Washington, D.C. 20549
Former name, former address, former fiscal year, if changed since last report: NA
Indicate the number of shares of the Registrant's Common Stock outstanding as of the latest practicable date:
1. Business
2. Basis of Presentation
The unaudited condensed consolidated financial statements included in this quarterly report have been prepared in accordance with accounting principles generally accepted in the United States of America and the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. In the application of certain accounting policies management is required to make assumptions regarding the effect of matters that are inherently uncertain. These estimates and assumptions affect the reported amounts of certain assets, liabilities, revenues, and expenses in the unaudited condensed consolidated financial statements. Different amounts could be reported under different conditions, or if different assumptions were used in the application of these accounting policies. The accounting policies that management considers critical in this respect are the determination of the allowance for loan and lease losses, the expenses and liabilities associated with the Company’s pension and post-retirement benefits, and the review of its securities portfolio for other than temporary impairment.
In management’s opinion, the unaudited condensed consolidated financial statements reflect all adjustments of a normal recurring nature. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year ended December 31, 2012. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. There have been no significant changes to the Company’s accounting policies from those presented in the 2011 Annual Report on Form 10-K. Refer to Note 3- “Accounting Standards Updates” of this Report for a discussion of recently issued accounting guidelines.
Cash and cash equivalents in the consolidated statements of cash flow include cash and noninterest bearing balances due from banks, interest-bearing balances due from banks, and money market funds. Management regularly evaluates the credit risk associated with the counterparties to these transactions and believes that the Company is not exposed to any significant credit risk on cash and cash equivalents.
The Company has evaluated subsequent events for potential recognition and/or disclosure. Refer to Note 13 “Subsequent Events”.
The consolidated financial information included herein combines the results of operations, the assets, liabilities, and shareholders’ equity of the Company and its subsidiaries. Amounts in the prior periods’ unaudited condensed consolidated financial statements are reclassified when necessary to conform to the current periods’ presentation. All significant intercompany balances and transactions are eliminated in consolidation.
3. Accounting Standards Updates
Realized gains on available-for-sale securities were $933,000 and $935,000 in the second quarter and six months ending June 30, 2012, respectively, and $0 and $209,000 in the same periods of 2011; realized losses on available-for-sale securities were $0 in the second quarter and six months ending June 30, 2012, respectively, and $0 and $114,000 in the same time periods of 2011.
The gross unrealized losses reported at June 30, 2012 and December 31, 2011 for mortgage-backed securities-residential relate to investment securities issued by U.S. government sponsored entities such as Federal National Mortgage Association and Federal Home Loan Mortgage Corporation, and U.S. government agencies such as Government National Mortgage Association, and non U.S. Government agencies or sponsored entities. 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 generally not due to the credit quality of the investment securities.
The Company does not intend to sell the securities that are in an unrealized loss position and it is not more-likely-than not that the Company will be required to sell these available-for-sale investment securities, before recovery of their amortized cost basis, which may be at maturity. Accordingly, as of June 30, 2012, and December 31, 2011, management believes the unrealized losses detailed in the tables above are not other-than-temporary.
As of June 30, 2012, the Company held five mortgage backed securities, with a fair value of $5.1 million, that were not issued by U.S. Government agencies or U.S. Government sponsored entities. In 2009, the Company determined that three of these non-U.S. Government mortgage backed securities were other-than-temporarily impaired based on an analysis of the above factors for these three securities. As a result, the Company recorded other-than-temporary impairment charges of $2.0 million in 2009 on these investments. The credit loss component of $146,000 was recorded as other-than-temporary impairment losses in the consolidated statement of income, while the remaining non-credit portion of the impairment loss was recognized in other comprehensive income in the condensed consolidated statements of condition and changes in shareholders’ equity. In 2010 and 2011, the Company recorded an additional credit loss component of other-than-temporary charge of $34,000 and $65,000, respectively. The Company’s review of these securities as of June 30, 2012 determined that an additional credit loss component of other than temporary impairment charge of $65,000 was necessary. As of June 30, 2012, these securities had an unrealized loss of $89,000, which was recognized in other comprehensive income. A continuation or worsening of current economic conditions may result in additional credit loss component of other-than-temporary impairment losses related to these investments.
The amortized cost and estimated fair value of debt securities by contractual maturity are shown in the following table. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities are shown separately since they are not due at a single maturity date.
The Company also holds non-marketable Federal Home Loan Bank New York (“FHLBNY”) stock and non-marketable Federal Reserve Bank (“FRB”) stock, both of which are required to be held for regulatory purposes and for borrowing availability. The required investment in FHLBNY stock is tied to the Company’s borrowing levels with the FHLBNY. Holdings of FHBLNY stock and FRB stock totaled $14.6 million and $2.1 million at June 30, 2012, respectively, and $17.0 million and $2.1 million at December 31, 2011, respectively. The FHLBNY continues to pay dividends and repurchase its stock. As such, the Company has not recognized any impairment on its holdings of FHLBNY stock.
The net (loss) gain on trading account securities, which reflect mark-to-market adjustments, totaled ($75,000) and ($157,000) for the three and six months ended June 30, 2012, and $165,000 and $115,000 for the three and six months ended June 30, 2011.
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, 2011. There have been no significant changes in these policies and guidelines. As such, these policies continue through new originations as well as those balances held at June 30, 2012. 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.
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments are due. Generally loans are placed on nonaccrual status if principal or interest payments become 90 days or more past due and/or management deem the collectability of the principal and/or interest to be in question, as well as when required by regulatory requirements. When interest accrual is discontinued, all unpaid accrued interest is reversed. Payments received on loans on nonaccrual are generally applied to reduce the principal balance of the loan. Loans are generally returned to accrual status when all the principal and interest amounts contractually due are brought current, the borrower has established a payment history, and future payments are reasonably assured. When management determines that the collection of principal in full is improbable, management will charge-off a partial amount or full amount of the loan balance. Management considers specific facts and circumstances relative to each individual credit in making such a determination. For residential and consumer loans, management uses specific regulatory guidance and thresholds for determining charge-offs.
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 customer’s expected future cash flow, operating results, and financial condition; 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 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 interest 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. In determining and assigning historical loss factors to the various homogeneous portfolios, the Company calculates average net losses over a period of time and compares this average to current levels and trends to ensure that the calculated average loss factor is reasonable.
Since the methodology is based upon historical experience and trends as well as management’s judgment, factors may arise that result in different estimates. 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. While management’s evaluation of the allowance as of June 30, 2012, considers the allowance to be appropriate, under adversely different conditions or assumptions, the Company would need to increase the allowance.
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 loans restructured in a troubled debt restructuring (TDR). 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 majority of impaired loans are collateral dependent impaired loans that have limited exposure or require limited specific reserves 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.
Impaired loans are set forth in the tables below as of June 30, 2012 and December 31, 2011.
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. These modifications may include, among others, an extension for 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. There was one loan modified as a TDR during the three and six months ended June 30, 2012.
A loan that was restructured as a TDR is considered to be in payment default once it is 90 days contractually past due under the modified terms. During the three and six months ended June 30, 2012, there was one loan classified as a TDR that became 91 days past due, with a balance of $56,000.
7. Earnings Per Share
8. Employee Benefit Plan
The following table sets forth the amount of the net periodic benefit cost recognized by the Company for the Company’s pension plan, post-retirement plan (Life and Health), and supplemental employee retirement plans (“SERP”) including the following components: service cost; interest cost; expected return on plan assets for the period; amortization of the unrecognized transitional obligation or transition asset; and the amounts of recognized gains and losses, prior service cost recognized, and gain or loss recognized due to settlement or curtailment.
The Company realized approximately $735,000 and $564,000, net of tax, as amortization of amounts previously recognized in accumulated other comprehensive income, for the six months ended June 30, 2012 and 2011, respectively.
The Company is not required to contribute to the pension plan in 2012, but it may make voluntary contributions. The Company did not contribute to the pension plan in the three months ended June 30, 2012. For the six months ended June 30, 2012, the Company contributed $5.0 million to the pension plan.
The Company currently does not issue any guarantees that would require liability recognition or disclosure, other than standby letters of credit. The Company extends standby letters of credit to its customers in the normal course of business. The standby letters of credit are generally short-term. As of June 30, 2012, the Company’s maximum potential obligation under standby letters of credit was $56.0 million compared to $55.3 million at December 31, 2011. Management uses the same credit policies to extend standby letters of credit that it uses for on-balance sheet lending decisions and may require collateral to support standby letters of credit based upon its evaluation of the counterparty. Management does not anticipate any significant losses as a result of these transactions, and has determined that the fair value of standby letters of credit is not significant.
11. Segment and Related Information
The Company manages its operations through two business segments: banking and financial services. Financial services activities consist of the results of the Company’s trust, financial planning and wealth management services, insurance and risk management operations. All other activities, including holding company activities, are considered banking. The Company accounts for intercompany fees and services at an estimated fair value according to regulatory requirements for the services provided. Intercompany items relate primarily to the use of human resources, information systems, accounting and marketing services provided by any of the banks and the holding company. All other accounting policies are the same as those described in the summary of significant accounting policies in the 2011 Annual Report on Form 10-K.
Summarized financial information concerning the Company’s reportable segments and the reconciliation to the Company’s consolidated results is shown in the following table. Investment in subsidiaries is netted out of the presentations below. The “Intercompany” column identifies the intercompany activities of revenues, expenses and other assets between the banking and financial services segments.
Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 – Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;
Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2012 and December 31, 2011, segregated by the level of valuation inputs within the fair value hierarchy used to measure fair value.
| Recurring Fair Value Measurements | | | | | | | | | | |
| June 30, 2012 | | | | | | | | | | | | |
| | | Fair Value | | | | | | | | | | |
| (in thousands) | | 06/30/2012 | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| Trading securities | | | | | | | | | | | | |
Obligations of U.S. Government sponsored entities | | $ | 12,295 | | | $ | 12,295 | | | $ | 0 | | | $ | 0 | |
| Mortgage-backed securities – residential | | | | | | | | | | | | | | | | |
| U.S. Government sponsored entities | | | 5,640 | | | | 5,640 | | | | 0 | | | | 0 | |
| Available-for-sale securities | | | | | | | | | | | | | | | | |
| U.S. Treasury securities | | | 2,030 | | | | 2,030 | | | | 0 | | | | 0 | |
Obligations of U.S. Government sponsored entities | | | 562,200 | | | | 0 | | | | 562,200 | | | | 0 | |
| Obligations of U.S. states and political subdivisions | | | 57,046 | | | | 0 | | | | 57,046 | | | | 0 | |
| Mortgage-backed securities – residential, issued by: | | | | | | | | | | | | | | | | |
| U.S. Government agencies | | | 112,692 | | | | 0 | | | | 112,692 | | | | 0 | |
| U.S. Government sponsored entities | | | 437,876 | | | | 0 | | | | 437,876 | | | | 0 | |
| Non-U.S. Government agencies or sponsored entities | | | 5,074 | | | | 0 | | | | 5,074 | | | | 0 | |
| U.S. corporate debt securities | | | 5,148 | | | | 0 | | | | 5,148 | | | | 0 | |
| Equity securities | | | 1,022 | | | | 0 | | | | 0 | | | | 1,022 | |
| | | | | | | | | | | | | | | | | |
| Borrowings | | | | | | | | | | | | | | | | |
| Other borrowings | | | 11,927 | | | | 0 | | | | 11,927 | | | | 0 | |
| Recurring Fair Value Measurements | | | | | | | | | | |
| December 31, 2011 | | | | | | | | | | | | |
| | | Fair Value | | | | | | | | | | |
| (in thousands) | | 12/31/2011 | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| Trading securities | | | | | | | | | | | | |
Obligations of U.S. Government sponsored entities | | $ | 12,693 | | | $ | 12,693 | | | $ | 0 | | | $ | 0 | |
| Mortgage-backed securities – residential | | | | | | | | | | | | | | | | |
| U.S. Government sponsored entities | | | 6,905 | | | | 6,905 | | | | 0 | | | | 0 | |
| Available-for-sale securities | | | | | | | | | | | | | | | | |
| U.S. Treasury securities | | | 2,070 | | | | 2,070 | | | | 0 | | | | 0 | |
Obligations of U.S. Government sponsored entities | | | 422,590 | | | | 0 | | | | 422,590 | | | | 0 | |
| Obligations of U.S. states and political subdivisions | | | 59,653 | | | | 0 | | | | 59,653 | | | | 0 | |
| Mortgage-backed securities – residential, issued by: | | | | | | | | | | | | | | | | |
| U.S. Government agencies | | | 129,773 | | | | 0 | | | | 129,773 | | | | 0 | |
| U.S. Government sponsored entities | | | 517,378 | | | | 0 | | | | 517,378 | | | | 0 | |
| Non-U.S. Government agencies or sponsored entities | | | 5,876 | | | | 0 | | | | 5,876 | | | | 0 | |
| U.S. corporate debt securities | | | 5,183 | | | | 0 | | | | 5,183 | | | | 0 | |
| Equity securities | | | 1,023 | | | | 0 | | | | 0 | | | | 1,023 | |
| | | | | | | | | | | | | | | | | |
| Borrowings | | | | | | | | | | | | | | | | |
| Other borrowings | | | 12,093 | | | | 0 | | | | 12,093 | | | | 0 | |
There were no transfers between Levels 1 and 2 for the three months ended June 30, 2012.
