senior officers of the Company and its subsidiaries. The Company’s average investment in COLI was $35.1 million during 2009, compared to $31.1 million during 2008. The Company acquired $3.5 million of COLI in the acquisition of Sleepy Hollow during the second quarter of 2008.
The $1.6 million gain on Visa stock redemption in 2008 relates to the proceeds received from the Company’s allocation of the Visa IPO, and consists of a $1.2 million gain on the partial redemption of Visa stock and a $0.4 million partial reversal of a fourth quarter 2007 accrual for indemnification charges. Visa withheld a portion of the shares allocated to its member banks to create an escrow account to cover the costs and liabilities associated with certain litigation for which its member banks are obligated to indemnify Visa. Visa’s funding of this escrow account allowed member banks to reverse litigation related accruals made in the fourth quarter of 2007, up to each bank’s proportionate membership interest in the $3.0 billion used to fund the escrow account.
For the second quarter 2009, net gains on the sales of loans totaled $566,000, compared to net gains of $45,000 for the second quarter of 2008. For the six months ending June 30, gains were $967,000 in 2009 and $42,000 in 2008. The increase in gains on loan sales in 2009 is mainly a result of increased residential mortgage refinancing activity. Low market interest rates have led to a significant increase in the volume of homeowners refinancing existing mortgages to lower fixed rates. To manage interest rate risk exposures, the Company sold certain fixed rate loan production that had rates below or maturities greater than the thresholds set by the Company’s Asset/Liability Committee.
Other income decreased by $24,000 in the second quarter of 2009, compared to the same period in 2008. For the six months ended June 30, 2009, other income was down $281,000 compared to the same period prior year. Other income includes income from the Company’s investment in a Small Business Investment Company, Cephas Capital Partners, L.P. (“Cephas”). Because the Company’s percentage ownership in Cephas exceeds 20%, the equity method of accounting is utilized, such that the Company’s percentage of Cephas’ income is recognized as income on its investment; and likewise, any loss by Cephas is recognized as a loss on the Company’s investment. For three and six months ended June 30, 2009, the Company recognized income from this investment of $89,000, and $118,000, respectively, compared with income of $113,000, and $288,000 in the same periods prior year. The Company believes that, as of June 30, 2009, there is no impairment with respect to this investment.
For the three and six months ended June 30, 2009, net gains on the sales of available-for-sale securities totaled $19,000 and $26,000, respectively, compared to net gains of $159,000 and $406,000 for the same periods in 2008. Management may periodically sell available-for-sale securities for liquidity purposes, to improve yields, or to adjust the risk profile of the portfolio. Net gains on sales of available-for-sale securities in 2008 reflect sales of available-for-sale securities for which prices were favorably impacted by the Federal Reserve actions to reduce interest rates in 2008.
Noninterest expense for the second quarter of 2009 was $24.7 million, an increase of 13.4% over noninterest expense of $21.8 million for the second quarter of 2008. For the six months ending June 30, noninterest expense totaled $48.0 million in 2009 and $42.1 million in 2008.
Personnel-related expense increased by $1.2 million or 9.4% in the second quarter of 2009 over the same period in 2008, with an increase of $2.0 million for the six month period ending June 30. Salaries and employee benefits associated with an increased number of average full time equivalent employees (“FTEs”), annual salary adjustments and higher benefit related expenses contributed to the increase over 2008. Year-to-date June 30, 2009 average FTEs of 717 were up from 669 at June 30, 2008. The acquisition of Sleepy Hollow included the addition of six banking offices, including one limited service office, and 30 FTEs.
Expenses related to bank premises, furniture and fixtures did not change in the second quarter of 2009 compared to the same quarter of the prior year. For the six month period ending June 30, this expense increased $588,000 in 2009. Additions to the Company’s branch network, as well as higher real estate taxes and utility costs contributed to the increased expenses for premises and furniture and fixtures. The acquisition of Sleepy Hollow in May of 2008 added six banking offices to the Company’s branch network.
Professional fees for the second quarter of 2009 decreased by $38,000 or 4.9% compared to the second quarter of 2008. Professional fees include amounts paid to outside consultants for assistance on projects or initiatives. For the six month period ending June 30, 2009 this expense increased $200,000 or 14.2%. The second quarter decline is due primarily to higher expense in the second quarter of 2008 incidental to the acquisition of Sleepy Hollow.
FDIC deposit insurance expense increased by $2.0 million and $2.3 million for the three and six months ended June 30, 2009, over the same prior year periods. The increase reflects higher insurance premiums and a special deposit insurance assessment of $1.4 million in the second quarter of 2009. Deposit insurance expense in 2008 was also favorably impacted by the Company’s utilization of available credits to offset deposit assessments; these credits were fully utilized in 2008. The increase in 2009 was also partly related to the additional 10 basis point assessment paid on covered transaction accounts exceeding $250,000 under the Temporary Liquidity Guaranty Program.
