UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
For the quarterly period ended September 30, 2020 2021
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
For the transition period from ________ to ________
Commission File Number: 000-26481
Financial Institutions, Inc.
(Exact name of registrant as specified in its charter)
New York |
| 16-0816610 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
220 LIBERTY STREET, WARSAW, New York |
| 14569 |
(Address of principal executive offices) |
| (Zip Code) |
(585) (585) 786-1100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common stock, par value $0.01 per share | FISI | Nasdaq Global Select Market |
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
The registrant had 16,038,22015,837,725 shares of Common Stock, $0.01 par value, outstanding as of October 31, 2020.2021.
FINANCIAL INSTITUTIONS, INC.
Form 10-Q
For the Quarterly Period Ended September 30, 20202021
TABLE OF CONTENTS
| PAGE | |||
PART I. | ||||
ITEM 1. | ||||
3 | ||||
4 | ||||
5 | ||||
6 | ||||
8 | ||||
9 | ||||
ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| ||
ITEM 3. |
| |||
ITEM 4. |
| |||
PART II. | ||||
ITEM 1. |
| |||
ITEM |
| |||
|
| |||
|
- 2 -
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition (Unaudited)
(Dollars in thousands, except share and per share data) |
| September 30, 2020 |
|
| December 31, 2019 |
|
| September 30, |
|
| December 31, |
| ||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Cash and due from banks |
| $ | 282,070 |
|
| $ | 112,947 |
|
| $ | 288,426 |
| $ | 93,878 |
| |
Securities available for sale, at fair value |
|
| 515,971 |
|
|
| 417,917 |
|
| 1,097,950 |
| 628,059 |
| |||
Securities held to maturity, at amortized cost (net of allowance for credit losses of $8 and $0, respectively) (fair value of $301,878 and $363,259, respectively) |
|
| 290,946 |
|
|
| 359,000 |
| ||||||||
Securities held to maturity, at amortized cost (net of allowance for credit losses of $5 and $7, respectively) (fair value of $224,164 and $282,035, respectively) |
| 218,135 |
| 271,966 |
| |||||||||||
Loans held for sale |
|
| 7,076 |
|
|
| 4,224 |
|
| 5,916 |
| 4,305 |
| |||
Loans (net of allowance for credit losses of $49,395 and $30,482, respectively) |
|
| 3,519,144 |
|
|
| 3,190,505 |
| ||||||||
Loans (net of allowance for credit losses of $45,444 and $52,420, respectively) |
| 3,608,455 |
| 3,542,718 |
| |||||||||||
Company owned life insurance |
|
| 70,347 |
|
|
| 68,942 |
|
| 123,034 |
| 100,895 |
| |||
Premises and equipment, net |
|
| 40,568 |
|
|
| 41,424 |
|
| 40,605 |
| 40,610 |
| |||
Goodwill and other intangible assets, net |
|
| 74,062 |
|
|
| 74,923 |
|
| 74,659 |
| 73,789 |
| |||
Other assets |
|
| 159,017 |
|
|
| 114,296 |
|
|
| 166,013 |
|
| 156,086 |
| |
Total assets |
| $ | 4,959,201 |
|
| $ | 4,384,178 |
|
| $ | 5,623,193 |
| $ | 4,912,306 |
| |
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Noninterest-bearing demand |
| $ | 1,013,176 |
|
| $ | 707,752 |
|
| $ | 1,144,852 |
| $ | 1,018,549 |
| |
Interest-bearing demand |
|
| 786,059 |
|
|
| 627,842 |
|
| 893,976 |
| 731,885 |
| |||
Savings and money market |
|
| 1,724,463 |
|
|
| 1,039,892 |
|
| 2,015,855 |
| 1,642,340 |
| |||
Time deposits |
|
| 841,230 |
|
|
| 1,180,189 |
|
|
| 920,280 |
|
| 885,593 |
| |
Total deposits |
|
| 4,364,928 |
|
|
| 3,555,675 |
|
| 4,974,963 |
| 4,278,367 |
| |||
Short-term borrowings |
|
| 5,300 |
|
|
| 275,500 |
|
| — |
| 5,300 |
| |||
Long-term borrowings, net of issuance costs of $742 and $727, respectively |
|
| 39,258 |
|
|
| 39,273 |
| ||||||||
Long-term borrowings, net of issuance costs of $1,166 and $1,377, respectively |
| 73,834 |
| 73,623 |
| |||||||||||
Other liabilities |
|
| 93,354 |
|
|
| 74,783 |
|
|
| 80,383 |
|
| 86,653 |
| |
Total liabilities |
|
| 4,502,840 |
|
|
| 3,945,231 |
|
|
| 5,129,180 |
|
| 4,443,943 |
| |
Shareholders’ equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Series A 3% preferred stock, $100 par value; 1,533 shares authorized; 1,435 shares issued |
|
| 143 |
|
|
| 143 |
| ||||||||
Series B-1 8.48% preferred stock, $100 par value; 200,000 shares authorized; 171,847 shares issued |
|
| 17,185 |
|
|
| 17,185 |
| ||||||||
Series A 3% preferred stock, $100 par value; 1,533 shares authorized; |
| 143 |
| 143 |
| |||||||||||
Series B-1 8.48% preferred stock, $100 par value; 200,000 shares authorized; |
|
| 17,149 |
|
| 17,185 |
| |||||||||
Total preferred equity |
|
| 17,328 |
|
|
| 17,328 |
|
| 17,292 |
| 17,328 |
| |||
Common stock, $0.01 par value; 50,000,000 shares authorized; 16,099,556 shares issued |
|
| 161 |
|
|
| 161 |
| ||||||||
Common stock, $0.01 par value; 50,000,000 shares authorized; 16,099,556 shares issued |
| 161 |
| 161 |
| |||||||||||
Additional paid-in capital |
|
| 124,812 |
|
|
| 124,582 |
|
| 125,785 |
| 125,118 |
| |||
Retained earnings |
|
| 315,585 |
|
|
| 313,364 |
|
| 369,019 |
| 324,850 |
| |||
Accumulated other comprehensive loss |
|
| (209 | ) |
|
| (14,513 | ) | ||||||||
Treasury stock, at cost – 61,971 and 96,657 shares, respectively |
|
| (1,316 | ) |
|
| (1,975 | ) | ||||||||
Accumulated other comprehensive (loss) income |
| (12,116 | ) |
| 2,128 |
| ||||||||||
Treasury stock, at cost – 257,475 and 57,630 shares, respectively |
|
| (6,128 | ) |
|
| (1,222 | ) | ||||||||
Total shareholders’ equity |
|
| 456,361 |
|
|
| 438,947 |
|
|
| 494,013 |
|
| 468,363 |
| |
Total liabilities and shareholders’ equity |
| $ | 4,959,201 |
|
| $ | 4,384,178 |
|
| $ | 5,623,193 |
| $ | 4,912,306 |
|
See accompanying notes to the consolidated financial statements.
- 3 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
(In thousands, except per share amounts) |
| Three months ended September 30, |
|
| Nine months ended September 30, |
|
| Three months ended |
|
| Nine months ended |
| ||||||||||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||||||
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest and fees on loans |
| $ | 35,602 |
|
| $ | 37,904 |
|
| $ | 107,659 |
|
| $ | 112,177 |
|
| $ | 36,242 |
| $ | 35,602 |
| $ | 109,694 |
| $ | 107,659 |
| |||
Interest and dividends on investment securities |
|
| 4,086 |
|
|
| 4,449 |
|
|
| 13,206 |
|
|
| 14,147 |
|
| 4,918 |
| 4,086 |
| 13,603 |
| 13,206 |
| |||||||
Other interest income |
|
| 31 |
|
|
| 106 |
|
|
| 266 |
|
|
| 297 |
|
|
| 67 |
|
| 31 |
|
| 155 |
|
| 266 |
| |||
Total interest income |
|
| 39,719 |
|
|
| 42,459 |
|
|
| 121,131 |
|
|
| 126,621 |
|
|
| 41,227 |
|
| 39,719 |
|
| 123,452 |
|
| 121,131 |
| |||
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Deposits |
|
| 3,370 |
|
|
| 7,277 |
|
|
| 15,066 |
|
|
| 21,454 |
|
| 1,894 |
| 3,370 |
| 6,294 |
| 15,066 |
| |||||||
Short-term borrowings |
|
| 232 |
|
|
| 2,081 |
|
|
| 1,408 |
|
|
| 6,575 |
|
| 0 |
| 232 |
| 119 |
| 1,408 |
| |||||||
Long-term borrowings |
|
| 618 |
|
|
| 618 |
|
|
| 1,853 |
|
|
| 1,853 |
|
|
| 1,060 |
|
| 618 |
|
| 3,177 |
|
| 1,853 |
| |||
Total interest expense |
|
| 4,220 |
|
|
| 9,976 |
|
|
| 18,327 |
|
|
| 29,882 |
|
|
| 2,954 |
|
| 4,220 |
|
| 9,590 |
|
| 18,327 |
| |||
Net interest income |
|
| 35,499 |
|
|
| 32,483 |
|
|
| 102,804 |
|
|
| 96,739 |
|
| 38,273 |
| 35,499 |
| 113,862 |
| 102,804 |
| |||||||
Provision for credit losses |
|
| 4,028 |
|
|
| 1,844 |
|
|
| 21,689 |
|
|
| 5,391 |
| ||||||||||||||||
Net interest income after provision for credit losses |
|
| 31,471 |
|
|
| 30,639 |
|
|
| 81,115 |
|
|
| 91,348 |
| ||||||||||||||||
(Benefit) provision for credit losses |
|
| (541 | ) |
|
| 4,028 |
|
| (7,144 | ) |
|
| 21,689 |
| |||||||||||||||||
Net interest income after (benefit) provision for credit losses |
|
| 38,814 |
|
| 31,471 |
|
| 121,006 |
|
| 81,115 |
| |||||||||||||||||||
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Service charges on deposits |
|
| 1,254 |
|
|
| 1,925 |
|
|
| 3,321 |
|
|
| 5,361 |
|
| 1,502 |
| 1,254 |
| 4,081 |
| 3,321 |
| |||||||
Insurance income |
|
| 1,357 |
|
|
| 1,439 |
|
|
| 3,525 |
|
|
| 3,689 |
|
| 1,864 |
| 1,357 |
| 4,407 |
| 3,525 |
| |||||||
ATM and debit card |
|
| 1,943 |
|
|
| 1,801 |
|
|
| 5,321 |
|
|
| 4,983 |
| ||||||||||||||||
Card interchange income |
| 2,118 |
| 1,943 |
| 6,270 |
| 5,321 |
| |||||||||||||||||||||||
Investment advisory |
|
| 2,443 |
|
|
| 2,269 |
|
|
| 6,940 |
|
|
| 6,812 |
|
| 2,969 |
| 2,443 |
| 8,627 |
| 6,940 |
| |||||||
Company owned life insurance |
|
| 470 |
|
|
| 459 |
|
|
| 1,397 |
|
|
| 1,293 |
|
| 776 |
| 470 |
| 2,126 |
| 1,397 |
| |||||||
Investments in limited partnerships |
|
| (105 | ) |
|
| 116 |
|
|
| (136 | ) |
|
| 492 |
|
| 694 |
| (105 | ) |
| 1,787 |
| (136 | ) | ||||||
Loan servicing |
|
| 49 |
|
|
| 102 |
|
|
| 106 |
|
|
| 316 |
|
| 105 |
| 49 |
| 293 |
| 106 |
| |||||||
Income from derivative instruments, net |
|
| 1,931 |
|
|
| 890 |
|
|
| 4,617 |
|
|
| 1,013 |
|
| 377 |
| 1,931 |
| 1,660 |
| 4,617 |
| |||||||
Net gain on sale of loans held for sale |
|
| 1,581 |
|
|
| 439 |
|
|
| 2,616 |
|
|
| 1,028 |
|
| 600 |
| 1,397 |
| 2,468 |
| 2,261 |
| |||||||
Net gain on investment securities |
|
| 554 |
|
|
| 1,608 |
|
|
| 1,449 |
|
|
| 1,721 |
|
| 0 |
| 554 |
| 71 |
| 1,449 |
| |||||||
Net (loss) gain on other assets |
|
| (55 | ) |
|
| (2 | ) |
|
| 8 |
|
|
| 56 |
| ||||||||||||||||
Loss on tax credit investments |
|
| (40 | ) |
|
| — |
|
|
| (120 | ) |
|
| — |
| ||||||||||||||||
Net gain (loss) on other assets |
| 138 |
| (55 | ) |
| 286 |
| 8 |
| ||||||||||||||||||||||
Net (loss) gain on tax credit investments |
| (129 | ) |
| (40 | ) |
| 62 |
| (120 | ) | |||||||||||||||||||||
Other |
|
| 1,019 |
|
|
| 1,315 |
|
|
| 3,151 |
|
|
| 3,950 |
|
|
| 1,069 |
|
| 1,019 |
|
| 3,094 |
|
| 3,151 |
| |||
Total noninterest income |
|
| 12,401 |
|
|
| 12,361 |
|
|
| 32,195 |
|
|
| 30,714 |
|
|
| 12,083 |
|
| 12,217 |
|
| 35,232 |
|
| 31,840 |
| |||
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Salaries and employee benefits |
|
| 15,085 |
|
|
| 14,411 |
|
|
| 45,173 |
|
|
| 41,661 |
|
| 15,798 |
| 15,085 |
| 44,782 |
| 45,173 |
| |||||||
Occupancy and equipment |
|
| 3,263 |
|
|
| 4,650 |
|
|
| 10,407 |
|
|
| 10,106 |
|
| 3,834 |
| 3,263 |
| 10,502 |
| 10,407 |
| |||||||
Professional services |
|
| 1,242 |
|
|
| 1,528 |
|
|
| 4,974 |
|
|
| 3,618 |
|
| 1,600 |
| 1,242 |
| 5,098 |
| 4,974 |
| |||||||
Computer and data processing |
|
| 3,250 |
|
|
| 1,378 |
|
|
| 8,622 |
|
|
| 7,407 |
|
| 3,579 |
| 3,250 |
| 10,160 |
| �� | 8,622 |
| ||||||
Supplies and postage |
|
| 463 |
|
|
| 522 |
|
|
| 1,533 |
|
|
| 1,554 |
|
| 447 |
| 463 |
| 1,361 |
| 1,533 |
| |||||||
FDIC assessments |
|
| 594 |
|
|
| 7 |
|
|
| 1,505 |
|
|
| 1,005 |
|
| 697 |
| 594 |
| 1,942 |
| 1,505 |
| |||||||
Advertising and promotions |
|
| 955 |
|
|
| 745 |
|
|
| 2,055 |
|
|
| 2,351 |
|
| 474 |
| 955 |
| 1,234 |
| 2,055 |
| |||||||
Amortization of intangibles |
|
| 280 |
|
|
| 309 |
|
|
| 861 |
|
|
| 948 |
|
| 264 |
| 280 |
| 801 |
| 861 |
| |||||||
Restructuring charges |
|
| 1,362 |
|
|
| — |
|
|
| 1,362 |
|
|
| — |
|
| 0 |
| 1,362 |
| 0 |
| 1,362 |
| |||||||
Other |
|
| 2,165 |
|
|
| 2,336 |
|
|
| 6,583 |
|
|
| 7,410 |
|
|
| 2,476 |
|
| 1,981 |
|
| 6,973 |
|
| 6,228 |
| |||
Total noninterest expense |
|
| 28,659 |
|
|
| 25,886 |
|
|
| 83,075 |
|
|
| 76,060 |
|
|
| 29,169 |
|
| 28,475 |
|
| 82,853 |
|
| 82,720 |
| |||
Income before income taxes |
|
| 15,213 |
|
|
| 17,114 |
|
|
| 30,235 |
|
|
| 46,002 |
|
| 21,728 |
| 15,213 |
| 73,385 |
| 30,235 |
| |||||||
Income tax expense |
|
| 2,940 |
|
|
| 4,281 |
|
|
| 5,703 |
|
|
| 10,247 |
|
|
| 4,553 |
|
| 2,940 |
|
| 15,300 |
|
| 5,703 |
| |||
Net income |
| $ | 12,273 |
|
| $ | 12,833 |
|
| $ | 24,532 |
|
| $ | 35,755 |
|
| $ | 17,175 |
| $ | 12,273 |
| $ | 58,085 |
| $ | 24,532 |
| |||
Preferred stock dividends |
|
| 365 |
|
|
| 365 |
|
|
| 1,096 |
|
|
| 1,096 |
|
|
| 364 |
|
| 365 |
|
| 1,095 |
|
| 1,096 |
| |||
Net income available to common shareholders |
| $ | 11,908 |
|
| $ | 12,468 |
|
| $ | 23,436 |
|
| $ | 34,659 |
|
| $ | 16,811 |
| $ | 11,908 |
| $ | 56,990 |
| $ | 23,436 |
| |||
Earnings per common share (Note 3): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Earnings per common share (Note 4): |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Basic |
| $ | 0.74 |
|
| $ | 0.78 |
|
| $ | 1.46 |
|
| $ | 2.17 |
|
| $ | 1.06 |
| $ | 0.74 |
| $ | 3.60 |
| $ | 1.46 |
| |||
Diluted |
| $ | 0.74 |
|
| $ | 0.78 |
|
| $ | 1.46 |
|
| $ | 2.16 |
|
| $ | 1.05 |
| $ | 0.74 |
| $ | 3.58 |
| $ | 1.46 |
| |||
Cash dividends declared per common share |
| $ | 0.26 |
|
| $ | 0.25 |
|
| $ | 0.78 |
|
| $ | 0.75 |
|
| $ | 0.27 |
| $ | 0.26 |
| $ | 0.81 |
| $ | 0.78 |
|
See accompanying notes to the consolidated financial statements.
-
4 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Unaudited)
(Dollars in thousands) |
| Three months ended September 30, |
|
| Nine months ended September 30, |
|
| Three months ended |
|
| Nine months ended |
| ||||||||||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||||||
Net income |
| $ | 12,273 |
|
| $ | 12,833 |
|
| $ | 24,532 |
|
| $ | 35,755 |
|
| $ | 17,175 |
| $ | 12,273 |
| $ | 58,085 |
| $ | 24,532 |
| |||
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Securities available for sale and transferred securities |
|
| (69 | ) |
|
| 1,121 |
|
|
| 13,778 |
|
|
| 11,863 |
|
| (6,400 | ) |
| (69 | ) |
| (15,800 | ) |
| 13,778 |
| ||||
Hedging derivative instruments |
|
| 123 |
|
|
| 43 |
|
|
| (174 | ) |
|
| (317 | ) |
| 80 |
| 123 |
| 1,143 |
| (174 | ) | |||||||
Pension and post-retirement obligations |
|
| 233 |
|
|
| 262 |
|
|
| 700 |
|
|
| 784 |
|
|
| 138 |
|
| 233 |
|
| 413 |
|
| 700 |
| |||
Total other comprehensive income, net of tax |
|
| 287 |
|
|
| 1,426 |
|
|
| 14,304 |
|
|
| 12,330 |
| ||||||||||||||||
Total other comprehensive income (loss), net of tax |
|
| (6,182 | ) |
|
| 287 |
|
| (14,244 | ) |
|
| 14,304 |
| |||||||||||||||||
Comprehensive income |
| $ | 12,560 |
|
| $ | 14,259 |
|
| $ | 38,836 |
|
| $ | 48,085 |
|
| $ | 10,993 |
| $ | 12,560 |
| $ | 43,841 |
| $ | 38,836 |
|
See accompanying notes to the consolidated financial statements.
-
5 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Three and nine months ended September 30, 20202021 and 20192020
(Dollars in thousands, except per share data) |
| Preferred Equity |
|
| Common Stock |
|
| Additional Paid-in Capital |
|
| Retained Earnings |
|
| Accumulated Other Comprehensive Loss |
|
| Treasury Stock |
|
| Total Shareholders’ Equity |
|
| Preferred |
|
| Common |
|
| Additional |
|
| Retained |
|
| Accumulated |
|
| Treasury |
|
| Total |
| ||||||||||||||
Balance at December 31, 2019 |
| $ | 17,328 |
|
| $ | 161 |
|
| $ | 124,582 |
|
| $ | 313,364 |
|
| $ | (14,513 | ) |
| $ | (1,975 | ) |
| $ | 438,947 |
| ||||||||||||||||||||||||||||
Cumulative-effect adjustment |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (8,719 | ) |
|
| — |
|
|
| — |
|
|
| (8,719 | ) | ||||||||||||||||||||||||||||
Balance at January 1, 2020 |
| $ | 17,328 |
|
| $ | 161 |
|
| $ | 124,582 |
|
| $ | 304,645 |
|
| $ | (14,513 | ) |
| $ | (1,975 | ) |
| $ | 430,228 |
| ||||||||||||||||||||||||||||
Balance at December 31, 2020 |
| $ | 17,328 |
| $ | 161 |
| $ | 125,118 |
| $ | 324,850 |
| $ | 2,128 |
| $ | (1,222 | ) |
| $ | 468,363 |
| |||||||||||||||||||||||||||||||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Net income |
| — |
| — |
| — |
| 20,710 |
| — |
| — |
| 20,710 |
| |||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss, net of tax |
| — |
| — |
| — |
| — |
| (12,700 | ) |
| — |
| (12,700 | ) | ||||||||||||||||||||||||||||||||||||||||
Common stock issued |
| — |
| — |
| 3 |
| — |
| — |
| 298 |
| 301 |
| |||||||||||||||||||||||||||||||||||||||||
Purchases of common stock for treasury |
| — |
| — |
| — |
| — |
| — |
| (5,963 | ) |
| (5,963 | ) | ||||||||||||||||||||||||||||||||||||||||
Purchases of 8.48% preferred stock |
| (6 | ) |
| — |
| — |
| — |
| — |
| — |
| (6 | ) | ||||||||||||||||||||||||||||||||||||||||
Share-based compensation plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Share-based compensation |
| — |
| — |
| 216 |
| — |
| — |
| — |
| 216 |
| |||||||||||||||||||||||||||||||||||||||||
Restricted stock units released |
| — |
| — |
| (446 | ) |
| — |
| — |
| 446 |
| — |
| ||||||||||||||||||||||||||||||||||||||||
Cash dividends declared: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Series A 3% Preferred-$0.75 per share |
| — |
| — |
| — |
| (1 | ) |
| — |
| — |
| (1 | ) | ||||||||||||||||||||||||||||||||||||||||
Series B-1 8.48% Preferred-$2.12 per |
| — |
| — |
| — |
| (364 | ) |
| — |
| — |
| (364 | ) | ||||||||||||||||||||||||||||||||||||||||
Common-$0.27 per share |
|
| — |
|
| — |
|
| — |
|
| (4,272 | ) |
|
| — |
|
| — |
|
| (4,272 | ) | |||||||||||||||||||||||||||||||||
Balance at March 31, 2021 |
| $ | 17,322 |
| $ | 161 |
| $ | 124,891 |
| $ | 340,923 |
| $ | (10,572 | ) |
| $ | (6,441 | ) |
| $ | 466,284 |
| ||||||||||||||||||||||||||||||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,127 |
|
|
| — |
|
|
| — |
|
|
| 1,127 |
|
| — |
| — |
| — |
| 20,200 |
| — |
| — |
| 20,200 |
| |||||||||||||
Other comprehensive income, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 12,431 |
|
|
| — |
|
|
| 12,431 |
|
| — |
| — |
| — |
| — |
| 4,638 |
| — |
| 4,638 |
| |||||||||||||
Purchases of common stock for treasury |
| — |
| — |
| — |
| — |
| — |
| (1 | ) |
| (1 | ) | ||||||||||||||||||||||||||||||||||||||||
Purchases of 8.48% preferred stock |
| (30 | ) |
| — |
| (7 | ) |
| — |
| — |
| — |
| (37 | ) | |||||||||||||||||||||||||||||||||||||||
Share-based compensation plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Share-based compensation |
| — |
| — |
| 562 |
| — |
| — |
| — |
| 562 |
| |||||||||||||||||||||||||||||||||||||||||
Restricted stock awards issued |
| — |
| — |
| (223 | ) |
| — |
| — |
| 223 |
| — |
| ||||||||||||||||||||||||||||||||||||||||
Stock awards |
| — |
| — |
| 30 |
| — |
| — |
| 88 |
| 118 |
| |||||||||||||||||||||||||||||||||||||||||
Cash dividends declared: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Series A 3% Preferred-$0.75 per share |
| — |
| — |
| — |
| (1 | ) |
| — |
| — |
| (1 | ) | ||||||||||||||||||||||||||||||||||||||||
Series B-1 8.48% Preferred-$2.12 per |
| — |
| — |
| — |
| (365 | ) |
| — |
| — |
| (365 | ) | ||||||||||||||||||||||||||||||||||||||||
Common-$0.27 per share |
|
| — |
|
| — |
|
| — |
|
| (4,272 | ) |
|
| — |
|
| — |
|
| (4,272 | ) | |||||||||||||||||||||||||||||||||
Balance at June 30, 2021 |
| $ | 17,292 |
| $ | 161 |
| $ | 125,253 |
| $ | 356,485 |
| $ | (5,934 | ) |
| $ | (6,131 | ) |
| $ | 487,126 |
| ||||||||||||||||||||||||||||||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Net income |
| — |
| — |
| — |
| 17,175 |
| — |
| — |
| 17,175 |
| |||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss, net of tax |
| — |
| — |
| — |
| — |
| (6,182 | ) |
| — |
| (6,182 | ) | ||||||||||||||||||||||||||||||||||||||||
Purchases of common stock for treasury |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (196 | ) |
|
| (196 | ) |
| — |
| — |
| — |
| — |
| — |
| (3 | ) |
| (3 | ) | ||||||||||||
Share-based compensation plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Share-based compensation |
|
| — |
|
|
| — |
|
|
| 332 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 332 |
|
| — |
| — |
| 538 |
| — |
| — |
| — |
| 538 |
| |||||||||||||
Restricted stock units released |
|
| — |
|
|
| — |
|
|
| (469 | ) |
|
| — |
|
|
| — |
|
|
| 469 |
|
|
| — |
|
| — |
| — |
| (6 | ) |
| — |
| — |
| 6 |
| — |
| ||||||||||||
Cash dividends declared: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Series A 3% Preferred-$0.75 per share |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1 | ) |
|
| — |
|
|
| — |
|
|
| (1 | ) | ||||||||||||||||||||||||||||
Series B-1 8.48% Preferred-$2.12 per share |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (364 | ) |
|
| — |
|
|
| — |
|
|
| (364 | ) | ||||||||||||||||||||||||||||
Common-$0.26 per share |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,164 | ) |
|
| — |
|
|
| — |
|
|
| (4,164 | ) | ||||||||||||||||||||||||||||
Balance at March 31, 2020 |
| $ | 17,328 |
|
| $ | 161 |
|
| $ | 124,445 |
|
| $ | 301,243 |
|
| $ | (2,082 | ) |
| $ | (1,702 | ) |
| $ | 439,393 |
| ||||||||||||||||||||||||||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 11,132 |
|
|
| — |
|
|
| — |
|
|
| 11,132 |
| ||||||||||||||||||||||||||||
Other comprehensive income, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,586 |
|
|
| — |
|
|
| 1,586 |
| ||||||||||||||||||||||||||||
Share-based compensation plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
Share-based compensation |
|
| — |
|
|
| — |
|
|
| 369 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 369 |
| ||||||||||||||||||||||||||||
Restricted stock awards issued |
|
| — |
|
|
| — |
|
|
| (272 | ) |
|
| — |
|
|
| — |
|
|
| 272 |
|
|
| — |
| ||||||||||||||||||||||||||||
Stock awards |
|
| — |
|
|
| — |
|
|
| (19 | ) |
|
| — |
|
|
| — |
|
|
| 114 |
|
|
| 95 |
| ||||||||||||||||||||||||||||
Cash dividends declared: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
Series A 3% Preferred-$0.75 per share |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1 | ) |
|
| — |
|
|
| — |
|
|
| (1 | ) | ||||||||||||||||||||||||||||
Series B-1 8.48% Preferred-$2.12 per share |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (365 | ) |
|
| — |
|
|
| — |
|
|
| (365 | ) | ||||||||||||||||||||||||||||
Common-$0.26 per share |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,164 | ) |
|
| — |
|
|
| — |
|
|
| (4,164 | ) | ||||||||||||||||||||||||||||
Balance at June 30, 2020 |
| $ | 17,328 |
|
| $ | 161 |
|
| $ | 124,523 |
|
| $ | 307,845 |
|
| $ | (496 | ) |
| $ | (1,316 | ) |
| $ | 448,045 |
| ||||||||||||||||||||||||||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 12,273 |
|
|
| — |
|
|
| — |
|
|
| 12,273 |
| ||||||||||||||||||||||||||||
Other comprehensive income, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 287 |
|
|
| — |
|
|
| 287 |
| ||||||||||||||||||||||||||||
Share-based compensation plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
Share-based compensation |
|
| — |
|
|
| — |
|
|
| 289 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 289 |
| ||||||||||||||||||||||||||||
Cash dividends declared: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
Series A 3% Preferred-$0.75 per share |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1 | ) |
|
| — |
|
|
| — |
|
|
| (1 | ) | ||||||||||||||||||||||||||||
Series B-1 8.48% Preferred-$2.12 per share |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (364 | ) |
|
| — |
|
|
| — |
|
|
| (364 | ) | ||||||||||||||||||||||||||||
Common-$0.26 per share |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,168 | ) |
|
| — |
|
|
| — |
|
|
| (4,168 | ) | ||||||||||||||||||||||||||||
Balance at September 30, 2020 |
| $ | 17,328 |
|
| $ | 161 |
|
| $ | 124,812 |
|
| $ | 315,585 |
|
| $ | (209 | ) |
| $ | (1,316 | ) |
| $ | 456,361 |
| ||||||||||||||||||||||||||||
Series A 3% Preferred-$0.75 per share |
| — |
| — |
| — |
| (1 | ) |
| — |
| — |
| (1 | ) | ||||||||||||||||||||||||||||||||||||||||
Series B-1 8.48% Preferred-$2.12 per |
| — |
| — |
| — |
| (363 | ) |
| — |
| — |
| (363 | ) | ||||||||||||||||||||||||||||||||||||||||
Common-$0.27 per share |
|
| — |
|
| — |
|
| — |
|
| (4,277 | ) |
|
| — |
|
| — |
|
| (4,277 | ) | |||||||||||||||||||||||||||||||||
Balance at September 30, 2021 |
| $ | 17,292 |
| $ | 161 |
| $ | 125,785 |
| $ | 369,019 |
| $ | (12,116 | ) |
| $ | (6,128 | ) |
| $ | 494,013 |
|
Continued on next page
See accompanying notes to the consolidated financial statements.
- 6 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) (Continued)
Three and nine months ended September 30, 20202021 and 20192020
(Dollars in thousands, except per share data) |
| Preferred Equity |
|
| Common Stock |
|
| Additional Paid-in Capital |
|
| Retained Earnings |
|
| Accumulated Other Comprehensive Loss |
|
| Treasury Stock |
|
| Total Shareholders’ Equity |
|
| Preferred |
|
| Common |
|
| Additional |
|
| Retained |
|
| Accumulated |
|
| Treasury |
|
| Total |
| ||||||||||||||
Balance at December 31, 2018 |
| $ | 17,328 |
|
| $ | 161 |
|
| $ | 122,704 |
|
| $ | 279,867 |
|
| $ | (21,281 | ) |
| $ | (2,486 | ) |
| $ | 396,293 |
| ||||||||||||||||||||||||||||
Balance at December 31, 2019 |
| $ | 17,328 |
| $ | 161 |
| $ | 124,582 |
| $ | 313,364 |
| $ | (14,513 | ) |
| $ | (1,975 | ) |
| $ | 438,947 |
| ||||||||||||||||||||||||||||||||
Cumulative-effect adjustment |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (710 | ) |
|
| — |
|
|
| — |
|
|
| (710 | ) |
|
| — |
|
| — |
|
| — |
|
| (8,719 | ) |
|
| — |
|
| — |
|
| (8,719 | ) | |||||
Balance at January 1, 2019 |
| $ | 17,328 |
|
| $ | 161 |
|
| $ | 122,704 |
|
| $ | 279,157 |
|
| $ | (21,281 | ) |
| $ | (2,486 | ) |
| $ | 395,583 |
| ||||||||||||||||||||||||||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 11,521 |
|
|
| — |
|
|
| — |
|
|
| 11,521 |
| ||||||||||||||||||||||||||||
Other comprehensive income, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5,510 |
|
|
| — |
|
|
| 5,510 |
| ||||||||||||||||||||||||||||
Reclassification of income tax effects |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,783 |
|
|
| (2,783 | ) |
|
| — |
|
|
| — |
| ||||||||||||||||||||||||||||
Purchases of common stock for treasury |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (193 | ) |
|
| (193 | ) | ||||||||||||||||||||||||||||
Share-based compensation plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
Share-based compensation |
|
| — |
|
|
| — |
|
|
| 182 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 182 |
| ||||||||||||||||||||||||||||
Restricted stock units released |
|
| — |
|
|
| — |
|
|
| (362 | ) |
|
| — |
|
|
| — |
|
|
| 362 |
|
|
| — |
| ||||||||||||||||||||||||||||
Cash dividends declared: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
Series A 3% Preferred-$0.75 per share |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1 | ) |
|
| — |
|
|
| — |
|
|
| (1 | ) | ||||||||||||||||||||||||||||
Series B-1 8.48% Preferred-$2.12 per share |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (364 | ) |
|
| — |
|
|
| — |
|
|
| (364 | ) | ||||||||||||||||||||||||||||
Common-$0.25 per share |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,985 | ) |
|
| — |
|
|
| — |
|
|
| (3,985 | ) | ||||||||||||||||||||||||||||
Balance at March 31, 2019 |
| $ | 17,328 |
|
| $ | 161 |
|
| $ | 122,524 |
|
| $ | 289,111 |
|
| $ | (18,554 | ) |
| $ | (2,317 | ) |
| $ | 408,253 |
| ||||||||||||||||||||||||||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 11,401 |
|
|
| — |
|
|
| — |
|
|
| 11,401 |
| ||||||||||||||||||||||||||||
Other comprehensive income, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5,394 |
|
|
| — |
|
|
| 5,394 |
| ||||||||||||||||||||||||||||
Common stock issued |
|
| — |
|
|
| — |
|
|
| 1,151 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,151 |
| ||||||||||||||||||||||||||||
Share-based compensation plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
Share-based compensation |
|
| — |
|
|
| — |
|
|
| 453 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 453 |
| ||||||||||||||||||||||||||||
Restricted stock awards issued |
|
| — |
|
|
| — |
|
|
| (165 | ) |
|
| — |
|
|
| — |
|
|
| 165 |
|
|
| — |
| ||||||||||||||||||||||||||||
Stock awards |
|
| — |
|
|
| — |
|
|
| 17 |
|
|
| — |
|
|
| — |
|
|
| 46 |
|
|
| 63 |
| ||||||||||||||||||||||||||||
Cash dividends declared: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
Series A 3% Preferred-$0.75 per share |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1 | ) |
|
| — |
|
|
| — |
|
|
| (1 | ) | ||||||||||||||||||||||||||||
Series B-1 8.48% Preferred-$2.12 per share |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (365 | ) |
|
| — |
|
|
| — |
|
|
| (365 | ) | ||||||||||||||||||||||||||||
Common-$0.25 per share |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,995 | ) |
|
| — |
|
|
| — |
|
|
| (3,995 | ) | ||||||||||||||||||||||||||||
Balance at June 30, 2019 |
| $ | 17,328 |
|
| $ | 161 |
|
| $ | 123,980 |
|
| $ | 296,151 |
|
| $ | (13,160 | ) |
| $ | (2,106 | ) |
| $ | 422,354 |
| ||||||||||||||||||||||||||||
Balance at January 1, 2020 |
| $ | 17,328 |
| $ | 161 |
| $ | 124,582 |
| $ | 304,645 |
| $ | (14,513 | ) |
| $ | (1,975 | ) |
| $ | 430,228 |
| ||||||||||||||||||||||||||||||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 12,833 |
|
|
| — |
|
|
| — |
|
|
| 12,833 |
|
| — |
| — |
| — |
| 1,127 |
| — |
| — |
| 1,127 |
| |||||||||||||
Other comprehensive income, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,426 |
|
|
| — |
|
|
| 1,426 |
|
| — |
| — |
| — |
| — |
| 12,431 |
| — |
| 12,431 |
| |||||||||||||
Purchases of common stock for treasury |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (27 | ) |
|
| (27 | ) |
| — |
| — |
| — |
| — |
| — |
| (196 | ) |
| (196 | ) | ||||||||||||
Share-based compensation plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Share-based compensation |
|
| — |
|
|
| — |
|
|
| 393 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 393 |
|
| — |
| — |
| 332 |
| — |
| — |
| — |
| 332 |
| |||||||||||||
Restricted stock units released |
| — |
| — |
| (469 | ) |
| — |
| — |
| 469 |
| — |
| ||||||||||||||||||||||||||||||||||||||||
Cash dividends declared: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Series A 3% Preferred-$0.75 per share |
| — |
| — |
| — |
| (1 | ) |
| — |
| — |
| (1 | ) | ||||||||||||||||||||||||||||||||||||||||
Series B-1 8.48% Preferred-$2.12 per |
| — |
| — |
| — |
| (364 | ) |
| — |
| — |
| (364 | ) | ||||||||||||||||||||||||||||||||||||||||
Common-$0.26 per share |
|
| — |
|
| — |
|
| — |
|
| (4,164 | ) |
|
| — |
|
| — |
|
| (4,164 | ) | |||||||||||||||||||||||||||||||||
Balance at March 31, 2020 |
| $ | 17,328 |
| $ | 161 |
| $ | 124,445 |
| $ | 301,243 |
| $ | (2,082 | ) |
| $ | (1,702 | ) |
| $ | 439,393 |
| ||||||||||||||||||||||||||||||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Net income |
| — |
| — |
| — |
| 11,132 |
| — |
| — |
| 11,132 |
| |||||||||||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax |
| — |
| — |
| — |
| — |
| 1,586 |
| — |
| 1,586 |
| |||||||||||||||||||||||||||||||||||||||||
Share-based compensation plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Share-based compensation |
| — |
| — |
| 369 |
| — |
| — |
| — |
| 369 |
| |||||||||||||||||||||||||||||||||||||||||
Restricted stock awards issued |
|
| — |
|
|
| — |
|
|
| (51 | ) |
|
| — |
|
|
| — |
|
|
| 51 |
|
|
| — |
|
| — |
| — |
| (272 | ) |
| — |
| — |
| 272 |
| — |
| ||||||||||||
Stock awards |
| — |
| — |
| (19 | ) |
| — |
| — |
| 114 |
| 95 |
| ||||||||||||||||||||||||||||||||||||||||
Cash dividends declared: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Series A 3% Preferred-$0.75 per share |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1 | ) |
|
| — |
|
|
| — |
|
|
| (1 | ) | ||||||||||||||||||||||||||||
Series B-1 8.48% Preferred-$2.12 per share |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (364 | ) |
|
| — |
|
|
| — |
|
|
| (364 | ) | ||||||||||||||||||||||||||||
Common-$0.25 per share |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,997 | ) |
|
| — |
|
|
| — |
|
|
| (3,997 | ) | ||||||||||||||||||||||||||||
Balance at September 30, 2019 |
| $ | 17,328 |
|
| $ | 161 |
|
| $ | 124,322 |
|
| $ | 304,622 |
|
| $ | (11,734 | ) |
| $ | (2,082 | ) |
| $ | 432,617 |
| ||||||||||||||||||||||||||||
Series A 3% Preferred-$0.75 per share |
| — |
| — |
| — |
| (1 | ) |
| — |
| — |
| (1 | ) | ||||||||||||||||||||||||||||||||||||||||
Series B-1 8.48% Preferred-$2.12 per |
| — |
| — |
| — |
| (365 | ) |
| — |
| — |
| (365 | ) | ||||||||||||||||||||||||||||||||||||||||
Common-$0.26 per share |
|
| — |
|
| — |
|
| — |
|
| (4,164 | ) |
|
| — |
|
| — |
|
| (4,164 | ) | |||||||||||||||||||||||||||||||||
Balance at June 30, 2020 |
| $ | 17,328 |
| $ | 161 |
| $ | 124,523 |
| $ | 307,845 |
| $ | (496 | ) |
| $ | (1,316 | ) |
| $ | 448,045 |
| ||||||||||||||||||||||||||||||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Net income |
| — |
| — |
| — |
| 12,273 |
| — |
| — |
| 12,273 |
| |||||||||||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax |
| — |
| — |
| — |
| — |
| 287 |
| — |
| 287 |
| |||||||||||||||||||||||||||||||||||||||||
Share-based compensation plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Share-based compensation |
| — |
| — |
| 289 |
| — |
| — |
| — |
| 289 |
| |||||||||||||||||||||||||||||||||||||||||
Cash dividends declared: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Series A 3% Preferred-$0.75 per share |
| — |
| — |
| — |
| (1 | ) |
| — |
| — |
| (1 | ) | ||||||||||||||||||||||||||||||||||||||||
Series B-1 8.48% Preferred-$2.12 per |
| — |
| — |
| — |
| (364 | ) |
| — |
| — |
| (364 | ) | ||||||||||||||||||||||||||||||||||||||||
Common-$0.26 per share |
|
| — |
|
| — |
|
| — |
|
| (4,168 | ) |
|
| — |
|
| — |
|
| (4,168 | ) | |||||||||||||||||||||||||||||||||
Balance at September 30, 2020 |
| $ | 17,328 |
| $ | 161 |
| $ | 124,812 |
| $ | 315,585 |
| $ | (209 | ) |
| $ | (1,316 | ) |
| $ | 456,361 |
|
See accompanying notes to the consolidated financial statements.
-
7 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands) |
| Nine months ended September 30, |
|
| Nine months ended |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2021 |
|
| 2020 |
| ||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Net income |
| $ | 24,532 |
|
| $ | 35,755 |
|
| $ | 58,085 |
| $ | 24,532 |
| |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Depreciation and amortization |
|
| 5,924 |
|
|
| 6,221 |
|
| 6,067 |
| 5,924 |
| |||
Net amortization of premiums on securities |
|
| 2,313 |
|
|
| 1,253 |
|
| 3,845 |
| 2,313 |
| |||
Provision for credit losses |
|
| 21,689 |
|
|
| 5,391 |
| ||||||||
(Benefit) provision for credit losses |
| (7,144 | ) |
| 21,689 |
| ||||||||||
Share-based compensation |
|
| 990 |
|
|
| 1,028 |
|
| 1,316 |
| 990 |
| |||
Deferred income tax (benefit) expense |
|
| (2,692 | ) |
|
| 1,268 |
| ||||||||
Deferred income tax benefit |
| (6,885 | ) |
| (2,692 | ) | ||||||||||
Proceeds from sale of loans held for sale |
|
| 63,995 |
|
|
| 28,106 |
|
| 63,331 |
| 63,995 |
| |||
Originations of loans held for sale |
|
| (64,231 | ) |
|
| (30,751 | ) |
| (62,474 | ) |
| (64,586 | ) | ||
Income on company owned life insurance |
|
| (1,397 | ) |
|
| (1,293 | ) |
| (2,126 | ) |
| (1,397 | ) | ||
Net gain on sale of loans held for sale |
|
| (2,616 | ) |
|
| (1,028 | ) |
| (2,468 | ) |
| (2,261 | ) | ||
Net gain on investment securities |
|
| (1,449 | ) |
|
| (1,721 | ) |
| (71 | ) |
| (1,449 | ) | ||
Net gain on other assets |
|
| (8 | ) |
|
| (56 | ) |
| (286 | ) |
| (8 | ) | ||
Noncash restructuring charges against assets |
| 76 |
| — |
| |||||||||||
Increase in other assets |
|
| (42,243 | ) |
|
| (6,768 | ) |
| (2,513 | ) |
| (42,243 | ) | ||
Increase in other liabilities |
|
| 15,491 |
|
|
| 3,757 |
| ||||||||
(Decrease) increase in other liabilities |
|
| (9,286 | ) |
|
| 15,491 |
| ||||||||
Net cash provided by operating activities |
|
| 20,298 |
|
|
| 41,162 |
|
|
| 39,467 |
|
| 20,298 |
| |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Purchases of available for sale securities |
|
| (215,433 | ) |
|
| (103,627 | ) |
| (650,713 | ) |
| (215,433 | ) | ||
Purchases of held to maturity securities |
|
| (6,008 | ) |
|
| (9,596 | ) |
| (17,009 | ) |
| (6,008 | ) | ||
Proceeds from principal payments, maturities and calls on available for sale securities |
|
| 65,244 |
|
|
| 58,283 |
|
| 115,688 |
| 85,766 |
| |||
Proceeds from principal payments, maturities and calls on held to maturity securities |
|
| 73,114 |
|
|
| 69,090 |
|
| 69,954 |
| 73,120 |
| |||
Proceeds from sales of securities available for sale |
|
| 70,729 |
|
|
| 110,042 |
|
| 51,891 |
| 50,207 |
| |||
Proceeds from sales of securities held to maturity |
|
| 6 |
|
|
| — |
| ||||||||
Net loan originations |
|
| (361,935 | ) |
|
| (98,430 | ) |
| (59,841 | ) |
| (361,935 | ) | ||
Loans sold to others |
|
| — |
|
|
| 21,077 |
| ||||||||
Purchases of company owned life insurance, net of proceeds received |
|
| (8 | ) |
|
| (24 | ) |
| (20,013 | ) |
| (8 | ) | ||
Proceeds from sales of other assets |
|
| 482 |
|
|
| 360 |
|
| 3,425 |
| 482 |
| |||
Purchases of premises and equipment |
|
| (2,800 | ) |
|
| (2,367 | ) |
| (8,357 | ) |
| (2,800 | ) | ||
Net cash (used in) provided by investing activities |
|
| (376,609 | ) |
|
| 44,808 |
| ||||||||
Cash consideration paid for acquisition, net of cash acquired |
|
| (1,420 | ) |
|
| 0 |
| ||||||||
Net cash used in investing activities |
|
| (516,395 | ) |
|
| (376,609 | ) | ||||||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Net increase in deposits |
|
| 809,253 |
|
|
| 219,307 |
|
| 696,596 |
| 809,253 |
| |||
Net decrease in short-term borrowings |
|
| (270,200 | ) |
|
| (258,100 | ) |
| (5,300 | ) |
| (270,200 | ) | ||
Repurchase of preferred stock |
| (43 | ) |
| — |
| ||||||||||
Purchases of common stock for treasury |
|
| (196 | ) |
|
| (220 | ) |
| (5,967 | ) |
| (196 | ) | ||
Cash dividends paid to common and preferred shareholders |
|
| (13,423 | ) |
|
| (12,897 | ) |
|
| (13,810 | ) |
|
| (13,423 | ) |
Net cash provided by (used in) financing activities |
|
| 525,434 |
|
|
| (51,910 | ) | ||||||||
Net cash provided by financing activities |
|
| 671,476 |
|
| 525,434 |
| |||||||||
Net increase in cash and cash equivalents |
|
| 169,123 |
|
|
| 34,060 |
|
| 194,548 |
| 169,123 |
| |||
Cash and cash equivalents, beginning of period |
|
| 112,947 |
|
|
| 102,755 |
|
|
| 93,878 |
|
| 112,947 |
| |
Cash and cash equivalents, end of period |
| $ | 282,070 |
|
| $ | 136,815 |
|
| $ | 288,426 |
| $ | 282,070 |
|
See accompanying notes to the consolidated financial statements.
- 8 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(1.)BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
|
Nature of Operations
Financial Institutions, Inc. (the “Company”) is a financial holding company organized in 1931 under the laws of New York State (“New York”). The Company provides diversified financial services through its subsidiaries, Five Star Bank, SDN Insurance Agency, LLC (“SDN”), Courier Capital, LLC (“Courier Capital”) and HNP Capital, LLC (“HNP Capital”). The Company offers a broad array of deposit, lending and other financial services to individuals, municipalities and businesses in Western and Central New York through its wholly-owned New York chartered banking subsidiary, Five Star Bank (the “Bank”). The Bank also has indirect lending network relationships with franchised automobile dealers in the Capital District of New York and Northern and Central Pennsylvania. SDN provides a broad range of insurance services to personal and business clients. Courier Capital and HNP Capital provide customized investment management, investment consulting and retirement plan services to individuals, businesses, institutions, foundations and retirement plans.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The accounting and reporting policies conform to U.S. generally accepted accounting principles (“GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in conformity with GAAP have been condensed or omitted pursuant to such rules and regulations. However, in the opinion of management, the accompanying consolidated financial statements reflect all adjustments of a normal and recurring nature necessary for a fair presentation of the consolidated statements of financial condition, income, comprehensive income, changes in shareholders’ equity and cash flows for the periods indicated and contain adequate disclosure to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the Company’s 20192020 Annual Report on Form 10-K for the year ended December 31, 2019.2020. The results of operations for any interim periods are not necessarily indicative of the results which may be expected for the entire year.
Allowance for Credit Losses
On January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amends guidance on reporting credit losses for financial assets held at amortized cost basis and available for sale debt securities. Topic 326 eliminates the probable initial recognition threshold in current GAAP and instead, requires an entity to reflect its current estimate of all expected credit losses based on historical experience, current conditions and reasonable and supportable forecasts. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the reserve for credit losses. In addition, entities need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. The Company adopted ASU 2016-13 using the modified retrospective approach. Results for the periods beginning after January 1, 2020 are presented under Accounting Standards Codification (“ASC”) 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net reduction of retained earnings of $8.7 million upon adoption. The transition adjustment includes an increase in credit-related reserves of $9.6 million, $14 thousand, and $2.1 million for loans, held to maturity investment securities and unfunded commitments, respectively, net of the corresponding increase in deferred tax assets of $3.0 million.
