Note 1 Summary of Significant Accounting Policies
Basis Of Presentation
Tompkins Financial Corporation (“Tompkins” or “the Company”) is a registered Financial Holding Company with the Federal Reserve Board pursuant to the Bank Holding Company Act of 1956, as amended, organized under the laws of New York State, and is the parent company of Tompkins Community Bank, and Tompkins Insurance Agencies, Inc. (“Tompkins Insurance”). Tompkins Community Bank provides a full array of trust and investment services under the Tompkins Financial Advisors brand. Unless the context otherwise requires, the term “Company” refers to Tompkins Financial Corporation and its subsidiaries.
The consolidated financial information included herein combines the results of operations, the assets, liabilities, and shareholders’ equity (including comprehensive income or loss) of the Company and all entities in which the Company has a controlling financial interest. All significant intercompany balances and transactions are eliminated in consolidation.
The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity under U.S. generally accepted accounting principles. Voting interest entities are entities in which the total equity investment at risk is sufficient to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities. The Company consolidates voting interest entities in which it has all, or at least a majority of, the voting interest. As defined in applicable accounting standards, variable interest entities (VIEs) are entities that lack one or more of the characteristics of a voting interest entity. A controlling financial interest in a VIE is present when the Company has both the power and ability to direct the activities of the VIE that most significantly impact the VIE’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.
The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclose contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the allowance for credit losses, valuation of goodwill and intangible assets, deferred income tax assets, and obligations related to employee benefits.
The consolidated financial information included herein combines the results of operations, the assets, liabilities, and shareholders’ equity of the Company and its subsidiaries. Amounts in the prior periods’ unaudited consolidated financial statements are reclassified when necessary to conform to the current periods’ presentation.
The Company has evaluated subsequent events for potential recognition and/or disclosure and determined that no further disclosures were required.
Cash and Cash Equivalents
Cash and cash equivalents in the Consolidated Statements of Cash Flows include cash and noninterest bearing balances due from banks, interest-bearing balances due from banks, Federal funds sold, and money market funds. Management regularly evaluates the credit risk associated with the counterparties to these transactions and believes that the Company is not exposed to any significant credit risk on cash and cash equivalents. Historically, each bank subsidiary is required to maintain reserve balances by the Federal Reserve Bank. However, due to the COVID-19 pandemic, the Federal Reserve Board reduced reserve requirement ratios to zero percent effective March 26, 2020. The Federal Reserve Board has stated that it has no plans to re-impose reserve requirements, but that it may adjust reserve requirements ratios in the future if conditions warrant. At both December 31, 2021 and December 31, 2020, the reserve requirements for the Company’s banking subsidiaries totaled $0.0.
Securities
Management determines the appropriate classification of debt securities at the time of purchase. Securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. Debt securities not classified as held-to-maturity securities are classified as either available-for-sale or trading. Available-for-sale debt securities are stated at fair value with the unrealized gains and losses, net of tax, excluded from earnings and reported as a separate component of accumulated comprehensive income or loss, in shareholders’ equity. Trading securities are stated at fair value, with unrealized gains or losses included in earnings.
Premiums and discounts are amortized or accreted over the expected life or call date of the related security as an adjustment to yield using the interest method. Dividend and interest income are recognized when earned. Realized gains and losses on the sale of securities are included in net gain (loss) on securities transactions. The cost of securities sold is based on the specific identification method.
Beginning January 1, 2020, for available-for-sale debt securities in an unrealized loss position, at least quarterly, the Company evaluates the securities to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors. Any impairment that is not credit-related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized as an allowance for credit losses (“ACL”) on the Statements of Condition, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Both the ACL and the adjustment to net income may be reversed if conditions change. However, if the Company intends to sell an impaired available-for-sale debt security or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount must be recognized in earnings with a corresponding adjustment to the security’s amortized cost basis. Because the security’s amortized cost basis is adjusted to fair value, there is no ACL in this situation. Changes in the allowance for credit losses are recorded as provision (credit) for credit loss expense. Losses are charged against the ACL when management believes the uncollectability of an available-for-sale debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type with each type sharing similar risk characteristics and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. As of December 31, 2021, the held-to-maturity portfolio consisted of U.S. Treasury securities and securities issued by U.S. government-sponsored enterprises, including the Federal National Mortgage Agency and the Federal Farm Credit Banks Funding Corporation. U.S. Treasury securities are backed by the full faith and credit of and/or guaranteed by the U.S. government, and it is expected that the securities will not be settled at prices less than the amortized cost basis of the securities. Securities issued by U.S. government agencies or U.S. government-sponsored enterprises carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as "risk-free," and have a long history of zero credit loss.
Prior to January 1, 2020, we regularly evaluated our debt securities to determine whether there have been any events or economic circumstances indicating that a security with an unrealized loss has suffered other-than-temporary impairment. A debt security is considered impaired if the fair value is less than its amortized cost basis at the reporting date. If impaired, the Company then assesses whether the unrealized loss is other-than-temporary. An unrealized loss on a debt security is generally deemed to be other-than-temporary and a credit loss is deemed to exist if the present value, discounted at the security’s effective rate, of the expected future cash flows is less than the amortized cost basis of the debt security. As a result, the credit loss component of an other-than-temporary impairment write-down for debt securities is recorded in earnings while the remaining portion of the impairment loss is recognized, net of tax, in other comprehensive income provided that the Company does not intend to sell the underlying debt security and it is more-likely-than not that the Company would not have to sell the debt security prior to recovery of the unrealized loss, which may be to maturity. If the Company intended to sell any securities with an unrealized loss or it is more-likely-than not that the Company would be required to sell the investment securities, before recovery of their amortized cost basis, then the entire unrealized loss would be recorded in earnings.
Accrued interest receivable on securities is excluded from the estimate of credit losses.
Loans and Leases
Loans are reported at their principal outstanding balance, net of deferred loan origination fees and costs, and unearned income. The Company has the ability and intent to hold its loans for the foreseeable future, except for certain residential real estate loans held-for-sale. The Company provides motor vehicle and equipment financing to its customers through direct financing leases. These leases are carried at the aggregate of lease payments receivable, plus estimated residual values, less unearned income. Unearned income on direct financing leases is amortized over the lease terms, resulting in a level rate of return.
Residential real estate loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or estimated fair value. Fair value is determined on the basis of the rates quoted in the secondary market. Net unrealized losses attributable to changes in market interest rates are recognized through a valuation allowance by charges to income. Loans are generally sold on a non-recourse basis with servicing retained. Any gain or loss on the sale of loans is recognized at the time of sale as the difference between the recorded basis in the loan and the net proceeds from the sale. The Company may use commitments at the time loans are originated or identified for sale to mitigate interest rate risk. The commitments to sell loans and the commitments to originate loans held-for-sale at a set interest rate, if originated, are considered derivatives under Account Standard Codification ("ASC") Topic 815 Derivatives and Hedging. The impact of the estimated fair value adjustment was not significant to the consolidated financial statements.
Interest income on loans is accrued and credited to income based upon the principal amount outstanding. Loan origination fees and costs are deferred and recognized over the life of the loan as an adjustment to yield. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments are due. Loans and leases, including impaired loans, are generally classified as nonaccrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans are well secured and in the process of collection. Loans that are past due less than 90 days may also be classified as nonaccrual if repayment in full of principal or interest is in doubt.
Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within an acceptable time period, and there is a sustained period (generally six consecutive months) of repayment performance by the borrower in accordance with the contractual terms of the loan agreement. When interest accrual is discontinued, all unpaid accrued interest is reversed. Payments received on loans on nonaccrual are generally applied to reduce the principal balance of the loan.
In general, the principal balance of a loan is charged off in full or in part when management concludes, based on the available facts and circumstances, that collection of principal in full is not probable. For commercial and commercial real estate loans, this conclusion is generally based upon a review of the borrower’s financial condition and cash flow, payment history, economic conditions, and the conditions in the various markets in which the collateral, if any, may be liquidated. In general, consumer loans are charged-off in accordance with regulatory guidelines which provides that such loans be charged-off when the Company becomes aware of the loss, such as from a triggering event that may include new information about a borrower’s intent/ability to repay the loan, bankruptcy, fraud or death, among other things, but in no case will the charge-off exceed specified delinquency timeframes. Such delinquency timeframes state that closed-end retail loans (loans with pre-defined maturity dates, such as real estate mortgages, home equity loans and consumer installment loans) that become past due 120 cumulative days and open-end retail loans (loans that roll-over at the end of each term, such as home equity lines of credit) that become past due 180 cumulative days should be classified as a loss and charged-off. For residential real estate loans, charge-off decisions are based upon past due status, current assessment of collateral value, and general market conditions in the areas where the properties are located.
Acquired Loans
Acquired loans are recorded at fair value at the date of acquisition based on a discounted cash flow methodology that considers various factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and a discount rate reflecting the Company’s assessment of risk inherent in the cash flow estimates. Certain larger purchased loans are individually evaluated while other purchased loans are grouped together according to similar risk characteristics and are treated in the aggregate when applying various valuation techniques. These cash flow evaluations are inherently subjective as they require material estimates, all of which may be susceptible to significant change.
Prior to January 1, 2020, loans acquired in a business combination that had evidence of deterioration of credit quality since origination and for which it was probable, at acquisition, that the Company would be unable to collect all contractually required payments receivable were considered purchased credit impaired (“PCI”) loans. PCI loans were individually evaluated and recorded at fair value at the date of acquisition with no initial valuation allowance based on a discounted cash flow methodology that considered various factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and a discount rate reflecting the Company’s assessment of risk inherent in the cash flow estimates. The difference between the undiscounted cash flows expected at acquisition and the investment in the loan, or the “accretable yield,” was recognized as interest income on a level-yield method over the life of the loan. Contractually required payments for interest and principal that exceeded the undiscounted cash flows expected at acquisition, or the “non-accretable difference,” were not recognized on the Statement of Condition and did not result in any yield adjustments, loss accruals or valuation allowances. Increases in expected cash flows, including prepayments, subsequent to the initial investment were recognized prospectively through adjustment of the yield on the loan over its
remaining life. Decreases in expected cash flows were recognized as impairment. Valuation allowances on PCI loans reflected only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that ultimately were not to be received).
Commencing January 1, 2020, in connection with the Company's adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and its related amendments, loans acquired in a business combination that have experienced more-than-insignificant deterioration in credit quality since origination are considered purchased credit deteriorated (“PCD”) loans. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics. This initial allowance for credit losses is allocated to individual PCD loans and added to the purchase price or acquisition date fair values to establish the initial amortized cost basis of the PCD loans. As the initial allowance for credit losses is added to the purchase price, there is no credit loss expense recognized upon acquisition of a PCD loan. Any difference between the unpaid principal balance of PCD loans and the amortized cost basis is considered to relate to noncredit factors and results in a discount or premium. Discounts and premiums are recognized through interest income on a level-yield method over the life of the loans. All loans considered to be PCI prior to January 1, 2020 were converted to PCD on that date.
The subsequent measurement of expected credit losses for all acquired loans is the same as the subsequent measurement of expected credit losses for originated loans.
Allowance for Credit Losses – Loans
The Company adopted ASU 2016-13 on January 1, 2020 using the modified retrospective approach. The Company recorded a net increase to retained earnings of $1.7 million, upon adoption. The transition adjustment includes a decrease in the allowance for credit losses on loans of $2.5 million, and an increase in the allowance for credit losses on off-balance sheet credit exposures of $400,000, net of the corresponding decrease in deferred tax assets of $0.4 million. Results for the periods beginning after January 1, 2020 are presented under ASC 326 and follows the current expected credit loss methodology. Prior periods continue to be reported in accordance with previously applicable U.S. GAAP, which followed the incurred credit losses methodology. The following policies noted are under the current expected credit losses methodology. A summary of the Company's previous policies under the incurred credit losses methodology follows at the end of this section. Under the current expected credit loss model, the ACL on loans is a valuation allowance estimated at the balance sheet date in accordance with U.S. GAAP that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans.
The Company estimates the ACL on loans based on the underlying assets’ amortized cost basis, which is the amount at which the financing receivable is originated or acquired, adjusted for applicable accretion or amortization of premium, discount, collection of cash, and charge-offs. In the event that collection of principal becomes uncertain, the Company has policies in place to reverse accrued interest in a timely manner. Therefore, the Company has made a policy election to exclude accrued interest from the amortized cost basis.
Expected credit losses are reflected in the ACL through a charge to the provision for credit loss expense. When the Company deems all or a portion of a financial asset to be uncollectible, the appropriate amount is written off and the ACL is reduced by the same amount. In general, the principal balance of a loan is charged off in full or in part when management concludes, based on the available facts and circumstances, that collection of principal in full is not probable. In addition, the Company has reserves for expected recoveries where the Company reviews the prior four quarter charge offs and applies a recovery rate based on the Company’s historical experience. Subsequent recoveries, if any, are credited to the ACL when received.
The Company measures expected credit losses of financial assets at the loan level by segment, by pooling loans when the financial assets share similar risk characteristics. Depending on the nature of the pool of financial assets with similar risk characteristics, the Company uses a discounted cash flow (“DCF”) method to estimate the expected credit losses. Allowance on loans that do not share risk characteristics are evaluated on an individual basis. The Company assigns a credit risk rating to all commercial and commercial real estate loans. The Company reviews commercial and commercial real estate loans rated Substandard or worse, on nonaccrual, and greater than $250,000 for loss potential and when deemed appropriate, assigns an allowance based on an individual evaluation.
The Company’s methodologies for estimating the ACL consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. The methodologies apply historical loss information, adjusted for asset-specific characteristics, economic conditions at the measurement date, and forecasts about future economic conditions expected to exist through the contractual lives of the financial assets that are reasonable and supportable, to the identified pools of financial assets with similar risk characteristics for
which the historical loss experience was observed. The Company’s methodologies revert back to average historical loss information on a straight line basis over eight quarters when it can no longer develop reasonable and supportable forecasts.
The Company has identified the following pools of financial assets with similar risk characteristics for measuring expected credit losses: commercial, commercial real estate, residential, home equity, consumer and leases. This segmentation was selected based on the differences in the risk profile of each of these categories and aligns well with regulatory reporting categories. This segmentation separates borrower type, collateral type and the nature of the loan. The differences in risk profiles of these segments enable the ACL to be more precise in its allocation due to the inherent risk in these specific portfolios.
Discounted Cash Flow Method
The Company uses the DCF method to estimate expected credit losses for the commercial, commercial real estate, residential, home equity, and consumer loan pools. For each of these loan segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for exposure at default using estimated prepayment speeds, time to recovery, probability of default, and loss given default. The modeling of expected prepayment speeds, and time to recovery are based on historical internal data.
The Company uses regression analysis of historical internal and peer data to determine suitable loss drivers to utilize when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers. For all loan pools utilizing the DCF method, management utilizes and forecasts national unemployment and a one year percentage change in national gross domestic product as loss drivers in the model.
For all DCF models, management has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over eight quarters on a straight-line basis. Management leverages economic projections from an independent third party to inform its loss driver forecasts over the four-quarter forecast period. Other internal and external indicators of economic forecasts, and scenario weightings, are also considered by management when developing the forecast metrics. The model considers a base case forecast and two alternative forecasts and assigns weightings to these three scenarios based on current conditions and expectations for future conditions.
The combination of adjustments for credit expectations (default and loss) and timing expectations (prepayment, curtailment, and time to recovery) produces an expected cash flow stream at the instrument level. Instrument effective yield is calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce an instrument-level net present value of expected cash flows (“NPV”). An ACL is established for the difference between the instrument’s NPV and amortized cost basis.
The model also considers the need to qualitatively adjust expected loss estimates for information not already captured in the loss estimation process. These qualitative factors include, but are not limited to, those suggested by the Interagency Policy Statement on Allowances for Credit Losses. These qualitative factor adjustments may increase or decrease the Company's estimate of expected credit losses. At December 31, 2021 and 2020, the ACL model included increases in qualitative reserves for loans within the hospitality and other certain industries that may have an elevated level of risk due to the adverse economic impact of the COVID-19 pandemic, as well as loans that remain in the Company's payment deferral program implemented in response to the COVID-19 pandemic. The qualitative reserves were added to all portfolio segments with the majority in commercial real estate and then residential real estate.
Due to the size and characteristics of the leasing portfolio, the remaining life method, using the historical loss rate of the commercial and industrial segment, is used to determine the allowance for credit losses.
Individually Evaluated Financial Assets
Loans that do not share common risk characteristics are evaluated on an individual basis. For collateral dependent financial assets where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral less cost to sell, and the amortized cost basis of the asset as of the measurement date. The ACL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset.
The Company’s estimate of the ACL reflects losses expected over the remaining contractual life of the assets. The contractual term does not consider extensions, renewals or modifications unless the Company has identified an expected troubled debt restructuring.
Under the incurred credit losses methodology utilized in the prior periods, the allowance for loans and leases was maintained at an amount to assure that an appropriate allowance was maintained. The methodology was comprised of four major components that management had deemed appropriate in evaluating the appropriateness of the allowance for loan and lease losses. The components included: impaired loans; criticized and classified credits; historical loss experience; and qualitative or subjective analysis. For impaired loans, an allowance was recognized if the fair value of the loan was less than the recorded investment in the loan (recorded investment in the loan is the principal balance plus any accrued interest, net of deferred loan fees or costs and unamortized premium or discount). For loans that were not impaired or reviewed individually, management assigned a reserve based upon historical loss experience over a designated look-back period. Management had evaluated a variety of look-back periods and had determined that an eight year look back period was appropriate to capture a full range of economic cycles. Management had also evaluated a variety of statistical methods in analyzing loss history, including averages, weighted averages and loss emergence periods and had determined that by applying a loss emergence period analysis to historical losses over a full economic cycle had resulted in a reasonable estimate of losses inherent in the loan portfolio. The model also included an analysis of a variety of subjective factors to support the reserve estimate. These subjective factors included allowance allocations for risks that may not otherwise be fully recognized in other components of the model. Among the subjective factors that were routinely considered as part of this analysis were: growth trends in the portfolio, changes in management and/or polices related to lending activities, trends in classified or nonaccrual loans, concentrations of credit, local and national economic trends, and industry trends.
For acquired credit impaired loans accounted for under FASB ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, (“ASC Topic 310-30”), the Company’s allowance for loan and lease losses was estimated based upon our expected cash flows for these loans. To the extent that we experienced a deterioration in borrower credit quality resulting in a decrease in our expected cash flows subsequent to the acquisition of the loans, an allowance for loan losses would be established based on our estimate of future credit losses over the remaining life of the loans.
For acquired non-credit impaired loans accounted for under FASB ASC Topic 310-20, Nonrefundable Fees and Other Costs, (“ASC Topic 310-20”), the Company’s allowance for loan and lease losses was maintained through provisions for loan losses based upon an evaluation process that was similar to our evaluation process used for originated loans. This evaluation, which included a review of loans on which full collectability may not be reasonably assured, it considered, among other matters, the estimated fair value of the underlying collateral, economic conditions, historical net loan loss experience, carrying value of the loans, which included the remaining net purchase discount or premium, and other factors that warrant recognition in determining our allowance for loan losses.
Troubled Debt Restructuring
A loan that has been modified or renewed is considered a troubled debt restructuring (“TDR”) when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made for the borrower's benefit that would not otherwise be considered for a borrower or transaction with similar credit risk characteristics. The Company’s ACL reflects all effects of a TDR when an individual asset is specifically identified as a reasonably expected TDR. The Company has determined that a TDR is reasonably expected no later than the point when the lender concludes that modification is the best course of action and it is at least reasonably possible that the troubled borrower will accept some form of concession from the lender to avoid a default. Reasonably expected TDRs and executed non-performing TDRs are evaluated individually to determine the required ACL. TDRs performing in accordance with their modified contractual terms for a reasonable period of time, generally six months, may be included in the Company’s existing pools based on the underlying risk characteristics of the loan to measure the ACL. The provisions of the CARES Act and interagency guidance issued by Federal banking regulators provided guidance and clarification related to modifications and deferral programs to assist borrowers who are negatively impacted by the COVID-19 national emergency. Under the CARES Act, a modification deemed to be COVID-19-related is not considered to be a TDR if the loan was not more than 30 days past due as of December 31, 2019 and the deferral was executed between March 1, 2020 and the earlier of 60 days after the date of termination of the COVID-19 national emergency or December 31, 2020. The Appropriations Act extended the termination of these provisions to the earlier of 60 days after the COVID-19 national emergency date or January 1, 2022. The banking regulators issued similar guidance, which clarified that a COVID-19-related modification should not be considered a TDR if the borrower was current on payments at the time the underlying loan modification program was implemented and if the modification was considered to be short-term. In accordance with the CARES Act, the Appropriations Act and the interagency guidance, the Company does not designate eligible loan modifications and deferrals resulting from the impacts of COVID-19 as TDRs. The Company evaluates modifications for eligibility under the CARES Act and Appropriations Act, then the interagency guidance if they do not qualify
for the CARES Act or Appropriation Act relief. Modifications that are not eligible for either program continue to follow the Corporation’s established TDR policy. Additionally, loans with deferrals granted due to COVID-19 are not generally reported as past due or nonaccrual.
Loan Commitments and Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans, unused lines of credit and commercial letters of credit, issued to meet customer financing needs. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.
The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancellable, through a charge to the provision for credit loss expense for off-balance sheet credit exposures included in other noninterest expense in the Company’s Consolidated Statements of Income. The ACL on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using similar methodologies as portfolio loans, taking into consideration the likelihood that funding will occur, and is included in other liabilities on the Company’s Statements of Condition.
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost, less allowances for depreciation. The provision for depreciation for financial reporting purposes is computed generally by the straight-line method at rates sufficient to write-off the cost of such assets over their estimated useful lives. Buildings are amortized over a period of 10-39 years, and furniture, fixtures, and equipment are amortized over a period of 2-20 years. Leasehold improvements are generally depreciated over the lesser of the lease term or the estimated lives of the improvements. Maintenance and repairs are charged to expense as incurred. Gains or losses on disposition are reflected in earnings.
Other Real Estate Owned
Other real estate owned consists of properties formerly pledged as collateral to loans, which have been acquired by the Company through foreclosure proceedings or acceptance of a deed in lieu of foreclosure. Upon transfer of a loan to foreclosure status, an appraisal is generally obtained and any excess of the loan balance over the fair value, less estimated costs to sell, is charged against the allowance for credit losses. Expenses and subsequent adjustments to the fair value are treated as other operating expense.