There was no significant change in the fair value of the $1.0 million of available-for-sale securities valued using significant unobservable inputs (Level 3), between January 1, 2012 and June 30, 2012.
The Company determines fair value for its trading securities using independently quoted market prices. The Company determines fair value for its available-for-sale securities using an independent bond pricing service for identical assets or very similar securities. The pricing service uses a variety of techniques to determine fair value, including market maker bids, quotes and pricing models. Inputs to the model include recent trades, benchmark interest rates, spreads, and actual and projected cash flows. Based on the inputs used by our independent pricing services, we identify the appropriate level within the fair value hierarchy to report these fair values.
Fair values of borrowings are estimated using Level 2 inputs based upon observable market data. The Company determines fair value for its borrowings using a discounted cash flow technique based upon expected cash flows and current spreads on FHLB advances with the same structure and terms. The Company also receives pricing information from third parties, including the FHLB. The pricing obtained is considered representative of the transfer price if the liabilities were assumed by a third party. The Company’s potential credit risk did not have a material impact on the quoted settlement prices used in measuring the fair value of the FHLB borrowings at June 30, 2012.
Certain assets are measured at fair value on a nonrecurring basis. For the Company, these include loans held for sale, collateral dependent impaired loans, and other real estate owned. During the second quarter of 2012, certain collateral dependent impaired loans were remeasured and reported at fair value through a specific valuation allowance for loan and lease losses based upon the fair value of the underlying collateral. Collateral values are estimated using Level 2 inputs based upon observable market data. In addition to collateral dependent impaired loans, certain other real estate owned were remeasured and reported at fair value based upon the fair value of the underlying collateral. The fair values of other real estate owned are estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria. In general, the fair values of other real estate owned are based upon appraisals, with discounts made to reflect estimated costs to sell the real estate. Upon initial recognition, fair value write-downs on other real estate owned are taken through a charge-off to the allowance for loan and lease losses. Subsequent fair value write-downs on other real estate owned are reported in other noninterest expense.
| Non-Recurring Fair Value Measurements | |
| Three months ended June 30, 2012 | | | | | | | | | | | | | | | |
| (In thousands) | | Fair Value | | | (Level 1) | | | (Level 2) | | | (Level 3) | | | Total gain (loss) | |
Collateral dependent impaired loans1 | | $ | 7,789 | | | $ | 0 | | | $ | 7,789 | | | $ | 0 | | | $ | 0 | |
Other real estate owned2 | | | 2,163 | | | | 0 | | | | 2,163 | | | | 0 | | | | (222 | ) |
1 Collateral-dependent impaired loans held at June 30, 2012 that had write-downs in fair value or whose specific reserve changed during the second quarter 2012. |
2 Two OREO properties held at June 30, 2012 that had write-downs during the second quarter of 2012. |
| Non-Recurring Fair Value Measurements | |
| Three months ended June 30, 2011 | | | | | | | | | | | | | | | |
| (In thousands) | | Fair Value | | | (Level 1) | | | (Level 2) | | | (Level 3) | | | Total gain (loss) | |
Collateral dependent impaired loans1 | | $ | 7,895 | | | $ | 0 | | | $ | 7,895 | | | $ | 0 | | | $ | 0 | |
Other real estate owned2 | | | 825 | | | | 0 | | | | 0 | | | | 0 | | | | (73 | ) |
1 Collateral-dependent impaired loans held at June 30, 2011 that had write-downs in fair value or whose specific reserve changed during the second quarter 2011. |
2 Three OREO properties held at June 30, 2011 that had write-downs during the second quarter of 2011. |
| Non-Recurring Fair Value Measurements | |
| Six months ended June 30, 2012 | | | | | | | | | | | | | | | |
| (In thousands) | | Fair Value | | | (Level 1) | | | (Level 2) | | | (Level 3) | | | Total gain (loss) | |
Collateral dependent impaired loans1 | | $ | 9,134 | | | $ | 0 | | | $ | 9,134 | | | $ | 0 | | | $ | 0 | |
Other real estate owned2 | | | 2,163 | | | | 0 | | | | 2,163 | | | | 0 | | | | (222 | ) |
1 Collateral-dependent impaired loans held at June 30, 2012 that had write-downs in fair value or whose specific reserve changed during the six months ended 2012. |
2 Five OREO properties held at June 30, 2012 had write-downs during the six months ended 2012. |
| Non-Recurring Fair Value Measurements | |
| Six months ended June 30, 2011 | | | | | | | | | | | | | | | |
| (In thousands) | | Fair Value | | | (Level 1) | | | (Level 2) | | | (Level 3) | | | Total gain (loss) | |
Collateral dependent impaired loans1 | | $ | 10,363 | | | $ | 0 | | | $ | 10,363 | | | $ | 0 | | | $ | 0 | |
Other real estate owned2 | | | 1,588 | | | | 0 | | | | 0 | | | | 0 | | | | (73 | ) |
1 Collateral-dependent impaired loans held at June 30, 2011 that had write-downs in fair value or whose specific reserve changed during the six months ended 2011. |
2 Four OREO properties held at June 30, 2011 had write-downs during the six months ended 2011. |
The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments at June 30, 2012 and December 31, 2011. The carrying amounts shown in the table are included in the Consolidated Statements of Condition under the indicated captions.
The fair value estimates, methods and assumptions set forth below for the Company’s financial instruments, including those financial instruments carried at cost, are made solely to comply with disclosures required by generally accepted accounting principles in the United States and does not always incorporate the exit-price concept of fair value prescribed by ASC Topic 820-10 and should be read in conjunction with the financial statements and notes included in this Report.
| Estimated Fair Value of Financial Instruments | | | | | |
| June 30, 2012 | | | | | | | | | | | | | | | |
| (in thousands) | | Carrying Amount | | | Fair Value | | | (Level 1) | | | (Level 2) | | | | |
| Financial Assets: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 59,779 | | | $ | 59,779 | | | $ | 59,779 | | | $ | | | | $ | | |
| Securities - held to maturity | | | 27,120 | | | | 27,613 | | | | | | | | 27,613 | | | | | |
| FHLB and FRB stock | | | 16,692 | | | | 16,692 | | | | | | | | 16,692 | | | | | |
| Accrued interest receivable | | | 12,531 | | | | 12,531 | | | | | | | | 12,531 | | | | | |
| Loans/leases, net | | | 1,992,816 | | | | 2,061,982 | | | | | | | | | | | | 2,061,982 | |
| | | | | | | | | | | | | | | | | | | | | |
| Financial Liabilities: | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Time deposits | | $ | 678,550 | | | $ | 682,179 | | | $ | | | | $ | 682,179 | | | $ | | |
| Other deposits | | | 2,086,543 | | | | 2,086,543 | | | | | | | | 2,086,543 | | | | | |
| Securities sold under agreements to repurchase | | | 161,662 | | | | 168,796 | | | | | | | | 168,796 | | | | | |
| Other borrowings | | | 110,007 | | | | 125,446 | | | | | | | | 125,446 | | | | | |
| Accrued interest payable | | | 1,287 | | | | 1,287 | | | | | | | | 1,287 | | | | | |
| Trust preferred debentures | | | 25,067 | | | | 29,347 | | | | | | | | 29,347 | | | | | |
| Estimated Fair Value of Financial Instruments | | 12/31/2011 | |
| | | | |
| (in thousands) | | Carrying Amount | | | Fair Value | |
| Financial Assets: | | | | | | |
| | | | | | | |
| Cash and cash equivalents | | $ | 49,567 | | | $ | 49,567 | |
| Securities - held to maturity | | | 26,673 | | | | 27,255 | |
| FHLB and FRB stock | | | 19,070 | | | | 19,070 | |
| Accrued interest receivable | | | 12,420 | | | | 12,420 | |
| Loans/leases, net | | | 1,954,256 | | | | 2,003,257 | |
| | | | | | | | | |
| Financial Liabilities: | | | | | | | | |
| | | | | | | | | |
| Time deposits | | $ | 687,321 | | | $ | 690,480 | |
| Other deposits | | | 1,973,243 | | | | 1,973,243 | |
| Securities sold under agreements to repurchase | | | 169,090 | | | | 179,840 | |
| Other borrowings | | | 173,982 | | | | 188,062 | |
| Accrued interest payable | | | 1,354 | | | | 1,354 | |
| Trust preferred debentures | | | 25,065 | | | | 25,314 | |
The following methods and assumptions were used in estimating fair value disclosures for financial instruments.
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the Consolidated Statements of Condition for cash, noninterest-bearing deposits, money market funds, and Federal funds sold approximate the fair value of those assets.
SECURITIES: Fair values for U.S. Treasury securities are based on quoted market prices. Fair values for obligations of U.S. government sponsored entities, mortgage-backed securities-residential, obligations of U.S. states and political subdivisions, and U.S. corporate debt securities are based on quoted market prices, where available, as provided by third party pricing vendors. If quoted market prices were not available, fair values are based on quoted market prices of comparable instruments in active markets and/or based upon matrix pricing methodology, which uses comprehensive interest rate tables to determine market price, movement and yield relationships. These securities are reviewed periodically to determine if there are any events or changes in circumstances that would adversely affect their value.
LOANS AND LEASES: The fair values of residential loans are estimated using discounted cash flow analyses, based upon available market benchmarks for rates and prepayment assumptions. The fair values of commercial and consumer loans are estimated using discounted cash flow analyses, based upon interest rates currently offered for loans and leases with similar terms and credit quality. The fair value of loans held for sale are determined based upon contractual prices for loans with similar characteristics.
FHLB AND FRB STOCK: The carrying amount of FHLB and FRB stock approximates fair value. If the stock is redeemed, the Company will receive an amount equal to the par value of the stock. For miscellaneous equity securities, carrying value is cost.
ACCRUED INTEREST RECEIVABLE AND ACCRUED INTEREST PAYABLE: The carrying amount of these short term instruments approximate fair value.
DEPOSITS: The fair values disclosed for noninterest bearing accounts and accounts with no stated maturities are equal to the amount payable on demand at the reporting date. The fair value of time deposits is based upon discounted cash flow analyses using rates offered for FHLB advances, which is the Company’s primary alternative source of funds.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE: The carrying amounts of repurchase agreements and other short-term borrowings approximate their fair values. Fair values of long-term borrowings are estimated using a discounted cash flow approach, based on current market rates for similar borrowings. For securities sold under agreements to repurchase where the Company has elected the fair value option, the Company also receives pricing information from third parties, including the FHLB.
