Securities
As of March 31, 2013, total securities were $1.6 billion or 31.1% of total assets, compared to $1.4 billion or 29.3% of total assets at year-end 2012, and $1.3 billion or 36.3% at March 31, 2012. The following table details the composition of securities available-for-sale and securities held-to-maturity.
Available-for-Sale Securities
|
|
|
|
|
|
03/31/2013
|
|
|
12/31/2012
|
|
|
|
Amortized Cost
1
|
|
|
Fair Value
|
|
|
Amortized Cost
1
|
|
|
Fair Value
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,001
|
|
|
$
|
1,004
|
|
Obligations of U.S. Government sponsored entities
|
|
|
586,535
|
|
|
|
607,458
|
|
|
|
570,871
|
|
|
|
593,778
|
|
Obligations of U.S. states and political subdivisions
|
|
|
76,308
|
|
|
|
78,228
|
|
|
|
76,803
|
|
|
|
79,056
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
|
159,707
|
|
|
|
163,864
|
|
|
|
162,853
|
|
|
|
167,667
|
|
U.S. Government sponsored entities
|
|
|
659,471
|
|
|
|
670,512
|
|
|
|
526,364
|
|
|
|
540,355
|
|
Non-U.S. Government agencies or sponsored entities
|
|
|
395
|
|
|
|
403
|
|
|
|
4,457
|
|
|
|
4,354
|
|
U.S. corporate debt securities
|
|
|
5,007
|
|
|
|
5,074
|
|
|
|
5,009
|
|
|
|
5,083
|
|
Total debt securities
|
|
|
1,487,423
|
|
|
|
1,525,539
|
|
|
|
1,347,358
|
|
|
|
1,391,297
|
|
Equity securities
|
|
|
2,058
|
|
|
|
2,036
|
|
|
|
2,058
|
|
|
|
2,043
|
|
Total available-for-sale securities
|
|
$
|
1,489,481
|
|
|
$
|
1,527,575
|
|
|
$
|
1,349,416
|
|
|
$
|
1,393,340
|
|
1
Net of other-than-temporary impairment losses recognized in earnings
Held-to-Maturity Securities
|
|
|
|
03/31/2013
|
|
|
12/31/2012
|
|
(in thousands)
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
Obligations of U.S. states and political subdivisions
|
|
$
|
23,304
|
|
|
$
|
24,355
|
|
|
$
|
24,062
|
|
|
$
|
25,163
|
|
Total held-to-maturity debt securities
|
|
$
|
23,304
|
|
|
$
|
24,355
|
|
|
$
|
24,062
|
|
|
$
|
25,163
|
|
The growth in the available-for-sale portfolio was mainly in obligations of U.S. Government sponsored entities and driven by yield and duration considerations. Management’s policy is to purchase investment grade securities that on average have relatively short duration, which helps mitigate interest rate risk and provides sources of liquidity without significant risk to capital. The decrease in the held-to-maturity portfolio was due to maturities and calls during the year.
The Company has no investments in preferred stock of U.S. government sponsored entities and no investments in pools of Trust Preferred securities. Quarterly, the Company evaluates all investment securities with a fair value less than amortized cost to identify any other-than-temporary impairment as defined under generally accepted accounting principles.
As of March 31, 2013, the Company owned one corporate (non-agency) collateralized mortgage obligation issue (“CMO”) in a super senior or senior tranche. At March 31, 2013, this non-agency CMO with an amortized cost basis of $395,000 and a fair value of $403,000 was collateralized by residential real estate and is not currently deferring nor is it in default of interest payments to the Company.
For the three month periods ended March 31, 2013 and 2012, respectively, the Company did not recognize any net credit impairment charge to earnings on any non-agency CMO security and, as a result of the impairment review process, the Company does not consider the non-agency CMO held at March 31, 2013 to be other-than-temporarily impaired. Future changes in interest rates or the credit quality and credit support of the underlying issuers may reduce the market value of these and other securities. If such decline is determined to be other than temporary, the Company will record the necessary charge to earnings and/or AOCI to reduce the securities to their then current fair value.
During the 1st quarter of 2013, the Company sold three non-agency CMO securities for a gain of approximately $94,000. Prior to the 1st quarter of 2013, these three non-agency CMO securities were determined to be other-than-temporarily impaired and the Company did recognize net credit impairment charges to earnings of $441,000 over the life of these three
securities. Also during the 1st quarter of 2013, one non-agency CMO security was repaid in full. The Company did not recognize any net credit impairment charge to earnings for this security.
The Company maintains a trading portfolio with a fair value of $15.6 million as of March 31, 2013, compared to $16.5 million at December 31, 2012. The decrease in the trading portfolio reflects maturities or payments during 2013. For the three months ended March 31, 2013, net mark-to-market losses related to the securities trading portfolio were $115,000, compared to net mark-to-market losses of $82,000 for the same period in 2012.
