10-K 1 cbna201610k.htm
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549

FORM 10-K
 
 ☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the fiscal year ended December 31, 2016
 
 
 
 
 
 
 
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the transition period from                       to                                           .
 
  
    Commission File Number: 001-13695

 (Exact name of registrant as specified in its charter)
 
Delaware
 
16‑1213679
(State or other jurisdiction of incorporation or organization)
 
 
 (I.R.S. Employer Identification No.)
 
5790 Widewaters Parkway, DeWitt, New York
 
13214-1883
(Address of principal executive offices)
 
 (Zip Code)
 
 (315) 445‑2282
 
 
(Registrant's telephone number, including area code)
 
 

Securities registered pursuant of Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, Par Value $1.00 per share
New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes   ☒   No   ☐  .
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes      No   ☒   .
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes      No      .

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes      No      .

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K.      .

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.    
 Large accelerated filer   ☒
Accelerated filer    
Non-accelerated filer    
Smaller reporting company      . 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes      No   ☒   .
 
The aggregate market value of the common stock, $1.00 par value per share, held by non-affiliates of the registrant computed by reference to the closing price as of the close of business on June 30, 2016 (the registrant's most recently completed second fiscal quarter): $1,765,509,358.

The number of shares of the common stock, $1.00 par value per share, outstanding as of the close of business on January 31, 2017: 44,541,700
 
DOCUMENTS INCORPORATED BY REFERENCE.

Portions of the Definitive Proxy Statement for the Annual Meeting of the Shareholders to be held on May 17, 2017 (the "Proxy Statement") is incorporated by reference in Part III of this Annual Report on Form 10-K.

1 of 112
 

TABLE OF CONTENTS
 
PART I
 
Page
Item 1
Business__________________________________________________________________________________________________________________
3
Item 1A
Risk Factors _______________________________________________________________________________________________________________
13
Item 1B
Unresolved Staff Comments ___________________________________________________________________________________________________
19
Item 2
Properties_________________________________________________________________________________________________________________
19
Item 3
Legal Proceedings___________________________________________________________________________________________________________
20
Item 4
Mine Safety Disclosures______________________________________________________________________________________________________
20
Item 4A.
Executive Officers of the Registrant______________________________________________________________________________________________
20
     
PART II
   
Item 5
Market for Registrant's Common Equity, Related Stockholders Matters and Issuer Purchases of Equity Securities___________________________________
21
Item 6
Selected Financial Data_______________________________________________________________________________________________________
23
Item 7
Management's Discussion and Analysis of Financial Condition and Results of Operations____________________________________________________
25
Item 7A
Quantitative and Qualitative Disclosures about Market Risk___________________________________________________________________________
51
Item 8
Financial Statements and Supplementary Data:
 
 
     Consolidated Statements of Condition_________________________________________________________________________________________
54
 
     Consolidated Statements of Income___________________________________________________________________________________________
55
 
     Consolidated Statements of Comprehensive Income_______________________________________________________________________________
56
 
     Consolidated Statements of Changes in Shareholders' Equity________________________________________________________________________
57
 
     Consolidated Statements of Cash Flows________________________________________________________________________________________
58
 
     Notes to Consolidated Financial Statements_____________________________________________________________________________________
59
 
     Report on Internal Control over Financial Reporting_______________________________________________________________________________
98
 
     Report of Independent Registered Public Accounting Firm__________________________________________________________________________
99
 
Two Year Selected Quarterly Data______________________________________________________________________________________________
100
Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure___________________________________________________
100
Item 9A.
Controls and Procedures_____________________________________________________________________________________________________
100
Item 9B.
Other Information___________________________________________________________________________________________________________
101
     
PART III
   
Item 10
Directors, Executive Officers and Corporate Governance______________________________________________________________________________
101
Item 11
Executive Compensation_____________________________________________________________________________________________________
101
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters____________________________________________
101
Item 13
Certain Relationships and Related Transactions, and Director Independence______________________________________________________________
101
Item 14
Principal Accounting Fees and Services__________________________________________________________________________________________
101
     
PART IV
   
Item 15
Exhibits, Financial Statement Schedules__________________________________________________________________________________________
102
Item 16
Form 10-K Summary_________________________________________________________________________________________________________
105
Signatures
________________________________________________________________________________________________________________________
106
 
2

Part I

This Annual Report on Form 10-K contains certain forward-looking statements with respect to the financial condition, results of operations and business of Community Bank System, Inc.  These forward-looking statements by their nature address matters that involve certain risks and uncertainties.  Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements are set forth herein under the caption "Forward-Looking Statements."

Item 1. Business

Community Bank System, Inc. (the "Company") was incorporated on April 15, 1983, under the Delaware General Corporation Law.  Its principal office is located at 5790 Widewaters Parkway, DeWitt, New York 13214.  The Company is a registered financial holding company which wholly-owns two significant subsidiaries: Community Bank, N.A. (the "Bank" or "CBNA"), and Benefit Plans Administrative Services, Inc. ("BPAS").  As of December 31, 2016, BPAS owns four subsidiaries: Benefit Plans Administrative Services, LLC ("BPA"), a provider of defined contribution plan administration services; BPAS Actuarial & Pension Services, LLC ("BPAS-APS") (formally known as Harbridge Consulting Group, LLC), a provider of actuarial and benefit consulting services; BPAS Trust Company of Puerto Rico, a Puerto Rican trust company; and Hand Benefits & Trust Company ("HB&T"), a provider of collective investment fund administration and institutional trust services.  HB&T owns one subsidiary, Hand Securities, Inc. ("HSI"), an introducing broker-dealer.  The Company also wholly-owns two unconsolidated subsidiary business trusts formed for the purpose of issuing mandatorily-redeemable preferred securities which are considered Tier I capital under regulatory capital adequacy guidelines. 

The Bank's business philosophy is to operate as a community bank with local decision-making, principally in non-metropolitan markets, providing a broad array of banking and financial services to retail, commercial, and municipal customers.  As of December 31, 2016, the Bank operates 193 full-service branches operating as Community Bank, N.A. throughout 35 counties of Upstate New York and six counties of Northeastern Pennsylvania, offering a range of commercial and retail banking services.  The Bank owns the following operating subsidiaries: The Carta Group, Inc. ("Carta Group"), CBNA Preferred Funding Corporation ("PFC"), CBNA Treasury Management Corporation ("TMC"), Community Investment Services, Inc. ("CISI"),  Nottingham Advisors, Inc. ("Nottingham"), OneGroup NY, Inc. ("OneGroup"), Oneida Wealth Management, Inc. ("OWM") and Oneida Preferred Funding II LLC ("OPFCII").  OneGroup is a full-service insurance agency offering personal and commercial property insurance and other risk management products and services.  On August 19, 2016, the Company merged its insurance subsidiary CBNA Insurance Agency, Inc. ("CBNA Insurance") into OneGroup.   PFC and OPFCII primarily act as investors in residential real estate loans and properties.  TMC provides cash management, investment, and treasury services to the Bank.  CISI, The Carta Group and OWM provide broker-dealer and investment advisory services.  On April 22, 2016, the Company merged the activities of OWM into CISI.  Nottingham provides asset management services to individuals, corporations, corporate pension and profit sharing plans, and foundations.

The Company maintains a website at communitybankna.com.  Annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, are available on the Company's website free of charge as soon as reasonably practicable after such reports or amendments are electronically filed with or furnished to the Securities and Exchange Commission ("SEC").  The information posted on the website is not incorporated into or a part of this filing.  Copies of all documents filed with the SEC can also be obtained by visiting the SEC's Public Reference Room at 100 F Street, NE, Washington, DC  20549, by calling the SEC at 1-800-SEC-0330 or by accessing the SEC's website at https://www.sec.gov.

Acquisition History (2012-2016)

Northeast Retirement Services, Inc.
On December 5, 2016, the Company announced that it had entered into a definitive agreement to acquire Northeast Retirement Services, Inc. ("NRS") and its subsidiary Global Trust Company ("GTC") headquartered in Woburn, Massachusetts for approximately $148 million in Company stock and cash.  On February 3, 2017, the Company completed its acquisition of NRS and GTC.  NRS was a privately held corporation focused on providing institutional transfer agency, master recordkeeping services, custom target date fund administration, trust product administration and customized reporting services to institutional clients.  Its wholly-owned subsidiary, GTC, was chartered in the State of Maine in 2008, as a non-depository trust company which provides fiduciary services for collective investment trusts and other products.  The acquisition will strengthen and complement the Company's existing employee benefit services businesses.  Upon the completion of the merger, NRS is a wholly-owned subsidiary of BPAS and will operate as Northeast Retirement Services, LLC, a Delaware limited liability company.  The initial accounting for the assets and liabilities assumed with this acquisition is incomplete as of the date of issuance of the financial statements due to the proximity of the acquisition date to the date of issuance.


3



Merchants Bancshares, Inc. – Pending Acquisition
On October 24, 2016, the Company announced that it had entered into a definitive agreement to acquire Merchants Bancshares, Inc. ("Merchants"), parent company of Merchants Bank, a state chartered bank headquartered in South Burlington, Vermont, for approximately $362 million in Company stock and cash.  The acquisition will extend the Company's footprint into the Vermont and Western Massachusetts markets.  Upon the completion of the merger, the Bank will add 31 branch locations in Vermont and one location in Massachusetts with approximately $2.1 billion of assets, and deposits of $1.5 billion.  The acquisition is expected to close during the second or third quarter of 2017, pending both regulatory and Merchants' shareholder approval.  The Company expects to incur certain one-time, transaction-related costs in 2017.

WJL Agencies, Inc.
On January 4, 2016, the Company, through its subsidiary, CBNA Insurance, completed its acquisition of WJL Agencies, Inc. doing business as The Clark Insurance Agencies ("WJL"), an insurance agency operating in northern New York. The Company paid $0.6 million in cash for the intangible assets of the company.  Goodwill in the amount of $0.3 million and intangible assets in the amount of $0.3 million were recorded in conjunction with the acquisition.  The effects of the acquired assets and liabilities have been included in the consolidated financial statements since that date.  On August 19, 2016, the Company merged together its insurance subsidiaries and as of that date, the activities of CBNA Insurance were merged into OneGroup.

Oneida Financial Corp.
On December 4, 2015, the Company completed its acquisition of Oneida Financial Corp. ("Oneida"), parent company of Oneida Savings Bank, headquartered in Oneida, New York for approximately $158 million in Company stock and cash, comprised of $56.3 million of cash and the issuance of 2.38 million common shares.  Upon the completion of the merger, the Bank added 12 branch locations in Oneida and Madison counties and approximately $769 million of assets, including approximately $399 million of loans and $226 million of investment securities, along with $699 million of deposits.  Through the acquisition of Oneida, the Company acquired OneGroup and OWM as wholly-owned subsidiaries primarily engaged in offering insurance and investment advisory services.  These subsidiaries complement the Company's other non-banking financial services businesses.  The effects of the acquired assets and liabilities have been included in the consolidated financial statements since that date.

EBS-RMSCO, Inc.
On January 1, 2014, BPAS-APS, formerly known as Harbridge Consulting Group LLC, completed its acquisition of a professional services practice from EBS-RMSCO, Inc., a subsidiary of The Lifetime Healthcare Companies ("EBS-RMSCO").  This professional services practice, which provides actuarial valuation and consulting services to clients who sponsor pension and post-retirement medical and welfare plans, enhanced the Company's participation in the Western New York marketplace.

Bank of America Branches
On December 13, 2013,  the Bank completed its acquisition of eight retail branch-banking locations across its Northeast Pennsylvania markets from Bank of America, N.A. ("B of A"), acquiring approximately $1.1 million in loans and $303 million of deposits.  The assumed deposits consisted of $220 million of checking, savings and money market accounts ("core deposits") and $83 million of time deposits.  Under the terms of the purchase agreement, the Bank paid B of A a blended deposit premium of 2.4%, or approximately $7.3 million.

HSBC and First Niagara Branches
On July 20, 2012,  the Bank completed its acquisition of 16 retail branches in central, northern and western New York from HSBC Bank USA, N.A. ("HSBC"), acquiring approximately $106 million in loans and approximately $697 million of deposits.  The assumed deposits consisted primarily of core deposits and the acquired loans consisted of in-market performing loans, primarily residential real estate loans.  Under the terms of the purchase agreement, the Bank paid First Niagara Bank, N.A. ("First Niagara"), who acquired HSBC's Upstate New York banking business and assigned its right to purchase the 16 branches to the Bank, a blended deposit premium of 3.4%, or approximately $24 million.

On September 7, 2012, the Bank completed its acquisition of three branches in central New York from First Niagara, acquiring approximately $54 million of loans and $101 million of deposits.  The assumed deposits consisted primarily of core deposits and the acquired loans consisted of in-market performing loans, primarily residential real estate loans. Under the terms of the purchase agreement, the Bank paid a blended deposit premium of 3.1%, or approximately $3 million.

In support of the HSBC and First Niagara branch acquisitions, the Company completed a public common stock offering in late January 2012, raising $57.5 million through the issuance of 2.13 million shares of common stock.  The net proceeds of the offering were approximately $54.9 million.
4


Services

Banking
The Bank is a community bank committed to the philosophy of serving the financial needs of customers in local communities.  The Bank's branches are generally located in smaller towns and cities within its geographic market areas of Upstate New York and Northeastern Pennsylvania. The Company believes that the local character of its business, knowledge of the customers and their needs, and its comprehensive retail and business products, together with responsive decision-making at the branch and regional levels, enable the Bank to compete effectively in its geographic market.   The Bank is a member of the Federal Reserve System ("FRB") and the Federal Home Loan Bank of New York ("FHLB"), and its deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") up to applicable limits.

Employee Benefit Services
Through BPAS and its subsidiaries, the Company operates a national practice that provides employee benefit trust, collective investment fund, retirement plan administration, actuarial, VEBA/HRA and health and welfare consulting services to a diverse array of clients spanning the United States and Puerto Rico.

Wealth Management
Through the Bank, CISI, OWM, Carta Group, and Nottingham, the Company provides wealth management, retirement planning, higher educational planning, fiduciary, risk management, and personal financial planning services.  The Company offers investment alternatives including stocks, bonds, mutual funds and advisory products.

Insurance Agency
Through OneGroup, the Company offers personal and commercial property insurance and other risk management products and services. In addition, OneGroup offers employee benefit related services.  OneGroup represents many leading insurance companies.

Segment Information
The Company has identified three reportable operating business segments:  Banking, Employee Benefit Services, and All Other.  Included in the All Other segment are the smaller Wealth Management and Insurance operations.  Information about the Company's reportable business segments is included in Note U of the "Notes to Consolidated Financial Statements" filed herewith in Part II.

