Washington, D.C. 20549
Former name, former address, and former fiscal year, if changed since last report: NA
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1. Business
2. Basis of Presentation
The unaudited consolidated financial statements included in this quarterly report do not include all of the information and footnotes required by GAAP for a full year presentation and certain disclosures have been condensed or omitted in accordance with rules and regulations of the Securities and Exchange Commission. 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.
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 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
4. Mergers and Acquisitions
The acquisition was a stock transaction. Under the terms of the merger agreement, each share of VIST Financial 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, resulting in the Company issuing 2,093,689 shares at a fair value of $82.2 million. The Company also paid $1.2 million to retire outstanding VIST Financial employee stock options; while other VIST Financial employee stock options were converted into options to purchase Tompkins’ common stock, with an aggregate fair value of $1.1 million. In addition, immediately prior to the completion of the merger, Tompkins purchased from the United States Department of the Treasury the issued and outstanding shares of VIST Financial Fixed Rate Cumulative Perpetual Preferred Stock, Series A, as well as the warrant to purchase shares of VIST Financial common stock issued in connection with the issuance of the preferred stock (the “TARP Purchase”) and any accrued and unpaid dividends for an aggregate purchase price of $26.5 million. The securities purchased in the Troubled Asset Relief Program (“TARP”) Purchase were cancelled in connection with the consummation of the merger.
The acquisition was accounted for under the acquisition method of accounting and accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at their estimated fair values as of acquisition date. VIST Financial’s assets and liabilities were recorded at their preliminary estimated fair values as of August 1, 2012, the acquisition date, and VIST Financial’s results of operations have been included in the Company’s Consolidated Statements of Income since that date.
The core deposit intangible and customer related intangibles totaled $10.7 million and $5.3 million, respectively and are being amortized over their estimated useful lives of approximately 10 years and 15 years, respectively, using an accelerated method. The goodwill is not being amortized but will be evaluated at least annually for impairment. The goodwill, core deposit intangibles, and customer related intangibles are not deductable for taxes.
The fair values of deposit liabilities with no stated maturities such as checking, money market and savings accounts, were assumed to equal the carrying amounts since these deposits are payable on demand. The fair values of certificates of deposits and IRAs represent the present value of contractual cash flows discounted at market rates for similar certificates of deposit.
The fair value of borrowings, which were mainly repurchase agreements with a large money center bank, was determined by discounted cash flow, as well as obtaining quotes from the money center bank. The Company also assumed trust preferred debentures. The fair value of these instruments was estimated by using the income approach whereby the expected cash flows over remaining estimated life are discounted using the Company’s credit spread over the current fully indexed yield based on an expectation of future interest rates derived from observed market interest rate curve and volatilities.
Direct costs related to the acquisition were expensed as incurred. During the three and nine months ended September 30, 2012, the Company incurred $13.8 million and $14.8 million, respectively, of merger and acquisition integration-related expenses, which have been separately stated in the Company’s Consolidated Statements of Income.
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 September 30, 2012, management considers the allowance to be appropriate. Under adversely different conditions or assumptions, the Company would need to increase the allowance.
Acquired Loans and Leases
As of September 30, 2012 there was no allowance for loans and lease losses on the acquired loan portfolio. There were also no charge-offs or provision expense related to the acquired loans between acquisition date of August 1, 2012 and September 30, 2012.
Acquired loans accounted for under ASC 310-30
For our acquired loans, our allowance for loan losses is estimated based upon our expected cash flows for these loans. To the extent that we experience a deterioration in borrower credit quality resulting in a decrease in our expected cash flows subsequent to the acquisition of the loans, an allowance for loan losses would be established based on our estimate of future credit losses over the remaining life of the loans.
Acquired loans accounted for under ASC 310-20
We establish our allowance for loan losses through a provision for credit losses based upon an evaluation process that is similar to our evaluation process used for originated loans. This evaluation, which includes a review of loans on which full collectability may not be reasonably assured, considers, among other matters, the estimated fair value of the underlying collateral, economic conditions, historical net loan loss experience, carrying value of the loans, which includes the remaining net purchase discount or premium, and other factors that warrant recognition in determining our allowance for loan losses.