Loans and Leases at March 31, 2013 and December 31, 2012 were as follows:
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
(in thousands)
|
|
Originated
|
|
|
Acquired
|
|
|
Total Loans and Leases
|
|
|
Originated
|
|
|
Acquired
|
|
|
Total Loans and Leases
|
|
Commercial and industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture
|
|
$
|
63,469
|
|
|
$
|
0
|
|
|
$
|
63,469
|
|
|
$
|
77,777
|
|
|
$
|
0
|
|
|
$
|
77,777
|
|
Commercial and industrial other
|
|
|
468,297
|
|
|
|
154,177
|
|
|
|
622,474
|
|
|
|
446,876
|
|
|
|
167,427
|
|
|
|
614,303
|
|
Subtotal commercial and industrial
|
|
|
531,766
|
|
|
|
154,177
|
|
|
|
685,943
|
|
|
|
524,653
|
|
|
|
167,427
|
|
|
|
692,080
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
41,304
|
|
|
|
29,216
|
|
|
|
70,520
|
|
|
|
41,605
|
|
|
|
43,074
|
|
|
|
84,679
|
|
Agriculture
|
|
|
46,677
|
|
|
|
3,178
|
|
|
|
49,855
|
|
|
|
48,309
|
|
|
|
3,247
|
|
|
|
51,556
|
|
Commercial real estate other
|
|
|
763,876
|
|
|
|
445,133
|
|
|
|
1,209,009
|
|
|
|
722,273
|
|
|
|
445,359
|
|
|
|
1,167,632
|
|
Subtotal commercial real estate
|
|
|
851,857
|
|
|
|
477,527
|
|
|
|
1,329,384
|
|
|
|
812,187
|
|
|
|
491,680
|
|
|
|
1,303,867
|
|
Residential real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
|
|
159,538
|
|
|
|
77,888
|
|
|
|
237,426
|
|
|
|
159,720
|
|
|
|
81,657
|
|
|
|
241,377
|
|
Mortgages
|
|
|
604,593
|
|
|
|
39,159
|
|
|
|
643,752
|
|
|
|
573,861
|
|
|
|
41,618
|
|
|
|
615,479
|
|
Subtotal residential real estate
|
|
|
764,131
|
|
|
|
117,047
|
|
|
|
881,178
|
|
|
|
733,581
|
|
|
|
123,275
|
|
|
|
856,856
|
|
Consumer and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect
|
|
|
25,125
|
|
|
|
18
|
|
|
|
25,143
|
|
|
|
26,679
|
|
|
|
24
|
|
|
|
26,703
|
|
Consumer and other
|
|
|
31,418
|
|
|
|
1,376
|
|
|
|
32,794
|
|
|
|
32,251
|
|
|
|
1,498
|
|
|
|
33,749
|
|
Subtotal consumer and other
|
|
|
56,543
|
|
|
|
1,394
|
|
|
|
57,937
|
|
|
|
58,930
|
|
|
|
1,522
|
|
|
|
60,452
|
|
Leases
|
|
|
5,109
|
|
|
|
0
|
|
|
|
5,109
|
|
|
|
4,618
|
|
|
|
0
|
|
|
|
4,618
|
|
Covered loans
|
|
|
|
|
|
|
35,304
|
|
|
|
35,304
|
|
|
|
0
|
|
|
|
37,600
|
|
|
|
37,600
|
|
Total loans and leases
|
|
|
2,209,406
|
|
|
|
785,449
|
|
|
|
2,994,855
|
|
|
|
2,133,969
|
|
|
|
821,504
|
|
|
|
2,955,473
|
|
Less: unearned income and deferred costs and fees
|
|
|
(1,060
|
)
|
|
|
0
|
|
|
|
(1,060
|
)
|
|
|
(863
|
)
|
|
|
0
|
|
|
|
(863
|
)
|
Total loans and leases, net of unearned income and deferred costs and fees
|
|
$
|
2,208,346
|
|
|
$
|
785,449
|
|
|
$
|
2,993,795
|
|
|
$
|
2,133,106
|
|
|
$
|
821,504
|
|
|
$
|
2,954,610
|
|
Total loans and leases of $3.0 billion at March 31, 2013 were up $39.2 million or 1.3% from December 31, 2012. Increases in commercial and residential mortgages were partially offset by declines in agricultural, construction and consumer loans. As of March 31, 2013 total loans and leases represented 60.0% of total assets compared to 61.1% of total assets at December 31, 2012.
Residential real estate loans, including home equity loans, of $881.2 million at March 31, 2013 increased by $24.3 million or 2.8% from $856.9 million at year-end 2012, and comprised 29.4% of total loans and leases at March 31, 2013. The growth in residential real estate loan balances reflects higher origination volumes due to the low interest rate environment as well as a decision to retain certain residential mortgages in portfolio rather than sell them in the secondary market due to interest rate considerations. The Company’s Asset/Liability Committee meets regularly and establishes standards for selling and retaining residential real estate mortgage originations.
Prior to August 2012, loans were generally sold to Federal Home Loan Mortgage Corporation (“FHLMC”) or State of New York Mortgage Agency (“SONYMA”). With the acquisition to VIST on August 1, 2012, the Company also sells loans to other third parties, including money center banks. These residential real estate loans are generally sold without recourse in accordance with standard secondary market loan sale agreements. These residential real estate loans also are subject to customary representations and warranties made by the Company, including representations and warranties related to gross incompetence and fraud. The Company has not had to repurchase any loans as a result of these general representations and
warranties. While in the past in rare circumstances the Company agreed to sell residential real estate loans with recourse, the Company has not done so in the past several years and the amount of such loans included on the Company’s balance sheet at March 31, 2013 is insignificant. The Company has never had to repurchase a loan sold with recourse.
During the first three months of 2013 and 2012, the Company sold residential mortgage loans totaling $720,000 and $4.3 million, respectively, and realized gains on these sales of $29,000 and $100,000, respectively. These residential real estate loans were sold without recourse in accordance with standard secondary market loan sale agreements. When residential mortgage loans are sold, the Company typically retains all servicing rights, which provides the Company with a source of fee income. Mortgage servicing rights, at amortized basis, totaled $1.1 million at March 31, 2013 down from $1.2 million at December 31, 2012.
The Company has not originated any hybrid loans, such as payment option ARMs. The Company underwrites residential real estate loans in accordance with secondary market standards in effect at the time of origination, including loan-to-value (“LTV”) and documentation requirements. The Company does not underwrite low or reduced documentation loans other than those that meet secondary market standards for low or reduced documentation loans. In those instances, W-2’s and paystubs are used instead of sending Verification of Employment forms to employers to verify income and bank deposit statements are used instead of Verification of Deposit forms mailed to financial institutions to verify deposit balances.
Commercial real estate loans increased by $25.5 million or 2.0% compared to December 31, 2012. Commercial real estate loans represented 44.4% of total loans as of March 31, 2013. Commercial and industrial loans of $685.9 million at March 31, 2013, are in line with December 31, 2012 balances. Demand for commercial loans continued to be soft in the first quarter of 2013, reflecting weak economic conditions. As of March 31, 2013, agriculturally-related loans totaled $113.3 million or 3.8% of total loans and leases, down from $129.3 million or 4.4% of total loans and leases at December 31, 2012. Agriculturally-related loans include loans to dairy farms and cash and vegetable crop farms. Agriculturally related loans are primarily made based on identified cash flows of the borrower with consideration given to underlying collateral, personal guarantees, and government related guarantees. Agriculturally-related loans are generally secured by the assets or property being financed or other business assets such as accounts receivable, livestock, equipment or commodities/crops.
The consumer loan portfolio includes personal installment loans, indirect automobile financing, and overdraft lines of credit. Consumer and other loans were $57.9 million at March 31, 2013, in line with $60.5 million at December 31, 2012. The decrease is mainly in indirect automobile loans and reflects increased competition.
The lease portfolio increased by 10.6% to $5.1 million at March 31, 2013 from $4.6 million at December 31, 2012. The lease portfolio has traditionally consisted of leases on vehicles for consumers and small businesses. Management continues to review leasing opportunities, primarily commercial leasing and municipal leasing. As of March 31, 2013, commercial leases and municipal leases represented 99.6% of total leases, while consumer leases made up the remaining percentage, unchanged from the percentages at December 31, 2012.
At March 31, 2013, the Company had $785.4 million of acquired loans as a result of the Company’s acquisition of VIST Financial during the third quarter of 2012. The acquired loans were recorded at fair value pursuant to the purchase accounting guidelines in FASB ASC 805 – “Fair Value Measurements and Disclosures” (as determined by the present value of expected future cash flows) with no valuation allowance (i.e., the allowance for loan losses). Upon acquisition, the Company evaluated whether each acquired loan (regardless of size) was within the scope of ASC 310-30, “Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality”.
