The following analysis is intended to provide
the reader with a further understanding of the consolidated financial condition and results of operations of the Company and its
operating subsidiaries for the periods shown. This Management’s Discussion and Analysis of Financial Condition and Results
of Operations should be read in conjunction with other sections of this Report on Form 10-K, including Part I, “Item 1. Business,”
Part II, “Item 6. Selected Financial Data,” and Part II, “Item 8. Financial Statements and Supplementary Data.”
On August 1, 2012, Tompkins completed
its acquisition of VIST Financial, a financial holding company headquartered in Wyomissing, Pennsylvania, and parent to VIST Bank,
VIST Insurance, LLC (“VIST Insurance”), and VIST Capital Management, LLC (“VIST Capital Management”). On
the acquisition date, VIST Financial had $1.4 billion in total assets, $889.3 million in loans, and $1.2 billion in deposits. On
the acquisition date, VIST Financial was merged into Tompkins. VIST Bank, a Pennsylvania state-chartered commercial bank, became
a wholly-owned subsidiary of Tompkins and will continue to operate as a separate subsidiary bank of Tompkins. VIST Insurance was
merged into Tompkins Insurance, and VIST Capital Management became part of Tompkins Financial Advisors. The acquisition expands
the Company’s presence into the southeastern region of Pennsylvania. The acquisition of VIST Insurance is expected to nearly
double Company’s annual insurance revenues.
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 Report on Form 10-K 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 forward-looking
statements. The following factors, in addition to those listed as Risk Factors in Item 1.A 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, bank holding companies and/or financial holding companies, such as the Dodd-Frank 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; and financial resources in the amounts, at the times and on the terms required to support
the Company’s future businesses. 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.
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 our 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 consolidated financial statements. Management considers the accounting policies relating
to the allowance for loan and lease losses (“allowance”), pension and postretirement benefits, the review of the securities
portfolio for other-than-temporary impairment and the accounting for acquired loans 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.
Management considers the accounting policy
relating to the allowance to be a critical accounting policy because of the uncertainty and subjectivity inherent in estimating
the levels of allowance needed to cover probable credit losses within the loan portfolio and the material effect that these estimates
can 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 includes allowance allocations calculated in accordance with Accounting
Standards Codification (“ASC”) Topic 310,
Receivables
, and allowance allocations calculated in accordance with
ASC Topic 450
Contingencies.
The Company’s methodology for determining the allowance for loan and lease losses focuses
on our annual, or more often if necessary, 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 quarterly basis.
Since the methodology is based upon historical
experience, market trends, and 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, changes in interest rates, concentration of risk, declines in local property values, and the view of regulatory
authorities towards loan classifications. Management believes that the allowance is appropriate given the inherent risk of loss
in the loan and lease portfolios, as of December 31, 2012. Under different conditions or assumptions, the Company may need to adjust
the allowance. Refer to the section captioned “Allowance for Loan and Lease Losses” elsewhere in this discussion for
further details on the Company’s methodology and allowance.
Another critical accounting policy is the policy
for pensions and other post-retirement benefits.
The calculation of the expenses and liabilities related
to pensions and post-retirement benefits requires estimates and assumptions of key factors including, but not limited to, discount
rate, return on plan assets, future salary increases, employment levels, employee retention, and life expectancies of plan participants.
The Company uses an actuarial firm in making these estimates and assumptions.
Changes in these assumptions due to market
conditions, governing laws and regulations, or Company specific circumstances may result in material changes to the Company’s
pension and other post-retirement expenses and liabilities.
Another critical accounting policy is the policy
for reviewing available-for-sale securities and held-to-maturity securities to determine if declines in fair value below amortized
cost are other-than-temporary as required by FASB ASC Topic 320,
Investments – Debt and Equity Securities.
When
other-than-temporary impairment has occurred, the amount of the other-than-temporary impairment recognized in earnings depends
on whether the Company intends to sell the security and whether it is more likely than not will be required to sell the security
before recovery of its amortized cost basis less any current-period credit loss. If the Company intends to sell the security
or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period
credit loss, the other-than-temporary impairment is recognized in earnings equal to the entire difference between the investment’s
amortized cost basis and its fair value at the balance sheet date. If the Company does not intend to sell the security and
it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis
less any current-period credit loss, the other-than-temporary impairment is separated into the amount representing the credit loss
and the amount related to all other factors. The amount of the total other-than-temporary impairment related to the credit
loss is recognized in earnings. In estimating other-than-temporary impairment losses, management considers, among other factors,
the length of time and extent to which the fair value has been less than cost, the financial condition and near term prospects
of the issuer, underlying collateral of the security, and the structure of the security.
Another critical accounting policy is the policy
for acquired loans. Acquired loans are initially recorded at their acquisition date fair values. The carryover of allowance
for loan losses is prohibited as any credit losses in the loans are included in the determination of the fair value of the loans
at the acquisition date. Fair values for acquired loans are based on a discounted cash flow methodology that involves
assumptions and judgments as to credit risk, prepayment risk, liquidity risk, default rates, loss severity, payment speeds, collateral
values and discount rate. Subsequent to the acquisition of acquired impaired loans, GAAP requires the continued estimation
of expected cash flows to be received. This estimation requires numerous assumptions, interpretations and judgments
using internal and third-party credit quality information. Changes in expected cash flows could result in the recognition
of impairment through provision for credit losses.
For acquired loans that are not deemed impaired
at acquisition, credit discounts representing the principal losses expected over the life of the loan are a component of the initial
fair value. Subsequent to the purchase date, the methods utilized to estimate the required allowance for loan losses
for the non-impaired acquired loans is similar to originated loans.
All accounting policies are important and the
reader of the financial statements should review these policies, described in “Note 1 Summary of Significant Accounting Policies”
in Notes to Consolidated Financial Statements in Part II, Item 8. of this Form 10-K, to gain a better understanding of how the
Company’s financial performance is reported.
Results of Operations
(Comparison of December 31, 2012 and 2011 results)
General
The Company reported diluted earnings per share
of $2.43 in 2012, a decrease of 24.1% from diluted earnings per share of $3.20 in 2011. Net income attributable to Tompkins Financial
Corporation for the year ended December 31, 2012, was $31.3 million, down 11.7% compared to $35.4 million in 2011. The decline
in 2012 is primarily due to the $9.7 million ($0.76 diluted per share) in after-tax merger and acquisition integration related
expenses included in 2012 results, compared to $152,000 ($0.01 diluted per share) in after-tax merger expenses in 2011 results;
as well as an increase in the weighted average shares outstanding.
In addition to earnings per share, key performance
measurements for the Company include return on average shareholders’ equity (ROE) and return on average assets (ROA). ROE
was 8.30% in 2012, compared to 12.02% in 2011, while ROA was 0.76% in 2011 and 1.07% in 2011. The decrease is primarily due to
the $9.7 million in after-tax merger related expenses being recorded in 2012. Tompkins’ ROE and ROA dropped in comparison
to peer ratios, ranking in the 37
th
percentile for ROE and the 25
th
percentile for ROA of its peer group.
The peer group is derived from the Federal Reserve Board and represents banks and bank holding companies with assets between $3.0
billion and $10.0 billion. The comparative peer group ratios are as of December 31, 2012, the most recent data available from the
Federal Reserve Board.
The Company’s operating (non-GAAP) net
income in 2012 amounted to $40.6 million or $3.16 diluted per share compared to $35.5 million or $3.21 per diluted share in 2011.
Operating (non-GAAP) net income for 2012 excludes $9.7 million in after-tax merger and acquisition integration related expenses
and $243,000 in accrual reversals related to the Company’s accrual for potential VISA litigation. Operating (non-GAAP) net
income for 2011 excludes $152,000 in after-tax merger and acquisition integration related expenses.
The following table summarizes the Company’s
results of operations for the periods indicated on a GAAP basis and on an operating (non-GAAP) basis for the periods indicated.
The Company’s non-GAAP operating income and returns exclude the merger and acquisition integration expenses and the reversal
of accrual related to VISA litigation. The Company believes the non-GAAP measures provide meaningful comparisons of our underlying
operational performance and facilitates managements’ and investors’ assessments of business and performance trends
in comparison to others in the financial services industry. In addition, the Company believes the exclusion of the nonoperating
items from our performance enables management and investors to perform a more effective evaluation and comparison of our results
and to assess performance in relation to our ongoing operations. These non-GAAP financial measures should not be considered in
isolation or as a measure of the Company’s profitability or liquidity; they are in addition to, and are not a substitute
for, financial measures under GAAP. Net operating income and adjusted diluted earnings per share as presented herein may be different
from non-GAAP financial measures used by other companies, and may not be comparable to similarly titled measures reported by other
companies. Further, the Company may utilize other measures to illustrate performance in the future. Non-GAAP financial measures
have limitations since they do not reflect all of the amounts associated with the Company’s results of operations as determined
in accordance with GAAP.