In December 2008, the FDIC raised insurance assessments by seven basis points, effective beginning with the assessments payable in the second quarter of 2009. On February 27, 2009, the FDIC approved an interim rule for a special assessment of $0.20 per $100.0 in domestic deposits to restore the Deposit Insurance Fund. Recent legislation approved by lawmakers on May 19, 2009, “The Depositor Protection Act of 2009”, increased the FDIC’s borrowing authority with the U.S. Treasury to $100.0 billion from $30.0 billion. As a result of this increased borrowing authority, the FDIC voted 4 to 1 to reduce the size of the special assessment to 5 basis points on an expanded base of total assets less Tier 1 capital (capped at 10 basis points times an institution’s domestic deposits as of June 30, 2009). The Company accrued a charge of $1.4 million for the special assessment in the quarter ending June 30, 2009.
Other operating expenses decreased by $241,000 or 7.2% and increased by $545,000 or 8.3% for the three and six months ended June 30, 2009 over the same periods prior year. Contributing to the year-to-date increases over prior year were the following: telephone (up $178,000); legal expenses (up $115,000); audit and tax fees (up $112,000); and loan origination related expenses (up $178,000). Printing and supplies were down $99,000 and $115,000 for the three and six months ended June 30, 2009 from the same periods in 2008.
Income Tax Expense
The provision for income taxes provides for Federal and New York State income taxes. The provision for the second quarter of 2009 was $3.5 million, compared to $3.3 million for the same period in 2008. For the six month period ending June 30, the tax provision totaled $7.2 million in 2009 and $7.1 million in 2008. The Company’s effective tax rate for the second quarter of 2009 was 32.0% compared to 31.2% for the second quarter of 2008. For the six month period ending June 30, the Company’s effective tax rate was 32.2% in 2009 and 32.4% in 2008.
FINANCIAL CONDITION
Total assets were $3.0 billion at June 30, 2009, up $100.3 million or 3.5% over December 31, 2008, and up $262.9 million or 9.7% over June 30, 2008. The acquisition of Sleepy Hollow in May 2008 added $269.1 million of assets, including $151.2 million of loans, $51.5 million of securities, and $5.8 million of cash and equivalents. Asset growth over year-end 2008 was mainly in available-for-sale securities, which were up $81.8 million. Total deposits at June 30, 2009 were up $154.8 million or 7.3% over December 31, 2008, driven by increases in savings and money market balances as well as in time deposits.
Loans and leases totaled $1.8 billion or 62.0% of total assets at June 30, 2009, compared to $1.8 billion or 63.4% of total assets at December 31, 2008. Commercial real estate loans at June 30, 2009 were up $46.5 million or 7.5% over December 31, 2008, while commercial loans were unchanged during the period. Demand for residential mortgage loans was strong during the first quarter of 2009, largely driven by refinancings in the current low interest rate environment. The Company originated $69.2 million of residential mortgage loans for sale during the first six months of 2009 and sold $68.4 million during the same period. The Company sells certain fixed rate residential mortgage loans in the secondary market because of interest rate risk considerations. The consumer and leasing portfolios at June 30, 2009 were flat compared to year-end 2008.
Nonperforming loans (loans on nonaccrual, loans past due 90 days or more and still accruing interest, and loans restructured in a troubled debt restructuring) were $25.7 million at June 30, 2009, up from $16.0 million at December 31, 2008, and up $12.6 million from June 30, 2008. Nonperforming loans represented 1.40% of total loans at June 30, 2009, compared to 0.88% of total loans at December 31, 2008, and 0.73% of total loans at June 30, 2008. For the second quarter of 2009, net charge-offs were $1.0 million, up from $615,000 in the same period of 2008, and up compared to $728,000 for the first quarter of 2009. In general, the increase in nonperforming loans is reflective of the current weak economic conditions.
Over the past year, there has been significant attention to subprime consumer real estate lending in the media. The Company has not engaged in the origination or purchase of subprime loans as a line of business. As a result, gross losses in the Company’s residential portfolio have been relatively low, totaling $369,000 for the six months ended June 30, 2009, compared to $16,000 for the same period in 2008. The combined nonperforming loan balances in our construction and home equity lending portfolios represented less than 0.13% of total loans at June 30, 2009.