Goodwill
Goodwill represents the excess of purchase price over the fair value of assets acquired in a transaction using purchase accounting. Goodwill has an indefinite useful life and is not amortized, but is tested for impairment. Goodwill impairment tests are performed on an annual basis or when events or circumstances dictate. On January 1, 2020, the Company adopted ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment", which eliminates the entities requirement to compute the implied fair value. The Company tests goodwill annually as of December 31st. The Company has the option to perform a qualitative assessment of goodwill, which considers company-specific and economic characteristics that might impact its carrying value. If based on this qualitative assessment, it is more likely than not that the fair value of the reporting unit is less than its carrying amount, then a quantitative test (Step 1) is performed, which compares the fair value of the reporting unit to the carrying amount of the reporting unit in order to identify potential impairment. If the estimated fair value of a reporting unit exceeds its carrying amount, the goodwill of the reporting unit is not considered impaired. The implied fair value of goodwill is determined in the same manner as goodwill that is recognized in a business combination. Significant judgment and estimates are involved in estimating the fair value of the assets and liabilities of the reporting units.
Other Intangible Assets
Other intangible assets include core deposit intangibles, customer related intangibles, covenants not to compete, and mortgage servicing rights. Core deposit intangibles represent a premium paid to acquire a base of stable, low cost deposits in the acquisition of a bank, or a bank branch, using purchase accounting. The amortization period for core deposit intangible ranges from 5 to 10 years, using an accelerated method. The covenants not to compete are amortized on a straight-line basis over 3 to 6 years, while customer related intangibles are amortized on an accelerated basis over a range of 6 to 15 years. The amortization period is monitored to determine if circumstances require such periods to be revised. The Company periodically reviews its intangible assets for changes in circumstances that may indicate the carrying amount of the asset is impaired. The Company tests its intangible assets for impairment on an annual basis or more frequently if conditions indicate that an impairment loss has more likely than not been incurred.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred taxes are reviewed quarterly and reduced by a valuation allowance if, based upon the information available, it is more likely than not that some or all of the deferred tax assets will not be realized. Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and recoverable taxes paid in prior years. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets will be realized. The Company’s policy is to recognize interest and penalties on unrecognized tax benefits in income tax expense in the Consolidated Statements of Income.
Tax Credit Investments
The Company accounts for its investments in qualified affordable housing projects using the proportional amortization method. Under that method, the Company amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense. As of December 31, 2021 and 2020, the Company's remaining investment in qualified affordable housing projects, net of amortization totaled $97,000 and $485,000, respectively.
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase (repurchase agreements) are agreements in which the Company transfers the underlying securities to a third-party custodian’s account that explicitly recognizes the Company’s interest in the securities. The agreements are accounted for as secured financing transactions provided the Company maintains effective control over the transferred securities and meets other criteria as specified in FASB ASC Topic 860, Transfers and Servicing (“ASC Topic 860”). The Company’s agreements are accounted for as secured financings; accordingly, the transaction proceeds are reflected as liabilities and the securities underlying the agreements continue to be carried in the Company’s securities portfolio.
Treasury Stock
The cost of treasury stock is shown on the Consolidated Statements of Condition as a separate component of shareholders’ equity, and is a reduction to total shareholders’ equity. Shares are released from treasury at fair value, identified on an average cost basis.
Trust and Investment Services
Assets held in fiduciary or agency capacities for customers are not included in the accompanying Consolidated Statements of Condition, since such items are not assets of the Company. Fees associated with providing trust and investment services are included in noninterest income. Additional information on trust and investment fees is presented in Note 14 - "Revenue Recognition."
Earnings Per Share
Basic earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of shares outstanding during the year, exclusive of shares represented by the unvested portion of restricted stock and restricted stock units. Diluted earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of shares outstanding during the year plus the dilutive effect of the unvested portion of restricted stock and restricted stock units and stock issuable upon conversion of common stock equivalents (primarily stock options) or certain other contingencies. The Company uses authoritative accounting guidance under ASC Topic 260, Earnings Per Share, which provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The Company issues stock-based compensation awards that included restricted stock awards that contain such rights.
Segment Reporting
The Company manages its operations through three reportable business segments in accordance with the standards set forth in FASB ASC Topic 280, “Segment Reporting”. The three segments are: (i) banking (“Banking”), (ii) insurance (“Tompkins Insurance Agencies, Inc.”) and (iii) wealth management (“Tompkins Financial Advisors”). The Company’s insurance services and wealth management services are managed separately from the Bank. Additional information on the segments is presented in Note 22- “Segment and Related Information.”
Comprehensive Income (Loss)
For the Company, comprehensive income (loss) represents net income plus the net change in unrealized gains or losses on available-for-sale debt securities for the period (net of taxes), and the actuarial gain or loss and amortization of unrealized amounts in the Company’s defined-benefit retirement and pension plan, supplemental employee retirement plan, and post-retirement life and healthcare benefit plan (net of taxes), and is presented in the Consolidated Statements of Comprehensive Income (Loss) and Consolidated Statements of Changes in Shareholders’ Equity. Accumulated other comprehensive income (loss) represents the net unrealized gains or losses on available-for-sale debt securities (net of tax) and unrecognized net actuarial gain or loss, unrecognized prior service costs, and unrecognized net initial obligation (net of tax) in the Company’s defined-benefit retirement and pension plan, supplemental employee retirement plan, and post-retirement life and healthcare benefit plan.
Pension and Other Employee Benefits
The Company maintains noncontributory defined-benefit and defined contribution plans, which cover substantially all employees of the Company. In addition, the Company also maintains supplemental employee retirement plans for certain executives and a post-retirement life and healthcare plan. These plans are discussed in detail in Note 11 “Employee Benefit Plans”. The Company incurs certain employment-related expenses associated with these plans. In order to measure the expense associated with these plans, various assumptions are made including the discount rate used to value certain liabilities, expected return on plan assets, anticipated mortality rates, and expected future healthcare costs. The assumptions are based on historical experience as well as current facts and circumstances. A third-party actuarial firm is used to assist management in measuring the expense and liability associated with the plans. The Company uses a December 31 measurement date for its plans. As of the measurement date, plan assets are determined based on fair value, generally representing observable market prices. The projected benefit obligation is primarily determined based on the present value of projected benefit distributions at an assumed discount rate.
The expenses associated with these plans are charged to current operating expenses. The Company recognizes an asset for a plan’s overfunded status or a liability for a plan’s underfunded status in the Company’s consolidated statements of condition, and recognizes changes in the funded status of these plans in comprehensive income, net of applicable taxes, in the year in which the change occurred.
Fair Value Measurements
The Company accounts for the provisions of FASB ASC Topic 820, Fair Value Measurements and Disclosures (“ASC Topic 820”), for financial assets and financial liabilities. ASC Topic 820 defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP, and expands disclosures about fair value measurements. See Note 19 “Fair Value Measurements”.
In general, fair values of financial instruments are based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among others.
Revenue Recognition
Under ASU 2014-09 Revenue From contracts With Customers (Topic 606), effective January 1, 2018, the Company adopted new policies related to revenue recognition. In general, for revenue not associated with financial instruments, guarantees and lease contracts, the Company applies the following steps when recognizing revenue from contracts with customers: (i) identify the contract, (ii) identify the performance obligations, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations and (v) recognize revenue when a performance obligation is satisfied. Tompkins' contracts with customers are generally short term in nature, typically due within one year or less or cancellable by the Company or the Company's customer upon a short notice period. Performance obligations for the Company's customer contracts are generally satisfied at a single point in time, typically when the transaction is complete, or over time. For performance obligations satisfied over time, Tompkins primarily uses the output method, directly measuring the value of the products/services transferred to the customer, to determine when performance obligations have been satisfied. The Company typically receives payment from customers and recognizes revenue concurrent with the satisfaction of the Company's performance obligations. In most cases, this occurs within a single financial reporting period. For payments received in advance of the satisfaction of performance obligations, revenue recognition is deferred until such time as the performance obligations have been satisfied. In cases where the Company has not received payment despite satisfaction of the Company's performance obligations, the Company accrues an estimate of the amount due in the period the Company's performance obligations have been satisfied. For contracts with variable components, only amounts for which collection is probable are accrued. The Company generally acts in a principal capacity, on the Company's own behalf, in most of the Company's contracts with customers. In such transactions, Tompkins
recognizes revenue and the related costs to provide the services on a gross basis in the Company's financial statements. In some cases, Tompkins acts in an agent capacity, deriving revenue through assisting other entities in transactions with the Company's customers. In such transactions, Tompkins recognizes revenue and the related costs to provide the services on a net basis in the Company's financial statements. These transactions recognized on a net basis primarily relate to insurance and brokerage commissions and fees derived from the Company's customers' use of various interchange and ATM/debit card networks. Refer to Note 14 "Revenue Recognition" for additional disclosures required by ASC 606.
Note 2 Securities
Available-for-Sale Debt Securities
The following tables summarize available-for-sale debt securities held by the Company at December 31, 2021 and 2020:
| | | | | | | | | | | | | | |
| December 31, 2021 | Available-for-Sale Debt Securities |
| (In thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
| U.S. Treasuries | $ | 160,291 | | $ | 85 | | $ | 2,542 | | $ | 157,834 | |
| Obligations of U.S. Government sponsored entities | 843,218 | | 4,527 | | 15,372 | | 832,373 | |
| Obligations of U.S. states and political subdivisions | 102,177 | | 2,092 | | 100 | | 104,169 | |
| Mortgage-backed securities – residential, issued by | | | | |
| U.S. Government agencies | 76,502 | | 1,187 | | 532 | | 77,157 | |
| U.S. Government sponsored entities | 879,102 | | 5,735 | | 14,281 | | 870,556 | |
| | | | |
| U.S. corporate debt securities | 2,500 | | 0 | | 76 | | 2,424 | |
| Total available-for-sale debt securities | $ | 2,063,790 | | $ | 13,626 | | $ | 32,903 | | $ | 2,044,513 | |
| | | | | | | | | | | | | | |
| December 31, 2020 | Available-for-Sale Debt Securities |
| (In thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
| | | | |
| Obligations of U.S. Government sponsored entities | $ | 599,652 | | $ | 9,820 | | $ | 1,992 | | $ | 607,480 | |
| Obligations of U.S. states and political subdivisions | 126,642 | | 3,144 | | 40 | | 129,746 | |
| Mortgage-backed securities – residential, issued by | | | | |
| U.S. Government agencies | 179,538 | | 3,216 | | 646 | | 182,108 | |
| U.S. Government sponsored entities | 691,562 | | 14,593 | | 675 | | 705,480 | |
| | | | |
| U.S. corporate debt securities | 2,500 | | 0 | | 121 | | 2,379 | |
| Total available-for-sale debt securities | $ | 1,599,894 | | $ | 30,773 | | $ | 3,474 | | $ | 1,627,193 | |
Held-to-Maturity Securities
The following tables summarize held-to-maturity debt securities held by the Company at December 31, 2021 and 2020:
| | | | | | | | | | | | | | |
| December 31, 2021 | Held-to-Maturity Securities |
| (In thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
| U.S. Treasuries | $ | 86,689 | | $ | 279 | | $ | 600 | | $ | 86,368 | |
| Obligations of U.S. Government sponsored entities | 197,320 | | 389 | | 1,789 | | 195,920 | |
| Total held-to-maturity debt securities | $ | 284,009 | | $ | 668 | | $ | 2,389 | | $ | 282,288 | |
There were no held-to-maturity debt securities at December 31, 2020.
The following table sets forth information with regard to sales transactions of debt securities available-for-sale:
| | | | | | | | | | | |
| Year ended December 31, |
| (In thousands) | 2021 | 2020 | 2019 |
| Proceeds from sales | $ | 142,679 | | $ | 42,333 | | $ | 232,598 | |
| Gross realized gains | 1,126 | | 179 | | 1,123 | |
| Gross realized losses | (851) | | 0 | | (595) | |
| Net gains (losses) on sales of available-for-sale debt securities | $ | 275 | | $ | 179 | | $ | 528 | |
The Company's available-for-sale and held-to-maturity debt securities portfolios includes callable securities that may be called prior to maturity. In 2021, 2020, and 2019, the Company recognized gross gains of $0, $251,000 and $88,000 on securities that were called. The Company also recognized net losses of $26,000 on equity securities for the years ended December 31, 2021 and net gains of $13,000 and $29,000 for the years ended December 31, 2020 and 2019, respectively, reflecting the change in fair value.
The following table summarizes available-for-sale debt securities that had unrealized losses at December 31, 2021:
| | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | Available-for-Sale Debt Securities |
| Less than 12 Months | 12 Months or Longer | Total |
| (In thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses |
| U.S. Treasuries | $ | 147,810 | | $ | 2,542 | | $ | 0 | | $ | 0 | | $ | 147,810 | | $ | 2,542 | |
| Obligations of U.S. Government sponsored entities | 362,895 | | $ | 6,694 | | $ | 289,210 | | $ | 8,678 | | $ | 652,105 | | $ | 15,372 | |
| Obligations of U.S. states and political subdivisions | 9,700 | | 85 | | 1,283 | | 15 | | 10,983 | | 100 | |
| Mortgage-backed securities – residential, issued by | | | | | | |
| U.S. Government agencies | 22,074 | | 160 | | 16,846 | | 372 | | 38,920 | | 532 | |
| U.S. Government sponsored entities | 553,351 | | 11,440 | | 84,537 | | 2,841 | | 637,888 | | 14,281 | |
| U.S. corporate debt securities | 0 | | 0 | | 2,424 | | 76 | | 2,424 | | 76 | |
| Total available-for-sale debt securities | $ | 1,095,830 | | $ | 20,921 | | $ | 394,300 | | $ | 11,982 | | $ | 1,490,130 | | $ | 32,903 | |
The following table summarizes held-to-maturity debt securities that had unrealized losses at December 31, 2021:
| | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | Held-to-Maturity Securities |
| Less than 12 Months | 12 Months or Longer | Total |
| (In thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses |
| U.S. Treasuries | $ | 35,280 | | $ | 600 | | $ | 0 | | $ | 0 | | $ | 35,280 | | $ | 600 | |
| Obligations of U.S. Government sponsored entities | 84,592 | | 1,789 | | 0 | | 0 | | 84,592 | | 1,789 | |
| Total held-to-maturity securities | $ | 119,872 | | $ | 2,389 | | $ | 0 | | $ | 0 | | $ | 119,872 | | $ | 2,389 | |
Within the available-for-sale and held-to-maturity portfolios, the total number of securities in an unrealized loss position were 268 and 77 at December 31, 2021 and 2020.
The following table summarizes available-for-sale debt securities that had unrealized losses at December 31, 2020:
| | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | Available-for-Sale Debt Securities |
| Less than 12 Months | 12 Months or Longer | Total |
| (In thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses |
| Obligations of U.S. Government sponsored entities | $ | 310,711 | | $ | 1,992 | | $ | 0 | | $ | 0 | | $ | 310,711 | | $ | 1,992 | |
| Obligations of U.S. states and political subdivisions | 8,868 | | 40 | | 0 | | 0 | | 8,868 | | 40 | |
| Mortgage-backed securities – residential, issued by | | | | | | |
| U.S. Government agencies | 10,560 | | 396 | | 1,819 | | 250 | | 12,379 | | 646 | |
| U.S. Government sponsored entities | 87,643 | | 586 | | 5,068 | | 89 | | 92,711 | | 675 | |
| U.S. corporate debt securities | 0 | | 0 | | 2,379 | | 121 | | 2,379 | | 121 | |
| Total available-for-sale debt securities | $ | 417,782 | | $ | 3,014 | | $ | 9,266 | | $ | 460 | | $ | 427,048 | | $ | 3,474 | |
There were no held-to-maturity debt securities at December 31, 2020.
The Company evaluates available-for-sale debt securities for expected credit losses (“ECL”) in unrealized loss positions at each measurement date to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors.
Factors that may be indicative of ECL include, but are not limited to, the following:
◦Extent to which the fair value is less than the amortized cost basis.
◦Adverse conditions specifically related to the security, an industry, or geographic area (changes in technology, business practice).
◦Payment structure of the debt security with respect to underlying issuer or obligor.
◦Failure of the issuer to make scheduled payment of principal and/or interest.
◦Changes to the rating of a security or issuer by a nationally recognized statistical rating organization.
◦Changes in tax or regulatory guidelines that impact a security or underlying issuer.
For available-for-sale debt securities in an unrealized loss position, the Company evaluates the securities to determine whether the decline in the fair value below the amortized cost basis (technical impairment) is the result of changes in interest rates or reflects a fundamental change in the credit worthiness of the underlying issuer. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized as an allowance for credit losses (“ACL”) on the Statement of Condition, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Both the ACL and the adjustment to net income may be reversed if conditions change.
The total gross unrealized losses, shown in the tables above, were primarily attributable to changes in interest rates and levels of market liquidity, relative to when the investment securities were purchased, and not due to the credit-related quality of the investment securities. The Company does not have the intent to sell these securities and does not believe it is more likely than not that the Company will be required to sell these securities before a recovery of amortized cost. The gross unrealized losses reported for available-for-sale residential mortgage-backed securities relate to investment securities issued by U.S. government sponsored entities such as Federal National Mortgage Association, FHLMC and U.S. government agencies such as Government National Mortgage Association. The gross unrealized losses for held-to-maturity securities are on US Treasuries and securities issued by U.S. government-sponsored enterprises, including The Federal National Mortgage Agency and the Federal Farm Credit Banks Funding Corporation.
Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type with each type sharing similar risk characteristics and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Management has made the accounting policy election to exclude accrued interest receivable on held-to-maturity debt securities from the estimate of credit losses. As of December 31, 2021, the held-to- maturity portfolio consisted of U.S. Treasury securities and securities issued by U.S. government-sponsored enterprises, including The Federal National Mortgage Agency and the Federal Farm Credit Banks Funding Corporation. U.S. Treasury securities are backed by the full faith and credit of and/or guaranteed by the U.S. government, and it is expected that the securities will not be settled at prices less than the amortized cost bases of the securities. Securities issued by U.S. government agencies or U.S. government-sponsored enterprises carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk-free,” and have a long history of zero credit loss. As such, the Company did not record an allowance for credit losses for these securities as of December 31, 2021.
The Company did not recognize any net credit impairment charge to earnings on investment securities in 2021, 2020, or 2019.
The amortized cost and estimated fair value of debt securities by contractual maturity are shown in the following table. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities are shown separately since they are not due at a single maturity date.
| | | | | | | | |
| December 31, 2021 | | |
| (In thousands) | Amortized Cost | Fair Value |
| Available-for-sale debt securities: | | |
| Due in one year or less | $ | 77,159 | | $ | 77,892 | |
| Due after one year through five years | 474,537 | | 471,776 | |
| Due after five years through ten years | 501,748 | | 492,573 | |
| Due after ten years | 54,742 | | 54,559 | |
| Total | 1,108,186 | | 1,096,800 | |
| Mortgage-backed securities | 955,604 | | 947,713 | |
| Total available-for-sale debt securities | $ | 2,063,790 | | $ | 2,044,513 | |
| | | | | | | | |
| December 31, 2020 | | |
| (In thousands) | Amortized Cost | Fair Value |
| Available-for-sale debt securities: | | |
| Due in one year or less | $ | 54,484 | | $ | 55,008 | |
| Due after one year through five years | 379,044 | | 388,132 | |
| Due after five years through ten years | 228,572 | | 229,107 | |
| Due after ten years | 66,694 | | 67,358 | |
| Total | 728,794 | | 739,605 | |
| Mortgage-backed securities | 871,100 | | 887,588 | |
| Total available-for-sale debt securities | $ | 1,599,894 | | $ | 1,627,193 | |
| | | | | | | | |
| December 31, 2021 | | |
| (In thousands) | Amortized Cost | Fair Value |
| Held-to-maturity securities: | | |
| | |
| | |
| Due after five years through ten years | 284,009 | | 282,288 | |
| | |
| Total held-to-maturity debt securities | $ | 284,009 | | $ | 282,288 | |
There were no held-to-maturity debt securities at December 31, 2020.
Trading Securities
The Company had no securities designated as trading during 2021 or 2020.
Pledged Securities
The Company pledges securities as collateral for public deposits and other borrowings, and sells securities under agreements to repurchase. See “Note 8 - Securities Sold Under Agreements to Repurchase and Federal Funds Purchased” for further discussion. Securities carried of $1.4 billion and $1.2 billion, at December 31, 2021 and 2020, respectively, were either pledged or sold under agreements to repurchase.
Concentrations of Securities
Except for U.S. government securities, there were no holdings, when taken in the aggregate, of any single issuer that exceeded 10% of shareholders’ equity at December 31, 2021.
Equity Securities
The Company invests in one CRA qualified equity fund. This security is carried at market value.
Investment in Small Business Investment Companies
The Company has equity investments in small business investment companies (“SBIC”) established for the purpose of providing financing to small businesses in market areas served by the Company. These investments totaled $1.6 million and $1.5 million at December 31, 2021 and 2020, respectfully, and were included in other assets on the Company’s Consolidated Statements of Condition. These investments are accounted for either under the cost method or the equity method of accounting. As of December 31, 2021, the Company reviewed these investments and determined that there was no impairment.
Federal Home Loan Bank Stock
The Company also holds non-marketable Federal Home Loan Bank New York (“FHLBNY”) stock, non-marketable Federal Home Loan Bank Pittsburgh (“FHLBPITT”) stock and non-marketable Atlantic Community Bankers Bank (“ACBB”) stock, all of which are required to be held for regulatory purposes and for borrowing availability. The required investment in FHLB stock is tied to the Company’s borrowing levels with the FHLB. Holdings of FHLBNY stock, FHLBPITT stock and ACBB stock totaled $9.9 million, $1.0 million and $95,000 at December 31, 2021, respectively. These securities are carried at par, which is also cost. The FHLBNY and FHLBPITT continue to pay dividends and repurchase stock. As such, the Company has not recognized any impairment on its holdings of FHLBNY and FHLBPITT stock.