|
|
As of December 31,
|
|
(in thousands, except per share data)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Net income attributable to Tompkins Financial Corporation
|
|
$
|
31,285
|
|
|
$
|
35,419
|
|
Less: dividends and undistributed earnings allocated to unvested stock awards
|
|
|
(115
|
)
|
|
|
(120
|
)
|
Net income available to common shareholders (GAAP)
|
|
|
31,170
|
|
|
|
35,299
|
|
Diluted earnings per share (GAAP)
|
|
|
2.43
|
|
|
|
3.20
|
|
|
|
|
|
|
|
|
|
|
Adjustments for non-operating income and expense, net of tax:
|
|
|
|
|
|
|
|
|
Reversal of VISA Covered Litigation accrual
|
|
|
(243
|
)
|
|
|
0
|
|
Merger and acquisition integration related expenses
|
|
|
9,664
|
|
|
|
152
|
|
Total adjustments, net of tax
|
|
|
9,421
|
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
Net operating income available to common shareholders (Non-GAAP)
|
|
|
40,591
|
|
|
|
35,451
|
|
Adjusted diluted earnings per share (Non-GAAP)
|
|
|
3.16
|
|
|
|
3.21
|
|
|
|
As of December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Net income attributable to Tompkins Financial Corporation
|
|
$
|
31,285
|
|
|
$
|
35,419
|
|
|
|
|
|
|
|
|
|
|
Adjustments for non-operating income and expense, net of tax:
|
|
|
|
|
|
|
|
|
Reversal of VISA Covered Litigation accrual
|
|
|
(243
|
)
|
|
|
0
|
|
Merger and acquisition integration related expenses
|
|
|
9,664
|
|
|
|
152
|
|
Total adjustments, net of tax
|
|
|
9,421
|
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
Net operating income (Non-GAAP)
|
|
|
40,706
|
|
|
|
35,571
|
|
Amortization of intangibles, net of tax
|
|
|
758
|
|
|
|
353
|
|
Adjusted net operating income (Non-GAAP)
|
|
|
41,464
|
|
|
|
35,924
|
|
|
|
|
|
|
|
|
|
|
Average total shareholders' equity
|
|
|
376,890
|
|
|
|
294,620
|
|
Average goodwill and intangibles
|
|
|
76,146
|
|
|
|
47,043
|
|
Average shareholders' tangible equity (Non-GAAP)
|
|
|
300,744
|
|
|
|
247,577
|
|
|
|
|
|
|
|
|
|
|
Adjusted
operating return on average shareholders' tangible equity (annualized) (Non-GAAP)
|
|
|
13.79
|
%
|
|
|
14.51
|
%
|
|
|
As of December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
Adjusted net operating income (Non-GAAP)
|
|
$
|
41,464
|
|
|
$35,924
|
|
|
|
|
|
|
|
|
Average total assets
|
|
|
4,092,473
|
|
|
3,294,982
|
Average goodwill and intangibles
|
|
|
76,146
|
|
|
47,043
|
Average tangible assets (Non-GAAP)
|
|
|
4,016,327
|
|
|
3,247,939
|
|
|
|
|
|
|
|
|
Adjusted
operating return on average shareholders' tangible assets (annualized) (Non-GAAP)
|
|
|
1.03
|
%
|
|
1.11%
|
Segment Reporting
The Company operates in three business segments:
banking, insurance and wealth management. Insurance is comprised of property and casualty insurance services and employee benefit
consulting operated under the Tompkins Insurance Agencies, Inc. subsidiary. Wealth management activities include the results of
the Company’s trust, financial planning, and wealth management services, and risk management operations organized under the
Tompkins Financial Advisors brand. All other activities are considered banking.
For additional financial
information on the Company’s segments, refer to “Note 23 – Segment and Related Information” in the Notes
to Consolidated Financial Statements in Part II, Item 8. of this Report.
Banking Segment
The Banking segment reported net income of
$37.7 million for the year ending December 31, 2012, representing a $6.2 million or 19.8% increase compared to 2011, driven mainly
by growth in net interest income. Net interest income increased $22.8 million in 2012, up 20.5% versus 2011, due primarily to the
acquisition of VIST Financial in the third quarter of 2012. Interest income rose $21.3 million or 15.6%, while interest expense
declined $1.5 million or 5.7% compared to the same period last year. It should be noted that merger and acquisition integration
related pre-tax expenses of $15.6 million were removed from the banking segment operating results as these costs were not indicative
of the core operating performance for the periods presented. An applicable income tax adjustment was applied to the results on
a weighted average basis to compensate for the removal of the merger costs. All associated segment results have been reconciled
to their corresponding consolidated financial statement amounts (see
“Note 23 – Segment
and Related Information” in the Notes to Consolidated Financial Statements in Part II, Item 8. of this Report
for
additional details).
The provision for loan and lease losses was
$8.8 million in 2012, compared to $8.9 million in the prior year.
Noninterest income grew $1.3 million or 6.0%
in 2012 from 2011. The main contributors to the improvement were an increase in card services income of $970,000 or 19.2%, a $604,000
or 74.3% increase in loan related fees and a pre-tax $405,000 accrual reversal of a liability associated with obligations to share
in certain VISA litigation. The VISA accrual reversal was attributed to VISA’s public announcement of sufficient reserves
to cover estimated litigation settlement costs. Card services income rose as a result of an increase in debit card transaction
volumes and the expiration of associated reward program incentives. Service charges on deposit accounts were down $1.1 million
or 12.4% in 2012 compared to 2011. The decrease was mainly a result of lower overdraft fee revenue reflecting regulatory changes.
Noninterest expenses increased $19.2 million
or 24.8% from the same period in 2011 primarily due salaries and facilities costs associated with the integration of VIST Bank
into the organization. Increases in salaries and other benefits, including annual merit increases, occupancy and equipment costs,
cardholder expenses and the amortization of intangibles related to the VIST Financial acquisition more than offset decreases in
incentive compensation.
Insurance Segment
The Insurance segment reported net income of
$2.4 million; up $743,000 or 46.2% from 2011. The primary reason for the increase in net income is the addition of VIST Insurance
in the operating results of the Company as a result of the VIST Financial acquisition. VIST Insurance has been consolidated into
the operating results of Tompkins Insurance. 2012 was also the first full year which included business resulting from the Olver
acquisition which closed in the second quarter of 2011.
Noninterest income increased $6.2 million or
48.7% over the prior year. Revenues from all three of the Company’s primary insurance product lines: commercial, personal
and health and benefit insurance increased over the prior year. Insurance commissions increased $6.2 million or 48.7% compared
to the previous year.
Noninterest expense increased $5.0 million
in 2012, up 49.2% compared to 2011. Increases in salaries and benefits costs, associated with merit increases and additional headcount
contributed to most of the noninterest expense variance for the current year. In addition, other contributors to the increase in
expense included a $247,000 increase in amortization of intangible assets, and a $230,000 increase in expense for commissions paid.
Wealth Management Segment
The Wealth Management segment reported net
income of $2.4 million for the period ending December 31, 2012, an increase of $75,000 or 3.2% compared to 2011. Included in the
current year’s Wealth Management segment are the operating results of VIST Capital Management, LLC, which became part of
Tompkins Financial Advisors.
Noninterest income improved $275,000 or 1.8%
over prior year due primarily to trust services and brokerage income, which increased $962,000 and $296,000, respectively over
the prior year. These increases offset declines associated with the Company’s decision to stop providing services to external
broker dealer relationships in the third quarter of 2011. The market value of assets under management at December 31, 2012, totaled
$3.2 billion, an increase of 16.5% compared to year-end 2011. Assets under management of VIST Capital Management were $139.8 million
at the time of acquisition on August 1, 2012.
Noninterest expenses increased $175,000, or
1.4% over 2011, due primarily to changes in formulas for incentive compensation, additional headcount related to the VIST acquisition,
and higher professional fees.
Net Interest Income
Net interest income is the Company’s
largest source of revenue, representing 71.0% of total revenues for the twelve months ended December 31, 2012, and 69.9% of total
revenues for the twelve months ended December 31, 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 benefitted from steady growth in average earning assets. 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 twelve months ended December 31, 2012, compared to the same period
in 2011. The taxable equivalent net interest margin of 3.65% for 2012 is below the 3.72% level for 2011.
Table 1 – Average Statements of Condition
and Net Interest Analysis
shows average interest-earning assets and interest-bearing liabilities, and the corresponding yield
or cost associated with each. Taxable-equivalent net interest income for 2012 was $137.0 million, which is up 20.2% compared to
2011. Taxable-equivalent net interest income was positively impacted by growth in average interest earnings assets and lower funding
costs; however, these positives were partially offset by the decrease in average earning asset yields. In addition, net interest
income benefitted from approximately $3.8 million in accretable yield attributable to loans acquired with evidence of
credit deterioration and accounted for in accordance with ASC Topic 310-30.
Taxable-equivalent interest income increased
by 15.4% in 2012 over 2011. The increase in taxable-equivalent interest income was the result of the increase in average earning
assets year-over-year, mainly a result of the VIST Financial acquisition, as well as organic growth. For 2012, average earning
assets were up $689.9 million or 22.5%, with the acquisition of VIST Financial contributing $1.3 billion of earning assets at the
time of acquisition. Between 2011 and 2012 the average yields on earning assets decreased by 27 basis points. The yield on average
earning assets was impacted by the low rate environment as well as growth in lower yielding securities instead of loans as a result
of soft loan demand. Furthermore, the purchase accounting impact to earning assets acquired from VIST Bank resulted in reduced
yields on these acquired assets. Average loan balances in 2012 were up $453.6 million or 23.5% over 2011, while the average yield
on loans decreased 15 basis points to 5.27%. At the time of acquisition, VIST Bank’s loan portfolio totaled $889.3 million.
