only partially offset a small proportion of the decrease in interest income.
The analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions: the nature and timing of interest rate levels (including yield curve shape), prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows, and other factors. While the assumptions are developed based upon a reasonable outlook for economic and local market conditions, the Company cannot make any assurances as to the predictive natureefficacy of these assumptions, including how customer preferences or competitor influences might change. Furthermore, the sensitivity analysis does not reflect actions that the ALCO might take in responding to or anticipating changes in interest rates.
69
The following consolidated financial statements and independent registered public accounting firm’s report of Community Bank System, Inc. are contained on pages 6071 through 111136 of this item.
· | Consolidated Statements of Condition, |
December 31, 20192021 and 2018
· | Consolidated Statements of Income, |
Years ended December 31, 2019, 2018,2021, 2020, and 2017
· | Consolidated Statements of Comprehensive Income, |
Years ended December 31, 2019, 2018,2021, 2020, and 2017
· | Consolidated Statements of Changes in |
Years ended December 31, 2019, 2018,2021, 2020, and 2017
· | Consolidated Statements of Cash Flows, |
Years ended December 31, 2019, 2018,2021, 2020, and 2017
· | Notes to Consolidated Financial Statements, |
December 31, 2019
· | Management’s Report on Internal Control Over Financial Reporting |
Report of Independent Registered Public Accounting Firm (PCAOB ID 238) |
70
(In Thousands, Except Share Data)
December 31, | ||||||||
2019 | 2018 | |||||||
Assets: | ||||||||
Cash and cash equivalents | $ | 205,030 | $ | 211,834 | ||||
Available-for-sale investment securities (cost of $3,011,551 and $2,952,278, respectively) | 3,044,428 | 2,936,049 | ||||||
Equity and other securities (cost of $42,965 and $44,678, respectively) | 43,915 | 45,609 | ||||||
Loans held for sale, at fair value | 0 | 83 | ||||||
Loans | 6,890,543 | 6,281,121 | ||||||
Allowance for loan losses | (49,911 | ) | (49,284 | ) | ||||
Net loans | 6,840,632 | 6,231,837 | ||||||
Goodwill, net | 773,810 | 733,503 | ||||||
Core deposit intangibles, net | 16,418 | 18,596 | ||||||
Other intangibles, net | 46,695 | 55,250 | ||||||
Intangible assets, net | 836,923 | 807,349 | ||||||
Premises and equipment, net | 164,638 | 119,988 | ||||||
Accrued interest and fees receivable | 31,647 | 31,048 | ||||||
Other assets | 243,082 | 223,498 | ||||||
Total assets | $ | 11,410,295 | $ | 10,607,295 | ||||
Liabilities: | ||||||||
Noninterest-bearing deposits | $ | 2,465,902 | $ | 2,312,816 | ||||
Interest-bearing deposits | 6,529,065 | 6,009,555 | ||||||
Total deposits | 8,994,967 | 8,322,371 | ||||||
Overnight Federal Home Loan Bank borrowings | 8,300 | 54,400 | ||||||
Securities sold under agreement to repurchase, short-term | 241,708 | 259,367 | ||||||
Other Federal Home Loan Bank borrowings | 3,750 | 1,976 | ||||||
Subordinated notes payable | 13,795 | 0 | ||||||
Subordinated debt held by unconsolidated subsidiary trusts | 77,320 | 97,939 | ||||||
Accrued interest and other liabilities | 215,221 | 157,459 | ||||||
Total liabilities | 9,555,061 | 8,893,512 | ||||||
Commitments and contingencies (See Note N) | ||||||||
Shareholders’ equity: | ||||||||
Preferred stock, $1.00 par value, 500,000 shares authorized, 0 shares issued | 0 | 0 | ||||||
Common stock, $1.00 par value, 75,000,000 shares authorized; 51,974,726 and 51,576,839 shares issued, respectively | 51,975 | 51,577 | ||||||
Additional paid-in capital | 927,337 | 911,748 | ||||||
Retained earnings | 882,851 | 795,563 | ||||||
Accumulated other comprehensive (loss) | (10,226 | ) | (45,305 | ) | ||||
Treasury stock, at cost (180,803 shares including 179,548 shares held by deferred compensation arrangements at December 31, 2019, and 319,015 shares including 207,403 shares held by deferred compensation arrangements at December 31, 2018) | (6,823 | ) | (11,528 | ) | ||||
Deferred compensation arrangements (179,548 shares at December 31, 2019 and 207,403 shares at December 31, 2018) | 10,120 | 11,728 | ||||||
Total shareholders’ equity | 1,855,234 | 1,713,783 | ||||||
Total liabilities and shareholders’ equity | $ | 11,410,295 | $ | 10,607,295 |
| | | | | | |
| | December 31, | ||||
|
| 2021 |
| 2020 | ||
Assets: |
| |
|
| |
|
Cash and cash equivalents | | $ | 1,875,064 |
| $ | 1,645,805 |
Available-for-sale investment securities (cost of $4,980,102 and $3,427,779 respectively) | |
| 4,934,210 |
|
| 3,547,892 |
Equity and other securities (cost of $43,917 and $46,511, respectively) | |
| 44,879 |
|
| 47,455 |
Loans held for sale, at fair value | |
| 0 |
|
| 1,622 |
Loans | |
| 7,373,639 |
|
| 7,415,952 |
Allowance for credit losses | |
| (49,869) | |
| (60,869) |
Net loans | |
| 7,323,770 |
|
| 7,355,083 |
| | | | | | |
Goodwill, net | |
| 799,109 |
|
| 793,708 |
Core deposit intangibles, net | |
| 9,087 |
|
| 13,831 |
Other intangibles, net | |
| 56,139 |
|
| 39,109 |
Intangible assets, net | |
| 864,335 |
|
| 846,648 |
| | | | | | |
Premises and equipment, net | |
| 160,651 |
|
| 165,655 |
Accrued interest and fees receivable | |
| 35,894 |
|
| 39,031 |
Other assets | |
| 313,854 |
|
| 281,903 |
| | | | | | |
Total assets | | $ | 15,552,657 |
| $ | 13,931,094 |
| | | | | | |
Liabilities: | |
|
|
|
|
|
Noninterest-bearing deposits | | $ | 3,921,663 |
| $ | 3,361,768 |
Interest-bearing deposits | |
| 8,989,505 |
|
| 7,863,206 |
Total deposits | |
| 12,911,168 |
|
| 11,224,974 |
| | | | | | |
Securities sold under agreement to repurchase, short-term | |
| 324,720 |
|
| 284,008 |
Other Federal Home Loan Bank borrowings | |
| 1,888 |
|
| 6,658 |
Subordinated notes payable | |
| 3,277 |
|
| 3,303 |
Subordinated debt held by unconsolidated subsidiary trusts | |
| 0 |
|
| 77,320 |
Accrued interest and other liabilities | |
| 210,797 |
|
| 230,724 |
Total liabilities | |
| 13,451,850 |
|
| 11,826,987 |
| | | | | | |
Commitments and contingencies (See Note N) | |
|
|
|
|
|
| | | | | | |
Shareholders’ equity: | |
|
|
|
|
|
Preferred stock, $1.00 par value, 500,000 shares authorized, 0 shares issued | |
| 0 |
|
| 0 |
Common stock, $1.00 par value, 75,000,000 shares authorized; 54,092,421 and 53,754,599 shares issued, respectively | |
| 54,092 |
|
| 53,755 |
Additional paid-in capital | |
| 1,041,304 |
|
| 1,025,163 |
Retained earnings | |
| 1,058,286 |
|
| 960,183 |
Accumulated other comprehensive (loss) income | |
| (50,627) | |
| 62,077 |
Treasury stock, at cost (214,374 shares including 146,860 shares held by deferred compensation arrangements at December 31, 2021, and 161,472 shares including 161,457 shares held by deferred compensation arrangements at December 31, 2020) | |
| (10,610) | |
| (6,198) |
Deferred compensation arrangements (146,860 shares at December 31, 2021 and 161,457 shares at December 31, 2020) | |
| 8,362 |
|
| 9,127 |
Total shareholders’ equity | |
| 2,100,807 |
|
| 2,104,107 |
| | | | | | |
Total liabilities and shareholders’ equity | | $ | 15,552,657 |
| $ | 13,931,094 |
The accompanying notes are an integral part of the consolidated financial statements.
71
(In Thousands, Except Per-Share Data)
Years Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Interest income: | ||||||||||||
Interest and fees on loans | $ | 308,210 | $ | 286,165 | $ | 253,949 | ||||||
Interest and dividends on taxable investments | 65,904 | 63,504 | 60,159 | |||||||||
Interest and dividends on nontaxable investments | 11,613 | 13,064 | 15,347 | |||||||||
Total interest income | 385,727 | 362,733 | 329,455 | |||||||||
Interest expense: | ||||||||||||
Interest on deposits | 20,460 | 10,658 | 8,031 | |||||||||
Interest on borrowings | 1,848 | 2,343 | 1,845 | |||||||||
Interest on subordinated notes payable | 346 | 0 | 0 | |||||||||
Interest on subordinated debt held by unconsolidated subsidiary trusts | 3,898 | 4,677 | 3,904 | |||||||||
Total interest expense | 26,552 | 17,678 | 13,780 | |||||||||
Net interest income | 359,175 | 345,055 | 315,675 | |||||||||
Provision for loan losses | 8,430 | 10,837 | 10,984 | |||||||||
Net interest income after provision for loan losses | 350,745 | 334,218 | 304,691 | |||||||||
Noninterest revenues: | ||||||||||||
Deposit service fees | 65,602 | 70,384 | 67,896 | |||||||||
Other banking services | 4,881 | 4,968 | 5,466 | |||||||||
Employee benefit services | 97,167 | 92,279 | 80,830 | |||||||||
Insurance services | 32,199 | 30,317 | 26,150 | |||||||||
Wealth management services | 25,869 | 25,772 | 22,079 | |||||||||
Unrealized gain on equity securities | 19 | 657 | 0 | |||||||||
Loss on debt extinguishment | 0 | (318 | ) | 0 | ||||||||
Gain on sales of investment securities, net | 4,882 | 0 | 2 | |||||||||
Total noninterest revenues | 230,619 | 224,059 | 202,423 | |||||||||
Noninterest expenses: | ||||||||||||
Salaries and employee benefits | 219,916 | 207,363 | 186,903 | |||||||||
Occupancy and equipment | 39,850 | 39,948 | 35,561 | |||||||||
Data processing and communications | 41,407 | 39,094 | 37,579 | |||||||||
Amortization of intangible assets | 15,956 | 18,155 | 16,941 | |||||||||
Legal and professional fees | 10,783 | 10,644 | 11,576 | |||||||||
Business development and marketing | 11,416 | 9,383 | 9,994 | |||||||||
Acquisition expenses | 8,608 | (769 | ) | 25,986 | ||||||||
Other expenses | 24,090 | 21,471 | 22,609 | |||||||||
Total noninterest expenses | 372,026 | 345,289 | 347,149 | |||||||||
Income before income taxes | 209,338 | 212,988 | 159,965 | |||||||||
Income taxes | 40,275 | 44,347 | 9,248 | |||||||||
Net income | $ | 169,063 | $ | 168,641 | $ | 150,717 | ||||||
Basic earnings per share | $ | 3.26 | $ | 3.28 | $ | 3.07 | ||||||
Diluted earnings per share | $ | 3.23 | $ | 3.24 | $ | 3.03 |
| | | | | | | | | |
| | | |||||||
| | Years Ended December 31, | |||||||
| | 2021 |
| 2020 |
| 2019 | |||
Interest income: | | |
|
| |
|
| |
|
Interest and fees on loans | | $ | 308,355 | | $ | 314,779 |
| $ | 308,210 |
Interest and dividends on taxable investments | |
| 68,607 | |
| 62,538 |
|
| 65,904 |
Interest and dividends on nontaxable investments | |
| 10,458 | |
| 11,961 |
|
| 11,613 |
Total interest income | |
| 387,420 | |
| 389,278 |
|
| 385,727 |
| | | | | | | | | |
Interest expense: | |
|
| |
|
|
|
|
|
Interest on deposits | |
| 11,631 | |
| 16,761 |
|
| 20,460 |
Interest on borrowings | |
| 930 | |
| 1,569 |
|
| 1,848 |
Interest on subordinated notes payable | |
| 154 | |
| 670 |
|
| 346 |
Interest on subordinated debt held by unconsolidated subsidiary trusts | |
| 293 | |
| 1,875 |
|
| 3,898 |
Total interest expense | |
| 13,008 | |
| 20,875 |
|
| 26,552 |
| | | | | | | | | |
Net interest income | |
| 374,412 | |
| 368,403 |
|
| 359,175 |
Provision for credit losses | |
| (8,839) | |
| 14,212 |
|
| 8,430 |
Net interest income after provision for credit losses | |
| 383,251 | |
| 354,191 |
|
| 350,745 |
| | | | | | | | | |
Noninterest revenues: | |
|
| |
|
|
|
|
|
Deposit service fees | |
| 59,212 | |
| 57,370 |
|
| 65,602 |
Mortgage banking | | | 1,772 | | | 5,301 | | | 523 |
Other banking services | |
| 3,674 | |
| 3,753 |
|
| 4,358 |
Employee benefit services | |
| 114,328 | |
| 101,329 |
|
| 97,167 |
Insurance services | |
| 33,992 | |
| 32,372 |
|
| 32,199 |
Wealth management services | |
| 33,240 | |
| 27,879 |
|
| 25,869 |
Unrealized gain (loss) on equity securities | |
| 17 | |
| (6) |
|
| 19 |
Gain on debt extinguishment | |
| 0 | |
| 421 | |
| 0 |
Gain on sales of investment securities, net | |
| 0 | |
| 0 |
|
| 4,882 |
Total noninterest revenues | |
| 246,235 | |
| 228,419 |
|
| 230,619 |
| | | | | | | | | |
Noninterest expenses: | |
|
| |
|
|
|
|
|
Salaries and employee benefits | |
| 241,501 | |
| 228,384 |
|
| 219,916 |
Occupancy and equipment | |
| 41,240 | |
| 40,732 |
|
| 39,850 |
Data processing and communications | |
| 51,003 | |
| 45,755 |
|
| 41,407 |
Amortization of intangible assets | |
| 14,051 | |
| 14,297 |
|
| 15,956 |
Legal and professional fees | |
| 11,723 | |
| 11,605 |
|
| 10,783 |
Business development and marketing | |
| 9,319 | |
| 9,463 |
|
| 11,416 |
Litigation accrual | | | (100) | | | 2,950 | | | 0 |
Acquisition expenses | | | 701 | | | 4,933 | | | 8,608 |
Acquisition-related contingent consideration adjustment | | | 200 | | | 0 | | | 0 |
Other expenses | |
| 18,500 | |
| 18,415 |
|
| 24,090 |
Total noninterest expenses | |
| 388,138 | |
| 376,534 |
|
| 372,026 |
| | | | | | | | | |
Income before income taxes | |
| 241,348 | |
| 206,076 |
|
| 209,338 |
Income taxes | |
| 51,654 | |
| 41,400 |
|
| 40,275 |
Net income | | $ | 189,694 | | $ | 164,676 |
| $ | 169,063 |
| | | | | | | | | |
Basic earnings per share | | $ | 3.51 | | $ | 3.10 |
| $ | 3.26 |
Diluted earnings per share | | $ | 3.48 | | $ | 3.08 |
| $ | 3.23 |
The accompanying notes are an integral part of the consolidated financial statements.
72
(In Thousands)
Years Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Pension and other post retirement obligations: | ||||||||||||
Amortization of actuarial losses included in net periodic pension cost, gross | $ | (2,563 | ) | $ | (12,647 | ) | $ | (707 | ) | |||
Tax effect | 605 | 3,087 | 263 | |||||||||
Amortization of actuarial losses included in net periodic pension cost, net | (1,958 | ) | (9,560 | ) | (444 | ) | ||||||
Amortization of prior service cost included in net periodic pension cost, gross | (115 | ) | (1,398 | ) | (859 | ) | ||||||
Tax effect | 28 | 340 | 324 | |||||||||
Amortization of prior service cost included in net periodic pension cost, net | (87 | ) | (1,058 | ) | (535 | ) | ||||||
Initial projected benefit obligation recognized upon plan adoption, gross | 0 | (775 | ) | 0 | ||||||||
Tax effect | 0 | 189 | 0 | |||||||||
Initial projected benefit obligation recognized upon plan adoption, net | 0 | (586 | ) | 0 | ||||||||
Unamortized actuarial gain due to plan merger, gross | 0 | 0 | 1,858 | |||||||||
Tax effect | 0 | 0 | (711 | ) | ||||||||
Unamortized actuarial gain due to plan merger, net | 0 | 0 | 1,147 | |||||||||
Other comprehensive (loss)/income related to pension and other post retirement obligations, net of taxes | (2,045 | ) | (11,204 | ) | 168 | |||||||
Unrealized gains/(losses) on available-for-sale securities: | ||||||||||||
Net unrealized holding gains (losses) arising during period, gross | 53,988 | (39,894 | ) | (17,851 | ) | |||||||
Tax effect | (13,176 | ) | 9,700 | 6,787 | ||||||||
Net unrealized holding gains (losses) arising during period, net | 40,812 | (30,194 | ) | (11,064 | ) | |||||||
Reclassification of other comprehensive income due to change in accounting principle – equity securities | 0 | (208 | ) | 0 | ||||||||
Reclassification adjustment for net (gains) included in net income, gross | (4,882 | ) | 0 | (2 | ) | |||||||
Tax effect | 1,194 | 0 | 1 | |||||||||
Reclassification adjustment for net (gains) included in net income, net | (3,688 | ) | 0 | (1 | ) | |||||||
Other comprehensive gain (loss) related to unrealized gains/(losses) on available-for-sale securities, net of taxes | 37,124 | (30,402 | ) | (11,065 | ) | |||||||
Other comprehensive income (loss), net of tax | 35,079 | (41,606 | ) | (10,897 | ) | |||||||
Net income | 169,063 | 168,641 | 150,717 | |||||||||
Comprehensive income | $ | 204,142 | $ | 127,035 | $ | 139,820 |
As of December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Accumulated Other Comprehensive Income/(Loss) By Component: | ||||||||||||
Unrealized (loss) for pension and other postretirement obligations | $ | (46,175 | ) | $ | (43,497 | ) | $ | (28,677 | ) | |||
Tax effect | 11,293 | 10,660 | 7,044 | |||||||||
Net unrealized (loss) for pension and other postretirement obligations | (34,882 | ) | (32,837 | ) | (21,633 | ) | ||||||
Unrealized gain (loss) on available-for-sale securities | 32,877 | (16,229 | ) | 23,940 | ||||||||
Tax effect | (8,221 | ) | 3,761 | (6,006 | ) | |||||||
Net unrealized gain (loss) on available-for-sale securities | 24,656 | (12,468 | ) | 17,934 | ||||||||
Accumulated other comprehensive (loss) | $ | (10,226 | ) | $ | (45,305 | ) | $ | (3,699 | ) |
| | | | | | | | | |
| | Years Ended December 31, | |||||||
|
| 2021 |
| 2020 |
| 2019 | |||
| | | | | | | | | |
Pension and other post retirement obligations: |
| |
|
| |
|
| |
|
Amortization of actuarial gains (losses) included in net periodic pension cost, gross | | $ | 17,443 | | $ | 8,379 | | $ | (2,563) |
Tax effect | |
| (4,192) |
|
| (2,012) |
|
| 605 |
Amortization of actuarial gains (losses) included in net periodic pension cost, net | |
| 13,251 | |
| 6,367 | |
| (1,958) |
Amortization of prior service cost included in net periodic pension cost, gross | |
| 200 | |
| (471) | |
| (115) |
Tax effect | |
| (48) |
|
| 113 |
|
| 28 |
Amortization of prior service cost included in net periodic pension cost, net | |
| 152 | |
| (358) | |
| (87) |
Other comprehensive income (loss) related to pension and other post retirement obligations, net of taxes | |
| 13,403 | |
| 6,009 | |
| (2,045) |
| | | | | | | | | |
Unrealized gains (losses) on available-for-sale securities: | |
|
|
|
|
|
|
|
|
Net unrealized holding (losses) gains arising during period, gross | |
| (166,007) |
|
| 87,237 | |
| 53,988 |
Tax effect | |
| 39,900 | |
| (20,943) |
|
| (13,176) |
Net unrealized holding (losses) gains arising during period, net | |
| (126,107) |
|
| 66,294 | |
| 40,812 |
Reclassification adjustment for net (gains) included in net income, gross | |
| 0 | |
| 0 |
|
| (4,882) |
Tax effect | |
| 0 |
|
| 0 |
|
| 1,194 |
Reclassification adjustment for net (gains) included in net income, net | |
| 0 | |
| 0 |
|
| (3,688) |
Other comprehensive (loss) gain related to unrealized (losses) gains on available-for-sale securities, net of taxes | |
| (126,107) |
|
| 66,294 | |
| 37,124 |
Other comprehensive (loss) income, net of tax | |
| (112,704) |
|
| 72,303 | |
| 35,079 |
Net income | |
| 189,694 |
|
| 164,676 |
|
| 169,063 |
Comprehensive income | | $ | 76,990 |
| $ | 236,979 |
| $ | 204,142 |
| | | | | | | | |
| | | | | | | | |
| As of December 31, | |||||||
| 2021 |
| 2020 |
| 2019 | |||
Accumulated Other Comprehensive (Loss) Income By Component: | |
|
| |
|
| |
|
Unrealized (loss) for pension and other postretirement obligations | $ | (20,624) | | $ | (38,267) | | $ | (46,175) |
Tax effect |
| 5,154 |
|
| 9,394 |
|
| 11,293 |
Net unrealized (loss) for pension and other postretirement obligations |
| (15,470) | |
| (28,873) | |
| (34,882) |
Unrealized (loss) gain on available-for-sale securities |
| (45,893) |
|
| 120,114 | |
| 32,877 |
Tax effect |
| 10,736 | |
| (29,164) |
|
| (8,221) |
Net unrealized (loss) gain on available-for-sale securities |
| (35,157) |
|
| 90,950 | |
| 24,656 |
Accumulated other comprehensive (loss) income | $ | (50,627) | | $ | 62,077 | | $ | (10,226) |
The accompanying notes are an integral part of the consolidated financial statements.
73
Years ended December 31, 2017, 20182019, 2020 and 2019
(In Thousands, Except Share Data)
Common Stock | Accumulated | |||||||||||||||||||||||||||||||
Shares Outstanding | Amount Issued | Additional Paid-in Capital | Retained Earnings | Other Comprehensive Income/(Loss) | Treasury Stock | Deferred Compensation Arrangements | Total | |||||||||||||||||||||||||
Balance at December 31, 2016 | 44,437,415 | $ | 44,950 | $ | 545,775 | $ | 614,692 | $ | 7,843 | $ | (15,160 | ) | $ | 0 | $ | 1,198,100 | ||||||||||||||||
Net income | 150,717 | 150,717 | ||||||||||||||||||||||||||||||
Other comprehensive loss, net of tax | (10,897 | ) | (10,897 | ) | ||||||||||||||||||||||||||||
Reclassification related to tax effect of Tax Cuts and Jobs Act | 645 | (645 | ) | 0 | ||||||||||||||||||||||||||||
Dividends declared: | ||||||||||||||||||||||||||||||||
Common, $1.32 per share | (65,497 | ) | (65,497 | ) | ||||||||||||||||||||||||||||
Common stock issued under employee stock plans | 264,640 | 265 | 4,298 | 4,563 | ||||||||||||||||||||||||||||
Stock-based compensation | 5,137 | 5,137 | ||||||||||||||||||||||||||||||
Stock issued for acquisitions | 6,048,849 | 6,049 | 337,083 | 343,132 | ||||||||||||||||||||||||||||
Deferred compensation arrangements acquired | (179,003 | ) | (10,022 | ) | 10,022 | 0 | ||||||||||||||||||||||||||
Treasury stock purchased | (58,491 | ) | (3,306 | ) | 3,306 | 0 | ||||||||||||||||||||||||||
Treasury stock issued to benefit plan | 182,667 | 2,586 | 7,474 | 10,060 | ||||||||||||||||||||||||||||
Balance at December 31, 2017 | 50,696,077 | 51,264 | 894,879 | 700,557 | (3,699 | ) | (21,014 | ) | 13,328 | 1,635,315 | ||||||||||||||||||||||
Net income | 168,641 | 168,641 | ||||||||||||||||||||||||||||||
Other comprehensive loss, net of tax | (41,398 | ) | (41,398 | ) | ||||||||||||||||||||||||||||
Cumulative effect of change in accounting principle – equity securities | 208 | (208 | ) | 0 | ||||||||||||||||||||||||||||
Dividends declared: | ||||||||||||||||||||||||||||||||
Common, $1.44 per share | (73,843 | ) | (73,843 | ) | ||||||||||||||||||||||||||||
Common stock issued under employee stock plans | 312,998 | 313 | 6,130 | 6,443 | ||||||||||||||||||||||||||||
Stock-based compensation | 6,064 | 6,064 | ||||||||||||||||||||||||||||||
Distribution of stock under deferred compensation arrangements | 35,233 | 1,898 | (1,898 | ) | 0 | |||||||||||||||||||||||||||
Treasury stock purchased | (5,142 | ) | (298 | ) | 298 | 0 | ||||||||||||||||||||||||||
Treasury stock issued to benefit plan | 218,658 | 4,675 | 7,886 | 12,561 | ||||||||||||||||||||||||||||
Balance at December 31, 2018 | 51,257,824 | 51,577 | 911,748 | 795,563 | (45,305 | ) | (11,528 | ) | 11,728 | 1,713,783 | ||||||||||||||||||||||
Net income | 169,063 | 169,063 | ||||||||||||||||||||||||||||||
Other comprehensive income, net of tax | 35,079 | 35,079 | ||||||||||||||||||||||||||||||
Dividends declared: | ||||||||||||||||||||||||||||||||
Common, $1.58 per share | (81,775 | ) | (81,775 | ) | ||||||||||||||||||||||||||||
Common stock issued under employee stock plans | 397,887 | 398 | 6,517 | 6,915 | ||||||||||||||||||||||||||||
Stock-based compensation | 5,285 | 5,285 | ||||||||||||||||||||||||||||||
Distribution of stock under deferred compensation arrangements | 32,431 | 1,064 | 830 | (1,894 | ) | 0 | ||||||||||||||||||||||||||
Treasury stock purchased | (4,576 | ) | (286 | ) | 286 | 0 | ||||||||||||||||||||||||||
Treasury stock issued to benefit plan | 110,357 | 2,723 | 4,161 | 6,884 | ||||||||||||||||||||||||||||
Balance at December 31, 2019 | 51,793,923 | $ | 51,975 | $ | 927,337 | $ | 882,851 | $ | (10,226 | ) | $ | (6,823 | ) | $ | 10,120 | $ | 1,855,234 |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Accumulated | | | | | | | | | | |
| | Common Stock | | | | | | | | Other | | | | | Deferred | | | | |||||
| | Shares | | Amount | | Additional | | Retained | | Comprehensive | | Treasury | | Compensation | | | | ||||||
|
| Outstanding |
| Issued |
| Paid-in Capital |
| Earnings |
| (Loss)/Income |
| Stock |
| Arrangements |
| Total | |||||||
Balance at December 31, 2018 |
| 51,257,824 | | $ | 51,577 | | $ | 911,748 | | $ | 795,563 | | $ | (45,305) | | $ | (11,528) | | $ | 11,728 | | $ | 1,713,783 |
Net income |
| | |
| | |
|
| |
| 169,063 | |
|
| |
|
| |
|
| |
| 169,063 |
Other comprehensive income, net of tax |
| | |
| | |
|
| |
|
| |
| 35,079 | |
|
| |
|
| |
| 35,079 |
Common, $1.58 per share |
| | |
| | |
|
| |
| (81,775) | |
|
| |
|
| |
|
| |
| (81,775) |
Common stock issued under employee stock plans |
| 397,887 | |
| 398 | |
| 6,517 | |
| | |
|
| |
|
| |
|
| |
| 6,915 |
Stock-based compensation |
| | |
| | |
| 5,285 | |
|
| |
|
| |
|
| |
|
| |
| 5,285 |
Distribution of stock under deferred compensation arrangements | | 32,431 | | | | | | 1,064 | | | | | | | | | 830 | | | (1,894) | | | 0 |
Treasury stock purchased |
| (4,576) | |
| | |
| | |
| | |
|
| |
| (286) | |
| 286 | |
| 0 |
Treasury stock issued to benefit plan |
| 110,357 | |
| | |
| 2,723 | |
| | |
|
| |
| 4,161 | |
|
| |
| 6,884 |
Balance at December 31, 2019 |
| 51,793,923 | |
| 51,975 | |
| 927,337 | |
| 882,851 | |
| (10,226) | |
| (6,823) | |
| 10,120 | |
| 1,855,234 |
Net income |
| | |
| | |
|
| |
| 164,676 | |
|
| |
|
| |
|
| |
| 164,676 |
Other comprehensive income, net of tax |
| | |
| | |
|
| |
|
| |
| 72,303 | |
|
| |
|
| |
| 72,303 |
Cumulative effect of change in accounting principle – ASC 326 |
| | |
| | |
| | |
| 1,140 | |
| | |
|
| |
|
| |
| 1,140 |
Dividends declared: |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Common, $1.66 per share |
| | |
| | |
|
| |
| (88,484) | |
|
| |
|
| |
|
| |
| (88,484) |
Common stock issued under employee stock plans |
| 416,614 | |
| 417 | |
| 15,375 | |
| | |
|
| |
|
| |
|
| |
| 15,792 |
Stock-based compensation |
| | |
| | |
| 6,419 | |
|
| |
|
| |
|
| |
|
| |
| 6,419 |
Stock issued for acquisition | | 1,363,259 | | | 1,363 | | | 75,579 | | | | | | | | | | | | | | | 76,942 |
Distribution of stock under deferred compensation arrangements |
| 22,497 | |
| | |
| 415 | |
| | |
|
| |
| 849 | |
| (1,264) | |
| 0 |
Treasury stock purchased |
| (4,406) | |
| | |
| | |
| | |
|
| |
| (271) | |
| 271 | |
| 0 |
Treasury stock issued to benefit plan |
| 1,240 | |
| | |
| 38 | |
| | |
|
| |
| 47 | |
|
| |
| 85 |
Balance at December 31, 2020 |
| 53,593,127 | | | 53,755 | | | 1,025,163 | | | 960,183 | | | 62,077 | | | (6,198) | | | 9,127 | | | 2,104,107 |
Net income |
| | |
| | |
|
| |
| 189,694 | |
|
| |
|
| |
|
| |
| 189,694 |
Other comprehensive income, net of tax |
| | |
| | |
|
| |
|
| |
| (112,704) | |
|
| |
|
| |
| (112,704) |
Dividends declared: |
|
| |
|
| |
|
| |
| | |
|
| |
|
| |
|
| |
| |
Common, $1.70 per share |
| | |
| | |
|
| |
| (91,591) | |
|
| |
|
| |
|
| |
| (91,591) |
Common stock issued under employee stock plans |
| 337,822 | |
| 337 | |
| 9,484 | |
| | |
|
| |
|
| |
|
| |
| 9,821 |
Stock-based compensation |
| | |
| | |
| 6,334 | |
|
| |
|
| |
|
| |
|
| |
| 6,334 |
Distribution of stock under deferred compensation arrangements |
| 18,089 | |
| | |
| 323 | |
| | |
| | |
| 694 | |
| (1,017) | |
| 0 |
Treasury stock purchased |
| (70,991) | |
| | |
| | |
| | |
|
| |
| (5,106) | |
| 252 | |
| (4,854) |
Balance at December 31, 2021 |
| 53,878,047 | | $ | 54,092 | | $ | 1,041,304 | | $ | 1,058,286 | | $ | (50,627) | | $ | (10,610) | | $ | 8,362 | | $ | 2,100,807 |
The accompanying notes are an integral part of the consolidated financial statements.
74
(In Thousands of Dollars)
Years Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Operating activities: | ||||||||||||
Net income | $ | 169,063 | $ | 168,641 | $ | 150,717 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation | 15,891 | 15,749 | 16,024 | |||||||||
Amortization of intangible assets | 15,956 | 18,155 | 16,941 | |||||||||
Net accretion on securities, loans and borrowings | (6,176 | ) | (9,404 | ) | (6,619 | ) | ||||||
Stock-based compensation | 5,285 | 6,064 | 5,137 | |||||||||
Provision for loan losses | 8,430 | 10,837 | 10,984 | |||||||||
(Benefit)/provision for deferred income taxes | (2,302 | ) | 2,663 | (28,692 | ) | |||||||
Amortization of mortgage servicing rights | 378 | 449 | 499 | |||||||||
Unrealized gain on equity securities | (19 | ) | (657 | ) | 0 | |||||||
Loss on debt extinguishment | 0 | 318 | 0 | |||||||||
Income from bank-owned life insurance policies | (1,678 | ) | (1,579 | ) | (1,586 | ) | ||||||
Gain on sales of investment securities, net | (4,882 | ) | 0 | (2 | ) | |||||||
Net loss/(gain) on sale of loans and other assets | 11 | (80 | ) | 181 | ||||||||
Change in other assets and liabilities | 2,545 | 10,252 | 26,090 | |||||||||
Net cash provided by operating activities | 202,502 | 221,408 | 189,674 | |||||||||
Investing activities: | ||||||||||||
Proceeds from sales of available-for-sale investment securities | 590,179 | 0 | 0 | |||||||||
Proceeds from maturities, calls and paydowns of available-for-sale investment securities | 209,857 | 140,784 | 157,278 | |||||||||
Proceeds from maturities and redemptions of other investment securities | 3,995 | 5,867 | 30,116 | |||||||||
Purchases of available-for-sale investment securities | (810,122 | ) | (78,131 | ) | (90,380 | ) | ||||||
Purchases of equity and other securities | (202 | ) | (31 | ) | (13,302 | ) | ||||||
Net (increase) decrease in loans | (140,382 | ) | (35,414 | ) | 164,846 | |||||||
Cash paid for acquisition, net of cash acquired of $90,381, $16, and $52,132, respectively | (4,653 | ) | (1,737 | ) | (107,414 | ) | ||||||
Settlement of bank owned life insurance policies | 1,597 | 0 | 1,779 | |||||||||
Purchases of premises and equipment, net | (5,686 | ) | (12,646 | ) | (10,819 | ) | ||||||
Real estate limited partnership investments | (1,637 | ) | (1,197 | ) | (733 | ) | ||||||
Net cash (used in)/provided by investing activities | (157,054 | ) | 17,495 | 131,371 | ||||||||
Financing activities: | ||||||||||||
Net increase (decrease) in deposits | 104,435 | (122,049 | ) | (79,940 | ) | |||||||
Net decrease in borrowings, net of payments of $646, $95 and $81,544 | (64,405 | ) | (47,339 | ) | (144,809 | ) | ||||||
Payments on subordinated debt held by unconsolidated subsidiary trusts | (22,681 | ) | (25,207 | ) | 0 | |||||||
Issuance of common stock | 6,915 | 6,443 | 4,563 | |||||||||
Purchase of treasury stock | (286 | ) | (298 | ) | (3,306 | ) | ||||||
Sale of treasury stock | 6,884 | 12,561 | 10,060 | |||||||||
Increase in deferred compensation agreements | 286 | 298 | 3,306 | |||||||||
Cash dividends paid | (80,241 | ) | (71,495 | ) | (62,305 | ) | ||||||
Withholding taxes paid on share-based compensation | (3,159 | ) | (1,021 | ) | (1,433 | ) | ||||||
Net cash used in financing activities | (52,252 | ) | (248,107 | ) | (273,864 | ) | ||||||
Change in cash and cash equivalents | (6,804 | ) | (9,204 | ) | 47,181 | |||||||
Cash and cash equivalents at beginning of year | 211,834 | 221,038 | 173,857 | |||||||||
Cash and cash equivalents at end of year | $ | 205,030 | $ | 211,834 | $ | 221,038 | ||||||
Supplemental disclosures of cash flow information: | ||||||||||||
Cash paid for interest | $ | 25,425 | $ | 17,926 | $ | 13,705 | ||||||
Cash paid for income taxes | 46,457 | 30,266 | 41,231 | |||||||||
Supplemental disclosures of noncash financing and investing activities: | ||||||||||||
Dividends declared and unpaid | 21,342 | 19,808 | 17,460 | |||||||||
Transfers from loans to other real estate | 2,522 | 3,299 | 3,518 | |||||||||
Acquisitions: | ||||||||||||
Common stock issued | 0 | 0 | 343,132 | |||||||||
Fair value of assets acquired, excluding acquired cash and intangibles | 548,856 | 115 | 1,961,246 | |||||||||
Fair value of liabilities assumed | 589,733 | 31 | 1,870,449 |
| | | | | | | | |
| | |||||||
| Years Ended December 31, | |||||||
| 2021 |
| 2020 |
| 2019 | |||
Operating activities: | |
|
| |
|
| |
|
Net income | $ | 189,694 | | $ | 164,676 | | $ | 169,063 |
Adjustments to reconcile net income to net cash provided by operating activities: |
| | |
|
| |
|
|
Depreciation |
| 15,592 | |
| 15,963 | |
| 15,891 |
Amortization of intangible assets |
| 14,051 | |
| 14,297 | |
| 15,956 |
Net accretion on securities, loans and borrowings |
| (22,501) | |
| (11,353) | |
| (6,176) |
Stock-based compensation |
| 6,334 | |
| 6,419 | |
| 5,285 |
Provision for credit losses |
| (8,839) | |
| 14,212 | |
| 8,430 |
Provision (benefit) for deferred income taxes |
| 7,989 | |
| (2,336) | |
| (2,302) |
Amortization of mortgage servicing rights |
| 519 | |
| 379 | |
| 378 |
Unrealized (gain) loss on equity securities |
| (17) | |
| 6 | |
| (19) |
Gain on debt extinguishment |
| 0 | |
| (421) | |
| 0 |
Income from bank-owned life insurance policies |
| (2,012) | |
| (1,915) | |
| (1,678) |
Gain on sales of investment securities, net |
| 0 | |
| 0 | |
| (4,882) |
Net (gain) loss on sale of loans and other assets |
| (328) | |
| (3,505) | |
| 11 |
Change in other assets and liabilities |
| 2,064 | |
| (16,939) | |
| 2,545 |
Net cash provided by operating activities |
| 202,546 | |
| 179,483 | |
| 202,502 |
Investing activities: |
| | |
|
| |
|
|
Proceeds from sales of available-for-sale investment securities |
| 0 | |
| 0 | |
| 590,179 |
Proceeds from maturities, calls and paydowns of available-for-sale investment securities |
| 423,738 | |
| 885,549 | |
| 209,857 |
Proceeds from maturities and redemptions of equity and other securities |
| 2,946 | |
| 516 | |
| 3,995 |
Purchases of available-for-sale investment securities |
| (1,963,884) | |
| (1,114,914) | |
| (810,122) |
Purchases of equity and other securities |
| (353) | |
| (3,234) | |
| (202) |
Net decrease (increase) in loans |
| 49,929 | |
| (185,131) | |
| (140,382) |
Cash (paid) received for acquisition, net of cash acquired of $541, $55,973, and $90,381, respectively |
| (29,329) | |
| 34,360 | |
| (4,653) |
Settlement of bank owned life insurance policies |
| 0 | |
| 0 | |
| 1,597 |
Purchases of premises and equipment, net |
| (13,176) | |
| (14,395) | |
| (5,686) |
Real estate limited partnership investments | | (646) | | | (1,471) | | | (1,637) |
Net cash used in investing activities |
| (1,530,775) | |
| (398,720) | |
| (157,054) |
Financing activities: |
| | |
|
| |
|
|
Net increase in deposits |
| 1,686,194 | |
| 1,713,733 | |
| 104,435 |
Net increase/(decrease) in borrowings, net of payments of $4,769, $3,092, and $646, respectively |
| 35,942 | |
| 30,908 | |
| (64,405) |
Payments on subordinated debt held by unconsolidated subsidiary trusts |
| (77,320) | |
| (2,062) | |
| (22,681) |
Payments on subordinated notes payable | | 0 | | | (10,000) | | | 0 |
Issuance of common stock |
| 9,821 | |
| 15,792 | |
| 6,915 |
Purchase of treasury stock |
| (5,106) | |
| (271) | |
| (286) |
Sale of treasury stock |
| 0 | |
| 85 | |
| 6,884 |
Increase in deferred compensation agreements |
| 252 | |
| 271 | |
| 286 |
Cash dividends paid |
| (91,051) | |
| (87,131) | |
| (80,241) |
Withholding taxes paid on share-based compensation |
| (1,244) | |
| (1,313) | |
| (3,159) |
Net cash provided by (used in) financing activities |
| 1,557,488 | |
| 1,660,012 | |
| (52,252) |
Change in cash and cash equivalents |
| 229,259 | |
| 1,440,775 | |
| (6,804) |
Cash and cash equivalents at beginning of year |
| 1,645,805 | |
| 205,030 | |
| 211,834 |
Cash and cash equivalents at end of year | $ | 1,875,064 | | $ | 1,645,805 | | $ | 205,030 |
| | | | | | | | |
Supplemental disclosures of cash flow information: |
|
| |
| | |
|
|
Cash paid for interest | $ | 13,752 | | $ | 21,169 | | $ | 25,425 |
Cash paid for income taxes |
| 41,531 | |
| 39,578 | |
| 46,457 |
Supplemental disclosures of noncash financing and investing activities: |
|
| |
| | |
|
|
Dividends declared and unpaid |
| 23,235 | |
| 22,695 | |
| 21,342 |
Transfers from loans to other real estate |
| 520 | |
| 1,291 | |
| 2,522 |
Acquisitions: |
|
| |
| | |
|
|
Common stock issued |
| 0 | |
| 76,942 | |
| 0 |
Fair value of assets acquired, excluding acquired cash and intangibles |
| 1,339 | |
| 547,654 | |
| 548,856 |
Fair value of liabilities assumed |
| 1,101 | |
| 529,177 | |
| 589,396 |
The accompanying notes are an integral part of the consolidated financial statements.