The carrying value of acquired loans acquired and accounted for in accordance with ASC Subtopic 310-30, “Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality,” was $76.1 million at March 31, 2013 as compared to $92.3 million at acquisition date of August 1, 2012, and the net reduction reflects payments. Under ASC Subtopic 310-30, loans may be aggregated and accounted for as pools of loans if the loans being aggregated have common risk characteristics. The Company elected to account for the loans with evidence of credit deterioration individually rather than aggregate them into pools. The difference between the undiscounted cash flows expected at acquisition and the investment in the acquired loans, or the “accretable yield,” is recognized as interest income utilizing the level-yield method over the life of each loan. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “non-accretable difference,” are not recognized as a yield adjustment, as a loss accrual or as a valuation allowance.
Increases in expected cash flows subsequent to the acquisition are recognized prospectively through an adjustment of the yield on the loans over the remaining life. Subsequent decreases to the expected cash flows require us to evaluate the need for an addition to the allowance for loan losses. Valuation allowances (recognized in the allowance for loan losses) on these impaired loans reflect only losses incurred after the acquisition (representing all cash flows that were expected at acquisition but currently are not expected to be received).
The carrying value of loans not exhibiting evidence of credit impairment at the time of the acquisition (i.e. loans outside of the scope of ASC 310-30) was $709.4 million at March 31, 2013. The fair value of the acquired loans not exhibiting evidence of credit impairment was determined by projecting contractual cash flows discounted at risk-adjusted interest rates.
The carrying value of the acquired loans reflects management’s best estimate of the amount to be realized from the acquired loan and lease portfolios. However, the amounts the Company actually realizes on these loans could differ materially from the carrying value reflected in these financial statements, based upon the timing of collections on the acquired loans in future periods, underlying collateral values and the ability of borrowers to continue to make payments.
Purchased performing loans were recorded at fair value, including a credit discount. Credit losses on acquired performing loans are estimated based on analysis of the performing portfolio. The purchased performing portfolio also included a general interest rate mark (premium). Both the credit discount and interest rate mark are accreted/amortized as a yield adjustment over the estimated lives of the loans. Interest is accured daily on the outstanding principal balances of purchased performing loans.
At March 31, 2013, acquired loans included $35.3 million of covered loans. VIST Financial had acquired these loans in an FDIC assisted transaction in the fourth quarter of 2010. In accordance with loss sharing agreements with the FDIC, certain losses and expenses relating to covered loans may be reimbursed by the FDIC at 70% or, if certain levels of reimbursement are reached, 80%. See Note 8 – “FDIC Indemnification Asset Related to Covered Loans” in the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q.
The Company has adopted comprehensive lending policies, underwriting standards and loan review procedures. Management reviews these policies and procedures on a regular basis. The Company discussed its lending policies and underwriting guidelines for its various lending portfolios in Note 5 – “Loans and Leases” in the Notes to Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. There have been no significant changes in these policies and guidelines. As such, these policies are reflective of new originations as well as those balances held at March 31, 2013. The Company’s Board of Directors approves the lending policies at least annually. The Company recognizes that exceptions to policy guidelines may occasionally occur and has established procedures for approving exceptions to these policy guidelines. Management has also implemented reporting systems to monitor loan originations, loan quality, concentrations of credit, loan delinquencies and nonperforming loans and potential problem loans.
The Company’s loan and lease customers are located primarily in the New York and Pennsylvania communities served by its four subsidiary banks. Although operating in numerous communities in New York State and Pennsylvania, the Company is still dependent on the general economic conditions of these states. Other than geographic and general economic risks, management is not aware of any material concentrations of credit risk to any industry or individual borrower.
The Allowance for Loan and Lease Losses
Originated Loans and Leases
Management reviews the appropriateness of the allowance for loan and lease losses (“allowance”) 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 loan loss exposure inherent in the loan portfolio to assure that an appropriate allowance is maintained. The Company’s methodology is based upon guidance provided in SEC Staff Accounting Bulletin No. 102,
Selected Loan Loss Allowance Methodology and Documentation Issues
and allowance allocations are calculated in accordance with ASC Topic 310,
Receivables
and ASC Topic 450,
Contingencies
.
The Company’s methodology for determining and allocating the allowance for loan and lease losses focuses on ongoing reviews of larger individual loans and leases, historical net charge-offs, delinquencies in the loan and lease portfolio, the level of impaired and nonperforming loans, values of underlying loan and lease collateral, the overall risk characteristics of the portfolios, changes in character or size of the portfolios, geographic location, current economic conditions, changes in capabilities and experience of lending management and staff, and other relevant factors. The various factors used in the methodologies are reviewed on a regular basis.
At least annually, management reviews all commercial and commercial real estate loans exceeding a certain threshold and assigns a risk rating. The Company uses an internal loan rating system of pass credits, special mention loans, substandard loans, doubtful loans, and loss loans (which are fully charged off). The definitions of “special mention”, “substandard”,
“doubtful” and “loss” are consistent with banking regulatory definitions. Factors considered in assigning loan ratings include: the customer’s ability to repay based upon the customer’s expected future cash flow, operating results, and financial condition; value of the underlying collateral, if any; and the economic environment and industry in which the customer operates. Special mention loans have potential weaknesses that if left uncorrected may result in deterioration of the repayment prospects and a downgrade to a more severe risk rating. A substandard loan credit has a well-defined weakness which makes payment default or principal exposure likely, but not yet certain. There is a possibility that the Company will sustain some loss if the deficiencies are not corrected. A doubtful loan has a high possibility of loss, but the extent of the loss is difficult to quantify because of certain important and reasonably specific pending factors.
At least quarterly, management reviews all commercial and commercial real estate loans and leases and agriculturally related loans with an outstanding principal balance of over $500,000 that are internally risk rated as special mention or worse, giving consideration to payment history, debt service payment capacity, collateral support, strength of guarantors, local market trends, industry trends, and other factors relevant to the particular borrowing relationship. Through this process, management identifies impaired loans. For loans and leases considered impaired, estimated exposure amounts are based upon collateral values or present value of expected future cash flows discounted at the original effective rate of each loan. For commercial loans, commercial mortgage loans, and agricultural loans not specifically reviewed, and for homogenous loan portfolios such as residential mortgage loans and consumer loans, estimated exposure amounts are assigned based upon historical net loss experience and current charge-off trends, past due status, and management’s judgment of the effects of current economic conditions on portfolio performance.