The 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) | | 09/30/2012 | | | 12/31/2011 | | | 09/30/2011 | |
| | | | | | | | | | |
| Commercial and industrial | | $ | 8,002 | | | $ | 8,936 | | | $ | 8,569 | |
| Commercial real estate | | | 11,984 | | | | 12,662 | | | | 13,853 | |
| Residential real estate | | | 4,641 | | | | 4,247 | | | | 4,009 | |
| Consumer and other | | | 2,004 | | | | 1,709 | | | | 1,408 | |
| Leases | | | 1 | | | | 39 | | | | 39 | |
| Total | | $ | 26,632 | | | $ | 27,593 | | | $ | 27,878 | |
As of September 30, 2012, the allowance is down $961,000 or 3.5% 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 $113.5 million at September 30, 2012 compared to $126.6 million at December 31, 2011 and $140.5 million at September 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 that 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 nine 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 decrease in the allocations for commercial real estate loans was mainly a result of a decrease in allocations based upon historical losses as net charge-offs for commercial real estate loans were down from previous year, and 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 up 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 nine 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) | | 09/30/2012 | | | 12/31/2011 | | | 09/30/2011 | |
| Average loans outstanding during year | | $ | 2,194,794 | | | $ | 1,928,540 | | | $ | 1,917,531 | |
| Balance of allowance at beginning of year | | | 27,593 | | | | 27,832 | | | | 27,832 | |
| | | | | | | | | | | | | |
| LOANS CHARGED-OFF: | | | | | | | | | | | | |
| Commercial and industrial | | | 888 | | | | 2,403 | | | | 1,259 | |
| Commercial real estate | | | 2,332 | | | | 4,488 | | | | 5,383 | |
| Residential real estate | | | 931 | | | | 2,730 | | | | 1,503 | |
| Consumer and other | | | 580 | | | | 608 | | | | 436 | |
| Leases | | | 0 | | | | 3 | | | | 0 | |
| Total loans charged-off | | $ | 4,731 | | | $ | 10,232 | | | $ | 8,581 | |
| | | | | | | | | | | | | |
RECOVERIES OF LOANS PREVIOUSLY CHARGED-OFF: | | | | | | | | | | | | |
| Commercial and industrial | | | 151 | | | | 424 | | | | 407 | |
| Commercial real estate | | | 166 | | | | 280 | | | | 157 | |
| Residential real estate | | | 29 | | | | 33 | | | | 33 | |
| Consumer and other | | | 246 | | | | 311 | | | | 245 | |
| Total loans recovered | | $ | 592 | | | $ | 1,048 | | | $ | 842 | |
| Net loans charged-off | | | 4,139 | | | | 9,184 | | | | 7,739 | |
| Additions to allowance charged to operations | | | 3,178 | | | | 8,945 | | | | 7,785 | |
| Balance of allowance at end of year | | $ | 26,632 | | | $ | 27,593 | | | $ | 27,878 | |
| Annualized net charge-offs to average total loans and leases | | | 0.19 | % | | | 0.48 | % | | | 0.40 | % |
As of September 30, 2012 the allowance was $26.6 million or 1.29% of total originated loans and leases outstanding, compared with $27.6 million or 1.39% at December 31, 2011 and $27.9 million or 1.43% at September 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 $38.6 million at September 30, 2012, down 6.4% from September 30, 2011, and loans internally identified as Special Mention, Substandard, and Doubtful totaled $113.5 million, down 10.3% from the end of the third 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 and lease losses was $1.0 million and $3.2 million, respectively, for the three and nine months ended September 30, 2012, compared to $4.9 million and $7.8 million, respectively, for the same periods in 2011. Net charge-offs for the three and nine months ended September 30, 2012 were $1.3 million and $4.1 million compared to $5.4 million and $7.7 million in the comparable year ago periods. Annualized net charge-offs for the first nine months of 2012 represented 0.19% of average loans, which is down from 0.40% for the same period in 2011, and is favorable to our peer group ratio of 0.65% at June 30, 2012. Commercial real estate gross charge-offs in the first nine 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) | | 09/30/2012 | | | 12/31/2011 | | | 09/30/2011 | |
| Loans 90 days past due and accruing | | | | | | | | | |
| Residential real estate | | | 121 | | | | 1,378 | | | | 379 | |