Competition
The banking and financial services industry is highly competitive in the New York and Pennsylvania markets.  The Company competes actively for loans, deposits and customers with other national and state banks, thrift institutions, credit unions, retail brokerage firms, mortgage bankers, finance companies, insurance agencies, and other regulated and unregulated providers of financial services.  In order to compete with other financial service providers, the Company stresses the community nature of its operations and the development of profitable customer relationships across all lines of business.
5



The table below summarizes the Bank's deposits and market share by the forty-one counties of New York and Pennsylvania in which it has customer facilities.  Market share is based on deposits of all commercial banks, credit unions, savings and loan associations, and savings banks.
                 
Number of
 
County
State
 
Deposits as of 6/30/2016(1)
(000's omitted)
   
Market
Share (1)
   
Branches
   
ATM's
   
Towns/ Cities
   
Towns Where Company
Has 1st or 2nd Market Position
 
Lewis
NY
 
$
198,077
     
75.70
%
   
4
     
4
     
3
     
3
 
Franklin
NY
   
322,707
     
63.30
%
   
6
     
6
     
5
     
5
 
Hamilton
NY
   
54,393
     
54.98
%
   
2
     
2
     
2
     
2
 
Madison
NY
   
465,922
     
53.33
%
   
8
     
8
     
5
     
5
 
Allegany
NY
   
254,923
     
48.16
%
   
9
     
10
     
8
     
8
 
Cattaraugus
NY
   
405,535
     
42.84
%
   
10
     
11
     
7
     
6
 
Saint Lawrence
NY
   
430,746
     
37.27
%
   
13
     
11
     
11
     
10
 
Otsego
NY
   
355,965
     
34.69
%
   
10
     
9
     
6
     
5
 
Jefferson
NY
   
436,631
     
28.15
%
   
7
     
9
     
6
     
6
 
Seneca
NY
   
131,020
     
27.80
%
   
4
     
3
     
4
     
4
 
Clinton
NY
   
354,656
     
26.80
%
   
4
     
7
     
2
     
2
 
Yates
NY
   
95,300
     
25.70
%
   
3
     
2
     
2
     
1
 
Wyoming
PA
   
121,488
     
24.65
%
   
4
     
4
     
4
     
4
 
Schuyler
NY
   
48,371
     
24.43
%
   
1
     
1
     
1
     
1
 
Chautauqua
NY
   
349,177
     
22.87
%
   
12
     
12
     
10
     
7
 
Livingston
NY
   
176,354
     
22.51
%
   
5
     
6
     
5
     
4
 
Steuben
NY
   
187,672
     
18.31
%
   
8
     
8
     
7
     
4
 
Essex
NY
   
120,533
     
18.03
%
   
5
     
5
     
4
     
4
 
Wayne
NY
   
131,884
     
15.62
%
   
3
     
3
     
2
     
2
 
Delaware
NY
   
144,681
     
14.88
%
   
5
     
5
     
5
     
5
 
Ontario
NY
   
241,814
     
12.07
%
   
8
     
14
     
5
     
3
 
Oswego
NY
   
169,822
     
9.63
%
   
4
     
5
     
4
     
2
 
Tioga
NY
   
37,835
     
8.62
%
   
2
     
2
     
2
     
1
 
Oneida
NY
   
273,502
     
7.94
%
   
7
     
7
     
6
     
5
 
Lackawanna
PA
   
398,822
     
7.66
%
   
11
     
11
     
8
     
4
 
Herkimer
NY
   
46,717
     
7.55
%
   
1
     
1
     
1
     
1
 
Luzerne
PA
   
451,924
     
7.44
%
   
10
     
14
     
8
     
3
 
Chemung
NY
   
74,589
     
7.29
%
   
2
     
2
     
1
     
0
 
Susquehanna
PA
   
52,519
     
6.41
%
   
3
     
1
     
3
     
2
 
Schoharie
NY
   
23,327
     
5.38
%
   
1
     
1
     
1
     
0
 
Bradford
PA
   
46,941
     
4.19
%
   
2
     
2
     
2
     
1
 
Carbon
PA
   
40,002
     
4.07
%
   
2
     
2
     
2
     
1
 
Cayuga
NY
   
43,470
     
4.03
%
   
2
     
2
     
2
     
1
 
Washington
NY
   
19,194
     
2.67
%
   
1
     
0
     
1
     
1
 
Chenango
NY
   
22,852
     
2.38
%
   
2
     
2
     
1
     
0
 
Warren
NY
   
32,543
     
1.92
%
   
1
     
1
     
1
     
1
 
Onondaga
NY
   
151,245
     
1.55
%
   
4
     
4
     
4
     
1
 
Broome
NY
   
32,133
     
1.22
%
   
1
     
1
     
1
     
0
 
Ulster
NY
   
29,496
     
0.97
%
   
1
     
1
     
1
     
1
 
Erie
NY
   
117,828
     
0.29
%
   
4
     
4
     
3
     
2
 
Tompkins
NY
   
4,150
     
0.22
%
   
1
     
0
     
1
     
0
 
 
  
 
$
7,096,760
     
6.95
%
   
193
     
203
     
157
     
118
 
 (1) Deposits and Market Share data as of June 30, 2016, the most recent information available from SNL Financial LLC.  Deposit amounts include $138.9 million of intercompany balances that are eliminated upon consolidation.                         

 
6


Employees

As of December 31, 2016, the Company employed 2,222 full-time employees, 138 part-time employees and 139 temporary employees.  None of the Company's employees are represented by a collective bargaining agreement.  The Company offers a variety of employment benefits and considers its relationship with its employees to be good.

Supervision and Regulation

General
The banking industry is highly regulated with numerous statutory and regulatory requirements that are designed primarily for the protection of depositors and the financial system, and not for the purpose of protecting shareholders.  Set forth below is a description of the material laws and regulations applicable to the Company and the Bank.  This summary is not complete and the reader should refer to these laws and regulations for more detailed information.  The Company's and the Bank's failure to comply with applicable laws and regulations could result in a range of sanctions and administrative actions imposed upon the Company and/or the Bank, including the imposition of civil money penalties, formal agreements and cease and desist orders.  Changes in applicable law or regulations, and in their interpretation and application by regulatory agencies, cannot be predicted, and may have a material effect on the Company's business and results.

The Company and its subsidiaries are subject to the laws and regulations of the federal government and the states and jurisdictions in which they conduct business.  The Company, as a bank holding company, is subject to extensive regulation, supervision and examination by the Board of Governors of the Federal Reserve System ("FRB") as its primary federal regulator.  The Bank is a nationally-chartered bank and is subject to extensive regulation, supervision and examination by the Office of the Comptroller of the Currency ("OCC") as its primary federal regulator, and as to certain matters, the FRB, the Consumer Financial Protection Bureau ("CFPB"), and the Federal Deposit Insurance Corporation ("FDIC").

The Company is also subject to the jurisdiction of the SEC and is subject to disclosure and regulatory requirements under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended.  The Company's common stock is listed on the New York Stock Exchange ("NYSE") and it is subject to NYSE's rules for listed companies.  Affiliated entities, including BPAS, HB&T, HSI, BPAS Trust Company of Puerto Rico, Nottingham, CISI, OneGroup, Carta Group, and OWM are subject to the jurisdiction of certain state and federal regulators and self-regulatory organizations including, but not limited to, the SEC, the Texas Department of Banking, the Financial Industry Regulatory Authority ("FINRA"), Puerto Rico Office of the Commissioner of Financial Institutions, and state securities and insurance regulators.

The Company, the Bank, and their respective subsidiaries may be subject to the laws and regulations of the federal government and/or the various states in which they conduct business.

Federal Bank Holding Company Regulation
The Company is a bank holding company under the Bank Holding Company Act of 1956, (the "BHC Act"), and became a financial holding company effective September 30, 2015.  As a bank holding company that has elected to become a financial holding company, the Company can affiliate with securities firms and insurance companies and engage in other activities that are "financial in nature" or "incidental" or "complementary" to activities that are financial in nature, as long as it continues to meet the eligibility requirements for financial holding companies (including requirements that the financial holding company and its depository institution subsidiary maintain their status as "well capitalized" and "well managed").

Generally, FRB approval is not required for the Company to acquire a company (other than a bank holding company, bank or savings association) engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the FRB.  Prior notice to the FRB may be required, however, if the company to be acquired has total consolidated assets of $10 billion or more.  Prior FRB approval is required before the Company may acquire the beneficial ownership or control of more than 5% of the voting shares or substantially all of the assets of a bank holding company, bank or savings association.

Because the Company is a financial holding company, if the Bank were to receive a rating under the Community Reinvestment Act of 1977, as amended ("CRA"), of less than Satisfactory, the Company will be prohibited, until the rating is raised to Satisfactory or better, from engaging in new activities or acquiring companies other than bank holding companies, banks or savings associations, except that the Company could engage in new activities, or acquire companies engaged in activities, that are considered "closely related to banking" under the BHC Act.  In addition, if the FRB determines that the Company or the Bank is not well capitalized or well managed, the Company would be required to enter into an agreement with the FRB to comply with all applicable capital and management requirements and may contain additional limitations or conditions.  Until corrected, the Company could be prohibited from engaging in any new activity or acquiring companies engaged in activities that are not closely related to banking, absent prior FRB approval.

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Federal Reserve System Regulation
Because the Company is a bank holding company, it is subject to regulatory capital requirements and required by the FRB to, among other things, maintain cash reserves against its deposits.  The Bank is under similar capital requirements administered by the OCC as discussed below.  FRB policy has historically required a bank holding company to act as a source of financial and managerial strength to its subsidiary banks.  The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act") codifies this historical policy as a statutory requirement.  To the extent the Bank is in need of capital, the Company could be expected to provide additional capital, including borrowings from the FRB for such purpose.  Both the Company and the Bank are subject to extensive supervision and regulation, which focus on, among other things, the protection of depositors' funds.

The FRB also regulates the national supply of bank credit in order to influence general economic conditions.  These policies have a significant influence on overall growth and distribution of loans, investments and deposits, and affect the interest rates charged on loans or paid for deposits.

Fluctuations in interest rates, which may result from government fiscal policies and the monetary policies of the FRB, have a strong impact on the income derived from loans and securities, and interest paid on deposits and borrowings.  While the Company and the Bank strive to model various interest rate changes and adjust our strategies for such changes, the level of earnings can be materially affected by economic circumstances beyond our control.

The Office of Comptroller of the Currency Regulation
The Bank is supervised and regularly examined by the OCC.  The various laws and regulations administered by the OCC affect the Company's practices such as payment of dividends, incurring debt, and acquisition of financial institutions and other companies.  It also affects the Bank's business practices, such as payment of interest on deposits, the charging of interest on loans, types of business conducted and the location of its offices.  The OCC generally prohibits a depository institution from making any capital distributions, including the payment of a dividend, or paying any management fee to its parent holding company if the depository institution would become undercapitalized due to the payment.  Undercapitalized institutions are subject to growth limitations and are required to submit a capital restoration plan to the OCC.  The Bank is well capitalized under regulatory standards administered by the OCC.  For additional information on our capital requirements see "Management's Discussion and Analysis of Financial Condition and Results of Operations – Shareholders' Equity" and Note P to the Financial Statements.

Federal Home Loan Bank
The Bank is a member of the FHLB, which provides a central credit facility primarily for member institutions for home mortgage and neighborhood lending.  The Bank is subject to the rules and requirements of the FHLB, including the purchase of shares of FHLB activity-based stock in the amount of 4.5% of the dollar amount of outstanding advances and FHLB capital stock in an amount equal to the greater of $1,000 or the sum of 0.15% of the mortgage-related assets held by the Bank based upon the previous year-end financial information.  The Bank was in compliance with the rules and requirements of the FHLB at December 31, 2016.

Deposit Insurance
Deposits of the Bank are insured up to the applicable limits by the Deposit Insurance Fund ("DIF") and are subject to deposit insurance assessments to maintain the DIF.  The Dodd-Frank Act permanently increased the maximum amount of deposit insurance to $250,000 per deposit category, per depositor, per institution.  A depository institution's DIF assessment is calculated by multiplying its assessment rate by the assessment base, which is defined as the average consolidated total assets less the average tangible equity of the depository institution.  The initial base assessment rate is based on its capital level and supervisory ratings (its "CAMELS ratings"), certain financial measures to assess an institution's ability to withstand asset related stress and funding related stress and, in some cases, additional discretionary adjustments by the FDIC to reflect additional risk factors.

In October 2010, the FDIC adopted a DIF restoration plan to ensure that the fund reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Act.  At least semi-annually, the FDIC will update its loss and income projections for the fund and, if needed, will increase or decrease assessment rates, following notice-and-comment rulemaking if required.  On June 30, 2016, the fund reserve ratio reached 1.15% and the assessment rate schedule was lowered.  FDIC insurance expense totaled $3.7 million, $4.0 million and $3.9 million in 2016, 2015 and 2014, respectively.
 
Under the Federal Deposit Insurance Act, if the FDIC finds that an institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC, the FDIC may determine that such violation or unsafe or unsound practice or condition require the termination of deposit insurance.

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Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
On July 21, 2010, the Dodd-Frank Act was signed into law, which resulted in significant changes to the banking industry.  The provisions that have received the most public attention have been those that apply to financial institutions larger than the Company; however, the Dodd-Frank Act does contain numerous other provisions that affect all banks and bank holding companies and impacts how the Company and the Bank handle their operations.  The Dodd-Frank Act requires various federal agencies, including those that regulate the Company and the Bank, to promulgate new rules and regulations and to conduct various studies and reports for Congress.  The federal agencies have either completed or are in the process of completing these rules and regulations and have been given significant discretion in drafting such rules and regulations.  Several of the provisions of the Dodd-Frank Act may have the consequence of increasing the Bank's expenses, decreasing its revenues, and changing the activities in which it chooses to engage.  The specific impact of the Dodd-Frank Act on the Company's current activities or new financial activities the Company may consider in the future, the Company's financial performance, and the markets in which the Company operates depends on the manner in which the relevant agencies continue to develop and implement the required rules and regulations and the reaction of market participants to these regulatory developments.

Pursuant to FRB regulations mandated by the Dodd-Frank Act, effective October 1, 2011, interchange fees on debit card transactions are limited to a maximum of $0.21 per transaction plus 5 basis points of the transaction amount.  A debit card issuer may recover an additional one cent per transaction for fraud prevention purposes if the issuer complies with certain fraud-related requirements prescribed by the FRB.  Currently, the Company is exempt from the interchange fee cap under the "small issuer" exemption, which applies to any debit card issuer with total worldwide assets (including those of its affiliates) of less than $10 billion as of the end of the previous calendar year.  In the event the Company's assets reach $10 billion or more, it will become subject to the interchange fee limitations beginning July 1 of the following year, and the fees the Company may receive for an electronic debit transaction will be capped at the statutory limit.  The FRB also adopted requirements in the final rule that issuers include two unaffiliated networks for routing debit transactions that are applicable to the Company and the Bank.

