10-Q 1 d16976d10q.htm FORM 10-Q Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 000-26481

 

 

 

LOGO

(Exact name of registrant as specified in its charter)

 

 

 

NEW YORK   16-0816610

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

220 LIBERTY STREET, WARSAW, NEW YORK   14569
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (585)786-1100

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  x    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  x    No  ¨

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The registrant had 14,189,535 shares of Common Stock, $0.01 par value, outstanding as of October 28, 2015.


Table of Contents

FINANCIAL INSTITUTIONS, INC.

Form 10-Q

For the Quarterly Period Ended September 30, 2015

TABLE OF CONTENTS

 

         PAGE  

PART I.

 

FINANCIAL INFORMATION

     3   

ITEM 1.

 

Financial Statements

     3   
 

Consolidated Statements of Financial Condition (Unaudited) - at September 30, 2015 and December 31, 2014

     3   
 

Consolidated Statements of Income (Unaudited) - Three and nine months ended September 30, 2015 and 2014

     4   
  Consolidated Statements of Comprehensive Income (Unaudited) - Three and nine months ended September 30, 2015 and 2014      5   
  Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) - Nine months ended September 30, 2015 and 2014      6   
 

Consolidated Statements of Cash Flows (Unaudited) - Nine months ended September 30, 2015 and 2014

     7   
 

Notes to Consolidated Financial Statements (Unaudited)

     8   

ITEM 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     32   

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     52   

ITEM 4.

 

Controls and Procedures

     53   

PART II.

 

OTHER INFORMATION

     54   

ITEM 1.

 

Legal Proceedings

     54   

ITEM 1A.

 

Risk Factors

     54   

ITEM 6.

 

Exhibits

     54   
 

Signatures

     55   

 

- 2 -


Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Financial Condition (Unaudited)

 

(Dollars in thousands, except share and per share data)    September 30,     December 31,  
     2015     2014  
ASSETS     

Cash and cash equivalents

   $ 51,334      $ 58,151   

Securities available for sale, at fair value

     577,509        622,494   

Securities held to maturity, at amortized cost (fair value of $496,751 and $298,695, respectively)

     490,638        294,438   

Loans held for sale

     1,568        755   

Loans (net of allowance for loan losses of $26,455 and $27,637, respectively)

     2,009,781        1,884,365   

Company owned life insurance

     62,486        61,004   

Premises and equipment, net

     38,032        36,394   

Goodwill and other intangible assets, net

     67,925        68,639   

Other assets

     58,335        63,281   
  

 

 

   

 

 

 

Total assets

   $ 3,357,608      $ 3,089,521   
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Deposits:

    

Noninterest-bearing demand

   $ 623,296      $ 571,260   

Interest-bearing demand

     563,731        490,190   

Savings and money market

     942,673        795,835   

Certificates of deposit

     623,800        593,242   
  

 

 

   

 

 

 

Total deposits

     2,753,500        2,450,527   

Short-term borrowings

     241,400        334,804   

Long-term borrowings, net of issuance costs of $1,028

     38,972        —     

Other liabilities

     28,302        24,658   
  

 

 

   

 

 

 

Total liabilities

     3,062,174        2,809,989   
  

 

 

   

 

 

 

Shareholders’ equity:

    

Series A 3% preferred stock, $100 par value; 1,533 shares authorized and 1,492 shares issued and outstanding

     149        149   

Series B-1 8.48% preferred stock, $100 par value; 200,000 shares authorized and 171,906 shares issued and outstanding

     17,191        17,191   
  

 

 

   

 

 

 

Total preferred equity

     17,340        17,340   

Common stock, $0.01 par value; 50,000,000 shares authorized and 14,397,509 shares issued

     144        144   

Additional paid-in capital

     72,427        72,955   

Retained earnings

     215,470        203,312   

Accumulated other comprehensive loss

     (6,052     (9,011

Treasury stock, at cost – 208,674 and 279,461 shares, respectively

     (3,895     (5,208
  

 

 

   

 

 

 

Total shareholders’ equity

     295,434        279,532   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 3,357,608      $ 3,089,521   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)

 

(In thousands, except per share amounts)    Three months ended
September 30,
     Nine months ended
September 30,
 
     2015     2014      2015     2014  

Interest income:

         

Interest and fees on loans

   $ 21,210      $ 20,671       $ 61,793      $ 61,168   

Interest and dividends on investment securities

     5,797        4,458         16,170        13,903   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest income

     27,007        25,129         77,963        75,071   
  

 

 

   

 

 

    

 

 

   

 

 

 

Interest expense:

         

Deposits

     1,917        1,627         5,364        4,729   

Short-term borrowings

     342        244         785        706   

Long-term borrowings

     617        —           1,132        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest expense

     2,876        1,871         7,281        5,435   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income

     24,131        23,258         70,682        69,636   

Provision for loan losses

     754        2,015         4,783        5,879   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan losses

     23,377        21,243         65,899        63,757   
  

 

 

   

 

 

    

 

 

   

 

 

 

Noninterest income:

         

Service charges on deposits

     2,037        2,277         5,880        6,768   

Insurance income

     1,265        922         3,930        979   

ATM and debit card

     1,297        1,263         3,773        3,694   

Investment advisory

     523        524         1,551        1,647   

Company owned life insurance

     488        421         1,448        1,249   

Investments in limited partnerships

     336        187         865        894   

Loan servicing

     153        120         416        450   

Net gain on sale of loans held for sale

     53        76         161        231   

Net gain on disposal of investment securities

     286        515         1,348        1,777   

Net gain on disposal of other assets

     —          72         20        61   

Amortization of tax credit investment

     (390     —           (390     —     

Other

     957        884         2,755        2,445   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest income

     7,005        7,261         21,757        20,195   
  

 

 

   

 

 

    

 

 

   

 

 

 

Noninterest expense:

         

Salaries and employee benefits

     10,278        9,725         31,107        28,044   

Occupancy and equipment

     3,417        3,131         10,491        9,505   

Professional services

     1,064        976         2,898        3,332   

Computer and data processing

     779        725         2,291        2,225   

Supplies and postage

     540        507         1,611        1,554   

FDIC assessments

     444        390         1,277        1,200   

Advertising and promotions

     312        216         789        609   

Other

     2,484        2,285         7,101        6,507   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest expense

     19,318        17,955         57,565        52,976   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before income taxes

     11,064        10,549         30,091        30,976   

Income tax expense

     2,748        3,365         8,389        9,541   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 8,316      $ 7,184       $ 21,702      $ 21,435   
  

 

 

   

 

 

    

 

 

   

 

 

 

Preferred stock dividends

     366        366         1,097        1,097   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income available to common shareholders

   $ 7,950      $ 6,818       $ 20,605      $ 20,338   
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings per common share (Note 3):

         

Basic

   $ 0.56      $ 0.49       $ 1.46      $ 1.47   

Diluted

   $ 0.56      $ 0.49       $ 1.46      $ 1.46   

Cash dividends declared per common share

   $ 0.20      $ 0.19       $ 0.60      $ 0.57   

Weighted average common shares outstanding:

         

Basic

     14,087        13,953         14,076        13,840   

Diluted

     14,139        14,007         14,124        13,890   

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

 

(Dollars in thousands)    Three months ended
September 30,
    Nine months ended
September 30,
 
     2015      2014     2015      2014  

Net income

   $ 8,316       $ 7,184      $ 21,702       $ 21,435   

Other comprehensive income (loss), net of tax:

          

Net unrealized gains (losses) on securities available for sale

     5,492         (1,745     2,546         4,683   

Pension and post-retirement obligations

     138         19        413         58   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total other comprehensive income (loss), net of tax

     5,630         (1,726     2,959         4,741   
  

 

 

    

 

 

   

 

 

    

 

 

 

Comprehensive income

   $ 13,946       $ 5,458      $ 24,661       $ 26,176   
  

 

 

    

 

 

   

 

 

    

 

 

 

See accompanying notes to the consolidated financial statements.

 

- 5 -


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

Nine months ended September 30, 2015 and 2014

 

(Dollars in thousands,

except per share data)

   Preferred
Equity
    Common
Stock
     Additional
Paid-in
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Loss
    Treasury
Stock
    Total
Shareholders’
Equity
 

Balance at January 1, 2014

   $ 17,342      $ 142       $ 67,574      $ 186,137      $ (10,187   $ (6,169   $ 254,839   

Comprehensive income:

               

Net income

     —          —           —          21,435        —          —          21,435   

Other comprehensive income, net of tax

     —          —           —          —          4,741        —          4,741   

Issuance of common stock for acqusition

     —          2         5,398        —          —          —          5,400   

Purchases of common stock for treasury

     —          —           —          —          —          (195     (195

Repurchase of Series B-1 8.48% preferred stock

     (2            —          —          (2

Share-based compensation plans:

               

Share-based compensation

     —          —           383        —          —          —          383   

Stock options exercised

     —          —           2        —          —          158        160   

Restricted stock awards issued, net

     —          —           (554     —          —          554        —     

Cash dividends declared:

               

Series A 3% Preferred-$2.25 per share

     —          —           —          (3     —          —          (3

Series B-1 8.48% Preferred-$6.36 per share

     —          —           —          (1,094     —          —          (1,094

Common-$0.57 per share

     —          —           —          (7,906     —          —          (7,906
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

   $ 17,340      $ 144       $ 72,803      $ 198,569      $ (5,446   $ (5,652   $ 277,758   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 1, 2015

   $ 17,340      $ 144       $ 72,955      $ 203,312      $ (9,011   $ (5,208   $ 279,532   

Comprehensive income:

               

Net income

     —          —           —          21,702        —          —          21,702   

Other comprehensive income, net of tax

     —          —           —          —          2,959        —          2,959   

Purchases of common stock for treasury

     —          —           —          —          —          (41     (41

Share-based compensation plans:

               

Share-based compensation

     —          —           520        —          —          —          520   

Stock options exercised

     —          —           1        —          —          251        252   

Restricted stock awards issued, net

     —          —           (1,060     —          —          1,060        —     

Stock awards

     —          —           11        —          —          43        54   

Cash dividends declared:

               

Series A 3% Preferred-$2.25 per share

     —          —           —          (3     —          —          (3

Series B-1 8.48% Preferred-$6.36 per share

     —          —           —          (1,094     —          —          (1,094

Common-$0.60 per share

     —          —           —          (8,447     —          —          (8,447
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2015

   $ 17,340      $ 144       $ 72,427      $ 215,470      $ (6,052   $ (3,895   $ 295,434   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

 

(Dollars in thousands)    Nine months ended
September 30,
 
     2015     2014  

Cash flows from operating activities:

    

Net income

   $ 21,702      $ 21,435   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     4,065        3,247   

Net amortization of premiums on securities

     2,355        2,435   

Provision for loan losses

     4,783        5,879   

Share-based compensation

     520        383   

Deferred income tax expense

     318        802   

Proceeds from sale of loans held for sale

     10,370        12,649   

Originations of loans held for sale

     (11,022     (10,919

Increase in company owned life insurance

     (1,448     (1,249

Net gain on sale of loans held for sale

     (161     (231

Net gain on disposal of investment securities

     (1,348     (1,777

Amortization of tax credit investment

     390        —     

Net gain on sale and disposal of other assets

     (20     (61

Decrease in other assets

     2,830        5,420   

Increase (decrease) in other liabilities

     1,819        (61
  

 

 

   

 

 

 

Net cash provided by operating activities

     35,153        37,952   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of available for sale securities

     (271,899     (179,203

Purchases of held to maturity securities

     (53,768     (50,394

Proceeds from principal payments, maturities and calls on available for sale securities

     118,378        123,625   

Proceeds from principal payments, maturities and calls on held to maturity securities

     23,826        26,432   

Proceeds from sales of securities available for sale

     37,620        76,100   

Net loan originations

     (130,485     (79,138

Purchases of company owned life insurance

     (34     (5,034

Proceeds from sales of other assets

     167        1,289   

Purchases of premises and equipment

     (4,957     (4,448

Cash consideration paid for acquisition, net of cash acquired

     —          (7,995
  

 

 

   

 

 

 

Net cash used in investing activities

     (281,152     (98,766
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase in deposits

     302,973        218,768   

Net decrease in short-term borrowings

     (93,404     (121,075

Issuance of long-term debt

     40,000        —     

Debt issuance costs

     (1,060     —     

Repurchase of preferred stock

     —          (2

Purchase of common stock for treasury

     (41     (195

Proceeds from stock options exercised

     252        160   

Cash dividends paid to common and preferred shareholders

     (9,538     (8,952
  

 

 

   

 

 

 

Net cash provided by financing activities

     239,182        88,704   
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (6,817     27,890   

Cash and cash equivalents, beginning of period

     58,151        59,692   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 51,334      $ 87,582   
  

 

 

   

 

 

 

Supplemental information:

    

Cash paid for interest

   $ 5,566      $ 5,056   

Cash paid for income taxes

     4,257        9,739   

Noncash investing and financing activities:

    

Real estate and other assets acquired in settlement of loans

     286        394   

Accrued and declared unpaid dividends

     3,183        3,032   

Increase in net unsettled security purchases

     2,232        1,724   

Securities transferred from available for sale to held to maturity (at fair value)

     165,238        12,802   

Loans transferred from held for sale to held for investment

     —          853   

Common stock issued for acquisition

     —          5,400   

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(1.) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Financial Institutions, Inc., (the “Company”) is a financial holding company organized in 1931 under the laws of New York State. The Company offers a broad array of deposit, lending and other financial services to individuals, municipalities and businesses in Western and Central New York through its wholly-owned New York chartered banking subsidiary, Five Star Bank (the “Bank”). The Company has also expanded its indirect lending network to include relationships with franchised automobile dealers in the Capital District of New York and Northern Pennsylvania. On August 1, 2014, the Company acquired Scott Danahy Naylon Co., Inc., a full service insurance agency located in Amherst, New York. The Company provides insurance and risk consulting services through its wholly-owned insurance subsidiary, Scott Danahy Naylon, LLC (“SDN”).