Average securities balances in 2012 were up $231.2 million over 2011 and had an average yield of 2.61% in 2012 compared to an average
yield of 3.11% in 2011. During 2012, cash flow from securities maturities and prepayments have been reinvested at lower yields
as a result of the decrease in market interest rates.
Interest expense for 2012 was down $1.5 million
or 5.7% compared to 2011, despite a $540.5 million or 22.3% increase in average interest bearing liabilities. The decrease in interest
expense reflects lower average rates paid on deposits and borrowings, a lower average volume of borrowings and growth in noninterest
bearing deposit balances. The average rate paid on interest-bearing deposits during 2012 of 0.47% was 16 basis points lower than
the average rate paid in 2011. The decrease in the average cost of interest-bearing deposits reflects a decrease in the interest
rates offered on deposit products due to decreases in average market rates combined with an increase in the relative proportion
of lower cost savings and money market deposits. Average interest-bearing deposit balances increased by $528.4 million or 25.6%
in 2012 compared to 2011. At the time of acquisition, VIST Bank had total deposits of $1.2 billion. The remainder of the increase
was in average interest bearing checking, savings and money market deposit balances. Average noninterest bearing deposit balances
in 2012 were up $141.3 million or 26.2% 2011. At the time of acquisition, VIST Bank had noninterest bearing balances of $129.5
million.
Table 1 - Average Statements of Condition and Net Interest analysis
|
|
|
For the year ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
(Dollar amounts in
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
thousands)
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing balances due from banks
|
|
$
|
21,442
|
|
|
$
|
33
|
|
|
|
0.15
|
%
|
|
$
|
12,717
|
|
|
$
|
12
|
|
|
|
0.09
|
%
|
|
$
|
25,189
|
|
|
$
|
31
|
|
|
|
0.12
|
%
|
Money market funds
|
|
|
18
|
|
|
|
—
|
|
|
|
0.00
|
%
|
|
|
100
|
|
|
|
—
|
|
|
|
0.00
|
%
|
|
|
100
|
|
|
|
—
|
|
|
|
0.00
|
%
|
Securities (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Securities
|
|
|
1,205,759
|
|
|
|
28,546
|
|
|
|
2.37
|
%
|
|
|
969,303
|
|
|
|
27,504
|
|
|
|
2.84
|
%
|
|
|
857,724
|
|
|
|
30,964
|
|
|
|
3.61
|
%
|
Trading Securities
|
|
|
18,162
|
|
|
|
744
|
|
|
|
4.10
|
%
|
|
|
21,262
|
|
|
|
873
|
|
|
|
4.11
|
%
|
|
|
27,389
|
|
|
|
1,085
|
|
|
|
3.96
|
%
|
State and municipal (2)
|
|
|
95,095
|
|
|
|
4,946
|
|
|
|
5.20
|
%
|
|
|
95,039
|
|
|
|
5,143
|
|
|
|
5.41
|
%
|
|
|
107,376
|
|
|
|
6,059
|
|
|
|
5.64
|
%
|
Other Securities (2)
|
|
|
11,766
|
|
|
|
544
|
|
|
|
4.62
|
%
|
|
|
13,971
|
|
|
|
648
|
|
|
|
4.64
|
%
|
|
|
17,465
|
|
|
|
849
|
|
|
|
4.86
|
%
|
Total securities
|
|
|
1,330,782
|
|
|
|
34,780
|
|
|
|
2.61
|
%
|
|
|
1,099,575
|
|
|
|
34,168
|
|
|
|
3.11
|
%
|
|
|
1,009,954
|
|
|
|
38,957
|
|
|
|
3.86
|
%
|
Federal Funds Sold
|
|
|
1,837
|
|
|
|
2
|
|
|
|
0.11
|
%
|
|
|
5,837
|
|
|
|
7
|
|
|
|
0.12
|
%
|
|
|
9,233
|
|
|
|
17
|
|
|
|
0.18
|
%
|
FHLBNY and FRB stock
|
|
|
18,479
|
|
|
|
824
|
|
|
|
4.46
|
%
|
|
|
17,992
|
|
|
|
910
|
|
|
|
5.06
|
%
|
|
|
19,597
|
|
|
|
1,049
|
|
|
|
5.35
|
%
|
Total loans, net of unearned income(3)
|
|
|
2,382,109
|
|
|
|
125,541
|
|
|
|
5.27
|
%
|
|
|
1,928,540
|
|
|
|
104,548
|
|
|
|
5.42
|
%
|
|
|
1,897,983
|
|
|
|
106,602
|
|
|
|
5.62
|
%
|
Total interest-earning assets
|
|
|
3,754,667
|
|
|
|
161,180
|
|
|
|
4.29
|
%
|
|
|
3,064,761
|
|
|
|
139,645
|
|
|
|
4.56
|
%
|
|
|
2,962,056
|
|
|
|
146,656
|
|
|
|
4.95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
337,806
|
|
|
|
|
|
|
|
|
|
|
|
230,221
|
|
|
|
|
|
|
|
|
|
|
|
229,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
4,092,473
|
|
|
|
|
|
|
|
|
|
|
|
3,294,982
|
|
|
|
|
|
|
|
|
|
|
|
3,191,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES & EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing checking, savings, & money market
|
|
|
1,750,444
|
|
|
|
4,854
|
|
|
|
0.28
|
%
|
|
|
1,350,659
|
|
|
|
4,741
|
|
|
|
0.35
|
%
|
|
|
1,226,852
|
|
|
|
5,994
|
|
|
|
0.49
|
%
|
Time Dep > $100,000
|
|
|
405,478
|
|
|
|
3,322
|
|
|
|
0.82
|
%
|
|
|
313,881
|
|
|
|
3,292
|
|
|
|
1.05
|
%
|
|
|
327,626
|
|
|
|
4,297
|
|
|
|
1.31
|
%
|
Time Dep < $100,000
|
|
|
435,441
|
|
|
|
3,992
|
|
|
|
0.92
|
%
|
|
|
401,902
|
|
|
|
5,033
|
|
|
|
1.25
|
%
|
|
|
432,804
|
|
|
|
6,984
|
|
|
|
1.61
|
%
|
Brokered Time Dep < $100,000
|
|
|
5,247
|
|
|
|
63
|
|
|
|
1.20
|
%
|
|
|
1,731
|
|
|
|
21
|
|
|
|
1.21
|
%
|
|
|
24,886
|
|
|
|
402
|
|
|
|
1.62
|
%
|
Total interest-bearing deposits
|
|
|
2,596,610
|
|
|
|
12,231
|
|
|
|
0.47
|
%
|
|
|
2,068,173
|
|
|
|
13,087
|
|
|
|
0.63
|
%
|
|
|
2,012,168
|
|
|
|
17,677
|
|
|
|
0.88
|
%
|
Federal funds purchased & securities sold under agreements to repurchase
|
|
|
200,906
|
|
|
|
4,451
|
|
|
|
2.22
|
%
|
|
|
173,692
|
|
|
|
4,872
|
|
|
|
2.80
|
%
|
|
|
185,563
|
|
|
|
5,418
|
|
|
|
2.92
|
%
|
Other borrowings
|
|
|
132,746
|
|
|
|
5,437
|
|
|
|
4.10
|
%
|
|
|
155,650
|
|
|
|
6,143
|
|
|
|
3.95
|
%
|
|
|
193,296
|
|
|
|
7,611
|
|
|
|
3.94
|
%
|
Trust preferred debentures
|
|
|
32,835
|
|
|
|
2,094
|
|
|
|
6.38
|
%
|
|
|
25,062
|
|
|
|
1,580
|
|
|
|
6.30
|
%
|
|
|
25,058
|
|
|
|
1,581
|
|
|
|
6.31
|
%
|
Total interest-bearing liabilities
|
|
|
2,963,097
|
|
|
|
24,213
|
|
|
|
0.82
|
%
|
|
|
2,422,577
|
|
|
|
25,682
|
|
|
|
1.06
|
%
|
|
|
2,416,085
|
|
|
|
32,287
|
|
|
|
1.34
|
%
|
Noninterest bearing deposits
|
|
|
681,260
|
|
|
|
|
|
|
|
|
|
|
|
539,917
|
|
|
|
|
|
|
|
|
|
|
|
468,219
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
|
71,226
|
|
|
|
|
|
|
|
|
|
|
|
37,868
|
|
|
|
|
|
|
|
|
|
|
|
41,593
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
3,715,583
|
|
|
|
|
|
|
|
|
|
|
|
3,000,362
|
|
|
|
|
|
|
|
|
|
|
|
2,925,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tompkins Financial Corporation Shareholders’ equity
|
|
|
375,378
|
|
|
|
|
|
|
|
|
|
|
|
292,845
|
|
|
|
|
|
|
|
|
|
|
|
264,431
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
|
1,512
|
|
|
|
|
|
|
|
|
|
|
|
1,775
|
|
|
|
|
|
|
|
|
|
|
|
1,512
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
376,890
|
|
|
|
|
|
|
|
|
|
|
|
294,620
|
|
|
|
|
|
|
|
|
|
|
|
265,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
4,092,473
|
|
|
|
|
|
|
|
|
|
|
$
|
3,294,982
|
|
|
|
|
|
|
|
|
|
|
$
|
3,191,840
|
|
|
|
|
|
|
|
|
|
Interest rate spread
|
|
|
|
|
|
|
|
|
|
|
3.48
|
%
|
|
|
|
|
|
|
|
|
|
|
3.50
|
%
|
|
|
|
|
|
|
|
|
|
|
3.61
|
%
|
Net interest income/margin on earning assets
|
|
|
|
|
|
|
136,967
|
|
|
|
3.65
|
%
|
|
|
|
|
|
|
113,963
|
|
|
|
3.72
|
%
|
|
|
|
|
|
|
114,369
|
|
|
|
3.86
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Equivalent Adjustment
|
|
|
|
|
|
|
(2,824
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,557
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,594
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income per consolidated financial statements
|
|
|
|
|
|
$
|
134,143
|
|
|
|
|
|
|
|
|
|
|
$
|
111,406
|
|
|
|
|
|
|
|
|
|
|
$
|
111,775
|
|
|
|
|
|
(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 condensed consolidated
financial statements included in Part I of the Company's annual report on Form 10-K for the fiscal year ended December 31, 2012.