The allowance for credit losses is evaluated on a regular basis and established through charges to earnings in the form of a provision for credit losses. When a loan or portion of a loan is determined to be uncollectible, the portion deemed uncollectible is charged against the allowance and subsequent recoveries, if any, are credited to the allowance. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
|
|
Portfolio segmentation is defined as the pooling of loans based upon similar risk characteristics such that quantitative methodologies and qualitative adjustment factors for estimating the allowance for credit losses is constructed for each segment. The Company has identified 6 portfolio segments of loans including Commercial Loans/Lines, Commercial Mortgage, Indirect Loans, Direct Loans, Residential Lines of Credit, and Residential Loans.
The allowance for credit losses for Pooled Loans estimate is based upon periodic review of the collectability of the loans quantitatively correlating historical loan experience with reasonable and supportable forecasts using forward looking information. Adjustments to the quantitative evaluation may be made for differences in current or expected qualitative risk characteristics such as changes in: underwriting standards, delinquency level, regulatory environment, economic condition, Company management and the status of portfolio administration including the Company’s Loan Review function.
- 9 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
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|
|
|
The Company establishes a specific reserve for individually evaluated loans which do not share similar risk characteristics with the loans included in the forecasted allowance for credit losses. These individually evaluated loans are removed from the pooling approach discussed above for the forecasted allowance for credit losses, and include nonaccrual loans, troubled debt restructurings (“TDRs”), and other loans deemed appropriate by management.
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|
The Company’s HTM debt securities are also required to utilize the current expected credit losses approach to estimate expected credit losses. The Company’s HTM debt securities included securities that are issued by U.S. government or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk free,” and have a long history of zero credit loss. The Company also carries a portfolio of HTM municipal bonds. The Company measures its allowance for credit losses on HTM debt securities on a collective basis by major security type. The estimate is based on historical credit losses, if any, adjusted for current conditions and reasonable and supportable forecasts. The Company considers the nature of the collateral, potential future changes in collateral values and available loss information.
|
|
For AFS securities in an unrealized loss position, we first assess whether (i) we intend to sell, or (ii) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either case is affirmative, any previously recognized allowances are charged-off and the security's amortized cost is written down to fair value through income. If neither case is affirmative, the security is evaluated to determine whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency and any adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Adjustments to the allowance are reported in our income statement as a component of credit loss expense. AFS securities are charged-off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible by management or when either of the aforementioned criteria regarding intent or requirement to sell is met.
|
|
Upon adoption of ASU 2016-13 and its related amendments on January 1, 2020, the Company made the following elections regarding accrued interest receivable:
|
|
|
|
|
|
|
|
|
|
The reserve for unfunded commitments (the “Unfunded Reserve”) represents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit and standby letters of credit. However, a liability is not recognized for commitments unconditionally cancellable by the Company. The Unfunded Reserve is recognized as a liability (other liabilities in the consolidated statements of financial condition), with adjustments to the reserve recognized as a provision for credit loss expense in the consolidated statements of income. The Unfunded Reserve is determined by estimating expected future fundings, under each segment, and applying the expected loss rates. Expected future fundings are based on historical averages of funding rates (i.e., the likelihood of draws taken). To estimate future fundings on unfunded balances, current funding rates are compared to historical funding rates.
- 10 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
|
|
Operating,Operational, Accounting and Reporting Considerations relatedImpacts Related to the COVID-19 Pandemic
The COVID-19 pandemic has negatively impacted the global economy, including our operating footprint of Western and Central New York. In response to this crisis, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was passed by Congress and signed into law on March 27, 2020. The CARES Act providesprovided an estimated $2.2$2.2 trillion to fight the COVID-19 pandemic and stimulate the economy by supporting individuals and businesses through loans, grants, tax changes, and other types of relief. Some of the provisions applicable to the Company include, but are not limited to:
Accounting for Loan Modifications - The CARES Act provided that a financial institution may elect to suspend (1) the application of GAAP for certain loan modifications related to COVID-19 that would otherwise be categorized as a troubled debt restructuring (“TDR”) and (2) any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes. Paycheck Protection Program - The CARES Act established the Paycheck Protection Program (“PPP”), an expansion of the Small Business Administration’s (“SBA”) 7(a) loan program and the Economic Injury Disaster Loan Program (“EIDL”), administered directly by the SBA. On December 27, 2020, the Consolidated Appropriations Act, 2021 provided approximately $284 billion for PPP loans in an additional round of funding under the program and extended the PPP through March 31, 2021. This additional round of PPP loan funding is authorized for first-time borrowers and for second draws by certain borrowers who have previously received PPP loans. On March 30, 2021, the PPP Extension Act of 2021 was signed into law, which extended the program to May 31, 2021. Mortgage Forbearance - Under the CARES Act, a borrower with a federally backed mortgage loan that was experiencing financial hardship due to COVID-19 was able to request a forbearance until September 30, 2021. 9 FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (1.)BASIS OF PRESENTATIOY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
|
|
|
|
|
|
Also, in response to the COVID-19 pandemic, the Board of Governors of the Federal Reserve System (“FRB”), the Federal Deposit Insurance Corporation (“FDIC”), the National Credit Union Administration (“NCUA”), the Office of the Comptroller of the Currency (“OCC”), and the Consumer Financial Protection Bureau (“CFPB”), in consultation with the state financial regulators (collectively, the “agencies”) issued a joint interagency statement (issued March 22, 2020; revised statement issued April 7, 2020). Some of the provisions applicable to the Company include, but are not limited to:
Accounting for Loan Modifications - Loan modifications that do not meet the conditions of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. The agencies confirmed with FASB staff that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or insignificant delays in payment. Past Due Reporting - With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral. A loan’s payment date is governed by the due date stipulated in the legal agreement. If a financial institution agrees to a payment deferral, these loans would not be considered past due during the period of the deferral. Nonaccrual Status and Charge-offs - During short-term COVID-19 modifications, these loans generally should not be reported as nonaccrual or as classified.
|
|
|
|
|
|
Effective March 23, 2020 through July 9, 2020, for consumer customers, the Bank waived early CD penalty fees for withdrawals up to $20,000$20,000 (limited to one penalty-free withdrawal per CD account); eliminated all insufficient funds (overdrafts) and returned item fees; eliminated all Pay by Phone fees; waived all late fees; offered the opportunity for monthly mortgage, home equity loan or home equity line payment relief; offered the opportunity to defer unsecured consumer loans or lines of credit and secured consumer loans and lines of credit payments; and offered unsecured personal loans up to $5,000,$5,000, up to 60 months at 2.95%2.95% APR subject to credit approval (additional terms and conditions may apply). In addition,approval. ATM access fees were reinitiated on September 19, 2020.
As part of the first round of PPP loans we have helped more than 1,700 customers obtain more than $270 million in loans as of December 31, 2020. We have helped customers complete the forgiveness process for approximately $239 million of PPP loans in the first nine months of 2021. Also, during the first nine months of 2021, we have helped customers obtain approximately $107 million of new PPP loans under the second round of the PPP. Additionally, as of September 30, 2021, approximately 2% of our commercial loan and mortgage customers, 1% of our residential real estate loans and lines customers and less than 1% of our indirect loans customers have active payment deferrals, in accordance with the previously noted loan modifications under the CARES Act or agencies guidelines.
Reclassifications
Reclassifications
Certain reclassifications of previously reported amounts have been made to conform to the current year presentation. Such reclassifications did not impact net income or shareholders’ equity as previously reported.
Subsequent Events
Subordinated Note Issuance
On October 7, 2020, the Company completed a private placement of $35.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes due 2030 (the “Notes”) to qualified institutional buyers and accredited institutional investors. The Notes have a maturity date of October 15, 2030 and bear interest, payable semi-annually, at the rate of 4.375% per annum, until October 15, 2025. Commencing on that date, the interest rate will reset quarterly to an interest rate per annum equal to the then current three-month secured overnight financing rate (“SOFR”) plus 4.265%, payable quarterly until maturity.
- 11 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
|
|
The Company is entitled to redeem the Notes, in whole or in part, on any interest payment date on or after October 15, 2025, and to redeem the Notes in whole at any time upon certain other specified events. The Company intends to use the net proceeds for general corporate purposes, organic growth and to support regulatory capital ratios at Five Star Bank.
In connection with the issuance and sale of the Notes, the Company entered into a registration rights agreement with the purchasers of the Notes pursuant to which the Company has agreed to take certain actions to provide for the exchange of the Notes for subordinated notes that are registered under the Securities Act of 1933, as amended, with substantially the same terms as the Notes.
Enterprise Standardization Program
In October 2020, the Company announced the planned closure of 1 additional branch in January 2021. This location was not included in the branch consolidations announced in July, as alternative options were being considered and consolidation was not possible given its significant distance from other Five Star Bank branches. This closure is expected to result in one-time expenses related to severance costs and real estate related charges of approximately $130 thousand in the fourth quarter of 2020. Expected expense savings are anticipated at $340 thousand on an annualized basis.
Stock Repurchase Program
In November 2020, the Company announced that its Board of Directors approved a stock repurchase program for up to 801,879 shares of its common stock, or approximately 5% of the Company’s outstanding common shares. The repurchase program permits shares to be repurchased in open market transactions and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. The timing and number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. The repurchase program does not obligate the Company to purchase any shares and it may be extended, modified or discontinued at any time.
Use of Estimates
The preparation of these financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates relate to the determination of the allowance for credit losses, the carrying value of goodwill and deferred tax assets, and assumptions used in the defined benefit pension plan accounting.
10
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(1.)BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash Flow Reporting
Supplemental cash flow information is summarized as follows for the nine months ended September 30 (in thousands):
|
| 2021 |
|
| 2020 |
| ||
Supplemental information: |
|
|
|
|
|
| ||
Cash paid for interest |
| $ | 12,100 |
|
| $ | 23,533 |
|
Cash paid for income taxes |
|
| 10,800 |
|
|
| 5,656 |
|
Noncash investing and financing activities: |
|
|
|
|
|
| ||
Real estate and other assets acquired in settlement of loans |
|
| — |
|
|
| 2,966 |
|
Accrued and declared unpaid dividends |
|
| 4,641 |
|
|
| 4,534 |
|
Common stock issued for acquisition |
|
| 301 |
|
|
| — |
|
Assets acquired and liabilities assumed in business combinations: |
|
|
|
|
|
| ||
Fair value of assets acquired |
|
| 712 |
|
|
| — |
|
|
| 2020 |
|
| 2019 |
| ||
Supplemental information: |
|
|
|
|
|
|
|
|
Cash paid for interest |
| $ | 23,533 |
|
| $ | 28,672 |
|
Cash paid for income taxes |
|
| 5,656 |
|
|
| 8,666 |
|
Noncash investing and financing activities: |
|
|
|
|
|
|
|
|
Real estate and other assets acquired in settlement of loans |
|
| 2,966 |
|
|
| 159 |
|
Accrued and declared unpaid dividends |
|
| 4,534 |
|
|
| 4,363 |
|
Increase in net unsettled security purchases |
|
| — |
|
|
| (2,650 | ) |
Common stock issued for Courier Capital contingent earn-out |
|
| — |
|
|
| 1,151 |
|
- 12 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
|
|
Recent Accounting Pronouncements
In April 2019,2017, the United Kingdom’s Financial Accounting Standards BoardConduct Authority (“FASB”FCA”) issued ASU No. 2019-04, Codification Improvements, who is responsible for regulating the London Interbank Offered Rate (“LIBOR”), announced its intention that it would no longer be necessary to Topic 326, Financial Instruments - Credit Losses, Topic 815,persuade or compel its panel banks to submit LIBOR rates after December 31, 2021. On March 5, 2021, the ICE Benchmark Administration (“IBA”), the administrator of LIBOR, released the results of its consultation on the cessation timeline for certain LIBOR tenors. In coordination with the IBA, the FCA also confirmed when certain LIBOR tenors will cease to exist. The results of the consultation indicated that certain LIBOR tenors (overnight, one-month, three-month, six-month, and twelve-month USD LIBOR) will be extended to June 30, 2023 to allow some legacy contracts that cannot be easily amended to mature on their current terms. Notwithstanding the extension of certain LIBOR tenors to 2023, banks may no longer offer new LIBOR-based contracts after December 31, 2021. Given that LIBOR is a widely used pricing index for loan and derivative contracts, a Company-wide initiative was introduced to assess all LIBOR exposures through the Company’s loan, deposit, borrowing and derivative categories, while developing a plan for the ultimate cessation of the index. In developing the transition plan, the Company has followed best practice recommendations from the Federal Reserve’s Alternative Reference Rate Committee, our third-party derivative advisor and the Internal Swaps and Derivatives and Hedging, and Topic 825, Financial Instruments. With respectAssociation. To date, the Company has identified the portion of loan notes that reference LIBOR, which are primarily representative of commercial relationships. Additionally, the Company has 1 designated derivative instrument that is utilized to Topic 815, Derivatives and Hedging, ASU 2019-04 clarifies thathedge the reclassificationLIBOR characteristic of a debt security from Heldfuture dated borrowing (i.e. Federal Home Loan Bank Advance). In 2015, the Company issued $40 million in fixed to Maturity (“HTM”)floating rate subordinated notes that currently bear a fixed rate of interest at 6.00% until April 2025, when the rate converts to Available for Sale (“AFS”)a floating rate equal to three-month LIBOR plus 3.944%; the indenture under which the transition guidance in ASU No. 2017-12, Derivatives and Hedging (Topic 815) – Targeted Improvementsnotes were issued includes language allowing an alternate index to Accounting for Hedging Activities, would not (1) call into question the classification of other HTM securities, (2) be required to actually designate any reclassified security in a last-of-layer hedge, or (3) be restricted from selling any reclassified security. As part of the transition of ASU 2019-04, entities may reclassify securities that would qualify for designation as the hedged item in a last-of-layer hedging relationship from HTM to AFS; however, entities that already made such a reclassification upon their adoption of ASU 2017-12 are precluded from reclassifying additional securities. The Company did not reclassify any securities from HTM to AFS upon adoption of ASU 2017-12. The Company elected to early adopt the amendments to Topic 815 in December 2019, resultingapplied in the reclassification of $26.2 million of qualified investment securities from HTM to AFS. With respect to Topic 326, Financial Instruments - Credit Losses, ASU 2019-04 clarifiesevent that LIBOR becomes unavailable at the scope of the credit losses standard and addresses issues related to accrued interest receivable balances, recoveries, variable interest rates and prepayments, amongfloating rate determination date. At this time, no other things. With respect to Topic 825, Financial Instruments, on recognizing and measuring financial instruments, ASU 2019-04 addresses the scope of the guidance, the requirement for remeasurement under ASC 820 (Fair Value Measurement) when using the measurement alternative, certain disclosure requirements and which equity securitiesborrowing or deposit relationships have to be remeasured at historical exchange rates. The amendments to Topic 326 and the amendments to Topic 825, under ASU 2019-04, were adoptedbeen identified that utilize LIBOR as of January 1, 2020 and did not have a significant impact on the Company’s financial statements.an index.
In March 2020, the FASB issued ASU No. 2020-04, “FacilitationReference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ThisReporting. The ASU provides temporary optional expedients and exceptions to GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative rates, such as SOFR. For instance, entities can elect not to apply certain modification accounting requirements to contracts affected by reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Entities can also elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met. Finally, entities can make a one-time election to sell and/or reclassify HTM debt securities that reference an interest rate affected by reference rate reform. ASU 2020-04 isbecame effective during the first quarter of 2020 and applies to contract modifications and amendments made as of the beginning of the reporting period including the ASU’s issuance date, March 12, 2020, through December 31, 2022. The Company isadoption of this guidance in 2020 resulted in the processapplication of determiningcertain practical expedients, which did not have a material effect on the Company's consolidated financial statements.
In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope. The ASU clarifies that certain optional expedients and exceptions in ASC 848 for contract modifications and hedge accounting apply to elect, if any, as well asderivatives that are affected by the timingdiscounting transition. The ASU also amends the expedients and exceptions in ASC 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. ASU 2021-01 was effective upon issuance and applies through December 31, 2022. The adoption of this guidance resulted in the application of those elections. At this time, the Company doescertain practical expedients, which did not expect any elections to have a significant impactmaterial effect on itsthe Company's consolidated financial statements.
11
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(2.)BUSINESS COMBINATIONS 2021 Activity On February 1, 2021, SDN completed the acquisition of the assets of Landmark Group (“Landmark”), an independent insurance brokerage firm. Consideration for the acquisition included common shares of Company stock and cash. As a result of the acquisition, SDN recorded goodwill of $611 thousand and other intangible assets of $399 thousand. The goodwill and other intangible assets are expected to be deductible for income tax purposes. The allocation of acquisition cost to the assets acquired and liabilities assumed and pro forma results of operations for this acquisition have not been presented because the effect of this acquisition was not material to the Company’s consolidated financial statements. On August 2, 2021, SDN completed the acquisition of the assets of North Woods Capital Benefits LLC ("North Woods"), an employee benefits and human resources advisory firm. As a result of the acquisition, SDN recorded goodwill of $399 thousand and other intangible assets of $263 thousand. The goodwill and other intangible assets are expected to be deductible for income tax purposes. The allocation of acquisition cost to the assets acquired and liabilities assumed and pro forma results of operations for this acquisition have not been presented because the effect of this acquisition was not material to the Company’s consolidated financial statements. 2020 Activity – No Activity (3.)RESTRUCTURING CHARGES
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|
On July 17, 2020, the Bank announced management’s decision to adapt to a full-service branch model to streamline retail branches to better align with shifting customer needs and preferences. The transformation resulted in 6 branch closures and a reduction in staffing. The announcement was the result of a nine-month comprehensive assessment of all lines of business and functional areas, conducted in partnership with a leading process improvement organization. The data-driven analysis identified, among other things, overlapping service areas, automation opportunities and streamlining of processes and operations that would enhance customer experiences and facilitate the long-term sustainability of current and future branches. The announced consolidations represented about 10 percent of the branch network and impacted approximately 6 percent of the total Company workforce. Where possible, those impacted were offered alternative roles or the opportunity to apply for open positions in other areas of the Company. Separated associates received a comprehensive severance package based on tenure. The
In October 2020, the Company expects to complete a substantial majorityannounced the planned closure of these actions by December 31, 2020.1 additional branch that closed in January 2021. This location was not included in the branch consolidations announced in July 2020, as alternative options were being considered and consolidation was not possible given its significant distance from other Bank branches.
The Company incurred total pre-tax expense related to the branch closures of approximately $1.6$1.7 million, including approximately $0.2$0.2 million in employee severance, $0.5$0.5 million in lease termination costs and $0.9$1.0 million in valuation adjustments on branch facilities. The Company recognized all of these expenses during 2020. The Company expects $0.7$0.8 million of total costs will result in future cash expenditures. The Company recognized all of these expenses during the third quarter of 2020. The Company anticipates annual expense savings of approximately $2.6$2.7 million as a result of these branch closures.
- 13 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
|
|
The following table represents the consolidated statements of income classification of the Company’sCompany's restructuring charges (in thousands):
|
|
|
| Three months ended |
|
| Nine months ended |
| ||||||||||
|
| Income Statement Location |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Severance costs |
| Salaries and employee benefits |
| $ | — |
|
| $ | 224 |
|
| $ | — |
|
| $ | 224 |
|
Lease termination costs |
| Restructuring charges |
|
| — |
|
|
| 454 |
|
|
| — |
|
|
| 454 |
|
Valuation adjustments |
| Restructuring charges |
|
| — |
|
|
| 908 |
|
|
| — |
|
|
| 908 |
|
Total |
|
|
| $ | — |
|
| $ | 1,586 |
|
| $ | — |
|
| $ | 1,586 |
|
12
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(3.)RESTRUCTURING CHARGES (Continued)
|
|
|
| Three months ended September 30, |
|
| Nine months ended September 30, |
| ||||||||||
|
| Income Statement Location |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance costs |
| Salaries and employee benefits |
| $ | 224 |
|
| $ | — |
|
| $ | 224 |
|
| $ | — |
|
Lease termination costs |
| Restructuring charges |
|
| 454 |
|
|
| — |
|
|
| 454 |
|
|
| — |
|
Valuation adjustments |
| Restructuring charges |
|
| 908 |
|
|
| — |
|
|
| 908 |
|
|
| — |
|
Total |
|
|
| $ | 1,586 |
|
| $ | — |
|
| $ | 1,586 |
|
| $ | — |
|
The following table represents the changes in the restructuring reserve (in thousands):
|
| Three months ended |
|
| Nine months ended |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Balance at beginning of period |
| $ | 1,088 |
|
| $ | — |
|
| $ | 1,245 |
|
| $ | — |
|
Restructuring charges |
|
| — |
|
|
| 1,586 |
|
|
| — |
|
|
| 1,586 |
|
Cash payments |
|
| (33 | ) |
|
| (249 | ) |
|
| (179 | ) |
|
| (249 | ) |
Charges against assets |
|
| (456 | ) |
|
| — |
|
|
| (467 | ) |
|
| — |
|
Balance at end of period |
| $ | 599 |
|
| $ | 1,337 |
|
| $ | 599 |
|
| $ | 1,337 |
|
In contemplation of the transactions noted above, certain long-lived assets have met the held for sale criteria as of September 30, 2021. The Company reclassified $4.7 million from premises and equipment, net to other assets on the consolidated statement of financial condition as of September 30, 2021. NaN long-lived assets were reclassified as held for sale as of December 31, 2020.
|
| Three months ended September 30, |
|
| Nine months ended September 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
Restructuring charges |
|
| 1,586 |
|
|
| — |
|
|
| 1,586 |
|
|
| — |
|
Cash payments |
|
| (249 | ) |
|
| — |
|
|
| (249 | ) |
|
| — |
|
Ending balance |
| $ | 1,337 |
|
| $ | — |
|
| $ | 1,337 |
|
| $ | — |
|
(4.)EARNINGS PER COMMON SHARE (“EPS”)
|
|
The following table presents a reconciliation of the earnings and shares used in calculating basic and diluted EPS (in thousands, except per share amounts).
|
| Three months ended |
|
| Nine months ended |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Net income available to common shareholders |
| $ | 16,811 |
|
| $ | 11,908 |
|
| $ | 56,990 |
|
| $ | 23,436 |
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total shares issued |
|
| 16,100 |
|
|
| 16,100 |
|
|
| 16,100 |
|
|
| 16,100 |
|
Unvested restricted stock awards |
|
| (5 | ) |
|
| (7 | ) |
|
| (6 | ) |
|
| (5 | ) |
Treasury shares |
|
| (258 | ) |
|
| (62 | ) |
|
| (244 | ) |
|
| (77 | ) |
Total basic weighted average common shares outstanding |
|
| 15,837 |
|
|
| 16,031 |
|
|
| 15,850 |
|
|
| 16,018 |
|
Incremental shares from assumed: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Exercise of stock options |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Vesting of restricted stock awards |
|
| 99 |
|
|
| 27 |
|
|
| 90 |
|
|
| 40 |
|
Total diluted weighted average common shares outstanding |
|
| 15,936 |
|
|
| 16,058 |
|
|
| 15,940 |
|
|
| 16,058 |
|
Basic earnings per common share |
| $ | 1.06 |
|
| $ | 0.74 |
|
| $ | 3.60 |
|
| $ | 1.46 |
|
Diluted earnings per common share |
| $ | 1.05 |
|
| $ | 0.74 |
|
| $ | 3.58 |
|
| $ | 1.46 |
|
|
| Three months ended September 30, |
|
| Nine months ended September 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Net income available to common shareholders |
| $ | 11,908 |
|
| $ | 12,468 |
|
| $ | 23,436 |
|
| $ | 34,659 |
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shares issued |
|
| 16,100 |
|
|
| 16,100 |
|
|
| 16,100 |
|
|
| 16,081 |
|
Unvested restricted stock awards |
|
| (7 | ) |
|
| (4 | ) |
|
| (5 | ) |
|
| (4 | ) |
Treasury shares |
|
| (62 | ) |
|
| (105 | ) |
|
| (77 | ) |
|
| (113 | ) |
Total basic weighted average common shares outstanding |
|
| 16,031 |
|
|
| 15,991 |
|
|
| 16,018 |
|
|
| 15,964 |
|
Incremental shares from assumed: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Vesting of restricted stock awards |
|
| 27 |
|
|
| 65 |
|
|
| 40 |
|
|
| 53 |
|
Total diluted weighted average common shares outstanding |
|
| 16,058 |
|
|
| 16,056 |
|
|
| 16,058 |
|
|
| 16,017 |
|
Basic earnings per common share |
| $ | 0.74 |
|
| $ | 0.78 |
|
| $ | 1.46 |
|
| $ | 2.17 |
|
Diluted earnings per common share |
| $ | 0.74 |
|
| $ | 0.78 |
|
| $ | 1.46 |
|
| $ | 2.16 |
|
For each of the periods presented, average shares subject to the following instruments were excluded from the computation of diluted EPS because the effect would be antidilutive:antidilutive (in thousands):
|
| Three months ended |
|
| Nine months ended |
| ||||||||||||||||||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||||||||||||||||||
Stock options |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
| — |
| — |
| — |
| — |
| |||||||
Restricted stock awards |
|
| 71 |
|
|
| — |
|
|
| 49 |
|
|
| 5 |
|
|
| 0 |
|
| 71 |
|
| 4 |
|
| 49 |
| |||
Total |
|
| 71 |
|
|
| — |
|
|
| 49 |
|
|
| 5 |
|
|
| 0 |
|
| 71 |
|
| 4 |
|
| 49 |
|
- 14 -
13
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(5.)INVESTMENT SECURITIES
|
|
The amortized cost and fair value of investment securities are summarized below (in thousands):
��
|
| Amortized |
|
| Unrealized |
|
| Unrealized |
|
| Fair |
| ||||||||||||||||||||
|
| Cost |
|
| Gains |
|
| Losses |
|
| Value |
|
| Amortized |
|
| Unrealized |
|
| Unrealized |
|
| Fair |
| ||||||||
September 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
| Cost |
|
| Gains |
|
| Losses |
|
| Value |
| ||||||||||||||||||||
September 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. Government agency and government sponsored enterprises |
| $ | 6,234 |
|
| $ | 421 |
|
| $ | — |
|
| $ | 6,655 |
|
| $ | 6,253 |
| $ | 278 |
| $ | — |
| $ | 6,531 |
| |||
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Federal National Mortgage Association |
|
| 303,740 |
|
|
| 15,923 |
|
|
| 66 |
|
|
| 319,597 |
|
| 575,861 |
| 8,847 |
| 4,973 |
| 579,735 |
| |||||||
Federal Home Loan Mortgage Corporation |
|
| 139,875 |
|
|
| 2,684 |
|
|
| 140 |
|
|
| 142,419 |
|
| 390,062 |
| 1,257 |
| 6,195 |
| 385,124 |
| |||||||
Government National Mortgage Association |
|
| 23,300 |
|
|
| 851 |
|
|
| — |
|
|
| 24,151 |
|
| 92,793 |
| 468 |
| 935 |
| 92,326 |
| |||||||
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Federal National Mortgage Association |
|
| 18,104 |
|
|
| 229 |
|
|
| — |
|
|
| 18,333 |
|
| 17,689 |
| 67 |
| 132 |
| 17,624 |
| |||||||
Federal Home Loan Mortgage Corporation |
|
| 4,365 |
|
|
| 16 |
|
|
| — |
|
|
| 4,381 |
|
| 16,318 |
| — |
| 128 |
| 16,190 |
| |||||||
Privately issued |
|
| — |
|
|
| 435 |
|
|
| — |
|
|
| 435 |
|
|
| — |
|
| 420 |
|
| — |
|
| 420 |
| |||
Total mortgage-backed securities |
|
| 489,384 |
|
|
| 20,138 |
|
|
| 206 |
|
|
| 509,316 |
|
|
| 1,092,723 |
|
| 11,059 |
|
| 12,363 |
|
| 1,091,419 |
| |||
Total available for sale securities |
| $ | 495,618 |
|
| $ | 20,559 |
|
| $ | 206 |
|
| $ | 515,971 |
|
| $ | 1,098,976 |
| $ | 11,337 |
| $ | 12,363 |
| $ | 1,097,950 |
| |||
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
State and political subdivisions |
| $ | 151,611 |
|
| $ | 5,052 |
|
| $ | — |
|
| $ | 156,663 |
|
| $ | 116,812 |
| $ | 2,897 |
| $ | 196 |
| $ | 119,513 |
| |||
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Federal National Mortgage Association |
|
| 11,576 |
|
|
| 725 |
|
|
| — |
|
|
| 12,301 |
|
| 9,535 |
| 539 |
| — |
| 10,074 |
| |||||||
Federal Home Loan Mortgage Corporation |
|
| 6,183 |
|
|
| 365 |
|
|
| — |
|
|
| 6,548 |
|
| 8,835 |
| 203 |
| 132 |
| 8,906 |
| |||||||
Government National Mortgage Association |
|
| 39,631 |
|
|
| 1,402 |
|
|
| — |
|
|
| 41,033 |
|
| 29,172 |
| 1,009 |
| — |
| 30,181 |
| |||||||
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Federal National Mortgage Association |
|
| 33,396 |
|
|
| 1,236 |
|
|
| — |
|
|
| 34,632 |
|
| 21,668 |
| 644 |
| — |
| 22,312 |
| |||||||
Federal Home Loan Mortgage Corporation |
|
| 39,905 |
|
|
| 1,835 |
|
|
| — |
|
|
| 41,740 |
|
| 26,125 |
| 894 |
| — |
| 27,019 |
| |||||||
Government National Mortgage Association |
|
| 8,652 |
|
|
| 309 |
|
|
| — |
|
|
| 8,961 |
|
|
| 5,993 |
|
| 166 |
|
| — |
|
| 6,159 |
| |||
Total mortgage-backed securities |
|
| 139,343 |
|
|
| 5,872 |
|
|
| — |
|
|
| 145,215 |
|
|
| 101,328 |
|
| 3,455 |
|
| 132 |
|
| 104,651 |
| |||
Total held to maturity securities |
|
| 290,954 |
|
| $ | 10,924 |
|
| $ | — |
|
| $ | 301,878 |
|
| 218,140 |
| $ | 6,352 |
| $ | 328 |
| $ | 224,164 |
| ||||
Allowance for credit losses - securities |
|
| (8 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (5 | ) |
|
|
|
|
|
|
|
|
| |||
Total held to maturity securities, net |
| $ | 290,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 218,135 |
|
|
|
|
|
|
|
|
| ||||
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. Government agency and government sponsored enterprises |
| $ | 26,440 |
|
| $ | 437 |
|
| $ | — |
|
| $ | 26,877 |
|
| $ | 6,239 |
| $ | 396 |
| $ | — |
| $ | 6,635 |
| |||
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Federal National Mortgage Association |
|
| 293,873 |
|
|
| 2,263 |
|
|
| 1,380 |
|
|
| 294,756 |
|
| 350,627 |
| 15,549 |
| 44 |
| 366,132 |
| |||||||
Federal Home Loan Mortgage Corporation |
|
| 52,733 |
|
|
| 318 |
|
|
| 172 |
|
|
| 52,879 |
|
| 225,645 |
| 3,155 |
| 24 |
| 228,776 |
| |||||||
Government National Mortgage Association |
|
| 14,065 |
|
|
| 60 |
|
|
| 4 |
|
|
| 14,121 |
|
| 22,107 |
| 830 |
| — |
| 22,937 |
| |||||||
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Federal National Mortgage Association |
|
| 23,834 |
|
|
| — |
|
|
| 57 |
|
|
| 23,777 |
|
| 3,047 |
| 97 |
| — |
| 3,144 |
| |||||||
Federal Home Loan Mortgage Corporation |
|
| 4,907 |
|
|
| — |
|
|
| 18 |
|
|
| 4,889 |
|
| — |
| — |
| — |
| — |
| |||||||
Privately issued |
|
| — |
|
|
| 618 |
|
|
| — |
|
|
| 618 |
|
|
| — |
|
| 435 |
|
| — |
|
| 435 |
| |||
Total mortgage-backed securities |
|
| 389,412 |
|
|
| 3,259 |
|
|
| 1,631 |
|
|
| 391,040 |
|
|
| 601,426 |
|
| 20,066 |
|
| 68 |
|
| 621,424 |
| |||
Total available for sale securities |
| $ | 415,852 |
|
| $ | 3,696 |
|
| $ | 1,631 |
|
| $ | 417,917 |
|
| $ | 607,665 |
| $ | 20,462 |
| $ | 68 |
| $ | 628,059 |
|
- 15 -14
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(5.)INVESTMENT SECURITIES (Continued)
|
|
|
| Amortized |
|
| Unrealized |
|
| Unrealized |
|
| Fair |
| ||||
|
| Cost |
|
| Gains |
|
| Losses |
|
| Value |
| ||||
December 31, 2019 (continued) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions |
| $ | 192,215 |
|
| $ | 3,803 |
|
| $ | — |
|
| $ | 196,018 |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal National Mortgage Association |
|
| 12,049 |
|
|
| 227 |
|
|
| 6 |
|
|
| 12,270 |
|
Federal Home Loan Mortgage Corporation |
|
| 6,995 |
|
|
| 77 |
|
|
| 47 |
|
|
| 7,025 |
|
Government National Mortgage Association |
|
| 45,758 |
|
|
| 306 |
|
|
| 128 |
|
|
| 45,936 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal National Mortgage Association |
|
| 41,561 |
|
|
| 150 |
|
|
| 256 |
|
|
| 41,455 |
|
Federal Home Loan Mortgage Corporation |
|
| 49,389 |
|
|
| 307 |
|
|
| 103 |
|
|
| 49,593 |
|
Government National Mortgage Association |
|
| 11,033 |
|
|
| 12 |
|
|
| 83 |
|
|
| 10,962 |
|
Total mortgage-backed securities |
|
| 166,785 |
|
|
| 1,079 |
|
|
| 623 |
|
|
| 167,241 |
|
Total held to maturity securities |
| $ | 359,000 |
|
| $ | 4,882 |
|
| $ | 623 |
|
| $ | 363,259 |
|
The Company elected to exclude accrued interest receivable (“AIR”) from the amortized cost basis of debt securities disclosed throughout this footnote. For AFSavailable for sale (“AFS”) debt securities, AIR totaled $1.0$1.9 million and $1.2 million as of September 30, 20202021 and December 31, 2019.2020. For HTMheld to maturity (“HTM”) debt securities, AIR totaled $1.4$1.0 million and $1.2 million$905 thousand as of September 30, 20202021 and December 31, 2019,2020, respectively. AIR is included in other assets on the Company’s consolidated statements of financial condition.
For each of the three months ended September 30, 20202021 and 2019,2020, credit loss expense (credit) for HTM investment securities was $0.$(1) thousand and $0, respectively. For the nine months ended September 30, 20202021 and 2019,2020, credit loss expense (credit) for HTM investment securities was $(6)$(2) thousand and $0,$(6) thousand, respectively.
Investment securities with a total fair value of $634.4$861.2 million and $676.9$567.4 million at September 30, 20202021 and December 31, 2019,2020, respectively, were pledged as collateral to secure public deposits and for other purposes required or permitted by law.
Sales of securities available for sale were as follows (in thousands):
|
| Three months ended |
|
| Nine months ended |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Proceeds from sales |
| $ | 0 |
|
| $ | 20,576 |
|
| $ | 51,891 |
|
| $ | 50,207 |
|
Gross realized gains |
|
| 0 |
|
|
| 554 |
|
|
| 251 |
|
|
| 1,170 |
|
Gross realized losses |
|
| 0 |
|
|
| — |
|
|
| 180 |
|
|
| 9 |
|
|
| Three months ended September 30, |
|
| Nine months ended September 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Proceeds from sales |
| $ | 20,576 |
|
| $ | 65,427 |
|
| $ | 70,729 |
|
| $ | 110,042 |
|
Gross realized gains |
|
| 554 |
|
|
| 1,608 |
|
|
| 1,458 |
|
|
| 1,811 |
|
Gross realized losses |
|
| — |
|
|
| — |
|
|
| 9 |
|
|
| 90 |
|
The scheduled maturities of securities available for sale and securities held to maturity at September 30, 20202021 are shown below (in thousands). Actual expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.
|
| Amortized |
|
| Fair |
|
| Amortized |
|
| Fair |
| ||||
|
| Cost |
|
| Value |
|
| Cost |
|
| Value |
| ||||
Debt securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Due in one year or less |
| $ | 1 |
|
| $ | 1 |
|
| $ | 4,863 |
| $ | 4,891 |
| |
Due from one to five years |
|
| 36,525 |
|
|
| 38,323 |
|
| 62,802 |
| 65,773 |
| |||
Due after five years through ten years |
|
| 162,953 |
|
|
| 175,586 |
|
| 175,663 |
| 180,702 |
| |||
Due after ten years |
|
| 296,139 |
|
|
| 302,061 |
|
|
| 855,648 |
|
| 846,584 |
| |
Total available for sale securities |
| $ | 495,618 |
|
| $ | 515,971 |
|
| $ | 1,098,976 |
| $ | 1,097,950 |
| |
Debt securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Due in one year or less |
| $ | 48,688 |
|
| $ | 49,234 |
|
| $ | 36,191 |
| $ | 36,543 |
| |
Due from one to five years |
|
| 102,292 |
|
|
| 106,631 |
|
| 72,707 |
| 75,317 |
| |||
Due after five years through ten years |
|
| 19,076 |
|
|
| 20,008 |
|
| 20,848 |
| 21,233 |
| |||
Due after ten years |
|
| 120,898 |
|
|
| 126,005 |
|
|
| 88,394 |
|
| 91,071 |
| |
Total held to maturity securities |
| $ | 290,954 |
|
| $ | 301,878 |
|
| $ | 218,140 |
| $ | 224,164 |
|
- 16 -15
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(5.)INVESTMENT SECURITIES (Continued)
|
|
Unrealized losses on investment securities for which an allowance for credit losses has not been recorded and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows (in thousands):
|
| Less than 12 months |
|
| 12 months or longer |
|
| Total |
| |||||||||||||||||||||||||||||||||||||||
|
| Fair |
|
| Unrealized |
|
| Fair |
|
| Unrealized |
|
| Fair |
|
| Unrealized |
|
| Less than 12 months |
|
| 12 months or longer |
|
| Total |
| |||||||||||||||||||||
|
| Value |
|
| Losses |
|
| Value |
|
| Losses |
|
| Value |
|
| Losses |
|
| Fair |
|
| Unrealized |
|
| Fair |
|
| Unrealized |
|
| Fair |
|
| Unrealized |
| ||||||||||||
September 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
|
| Value |
|
| Losses |
|
| Value |
|
| Losses |
|
| Value |
|
| Losses |
| ||||||||||||||||||||||||||||||
September 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. Government agency and government sponsored enterprises |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| |||||
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Federal National Mortgage Association |
|
| 40,103 |
|
|
| 66 |
|
|
| — |
|
|
| — |
|
|
| 40,103 |
|
|
| 66 |
|
| 328,931 |
| 4,650 |
| 9,173 |
| 323 |
| 338,104 |
| 4,973 |
| |||||||||||
Federal Home Loan Mortgage Corporation |
|
| 43,075 |
|
|
| 140 |
|
|
| — |
|
|
| — |
|
|
| 43,075 |
|
|
| 140 |
|
| 335,977 |
| 5,977 |
| 7,676 |
| 218 |
| 343,653 |
| 6,195 |
| |||||||||||
Government National Mortgage Association |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
| 79,351 |
| 935 |
| — |
| — |
| 79,351 |
| 935 |
| |||||||||||
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Federal National Mortgage Association |
|
| — |
|
|
| — |
|
|
| 8 |
|
|
| — |
|
|
| 8 |
|
|
| — |
|
| 7,818 |
| 132 |
| — |
| — |
| 7,818 |
| 132 |
| |||||||||||
Federal Home Loan Mortgage Corporation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
| 16,190 |
| 128 |
| — |
| — |
| 16,190 |
| 128 |
| |||||||||||
Privately issued |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| |||||||||||||||||||||||||||||
Total mortgage-backed securities |
|
| 83,178 |
|
|
| 206 |
|
|
| 8 |
|
|
| — |
|
|
| 83,186 |
|
|
| 206 |
|
|
| 768,267 |
|
| 11,822 |
|
| 16,849 |
|
| 541 |
|
| 785,116 |
|
| 12,363 |
| |||||
Total available for sale securities |
|
| 83,178 |
|
|
| 206 |
|
|
| 8 |
|
|
| — |
|
|
| 83,186 |
|
|
| 206 |
|
|
| 768,267 |
|
| 11,822 |
|
| 16,849 |
|
| 541 |
|
| 785,116 |
|
| 12,363 |
| |||||
Total temporarily impaired securities |
| $ | 83,178 |
|
| $ | 206 |
|
| $ | 8 |
|
| $ | — |
|
| $ | 83,186 |
|
| $ | 206 |
|
| $ | 768,267 |
| $ | 11,822 |
| $ | 16,849 |
| $ | 541 |
| $ | 785,116 |
| $ | 12,363 |
| |||||
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. Government agencies and government sponsored enterprises |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| |||||
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Federal National Mortgage Association |
|
| 104,634 |
|
|
| 1,277 |
|
|
| 7,196 |
|
|
| 103 |
|
|
| 111,830 |
|
|
| 1,380 |
|
| 18,155 |
| 44 |
| — |
| — |
| 18,155 |
| 44 |
| |||||||||||
Federal Home Loan Mortgage Corporation |
|
| 10,347 |
|
|
| 11 |
|
|
| 9,409 |
|
|
| 161 |
|
|
| 19,756 |
|
|
| 172 |
|
| 10,932 |
| 24 |
| — |
| — |
| 10,932 |
| 24 |
| |||||||||||
Government National Mortgage Association |
|
| 533 |
|
|
| 4 |
|
|
| — |
|
|
| — |
|
|
| 533 |
|
|
| 4 |
|
| — |
| — |
| — |
| — |
| — |
| — |
| |||||||||||
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Federal National Mortgage Association |
|
| 8,803 |
|
|
| 57 |
|
|
| 8 |
|
|
| — |
|
|
| 8,811 |
|
|
| 57 |
|
| — |
| — |
| 8 |
| — |
| 8 |
| — |
| |||||||||||
Federal Home Loan Mortgage Corporation |
|
| 4,889 |
|
|
| 18 |
|
|
| — |
|
|
| — |
|
|
| 4,889 |
|
|
| 18 |
|
| — |
| — |
| — |
| — |
| — |
| — |
| |||||||||||
Privately issued |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| |||||||||||||||||||||||||||||
Total mortgage-backed securities |
|
| 129,206 |
|
|
| 1,367 |
|
|
| 16,613 |
|
|
| 264 |
|
|
| 145,819 |
|
|
| 1,631 |
|
|
| 29,087 |
|
| 68 |
|
| 8 |
|
| — |
|
| 29,095 |
|
| 68 |
| |||||
Total available for sale securities |
|
| 129,206 |
|
|
| 1,367 |
|
|
| 16,613 |
|
|
| 264 |
|
|
| 145,819 |
|
|
| 1,631 |
|
|
| 29,087 |
|
| 68 |
|
| 8 |
|
| — |
|
| 29,095 |
|
| 68 |
| |||||
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
State and political subdivisions |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||||||||||||||||
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Federal National Mortgage Association |
|
| 2,388 |
|
|
| 6 |
|
|
| — |
|
|
| — |
|
|
| 2,388 |
|
|
| 6 |
| ||||||||||||||||||||||||
Federal Home Loan Mortgage Corporation |
|
| 2,967 |
|
|
| 19 |
|
|
| 2,598 |
|
|
| 28 |
|
|
| 5,565 |
|
|
| 47 |
| ||||||||||||||||||||||||
Government National Mortgage Association |
|
| 11,155 |
|
|
| 61 |
|
|
| 5,625 |
|
|
| 67 |
|
|
| 16,780 |
|
|
| 128 |
| ||||||||||||||||||||||||
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Federal National Mortgage Association |
|
| 9,120 |
|
|
| 40 |
|
|
| 13,486 |
|
|
| 216 |
|
|
| 22,606 |
|
|
| 256 |
| ||||||||||||||||||||||||
Federal Home Loan Mortgage Corporation |
|
| 15,127 |
|
|
| 30 |
|
|
| 7,988 |
|
|
| 73 |
|
|
| 23,115 |
|
|
| 103 |
| ||||||||||||||||||||||||
Government National Mortgage Association |
|
| 8,760 |
|
|
| 72 |
|
|
| 892 |
|
|
| 11 |
|
|
| 9,652 |
|
|
| 83 |
| ||||||||||||||||||||||||
Total mortgage-backed securities |
|
| 49,517 |
|
|
| 228 |
|
|
| 30,589 |
|
|
| 395 |
|
|
| 80,106 |
|
|
| 623 |
| ||||||||||||||||||||||||
Total held to maturity securities |
|
| 49,517 |
|
|
| 228 |
|
|
| 30,589 |
|
|
| 395 |
|
|
| 80,106 |
|
|
| 623 |
| ||||||||||||||||||||||||
Total temporarily impaired securities |
| $ | 178,723 |
|
| $ | 1,595 |
|
| $ | 47,202 |
|
| $ | 659 |
|
| $ | 225,925 |
|
| $ | 2,254 |
|
| $ | 29,087 |
| $ | 68 |
| $ | 8 |
| $ | — |
| $ | 29,095 |
| $ | 68 |
|
- 17 -16
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(5.)INVESTMENT SECURITIES (Continued)
|
|
The total number of securities positions in the investment portfolio in an unrealized loss position at September 30, 20202021 was 1699 compared to 918 at December 31, 2019.2020. At September 30, 2020,2021, the Company had a positionpositions in 16 investment securitysecurities with a fair value of $8 thousand$16.8 million and a total unrealized loss of less than $1$541 thousand dollars that has been in a continuous unrealized loss position for more than 12 months. At September 30, 2020,2021, there were a total of 1593 securities positions in the Company’s investment portfolio with a fair value of $83.2$768.3 million and a total unrealized loss of $206 thousand$11.8 million that had been in a continuous unrealized loss position for less than 12 months. At December 31, 2019,2020, the Company had positionsa position in 341 investment securitiessecurity with a fair value of $47.2 million8 thousand dollars and a total unrealized loss of $659less than 1 thousand dollars that had been in a continuous unrealized loss position for more than 12 months. At December 31, 2019,2020, there were a total of 577 securities positions in the Company’s investment portfolio with a fair value of $178.7$29.1 million and a total unrealized loss of $1.6 million$68 thousand that had been in a continuous unrealized loss position for less than 12 months. The unrealized loss on investment securities was predominantly caused by changes in market interest rates subsequent to purchase. The fair value of most of the investment securities in the Company’s portfolio fluctuates as market interest rates change.
Securities Available for Sale
As of September 30, 2021 and December 31, 2020, 0 allowance for credit losses has been recognized on available for sale securities in an unrealized loss position as management does not believe any of the securities arewere impaired due to reasons of credit quality. This is based upon our analysis of the underlying risk characteristics, including credit ratings, and other qualitative factors related to our available for sale securities and in consideration of our historical credit loss experience and internal forecasts. The issuers of these securities continue to make timely principal and interest payments under the contractual terms of the securities. Furthermore, management does not have the intent to sell any of the securities classified as available for sale in the table above and believes that it is more likely than not that we will not have to sell any such securities before a recovery of cost. The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline.
Securities Held to Maturity
The Company’s HTM investment securities include debt securities that are issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk free,” and have a long history of zero credit loss. In addition, the Company’s HTM investment securities include debt securities that are issued by state and local government agencies, or municipal bonds.
The Company monitors the credit quality of our municipal bonds through the use of a credit rating agency or by ratings that are derived by an internal scoring model. The scoring methodology for the internally derived ratings is based on a series of financial ratios for the municipality being reviewed as compared to typical industry figures. This information is used to determine the financial strengths and weaknesses of the municipality, which is indicated with a numeric rating. This number is then converted into a letter rating to better match the system used by the credit rating agencies. As of September 30, 2020, $151.62021, $111.0 million of our municipal bonds were rated as an equivalent to Standard & Poor’s A/AA/AAA, with $8.5$5.8 million internally rated to be the equivalent of Standard & Poor’s A/AA/AAA rating. Additionally, no municipal bonds were rated below investment grade. As of December 31, 2020, $135.7 million of our municipal bonds were rated as an equivalent to Standard & Poor’s A/AA/AAA, with $8.5 million internally rated to be the equivalent of Standard & Poor’s A/AA/AAA rating. Additionally, one municipal bond iswas rated below investment grade, with a BB+ Standard & Poor’s equivalent rating. The below investment grade bond was recently upgraded from a Standard & Poor’s equivalent rating of BB-, representsrepresented exposure of $279$279 thousand, or 0.18%0.19% of the municipal bond portfolio and ishad been closely monitored for repayment.
As of September 30, 2021 and December 31, 2020, the Company had 0 past due or nonaccrual held to maturity investment securities.