As of June 30, 2009, total securities were $923.8 million or 31.1% of total assets, compared to $856.7 million or 29.9% of total assets at year-end 2008. The increase over year-end 2008 was mainly in debt obligations of U.S. government sponsored
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enterprises and mortgage-backed securities issued by U.S. government sponsored enterprises and was partially due to the seasonal inflow of municipal deposits in the first quarter of the year. The portfolio is comprised primarily of mortgage-backed securities, obligations of U.S. Government sponsored entities, and obligations of states and political subdivisions. As of June 30, 2009, the Company had $14.9 million of non-agency issued mortgage-backed securities. The Company has no investments in preferred stock of U.S. Government sponsored enterprises 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 determine if there exists other-than-temporary impairment as defined under generally accepted accounting principles. Management does not believe that the investment securities that were in an unrealized loss position as of June 30, 2009, represent an other-than-temporary impairment. Total gross unrealized losses 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 quality of the investment securities. The Company maintains a trading portfolio valued at a fair value of $34.6 million as of June 30, 2009, compared to $38.1 million at December 31, 2008. The decrease in the portfolio reflects maturities or payments during 2009. For the six months ended June 30, 2009, mark-to-market gains related to the securities trading portfolio were $98,000.
Total deposits were $2.3 billion at June 30, 2009, up $154.8 million or 7.3% over December 31, 2008, and up $231.6 million or 11.3% over June 30, 2008. The Company acquired $229.0 million of deposits, including $109.2 million of time deposits, $93.1 million of savings and money market, and $24.5 million of noninterest bearing deposits, in the acquisition of Sleepy Hollow in May 2008. The growth in total deposits from December 31, 2008 was mainly in money market and savings balances, which were up $104.7 million or 10.7%. The increase in money market and savings balances was mainly in municipal deposits and is partially due to the seasonal nature of these deposits. Time deposit balances were up $64.2 million or 9.1% at June 30, 2009 compared to December 31, 2008.
Other borrowings decreased $80.0 million or 29.1% from year-end 2008 to $194.8 million at June 30, 2009 as the Company used deposit inflows to reduce advances from the FHLB.
Capital
Total equity was $229.3 million at June 31, 2009, an increase of $9.9 million from December 31, 2008. Additional paid-in capital increased by $1.3 million, from $152.8 million at December 31, 2008, to $154.2 million at June 30, 2009, reflecting $977,000 in proceeds from stock option exercises and $435,000 related to stock-based compensation. Retained earnings increased by $8.6 million from $73.8 million at December 31, 2008, to $82.3 million at June 30, 2009, reflecting net income of $15.2 million less dividends paid of $6.6 million. Accumulated other comprehensive loss remained relatively flat from a net unrealized loss of $7.6 million at December 31, 2008, to a net unrealized loss of $7.5 million at June 30, 2009, reflecting an increase in unrealized gains on available-for-sale securities due to lower market rates, offset by amounts recognized in other comprehensive income 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 six months of 2009 totaled approximately $6.6 million, representing 43.5% of year to date 2009 earnings. Cash dividends of $0.34 per common share paid in the first and second quarters of 2009 were each up 6.3% over cash dividends of $0.32 per common share paid in the first and second quarters of 2008.
On July 22, 2008, the Company’s Board of Directors approved a stock repurchase plan (the “2008 Plan”). The 2008 Plan authorizes the repurchase of up to 150,000 shares of the Company’s outstanding common stock over a two-year period. The Company repurchased 5,000 shares of common stock at an average price of $35.51 under the 2008 Plan during the first quarter and none during the second quarter of 2009. Since inception of the 2008 Plan, the Company has repurchased 6,500 shares at an average price of $36.21.
In the second quarter of 2009, Tompkins issued $18.6 million aggregate liquidation amount of Trust Preferred Securities, through Tompkins Capital Trust I. The proceeds from the issuance of the Trust Preferred Securities, together with Tompkins’ capital contribution to the trust, were used to acquire Tompkins’ Subordinated Debentures, totaling $19.1 million, which are due concurrently with the Trust Preferred Securities.
The Trust Preferred Securities have a 30 year maturity, and carry a fixed rate of interest of 7.0%. The Trust Preferred Securities have a liquidation amount of $1,000 per security. The Company has retained the right to redeem the Trust Preferred Securities at par (plus accrued but unpaid interest) at a date which is no earlier than 5 years from the date of issuance. Commencing in 2019, and during specified annual windows thereafter, holders may convert the Trust Preferred Securities into shares of the Company’s common stock at a conversion price equal to the greater of (i) $41.35, or (ii) the
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average closing price of Tompkins Financial Corporation’s common stock during the first three months of the year in which the conversion will be completed.
The Company has guaranteed the distributions with respect to, and amounts payable upon liquidation or redemption of, the Trust Preferred Securities on a subordinated basis as and to the extent set forth in the Preferred Securities Guarantee Agreement entered into on April 10, 2009, between the Company and Wilmington Trust Company, as Preferred Guarantee Trustee.
In accordance with the applicable accounting standards related to variable interest entities, the accounts of Tompkins Capital Trust I will not be included in the Company’s consolidated financial statements. However, $18.6 million in Tompkins’ Subordinated Debentures issued to Tompkins Capital Trust I will be included in the Tier 1 capital of the Company for regulatory capital purposes pursuant to regulatory guidelines.