Table 2 - Analysis of Changes in Net Interest Income
(in thousands)(taxable equivalent)
|
|
2012 vs. 2011
|
|
|
2011 vs. 2010
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) Due to Change in Average
|
|
|
Increase (Decrease) Due to Change in Average
|
|
|
|
Volume
|
|
|
Yield/Rate
|
|
|
Total
|
|
|
Volume
|
|
|
Yield/Rate
|
|
|
Total
|
|
INTEREST INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit, other banks
|
|
$
|
11
|
|
|
$
|
10
|
|
|
$
|
21
|
|
|
$
|
(13
|
)
|
|
$
|
(6
|
)
|
|
$
|
(19
|
)
|
Federal funds sold
|
|
|
(4
|
)
|
|
|
(1
|
)
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
(10
|
)
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
5,818
|
|
|
|
(5,009
|
)
|
|
|
809
|
|
|
|
3,445
|
|
|
|
(7,318
|
)
|
|
|
(3,873
|
)
|
Tax-exempt
|
|
|
3
|
|
|
|
(200
|
)
|
|
|
(197
|
)
|
|
|
(675
|
)
|
|
|
(241
|
)
|
|
|
(916
|
)
|
FHLB and FRB stock
|
|
|
25
|
|
|
|
(111
|
)
|
|
|
(86
|
)
|
|
|
(83
|
)
|
|
|
(56
|
)
|
|
|
(139
|
)
|
Loans, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
18,265
|
|
|
|
(2,943
|
)
|
|
|
15,322
|
|
|
|
1,654
|
|
|
|
(3,770
|
)
|
|
|
(2,116
|
)
|
Tax-exempt
|
|
|
4,558
|
|
|
|
1,113
|
|
|
|
5,671
|
|
|
|
(229
|
)
|
|
|
291
|
|
|
|
62
|
|
Total interest income
|
|
$
|
28,676
|
|
|
$
|
(7,141
|
)
|
|
$
|
21,535
|
|
|
$
|
4,094
|
|
|
$
|
(11,105
|
)
|
|
$
|
(7,011
|
)
|
INTEREST EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking, savings and money market
|
|
|
1,231
|
|
|
|
(1,118
|
)
|
|
|
113
|
|
|
|
560
|
|
|
|
(1,813
|
)
|
|
|
(1,253
|
)
|
Time
|
|
|
1,275
|
|
|
|
(2,244
|
)
|
|
|
(969
|
)
|
|
|
(946
|
)
|
|
|
(2,391
|
)
|
|
|
(3,337
|
)
|
Federal funds purchased and securities sold under agreements to repurchase
|
|
|
695
|
|
|
|
(1,116
|
)
|
|
|
(421
|
)
|
|
|
(338
|
)
|
|
|
(208
|
)
|
|
|
(546
|
)
|
Other borrowings
|
|
|
(435
|
)
|
|
|
243
|
|
|
|
(192
|
)
|
|
|
(1,607
|
)
|
|
|
138
|
|
|
|
(1,469
|
)
|
Total interest expense
|
|
$
|
2,766
|
|
|
$
|
(4,235
|
)
|
|
$
|
(1,469
|
)
|
|
$
|
(2,331
|
)
|
|
$
|
(4,274
|
)
|
|
$
|
(6,605
|
)
|
Net interest income
|
|
$
|
25,910
|
|
|
$
|
(2,906
|
)
|
|
$
|
23,004
|
|
|
$
|
6,425
|
|
|
$
|
(6,831
|
)
|
|
$
|
(406
|
)
|
Changes in net interest income occur from a
combination of changes in the volume of interest-earning assets and interest-bearing liabilities, and in the rate of interest earned
or paid on them. The above table illustrates changes in interest income and interest expense attributable to changes in volume
(change in average balance multiplied by prior year rate), changes in rate (change in rate multiplied by prior year volume), and
the net change in net interest income. The net change attributable to the combined impact of volume and rate has been allocated
to each in proportion to the absolute dollar amounts of the change. In 2012, net interest income increased by $23.0 million, reflecting
a $21.5 million increase in interest income and a $1.5 million decrease in interest expense. Growth in average balances on earnings
assets contributed $28.6 million to the increase in interest income, while the lower yields offset this growth by $7.1 million.
The decrease in interest expense is due to lower rates paid on interest bearing liabilities, partially offset by growth in average
balances.
Provision for Loan
and Lease Losses
The provision for loan and lease losses represents
management’s estimate of the expense necessary to maintain the allowance for loan and lease losses at an appropriate level.
The provision for loan and lease losses was $8.8 million in 2012, compared to $8.9 million in 2011. Net loan charge-offs of $11.8
million in 2012 were up from $9.2 million in 2011, and included one commercial loan charge-off of approximately $4.2 million in
the fourth quarter of 2012 that was partially reserved for in prior periods.
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 prior year end.
See the section captioned “The Allowance for Loan and Lease Losses” included
within “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Financial Condition”
of this Report for further analysis of the Company’s allowance for loan and lease losses.
Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Insurance commissions and fees
|
|
|
19,421
|
|
|
|
13,542
|
|
|
|
12,738
|
|
Investment services
|
|
$
|
14,340
|
|
|
$
|
14,287
|
|
|
$
|
14,329
|
|
Service charges on deposit accounts
|
|
|
7,441
|
|
|
|
8,491
|
|
|
|
8,554
|
|
Card services
|
|
|
6,030
|
|
|
|
5,060
|
|
|
|
4,285
|
|
Net mark-to-market (losses) gains
|
|
|
(86
|
)
|
|
|
(402
|
)
|
|
|
(222
|
)
|
Net other-than-temporary impairment losses
|
|
|
(196
|
)
|
|
|
(65
|
)
|
|
|
(34
|
)
|
Other income
|
|
|
7,534
|
|
|
|
6,705
|
|
|
|
6,331
|
|
Net gain on securities transactions
|
|
|
324
|
|
|
|
396
|
|
|
|
178
|
|
Total
|
|
$
|
54,808
|
|
|
$
|
48,014
|
|
|
$
|
46,159
|
|
Noninterest income is a significant source
of income for the Company, representing 29.0% of total revenues in 2012, and 30.1% in 2011, and is an important factor in the Company’s
results of operations. Noninterest income increased 14.2% over 2011. The year-over-year changes in the various noninterest categories
are discussed in more detail below.
Insurance commissions and fees increased $5.9
million or 43.4% over 2011. Revenues for commercial insurance lines, personal insurance lines, and health and benefit related insurance
products were all up for the year compared to the same period in 2011. The majority of the increase in revenue is attributable
to the August 1, 2012 acquisition of VIST Insurance. The VIST acquisition added about $1.5 million of commercial lines revenue,
$697,000 of personal lines revenue, and $2.5 million in health and benefit revenues in 2012. In addition, 2012 was also the first
full year which included business resulting from the Olver acquisition which closed in the second quarter of 2011.
Investment services income in 2012 was relatively
flat compared to the same period in 2011. Increases in trust and wealth management fees were mainly offset by lower brokerage fees
and commissions. In 2011, the Company discontinued providing broker dealer services to third party representatives, which resulted
in lower commissions. 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, volatility in the equity and bond
markets impacts the market value of assets and the related investment fees. The market value of assets managed by, or in custody
of, Tompkins was $3.2 billion at December 31, 2012, and $2.7 billion in 2011. These figures include $931.6 million in 2012 and
$974.3 million in 2011, of Company-owned securities where Tompkins Investment Services serves as custodian.
Service charges on deposit accounts were down
$1.1 million or 12.4%, compared to 2011.
The largest component of this category is overdraft fees, which
is largely driven by customer activity. The Company implemented changes to its transaction processing as required by the Dodd-Frank
Act, which negatively impacted overdraft revenue.
Card services income increased $970,000 or
19.2% over the same period in 2011. The primary components of card services income are fees related to debit card transactions
and ATM usage. Debit card income and fees associated with debit card transactions increased by 25.9% compared to 2011. The increase
was mainly due to an increase in the number of cards issued, higher transaction volumes contributing to additional interchange
income, and an accrual adjustment related to a card reward program to reflect an actual redemption rate on program incentives,
lower than Management’s original estimates. Furthermore, $529,000 of the card services income increase can be attributed
to VIST Bank.