| Consumer and other | | | 5 | | | | 2 | | | | 0 | |
| Total loans 90 days past due and accruing | | | 126 | | | | 1,380 | | | | 379 | |
| Nonaccrual loans | | | | | | | | | | | | |
| Commercial and industrial | | | 4,839 | | | | 7,105 | | | | 9,143 | |
| Commercial real estate | | | 24,216 | | | | 26,352 | | | | 22,771 | |
| Residential real estate | | | 7,670 | | | | 5,884 | | | | 8,240 | |
| Consumer and other | | | 271 | | | | 237 | | | | 254 | |
| Leases | | | 0 | | | | 10 | | | | 11 | |
| Total nonaccrual loans | | | 36,996 | | | | 39,588 | | | | 40,419 | |
| Troubled debt restructurings not included above | | | 1,468 | | | | 428 | | | | 441 | |
| Total nonperforming originated loans and leases | | | 38,590 | | | | 41,396 | | | | 41,239 | |
| Other real estate owned | | | 4,675 | | | | 1,334 | | | | 1,632 | |
| Total nonperforming assets | | $ | 43,265 | | | $ | 42,730 | | | $ | 42,871 | |
| Allowance as a percentage of originated loans and leases outstanding | | | 1.29 | % | | | 1.39 | % | | | 1.43 | % |
| Allowance as a percentage of nonperforming loans and leases | | | 69.01 | % | | | 66.65 | % | | | 67.60 | % |
| Total nonperforming assets as percentage of total assets | | | 0.88 | % | | | 1,26 | % | | | 1.28 | % |
| *Acquired loans and leases are not included in nonperforming loans because the accretion method is used for all acquired loans | *Acquired loans and leases are not included in nonperforming loans because the accretion method is used for all acquired loans | *Acquired loans and leases are not included in nonperforming loans because the accretion method is used for all acquired loans | *Acquired loans and leases are not included in nonperforming loans because the accretion method is used for all acquired loans |
| *Acquired loans and leases are not included in nonperforming loans because the accretion method is used for all acquired loans | *Acquired loans and leases are not included in nonperforming loans because the accretion method is used for all acquired loans | *Acquired loans and leases are not included in nonperforming loans because the accretion method is used for all acquired loans | |
*Acquired loans and leases are not included in nonperforming loans because the accretion method is used for all acquired loans | *Acquired loans and leases are not included in nonperforming loans because the accretion method is used for all acquired loans | | |
| *Acquired loans and leases are not included in nonperforming loans because the accretion method is used for all acquired loans | | | |
Nonperforming assets include nonaccrual loans, troubled debt restructurings (“TDR”), and foreclosed real estate. Nonperforming assets represented 0.88% of total assets at September 30, 2012, compared to 1.26% at December 31, 2011, and 1.28% at September 30, 2011. Nonperforming assets were down 1.3% from December 31, 2011 and were in line with September 30, 2011. 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 2.33% at September 30, 2012.
Nonperforming loans represented 1.87% of total loans at September 30, 2012, compared to 2.09% of total loans at December 31, 2011, and 2.11% of total loans at September 30, 2011. A breakdown of nonperforming loans by portfolio segment is shown above. Total nonperforming originated loans and leases are down from December 31, 2011 and September 30, 2011 by 6.8% and 6.4%, respectively. Commercial real estate loans represent the largest component of nonperforming loans. Nonperforming commercial real estate loans include two relationships totaling $8.7 million at September 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 category include loans that meet the definition of a TDR but are performing in accordance with the modified terms and therefore classified as accruing loans. At September 30, 2012 the Company had $13.0 million in TDRs, of which $11.5 million were nonaccrual and included in the table above, and one loan was more than 90 days past due with a total balance of $51,000.
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 September 30, 2012 and December 31, 2011, the Company was regularly receiving payments on over 65% of the loans categorized as nonaccrual.