The final rules issued by the FRB, SEC, OCC, FDIC, and Commodity Futures Trading Commission implementing Section 619 of the Dodd-Frank Act (commonly known as the Volcker Rule) prohibit insured depository institutions and companies affiliated with insured depository institutions from engaging in short-term proprietary trading of certain securities, derivatives, commodity futures and options on these instruments, for their own account.  The final rules also impose limits on banking entities' investments in, and other relationships with, hedge funds or private equity funds.  Banking entities with less than $10 billion in total consolidated assets, which generally have very little or no involvement in prohibited proprietary trading or investment activities in covered funds, do not have any compliance obligations under the final rule if they do not engage in any covered activities other than trading in certain government, agency, State or municipal obligations.

The CFPB rules implementing Section 1073 of the Dodd-Frank Act create a comprehensive new system of consumer protections for remittance transfers sent by consumers in the United States to individuals and businesses in foreign countries.  The amendments provide new protections, including disclosure requirements, and error resolution and cancellation rights, to consumers who send remittance transfers to other consumers or businesses in a foreign country.  The Bank has adopted policies and procedures to comply with the final foreign remittance transfer rules.

The scope and impact of many of the Dodd-Frank Act's provisions will continue to be determined over time, including as final regulations are issued and become effective.  As a result, the Company cannot predict the ultimate impact of the Dodd-Frank Act on the Company or the Bank at this time, including the extent to which it could increase costs or limit the Company's ability to pursue business opportunities in an efficient manner, or otherwise adversely affect its business, financial condition and results of operations.  Nor can the Company predict the impact or substance of other future legislation or regulation.  However, it is expected that they at a minimum will increase the Company's and the Bank's operating and compliance costs.  As rules and regulations continue to be implemented or issued, the Company may need to dedicate additional resources to ensure compliance, which may increase its costs of operations and adversely impact its earnings.

Capital Requirements
The Company and the Bank are required to comply with applicable capital adequacy standards established by the federal banking agencies.  The risk-based capital standards that were applicable to the Company and the Bank through December 31, 2014 were based on the 1988 Capital Accord, known as Basel I ("Basel I"), of the Basel Committee on Banking Supervision (the "Basel Committee").  However, in July 2013, the FRB, the OCC and the FDIC approved final rules (the "New Capital Rules") establishing a new comprehensive capital framework for U.S. banking organizations.  These rules went into effect for the Company and the Bank on January 1, 2015, subject to phase-in periods for certain components.
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The New Capital Rules implement the Basel Committee's December 2010 capital framework (known as "Basel III") for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act.  The New Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions, including the Company and the Bank, compared to the previous U. S. Basel I risk-based capital rules.  The New Capital Rules define the components of capital and address other issues affecting the numerator in banking institutions regulatory capital ratios and replace the Basel I risk-weighting approach, with a more risk-sensitive one based, in part, on the standardized approach set forth in "Basel II".  The New Capital Rules also implement the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the Federal banking agencies' rules.

The New Capital Rules, among other things: (i) introduces as a new capital measure "Common Equity Tier 1," ("CET1"), (ii) specify that Tier 1 capital consists of CET1 and "Additional Tier 1 capital" instruments meeting specified revised requirements, (iii) defines CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital, and (iv) expands the scope of the deductions from and adjustments to capital as compared to existing regulations.  Under the New Capital Rules, the most common form of Additional Tier 1 capital is non-cumulative perpetual preferred stock, and the most common form of Tier 2 capital is subordinated notes and a portion of the allowance for loan and lease losses, in each case, subject to the New Capital Rules specific requirements.

Under the New Capital Rules, the minimum capital ratios as of January 1, 2015 are as follows:
·
4.5% CET1 to total risk-weighted assets;
·
6.0% Tier 1 capital (CET1 plus Additional Tier 1 capital) to total risk-weighted assets;
·
8.0% Total capital (Tier 1 Capital plus Tier 2 capital) to total risk-weighted assets;
·
4.0% Tier 1 capital to total adjusted quarterly average assets (known as "leverage ratio")

Beginning in 2016, the New Capital Rules required the Company and the Bank to maintain a "capital conservation buffer" composed entirely of CET1. When it is fully phased-in by the beginning of 2019, banking organizations will be required to maintain a minimum capital conservation buffer of 2.5% (CET1 to Total risk-weighted assets), in addition to the minimum risk-based capital ratios. Therefore, to satisfy both the minimum risk-based capital ratios and the capital conservation buffer, a banking organization will be required to maintain the following: (i) CET1 to total risk-weighted assets of at least 7%, (ii) Tier 1 capital to total risk-weighted assets of at least 8.5%, and (iii) Total capital (Tier 1 capital plus Tier 2 capital) to total risk-weighted assets of at least 10.5% by January 1, 2019, upon full phase-in of the capital conservation buffer. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions that do not maintain a capital conservation buffer of 2.5% or more will face constraints on dividends, common share repurchases and incentive compensation based on the amount of the shortfall.

The New Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Under the general Basel I risk based capital rules, the effects of accumulated other comprehensive income or loss items included in shareholders' equity (for example, marks-to-market of securities held in the available for sale portfolio) were reversed for the purposes of determining regulatory capital. Under the New Capital Rules, the effects of certain accumulated other comprehensive income or loss items are not excluded; however, banks not using the advanced approaches, including the Company and the Bank, were permitted to, and in the case of the Company and the Bank they did, make a one-time permanent election to continue to exclude these items.

Consistent with the section 171 of the Dodd-Frank Act, the New Capital Rules allow certain bank holding companies to include certain hybrid securities, such as trust preferred securities, in Tier 1 capital if they had less than $15 billion in assets as of December 31, 2009 and the securities were issued before May 19, 2010.  Accordingly, the trust preferred securities classified as long-term debt on the Company's balance sheet will be included as Tier 1 capital while they are outstanding, unless the Company completes an acquisition of a depository institution holding company that did not meet this criteria, or are acquired by such an organization, after January 1, 2014, at which time they would be subject to the stated phase-out requirements of the New Capital Rules and would be included as Tier 2 capital.

Implementation of the deductions and other adjustments to CET1 began on January 1, 2015 and will be phased-in over a 4-year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter). The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019).
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With respect to the Bank, the New Capital Rules also revise the prompt corrective action ("PCA") regulations established pursuant to Section 38 of the Federal Deposit Insurance Act, by (i) introducing a CET1 ratio requirement for each capital category other than critically undercapitalized, with the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each capital category, with the minimum Tier 1 capital ratio for well-capitalized status being 8.0% (as compared to the current 6.0%); and (iii) eliminating the current provision that allows certain highly-rated banking organizations to maintain a 3.0% leverage ratio and still be adequately capitalized. The New Capital Rules do not change the Total risk-based PCA capital requirement for any capital category.

The New Capital Rules prescribe a new standardized approach for risk weighted-assets that expands the risk-weight categories from the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories, depending on the nature of the asset. The new risk-weight categories generally range from 0% for U.S. government and agency securities, to 1,250% for certain securitized exposures, and result in higher risk weights for a variety of asset categories. The standardized approach requires financial institutions to transition assets that are 90 days or more past due or on nonaccrual from their original risk weight to 150 percent.  Additionally, loans designated as high volatility commercial real estate ("HVCRE") are assigned a risk-weighting of 150 percent.

Requirements to maintain higher levels of capital or to maintain higher levels of liquid assets could adversely impact the Company's net income and return on equity. The current requirements and the Company's actual capital levels are detailed in Note P of "Notes to Consolidated Financial Statements" filed in Part II, Item 8, "Financial Statements and Supplementary Data."

Consumer Protection Laws
In connection with its banking activities, the Bank is subject to a number of federal and state laws designed to protect borrowers and promote lending to various sectors of the economy.  These laws include the Equal Credit Opportunity Act, GLB Act, the Fair Credit Reporting Act ("FCRA"), the Fair and Accurate Credit Transactions Act of 2003 ("FACT Act"), Electronic Funds Transfer Act, the Truth in Lending Act, the Home Mortgage Disclosure Act, the Dodd-Frank Act, the Real Estate Settlement Procedures Act, the Secure and Fair Enforcement for Mortgage Licensing Act ("SAFE"), and various state law counterparts.

The Dodd-Frank Act created the CFPB with broad powers to supervise and enforce consumer protection laws, including laws that apply to banks in order to prohibit unfair, deceptive or abusive practices.  The CFPB has examination authority over all banks and savings institutions with more than $10 billion in assets.  Until the Company exceeds this threshold, the OCC continues to exercise primary examination authority over the Bank with regard to compliance with federal consumer protection laws and regulations.  The Dodd-Frank Act weakens the federal preemption rules that have been applicable to national banks and gives attorney generals for the states certain powers to enforce federal consumer protection laws.  Further, under the Dodd-Frank Act, it is unlawful for any provider of consumer financial products or services to engage in any unfair, deceptive, or abusive acts or practice ("UDAAP").  A violation of the consumer protection and privacy laws, and in particular UDAAP, could have serious legal, financial, and reputational consequences.

In addition, the GLB Act requires all financial institutions to adopt privacy policies, restrict the sharing of nonpublic customer data with nonaffiliated parties and establishes procedures and practices to protect customer data from unauthorized access.  In addition, the FCRA, as amended by the FACT Act, includes provisions affecting the Company, the Bank, and their affiliates, including provisions concerning obtaining consumer reports, furnishing information to consumer reporting agencies, maintaining a program to prevent identity theft, sharing of certain information among affiliated companies, and other provisions.  The FACT Act requires persons subject to FCRA to notify their customers if they report negative information about them to a credit bureau or if they are granted credit on terms less favorable than those generally available.  The FRB and the Federal Trade Commission have extensive rulemaking authority under the FACT Act, and the Company and the Bank are subject to the rules that have been created under the FACT Act, including rules regarding limitations on affiliate marketing and implementation of programs to identify, detect and mitigate certain identity theft red flags.  The Bank is also subject to data security standards and data breach notice requirements issued by the OCC and other regulatory agencies.  The Bank has created policies and procedures to comply with these consumer protection requirements.

The CFPB issued the final rules implementing the ability-to-repay and qualified mortgage (QM) provisions of the Truth in Lending Act, as amended by the Dodd-Frank Act (the "QM Rule").  The ability-to-repay provision requires creditors to make reasonable, good faith determinations that borrowers are able to repay their mortgages before extending the credit based on a number of factors and consideration of financial information about the borrower derived from reasonably reliable third-party documents. Under the Dodd-Frank Act and the QM Rule, loans meeting the definition of "qualified mortgage" are entitled to a presumption that the lender satisfied the ability-to-repay requirements.  The presumption is a conclusive presumption/safe harbor for loans meeting the QM requirements, and a rebuttable presumption for higher-priced loans meeting the QM requirements.  The definition of a "qualified mortgage" incorporates the statutory requirements, such as not allowing negative amortization or terms longer than 30 years. The QM Rule also adds an explicit maximum 43% debt-to-income ratio for borrowers if the loan is to meet the QM definition, though some mortgages that meet government-sponsored enterprises, Federal Housing Administration, and Veterans Administration underwriting guidelines may, for a period not to exceed seven years, meet the QM definition without being subject to the 43% debt-to-income limits.  The Bank has created policies and procedures to comply with these consumer protection requirements.
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USA Patriot Act
The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 ("USA Patriot Act") imposes obligations on U.S. financial institutions, including banks and broker-dealer subsidiaries, to implement policies, procedures and controls which are reasonably designed to detect and report instances of money laundering and the financing of terrorism.  In addition, provisions of the USA Patriot Act require the federal financial institution regulatory agencies to consider the effectiveness of a financial institution's anti-money laundering activities when reviewing bank mergers and bank holding company acquisitions.  The USA Patriot Act also encourages information-sharing among financial institutions, regulators, and law enforcement authorities by providing an exemption from the privacy provisions of the GLB Act for financial institutions that comply with the provision of the Act.  Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal, financial and reputational consequences for the institution.  The Company has approved policies and procedures that are designed to comply with the USA Patriot Act and its regulations.

Office of Foreign Assets Control Regulation
The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others administrated by the Treasury's Office of Foreign Assets Control ("OFAC").  The OFAC administered sanctions can take many different forms; however, they generally contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, entity or individual, including prohibitions against direct or indirect imports and exports and prohibitions on "U.S. persons" engaging in financial transactions relating to making investments, or providing investment related advice or assistance; and (ii) a blocking of assets in which the government or specially designated nationals have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons).  Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC.  Failure to comply with these sanctions could have serious legal, financial, and reputational consequences.

Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act") implemented a broad range of corporate governance, accounting and reporting reforms for companies that have securities registered under the Securities Exchange Act of 1934, as amended.  In particular, the Sarbanes-Oxley Act established, among other things: (i) new requirements for audit and other key Board of Directors committees involving independence, expertise levels, and specified responsibilities; (ii) additional responsibilities regarding the oversight of financial statements by the Chief Executive Officer and Chief Financial Officer of the reporting company; (iii) the creation of an independent accounting oversight board for the accounting industry; (iv) new standards for auditors and the regulation of audits, including independence provisions which restrict non-audit services that accountants may provide to their audit clients; (v) increased disclosure and reporting obligations for the reporting company and its directors and executive officers including accelerated reporting of company stock transactions; (vi) a prohibition of personal loans to directors and officers, except certain loans made by insured financial institutions on non-preferential terms and in compliance with other bank regulator requirements; and (vii) a range of new and increased civil and criminal penalties for fraud and other violations of the securities laws.

Electronic Fund Transfer Act
A federal banking rule under the Electronic Fund Transfer Act prohibits financial institutions from charging consumers fees for paying overdrafts on automated teller machines and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions.  The new rule does not govern overdraft fees on the payment of checks and certain other forms of bill payments.

Community Reinvestment Act of 1977
Under the Community Reinvestment Act of 1977 ("CRA"), the Bank is required to help meet the credit needs of its communities, including low- and moderate-income neighborhoods.  Although the Bank must follow the requirements of CRA, it does not limit the Bank's discretion to develop products and services that are suitable for a particular community or establish lending requirements or programs.  In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibits discrimination in lending practices.  The Bank's failure to comply with the provisions of the CRA could, at a minimum, result in regulatory restrictions on its activities and the activities of the Company.  The Bank's failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions against it by its regulators as well as other federal regulatory agencies and the Department of Justice.  The Bank's latest CRA rating was "Satisfactory".