75
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Community Bank System, Inc. (the “Company”) is a registered financial holding company which wholly-owns 2 significant consolidated subsidiaries: Community Bank, N.A. (the “Bank” or “CBNA”), and Benefit Plans Administrative Services, Inc. (“BPAS”). As of December 31, 2019,2021, BPAS owns 5 subsidiaries: Benefit Plans Administrative Services, LLC (“BPA”), a provider of defined benefit contribution plan administration services; Northeast Retirement Services, LLC (“NRS”), a provider of institutional transfer agency, master recordkeeping services, fund administration, trust and retirement plan services; BPAS Actuarial & Pension Services, LLC (“BPAS-APS”), a provider of actuarial and benefit consulting services; BPAS Trust Company of Puerto Rico, a Puerto Rican trust company; and Hand Benefits & Trust Company (“HB&T”), a provider of collective investment fund administration and institutional trust services. BPA owns one subsidiary, Fringe Benefits Design of Minnesota, Inc. ("FBD"), a provider of retirement plan administration and benefit consulting services. NRS owns 1 subsidiary, Global Trust Company, Inc. (“GTC”), a non-depository trust company which provides fiduciary services for collective investment trusts and other products. HB&T owns 1 subsidiary, Hand Securities Inc. (“HSI”), an introducing broker-dealer. The Company also wholly-owns 1 unconsolidated subsidiary business trust formed for the purpose of issuing mandatorily-redeemable preferred securities which are considered Tier I capital under regulatory capital adequacy guidelines (see Note P).
As of December 31, 2019,2021, the Bank operated 231 full service206 full-service branches and 12 drive-thru only locations operating as Community Bank, N.A. throughout 4042 counties of Upstate New York, 6 counties of Northeastern Pennsylvania, 12 counties of Vermont and 1 county of Western Massachusetts, offering a range of commercial and retail banking services. The Bank owns the following operating subsidiaries: The Carta Group, Inc. (“Carta Group”), CBNA Preferred Funding Corporation (“PFC”), CBNA Treasury Management Corporation (“TMC”), Community Investment Services, Inc. (“CISI”), NOTCH Investment Fund, LLC (“NOTCH”), Nottingham Advisors, Inc. (“Nottingham”), OneGroup NY, Inc. (“OneGroup”), OneGroup Wealth Partners, Inc. ("Wealth Partners") and Oneida Preferred Funding II LLC (“OPFC II”). OneGroup is a full-service insurance agency offering personal and commercial lines of insurance and other risk management products and services. NOTCH, PFC and OPFC II primarily act as investors in residential and commercial real estate activities. TMC provides cash management, investment, and treasury services to the Bank. CISI, and Carta Group and Wealth Partners provide broker-dealer and investment advisory services. Nottingham provides asset management services to individuals, corporations, corporate pension and profit sharing plans, and foundations.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Variable Interest Entities (“VIE”) are legal entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the legal entities to finance its activities without additional subordinated financial support. VIEs may be required to be consolidated by a company if it is determined the company is the primary beneficiary of a VIE. The primary beneficiary of a VIE is the enterprise that has: (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (2) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits of the VIE that could potentially be significant to the VIE. The Company’s VIE’s are described in more detail in Note T to the consolidated financial statements.
Critical Accounting Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Critical accounting estimates include the allowance for loancredit losses, actuarial assumptions associated with the pension, post-retirement and other employee benefit plans, the provision for income taxes, investment valuation, and other-than-temporary impairment, the carrying value of goodwill and other intangible assets, the fair value of contingent consideration liabilities, and acquired loan valuations.
76
Risk and Uncertainties
In the normal course of its business, the Company encounters economic and regulatory risks. There are 3 main components of economic risk: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on a different basis, from its interest-earning assets. The Company’s primary credit risk is the risk of default on the Company’s loan portfolio that results from the borrowers’ inability or unwillingness to make contractually required payments. Market risk reflects potential changes in the value of collateral underlying loans, the fair value of investment securities, and loans held for sale.
The Company is subject to regulations of various governmental agencies. These regulations can change significantly from period to period. The Company also undergoes periodic examinations by the regulatory agencies which may subject it to further changes with respect to asset valuations, amounts of required loancredit loss allowances, and operating restrictions resulting from the regulators’ judgments based on information available to them at the time of their examinations.
The extent to which the ongoing coronavirus pandemic ("COVID-19") impacts the Company's business and financial results depends on numerous evolving factors including, but not limited to: the magnitude and duration of COVID-19, the extent to which it continues to impact national and international macroeconomic conditions including interest rates, unemployment rates, the trajectory of the ongoing economic recovery, and governmental and business reactions to the pandemic. The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company adoptedand the unknown future impacts of COVID-19 as of December 31, 2021 and through the date of this Annual Report on Form 10-K. The accounting matters assessed included, but were not limited to, the Company's allowance for credit losses, changes in fee and interest income, and the carrying value of goodwill and other long-lived assets.
Revenue Recognition
The Company recognizes revenue in accordance with ASU No. 2014-09 Revenue from Contracts with Customers (Topic 606)and all subsequent ASUs that modified Topic 606. The implementation of the new standard did not have a material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.
Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of the newly adopted guidance.scope. Topic 606 is applicable to the Company’s noninterest revenue streams including its deposit related fees, electronic payment interchange fees, merchant income, trust, asset management and other wealth management revenues, insurance commissions and benefit plan services income. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Noninterest revenue streams in-scope of Topic 606 are discussed below.
Deposit Service Fees
Deposit service fees consist of account activity fees, monthly service fees, check orders, debit and credit card income, ATM fees, Merchantmerchant services income and other revenues from processing wire transfers, bill pay service, cashier’s checks and foreign exchange. Debit and credit card income is primarily comprised of interchange fees earned at the time the Company’s debit and credit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. The Company’s performance obligation for deposit service fees is generally satisfied, and the related revenue recognized, when the services are rendered or the transaction has been completed. Payment for deposit service fees is typically received at the time it is assessed through a direct charge to customers’ accounts or on a monthly basis. Deposit service fees revenue primarily relates to the Company’s Banking operating segment.
77
Other Banking Services
Other banking services consists of other recurring revenue streams such as commissions from sales of credit life insurance, safe deposit box rental fees, mortgage banking income, bank owned life insurance income and other miscellaneous revenue streams. Commissions from the sale of credit life insurance are recognized at the time of sale of the policies. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation. Mortgage banking income and bank owned life insurance income are not within the scope of Topic 606. Other banking services revenue primarily relates to the Company’s Banking operating segment.
Employee Benefit Services
Employee benefit services income consists of revenue received from retirement plan services, collective investment fund services, fund administration, transfer agency, consulting and actuarial services. The Company’s performance obligation that relates to plan services are satisfied over time and the resulting fees are recognized monthly or quarterly, based upon the market value of the assets under management and the applicable fee rate or on a time expended basis. Payment is generally received a few days after month end or quarter end. The Company does not earn performance-based incentives. Transactional services such as consulting services, mailings, or other ad hoc services are provided to existing trust and asset management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered. Employee benefit services revenue primarily relates to the Company’s Employee Benefit Services operating segment.
Insurance Services
Insurance services primarily consists of commissions received on insurance product sales and consulting services. The Company acts in the capacity of a broker or agent between the Company’s customer and the insurance carrier. The Company’s performance obligation related to insurance sales for both property and casualty insurance and employee benefit plans is generally satisfied upon the later of the issuance or effective date of the policy. The Company’s performance obligation related to consulting services is considered transactional in nature and is generally satisfied when the services have been completed and related revenue recognized at a point in time. Payment is received at the time services are rendered. The Company earns performance based incentives, commonly known as contingency payments, which usually are based on certain criteria established by the insurance carrier such as premium volume, growth and insured loss ratios. Contingent payments are accrued for based upon management’s expectations for the year. Commission expense associated with sales of insurance products is expensed as incurred. Insurance services revenue primarily relates to the Company’s All Other operating segment.
Wealth Management Services
Wealth management services income is primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company generally has 2 types of performance obligations related to these services. The Company’s performance obligation that relates to advisory and administration services are satisfied over time and the resulting fees are recognized monthly, based upon the market value of the assets under management and the applicable fee rate. Payment is generally received soon after month end or quarter end through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. Transactional services such as tax return preparation services, purchases and sales of investments and insurance products are also available to existing trust and asset management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e. as incurred). Payment is generally received on a monthly basis. Wealth management services revenue primarily relates to the Company’s All Other operating segment.
78
Contract Balances
A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of December 31, 2019, $26.82021, $31.6 million of accounts receivable, including $7.5 million of unbilled fee revenue, and $1.8 million of unearned revenue was recorded in the Consolidated Statements of Condition. As of December 31, 2018, $26.4 million of accounts receivable, including $7.8$9.1 million of unbilled fee revenue, and $2.2 million of unearned revenue was recorded in the Consolidated Statementsconsolidated statements of Condition.
Contract Acquisition Costs
Under the adoptionguidance of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient method which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, the Company did not capitalize any contract acquisition costs.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and highly liquid investments with original maturities of less than 90 days. The carrying amounts reported in the Consolidated Statementsconsolidated statements of Conditioncondition for cash and cash equivalents approximate those assets’ fair values. As of December 31, 20192021 and 2018,2020, cash and cash equivalents reported in the consolidated statements of condition included cash due from banks of $10.4$11.0 million and $15.0$7.7 million, respectively.
Investment Securities
The Company can classify its investments in debt securities as held-to-maturity, available-for-sale, or trading. Held-to-maturity securities are those for which the Company has the positive intent and ability to hold until maturity, and are reported at cost, which is adjusted for amortization of premiums and accretion of discounts. The Company did not use the held-to-maturity classification in 20182021 or 2019.2020. Available-for-sale debt securities are reported at fair value with net unrealized gains and losses reflected as a separate component of shareholders'shareholders’ equity, net of applicable income taxes. None of the Company'sCompany’s investment securities have been classified as trading securities at December 31, 2019.2021 or 2020.
Interest income includes amortization of purchase premiums or discounts. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Gains and losses are recorded on the trade date and determined using the specific identification method. Equity securities with a readily determinable fair value are reported at fair value with net unrealized gains and losses recognized in the Consolidated Statementconsolidated statements of Income.income. Certain equity securities that do not have a readily determinable fair value are stated at cost, less impairment, adjusted for observable price changes in orderly transactions for identical or similar investments of the same issuer. These securities include restricted stock of the Federal Reserve Bank of New York (“Federal Reserve”) and the Federal Home Loan Bank of New York and the Federal Home Loan Bank of Boston (collectively referred to as “FHLB”), as well as other equity securities.
Fair values for investment securities are based upon quoted market prices, where available. If quoted market prices are not available, fair values are based upon quoted market prices of comparable instruments, or a discounted cash flow model using market estimates of interest rates and volatility.
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Allowance for Credit Losses – Debt Securities
For held-to-maturity debt securities, the Company measures expected credit losses on a collective basis by major security type. The Company conducts an assessmentestimates of allexpected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Accrued interest receivable on held-to-maturity securities is excluded from the estimate of credit losses.
For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to determine if other-than-temporary impairment (“OTTI”) exists on a quarterly basis. An unrealized loss exists whensell, or it more likely than not that it will be required to sell the current fair valuesecurity before recovery of an individual security is less than its amortized cost basis. The OTTIIf either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For available-for-sale debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the security structure, recent security collateral performance metrics, if applicable, external credit ratings, failure of the issuer to make scheduled interest or principal payments, judgment about and expectations of future performance, and relevant independent industry research, analysis, and forecasts. The severity of the impairment and the length of time the security has been impaired is also considered in the assessment. TheThis assessment of whether an OTTI decline exists is performed on each security, regardless of the classification of the security as available-for-sale or held-to-maturity, and involves a high degree of subjectivity and judgment that is based on the information available to management at a point in time.
Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit losses in the consolidated statements of income. Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
Accrued interest receivable on available-for-sale debt securities, included in accrued interest and fees receivable on the consolidated statements of condition, totaled $15.8 million and $13.3 million at December 31, 2021 and 2020, respectively, and is excluded from the estimate of credit losses.
Prior to the adoption of ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326) on January 1, 2020, all debt securities in an unrealized loss position were assessed for other-than-temporary impairment (“OTTI”) and an OTTI loss must bewas recognized in income for aany debt security in an unrealized loss position if there iswas intent to sell the security or it iswas more likely than not the Company will bewas required to sell the security prior to recovery of its amortized cost basis. In this situation, the amount of loss recognized in income is equal to the difference between the fair value and the amortized cost basis of the security. Even if
Loans
Loans that management does not havehas the intent and it is not more likely than not thatability to hold for the Company will be required to sell the securities, an evaluationforeseeable future or until maturity or payoff are reported at amortized cost, net of the expected cash flows to be received is performed to determine if aallowance for credit loss has occurred. For debt securities, a critical component of the evaluation for OTTIlosses. Amortized cost is the identificationprincipal balance outstanding, net of credit-impaired securities, where the Company does not expect to receive cash flows sufficient to recover the entire amortized cost basis of the security. In the event of a credit loss, only the amount of impairment associated with the credit loss would be recognized in income. The portion of the unrealized loss relating to other factors, such as liquidity conditions in the market or changes in market interest rates, is recorded in accumulated other comprehensive loss.
Mortgage loans held for sale are carried at fair value and are included in loans held for sale on the consolidated statements of condition. Fair values for variable rate loans that reprice frequently are based on carrying values. Fair values for fixed rate loans are estimated using discounted cash flows and interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The carrying amount of accrued interest approximates its fair value.
Interest on loans is accrued and credited to operations based upon the principal amount outstanding. Nonrefundable loan fees and related direct costs are deferred and included in the loan balances where they are amortized over the life of the loan as an adjustment to loan yield using the effective yield method. Premiums and discounts on purchased loans are amortized using the effective yield method over the life of the loans.
Accrued interest receivable on loans
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The Company places a loan on nonaccrual status when the loan becomes 90 days past due (or sooner, if management concludes collection is doubtful), except when, in the opinion of management, it is well-collateralized and in the process of collection. A loan may be placed on nonaccrual status earlier than 90 days past due if there is deterioration in the financial position of the borrower or if other conditions of the loan so warrant. When a loan is placed on nonaccrual status, uncollected accrued interest is reversed against interest income and the amortization of nonrefundable loan fees and related direct costs is discontinued. Interest income during the period the loan is on nonaccrual status is recorded on a cash basis after recovery of principal is reasonably assured. Nonaccrual loans are returned to accrual status when management determines that the borrower’s performance has improved and that both principal and interest are collectible. This generally requires a sustained period of timely principal and interest payments and a well-documented credit evaluation of the borrower’s financial condition.
The Company’s charge-off policy by loan type is as follows:
● | Business lending loans are generally charged-off to the extent outstanding principal exceeds the fair value of estimated proceeds from collection efforts, including liquidation of collateral. The charge-off is recognized when the loss becomes reasonably quantifiable. |
● | Consumer installment loans are generally charged-off to the extent outstanding principal exceeds the fair value of collateral, and are recognized by the end of the month in which the loan becomes 90 days past due. |
● | Consumer mortgage and home equity loans are generally charged-off to the extent outstanding principal exceeds the fair value of the property, less estimated costs to sell, and are recognized when the loan becomes 180 days past due. |
Allowance for LoanCredit Losses
The allowance for credit losses is a valuation account that is netted against the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed.
Management continually evaluatesestimates the allowance balance using relevant available information from internal and external sources relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit qualityloss experience provides the basis for the estimation of expected credit losses. Adjustments are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, acquired loans, delinquency level, risk ratings or term of loans as well as changes in macroeconomic conditions, such as changes in unemployment rates, property values such as home prices, commercial real estate prices and automobile prices, gross domestic product, recession probability, and other relevant factors.
The segments of the Company’sCompany's loan portfolio are disaggregated into the following classes that allow management to monitor risk and performsperformance:
● | Business lending is comprised of general purpose commercial and industrial loans including, but not limited to, agricultural-related and dealer floor plans, loans to not-for-profit enterprises, as well as mortgages on commercial property and Paycheck Protection Program ("PPP") loans. The portfolio segment is further broken into portfolio classes based on risks associated with the collateral supporting the loans. Each class of business lending can also have different payment structures. Business lending loans are generally higher dollar loans and a large portion are risk rated at least annually. |
● | Consumer mortgages consist primarily of fixed rate residential instruments, typically 10 - 30 years in contractual term, secured by first liens on real property. FICO scores are used to monitor higher risks related to this type of lending with FICO AB referring to higher tiered loans with FICO scores greater than or equal to 720 as compared to FICO CDE with lower FICO scores less than 720 and potentially higher risk. |
● | Consumer indirect consists primarily of installment loans originated through selected dealerships and are generally secured by automobiles, marine and other recreational vehicles. Collateral securing the loans was used to further disaggregate this portfolio as charge-offs can vary depending on the purpose of the loan. Non-auto loans often have longer terms, and generally have higher risk due to declines in collateral value given the nature of the property. |
● | Consumer direct consists of all other loans to consumers such as personal installment loans and check credit lines of credit. |
● | Home equity products are installment loans or lines of credit most often secured by a first or second lien position on residential real estate with terms up to 30 years. |
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The allowance for credit losses is measured on a formal review ofcollective (pool) basis when similar risk characteristics exist, including collateral type, credit ratings/scores, size, duration, interest rate structure, industry, geography, origination vintage, and payment structure. The Company has identified the adequacy offollowing portfolio segments and classes and measures the allowance for credit losses using the following methods:
| | | | |
Loan Portfolio Segment | Loan Portfolio Class | Allowance for Credit Losses Methodology | ||
Business lending | Commercial real estate multi family | Cumulative loss rate | ||
Business lending | Commercial real estate non-owner occupied | Cumulative loss rate | ||
Business lending | Commercial real estate owner occupied | Cumulative loss rate | ||
Business lending | Commercial and industrial loans | Vintage loss rate | ||
Business lending | Commercial and industrial lines of credit | Line loss | ||
Business lending | Municipal | Cumulative loss rate | ||
Business lending | Other business | Cumulative loss rate | ||
Business lending | Paycheck Protection Program | Cumulative loss rate | ||
Consumer mortgage | Consumer mortgage FICO AB | Cumulative loss rate | ||
Consumer mortgage | Consumer mortgage FICO CDE | Cumulative loss rate | ||
Consumer indirect | Indirect new auto | Vintage loss rate | ||
Consumer indirect | Indirect used auto | Vintage loss rate | ||
Consumer indirect | Indirect non-auto | Vintage loss rate | ||
Consumer direct | Consumer check credit | Line loss | ||
Consumer direct | Consumer direct | Vintage loss rate | ||
Home equity | Home equity fixed rate | Vintage loss rate | ||
Home equity | Home equity lines of credit | Line loss |
The cumulative loss rate method uses historical loss data applied against multiple pools of loans and uses a quantitatively based management overlay in order to capture the risk for a loan's entire expected life. These loss rates are then applied to current balances to achieve a required reserve before qualitative adjustments.
The line loss method calculates the quantitative required reserve for lines of credit. This method contains several different underlying calculations including average annual loss rate, pay-down rate, cumulative loss, average draw percentage, and undrawn liability reserve.
The vintage loss rate method calculates annual loss rates by origination year. The results of this model are then applied to outstanding balances, which correspond to the origination period for each annual loss rate.
In addition to the risk characteristics noted above, management considers the portion of acquired loans to the overall segment balance, as well as current delinquency and charge-off trends compared to historical time periods.
Loans that do not share risk characteristics are evaluated on an individual basis. Loans that are individually assessed are not included in the collective evaluation. When management determines that foreclosure is probable or when the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.
Expected credit losses are estimated over the contractual term of the loans and adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.
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Certain business lending, consumer direct, and home equity loans do not have stated maturities. In determining the estimated life of these loans, management first estimates the future cash flows expected to be received and then applies those expected future cash flows to the balance. Expected credit losses for lines of credit with no stated maturity are determined by estimating the amount and timing of all principal payments expected to be received after the reporting period and allocating those principal payments between the balance outstanding as of the reporting period and the balance of future receivables expected to be originated through subsequent usage of the unconditionally cancellable loan commitment associated with the account until the expected payments have been fully allocated. An additional allowance for credit loss is recorded for the excess of the balance outstanding as of the reporting period over the expected principal payments allocated to that balance.
Prior to the adoption of ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326) on January 1, 2020, the allowance for credit losses on a quarterly basis. The allowance reflectsreflected management’s best estimate of probable losses inherent in the loan portfolio. Determination
Troubled Debt Restructuring
A loan for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, is considered to be a troubled debt restructuring ("TDR"). The allowance for credit loss on a TDR is measured using the same method as all other loans, except when the value of a concession cannot be measured using a method other than the discounted cash flow method. When the value of a concession is measured using the discounted cash flow method, the allowance for credit loss is determined by discounting the expected future cash flows at the original interest rate of the loan. Refer to Note D: Loans for the Company's policy regarding COVID-19 related financial hardship payment deferrals.
Allowance for Credit Losses - Off-balance-sheet credit exposures
The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. There are unfunded commitments for lines of credit within each of the Company's loan portfolio segments except consumer indirect. The allowance for credit losses on off-balance-sheet credit exposures is subjectiveadjusted as a provision for (or reversal of) credit losses. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in nature and requires significant estimates. The Company’s allowance methodology consists of 2 broad components - general and specific loan loss allocations.
Purchased Credit Deteriorated (“PCD”) Loans
The first calculation is quantitative and determines an allowance level based onCompany has purchased loans, some of which have experienced a more-than-insignificant credit deterioration since origination. The Company's policy for reviewing what meets the latest 36 months of historical net charge-off data for each loan class (commercial loans exclude balances with specific loan loss allocations). The second calculation is qualitative and takes into consideration 8 qualitative environmental factors: levels and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards, and other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. A componentthreshold of the qualitative calculation is the unallocated allowance for loan loss. The qualitative and quantitative calculations are added together to determine the general loan loss allocation. The specific loan loss allocation relates to individual commercialdefinition of a more-than-insignificant credit deterioration includes loans that are both greaterdelinquent more than $0.5 million30 days, loans that have historical delinquencies of more than 30 days at least three times since origination, risk rating downgrades since origination, loans with multiple payment deferrals, loans considered to be troubled debt restructurings, individually assessed loans or loans with certain documented policy exceptions, further refined based on loan-specific facts and incircumstances. PCD loans are initially recorded at the amount paid. An allowance for credit losses is determined using the same methodology as other loans. The initial allowance for credit losses determined on a nonaccruing status with respectcollective basis is allocated to interest. Specificindividual loans. The sum of the loan's purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are basedrecorded as provision for (or reversal of) credit losses.
Prior to the adoption of ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326) on discounted estimated cash flows, including any cash flows resulting from the conversion of collateral or collateral shortfalls. The allowance levels computed from the specific and general loan loss allocation methods are combined with unallocated allowances and allowances needed forJanuary 1, 2020, acquired loans that had evidence of deterioration in credit quality since origination and for which it was probable, at acquisition, that the Company would be unable to derivecollect all contractually required payments were accounted for as impaired loans under ASC 310-30. Acquired impaired loans were initially recorded at fair value with no initial allowance for credit losses recorded at acquisition.
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Non-Purchased Credit Deteriorated (“non-PCD”) Loans
Acquired loans that are not deemed to have experienced a more-than-insignificant credit deterioration since origination are considered non-PCD. At the totalacquisition date, a fair value adjustment is recorded that includes both credit and interest rate considerations. Fair value adjustments may be discounts (or premiums) to a loan’s cost basis and are accreted (or amortized) to net interest income (or expense) over the loan’s remaining life. Fair value adjustments for revolving loans are accreted (or amortized) using a straight line method. Term loans are accreted (or amortized) using the constant effective yield method. A provision for credit losses is also recorded at acquisition for the credit considerations on non-PCD loans. Subsequent to the purchase date, the methods utilized to estimate the required allowance for loancredit losses for these loans are the same as originated loans and subsequent changes to be reflected on the Consolidated Statement of Condition.
Prior to the allowance. A provisionadoption of ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326) on January 1, 2020, acquired loans that did not meet the requirements under ASC 310-30 were considered acquired non-impaired loans and were accounted for loanin accordance with ASC 310-20. Acquired non-impaired loans were initially recorded at fair value with no initial allowance for credit losses is charged to operations based on management’s periodic evaluation of factors previously mentioned.
Intangible Assets
Intangible assets include core deposit intangibles, customer relationship intangibles and goodwill arising from acquisitions. Core deposit intangibles and customer relationship intangibles are amortized on either an accelerated or straight-line basis over periods rangingfrom seven to 20 years. The initial and ongoing carrying value of goodwill and other intangible assets is based upon discounted cash flow modeling techniques that require management to make estimates regarding the amount and timing of expected future cash flows. It also requires use of a discount rate that reflects the current return requirements of the market in relation to present risk-free interest rates, required equity market premiums, peer volatility indicators, and company-specific risk indicators.
The Company evaluates goodwill for impairment on an annual basis, or more often if events or circumstances indicate there may be impairment. The implied fair value of a reporting unit’s goodwill is compared to its carrying amount and the impairment loss is measured by the excess of the carrying value over fair value. The fair value of each reporting unit is compared to the carrying amount of that reporting unit in order to determine if impairment is indicated.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Computer software costs that are capitalized include only external direct costs of obtaining and installing the software. The Company has not developed any internal use software. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Useful lives range from two to 20 years for equipment; three to seven years for software and hardware;hardware; and 10 to 40 years for building and building improvements. Land improvements are depreciated over 20 years and leasehold improvements are amortized over the shorter of the term of the respective lease plus any optional renewal periods that are reasonably assured or life of the asset. Maintenance and repairs are charged to expense as incurred.
Leases
The Company occupies certain offices and uses certain equipment under non-cancelable operating lease agreements. The Company determines if an arrangement is a lease at inception. The right-of-use assets associated with operating leases are recorded in premises and equipment in the Company’s consolidated statements of condition. The lease liabilities associated with operating leases are included in accrued interest and other liabilities in the Company’s consolidated statements of condition.
Right-of-use assets represent the Company’s right to use the underlying assets for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the associated leases. Operating lease right-of-use assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. The Company uses interest rates on advances from the FHLB available at the time of commencement to determine the present value of lease payments. The operating lease right-of-use assets include any lease payments made at the time of commencement and exclude lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. Lease expense is recognized on a straight-line basis over the lease term and is included in occupancy and equipment expense in the Company’s consolidated statements of income.
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The Company elected to account for lease and non-lease components separately, applies a portfolio approach to account for the lease right-of-use assets and liabilities for certain equipment leases and elected to exclude leases with a term of 12 months or less from the recognition and measurement policies described above.
Other Real Estate
Other real estate owned is comprised of properties acquired through foreclosure, or by deed in lieu of foreclosure. These assets are carried at fair value less estimated costs of disposal. At foreclosure, if the fair value, less estimated costs to sell, of the real estate acquired is less than the Company’s recorded investment in the related loan, a write-down is recognized through a charge to the allowance for loancredit losses. Any subsequent reduction in value is recognized by a charge to income. Operating costs associated with the properties are charged to expense as incurred. At December 31, 20192021 and 2018,2020, other real estate totaled $1.3$0.7 million and $1.3$0.9 million, respectively, and is included in other assets.
Mortgage Servicing Rights
Originated mortgage servicing rights are recorded at their fair value at the time of sale of the underlying loan, and are amortized in proportion to and over the period of estimated net servicing income or loss. The Company uses a valuation model that calculates the present value of future cash flows to determine the fair value of servicing rights. In using this valuation method, the Company incorporates assumptions that market participants would use in estimating future net servicing income, which includes estimates of the servicing cost per loan, the discount rate, and prepayment speeds. The carrying value of the originated mortgage servicing rights is included in other assets and is evaluated quarterly for impairment using these same market assumptions. The amount of impairment recognized is the amount by which the carrying value of the capitalized servicing rights for a stratum exceeds estimated fair value. Impairment is recognized through a valuation allowance.
Treasury Stock
Repurchases of shares of the Company’s common stock are recorded at cost as a reduction of shareholders’ equity. Reissuance of shares of treasury stock is recorded at average cost.
Income Taxes
The Company and its subsidiaries file a consolidated federal income tax return. ProvisionsProvision for income taxes areis based on taxes currently payable or refundable as well as deferred taxes that are based on temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. Deferred tax assets and liabilities are reported in the consolidated financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled.
Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority having full knowledge of all relevant information. A tax position meeting the more-likely-than-not recognition threshold should be measured at the largest amount of benefit for which the likelihood of realization upon ultimate settlement exceeds 50 percent. Should tax laws change or the taxing authorities determine that management’s assumptions were inappropriate, an adjustment may be required which could have a material effect on the Company’s results of operations.
Investments in Real Estate Limited Partnerships
The Company has investments in various real estate limited partnerships that acquire, develop, own and operate low and moderate-income housing. The Company’s ownership interest in these limited partnerships ranges from 5.00% to 99.99% as of December 31, 2019.2021. These investments are made directly in Low Income Housing Tax Credit, or LIHTC, partnerships formed by third parties. As a limited partner in these operating partnerships, the Company receives tax credits and tax deductions for losses incurred by the underlying properties.
The Company accounts for its ownership interest in LIHTC partnerships in accordance with Accounting Standards Update (“ASU”) 2014-01, Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects. The standard permits an entity to amortize the initial cost of the investment in proportion to the amount of the tax credits and other tax benefits received and recognize the net investment performance in the income statement as a component of income tax expense. The Company has unfunded commitments of $0.4$0.2 million at year-endDecember 31, 2021 related to qualified affordable housing project investments, which will be funded in 2020.2022. There were 0 impairment losses during the year resulting from the forfeiture or ineligibility of tax credits related to qualified affordable housing project investments.
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Repurchase Agreements
The Company sells certain securities under agreements to repurchase. These agreements are treated as collateralized financing transactions. These secured borrowings are reflected as liabilities in the accompanying consolidated statements of condition and are recorded at the amount of cash received in connection with the transaction. Short-term securities sold under agreements to repurchase generally mature within one day from the transaction date. Securities, generally U.S. government and federal agency securities, pledged as collateral under these financing arrangements can be repledged by the secured party. Additional collateral may be required based on the fair value of the underlying securities.
Retirement Benefits
The Company provides defined benefit pension benefits to eligible employees and post-retirement health and life insurance benefits to certain eligible retirees. The Company also provides deferred compensation and supplemental executive retirement plans for selected current and former employees, officers, and directors. Expense under these plans is charged to current operations and consists of several components of net periodic benefit cost based on various actuarial assumptions regarding future experience under the plans, including discount rate, rate of future compensation increases and expected return on plan assets.
Derivative Financial Instruments and Hedging Activities
The Company accounts for derivative financial instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (1) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment (“fair value hedge”), (2) a hedge of the exposure to variable cash flows of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), or (3) an instrument with no hedging designation (“stand-alone derivative”). For a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item, are recognized in current earnings as fair values change. For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transaction affects earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, as noninterest revenues.
Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in noninterest revenues. Cash flows on hedges are classified in the consolidated statement of cash flow statement the same as the cash flows of the items being hedged.
The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and strategy for undertaking hedge transactions at the inception of the hedging relationship. This documentation includes linking the fair value or cash flow hedges to specific assets and liabilities on the statement of condition or to specific commitments or forecasted transactions.
When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded in noninterest revenues. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued, but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods which the hedged transactions will affect earnings.
Assets Under Management or Administration
Assets held in fiduciary or agency capacities for customers are not included in the accompanying consolidated statements of condition as they are not assets of the Company. All fees associated with providing asset management services are recorded on an accrual basis of accounting and are included in noninterest income.
Advertising
Advertising costs, amounting to approximately $7.1 million, $5.1 million and $5.7 million for the years ending December 31, 2019, 2018 and 2017, respectively,which are nondirect response in nature and expensed as incurred.incurred, totaled approximately $5.2 million, $6.1 million and $7.1 million for the years ending December 31, 2021,2020 and 2019, respectively.
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Bank Owned Life Insurance
The Company owns life insurance policies on certain current and former employees and directors where the Bank is the beneficiary. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value (“CSV”) adjusted for other charges or other amounts due that are probable at settlement. Increases in the CSV of the policies, as well as the death benefits received, net of any CSV, are recorded in noninterest income, and are not subject to income taxes.
Earnings Per Share
Using the two-class method, basic earnings per common share is computed based upon net income available to common shareholders divided by the weighted average number of common shares outstanding during each period, which excludes the outstanding unvested restricted stock. Diluted earnings per share is computed using the weighted average number of common shares determined for the basic earnings per common share computation plus the dilutive effect of stock options using the treasury stock method. Stock options where the exercise price is greater than the average market price of common shares were not included in the computation of earnings per diluted share as they would have been anti-dilutive. Shares held in rabbi trusts related to deferred compensation plans are considered outstanding for purposes of computing earnings per share.
Stock-based Compensation
Companies are required to measure and record compensation expense for stock options and other share-based payments on the instruments’ fair value on the date of grant. Stock-based compensation expense is recognized ratably over the requisite service period for all awards (see Note L).
Fair Values of Financial Instruments
The Company determines fair values based on quoted market values where available or on estimates using present values or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments are excluded from this disclosure requirement. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The fair values of investment securities, loans, deposits, and borrowings have been disclosed in Note R.
Contingent Consideration
The Company measures contingent consideration liabilities recognized in connection with business combinations at fair value on a recurring basis using significant unobservable inputs classified within Level 3 of the fair value hierarchy as defined in ASC 820 Fair Value Measurement. The Company used a probability-weighted discounted cash flow approach as a valuation technique to determine the fair value of the contingent consideration on the acquisition date. At each subsequent reporting period, the fair value is re-measured with the change in fair value recognized in noninterest expenses in the consolidated statements of income. Amounts, if any, paid to the seller in excess of the amount recorded on the acquisition date will be classified as cash flows used in operating activities. Payments to the seller not exceeding the acquisition-date fair value of the contingent consideration will be classified as cash flows used in financing activities.
Reclassifications
Certain reclassifications have been made to prior years’ balances to conform to the current year presentation.
Recently Adopted Accounting Pronouncements
In August 2018, the FASB issued ASU No. 2018-14, Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans (Subtopic 715-20). The updated guidance removed the requirements to identify amounts that are expected to be reclassified out of accumulated other comprehensive income and recognized as components of net periodic benefit cost in the next fiscal year, as well as the effects of a one-percentage-point change in assumed health care cost trend rates on service and interest cost and on the postretirement benefit obligation. The updated guidance added annual disclosure requirements for the weighted-average interest crediting rates for cash balance plans and other plans with interest crediting rates, and explanations for significant gains and losses related to changes in the benefit obligation for the period. This new guidance is effective retrospectively for fiscal years beginning after December 15, 2020 with early adoption permitted. The Company is currently evaluating the impactsadopted this guidance on January 1, 2021 and determined the adoption of this guidance willdid not have a material impact on the Company’s consolidated financial statements.
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In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). The updated guidance simplifiessimplified the accounting for income taxes by removing certain exceptions to the general principles in Topic 740, and clarifyingclarified and amendingamended existing guidance to improve consistent application. This new guidance is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted in any interim periods for which financial statements have not been issued. The Company is currently evaluating the impactadopted this guidance on January 1, 2021 and determined the adoption of this guidance willdid not have a material impact on the Company’s consolidated financial statements.
New Accounting Pronouncements
In March 2020, the FASB issued ASU No. 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848). The updated guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this guidance apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This new guidance is effective as of March 12, 2020 through December 31, 2022. Adoption is permitted in any interim periods for which financial statements have not been issued. The Company has not yet fully adopted this standard. The Company has established a working group that includes multiple functions to guide the transition from LIBOR to alternative reference rates. The Company has identified all known LIBOR exposures, created a preliminary plan to address the exposures, and new originations either do not utilize LIBOR or replacement rate language, provisions, and conventions have been specified. The Company continues to evaluate its exposure to LIBOR and communicate with all stakeholders in order to facilitate the transition. As the Company's exposure to LIBOR-based loans and financial instruments is insignificant, the Company does not expect the adoption of this standard will have a material impact on the Company's consolidated financial statements.