The Company’s recorded investment in loans and leases that are considered impaired totaled $29.6 million at September 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 $40.4 million at September 30, 2012, $32.9 million at December 31, 2011, and $27.5 million at September 30, 2011. At September 30, 2012, $4.5 million of impaired loans had specific reserve allocations of $2.5 million and $25.1 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 period ended September 30, 2012, $0 for December 31, 2011, and $24,000 for the year-to-date period ended September 30, 2011.
The ratio of the allowance to nonperforming loans (loans past due 90 days and accruing, nonaccrual loans and restructured troubled debt) was 69.0 times at September 30, 2012, up from 66.7 times in December 31, 2011, and 67.6 times at September 30, 2011. The Company’s ratio is comparable to our peer group ratio of 0.65 times as of June 30, 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 57 commercial relationships totaling $26.0 million at September 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 57 commercial relationships that were Substandard, there are 8 relationships that equaled or exceeded $1.0 million, which in aggregate totaled $17.3 million, the largest of which is $4.5 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 $441.0 million at September 30, 2012, an increase of $141.9 million or 47.4% from December 31, 2011, mainly a result of the issuance of $83.4 million in common stock for the acquisition of VIST Financial and the net $38.0 million capital raise completed in the second quarter of 2012. Other significant components of the increase in total equity since year end include: net income of $20.1 million less cash dividends paid of $8.4 million, a $2.6 million increase for the exercise of stock options, and $1.0 million for the issuance of shares under the employee stock ownership plan.
Additional paid-in capital increased by $126.7 million, from $206.4 million at December 31, 2011, to $333.0 million at September 30, 2012. The increase is primarily attributable to the issuance of $83.4 million in common stock for the acquisition of VIST Financial, the $38.0 million capital raise, $2.6 million related to stock option exercises, $1.0 million related to shares issued under the employee stock ownership plan, $939,000 related to shares issued under the dividend reinvestment and direct stock purchase plan, and $975,000 related to stock-based compensation. Retained earnings increased by $6.6 million from $96.4 million at December 31, 2011, to $103.0 million at September 30, 2012, reflecting net income of $20.1 million less dividends paid of $13.6 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 $4.7 million at September 30, 2012; reflecting a $7.2 million increase in unrealized gains on available-for-sale securities due to market rates, and a $1.1 million 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 nine months of 2012 totaled approximately $13.6 million, representing 67.4% of year to date 2012 earnings. Cash dividends of $1.08 per common share paid in the first nine months of 2012 were up 3.9% over cash dividends of $1.04 per common share paid in the first nine 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, no 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 September 30, 2012, compared to the regulatory capital requirements for “well capitalized” institutions.
| REGULATORY CAPITAL ANALYSIS | | | | | | | | | | | |
| September 30, 2012 | | Actual | | | | Well Capitalized Requirement | |
| (dollar amounts in thousands) | | Amount | | | Ratio | | | | Amount | | | Ratio | |
| Total Capital (to risk weighted assets) | | $ | 393,103 | | | | 12.87 | % | | | $ | 305,414 | | | | 10.00 | % |
| Tier 1 Capital (to risk weighted assets) | | $ | 336,213 | | | | 11.99 | % | | | $ | 183,248 | | | | 6.00 | % |
| Tier 1 Capital (to average assets) | | $ | 366,213 | | | | 8.50 | % | | | $ | 215,358 | | | | 5.00 | % |
As illustrated above, the Company’s capital ratios on September 30, 2012 remain above the minimum requirements for well capitalized institutions. Total capital as a percent of risk weighted assets decreased from 14.2% at December 31, 2011 to 12.9% as of September 30, 2012. Tier 1 capital as a percent of risk weighted assets decreased from 12.9% at the end of 2011 to 12.0% as of September 30, 2012. Tier 1 capital as a percent of average assets was 8.5% at year end December 31, 2011 and September 30, 2012, respectively. The decrease in capital ratios over year-end 2011 is mainly the result of the acquisition of VIST Bank which has $868.6 million in risk weighted assets. Partially offsetting this acquisition was the $38.0 million capital raise the Company completed in the second quarter of 2012.