The Bank Secrecy Act
The Bank Secrecy Act ("BSA") requires all financial institutions, including banks and securities broker-dealers, to, among other things, establish a risk-based system of internal controls reasonably designed to prevent money laundering and the financing of terrorism.  The BSA includes a variety of recordkeeping and reporting requirements (such as cash and suspicious activity reporting), as well as due diligence/know-your-customer documentation requirements.  The Company has established an anti-money laundering program and taken other appropriate measures in order to comply with BSA requirements.
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Item 1A. Risk Factors

There are risks inherent in the Company's business.  The material risks and uncertainties that management believes affect the Company are described below.  Adverse experience with these could have a material impact on the Company's financial condition and results of operations.

Changes in interest rates affect our profitability, assets and liabilities.

The Company's income and cash flow depends to a great extent on the difference between the interest earned on loans and investment securities, and the interest paid on deposits and borrowings.  Interest rates are highly sensitive to many factors that are beyond the Company's control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the FRB.  Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings, but such changes could also affect (1) our ability to originate loans and obtain deposits, which could reduce the amount of fee income generated, (2) the fair value of our financial assets and liabilities and (3) the average duration of the Company's various categories of earning assets.  If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income could be adversely affected, which in turn could negatively affect our earnings.  Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.  Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on the results of operations, any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on the financial condition and results of operations.

The Company operates in a highly regulated environment and may be adversely affected by changes in laws and regulations or the interpretation and examination of existing laws and regulations.

The Company and its subsidiaries are subject to extensive state and federal regulation, supervision and legislation that govern nearly every aspect of its operations.  The Company, as a bank holding company, is subject to regulation by the FRB and its banking subsidiary is subject to regulation by the OCC.  These regulations affect deposit and lending practices, capital levels and structure, investment practices, dividend policy and growth.  In addition, the non-bank subsidiaries are engaged in providing retirement plan administration, investment management and insurance brokerage services, which industries are also heavily regulated at both a state and federal level.  Such regulators govern the activities in which the Company and its subsidiaries may engage.  These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of a bank, the classification of assets by a bank and the adequacy of a bank's allowance for loan losses.  Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation, interpretation or application, could have a material impact on the Company and its operations.  Changes to the regulatory laws governing these businesses could affect the Company's ability to deliver or expand its services and adversely impact its operating and financial condition.

For example, the Dodd-Frank Act, enacted in July 2010, instituted major changes to the banking and financial institutions regulatory regimes based upon the performance of, and ultimate government intervention in, the financial services sector.  To date, not all the rules required or expected to be implemented under the Dodd-Frank Act have been adopted and many of the rules that have been adopted are subject to interpretation or clarification.  The implications of the Dodd-Frank Act for the Company's businesses continue to depend to a large extent on the implementation of the legislation by the FRB and other agencies as well as how market practices and structures change in response to the requirements of the Dodd-Frank Act.  All of these changes in regulations could subject the Company, among other things, to additional costs and limit the types of financial services and products it can offer and/or increase the ability of non-banks to offer competing financial services and products.

The Company is also directly subject to the requirements of entities that set and interpret the accounting standards such as the Financial Accounting Standards Board, and indirectly subject to the actions and interpretations of the Public Company Accounting Oversight Board, which establishes auditing and related professional practice standards for registered public accounting firms and inspects registered firms to assess their compliance with certain laws, rules, and professional standards in public company audits.  These regulations, along with the currently existing tax, accounting, securities, insurance, and monetary laws, regulations, rules, standards, policies and interpretations, control the methods by which financial institutions and their holding companies conduct business, engage in strategic and tax planning, implement strategic initiatives, and govern financial reporting.

The Company's failure to comply with laws, regulations or policies could result in civil or criminal sanctions and money penalties by state and federal agencies, and/or reputation damage, which could have a material adverse effect on the Company's business, financial condition and results of operations.  See "Supervision and Regulation" for more information about the regulations to which the Company is subject.
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If the Company's total consolidated assets were to reach $10 billion, it would become subject to additional regulation and increased supervision.

The Dodd-Frank Act imposes additional regulatory requirement on institutions with $10 billion or more in assets.  The Company had $8.7 billion in assets as of December 31, 2016.  The pending merger with Merchants will result in the Company having assets of $10 billion or more and will subject the Company to the following: (1) supervision, examination and enforcement by the CFPB with respect to consumer financial protection laws, (2) regulatory stress testing requirements, whereby the Company would be required to conduct an annual stress test using assumptions for baseline, adverse and severely adverse scenarios, (3) a modified methodology for calculating FDIC insurance assessments and potentially higher assessment rates as a result of institutions with $10 billion or more in assets being required to bear a greater portion of the cost of raising the reserve ratio to 1.35% as required by the Dodd-Frank Act, (4) limitations on interchange fees for debit card transactions, (5) heightened compliance standards under the Volcker Rule, and (6) enhanced supervision as a larger financial institution.  The imposition of these regulatory requirements and increased supervision may require additional commitment of financial resources to regulatory compliance and may increase the Company's cost of operations.  Further, the results of the stress testing process may lead the Company to retain additional capital or alter the mix of its capital components.

To ensure compliance with these heightened requirements when effective, the Company's regulators may require it to fully comply with these requirements or take actions to prepare for compliance even before the Company's or the Bank's total consolidated assets equal or exceed $10 billion.  As a result, the Company may incur compliance-related costs before it might otherwise be required, including if the Company does not continue to grow at the rate it expects or at all.  The Company's regulators may also consider its preparation for compliance with these regulatory requirements when examining its operations generally or considering any request for regulatory approval the Company may make, even requests for approvals on unrelated matters.

The Company may be subject to more stringent capital requirements.

As discussed above, Basel III and the Dodd-Frank Act require the federal banking agencies to establish stricter risk-based capital requirements and leverage limits for banks and bank holding companies.  Under the legislation, the federal banking agencies are required to develop capital requirements that address systemically-risky activities.  The capital rules must address, at a minimum, risks arising from significant volumes of activity in derivatives, securities products, financial guarantees, securities borrowing and lending and repurchase agreements; concentrations in assets for which reported values are based on models; and concentrations in market share for any activity that would substantially disrupt financial markets if the institutions were forced to unexpectedly cease the activity.  These requirements, and any other new regulations, could adversely affect the Company's ability to pay dividends, or could require it to reduce business levels or to raise capital, including in ways that may adversely affect its results of operations or financial condition.

Regional economic factors may have an adverse impact on the Company's business.

The Company's main markets are located in the states of New York and Pennsylvania.  Most of the Company's customers are individuals and small and medium-sized businesses which are dependent upon the regional economy.  Accordingly, the local economic conditions in these areas have a significant impact on the demand for the Company's products and services as well as the ability of the Company's customers to repay loans, the value of the collateral securing loans and the stability of the Company's deposit funding sources.  A prolonged economic downturn in these markets could negatively impact the Company.

The Company is subject to a variety of operational risks, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, which may adversely affect the Company's business and results of operations.

The Company is exposed to many types of operational risks, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, unauthorized transactions by employees, or operational errors, including clerical or record keeping errors or those resulting from faulty or disabled computer or telecommunications systems or disclosure of confidential proprietary information of its customers.  Negative public opinion can result from actual or alleged conduct in any number of activities, including lending practices, sales practices, customer treatment, corporate governance and acquisitions and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect the Company's ability to attract and keep customers and can expose the Company to litigation and regulatory action. Actual or alleged conduct by the Company can result in negative public opinion about its business.

If personal, nonpublic, confidential, or proprietary information of customers in the Company's possession were to be mishandled or misused, the Company could suffer significant regulatory consequences, reputational damage, and financial loss. Such mishandling or misuse could include, for example, if such information were erroneously provided to parties who are not permitted to have the information, either by fault of its systems, employees, or counterparties, or where such information is intercepted or otherwise inappropriately taken by third parties.
14


Because the nature of the financial services business involves a high volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully rectified. The Company's necessary dependence upon automated systems to record and process transactions and the large transaction volumes may further increase the risk that technical flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect.  The Company also may be subject to disruptions of our operating systems arising from events that are wholly or partially beyond its control (for example, computer viruses or electrical or telecommunications outages), which may give rise to disruption of service to customers and to financial loss or liability. The Company is further exposed to the risk that external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees) and to the risk that business continuity and data security systems prove to be inadequate. The occurrence of any of these risks could result in a diminished ability to operate the Company's business, potential liability to clients, reputational damage, and regulatory intervention, which could adversely affect our business, financial condition, and results of operations, perhaps materially.

The financial services industry is highly competitive and creates competitive pressures that could adversely affect the Company's revenue and profitability.

The financial services industry in which the Company operates is highly competitive.  The Company competes not only with commercial and other banks and thrifts, but also with insurance companies, mutual funds, hedge funds, securities brokerage firms and other companies offering financial services in the U.S., globally and over the Internet.  The Company competes on the basis of several factors, including capital, access to capital, revenue generation, products, services, transaction execution, innovation, reputation and price.  Over time, certain sectors of the financial services industry have become more concentrated, as institutions involved in a broad range of financial services have been acquired by or merged into other firms.  These developments could result in the Company's competitors gaining greater capital and other resources, such as a broader range of products and services and geographic diversity.  The Company may experience pricing pressures as a result of these factors and as some of its competitors seek to increase market share by reducing prices or paying higher rates of interest on deposits.  Finally, technological change is influencing how individuals and firms conduct their financial affairs and changing the delivery channels for financial services, with the result that the Company may have to contend with a broader range of competitors including many that are not located within the geographic footprint of its banking office network.

Conditions in the insurance market could adversely affect the Company's earnings.

Revenue from insurance fees and commissions could be negatively affected by fluctuating premiums in the insurance markets or other factors beyond the Company's control.  Other factors that affect insurance revenue are the profitability and growth of the Company's clients, the renewal rate of the current insurance policies, continued development of new product and services as well as access to new markets.  The Company's insurance revenues and profitability may also be adversely affected by new laws and regulatory developments impacting the healthcare and insurance markets.

Changes in employee benefit regulations may reduce our profitability.

The Company provides products and services to certain employee benefit plans that are subject to ERISA or the Internal Revenue Code of 1986, as amended.  The U.S. Congress has, from time to time, considered legislation relating to changes in ERISA to permit application of state law remedies, such as consequential and punitive damages, in lawsuits for wrongful denial of benefits, which, if adopted, could increase our liability for damages in future litigation.  In addition, reductions in contribution levels to defined contribution plans may decrease our profitability.

In April 2016, the Department of Labor ("DOL") released its final fiduciary definition regulation package, which was scheduled to be phased in April 10, 2017 to January 1, 2018.  However, on February 3, 2017 a memorandum was issued that will most likely delay the rules implementation by 180 days.  The regulation broadens the definition of a fiduciary under ERISA to include persons providing investment advice to an employee benefit plan or an IRA for a fee or other compensation.  The DOL also released two new prohibited transaction class exemptions and amendments to current prohibited transaction exemptions.  Broker-dealers and advisors are in various stages of determining the implications of the regulations and changes to the regulations on their business models.  Even with this fluid environment, our preliminary assessment of the new regulation's impact to our business and future financial results indicates the costs will not have a significant effect on our financial condition or results of operations.  As the rules become applicable and are operationalized, we will assess what business impacts need to be addressed and how they affect the organization.

15


The allowance for loan losses may be insufficient.

The Company's business depends on the creditworthiness of its customers.  The Company reviews the allowance for loan losses quarterly for adequacy considering economic conditions and trends, collateral values and credit quality indicators, including past charge-off experience and levels of past due loans and nonperforming assets.  If the Company's assumptions prove to be incorrect, the Company's allowance for loan losses may not be sufficient to cover losses inherent in the Company's loan portfolio, resulting in additions to the allowance.  Material additions to the allowance would materially decrease its net income.  It is possible that over time the allowance for loan losses will be inadequate to cover credit losses in the portfolio because of unanticipated adverse changes in the economy, market conditions or events adversely affecting specific customers, industries or markets.

Changes in the equity markets could materially affect the level of assets under management and the demand for other fee-based services.

Economic downturns could affect the volume of income from and demand for fee-based services.  Revenue from the wealth management and benefit plan administration businesses depends in large part on the level of assets under management and administration.  Market volatility, and the potential to lead customers to liquidate investments, as well as lower asset values, can reduce the level of assets under management and administration and thereby decrease the Company's investment management and administration revenues.

Mortgage banking income may experience significant volatility.

Mortgage banking income is highly influenced by the level and direction of mortgage interest rates, and real estate and refinancing activity.  In lower interest rate environments, the demand for mortgage loans and refinancing activity will tend to increase.  This has the effect of increasing fee income, but could adversely impact the estimated fair value of the Company's mortgage servicing rights as the rate of loan prepayments increase.  In higher interest rate environments, the demand for mortgage loans and refinancing activity will generally be lower.  This has the effect of decreasing fee income opportunities.

The Company depends on dividends from its banking subsidiary for cash revenues, but those dividends are subject to restrictions.

The ability of the Company to satisfy its obligations and pay cash dividends to its shareholders is primarily dependent on the earnings of and dividends from the subsidiary bank.  However, payment of dividends by the bank subsidiary is limited by dividend restrictions and capital requirements imposed by bank regulations.  The ability to pay dividends is also subject to the continued payment of interest that the Company owes on its subordinated junior debentures.  As of December 31, 2016, the Company had $102 million of subordinated junior debentures outstanding.  The Company has the right to defer payment of interest on the subordinated junior debentures for a period not exceeding 20 quarters, although the Company has not done so to date.  If the Company defers interest payments on the subordinated junior debentures, it will be prohibited, subject to certain exceptions, from paying cash dividends on the common stock until all deferred interest has been paid and interest payments on the subordinated junior debentures resumes.

Risks related to the Company's proposed merger with Merchants.

The Company and Merchants have operated and, until the completion of the merger, will continue to operate, independently.  The success of the merger, including anticipated benefits and cost savings, will depend, in part, on the Company's and Merchants' ability to successfully combine and integrate the businesses of the Company and Merchants in a manner that permits growth opportunities and does not materially disrupt the existing customer relations or result in decreased revenues due to loss of customers.  It is possible that the integration process could result in the loss of key employees, the disruption of either entity's ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the combined entity's ability to maintain relationships with customers, depositors, clients and employees or to achieve the anticipated benefits and cost savings of the merger.  If the combined company experiences difficulties with the integration process, the anticipated benefits of the merger may not be realized fully or at all, or may take longer to realize than expected.

The Company has incurred, and will continue to incur, substantial expenses in connection with the negotiation and completion of the transaction contemplated by the merger agreement with Merchants.  If the merger is not completed, the Company would have to recognize these expenses without realizing the expected benefits of the merger.  These circumstances could have an adverse effect on the Company's business, results of operations and stock price.