The Company and its banking subsidiaries are subject to various regulatory capital requirements administered by Federal banking agencies. Management believes the Company and its subsidiaries meet all capital adequacy requirements to which they are subject. The table below reflects the Company’s capital position at June 30, 2009, compared to the regulatory capital requirements for “well capitalized” institutions.
REGULATORY CAPITAL ANALYSIS June 30, 2009
| | | | | | | | | |
| | | | | | | | | | | | | | |
| | Actual | | Well Capitalized
Requirement | |
(Dollar amounts in thousands) | | Amount | | Ratio | | Amount | | Ratio | |
| | | | | | | | | | |
Total Capital (to risk weighted assets) | | $ | 235,808 | | 11.7 | % | | $ | 200,780 | | 10.0 | % | |
Tier I Capital (to risk weighted assets) | | $ | 214,333 | | 10.7 | % | | $ | 120,468 | | 6.0 | % | |
Tier I Capital (to average assets) | | $ | 214,333 | | 7.3 | % | | $ | 146,285 | | 5.0 | % | |
| | | | | | | | | | | | | | |
As illustrated above, the Company’s capital ratios on June 30, 2009 remain above the minimum requirements for well capitalized institutions. As of June 30, 2009, the capital ratios for each of the Company’s subsidiary banks also exceeded the minimum levels required to be considered well capitalized.
Allowance for Loan and Lease Losses and Nonperforming Assets
Management reviews the adequacy of the allowance for loan and lease losses (the “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 Company’s portfolio and the material effect that assumption could have on the Company’s results of operations. Factors considered in determining the adequacy of the allowance and the related provision include: management’s approach to granting new credit; the ongoing monitoring of existing credits by the internal and external loan review functions; the growth and composition of the loan and lease portfolio; the level and trend of market interest rates; comments received during the course of regulatory examinations; current local economic conditions; past due and nonperforming loan statistics; estimated collateral values; and a historical review of loan and lease loss experience.
Based upon consideration of the above factors, management believes that the allowance is adequate to provide for the risk of loss inherent in the current loan and lease portfolio as of June 30, 2009. Should any of the factors considered by management in evaluating the adequacy of the allowance change, the Company’s estimate of probable loan losses could also change, which could affect the level of future provisions for possible loan and lease losses.
Activity in the Company’s allowance for loan and lease losses during the first six months of 2009 and 2008 and for the 12 months ended December 31, 2008, is illustrated in the table below.
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ANALYSIS OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES(In thousands)
| | | | | | | | | | |
| | | | | | | | | | | |
| | Six months ended
06/30/09 | | Twelve months ended
12/31/08 | | Six months ended
06/30/08 | |
| | | | | | | | |
Average loans and leases outstanding during the period | | $ | 1,818,307 | | $ | 1,612,716 | | $ | 1,506,250 | |
| | | | | | | | | | | |
Total loans and leases outstanding at end of period | | $ | 1,841,198 | | $ | 1,817,531 | | $ | 1,652,831 | |
| | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | |
ALLOWANCE FOR LOAN AND LEASE LOSSES | | | | | | | | | | |
| | | | | | | | | | | |
Beginning balance | | $ | 18,672 | | $ | 14,607 | | $ | 14,607 | |
| | | | | | | | | | | |
Provision for loan and lease losses | | | 4,403 | | | 5,428 | | | 1,808 | |
Loans charged off | | | (2,069 | ) | | (3,290 | ) | | (1,293 | ) |
Loan recoveries | | | 313 | | | 442 | | | 228 | |
| | | | | | | | | | | |
Net charge-offs | | | (1,756 | ) | | (2,848 | ) | | (1,065 | ) |
| | | | | | | | | | | |
Allowance acquired in purchase acquisition | | | 0 | | | 1,485 | | | 1,485 | |
| | | | | | | | | | | |
Ending balance | | $ | 21,319 | | $ | 18,672 | | $ | 16,835 | |
| | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | |
Allowance for loan and lease losses to total loans and leases | | | 1.16 | % | | 1.03 | % | | 1.02 | % |
| | | | | | | | | | | |
Annualized net charge-offs to average loans and leases | | | 0.19 | % | | 0.18 | % | | 0.14 | % |
| | | | | | | | | | | |
As of June 30, 2009, the allowance was $21.3 million or 1.16% of total loans and leases outstanding. This represents an increase of 13 basis points from December 31, 2008 and an increase of 14 basis points from June 30, 2008. The provision for loan and lease losses was $2.4 million and $4.4 million for the three and six months ended June 30, 2009 compared to $1.2 million and $1.8 million for the three and six months ended June 30, 2008. The increase in the provision in 2009 over the comparable periods in 2008, reflects the increase in net charge-offs and nonperforming loans, growth in total loans from June 30, 2008 to June 30, 2009, as well as concerns over weak economic conditions and uncertain real estate markets.