- 18 -17
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(6.)LOANS
|
|
The Company’s loan portfolio consisted of the following as of the dates indicated (in thousands):
|
| Principal Amount Outstanding |
|
| Net Deferred Loan (Fees) Costs |
|
| Loans, Net |
| |||||||||||||||
September 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
| Principal |
|
| Net Deferred |
|
| Loans, |
| |||||||||||||||
September 30, 2021 |
|
|
|
|
|
|
|
|
| |||||||||||||||
Commercial business |
| $ | 823,611 |
|
| $ | (5,476 | ) |
| $ | 818,135 |
|
| $ | 689,819 |
| $ | (3,628 | ) |
| $ | 686,191 |
| |
Commercial mortgage |
|
| 1,204,353 |
|
|
| (2,307 | ) |
|
| 1,202,046 |
|
| 1,350,932 |
| (2,382 | ) |
| 1,348,550 |
| ||||
Residential real estate loans |
|
| 583,963 |
|
|
| 12,939 |
|
|
| 596,902 |
|
| 570,435 |
| 13,656 |
| 584,091 |
| |||||
Residential real estate lines |
|
| 90,899 |
|
|
| 3,118 |
|
|
| 94,017 |
|
| 76,214 |
| 2,982 |
| 79,196 |
| |||||
Consumer indirect |
|
| 813,345 |
|
|
| 27,234 |
|
|
| 840,579 |
|
| 907,185 |
| 33,352 |
| 940,537 |
| |||||
Other consumer |
|
| 16,703 |
|
|
| 157 |
|
|
| 16,860 |
|
|
| 15,206 |
|
| 128 |
|
| 15,334 |
| ||
Total |
| $ | 3,532,874 |
|
| $ | 35,665 |
|
|
| 3,568,539 |
|
| $ | 3,609,791 |
| $ | 44,108 |
|
| 3,653,899 |
| ||
Allowance for credit losses - loans |
|
|
|
|
|
|
|
|
|
| (49,395 | ) |
|
|
|
|
|
|
|
| (45,444 | ) | ||
Total loans, net |
|
|
|
|
|
|
|
|
| $ | 3,519,144 |
|
|
|
|
|
|
|
| $ | 3,608,455 |
| ||
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
December 31, 2020 |
|
|
|
|
|
|
|
|
| |||||||||||||||
Commercial business |
| $ | 571,222 |
|
| $ | 818 |
|
| $ | 572,040 |
|
| $ | 798,409 |
| $ | (4,261 | ) |
| $ | 794,148 |
| |
Commercial mortgage |
|
| 1,108,315 |
|
|
| (2,032 | ) |
|
| 1,106,283 |
|
| 1,256,525 |
| (2,624 | ) |
| 1,253,901 |
| ||||
Residential real estate loans |
|
| 560,717 |
|
|
| 11,633 |
|
|
| 572,350 |
|
| 586,537 |
| 13,263 |
| 599,800 |
| |||||
Residential real estate lines |
|
| 101,048 |
|
|
| 3,070 |
|
|
| 104,118 |
|
| 86,708 |
| 3,097 |
| 89,805 |
| |||||
Consumer indirect |
|
| 822,179 |
|
|
| 27,873 |
|
|
| 850,052 |
|
| 812,816 |
| 27,605 |
| 840,421 |
| |||||
Other consumer |
|
| 15,984 |
|
|
| 160 |
|
|
| 16,144 |
|
|
| 16,913 |
|
| 150 |
|
| 17,063 |
| ||
Total |
| $ | 3,179,465 |
|
| $ | 41,522 |
|
|
| 3,220,987 |
|
| $ | 3,557,908 |
| $ | 37,230 |
|
| 3,595,138 |
| ||
Allowance for credit losses - loans |
|
|
|
|
|
|
|
|
|
| (30,482 | ) |
|
|
|
|
|
|
|
| (52,420 | ) | ||
Total loans, net |
|
|
|
|
|
|
|
|
| $ | 3,190,505 |
|
|
|
|
|
|
|
| $ | 3,542,718 |
|
Loans held for sale (not included above) were comprised entirely of residential real estate mortgages and totaled $7.1$5.9 million and $4.2$4.3 million as of September 30, 20202021 and December 31, 2019,2020, respectively.
The CARES Act was passed by Congress and signed into law on March 27, 2020. The CARES Act established the PPP, an expansion of the SBA’s 7(a) loan program and the EIDL, administered directly by the SBA. The Company had $270.5$121.4 million and $253.1 million of PPP loans (included in Commercial business above) as of September 30, 2020.2021 and December 31, 2020, respectively. In addition, the CARES Act provides that a financial institution may elect to suspend (1) the application of GAAP for certain loan modifications related to COVID-19 that would otherwise be categorized as a TDR and (2) any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes. Accordingly, the Company had $526.7$532.4 million of loans with modifications related to COVID-19 during 2020, with $61.4 million and $113.0 million still on deferral as of September 30, 2020.2021 and December 31, 2020, respectively.
The Company elected to exclude AIR from the amortized cost basis of loans disclosed throughout this footnote. As of September 30, 20202021 and December 31, 2019,2020, AIR for loans totaled $13.7$12.8 million and $9.1$13.6 million, respectively, and is included in other assets on the Company’s consolidated statements of financial condition.
- 19 -18
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(6.)LOANS (Continued)
|
|
Past Due Loans Aging
The Company’s recorded investment, by loan class, in current and nonaccrual loans, as well as an analysis of accruing delinquent loans is set forth as of the dates indicated (in thousands):
|
| 30-59 Days Past Due |
|
| 60-89 Days Past Due |
|
| Greater Than 90 Days |
|
| Total Past Due |
|
| Nonaccrual |
|
| Current |
|
| Total Loans |
|
| Nonaccrual with no allowance |
| ||||||||||||||||||||||||||||||||||||||||
September 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||
|
| 30-59 |
|
| 60-89 |
|
| Greater |
|
| Total |
|
| Nonaccrual |
|
| Current |
|
| Total |
|
| Nonaccrual |
| ||||||||||||||||||||||||||||||||||||||||
September 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
Commercial business |
| $ | 139 |
|
| $ | 2 |
|
| $ | — |
|
| $ | 141 |
|
| $ | 2,628 |
|
| $ | 820,842 |
|
| $ | 823,611 |
|
| $ | 894 |
|
| $ | 11,489 |
| $ | — |
| $ | — |
| $ | 11,489 |
| $ | 1,046 |
| $ | 677,284 |
| $ | 689,819 |
| $ | 498 |
| |||||||
Commercial mortgage |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3,372 |
|
|
| 1,200,981 |
|
|
| 1,204,353 |
|
|
| 3,175 |
|
| 272 |
| — |
| — |
| 272 |
| 874 |
| 1,349,786 |
| 1,350,932 |
| 344 |
| |||||||||||||||
Residential real estate loans |
|
| 389 |
|
|
| 35 |
|
|
| — |
|
|
| 424 |
|
|
| 3,305 |
|
|
| 580,234 |
|
|
| 583,963 |
|
|
| 3,305 |
|
| 543 |
| 80 |
| — |
| 623 |
| 2,457 |
| 567,355 |
| 570,435 |
| 2,457 |
| |||||||||||||||
Residential real estate lines |
|
| 288 |
|
|
| — |
|
|
| — |
|
|
| 288 |
|
|
| 207 |
|
|
| 90,404 |
|
|
| 90,899 |
|
|
| 207 |
|
| 55 |
| 24 |
| — |
| 79 |
| 192 |
| 75,943 |
| 76,214 |
| 192 |
| |||||||||||||||
Consumer indirect |
|
| 3,520 |
|
|
| 566 |
|
|
| — |
|
|
| 4,086 |
|
|
| 1,244 |
|
|
| 808,015 |
|
|
| 813,345 |
|
|
| 1,244 |
|
| 4,499 |
| 899 |
| — |
| 5,398 |
| 2,104 |
| 899,683 |
| 907,185 |
| 2,104 |
| |||||||||||||||
Other consumer |
|
| 126 |
|
|
| 20 |
|
|
| 141 |
|
|
| 287 |
|
|
| 6 |
|
|
| 16,410 |
|
|
| 16,703 |
|
|
| 6 |
|
|
| 85 |
|
| 0 |
|
| 1 |
|
| 86 |
|
| 2 |
|
| 15,118 |
|
| 15,206 |
|
| 2 |
| |||||||
Total loans, gross |
| $ | 4,462 |
|
| $ | 623 |
|
| $ | 141 |
|
| $ | 5,226 |
|
| $ | 10,762 |
|
| $ | 3,516,886 |
|
| $ | 3,532,874 |
|
| $ | 8,831 |
|
| $ | 16,943 |
| $ | 1,003 |
| $ | 1 |
| $ | 17,947 |
| $ | 6,675 |
| $ | 3,585,169 |
| $ | 3,609,791 |
| $ | 5,597 |
| |||||||
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||
December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
Commercial business |
| $ | 361 |
|
| $ | — |
|
| $ | — |
|
| $ | 361 |
|
| $ | 1,177 |
|
| $ | 569,684 |
|
| $ | 571,222 |
|
|
|
|
|
| $ | 264 |
| $ | 87 |
| $ | — |
| $ | 351 |
| $ | 1,975 |
| $ | 796,083 |
| $ | 798,409 |
| $ | 1,502 |
| |||||||
Commercial mortgage |
|
| 531 |
|
|
| — |
|
|
| — |
|
|
| 531 |
|
|
| 3,146 |
|
|
| 1,104,638 |
|
|
| 1,108,315 |
|
|
|
|
|
| 822 |
| 26 |
| — |
| 848 |
| 2,906 |
| 1,252,771 |
| 1,256,525 |
| 2,709 |
| |||||||||||||||
Residential real estate loans |
|
| 929 |
|
|
| 114 |
|
|
| — |
|
|
| 1,043 |
|
|
| 2,484 |
|
|
| 557,190 |
|
|
| 560,717 |
|
|
|
|
|
| 984 |
| 60 |
| — |
| 1,044 |
| 2,587 |
| 582,906 |
| 586,537 |
| 2,587 |
| |||||||||||||||
Residential real estate lines |
|
| 231 |
|
|
| 37 |
|
|
| — |
|
|
| 268 |
|
|
| 102 |
|
|
| 100,678 |
|
|
| 101,048 |
|
|
|
|
|
| 40 |
| 15 |
| — |
| 55 |
| 323 |
| 86,330 |
| 86,708 |
| 323 |
| |||||||||||||||
Consumer indirect |
|
| 3,729 |
|
|
| 1,019 |
|
|
| — |
|
|
| 4,748 |
|
|
| 1,725 |
|
|
| 815,706 |
|
|
| 822,179 |
|
|
|
|
|
| 3,966 |
| 1,348 |
| — |
| 5,314 |
| 1,495 |
| 806,007 |
| 812,816 |
| 1,495 |
| |||||||||||||||
Other consumer |
|
| 116 |
|
|
| 8 |
|
|
| 6 |
|
|
| 130 |
|
|
| — |
|
|
| 15,854 |
|
|
| 15,984 |
|
|
|
|
|
|
| 133 |
|
| 18 |
|
| 231 |
|
| 382 |
|
| — |
|
| 16,531 |
|
| 16,913 |
|
| — |
| |||||||
Total loans, gross |
| $ | 5,897 |
|
| $ | 1,178 |
|
| $ | 6 |
|
| $ | 7,081 |
|
| $ | 8,634 |
|
| $ | 3,163,750 |
|
| $ | 3,179,465 |
|
|
|
|
|
| $ | 6,209 |
| $ | 1,554 |
| $ | 231 |
| $ | 7,994 |
| $ | 9,286 |
| $ | 3,540,628 |
| $ | 3,557,908 |
| $ | 8,616 |
|
The Company had $11.4 million of PPP loans 30-59 days past due (included in Commercial business above) as of September 30, 2021. Repayment of PPP loans is 100% secured by guarantees from the SBA.
There were 0 loans past due greater than 90 days and still accruing interest as of September 30, 20202021 and December 31, 2019.2020. There were $141$1 thousand and $6$231 thousand in consumer overdrafts which were past due greater than 90 days as of September 30, 20202021 and December 31, 2019,2020, respectively. Consumer overdrafts are overdrawn deposit accounts which have been reclassified as loans but by their terms do not accrue interest.
The Company recognized 0 interest income on nonaccrual loans during the nine months ended September 30, 20202021 and 2019.2020.
Troubled Debt Restructurings
A modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. Commercial loans modified in a TDR may involve temporary interest-only payments, term extensions, reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, collateral concessions, forgiveness of principal, forbearance agreements, or substituting or adding a new borrower or guarantor.
There were 0 loans modified as a TDR during the nine months ended September 30, 20202021 and 2019. During the third quarter of 2020, the Company discovered that the previously reported 2020 TDR was reported in error. This correction had no impact to any other section within our consolidated financial statements and the Company does not consider this correction to be material to any previously issued consolidated financial statement.2020. There were 0 loans modified as a TDR within the previous 12 months that defaulted during the nine months ended September 30, 20202021 and 2019.2020. For purposes of this disclosure, a loan modified as a TDR is considered to have defaulted when the borrower becomes 90 days past due.
19
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(6.)LOANS (Continued)
Collateral Dependent Loans
Management has determined that specific commercial loans on nonaccrual status, and all loans that have had their terms restructured in a troubled debt restructuring and other loans deemed appropriate by management where repayment is expected to be provided substantially through the operation or sale of the collateral to be collateral dependent loans. Collateral dependent loans at September 30, 2021 and December 31, 2020 included certain criticized COVID-19 bridge loans not otherwise classified as nonaccrual. The following table presents the amortized cost basis of collateral dependent loans by collateral type as of September 30, 2021 and December 31, 2020 (in thousands):
|
| Collateral type |
|
|
|
|
|
|
| |||||||
|
| Business assets |
|
| Real property |
|
| Total |
|
| Specific Reserve |
| ||||
September 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Commercial business |
| $ | 596 |
|
| $ | 1,062 |
|
| $ | 1,658 |
|
| $ | 1,370 |
|
Commercial mortgage |
|
| — |
|
|
| 64,216 |
|
|
| 64,216 |
|
|
| 9,950 |
|
Total |
| $ | 596 |
|
| $ | 65,278 |
|
| $ | 65,874 |
|
| $ | 11,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Commercial business |
| $ | 2,379 |
|
| $ | — |
|
| $ | 2,379 |
|
| $ | 1,383 |
|
Commercial mortgage |
|
| — |
|
|
| 36,625 |
|
|
| 36,625 |
|
|
| 8,187 |
|
Total |
| $ | 2,379 |
|
| $ | 36,625 |
|
| $ | 39,004 |
|
| $ | 9,570 |
|
|
| Collateral type |
|
|
|
|
| |||||
|
| Business assets |
|
| Real property |
|
| Total |
| |||
September 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business |
| $ | 4,287 |
|
| $ | 77 |
|
| $ | 4,364 |
|
Commercial mortgage |
|
| — |
|
|
| 14,465 |
|
|
| 14,465 |
|
Total |
| $ | 4,287 |
|
| $ | 14,542 |
|
| $ | 18,829 |
|
- 20 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
|
|
Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors such as the fair value of collateral. The Company analyzes commercial business and commercial mortgage loans individually by classifying the loans as to credit risk. Risk ratings are updated any time the situation warrants. The Company uses the following definitions for risk ratings:
Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.
Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loans that do not meet the criteria above that are analyzed individually as part of the process described above are considered “uncriticized” or pass-rated loans and are included in groups of homogeneous loans with similar risk and loss characteristics.
20
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(6.)LOANS (Continued)
The following table setstables set forth the Company’s commercial loan portfolio, categorized by internally assigned asset classification, as of the dates indicated (in thousands):
|
| Term Loans Amortized Cost Basis by Origination Year |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| Prior |
|
| Revolving Loans Amortized Cost Basis |
|
| Revolving Loans Converted to Term |
|
| Total |
|
| Term Loans Amortized Cost Basis by Origination Year |
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
September 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
|
| 2021 |
|
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| Prior |
| Revolving |
| Revolving |
| Total |
| ||||||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial Business |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Uncriticized |
| $ | 356,882 |
|
| $ | 111,373 |
|
| $ | 90,038 |
|
| $ | 32,169 |
|
| $ | 12,489 |
|
| $ | 19,063 |
|
| $ | 183,654 |
|
| $ | 0 |
|
| $ | 805,668 |
|
| $ | 111,558 |
| $ | 109,269 |
|
| $ | 78,305 |
|
| $ | 49,811 |
|
| $ | 16,289 |
|
| $ | 13,906 |
|
| $ | 296,861 |
|
| $ | 0 |
|
| $ | 675,999 |
| |
Special mention |
|
| 709 |
|
|
| 108 |
|
|
| 3 |
|
|
| 802 |
|
|
| 40 |
|
|
| 3 |
|
|
| 2,088 |
|
|
| 0 |
|
|
| 3,753 |
|
| 164 |
| 41 |
|
|
| 153 |
|
|
| 23 |
|
|
| 360 |
|
|
| 1,034 |
|
|
| 1,745 |
|
|
| 0 |
|
|
| 3,520 |
| |||
Substandard |
|
| 223 |
|
|
| 486 |
|
|
| 1,321 |
|
|
| 757 |
|
|
| 239 |
|
|
| 929 |
|
|
| 4,759 |
|
|
| 0 |
|
|
| 8,714 |
|
| 0 |
| 215 |
|
|
| 160 |
|
|
| 722 |
|
|
| 696 |
|
|
| 283 |
|
|
| 4,596 |
|
|
| 0 |
|
|
| 6,672 |
| |||
Doubtful |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
| |
Total |
| $ | 357,814 |
|
| $ | 111,967 |
|
| $ | 91,362 |
|
| $ | 33,728 |
|
| $ | 12,768 |
|
| $ | 19,995 |
|
| $ | 190,501 |
|
| $ | 0 |
|
| $ | 818,135 |
|
| $ | 111,722 |
| $ | 109,525 |
|
| $ | 78,618 |
|
| $ | 50,556 |
|
| $ | 17,345 |
|
| $ | 15,223 |
|
| $ | 303,202 |
|
| $ | 0 |
|
| $ | 686,191 |
| |
Commercial Mortgage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Uncriticized |
| $ | 213,341 |
|
| $ | 278,617 |
|
| $ | 186,224 |
|
| $ | 189,627 |
|
| $ | 96,571 |
|
| $ | 199,397 |
|
| $ | 430 |
|
| $ | 0 |
|
| $ | 1,164,207 |
|
| $ | 208,019 |
| $ | 343,976 |
|
| $ | 181,132 |
|
| $ | 143,005 |
|
| $ | 142,828 |
|
| $ | 172,277 |
|
| $ | 3,736 |
|
| $ | 0 |
|
| $ | 1,194,973 |
| |
Special mention |
|
| 0 |
|
|
| 2,091 |
|
|
| 17,133 |
|
|
| 454 |
|
|
| 329 |
|
|
| 1,449 |
|
|
| 0 |
|
|
| 0 |
|
|
| 21,456 |
|
| 11,742 |
| 3,041 |
|
|
| 49,691 |
|
|
| 9,622 |
|
|
| 13,624 |
|
|
| 39,755 |
|
|
| 0 |
|
|
| 0 |
|
|
| 127,475 |
| |||
Substandard |
|
| 189 |
|
|
| 2,448 |
|
|
| 1,910 |
|
|
| 1,615 |
|
|
| 3 |
|
|
| 10,019 |
|
|
| 199 |
|
|
| 0 |
|
|
| 16,383 |
|
| 1,001 |
| 389 |
|
|
| 2,938 |
|
|
| 11,610 |
|
|
| 300 |
|
|
| 9,864 |
|
|
| 0 |
|
|
| 0 |
|
|
| 26,102 |
| |||
Doubtful |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
| |
Total |
| $ | 213,530 |
|
| $ | 283,156 |
|
| $ | 205,267 |
|
| $ | 191,696 |
|
| $ | 96,903 |
|
| $ | 210,865 |
|
| $ | 629 |
|
| $ | 0 |
|
| $ | 1,202,046 |
|
| $ | 220,762 |
| $ | 347,406 |
|
| $ | 233,761 |
|
| $ | 164,237 |
|
| $ | 156,752 |
|
| $ | 221,896 |
|
| $ | 3,736 |
|
| $ | 0 |
|
| $ | 1,348,550 |
|
|
| Term Loans Amortized Cost Basis by Origination Year |
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| Prior |
|
| Revolving |
|
| Revolving |
|
| Total |
| |||||||||
December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Commercial Business |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Uncriticized |
| $ | 350,992 |
|
| $ | 112,469 |
|
| $ | 82,029 |
|
| $ | 31,990 |
|
| $ | 8,195 |
|
| $ | 16,600 |
|
| $ | 179,770 |
|
| $ | 0 |
|
| $ | 782,045 |
|
Special mention |
|
| 0 |
|
|
| 360 |
|
|
| 21 |
|
|
| 709 |
|
|
| 41 |
|
|
| 1,025 |
|
|
| 2,995 |
|
|
| 0 |
|
|
| 5,151 |
|
Substandard |
|
| 193 |
|
|
| 211 |
|
|
| 1,183 |
|
|
| 464 |
|
|
| 202 |
|
|
| 309 |
|
|
| 4,390 |
|
|
| 0 |
|
|
| 6,952 |
|
Doubtful |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Total |
| $ | 351,185 |
|
| $ | 113,040 |
|
| $ | 83,233 |
|
| $ | 33,163 |
|
| $ | 8,438 |
|
| $ | 17,934 |
|
| $ | 187,155 |
|
| $ | 0 |
|
| $ | 794,148 |
|
Commercial Mortgage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Uncriticized |
| $ | 310,364 |
|
| $ | 227,406 |
|
| $ | 163,839 |
|
| $ | 161,771 |
|
| $ | 74,915 |
|
| $ | 154,399 |
|
| $ | 731 |
|
| $ | 0 |
|
| $ | 1,093,425 |
|
Special mention |
|
| 14,299 |
|
|
| 42,305 |
|
|
| 19,505 |
|
|
| 27,530 |
|
|
| 12,256 |
|
|
| 28,744 |
|
|
| 43 |
|
|
| 0 |
|
|
| 144,682 |
|
Substandard |
|
| 189 |
|
|
| 2,521 |
|
|
| 1,890 |
|
|
| 1,648 |
|
|
| 3 |
|
|
| 9,344 |
|
|
| 199 |
|
|
| 0 |
|
|
| 15,794 |
|
Doubtful |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Total |
| $ | 324,852 |
|
| $ | 272,232 |
|
| $ | 185,234 |
|
| $ | 190,949 |
|
| $ | 87,174 |
|
| $ | 192,487 |
|
| $ | 973 |
|
| $ | 0 |
|
| $ | 1,253,901 |
|
-
21 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(6.)LOANS (Continued)
|
|
The Company utilizes payment status as a means of identifying and reporting problem and potential problem retail loans. The Company considers nonaccrual loans and loans past due greater than 90 days and still accruing interest to be non-performing. The following table setstables set forth the Company’s retail loan portfolio, categorized by performance status, as of the dates indicated (in thousands):
|
| Term Loans Amortized Cost Basis by Origination Year |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| Prior |
|
| Revolving Loans Amortized Cost Basis |
|
| Revolving Loans Converted to Term |
|
| Total |
|
| Term Loans Amortized Cost Basis by Origination Year |
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
September 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
|
| 2021 |
|
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| Prior |
| Revolving |
| Revolving |
| Total |
| ||||||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential Real Estate Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Performing |
| $ | 106,889 |
|
| $ | 100,498 |
|
| $ | 93,116 |
|
| $ | 73,143 |
|
| $ | 71,269 |
|
| $ | 148,682 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 593,597 |
|
| $ | 72,522 |
| $ | 132,594 |
|
| $ | 89,736 |
|
| $ | 71,263 |
|
| $ | 54,733 |
|
| $ | 160,786 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 581,634 |
| |
Nonperforming |
|
| 0 |
|
|
| 200 |
|
|
| 1,209 |
|
|
| 790 |
|
|
| 312 |
|
|
| 794 |
|
|
| 0 |
|
|
| 0 |
|
|
| 3,305 |
|
|
| 0 |
|
| 305 |
|
|
| 240 |
|
|
| 600 |
|
|
| 688 |
|
|
| 624 |
|
|
| 0 |
|
|
| 0 |
|
|
| 2,457 |
| |
Total |
| $ | 106,889 |
|
| $ | 100,698 |
|
| $ | 94,325 |
|
| $ | 73,933 |
|
| $ | 71,581 |
|
| $ | 149,476 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 596,902 |
|
| $ | 72,522 |
| $ | 132,899 |
|
| $ | 89,976 |
|
| $ | 71,863 |
|
| $ | 55,421 |
|
| $ | 161,410 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 584,091 |
| |
Residential Real Estate Lines |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Performing |
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 83,746 |
|
| $ | 10,064 |
|
| $ | 93,810 |
|
| $ | 0 |
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 70,898 |
|
| $ | 8,106 |
|
| $ | 79,004 |
| |
Nonperforming |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 46 |
|
|
| 161 |
|
|
| 207 |
|
|
| 0 |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 61 |
|
|
| 131 |
|
|
| 192 |
| |
Total |
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 83,792 |
|
| $ | 10,225 |
|
| $ | 94,017 |
|
| $ | 0 |
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 70,959 |
|
| $ | 8,237 |
|
| $ | 79,196 |
| |
Consumer Indirect |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Performing |
| $ | 223,417 |
|
| $ | 220,615 |
|
| $ | 186,913 |
|
| $ | 128,567 |
|
| $ | 57,873 |
|
| $ | 21,950 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 839,335 |
|
| $ | 370,536 |
| $ | 230,468 |
|
| $ | 139,884 |
|
| $ | 106,545 |
|
| $ | 63,216 |
|
| $ | 27,784 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 938,433 |
| |
Nonperforming |
|
| 97 |
|
|
| 241 |
|
|
| 475 |
|
|
| 273 |
|
|
| 165 |
|
|
| (7 | ) |
|
| 0 |
|
|
| 0 |
|
|
| 1,244 |
|
|
| 371 |
|
| 406 |
|
|
| 656 |
|
|
| 334 |
|
|
| 298 |
|
|
| 39 |
|
|
| 0 |
|
|
| 0 |
|
|
| 2,104 |
| |
Total |
| $ | 223,514 |
|
| $ | 220,856 |
|
| $ | 187,388 |
|
| $ | 128,840 |
|
| $ | 58,038 |
|
| $ | 21,943 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 840,579 |
|
| $ | 370,907 |
| $ | 230,874 |
|
| $ | 140,540 |
|
| $ | 106,879 |
|
| $ | 63,514 |
|
| $ | 27,823 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 940,537 |
| |
Other Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Performing |
| $ | 5,950 |
|
| $ | 3,684 |
|
| $ | 2,073 |
|
| $ | 1,083 |
|
| $ | 466 |
|
| $ | 688 |
|
| $ | 2,910 |
|
| $ | 0 |
|
| $ | 16,854 |
|
| $ | 4,091 |
| $ | 4,273 |
|
| $ | 2,010 |
|
| $ | 964 |
|
| $ | 376 |
|
| $ | 812 |
|
| $ | 2,806 |
|
| $ | 0 |
|
| $ | 15,332 |
| |
Nonperforming |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 5 |
|
|
| 0 |
|
|
| 0 |
|
|
| 1 |
|
|
| 0 |
|
|
| 6 |
|
|
| 0 |
|
| 0 |
|
|
| 2 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 2 |
| |
Total |
| $ | 5,950 |
|
| $ | 3,684 |
|
| $ | 2,073 |
|
| $ | 1,088 |
|
| $ | 466 |
|
| $ | 688 |
|
| $ | 2,911 |
|
| $ | 0 |
|
| $ | 16,860 |
|
| $ | 4,091 |
| $ | 4,273 |
|
| $ | 2,012 |
|
| $ | 964 |
|
| $ | 376 |
|
| $ | 812 |
|
| $ | 2,806 |
|
| $ | 0 |
|
| $ | 15,334 |
|
|
| Term Loans Amortized Cost Basis by Origination Year |
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| Prior |
|
| Revolving |
|
| Revolving |
|
| Total |
| |||||||||
December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Residential Real Estate Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Performing |
| $ | 137,926 |
|
| $ | 103,923 |
|
| $ | 87,153 |
|
| $ | 66,446 |
|
| $ | 67,473 |
|
| $ | 134,292 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 597,213 |
|
Nonperforming |
|
| 0 |
|
|
| 199 |
|
|
| 765 |
|
|
| 665 |
|
|
| 233 |
|
|
| 725 |
|
|
| 0 |
|
|
| 0 |
|
|
| 2,587 |
|
Total |
| $ | 137,926 |
|
| $ | 104,122 |
|
| $ | 87,918 |
|
| $ | 67,111 |
|
| $ | 67,706 |
|
| $ | 135,017 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 599,800 |
|
Residential Real Estate Lines |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Performing |
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 79,257 |
|
| $ | 10,225 |
|
| $ | 89,482 |
|
Nonperforming |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 65 |
|
|
| 258 |
|
|
| 323 |
|
Total |
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 79,322 |
|
| $ | 10,483 |
|
| $ | 89,805 |
|
Consumer Indirect |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Performing |
| $ | 295,216 |
|
| $ | 202,187 |
|
| $ | 166,773 |
|
| $ | 111,008 |
|
| $ | 47,793 |
|
| $ | 15,949 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 838,926 |
|
Nonperforming |
|
| 70 |
|
|
| 652 |
|
|
| 319 |
|
|
| 287 |
|
|
| 132 |
|
|
| 35 |
|
|
| 0 |
|
|
| 0 |
|
|
| 1,495 |
|
Total |
| $ | 295,286 |
|
| $ | 202,839 |
|
| $ | 167,092 |
|
| $ | 111,295 |
|
| $ | 47,925 |
|
| $ | 15,984 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 840,421 |
|
Other Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Performing |
| $ | 6,774 |
|
| $ | 3,177 |
|
| $ | 1,765 |
|
| $ | 907 |
|
| $ | 369 |
|
| $ | 508 |
|
| $ | 3,563 |
|
| $ | 0 |
|
| $ | 17,063 |
|
Nonperforming |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Total |
| $ | 6,774 |
|
| $ | 3,177 |
|
| $ | 1,765 |
|
| $ | 907 |
|
| $ | 369 |
|
| $ | 508 |
|
| $ | 3,563 |
|
| $ | 0 |
|
| $ | 17,063 |
|
22
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(6.)LOANS (Continued)
Allowance for Credit Losses - Loans
On January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amends guidance on reporting credit losses for financial assets held at amortized cost basis and available for sale debt securities. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. The Company adopted ASU 2016-13 using the modified retrospective approach. Results for the periods beginning after January 1, 2020 are presented under Accounting Standards Codification (“ASC”) 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net reduction of retained earnings of $8.7 million upon adoption. The transition adjustment includes an increase in credit-related reserves of $9.6 million, $14 thousand, and $2.1 million for loans, held to maturity investment securities and unfunded commitments, respectively, net of the corresponding increase in deferred tax assets of $3.0 million.
The following table sets forth the changes in the allowance for credit losses - loans for the three- and nine-month periods ended September 30, 2020as of the dates indicated (in thousands):
|
| Commercial Business |
|
| Commercial Mortgage |
|
| Residential Real Estate Loans |
|
| Residential Real Estate Lines |
|
| Consumer Indirect |
|
| Other Consumer |
|
| Total |
| |||||||||||||||||||||||||||||||||||
Three months ended September 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
|
| Commercial |
|
| Commercial |
|
| Residential |
|
| Residential |
|
| Consumer |
|
| Other |
|
| Total |
| |||||||||||||||||||||||||||||||||||
Three months ended September 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Beginning balance |
| $ | 12,399 |
|
| $ | 15,666 |
|
| $ | 5,769 |
|
| $ | 939 |
|
| $ | 11,222 |
|
| $ | 321 |
|
| $ | 46,316 |
|
| $ | 11,005 |
| $ | 21,662 |
| $ | 2,299 |
| $ | 395 |
| $ | 10,748 |
| $ | 256 |
| $ | 46,365 |
| ||||||
Charge-offs |
|
| (15 | ) |
|
| (640 | ) |
|
| 0 |
|
|
| 0 |
|
|
| (1,388 | ) |
|
| (160 | ) |
|
| (2,203 | ) |
| (218 | ) |
| 0 |
| (36 | ) |
| (60 | ) |
| (1,395 | ) |
| (250 | ) |
| (1,959 | ) | ||||||||
Recoveries |
|
| 103 |
|
|
| 37 |
|
|
| 7 |
|
|
| 0 |
|
|
| 1,503 |
|
|
| 65 |
|
|
| 1,715 |
|
| 168 |
| 0 |
| 15 |
| 0 |
| 1,130 |
| 59 |
| 1,372 |
| |||||||||||||
Provision (credit) |
|
| 507 |
|
|
| 1,417 |
|
|
| (1,224 | ) |
|
| (121 | ) |
|
| 2,833 |
|
|
| 155 |
|
|
| 3,567 |
|
|
| 889 |
|
| (2,210 | ) |
|
| (302 | ) |
|
| 10 |
|
| 1,096 |
|
| 183 |
|
| (334 | ) | ||||
Ending balance |
| $ | 12,994 |
|
| $ | 16,480 |
|
| $ | 4,552 |
|
| $ | 818 |
|
| $ | 14,170 |
|
| $ | 381 |
|
| $ | 49,395 |
|
| $ | 11,844 |
| $ | 19,452 |
| $ | 1,976 |
| $ | 345 |
| $ | 11,579 |
| $ | 248 |
| $ | 45,444 |
| ||||||
Nine months ended September 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
Beginning balance, prior to adoption of ASC 326 |
| $ | 11,358 |
|
| $ | 5,681 |
|
| $ | 1,059 |
|
| $ | 118 |
|
| $ | 11,852 |
|
| $ | 414 |
|
| $ | 30,482 |
| ||||||||||||||||||||||||||||
Impact of adopting ASC 326 |
|
| (246 | ) |
|
| 7,310 |
|
|
| 3,290 |
|
|
| 607 |
|
|
| (1,234 | ) |
|
| (133 | ) |
|
| 9,594 |
| ||||||||||||||||||||||||||||
Beginning balance, after adoption of ASC 326 |
|
| 11,112 |
|
|
| 12,991 |
|
|
| 4,349 |
|
|
| 725 |
|
|
| 10,618 |
|
|
| 281 |
|
|
| 40,076 |
| ||||||||||||||||||||||||||||
Nine months ended September 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||
Beginning balance |
| $ | 13,580 |
| $ | 21,763 |
| $ | 3,924 |
| $ | 674 |
| $ | 12,165 |
| $ | 314 |
| $ | 52,420 |
| ||||||||||||||||||||||||||||||||||
Charge-offs |
|
| (8,281 | ) |
|
| (1,712 | ) |
|
| (100 | ) |
|
| 0 |
|
|
| (7,366 | ) |
|
| (499 | ) |
|
| (17,958 | ) |
| (396 | ) |
| (203 | ) |
| (103 | ) |
| (130 | ) |
| (4,965 | ) |
| (755 | ) |
| (6,552 | ) | |||||||
Recoveries |
|
| 1,644 |
|
|
| 37 |
|
|
| 25 |
|
|
| 3 |
|
|
| 4,550 |
|
|
| 282 |
|
|
| 6,541 |
|
| 785 |
| 7 |
| 79 |
| 0 |
| 4,383 |
| 218 |
| 5,472 |
| |||||||||||||
Provision |
|
| 8,519 |
|
|
| 5,164 |
|
|
| 278 |
|
|
| 90 |
|
|
| 6,368 |
|
|
| 317 |
|
|
| 20,736 |
| ||||||||||||||||||||||||||||
Provision (credit) |
|
| (2,125 | ) |
|
| (2,115 | ) |
|
| (1,924 | ) |
|
| (199 | ) |
|
| (4 | ) |
|
| 471 |
|
| (5,896 | ) | |||||||||||||||||||||||||||||
Ending balance |
| $ | 12,994 |
|
| $ | 16,480 |
|
| $ | 4,552 |
|
| $ | 818 |
|
| $ | 14,170 |
|
| $ | 381 |
|
| $ | 49,395 |
|
| $ | 11,844 |
| $ | 19,452 |
| $ | 1,976 |
| $ | 345 |
| $ | 11,579 |
| $ | 248 |
| $ | 45,444 |
|
|
| Commercial |
|
| Commercial |
|
| Residential |
|
| Residential |
|
| Consumer |
|
| Other |
|
| Total |
| |||||||
Three months ended September 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Beginning balance |
| $ | 12,399 |
|
| $ | 15,666 |
|
| $ | 5,769 |
|
| $ | 939 |
|
| $ | 11,222 |
|
| $ | 321 |
|
| $ | 46,316 |
|
Charge-offs |
|
| (15 | ) |
|
| (640 | ) |
|
| 0 |
|
|
| 0 |
|
|
| (1,388 | ) |
|
| (160 | ) |
|
| (2,203 | ) |
Recoveries |
|
| 103 |
|
|
| 37 |
|
|
| 7 |
|
|
| 0 |
|
|
| 1,503 |
|
|
| 65 |
|
|
| 1,715 |
|
Provision (credit) |
|
| 507 |
|
|
| 1,417 |
|
|
| (1,224 | ) |
|
| (121 | ) |
|
| 2,833 |
|
|
| 155 |
|
|
| 3,567 |
|
Ending balance |
| $ | 12,994 |
|
| $ | 16,480 |
|
| $ | 4,552 |
|
| $ | 818 |
|
| $ | 14,170 |
|
| $ | 381 |
|
| $ | 49,395 |
|
Nine months ended September 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Beginning balance, prior to adoption of ASC 326 |
| $ | 11,358 |
|
| $ | 5,681 |
|
| $ | 1,059 |
|
| $ | 118 |
|
| $ | 11,852 |
|
| $ | 414 |
|
| $ | 30,482 |
|
Impact of adopting ASC 326 |
|
| (246 | ) |
|
| 7,310 |
|
|
| 3,290 |
|
|
| 607 |
|
|
| (1,234 | ) |
|
| (133 | ) |
|
| 9,594 |
|
Beginning balance, after adoption of ASC 326 |
|
| 11,112 |
|
|
| 12,991 |
|
|
| 4,349 |
|
|
| 725 |
|
|
| 10,618 |
|
|
| 281 |
|
|
| 40,076 |
|
Charge-offs |
|
| (8,281 | ) |
|
| (1,712 | ) |
|
| (100 | ) |
|
| 0 |
|
|
| (7,366 | ) |
|
| (499 | ) |
|
| (17,958 | ) |
Recoveries |
|
| 1,644 |
|
|
| 37 |
|
|
| 25 |
|
|
| 3 |
|
|
| 4,550 |
|
|
| 282 |
|
|
| 6,541 |
|
Provision |
|
| 8,519 |
|
|
| 5,164 |
|
|
| 278 |
|
|
| 90 |
|
|
| 6,368 |
|
|
| 317 |
|
|
| 20,736 |
|
Ending balance |
| $ | 12,994 |
|
| $ | 16,480 |
|
| $ | 4,552 |
|
| $ | 818 |
|
| $ | 14,170 |
|
| $ | 381 |
|
| $ | 49,395 |
|
- 22 -
23
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(6.)LOANS (Continued)
|
|
The following table sets forth the changes in the allowance for credit losses - loans for the three- and nine-month periods ended September 30, 2019 (in thousands):
|
| Commercial Business |
|
| Commercial Mortgage |
|
| Residential Real Estate Loans |
|
| Residential Real Estate Lines |
|
| Consumer Indirect |
|
| Other Consumer |
|
| Total |
| |||||||
Three months ended September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
| $ | 11,717 |
|
| $ | 8,790 |
|
| $ | 1,217 |
|
| $ | 145 |
|
| $ | 12,157 |
|
| $ | 408 |
|
| $ | 34,434 |
|
Charge-offs |
|
| (112 | ) |
|
| (2,994 | ) |
|
| (54 | ) |
|
| (8 | ) |
|
| (2,420 | ) |
|
| (315 | ) |
|
| (5,903 | ) |
Recoveries |
|
| 102 |
|
|
| 0 |
|
|
| 14 |
|
|
| 1 |
|
|
| 1,103 |
|
|
| 73 |
|
|
| 1,293 |
|
Provision |
|
| 448 |
|
|
| 126 |
|
|
| 6 |
|
|
| 8 |
|
|
| 1,002 |
|
|
| 254 |
|
|
| 1,844 |
|
Ending balance |
| $ | 12,155 |
|
| $ | 5,922 |
|
| $ | 1,183 |
|
| $ | 146 |
|
| $ | 11,842 |
|
| $ | 420 |
|
| $ | 31,668 |
|
Nine months ended September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance |
| $ | 14,312 |
|
| $ | 5,219 |
|
| $ | 1,112 |
|
| $ | 210 |
|
| $ | 12,572 |
|
| $ | 489 |
|
| $ | 33,914 |
|
Charge-offs |
|
| (380 | ) |
|
| (2,997 | ) |
|
| (172 | ) |
|
| (10 | ) |
|
| (8,102 | ) |
|
| (867 | ) |
|
| (12,528 | ) |
Recoveries |
|
| 333 |
|
|
| 17 |
|
|
| 31 |
|
|
| 6 |
|
|
| 4,205 |
|
|
| 299 |
|
|
| 4,891 |
|
Provision (credit) |
|
| (2,110 | ) |
|
| 3,683 |
|
|
| 212 |
|
|
| (60 | ) |
|
| 3,167 |
|
|
| 499 |
|
|
| 5,391 |
|
Ending balance |
| $ | 12,155 |
|
| $ | 5,922 |
|
| $ | 1,183 |
|
| $ | 146 |
|
| $ | 11,842 |
|
| $ | 420 |
|
| $ | 31,668 |
|
Loans and the related allowance for credit losses - loans are presented below as of the dates indicated (in thousands):
|
| Commercial Business |
|
| Commercial Mortgage |
|
| Residential Real Estate Loans |
|
| Residential Real Estate Lines |
|
| Consumer Indirect |
|
| Other Consumer |
|
| Total |
| |||||||
September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
| $ | 573,610 |
|
| $ | 1,037,304 |
|
| $ | 547,839 |
|
| $ | 104,545 |
|
| $ | 834,968 |
|
| $ | 16,467 |
|
| $ | 3,114,733 |
|
Evaluated for impairment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually |
| $ | 3,010 |
|
| $ | 3,290 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 6,300 |
|
Collectively |
| $ | 570,600 |
|
| $ | 1,034,014 |
|
| $ | 547,839 |
|
| $ | 104,545 |
|
| $ | 834,968 |
|
| $ | 16,467 |
|
| $ | 3,108,433 |
|
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
| $ | 12,155 |
|
| $ | 5,922 |
|
| $ | 1,183 |
|
| $ | 146 |
|
| $ | 11,842 |
|
| $ | 420 |
|
| $ | 31,668 |
|
Evaluated for impairment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually |
| $ | 1,563 |
|
| $ | 1 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 1,564 |
|
Collectively |
| $ | 10,592 |
|
| $ | 5,921 |
|
| $ | 1,183 |
|
| $ | 146 |
|
| $ | 11,842 |
|
| $ | 420 |
|
| $ | 30,104 |
|
Risk Characteristics
Commercial business loans primarily consist of loans to small to mid-sized businesses in our market area in a diverse range of industries. These loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. Further, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value. The credit risk related to commercial loans is largely influenced by general economic conditions, including the impact of the COVID-19 pandemic on small to mid-sized business in our market area, and the resulting impact on a borrower’s operations or on the value of underlying collateral, if any.
Commercial mortgage loans generally have larger balances and involve a greater degree of risk than residential mortgage loans, potentially resulting in higher potential losses on an individual customer basis. Loan repayment is often dependent on the successful operation and management of the properties, as well as on the collateral securing the loan. Economic events, including the impact of the COVID-19 pandemic on the ability of the tenants to pay rent at these properties, or conditions in the real estate market could have an adverse impact on the cash flows generated by properties securing the Company’s commercial real estate loans and on the value of such properties.
- 23 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
|
|
Residential real estate loans (comprised of conventional mortgages and home equity loans) and residential real estate lines (comprised of home equity lines) are generally made based on the borrower’s ability to make repayment from his or her employment and other income but are secured by real property whose value tends to be more easily ascertainable. Credit risk for these types of loans is generally influenced by general economic conditions, including the impact of the COVID-19 pandemic on the employment income of these borrowers, the characteristics of individual borrowers, and the nature of the loan collateral.
Consumer indirect and other consumer loans may entail greater credit risk than residential mortgage loans and home equities, particularly in the case of other consumer loans which are unsecured or, in the case of indirect consumer loans, secured by depreciable assets, such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances such as job loss, illness or personal bankruptcy, including the heightened risk that such circumstances may arise as a result of the COVID-19 pandemic. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.
(7.)LEASES
|
|
ASC 842, Leases (“ASC 842”), establishes a right of use model that requires a lessee to record a right of use asset and a lease liability for all leases with terms longer than 12 months. The Company is obligated under a number of non-cancellable operating lease agreements for land, buildings and equipment with terms, including renewal options reasonably certain to be exercised, extending through 2047. 2061. NaN building lease iswas subleased in 2021 for terms extendingthat extended through June 30, 2021.
The following table represents the consolidated statements of financial condition classification of the Company’s right of use assets and lease liabilities:
|
|
|
| September 30, |
|
| December 31, |
|
| September 30, |
|
| December 31, |
| ||||||
|
| Balance Sheet Location |
| 2020 |
|
| 2019 |
|
| Balance Sheet Location |
| 2021 |
|
| 2020 |
| ||||
Operating Lease Right of Use Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Gross carrying amount |
| Other assets |
| $ | 23,690 |
|
| $ | 23,224 |
|
| Other assets |
| $ | 26,990 |
|
| $ | 23,697 |
|
Accumulated amortization |
| Other assets |
|
| (3,266 | ) |
|
| (1,861 | ) |
| Other assets |
|
| (4,536 | ) |
|
| (3,741 | ) |
Net book value |
|
|
| $ | 20,424 |
|
| $ | 21,363 |
|
|
|
| $ | 22,454 |
|
| $ | 19,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Operating Lease Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Right of use lease obligations |
| Other liabilities |
| $ | 21,947 |
|
| $ | 22,800 |
|
| Other liabilities |
| $ | 24,212 |
|
| $ | 21,507 |
|
The weighted average remaining lease term for operating leases was 21.524.0 years at September 30, 20202021 and the weighted-average discount rate used in the measurement of operating lease liabilities was 3.80%3.70%. The Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term for the discount rate.
24
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
The following table represents lease costs and other lease information:
|
| Three months ended |
|
| Nine months ended |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Lease costs: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Operating lease costs |
| $ | 687 |
|
| $ | 663 |
|
| $ | 2,162 |
|
| $ | 2,018 |
|
Variable lease costs (1) |
|
| 137 |
|
|
| 111 |
|
|
| 325 |
|
|
| 313 |
|
Sublease income |
|
| 0 |
|
|
| (12 | ) |
|
| (23 | ) |
|
| (35 | ) |
Net lease costs |
| $ | 824 |
|
| $ | 762 |
|
| $ | 2,464 |
|
| $ | 2,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other information: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Operating cash flows from operating leases |
|
|
|
|
|
|
| $ | 2,008 |
|
| $ | 1,947 |
| ||
Right of use assets obtained in exchange for new operating |
|
|
|
|
|
|
| $ | 4,178 |
|
| $ | 470 |
|
|
| Three months ended September 30, |
|
| Nine months ended September 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Lease costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease costs |
| $ | 663 |
|
| $ | 706 |
|
| $ | 2,018 |
|
| $ | 2,096 |
|
Variable lease costs (1) |
|
| 111 |
|
|
| 112 |
|
|
| 313 |
|
|
| 321 |
|
Sublease income |
|
| (12 | ) |
|
| (12 | ) |
|
| (35 | ) |
|
| (35 | ) |
Net lease costs |
| $ | 762 |
|
| $ | 806 |
|
| $ | 2,296 |
|
| $ | 2,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases |
|
|
|
|
|
|
|
|
| $ | 1,947 |
|
| $ | 1,332 |
|
Initial recognition of operating lease right of use assets |
|
|
|
|
|
|
|
|
| $ | — |
|
| $ | 23,275 |
|
Initial recognition of operating lease liabilities |
|
|
|
|
|
|
|
|
| $ | — |
|
| $ | 23,985 |
|
Right of use assets obtained in exchange for new operating lease liabilities |
|
|
|
|
|
|
|
|
| $ | 470 |
|
| $ | 346 |
|
|
|
- 24 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
|
|
Future minimum payments under non-cancellable operating leases with initial or remaining terms of one year or more, are as follows at September 30, 20202021 (in thousands):
Twelve months ended September 30, |
|
| |
2022 | $ | 2,380 |
|
2023 |
| 2,048 |
|
2024 |
| 1,508 |
|
2025 |
| 1,416 |
|
2026 |
| 1,338 |
|
Thereafter |
| 30,217 |
|
Total future minimum operating lease payments |
| 38,907 |
|
Amounts representing interest |
| (14,695 | ) |
Present value of net future minimum operating lease payments | $ | 24,212 |
|
25
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Twelve months ended September 30, |
|
|
|
2021 | $ | 2,570 |
|
2022 |
| 2,039 |
|
2023 |
| 1,731 |
|
2024 |
| 1,332 |
|
2025 |
| 1,208 |
|
Thereafter |
| 25,085 |
|
Total future minimum operating lease payments |
| 33,965 |
|
Amounts representing interest |
| (12,018 | ) |
Present value of net future minimum operating lease payments | $ | 21,947 |
|
(8.)GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
|
|
Goodwill
The carrying amount of goodwill totaled $66.1$67.1 million and $66.1 million as of both September 30, 20202021 and December 31, 2019.2020. The Company performs a goodwill impairment test on an annual basis as of October 1st or more frequently if events and circumstances warrant.
|
| Banking |
|
| All Other (1) |
|
| Total |
| |||
Balance, December 31, 2020 |
| $ | 48,536 |
|
| $ | 17,526 |
|
| $ | 66,062 |
|
Acquisitions |
|
| — |
|
|
| 1,009 |
|
|
| 1,009 |
|
Balance, September 30, 2021 |
| $ | 48,536 |
|
| $ | 18,535 |
|
| $ | 67,071 |
|
|
| Banking |
|
| Non-Banking |
|
| Total |
| |||
Balance, December 31, 2019 |
| $ | 48,536 |
|
| $ | 17,526 |
|
| $ | 66,062 |
|
No activity during the period |
|
| — |
|
|
| — |
|
|
| — |
|
Balance, September 30, 2020 |
| $ | 48,536 |
|
| $ | 17,526 |
|
| $ | 66,062 |
|
Goodwill is not amortized but, instead, is subject to impairment tests on at least an annual basis, and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Based on the volatility in the capital markets in 2020 and overall economic conditions as a result of the COVID-19 pandemic accompanied by a decline in the Company’s stock price, a quantitative assessment was performed for the Banking segment in the third quarter of 2020. Based on this quantitative assessment, the Company concluded that goodwill was 0t impaired for the Banking segment. Based on its qualitative assessment for each of(1) All Other includes the SDN, Courier Capital and HNP Capital reporting units
Goodwill and other intangible assets added during the Company concluded that itperiod relates to the acquisition of assets of Landmark, which was more likely than not that goodwillcompleted on February 1, 2021 and the acquisition of assets of North Woods, which was 0t impaired as of September 30, 2020. Therefore, no quantitative assessment was deemed necessary as of September 30, 2020.completed on August 2, 2021. See Note 2 – Business Combinations for additional information.