During the first quarter of 2010, the OCC notified the Company that it was requiring Mahopac National Bank (“Mahopac”), one of the Company’s three banking subsidiaries, to maintain certain minimum capital ratios at levels higher than those otherwise required by applicable regulations. The OCC 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 September 30, 2012, Mahopac had a Tier 1 capital to average assets ratio of 9.2%, a Tier 1 risk-based capital to risk-weighted capital ratio of 13.5% and a Total risk-based capital to risk-weighted assets ratio of 14.7%.
As of September 30, 2012, the capital ratios for the Company’s other three 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. The Company continues to monitor and evaluate the impact that Basel III may have on our capital ratios.
Deposits and Other Liabilities
Total deposits of $4.0 billion at September 30, 2012 increased $1.4 billion or 51.8% from December 31, 2011. $1.2 billion of this increase is directly attributable to the VIST Financial acquisition. Exclusive of the VIST Financial acquisition, total deposits increased $167.7 million or 6.3% over year end December 31, 2011 driven mainly by a $120.7 million increase in interest checking, savings and money market balances and a $49.5 million increase in non interest bearing deposits. Growth over year-end 2011 was comprised mainly of personal and business savings and money market balances and personal non interest bearing accounts.
Total deposits were up $152.6 billion or 5.7% over September 30, 2011 excluding VIST. The increase was due to a $95.4 million increase in non-interest deposits and $75.1 million increase in interest bearing checking, savings and money market accounts offset by a decline in time deposits of $17.9 million compared to September 30, 2011.
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 $1.1 billion or 51.6% to $3.4 billion ($399.4 million increase or 18.6% net of VIST Financial acquisition) at September 30, 2012 from $2.2 billion at year-end 2011. Core deposits represented 83.1% of total deposits at September 30, 2012, compared to 83.1% of total deposits at December 31, 2011.
Municipal money market and interest bearing checking accounts of $432.5 million at September 30, 2012 increased from $365.5 million at year-end 2011. As compared to September 30, 2011, municipal money market accounts and interest bearing checking were flat. 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 $58.2 million at September 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 $148.8 million at September 30, 2012, which includes $33.8 million (net of a $3.8 million fair value adjustment) of wholesale repurchase agreements from the VIST Financial acquisition payable to another large financial institution. By comparison, wholesale repurchase agreements totaled $120.0 million at December 31, 2011.
The Company’s other borrowings totaled $125.5 million at September 30, 2012, down $60.6 million or 32.6% from $186.1 million at December 31, 2011. Borrowings at September 30, 2012 included $90.0 million in FHLB term advances, $13.5 million of overnight FHLB advances, and a $20.0 million advance from a bank. 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 $90.0 million in FHLB term advances at September 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 $138,000 (net mark-to-market gain of $138,000) over the nine months ended September 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, national deposit listing services, municipal money market deposits, bank borrowings, securities sold under agreements to repurchase and term advances from the FHLB. Rates and terms are the primary determinants of the mix of these funding sources. Non-core funding sources, at September 30, 2012, increased by $212.3 million or 26.4% ($126.9 million attributed to VIST) from $804.0 million at December 31, 2011. Non-core funding sources, as a percentage of total liabilities, were 22.7% at September 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 $1.2 billion and $730.6 million at September 30, 2012 and December 31, 2011, respectively, were either pledged or sold under agreements to repurchase. Pledged securities represented 84.4% of total securities at September 30, 2012, compared to 66.1% of total securities at December 31, 2011.
Cash and cash equivalents totaled $142.7 million as of September 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 $42.3 million on September 30, 2012. The Company also had $17.4 million of securities designated as trading securities at September 30, 2012.