Note 3 Loans and Leases
Loans and Leases at December 31, 2021 and December 31, 2020 were as follows:
| | | | | | | | |
| December 31, |
| (In thousands) | 2021 | 2020 |
| Commercial and industrial | | |
| Agriculture | $ | 99,172 | | $ | 94,489 | |
| Commercial and industrial other | 699,121 | | 792,987 | |
| PPP loans* | 71,260 | | 291,252 | |
| Subtotal commercial and industrial | 869,553 | | 1,178,728 | |
| Commercial real estate | | |
| Construction | 178,582 | | 163,016 | |
| Agriculture | 195,973 | | 201,866 | |
| Commercial real estate other | 2,278,599 | | 2,204,310 | |
| Subtotal commercial real estate | 2,653,154 | | 2,569,192 | |
| Residential real estate | | |
| Home equity | 182,671 | | 200,827 | |
| Mortgages | 1,290,911 | | 1,235,160 | |
| Subtotal residential real estate | 1,473,582 | | 1,435,987 | |
| Consumer and other | | |
| Indirect | 4,655 | | 8,401 | |
| Consumer and other | 67,396 | | 61,399 | |
| Subtotal consumer and other | 72,051 | | 69,800 | |
| Leases | 13,948 | | 14,203 | |
| Total loans and leases | 5,082,288 | | 5,267,910 | |
| Less: unearned income and deferred costs and fees | (6,821) | | (7,583) | |
| Total loans and leases, net of unearned income and deferred costs and fees | $ | 5,075,467 | | $ | 5,260,327 | |
| *SBA Paycheck Protection Program ("PPP") | | |
The Company has adopted comprehensive lending policies, underwriting standards and loan review procedures. There were no significant changes to the Company’s existing lending policies, underwriting standards or loan review procedures during 2021. The Company’s Board of Directors approves the lending policies at least annually. The Company recognizes that exceptions to policy guidelines may occasionally occur and has established procedures for approving exceptions to these policy guidelines. Management has also implemented reporting systems to monitor loan originations, loan quality, concentrations of credit, loan delinquencies and nonperforming loans and potential problem loans.
Residential real estate loans
The Company’s policy is to underwrite residential real estate loans in accordance with secondary market guidelines in effect at the time of origination, including loan-to-value (“LTV”) and documentation requirements. LTVs exceeding 80% for fixed rate loans and 85% for adjustable rate loans require private mortgage insurance to reduce the exposure. The Company verifies applicants’ income, obtains credit reports and independent real estate appraisals in the underwriting process to ensure adequate collateral coverage and that loans are extended to individuals with good credit and income sufficient to repay the loan. In limited circumstances, the Company will make exceptions to secondary market underwriting standards to support community reinvestment activities.
The Company originates fixed rate and adjustable rate residential mortgage loans, including loans that have characteristics of both, such as a 7/1 adjustable rate mortgage, which has a fixed rate for the first seven years and then adjusts annually thereafter. The majority of residential mortgage loans originated over the last several years have been fixed rate loans due to the low interest rate environment. Adjustable rate residential real estate loans may be underwritten based upon an initial rate which is below the fully indexed rate; however, the initial rate is generally less than 100 basis points below the fully indexed rate. As such, the Company does not believe that this practice creates any significant credit risk.
The Company may sell residential real estate loans in the secondary market based on interest rate considerations. These residential real estate loans are generally sold to FHLMC or SONYMA without recourse in accordance with standard secondary market loan sale agreements. These residential real estate loan sales are subject to customary representations and warranties, including representations and warranties related to gross incompetence and fraud. The Company has not had to repurchase any loans as a result of these general representations and warranties.
During 2021, 2020, and 2019, the Company sold residential mortgage loans totaling $31.5 million, $51.7 million, and $16.9 million, respectively, and realized net gains on these sales of $943,000, $2.1 million, and $227,000, respectively. These residential real estate loans are generally sold without recourse in accordance with standard secondary market loan sale agreements. When residential mortgage loans are sold to FHLMC or SONYMA, the Company typically retains all servicing rights, which provides the Company with a source of fee income. In connection with the sales in 2021, 2020, and 2019, the Company recorded mortgage-servicing assets of $236,000, $388,000, and $127,000, respectively. The loans sold to FHLMC and SONYMA were originated with the intent to sell.
Amortization of mortgage servicing assets amounted to $182,000 in 2021, $221,000 in 2020, and $117,000 in 2019. At December 31, 2021 and 2020, the Company serviced residential mortgage loans aggregating $147.1 million and $140.9 million, including loans securitized and held as available-for-sale debt securities. Mortgage servicing rights, at an amortized cost basis, totaled $1.0 million at December 31, 2021 and $981,000 at December 31, 2020. These mortgage servicing rights were evaluated for impairment at year-end 2021 and 2020 and no impairment was recognized. Loans held for sale, which are included in residential real estate, totaled $205,000 and $4.4 million at December 31, 2021 and 2020, respectively.
As members of the FHLB, the Company’s subsidiary banks may use unencumbered mortgage related assets to secure borrowings from the FHLB. At December 31, 2021 and 2020, the Company had $110.0 million and $265.0 million, respectively, of term advances from the FHLB that were secured by residential mortgage loans.
Commercial and industrial loans
The Company’s Commercial Loan Policy sets forth guidelines for debt service coverage ratios, LTV’s and documentation standards. Commercial and industrial loans are primarily made based on identified cash flows of the borrower with consideration given to underlying collateral and personal or government guarantees. The Company’s policy establishes debt service coverage ratio limits that require a borrower’s cash flow to be sufficient to cover principal and interest payments on all new and existing debt. Commercial and industrial loans are generally secured by the assets being financed or other business assets such as accounts receivable or inventory. Many of the loans in the commercial portfolio have variable interest rates tied to Prime Rate, FHLBNY borrowing rates, SOFR, or U.S. Treasury indices.
Commercial real estate
The Company’s Commercial Loan Policy sets forth guidelines for debt service coverage ratios, LTV’s and documentation standards. Commercial real estate loans are primarily made based on identified cash flows of the borrower with consideration given to underlying real estate collateral and personal or government guarantees. The Company’s policy establishes a maximum LTV based on the type of property and debt service coverage ratio limits that require a borrower’s cash flow to be sufficient to cover principal and interest payments on all new and existing debt. Commercial real estate loans may be fixed or variable rate loans with interest rates tied to Prime Rate, FHLBNY borrowing rates, SOFR, or U.S. Treasury indices.
Agriculture loans
Agriculturally-related loans include loans to dairy farms, cash and vegetable crop farms and a variety of other livestock and crop producers. Agriculturally-related loans are primarily made based on identified cash flows of the borrower with consideration given to underlying collateral, personal guarantees, and government related guarantees. Agriculturally-related loans are generally secured by the assets or property being financed or other business assets such as accounts receivable, livestock, equipment, or commodities/crops. The Company’s Commercial Loan Policy establishes a maximum LTV of 80% for real estate secured loans and debt service coverage ratio limits that require a borrower’s cash flow to be sufficient to cover principal and interest payments on all new and existing debt, with limited adjustments to consider commodity market cycles. The policy also establishes maximum LTV ratios for non-real estate collateral, such as livestock, commodities/crops, equipment and accounts receivable. Agriculturally-related loans may be fixed or variable rate with interest tied to Prime Rate, FHLBNY borrowing rates, SOFR, or U.S. Treasury indices.
Consumer and other loans
The consumer loan portfolio includes personal installment loans, direct and indirect automobile financing, and overdraft lines of credit. The majority of the consumer portfolio consists of indirect and direct automobile loans. Consumer loans are generally short-term and have fixed rates of interest that are set giving consideration to current market interest rates, the financial strength of the borrower, and internal profitability targets. The Company's Consumer Loan Underwriting Guidelines Policy establishes maximum debt to income ratios and includes guidelines for verification of applicants’ income and receipt of credit reports.
Leases
Leases are primarily made to commercial customers and the origination criteria typically includes the value of the underlying assets being financed, the useful life of the assets being financed, and identified cash flows of the borrower. Most leases carry a fixed rate of interest that is set giving consideration to current market interest rates, the financial strength of the borrower, and internal profitability targets.
Loan and Lease Customers
The Company’s loan and lease customers are located primarily in the upstate New York communities served by its three subsidiary banks and in the Pennsylvania communities served by VIST Bank. The Trust Company operates thirteen banking offices in the counties of Tompkins, Cayuga, Cortland, Onondaga and Schuyler, New York. The Bank of Castile operates sixteen banking offices in the counties of Wyoming, Livingston, Genesee, Orleans and Monroe, New York. Mahopac Bank operates fourteen banking offices in the counties of Putnam County, Dutchess County and Westchester, New York. VIST Bank operates twenty offices in the counties of Berks, Montgomery, Philadelphia, Delaware and Schuylkill, Pennsylvania. Other than general economic risks, management is not aware of any material concentrations of credit risk to any industry or individual borrower.
Loans to Related Parties
Directors and officers of the Company and its affiliated companies were customers of, and had other transactions with, the Company's banking subsidiaries in the ordinary course of business. Such loans and commitments were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons not related to the Company, and did not involve more than normal risk of collectability or present other unfavorable features.
Loan transactions with related parties are summarized as follows:
| | | | | | | | |
| December 31, |
| (In thousands) | 2021 | 2020 |
| Balance at beginning of year | $ | 49,080 | | $ | 48,389 | |
| Loans to new directors/executive officers | 0 | | 5,886 | |
| New loans and advancements | 7,274 | | 3,022 | |
| Loan payments | (34,451) | | (8,217) | |
| Balance at end of year | $ | 21,903 | | $ | 49,080 | |
Nonaccrual Loans and Leases
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments are due. Loans are placed on nonaccrual status either due to the delinquency status of principal and/or interest (generally when past due 90 or more days) or a judgment by management that the full repayment of principal and interest is unlikely. When interest accrual is discontinued, all unpaid accrued interest is reversed. Payments received on loans on nonaccrual are generally applied to reduce the principal balance of the loan. Loans are generally returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. When management determines that the collection of principal in full is improbable, management will charge-off a partial amount or full amount of the loan balance. Management considers specific facts and circumstances relative to each individual credit in making such a determination. For residential and consumer loans, management uses specific regulatory guidance and thresholds for determining charge-offs.
Acquired loans that met the criteria for nonaccrual of interest prior to the acquisition may be considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if we can reasonably estimate the timing and amount of the expected cash flows on such loans and if the Company expects to fully collect the new carrying value of the loans. As such, we may no longer consider the loan to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable discount.
The below table is an aging analysis of past due loans, segregated by class of loans as of December 31, 2021 and 2020.
| | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | | | | | |
| (In thousands) | 30-59 Days | 60-89 Days | 90 Days or More | Total Past Due | Current Loans | Total Loans |
| Loans and Leases | | | | | | |
| Commercial and industrial | | | | | | |
| Agriculture | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 99,172 | | $ | 99,172 | |
| Commercial and industrial other | 506 | | 6 | 88 | | 600 | | 698,521 | | 699,121 | |
| PPP loans | 0 | | 0 | 0 | | 0 | | 71,260 | | 71,260 | |
| Subtotal commercial and industrial | 506 | 6 | 88 | 600 | 868,953 | 869,553 |
| Commercial real estate | | | | | | |
| Construction | 0 | | 0 | 0 | | 0 | | 178,582 | | 178,582 | |
| Agriculture | 121 | | 0 | 0 | | 121 | | 195,852 | | 195,973 | |
| Commercial real estate other | 150 | | 257 | 3,305 | | 3,712 | | 2,274,887 | | 2,278,599 | |
| Subtotal commercial real estate | 271 | 257 | 3,305 | 3,833 | 2,649,321 | 2,653,154 |
| Residential real estate | | | | | | |
| Home equity | 441 | | 417 | 798 | | 1,656 | | 181,015 | | 182,671 | |
| Mortgages | 7 | | 839 | 3,917 | | 4,763 | | 1,286,148 | | 1,290,911 | |
| Subtotal residential real estate | 448 | 1,256 | 4,715 | 6,419 | 1,467,163 | 1,473,582 |
| Consumer and other | | | | | | |
| Indirect | 77 | | 86 | 2 | | 165 | | 4,490 | | 4,655 | |
| Consumer and other | 120 | | 45 | 45 | | 210 | | 67,186 | | 67,396 | |
| Subtotal consumer and other | 197 | | 131 | 47 | | 375 | | 71,676 | | 72,051 | |
| Leases | 0 | | 0 | 0 | | 0 | | 13,948 | | 13,948 | |
| Total loans and leases | 1,422 | | 1,650 | 8,155 | | 11,227 | | 5,071,061 | | 5,082,288 | |
| Less: unearned income and deferred costs and fees | 0 | | 0 | 0 | | 0 | | (6,821) | | (6,821) | |
| Total loans and leases, net of unearned income and deferred costs and fees | $ | 1,422 | | $ | 1,650 | | $ | 8,155 | | $ | 11,227 | | $ | 5,064,240 | | $ | 5,075,467 | |
*SBA Paycheck Protection Program ("PPP")
| | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | | | | | |
| (In thousands) | 30-59 Days | 60-89 Days | 90 Days or More | Total Past Due | Current Loans | Total Loans |
| Loans and Leases | | | | | | |
| Commercial and industrial | | | | | | |
| Agriculture | $ | 0 | | $ | 18 | | $ | 0 | | $ | 18 | | $ | 94,471 | | $ | 94,489 | |
| Commercial and industrial other | 44 | | 7 | | 1,516 | | 1,567 | | 791,420 | | 792,987 | |
| PPP loans | 0 | | 0 | | 0 | | 0 | | 291,252 | | 291,252 | |
| Subtotal commercial and industrial | 44 | | 25 | | 1,516 | | 1,585 | | 1,177,143 | | 1,178,728 | |
| Commercial real estate | | | | | | |
| Construction | 0 | | 0 | | 0 | | 0 | | 163,016 | | 163,016 | |
| Agriculture | 263 | | 0 | | 0 | | 263 | | 201,603 | | 201,866 | |
| Commercial real estate other | 0 | | 0 | | 7,125 | | 7,125 | | 2,197,185 | | 2,204,310 | |
| Subtotal commercial real estate | 263 | | 0 | | 7,125 | | 7,388 | | 2,561,804 | | 2,569,192 | |
| Residential real estate | | | | | | |
| Home equity | 713 | | 224 | | 1,126 | | 2,063 | | 198,764 | | 200,827 | |
| Mortgages | 521 | | 879 | | 4,210 | | 5,610 | | 1,229,550 | | 1,235,160 | |
| Subtotal residential real estate | 1,234 | | 1,103 | | 5,336 | | 7,673 | | 1,428,314 | | 1,435,987 | |
| Consumer and other | | | | | | |
| Indirect | 175 | | 35 | | 91 | | 301 | | 8,100 | | 8,401 | |
| Consumer and other | 115 | | 18 | | 232 | | 365 | | 61,034 | | 61,399 | |
| Subtotal consumer and other | 290 | | 53 | | 323 | | 666 | | 69,134 | | 69,800 | |
| Leases | 0 | | 0 | | 0 | | 0 | | 14,203 | | 14,203 | |
| Total loans and leases | 1,831 | | 1,181 | | 14,300 | | 17,312 | | 5,250,598 | | 5,267,910 | |
| Less: unearned income and deferred costs and fees | 0 | | 0 | | 0 | | 0 | | (7,583) | | (7,583) | |
| Total loans and leases, net of unearned income and deferred costs and fees | $ | 1,831 | | $ | 1,181 | | $ | 14,300 | | $ | 17,312 | | $ | 5,243,015 | | $ | 5,260,327 | |
The following table presents the amortized cost basis of loans on nonaccrual status and the amortized cost basis of loans on nonaccrual status for which there was no related allowance for credit losses.
| | | | | | | | | | | |
| December 31, 2021 | | | |
| (In thousands) | Nonaccrual Loans and Leases with no ACL | Nonaccrual Loans and Leases | Loans and Leases Past Due Over 89 Days and Accruing |
| Loans and Leases | | | |
| Commercial and industrial | | | |
| | | |
| Commercial and industrial other | $ | 502 | | $ | 533 | | $ | 0 | |
| | | |
| Subtotal commercial and industrial | 502 | | 533 | | 0 | |
| Commercial real estate | | | |
| Construction | 671 | | 671 | | 0 | |
| Agriculture | 348 | | 456 | | 0 | |
| Commercial real estate other | 12,483 | | 12,766 | | 0 | |
| Subtotal commercial real estate | 13,502 | | 13,893 | | 0 | |
| Residential real estate | | | |
| Home equity | 380 | | 2,459 | | 0 | |
| Mortgages | 716 | | 8,719 | | 0 | |
| Subtotal residential real estate | 1,096 | | 11,178 | | 0 | |
| Consumer and other | | | |
| Indirect | 1 | | 246 | | 0 | |
| Consumer and other | 0 | | 183 | | 0 | |
| Subtotal consumer and other | 1 | | 429 | | 0 | |
| | | |
| Total loans and leases | $ | 15,101 | | $ | 26,033 | | $ | 0 | |
| | | | | | | | | | | |
| December 31, 2020 | | | |
| (In thousands) | Nonaccrual Loans and Leases with no ACL | Nonaccrual Loans and Leases | Loans and Leases Past Due Over 89 Days and Accruing |
| Loans and Leases | | | |
| Commercial and industrial | | | |
| | | |
| Commercial and industrial other | $ | 803 | | $ | 1,775 | | $ | 0 | |
| | | |
| Subtotal commercial and industrial | 803 | | 1,775 | | 0 | |
| Commercial real estate | | | |
| | | |
| Agriculture | 0 | | 118 | | 0 | |
| Commercial real estate other | 23,080 | | 23,509 | | 0 | |
| Subtotal commercial real estate | 23,080 | | 23,627 | | 0 | |
| Residential real estate | | | |
| Home equity | 767 | | 2,965 | | 0 | |
| Mortgages | 1,365 | | 10,180 | | 0 | |
| Subtotal residential real estate | 2,132 | | 13,145 | | 0 | |
| Consumer and other | | | |
| Indirect | 3 | | 169 | | 0 | |
| Consumer and other | 0 | | 260 | | 0 | |
| Subtotal consumer and other | 3 | | 429 | | 0 | |
| | | |
| Total loans and leases | $ | 26,018 | | $ | 38,976 | | $ | 0 | |
The difference between the interest income that would have been recorded if nonaccrual loans and leases had paid in accordance with their original terms and the interest income that was recorded, was $1.5 million for the year ended December 31, 2021, $1.7 million for year ended December 31, 2020, and $1.2 million for year ended December 31, 2019. The Company had no material commitments to make additional advances to borrowers with nonperforming loans.
Note 4 Allowance for Credit Losses
Management reviews the appropriateness of the ACL on a regular basis. Management considers the accounting policy relating to the allowance to be a critical accounting policy, given the inherent uncertainty in evaluating the levels of the allowance required to cover credit losses in the portfolio and the material effect that assumptions could have on the Company’s results of operations. The Company has developed a methodology to measure the amount of estimated credit loss exposure inherent in the loan portfolio to assure that an appropriate allowance is maintained. The Company’s methodology is based upon guidance provided in SEC Staff Accounting Bulletin No. 119, Measurement of Credit Losses on Financial Instruments ("CECL"), and Financial Instruments - Credit Losses and ASC Topic 326, Financial Instruments - Credit Losses.
The Company uses a DCF method to estimate expected credit losses for all loan segments excluding the leasing segment. For each of these loan segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, curtailments, recovery lag, probability of default, and loss given default. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on internal historical data.
The Company uses regression analysis of historical internal and peer data to determine suitable loss drivers to utilize when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers. For all loans utilizing the DCF method, management utilizes forecasts of national unemployment rates and a one year percentage change in national gross domestic product as loss drivers in the model.
For all DCF models, management has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over eight quarters on a straight-line basis. Management leverages economic projections from a reputable and independent third party to inform its loss driver forecasts over the four-quarter forecast period. Other internal and external indicators of economic forecasts, and scenario weightings, are also considered by management when developing the forecast metrics.
Due to the size and characteristics of the leasing portfolio, the Company uses the remaining life method, using the historical loss rate of the commercial and industrial segment, to determine the allowance for credit losses.
The combination of adjustments for credit expectations and timing expectations produces an expected cash flow stream at the instrument level. Instrument effective yield is calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce a net present value of expected cash flows ("NPV"). An ACL is established for the difference between the NPV and amortized cost basis.
The Company adopted ASU 2016-13 as of January 1, 2020 using the prospective transition approach for financial assets purchased with credit deterioration ("PCD") that were previously classified as purchased credit impaired ("PCI") and accounted for under ASC 310-30. In accordance with the standard, the Company did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. The remaining discount on the PCD assets will be accreted into interest income on a level-yield method over the life of the loans.
Since the methodology is based upon historical experience and trends, current conditions, and reasonable and supportable forecasts, as well as management’s judgment, factors may arise that result in different estimates. While management’s evaluation of the allowance as of December 31, 2021, considers the allowance to be appropriate, under adversely different conditions or assumptions, the Company would need to increase or decrease the allowance. In addition, various federal and State regulatory agencies, as part of their examination process, review the Company's allowance and may require the Company to recognize additions to the allowance based on their judgements and information available to them at the time of their examinations.
Loan Commitments and Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans, and commercial letters of credit. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded. The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancellable, through a charge to credit loss expense for off-balance sheet credit exposures included in provision expense in the Company's consolidated statements of income.