16


Before the merger may be completed, the Company must obtain approval from the OCC and the FRB.  Other approvals, waivers or consents from regulators may also be required.  These regulators may impose conditions on the completion of the merger or require changes to the terms of the merger.  Although the Company and Merchants do not currently expect that any such conditions or changes would be imposed, there can be no assurance that they will not be, and such conditions or changes could have the effect of delaying or preventing completion of the merger or imposing additional costs on or limiting the revenues of the combined company following the merger, any of which might have an adverse effect on the combined company following the merger.

Before the merger may be completed, Merchants must obtain the requisite approval of its stockholders.  There is no assurance that this approval will be obtained.

The risks presented by acquisitions could adversely affect the Company's financial condition and result of operations.

The business strategy of the Company includes growth through acquisition.  Any other future acquisitions will be accompanied by the risks commonly encountered in acquisitions.  These risks include among other things: obtaining timely regulatory approval, the difficulty of integrating operations and personnel, the potential disruption of our ongoing business, the inability of the Company's management to maximize its financial and strategic position, the inability to maintain uniform standards, controls, procedures and policies, and the impairment of relationships with employees and customers as a result of changes in ownership and management.  Further, the asset quality or other financial characteristics of a company may deteriorate after the acquisition agreement is signed or after the acquisition closes.

A portion of the Company's loan portfolio is acquired and was not underwritten by the Company at origination.

At December 31, 2016, 10% of the loan portfolio was acquired and was not underwritten by the Company at origination, and therefore is not necessarily reflective of the Company's historical credit risk experience. The Company performed extensive credit due diligence prior to each acquisition and marked the loans to fair value upon acquisition, with such fair valuation considering expected credit losses that existed at the time of acquisition. Additionally, the Company evaluates the expected cash flows of these loans on a quarterly basis. However, there is a risk that credit losses could be larger than currently anticipated, thus adversely affecting earnings.

The Company may be required to record impairment charges related to goodwill, other intangible assets and the investment portfolio.

The Company may be required to record impairment charges in respect to goodwill, other intangible assets and the investment portfolio.  Numerous factors, including lack of liquidity for resale of certain investment securities, absence of reliable pricing information for investment securities, the economic condition of state and local municipalities, adverse changes in the business climate, adverse actions by regulators, unanticipated changes in the competitive environment or a decision to change the operations or dispose of an operating unit could have a negative effect on the investment portfolio, goodwill or other intangible assets in future periods.

The Company's financial statements are based, in part, on assumptions and estimates, which, if conditions change, could cause unexpected losses in the future.

Pursuant to accounting principles generally accepted in the United States, the Company is required to use certain assumptions and estimates in preparing its financial statements, including in determining credit loss reserves, mortgage repurchase liability and reserves related to litigation, among other items.  Certain of the Company's financial instruments, including available-for-sale securities and certain loans, among other items, require a determination of their fair value in order to prepare the Company's financial statements.  Where quoted market prices are not available, the Company may make fair value determinations based on internally developed models or other means which ultimately rely to some degree on management judgment.  Some of these and other assets and liabilities may have no direct observable price levels, making their valuation particularly subjective, as they are based on significant estimation and judgment.  In addition, sudden illiquidity in markets or declines in prices of certain loans and securities may make it more difficult to value certain balance sheet items, which may lead to the possibility that such valuations will be subject to further change or adjustment.  If assumptions or estimates underlying the Company's financial statements are incorrect, it may experience material losses.

17


Financial services companies depend on the accuracy and completeness of information about customers and counterparties.

In deciding whether to extend credit or enter into other transactions, the Company may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports and other financial information. The Company may also rely on representations of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports or other information could have a material adverse impact on business and, in turn, the Company's financial condition and results of operations.

The Company's information systems may experience an interruption or security breach.

The Company relies heavily on communications and information systems to conduct its business.  The Company may be the subject of sophisticated and targeted attacks intended to obtain unauthorized access to assets or confidential information, destroy data, disable or degrade service, or sabotage systems, often through the introduction of computer viruses or malware, cyber-attacks and other means.  Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Company's online banking system, its general ledger, and its deposit and loan servicing and origination systems or other systems.  Furthermore, if personal, confidential or proprietary information of customers or clients in the Company's possession were to be mishandled or misused, the Company could suffer significant regulatory consequences, reputational damage and financial loss.  Such mishandling or misuse could include circumstances where, for example, such information was erroneously provided to parties who are not permitted to have the information, either by fault of the Company's systems, employees, or counterparties, or where such information was intercepted or otherwise inappropriately taken by third parties.  The Company has policies and procedures designed to prevent or limit the effect of the possible failure, interruption or security breach of its information systems; however, any such failure, interruption or security breach could adversely affect the Company's business and results of operations through loss of assets or by requiring it to expend significant resources to correct the defect, as well as exposing the Company to customer dissatisfaction and civil litigation, regulatory fines or penalties or losses not covered by insurance.

The Company is exposed to fraud in many aspects of the services and products that it provides.

The Company offers a wide variety of products and services.  When account credentials and other access tools are not adequately protected, risks and potential costs may increase.  As (a) sales of these services and products expand, (b) those who are committing fraud become more sophisticated and more determined, and (c) banking services and product offerings expand, the Company's operational losses could increase.

The Company may be adversely affected by the soundness of other financial institutions.

Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. The Company has exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry. Many of these transactions expose the Company to credit risk in the event of a default by a counterparty or client. In addition, credit risk may be exacerbated when the collateral held by the Company cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to the Company. Any such losses could have a material adverse effect on the Company's financial condition and results of operations.
The Company is or may become involved in lawsuits, legal proceedings, information-gathering requests, investigations, and proceedings by governmental agencies or other parties that may lead to adverse consequences.

As a participant in the financial services industry, many aspects of the Company's business involve substantial risk of legal liability. The Company and its subsidiaries have been named or threatened to be named as defendants in various lawsuits arising from its or its subsidiaries' business activities (and in some cases from the activities of acquired companies). In addition, from time to time, the Company is, or may become, the subject of governmental and self-regulatory agency information-gathering requests, reviews, investigations and proceedings and other forms of regulatory inquiry, including by bank regulatory agencies, the SEC and law enforcement authorities. The results of such proceedings could lead to delays in or prohibition to acquire other companies, significant penalties, including monetary penalties, damages, adverse judgments, settlements, fines, injunctions, restrictions on the way in which the Company conducts its business, or reputational harm.
Although the Company establishes accruals for legal proceedings when information related to the loss contingencies represented by those matters indicates both that a loss is probable and that the amount of loss can be reasonably estimated, the Company does not have accruals for all legal proceedings where it faces a risk of loss. In addition, due to the inherent subjectivity of the assessments and unpredictability of the outcome of legal proceedings, amounts accrued may not represent the ultimate loss to the Company from the legal proceedings in question. Thus, the Company's ultimate losses may be higher than the amounts accrued for legal loss contingencies, which could adversely affect the Company's financial condition and results of operations.
18


The Company continually encounters technological change and the failure to understand and adapt to these changes could have a negative impact on the business.

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. The Company's future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in the Company's operations. Many of the Company's competitors have substantially greater resources to invest in technological improvements. The Company may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers. Failure to successfully keep pace with technological changes affecting the financial services industry could have a material adverse impact on the Company's financial condition and results of operations.

Trading activity in the Company's common stock could result in material price fluctuations.

The market price of the Company's common stock may fluctuate significantly in response to a number of other factors including, but not limited to:
·
Changes in securities analysts' expectations of financial performance;
·
Volatility of stock market prices and volumes;
·
Incorrect information or speculation;
·
Changes in industry valuations;
·
Variations in operating results from general expectations;
·
Actions taken against the Company by various regulatory agencies;
·
Changes in authoritative accounting guidance by the Financial Accounting Standards Board or other regulatory agencies;
·
Changes in general domestic economic conditions such as inflation rates, tax rates, unemployment rates, oil prices, labor and healthcare cost trend rates, recessions, and changing government policies, laws and regulations; and
·
Severe weather, natural disasters, acts of war or terrorism and other external events.

The Company's ability to attract and retain qualified employees is critical to the success of its business, and failure to do so may have a materially adverse effect on the Company's performance.

The Company's employees are its most important resource, and in many areas of the financial services industry, competition for qualified personnel is intense.  The imposition on the Company or its employees of certain existing and proposed restrictions or taxes on executive compensation may adversely affect the Company's ability to attract and retain qualified senior management and employees.  If the Company provides inadequate succession planning, is unable to continue to retain and attract qualified employees, the Company's performance, including its competitive position, could have a materially adverse effect.

Item 1B. Unresolved Staff Comments
None

Item 2.  Properties

The Company's primary headquarters are located at 5790 Widewaters Parkway, Dewitt, New York, which is leased.  In addition, the Company has 225 properties located in the counties identified in the table on page 6, of which 148 are owned and 77 are under lease arrangements.  With respect to the Banking segment, the Company operates 193 full-service branches and eight facilities for back office banking operations.  With respect to the Employee Benefit Services segment, the Company operates 13 customer service facilities, all of which are leased.  With respect to the All Other segment, the Company operates 11 customer service facilities, nine of which are leased and two are owned.  Some properties contain tenant leases or subleases.

Real property and related banking facilities owned by the Company at December 31, 2016 had a net book value of $79.5 million and none of the properties were subject to any material encumbrances.  For the year ended December 31, 2016, the Company paid $5.8 million of rental fees for facilities leased for its operations.  The Company believes that its facilities are suitable and adequate for the Company's current operations.

19


Item 3.  Legal Proceedings

The Company and its subsidiaries are subject in the normal course of business to various pending and threatened legal proceedings in which claims for monetary damages are asserted. As of December 31, 2016, management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against the Company or its subsidiaries will be material to the Company's consolidated financial position. On at least a quarterly basis the Company assesses its liabilities and contingencies in connection with such legal proceedings. For those matters where it is probable that the Company will incur losses and the amounts of the losses can be reasonably estimated, the Company records an expense and corresponding liability in its consolidated financial statements. To the extent the pending or threatened litigation could result in exposure in excess of that liability, the amount of such excess is not currently estimable. The range of reasonably possible losses for matters where an exposure is not currently estimable or considered probable, beyond the existing recorded liabilities, is between $0 and $1 million in the aggregate. Although the Company does not believe that the outcome of pending litigation will be material to the Company's consolidated financial position, it cannot rule out the possibility that such outcomes will be material to the consolidated results of operations for a particular reporting period in the future.

Item 4.  Mine Safety Disclosures

Not Applicable

Item 4A.  Executive Officers of the Registrant

The executive officers of the Company and the Bank who are elected by the Board of Directors are as follows:

Name
Age
Position
Mark E. Tryniski
 
56
Director, President and Chief Executive Officer.  Mr. Tryniski assumed his current position in August 2006. He served as Executive Vice President and Chief Operating Officer from March 2004 to July 2006 and as the Treasurer and Chief Financial Officer from June 2003 to March 2004. He previously served as a partner in the Syracuse office of PricewaterhouseCoopers LLP.
Scott Kingsley
 
52
Executive Vice President and Chief Financial Officer.  Mr. Kingsley joined the Company in August 2004 in his current position.  He served as Vice President and Chief Financial Officer of Carlisle Engineered Products, Inc., a subsidiary of the Carlisle Companies, Inc., from 1997 until joining the Company.
Brian D. Donahue
 
60
Executive Vice President and Chief Banking Officer.  Mr. Donahue assumed his current position in August 2004.  He served as the Bank's Chief Credit Officer from February 2000 to July 2004 and as the Senior Lending Officer for the Southern Region of the Bank from 1992 until June 2004.
George J. Getman
60
Executive Vice President and General Counsel.  Mr. Getman assumed his current position in January 2008.  Prior to joining the Company, he was a partner with Bond, Schoeneck & King, PLLC and served as corporate counsel to the Company.

20


Part II

Item 5.  Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company's common stock has been trading on the New York Stock Exchange under the symbol "CBU" since December 31, 1997.  Prior to that, the common stock traded over-the-counter on the NASDAQ National Market under the symbol "CBSI" beginning on September 16, 1986. There were 44,541,700 shares of common stock outstanding on January 31, 2017, held by approximately 3,670 registered shareholders of record. The following table sets forth the high and low closing prices for the common stock, and the cash dividends declared with respect thereto, for the periods indicated.  The prices do not include retail mark-ups, mark-downs or commissions.
 
Year / Qtr
 
High Price
   
Low Price
   
Quarterly Dividend
 
2016
                 
4th
 
$
62.24
   
$
46.07
   
$
0.32
 
3rd
 
$
48.11
   
$
39.96
   
$
0.32
 
2nd
 
$
42.18
   
$
36.78
   
$
0.31
 
1st
 
$
39.23
   
$
34.47
   
$
0.31
 
                         
2015
                       
4th
 
$
43.13
   
$
36.70
   
$
0.31
 
3rd
 
$
39.80
   
$
34.21
   
$
0.31
 
2nd
 
$
38.52
   
$
34.58
   
$
0.30
 
1st
 
$
37.71
   
$
33.60
   
$
0.30
 
 
The Company has historically paid regular quarterly cash dividends on its common stock, and declared a cash dividend of $0.32 per share for the first quarter of 2017.  The Board of Directors of the Company presently intends to continue the payment of regular quarterly cash dividends on the common stock, as well as to make payment of regularly scheduled dividends on the trust preferred stock when due, subject to the Company's need for those funds.  However, because substantially all of the funds available for the payment of dividends by the Company are derived from the subsidiary Bank, future dividends will depend upon the earnings of the Bank, its financial condition, its need for funds and applicable governmental policies and regulations.
21


The following graph compares cumulative total shareholders returns on the Company's common stock over the last five fiscal years to the S&P 600 Commercial Banks Index, the NASDAQ Bank Index, the S&P 500 Index, and the KBW Regional Banking Index. Total return values were calculated as of December 31 of each indicated year assuming a $100 investment on December 31, 2011 and reinvestment of dividends.


22

Equity Compensation Plan Information
The following table provides information as of December 31, 2016 with respect to shares of common stock that may be issued under the Company's existing equity compensation plans.
Plan Category
 
Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights (1)
   
Weighted-average Exercise Price
of Outstanding Options, Warrants and Rights
   
Number of Securities Remaining Available For Future Issuance Under Equity Compensation Plans (excluding securities reflected in the first column)
 
Equity compensation plans approved by security holders:
                 
  1994 Long-term Incentive Plan
   
12,883
   
$
17.41
     
5,701
 
  2004 Long-term Incentive Plan
   
1,215,998
     
26.51
     
48,830
 
  2014 Long-term Incentive Plan
   
780,941
     
27.80
     
889,482
 
Equity compensation plans not approved by security holders
0
     
0
     
0
 
     Total
   
2,009,822
   
$
26.95
     
944,013
 
 (1) The number of securities includes 253,830 shares of unvested restricted stock.
 