Other Intangible Assets
The Company has other intangible assets that are amortized, consisting of core deposit intangibles and other intangibles (primarily related to customer relationships). Gross carrying amount, accumulated amortization and net book value, were as follows (in thousands):
|
| September 30, |
|
| December 31, |
| ||
|
| 2020 |
|
| 2019 |
| ||
Other intangibles assets: |
|
|
|
|
|
|
|
|
Gross carrying amount |
| $ | 15,925 |
|
| $ | 15,925 |
|
Accumulated amortization |
|
| (7,925 | ) |
|
| (7,064 | ) |
Net book value |
| $ | 8,000 |
|
| $ | 8,861 |
|
|
| September 30, |
|
| December 31, |
| ||
|
| 2021 |
|
| 2020 |
| ||
Other intangibles assets: |
|
|
|
|
|
| ||
Gross carrying amount |
| $ | 16,587 |
|
| $ | 15,925 |
|
Accumulated amortization |
|
| (8,999 | ) |
|
| (8,198 | ) |
Net book value |
| $ | 7,588 |
|
| $ | 7,727 |
|
Amortization expense for total other intangible assets was $280$264 thousand and $861$801 thousand for the three and nine months ended September 30, 2021, respectively, and $280 thousand and $861 thousand for the three and nine months ended September 30, 2020, respectively, and $309 thousand and $948 thousand for the three and nine months ended September 30, 2019, respectively. As of September 30, 2020,2021, the estimated amortization expense of other intangible assets for the remainder of 20202021 and each of the next five years is as follows (in thousands):
2021 (remainder of year) | $ | 260 |
|
2022 |
| 985 |
|
2023 |
| 910 |
|
2024 |
| 838 |
|
2025 |
| 766 |
|
2026 |
| 694 |
|
2020 (remainder of year) | $ | 273 |
|
2021 |
| 1,014 |
|
2022 |
| 923 |
|
2023 |
| 852 |
|
2024 |
| 783 |
|
2025 |
| 714 |
|
(9.)OTHER ASSETS
A summary of other assets as of the dates indicated are as follows (in thousands):
|
| September 30, |
|
| December 31, |
| ||
|
| 2021 |
|
| 2020 |
| ||
Operating lease right of use assets |
| $ | 22,454 |
|
| $ | 19,956 |
|
Tax credit investments |
|
| 50,075 |
|
|
| 34,370 |
|
Derivative instruments |
|
| 16,139 |
|
|
| 20,120 |
|
Collateral on derivative instruments |
|
| 6,180 |
|
|
| 19,630 |
|
Other |
|
| 71,165 |
|
|
| 62,010 |
|
Total other assets |
| $ | 166,013 |
|
| $ | 156,086 |
|
- 25 -
26
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(10.)DERIVATIVE INSTRUMENT AND HEDGING ACTIVITIES
|
|
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities, and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company uses interest rate caps and interest rate swaps as part of its interest rate risk management strategy. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. During the first nine months of 20202021 and in 2019,2020, such derivatives were used to hedge the variable cash flows associated with short-term borrowings. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The Company is hedging its exposure to the variability in future cash flows for forecasted transactions over a period of approximately 60 months. As of September 30, 2020,2021, the Company had 1 outstanding forward starting interest rate derivative with a notional value of $50.0$50.0 million that was designated as a cash flow hedge of interest rate risk. The derivative becomes effective in April 2022.2022.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income (loss) and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s borrowings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. The Company’s cash flow hedge derivatives did not have any hedge ineffectiveness recognized in earnings during the nine months ended September 30, 2020 and 2019. During the next twelve months, the Company estimates that $283$142 thousand will be reclassified as an increase tointo interest expense.
Interest Rate Swaps
The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. These interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings.
Credit-risk-related Contingent Features
The Company has agreements with certain of its derivative counterparties that contain one or more of the following provisions: (a) if the Company defaults on any of its indebtedness, including a default where repayment of the indebtedness has not been accelerated by the lender, the Company could also be declared in default on its derivative obligations, and (b) if the Company fails to maintain its status as a well-capitalized institution, the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.
27
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(10.)DERIVATIVE INSTRUMENT AND HEDGING ACTIVITIES (Continued)
Mortgage Banking Derivatives
The Company extends rate lock agreements to borrowers related to the origination of residential mortgage loans. To mitigate the interest rate risk inherent in these rate lock agreements when the Company intends to sell the related loan, once originated, as well as closed residential mortgage loans held for sale, the Company enters into forward commitments to sell individual residential mortgages. Rate lock agreements and forward commitments are considered derivatives and are recorded at fair value.
- 26 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
|
|
Fair Values of Derivative Instruments on the Balance Sheet
The table below presents the notional amounts, respective fair values of the Company’s derivative financial instruments, as well as their classification on the balance sheet as of September 30, 20202021 and December 31, 20192020 (in thousands):
|
|
|
|
|
|
|
| Asset derivatives |
|
| Liability derivatives |
| ||||||||||||||||
|
| Gross notional |
|
| Balance |
| Fair value |
|
| Balance |
| Fair value |
| |||||||||||||||
|
| Sept. 30, |
|
| Dec. 31, |
|
| sheet |
| Sept. 30, |
|
| Dec. 31, |
|
| sheet |
| Sept. 30, |
|
| Dec. 31, |
| ||||||
Derivatives designated as hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cash flow hedges |
| $ | 50,000 |
|
| $ | 50,000 |
|
| Other assets |
| $ | 1,112 |
|
| $ | — |
|
| Other liabilities |
| $ | — |
|
| $ | 311 |
|
Total derivatives |
| $ | 50,000 |
|
| $ | 50,000 |
|
|
|
| $ | 1,112 |
|
| $ | — |
|
|
|
| $ | — |
|
| $ | 311 |
|
Derivatives not designated as hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cash flow hedges |
| $ | — |
|
| $ | 100,000 |
|
| Other assets |
| $ | — |
|
| $ | — |
|
| Other liabilities |
| $ | — |
|
| $ | — |
|
Interest rate swaps (1) |
|
| 726,910 |
|
|
| 631,907 |
|
| Other assets |
|
| 14,653 |
|
|
| 19,626 |
|
| Other liabilities |
|
| 14,658 |
|
|
| 19,837 |
|
Credit contracts |
|
| 109,552 |
|
|
| 113,434 |
|
| Other assets |
|
| 0 |
|
|
| 23 |
|
| Other liabilities |
|
| 1 |
|
|
| 86 |
|
Mortgage banking |
|
| 26,748 |
|
|
| 28,225 |
|
| Other assets |
|
| 374 |
|
|
| 471 |
|
| Other liabilities |
|
| 5 |
|
|
| 1 |
|
Total derivatives |
| $ | 863,210 |
|
| $ | 873,566 |
|
|
|
| $ | 15,027 |
|
| $ | 20,120 |
|
|
|
| $ | 14,664 |
|
| $ | 19,924 |
|
|
|
|
|
|
|
|
|
|
| Asset derivatives |
|
| Liability derivatives |
| ||||||||||||||
|
| Gross notional amount |
|
| Balance |
| Fair value |
|
| Balance |
| Fair value |
| |||||||||||||||
|
| Sept. 30, 2020 |
|
| Dec. 31, 2019 |
|
| sheet line item |
| Sept. 30, 2020 |
|
| Dec. 31, 2019 |
|
| sheet line item |
| Sept. 30, 2020 |
|
| Dec. 31, 2019 |
| ||||||
Derivatives designated as hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges |
| $ | 50,000 |
|
| $ | 100,000 |
|
| Other assets |
| $ | — |
|
| $ | — |
|
| Other liabilities |
| $ | 647 |
|
| $ | — |
|
Total derivatives |
| $ | 50,000 |
|
| $ | 100,000 |
|
|
|
| $ | — |
|
| $ | — |
|
|
|
| $ | 647 |
|
| $ | — |
|
Derivatives not designated as hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges |
| $ | 100,000 |
|
| $ | — |
|
| Other assets |
| $ | — |
|
| $ | — |
|
| Other liabilities |
| $ | — |
|
| $ | — |
|
Interest rate swaps (1) |
|
| 575,707 |
|
|
| 272,962 |
|
| Other assets |
|
| 23,079 |
|
|
| 6,419 |
|
| Other liabilities |
|
| 23,498 |
|
|
| 6,720 |
|
Credit contracts |
|
| 87,393 |
|
|
| 68,324 |
|
| Other assets |
|
| 29 |
|
|
| 13 |
|
| Other liabilities |
|
| 47 |
|
|
| 18 |
|
Mortgage banking |
|
| 40,752 |
|
|
| 11,859 |
|
| Other assets |
|
| 891 |
|
|
| 119 |
|
| Other liabilities |
|
| 13 |
|
|
| 7 |
|
Total derivatives |
| $ | 803,852 |
|
| $ | 353,145 |
|
|
|
| $ | 23,999 |
|
| $ | 6,551 |
|
|
|
| $ | 23,558 |
|
| $ | 6,745 |
|
|
|
Effect of Derivative Instruments on the Income Statement
The table below presents the effect of the Company’s derivative financial instruments on the income statement for the three and nine months ended September 30, 20202021 and 20192020 (in thousands):
|
|
|
| Gain (loss) recognized in income |
|
| Gain (loss) recognized in income |
|
|
|
| Gain (loss) recognized in income |
|
| Gain (loss) recognized in income |
| ||||||||||||||||||||
|
| Line item of gain (loss) |
| Three months ended September 30, |
|
| Nine months ended September 30, |
|
| Line item of gain (loss) |
| Three months ended |
|
| Nine months ended |
| ||||||||||||||||||||
Undesignated derivatives |
| recognized in income |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
| recognized in income |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||||||
Cash flow hedges |
| Income from derivative instruments, net |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| Income from derivative instruments, net |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| |||
Interest rate swaps |
| Income from derivative instruments, net |
|
| 1,310 |
|
|
| 854 |
|
|
| 3,715 |
|
|
| 838 |
|
| Income from derivative instruments, net |
| 248 |
| 1,310 |
| 1,687 |
| 3,715 |
| |||||||
Credit contracts |
| Income from derivative instruments, net |
|
| 13 |
|
|
| 48 |
|
|
| 136 |
|
|
| 54 |
|
| Income from derivative instruments, net |
| 38 |
| 13 |
| 74 |
| 136 |
| |||||||
Mortgage banking |
| Income from derivative instruments, net |
|
| 608 |
|
|
| (12 | ) |
|
| 766 |
|
|
| 121 |
|
| Income from derivative instruments, net |
|
| 91 |
|
| 608 |
|
| (101 | ) |
|
| 766 |
| ||
Total undesignated |
|
|
| $ | 1,931 |
|
| $ | 890 |
|
| $ | 4,617 |
|
| $ | 1,013 |
|
|
|
| $ | 377 |
| $ | 1,931 |
| $ | 1,660 |
| $ | 4,617 |
|
- 27 -
28
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(11.)SHAREHOLDERS’ EQUITY
|
|
Common Stock
The changes in shares of common stock were as follows for the three and nine months ended September 30, 2021 and 2020:
|
| Outstanding |
|
| Treasury |
|
| Issued |
| |||
2021 |
|
|
|
|
|
|
|
|
| |||
Shares at December 31, 2020 |
|
| 16,041,926 |
|
|
| 57,630 |
|
|
| 16,099,556 |
|
Shares issued for Landmark Group acquisition |
|
| 12,831 |
|
|
| (12,831 | ) |
|
| — |
|
Restricted stock units released |
|
| 18,819 |
|
|
| (18,819 | ) |
|
| — |
|
Treasury stock purchases |
|
| (244,677 | ) |
|
| 244,677 |
|
|
| — |
|
Shares at March 31, 2021 |
|
| 15,828,899 |
|
|
| 270,657 |
|
|
| 16,099,556 |
|
Restricted stock awards issued |
|
| 9,350 |
|
|
| (9,350 | ) |
|
| — |
|
Stock awards |
|
| 3,680 |
|
|
| (3,680 | ) |
|
| — |
|
Shares at June 30, 2021 |
|
| 15,841,929 |
|
|
| 257,627 |
|
|
| 16,099,556 |
|
Restricted stock units released |
|
| 250 |
|
|
| (250 | ) |
|
|
| |
Treasury stock purchases |
|
| (98 | ) |
|
| 98 |
|
|
| — |
|
Shares at September 30, 2021 |
|
| 15,842,081 |
|
|
| 257,475 |
|
|
| 16,099,556 |
|
2020 |
|
|
|
|
|
|
|
|
| |||
Shares at December 31, 2019 |
|
| 16,002,899 |
|
|
| 96,657 |
|
|
| 16,099,556 |
|
Restricted stock units released |
|
| 22,921 |
|
|
| (22,921 | ) |
|
| — |
|
Treasury stock purchases |
|
| (6,436 | ) |
|
| 6,436 |
|
|
| — |
|
Shares at March 31, 2020 |
|
| 16,019,384 |
|
|
| 80,172 |
|
|
| 16,099,556 |
|
Restricted stock awards issued |
|
| 12,798 |
|
|
| (12,798 | ) |
|
| — |
|
Stock awards |
|
| 5,403 |
|
|
| (5,403 | ) |
|
| — |
|
Shares at June 30, 2020 |
|
| 16,037,585 |
|
|
| 61,971 |
|
|
| 16,099,556 |
|
No activity during the period |
|
| — |
|
|
| — |
|
|
| — |
|
Shares at September 30, 2020 |
|
| 16,037,585 |
|
|
| 61,971 |
|
|
| 16,099,556 |
|
Share Repurchase Program
In November 2020, the Company’s Board of Directors authorized a share repurchase program for up to 801,879 shares of common stock. Repurchased shares are recorded in treasury stock, at cost, which includes any applicable transaction costs. 238,439 shares were repurchased at an average price of $24.30 during the nine months ended September 30, 2021. NaN shares were repurchased under this program during the three months ended September 30, 2021 and 2019:during the year ended December 31, 2020. As of September 30, 2021, the remaining number of shares authorized for repurchase under the repurchase program was 563,440.
|
| Outstanding |
|
| Treasury |
|
| Issued |
| |||
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
Shares at December 31, 2019 |
|
| 16,002,899 |
|
|
| 96,657 |
|
|
| 16,099,556 |
|
Restricted stock units released |
|
| 22,921 |
|
|
| (22,921 | ) |
|
| — |
|
Treasury stock purchases |
|
| (6,436 | ) |
|
| 6,436 |
|
|
| — |
|
Shares at March 31, 2020 |
|
| 16,019,384 |
|
|
| 80,172 |
|
|
| 16,099,556 |
|
Restricted stock awards issued |
|
| 12,798 |
|
|
| (12,798 | ) |
|
| — |
|
Stock awards |
|
| 5,403 |
|
|
| (5,403 | ) |
|
| — |
|
Shares at June 30, 2020 |
|
| 16,037,585 |
|
|
| 61,971 |
|
|
| 16,099,556 |
|
No activity during the period |
|
| — |
|
|
| — |
|
|
| — |
|
Shares at September 30, 2020 |
|
| 16,037,585 |
|
|
| 61,971 |
|
|
| 16,099,556 |
|
2019 |
|
|
|
|
|
|
|
|
|
|
|
|
Shares at December 31, 2018 |
|
| 15,928,598 |
|
|
| 127,580 |
|
|
| 16,056,178 |
|
Restricted stock units released |
|
| 18,580 |
|
|
| (18,580 | ) |
|
| — |
|
Treasury stock purchases |
|
| (6,368 | ) |
|
| 6,368 |
|
|
| — |
|
Shares at March 31, 2019 |
|
| 15,940,810 |
|
|
| 115,368 |
|
|
| 16,056,178 |
|
Common stock issued for Courier Capital contingent earn-out |
|
| 43,378 |
|
|
| — |
|
|
| 43,378 |
|
Restricted stock awards issued |
|
| 8,226 |
|
|
| (8,226 | ) |
|
| — |
|
Stock awards |
|
| 2,283 |
|
|
| (2,283 | ) |
|
| — |
|
Shares at June 30, 2019 |
|
| 15,994,697 |
|
|
| 104,859 |
|
|
| 16,099,556 |
|
Restricted stock units released |
|
| 2,500 |
|
|
| (2,500 | ) |
|
| — |
|
Treasury stock purchases |
|
| (839 | ) |
|
| 839 |
|
|
| — |
|
Shares at September 30, 2019 |
|
| 15,996,358 |
|
|
| 103,198 |
|
|
| 16,099,556 |
|
- 28 -29
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(12.)ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
|
|
The following tables present the components of other comprehensive income (loss) for the three and nine months ended September 30, 20202021 and 20192020 (in thousands):
|
| Pre-tax Amount |
|
| Tax Effect |
|
| Net-of-tax Amount |
| |||||||||||||||
Three months ended September 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Securities available for sale and transferred securities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Change in unrealized gain/loss during the period |
| $ | 374 |
|
| $ | 96 |
|
| $ | 278 |
| ||||||||||||
Reclassification adjustment for net gains included in net income (1) |
|
| (467 | ) |
|
| (120 | ) |
|
| (347 | ) | ||||||||||||
Total securities available for sale and transferred securities |
|
| (93 | ) |
|
| (24 | ) |
|
| (69 | ) | ||||||||||||
Hedging derivative instruments: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Change in unrealized gain/loss during the period |
|
| 165 |
|
|
| 42 |
|
|
| 123 |
| ||||||||||||
Pension and post-retirement obligations: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Amortization of prior service credit included in income |
|
| (8 | ) |
|
| (2 | ) |
|
| (6 | ) | ||||||||||||
Amortization of net actuarial loss included in income |
|
| 321 |
|
|
| 82 |
|
|
| 239 |
| ||||||||||||
Total pension and post-retirement obligations |
|
| 313 |
|
|
| 80 |
|
|
| 233 |
| ||||||||||||
Other comprehensive income |
| $ | 385 |
|
| $ | 98 |
|
| $ | 287 |
| ||||||||||||
Nine months ended September 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
| Pre-tax |
|
| Tax |
|
| Net-of-tax |
| |||||||||||||||
Three months ended September 30, 2021 |
|
|
|
|
|
|
|
|
| |||||||||||||||
Securities available for sale and transferred securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Change in unrealized gain/loss during the period |
| $ | 19,737 |
|
| $ | 5,057 |
|
| $ | 14,680 |
|
| $ | (8,647 | ) |
| $ | (2,216 | ) |
| $ | (6,431 | ) |
Reclassification adjustment for net gains included in net income (1) |
|
| (1,213 | ) |
|
| (311 | ) |
|
| (902 | ) |
|
| 42 |
|
| 11 |
|
| 31 |
| ||
Total securities available for sale and transferred securities |
|
| 18,524 |
|
|
| 4,746 |
|
|
| 13,778 |
|
| (8,605 | ) |
| (2,205 | ) |
| (6,400 | ) | |||
Hedging derivative instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Change in unrealized gain/loss during the period |
|
| (234 | ) |
|
| (60 | ) |
|
| (174 | ) |
| 108 |
| 28 |
| 80 |
| |||||
Pension and post-retirement obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Amortization of prior service credit included in income |
|
| (26 | ) |
|
| (7 | ) |
|
| (19 | ) |
| (1 | ) |
| (1 | ) |
| 0 |
| |||
Amortization of net actuarial loss included in income |
|
| 967 |
|
|
| 248 |
|
|
| 719 |
|
|
| 186 |
|
| 48 |
|
| 138 |
| ||
Total pension and post-retirement obligations |
|
| 941 |
|
|
| 241 |
|
|
| 700 |
|
|
| 185 |
|
| 47 |
|
| 138 |
| ||
Other comprehensive loss |
| $ | 19,231 |
|
| $ | 4,927 |
|
| $ | 14,304 |
|
| $ | (8,312 | ) |
| $ | (2,130 | ) |
| $ | (6,182 | ) |
Nine months ended September 30, 2021 |
|
|
|
|
|
|
|
|
| |||||||||||||||
Securities available for sale and transferred securities: |
|
|
|
|
|
|
|
|
| |||||||||||||||
Change in unrealized gain/loss during the period |
| $ | (21,348 | ) |
| $ | (5,470 | ) |
| $ | (15,878 | ) | ||||||||||||
Reclassification adjustment for net gains included in net income (1) |
|
| 105 |
|
| 27 |
|
| 78 |
| ||||||||||||||
Total securities available for sale and transferred securities |
| (21,243 | ) |
| (5,443 | ) |
| (15,800 | ) | |||||||||||||||
Hedging derivative instruments: |
|
|
|
|
|
|
|
|
| |||||||||||||||
Change in unrealized gain/loss during the period |
| 1,537 |
| 394 |
| 1,143 |
| |||||||||||||||||
Pension and post-retirement obligations: |
|
|
|
|
|
|
|
|
| |||||||||||||||
Amortization of prior service credit included in income |
| (2 | ) |
| (1 | ) |
| (1 | ) | |||||||||||||||
Amortization of net actuarial loss included in income |
|
| 557 |
|
| 143 |
|
| 414 |
| ||||||||||||||
Total pension and post-retirement obligations |
|
| 555 |
|
| 142 |
|
| 413 |
| ||||||||||||||
Other comprehensive loss |
| $ | (19,151 | ) |
| $ | (4,907 | ) |
| $ | (14,244 | ) |
(1) Includes amounts related to the amortization/accretion of unrealized net gains and losses related to the Company’s reclassification of available for sale investment securities to the held to maturity category. The unrealized net gains/losses will be amortized/accreted over the remaining life of the investment securities as an adjustment of yield.
|
|
- 29 -
30
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(12.)ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Pre-tax Tax Net-of-tax Three months ended September 30, 2020 Securities available for sale and transferred securities: Change in unrealized gain/loss during the period $ 374 $ 96 $ 278 Reclassification adjustment for net gains included in net income (1) (467 ) (120 ) (347 ) Total securities available for sale and transferred securities (93 ) (24 ) (69 ) Hedging derivative instruments: Change in unrealized gain/loss during the period 165 42 123 Pension and post-retirement obligations: Amortization of prior service credit included in income (8 ) (2 ) (6 ) Amortization of net actuarial loss included in income 321 82 239 Total pension and post-retirement obligations 313 80 233 Other comprehensive income $ 385 $ 98 $ 287 Nine months ended September 30, 2020 Securities available for sale and transferred securities: Change in unrealized gain/loss during the period $ 19,737 $ 5,057 $ 14,680 Reclassification adjustment for net gains included in net income (1) (1,213 ) (311 ) (902 ) Total securities available for sale and transferred securities 18,524 4,746 13,778 Hedging derivative instruments: Change in unrealized gain/loss during the period (234 ) (60 ) (174 ) Pension and post-retirement obligations: Amortization of prior service credit included in income (26 ) (7 ) (19 ) Amortization of net actuarial loss included in income 967 248 719 Total pension and post-retirement obligations 941 241 700 Other comprehensive income $ 19,231 $ 4,927 $ 14,304 (1) Includes amounts related to the amortization/accretion of unrealized net gains and losses related to the Company’s reclassification of available for sale investment securities to the held to maturity category. The unrealized net gains/losses will be amortized/accreted over the remaining life of the investment securities as an adjustment of yield. |
|
|
| Pre-tax Amount |
|
| Tax Effect |
|
| Net-of-tax Amount |
| |||
Three months ended September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale and transferred securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain/loss during the period |
| $ | 2,992 |
|
| $ | 755 |
|
| $ | 2,237 |
|
Reclassification adjustment for net gains included in net income (1) |
|
| (1,492 | ) |
|
| (376 | ) |
|
| (1,116 | ) |
Total securities available for sale and transferred securities |
|
| 1,500 |
|
|
| 379 |
|
|
| 1,121 |
|
Hedging derivative instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain/loss during the period |
|
| 57 |
|
|
| 14 |
|
|
| 43 |
|
Pension and post-retirement obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service credit included in income |
|
| (16 | ) |
|
| (4 | ) |
|
| (12 | ) |
Amortization of net actuarial loss included in income |
|
| 366 |
|
|
| 92 |
|
|
| 274 |
|
Total pension and post-retirement obligations |
|
| 350 |
|
|
| 88 |
|
|
| 262 |
|
Other comprehensive income |
| $ | 1,907 |
|
| $ | 481 |
|
| $ | 1,426 |
|
Nine months ended September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale and transferred securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain/loss during the period |
| $ | 17,222 |
|
| $ | 4,342 |
|
| $ | 12,880 |
|
Reclassification adjustment for net gains included in net income (1) |
|
| (1,360 | ) |
|
| (343 | ) |
|
| (1,017 | ) |
Total securities available for sale and transferred securities |
|
| 15,862 |
|
|
| 3,999 |
|
|
| 11,863 |
|
Hedging derivative instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain/loss during the period |
|
| (424 | ) |
|
| (107 | ) |
|
| (317 | ) |
Pension and post-retirement obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service credit included in income |
|
| (49 | ) |
|
| (12 | ) |
|
| (37 | ) |
Amortization of net actuarial loss included in income |
|
| 1,098 |
|
|
| 277 |
|
|
| 821 |
|
Total pension and post-retirement obligations |
|
| 1,049 |
|
|
| 265 |
|
|
| 784 |
|
Other comprehensive income |
| $ | 16,487 |
|
| $ | 4,157 |
|
| $ | 12,330 |
|
|
|
- 30 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(12.)ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (Continued)
|
|
Activity in accumulated other comprehensive income (loss), net of tax, for the three and nine months ended September 30, 20202021 and 20192020 was as follows (in thousands):
|
| Hedging |
|
| Securities |
|
| Pension and |
|
| Accumulated |
| ||||||||||||||||||||
Three months ended September 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Balance at beginning of period |
| $ | 747 |
| $ | 5,343 |
| $ | (12,024 | ) |
| $ | (5,934 | ) | ||||||||||||||||||
Other comprehensive income (loss) before reclassifications |
| 80 |
| (6,431 | ) |
| — |
| (6,351 | ) | ||||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive |
|
| — |
|
| 31 |
|
| 138 |
|
| 169 |
| |||||||||||||||||||
Net current period other comprehensive income (loss) |
|
| 80 |
|
| (6,400 | ) |
|
| 138 |
|
| (6,182 | ) | ||||||||||||||||||
Balance at end of period |
| $ | 827 |
| $ | (1,057 | ) |
| $ | (11,886 | ) |
| $ | (12,116 | ) | |||||||||||||||||
Nine months ended September 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Balance at beginning of period |
| $ | (316 | ) |
| $ | 14,743 |
| $ | (12,299 | ) |
| $ | 2,128 |
| |||||||||||||||||
Other comprehensive income (loss) before reclassifications |
| 1,143 |
| (15,878 | ) |
| — |
| (14,735 | ) | ||||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive |
|
| — |
|
| 78 |
|
| 413 |
|
| 491 |
| |||||||||||||||||||
Net current period other comprehensive income (loss) |
|
| 1,143 |
|
| (15,800 | ) |
|
| 413 |
|
| (14,244 | ) | ||||||||||||||||||
Balance at end of period |
| $ | 827 |
| $ | (1,057 | ) |
| $ | (11,886 | ) |
| $ | (12,116 | ) | |||||||||||||||||
|
| Hedging Derivative Instruments |
|
| Securities Available for Sale and Transferred Securities |
|
| Pension and Post- retirement Obligations |
|
| Accumulated Other Comprehensive Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Three months ended September 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Balance at beginning of period |
| $ | (815 | ) |
| $ | 14,720 |
|
| $ | (14,401 | ) |
| $ | (496 | ) |
| $ | (815 | ) |
| $ | 14,720 |
| $ | (14,401 | ) |
| $ | (496 | ) | |
Other comprehensive income before reclassifications |
|
| 123 |
|
|
| 278 |
|
|
| — |
|
|
| 401 |
|
| 123 |
| 278 |
| — |
| 401 |
| |||||||
Amounts reclassified from accumulated other comprehensive (loss) income |
|
| — |
|
|
| (347 | ) |
|
| 233 |
|
|
| (114 | ) |
|
| — |
|
| (347 | ) |
|
| 233 |
|
| (114 | ) | ||
Net current period other comprehensive income (loss) |
|
| 123 |
|
|
| (69 | ) |
|
| 233 |
|
|
| 287 |
|
|
| 123 |
|
| (69 | ) |
|
| 233 |
|
| 287 |
| ||
Balance at end of period |
| $ | (692 | ) |
| $ | 14,651 |
|
| $ | (14,168 | ) |
| $ | (209 | ) |
| $ | (692 | ) |
| $ | 14,651 |
| $ | (14,168 | ) |
| $ | (209 | ) | |
Nine months ended September 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Balance at beginning of period |
| $ | (518 | ) |
| $ | 873 |
|
| $ | (14,868 | ) |
| $ | (14,513 | ) |
| $ | (518 | ) |
| $ | 873 |
| $ | (14,868 | ) |
| (14,513 | ) | ||
Other comprehensive (loss) income before reclassifications |
|
| (174 | ) |
|
| 14,680 |
|
|
| — |
|
|
| 14,506 |
|
| (174 | ) |
| 14,680 |
| — |
| 14,506 |
| ||||||
Amounts reclassified from accumulated other comprehensive (loss) income |
|
| — |
|
|
| (902 | ) |
|
| 700 |
|
|
| (202 | ) |
|
| — |
|
| (902 | ) |
|
| 700 |
|
| (202 | ) | ||
Net current period other comprehensive income (loss) |
|
| (174 | ) |
|
| 13,778 |
|
|
| 700 |
|
|
| 14,304 |
|
|
| (174 | ) |
|
| 13,778 |
|
| 700 |
|
| 14,304 |
| ||
Balance at end of period |
| $ | (692 | ) |
| $ | 14,651 |
|
| $ | (14,168 | ) |
| $ | (209 | ) |
| $ | (692 | ) |
| $ | 14,651 |
| $ | (14,168 | ) |
| $ | (209 | ) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Three months ended September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Balance at beginning of period |
| $ | (636 | ) |
| $ | 2,292 |
|
| $ | (14,816 | ) |
| $ | (13,160 | ) | ||||||||||||||||
Other comprehensive income before reclassifications |
|
| 43 |
|
|
| 2,237 |
|
|
| — |
|
|
| 2,280 |
| ||||||||||||||||
Amounts reclassified from accumulated other comprehensive (loss) income |
|
| — |
|
|
| (1,116 | ) |
|
| 262 |
|
|
| (854 | ) | ||||||||||||||||
Net current period other comprehensive income |
|
| 43 |
|
|
| 1,121 |
|
|
| 262 |
|
|
| 1,426 |
| ||||||||||||||||
Balance at end of period |
| $ | (593 | ) |
| $ | 3,413 |
|
| $ | (14,554 | ) |
| $ | (11,734 | ) | ||||||||||||||||
Nine months ended September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Balance at beginning of period |
| $ | (276 | ) |
| $ | (7,769 | ) |
| $ | (13,236 | ) |
|
| (21,281 | ) | ||||||||||||||||
Reclassification of income tax effects to retained earnings |
|
| — |
|
|
| (681 | ) |
|
| (2,102 | ) |
|
| (2,783 | ) | ||||||||||||||||
Other comprehensive (loss) income before reclassifications |
|
| (317 | ) |
|
| 12,880 |
|
|
| — |
|
|
| 12,563 |
| ||||||||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) |
|
| — |
|
|
| (1,017 | ) |
|
| 784 |
|
|
| (233 | ) | ||||||||||||||||
Net current period other comprehensive (loss) income |
|
| (317 | ) |
|
| 11,863 |
|
|
| 784 |
|
|
| 12,330 |
| ||||||||||||||||
Balance at end of period |
| $ | (593 | ) |
| $ | 3,413 |
|
| $ | (14,554 | ) |
| $ | (11,734 | ) |
- 31 -
32
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(12.)ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (Continued)
|
|
The following table presents the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 20202021 and 20192020 (in thousands):
Details About Accumulated Other Comprehensive Income (Loss) Components |
| Amount Reclassified from Accumulated Other Comprehensive Income (Loss) |
|
| Affected Line Item in the Consolidated Statement of Income |
| Amount Reclassified from |
|
| Affected Line Item in the | ||||||||||
|
| Three months ended |
|
|
|
| Three months ended |
|
|
| ||||||||||
|
| September 30, |
|
|
|
| September 30, |
|
|
| ||||||||||
|
| 2020 |
|
| 2019 |
|
|
|
| 2021 |
|
| 2020 |
|
|
| ||||
Realized gain on sale of investment securities |
| $ | 554 |
|
| $ | 1,608 |
|
| Net gain on investment securities | ||||||||||
Realized gain (loss) on sale of investment securities |
| $ | 0 |
| $ | 554 |
| Net gain on investment securities | ||||||||||||
Amortization of unrealized holding losses on investment securities transferred from available for sale to held to maturity |
|
| (87 | ) |
|
| (116 | ) |
| Interest income |
|
| (42 | ) |
|
| (87 | ) |
| Interest income |
|
|
| 467 |
|
|
| 1,492 |
|
| Total before tax |
| (42 | ) |
| 467 |
| Total before tax | |||
|
|
| (120 | ) |
|
| (376 | ) |
| Income tax expense |
|
| 11 |
|
| (120 | ) |
| Income tax expense | |
|
|
| 347 |
|
|
| 1,116 |
|
| Net of tax |
| (31 | ) |
| 347 |
| Net of tax | |||
Amortization of pension and post-retirement items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Prior service credit (1) |
|
| 8 |
|
|
| 16 |
|
| Salaries and employee benefits |
| 1 |
| 8 |
| Salaries and employee benefits | ||||
Net actuarial losses (1) |
|
| (321 | ) |
|
| (366 | ) |
| Salaries and employee benefits |
|
| (186 | ) |
|
| (321 | ) |
| Salaries and employee benefits |
|
|
| (313 | ) |
|
| (350 | ) |
| Total before tax |
| (185 | ) |
| (313 | ) |
| Total before tax | ||
|
|
| 80 |
|
|
| 88 |
|
| Income tax benefit |
|
| 47 |
|
| 80 |
| Income tax benefit | ||
|
|
| (233 | ) |
|
| (262 | ) |
| Net of tax |
|
| (138 | ) |
|
| (233 | ) |
| Net of tax |
Total reclassified for the period |
| $ | 114 |
|
| $ | 854 |
|
|
|
| $ | (169 | ) |
| $ | 114 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
| Nine months ended |
|
|
|
| Nine months ended |
|
|
| ||||||||||
|
| September 30, |
|
|
|
| September 30, |
|
|
| ||||||||||
|
| 2020 |
|
| 2019 |
|
|
|
| 2021 |
|
| 2020 |
|
|
| ||||
Realized gain on sale of investment securities |
| $ | 1,449 |
|
| $ | 1,721 |
|
| Net gain on investment securities |
| $ | 71 |
| $ | 1,449 |
| Net gain on investment securities | ||
Amortization of unrealized holding losses on investment securities transferred from available for sale to held to maturity |
|
| (236 | ) |
|
| (361 | ) |
| Interest income |
|
| (176 | ) |
|
| (236 | ) |
| Interest income |
|
|
| 1,213 |
|
|
| 1,360 |
|
| Total before tax |
| (105 | ) |
| 1,213 |
| Total before tax | |||
|
|
| (311 | ) |
|
| (343 | ) |
| Income tax (expense) benefit |
|
| 27 |
|
| (311 | ) |
| Income tax expense | |
|
|
| 902 |
|
|
| 1,017 |
|
| Net of tax |
| (78 | ) |
| 902 |
| Net of tax | |||
Amortization of pension and post-retirement items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Prior service credit (1) |
|
| 26 |
|
|
| 49 |
|
| Salaries and employee benefits |
| 2 |
| 26 |
| Salaries and employee benefits | ||||
Net actuarial losses (1) |
|
| (967 | ) |
|
| (1,098 | ) |
| Salaries and employee benefits |
|
| (557 | ) |
|
| (967 | ) |
| Salaries and employee benefits |
|
|
| (941 | ) |
|
| (1,049 | ) |
| Total before tax |
| (555 | ) |
| (941 | ) |
| Total before tax | ||
|
|
| 241 |
|
|
| 265 |
|
| Income tax benefit |
|
| 142 |
|
| 241 |
| Income tax benefit | ||
|
|
| (700 | ) |
|
| (784 | ) |
| Net of tax |
|
| (413 | ) |
|
| (700 | ) |
| Net of tax |
Total reclassified for the period |
| $ | 202 |
|
| $ | 233 |
|
|
|
| $ | (491 | ) |
| $ | 202 |
|
|
(1) These items are included in the computation of net periodic pension expense. See Note 14 – Employee Benefit Plans for additional information.
|
|
- 32 -33
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(13.)SHARE-BASED COMPENSATION PLANS
|
|
The Company maintains certain share-based compensation plans, approved by the Company’s shareholders, that are administered by the Management Development and Compensation Committee (the “MD&C Committee”) of the Board. The share-based compensation plans were established to allow for the grant of compensation awards to attract, motivate and retain employees, executive officers and non-employee directors who contribute to the long-term growth and profitability of the Company and to give such persons a proprietary interest in the Company, thereby enhancing their personal interest in the Company’s success.
The MD&C Committee approved the grant of restricted stock units (“RSUs”) and performance share units (“PSUs”) shown in the table below to certain members of management during the nine months ended September 30, 2020.2021.
|
| Number of Underlying Shares |
|
| Weighted Average Per Share Grant Date Fair Value |
|
| Number of |
|
| Weighted |
| ||||
RSUs |
|
| 57,306 |
|
| $ | 25.67 |
|
| 59,998 |
| $ | 27.50 |
| ||
PSUs |
|
| 23,302 |
|
|
| 25.63 |
|
| 22,178 |
| 27.58 |
|
The grant-date fair value for the RSUs granted during the nine months ended September 30, 20202021 is equal to the closing market price of our common stock on the date of grant reduced by the present value of the dividends expected to be paid on the underlying shares.
NaNFifty percent of the PSUs that ultimately vest is contingent on achieving specified return on average equity (“ROAE”) targets relative to the SNL Small Cap Bank & Thrift Index, a market index the MD&C Committee has selected as a peer group for this purpose. These shares will be earned based on the Company’s achievement of a relative ROAE performance requirement, on a percentile basis, compared to the SNL Small Cap Bank & Thrift Index over a three-year performance period ended December 31, 2022. 2023. During the three months ended September 30, 2021, the SNL Small Cap Bank & Thrift Index was delisted and the Company is currently evaluating an alternative market index. The shares earned based on the achievement of the ROAE performance requirement, if any, will vest on the third anniversary of the grant date assuming the recipient’s continuous service to the Company.Company. The remaining 50fifty percent of the PSUs that ultimately vest is contingent upon achievement of an average return on average assets (“ROAA”) performance requirement over a three-year performance period ended December 31, 2022. 2023. The shares earned based on the achievement of the ROAA performance requirement, if any, will vest on the third anniversary of the grant date assuming the recipient’s continuous service to the Company. Company.
The grant-date fair values for both the ROAE and the ROAA portions of PSUs granted during the nine months ended September 30, 20202021 are equal to the closing market price of our common stock on the date of grant reduced by the present value of the dividends expected to be paid on the underlying shares.
During the nine months ended September 30, 2020,2021, the Company issued a total of 5,4033,680 shares of common stock in-lieuin lieu of cash for the annual retainer of 46 non-employee directors and granted a total of 12,7989,350 restricted shares of common stock to non-employee directors, of which 6,3994,670 shares vested immediately and 6,3994,680 shares will vest after completion of a one-year service requirement. The market value of the stock and restricted stock at the close of the Nasdaq Global Select Market on the date of grant was $17.57.$32.06.
The following is a summary of restricted stock awards and restricted stock units activity for the nine months ended September 30, 2020:2021:
|
| Number of Shares |
|
| Weighted Average Market Price at Grant Date |
|
| Number of |
|
| Weighted |
| ||||
Outstanding at beginning of year |
|
| 151,808 |
|
| $ | 27.80 |
|
| 168,513 |
| $ | 25.65 |
| ||
Granted |
|
| 93,406 |
|
|
| 24.55 |
|
| 91,526 |
| 27.99 |
| |||
Vested |
|
| (33,433 | ) |
|
| 28.88 |
|
| (30,138 | ) |
| 26.67 |
| ||
Forfeited |
|
| (39,406 | ) |
|
| 27.99 |
|
|
| (27,901 | ) |
|
| 26.66 |
|
Outstanding at end of period |
|
| 172,375 |
|
| $ | 25.78 |
|
|
| 202,000 |
| $ | 26.42 |
|
At September 30, 2020,2021, there was $2.5$2.9 million of unrecognized compensation expense related to unvested restricted stock awards and restricted stock units that is expected to be recognized over a weighted average period of 1.961.95 years.
- 33 -34
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(13.)SHARE-BASED COMPENSATION PLANS (Continued)
|
|
The Company uses the Black-Scholes valuation method to estimate the fair value of its stock option awards. There were 0 stock options awarded during the first nine months of 2020 or 2019. There was 0 unrecognized compensation expense related to unvested stock options as of September 30, 2020. There was 0 stock option activity for the nine months ended September 30, 2020.
The Company amortizes the expense related to share-based compensation awards over the vesting period. Share-based compensation expense is recorded as a component of salaries and employee benefits in the consolidated statements of income for awards granted to management and as a component of other noninterest expense for awards granted to directors. The share-based compensation expense included in the consolidated statements of income, is as follows (in thousands):
|
| Three months ended |
|
| Nine months ended |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Salaries and employee benefits |
| $ | 500 |
|
| $ | 261 |
|
| $ | 1,071 |
|
| $ | 793 |
|
Other noninterest expense |
|
| 38 |
|
|
| 28 |
|
|
| 245 |
|
|
| 197 |
|
Total share-based compensation expense |
| $ | 538 |
|
| $ | 289 |
|
| $ | 1,316 |
|
| $ | 990 |
|
|
| Three months ended September 30, |
|
| Nine months ended September 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Salaries and employee benefits |
| $ | 261 |
|
| $ | 364 |
|
| $ | 793 |
|
| $ | 825 |
|
Other noninterest expense |
|
| 28 |
|
|
| 29 |
|
|
| 197 |
|
|
| 203 |
|
Total share-based compensation expense |
| $ | 289 |
|
| $ | 393 |
|
| $ | 990 |
|
| $ | 1,028 |
|
(14.)EMPLOYEE BENEFIT PLANS
|
|
The components of the Company’s net periodic benefit expense for its pension and post-retirement obligations were as follows (in thousands):
|
| Three months ended September 30, |
|
| Nine months ended September 30, |
|
| Three months ended |
|
| Nine months ended |
| ||||||||||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||||||
Service cost |
| $ | 924 |
|
| $ | 801 |
|
| $ | 2,770 |
|
| $ | 2,405 |
|
| $ | 1,049 |
| $ | 924 |
| $ | 3,147 |
| $ | 2,770 |
| |||
Interest cost on projected benefit obligation |
|
| 635 |
|
|
| 696 |
|
|
| 1,905 |
|
|
| 2,086 |
|
| 551 |
| 635 |
| 1,653 |
| 1,905 |
| |||||||
Expected return on plan assets |
|
| (1,284 | ) |
|
| (1,184 | ) |
|
| (3,852 | ) |
|
| (3,552 | ) |
| (1,306 | ) |
| (1,284 | ) |
| (3,919 | ) |
| (3,852 | ) | ||||
Amortization of unrecognized prior service credit |
|
| (8 | ) |
|
| (16 | ) |
|
| (26 | ) |
|
| (49 | ) |
| (1 | ) |
| (8 | ) |
| (2 | ) |
| (26 | ) | ||||
Amortization of unrecognized net actuarial loss |
|
| 321 |
|
|
| 366 |
|
|
| 967 |
|
|
| 1,098 |
|
|
| 186 |
|
| 321 |
|
| 557 |
|
| 967 |
| |||
Net periodic benefit expense |
| $ | 588 |
|
| $ | 663 |
|
| $ | 1,764 |
|
| $ | 1,988 |
|
| $ | 479 |
| $ | 588 |
| $ | 1,436 |
| $ | 1,764 |
|
The net periodic benefit expense is recorded as a component of salaries and employee benefits in the consolidated statements of income. The Company’s funding policy is to contribute, at a minimum, an actuarially determined amount that will satisfy the minimum funding requirements determined under the appropriate sections of the Internal Revenue Code. The Company has 0 minimum required contribution for the 20202021 fiscal year.
(15.)COMMITMENTS AND CONTINGENCIES
|
|
Financial Instruments with Off-Balance Sheet Risk
The Company has financial instruments with off-balance sheet risk established in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk extending beyond amounts recognized in the financial statements.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is essentially the same as that involved with extending loans to customers. The Company uses the same credit underwriting policies in making commitments and conditional obligations as for on-balance sheet instruments.
Off-balance sheet commitments consist of the following (in thousands):
|
| September 30, 2020 |
|
| December 31, 2019 |
|
| September 30, |
|
| December 31, |
| ||||
Commitments to extend credit |
| $ | 973,129 |
|
| $ | 820,282 |
|
| $ | 968,157 |
| $ | 1,012,810 |
| |
Standby letters of credit |
|
| 22,652 |
|
|
| 21,911 |
|
| 25,379 |
| 22,393 |
|
- 34 -35
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(15.)COMMITMENTS AND CONTINGENCIES (Continued)
|
|
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the agreement. Commitments generally have fixed expiration dates or other termination clauses which may require payment of a fee. Commitments may expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if any, is based on management’s credit evaluation of the borrower. Standby letters of credit are conditional lending commitments issued by the Company to guarantee the performance of a customer to a third party. These standby letters of credit are primarily issued to support private borrowing arrangements. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers.
Unfunded Commitments
At September 30, 20202021 and December 31, 2019,2020, the allowance for credit losses for unfunded commitments totaled $3.1$1.9 million and $0,$3.1 million, respectively, and was included in other liabilities on the Company's consolidated statements of financial condition. For the three months ended September 30, 20202021 and 2019,2020, credit loss (benefit) expense for unfunded commitments was $461$(206) thousand and $0,$461 thousand, respectively. For the nine months ended September 30, 20202021 and 2019,2020, credit loss (benefit) expense for unfunded commitments was $959$(1.2) million and $959 thousand, and $0, respectively.
Contingent Liabilities and Litigation
In the ordinary course of business, there are various threatened and pending legal proceedings against the Company. Management believes that the aggregate liability, if any, arising from such litigation, except for the matter described below, would not have a material adverse effect on the Company’s consolidated financial statements.
As previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 20192020 as filed with the SEC on March 4, 202015, 2021 and as disclosed in Part II, Item 1 of this Quarterly Report on Form 10-Q, we are party to an action filed against us on May 16, 2017 by Matthew L. Chipego, Charlene Mowry, Constance C. Churchill and Joseph W. Ewing in the Court of Common Pleas in Philadelphia, Pennsylvania. Plaintiffs sought class certification to represent classes of consumers in New York and Pennsylvania along with statutory damages, interest and declaratory relief. The plaintiffs seeksought to represent a putative class of consumers who are alleged to have obtained direct or indirect financing from us for the purchase of vehicles that we later repossessed. The plaintiffs specifically claim that the notices the Bank sent to defaulting consumers after their vehicles were repossessed did not comply with the relevant portions of the Uniform Commercial Code in New York and Pennsylvania and are seeking statutory damages, interest and declaratory relief. The Company is pursuing insurance coverage for these claims, including reimbursement for defense costs.Pennsylvania. We dispute and believe we have meritorious defenses against these claims and plan to vigorously defend ourselves.
On September 30, 2021, the Court granted plaintiffs’ motion for class certification and certified four different classes (two classes of New York consumers and two classes of Pennsylvania consumers). We estimate there may be approximately 5,200 members in the New York classes and 300 members in the Pennsylvania classes. We filed a motion seeking permission to appeal the class certification ruling to the Superior Court of Pennsylvania and a stay of proceedings pending any such appeal. We also filed a motion to dismiss the action for lack of standing. We have not accrued a contingent liability for this matter at this time because, given our defenses, we are unable to conclude whether a liability is reasonably probable to occur nor are we able to currently reasonably estimate the amount of potential loss.
If we settle these claims or the action is not resolved in our favor, we may suffer reputational damage and incur legal costs, settlements or judgments that exceed the amounts covered by our existing insurance policies. We can provide no assurances that our insurer will insure the legal costs, settlements or judgments we incur in excess of our deductible. If we are unsuccessful in defending ourselves from these claims or if we elect to settle these claims and if our insurer does not insure us against legal costs we incur in excess of our deductible, the result may materially adversely affect our business, results of operations and financial condition.
36
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(16.)FAIR VALUE MEASUREMENTS
|
|
Determination of Fair Value – Assets Measured at Fair Value on a Recurring and Nonrecurring Basis
Valuation Hierarchy
The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. ASC Topic 820, “Fair Value Measurements and Disclosures,” establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. There have been no changes in the valuation techniques used during the current period. The fair value hierarchy is as follows:
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means. Level 3 - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
|
|
|
|
|
|
Transfers between levels of the fair value hierarchy are recorded as of the end of the reporting period.