Net charge-offs for the three and six months ended June 30, 2009 were $1.0 million and $1.8 million compared to $614,000 and $1.1 million in the comparable year ago periods. Annualized net charge-offs for the first six months of 2009 represented 0.19% of average loans, up from 0.14% for the first six months of 2008, but is favorable to our peer group ratio of 0.74% at March 31, 2009. A continuation or worsening of current economic conditions may result in further declines in asset quality measures and increases in loan and lease losses.
The allowance coverage of nonperforming loans (loans past due 90 days and accruing, nonaccrual loans, and restructured troubled debt) was 0.83 times at June 30, 2009, compared to 1.17 times at December 31, 2008, and 1.39 times at June 30, 2008.
NONPERFORMING ASSETS (In thousands)
| | | | | | | | | | |
| | | | | | | | | | | |
| | 06/30/09 | | 12/31/08 | | 06/30/08 | |
| | | | | | | | |
Nonaccrual loans and leases | | $ | 24,662 | | $ | 15,798 | | $ | 10,552 | |
Loans past due 90 days and accruing | | | 1,073 | | | 161 | | | 1,422 | |
Troubled debt restructuring not included above | | | 0 | | | 69 | | | 135 | |
| | | | | | | | | | | |
Total nonperforming loans | | | 25,735 | | | 16,028 | | | 12,109 | |
| | | | | | | | | | | |
Other real estate, net of allowances | | | 68 | | | 110 | | | 481 | |
| | | | | | | | | | | |
Total nonperforming assets | | $ | 25,803 | | $ | 16,138 | | $ | 12,590 | |
| | | | | | | | | | | |
Total nonperforming loans and leases as a percentage of total loans and leases | | | 1.40 | % | | 0.88 | % | | 0.73 | % |
| | | | | | | | | | | |
Total nonperforming assets as a percentage of total assets | | | 0.87 | % | | 0.56 | % | | 0.47 | % |
| | | | | | | | | | | |
The level of nonperforming assets at June 30, 2009, and 2008, and December 31, 2008 is illustrated in the table above. Nonperforming assets of $25.8 million at June 30, 2009, were up from December 31, 2008, and June 30, 2008. The increase was partially due to the addition of four credit relationships totaling $6.3 million during the second quarter of 2009. In general, the increasing trend in nonperforming assets is reflective of the current weak economic conditions, which has pressured real estate values in some markets and stressed the financial conditions of various commercial borrowers. Approximately $7.8 million of nonperforming loans at June 30, 2009, were secured by U.S. government guarantees, while $3.6 million were secured by one-to-four family residential properties.
Nonperforming assets represented 0.87% of total assets at June 30, 2009, compared to 0.56% at December 31, 2008, and 0.47% at June 30, 2008. Although up over the same period prior year, the Company’s ratio of nonperforming assets to total assets of 0.87% continues to compare favorably to our peer group ratio of 2.63% at March 31, 2009.
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As of June 30, 2009, the Company’s recorded investment in loans and leases that are considered impaired totaled $20.9 million compared to $9.7 million at December 31, 2008, and $8.8 million at June 30, 2008. The $20.9 million of impaired loans at June 30, 2009, had related allowances of $1.1 million, the $9.7 million of impaired loans at December 31, 2008, had related allowances of $520,000, and the $8.8 million at June 30, 2008, had related allowances of $657,000.
Potential problem loans and leases are loans and leases that are currently performing, 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 disclosure of such loans and leases as nonperforming at some time in the future. Management considers loans and leases classified as Substandard that continue to accrue interest to be potential problem loans and leases. At June 30, 2009, the Company’s internal loan review function had identified 55 commercial relationships, totaling $39.6 million, which it classified as Substandard, which continue to accrue interest. As of December 31, 2008, the Company’s internal loan review function had classified 36 commercial relationships as Substandard totaling $20.3 million, which continued to accrue interest. 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 is not significant. 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 loans, which are reviewed at least quarterly. The increase in the dollar amount of commercial relationships classified as Substandard and still accruing interest between December 31, 2008 and June 30, 2009 was mainly due to the addition of six larger commercial relationships totaling $23.8 million that were classified as Substandard and accruing at June 30, 2009, and were not classified as Substandard at December 31, 2008.
Deposits and Other Liabilities
Total deposits of $2.3 billion at June 30, 2009 increased $154.8 million or 7.3% from December 31, 2008. A $104.7 million increase in interest checking, savings and money market balances and a $64.2 million increase in time deposits was partially offset by a $14.1 million decline in noninterest bearing deposits. Growth in municipal deposits accounted for a majority of the increase in savings and money market balances from year end 2008. With interest rates on time deposits lower and more in line with money market rates, municipalities are placing tax deposits into money market accounts. Municipal deposit balances are somewhat seasonal, increasing as tax deposits are collected and decreasing as these monies are used by the municipality. Total deposits were up $231.6 million or 11.3% over June 30, 2008. The increase was primarily due to a $146.9 million increase in savings and money market accounts of which $90.0 million was attributable to growth in municipal deposits. Additionally, time deposits increased $68.3 million over June 30, 2008, of which $40.0 million was due to the acquisition of brokered time deposits. The Sleepy Hollow acquisition during the second quarter of 2008 added $229.0 million at the time of the acquisition and expanded the existing customer deposit base. In 2007 and 2008, the Federal Reserve reduced short-term market rates, which led to a decrease in rates paid on deposits.