OTHER BORROWINGS: The fair values of other borrowings are estimated using discounted cash flow analysis, discounted at the Company’s current incremental borrowing rate for similar borrowing arrangements. For other borrowings where the Company has elected the fair value option, the Company also receives pricing information from third parties, including the FHLB.
TRUST PREFERRED DEBENTURES: The fair value of the trust preferred debentures has been estimated using a discounted cash flow analysis which uses a discount factor of a market spread over current interest rates for similar instruments.
13. Subsequent Event
On August 1, 2012, the Company completed its acquisition of VIST pursuant to that certain Agreement and Plan of Merger dated January 25, 2012 (the “Agreement and Plan of Merger”), under which VIST merged with and into a wholly-owned subsidiary of Tompkins, whereupon the separate corporate existence of VIST ceased and the merger subsidiary survived (the “Merger”). Immediately after the Merger, the merger subsidiary was merged with and into Tompkins, with Tompkins being the corporation surviving that merger. Pursuant to the Agreement and Plan of Merger, each share of VIST common stock was cancelled and converted into the right to receive 0.3127 shares of Tompkins common stock, with any fractional share entitlement paid in cash.
In addition, immediately prior to the completion of the Merger, Tompkins purchased from the United States Department of the Treasury (“Treasury”) the issued and outstanding shares of VIST Fixed Rate Cumulative Perpetual Preferred Stock, Series A, as well as the warrant to purchase shares of VIST common stock issued in connection with the issuance of the preferred stock (collectively, the “TARP Purchase”) for an aggregate purchase price of $26,453,701.89. The securities purchased in the TARP Purchase were cancelled in connection with the consummation of the Merger.
Corporate Overview and Strategic Initiatives
Tompkins Financial Corporation (“Tompkins” or the “Company”) is a registered financial holding company incorporated in 1995 under the laws of the State of New York and its common stock is listed on the NYSE MKT LLC (Symbol: TMP). Tompkins is headquartered at The Commons, Ithaca, New York. The Company is a locally-oriented, community-based financial services organization that offers a full array of financial products and services, including commercial and consumer banking, leasing, trust and investment services, financial planning and wealth management, insurance and brokerage services. At June 30, 2012, Tompkins subsidiaries included: three wholly-owned community banking subsidiaries, Tompkins Trust Company (the “Trust Company”), The Bank of Castile and The Mahopac National Bank; a wholly-owned registered investment advisor, AM&M Financial Services, Inc. (“AM&M”); and a wholly-owned insurance agency subsidiary, Tompkins Insurance Agencies, Inc. (“Tompkins Insurance”). AM&M and the trust division of the Trust Company provide a
full suite of investment services under the Tompkins Financial Advisors division, including investment management, trust and estate, financial and tax planning as well as life, disability and long term care insurance services. Unless the context otherwise requires, the term “Company” refers collectively to Tompkins Financial Corporation and its subsidiaries.
The Company’s strategic initiatives include diversification within its markets, growth of its fee-based businesses, and growth internally and through acquisitions of financial institutions, branches and financial services businesses. During the second quarter of 2012, the Company completed a successful capital raise through a registered public offering of shares of its common stock. The Company believes that this capital raise helped position the Company for future growth, including its recently completed acquisition of VIST Financial Corp. (“VIST”), described below. After transaction costs, net proceeds from the capital raise were approximately $38.0 million, and resulted in the issuance of 1,006,250 shares of Tompkins common stock on April 3, 2012.
Recent Acquisitions
On August 1, 2012, the Company completed its acquisition of VIST pursuant to that certain Agreement and Plan of Merger dated January 25, 2012 (the “Agreement and Plan of Merger”), under which VIST merged with and into a wholly-owned subsidiary of Tompkins, whereupon the separate corporate existence of VIST ceased and the merger subsidiary survived (the “Merger”). Immediately after the Merger, the merger subsidiary was merged with and into Tompkins, with Tompkins being the corporation surviving that merger. As a result, VIST Bank, a Pennsylvania state-chartered commercial bank and a wholly-owned subsidiary of VIST, became a wholly-owned subsidiary of Tompkins and it will continue to operate as a separate subsidiary bank of Tompkins.
Pursuant to the Agreement and Plan of Merger, each share of VIST common stock was cancelled and converted into the right to receive 0.3127 shares of Tompkins common stock, with any fractional share entitlement paid in cash. In addition, immediately prior to the completion of the Merger, Tompkins purchased from the United States Department of the Treasury (“Treasury”) the issued and outstanding shares of VIST Fixed Rate Cumulative Perpetual Preferred Stock, Series A, as well as the warrant to purchase shares of VIST common stock issued in connection with the issuance of the preferred stock (collectively, the “TARP Purchase”) for an aggregate purchase price of $26,453,701.89. The securities purchased in the TARP Purchase were cancelled in connection with the consummation of the Merger.
The information in this Quarterly Report on Form 10-Q, including the information contained in this Item 2 under the heading “Business”, is of June 30, 2012 and does not reflect any changes in the business operations or financial condition of Tompkins after that date, including those resulting from the acquisition of VIST described above.
In June 2011, Tompkins Insurance acquired all of the outstanding shares of Olver & Associates, Inc. (“Olver”), a property and casualty agency located in Ithaca, New York. As a result of pursuing an available tax election under Internal Revenue Code section 338(h)(10), it was determined that the acquisition qualified for beneficial tax treatment that would enable the tax deductible amortization of the purchase premium, including goodwill. To compensate the Olver shareholders for their consent to make this election, additional consideration of $755,000 and $238,000 were recorded as additional goodwill during the first and second quarters of 2012, respectively.
Business Segments
The Company has identified two business segments, banking and financial services. Financial services activities include the results of the Company’s trust, financial planning, wealth management services, and insurance and risk management operations. All other activities are considered banking. Information about the Company’s business segments is included in Note 11 “Segment and Related Information,” in the Notes to Unaudited Condensed Consolidated Financial Statements contained in Part I of this Quarterly Report on Form 10-Q.
Business Overview
Banking services consist primarily of attracting deposits from the areas served by the Company’s 46 banking offices and using those deposits to originate a variety of commercial loans, consumer loans, real estate loans (including commercial loans collateralized by real estate), and leases. The Company’s lending function is managed within the guidelines of a comprehensive Board-approved lending policy. Reporting systems are in place to provide management with ongoing information related to loan production, loan quality, and concentrations of credit, loan delinquencies, and nonperforming and potential problem loans.
The Company may sell residential real estate loans in the secondary market based on interest rate considerations. These residential real estate loans are generally sold without recourse and in accordance with standard secondary market loan sale
agreements. The Company primarily sells loans to the Federal Home Loan Mortgage Corporation. These residential real estate loans are subject to normal representations and warranties, including representations and warranties related to gross fraud and incompetence. The Company has not had to repurchase any loans as a result of these representations and warranties. The Company reviews the risks in residential real estate lending related to representations and warranties, title issues, and servicing. The Company determined that these risks are immaterial and do not require any reserves on the Company’s statements of condition.
The Company’s principal expenses are interest on deposits, interest on borrowings, and operating and general administrative expenses, as well as provisions for loan and lease losses. Funding sources, other than deposits, include borrowings, securities sold under agreements to repurchase, and cash flow from lending and investing activities.
Financial services consists of providing insurance, financial planning and wealth management, and trust services to individuals and businesses in the Company’s market areas. The Company has expanded its financial services segment over the past ten years through internal growth and acquisitions. In 2006, Tompkins acquired AM&M, a financial planning and wealth management company, to complement its existing trust and investment services businesses. In 2010, the Company unified the branding of its trust and investment services businesses and began marketing these services under the name “Tompkins Financial Advisors”. Tompkins Financial Advisors has office locations at all three of the Company’s subsidiary banks.
The Company provides property and casualty insurance services, employee benefit consulting, and life, long-term care and disability insurance. Tompkins Insurance is headquartered in Batavia, New York, and offers property and casualty insurance to individuals and businesses located primarily in Western New York. Over the past eleven years, Tompkins Insurance has acquired smaller insurance agencies in the market areas serviced by the Company’s banking subsidiaries and successfully consolidated them into Tompkins Insurance. The most recent acquisition was Olver. Tompkins Insurance offers services to customers of the Company’s banking subsidiaries by sharing offices with The Bank of Castile and Trust Company. In addition to these shared offices, Tompkins Insurance has five stand-alone offices in Western New York and two stand-alone offices in Tompkins County, New York.
Competition
Competition for commercial banking and other financial services is strong in the Company’s market areas. Competition includes other commercial banks, savings and loan associations, credit unions, finance companies, Internet-based financial services companies, mutual funds, insurance companies, brokerage and investment companies, and other financial intermediaries. The Company differentiates itself from its competitors through its full complement of banking and related financial services, and through its community commitment and involvement in its primary market areas, as well as its commitment to quality and personalized banking services.
Regulation
Banking and financial services are highly regulated. As a financial holding company with three community banks and an investment advisor, the Company and its subsidiaries are subject to examination and regulation by the Federal Reserve Board (“FRB”), the Federal Deposit Insurance Corporation (“FDIC”), the Office of the Comptroller of the Currency (“OCC”), and the New York State Department of Financial Services. Additionally, the Company is subject to examination and regulation from the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority.
Other Factors Affecting Performance
Other external factors affecting the Company’s operating results are market rates of interest, the condition of financial markets, and both national and regional economic conditions. Weak economic conditions over the past several years have contributed to increases in the Company’s past due loans and leases, nonperforming assets, and net loan and lease losses, as well as decreases in certain fee-based products and services. Although nonperforming loans and leases and criticized and classified loans continue to be higher than historical levels, the Company has seen some signs of improving economic conditions within the market areas in which it operates, which have contributed to improvement in its credit quality metrics in recent quarters including decreases in the level of internally classified assets and nonperforming assets. With the strength of the economic recovery uncertain, there is no assurance that these conditions may not adversely affect the credit quality of the Company’s loans and leases, results of operations, and financial condition going forward. Refer to the section captioned “Financial Condition- Allowance for Loan and Lease Losses and Nonperforming Assets” below for further details on asset quality.
OTHER IMPORTANT INFORMATION
The following discussion is intended to provide an understanding of the consolidated financial condition and results of operations of the Company for the three months and six months ended June 30, 2012. It should be read in conjunction with the Company’s Audited Consolidated Financial Statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, and the Unaudited Condensed Consolidated Financial Statements and notes thereto included in Part I of this Quarterly Report on Form 10-Q.
Forward-Looking Statements
The Company is making this statement in order to satisfy the “Safe Harbor” provision contained in the Private Securities Litigation Reform Act of 1995. The statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact may include forward-looking statements that involve a number of risks and uncertainties. Such forward-looking statements are made based on management’s expectations and beliefs concerning future events impacting the Company and are subject to certain uncertainties and factors relating to the Company’s operations and economic environment, all of which are difficult to predict and many of which are beyond the control of the Company, that could cause actual results of the Company to differ materially from those matters expressed and/or implied by such forward-looking statements. The following factors are among those that could cause actual results to differ materially from the forward-looking statements: changes in general economic, market and regulatory conditions; the development of an interest rate environment that may adversely affect the Company’s interest rate spread, other income or cash flow anticipated from the Company’s operations, investment and/or lending activities; changes in laws and regulations affecting banks, insurance companies, bank holding companies and/or financial holding companies, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act and Basel III; technological developments and changes; the ability to continue to introduce competitive new products and services on a timely, cost-effective basis; governmental and public policy changes, including environmental regulation; protection and validity of intellectual property rights; reliance on large customers; financial resources in the amounts, at the times and on the terms required to support the Company’s future businesses, and other factors discussed elsewhere in this Quarterly Report on Form 10-Q and in other reports we file with the SEC, in particular the “Risk Factors” discussed in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. In addition, such forward-looking statements could be affected by general industry and market conditions and growth rates, general economic and political conditions, including interest rate and currency exchange rate fluctuations, and other factors.