NOTE B: ACQUISITIONS
Pending Acquisition – Steuben Trust Corporation
On October 21, 2019,4, 2021, the Company announced that itthe Bank had entered into a definitivean agreement to acquire Elmira Savings Bank (“Elmira”), a 12 branch banking franchise headquartered in Elmira, New York, for $82.8 million in cash. The acquisition will enhance the Company’s presence in 5 counties in New York’s Southern Tier and Finger Lakes regions. The merger was approved by the shareholders of Elmira on December 14, 2021. The Company expects to complete the acquisition in the second quarter of 2022, subject to customary closing conditions, including required regulatory approval. The Company expects to incur certain one-time, transaction-related costs in connection with the Elmira acquisition.
Current and Prior Period Acquisitions
On August 2, 2021, the Company, through its subsidiary OneGroup NY, Inc. (“OneGroup”), completed its acquisition of certain assets and liabilities of the Thomas Gregory Associates Insurance Brokers, Inc. (“TGA”), a specialty-lines insurance broker based in the Boston, Massachusetts area, for $11.6 million in cash plus contingent consideration with a fair value at acquisition date of $1.5 million. The Company recorded a $10.9 million customer list intangible asset and $2.2 million of goodwill in conjunction with the acquisition. The effects of the acquired assets and liabilities have been included in the consolidated financial statements since that date. Revenues of approximately $0.6 million and direct expenses of approximately $0.6 million from TGA were included in the consolidated income statement for the year ended December 31, 2021.
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The acquisition of TGA includes a contingent consideration arrangement that requires additional consideration to be paid by the Company based on the future retained revenue of TGA over a three-year period. Amounts are payable in two payments, the first of which is two years after the acquisition date, and the second three years after the acquisition date. The range of the undiscounted amounts the Company could pay under the contingent consideration agreement is between 0 and $3.4 million. The fair value of the contingent consideration recognized on the acquisition date of $1.5 million was estimated by applying the income approach; a measure that is based on significant Level 3 inputs not readily observable in the market. Key assumptions at the date of acquisition include (1) a discount rate range of 0.82% to 1.09%, and (2) probability adjusted level of retained revenue between $2.3 million and $3.8 million.
The contingent consideration related to the TGA acquisition was revalued at December 31, 2021. The range of the undiscounted amounts the Company could pay under the agreement remained at between 0 and $3.4 million. Key assumptions include (1) a discount rate range of 1.38% to 1.65%, and (2) probability adjusted level of retained revenue between $3.0 million and $3.4 million. Based on the results of the revaluation, no adjustments were made to the fair value of the contingent consideration related to the TGA acquisition at December 31, 2021.
On July 1, 2021, the Company, through its subsidiary BPA, completed its acquisition of Fringe Benefits Design of Minnesota, Inc. (“FBD”) for $15.4 million in cash plus contingent consideration with a fair value at acquisition date of $1.4 million. The Company recorded a $14.0 million customer list intangible asset and $2.0 million of goodwill in conjunction with the acquisition. The effects of the acquired assets have been included in the consolidated financial statements since that date. Revenues of approximately $2.8 million and direct expenses of approximately $2.5 million from FBD were included in the consolidated income statement for the year ended December 31, 2021.
The acquisition of FBD includes a contingent consideration arrangement that requires additional consideration to be paid by the Company based on the future retained revenue of FBD over a two-year period. Amounts are payable three years after the acquisition date. The range of the undiscounted amounts the Company could pay under the contingent consideration agreement is between 0 and $2.7 million. The fair value of the contingent consideration recognized on the acquisition date of $1.4 million was estimated by applying the income approach; a measure that is based on significant Level 3 inputs not readily observable in the market. Key assumptions at the date of acquisition include (1) a discount rate of 1.05%, and (2) probability adjusted level of retained revenue between $5.6 million and $5.8 million.
The contingent consideration related to the FBD acquisition was revalued at December 31, 2021. The range of the undiscounted amounts the Company could pay under the agreement remained at between 0 and $2.7 million. Key assumptions include (1) a discount rate of 1.50%, and (2) probability adjusted level of retained revenue between $5.6 million and $5.8 million. Based on the results of the revaluation, the Company recorded a $0.2 million acquisition-related contingent consideration adjustment in the consolidated statements of income related to the FBD acquisition, resulting in an adjusted fair value of $1.6 million at December 31, 2021.
On June 1, 2021, the Company, through its subsidiary OneGroup, completed its acquisition of certain assets and liabilities of NuVantage Insurance Corp. (“NuVantage”), an insurance agency headquartered in Melbourne, Florida. The Company paid $2.9 million in cash and recorded a $1.4 million customer list intangible asset and $1.4 million of goodwill in conjunction with the acquisition. The effects of the acquired assets and liabilities have been included in the consolidated financial statements since that date. Revenues of approximately $0.7 million and direct expenses of approximately $0.6 million from NuVantage were included in the consolidated income statement for the year ended December 31, 2021.
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On June 12, 2020, the Company completed its merger with Steuben Trust Corporation (“Steuben”), parent company of Steuben Trust Company, a New York State chartered bank headquartered in Hornell, New York, for approximately $104.4$98.6 million in Company stock and cash. Steuben currently operates 14 branch locationscash, comprised of $21.6 million in Western New York.cash and the issuance of 1.36 million shares of common stock. The acquisition will extendmerger extended the Company’s footprint into 2 new counties in Western New York State, and enhanceenhanced the Company’s presence in 4 Western New York State counties in which it currently operates. In connection with the merger, the Company added 11 full-service offices to its branch service network and acquired $607.8 million of assets, including $339.7 million of loans and $180.5 million of investment securities, as well as $516.3 million of deposits. Goodwill of $20.0 million was recognized as a result of the merger. The acquisition is expected to close duringeffects of the second quarteracquired assets and liabilities have been included in the consolidated financial statements since that date. Revenues, excluding interest income on acquired investments, interest income on acquired consumer indirect loans, and revenues associated with acquired loans and deposits consolidated into the legacy branch network, of approximately $13.1 million and $7.7 million, and direct expenses, which may not include certain shared expenses, of approximately $5.1 million and $2.6 million from Steuben were included in the consolidated income statement for the years ended December 31, 2021 and 2020, pending both customary regulatory and Steuben shareholder approval.respectively. The Company expects to incurincurred certain one-time, transaction-related costs in 2020 in connection with the Steuben acquisition.
On September 18, 2019, the Company, through its subsidiary, CISI, completed its acquisition of certain assets of a practice engaged in the financial services business headquartered in Syracuse, New York. The Company paid $0.5 million in cash to acquire a customer list, and recorded a $0.5 million customer list intangible asset in conjunction with the acquisition. The effects of the acquired assets have been included in the consolidated financial statements since that date.
On July 12, 2019, the Company completed its merger with Kinderhook Bank Corp. (“Kinderhook”), parent company of The National Union Bank of Kinderhook, headquartered in Kinderhook, New York, for $93.4 million in cash. The merger added 11 branch locations across a 5 county area in the Capital District of Upstate New York. The merger resulted in the acquisition of $642.8 million of assets, including $479.9 million of loans and $39.8 million of investment securities, as well as $568.2 million of deposits and $40.3$40.0 million in goodwill. The effects of the acquired assets and liabilities have been included in the consolidated financial statements since that date. Revenues, excluding interest income on acquired investments, of approximately $11.8 million, $16.3 million, and $10.6 million and direct expenses, which may not include certain shared expenses, of approximately $7.1 million, $7.4 million, and $4.7 million from Kinderhook were included in the consolidated income statementstatements for the yearyears ended December 31, 2019.
On January 2, 2019, the Company, through its subsidiary, CISI, completed its acquisition of certain assets of Wealth Resources Network, Inc. (“Wealth Resources”), a financial services business headquartered in Liverpool, New York. The Company paid $1.2 million in cash to acquire a customer list from Wealth Resources, and recorded a $1.2 million customer list intangible asset in conjunction with the acquisition. The effects of the acquired assets have been included in the consolidated financial statements since that date.
The assets and liabilities assumed in the acquisitions were recorded at their estimated fair values based on management’s best estimates using information available at the dates of the acquisition,acquisitions, and were subject to adjustment based on updated information not available at the time of acquisition.the acquisitions. During the first quarter of 2018,2021, the carrying amount of other liabilities associated with the NRSSteuben acquisition decreased by $
The above referenced acquisitions generally expanded the Company’s geographical presence in New York, Pennsylvania, Vermont,Florida, Massachusetts, and Western MassachusettsMinnesota, and management expects that the Company will benefit from greater geographic diversity and the advantages of other synergistic business development opportunities.
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The following table summarizes the estimated fair value of the assets acquired and liabilities assumed after considering the measurement period adjustments described above:
| | | | | | | | | | | | | | | | | |
|
| 2021 | | | 2020 | | 2019 | ||||||||||
(000s omitted) |
| TGA | | FBD |
| NuVantage |
| Total | | | Steuben |
| Total (1) | ||||
Consideration: | | | | |
| | |
| | |
| | | | | |
|
Cash | $ | 11,620 | | $ | 15,350 | | $ | 2,900 | | $ | 29,870 | | $ | 21,613 | | $ | 95,034 |
Community Bank System, Inc. common stock | | 0 | |
| 0 | |
| 0 | |
| 0 | | | 76,942 | |
| 0 |
Contingent consideration | | 1,500 | | | 1,400 | | | 0 | | | 2,900 | | | 0 | | | 0 |
Total net consideration | | 13,120 | |
| 16,750 | |
| 2,900 | |
| 32,770 | | | 98,555 | |
| 95,034 |
Recognized amounts of identifiable assets acquired and liabilities assumed: | | | |
|
| |
|
| |
|
| | | | |
|
|
Cash and cash equivalents | | 0 | |
| 541 | |
| 0 | |
| 541 | | | 55,973 | |
| 90,381 |
Investment securities | | 0 | |
| 0 | |
| 0 | |
| 0 | | | 180,497 | |
| 39,770 |
Loans, net of allowance for credit losses on PCD loans (2) | | 0 | |
| 0 | |
| 0 | |
| 0 | | | 339,017 | |
| 479,877 |
Premises and equipment, net | | 279 | |
| 282 | |
| 199 | |
| 760 | | | 7,764 | |
| 13,970 |
Accrued interest and fees receivable | | 0 | |
| 0 | |
| 0 | |
| 0 | | | 2,701 | |
| 1,130 |
Other assets | | 0 | |
| 579 | |
| 0 | |
| 579 | | | 17,675 | |
| 14,109 |
Core deposit intangibles | | 0 | |
| 0 | |
| 0 | |
| 0 | | | 2,928 | |
| 3,573 |
Other intangibles | | 10,900 | |
| 14,000 | |
| 1,437 | |
| 26,337 | | | 1,196 | |
| 1,650 |
Deposits | | 0 | |
| 0 | |
| 0 | |
| 0 | | | (516,274) | |
| (568,161) |
Other liabilities | | (229) | |
| (698) | |
| (174) | |
| (1,101) | | | (4,841) | |
| (2,922) |
Other Federal Home Loan Bank borrowings | | 0 | |
| 0 | |
| 0 | |
| 0 | | | (6,000) | |
| (2,420) |
Subordinated notes payable | | 0 | |
| 0 | |
| 0 | |
| 0 | | | 0 | |
| (13,831) |
Subordinated debt held by unconsolidated subsidiary trusts | | 0 | |
| 0 | |
| 0 | |
| 0 | | | (2,062) | |
| (2,062) |
Total identifiable assets, net | | 10,950 | |
| 14,704 | |
| 1,462 | |
| 27,116 | | | 78,574 | |
| 55,064 |
Goodwill | $ | 2,170 | | $ | 2,046 | | $ | 1,438 | | $ | 5,654 | | $ | 19,981 | | $ | 39,970 |
(1) | Includes amounts related to the Kinderhook and both CISI acquisitions completed in 2019. |
(2) | Acquisition-related allowance for credit losses on purchased credit deteriorated ("PCD") loans applicable beginning in 2020. |
2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||
(000s omitted) | Kinderhook | Other (1) | Total | Other (2) | NRS | Merchants | Other (3) | Total | ||||||||||||||||||||||||
Consideration paid : | ||||||||||||||||||||||||||||||||
Cash | $ | 93,384 | $ | 1,650 | $ | 95,034 | $ | 1,753 | $ | 70,073 | $ | 82,898 | $ | 6,775 | $ | 159,746 | ||||||||||||||||
Community Bank System, Inc. common stock | 0 | 0 | 0 | 0 | 78,483 | 262,254 | 2,395 | 343,132 | ||||||||||||||||||||||||
Total net consideration paid | 93,384 | 1,650 | 95,034 | 1,753 | 148,556 | 345,152 | 9,170 | 502,878 | ||||||||||||||||||||||||
Recognized amounts of identifiable assets acquired and liabilities assumed: | ||||||||||||||||||||||||||||||||
Cash and cash equivalents | 90,381 | 0 | 90,381 | 16 | 11,063 | 40,730 | 339 | 52,132 | ||||||||||||||||||||||||
Investment securities | 39,770 | 0 | 39,770 | 0 | 20,294 | 370,648 | 0 | 390,942 | ||||||||||||||||||||||||
Loans | 479,877 | 0 | 479,877 | 0 | 0 | 1,488,157 | 0 | 1,488,157 | ||||||||||||||||||||||||
Premises and equipment | 13,970 | 0 | 13,970 | 10 | 411 | 16,608 | 27 | 17,046 | ||||||||||||||||||||||||
Accrued interest and fees receivable | 1,130 | 0 | 1,130 | 0 | 72 | 4,773 | 0 | 4,845 | ||||||||||||||||||||||||
Other assets | 14,109 | 0 | 14,109 | 105 | 8,088 | 51,585 | 583 | 60,256 | ||||||||||||||||||||||||
Core deposit intangibles | 3,573 | 0 | 3,573 | 0 | 0 | 23,214 | 0 | 23,214 | ||||||||||||||||||||||||
Other intangibles | 0 | 1,650 | 1,650 | 1,343 | 60,200 | 2,857 | 5,626 | 68,683 | ||||||||||||||||||||||||
Deposits | (568,161 | ) | 0 | (568,161 | ) | 0 | 0 | (1,448,406 | ) | 0 | (1,448,406 | ) | ||||||||||||||||||||
Other liabilities | (3,259 | ) | 0 | (3,259 | ) | (31 | ) | (26,828 | ) | (11,750 | ) | (1,155 | ) | (39,733 | ) | |||||||||||||||||
Short-term advances | 0 | 0 | 0 | 0 | 0 | (80,000 | ) | 0 | (80,000 | ) | ||||||||||||||||||||||
Securities sold under agreement to repurchase, short-term | 0 | 0 | 0 | 0 | 0 | (278,076 | ) | 0 | (278,076 | ) | ||||||||||||||||||||||
Other Federal Home Loan Bank borrowings | (2,420 | ) | 0 | (2,420 | ) | 0 | 0 | (3,615 | ) | 0 | (3,615 | ) | ||||||||||||||||||||
Subordinated notes payable | (13,831 | ) | 0 | (13,831 | ) | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||
Subordinated debt held by unconsolidated subsidiary trusts | (2,062 | ) | 0 | (2,062 | ) | 0 | 0 | (20,619 | ) | 0 | (20,619 | ) | ||||||||||||||||||||
Total identifiable assets, net | 53,077 | 1,650 | 54,727 | 1,443 | 73,300 | 156,106 | 5,420 | 234,826 | ||||||||||||||||||||||||
Goodwill | $ | 40,307 | $ | 0 | $ | 40,307 | $ | 310 | $ | 75,256 | $ | 189,046 | $ | 3,750 | $ | 268,052 |
Under ASC 310-30, acquired loans that have evidence of deterioration in credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all contractually required payments were aggregated by comparable characteristics and recorded at fair value without a carryover of the related allowance for loancredit losses. Cash flows for each loan were determined using an estimate of credit losses and rate of prepayments. Projected monthly cash flows were then discounted to present value using a market-based discount rate. The excess of the undiscounted expected cash flows over the estimated fair value is referred to as the “accretable yield” and is recognized into interest income over the remaining lives of the acquired loans.
On January 1, 2020, the Company adopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) which replaces the ASC 310-30 acquired impaired loans methodology described above with the purchased credit deteriorated ("PCD") methodology discussed in Note A: Summary of Significant Accounting Policies.
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The Company has acquired loans from Steuben for which there was evidence of a more-than-insignificant deterioration in credit quality since origination. There were no investment securities acquired from Steuben for which there was evidence of a more-than-insignificant deterioration in credit quality since origination. The carrying amount of those loans is as follows at the date of acquisition:
| | | |
(000s omitted) |
| PCD Loans | |
Par value of PCD loans at acquisition | | $ | 35,906 |
Allowance for credit losses at acquisition | |
| (668) |
Non-credit premium at acquisition | |
| 103 |
Fair value of PCD loans at acquisition | | $ | 35,341 |
The following is a summary of the remaining loans acquired from Steuben for which there was no evidence of a more-than-insignificant deterioration in credit quality since origination at the date of acquisition:
| | | |
(000s omitted) |
| Non-PCD Loans | |
Contractually required principal and interest at acquisition | | $ | 400,738 |
Contractual cash flows not expected to be collected | |
| (2,994) |
Expected cash flows at acquisition | |
| 397,744 |
Interest component of expected cash flows | |
| (94,068) |
Fair value of non-PCD loans at acquisition | | $ | 303,676 |
The following is a summary of the loans acquired from Kinderhook at the date of acquisition:
Acquired | Acquired | Total | ||||||||||
Impaired | Non-impaired | Acquired | ||||||||||
(000s omitted) | Loans | Loans | Loans | |||||||||
Contractually required principal and interest at acquisition | $ | 13,350 | $ | 636,384 | $ | 649,734 | ||||||
Contractual cash flows not expected to be collected | (4,176 | ) | (5,472 | ) | (9,648 | ) | ||||||
Expected cash flows at acquisition | 9,174 | 630,912 | 640,086 | |||||||||
Interest component of expected cash flows | (551 | ) | (159,658 | ) | (160,209 | ) | ||||||
Fair value of acquired loans | $ | 8,623 | $ | 471,254 | $ | 479,877 |
| | | | | | | | | |
| | Acquired | | Acquired | | Total | |||
| | Impaired | | Non-impaired | | Acquired | |||
(000s omitted) |
| Loans |
| Loans |
| Loans | |||
Contractually required principal and interest at acquisition | | $ | 13,350 | | $ | 636,384 | | $ | 649,734 |
Contractual cash flows not expected to be collected |
| | (4,176) |
| | (5,472) |
| | (9,648) |
Expected cash flows at acquisition |
| | 9,174 |
| | 630,912 |
| | 640,086 |
Interest component of expected cash flows |
| | (551) |
| | (159,658) |
| | (160,209) |
Fair value of acquired loans | | $ | 8,623 | | $ | 471,254 | | $ | 479,877 |
The following is a summaryfair value of the loans acquired from Merchants atCompany’s common stock issued for the dateSteuben acquisition was determined using the market close price of acquisition:
Acquired | Acquired | Total | ||||||||||
Impaired | Non-impaired | Acquired | ||||||||||
(000s omitted) | Loans | Loans | Loans | |||||||||
Contractually required principal and interest at acquisition | $ | 15,454 | $ | 1,872,574 | $ | 1,888,028 | ||||||
Contractual cash flows not expected to be collected | (5,385 | ) | (14,753 | ) | (20,138 | ) | ||||||
Expected cash flows at acquisition | 10,069 | 1,857,821 | 1,867,890 | |||||||||
Interest component of expected cash flows | (793 | ) | (378,940 | ) | (379,733 | ) | ||||||
Fair value of acquired loans | $ | 9,276 | $ | 1,478,881 | $ | 1,488,157 |
The fair value of checking, savings and money market deposit accounts acquired were assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. Certificate of deposit accounts were valued at the present value of the certificates’ expected contractual payments discounted at market rates for similar certificates. The fair value of subordinated notes payable was estimated using discounted cash flows and interest rates being offered on similar securities. Subordinated notes payable assumed with the Kinderhook acquisition included $3.0 million of subordinated notes with a fixed interest rate of 6.0% maturing in February 2028 and $10.0 million of subordinated notes with a fixed interest rate of 6.375% maturing in November 2025.
The core deposit intangibles and other intangibles related to the NuVantage acquisition, Steuben acquisition, both acquisitions completed by CISI in 2019, and the Kinderhook Penna, Styles Bridges, HR Consultants, Merchants, Dryfoos, BAS, NECM,acquisition are being amortized using an accelerated method over their estimated useful life of eight years. The other intangibles related to the TGA and GBRFBD acquisitions are being amortized using an accelerated method over their estimated useful life of 13 years and 15 yearseight years. , respectively. The goodwill, which is not amortized for book purposes, was assigned to the Banking segment for the Steuben and Kinderhook acquisitions, the All Other segment for the NuVantage and MerchantsTGA acquisitions, and the Employee Benefit Services segment for NRS, and All Other segments for the Penna, Dryfoos, BAS, and GBR acquisitions.FBD acquisition. Goodwill arising from the Kinderhook, Merchants, NRS,FBD, Steuben, and GBRKinderhook acquisitions is not deductible for tax purposes. Goodwill arising from the Penna, Dryfoos, BAS,NuVantage and GBRTGA acquisitions is deductible for tax purposes.
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Direct costs related to the acquisitions were expensed as incurred. Merger and acquisition integration-related expenses (recoveries) amount to $0.7 million, $4.9 million and $8.6 million $(0.8) millionduring 2021, 2020 and $26.0 million during 2019, 2018 and 2017, respectively, and have been separately stated in the consolidated statements of income.
Supplemental Pro Forma Financial Information (Unaudited)
The following unaudited condensed pro forma information assumes the Steuben acquisition had been completed as of January 1, 2019 for the years ended December 31, 2020 and 2019 and the Kinderhook acquisitionacquisitions had been completed as of January 1, 2018 for the year ended December 31, 2019 and December 31, 2018 and the Merchants and NRS acquisitions had been completed as of January 1, 2016 for the year ended December 31, 2017 and December 31, 2016.2019. The pro forma information does not include amounts related to the NuVantage, FBD, or TGA acquisitions completed in 2021, or the two acquisitions completed by CISI in 2019, Penna, Styles Bridges, HR Consultants, BAS, Dryfoos, NECM and GBR as the amounts were immaterial. The table below has been prepared for comparative purposes only and is not necessarily indicative of the actual results that would have been attained had the acquisitions occurred as of the beginning of the year presented, nor is it indicative of the Company’s future results. Furthermore, the unaudited pro forma information does not reflect management’s estimate of any revenue-enhancing opportunities nor anticipated cost savings that may have occurred as a result of the integration and consolidation of the acquisitions.
The pro forma information set forth below reflects the historical results of Kinderhook, Merchants,Steuben and NRSKinderhook combined with the Company’s consolidated statementstatements of income with adjustments related to (a) certain purchase accounting fair value adjustments and (b) amortization of customer lists and core deposit intangibles. Acquisition expenses related to the KinderhookSteuben transaction totaling $8.0$4.8 million for the year ended December 31, 20192020 were included in the pro forma information as if they were incurred in 2018. 2019.
Acquisition expenses related to the Merchants and NRS transactions totaling $25.7
| | | | | | |
| | Pro Forma (Unaudited) | ||||
| | Year Ended December 31, | ||||
(000s omitted) |
| 2020 |
| 2019 | ||
Total revenue, net of interest expense | | $ | 607,382 | | $ | 626,229 |
Net income | |
| 171,147 | |
| 180,237 |
million for the year ended December 31, 2017 were included in the pro forma information as if they were incurred in 2016.
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Pro Forma (Unaudited) Year Ended December 31, | ||||||||||||||||
(000’s omitted) | 2019 | 2018 | 2017 | 2016 | ||||||||||||
Total revenue, net of interest expense | $ | 602,817 | $ | 594,174 | $ | 546,977 | $ | 536,183 | ||||||||
Net income | 178,427 | 167,914 | 176,257 | 109,186 |
The amortized cost and estimated fair value of investment securities as of December 31 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
|
| 2021 |
| 2020 | ||||||||||||||||||||
| | | | | Gross | | Gross | | | | | | | | Gross | | Gross | | | | ||||
| | Amortized | | Unrealized | | Unrealized | | Estimated | | Amortized | | Unrealized | | Unrealized | | Estimated | ||||||||
(000’s omitted) |
| Cost |
| Gains |
| Losses |
| Fair Value |
| Cost |
| Gains |
| Losses |
| Fair Value | ||||||||
Available-for-Sale Portfolio: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
U.S. Treasury and agency securities | | $ | 4,064,624 | | $ | 39,997 | | $ | 106,057 | | $ | 3,998,564 | | $ | 2,423,236 | | $ | 94,741 | | $ | 16,595 | | $ | 2,501,382 |
Obligations of state and political subdivisions | | | 413,019 | | | 17,326 | | | 56 | | | 430,289 | | | 451,028 | | | 24,632 | | | 0 | | | 475,660 |
Government agency mortgage-backed securities | | | 474,506 | | | 7,615 | | | 5,065 | | | 477,056 | | | 506,540 | | | 16,280 | | | 182 | | | 522,638 |
Corporate debt securities | | | 8,000 | | | 39 | | | 77 | | | 7,962 | | | 4,499 | | | 137 | | | 1 | | | 4,635 |
Government agency collateralized mortgage obligations | | | 19,953 | | | 410 | | | 24 | | | 20,339 | | | 42,476 | | | 1,111 | | | 10 | | | 43,577 |
Total available-for-sale portfolio | | $ | 4,980,102 | | $ | 65,387 | | $ | 111,279 | | $ | 4,934,210 | | $ | 3,427,779 | | $ | 136,901 | | $ | 16,788 | | $ | 3,547,892 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Equity and other Securities: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Equity securities, at fair value | | $ | 251 | | $ | 212 | | $ | 0 | | $ | 463 | | $ | 251 | | $ | 194 | | $ | 0 | | $ | 445 |
Federal Home Loan Bank common stock | |
| 7,188 | |
| 0 | |
| 0 | |
| 7,188 | |
| 7,468 | |
| 0 | |
| 0 | |
| 7,468 |
Federal Reserve Bank common stock | |
| 33,916 | |
| 0 | |
| 0 | |
| 33,916 | |
| 33,916 | |
| 0 | |
| 0 | |
| 33,916 |
Other equity securities, at adjusted cost | |
| 2,562 | |
| 750 | |
| 0 | |
| 3,312 | |
| 4,876 | |
| 750 | |
| 0 | |
| 5,626 |
Total equity and other securities | | $ | 43,917 | | $ | 962 | | $ | 0 | | $ | 44,879 | | $ | 46,511 | | $ | 944 | | $ | 0 | | $ | 47,455 |
94
2019 | 2018 | |||||||||||||||||||||||||||||||
(000's omitted) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||||||||||||||
Available-for-Sale Portfolio: | ||||||||||||||||||||||||||||||||
U.S. Treasury and agency securities | $ | 2,030,060 | $ | 21,674 | $ | 7,975 | $ | 2,043,759 | $ | 2,036,474 | $ | 2,190 | $ | 14,911 | $ | 2,023,753 | ||||||||||||||||
Obligations of state and political subdivisions | 497,852 | 14,382 | 26 | 512,208 | 453,640 | 6,563 | 1,049 | 459,154 | ||||||||||||||||||||||||
Government agency mortgage-backed securities | 428,491 | 5,478 | 1,107 | 432,862 | 390,234 | 1,526 | 9,283 | 382,477 | ||||||||||||||||||||||||
Corporate debt securities | 2,527 | 1 | 0 | 2,528 | 2,588 | 0 | 42 | 2,546 | ||||||||||||||||||||||||
Government agency collateralized mortgage obligations | 52,621 | 482 | 32 | 53,071 | 69,342 | 60 | 1,283 | 68,119 | ||||||||||||||||||||||||
Total available-for-sale portfolio | $ | 3,011,551 | $ | 42,017 | $ | 9,140 | $ | 3,044,428 | $ | 2,952,278 | $ | 10,339 | $ | 26,568 | $ | 2,936,049 | ||||||||||||||||
Equity and other Securities: | ||||||||||||||||||||||||||||||||
Equity securities, at fair value | $ | 251 | $ | 200 | $ | 0 | $ | 451 | $ | 251 | $ | 200 | $ | 19 | $ | 432 | ||||||||||||||||
Federal Home Loan Bank common stock | 7,246 | 0 | 0 | 7,246 | 8,768 | 0 | 0 | 8,768 | ||||||||||||||||||||||||
Federal Reserve Bank common stock | 30,922 | 0 | 0 | 30,922 | 30,690 | 0 | 0 | 30,690 | ||||||||||||||||||||||||
Other equity securities, at adjusted cost | 4,546 | 750 | 0 | 5,296 | 4,969 | 750 | 0 | 5,719 | ||||||||||||||||||||||||
Total equity and other securities | $ | 42,965 | $ | 950 | $ | 0 | $ | 43,915 | $ | 44,678 | $ | 950 | $ | 19 | $ | 45,609 |
A summary of investment securities that have been in a continuous unrealized loss position for less than or greater than twelve months is as follows:
As of December 31, 2021
| | | | | | | | | | | | | | | | | | | | | | | | |
|
| Less than 12 Months |
| 12 Months or Longer |
| Total | ||||||||||||||||||
| | | | | | | Gross | | | | | | | Gross | | | | | | | Gross | |||
| | | | | | Unrealized | | | | | | Unrealized | | | | | | Unrealized | ||||||
(000’s omitted) |
| # |
| Fair Value |
| Losses |
| # |
| Fair Value |
| Losses |
| # |
| Fair Value |
| Losses | ||||||
Available-for-Sale Portfolio: | |
| | |
| | |
| |
| | |
| | |
| |
| | | | | |
|
U.S. Treasury and agency securities | | 47 | | $ | 1,224,101 | | $ | 14,873 | | 13 | | $ | 900,462 | | $ | 91,184 | | 60 | | $ | 2,124,563 | | $ | 106,057 |
Obligations of state and political subdivisions | | 27 | |
| 23,966 | |
| 56 | | 0 | |
| 0 | |
| 0 | | 27 | |
| 23,966 | |
| 56 |
Government agency mortgage-backed securities | | 147 | |
| 139,442 | |
| 2,475 | | 52 | |
| 67,273 | |
| 2,590 | | 199 | |
| 206,715 | |
| 5,065 |
Corporate debt securities | | 1 | | | 4,923 | | | 77 | | 0 | | | 0 | | | 0 | | 1 | | | 4,923 | | | 77 |
Government agency collateralized mortgage obligations | | 18 | |
| 3,146 | |
| 24 | | 1 | |
| 53 | |
| 0 | | 19 | |
| 3,199 | |
| 24 |
Total available-for-sale investment portfolio | | 240 | | $ | 1,395,578 | | $ | 17,505 | | 66 | | $ | 967,788 | | $ | 93,774 | | 306 | | $ | 2,363,366 | | $ | 111,279 |
2019
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||||||||||||||
(000's omitted) | # | Fair Value | Gross Unrealized Losses | # | Fair Value | Gross Unrealized Losses | # | Fair Value | Gross Unrealized Losses | |||||||||||||||||||||||||||
Available-for-Sale Portfolio: | ||||||||||||||||||||||||||||||||||||
U.S. Treasury and agency securities | 12 | $ | 592,678 | $ | 7,970 | 5 | $ | 25,998 | $ | 5 | 17 | $ | 618,676 | $ | 7,975 | |||||||||||||||||||||
Obligations of state and political subdivisions | 21 | 22,716 | 26 | 0 | 0 | 0 | 21 | 22,716 | 26 | |||||||||||||||||||||||||||
Government agency mortgage-backed securities | 50 | 89,237 | 341 | 52 | 52,975 | 766 | 102 | 142,212 | 1,107 | |||||||||||||||||||||||||||
Government agency collateralized mortgage obligations | 5 | 5,971 | 14 | 5 | 4,405 | 18 | 10 | 10,376 | 32 | |||||||||||||||||||||||||||
Total available-for-sale investment portfolio | 88 | $ | 710,602 | $ | 8,351 | 62 | $ | 83,378 | $ | 789 | 150 | $ | 793,980 | $ | 9,140 |
As of December 31, 2020
| | | | | | | | | | | | | | | | | | | | | | | | |
|
| Less than 12 Months |
| 12 Months or Longer |
| Total | ||||||||||||||||||
| | | | | | | Gross | | | | | | | Gross | | | | | | | Gross | |||
| | | | | | Unrealized | | | | | | Unrealized | | | | | | Unrealized | ||||||
(000’s omitted) |
| # |
| Fair Value |
| Losses |
| # |
| Fair Value |
| Losses |
| # |
| Fair Value |
| Losses | ||||||
Available-for-Sale Portfolio: | |
| | |
| | |
| |
| | |
| | |
| |
| | |
| | |
|
U.S. Treasury and agency securities | | 13 | | $ | 831,015 | | $ | 16,595 | | 0 | | $ | 0 | | $ | 0 | | 13 | | $ | 831,015 | | $ | 16,595 |
Obligations of state and political subdivisions | | 1 | |
| 358 | |
| 0 | | 0 | |
| 0 | |
| 0 | | 1 | |
| 358 | |
| 0 |
Government agency mortgage-backed securities | | 89 | |
| 75,992 | |
| 182 | | 2 | |
| 14 | |
| 0 | | 91 | |
| 76,006 | |
| 182 |
Corporate debt securities | | 1 | | | 1,001 | | | 1 | | 0 | | | 0 | | | 0 | | 1 | | | 1,001 | | | 1 |
Government agency collateralized mortgage obligations | | 13 | |
| 5,246 | |
| 10 | | 1 | |
| 0 | |
| 0 | | 14 | |
| 5,246 | |
| 10 |
Total available-for-sale investment portfolio | | 117 | | $ | 913,612 | | $ | 16,788 | | 3 | | $ | 14 | | $ | 0 | | 120 | | $ | 913,626 | | $ | 16,788 |
2018
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||||||||||||||
(000's omitted) | # | Fair Value | Gross Unrealized Losses | # | Fair Value | Gross Unrealized Losses | # | Fair Value | Gross Unrealized Losses | |||||||||||||||||||||||||||
Available-for-Sale Portfolio: | ||||||||||||||||||||||||||||||||||||
U.S. Treasury and agency securities | 7 | $ | 473,082 | $ | 682 | 64 | $ | 1,213,276 | $ | 14,229 | 71 | $ | 1,686,358 | 14,911 | ||||||||||||||||||||||
Obligations of state and political subdivisions | 118 | 55,671 | 216 | 97 | 51,753 | 833 | 215 | 107,424 | 1,049 | |||||||||||||||||||||||||||
Government agency mortgage-backed securities | 43 | 47,708 | 258 | 181 | 253,931 | 9,025 | 224 | 301,639 | 9,283 | |||||||||||||||||||||||||||
Corporate debt securities | 0 | 0 | 0 | 1 | 2,546 | 42 | 1 | 2,546 | 42 | |||||||||||||||||||||||||||
Government agency collateralized mortgage obligations | 1 | 66 | 0 | 41 | 63,112 | 1,283 | 42 | 63,178 | 1,283 | |||||||||||||||||||||||||||
Total available-for-sale investment portfolio | 169 | $ | 576,527 | $ | 1,156 | 384 | $ | 1,584,618 | $ | 25,412 | 553 | $ | 2,161,145 | $ | 26,568 | |||||||||||||||||||||
Equity and other Securities: | ||||||||||||||||||||||||||||||||||||
Equity securities, at fair value | 1 | $ | 82 | $ | 19 | 0 | $ | 0 | $ | 0 | 1 | $ | 82 | $ | 19 | |||||||||||||||||||||
Total equity and other securities | 1 | $ | 82 | $ | 19 | 0 | $ | 0 | $ | 0 | 1 | $ | 82 | $ | 19 |
The unrealized losses reported pertaining to securities issued by the U.S. government and its sponsored entities, include treasuries, agencies, and mortgage-backed securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac, which are currently rated AAA by Moody’s Investor Services, AA+ by Standard & Poor’s and are guaranteed by the U.S. government. The majority of the obligations of state and political subdivisions and corporations carry a credit rating of A or better. Additionally, a majorityportion of the obligations of state and political subdivisions carry a secondary level of credit enhancement. The Company holds one corporate debt security in an unrealized loss position which is currently rated A- or better and the issuer of the security shows a low risk of default. The Company does not intend to sell these securities, nor is it more likely than not that the Company will be required to sell these securities prior to recovery of the amortized cost. Timely principal and interest payments continue to be made on the securities. The unrealized losses in the portfolios are primarily attributable to changes in interest rates. As such, management does not believe any individual unrealized loss as of December 31, 20192021 and 2020 represents OTTI.credit losses and no unrealized losses have been recognized in the provision for credit losses. Accordingly, there is 0 allowance for credit losses on the Company’s available-for-sale portfolio as of December 31, 2021 and 2020.
95
The amortized cost and estimated fair value of debt securities at December 31, 2019,2021, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.
Available-for-Sale | ||||||||
(000's omitted) | Amortized Cost | Fair Value | ||||||
Due in one year or less | $ | 677,169 | $ | 680,805 | ||||
Due after one through five years | 905,531 | 925,987 | ||||||
Due after five years through ten years | 453,320 | 456,833 | ||||||
Due after ten years | 494,419 | 494,870 | ||||||
Subtotal | 2,530,439 | 2,558,495 | ||||||
Government agency mortgage-backed securities | 428,491 | 432,862 | ||||||
Government agency collateralized mortgage obligations | 52,621 | 53,071 | ||||||
Total | $ | 3,011,551 | $ | 3,044,428 |
| | | | | | |
|
| Available-for-Sale | ||||
| | Amortized | | | ||
(000’s omitted) |
| Cost |
| Fair Value | ||
Due in one year or less | | $ | 156,262 | | $ | 158,119 |
Due after one through five years | |
| 876,849 | |
| 891,772 |
Due after five years through ten years | |
| 1,958,202 | |
| 1,962,453 |
Due after ten years | |
| 1,494,330 | |
| 1,424,471 |
Subtotal | |
| 4,485,643 | |
| 4,436,815 |
Government agency mortgage-backed securities | |
| 474,506 | |
| 477,056 |
Government agency collateralized mortgage obligations | |
| 19,953 | |
| 20,339 |
Total | | $ | 4,980,102 | | $ | 4,934,210 |
Investment securities with a carrying value of $1.471$2.32 billion and $1.447$2.03 billion at December 31, 20192021 and 2018,2020, respectively, were pledged to collateralize certain deposits and borrowings. Securities pledged to collateralize certain deposits and borrowings included $502.8$485.4 million and $492.4$473.4 million of U.S. Treasury securities that were pledged as collateral for securities sold under agreement to repurchase at December 31, 2019,2021 and 2018,2020, respectively. All securities sold under agreement to repurchase as of December 31, 20192021 and 20182020 have an overnight and continuous maturity.
During 2019, the Company sold $590.2 million of U.S. Treasury and agency securities, recognizing $5.0 million of gross realized gains and $0.1 million of gross realized losses. The proceeds from theseThere were no sales were reinvested primarilyof investment securities in U.S. Treasury2021 and agency securities at higher net yields as of December 31, 2019.