The Company’s primary funding source is core deposits, defined as total deposits less time deposits of $100,000 or more, brokered time deposits, and municipal money market deposits. Core deposits increased $34.9 million or 2.1% over December 31, 2008 to $1.7 billion, and represented 72.8% of total deposits at June 30, 2009 compared to 76.4% of total deposits at December 31, 2008. The increase in core deposits is attributable to the same factors discussed above with respect to the increase in total deposits.
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 $32.0 million at June 30, 2009, and $42.1 million at December 31, 2008. Management generally views local repurchase agreements as an alternative to large time deposits. The Company’s wholesale repurchase agreements are primarily with the Federal Home Loan Bank (“FHLB”) and amounted to $158.0 million at June 30, 2009 and $153.2 million at December 31, 2008. Included in the $158.0 million of wholesale repurchase agreements at June 30, 2009, are $16.0 million of repurchase agreements with the FHLB where the Company elected to adopt the fair value option under SFAS 159. The fair value of these borrowings decreased by $128,000 (net mark-to-market pre-tax gain of $128,000) over the six months ended June 30, 2009.
The Company’s other borrowings totaled $194.8 million at June 30, 2009, down $80.0 million or 29.1% from $274.8 million at December 31, 2008. Borrowings at June 30, 2009 included $175.6 million in term advances, and a $19.0 million advance from a bank. Borrowings at year-end 2008 included $177.2 million in term advances, $73.5 million of overnight FHLB advances and a $24.0 million advance from a bank. The decrease in borrowings reflects the pay down of FHLB borrowings as a result of deposit growth. Of the $175.6 million of the FHLB term advances at June 30, 2009, $160.6 million are due over one year. The Company elected the fair value option under SFAS 159 for a $10.0 million advance with the FHLB. The fair value of this advance decreased by $560,000 (net mark-to-market gain of $560,000) over the six months ended June 30, 2009.
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As previously mentioned, Tompkins issued $18.6 million of 7.0% cumulative Trust Preferred Securities during the second quarter of 2009 through Tompkins Capital Trust I. The proceeds from the issuance of the Trust Preferred Securities, together with Tompkins’ capital contribution of $574,000 to the trust, were used to acquire Tompkins’ Subordinated Debentures, totaling $19.1 million, which are due concurrently with the Trust Preferred Securities. The acquisition of Sleepy Hollow in May 2008 included the assumption of additional trust preferred securities. The outstanding balance of these securities as of June 30, 2009 was $3.9 million.
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. Asset and liability positions are monitored primarily through Asset/Liability Management Committees of the Company’s subsidiary banks individually and on a combined basis. These Committees review 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 $100,000 or more, brokered time deposits, municipal money market deposits, 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 increased by $33.6 million or 3.5% from December 31, 2008 to $1.0 billion at June 30, 2009. Non-core funding sources, as a percentage of total liabilities, were 36.8% at June 30, 2009, which is equal to December 31, 2008. The increase in non-core funding sources was mainly in municipal money market deposit balances and brokered time deposits, partially offset by a decrease in FHLB advances.
Non-core funding sources may require securities to be pledged against the underlying liability. Securities carried at $653.3 million and $677.8 million at June 30, 2009 and December 31, 2008, respectively, were either pledged or sold under agreements to repurchase. Pledged securities represented 70.7% of total securities at June 30, 2009, compared to 79.1% of total securities at December 31, 2008.
Cash and cash equivalents totaled $68.0 million at June 30, 2009, up from $52.2 million at December 31, 2008. Short-term investments, consisting of securities due in one year or less, decreased from $41.9 million at December 31, 2008, to $29.1 million at June 30, 2009. The Company also has $34.6 million of securities designated as trading securities.
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 available-for-sale mortgage-backed securities, at book value, were $504.2 million at June 30, 2009, compared with $469.2 million at December 31, 2008. Outstanding principal balances of residential mortgage loans, consumer loans, and leases totaled approximately $709.7 million at June 30, 2009, as compared to $732.5 million at December 31, 2008. 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 June 30, 2009 the unused borrowing capacity on established lines with the FHLB was $435.8 million. 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 June 30, 2009, total unencumbered residential mortgage loans of the Company were $136.7 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.
37
| |
Item 3. | Quantitative and Qualitative Disclosure About Market Risk |
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 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 May 31, 2009, 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 0.7%, while a 100 basis point parallel decline in interest rates over a one-year period would result in a marginal decrease in one-year net interest income from the base case of 0.4%. The simulation assumes no balance sheet growth and no management action to address balance sheet mismatches.
