TOMPKINS FINANCIAL CORPORATION The following analysis is intended to provide the reader with a further understanding of the consolidated financial condition and results of operations of the Company and its operating subsidiaries for the periods shown. This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with other sections of this Report on Form 10-K, including Part I, "Item 1. Business," Part II, "Item 6. Selected Financial Data," and Part II, "Item 8. Financial Statements and Supplementary Data." OverviewTompkins Financial Corporation ("Tompkins" or the "Company") is headquartered inIthaca, New York and is registered as aFinancial Holding Company with theFederal Reserve Board under the Bank Holding Company Act of 1956, as amended. The Company is a locally oriented, community-based financial services organization that offers a full array of products and services, including commercial and consumer banking, leasing, trust and investment management, financial planning and wealth management, and insurance services. AtDecember 31, 2019 , the Company's subsidiaries included: four wholly-owned banking subsidiaries,Tompkins Trust Company (the "Trust Company "), TheBank of Castile (DBA Tompkins Bank of Castile ),Mahopac Bank (DBA Tompkins Mahopac Bank ),VIST Bank (DBA Tompkins VIST Bank ); and a wholly-owned insurance agency subsidiary,Tompkins Insurance Agencies, Inc. ("Tompkins Insurance "). The trust division of theTrust Company provides a full array of investment services, including investment management, trust and estate, financial and tax planning as well as life, disability and long-term care insurance services. The Company's principal offices are located at118 E. Seneca Street , P.O. Box 460,Ithaca, NY , 14850, and its telephone number is (888) 503-5753. The Company's common stock is traded on the NYSE American under the Symbol "TMP."
Forward-Looking Statements
This Annual Report on Form 10-K contains "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. The statements
contained in this Report that are not statements of historical fact may include
forward-looking statements that involve a number of risks and uncertainties.
Forward-looking statements may be identified by use of such words as "may",
"will", "estimate", "intend", "continue", "believe", "expect", "plan", or
"anticipate", and other similar words. Examples of forward-looking statements
may include statements regarding; the asset quality of the Company's loan
portfolios; the level of the Company's allowance for loan losses; the
sufficiency of liquidity sources; the Company's exposure to changes in interest
rates; the impact of changes in accounting standards; the likelihood that
deferred tax assets will be realized and plans, prospects, growth and
strategies. Forward-looking statements are made based on management's
expectations and beliefs concerning future events impacting the Company and are
subject to certain uncertainties and factors relating to the Company's
operations and economic environment, all of which are difficult to predict and
many of which are beyond the control of the Company, that could cause actual
results of the Company to differ materially from those expressed and/or implied
by forward-looking statements. The following factors, in addition to those
listed as Risk Factors in Item 1A are among those that could cause actual
results to differ materially from the forward-looking statements: changes in
general economic, market and regulatory conditions; the development of an
interest rate environment that may adversely affect the Company's interest rate
spread, other income or cash flow anticipated from the Company's operations,
investment and/or lending activities; changes in laws and regulations affecting
banks, bank holding companies and/or financial holding companies, such as the
Dodd-Frank Act, Basel III and the Economic Growth, Regulatory Relief, and
Consumer Protection Act; technological developments and changes; the ability to
continue to introduce competitive new products and services on a timely,
cost-effective basis; governmental and public policy changes, including
environmental regulation; reliance on large customers; and financial resources
in the amounts, at the times and on the terms required to support the Company's
future businesses.
Critical Accounting Policies
In the course of normal business activity, management must select and apply many
accounting policies and methodologies and make estimates and assumptions that
lead to the financial results presented in the Company's consolidated financial
statements and accompanying notes. There are uncertainties inherent in making
these estimates and assumptions, which could materially affect our results of
operations and financial position.
Management considers accounting estimates to be critical to reported financial
results if (i) the accounting estimates require management to make assumptions
about matters that are highly uncertain, and (ii) different estimates that
management reasonably could have used for the accounting estimate in the current
period, or changes in the accounting estimate that are reasonably likely to
occur from period to period, could have a material impact on the Company's
consolidated financial statements. Management considers the accounting policy
relating to the allowance for loan and lease losses ("allowance") to be a
critical accounting policy
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because of the uncertainty and subjectivity involved in this policy and the material effect that estimates related to this area can have on the Company's results of operations.
Allowance for loan and lease losses Management considers the accounting policy relating to the allowance to be a critical accounting policy because of the high degree of judgment involved, the subjectivity of the assumptions used and the potential changes in the economic environment that could result in changes to the amount of the allowance. The Company has developed a methodology to measure the amount of estimated loan loss exposure inherent in the loan portfolio to assure that an appropriate allowance is maintained. The Company's methodology is based upon guidance provided inSEC Staff Accounting Bulletin No. 102, Selected Loan Loss Allowance Methodology and Documentation Issues and includes allowance allocations calculated in accordance with Accounting Standards Codification ("ASC") Topic 310, Receivables, and allowance allocations calculated in accordance with ASC Topic 450 Contingencies. The model is comprised of evaluating impaired loans, criticized and classified loans, historical losses, and qualitative factors. Management has deemed these components appropriate in evaluating the appropriateness of the allowance for loan and lease losses. While none of these components, when used independently, is effective in arriving at an allowance level that appropriately measures the risk inherent in the portfolio, management believes that using them collectively, provides reasonable measurement of the loss exposure in the portfolio. The various factors used in the methodologies are reviewed on a quarterly basis. Although we believe our process for determining the allowance adequately considers all of the factors that would likely result in credit losses, this evaluation is inherently subjective as it requires material estimates, including expected default probabilities, the loss emergence periods, the amounts and timing of expected future cash flows on impaired loans, and estimated losses based on historical loss experience and current economic conditions. All of these factors may be susceptible to significant change. To the extent that actual results differ from management estimates, additional loan loss provisions may be required that would adversely impact earnings for future periods. For example, if historical loan losses significantly worsen, or if current economic conditions significantly deteriorate, an additional provision for loan losses would be required to increase the allowance for loan and lease losses. All accounting policies are important and the reader of the financial statements should review these policies, described in "Note 1 Summary of Significant Accounting Policies" in Notes to Consolidated Financial Statements in Part II, Item 8. of this Form 10-K, to gain a better understanding of how the Company's financial performance is reported. Results of Operations (Comparison ofDecember 31, 2019 and 2018 results)
General
The Company reported diluted earnings per share of
In addition to earnings per share, key performance measurements for the Company include return on average shareholders' equity (ROE) and return on average assets (ROA). ROE was 12.55% in 2019, compared to 13.93% in 2018, while ROA was 1.22% in 2019 and 1.23% in 2018. Tompkins' ROE and ROA atSeptember 30, 2019 (the most recent date for which peer data is publicly available) were in the 75th percentile for ROE and the 49th percentile for ROA of its peer group. The peer group data is derived from the FRB's "Bank Holding Company Performance Report", which covers banks and bank holding companies with assets between$3.0 billion and$10.0 billion as ofSeptember 30, 2019 (the most recent report available). Although the peer group data is presented based upon financial information that is one fiscal quarter behind the financial information included in this report, the Company believes that it is relevant to include certain peer group information for comparison to current period numbers.
Non-GAAP Disclosure
The following table summarizes the Company's results of operations on a GAAP
basis and on an operating (non-GAAP) basis for the periods indicated. The
non-GAAP financial measures adjust GAAP measures to exclude the effects of
non-operating items, such as acquisition related intangible amortization
expense, and significant nonrecurring income or expense on earnings, equity, and
capital. In 2018, the Company had nonrecurring gains on the sales of real estate
and write-downs of impaired leases related to the completion of the Company's
new headquarters building in the second quarter of 2018. The Company believes
the non-GAAP measures provide meaningful comparisons of our underlying
operational performance and facilitate management's and investors' assessments
of business and performance trends in comparison to others in the financial
services industry. These non-
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GAAP financial measures should not be considered in isolation or as a measure of the Company's profitability or liquidity; they are in addition to, and are not a substitute for, financial measures under GAAP. The non-GAAP financial measures presented herein may be different from non-GAAP financial measures used by other companies, and may not be comparable to similarly titled measures reported by other companies. Further, the Company may utilize other measures to illustrate performance in the future. Non-GAAP financial measures have limitations since they do not reflect all of the amounts associated with the Company's results of operations as determined in accordance with GAAP.
Reconciliation of Net Income/Diluted Earnings Per Share (GAAP) to Net Operating Income/Adjusted Diluted Earnings Per Share
(Non-GAAP) and Adjusted Operating Return on Average Tangible Common Equity (Non-GAAP)
For the year ended
December 31,
(In thousands, except per share data) 2019 2018 2017 2016 2015
Net income attributable to Tompkins
Financial Corporation $ 81,718 $ 82,308 $ 52,494 $ 59,340 $ 58,421
Less: income attributable to unvested
stock-based compensations awards (1,306 ) (1,315 ) (818 ) (912 ) (834 )
Net income available to common
shareholders (GAAP) 80,412 80,993 51,676 58,428 57,587
Diluted earnings per share (GAAP) 5.37 5.35 3.43 3.91 3.87
Adjustments for non-operating income and
expense:
Gain on pension plan curtailment 0 0 0 0 (6,003 )
Gain on sale of real estate 0 (2,950 ) 0 0 0
Write-down of impaired leases 0 2,536 0 0 0
Remeasurement of deferred taxes 0 0 14,944 0 0
Total adjustments 0 (414 ) 14,944 0 (6,003 )
Tax expense 0 102 0 0 2,401
Total adjustments, net of tax 0 (312 ) 14,944 0 (3,602 )
Net operating income available to common
shareholders (Non-GAAP) 80,412 80,681 66,620 58,428 53,985
Adjusted diluted earnings per share
(Non-GAAP) 5.37 5.33 4.42 3.91 3.63
Net operating income available to common
shareholders' (Non-GAAP) 80,412 80,681 66,620 58,428 53,985
Amortization of intangibles 1,673 1,771 1,932 2,090 2,013
Tax expense 410 434 773 836 805
Amortization of intangibles, net of tax 1,263 1,337 1,159 1,254 1,208
Adjusted net income available to common
shareholders' (Non-GAAP) 81,675 82,018 67,779 59,682 55,193
Average Tompkins Financial Corporation
shareholders' common equity 649,871 589,475 575,958 545,545 506,243
Average goodwill and intangibles 98,104 99,999 101,583 104,263 104,837
Average Tompkins Financial Corporation
shareholders' tangible common equity
(Non-GAAP) 551,767 489,476 474,375 441,282 401,406
Adjusted operating return on average
shareholders' tangible common equity
(Non-GAAP) 14.80 % 16.76 % 14.29 % 13.52 % 13.75 %
1 Average goodwill and intangibles excludes mortgage servicing rights.
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Reconciliation of Shareholders' Common Equity/Common Equity Per Share (GAAP) to Tangible
Common Equity/Tangible Common Equity Per Share (Non-GAAP)
As of December 31 ,
(In thousands, except per share data) 2019 2018
Tompkins Financial Corporations Shareholders' common equity (GAAP)
661,642 619,459
Goodwill and intangibles 1 97,855
99,106
Tangible common equity (Non-GAAP) 563,787
520,353
Common equity per share 44.17
40.45
Tangible common equity per share (Non-GAAP) 37.64
33.98
1
Segment Reporting
The Company operates in three business segments: banking, insurance and wealth management. Insurance is comprised of property and casualty insurance services and employee benefit consulting operated under theTompkins Insurance Agencies, Inc. subsidiary. Wealth management activities include the results of the Company's trust, financial planning, and wealth management services provided byTompkins Financial Advisors , a division of theTrust Company . All other activities are considered banking. For additional financial information on the Company's segments, refer to "Note 23 - Segment and Related Information" in the Notes to Consolidated Financial Statements in Part II, Item 8. of this Report. Banking Segment The banking segment reported net income of$74.5 million for the year endedDecember 31, 2019 , representing a$424,000 or a 0.6% decrease compared to 2018. Net interest income decreased$1.2 million or 0.6% in 2019 compared to 2018. Contributing to the decline from 2018, was a decline in average security balances, which was partially offset by an improved net interest margin in 2019. Interest income increased$9.8 million or 3.9% compared to 2018, while interest expense increased$11.0 million or 27.5%. The provision for loan and lease losses was$1.4 million in 2019, compared to$3.9 million in the prior year. The reduction in provision was primarily due to a$3.0 million specific reserve on one commercial real estate property atDecember 31, 2018 , which was subsequently charged off in the first quarter of 2019. The provision expense in 2019 also benefited from favorable trends in certain qualitative factors and lower average historical loan loss rates in all loan portfolios except commercial real estate at year-end 2019, compared to year-end 2018. Noninterest income in the banking segment of$29.1 million in 2019 decreased by$2.7 million or 8.5% when compared to 2018. The negative variance to prior year was mainly due to the$2.9 million gain on the sale of two properties in 2018 related to the completion and move to the Company's new headquarters building and the collection of fees and nonaccrual interest of$2.5 million in 2018 on a loan that was charged off in 2010. This was partially offset by the$500,000 one-time incentive payment received by the Company in the first quarter of 2019 related to the Company's merchant card business, and gains of$645,000 on sales of available-for-sale securities in 2019 compared to net losses on sales of available-for-sale securities of$466,000 in 2018. Noninterest expenses in 2019 were flat compared to 2018. Salary and wages and employee benefits were up in 2019 over 2018, mainly as a result of an increase in average FTEs, normal annual merit and incentive adjustments and higher health insurance costs. These increases were mainly offset by a decrease in other operating expenses.FDIC insurance expense was down in 2019 compared to 2018, mainly as a result of deposit insurance credits received from theFDIC , which included$1.5 million that were applied in 2019. 2018 operating expenses included write-downs of$2.3 million on leases on space vacated in 2018 following completion of the Company's new headquarters in 2018. Insurance Segment The insurance segment reported net income of$4.2 million , up$926,000 or 28.5% when compared to 2018, as a 5.9% increase in noninterest revenue was only partially offset by a 1.9% increase in expenses. This increase included$900,000 or 4.6% of organic growth in property and casualty commissions and a$738,000 or 32.0% increase in contingency revenue over 2018, while life, health and financial services commissions decreased slightly. OnMay 1, 2019 ,Tompkins Insurance purchased the assets ofCali Agency, Inc. inWarsaw, NY , adding an additional$112,000 in non-interest income for 2019. The increase in expenses was mainly attributed to an increase in salary and wages and employee 31
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benefits reflecting normal annual merit and incentive adjustments and higher health insurance costs, respectively, over the prior year.