Net mark-to-market losses on securities and
borrowings held at fair value were down $316,000 compared to losses reported in 2011. Mark-to-market losses or gains relate to
the change in the fair value of securities and borrowings where the Company has elected the fair value option. The year-over-year
losses are mainly attributed to changes in market interest rates.
Other income increased $829,000 or 12.4% when
compared to 2011. The primary components of other income are other service charges, increases in cash surrender value of life insurance,
gains on sales of residential mortgage loans, and other miscellaneous income, which includes income from miscellaneous equity investments,
including the Company’s investment in Small Business Investment Companies (“SBIC”).
Other service charge income, included in other
income on the consolidated statements of income, was up compared to the prior year by $762,000, mainly as a result of the VIST
Bank acquisition, which contributed $739,000.
Net gains on sale of loans, included in other
income on the consolidated statements of income, of $885,000 in 2012 were up by $389,000 or 78.3% compared to 2011. The increase
in gains in 2012 compared to 2011 is attributable to the VIST acquisition. VIST Bank had $524,000 of gains on sales of loans since
acquisition. To manage interest rate risk exposures, the Company from time to time sells certain fixed rate residential mortgage
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.
Increases in the value of Corporate Owned Life
Insurance (“COLI”) net of mortality expenses, included in other income on the consolidated statements of income, were
$1.7 million in 2012, up $212,000 or 14.1% over 2011. COLI relates to life insurance policies covering certain senior officers
of the Company and its subsidiaries. The Company’s average investment in COLI was $65.1 million at December 31, 2012, and
$41.6 million during the same period in 2011.
Other miscellaneous income in 2012 also included
approximately $755,000 in nonrecurring income attributable to a merchant servicing contract bonus of $350,000 and a pre-tax $405,000
reversal of a liability that was previously established to cover the Company’s potential obligation to share in certain VISA
litigations. During the second quarter of 2012, VISA reached a settlement with certain merchants.
Noninterest Expense
|
|
|
|
Year ended December 31,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Salaries and wages
|
|
$
|
51,700
|
|
|
$
|
44,140
|
|
|
$
|
42,530
|
|
Pension and other employee benefits
|
|
|
18,075
|
|
|
|
14,275
|
|
|
|
14,523
|
|
Net occupancy expense of premises
|
|
|
8,969
|
|
|
|
7,117
|
|
|
|
7,161
|
|
Furniture and fixture expense
|
|
|
4,996
|
|
|
|
4,463
|
|
|
|
4,421
|
|
FDIC insurance
|
|
|
2,685
|
|
|
|
2,527
|
|
|
|
3,768
|
|
Amortization of intangible assets
|
|
|
1,264
|
|
|
|
589
|
|
|
|
762
|
|
Merger and integration related expense
|
|
|
15,584
|
|
|
|
174
|
|
|
|
0
|
|
Other
|
|
|
34,335
|
|
|
|
25,267
|
|
|
|
25,880
|
|
Total
|
|
$
|
137,608
|
|
|
$
|
98,552
|
|
|
$
|
99,045
|
|
Noninterest expenses of $137.6 million were
up $39.1 million or 39.6% over 2011. This increase was largely the result of the VIST Financial merger and acquisition integration
related pre-tax expenses, which were $15.6 million and $174,000, for 2012 and 2011, respectively. VIST Financial contributed $13.1
million in noninterest expense 2012. Changes in various components of noninterest expense are discussed below.
Total personnel-related expenses increased
by $11.3 million or 19.4% in 2012 over 2011. Salaries and wages increased by $7.6 million or 17.1% in 2012 when compared to 2011.
The increase was primarily related to VIST Financial, which added $3.3 million of additional expense over 2011; also contributing
to the increase were annual merit increases as well as increases in incentive compensation expense and stock-based compensation
expense. Total pension and other employee benefit expense increased by $3.8 million or 26.6% compared to 2011. The increase was
mainly related to VIST Financial, which added $948,000 of additional expense over 2011, along with increases in pension and health
insurance expense.
Net occupancy expense increased by $1.9 million
or 26.0% in 2012 over 2011; VIST Financial contributed $1.5 million in additional net occupancy expense in 2012.
Other operating expenses of $34.3 million,
increased by $9.1 million or 35.9% compared to 2011. The primary components of other operating expenses in 2012 are marketing expense
($4.1 million), professional fees ($4.1 million), software licensing and maintenance ($4.0 million), cardholder expense ($2.4 million)
and other miscellaneous expense ($19.8 million). Other miscellaneous expense in 2012 included FDIC deposit insurance ($2.7 million);
investment tax credit amortization ($2.2 million); postage and courier ($1.4 million); legal ($1.4 million); other real estate
owned ($1.1 million); and telephone ($1.0 million). VIST Financial contributed $6.2 million in other operating expense in 2012.
The Company’s efficiency ratio, defined
as operating expense excluding amortization of intangible assets, divided by tax-equivalent net interest income plus noninterest
income before securities gains and losses (increase in the cash surrender value of COLI is shown on a tax equivalent basis), improved
to 62.7% in 2012, compared to 60.3% in 2011. Tax equivalency was based upon a 40% tax rate. Excluding the tax equivalent adjustments
for tax-exempt securities and tax-exempt loans and leases, the efficiency ratio would be 63.4% in 2012 and 61.4% in 2011.
Noncontrolling Interests
Net income attributable to noncontrolling interests
represents the portion of net income in consolidated majority-owned subsidiaries that is attributable to the minority owners of
a subsidiary. The Company had net income attributable to noncontrolling interests of $131,000 in 2012 and 2011. The noncontrolling
interests are mainly in three real estate investment trusts, which are substantially owned by the Company’s banking subsidiaries.
Income Tax Expense
The provision for income taxes provides for
Federal, New York State income taxes. The 2012 provision was $11.1 million. The effective tax rate for the Company was 26.2% in
2012, down from 31.6% in 2011. The decrease in the effective rate in 2012 was primarily a result of investments in low income housing
and historic tax credits and an increase in tax exempt income.
Results of Operations
(Comparison of December 31, 2011 and 2010 results)
General
The Company reported diluted earnings per share
of $3.20 in 2011, an increase of 2.9% over diluted earnings per share of $3.11 in 2010. Net income for the year ended December
31, 2011, was $35.4 million, up 4.7% compared to $33.8 million in 2010. The improvement in 2011 results was mainly attributable
to an increase in noninterest income and lower noninterest expense. The Company’s return on equity was 12.02% in 2011, compared
to 12.72% in 2010, while return on assets was 1.07% in 2011 and 1.06% in 2010.
Segment Reporting
Banking Segment
The Banking segment net income increased $1.0
million or 3.4% compared to 2010, driven by growth in noninterest income and lower noninterest expense. Net interest income declined
$328,000, or 0.3% in 2011 versus 2010 due to lower average earning assets yields compared to reductions in rates paid on interest-bearing
liabilities.
The provision for loan and lease losses increased
$438,000 or 5.2% in 2011 over 2010. The increase in the provision for loan and lease losses in 2011 was largely the result of an
increase in loan charge-offs during the third quarter of 2011, which included a $5.0 million charge-off related to a single commercial
real estate customer.
Noninterest income grew $938,000 or 4.7% in
2011 from 2010. The main contributors to the improvement were an increase in card services income of $775,000 or 18.1% and a $218,000
increase in net gains on securities transactions. Card services income rose as a result of an increase in debit card transaction
volumes and the expiration of associated reward program incentives. Service charges on deposit accounts were down $63,000 or 0.7%
in 2011 compared to 2010. The decrease was mainly a result of lower overdraft fees and reflected regulatory changes that took effect
in 2010.
Noninterest expenses declined $585,000 or 0.7%
from the same period in 2010. Decreases in pension expense and FDIC insurance expense more than offset increases in cardholder
expenses, and salaries and other benefits, including annual merit increases, increases in incentive compensation and stock based
compensation, and higher health insurance costs.
Insurance Segment
The Insurance segment reported net income of
$1.6 million for 2011, an increase of $230,000 or 16.7% compared to 2010. The improvement over the previous year can be attributed
partially to increases in insurance commissions related to the Olver acquisition in the current year.
Noninterest income derived from the insurance
segment increased $796,000 or 6.7% compared to the same period in 2010 made up primarily of insurance commissions and fees. Revenue
of all the Company’s insurance product lines: commercial, personal and health and benefit increased over the previous year.
Noninterest expenses increased in 2011 by $395,000
or 4.1% over the same period prior year. The increase was mainly in salaries and benefits, reflecting annual merit increases, and
other incentive compensation accruals, and other operating expenses.
Wealth Management Segment
The Wealth Management segment reported net income of $2.3 million
for 2011, an increase of $321,000 or 16.2% compared to the same period in 2010 mainly due to increases in Trust services income.
Noninterest income increased $398,000 or 2.6% over the prior year
due to an $874,000 increase in Trust and Investment management services. This increase offset a decline in revenue resulting from
the decision in Q3 of 2011 to stop providing services to external broker dealer relationships.
Noninterest expenses were flat compared to the prior year end of
2010. A $224,000 increase in marketing expense in the current year was offset by declines in technology ($137,000), professional
fees ($103,000) and external commissions ($100,000).
Net Interest Income
Net interest income was the Company’s
largest source of revenue, representing 69.9% of total revenues for the twelve months ended December 31, 2011 and 77.6% of total
revenues for the twelve months ended December 31, 2010. Net interest income was 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.