Changes in the allowance for credit losses for the years ended December 31, 2021, 2020 and 2019 are summarized as follows:
Allowance for Credit Losses - Loans and Leases
| | | | | | | | | | | |
| (In thousands) | 2021 | 2020 | 2019 |
| Total allowance at beginning of year | $ | 51,669 | | $ | 39,892 | | $ | 43,410 | |
| Impact of adopting ASU 2016-13 | 0 | | (2,534) | | 0 | |
| (Credit) provision for credit loss expense | (2,805) | | 16,151 | | 1,366 | |
| Recoveries on loans and leases | 1,725 | | 631 | | 906 | |
| Charge-offs on loans and leases | (7,746) | | (2,471) | | (5,790) | |
| Total allowance at end of year | $ | 42,843 | | $ | 51,669 | | $ | 39,892 | |
Allowance for Credit Losses - Off-Balance Sheet Credit Exposures
| | | | | | | | | | | |
| (In thousands) | 2021 | 2020 | 2019 |
| Liabilities for off-balance sheet credit exposures at beginning of period | $ | 1,920 | | $ | 476 | | $ | 748 | |
| Impact of adopting ASU 2016-13 | 0 | | 382 | | 0 | |
| Provision (credit) for credit loss expense related to off-balance sheet credit exposures | 586 | | 1,062 | | (272) | |
| Liabilities for off-balance sheet credit exposures at end of period | $ | 2,506 | | $ | 1,920 | | $ | 476 | |
The following table details activity in the allowance for credit losses for loans for the years ended December 31, 2021 and 2020. As previously discussed, the Company adopted ASU 2016-13 on January 1, 2020 using the modified retrospective approach. Results for the periods beginning after January 1, 2020 are presented under ASC 326. As a result of the adoption of ASC 326, the Company recorded a net cumulative-effect adjustment reducing the allowance for credit losses by $2.5 million. The allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
| | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | | | | | |
| (In thousands) | Commercial
& Industrial | Commercial
Real Estate | Residential
Real Estate | Consumer
and Other | Finance
Leases | Total |
| Allowance for credit losses: | | | | |
| Beginning balance | $ | 9,239 | | $ | 30,546 | | $ | 10,257 | | $ | 1,562 | | $ | 65 | | $ | 51,669 | |
| Charge-offs | (274) | | (6,957) | | (77) | | (438) | | 0 | | (7,746) | |
| Recoveries | 118 | | 1,175 | | 236 | | 196 | | 0 | | 1,725 | |
| (Credit) provision for credit loss expense | (2,748) | | 49 | | (277) | | 172 | | (1) | | (2,805) | |
| Ending Balance | $ | 6,335 | | $ | 24,813 | | $ | 10,139 | | $ | 1,492 | | $ | 64 | | $ | 42,843 | |
| | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | | | | | |
| (In thousands) | Commercial
& Industrial | Commercial
Real Estate | Residential
Real Estate | Consumer
and Other | Finance
Leases | Total |
| Allowance for credit losses: | | | | |
| Beginning balance, prior to adoption of ASU 2016-13 | $ | 10,541 | | $ | 21,608 | | $ | 6,381 | | $ | 1,362 | | $ | 0 | | $ | 39,892 | |
| Impact of adopting ASU 2016-13 | (2,008) | | (5,917) | | 4,459 | | 850 | | 82 | | $ | (2,534) | |
| Charge-offs | (2) | | (1,903) | | (84) | | (482) | | 0 | | (2,471) | |
| Recoveries | 131 | | 58 | | 194 | | 248 | | 0 | | 631 | |
| (Credit) provision for credit loss expense | 577 | | 16,700 | | (693) | | (416) | | (17) | | 16,151 | |
| Ending Balance | $ | 9,239 | | $ | 30,546 | | $ | 10,257 | | $ | 1,562 | | $ | 65 | | $ | 51,669 | |
The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses, and the related allowance for credit losses allocated to these loans:
| | | | | | | | | | | | | | | | | |
| December 31, 2021 | | | | | |
| (In thousands) | Real Estate | Business Assets | Other | Total | ACL Allocation |
| Commercial and Industrial | $ | 142 | | $ | 395 | | $ | 328 | | $ | 865 | | $ | 26 | |
| Commercial Real Estate | 13,334 | | 0 | | 1,931 | | 15,265 | | 40 | |
| Residential Real Estate | 32 | | 0 | | 0 | | 32 | | 1 | |
| Total | $ | 13,508 | | $ | 395 | | $ | 2,259 | | $ | 16,162 | | $ | 67 | |
Loans are considered modified in a TDR when, due to a borrower’s financial difficulties, the Company makes a concession(s) to the borrower that it would not otherwise consider. When modifications are provided for reasons other than as a result of the financial distress of the borrower, these loans are not classified as TDRs or impaired. These modifications primarily include, among others, an extension of the term of the loan, and granting a period when interest-only payments can be made, with the principal payments and interest caught up over the remaining term of the loan or at maturity, among others.
The following tables present loans by class modified in 2021 and 2020 as troubled debt restructurings. Post-modification balances reflect paydowns and charge-offs at time of modification.
Troubled Debt Restructuring
| | | | | | | | | | | | | | | | | |
| December 31, 2021 | Year Ended |
| | | | Defaulted TDRs2 |
| (In thousands) | Number of
Loans | Pre-
Modification
Outstanding
Recorded
Investment | Post-Modification Outstanding Recorded Investment | Number of
Loans | Post-
Modification
Outstanding
Recorded
Investment |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Residential real estate | | | | | |
| | | | | |
Home equity1 | 2 | | 219 | | 219 | | 1 | | 201 | |
| | | | | |
| | | | | |
| Total | 2 | | $ | 219 | | $ | 219 | | 1 | | $ | 201 | |
1Represents the following concessions: extension of term and reduction of rate.
2TDRs that defaulted during the 12 months ended December 31, 2021, that had been restructured in the prior twelve months.
| | | | | | | | | | | | | | | | | |
| December 31, 2020 | Year Ended |
| | | | Defaulted TDRs2 |
| (In thousands) | Number of
Loans | Pre-
Modification
Outstanding
Recorded
Investment | Post-Modification Outstanding Recorded Investment | Number of
Loans | Post-
Modification
Outstanding
Recorded
Investment |
| Commercial & industrial | | | | | |
Commercial and industrial other1 | 1 | | $ | 24 | | $ | 24 | | 0 | | $ | 0 | |
| | | | | |
| | | | | |
| Residential real estate | | | | | |
Mortgages1 | 2 | | 274 | | 274 | | 1 | | 37 | |
Home equity1 | 1 | | 43 | | 43 | | 1 | | 87 | |
| Consumer and other | | | | | |
Consumer and other1 | 1 | 4 | | 4 | | 0 | 0 | |
| Total | 5 | | $ | 345 | | $ | 345 | | 2 | | $ | 124 | |
1Represents the following concessions: extension of term and reduction of rate.
2TDRs that defaulted during the 12 months ended December 31, 2020, that had been restructured in the prior twelve months.
The Company's TDRs added during 2021 totaled $219,000, compared to $345,000 in 2020. At December 31, 2021, the Company was not committed to lend additional amounts to customers with outstanding loans that were classified as TDRs. The provisions of the CARES Act and the interagency guidance issued by Federal banking regulators provided clarification related to modifications and deferral programs to assist borrowers who are negatively impacted by the COVID-19 national emergency. The guidance and clarifications detail certain provisions whereby banks are permitted to make deferrals and modifications to the terms of a loan which would not require the loan to be reported as a troubled debt restructuring ("TDR"). In accordance with the CARES Act. Appropriations Act, and the interagency guidance, the Company elected to adopt the provisions to not report qualified loan modifications as TDRs during 2020 and 2021.
The following table presents credit quality indicators by total loans on an amortized cost basis by origination year as of December 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Revolving Loans Amortized Cost Basis | Revolving Loans Converted to Term | Total Loans |
| | | | | | | | | |
| Commercial and Industrial - Other: | | | | | | |
| Pass | $ | 123,996 | | $ | 58,432 | | $ | 54,116 | | $ | 42,093 | | $ | 35,725 | | $ | 239,093 | | $ | 125,476 | | $ | 10,039 | | $ | 688,970 | |
| Special Mention | 156 | | 770 | | 450 | | 100 | | 201 | | 393 | | 1,417 | | 0 | | 3,487 | |
| Substandard | 179 | | 584 | | 47 | | 575 | | 0 | | 637 | | 4,642 | | 0 | | 6,664 | |
| Total Commercial and Industrial - Other | $ | 124,331 | | $ | 59,786 | | $ | 54,613 | | $ | 42,768 | | $ | 35,926 | | $ | 240,123 | | $ | 131,535 | | $ | 10,039 | | $ | 699,121 | |
| | | | | | | | | |
| Commercial and Industrial - PPP: | | | | | | |
| Pass | $ | 71,260 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 71,260 | |
| Special Mention | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
| Substandard | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
| Total Commercial and Industrial - PPP | $ | 71,260 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 71,260 | |
| | | | | | | | | |
| Commercial and Industrial - Agriculture: | | | | | |
| Pass | $ | 8,573 | | $ | 6,782 | | $ | 5,700 | | $ | 10,136 | | $ | 6,867 | | $ | 3,186 | | $ | 53,145 | | $ | 595 | | $ | 94,984 | |
| Special Mention | 0 | | 0 | | 0 | | 23 | | 0 | | 0 | | 0 | | 0 | | 23 | |
| Substandard | 0 | | 85 | | 11 | | 0 | | 93 | | 2,316 | | 1,660 | | 0 | | 4,165 | |
| Total Commercial and Industrial - Agriculture | $ | 8,573 | | $ | 6,867 | | $ | 5,711 | | $ | 10,159 | | $ | 6,960 | | $ | 5,502 | | $ | 54,805 | | $ | 595 | | $ | 99,172 | |
| | | | | | | | | |
| Commercial Real Estate | | | | | | | | |
| Pass | $ | 325,874 | | $ | 271,680 | | $ | 249,266 | | $ | 201,992 | | $ | 212,991 | | $ | 810,713 | | $ | 44,264 | | $ | 43,225 | | $ | 2,160,005 | |
| Special Mention | 0 | | 1,763 | | 11,772 | | 3,217 | | 2,167 | | 61,723 | | 358 | | 0 | | 81,000 | |
| Substandard | 3,482 | | 0 | | 2,262 | | 2,518 | | 8,509 | | 20,401 | | 422 | | 0 | | 37,594 | |
| Total Commercial Real Estate | $ | 329,356 | | $ | 273,443 | | $ | 263,300 | | $ | 207,727 | | $ | 223,667 | | $ | 892,837 | | $ | 45,044 | | $ | 43,225 | | $ | 2,278,599 | |
| | | | | | | | | |
| Commercial Real Estate - Agriculture: | | | | | |
| Pass | $ | 23,151 | | $ | 21,856 | | $ | 28,943 | | $ | 41,064 | | $ | 23,195 | | $ | 50,809 | | $ | 1,949 | | $ | 2,850 | | $ | 193,817 | |
| Special Mention | 0 | | 479 | | 0 | | 0 | | 0 | | 350 | | 35 | | 0 | | 864 | |
| Substandard | 0 | | 0 | | 0 | | 39 | | 0 | | 1,253 | | 0 | | 0 | | 1,292 | |
| Total Commercial Real Estate - Agriculture | $ | 23,151 | | $ | 22,335 | | $ | 28,943 | | $ | 41,103 | | $ | 23,195 | | $ | 52,412 | | $ | 1,984 | | $ | 2,850 | | $ | 195,973 | |
| | | | | | | | | |
| Commercial Real Estate - Construction | | | | | |
| Pass | $ | 12,840 | | $ | 10,025 | | $ | 16,325 | | $ | 7,542 | | $ | 1,274 | | $ | 6,559 | | $ | 112,537 | | $ | 10,037 | | $ | 177,139 | |
| Special Mention | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
| Substandard | 0 | | 0 | | 0 | | 0 | | 0 | | 643 | | 800 | | 0 | | 1,443 | |
| Total Commercial Real Estate - Construction | $ | 12,840 | | $ | 10,025 | | $ | 16,325 | | $ | 7,542 | | $ | 1,274 | | $ | 7,202 | | $ | 113,337 | | $ | 10,037 | | $ | 178,582 | |
The following table presents credit quality indicators by total loans on an amortized cost basis by origination year as of December 31, 2021, continued.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Revolving Loans Amortized Cost Basis | Revolving Loans Converted to Term | Total Loans |
| | | | | | | | | |
| Residential - Home Equity | | | | | | | | |
| Performing | $ | 2,033 | | $ | 1,142 | | $ | 3,041 | | $ | 1,600 | | $ | 1,572 | | $ | 3,144 | | $ | 161,630 | | $ | 6,050 | | $ | 180,212 | |
| Nonperforming | 0 | | 0 | | 16 | | 0 | | 0 | | 604 | | 1,839 | | 0 | | 2,459 | |
| Total Residential - Home Equity | $ | 2,033 | | $ | 1,142 | | $ | 3,057 | | $ | 1,600 | | $ | 1,572 | | $ | 3,748 | | $ | 163,469 | | $ | 6,050 | | $ | 182,671 | |
| | | | | | | | | |
| Residential - Mortgages | | | | | | | | |
| Performing | $ | 324,967 | | $ | 282,202 | | $ | 162,574 | | $ | 97,778 | | $ | 124,221 | | $ | 275,133 | | $ | 14,112 | | $ | 1,205 | | $ | 1,282,192 | |
| Nonperforming | 0 | | 0 | | 241 | | 702 | | 693 | | 7,060 | | 23 | | 0 | | 8,719 | |
| Total Residential - Mortgages | $ | 324,967 | | $ | 282,202 | | $ | 162,815 | | $ | 98,480 | | $ | 124,914 | | $ | 282,193 | | $ | 14,135 | | $ | 1,205 | | $ | 1,290,911 | |
| | | | | | | | | |
| Consumer - Direct | | | | | | | | |
| Performing | $ | 20,653 | | $ | 10,735 | | $ | 9,397 | | $ | 5,542 | | $ | 4,849 | | $ | 10,602 | | $ | 5,435 | | $ | 0 | | $ | 67,213 | |
| Nonperforming | 0 | | 9 | | 44 | | 117 | | 12 | | 0 | | 1 | | $ | 0 | | 183 | |
| Total Consumer - Direct | $ | 20,653 | | $ | 10,744 | | $ | 9,441 | | $ | 5,659 | | $ | 4,861 | | $ | 10,602 | | $ | 5,436 | | $ | 0 | | $ | 67,396 | |
| | | | | | | | | |
| Consumer - Indirect | | | | | | | | |
| Performing | $ | 1,809 | | $ | 854 | | $ | 812 | | $ | 506 | | $ | 362 | | $ | 66 | | $ | 0 | | $ | 0 | | $ | 4,409 | |
| Nonperforming | 0 | | 2 | | 148 | | 81 | | 1 | | 14 | | 0 | | 0 | | 246 | |
| Total Consumer - Indirect | $ | 1,809 | | $ | 856 | | $ | 960 | | $ | 587 | | $ | 363 | | $ | 80 | | $ | 0 | | $ | 0 | | $ | 4,655 | |
The following tables present credit quality indicators (internal risk grade) by class of commercial and industrial loans and commercial real estate loans as of December 31, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Revolving Loans Amortized Cost Basis | Revolving Loans Converted to Term | Total Loans |
| | | | | | | | | |
| Commercial and Industrial - Other: | | | | | | | |
| Pass | $ | 91,597 | | $ | 72,639 | | $ | 56,191 | | $ | 60,714 | | $ | 33,402 | | $ | 301,027 | | $ | 149,969 | | $ | 16,301 | | $ | 781,840 | |
| Special Mention | 1,064 | | 367 | | 344 | | 912 | | 2,045 | | 228 | | 1,331 | | 0 | | 6,291 | |
| Substandard | 412 | | 305 | | 933 | | 485 | | 292 | | 783 | | 1,646 | | 0 | | 4,856 | |
| Total Commercial & Industrial - Other | $ | 93,073 | | $ | 73,311 | | $ | 57,468 | | $ | 62,111 | | $ | 35,739 | | $ | 302,038 | | $ | 152,946 | | $ | 16,301 | | $ | 792,987 | |
| | | | | | | | | $ | — | |
| Commercial and Industrial - PPP: | | | | | | | |
| Pass | $ | 291,252 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 291,252 | |
| Special Mention | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
| Substandard | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
| Total Commercial and Industrial - PPP | $ | 291,252 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 291,252 | |
| | | | | | | | | |
| Commercial and Industrial - Agriculture: | | | | | | |
| Pass | $ | 11,536 | | $ | 8,005 | | $ | 11,162 | | $ | 6,531 | | $ | 3,539 | | $ | 2,599 | | $ | 41,936 | | $ | 1,340 | | $ | 86,648 | |
| Special Mention | 0 | | 0 | | 28 | | 729 | | 0 | | 0 | | 2,080 | | 0 | | 2,837 | |
| Substandard | 99 | | 83 | | 0 | | 202 | | 0 | | 2,308 | | 2,312 | | 0 | | 5,004 | |
| Total Commercial and Industrial - Agriculture | $ | 11,635 | | $ | 8,088 | | $ | 11,190 | | $ | 7,462 | | $ | 3,539 | | $ | 4,907 | | $ | 46,328 | | $ | 1,340 | | $ | 94,489 | |
| | | | | | | | | |
| Commercial Real Estate: | | | | | | | |
| Pass | $ | 278,747 | | $ | 246,331 | | $ | 232,651 | | $ | 237,487 | | $ | 290,106 | | $ | 664,027 | | $ | 33,117 | | $ | 64,903 | | $ | 2,047,369 | |
| Special Mention | 35 | | 13,016 | | 5,612 | | 4,654 | | 34,310 | | 46,074 | | 203 | | 0 | | 103,904 | |
| Substandard | 0 | | 4,933 | | 18,395 | | 6,172 | | 5,625 | | 17,610 | | 302 | | 0 | | 53,037 | |
| Total Commercial Real Estate | $ | 278,782 | | $ | 264,280 | | $ | 256,658 | | $ | 248,313 | | $ | 330,041 | | $ | 727,711 | | $ | 33,622 | | $ | 64,903 | | $ | 2,204,310 | |
| | | | | | | | | |
| Commercial Real Estate - Agriculture: | | | | | | | |
| Pass | $ | 22,440 | | $ | 35,081 | | $ | 44,519 | | $ | 22,356 | | $ | 17,081 | | $ | 44,559 | | $ | 919 | | $ | 5,602 | | $ | 192,557 | |
| Special Mention | 1,960 | | 0 | | 575 | | 1,366 | | 1,053 | | 6 | | 49 | | 0 | | 5,009 | |
| Substandard | 0 | | 0 | | 0 | | 1,777 | | 713 | | 1,527 | | 283 | | 0 | | 4,300 | |
| Total Commercial Real Estate - Agriculture | $ | 24,400 | | $ | 35,081 | | $ | 45,094 | | $ | 25,499 | | $ | 18,847 | | $ | 46,092 | | $ | 1,251 | | $ | 5,602 | | $ | 201,866 | |
| | | | | | | | | |
| Commercial Real Estate - Construction: | | | | | | | |
| Pass | $ | 14,465 | | $ | 20,705 | | $ | 7,999 | | $ | 2,478 | | $ | 1,879 | | $ | 6,682 | | $ | 85,513 | | $ | 21,051 | | $ | 160,772 | |
| Special Mention | 0 | | 0 | | 0 | | 0 | | 0 | | 467 | | 1,453 | | 0 | | 1,920 | |
| Substandard | 0 | | 0 | | 0 | | 0 | | 0 | | 324 | | 0 | | 0 | | 324 | |
| Total Commercial Real Estate - Construction | $ | 14,465 | | $ | 20,705 | | $ | 7,999 | | $ | 2,478 | | $ | 1,879 | | $ | 7,473 | | $ | 86,966 | | $ | 21,051 | | $ | 163,016 | |
The following table presents credit quality indicators by total loans on an amortized cost basis by origination year as of December 31, 2020, continued.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Revolving Loans Amortized Cost Basis | Revolving Loans Converted to Term | Total Loans |
| | | | | | | | | |
| Residential - Home Equity | | | | | | | | |
| Performing | $ | 1,440 | | $ | 2,764 | | $ | 1,052 | | $ | 2,120 | | $ | 722 | | $ | 1,106 | | $ | 188,614 | | $ | 44 | | $ | 197,862 | |
| Nonperforming | 0 | | 18 | | 0 | | 0 | | 194 | | 506 | | 2,247 | | 0 | | 2,965 | |
| Total Residential - Home Equity | $ | 1,440 | | $ | 2,782 | | $ | 1,052 | | $ | 2,120 | | $ | 916 | | $ | 1,612 | | $ | 190,861 | | $ | 44 | | $ | 200,827 | |
| | | | | | | | | |
| Residential - Mortgages | | | | | | | | |
| Performing | $ | 305,476 | | $ | 193,543 | | $ | 123,205 | | $ | 155,699 | | $ | 178,149 | | $ | 255,556 | | $ | 11,735 | | $ | 1,617 | | $ | 1,224,980 | |
| Nonperforming | 0 | | 258 | | 455 | | 706 | | 1,404 | | 7,305 | | 52 | | 0 | | 10,180 | |
| Total Residential - Mortgages | $ | 305,476 | | $ | 193,801 | | $ | 123,660 | | $ | 156,405 | | $ | 179,553 | | $ | 262,861 | | $ | 11,787 | | $ | 1,617 | | $ | 1,235,160 | |
| | | | | | | | | |
| Consumer - Direct | | | | | | | | |
| Performing | $ | 14,840 | | $ | 11,127 | | $ | 8,011 | | $ | 6,632 | | $ | 2,854 | | $ | 10,840 | | $ | 6,835 | | $ | 0 | | $ | 61,139 | |
| Nonperforming | 5 | | 74 | | 167 | | 12 | | 0 | | 2 | | 0 | | $ | 0 | | 260 | |
| Total Consumer - Direct | $ | 14,845 | | $ | 11,201 | | $ | 8,178 | | $ | 6,644 | | $ | 2,854 | | $ | 10,842 | | $ | 6,835 | | $ | 0 | | $ | 61,399 | |
| | | | | | | | | |
| Consumer - Indirect | | | | | | | | |
| Performing | $ | 1,424 | | $ | 1,878 | | $ | 3,327 | | $ | 1,128 | | $ | 382 | | $ | 93 | | $ | 0 | | $ | 0 | | $ | 8,232 | |
| Nonperforming | 0 | | 67 | | 44 | | 7 | | 36 | | 15 | | 0 | | 0 | | 169 | |
| Total Consumer - Indirect | $ | 1,424 | | $ | 1,945 | | $ | 3,371 | | $ | 1,135 | | $ | 418 | | $ | 108 | | $ | 0 | | $ | 0 | | $ | 8,401 | |
Note 5 Goodwill and Other Intangible Assets
| | | | | | | | | | | | | | |
| (In thousands) | Banking | Insurance | Wealth Management | Total |
| Balance at January 1, 2020 | $ | 64,369 | | $ | 19,867 | | $ | 8,211 | | $ | 92,447 | |
| | | | |
| | | | |
| Acquisitions | 0 | | 0 | | 0 | | 0 | |
| Balance at December 31, 2020 | 64,369 | | 19,867 | | 8,211 | | 92,447 | |
| Acquisitions | 0 | | 0 | | 0 | | 0 | |
| | | | |
| Balance at December 31, 2021 | $ | 64,369 | | $ | 19,867 | | $ | 8,211 | | $ | 92,447 | |
Goodwill is assigned to reporting units. The Company reviews its goodwill and intangible assets annually, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. Based on the Company’s review as of December 31, 2021, there was no impairment of its goodwill or intangible assets.