Critical Accounting Policies
The accounting and reporting policies followed by the Company conform, in all material respects, to accounting principles generally accepted in the United States and to general practices within the financial services industry. In the course of normal business activity, management must select and apply many accounting policies and methodologies and make estimates and assumptions that lead to the financial results presented in the Company’s consolidated financial statements and accompanying notes. There are uncertainties inherent in making these estimates and assumptions, which could materially affect the Company’s results of operations and financial position.
Management considers accounting estimates to be critical to reported financial results if (i) the accounting estimates require management to make assumptions about matters that are highly uncertain, and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the Company’s financial statements. Management considers the accounting policies relating to the allowance for loan and lease losses (“allowance”), pension and postretirement benefits and the review of the securities portfolio for other-than-temporary impairment to be critical accounting policies because of the uncertainty and subjectivity involved in these policies and the material effect that estimates related to these areas can have on the Company’s results of operations.
For additional information on critical accounting policies and to gain a greater understanding of how the Company’s financial performance is reported, refer to Note 1 – “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements, and the section captioned “Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. There have been no significant changes in the Company’s application of critical accounting policies since December 31, 2011. Refer to Note 3 – “Accounting Standards Updates” in the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q for a discussion of recent accounting updates.
In this Report there are comparisons of the Company’s performance to that of a peer group. Unless otherwise stated, this peer group is comprised of the group of 89 domestic bank holding companies with $3 billion to $10 billion in total assets as defined in the Federal Reserve’s “Bank Holding Company Performance Report” for March 31, 2012 (most recent report available).
OVERVIEW
Net income for the second quarter of 2012 was $8.8 million, a decrease of 6.1% when compared to net income of $9.4 million reported in the second quarter of 2011. Net income totaled $16.6 million for the first six months of 2012 compared to $18.2 million for the same period in 2011. Diluted earnings per share for the three and six months ended June 30, 2012 were $0.72 and $1.42, respectively, compared to $0.85 and $1.65, respectively, for the same periods in 2011.
Return on average assets (“ROA”) for the quarter and six months ended June 30, 2012 were 1.00% and 0.96%, respectively, compared to 1.15% for the quarter and 1.12% for the six months ended June 30, 2011. Return on average shareholders’ equity (“ROE”) for the second quarter and first six months of 2012 were 10.17% and 10.26%, respectively, compared to 13.08% and 12.96%, respectively, for the same period in 2011. Tompkins’ second quarter ROA and ROE compare to the most recent peer average ratios of 0.91% and 8.54%, respectively, published as of March 31, 2012 by the Federal Reserve, ranking Tompkins’ ROA in the 53rd percentile and ROE in the 67th percentile of the peer group.
Second quarter and year-to-date results were impacted by the following:
| | · | After-tax merger related expenses of $703,000 in the second quarter and $778,000 in the year-to-date; |
| | · | After-tax income of $243,000 in the quarter and year-to-date 2012, representing the reversal of an accrual related to the liability that was previously established to cover the Company’s potential obligation to share in losses stemming from certain litigation of VISA Inc.; and |
| | · | Capital raise in second quarter which resulted in net proceeds of $38.0 million and the issuance of 1,006,250 shares of common stock. |
Segment Reporting
The Company operates in two business segments, banking and financial services. Financial services activities include the results of the Company’s trust, financial planning, and wealth management services, and insurance and risk management operations. All other activities are considered banking.
Banking Segment
The banking segment reported net income of $7.8 million for the second quarter of 2012, down $570,000 or 6.8% from net income of $8.4 million for the same period in 2011. For the six month period ended June 30, 2012 net income was $14.9 million, down $1.2 million or 7.4% from 2011.
Net interest income for the three and six month periods ended June 30, 2012 was flat compared to the same periods in 2011. Average earning assets for the three months and six months ended June 30, 2012 were up 6.8% and 7.6% over the same periods in 2011, maintaining net interest income while margins decreased. The funding for the increase in average earning assets came from deposits as borrowings declined for the second quarter and first six months of 2012.
The provision for loan and lease losses totaled $1.0 million for the three months ended June 30, 2012 and the same period in 2011. For the six month period ending June 30, 2012 provision expense declined $779,000 from 2011 to $2.1 million from 2011. The decrease in the provision for loan and lease losses was largely the result of improvement of asset quality measures compared to the same period in 2011.
Noninterest income for the three months ended June 30, 2012, was up $758,000 or 15.1% compared to the same period in 2011. The main drivers behind the increase were a net gain on the sale of securities of $933,000 and the reversal of an accrued liability of $405,000 related to the recently announced settlement of litigation between VISA Inc. and certain merchants related to certain card related fees. Partially offsetting these items were lower service charges on deposit accounts income, which were down $514,000 compared to the same period last year, due to lower overdraft fees. In addition, the Company incurred an other-than-temporary impairment loss of $65,000 due to credit related exposure on two private label mortgage backed securities. For the first six months of 2012 noninterest income was slightly under noninterest income for the same time period in 2011. Net securities gains increased by $840,000 to $935,000 and card service fees increased by $335,000. These increases were partially offset by declines in deposit fees of $713,000, largely due to lower overdraft fees.
Noninterest expenses for the three months ended June 30, 2012, were up $1.7 million or 8.7% from the same period in 2011. Noninterest expense for the six months ending June 30, 2012 was up $2.5 million or 6.3% to $42.0 million. The quarterly increase was mainly due to merger related expenses of $879,000 related to the planned merger with VIST, increases in pension and employee benefit cost, with lower rates contributing to the increase, and higher expenses related to marketing and business development. The increase in year-to-date noninterest expense was mainly due to merger related expenses of $972,000, increases in salaries, pension and employee benefit cost, as well as higher professional fees, marketing and business development expenditures than during the same period last year. These increases were partially offset by a $500,000 decline in FDIC insurance expense due to lower assessment rates.
Financial Services Segment
The financial services segment had net income of $981,000 and $1.8 million for the three and six months ended June 30, 2012, flat to net income for the second quarter of 2011 and down $333,000 or 16.0% from the six month period of 2011. Noninterest income for the three months ended June 30, 2012, was even compared to the same period in 2011 and down $84,000 or 0.6% for the six months ended June 30, 2012 compared to the same period in 2011. The decrease in noninterest income year over the first six months of 2012 is mainly due to lower investment services income. Investment services fees are largely based on the market value of assets within each account and therefore fluctuate with market conditions. In addition, the Company reduced the number of its broker/dealer relationships which contributed to the decline in noninterest income. Noninterest expenses for the three months ended June 30, 2012, were even compared to the second quarter of 2011 and up $402,000 or 3.5% for the six months ended June 30, 2012 compared to the same period in the prior year. The increases were mainly the result of increases in salary and wages, reflecting annual merit increases, and other employee benefit costs and an increase in marketing initiatives aimed at increasing brand awareness.
| Average Consolidated Statements of Condition and Net Interest Analysis | |
| | |
| | | Quarter Ended | | | Year to Date Period Ended | | | Year to Date Period Ended | |
| | | June 30, 2012 | | | June 30, 2012 | | | June 30, 2011 | |
| | | Average | | | | | | | | | Average | | | | | | | | | Average | | | | | | | |
| | | Balance | | | | | | Average | | | Balance | | | | | | Average | | | Balance | | | | | | Average | |
| (Dollar amounts in thousands) | | (QTD) | | | Interest | | | Yield/Rate | | | (YTD) | | | Interest | | | Yield/Rate | | | (YTD) | | | Interest | | | Yield/Rate | |
| ASSETS | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-earning assets | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing balances due from banks | | $ | 1,887 | | | $ | 5 | | | | 1.07 | % | | $ | 20,269 | | | $ | 8 | | | | 0.08 | % | | $ | 13,235 | | | $ | 9 | | | | 0.14 | % |
| Money market funds | | | - | | | | - | | | | 0.00 | % | | | 36 | | | | - | | | | 0.00 | % | | | 100 | | | | - | | | | 0.00 | % |
| Securities (1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Government securities | | | 1,153,660 | | | | 6,927 | | | | 2.42 | % | | | 1,107,730 | | | | 13,504 | | | | 2.45 | % | | | 945,956 | | | | 14,215 | | | | 3.03 | % |
| Trading securities | | | 18,483 | | | | 189 | | | | 4.11 | % | | | 18,917 | | | | 387 | | | | 4.11 | % | | | 22,053 | | | | 455 | | | | 4.16 | % |
| State and municipal (2) | | | 86,456 | | | | 1,141 | | | | 5.31 | % | | | 84,785 | | | | 2,270 | | | | 5.38 | % | | | 107,672 | | | | 2,811 | | | | 5.26 | % |
| Other securities | | | 11,523 | | | | 129 | | | | 4.50 | % | | | 11,787 | | | | 268 | | | | 4.57 | % | | | 14,790 | | | | 348 | | | | 4.74 | % |
| Total securities | | | 1,270,122 | | | | 8,386 | | | | 2.66 | % | | | 1,223,219 | | | | 16,429 | | | | 2.70 | % | | | 1,090,471 | | | | 17,829 | | | | 3.30 | % |
| Federal Funds Sold | | | 11 | | | | - | | | | 0.00 | % | | | 3,693 | | | | 2 | | | | 0.11 | % | | | 6,426 | | | | 5 | | | | 0.16 | % |
| FHLBNY and FRB stock | | | 17,546 | | | | 196 | | | | 4.49 | % | | | 17,134 | | | | 415 | | | | 4.87 | % | | | 18,505 | | | | 509 | | | | 5.55 | % |
| Loans, net of unearned income (3) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Real estate | | | 1,452,800 | | | | 18,229 | | | | 5.05 | % | | | 1,445,064 | | | | 36,461 | | | | 5.07 | % | | | 1,376,735 | | | | 36,978 | | | | 5.42 | % |
| Commercial loans (2) | | | 470,083 | | | | 6,221 | | | | 5.32 | % | | | 468,418 | | | | 12,311 | | | | 5.29 | % | | | 454,155 | | | | 12,176 | | | | 5.41 | % |
| Consumer loans | | | 61,057 | | | | 1,020 | | | | 6.72 | % | | | 61,804 | | | | 2,054 | | | | 6.68 | % | | | 70,446 | | | | 2,443 | | | | 6.99 | % |
| Direct lease financing | | | 5,013 | | | | 71 | | | | 5.70 | % | | | 5,387 | | | | 154 | | | | 5.75 | % | | | 8,318 | | | | 246 | | | | 5.96 | % |
| Total loans, net of unearned income | | | 1,988,953 | | | | 25,541 | | | | 5.17 | % | | | 1,980,673 | | | | 50,980 | | | | 5.18 | % | | | 1,909,654 | | | | 51,843 | | | | 5.47 | % |
| Total interest-earning assets | | | 3,278,519 | | | | 34,128 | | | | 4.19 | % | | | 3,245,024 | | | | 67,834 | | | | 4.20 | % | | | 3,038,391 | | | | 70,195 | | | | 4.66 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other assets | | | 260,651 | | | | | | | | | | | | 257,020 | | | | | | | | | | | | 223,893 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total assets | | | 3,539,170 | | | | | | | | | | | | 3,502,044 | | | | | | | | | | | | 3,262,284 | | | | | | | | | |
| LIABILITIES & EQUITY | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-bearing deposits | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest bearing checking, savings, & money market | | | 1,474,516 | | | | 867 | | | | 0.24 | % | | | 1,466,424 | | | | 1,872 | | | | 0.26 | % | | | 1,332,585 | | | | 2,455 | | | | 0.37 | % |
| Time deposits > $100,000 | | | 334,148 | | | | 720 | | | | 0.87 | % | | | 333,605 | | | | 1,454 | | | | 0.88 | % | | | 316,628 | | | | 1,717 | | | | 1.09 | % |