Over this period the Company’s interest-bearing liabilities repriced at a faster pace than our interest earning assets. With
deposit rates currently at low levels, the downward pricing of these liabilities slowed, while interest earning assets continued
to reprice downward at a steady rate. This contributed to a decrease in net interest margin for the twelve months ended December
31, 2011 compared to the same period in 2010. The taxable equivalent net interest margin of 3.72% for 2011 is below the 3.86% for
2010. The decrease in the net interest margin was also partly due to the impact of the growth in interest earning assets over prior
year being concentrated in lower yielding securities rather than higher yielding loans.
Taxable-equivalent interest income decreased
by 4.8% in 2011 over the same period in 2010. The decrease in taxable-equivalent interest income was primarily a result of lower
average yields on interest-earning assets year-over-year. In addition to the lower level of market interest rates, the yield on
interest earning assets was also impact by the composition of interest earning assets. Of the $102.7 million of growth in average
earnings assets in 2011, $89.6 million was in average securities, which had an average yield of 3.11% in 2011 compared to an average
yield of 3.86% in 2010 and an average yield on loans of 5.42% in 2011. During 2011, cash flow from securities maturities and prepayments
had been reinvested at lower yields as a result of the decrease in market interest rates. Average loan balances were up $30.6 million
or 1.6% in 2011 over 2010, while the average yield on loans decreased 20 basis points to 5.42%. Loan growth in 2011 included a
$50.0 million increase in average real estate loans, and a decrease of $12.0 million and $4.2 million in average consumer and commercial
loan balances, respectively.
Interest expense for 2011 was down $6.6 million
or 20.5% compared to 2010, reflecting lower average rates paid on deposits and borrowings, a lower average volume of borrowings
and growth in noninterest bearing deposit balances. The average rate paid on interest-bearing deposits during 2011 of 0.63% was
25 basis points lower than the average rate paid in 2010. The decrease in the average cost of interest-bearing deposits reflected
a decrease in the interest rates offered on deposit products due to decreases in average market rates combined with an increase
in the relative proportion of lower cost savings and money market deposits. Average interest-bearing deposit balances increased
by $56.0 million or 2.8% in 2011 compared to 2010. The majority of the increase was in average interest bearing checking, savings
and money market deposit balances, which were up 10.1%, and were partially offset by lower average time deposits of $100,000 or
less which were down $30.9 million or 7.1%. Average noninterest bearing deposit balances were up $71.7 million or 15.3% in 2011
over the same period in 2010. Average other borrowings were down $37.6 million or 19.5% over 2010.
Provision for Loan
and Lease Losses
The provision for loan and lease losses was
$8.9 million in 2011, compared to $8.5 million in 2010. The increase in the provision for loan and lease losses in 2011 was largely
the result of an increase in loan charge-offs during 2011, which included a $5.0 million charge-off related to a single commercial
real estate customer ($1.9 million of this was specifically reserved at December 31, 2010). The increase in net charge-offs was
offset by reductions in criticized and classified loans. Over the past several years, the provision has been higher than historical
levels due to increases in nonperforming loans and leases and net charge-offs as well as concerns over weak economic conditions
and uncertain real estate markets. During 2011, the Company reported some improvement in asset quality measures, including a decrease
in nonperforming loans at year-end 2011 compared with year-end 2010 as well as a decrease in internally-classified loans over the
same period.
Noninterest Income
Noninterest income represented 30.1% of total
revenues in 2011, and 29.2% in 2010, and was an important factor in the Company’s results of operations. Noninterest income
increased 4.0% over 2010. The year-over-year changes in the various noninterest categories are discussed in more detail below.
Investment services income was relatively flat
compared to the same period in 2011. Increases in trust and wealth management fees were mainly offset by lower brokerage fees and
commissions. In 2011, the Company discontinued providing broker dealer services to third party representatives, which resulted
in lower commissions. With fees largely based on the market value and the mix of assets managed, volatility in the equity and bond
markets impacts the market value of assets and the related investment fees. The market value of assets managed by, or in custody
of, Tompkins was $2.7 billion at December 31, 2011, and $2.9 billion in 2010. These figures included $974.3 million, and $844.9
million, of Company-owned securities where Tompkins Investment Services serves as custodian.
Insurance commissions and fees increased $804,000
or 6.3% over 2010. Revenues for commercial insurance lines, personal insurance lines, and health and benefit related insurance
products were all up for the year compared to the same period in 2010. Part of the increase in all three product lines was the
June 1, 2011 acquisition of Olver & Associates, Inc. The Olver acquisition has added about $322,000 of commercial lines revenue,
$138,000 of personal lines revenue, and $108,000 in health and benefit revenues in 2011. Health and benefit related insurance products
continue to be a main source of growth increasing by $289,000 in 2011over the same period prior year.
Service charges on deposit accounts were down
$63,000 or 0.7%, compared to 2010.
The largest component of this category was overdraft fees, which
was largely driven by customer activity. Regulatory changes which became effective in the third quarter of 2010 impacted earning
capability in overdraft fees. The Federal Reserve Board rule prohibits financial institutions from charging consumer fees for paying
overdrafts on automated teller machines and one-time debit transactions, unless the consumer consents, or opts in, to the overdraft
service for these types of transactions.
Card services income increased $775,000 or
18.1% over the same period in 2010. The primary components of card services income were fees related to debit card transactions
and ATM usage. Debit card income and fees associated with debit card transactions increased by 17.2% compared to 2010. The increase
was mainly due to the increased number of cards and transactions, as well as an increase in interchange fees associated with debit
cards. ATM fee income was relatively flat compared to 2010.
Net mark-to-market losses on securities and
borrowings held at fair value were up $180,000 compared to losses reported in 2010. Mark-to-market losses or gains relate to the
change in the fair value of securities and borrowings where the Company has elected the fair value option. The year-over-year losses
are mainly attributed to changes in market interest rates.
Other income increased $374,000 or 5.9% when
compared to 2010. The primary components of other income were other service charges, increases in cash surrender value of life
insurance, gains on sales of residential mortgage loans, and other miscellaneous income, which includes, income from miscellaneous
equity investments, including the Company’s investment in a Small Business Investment Company (“SBIC”).
Other service charge income, included in other
income on the consolidated statements of income, was down compared to prior year by $151,000, mainly as a result of lower loan
related fees.
Net gains on sale of loans, included in other
income on the consolidated statements of income, of $496,000 in 2011 were down by $459,000 or 48.1% compared to 2010. The decrease
in gains in 2011 compared to 2010 was consistent with the decrease in volume of loans sold in 2011 compared to 2010. To manage
interest rate risk exposures, the Company from time to time sells certain fixed rate residential mortgage 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.
Increases in the value of COLI net of mortality
expenses, included in other income on the consolidated statements of income, were $1.5 million in 2011, up $126,000 or 9.1% over
2010. COLI relates to life insurance policies covering certain senior officers of the Company and its subsidiaries. The Company’s
average investment in COLI was $41.6 million at December 31, 2011, and $36.5 million during the same period in 2010.
Other miscellaneous income, included in other
income on the consolidated statements of income, also included income related to an investment in a SBIC. In 2011 and 2010, the
Company recognized $1.1 million and $543,000, respectively, related to an investment in a SBIC. The amounts for 2011 and 2010 included
$807,000 and $371,000, respectively, of gains recognized and distributed by the SBIC. The SBIC periodically recognizes gains related
to investments held in its portfolio and distributes these gains to its investors. The Company believed that, as of December 31,
2011, there were no impairments with respect to its investment in the SBIC. Other miscellaneous income in 2011 also included approximately
$600,000 in nonrecurring gains on the sale of real estate and other assets.
Noninterest Expense
Noninterest expenses for 2011were in line with
2010. Changes in various components of noninterest expense are discussed below.
Total personnel-related expenses increased
by $1.4 million or 2.4% in 2011 over 2010. Salaries and wages increased by $1.6 million or 3.8% in 2011 when compared to 2010.
The increases were primarily related to annual merit increases as well as increases in incentive compensation expense and stock-based
compensation expense. Total pension and other employee benefit expense decreased by $248,000 or 1.7% compared to 2010. The decrease
was mainly in pension expense (down $964,000) and was partially offset by higher health insurance expense (up $810,000).
FDIC insurance decreased by $1.2 million or
32.9% in 2011 compared to 2010, mainly
as a result of changes to the FDIC assessment calculation that
took effect in the second quarter of 2011.
Other operating expenses decreased by 1.7%
compared to 2010. The primary components of other operating expense were marketing expense, professional fees, software licensing
and maintenance, and cardholder expense. Contributing to the decrease in the 2011 from 2010 were the following: professional fees
(down $815,000), partially offset by increases in software licenses and maintenance (up $167,000) and cardholder expenses (up $220,000).
Professional fees included amounts paid to outside consultants for assistance on projects or initiatives and vary depending on
the number and scope of actual projects in a given year. The increase in cardholder expenses was mainly a result of an increased
number of cards and a higher volume of customer transactions.
The Company’s efficiency ratio, defined
as operating expense excluding amortization of intangible assets, divided by tax-equivalent net interest income plus noninterest
income before securities gains and losses (increase in the cash surrender value of COLI is shown on a tax equivalent basis), improved
to 60.3% in 2011, compared to 60.9% in 2010. Tax equivalency was based upon a 40% tax rate. Excluding the tax equivalent adjustments
for tax-exempt securities and tax-exempt loans and leases, the efficiency ratio would have been 61.4% in 2011 and 62.0% in 2010.