The segments of the Company’s loan portfolio are disaggregated into the following classes that allow management to monitor risk and performance:
(000’s omitted) | 2019 | 2018 | ||||||
Business lending | $ | 2,775,876 | $ | 2,396,977 | ||||
Consumer mortgage | 2,430,902 | 2,235,408 | ||||||
Consumer indirect | 1,113,062 | 1,083,207 | ||||||
Consumer direct | 184,378 | 178,820 | ||||||
Home equity | 386,325 | 386,709 | ||||||
Gross loans, including deferred origination costs | 6,890,543 | 6,281,121 | ||||||
Allowance for loan losses | (49,911 | ) | (49,284 | ) | ||||
Loans, net of allowance for loan losses | $ | 6,840,632 | $ | 6,231,837 |
| | | | | | |
| | | | | | |
(000’s omitted) | | 2021 |
| 2020 | ||
Business lending | | $ | 3,075,904 | | $ | 3,440,077 |
Consumer mortgage | |
| 2,556,114 | |
| 2,401,499 |
Consumer indirect | |
| 1,189,749 | |
| 1,021,885 |
Consumer direct | |
| 153,811 | |
| 152,657 |
Home equity | |
| 398,061 | |
| 399,834 |
Gross loans, including deferred origination costs | |
| 7,373,639 | |
| 7,415,952 |
Allowance for credit losses | |
| (49,869) | |
| (60,869) |
Loans, net of allowance for credit losses | | $ | 7,323,770 | | $ | 7,355,083 |
The Company had approximately $32.3$34.9 million and $28.4$25.5 million of net deferred loan origination costs included in gross loans as of December 31, 20192021 and 2018,2020, respectively.
96
Certain directors and executive officers of the Company, as well as associates of such persons, are loan customers. Loans to these individuals were made in the ordinary course of business under normal credit terms and do not have more than a normal risk of collection. Following is a summary of the aggregate amount of such loans during 20192021 and 2018.
(000’s omitted) | 2019 | 2018 | ||||||
Balance at beginning of year | $ | 20,661 | $ | 22,344 | ||||
New loans | 5,720 | 2,600 | ||||||
Payments | (8,895 | ) | (4,283 | ) | ||||
Balance at end of year | $ | 17,486 | $ | 20,661 |
| | | | | | |
(000’s omitted) |
| 2021 |
| 2020 | ||
Balance at beginning of year | | $ | 15,549 | | $ | 17,486 |
New loans | |
| 2,500 | |
| 4,194 |
Payments | |
| (4,276) | |
| (6,131) |
Balance at end of year | | $ | 13,773 | | $ | 15,549 |
Acquired loans
The following table presents the aging of the date of purchase with no allowance for loan loss. The outstanding principal balance and the related carrying amount of acquired loans included in the Consolidated Statement of Condition at December 31 are as follows:
(000’s omitted) | 2019 | 2018 | ||||||
Credit impaired acquired loans: | ||||||||
Outstanding principal balance | $ | 16,200 | $ | 6,936 | ||||
Carrying amount | 11,797 | 5,446 | ||||||
Non-impaired acquired loans: | ||||||||
Outstanding principal balance | 1,448,046 | 1,271,584 | ||||||
Carrying amount | 1,428,154 | 1,247,691 | ||||||
Total acquired loans: | ||||||||
Outstanding principal balance | 1,464,246 | 1,278,520 | ||||||
Carrying amount | 1,439,951 | 1,253,137 |
(000’s omitted) | 2019 | 2018 | ||||||
Balance at beginning of year | $ | 437 | $ | 976 | ||||
Kinderhook acquisition | 551 | 0 | ||||||
Accretion recognized | (493 | ) | (783 | ) | ||||
Net reclassification from non-accretable to accretable | 138 | 244 | ||||||
Balance at end of year | $ | 633 | $ | 437 |
Legacy Loans (excludes
| | | | | | | | | | | | | | | | | | |
| | Past Due | | 90+ Days Past | | | | | | | | | | | | | ||
(000’s omitted) | | 30 – 89 | | Due and | | | | | Total | | | | | | | |||
December 31, 2021 |
| Days |
| Still Accruing |
| Nonaccrual |
| Past Due |
| Current |
| Total Loans | ||||||
Business lending | | $ | 5,540 | | $ | 99 | | $ | 24,105 | | $ | 29,744 | | $ | 3,046,160 | | $ | 3,075,904 |
Consumer mortgage | |
| 10,297 | |
| 3,328 | |
| 15,027 | |
| 28,652 | |
| 2,527,462 | |
| 2,556,114 |
Consumer indirect | |
| 9,611 | |
| 87 | |
| 0 | |
| 9,698 | |
| 1,180,051 | |
| 1,189,749 |
Consumer direct | |
| 796 | |
| 22 | |
| 1 | |
| 819 | |
| 152,992 | |
| 153,811 |
Home equity | |
| 1,778 | |
| 272 | |
| 2,532 | |
| 4,582 | |
| 393,479 | |
| 398,061 |
Total | | $ | 28,022 | | $ | 3,808 | | $ | 41,665 | | $ | 73,495 | | $ | 7,300,144 | | $ | 7,373,639 |
| | | | | | | | | | | | | | | | | | |
| | Past Due | | 90+ Days Past | | | | | | | | | | | | | ||
(000’s omitted) | | 30 – 89 | | Due and | | | | | Total | | | | | | | |||
December 31, 2020 |
| Days |
| Still Accruing |
| Nonaccrual |
| Past Due |
| Current |
| Total Loans | ||||||
Business lending | | $ | 4,896 | | $ | 59 | | $ | 55,709 | | $ | 60,664 | | $ | 3,379,413 | | $ | 3,440,077 |
Consumer mortgage | |
| 13,236 | |
| 3,051 | |
| 14,970 | |
| 31,257 | |
| 2,370,242 | |
| 2,401,499 |
Consumer indirect | |
| 13,161 | |
| 219 | |
| 1 | |
| 13,381 | |
| 1,008,504 | |
| 1,021,885 |
Consumer direct | |
| 1,170 | |
| 28 | |
| 3 | |
| 1,201 | |
| 151,456 | |
| 152,657 |
Home equity | |
| 2,296 | |
| 565 | |
| 2,246 | |
| 5,107 | |
| 394,727 | |
| 399,834 |
Total | | $ | 34,759 | | $ | 3,922 | | $ | 72,929 | | $ | 111,610 | | $ | 7,304,342 | | $ | 7,415,952 |
The delinquency status for loans acquired after January 1, 2009)
(000’s omitted) | Past Due 30 - 89 days | 90+ Days Past Due and Still Accruing | Nonaccrual | Total Past Due | Current | Total Loans | ||||||||||||||||||
Business lending | $ | 3,936 | $ | 126 | $ | 3,840 | $ | 7,902 | $ | 1,848,683 | $ | 1,856,585 | ||||||||||||
Consumer mortgage | 10,990 | 2,052 | 10,131 | 23,173 | 1,973,543 | 1,996,716 | ||||||||||||||||||
Consumer indirect | 12,673 | 125 | 0 | 12,798 | 1,094,510 | 1,107,308 | ||||||||||||||||||
Consumer direct | 1,455 | 76 | 0 | 1,531 | 174,445 | 175,976 | ||||||||||||||||||
Home equity | 1,508 | 328 | 1,444 | 3,280 | 310,727 | 314,007 | ||||||||||||||||||
Total | $ | 30,562 | $ | 2,707 | $ | 15,415 | $ | 48,684 | $ | 5,401,908 | $ | 5,450,592 |
(000’s omitted) | Past Due 30 - 89 days | 90+ Days Past Due and Still Accruing | Nonaccrual | Total Past Due | Acquired Impaired(1) | Current | Total Loans | |||||||||||||||||||||
Business lending | $ | 8,518 | $ | 2,173 | $ | 570 | $ | 11,261 | $ | 11,797 | $ | 896,233 | $ | 919,291 | ||||||||||||||
Consumer mortgage | 890 | 277 | 2,386 | 3,553 | 0 | 430,633 | 434,186 | |||||||||||||||||||||
Consumer indirect | 79 | 31 | 0 | 110 | 0 | 5,644 | 5,754 | |||||||||||||||||||||
Consumer direct | 59 | 0 | 52 | 111 | 0 | 8,291 | 8,402 | |||||||||||||||||||||
Home equity | 744 | 238 | 412 | 1,394 | 0 | 70,924 | 72,318 | |||||||||||||||||||||
Total | $ | 10,290 | $ | 2,719 | $ | 3,420 | $ | 16,429 | $ | 11,797 | $ | 1,411,725 | $ | 1,439,951 |
NaN interest income on nonaccrual loans was recognized during the years ended December 31, 2021 or 2020. For the year ended December 31, 2021, an immaterial amount of accrued interest was written off on nonaccrual loans by class asreversing interest income. The Company wrote off $1.5 million of accrued interest on nonaccrual loans by reversing interest income in 2020 primarily due to the reversal of accrued interest on business lending loans of certain commercial borrowers, which primarily operate in the hospitality, travel and entertainment industries, who requested and were granted further extensions of existing loan repayment forbearance due to the continued pandemic-related financial hardship they were experiencing, which were reclassified from accruing to nonaccrual status. Approximately $2.3 million of interest income on loans that returned to accrual status in 2021 was recognized for the year ended December 31, 2018:2021.
(000’s omitted) | Past Due 30 - 89 days | 90+ Days Past Due and Still Accruing | Nonaccrual | Total Past Due | Current | Total Loans | ||||||||||||||||||
Business lending | $ | 5,261 | $ | 179 | $ | 4,872 | $ | 10,312 | $ | 1,608,515 | $ | 1,618,827 | ||||||||||||
Consumer mortgage | 12,468 | 1,393 | 9,872 | 23,733 | 1,824,717 | 1,848,450 | ||||||||||||||||||
Consumer indirect | 14,609 | 258 | 0 | 14,867 | 1,057,525 | 1,072,392 | ||||||||||||||||||
Consumer direct | 1,778 | 48 | 0 | 1,826 | 173,948 | 175,774 | ||||||||||||||||||
Home equity | 983 | 228 | 1,438 | 2,649 | 309,892 | 312,541 | ||||||||||||||||||
Total | $ | 35,099 | $ | 2,106 | $ | 16,182 | $ | 53,387 | $ | 4,974,597 | $ | 5,027,984 |
97
(000’s omitted) | Past Due 30 - 89 days | 90+ Days Past Due and Still Accruing | Nonaccrual | Total Past Due | Acquired Impaired(1) | Current | Total Loans | |||||||||||||||||||||
Business lending | $ | 974 | $ | 0 | $ | 3,498 | $ | 4,472 | $ | 5,446 | $ | 768,232 | $ | 778,150 | ||||||||||||||
Consumer mortgage | 841 | 232 | 2,390 | 3,463 | 0 | 383,495 | 386,958 | |||||||||||||||||||||
Consumer indirect | 78 | 34 | 0 | 112 | 0 | 10,703 | 10,815 | |||||||||||||||||||||
Consumer direct | 115 | 4 | 0 | 119 | 0 | 2,927 | 3,046 | |||||||||||||||||||||
Home equity | 613 | 79 | 474 | 1,166 | 0 | 73,002 | 74,168 | |||||||||||||||||||||
Total | $ | 2,621 | $ | 349 | $ | 6,362 | $ | 9,332 | $ | 5,446 | $ | 1,238,359 | $ | 1,253,137 |
| | |
Pass | The condition of the borrower and the performance of the loans are satisfactory or better. |
Special Mention | | The condition of the borrower has deteriorated although the loan performs as agreed. Loss may be incurred at some future date, if conditions deteriorate further. |
Classified | | The condition of the borrower has significantly deteriorated and the performance of the loan could further deteriorate and incur loss, if deficiencies are not corrected. |
Doubtful | | The condition of the borrower has deteriorated to the point that collection of the balance is improbable based on current facts and |
The following table showstables show the amount of business lending loans by credit quality category:
December 31, 2019 | December 31, 2018 | |||||||||||||||||||||||
(000’s omitted) | Legacy | Acquired | Total | Legacy | Acquired | Total | ||||||||||||||||||
Pass | $ | 1,655,280 | $ | 832,693 | $ | 2,487,973 | $ | 1,439,337 | $ | 702,493 | $ | 2,141,830 | ||||||||||||
Special mention | 98,953 | 45,324 | 144,277 | 105,065 | 40,107 | 145,172 | ||||||||||||||||||
Classified | 102,352 | 29,477 | 131,829 | 74,425 | 28,525 | 102,950 | ||||||||||||||||||
Doubtful | 0 | 0 | 0 | 0 | 1,579 | 1,579 | ||||||||||||||||||
Acquired impaired | 0 | 11,797 | 11,797 | 0 | 5,446 | 5,446 | ||||||||||||||||||
Total | $ | 1,856,585 | $ | 919,291 | $ | 2,775,876 | $ | 1,618,827 | $ | 778,150 | $ | 2,396,977 |
| | | | | | | | | | | | | | | | | | | | | | | | |
|
| Term Loans Amortized Cost Basis by Origination Year | | | | | | | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | Revolving | | | | |
| | | | | | | | | | | | | | | | | | | | Loans | | | | |
(000’s omitted) | | | | | | | | | | | | | | | | | | | | Amortized | | | | |
December 31, 2021 |
| 2021 |
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| Prior |
| Cost Basis |
| Total | ||||||||
Business lending: |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Risk rating |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Pass | | $ | 524,302 | | $ | 328,885 | | $ | 320,638 | | $ | 248,175 | | $ | 186,074 | | $ | 584,912 | | $ | 524,553 | | $ | 2,717,539 |
Special mention | |
| 5,969 | |
| 11,013 | |
| 10,111 | |
| 46,318 | |
| 22,524 | |
| 57,134 | |
| 27,444 | |
| 180,513 |
Classified | |
| 1,870 | |
| 1,767 | |
| 20,315 | |
| 40,235 | |
| 21,904 | |
| 63,685 | |
| 27,511 | |
| 177,287 |
Doubtful | |
| 0 | |
| 0 | |
| 0 | |
| 62 | |
| 0 | |
| 0 | |
| 503 | |
| 565 |
Total business lending | | $ | 532,141 | | $ | 341,665 | | $ | 351,064 | | $ | 334,790 | | $ | 230,502 | | $ | 705,731 | | $ | 580,011 | | $ | 3,075,904 |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Term Loans Amortized Cost Basis by Origination Year | | | | | | | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | Revolving | | | | |
| | | | | | | | | | | | | | | | | | | | Loans | | | | |
(000’s omitted) | | | | | | | | | | | | | | | | | | | | Amortized | | | | |
December 31, 2020 |
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| 2016 |
| Prior |
| Cost Basis |
| Total | ||||||||
Business lending: | | | | | | | | | | | | | | | | | | | | | | | | |
Risk rating | | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Pass | | $ | 860,178 | | $ | 351,350 | | $ | 312,087 | | $ | 217,138 | | $ | 231,453 | | $ | 543,999 | | $ | 483,018 | | $ | 2,999,223 |
Special mention | |
| 14,687 | |
| 36,041 | |
| 28,410 | |
| 21,875 | |
| 29,386 | |
| 51,657 | |
| 52,732 | |
| 234,788 |
Classified | |
| 6,336 | |
| 4,560 | |
| 30,422 | |
| 24,807 | |
| 14,891 | |
| 65,157 | |
| 56,000 | |
| 202,173 |
Doubtful | |
| 0 | |
| 18 | |
| 2,888 | |
| 0 | |
| 0 | |
| 108 | |
| 879 | |
| 3,893 |
Total business lending | | $ | 881,201 | | $ | 391,969 | | $ | 373,807 | | $ | 263,820 | | $ | 275,730 | | $ | 660,921 | | $ | 592,629 | | $ | 3,440,077 |
All other loans are underwritten and structured using standardized criteria and characteristics, primarily payment performance, and are normally risk rated and monitored collectively on a monthly basis. These are typically loans to individuals in the consumer categories and are delineated as either performing or nonperforming. Performing loans include loans classified as current as well as those classified as 30 –- 89 days past due and acquired impaired loans.due. Nonperforming loans include 90+ days past due and still accruing and nonaccrual loans. The following tables detail the balances in all loan categories except for business lending at December 31, 2019:
(000’s omitted) | Consumer Mortgage | Consumer Indirect | Consumer Direct | Home Equity | Total | |||||||||||||||
Performing | $ | 1,984,533 | $ | 1,107,183 | $ | 175,900 | $ | 312,235 | $ | 3,579,851 | ||||||||||
Nonperforming | 12,183 | 125 | 76 | 1,772 | 14,156 | |||||||||||||||
Total | $ | 1,996,716 | $ | 1,107,308 | $ | 175,976 | $ | 314,007 | $ | 3,594,007 |
(000’s omitted) | Consumer Mortgage | Consumer Indirect | Consumer Direct | Home Equity | Total | |||||||||||||||
Performing | $ | 431,523 | $ | 5,723 | $ | 8,350 | $ | 71,668 | $ | 517,264 | ||||||||||
Nonperforming | 2,663 | 31 | 52 | 650 | 3,396 | |||||||||||||||
Total | $ | 434,186 | $ | 5,754 | $ | 8,402 | $ | 72,318 | $ | 520,660 |
98
The following table details the balances in all other loan categories at December 31, 2018:2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | |
|
| Term Loans Amortized Cost Basis by Origination Year |
|
| |
|
| | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | Revolving | | | | |
| | | | | | | | | | | | | | | | | | | | Loans | | | | |
(000’s omitted) | | | | | | | | | | | | | | | | | | | | Amortized | | | | |
December 31, 2021 |
| 2021 |
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| Prior |
| Cost Basis |
| Total | ||||||||
Consumer mortgage: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
FICO AB |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Performing | | $ | 514,680 | | $ | 229,039 | | $ | 183,469 | | $ | 113,618 | | $ | 116,417 | | $ | 566,129 | | $ | 0 | | $ | 1,723,352 |
Nonperforming | |
| 0 | |
| 266 | |
| 0 | |
| 131 | |
| 435 | |
| 3,236 | |
| 0 | |
| 4,068 |
Total FICO AB | |
| 514,680 | |
| 229,305 | |
| 183,469 | |
| 113,749 | |
| 116,852 | |
| 569,365 | |
| 0 | |
| 1,727,420 |
FICO CDE | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Performing | |
| 168,870 | |
| 122,546 | |
| 85,253 | |
| 57,973 | |
| 54,396 | |
| 300,341 | |
| 25,028 | |
| 814,407 |
Nonperforming | |
| 0 | |
| 522 | |
| 972 | |
| 1,465 | |
| 939 | |
| 10,389 | |
| 0 | |
| 14,287 |
Total FICO CDE | |
| 168,870 | |
| 123,068 | |
| 86,225 | |
| 59,438 | |
| 55,335 | |
| 310,730 | |
| 25,028 | |
| 828,694 |
Total consumer mortgage | | $ | 683,550 | | $ | 352,373 | | $ | 269,694 | | $ | 173,187 | | $ | 172,187 | | $ | 880,095 | | $ | 25,028 | | $ | 2,556,114 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Consumer indirect: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Performing | | $ | 590,857 | | $ | 204,529 | | $ | 182,458 | | $ | 107,683 | | $ | 39,385 | | $ | 64,750 | | $ | 0 | | $ | 1,189,662 |
Nonperforming | |
| 0 | |
| 34 | |
| 0 | |
| 24 | |
| 17 | |
| 12 | |
| 0 | |
| 87 |
Total consumer indirect | | $ | 590,857 | | $ | 204,563 | | $ | 182,458 | | $ | 107,707 | | $ | 39,402 | | $ | 64,762 | | $ | 0 | | $ | 1,189,749 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Consumer direct: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Performing | | $ | 72,584 | | $ | 28,905 | | $ | 24,770 | | $ | 12,340 | | $ | 4,396 | | $ | 4,575 | | $ | 6,218 | | $ | 153,788 |
Nonperforming | |
| 0 | |
| 4 | |
| 18 | |
| 1 | |
| 0 | |
| 0 | |
| 0 | |
| 23 |
Total consumer direct | | $ | 72,584 | | $ | 28,909 | | $ | 24,788 | | $ | 12,341 | | $ | 4,396 | | $ | 4,575 | | $ | 6,218 | | $ | 153,811 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Home equity: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Performing | | $ | 76,041 | | $ | 43,106 | | $ | 35,990 | | $ | 18,824 | | $ | 15,134 | | $ | 35,740 | | $ | 170,422 | | $ | 395,257 |
Nonperforming | |
| 0 | |
| 64 | |
| 47 | |
| 102 | |
| 131 | |
| 679 | |
| 1,781 | |
| 2,804 |
Total home equity | | $ | 76,041 | | $ | 43,170 | | $ | 36,037 | | $ | 18,926 | | $ | 15,265 | | $ | 36,419 | | $ | 172,203 | | $ | 398,061 |
99
(000’s omitted) | Consumer Mortgage | Consumer Indirect | Consumer Direct | Home Equity | Total | |||||||||||||||
Performing | $ | 1,837,185 | $ | 1,072,134 | $ | 175,726 | $ | 310,875 | $ | 3,395,920 | ||||||||||
Nonperforming | 11,265 | 258 | 48 | 1,666 | 13,237 | |||||||||||||||
Total | $ | 1,848,450 | $ | 1,072,392 | $ | 175,774 | $ | 312,541 | $ | 3,409,157 |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Term Loans Amortized Cost Basis by Origination Year | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | Revolving | | | | |
| | | | | | | | | | | | | | | | | | | | Loans | | | | |
(000’s omitted) | | | | | | | | | | | | | | | | | | | | Amortized | | | | |
December 31, 2020 |
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| 2016 |
| Prior |
| Cost Basis |
| Total | ||||||||
Consumer mortgage: |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
FICO AB |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Performing | | $ | 260,588 | | $ | 227,027 | | $ | 166,638 | | $ | 163,653 | | $ | 160,911 | | $ | 614,976 | | $ | 321 | | $ | 1,594,114 |
Nonperforming | |
| 0 | |
| 0 | |
| 275 | |
| 398 | |
| 345 | |
| 2,709 | |
| 0 | |
| 3,727 |
Total FICO AB | |
| 260,588 | |
| 227,027 | |
| 166,913 | |
| 164,051 | |
| 161,256 | |
| 617,685 | |
| 321 | |
| 1,597,841 |
FICO CDE | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Performing | |
| 115,049 | |
| 102,788 | |
| 80,973 | |
| 75,289 | |
| 83,214 | |
| 314,668 | |
| 17,382 | |
| 789,363 |
Nonperforming | |
| 0 | |
| 1,010 | |
| 582 | |
| 877 | |
| 1,786 | |
| 10,040 | |
| 0 | |
| 14,295 |
Total FICO CDE | |
| 115,049 | |
| 103,798 | |
| 81,555 | |
| 76,166 | |
| 85,000 | |
| 324,708 | |
| 17,382 | |
| 803,658 |
Total consumer mortgage | | $ | 375,637 | | $ | 330,825 | | $ | 248,468 | | $ | 240,217 | | $ | 246,256 | | $ | 942,393 | | $ | 17,703 | | $ | 2,401,499 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Consumer indirect: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Performing | | $ | 303,471 | | $ | 305,901 | | $ | 202,373 | | $ | 86,497 | | $ | 61,449 | | $ | 61,975 | | $ | 0 | | $ | 1,021,666 |
Nonperforming | |
| 51 | |
| 52 | |
| 82 | |
| 17 | |
| 16 | |
| 1 | |
| 0 | |
| 219 |
Total consumer indirect | | $ | 303,522 | | $ | 305,953 | | $ | 202,455 | | $ | 86,514 | | $ | 61,465 | | $ | 61,976 | | $ | 0 | | $ | 1,021,885 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Consumer direct: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Performing | | $ | 49,181 | | $ | 46,992 | | $ | 27,872 | | $ | 12,326 | | $ | 5,232 | | $ | 4,146 | | $ | 6,878 | | $ | 152,627 |
Nonperforming | |
| 1 | |
| 19 | |
| 2 | |
| 5 | |
| 0 | |
| 3 | |
| 0 | |
| 30 |
Total consumer direct | | $ | 49,182 | | $ | 47,011 | | $ | 27,874 | | $ | 12,331 | | $ | 5,232 | | $ | 4,149 | | $ | 6,878 | | $ | 152,657 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Home equity: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Performing | | $ | 48,145 | | $ | 48,780 | | $ | 28,074 | | $ | 23,524 | | $ | 17,828 | | $ | 35,900 | | $ | 194,773 | | $ | 397,024 |
Nonperforming | |
| 0 | |
| 24 | |
| 73 | |
| 104 | |
| 183 | |
| 490 | |
| 1,936 | |
| 2,810 |
Total home equity | | $ | 48,145 | | $ | 48,804 | | $ | 28,147 | | $ | 23,628 | | $ | 18,011 | | $ | 36,390 | | $ | 196,709 | | $ | 399,834 |
Acquired loans (includes loans acquired after January 1, 2009)
(000’s omitted) | Consumer Mortgage | Consumer Indirect | Consumer Direct | Home Equity | Total | |||||||||||||||
Performing | $ | 384,336 | $ | 10,781 | $ | 3,042 | $ | 73,615 | $ | 471,774 | ||||||||||
Nonperforming | 2,622 | 34 | 4 | 553 | 3,213 | |||||||||||||||
Total | $ | 386,958 | $ | 10,815 | $ | 3,046 | $ | 74,168 | $ | 474,987 |
All loan classes are collectively evaluatedassessed for impairment except business lending, as described in Note A.lending. A summary of individually evaluated impairedassessed business lending loans as of December 31, 20192021 and 2018 is as2020 follows:
| | | | | | |
| | December 31, | | December 31, | ||
(000’s omitted) |
| 2021 |
| 2020 | ||
Loans with allowance allocation | | $ | 7,102 | | $ | 27,437 |
Loans without allowance allocation | |
| 7,417 | |
| 8,138 |
Carrying balance | |
| 14,519 | |
| 35,575 |
Contractual balance | |
| 16,963 | |
| 38,362 |
Specifically allocated allowance | |
| 566 | |
| 3,874 |
The average carrying balance of individually assessed loans was $33.4 million, and $12.2 million for the years ended December 31, 2021 and 2020, respectively. NaN interest income was recognized on individually assessed loans for the years ended December 31, 2021 and 2020.
100
(000’s omitted) | 2019 | 2018 | ||||||
Loans with allowance allocation | $ | 0 | $ | 3,956 | ||||
Loans without allowance allocation | 1,414 | 2,230 | ||||||
Carrying balance | 1,414 | 6,186 | ||||||
Contractual balance | 2,944 | 12,078 | ||||||
Specifically allocated allowance | 0 | 956 | ||||||
Average impaired loans | 5,078 | 7,618 | ||||||
Interest income recognized | 0 | �� | 0 |
In the course of working with borrowers, the Company may choose to restructure the contractual terms of certain loans. In this scenario, the Company attempts to work-out an alternative payment schedule with the borrower in order to optimize collectability of the loan. Any loans that are modified are reviewed by the Company to identify if a TDR has occurred, which is when, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial standing and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two. With regard to determination of the amount of the allowance for loan losses, troubled debt restructured loans are considered to be impaired. As a result, the determination of the amount of allowance for loan losses related to impaired loans for each portfolio segment within TDRs is the same as detailed previously.
In accordance with clarified guidance issued by the OCC, loans that have been discharged in Chapter 7 bankruptcy but not reaffirmed by the borrower, are classified as TDRs, irrespective of payment history or delinquency status, even if the repayment terms for the loan have not been otherwise modified. The Company’s lien position against the underlying collateral remains unchanged. Pursuant to that guidance, the Company records a charge-off equal to any portion of the carrying value that exceeds the net realizable value of the collateral. The amount of loss incurred in 2019, 20182021 and 20172020 was immaterial.
TDRs less than $0.5 million are collectively included in the general loanallowance for credit loss allocation and the qualitative review, if necessary.estimate. Commercial loans greater than $0.5 million are individually evaluated for impairment,assessed, and if necessary, a specific allocation of the allowance for loancredit losses is provided.
With respect to the Company’s lending activities, the Company implemented a customer forbearance program allowing for loan payment deferrals up to three months per request during 2020 to assist both consumer and business borrowers that were experiencing financial hardship due to COVID-19 related challenges. Business lending, consumer direct, and consumer indirect loans in deferment status continued to accrue interest on the deferred principal during the deferment period unless otherwise classified as nonaccrual. Consumer mortgage and home equity loans did not accrue interest on the deferred payments during the deferment period. Consistent with the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), the Consolidated Appropriations Act of 2021 (“CAA”), and industry regulatory guidance, borrowers that were otherwise current on loan payments and granted COVID-19 related financial hardship payment deferrals were reported as current loans throughout the first 180 days of the deferral period and were not classified as TDRs. Borrowers that were delinquent in their payments to the Bank prior to requesting a COVID-19 related financial hardship payment deferral were reviewed on a case-by-case basis for TDR classification and non-performing loan status.
As of December 31, 2021, the Company had 5 borrowers in forbearance due to COVID-19 related financial hardship, representing $4.2 million in outstanding loan balances, or 0.1% of total loans outstanding. These forbearances were comprised of 4 business borrowers representing $4.1 million in outstanding loan balances and 1 consumer borrower representing approximately $0.1 million in outstanding loan balances.
Information regarding TDRs as of December 31, 20192021 and December 31, 20182020 is as followsfollows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| December 31, 2020 | ||||||||||||||||||||||||||
(000’s omitted) | | Nonaccrual | | Accruing | | Total | | Nonaccrual | | Accruing | | Total | ||||||||||||||||||
|
| # |
| Amount |
| # |
| Amount |
| # |
| Amount |
| # |
| Amount |
| # |
| Amount |
| # |
| Amount | ||||||
Business lending | | 10 | | $ | 1,011 |
| 4 | | $ | 811 |
| 14 | | $ | 1,822 |
| 6 | | $ | 529 |
| 4 | | $ | 191 |
| 10 | | $ | 720 |
Consumer mortgage | | 61 | |
| 2,694 |
| 47 | |
| 2,420 |
| 108 | |
| 5,114 |
| 56 | |
| 2,413 |
| 48 | |
| 2,266 |
| 104 | |
| 4,679 |
Consumer indirect | | 0 | |
| 0 |
| 72 | |
| 829 |
| 72 | |
| 829 |
| 0 | |
| 0 |
| 86 | |
| 951 |
| 86 | |
| 951 |
Consumer direct | | 0 | |
| 0 |
| 16 | |
| 7 |
| 16 | |
| 7 |
| 0 | |
| 0 |
| 23 | |
| 85 |
| 23 | |
| 85 |
Home equity | | 10 | |
| 235 |
| 12 | |
| 232 |
| 22 | |
| 467 |
| 11 | |
| 285 |
| 13 | |
| 264 |
| 24 | |
| 549 |
Total | | 81 | | $ | 3,940 |
| 151 | | $ | 4,299 |
| 232 | | $ | 8,239 |
| 73 | | $ | 3,227 |
| 174 | | $ | 3,757 |
| 247 | | $ | 6,984 |
101
December 31, 2019 | December 31, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||
(000’s omitted) | Nonaccrual | Accruing | Total | Nonaccrual | Accruing | Total | ||||||||||||||||||||||||||||||||||||||||||
# | Amount | # | Amount | # | Amount | # | Amount | # | Amount | # | Amount | |||||||||||||||||||||||||||||||||||||
Business lending | 8 | $ | 681 | 3 | $ | 201 | 11 | $ | 882 | 4 | $ | 162 | 2 | $ | 165 | 6 | $ | 327 | ||||||||||||||||||||||||||||||
Consumer mortgage | 59 | 2,638 | 47 | 1,892 | 106 | 4,530 | 46 | 1,986 | 46 | 1,769 | 92 | 3,755 | ||||||||||||||||||||||||||||||||||||
Consumer indirect | 0 | 0 | 84 | 941 | 84 | 941 | 0 | 0 | 77 | 857 | 77 | 857 | ||||||||||||||||||||||||||||||||||||
Consumer direct | 0 | 0 | 23 | 101 | 23 | 101 | 0 | 0 | 22 | 71 | 22 | 71 | ||||||||||||||||||||||||||||||||||||
Home equity | 13 | 290 | 11 | 238 | 24 | 528 | 12 | 240 | 9 | 275 | 21 | 515 | ||||||||||||||||||||||||||||||||||||
Total | 80 | $ | 3,609 | 168 | $ | 3,373 | 248 | $ | 6,982 | 62 | $ | 2,388 | 156 | $ | 3,137 | 218 | $ | 5,525 |
The following table presents information related to loans modified in a TDR during the years ended December 31, 20192021 and 2018.2020. Of the loans noted in the table below, all consumer mortgage loans for the years ended December 31, 20192021 and December 31, 2018,2020 were modified due to a Chapter 7 bankruptcy as described previously. The financial effects of these restructurings were immaterial.
December 31, 2019 | December 31, 2018 | |||||||||||||||
(000’s omitted) | # | Amount | # | Amount | ||||||||||||
Business lending | 6 | $ | 685 | 2 | $ | 103 | ||||||||||
Consumer mortgage | 22 | 1,519 | 9 | 470 | ||||||||||||
Consumer indirect | 33 | 364 | 32 | 320 | ||||||||||||
Consumer direct | 6 | 49 | 6 | 24 | ||||||||||||
Home equity | 6 | 181 | 3 | 118 | ||||||||||||
Total | 73 | $ | 2,798 | 52 | $ | 1,035 |
| | | | | | | | | | |
|
| December 31, 2021 |
| December 31, 2020 | ||||||
(000’s omitted) |
| # |
| Amount |
| # |
| Amount | ||
Business lending | | 5 | | $ | 1,371 | | 1 | | $ | 4 |
Consumer mortgage | | 24 | | | 1,425 | | 17 | |
| 1,339 |
Consumer indirect | | 23 | | | 284 | | 31 | |
| 333 |
Consumer direct | | 2 | | | 7 | | 3 | |
| 10 |
Home equity | | 0 | | | 0 | | 3 | |
| 70 |
Total | | 54 | | $ | 3,087 | | 55 | | $ | 1,756 |
Allowance for LoanCredit Losses
The following presents by classsegment the activity in the allowance for loan losses:credit losses during 2021 and 2020:
| | | | | | | | | | | | | | | |
| | Year Ended December 31, 2021 | |||||||||||||
|
| Beginning |
| Charge- |
|
| |
| Ending | ||||||
(000’s omitted) | | balance | | offs | | Recoveries | | Provision | | balance | |||||
Business lending | | $ | 28,190 | | $ | (1,618) | | $ | 689 | | $ | (6,240) | | $ | 21,021 |
Consumer mortgage | |
| 10,672 | |
| (426) | |
| 91 | |
| (320) | |
| 10,017 |
Consumer indirect | |
| 13,696 | |
| (5,160) | |
| 4,346 | |
| (1,145) | |
| 11,737 |
Consumer direct | |
| 3,207 | |
| (1,232) | |
| 793 | |
| (462) | |
| 2,306 |
Home equity | |
| 2,222 | |
| (225) | |
| 92 | |
| (275) | |
| 1,814 |
Unallocated | |
| 1,000 | |
| 0 | |
| 0 | |
| 0 | |
| 1,000 |
Purchased credit deteriorated | |
| 1,882 | |
| (304) | |
| 107 | |
| 289 | |
| 1,974 |
Allowance for credit losses – loans | |
| 60,869 | |
| (8,965) | |
| 6,118 | |
| (8,153) | |
| 49,869 |
Liabilities for off-balance-sheet credit exposures | |
| 1,489 | |
| 0 | |
| 0 | |
| (686) | |
| 803 |
Total allowance for credit losses | | $ | 62,358 | | $ | (8,965) | | $ | 6,118 | | $ | (8,839) | | $ | 50,672 |
| | | | | | | | | | | | | | | | | | | | | | | | |
|
| Year Ended December 31, 2020 | ||||||||||||||||||||||
| | Beginning | | | | | Beginning | | | | | | | | | | | | | | | | ||
| | balance, | | | | | balance, | | | | | | | | | | | | | | | | ||
| | prior to the | | | | | after | | | | | | | | | | | | | | | | ||
| | adoption of | | Impact of | | adoption of | | Charge- | | | | | Steuben | | | | | Ending | ||||||
(000’s omitted) | | ASC 326 |
| ASC 326 |
| ASC 326 |
| offs |
| Recoveries |
| acquisition |
| Provision |
| balance | ||||||||
Business lending | | $ | 19,426 | | $ | 288 | | $ | 19,714 | | $ | (1,497) | | $ | 356 | | $ | 2,343 | | $ | 7,274 | | $ | 28,190 |
Consumer mortgage | |
| 10,269 | |
| (1,051) | |
| 9,218 | |
| (862) | |
| 130 | |
| 146 | |
| 2,040 | |
| 10,672 |
Consumer indirect | |
| 13,712 | |
| (997) | |
| 12,715 | |
| (6,382) | |
| 3,992 | |
| 183 | |
| 3,188 | |
| 13,696 |
Consumer direct | |
| 3,255 | |
| (643) | |
| 2,612 | |
| (1,633) | |
| 743 | |
| 87 | |
| 1,398 | |
| 3,207 |
Home equity | |
| 2,129 | |
| 808 | |
| 2,937 | |
| (199) | |
| 28 | |
| 235 | |
| (779) | |
| 2,222 |
Unallocated | |
| 957 | |
| 43 | |
| 1,000 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 1,000 |
Purchased credit deteriorated | |
| 0 | |
| 3,072 | |
| 3,072 | |
| (91) | |
| 440 | |
| 668 | |
| (2,207) | |
| 1,882 |
Acquired impaired | |
| 163 | |
| (163) | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 | |
| 0 |
Allowance for credit losses – loans | |
| 49,911 | |
| 1,357 | |
| 51,268 | |
| (10,664) | |
| 5,689 | |
| 3,662 | |
| 10,914 | |
| 60,869 |
Liabilities for off-balance-sheet credit exposures | |
| 0 | |
| 1,185 | |
| 1,185 | |
| 0 | |
| 0 | |
| 67 | |
| 237 | |
| 1,489 |
Total allowance for credit losses | | $ | 49,911 | | $ | 2,542 | | $ | 52,453 | | $ | (10,664) | | $ | 5,689 | | $ | 3,729 | | $ | 11,151 | | $ | 62,358 |
102
(000’s omitted) | Business Lending | Consumer Mortgage | Consumer Indirect | Consumer Direct | Home Equity | Unallocated | Acquired Impaired | Total | ||||||||||||||||||||||||
Balance at December 31, 2016 | $ | 17,220 | $ | 10,094 | $ | 13,782 | $ | 2,979 | $ | 2,399 | $ | 651 | $ | 108 | $ | 47,233 | ||||||||||||||||
Charge-offs | (4,959 | ) | (707 | ) | (8,456 | ) | (2,081 | ) | (284 | ) | 0 | (270 | ) | (16,757 | ) | |||||||||||||||||
Recoveries | 656 | 50 | 4,516 | 849 | 52 | 0 | 0 | 6,123 | ||||||||||||||||||||||||
Provision | 4,340 | 1,028 | 3,626 | 1,292 | (60 | ) | 449 | 309 | 10,984 | |||||||||||||||||||||||
Balance at December 31, 2017 | 17,257 | 10,465 | 13,468 | 3,039 | 2,107 | 1,100 | 147 | 47,583 | ||||||||||||||||||||||||
Charge-offs | (3,566 | ) | (836 | ) | (8,382 | ) | (1,777 | ) | (544 | ) | 0 | (381 | ) | (15,486 | ) | |||||||||||||||||
Recoveries | 485 | 136 | 4,874 | 807 | 48 | 0 | 0 | 6,350 | ||||||||||||||||||||||||
Provision | 4,346 | 359 | 4,406 | 1,026 | 533 | (100 | ) | 267 | 10,837 | |||||||||||||||||||||||
Balance at December 31, 2018 | 18,522 | 10,124 | 14,366 | 3,095 | 2,144 | 1,000 | 33 | 49,284 | ||||||||||||||||||||||||
Charge-offs | (2,334 | ) | (1,372 | ) | (7,631 | ) | (1,945 | ) | (445 | ) | 0 | 0 | (13,727 | ) | ||||||||||||||||||
Recoveries | 826 | 60 | 4,180 | 710 | 148 | 0 | 0 | 5,924 | ||||||||||||||||||||||||
Provision | 2,412 | 1,457 | 2,797 | 1,395 | 282 | (43 | ) | 130 | 8,430 | |||||||||||||||||||||||
Balance at December 31, 2019 | $ | 19,426 | $ | 10,269 | $ | 13,712 | $ | 3,255 | $ | 2,129 | $ | 957 | $ | 163 | $ | 49,911 |
The allowance for credit losses to total loans ratio of 0.68% at December 31, 2021 was 14 basis points lower than the level at December 31, 2020. This decrease was primarily due to improvements in the economic forecasts and improvements in non-economic qualitative adjustments resulting from lower levels of delinquencies, deferrals, and chargeoffs than in the prior year.