Other Intangible Assets
The following table provides information regarding the Company's amortizing intangible assets:
| | | | | | | | | | | |
| December 31, 2021 | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount |
| (In thousands) |
| Amortized intangible assets: | | | |
| Core deposit intangible | $ | 18,774 | | $ | 18,269 | | $ | 505 | |
| Customer relationships | 9,048 | | 7,282 | | 1,766 | |
| Other intangibles | 6,821 | | 5,449 | | 1,372 | |
| Total intangible assets | $ | 34,643 | | $ | 31,000 | | $ | 3,643 | |
| | | | | | | | | | | |
| December 31, 2020 | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount |
| (In thousands) |
| Amortized intangible assets: | | | |
| Core deposit intangible | $ | 18,774 | | $ | 17,367 | | $ | 1,407 | |
| Customer relationships | 9,048 | | 6,884 | | 2,164 | |
| Other intangibles | 6,585 | | 5,251 | | 1,334 | |
| Total intangible assets | $ | 34,407 | | $ | 29,502 | | $ | 4,905 | |
Amortization expense related to intangible assets totaled $1.3 million in 2021, $1.5 million in 2020 and $1.7 million in 2019. The estimated aggregate future amortization expense for intangible assets remaining as of December 31, 2021 is as follows:
| | | | | |
Estimated amortization expense:1 | |
| (In thousands) | |
| For the year ended December 31, 2022 | $ | 897 | |
| For the year ended December 31, 2023 | 334 | |
| For the year ended December 31, 2024 | 294 | |
| For the year ended December 31, 2025 | 264 | |
| For the year ended December 31, 2026 | 225 | |
1Excludes the amortization of mortgage servicing rights. Amortization of mortgage servicing rights was $182,000 in 2021, $221,000 in 2020 and $117,000 in 2019.
Note 6 Premises and Equipment
Premises and equipment at December 31 were as follows:
| | | | | | | | |
| (In thousands) | 2021 | 2020 |
| Land | $ | 9,195 | | $ | 9,195 | |
| Premises and equipment | 105,164 | | 104,027 | |
| Furniture, fixtures, and equipment | 83,803 | | 80,520 | |
| Accumulated depreciation and amortization | (112,746) | | (105,033) | |
| Total | $ | 85,416 | | $ | 88,709 | |
Depreciation and amortization expenses in 2021, 2020 and 2019 are included in operating expenses as follows:
| | | | | | | | | | | |
| (In thousands) | 2021 | 2020 | 2019 |
| Premises | $ | 2,599 | | $ | 2,608 | | $ | 2,809 | |
| Furniture, fixtures, and equipment | 5,367 | | 5,225 | | 4,906 | |
| Total | $ | 7,966 | | $ | 7,833 | | $ | 7,715 | |
The Company leases land, buildings and equipment under operating lease arrangements. Total gross rental expense amounted to $4.9 million in 2021, $4.9 million in 2020, and $4.7 million in 2019. Most leases include options to renew for periods ranging from 5 to 20 years.
Note 7 Deposits
Aggregate time deposits of $250,000 or more were $167.9 million at December 31, 2021, and $229.7 million at December 31, 2020. Scheduled maturities of time deposits at December 31, 2021, were as follows:
| | | | | | | | | | | |
| (In thousands) | Less than $250,000 | $250,000 and over | Total |
| Maturity | | | |
| Three months or less | $ | 128,186 | | $ | 53,403 | | $ | 181,589 | |
| Over three through six months | 88,224 | | 33,990 | | 122,214 | |
| Over six through twelve months | 149,328 | | 54,175 | | 203,503 | |
| Total due in 2022 | $ | 365,738 | | $ | 141,568 | | $ | 507,306 | |
| 2023 | 63,879 | | 13,466 | | 77,345 | |
| 2024 | 24,318 | | 3,782 | | 28,100 | |
| 2025 | 10,129 | | 7,136 | | 17,265 | |
| 2026 | 7,559 | | 1,974 | | 9,533 | |
| Thereafter | 125 | | 0 | | 125 | |
| Total | $ | 471,748 | | $ | 167,926 | | $ | 639,674 | |
Note 8 Securities Sold Under Agreements to Repurchase and Federal Funds Purchased
Information regarding securities sold under agreements to repurchase and Federal funds purchased is detailed in the following tables for the years ended December 31:
| | | | | | | | | | | |
| Securities Sold Under Agreements to Repurchase | | | |
| (In thousands) | 2021 | 2020 | 2019 |
| Total outstanding at December 31 | $ | 66,787 | | $ | 65,845 | | $ | 60,346 | |
| | | |
| Maximum month-end balance | 78,420 | | 72,883 | | 71,875 | |
| Average balance during the year | 58,627 | | 55,973 | | 59,742 | |
| Weighted average rate at December 31 | 0.10 | % | 0.11 | % | 0.22 | % |
| Average interest rate paid during the year | 0.11 | % | 0.17 | % | 0.24 | % |
| Federal Funds Purchased | | | |
| Average balance during the year | 0 | | 0 | | 82 | |
| Weighted average rate at December 31 | N/A | N/A | N/A |
| Average interest rate paid during the year | 0.00 | % | 0.00 | % | 2.86 | % |
Securities sold under agreements to repurchase (“repurchase agreements”) are secured borrowings that typically mature within thirty to ninety days, although the Company has entered into repurchase agreements with the Federal Home Loan Bank (“FHLB”) with longer maturities. The Company uses both retail and wholesale repurchase agreements. Retail repurchase agreements are arrangements with local customers of the Company, in which the Company agrees to sell securities to the customer with an agreement to repurchase those securities at a specified later date. Retail repurchase agreements totaled $66.8 million at December 31, 2021. The Company had no outstanding wholesale repurchase agreements at December 31, 2021.
Securities sold under agreements to repurchase are stated at the amount of cash received in connection with the transaction. The Company may be required to provide additional collateral based on the fair value of the underlying securities.
Federal funds purchased are short-term borrowings that typically mature within one to ninety days.
Note 9 Other Borrowings
The following table summarized the Company’s borrowings as of December 31:
| | | | | | | | |
| (In thousands) | 2021 | 2020 |
| Overnight FHLB advances | $ | 14,000 | | $ | 0 | |
| Term FHLB advances | 110,000 | | 265,000 | |
| | |
| Total other borrowings | $ | 124,000 | | $ | 265,000 | |
The Company, through its subsidiary banks, had available line-of-credit agreements with correspondent banks permitting borrowings to a maximum of approximately $89.0 million at both December 31, 2021 and 2020. There were no outstanding advances against those lines at December 31, 2021 and December 31, 2020.
Through its subsidiary banks, the Company has borrowing relationships with the FHLB, which provides secured borrowing capacity, subject to available collateral. The unused borrowing capacity on established lines with the FHLB was $2.3 billion at December 31, 2021 and $2.1 billion at December 31, 2020.
As members of the FHLB, the Company’s subsidiary banks can use certain unencumbered residential and commercial real estate related assets and investment securities to secure borrowings from the FHLB. At December 31, 2021, total unencumbered residential and commercial real estate related loans and investment securities pledged at the FHLB were $1.6 billion. At December 31, 2021, there were $14.0 million in overnight advances and $110.0 million in term advances with the FHLB, with a weighted average rate of 1.80%, compared to no overnight advances and $265.0 million in term advances with a weighted average rate of 2.09%, at December 31, 2020. At December 31, 2021, the term advances with the FHLB includes $10.0 million which matures within one year and $100.0 million which matures in over one year. Maturities of advances due in over one year include $60.0 million in 2023 and $40.0 million in 2024.
The Company had no callable FHLB borrowings at December 31, 2021.
The Company has a $25.0 million line of credit with a bank. As of December 31, 2021 and December 31, 2020, there was no outstanding balance outstanding on the line. The line matures in June 2023.
Note 10 Trust Preferred Debentures
During the second quarter of 2021, the Company exercised its right to redeem all of the trust preferred of Madison Statutory Trust I, with a par amount of $5.0 million. The redemption price was equal to 100% of the principal amount plus accrued and unpaid interest up to June 26, 2021. During the third quarter of 2021, the Company exercised its right to redeem all of the trust preferred of Leesport Capital Trust II, with a par amount of $10.0 million. The redemption price was equal to 100% of the principal amount plus accrued and unpaid interest up to August 7, 2021. The Company recognized accelerated non-cash purchase accounting discounts of $1.9 million in interest expense related to the redemptions. As of December 31, 2021, the Company had no trust preferred debentures.
At December 31, 2020, the Company had two unconsolidated subsidiary trusts (the "Trusts"): Leesport Capital Trust II, with a par value of $10.0 million and a maturity date of September 2032 and Madison Statutory Trust I, with a par value of $5.0 million and a maturity date of June 2033. The two Trusts were acquired in the acquisition of VIST Financial. The Company owned 100% of the common equity of each Trust. The Trusts were formed for the purpose of issuing Company-obligated mandatorily redeemable capital securities to third-party investors and investing the proceeds from the sale in junior subordinated debt securities (subordinated debt) issued by the Company, which are the sole assets of each Trust. Since third-party investors are the primary beneficiaries, the Trusts are not consolidated in the Company’s financial statements. Distributions on the preferred securities issued by the Trusts are payable quarterly at a rate per annum equal to the interest rate being earned by the Trusts on the debenture held by the Trusts and are recorded as interest expense in the consolidated financial statements.
Note 11 Employee Benefit Plans
The Company maintains a noncontributory defined-benefit plan (the "DB Pension Plan") and two noncontributory defined-contribution retirement plans (the "DC Retirement Plan" and "2015 DC Retirement Plan") which cover substantially all employees of the Company.
The DB Pension Plan was closed to new employees at year-end 2009 and was frozen on July 31, 2015. The benefits under the DB Pension Plan are based on years of service, age and percentages of the employees' average final compensation. Assets of the Company's DB Pension Plan are invested in common and preferred stock, mutual funds and cash equivalents.
The defined-contribution retirement plans cover substantially all employees of the Company who have reached the age of 21 and completed one year of service. For participants in these plans, the Company makes contributions to an account set up in the participant's name. The amount equals a percentage of pay and varies based on the participant's age, service, and tenure with the Company. The defined-contribution retirement plans offer the participant a wide range of investment alternatives from which to choose. Expenses related to the defined-contribution plans totaled $4.4 million in 2021, $4.4 million in 2020, and $4.0 million in 2019.
The Company maintains supplemental employee retirement plans (“SERPs”) for certain executives. In 2016, certain SERPs were amended and restated to reflect changes resulting from the freezing of the DB Pension Plan and the Company entered into additional SERP agreements with certain executives. In 2019, the SERP for the Company's CEO was amended to expand the definition of "Earnings" under the SERP to better align the scope of compensation included in our CEO's retirement benefits with chief executive compensation in a manner that is more consistent with market practice. All benefits provided under the SERPs are unfunded and the Company makes payments to plan participants.
The Company also maintains a post-retirement life and healthcare benefit plan (the “Life and Healthcare Plan”), which was amended in 2005. For employees commencing employment after January 1, 2005, the Company does not contribute towards post-retirement healthcare benefits. Retirees and employees who were eligible to retire when the Life and Healthcare Plan was amended were unaffected. Generally, all other employees were eligible for Health Reimbursement Accounts (“HRA”) with an initial balance equal to the amount of the Company’s estimated then current liability. Contributions to the plan are limited to an annual contribution of 4% of the total HRA defined term. Employees, upon retirement, will be able to utilize their HRA for qualified health costs and deductibles. In 2019, the Retiree Life Benefit program was closed to new entrants, and only employees who attained age 50 as of February 1, 2020 will be eligible to earn this benefit.
The Company engages independent, external actuaries to compute the amounts of liabilities and expenses relating to these plans, subject to the assumptions that the Company selects. The benefit obligation for these plans represents the liability of the Company for current and former employees, and is affected primarily by the following: service cost (benefits attributed to employee service during the period); interest cost (interest on the liability due to the passage of time); actuarial gains/losses (experience during the year different from that assumed and changes in plan assumptions); and benefits paid to participants.
U.S. GAAP requires an employer to recognize in its statement of condition as an asset or liability the overfunded or underfunded status of a defined benefit postretirement plan, measured as the difference between the fair value of plan assets and the benefit obligation. For a pension plan, the benefit obligation is the projected benefit obligation; for any other postretirement benefit plan, such as a retiree health care plan, the benefit obligation is the accumulated postretirement benefit obligation. The following table sets forth the changes in the projected benefit obligation for the DB Pension Plan and SERPs and the accumulated post-retirement benefit obligation for the Life and Healthcare Plan; and the respective plan assets, and the plans’ funded status and amounts recognized in the Company’s Consolidated Statements of Condition at December 31, 2021 and 2020 (the measurement dates of the plans).
| | | | | | | | | | | | | | | | | | | | |
| DB Pension Plan | Life and Healthcare Plan | SERP Plan |
| (In thousands) | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 |
| Change in benefit obligation: | | | | | | |
| Benefit obligation at beginning of year | $ | 98,021 | | $ | 90,346 | | $ | 10,508 | | $ | 9,022 | | $ | 36,710 | | $ | 32,153 | |
| Service cost | 0 | | 0 | | 186 | | 173 | | 231 | | 214 | |
| Interest cost | 1,628 | | 2,371 | | 180 | | 245 | | 692 | | 914 | |
| Plan participants’ contributions | 0 | | 0 | | 108 | | 90 | | 0 | | 0 | |
| | | | | | |
| | | | | | |
| Actuarial (gain) loss | (2,834) | | 10,046 | | (574) | | 1,340 | | (3,002) | | 4,070 | |
| Benefits paid | (3,806) | | (4,742) | | (353) | | (362) | | (598) | | (641) | |
| Benefit obligation at end of year | $ | 93,009 | | $ | 98,021 | | $ | 10,055 | | $ | 10,508 | | $ | 34,033 | | $ | 36,710 | |
| Change in plan assets: | | | | | | |
| Fair value of plan assets at beginning of year | $ | 89,172 | | $ | 82,352 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | |
| Actual return on plan assets | 11,027 | | 11,562 | | 0 | | 0 | | 0 | | 0 | |
| Plan participants’ contributions | 0 | | 0 | | 108 | | 90 | | 0 | | 0 | |
| Employer contributions | 0 | | 0 | | 245 | | 272 | | 598 | | 641 | |
| Benefits paid | (3,806) | | (4,742) | | (353) | | (362) | | (598) | | (641) | |
| Fair value of plan assets at end of year | $ | 96,393 | | $ | 89,172 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | |
| Funded (unfunded) status | $ | 3,384 | | $ | (8,849) | | $ | (10,055) | | $ | (10,508) | | $ | (34,033) | | $ | (36,710) | |
The accumulated benefit obligation for the DB Pension Plan at December 31, 2021 and 2020, was $93.0 million and $98.0 million, respectively. The accumulated benefit obligation for the Life and Healthcare Plan at year end 2021 and 2020 was $10.1 million and $10.5 million, respectively. The accumulated benefit obligation for the SERPs at December 31, 2021 and 2020 was $34.0 million and $36.7 million, respectively. The funded status of the DB Pension Plan was recognized in other assets and the unfunded status of the Life and Healthcare Plan, and SERPs was recognized in other liabilities in the Consolidated Statement of Condition at December 31, 2021 in the amounts of $3.4 million, $10.1 million, and $34.0 million, respectively. The unfunded status of the DB Pension Plan, the Life and Healthcare Plan, and SERPs in the amount of $8.8 million, $10.5 million, and $36.7 million, respectively, was recognized in other liabilities in the Consolidated Statement of Condition at December 31, 2020.
The actuarial (gains) losses shown above totaling $(6.4) million in 2021 and $15.5 million in 2020 were mainly the result of changes in the discount rates used to measure the benefit obligation of all plans at year end compared to those used at the prior year-end. The specific discount rates for each plan at December 31, 2021 and December 31, 2020 are provided below.
Net periodic benefit cost and other comprehensive income (loss) includes the following components:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | DB Pension Plan | Life and Healthcare Plan | SERP Plan |
| Components of net periodic benefit cost | 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | 2021 | 2020 | 2019 |
| Service cost | $ | 0 | | $ | 0 | | $ | 0 | | $ | 186 | | $ | 173 | | $ | 159 | | $ | 231 | | $ | 214 | | $ | 157 | |
| Interest cost | 1,628 | | 2,371 | | 2,936 | | 180 | | 245 | | 289 | | 692 | | 914 | | 909 | |
| Expected return on plan assets | (5,652) | | (5,416) | | (4,933) | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
| Amortization of prior service (credit) cost | 1 | | (10) | | (10) | | (61) | | (61) | | (62) | | 282 | | 285 | | 104 | |
| Recognized net actuarial loss | 1,559 | | 1,411 | | 1,334 | | 312 | | 155 | | 0 | | 1,080 | | 800 | | 343 | |
| Recognized net actuarial gain due to curtailments | 0 | | 0 | | 0 | | 0 | | 0 | | (399) | | 0 | | 0 | | 0 | |
| | | | | | | | | |
| Net periodic benefit (credit) cost | $ | (2,464) | | $ | (1,644) | | $ | (673) | | $ | 617 | | $ | 512 | | $ | (13) | | $ | 2,285 | | $ | 2,213 | | $ | 1,513 | |
Service cost is included in salaries and wages in the Consolidated Statements of Income. The other components of net periodic benefit costs are included in other operating expense in the Consolidated Statements of Income.
Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | DB Pension Plan | Life and Healthcare Plan | SERP Plan |
| 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | 2021 | 2020 | 2019 |
| Net actuarial loss (gain) | $ | (8,209) | | $ | 3,899 | | $ | 2,776 | | $ | (574) | | $ | 1,340 | | $ | 1,218 | | $ | (3,002) | | $ | 4,070 | | $ | 6,128 | |
| Recognized actuarial loss | (1,559) | | (1,411) | | (1,334) | | (312) | | (155) | | 0 | | (1,080) | | (800) | | (343) | |
| Prior service credit | 0 | | 0 | | 0 | | 0 | | 0 | | (203) | | 0 | | 0 | | 2,022 | |
| Recognized prior service cost (credit) | (1) | | 10 | | 10 | | 61 | | 61 | | 62 | | (282) | | (285) | | (104) | |
| Prior service cost (credit) recognized due to curtailment | 0 | | 0 | | 0 | | 0 | | 0 | | 399 | | 0 | | 0 | | 0 | |
| | | | | | | | | |
| Recognized in other comprehensive income (loss) | $ | (9,769) | | $ | 2,498 | | $ | 1,452 | | $ | (825) | | $ | 1,246 | | $ | 1,476 | | $ | (4,364) | | $ | 2,985 | | $ | 7,703 | |
| Total recognized in net periodic benefit cost and other comprehensive income (loss) | $ | (12,233) | | $ | 854 | | $ | 779 | | $ | (208) | | $ | 1,758 | | $ | 1,463 | | $ | (2,079) | | $ | 5,198 | | $ | 9,216 | |
Pre-tax amounts recognized as a component of accumulated other comprehensive income (loss) as of year-end that have not been recognized as a component of the Company’s combined net periodic benefit cost of the Company’s DB Pension Plan, Life and Healthcare Plan and SERPs are presented in the following table.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | DB Pension Plan | Life and Healthcare Plan | SERP Plan |
| 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | 2021 | 2020 | 2019 |
| Net actuarial loss (gain) | $ | 40,765 | | $ | 50,533 | | $ | 48,045 | | $ | 1,886 | | $ | 2,771 | | $ | 1,586 | | $ | 10,532 | | $ | 14,614 | | $ | 11,345 | |
| Prior service cost (credit) | 0 | | 1 | | (9) | | (226) | | (287) | | (348) | | 1,866 | | 2,148 | | 2,433 | |
| Total | $ | 40,765 | | $ | 50,534 | | $ | 48,036 | | $ | 1,660 | | $ | 2,484 | | $ | 1,238 | | $ | 12,398 | | $ | 16,762 | | $ | 13,778 | |
Weighted-average assumptions used in accounting for the plans were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | DB Pension Plan | Life and Healthcare Plan | SERP Plan |
| 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | 2021 | 2020 | 2019 |
| Discount Rates | | | | | | | | | |
| Benefit Cost for Plan Year | 2.24 | % | 3.04 | % | 4.08 | % | 2.33 | % | 3.10 % | 4.13 | % | 2.37 | % | 3.14 % | 4.16 | % |
| Benefit Obligation at End of Plan Year | 2.63 | % | 2.24 | % | 3.04 | % | 2.69 | % | 2.33 % | 3.10 | % | 2.71 | % | 2.37 % | 3.14 | % |
| Expected long-term return on plan assets | 6.50 | % | 6.75 | % | 7.00 | % | N/A | N/A | N/A | N/A | N/A | N/A |
| Rate of compensation increase | | | | | | | | | |
| Benefit Cost for Plan Year | N/A | N/A | N/A | 4.00 % | 4.00 % | 4.00 | % | 5.00 % | 5.00 % | 5.00 | % |
| Benefit Obligation at End of Plan Year | N/A | N/A | N/A | 4.00 % | 4.00 % | 4.00 | % | 5.00 % | 5.00 % | 5.00 | % |
To develop the expected long-term rate of return on assets assumption for the DB Pension Plan, the Company considered the historical returns and the future expectations for returns for each asset class, as well as target asset allocations of the pension portfolio. Based on this analysis, the Company selected 6.50% as the long-term rate of return on assets assumption.
The discount rates used to determine the Company’s DB Pension Plan and other post-retirement benefit obligations as of December 31, 2021, and December 31, 2020, were determined by matching estimated benefit cash flows to a yield curve derived from Citigroup’s regular bond yield at December 31, 2021 and December 31, 2020.
Based on the Company’s anticipation of future experience under the DB Pension Plan, the mortality tables used to determine future benefit obligations under the plan were updated as of December 31, 2021 to the PRI-2012 Mortality Tables with Mortality Improvement Scale MP 2021. The Company updated this assumption based on the newest improvement table released by The Society of Actuaries as of December 31, 2021. The appropriateness of the assumptions is reviewed annually.