The positive exposure in a rising interest rate environment is mainly driven by the repricing assumptions of the Company’s core deposit base are met with slightly higher increases to asset yields. Longer-term, the impact of a rising rate environment is positive as the asset base continues to reset at higher levels, while the repricing of the rate sensitive liabilities moderates. The moderate exposure in the 100 basis point decline scenario results from the Company’s assets repricing downward to a greater degree than the rates on the Company’s interest-bearing liabilities, mainly deposits. Rates on savings and money market accounts are at low levels as a result of the historically low interest rate environment experienced in recent years. In addition, the model assumes that prepayments accelerate in the down interest rate environment resulting in additional pressure on asset yields as proceeds are reinvested at lower rates.
In our most recent simulation, the base case scenario, which assumes interest rates remain unchanged from the date of the simulation, showed a relatively flat net interest margin during the remainder of 2009.
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 its 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. The table below is a Condensed Static Gap Report, which illustrates the anticipated repricing intervals of assets and liabilities as of June 30, 2009. The Company’s one-year net interest rate gap was a negative $83,000 or 2.79% of total assets at June 30, 2009, compared with a negative $12,000 or 0.44% of total assets at December 31, 2008. 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 more vulnerable to a 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 – June 30, 2009 | | Repricing Interval | |
(Dollar amounts in thousands) | | Total | | 0-3 months | | 3-6 months | | 6-12 months | | Cumulative
12 months | |
| | | | | | | | | | | | |
| | | | | | | | | | | |
Interest-earning assets | | $ | 2,759,179 | | $ | 717,628 | | $ | 155,901 | | $ | 355,281 | | $ | 1,228,810 | |
Interest-bearing liabilities | | | 2,236,754 | | | 913,180 | | | 191,148 | | | 207,298 | | $ | 1,311,626 | |
| | | | | | | | | | | | | | | | | |
Net gap position | | | | | | (195,552 | ) | | (35,247 | ) | | 147,983 | | | (82,816 | ) |
| | | | | | | | | | | | | | | | | |
Net gap position as a percentage of total assets | | | | | | (6.59 | )% | | (1.19 | )% | | 4.99 | % | | (2.79 | )% |
| | | | | | | | | | | | | | | | | |
38
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Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
The Company’s management, including its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operations 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 June 30, 2009. 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 in providing reasonable assurance that any information required to be disclosed by the Company in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that material information relating to the Company and its subsidiaries is made known to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s second quarter ended June 30, 2009, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
The Company is involved in legal proceedings in the normal course of business, none of which are expected to have a material adverse impact on the financial condition or results of operations of the Company.
There have been no material changes in the risk factors previously disclosed under Item 1A. of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.
| |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Issuer Purchases of Equity Securities
The following table includes all Company repurchases made on a monthly basis during the period covered by this Quarterly Report on Form 10-Q, including those made pursuant to publicly announced plans or programs.
| | | | | | | | | | | | | |
| | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | |
Period | | (a) | | (b) | | (c) | | (d) | |
| | | | | | | | | | |
April 1, 2009 through
April 30, 2009 | | | 0 | | | 0.00 | | | 0 | | | 143,500 | |
| | | | | | | | | | | | | |
May 1, 2009 through
May 31, 2009 | | | 1,361 | | | 45.01 | | | 0 | | | 143,500 | |
| | | | | | | | | | | | | |
June 1, 2009 through
June 30, 2009 | | | 0 | | | 0.00 | | | 0 | | | 143,500 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Total | | | 1,361 | | $ | 45.01 | | | 0 | | | 143,500 | |
| | | | | | | | | | | | | | |
39
On July 22, 2008, the Company’s Board of Directors approved a stock repurchase plan (the “2008 Plan”). The 2008 Plan authorizes the repurchase of up to 150,000 shares of the Company’s outstanding common stock over a two-year period. The Company did not purchase any shares under the 2008 Plan during the second quarter of 2009. The Company purchased 5,000 shares at an average price of $35.51 during the first quarter of 2009.
Included above are 1,361 shares purchased in May 2009, at an average cost of $45.01, by the trustee of the rabbi trust established by the Company under the Company’s Stock Retainer Plan For Eligible Directors of Tompkins Financial Corporation and Participating Subsidiaries, and were part of the director deferred compensation under that plan. Shares purchased under the rabbi trust are not part of the 2008 Plan.
Recent Sales of Unregistered Securities
Recent sales of trust preferred securities were previously disclosed on the Company’s Current Report on Form 8-K.
| |
Item 3 | Defaults Upon Senior Securities |
| |
| None |
| |
Item 4 | Submission of Matters to a Vote of Security Holders |
(a) The Annual Meeting of Stockholders of the Company was held on May 11, 2009.