Basis of Presentation

The consolidated financial statements include the accounts of Financial Institutions, Inc. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The accounting and reporting policies conform to U.S. generally accepted accounting principles (“GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in conformity with GAAP have been condensed or omitted pursuant to applicable rules and regulations of the Securities and Exchange Commission. However, in the opinion of management, the accompanying consolidated financial statements reflect all adjustments of a normal and recurring nature necessary for a fair presentation of the consolidated statements of financial condition, income, comprehensive income, changes in shareholders’ equity and cash flows for the periods indicated, and contain adequate disclosure to make the information presented not misleading. Prior years’ consolidated financial statements are re-classified whenever necessary to conform to the current year’s presentation. These consolidated financial statements should be read in conjunction with the Company’s 2014 Annual Report on Form 10-K for the year ended December 31, 2014. The results of operations for any interim periods are not necessarily indicative of the results which may be expected for the entire year.

Subsequent Events

The Company has evaluated events and transactions for potential recognition or disclosure through the day the financial statements were issued and determined that there were no subsequent events.

Use of Estimates

The preparation of these financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates relate to the determination of the allowance for loan losses, the carrying value of goodwill and deferred tax assets, the valuation and other than temporary impairment (“OTTI”) considerations related to the securities portfolio, and assumptions used in the defined benefit pension plan accounting.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The effective date was recently deferred for one year to the interim and annual periods beginning on or after December 15, 2017. Early adoption is permitted as of the original effective date – interim and annual periods beginning on or after December 15, 2016. The Company is evaluating the potential impact of ASU 2014-09 on the Company’s financial statements.

In June 2014, the FASB issued ASU 2014-12, Compensation – Stock Compensation (Topic 718). The pronouncement was issued to clarify the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. ASU 2014-12 will be effective for the Company beginning January 1, 2016, though early adoption is permitted. The adoption of ASU 2014-12 is not expected to have a significant impact on the Company’s financial statements.

 

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Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(1.) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

In January 2015, the FASB issued ASU 2015-01, Income Statement – Extraordinary and Unusual Items (Subtopic 225-20) – Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. ASU 2015-01 eliminates from U.S. GAAP the concept of extraordinary items, which, among other things, required an entity to segregate extraordinary items considered to be unusual and infrequent from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. ASU 2015-01 will be effective for the Company beginning January 1, 2016, though early adoption is permitted. ASU 2015-01 is not expected to have a significant impact on the Company’s financial statements.

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. Under ASU 2015-03, the Company will present debt issuance costs in the balance sheet as a reduction from the related debt liability rather than as an asset. Amortization of such costs will continue to be reported as interest expense. ASU 2015-03 will be effective for the Company beginning January 1, 2016, though early adoption is permitted. Retrospective adoption is required. The Company early adopted this standard during the quarter ended June 30, 2015, concurrent with the issuance of the Subordinated Notes described in Note 7. Unamortized debt issuance costs of $1.0 million are included in the net balance of long-term borrowings reported on the Consolidated Statements of Financial Condition. Retrospective application of this standard did not impact previously issued financial statements.

(2.) BUSINESS COMBINATIONS

SDN Acquisition

On August 1, 2014, the Company completed the acquisition of Scott Danahy Naylon Co., Inc., a full service insurance agency located in Amherst, New York. Consideration for the acquisition included both cash and stock totaling $16.9 million, including up to $3.4 million of future payments, contingent upon SDN meeting certain revenue targets through 2017. The estimated fair value of the contingent consideration at the date of acquisition was $3.2 million, which was estimated using a probability-weighted discounted cash flow model. As a result of the acquisition, the Company recorded goodwill of $12.6 million and other intangible assets of $6.6 million. The goodwill is not expected to be deductible for income tax purposes. Pro forma results of operations for this acquisition have not been presented because the effect of this acquisition was not material to the Company’s consolidated financial statements.

This acquisition was accounted for under the acquisition method in accordance with FASB ASC Topic 805. Accordingly, the assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the acquisition date. The following table summarizes the consideration paid for Scott Danahy Naylon Co., Inc. and the amounts of the assets acquired and liabilities assumed.

 

Consideration paid:

  

Cash

   $ 8,100   

Stock

     5,400   

Contingent consideration

     3,227   
  

 

 

 

Fair value of total consideration transferred

     16,727   

Fair value of assets acquired:

  

Cash

     105   

Identified intangible assets

     6,640   

Premises and equipment, accounts receivable and other assets

     1,094   
  

 

 

 

Total identifiable assets acquired

     7,839   

Fair value of liabilities assumed:

  

Deferred tax liability

     2,556   

Other liabilities

     1,173   
  

 

 

 

Total liabilities assumed

     3,729   
  

 

 

 

Fair value of net assets acquired

     4,110   
  

 

 

 

Goodwill resulting from acquisition

   $ 12,617   
  

 

 

 

 

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Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(3.) EARNINGS PER COMMON SHARE (“EPS”)

The following table presents a reconciliation of the earnings and shares used in calculating basic and diluted EPS (in thousands, except per share amounts).

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2015      2014      2015      2014  

Net income available to common shareholders

   $ 7,950       $ 6,818       $ 20,605       $ 20,338   

Weighted average common shares outstanding:

           

Total shares issued

     14,398         14,318         14,398         14,214   

Unvested restricted stock awards

     (100      (64      (92      (64

Treasury shares

     (211      (301      (230      (310
  

 

 

    

 

 

    

 

 

    

 

 

 

Total basic weighted average common shares outstanding

     14,087         13,953         14,076         13,840   

Incremental shares from assumed:

           

Exercise of stock options

     23         26         22         25   

Vesting of restricted stock awards

     29         28         26         25   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total diluted weighted average common shares outstanding

     14,139         14,007         14,124         13,890   

Basic earnings per common share

   $ 0.56       $ 0.49       $ 1.46       $ 1.47   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per common share

   $ 0.56       $ 0.49       $ 1.46       $ 1.46   
  

 

 

    

 

 

    

 

 

    

 

 

 

For each of the periods presented, average shares subject to the following instruments were excluded from the computation of diluted EPS because the effect would be antidilutive:

   

Stock options

     —           —           —           5   

Restricted stock awards

     —           —           1         1   
  

 

 

    

 

 

    

 

 

    

 

 

 
     —           —           1         6   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(4.) INVESTMENT SECURITIES

The amortized cost and fair value of investment securities are summarized below (in thousands):

 

     Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
     Fair
Value
 

September 30, 2015

           

Securities available for sale:

           

U.S. Government agencies and government sponsored enterprises

   $ 261,364       $ 2,539       $ 351       $ 263,552   

Mortgage-backed securities:

           

Federal National Mortgage Association

     220,626         3,482         468         223,640   

Federal Home Loan Mortgage Corporation

     27,371         582         73         27,880   

Government National Mortgage Association

     33,533         1,399         3         34,929   

Collateralized mortgage obligations:

           

Federal National Mortgage Association

     20,798         408         5         21,201   

Federal Home Loan Mortgage Corporation

     5,181         1         6         5,176   

Privately issued

     —           920         —           920   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed securities

     307,509         6,792         555         313,746   

Asset-backed securities

     —           211         —           211   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale securities

   $ 568,873       $ 9,542       $ 906       $ 577,509   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities held to maturity:

           

State and political subdivisions

     289,986         6,110         70         296,026   

Mortgage-backed securities:

           

Federal National Mortgage Association

     9,293         81         11         9,363   

Government National Mortgage Association

     26,121         112         109         26,124   

Collateralized mortgage obligations:

           

Federal National Mortgage Association

     59,490         —           —           59,490   

Federal Home Loan Mortgage Corporation

     84,350         —           —           84,350   

Government National Mortgage Association

     21,398         —           —           21,398   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed securities

     200,652         193         120         200,725   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held to maturity securities

   $ 490,638       $ 6,303       $ 190       $ 496,751   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

           

Securities available for sale:

           

U.S. Government agencies and government sponsored enterprises

   $ 160,334       $ 1,116       $ 975       $ 160,475   

Mortgage-backed securities:

           

Federal National Mortgage Association

     184,857         2,344         1,264         185,937   

Federal Home Loan Mortgage Corporation

     29,478         799         7         30,270   

Government National Mortgage Association

     48,800         2,022         —           50,822   

Collateralized mortgage obligations:

           

Federal National Mortgage Association

     76,247         489         944         75,792   

Federal Home Loan Mortgage Corporation

     89,623         199         2,585         87,237   

Government National Mortgage Association

     29,954         598         40         30,512   

Privately issued

     —           1,218         —           1,218   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed securities

     458,959         7,669         4,840         461,788   

Asset-backed securities

     —           231         —           231   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale securities

   $ 619,293       $ 9,016       $ 5,815       $ 622,494   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities held to maturity:

           

State and political subdivisions

     277,273         4,231         120         281,384   

Mortgage-backed securities:

           

Federal National Mortgage Association

     3,279         24         —           3,303   

Government National Mortgage Association

     13,886         122         —           14,008   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed securities

     17,165         146         —           17,311   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held to maturity securities

   $ 294,438       $ 4,377       $ 120       $ 298,695   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities with a total fair value of $810.6 million at September 30, 2015 were pledged as collateral to secure public deposits and for other purposes required or permitted by law.

 

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(4.) INVESTMENT SECURITIES (Continued)

 

During the third quarter of 2015, the Company transferred $165.2 million of available for sale mortgage backed securities to the held to maturity category, reflecting the Company’s intent to hold those securities to maturity. Transfers of investment securities into the held to maturity category from the available for sale category are made at fair value at the date of transfer. The related $1.1 million of unrealized holding losses that were included in the transfer are retained in accumulated other comprehensive income and in the carrying value of the held to maturity securities. This amount will be amortized as an adjustment to interest income over the remaining life of the securities. This will offset the impact of amortization of the net premium created in the transfer. There were no gains or losses recognized as a result of this transfer.

Sales and calls of securities available for sale were as follows (in thousands):

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2015      2014      2015      2014  

Proceeds from sales

   $ 8,112       $ 14,672       $ 37,620       $ 76,100   

Gross realized gains

     286         515         1,359         1,777   

Gross realized losses

     —           —           11         —     

The scheduled maturities of securities available for sale and securities held to maturity at September 30, 2015 are shown below (in thousands). Actual expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.