Cash Flows
Plan assets are amounts that have been segregated and restricted to provide benefits, and include amounts contributed by the Company and amounts earned from investing contributions, less benefits paid. The Company funds the cost of the SERPs and the Life and Healthcare Plan benefits on a pay-as-you-go basis.
The benefits as of December 31, 2021, expected to be paid in each of the next five fiscal years, and in the aggregate for the five fiscal years thereafter were as follows:
| | | | | | | | | | | |
| (In thousands) | DB Pension Plan | Life and Healthcare Plan | SERP Plan |
| 2022 | $ | 4,285 | | $ | 485 | | $ | 808 | |
| 2023 | 4,432 | | 472 | | 900 | |
| 2024 | 4,511 | | 479 | | 873 | |
| 2025 | 4,687 | | 474 | | 856 | |
| 2026 | 4,769 | | 469 | | 1,001 | |
| 2027-2031 | 24,221 | | 2,357 | | 6,998 | |
| Total | $ | 46,905 | | $ | 4,736 | | $ | 11,436 | |
Plan Assets
The Company’s DB Pension Plan’s weighted-average asset allocations at December 31, 2021 and 2020, respectively, by asset category are as follows:
| | | | | | | | |
| 2021 | 2020 |
| Equity securities | 61 | % | 63 | % |
| Debt securities | 33 | % | 36 | % |
| Other | 6 | % | 1 | % |
| Total Allocation | 100 | % | 100 | % |
It is the policy of the Trustees to invest the Pension Trust Fund (the “Fund”) for total return. The Trustees seek the maximum return consistent with the interests of the participants and beneficiaries and prudent investment management. The management of the Fund’s assets is in compliance with the guidelines established in the Company’s Pension Plan and Trust Investment Policy, which is reviewed and approved annually by the Tompkins Board of Directors, and the Pension Investment Review Committee.
The intention is for the Fund to be prudently diversified. The Fund’s investments will be invested among the fixed income, equity and cash equivalent sectors. The Pension Committee will designate minimum and maximum positions in any of the sectors. In no case shall more than 10% of the Fund assets consist of qualified securities or real estate of the Company. Unless otherwise approved by the Trustees, the following investments are prohibited:
–Restricted stock, private placements, short positions, calls, puts, or margin transactions;
–Commodities, oil and gas properties, real estate properties, or
–Any investment that would constitute a prohibited transaction as described in the Employee Retirement Income Security Act of 1974 (“ERISA”), section 407, 29 U.S.C. 1106.
In general, the investment in debt securities is limited to readily marketable debt securities having a Standard & Poor’s rating of “A” or Moody’s rating of “A”, securities of, or guaranteed by the United States Government or its agencies, or obligations of banks or their holding companies that are rated in the three highest ratings assigned by Fitch Investor Service, Inc. In addition, investments in equity securities must be listed on the NYSE or traded on the national Over The Counter market or listed on the NASDAQ. Cash equivalents generally may be United States Treasury obligations, commercial paper having a Standard & Poor’s rating of “A-1” or Moody’s National Credit Officer rating of “P-1”or higher.
The major categories of assets in the Company’s DB Pension Plan as of year-end are presented in the following table. Assets are segregated by the level of valuation inputs within the fair value hierarchy established by ASC Topic 820 utilized to measure fair value (see Note 19-Fair Value Measurements).
| | | | | | | | | | | | | | |
| Fair Value Measurements | | | | |
| December 31, 2021 | | | | |
| (In thousands) | Fair Value 2021 | (Level 1) | (Level 2) | (Level 3) |
| Cash and cash equivalents | $ | 5,472 | | $ | 5,472 | | $ | 0 | | $ | 0 | |
| | | | |
| | | | |
| | | | |
| Common stocks | 29,227 | | 29,227 | | 0 | | 0 | |
| Mutual funds | 61,694 | | 61,694 | | 0 | | 0 | |
| | | | |
| Total Fair Value of Plan Assets | $ | 96,393 | | $ | 96,393 | | $ | 0 | | $ | 0 | |
| | | | | | | | | | | | | | |
| Fair Value Measurements | | | | |
| December 31, 2020 | | | | |
| (In thousands) | Fair Value 2020 | (Level 1) | (Level 2) | (Level 3) |
| Cash and cash equivalents | $ | 2,417 | | $ | 2,417 | | $ | 0 | | $ | 0 | |
| | | | |
| | | | |
| | | | |
| Common stocks | 26,422 | | 26,422 | | 0 | | 0 | |
| Mutual funds | 60,333 | | 60,333 | | 0 | | 0 | |
| | | | |
| Total Fair Value of Plan Assets | $ | 89,172 | | $ | 89,172 | | $ | 0 | | $ | 0 | |
The Company determines the fair value for its pension plan assets using an independent pricing service. The pricing service uses a variety of techniques to determine fair value, including market maker bids, quotes and pricing models. Inputs to the model include recent trades, benchmark interest rates, spreads, and actual and projected cash flows. Based on the inputs used by our independent pricing services, the Company identifies the appropriate level within the fair value hierarchy to report these fair values. U.S. Treasury securities, common stocks and mutual funds are considered Level 1 based on quoted prices in active markets.
The Company has an Employee Stock Ownership Plan (ESOP) and a 401(k) Investment and Stock Ownership Plan (ISOP) covering substantially all employees of the Company. The ESOP allows for Company contributions in the form of common stock of the Company. Annually, the Tompkins Board of Directors determines a profit-sharing payout to its employees in accordance with a performance-based formula. A percentage of the approved amount is paid in Company common stock into the ESOP. Contributions are limited to a maximum amount as stipulated in the ESOP. The remaining percentage is either paid out in cash or deferred into the ISOP at the direction of the employee. Compensation expense related to the profit-sharing totaled $5.4 million in 2021, $4.5 million in 2020, and $4.4 million in 2019.
Under the ISOP, employees may contribute a percentage of their eligible compensation with a Company match of such contributions up to a maximum match of 4%. Participation in the ISOP is contingent upon certain age and service requirements. The Company’s expense associated with these matching provisions was $3.0 million in 2021, $2.9 million in 2020, and $2.9 million in 2019.
Life insurance benefits are provided to certain officers of the Company. In connection with these policies, the Company reflects life insurance assets on its Consolidated Statements of Condition of $86.5 million at December 31, 2021, and $84.7 million at December 31, 2020. The insurance is carried at its cash surrender value on the Consolidated Statements of Condition. Increases in the cash surrender value of the insurance are reflected as noninterest income, net of any related mortality expense.
The Company provides split dollar life insurance benefits to certain employees. The plan is unfunded and the estimated liability of the plan of $1.5 million and $1.7 million is recorded in other liabilities in the Consolidated Statements of Condition at December 31, 2021 and 2020, respectively. Compensation expense related to the split dollar life insurance was approximately $52,000 in 2021 and $55,000 in 2020.
Note 12 Stock Plans and Stock Based Compensation
In 2019, the 2009 Tompkins Financial Corporation Equity Plan (“2009 Equity Plan”) expired and was replaced by the new Tompkins Financial Corporation 2019 Equity Plan (“2019 Equity Plan”). Under the 2019 Equity Plan, the Company may grant stock appreciation rights ("SARs"), shares of restricted stock and restricted units and performance share awards covering up to 1,275,000 shares of the Company's common stock to certain officers, employees, and nonemployee directors. Additionally, restricted stock awards and restricted units and performance share awards will reduce the shares available for grant under the 2019 Equity Plan by 4.25 shares for each share subject to an award, resulting in a total number of full-value share awards that may be issued under the 2019 Plan to 300,000. Stock options and SARs are granted at an exercise price equal to the stock’s fair value at the date of grant, may not have a term in excess of ten years, and have vesting periods that range between five and seven years from the grant date. Options and Stock Appreciation Rights with an expiration date in 2026 have a five-year vesting schedule with zero percent vesting in year one and 25% vesting in years two through five. All other Options and Stock Appreciation Rights have a seven-year vesting schedule with zero percent vesting in year one, 17% vesting in years two through six and 15% vesting in year seven. Restricted stock awards that were granted in 2016, 2017, 2018, 2019, 2020 and 2021 have a five-year vesting schedule with zero percent vesting in year one and 25% vesting in years two through five. All other restricted stock awards have a seven-year vesting schedule with zero percent vesting in year one, 17% vesting in years two through six and 15% vesting in year seven. For Performance Awards, there is a 3-year performance period in the fiscal years immediately following the grant date, at which time the performance goal is measured. If the goal is achieved, the value of the award vests is either immediately payable, or is subject to additional time-based vesting, depending on the terms of the particular executive’s award agreement.
The Company granted 67,846 equity awards to its employees in 2021, consisting of 54,151 shares of restricted stock, 5,340 performance share awards and 8,355 restricted stock units. The Company granted 86,411 equity awards to its employees in 2020, consisting of 69,451 shares of restricted stock, 6,545 performance share awards and 10,415 restricted stock units. The Company granted 62,360 equity awards to its employees in 2019, consisting of 49,365 shares of restricted stock, 4,650 performance share awards and 8,345 restricted stock units.
The following table presents the activity related to stock options and SARs under all plans for the year ended December 31, 2021. | | | | | | | | | | | | | | |
| Number of Shares/Rights | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value |
| Outstanding at January 1, 2021 | 144,387 | | $ | 50.61 | | | |
| Granted | 0 | | 0.00 | | | |
| Exercised | (51,771) | | 44.42 | | | |
| Forfeited | (1,136) | | 46.28 | | | |
| Outstanding at December 31, 2021 | 91,480 | | $ | 54.17 | | 3.10 | $ | 2,690,855 | |
| Exercisable at December 31, 2021 | 85,821 | | $ | 54.03 | | 3.05 | $ | 2,536,421 | |
Total stock-based compensation expense for stock options and SARs was $151,000 in 2021, $194,000 in 2020, and $235,000 in 2019. As of December 31, 2021, unrecognized compensation cost related to unvested stock options and SARs totaled $40,000. The cost is expected to be recognized over a weighted average period of 0.8 years. Net cash proceeds, tax benefits and intrinsic value related to total stock options, SARs, and restricted stock exercised is as follows:
| | | | | | | | | | | |
| (In thousands) | 2021 | 2020 | 2019 |
| Proceeds from stock option exercises | $ | (803) | | $ | (253) | | $ | (992) | |
| Tax benefits related to stock option exercises | 355 | | 156 | | 944 | |
| Intrinsic value of stock option exercises | 1,900 | | 570 | | 2,460 | |
The Company uses the Black-Scholes option-valuation model to determine the fair value of incentive stock options and SARs at the date of grant. The valuation model estimates fair value based on the assumptions for the risk-free rate, expected dividend yield, volatility and expected life. The risk-free rate is the interest rate available on zero-coupon U.S. Treasury instruments with a remaining term equal to the expected term of the share option at the time of grant. The expected dividend yield is based on the dividend trends and the market price of the Company’s stock price at grant. Volatility is largely based on historical volatility of the Company’s stock price. The expected term is based upon historical experience of employee exercises and terminations as the vesting term of the grants. The fair values of the grants are expensed over the vesting periods. There were no incentive stock options or SARs granted in 2021, 2020 and 2019.
| | | | | | | | | | | | | | | | | |
| December 31, 2021 | | | |
| Options and SARs Outstanding | Options and SARs Exercisable |
| Range of Exercise Prices | Number Outstanding | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price |
| | | | | |
| | | | | |
| | | | | |
$37.51-41.00 | 17,034 | | 1.27 | $ | 40.60 | | 17,034 | | $ | 40.60 | |
$41.01-50.00 | 33,763 | | 2.79 | $ | 49.22 | | 33,763 | | $ | 49.22 | |
$50.01-76.90 | 40,461 | | 4.11 | $ | 63.84 | | 34,802 | | $ | 65.07 | |
$76.91-86.18 | 222 | | 4.89 | $ | 86.18 | | 222 | | $ | 86.18 | |
| 91,480 | | 3.10 | $ | 54.17 | | 85,821 | | $ | 54.03 | |
The following table presents activity related to restricted stock awards and restricted stock units for the year ended December 31, 2021.
| | | | | | | | |
| Number of Shares | Weighted Average Grant Date Fair Value |
| Unvested at January 1, 2021 | 254,989 | | $ | 70.55 | |
| Granted | 67,846 | | 83.97 | |
| Vested | (71,907) | | 72.67 | |
| Forfeited | (9,018) | | 70.10 | |
| Unvested at December 31, 2021 | 241,910 | | $ | 71.60 | |
The Company granted 54,151 restricted stock awards, 8,355 restricted stock units and 5,340 performance share awards in 2021, each at an average grant date fair value of $83.97. The Company granted 69,451 restricted stock awards,10,415 restricted stock units and 6,545 performance share awards in 2020, each at an average grant date fair value of $63.44. The Company granted 49,365 restricted stock awards, 8,345 restricted stock units and 4,650 performance share awards in 2019 at an average grant date fair value of $89.21. The grant date fair values were the closing prices of the Company’s common stock on the grant dates. The Company recognized stock-based compensation related to restricted stock awards, restricted stock units, and performance share awards of $5.4 million in 2021, $4.7 million in 2020, and $4.0 million in 2019. Unrecognized compensation costs related to restricted stock and performance awards totaled $11.5 million, and restricted stock units totaled $1.4 million at December 31, 2021 and will be recognized over 3.5 years and 4.1 years, respectively on a weighted average basis.
Note 13 Other Noninterest Income and Expense
Other income and operating expense totals are presented in the table below. Components of these totals exceeding 1%, and other significant items, of the aggregate of total other noninterest income and total other noninterest expenses for any of the years presented below are stated separately.
| | | | | | | | | | | |
| Year ended December 31, |
| (In thousands) | 2021 | 2020 | 2019 |
| NONINTEREST INCOME | | | |
| Other service charges | $ | 2,826 | | $ | 2,835 | | $ | 3,166 | |
| Increase in cash surrender value of corporate owned life insurance | 1,879 | | 2,188 | | 2,164 | |
| Net gain on sale of loans | 943 | | 2,054 | | 227 | |
| | | |
| Other miscellaneous income | 1,555 | | 1,740 | | 2,859 | |
| Total other noninterest income | $ | 7,203 | | $ | 8,817 | | $ | 8,416 | |
| NONINTEREST EXPENSES | | | |
| Marketing expense | $ | 4,319 | | $ | 4,750 | | $ | 4,856 | |
| Professional fees | 6,909 | | 6,054 | | 8,942 | |
| Technology expense | 11,747 | | 11,791 | | 10,666 | |
| Cardholder expense | 3,532 | | 3,252 | | 3,238 | |
| FDIC insurance | 2,758 | | 2,398 | | 773 | |
| Legal expense | 1,190 | | 1,199 | | 1,200 | |
| Penalties on prepayment of FHLB borrowings | 2,929 | | 0 | | 0 | |
| Other miscellaneous expenses | 13,869 | | 15,285 | | 16,574 | |
| Total other noninterest expenses | $ | 47,253 | | $ | 44,729 | | $ | 46,249 | |
Note 14 Revenue Recognition
As stated in Note 1 - "Summary of Significant Accounting Policies," the Company adopted ASU No. 2014-09 “Revenue from Contracts with Customers” (ASC 606) and all subsequent ASUs that modified ASC 606 on January 1, 2018. ASC 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain
noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of the new guidance. ASC 606 is applicable to noninterest revenue streams such as trust and asset management income, deposit related fees, interchange fees, merchant income, and annuity and insurance commissions. However, the recognition of these revenue streams did not change significantly upon adoption of ASC 606.
Insurance Commissions and Fees
Insurance commissions and fees from insurance product sales are typically earned upon the effective date of bound coverage, as no significant performance obligation remains after coverage is bound. Commission revenue on policies billed in installments is now accrued based upon the completion of the performance obligation creating a current asset for the unbilled revenue until such time as an invoice is generated, typically not to exceed twelve months. The impact of these changes was not significant, but it will result in slight variances from quarter to quarter. Contingent commissions are estimated based upon management’s expectations for the year with an appropriate constraint applied and accrued relative to the recognition of the corresponding core commissions.
Trust & Asset Management
Trust and asset management income is primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered.
Mutual Fund & Investment Income
Mutual fund and investment income consists of other recurring revenue streams such as commissions from sales of mutual funds and other investments, investment advisory fees from the Company’s Strategic Asset Management Services (SAM) wealth management product. Commissions from the sale of mutual funds and other investments are recognized on trade date, which is when the Company has satisfied its performance obligation. The Company also receives periodic service fees (i.e., trailers) from mutual fund companies typically based on a percentage of net asset value, recorded over time, usually monthly or quarterly, as net asset value is determined. Investment advisor fees from the wealth management product is earned over time and based on an annual percentage rate of the net asset value. The investment advisor fees are charged to the customer’s account in advance on the first month of the quarter, and the revenue is recognized over the following three-month period. The Company does engage a third party, LPL Financial, LLC (LPL), to satisfy part of this performance obligation, and therefore this income is reported net of any corresponding expenses paid to LPL.
Service Charges on Deposit Accounts
Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.
Card Services Income
Fees, exchange, and other service charges are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as MasterCard. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. The Company’s performance obligation for fees and exchange are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.
Other
Other service charges include revenue from processing wire and ACH transfers, lock box service and safe deposit box rental. Payment on these revenue streams is received primarily through a direct charge to the customer’s account, immediately or in the following month, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time.
The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of ASC 606, for the years ended December 31, 2021, 2020, and 2019.
| | | | | | | | | | | |
| Year Ended |
| (In thousands) | 2021 | 2020 | 2019 |
| Noninterest Income | | | |
| In-scope of Topic 606: | | | |
| Insurance Revenues | $ | 34,836 | | $ | 31,505 | | $ | 31,091 | |
| Investment Service Income | 19,388 | | 17,520 | | 16,434 | |
| Service Charges on Deposit Accounts | 6,347 | | 6,312 | | 8,321 | |
| Card Services Income | 10,826 | | 9,263 | | 10,526 | |
| Other | 1,204 | | 1,146 | | 1,183 | |
| Noninterest Income (in-scope of ASC 606) | 72,601 | | 65,746 | | 67,555 | |
| Noninterest Income (out-of-scope of ASC 606) | 6,248 | | 8,114 | | 7,878 | |
| Total Noninterest Income | $ | 78,849 | | $ | 73,860 | | $ | 75,433 | |
Contract Balances
A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration or before payment is due, which would result in contract receivables or assets, respectively. A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment or for which payment is due from the customer. The Company’s noninterest revenue streams, excluding some insurance commissions and fees, are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Receivables primarily consist of amounts due for insurance and wealth management services performed for which the Company's performance obligations have been fully satisfied. Receivables amounted to $6.0 million and $2.3 million, respectively, at December 31, 2021, compared to $5.2 million and $2.2 million, respectively, at December 31, 2020. Additionally, the Company had contract assets related to contingent income of $3.0 million, and $2.5 million, respectively, related to period end 2021, and 2020, and contract liabilities of $1.7 million for year end 2021 and $2.0 million for year end 2020.
Contract Acquisition Costs
In connection with the adoption of ASC 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of ASC 606, the Company did not capitalize any contract acquisition costs.
Note 15 Income Taxes
The income tax expense (benefit) attributable to income from operations is summarized as follows:
| | | | | | | | | | | |
| (In thousands) | Current | Deferred | Total |
| 2021 | | | |
| Federal | $ | 19,345 | | $ | 1,485 | | $ | 20,830 | |
| State | 4,039 | | 313 | | 4,352 | |
| Total | $ | 23,384 | | $ | 1,798 | | $ | 25,182 | |
| 2020 | | | |
| Federal | $ | 22,199 | | $ | (5,247) | | $ | 16,952 | |
| State | 4,009 | | (1,037) | | 2,972 | |
| Total | $ | 26,208 | | $ | (6,284) | | $ | 19,924 | |
| 2019 | | | |
| Federal | $ | 15,161 | | $ | 2,668 | | $ | 17,829 | |
| State | 2,782 | | 405 | | 3,187 | |
| Total | $ | 17,943 | | $ | 3,073 | | $ | 21,016 | |
The primary reasons for the differences between income tax expense and the amount computed by applying the statutory federal income tax rate to earnings are as follows:
| | | | | | | | | | | |
| 2021 | 2020 | 2019 |
| Statutory federal income tax rate | 21.0 | % | 21.0 | % | 21.0 | % |
| State income taxes, net of federal benefit | 3.0 | | 2.4 | | 2.5 | |
| Tax exempt income | (1.2) | | (1.8) | | (1.5) | |
| Excess benefits from equity-based compensation | (0.5) | | (0.2) | | (0.8) | |
| Bank-owned life insurance income | (0.4) | | (0.5) | | (0.5) | |
| Federal tax credit | 0.0 | | (0.4) | | (0.7) | |
| | | |
| All other | 0.1 | | (0.1) | | 0.5 | |
| Total | 22.0 | % | 20.4 | % | 20.5 | % |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities as of December 31 were as follows:
| | | | | | | | | | |
| (In thousands) | 2021 | 2020 | | |
| Deferred tax assets: | | | | |
| Allowance for credit losses | $ | 11,160 | | $ | 13,095 | | | |
| Lease liability | 7,277 | | 7,858 | | |
| Interest income on nonperforming loans | 470 | | 500 | | | |
| Compensation and benefits | 12,303 | | 11,580 | | | |
| Purchase accounting adjustments | 360 | | 0 | | | |
| | | | |
| Liabilities held at fair value | 21 | | 20 | | | |
| Deferred loan fees and costs | 1,664 | | 1,783 | | | |
| Other | 1,017 | | 1,097 | | | |
| Total | $ | 34,272 | | $ | 35,933 | | | |
| Deferred tax liabilities: | | | | |
| Prepaid pension | 10,875 | | 10,254 | | | |
| Right of use asset | 7,092 | | 7,270 | | |
| Depreciation | 3,586 | | 3,735 | | | |
| Intangibles | 1,401 | | 1,266 | | | |
| Purchase accounting adjustments | 0 | | 5 | | | |
| Leases | 1,985 | | 2,425 | | | |
| Other | 1,657 | | 1,504 | | | |
| Total deferred tax liabilities | $ | 26,596 | | $ | 26,459 | | | |
| Net deferred tax asset at year-end | 7,676 | | 9,474 | | | |
| Net deferred tax asset at beginning of year | 9,474 | | 3,776 | | | |
| (Decrease) increase in net deferred tax asset | (1,798) | | 5,698 | | | |
| | | | |
| CECL accounting standard adoption recorded through equity | 0 | | 586 | | | |
| Deferred tax expense | $ | 1,798 | | $ | (6,284) | | | |
The above analysis does not include recorded deferred tax assets (liabilities) of $4.7 million and $(6.7) million as of December 31, 2021 and 2020, respectively, related to net unrealized holdings losses/(gains) in the available-for-sale debt securities portfolio. In addition, the analysis excludes recorded deferred tax assets of $13.4 million and $17.1 million, as of December 31, 2021 and 2020, respectively, related to employee benefit plans.