(b) All director nominees were elected. At the meeting, the stockholders elected the following twelve directors for a one year term expiring in 2010:
| | | | | | | | | | | | | |
% Votes
Cast | | % of Shares
Outstanding | | Director | | Number of
Shares Voted For | | Number of
Shares Withheld | |
| | | | | | | | | | |
7,697,000 | | 9,700,328 | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | |
97.36 | | 77.26 | | | | Russell K. Achzet | | 7,494,156 | | | 202,836 | | |
| | | | | | | | | | | | | |
81.16 | | 64.40 | | | | John E. Alexander | | 6,247,101 | | | 1,449,891 | | |
| | | | | | | | | | | | | |
99.10 | | 78.63 | | | | Daniel J. Fessenden | | 7,627,666 | | | 69,326 | | |
| | | | | | | | | | | | | |
97.95 | | 77.72 | | | | James W. Fulmer | | 7,539,068 | | | 157,924 | | |
| | | | | | | | | | | | | |
97.69 | | 77.51 | | | | James R. Hardie | | 7,519,146 | | | 177,846 | | |
| | | | | | | | | | | | | |
99.06 | | 78.61 | | | | Elizabeth W. Harrison | | 7,625,003 | | | 71,988 | | |
| | | | | | | | | | | | | |
98.93 | | 78.50 | | | | Patricia A. Johnson | | 7,614,371 | | | 82,621 | | |
| | | | | | | | | | | | | |
75.00 | | 59.51 | | | | Hunter R. Rawlings, III | | 5,772,763 | | | 1,924,229 | | |
| | | | | | | | | | | | | |
99.07 | | 78.61 | | | | Thomas R. Rochon | | 7,625,159 | | | 71,833 | | |
| | | | | | | | | | | | | |
97.98 | | 77.74 | | | | Stephen S. Romaine | | 7,541,417 | | | 155,575 | | |
| | | | | | | | | | | | | |
99.12 | | 78.65 | | | | Thomas R. Salm | | 7,629,594 | | | 67,397 | | |
| | | | | | | | | | | | | |
98.49 | | 78.15 | | | | Craig Yunker | | 7,580,741 | | | 116,251 | | |
The directors continuing in office are: James J. Byrnes; Reeder D. Gates; Carl E. Haynes; Michael H. Spain, and William D. Spain, Jr. Michael D. Shay chose not to stand for re-election, and his term expired effective May 11, 2009.
(c) At the meeting, the stockholders also approved a proposal to approve ratification of the selection of the independent registered public accounting firm, KPMG LLP, as the Company’s independent auditor for the fiscal year ending December 31, 2009:
| | | | | | | | | | | | | | | | |
% Votes
Cast | | % of Shares
Outstanding | | Number of
Shares Voted For | | Number of
Shares Against | | Number of
Shares Abstain | | Broker
Non-Votes | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
97.88 | | 77.66 | | | 7,533,629 | | | 131,751 | | | 31,607 | | | 12 | |
(d) At the meeting, the stockholders also approved a proposal to approve the proposed Tompkins Financial Corporation 2009 Equity Plan:
40
| | | | | | | | | | | | | | | | |
% Votes
Cast | | % of Shares
Outstanding | | Number of
Shares Voted For | | Number of
Shares Against | | Number of
Shares Abstain | | Broker
Non-Votes | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
63.44 | | 50.34 | | | 4,882,901 | | | 1,210,671 | | | 42,639 | | | 1,560,789 | |
| | |
Item 5 | Other Information |
| |
| None |
| |
Item 6 | Exhibits |
| | |
| 31.1 | Certification of Principal Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended (filed herewith). |
| | |
| 31.2 | Certification of Principal Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended (filed herewith). |
| | |
| 32.1 | Certification of Principal Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, 18 U.S.C. Section 1350 (filed herewith) |
| | |
| 32.2 | Certification of Principal Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, 18 U.S.C. Section 1350 (filed herewith) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| |
Date: August 10, 2009 |
| |
TOMPKINS FINANCIAL CORPORATION |
| |
By: | /s/ Stephen S. Romaine |
| |
| Stephen S. Romaine |
| President and |
| Chief Executive Officer |
| (Principal Executive Officer) |
| |
By: | /s/ Francis M. Fetsko |
| |
| Francis M. Fetsko |
| Executive Vice President and |
| Chief Financial Officer |
| (Principal Financial Officer) |
41
EXHIBIT INDEX
| | | | |
Exhibit Number | Description | | Pages | |
| | | | | |
| | | | |
31.1 | Certification of Principal Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. | | 43 | |
| | | | |
31.2 | Certification of Principal Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. | | 44 | |
| | | | |
32.1 | Certification of Principal Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, 18 U.S.C. Section 1350 | | 45 | |
| | | | |
32.2 | Certification of Principal Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, 18 U.S.C. Section 1350 | | 46 | |
42