Noncontrolling Interests
Net income attributable to noncontrolling interests
represented the portion of net income in consolidated majority-owned subsidiaries that was attributable to the minority owners
of a subsidiary. The Company had net income attributable to noncontrolling interests of $131,000 in 2011 and 2010. The noncontrolling
interests were mainly in three real estate investment trusts, which were substantially owned by the Company’s banking subsidiaries.
Income Tax Expense
The provision for income taxes provides for
Federal and New York State income taxes. The 2011 provision was $16.4 million, which was in line with same period prior year. The
effective tax rate for the Company was 31.6% in 2011, down from 32.7% in 2010. The effective rate in 2011 benefitted from investments
in low income housing tax credits.
FINANCIAL CONDITION
Total assets, at December 31, 2012, grew by
$1.4 billion or 42.3% compared to the previous year. The majority of the growth is due to the August 1, 2012 acquisition of VIST
Financial, which had total assets of approximately $1.4 million as of the acquisition date.
Table 3-Balance Sheet Comparisons
below provides a comparison of average and year-end balances of selected balance sheet categories over the past three years, and
the change in those balances between 2011 and 2012. Earning asset growth over year-end 2011 was attributed to a $975.7 million
increase in total loans (VIST Bank had total loans of $889.3 million on the acquisition date) and a $246.6 million increase in
securities (VIST Financial had total securities of $381.0 million on acquisition date). As part of a planned balance sheet restructuring
following the VIST acquisition, the Company sold approximately $74.9 million of available-for-sale securities, at a pre-tax loss
of $194,000 and used the proceeds, together with other available cash, to prepay repurchase agreements of about $85.6 million,
inclusive of prepayment fees.
As of December 31, 2012, total securities comprised
29.1% of total assets, compared to 34.2% of total assets at year-end 2011. The securities portfolio contains primarily mortgage-backed
securities, obligations of U.S. Government sponsored entities, and obligations of states and political subdivisions. The Company
has no investments in preferred stock of U.S. Government sponsored entities and no investments in pools of trust preferred securities.
A more detailed discussion of the securities portfolio is provided below in this section under the caption “Securities”.
Loans and leases were 60.6% of total assets
at December 31, 2012, compared to 57.5% of total assets at December 31, 2011. A more detailed discussion of the loan portfolio
is provided below in this section under the caption “Loans and Leases”.
Nonperforming loans (loans on nonaccrual, loans
past due 90 days or more and still accruing interest, and loans restructured in a troubled debt restructuring) declined $1.9 million
or 4.5% compared to the same period last year ended December 31, 2011. Nonperforming loans, on the originated loan portfolio, represented
1.34% of total originated loans at December 31, 2012, compared to 2.09% of total loans at December 31, 2011. For 2012, net charge-offs
were $11.8 million, up from $2.6 million in the same period of 2011. A more detailed discussion of nonperforming loans and other
asset quality measures is provided below in this section under the caption “Allowance for Loan and Lease Losses”.
Total deposits increased $1.3 billion or 48.5%
over December 31, 2012 (VIST Financial had total deposits of $1.2 billion on acquisition date). The growth in total deposits from
December 31, 2011 was concentrated in checking, money market and savings and noninterest bearing deposit balances which were up
$787.5 million (VIST Financial had balances of $661.8 million on the acquisition date) and $215.5 million (VIST Financial had noninterest
bearing balance of $129.5 million on acquisition date), respectively. Other funding sources include Federal funds purchased, securities
sold under agreements to repurchase, other borrowings, and trust preferred securities. These funding sources totaled $369.5 million
at December 31, 2012, down $10.7 million or 2.8% from $380.2 million at December 31, 2011. Included in this total are certain borrowings
that the Company elected to account for at fair value. As of December 31, 2012, the Company had $10.0 million of borrowings with
the FHLB accounted for at fair value, with an aggregate fair value of $11.8 million.
A more detailed discussion of deposits and
borrowings is provided below in this section under the caption “Deposits and Other Liabilities”. In addition, refer
to “Note 10 – Federal Funds Purchased and Securities Sold Under Agreements to Repurchase”,
“Note 11 - Other Borrowings”, and “Note 12 - Trust Preferred Debentures” in Notes to Consolidated Financial
Statements in Part II, Item 8. of this Report for further details on these funding sources.
Table 3 Balance Sheet Comparisons
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balance Sheet
|
|
As of December 31,
|
|
|
Change (2012 to 2011)
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
Amount
|
|
|
Percentage
|
Total assets
|
|
$
|
4,092,473
|
|
|
$
|
3,294,982
|
|
|
$
|
3,191,840
|
|
|
|
797,491
|
|
|
24.20%
|
Earning assets
*
|
|
|
3,754,667
|
|
|
|
3,064,761
|
|
|
|
2,962,056
|
|
|
|
689,906
|
|
|
22.51%
|
Total loans and leases, less unearned income and net deferred costs and fees
|
|
|
2,382,109
|
|
|
|
1,928,540
|
|
|
|
1,897,983
|
|
|
|
453,569
|
|
|
23.52%
|
Securities
*
|
|
|
1,330,782
|
|
|
|
1,099,575
|
|
|
|
1,009,954
|
|
|
|
231,207
|
|
|
21.03%
|
Core deposits
**
|
|
|
2,714,869
|
|
|
|
1,984,653
|
|
|
|
1,819,300
|
|
|
|
730,216
|
|
|
36.79%
|
Time deposits of $100,000 and more
|
|
|
405,478
|
|
|
|
313,881
|
|
|
|
327,626
|
|
|
|
91,597
|
|
|
29.18%
|
Federal funds purchased and securities
sold under agreements to repurchase
|
|
|
200,906
|
|
|
|
173,692
|
|
|
|
185,563
|
|
|
|
27,214
|
|
|
15.67%
|
Other borrowings
|
|
|
132,746
|
|
|
|
155,650
|
|
|
|
193,296
|
|
|
|
(22,904
|
)
|
|
(14.72%)
|
Shareholders' equity
|
|
|
376,890
|
|
|
|
294,620
|
|
|
|
265,943
|
|
|
|
82,270
|
|
|
27.92%
|
Ending Balance Sheet
|
|
As of December 31,
|
|
|
Change (2012 to 2011)
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
Amount
|
|
|
Percentage
|
|
Total assets
|
|
$
|
4,837,197
|
|
|
$
|
3,400,248
|
|
|
$
|
3,260,343
|
|
|
|
1,436,949
|
|
|
|
42.26
|
%
|
Earning assets
*
|
|
|
4,431,698
|
|
|
|
3,165,412
|
|
|
|
3,029,621
|
|
|
|
1,266,286
|
|
|
|
40.00
|
%
|
Total loans and leases, less unearned income and net deferred costs and fees
|
|
|
2,954,610
|
|
|
|
1,981,849
|
|
|
|
1,910,358
|
|
|
|
972,761
|
|
|
|
49.08
|
%
|
Securities
*
|
|
|
1,389,928
|
|
|
|
1,151,124
|
|
|
|
1,094,952
|
|
|
|
238,804
|
|
|
|
20.75
|
%
|
Core deposits
**
|
|
|
3,247,637
|
|
|
|
2,211,702
|
|
|
|
1,917,886
|
|
|
|
1,035,935
|
|
|
|
46.84
|
%
|
Time deposits of $100,000 and more
|
|
|
467,553
|
|
|
|
305,652
|
|
|
|
296,399
|
|
|
|
161,901
|
|
|
|
52.97
|
%
|
Federal funds purchased and securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sold under agreements to repurchase
|
|
|
213,973
|
|
|
|
169,090
|
|
|
|
183,609
|
|
|
|
44,883
|
|
|
|
26.54
|
%
|
Other borrowings
|
|
|
111,848
|
|
|
|
186,075
|
|
|
|
244,193
|
|
|
|
(74,227
|
)
|
|
|
(39.89
|
%)
|
Shareholders' equity
|
|
|
441,360
|
|
|
|
299,143
|
|
|
|
273,408
|
|
|
|
142,217
|
|
|
|
47.54
|
%
|
*
Balances of available-for-sale securities are shown
at amortized cost.
**
Core deposits equal total deposits less time deposits
of $250,000 and more, brokered deposits, and municipal money market deposits. Prior to 2011, core deposits equaled total deposits
less time deposits of $100,000 or more, brokered deposits and municipal money market deposits.
Shareholders’ Equity
The Consolidated Statements of Changes in Shareholders’
Equity included in the Consolidated Financial Statements of the Company contained in Part II, Item 8. of this Report, detail the
changes in equity capital. Total shareholders’ equity was up $142.2 million or 47.5% to $441.4 million at December 31, 2012,
from $299.1 million at December 31, 2011 mainly as a result of the stock issued as part of the VIST acquisition, a capital raise
completed in the second quarter of 2012 and net income. Additional paid-in capital increased by $128.3 million, from $206.4 million
at December 31, 2011, to $334.6 million at December 31, 2012. The $128.3 million included the following: the issuance of $83.1
million in common stock for the acquisition of VIST Financial; the net $37.9 million capital raise completed in the second quarter
of 2012; $2.8 million of proceeds from stock option exercises and the related tax benefits; $1.3 million related to stock-based
compensation; $1.9 million related to shares issued for dividend reinvestment plans; $1.0 million related to shares issued for
the employee stock ownership plan; and $199,000 related to shares issued for director deferred compensation plan. Retained earnings
increased by $12.3 million, reflecting net income of $31.3 million less dividends of $19.0 million.