Stock Repurchase Program
At its December 2015 meeting, the Board approved a stock repurchase program authorizing the repurchase, at the discretion of senior management, of up to 2,200,000 shares of the Company's common stock, in accordance with securities laws and regulations, during a twelve-month period starting January 1, 2016.  There were no treasury stock purchases made under this authorization in 2016.  At its December 2016 meeting, the Board approved a new stock repurchase program authorizing the repurchase, at the discretion of senior management, of up to 2,200,000 shares of the Company's common stock, in accordance with securities laws and regulations, during a twelve-month period starting January 1, 2017.  Any repurchased shares will be used for general corporate purposes, including those related to stock plan activities.  The timing and extent of repurchases will depend on market conditions and other corporate considerations as determined at the Company's discretion.

The following table presents stock purchases made during the fourth quarter of 2016:

Issuer Purchases of Equity Securities
 
                         
Period
 
Total
Number of Shares Purchased
   
Average
Price Paid
Per share
   
Total Number of Shares Purchased as Part of
Publicly Announced
Plans or Programs
   
Maximum Number of Shares That May Yet be Purchased Under the Plans or Programs
 
October 1-31, 2016
   
0
   
$
0
     
0
     
2,200,000
 
November 1-30, 2016(1)
   
50,952
     
54.14
     
0
     
2,200,000
 
December 1-31, 2016
   
0
     
0
     
0
     
2,200,000
 
  Total
   
50,952
   
$
54.14
                 
 
(1) Included in the common shares repurchased were 91 shares acquired by the Company in connection with satisfaction of tax withholding obligations on vested restricted stock issued pursuant to the employee benefit plan and 50,861 shares acquired by the Company in connection with the administration of the Company's retirement plan.  These shares were not repurchased as part of the publicly announced repurchase plan described above.

Item 6.  Selected Financial Data

The following table sets forth selected consolidated historical financial data of the Company as of and for each of the years in the five-year period ended December 31, 2016.  The historical information set forth under the captions "Income Statement Data" and "Balance Sheet Data" is derived from the audited financial statements while the information under the captions "Capital and Related Ratios", "Selected Performance Ratios" and "Asset Quality Ratios" for all periods is unaudited.  All financial information in this table should be read in conjunction with the information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and with the Consolidated Financial Statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K.

23

SELECTED CONSOLIDATED FINANCIAL INFORMATION
 
   
Years Ended December 31,
 
(In thousands except per share data and ratios)
 
2016
   
2015
   
2014
   
2013
   
2012
 
Income Statement Data:
                             
Loan interest income
 
$
211,467
   
$
187,743
   
$
185,527
   
$
188,197
   
$
192,710
 
Investment interest income
   
73,720
     
71,879
     
70,693
     
75,962
     
88,690
 
Interest expense
   
11,291
     
11,202
     
11,792
     
26,065
     
50,976
 
  Net interest income
   
273,896
     
248,420
     
244,428
     
238,094
     
230,424
 
Provision for loan losses
   
8,076
     
6,447
     
7,178
     
7,992
     
9,108
 
Noninterest income
   
155,625
     
123,303
     
119,020
     
108,748
     
98,955
 
Gain (loss) on investment securities & early
   retirement of long-term borrowings, net
   
0
     
(4
)
   
0
     
(6,568
)
   
291
 
Acquisition expenses and litigation settlement
   
1,706
     
7,037
     
2,923
     
2,181
     
8,247
 
Other noninterest expenses
   
265,142
     
226,018
     
223,657
     
219,074
     
203,510
 
Income before income taxes
   
154,597
     
132,217
     
129,690
     
111,027
     
108,805
 
     Net income
   
103,812
     
91,230
     
91,353
     
78,829
     
77,068
 
Diluted earnings per share
   
2.32
     
2.19
     
2.22
     
1.94
     
1.93
 
                                         
Balance Sheet Data:
                                       
Cash equivalents
 
$
24,243
   
$
21,931
   
$
12,870
   
$
11,288
   
$
84,415
 
Investment securities
   
2,784,392
     
2,847,940
     
2,512,974
     
2,218,725
     
2,818,527
 
Loans
   
4,948,562
     
4,801,375
     
4,236,206
     
4,109,083
     
3,865,576
 
Allowance for loan losses
   
(47,233
)
   
(45,401
)
   
(45,341
)
   
(44,319
)
   
(42,888
)
Intangible assets
   
480,844
     
484,146
     
386,973
     
390,499
     
387,134
 
  Total assets
   
8,666,437
     
8,552,669
     
7,489,440
     
7,095,864
     
7,496,800
 
Deposits
   
7,075,954
     
6,873,474
     
5,935,264
     
5,896,044
     
5,628,039
 
Borrowings
   
248,370
     
403,446
     
440,122
     
244,010
     
830,134
 
Shareholders' equity
   
1,198,100
     
1,140,647
     
987,904
     
875,812
     
902,778
 
                                         
Capital and Related Ratios:
                                       
Cash dividends declared per share
 
$
1.26
   
$
1.22
   
$
1.16
   
$
1.10
   
$
1.06
 
Book value per share
   
26.96
     
26.06
     
24.24
     
21.66
     
22.78
 
Tangible book value per share (1)
   
17.12
     
15.90
     
15.63
     
12.80
     
13.72
 
Market capitalization (in millions)
   
2,746
     
1,748
     
1,554
     
1,604
     
1,084
 
Tier 1 leverage ratio
   
10.55
%
   
10.32
%
   
9.96
%
   
9.29
%
   
8.40
%
Total risk-based capital to risk-adjusted assets
   
19.10
%
   
18.08
%
   
18.75
%
   
17.57
%
   
16.20
%
Tangible equity to tangible assets (1)
   
9.24
%
   
8.59
%
   
8.92
%
   
7.68
%
   
7.62
%
Dividend payout ratio
   
53.7
%
   
55.5
%
   
51.6
%
   
56.0
%
   
54.3
%
Period end common shares outstanding
   
44,437
     
43,775
     
40,748
     
40,431
     
39,626
 
Diluted weighted-average shares outstanding
   
44,720
     
41,605
     
41,232
     
40,726
     
39,927
 
                                         
Selected Performance Ratios:
                                       
Return on average assets
   
1.20
%
   
1.17
%
   
1.23
%
   
1.09
%
   
1.08
%
Return on average equity
   
8.57
%
   
8.87
%
   
9.65
%
   
9.04
%
   
8.82
%
Net interest margin
   
3.71
%
   
3.73
%
   
3.91
%
   
3.91
%
   
3.88
%
Noninterest income/operating income (FTE)
   
35.4
%
   
32.1
%
   
31.4
%
   
30.0
%
   
28.6
%
Efficiency ratio (2)
   
59.2
%
   
57.9
%
   
57.9
%
   
59.3
%
   
57.4
%
                                         
Asset Quality Ratios:
                                       
Allowance for loan losses/total loans
   
0.95
%
   
0.95
%
   
1.07
%
   
1.08
%
   
1.11
%
Nonperforming loans/total loans
   
0.48
%
   
0.50
%
   
0.56
%
   
0.54
%
   
0.75
%
Allowance for loan losses/nonperforming loans
   
199
%
   
190
%
   
190
%
   
201
%
   
147
%
Loan loss provision/net charge-offs
   
129
%
   
101
%
   
117
%
   
122
%
   
108
%
Net charge-offs/average loans
   
0.13
%
   
0.15
%
   
0.15
%
   
0.17
%
   
0.23
%
 
 (1) The tangible book value per share and the tangible equity to tangible asset ratio excludes goodwill and identifiable intangible assets, adjusted for deferred tax liabilities generated from tax deductible goodwill.  The ratio is not a financial measurement required by accounting principles generally accepted in the United States of America.  However, management believes such information is useful to analyze the relative strength of the Company's capital position and is useful to investors in evaluating Company performance (See Table 20 for Reconciliation of GAAP to Non-GAAP Measures).
 (2) Efficiency ratio provides a ratio of operating expenses to operating income.  It excludes intangible amortization, acquisition expenses, and litigation settlement from expenses and gains and losses on investment securities & early retirement of long-term borrowings from income while adding a fully-taxable equivalent adjustment. The efficiency ratio is not a financial measurement required by accounting principles generally accepted in the United States of America.  However, the efficiency ratio is used by management in its assessment of financial performance specifically as it relates to noninterest expense control.  Management also believes such information is useful to investors in evaluating Company performance.

 
24


Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations

This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") primarily reviews the financial condition and results of operations of the Company for the past two years, although in some circumstances a period longer than two years is covered in order to comply with SEC disclosure requirements or to more fully explain long-term trends.  The following discussion and analysis should be read in conjunction with the Selected Consolidated Financial Information beginning on page 23 and the Company's Consolidated Financial Statements and related notes that appear on pages 54 through 97.  All references in the discussion to the financial condition and results of operations refer to the consolidated position and results of the Company and its subsidiaries taken as a whole.

Unless otherwise noted, all earnings per share ("EPS") figures disclosed in the MD&A refer to diluted EPS; interest income, net interest income, and net interest margin are presented on a fully tax-equivalent ("FTE") basis, which is a non-GAAP measure.  The term "this year" and equivalent terms refer to results in calendar year 2016, "last year" and equivalent terms refer to calendar year 2015, and all references to income statement results correspond to full-year activity unless otherwise noted.

This MD&A contains certain forward-looking statements with respect to the financial condition, results of operations, and business of the Company.  These forward-looking statements involve certain risks and uncertainties.  Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements are set herein under the caption "Forward-Looking Statements" on page 50.

Critical Accounting Policies

As a result of the complex and dynamic nature of the Company's business, management must exercise judgment in selecting and applying the most appropriate accounting policies for its various areas of operations.  The policy decision process not only ensures compliance with the latest generally accepted accounting principles ("GAAP"), but also reflects management's discretion with regard to choosing the most suitable methodology for reporting the Company's financial performance.  It is management's opinion that the accounting estimates covering certain aspects of the business have more significance than others due to the relative importance of those areas to overall performance, or the level of subjectivity in the selection process.  These estimates affect the reported amounts of assets and liabilities as well as disclosures of revenues and expenses during the reporting period.  Actual results could differ from these estimates.  Management believes that the critical accounting estimates include:

·
Acquired loans – Acquired loans are initially recorded at their acquisition date fair values based on a discounted cash flow methodology that involves assumptions and judgments as to credit risk, prepayment risk, liquidity risk, default rates, loss severity, payment speeds, collateral values and discount rate.

Acquired loans deemed impaired at acquisition are recorded in accordance with ASC 310-30.  The excess of undiscounted cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount. The difference between contractually required payments at acquisition and the undiscounted cash flows expected to be collected at acquisition is referred to as the non-accretable discount, which represents estimated future credit losses and other contractually required payments that the Company does not expect to collect. Subsequent decreases in expected cash flows are recognized as impairments through a charge to the provision for credit losses resulting in an increase in the allowance for loan losses. Subsequent improvements in expected cash flows result in a recovery of previously recorded allowance for loan losses or a reversal of a corresponding amount of the non-accretable discount, which the Company then reclassifies as an accretable discount that is recognized into interest income over the remaining life of the loans using the interest method.

For acquired loans that are not deemed impaired at acquisition, the difference between the acquisition date fair value and the outstanding balance represents the fair value adjustment for a loan, and includes both credit and interest rate considerations. Subsequent to the purchase date, the methods used to estimate the allowance for loan losses for the acquired non-impaired loans is consistent with the policy described below.  However, for loans collectively evaluated for impairment, the Company compares the net realizable value of the loans to the carrying value.  The carrying value represents the net of the loan's unpaid principal balance and the remaining purchase discount or premium that has yet to be accreted into interest income.  When the carrying value exceeds the net realizable value, an allowance for loan losses is recognized. For loans individually evaluated for impairment, a provision is recorded when the required allowance exceeds any remaining discount on the loan.

·
Allowance for loan losses – The allowance for loan losses reflects management's best estimate of probable loan losses in the Company's loan portfolio. Determination of the allowance for loan losses is inherently subjective.  It requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, appraisal values of underlying collateral for collateralized loans, and the amount of estimated losses on pools of homogeneous loans which is based on historical loss experience and consideration of current economic trends, all of which may be susceptible to significant change.

25

·
Investment securities – Investment securities can be classified as held-to-maturity, available-for-sale or trading.  The appropriate classification is based partially on the Company's ability to hold the securities to maturity and largely on management's intentions with respect to either holding or selling the securities.  The classification of investment securities is significant since it directly impacts the accounting for unrealized gains and losses on securities.  Unrealized gains and losses on available-for-sale securities are recorded in accumulated other comprehensive income or loss, as a separate component of shareholders' equity, and do not affect earnings until realized.  The fair values of investment securities are generally determined by reference to quoted market prices, where available.  If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments, or a discounted cash flow model using market estimates of interest rates and volatility.  Investment securities with significant declines in fair value are evaluated to determine whether they should be considered other-than-temporarily impaired ("OTTI").  An unrealized loss is generally deemed to be other-than-temporary and a credit loss is deemed to exist if the present value of the expected future cash flows is less than the amortized cost basis of the debt security.  The credit loss component of an other-than-temporary impairment write-down is recorded in current earnings, while the remaining portion of the impairment loss is recognized in other comprehensive income (loss), provided the Company does not intend to sell the underlying debt security, and it is not likely that the Company will be required to sell the debt security prior to recovery of the full value of its amortized cost basis.  During 2013, the Company sold certain held-to-maturity securities and consequently did not use the held-to-maturity classification in 2014, 2015 or 2016.

·
Retirement benefits - The Company provides defined benefit pension benefits to eligible employees and retirees and post-retirement health and life insurance benefits to certain eligible retirees.  The Company also provides deferred compensation and supplemental executive retirement plans for selected current and former employees.  Expense under these plans is charged to current operations and consists of several components of net periodic (benefit) cost based on various actuarial assumptions regarding future experience under the plans, including, but not limited to, discount rate, rate of future compensation increases, mortality rates, future health care costs and the expected return on plan assets.

·
Provision for income taxes – The Company is subject to examinations from various taxing authorities.  Such examinations may result in challenges to the tax return treatment applied by the Company to specific transactions.  Management believes that the assumptions and judgments used to record tax-related assets or liabilities have been appropriate.  Should tax laws change or the taxing authorities determine that management's assumptions were inappropriate, an adjustment may be required which could have a material effect on the Company's results of operations.