| Time deposits < $100,000 | | | 369,864 | | | | 931 | | | | 1.01 | % | | | 375,981 | | | | 1,953 | | | | 1.04 | % | | | 413,119 | | | | 2,714 | | | | 1.32 | % |
| Brokered time deposits < $100,000 | | | - | | | | - | | | | 0.00 | % | | | - | | | | - | | | | 0.00 | % | | | 3,372 | | | | 21 | | | | 1.26 | % |
| Total interest-bearing deposits | | | 2,178,528 | | | | 2,518 | | | | 0.46 | % | | | 2,176,010 | | | | 5,279 | | | | 0.49 | % | | | 2,065,704 | | | | 6,907 | | | | 0.67 | % |
Federal funds purchased & securities sold under agreements to repurchase | | | 168,303 | | | | 1,074 | | | | 2.57 | % | | | 169,103 | | | | 2,166 | | | | 2.58 | % | | | 178,359 | | | | 2,540 | | | | 2.87 | % |
| Other borrowings | | | 149,388 | | | | 1,437 | | | | 3.87 | % | | | 144,037 | | | | 2,866 | | | | 4.00 | % | | | 162,731 | | | | 3,108 | | | | 3.85 | % |
| Trust preferred debentures | | | 25,066 | | | | 402 | | | | 6.45 | % | | | 25,066 | | | | 807 | | | | 6.47 | % | | | 25,061 | | | | 792 | | | | 6.37 | % |
| Total interest-bearing liabilities | | | 2,521,285 | | | | 5,431 | | | | 0.87 | % | | | 2,514,216 | | | | 11,118 | | | | 0.89 | % | | | 2,431,855 | | | | 13,347 | | | | 1.11 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Noninterest bearing deposits | | | 613,315 | | | | | | | | | | | | 604,866 | | | | | | | | | | | | 511,345 | | | | | | | | | |
| Accrued expenses and other liabilities | | | 55,549 | | | | | | | | | | | | 56,679 | | | | | | | | | | | | 36,242 | | | | | | | | | |
| Total liabilities | | | 3,190,149 | | | | | | | | | | | | 3,175,761 | | | | | | | | | | | | 2,979,442 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Tompkins Financial Corporation Shareholders’ equity | | | 347,519 | | | | | | | | | | | | 324,798 | | | | | | | | | | | | 281,357 | | | | | | | | | |
| Noncontrolling interest | | | 1,502 | | | | | | | | | | | | 1,485 | | | | | | | | | | | | 1,485 | | | | | | | | | |
| Total equity | | | 349,021 | | | | | | | | | | | | 326,283 | | | | | | | | | | | | 282,842 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total liabilities and equity | | $ | 3,539,170 | | | | | | | | | | | $ | 3,502,044 | | | | | | | | | | | $ | 3,262,284 | | | | | | | | | |
| Interest rate spread | | | | | | | | | | | 3.32 | % | | | | | | | | | | | 3.31 | % | | | | | | | | | | | 3.55 | % |
| Net interest income/margin on earning assets | | | | | | | 28,697 | | | | 3.52 | % | | | | | | | 56,716 | | | | 3.51 | % | | | | | | | 56,848 | | | | 3.77 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Tax Equivalent Adjustment | | | | | | | (587 | ) | | | | | | | | | | | (1,165 | ) | | | | | | | | | | | (1,354 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income per consolidated financial statements | | | | | | $ | 28,110 | | | | | | | | | | | $ | 55,551 | | | | | | | | | | | $ | 55,494 | | | | | |
| (1) | | Average balances and yields on available-for-sale securities are based on historical amortized cost. |
| (2) | | Interest income includes the tax effects of taxable-equivalent adjustments using a combined New York State and Federal effective income tax rate of 40% to increase tax exempt interest income to taxable-equivalent basis. |
| (3) | | Nonaccrual loans are included in the average asset totals presented above. Payments received on nonaccrual loans have been recognized as disclosed in Note 1 of the Company’s consolidated financial statements included in Part I of the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2011. |
Net Interest Income
Net interest income is the Company’s largest source of revenue and stayed relatively flat as a percentage of total revenues at 68.8% and 69.5% for the three and six months ended June 30, 2012, compared to 69.9% and 69.4%, respectively, for the same periods in 2011. Net interest income is dependent on the volume and composition of interest earning assets and interest-bearing liabilities and the level of market interest rates. The Company’s net interest income over the past several years has benefitted from steady growth in average earning assets, as well as the low interest rate environment. With deposit rates currently at low levels, the downward pricing of these liabilities has slowed, while interest earning assets continue to reprice downward at a steady rate. This has contributed to a decrease in net interest margin for the three and six months ended June 30, 2012 compared to the same periods in 2011. The taxable equivalent net interest margin of 3.52% for the three month period ended June 30, 2012 and 3.51% for the six month period ended June 30, 2012 are below the margin for the same periods in 2011 of 3.77%. The decrease in the net interest margin was also partly due to the growth in interest earning assets over the prior year being concentrated in lower yielding securities rather than higher yielding loans.
The above table shows average interest-earning assets and interest-bearing liabilities, and the corresponding yield or cost associated with each. Taxable-equivalent net interest income for the three and six months ended June 30, 2012 was $28.7 million and $56.7 million, respectively, up 0.3% and down 0.2% when compared to the same periods in 2011.
Taxable-equivalent interest income for the second quarter of 2012 was $34.1 million, down 3.1% when compared to the second quarter of 2011. Taxable-equivalent interest income for the six months ending June 30, 2012 was $67.8 million, down 3.4% from $70.2 million for the first six months of 2011. The decrease in taxable-equivalent interest income was mainly a result of the decrease in the yield on average earnings assets, which was partially offset by growth in average earning assets. The yields on average earning assets were down 44 basis points and 46 basis points for the three and six month periods ended June 30, 2012 compared to the same periods in 2011; however, average earning assets were up 7.6% and 6.8% over the same periods. The yield on average earning assets was impacted by the low rate environment as well as growth being concentrated in lower yielding securities as a result of soft loan demand. Average securities balances for the second quarter of 2012 were up $168.0 million or 15.2% over average balances in the second quarter of 2011, while average yields were down 61 basis points. For the six months ended June 30, 2011 average securities balances increased $132.7 million or 12.2% from the same period in 2011, while yields declined 60 basis points. Average loan balances for the three and six months ended June 30, 2012 were up $76.2 million or 4.0% and $71.0 million or 3.7%, while average yields are down 28 basis points and 29 basis points, respectively over the same periods in 2011.
Interest expense for the second quarter of 2012 was down $1.2 million or 17.7% compared to the second quarter of 2011, reflecting lower average rates paid on deposits and borrowings. The average rate paid on interest bearing deposits during the second quarter of 2012 of 0.46% was 20 basis points lower than the average rate paid in the second quarter of 2011. Interest expense for the six months ending June 30, 2012 was $11.1 million, down $2.2 million or 16.7% compared to 2011. The rates paid were lower across all deposit categories. The lower cost of deposits was partially offset by growth in interest-bearing deposits. Average interest-bearing deposit balances in the second quarter of 2012 increased by $96.3 million or 4.6% compared to the same period in 2011. For the six months ending June 30, 2012 average interest-bearing deposits increased $110.3 million or 5.3% compared to the previous year. Total funding costs also benefitted from the growth in average noninterest bearing deposit balances. For the three and six months ended June 30, 2012, average noninterest bearing deposits of $613.3 million and $604.9 million were up 19.1% and 18.3%, respectively, over the same periods in 2011. Average other borrowings for the second quarter were down $4.5 million or 2.9% compared to prior year, and down $18.7 million or 11.5% for the six months ended June 30, 2012.
Provision for Loan and Lease Losses
The provision for loan and lease losses represents management’s estimate of the amount necessary to maintain the allowance for loan and lease losses at an adequate level. The provision for loan and lease losses was $1.0 million for the second quarter of 2012 and $2.1 million for the six months ended June 30, 2012, compared to $1.0 million and $2.9 million for the respective periods in 2011. The decrease in the provision for loan and lease losses for the six-month comparison is mainly a result of improved credit quality. The Company has seen improvement in credit quality metrics over the past several quarters and current levels of nonperforming loans and criticized and classified loans are down from the same period prior year. The allowance for loan and lease losses as a percentage of period end loans and leases was 1.33% at June 30, 2012, compared to 1.48% at June 30, 2011. The section captioned “Allowance for Loan and Lease Losses and Nonperforming Assets” contained elsewhere in this report has further details on the allowance for loan and lease losses. The section captioned “Financial Condition-Allowance for Loan and Lease Losses and Nonperforming Assets” below has further details on the allowance for loan and lease losses.
Noninterest Income
Noninterest income totaled $12.8 million and $24.4 million for the three and six months ended June 30, 2012, compared with $12.0 million and $24.5 million for the same periods in 2011. Noninterest income represented 31.2% and 30.5% of total revenues for the three and six months ended June 30, 2012 and remained relatively unchanged from 30.1% and 30.6% for the same periods in 2011.
Investment services income was $3.5 million in second quarter of 2012, a decrease of 8.7% from $3.8 million in the second quarter of 2011. Investment services income totaled $6.9 million for the first six months of 2012, down 10.1% over the same period in 2011. The decrease was mainly in brokerage related fees as a result of a planned decrease in the number of external broker dealer relationships, which will continue to impact comparisons through the remainder of 2012. Investment services income includes trust services, financial planning, wealth management services, and brokerage related services. With fees largely based on the market value and the mix of assets managed, the general direction of the stock market can have a considerable impact on fee income. The fair value of assets managed by, or in custody of, Tompkins was $3.1 billion at June 30, 2012, up 24.5% from $2.5 billion at June 30, 2011. These figures include $1.0 billion and $757.7 million, respectively, of Company-owned securities where TIS is custodian. The increase in fair value of assets reflects successful business development initiatives resulting in customer retention as well as generally higher stock market indices in 2012 when compared to the same period in 2011.
Insurance commissions and fees for the three and six months ended June 30, 2012 increased by $301,000 and $565,000 or 8.7% and 8.3% as compared to the same periods in 2011. Revenues for commercial insurance lines, personal insurance lines, and health and benefit related insurance products were up for the quarter compared to the same period in 2011. Both commercial lines and personal lines benefitted from the June 1, 2011 acquisition of Olver & Associates, Inc. The Olver acquisition added about $314,000 of commercial lines revenue, $105,000 of benefits revenue and $78,000 of personal lines revenue during the first six months of 2012. Health and benefit related insurance products continue to be a main source of internal growth for 2012, increasing by $123,000 or 43.2% for the second quarter over last year and by $202,000 or 35.3% for the six months ended June 30, 2012.
Service charges on deposit accounts were down $514,000 or 24.4% for the second quarter of 2012 compared to the second quarter of 2011 and down $713,000 or 17.4% for the six month period ended June 30, 2012 compared to the same period prior year. The largest component of this category is overdraft fees, which is largely driven by customer activity. The Company implemented changes related to the Dodd-Frank Act to its transaction processing which had an unfavorable impact on overdraft fees during the quarter and year to date periods.
Card services income for the three and six months ended June 30, 2012 was up $11,000 or 0.9% and $335,000 or 13.3% over the same periods in 2011. The increase was mainly in debit card income and reflects a higher number of cards issued, increased transaction volume, increased inter-change fees and a favorable adjustment to an accrual rate related to a points reward program as redemption rates have been below expectations.