 

     Amortized
Cost
     Fair
Value
 

Debt securities available for sale:

     

Due in one year or less

   $ 25,099       $ 25,201   

Due from one to five years

     172,819         174,865   

Due after five years through ten years

     296,229         300,942   

Due after ten years

     74,726         76,501   
  

 

 

    

 

 

 
   $ 568,873       $ 577,509   
  

 

 

    

 

 

 

Debt securities held to maturity:

     

Due in one year or less

   $ 21,222       $ 21,325   

Due from one to five years

     167,246         170,997   

Due after five years through ten years

     119,314         121,512   

Due after ten years

     182,856         182,917   
  

 

 

    

 

 

 
   $ 490,638       $ 496,751   
  

 

 

    

 

 

 

 

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Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(4.) INVESTMENT SECURITIES (Continued)

 

Unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows (in thousands):

 

     Less than 12 months      12 months or longer      Total  
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

September 30, 2015

                 

Securities available for sale:

                 

U.S. Government agencies and government sponsored enterprises

   $ 52,180       $ 268       $ 26,640       $ 83       $ 78,820       $ 351   

Mortgage-backed securities:

                 

Federal National Mortgage Association

     36,563         428         9,768         40         46,331         468   

Federal Home Loan Mortgage Corporation

     5,967         73         —           —           5,967         73   

Government National Mortgage Association

     1,525         3         —           —           1,525         3   

Collateralized mortgage obligations:

                 

Federal National Mortgage Association

     2,542         5         —           —           2,542         5   

Federal Home Loan Mortgage Corporation

     5,086         6         —           —           5,086         6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed securities

     51,683         515         9,768         40         61,451         555   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale securities

     103,863         783         36,408         123         140,271         906   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Securities held to maturity:

                 

State and political subdivisions

     11,985         70         —           —           11,985         70   

Mortgage-backed securities:

                 

Federal National Mortgage Association

     1,369         11         —           —           1,369         11   

Government National Mortgage Association

     8,888         109         —           —           8,888         109   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed securities

     10,257         120         —           —           10,257         120   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total held to maturity securities

     22,242         190         —           —           22,242         190   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 126,105       $ 973       $ 36,408       $ 123       $ 162,513       $ 1,096   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

                 

Securities available for sale:

                 

U.S. Government agencies and government sponsored enterprises

   $ 34,995       $ 77       $ 41,070       $ 898       $ 76,065       $ 975   

Mortgage-backed securities:

                 

Federal National Mortgage Association

     2,242         8         62,592         1,256         64,834         1,264   

Federal Home Loan Mortgage Corporation

     3,387         7         —           —           3,387         7   

Collateralized mortgage obligations:

                 

Federal National Mortgage Association

     11,228         24         25,644         920         36,872         944   

Federal Home Loan Mortgage Corporation

     —           —           76,126         2,585         76,126         2,585   

Government National Mortgage Association

     —           —           2,510         40         2,510         40   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed securities

     16,857         39         166,872         4,801         183,729         4,840   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale securities

     51,852         116         207,942         5,699         259,794         5,815   

Securities held to maturity:

                 

State and political subdivisions

     18,036         120         —           —           18,036         120   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 69,888       $ 236       $ 207,942       $ 5,699       $ 277,830       $ 5,935   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(4.) INVESTMENT SECURITIES (Continued)

 

The total number of security positions in the investment portfolio in an unrealized loss position at September 30, 2015 was 82 compared to 122 at December 31, 2014. At September 30, 2015, the Company had positions in 10 investment securities with a fair value of $36.4 million and a total unrealized loss of $123 thousand that have been in a continuous unrealized loss position for more than 12 months. At September 30, 2015, there were a total of 72 securities positions in the Company’s investment portfolio with a fair value of $126.1 million and a total unrealized loss of $973 thousand that had been in a continuous unrealized loss position for less than 12 months. At December 31, 2014, the Company had positions in 51 investment securities with a fair value of $207.9 million and a total unrealized loss of $5.7 million that have been in a continuous unrealized loss position for more than 12 months. At December 31, 2014, there were a total of 71 securities positions in the Company’s investment portfolio with a fair value of $69.9 million and a total unrealized loss of $236 thousand that had been in a continuous unrealized loss position for less than 12 months.

The unrealized loss on investment securities was predominantly caused by changes in market interest rates subsequent to purchase. The fair value of most of the investment securities in the Company’s portfolio fluctuates as market interest rates change. The Company reviews investment securities on an ongoing basis for the presence of OTTI with formal reviews performed quarterly. When evaluating debt securities for OTTI, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intention to sell the debt security or whether it is more likely than not that it will be required to sell the debt security before its anticipated recovery. The assessment of whether OTTI exists involves a high degree of subjectivity and judgment and is based on the information then available to management. There was no OTTI recorded during the nine months ended September 30, 2015 and 2014.

Based on management’s review and evaluation of the Company’s debt securities as of September 30, 2015, the debt securities with unrealized losses were not considered to be other-than-temporarily imparied. As of September 30, 2015, the Company did not intend to sell any of the securities in a loss position and believes that it is not likely that it will be required to sell any such securities before the anticipated recovery of amortized cost. Accordingly, as of September 30, 2015, management has concluded that unrealized losses on its investment securities are temporary and no further impairment loss has been realized in the Company’s consolidated statements of income.

 

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Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(5.) LOANS

The Company’s loan portfolio consisted of the following as of the dates indicated (in thousands):

 

     Principal
Amount
Outstanding
     Net Deferred
Loan Costs
(Fees)
     Loans, Net  

September 30, 2015

        

Commercial business

   $ 297,640       $ 236       $ 297,876   

Commercial mortgage

     549,911         (1,382      548,529   

Residential mortgage

     96,298         (19      96,279   

Home equity

     401,103         7,531         408,634   

Consumer indirect

     641,453         24,261         665,714   

Other consumer

     19,020         184         19,204   
  

 

 

    

 

 

    

 

 

 

Total

   $ 2,005,425       $ 30,811         2,036,236   
  

 

 

    

 

 

    

Allowance for loan losses

           (26,455
        

 

 

 

Total loans, net

         $ 2,009,781   
        

 

 

 

December 31, 2014

        

Commercial business

   $ 267,377       $ 32       $ 267,409   

Commercial mortgage

     476,407         (1,315      475,092   

Residential mortgage

     100,241         (140      100,101   

Home equity

     379,774         6,841         386,615   

Consumer indirect

     636,357         25,316         661,673   

Other consumer

     20,915         197         21,112   
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,881,071       $ 30,931         1,912,002   
  

 

 

    

 

 

    

Allowance for loan losses

           (27,637
        

 

 

 

Total loans, net

         $ 1,884,365   
        

 

 

 

Loans held for sale (not included above) were comprised entirely of residential real estate mortgages and totaled $1.6 million and $755 thousand as of September 30, 2015 and December 31, 2014, respectively.

 

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Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(5.) LOANS (Continued)

 

Past Due Loans Aging

The Company’s recorded investment, by loan class, in current and nonaccrual loans, as well as an analysis of accruing delinquent loans is set forth as of the dates indicated (in thousands):

 

     30-59 Days
Past Due
     60-89 Days
Past Due
     Greater
Than 90
Days
     Total
Past Due
     Nonaccrual      Current      Total Loans  

September 30, 2015

                    

Commercial business

   $ 657       $ —         $ —         $ 657       $ 3,064       $ 293,919       $ 297,640   

Commercial mortgage

     383         9         —           392         1,802         547,717         549,911   

Residential mortgage

     99         —           —           99         1,523         94,676         96,298   

Home equity

     709         122         —           831         792         399,480         401,103   

Consumer indirect

     1,710         338         —           2,048         1,292         638,113         641,453   

Other consumer

     100         62         8         170         12         18,838         19,020   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans, gross

   $ 3,658       $ 531       $ 8       $ 4,197       $ 8,485       $ 1,992,743       $ 2,005,425   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

                    

Commercial business

   $ 28       $ —         $ —         $ 28       $ 4,288       $ 263,061       $ 267,377   

Commercial mortgage

     83         —           —           83         3,020         473,304         476,407   

Residential mortgage

     321         —           —           321         1,194         98,726         100,241   

Home equity

     799         67         —           866         463         378,445         379,774   

Consumer indirect

     2,429         402         —           2,831         1,169         632,357         636,357   

Other consumer

     148         48         8         204         11         20,700         20,915   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans, gross

   $ 3,808       $ 517       $ 8       $ 4,333       $ 10,145       $ 1,866,593       $ 1,881,071   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were no loans past due greater than 90 days and still accruing interest as of September 30, 2015 and December 31, 2014. There were $8 thousand in consumer overdrafts which were past due greater than 90 days as of September 30, 2015 and December 31, 2014. Consumer overdrafts are overdrawn deposit accounts which have been reclassified as loans but by their terms do not accrue interest.

Troubled Debt Restructurings

A modification of a loan constitutes a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulty and the modification constitutes a concession. Commercial loans modified in a TDR may involve temporary interest-only payments, term extensions, reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, collateral concessions, forgiveness of principal, forebearance agreements, or substituting or adding a new borrower or guarantor.

The following table presents information related to loans modified in a TDR during the periods indicated (dollars in thousands).

 

     Quarter-to-Date      Year-to-Date  
     Number of
Contracts
     Pre-
Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
     Number of
Contracts
     Pre-Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
 

September 30, 2015

                 

Commercial business

     —         $ —         $ —           2       $ 1,342       $ 1,342   

Commercial mortgage

     —           —           —           1         682         330   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —         $ —           3       $ 2,024       $ 1,672   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2014

                 

Commercial business

     —         $ —         $ —           1       $ 1,381       $ 1,381   

Commercial mortgage

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —         $ —           1       $ 1,381       $ 1,381   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(5.) LOANS (Continued)

 

The loans identified as a TDR by the Company during the nine month periods ended September 30, 2015 and 2014 were previously on nonaccrual status and reported as impaired loans prior to restructuring. The modifications during the reported periods primarily related to extending amortization periods, forebearance agreements, requesting additional collateral and, in one instance, forgiveness of principal. Nonaccrual loans that are restructured remain on nonaccrual status, but may move to accrual status after they have performed according to the restructured terms for a period of time. The TDR classification did not have a material impact on the Company’s determination of the allowance for loan losses because the modified loans were impaired and evaluated for a specific reserve both before and after restructuring.

There were two commercial business loans with an aggregate pre-default balance of $1.3 million restructured in the 12 months prior to September 30, 2015 that went into default during the nine months ended September 30, 2015. There were no loans modified as a TDR in the 12 months prior to September 30, 2014 that defaulted during the nine months ended September 30, 2014. For purposes of this disclosure, a loan modified as a TDR is considered to have defaulted when the borrower becomes 90 days past due.

Impaired Loans

Management has determined that specific commercial loans on nonaccrual status and all loans that have had their terms restructured in a TDR are impaired loans. The following table presents the recorded investment, unpaid principal balance and related allowance of impaired loans as of the dates indicated, and average recorded investment and interest income recognized on impaired loans for the year-to-date periods ended as of the dates indicated (in thousands):

 

     Recorded
Investment(1)
     Unpaid
Principal
Balance(1)
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

September 30, 2015

              

With no related allowance recorded:

              

Commercial business

   $ 1,291       $ 2,750       $ —         $ 1,314       $ —     

Commercial mortgage

     912         1,260         —           1,077         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     2,203         4,010         —           2,391         —     

With an allowance recorded:

           

Commercial business

     1,773         1,773         806         2,152         —     

Commercial mortgage

     890         890         278         1,147         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     2,663         2,663         1,084         3,299         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 4,866       $ 6,673       $ 1,084       $ 5,690       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

              

With no related allowance recorded:

              

Commercial business

   $ 1,408       $ 1,741       $ —         $ 1,431       $ —     

Commercial mortgage

     781         920         —           1,014         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     2,189         2,661         —           2,445         —     

With an allowance recorded:

              

Commercial business

     2,880         2,880         1,556         1,998         —     

Commercial mortgage

     2,239         2,239         911         1,560         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     5,119         5,119         2,467         3,558         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 7,308       $ 7,780       $ 2,467       $ 6,003       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  Difference between recorded investment and unpaid principal balance represents partial charge-offs.

 

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Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(5.) LOANS (Continued)

 

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors such as the fair value of collateral. The Company analyzes commercial business and commercial mortgage loans individually by classifying the loans as to credit risk. Risk ratings are updated any time the situation warrants. The Company uses the following definitions for risk ratings:

Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans that do not meet the criteria above that are analyzed individually as part of the process described above are considered “uncriticized” or pass-rated loans and are included in groups of homogeneous loans with similar risk and loss characteristics.