·
Intangible assets – As a result of acquisitions, the Company carries goodwill and identifiable intangible assets.  Goodwill represents the cost of acquired companies in excess of the fair value of net assets at the acquisition date.  Goodwill is evaluated at least annually, or when business conditions suggest impairment may have occurred.  Should impairment occur, goodwill will be reduced to its carrying value through a charge to earnings.  Core deposits and other identifiable intangible assets are amortized to expense over their estimated useful lives.  The determination of whether or not impairment exists is based upon discounted cash flow modeling techniques that require management to make estimates regarding the amount and timing of expected future cash flows.  It also requires them to select a discount rate that reflects the current return requirements of the market in relation to present risk-free interest rates, required equity market premiums, and company-specific performance and risk metrics, all of which are susceptible to change based on changes in economic and market conditions and other factors.  Future events or changes in the estimates used to determine the carrying value of goodwill and identifiable intangible assets could have a material impact on the Company's results of operations.

A summary of the accounting policies used by management is disclosed in Note A, "Summary of Significant Accounting Policies", starting on page 59.

Supplemental Reporting of Non-GAAP Results of Operations

The Company consistently provides supplemental reporting of its results on a "net operating" or "tangible" basis, from which the amortization of core deposits and other intangible assets (and the related goodwill, core deposit intangible and other intangible asset balances, net of applicable deferred tax amounts), special charges and recoveries, acquisition expenses and deferred tax liabilities are excluded.  Reconciliations of GAAP amounts with corresponding non-GAAP amounts are presented in Table 20.

Executive Summary

The Company's business philosophy is to operate as a community bank with local decision-making, principally in non-metropolitan markets, providing a broad array of banking and financial services to retail, commercial and municipal customers.  The Company's banking subsidiary is Community Bank, N.A. (the "Bank" or "CBNA").


26


The Company's core operating objectives are: (i) grow the branch network, primarily through a disciplined acquisition strategy and certain selective de novo expansions, (ii) build profitable loan and deposit volume using both organic and acquisition strategies, (iii) increase the noninterest component of total revenue through development of banking-related fee income, growth in existing financial services business units, and the acquisition of additional financial services and banking businesses, and (iv) utilize technology to deliver customer-responsive products and services and to improve efficiencies.

Significant factors reviewed by management to evaluate achievement of the Company's operating objectives and its operating results and financial condition include, but are not limited to:  net income and earnings per share; return on assets and equity; net interest margins; noninterest revenues; noninterest expenses; asset quality; loan and deposit growth; capital management; performance of individual banking and financial services units; performance of specific product lines and customers; liquidity and interest rate sensitivity; enhancements to customer products and services and their underlying performance characteristics; technology advancements; market share; peer comparisons; and the performance of recently acquired businesses.

The Company reported net income and earnings per share for the year ended December 31, 2016 that were 13.8% and 5.9%, respectively, above the prior year amounts.  The increase in net income was due primarily to the earnings generated by the acquired Oneida businesses as well as organic growth.  Contributing to the increase in net income was an increase in net interest income, higher noninterest income and lower acquisition-related expenses.  Offsetting these items were an increase in the provision for loan loss, increased operating expenses, a higher effective tax rate and an increase in weighted average diluted shares outstanding, including the impact of the issuance of 2.38 million shares as part of the consideration for the Oneida acquisition.

The Company experienced year-over-year growth in average interest-earning assets, reflective of the addition of loans from the Oneida acquisition in December 2015, as well as solid organic loan growth. Average deposits increased in 2016 as compared to 2015, reflective of organic growth in core deposits and the impact of the Oneida transaction.  Average external borrowings in 2016 decreased from 2015 reflective of the use of the net liquidity from the Oneida acquisition to reduce overnight borrowings.

Asset quality in 2016 remained stable and favorable in comparison to averages for peer financial organizations.  As compared to the end of 2015, loan nonperforming ratios and the total loan net charge-off ratio at December 31, 2016 were improved while the total loan delinquency ratio was up slightly year-over-year.

Net Income and Profitability

Net income for 2016 was $103.8 million, an increase of $12.6 million, or 13.8%, from 2015's earnings.  Earnings per share for 2016 was $2.32, up $0.13, or 5.9%, from 2015's results.  The 2016 results included $1.7 million, or $0.03 per share, of acquisition expenses related to the Merchants and NRS acquisitions.  The 2015 results included $7.0 million, or $0.11 per share, of acquisition expenses related to the Oneida acquisition that was completed in December of 2015.

Net income for 2015 was $91.2 million, a decrease of $0.1 million, or 0.1%, from 2014's earnings, while earnings per share for 2015 was $2.19, down $0.03, or 1.4%, from 2014's results.  The 2015 results included the aforementioned acquisition expenses.  The 2014 results included a $2.8 million, or $0.05 per share, litigation settlement charge.

Table 1: Condensed Income Statements

 
 
Years Ended December 31,
 
(000's omitted, except per share data)
 
2016
   
2015
   
2014
   
2013
   
2012
 
Net interest income
 
$
273,896
   
$
248,420
   
$
244,428
   
$
238,094
   
$
230,424
 
Provision for loan losses
   
8,076
     
6,447
     
7,178
     
7,992
     
9,108
 
(Loss)/Gain on sales of investment securities, net
   
0
     
(4
)
   
0
     
80,768
     
291
 
Loss on debt extinguishments
   
0
     
0
     
0
     
87,336
     
0
 
Noninterest income
   
155,625
     
123,303
     
119,020
     
108,748
     
98,955
 
Acquisition expenses and litigation settlement
   
1,706
     
7,037
     
2,923
     
2,181
     
8,247
 
Other noninterest expenses
   
265,142
     
226,018
     
223,657
     
219,074
     
203,510
 
Income before taxes
   
154,597
     
132,217
     
129,690
     
111,027
     
108,805
 
Income taxes
   
50,785
     
40,987
     
38,337
     
32,198
     
31,737
 
Net income
 
$
103,812
   
$
91,230
   
$
91,353
   
$
78,829
   
$
77,068
 
 
                                       
Diluted weighted average common shares outstanding
   
44,720
     
41,605
     
41,232
     
40,726
     
39,927
 
Diluted earnings per share
 
$
2.32
   
$
2.19
   
$
2.22
   
$
1.94
   
$
1.93
 

 
27

 
The Company operates in three business segments: Banking, Employee Benefit Services and All Other.  The banking segment provides a wide array of lending and depository-related products and services to individuals, businesses and municipal enterprises.  In addition to these general intermediation services, the Banking segment provides treasury management solutions, capital financing products and payment processing services.  Employee Benefit Services, consisting of BPAS and its subsidiaries, provides the following on a national basis: employee benefit trust services; collective investment fund; retirement plan and VEBA/HRA and health savings account plan administration services; actuarial services; and healthcare consulting services.  BPAS services approximately 3,800 retirement plans and more than 400,000 plan participants.  In addition, BPAS employs nearly 350 professionals, and operates from 10 offices located in New York, New Jersey, Pennsylvania, Texas and Puerto Rico.  The All Other segment is comprised of wealth management and insurance services.  Wealth management activities include trust services provided by the personal trust unit of CBNA, investment products and services provided by CISI, OWM and The Carta Group, and asset advisory services provided by Nottingham.  The insurance services activities include the offerings of personal and commercial property insurance and other risk management products and services provided by OneGroup.  For additional financial information on the Company's segments, refer to Note U – Segment Information in the Notes to Consolidated Financial Statements.

The primary factors explaining 2016 earnings performance are discussed in the remaining sections of this document and are summarized as follows:

BANKING
·
Net interest income increased $25.4 million, or 10.2%.  This was the result of a $668.4 million increase in average earning assets, partially offset by a two basis point decrease in the net interest margin.  Average loans grew $593.8 million related to both the Oneida acquisition and organic growth.  Also contributing to the growth in interest-earning assets was a $74.6 million increase in the average book value of investments, including cash equivalents, partially offset by a six basis-point decrease in the average yield on investments.  Average interest-bearing deposits increased $671.7 million due to the Oneida acquisition and organic core deposit growth, partially offset by the continued trend of declining time deposit balances.  Borrowing interest expense decreased as a result of a decrease in average balances of $241.9 million, or 47.1%, compared to the prior year, partially offset by a blended rate that was 64 basis points higher than the prior year.

·
The loan loss provision of $8.1 million increased $1.6 million, or 25.3%, from the prior year level.  Net charge‑offs of $6.2 million were $0.1 million less than 2015.  This resulted in an annual net charge-off ratio (net charge-offs / total average loans) of 0.13%, which was two basis points lower than the prior year.  Nonperforming loans as a percentage of total loans and nonperforming assets as a percentage of loans and other real estate owned, each decreased two basis points compared to December 31, 2015 levels, and remain better than levels for the Company's peers.  Additional information on trends and policy related to asset quality is provided in the asset quality section on pages 41 through 45.

·
Banking noninterest income for 2016 of $66.1 million increased by $8.4 million from 2015's level, primarily due to new deposit relationships from both acquired and organic sources, increased debit card-related revenues and $1.6 million in nonrecurring insurance-related gains, partially offset by the continuing trend of lower utilization of overdraft protection programs and other deposit-related services.

·
Total banking noninterest expenses, including acquisition expenses, increased $9.3 million, or 5.0%, in 2016 to $194.0 million, primarily reflective of a full year of expenses related to an expanded branch network and other acquired activities from the Oneida acquisition, and continued investment in risk management capabilities and technology and data processing costs.  Excluding acquisition expenses, banking noninterest expenses increased $15.2 million, or 8.6%, again reflective of expanded operations resulting from the Oneida acquisition.

EMPLOYEE BENEFIT SERVICES
·
Employee benefit services noninterest income for 2016 of $48.3 million increased $1.5 million, or 3.2%, from the prior year level, benefiting from a combination of new client generation, activities acquired with the Oneida transaction and expanded service offerings.

·
Employee benefit services noninterest expenses for 2016 totaled $37.8 million.  This represented an increase from 2015 of $2.0 million, or 5.7%, and was attributable to the continued buildout of resources to support an expanding revenue base.

ALL OTHER (WEALTH MANAGEMENT AND INSURANCE SERVICES)
·
Wealth management and insurance services noninterest income for 2016 was $43.7 million; an increase of $22.8 million from the prior year level.  The increase was primarily due to the addition of the OneGroup and OWM businesses in conjunction with the Oneida acquisition.

·
Wealth management and insurance services noninterest expenses of $37.6 million increased $22.8 million from 2015 primarily due to the acquisition of OneGroup and OWM, and increased personnel costs associated with growth initiatives.
28

 
 
 
Selected Profitability and Other Measures

Return on average assets, return on average equity, dividend payout and equity to asset ratios for the years indicated are as follows:
Table 2: Selected Ratios

 
 
2016
   
2015
   
2014
 
Return on average assets
   
1.20
%
   
1.17
%
   
1.23
%
Return on average equity
   
8.57
%
   
8.87
%
   
9.65
%
Dividend payout ratio
   
53.7
%
   
55.5
%
   
51.6
%
Average equity to average assets
   
13.99
%
   
13.16
%
   
12.75
%
 
As displayed in Table 2, the return on average assets ratio increased while the return on average equity ratio decreased in 2016, as compared to 2015.  The increase in return on average assets was the result of an increase in net income, reflective of the full year impact of the Oneida transaction and a decrease in acquisition expenses, which outpaced the increase in average assets.  The decrease in the return on average equity ratio was the result of the aforementioned increase in net income being outpaced by the increase in average equity, due primarily to the full year impact of the issuance of common stock as consideration in the Oneida transaction, a higher average after tax investment market value adjustment and strong earnings retention.  Both return ratios decreased in 2015 as compared to 2014.  The decreases in return on average assets and return on average equity were the result of a decrease in net income, due primarily to acquisition charges related to the Oneida transaction, while both average assets and average equity increased.

The dividend payout ratio for 2016 decreased 1.8% from 2015 as net income increased 13.8% from 2015 while dividends declared increased 10.0%, a result of a 3.3% increase in the dividends declared per share in addition to an increase in the shares outstanding due to the issuance of shares as partial consideration in the Oneida transaction and the issuance of shares in connection with the administration of the Company's 401(k) plan and employee stock plan.  The dividend payout ratio for 2015 increased 3.9% from 2014 as net income decreased slightly from 2014 while dividends declared increased 7.5%, as a result of a 5.2% increase in the dividends declared per share in addition to an increase in the shares outstanding due to the shares issued in conjunction with the employee stock plan and as consideration in the Oneida transaction.

The average equity to average assets ratio continued to increase as the growth in common shareholders' equity outpaced the growth in assets.  During 2016, average equity increased at a rate of 17.8% while average assets increased at a rate of 10.8%, while in 2015 average equity rose 8.6% and average assets grew 5.3% in comparison to 2014.

Net Interest Income

Net interest income is the amount by which interest and fees on earning assets (loans, investments and cash equivalents) exceeds the cost of funds, which consists primarily of interest paid to the Company's depositors and interest on external borrowings.  Net interest margin is the difference between the yield on interest earning assets and the cost of interest-bearing liabilities as a percentage of earning assets.

As disclosed in Table 3, net interest income (with nontaxable income converted to a fully tax-equivalent basis) totaled $283.9 million in 2016, an increase of $23.0 million, or 8.8%, from the prior year.  The increase is a result of a $668.4 million, or 9.6%, increase in average interest-earning assets and a one basis point decrease in the average rate on interest-bearing liabilities, partially offset by a four basis point decline in the average yield on interest-earning assets and a $429.8 million increase in average interest-bearing liabilities.  As reflected in Table 4, the favorable impact of the lower rate on interest-bearing liabilities ($0.8 million) and the increase in interest-earning assets ($25.8 million) were partially offset by a $2.7 million unfavorable impact from the decrease in the yield on interest-earning assets and the increase in interest-bearing liabilities ($0.9 million).

The 2016 net interest margin decreased two basis points to 3.71% from the 3.73% reported in 2015.  The decrease was attributable to a four basis point decrease in the earning-asset yield, partially offset by a one basis point decrease in the cost of interest-bearing liabilities.  The 4.34% yield on loans decreased eight basis points in 2016 as compared to 4.42% in 2015, due to new loan volume for certain products carrying lower yields than the loans maturing or being prepaid in the continued low rate environment.  The yield on investments, including cash equivalents, decreased from 3.05% in 2015 to 2.99% in 2016.  This is reflective of the purchase of lower-yielding securities at various times throughout the last 24 months, as well as the effect certain changes in state tax rates had on the fully tax-equivalent adjustment.  The cost of interest-bearing liabilities was 0.20% during 2016 as compared to 0.21% for 2015.  The decreased cost primarily reflects the shift of customer deposits from higher cost time and money market deposits into non-interest bearing and lower cost checking and savings.