Wealth Management Segment The wealth management segment reported net income of$3.1 million for the year endedDecember 31, 2019 , a decrease of$1.1 million or 26.3% compared to 2018. Noninterest income of$17.0 million decreased$1.0 million or 5.5% compared to 2018, mainly a result of estate and terminating trust fees, which were down$1.0 million or 75.4% in 2019 over 2018, as a result of the settlement of a large estate in 2018. Noninterest expenses increased by$331,000 or 2.6% in 2019 compared to 2018, mainly due to changes in staffing and normal merit and incentive adjustments in 2019 compared to 2018. The market value of assets under management or in custody atDecember 31, 2019 totaled$4.1 billion , an increase of 6.7% compared to year-end 2018. This figure included$1.0 billion at year-end 2019, of Company-owned securities from which no income was recognized as theTrust Company was serving as custodian.
Net Interest Income
Net interest income is the Company's largest source of revenue, representing 73.6% of total revenues for the year endedDecember 31, 2019 , and 73.2% of total revenues for the year endedDecember 31, 2018 . Net interest income is dependent on the volume and composition of interest earning assets and interest-bearing liabilities and the level of market interest rates. Table 1 - Average Statements of Condition and Net Interest Analysis shows average interest-earning assets and interest-bearing liabilities, and the corresponding yield or cost associated with each. Tax-equivalent net interest income for 2019 decreased by$1.3 million or 0.6% from 2018. The decrease is mainly due to the decline in average earning assets and higher funding costs in 2019 compared to 2018. Average total deposits represented 84.4% of average total liabilities in 2019 compared to 79.8% in 2018, while total average borrowings represented 13.9% of average total liabilities in 2019 and 19.1% in 2018. Tax-equivalent interest income increased$9.7 million or 3.8% in 2019 over 2018. The increase in taxable-equivalent interest income was mainly the result of improved asset yields and an increase in average loan balances. Average loans and leases increased$72.5 million or 1.5% in 2019 compared to 2018. Average loan balances represented 77.1% of average earning assets in 2019 compared to 75.0% in 2018. The average yield on interest earning assets for 2019 was 4.2%, which increased by 20 basis points from 2018. The average yield on loans was 4.72% in 2019, an increase of 19 basis points compared to 4.53% in 2018. Average balances on securities decreased$132.1 million or 8.6% compared to 2018, while the average yield on the securities portfolio increased 5 basis points or 2.2% compared to 2018. The decrease in average securities was mainly due to the sale of approximately$152.1 million of available-for-sale securities in the second quarter of 2019. The proceeds from the sale were mainly used to reduce borrowings. Interest expense for 2019 increased$11.0 million or 27.5% compared to 2018, reflecting higher rates as average interest bearing liabilities decreased$131.5 million or 2.8% from 2018. The increase in interest expense was the result of the increase in the average rates paid on deposits and interest bearing liabilities in 2019 compared to 2018. The average cost of interest bearing deposits was 0.84% in 2019, up 36 basis points from 0.48% in 2018, while the average costs of interest bearing liabilities increased to 1.12% in 2019 from 0.85% in 2018. Average total deposits were up$216.6 million or 4.4% in 2019 over 2018, with the majority of the growth in average interest bearing deposits. Average interest bearing deposits in 2019 increased$195.8 million or 5.6% compared to 2018. Average noninterest bearing deposit balances in 2019 increased$20.8 million or 1.5% over 2018 and represented 27.6% of average total deposits in 2019 compared to 28.4% in 2018. Average other borrowings decreased by$323.9 million or 29.8% in 2019 from 2018. The decrease in borrowings was due to strong deposit growth during the third quarter of 2019 as well as pay downs resulting from proceeds from sales of$152.1 million of available-for-sale securities in the second quarter of 2019. 32
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Table 1 - Average Statements of Condition and Net Interest Analysis
For the year ended December 31,
2019 2018 2017
Average Average Average
(dollar amounts in Balance Average Balance Average Balance Average
thousands) (YTD) Interest Yield/Rate (YTD) Interest Yield/Rate (YTD) Interest Yield/Rate
ASSETS
Interest-earning assets
Interest-bearing balances
due from banks $ 1,647 $ 41 2.49 % $ 2,139 $ 31 1.45 % $ 4,599 $ 37 0.80 %
Securities1
U.S. Government securities 1,301,813 29,411 2.26 % 1,429,875 31,645 2.21 % 1,471,717 31,006 2.11 %
State and municipal2 93,168 2,547 2.73 % 97,116 2,520 2.59 % 100,595 3,393 3.37 %
Other securities2 3,417 158 4.62 % 3,491 153 4.38 % 3,597 129 3.59 %
Total securities 1,398,398 32,116 2.30 % 1,530,482 34,318 2.24 % 1,575,909 34,528 2.19 %
FHLBNY and FRB stock 38,308 3,003 7.84 % 51,815 3,377 6.52 % 42,465 2,121 4.99 %
Total loans and leases, net
of unearned income2,3 4,830,089 227,869 4.72 % 4,757,583 215,648 4.53 % 4,401,205 194,433 4.42 %
Total interest-earning
assets 6,268,442 263,029 4.20 % 6,342,019 253,374 4.00 % 6,024,178 231,119 3.84 % Other assets
411,136 350,659 365,326
Total assets $ 6,679,578 $ 6,692,678 $ 6,389,504
LIABILITIES & EQUITY
Deposits
Interest-bearing deposits
Interest bearing checking,
savings, & money market 3,007,221 20,099 0.67 % 2,822,747 9,847 0.35 % 2,674,204 5,141 0.19 %
Time deposits 676,106 10,805 1.60 % 664,788 6,748 1.02 % 827,181 6,992 0.85 %
Total interest-bearing
deposits 3,683,327 30,904 0.84 % 3,487,535 16,595 0.48 % 3,501,385 12,133 0.35 %
Federal funds purchased &
securities sold under
agreements to repurchase 59,825 143 0.24 % 63,472 152 0.24 % 64,888 235 0.36 %
Other borrowings 762,993 18,427 2.42 % 1,086,847 21,818 2.01 % 882,235 11,934 1.35 %
Trust preferred debentures 16,943 1,276 7.53 % 16,771 1,227 7.32 % 18,338 1,158 6.31 %
Total interest-bearing
liabilities 4,523,088 50,750 1.12 % 4,654,625 39,792 0.85 % 4,466,846 25,460 0.57 %
Noninterest bearing
deposits 1,403,330 1,382,550 1,279,027
Accrued expenses and other
liabilities 101,819 64,559 66,185
Total liabilities 6,028,237 6,101,734 5,812,058
Tompkins Financial
Corporation Shareholders'
equity 649,871 589,475 575,958
Noncontrolling interest 1,470 1,469 1,488
Total equity 651,341 590,944 577,446
Total liabilities and
equity $ 6,679,578 $ 6,692,678 $ 6,389,504
Interest rate spread 3.07 % 3.14 % 3.27 %
Net interest income /margin
on earning assets 212,279 3.39 % 213,582 3.37 % 205,659 3.41 %
Tax Equivalent Adjustment (1,651 ) (1,782 ) (4,355 )
Net interest income per
consolidated financial
statements $ 210,628 $ 211,800 $ 201,304
1 Average balances and yields on available-for-sale securities are based on
historical amortized cost.
2 Interest income includes the tax effects of taxable-equivalent adjustments
using a combined New York State and Federal effective income tax rate of 21.0%
in 2019 and 2018, and 40% in 2017 to increase tax exempt interest income to
taxable-equivalent basis.
3 Nonaccrual loans are included in the average asset totals presented above.
Payments received on nonaccrual loans have been recognized as disclosed in Note
1 of the Company's consolidated financial statements included in Part 1 of this
annual report on Form 10-K.
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Table 2 - Analysis of Changes in Net Interest Income
2019 vs. 2018 2018 vs. 2017
Increase (Decrease) Due to Change Increase (Decrease) Due to Change
in Average in Average(In thousands)(taxable equivalent) Volume Yield/Rate Total
Volume Yield/Rate Total
INTEREST INCOME:
Certificates of deposit, other banks $ (10 ) $ 20 $ 10 $ (28 ) $ 22 $ (6 )
Investments1
Taxable (2,896 ) 667 (2,229 ) (931 ) 1,594 663
Tax-exempt (105 ) 132 27 (102 ) (771 ) (873 )
FHLB and FRB stock (970 ) 596 (374 ) 538 718 1,256
Loans, net1 3,354 8,867 12,221 15,948 5,267 21,215
Total interest income $ (627 ) $ 10,282 $ 9,655 $ 15,425 $ 6,830 $ 22,255
INTEREST EXPENSE:
Interest-bearing deposits:
Interest checking, savings and money
market 938 9,314 10,252 401 4,305 4,706
Time 148 3,909 4,057 (1,505 ) 1,261 (244 )
Federal funds purchased and
securities sold under agreements to
repurchase (9 ) 0 (9 ) (5 ) (78 ) (83 )
Other borrowings (7,148 ) 3,806 (3,342 ) 3,339 6,614 9,953
Total interest expense $ (6,071 ) $ 17,029 $ 10,958 $ 2,230 $ 12,102 $ 14,332
Net interest income $ 5,444 $ (6,747 ) $ (1,303 ) $ 13,195 $ (5,272 ) $ 7,923
1 Interest income includes the tax effects of taxable-equivalent adjustments
using a combined New York State and Federal effective income tax rate of 21.0%
in 2019, 21.0% in 2018, and 40% in 2017 to increase tax exempt interest income
to taxable-equivalent basis.
Changes in net interest income occur from a combination of changes in the volume
of interest-earning assets and interest-bearing liabilities, and in the rate of
interest earned or paid on them. The above table illustrates changes in interest
income and interest expense attributable to changes in volume (change in average
balance multiplied by prior year rate), changes in rate (change in rate
multiplied by prior year volume), and the net change in net interest income. The
net change attributable to the combined impact of volume and rate has been
allocated to each in proportion to the absolute dollar amounts of the change. In
2019, net interest income decreased by $1.3 million , resulting from an $11.0
million increase in interest expense, offset by a $9.7 million increase in
interest income. Higher yields on average earning assets added $10.3 million ,
while the decrease in average balances on interest-earning assets contributed
$627,000 to the decrease in interest income. The increase in interest expense
reflects higher rates paid on interest bearing liabilities, both deposits and
other borrowings. Higher rates on deposits and borrowings added $17.0 million to
interest expense, while lower average balances reduced interest expense by $6.1
million .
Provision for Loan and Lease Losses
The provision for loan and lease losses represents management's estimate of the expense necessary to maintain the allowance for loan and lease losses at an appropriate level. The provision for loan and lease losses was$1.4 million in 2019, compared to$3.9 million in 2018. The ratio of total allowance to total loans and leases decreased to 0.81% atDecember 31, 2019 from 0.90% atDecember 31, 2018 . Favorable trends in certain qualitative factors and lower average historical loan loss rates in all loan portfolios except commercial real estate at year-end 2019, compared to year-end 2018, and lower specific reserves for impaired loans, contributed to the lower allowance level atDecember 31, 2019 . The allowance atDecember 31, 2018 included a specific reserve of$3.0 million related to one commercial real estate credit that was subsequently charged off in the first quarter of 2019. See the section captioned "The Allowance for Loan and Lease Losses" included within "Management's Discussion and Analysis of Financial Condition and Results of Operations-Financial Condition" of this Report for further analysis of the Company's allowance for loan and lease losses. 34
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Noninterest Income
Year ended December 31,
(In thousands) 2019 2018 2017
Insurance commissions and fees $ 31,091 $ 29,369 $ 28,778
Investment services 16,434 17,288
15,665
Service charges on deposit accounts 8,321 8,435 8,437 Card services 10,526 9,693 9,100 Other income 8,416 13,130 7,631 Net gain (loss) on securities transactions 645 (466 ) (407 ) Total$ 75,433 $ 77,449 $ 69,204
Noninterest income is a significant source of income for the Company, representing 26.4% of total revenues in 2019, and 26.8% in 2018, and is an important factor in the Company's results of operations.
Insurance commissions and fees increased 5.9% to$31.1 million in 2019, compared to$29.4 million in 2018. This increase included$900,000 or 4.6% of organic growth in property and casualty commissions and a$738,000 or 32.0% increase in contingency revenue over 2018, while life, health and financial services commissions decreased slightly. Investment services income of$16.4 million decreased$854,000 or 4.9% in 2019 compared to 2018. Investment services income includes trust services, financial planning, and wealth management services. The decrease in income was mainly a result of estate and terminating trust fees being down$1.0 million or 75.4% in 2019 over 2018, due to fees received in 2018 related to the settlement of a large estate. Fees are largely based on the market value and the mix of assets managed, and accordingly, the general direction of the stock market can have a considerable impact on fee income. The market value of assets managed by, or in custody of, theTrust Company was$4.1 billion atDecember 31, 2019 , and$3.8 billion atDecember 31, 2018 . These figures included$1.0 billion in 2019 and 2018 of Company-owned securities from which no income was recognized as theTrust Company was serving as custodian. Service charges on deposit accounts in 2019 were down$114,000 or 1.4% compared to prior year. Overdraft/insufficient funds charges, the largest component of service charges on deposit accounts, were down$180,000 or 3.2% in 2019 compared to 2018, while service fees on personal and business accounts were up by$36,000 or 1.4% in 2019 compared to 2018. Card services income increased$833,000 or 8.6% over 2018. The primary components of card services income are fees related to interchange income and transactions fees for debit card transactions, credit card transactions and ATM usage. Card services income for 2019 included a one-time incentive payment of$500,000 related to the Company's merchant card business. Increased revenue was also driven by increased transaction volume in both credit and debit cards. The Company recognized$645,000 of gains on sales/calls of available-for-sale securities in 2019, compared to$466,000 of losses in 2018. The gains are primarily related to the sales of available-for-sale securities, which are generally the result of general portfolio maintenance and interest rate risk management. Other income of$8.4 million was down$4.7 million or 35.9% compared to 2018. The primary contributors for the decrease in 2019 over 2018 were$2.9 million of gains on the sale of two properties we sold in 2018 upon completion of the Company's new headquarters building and$2.5 million related to the collection of fees and nonaccrual interest for a credit that was charged off in 2010. 35
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Noninterest Expense
Year ended December 31,
(In thousands) 2019 2018 2017
Salaries and wages $ 89,399 $ 85,625 $ 81,948
Other employee benefits 23,488 22,090 21,458
Net occupancy expense of premises 13,210 13,309 13,214
Furniture and fixture expense 7,815 7,351 7,028
773 2,618 2,527
Amortization of intangible assets 1,673 1,771 1,932
Other 45,476 48,303 42,998
Total $ 181,834 $ 181,067 $ 171,105
Noninterest expense as a percentage of total revenue was 63.6% in 2019, compared
to 62.6% in 2018. Expenses associated with salaries and wages and employee
benefits are the largest component of total noninterest expense. In 2019, these
expenses increased $5.2 million or 4.8% compared to 2018. Salaries and wages
increased $3.8 million or 4.4% in 2019 over prior year, mainly as a result of
annual merit pay increases. Other employee benefits increased $1.4 million or
6.3% over 2018, mainly in health insurance, which was up $736,000 or 8.9% in
2019 over 2018.