Since the methodology is based upon historical experience and trends as well as management’s judgment, factors may arise that result in different estimations. Significant factors that could give rise to changes in these estimates may include, but are not limited to, changes in economic conditions in the local area, concentration of risk, changes in interest rates, and declines in local property values. Based on its evaluation of the allowance as of March 31, 2013, management considers the allowance to be appropriate. Under adversely different conditions or assumptions, the Company would need to increase the allowance.
Acquired Loans and Leases
Acquired loans accounted for under ASC 310-30
For our acquired loans, our allowance for loan losses is estimated based upon our expected cash flows for these loans. To the extent that we experience a deterioration in borrower credit quality resulting in a decrease in our expected cash flows subsequent to the acquisition of the loans, an allowance for loan losses would be established based on our estimate of future credit losses over the remaining life of the loans.
Acquired loans accounted for under ASC 310-20
We establish our allowance for loan losses through a provision for credit losses based upon an evaluation process that is similar to our evaluation process used for originated loans. This evaluation, which includes a review of loans on which full collectability may not be reasonably assured, considers, among other matters, the estimated fair value of the underlying collateral, economic conditions, historical net loan loss experience, carrying value of the loans, which includes the remaining net purchase discount or premium, and other factors that warrant recognition in determining our allowance for loan losses.
The tables below provide, as of the dates indicated, an allocation of the allowance for probable and inherent loan losses by type. The allocation is neither indicative of the specific amounts or the loan categories in which future charge-offs may occur, nor is it an indicator of future loss trends. The allocation of the allowance to each category does not restrict the use of the allowance to absorb losses in any category.
(in thousands)
|
|
03/31/2013
|
|
|
12/31/2012
|
|
|
03/31/2012
|
|
Originated
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
7,037
|
|
|
$
|
7,533
|
|
|
$
|
8,270
|
|
Commercial real estate
|
|
|
10,644
|
|
|
|
10,184
|
|
|
|
12,314
|
|
Residential real estate
|
|
|
5,036
|
|
|
|
4,981
|
|
|
|
4,491
|
|
Consumer and other
|
|
|
1,879
|
|
|
|
1,940
|
|
|
|
1,868
|
|
Leases
|
|
|
2
|
|
|
|
5
|
|
|
|
5
|
|
Total
|
|
$
|
24,598
|
|
|
$
|
24,643
|
|
|
$
|
26,948
|
|
(in thousands)
|
|
03/31/2013
|
|
|
12/31/2012
|
|
|
03/31/2012
|
|
Acquired
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
63
|
|
|
|
0
|
|
|
|
0
|
|
Total
|
|
$
|
63
|
|
|
$
|
0
|
|
|
$
|
0
|
|
As of March 31, 2013, the allowance is in line with year-end 2012. The amount of loans internally-classified as Special Mention, Substandard and Doubtful totaled $91.9 million at March 31, 2013 compared to $101.4 million at December 31, 2012 and $122.3 million at March 31, 2012. While the overall strength of the economy remains uncertain, there are signs of improvement in national and local economic conditions, which have contributed to some improvements in the financial conditions of several of the Company’s commercial and agricultural customers. This has led to upgrades of the risk ratings of individual credits which is evidenced by the overall decrease in loans classified Special Mention and Substandard. In addition to upgrades, charge-offs have contributed to the decrease in total internally classified loans and leases. The decrease in the allocation for commercial and industrial loans was mainly a result of a decrease in the level of classified commercial and industrial loans. The increase in reserve allocations for commercial real estate loans was mainly due to growth in the portfolio over year-end 2012. Reserve allocations for residential real estate loans and consumer loans were relatively unchanged compared to December 31, 2012. The reserve allocation for acquired commercial real estate loans is related to one credit and is based on an evaluation of collateral securing the credit.
Activity in the Company’s allowance for loan and lease losses during the first three months of 2013 and 2012, and for the twelve months ended December 31, 2012 is illustrated in the table below.
Analysis of the Allowance for Originated Loan and Lease Losses
|
|
|
|
|
|
(in thousands)
|
|
03/31/2013
|
|
|
12/31/2012
|
|
|
03/31/2012
|
|
Average originated loans outstanding during year
|
|
$
|
2,161,200
|
|
|
$
|
2,301,901
|
|
|
$
|
1,972,394
|
|
Balance of originated allowance at beginning of year
|
|
|
24,643
|
|
|
|
27,593
|
|
|
|
27,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ORIGINATED LOANS CHARGED-OFF:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
390
|
|
|
|
5,328
|
|
|
|
252
|
|
Commercial real estate
|
|
|
346
|
|
|
|
3,977
|
|
|
|
969
|
|
Residential real estate
|
|
|
192
|
|
|
|
2,390
|
|
|
|
409
|
|
Consumer and other
|
|
|
264
|
|
|
|
826
|
|
|
|
259
|
|
Total loans charged-off
|
|
$
|
1,192
|
|
|
$
|
12,521
|
|
|
$
|
1,889
|
|
|
|
|
|
|
|
|
|
|
|
ORIGINATED RECOVERIES OF LOANS
|
|
|
|
|
|
|
|
|
|
PREVIOUSLY CHARGED-OFF:
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
160
|
|
|
|
198
|
|
|
|
19
|
|
Commercial real estate
|
|
|
78
|
|
|
|
200
|
|
|
|
0
|
|
Residential real estate
|
|
|
2
|
|
|
|
30
|
|
|
|
0
|
|
Consumer and other
|
|
|
87
|
|
|
|
306
|
|
|
|
100
|
|
Total loans recovered
|
|
$
|
327
|
|
|
$
|
734
|
|
|
$
|
119
|
|
Net loans charged-off
|
|
|
865
|
|
|
|
11,787
|
|
|
|
1,770
|
|
Additions to originated allowance charged to operations
|
|
|
820
|
|
|
|
8,837
|
|
|
|
1,125
|
|
Balance of originated allowance at end of year
|
|
$
|
24,598
|
|
|
$
|
24,643
|
|
|
$
|
26,948
|
|
Annualized net charge-offs on originated loans to average total
originated loans and leases
|
|
|
0.16
|
%
|
|
|
0.51
|
%
|
|
|
0.36
|
%
|
Originated allowance as a percentage of originated loans
and leases outstanding
|
|
|
1.11
|
%
|
|
|
1.16
|
%
|
|
|
1.36
|
%
|
Analysis of the Allowance for Acquired Loan and Lease Losses
|
|
|
|
|
|
(in thousands)
|
|
03/31/2013
|
|
|
12/31/2012
|
|
|
03/31/2012
|
|
Average acquired loans outstanding during year
|
|
$
|
802,437
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Balance of acquired allowance at beginning of year
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACQUIRED LOANS CHARGED-OFF:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
23
|
|
|
|
0
|
|
|
|
0
|
|
Residential real estate
|
|
|
107
|
|
|
|
0
|
|
|
|
0
|
|
Consumer and other
|
|
|
25
|
|
|
|
0
|
|
|
|
0
|
|
Total loans charged-off
|
|
$
|
155
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans charged-off
|
|
|
155
|
|
|
|
0
|
|
|
|
0
|
|
Additions to acquired allowance charged to operations
|
|
|
218
|
|
|
|
0
|
|
|
|
0
|
|
Balance of acquired allowance at end of year
|
|
$
|
63
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Annualized net charge-offs of acquired loans to average total
acquired loans and leases
|
|
|
0.08
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
There was no allowance, charge-offs, or recoveries for acquired loans accounted for in accordance with ASC Topic 805 for the periods ending December 31, 2012 and March 31, 2012.