Accrued interest receivable on loans, included in accrued interest and fees receivable on the consolidated statements of condition, totaled $16.7 million and $22.2 million at December 31, 2021 and 2020, respectively, and is excluded from the estimate of credit losses and amortized cost basis of loans.
Under ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), also referred to as CECL, the Company utilizes the historical loss rate on its loan portfolio as the initial basis for the estimate of credit losses using the cumulative loss, vintage loss and line loss methods which is derived from the Company’s historical loss experience from January 1, 2012 to December 31, 2020. Adjustments to historical loss experience were made for differences in current loan-specific risk characteristics and to address current period delinquencies, charge-off rates, risk ratings, lack of loan level data through an entire economic cycle, changes in loan sizes and underwriting standards as well as the addition of acquired loans which were not underwritten by the Company. The Company considered historical losses immediately prior, through and following the Great Recession of 2008 compared to the historical period used for modeling to adjust the historical information to account for longer-term expectations for loan credit performance. Under CECL, the Company is required to consider future economic conditions to determine current expected credit losses. Management selected an eight quarter reasonable and supportable forecast period using a two quarter lag adjustment for economic factors that are not dependent on collateral values, and no lag for factors that do utilize collateral values, with a four quarter reversion to the historical mean, to use as part of the economic forecast. Management determined that these qualitative adjustments were needed to adjust historical information for expected losses and to reflect changes as a result of current conditions.
For qualitative macroeconomic adjustments, the Company uses third party forecasted economic data scenarios utilizing a base scenario and two alternative scenarios that were weighted based on guidance from the third party provider, with forecasts available as of December 31, 2021. These forecasts were factored into the qualitative portion of the calculation of the estimated credit losses and included the continued impact of COVID-19, such as supply chain pressures and their impact on collateral values and economic growth. The scenarios utilized forecast a generally positive outlook on the economy, with low unemployment figures and high collateral values for housing, commercial real estate, and vehicles. In addition to the economic forecast, the Company also considered additional qualitative adjustments as a result of COVID-19 and the impact on all industries, loan deferrals, delinquencies and downgrades.
Management developed expected loss estimates considering factors for segments as outlined below:
● | Business lending – non real estate: The Company selected projected unemployment and GDP as indicators of forecasted losses related to business lending and utilize both factors in an even weight for the calculation. The Company also considered delinquencies, the level of loan deferrals, risk rating changes, recent charge-off history and acquired loans as part of the review of estimated losses. |
● | Business lending – real estate: The Company selected projected unemployment and commercial real estate values as indicators of forecasted losses related to commercial real estate loans and utilize both factors in an even weight for the calculation. The Company also considered the factors noted in business lending – non real estate. |
● | Consumer mortgages and home equity: The Company selected projected unemployment and residential real estate values as indicators of forecasted losses related to mortgage lending and utilize both factors in an even weight for the calculation. In addition, current delinquencies, the level of loan deferrals, charge-offs and acquired loans were considered. |
● | Consumer indirect: The Company selected projected unemployment and vehicle valuation indices as indicators of forecasted losses related to indirect lending and utilize both factors in an even weight for the calculation. In addition, current delinquencies, the level of loan deferrals, charge-offs and acquired loans were considered. |
● | Consumer direct: The Company selected projected unemployment and household income as indicators of forecasted losses related to consumer direct lending and utilize both factors in an even weight for the calculation. In addition, current delinquencies, the level of loan deferrals, charge-offs and acquired loans were considered. |
103
The following table presents the carrying amounts of loans purchased and sold during the year ended December 31, 2021 by portfolio segment:
| | | | | | | | | | | | | | | | | | |
(000’s |
| Business |
| Consumer |
| Consumer |
| Consumer |
| Home |
| | ||||||
omitted) | | lending | | mortgage | | indirect | | direct | | equity | | Total | ||||||
Purchases | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 |
Sales | |
| 3,748 | |
| 20,133 | |
| 0 | |
| 0 | |
| 0 | |
| 23,881 |
All the sales of consumer mortgages during the year ended December 31, 2021 were sales of secondary market eligible residential mortgage loans. The sales of business loans during the year ended December 31, 2021 includes three business lending loans under two relationships.
NOTE E: PREMISES AND EQUIPMENT
Premises and equipment consist of the following at December 31:
(000’s omitted) | 2019 | 2018 | ||||||
Land and land improvements | $ | 26,301 | $ | 24,340 | ||||
Bank premises | 141,905 | 133,259 | ||||||
Equipment and construction in progress | 89,819 | 89,950 | ||||||
Operating lease right-of-use assets | 39,895 | 0 | ||||||
Premises and equipment, gross | 297,920 | 247,549 | ||||||
Accumulated depreciation | (133,282 | ) | (127,561 | ) | ||||
Premises and equipment, net | $ | 164,638 | $ | 119,988 |
| | | | | | |
(000’s omitted) |
| 2021 |
| 2020 | ||
Land and land improvements | | $ | 31,884 | | $ | 29,070 |
Bank premises | |
| 151,724 | |
| 149,217 |
Equipment | |
| 85,391 | |
| 93,013 |
Operating lease right-of-use assets | |
| 31,754 | |
| 34,908 |
Construction in progress | | | 4,786 | | | 6,226 |
Premises and equipment, gross | |
| 305,539 | |
| 312,434 |
Accumulated depreciation | |
| (144,888) | |
| (146,779) |
Premises and equipment, net | | $ | 160,651 | | $ | 165,655 |
NOTE F: GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
The gross carrying amount and accumulated amortization for each type of identifiable intangible asset are as follows:
December 31, 2019 | December 31, 2018 | |||||||||||||||||||||||
(000’s omitted) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||
Amortizing intangible assets: | ||||||||||||||||||||||||
Core deposit intangibles | $ | 66,475 | $ | (50,057 | ) | $ | 16,418 | $ | 62,902 | $ | (44,306 | ) | $ | 18,596 | ||||||||||
Other intangibles | 89,266 | (42,571 | ) | 46,695 | 87,616 | (32,366 | ) | 55,250 | ||||||||||||||||
Total amortizing intangibles | $ | 155,741 | $ | (92,628 | ) | $ | 63,113 | $ | 150,518 | $ | (76,672 | ) | $ | 73,846 |
| | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| December 31, 2020 | ||||||||||||||
| | Gross | | | | | Net | | Gross | | | | | Net | ||||
|
| Carrying |
| Accumulated |
| Carrying |
| Carrying |
| Accumulated |
| Carrying | ||||||
(000’s omitted) | | Amount |
| Amortization |
| Amount |
| Amount |
| Amortization |
| Amount | ||||||
Amortizing intangible assets: | | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Core deposit intangibles | | $ | 69,403 | | $ | (60,316) | | $ | 9,087 | | $ | 69,403 | | $ | (55,572) | | $ | 13,831 |
Other intangibles | |
| 116,799 | |
| (60,660) | |
| 56,139 | |
| 90,462 | |
| (51,353) | |
| 39,109 |
Total amortizing intangibles | | $ | 186,202 | | $ | (120,976) | | $ | 65,226 | | $ | 159,865 | | $ | (106,925) | | $ | 52,940 |
The estimated aggregate amortization expense for each of the five succeeding fiscal years ended December 31 is as follows:follows (000’s omitted):
| | | |
Year |
| Amount | |
2022 | | $ | 13,668 |
2023 | | | 11,595 |
2024 | |
| 9,782 |
2025 | |
| 8,349 |
2026 | |
| 7,494 |
Thereafter | |
| 14,338 |
Total | | $ | 65,226 |
104
2020 | $ | 13,800 | ||
2021 | 11,786 | |||
2022 | 10,105 | |||
2023 | 8,457 | |||
2024 | 7,041 | |||
Thereafter | 11,924 | |||
Total | $ | 63,113 |
Shown below are the components of the Company’s goodwill at December 31, 2019, 20182021, 2020, and 2017:
(000’s omitted) | Year Ended December 31, 2017 | Activity | Year Ended December 31, 2018 | Activity | Year Ended December 31, 2019 | |||||||||||||||
Goodwill | $ | 739,254 | $ | (927 | ) | $ | 738,327 | $ | 40,307 | $ | 778,634 | |||||||||
Accumulated impairment | (4,824 | ) | 0 | (4,824 | ) | 0 | (4,824 | ) | ||||||||||||
Goodwill, net | $ | 734,430 | $ | (927 | ) | $ | 733,503 | $ | 40,307 | $ | 773,810 |
| | | | | | | | | | | | | | | |
| | | December 31, | | | | | December 31, | | | | | December 31, | ||
(000’s omitted) |
| | 2019 |
| Activity |
| 2020 |
| Activity |
| 2021 | ||||
Goodwill, net | | $ | 773,810 | | $ | 19,898 | | $ | 793,708 | | $ | 5,401 | | $ | 799,109 |
During the first quarter of 2019,2021, the Company performed its annual internal valuationquarterly qualitative analyses of goodwill impairment and impairment analysisperformed a quantitative assessment of its banking and financial services businesses during the fourth quarter of 2021 by comparing the fair value of eachthe reporting unit towith its carrying value.amount. The qualitative analyses performed in 2021 included assessments of macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, other relevant entity-specific events, events affecting a reporting unit and changes in share price. During 2020, the Company performed quarterly qualitative analyses of goodwill impairment and performed a quantitative assessment of its insurance subsidiary included in the All Other segment during the fourth quarter of 2020. Results of the valuationsquarterly and annual analyses indicate there was no goodwill impairment.
Mortgage Servicing Rights
Under certain circumstances, the Company sells consumer residential mortgage loans in the secondary market and typically retains the right to service the loans sold. Generally, the Company’s residential mortgage loans sold to third parties are sold on a non-recourse basis. Upon sale, a mortgage servicing right (“MSR”) is established, which represents the current fair value of future net cash flows expected to be realized for performing the servicing activities. The Company stratifies these assets based on predominant risk characteristics, namely expected term of the underlying financial instruments, and uses a valuation model that calculates the present value of future cash flows to determine the fair value of servicing rights. MSRs are recorded in other assets at the lower of the initial capitalized amount, net of accumulated amortization or fair value. Mortgage loans serviced for others are not included in the accompanying consolidated statements of condition.
The following table summarizes the changes in carrying value of MSRs and the associated valuation allowance:
(000’s omitted) | 2019 | 2018 | ||||||
Carrying value before valuation allowance at beginning of period | $ | 1,137 | $ | 1,358 | ||||
Additions | 17 | 228 | ||||||
Kinderhook acquisition | 196 | 0 | ||||||
Amortization | (378 | ) | (449 | ) | ||||
Carrying value before valuation allowance at end of period | 972 | 1,137 | ||||||
Valuation allowance balance at beginning of period | 0 | 0 | ||||||
Impairment charges | (326 | ) | 0 | |||||
Impairment recoveries | 28 | 0 | ||||||
Valuation allowance balance at end of period | (298 | ) | 0 | |||||
Net carrying value at end of period | $ | 674 | $ | 1,137 | ||||
Fair value of MSRs at end of period | $ | 1,362 | $ | 2,397 | ||||
Principal balance of loans sold during the year | $ | 2,204 | $ | 18,228 | ||||
Principal balance of loans serviced for others | $ | 294,093 | $ | 333,862 | ||||
Custodial escrow balances maintained in connection with loans serviced for others | $ | 4,596 | $ | 4,982 |
| | | | | | |
(000’s omitted) | | 2021 | | 2020 | ||
Carrying value before valuation allowance at beginning of period | | $ | 1,430 | | $ | 972 |
Additions | |
| 233 | |
| 715 |
Acquisitions | |
| 0 | |
| 122 |
Amortization | |
| (519) | |
| (379) |
Carrying value before valuation allowance at end of period | |
| 1,144 | |
| 1,430 |
Valuation allowance balance at beginning of period | |
| (219) | |
| (298) |
Impairment charges | |
| (55) | |
| (150) |
Impairment recoveries | |
| 274 | |
| 229 |
Valuation allowance balance at end of period | |
| 0 | |
| (219) |
Net carrying value at end of period | | $ | 1,144 | | $ | 1,211 |
Fair value of MSRs at end of period | | $ | 1,469 | | $ | 1,384 |
Principal balance of mortgage loans sold during the year | | $ | 20,133 | | $ | 79,709 |
Principal balance of loans serviced for others | | $ | 296,506 | | $ | 351,759 |
Custodial escrow balances maintained in connection with loans serviced for others | | $ | 4,934 | | $ | 5,583 |
The following table summarizes the key economic assumptions used to estimate the value of the MSRs at December 31:
| | | | | |
| | 2021 | | 2020 |
|
Weighted-average contractual life (in years) |
| 21.4 |
| 21.5 | |
Weighted-average constant prepayment rate (CPR) |
| 24.5 | % | 30.4 | % |
Weighted-average discount rate |
| 2.6 | % | 2.1 | % |
105
2019 | 2018 | |||||||
Weighted-average contractual life (in years) | 20.9 | 21.4 | ||||||
Weighted-average constant prepayment rate (CPR) | 18.7 | % | 9.3 | % | ||||
Weighted-average discount rate | 3.0 | % | 3.6 | % |
Deposits recorded in the consolidated statements of condition consist of the following at December 31:
(000’s omitted) | 2019 | 2018 | ||||||
Noninterest checking | $ | 2,465,902 | $ | 2,312,816 | ||||
Interest checking | 2,138,348 | 1,920,545 | ||||||
Savings | 1,538,203 | 1,448,208 | ||||||
Money market | 1,916,385 | 1,901,262 | ||||||
Time | 936,129 | 739,540 | ||||||
Total deposits | $ | 8,994,967 | $ | 8,322,371 |
| | | | | | |
(000’s omitted) | | 2021 | | 2020 | ||
Noninterest checking | | $ | 3,921,663 | | $ | 3,361,768 |
Interest checking | |
| 3,201,225 | |
| 2,876,420 |
Savings | |
| 2,255,961 | |
| 1,949,517 |
Money market | |
| 2,603,988 | |
| 2,103,498 |
Time | |
| 928,331 | |
| 933,771 |
Total deposits | | $ | 12,911,168 | | $ | 11,224,974 |
Interest on deposits recorded in the consolidated statements of income consists of the following at December 31:
(000’s omitted) | 2019 | 2018 | 2017 | |||||||||
Interest on interest checking | $ | 3,678 | $ | 1,796 | $ | 1,032 | ||||||
Interest on savings | 942 | 858 | 841 | |||||||||
Interest on money market | 5,836 | 3,638 | 2,981 | |||||||||
Interest on time | 10,004 | 4,366 | 3,177 | |||||||||
Total interest on deposits | $ | 20,460 | $ | 10,658 | $ | 8,031 |
| | | | | | | | | |
(000’s omitted) | | 2021 | | 2020 | | 2019 | |||
Interest on interest checking | | $ | 1,142 | | $ | 2,182 | | $ | 3,678 |
Interest on savings | |
| 598 | |
| 665 | |
| 942 |
Interest on money market | |
| 1,393 | |
| 2,685 | |
| 5,836 |
Interest on time | |
| 8,498 | |
| 11,229 | |
| 10,004 |
Total interest on deposits | | $ | 11,631 | | $ | 16,761 | | $ | 20,460 |
The approximate maturities of time deposits at December 31, 20192021 are as follows:
(000’s omitted) | All Accounts | Accounts $250,000 or Greater | ||||||
2020 | $ | 505,008 | $ | 73,893 | ||||
2021 | 162,729 | 23,356 | ||||||
2022 | 84,028 | 7,297 | ||||||
2023 | 87,907 | 5,719 | ||||||
2024 | 96,439 | 20,252 | ||||||
Thereafter | 18 | 0 | ||||||
Total | $ | 936,129 | $ | 130,517 |
| | | | | | |
|
| | |
| Accounts $250,000 | |
(000’s omitted) | | All Accounts | | or Greater | ||
2022 | | $ | 579,595 | | $ | 186,647 |
2023 | |
| 139,881 | |
| 7,408 |
2024 | |
| 162,317 | |
| 38,681 |
2025 | |
| 21,494 | |
| 2,102 |
2026 | |
| 25,010 | |
| 1,922 |
Thereafter | |
| 34 | |
| 0 |
Total | | $ | 928,331 | | $ | 236,760 |
Outstanding borrowings at December 31 are as follows:
(000’s omitted) | 2019 | 2018 | ||||||
Overnight FHLB borrowings | $ | 8,300 | $ | 54,400 | ||||
Subordinated notes payable, net of premium of $795 and $0, respectively | 13,795 | 0 | ||||||
Subordinated debt held by unconsolidated subsidiary trusts | 77,320 | 97,939 | ||||||
Securities sold under agreement to repurchase, short term | 241,708 | 259,367 | ||||||
Other FHLB borrowings | 3,750 | 1,976 | ||||||
Total borrowings | $ | 344,873 | $ | 413,682 |
| | | | | | |
(000’s omitted) | | 2021 | | 2020 | ||
Subordinated notes payable, includes premium of $277 and $303, respectively | | $ | 3,277 | | $ | 3,303 |
Subordinated debt held by unconsolidated subsidiary trusts | |
| 0 | |
| 77,320 |
Securities sold under agreement to repurchase, short term | |
| 324,720 | |
| 284,008 |
Other FHLB borrowings | |
| 1,888 | |
| 6,658 |
Total borrowings | | $ | 329,885 | | $ | 371,289 |
FHLB advances are collateralized by a blanket lien on the Company’sCompany's residential real estate loan portfolio and various investment securities.
106
(000’s omitted, except rate) | Carrying Value | Weighted-average Rate at December 31, 2019 | ||||||
January 2, 2020 | $ | 250,008 | 0.82 | % | ||||
June 15, 2020 | 1,000 | 1.75 | % | |||||
February 8, 2021 | 675 | 1.45 | % | |||||
February 8, 2023 | 190 | 1.79 | % | |||||
July 3, 2023 | 549 | 2.25 | % | |||||
October 23, 2023 | 455 | 1.50 | % | |||||
October 1, 2025 | 302 | 1.50 | % | |||||
November 18, 2025 | 10,467 | 6.38 | % | |||||
February 28, 2028 | 3,328 | 6.00 | % | |||||
March 1, 2029 | 579 | 2.50 | % | |||||
December 15, 2036 | 77,320 | 3.54 | % | |||||
Total | $ | 344,873 | 1.65 | % |
| | | | | | |
|
| | |
| Weighted-average |
|
| | Carrying | | Rate at |
| |
(000’s omitted, except rate) | | Value | | December 31, 2021 |
| |
January 2, 2022 | | $ | 324,720 |
| 0.27 | % |
February 8, 2023 | |
| 190 |
| 1.79 | % |
July 3, 2023 | |
| 497 |
| 2.25 | % |
October 23, 2023 | |
| 395 |
| 1.50 | % |
October 1, 2025 | |
| 275 |
| 1.50 | % |
February 28, 2028 | |
| 3,277 |
| 4.67 | % |
March 1, 2029 | |
| 531 |
| 2.50 | % |
Total | | $ | 329,885 |
| 0.32 | % |
The weighted-average interest rate on borrowings for the years ended December 31, 20192021 and 20182020 was 1.86%0.48% and 1.72%1.27%, respectively.
As of December 31,
31,2019, the terms of the preferred securities of CCT IV are as follows:
107
The provision for income taxes for the years ended December 31 is as follows:
(000’s omitted) | 2019 | 2018 | 2017 | |||||||||
Current: | ||||||||||||
Federal | $ | 34,804 | $ | 32,504 | $ | 31,152 | ||||||
State and other | 7,773 | 9,180 | 6,788 | |||||||||
Deferred: | ||||||||||||
Federal | (699 | ) | 2,122 | (28,146 | ) | |||||||
State and other | (1,603 | ) | 541 | (546 | ) | |||||||
Provision for income taxes | $ | 40,275 | $ | 44,347 | $ | 9,248 |
| | | | | | | | | |
(000’s omitted) |
| 2021 |
| 2020 |
| 2019 | |||
Current: |
| |
|
| |
|
| |
|
Federal | | $ | 35,507 | | $ | 35,728 | | $ | 34,804 |
State and other | |
| 8,158 | |
| 8,008 | |
| 7,773 |
Deferred: | |
| | |
|
| |
|
|
Federal | |
| 5,493 | |
| (2,005) | |
| (699) |
State and other | |
| 2,496 | |
| (331) | |
| (1,603) |
Provision for income taxes | | $ | 51,654 | | $ | 41,400 | | $ | 40,275 |
Components of the net deferred tax liability, included in other liabilities, as of December 31 are as follows:
(000’s omitted) | 2019 | 2018 | ||||||
Allowance for loan losses | $ | 12,059 | $ | 12,131 | ||||
Employee benefits | 5,393 | 4,479 | ||||||
Operating lease liabilities | 9,801 | 0 | ||||||
Other, net | 837 | 541 | ||||||
Deferred tax asset | 28,090 | 17,151 | ||||||
Investment securities | 21,547 | 14,451 | ||||||
Goodwill and intangibles | 39,189 | 39,540 | ||||||
Operating lease right-of-use assets | 9,566 | 0 | ||||||
Loan origination costs | 7,639 | 6,851 | ||||||
Depreciation | 2,736 | 3,098 | ||||||
Mortgage servicing rights | 162 | 277 | ||||||
Pension | 13,769 | 11,078 | ||||||
Deferred tax liability | 94,608 | 75,295 | ||||||
Net deferred tax liability | $ | (66,518 | ) | $ | (58,144 | ) |
| | | | | | |
(000’s omitted) |
| 2021 |
| 2020 | ||
Allowance for credit losses | | $ | 12,435 | | $ | 15,004 |
Employee benefits | |
| 7,708 | |
| 7,552 |
Operating lease liabilities | |
| 7,955 | |
| 8,601 |
Other, net | |
| 1,250 | |
| 900 |
Deferred tax asset | |
| 29,348 | |
| 32,057 |
| | | | | | |
Investment securities | |
| 7,227 | |
| 43,325 |
Goodwill and intangibles | |
| 41,917 | |
| 40,802 |
Operating lease right-of-use assets | |
| 7,693 | |
| 8,384 |
Loan origination costs | |
| 8,993 | |
| 7,904 |
Depreciation | |
| 535 | |
| 3,089 |
Mortgage servicing rights | |
| 278 | |
| 291 |
Pension | |
| 22,950 | |
| 16,987 |
Deferred tax liability | |
| 89,593 | |
| 120,782 |
Net deferred tax liability | | $ | (60,245) | | $ | (88,725) |
The Company has determined that no valuation allowance is necessary as it is more likely than not that the gross deferred tax assets will be realized through future reversals of existing temporary differences and through future taxable income.
A reconciliation of the differences between the federal statutory income tax rate and the effective tax rate for the years ended December 31 is shown in the following table:
2019 | 2018 | 2017 | ||||||||||
Federal statutory income tax rate | 21.0 | % | 21.0 | % | 35.0 | % | ||||||
Increase (reduction) in taxes resulting from: | ||||||||||||
Tax-exempt interest | (1.5 | ) | (1.6 | ) | (3.8 | ) | ||||||
State income taxes, net of federal benefit | 2.5 | 3.4 | 2.5 | |||||||||
Stock-based compensation | (1.6 | ) | (0.9 | ) | (2.0 | ) | ||||||
Federal deferred tax revaluation adjustment | 0 | 0 | (23.7 | ) | ||||||||
Federal tax credits | (1.3 | ) | (1.4 | ) | (1.5 | ) | ||||||
Other, net | 0.1 | 0.3 | (0.7 | ) | ||||||||
Effective income tax rate | 19.2 | % | 20.8 | % | 5.8 | % |
(000’s omitted) | 2019 | 2018 | 2017 | |||||||||
Unrecognized tax benefits at beginning of year | $ | 0 | $ | 24 | $ | 92 | ||||||
Changes related to: | ||||||||||||
Lapse of statutes of limitations | 0 | (24 | ) | (68 | ) | |||||||
Unrecognized tax benefits at end of year | $ | 0 | $ | 0 | $ | 24 |
| | | | | | | |
|
| 2021 |
| 2020 |
| 2019 |
|
Federal statutory income tax rate |
| 21.0 | % | 21.0 | % | 21.0 | % |
Increase (reduction) in taxes resulting from: |
| |
|
|
|
| |
Tax-exempt interest |
| (1.1) |
| (1.5) |
| (1.5) | |
State income taxes, net of federal benefit |
| 3.6 |
| 3.0 |
| 2.5 | |
Stock-based compensation |
| (0.9) |
| (0.8) |
| (1.6) | |
Federal tax credits |
| (1.0) |
| (1.3) |
| (1.3) | |
Other, net |
| (0.2) |
| (0.3) |
| 0.1 | |
Effective income tax rate |
| 21.4 | % | 20.1 | % | 19.2 | % |
As of December 31, 2021, 2020 and 2019, there was 0 amount of material unrecognized tax benefits that would impact the Company’s effective tax rate if recognized. It is reasonably possible that the amount of unrecognized tax benefits could change in the next twelve months as a result of various examinations and expiration of statutes of limitations on prior tax returns.
108
The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as part of income taxes in the consolidated statement of income. The accrued interest related to tax positions was immaterial.
The Company’s federal and state income tax returns are routinely subject to examination from various governmental taxing authorities. Such examinations may result in challenges to the tax return treatment applied by the Company to specific transactions. Management believes that the assumptions and judgment used to record tax-related assets or liabilities have been appropriate. Future examinations by taxing authorities of the Company’s federal or state tax returns could have a material impact on the Company’s results of operations. The Company’s federal income tax returns for years after 20152017 may still be examined by the Internal Revenue Service. New York State income tax returns for years after 20152017 may still be examined by the New York Department of Taxation and Finance. The Company is currently under examination by the Massachusetts Department of Revenue in connection with tax years 2018 to 2019 and the New York Department of Taxation and Finance in connection with tax years 2015 to 2017, and has not received any notices of proposed adjustments. It is not possible to estimate if and when those examinations may be completed.
Income Taxes, requires existing deferred tax assets and liabilities to be measured at the enacted tax rate expected to be applied when the temporary differences are to be realized or settled. Thus, as of the date of enactment, deferred taxes were re-measured based upon the new 21% tax rate. Prior to the change in tax rate, the Company had recorded net deferred tax liabilities based on a marginal tax rate of 37.70%. The change in tax rate resulted in a decrease in the marginal tax rate to 24.29% and a deferred tax benefit of $38.0 million from the write-down of the net deferred tax liabilities. The effect of this change in tax law was recorded as a component of the income tax provision including those deferred assets and liabilities that were established through a financial statement component other than continuing operations.
NOTE J: LIMITS ON DIVIDENDS AND OTHER REVENUE SOURCES
The Company’s ability to pay dividends to its shareholders is largely dependent on the Bank’s ability to pay dividends to the Company. In addition to the capital requirements discussed below, the circumstances under which the Bank may pay dividends are limited by federal statutes, regulations, and policies. For example, as a national bank, the Bank must obtain the approval of the Office of the Comptroller of the Currency (“OCC”) for payments of dividends if the total of all dividends declared in any calendar year would exceed the total of the Bank’s net profits, as defined by applicable regulations, for that year, combined with its retained net profits for the preceding two years. Furthermore, the Bank may not pay a dividend in an amount greater than its undivided profits then on hand after deducting its losses and bad debts, as defined by applicable regulations. At December 31, 2019,2021, the Bank had approximately $119.3$94.2 million in undivided profits legally available for the payment of dividends.
In addition, the Board of Governors of the Federal Reserve System (“FRB”) and the OCC are authorized to determine under certain circumstances that the payment of dividends would be an unsafe or unsound practice and to prohibit payment of such dividends. The FRB has indicated that banking organizations should generally pay dividends only out of current operating earnings.
There are also statutory limits on the transfer of funds to the Company by its banking subsidiary, whether in the form of loans or other extensions of credit, investments or assets purchases. Such transfer by the Bank to the Company generally is limited in amount to 10% of the Bank’s capital and surplus, or 20% in the aggregate. Furthermore, such loans and extensions of credit are required to be collateralized in specific amounts.
109
Pension and post-retirement plans
The Company provides a qualified defined benefit pension to eligible employees and retirees, other post-retirement health and life insurance benefits to certain retirees, an unfunded supplemental pension plan for certain key executives, and an unfundedstock balance plan for certain of its nonemployee directors. Using a measurement date of December 31, the following table shows the funded status of the Company’sCompany's plans reconciled with amounts reported in the Company’sCompany's consolidated statements of condition:
Pension Benefits | Post-retirement Benefits | |||||||||||||||
(000’s omitted) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Change in benefit obligation: | ||||||||||||||||
Benefit obligation at the beginning of year | $ | 144,211 | $ | 147,450 | $ | 1,657 | $ | 1,785 | ||||||||
Service cost | 5,081 | 4,561 | 0 | 0 | ||||||||||||
Interest cost | 6,264 | 5,676 | 70 | 69 | ||||||||||||
Plan amendment / acquisition | 0 | 883 | 0 | 0 | ||||||||||||
Participant contributions | 0 | 0 | 35 | 479 | ||||||||||||
Deferred actuarial (gain)/loss | 16,292 | (4,177 | ) | 87 | 191 | |||||||||||
Benefits paid | (9,764 | ) | (10,182 | ) | (172 | ) | (867 | ) | ||||||||
Benefit obligation at end of year | 162,084 | 144,211 | 1,677 | 1,657 | ||||||||||||
Change in plan assets: | ||||||||||||||||
Fair value of plan assets at beginning of year | 203,672 | 217,107 | 0 | 0 | ||||||||||||
Actual return of plan assets | 25,522 | (3,858 | ) | 0 | 0 | |||||||||||
Participant contributions | 0 | 0 | 35 | 479 | ||||||||||||
Employer contributions | 7,893 | 605 | 137 | 388 | ||||||||||||
Plan acquisition | 0 | 0 | 0 | 0 | ||||||||||||
Benefits paid | (9,764 | ) | (10,182 | ) | (172 | ) | (867 | ) | ||||||||
Fair value of plan assets at end of year | 227,323 | 203,672 | 0 | 0 | ||||||||||||
Over/(Under) funded status at year end | $ | 65,239 | $ | 59,461 | $ | (1,677 | ) | $ | (1,657 | ) | ||||||
Amounts recognized in the consolidated statement of condition were: | ||||||||||||||||
Other assets | $ | 81,930 | $ | 72,659 | $ | 0 | $ | 0 | ||||||||
Other liabilities | (16,691 | ) | (13,198 | ) | (1,677 | ) | (1,657 | ) | ||||||||
Amounts recognized in accumulated other comprehensive loss/(income) (“AOCI”) were: | ||||||||||||||||
Net loss | $ | 41,924 | $ | 39,410 | $ | 641 | $ | 592 | ||||||||
Net prior service cost (credit) | 4,875 | 4,939 | (1,265 | ) | (1,444 | ) | ||||||||||
Pre-tax AOCI | 46,799 | 44,349 | (624 | ) | (852 | ) | ||||||||||
Taxes | (11,448 | ) | (10,870 | ) | 155 | 210 | ||||||||||
AOCI at year end | $ | 35,351 | $ | 33,479 | $ | (469 | ) | $ | (642 | ) |
| | | | | | | | | | | | |
| | Pension Benefits | | Post-retirement Benefits | ||||||||
(000’s omitted) |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Change in benefit obligation: |
| |
|
| |
|
| |
|
| |
|
Benefit obligation at the beginning of year | | $ | 190,361 | | $ | 162,084 | | $ | 1,718 | | $ | 1,677 |
Service cost | |
| 5,920 | |
| 5,750 | |
| 0 | |
| 0 |
Interest cost | |
| 5,036 | |
| 5,657 | |
| 44 | |
| 57 |
Plan amendment / acquisition | |
| 0 | |
| 13,598 | |
| 0 | |
| 0 |
Participant contributions | |
| 0 | |
| 0 | |
| 0 | |
| 0 |
Deferred actuarial (gain)/loss | |
| (4,881) | |
| 13,954 | |
| (85) | |
| 114 |
Benefits paid | |
| (13,166) | |
| (10,682) | |
| (148) | |
| (130) |
Benefit obligation at end of year | |
| 183,270 | |
| 190,361 | |
| 1,529 | |
| 1,718 |
Change in plan assets: | |
| | |
| | |
| | |
| |
Fair value of plan assets at beginning of year | |
| 272,600 | |
| 227,323 | |
| 0 | |
| 0 |
Actual return of plan assets | |
| 27,614 | |
| 33,543 | |
| 0 | |
| 0 |
Participant contributions | |
| 0 | |
| 0 | |
| 0 | |
| 0 |
Employer contributions | |
| 3,639 | |
| 7,993 | |
| 148 | |
| 130 |
Plan acquisition | |
| 0 | |
| 14,423 | |
| 0 | |
| 0 |
Benefits paid | |
| (13,166) | |
| (10,682) | |
| (148) | |
| (130) |
Fair value of plan assets at end of year | |
| 290,687 | |
| 272,600 | |
| 0 | |
| 0 |
Over/(Under) funded status at year end | | $ | 107,417 | | $ | 82,239 | | $ | (1,529) | | $ | (1,718) |
| | | | | | | | | | | | |
Amounts recognized in the consolidated statement of condition were: | |
|
| |
|
| |
|
| |
|
|
Other assets | | $ | 127,538 | | $ | 101,849 | | $ | 0 | | $ | 0 |
Other liabilities | |
| (20,121) | |
| (19,610) | |
| (1,529) | |
| (1,718) |
Amounts recognized in accumulated other comprehensive loss/(income) (“AOCI”) were: | |
|
| |
|
| |
|
| |
|
|
Net loss | | $ | 16,977 | | $ | 34,290 | | $ | 585 | | $ | 715 |
Net prior service cost (credit) | |
| 3,969 | |
| 4,348 | |
| (907) | |
| (1,086) |
Pre-tax AOCI | |
| 20,946 | |
| 38,638 | |
| (322) | |
| (371) |
Taxes | |
| (5,236) | |
| (9,488) | |
| 82 | |
| 94 |
AOCI at year end | | $ | 15,710 | | $ | 29,150 | | $ | (240) | | $ | (277) |
The benefit obligation for the defined benefit pension plan was $145.4$163.1 million and $131.0$170.8 million as of December 31, 20192021 and 2018,2020, respectively, and the fair value of plan assets as of December 31, 20192021 and 20182020 was $227.3$290.7 million and $203.7$272.6 million, respectively. The defined benefit pension plan was amended effective December 31, 20182020 to transfer certain obligations from the Company’s non-qualified supplemental pensiondeferred compensation plan and Restoration Plan (as defined below) into the qualified defined benefit pension plan.
The Company has unfunded supplemental pension plans for certain key active and retired executives. The projected benefit obligation for the unfunded supplemental pension plan for certain key executives was $16.4$19.8 million and $13.2$19.6 million for 20192021 and 2018,2020, respectively. The Company also has an unfunded stock balance plan for certain of its nonemployee directors. The projected benefit obligation for the unfunded stock balance plan was $0.1 millionimmaterial for 20192021 and 2018. The plan was frozen effective December 31, 2009.2020, respectively.
110
The Company adopted the Community Bank System, Inc. Restoration Plan (“Restoration Plan”). The Restoration Plan ishas a non-qualified deferred compensation plan for certain employees (“Restoration Plan”) whose benefits under tax-qualified retirement plans are restricted by the Internal Revenue Code Section 401(a)(17) limitation on compensation. Adoption of the plan resulted in an unfunded initial projected benefit obligation of approximately $0.8 million. The Restoration Plan was amended effective December 31, 20182020 to transfer certain obligations into the Company’s qualified defined benefit pension plan. The projected benefit obligation for the unfunded Restoration Plan was $0.3$0.03 million for 20192021 and $0.1$0.03 million for 2018, respectively2020, respectively..
Effective December 31, 2009, the Company terminated its post-retirement medical program for current and future employees. Remaining plan participants will include only existing retirees as of December 31, 2010. This change was accounted for as a negative plan amendment and a $3.5 million, net of income taxes, benefit for prior service was recognized in AOCI in 2009. This negative plan amendment is being amortized over the expected benefit utilization period of remaining plan participants.