Net mark-to-market gains on securities and borrowings held at fair value totaled $2,000 in the second quarter of 2012, compared to net mark-to-market losses of $37,000 in the second quarter of 2011. For the six month period ended June 30, 2012 net mark-to-market gains totaled $9,000 compared to net mark-to-market gains of $88,000 for the comparable period in 2011. Mark-to-market losses or gains relate to the change in the fair value of trading securities and certain borrowings where the Company has elected the fair value option. These unrealized amounts are primarily impacted by changes in interest rates.
Other income was $1.8 million and $1.4 million for the second quarters of 2012 and 2011. For the six months ended June 30, 2012 other income was $3.0 million, down $185,000 or 5.8% from 2011. The Company reversed $405,000 of an accrual that was previously established to cover the Company’s potential obligation to share in certain VISA litigation as a result of a recently announced settlement between VISA and certain merchants related to certain card related fees. The other significant components of other income are other service charges, increases in cash surrender value of corporate owned life insurance (”COLI”), gains on the sales of residential mortgage loans, and income from miscellaneous equity investments, including the Company’s investment in a Small Business Investment Company (“SBIC”). The first quarter of 2011 included a $504,000 gain related to an investment in a SBIC. The SBIC periodically recognizes gains related to investments held in its portfolio and distributes these gains to its investors. The Company believes that, as of June 30, 2012, there were no impairments with respect to its investment in the SBIC.
Net gains on sale of residential mortgage loans, included in other income on the consolidated statements of income, of $150,000 in the second quarter of 2012 were up by $14,000 or 10.3% compared to the second quarter of 2011. For the six month period ended June 30, 2012 net gain on the sale of mortgage loans was $250,000, down $50,000 or 16.7% from same period in 2011. To manage interest rate risk exposures, the Company from time to time sells certain fixed rate loan originations that have rates below or maturities greater than the standards set by the Company’s Asset/Liability Committee for loans held in the portfolio.
Noninterest Expense
Noninterest expense was $26.9 million for the second quarter of 2012, up $1.7 million or 6.7% compared to the same period prior year and $53.2 million for the six months ended June 30, 2012, up $2.8 million or 5.7% from $50.4 million in the first six months of 2011.
Salaries and wages expense decreased by $130,000 or 1.2% in the second quarter of 2012 from the same period in 2011. The decrease is largely the result of lowering certain incentive compensation accruals. For the six months ended June 30, 2012, salaries and wages were up $345,000 or 1.6%, over the same period in 2011, mainly reflecting annual merit increases and higher accruals for business development activities, partially offset by lower accruals for incentive compensation. Pension and other employee related benefits were up $466,000 or 12.7% and $734,000 or 9.6% for the second quarter and six months ended 2012 compared to the same periods in 2011. Lower interest rates have contributed to the increase in the cost of pension and employee benefits.
Merger expenses of $879,000 and $972,000 related to the merger with VIST were incurred during the quarter and six months ended June 30, 2012.
Other operating expenses for the second quarter 2012 increased by $472,000 or 7.0% compared to prior year. Contributing to the increase in the second quarter 2012 over the second quarter 2011 were the following: marketing expense (up $329,000), technology expense (up $56,000), as well as professional fees and cardholder expense (up $54,000 each). For the six months ended June 30, 2012, other operating expense increased $1.4 million or 10.7% to $14.3 million largely as a result of increases in marketing expense (up $639,000), professional fees (up $341,000) and cardholder expense (up $156,000).
Income Tax Expense
The provision for income taxes provides for Federal and New York State income taxes. The provision for income taxes was $4.2 million for an effective rate of 31.9% for the second quarter of 2012, compared to tax expense of $4.4 million and an effective rate of 31.6% for the same quarter in 2011. For the six month period ended June 30, 2012, the tax provision was $7.9 million for an effective rate of 32.1%, compared to tax expense of $8.5 million and an effective rate of 31.7% for the same period in 2011. The effective rates differ from the U.S. statutory rate of 35.0% during the comparable periods primarily due to the effect of tax-exempt income from loans, securities and life insurance assets.
FINANCIAL CONDITION
Total assets were $3.5 billion at June 30, 2012, up $82.4 million or 2.4% over December 31, 2011, and up $195.3 million or 5.9% over June 30, 2011. The growth over year-end was mainly in available-for-sale securities and loans which were up $39.5 million or 3.5% and $37.8 million or 1.9% respectively. Cash and cash equivalents were up $10.2 million or 20.6% when compared to year end. Total deposits were up $104.5 million or 3.9% over year-end with the majority of growth centered in checking, savings and money market deposits. Deposit growth was used to reduce other borrowings, mainly short-term borrowings with the FHLB as loan demand continues to remain relatively soft.
Securities
As of June 30, 2012, total securities were $1.2 billion or 35.3% of total assets, compared to $1.2 billion or 35.0% of total assets at year-end 2011, and $1.1 billion or 34.6% at June 30, 2011. The following table details the composition of securities available-for-sale and securities held-to-maturity.
| Available-for-Sale Securities | | | |
| | | | |
| | | 06/30/2012 | | | 12/31/2011 | |
| | | Amortized Cost1 | | | Fair Value | | | Amortized Cost1 | | | Fair Value | |
| (in thousands) | | | | | | | | | | | | |
| U.S. Treasury securities | | $ | 2,008 | | | $ | 2,030 | | | $ | 2,020 | | | $ | 2,070 | |
| Obligations of U.S. Government sponsored entities | | | 543,324 | | | | 562,200 | | | | 408,958 | | | | 422,590 | |
| Obligations of U.S. states and political subdivisions | | | 54,768 | | | | 57,046 | | | | 56,939 | | | | 59,653 | |
| Mortgage-backed securities – residential | | | | | | | | | | | | | | | | |
| U.S. Government agencies | | | 106,698 | | | | 112,692 | | | | 123,426 | | | | 129,773 | |
| U.S. Government sponsored entities | | | 420,690 | | | | 437,876 | | | | 501,136 | | | | 517,378 | |
| Non-U.S. Government agencies or sponsored entities | | | 5,163 | | | | 5,074 | | | | 6,334 | | | | 5,876 | |
| U.S. corporate debt securities | | | 5,013 | | | | 5,148 | | | | 5,017 | | | | 5,183 | |
| Total debt securities | | | 1,137,664 | | | | 1,182,066 | | | | 1,103,830 | | | | 1,142,523 | |
| Equity securities | | | 1,022 | | | | 1,022 | | | | 1,023 | | | | 1,023 | |
| Total available-for-sale securities | | $ | 1,138,686 | | | $ | 1,183,088 | | | $ | 1,104,853 | | | $ | 1,143,546 | |
1 Net of other-than-temporary impairment losses recognized in earnings
| Held-to-Maturity Securities | |
| | |
| | | 06/30/2012 | | | 12/31/2011 | |
| (in thousands) | | Amortized Cost | | | Fair Value | | | Amortized Cost | | | Fair Value | |
| Obligations of U.S. states and political subdivisions | | $ | 27,120 | | | $ | 27,613 | | | $ | 26,673 | | | $ | 27,255 | |
| Total held-to-maturity debt securities | | $ | 27,120 | | | $ | 27,613 | | | $ | 26,673 | | | $ | 27,255 | |
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 to mitigate interest rate risk and provides sources of liquidity without significant risk to capital. The held-to-maturity portfolio remained flat in the current quarter as compared to year-end.
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 June 30, 2012, the Company held five mortgage backed securities, with a fair value of $5.1 million, that were not issued by U.S. Government agencies or U.S. Government sponsored entities. In 2009, the Company determined that three of these non-U.S. Government mortgage backed securities were other-than-temporarily impaired based on an analysis of the above factors for these three securities. As a result, the Company recorded other-than-temporary impairment charges of $2.0 million in 2009 on these investments. The credit loss component of $146,000 was recorded as other-than-temporary impairment losses in the consolidated statement of income, while the remaining non-credit portion of the impairment loss was recognized in other comprehensive income in the condensed consolidated statements of condition and changes in shareholders’ equity. In 2010 and 2011, the Company recorded an additional credit loss component of other-than-temporary charge of $34,000 and $65,000, respectively. The Company’s review of these securities as of June 30, 2012 determined that an additional credit loss component of other than temporary impairment charge of $65,000 was necessary. As of June 30, 2012, the carrying value of these securities exceeded their fair value by $89,000. A continuation or worsening of current economic conditions may result in additional credit loss component of other-than-temporary impairment losses related to these investments.
The Company maintains a trading portfolio with a fair value of $17.9 million as of June 30, 2012, compared to $19.6 million at December 31, 2011. The decrease in the trading portfolio reflects maturities or payments during 2012. For the six months ended June 30, 2012, net mark-to-market losses related to the securities trading portfolio were $157,000, compared to net mark-to-market gains of $115,000 for the same period in 2011.
| Loans and Leases | |
| | |
| Loans and Leases at June 30, 2012 and December 31, 2011 were as follows: | | | | | | |
| | | | | | | |
| (in thousands) | | 06/30/2012 | | | 12/31/2011 | |
| Commercial and industrial | | | | | | |
| Agriculture | | $ | 56,241 | | | $ | 67,566 | |
| Commercial and industrial other | | | 425,306 | | | | 417,128 | |
| Subtotal commercial and industrial | | | 481,547 | | | | 484,694 | |
| Commercial real estate | | | | | | | | |
| Construction | | | 31,734 | | | | 47,304 | |
| Agriculture | | | 47,573 | | | | 53,071 | |
| Commercial real estate other | | | 702,458 | | | | 665,859 | |
| Subtotal commercial real estate | | | 781,765 | | | | 766,234 | |
| Residential real estate | | | | | | | | |
| Home equity | | | 156,911 | | | | 161,278 | |
| Mortgages | | | 534,552 | | | | 500,034 | |
| Subtotal residential real estate | | | 691,463 | | | | 661,312 | |
| Consumer and other | | | | | | | | |
| Indirect | | | 29,569 | | | | 32,787 | |
| Consumer and other | | | 31,192 | | | | 30,961 | |
| Subtotal consumer and other | | | 60,761 | | | | 63,748 | |
| Leases | | | 4,993 | | | | 6,489 | |
| Total loans and leases | | | 2,020,529 | | | | 1,982,477 | |
| Less: unearned income and deferred costs and fees | | | (848 | ) | | | (628 | ) |
| Total loans and leases, net of unearned income and deferred costs and fees | | $ | 2,019,681 | | | $ | 1,981,849 | |
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, 2011. 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 June 30, 2012. 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.
Total loans and leases of $2.0 billion at June 30, 2012, are up 1.9% from December 31, 2011, with growth in residential real estate of 4.6%, and commercial real estate loans of 2.0%; commercial and industrial loans and consumer loans are down 0.6% and 4.7%, respectively, compared to December 31, 2011. As of June 30, 2012 total loans and leases represented 58.0% of total assets compared to 58.3% of total assets at December 31, 2011. In general, the demand for some lending products continues to be soft.
Residential real estate loans, including home equity loans, of $691.5 million at June 30, 2012 increased by $30.2 million or 4.6% from $661.3 million at year-end 2011, and comprised 34.2% of total loans and leases at June 30, 2012. 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.
The Company may sell residential real estate loans in the secondary market based on interest rate considerations. Loans are generally sold to the Federal Home Loan Mortgage Corporation (“FHLMC”) or the State of New York Mortgage Agency (“SONYMA”). These residential real estate loans are generally sold without recourse in accordance with standard secondary market loan sale agreements. These residential real estate loan sales 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 June 30, 2012 is insignificant. The Company has never had to repurchase a loan sold with recourse.
During the first six months of 2012 and 2011, the Company sold residential mortgage loans totaling $10.9 million and $15.6 million, respectively, and realized gains on these sales of $250,000 and $300,000, 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 $1.3 million at June 30, 2012 down from $1.4 million at December 31, 2011.