The following table sets forth the Company’s commercial loan portfolio, categorized by internally assigned asset classification, as of the dates indicated (in thousands):

 

     Commercial
Business
     Commercial
Mortgage
 

September 30, 2015

     

Uncriticized

   $ 282,900       $ 532,892   

Special mention

     4,763         9,247   

Substandard

     9,977         7,772   

Doubtful

     —           —     
  

 

 

    

 

 

 

Total

   $ 297,640       $ 549,911   
  

 

 

    

 

 

 

December 31, 2014

     

Uncriticized

   $ 250,961       $ 460,880   

Special mention

     5,530         5,411   

Substandard

     10,886         10,116   

Doubtful

     —           —     
  

 

 

    

 

 

 

Total

   $ 267,377       $ 476,407   
  

 

 

    

 

 

 

The Company utilizes payment status as a means of identifying and reporting problem and potential problem retail loans. The Company considers nonaccrual loans and loans past due greater than 90 days and still accruing interest to be non-performing. The following table sets forth the Company’s retail loan portfolio, categorized by payment status, as of the dates indicated (in thousands):

 

     Residential
Mortgage
     Home
Equity
     Consumer
Indirect
     Other
Consumer
 

September 30, 2015

           

Performing

   $ 94,775       $ 400,311       $ 640,161       $ 19,000   

Non-performing

     1,523         792         1,292         20   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 96,298       $ 401,103       $ 641,453       $ 19,020   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

           

Performing

   $ 99,047       $ 379,311       $ 635,188       $ 20,896   

Non-performing

     1,194         463         1,169         19   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 100,241       $ 379,774       $ 636,357       $ 20,915   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(5.) LOANS (Continued)

 

Allowance for Loan Losses

Loans and the related allowance for loan losses are presented below as of the dates indicated (in thousands):

 

     Commercial
Business
     Commercial
Mortgage
     Residential
Mortgage
     Home
Equity
     Consumer
Indirect
     Other
Consumer
     Total  

September 30, 2015

                    

Loans:

                    

Ending balance

   $ 297,640       $ 549,911       $ 96,298       $ 401,103       $ 641,453       $ 19,020       $ 2,005,425   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Evaluated for impairment:

                    

Individually

   $ 3,064       $ 1,802       $ —         $ —         $ —         $ —         $ 4,866   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Collectively

   $ 294,576       $ 548,109       $ 96,298       $ 401,103       $ 641,453       $ 19,020       $ 2,000,559   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Allowance for loan losses:

                    

Ending balance

   $ 5,281       $ 8,888       $ 456       $ 1,177       $ 10,264       $ 389       $ 26,455   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Evaluated for impairment:

                    

Individually

   $ 806       $ 278       $ —         $ —         $ —         $ —         $ 1,084   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Collectively

   $ 4,475       $ 8,610       $ 456       $ 1,177       $ 10,264       $ 389       $ 25,371   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2014

                    

Loans:

                    

Ending balance

   $ 275,027       $ 470,566       $ 103,183       $ 376,062       $ 630,441       $ 21,096       $ 1,876,375   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Evaluated for impairment:

                    

Individually

   $ 3,258       $ 2,460       $ —         $ —         $ —         $ —         $ 5,718   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Collectively

   $ 271,769       $ 468,106       $ 103,183       $ 376,062       $ 630,441       $ 21,096       $ 1,870,657   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Allowance for loan losses:

                    

Ending balance

   $ 5,758       $ 7,488       $ 592       $ 1,658       $ 11,292       $ 456       $ 27,244   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Evaluated for impairment:

                    

Individually

   $ 1,331       $ 269       $ —         $ —         $ —         $ —         $ 1,600   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Collectively

   $ 4,427       $ 7,219       $ 592       $ 1,658       $ 11,292       $ 456       $ 25,644   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table sets forth the changes in the allowance for loan losses for the three and nine month periods ended September 30, 2015 (in thousands):

 

     Commercial
Business
     Commercial
Mortgage
    Residential
Mortgage
    Home
Equity
    Consumer
Indirect
     Other
Consumer
     Total  

Three months ended September 30, 2015

                 

Beginning balance

   $ 5,334       $ 9,358      $ 465      $ 1,198      $ 10,676       $ 469       $ 27,500   

Charge-offs

     106         56        37        98        2,380         239         2,916   

Recoveries

     38         44        34        34        905         62         1,117   

Provision (credit)

     15         (458     (6     43        1,063         97         754   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Ending balance

   $ 5,281       $ 8,888      $ 456      $ 1,177      $ 10,264       $ 389       $ 26,455   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Nine months ended September 30, 2015

                 

Beginning balance

   $ 5,621       $ 8,122      $ 570      $ 1,485      $ 11,383       $ 456       $ 27,637   

Charge-offs

     1,260         866        114        336        6,643         652         9,871   

Recoveries

     172         140        80        53        3,206         255         3,906   

Provision

     748         1,492        (80     (25     2,318         330         4,783   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Ending balance

   $ 5,281       $ 8,888      $ 456      $ 1,177      $ 10,264       $ 389       $ 26,455   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

- 19 -


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(5.) LOANS (Continued)

 

The following table sets forth the changes in the allowance for loan losses for the three and nine month periods ended September 30, 2014 (in thousands):

 

     Commercial
Business
     Commercial
Mortgage
    Residential
Mortgage
    Home
Equity
     Consumer
Indirect
     Other
Consumer
     Total  

Three months ended September 30, 2014

  

Beginning balance

   $ 5,402       $ 7,633      $ 618      $ 1,607       $ 11,446       $ 460       $ 27,166   

Charge-offs

     105         111        16        73         2,606         272         3,183   

Recoveries

     61         45        5        7         1,029         99         1,246   

Provision (credit)

     400         (79     (15     117         1,423         169         2,015   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ 5,758       $ 7,488      $ 592      $ 1,658       $ 11,292       $ 456       $ 27,244   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Nine months ended September 30, 2014

                  

Beginning balance

   $ 4,273       $ 7,743      $ 676      $ 1,367       $ 12,230       $ 447       $ 26,736   

Charge-offs

     176         276        163        335         7,392         765         9,107   

Recoveries

     158         58        34        47         3,129         310         3,736   

Provision (credit)

     1,503         (37     45        579         3,325         464         5,879   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ 5,758       $ 7,488      $ 592      $ 1,658       $ 11,292       $ 456       $ 27,244   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Risk Characteristics

Commercial business loans primarily consist of loans to small to midsize businesses in our market area in a diverse range of industries. These loans are typically made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. Risk arises primarily due to a difference between expected and actual cash flows of the borrowers. Further, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value. The credit risk related to commercial loans is largely influenced by general economic conditions and the resulting impact on a borrower’s operations or on the value of underlying collateral, if any.

Commercial mortgage loans generally have larger balances and involve a greater degree of risk than residential mortgage loans, potentially resulting in higher losses on an individual customer basis. Loan repayment is often dependent on the successful operation and management of the properties, as well as on the collateral securing the loan. Economic events or conditions in the real estate market could have an adverse impact on the cash flows generated by properties securing the Company’s commercial real estate loans and on the value of such properties.

Residential mortgage loans and home equities (comprised of home equity loans and home equity lines) are generally made on the basis of the borrower’s ability to make repayment from his or her employment and other income, but are secured by real property whose value tends to be more easily ascertainable. Credit risk for these types of loans is generally influenced by general economic conditions, the characteristics of individual borrowers, and the nature and sufficiency of the loan collateral.

Consumer indirect and other consumer loans may entail greater credit risk than residential mortgage loans and home equities, particularly in the case of other consumer loans which are unsecured or, in the case of indirect consumer loans, secured by depreciable assets, such as automobiles or boats. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances such as job loss, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

 

- 20 -


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(6.) GOODWILL AND OTHER INTANGIBLE ASSETS

The carrying amount of goodwill totaled $61.2 million as of September 30, 2015 and December 31, 2014. The Company performs a goodwill impairment test on an annual basis or more frequently if events and circumstances warrant.

The Company has other intangible assets that are amortized, consisting of core deposit intangibles and other intangibles (primarily related to customer relationships acquired in connection with the Company’s insurance agency acquisition). Changes in the gross carrying amount, accumulated amortization and net book value, were as follows (in thousands):

 

     September 30,
2015
     December 31,
2014
 

Other intangibles assets:

     

Gross carrying amount

   $ 8,682       $ 8,682   

Accumulated amortization

     (1,910      (1,196
  

 

 

    

 

 

 

Net book value

   $ 6,772       $ 7,486   
  

 

 

    

 

 

 

Amortization expense for total other intangible assets was $233 thousand and $714 thousand for the three and nine months ended September 30, 2015, and $196 thousand and $372 thousand for the three and nine months ended September 30, 2014, respectively. As of September 30, 2015, the estimated amortization expense of other intangible assets for the remainder of 2015 and each of the next five years is as follows (in thousands):

 

2015 (remainder of year)

   $ 228   

2016

     864   

2017

     778   

2018

     689   

2019

     611   

2020

     533   

(7.) BORROWINGS

The Company classifies borrowings as short-term or long-term in accordance with the original terms of the agreement. Outstanding borrowings consisted of the following as of the dates indicated (in thousands):

 

     September 30,
2015
     December 31,
2014
 

Short-term borrowings:

     

Short-term FHLB borrowings

   $ 241,400       $ 295,300   

Repurchase agreements

     —           39,504   
  

 

 

    

 

 

 

Total short-term borrowings

     241,400         334,804   

Long-term borrowings:

     

Subordinated notes, net

     38,972         —     
  

 

 

    

 

 

 

Total borrowings

   $ 280,372       $ 334,804   
  

 

 

    

 

 

 

Subordinated Notes

On April 15, 2015, the Company issued $40.0 million of 6.0% fixed to floating rate subordinated notes due April 15, 2030 (the “Subordinated Notes”) in a registered public offering. The Subordinated Notes bear interest at a fixed rate of 6.0% per year, payable semi-annually, for the first 10 years. From April 15, 2025 to the April 15, 2030 maturity date, the interest rate will reset quarterly to an annual interest rate equal to the then current three-month London Interbank Offered Rate (LIBOR) plus 3.944%, payable quarterly. The Subordinated Notes are redeemable by the Company at any quarterly interest payment date beginning on April 15, 2025 to maturity at par, plus accrued and unpaid interest. Proceeds, net of debt issuance costs of $1.1 million, were $38.9 million. The net proceeds from this offering were used for general corporate purposes, including but not limited to, contribution of capital to the Bank to support both organic growth and opportunistic acquisitions. The Subordinated Notes qualify as Tier 2 capital for regulatory purposes.

The Company adopted ASU 2015-03 that requires debt issuance costs to be reported as a direct deduction from the face of the Notes and not as a deferred charge. Refer to Note 1 for additional information. The debt issuance costs will be amortized as an adjustment to interest expense over 15 years.

 

- 21 -


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(8.) SHAREHOLDERS’ EQUITY

Common Stock

The changes in shares of common stock were as follows for the nine month periods ended September 30, 2015 and 2014:

 

     Outstanding      Treasury      Issued  

September 30, 2015

        

Shares outstanding at December 31, 2014

     14,118,048         279,461         14,397,509   

Restricted stock awards issued

     59,834         (59,834      —     

Restricted stock awards forfeited

     (3,041      3,041         —     

Stock options exercised

     13,422         (13,422      —     

Treasury stock purchases

     (1,791      1,791         —     

Stock awards

     2,363         (2,363      —     
  

 

 

    

 

 

    

 

 

 

Shares outstanding at September 30, 2015

     14,188,835         208,674         14,397,509   
  

 

 

    

 

 

    

 

 

 

September 30, 2014

        

Shares outstanding at December 31, 2013

     13,829,355         332,242         14,161,597   

Shares issued for the SDN acquisition

     235,912         —           235,912   

Restricted stock awards issued

     43,242         (43,242      —     

Restricted stock awards forfeited

     (13,609      13,609         —     

Stock options exercised

     8,467         (8,467      —     

Treasury stock purchases

     (9,102      9,102         —     
  

 

 

    

 

 

    

 

 

 

Shares outstanding at September 30, 2014

     14,094,265         303,244         14,397,509   
  

 

 

    

 

 

    

 

 

 

(9.) ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table presents the components of other comprehensive income for the nine month periods ended September 30, 2015 and 2014 (in thousands):

 

     Pre-tax
Amount
     Tax Effect      Net-of-tax
Amount
 

September 30, 2015

        

Securities available for sale and transferred securities:

        

Change in unrealized gain/loss during the period

   $ 5,693       $ 2,197       $ 3,496   

Reclassification adjustment for net gains included in net income (1)

     (1,546      (596      (950
  

 

 

    

 

 

    

 

 

 

Total securities available for sale and transferred securities

     4,147         1,601         2,546   

Amortization of pension and post-retirement items:

        

Prior service credit

     (36      (14      (22

Net actuarial losses

     708         273         435   
  

 

 

    

 

 

    

 

 

 

Total pension and post-retirement obligations

     672         259         413   
  

 

 

    

 

 

    

 

 

 

Other comprehensive income

   $ 4,819       $ 1,860       $ 2,959   
  

 

 

    

 

 

    

 

 

 

September 30, 2014

        

Securities available for sale and transferred securities:

        

Change in unrealized gain/loss during the period

   $ 9,923       $ 3,931       $ 5,992   

Reclassification adjustment for net gains included in net income (1)

     (2,167      (858      (1,309
  

 

 

    

 

 

    

 

 

 

Total securities available for sale and transferred securities

     7,756         3,073         4,683   

Amortization of pension and post-retirement items:

        

Prior service credit

     (36      (14      (22

Net actuarial losses

     132         52         80   
  

 

 

    

 

 

    

 

 

 

Total pension and post-retirement obligations

     96         38         58   
  

 

 

    

 

 

    

 

 

 

Other comprehensive income

   $ 7,852       $ 3,111       $ 4,741   
  

 

 

    

 

 

    

 

 

 

 

(1)  Includes amounts related to the amortization/accretion of unrealized net gains and losses resulting from the Company’s reclassification of available for sale investment securities to the held to maturity category. The remaining unrealized net gains/losses will be amortized/accreted over the remaining life of the investment securities as an adjustment of yield.