Other operating expenses of $45.5 million decreased by $2.8 million or 5.9%
compared to 2018. The primary components of other operating expenses in 2019
were technology expense ($10.7 million ), professional fees ($8.9 million ),
marketing expense ($4.9 million ), cardholder expense ($3.2 million ) and other
miscellaneous expense ($18.3 million ). Professional fees and technology related
expenses in 2019 were up by $378,000 and $567,000 , respectively, over 2018,
mainly as a result of investments in strengthening the Company's compliance and
information security infrastructure. Other operating expense in 2018 included
$2.5 million of write-downs related to two leases on space vacated in 2018.
Noncontrolling Interests
Net income attributable to noncontrolling interests represents the portion of net income in consolidated majority-owned subsidiaries that is attributable to the minority owners of a subsidiary. The Company had net income attributable to noncontrolling interests of$127,000 in 2019 and 2018. The noncontrolling interests relate to three real estate investment trusts, which are substantially owned by the Company'sNew York banking subsidiaries.
Income Tax Expense
The provision for income taxes provides for Federal,New York State ,Pennsylvania and other miscellaneous state income taxes. The 2019 provision was$21.0 million , which decreased$789,000 or 3.6% compared to the 2018 provision. The effective tax rate for the Company was 20.5% in 2019, down from 20.9% in 2018. The effective rates for 2019 and 2018 differed from theU.S. statutory rate of 21.0% during those periods due to the effect of tax-exempt income from loans, securities, and life insurance assets, investments in tax credits, and excess tax benefits of stock based compensation. Results of Operations (Comparison ofDecember 31, 2018 and 2017 results)
General
The Company reported diluted earnings per share of$5.35 in 2018, compared to diluted earnings per share of$3.43 in 2017. Net income for the year endedDecember 31, 2018 , was$82.3 million , an increase of 56.8% compared to$52.5 million in 2017. The 2017 results were impacted by the Tax Cuts and Jobs Act of 2017 (the "TCJA"), resulting in a one-time, non-cash write-down of net deferred tax assets in the amount of$14.9 million . For additional financial information on the impact of the TCJA, refer to "Note 15 - Income Taxes" in the Notes to Consolidated Financial Statements in Part II, Item 8. of this Report. In addition to earnings per share, key performance measurements for the Company included return on average shareholders' equity (ROE) and return on average assets (ROA). ROE was 13.93% in 2018, compared to 9.09% in 2017, while ROA was 1.23% in 2018 and 0.82% in 2017. 36
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Table of Contents Segment Reporting Banking Segment The banking segment reported net income of$74.9 million for the year endedDecember 31, 2018 , representing a$27.9 million or 59.3% increase compared to 2017. Banking segment earnings in 2018 and 2017 were significantly impacted by the Tax Cuts and Jobs Act of 2017. Due to this legislation, a one-time,$14.9 million write-down was recorded for the remeasurement of net deferred tax assets and is reflected in the banking segment's results of operations for the fourth quarter of 2017 as an additional charge to income tax expense. The legislation also decreased the Federal statutory tax rate from 35% in 2017 to 21% in 2018. Net interest income increased$10.5 million or 5.2% in 2018 compared to 2017, due primarily to loan growth, and an increase in average loan yields. Interest income increased$24.8 million or 10.9% compared to 2017, while interest expense increased$14.3 million or 56.3%. The provision for loan and lease losses was$3.9 million in 2018, compared to$4.2 million in the prior year. The loan growth rate for 2018 was 3.5% compared to 12.8% for 2017, contributing to the year-over-year decrease in provision expense. Noninterest income in the banking segment of$31.7 million in 2018 increased by$6.2 million or 24.5% when compared to 2017. The increase in noninterest income was mainly due to gain on sale of fixed assets (up$2.9 million ), collection of fees and nonaccrual interest on a loan that was charged off in 2010 (up$2.5 million ), card services income (up$594,000 ), net gain on sale of loans (up$408,000 ) and other fee income (up$281,000 ). These were partially offset by a decrease in BOLI (down$378,000 ). Noninterest expenses increased by$9.3 million or 6.9% compared to 2017. The increase was mainly attributed to an increase in salary and wages and employee benefits reflecting normal annual merit and incentive adjustments and higher health insurance costs over the prior year, write-downs of$2.3 million on leases on space vacated in 2018 following completion of the Company's new headquarters in 2018, total technology expense (up$1.8 million ), and professional fees and consulting (up$2.8 million ). The increase in technology and professional fees primarily relates to investments in strengthening the Company's compliance and information security infrastructure. Insurance Segment The insurance segment reported net income of$3.2 million , up 11.9% when compared to 2017. The increase in net income is mainly a result of the decrease in the Federal statutory tax rate in 2018 described above. Net income before tax decreased by$269,000 or 5.8%, as a 2.2% increase in noninterest revenue was offset by a 3.8% increase in expenses. The increase in expenses was mainly attributed to an increase in salary and wages and employee benefits reflecting normal annual merit and incentive adjustments and higher health insurance costs, respectively, over the prior year. Noninterest income increased$654,000 , or 2.2%, when compared to 2017, reflecting increases in all business lines (personal, commercial, and life and health). Revenues for 2017 included a non-recurring gain on the sale of certain customer relationships in the amount of$154,000 . Wealth Management Segment The wealth management segment reported net income of$4.2 million for the year endedDecember 31, 2018 , an increase of$1.6 million or 62.0% compared to 2017. Noninterest income of$18.0 million increased$1.7 million or 10.1% compared to 2017. Estate and terminating trust fees were up$1.1 million or 661.3% in 2018 over 2017, benefiting from the settlement of a large estate in 2018. Noninterest expenses were flat in 2018 compared to 2017, mainly due to lower staffing levels in 2018 compared to 2017. The market value of assets under management or in custody atDecember 31, 2018 totaled$3.8 billion , a decrease of 5.3% compared to year-end 2017. Net Interest Income Net interest income is the Company's largest source of revenue, representing 73.2% of total revenues for the year endedDecember 31, 2018 , and 74.4% of total revenues for the year endedDecember 31, 2017 . Net interest income in 2018 increased 5.2% over 2017. Net interest income is dependent on the volume and composition of interest earning assets and interest-bearing liabilities and the level of market interest rates. The Company's net interest income over the past several years benefited from steady growth in average earning assets, which increased 5.3% in 2018 compared to 2017. Tax-equivalent interest income increased$22.3 million or 9.6% in 2018 over 2017. The increase in taxable-equivalent interest income reflected a$317.8 million or 5.3% increase in average interest-earning assets and improved yields. The increase in average interest-earning assets was mainly in average loans and leases, which increased$356.4 million or 8.1% in 2018 compared to 2017. Average loan balances represented 75.0% of average earning assets in 2018 compared to 73.1% in 2017. The average yield on interest earning assets for 2018 was 4.0%, which increased by 16 basis points from 2017. The average yield on loans was 4.53% 37
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in 2018, an increase of 11 basis points compared to 4.42% in 2017. Average balances on securities decreased$45.4 million or 2.9% compared to 2017, while the average yield on the securities portfolio increased 5 basis points or 2.3% compared to 2017. Interest expense for 2018 increased$14.3 million or 56.3% compared to 2017, and average interest bearing liabilities increased$187.8 million or 4.2% over 2017. The increase in interest expense was the result of the increase in the average rates paid on deposits and interest bearing liabilities in 2018 compared to 2017, as well as the growth in average borrowings during 2018 when compared to 2017. The average rate paid on interest bearing deposits was 0.48% in 2018, up 13 basis points from 0.35% in 2017, while the average costs of interest bearing liabilities increased to 0.85% in 2018 from 0.57% in 2017. Average other borrowings increased by$204.6 million or 23.2% year over year, mainly due to a higher volume of overnight borrowings with the FHLB in 2018, which were used to support loan growth that exceeded deposit growth in 2018. Average total deposits were up$89.7 million or 1.9% in 2018 over 2017, with the majority of the growth in average noninterest bearing deposits. Average interest bearing deposits in 2018 decreased$13.9 million or 0.4% compared to 2017. Average noninterest bearing deposit balances in 2018 increased$103.5 million or 8.1% over 2017 and represented 28.4% of average total deposits in 2018 compared to 26.8% in 2017.
Provision for Loan and Lease Losses
The provision for loan and lease losses represents management's estimate of the expense necessary to maintain the allowance for loan and lease losses at an appropriate level. The provision for loan and lease losses was$3.9 million in 2018, compared to$4.2 million in 2017. Loan growth for 2018 was down from 2017, which contributed to the lower provision expense. See the section captioned "The Allowance for Loan and Lease Losses" included within "Management's Discussion and Analysis of Financial Condition and Results of Operations-Financial Condition" of this Report for further analysis of the Company's allowance for loan and lease losses. Noninterest Income Noninterest income represented 26.8% of total revenues in 2018, and 25.6% in 2017. Insurance commissions and fees increased 2.1% to$29.4 million in 2018, compared to$28.8 million in 2017. Insurance revenues increased$654,000 , or 2.2%, when compared to 2017, reflecting increases in all business lines (personal, commercial, and life and health). Revenues for 2017 included a non-recurring gain on the sale of certain customer relationships in the amount of$154,000 . Investment services income of$17.3 million in 2018 increased$1.6 million or 10.4% compared to 2017. Investment services income includes trust services, financial planning, and wealth management services. The increase in fees in 2018 over 2017 was mainly in trust and estate fees and included fees related to the settlement of a large estate as well as growth in higher fee accounts such as asset management accounts and an increase in fees on certain products. With fees largely based on the market value and the mix of assets managed, the general direction of the stock market can have a considerable impact on fee income. Global equity markets and the broad market index averages finished generally lower in 2018, when compared to 2017, which had an unfavorable impact on fees. The market value of assets managed by, or in custody of, theTrust Company was$3.8 billion atDecember 31, 2018 , and$4.0 billion atDecember 31, 2017 . These figures included$1.0 billion in 2018 and$1.0 billion in 2017, of Company-owned securities from which no income was recognized as theTrust Company was serving as custodian. Service charges on deposit accounts in 2018 were flat compared to prior year. Overdraft/insufficient funds charges, the largest component of service charges on deposit accounts, were up$112,000 or 2.1% in 2018 compared to 2017, but were mainly offset by a decrease in service fees on personal and business accounts. Card services income increased$593,000 or 6.5% over 2017. The primary components of card services income are fees related to interchange income and transactions fees for debit card transactions, credit card transactions and ATM usage. Increased revenue was largely driven by increased transaction volume in both credit and debit cards. The Company recognized$466,000 of losses on sales/calls of available-for-sale securities in 2018, compared to$407,000 of losses in 2017. The losses are primarily related to the sales of available-for-sale securities, which are generally the result of general portfolio maintenance and interest rate risk management. Other income of$13.1 million was up$5.5 million or 72.1% compared to 2017. The primary contributors for the increase in 2018 over 2017 were$2.9 million of gains on the sale of two properties we sold upon completion of the Company's new headquarters building and$2.5 million related to the collection of fees and nonaccrual interest for a credit that was charged off in 2010. Other income also included$458,000 of gains on the sales of residential mortgage loans, which were up$408,000 over 2017. These increases were partially offset by a$378,000 decrease in earnings on bank owned life insurance in 2018 when compared to 2017. 38
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Noninterest Expense
Noninterest expense as a percentage of total revenue was 62.6% in 2018, compared to 63.3% in 2017. Expenses associated with salaries and wages and employee benefits are the largest component of total noninterest expense. In 2018, these expenses increased$4.3 million or 4.2% compared to 2017. Salaries and wages increased$3.7 million or 4.5% in 2018 over prior year, mainly as a result of annual merit pay increases as well as the Company's decision to raise the minimum wage paid to our employees. Other employee benefits increased$632,000 or 2.9% over 2017. The increase over prior year in other employee benefit expenses was mainly in health insurance, which was up$431,000 or 5.5% in 2018 over 2017. Other operating expenses of$48.3 million increased by$5.3 million or 12.3% compared to 2017. The primary components of other operating expenses in 2018 were technology expense ($10.1 million ), marketing expense ($5.5 million ), professional fees ($8.6 million ), cardholder expense ($3.3 million ) and other miscellaneous expense ($20.8 million ). Professional fees and technology related expenses in 2018 were up by$2.8 million and$1.8 million , respectively, over 2017, mainly as a result of investments in strengthening the Company's compliance and information security infrastructure. Other operating expenses in 2018 included$2.5 million of write-downs related to two leases on space vacated in 2018. Other operating expense in 2017 included$2.7 million related to a write-off of a historic tax credit investment. The historic tax credit project was placed in service in 2017 resulting in the write-off of$2.7 million and recognition of the$3.3 million of tax credits as a reduction of income tax expense for 2017.