Amounts recognized in accumulated other comprehensive income, net of tax, for the year ended December 31, are as follows:
Pension Benefits | Post-retirement Benefits | |||||||||||||||
(000’s omitted) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Prior service cost/(credit) | $ | (49 | ) | $ | 1,509 | $ | 136 | $ | 135 | |||||||
Net (gain) loss | 1,920 | 9,431 | 38 | 129 | ||||||||||||
Total | $ | 1,871 | $ | 10,940 | $ | 174 | $ | 264 |
(000’s omitted) | Pension Benefits | Post-retirement Benefits | ||||||
Prior service credit | $ | 241 | $ | (179 | ) | |||
Net loss | 3,212 | 40 | ||||||
Total | $ | 3,453 | $ | (139 | ) |
| | | | | | | | | | | | |
| | Pension Benefits | | Post-retirement Benefits | ||||||||
(000’s omitted) |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Prior service cost/(credit) | | $ | (288) | | $ | 222 | | $ | 136 | | $ | 136 |
Net (gain) loss | |
| (13,152) | |
| (6,423) | |
| (99) | |
| 56 |
Total | | $ | (13,440) | | $ | (6,201) | | $ | 37 | | $ | 192 |
The weighted-average assumptions used to determine the benefit obligations as of December 31 are as follows:
Pension Benefits | Post-retirement Benefits | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Discount rate | 3.50 | % | 4.50 | % | 3.60 | % | 4.45 | % | ||||||||
Expected return on plan assets | 7.00 | % | 7.00 | % | N/A | N/A | ||||||||||
Rate of compensation increase | 3.50 | % | 3.50 | % | N/A | N/A |
| | | | | | | | | |
| | Pension Benefits | | Post-retirement Benefits |
| ||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
|
Discount rate |
| 3.10 | % | 2.80 | % | 3.10 | % | 2.80 | % |
Expected return on plan assets |
| 6.70 | % | 7.00 | % | N/A |
| N/A | |
Rate of compensation increase | | 4.00% for 2022 | | 3.50 | % | N/A | | N/A | |
|
| 3.50% for 2023 | + | | | |
| | |
Interest crediting rates | | 6.00% while employed, | | 6.00% while employed, | | N/A | | N/A | |
| | 1.94% after termination | | 1.42% after termination | | | | | |
The net periodic benefit cost as of December 31 is as follows:
Pension Benefits | Post-retirement Benefits | |||||||||||||||||||||||
(000’s omitted) | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||||||||
Service cost | $ | 5,081 | $ | 4,561 | $ | 4,181 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||
Interest cost | 6,264 | 5,676 | 5,717 | 70 | 69 | 76 | ||||||||||||||||||
Expected return on plan assets | (14,311 | ) | (14,820 | ) | (13,354 | ) | 0 | 0 | 0 | |||||||||||||||
Plan amendment | 0 | 13 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Amortization of unrecognized net loss/(gain) | 2,568 | 1,193 | 767 | 38 | 21 | 8 | ||||||||||||||||||
Amortization of prior service cost | 64 | (293 | ) | 55 | (179 | ) | (179 | ) | (179 | ) | ||||||||||||||
Net periodic (benefit) | $ | (334 | ) | $ | (3,670 | ) | $ | (2,634 | ) | $ | (71 | ) | $ | (89 | ) | $ | (95 | ) |
| | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Post-retirement Benefits | ||||||||||||||
(000’s omitted) |
| 2021 |
| 2020 |
| 2019 |
| 2021 |
| 2020 |
| 2019 | ||||||
Service cost | | $ | 5,920 | | $ | 5,750 | | $ | 5,081 | | $ | 0 | | $ | 0 | | $ | 0 |
Interest cost | |
| 5,036 | |
| 5,657 | |
| 6,264 | |
| 44 | |
| 57 | |
| 70 |
Expected return on plan assets | |
| (18,783) | |
| (16,306) | |
| (14,311) | |
| 0 | |
| 0 | |
| 0 |
Plan amendment | |
| 0 | |
| (637) | |
| 0 | |
| 0 | |
| 0 | |
| 0 |
Amortization of unrecognized net loss | |
| 3,600 | |
| 3,239 | |
| 2,568 | |
| 45 | |
| 40 | |
| 38 |
Amortization of prior service cost | |
| 379 | |
| 241 | |
| 64 | |
| (179) | |
| (179) | |
| (179) |
Net periodic (benefit) | | $ | (3,848) | | $ | 2,056 | | $ | (334) | | $ | (90) | | $ | (82) | | $ | (71) |
Prior service costs in which all or almost all of the plan’s participants are fully eligible for benefits under the plan are amortized on a straight-line basis over the expected future working years of all active plan participants. Unrecognized gains or losses are amortized using the “corridor approach”, which is the minimum amortization required. Under the corridor approach, the net gain or loss in excess of 10 percent of the greater of the projected benefit obligation or the market-related value of the assets is amortized on a straight-line basis over the expected future working years of all active plan participants.
111
The weighted-average assumptions used to determine the net periodic pension cost for the years ended December 31 are as follows:
Pension Benefits | Post-retirement Benefits | |||||||||||||||||||||||
2019 | 2018 | 2017 | 2019 | 2018 | 2017 | |||||||||||||||||||
Discount rate | 4.50 | % | 4.00 | % | 4.40 | % | 4.45 | % | 4.00 | % | 4.40 | % | ||||||||||||
Expected return on plan assets | 7.00 | % | 7.00 | % | 7.00 | % | N/A | N/A | N/A | |||||||||||||||
Rate of compensation increase | 3.50 | % | 3.50 | % | 3.50 | % | N/A | N/A | N/A |
| | | | | | | | | | | | | |
| | Pension Benefits | | Post-retirement Benefits |
| ||||||||
|
| 2021 |
| 2020 |
| 2019 |
| 2021 |
| 2020 |
| 2019 |
|
Discount rate |
| 2.80 | % | 3.50 | % | 4.50 | % | 2.80 | % | 3.60 | % | 4.45 | % |
Expected return on plan assets |
| 7.00 | % | 7.00 | % | 7.00 | % | N/A |
| N/A |
| N/A | |
Rate of compensation increase |
| 3.50 | % | 3.50 | % | 3.50 | % | N/A |
| N/A |
| N/A | |
Interest crediting rates | | 6.00% while employed, | | 6.00% while employed | | 6.00% while employed | | N/A | | N/A | | N/A | |
| | 1.42% after termination | | 2.16% after termination | | 3.15% after termination | | | | | | | |
The amount of benefit payments that are expected to be paid over the next ten years are as follows:
(000’s omitted) | Pension Benefits | Post-retirement Benefits | ||||||
2020 | $ | 9,947 | $ | 179 | ||||
2021 | 10,713 | 135 | ||||||
2022 | 10,913 | 132 | ||||||
2023 | 11,455 | 129 | ||||||
2024 | 11,762 | 126 | ||||||
2025-2029 | 59,503 | 572 |
| | | | | | |
| | | Pension | | | Post-retirement |
(000’s omitted) |
| | Benefits |
| | Benefits |
2022 | | $ | 10,940 | | $ | 151 |
2023 | |
| 11,863 | |
| 119 |
2024 | |
| 12,185 | |
| 117 |
2025 | |
| 11,991 | |
| 115 |
2026 | |
| 13,567 | |
| 113 |
2027-2031 | |
| 63,874 | |
| 522 |
The payments reflect future service and are based on various assumptions including retirement age and form of payment (lump-sum versus annuity). Actual results may differ from these estimates.
The assumed discount rate is used to reflect the time value of future benefit obligations. The discount rate was determined based upon the yield on high-quality fixed income investments expected to be available during the period to maturity of the pension benefits. This rate is sensitive to changes in interest rates. A decrease in the discount rate would increase the Company’s obligation and future expense while an increase would have the opposite effect. The expected long-term rate of return was estimated by taking into consideration asset allocation, reviewing historical returns on the type of assets held and current economic factors. Based on the Company’s anticipation of future experience under the defined benefit pension plan, the mortality tables used to determine future benefit obligations under the plan were updated as of December 31, 20192021 to the RP-2014sex-distinct Pri-2012 Mortality TableTables for employees, and healthy annuitants adjusted backward to 2006 with Scale MP-2014, and thencontingent survivors, adjusted for mortality improvements with theusing Scale MP-2018MP-2021 mortality improvement scale on a generational basis. The appropriateness of the assumptions are reviewed annually.
Plan Assets
The investment objective for the defined benefit pension plan is to achieve an average annual total return over a five-year period equal to the assumed rate of return used in the actuarial calculations. At a minimum performance level, the portfolio should earn the return obtainable on high quality intermediate-term bonds. The Company’s perspective regarding portfolio assets combines both preservation of capital and moderate risk-taking. Asset allocation favors fixed income securities, with a target allocation of approximately 60% equity securities and 40% fixed income securities and money market funds. Due to the volatility in the market, the target allocation is not always desirable and asset allocations will fluctuate between acceptable ranges. Prohibited transactions include purchase of securities on margin, uncovered call options, and short sale transactions.
112
The fair values of the Company’s defined benefit pension plan assets at December 31, 20192021 by asset category are as follows:
Asset category (000’s omitted) | Quoted Prices in Active Markets for Identical Assets Level 1 | Significant Observable Inputs Level 2 | Significant Unobservable Inputs Level 3 | Total | ||||||||||||
Cash equivalents | $ | 3,983 | $ | 0 | $ | 0 | $ | 3,983 | ||||||||
Equity securities: | ||||||||||||||||
U.S. large-cap | 50,301 | 0 | 0 | 50,301 | ||||||||||||
U.S mid/small cap | 10,408 | 0 | 0 | 10,408 | ||||||||||||
CBU stock | 6,522 | 0 | 0 | 6,522 | ||||||||||||
International | 37,990 | 0 | 0 | 37,990 | ||||||||||||
105,221 | 0 | 0 | 105,221 | |||||||||||||
Fixed income securities: | ||||||||||||||||
Government securities | 73,698 | 8,341 | 0 | 82,039 | ||||||||||||
Investment grade bonds | 12,884 | 0 | 0 | 12,884 | ||||||||||||
High yield(a) | 6,770 | 0 | 0 | 6,770 | ||||||||||||
93,352 | 8,341 | 0 | 101,693 | |||||||||||||
Other investments (b) | 15,856 | 82 | 0 | 15,938 | ||||||||||||
Total (c) | $ | 218,412 | $ | 8,423 | $ | 0 | $ | 226,835 |
| | | | | | | | | | | | |
| | Quoted Prices | | | | | | | | | | |
| | in Active | | Significant | | Significant | |
| | |||
| | Markets for | | Observable | | Unobservable | |
| | |||
| | Identical Assets | | Inputs | | Inputs | |
| | |||
Asset category (000’s omitted) |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
Cash equivalents | | $ | 19,605 | | $ | 0 | | $ | 0 | | $ | 19,605 |
Equity securities: | |
| | |
| | |
|
| |
| |
U.S. large-cap | |
| 75,180 | |
| 0 | |
| 0 | |
| 75,180 |
U.S mid/small cap | |
| 12,052 | |
| 0 | |
| 0 | |
| 12,052 |
CBU common stock | |
| 7,604 | |
| 0 | |
| 0 | |
| 7,604 |
International | |
| 73,891 | |
| 0 | |
| 0 | |
| 73,891 |
Other | |
| 1,091 | |
| 0 | |
| 0 | |
| 1,091 |
| |
| 169,818 | |
| 0 | |
| 0 | |
| 169,818 |
| |
| | |
| | |
|
| |
| |
Fixed income securities: | |
| | |
| | |
|
| |
| |
Government securities | |
| 19,988 | |
| 5,974 | |
| 0 | |
| 25,962 |
Investment grade bonds | |
| 41,374 | |
| 136 | |
| 0 | |
| 41,510 |
High yield(a) | |
| 8,625 | |
| 0 | |
| 0 | |
| 8,625 |
| |
| 69,987 | |
| 6,110 | |
| 0 | |
| 76,097 |
| |
| | |
| | |
|
| |
| |
Other investments (b) | |
| 24,727 | |
| 0 | |
| 0 | |
| 24,727 |
| |
| | |
| | |
|
| |
| |
Total (c) | | $ | 284,137 | | $ | 6,110 | | $ | 0 | | $ | 290,247 |
The fair values of the Company’s defined benefit pension plan assets at December 31, 20182020 by asset category are as follows:
| | | | | | | | | | | | |
| | Quoted Prices | | | | | | | | | | |
| | in Active | | Significant | | Significant | | | | |||
| | Markets for | | Observable | | Unobservable | | | | |||
| | Identical Assets | | Inputs | | Inputs | | | | |||
Asset category (000’s omitted) |
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
Cash equivalents | | $ | 68,137 | | $ | 0 | | $ | 0 | | $ | 68,137 |
Equity securities: | |
| | |
| | |
|
| |
| |
U.S. large-cap | |
| 69,195 | |
| 0 | |
| 0 | |
| 69,195 |
U.S mid/small cap | |
| 17,338 | |
| 0 | |
| 0 | |
| 17,338 |
CBU common stock | |
| 7,701 | |
| 0 | |
| 0 | |
| 7,701 |
International | |
| 43,457 | |
| 6,088 | |
| 0 | |
| 49,545 |
| |
| 137,691 | |
| 6,088 | |
| 0 | |
| 143,779 |
| |
| | |
| | |
|
| |
| |
Fixed income securities: | |
| | |
| | |
|
| |
| |
Government securities | |
| 6,154 | |
| 6,241 | |
| 0 | |
| 12,395 |
Investment grade bonds | |
| 23,085 | |
| 141 | |
| 0 | |
| 23,226 |
High yield(a) | |
| 5,803 | |
| 0 | |
| 0 | |
| 5,803 |
| |
| 35,042 | |
| 6,382 | |
| 0 | |
| 41,424 |
| |
| | |
| | |
|
| |
| |
Other investments (b) | |
| 17,613 | |
| 0 | |
| 0 | |
| 17,613 |
| |
| | |
| | |
|
| |
| |
Total (c)(d) | | $ | 258,483 | | $ | 12,470 | | $ | 0 | | $ | 270,953 |
113
Asset category (000’s omitted) | Quoted Prices in Active Markets for Identical Assets Level 1 | Significant Observable Inputs Level 2 | Significant Unobservable Inputs Level 3 | Total | ||||||||||||
Cash equivalents | $ | 4,856 | $ | 0 | $ | 0 | $ | 4,856 | ||||||||
Equity securities: | ||||||||||||||||
U.S. large-cap | 39,122 | 0 | 0 | 39,122 | ||||||||||||
U.S mid/small cap | 9,881 | 0 | 0 | 9,881 | ||||||||||||
CBU stock | 7,692 | 0 | 0 | 7,692 | ||||||||||||
International | 32,506 | 0 | 0 | 32,506 | ||||||||||||
89,201 | 0 | 0 | 89,201 | |||||||||||||
Fixed income securities: | ||||||||||||||||
Government securities | 64,417 | 11,370 | 0 | 75,787 | ||||||||||||
Investment grade bonds | 12,054 | 0 | 0 | 12,054 | ||||||||||||
High yield(a) | 6,712 | 0 | 0 | 6,712 | ||||||||||||
83,183 | 11,370 | 0 | 94,553 | |||||||||||||
Other investments (b) | 14,267 | 66 | 0 | 14,333 | ||||||||||||
Total (c) | $ | 191,507 | $ | 11,436 | $ | 0 | $ | 202,943 |
(a) | This category is exchange-traded funds representing a diversified index of high yield corporate bonds. |
(b) | This category is comprised of exchange-traded funds and mutual funds holding non-traditional investment classes including private equity funds and alternative exchange funds. |
(c) | Excludes dividends and interest receivable totaling |
(d) | Excludes certain investments that were measured at net asset value per share (or its equivalents) totaling $1.4 million at December 31, 2020. |
The valuation techniques used to measure fair value for the items in the table above are as follows:
● | Money market funds - Managed portfolios, including commercial paper and other fixed income securities issued by U.S. and foreign corporations, asset-backed commercial paper, U.S. government securities, obligations of foreign governments and U.S. and foreign banks, which are valued at the closing price reported on the market on which the underlying securities are traded. |
● | Equity securities and other investments – Mutual funds, equity securities and common stock of the Company which are valued at the quoted market price of shares held at year-end. |
● | Fixed income securities - U.S. Treasuries, municipal bonds and notes, government sponsored entities, and corporate debt valued at the closing price reported on the active market on which the individual securities are traded or for municipal bonds and notes based on quoted prices for similar assets in the active market. |
The Company makes contributions to its funded qualified pension plan as required by government regulation or as deemed appropriate by management after considering the fair value of plan assets, expected return on such assets, and the value of the accumulated benefit obligation. The Company made a $7.3$3.5 million contribution to the Steuben Trust Company Pension Plan in 2020. The Company made a $2.9 million and $3.9 million contribution to its defined benefit pension plan in 2019.2021 and 2020, respectively. The Company funds the payment of benefit obligations for the supplemental pension and post-retirement plans because such plans do not hold assets for investment.
401(k) Employee Stock Ownership Plan
The Company has a 401(k) Employee Stock Ownership Plan in which employees can contribute from 1% to 90% of eligible compensation, with the first 3% being eligible for a 100% matching contribution in the form of Company common stock and the next 3% being eligible for a 50% matching contributions in the form of Company common stock. The expense recognized under this plan for the years ended December 31, 2021, 2020 and 2019 2018 and 2017 was $6.1$6.9 million, $5.9$6.3 million, and $5.3$6.1 million, respectively. Effective January 1, 2010, the defined benefit pension plan was modified to a new plan design that includes an interest credit contribution to be made to the 401(k) plan. The expense recognized for this interest credit contribution for the years ended December 31, 2019, 2018,2021, 2020, and 20172019 was $1.1 million, $0.9 million, and $0.8$1.1 million, respectively.
The Company acquired The MerchantsNational Union Bank of Kinderhook 401(k) ESOPSavings Plan with the MerchantsKinderhook acquisition and The Gordon B. RobertsSteuben Trust Company 401(k) Plan with the GBRSteuben acquisition. Effective November 9, 2020 and January 1, 2018,2021, The MerchantsNational Union Bank of Kinderhook 401(k) ESOPSavings Plan and The Gordon B. RobertsSteuben Trust Company 401(k) Plan were merged into and became part of the Community Bank System, Inc. 401(k) Employee Stock Ownership Plan.
Other Deferred Compensation Arrangements
In addition to the supplemental pension plans for certain executives, the Company has nonqualified deferred compensation arrangements for several former directors, officers and key employees. All benefits provided under these plans are unfunded and payments to plan participants are made by the Company. At December 31, 20192021 and 2018,2020, the Company has recorded a liability of $2.6$5.1 million and $2.8$5.4 million, respectively. The expense recognized under these plans for the years ended December 31, 2019, 2018,2021, 2020, and 20172019 was approximately $0.2 million, $0.08$0.4 million, and $0.3$0.2 million, respectively.
114
Deferred Compensation Plans for Directors
Directors of the Company may defer all or a portion of their director fees under the Deferred Compensation Plan for Directors. Under this plan, there is a separate account for each participating director which is credited with the amount of shares that could have been purchased with the director’s fees as well as any dividends on such shares. On the distribution date, the director will receive common stock equal to the accumulated share balance in their account. As of December 31, 20192021 and 2018,2020, there were 151,519137,945 and 151,977141,655 shares credited to the participants’ accounts, for which a liability of $4.9$5.1 million and $4.6$4.8 million was accrued, respectively. The expense recognized under the plan for the years ended December 31, 2019, 20182021, 2020 and 2017,2019, was $0.2 million, $0.2 million, and $0.2 million, respectively.
The Company acquired deferred compensation plans for certain non-employee directors and trustees of Merchants. Under the terms of these acquired deferred compensation plans, participating directors could elect to have all, or a specified percentage, of their Merchants director’s fees for a given year paid in the form of cash or deferred in the form of restricted shares of Merchants’ common stock. Directors who elected to have their compensation deferred were credited with a number of shares of Merchants’ common stock equal in value to the amount of fees deferred. These shares were converted to shares of Company stock in connection with the acquisition and are held in a rabbi trust. The shares held in the rabbi trust are considered outstanding for purposes of computing earnings per share. The participating director may not sell, transfer or otherwise dispose of these shares prior to distribution. With respect to shares of common stock issued or otherwise transferred to a participating director, the participating director has the right to receive dividends or other distributions thereon.
NOTE L: STOCK-BASED COMPENSATION PLANS
The Company has a long-term incentive program for directors, officers and employees. Under this program, the Company initially authorized 4four million shares of Company common stock for the grant of incentive stock options, nonqualified stock options, restricted stock awards, and retroactive stock appreciation rights. The long-term incentive program was amended effective May 25, 2011, May 14, 2014 and May 17, 2017 to authorize an additional 900,000 shares, 1,000,000 shares and 1,000,000 shares of Company common stock, respectively, for the grant of incentive stock options, nonqualified stock options, restricted stock awards, and retroactive stock appreciation rights. As of December 31, 2019,2021, the Company has authorization to grant up to approximately 1.20.6 million additional shares of Company common stock for these instruments. The nonqualified (offset) stock options in its Director’s Stock Balance Plan vest and become exercisable immediately and expire one year after the date the director retires or two years in the event of death. The remaining options have a ten-year term, and vest and become exercisable on a grant-by-grant basis, ranging from immediate vesting to ratably over a five-year period.
115
Stock Options | |||||
Outstanding | Weighted- average Exercise Price of Shares | ||||
Outstanding at December 31, 2017 | 1,708,296 | $ | 34.57 | ||
Granted | 213,504 | 55.92 | |||
Exercised | (268,004) | 27.94 | |||
Forfeited | (9,435) | 45.54 | |||
Outstanding at December 31, 2018 | 1,644,361 | 38.36 | |||
Granted | 199,110 | 59.41 | |||
Exercised | (331,315) | 30.42 | |||
Forfeited | (9,162) | 51.29 | |||
Outstanding at December 31, 2019 | 1,502,994 | 42.82 | |||
Exercisable at December 31, 2019 | 929,120 | $ | 36.73 |
| | | | | |
| | Stock Options | |||
| | | | Weighted- | |
| | | | average Exercise | |
|
| Outstanding |
| Price of Shares | |
Outstanding at December 31, 2019 |
| 1,502,994 | | $ | 42.82 |
Granted |
| 254,496 | |
| 51.68 |
Exercised |
| (197,564) | |
| 32.65 |
Forfeited |
| (17,667) | |
| 50.97 |
Outstanding at December 31, 2020 |
| 1,542,259 | |
| 45.49 |
Granted |
| 168,976 | |
| 79.68 |
Exercised |
| (310,423) | |
| 40.17 |
Forfeited |
| (8,107) | |
| 61.56 |
Outstanding at December 31, 2021 |
| 1,392,705 | |
| 50.73 |
Exercisable at December 31, 2021 |
| 879,074 | | $ | 43.84 |
The following table summarizes the information about stock options outstanding under the Company’s stock option plan at December 31, 2019:
Options outstanding | Options exercisable | |||||||||||||||
Range of Exercise Price | Shares | Weighted- average Exercise Price | Weighted- average Remaining Life (years) | Shares | Weighted- average Exercise Price | |||||||||||
$0.00 – $28.00 | 96,324 | $ | 79.25 | 3.36 | 96,324 | $ | 24.26 | |||||||||
$28.001 – $29.00 | 97,492 | 28.78 | 2.22 | 97,492 | 28.78 | |||||||||||
$29.001 – $30.00 | 141,501 | 29.79 | 3.21 | 141,501 | 29.79 | |||||||||||
$30.001 – $40.00 | 594,156 | 37.09 | 5.38 | 453,418 | 37.05 | |||||||||||
$40.001 – $60.00 | 573,521 | 57.47 | 8.24 | 140,385 | 56.76 | |||||||||||
TOTAL | 1,502,994 | $ | 42.82 | 5.93 | 929,120 | $ | 36.73 |
| | | | | | | | | | | | |
| | Options outstanding | | Options exercisable | ||||||||
| | | | Weighted- | | Weighted- | | | | Weighted- | ||
| | | | average | | average | | | | average | ||
| | | | Exercise | | Remaining | | | | Exercise | ||
Range of Exercise Price |
| Shares |
| Price |
| Life (years) |
| Shares |
| Price | ||
$0.00 – $29.00 |
| 57,354 | | $ | 24.78 |
| 3.55 |
| 57,354 | | $ | 24.78 |
$29.01 – $30.00 |
| 58,276 | |
| 29.79 |
| 1.21 |
| 58,276 | |
| 29.79 |
$30.01 – $40.00 |
| 403,901 | |
| 37.07 |
| 3.46 |
| 403,901 | |
| 37.07 |
$40.01 – $60.00 |
| 706,389 | |
| 55.54 |
| 6.91 |
| 352,515 | |
| 56.30 |
$60.01 – $80.00 |
| 166,785 | |
| 79.68 |
| 9.22 |
| 7,028 | |
| 79.66 |
TOTAL |
| 1,392,705 | | $ | 50.73 |
| 5.81 |
| 879,074 | | $ | 43.84 |
The weighted-average remaining contractual term of outstanding and exercisable stock options at December 31, 20192021 is 5.935.81 years and 4.774.56 years, respectively. The aggregate intrinsic value of outstanding and exercisable stock options at December 31, 20192021 is $42.3$33.9 million and $31.8$27.0 million, respectively.
The Company recognized stock-based compensation expense related to non-qualified stock options of $2.2$2.6 million, $2.6$2.7 million and $2.2 million for the years ended December 31, 2019, 20182021, 2020 and 2017,2019, respectively. A related income tax benefit was recognized of $0.5 million, $0.6 million, $0.7 million and $0.8$0.5 million for the 2019, 20182021, 2020 and 20172019 years, respectively. Compensation expense related to restricted stock vesting recognized in the income statement for 2019, 20182021, 2020 and 20172019 was approximately $3.3 million, $3.3 million and $2.8 million, $3.2 million and $2.7 million, respectively.
116
Management estimated the fair value of options granted using the Black-Scholes option-pricing model. This model was originally developed to estimate the fair value of exchange-traded equity options, which (unlike employee stock options) have no vesting period or transferability restrictions. As a result, the Black-Scholes model is not necessarily a precise indicator of the value of an option, but it is commonly used for this purpose. The Black-Scholes model requires several assumptions, which management developed based on historical trends and current market observations.
2019 | 2018 | 2017 | ||||||||||
Weighted-average Fair Value of Options Granted | $ | 14.16 | $ | 13.44 | $ | 12.78 | ||||||
Assumptions: | ||||||||||||
Weighted-average expected life (in years) | 6.50 | 6.50 | 6.50 | |||||||||
Future dividend yield | 2.73 | % | 2.91 | % | 3.19 | % | ||||||
Share price volatility | 29.31 | % | 29.44 | % | 29.71 | % | ||||||
Weighted-average risk-free interest rate | 2.44 | % | 2.82 | % | 2.31 | % |
| | | | | | | | | | |
|
| 2021 |
| 2020 |
| 2019 |
| |||
Weighted-average Fair Value of Options Granted | | $ | 18.43 | | $ | 10.86 | | $ | 14.16 | |
Assumptions: | |
| | |
|
| |
|
| |
Weighted-average expected life (in years) | |
| 6.50 | |
| 6.50 | |
| 6.50 | |
Future dividend yield | |
| 2.48 | % |
| 2.57 | % |
| 2.73 | % |
Share price volatility | |
| 30.09 | % |
| 29.29 | % |
| 29.31 | % |
Weighted-average risk-free interest rate | |
| 1.28 | % |
| 0.67 | % |
| 2.44 | % |
Unrecognized stock-based compensation expense related to non-vested stock options totaled $5.1$5.5 million at December 31, 2019.2021. The weighted-average period over which this unrecognized expense would be recognized is 3.3 years. The total fair value of stock options vested during 2021, 2020, and 2019 2018,were $2.5 million, $2.5 million and 2017 were $2.4 million, $2.3 million and $2.2 million, respectively.
During the 12 months ended December 31, 20192021 and 2018,2020, proceeds from stock option exercises totaled $11.3$14.2 million and $9.4$7.5 million, respectively, and the related tax benefits from exercise were approximately $2.3$1.8 million and $1.6$1.2 million, respectively. During the twelve months ended December 31, 20192021 and 2018,2020, approximately 0.3 million and 0.2 million shares, respectively, were issued in connection with stock option exercises each year. The total intrinsic value of options exercised during 2021, 2020 and 2019 2018were $10.3 million, $6.6 million and 2017 were $11.6 million, $8.4 million and $7.6 million, respectively.
A summary of the status of the Company’s unvested restricted stock awards as of December 31, 2019,2021, and changes during the twelve months ended December 31, 20192021 and 2018,2020, is presented below:
Restricted Shares | Weighted-average grant date fair value | |||
Unvested at December 31, 2017 | 230,873 | $ | 34.06 | |
Awards | 50,133 | 55.92 | ||
Forfeitures | (3,429) | 34.95 | ||
Vestings | (56,514) | 39.40 | ||
Unvested at December 31, 2018 | 221,063 | 37.72 | ||
Awards | 108,556 | 42.53 | ||
Forfeitures | (2,365) | 52.47 | ||
Vestings | (130,466) | 29.71 | ||
Unvested at December 31, 2019 | 196,788 | $ | 45.58 |
| | | | | |
| | Restricted | | Weighted-average | |
|
| Shares |
| grant date fair value | |
Unvested at December 31, 2019 |
| 196,788 | | $ | 45.58 |
Awards |
| 52,132 | |
| 51.64 |
Forfeitures |
| (12,884) | |
| 37.14 |
Vestings |
| (59,628) | |
| 47.80 |
Unvested at December 31, 2020 |
| 176,408 | |
| 47.24 |
Awards |
| 51,456 | |
| 79.51 |
Forfeitures |
| (2,619) | |
| 54.15 |
Vestings |
| (47,977) | |
| 52.84 |
Unvested at December 31, 2021 |
| 177,268 | | $ | 54.98 |
Unrecognized stock-based compensation expense related to unvested restricted stock totaled $6.6$7.1 million at December 31, 2019,2021, which will be recognized as expense over the next five years. The weighted-average period over which this unrecognized expense would be recognized is 4.73.7 years. The total fair value of restricted stock vested during 2021, 2020, and 2019 2018,were $2.5 million, $2.9 million and 2017 were $3.8 million, $2.3 million and $2.2 million, respectively.
NOTE M: EARNINGS PER SHARE
The two class method is used in the calculations of basic and diluted earnings per share. Under the two class method, earnings available to common shareholders for the period are allocated between common shareholders and participating securities according to dividends declared and participation rights in undistributed earnings. The Company has determined that all of its outstanding non-vested stock awards are participating securities as of December 31, 2019.2021.
117
Basic earnings per share are computed based on the weighted-average of the common shares outstanding for the period. Diluted earnings per share are based on the weighted-average of the shares outstanding and the assumed exercise of stock options during the year. The dilutive effect of options is calculated using the treasury stock method of accounting. The treasury stock method determines the number of common shares that would be outstanding if all the dilutive options were exercised and the proceeds were used to repurchase common shares in the open market at the average market price for the applicable time period. There were approximately 0.50.1 million, 0.40.6 million and 0.20.5 million weighted-average anti-dilutive stock options outstanding at December 31, 2019, 20182021, 2020 and 2017,2019, respectively, which were not included in the computation below.
The following is a reconciliation of basic to diluted earnings per share for the years ended December 31, 2019, 20182021, 2020 and 2017.
(000’s omitted, except per share data) | 2019 | 2018 | 2017 | |||||||||
Net income | $ | 169,063 | $ | 168,641 | $ | 150,717 | ||||||
Income attributable to unvested stock-based compensation awards | (400 | ) | (744 | ) | (597 | ) | ||||||
Income available to common shareholders | $ | 168,663 | $ | 167,897 | $ | 150,120 | ||||||
Weighted-average common shares outstanding - basic | 51,732 | 51,165 | 48,843 | |||||||||
Basic earnings per share | $ | 3.26 | $ | 3.28 | $ | 3.07 | ||||||
Net income | $ | 169,063 | $ | 168,641 | $ | 150,717 | ||||||
Income attributable to unvested stock-based compensation awards | (400 | ) | (744 | ) | (597 | ) | ||||||
Income available to common shareholders | $ | 168,663 | $ | 167,897 | $ | 150,120 | ||||||
Weighted-average common shares outstanding | 51,732 | 51,165 | 48,843 | |||||||||
Assumed exercise of stock options | 516 | 583 | 627 | |||||||||
Weighted-average common shares outstanding – diluted | 52,248 | 51,748 | 49,470 | |||||||||
Diluted earnings per share | $ | 3.23 | $ | 3.24 | $ | 3.03 | ||||||
Cash dividends declared per share | $ | 1.58 | $ | 1.44 | $ | 1.32 |
| | | | | | | | | |
(000’s omitted, except per share data) |
| 2021 |
| 2020 |
| 2019 | |||
Net income | | $ | 189,694 | | $ | 164,676 | | $ | 169,063 |
Income attributable to unvested stock-based compensation awards | |
| (445) | |
| (514) | |
| (400) |
Income available to common shareholders | | $ | 189,249 | | $ | 164,162 | | $ | 168,663 |
| | | | | | | | | |
Weighted-average common shares outstanding – basic | |
| 53,977 | |
| 52,969 | |
| 51,732 |
Basic earnings per share | | $ | 3.51 | | $ | 3.10 | | $ | 3.26 |
| | | | | | | | | |
Net income | | $ | 189,694 | | $ | 164,676 | | $ | 169,063 |
Income attributable to unvested stock-based compensation awards | |
| (445) | |
| (514) | |
| (400) |
Income available to common shareholders | | $ | 189,249 | | $ | 164,162 | | $ | 168,663 |
| | | | | | | | | |
Weighted-average common shares outstanding | |
| 53,977 | |
| 52,969 | |
| 51,732 |
Assumed exercise of stock options | |
| 423 | |
| 352 | |
| 516 |
Weighted-average common shares outstanding – diluted | |
| 54,400 | |
| 53,321 | |
| 52,248 |
Diluted earnings per share | | $ | 3.48 | | $ | 3.08 | | $ | 3.23 |
Cash dividends declared per share | | $ | 1.70 | | $ | 1.66 | | $ | 1.58 |
Stock Repurchase Program
At its December 20182020 meeting, the Company’s Board of Directors (the “Board”) approved a stock repurchase program authorizing the repurchase, at the discretion of senior management, of up to 2.5 million2,680,000 shares of the Company’s common stock, in accordance with securities and banking laws and regulations, through December 31, 2019.during the twelve-month period starting January 1, 2021. There were 67,500 shares repurchased pursuant to the 2021 stock repurchase program in the fourth quarter of 2021. At its December 20192021 meeting, the Board approved a similarnew stock repurchase program for 2020, authorizing the repurchase, at the discretion of senior management, of up to 2.6 million2,697,000 shares of the Company’s common stock, through December 31, 2020.in accordance with securities and banking laws and regulations, during the twelve-month period starting January 1, 2022. Any repurchased shares will be used for general corporate purposes, including those related to stock plan activities. The timing and extent of repurchases will depend on market conditions and other corporate considerations as determined at the Company’s discretion. There were 0 stock repurchases pursuant to the announced plans in 2019 or 2018.
118
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist primarily of commitments to extend credit and standby letters of credit. Commitments to extend credit are agreements to lend to customers, generally having fixed expiration dates or other termination clauses that may require payment of a fee. These commitments consist principally of unused commercial and consumer credit lines. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of an underlying contract with a third party. The credit risks associated with commitments to extend credit and standby letters of credit are essentially the same as that involved with extending loans to customers and are subject to the Company’s normal credit policies. Collateral may be obtained based on management’s assessment of the customer’s creditworthiness. The fair value of the standby letters of credit is immaterial for disclosure.
The contract amounts of commitments and contingencies are as follows at December 31:
(000’s omitted) | 2019 | 2018 | ||||||
Commitments to extend credit | $ | 1,143,780 | $ | 1,134,576 | ||||
Standby letters of credit | 37,872 | 33,169 | ||||||
Total | $ | 1,181,652 | $ | 1,167,745 |
| | | | | | |
|
| | | | ||
(000’s omitted) |
| 2021 |
| 2020 | ||
Commitments to extend credit | | $ | 1,443,879 | | $ | 1,313,568 |
Standby letters of credit | |
| 42,684 | |
| 39,213 |
Total | | $ | 1,486,563 | | $ | 1,352,781 |
The Bank has unused lines of credit of $25.0 million at December 31, 2019.2021. The Bank has unused borrowing capacity of approximately $1.80$1.71 billion through collateralized transactions with the FHLB and $25.1$247.7 million through collateralized transactions with the Federal Reserve.
The Company is typically required to maintain a reserve balance, as established by the FRB. TheEffective on March 26, 2020, the FRB reduced this cash reserve requirement to zero percent to help support lending to households and businesses as a result of the impacts of the COVID-19 pandemic. As a result, the Company had 0 required average total reserve for the 14-day maintenance periodas of December 19, 2019 through January 1, 2020 was $100.3 million, with $77.2 million represented by cash on hand31, 2021 and the remaining $23.1 million was required to be on deposit with the Federal Reserve.
The Company and its subsidiaries are subject in the normal course of business to various pending and threatened legal proceedings in which claims for monetary damages are asserted. As of December 31, 2019,2021, management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against the Company or its subsidiaries will be material to the Company’s consolidated financial position. On at least a quarterly basis, the Company assesses its liabilities and contingencies in connection with such legal proceedings. For those matters where it is probable that the Company will incur losses and the amounts of the losses can be reasonably estimated, the Company records an expense and corresponding liability in its consolidated financial statements. To the extent the pending or threatened litigation could result in exposure in excess of that liability, the amount of such excess is not currently estimable. The range of reasonably possible losses for matters where an exposure is not currently estimable or considered probable, beyond the existing recorded liabilities, is believed to be between $0 and $1 million in the aggregate. AlthoughThis estimated range is based on information currently available to the Company and involves elements of judgment and significant uncertainties. The Company does not believe that the outcome of pending or threatened litigation will be material to the Company’s consolidated financial position, it cannot rule out the possibility that such outcomes will be material to the consolidated results of operations for a particular reporting period in the future.
The Company recorded $3.0 million in litigation accrual in 2020 related to a settlement of a purported class action lawsuit regarding the Bank’s deposit account terms and overdraft disclosures. The Company executed a settlement agreement with respect to the lawsuit in the fourth quarter of 2020 providing for a release of all claims asserted by class members in the action, and the Company does not anticipate that additional amounts will be accrued for this matter in future periods. Notice of the settlement terms was provided to all class members and no objections to the settlement were received prior to expiration of the notice period. The hearing for final Court approval of the settlement took place on August 25, 2021 and the settlement was approved for $2.9 million which was paid in the third quarter of 2021, resulting in a $0.1 million adjustment to the Company’s litigation accrual.
119
The Company has operating leases for certain offices and certain equipment. These leases have remaining terms that range from less than one year to 1513 years. Options to extend the leases range from a single extension option of one year to multiple extension options for up to 40 years. Certain agreements include an option to terminate the lease within one year.