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 $786.1 million at September 30, 2012 compared with $653.0 million at December 31, 2011. Outstanding principal balances of residential mortgage loans, consumer loans, and leases totaled approximately $929.6 million at September 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 September 30, 2012, the unused borrowing capacity on established lines with the FHLB was $1.1 billion. As members of the FHLB, the Company’s subsidiary banks can use certain unencumbered mortgage-related assets to secure additional borrowings from the FHLB. At September 30, 2012, total unencumbered residential mortgage loans of the Company were $555.2 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 August 31, 2012 a 200 basis point parallel upward change in interest rates over a one-year time frame would result in a one-year increase in net interest income from the base case of approximately 0.19%, 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 0.73%. 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. While the bank is currently asset sensitive, floors in loan repricing during year one are offset by the ability to price core deposits lower. This results in the slight improvement in the 100 basis point decline scenario. This offsets the model assumption 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 September 30, 2012. The Company’s one-year net interest rate gap was a positive $7.4 million or 0.15% of total assets at September 30, 2012 compared with a negative $89.4 million or 2.63% of total assets at December 31, 2011. A positive gap position exists when the amount of interest-bearing assets maturing or repricing exceeds the amount of interest-earning liabilities maturing or repricing within a particular time period. This analysis suggests that the Company’s net interest income is moderately more vulnerable to an decreasing rate environment than it is to a prolonged increasing 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 – September 30, 2012 | | | | | | | | Repricing Interval | | | | |
| | | | | | | | | | | | | | | | |
| (in thousands) | | Total | | | 0-3 months | | | 3-6 months | | | 6-12 months | | | Cumulative 12 months | |
| | | | | | | | | | | | | | | | |
Interest-earning assets1 | | $ | 4,455,196 | | | $ | 1,123,165 | | | $ | 199,630 | | | $ | 413,413 | | | $ | 1,736,208 | |
| Interest-bearing liabilities | | | 3,619,016 | | | | 1,158,335 | | | | 261,339 | | | | 309,164 | | | | 1,728,838 | |
| Net gap position | | | | | | | (35,170 | ) | | | (61,709 | ) | | | 104,249 | | | | 7,370 | |
| Net gap position as a percentage of total assets | | | | | | | (0.71 | %) | | | (1.25 | %) | | | 2.12 | % | | | 0.15 | % |
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 September 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
The Company completed its acquisition of VIST Financial on August 1, 2012. As a result of the VIST Financial acquisition, the Company has begun the process of evaluating the internal control processes of VIST Financial, and integrating those processes into the Company’s existing control environment. Other than the VIST Financial acquisition, there were not changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 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) | |
| | | | | | | | | | | | | |
| July 1, 2012 through July 31, 2012 | | | 1,446 | | | $ | 38.63 | | | | 0 | | | | 335,000 | |
| | | | | | | | | | | | | | | | | |
| August 1, 2012 through August 31, 2012 | | | 562 | | | | 39.14 | | | | 0 | | | | 335,000 | |
| | | | | | | | | | | | | | | | | |
| September 1, 2012 through September 30, 2012 | | | 0 | | | | 0 | | | | 0 | | | | 335,000 | |
| | | | | | | | | | | | | | | | | |
| Total | | | 2,008 | | | $ | 38.77 | | | | 0 | | | | 335,000 | |
Included in the table above are 1,446 shares purchased in July 2012, at an average cost of $38.63 and 562 shares purchased in August 2012, at an average cost of $39.14 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 its 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 |
| | |
| | None |
| Mine Safety Disclosure |
| | |
| | Not applicable |
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: November 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 |
| | | |
| 10.1 | Employment Agreement dated as of September 19, 2005 among Leesport Financial Corp., Leesport Bank and Robert D. Davis (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 7, 2012 and incorporated by reference herein). | |
| | | |
| 10.2 | First Amendment to Employment Agreement dated October 10, 2008, by and among Leesport Financial Corp n/k/a VIST Financial Corp., Leesport Bank n/k/a VIST Bank, and Robert D. Davis (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on August 7, 2012 and incorporated by reference herein). | |
| | | |
| | 68 |
| | | |
| | 69 |
| | | |
| | 70 |
| | | |
| | 71 |
| | | |
| 101* | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Condition as of September 30, 2012 and December 31, 2011; (ii) Condensed Consolidated Statements of Income for the three months ended September 30, 2012 and 2011; (iii) Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2012 and 2011; (iv) Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended September 30, 2012 and 2011; and (v) Notes to Unaudited Condensed Consolidated Financial Statements. | |
| | | |
| * | Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. | |
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