Realization of deferred tax assets is dependent upon the generation of future taxable income or the existence of sufficient taxable income. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. In assessing the need for a valuation allowance, management considers the scheduled reversal of the deferred tax liabilities, the level of historical taxable income, and the projected future taxable income over the periods in which the temporary differences comprising the deferred tax assets will be deductible. Based on its assessment, management determined that no valuation allowance was necessary at December 31, 2021 and 2020.
At December 31, 2021 the Company had an insignificant amount of ASC 740-10 unrecognized tax benefits. At December 31, 2020, the Company had no ASC 740-10 unrecognized tax benefits. The Company does not expect the total amount of unrecognized tax benefits to significantly increase within the next twelve months. The Company recognizes interest and penalties on unrecognized tax benefits in income tax expense in its Consolidated Statements of Income.
The Company is subject to U.S. federal income tax and income tax in New York and various state jurisdictions. All tax years ending after December 31, 2017 are open to examination by the taxing authorities.
Note 16 Other Comprehensive Income (Loss)
The tax effect allocated to each component of other comprehensive income (loss) were as follows:
| | | | | | | | | | | |
| December 31, 2021 | Before-Tax Amount | Tax (Expense) Benefit | Net of Tax |
| (In thousands) | | | |
| Available-for-sale debt securities: | | | |
| Change in net unrealized (loss) gain during the period | $ | (46,301) | | $ | 11,340 | | $ | (34,961) | |
| | | |
| Reclassification adjustment for net realized gain on sale included in available-for-sale debt securities | (275) | | 67 | | (208) | |
| Net unrealized losses | (46,576) | | 11,407 | | (35,169) | |
| | | |
| Employee benefit plans: | | | |
| Net retirement plan gain ( loss) | 11,785 | | (2,887) | | 8,898 | |
| | | |
| | | |
| Amortization of net retirement plan actuarial gain | 2,951 | | (723) | | 2,228 | |
| Amortization of net retirement plan prior service (cost) credit | 221 | | (54) | | 167 | |
| Employee benefit plans | 14,957 | | (3,664) | | 11,293 | |
| | | |
| Other comprehensive loss | $ | (31,619) | | $ | 7,743 | | $ | (23,876) | |
| | | | | | | | | | | |
| December 31, 2020 | Before-Tax Amount | Tax (Expense) Benefit | Net of Tax |
| (In thousands) | | | |
| Available-for-sale debt securities: | | | |
| Change in net unrealized gain during the period | $ | 22,381 | | $ | (5,487) | | $ | 16,894 | |
| | | |
| Reclassification adjustment for net realized loss on sale included in available-for-sale debt securities | (430) | | 106 | | (324) | |
| Net unrealized gains | 21,951 | | (5,381) | | 16,570 | |
| | | |
| Employee benefit plans: | | | |
| Net retirement plan loss | (9,309) | | 2,281 | | (7,028) | |
| | | |
| | | |
| Amortization of net retirement plan actuarial gain | 2,366 | | (580) | | 1,786 | |
| Amortization of net retirement plan prior service (cost) credit | 214 | | (52) | | 162 | |
| Employee benefit plans | (6,729) | | 1,649 | | (5,080) | |
| | | |
| Other comprehensive income | $ | 15,222 | | $ | (3,732) | | $ | 11,490 | |
| | | | | | | | | | | |
| December 31, 2019 | Before-Tax Amount | Tax (Expense) Benefit | Net of Tax |
| (In thousands) | | | |
| Available-for-sale debt securities: | | | |
| Change in net unrealized loss during the period | $ | 33,431 | | $ | (8,190) | | $ | 25,241 | |
| Unrealized gains on HTM securities transferred to AFS debt securities | 3,777 | | (925) | | 2,852 | |
| Reclassification adjustment for net realized loss on sale included in available-for-sale debt securities | (616) | | 151 | | (465) | |
| Net unrealized gains | 36,592 | | (8,964) | | 27,628 | |
| | | |
| Employee benefit plans: | | | |
| Net retirement plan loss | (10,122) | | 2,480 | | (7,642) | |
| Net actuarial gain due to curtailment | (399) | | 97 | | (302) | |
| Net retirement plan prior service credit | (1,819) | | 446 | | (1,373) | |
| Amortization of net retirement plan actuarial gain | 1,677 | | (411) | | 1,266 | |
| Amortization of net retirement plan prior service (cost) credit | 32 | | (8) | | 24 | |
| Employee benefit plans | (10,631) | | 2,604 | | $ | (8,027) | |
| Other comprehensive income | $ | 25,961 | | $ | (6,360) | | $ | 19,601 | |
The following table presents the activity in our accumulated other comprehensive loss for the periods indicated:
| | | | | | | | | | | |
(In thousands) | Available-for-Sale Debt
Securities | Employee Benefit
Plans | Accumulated Other
Comprehensive
Income (loss) |
| Balance at January 1, 2019 | $ | (23,589) | | $ | (39,576) | | $ | (63,165) | |
| Other comprehensive income (loss) | 27,628 | | (8,027) | | 19,601 | |
| Balance at December 31, 2019 | $ | 4,039 | | $ | (47,603) | | $ | (43,564) | |
| | | |
| Balance at January 1, 2020 | 4,039 | | (47,603) | | (43,564) | |
| Other comprehensive income (loss) | 16,570 | | (5,080) | | 11,490 | |
| | | |
| Balance at December 31, 2020 | $ | 20,609 | | $ | (52,683) | | $ | (32,074) | |
| | | |
| Balance at January 1, 2021 | 20,609 | | (52,683) | | (32,074) | |
| Other comprehensive income (loss) | (35,169) | | 11,293 | | (23,876) | |
| | | |
| Balance at December 31, 2021 | $ | (14,560) | | $ | (41,390) | | $ | (55,950) | |
| | | | | | | | |
| December 31, 2021 | | |
| Details about Accumulated other Comprehensive Income Components (in thousands) | Amount Reclassified from Accumulated Other Comprehensive (Loss)1 | Affected Line Item in the Statement Where Net Income is Presented |
| Available-for-sale debt securities: | | |
| Unrealized gains and losses on available-for-sale debt securities | $ | 275 | | Net gain on securities transactions |
| (67) | | Tax expense |
| 208 | | Net of tax |
| Employee benefit plans: | | |
Amortization of the following2 | | |
| Net retirement plan actuarial gain | (2,951) | | Other operating expense |
| Net retirement plan prior service credit | (221) | | Other operating expense |
| | |
| (3,172) | | Total before tax |
| 777 | | Tax benefit |
| $ | (2,395) | | Net of tax |
| | | | | | | | |
| December 31, 2020 | | |
| Details about Accumulated other Comprehensive Income Components (in thousands) | Amount Reclassified from Accumulated Other Comprehensive (Loss)1 | Affected Line Item in the Statement Where Net Income is Presented |
| Available-for-sale debt securities: | | |
| Unrealized gains and losses on available-for-sale debt securities | $ | 430 | | Net gain on securities transactions |
| (106) | | Tax benefit |
| 324 | | Net of tax |
| Employee benefit plans: | | |
Amortization of the following2 | | |
| Net retirement plan actuarial gain | (2,366) | | Other operating expense |
| Net retirement plan prior service credit | (214) | | Other operating expense |
| | |
| (2,580) | | Total before tax |
| 632 | | Tax benefit |
| $ | (1,948) | | Net of tax |
1 Amounts in parentheses indicate debits in income statement.
2 The accumulated other comprehensive income (loss) components are included in the computation of net periodic benefit cost (See Note 11 - “Employee Benefit Plans”).
Note 17 Commitments and Contingent Liabilities
The Company, in the normal course of business, is a party to financial instruments with off-balance-sheet risk to meet the financial needs of its customers. These financial instruments include loan commitments, standby letters of credit, and unused portions of lines of credit. The contract, or notional amount, of these instruments represents the Company’s involvement in particular classes of financial instruments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the Consolidated Statements of Condition.
The Company’s maximum potential obligations to extend credit for loan commitments (unfunded loans, unused lines of credit, and standby letters of credit) outstanding on December 31 were as follows:
| | | | | | | | |
| (In thousands) | 2021 | 2020 |
| Loan commitments | $ | 176,510 | | $ | 144,593 | |
| Standby letters of credit | 39,773 | | 31,441 | |
| Undisbursed portion of lines of credit | 911,694 | | 830,930 | |
| Total | $ | 1,127,977 | | $ | 1,006,964 | |
Commitments to extend credit (including lines of 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 and may require payment of a fee. Standby letters of credit are conditional commitments to guarantee the performance of a customer to a third party. The Company extends standby letters of credit to its customers in the normal course of business. The standby letters of credit are generally short-term. As of December 31, 2021, the Company’s maximum potential obligation under standby letters of credit was $39.8 million. Management uses the same credit policies in making commitments to extend credit and standby letters of credit as are used for on-balance-sheet lending decisions. Based upon management’s evaluation of the counterparty, the Company may require collateral to support commitments to extend credit and standby letters of credit. The credit risk amounts are equal to the contractual amounts, assuming the amounts are fully advanced and collateral or other security is of no value. The Company does not anticipate losses as a result of these transactions. These commitments also have off-balance-sheet interest-rate risk, in that the interest rate at which these commitments were made may not be at market rates on the date the commitments are fulfilled. Since some commitments and standby letters of credit are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements.
The Company may also have rate lock agreements associated with mortgage loans to be sold in the secondary market (certain of which relate to loan applications for which no formal commitment has been made). The amount of rate lock agreements at December 31, 2021 were immaterial. In order to limit the interest rate risk associated with rate lock agreements, as well as the interest rate risk associated with mortgages held for sale, if any, the Company enters into agreements to sell loans in the secondary market to unrelated investors on a loan-by-loan basis. At December 31, 2021, the Company had approximately $205,000 of commitments to sell mortgages to unrelated investors on a loan-by-loan basis.
In the normal course of business, the Company is involved in various legal proceedings, investigations, and administrative proceedings. Civil litigation may range from individual actions involving a single plaintiff to putative class action lawsuits with potentially thousands of class members. Investigations may involve both formal and informal proceedings, by both government agencies and self-regulatory bodies. Based on information presently known to us, we do not believe there is any matter to which we are a party, or involving any of our properties, that individually or in the aggregate, would reasonably be expected to have a material adverse effect on our financial statements.
Note 18 Earnings Per Share
Calculation of basic earnings per share (Basic EPS) and diluted earnings per share (Diluted EPS) is shown below.
| | | | | | | | | | | |
| Year ended December 31, |
| (In thousands, except share and per share data) | 2021 | 2020 | 2019 |
| Basic | | | |
| Net income available to common shareholders | $ | 89,264 | | $ | 77,588 | | $ | 81,718 | |
| Less: income attributable to unvested stock-based compensation awards | (615) | | (857) | | (1,306) | |
| Net earnings allocated to common shareholders | 88,649 | | 76,731 | | 80,412 | |
| Weighted average shares outstanding, including unvested stock-based compensation awards | 14,798,447 | | 14,933,990 | | 15,149,535 | |
| Less: average unvested stock-based compensation awards | (229,684) | | (230,600) | | (242,478) | |
| Weighted average shares outstanding - Basic | 14,568,763 | | 14,703,390 | | 14,907,057 | |
| | | |
| Diluted | | | |
| Net earnings allocated to common shareholders | 88,649 | | 76,731 | | 80,412 | |
| Weighted average shares outstanding - Basic | 14,568,763 | | 14,703,390 | | 14,907,057 | |
| Plus: incremental shares from assumed conversion of stock-based compensation awards | 79,404 | | 38,650 | | 66,894 | |
| | | |
| Weighted average shares outstanding - Diluted | 14,648,167 | | 14,742,040 | | 14,973,951 | |
| | | |
| Basic EPS | $ | 6.08 | | $ | 5.22 | | $ | 5.39 | |
| Diluted EPS | $ | 6.05 | | $ | 5.20 | | $ | 5.37 | |
Stock-based compensation awards representing 4,984, 7,591, and 14,982 common shares for 2021, 2020, and 2019, respectively, were not included in the computations of diluted earnings per common share because the effect on those periods would have been antidilutive.
Note 19 Fair Value Measurements
FASB ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FASB ASC Topic 820 also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
The three levels of the fair value hierarchy are:
Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 – 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, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;
Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of December 31, 2021 and 2020 segregated by the level of valuation inputs within the fair value hierarchy used to measure fair value.
Recurring Fair Value Measurements
December 31, 2021
| | | | | | | | | | | | | | |
| (In thousands) | Fair Value | (Level 1) | (Level 2) | (Level 3) |
| Available-for-sale debt securities | | | | |
| | | | |
| U.S. Treasuries | $ | 157,834 | | $ | 0 | | $ | 157,834 | | $ | 0 | |
| Obligations of U.S. Government sponsored entities | 832,373 | | $ | 0 | | 832,373 | | $ | 0 | |
| Obligations of U.S. states and political subdivisions | 104,169 | | 0 | | 104,169 | | 0 | |
| Mortgage-backed securities - residential, issued by | | | | |
| U.S. Government agencies | 77,157 | | 0 | | 77,157 | | 0 | |
| U.S. Government sponsored entities | 870,556 | | 0 | | 870,556 | | 0 | |
| | | | |
| U.S. corporate debt securities | 2,424 | | 0 | | 2,424 | | 0 | |
| Total Available-for-sale debt securities | $ | 2,044,513 | | $ | 0 | | $ | 2,044,513 | | $ | 0 | |
| Equity securities | $ | 902 | | $ | 0 | | $ | 0 | | $ | 902 | |
| | | | |
| | | | |
| | | | |
The change in the fair value of the $902,000 of equity securities valued using significant unobservable inputs (level 3), between January 1, 2021 and December 31, 2021 was immaterial.
Recurring Fair Value Measurements
December 31, 2020
| | | | | | | | | | | | | | |
| (In thousands) | Fair Value | (Level 1) | (Level 2) | (Level 3) |
| Available-for-sale debt securities | | | | |
| | | | |
| Obligations of U.S. Government sponsored entities | $ | 607,480 | | $ | 0 | | $ | 607,480 | | $ | 0 | |
| Obligations of U.S. states and political subdivisions | 129,746 | | 0 | | 129,746 | | 0 | |
| Mortgage-backed securities - residential, issued by | | | | |
| U.S. Government agencies | 182,108 | | 0 | | 182,108 | | 0 | |
| U.S. Government sponsored entities | 705,480 | | 0 | | 705,480 | | 0 | |
| | | | |
| U.S. corporate debt securities | 2,379 | | 0 | | 2,379 | | 0 | |
| Total Available-for-sale debt securities | $ | 1,627,193 | | $ | 0 | | $ | 1,627,193 | | $ | 0 | |
| Equity securities | $ | 929 | | $ | 0 | | $ | 0 | | $ | 929 | |
Fair values for U.S. Treasury securities are based on quoted market prices. Fair values for obligations of U.S. government sponsored entities, mortgage-backed securities-residential, obligations of U.S. states and political subdivisions, and U.S. corporate debt securities are based on quoted market prices, where available, as provided by third party pricing vendors. If quoted market prices were not available, fair values are based on quoted market prices of comparable instruments in active markets and/or based upon matrix pricing methodology, which uses comprehensive interest rate tables to determine market price, movement and yield relationships. For miscellaneous equity securities, carrying value is cost. These securities are reviewed periodically to determine if there are any events or changes in circumstances that would adversely affect their value.
The Company determines fair value for its available-for-sale debt securities using an independent bond pricing service for identical assets or very similar securities. The pricing service uses a variety of techniques to determine fair value, including market maker bids, quotes and pricing models. Inputs to the model include recent trades, benchmark interest rates, spreads, and actual and projected cash flows. The Company reviews the prices supplied by the independent pricing service, as well as their underlying pricing methodologies, for reasonableness and to ensure such prices are aligned with traditional pricing matrices. In general, the Company’s investment portfolio consists of traditional investments, nearly all of which are U.S. Treasury obligations, federal agency bullet or mortgage pass-through securities, or general obligation municipal bonds. Pricing for such instruments is fairly generic and is easily obtained. Quarterly, the Company will validate prices supplied by the independent
pricing service by comparing to prices obtained from a second third-party source. Based on the inputs used by our independent pricing services, the Company identifies the appropriate level within the fair value hierarchy to report these fair values.
Certain assets are measured at fair value on a nonrecurring basis, that is, they are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances. For the Company, these include loans held for sale, collateral dependent individually evaluated loans, other real estate owned, goodwill and other intangible assets. During 2021, certain collateral dependent individually evaluated loans and other real estate owned at December 31, 2021, were adjusted down to fair value. Collateral values are estimated using Level 3 inputs based upon observable market data. Real estate values are generally valued using independent appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally available in the market.
| | | | | | | | | | | | | | | | | |
| (In thousands) | | Fair value measurements at reporting date using: | Gain (losses) from fair value changes |
| As of | Quoted prices in active markets for identical assets | Significant other observable inputs | Significant unobservable inputs | Year ended |
| Assets: | 12/31/2021 | (Level 1) | (Level 2) | (Level 3) | 12/31/2021 |
| Individually evaluated loans | $ | 5,456 | | $ | 0 | | | $ | 5,456 | | $ | (7,107) | |
| Other real estate owned | 46 | | 0 | | 0 | | 46 | | (8) | |
| | | | | | | | | | | | | | | | | |
| (In thousands) | | Fair value measurements at reporting date using: | Gain (losses) from fair value changes |
| As of | Quoted prices in active markets for identical assets | Significant other observable inputs | Significant unobservable inputs | Year ended |
| Assets: | 12/31/2020 | (Level 1) | (Level 2) | (Level 3) | 12/31/2020 |
| Individually evaluated loans | $ | 22,171 | | $ | 0 | | $ | 22,171 | | $ | 0 | | $ | (1,855) | |
| Other real estate owned | 88 | | 0 | | 88 | | 0 | | (35) | |
The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments at December 31, 2021 and 2020. The carrying amounts shown in the table are included in the Consolidated Statements of Condition under the indicated captions. The fair value estimates, methods and assumptions set forth below for the Company’s financial instruments, including those financial instruments carried at cost, are made solely to comply with disclosures required by U.S. generally accepted accounting principles and does not always incorporate the exit-price concept of fair value prescribed by ASC Topic 820-10 and should be read in conjunction with the financial statements and notes included in this Report.
| | | | | | | | | | | | | | | | | |
| Estimated Fair Value of Financial Instruments | | | | |
| December 31, 2021 | | | | | |
| (In thousands) | Carrying Amount | Fair Value | (Level 1) | (Level 2) | (Level 3) |
| Financial Assets: | | | | | |
| Cash and cash equivalents | $ | 63,107 | | $ | 63,107 | | $ | 63,107 | | $ | 0 | | $ | 0 | |
| Securities - held-to-maturity | 284,009 | | 282,288 | | 0 | | 282,288 | | 0 | |
| FHLB and ACBB stock | 10,996 | | 10,996 | | 0 | | 10,996 | | 0 | |
| Accrued interest receivable | 22,597 | | 22,597 | | 0 | | 22,597 | | 0 | |
Loans and leases, net1 | 5,032,624 | | 5,028,734 | | 0 | | 0 | | 5,028,734 | |
| | | | | |
| Financial Liabilities: | | | | | |
| Time deposits | $ | 639,674 | | $ | 641,517 | | $ | 0 | | $ | 641,517 | | $ | 0 | |
| Other deposits | 6,151,761 | | 6,151,761 | | 0 | | 6,151,761 | | 0 | |
| Securities sold under agreements to repurchase | 66,787 | | 66,787 | | 0 | | 66,787 | | 0 | |
| Other borrowings | 124,000 | | 125,700 | | 0 | | 125,700 | | 0 | |
| Accrued interest payable | 901 | | 901 | | 0 | | 901 | | 0 | |
1 Lease receivables, although excluded from the scope of ASC Topic 825, are included in the estimated fair value amounts at their carrying value.
| | | | | | | | | | | | | | | | | |
| Estimated Fair Value of Financial Instruments | | | | |
| December 31, 2020 | | | | | |
| (In thousands) | Carrying Amount | Fair Value | (Level 1) | (Level 2) | (Level 3) |
| Financial Assets: | | | | | |
| Cash and cash equivalents | $ | 388,462 | | $ | 388,462 | | $ | 388,462 | | $ | 0 | | $ | 0 | |
| | | | | |
| FHLB and ACBB stock | 16,382 | | 16,382 | | 0 | | 16,382 | | 0 | |
| Accrued interest receivable | 32,025 | | 32,025 | | 0 | | 32,025 | | 0 | |
Loans and leases, net1 | 5,208,658 | | 5,226,301 | | 0 | | 22,171 | | 5,204,130 | |
| | | | | |
| Financial Liabilities: | | | | | |
| Time deposits | $ | 746,234 | | $ | 753,045 | | $ | 0 | | $ | 753,045 | | $ | 0 | |
| Other deposits | 5,691,518 | | 5,691,518 | | 0 | | 5,691,518 | | 0 | |
| Securities sold under agreements to repurchase | 65,845 | | 65,845 | | 0 | | 65,845 | | 0 | |
| Other borrowings | 265,000 | | 274,238 | | 0 | | 274,238 | | 0 | |
| Trust preferred debentures | 13,220 | | 18,483 | | 0 | | 18,483 | | 0 | |
| Accrued interest payable | 1,727 | | 1,727 | | 0 | | 1,727 | | 0 | |
1 Lease receivables, although excluded from the scope of ASC Topic 825, are included in the estimated fair value amounts at their carrying value.
The following methods and assumptions were used in estimating fair value disclosures for financial instruments.