- 35 -
37
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(16.)FAIR VALUE MEASUREMENTS (Continued)
|
|
In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein. A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
Securities available for sale: Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.
Derivative instruments: The fair value of derivative instruments is determined using quoted secondary market prices for similar financial instruments and are classified as Level 2 in the fair value hierarchy.
Loans held for sale: The fair value of loans held for sale is determined using quoted secondary market prices and investor commitments. Loans held for sale are classified as Level 2 in the fair value hierarchy.
Collateral dependent loans: Fair value of collateral dependent loans with specific allocations of the allowance for credit losses – loans is measured based on the value of the collateral securing these loans and is classified as Level 3 in the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable and collateral value is determined based on appraisals performed by qualified licensed appraisers hired by the Company. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Appraised and reported values may be 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 client and the client’s business. Such discounts are typically significant and result in a Level 3 classification of the inputs for determining fair value. Collateral dependent loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.
Long-lived assets held for sale: The fair value of the long-lived assets held for sale was based on estimated market prices from independently prepared current appraisals and are classified as Level 2 in the fair value hierarchy.
Loan servicing rights: Loan servicing rights do not trade in an active market with readily observable market data. As a result, the Company estimates the fair value of loan servicing rights by using a discounted cash flow model to calculate the present value of estimated future net servicing income. The assumptions used in the discounted cash flow model are those that we believe market participants would use in estimating future net servicing income, including estimates of loan prepayment rates, servicing costs, ancillary income, impound account balances, and discount rates. The significant unobservable inputs used in the fair value measurement of the Company’s loan servicing rights are the constant prepayment rates and weighted average discount rate. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement. Although the constant prepayment rate and the discount rate are not directly interrelated, they will generally move in opposite directions. Loan servicing rights are classified as Level 3 measurements due to the use of significant unobservable inputs, as well as significant management judgment and estimation.
Other real estate owned (foreclosed assets): Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. 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 client and client’s business. Such discounts are typically significant and result in a Level 3 classification of the inputs for determining fair value. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.
Commitments to extend credit and letters of credit: Commitments to extend credit and fund letters of credit are principally at current interest rates, and, therefore, the carrying amount approximates fair value. The fair value of commitments is not material.
- 36 -38
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(16.)FAIR VALUE MEASUREMENTS (Continued)
|
|
Assets Measured at Fair Value
The following tables present for each of the fair-value hierarchy levels the Company’s assets that are measured at fair value on a recurring and non-recurringnonrecurring basis as of the dates indicated (in thousands).
|
| Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1) |
|
| Significant Other Observable Inputs (Level 2) |
|
| Significant Unobservable Inputs (Level 3) |
|
| Total |
| ||||||||||||||||||||
September 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
| Quoted |
| Significant |
| Significant |
| Total |
| |||||||||||||||||||||||
September 30, 2021 |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Measured on a recurring basis: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. Government agency and government sponsored enterprises |
| $ | — |
|
| $ | 6,655 |
|
| $ | — |
|
| $ | 6,655 |
|
| $ | — |
| $ | 6,531 |
| $ | — |
| $ | 6,531 |
| |||
Mortgage-backed securities |
|
| — |
|
|
| 509,316 |
|
|
| — |
|
|
| 509,316 |
|
| — |
| 1,091,419 |
| — |
| 1,091,419 |
| |||||||
Other liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Other assets: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Hedging derivative instruments |
|
| — |
|
|
| (647 | ) |
|
| — |
|
|
| (647 | ) |
| — |
| 1,112 |
| — |
| 1,112 |
| |||||||
Fair value adjusted through comprehensive income |
| $ | — |
|
| $ | 515,324 |
|
| $ | — |
|
| $ | 515,324 |
|
| $ | — |
| $ | 1,099,062 |
| $ | — |
| $ | 1,099,062 |
| |||
Other assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Derivative instruments - cash flow hedges |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
| ||||||||||||||||
Derivative instruments - interest rate swaps |
|
| — |
|
|
| 23,079 |
|
|
| — |
|
|
| 23,079 |
|
| — |
| 14,653 |
| — |
| 14,653 |
| |||||||
Derivative instruments - credit contracts |
|
| — |
|
|
| 29 |
|
|
| — |
|
|
| 29 |
|
| — |
| 0 |
| — |
| 0 |
| |||||||
Derivative instruments - mortgage banking |
|
| — |
|
|
| 891 |
|
|
| — |
|
|
| 891 |
|
| — |
| 374 |
| — |
| 374 |
| |||||||
Other liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Derivative instruments - interest rate swaps |
|
| — |
|
|
| (23,498 | ) |
|
| — |
|
|
| (23,498 | ) |
| — |
| (14,658 | ) |
| — |
| (14,658 | ) | ||||||
Derivative instruments - credit contracts |
|
| — |
|
|
| (47 | ) |
|
| — |
|
|
| (47 | ) |
| — |
| (1 | ) |
| — |
| (1 | ) | ||||||
Derivative instruments - mortgage banking |
|
| — |
|
|
| (13 | ) |
|
| — |
|
|
| (13 | ) |
|
| — |
|
| (5 | ) |
|
| — |
|
| (5 | ) | ||
Fair value adjusted through net income |
| $ | — |
|
| $ | 441 |
|
| $ | — |
|
| $ | 441 |
|
| $ | — |
| $ | 363 |
| $ | — |
| $ | 363 |
| |||
Measured on a nonrecurring basis: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Loans held for sale |
| $ | — |
|
| $ | 7,076 |
|
| $ | — |
|
| $ | 7,076 |
|
| $ | — |
| $ | 5,916 |
| $ | — |
| $ | 5,916 |
| |||
Collateral dependent loans |
|
| — |
|
|
| — |
|
|
| 17,913 |
|
|
| 17,913 |
|
| — |
| — |
| 54,554 |
| 54,554 |
| |||||||
Other assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Long-lived assets held for sale |
| — |
| 4,341 |
| — |
| 4,341 |
| |||||||||||||||||||||||
Loan servicing rights |
|
| — |
|
|
| — |
|
|
| 1,175 |
|
|
| 1,175 |
|
| — |
| — |
| 1,484 |
| 1,484 |
| |||||||
Other real estate owned |
|
| — |
|
|
| — |
|
|
| 2,999 |
|
|
| 2,999 |
| ||||||||||||||||
Total |
| $ | — |
|
| $ | 7,076 |
|
| $ | 22,087 |
|
| $ | 29,163 |
|
| $ | — |
| $ | 10,257 |
| $ | 56,038 |
| $ | 66,295 |
|
There were 0 transfers between Levels 1 and 2 during the nine months ended September 30, 2021. There were 0 liabilities measured at fair value on a nonrecurring basis during the nine months ended September 30, 2021.
39
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(16.)FAIR VALUE MEASUREMENTS (Continued)
|
| Quoted |
|
| Significant |
|
| Significant |
|
| Total |
| ||||
December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Measured on a recurring basis: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. Government agency and government sponsored enterprises |
| $ | — |
|
| $ | 6,635 |
|
| $ | — |
|
| $ | 6,635 |
|
Mortgage-backed securities |
|
| — |
|
|
| 621,424 |
|
|
| — |
|
|
| 621,424 |
|
Other liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Hedging derivative instruments |
|
| — |
|
|
| (311 | ) |
|
| — |
|
|
| (311 | ) |
Fair value adjusted through comprehensive income |
| $ | — |
|
| $ | 627,748 |
|
| $ | — |
|
| $ | 627,748 |
|
Other assets: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Derivative instruments - cash flow hedges |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | - |
|
Derivative instruments - interest rate swaps |
|
| — |
|
|
| 19,626 |
|
|
| — |
|
|
| 19,626 |
|
Derivative instruments - credit contracts |
|
| — |
|
|
| 23 |
|
|
| — |
|
|
| 23 |
|
Derivative instruments - mortgage banking |
|
| — |
|
|
| 471 |
|
|
| — |
|
|
| 471 |
|
Other liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Derivative instruments - interest rate swaps |
|
| — |
|
|
| (19,837 | ) |
|
| — |
|
|
| (19,837 | ) |
Derivative instruments - credit contracts |
|
| — |
|
|
| (86 | ) |
|
| — |
|
|
| (86 | ) |
Derivative instruments - mortgage banking |
|
| — |
|
|
| (1 | ) |
|
| — |
|
|
| (1 | ) |
Fair value adjusted through net income |
| $ | — |
|
| $ | 196 |
|
| $ | — |
|
| $ | 196 |
|
Measured on a nonrecurring basis: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Loans: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Loans held for sale |
| $ | — |
|
| $ | 4,305 |
|
| $ | — |
|
| $ | 4,305 |
|
Collateral dependent loans |
|
| — |
|
|
| — |
|
|
| 29,434 |
|
|
| 29,434 |
|
Other assets: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Loan servicing rights |
|
| — |
|
|
| — |
|
|
| 1,320 |
|
|
| 1,320 |
|
Other real estate owned |
|
| — |
|
|
| — |
|
|
| 2,966 |
|
|
| 2,966 |
|
Total |
| $ | — |
|
| $ | 4,305 |
|
| $ | 33,720 |
|
| $ | 38,025 |
|
There were 0 transfers between Levels 1 and 2 during the nine months ended September 30, 2020. There were 0 liabilities measured at fair value on a nonrecurring basis during the nine months ended September 30, 2020.
- 37 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
|
|
|
| Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1) |
|
| Significant Other Observable Inputs (Level 2) |
|
| Significant Unobservable Inputs (Level 3) |
|
| Total |
| ||||
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measured on a recurring basis: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency and government sponsored enterprises |
| $ | — |
|
| $ | 26,877 |
|
| $ | — |
|
| $ | 26,877 |
|
Mortgage-backed securities |
|
| — |
|
|
| 391,040 |
|
|
| — |
|
|
| 391,040 |
|
Other assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedging derivative instruments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Fair value adjusted through comprehensive income |
| $ | — |
|
| $ | 417,917 |
|
| $ | — |
|
| $ | 417,917 |
|
Other assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments - interest rate swaps |
| $ | — |
|
| $ | 6,419 |
|
| $ | — |
|
| $ | 6,419 |
|
Derivative instruments - credit contracts |
|
| — |
|
|
| 13 |
|
|
| — |
|
|
| 13 |
|
Derivative instruments - mortgage banking |
|
| — |
|
|
| 119 |
|
|
| — |
|
|
| 119 |
|
Other liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments - interest rate swaps |
|
| — |
|
|
| (6,720 | ) |
|
| — |
|
|
| (6,720 | ) |
Derivative instruments - credit contracts |
|
| — |
|
|
| (18 | ) |
|
| — |
|
|
| (18 | ) |
Derivative instruments - mortgage banking |
|
| — |
|
|
| (7 | ) |
|
| — |
|
|
| (7 | ) |
Fair value adjusted through net income |
| $ | — |
|
| $ | (194 | ) |
| $ | — |
|
| $ | (194 | ) |
Measured on a nonrecurring basis: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale |
| $ | — |
|
| $ | 4,224 |
|
| $ | — |
|
| $ | 4,224 |
|
Collateral dependent impaired loans |
|
| — |
|
|
| — |
|
|
| 3,630 |
|
|
| 3,630 |
|
Other assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan servicing rights |
|
| — |
|
|
| — |
|
|
| 1,129 |
|
|
| 1,129 |
|
Other real estate owned |
|
| — |
|
|
| — |
|
|
| 468 |
|
|
| 468 |
|
Total |
| $ | — |
|
| $ | 4,224 |
|
| $ | 5,227 |
|
| $ | 9,451 |
|
There were 0 transfers between Levels 1 and 2 during the nine months ended September 30, 2019. There were 0 liabilities measured at fair value on a nonrecurring basis during the nine months ended September 30, 2019.
The following table presents additional quantitative information about assets measured at fair value on a recurring and nonrecurring basis for which the Company has utilized Level 3 inputs to determine fair value as of September 30, 20202021 (dollars in thousands).
Asset |
| Fair Value |
|
| Valuation Technique |
| Unobservable Input |
| Unobservable Input Value or Range |
| Fair |
| Valuation Technique |
| Unobservable Input |
| Unobservable Input | |||
Collateral dependent loans |
| $ | 17,913 |
|
| Appraisal of collateral (1) |
| Appraisal adjustments (2) |
| 10.0% (3) |
| $ | 54,554 |
| Appraisal of collateral (1) |
| Appraisal adjustments (2) |
| 27.2% (3) / 0 - 35% | |
Loan servicing rights |
|
| 1,175 |
|
| Discounted cash flow |
| Discount rate |
| 10.2% (3) |
| 1,484 |
| Discounted cash flow |
| Discount rate |
| 10.3% (3) | ||
|
|
|
|
|
|
|
| Constant prepayment rate |
| 18.4% (3) |
|
|
| Constant prepayment rate |
| 14.5% (3) | ||||
Other real estate owned |
|
| 2,999 |
|
| Appraisal of collateral (1) |
| Appraisal adjustments (2) |
| 23.3% (3) |
(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable.
(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.
(3) Weighted averages.
40
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (16.)FAIR VALUE MEASUREMENTS (Continued)
|
|
|
|
|
|
Changes in Level 3 Fair Value Measurements
There were 0 assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of or during the nine months ended September 30, 20202021 and 2019.2020.
- 38 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
|
|
Disclosures about Fair Value of Financial Instruments
The assumptions used below are expected to approximate those that market participants would use in valuing these financial instruments.
Fair value estimates are made at a specific point in time, based on available market information and judgments about the financial instrument, including estimates of timing, amount of expected future cash flows and the credit standing of the issuer. Such estimates do not consider the tax impact of the realization of unrealized gains or losses. In some cases, the fair value estimates cannot be substantiated by comparison to independent markets. In addition, the disclosed fair value may not be realized in the immediate settlement of the financial instrument. Care should be exercised in deriving conclusions about our business, its value or financial position based on the fair value information of financial instruments presented below.
The estimated fair value approximates carrying value for cash and cash equivalents, Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) stock, accrued interest receivable, non-maturity deposits, short-term borrowings and accrued interest payable.
The following presents (in thousands) the carrying amount, estimated fair value, and placement in the fair value measurement hierarchy of the Company’s financial instruments as of the dates indicated.
|
| Level in |
| September 30, 2020 |
|
| December 31, 2019 |
|
| Level in |
| September 30, 2021 |
| December 31, 2020 |
| |||||||||||||||||||||
|
| Fair Value |
|
|
|
|
| Estimated |
|
|
|
|
|
| Estimated |
|
| Fair Value |
|
|
| Estimated |
|
|
| Estimated |
| |||||||||
|
| Measurement |
| Carrying |
|
| Fair |
|
| Carrying |
|
| Fair |
|
| Measurement |
| Carrying |
| Fair |
| Carrying |
| Fair |
| |||||||||||
|
| Hierarchy |
| Amount |
|
| Value |
|
| Amount |
|
| Value |
|
| Hierarchy |
| Amount |
| Value |
| Amount |
| Value |
| |||||||||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
| Level 1 |
| $ | 282,070 |
|
| $ | 282,070 |
|
| $ | 112,947 |
|
| $ | 112,947 |
|
| Level 1 |
| $ | 288,426 |
| $ | 288,426 |
| $ | 93,878 |
| $ | 93,878 |
| |||
Securities available for sale |
| Level 2 |
|
| 515,971 |
|
|
| 515,971 |
|
|
| 417,917 |
|
|
| 417,917 |
|
| Level 2 |
| 1,097,950 |
| 1,097,950 |
| 628,059 |
| 628,059 |
| |||||||
Securities held to maturity, net |
| Level 2 |
|
| 290,946 |
|
|
| 301,878 |
|
|
| 359,000 |
|
|
| 363,259 |
|
| Level 2 |
| 218,135 |
| 224,164 |
| 271,973 |
| 282,035 |
| |||||||
Loans held for sale |
| Level 2 |
|
| 7,076 |
|
|
| 7,076 |
|
|
| 4,224 |
|
|
| 4,224 |
|
| Level 2 |
| 5,916 |
| 5,916 |
| 4,305 |
| 4,305 |
| |||||||
Loans |
| Level 2 |
|
| 3,501,231 |
|
|
| 3,536,646 |
|
|
| 3,186,875 |
|
|
| 3,201,814 |
| ||||||||||||||||||
Loans |
| Level 3 |
|
| 17,913 |
|
|
| 17,913 |
|
|
| 3,630 |
|
|
| 3,630 |
|
| Level 2 |
| 3,553,901 |
| 3,597,936 |
| 3,513,284 |
| 3,549,770 |
| |||||||
Loans (1) |
| Level 3 |
| 54,554 |
| 54,554 |
| 29,434 |
| 29,434 |
| |||||||||||||||||||||||||
Long-lived assets held for sale |
| Level 2 |
| 4,341 |
| 4,341 |
| — |
| — |
| |||||||||||||||||||||||||
Accrued interest receivable |
| Level 1 |
|
| 16,230 |
|
|
| 16,230 |
|
|
| 11,308 |
|
|
| 11,308 |
|
| Level 1 |
| 15,742 |
| 15,742 |
| 15,635 |
| 15,635 |
| |||||||
FHLB and FRB stock |
| Level 2 |
|
| 8,619 |
|
|
| 8,619 |
|
|
| 20,637 |
|
|
| 20,637 |
| ||||||||||||||||||
Derivative instruments – cash flow hedges |
| Level 2 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
| Level 2 |
| 1,112 |
| 1,112 |
| — |
| — |
| |||||||
Derivative instruments – interest rate products |
| Level 2 |
|
| 23,079 |
|
|
| 23,079 |
|
|
| 6,419 |
|
|
| 6,419 |
|
| Level 2 |
| 14,653 |
| 14,653 |
| 19,626 |
| 19,626 |
| |||||||
Derivative instruments – credit contracts |
| Level 2 |
|
| 29 |
|
|
| 29 |
|
|
| 13 |
|
|
| 13 |
|
| Level 2 |
| 0 |
| 0 |
| 23 |
| 23 |
| |||||||
Derivative instruments – mortgage banking |
| Level 2 |
|
| 891 |
|
|
| 891 |
|
|
| 119 |
|
|
| 119 |
|
| Level 2 |
| 374 |
| 374 |
| 471 |
| 471 |
| |||||||
FHLB and FRB stock |
| Level 2 |
| 9,368 |
| 9,368 |
| 8,619 |
| 8,619 |
| |||||||||||||||||||||||||
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Non-maturity deposits |
| Level 1 |
|
| 3,523,698 |
|
|
| 3,523,698 |
|
|
| 2,375,486 |
|
|
| 2,375,486 |
|
| Level 1 |
| 4,054,683 |
| 4,054,683 |
| 3,392,774 |
| 3,392,774 |
| |||||||
Time deposits |
| Level 2 |
|
| 841,230 |
|
|
| 843,191 |
|
|
| 1,180,189 |
|
|
| 1,179,991 |
|
| Level 2 |
| 920,280 |
| 920,221 |
| 885,593 |
| 887,113 |
| |||||||
Short-term borrowings |
| Level 1 |
|
| 5,300 |
|
|
| 5,300 |
|
|
| 275,500 |
|
|
| 275,500 |
|
| Level 1 |
| — |
| — |
| 5,300 |
| 5,300 |
| |||||||
Long-term borrowings |
| Level 2 |
|
| 39,258 |
|
|
| 45,224 |
|
|
| 39,273 |
|
|
| 41,083 |
|
| Level 2 |
| 73,834 |
| 79,275 |
| 73,623 |
| 83,953 |
| |||||||
Accrued interest payable |
| Level 1 |
|
| 5,737 |
|
|
| 5,737 |
|
|
| 10,942 |
|
|
| 10,942 |
|
| Level 1 |
| 3,226 |
| 3,226 |
| 4,381 |
| 4,381 |
| |||||||
Derivative instruments – cash flow hedges |
| Level 2 |
|
| 647 |
|
|
| 647 |
|
|
| — |
|
|
| — |
|
| Level 2 |
| — |
| — |
| 311 |
| 311 |
| |||||||
Derivative instruments – interest rate products |
| Level 2 |
|
| 23,498 |
|
|
| 23,498 |
|
|
| 6,720 |
|
|
| 6,720 |
|
| Level 2 |
| 14,658 |
| 14,658 |
| 19,837 |
| 19,837 |
| |||||||
Derivative instruments – credit contracts |
| Level 2 |
|
| 47 |
|
|
| 47 |
|
|
| 18 |
|
|
| 18 |
|
| Level 2 |
| 1 |
| 1 |
| 86 |
| 86 |
| |||||||
Derivative instruments – mortgage banking |
| Level 2 |
|
| 13 |
|
|
| 13 |
|
|
| 7 |
|
|
| 7 |
|
| Level 2 |
| 5 |
| 5 |
| 1 |
| 1 |
|
(1) Comprised of collateral dependent loans.
41 |
|
- 39 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(17.)SEGMENT REPORTING
|
|
The Company has 21 reportable segments:segment, Banking, which includes all of the company’s retail and Non-Banking. Thesecommercial banking operations. This reportable segments havesegment has been identified and organized based on the nature of the underlying products and services applicable to eachthe segment, the type of customers to whom those products and services are offered and the distribution channel through which those products and services are made available.
The Banking segment includes all ofAll other segments that do not meet the Company’s retail and commercial banking operations. The Non-Banking segmentquantitative threshold for separate reporting have been grouped as “All Other.” This “All Other” grouping includes the activities of SDN, a full-service insurance agency that provides a broad range of insurance services to both personal and business clients, and Courier Capital and HNP Capital, our investment advisor and wealth management firms that provide customized investment management, investment consulting and retirement plan services to individuals, businesses, institutions, foundations and retirement plans.plans, and Holding companyCompany amounts, which are the primary differences between segment amounts and consolidated totals, and are reflected in the Holding Company and Other column below, along with amounts to eliminate balances and transactions between segments.
The following tables present information regarding our business segments as of and for the periods indicated (in thousands).
|
| Banking |
|
| All Other |
|
| Consolidated |
| |||
September 30, 2021 |
|
|
|
|
|
|
|
|
| |||
Goodwill |
| $ | 48,536 |
|
| $ | 18,535 |
|
| $ | 67,071 |
|
Other intangible assets, net |
|
| 6 |
|
|
| 7,582 |
|
|
| 7,588 |
|
Total assets |
|
| 5,583,776 |
|
|
| 39,417 |
|
|
| 5,623,193 |
|
December 31, 2020 |
|
|
|
|
|
|
|
|
| |||
Goodwill |
| $ | 48,536 |
|
| $ | 17,526 |
|
| $ | 66,062 |
|
Other intangible assets, net |
|
| 28 |
|
|
| 7,699 |
|
|
| 7,727 |
|
Total assets |
|
| 4,875,673 |
|
|
| 36,633 |
|
|
| 4,912,306 |
|
|
| Banking |
|
| All Other (1) |
|
| Consolidated |
| |||
Three months ended September 30, 2021 |
|
|
|
|
|
|
|
|
| |||
Net interest income (expense) |
| $ | 39,333 |
|
| $ | (1,060 | ) |
| $ | 38,273 |
|
Benefit (provision) for credit losses |
|
| 541 |
|
|
| — |
|
|
| 541 |
|
Noninterest income |
|
| 7,733 |
|
|
| 4,350 |
|
|
| 12,083 |
|
Noninterest expense |
|
| (24,351 | ) |
|
| (4,818 | ) |
|
| (29,169 | ) |
Income (loss) before income taxes |
|
| 23,256 |
|
|
| (1,528 | ) |
|
| 21,728 |
|
Income tax (expense) benefit |
|
| (4,748 | ) |
|
| 195 |
|
|
| (4,553 | ) |
Net income (loss) |
| $ | 18,508 |
|
| $ | (1,333 | ) |
| $ | 17,175 |
|
Nine months ended September 30, 2021 |
|
|
|
|
|
|
|
|
| |||
Net interest income (expense) |
| $ | 117,039 |
|
| $ | (3,177 | ) |
| $ | 113,862 |
|
Benefit (provision) for credit losses |
|
| 7,144 |
|
|
| — |
|
|
| 7,144 |
|
Noninterest income |
|
| 23,611 |
|
|
| 11,621 |
|
|
| 35,232 |
|
Noninterest expense |
|
| (70,183 | ) |
|
| (12,670 | ) |
|
| (82,853 | ) |
Income (loss) before income taxes |
|
| 77,611 |
|
|
| (4,226 | ) |
|
| 73,385 |
|
Income tax (expense) benefit |
|
| (16,563 | ) |
|
| 1,263 |
|
|
| (15,300 | ) |
Net income (loss) |
| $ | 61,048 |
|
| $ | (2,963 | ) |
| $ | 58,085 |
|
|
| Banking |
|
| Non- Banking |
|
| Holding Company and Other |
|
| Consolidated Totals |
| ||||
September 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
| $ | 48,536 |
|
| $ | 17,526 |
|
| $ | — |
|
| $ | 66,062 |
|
Other intangible assets, net |
|
| 41 |
|
|
| 7,959 |
|
|
| — |
|
|
| 8,000 |
|
Total assets |
|
| 4,922,251 |
|
|
| 37,420 |
|
|
| (470 | ) |
|
| 4,959,201 |
|
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
| $ | 48,536 |
|
| $ | 17,526 |
|
| $ | — |
|
| $ | 66,062 |
|
Other intangible assets, net |
|
| 98 |
|
|
| 8,763 |
|
|
| — |
|
|
| 8,861 |
|
Total assets |
|
| 4,346,615 |
|
|
| 36,733 |
|
|
| 830 |
|
|
| 4,384,178 |
|
(1) Reflects activity from the acquisitions of assets of Landmark since February 1, 2021 (the date of acquisition) and North Woods since August 2, 2021 (the date of acquisition).
|
| Banking |
|
| Non- Banking |
|
| Holding Company and Other |
|
| Consolidated Totals |
| ||||
Three months ended September 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (expense) |
| $ | 36,117 |
|
| $ | — |
|
| $ | (618 | ) |
| $ | 35,499 |
|
Provision for credit losses |
|
| (4,028 | ) |
|
| — |
|
|
| — |
|
|
| (4,028 | ) |
Noninterest income |
|
| 9,101 |
|
|
| 3,489 |
|
|
| (189 | ) |
|
| 12,401 |
|
Noninterest expense |
|
| (24,504 | ) |
|
| (3,571 | ) |
|
| (584 | ) |
|
| (28,659 | ) |
Income (loss) before income taxes |
|
| 16,686 |
|
|
| (82 | ) |
|
| (1,391 | ) |
|
| 15,213 |
|
Income tax (expense) benefit |
|
| (3,598 | ) |
|
| 18 |
|
|
| 640 |
|
|
| (2,940 | ) |
Net income (loss) |
| $ | 13,088 |
|
| $ | (64 | ) |
| $ | (751 | ) |
| $ | 12,273 |
|
Nine months ended September 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (expense) |
| $ | 104,657 |
|
| $ | — |
|
| $ | (1,853 | ) |
| $ | 102,804 |
|
Provision for credit losses |
|
| (21,689 | ) |
|
| — |
|
|
| — |
|
|
| (21,689 | ) |
Noninterest income |
|
| 23,169 |
|
|
| 9,543 |
|
|
| (517 | ) |
|
| 32,195 |
|
Noninterest expense |
|
| (72,008 | ) |
|
| (9,349 | ) |
|
| (1,718 | ) |
|
| (83,075 | ) |
Income (loss) before income taxes |
|
| 34,129 |
|
|
| 194 |
|
|
| (4,088 | ) |
|
| 30,235 |
|
Income tax (expense) benefit |
|
| (6,317 | ) |
|
| (56 | ) |
|
| 670 |
|
|
| (5,703 | ) |
Net income (loss) |
| $ | 27,812 |
|
| $ | 138 |
|
| $ | (3,418 | ) |
| $ | 24,532 |
|
- 40 -42
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
|
|
(17.)SEGMENT REPORTING (Continued)
|
| Banking |
|
| All Other |
|
| Consolidated |
| |||
Three months ended September 30, 2020 |
|
|
|
|
|
|
|
|
| |||
Net interest income (expense) |
| $ | 36,117 |
|
| $ | (618 | ) |
| $ | 35,499 |
|
Provision for credit losses |
|
| (4,028 | ) |
|
| — |
|
|
| (4,028 | ) |
Noninterest income |
|
| 8,917 |
|
|
| 3,300 |
|
|
| 12,217 |
|
Noninterest expense |
|
| (24,320 | ) |
|
| (4,155 | ) |
|
| (28,475 | ) |
Income (loss) before income taxes |
|
| 16,686 |
|
|
| (1,473 | ) |
|
| 15,213 |
|
Income tax (expense) benefit |
|
| (3,598 | ) |
|
| 658 |
|
|
| (2,940 | ) |
Net income (loss) |
| $ | 13,088 |
|
| $ | (815 | ) |
| $ | 12,273 |
|
Nine months ended September 30, 2020 |
|
|
|
|
|
|
|
|
| |||
Net interest income (expense) |
| $ | 104,657 |
|
| $ | (1,853 | ) |
| $ | 102,804 |
|
Provision for credit losses |
|
| (21,689 | ) |
|
| — |
|
|
| (21,689 | ) |
Noninterest income |
|
| 22,814 |
|
|
| 9,026 |
|
|
| 31,840 |
|
Noninterest expense |
|
| (71,653 | ) |
|
| (11,067 | ) |
|
| (82,720 | ) |
Income (loss) before income taxes |
|
| 34,129 |
|
|
| (3,894 | ) |
|
| 30,235 |
|
Income tax (expense) benefit |
|
| (6,317 | ) |
|
| 614 |
|
|
| (5,703 | ) |
Net income (loss) |
| $ | 27,812 |
|
| $ | (3,280 | ) |
| $ | 24,532 |
|
|
| Banking |
|
| Non- Banking |
|
| Holding Company and Other |
|
| Consolidated Totals |
| ||||
Three months ended September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (expense) |
| $ | 33,101 |
|
| $ | — |
|
| $ | (618 | ) |
| $ | 32,483 |
|
Provision for loan losses |
|
| (1,844 | ) |
|
| — |
|
|
| — |
|
|
| (1,844 | ) |
Noninterest income |
|
| 9,398 |
|
|
| 3,149 |
|
|
| (186 | ) |
|
| 12,361 |
|
Noninterest expense |
|
| (22,153 | ) |
|
| (3,225 | ) |
|
| (508 | ) |
|
| (25,886 | ) |
Income (loss) before income taxes |
|
| 18,502 |
|
|
| (76 | ) |
|
| (1,312 | ) |
|
| 17,114 |
|
Income tax (expense) benefit |
|
| (4,034 | ) |
|
| 16 |
|
|
| (263 | ) |
|
| (4,281 | ) |
Net income (loss) |
| $ | 14,468 |
|
| $ | (60 | ) |
| $ | (1,575 | ) |
| $ | 12,833 |
|
Nine months ended September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (expense) |
| $ | 98,592 |
|
| $ | — |
|
| $ | (1,853 | ) |
| $ | 96,739 |
|
Provision for loan losses |
|
| (5,391 | ) |
|
| — |
|
|
| — |
|
|
| (5,391 | ) |
Noninterest income |
|
| 22,452 |
|
|
| 8,809 |
|
|
| (547 | ) |
|
| 30,714 |
|
Noninterest expense |
|
| (65,256 | ) |
|
| (9,097 | ) |
|
| (1,707 | ) |
|
| (76,060 | ) |
Income (loss) before income taxes |
|
| 50,397 |
|
|
| (288 | ) |
|
| (4,107 | ) |
|
| 46,002 |
|
Income tax (expense) benefit |
|
| (10,693 | ) |
|
| 59 |
|
|
| 387 |
|
|
| (10,247 | ) |
Net income (loss) |
| $ | 39,704 |
|
| $ | (229 | ) |
| $ | (3,720 | ) |
| $ | 35,755 |
|
- 41 -43
MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q should be read in conjunction with the more detailed and comprehensive disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2019.2020. In addition, please read this section in conjunction with our Consolidated Financial Statements and Notes to Consolidated Financial Statements contained herein.
FORWARD LOOKING INFORMATION
Statements and financial analysis contained in this Quarterly Report on Form 10-Q that are based on other than historical data are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations or forecasts of future events and include, among others:
statements with respect to the beliefs, plans, objectives, goals, guidelines, expectations, anticipations, and future financial condition, results of operations and performance of Financial Institutions, Inc. (the “Parent” or “FII”) and its subsidiaries (collectively, the “Company,” “we,” “our” or “us”); and statements preceded by, followed by or that include the words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “projects” or similar expressions.
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These forward-looking statements are not guarantees of future performance, nor should they be relied upon as representing management’s views as of any subsequent date. Forward-looking statements involve significant risks and uncertainties and actual results may differ materially from those presented, either expressed or implied, in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 20192020 (the “Form 10-K”), including, but not limited to, those presented in the Management’s Discussion and Analysis of Financial Condition and Results of Operations. Factors that might cause such material differences include, but are not limited to:
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- 42 -44
MANAGEMENT’SMANAGEMENT'S DISCUSSION AND ANALYSIS
Our tax strategies and the value of our deferred tax assets and liabilities could adversely affect our operating results and regulatory capital ratios; Liquidity is essential to our businesses; We rely on dividends from our subsidiaries for most of our revenue; If our risk management framework does not effectively identify or mitigate our risks, we could suffer losses; We face competition in staying current with technological changes and banking alternatives to compete and meet customer demands; We rely on other companies to provide key components of our business infrastructure; A breach in security of our or third-party information systems, including the occurrence of a cyber incident or a deficiency in cybersecurity, or a failure by us to comply with New York State cybersecurity regulations, may subject us to liability, result in a loss of customer business or damage our brand image; We are subject to interest rate risk, and a rising rate environment may reduce our income and result in higher defaults on our loans, whereas a falling rate environment may result in earlier loan prepayments than we expect, which may reduce our income; The soundness of other financial institutions could adversely affect us; We may need to raise additional capital in the future and such capital may not be available on acceptable terms or at all; We may not pay or may reduce the dividends on our common stock; We may issue debt and equity securities or securities convertible into equity securities, any of which may be senior to our common stock as to distributions and in liquidation, which could dilute our current shareholders or negatively affect the value of our common stock; Our certificate of incorporation, our bylaws, and certain banking laws may have an anti-takeover effect; The market price of our common stock may fluctuate significantly in response to a number of factors; We may not be able to attract and retain skilled people; We use financial models for business planning purposes that may not adequately predict future results; We depend on the accuracy and completeness of information about or from customers and counterparties; Our business may be adversely affected by conditions in the financial markets and economic conditions generally; and Severe weather, natural disasters, public health emergencies and pandemics, acts of war or terrorism, and other external events could significantly impact our business.
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We caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, and advise readers that various factors, including those described above, could affect our financial performance and could cause our actual results or circumstances for future periods to differ materially from those anticipated or projected. See also Item 1A, Risk Factors, in the Form 10-K and Item 1A, Risk Factors, below for further information. Except as required by law, we do not undertake, and specifically disclaim any obligation to publicly release any revisions to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.
GENERAL
The Parent is a financial holding company headquartered in New York State, providing diversified financial services through its subsidiaries, Five Star Bank (the “Bank”), SDN Insurance Agency, LLC (“SDN”), Courier Capital, LLC (“Courier Capital”) and HNP Capital, LLC (“HNP Capital”). The Company offers a broad array of deposit, lending and other financial services to individuals, municipalities and businesses in Western and Central New York through its wholly-owned New York-chartered banking subsidiary, the Bank. Our indirect lending network includes relationships with franchised automobile dealers in Western and Central New York, the Capital District of New York and Northern and Central Pennsylvania. SDN provides a broad range of insurance services to personal and business clients. Courier Capital and HNP Capital provide customized investment advice, wealth management, investment consulting and retirement plan services to individuals, businesses, institutions, foundations and retirement plans.
Our primary sources of revenue are net interest income (interest earned on our loans and securities, net of interest paid on deposits and other funding sources) and noninterest income, particularly fees and other revenue from insurance, investment advisory and financial services provided to customers or ancillary services tied to loans and deposits. Business volumes and pricing drive revenue potential, and tend to be influenced by overall economic factors, including market interest rates, business spending, consumer confidence, economic growth, and competitive conditions within the marketplace. We are not able to predict market interest rate fluctuations with certainty and our asset/liability management strategy may not prevent interest rate changes from having a material adverse effect on our results of operations and financial condition.
45
MANAGEMENT'S DISCUSSION AND ANALYSIS
Our business strategy has been to maintain a community bank philosophy, which consists of focusing on and understanding the individualized banking and other financial needs of individuals, municipalities and businesses of the local communities surrounding our primary service area. We believe this focus allows us to be more responsive to our customers’ needs and provide a high level of personal service that differentiates us from larger competitors, resulting in long-standing and broad-based banking relationships. Our core customers are primarily small- to medium-sized businesses, individuals and community organizations who prefer to build banking, insurance and wealth management relationships with a community bank that combines high quality, competitively-priced products and services with personalized service. Because of our identity and origin as a locally operated bank, we believe that our level of personal service provides a competitive advantage over larger banks, which tend to consolidate decision-making authority outside local communities.
A key aspect of our current business strategy is to foster a community-oriented culture where our customers and employees establish long-standing and mutually beneficial relationships. We believe that we are well-positioned to be a strong competitor within our market area because of our focus on community banking needs and customer service, our comprehensive suite of deposit, loan, insurance and wealth management
- 43 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
products typically found at larger banks, our highly experienced management team and our strategically located banking centers. We have evolved to meet changing customer needs by opening what we refer to as financial solution center branches. These financial solution center branches have a smaller footprint than our traditional branches, focus on technology to provide solutions that fit our customer preferences for transacting business with us, and are staffed by certified personal bankers who are trained to meet a broad array of customer needs. In recent years, we have opened four financial solution centers in the Rochester and Buffalo markets. We believe that the foregoing factors all help to grow our core deposits, which supports a central element of our business strategy - the growth of a diversified and high-quality loan portfolio.
EXECUTIVE OVERVIEW
Summary of 20202021 Third Quarter Results
Net income decreased $560 thousand, or 4%,income increased $4.9 million to $17.2 million for the third quarter of 2021 compared to $12.3 million for the third quarter of 2020 compared to $12.8 million for the third quarter of 2019.2020. Net income available to common shareholders for the third quarter of 20202021 was $11.9$16.8 million, or $0.74$1.05 per diluted share, compared with $12.5$11.9 million, or $0.78$0.74 per diluted share, for the third quarter of last year. Return on average common equity was 10.72%13.94% and return on average assets was 1.02%1.27% for the third quarter of 20202021 compared to 12.00%10.72% and 1.19%1.02%, respectively, for the third quarter of 2019.2020.
ThirdThe increase in net income for the third quarter results were negatively impacted byof 2021 reflected a higher provision$541 thousand benefit for credit losses of $4.0 million, as compared to $1.8a provision of $4.0 million in the third quarter of 2019. The higher provision was driven by2020. Continued improvement in the adoptionnational unemployment forecast, positive trends in qualitative factors and a relatively low level of the current expectednet charge-offs resulted in a release of credit loss (“CECL”) standardreserves and uncertainty around the long-term impact ofcorresponding benefit for credit losses in the COVID-19 pandemic on the economic environment.quarter.
Net interest income totaled $38.3 million in the third quarter of 2021, up from $35.5 million in the third quarter of 2020, up from $32.5 million in the third quarter of 2019. This2020. The increase was primarily the result of an increase in interest-earning assets and a changedecrease in theinterest expense. The decrease in interest expense was primarily due to a favorable shift in deposit categories, with a lower allocation of time deposits, coupled with a lower interest-bearing cost of funds. Average Federal Reserve interest-earning asset mix as loans became a larger percentage of the portfolio. Averagecash, average investment securities and average loans were up $368.2$35.3 million, $407.6 million and $110.1 million, respectively, in the third quarter of 20202021 compared to the same quarter in 2019.2020.
The provision for credit losses - loans was a $334 thousand benefit in the third quarter of 2021 compared to a provision of $3.6 million in the third quarter of 2020 compared to $1.8 million in the third quarter of 2019.2020. Net charge-offs during the recent quarter were $587 thousand compared to $488 thousand down from $4.6 million in the third quarter of 2019.2020. Net charge-offs expressed as an annualized percentage of average loans outstanding werewas 0.06% during the third quarter of 2020 compared with 0.58% in the third quarter of 2019.2021 and 2020. See the “Allowance for Credit Losses - Loans” and “Non-Performing Assets and Potential Problem Loans” sections of this Management’s Discussion and Analysis for further discussion regarding the increase in the provision (benefit) for credit losses - loans and the decrease in net charge-offs.
Noninterest income was relatively flat at $12.4totaled $12.1 million in both the third quarter of 2020 and2021, compared to $12.2 million in the third quarter of 2019. Changes2020. The decrease in noninterest income for the third quarter werewas primarily attributeddue to increasesdecreases in income from derivative instruments, net, gain on sale of loans held for sale and income from derivative instruments, net, partially offset by decreases in net gain on investment securities, partially offset by increases in insurance income, investment advisory income and service charges on deposits. Net gain on sale of loans held for sale ofincome from investments in limited partnerships. Income from derivative instruments, net was $1.6 million was recognized inlower than the third quarter of 2020 due to increased residential real estate loans for sale volume and an increase in margin on these transactions.2020. Income from derivative instruments, of $1.9 million was recognized in the third quarter of 2020 driven primarily by an increase innet is based on the number and value of interest rate swap transactions executed and reflects growth and maturityduring the quarter combined with the impact of changes in the Company’s commercial loan business. The Company sold investment securities duringfair market value of borrower-facing trades. Net gain on sale of loans held for sale was $797 thousand lower than the third quarter of 2020, generatingprimarily due to lower transaction volume. Sale volume and margin were at historically high levels in the third quarter of 2020, driven by mortgage refinancing activity. No gain or loss was recognized on investment securities in the quarter compared to a net gain of $554 thousand asin the third quarter of 2020. The increase in insurance income of $507 thousand from the third quarter of 2020 was driven by the two 2021 bolt on acquisitions (North Woods in August and Landmark in February) and growth in the legacy SDN business, including the impact of increasing insurance premiums. The increase in investment advisory income of $526 thousand was primarily due to an increase in assets under management driven by a combination of market gains, new customer accounts and contributions to existing accounts. Income from investments in limited partnerships increased $799 thousand compared to a net gainthe third quarter of $1.62020.
46
MANAGEMENT'S DISCUSSION AND ANALYSIS
Noninterest expense totaled $29.2 million in the third quarter of 2019. The Company recognized $1.3 million in service charges on deposits in the third quarter of 2020 as2021, compared to $1.9to $28.5 million in the third quarter of 2019 primarily due to the Company’s COVID-19 relief initiatives of waiving or eliminating fees, implemented from March 23, 2020 through July 9, 2020, and the Company not re-initiating ATM access fees until September 19, 2020.
Noninterest expense in the third quarter of 2020 totaled $28.7 million compared with $25.9 million in the third quarter of 2019. The increase in noninterest expense was primarily the result of increases in salaries and employee benefits expense, occupancy and equipment expense and computer and data processing expense, partially offset by decreases in restructuring charges incurredand advertising and promotions expense. Salaries and benefits expense increased primarily due to higher incentive compensation and commissions, investments in personnel and the impact of 2021 acquisitions. Occupancy and equipment expense increased primarily as a result of the purchase of security equipment for multiple locations, timing differences related to the outsourcing of property management services and expenses related to two Five Star Bank branches opened in Buffalo in June 2021. Computer and data processing expense increased primarily as a result of the Company’s investments in technology, including digital banking initiatives. Restructuring charges in the third quarter of 2020 and increases in salaries and employee benefits, computer and data processing and FDIC assessments. Restructuring charges of $1.4 million representrepresents non-recurring real estate related charges related to the previously described branch closingsclosure of six bank branches and staff reduction announceda staffing reduction. The decrease in July 2020. The increase in salariesadvertising and employee benefits includes $224 thousand of non-recurring severance costs incurred in connection with the previously described branch closings and staff reduction announced in July 2020. The increase in computer and data processingpromotions expense was primarily due to costs related to the Bank’s new onlineongoing evolution of our long-term marketing strategy and mobile platform, Five Star Bank Digital Banking, launcheda temporary reduction in the second quarter of 2020. FDIC assessments were $594 thousand in the third quarter of 2020 compared to $7 thousand in the third quarter of 2019. The FDIC minimum reserve ratio was exceeded in 2018, resulting in credits used to offset expense in 2019 and the first quarter of 2020.external advertising expense.
The regulatory Common Equity Tier 1 Ratio and Total Risk-Based Capital Ratio were 10.19%10.24%, and 12.74%13.25%, respectively, at September 30, 2020.2021. See the “Liquidity and Capital Management” section of this Management’s Discussion and Analysis for further discussion regarding regulatory capital and the Basel III capital rules.
Enterprise Standardization ProgramAcquisition of North Woods Capital Benefits
On August 2, 2021, North Woods Capital Benefits LLC (“North Woods”) was acquired by the Company’s insurance subsidiary SDN. North Woods was a Buffalo-based employee benefits and human resources advisory firm with a mission of helping clients of all sizes navigate the complexities of employee benefits, human resources and compliance to control costs and maximize long-term savings.
The Company’s enterprise standardization program is focused on improving operational efficiencyacquisition expands SDN’s employee benefits business and enhancing future profitability. On July 17, 2020,adds important expertise in connection with the program, employee benefits and human resources consulting. William (Bill) Wadsworth, North Woods’ Founder, continues his long-term client relationships in his new role leading SDN’s employee benefits practice. Sarah Kirke, former Director of Client Service and HR Consulting at North Woods, serves as Employee Benefits Account Manager and HR Consultant at SDN.
Elmira Branch Relocation
Five Star Bank announced changesopened its relocated branch in the City of Elmira on August 2, 2021. The new branch is in a newly-constructed building that is part of the New York State Downtown Revitalization Initiative. Consumers and businesses can access a full spectrum of banking and lending services, insurance and wealth management and investment services at the new branch.
The branch is designed to adapt toserve as a full-service branch model to streamline retail branches to better alignfinancial solution center, with no teller lines and no barriers between bank associates and customers. It features a blend of new technology including Interactive Teller Machines and the comfort of community banking with Certified Personal Bankers. Our new design aligns services with shifting customer needs and preferences.
The announcement was the result of a nine-month comprehensive assessment of all lines of business and functional areas, conductedpreferences including rapid advancements in partnership with a leading process improvement organization. The data-driven analysis identified, among other things, overlapping service
- 44 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
areas, automation opportunities and streamlining of processes and operations that would enhance customer experiences and facilitate the long-term sustainability of current and future branches.
The July announcement included the consolidation of eleven branches into five, resulting in six branch closings and a reduction in staffing. The consolidations represent about ten percent of the branch network and impacted approximately six percent of the Company’s total workforce. These actions resulted in one-time expenses related to severance and real estate related charges of approximately $1.6 million in the third quarter of 2020. Expense savings of $2.6 million are anticipated on an annualized basis.
In October 2020, the Company announced the planned closure of one additional branch in January 2021. This location was not included in the branch consolidations announced in July, as alternative options were being considered and consolidation was not possible given its significant distance from other Five Star Bank branches. This closure is expected to result in one-time expenses related to severance costs and real estate related charges of approximately $130 thousand in the fourth quarter of 2020. Expected expense savings are anticipated at $340 thousand on an annualized basis.
The enterprise standardization program is not yet complete as we continue to evaluate activities and functions across the organization, focusing on ways to improve operational efficiency while enhancing the employee and customer experience.
Subordinated Note Issuance
On October 7, 2020, the Company completed a private placement of $35.0 million of fixed-to-floating rate subordinated notes due 2030 (the “Notes”) to qualified institutional buyers and accredited institutional investors. The Notes have a maturity date of October 15, 2030 and bear interest, payable semi-annually, at the rate of 4.375% per annum, until October 15, 2025. Commencing on that date, the interest rate will reset quarterly to an interest rate per annum equalcommitted to the then current three-month secured overnight financing rate (“SOFR”) plus 4.265% basis points, payable quarterly until maturity.
The Company is entitled to redeem the Notes,use of green and energy efficient materials in whole or in part, on any interest payment date on or after October 15, 2025, and in whole at any time upon certain other specified events. The Company intends to use the net proceeds for general corporate purposes, organic growth and to support regulatory capital ratios at Five Star Bank.
In connection with the issuance and sale of the Notes, the Company entered into a registration rights agreement with the purchasers of the Notes pursuant to which the Company has agreed to take certain actions to provideconstruction. Materials sourced for the exchangeElmira branch received certifications from Cradle to Cradle, Declare, Forest Stewardship Council, Green Square and GreenGuard. Materials with a high percentage of recycled content were used when possible and energy-efficient LED lighting was used throughout the Notes for subordinated notes that are registered under the Securities Act of 1933, as amended, with substantially the same terms as the Notes.interior and exterior.
Stock Repurchase Program
In November 2020, the Company announced that its Board of Directors approved a stock repurchase program for up to 801,879 shares of its common stock, or approximately 5% of the Company’s outstanding common shares. The repurchase program permits shares to be repurchased in open market transactions and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. The timing and number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. The repurchase program does not obligate the Company to purchase any shares and it may be extended, modified or discontinued at any time.