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 $15.5 million compared with December 31, 2011. Commercial real estate loans represented 38.7% of total loans as of June 30, 2012. Commercial and industrial loans totaled $481.5 million at June 30, 2012, which is a decrease of 0.7% from $484.7 million reported as of December 31, 2011. Demand for commercial loans continues to be soft in the second quarter of 2012, reflecting weak economic conditions. As of June 30, 2012, agriculturally-related loans totaled $103.8 million or 5.1% of total loans and leases down from $120.6 million or 6.1% of total loans at December 31, 2011. 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 $60.8 million at June 30, 2012, down from $63.7 million at December 31, 2011. The decrease is mainly in indirect automobile loans and reflects increased competition.
The lease portfolio decreased by 23.1% to $5.0 million at June 30, 2012 from $6.5 million at December 31, 2011. The lease portfolio has traditionally consisted of leases on vehicles for consumers and small businesses. More aggressive competition for automobile financing has led to a decline in the consumer lease portfolio over the past several years. Management continues to review leasing opportunities, primarily commercial leasing and municipal leasing. As of June 30, 2012, commercial leases and municipal leases represented 99.4% of total leases, while consumer leases made up the remaining percentage, unchanged from the percentages at December 31, 2011.
The Company’s loan and lease customers are located primarily in the New York communities served by its three subsidiary banks. Although operating in numerous communities in New York State, the Company is still dependent on the general economic conditions of New York. 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
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 June 30, 2012, management considers the allowance to be appropriate. Under adversely different conditions or assumptions, the Company would need to increase the allowance.
The table below provides, 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) | | 06/30/2012 | | | 12/31/2011 | | | 06/30/2011 | |
| | | | | | | | | | |
| Commercial and industrial | | $ | 7,807 | | | $ | 8,936 | | | $ | 7,840 | |
| Commercial real estate | | | 12,967 | | | | 12,662 | | | | 14,444 | |
| Residential real estate | | | 4,350 | | | | 4,247 | | | | 4,425 | |
| Consumer and other | | | 1,720 | | | | 1,709 | | | | 1,605 | |
| Leases | | | 21 | | | | 39 | | | | 47 | |
| Total | | $ | 26,865 | | | $ | 27,593 | | | $ | 28,361 | |
As of June 30, 2012, the allowance is down $728,000 or 2.6% from year end 2011. The decrease is mainly a result of improvement in credit quality measures, including a decrease in the volume of internally-classified loans. The amount of loans internally-classified Special Mention, Substandard and Doubtful totaled $122.4 million at June 30, 2012 compared to $126.6 million at December 31, 2011 and $162.9 million at June 30, 2011. In addition to the decrease in total internally-classified loans from December 31, 2011, there were 6 relationships totaling $13.2 million upgraded from Substandard to Special Mention as well as some upgrades of Special Mention and Substandard to non-classified risk ratings. These upgrades reflect improvement in the financial conditions of some commercial relationships. The decrease in the allocations for commercial and industrial loans was mainly a result of a decrease in allocations based upon historical losses as net charge-offs for commercial and industrial loans were down from prior year, and a decrease in allocations for specific loans related to the upgrades of certain relationships from Substandard to Special Mention. During the first six months of 2012, the Company upgraded one commercial relationship totaling $11.2 million from Substandard to a nonclassified or pass rating based upon improved operating results. The Company also
downgraded one commercial relationship totaling $16.9 million from a pass to a Special Mention due to some weakness in 2011 operating results. The increase in the allocations for commercial real estate loans was mainly a result of an increase in allocations based upon historical losses as net charge-offs for commercial real estate loans were up from previous year, which was partially offset by a decrease in allocations for specific loans related to the upgrade of certain relationships from Substandard to Special Mention and a decrease in the level of internally-classified loans. Reserve allocations for residential real estate loans were up slightly over year-end 2011 amid concern over high unemployment and soft real estate values in some of the Company’s market areas. The allocation for consumer loans is largely unchanged as the increase in consumer loan net charge-offs during the period, was partially offset by a decrease in the outstanding balance for this portfolio.
Activity in the Company’s allowance for loan and lease losses during the first six months of 2012 and 2011, and for the twelve months ended December 31, 2011 is illustrated in the table below.
| Analysis of the Allowance for Loan and Lease Losses | |
| | | | |
| (in thousands) | | 06/30/2012 | | | 12/31/2011 | | | 06/30/2011 | |
| Average loans outstanding during year | | $ | 1,980,673 | | | $ | 1,928,540 | | | $ | 1,914,951 | |
| Balance of allowance at beginning of year | | | 27,593 | | | | 27,832 | | | | 27,832 | |
| | | | | | | | | | | | | |
| LOANS CHARGED-OFF: | | | | | | | | | | | | |
| Commercial and industrial | | | 581 | | | | 2,403 | | | | 1,257 | |
| Commercial real estate | | | 1,169 | | | | 4,488 | | | | 369 | |
| Residential real estate | | | 1,023 | | | | 2,730 | | | | 1,195 | |
| Consumer and other | | | 411 | | | | 608 | | | | 268 | |
| Leases | | | 0 | | | | 3 | | | | 0 | |
| Total loans charged-off | | $ | 3,184 | | | $ | 10,232 | | | $ | 3,089 | |
| | | | | | | | | | | | | |
| RECOVERIES OF LOANS | | | | | | | | | | | | |
| PREVIOUSLY CHARGED-OFF: | | | | | | | | | | | | |
| Commercial and industrial | | | 65 | | | | 424 | | | | 393 | |
| Commercial real estate | | | 0 | | | | 280 | | | | 105 | |
| Residential real estate | | | 66 | | | | 33 | | | | 32 | |
| Consumer and other | | | 189 | | | | 311 | | | | 173 | |
| Total loans recovered | | $ | 320 | | | $ | 1,048 | | | $ | 703 | |
| Net loans charged-off | | | 2,864 | | | | 9,184 | | | | 2,386 | |
| Additions to allowance charged to operations | | | 2,136 | | | | 8,945 | | | | 2,915 | |
| Balance of allowance at end of year | | $ | 26,865 | | | $ | 27,593 | | | $ | 28,361 | |
| Annualized net charge-offs to average total loans and leases | | | 0.22 | % | | | 0.48 | % | | | 0.25 | % |
As of June 30, 2012 the allowance was $26.9 million or 1.33% of total loans and leases outstanding, compared with $27.6 million or 1.39% at December 31, 2011 and $28.4 million or 1.48% at June 30, 2011. 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. Nonperforming loans totaled $38.5 million at June 30, 2012, down 6.0% from June 31, 2011, and loans internally identified as Special Mention, Substandard, and Doubtful totaled $122.4 million, down 24.9% from the end of the second quarter of 2011. However, with the strength of the economic recovery uncertain, there is no assurance that weak economic conditions may not adversely affect the credit quality of the Company’s loans and leases, results of operations, and financial condition going forward.
The provision for loan losses was $1.0 million for the second quarter of 2011 and 2012 and $2.1 million and $2.9 million, respectively, for the six months ended June 30, 2012 and 2011. Net charge-offs for the six months ended June 30, 2012 were $2.9 million compared to $2.4 million in the comparable year ago period. Annualized net charge-offs for the first six months of 2012 represent 0.22% of average loans, which is down from 0.25% for the same period in 2011, and is favorable to our peer group ratio of 0.70% at March 31, 2012. Commercial real estate gross charge-offs in the first six months of 2012 include a $1.0 million charge-off on one commercial real estate relationship totaling $4.5 million.
| Analysis of Past Due and Nonperforming Loans | |
| | |
| (dollar amounts in thousands) | | 06/30/2012 | | | 12/31/2011 | | | 06/30/2011 | |
| Loans 90 days past due and accruing | | | | | | | | | |
| Commercial and industrial | | $ | 0 | | | $ | 0 | | | $ | 785 | |
| Commercial real estate | | | 0 | | | | 0 | | | | 207 | |
| Residential real estate | | | 321 | | | | 1,378 | | | | 1,520 | |
| Consumer and other | | | 0 | | | | 2 | | | | 0 | |
| Total loans 90 days past due and accruing | | | 321 | | | | 1,380 | | | | 2,512 | |
| Nonaccrual loans | | | | | | | | | | | | |
| Commercial and industrial | | | 5,150 | | | | 7,105 | | | | 5,383 | |
| Commercial real estate | | | 24,729 | | | | 26,352 | | | | 27,541 | |
| Residential real estate | | | 6,736 | | | | 5,884 | | | | 5,318 | |
| Consumer and other | | | 134 | | | | 237 | | | | 202 | |
| Leases | | | 0 | | | | 10 | | | | 13 | |
| Total nonaccrual loans | | | 36,749 | | | | 39,588 | | | | 38,457 | |
| Troubled debt restructurings not included above | | | 1,507 | | | | 428 | | | | 0 | |
| Total nonperforming loans and leases | | | 38,577 | | | | 41,396 | | | | 40,969 | |
| Other real estate owned | | | 2,161 | | | | 1,334 | | | | 1,742 | |
| Total nonperforming assets | | $ | 40,738 | | | $ | 42,730 | | | $ | 42,711 | |
| Allowance as a percentage of loans and leases outstanding | | | 1.33 | % | | | 1.39 | % | | | 1.48 | % |
| Allowance as a percentage of nonperforming loans and leases | | | 69.75 | % | | | 66.65 | % | | | 69.23 | % |
| Total nonperforming assets as percentage of total assets | | | 1.17 | % | | | 1.26 | % | | | 1.30 | % |
Nonperforming assets include nonaccrual loans, troubled debt restructurings (“TDR”), and foreclosed real estate. Nonperforming assets represented 1.17% of total assets at June 30, 2012, compared to 1.26% at December 31, 2011, and 1.30% at June 30, 2011. Nonperforming assets are down 4.8% from December 31, 2011 and 5.1% from June 30, 2011, respectively. 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. The Company’s ratio of nonperforming assets to total assets continues to compare favorably to our peer group’s most recent ratio of 2.62% at March 31, 2012.
Nonperforming loans represented 1.91% of total loans at June 30, 2012, compared to 2.09% of total loans at December 31, 2011, and 2.13% of total loans at June 30, 2011. A breakdown of nonperforming loans by portfolio segment is shown above. Total nonperforming loans are down from December 31, 2011 and June 31, 2011 by 7.0% and 6.0%, respectively. Commercial real estate loans represent the largest component of nonperforming loans. Nonperforming commercial real estate loans include two relationships totaling $8.6 million at June 30, 2012 and $12.5 million at December 31, 2011. Both of these relationships are considered impaired and have either been charged down to fair value or have specific allocations within the allowance model.
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 include loans that meet the definition of a TDR but are performing in accordance with the modified terms and therefore classified as accruing loans. At June 30, 2012 the Company had $11.80 million in TDRs, of which $10.3 million were nonaccrual and included in the table above, and one loan was more than 90 days past due with a total balance of $56,000.
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. As of June 30, 2012 and December 31, 2011, the Company was regularly receiving payments on over 60% of the loans categorized as nonaccrual.
The Company’s recorded investment in loans and leases that are considered impaired totaled $30.2 million at June 30, 2012, and $32.8 million at December 31, 2011. 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 $32.5 million at June 30, 2012, $32.9 million at December 31, 2011, and $33.3 million at June 30, 2011. At June 30, 2012, $5.0 million of impaired loans had specific reserve allocations of $2.7 million and $25.2 million had no specific reserve allocation. At December 31, 2011, $8.7 million of impaired loans had specific reserve allocations of $3.5 million and $24.0 million had no specific reserve allocation. 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. Interest income recognized on impaired loans and leases, all collected in cash, was $28,000 for the year-to-date periods ended June 30, 2012 and $0 for December 31, 2011, respectively, and $10,000 for the year-to-date period ended June 30, 2011.
The ratio of the allowance to nonperforming loans (loans past due 90 days and accruing, nonaccrual loans and restructured troubled debt) was 69.8 times at June 30, 2012, up from 66.7 times in December 31, 2011, and 69.2 times at June 30, 2011. The Company’s ratio is comparable to our peer group ratio of 0.70 times as of 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.