 

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Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(9.) ACCUMULATED OTHER COMPREHENSIVE LOSS (Continued)

 

Activity in accumulated other comprehensive loss, net of tax, for the nine month periods ended September 30, 2015 and 2014 was as follows (in thousands):

 

     Securities
Available for
Sale and
Transferred
Securities
     Pension and
Post-
retirement
Obligations
     Accumulated
Other
Comprehensive
Loss
 

September 30, 2015

        

Balance at beginning of year

   $ 1,625       $ (10,636    $ (9,011

Other comprehensive income before reclassifications

     3,496         —           3,496   

Amounts reclassified from accumulated other comprehensive loss

     (950      413         (537
  

 

 

    

 

 

    

 

 

 

Net current period other comprehensive income

     2,546         413         2,959   
  

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ 4,171       $ (10,223    $ (6,052
  

 

 

    

 

 

    

 

 

 

September 30, 2014

        

Balance at beginning of year

   $ (5,337    $ (4,850    $ (10,187

Other comprehensive income before reclassifications

     5,992         —           5,992   

Amounts reclassified from accumulated other comprehensive loss

     (1,309      58         (1,251
  

 

 

    

 

 

    

 

 

 

Net current period other comprehensive income

     4,683         58         4,741   
  

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ (654    $ (4,792    $ (5,446
  

 

 

    

 

 

    

 

 

 

The following table presents the amounts reclassified out of each component of accumulated other comprehensive loss for nine month periods ended September 30, 2015 and 2014 (in thousands):

 

Details About Accumulated Other

Comprehensive Loss Components

   Amount Reclassified from
Accumulated Other
Comprehensive Loss
    

Affected Line Item in the

Consolidated Statement of Income

     Nine months ended
September 30,
      
     2015      2014       

Realized gain on sale of investment securities

   $ 1,348       $ 1,777       Net gain on disposal of investment securities

Amortization of unrealized holding gains (losses) on investment securities transferred from available for sale to held to maturity

     198         390       Interest income
  

 

 

    

 

 

    
     1,546         2,167       Total before tax
     (596      (858    Income tax expense
  

 

 

    

 

 

    
     950         1,309       Net of tax

Amortization of pension and post-retirement items:

        

Prior service credit (1)

     36         36       Salaries and employee benefits

Net actuarial losses (1)

     (708      (132    Salaries and employee benefits
  

 

 

    

 

 

    
     (672      (96    Total before tax
     259         38       Income tax benefit
  

 

 

    

 

 

    
     (413      (58    Net of tax
  

 

 

    

 

 

    

Total reclassified for the period

   $ 537       $ 1,251      
  

 

 

    

 

 

    

 

(1)  These items are included in the computation of net periodic pension expense. See Note 11 – Employee Benefit Plans for additional information.

 

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Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(10.) SHARE-BASED COMPENSATION PLANS

The Company maintains certain stock-based compensation plans that were approved by the Company’s shareholders and are administered by the Company’s Board of Directors, or the Management Development and Compensation Committee of the Board. The share-based compensation plans were established to allow for the grant of compensation awards to attract, motivate and retain employees, executive officers and non-employee directors who contribute to the success and profitability of the Company by giving such persons a proprietary interest in the Company, thereby enhancing their personal interest in the Company’s success.

The Company awarded grants of 36,384 shares of restricted common stock to certain members of management during the nine months ended September 30, 2015. Thirty percent of the shares subject to each grant will be earned based upon achievement of an EPS performance requirement for the Company’s fiscal year ended December 31, 2015. The remaining seventy percent of the shares will be earned based on the Company’s achievement of a relative total shareholder return (“TSR”) performance requirement, on a percentile basis, compared to the SNL Small Cap Bank & Thrifts Index over a three-year performance period ended December 31, 2017. The shares earned based on the achievement of the EPS and TSR performance requirements, if any, will vest on February 25, 2018 assuming the recipient’s continuous service to the Company.

The grant-date fair value of the TSR portion of the award granted during the nine month period ended September 30, 2015 was determined using the Monte Carlo simulation model on the date of grant, assuming the following (i) expected term of 2.85 years, (ii) risk free interest rate of 0.92%, (iii) expected dividend yield of 3.53% and (iv) expected stock price volatility over the expected term of the TSR award of 26.8%. The grant-date fair value of all other restricted stock awards is equal to the closing market price of the Company’s common stock on the date of grant.

The Company granted 12,700 additional shares of restricted common stock to management during the nine months ended September 30, 2015. These shares will vest after completion of a three-year service requirement. The average market price of the restricted stock awards on the date of grant was $22.79.

During the nine months ended September 30, 2015, the Company issued a total of 2,363 shares of common stock in-lieu of cash for the annual retainer of three non-employee directors and granted a total of 10,750 restricted shares of common stock to non-employee directors, of which 5,380 shares vested immediately and 5,370 shares will vest after completion of a one-year service requirement. The market price of the stock and restricted stock on the date of grant was $23.25.

The restricted stock awards granted to management and directors in 2015 do not have rights to dividends or dividend equivalents.

The following is a summary of restricted stock award activity for the nine month period ended September 30, 2015:

 

            Weighted  
            Average  
            Market  
     Number of
Shares
     Price at
Grant Date
 

Outstanding at beginning of year

     59,113       $ 17.24   

Granted

     59,834         17.66   

Vested

     (16,458      20.80   

Forfeited

     (3,041      20.39   
  

 

 

    

Outstanding at end of period

     99,448       $ 16.81   
  

 

 

    

As of September 30, 2015, there was $885 thousand of unrecognized compensation expense related to unvested restricted stock awards that is expected to be recognized over a weighted average period of 1.9 years.

The Company amortizes the expense related to restricted stock awards over the vesting period. Share-based compensation expense is recorded as a component of salaries and employee benefits in the consolidated statements of income for awards granted to management and as a component of other noninterest expense for awards granted to directors. The share-based compensation expense included in the consolidated statements of income is as follows (in thousands):

 

     Three months ended      Nine months ended  
     September 30,      September 30,  
     2015      2014        2015          2014    

Salaries and employee benefits

   $ 118       $ 52       $ 309       $ 208   

Other noninterest expense

     32         26         211         175   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total share-based compensation expense

   $ 150       $ 78       $ 520       $ 383   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(10.) SHARE-BASED COMPENSATION PLANS (Continued)

 

The Company uses the Black-Scholes valuation method to estimate the fair value of its stock option awards. There were no stock options awarded during 2015 or 2014. The following is a summary of stock option activity for the nine months ended September 30, 2015 (dollars in thousands, except per share amounts):

 

                   Weighted         
            Weighted      Average         
            Average      Remaining      Aggregate  
     Number of      Exercise      Contractual      Intrinsic  
     Options      Price      Term      Value  

Outstanding at beginning of year

     135,416       $ 19.25         

Exercised

     (13,422      18.74         

Expired

     (14,245      19.87         
  

 

 

          

Outstanding and exercisable at end of period

     107,749       $ 19.23         1.6       $ 598   
  

 

 

          

The aggregate intrinsic value (the amount by which the market price of the stock on the date of exercise exceeded the market price of the stock on the date of grant) of option exercises for the nine months ended September 30, 2015 and 2014 was $70 thousand and $35 thousand, respectively. The total cash received as a result of option exercises under stock compensation plans for the nine months ended September 30, 2015 and 2014 was $252 thousand and $160 thousand, respectively.

(11.) EMPLOYEE BENEFIT PLANS

The components of the Company’s net periodic benefit expense for its pension and post-retirement obligations were as follows (in thousands):

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2015      2014      2015      2014  

Service cost

   $ 581       $ 479       $ 1,743       $ 1,438   

Interest cost on projected benefit obligation

     583         573         1,749         1,720   

Expected return on plan assets

     (1,205      (1,029      (3,615      (3,088

Amortization of prior service credit

     (12      (12      (36      (36

Amortization of net actuarial losses

     237         44         708         132   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic pension expense

   $ 184       $ 55       $ 549       $ 166   
  

 

 

    

 

 

    

 

 

    

 

 

 

The net periodic benefit expense is recorded as a component of salaries and employee benefits in the consolidated statements of income. The Company’s funding policy is to contribute, at a minimum, an actuarially determined amount that will satisfy the minimum funding requirements determined under the appropriate sections of the Internal Revenue Code. The Company has no minimum required contribution for the 2015 fiscal year.

 

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Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(12.) COMMITMENTS AND CONTINGENCIES

The Company has financial instruments with off-balance sheet risk established in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk extending beyond amounts recognized in the Company’s financial statements.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is essentially the same as that involved with extending loans to customers. The Company uses the same credit underwriting policies in making commitments and conditional obligations as for on-balance sheet instruments.

Off-balance sheet commitments consist of the following (in thousands):

 

     September 30,
2015
     December 31,
2014
 

Commitments to extend credit

   $ 515,443       $ 450,343   

Standby letters of credit

     12,625         8,578   

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses which may require payment by the customer of a termination fee. Commitments may expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if any, is based on management’s credit evaluation of the borrower. Standby letters of credit are conditional lending commitments issued by the Company to guarantee the performance of a customer to a third party. These standby letters of credit are primarily issued to support private borrowing arrangements. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers.

The Company also extends rate lock agreements to borrowers related to the origination of residential mortgage loans. To mitigate the interest rate risk inherent in these rate lock agreements, the Company may enter into forward commitments to sell individual residential mortgages. Rate lock agreements and forward commitments are considered derivatives and are recorded at fair value. Forward sales commitments totaled $1.1 million and $1.2 million at September 30, 2015 and December 31, 2014, respectively. In addition, the net change in the fair values of these derivatives was recognized as other noninterest income or other noninterest expense in the consolidated statements of income.

(13.) FAIR VALUE MEASUREMENTS

Determination of Fair Value – Assets Measured at Fair Value on a Recurring and Nonrecurring Basis

Valuation Hierarchy

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. ASC Topic 820, “Fair Value Measurements and Disclosures,” establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. There have been no changes in the valuation techniques used during the current period. The fair value hierarchy is as follows:

 

    Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

 

    Level 2 – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

 

    Level 3 – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

Transfers between levels of the fair value hierarchy are recorded as of the end of the reporting period.

 

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Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(13.) FAIR VALUE MEASUREMENTS (Continued)

 

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the issuer’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein. A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

Securities available for sale: Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

Loans held for sale: The fair value of loans held for sale is determined using quoted secondary market prices and investor commitments. Loans held for sale are classified as Level 2 in the fair value hierarchy.

Collateral dependent impaired loans: Fair value of impaired loans with specific allocations of the allowance for loan losses is measured based on the value of the collateral securing these loans and is classified as Level 3 in the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable and collateral value is determined based on appraisals performed by qualified licensed appraisers hired by the Company. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and the client’s business. Such discounts are typically significant and result in a Level 3 classification of the inputs for determining fair value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.