29


The net interest margin in 2015 decreased 18 basis points to 3.73% from 3.91% reported in 2014. The decrease was attributable to a 20 basis point decrease in earning-asset yield, partially offset by a two basis point decrease in the cost of interest-bearing liabilities. The yield on loans decreased seven basis points in 2015 to 4.42% from 4.49% in 2014, due to new loan volume carrying lower yields in the continued low-rate environment than the loans maturing or being prepaid, a proportionally higher mix of shorter term adjustable rate business loans, as well as promotional rates and shorter blended maturity terms on new originations or fixed rate home equity loans.  The yield on investments, including cash equivalents, decreased from 3.42% in 2014 to 3.05% in 2015.  This is reflective of the purchase of lower-yielding Treasury securities at various times throughout the last 24 months, as well as the effect certain changes in state tax rates had on the fully tax-equivalent adjustment.  The cost of interest-bearing liabilities was 0.21% during 2015 as compared to 0.23% for 2014.  The decreased cost primarily reflects the larger proportion of funding being provided by lower-rate overnight borrowings.  Additionally, the proportion of customer deposits in higher cost time and money market deposits declined 2.5 percentage points in 2015, while the percentage of deposits in non-interest bearing and lower cost checking and savings accounts correspondingly increased.

As shown in Table 3, total FTE-basis interest income increased by $23.1 million, or 8.5%, in 2016 in comparison to 2015. Table 4 indicates that a higher average earning-asset balance created $25.8 million of incremental interest income.  As mentioned previously, this was partially offset by a lower average yield on earning assets that had a negative impact of $2.7 million.  Average loans increased $593.8 million, or 13.8%, in 2016, a result of organic and acquired growth in all loan portfolios, with the Oneida acquisition accounting for $364.2 million of the total growth.  FTE-basis loan interest income and fees increased $22.5 million, or 11.9%, in 2016 as compared to 2015, attributable to the higher average balances, partially offset by an eight basis point decrease in the loan yield.

Investment interest income (FTE basis) in 2016 was $0.6 million, or 0.7%, higher than the prior year as a result of a $74.6 million, or 2.8%, higher average book basis balance (including cash equivalents) for 2016 versus the prior year.  This was partially offset by a six basis point decrease in the average investment yield from 3.05% to 2.99% including the impact of changes in state tax structures.  During most of 2016, market interest rates continued to be low, and as a result, cash flows from higher rate maturing investments were reinvested at lower interest rates.  The investments purchased during 2016 had a weighted average yield of 2.27% as compared to 2015 purchases which had a weighted average yield of 2.46%.

Total interest income in 2015 increased $0.3 million, or 0.1%, from 2014's level.  Table 4 indicates that the lower average yield on earning assets had a negative impact of $13.6 million.  This was partially offset by a higher average earning-asset balance that created $13.9 million of incremental interest income.  Average loans increased $131.3 million, or 3.2%, in 2015, a result of organic and acquired growth in all loan portfolios, with the Oneida acquisition accounting for $24.9 million of the total growth.  FTE-basis loan interest income and fees increased $2.8 million, or 1.5%, in 2015 as compared to 2014, attributable to the higher average balances, partially offset by a seven basis point decrease in loan yields.  On a FTE basis, investment interest income, including interest on cash equivalents, totaled $82.5 million in 2015, $2.5 million, or 2.9%, lower than the prior year as a result of a 37 basis point decrease in the average investment yield from 3.42% to 3.05% that includes the effect of changes in the state tax structures.  Average investments for 2015, including cash equivalents, were $217.2 million higher than 2014, reflective of investment purchases made in the first half of the year in anticipation of liquidity to be received from the Oneida acquisition.

Total interest expense increased by $0.1 million, or 0.8%, to $11.3 million in 2016.  As shown in Table 4, lower interest rates on interest-bearing liabilities resulted in a decrease in interest expense of $0.8 million, while higher deposit balances resulted in a $0.9 million increase in interest expense.  Interest expense as a percentage of average earning assets for 2016 decreased one basis point to 0.15%.  The rate on interest-bearing deposits decreased two basis points to 0.13% as rates have held relatively steady in all interest-bearing categories throughout 2016 and 2015, as well as the change in deposit mix to a lower proportion of time deposit products.  The rate on external borrowings increased 64 basis points to 1.46% in 2016, a result of lower-rate overnight FHLB borrowings becoming a smaller proportion of this funding component.  Total average funding balances (deposits and borrowings) in 2016 increased $635.6 million, or 9.5%.  Average deposits increased $877.5 million, of which approximately $654.1 million was attributable to the Oneida acquisition, with the remaining $223.4 million attributable to organic deposit growth.  Consistent with the Company's funding mix objective and customers' unwillingness to commit to less liquid instruments in the low rate environment, average core deposit balances increased $864.3 million to 89.3% of total average deposits compared to 88% in 2015, while time deposits increased at a slower rate of $13.2 million year-over-year representing 10.7% of total average deposits for 2016 compared to 12.0% in 2015.  Average external borrowings decreased $241.9 million in 2016 as compared to the prior year, reflective of the pay down of overnight FHLB borrowings with liquidity from the Oneida acquisition and organic deposit growth.

30


Total interest expense decreased by $0.6 million to $11.2 million in 2015 as compared to 2014.  As shown in Table 4, lower interest rates on interest-bearing liabilities resulted in decreasing interest expense by $1.0 million, while higher external borrowing balances accounted for $0.4 million more interest expense.  Interest expense as a percentage of average earning assets for 2015 decreased two basis points to 0.16%.  The rate on interest-bearing deposits decreased two basis points to 0.15% as rates have declined or held steady in all interest-bearing categories throughout 2015 and 2014, as well as the change in deposit mix to a lower proportion of time deposit products.  The rate on external borrowings decreased seven basis points to 0.82% in 2015 primarily due to lower-rate FHLB overnight borrowings being a larger proportion of the balance.  In 2015, total average funding increased $289.9 million or 4.6%. Average deposits increased $181.5 million, of which approximately $53.1 million was attributable to the Oneida acquisition, with the remaining $128.4 million attributable to organic deposit growth.  Consistent with the Company's funding mix objective and customers' unwillingness to commit to less liquid instruments in the low rate environment, average core deposit balances increased $288.8 million, while average time deposits declined $107.3 million year-over-year.  Average external borrowings increased $108.4 million in 2015 as compared to the prior year, reflective of the funding of the pre-investment of expected net liquidity from the Oneida acquisition.

The following table sets forth information related to average interest-earning assets and interest-bearing liabilities and their associated yields and rates for the years ended December 31, 2016, 2015 and 2014.  Interest income and yields are on a fully tax-equivalent basis using marginal income tax rates of 38.2% in 2016, 38.3% in 2015 and 38.7% in 2014.  Average balances are computed by totaling the daily ending balances in a period and dividing by the number of days in that period.  Loan interest income and yields include loan fees.  Average loan balances include nonaccrual loans and loans held for sale.

Table 3: Average Balance Sheet
 
   
Year Ended December 31, 2016
   
Year Ended December 31, 2015
   
Year Ended December 31, 2014
 
(000's omitted except yields and rates) 
 
Average Balance
   
Interest
   
Avg. Yield/Rate Paid
   
Average Balance
   
Interest
   
Avg. Yield/Rate Paid
   
Average Balance
   
Interest
   
Avg. Yield/Rate Paid
 
                                                       
Interest-earning assets:
                                                     
   Cash equivalents
 
$
19,062
   
$
89
     
0.47
%
 
$
13,543
   
$
32
     
0.23
%
 
$
9,701
   
$
21
     
0.21
%
   Taxable investment securities (1)
   
2,177,589
     
56,113
     
2.58
%
   
2,071,095
     
53,282
     
2.57
%
   
1,834,430
     
52,268
     
2.85
%
   Nontaxable investment securities (1)
   
579,986
     
26,924
     
4.64
%
   
617,418
     
29,205
     
4.73
%
   
640,737
     
32,737
     
5.11
%
   Loans (net of unearned discount)(2)
   
4,881,905
     
212,022
     
4.34
%
   
4,288,091
     
189,507
     
4.42
%
   
4,156,840
     
186,727
     
4.49
%
       Total interest-earning assets
   
7,658,542
     
295,148
     
3.85
%
   
6,990,147
     
272,026
     
3.89
%
   
6,641,708
     
271,753
     
4.09
%
Noninterest-earning assets
   
1,001,525
                     
824,417
                     
782,195
                 
     Total assets
 
$
8,660,067
                   
$
7,814,564
                   
$
7,423,903
                 
                                                                         
Interest-bearing liabilities:
                                                                       
   Interest checking, savings and money
      market deposits
 
$
4,712,212
     
4,121
     
0.09
%
 
$
4,053,761
     
3,598
     
0.09
%
 
$
3,867,818
     
3,614
     
0.09
%
   Time deposits
   
750,944
     
3,204
     
0.43
%
   
737,734
     
3,373
     
0.46
%
   
845,035
     
4,576
     
0.54
%
   FHLB borrowings
   
169,769
     
1,017
     
0.60
%
   
411,694
     
1,694
     
0.41
%
   
303,295
     
1,125
     
0.37
%
   Subordinated debt held by unconsolidated
       subsidiary trusts
   
102,158
     
2,949
     
2.89
%
   
102,133
     
2,537
     
2.48
%
   
102,116
     
2,477
     
2.43
%
     Total interest-bearing liabilities
   
5,735,083
     
11,291
     
0.20
%
   
5,305,322
     
11,202
     
0.21
%
   
5,118,264
     
11,792
     
0.23
%
Noninterest-bearing liabilities:
                                                                       
   Noninterest checking deposits
   
1,558,548
                     
1,352,683
                     
1,249,807
                 
   Other liabilities
   
154,916
                     
128,521
                     
109,206
                 
Shareholders' equity
   
1,211,520
                     
1,028,038
                     
946,626
                 
     Total liabilities and shareholders' equity
 
$
8,660,067
                   
$
7,814,564
                   
$
7,423,903
                 
                                                                         
Net interest earnings
         
$
283,857
                   
$
260,824
                   
$
259,961
         
                                                                         
Net interest spread
                   
3.65
%
                   
3.68
%
                   
3.86
%
Net interest margin on interest-earning
      assets
                   
3.71
%
                   
3.73
%
                   
3.91
%
                                                                         
Fully tax-equivalent adjustment
         
$
9,961
                   
$
12,404
                   
$
15,533
         
 
(1) Averages for investment securities are based on historical cost and the yields do not give effect to changes in fair value that is reflected as a component of shareholders' equity and deferred taxes.
(2)  Includes nonaccrual loans.  The impact of interest and fees not recognized on nonaccrual loans was immaterial.
 
31

 
As discussed above, the change in net interest income (fully tax-equivalent basis) may be analyzed by segregating the volume and rate components of the changes in interest income and interest expense for each underlying category.

Table 4: Rate/Volume
   
2016 Compared to 2015
   
2015 Compared to 2014
 
   
Increase (Decrease) Due to Change in (1)
   
Increase (Decrease) Due to Change in (1)
 
(000's omitted)
 
Volume
   
Rate
   
Net Change
   
Volume
   
Rate
   
Net Change
 
Interest earned on:
                                   
  Cash equivalents
 
$
17
   
$
40
   
$
57
   
$
9
   
$
2
   
$
11
 
  Taxable investment securities
   
2,745
     
86
     
2,831
     
6,369
     
(5,355
)
   
1,014
 
  Nontaxable investment securities
   
(1,746
)
   
(535
)
   
(2,281
)
   
(1,162
)
   
(2,370
)
   
(3,532
)
  Loans (net of unearned discount)
   
25,840
     
(3,325
)
   
22,515
     
5,833
     
(3,053
)
   
2,780
 
Total interest-earning assets (2)
   
25,782
     
(2,660
)
   
23,122
     
13,897
     
(13,624
)
   
273
 
                                                 
Interest paid on:
                                               
  Interest checking, savings and           money market deposits
   
577
     
(54
)
   
523
     
170
     
(186
)
   
(16
)
  Time deposits
   
59
     
(228
)
   
(169
)
   
(540
)
   
(663
)
   
(1,203
)
  Short-term borrowings
   
(1,250
)
   
573
     
(677
)
   
436
     
133
     
569
 
  Long-term borrowings
   
1
     
411
     
412
     
0
     
60
     
60
 
Total interest-bearing liabilities (2)
   
874
     
(785
)
   
89
     
420
     
(1,010
)
   
(590
)
                                                 
Net interest earnings (2)
 
$
24,784
   
(1,751
)
 
$
23,033
   
$
13,302
   
(12,439
)
 
$
863
 
 
 
 
 
(1) The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of change in each.
(2) Changes due to volume and rate are computed from the respective changes in average balances and rates of the totals; they are not a summation of the changes of the components.

Noninterest Income

The Company's sources of noninterest income are of four primary types: 1) general banking services related to loans, deposits and other core customer activities typically provided through the branch network and electronic banking channels (performed by CBNA); 2) employee benefit services (performed by BPAS); 3) wealth management services, comprised of trust services (performed by the trust unit within CBNA), investment products and services (performed by CISI, The Carta Group and OWM) and asset management services (performed by Nottingham); and 4) insurance products and services (performed by OneGroup).  Additionally, the Company has periodic transactions, most often net gains or losses from the sale of investment securities and prepayment of debt instruments.

Table 5: Noninterest Income

 
 
Years Ended December 31,
 
(000's omitted except ratios)
 
2016
   
2015
   
2014
 
Employee benefit services
 
$
46,628
   
$
45,388
   
$
42,580
 
Deposit service charges and fees
   
29,061
     
28,087
     
29,379
 
Electronic banking
   
25,781
     
22,263
     
21,156
 
Insurance services
   
23,149
     
3,352
     
1,450
 
Wealth management services
   
19,776
     
16,856
     
16,420
 
Other banking revenues
   
9,140
     
5,656
     
6,576
 
Mortgage banking
   
2,090
     
1,701
     
1,459
 
   Subtotal
   
155,625
     
123,303
     
119,020
 
Loss on sales of investment securities, net
   
0
     
(4
)
   
0
 
      Total noninterest income
 
$
155,625
   
$
123,299
   
$
119,020
 
 
                       
Noninterest income/operating income (FTE basis) (1)
   
35.4
%
   
32.1
%
   
31.4
%
 
(1) For purposes of this ratio noninterest income excludes gains (losses) on sales of investment securities. Operating income is defined as net interest income on a fully-tax equivalent basis, plus noninterest income, excluding gains (losses) on sales of investment securities.