As of March 31, 2013, the allowance for originated loans and leases was $24.6 million or 1.11% of total originated loans and leases outstanding, compared with $24.6 million or 1.16% at December 31, 2012 and $26.9 million or 1.36% at March 31, 2012. The provision for originated loan and lease losses was $820,000 for the three months ended March 31, 2013, compared to $1.1 million for the same period in 2012. Net originated loan and lease charge-offs of $865,000 were down compared to the $1.8 million for the first quarter of 2012. The Company has seen improvement in credit quality metrics over the past several quarter and current levels of nonperforming loans and criticized and classified loans are down from prior year end.
As of March 31, 2013, the allowance for acquired loans and leases was $63,000. Although loans within the acquired portfolio were accounted for in accordance with ASC Topic 805, it was determined through impairment testing that one relationship demonstrated further deterioration and a specific reserve was assigned. The Company has seen improvement in credit quality metrics over the past several quarters and current levels of nonperforming loans are down from the same period prior year.
Analysis of Past Due and Nonperforming Loans
|
|
(dollar amounts in thousands)
|
|
03/31/2013
1
|
|
|
12/31/2012
1
|
|
|
03/31/2012
|
|
Loans 90 days past due and accruing
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
28
|
|
Commercial real estate
|
|
|
0
|
|
|
|
0
|
|
|
|
1,202
|
|
Residential real estate
|
|
|
157
|
|
|
|
257
|
|
|
|
322
|
|
Total loans 90 days past due and accruing
|
|
|
157
|
|
|
|
257
|
|
|
|
1,552
|
|
Nonaccrual loans
2
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
1,299
|
|
|
|
1,340
|
|
|
|
7,292
|
|
Commercial real estate
|
|
|
24,782
|
|
|
|
25,014
|
|
|
|
24,194
|
|
Residential real estate
|
|
|
10,798
|
|
|
|
11,084
|
|
|
|
6,750
|
|
Consumer and other
|
|
|
236
|
|
|
|
302
|
|
|
|
219
|
|
Total nonaccrual loans
|
|
|
37,115
|
|
|
|
37,740
|
|
|
|
38,455
|
|
Troubled debt restructurings not included above
|
|
|
0
|
|
|
|
1,532
|
|
|
|
423
|
|
Total nonperforming loans and leases
|
|
|
37,272
|
|
|
|
39,529
|
|
|
|
40,430
|
|
Other real estate owned
|
|
|
3,950
|
|
|
|
4,862
|
|
|
|
1,906
|
|
Total nonperforming assets
|
|
$
|
41,222
|
|
|
$
|
44,391
|
|
|
$
|
42,336
|
|
Allowance as a percentage of nonperforming loans and leases
|
|
|
66.16
|
%
|
|
|
62.34
|
%
|
|
|
66.65
|
%
|
Total nonperforming assets as percentage of total assets
|
|
|
0.83
|
%
|
|
|
0.92
|
%
|
|
|
1.19
|
%
|
1
The March 31, 2013 and December 31, 2012 columns in the above table exclude $17.8 million and $18.7 million, respectively, of acquired loans that are 90 days past due and accruing interest. These loans were originally recorded at fair value on the acquisition date of August 1, 2012. These loans are considered to be accruing as we can reasonably estimate future cash flows on these acquired loans and we expect to fully collect the carrying value of these loans. Therefore, we are accreting the difference between the carrying value of these loans and their expected cash flows into interest income.
2
Nonaccrual loans at March 31, 2013 and December 31, 2012 include $4.6 million and $4.4 million, respectively, of nonaccrual acquired loans. There were no acquired loans at March 31, 2012.
Nonperforming assets include nonaccrual loans, troubled debt restructurings (“TDR”), and foreclosed real estate. Nonperforming assets represented 0.83% of total assets at March 31, 2013, compared to 0.92% at December 31, 2012, and 1.19% at March 31, 2012.
The decrease in nonperforming assets at March 31, 2013, from year-end 2012 was mainly as result of the payoff of the $1.5 million loan reported in the above table in the category, ‘troubled debt restructuring not included above’. The Company’s ratio of nonperforming assets to total assets continues to compare favorably to our peer group’s most recent ratio of 2.16% at December 31, 2012.
Total nonperforming originated loans represented 1.48% of total originated loans at March 31, 2013, compared to 1.65% of total originated loans at December 31, 2012, and 2.04% of total originated loans at March 31, 2012. A breakdown of nonperforming loans by portfolio segment is shown above. Commercial real estate loans represent the largest component of nonperforming loans. Nonperforming commercial real estate loans include two relationships totaling $9.8 million at March 31, 2013 and $10.0 million at December 31, 2012. Both of these relationships are considered impaired and have been charged down to fair value.
Loans past due 30-89 days and accruing interest increased from $13.3 million at December 31, 2012 to $20.1 million at March 31, 2013. Originated loans past due 30-89 days and accruing interest increased by $2.9 million to $10.9 million, while acquired loans past due 30-89 days and accruing increased by $4.0 million to $9.2 million at March 31, 2013. The increase in the originated portfolio was mainly one commercial relationship totaling $3.5 million, which is 90% guaranteed by a U.S. government agency. The increase in the acquired portfolio is mainly a result of matured loans that are in process of being renewed.
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 and the borrower could not obtain elsewhere. These modifications may include, among others, an extension of the term of the loan, and granting a period when interest-only payments can be made, with the principal payments made over the remaining term of the loan or at maturity. TDRs are included in the above table within the following categories: “loans 90 days past due and accruing”, “nonaccrual loans”, or “troubled debt restructurings not included above”. Loans in the latter category include loans that meet the definition of a TDR but are performing in accordance with the modified terms and therefore classified as accruing loans. As mentioned above, the decrease in this category from year-end 2012 reflects the payoff of the $1.5 million loan included at year-end.
At March 31, 2013 the Company had $7.4 million in TDRs, all were reported as nonaccrual and included in the table above, and two loans were more than 90 days past due with a total balance of $552,000.