Loan servicing rights: Loan servicing rights do not trade in an active market with readily observable market data. As a result, the Company estimates the fair value of loan servicing rights by using a discounted cash flow model to calculate the present value of estimated future net servicing income. The assumptions used in the discounted cash flow model are those that we believe market participants would use in estimating future net servicing income, including estimates of loan prepayment rates, servicing costs, ancillary income, impound account balances, and discount rates. The significant unobservable inputs used in the fair value measurement of the Company’s loan servicing rights are the constant prepayment rates and weighted average discount rate. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement. Although the constant prepayment rate and the discount rate are not directly interrelated, they will generally move in opposite directions. Loan servicing rights are classified as Level 3 measurements due to the use of significant unobservable inputs, as well as significant management judgment and estimation.

Other real estate owned (Foreclosed assets): Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. The appraisals are sometimes further discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. Such discounts are typically significant and result in a Level 3 classification of the inputs for determining fair value. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

Commitments to extend credit and letters of credit: Commitments to extend credit and fund letters of credit are principally at current interest rates, and, therefore, the carrying amount approximates fair value. The fair value of commitments is not material.

 

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Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(13.) FAIR VALUE MEASUREMENTS (Continued)

 

Assets Measured at Fair Value

The following tables present for each of the fair-value hierarchy levels the Company’s assets that are measured at fair value on a recurring and non-recurring basis as of the dates indicated (in thousands).

 

     Quoted Prices in
Active Markets
for Identical
Assets or
Liabilities
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Total  

September 30, 2015

           

Measured on a recurring basis:

           

Securities available for sale:

           

U.S. Government agencies and government sponsored enterprises

   $ —         $ 263,552       $ —         $ 263,552   

Mortgage-backed securities

     —           313,746         —           313,746   

Asset-backed securities

     —           211         —           211   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ 577,509       $ —         $ 577,509   
  

 

 

    

 

 

    

 

 

    

 

 

 

Measured on a nonrecurring basis:

           

Loans:

           

Loans held for sale

   $ —         $ 1,568       $ —         $ 1,568   

Collateral dependent impaired loans

     —           —           1,579         1,579   

Other assets:

           

Loan servicing rights

     —           —           1,241         1,241   

Other real estate owned

     —           —           286         286   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ 1,568       $ 3,106       $ 4,674   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

           

Measured on a recurring basis:

           

Securities available for sale:

           

U.S. Government agencies and government sponsored enterprises

   $ —         $ 160,475       $ —         $ 160,475   

Mortgage-backed securities

     —           461,788         —           461,788   

Asset-backed securities

     —           231         —           231   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ 622,494       $ —         $ 622,494   
  

 

 

    

 

 

    

 

 

    

 

 

 

Measured on a nonrecurring basis:

           

Loans:

           

Loans held for sale

   $ —         $ 755       $ —         $ 755   

Collateral dependent impaired loans

     —           —           2,652         2,652   

Other assets:

           

Loan servicing rights

     —           —           1,359         1,359   

Other real estate owned

     —           —           194         194   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ 755       $ 4,205       $ 4,960   
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no transfers between Levels 1 and 2 during the nine months ended September 30, 2015 and 2014. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the nine month periods ended September 30, 2015 and 2014.

 

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Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(13.) FAIR VALUE MEASUREMENTS (Continued)

 

The following table presents additional quantitative information about assets measured at fair value on a recurring and nonrecurring basis for which the Company has utilized Level 3 inputs to determine fair value (dollars in thousands).

 

Asset

   Fair
Value
    

Valuation Technique

  

Unobservable Input

  

Unobservable Input
Value or Range

Collateral dependent impaired loans

   $ 1,579       Appraisal of collateral (1)    Appraisal adjustments (2)    0% - 100% discount

Loan servicing rights

     1,241       Discounted cash flow    Discount rate    4.9% (3)
         Constant prepayment rate    12.7% (3)

Other real estate owned

     286       Appraisal of collateral (1)    Appraisal adjustments (2)    20% - 70% discount

 

(1)  Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable.
(2)  Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.
(3)  Weighted averages.

Changes in Level 3 Fair Value Measurements

There were no assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of or during the nine months ended September 30, 2015.

Disclosures about Fair Value of Financial Instruments

The assumptions used below are expected to approximate those that market participants would use in valuing these financial instruments.

Fair value estimates are made at a specific point in time, based on available market information and judgments about the financial instrument, including estimates of timing, amount of expected future cash flows and the credit standing of the issuer. Such estimates do not consider the tax impact of the realization of unrealized gains or losses. In some cases, the fair value estimates cannot be substantiated by comparison to independent markets. In addition, the disclosed fair value may not be realized in the immediate settlement of the financial instrument. Care should be exercised in deriving conclusions about our business, its value or financial position based on the fair value information of financial instruments presented below.

The estimated fair value approximates carrying value for cash and cash equivalents, Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) stock, accrued interest receivable, non-maturity deposits, short-term borrowings and accrued interest payable. Fair value estimates for other financial instruments not included elsewhere in this disclosure are discussed below.

Securities held to maturity: The fair value of the Company’s investment securities held to maturity is primarily measured using information from a third-party pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

Loans: The fair value of the Company’s loans was estimated by discounting the expected future cash flows using the current interest rates at which similar loans would be made for the same remaining maturities. Loans were first segregated by type such as commercial, residential mortgage, and consumer, and were then further segmented into fixed and variable rate and loan quality categories. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments.

Time deposits: The fair value of time deposits was estimated using a discounted cash flow approach that applies prevailing market interest rates for similar maturity instruments. The fair values of the Company’s time deposit liabilities do not take into consideration the value of the Company’s long-term relationships with depositors, which may have significant value.

Long-term borrowings: Long-term borrowings consist of $40 million of subordinated notes issued during the second quarter of 2015. The subordinated notes are publicly traded and are valued based on market prices, which are characterized as Level 2 liabilities in the fair value hierarchy.

 

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Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(13.) FAIR VALUE MEASUREMENTS (Continued)

 

The following presents (in thousands) the carrying amount, estimated fair value, and placement in the fair value measurement hierarchy of the Company’s financial instruments as of the dates indicated.

 

     Level in    September 30, 2015      December 31, 2014  
     Fair Value           Estimated             Estimated  
     Measurement    Carrying      Fair      Carrying      Fair  
     Hierarchy    Amount      Value      Amount      Value  

Financial assets:

              

Cash and cash equivalents

   Level 1    $ 51,334       $ 51,334       $ 58,151       $ 58,151   

Securities available for sale

   Level 2      577,509         577,509         622,494         622,494   

Securities held to maturity

   Level 2      490,638         496,751         294,438         298,695   

Loans held for sale

   Level 2      1,568         1,568         755         755   

Loans

   Level 2      2,008,202         2,015,542         1,881,713         1,887,959   

Loans (1)

   Level 3      1,579         1,579         2,652         2,652   

Accrued interest receivable

   Level 1      9,822         9,822         8,104         8,104   

FHLB and FRB stock

   Level 2      17,664         17,664         19,014         19,014   

Financial liabilities:

              

Non-maturity deposits

   Level 1      2,129,700         2,129,700         1,857,285         1,857,285   

Time deposits

   Level 2      623,800         625,288         593,242         593,793   

Short-term borrowings

   Level 1      241,400         241,400         334,804         334,804   

Long-term borrowings

   Level 2      38,972         39,105         —           —     

Accrued interest payable

   Level 1      5,577         5,577         3,862         3,862   

 

(1)  Comprised of collateral dependent impaired loans.

(14.) SEGMENT REPORTING

The Company has two reportable operating segments, banking and insurance, which are delineated by the consolidated subsidiaries of Financial Institutions, Inc. The banking segment includes all of the Company’s retail and commercial banking operations. The insurance segment includes the activities of SDN, a full service insurance agency that provides a broad range of insurance services to both personal and business clients. The Company operated as one business segment until the acquisition of SDN on August 1, 2014, at which time the new “Insurance” segment was created for financial reporting purposes. Holding company amounts are the primary differences between segment amounts and consolidated totals, and are reflected in the “Holding Company and Other” column below, along with amounts to eliminate balances and transactions between segments.

The following tables present information regarding the Company’s business segments as of and for the periods indicated (in thousands).

 

     Banking      Insurance      Holding
Company and
Other
     Consolidated
Totals
 

September 30, 2015

           

Goodwill

   $ 48,536       $ 12,617       $ —         $ 61,153   

Other intangible assets, net

     899         5,873         —           6,772   

Total assets

     3,336,234         20,520         854         3,357,608   

December 31, 2014

           

Goodwill

   $ 48,536       $ 12,617       $ —         $ 61,153   

Other intangible assets, net

     1,125         6,361         —           7,486   

Total assets

     3,065,109         20,368         4,044         3,089,521   

 

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(14.) SEGMENT REPORTING (Continued)

 

     Banking      Insurance      Holding
Company and
Other
     Consolidated
Totals
 

Three months ended September 30, 2015

        

Net interest income

   $ 24,748       $ —         $ (617    $ 24,131   

Provision for loan losses

     (754      —           —           (754

Noninterest income

     6,010         1,124         (129      7,005   

Noninterest expense

     (17,679      (1,152      (487      (19,318
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) before income taxes

     12,325         (28      (1,233      11,064   

Income tax (expense) benefit

     (3,361      10         603         (2,748
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

   $ 8,964       $ (18    $ (630    $ 8,316   
  

 

 

    

 

 

    

 

 

    

 

 

 

Nine months ended September 30, 2015

        

Net interest income

   $ 71,814       $ —         $ (1,132    $ 70,682   

Provision for loan losses

     (4,783      —           —           (4,783

Noninterest income

     18,363         3,750         (356      21,757   

Noninterest expense

     (52,626      (3,389      (1,550      (57,565
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) before income taxes

     32,768         361         (3,038      30,091   

Income tax (expense) benefit

     (9,417      (144      1,172         (8,389
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

   $ 23,351       $ 217       $ (1,866    $ 21,702   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Banking      Insurance(1)      Holding
Company and
Other
     Consolidated
Totals
 

Three months ended September 30, 2014

        

Net interest income

   $ 23,258       $ —         $ —         $ 23,258   

Provision for loan losses

     (2,015      —           —           (2,015

Noninterest income

     6,684         670         (93      7,261   

Noninterest expense

     (16,794      (640      (521      (17,955
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) before income taxes

     11,133         30         (614      10,549   

Income tax (expense) benefit

     (3,584      (12      231         (3,365
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

   $ 7,549       $ 18       $ (383    $ 7,184   
  

 

 

    

 

 

    

 

 

    

 

 

 

Nine months ended September 30, 2014

        

Net interest income

   $ 69,636       $ —         $ —         $ 69,636   

Provision for loan losses

     (5,879      —           —           (5,879

Noninterest income

     19,779         670         (254      20,195   

Noninterest expense

     (50,315      (640      (2,021      (52,976
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) before income taxes

     33,221         30         (2,275      30,976   

Income tax (expense) benefit

     (10,480      (12      951         (9,541
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

   $ 22,741       $ 18       $ (1,324    $ 21,435   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  Reflects activity from SDN since August 1, 2014, the date of acquisition.

 

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q should be read in conjunction with the more detailed and comprehensive disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2014. In addition, please read this section in conjunction with our Consolidated Financial Statements and Notes to Consolidated Financial Statements contained herein.

FORWARD LOOKING INFORMATION

Statements and financial analysis contained in this document that are based on other than historical data are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations or forecasts of future events and include, among others:

 

    statements with respect to the beliefs, plans, objectives, goals, guidelines, expectations, anticipations, and future financial condition, results of operations and performance of Financial Institutions, Inc. and our subsidiaries; and

 

    statements preceded by, followed by or that include the words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “projects,” or similar expressions.

These forward-looking statements are not guarantees of future performance, nor should they be relied upon as representing management’s views as of any subsequent date. Forward-looking statements involve significant risks and uncertainties and actual results may differ materially from those presented, either expressed or implied, in this document and our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, which we refer to as the Form 10-K, including, but not limited to, those presented in the Management’s Discussion and Analysis of Financial Condition and Results of Operations. Factors that might cause such differences include, but are not limited to:

 

    greater credit losses than anticipated;

 

    changes in our tax strategies and the value of our deferred tax assets;

 

    limited geographic concentration;

 

    failure to obtain accurate and complete information about or from customers and counterparties;

 

    insurance industry risks on our insurance brokerage subsidiary;

 

    environmental liability risk associated with our lending activities;

 

    changes in the quality or composition of our loan or investment portfolios;

 

    risks through our indirect lending;

 

    changes in banking laws, regulations and regulatory practices;

 

    new or changing tax and accounting rules and interpretations;

 

    legal and regulatory proceedings and related matters;

 

    a breach in security of our information systems, including the occurrence of a cyber incident or a deficiency in cyber security;

 

    technological changes;

 

    failure of other companies to provide key components of our business infrastructure;

 

    incorrect modeling assumptions for business planning purposes;

 

    the failure to attract and retain skilled people;

 

    interest rate risk, changes in interest rate risk and changes in real estate values;

 

    conditions in the financial markets and economic conditions generally;

 

    the fiscal and monetary policies of the federal government and its agencies;

 

    goodwill impairment;

 

    competition in our market area; and

 

    severe weather, natural disasters, acts of war or terrorism, and other external events.

We caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, and advise readers that various factors, including those described above, could affect our financial performance and could cause our actual results or circumstances for future periods to differ materially from those anticipated or projected. See also Item 1A, Risk Factors in the Form 10-K for further information. Except as required by law, we do not undertake, and specifically disclaim any obligation to publicly release any revisions to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

GENERAL

Financial Institutions, Inc. (the “Parent”) is a financial holding company headquartered in New York State, providing banking and nonbanking financial services to individuals, municipalities and businesses primarily in Western and Central New York. We offer a broad array of deposit, lending and other financial services to individuals, municipalities and businesses primarily in Western and Central New York through our wholly-owned New York chartered banking subsidiary, Five Star Bank. Our indirect lending network includes relationships with franchised automobile dealers in Western and Central New York, the Capital District of New York and Northern Pennsylvania. We also offer insurance services through our wholly-owned insurance subsidiary, Scott Danahy Naylon, LLC (“SDN”), a full service insurance agency which we acquired during the third quarter of 2014. References in this report to “the Company”, “we”, “our” or “us” mean the consolidated reporting entity and references to “the Bank” mean Five Star Bank.

Our primary sources of revenue are net interest income (interest earned on our loans and securities, net of interest paid on deposits and other funding sources) and noninterest income, particularly fees and other revenue from insurance and financial services provided to customers or ancillary services tied to loans and deposits. Business volumes and pricing drive revenue potential, and tend to be influenced by overall economic factors, including market interest rates, business spending, consumer confidence, economic growth, and competitive conditions within the marketplace. We are not able to predict market interest rate fluctuations with certainty and our asset/liability management strategy may not prevent interest rate changes from having a material adverse effect on our results of operations and financial condition.

Our business strategy has been to maintain a community bank philosophy, which consists of focusing on and understanding the individualized banking needs of individuals, municipalities and businesses of the local communities surrounding our primary service areas. We believe this focus allows us to be more responsive to our customers’ needs and provide a high level of personal service that differentiates us from larger competitors, resulting in long-standing and broad based banking relationships. Our core customers are primarily small to medium-sized businesses, individuals and community organizations, which prefer to build banking and insurance relationships with a community bank that combines high quality, competitively-priced products and services with personalized service. Because of our identity and origin as a locally operated bank, we believe that our level of personal service provides a competitive advantage over larger banks, which tend to consolidate decision-making authority outside local communities.

A key aspect of our current business strategy is to foster a community-oriented culture where our customers and employees establish long-standing and mutually beneficial relationships. We believe that we are well-positioned to be a strong competitor within our market area because of our focus on community banking needs and customer service, our comprehensive suite of deposit, loan and insurance products typically found at larger banks, our highly experienced management team and our strategically located banking centers. We believe that the foregoing factors all help to grow our core deposits, which supports a central element of our business strategy – the growth of a diversified and high-quality loan portfolio.

EXECUTIVE OVERVIEW

Summary of 2015 Third Quarter Results

Net income increased $1.1 million or 16% to $8.3 million for the third quarter of 2015 compared to $7.2 million for the third quarter of 2014. Net income available to common shareholders for the third quarter of 2015 was $8.0 million, or $0.56 per diluted share, compared with $6.8 million, or $0.49 per diluted share, for the third quarter of last year. Return on average common equity was 11.60% and return on average assets was 0.99% for the third quarter of 2015 compared to 10.55% and 0.95%, respectively, for the third quarter of 2014.

Competitive pricing pressure in all loan categories and the continuation of a low interest-rate environment, along with our diminishing ability to reduce our cost of funds, continues to place pressure on our net interest margin and net interest income. Net interest income totaled $24.1 million in the third quarter 2015, up $873 thousand or 4% from $23.3 million in the third quarter 2014. Average earning assets were up $335.5 million, led by a $213.8 million increase in investment securities and an $121.7 million increase in loans in the third quarter of 2015 compared to the same quarter in 2014. The growth in earning assets was partially offset by a lower net interest margin. Third quarter 2015 net interest margin was 3.20%, a decrease of 26 basis points from 3.46% reported in the third quarter of 2014. The decrease in net interest margin reflects lower yields on average earning assets as a result of the low interest rate environment, a slight shift in the composition of average earnings assets as well as increased interest expense related to the subordinated debt issued in April 2015. Average loans and average securities totaled 65.5% and 34.5%, respectively, of average earning assets for the quarter ended September 30, 2015, compared with 69.0% and 31.0%, respectively for the quarter ended September 30, 2014.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

 

The provision for loans losses was $754 thousand in the third quarter of 2015 compared to $2.0 million in the third quarter of 2014. The decrease in the provision for loan losses reflects the reversal of a $1.1 million specific reserve related to a non-performing $2.5 million commercial credit relationship that paid off during the third quarter 2015. Net charge-offs were $1.8 million during the third quarter of 2015, a $138 thousand decrease from the third quarter of 2014. Net charge-offs expressed as an annualized percentage of average loans outstanding were 0.35% during the third quarter of 2015 compared with 0.40% in the third quarter of 2014. See the “Allowance for Loan Losses” and “Non-Performing Assets and Potential Problem Loans” sections of this Management’s Discussion and Analysis for further discussion regarding the decreases in the provision for loan losses and net-charge-offs.

Noninterest income totaled $7.0 million in the third quarter of 2015, compared to $7.3 million in the third quarter of 2014. Included in these totals are gains realized from the sale of investment securities. Exclusive of those securities gains and $390 thousand of tax credit amortization included in the third quarter of 2015, noninterest income was $7.1 million in the recently completed quarter and $6.7 million in the third quarter of 2014, primarily a result of increased income from insurance and investments in limited partnerships, partially offset by lower service charges on deposits.

Noninterest expense in the third quarter of 2015 totaled $19.3 million compared with $18.0 million in the third quarter of 2014. The increase in noninterest expense was primarily the result of higher salaries and employee benefits expense, occupancy and equipment expense and other noninterest expense. Noninterest expense for the third quarter of 2015 also includes an additional month of expense related to SDN, which was acquired on August 1, 2014.

The regulatory common equity Tier 1 ratio and total risk-based capital ratio were 9.74%, and 13.37%, respectively, for the third quarter of 2015. See the “Liquidity and Capital Management” section of this Management’s Discussion and Analysis for further discussion regarding regulatory capital and the Basel III capital rules, which became effective January 1, 2015.

Issuance of Subordinated Notes

On April 15, 2015, the Parent issued $40.0 million of 6.0% fixed to floating rate subordinated notes due April 15, 2030 (the “Subordinated Notes”) to certain accredited investors. The Subordinated Notes bear interest at a fixed rate of 6.0% per year, payable semi-annually, for the first 10 years. From April 15, 2025 to April 15, 2030, the interest rate will reset quarterly to an annual interest rate equal to the then current three-month London Interbank Offered Rate (LIBOR) plus 3.944%, payable quarterly. The Subordinated Notes are redeemable by us at any quarterly interest payment date beginning on April 15, 2025 to maturity at par, plus accrued and unpaid interest. The net proceeds from this offering were intended for general corporate purposes, including but not limited to, contribution of capital to the Bank to support both organic growth as well as opportunistic acquisitions. The Parent company contributed $34.0 million of net proceeds from this offering to the Bank as capital to support general corporate purposes. The notes qualify as Tier 2 capital for regulatory purposes.

We used the proceeds of the Subordinated Notes to purchase high-quality investment securities, comprised of mortgage-backed securities, U.S. Government agencies and sponsored enterprise bonds and tax-exempt municipal bonds. All of the securities purchased were of high credit quality with a low to moderate duration.

RESULTS OF OPERATIONS

Net Interest Income and Net Interest Margin

Net interest income is the primary source of our revenue. Net interest income is the difference between interest income on interest-earning assets, such as loans and investment securities, and the interest expense on interest-bearing deposits and other borrowings used to fund interest-earning and other assets or activities. Net interest income is affected by changes in interest rates and by the amount and composition of earning assets and interest-bearing liabilities, as well as the sensitivity of the balance sheet to changes in interest rates, including characteristics such as the fixed or variable nature of the financial instruments, contractual maturities and repricing frequencies.

We use interest rate spread and net interest margin to measure and explain changes in net interest income. Interest rate spread is the difference between the yield on earning assets and the rate paid for interest-bearing liabilities that fund those assets. The net interest margin is expressed as the percentage of net interest income to average earning assets. The net interest margin exceeds the interest rate spread because noninterest-bearing sources of funds (“net free funds”), principally noninterest-bearing demand deposits and shareholders’ equity, also support earning assets. To compare tax-exempt asset yields to taxable yields, we compute the yield on tax-exempt investment securities on a taxable equivalent basis. Net interest income, interest rate spread, and net interest margin are discussed on a taxable equivalent basis.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

 

The following table reconciles interest income per the consolidated statements of income to interest income adjusted to a fully taxable equivalent basis (dollars in thousands):

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2015      2014      2015      2014  

Interest income per consolidated statements of income

   $ 27,007       $ 25,129       $ 77,963       $ 75,071   

Adjustment to fully taxable equivalent basis

     781         721         2,310         2,117   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest income adjusted to a fully taxable equivalent basis

     27,788         25,850         80,273         77,188   

Interest expense per consolidated statements of income

     2,876         1,871         7,281         5,435   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income on a taxable equivalent basis

   $ 24,912       $ 23,979       $ 72,992       $ 71,753   
  

 

 

    

 

 

    

 

 

    

 

 

 

2015 Leverage Strategy

During the second quarter of 2015, we used the proceeds of short-term FHLB advances to purchase high-quality investment securities of approximately $50 million. Our purchase of investment securities was comprised of mortgage-backed securities, U.S. Government agencies and sponsored enterprise bonds and tax-exempt municipal bonds. All of the securities purchased were of high credit quality with a low to moderate duration. This strategy allowed us to increase net interest income by taking advantage of the positive interest rate spread between the FHLB advances and the newly acquired investment securities.

Analysis of Net Interest Income for the Three Months ended September 30, 2015 and 2014

Net interest income on a taxable equivalent basis for the three months ended September 30, 2015, was $24.9 million, an increase of $933 thousand or 4% versus the comparable quarter last year. The increase in net interest income was due to an increase in average earning assets of $335.5 million or 12% compared to the third quarter of 2014.

The net interest margin for the third quarter of 2015 was 3.20%, 26 basis points lower than 3.46% for the same period in 2014. This comparable period decrease was a function of a 28 basis point decrease in interest rate spread, partially offset by a higher contribution from net free funds of 2 basis points (due principally to increases in average noninterest-bearing deposits and other net free funds). The lower interest rate spread was a result of a 16 basis point decrease in the yield on earning assets and a 12 basis point increase in the cost of interest-bearing liabilities.

For the third quarter of 2015, the yield on average earning assets of 3.57% was 16 basis points lower than the third quarter of 2014. Loan yields decreased 15 basis points during the third quarter of 2015 to 4.16%. Commercial mortgage loan yields in particular, down 39 basis points, experienced lower yields because of competitive pricing pressures in a low interest rate environment. The yield on investment securities increased 3 basis points during the third quarter of 2015 to 2.46%. Overall, the earning asset rate changes reduced interest income by $586 thousand during the third quarter of 2015, but that was more than offset by a favorable volume variance that increased interest income by $2.5 million, which collectively drove a $1.9 million increase in interest income.

Average interest-earning assets were $3.09 billion for the third quarter 2015, an increase of $335.5 million or 12% from the comparable quarter last year, with average loans up $121.7 million and average securities up $213.8 million. The growth in average loans reflected increases in most loan categories, with commercial and consumer loans up $96.7 million and $33.5 million, respectively, partially offset by a $8.5 million decrease in residential mortgage loans. Loans represented 65.5% of average interest-earning assets during third quarter of 2015 compared to 69.0% during the third quarter of 2014. The yield on average loans was 4.16% for the third quarter of 2015, a decrease of 15 basis points compared to 4.31% for the third quarter of 2014. The yield on average loans was negatively impacted by lower average spreads due to increased competition in loan pricing during 2015 compared to 2014. The growth in average securities was primarily a result of securities purchased with proceeds from our previously described leverage strategy and issuance of the Subordinated Notes. Securities represented 34.5% of average interest-earning assets during third quarter of 2015 compared to 31.0% during the third quarter of 2014. The increase in the volume of average securities resulted in a $1.2 million increase in interest income, coupled with a $161 thousand increase due to the favorable rate variance.