Noncontrolling Interests
The Company had net income attributable to noncontrolling interests of$127,000 in 2018 and$128,000 in 2017. The noncontrolling interests relate to three real estate investment trusts, which are substantially owned by the Company'sNew York banking subsidiaries. Income Tax Expense The provision for income taxes provides for Federal,New York State andPennsylvania state income taxes. The 2018 provision was$21.8 million , which decreased$20.8 million or 48.8% compared to the 2017 provision. The effective tax rate for the Company was 20.9% in 2018, down from 44.8% in 2017. The effective rates for 2017 and 2018 differed from theU.S. statutory rate of 35.0% and 21.0% during those periods due to the effect of tax-exempt income from loans, securities, and life insurance assets, investments in tax credits, and excess tax benefits of stock based compensation. The effective rate in 2017 was significantly impacted by a$14.9 million one-time write down of net deferred tax assets due to the required remeasurement of the assets that resulted from the TCJA. The change in the effective rate in 2017 was partially offset by the recognition of$3.3 million of tax credits related to an investment in a historic tax credit. The changes to the tax laws approved inDecember 2017 reduced the federal statutory tax rate from 35% in 2017, to 21% in 2018 and beyond. Financial Condition Total assets were$6.7 billion atDecember 31, 2019 , decreasing by 0.5% or$32.8 million from the previous year end. The decrease in total assets was mainly in the securities portfolio, which at year-end 2019 were down$174.6 million or 11.8% from year-end 2018, and mainly reflects the sale of about$152.1 million of low yielding and short average life securities inJune 2019 . The securities sold had an average yield of 1.68% and an average life of 2.9 years. The proceeds were used to reduce overnight borrowings with the FHLB. Loans and leases were 73.1% of total assets atDecember 31, 2019 , compared to 71.5% of total assets atDecember 31, 2018 . A more detailed discussion of the loan portfolio is provided below in this section under the caption "Loans and Leases". As ofDecember 31, 2019 , total securities comprised 19.3% of total assets, compared to 21.8% of total assets at year-end 2018. The securities portfolio primarily contains mortgage-backed securities, obligations ofU.S. Government sponsored entities, and obligations of states and political subdivisions. A more detailed discussion of the securities portfolio is provided below in this section under the caption "Securities". 39
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Total deposits increased by$324.0 million or 6.6% compared toDecember 31, 2018 . Noninterest bearing deposits increased by$58.7 million or 4.2%, while time deposit balances increased by$37.7 million or 5.9% compared to 2018 year-end. Checking, savings and money market accounts increased$227.5 million or 8.0% compared toDecember 31, 2018 . Other borrowings, consisting mainly of short term advances with the FHLB, decreased$418.0 million fromDecember 31, 2018 , as a result of the securities sales discussed above as well as deposit growth exceeding loan growth during the period. A more detailed discussion of deposits and borrowings is provided below in this section under the caption "Deposits and Other Liabilities".
Shareholders' Equity
The Consolidated Statements of Changes in Shareholders' Equity included in the Consolidated Financial Statements of the Company contained in Part II, Item 8. of this Report, detail changes in equity capital over prior year end. Total shareholders' equity was up$42.2 million or 6.8% to$663.1 million atDecember 31, 2019 , from$620.9 million atDecember 31, 2018 . Additional paid-in capital decreased by$28.1 million , from$366.6 million atDecember 31, 2018 , to$338.5 million atDecember 31, 2019 . The$28.1 million decrease included the following: a$29.9 million aggregate purchase price related to the Company's repurchase and retirement of 376,021 shares of its common stock in connection with its stock repurchase plan and$2.9 million related to the exercise of stock options and restricted stock activity. These were partially offset by$4.2 million attributed to stock based compensation expense and$377,000 related to shares issued for the Company's director deferred compensation plan. Retained earnings increased by$51.1 million , reflecting net income of$81.7 million , less dividends paid of$30.6 million . Accumulated other comprehensive loss decreased from$63.2 million atDecember 31, 2018 to$43.6 million atDecember 31, 2019 , reflecting a$27.6 million increase in unrealized gains on available-for-sale securities due to market interest rates, and an$8.0 million decrease in actuarial loss associated with employee benefit plans. Under regulatory requirements, amounts reported as accumulated other comprehensive income/loss related to net unrealized gain or loss on available-for-sale securities and the funded status of the Company's defined benefit post-retirement benefit plans do not increase or reduce regulatory capital and are not included in the calculation of risk-based capital and leverage capital ratios. Total shareholders' equity was up$44.7 million or 7.8% to$620.9 million atDecember 31, 2018 , from$576.2 million atDecember 31, 2017 . Additional paid-in capital increased by$2.6 million , from$364.0 million atDecember 31, 2017 , to$366.6 million atDecember 31, 2018 . The$2.6 million increase included the following:$3.5 million related to stock-based compensation;$3.1 million related to shares issued for the employee stock ownership plan; and$410,000 related to shares issued for the Company's director deferred compensation plan. These were partially offset by the repurchase of Company stock of$2.4 million ; and net payout of$1.4 million and$541,000 from restricted stock activity and stock option exercises, respectively. Retained earnings increased by$54.4 million , reflecting net income of$82.3 million , less dividends paid of$29.6 million . Accumulated other comprehensive loss increased from$51.3 million atDecember 31, 2017 to$63.2 million atDecember 31, 2018 ; reflecting a$10.6 million increase in unrealized losses on available-for-sale securities due to market interest rates, and a$1.3 million actuarial loss associated with employee benefit plans. The Company continued its long history of increasing cash dividends with a per share increase of 4.1% in 2019, which followed an increase of 6.6% in 2018. Dividends per share amounted to$2.02 in 2019, compared to$1.94 in 2018, and$1.82 in 2017. Cash dividends paid represented 37.5%, 36.0%, and 52.6% of after-tax net income in 2019, 2018, and 2017, respectively. OnJuly 19, 2018 , the Company's Board of Directors authorized a stock repurchase plan (the "2018 Repurchase Plan") for the Company to repurchase up to 400,000 shares of the Company's common stock over the 24 months following adoption of the plan. The 2018 Repurchase Plan could be suspended, modified or terminated by the Board of Directors at any time for any reason. ThroughDecember 31, 2019 , the Company had repurchased 393,004 shares under the 2018 Repurchase Plan at an average price of$79.15 . The 2018 Repurchase Plan had replaced a repurchase plan authorized by the Company's Board of Directors inJuly 2016 , under which the Company had repurchased an aggregate of 15,500 shares at an average price of$77.85 ; all of those shares were repurchased in the first quarter of 2018. OnJanuary 30, 2020 , the Company's Board of Directors authorized a stock repurchase plan (the "2020 Repurchase Plan") for the Company to repurchase up to 400,000 shares of the Company's common stock over the 24 months following adoption of the plan. As with the 2018 Repurchase Plan, shares may be repurchased from time to time under the 2020 Repurchase Plan in open market transactions at prevailing market prices, in privately negotiated transactions, or by other means in accordance with federal securities laws, and the repurchase program may be suspended, modified or terminated by the Board of Directors at any time for any reason. 40
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The Company and its subsidiary banks are subject to quantitative capital measures established by regulation to ensure capital adequacy. Consistent with the objective of operating a sound financial organization, the Company and its subsidiary banks maintain capital ratios well above regulatory minimums and meet the requirements to be considered well-capitalized under the regulatory guidelines. As ofDecember 31, 2019 , the capital ratios for the Company's 4 subsidiary banks exceeded the minimum levels required to be considered well capitalized. Additional information on the Company's capital ratios and regulatory requirements is provided in "Note 21 - Regulations and Supervision" in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report on Form 10-K. Securities The Company maintains a portfolio of securities such asU.S. Treasuries,U.S. government sponsored entities securities,U.S. government agencies, non-U.S. Government agencies or sponsored entities mortgage-backed securities, obligations of states and political subdivisions thereof and equity securities. Management typically invests in securities with short to intermediate average lives in order to better match the interest rate sensitivities of its assets and liabilities. Investment decisions are made within policy guidelines established by the Company's Board of Directors. The investment policy established by the Company's Board of Directors is based on the asset/liability management goals of the Company, and is monitored by the Company's Asset/Liability Management Committee. The intent of the policy is to establish a portfolio of high quality diversified securities, which optimizes net interest income within safety and liquidity limits deemed acceptable by the Asset/Liability Management Committee. The Company classifies its securities at date of purchase as available-for-sale, held-to-maturity or trading. Securities, other than certain obligations of states and political subdivisions thereof, are generally classified as available-for-sale. Securities available-for-sale may be used to enhance total return, provide additional liquidity, or reduce interest rate risk. The held-to-maturity portfolio consists of obligations ofU.S. Government sponsored entities and obligations of state and political subdivisions. The securities in the trading portfolio reflect those securities that the Company elects to account for at fair value, with the adoption of ASC Topic 825, Financial Instruments. The Company's total securities portfolio atDecember 31, 2019 totaled$1.30 billion compared to$1.47 billion atDecember 31, 2018 . The table below shows the composition of the available-for-sale and held-to-maturity securities portfolio as of year-end 2019, 2018 and 2017. The available-for-sale portfolio has decreased over the past two years as maturities, calls and sales have exceeded purchases and reclassifications in the portfolio. In 2019, fair values were favorably impacted by changes in market interest rates. For held-to-maturity securities, the Company early adopted ASU 2019-04 onNovember 30, 2019 . Since the Company had already adopted ASUs 2016-01 and 2017-12, the related amendments were effective as ofNovember 30, 2019 . As part of the adoption of ASU 2019-04, the Company reclassified$138.2 million aggregate amortized cost basis of debt securities from held-to-maturity to available-for-sale. Included in other comprehensive income atDecember 31, 2019 is an unrealized gain of approximately$3.8 million related to the fair market value versus the cost basis of the portfolio at the time of the transfer. The Company had not reclassified debt securities from held-to-maturity to available-for-sale upon adoption of the amendments in ASU 2017-12. Under ASU 2019-04, entities that did not reclassify debt securities from held-to-maturity to available-for-sale upon adoption of the amendments in ASU 2017-12 and elect to reclassify debt securities upon adoption of the amendments in ASU 2019-04 are required to reflect the reclassification as of the date of adoption of that Update. Additional information on the securities portfolio is available in "Note 2 Securities" in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report, which details the types of securities held, the carrying and fair values, and the contractual maturities as ofDecember 31, 2019 and 2018. 41
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As of December 31,
Available-for-Sale Securities 2019 2018 2017
Amortized Amortized Amortized
(In thousands) Cost Fair Value Cost Fair Value Cost Fair Value
U.S. Treasuries $ 1,840 $ 1,840 $ 289 $ 289 $ 0 $ 0
Obligations of U.S. Government
sponsored entities $ 367,551 $ 372,488 $ 493,371 $ 485,898 $ 507,248 $ 504,193
Obligations of U.S. states and
political subdivisions 96,668 97,785 86,260 85,440 91,659 91,519
Mortgage-backed
securities-residential, issued
by
U.S. Government agencies 164,643 164,451 131,831 128,267 139,747 137,735
U.S. Government sponsored
entities 660,037 659,590 649,620 630,558 667,767 656,178
Non-U.S. Government agencies
or sponsored entities 0 0 31 31 75 75
U.S. corporate debt securities 2,500 2,433 2,500 2,175 2,500 2,162
Total available-for-sale
securities $ 1,293,239 $ 1,298,587 $ 1,363,902 $ 1,332,658 $ 1,408,996 $ 1,391,862
Held-to-Maturity Securities 2019 2018 2017
Amortized Amortized Amortized
(In thousands) Cost Fair Value Cost Fair Value Cost Fair Value
Obligations of U.S.
Government sponsored
entities $ 0 $ 0 $ 131,306 $ 130,108 $ 131,707 $ 132,720
Obligations of U.S. states
and political subdivisions 0 0 9,273 9,269 7,509 7,595
Total held-to-maturity
securities $ 0 $ 0 $ 140,579 $ 139,377 $ 139,216 $ 140,315
Quarterly, the Company evaluates all investment securities with a fair value
less than amortized cost to identify any other-than-temporary impairment as
defined under generally accepted accounting principles. The Company did not
recognize any net credit impairment charge to earnings on investment securities
in 2019, 2018, and 2017.
The Company uses a two-step modeling approach to analyze each non-agency CMO
issue to determine whether or not the current unrealized losses are due to
credit impairment and therefore other-than-temporarily impaired ("OTTI"). Step
one in the modeling process applies default and severity credit vectors to each
security based on current credit data detailing delinquency, bankruptcy,
foreclosure and real estate owned (REO) performance. The results of the credit
vector analysis are compared to the security's current credit support coverage
to determine if the security has adequate collateral support. If the security's
current credit support coverage falls below certain predetermined levels, step
two is initiated. In step two, the Company uses a third party to assist in
calculating the present value of current estimated cash flows to ensure there
are no adverse changes in cash flows during the quarter leading to an
other-than-temporary-impairment. Management's assumptions used in step two
include default and severity vectors and prepayment assumptions along with
various other criteria including: percent decline in fair value; credit rating
downgrades; probability of repayment of amounts due, credit support and changes
in average life. As a result of the modeling process, the Company does not
consider any investment security to be other-than-temporarily impaired at
December 31, 2019 . Future changes in interest rates or the credit quality and
credit support of the underlying issuers may reduce the market value of these
and other securities. If such decline is determined to be other than temporary,
the Company will record the necessary charge to earnings and/or accumulated
other comprehensive income to reduce the securities to their then current fair
value.
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The Company also holds non-marketable Federal Home Loan Bank New York ("FHLBNY")
stock, non-marketable Federal Home Loan Bank Pittsburgh ("FHLBPITT") stock and
non-marketable Atlantic Community Bankers Bank ("ACBB") stock, all of which are
required to be held for regulatory purposes and for borrowing availability. The
required investment in FHLB stock is tied to the Company's borrowing levels with
the FHLB. Holdings of FHLBNY stock, FHLBPITT stock and ACBB stock totaled $24.3
million , $9.3 million and $95,000 at December 31, 2019 , respectively. These
securities are carried at par, which is also cost. The FHLBNY and FHLBPITT
continue to pay dividends and repurchase stock. As such, the Company has not
recognized any impairment on its holdings of FHLBNY and FHLBPITT stock. At
December 31, 2018 , the Company's holdings of FHLBNY stock, FHLBPITT stock, and
ACBB stock totaled $37.4 million , $14.8 million , and $95,000 , respectively.
Management's policy is to purchase investment grade securities that, on average,
have relatively short expected durations. This policy helps mitigate interest
rate risk and provides sources of liquidity without significant risk to capital.
The contractual maturity distribution of debt securities and mortgage-backed
securities as of December 31, 2019 , along with the weighted average yield of
each category, is presented in Table 3-Maturity Distribution below. Balances are
shown at amortized cost and weighted average yields are calculated on a fully
taxable-equivalent basis. Expected maturities will differ from contractual
maturities presented in Table 3-Maturity Distribution below, because issuers may
have the right to call or prepay obligations with or without penalty and
mortgage-backed securities will pay throughout the periods prior to contractual
maturity.