In general, the Company places a loan on nonaccrual status if principal or interest payments become 90 days or more past due and/or management deems the collectability of the principal and/or interest to be in question, as well as when required by applicable regulations. Although in nonaccrual status, the Company may continue to receive payments on these loans. These payments are generally recorded as a reduction to principal, and interest income is recorded only after principal recovery is reasonably assured.
The Company’s recorded investment in loans and leases that are considered impaired totaled $24.3 million March 31, 2013, and $27.1 million at December 31, 2012. A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans consist of our non-homogenous nonaccrual loans, and all TDRs. Specific reserves on individually identified impaired loans that are not collateral dependent are measured based on the present value of expected future cash flows discounted at the original effective interest rate of each loan. For loans that are collateral dependent, impairment is measured based on the fair value of the collateral less estimated selling costs, and such impaired amounts are generally charged off.
The year-to-date average recorded investment in impaired loans and leases was $25.8 million at March 31, 2013, $31.8 million at December 31, 2012, and $33.0 million at March 31, 2012. At March 31, 2013 there was a specific reserve of $63,000 on impaired loans compared to $0 specific reserves at December 31, 2012, and $2.5 million of specific reserves at March 31, 2012. The majority of impaired loans are collateral dependent impaired loans that have limited exposure or require limited specific reserve because of the amount of collateral support with respect to these loans and previous charge-offs. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured. In these cases, interest is recognized on a cash basis. There was $35,000 and $48,000 interest income recognized for the periods ended March 31, 2013 and December 31, 2012, respectively, and $0 for March 31, 2012.
The ratio of the allowance to nonperforming loans (loans past due 90 days and accruing, nonaccrual loans and restructured troubled debt) was 66.2 times at March 31, 2013, up from 62.3 times in December 31, 2012, and down from 66.7 times at March 31, 2012. The Company’s nonperforming loans are mostly made up of collateral dependent impaired loans requiring little to no specific allowance due to the level of collateral available with respect to these loans and/or previous charge-offs. The Company’s peer group ratio was 101.15% as of December 31, 2012.
Management reviews the loan portfolio continuously for evidence of potential problem loans and leases. Potential problem loans and leases are loans and leases that are currently performing in accordance with contractual terms, but where known information about possible credit problems of the related borrowers causes management to have doubt as to the ability of such borrowers to comply with the present loan payment terms and may result in such loans and leases becoming nonperforming at some time in the future. Management considers loans and leases classified as Substandard, which continue to accrue interest, to be potential problem loans and leases.
The Company, through its internal loan review function, identified 45 commercial relationships from the originated portfolio and 43 commercial relationships from the acquired portfolio totaling $20.5 million and $23.8 million, respectively at March 31, 2013 that were potential problem loans. At December 31, 2012, the Company had identified 42 relationships totaling $25.4 million in the originated portfolio and 49 relationships totaling $30.2 million that were potential problem loans. Of the 45 commercial relationships in the originated portfolio that were Substandard, there are 6 relationships that equaled or exceeded $1.0 million, which in aggregate totaled $12.2 million, the largest of which is $2.8 million. Of the 43 commercial relationships from the acquired loan portfolio, there were 9 relationships that equaled or exceeded $1.0 million, which in aggregate totaled $16.7 million. The Company continues to monitor these potential problem relationships; however, management cannot predict the extent to which continued weak economic conditions or other factors may further impact borrowers. These loans remain in a performing status due to a variety of factors, including payment history, the value of collateral supporting the credits, and personal or government guarantees. These factors, when considered in the aggregate, give management reason to believe that the current risk exposure on these loans does not warrant accounting for these loans as nonperforming. However, these loans do exhibit certain risk factors, which have the potential to cause them to become nonperforming. Accordingly, management's attention is focused on these credits, which are reviewed on at least a quarterly basis.
Capital
Total equity was $446.8 million at March 31, 2013, an increase of $5.5 million or 1.2% from December 31, 2012, mainly a result the receipt of net income of $11.5 million less cash dividends of $5.5 million.
Additional paid-in capital increased by $2.4 million, from $334.6 million at December 31, 2012, to $337.1 million at March 31, 2013. The increase is primarily attributable to $968,000 related to shares issued for dividend reinvestment, $715,000 for the issuance of shares under the employee stock ownership plan, $475,000 million increase for the exercise of stock options and $307,000 related to stock-based compensation. Retained earnings increased by $6.0 million from $108.7 million at December 31, 2012, to $114.7 million at March 31, 2013. Accumulated other comprehensive loss increased from a net unrealized loss of $2.1 million at December 31, 2012 to a net unrealized loss of $5.2 million at March 31, 2013; reflecting a $3.5 million decrease in unrealized gains on available-for-sale securities due to market rates, and a $409,000 increase related to postretirement benefit plans. Under regulatory requirements, amounts reported as accumulated other comprehensive income/loss related to net unrealized gain or loss on available-for-sale securities and the funded status of the Company’s defined benefit post-retirement benefit plans do not increase or reduce regulatory capital and are not included in the calculation of risk-based capital and leverage ratios.
Cash dividends paid in the first three months of 2013 totaled approximately $5.5 million, representing 47.5% of year to date 2013 earnings. Cash dividends of $0.38 per common share paid in the first three months of 2013 were up 5.6% over cash dividends of $0.36 per common share paid in the first three months of 2012.
On October 25, 2011, the Company’s Board of Directors authorized a new stock repurchase plan for the Company to repurchase up to 335,000 shares of the Company’s common stock. Purchases may be made on the open market or in privately negotiated transactions over the 24 months following adoption of the plan. The repurchase program may be suspended, modified, or terminated at any time for any reason. As of the date of this report, no shares have been repurchased under the plan.
The Company and its banking subsidiaries are subject to various regulatory capital requirements administered by Federal banking agencies. The table below reflects the Company’s capital position at March 31, 2013, compared to the regulatory capital requirements for “well capitalized” institutions.
REGULATORY CAPITAL ANALYSIS
|
|
|
|
|
|
|
|
|
|
|
March 31, 2013
|
|
Actual
|
|
|
Well Capitalized Requirement
|
|
(dollar amounts in thousands)
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
Total Capital (to risk weighted assets)
|
|
$
|
411,419
|
|
|
|
12.93
|
%
|
|
$
|
318,073
|
|
|
|
10.00
|
%
|
Tier 1 Capital (to risk weighted assets)
|
|
$
|
386,368
|
|
|
|
12.15
|
%
|
|
$
|
190,844
|
|
|
|
6.00
|
%
|
Tier 1 Capital (to average assets)
|
|
$
|
386,368
|
|
|
|
8.11
|
%
|
|
$
|
238,311
|
|
|
|
5.00
|
%
|
As illustrated above, the Company’s capital ratios on March 31, 2013 remain above the minimum requirements for well capitalized institutions. Total capital as a percent of risk weighted assets was 12.9% as of December 31, 2012 and March 31, 2013 respectively. Tier 1 capital as a percent of risk weighted assets increased from 12.1% at the end of 2012 to 12.2% as of March 31, 2013. Tier 1 capital as a percent of average assets was 8.1% at March 31, 2013 up from 7.9% at year end December 31, 2012.