The components of lease expense are as follows:
(000’s omitted) | 2019 | |||
Operating lease cost | $ | 8,724 | ||
Variable lease cost | 18 | |||
Short-term lease cost (1) | 240 | |||
Total lease cost | $ | 8,982 |
| | | | | | | | | |
(000’s omitted) |
| 2021 | | 2020 | | 2019 | |||
Operating lease cost | | $ | 8,397 | | $ | 9,000 | | $ | 8,724 |
Variable lease cost | |
| 50 | | | 53 | | | 18 |
Short-term lease cost (1) | |
| 148 | | | 369 | | | 240 |
Total lease cost | | $ | 8,595 | | $ | 9,422 | | $ | 8,982 |
(1) | Short-term lease cost includes the cost of leases with terms of twelve months or less, excluding leases with terms of one month or less. |
Supplemental cash flow information related to leases is as follows:
(000’s omitted) | 2019 | |||
Cash paid for amounts included in the measurement of lease liabilities: | ||||
Operating cash outflows for operating leases | $ | 7,938 | ||
Right-of-use assets obtained in exchange for lease obligations: | ||||
Operating leases | 14,145 |
| | | | | | |
(000’s omitted) |
| 2021 |
| 2020 | ||
Cash paid for amounts included in the measurement of lease liabilities: |
| |
| | | |
Operating cash outflows for operating leases | | $ | 8,203 | | $ | 8,478 |
| | | | | | |
Right-of-use assets obtained in exchange for lease obligations: | |
| | | | |
Operating leases | |
| 5,344 | | | 3,519 |
Supplemental balance sheet information related to leases is as follows:
(000’s omitted, except lease term and discount rate) | 2019 | |||
Operating leases | ||||
Operating lease right-of-use assets | $ | 39,895 | ||
Operating lease liabilities | 40,913 | |||
Weighted average remaining lease term | ||||
Operating leases | 6.6 years | |||
Weighted average discount rate | ||||
Operating leases | 2.95 | % |
| | | | | | | |
(000’s omitted, except lease term and discount rate) |
| 2021 |
| 2020 | | ||
Operating leases |
| |
| | | | |
Operating lease right-of-use assets | | $ | 31,754 | | $ | 34,908 | |
| | | | | | | |
Operating lease liabilities | |
| 32,833 | | | 35,857 | |
| | | | | | | |
Weighted average remaining lease term | |
| | | | | |
Operating leases | |
| 5.4 years | | | 6.1 years | |
| | | | | | | |
Weighted average discount rate | |
| | | | | |
Operating leases | |
| 2.62 | % | | 2.82 | % |
Maturities of lease liabilities as of December 31, 20192021 are as follows:
| | | |
(000’s omitted) |
| Operating Leases | |
2022 | | $ | 8,729 |
2023 | |
| 7,640 |
2024 | |
| 5,920 |
2025 | |
| 4,401 |
2026 | |
| 3,062 |
Thereafter | |
| 5,846 |
Total lease payments | |
| 35,598 |
Less imputed interest | |
| (2,765) |
Total | | $ | 32,833 |
120
(000’s omitted) | Operating Leases | |||
2020 | $ | 9,396 | ||
2021 | 7,952 | |||
2022 | 6,664 | |||
2023 | 5,695 | |||
2024 | 4,565 | |||
Thereafter | 11,150 | |||
Total lease payments | 45,422 | |||
Less imputed interest | (4,509 | ) | ||
Total | $ | 40,913 |
Maturities of lease liabilities as of December 31, 2020 are as follows:
| | | |
(000’s omitted) |
| Operating Leases | |
2021 | | $ | 8,697 |
2022 | |
| 7,505 |
2023 | |
| 6,336 |
2024 | |
| 4,973 |
2025 | |
| 3,688 |
Thereafter | |
| 8,222 |
Total lease payments | |
| 39,421 |
Less imputed interest | |
| (3,564) |
Total | | $ | 35,857 |
Included in the Company’s operating leases are related party leases where BPAS APS and OneGroup, subsidiaries of the Company, lease office space from 706 North Clinton, LLC. (“LLC (“706 North Clinton”), an entity the Company holds a 50% membership interest in through its subsidiary OPFC II. As of December 31, 2019,2021, the operating lease right-of-use assets and operating lease liabilities associated with these related party leases total $4.9$4.0 million and $4.9$4.1 million, respectively. As of December 31, 2019,2020, the operating lease right-of-use assets and operating lease liabilities associated with these related party leases total $4.5 million and $4.5 million, respectively. As of December 31, 2021, the weighted average remaining lease term and weighted average discount rate for the Company’s related party leases are 10.08.0 years and 3.67%3.68%, respectively. As of December 31, 2020, the weighted average remaining lease term and weighted average discount rate for the Company’s related party leases are 9.0 years and 3.68%, respectively.
The maturities of the Company’s related party lease liabilities as of December 31, 20192021 are as follows:
(000’s omitted) | 706 North Clinton, LLC | |||
2020 | $ | 591 | ||
2021 | 591 | |||
2022 | 591 | |||
2023 | 591 | |||
2024 | 591 | |||
Thereafter | 2,946 | |||
Total lease payments | 5,901 | |||
Less imputed interest | (964 | ) | ||
Total | $ | 4,937 |
| | | |
(000’s omitted) |
| 706 North Clinton, LLC | |
2022 | | $ | 591 |
2023 | |
| 591 |
2024 | |
| 591 |
2025 | |
| 605 |
2026 | |
| 614 |
Thereafter | |
| 1,727 |
Total lease payments | |
| 4,719 |
Less imputed interest | |
| (633) |
Total | | $ | 4,086 |
As
The maturities of December 31,2019,the Company has one additional operating lease for office space that has not yet commenced with a lease term of 5 years. The Company anticipates that the operating lease will commence during the second quarter of 2020. Upon commencement, lease right-of-use assets andCompany’s related party lease liabilities of approximately $0.6 million will be recorded in the consolidated statements of condition.
| | | |
(000’s omitted) | | 706 North Clinton, LLC | |
2021 |
| $ | 591 |
2022 |
| | 591 |
2023 | | | 591 |
2024 | | | 591 |
2025 |
| | 605 |
Thereafter |
| | 2,341 |
Total lease payments |
| | 5,310 |
Less imputed interest |
| | (791) |
Total | | $ | 4,519 |
As of December 31, 2021, the Company has an immaterial amount of additional operating leases are as follows:for offices and equipment that have not yet commenced.
121
2019 | $ | 8,452 | ||
2020 | 7,262 | |||
2021 | 5,673 | |||
2022 | 4,411 | |||
2023 | 2,621 | |||
Thereafter | 10,390 | |||
Total | $ | 38,809 |
The Company and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Management believes, as of December 31, 2019,2021, that the Company and Bank meet all applicable capital adequacy requirements.
The Company and the Bank are required to maintain a “capital conservation buffer,” composed entirely of common equity Tier 1 capital, in addition to minimum risk-based capital ratios. The required capital conservation buffer is 2.50% for 2019both 2021 and 1.875% for 2018.2020. Therefore, to satisfy both the minimum risk-based capital ratios and the capital conservation buffer in 2019,2021 and 2020, the Company and the Bank must maintain: (i) Common equity Tier 1 capital to total risk-weighted assets of at least 7.0%, (ii) Tier 1 capital to total risk-weighted assets of at least 8.5%, and (iii) Total capital (Tier 1 capital plus Tier 2 capital) to total risk-weighted assets of at least 10.5%. To satisfy both the minimum risk-based capital ratios and the capital conservation buffer in 2018, the Company and the Bank must maintain: (i) Common equity Tier 1 capital to total risk-weighted assets of at least 6.375%, (ii) Tier 1 capital to total risk-weighted assets of at least 7.875%, and (iii) Total capital (Tier 1 capital plus Tier 2 capital) to total risk-weighted assets of at least 9.875%. As of December 31, 20192021 and 2018,2020, the amounts, ratios and requirements for the Company are presented below calculated under the Basel III Standardized Transitional Approach. below. As of December 31, 2019,2021, the OCC categorized the Company and Bank as “well capitalized” under the regulatory framework for prompt corrective action.
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | For capital adequacy | | To be well-capitalized |
| ||||||
| | | | | | | For capital adequacy | | purposes plus Capital | | under prompt |
| |||||||||
| | Actual | | purposes | | Conservation Buffer | | corrective action |
| ||||||||||||
(000’s omitted) |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| ||||
Community Bank System, Inc.: |
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
| |
2021 |
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
| |
Tier 1 Leverage ratio | | $ | 1,331,368 |
| 9.09 | % | $ | 585,594 |
| 4.00 | % | | |
| | | $ | 731,993 |
| 5.00 | % |
Tier 1 risk-based capital | |
| 1,331,368 |
| 18.60 | % |
| 429,559 |
| 6.00 | % | $ | 608,542 |
| 8.50 | % | | 572,746 |
| 8.00 | % |
Total risk-based capital | |
| 1,380,458 |
| 19.28 | % |
| 572,746 |
| 8.00 | % |
| 751,729 |
| 10.50 | % | | 715,932 |
| 10.00 | % |
Common equity tier 1 capital | |
| 1,331,259 |
| 18.60 | % |
| 322,169 |
| 4.50 | % |
| 501,152 |
| 7.00 | % | | 465,356 |
| 6.50 | % |
2020 | |
| |
|
| |
| |
|
| |
| |
|
|
| | |
|
| |
Tier 1 Leverage ratio | | $ | 1,314,864 |
| 10.16 | % | $ | 517,736 |
| 4.00 | % | | |
| | | $ | 647,169 |
| 5.00 | % |
Tier 1 risk-based capital | |
| 1,314,864 |
| 18.99 | % |
| 415,472 |
| 6.00 | % | $ | 588,585 |
| 8.50 | % | | 553,962 |
| 8.00 | % |
Total risk-based capital | |
| 1,375,704 |
| 19.87 | % |
| 553,962 |
| 8.00 | % |
| 727,075 |
| 10.50 | % | | 692,453 |
| 10.00 | % |
Common equity tier 1 capital | |
| 1,239,754 |
| 17.90 | % |
| 311,604 |
| 4.50 | % |
| 484,717 |
| 7.00 | % | | 450,094 |
| 6.50 | % |
| | | | | | | | | | | | | | | | | | | | | |
Community Bank, N.A.: | |
|
|
|
| |
|
|
|
| |
|
|
|
|
| |
|
|
| |
2021 | |
|
|
|
| |
|
|
|
| |
|
|
|
|
| |
|
|
| |
Tier 1 Leverage ratio | | $ | 1,058,091 |
| 7.26 | % | $ | 582,631 |
| 4.00 | % | | |
| | | $ | 728,289 |
| 5.00 | % |
Tier 1 risk-based capital | |
| 1,058,091 |
| 14.92 | % |
| 425,393 |
| 6.00 | % | $ | 602,640 |
| 8.50 | % | | 567,190 |
| 8.00 | % |
Total risk-based capital | |
| 1,107,181 |
| 15.62 | % |
| 567,190 |
| 8.00 | % |
| 744,437 |
| 10.50 | % | | 708,988 |
| 10.00 | % |
Common equity tier 1 capital | |
| 1,057,982 |
| 14.92 | % |
| 319,045 |
| 4.50 | % |
| 496,292 |
| 7.00 | % | | 460,842 |
| 6.50 | % |
2020 | |
| |
|
| |
| |
|
| |
|
|
|
|
| | |
|
| |
Tier 1 Leverage ratio | | $ | 1,028,285 |
| 7.98 | % | $ | 515,552 |
| 4.00 | % | | |
| | | $ | 644,440 |
| 5.00 | % |
Tier 1 risk-based capital | |
| 1,028,285 |
| 14.98 | % |
| 411,880 |
| 6.00 | % | $ | 583,497 |
| 8.50 | % | | 549,174 |
| 8.00 | % |
Total risk-based capital | |
| 1,089,125 |
| 15.87 | % |
| 549,174 |
| 8.00 | % |
| 720,791 |
| 10.50 | % | | 686,467 |
| 10.00 | % |
Common equity tier 1 capital | |
| 1,028,175 |
| 14.98 | % |
| 308,910 |
| 4.50 | % |
| 480,527 |
| 7.00 | % | | 446,204 |
| 6.50 | % |
122
Actual | For capital adequacy purposes | For capital adequacy purposes plus Capital Conservation Buffer | To be well-capitalized under prompt corrective action | |||||||||||||||||||||||||||||
(000’s omitted) | Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||
Community Bank System, Inc.: | ||||||||||||||||||||||||||||||||
2019 | ||||||||||||||||||||||||||||||||
Tier 1 Leverage ratio | $ | 1,148,336 | 10.80 | % | $ | 425,431 | 4.00 | % | $ | 531,788 | 5.00 | % | ||||||||||||||||||||
Tier 1 risk-based capital | 1,148,336 | 17.23 | % | 399,834 | 6.00 | % | $ | 566,432 | 8.50 | % | 533,112 | 8.00 | % | |||||||||||||||||||
Total risk-based capital | 1,198,724 | 17.99 | % | 533,112 | 8.00 | % | 699,710 | 10.50 | % | 666,390 | 10.00 | % | ||||||||||||||||||||
Common equity tier 1 capital | 1,073,281 | 16.11 | % | 299,876 | 4.50 | % | 466,473 | 7.00 | % | 433,154 | 6.50 | % | ||||||||||||||||||||
2018 | ||||||||||||||||||||||||||||||||
Tier 1 Leverage ratio | $ | 1,093,166 | 11.08 | % | $ | 394,700 | 4.00 | % | $ | 493,375 | 5.00 | % | ||||||||||||||||||||
Tier 1 risk-based capital | 1,093,166 | 18.23 | % | 359,747 | 6.00 | % | $ | 472,168 | 7.875 | % | 479,662 | 8.00 | % | |||||||||||||||||||
Total risk-based capital | 1,142,927 | 19.06 | % | 479,662 | 8.00 | % | 592,083 | 9.875 | % | 599,578 | 10.00 | % | ||||||||||||||||||||
Common equity tier 1 capital | 998,111 | 16.65 | % | 269,810 | 4.50 | % | 382,231 | 6.375 | % | 389,726 | 6.50 | % | ||||||||||||||||||||
Community Bank, N.A.: | ||||||||||||||||||||||||||||||||
2019 | ||||||||||||||||||||||||||||||||
Tier 1 Leverage ratio | $ | 910,364 | 8.61 | % | $ | 422,882 | 4.00 | % | $ | 528,603 | 5.00 | % | ||||||||||||||||||||
Tier 1 risk-based capital | 910,364 | 13.79 | % | 396,064 | 6.00 | % | $ | 561,091 | 8.50 | % | 528,086 | 8.00 | % | |||||||||||||||||||
Total risk-based capital | 960,752 | 14.55 | % | 528,086 | 8.00 | % | 693,113 | 10.50 | % | 660,107 | 10.00 | % | ||||||||||||||||||||
Common equity tier 1 capital | 910,309 | 13.79 | % | 297,048 | 4.50 | % | 462,075 | 7.00 | % | 429,070 | 6.50 | % | ||||||||||||||||||||
2018 | ||||||||||||||||||||||||||||||||
Tier 1 Leverage ratio | $ | 912,995 | 9.32 | % | $ | 391,953 | 4.00 | % | $ | 489,941 | 5.00 | % | ||||||||||||||||||||
Tier 1 risk-based capital | 912,995 | 15.35 | % | 356,973 | 6.00 | % | $ | 468,527 | 7.875 | % | 475,964 | 8.00 | % | |||||||||||||||||||
Total risk-based capital | 962,756 | 16.18 | % | 475,964 | 8.00 | % | 587,518 | 9.875 | % | 594,955 | 10.00 | % | ||||||||||||||||||||
Common equity tier 1 capital | 912,940 | 15.35 | % | 267,730 | 4.50 | % | 379,284 | 6.375 | % | 386,721 | 6.50 | % |
The condensed statements of condition of the parent company, Community Bank System, Inc., at December 31 are as follows:
(000's omitted) | 2019 | 2018 | ||||||
Assets: | ||||||||
Cash and cash equivalents | $ | 180,663 | $ | 116,133 | ||||
Investment securities | 2,853 | 3,452 | ||||||
Investment in and advances to: | ||||||||
Bank subsidiary | 1,594,790 | 1,522,109 | ||||||
Non-bank subsidiaries | 180,487 | 182,617 | ||||||
Other assets | 12,406 | 8,957 | ||||||
Total assets | $ | 1,971,199 | $ | 1,833,268 | ||||
Liabilities and shareholders' equity: | ||||||||
Accrued interest and other liabilities | $ | 24,850 | $ | 21,546 | ||||
Borrowings | 91,115 | 97,939 | ||||||
Shareholders' equity | 1,855,234 | 1,713,783 | ||||||
Total liabilities and shareholders' equity | $ | 1,971,199 | $ | 1,833,268 |
| | | | | | |
(000's omitted) |
| 2021 |
| 2020 | ||
Assets: |
| |
|
| |
|
Cash and cash equivalents | | $ | 154,374 | | $ | 196,021 |
Investment securities | |
| 8,679 | |
| 6,043 |
Investment in and advances to: | |
| | |
|
|
Bank subsidiary | |
| 1,721,520 | |
| 1,802,150 |
Non-bank subsidiaries | |
| 232,096 | |
| 196,090 |
Other assets | |
| 18,462 | |
| 15,290 |
Total assets | | $ | 2,135,131 | | $ | 2,215,594 |
| | | | | | |
Liabilities and shareholders' equity: | |
| | |
|
|
Accrued interest and other liabilities | | $ | 31,047 | | $ | 30,864 |
Borrowings | |
| 3,277 | |
| 80,623 |
Shareholders' equity | |
| 2,100,807 | |
| 2,104,107 |
Total liabilities and shareholders' equity | | $ | 2,135,131 | | $ | 2,215,594 |
The condensed statements of income of the parent company for the years ended December 31 is as follows:
| | | | | | | | | |
(000's omitted) |
| 2021 |
| 2020 |
| 2019 | |||
Revenues: |
| |
|
| |
|
| |
|
Dividends from subsidiaries: |
| |
|
| |
|
| |
|
Bank subsidiary | | $ | 125,000 | | $ | 105,000 | | $ | 115,000 |
Non-bank subsidiaries | |
| 14,000 | |
| 13,500 | |
| 27,600 |
Interest and dividends on investments | |
| 245 | |
| 168 | |
| 134 |
Total revenues | |
| 139,245 | |
| 118,668 | |
| 142,734 |
Expenses: | |
| | |
| | |
| |
Interest on borrowings | |
| 446 | |
| 2,546 | |
| 4,244 |
Acquisition expenses | |
| 0 | |
| 450 | |
| 1,248 |
Gain on debt extinguishment | |
| 0 | |
| (421) | |
| 0 |
Other expenses | |
| 5,717 | |
| 4,945 | |
| 477 |
Total expenses | |
| 6,163 | |
| 7,520 | |
| 5,969 |
| | | | | | | | | |
Income before tax benefit and equity in undistributed net income of subsidiaries | |
| 133,082 | |
| 111,148 | |
| 136,765 |
Income tax benefit | |
| 3,964 | |
| 3,739 | |
| 4,545 |
Income before equity in undistributed net income of subsidiaries | |
| 137,046 | |
| 114,887 | |
| 141,310 |
Equity in undistributed net income of subsidiaries | |
| 52,648 | |
| 49,789 | |
| 27,753 |
Net income | | $ | 189,694 | | $ | 164,676 | | $ | 169,063 |
Other comprehensive (loss) income, net of tax: | |
| | |
| | |
| |
Changes in other comprehensive income (loss) related to pension and other post retirement obligations | |
| 13,403 | |
| 6,009 | |
| (2,045) |
Changes in other comprehensive (loss) income related to unrealized (losses) gains on available-for-sale securities | |
| (126,107) | |
| 66,294 | |
| 37,124 |
Other comprehensive (loss) income | |
| (112,704) | |
| 72,303 | |
| 35,079 |
Comprehensive income | | $ | 76,990 | | $ | 236,979 | | $ | 204,142 |
(000's omitted) | 2019 | 2018 | 2017 | |||||||||
Revenues: | ||||||||||||
Dividends from subsidiaries: | ||||||||||||
Bank subsidiary | $ | 115,000 | $ | 98,000 | $ | 91,000 | ||||||
Non-bank subsidiaries | 27,600 | 9,250 | 35,500 | |||||||||
Interest and dividends on investments | 134 | 161 | 133 | |||||||||
Total revenues | 142,734 | 107,411 | 126,633 | |||||||||
Expenses: | ||||||||||||
Interest on borrowings | 4,244 | 4,677 | 3,904 | |||||||||
Acquisition expenses | 1,248 | 0 | 91 | |||||||||
Loss on debt prepayment | 0 | 318 | 0 | |||||||||
Other expenses | 477 | 131 | 26 | |||||||||
Total expenses | 5,969 | 5,126 | 4,021 | |||||||||
Income before tax benefit and equity in undistributed net income of subsidiaries | 136,765 | 102,285 | 122,612 | |||||||||
Income tax benefit | 4,545 | 1,330 | 1,930 | |||||||||
Income before equity in undistributed net income of subsidiaries | 141,310 | 103,615 | 124,542 | |||||||||
Equity in undistributed net income of subsidiaries | 27,753 | 65,026 | 26,175 | |||||||||
Net income | $ | 169,063 | $ | 168,641 | $ | 150,717 | ||||||
Other comprehensive income/(loss), net of tax: | ||||||||||||
Changes in other comprehensive (loss)/income related to pension and other post retirement obligations | (2,045 | ) | (11,204 | ) | 168 | |||||||
Changes in other comprehensive income/(loss) related to unrealized losses on available-for-sale securities | 37,124 | (30,402 | ) | (11,065 | ) | |||||||
Other comprehensive income/(loss) | 35,079 | (41,606 | ) | (10,897 | ) | |||||||
Comprehensive income | $ | 204,142 | $ | 127,035 | $ | 139,820 |
123
(000's omitted) | 2019 | 2018 | 2017 | |||||||||
Operating activities: | ||||||||||||
Net income | $ | 169,063 | $ | 168,641 | $ | 150,717 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||||||
Equity in undistributed net income of subsidiaries | (27,753 | ) | (65,026 | ) | (26,175 | ) | ||||||
Net change in other assets and other liabilities | 86 | (1,084 | ) | 1,870 | ||||||||
Net cash provided by operating activities | 141,396 | 102,531 | 126,412 | |||||||||
Investing activities: | ||||||||||||
Proceeds from redemption of investment securities | 0 | 776 | 0 | |||||||||
Cash paid for acquisitions, net of cash acquired of $1,328, $0, and $150,534, respectively | (92,056 | ) | 0 | (139,471 | ) | |||||||
Return of capital from/(capital contributions to) | 100,680 | 0 | (11,063 | ) | ||||||||
Net cash provided by/(used in) investing activities | 8,624 | 776 | (150,534 | ) | ||||||||
Financing activities: | ||||||||||||
Repayment of advances from subsidiaries | (1,652 | ) | 0 | 0 | ||||||||
Repayment of borrowings | (22,681 | ) | (25,207 | ) | 0 | |||||||
Issuance of common stock | 12,200 | 12,507 | 9,700 | |||||||||
Purchase of treasury stock | (286 | ) | (298 | ) | (3,306 | ) | ||||||
Sale of treasury stock | 6,884 | 12,561 | 10,060 | |||||||||
Increase in deferred compensation arrangements | 286 | 298 | 3,306 | |||||||||
Cash dividends paid | (80,241 | ) | (71,495 | ) | (62,305 | ) | ||||||
Net cash used in financing activities | (85,490 | ) | (71,634 | ) | (42,545 | ) | ||||||
Change in cash and cash equivalents | 64,530 | 31,673 | (66,667 | ) | ||||||||
Cash and cash equivalents at beginning of year | 116,133 | 84,460 | 151,127 | |||||||||
Cash and cash equivalents at end of year | $ | 180,663 | $ | 116,133 | $ | 84,460 | ||||||
Supplemental disclosures of cash flow information: | ||||||||||||
Cash paid for interest | $ | 4,306 | $ | 4,857 | $ | 3,826 | ||||||
Supplemental disclosures of noncash financing activities | ||||||||||||
Dividends declared and unpaid | $ | 21,342 | $ | 19,808 | $ | 17,460 | ||||||
Advances from subsidiaries | 1,691 | 0 | 0 | |||||||||
Capital contributions to subsidiaries | 0 | 0 | 513,769 | |||||||||
Common stock issued for acquisition | 0 | 0 | 343,132 |
| | | | | | | | | |
(000's omitted) |
| 2021 |
| 2020 |
| 2019 | |||
Operating activities: |
| |
|
| |
|
| |
|
Net income | | $ | 189,694 | | $ | 164,676 | | $ | 169,063 |
Adjustments to reconcile net income to net cash provided by operating activities | |
| | |
| | |
| |
Equity in undistributed net income of subsidiaries | |
| (52,648) | |
| (49,789) | |
| (27,753) |
Net change in other assets and other liabilities | |
| (3,050) | |
| 1,740 | |
| 86 |
Net cash provided by operating activities | |
| 133,996 | |
| 116,627 | |
| 141,396 |
Investing activities: | |
| | |
| | |
| |
Purchases of investment securities | | | (5,173) | | | (3,000) | | | 0 |
Cash paid for acquisitions, net of cash acquired of $0, $448, and $1,328, respectively | |
| 0 | |
| (20,892) | |
| (92,056) |
(Capital contributions to)/Return of capital from | |
| (12,918) | |
| 2 | |
| 100,680 |
Net cash (used in)/provided by investing activities | |
| (18,091) | |
| (23,890) | |
| 8,624 |
Financing activities: | |
| | |
| | |
| |
Repayment of advances from subsidiaries | |
| (482) | |
| (482) | |
| (1,652) |
Repayment of borrowings | |
| (77,320) | |
| (12,062) | |
| (22,681) |
Issuance of common stock | |
| 16,155 | |
| 22,211 | |
| 12,200 |
Purchase of treasury stock | |
| (5,106) | |
| (271) | |
| (286) |
Sale of treasury stock | |
| 0 | |
| 85 | |
| 6,884 |
Increase in deferred compensation arrangements | |
| 252 | |
| 271 | |
| 286 |
Cash dividends paid | |
| (91,051) | |
| (87,131) | |
| (80,241) |
Net cash used in financing activities | |
| (157,552) | |
| (77,379) | |
| (85,490) |
Change in cash and cash equivalents | |
| (41,647) | |
| 15,358 | |
| 64,530 |
Cash and cash equivalents at beginning of year | |
| 196,021 | |
| 180,663 | |
| 116,133 |
Cash and cash equivalents at end of year | | $ | 154,374 | | $ | 196,021 | | $ | 180,663 |
| | | | | | | | | |
Supplemental disclosures of cash flow information: | |
|
| |
| | |
|
|
Cash paid for interest | | $ | 560 | | $ | 2,555 | | $ | 4,306 |
Supplemental disclosures of noncash financing activities: | |
|
| |
|
| |
|
|
Dividends declared and unpaid | | $ | 23,235 | | $ | 22,695 | | $ | 21,342 |
Advances from subsidiaries | |
| 482 | |
| 932 | |
| 1,691 |
Common stock issued for acquisition | |
| 0 | |
| 76,942 | |
| 0 |
NOTE R: FAIR VALUE
Accounting standards allow entities an irrevocable option to measure certain financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. The Company has elected to value mortgage loans held for sale at fair value in order to more closely match the gains and losses associated with loans held for sale with the gains and losses on forward sales contracts. Accordingly, the impact on the valuation will be recognized in the Company’s consolidated statementstatements of income. All mortgage loans held for sale are current and in performing status.
Accounting standards establish a framework for measuring fair value and require certain disclosures about such fair value instruments. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e. exit price). Inputs used to measure fair value are classified into the following hierarchy:
124
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following tables set forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis. There were no0 transfers between any of the levels for the periods presented.
| | | | | | | | | | | | |
| | December 31, 2021 | ||||||||||
| | | | | | | | | | | Total Fair | |
(000’s omitted) |
| Level 1 |
| Level 2 |
| Level 3 |
| Value | ||||
Available-for-sale investment securities: |
| |
|
| |
|
| |
|
| |
|
U.S. Treasury and agency securities | | $ | 3,900,924 | | $ | 97,640 | | $ | 0 | | $ | 3,998,564 |
Obligations of state and political subdivisions | |
| 0 | |
| 430,289 | |
| 0 | |
| 430,289 |
Government agency mortgage-backed securities | |
| 0 | |
| 477,056 | |
| 0 | |
| 477,056 |
Corporate debt securities | |
| 0 | |
| 7,962 | |
| 0 | |
| 7,962 |
Government agency collateralized mortgage obligations | |
| 0 | |
| 20,339 | |
| 0 | |
| 20,339 |
Total available-for-sale investment securities | |
| 3,900,924 | |
| 1,033,286 | |
| 0 | |
| 4,934,210 |
Equity securities | |
| 463 | |
| 0 | |
| 0 | |
| 463 |
Commitments to originate real estate loans for sale | | | 0 | | | 0 | | | 51 | | | 51 |
Forward sales commitments | | | 0 | | | 32 | | | 0 | | | 32 |
Interest rate swap agreements asset | |
| 0 | |
| 296 | |
| 0 | |
| 296 |
Interest rate swap agreements liability | |
| 0 | |
| (3) | |
| 0 | |
| (3) |
Total | | $ | 3,901,387 | | $ | 1,033,611 | | $ | 51 | | $ | 4,935,049 |
| | | | | | | | | | | | |
| | December 31, 2020 | ||||||||||
| | | | | | | | | | | Total Fair | |
(000’s omitted) |
| Level 1 |
| Level 2 |
| Level 3 |
| Value | ||||
Available-for-sale investment securities: |
| |
|
| |
|
| |
|
| |
|
U.S. Treasury and agency securities | | $ | 2,359,912 | | $ | 141,470 | | $ | 0 | | $ | 2,501,382 |
Obligations of state and political subdivisions | |
| 0 | |
| 475,660 | |
| 0 | |
| 475,660 |
Government agency mortgage-backed securities | |
| 0 | |
| 522,638 | |
| 0 | |
| 522,638 |
Corporate debt securities | |
| 0 | |
| 4,635 | |
| 0 | |
| 4,635 |
Government agency collateralized mortgage obligations | |
| 0 | |
| 43,577 | |
| 0 | |
| 43,577 |
Total available-for-sale investment securities | |
| 2,359,912 | |
| 1,187,980 | |
| 0 | |
| 3,547,892 |
Equity securities | |
| 445 | |
| 0 | |
| 0 | |
| 445 |
Mortgage loans held for sale | |
| 0 | |
| 1,622 | |
| 0 | |
| 1,622 |
Commitments to originate real estate loans for sale | | | 0 | | | 0 | | | 14 | | | 14 |
Forward sales commitments | | | 0 | | | 2 | | | 0 | | | 2 |
Interest rate swap agreements asset | |
| 0 | |
| 1,572 | |
| 0 | |
| 1,572 |
Interest rate swap agreements liability | |
| 0 | |
| (1,074) | | | 0 | |
| (1,074) |
Total | | $ | 2,360,357 | | $ | 1,190,102 | | $ | 14 | | $ | 3,550,473 |
125
December 31, 2019 | ||||||||||||||||
(000’s omitted) | Level 1 | Level 2 | Level 3 | Total Fair Value | ||||||||||||
Available-for-sale investment securities: | ||||||||||||||||
U.S. Treasury and agency securities | $ | 1,878,705 | $ | 165,054 | $ | 0 | $ | 2,043,759 | ||||||||
Obligations of state and political subdivisions | 0 | 512,208 | 0 | 512,208 | ||||||||||||
Government agency mortgage-backed securities | 0 | 432,862 | 0 | 432,862 | ||||||||||||
Corporate debt securities | 0 | 2,528 | 0 | 2,528 | ||||||||||||
Government agency collateralized mortgage obligations | 0 | 53,071 | 0 | 53,071 | ||||||||||||
Total available-for-sale investment securities | 1,878,705 | 1,165,723 | 0 | 3,044,428 | ||||||||||||
Equity securities | 451 | 0 | 0 | 451 | ||||||||||||
Interest rate swap agreements asset | 0 | 851 | 0 | 851 | ||||||||||||
Interest rate swap agreements liability | 0 | (586 | ) | 0 | (586 | ) | ||||||||||
Total | $ | 1,879,156 | $ | 1,165,988 | $ | 0 | $ | 3,045,144 |
December 31, 2018 | ||||||||||||||||
(000’s omitted) | Level 1 | Level 2 | Level 3 | Total Fair Value | ||||||||||||
Available-for-sale investment securities: | ||||||||||||||||
U.S. Treasury and agency securities | $ | 1,896,931 | $ | 126,822 | $ | 0 | $ | 2,023,753 | ||||||||
Obligations of state and political subdivisions | 0 | 459,154 | �� | 0 | 459,154 | |||||||||||
Government agency mortgage-backed securities | 0 | 382,477 | 0 | 382,477 | ||||||||||||
Corporate debt securities | 0 | 2,546 | 0 | 2,546 | ||||||||||||
Government agency collateralized mortgage obligations | 0 | 68,119 | 0 | 68,119 | ||||||||||||
Total available-for-sale investment securities | 1,896,931 | 1,039,118 | 0 | 2,936,049 | ||||||||||||
Equity securities | 432 | 0 | 0 | 432 | ||||||||||||
Mortgage loans held for sale | 0 | 83 | 0 | 83 | ||||||||||||
Interest rate swap agreements asset | 0 | 793 | 0 | 793 | ||||||||||||
Interest rate swap agreements liability | 0 | (742 | ) | 0 | (742 | ) | ||||||||||
Total | $ | 1,897,363 | $ | 1,039,252 | $ | 0 | $ | 2,936,615 |
The valuation techniques used to measure fair value for the items in the table above are as follows:
● | Available for sale investment securities and equity securities – The fair |
● | Mortgage loans held for sale – |
● | Forward sales commitments – The Company enters into forward sales commitments to sell certain residential real estate loans. Such commitments are considered to be derivative financial instruments and, therefore, are carried at estimated fair value in the other asset or other liability section of the consolidated |
● | Commitments to originate real estate loans for sale – The Company enters into various commitments to originate residential real estate loans for sale. Such commitments are considered to be derivative financial instruments and, therefore, are carried at estimated fair value in the other asset or other liability section of the consolidated |
● | Interest rate swap agreements – The interest rate swaps are reported at their fair value utilizing Level 2 inputs from third parties. The fair value of |
The changes in Level 3 assets measured at fair value on a recurring basis are immaterial.
126
December 31, 2019 | December 31, 2018 | |||||||||||||||||||||||||||||||
(000’s omitted) | Level 1 | Level 2 | Level 3 | Total Fair Value | Level 1 | Level 2 | Level 3 | Total Fair Value | ||||||||||||||||||||||||
Impaired loans | $ | 0 | $ | 0 | $ | 848 | $ | 848 | $ | 0 | $ | 0 | $ | 1,102 | $ | 1,102 | ||||||||||||||||
Other real estate owned | 0 | 0 | 1,270 | 1,270 | 0 | 0 | 1,320 | 1,320 | ||||||||||||||||||||||||
Mortgage servicing rights | 0 | 0 | 56 | 56 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Total | $ | 0 | $ | 0 | $ | 2,174 | $ | 2,174 | $ | 0 | $ | 0 | $ | 2,422 | $ | 2,422 |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 | ||||||||||||||||||||
|
| | |
| | |
| | | | Total Fair |
| | |
| | |
| | | Total Fair | |||
(000's omitted) | | Level 1 | | Level 2 | | Level 3 | | Value | | Level 1 | | Level 2 | | Level 3 | | Value | ||||||||
Individually assessed loans | | $ | 0 | | $ | 0 | | $ | 1,820 |
| $ | 1,820 | | $ | 0 | | $ | 0 | | $ | 25,063 |
| $ | 25,063 |
Other real estate owned | |
| 0 | |
| 0 | |
| 718 |
|
| 718 | |
| 0 | |
| 0 | |
| 883 |
|
| 883 |
Mortgage servicing rights | |
| 0 | |
| 0 | |
| 810 |
|
| 810 | |
| 0 | |
| 0 | |
| 682 |
|
| 682 |
Contingent consideration | | | 0 | | | 0 | | | (3,100) | | | (3,100) | | | 0 | | | 0 | | | 0 | | | 0 |
Total | | $ | 0 | | $ | 0 | | $ | 248 |
| $ | 248 | | $ | 0 | | $ | 0 | | $ | 26,628 |
| $ | 26,628 |
Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Nonrecurring adjustments also include certain impairment amounts for collateral-dependent loans calculated when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuation amount does not necessarily represent the fair value of the loan. Real estate collateral is typically valued using independent appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace, adjusted for non-observable inputs. Thus, the resulting nonrecurring fair value measurements are generally classified as Level 3. Estimates of fair value used for other collateral supporting commercial loans generally are based on assumptions not observable in the marketplace and, therefore, such valuations classify as Level 3.
Other real estate owned (“OREO”) is valued at the time the loan is foreclosed upon and the asset is transferred to OREO. The value is based primarily on third party appraisals, less estimated costs to sell. The appraisals are sometimes further discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the customer and customer’s business. Such discounts are significant, ranging from 9%31.8% to 86%42.3% at December 31, 2019,2021, and result in a Level 3 classification of the inputs for determining fair value. OREO is reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above. The Company recovers the carrying value of OREO through the sale of the property. The ability to affect future sales prices is subject to market conditions and factors beyond the Company’s control and may impact the estimated fair value of a property.
Originated mortgage servicing rights are recorded at their fair value at the time of sale of the underlying loan, and are amortized in proportion to and over the estimated period of net servicing income. The fair value of mortgage servicing rights is based on a valuation model incorporating inputs that market participants would use in estimating future net servicing income. Such inputs include estimates of the cost of servicing loans, appropriate discount rate, and prepayment speeds and are considered to be unobservable and contribute to the Level
3 classification of mortgage servicing rights. In accordance with GAAP, the Company must record impairment charges, on a nonrecurring basis, when the carrying value of a stratum exceeds its estimated fair value. Impairment is recognized through a valuation allowance. ThereThe Company has recorded contingent consideration liabilities that arise from acquisition activity. The contingent consideration is recorded at fair value at the date of acquisition. The valuation of contingent consideration is calculated using an income approach method, which provides an estimation of the fair value of an asset or liability based on future cash flows over a discrete projection period, discounted to present value using an appropriate rate of return. The assumptions used in the valuation calculation are based on significant unobservable inputs, therefore such valuations classify as Level 3.
The Company evaluates goodwill for impairment on an annual basis, or more often if events or circumstances indicate there may be impairment. The fair value of each reporting unit is compared to the carrying amount of that reporting unit in order to determine if impairment is indicated. If so, the implied fair value of the reporting unit’s goodwill is compared to its carrying amount and the impairment loss is measured by the excess of the carrying value of the goodwill over fair value of the goodwill. In such situations, the Company performs a discounted cash flow modeling technique that requires management to make estimates regarding the amount and timing of expected future cash flows of the assets and liabilities of the reporting unit that enable the Company to calculate the implied fair value of the goodwill. It also requires use of a discount rate that reflects the current return expectation of the market in relation to present risk-free interest rates, expected equity market premiums, peer volatility indicators and company-specific risk indicators. The Company did not recognize an impairment charge during 20192021 or 2018.2020.