Operational, Accounting and Reporting Impacts Related to the COVID-19 Pandemic
The COVID-19 pandemic has negatively impacted the global economy, including our operating footprint of Western and Central New York. In response to this crisis, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was passed by Congress and signed into law on March 27, 2020. The CARES Act providesprovided an estimated $2.2 trillion to fight the COVID-19 pandemic and stimulate the economy by supporting individuals and businesses through loans, grants, tax changes, and other types of relief. Some of the provisions applicable to the Company include, but are not limited to:
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- 45 -47
MANAGEMENT’SMANAGEMENT'S DISCUSSION AND ANALYSIS
Also, in response to the COVID-19 pandemic, the Board of Governors of the Federal Reserve System (“FRB”), the Federal Deposit Insurance Corporation (“FDIC”), the National Credit Union Administration (“NCUA”), the Office of the Comptroller of the Currency (“OCC”), and the Consumer Financial Protection Bureau (“CFPB”), in consultation with the state financial regulators (collectively, the “agencies”) issued a joint interagency statement (issued March 22, 2020; revised statement issued April 7, 2020). Some of the provisions applicable to the Company include, but are not limited to:
Accounting for Loan Modifications - Loan modifications that do not meet the conditions of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. The agencies confirmed with FASB staff that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or insignificant delays in payment. Past Due Reporting - With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral. A loan’s payment date is governed by the due date stipulated in the legal agreement. If a financial institution agrees to a payment deferral, these loans would not be considered past due during the period of the deferral. Nonaccrual Status and Charge-offs - During short-term COVID-19 modifications, these loans generally should not be reported as nonaccrual or as classified.
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Effective March 23, 2020 through July 9, 2020, for consumer customers, the Bank waived early CD penalty fees for withdrawals up to $20,000 (limited to one penalty-free withdrawal per CD account); eliminated all insufficient funds (overdrafts) and returned item fees; eliminated all Pay by Phone fees; waived all late fees; offered the opportunity for monthly mortgage, home equity loan or home equity line payment relief; offered the opportunity to defer unsecured consumer loans or lines of credit and secured consumer loans and lines of credit payments; and offered unsecured personal loans up to $5,000, up to 60 months at 2.95% APR subject to credit approval (additional terms and conditions may apply). In addition,approval. ATM access fees were reinitiated on September 19, 2020.
Business customers are being faced with challenging and unique circumstances. The Bank’s relationship bankers are highly skilled in providing tailored financial solutions designed to meetAs part of the specific, individual needsfirst round of each business and they are actively reaching out to each business customer to understand how the Bank can help, given each unique business circumstance.
As of October 23, 2020,PPP loans we have helped more than 1,700 customers obtain more than $270 million in loans throughas of December 31, 2020. We have helped customers complete the forgiveness process for approximately $239 million of PPP loans in the first nine months of 2021. Also, during the first nine months of 2021, we have helped customers obtain approximately $107 million of new PPP loans under the second round of the PPP. Additionally, as of September 30, 2021, approximately 3%2% of our commercial loan and mortgage customers, 1% of our residential real estate loans and lines customers and less than 1% of our indirect loans customers have active payment deferrals.deferrals in accordance with the previously noted loan modifications under the CARES Act or agencies guidelines.
RESULTS OF OPERATIONS
Net Interest Income and Net Interest Margin
Net interest income is our primary source of revenue, comprising 76% of revenue during the nine months ended September 30, 2020.2021. Net interest income is the difference between interest income on interest-earning assets, such as loans and investment securities, and interest expense on interest-bearing deposits and other borrowings used to fund interest-earning and other assets or activities. Net interest income is affected by changes in interest rates and by the amount and composition of earning assets and interest-bearing liabilities, as well as the sensitivity of the balance sheet to changes in interest rates, including characteristics such as the fixed or variable nature of the financial instruments, contractual maturities and repricing frequencies.
We use interest rate spread and net interest margin to measure and explain changes in net interest income. Interest rate spread is the difference between the yield on earning assets and the rate paid for interest-bearing liabilities that fund those assets. The net interest margin is expressed as the percentage of net interest income to average earning assets. The net interest margin exceeds the interest rate spread because noninterest-bearing sources of funds (“net free funds”), principally noninterest-bearing demand deposits and shareholders’ equity, also support earning assets. To compare tax-exempt asset yields to taxable yields, the yield on tax-exempt investment securities is computed on a taxable equivalent basis. Net interest income, interest rate spread, and net interest margin are discussed on a taxable equivalent basis.
48
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following table reconciles interest income per the consolidated statements of income to interest income adjusted to a fully taxable equivalent basis (dollars in thousands):
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| Three months ended September 30, |
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| Nine months ended September 30, |
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| Three months ended |
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| Nine months ended |
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| 2020 |
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| 2019 |
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| 2020 |
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| 2019 |
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| 2021 |
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| 2020 |
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| 2021 |
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| 2020 |
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Interest income per consolidated statements of income |
| $ | 39,719 |
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| $ | 42,459 |
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| $ | 121,131 |
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| $ | 126,621 |
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| $ | 41,227 |
| $ | 39,719 |
| $ | 123,452 |
| $ | 121,131 |
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Adjustment to fully taxable equivalent basis |
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| 201 |
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| 258 |
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| 680 |
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| 849 |
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| 140 |
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| 201 |
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| 493 |
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| 680 |
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Interest income adjusted to a fully taxable equivalent basis |
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| 39,920 |
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| 42,717 |
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| 121,811 |
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| 127,470 |
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| 41,367 |
| 39,920 |
| 123,945 |
| 121,811 |
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Interest expense per consolidated statements of income |
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| 4,220 |
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| 9,976 |
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| 18,327 |
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| 29,882 |
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| 2,954 |
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| 4,220 |
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| 9,590 |
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| 18,327 |
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Net interest income on a taxable equivalent basis |
| $ | 35,700 |
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| $ | 32,741 |
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| $ | 103,484 |
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| $ | 97,588 |
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| $ | 38,413 |
| $ | 35,700 |
| $ | 114,355 |
| $ | 103,484 |
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- 46 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
Analysis of Net Interest Income for the Three Months Ended September 30, 20202021 and 20192020
Net interest income on a taxable equivalent basis for the three months ended September 30, 2020,2021, was $35.7$38.4 million, an increase of $3.0approximately $2.7 million versus the comparable quarter last year of $32.7 million.$35.7 million. The increase in net interest income was primarily due primarily to an increaseincreases in average loans and average investment securities of $368.2$110.1 million, or 12%3%, and $407.6 million, or 53%, respectively, compared to the third quarter of 2019, partially offset by2020, and a decrease in investment securitiesinterest expense of $15.9 million, or 2%, compared to the third quarter of 2019.$1.3 million. The decrease in investment securities isinterest expense was primarily due to a favorable shift in deposit categories, with a lower allocation of time deposits, coupled with a lower interest-bearing cost of funds. Average PPP loans, net of deferred fees were $141.3 million for the result ofthree months ended September 30, 2021 compared to $263.0 million for the redeployment of assets from investment securities into loans, resulting in loans comprising a higher percentage of total interest-earning assets.three months ended September 30, 2020.
Our net interest margin for the third quarter of 20202021 was 3.22%3.07%, seven-basis15-basis points lower than 3.29%3.22% for the same period in 2019.2020. This comparable period decrease was a function of a 16-basissix-basis point lower contribution from net free funds partially offset byand a nine-basis point increasedecrease in the interest rate spread. The higherlower interest rate spread was a result of a 69-basis29-basis point decrease in the yield on average interest-earning assets and a 78-basis20-basis point decrease in the cost of average interest-bearing liabilities.
For the third quarter of 2020,2021, the yield on average interest earning assets of 3.60%3.31% was 69-basis29-basis points lower than the third quarter of 20192020 of 4.29%3.60%. Loan yields decreased 75 basissix-basis points during the third quarter of 20202021 to 4.02%3.96% from 4.77%4.02%. The yield on investment securities decreased 17-basis51-basis points during the third quarter of 20202021 to 2.23%1.72% from 2.40%2.23%. Overall, a favorable volume variance increased interest income by $3.1 million during the third quarter of 2021, while the earning asset rate changes decreased interest income by $6.8 million during the third quarter of 2020 and a favorable volume variance increased interest income by $4.0$1.7 million which collectively drove a $2.8$1.4 million decreaseincrease in interest income.
Average interest-earning assets were $4.97 billion for the third quarter of 2021 compared to $4.41 billion for the third quarter of 2020, compared to $3.96 billion for the third quarter of 2019, an increase of $454.9$553.0 million, or 12%13%, from the comparable quarter last year, with average loans up $368.2$110.1 million from $3.15$3.52 billion to $3.52$3.63 billion and average securities down $15.9up $407.6 million from $785.6$769.7 million to $769.7 million.$1.18 billion. The growth in average loans reflected increases in theour commercial loans, residential real estate loans and other consumer loansindirect loan categories. Commercial loans in particular, were up $381.1$42.5 million from $1.61$1.99 billion to $1.99$2.03 billion, or 24%2%, from the third quarter of 2019.2020. The increaseaverage balances of PPP loans net of deferred fees, which are included in commercial loans, was primarily driven bywere $141.3 million and $263.0 million in the PPP loans. third quarter of 2021 and 2020, respectively. Residential real estate lines and loans were up $37.1down $15.5 million, partially offset by a decrease of $12.0or 16%, and $1.9 million, in residential real estate lines. or less than 1%, respectively, primarily due to consumer behavior. Consumer indirect loans decreasedincreased by $38.3$86.8 million, or 10%, and other consumer loans increaseddecreased by $304 thousand.$1.7 million, or 11%. Loans comprised 79.8%73.1% of average interest-earning assets during the third quarter of 20202021 compared to 79.7%79.8% during the third quarter of 2019.2020. Loans generally have significantly higher yields compared to securities and federal funds sold and interest-earning deposits and, as such, have a more positive effect on the net interest margin. The yield on average loans was 3.96% for the third quarter of 2021, a decrease of six-basis points compared to 4.02% for the comparable quarter in 2020. An increase in the volume of average loans resulted in a $1.4 million increase in interest income, partially offset by a $740 thousand decrease due to the unfavorable rate variance. Securities represented 23.7% of average interest-earning assets during the third quarter of 2021 compared to 17.4% during the third quarter of 2020. The increase in investment securities is due to the redeployment of excess liquidity intended to benefit interest income. An increase in the volume of average investment securities resulted in a $1.7 million increase in interest income, partially offset by a $1.0 million decrease due to the unfavorable rate variance.
The cost of average interest-bearing liabilities of 0.32% in the third quarter of 2021 compared to 0.52% in the third quarter of 2020, was 20-basis points lower and the cost of average interest-bearing deposits decreased 22-basis points from 0.43% to 0.21%. Average short-term borrowings decreased from $57.9 million to $0 in the third quarter of 2021 compared to the same quarter of 2020. The decrease in average short-term borrowings was a result of the Company’s decision to utilize brokered deposits as a cost-effective alternative to Federal Home Loan Bank borrowings. The cost of long-term borrowings for the third quarter of 2021 decreased 56-basis points from 6.31% to 5.75% compared to the same quarter of 2020. Overall, interest-bearing liability rate and volume changes resulted in $1.3 million of lower interest expense.
Average interest-bearing liabilities of $3.65 billion in the third quarter of 2021 were $411.6 million, or 13%, higher than the third quarter of 2020. On average, interest-bearing deposits grew $435.0 million from $3.15 billion to $3.58 billion, and noninterest-bearing demand deposits (a principal component of net free funds) were up $161.2 million from $987.9 million to $1.15 billion. The increase in average deposits was primarily due to growth in non-public and public demand deposits and an increase in reciprocal deposit programs. For further discussion of the
49
MANAGEMENT'S DISCUSSION AND ANALYSIS
reciprocal deposit programs, refer to the “Funding Activities - Deposits” section of this Management’s Discussion and Analysis. Overall, interest-bearing deposit rate and volume changes resulted in a $1.5 million decrease in interest expense during the third quarter of 2021, primarily due to the overall lower interest rate market conditions. Average borrowings decreased $23.4 million from $97.2 million to $73.8 million compared to the third quarter of 2020. Overall, short and long-term borrowing rate and volume changes resulted in $210 thousand of higher interest expense during the third quarter of 2021.
Analysis of Net Interest Income for the Nine Months Ended September 30, 2021 and 2020
Net interest income on a taxable equivalent basis for the nine months ended September 30, 2021, was $114.4 million, an increase of $10.9 million versus the comparable period last year of $103.5 million. The increase in net interest income was due primarily to increases in deferred fee amortization on PPP loans of $3.8 million, which included accelerated amortization of fees on PPP loans paid-off through the forgiveness process, increases in average loans and average investment securities of $259.4 million, or 8%, and $278.5 million, or 36%, respectively, compared to the first nine months of 2020, and a decrease in interest expense of $8.7 million. The decrease in interest expense was primarily due to a favorable shift in deposit categories, with a lower allocation of time deposits, coupled with a lower interest-bearing cost of funds. Average PPP loans, net of deferred fees were $206.9 million for the nine months ended September 30, 2021 compared to $147.0 million for the nine months ended September 30, 2020.
The net interest margin for the first nine months of 2021 was 3.14%, eleven-basis points lower than 3.25% for the same period in 2020. This comparable period decrease was a function of a nine-basis point lower contribution from net free funds, and a two-basis point decrease in interest rate spread. The lower interest rate spread was a result of a 43-basis point decrease in the yield on average interest-earning assets and a 41-basis point decrease in the cost of average interest-bearing liabilities.
For the first nine months of 2021, the yield on average earning assets of 3.40% was 43-basis points lower than the first nine months of 2020 of 3.83%. Loan yields decreased 23-basis points during the first nine months of 2021 to 4.02% from 4.25%. The yield on investment securities decreased 61-basis points during the first nine months of 2021 to 1.79% from 2.40%. Overall, a favorable volume variance increased interest income by $12.1 million during the first nine months of 2021, while the earning asset rate changes decreased interest income by $9.9 million, which collectively drove a $2.1 million increase in interest income.
Average interest-earning assets were $4.87 billion for the first nine months of 2021 compared to $4.25 billion for the first nine months of 2020, an increase of $623.3 million, or 15%, from the comparable period last year, with average loans up $259.4 million from $3.38 billion to $3.64 billion and average securities up $278.5 million from $772.1 million to $1.05 billion. The growth in average loans reflected increases in most loan categories. Commercial loans, in particular, were up $218.1 million from $1.85 billion to $2.07 billion, or 12%, from the first nine months of 2020. The average balances of PPP loans net of deferred fees, which are included in commercial loans, were $206.9 million and $147.0 million in the first nine months of 2021 and 2020, respectively. Residential real estate loans were up $12.2 million, or 2%, partially offset by a decrease of $15.7 million, or 16%, in residential real estate lines. Consumer indirect loans increased by $45.2 million, or 5%, and other consumer loans decreased by $283 thousand, or 2%. Loans represented 74.8% of average interest-earning assets during the first nine months of 2021 compared to 79.7% during the first nine months of 2020. Loans generally have significantly higher yields compared to securities and federal funds sold and interest-earning deposits and, as such, have a more positive effect on the net interest margin. The yield on average loans was 4.02% for the third quarterfirst nine months of 2020,2021, a decrease of 75-basis23-basis points compared to 4.77%4.25% for first nine months of 2020. An increase in the comparable quarter in 2019. An unfavorable rate variancevolume of average loans resulted in a $6.3an $8.1 million decreaseincrease in interest income, partially offset by an increase of $4.0a $6.1 million due to the increase in the volume of average loans. Securities represented 17.4% of average interest-earning assets during the third quarter of 2020 compared to 19.8% during the third quarter of 2019. The decrease in the volume of average securities resulted in a $110 thousand decrease in interest income, in addition to a $310 thousand decrease due to the unfavorable rate variance. Securities represented 21.6% of average interest-earning assets during first nine months of 2021 compared to 18.2% during the first nine months of 2020. The increase in investment securities is due to the redeployment of excess liquidity intended to benefit interest income. An increase in the volume of investment securities resulted in a $3.8 million increase in interest income, partially offset by a $3.6 million decrease due to the unfavorable rate variance.
The cost of average interest-bearing liabilities of 0.52%0.36% in the third quarterfirst nine months of 2021 compared to 0.77% in the first nine months of 2020 compared to 1.30% inwas 41-basis points lower and the third quarter of 2019, was 78-basis points lower. The cost of average interest-bearing deposits decreased 64-basis42-basis points from 1.07%0.66% to 0.43% and the cost of0.24%. Average short-term borrowings decreased 91-basis points$112.1 million from 2.51%$112.5 million to 1.60%$388 thousand in the third quarterfirst nine months of 20202021 compared to the same quarterperiod of 2019.2020. The decrease in the cost ofaverage short-term borrowings was a result of decreases in the federal funds rate.Company’s decision to utilize brokered deposits as a cost-effective alternative to Federal Home Loan Bank borrowings. The cost of long-term borrowings for the third quarterfirst nine months of 2020 increased one-basis point2021 decreased 55-basis points from 6.30% to 6.31%5.75% in the first nine months of 2021 compared to the same quarterperiod of 2019.2020. Overall, interest-bearing liability rate and volume decreases resulted in $5.8$8.7 million of lower interest expense.
50
MANAGEMENT'S DISCUSSION AND ANALYSIS
Average interest-bearing liabilities of $3.24$3.61 billion in the third quarterfirst nine months of 20202021 were $186.9$421.1 million, or 6%13%, higher than the third quarterfirst nine months of 2019.2020. On average, interest-bearing deposits grew $457.9$498.7 million from $2.69$3.03 billion to $3.15$3.53 billion, and noninterest-bearing demand deposits (a principal component of net free funds) were up $270.4$221.0 million from $717.5$874.5 million to $987.9 million.$1.10 billion. The increase in average deposits was driven by PPP loan proceeds, successful business development effortsprimarily due to growth in retail banking,non-public and public demand deposits and an increase in reciprocal deposit programs, and higher utilization of brokered deposits as a funding source. programs. For further discussion of the reciprocal deposit programs, refer to the “Funding Activities - Deposits” section of this Management’s Discussion and Analysis. Overall, interest-bearing deposit rate and volume changes resulted in a $3.9$8.8 million decrease inof lower interest expense during the third quarterfirst nine months of 2020.2021, primarily due to the overall lower interest rate market conditions. Average borrowings decreased $271.0$77.6 million from $368.2$151.7 million to $97.2$74.1 million compared to the third quarterfirst nine months of 2019.2020. Overall, short and long-term borrowing rate and volume changes resulted in $1.8 million$35 thousand of lower interest expense during the third quarter of 2020.
Analysis of Net Interest Income for the Nine Months Ended September 30, 2020 and 2019
Net interest income on a taxable equivalent basis for the nine months ended September 30, 2020, was $103.5 million, an increase of $5.9 million versus the comparable period last year of $97.6 million. The increase in net interest income was due primarily to an increase in average earning assets of $260.1 million or 7% compared to the first nine months of 2019.
- 47 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
The net interest margin for the first nine months of 2020 was 3.25%, two-basis point lower than 3.27% for the same period in 2019. This comparable period decrease was a function of an eight-basis point increase in interest rate spread, partially offset by a ten-basis point lower contribution from net free funds. The higher interest rate spread was a result of a 52-basis point decrease in the cost of average interest-bearing liabilities and a 44-basis point decrease in the yield on average interest-earning assets.
For the first nine months of 2020, the yield on average earning assets of 3.83% was 44-basis points lower than the first nine months of 2019 of 4.27%. Loan yields decreased 54-basis points during the first nine months of 2020 to 4.25% from 4.79%. The yield on investment securities increased two-basis points during the first nine months of 2020 to 2.40% from 2.38%. Overall, the earning asset rate changes decreased interest income by $13.5 million during the first nine months of 2020 and a favorable volume variance increased interest income by $7.8 million, which collectively drove a $5.7 million decrease in interest income.
Average interest-earning assets were $4.25 billion for the first nine months of 2020 compared to $3.99 billion for the first nine months of 2019, an increase of $260.1 million, or 7%, from the comparable period last year, with average loans up $254.3 million from $3.13 billion to $3.38 billion and average securities down $66.9 million from $839.0 million to $772.1 million. The growth in average loans reflected increases in the commercial loans and residential real estate loans categories. Commercial loans, in particular, were up $277.1 million from $1.57 billion to $1.85 billion, or 18%, from the first nine months of 2019. Loans represented 79.7% of average interest-earning assets during the first nine months of 2020 compared to 78.5% during the first nine months of 2019. Loans generally have significantly higher yields compared to securities and federal funds sold and interest-bearing deposits and, as such, have a more positive effect on the net interest margin. The yield on average loans was 4.25% for the first nine months of 2020, a decrease of 54-basis points compared to 4.79% for first nine months of 2019. An unfavorable rate variance resulted in a $13.2 million decrease in interest income, partially offset by an increase of $8.7 million due to the increase in the volume of average loans. Securities represented 18.2% of average interest-earning assets during first nine months of 2020 compared to 21.0% during the first nine months of 2019. The decrease in the volume of average securities resulted in a $1.2 million decrease in interest income, partially offset by a $109 thousand increase due to the favorable rate variance.
The cost of average interest-bearing liabilities of 0.77% in the first nine months of 2020 compared to 1.29% in the first nine months of 2019 was 52-basis points lower than the first nine months of 2019. The cost of average interest-bearing deposits decreased 40-basis points from 1.06% to 0.66% and the cost of short-term borrowings decreased 97-basis points from 2.64% to 1.67% in the first nine months of 2020 compared to the same period of 2019. The decrease in the cost of short-term borrowings was a result of decreases in the federal funds rate. The cost of long-term borrowings for the first nine months of 2020 remained relatively flat at 6.30% compared to the same period of 2019. Overall, interest-bearing liability rate and volume decreases resulted in $11.6 million of lower interest expense.
Average interest-bearing liabilities of $3.19 billion in the first nine months of 2020 were $95.9 million, or 3%, higher than the first nine months of 2019. On average, interest-bearing deposits grew $316.3 million from $2.72 billion to $3.03 billion, and noninterest-bearing demand deposits (a principal component of net free funds) were up $154.8 million from $719.6 million to $874.5 million. The increase in average deposits was driven by PPP loans, successful business development efforts in retail banking, an increase in reciprocal deposit programs, and higher utilization of brokered deposits as a funding source. For further discussion of the reciprocal deposit programs, refer to the “Funding Activities - Deposits” section of this Management’s Discussion and Analysis. Overall, interest-bearing deposit rate and volume changes resulted in $6.4 million of lower interest expense during the first nine months of 2020. Average borrowings decreased $220.4 million from $372.1 million to $151.7 million compared to the first nine months of 2019. Overall, short and long-term borrowing rate and volume changes resulted in $5.2 million of lower interest expense during the first nine months of 2020.2021.
- 48 -51
MANAGEMENT’SMANAGEMENT'S DISCUSSION AND ANALYSIS
The following tables sets forth certain information relating to the consolidated balance sheets and reflects the average yields earned on interest-earning assets, as well as the average rates paid on interest-bearing liabilities for the periods indicated (in thousands).
|
| Three months ended September 30, |
|
| Three months ended September 30, |
| ||||||||||||||||||||||||||||||||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2021 |
| 2020 |
| |||||||||||||||||||||||||||||||||||||
|
| Average Balance |
|
| Interest |
|
| Average Rate |
|
| Average Balance |
|
| Interest |
|
| Average Rate |
|
| Average |
| Interest |
| Average |
| Average |
| Interest |
| Average |
| |||||||||||||||||
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Federal funds sold and interest-earning deposits |
| $ | 121,929 |
|
| $ | 31 |
|
|
| 0.10 | % |
| $ | 19,370 |
|
| $ | 106 |
|
|
| 2.17 | % |
| $ | 157,229 |
| $ | 67 |
| 0.17 | % |
| $ | 121,929 |
| $ | 31 |
| 0.10 | % | ||||||
Investment securities (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Taxable |
|
| 614,465 |
|
|
| 3,330 |
|
|
| 2.17 |
|
|
| 587,069 |
|
|
| 3,478 |
|
|
| 2.37 |
|
| 1,068,226 |
| 4,392 |
| 1.64 |
| 614,465 |
| 3,330 |
| 2.17 |
| |||||||||||
Tax-exempt (2) |
|
| 155,208 |
|
|
| 957 |
|
|
| 2.47 |
|
|
| 198,526 |
|
|
| 1,229 |
|
|
| 2.48 |
|
|
| 109,011 |
|
| 666 |
|
| 2.44 |
|
| 155,208 |
|
| 957 |
|
| 2.47 |
| |||||
Total investment securities |
|
| 769,673 |
|
|
| 4,287 |
|
|
| 2.23 |
|
|
| 785,595 |
|
|
| 4,707 |
|
|
| 2.40 |
|
| 1,177,237 |
| 5,058 |
| 1.72 |
| 769,673 |
| 4,287 |
| 2.23 |
| |||||||||||
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Commercial business |
|
| 808,582 |
|
|
| 6,792 |
|
|
| 3.34 |
|
|
| 586,293 |
|
|
| 7,620 |
|
|
| 5.16 |
|
| 700,797 |
| 6,321 |
| 3.58 |
| 808,582 |
| 6,792 |
| 3.34 |
| |||||||||||
Commercial mortgage |
|
| 1,180,747 |
|
|
| 12,160 |
|
|
| 4.10 |
|
|
| 1,021,931 |
|
|
| 13,244 |
|
|
| 5.14 |
|
| 1,331,063 |
| 13,004 |
| 3.88 |
| 1,180,747 |
| 12,160 |
| 4.10 |
| |||||||||||
Residential real estate loans |
|
| 590,483 |
|
|
| 5,314 |
|
|
| 3.60 |
|
|
| 553,382 |
|
|
| 5,326 |
|
|
| 3.85 |
|
| 588,585 |
| 4,950 |
| 3.36 |
| 590,483 |
| 5,314 |
| 3.60 |
| |||||||||||
Residential real estate lines |
|
| 95,288 |
|
|
| 874 |
|
|
| 3.65 |
|
|
| 107,290 |
|
|
| 1,397 |
|
|
| 5.17 |
|
| 79,766 |
| 672 |
| 3.35 |
| 95,288 |
| 874 |
| 3.65 |
| |||||||||||
Consumer indirect |
|
| 830,647 |
|
|
| 10,039 |
|
|
| 4.81 |
|
|
| 868,927 |
|
|
| 9,813 |
|
|
| 4.48 |
|
| 917,402 |
| 10,903 |
| 4.71 |
| 830,647 |
| 10,039 |
| 4.81 |
| |||||||||||
Other consumer |
|
| 16,445 |
|
|
| 423 |
|
|
| 10.23 |
|
|
| 16,141 |
|
|
| 504 |
|
|
| 12.40 |
|
|
| 14,718 |
|
| 392 |
|
| 10.58 |
|
| 16,445 |
|
| 423 |
|
| 10.23 |
| |||||
Total loans |
|
| 3,522,192 |
|
|
| 35,602 |
|
|
| 4.02 |
|
|
| 3,153,964 |
|
|
| 37,904 |
|
|
| 4.77 |
|
|
| 3,632,331 |
|
| 36,242 |
|
| 3.96 |
|
| 3,522,192 |
|
| 35,602 |
|
| 4.02 |
| |||||
Total interest-earning assets |
|
| 4,413,794 |
|
|
| 39,920 |
|
|
| 3.60 |
|
|
| 3,958,929 |
|
|
| 42,717 |
|
|
| 4.29 |
|
| 4,966,797 |
|
| 41,367 |
|
| 3.31 |
|
| 4,413,794 |
|
| 39,920 |
|
| 3.60 |
| ||||||
Less: Allowance for credit losses |
|
| (47,447 | ) |
|
|
|
|
|
|
|
|
|
| (35,271 | ) |
|
|
|
|
|
|
|
|
| (48,202 | ) |
|
|
|
|
|
|
| (47,447 | ) |
|
|
|
|
|
| ||||||
Other noninterest-earning assets |
|
| 408,986 |
|
|
|
|
|
|
|
|
|
|
| 337,152 |
|
|
|
|
|
|
|
|
|
|
| 449,459 |
|
|
|
|
|
|
|
| 408,986 |
|
|
|
|
|
| ||||||
Total assets |
| $ | 4,775,333 |
|
|
|
|
|
|
|
|
|
| $ | 4,260,810 |
|
|
|
|
|
|
|
|
|
| $ | 5,368,054 |
|
|
|
|
|
|
| $ | 4,775,333 |
|
|
|
|
|
| ||||||
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest-bearing demand |
| $ | 704,550 |
|
| $ | 254 |
|
|
| 0.14 | % |
| $ | 632,540 |
|
|
| 348 |
|
|
| 0.22 | % |
| $ | 796,371 |
| $ | 291 |
| 0.15 | % |
| $ | 704,550 |
| 254 |
| 0.14 | % | |||||||
Savings and money market |
|
| 1,574,068 |
|
|
| 1,102 |
|
|
| 0.28 |
|
|
| 956,410 |
|
|
| 1,060 |
|
|
| 0.44 |
|
| 1,876,394 |
| 798 |
| 0.17 |
| 1,574,068 |
| 1,102 |
| 0.28 |
| |||||||||||
Time deposits |
|
| 867,479 |
|
|
| 2,014 |
|
|
| 0.92 |
|
|
| 1,099,212 |
|
|
| 5,869 |
|
|
| 2.12 |
|
|
| 908,351 |
|
| 805 |
|
| 0.35 |
|
| 867,479 |
|
| 2,014 |
|
| 0.92 |
| |||||
Total interest-bearing deposits |
|
| 3,146,097 |
|
|
| 3,370 |
|
|
| 0.43 |
|
|
| 2,688,162 |
|
|
| 7,277 |
|
|
| 1.07 |
|
| 3,581,116 |
| 1,894 |
| 0.21 |
| 3,146,097 |
| 3,370 |
| 0.43 |
| |||||||||||
Short-term borrowings |
|
| 57,856 |
|
|
| 232 |
|
|
| 1.60 |
|
|
| 328,952 |
|
|
| 2,081 |
|
|
| 2.51 |
|
| — |
| — |
| — |
| 57,856 |
| 232 |
| 1.60 |
| |||||||||||
Long-term borrowings |
|
| 39,314 |
|
|
| 618 |
|
|
| 6.31 |
|
|
| 39,244 |
|
|
| 618 |
|
|
| 6.30 |
|
|
| 73,786 |
|
| 1,060 |
|
| 5.75 |
|
| 39,314 |
|
| 618 |
|
| 6.31 |
| |||||
Total borrowings |
|
| 97,170 |
|
|
| 850 |
|
|
| 3.50 |
|
|
| 368,196 |
|
|
| 2,699 |
|
|
| 2.91 |
|
|
| 73,786 |
|
| 1,060 |
|
| 5.75 |
|
| 97,170 |
|
| 850 |
|
| 3.50 |
| |||||
Total interest-bearing liabilities |
|
| 3,243,267 |
|
|
| 4,220 |
|
|
| 0.52 |
|
|
| 3,056,358 |
|
|
| 9,976 |
|
|
| 1.30 |
|
| 3,654,902 |
|
| 2,954 |
|
| 0.32 |
|
| 3,243,267 |
| 4,220 |
|
| 0.52 |
| |||||||
Noninterest-bearing demand deposits |
|
| 987,908 |
|
|
|
|
|
|
|
|
|
|
| 717,473 |
|
|
|
|
|
|
|
|
|
| 1,149,120 |
|
|
|
|
|
|
| 987,908 |
|
|
|
|
|
| ||||||||
Other noninterest-bearing liabilities |
|
| 88,882 |
|
|
|
|
|
|
|
|
|
|
| 57,578 |
|
|
|
|
|
|
|
|
|
| 68,158 |
|
|
|
|
|
|
| 88,882 |
|
|
|
|
|
| ||||||||
Shareholders’ equity |
|
| 455,276 |
|
|
|
|
|
|
|
|
|
|
| 429,401 |
|
|
|
|
|
|
|
|
|
|
| 495,874 |
|
|
|
|
|
|
|
| 455,276 |
|
|
|
|
|
| ||||||
Total liabilities and shareholders’ equity |
| $ | 4,775,333 |
|
|
|
|
|
|
|
|
|
| $ | 4,260,810 |
|
|
|
|
|
|
|
|
|
| $ | 5,368,054 |
|
|
|
|
|
|
| $ | 4,775,333 |
|
|
|
|
|
| ||||||
Net interest income (tax-equivalent) |
|
|
|
|
| $ | 35,700 |
|
|
|
|
|
|
|
|
|
| $ | 32,741 |
|
|
|
|
|
|
|
|
| $ | 38,413 |
|
|
|
|
|
|
| $ | 35,700 |
|
|
| ||||||
Interest rate spread |
|
|
|
|
|
|
|
|
|
| 3.08 | % |
|
|
|
|
|
|
|
|
|
| 2.99 | % |
|
|
|
|
|
|
|
| 2.99 | % |
|
|
|
|
|
|
|
| 3.08 | % | ||||
Net earning assets |
| $ | 1,170,527 |
|
|
|
|
|
|
|
|
|
| $ | 902,571 |
|
|
|
|
|
|
|
|
|
| $ | 1,311,895 |
|
|
|
|
|
|
| $ | 1,170,527 |
|
|
|
|
|
| ||||||
Net interest margin (tax-equivalent) |
|
|
|
|
|
|
|
|
|
| 3.22 | % |
|
|
|
|
|
|
|
|
|
| 3.29 | % |
|
|
|
|
|
|
|
| 3.07 | % |
|
|
|
|
|
|
|
| 3.22 | % | ||||
Ratio of average interest-earning assets to average interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
| 136.09 | % |
|
|
|
|
|
|
|
|
|
| 129.53 | % |
|
|
|
|
|
|
|
| 135.89 | % |
|
|
|
|
|
|
|
| 136.09 | % |
|
|
|
|
(1) Investment securities are shown at amortized cost.
- 49 -(2) The interest on tax-exempt securities is calculated on a tax-equivalent basis assuming a Federal income tax rate of 21%.
|
| Nine months ended |
| |||||||||||||||
|
| 2021 |
|
| 2020 |
| ||||||||||||
|
| Average |
|
| Interest |
|
| Average |
|
| Average |
|
| Interest |
|
| Average |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
MANAGEMENT’SMANAGEMENT'S DISCUSSION AND ANALYSIS
|
| Nine months ended September 30, |
| |||||||||||||||||||||||||||||||||||||||||||||
|
| 2020 |
|
| 2019 |
| ||||||||||||||||||||||||||||||||||||||||||
|
| Average Balance |
|
| Interest |
|
| Average Rate |
|
| Average Balance |
|
| Interest |
|
| Average Rate |
| ||||||||||||||||||||||||||||||
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Federal funds sold and interest-earning deposits |
| $ | 91,263 |
|
| $ | 266 |
|
|
| 0.39 | % |
| $ | 18,495 |
|
| $ | 297 |
|
|
| 2.15 | % |
| $ | 176,653 |
| $ | 155 |
| 0.12 | % |
| $ | 91,263 |
| $ | 266 |
| 0.39 | % | ||||||
Investment securities (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
Investment securities (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||
Taxable |
|
| 596,604 |
|
|
| 10,649 |
|
|
| 2.38 |
|
|
| 620,607 |
|
|
| 10,949 |
|
|
| 2.35 |
|
| 923,162 |
| 11,751 |
| 1.70 |
| 596,604 |
| 10,649 |
| 2.38 |
| |||||||||||
Tax-exempt (2) |
|
| 175,455 |
|
|
| 3,237 |
|
|
| 2.46 |
|
|
| 218,388 |
|
|
| 4,047 |
|
|
| 2.47 |
|
|
| 127,368 |
|
| 2,345 |
|
| 2.45 |
|
| 175,455 |
|
| 3,237 |
|
| 2.46 |
| |||||
Total investment securities |
|
| 772,059 |
|
|
| 13,886 |
|
|
| 2.40 |
|
|
| 838,995 |
|
|
| 14,996 |
|
|
| 2.38 |
|
| 1,050,530 |
| 14,096 |
| 1.79 |
| 772,059 |
| 13,886 |
| 2.40 |
| |||||||||||
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| �� |
|
|
|
|
|
|
|
|
| ||||||
Commercial business |
|
| 712,703 |
|
|
| 19,843 |
|
|
| 3.72 |
|
|
| 570,596 |
|
|
| 22,627 |
|
|
| 5.30 |
|
| 763,332 |
| 21,740 |
| 3.81 |
| 712,703 |
| 19,843 |
| 3.72 |
| |||||||||||
Commercial mortgage |
|
| 1,138,568 |
|
|
| 37,659 |
|
|
| 4.42 |
|
|
| 1,003,593 |
|
|
| 38,994 |
|
|
| 5.19 |
|
| 1,306,001 |
| 38,163 |
| 3.91 |
| 1,138,568 |
| 37,659 |
| 4.42 |
| |||||||||||
Residential real estate loans |
|
| 583,540 |
|
|
| 16,095 |
|
|
| 3.68 |
|
|
| 541,185 |
|
|
| 15,649 |
|
|
| 3.86 |
|
| 595,740 |
| 15,298 |
| 3.42 |
| 583,540 |
| 16,095 |
| 3.68 |
| |||||||||||
Residential real estate lines |
|
| 99,156 |
|
|
| 2,979 |
|
|
| 4.01 |
|
|
| 108,207 |
|
|
| 4,247 |
|
|
| 5.25 |
|
| 83,429 |
| 2,128 |
| 3.41 |
| 99,156 |
| 2,979 |
| 4.01 |
| |||||||||||
Consumer indirect |
|
| 834,810 |
|
|
| 29,757 |
|
|
| 4.76 |
|
|
| 890,560 |
|
|
| 29,174 |
|
|
| 4.38 |
|
| 879,993 |
| 31,173 |
| 4.74 |
| 834,810 |
| 29,757 |
| 4.76 |
| |||||||||||
Other consumer |
|
| 15,691 |
|
|
| 1,326 |
|
|
| 11.29 |
|
|
| 16,029 |
|
|
| 1,486 |
|
|
| 12.40 |
|
|
| 15,408 |
|
| 1,192 |
|
| 10.35 |
|
| 15,691 |
|
| 1,326 |
|
| 11.29 |
| |||||
Total loans |
|
| 3,384,468 |
|
|
| 107,659 |
|
|
| 4.25 |
|
|
| 3,130,170 |
|
|
| 112,177 |
|
|
| 4.79 |
|
|
| 3,643,903 |
|
| 109,694 |
|
| 4.02 |
|
| 3,384,468 |
|
| 107,659 |
|
| 4.25 |
| |||||
Total interest-earning assets |
|
| 4,247,790 |
|
|
| 121,811 |
|
|
| 3.83 |
|
|
| 3,987,660 |
|
|
| 127,470 |
|
|
| 4.27 |
|
| 4,871,086 |
|
| 123,945 |
|
| 3.40 |
|
| 4,247,790 |
| 121,811 |
|
| 3.83 |
| |||||||
Less: Allowance for loan losses |
|
| (44,228 | ) |
|
|
|
|
|
|
|
|
|
| (34,759 | ) |
|
|
|
|
|
|
|
|
| (51,395 | ) |
|
|
|
|
|
|
| (44,228 | ) |
|
|
|
|
|
| ||||||
Other noninterest-earning assets |
|
| 389,047 |
|
|
|
|
|
|
|
|
|
|
| 328,369 |
|
|
|
|
|
|
|
|
|
|
| 432,818 |
|
|
|
|
|
|
|
| 389,047 |
|
|
|
|
|
| ||||||
Total assets |
| $ | 4,592,609 |
|
|
|
|
|
|
|
|
|
| $ | 4,281,270 |
|
|
|
|
|
|
|
|
|
| $ | 5,252,509 |
|
|
|
|
|
|
| $ | 4,592,609 |
|
|
|
|
|
| ||||||
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest-bearing demand |
| $ | 694,830 |
|
| $ | 840 |
|
|
| 0.16 | % |
| $ | 653,780 |
|
| $ | 1,030 |
|
|
| 0.21 | % |
| $ | 810,086 |
| $ | 848 |
| 0.14 | % |
| $ | 694,830 |
| $ | 840 |
| 0.16 | % | ||||||
Savings and money market |
|
| 1,349,931 |
|
|
| 3,724 |
|
|
| 0.37 |
|
|
| 973,005 |
|
|
| 3,143 |
|
|
| 0.43 |
|
| 1,819,766 |
| 2,550 |
| 0.19 |
| 1,349,931 |
| 3,724 |
| 0.37 |
| |||||||||||
Time deposits |
|
| 989,236 |
|
|
| 10,502 |
|
|
| 1.42 |
|
|
| 1,090,896 |
|
|
| 17,281 |
|
|
| 2.12 |
|
|
| 902,883 |
|
| 2,896 |
|
| 0.43 |
|
| 989,236 |
|
| 10,502 |
|
| 1.42 |
| |||||
Total interest-bearing deposits |
|
| 3,033,997 |
|
|
| 15,066 |
|
|
| 0.66 |
|
|
| 2,717,681 |
|
|
| 21,454 |
|
|
| 1.06 |
|
| 3,532,735 |
| 6,294 |
| 0.24 |
| 3,033,997 |
| 15,066 |
| 0.66 |
| |||||||||||
Short-term borrowings |
|
| 112,451 |
|
|
| 1,408 |
|
|
| 1.67 |
|
|
| 332,922 |
|
|
| 6,575 |
|
|
| 2.64 |
|
| 388 |
| 119 |
| 41.07 |
| 112,451 |
| 1,408 |
| 1.67 |
| |||||||||||
Long-term borrowings |
|
| 39,297 |
|
|
| 1,853 |
|
|
| 6.30 |
|
|
| 39,227 |
|
|
| 1,853 |
|
|
| 6.30 |
|
|
| 73,711 |
|
| 3,177 |
|
| 5.75 |
|
| 39,297 |
|
| 1,853 |
|
| 6.30 |
| |||||
Total borrowings |
|
| 151,748 |
|
|
| 3,261 |
|
|
| 2.87 |
|
|
| 372,149 |
|
|
| 8,428 |
|
|
| 3.03 |
|
|
| 74,099 |
|
| 3,296 |
|
| 5.93 |
|
| 151,748 |
|
| 3,261 |
|
| 2.87 |
| |||||
Total interest-bearing liabilities |
|
| 3,185,745 |
|
|
| 18,327 |
|
|
| 0.77 |
|
|
| 3,089,830 |
|
|
| 29,882 |
|
|
| 1.29 |
|
| 3,606,834 |
|
| 9,590 |
|
| 0.36 |
|
| 3,185,745 |
|
| 18,327 |
|
| 0.77 |
| ||||||
Noninterest-bearing demand deposits |
|
| 874,456 |
|
|
|
|
|
|
|
|
|
|
| 719,630 |
|
|
|
|
|
|
|
|
|
| 1,095,497 |
|
|
|
|
|
|
| 874,456 |
|
|
|
|
|
| ||||||||
Other noninterest-bearing liabilities |
|
| 85,069 |
|
|
|
|
|
|
|
|
|
|
| 56,449 |
|
|
|
|
|
|
|
|
|
| 69,847 |
|
|
|
|
|
|
| 85,069 |
|
|
|
|
|
| ||||||||
Shareholders’ equity |
|
| 447,339 |
|
|
|
|
|
|
|
|
|
|
| 415,361 |
|
|
|
|
|
|
|
|
|
|
| 480,331 |
|
|
|
|
|
|
|
| 447,339 |
|
|
|
|
|
| ||||||
Total liabilities and shareholders’ equity |
| $ | 4,592,609 |
|
|
|
|
|
|
|
|
|
| $ | 4,281,270 |
|
|
|
|
|
|
|
|
|
| $ | 5,252,509 |
|
|
|
|
|
|
| $ | 4,592,609 |
|
|
|
|
|
| ||||||
Net interest income (tax-equivalent) |
|
|
|
|
| $ | 103,484 |
|
|
|
|
|
|
|
|
|
| $ | 97,588 |
|
|
|
|
|
|
|
|
| $ | 114,355 |
|
|
|
|
|
|
| $ | 103,484 |
|
|
| ||||||
Interest rate spread |
|
|
|
|
|
|
|
|
|
| 3.06 | % |
|
|
|
|
|
|
|
|
|
| 2.98 | % |
|
|
|
|
|
|
|
| 3.04 | % |
|
|
|
|
|
|
|
| 3.06 | % | ||||
Net earning assets |
| $ | 1,062,045 |
|
|
|
|
|
|
|
|
|
| $ | 897,830 |
|
|
|
|
|
|
|
|
|
| $ | 1,264,252 |
|
|
|
|
|
|
| $ | 1,062,045 |
|
|
|
|
|
| ||||||
Net interest margin (tax-equivalent) |
|
|
|
|
|
|
|
|
|
| 3.25 | % |
|
|
|
|
|
|
|
|
|
| 3.27 | % |
|
|
|
|
|
|
|
| 3.14 | % |
|
|
|
|
|
|
|
| 3.25 | % | ||||
Ratio of average interest-earning assets to average interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
| 133.34 | % |
|
|
|
|
|
|
|
|
|
| 129.06 | % |
|
|
|
|
|
|
|
| 135.05 | % |
|
|
|
|
|
|
|
| 133.34 | % |
(1) Investment securities are shown at amortized cost. (2) The interest on tax-exempt securities is calculated on a tax-equivalent basis assuming a Federal income tax rate of 21%. 53 |
|
|
|
- 50 -
MANAGEMENT’SMANAGEMENT'S DISCUSSION AND ANALYSIS
The following table presents, on a tax-equivalent basis, the relative contribution of changes in volumes and changes in rates to changes in net interest income for the periods indicated. The change in interest income not solely due to changes in volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each (in thousands):
|
| Three months ended September 30, 2020 vs. 2019 |
|
| Nine months ended September 30, 2020 vs. 2019 |
|
| Three months ended |
|
| Nine months ended |
| ||||||||||||||||||||||||||||||||||||
Increase (decrease) in: |
| Volume |
|
| Rate |
|
| Total |
|
| Volume |
|
| Rate |
|
| Total |
|
| Volume |
| Rate |
| Total |
|
| Volume |
| Rate |
| Total |
| ||||||||||||||||
Interest income: |
|
|
|
|
|
|
|
| �� |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Federal funds sold and interest-earning deposits |
| $ | 108 |
|
| $ | (183 | ) |
| $ | (75 | ) |
| $ | 377 |
|
| $ | (408 | ) |
| $ | (31 | ) |
| $ | 11 |
| $ | 25 |
| $ | 36 |
| $ | 149 |
| $ | (260 | ) |
| $ | (111 | ) | ||||
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Taxable |
|
| 157 |
|
|
| (305 | ) |
|
| (148 | ) |
|
| (427 | ) |
|
| 127 |
|
|
| (300 | ) |
| 2,012 |
| (950 | ) |
| 1,062 |
| 4,732 |
| (3,630 | ) |
| 1,102 |
| |||||||||
Tax-exempt |
|
| (267 | ) |
|
| (5 | ) |
|
| (272 | ) |
|
| (792 | ) |
|
| (18 | ) |
|
| (810 | ) |
|
| (282 | ) |
|
| (9 | ) |
|
| (291 | ) |
|
| (885 | ) |
|
| (7 | ) |
|
| (892 | ) |
Total investment securities |
|
| (110 | ) |
|
| (310 | ) |
|
| (420 | ) |
|
| (1,219 | ) |
|
| 109 |
|
|
| (1,110 | ) |
| 1,730 |
| (959 | ) |
| 771 |
| 3,847 |
| (3,637 | ) |
| 210 |
| |||||||||
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Commercial business |
|
| 2,360 |
|
|
| (3,188 | ) |
|
| (828 | ) |
|
| 4,871 |
|
|
| (7,655 | ) |
|
| (2,784 | ) |
| (948 | ) |
| 477 |
| (471 | ) |
| 1,434 |
| 463 |
| 1,897 |
| |||||||||
Commercial mortgage |
|
| 1,876 |
|
|
| (2,960 | ) |
|
| (1,084 | ) |
|
| 4,874 |
|
|
| (6,209 | ) |
|
| (1,335 | ) |
| 1,492 |
| (648 | ) |
| 844 |
| 5,178 |
| (4,674 | ) |
| 504 |
| |||||||||
Residential real estate loans |
|
| 345 |
|
|
| (357 | ) |
|
| (12 | ) |
|
| 1,189 |
|
|
| (743 | ) |
|
| 446 |
|
| (17 | ) |
| (347 | ) |
| (364 | ) |
| 331 |
| (1,128 | ) |
| (797 | ) | |||||||
Residential real estate lines |
|
| (143 | ) |
|
| (380 | ) |
|
| (523 | ) |
|
| (333 | ) |
|
| (935 | ) |
|
| (1,268 | ) |
| (135 | ) |
| (67 | ) |
| (202 | ) |
| (436 | ) |
| (415 | ) |
| (851 | ) | ||||||
Consumer indirect |
|
| (444 | ) |
|
| 670 |
|
|
| 226 |
|
|
| (1,893 | ) |
|
| 2,476 |
|
|
| 583 |
|
| 1,033 |
| (169 | ) |
| 864 |
| 1,602 |
| (186 | ) |
| 1,416 |
| |||||||||
Other consumer |
|
| 9 |
|
|
| (90 | ) |
|
| (81 | ) |
|
| (31 | ) |
|
| (129 | ) |
|
| (160 | ) |
|
| (45 | ) |
|
| 14 |
|
| (31 | ) |
|
| (24 | ) |
|
| (110 | ) |
|
| (134 | ) | |
Total loans |
|
| 4,003 |
|
|
| (6,305 | ) |
|
| (2,302 | ) |
|
| 8,677 |
|
|
| (13,195 | ) |
|
| (4,518 | ) |
|
| 1,380 |
|
| (740 | ) |
|
| 640 |
|
| 8,085 |
|
| (6,050 | ) |
|
| 2,035 |
| |||
Total interest income |
|
| 4,001 |
|
|
| (6,798 | ) |
|
| (2,797 | ) |
|
| 7,835 |
|
|
| (13,494 | ) |
|
| (5,659 | ) |
|
| 3,121 |
|
| (1,674 | ) |
|
| 1,447 |
|
| 12,081 |
|
| (9,947 | ) |
|
| 2,134 |
| |||
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest-bearing demand |
|
| 36 |
|
|
| (130 | ) |
|
| (94 | ) |
|
| 62 |
|
|
| (252 | ) |
|
| (190 | ) |
| 34 |
| 3 |
| 37 |
| 129 |
| (121 | ) |
| 8 |
| ||||||||||
Savings and money market |
|
| 524 |
|
|
| (482 | ) |
|
| 42 |
|
|
| 1,089 |
|
|
| (508 | ) |
|
| 581 |
|
| 185 |
| (489 | ) |
| (304 | ) |
| 1,032 |
| (2,206 | ) |
| (1,174 | ) | ||||||||
Time deposits |
|
| (1,047 | ) |
|
| (2,808 | ) |
|
| (3,855 | ) |
|
| (1,493 | ) |
|
| (5,286 | ) |
|
| (6,779 | ) |
|
| 91 |
|
| (1,300 | ) |
|
| (1,209 | ) |
|
| (846 | ) |
|
| (6,760 | ) |
|
| (7,606 | ) | |
Total interest-bearing deposits |
|
| (487 | ) |
|
| (3,420 | ) |
|
| (3,907 | ) |
|
| (342 | ) |
|
| (6,046 | ) |
|
| (6,388 | ) |
| 310 |
| (1,786 | ) |
| (1,476 | ) |
| 315 |
| (9,087 | ) |
| (8,772 | ) | ||||||||
Short-term borrowings |
|
| (1,280 | ) |
|
| (569 | ) |
|
| (1,849 | ) |
|
| (3,328 | ) |
|
| (1,839 | ) |
|
| (5,167 | ) |
| (116 | ) |
| (116 | ) |
| (232 | ) |
| (2,744 | ) |
| 1,455 |
| (1,289 | ) | |||||||
Long-term borrowings |
|
| 1 |
|
|
| (1 | ) |
|
| — |
|
|
| 3 |
|
|
| (3 | ) |
|
| — |
|
|
| 499 |
|
| (57 | ) |
|
| 442 |
|
| 1,495 |
|
| (171 | ) |
|
| 1,324 |
| |||
Total borrowings |
|
| (1,279 | ) |
|
| (570 | ) |
|
| (1,849 | ) |
|
| (3,325 | ) |
|
| (1,842 | ) |
|
| (5,167 | ) |
|
| 383 |
|
| (173 | ) |
|
| 210 |
|
| (1,249 | ) |
|
| 1,284 |
|
| 35 |
| |||
Total interest expense |
|
| (1,766 | ) |
|
| (3,990 | ) |
|
| (5,756 | ) |
|
| (3,667 | ) |
|
| (7,888 | ) |
|
| (11,555 | ) |
|
| 693 |
|
| (1,959 | ) |
|
| (1,266 | ) |
|
| (934 | ) |
|
| (7,803 | ) |
|
| (8,737 | ) | |
Net interest income |
| $ | 5,767 |
|
| $ | (2,808 | ) |
| $ | 2,959 |
|
| $ | 11,502 |
|
| $ | (5,606 | ) |
| $ | 5,896 |
|
| $ | 2,428 |
| $ | 285 |
| $ | 2,713 |
| $ | 13,015 |
| $ | (2,144 | ) |
| $ | 10,871 |
|
Provision for Credit Losses
The provision for credit losses for the three and nine months ended September 30, 2020 was2021 were benefits of $541 thousand and $7.1 million, respectively, compared to provisions of $4.0 million and $21.7 million, respectively, compared to $1.8 million and $5.4 million for the corresponding periods in 2019.2020. The increase wasbenefits in the third quarter and first nine months of 2021 were due to continued improvement in the national unemployment forecast, the designated loss driver for our current expected credit loss (“CECL”) model, positive trends in qualitative factors and a relatively low level of net charge-offs, resulting in releases of credit loss reserves. The provisions in the third quarter and first nine months of 2020 were driven by the adoption of the CECL standard higher net charge-offs in the first quarter of 2020 and deterioration in the economic environment as a result of the COVID-19 pandemic, which adversely impacted our unemployment forecast, the designated loss driver for our CECL model. Although the unemployment forecast improved in the latest quarter, qualitative factors were increased to more than offset the improved unemployment forecast due to uncertainty around the long-term impact of the pandemic on the economy. The increase in net charge-offs in the first nine months of 2020 is primarily attributable to one commercial credit that was downgraded and partially charged-off during the first quarter of 2020. The borrower’s business was related to the hospitality industry and the downgrade and charge-off were precipitated by the impact of the COVID-19 pandemic.pandemic on the economic environment. The provision for credit losses - loans varies based primarily on forecasted unemployment rates, loan growth, net charge-offs, collateral values associated with collateral dependent loans and qualitative factors.