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Table 3 - Maturity Distribution
As of December 31, 2019
Securities Securities
Available-for-Sale1 Held-to-Maturity
(dollar amounts in thousands) Amount Yield2 Amount Yield2
U.S. Treasury
Within 1 year $ 1,840 0.00 % $ 0 0.00 %
$ 1,840 0.00 % $ 0 0.00 %
Obligations of U.S. Government sponsored
entities
Within 1 year $ 95,765 1.97 % $ 0 0.00 %
Over 1 to 5 years 246,887 2.28 % 0 0.00 %
Over 5 to 10 years 24,899 2.60 % 0 0.00 %
$ 367,551 2.22 % $ 0 0.00 %
Obligations of U.S. state and political
subdivisions
Within 1 year $ 10,370 3.09 % $ 0 0.00 %
Over 1 to 5 years 23,590 2.43 % 0 0.00 %
Over 5 to 10 years 50,311 2.99 % 0 0.00 %
Over 10 years 12,397 3.27 % 0 0.00 %
$ 96,668 2.90 % $ 0 0.00 %
Mortgage-backed securities - residential
Within 1 year $ 16 6.76 % $ 0 0.00 %
Over 1 to 5 years 4,378 3.75 % 0 0.00 %
Over 5 to 10 years 154,689 2.22 % 0 0.00 %
Over 10 years 665,597 2.13 % 0 0.00 %
$ 824,680 2.16 % $ 0 0.00 %
Other securities
Over 5 to 10 years $ 2,500 4.70 % $ 0 0.00 %
$ 2,500 4.70 % $ 0 0.00 %
Total securities
Within 1 year $ 107,991 2.04 % $ 0 0.00 %
Over 1 to 5 years 274,854 2.31 % 0 0.00 %
Over 5 to 10 years 232,399 2.45 % 0 0.00 %
Over 10 years 677,995 2.15 % 0 0.00 %
$ 1,293,239 2.24 % $ 0 0.00 %
1 Balances of available-for-sale securities are shown at amortized cost.
2 Interest income includes the tax effects of taxable-equivalent adjustments
using a combined New York State and Federal effective income tax rate of 24.5%
to increase tax exempt interest income to taxable-equivalent basis.
The average taxable-equivalent yield on the securities portfolio was 2.30% in 2019, 2.24% in 2018 and 2.19% in 2017.
At
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Loans and Leases
Table 4 - Composition of Loan and Lease Portfolio Originated Loans and Leases As of December 31, (In thousands) 2019 2018 2017 2016 2015 Commercial and industrial Agriculture$ 105,786 $ 107,494 $ 108,608 $ 118,247 $ 88,299 Commercial and industrial other 863,199 926,429 932,067 847,055 768,024 Subtotal commercial and industrial 968,985 1,033,923 1,040,675 965,302 856,323 Commercial real estate Construction 212,302 164,285 202,486 135,834 103,037 Agriculture 184,701 170,005 129,712 102,509 86,935 Commercial real estate other 1,899,645 1,827,279 1,660,782 1,431,690 1,167,250 Subtotal commercial real estate 2,296,648 2,161,569 1,992,980 1,670,033 1,357,222 Residential real estate Home equity 203,894 208,459 212,812 209,277 202,578 Mortgages 1,140,572 1,083,802 1,039,040 947,378 823,841 Subtotal residential real estate 1,344,466 1,292,261 1,251,852 1,156,655 1,026,419 Consumer and other Indirect 12,964 12,663 12,144 14,835 17,829 Consumer and other 60,661 57,565 50,214 44,393 40,904 Subtotal consumer and other 73,625 70,228 62,358 59,228 58,733 Leases 17,322 14,556 14,467 16,650 14,861 Total loans and leases 4,701,046 4,572,537 4,362,332 3,867,868 3,313,558 Less: unearned income and deferred costs and fees (3,645 ) (3,796 ) (3,789 ) (3,946 ) (2,790 ) Total originated loans and leases, net of unearned income and deferred costs and fees$ 4,697,401 $ 4,568,741 $
4,358,543
Acquired Loans Commercial and industrial Commercial and industrial other$ 39,076 $ 43,712 $ 50,976 $ 79,317 $ 84,810 Subtotal commercial and industrial 39,076 43,712 50,976 79,317 84,810 Commercial real estate Construction 1,335 1,384 1,480 8,936 4,892 Agriculture 197 224 247 267 2,095 Commercial real estate other 145,385 177,484 206,020 241,605 284,952 Subtotal commercial real estate 146,917 179,092 207,747 250,808 291,939 Residential real estate Home equity 15,351 21,149 28,444 37,737 42,092 Mortgages 18,020 20,484 22,645 25,423 27,491 Subtotal residential real estate 33,371 41,633 51,089 63,160 69,583 Consumer and other Consumer and other 785 761 765 826 911 Subtotal consumer and other 785 761 765 826 911 Covered loans 0 0 0 0 14,031
Total acquired loans and leases
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Total loans and leases of$4.9 billion atDecember 31, 2019 were up$83.6 million or 1.7% fromDecember 31, 2018 . The growth was mainly due to organic loan growth. OnAugust 1, 2012 , the Company acquired$889.3 million of loans in the VIST Financial acquisition. These loans are shown in the table under the acquired loan heading. All other loans, including loans originated byVIST Bank since the acquisition date ofAugust 1, 2012 , are considered originated loans. Originated loan balances atDecember 31, 2019 were up$128.7 million or 2.8% over year-end 2018. The increase in originated loans, over prior year-end, was in all loan categories except commercial and industrial, which was down$64.9 million or 6.3% compared to prior year-end. As ofDecember 31, 2019 , total loans and leases represented 73.1% of total assets compared to 71.5% of total assets atDecember 31, 2018 . Residential real estate loans of$1.4 billion atDecember 31, 2019 , including home equity loans, increased by$43.9 million or 3.3% from$1.3 billion at year-end 2018, and comprised 28.0% of total loans and leases atDecember 31, 2019 . Growth in residential loan balances is impacted by the Company's decision to retain these loans or sell them in the secondary market due to interest rate considerations. The Company's Asset/Liability Committee meets regularly and establishes standards for selling and retaining residential real estate mortgage originations. The Company may sell residential real estate loans in the secondary market based on interest rate considerations. These residential real estate loans are generally sold to Federal Home Loan Mortgage Corporation ("FHLMC") orState of New York Mortgage Agency ("SONYMA") without recourse in accordance with standard secondary market loan sale agreements. These residential real estate loans also are subject to customary representations and warranties made by the Company, including representations and warranties related to gross incompetence and fraud. The Company has not had to repurchase any loans as a result of these representations and warranties. During 2019, 2018, and 2017, the Company sold residential mortgage loans totaling$16.9 million ,$27.7 million , and$4.6 million , respectively, and realized net gains on these sales of$227,000 ,$458,000 , and$50,000 , respectively. When residential mortgage loans are sold to FHLMC or SONYMA, the Company typically retains all servicing rights, which provides the Company with a source of fee income. In connection with the sales in 2019, 2018, and 2017, the Company recorded mortgage-servicing assets of$127,000 ,$207,000 , and$38,000 , respectively. The Company originates fixed rate and adjustable rate residential mortgage loans, including loans that have characteristics of both, such as a 7/1 adjustable rate mortgage, which has a fixed rate for the first seven years and then adjusts annually thereafter. The majority of residential mortgage loans originated over the last several years have been fixed rate given the low interest rate environment. Adjustable rate residential real estate loans may be underwritten based upon an initial rate which is below the fully indexed rate; however, the initial rate is generally less than 100 basis points below the fully indexed rate. As such, the Company does not believe that this practice creates any significant credit risk.
Commercial real estate loans totaled
Commercial and industrial loans totaled$1.0 billion atDecember 31, 2019 , which is a decrease of$69.6 million or 6.5% fromDecember 31, 2018 . Commercial and industrial loans represented 20.5% of total loans atDecember 31, 2019 compared to 22.3% atDecember 31, 2018 . As ofDecember 31, 2019 , agriculturally-related loans totaled$290.7 million or 5.9% of total loans and leases compared to$277.7 million or 5.7% of total loans and leases atDecember 31, 2018 . Agriculturally-related loans include loans to dairy farms and cash and vegetable crop farms. Agriculturally related loans are primarily made based on identified cash flows of the borrower with consideration given to underlying collateral, personal guarantees, and government related guarantees. Agriculturally-related loans are generally secured by the assets or property being financed or other business assets such as accounts receivable, livestock, equipment or commodities/crops. The consumer loan portfolio includes personal installment loans, indirect automobile financing, and overdraft lines of credit. Consumer and other loans were$74.4 million atDecember 31, 2019 , compared to$71.0 million atDecember 31, 2018 . The lease portfolio increased by 19.0% to$17.3 million atDecember 31, 2019 from$14.6 million atDecember 31, 2018 . As ofDecember 31, 2019 , commercial leases and municipal leases represented 100.0% of total leases. 46
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Acquired loans were recorded at fair value pursuant to the purchase accounting guidelines in FASB ASC 805 - "Fair Value Measurements and Disclosures" (as determined by the present value of expected future cash flows) with no valuation allowance (i.e., the allowance for loan losses). At acquisition, the Company evaluated whether each acquired loan (regardless of size) was within the scope of ASC 310-30, "Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality". The carrying value of loans acquired from VIST and accounted for in accordance with ASC Subtopic 310-30, "Loans and Debt Securities Acquired with Deteriorated Credit Quality," was$9.1 million atDecember 31, 2019 , compared to$11.0 million atDecember 31, 2018 due to normal loan run off. Under ASC Subtopic 310-30, loans may be aggregated and accounted for as pools of loans if the loans being aggregated have common risk characteristics. The Company elected to account for the loans with evidence of credit deterioration individually rather than aggregate them into pools. The difference between the undiscounted cash flows expected at acquisition and the investment in the acquired loans, or the "accretable yield," is recognized as interest income utilizing the level-yield method over the life of each loan. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the "non-accretable difference," are not recognized as a yield adjustment, as a loss accrual or as a valuation allowance. Increases in expected cash flows subsequent to the acquisition are recognized prospectively through an adjustment of the yield on the loans over the remaining life, while decreases in expected cash flows are recognized as impairment through a loss provision and an increase in the allowance for loan losses. Valuation allowances (recognized in the allowance for loan losses) on these impaired loans reflect only losses incurred after the acquisition (representing all cash flows that were expected at acquisition but currently are not expected to be received). The carrying value of loans not exhibiting evidence of credit impairment at the time of the acquisition (i.e. loans outside of the scope of ASC 310-30) was$211.0 million atDecember 31, 2019 as compared to$254.2 million atDecember 31, 2018 due to normal loan run off. The fair value of the acquired loans not exhibiting evidence of credit impairment was determined by projecting contractual cash flows discounted at risk-adjusted interest rates. The carrying value of the acquired loans reflects management's best estimate of the amount to be realized from the acquired loan and lease portfolios. However, the amounts the Company actually realizes on these loans could differ materially from the carrying value reflected in these financial statements, based upon the timing of collections on the acquired loans in future periods, underlying collateral values and the ability of borrowers to continue to make payments. Purchased performing loans were recorded at fair value, including a credit discount. Credit losses on acquired performing loans are estimated based on analysis of the performing portfolio. Such estimated credit losses are recorded as an accretable discount in a manner similar to purchased impaired loans. The fair value discount other than for credit loss is accreted as an adjustment to yield over the estimated lives of the loans. Interest is accrued daily on the outstanding principal balances of purchased performing loans. Fair value adjustments are also accreted into income over the estimated lives of the loans on a level yield basis. The Company has adopted comprehensive lending policies, underwriting standards and loan review procedures. There were no significant changes to the Company's existing policies, underwriting standards and loan review during 2019. The Company's Board of Directors approves the lending policies at least annually. The Company recognizes that exceptions to policy guidelines may occasionally occur and has established procedures for approving exceptions to these policy guidelines. Management has also implemented reporting systems to monitor loan originations, loan quality, concentrations of credit, loan delinquencies and nonperforming loans and potential problem loans. The Company's loan and lease customers are located primarily in theNew York andPennsylvania communities served by its 4 subsidiary banks. Although operating in numerous communities inNew York State andPennsylvania , the Company is still dependent on the general economic conditions of these states. Other than geographic and general economic risks, management is not aware of any material concentrations of credit risk to any industry or individual borrower. 47
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Analysis of Past Due and Nonperforming Loans
As of December 31,
(In thousands) 2019 2018 2017 2016 2015 Loans 90 days past due and accruing1 Commercial real estate$ 0 $ 0 $ 0 $ 0 $ 0 Residential real estate 0 0 0 0 58 Consumer and other 0 0 44 0 0 Total loans 90 days past due and accruing 0 0 44 0 58 Nonaccrual loans Commercial and industrial 2,335 1,883 2,852 738 1,738 Commercial real estate 10,789 8,007 5,948 9,076 6,054 Residential real estate 10,882 12,072 10,363 9,061 9,863 Consumer and other 275 234 354 166 182 Leases 0 0 0 0 0 Total nonaccrual loans and leases 24,281 22,196 19,517 19,041 17,837 Troubled debt restructurings not included above 7,154 4,395 3,449 2,631 3,915 Total nonperforming loans and leases 31,435 26,591 23,010 21,672 21,810 Other real estate owned 428 1,595 2,047 908 2,692 Total nonperforming assets$ 31,863 $ 28,186 $ 25,057 $ 22,580 $ 24,502 Total nonperforming loans and leases as a percentage of total loans and leases 0.64 % 0.55 % 0.49 % 0.51 % 0.58 % Total nonperforming assets as a percentage of total assets 0.47 % 0.42 % 0.38 % 0.36 % 0.43 % Allowance as a percentage of nonperforming loans and leases 126.90 % 163.25 % 172.84 %
164.98 % 146.74 %
1 The 2019, 2018, 2017, 2016 and 2015 columns in the above table exclude$794,000 ,$1.3 million ,$1.1 million ,$2.6 million , and$2.5 million , respectively, of acquired loans that are 90 days past due and accruing interest. These loans were originally recorded at fair value on the acquisition date ofAugust 1, 2012 . These loans are considered to be accruing as the Company can reasonably estimate future cash flows on these acquired loans and the Company expects to fully collect the carrying value of these loans. Therefore, the Company is accreting the difference between the carrying value of these loans and their expected cash flows into interest income. The level of nonperforming assets at the past five year-ends is illustrated in the table above. The ratio of nonperforming loans to total loans improved between 2015 and 2017, but was up at year-end 2018 and 2019. The Company's total nonperforming assets as a percentage of total assets was 0.47% atDecember 31, 2019 , up from 0.42% atDecember 31, 2018 , but continues to compare favorably to its peer group's most recent ratio of 0.60% atSeptember 30, 2019 . The peer data is from theFederal Reserve Board and represents banks or bank holding companies with assets between$3.0 billion and$10.0 billion . A breakdown of nonperforming loans by portfolio segment is shown above. Nonperforming loans totaled$31.4 million atDecember 31, 2019 and were up 18.2% fromDecember 31, 2018 . Nonperforming loans represented 0.64% of total loans atDecember 31, 2019 , compared to 0.55% of total loans atDecember 31, 2018 , and 0.49% of total loans atDecember 31, 2017 . The increase in nonperforming loans over year-end 2018 was mainly due to the addition of one agriculturally-related commercial mortgage relationship totaling$1.6 million to troubled debt restructuring, and two commercial mortgage relationships totaling$5.7 million to nonaccrual. These additions were partially offset by the$3.1 million write-down of a single commercial real estate relationship during the first quarter of 2019. This relationship had been downgraded and placed on nonaccrual status during the fourth quarter of 2018. AtDecember 31, 2019 , other real estate owned was down$1.2 million from prior year-end and represented 1.3% of total nonperforming assets, down from 5.7% atDecember 31, 2018 . The decrease in other real estate owned was mainly a result of sales during 2019. 48
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Loans are considered modified in a troubled debt restructuring ("TDR") when, due
to a borrower's financial difficulties, the Company makes a concession(s) to the
borrower that the Company would not otherwise consider. When modifications are
provided for reasons other than as a result of the financial distress of the
borrower, these loans are not classified as TDRs or impaired. These
modifications may include, among others, an extension of the term of the loan,
and granting a period when interest-only payments can be made, with the
principal payments made over the remaining term of the loan or at maturity. TDRs
are included in the above table within the following categories: "loans 90 days
past due and accruing", "nonaccrual loans", or "troubled debt restructurings not
included above". Loans in the latter category include loans that meet the
definition of a TDR but are performing in accordance with the modified terms and
have shown a satisfactory period of repayment (generally six consecutive months)
and where full collection of all is reasonably assured. At December 31, 2019 ,
the Company had $8.6 million in TDR balances, which are included in the above
table, of which $7.2 million are included in the line captioned "Troubled debt
restructurings not included above" and the remainder are included within
nonaccrual loans.