The cost of average interest-bearing liabilities of 0.47% in the third quarter of 2015 was 12 basis points higher than the third quarter of 2014. The cost of average interest-bearing deposits increased 3 basis points to 0.37% and the cost of short-term borrowings increased 4 basis points to 0.41% in the third quarter of 2015 compared to the same quarter of 2014. The cost of long-term borrowings for the third quarter of 2015 was 6.34% due to the issuance of the Subordinated Notes in April. Overall, interest-bearing liability rate and volume increases resulted in $1.0 million of higher interest expense.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

 

Average interest-bearing liabilities of $2.41 billion in the third quarter of 2015 were $268.4 million or 13% higher than the third quarter of 2014. On average, interest-bearing deposits grew $160.4 million, while noninterest-bearing demand deposits (a principal component of net free funds) were up $68.6 million. The increase in average deposits was due in part to seasonal inflows of municipal deposits and an increase in deposits from our Insured Cash Sweep (“ICS”) programs. For further discussion of the Certificate of Deposit Account Registry Service (“CDARS”) and ICS programs, refer to the “Funding Activities – Deposits” section of this Management’s Discussion and Analysis. Overall, interest-bearing deposit rate and volume changes resulted in $290 thousand of higher interest expense during the third quarter of 2015. Average short-term and long-term borrowings increased $69.1 million and $39.0 million, respectively, between the third quarter periods. Overall, short and long-term borrowing rate and volume changes resulted in $715 thousand of higher interest expense during the third quarter of 2015. The increase in average long-term borrowings for the third quarter of 2015 was due to the issuance of the Subordinated Notes in April.

Analysis of Net Interest Income for the Nine Months ended September 30, 2015 and 2014

Net interest income on a taxable equivalent basis for the first nine months of 2015 was $73.0 million compared to $71.8 million for the same period last year. The increase in net interest income was due to an increase in average earning assets of $216.1 million or 8% compared to the first nine months of 2014.

The net interest margin of 3.28% for the first nine months of 2015 was 20 basis points lower than 3.48% for the same period last year. This comparable period decrease was a function of a 22 basis point decrease in interest rate spread to 3.19% during the first nine months of 2015, partially offset by a 2 basis point higher contribution from net free funds. The lower interest rate spread was a net result of a 14 basis point decrease in the yield on earning assets and an 8 basis point increase in the cost of interest-bearing liabilities.

The yield on earning assets was 3.61% for the first nine months of 2015, 14 basis points lower than the same period last year, primarily attributable to a decrease in the yields on the loan portfolio during the period (down 16 basis points to 4.20%), partially offset by an increase in the yields on the investment securities portfolio (up 3 basis points, to 2.46%). Overall, earning asset rate changes reduced interest income by $1.9 million during the first nine months of 2015, but that was more than offset by a favorable volume variance that increased interest income by $5.0 million, which collectively drove a $3.1 million increase in interest income.

Average interest-earning assets were $2.97 billion for the first nine months of 2015, an increase of $216.1 million or 8% from the comparable period last year, with average loans up $91.8 million and average securities up $124.4 million. The growth in average loans reflected increases in most loan categories, with commercial and consumer loans up $49.4 million and $53.9 million, respectively, partially offset by an $11.5 million decrease in residential mortgage loans.

The cost on interest-bearing liabilities of 0.42% for the first nine months of 2015 was 8 basis points higher than the same period in 2014. Rates on interest-bearing deposits were up 2 basis points to 0.35%. The cost of long-term borrowings for the first nine months of 2015 was 6.25% due to the issuance of the Subordinated Notes in April. Overall, interest-bearing liability rate and volume increases resulted in $1.8 million of higher interest expense.

Average interest-bearing liabilities of $2.34 billion in the first nine months of 2015 were $187.5 million or 9% higher than the first nine months of 2014. On average, interest-bearing deposits grew $147.0 million, while noninterest-bearing demand deposits and average short-term borrowings were up $52.9 million and $16.4 million, respectively. Average long-term borrowings increased $24.1 million during the first nine months of 2015 due to the issuance of the Subordinated Notes in April.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

 

The following tables set forth certain information relating to the consolidated balance sheets and reflects the average yields earned on interest-earning assets, as well as the average rates paid on interest-bearing liabilities for the periods indicated (in thousands).

 

     Three months ended September 30,  
     2015     2014  
     Average
Balance
    Interest      Average
Rate
    Average
Balance
    Interest      Average
Rate
 

Interest-earning assets:

              

Federal funds sold and interest-earning deposits

   $ —        $ —           —     $ 51      $ —           0.28

Investment securities (1):

              

Taxable

     778,380        4,347         2.23        589,054        3,117         2.12   

Tax-exempt (2)

     289,435        2,231         3.09        264,976        2,062         3.11   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total investment securities

     1,067,815        6,578         2.46        854,030        5,179         2.43   

Loans:

              

Commercial business

     297,216        3,085         4.12        273,239        2,878         4.18   

Commercial mortgage

     545,875        6,210         4.51        473,168        5,847         4.90   

Residential mortgage

     96,776        1,069         4.42        105,255        1,247         4.74   

Home equity

     402,368        3,859         3.81        377,360        3,685         3.88   

Consumer indirect

     663,884        6,436         3.85        653,192        6,420         3.90   

Other consumer

     18,680        551         11.71        20,847        594         11.30   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total loans

     2,024,799        21,210         4.16        1,903,061        20,671         4.31   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-earning assets

     3,092,614        27,788         3.57        2,757,142        25,850         3.73   
    

 

 

    

 

 

     

 

 

    

 

 

 

Allowance for loan losses

     (27,836          (27,853     

Other noninterest-earning assets

     279,024             256,631        
  

 

 

        

 

 

      

Total assets

   $ 3,343,802           $ 2,985,920        
  

 

 

        

 

 

      

Interest-bearing liabilities:

              

Deposits:

              

Interest-bearing demand

   $ 516,448      $ 199         0.15   $ 486,311      $ 151         0.12

Savings and money market

     903,491        321         0.14        758,306        222         0.12   

Time deposits

     619,459        1,397         0.89        634,400        1,254         0.78   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing deposits

     2,039,398        1,917         0.37        1,879,017        1,627         0.34   

Short-term borrowings

     329,050        342         0.41        259,995        244         0.37   

Long-term borrowings

     38,962        617         6.34        —          —           —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total borrowings

     368,012        959         1.04        259,995        244         0.37   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     2,407,410        2,876         0.47        2,139,012        1,871         0.35   
    

 

 

    

 

 

     

 

 

    

 

 

 

Noninterest-bearing demand deposits

     625,131             556,485        

Other noninterest-bearing liabilities

     22,032             16,777        

Shareholders’ equity

     289,229             273,646        
  

 

 

        

 

 

      

Total liabilities and shareholders’ equity

   $ 3,343,802           $ 2,985,920        
  

 

 

        

 

 

      

Net interest income (tax-equivalent)

     $ 24,912           $ 23,979      
    

 

 

        

 

 

    

Interest rate spread

          3.10          3.38
       

 

 

        

 

 

 

Net earning assets

   $ 685,204           $ 618,130        
  

 

 

        

 

 

      

Net interest margin (tax-equivalent)

          3.20          3.46
       

 

 

        

 

 

 

Ratio of average interest-earning assets to average interest-bearing liabilities

          128.46          128.90
       

 

 

        

 

 

 

 

(1)  Investment securities are shown at amortized cost and include non-performing securities.
(2)  The interest on tax-exempt securities is calculated on a tax equivalent basis assuming a Federal tax rate of 35%.

 

- 37 -


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

     Nine months ended September 30,  
     2015     2014  
     Average
Balance
    Interest      Average
Rate
    Average
Balance
    Interest      Average
Rate
 

Interest-earning assets:

              

Federal funds sold and interest-earning deposits

   $ 50      $ —           0.30   $ 153      $ —           0.10

Investment securities (1):

              

Taxable

     717,330        11,879         2.21        621,605        9,971         2.14   

Tax-exempt (2)

     285,031        6,601         3.09        256,318        6,049         3.15   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total investment securities

     1,002,361        18,480         2.46        877,923        16,020         2.43   

Loans:

              

Commercial business

     282,307        8,731         4.13        271,190        8,701         4.29   

Commercial mortgage

     511,545        17,584         4.60        473,263        17,045         4.82   

Residential mortgage

     97,496        3,377         4.62        109,030        3,926         4.80   

Home equity

     392,909        11,304         3.85        351,212        10,396         3.96   

Consumer indirect

     663,286        19,143         3.86        648,901        19,301         3.98   

Other consumer

     19,084        1,654         11.59        21,251        1,799         11.32   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total loans

     1,966,627        61,793         4.20        1,874,847        61,168         4.36   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-earning assets

     2,969,038        80,273         3.61        2,752,923        77,188         3.75   
    

 

 

    

 

 

     

 

 

    

 

 

 

Allowance for loan losses

     (27,881          (27,389     

Other noninterest-earning assets

     300,489             249,560        
  

 

 

        

 

 

      

Total assets

   $ 3,241,646           $ 2,975,094        
  

 

 

        

 

 

      

Interest-bearing liabilities:

              

Deposits:

              

Interest-bearing demand

   $ 543,045      $ 552         0.14   $ 502,170      $ 462         0.12

Savings and money market

     891,039        827         0.12        770,008        689         0.12   

Time deposits

     612,637        3,985         0.87        627,550        3,578         0.76   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing deposits

     2,046,721        5,364         0.35        1,899,728        4,729         0.33   

Short-term borrowings

     269,415        785         0.39        253,017        706         0.37   

Long-term borrowings

     24,148        1,132         6.25        —          —           —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total borrowings

     293,563        1,917         0.87        253,017        706         0.37   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     2,340,284        7,281         0.42        2,152,745        5,435         0.34   
    

 

 

    

 

 

     

 

 

    

 

 

 

Noninterest-bearing demand deposits

     592,564             539,693        

Other noninterest-bearing liabilities

     21,603             14,803        

Shareholders’ equity

     287,195             267,853        
  

 

 

        

 

 

      

Total liabilities and shareholders’ equity

   $ 3,241,646           $ 2,975,094        
  

 

 

        

 

 

      

Net interest income (tax-equivalent)

     $ 72,992           $ 71,753      
    

 

 

        

 

 

    

Interest rate spread

          3.19          3.41
       

 

 

        

 

 

 

Net earning assets

   $ 628,754           $ 600,178        
  

 

 

        

 

 

      

Net interest margin (tax-equivalent)

          3.28          3.48
       

 

 

        

 

 

 

Ratio of average interest-earning assets to average interest-bearing liabilities

          126.87          127.88
       

 

 

        

 

 

 

 

(1)  Investment securities are shown at amortized cost and include non-performing securities.
(2)  The interest on tax-exempt securities is calculated on a tax equivalent basis assuming a Federal tax rate of 35%.

 

- 38 -


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

The following table presents, on a tax equivalent basis, the relative contribution of changes in volumes and changes in rates to changes in net interest income for the periods indicated. The change in net interest income not solely due to changes in volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each (in thousands):

 

     Three months ended
September 30, 2015 vs. 2014
    Nine months ended
September 30, 2015 vs. 2014
 
     Volume     Rate     Total     Volume     Rate     Total  

Increase (decrease) in:

            

Interest income:

          

Federal funds sold and interest-earning deposits

   $ —        $ —        $ —        $ —        $ —        $ —     

Investment securities:

          

Taxable

     1,049        181        1,230        1,576        332        1,908   

Tax-exempt

     189        (20     169        667        (115     552   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investment securities

     1,238        161        1,399        2,243        217        2,460   

Loans:

          

Commercial business

     250        (43     207        350        (320     30   

Commercial mortgage

     851        (488     363        1,339        (800     539   

Residential mortgage

     (97     (81     (178     (404     (145     (549

Home equity

     241        (67     174        1,207        (299     908   

Consumer indirect

     104        (88     16        422        (580     (158

Other consumer

     (63     20        (43     (187     42        (145
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

     1,286        (747     539        2,727        (2,102     625