During the first quarter of 2010, the OCC notified the Company that it was requiring Mahopac National Bank (“Mahopac”), one of the Company’s three banking subsidiaries, to maintain certain minimum capital ratios at levels higher than those otherwise required by applicable regulations. The OCC was requiring Mahopac to maintain a Tier 1 capital to average assets ratio of 8.0%, a Tier 1 risk-based capital to risk-weighted capital ratio of 10.0% and a Total risk-based capital to risk-weighted assets ratio of 12.0%. Mahopac exceeded these minimum requirements at the time of the notification and continues to maintain ratios above these minimums. During the first quarter of 2013, the Company was notified by the OCC that it was no longer requiring Mahopac to maintain the higher capital ratios agreed to in 2010.
As of March 31, 2013, the capital ratios for the Company’s other four subsidiary banks also exceeded the minimum levels required to be considered well capitalized.
In December 2010, the oversight body of the Basel Committee on Banking Supervision published final rules on capital, leverage and liquidity. Implementation of these new capital and liquidity requirements has created significant uncertainty with respect to future requirements for financial institutions. Currently, the Company has issued $43.7 million of trust preferred securities which is included in the Tier 1 capital of the Company for regulatory capital purposes pursuant to regulatory guidelines. Under the recently enacted “Dodd-Frank Wall Street Reform and Consumer Protection Act,” outstanding trust preferred securities at the effective date of the Act will continue to qualify as Tier 1 capital for bank holding companies with total assets less than $15 billion. Trust preferred securities issued in the future, however, may no longer qualify as Tier 1 capital. The Company continues to monitor and evaluate the impact that Basel III may have on our capital ratios.
Deposits and Other Liabilities
Total deposits of $4.1 billion at March 31, 2013 increased $122.2 million or 3.1% from December 31, 2012. Growth over year-end 2012 was comprised mainly of increases in municipal interest bearing checking and municipal money market accounts.
Total deposits were up $1.2 billion or 42.4% over March 31, 2012. VIST Bank had total deposits of $1.2 billion as of the acquisition date of August 1, 2012 and was largely responsible for the increase in deposits.
The most significant source of funding for the Company is core deposits. Prior to December 31, 2011, the Company defined core deposits as total deposits less time deposits of $100,000 or more, brokered deposits and municipal money market deposits. A provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) made permanent an increase in the maximum amount of FDIC deposit insurance for financial institutions to $250,000 per depositor. That maximum had been $100,000 per depositor until 2009, when it was temporarily raised to $250,000. As a result of the permanently increased deposit insurance coverage, effective December 31, 2011 the Company defines core deposits as total deposits less time deposits of $250,000 or more (formerly $100,000), brokered deposits and municipal money market deposits.
Core deposits grew by $48.5 million or 1.5% to $3.3 billion at March 31, 2013 from $3.2 billion at year-end 2012. Core deposits represented 80.9% of total deposits at March 31, 2013, compared to 82.2% of total deposits at December 31, 2012.
Municipal money market and interest bearing checking accounts of $483.1 million at March 31, 2013 increased from $424.5 million at year-end 2012. As compared to March 31, 2012, municipal money market accounts and interest bearing checking accounts were up by $206.9 million or 42.0% to $700.0 million at March 31, 2103 largely due to the VIST acquisition. In general, there is a seasonal pattern to municipal deposits starting with a low point during July and August. Account balances tend to increase throughout the fall and into the winter months from tax deposits and receive an additional inflow at the end of March from the electronic deposit of state funds.
The Company uses both retail and wholesale repurchase agreements. Retail repurchase agreements are arrangements with local customers of the Company, in which the Company agrees to sell securities to the customer with an agreement to repurchase those securities at a specified later date. Retail repurchase agreements totaled $60.8 million at March 31, 2013, and $65.4 million at December 31, 2012. Management generally views local repurchase agreements as an alternative to large time deposits. The Company’s wholesale repurchase agreements are primarily with the FHLB and amounted to $133.3 million at March 31, 2013, which includes $33.3 million (net of a $3.3 million fair value adjustment) of wholesale repurchase agreements from the VIST Financial acquisition payable to another large financial institution. By comparison, wholesale repurchase agreements totaled $148.5 million at December 31, 2012.
The Company’s other borrowings totaled $156.6 million at March 31, 2013, up $44.8 million or 40.1% from $111.8 million at December 31, 2012. Borrowings at March 31, 2013 included $86.8 million in FHLB term advances, $49.9 million of overnight FHLB advances, and a $20.0 million advance from a bank. Borrowings at year-end 2012 included $111.8 million in FHLB term advances, $91.8 million of overnight FHLB advances, and a $20.0 million advance from a bank. The decrease in borrowings reflects the pay down of FHLB borrowings as a result of deposit growth. Of the $86.8 million in FHLB term advances at March 31, 2013, $81.6 million are due over one year. In 2007, the Company elected the fair value option under FASB ASC Topic 825 for a $10.0 million advance with the FHLB. The fair value of this advance decreased by $77,000 (net mark-to-market gain of $77,000) over the three months ended March 31, 2013.
Liquidity
The objective of liquidity management is to ensure the availability of adequate funding sources to satisfy the demand for credit, deposit withdrawals, and business investment opportunities. The Company’s large, stable core deposit base and strong capital position are the foundation for the Company’s liquidity position. The Company uses a variety of resources to meet its liquidity needs, which include deposits, cash and cash equivalents, short-term investments, cash flow from lending and investing activities, repurchase agreements, and borrowings. The Company’s Asset/Liability Management Committee
monitors asset and liability positions of the Company’s subsidiary banks individually and on a combined basis. The Committee reviews periodic reports on liquidity and interest rate sensitivity positions. Comparisons with industry and peer groups are also monitored. The Company’s strong reputation in the communities it serves, along with its strong financial condition, provides access to numerous sources of liquidity as described below. Management believes these diverse liquidity sources provide sufficient means to meet all demands on the Company’s liquidity that are reasonably likely to occur.