In general, the Company places a loan on nonaccrual status if principal or
interest payments become 90 days or more past due and/or management deems the
collectability of the principal and/or interest to be in question, as well as
when called for by regulatory requirements. Although in nonaccrual status, the
Company may continue to receive payments on these loans. These payments are
generally recorded as a reduction to principal and interest income is recorded
only after principal recovery is reasonably assured. For additional financial
information on the difference between the interest income that would have been
recorded if these loans and leases had been paid in accordance with their
original terms and the interest income that was recorded, refer to "Note 3 -
Loans and Leases" in the Notes to Consolidated Financial Statements in Part II,
Item 8. of this Report.
The Company's recorded investment in originated loans and leases that are
considered impaired totaled $19.4 million at December 31, 2019 , and $14.2
million at December 31, 2018 . A loan is impaired when, based on current
information and events, it is probable that we will be unable to collect all
amounts due according to the contractual terms of the loan agreement. Impaired
loans consist of our non-homogenous nonaccrual loans and loans that are 90 days
or more past due. Specific reserves on individually identified impaired loans
that are not collateral dependent are measured based on the present value of
expected future cash flows discounted at the original effective interest rate of
each loan. For loans that are collateral dependent, impairment is measured based
on the fair value of the collateral less estimated selling costs, and such
impaired amounts are generally charged off.
At December 31, 2019 , there were specific reserves of $907,000 on seven
commercial loans in the originated loan portfolio, compared to $3.8 million of
specific reserves on seven commercial real estate loans at December 31, 2018 .
The specific reserves at year-end 2018 included a $3.0 million specific reserve
added to one loan in the fourth quarter of 2018. This loan was charged off in
the first quarter of 2019, thus eliminating the specific reserve, which
contributed to the decrease in specific reserves between year-end 2019 and
year-end 2018. The majority of the remaining impaired loans are collateral
dependent impaired loans that have limited exposure or require limited specific
reserves because of the amount of collateral support with respect to these loans
or the loans have been written down to fair value. Interest payments on impaired
loans are typically applied to principal unless collectability of the principal
amount is reasonably assured. In these cases, interest is recognized on a cash
basis. There was no interest income recognized on impaired loans and leases for
2019, 2018 and 2017.
The ratio of the allowance to nonperforming loans (loans past due 90 days and
accruing, nonaccrual loans and restructured troubled debt) was 126.90% at
December 31, 2019 , compared to 163.25% at December 31, 2018 . The Company's
nonperforming loans are mostly made up of collateral dependent impaired loans
requiring little to no specific allowance due to the level of collateral
available with respect to these loans and/or previous charge-offs.
Management reviews the loan portfolio for evidence of potential problem loans
and leases. Potential problem loans and leases are loans and leases that are
currently performing in accordance with contractual terms, but where known
information about possible credit problems of the related borrowers causes
management to have doubt as to the ability of such borrowers to comply with the
present loan payment terms and may result in such loans and leases becoming
nonperforming at some time in the future. Management considers loans and leases
classified as Substandard, which continue to accrue interest, to be potential
problem loans and leases. The Company, through its credit administration
function, identified 34 commercial relationships from the originated portfolio
and 7 commercial relationships from the acquired portfolio totaling $42.6
million and $1.4 million , respectively at December 31, 2019 that were potential
problem loans. At December 31, 2018 , there were 29 relationships totaling $33.7
million in the originated portfolio and 6 relationships totaling $1.2 million in
the acquired portfolio that were considered potential problem loans.
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Of the 34 commercial relationships from the originated portfolio that were classified as potential problem loans atDecember 31, 2019 , there were 13 relationships that equaled or exceeded$1.0 million , which in aggregate totaled$38.0 million . Of the 7 commercial relationships from the acquired loan portfolio, there were no relationships that equaled or exceeded$1.0 million . The potential problem loans remain in a performing status due to a variety of factors, including payment history, the value of collateral supporting the credits, and personal or government guarantees. These factors, when considered in the aggregate, give management reason to believe that the current risk exposure on these loans does not warrant accounting for these loans as nonperforming. However, these loans do exhibit certain risk factors, which have the potential to cause them to become nonperforming. Accordingly, management's attention is focused on these credits, which are reviewed on at least a quarterly basis.
The Allowance for Loan and Lease Losses
Originated loans and leases The methodology for determining the allowance is considered by management to be a critical accounting policy due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic environment that could result in changes to the amount of the allowance. Management's determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio and of current economic conditions.
Tompkins' model has been designed with certain key concepts in mind, including:
- An acknowledgment that arriving at an appropriate allowance requires a
high degree of management judgment.
- The allowance should be maintained at a level appropriate to cover
estimated losses on loans individually evaluated for impairment, as wellas estimated credit losses inherent in the remainder of the portfolio.
- Estimates of credit losses should consider all significant factors that
affect the collectability of the portfolio as of the evaluation date.
- Loss emergence period is a critical assumption in the allowance estimate,
which represents the average amount of time between when loss events occur
for specific loan types and when such problem loans are identified and the
related loss amounts are confirmed through charge-offs.
- The allowance should be based on a comprehensive, well-documented, and
consistently applied analysis of the loan portfolio.
The model is comprised of four major components that management has deemed
appropriate in evaluating the appropriateness of the allowance for loan and
lease losses. While none of these components, when used independently, is
effective in arriving at a reserve level that appropriately measures the risk
inherent in the portfolio, management believes that using them collectively,
provides reasonable measurement of the loss exposure in the portfolio. The
components include:
- Impaired Loans - Management considers a loan to be impaired if, based on
current information, it is probable that the Company will be unable to
collect all scheduled payments of principal or interest when due,
according to the contractual terms of the loan agreement. When a loan is
considered to be impaired, the amount of the impairment is measured based
on the present value of expected future cash flows discounted at the
effective interest rate of the loan or, as a practical expedient, at the
observable market price or the fair value of collateral (less costs to
sell) if the loan is collateral dependent. Management excludes largegroups of smaller balance homogeneous loans such as residential mortgages,
consumer loans, and leases, which are collectively evaluated.
- Criticized and Classified Credits - For loans that are not impaired, butare rated special mention or worse, management evaluates credits based on
elevated risk characteristics and assigns reserves based upon analysis of
historical loss experience of loans with similar risk characteristics.
- Historical Loss Experience - For loans that are not impaired, or reviewed
individually, management assigns a reserve based upon historical loss
experience over a designated look-back period. Management has evaluated a
variety of look-back periods and has determined that an eight year look
back period is appropriate to capture a full range of economic cycles.
- Qualitative/Subjective Analysis - The model also includes an analysis of a
variety of subjective factors to support the reserve estimate. These
subjective factors may include reserve allocations for risks that may not
otherwise be fully recognized in other components of the model. Among the
subjective factors that are routinely considered as part of this analysis
are: growth trends in the portfolio, changes in management and/or polices
related to lending activities, trends in classified or past due/nonaccrual
loans, concentrations of credit, local and national economic trends, and
industry trends.
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Periodically, management conducts an analysis to estimate the loss emergence period for various loan categories based on samples of historical charge-offs. Model output by loan category is reviewed to evaluate the reasonableness of the reserve levels in comparison to the estimated loss emergence period applied to historical loss experience. In addition to the components discussed above, management reviews the model output for reasonableness by analyzing the results in comparisons to recent trends in the loan/lease portfolio, through back-testing of results from prior models in comparison to actual loss history, and by comparing our reserves and loss history to industry peer results. The model results are reviewed by management at theCorporate Credit Policy Committee and at the Audit Committee of the Board of Directors. Additionally, on an annual basis, management conducts a validation process of the model. This validation includes reviewing the appropriateness of model calculations, back testing of model results and appropriateness of key assumptions used in the model. Although we believe our process for determining the allowance adequately considers all of the factors that would likely result in credit losses, this evaluation is inherently subjective as it requires material estimates, including expected default probabilities, loss emergence periods, the amounts and timing of expected future cash flows on impaired loans, and estimated losses based on historical loss experience and current economic conditions. All of these factors may be susceptible to significant change. To the extent that actual results differ from management estimates, additional loan loss provisions may be required that would adversely impact earnings for future periods. Based on its evaluation of the allowance as ofDecember 31, 2019 , management considers the allowance to be appropriate. Under adversely or positively different conditions or assumptions, the Company would need to increase or decrease the allowance. Acquired Loans and Leases As part of our determination of the fair value of our acquired loans at the time of acquisition, the Company established a credit mark to provide for expected losses in our acquired loan portfolio. There was no allowance for loan losses carried over from the acquired company. To the extent that credit quality deteriorates subsequent to acquisition, such deterioration would result in the establishment of an allowance for the acquired loan portfolio.
Acquired loans accounted for under ASC 310-30
Acquired loans were accounted for under ASC 310-30, and our allowance for loan losses is estimated based upon our expected cash flows for these loans. To the extent that we experience a deterioration in borrower credit quality resulting in a decrease in our expected cash flows subsequent to the acquisition of the loans, an allowance for loan losses would be established based on our estimate of future credit losses over the remaining life of the loans.
Acquired loans accounted for under ASC 310-20
We establish our allowance for loan losses through a provision for credit losses
based upon an evaluation process that is similar to our evaluation process used
for originated loans. This evaluation, which includes a review of loans on which
full collectability may not be reasonably assured, considers, among other
matters, the estimated fair value of the underlying collateral, economic
conditions, historical net loan loss experience, carrying value of the loans,
which includes the remaining net purchase discount or premium, and other factors
that warrant recognition in determining our allowance for loan losses.
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The allocation of the Company's allowance as ofDecember 31, 2019 , and each of the previous four years is illustrated in Table 5- Allocation of the Allowance for Loan and Lease Losses, below. Table 5 - Allocation of the Allowance for Originated and Acquired Loan and Lease Losses As of December 31, (In thousands) 2019 2018 2017 2016 2015
Originated loans
outstanding at end of year
Allocation of the originated allowance by originated loan type: Commercial and industrial$ 10,541 $ 11,217 $ 11,812 $ 9,389 $ 10,495 Commercial real estate 21,557 23,483 20,412 19,836 15,479 Residential real estate 6,360 7,317 6,161 5,149 4,070 Consumer and other 1,356 1,304 1,301 1,224 1,268 Total$ 39,814 $ 43,321 $ 39,686 $ 35,598 $ 31,312 Allocation of the originated allowance as a percentage of total originated allowance: Commercial and industrial 27 % 26 % 30 % 27 % 34 % Commercial real estate 54 % 54 % 51 % 56 % 49 % Residential real estate 16 % 17 % 16 % 14 % 13 % Consumer and other 3 % 3 % 3 % 3 % 4 % Total 100 % 100 % 100 % 100 % 100 % Loan and lease types as a percentage of total originated loans and leases: Commercial and industrial 21 % 23 % 24 % 25 % 26 % Commercial real estate 48 % 47 % 46 % 43 % 41 % Residential real estate 29 % 28 % 29 % 30 % 31 % Consumer and other 2 % 2 % 1 % 2 % 2 % Total 100 % 100 % 100 % 100 % 100 % 52
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As of December 31,
(In thousands) 2019 2018 2017 2016 2015
Acquired loans outstanding at
end of year $ 220,149 $ 265,198 $ 310,577 $ 394,111 $ 461,274
Allocation of the acquired allowance by acquired loan type:
Commercial and industrial $ 0 $ 55 $ 25 $ 0 $ 433
Commercial real estate 51 0 0 97 61
Residential real estate 21 28 54 54 198
Consumer and other 6 6 6 6 0
Total $ 78 $ 89 $ 85 $ 157 $ 692
Allocation of the acquired allowance as a percentage of total acquired allowance:
Commercial and industrial 0 % 62 % 29 % 0 % 62 %
Commercial real estate 65 % 0 % 0 % 62 % 9 %
Residential real estate 27 % 31 % 64 % 34 % 29 %
Consumer and other 8 % 7 % 7 % 4 % 0 %
Total 100 % 100 % 100 % 100 % 100 %
Loan and lease types as a percentage of total acquired loans and leases:
Commercial and industrial 18 % 16 % 16 % 20 % 18 %
Commercial real estate 67 % 68 % 67 % 64 % 64 %
Residential real estate 15 % 16 % 17 % 16 % 15 %
Consumer and other 0 % 0 % 0 % 0 % 0 %
Covered 0 % 0 % 0 % 0 % 3 %
Total 100 % 100 % 100 % 100 % 100 %
The above tables provide, as of the dates indicated, an allocation of the
allowance for probable and inherent loan losses by loan type. The allocation is
neither indicative of the specific amounts or the loan categories in which
future charge-offs may occur, nor is it an indicator of future loss trends. The
allocation of the allowance to each category does not restrict the use of the
allowance to absorb losses in any category.