127
The significant unobservable inputs used in the determination of fair value of assets classified as Level 3 on a recurring or non-recurring basis as of December 31, 20192021 are as follows:
(000’s omitted) | Fair Value | Valuation Technique | Significant Unobservable Inputs | Significant Unobservable Input Range (Weighted Average) | ||||||
Impaired loans | $ | 848 | Fair value of collateral | Estimated cost of disposal/market adjustment | 9.0% - 35.0% (27.9 | %) | ||||
Other real estate owned | 1,270 | Fair value of collateral | Estimated cost of disposal/market adjustment | 9.0% - 85.7% (37.1 | %) | |||||
Mortgage servicing rights | 56 | Discounted cash flow | Weighted average constant prepayment rate | 52.8 | % | |||||
Weighted average discount rate | 3.00 | % | ||||||||
Adequate compensation | $7/loan | |||||||||
| | | | | | | | | | | |
|
| |
| |
| Significant |
| Significant Unobservable |
| ||
| | | | | Valuation | | Unobservable | | Input Range |
| |
(000’s omitted) | | Fair Value | | Technique | | Inputs | | (Weighted Average) |
| ||
Individually assessed loans | | $ | 1,820 |
| Fair value of collateral |
| Estimated cost of disposal/market adjustment |
| | 9.0% - 43.1% (43.1%) | |
Other real estate owned | |
| 718 |
| Fair value of collateral |
| Estimated cost of disposal/market adjustment |
| | 31.8% - 42.3% (33.3%) | |
Commitments to originate real estate loans for sale | | | 51 | | Discounted cash flow | | Embedded servicing value | | | 1.0 | % |
Mortgage servicing rights | |
| 810 |
| Discounted cash flow |
| Weighted average constant prepayment rate |
| | 6.4% - 15.2% (14.0%) | |
| | | | | |
| Weighted average discount rate |
| | 2.3% - 2.7% (2.6%) | |
| | | | | |
| Adequate compensation | | $ | 7/loan | |
Contingent consideration | | | (3,100) | | Discounted cash flow | | Discount rate | | | 1.4% - 1.7% (1.5%) | |
| | | | | | | Probability adjusted level of retained revenue | | | $3.0 million - $5.8 million | |
The significant unobservable inputs used in the determination of fair value of assets classified as Level 3 on a recurring or non-recurring basis as of December 31, 20182020 are as follows:
(000’s omitted) | Fair Value | Valuation Technique | Significant Unobservable Inputs | Significant Unobservable Input Range (Weighted Average) | ||||||
Impaired loans | $ | 1,102 | Fair value of collateral | Estimated cost of disposal/market adjustment | 9.0% - 35.4% (28.8 | %) | ||||
Other real estate owned | 1,320 | Fair value of collateral | Estimated cost of disposal/market adjustment | 9.0% - 69.3% (23.8 | %) |
| | | | | | | | | | | |
|
| |
| |
| Significant |
| Significant Unobservable |
| ||
| | | | | Valuation | | Unobservable | | Input Range |
| |
(000’s omitted) | | Fair Value | | Technique | | Inputs | | (Weighted Average) |
| ||
Individually assessed loans | | $ | 25,063 |
| Fair value of collateral |
| Estimated cost of disposal/market adjustment |
| | 9.0% - 78.4% (52.7%) | |
Other real estate owned | |
| 883 |
| Fair value of collateral |
| Estimated cost of disposal/market adjustment |
| | 11.3% - 52.9% (34.0%) | |
Commitments to originate real estate loans for sale | | | 14 | | Discounted cash flow | | Embedded servicing value | | | 1.0 | % |
Mortgage servicing rights | |
| 682 |
| Discounted cash flow |
| Weighted average constant prepayment rate |
| | 9.8% - 18.8% (17.6%) | |
| | | | | |
| Weighted average discount rate |
| | 1.7% - 2.2% (2.1%) | |
| | | | | |
| Adequate compensation | | $ | 7/loan | |
The Company determines fair values based on quoted market values, where available, estimates of present values, or other valuation techniques. Those techniques are significantly affected by the assumptions used, including, but not limited to, the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may not be realized in immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments are excluded from fair value disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
The significant unobservable inputs used in the determination of the fair value of assets classified as Level 3 have an inherent measurement uncertainty that if changed could result in higher or lower fair value measurements of these assets as of the reporting date. The weighted average of the estimated cost of disposal/market adjustment for individually assessed loans was calculated by dividing the total of the book value of the collateral of the individually assessed loans classified as Level 3 by the total of the fair value of the collateral of the individually assessed loans classified as Level 3. The weighted average of the estimated cost of disposal/market adjustment for other real estate owned was calculated by dividing the total of the differences between the appraisal values of the real estate and the book values of the real estate divided by the totals of the appraisal values of the real estate. The weighted average of the constant prepayment rate for mortgage servicing rights was calculated by adding the constant prepayment rates used in each loan pool weighted by the balance in each loan pool. The weighted average of the discount rate for mortgage servicing rights was calculated by adding the discount rates used in each loan pool weighted by the balance in each loan pool. The weighted average of the discount rate for the contingent consideration was calculated by adding the discount rates used for the calculation of the fair value of each payment of contingent consideration, weighted by the amount of the payment as part of the total fair value of contingent consideration.
128
The carrying amounts and estimated fair values of the Company’s other financial instruments that are not accounted for at fair value at December 31, 20192021 and 20182020 are as follows:
December 31, 2019 | December 31, 2018 | |||||||||||||||
(000’s omitted) | Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||
Financial assets: | ||||||||||||||||
Net loans | $ | 6,840,632 | $ | 7,028,663 | $ | 6,231,837 | $ | 6,247,939 | ||||||||
Financial liabilities: | ||||||||||||||||
Deposits | 8,994,967 | 8,997,551 | 8,322,371 | 8,308,765 | ||||||||||||
Overnight Federal Home Loan Bank borrowings | 8,300 | 8,300 | 54,400 | 54,400 | ||||||||||||
Securities sold under agreement to repurchase, short-term | 241,708 | 241,708 | 259,367 | 259,367 | ||||||||||||
Other Federal Home Loan Bank borrowings | 3,750 | 3,755 | 1,976 | 1,921 | ||||||||||||
Subordinated notes payable | 13,795 | 13,795 | 0 | 0 | ||||||||||||
Subordinated debt held by unconsolidated subsidiary trusts | 77,320 | 77,320 | 97,939 | 97,939 |
| | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 | ||||||||
|
| Carrying |
| |
| Carrying |
| | ||||
(000's omitted) | | Value | | Fair Value | | Value | | Fair Value | ||||
Financial assets: |
| |
|
| |
|
| |
|
| |
|
Net loans | | $ | 7,323,770 | | $ | 7,523,024 | | $ | 7,355,083 | | $ | 7,655,044 |
Financial liabilities: | |
| | |
| | |
| | |
| |
Deposits | |
| 12,911,168 | |
| 12,911,197 | |
| 11,224,974 | |
| 11,239,628 |
Securities sold under agreement to repurchase, short-term | |
| 324,720 | |
| 324,720 | |
| 284,008 | |
| 284,008 |
Other Federal Home Loan Bank borrowings | |
| 1,888 | |
| 1,907 | |
| 6,658 | |
| 6,758 |
Subordinated notes payable | |
| 3,277 | |
| 3,277 | |
| 3,303 | |
| 3,303 |
Subordinated debt held by unconsolidated subsidiary trusts | |
| 0 | |
| 0 | |
| 77,320 | |
| 77,320 |
The following is a further description of the principal valuation methods used by the Company to estimate the fair values of its financial instruments.
Loans have been classified as a Level 3 valuation. Fair values for variable rate loans that reprice frequently are based on carrying values. Fair values for fixed rate loans are estimated using discounted cash flows and interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.
Deposits have been classified as a Level 2 valuation. The fair value of demand deposits, interest-bearing checking deposits, savings accounts and money market deposits is the amount payable on demand at the reporting date. The fair value of time deposit obligations are based on current market rates for similar products.
Borrowings and subordinated debt held by unconsolidated subsidiary trusts have been classified as a Level 2 valuation. The fair value of FHLB overnight advances and securities sold under agreement to repurchase, short-term, is the amount payable on demand at the reporting date. Fair values for long-term borrowings and subordinated debt held by unconsolidated subsidiary trusts are estimated using discounted cash flows and interest rates currently being offered on similar securities. The difference between the carrying values of long-term borrowings and subordinated debt held by unconsolidated subsidiary trusts, and their fair values, are not material as of the reporting dates.
Other financial assets and liabilities – Cash and cash equivalents have been classified as a Level 1 valuation, while accrued interest receivable and accrued interest payable have been classified as a Level 2 valuation. The fair values of each approximate the respective carrying values because the instruments are payable on demand or have short-term maturities and present relatively low credit risk and interest rate risk.
NOTE S: DERIVATIVE INSTRUMENTS
The Company is party to derivative financial instruments in the normal course of its business to meet the financing needs of its customers and to manage its own exposure to fluctuations in interest rates. These financial instruments have been limited to interest rate swap agreements, commitments to originate real estate loans held for sale and forward sales commitments. The Company does not hold or issue derivative financial instruments for trading or other speculative purposes.
The Company enters into forward sales commitments for the future delivery of residential mortgage loans, and interest rate lock commitments to fund loans at a specified interest rate. The forward sales commitments are utilized to reduce interest rate risk associated with interest rate lock commitments and loans held for sale. Changes in the estimated fair value of the forward sales commitments and interest rate lock commitments subsequent to inception are based on changes in the fair value of the underlying loan resulting from the fulfillment of the commitment and changes in the probability that the loan will fund within the terms of the commitment, which is affected primarily by changes in interest rates and the passage of time. At inception and during the life of the interest rate lock commitment, the Company includes the expected net future cash flows related to the associated servicing of the loan as part of the fair value measurement of the interest rate lock commitments. These derivatives are recorded at fair value, which were immaterial at December 31,
129
The Company acquired interest rate swaps in 2017 with notional amounts with certain commercial customers which totaled $16.4$0.5 million at December 31,2019 2021 and $37.0$14.4 million at December 31,2018. 2020. In order to minimize the Company’s risk, these customer derivatives (pay floating/receive fixed swaps) have been offset with essentially matching interest rate swaps (pay fixed/receive floating swaps) with the Company’s counterparty totaling $16.4$0.5 million at December 31,2019 2021 and $37.0$14.4 million at December 31,2018. 2020. At December 31,2019, 2021, the weighted average receive rate of these interest rate swaps was 3.72%2.35%, the weighted average pay rate was 4.39%3.54% and the weighted average maturity was 6.11.3 years. At December 31,2018, 2020, the weighted average receive rate of these interest rate swaps was 4.34%2.10%, the weighted average pay rate was 3.84%4.44% and the weighted average maturity was 5.55.2 years. Hedge accounting has not been applied for these derivatives. Since the terms of the swaps with the customer and the other financial institution offset each other, with the only difference being counterparty credit risk, changes in the fair value of the underlying derivative contracts are not materially different and do not significantly impact our results of operations.
The Company also acquired interest rate swaps in
2017 with notional amounts totalingAs of December
31,
(000’s omitted) | ||||||||
Line Item in the Consolidated Statement of Condition in Which the Hedged Item Is Included | Carrying Amount of the Hedged Assets | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets | ||||||
December 31, 2019 | December 31, 2019 | |||||||
Loans | $ | 6,390 | $ | (265 | ) |
| | | | | | | | | | | | |
(000’s omitted) | | |
| | | | | | |
| |
|
| | | | | | | | | | | | |
| | | | | | | | Cumulative Amount of Fair Value Hedging | ||||
Line Item in the Consolidated | | Carrying Amount of the Hedged | | Adjustment Included in the Carrying | ||||||||
Statement of Condition in Which | | Assets | | Amount of the Hedged Assets | ||||||||
the Hedged Item Is Included |
| December 31, 2021 |
| December 31, 2020 |
| December 31, 2021 |
| December 31, 2020 | ||||
Loans | | $ | 5,400 | | $ | 5,675 | | $ | (293) | | $ | (498) |
Fair values of derivative instruments as of December 31,2019 2021 are as follows:
| | | | | | | | | | | |
(000’s omitted) | | December 31, 2021 | | ||||||||
| | Derivative Assets | | Derivative Liabilities | | ||||||
| | Consolidated Statement of | | Fair | | Consolidated Statement of Condition | | Fair | | ||
| | Condition Location |
| Value |
| Location |
| Value | | ||
Derivatives designated as hedging instruments under Subtopic 815-20 |
|
| |
| | |
| |
| | |
Interest rate swaps |
| Other assets | | $ | 293 |
|
|
|
| | |
| | | | | | | | | | | |
Derivatives not designated as hedging instruments under Subtopic 815-20 |
| | |
| |
|
|
|
| | |
Interest rate swaps |
| Other assets | |
| 3 |
| Accrued interest and other liabilities |
| $ | 3 | |
Commitments to originate real estate loans for sale | | Other assets | | | 51 | | | | | | |
Forward sales commitments | | Other assets | | | 32 | | | | | | |
Total derivatives |
|
| | $ | 379 |
|
|
| $ | 3 | |
130
(000’s omitted) | ||||||||||
December 31, 2019 | ||||||||||
Derivative Assets | Derivative Liabilities | |||||||||
Consolidated Statement of Condition Location | Fair Value | Consolidated Statement of Condition Location | Fair Value | |||||||
Derivatives designated as hedging instruments under Subtopic 815-20 | ||||||||||
Interest rate swaps | Other assets | $ | 265 | |||||||
Derivatives not designated as hedging instruments under Subtopic 815-20 | ||||||||||
Interest rate swaps | Other assets | 586 | Accrued interest and other liabilities | $ | 586 | |||||
Total derivatives | $ | 851 | $ | 586 |
Fair values of derivative instruments as of December 31, 2020 are as follows:
| | | | | | | | | | | |
(000’s omitted) |
| December 31, 2020 | |||||||||
| | Derivative Assets | | Derivative Liabilities | |||||||
|
| Consolidated Statement of |
| | |
| Consolidated Statement of Condition |
| | | |
|
| Condition Location |
| Fair Value |
| Location |
| Fair Value | |||
Derivatives designated as hedging instruments under Subtopic 815-20 |
| |
|
| |
|
|
|
| |
|
Interest rate swaps |
| | Other assets | | $ | 498 |
|
|
| |
|
| | | | | | | | | | | |
Derivatives not designated as hedging instruments under Subtopic 815-20 |
| |
| |
|
|
|
|
| |
|
Interest rate swaps |
| | Other assets | |
| 1,074 |
| Accrued interest and other liabilities | | $ | 1,074 |
Commitments to originate real estate loans for sale | | | Other assets | | | 14 | | | | | |
Forward sales commitments | | | Other assets | | | 2 | | | | | |
Total derivatives | | | | | $ | 1,588 |
|
| | $ | 1,074 |
The Company assessed its counterparty risk at December 31, 20192021 and 2020 and determined any credit risk inherent in our derivative contracts was not material. Information about the fair value of derivative financial instruments can be found in Note R to these consolidated financial statements.
The Company’s wholly-owned subsidiary CCT IV iswas a VIE for which the Company iswas not the primary beneficiary. Accordingly, the accounts of this entity arewere not included in the Company’s consolidated financial statements. On March 15, 2021, the Company exercised its right to redeem all of the CCT IV debentures and associated preferred securities. See further information regarding CCT IV in Note H: Borrowings.
In connection with the Company’s acquisition of Oneida Financial Corp, the Company acquired OPFC II which holds a 50% membership interest in 706 North Clinton, an entity formed for the purpose of acquiring and rehabilitating real property. The real property held by 706 North Clinton is principally occupied by subsidiaries of the Company. The Company analyzed the operating agreement and capital structure of 706 North Clinton and determined that it was the primary beneficiary and therefore should consolidate 706 North Clinton in its financial statements. This conclusion was based on the determination that the Company has a de facto agency relationship because of the financing arrangement between the other member of 706 North Clinton and the Bank which provides OPFC II with both the power to direct the activities of 706 North Clinton and the obligation to absorb any losses of 706 North Clinton.
The carrying amount of the assets and liabilities of 706 North Clinton and the classification of these assets and liabilities in the Company’s consolidated statements of condition at December 31 is as follows:
| | | | | | |
(000’s omitted) |
| 2021 |
| 2020 | ||
Cash and cash equivalents | | $ | 198 | | $ | 157 |
Premises and equipment, net | |
| 5,618 | |
| 5,782 |
Other assets | |
| 57 | |
| 48 |
Total assets | | $ | 5,873 | | $ | 5,987 |
Accrued interest and other liabilities / Total liabilities | | $ | 0 | | $ | 0 |
131
(000’s omitted) | 2019 | 2018 | ||||||
Cash and cash equivalents | $ | 138 | $ | 104 | ||||
Premises and equipment, net | 5,945 | 6,109 | ||||||
Other assets | 42 | 33 | ||||||
Total assets | $ | 6,125 | $ | 6,246 | ||||
Accrued interest and other liabilities / Total liabilities | $ | 1 | $ | 0 |
In addition to the assets and liabilities of 706 North Clinton, the minority interest in 706 North Clinton of $3.1$2.9 million at December 31, 20192021 is included in the Company’s consolidated statementstatements of condition. The creditors of 706 North Clinton do not have a claim on the general assets of the Company. The Company’s maximum loss exposure net of minority interest in 706 North Clinton is approximately $4.5$4.2 million as of December 31, 2019,2021, including a $1.4$1.2 million loss exposure related to the financing agreement between the other member of 706 North Clinton and the Bank.
NOTE U: SEGMENT INFORMATION
Operating segments are components of an enterprise, which are evaluated regularly by the “chief operating decision maker” in deciding how to allocate resources and assess performance. The Company’s chief operating decision maker is the President and Chief Executive Officer of the Company. The Company has identified Banking, Employee Benefit Services and All Other as its reportable operating business segments. CBNA operates the Banking segment that provides full-service banking to consumers, businesses, and governmental units in Upstate New York as well as Northeastern Pennsylvania, Vermont and Western Massachusetts. Employee Benefit Services, which includes operating subsidiaries of BPAS, BPA, BPAS-APS, BPAS Trust Company of Puerto Rico, NRS, GTC, HB&T, and HB&T,FBD, provides employee benefit trust, collective investment fund, retirement plan administration, fund administration, transfer agency, actuarial, VEBA/HRA, and health and welfare consulting services. The All Other segment is comprised of: (a) wealth management services including trust services provided by the personal trust unit within the Bank, broker-dealer and investment advisory services provided by CISI, and The Carta Group and Wealth Partners, as well as asset management provided by Nottingham; and (b) full-service insurance, risk management and employee benefit services provided by OneGroup. The accounting policies used in the disclosure of business segments are the same as those described in the summary of significant accounting policies (See Note A).
132
Information about reportable segments and reconciliation of the information to the consolidated financial statements follows:
(000’s omitted) | Banking | Employee Benefit Services | All Other | Eliminations | Consolidated Total | |||||||||||||||
2019 | ||||||||||||||||||||
Net interest income | $ | 358,334 | $ | 665 | $ | 176 | $ | 0 | $ | 359,175 | ||||||||||
Provision for loan losses | 8,430 | 0 | 0 | 0 | 8,430 | |||||||||||||||
Noninterest revenue | 75,067 | 99,483 | 59,075 | (3,006 | ) | 230,619 | ||||||||||||||
Amortization of intangible assets | 5,751 | 6,770 | 3,435 | 0 | 15,956 | |||||||||||||||
Acquisition expenses | 8,608 | 0 | 0 | 0 | 8,608 | |||||||||||||||
Other operating expenses | 245,870 | 59,428 | 45,170 | (3,006 | ) | 347,462 | ||||||||||||||
Income before income taxes | $ | 164,742 | $ | 33,950 | $ | 10,646 | $ | 0 | $ | 209,338 | ||||||||||
Assets | $ | 11,225,509 | $ | 209,690 | $ | 76,351 | $ | (101,255 | ) | $ | 11,410,295 | |||||||||
Goodwill | $ | 670,223 | $ | 83,275 | $ | 20,312 | $ | 0 | $ | 773,810 | ||||||||||
Core deposit intangibles & Other intangibles | $ | 16,418 | $ | 37,775 | $ | 8,920 | $ | 0 | $ | 63,113 | ||||||||||
2018 | ||||||||||||||||||||
Net interest income | $ | 344,551 | $ | 376 | $ | 128 | $ | 0 | $ | 345,055 | ||||||||||
Provision for loan losses | 10,837 | 0 | 0 | 0 | 10,837 | |||||||||||||||
Noninterest revenue | 75,399 | 94,449 | 57,204 | (2,993 | ) | 224,059 | ||||||||||||||
Amortization of intangible assets | 6,429 | 8,015 | 3,711 | 0 | 18,155 | |||||||||||||||
Acquisition expenses | (782 | ) | 7 | 6 | 0 | (769 | ) | |||||||||||||
Other operating expenses | 231,362 | 56,275 | 43,259 | (2,993 | ) | 327,903 | ||||||||||||||
Income before income taxes | $ | 172,104 | $ | 30,528 | $ | 10,356 | $ | 0 | $ | 212,988 | ||||||||||
Assets | $ | 10,397,623 | $ | 207,460 | $ | 68,288 | $ | (66,076 | ) | $ | 10,607,295 | |||||||||
Goodwill | $ | 629,916 | $ | 83,275 | $ | 20,312 | $ | 0 | $ | 733,503 | ||||||||||
Core deposit intangibles & Other intangibles | $ | 18,596 | $ | 44,545 | $ | 10,705 | $ | 0 | $ | 73,846 | ||||||||||
2017 | ||||||||||||||||||||
Net interest income | $ | 315,025 | $ | 396 | $ | 254 | $ | 0 | $ | 315,675 | ||||||||||
Provision for loan losses | 10,984 | 0 | 0 | 0 | 10,984 | |||||||||||||||
Noninterest revenue | 73,337 | 82,743 | 49,201 | (2,858 | ) | 202,423 | ||||||||||||||
Amortization of intangible assets | �� | 5,296 | 8,578 | 3,067 | 0 | 16,941 | ||||||||||||||
Acquisition expenses | 24,549 | 1,194 | 243 | 0 | 25,986 | |||||||||||||||
Other operating expenses | 218,608 | 51,138 | 37,334 | (2,858 | ) | 304,222 | ||||||||||||||
Income before income taxes | $ | 128,925 | $ | 22,229 | $ | 8,811 | $ | 0 | $ | 159,965 | ||||||||||
Assets | $ | 10,505,919 | $ | 203,369 | 66,548 | $ | (29,638 | ) | $ | 10,746,198 | ||||||||||
Goodwill | $ | 629,916 | $ | 84,449 | $ | 20,065 | $ | 0 | $ | 734,430 | ||||||||||
Core deposit intangibles & Other intangibles | $ | 25,025 | $ | 52,288 | $ | 13,345 | $ | 0 | $ | 90,658 |
| | | | | | | | | | | | | | | |
| | | | | Employee | | | | | | | | Consolidated | ||
(000’s omitted) |
| Banking |
| Benefit Services |
| All Other |
| Eliminations |
| Total | |||||
2021 | | | | | | | | | | | | | | | |
Net interest income | | $ | 374,078 | | $ | 293 | | $ | 41 | | $ | 0 | | $ | 374,412 |
Provision for credit losses | | | (8,839) | | | 0 | | | 0 | | | 0 | | | (8,839) |
Noninterest revenue | | | 67,910 | | | 116,621 | | | 68,834 | | | (7,130) | | | 246,235 |
Amortization of intangible assets | | | 4,744 | | | 6,033 | | | 3,274 | | | 0 | | | 14,051 |
Acquisition expenses | | | 638 | | | 36 | | | 27 | | | 0 | | | 701 |
Acquisition-related contingent consideration adjustment | | | 0 | | | 200 | | | 0 | | | 0 | | | 200 |
Other operating expenses | | | 265,525 | | | 64,423 | | | 50,368 | | | (7,130) | | | 373,186 |
Income before income taxes | | $ | 179,920 | | $ | 46,222 | | $ | 15,206 | | $ | 0 | | $ | 241,348 |
Assets | | $ | 15,325,732 | | $ | 257,879 | | $ | 97,391 | | $ | (128,345) | | $ | 15,552,657 |
Goodwill | | $ | 689,868 | | $ | 85,321 | | $ | 23,920 | | $ | 0 | | $ | 799,109 |
Core deposit intangibles & Other intangibles | | $ | 9,087 | | $ | 40,018 | | $ | 16,121 | | $ | 0 | | $ | 65,226 |
2020 | |
| | |
| | |
| | |
| | |
| |
Net interest income | | $ | 367,237 | | $ | 943 | | $ | 223 | | $ | 0 | | $ | 368,403 |
Provision for credit losses |
| | 14,212 |
| | 0 |
| | 0 |
| | 0 |
| | 14,212 |
Noninterest revenue |
| | 69,578 |
| | 103,456 |
| | 61,599 |
| | (6,214) |
| | 228,419 |
Amortization of intangible assets |
| | 5,515 |
| | 5,724 |
| | 3,058 |
| | 0 |
| | 14,297 |
Acquisition expenses |
| | 4,933 |
| | 0 |
| | 0 |
| | 0 |
| | 4,933 |
Other operating expenses |
| | 255,955 |
| | 60,709 |
| | 46,854 |
| | (6,214) |
| | 357,304 |
Income before income taxes | | $ | 156,200 | | $ | 37,966 | | $ | 11,910 | | $ | 0 | | $ | 206,076 |
Assets | | $ | 13,762,325 | | $ | 217,780 | | $ | 82,849 | | $ | (131,860) | | $ | 13,931,094 |
Goodwill | | $ | 690,121 | | $ | 83,275 | | $ | 20,312 | | $ | 0 | | $ | 793,708 |
Core deposit intangibles & Other intangibles | | $ | 13,831 | | $ | 32,051 | | $ | 7,058 | | $ | 0 | | $ | 52,940 |
2019 | |
| | |
| | |
| | |
| | |
| |
Net interest income | | $ | 358,334 | | $ | 665 | | $ | 176 | | $ | 0 | | $ | 359,175 |
Provision for credit losses | |
| 8,430 |
| | 0 |
| | 0 |
| | 0 |
| | 8,430 |
Noninterest revenue | |
| 75,067 |
| | 99,483 |
| | 59,075 |
| | (3,006) |
| | 230,619 |
Amortization of intangible assets | |
| 5,751 |
| | 6,770 |
| | 3,435 |
| | 0 |
| | 15,956 |
Acquisition expenses | |
| 8,608 |
| | 0 |
| | 0 |
| | 0 |
| | 8,608 |
Other operating expenses | |
| 245,870 |
| | 59,428 |
| | 45,170 |
| | (3,006) |
| | 347,462 |
Income before income taxes | | $ | 164,742 | | $ | 33,950 | | $ | 10,646 | | $ | 0 | | $ | 209,338 |
Assets | | $ | 11,225,509 | | $ | 209,690 | | $ | 76,351 | | $ | (101,255) | | $ | 11,410,295 |
Goodwill | | $ | 670,223 | | $ | 83,275 | | $ | 20,312 | | $ | 0 | | $ | 773,810 |
Core deposit intangibles & Other intangibles | | $ | 16,418 | | $ | 37,775 | | $ | 8,920 | | $ | 0 | | $ | 63,113 |
NOTE V: SUBSEQUENT EVENTS
Companies are required to evaluate events and transactions that occur after the balance sheet date but before the date the financial statements are issued, or available to be issued in the case of non-public entities.issued. They must recognize in the financial statements the effect of all events or transactions that provide additional evidence of conditions that existed at the balance sheet date, including the estimates inherent in the financial preparation process. Entities do not recognize the impact of events or transactions that provide evidence about conditions that did not exist at the balance sheet date but arose after that date.
Such events and transactions were evaluated through the date these consolidated financial statements were available to be issued. Based upon this evaluation, it wasissued and the Company determined that no subsequentsuch events occurred that required recognition or disclosure in the consolidated financial statements.had occurred.
133
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2019.
The consolidated financial statements of the Company have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm that was engaged to express an opinion as to the fairness of presentation of such financial statements. PricewaterhouseCoopers LLP was also engaged to audit the effectiveness of the Company’s internal control over financial reporting. The report of PricewaterhouseCoopers LLP follows this report.
Community Bank System, Inc.
By: /s/ Mark E. Tryniski
Mark E. Tryniski,
President, Chief Executive Officer and Director
By: /s/ Joseph E. Sutaris
Joseph E. Sutaris,
Treasurer and Chief Financial Officer
134
To theBoard of Directors and Shareholders of Community Bank System, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statements of condition of Community Bank System, Inc. and its subsidiaries (the “Company”) as of December 31, 20192021 and 2018,2020, and the related consolidated statements of income, of comprehensive income, of changes in shareholders’ equity and of cash flows for each of the three years in the period ended December 31, 2019,2021, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company'sCompany’s internal control over financial reporting as of December 31, 20192021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20192021 and 2018,2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20192021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company'sCompany’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company'sCompany’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for LoanCredit Losses – Qualitative Calculation for Consumer Mortgage & Consumer Indirect Classes
As described in Notes A and D to the consolidated financial statements, management estimates the Company’s allowance for loancredit losses on the Consumer Mortgage classusing relevant available information, from internal and the Consumer Indirect class was $10.3 millionexternal sources, relating to past events, current conditions, and $13.7 million, respectively, asreasonable and supportable forecasts. As of December 31, 2019. The Company’s2021, the allowance for loancredit losses methodology consistswas $49.9 million on loans of $7.4 billion. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, acquired loans, delinquency level, risk ratings or term of loans as well as changes in macroeconomic conditions, such as changes in unemployment rates, property values such as home prices, commercial real estate prices and automobile prices, gross domestic product, recession probability, and other relevant factors. For qualitative macroeconomic adjustments, management uses third party forecasted economic data scenarios utilizing a base scenario and two components – the general and the specific loan loss allocations. As disclosed by management, the general loan loss allocation is composed of two calculations. The first calculation is quantitative and determines an allowance based on the latest 36 months of historical net charge-off data for each loan class. The second calculation is qualitative and takes into consideration eight qualitative environmental factors, which include levels and trends in delinquencies and impaired loans and levels of and trends in charge-offs and recoveries.
The principal considerations for our determination that performing procedures relating to the qualitative calculation formacroeconomic adjustments to the allowance for loancredit losses on the Consumer Mortgage and Consumer Indirect classes is a critical audit matter are (i) there wasthe significant judgment and estimation by management in determining the impact of levels and trends in delinquencies and impaired loans and levels of and trends in charge-offs and recoveries used in themacroeconomic qualitative calculation on the allowance for loan losses for the Consumer Mortgage and Consumer Indirect classes,adjustments, which in turn led to significant auditor subjectivity in performing procedures relating to the qualitative calculation; (ii) significant audit effort was necessary in performing procedures relating to the qualitative calculation; (iii) a high degree of auditor judgment, was necessary to evaluate the audit evidence obtained relating to levelssubjectivity, and trendseffort in delinquenciesperforming procedures and impaired loansevaluating related evidence; and levels of and trends in charge-offs and recoveries used in the qualitative calculation for the Consumer Mortgage and Consumer Indirect classes; and (iv)(ii) the audit effort involved the use of professionals with specialized skill and knowledge to assist in evaluating the audit evidence obtained from these procedures.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the Company’s allowance for loancredit losses estimation process, including controls over the qualitative calculation.macroeconomic adjustments. These procedures also included, among others, testing management’s process for determining qualitative macroeconomic adjustments to the allowance for loancredit losses, including testing the completeness and accuracy of significant data inputs used in the estimate; involvement of professionals with specialized skill and knowledge to assist in evaluating the appropriateness of management’s methodology, relating totesting data used in the qualitative calculationmacroeconomic adjustments, and evaluating the determination of the impact of forecasted macroeconomic conditions. Professionals with specialized skill and knowledge were used to assist in evaluating the reasonableness of the impact of (i) levels and trends in delinquencies and impaired loans and (ii) levels of and trends in charge-offs and recoveries used in the qualitative calculation on the allowance for loan losses for the Consumer Mortgage and Consumer Indirect classes.
/s/PricewaterhouseCoopers LLP
Buffalo, New York
March 2, 2020
We have served as the Company’s auditor since 1984.
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2019 Results | 4th | 3rd | 2nd | 1st | ||||||||||||||||
(000's omitted, except per share data) | Quarter | Quarter | Quarter | Quarter | Total | |||||||||||||||
Net interest income | $ | 92,740 | $ | 91,276 | $ | 88,300 | $ | 86,859 | $ | 359,175 | ||||||||||
Provision for loan losses | 2,857 | 1,751 | 1,400 | 2,422 | 8,430 | |||||||||||||||
Net interest income after provision for loan losses | 89,883 | 89,525 | 86,900 | 84,437 | 350,745 | |||||||||||||||
Noninterest income | 57,123 | 57,094 | 60,706 | 55,696 | 230,619 | |||||||||||||||
Noninterest expenses | 95,269 | 96,929 | 91,176 | 88,652 | 372,026 | |||||||||||||||
Income before income taxes | 51,737 | 49,690 | 56,430 | 51,481 | 209,338 | |||||||||||||||
Income taxes | 8,853 | 10,472 | 11,415 | 9,535 | 40,275 | |||||||||||||||
Net income | $ | 42,884 | $ | 39,218 | $ | 45,015 | $ | 41,946 | $ | 169,063 | ||||||||||
Basic earnings per share | $ | 0.82 | $ | 0.76 | $ | 0.87 | $ | 0.81 | $ | 3.26 | ||||||||||
Diluted earnings per share | $ | 0.82 | $ | 0.75 | $ | 0.86 | $ | 0.80 | $ | 3.23 |
2018 Results | 4th | 3rd | 2nd | 1st | ||||||||||||||||
(000's omitted, except per share data) | Quarter | Quarter | Quarter | Quarter | Total | |||||||||||||||
Net interest income | $ | 87,387 | $ | 86,198 | $ | 86,846 | $ | 84,624 | $ | 345,055 | ||||||||||
Provision for loan losses | 2,495 | 2,215 | 2,448 | 3,679 | 10,837 | |||||||||||||||
Net interest income after provision for loan losses | 84,892 | 83,983 | 84,398 | 80,945 | 334,218 | |||||||||||||||
Noninterest income | 54,218 | 55,791 | 56,559 | 57,491 | 224,059 | |||||||||||||||
Noninterest expenses | 87,613 | 85,233 | 86,112 | 86,331 | 345,289 | |||||||||||||||
Income before income taxes | 51,497 | 54,541 | 54,845 | 52,105 | 212,988 | |||||||||||||||
Income taxes | 10,674 | 11,435 | 10,239 | 11,999 | 44,347 | |||||||||||||||
Net income | $ | 40,823 | $ | 43,106 | $ | 44,606 | $ | 40,106 | $ | 168,641 | ||||||||||
Basic earnings per share | $ | 0.79 | $ | 0.84 | $ | 0.87 | $ | 0.78 | $ | 3.28 | ||||||||||
Diluted earnings per share | $ | 0.78 | $ | 0.83 | $ | 0.86 | $ | 0.78 | $ | 3.24 |
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures, as defined in Rule 13a -15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, as amended, designed to:
(i) record, process, summarize, and report within the time periods specified in the SEC’s rules and forms, and (ii) accumulate and communicate to management, including the principal executive and principal financial officers, as appropriate, to allow timely decisions regarding disclosure. Based on evaluation of the Company’s disclosure controls and procedures, with the participation of the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), the CEO and CFO have concluded that, as of the end of the period covered by this Annual Report on Form 10-K, these disclosure controls and procedures were effective as of December 31,Management’s Annual Report on Internal Control over Financial Reporting
Management’s annual report on internal control over financial reporting is included under the heading “Report on Internal Control Over Financial Reporting” at Item 8 of this Annual Report on Form 10-K.
Report of the Registered Public Accounting Firm
The report of the Company’s registered public accounting firm is included under the heading “Report of the Independent Registered Public Accounting Firm” at Item 8 of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
The Company continually assesses the adequacy of its internal control over financial reporting and enhances its controls in response to internal control assessments, and internal and external audit and regulatory recommendations. No change in internal control over financial reporting during the quarter ended December 31, 20192021 has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The information concerning the Directors of the Company required to be furnished by this Item 10 is incorporated herein by referencepursuant to the sections entitled “Proposal One: ElectionItems 401, 405, 406 and 407(c)(3), (d)(4) and (d)(5) of Directors”Regulation S-K will be included in the Company’s Definitive Proxy Statement for its 2020the 2022 Annual Meeting of Shareholders, which willto be filed with the SEC on or about April 1, 2020March 25, 2022 (the “Proxy Statement”). The information concerning the Company’s Directors will appear under the caption “Director Nominee Qualifications and Experience” in the Proxy Statement. The information concerning the Company’s Code of Ethics will appear under the caption “Code of Ethics” in the Proxy Statement. The information regarding the Company’s Audit Committee and the Audit Committee Financial Expert will appear under the caption “Audit Committee Report.” The information regarding compliance with Section 16(a) will appear under the caption “Delinquent Section 16(a) Reports.” Such information is incorporated herein by reference. The information concerning the Company’s executive officers of the Company required by this Item 10 is presented under the “Information about our Executive Officers” section of Item 1 contained in Item 4APart I of this Annual Report on Form 10-K. Information concerning the Audit Committee and the Audit Committee Financial Experts is included in the Proxy Statement under the caption “Audit Committee Report” and is incorporated herein by reference.
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The information required by this Item 11 is incorporated herein by reference to the sections entitled “Compensation Discussion and Analysis,” “Compensation Committee Report,” “Compensation Committee Interlocks and Insider Reporting,Participation,” and “Executive Compensation Disclosure Tables” in the Company’s Proxy Statement.
I
temItem 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Item 403 of Regulation S-K is incorporated herein by reference to the section entitled “Security Ownership of Certain Beneficial Owners, Directors and Executive Officers” in the Company’s Proxy Statement. The information required by Item 201(d) of Regulation S-K concerning equity compensation plans is presented under the caption “Equity Compensation Plan Information” on page 2530 of this Annual Report on Form 10-K.
The information required by this Item 13 is incorporated herein by reference to the sections entitled “Corporate Governance”“Director Independence” and “Transactions with Related Parties”“Related Persons Transactions” in the Company’s Proxy Statement.
The information required by this Item 14 is incorporated herein by reference to the section entitled “Fees Paid to PricewaterhouseCoopers LLP” in the Company’s Proxy Statement.
(a) Documents filed as part of this report
-Consolidated Statements of Condition,
December 31, 20192021 and 2018
-Consolidated Statements of Income,
Years ended December 31, 2019, 2018,2021, 2020, and 2017
-Consolidated Statements of Comprehensive Income,
Years ended December 31, 2019, 2018,2021, 2020, and 2017
-Consolidated Statements of Changes in Shareholders’ Equity,
Years ended December 31, 2019, 2018,2021, 2020, and 2017
-Consolidated Statements of Cash Flows,
Years ended December 31, 2019, 2018,2021, 2020, and 20172019
-Notes to Consolidated Financial Statements,
December 31, 2021
-Report of Independent Registered Public Accounting Firm
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(2)Financial statement schedules. Schedules are omitted since the required information is either not applicable or shown elsewhere in the financial statements.
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101.INS | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH | Inline XBRL Taxonomy Extension Schema Document |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
(1) | Filed herewith. |
(2) | Denotes management contract or compensatory plan or arrangement. |
(3) | Furnished herewith. |
B. �� Not applicable.
C. Not applicable.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
COMMUNITY BANK SYSTEM, INC. | | |
| | |
By: | | |
/s/ Mark E. Tryniski | | |
Mark E. Tryniski | | |
President and Chief Executive Officer | | |
March 1, 2022 | |
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 21ndst day of March 2020.
By: | | |
/s/ Mark E. Tryniski | | |
Mark E. Tryniski | | |
President, Chief Executive Officer and Director | | |
(Principal Executive Officer) | | |
| | |
By: | | |
/s/ Joseph E. Sutaris | | |
Joseph E. Sutaris | | |
Treasurer and Chief Financial Officer | | |
(Principal Financial Officer and Principal Accounting Officer) | |
Directors:
/s/ Brian R. Ace | | /s/ John Parente | |
Brian R. Ace, Director | John Parente, Director | ||
/s/ Mark J. Bolus | | /s/ Raymond C. Pecor, III | |
Mark J. Bolus, Director | Raymond C. Pecor, III, Director | ||
/s/ Jeffrey L. Davis | | /s/ Susan E. Skerritt | |
Jeffrey L. Davis, Director | Susan E. Skerritt, Director | ||
| |||
/s/ Neil E. Fesette | | /s/ Sally A. Steele | |
Neil E. Fesette, Director | Sally A. Steele, Director | ||
| | ||
/s/ Jeffery J. Knauss | | /s/ Eric E. Stickels | |
Jeffery J. Knauss, Director | Eric E. Stickels, Director and Chair of the | ||
| Board of Directors | ||
| | ||
/s/ | |||
| |||
/s/ John F. Whipple, Jr. | | ||
Kerrie D. MacPherson, Director | John F. Whipple Jr., Director | ||
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