See the “Allowance for Credit Losses - Loans” and “Non-Performing Assets and Potential Problem Loans” sections of this Management’s Discussion and Analysis for further discussion.
- 51 -54
MANAGEMENT’SMANAGEMENT'S DISCUSSION AND ANALYSIS
Noninterest Income
The following table details the major categories of noninterest income for the periods presented (in thousands):
|
| Three months ended September 30, |
|
| Nine months ended September 30, |
|
| Three months ended |
|
| Nine months ended |
| ||||||||||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||||||
Service charges on deposits |
| $ | 1,254 |
|
| $ | 1,925 |
|
| $ | 3,321 |
|
| $ | 5,361 |
|
| $ | 1,502 |
| $ | 1,254 |
| $ | 4,081 |
| $ | 3,321 |
| |||
Insurance income |
|
| 1,357 |
|
|
| 1,439 |
|
|
| 3,525 |
|
|
| 3,689 |
|
| 1,864 |
| 1,357 |
| 4,407 |
| 3,525 |
| |||||||
ATM and debit card |
|
| 1,943 |
|
|
| 1,801 |
|
|
| 5,321 |
|
|
| 4,983 |
| ||||||||||||||||
Card interchange income |
| 2,118 |
| 1,943 |
| 6,270 |
| 5,321 |
| |||||||||||||||||||||||
Investment advisory |
|
| 2,443 |
|
|
| 2,269 |
|
|
| 6,940 |
|
|
| 6,812 |
|
| 2,969 |
| 2,443 |
| 8,627 |
| 6,940 |
| |||||||
Company owned life insurance |
|
| 470 |
|
|
| 459 |
|
|
| 1,397 |
|
|
| 1,293 |
|
| 776 |
| 470 |
| 2,126 |
| 1,397 |
| |||||||
Investments in limited partnerships |
|
| (105 | ) |
|
| 116 |
|
|
| (136 | ) |
|
| 492 |
|
| 694 |
| (105 | ) |
| 1,787 |
| (136 | ) | ||||||
Loan servicing |
|
| 49 |
|
|
| 102 |
|
|
| 106 |
|
|
| 316 |
|
| 105 |
| 49 |
| 293 |
| 106 |
| |||||||
Income from derivative instruments, net |
|
| 1,931 |
|
|
| 890 |
|
|
| 4,617 |
|
|
| 1,013 |
|
| 377 |
| 1,931 |
| 1,660 |
| 4,617 |
| |||||||
Net gain on sale of loans held for sale |
|
| 1,581 |
|
|
| 439 |
|
|
| 2,616 |
|
|
| 1,028 |
|
| 600 |
| 1,397 |
| 2,468 |
| 2,261 |
| |||||||
Net gain (loss) on investment securities |
|
| 554 |
|
|
| 1,608 |
|
|
| 1,449 |
|
|
| 1,721 |
| ||||||||||||||||
Net gain on investment securities |
| — |
| 554 |
| 71 |
| 1,449 |
| |||||||||||||||||||||||
Net gain (loss) on other assets |
|
| (55 | ) |
|
| (2 | ) |
|
| 8 |
|
|
| 56 |
|
| 138 |
| (55 | ) |
| 286 |
| 8 |
| ||||||
Net loss on tax credit investments |
|
| (40 | ) |
|
| — |
|
|
| (120 | ) |
|
| — |
| ||||||||||||||||
Net (loss) gain on tax credit investments |
| (129 | ) |
| (40 | ) |
| 62 |
| (120 | ) | |||||||||||||||||||||
Other |
|
| 1,019 |
|
|
| 1,315 |
|
|
| 3,151 |
|
|
| 3,950 |
|
|
| 1,069 |
|
| 1,019 |
|
| 3,094 |
|
| 3,151 |
| |||
Total noninterest income |
| $ | 12,401 |
|
| $ | 12,361 |
|
| $ | 32,195 |
|
| $ | 30,714 |
|
| $ | 12,083 |
| $ | 12,217 |
| $ | 35,232 |
| $ | 31,840 |
|
Service charges on deposits decreased $671increased $248 thousand, or 35%20%, to $1.5 million for the third quarter of 2021 compared to $1.3 million for the third quarter of 2020 compared to $1.9 million for the third quarter of 2019.2020. For the first nine months of 2020, service charges on deposits decreased $2.0 million,2021, insurance income increased $760 thousand, or 38%23%, to $3.3$4.1 million compared to $5.4$3.3 million for the first nine months of 2019.2020. The decreasesincreases were primarily due tothe result of our COVID-19 relief initiatives implemented between March 23, 2020 to July 9, 2020, including temporarily waiving or eliminating certain fees. In addition, insufficient fund fees in the remainder of the third quarter of 2020 were lower than historic levels, potentiallylevels.
Insurance income increased $507 thousand, or 37%, to $1.9 million for the third quarter of 2021 compared to $1.4 million for the third quarter of 2020. For the first nine months of 2021, insurance income increased $882 thousand, or 25%, to $4.4 million compared to $3.5 million for the first nine months of 2020. The increases were primarily due to the positive2021 acquisitions of Landmark in February and North Woods in August as well as growth in the legacy SDN business, including the impact of stimulus programs on consumer account balances. ATM access feesincreasing insurance premiums.
Investment advisory income increased $526 thousand, or 22%, to $3.0 million for the third quarter of 2021, compared to $2.4 million for the third quarter of 2020. For the first nine months of 2021, investment advisory income increased $1.7 million, or 24%, to $8.6 million compared to $6.9 million for the first nine months of 2020. The increases were not re-initiated until September 19th.primarily the result of an increase in assets under management driven by a combination of market gains, new customer accounts and contributions to existing accounts in 2021.
Company owned life insurance income increased $306 thousand, or 65%, to $776 thousand for the third quarter of 2021 compared to $470 thousand for the third quarter of 2020. For the first nine months of 2021, company owned life insurance income increased $729 thousand, or 52%, to $2.1 million compared to $1.4 million for the first nine months of 2020. We made additional investments in company-owned life insurance of $20.0 million in the third quarter of 2021 and $30.0 million in the fourth quarter of 2020 to take advantage of attractive tax-equivalent yields and partially offset employee benefit expenses.
Income (loss) from investments in limited partnerships decreased $221increased $799 thousand, to income of $694 thousand for the third quarter of 2021 compared to a loss of $105 thousand for the third quarter of 2020 compared to income of $116 thousand for the third quarter of 2019.2020. For the first nine months of 2020,2021, income (loss) from investments in limited partnerships decreased $628 thousand,increased $1.9 million, to income of $1.8 million compared to a loss of $136 thousand compared to income of $492 thousand for the first nine months of 2019.2020. We have investments in limited partnerships, primarily small business investment companies, and account for these investments under the equity method. The income from these equity method investments fluctuates based on the maturity and performance of the underlying investments.
Income from derivative instruments, net increased $1.0decreased $1.6 million, or 80%, to $377 thousand for the third quarter of 2021 compared to $1.9 million for the third quarter of 2020 compared to $890 thousand for the third quarter of 2019.2020. For the first nine months of 2020,2021, income from derivative instruments, net increased $3.6decreased $3.0 million, or 64%, to $4.6$1.7 million compared to $1.0$4.6 million for the first nine months of 2019. The increases were primarily the result of an increase in2020. Income from derivative instruments, net is based on the number and value of interest rate swap transactions executed and reflects growth and maturityduring the quarter combined with the impact of our commercial loan business.changes in the fair market value of borrower-facing trades.
Net gain on sale of loans held for sale was $1.6decreased $797 thousand, or 57%, to $600 thousand for the third quarter of 2021 compared to $1.4 million for the third quarter of 2020 compared2020. The decrease was due to $439 thousand fora lower transaction volumes in third quarter of 2021. Transaction volume and margin were at historically high levels in the third quarter of 2019.2020, driven by mortgage refinancing activity. For the first nine months of 2020,2021, net gain on sale of loans held for sale was $2.6increased $207 thousand, or 9%, to $2.5 million compared to $1.0$2.3 million for the first nine months of 2019. The increases were primarily due to increased residential real estate loans for sale volume and an increase in margin on these transactions. The low interest rate environment has resulted in a significant increase in mortgage refinancing activity.2020.
Net gain on investment securities was $554 thousand for the third quarter of 2020 compared to $1.6 million for the third quarter of 2019. For the first nine months of 2020, net gain on investment securities was $1.4 million compared to $1.7 million for the first nine months of 2019. The net gain in the current quarter is attributable to the management of premium risk, largely achieved through the sale of $20.0 million of fixed rate mortgage backed securities with higher expected prepayment speeds. Proceeds were reinvested in current coupon bonds, with lower anticipated prepayment behavior.
Other noninterest income decreased $296 thousand, or 23%, to $1.0 million for the third quarter of 2020 compared to $1.3 million for the third quarter of 2019. The decrease was due to the impact of stay-at-home orders for COVID-19 that reduced certain volume-based fees like merchant revenue and correspondent credit card fees. Our FHLB dividends have also declined year-over-year due to the lower level of FHLB borrowings in 2020 versus 2019. For the first nine months of 2020, other noninterest income decreased $799 thousand, or 20%, to $3.2 million compared to $4.0 million for the first nine months of 2019. The decrease was due to lower pay-by-phone fees associated with our COVID-19 consumer relief initiatives, coupled with the impact of stay-at-home orders that reduced certain volume-based fees like merchant revenue and correspondent credit card fees. Our FHLB dividends have also declined year-over-year due to the lower level of FHLB borrowings in 2020 versus 2019.
- 52 -55
MANAGEMENT’SMANAGEMENT'S DISCUSSION AND ANALYSIS
Noninterest Expense
The following table details the major categories of noninterest expense for the periods presented (in thousands):
|
| Three months ended September 30, |
|
| Nine months ended September 30, |
|
| Three months ended |
|
| Nine months ended |
| ||||||||||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||||||
Salaries and employee benefits |
| $ | 15,085 |
|
| $ | 14,411 |
|
| $ | 45,173 |
|
| $ | 41,661 |
|
| $ | 15,798 |
| $ | 15,085 |
| $ | 44,782 |
| $ | 45,173 |
| |||
Occupancy and equipment |
|
| 3,263 |
|
|
| 4,650 |
|
|
| 10,407 |
|
|
| 13,562 |
|
| 3,834 |
| 3,263 |
| 10,502 |
| 10,407 |
| |||||||
Professional services |
|
| 1,242 |
|
|
| 1,528 |
|
|
| 4,974 |
|
|
| 3,618 |
|
| 1,600 |
| 1,242 |
| 5,098 |
| 4,974 |
| |||||||
Computer and data processing |
|
| 3,250 |
|
|
| 1,378 |
|
|
| 8,622 |
|
|
| 3,951 |
|
| 3,579 |
| 3,250 |
| 10,160 |
| 8,622 |
| |||||||
Supplies and postage |
|
| 463 |
|
|
| 522 |
|
|
| 1,533 |
|
|
| 1,554 |
|
| 447 |
| 463 |
| 1,361 |
| 1,533 |
| |||||||
FDIC assessments |
|
| 594 |
|
|
| 7 |
|
|
| 1,505 |
|
|
| 1,005 |
|
| 697 |
| 594 |
| 1,942 |
| 1,505 |
| |||||||
Advertising and promotions |
|
| 955 |
|
|
| 745 |
|
|
| 2,055 |
|
|
| 2,351 |
|
| 474 |
| 955 |
| 1,234 |
| 2,055 |
| |||||||
Amortization of intangibles |
|
| 280 |
|
|
| 309 |
|
|
| 861 |
|
|
| 948 |
|
| 264 |
| 280 |
| 801 |
| 861 |
| |||||||
Restructuring charges |
|
| 1,362 |
|
|
| - |
|
|
| 1,362 |
|
|
| - |
|
| - |
| 1,362 |
| - |
| 1,362 |
| |||||||
Other |
|
| 2,165 |
|
|
| 2,336 |
|
|
| 6,583 |
|
|
| 7,410 |
|
|
| 2,476 |
|
| 1,981 |
|
| 6,973 |
|
| 6,228 |
| |||
Total noninterest expense |
| $ | 28,659 |
|
| $ | 25,886 |
|
| $ | 83,075 |
|
| $ | 76,060 |
|
| $ | 29,169 |
| $ | 28,475 |
| $ | 82,853 |
| $ | 82,720 |
|
Salaries and employee benefits expense increased by $674$713 thousand, or 5%, to $15.8 million for the third quarter of 2021 compared to $15.1 million for the third quarter of 2020 compared to $14.4 million for the third quarter of 2019.2020. The increase was primarily due to higher incentive compensation and commissions, coupled with investments in the current quarter includes $224 thousand of non-recurring severance costs incurred in connection with the previously described branch closingsexperienced personnel to support strategic initiatives including digital banking, retail community banking expansion, customer experience and staff reduction announced in July 2020.technology. For the first nine months of 2020,2021, salaries and employee benefits expense increaseddecreased by $3.5 million,$391 thousand, or 8%1%, to $45.2$44.8 compared to $41.7$45.2 million for the first nine months of 2019.2020. The decrease reflects a streamlining of retail branches to better align with shifting customer needs and preferences, including the closure of seven branches in the second half of 2020, partially offset by an increase in expense in the third quarter of 2021.
Occupancy and equipment expense increased $571 thousand, or 17%, to $3.8 million for the third quarter of 2021 compared to $3.3 million for the third quarter of 2020. The increase in the first nine months of 2020 was primarily the result of incentive compensation (including producer incentives and commissions), annual merit increases, COVID-19-related incremental pay to front-line retail associates, expensethe purchase of security equipment for multiple locations, timing of maintenance services related to the departureoutsourcing of a senior officer onproperty management services in the current year and expenses related to two Five Star Bank branches opened in Buffalo in June 26, 2020 and higher medical expense.2021.
Professional services expense decreased $286increased $358 thousand, or 19%29%, to $1.6 million for the third quarter of 2021 compared to $1.2 million for the third quarter of 2020 compared2020. The increase was primarily due to $1.5the timing of consulting and advisory projects including financial technology and improvement initiatives.
Computer and data processing expense increased $329 thousand, or 10%, to $3.6 million for the third quarter of 2019. For the first nine months of 2020, professional services expense increased $1.4 million, or 37%, to $5.0 million2021 compared to $3.6 million for the first nine months of 2019. The decrease in the third quarter of 2020 and increase in the first nine months of 2020 were primarily due to the timing of fees for consulting and advisory projects, including the Company’s improvement initiatives. Expenses related to improvement initiatives totaled $56 thousand and $1.0 million for the three- and nine-month periods ended September 30, 2020, respectively, and $298 thousand and $511 thousand for the three- and nine-month periods ended September 30, 2019, respectively.
Computer and data processing expense increased $603 thousand, or 23%, to $3.3 million for the third quarter of 20202020. For the first nine months of 2021, computer and data processing expense increased $1.5 million, or 18%, to $10.2 million compared to $2.6$8.6 million for the first nine months of 2020. The increases were primarily due to investments in technology, including costs related to the Bank’s ongoing digital banking initiatives.
Advertising and promotions expense decreased $481 thousand, or 50%, to $474 thousand for the third quarter of 2021 compared to $1.0 million for the third quarter of 2019.2020. For the first nine months of 2020, computer2021, advertising and data processingpromotions expense increased $1.2 million,decreased $821 thousand, or 16%40%, to $8.6$1.2 million compared to $7.4$2.1 million for the first nine months of 2019.2020. The increases in computer and data processing expensedecreases were primarily due to costs related to the Bank’s new onlineongoing evolution of our long-term marketing strategy and mobile platform, Five Star Bank Digital Banking, launcheda temporary reduction in the second quarter of 2020.external advertising expense.
FDIC assessments increased $587 thousand to $594 thousand for the third quarter of 2020 compared to $7 thousand for the third quarter of 2019. For the first nine months of 2020, FDIC assessments increased $500 thousand, or 50%, to $1.5 million compared to $1.0 million for the first nine months of 2019. In 2018, the FDIC minimum reserve ratio was exceeded, resulting in credits used to offset expense in 2019 and the first quarter of 2020.
Advertising and promotions expense increased $210 thousand, or 28%, to $955 thousand for the third quarter of 2020 compared to $745 thousand for the third quarter of 2019. For the first nine months of 2020, advertising and promotions expense decreased $296 thousand, or 13%, to $2.1 million compared to $2.4 million for the first nine months of 2019. Advertising and promotions expense was reduced in March 2020 when the COVID-19 pandemic impacted operations in Western New York. Higher expense in the third quarter of 2020 is attributable to promotional costs for Five Star Bank Digital Banking. The advertising campaign started after the last wave of customers was transitioned to the new platform in mid-June and ended in late August.
Restructuring charges of $1.4 million for the third quarter of 2020 represents non-recurring real estate related charges related to the previously described branch closingsclosure of bank branches and staff reduction announceda staffing reduction.
Other expense increased $495 thousand, or 25%, to $2.5 million for the third quarter of 2021 compared to $2.0 million for the third quarter of 2020. For the first nine months of 2021, other expense increased $745 thousand, or 12%, to $7.0 million compared to $6.2 million for the first nine months of 2020. The increases were primarily due to lower education, travel and business development expenses as a result of the stay-at home orders implemented in July 2020.the second quarter of 2020 in response to the COVID-19 pandemic and the timing of charitable contributions in the third quarter of 2021.
56
MANAGEMENT'S DISCUSSION AND ANALYSIS
Our efficiency ratio for the first nine months of 20202021 was 61.89%55.41% compared with 60.09%61.79% for the first nine months of 2019.2020. The higherlower efficiency ratio is a resultwas primarily the result of the higher noninterest expensesan increase in net interest income, associated with our improvement initiativesincreases in average interest-earning assets and COVID-related impactsdeferred fee amortization on PPP loans and a decrease in interest expense as well as an increase in noninterest income and noninterest expenses.compared to the prior year period. The efficiency ratio is calculated by dividing total noninterest expense by net revenue, defined as the sum of tax-equivalent net interest income and noninterest income before net gains on investment securities. An increase in the efficiency ratio indicates that more resources are being utilized to generate the same volume of income, while a decrease indicates a more efficient allocation of resources. The efficiency ratio, a banking industry financial measure, is not required by GAAP. However, the efficiency ratio is used by management in its assessment of financial performance specifically as it relates to noninterest expense control. Management also believes such information is useful to investors in evaluating Company performance.
- 53 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
Income Taxes
For the nine months ended September 30, 2020,2021, we recorded income tax expense of $5.7$15.3 million, versus $10.2$5.7 million for the same period in the prior year. In the first nine months of 2020, the Company2021, we recognized tax credit investments resulting in a $606 thousand reduction in income tax expense of $1.2 million, and a $120net gain recorded in noninterest income of $62 thousand. In the first nine months of 2020, we recognized tax credit investments resulting in a reduction in income tax expense of $606 thousand, and a net loss recorded in noninterest income.income of $120 thousand. For the three months ended September 30, 2020,third quarter of 2021, we recorded income tax expense of $2.9$4.6 million, versus $4.3$2.9 million for the same period in the prior year. Asyear, primarily driven by our higher pre-tax earnings.
During the three months ended June 30, 2021, New York State enacted legislation that temporarily increases the corporate tax rate from 6.5% to 7.25% for taxable years beginning in 2021 through 2023 for taxpayers with New York State income over $5.0 million. This rate change did not result in a result of the Tax Cuts and Jobs Act, the Company estimatedmaterial impact to our tax benefits and recorded a provisional amount in andprovision for the yearthree and nine months ended December 31, 2017. In the third quarter of 2019 an adjustment was made to the provisional amount resulting in incremental expense of approximately $600 thousand.September 30, 2021.
TheOur effective tax rates for the first nine months of 2021 and 2020 were 20.8% and 2019 were 18.9% and 22.3%, respectively. TheOur effective tax rates for the third quarter of 2021 and 2020 were 21.0% and 2019 were 19.3% and 25.0%, respectively. The increase in effective tax rates is the result of higher pre-tax earnings in comparison to the prior year. Effective tax rates are typically impacted by items of income and expense that are not subject to federal or state taxation. Our effective tax rates reflect the impact of these items, which include, but are not limited to, interest income from tax-exempt securities, earnings on Company owned life insurance and the impact of tax credit investments. In addition, our effective tax rate for 20202021 and 20192020 reflects the New York State tax benefit generated by our real estate investment trust.
ANALYSIS OF FINANCIAL CONDITION
INVESTING ACTIVITIES
Investment Securities
The following table summarizes the composition of our investment securities portfolio as of the dates indicated (in thousands):
|
| Investment Securities Portfolio Composition |
|
| Investment Securities Portfolio Composition |
| ||||||||||||||||||||||||||
|
| September 30, 2020 |
|
| December 31, 2019 |
|
| September 30, 2021 |
| December 31, 2020 |
| |||||||||||||||||||||
|
| Amortized |
|
| Fair |
|
| Amortized |
|
| Fair |
|
| Amortized |
| Fair |
| Amortized |
| Fair |
| |||||||||||
|
| Cost |
|
| Value |
|
| Cost |
|
| Value |
|
| Cost |
| Value |
| Cost |
| Value |
| |||||||||||
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. Government agency and government-sponsored enterprise securities |
| $ | 6,234 |
|
| $ | 6,655 |
|
| $ | 26,440 |
|
| $ | 26,877 |
|
| $ | 6,253 |
| $ | 6,531 |
| $ | 6,239 |
| $ | 6,635 |
| |||
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Agency mortgage-backed securities |
|
| 489,384 |
|
|
| 508,881 |
|
|
| 389,412 |
|
|
| 390,422 |
|
| 1,092,723 |
| 1,090,999 |
| 601,426 |
| 620,989 |
| |||||||
Non-Agency mortgage-backed securities |
|
| — |
|
|
| 435 |
|
|
| — |
|
|
| 618 |
|
|
| — |
|
| 420 |
|
| — |
|
| 435 |
| |||
Total available for sale securities |
|
| 495,618 |
|
|
| 515,971 |
|
|
| 415,852 |
|
|
| 417,917 |
|
| 1,098,976 |
| 1,097,950 |
| 607,665 |
| 628,059 |
| |||||||
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
State and political subdivisions |
|
| 151,611 |
|
|
| 156,663 |
|
|
| 192,215 |
|
|
| 196,018 |
|
| 116,812 |
| 119,513 |
| 144,506 |
| 148,984 |
| |||||||
Mortgage-backed securities |
|
| 139,343 |
|
|
| 145,215 |
|
|
| 166,785 |
|
|
| 167,241 |
|
|
| 101,328 |
|
| 104,651 |
|
| 127,467 |
|
| 133,051 |
| |||
Total held to maturity securities |
|
| 290,954 |
|
|
| 301,878 |
|
|
| 359,000 |
|
|
| 363,259 |
|
| 218,140 |
| 224,164 |
| 271,973 |
| 282,035 |
| |||||||
Allowance for credit losses - securities |
|
| (8 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (5 | ) |
|
|
|
|
| (7 | ) |
|
|
| ||
Total held to maturity securities, net |
|
| 290,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 218,135 |
|
|
|
|
| 271,966 |
|
|
| ||||
Total investment securities |
| $ | 786,564 |
|
| $ | 817,849 |
|
| $ | 774,852 |
|
| $ | 781,176 |
|
| $ | 1,317,111 |
| $ | 1,322,114 |
| $ | 879,631 |
| $ | 910,094 |
|
57
MANAGEMENT'S DISCUSSION AND ANALYSIS
The available for sale (“AFS”) investment securities portfolio increased $98.1$469.9 million from $417.9$628.1 million at December 31, 20192020 to $516.0$1.10 billion at September 30, 2021. The increase from year-end 2020 was primarily due to the deployment of excess liquidity into cash flowing agency backed securities. The AFS portfolio had a net unrealized loss of $1.0 million at September 30, 2020. The AFS portfolio had2021 and a net unrealized gainsgain of $20.4 million and $2.1 million at September 30, 2020 and December 31, 2019,2020, respectively. The fair value of most of the investment securities in the AFS portfolio fluctuates as market interest rates change.
- 54 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
Security Yields and Maturities Schedule
The following table sets forth certain information regarding the amortized cost (“Cost”), weighted average yields (“Yield”) and contractual maturities of our debt securities portfolio as of September 30, 2020.2021. Mortgage-backed securities are included in maturity categories based on their stated maturity date. Actual maturities may differ from the contractual maturities presented because borrowers may have the right to call or prepay certain investments. No tax-equivalent adjustments were made to the weighted average yields (dollars in thousands).
|
| Due in one year or less |
|
| Due from one to five years |
|
| Due after five years through ten years |
|
| Due after ten years |
|
| Total |
|
| Due in one |
| Due from one |
| Due after five |
| Due after ten years |
| Total |
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
| Cost |
|
| Yield |
|
| Cost |
|
| Yield |
|
| Cost |
|
| Yield |
|
| Cost |
|
| Yield |
|
| Cost |
|
| Yield |
|
| Cost |
| Yield |
| Cost |
| Yield |
| Cost |
| Yield |
| Cost |
| Yield |
| Cost |
| Yield |
| |||||||||||||||||||||||||||||
Available for sale debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
U.S. Government agencies and government-sponsored enterprises |
| $ | — |
|
|
| — | % |
| $ | 6,234 |
|
|
| 2.43 | % |
| $ | — |
|
|
| — | % |
| $ | — |
|
|
| — | % |
| $ | 6,234 |
|
|
| 2.43 | % |
| $ | — |
|
|
| — | % |
| $ | 6,253 |
|
|
| 2.42 | % |
| $ | — |
|
|
| — | % |
| $ | — |
|
|
| — | % |
| $ | 6,253 |
|
|
| 2.42 | % |
Mortgage-backed securities |
|
| 1 |
|
|
| 6.04 |
|
|
| 30,291 |
|
|
| 2.45 |
|
|
| 162,953 |
|
|
| 2.36 |
|
|
| 296,139 |
|
|
| 1.76 |
|
|
| 489,384 |
|
|
| 2.00 |
|
|
| 4,863 |
|
|
| 2.03 |
|
|
| 56,549 |
|
|
| 2.42 |
|
|
| 175,663 |
|
|
| 1.91 |
|
|
| 855,648 |
|
|
| 1.49 |
|
|
| 1,092,723 |
|
|
| 1.61 |
|
|
|
| 1 |
|
|
| — |
|
|
| 36,525 |
|
|
| 2.45 |
|
|
| 162,953 |
|
|
| 2.36 |
|
|
| 296,139 |
|
|
| 1.76 |
|
|
| 495,618 |
|
|
| 2.01 |
|
|
| 4,863 |
|
|
| 2.03 |
|
|
| 62,802 |
|
|
| 2.42 |
|
|
| 175,663 |
|
|
| 1.91 |
|
|
| 855,648 |
|
|
| 1.49 |
|
|
| 1,098,976 |
|
|
| 1.62 |
|
Held to maturity debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
State and political subdivisions |
|
| 48,688 |
|
|
| 2.27 |
|
|
| 99,947 |
|
|
| 1.93 |
|
|
| 2,976 |
|
|
| 2.02 |
|
|
| — |
|
|
| — |
|
|
| 151,611 |
|
|
| 2.04 |
|
|
| 36,191 |
|
|
| 2.04 |
|
|
| 70,429 |
|
|
| 1.89 |
|
|
| 5,005 |
|
|
| 1.62 |
|
|
| 5,187 |
|
|
| 1.92 |
|
|
| 116,812 |
|
|
| 1.93 |
|
Mortgage-backed securities |
|
| — |
|
|
| — |
|
|
| 2,345 |
|
|
| 2.30 |
|
|
| 16,100 |
|
|
| 2.14 |
|
|
| 120,898 |
|
|
| 2.40 |
|
|
| 139,343 |
|
|
| 2.37 |
|
|
| — |
|
|
| — |
|
|
| 2,278 |
|
|
| 2.28 |
|
|
| 15,843 |
|
|
| 2.23 |
|
|
| 83,207 |
|
|
| 2.45 |
|
|
| 101,328 |
|
|
| 2.41 |
|
|
|
| 48,688 |
|
|
| 2.27 |
|
|
| 102,292 |
|
|
| 1.94 |
|
|
| 19,076 |
|
|
| 2.12 |
|
|
| 120,898 |
|
|
| 2.40 |
|
|
| 290,954 |
|
|
| 2.20 |
|
|
| 36,191 |
|
|
| 2.04 |
|
|
| 72,707 |
|
|
| 1.90 |
|
|
| 20,848 |
|
|
| 2.23 |
|
|
| 88,394 |
|
|
| 2.45 |
|
|
| 218,140 |
|
|
| 2.17 |
|
Total investment securities |
| $ | 48,689 |
|
|
| 2.27 | % |
| $ | 138,817 |
|
|
| 2.07 | % |
| $ | 182,029 |
|
|
| 2.33 | % |
| $ | 417,037 |
|
|
| 1.94 | % |
| $ | 786,572 |
|
|
| 2.08 | % |
| $ | 41,054 |
|
|
| 2.04 | % |
| $ | 135,509 |
|
|
| 2.14 | % |
| $ | 196,511 |
|
|
| 1.93 | % |
| $ | 944,042 |
|
|
| 1.58 | % |
| $ | 1,317,116 |
|
|
| 1.71 | % |
Impairment Assessment
For AFS securities in an unrealized loss position, we first assess whether (i) we intend to sell, or (ii) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either case is affirmative, any previously recognized allowances are charged-off and the security's amortized cost is written down to fair value through income. If neither case is affirmative, the security is evaluated to determine whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency and any adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Adjustments to the allowance are reported in our income statement as a component of credit loss expense. AFS securities are charged-off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible by management or when either of the aforementioned criteria regarding intent or requirement to sell is met. For the nine months ended September 30, 20202021 and 20192020 no allowance for credit losses has been recognized on AFS securities in an unrealized loss position as management does not believe any of the securities are impaired due to reasons of credit quality.
58
MANAGEMENT'S DISCUSSION AND ANALYSIS
LENDING ACTIVITIES
The following table summarizes the composition of our loan portfolio, excluding loans held for sale and including net unearned income and net deferred fees and costs, as of the dates indicated (in thousands).
|
| Loan Portfolio Composition |
|
| Loan Portfolio Composition |
| ||||||||||||||||||||||||||
|
| September 30, 2020 |
|
| December 31, 2019 |
|
| September 30, 2021 |
| December 31, 2020 |
| |||||||||||||||||||||
|
| Amount |
|
| % of Total |
|
| Amount |
|
| % of Total |
|
| Amount |
| % of |
| Amount |
| % of |
| |||||||||||
Commercial business |
| $ | 818,135 |
|
|
| 22.9 | % |
| $ | 572,040 |
|
|
| 17.8 | % |
| $ | 686,191 |
| 18.8 | % |
| $ | 794,148 |
| 22.1 | % | ||||
Commercial mortgage |
|
| 1,202,046 |
|
|
| 33.7 |
|
|
| 1,106,283 |
|
|
| 34.3 |
|
|
| 1,348,550 |
|
| 36.9 |
|
| 1,253,901 |
|
| 34.9 |
| |||
Total commercial |
|
| 2,020,181 |
|
|
| 56.6 |
|
|
| 1,678,323 |
|
|
| 52.1 |
|
| 2,034,741 |
| 55.7 |
| 2,048,049 |
| 57.0 |
| |||||||
Residential real estate loans |
|
| 596,902 |
|
|
| 16.7 |
|
|
| 572,350 |
|
|
| 17.8 |
|
| 584,091 |
| 16.0 |
| 599,800 |
| 16.7 |
| |||||||
Residential real estate lines |
|
| 94,017 |
|
|
| 2.6 |
|
|
| 104,118 |
|
|
| 3.2 |
|
| 79,196 |
| 2.2 |
| 89,805 |
| 2.5 |
| |||||||
Consumer indirect |
|
| 840,579 |
|
|
| 23.6 |
|
|
| 850,052 |
|
|
| 26.4 |
|
| 940,537 |
| 25.7 |
| 840,421 |
| 23.4 |
| |||||||
Other consumer |
|
| 16,860 |
|
|
| 0.5 |
|
|
| 16,144 |
|
|
| 0.5 |
|
|
| 15,334 |
|
| 0.4 |
|
| 17,063 |
|
| 0.4 |
| |||
Total consumer |
|
| 1,548,358 |
|
|
| 43.4 |
|
|
| 1,542,664 |
|
|
| 47.9 |
|
|
| 1,619,158 |
|
| 44.3 |
|
| 1,547,089 |
|
| 43.0 |
| |||
Total loans |
|
| 3,568,539 |
|
|
| 100.0 | % |
|
| 3,220,987 |
|
|
| 100.0 | % |
| 3,653,899 |
|
| 100.0 | % |
|
| 3,595,138 |
|
| 100.0 | % | |||
Less: Allowance for credit losses |
|
| 49,395 |
|
|
|
|
|
|
| 30,482 |
|
|
|
|
| ||||||||||||||||
Less: Allowance for credit losses - loans |
|
| 45,444 |
|
|
|
|
| 52,420 |
|
|
| ||||||||||||||||||||
Total loans, net |
| $ | 3,519,144 |
|
|
|
|
|
| $ | 3,190,505 |
|
|
|
|
|
| $ | 3,608,455 |
|
|
|
| $ | 3,542,718 |
|
|
|
- 55 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
Total loans increased $347.6$58.8 million to $3.57$3.65 billion at September 30, 20202021 from $3.22$3.60 billion at December 31, 2019.2020. The increase in loans was primarily attributable to PPP loans in our commercial business portfolio. PPP loans of approximately $2 million and $269 million were funded in the third and second quarters of 2020, respectively. The loans carry a 1% interest rate and the Company recorded net PPP loan origination fees of approximately $7.4 million that are amortized over a 24-month period.organic growth initiatives.
Commercial loans increased $341.9decreased $13.3 million during the nine months ended September 30, 20202021 and represented 56.6%55.7% of total loans as of September 30, 2020.2021. The increasedecrease was due to a decrease of $131.3 million in PPP loans, net of deferred fees, from $248.0 million at December 31, 2020 to $116.7 million at September 30, 2021. The decrease in commercial loans was partially offset by an increase in commercial mortgage loans and commercial business loans, excluding PPP loans, of $94.7 million and $23.3 million, respectively, primarily attributable to PPP loans. At September 30, 2020, the PPP loan balance was $264.1 million, netas a result of deferred fees.our continued commercial business development efforts.
The consumer indirect portfolio totaled $840.6$940.5 million and represented 23.6%25.7% of total loans as of September 30, 2020.2021. During the first nine months of 2020,2021, we originated $230.0$376.6 million in indirect auto loans with a mix of approximately 32%26% new auto and 68%74% used auto. During the first nine months of 2019,2020, we originated $234.6$135.6 million in indirect auto loans with a mix of approximately 34%30% new auto and 66%70% used auto. Our origination volumes and mix of new and used vehicles financed fluctuate depending on general market conditions. Growth in the consumer indirect portfolio in the current year has been the result of pent-up consumer demand for automobiles with the Company well-positioned to take advantage of the market opportunity given our deep history and experience in this line of business.
Loans Held for Sale and Loan Servicing Rights
Loans held for sale (not included in the loan portfolio composition table) were entirely comprised of residential real estate loans and totaled $7.1$5.9 million and $4.2$4.3 million as of September 30, 20202021 and December 31, 2019,2020, respectively.
We sell certain qualifying newly originated or refinanced residential real estate loans on the secondary market. Residential real estate loans serviced for others, which are not included in the consolidated statements of financial condition, amounted to $220.7$265.2 million and $189.8$241.7 million as of September 30, 20202021 and December 31, 2019,2020, respectively.
59
MANAGEMENT'S DISCUSSION AND ANALYSIS
Allowance for Credit Losses - Loans
The following table summarizes the activity in the allowance for credit losses - loans for the periods indicated (in thousands).
|
| Loan Loss Analysis |
|
| Loan Loss Analysis |
| ||||||||||||||||||||||||||
|
| Three months ended September 30, |
|
| Nine months ended September 30, |
|
| Three months ended |
|
| Nine months ended |
| ||||||||||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||||||
Allowance for credit losses - loans, beginning of period, prior to adoption of ASC 326 |
|
|
|
|
|
|
|
|
| $ | 30,482 |
|
| $ | 33,914 |
|
|
|
|
|
|
|
|
|
|
| $ | 30,482 |
| |||
Impact of adopting ASC 326 |
|
|
|
|
|
|
|
|
|
| 9,594 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
| 9,594 |
| |||
Allowance for credit losses - loans, beginning of period, after adoption of ASC 326 |
|
| 46,316 |
|
|
| 34,434 |
|
|
| 40,076 |
|
|
| 33,914 |
|
| $ | 46,365 |
| $ | 46,316 |
| $ | 52,420 |
| 40,076 |
| ||||
Charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Commercial business |
|
| 15 |
|
|
| 112 |
|
|
| 8,281 |
|
|
| 380 |
|
| 218 |
| 15 |
| 396 |
| 8,281 |
| |||||||
Commercial mortgage |
|
| 640 |
|
|
| 2,994 |
|
|
| 1,712 |
|
|
| 2,997 |
|
| — |
| 640 |
| 203 |
| 1,712 |
| |||||||
Residential real estate loans |
|
| — |
|
|
| 54 |
|
|
| 100 |
|
|
| 172 |
|
| 36 |
| — |
| 103 |
| 100 |
| |||||||
Residential real estate lines |
|
| — |
|
|
| 8 |
|
|
| — |
|
|
| 10 |
|
| 60 |
| — |
| 130 |
| — |
| |||||||
Consumer indirect |
|
| 1,388 |
|
|
| 2,420 |
|
|
| 7,366 |
|
|
| 8,102 |
|
| 1,395 |
| 1,388 |
| 4,965 |
| 7,366 |
| |||||||
Other consumer |
|
| 160 |
|
|
| 315 |
|
|
| 499 |
|
|
| 867 |
|
|
| 250 |
|
| 160 |
|
| 755 |
|
| 499 |
| |||
Total charge-offs |
|
| 2,203 |
|
|
| 5,903 |
|
|
| 17,958 |
|
|
| 12,528 |
|
| 1,959 |
| 2,203 |
| 6,552 |
| 17,958 |
| |||||||
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Commercial business |
|
| 103 |
|
|
| 102 |
|
|
| 1,644 |
|
|
| 333 |
|
| 168 |
| 103 |
| 785 |
| 1,644 |
| |||||||
Commercial mortgage |
|
| 37 |
|
|
| — |
|
|
| 37 |
|
|
| 17 |
|
| — |
| 37 |
| 7 |
| 37 |
| |||||||
Residential real estate loans |
|
| 7 |
|
|
| 14 |
|
|
| 25 |
|
|
| 31 |
|
| 15 |
| 7 |
| 79 |
| 25 |
| |||||||
Residential real estate lines |
|
| — |
|
|
| 1 |
|
|
| 3 |
|
|
| 6 |
|
| — |
| — |
| — |
| 3 |
| |||||||
Consumer indirect |
|
| 1,503 |
|
|
| 1,103 |
|
|
| 4,550 |
|
|
| 4,205 |
|
| 1,130 |
| 1,503 |
| 4,383 |
| 4,550 |
| |||||||
Other consumer |
|
| 65 |
|
|
| 73 |
|
|
| 282 |
|
|
| 299 |
|
|
| 59 |
|
| 65 |
|
| 218 |
|
| 282 |
| |||
Total recoveries |
|
| 1,715 |
|
|
| 1,293 |
|
|
| 6,541 |
|
|
| 4,891 |
|
|
| 1,372 |
|
| 1,715 |
|
| 5,472 |
|
| 6,541 |
| |||
Net charge-offs |
|
| 488 |
|
|
| 4,610 |
|
|
| 11,417 |
|
|
| 7,637 |
|
| 587 |
| 488 |
| 1,080 |
| 11,417 |
| |||||||
Provision for credit losses - loans |
|
| 3,567 |
|
|
| 1,844 |
|
|
| 20,736 |
|
|
| 5,391 |
| ||||||||||||||||
Provision (benefit) for credit losses - loans |
|
| (334 | ) |
|
| 3,567 |
|
| (5,896 | ) |
|
| 20,736 |
| |||||||||||||||||
Allowance for credit losses - loans, end of period |
| $ | 49,395 |
|
| $ | 31,668 |
|
| $ | 49,395 |
|
| $ | 31,668 |
|
| $ | 45,444 |
| $ | 49,395 |
| $ | 45,444 |
| $ | 49,395 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net loan charge-offs to average loans (annualized) |
|
| 0.06 | % |
|
| 0.58 | % |
|
| 0.45 | % |
|
| 0.33 | % |
| 0.06 | % |
| 0.06 | % |
| 0.04 | % |
| 0.45 | % | ||||
Allowance for credit losses - loans to total loans |
|
| 1.38 | % |
|
| 1.00 | % |
|
| 1.38 | % |
|
| 1.00 | % |
| 1.24 | % |
| 1.38 | % |
| 1.24 | % |
| 1.38 | % | ||||
Allowance for credit losses - loans to non-performing loans |
|
| 453 | % |
|
| 324 | % |
|
| 453 | % |
|
| 324 | % |
| 681 | % |
| 453 | % |
| 681 | % |
| 453 | % |
- 56 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
The Company adopted CECL effective January 1, 2020, which resulted in an increase to the allowance for credit losses - loans of $9.6 million and established a reserve for unfunded commitments of $2.1 million, for a total pre-tax cumulative effect adjustment of $11.7 million.
The allowance for credit losses for Pooled Loans estimate is based upon periodic review of the collectability of the loans quantitatively correlating historical loan experience with reasonable and supportable forecasts using forward looking information. Adjustments to the quantitative evaluation may be made for differences in current or expected qualitative risk characteristics such as changes in: underwriting standards, delinquency level, regulatory environment, economic condition, Company management and the status of portfolio administration including the Company’s Loan Review function. The Company establishes a specific reserve for individually evaluated loans which do not share similar risk characteristics with the loans included in the forecasted allowance for credit losses. These individually evaluated loans are removed from the pooling approach discussed above for the forecasted allowance for credit losses, and include nonaccrual loans, troubled debt restructurings (“TDRs”), and other loans deemed appropriate by management,. collectively referred to as collateral dependent loans. See Note 6, Loans, of the notes to consolidated financial statements for further details on collateral dependent loans.
Assessing the adequacy of the allowance for credit losses - loans involves substantial uncertainties and is based upon management’s evaluation of the amounts required to meet estimated charge-offs in the loan portfolio after weighing a variety of factors, including the risk profile of our loan products and customers.
The adequacy of the allowance for credit losses - loans is subject to ongoing management review. While management evaluates currently available information in establishing the allowance for credit losses - loans, future adjustments to the allowance may be necessary if conditions differ substantially from the assumptions used in making the evaluations. In addition, various regulatory agencies, as an integral part of their
60
MANAGEMENT'S DISCUSSION AND ANALYSIS
examination process, periodically review a financial institution’s allowance for credit losses - loans. Such agencies may require the financial institution to increase the allowance based on their judgments about information available to them at the time of their examination.
Net charge-offs of $488$587 thousand in the third quarter of 20202021 represented 0.06% of average loans on an annualized basis compared to $4.6 million,net charge-offs of $488 thousand, or 0.58%0.06%, in the third quarter of 2019. The decrease from the prior year period is primarily attributable to the third quarter 2019 $3.0 million partial charge-off of a $5.6 million loan that had been classified as non-performing in the second quarter of 2019.2020. For the nine months ended September 30, 2020,2021, net charge-offs of $11.4$1.0 million represented 0.45%represented 0.04% of average loans, compared to $7.6$11.4 million or 0.33%0.45% of average loans for the same period in 2019.2020. The increasedecrease in net charge-offs in the nine months ended September 30, 20202021 was primarily due to an $8.2 million partial charge-off of an $11.9 million commercial loan downgraded in the first quarter of 2020. The borrower’s business was related to the hospitality industry and the downgrade and charge-off were precipitated by the impact of the COVID-19 pandemic. The allowance for credit losses - loans was $49.4$45.4 million at September 30, 2020,2021, compared with $30.5$52.4 million at December 31, 2019.2020. The ratio of the allowance for credit losses -loans- loans to total loans was 1.33%1.24% and 0.95%1.46% at September 30, 20202021 and December 31, 2019,2020, respectively. The ratio of allowance for credit losses - loans to non-performing loans was 453%681% at September 30, 2020,2021, compared with 353%551% at December 31, 2019.2020.