Cash and Cash Equivalents
The carrying amounts reported in the Consolidated Statements of Condition for cash, noninterest-bearing deposits, money market funds, and Federal funds sold approximate the fair value of those assets.
FHLB and FRB Stock
The carrying amount of FHLB and FRB stock approximates fair value. If the stock is redeemed, the Company will receive an amount equal to the par value of the stock.
Loans and Leases
Fair value for loans are calculated using an exit price notion. The Company's valuation methodology takes into account factors such as estimated cash flows, including contractual cash flow and assumptions for prepayments; liquidity risk; and credit risk. The fair values of residential loans were estimated using discounted cash flow analyses, based upon available market benchmarks for rates and prepayment assumptions. The fair values of commercial and consumer loans were estimated using discounted cash flow analyses, based upon interest rates currently offered for loans and leases with similar terms and credit quality. The fair values of loans and leases held for sale were determined based upon contractual prices for loans and leases with similar characteristics.
Accrued Interest Receivable and Accrued Interest Payable
The carrying amount of these short term instruments approximate fair value.
Deposits
The fair values disclosed for noninterest bearing accounts and accounts with no stated maturities are equal to the amount payable on demand at the reporting date. The fair value of time deposits is based upon discounted cash flow analyses using rates offered for FHLB advances, which is the Company’s primary alternative source of funds.
Trust Preferred Debentures
The fair value of the trust preferred debentures has been estimated using a discounted cash flow analysis which uses a discount factor of a market spread over current interest rates for similar instruments.
Note 20 Regulations and Supervision
Capital Requirements:
The Company and its subsidiary banks are subject to various regulatory capital requirements administered by federal bank regulatory agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on the Company’s business, results of operation and financial condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action (PCA), banks must meet specific guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classifications of the Company and its subsidiary banks are also subject to qualitative judgments by regulators concerning components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the table below) of common equity Tier I capital, total capital and Tier 1 capital to risk-weighted assets (as defined in the regulation), and of Tier 1 capital to average assets (as defined in the regulation). Management believes that the Company and its subsidiary banks meet all capital adequacy requirements to which they are subject.
As of December 31, 2021, the most recent notifications from Federal bank regulatory agencies categorized the Company's subsidiary banks as “well capitalized” under the regulatory framework for PCA. To be categorized as well capitalized, the Company and its subsidiary banks must maintain total risk-based, Tier 1 risk-based, common equity Tier 1 capital and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the capital category of the Company or its subsidiary banks.
In the first quarter of 2020, U.S. Federal regulatory authorities issued an interim final rule that provided banking organizations that adopt CECL during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-
year transition in total). In connection with our adoption of CECL on January 1, 2020, we elected to utilize the five-year CECL transition.
The following table presents actual and required capital ratios as of December 31, 2021 and December 31, 2020 for Tompkins and its four banking subsidiaries. The minimum capital amounts required under Basel III includes the capital conservation buffer of 2.5%, which must be added to each of the minimum required risk-based capital ratios (Total capital to risk-weighted assets, Common equity Tier 1 capital to risk weighted assets and Tier 1 capital to risk weighted assets). Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.
Actual capital amounts and ratios of the Company and its subsidiary banks are as follows:
| | | | | | | | | | | |
| Actual | Minimum Capital Required- Basel III Fully-Phased-In | Required
to be Considered
Well Capitalized |
| (dollar amounts in thousands) | Amount/Ratio | Amount/Ratio | Amount/Ratio |
| December 31, 2021 | | | |
| Total Capital (to risk-weighted assets) | | | |
| The Company (consolidated) | $735,187 /14.2% | $524,345/>10.5% | $516,519/>10.0% |
| Trust Company | $219,976/14.8% | $156,631/>10.5% | $149,172/>10.0% |
| Castile | $160,757/12.2% | $138,104/>10.5% | $131,527/>10.0% |
| Mahopac | $136,247/12.7% | $112,649/>10.5% | $107,285/>10.0% |
| VIST | $173,889/13.6% | $134,403/>10.5% | $128,003/>10.0% |
| Common Equity Tier 1 Capital (to risk-weighted assets) | |
| The Company (consolidated) | $688,425/13.3% | $361,563/>7.0% | $335,737/>6.5% |
| Trust Company | $207,632/13.9% | $104,421/>7.0% | $96,962/>6.5% |
| Castile | $149,154/11.3% | $92,069/>7.0% | $85,493/>6.5% |
| Mahopac | $126,718/11.8% | $75,100/>7.0% | $69,735/>6.5% |
| VIST | $163,145/12.8% | $89,602/>7.0% | $83,202/>6.5% |
| Tier 1 Capital (to risk-weighted assets) | | | |
| The Company (consolidated) | $688,425/13.3% | $439,041/>8.5% | $413,215/>8.0% |
| Trust Company | $207,632/13.9% | $126,797/>8.5% | $119,338/>8.0% |
| Castile | $149,154/11.3% | $111,798/>8.5% | $105,222/>8.0% |
| Mahopac | $126,718/11.8% | $91,192/>8.5% | $85,282/>8.0% |
| VIST | $163,145/12.8% | $108,803/>8.5% | $102,403/>8.0% |
| Tier 1 Capital (to average assets) | | | |
| The Company (consolidated) | $688,425/8.7% | $315,820/>4.0% | $394,775/>5.0% |
| Trust Company | $207,632/8.4% | $99,000/>4.0% | $123,751/>5.0% |
| Castile | $149,154/7.9% | $75,935/>4.0% | $94,918/>5.0% |
| Mahopac | $126,718/8.1% | $62,815/>4.0% | $78,519/>5.0% |
| VIST | $163,145/8.4% | $77,953/>4.0% | $97,441/>5.0% |
| | | |
| December 31, 2020 | | | |
| Total Capital (to risk-weighted assets) | | | |
| The Company (consolidated) | $720,755 /14.4% | $525,755/>10.5% | $500,719/>10.0% |
| Trust Company | $210,756/14.7% | $150,482/>10.5% | $143,316/>10.0% |
| Castile | $157,514/12.6% | $131,034/>10.5% | $124,795/>10.0% |
| Mahopac | $133,969/13.0% | $108,129/>10.5% | $102,980/>10.0% |
| VIST | $175,931/13.7% | $134,615/>10.5% | $128,205/>10.0% |
| Common Equity Tier 1 Capital (to risk-weighted assets) |
| The Company (consolidated) | $654,144/13.1% | $350,503/>7.0% | $325,467/>6.5% |
| Trust Company | $196,522/13.7% | $100,321/>7.0% | $93,156/>6.5% |
| Castile | $144,448/11.6% | $87,356/>7.0% | $81,117/>6.5% |
| Mahopac | $122,393/11.9% | $72,086/>7.0% | $66,937/>6.5% |
| VIST | $163,895/12.8% | $89,743/>7.0% | $83,333/>6.5% |
| Tier 1 Capital (to risk-weighted assets) | | | |
| The Company (consolidated) | $667,364/13.3% | $425,611/>8.5% | $400,575/>8.0% |
| Trust Company | $196,522/13.7% | $121,819/>8.5% | $114,653/>8.0% |
| Castile | $144,448/11.6% | $106,076/>8.5% | $99,836/>8.0% |
| Mahopac | $122,393/11.9% | $87,533/>8.5% | $82,384/>8.0% |
| VIST | $163,895/12.8% | $108,794/>8.5% | $102,564/>8.0% |
| Tier 1 Capital (to average assets) | | | |
| The Company (consolidated) | $667,364/8.8% | $305,083/>4.0% | $381,354/>5.0% |
| Trust Company | $196,522/8.2% | $95,691/>4.0% | $119,614/>5.0% |
| Castile | $144,448/8.1% | $71,605/>4.0% | $89,507/>5.0% |
| Mahopac | $122,393/8.2% | $59,742/>4.0% | $74,678/>5.0% |
| VIST | $163,895/8.4% | $77,874/>4.0% | $83,333/>5.0% |
Note 21 Condensed Parent Company Only Financial Statements
Condensed financial statements for Tompkins (the Parent Company) as of December 31, 2021, 2020 and 2019 are presented below.
| | | | | | | | |
Condensed Statements of Condition | | |
| (In thousands) | 2021 | 2020 |
| Assets | | |
| Cash | $ | 18,691 | | $ | 16,588 | |
| | |
| Investment in subsidiaries | 705,723 | | 707,721 | |
| Other | 4,032 | | 5,965 | |
| Total Assets | $ | 728,446 | | $ | 730,274 | |
| Liabilities and Shareholders’ Equity | | |
| Borrowings | $ | 0 | | $ | 0 | |
| Trust preferred debentures issued to non-consolidated subsidiary | 0 | | 13,220 | |
| Other liabilities | 917 | | 777 | |
| Tompkins Financial Corporation Shareholders’ Equity | 727,529 | | 716,277 | |
| Total Liabilities and Shareholders’ Equity | $ | 728,446 | | $ | 730,274 | |
| | | | | | | | | | | |
| Condensed Statements of Income | | | |
| (In thousands) | 2021 | 2020 | 2019 |
| | | |
| Dividends received from subsidiaries | $ | 81,408 | | $ | 60,818 | | $ | 72,827 | |
| Other income | 279 | | 52 | | 240 | |
| Total Operating Income | $ | 81,687 | | $ | 60,870 | | $ | 73,067 | |
| Interest expense | 2,232 | | 1,241 | | 1,450 | |
| Other expenses | 9,039 | | 9,184 | | 8,409 | |
| Total Operating Expenses | $ | 11,271 | | $ | 10,425 | | $ | 9,859 | |
| Income Before Taxes and Equity in Undistributed | | | |
| Earnings of Subsidiaries | 70,416 | | 50,445 | | 63,208 | |
| Income tax benefit | 2,068 | | 2,160 | | 2,085 | |
| Equity in undistributed earnings of subsidiaries | 16,780 | | 24,983 | | 16,425 | |
| Net Income | $ | 89,264 | | $ | 77,588 | | $ | 81,718 | |
| | | | | | | | | | | |
| Condensed Statements of Cash Flows | | | |
| (In thousands) | 2021 | 2020 | 2019 |
| Operating activities | | | |
| Net income | $ | 89,264 | $ | 77,588 | $ | 81,718 |
| Adjustments to reconcile net income to net cash provided by operating activities |
| Equity in undistributed earnings of subsidiaries | (16,780) | | (24,983) | | (16,425) | |
| Other, net | 4,126 | | (1,541) | | 3,209 | |
| Net Cash Provided by Operating Activities | 76,610 | | 51,064 | | 68,502 | |
| Investing activities | | | |
| Other, net | (76) | | (100) | | 3,265 | |
| Net Cash (Used in) Provided by Investing Activities | (76) | | (100) | | 3,265 | |
| Financing activities | | | |
| Borrowings, net | 0 | | (4,000) | | 0 | |
| Cash dividends | (32,415) | | (31,359) | | (30,637) | |
| Repurchase of common shares | (23,773) | | (9,414) | | (29,867) | |
| Redemption of trust preferred debentures | (15,150) | | (4,124) | | 0 | |
| Net proceeds from restricted stock awards | (2,292) | | (1,682) | | (1,875) | |
| Shares issued for dividend reinvestment plan | 2 | | 1,825 | | 0 | |
| Shares issued for employee stock ownership plan | 0 | | 0 | | 0 | |
| Net proceeds from exercise of stock options | (803) | | (253) | | (992) | |
| | | |
| | | |
| Net Cash Used in Financing Activities | (74,431) | | (49,007) | | (63,371) | |
| Net increase in cash | 2,103 | | 1,957 | | 8,396 | |
| Cash at beginning of year | 16,588 | | 14,631 | | 6,235 | |
| Cash at End of Year | $ | 18,691 | | $ | 16,588 | | $ | 14,631 | |
A Statement of Changes in Shareholders’ Equity has not been presented since it is the same as the Consolidated Statement of Changes in Shareholders’ Equity previously presented for the consolidated Company.
Note 22 Segment and Related Information
The Company manages its operations through three reportable business segments in accordance with the standards set forth in FASB ASC 280, “Segment Reporting”: (i) banking and financial services (“Banking”), (ii) insurance services (“Tompkins Insurance”) and (iii) wealth management (“Tompkins Financial Advisors”). The Company’s insurance services and wealth management services are managed separately from the Banking segment.
Banking
The banking segment is primarily comprised of the Company's four banking subsidiaries: Tompkins Trust Company, a commercial bank with 13 banking offices operated in Ithaca, NY and surrounding communities; The Bank of Castile (DBA Tompkins Bank of Castile), a commercial bank with 16 banking offices located in the Genesee Valley region of New York State as well as Monroe County; Mahopac Bank (DBA Tompkins Mahopac Bank), a commercial bank with 14 full-service banking offices located in the counties north of New York City; and VIST Bank (DBA Tompkins VIST Bank), a banking organization with 20 banking offices headquartered and operating in Southeastern Pennsylvania.
Banking services consist primarily of attracting deposits from the areas served by the Company’s banking subsidiaries and using those deposits to originate a variety of commercial loans, agricultural loans, consumer loans, real estate loans and leases in those same areas. The Company’s subsidiary banks provide a variety of retail banking services including checking accounts, savings accounts, time deposits, IRA products, residential mortgage loans, personal loans, home equity loans, credit cards, debit cards and safe deposit services delivered through its branch facilities, ATMs, voice response, mobile banking, Internet banking and remote deposit services. The Company’s subsidiary banks also provide a variety of commercial banking services such as lending activities for a variety of business purposes, including real estate financing, construction, equipment financing, accounts receivable financing and commercial leasing. Other commercial services include deposit and cash management services, letters
of credit, sweep accounts, credit cards, Internet-based account services, mobile banking and remote deposit services. The banking subsidiaries do not engage in sub-prime lending.
Insurance
The Company provides property and casualty insurance services and employee benefits consulting through Tompkins Insurance, a wholly-owned subsidiary of the Company, headquartered in Batavia, New York. Tompkins Insurance is an independent insurance agency, representing many major insurance carriers. Tompkins Insurance provides employee benefit consulting to employers in Western and Central New York and Southeastern Pennsylvania, assisting them with their medical, group life insurance and group disability insurance. Through the 2012 acquisition of VIST Financial, Tompkins Insurance expanded its operations with the addition of VIST Insurance, a full service agency offering a similar array of insurance products as Tompkins Insurance in southeastern Pennsylvania. Tompkins Insurance offers services to customers of the Company’s banking subsidiaries by sharing offices with The Bank of Castile, Tompkins Trust Company and VIST Bank. In addition to these shared offices, Tompkins Insurance has five stand-alone offices in Western New York.
Wealth Management
The wealth management segment is generally organized under the Tompkins Financial Advisors brand. Tompkins Financial Advisors offers a comprehensive suite of financial services to customers, including trust and estate services, investment management and financial and insurance planning for individuals, corporate executives, small business owners and high net worth individuals. Tompkins Financial Advisors has offices in each of the Company’s four subsidiary banks.
Summarized financial information concerning the Company’s reportable segments and the reconciliation to the Company’s consolidated results is shown in the following table. Investment in subsidiaries is netted out of the presentations below. The “Intercompany” column identifies the intercompany activities of revenues, expenses and other assets between the banking and financial services segments. The Company accounts for intercompany fees and services at an estimated fair value according to regulatory requirements for the services provided. Intercompany items relate primarily to the use of human resources, information systems, accounting and marketing services provided by any of the banks and the holding company. All other accounting policies are the same as those described in Note 1 “Summary of Significant Accounting Policies” in this Report.
| | | | | | | | | | | | | | | | | |
| As of and for the year ended December 31, 2021 |
| (In thousands) | Banking | Insurance | Wealth Management | Intercompany | Consolidated |
| Interest income | $ | 241,322 | | $ | 11 | | $ | 0 | | $ | (15) | | $ | 241,318 | |
| Interest expense | 17,541 | | 0 | | 0 | | (15) | | 17,526 | |
| Net interest income | 223,781 | | 11 | | 0 | | 0 | | 223,792 | |
| Credit for credit loss expense | (2,219) | | 0 | | 0 | | 0 | | (2,219) | |
| Noninterest income | 25,944 | | 35,430 | | 19,727 | | (2,252) | | 78,849 | |
| Noninterest expense | 152,624 | | 26,857 | | 13,058 | | (2,252) | | 190,287 | |
| Income before income tax expense | 99,320 | | 8,584 | | 6,669 | | 0 | | 114,573 | |
| Income tax expense | 21,257 | | 2,326 | | 1,599 | | 0 | | 25,182 | |
| Net Income attributable to noncontrolling interests and Tompkins Financial Corporation | 78,063 | | 6,258 | | 5,070 | | 0 | | 89,391 | |
| Less: Net income attributable to noncontrolling interests | 127 | | 0 | | 0 | | 0 | | 127 | |
| Net Income attributable to Tompkins Financial Corporation | $ | 77,936 | | $ | 6,258 | | $ | 5,070 | | $ | 0 | | $ | 89,264 | |
| | | | | |
| Depreciation and amortization | $ | 9,987 | | $ | 208 | | $ | 55 | | $ | 0 | | $ | 10,250 | |
| Assets | 7,794,561 | | 42,879 | | 33,735 | | (51,193) | | 7,819,982 | |
| Goodwill | 64,370 | | 19,866 | | 8,211 | | 0 | | 92,447 | |
| Other intangibles, net | 1,571 | | 2,004 | | 68 | | 0 | | 3,643 | |
| Net loans and leases | 5,032,624 | | 0 | | 0 | | 0 | | 5,032,624 | |
| Deposits | 6,802,852 | | 0 | | 0 | | (11,417) | | 6,791,435 | |
| Total equity | 664,800 | | 33,171 | | 30,970 | | 0 | | 728,941 | |
| | | | | | | | | | | | | | | | | |
| As of and for the year ended December 31, 2020 |
| (In thousands) | Banking | Insurance | Wealth Management | Intercompany | Consolidated |
| Interest income | $ | 254,330 | | $ | 4 | | $ | 0 | | $ | (4) | | $ | 254,330 | |
| Interest expense | 28,995 | | 0 | | 0 | | (4) | | 28,991 | |
| Net interest income | 225,335 | | 4 | | 0 | | 0 | | 225,339 | |
| Provision for credit loss expense | 17,213 | | 0 | | 0 | | 0 | | 17,213 | |
| Noninterest income | 26,015 | | 31,930 | | 18,131 | | (2,216) | | 73,860 | |
| Noninterest expense | 147,680 | | 25,941 | | 12,915 | | (2,216) | | 184,320 | |
| Income before income tax expense | 86,457 | | 5,993 | | 5,216 | | 0 | | 97,666 | |
| Income tax expense | 17,033 | | 1,625 | | 1,266 | | 0 | | 19,924 | |
| Net Income attributable to noncontrolling interests and Tompkins Financial Corporation | 69,424 | | 4,368 | | 3,950 | | 0 | | 77,742 | |
| Less: Net income attributable to noncontrolling interests | 154 | | 0 | | 0 | | 0 | | 154 | |
| Net Income attributable to Tompkins Financial Corporation | $ | 69,270 | | $ | 4,368 | | $ | 3,950 | | $ | 0 | | $ | 77,588 | |
| | | | | |
| Depreciation and amortization | $ | 9,912 | | $ | 229 | | $ | 51 | | $ | 0 | | $ | 10,192 | |
| Assets | 7,564,342 | | 41,812 | | 28,616 | | (12,599) | | 7,622,171 | |
| Goodwill | 64,370 | | 19,866 | | 8,211 | | 0 | | 92,447 | |
| Other intangibles, net | 2,418 | | 2,398 | | 89 | | 0 | | 4,905 | |
| Net loans and leases | 5,208,658 | | 0 | | 0 | | 0 | | 5,208,658 | |
| Deposits | 6,449,289 | | 0 | | 0 | | (11,537) | | 6,437,752 | |
| Total equity | 660,334 | | 31,455 | | 25,900 | | 0 | | 717,689 | |
| | | | | | | | | | | | | | | | | |
| As of and for the year ended December 31, 2019 |
| (In thousands) | Banking | Insurance | Wealth Management | Intercompany | Consolidated |
| Interest income | $ | 261,378 | | $ | 3 | | $ | 0 | | $ | (3) | | $ | 261,378 | |
| Interest expense | 50,753 | | 0 | | 0 | | (3) | | 50,750 | |
| Net interest income | 210,625 | | 3 | | 0 | | 0 | | 210,628 | |
| Provision for credit loss expense | 1,366 | | 0 | | 0 | | 0 | | 1,366 | |
| Noninterest income | 29,054 | | 31,501 | | 17,001 | | (2,123) | | 75,433 | |
| Noninterest expense | 145,102 | | 25,908 | | 12,947 | | (2,123) | | 181,834 | |
| Income before income tax expense | 93,211 | | 5,596 | | 4,054 | | 0 | | 102,861 | |
| Income tax expense | 18,598 | | 1,426 | | 992 | | 0 | | 21,016 | |
| Net Income attributable to noncontrolling interests and Tompkins Financial Corporation | 74,613 | | 4,170 | | 3,062 | | 0 | | 81,845 | |
| Less: Net income attributable to noncontrolling interests | 127 | | 0 | | 0 | | 0 | | 127 | |
| Net Income attributable to Tompkins Financial Corporation | $ | 74,486 | | $ | 4,170 | | $ | 3,062 | | $ | 0 | | $ | 81,718 | |
| | | | | |
| Depreciation and amortization | 9,778 | | 225 | | 41 | | 0 | | $ | 10,044 | |
| Assets | 6,671,409 | | 41,841 | | 24,313 | | (11,940) | | 6,725,623 | |
| Goodwill | 64,370 | | 19,866 | | 8,211 | | 0 | | 92,447 | |
| Other intangibles, net | 3,215 | | 2,860 | | 148 | | 0 | | 6,223 | |
| Net loans and leases | 4,877,658 | | 0 | | 0 | | 0 | | 4,877,658 | |
| Deposits | 5,223,893 | | 0 | | 0 | | (10,972) | | 5,212,921 | |
| Total equity | 608,901 | 32,204 | 21,949 | 0 | 663,054 |
Unaudited Quarterly Financial Data
The Company has adopted certain provisions within the amendments to Regulation S-K that eliminate tabular presentation of unaudited quarterly financial information. There have been no material retrospective changes to financial statements for any of the quarters within the fiscal years ended December 31, 2021 and December 31, 2020.