The five year trend in the allowance is shown above. Over the four year period
between 2015 through 2018, the originated allowance steadily increased driven in
large part by growth in originated loans, while the acquired portfolio steadily
decreased, reflecting run-off of the acquired portfolio, improving asset quality
metrics in the acquired portfolio, and net charge-offs. As of December 31, 2019 ,
the total allowance for loan and lease losses was $39.9 million , which was down
$3.5 million or 8.1% from year-end 2018. The decrease was related to a specific
reserve of $3.3 million at December 31, 2018 , related to one commercial real
estate credit that was subsequently charged off in the first quarter of 2019.
The year-end allowance for originated loans and leases was down $3.5 million
compared to prior year end, and the allowance for acquired loans was down
$11,000 from year-end 2018. At December 31, 2019 , the total allowance was
126.90% of total nonperforming loans compared to 163.25% at December 31, 2018 .
The Company's allowance for originated loan and lease losses totaled $39.8
million at December 31, 2019 , which represented 0.85% of total originated loans,
compared to $43.3 million and 0.95% of total originated loans at December 31,
2018 . Favorable trends in certain qualitative factors, lower historical loss
rates in all loan portfolios except for commercial real estate at year-end 2019
compared to year-end 2018, and lower specific reserves for impaired loans,
contributed to the lower allowance level at December 31, 2019 compared to
December 31, 2018 . Asset quality metrics in the originated portfolio remain
favorable at December 31, 2019 but did show some deterioration from December 31,
2018 . Originated loans internally-classified as Special Mention and Substandard
totaled $87.9 million at December 31, 2019 , up from $72.0 million at year-end
2018. Loans classified as Substandard increased by $14.1 million over December
31, 2018 , while loans classified as Special Mention were up $1.7 million .
Nonaccrual originated loans were $22.5 million as of December 31, 2019 , up $3.1
million from year-end 2018. Net charge-offs of originated loans were $4.8
million or 0.11% of average originated loans in 2019 compared to net charge-offs
of $262,000 or 0.01% of average originated loans in 2018. The year-over-year
increase in net charge-offs was mainly due to the $3.3 million write off of one
commercial real estate relationship in the first quarter of 2019.
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The allowance for acquired loans and leases was$78,000 atDecember 31, 2019 , down 12.4% from prior year end. The amount of acquired loans internally-classified as Special Mention and Substandard atDecember 31, 2019 was down$1.0 million or 28.5% compared toDecember 31, 2018 , reflecting successful workouts and related paydowns and charge-offs during 2019. Net charge-offs of acquired loans totaled$59,000 in 2019 compared to net charge-offs of$41,000 in 2018. Acquired nonaccrual loans totaled$1.8 million atDecember 31, 2019 , compared to$2.9 million atDecember 31, 2018 .
The level of future charge-offs is dependent upon a variety of factors such as national and local economic conditions, trends in, various industries, underwriting characteristics, and conditions unique to each borrower. Given uncertainties surrounding these factors, it is difficult to estimate future losses.
Table 6 - Analysis of the Allowance for Originated and Acquired Loan and Lease
Losses
December 31,
(In thousands) 2019 2018 2017 2016 2015Average originated loans outstanding during year$ 4,586,484 $ 4,472,682 $ 4,051,298 $ 3,525,649 $ 3,023,456 Balance of allowance at beginning of year 43,321 39,686 35,598 31,312 28,156 Originated loans charged-off: Commercial and industrial 653 293 291 878 221 Commercial real estate 4,013 60 21 12 363 Residential real estate 90 424 584 263 338 Consumer and other 816 1,350 960 521 1,074 Leases 0 0 0 0 0 Total loans charged-off$ 5,572 $ 2,127 $ 1,856 $ 1,674 $ 1,996 Recoveries of originated loans previously charged-off: Commercial and industrial 70 50 119 576 809 Commercial real estate 100 812 980 859 1,277 Residential real estate 283 324 212 63 112 Consumer and other 294 679 405 325 487 Total loan recoveries$ 747 $ 1,865 $ 1,716 $ 1,823 $ 2,685 Net loan charge-offs and (recoveries) 4,825 262 140 (149 ) (689 ) Additions to allowance charged to operations 1,318 3,897 4,228 4,137 2,467 Balance of originated allowance at end of year$ 39,814 $ 43,321 $ 39,686 $ 35,598 $ 31,312 Originated allowance as a percentage of originated loans and leases outstanding 0.85 % 0.95 % 0.91 % 0.92 % 0.95 % Net charge-offs (recoveries) as a percentage of average originated loans and leases outstanding during the year 0.11 % 0.01 % 0.00 % 0.00 % (0.02 )% 54
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December 31,
(In thousands) 2019 2018 2017 2016 2015
Average acquired loans
outstanding during year $ 243,607 $ 284,901 $ 349,915 $ 431,572 $ 508,490
Balance of allowance at
beginning of year 89 85 157 692 841
Acquired loans charged-off:
Commercial and industrial 43 41 74 698 77
Commercial real estate 2 82 159 181 400
Residential real estate 166 190 483 35 302
Consumer and other 7 0 2 121 6
Total loans charged-off $ 218 $ 313 $ 718 $ 1,035 $ 785
Recoveries of acquired loans previously charged-off:
Commercial and industrial 33 106 24 20 7
Commercial real estate 74 31 637 268 142
Residential real estate 51 135 44 0 9
Consumer and other 1 0 8 28 0
Total loan recoveries $ 159 $ 272 $ 713 $ 316 $ 158
Net loans charged-off 59 41 5 719 627
Additions (reductions) to
allowance charged to
operations 48 45 (67 ) 184 478
Balance of acquired allowance
at end of year $ 78 $ 89 $ 85 $ 157 $ 692
Acquired allowance as a
percentage of acquired loans
outstanding 0.03 % 0.03 % 0.02 % 0.04 % 0.14 %
Net charge-offs as a
percentage of average
acquired loans and leases
outstanding during the year 0.02 % 0.01 % 0.00 % 0.17 % 0.12 %
Total net charge-offs as a
percentage of average total
loans and leases outstanding
during the year 0.10 % 0.01 % 0.00 % 0.00 % 0.00 %
The provision for loan and lease losses represents management's estimate of the
expense necessary to maintain the allowance for loan and lease losses at an
appropriate level. Net loan charge-offs have been generally favorable over the
four year period between 2015 and 2018. The increase in 2019 was related to the
charge-off of $3.0 million related to one commercial real estate loan which had
a specific reserve in the fourth quarter of 2018. The provision expense for
originated loans over the past five years benefited from significant recoveries
on two commercial/commercial real estate relationships that resulted in net loan
recoveries on originated loans in 2016 and 2015 and smaller net charge-offs in
2018 and 2017. For 2019, favorable trends in certain qualitative factors, lower
historical loss rates in all loan portfolios except for commercial real estate
at year-end 2019 compared to year-end 2018, and lower specific reserves for
impaired loans contributed to the lower allowance level at December 31, 2019
compared to December 31, 2018 and decrease in provision expense in 2019 compared
to 2018. The allowance at December 31, 2018 included a specific reserve of $3.0
million related to one commercial real estate credit that was subsequently
charged off in the first quarter of 2019. Provision expense for the acquired
portfolio has remained relatively flat since 2017. Asset quality trends for the
acquired portfolio continue to show improvement as evidenced by low net
charge-offs and lower Special Mention and Substandard loans.
The ratio of the allowance for originated loan and lease losses as a percentage
of total originated loans was 0.85% at year-end 2019 compared to 0.95% at
year-end 2018. The allowance coverage to nonperforming loans and leases was
126.90% at December 31, 2019 compared to 163.25% at December 31, 2018 .
Management believes that, based upon its evaluation as of December 31, 2019 , the
allowance is appropriate.
Deposits and Other Liabilities
Total deposits were$5.2 billion atDecember 31, 2019 , up$324.0 million or 6.6% compared to year-end 2018. The increase from year-end 2018 consisted of savings and money market balances, noninterest bearing deposits, and time deposits up$227.5 million ,$58.7 million ,$37.7 million , respectively. 55
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The most significant source of funding for the Company is core deposits. The Company defines core deposits as total deposits less time deposits of$250,000 or more, brokered deposits, municipal money market deposits and reciprocal deposit relationships with municipalities. Core deposits increased by$182.3 million or 4.4% to$4.3 billion at year-end 2019 from$4.1 billion at year-end 2018. Core deposits represented 82.3% of total deposits atDecember 31, 2019 , compared to 84.0% of total deposits atDecember 31, 2018 . Municipal money market accounts and reciprocal deposit relationships with municipalities totaled$616.2 million at year-end 2019, which increased 8.5% over year-end 2018. In general, there is a seasonal pattern to municipal deposits starting with a low point during July and August. Account balances tend to increase throughout the fall and into the winter months from tax deposits and receive an additional inflow at the end of March from the electronic deposit of state funds. Table 1-Average Statements of Condition and Net Interest Analysis, shows the average balance and average rate paid on the Company's primary deposit categories for the years endedDecember 31, 2019 , 2018, and 2017. Average interest-bearing deposits were up$195.8 million or 5.6% for 2019 when compared to 2018. The average cost of interest-bearing deposits was 0.84% for 2019 and 0.48% for 2018. Average noninterest bearing deposits for 2019 were up$20.8 million or 1.5% over 2018. A maturity schedule of time deposits outstanding atDecember 31, 2019 is included in "Note 7 Deposits" in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report. The Company uses both retail and wholesale repurchase agreements. Retail repurchase agreements are arrangements with local customers of the Company, in which the Company agrees to sell securities to the customer with an agreement to repurchase those securities at a specified later date. Retail repurchase agreements totaled$60.3 million atDecember 31, 2019 , and$81.8 million atDecember 31, 2018 . Management generally views local repurchase agreements as an alternative to large time deposits. Refer to "Note 8 Federal Funds Purchased and Securities Sold Under Agreements to Repurchase" in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report for further details on the Company's repurchase agreements. The Company's other borrowings totaled$658.1 million at year-end 2019, which was$418.0 million below prior year end. The decrease was attributable to growth in deposits outpacing growth in loans during 2019. The$658.1 million in borrowings atDecember 31, 2019 , included$239.1 million in overnight advances from the FHLB,$415.0 million in term advances from the FHLB and a$4.0 million advance from a third party bank. Borrowings of$1.1 billion at year-end 2018 included$647.1 million in overnight advances from the FHLB,$425.0 million of FHLB term advances, and a$4.0 million advance from a bank. Of the$415.0 million of the FHLB term advances at year-end 2019,$245.0 million are due in over one year. Refer to "Note 9 - Other Borrowings" in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report for further details on the Company's term borrowings with the FHLB.
Liquidity Management
The objective of liquidity management is to ensure the availability of adequate funding sources to satisfy the demand for credit, deposit withdrawals, operating expenses, and business investment opportunities. The Company's large, stable core deposit base and strong capital position are the foundation for the Company's liquidity position. The Company uses a variety of resources to meet its liquidity needs, which include deposits, cash and cash equivalents, short-term investments, cash flow from lending and investing activities, repurchase agreements, and borrowings. The Company may also use borrowings as part of a growth strategy. Asset and liability positions are monitored primarily through theAsset/Liability Management Committee of the Company's subsidiary banks. This Committee reviews periodic reports on the liquidity and interest rate sensitivity positions. Comparisons with industry and peer groups are also monitored. The Company's strong reputation in the communities it serves, along with its strong financial condition, provides access to numerous sources of liquidity as described below. Management believes these diverse liquidity sources provide sufficient means to meet all demands on the Company's liquidity that are reasonably likely to occur. Core deposits, discussed above under "Deposits and Other Liabilities", are a primary and low cost funding source obtained primarily through the Company's branch network. In addition to core deposits, the Company uses non-core funding sources to support asset growth. These non-core funding sources include time deposits of$250,000 or more, brokered time deposits, municipal money market deposits, reciprocal deposits, bank borrowings, securities sold under agreements to repurchase, overnight borrowings and term advances from the FHLB and other funding sources. Rates and terms are the primary determinants of the mix of these funding sources. 56
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Non-core funding sources totaled$1.6 billion atDecember 31, 2019 , a decrease of$297.8 million or 15.4% from$1.9 billion atDecember 31, 2018 . Non-core funding sources decreased year-over-year as the Company experienced sufficient growth in core deposits to fund earning asset growth. Non-core funding sources as a percentage of total liabilities decreased from 31.6% at year-end 2018 to 27.1% at year-end 2019. Non-core funding sources may require securities to be pledged against the underlying liability. Securities carried at$1.2 billion atDecember 31, 2019 and 2018, were either pledged or sold under agreements to repurchase. Pledged securities or securities sold under agreements to repurchase represented 89.7% of total securities atDecember 31, 2019 , compared to 77.8% of total securities atDecember 31, 2018 . Cash and cash equivalents totaled$138.0 million as ofDecember 31, 2019 , up from$80.4 million atDecember 31, 2018 . Short-term investments, consisting of securities due in one year or less, increased from$86.8 million atDecember 31, 2018 , to$108.1 million atDecember 31, 2019 . Cash flow from the loan and investment portfolios provides a significant source of liquidity. These assets may have stated maturities in excess of one year, but they have monthly principal reductions. Total mortgage-backed securities, at fair value, were$824.0 million atDecember 31, 2019 compared with$758.9 million atDecember 31, 2018 . Outstanding principal balances of residential mortgage loans, consumer loans, and leases totaled approximately$1.5 billion atDecember 31, 2019 compared to$1.4 billion atDecember 31, 2018 . Aggregate amortization from monthly payments on these assets provides significant additional cash flow to the Company. Liquidity is enhanced by ready access to national and regional wholesale funding sources including Federal funds purchased, repurchase agreements, brokered certificates of deposit, and FHLB advances. Through its subsidiary banks, the Company has borrowing relationships with the FHLB and correspondent banks, which provide secured and unsecured borrowing capacity. AtDecember 31, 2019 , the unused borrowing capacity on established lines with the FHLB was$1.3 billion .
As members of the FHLB, the Company's subsidiary banks can use certain
unencumbered mortgage-related assets and securities to secure additional
borrowings from the FHLB. At
The Company has not identified any trends or circumstances that are reasonably
likely to result in material increases or decreases in liquidity in the near
term.