Non-Performing Assets and Potential Problem Loans
The table below summarizes our non-performing assets at the dates indicated (in thousands).
|
| Non-Performing Assets |
|
| Non-Performing Assets |
| ||||||||||
|
| September 30, 2020 |
|
| December 31, 2019 |
|
| September 30, |
|
| December 31, |
| ||||
Nonaccrual loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Commercial business |
| $ | 2,628 |
|
| $ | 1,177 |
|
| $ | 1,046 |
| $ | 1,975 |
| |
Commercial mortgage |
|
| 3,372 |
|
|
| 3,146 |
|
| 874 |
| 2,906 |
| |||
Residential real estate loans |
|
| 3,305 |
|
|
| 2,484 |
|
| 2,457 |
| 2,587 |
| |||
Residential real estate lines |
|
| 207 |
|
|
| 102 |
|
| 192 |
| 323 |
| |||
Consumer indirect |
|
| 1,244 |
|
|
| 1,725 |
|
| 2,104 |
| 1,495 |
| |||
Other consumer |
|
| 6 |
|
|
| — |
|
|
| 2 |
|
| — |
| |
Total nonaccrual loans |
|
| 10,762 |
|
|
| 8,634 |
|
| 6,675 |
| 9,286 |
| |||
Accruing loans 90 days or more delinquent |
|
| 141 |
|
|
| 6 |
|
|
| 1 |
|
| 231 |
| |
Total non-performing loans |
|
| 10,903 |
|
|
| 8,640 |
|
| 6,676 |
| 9,517 |
| |||
Foreclosed assets |
|
| 2,999 |
|
|
| 468 |
|
|
| - |
|
| 2,966 |
| |
Total non-performing assets |
| $ | 13,902 |
|
| $ | 9,108 |
|
| $ | 6,676 |
| $ | 12,483 |
| |
Non-performing loans to total loans |
|
| 0.31 | % |
|
| 0.27 | % |
| 0.18 | % |
| 0.26 | % | ||
Non-performing assets to total assets |
|
| 0.28 | % |
|
| 0.21 | % |
| 0.12 | % |
| 0.25 | % |
Non-performing assets include non-performing loans and foreclosed assets. Non-performing assets at September 30, 20202021 were $13.9$6.7 million, an increasea decrease of $4.8$5.8 million from the $9.1$12.5 million balance at December 31, 2019.2020. The primary component of non-performing assets is non-performing loans, which were $10.9$6.7 million or 0.31%0.12% of total loans at September 30, 2020,2021, compared with $8.6$9.5 million or 0.27%0.26% of total loans at December 31, 2019. The increase in non-performing assets in the nine months ended September 30, 2020 is primarily due to an $11.9 million commercial loan downgraded, with $8.2 million charged-off, in the first quarter of 2020. In the third quarter of 2020, this commercial loan was recategorized as a foreclosed asset. The borrower’s business was related to the hospitality industry and the downgrade and charge-off were precipitated by the impact of the COVID-19 pandemic.
- 57 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
Approximately $1.8$2.2 million, or 16.6%33%, of the $10.9$6.7 million in non-performing loans as of September 30, 20202021 were current with respect to payment of principal and interest but were classified as non-accruing because repayment in full of principal and/or interest was uncertain. IncludedWe had no TDRs included in nonaccrual loans are TDRs of $254 thousand and $297 thousand at September 30, 20202021 and $200 thousand at December 31, 2019, respectively.2020. There were no TDRs accruing interest as of September 30, 20202021 and one TDR of $550 thousand was accruing interest as of December 31, 2019.2020.
Foreclosed assets consist of real property formerly pledged as collateral for loans, which we have acquired through foreclosure proceedings or acceptance of a deed in lieu of foreclosure. ForeclosedWe had no properties representing foreclosed asset holdings represented threeat September 30, 2021 and two properties totaling $3.0 million at September 30, 2020 and three properties totaling $468 thousand at December 31, 2019.2020. The increasedecrease in foreclosedforeclosed assets during the first nine months of 2021 was primarily the result of the sale of an asset on which foreclosure occurred in the nine months ended September 30, 2020 is primarily duethird quarter of 2020. The borrower’s business was related to one commercial credit that was partially charged off duringthe hospitality industry and the downgrade and partial charge-off in the first quarter of 2020 and foreclosure occurred inwere precipitated by the third quarter.impact of the COVID-19 pandemic.
Potential problem loans are loans that are currently performing, but information known about possible credit problems of the borrowers causes us to have concern as to the ability of such borrowers to comply with the present loan payment terms and may result in disclosure of such loans as nonperforming at some time in the future. These loans remain in a performing status due to a variety of factors, including payment history, the value of collateral supporting the credits, and/or personal or government guarantees. We consider loans classified as substandard, which continue to accrue interest, to be potential problem loans. We identified $19.1$30.9 million and $14.6$17.9 million in loans that continued to accrue interest which were classified as substandard as of September 30, 20202021 and December 31, 2019,2020, respectively.
61
MANAGEMENT'S DISCUSSION AND ANALYSIS
FUNDING ACTIVITIES
Deposits
The following table summarizes the composition of our deposits at the dates indicated (dollars in thousands):
|
| Deposit Composition |
|
| Deposit Composition |
| ||||||||||||||||||||||||||
|
| September 30, 2020 |
|
| December 31, 2019 |
|
| September 30, 2021 |
|
| December 31, 2020 |
| ||||||||||||||||||||
|
| Amount |
|
| % of Total |
|
| Amount |
|
| % of Total |
|
| Amount |
|
| % of |
|
| Amount |
|
| % of |
| ||||||||
Noninterest-bearing demand |
| $ | 1,013,176 |
|
|
| 25.3 | % |
| $ | 707,752 |
|
|
| 19.9 | % |
| $ | 1,144,852 |
| 23.1 | % |
| $ | 1,018,549 |
| 23.8 | % | ||||
Interest-bearing demand |
|
| 786,059 |
|
|
| 18.2 |
|
|
| 627,842 |
|
|
| 17.7 |
|
| 893,976 |
| 18.0 |
| 731,885 |
| 17.1 |
| |||||||
Savings and money market |
|
| 1,724,463 |
|
|
| 34.3 |
|
|
| 1,039,892 |
|
|
| 29.2 |
|
| 2,015,855 |
| 40.4 |
| 1,642,340 |
| 38.4 |
| |||||||
Time deposits < $250,000 |
|
| 660,300 |
|
|
| 17.6 |
|
|
| 893,177 |
|
|
| 25.1 |
|
| 737,299 |
| 14.8 |
| 684,885 |
| 16.0 |
| |||||||
Time deposits of $250,000 or more |
|
| 180,930 |
|
|
| 4.6 |
|
|
| 287,012 |
|
|
| 8.1 |
|
|
| 182,981 |
|
| 3.7 |
|
| 200,708 |
|
| 4.7 |
| |||
Total deposits |
| $ | 4,364,928 |
|
|
| 100.0 | % |
| $ | 3,555,675 |
|
|
| 100.0 | % |
| $ | 4,974,963 |
|
| 100.0 | % |
| $ | 4,278,367 |
|
| 100.0 | % |
We offer a variety of deposit products designed to attract and retain customers, with the primary focus on building and expanding long-term relationships. At September 30, 2020,2021, total deposits were $4.36$4.97 billion, representing an increase of $809.3$696.6 million from December 31, 2019.2020. The increase was driven bydue to growth in nonpublic depositspublic, non-public demand and the reciprocal and brokered deposits portfolios.deposits. Time deposits were approximately 19% and 33%21% of total deposits at September 30, 20202021 and December 31, 2019,2020, respectively.
Nonpublic deposits, the largest component of our funding sources, totaled $2.50$2.73 billion and $2.16$2.55 billion at September 30, 20202021 and December 31, 2019,2020, respectively, and represented 57%55% and 61%60% of total deposits as of the end of each period, respectively. The increase in nonpublic deposits was in part attributable to PPP loan proceeds received by customers. We have managed this segment of funding through a strategy of competitive pricing that minimizes the number of customer relationships that have only a single service high cost deposit account.
As an additional source of funding, we offer a variety of public (municipal) deposit products to the towns, villages, counties and school districts within our market. Public deposits generally range from 20% to 30% of our total deposits. There is a high degree of seasonality in this component of funding, because the level of deposits varies with the seasonal cash flows for these public customers. We maintain the necessary levels of short-term liquid assets to accommodate the seasonality associated with public deposits. Total public deposits were $989.4 million$1.19 billion and $860.7$834.9 million at September 30, 20202021 and December 31, 2019,2020, respectively, and represented 23%24% and 24%20% of total deposits as of the end of each period, respectively. The increase in public deposits during 20202021 was due largely to seasonality.
We also participate in reciprocal deposit programs, which enable depositors to receive FDIC insurance coverage for deposits otherwise exceeding the maximum insurable amount. Through these programs, deposits in excess of the maximum insurable amount are placed with multiple participating financial institutions. Prior to the Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”) enacted on May 14, 2018, all reciprocal deposits were considered brokered deposits for regulatory reporting purposes. With the enactment of EGRRCPA, reciprocal deposits, subject to certain restrictions, are no longer required to be reported as brokered deposits. Reciprocal deposits totaled $243.9$806.5 million and $337.2 million, respectively, at September 30, 2020,2021, compared to $157.9$612.3 million and $172.0 million, respectively, at December 31, 2019.2020. Reciprocal deposits represented 13%16% and 9%14% of total deposits as of the end of each period, respectively.
Brokered deposits totaled $294.9$254.8 million and $208.8$279.6 million at September 30, 20202021 and December 31, 2019,2020, respectively, and represented 7%5% and 6%7% of total deposits as of the end of each period, respectively.
- 58 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
Borrowings
The Company classifies borrowings as short-term or long-term in accordance with the original terms of the applicable agreement. Outstanding borrowings consisted of the following as of the dates indicated (in thousands):
|
| September 30, |
|
| December 31, |
|
| September 30, |
| December 31, |
| |||||
|
| 2020 |
|
| 2019 |
|
| 2021 |
| 2020 |
| |||||
Short-term borrowings - FHLB |
| $ | 5,300 |
|
| $ | 275,500 |
|
| $ | — |
| $ | 5,300 |
| |
Long-term borrowings - Subordinated notes, net |
|
| 39,258 |
|
|
| 39,273 |
|
|
| 73,834 |
|
| 73,623 |
| |
Total borrowings |
| $ | 44,558 |
|
| $ | 314,773 |
|
| $ | 73,834 |
| $ | 78,923 |
|
Short-term Borrowings
Short-term Federal Home Loan Bank (“FHLB”) borrowings have original maturities of less than one year and include overnight borrowings which we typically utilize to address short term funding needs as they arise. Short-termWe had no short-term FHLB borrowings at September 30, 2020 consisted of $5.3 million in short-term borrowings. The maximum2021 and no amount of short-term FHLB borrowings outstanding at any month-end during the nine months ended September 30, 2020 was $198.9 million.2021. Short-term FHLB borrowings at December 31, 20192020 consisted of $10.0 million in overnight borrowings and $265.5$5.3 million in short-term borrowings. The lower level ofdecline in short-term borrowings at September 30, 2020, is attributable2021, was the result of the Company’s decision to growth inutilize brokered deposits which were utilized as a cost-effective alternative to FHLB borrowings. Short-term borrowings and brokered deposits have historically been utilized to manage the seasonality of public deposits, which reached a seasonal high point during the third quarter.deposits.
62
MANAGEMENT'S DISCUSSION AND ANALYSIS
We have credit capacity with the FHLB and can borrow through facilities that include amortizing and term advances or repurchase agreements. We had approximately $218.6$206.1 million of immediate credit capacity with the FHLB as of September 30, 2020.2021. We had approximately $538.8$601.8 million in secured borrowing capacity at the Federal Reserve Bank (“FRB”) discount window, none of which was outstanding at September 30, 2020.2021. The FHLB and FRB credit capacity are collateralized by securities from our investment portfolio and certain qualifying loans. We had approximately $130.0 million and $145.0 million of credit available under unsecured federal funds purchased lines with various banks as of September 30, 20202021 and December 31, 2019.2020, respectively. Additionally, we had approximately $174.6$454.9 million of unencumbered liquid securities available for pledging.
The Parent has a revolving line of credit with a commercial bank allowing borrowings up to $20.0 million in total as an additional source of working capital. At September 30, 2020,2021, no amounts have been drawn on the line of credit.
Long-term Borrowings
On October 7, 2020, we completed a private placement of $35.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes to qualified institutional buyers and accredited institutional investors that were subsequently exchanged for subordinated notes with substantially the same terms (the “2020 Notes”) registered under the Securities Act of 1933, as amended. The 2020 Notes have a maturity date of October 15, 2030 and bear interest, payable semi-annually, at the rate of 4.375% per annum, until October 15, 2025. Commencing on that date, the interest rate will reset quarterly to an interest rate per annum equal to the then current three-month SOFR plus 4.265%, payable quarterly until maturity. The 2020 Notes are redeemable by us, in whole or in part, on any interest payment date on or after October 15, 2025, and we may redeem the Notes in whole at any time upon certain other specified events. We used the net proceeds for general corporate purposes, organic growth and to support regulatory capital ratios at Five Star Bank.
On April 15, 2015, we issued $40.0 million of Subordinated Notessubordinated notes (the “2015 Notes”) in a registered public offering. The Subordinated2015 Notes bear interest at a fixed rate of 6.0% per year, payable semi-annually, for the first 10 years. From April 15, 2025 to the April 15, 2030 maturity date, the interest rate will reset quarterly to an annual interest rate equal to the then-current three-month London Interbank Offered Rate (LIBOR)(“LIBOR”) plus 3.944%, payable quarterly. After the discontinuance of LIBOR, the interest rate will be determined by an alternate method as reasonably selected by the Company. The Subordinated2015 Notes are redeemable by us at any quarterly interest payment date beginning on April 15, 2025 to maturity at par, plus accrued and unpaid interest. Proceeds, net of debt issuance costs of $1.1 million, were $38.9 million. The Subordinated2015 Notes qualify as Tier 2 capital for regulatory purposes.
On October 7, 2020, the Company completed a private placement of $35.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes due 2030 to qualified institutional buyers and accredited institutional investors. The Notes have a maturity date of October 15, 2030 and bear interest, payable semi-annually, at the rate of 4.375% per annum, until October 15, 2025. Commencing on that date, the interest rate will reset quarterly to an interest rate per annum equal to the then current three-month SOFR plus 4.265% basis points, payable quarterly until maturity. The Company is entitled to redeem the Notes, in whole or in part, on any interest payment date on or after October 15, 2025, and to redeem the Notes in whole at any time upon certain other specified events. The Company intends to use the net proceeds for general corporate purposes, organic growth and to support regulatory capital ratios at Five Star Bank.
LIQUIDITY AND CAPITAL MANAGEMENT
Liquidity
We continue to actively monitor our liquidity profile and funding concentrations in accordance with our Board approved Liquidity Policy. While funding pressures have not occurred, management is actively monitoring customer activity by way of commercial and consumer line of credit utilization, as well as deposit flows. As of September 30, 2020,2021, all structural liquidity ratios and early warning indicators remain in compliance, with what we believe are ample funding sources available in the event of a stress scenario.
The objective of maintaining adequate liquidity is to assure that we meet our financial obligations. These obligations include the withdrawal of deposits on demand or at their contractual maturity, the repayment of matured borrowings, the ability to fund new and existing loan commitments and the ability to take advantage of new business opportunities. We achieve liquidity by maintaining a strong base of both core customer funds and maturing short-term assets; we also rely on our ability to sell or pledge securities and lines-of-credit and our overall ability to access to the financial and capital markets.
- 59 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
Liquidity for the Bank is managed through the monitoring of anticipated changes in loans, the investment portfolio, deposits and wholesale funds. The strength of the Bank’s liquidity position is a result of its base of core customer deposits. These core deposits are supplemented by wholesale funding sources that include credit lines with other banking institutions, the FHLB, the FRB and the FRB.brokered deposit relationships. The primary source of our non-deposit short-term borrowings is FHLB advances, of which we had $5.3 million$0 outstanding at September 30, 2020. 2021 due to the excess liquidity position sustained as a result of continued growth and seasonal inflows of public deposits. In addition to this amount, we have additional collateralized wholesale borrowing capacity of approximately $902.4$937.9 million from various funding sources which include the FHLB, the FRB and commercial banks that we can use to fund lending activities, liquidity needs, and/or to adjust and manage our asset and liability position.
The Parent’s funding requirements consist primarily of dividends to shareholders, debt service, income taxes, operating expenses, funding of non-bank subsidiaries, repurchases of our stock, and acquisitions. The Parent obtains funding to meet obligations from dividends received from the Bank, net taxes collected from subsidiaries included in the federal consolidated tax return, and the issuance of debt and equity securities. In addition, the Parent maintains a revolving line of credit with a commercial bank for an aggregate amount of up to $20.0 million, all of which was available at September 30, 2020.2021. The line of credit has a one-year term and matures in May 2021.2022. Funds drawn would be used for general corporate purposes and backup liquidity.
63
MANAGEMENT'S DISCUSSION AND ANALYSIS
Cash and cash equivalents were $282.1$288.4 million as of September 30, 2020,2021, up $169.1$194.5 million from $112.9$93.9 million as of DecemberDecember 31, 2019.2020. Net cash provided by operating activities totaled $20.3$39.5 million and the principal source of operating activity cash flow was net income adjusted for noncash income and expense items. Net cash used in investing activities totaled $376.6$516.4 million, which included outflows of $361.9$59.8 million for net loan originations, and $12.3$430.2 million from net investment securities transactions. Net cash provided by financing activities of $525.4$516.4 million was attributed to a $809.3$696.6 million increase in deposits, partially offset by a $270.2$5.3 million decrease in short-term borrowings, $6.0 million in common stock repurchases and by $13.4$13.8 million in dividend payments. The increase in the period end cash balance was due to growth in public, non-public demand and reciprocal deposits.
Capital Management
We actively manage capital, commensurate with our risk profile, to enhance shareholder value. We also seek to maintain capital levels for the Company and the Bank at amounts in excess of the regulatory “well-capitalized” thresholds. Periodically, we may respond to market conditions by implementing changes to our overall balance sheet positioning to manage our capital position.
Banks and financial holding companies are subject to various regulatory capital requirements administered by state and federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material impact on our consolidated financial statements. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.
Shareholders’ equity was $456.4$494.0 million at September 30, 2020,2021, an increase of $17.5$25.7 million from $438.9$468.4 million at December 31, 2019.2020. Net income for the nine months ended September 30, 20202021 increased shareholders’ equity by $24.5$58.1 million, offset by an $8.7 million cumulative effect adjustment from the adoption of ASC 326 and common and preferred stock dividends declared of $13.6$13.9 million. Accumulated other comprehensive loss included in shareholders’ equity decreased $14.3increased $14.2 million during the first nine months of 20202021 due primarilyprimarily to higherlower net unrealized gains on securities available for sale.
The FRB and FDIC have adopted a system using risk-based capital guidelines to evaluate the capital adequacy of banks and bank holding companies. The final rules implementingAs of September 30, 2021, the Company’s capital levels remained characterized as “well-capitalized” under the Basel Committee on Banking Supervision’s (“BCBS”) capital guidelines for U.S. banks became effective for the Company on January 1, 2015 and was fully phased-in on January 1, 2019. As of September 30, 2020, the Company’s capital levels remained characterized as “well-capitalized” under the new rules.banks.
- 60 -64
MANAGEMENT’SMANAGEMENT'S DISCUSSION AND ANALYSIS
The following table reflects the ratios and their components (dollars in thousands):
|
| September 30, |
|
| December 31, |
|
| September 30, |
| December 31, |
| |||||
|
| 2020 |
|
| 2019 |
|
| 2021 |
| 2020 |
| |||||
Common shareholders’ equity |
| $ | 439,033 |
|
| $ | 421,619 |
|
| $ | 476,721 |
| $ | 451,035 |
| |
Add: CECL transitional amount |
|
| 11,286 |
|
|
| — |
|
| 10,005 |
| 12,061 |
| |||
Less: Goodwill and other intangible assets |
|
| 71,135 |
|
|
| 71,987 |
|
| 72,052 |
| 71,235 |
| |||
Net unrealized gain (loss) on investment securities (1) |
|
| 14,651 |
|
|
| 873 |
| ||||||||
Net unrealized gain on investment securities (1) |
| (1,057 | ) |
| 14,743 |
| ||||||||||
Hedging derivative instruments |
|
| (692 | ) |
|
| (518 | ) |
| 827 |
| (316 | ) | |||
Net periodic pension and postretirement benefits plan adjustments |
|
| (14,168 | ) |
|
| (14,868 | ) |
| (11,886 | ) |
| (12,299 | ) | ||
Other |
|
| — |
|
|
| — |
|
|
| — |
|
| — |
| |
Common Equity Tier 1 (“CET1”) Capital |
|
| 379,393 |
|
|
| 364,145 |
|
| 426,790 |
| 389,733 |
| |||
Plus: Preferred stock |
|
| 17,328 |
|
|
| 17,328 |
|
| 17,292 |
| 17,328 |
| |||
Less: Other |
|
| — |
|
|
| — |
|
|
| — |
|
| — |
| |
Tier 1 Capital |
|
| 396,721 |
|
|
| 381,473 |
|
| 444,082 |
| 407,061 |
| |||
Plus: Qualifying allowance for credit losses |
|
| 38,186 |
|
|
| 30,482 |
|
| 34,341 |
| 40,509 |
| |||
Subordinated Notes |
|
| 39,258 |
|
|
| 39,273 |
|
|
| 73,834 |
|
| 73,623 |
| |
Total regulatory capital |
| $ | 474,165 |
|
| $ | 451,228 |
|
| $ | 552,257 |
| $ | 521,193 |
| |
Adjusted average total assets (for leverage capital purposes) |
| $ | 4,713,549 |
|
| $ | 4,237,596 |
|
| $ | 5,310,329 |
| $ | 4,933,597 |
| |
Total risk-weighted assets |
| $ | 3,723,091 |
|
| $ | 3,533,281 |
|
| $ | 4,167,165 |
| $ | 3,844,380 |
| |
Regulatory Capital Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Tier 1 Leverage (Tier 1 capital to adjusted average assets) |
|
| 8.42 | % |
|
| 9.00 | % |
| 8.36 | % |
| 8.25 | % | ||
CET1 Capital (CET1 capital to total risk-weighted assets) |
|
| 10.19 |
|
|
| 10.31 |
|
| 10.24 |
| 10.14 |
| |||
Tier 1 Capital (Tier 1 capital to total risk-weighted assets) |
|
| 10.66 |
|
|
| 10.80 |
|
| 10.66 |
| 10.59 |
| |||
Total Risk-Based Capital (Total regulatory capital to total risk-weighted assets) |
|
| 12.74 |
|
|
| 12.77 |
|
| 13.25 |
| 13.56 |
|
(1) Includes unrealized gains and losses related to the Company’s reclassification of available for sale investment securities to the held to maturity category.
|
|
We have elected to apply the 2020 CECL transition provision related to the impact of the CECL accounting standard on regulatory capital, as provided by the US banking agencies’ March 2020 interim final rule. Under the 2020 CECL transition provision, the regulatory capital impact of the Day 1 adjustment to the allowance for credit losses (after-tax) upon the January 1, 2020 CECL adoption date has been deferred, and will phase in to regulatory capital at 25% per year commencing January 1, 2022. For the ongoing impact of CECL, we are allowed to defer the regulatory capital impact of the allowance for credit losses in an amount equal to 25% of the change in the allowance for credit losses (pre-tax) recognized through earnings for each period between January 1, 2020, and December 31, 2021. The cumulative adjustment to the allowance for credit losses between January 1, 2020, and December 31, 2021, will also phase in to regulatory capital at 25% per year commencing January 1, 2022.
BCBSBasel III Capital Rules
The BCBSUnder the Basel III Capital Rules, include a new common equitythe current minimum capital ratios, including an additional capital conservation buffer applicable to the Company and the Bank, are:
Banking institutions with a capital conservation buffer below the minimum level will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. The BCBSBasel III Capital Rules also provide for a “countercyclical capital buffer” that is applicable to only certain covered institutions and does not have any current applicability to the Company or the Bank. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules. The final rules also revised the definition and calculation of Tier 1 capital, total capital, and risk-weighted assets.Basel III Capital Rules.
- 61 -65
MANAGEMENT’SMANAGEMENT'S DISCUSSION AND ANALYSIS
The following table presents actual and required capital ratios as of September 30, 20202021 and December 31, 20192020 for the Company and the Bank under the BCBSBasel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of those dates based on the phase-in provisions of the BCBS Capital Rules and the minimum required capital levels as of January 1, 2019 when the BCBS Capital Rules have been fully phased-in. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the BCBSBasel III Capital Rules (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
| Required to be |
| ||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| Minimum Capital |
|
| Considered Well |
|
|
|
|
|
|
|
|
|
|
| Required to be |
| ||||||||||||||||||||||
|
| Actual |
|
| Required – Basel III |
|
| Capitalized |
|
|
|
|
|
|
|
| Minimum Capital |
|
| Considered Well |
| |||||||||||||||||||||||||||
|
| Amount |
|
| Ratio |
|
| Amount |
|
| Ratio |
|
| Amount |
|
| Ratio |
|
| Actual |
|
| Required – Basel III |
|
| Capitalized |
| |||||||||||||||||||||
September 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
|
| Amount |
|
| Ratio |
|
| Amount |
|
| Ratio |
|
| Amount |
|
| Ratio |
| ||||||||||||||||||||||||||||||
September 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||
Tier 1 leverage: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Company |
| $ | 396,721 |
|
|
| 8.42 | % |
| $ | 188,542 |
|
|
| 4.00 | % |
| $ | 235,677 |
|
|
| 5.00 | % |
| $ | 444,082 |
| 8.36 | % |
| $ | 212,413 |
| 4.00 | % |
| $ | 265,516 |
| 5.00 | % | ||||||
Bank |
|
| 422,605 |
|
|
| 8.98 |
|
|
| 188,265 |
|
|
| 4.00 |
|
|
| 235,332 |
|
|
| 5.00 |
|
| 483,083 |
| 9.11 |
| 212,080 |
| 4.00 |
| 265,100 |
| 5.00 |
| |||||||||||
CET1 capital: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Company |
|
| 379,393 |
|
|
| 10.19 |
|
|
| 260,616 |
|
|
| 7.00 |
|
|
| 242,001 |
|
|
| 6.50 |
|
| 426,790 |
| 10.24 |
| 291,702 |
| 7.00 |
| 270,866 |
| 6.50 |
| |||||||||||
Bank |
|
| 422,605 |
|
|
| 11.38 |
|
|
| 259,959 |
|
|
| 7.00 |
|
|
| 241,391 |
|
|
| 6.50 |
|
| 483,083 |
| 11.62 |
| 290,965 |
| 7.00 |
| 270,182 |
| 6.50 |
| |||||||||||
Tier 1 capital: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Company |
|
| 396,721 |
|
|
| 10.66 |
|
|
| 316,463 |
|
|
| 8.50 |
|
|
| 297,847 |
|
|
| 8.00 |
|
| 444,082 |
| 10.66 |
| 354,209 |
| 8.50 |
| 333,373 |
| 8.00 |
| |||||||||||
Bank |
|
| 422,605 |
|
|
| 11.38 |
|
|
| 315,665 |
|
|
| 8.50 |
|
|
| 297,096 |
|
|
| 8.00 |
|
| 483,083 |
| 11.62 |
| 353,315 |
| 8.50 |
| 332,532 |
| 8.00 |
| |||||||||||
Total capital: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Company |
|
| 474,165 |
|
|
| 12.74 |
|
|
| 390,925 |
|
|
| 10.50 |
|
|
| 372,309 |
|
|
| 10.00 |
|
| 552,257 |
| 13.25 |
| 437,552 |
| 10.50 |
| 416,717 |
| 10.00 |
| |||||||||||
Bank |
|
| 460,791 |
|
|
| 12.41 |
|
|
| 389,939 |
|
|
| 10.50 |
|
|
| 371,370 |
|
|
| 10.00 |
|
| 517,423 |
| 12.45 |
| 436,448 |
| 10.50 |
| 415,665 |
| 10.00 |
| |||||||||||
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||
Tier 1 leverage: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Company |
| $ | 381,473 |
|
|
| 9.00 | % |
| $ | 169,504 |
|
|
| 4.00 | % |
| $ | 211,880 |
|
|
| 5.00 | % |
| $ | 407,061 |
| 8.25 | % |
| $ | 197,344 |
| 4.00 | % |
| $ | 246,680 |
| 5.00 | % | ||||||
Bank |
|
| 409,031 |
|
|
| 9.67 |
|
|
| 169,189 |
|
|
| 4.00 |
|
|
| 211,486 |
|
|
| 5.00 |
|
| 441,929 |
| 8.97 |
| 197,064 |
| 4.00 |
| 246,330 |
| 5.00 |
| |||||||||||
CET1 capital: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Company |
|
| 364,145 |
|
|
| 10.31 |
|
|
| 247,330 |
|
|
| 7.00 |
|
|
| 229,663 |
|
|
| 6.50 |
|
| 389,733 |
| 10.14 |
| 269,107 |
| 7.00 |
| 249,885 |
| 6.50 |
| |||||||||||
Bank |
|
| 409,031 |
|
|
| 11.61 |
|
|
| 246,674 |
|
|
| 7.00 |
|
|
| 229,055 |
|
|
| 6.50 |
|
| 441,929 |
| 11.52 |
| 268,483 |
| 7.00 |
| 249,306 |
| 6.50 |
| |||||||||||
Tier 1 capital: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Company |
|
| 381,473 |
|
|
| 10.80 |
|
|
| 300,329 |
|
|
| 8.50 |
|
|
| 282,663 |
|
|
| 8.00 |
|
| 407,061 |
| 10.59 |
| 326,772 |
| 8.50 |
| 307,550 |
| 8.00 |
| |||||||||||
Bank |
|
| 409,031 |
|
|
| 11.61 |
|
|
| 299,533 |
|
|
| 8.50 |
|
|
| 281,914 |
|
|
| 8.00 |
|
| 441,929 |
| 11.52 |
| 326,015 |
| 8.50 |
| 306,838 |
| 8.00 |
| |||||||||||
Total capital: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Company |
|
| 451,228 |
|
|
| 12.77 |
|
|
| 370,995 |
|
|
| 10.50 |
|
|
| 353,328 |
|
|
| 10.00 |
|
| 521,193 |
| 13.56 |
| 403,660 |
| 10.50 |
| 384,438 |
| 10.00 |
| |||||||||||
Bank |
|
| 439,514 |
|
|
| 12.47 |
|
|
| 370,011 |
|
|
| 10.50 |
|
|
| 352,392 |
|
|
| 10.00 |
|
| 482,439 |
| 12.58 |
| 402,725 |
| 10.50 |
| 383,547 |
| 10.00 |
|
Dividend Restrictions
In the ordinary course of business, the Company is dependent upon dividends from the Bank to provide funds for the payment of dividends to shareholders and to provide for other cash requirements. Banking regulations may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels. Approval is also required if dividends declared exceed the net profits for that year combined with the retained net profits for the preceding two years.
- 62 -66
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk refers to the potential impact on earnings or capital arising from movements in interest rates. The Bank’s market risk management framework has been developed to control both short-term and long-term exposure within Board approved policy limits and is monitored by the Asset-Liability Management Committee and Board of Directors. Quantitative and qualitative disclosures about market risk were presented at December 31, 20192020 in Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019,2020, as filed with the Securities and Exchange Commission on March 4, 2020.15, 2021. The following is an update of the discussion provided therein.
Portfolio Composition
There was no material change in the composition of assets, deposit liabilities or borrowings from December 31, 20192020 to September 30, 2020,2021, aside from asset growth due to the PPP program, remixing of the wholesale funding basean increased liquidity position. The increased liquidity position resulted from continued deposit growth and drove investment security purchases and an increaseexcess Federal Reserve Bank excessinterest earning cash position resulting from deposit growth.balance at quarter end. See the section titled “Analysis of Financial Condition” in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of asset, deposit and borrowing activity during the period.
Net Interest Income at Risk
A primary tool used to manage interest rate risk is “rate shock” simulation to measure the rate sensitivity. Rate shock simulation is a modeling technique used to estimate the impact of changes in rates on net interest income as well as economic value of equity.
Net interest income at risk is measured by estimating the changes in net interest income resulting from instantaneous and sustained parallel shifts in interest rates of different magnitudes over a period of 12 months. The following table sets forth the estimated changes to net interest income over the 12-month period ending September 30, 20212022 assuming instantaneous changes in interest rates for the given rate shock scenarios (dollars in thousands):
|
| Changes in Interest Rate |
|
| Changes in Interest Rate |
| ||||||||||||||||||||||||||
|
| -100 bp |
|
| +100 bp |
|
| +200 bp |
|
| +300 bp |
|
| -100 bp |
|
| +100 bp |
|
| +200 bp |
|
| +300 bp |
| ||||||||
Estimated change in net interest income |
| $ | 921 |
|
| $ | 1,788 |
|
| $ | 4,077 |
|
| $ | 6,756 |
|
| $ | (2,792 | ) |
| $ | 2,104 |
| $ | 4,649 |
| $ | 7,063 |
| ||
% Change |
|
| 0.66 | % |
|
| 1.28 | % |
|
| 2.92 | % |
|
| 4.84 | % |
| -1.90 | % |
| 1.43 | % |
| 3.16 | % |
| 4.81 | % |
In the rising rate environments,scenarios, the model results indicate increases inthat net interest income is modeled to increase compared to the flat rate scenario over a one-year timeframe. This is a result of assumed commercial loan products and investment security cash flow repricing at a higher frequency than underlying borrowing and deposit costs. As intermediate and longer-term assets continue to mature and are replaced at higher yields, net interest income improves over longer term timeframes. Model results in the declining rate environments alsoscenario indicate increasesdecreases in net interest income due to floating rate loans, tiedassets having the ability to Prime, no longer repricing downwards due to Prime rate being floored,reprice downward, while interest rate sensitivedeposit and borrowing liabilities still have slight sensitivity to downward movement in rates.reach modeled floors.
In addition to the changes in interest rate scenarios listed above, other scenarios are typically modeled to measure interest rate risk. These scenarios vary depending on the economic and interest rate environment.
The simulation referenced above is based on our assumption as to the effect of interest rate changes on assets and liabilities and assumes a parallel shift of the yield curve. It also includes certain assumptions about the future pricing of loans and deposits in response to changes in interest rates. Further, it assumes that delinquency rates would not change as a result of changes in interest rates, although there can be no assurance that this will be the case. While this simulation is a useful measure as to net interest income at risk due to a change in interest rates, it is not a forecast of future results, does not measure the effect of changing interest rates on noninterest income and is based on many assumptions that, if changed, could cause a different outcome.
Economic Value of Equity At Risk
The economic (or “fair”) value of financial instruments on our balance sheet will also vary under the interest rate scenarios previously discussed. This variance is measured by simulating changes in our economic value of equity (“EVE”), which is calculated by subtracting the estimated fair value of liabilities from the estimated fair value of assets. Fair values for financial instruments are estimated by discounting projected cash flows (principal and interest) at current replacement rates for each account type, while fair values of non-financial assets and liabilities are assumed to equal book value and do not vary with interest rate fluctuations. An economic value simulation is a static measure for balance sheet accounts at a given point in time, but this measurement can change substantially over time as the characteristics of our balance sheet evolve and as interest rate and yield curve assumptions are updated.
67
The amount of change in economic value under different interest rate scenarios depends on the characteristics of each class of financial instrument, including the stated interest rate or spread relative to current market rates or spreads, the likelihood of prepayment, whether the rate is fixed or floating, and the maturity date of the instrument. As a general rule, fixed-rate financial assets become more valuable in declining rate scenarios and less valuable in rising rate scenarios, while fixed-rate financial liabilities gain in value as interest rates rise and lose value as interest rates decline. The longer the duration of the financial instrument, the greater the impact a rate change will have on its value. In our economic value simulations, estimated prepayments are factored in for financial instruments with stated maturity dates, and decay rates for non-maturity deposits are projected based on historical data (back-testing).
- 63 -
The analysis that follows presents the estimated EVE resulting from market interest rates prevailing at a given quarter-end (“Pre-Shock Scenario”), and under other interest rate scenarios (each a “Rate Shock Scenario”) represented by immediate, permanent, parallel shifts in interest rates from those observed at September 30, 20202021 and December 31, 20192020 (dollars in thousands). The analysis additionally presents a measurement of the interest rate sensitivity at September 30, 20202021 and December 31, 2019.2020. EVE amounts are computed under each respective Pre-Shock Scenario and Rate Shock Scenario. An increase in the EVE amount is considered favorable, while a decline is considered unfavorable. The following table sets forth the estimated changes to EVE assuming instantaneous changes in interest rates for the given rate shock scenarios (dollars in thousands):
|
| September 30, 2020 |
|
| December 31, 2019 |
|
| September 30, 2021 |
|
| December 31, 2020 |
| ||||||||||||||||||||||||||||||||||||
Rate Shock Scenario: |
| EVE |
|
| Change |
|
| Percentage Change |
|
| EVE |
|
| Change |
|
| Percentage Change |
|
| EVE |
|
| Change |
|
| Percentage |
|
| EVE |
|
| Change |
|
| Percentage |
| ||||||||||||
Pre-Shock Scenario |
| $ | 545,804 |
|
|
|
|
|
|
|
|
|
| $ | 632,832 |
|
|
|
|
|
|
|
|
|
| $ | 717,562 |
|
|
|
|
|
|
| $ | 583,156 |
|
|
|
|
|
| ||||||
- 100 Basis Points |
|
| 549,695 |
|
| $ | 3,891 |
|
|
| 0.71 | % |
|
| 676,362 |
|
| $ | 43,530 |
|
|
| 6.88 | % |
| 712,612 |
| $ | (4,950 | ) |
| -0.69 | % |
| 574,345 |
| $ | (8,811 | ) |
| -1.51 | % | ||||||
+100 Basis Points |
|
| 565,710 |
|
|
| 19,906 |
|
|
| 3.65 |
|
|
| 627,409 |
|
|
| (5,423 | ) |
|
| (0.86 | ) |
| 737,651 |
| 20,089 |
| 2.80 |
| 617,768 |
| 34,612 |
| 5.94 |
| |||||||||||
+ 200 Basis Points |
|
| 587,022 |
|
|
| 41,218 |
|
|
| 7.55 |
|
|
| 614,927 |
|
|
| (17,905 | ) |
|
| (2.83 | ) |
| 753,000 |
| 35,438 |
| 4.94 |
| 638,224 |
| 55,068 |
| 9.44 |
| |||||||||||
+ 300 Basis Points |
|
| 604,760 |
|
|
| 58,956 |
|
|
| 10.80 |
|
|
| 600,636 |
|
|
| (32,196 | ) |
|
| (5.09 | ) |
| 760,238 |
| 42,676 |
| 5.95 |
| 651,518 |
| 68,362 |
| 11.72 |
|
The decreaseincrease in the Pre-Shock Scenario EVE at September 30, 20202021 compared to December 31, 20192020 is athe result of a 15% increasegrowth in non-public deposits.investments. The slight decrease in the -100 basis point Rate Shock Scenario to EVE is reflectivea result of the assumption that deposit pricing is nearly floored and hascontinued growth in deposits over the inability to reprice to a lower level. This islast three quarters, compounded bywith the assumption that the discount curve on thegrowth of fixed rate portfolio is nearly floored, resultinglong-term assets not receiving the full benefit in less premium on the portfoliovalue appreciation typically observed in a fallingdown rate environment. The overall level of change is in line with expectations due to the Federal Open Market Committee action to reduce the Federal Funds target rate by 150 basis points within the period and programs introduced to help small businesses with loans.scenarios.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of September 30, 2020,2021, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b), as adopted by the SEC under the Securities Exchange Act of 1934, as amended (“Exchange Act”). Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
Disclosure controls and procedures are the controls and other procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 20202021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
- 64 -68
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
From time to time we are a party to or otherwise involved in legal proceedings arising out of the normal course of business. Regardless of the outcome, litigation can have an adverse impact on us because of prosecution, defense and settlement costs, unfavorable awards, diversion of management resources and other factors.
We are party to an action filed against us on May 16, 2017 by Matthew L. Chipego, Charlene Mowry, Constance C. Churchill and Joseph W. Ewing in the Court of Common Pleas in Philadelphia, Pennsylvania. Plaintiffs seeksought class certification to represent classes of consumers in New York and Pennsylvania along with statutory damages, interest and declaratory relief. The plaintiffs seeksought to represent a putative class of consumers who are alleged to have obtained direct or indirect financing from us for the purchase of vehicles that we later repossessed. The plaintiffs specifically claim that the notices the Bank sent to defaulting consumers after their vehicles were repossessed did not comply with the relevant portions of the Uniform Commercial Code in New York and Pennsylvania. We dispute and believe we have meritorious defenses against these claims and plan to vigorously defend ourselves.
In February 2020, we agreed to engage in mediation with the plaintiffs but mediation has not yet commenced. On October 19, 2020,September 30, 2021, the Court granted plaintiffs’ motion for judgment on the pleadings dismissing our affirmative defense against one namedclass certification and certified four different classes (two classes of New York plaintiff that his claim was time-barred underconsumers and two classes of Pennsylvania consumers). We estimate there may be approximately 5,200 members in the New York law, applyingclasses and 300 members in the Pennsylvania classes. We filed a six-year statute of limitations rather thanmotion seeking permission to appeal the three years limitation period we had argued. Under the current scheduling order, briefing on any class certification requestruling to the Superior Court of Pennsylvania and a stay of proceedings pending any such appeal. We also filed a motion to dismiss the action for lack of standing. We have not accrued a contingent liability for this matter at this time because, given our defenses, we are unable to conclude whether a liability is scheduledreasonably probable to occur in November 2020.nor are we able to currently reasonably estimate the amount of potential loss.
If we settle these claims or the action is not resolved in our favor, we may suffer reputational damage and incur legal costs, settlements or judgments that exceed the amounts covered by our existing insurance policies. We can provide no assurances that our insurer will insure the legal costs, settlements or judgementsjudgments we incur in excess of our deductible. If we are unsuccessful in defending ourselves from these claims or if our insurer does not insure us against legal costs we incur in excess of our deductible, the result may materially adversely affect our business, results of operations and financial condition.
ITEM 1A. Risk Factors
Except as stated below, there have been no material changes from the risk factors previously disclosed in Part I – Item 1A of the Company’s Form 10-K for the year ended December 31, 2019.
The ongoing novel coronavirus (“COVID-19”) pandemic, and governmental and individual efforts to contain the pandemic, have had a significant negative impact on the U.S. and global economy which has and will continue to adversely affect our business, financial condition and results of operations.
In response to the COVID-19 pandemic and resulting economic downturn, the Federal Reserve reduced the target federal funds rate to a range of 0.00% to 0.25% and has stated that it intends to keep the rate near 0.00% until signs of higher inflation and a tighter labor market emerge. This lower rate reduces the rate of interest we earn on loans and pay on borrowings and interest-bearing deposits, and can affect the value of financial instruments we hold. In an environment with lower interest rates, we will not be able to earn as much on our interest-earning assets, which will likely reduce net interest margin. In addition, our ability to earn interest and receive dividend income from investment securities will be reduced. If interest rates remain low for an extended period of time, our results of operations could be materially adversely affected.
The U.S. economy generally and our customers and employees in particular have been directly impacted by governmental orders reducing travel and in-person interactions. Executive orders from the Governor of the State of New York may impact our ability to keep our bank branch locations open. We expect we and our customers will continue to be impacted by social distancing efforts for the duration of the COVID-19 pandemic. A significant proportion of our employees are working remotely, which may slow response times to customers’ inquiries or preclude providing the level of service our employees are typically able to offer in person. Our reputation and results of operations may be impacted if our competitors are better able to adjust to the restrictions on in-person interactions and remote work. Furthermore, as our employees continue to work from home, our operational risk, including data security risk, is higher than it would otherwise be, as cybercriminal activity has increased in an attempt to profit from the disruption to typical operations. The cybersecurity-related risks we face include more phishing, malware, and other cybersecurity attacks, vulnerability to disruptions of our information technology infrastructure and telecommunications systems for remote operations, and unauthorized dissemination, misuse or destruction of confidential or valuable information.
While we have experienced higher loan origination volume due to the Paycheck Protection Program (“PPP”) under the CARES Act, there can be no assurance that the borrowers under the CARES Act programs will be able to pay the interest, and principal payments, if applicable, when they are due. If the borrower of a PPP loan fails to qualify for loan forgiveness under the program, we will have to hold the loan at an unfavorable interest rate as compared to a loan we may otherwise have extended to our customer. Even though those loans are guaranteed by the U.S. Small Business Association (the “SBA”), we may not be able to collect from the SBA as quickly as those payments come due, and our cash flow and earnings may be reduced accordingly. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which we originated, funded or serviced the PPP loan, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already made payment under the guaranty, seek recovery of any loss related to the deficiency from us. Originations for consumer indirect lending, which currently constitutes 23.6% of our total loans, have declined since the outbreak of the COVID-19 pandemic. If this trend continues, our financial condition and results of operations could be materially adversely affected.
- 65 -69
Our loan customers will likely be impacted by the overall decline in the U.S. economy, which may cause them to make late or reduced payments on their loans or default on their loans with us. In particular, our commercial mortgage customers may be experiencing higher rates of tenants not paying rent due to the COVID-19 pandemic. As a lender, we are exposed to the risk that customers will be unable to repay their loans according to their terms and that any collateral securing the payment of their loans may not be sufficient to assure repayment. The collateral securing our indirect loan portfolio in particular may not be sufficient to cover the full value of an outstanding loan because the collateral, namely automobiles, are depreciating assets. Our credit risk has increased since the start of the COVID-19 pandemic and related decline in the U.S. economy. In the event of delinquencies, regulatory changes and policies designed to protect borrowers may slow or prevent us from taking certain remediation actions, including foreclosure. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral, and we provide an allowance for estimated loan losses based on a number of factors. We believe that the allowance for loan losses is adequate. However, if our assumptions or judgments are wrong, the allowance for loan losses may not be sufficient to cover the actual credit losses. We may have to increase the allowance in the future in response to the COVID-19 pandemic and resulting changes to the U.S. economy. The actual amount of future provisions for credit losses may vary from the amount of past provisions. The longer the economic results of the COVID-19 pandemic negatively impact our customers, the more likely our credit quality is to decline and the more likely our customers will be to default on their loans with us. Continued economic disruption and fear of the spread of COVID-19 could result in business shutdowns, limitations on commercial activity and financial transactions, labor shortages, supply chain interruptions, increased unemployment and commercial property vacancy rates and reduced profitability and ability for property owners to make mortgage payments. If a significant proportion of our customers are unable to repay their loans and the collateral securing repayment is insufficient to cover our losses, we may have to increase our allowance for credit losses - loans, the quality of our loan portfolio will decline, our net income will decrease and our results of operations will be materially adversely impacted. In addition, our capital and leverage ratios may be adversely impacted.
At September 30, 2020, we held $151.6 million in debt securities that are issued by state and local government agencies, or municipal bonds, that are backed by the credit and taxing power of the issuing jurisdiction. As these state and local governments experience the impacts of the pandemic and stay at home orders, they are earning less sales tax revenue while incurring higher than expected costs as a result of the COVID-19 pandemic. The impact of the COVID-19 pandemic may cause the credit rating of the municipal bonds we hold to be downgraded, which could in turn cause us to incur credit losses. If these bond issuers are unable to repay us when the bonds mature, we could lose our investment and our results of operations and cash flows could be materially adversely impacted.
The market volatility related to the COVID-19 pandemic has driven market values of publicly traded securities downward. Because the majority of our investment advisory revenue is from fees based on a percentage of assets under management, our investment advisory revenues and profitability have fallen and will continue to fluctuate with the overall market conditions.
The spread of COVID-19 has led to an economic recession and continues to cause severe disruptions in the U.S. economy. Should the COVID-19 pandemic continue for an extended period of time, our business, financial condition, results of operations and cash flows may likewise be materially adversely impacted for an extended period of time.
The value of our goodwill and other intangible assets may decline in the future.
As of September 30, 2020, we had $66.1 million of goodwill and $8.0 million of other intangible assets. Although we did not record any impairment to our goodwill for the first nine months of 2020, significant and sustained declines in our stock price and market capitalization, significant declines in our expected future cash flows, significant adverse changes in the business climate and slower growth rates, any or all of which could be materially impacted by the ongoing COVID-19 pandemic, may necessitate our taking charges in the future related to the impairment of our goodwill. If the recent capital markets downturn resulting from the COVID-19 pandemic continues for an extended period of time, or the capital markets continue to experience increased volatility, we may record an impairment to our goodwill in subsequent fiscal periods. Future regulatory actions could also have a material impact on assessments of goodwill for impairment. If the fair value of our net assets improves at a faster rate than the market value of our reporting units, or if we were to experience increases in book values of a reporting unit in excess of the increase in fair value of equity, we may also have to take charges related to the impairment of our goodwill. If we were to conclude that a future write-down of our goodwill is necessary, we would record the appropriate charge, which could have a material adverse effect on our results of operations.
Identifiable intangible assets other than goodwill consist of core deposit intangibles and other intangible assets (primarily customer relationships). Adverse events or circumstances could impact the recoverability of these intangible assets including loss of core deposits, significant losses of customer accounts and/or balances, increased competition or adverse changes in the economy, such as those related to the ongoing COVID-19 pandemic. To the extent these intangible assets are deemed unrecoverable, a non-cash impairment charge would be recorded which could have a material adverse effect on our results of operations.
For further discussion, see Note 7, Goodwill and Other Intangible Assets, to the Consolidated Financial Statements (Unaudited) included in Item 1 of this Quarterly Report on Form 10-Q.
- 66 -
ITEM 6. Exhibits
(a)The following is a list of all exhibits filed or incorporated by reference as part of this Report:
Number |
|
| Description |
| Location | |
|
|
| ||
|
| |||
|
| |||
|
| |||
|
| Filed Herewith | ||
31.2 |
|
| Filed Herewith | |
32 |
|
| Filed Herewith | |
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.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |||
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
* Schedules and similar attachments have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The registrant will furnish a copy of any omitted schedule or similar attachment to the Securities and Exchange Commission upon request.
- 67 -70
SIGNATURES
Pursuant to the requirements 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.
FINANCIAL INSTITUTIONS, INC.
/s/ Martin K. Birmingham | , November | |
Martin K. Birmingham | ||
President and Chief Executive Officer | ||
(Principal Executive Officer) |
/s/ | , November | |
| ||
| ||
(Principal Financial Officer) |
/s/ Sonia M. Dumbleton | , November | |
Sonia M. Dumbleton | ||
Senior Vice President and Controller | ||
(Principal Accounting Officer) |
71
- 68 -