Core deposits, discussed above under “Deposits and Other Liabilities”, are a primary and low cost funding source obtained primarily through the Company’s branch network. In addition to core deposits, the Company uses non-core funding sources to support asset growth. These non-core funding sources include time deposits of $250,000 or more, brokered time deposits, national deposit listing services, municipal money market deposits, bank borrowings, securities sold under agreements to repurchase and term advances from the FHLB. Rates and terms are the primary determinants of the mix of these funding sources. Non-core funding sources, at March 31, 2013, increased by $98.6 million or 9.6% from $1.0 billion at December 31, 2012. Non-core funding sources, as a percentage of total liabilities, were 24.8% at March 31, 2013, compared to 23.4% at December 31, 2012. The increase in non-core funding sources was mainly due to increased municipal deposits and overnight borrowings from the FHLB.
Non-core funding sources may require securities to be pledged against the underlying liability. Securities carried at $1.2 billion and $986.8 million at March 31, 2013 and December 31, 2012, respectively, were either pledged or sold under agreements to repurchase. Pledged securities represented 78.2% of total securities at March 31, 2013, compared to 68.8% of total securities at December 31, 2012.
Cash and cash equivalents totaled $99.2 million as of March 31, 2013, down from $118.9 million at December 31, 2012. Short-term investments, consisting of securities due in one year or less, increased from $53.1 million at December 31, 2012, to $155.0 million on March 31, 2013. The Company also had $15.6 million of securities designated as trading securities at March 31, 2013.
Cash flow from the loan and investment portfolios provides a significant source of liquidity. These assets may have stated maturities in excess of one year, but have monthly principal reductions. Total mortgage-backed securities, at fair value, were $834.8 million at March 31, 2013 compared with $712.4 million at December 31, 2012. Outstanding principal balances of residential mortgage loans, consumer loans, and leases totaled approximately $944.2 million at March 31, 2013 as compared to $796.7 million at December 31, 2012. Aggregate amortization from monthly payments on these assets provides significant additional cash flow to the Company.
Liquidity is enhanced by ready access to national and regional wholesale funding sources including Federal funds purchased, repurchase agreements, brokered certificates of deposit, and FHLB advances. Through its subsidiary banks, the Company has borrowing relationships with the FHLB and correspondent banks, which provide secured and unsecured borrowing capacity. At March 31, 2013, the unused borrowing capacity on established lines with the FHLB was $1.1 billion. As members of the FHLB, the Company’s subsidiary banks can use certain unencumbered mortgage-related assets to secure additional borrowings from the FHLB. At March 31, 2013, total unencumbered residential mortgage loans of the Company were $532.5 million. Additional assets may also qualify as collateral for FHLB advances upon approval of the FHLB.
The Company has not identified any trends or circumstances that are reasonably likely to result in material increases or decreases in liquidity in the near term.
The Company continues to evaluate the potential impact on liquidity management of regulatory proposals, including Basel III and those required under the Dodd-Frank Act, as they continue to progress through the final rule-making process.
Interest rate risk is the primary market risk category associated with the Company’s operations. Interest rate risk refers to the volatility of earnings caused by changes in interest rates. The Company manages interest rate risk using income simulation to measure interest rate risk inherent in its on-balance sheet and off-balance sheet financial instruments at a given point in time. The simulation models are used to estimate the potential effect of interest rate shifts on net interest income for future periods. Each quarter, the Company’s Asset/Liability Management Committee reviews the simulation results to determine whether the exposure of net interest income to changes in interest rates remains within levels approved by the Company’s Board of Directors. The Committee also considers strategies to manage this exposure and incorporates these strategies into the investment and funding decisions of the Company. The Company does not currently use derivatives, such as interest rate swaps, to manage its interest rate risk exposure, but may consider such instruments in the future.
The Company’s Board of Directors has set a policy that interest rate risk exposure will remain within a range whereby net interest income will not decline by more than 10% in one year as a result of a 100 basis point parallel change in rates. Based upon the simulation analysis performed as of February 28, 2013 a 200 basis point parallel upward change in interest rates over a one-year time frame would result in a one-year increase in net interest income from the base case of approximately 0.74%, while a 100 basis point parallel decline in interest rates over a one-year period would result in an increase in one-year net interest income from the base case of 0.02%. The simulation assumes no balance sheet growth and no management action to address balance sheet mismatches.
In a rising rate environment (ex. Up 200 basis points over 12 months), net interest income is projected to remain slightly above the base case scenario for the first year of the simulation. As market rates begin to stabilize, funding cost increases begin to slow while higher replacement yields on loan and investment cashflows/repricings lead to a stabilization of net interest income in year 2 and a subsequent expansion in balance sheet spread thereafter.
Although the simulation model is useful in identifying potential exposure to interest rate movements, actual results may differ from those modeled as the repricing, maturity, and prepayment characteristics of financial instruments may change to a different degree than modeled. In addition, the model does not reflect actions that management may employ to manage the Company’s interest rate risk exposure. The Company’s current liquidity profile, capital position, and growth prospects, offer a level of flexibility for management to take actions that could offset some of the negative effects of unfavorable movements in interest rates. Management believes the current exposure to changes in interest rates is not significant in relation to the earnings and capital strength of the Company.
In addition to the simulation analysis, management uses an interest rate gap measure.
Table 10-Interest Rate Risk Analysis
below is a Condensed Static Gap Report, which illustrates the anticipated repricing intervals of assets and liabilities as of March 31, 2013. The Company’s one-year net interest rate gap was a negative $60.4 million or 1.21% of total assets at March 31, 2013 compared with a negative $72.4 million or 1.50% of total assets at December 31, 2012. A negative gap position exists when the amount of interest-bearing liabilities maturing or repricing exceeds the amount of interest-earning assets maturing or repricing within a particular time period. This analysis suggests that the Company’s net interest income is moderately more vulnerable to an increasing rate environment than it is to a prolonged declining interest rate environment. An interest rate gap measure could be significantly affected by external factors such as a rise or decline in interest rates, loan or securities prepayments, and deposit withdrawals.
Condensed Static Gap – March 31, 2013
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Repricing Interval
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(in thousands)
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Total
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0-3 months
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3-6 months
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6-12 months
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Cumulative 12 months
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Interest-earning assets
1
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|
$
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4,543,340
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|
|
$
|
1,143,006
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|
|
$
|
208,614
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|
|
$
|
328,998
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|
|
$
|
1,680,618
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|
Interest-bearing liabilities
|
|
|
3,695,012
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|
|
|
1,288,304
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|
|
|
215,894
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|
|
|
236,843
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|
|
|
1,741,041
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Net gap position
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|
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(145,298
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)
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|
|
(7,280
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)
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|
|
92,155
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|
|
|
(60,423
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)
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Net gap position as a percentage of total assets
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|
|
|
|
|
|
(2.91
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%)
|
|
|
(0.15
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%)
|
|
|
1.85
|
%
|
|
|
(1.21
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%)
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1
Balances of available securities are shown at amortized cost
Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31, 2013. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this Report on Form 10-Q the Company’s disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2013, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.