Table 7 - Loan Maturity
Remaining maturity of originated loans December 31, 2019
Less than 1 After 1 year
(In thousands) Total year to 5 years After 5 yearsCommercial and industrial$ 968,985 $ 237,057 $ 289,483 $ 442,445 Commercial real estate 2,296,648 113,282 237,165 1,946,201 Residential real estate 1,344,466 111 14,882 1,329,473 Total$ 4,610,099 $ 350,450 $ 541,530 $ 3,718,119 Remaining maturity of acquired loans December 31, 2019 Less than 1 After 1 year (In thousands) Total year to 5 years After 5 years
Commercial and industrial$ 39,076 $ 19,065 $ 3,619 $ 16,392 Commercial real estate 146,917 11,867 70,529 64,521 Residential real estate 33,371 2,795 4,179 26,397 Total$ 219,364 $ 33,727 $ 78,327 $ 107,310
Of the loan amounts shown above in Table 7 - Loan Maturity, maturing over 1
year,
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Off-Balance Sheet Arrangements
In the normal course of business, the Company is party to certain financial instruments, which in accordance with accounting principles generally accepted inthe United States , are not included in its Consolidated Statements of Condition. These transactions include commitments under standby letters of credit, unused portions of lines of credit, and commitments to fund new loans and are undertaken to accommodate the financing needs of the Company's customers. Loan commitments are agreements by the Company to lend monies at a future date. These loan and letter of credit commitments are subject to the same credit policies and reviews as the Company's loans. Because most of these loan commitments expire within one year from the date of issue, the total amount of these loan commitments as ofDecember 31, 2019 , are not necessarily indicative of future cash requirements. Further information on these commitments and contingent liabilities is provided in "Note 17 Commitments and Contingent Liabilities" in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report. Contractual Obligations The Company leases land, buildings, and equipment under operating lease arrangements extending to the year 2090. Most leases include options to renew for periods ranging from 5 to 20 years. In addition, the Company has a software contract for its core banking application throughJune 30, 2024 along with contracts for more specialized software programs through 2020. Further information on the Company's lease arrangements is provided in "Note 6 Premises and Equipment" in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report. The Company's contractual obligations as ofDecember 31, 2019 , are shown in Table 8-Contractual Obligations and Commitments below. Table 8 - Contractual Obligations and Commitments Contractual cash At December 31, 2019 obligations Payments due within (In thousands) Total 1 year 1-3 years 3-5 years After 5 years Long-term debt$ 436,320 $ 177,017 $ 127,092 $ 132,211 $ 0 Trust Preferred Debentures1 32,472 1,000 2,001 2,001 27,470 Operating leases 2 46,826 4,492 8,221 7,508 26,605 Software contracts 6,731 1,568 2,956 2,207 0 Total contractual cash obligations$ 522,349 $ 184,077 $ 140,270 $ 143,927 $ 54,075 1 Dollar amounts include interest payments and contractual payments due until maturity without conversion to stock or early redemption for the remainder of the Company's Trust Preferred Debentures. 2 Operating leases include renewals the Company considers reasonably certain to exercise.
Recently Issued Accounting Standards
Newly Adopted Accounting Standards ASU No. 2016-02, "Leases." Under the new guidance, lessees are required to recognize the following for all leases: 1) a lease liability, which is the present value of a lessee's obligation to make lease payments, and 2) a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. Lessor accounting under the new guidance remains largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct financing leases, and operating leases. Leveraged leases have been eliminated, although lessors can continue to account for existing leveraged leases using the current accounting guidance. Other limited changes were made to align lessor accounting with the lessee accounting model and the new revenue recognition standard. All entities will classify leases to determine how to recognize lease-related revenue and expense. Quantitative and qualitative disclosures are required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The intention is to require enough information to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity's leasing activities. ASU No. 2016-02 is effective for interim and annual reporting periods beginning afterDecember 15, 2018 . All entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. As the Company elected the transition option provided in ASU No. 2018-11 (see below), the modified retrospective approach was applied onJanuary 1, 2019 . The Company also elected certain relief options offered in ASU 2016-02 including the package of practical expedients, however, the Company has chosen to continue to separate lease and non-lease components instead of accounting for them as a single lease component. The Company did not elect the hindsight practical expedient, which allows entities to use hindsight when determining lease term 58
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and impairment of right-of-use assets. The Company has several lease agreements, such as leases for branch locations, which are considered operating leases, and therefore, were not previously recognized on the Company's consolidated statements of condition. The new guidance requires these lease agreements to be recognized on the consolidated statements of condition as a right-of-use asset and a corresponding lease liability. The new guidance did not have a material impact on the consolidated statements of income or the consolidated statements of cash flows. See Note 20 - "Leases" for more information. ASU No. 2018-11, "Leases - Targeted Improvements" to provide entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU No. 2016-02. Specifically, under the amendments in ASU 2018-11: (1) entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and (2) lessors may elect not to separate lease and non-lease components when certain conditions are met. The amendments have the same effective date as ASU 2016-02 (January 1, 2019 for the Company). The Company adopted ASU 2018-11 on its required effective date ofJanuary 1, 2019 and elected both transition options mentioned above. ASU 2018-11 did not have a material impact on the Company's Consolidated Financial Statements. ASU No. 2018-20, "Narrow-Scope Improvements for Lessors." This ASU (1) allows lessors to make an accounting policy election of presenting sales taxes and other similar taxes collected from lessees on a net basis, (2) requires a lessor to exclude lessor costs paid directly by a lessee to third parties on the lessor's behalf and include lessor costs that are paid by the lessor and reimbursed by the lessee in the measurement of variable lease revenue and the associated expense, and (3) clarifies that when lessors allocate variable payments to lease and non-lease components they are required to follow the recognition guidance in the new leases standard for the lease component and other applicable guidance, such as the new revenue standard, for the non-lease component. The Company adopted ASU 2018-20 on its required effective date ofJanuary 1, 2019 and its adoption did not have a material impact on the Company's Consolidated Financial Statements. ASU No. 2019-01, "Leases: Codification Improvements." This ASU (1) states that for lessors that are not manufacturers or dealers, the fair value of the underlying asset is its cost, less any volume or trade discounts, as long as there is not a significant amount of time between acquisition of the asset and lease commencement; (2) clarifies that lessors in the scope of ASC 942 (such as the Company) must classify principal payments received from sales-type and direct financing leases in investing activities in the statement of cash flows; and (3) clarifies the transition guidance related to certain interim disclosures provided in the year of adoption. To coincide with the adoption of ASU No. 2016-02, the Company elected to early adopt ASU 2019-01 effectiveJanuary 1, 2019 . The adoption of this ASU did not have a material impact on the Company's Consolidated Financial Statements. ASU No. 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities." This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments by making targeted improvements to GAAP as follows: (1) require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer; (2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value; (3) eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (5) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (6) require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (7) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (8) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets. The Company adopted ASU No. 2016-01 effectiveJanuary 1, 2018 , and recognized a cumulative-effect adjustment of$65,000 for the after-tax impact of the unrealized loss on equity securities. In addition, the Company measures the fair value of its loan portfolio using an exit price notion. Refer to Note 19 - "Fair Value". ASU 2017-08, "Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20) - Premium Amortization onPurchased Callable Debt Securities ." ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium to require such premiums to be amortized to the earliest call date unless applicable guidance related to certain pools of securities is applied to consider estimated prepayments. Under prior guidance, entities were generally required to amortize premiums on 59
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individual, non-pooled callable debt securities as a yield adjustment over the contractual life of the security. ASU 2017-08 does not change the accounting for callable debt securities held at a discount. ASU 2017-08 became effective for us onJanuary 1, 2019 and did not have a significant impact on the Company's Consolidated Financial Statements. ASU 2017-12, "Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities." ASU 2017-12 amends the hedge accounting recognition and presentation requirements in ASC 815 to improve the transparency and understandability of information conveyed to financial statement users about an entity's risk management activities to better align the entity's financial reporting for hedging relationships with those risk management activities and to reduce the complexity of and simplify the application of hedge accounting. ASU 2017-12 became effective for us onJanuary 1, 2019 and did not have a significant impact on the Company's Consolidated Financial Statements. ASU 2018-16, "Derivatives and Hedging (Topic 815) - Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes." The amendments in this update permit use of the OIS rate based on SOFR as aU.S. benchmark interest rate for hedge accounting purposes under Topic 815 in addition to the interest rates on directU.S. Treasury obligations, the LIBOR swap rate, the OIS rate based on the Fed Funds Effective Rate and theSecurities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate. ASU 2018-16 became effective for us onJanuary 1, 2019 and did not have a significant impact on the Company's Consolidated Financial Statements. ASU 2019-04, "Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments." ASU 2019-04 makes clarifications and corrections to the application of the guidance contained in each of the amended topics. The following is not an all-inclusive listing of every Topic affected by ASU 2019-04, but focuses on those Topics related toInvestments-Debt and Equity Securities . Regarding Topic 825, the amendments provide scope clarifications for Subtopics 320-10, Investments-Debt and Equity Securities-Overall, and 321-10, Investments-Equity Securities-Overall, held-to maturity debt securities fair value disclosures, and re-measurement of equity securities at historical exchange rates. The Company early adopted ASU 2019-04 onNovember 30, 2019 . Since the Company had already adopted ASU 2016-01 and 2017-12, the related amendments are effective as ofNovember 30, 2019 . As part of the adoption, the Company reclassified$138.4 million aggregate amortized cost basis of debt securities held-to-maturity to debt securities available-for-sale. The Company did not reclassify debt securities from held-to-maturity to available-for-sale upon adoption of the amendments in ASU 2017-12. Refer to Note 2 - "Securities". Accounting Standards Pending Adoption ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization's portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 will be effective onJanuary 1, 2020 . Upon adoption in the first quarter of 2020, a cumulative effect adjustment for the change in the allowance for credit losses will be recognized in retained earnings. The cumulative-effect adjustment to retained earnings, net of taxes, will be comprised of the impact to the allowance for credit losses on outstanding loans and leases and the impact to the liability for off-balance sheet commitments. The Company has evaluated the guidance through a cross-functional committee with members from Finance, Accounting, Risk Management, Internal Audit, andCredit Administration , along with the engagement of a third party for model development and a third party for model validation. Based on parallel modeling and testing performed in the third and fourth quarter of 2019, as well as implementation analysis utilizing existing exposures and forecasts of macroeconomic conditions as of year end, we currently expect that the adoption of ASU 2016-13 will result in an allowance for credit losses atJanuary 1, 2020 , in the range of$34.0 million to$39.0 million . AtDecember 31, 2019 , our allowance for loan and lease losses totaled$39.9 million . We are currently finalizing the execution of our implementation controls and processes, and the review of our most recent model run and assumptions, including qualitative adjustments and purchase credit deteriorated loans. Due to these activities still being in a finalization stage, the ultimate impact of the adoption of ASU 2013-13, as ofJanuary 1, 2020 , could differ from our current expectation. ASU 2017-04, "Intangibles -Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment." ASU 2017-04 eliminates Step 2 from the goodwill impairment test which required entities to compute the implied fair value of goodwill. Under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 will be effective for us onJanuary 1, 2020 . Tompkins is currently evaluating the potential impact of ASU 2017-04 on our consolidated financial statements. 60
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ASU 2018-13, "Fair Value Measurement (Topic 820) - Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement." ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820. The amendments in this update remove disclosures that no longer are considered cost beneficial, modify/clarify the specific requirements of certain disclosures, and add disclosure requirements identified as relevant. ASU 2018-13 will be effective for us onJanuary 1, 2020 , and is not expected to have a significant impact on our consolidated financial statements. ASU 2018-14, "Compensation - Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20)." ASU 2018-14 amends and modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. The amendments in this update remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. ASU 2018-14 will be effective for us onJanuary 1, 2021 , with early adoption permitted, and is not expected to have a significant impact on our consolidated financial statements. ASU 2018-15, "Intangibles -Goodwill and Other -Internal-Use Software (Subtopic 350-40) - Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." ASU 2018-15 clarifies certain aspects of ASU 2015-05, "Customer's Accounting for Fees Paid in a Cloud Computing Arrangement," which was issued inApril 2015 . Specifically, ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 does not affect the accounting for the service element of a hosting arrangement that is a service contract. ASU 2018-15 will be effective for us onJanuary 1, 2020 . Tompkins is currently evaluating the potential impact of ASU 2018-15 on our consolidated financial statements. ASU No 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." ASU 2019-12 removes certain exceptions to the general principles in Topic 740 in Generally Accepted Accounting Principles. ASU 2019-12 is effective for public entities for fiscal years beginning afterDecember 15, 2020 , with early adoption permitted. Tompkins is currently evaluating the potential impact of ASU 2019-12 on our consolidated financial statements.
Fourth Quarter Summary
Net income for the fourth quarter of 2019 was$21.1 million , up$2.2 million over the same period in 2018. Diluted earnings per share of$1.40 for the fourth quarter of 2019 were up from$1.23 in the fourth quarter of 2018. Net interest income of$53.2 million for the fourth quarter of 2019 was unchanged from the same period in 2018. The net interest margin for the fourth quarter of 2019 was 3.44%, up slightly from the 3.34% reported for the quarter endedDecember 31, 2018 , and 3.43% for the third quarter of 2019. When compared to the third quarter of 2019, the fourth quarter of 2019 saw lower yields on earning assets that were mostly offset by lower funding costs. Average deposits for the fourth quarter of 2019 increased$357.8 million , or 7.2% compared to the same period in 2018. Included in the growth of average deposits during 2019 was a$40.4 million increase in average noninterest bearing deposits, up 2.8% from the fourth quarter of 2018. The provision for loan and lease losses for the fourth quarter of 2019 was a negative$1.0 million compared to an expense of$2.1 million in the fourth quarter of 2018. The fourth quarter provision expense in 2018 included a specific reserve of$3.5 million related to one large commercial real estate loan. Noninterest income was$18.0 million for the fourth quarter of 2019, down$1.9 million or 9.5% compared to the same period in 2018. The decrease in noninterest income was largely due to the fact that results from the fourth quarter of the prior year included higher than normal investment service fees associated with trust and estate activities related to the settlement of a large estate, as well as the collection of nonaccrual interest and fees associated with a loan that was previously charged off. Noninterest expense was$45.9 million for the fourth quarter of 2019, down$1.3 million or 2.8% over the fourth quarter of 2018. Other expenses for the fourth quarter of 2019 decreased by$2.9 million from the same period in 2018. Of this decrease,$1.3 million represented a decrease in professional fees, primarily related to investments made in 2018 strengthening the Company's compliance and information security infrastructure. Income tax expense for the fourth quarter of 2019 was$5.2 million compared to$4.9 million for the fourth quarter of 2018. The Company's effective tax rate was 20.4% in the fourth quarter of 2019, compared to 20.9% for the same period in 2018. 61
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