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 60 commercial relationships totaling $22.6 million at June 30, 2012, that were classified as Substandard and continue to accrue interest. This presents an improvement from the 60 commercial relationships totaling $28.5 million at December 31, 2011, which were classified as Substandard, and continued to accrue interest. Of the 60 commercial relationships that were Substandard, there are 6 relationships that equaled or exceeded $1.0 million, which in aggregate totaled $14.6 million, the largest of which is $5.3 million. Over the past few years, the Company has seen an increase in potential problem loans as weak economic conditions have strained borrowers’ cash flows and collateral values. The decrease in the dollar volume of potential problem loans since year-end 2011 was mainly due to the upgrade of several large commercial credits, including agriculturally-related loans, to a risk grading better than Substandard. 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 $353.7 million at June 30, 2012, an increase of $54.6 million or 18.2% from December 31, 2011, mainly a result of the net $38.0 million capital raise completed in the second quarter of 2012. Other significant components of the increase in total equity include: net income of $16.6 million less cash dividends paid of $8.4 million a $1.5 million increase for the exercise of stock options and $1.0 million for the issue of shares under the employee stock ownership plan.
Additional paid-in capital increased by $42.0 million, from $206.4 million at December 31, 2011, to $248.4 million at June 30, 2012. The increase is primarily attributable to the $38.0 million capital raise, $1.5 million related to stock option exercises, $1.0 million related to shares purchased under the employee stock ownership plan, $934,000 related to shares issued under the dividend reinvestment and direct stock purchase plan, and $688,000 related to stock-based compensation. Retained earnings increased by $8.2 million from $96.4 million at December 31, 2011, to $104.7 million at June 30, 2012, reflecting net income of $16.6 million less dividends paid of $8.4 million. Accumulated other comprehensive loss increased from a net unrealized loss of $3.7 million at December 31, 2011 to a net unrealized gain of $484,000 at June 30, 2012; reflecting a $3.4 million increase in unrealized gains on available-for-sale securities due to market rates, and a $735,000 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 six months of 2012 totaled approximately $8.4 million, representing 50.5% of year to date 2012 earnings. Cash dividends of $0.72 per common share paid in the first six months of 2012 were up 5.9% over cash dividends of $0.68 per common share paid in the first six months of 2011.
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, shares have been repurchased under the plan.
As previously mentioned, on April 3, 2012, the Company closed the registered public offering of 1,006,250 shares of its common stock at a price of $40.00 per share, less underwriting discounts and commissions. After transaction costs, net proceeds from the capital raise were approximately $38.0 million and resulted in the issuance of 1,006,250 shares of common stock on April 3, 2012.
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 June 30, 2012, compared to the regulatory capital requirements for “well capitalized” institutions.
| REGULATORY CAPITAL ANALYSIS | | | | | | | | | | | |
| June 30, 2012 | | Actual | | | | Well Capitalized Requirement | |
| (dollar amounts in thousands) | | Amount | | | Ratio | | | | Amount | | | Ratio | |
| Total Capital (to risk weighted assets) | | $ | 357,453 | | | | 16.22 | % | | | $ | 220,332 | | | | 10.00 | % |
| Tier 1 Capital (to risk weighted assets) | | $ | 330,331 | | | | 14.99 | % | | | $ | 132,199 | | | | 6.00 | % |
| Tier 1 Capital (to average assets) | | $ | 330,331 | | | | 9.53 | % | | | $ | 173,280 | | | | 5.00 | % |
As illustrated above, the Company’s capital ratios on June 30, 2012 remain above the minimum requirements for well capitalized institutions. Total capital as a percent of risk weighted assets increased from 14.2% at December 31, 2011. Tier 1 capital as a percent of risk weighted assets increased from 12.9% at the end of 2011. Tier 1 capital as a percent of average assets increased from 8.5% at December 31, 2011. The increase in capital ratios over year-end 2011 is mainly the result of the $38.0 million capital raise the Company completed in the current quarter which positioned the Company for future growth including the recently-completed VIST acquisition.
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 is 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. As of June 30, 2012, Mahopac had a Tier 1 capital to average assets ratio of 9.1%, a Tier 1 risk-based capital to risk-weighted capital ratio of 13.3% and a Total risk-based capital to risk-weighted assets ratio of 14.6%.
As of June 30, 2012, the capital ratios for the Company’s other two 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. On June 7, 2012 the US banking regulators published their Notice of Proposed Rule Making to implement changes in capital rules. The Company is evaluating the potential impact on our capital ratios.
Deposits and Other Liabilities
Total deposits of $2.8 billion at June 30, 2012 increased $104.5 million or 3.9% from December 31, 2011, due primarily to an $83.0 million increase in interest checking, savings and money market balances and a $30.3 million increase in non interest bearing deposits offset by a $8.8 million decrease in time deposits. Growth over year-end 2011 was divided relatively equally among municipal interest checking, personal and business savings and money market balances and personal non interest bearing accounts.
Total deposits were up $193.1 million or 7.5% over June 30, 2011. The increase was due to a $119.2 million increase in interest checking, savings and money market accounts of which $68.5 million was attributable to growth in personal and business segments and $110.4 million of growth in noninterest bearing deposits. This was offset by a decline in time deposits of $36.5 million compared to June 30, 2011, mainly attributable to declines in time deposits less than $100,000.
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 $110.2 million or 5.0% to $2.3 billion at June 30, 2012 from $2.2 billion at year-end 2011. Core deposits represented 84.0% of total deposits at June 30, 2012, compared to 83.1% of total deposits at December 31, 2011.
Municipal money market accounts of $289.1 million at June 30, 2012 remained relatively flat from $291.7 million at year-end 2011. As compared to June 30, 2011, municipal money market accounts increased $15.1 million or 5.5%. 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 $46.7 million at June 30, 2012, and $49.1 million at December 31, 2011. 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 $115.0 million at June 30, 2012, comparable to $120.0 million at December 31, 2011.
The Company’s other borrowings totaled $121.9 million at June 30, 2012, down $64.1 million or 34.5% from $186.1 million at December 31, 2011. Borrowings at June 30, 2012 included $120.0 million in FHLB term advances. Borrowings at year-end 2011 included $122.1 million in FHLB term advances, $53.1 million of overnight FHLB advances, and a $10.9 million advance from a bank. The decrease in borrowings reflects the pay down of FHLB borrowings as a result of deposit growth and soft loan demand. Of the $120.0 million in FHLB term advances at June 30, 2012, $80.0 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 $165,000 (net mark-to-market gain of $165,000) over the six months ended June 30, 2012.
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, 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, at June 30, 2012, decreased by $77.2 million or 9.6% from $804.0 million at December 31, 2011. Non-core funding sources, as a percentage of total liabilities, were 23.2% at June 30, 2012, compared to 25.9% at December 31, 2011. The decrease in non-core funding sources was mainly due to declines in FHLB advances. With the growth in core deposits and soft loan demand over the past several quarters, the Company has paid down non-core funding sources.
Non-core funding sources may require securities to be pledged against the underlying liability. Securities carried at $737.3 million and $730.6 million at June 30, 2012 and December 31, 2011, respectively, were either pledged or sold under agreements to repurchase. Pledged securities represented 62.3% of total securities at June 30, 2012, compared to 66.1% of total securities at December 31, 2011.
Cash and cash equivalents totaled $59.8 million as of June 30, 2012, up from $49.6 million at December 31, 2011. Short-term investments, consisting of securities due in one year or less, increased from $19.6 million at December 31, 2011, to $28.5 million on June 30, 2012. The Company also has $17.9 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 mortgage-backed securities, at fair value, were $555.6 million at June 30, 2012 compared with $653.0 million at December 31, 2011. Outstanding principal balances of residential mortgage loans, consumer loans, and leases totaled approximately $756.9 million at June 30, 2012 as compared to $731.1 million at December 31, 2011. 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, 2012, the unused borrowing capacity on established lines with the FHLB was $1.0 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 June 30, 2012, total unencumbered residential mortgage loans of the Company were $251.3 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.
| 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 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 May 31, 2012 a 200 basis point parallel upward change in interest rates over a one-year time frame would result in a one-year decrease in net interest income from the base case of approximately 0.69%, while a 100 basis point parallel decline in interest rates over a one-year period would result in a decrease in one-year net interest income from the base case of 0.59%. The simulation assumes no balance sheet growth and no management action to address balance sheet mismatches.
The neutral exposure in a rising interest rate environment is mainly driven by the repricing assumptions of the Company’s core deposit base which currently match increases in asset yields in the short-term. Longer-term, the impact of a rising rate environment is slightly negative as assumed funding costs increase in the model. 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 slight decrease in net interest margin over the next twelve months. Funding cost reductions are limited and net interest income is expected to trend downward as loans and securities are assumed to roll back onto the balance sheet at lower than portfolio yields.
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. The table below is a Condensed Static Gap Report, which illustrates the anticipated repricing intervals of assets and liabilities as of June 30, 2012. The Company’s one-year net interest rate gap was a negative $220.7 million or 6.34% of total assets at June 30, 2012 compared with a negative $89.4 million or 2.63% of total assets at December 31, 2011. 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 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 – June 30, 2012 | | | | Repricing Interval | | | | |
| | | | | | | | | | | | | | | | |
| (in thousands) | | Total | | | 0-3 months | | | 3-6 months | | | 6-12 months | | | Cumulative 12 months | |
| | | | | | | | | | | | | | | | |
Interest-earning assets1 | | $ | 3,266,321 | | | $ | 691,140 | | | $ | 174,502 | | | $ | 312,863 | | | $ | 1,178,505 | |
| Interest-bearing liabilities | | | 2,427,088 | | | | 1,040,168 | | | | 184,862 | | | | 174,163 | | | | 1,399,193 | |
| Net gap position | | | | | | | (349,028 | ) | | | (10,360 | ) | | | 138,700 | | | | (220,688 | ) |
| Net gap position as a percentage of total assets | | | | | | | (10.02 | %) | | | (0.30 | %) | | | 3.98 | % | | | (6.34 | %) |
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 June 30, 2012. 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 June 30, 2012, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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, 2011.
| Unregistered Sales of Equity Securities and the Use of Proceeds |
| Issuer Purchases of Equity Securities | |
| | | Total Number of Shares Purchased (a) | | | Average Price Paid Per Share (b) | | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (c) | | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (d) | |
| | | | | | | | | | | | | |
| April 1, 2012 through April 30, 2012 | | | 1,571 | | | $ | 39.45 | | | | 0 | | | | 335,000 | |
| | | | | | | | | | | | | | | | | |
| May 1, 2012 through May 30, 2012 | | | 584 | | | | 36.49 | | | | 0 | | | | 335,000 | |
| | | | | | | | | | | | | | | | | |
| June 1, 2012 through June 30, 2012 | | | 0 | | | | 0 | | | | 0 | | | | 335,000 | |
| | | | | | | | | | | | | | | | | |
| Total | | | 2,155 | | | $ | 38.65 | | | | 0 | | | | 335,000 | |
Included in the table above are 1,571 shares purchased in April 2012, at an average cost of $39.45 and 584 shares purchased in May 2012, at an average cost of $36.49 by the trustee of the rabbi trust established by the Company under the Company’s Amended and Restated Retainer Plan For Eligible Directors of Tompkins Financial Corporation and it’s wholly-owned Subsidiaries, and were part of the director deferred compensation under that plan.
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, the Company has not made any repurchases under this plan.
Recent Sales of Unregistered Securities
None
| Defaults Upon Senior Securities |
The information called for by this item is incorporated by reference to the Exhibit Index included in this Quarterly Report on Form 10-Q, immediately following the signature page.
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 09, 2012
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) | |
| Exhibit Number | | Description | | Pages |
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| | | | 57 |
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| | | | 58 |
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| | | | 59 |
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| | | | 60 |
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