Accumulated other comprehensive loss decreased
from a net unrealized loss of $3.7 million at December 31, 2011 to a net unrealized loss of $2.1 million at December 31, 2012;
reflecting a $3.1 million increase in unrealized gains on available-for-sale securities due to lower market rates, and an $1.6
million loss associated with 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 capital ratios.
Total shareholders’ equity was up $25.7
million or 9.4% to $299.1 million at December 31, 2011, from $273.4 million at December 31, 2010. The increase was mainly due to
the Company’s strong financial performance, reflecting net income attributable to Tompkins Financial Corporation of $35.4
million less dividends of $15.4 million. Additional paid-in capital increased by $8.3 million, from $198.1 million at December
31, 2010, to $206.4 million at December 31, 2011. The $8.3 million included the following: 2.5 million attributed to shares issued
for an acquisition; $880,000 of proceeds from stock option exercises and the related tax benefits; $1.3 million related to stock-based
compensation; $2.4 million related to shares issued for dividend reinvestment plans; $1.1 million related to shares issued for
the employee stock ownership plan; and $151,000 related to shares issued for director deferred compensation plan.
Accumulated other comprehensive loss increased
from net unrealized loss of $1.3 million at December 31, 2010 to a net unrealized loss of $3.7 million at December 31, 2011; reflecting
a $9.7 million increase in unrealized gains on available-for-sale securities due to lower market rates, and an $12.1 million decrease
related to postretirement benefit plans.
The Company continued its long history of increasing
cash dividends with a per share increase of 4.3% in 2012, which follows an increase of 5.3% in 2011. Dividends per share amounted
to $1.46 in 2012, compared to $1.40 in 2011, and $1.33 in 2010. Cash dividends paid represented 59.8%, 43.5%, and 42.5% of after-tax
net income in each of 2012, 2011, and 2010, respectively.
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 next 24 months. The repurchase
program may be suspended, modified, or terminated at any time for any reason. The Company did not purchase any shares in 2011 or
2012 under the plan.
The Company and its subsidiary banks are subject
to quantitative capital measures established by regulation to ensure capital adequacy. Consistent with the objective of operating
a sound financial organization, the Company and its subsidiary banks maintain capital ratios well above regulatory minimums and
meet the requirements to be considered well-capitalized under the regulatory guidelines.
During the first quarter of 2010, the Comptroller
of the Currency (“OCC”) notified the Company that it was requiring Mahopac National Bank, one of the Company’s
four banking subsidiaries, to maintain certain minimum capital ratios at levels higher than those otherwise required by applicable
regulations. Mahopac has agreed 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. Since Mahopac’s ratios were above
the minimum requirements at the time of notification, there was not a material impact to Mahopac or the Company. As of December
31, 2012, Mahopac had a Tier 1 capital to average assets ratio of 9.0%, 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%. During the first quarter of 2013, the Company was
notified by the OCC that it was no longer requiring Mahopac to maintain the higher capital ratios agreed to in 2010.
As of December 31, 2012, the capital ratios
for the Company’s other three subsidiary banks also exceeded the minimum levels required to be considered well capitalized.
Additional information on the Company’s capital ratios and regulatory requirements is provided in “Note 21 - Regulations
and Supervision” in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report on Form 10-K.
Securities
The Company maintains a portfolio of securities
such as U.S. Treasuries, U.S. government sponsored entities securities, U.S. government agencies, non-U.S. Government agencies
or sponsored entities mortgage-backed securities, obligations of states and political subdivisions thereof and equity securities.
Management typically invests in securities with short to intermediate average lives in order to better match the interest rate
sensitivities of its assets and liabilities. Investment decisions are made within policy guidelines established by the Company's
Board of Directors. The investment policy established by the Company’s Board of Directors is based on the asset/liability
management goals of the Company, and is monitored by the Company’s Asset/Liability Management Committee. The intent of the
policy is to establish a portfolio of high quality diversified securities, which optimizes net interest income within safety and
liquidity limits deemed acceptable by the Asset/Liability Management Committee.
The Company classifies its securities at date
of purchase as either available-for-sale, held-to-maturity or trading. Securities, other than certain obligations of states
and political subdivisions thereof, are generally classified as available-for-sale. Securities available-for-sale may be used to
enhance total return, provide additional liquidity, or reduce interest rate risk. The held-to-maturity portfolio consists solely
of obligations of state and political subdivisions. The securities in the trading portfolio reflect those securities that the Company
elected to account for at fair value, with the adoption of ASC Topic 825,
Financial Instruments,
effective January 1, 2008.
The Company’s securities portfolio at
December 31, 2012 totaled $1.4 billion, reflecting an increase of 20.5% from $1.2 billion at December 31, 2011. The growth was
in the available-for-sale portfolio as the held-to-maturity and trading portfolios both decreased from year end 2011. The growth
in the available-for-sale portfolio was mainly in mortgage backed securities issued by U.S. Government sponsored entities and driven
by the acquisition of VIST in 2012. The decrease in the held-to-maturity portfolio was due to maturities and calls during the year.
The tables below show the composition of the securities portfolios as of the past three year ends. Additional information on the
securities portfolio is available in “Note 3 Securities” in Notes to Consolidated Financial Statements in Part II,
Item 8. of this Report, which details the types of securities held, the carrying and fair values, and the contractual maturities
as of December 31, 2012 and 2011.
Available-for-Sale Securities
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
(in thousands)
|
|
Amortized Cost
1
|
|
|
Fair Value
|
|
|
Amortized Cost
1
|
|
|
Fair Value
|
|
|
Amortized Cost
1
|
|
|
Fair Value
|
|
U.S. Treasury securities
|
|
$
|
1,001
|
|
|
$
|
1,004
|
|
|
$
|
2,020
|
|
|
$
|
2,070
|
|
|
$
|
2,043
|
|
|
$
|
2,129
|
|
Obligations of U.S. Government sponsored entities
|
|
|
570,871
|
|
|
|
593,778
|
|
|
|
408,958
|
|
|
|
422,590
|
|
|
|
402,057
|
|
|
|
407,440
|
|
Obligations of U.S. states and political subdivisions
|
|
|
76,803
|
|
|
|
79,056
|
|
|
|
56,939
|
|
|
|
59,653
|
|
|
|
60,707
|
|
|
|
63,037
|
|
Mortgage-backed securities - residential, issued by
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
|
162,853
|
|
|
|
167,667
|
|
|
|
123,426
|
|
|
|
129,773
|
|
|
|
143,319
|
|
|
|
146,013
|
|
U.S. Government sponsored entities
|
|
|
526,364
|
|
|
|
540,355
|
|
|
|
501,136
|
|
|
|
517,378
|
|
|
|
393,331
|
|
|
|
405,478
|
|
Non-U.S. Government agencies or sponsored entities
|
|
|
4,457
|
|
|
|
4,354
|
|
|
|
6,334
|
|
|
|
5,876
|
|
|
|
9,636
|
|
|
|
9,283
|
|
U.S. corporate debt securities
|
|
|
5,009
|
|
|
|
5,083
|
|
|
|
5,017
|
|
|
|
5,183
|
|
|
|
5,024
|
|
|
|
5,203
|
|
Total debt securities
|
|
|
1,347,358
|
|
|
|
1,391,297
|
|
|
|
1,103,830
|
|
|
|
1,142,523
|
|
|
|
1,016,117
|
|
|
|
1,038,583
|
|
Equity securities
|
|
|
2,058
|
|
|
|
2,043
|
|
|
|
1,023
|
|
|
|
1,023
|
|
|
|
1,025
|
|
|
|
1,025
|
|
Total available-for-sale securities
|
|
$
|
1,349,416
|
|
|
$
|
1,393,340
|
|
|
$
|
1,104,853
|
|
|
$
|
1,143,546
|
|
|
$
|
1,017,142
|
|
|
$
|
1,039,608
|
|
1
Net of other-than-temporary
impairment losses recognized in earnings.
Equity securities include miscellaneous investments
carried at fair value, which approximates cost.
Held-to-Maturity Securities
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. states and political subdivisions
|
|
$
|
24,062
|
|
|
$
|
25,163
|
|
|
$
|
26,673
|
|
|
$
|
27,255
|
|
|
$
|
54,973
|
|
|
$
|
56,064
|
|
Total held-to-maturity securities
|
|
$
|
24,062
|
|
|
$
|
25,163
|
|
|
$
|
26,673
|
|
|
$
|
27,255
|
|
|
$
|
54,973
|
|
|
$
|
56,064
|
|
Held-for-Trading Securities
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
Fair Value
|
|
|
Fair Value
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. Government sponsored entities
|
|
$
|
11,860
|
|
|
$
|
12,693
|
|
|
$
|
13,139
|
|
Mortgage-backed securities-residential issued by U.S. Government sponsored entities
|
|
|
4,590
|
|
|
|
6,905
|
|
|
|
9,698
|
|
Total held-for-trading securities
|
|
$
|
16,450
|
|
|
$
|
19,598
|
|
|
$
|
22,837
|
|
The decrease in trading securities reflects
principal repayments received during 2012. The pre-tax mark-to-market losses on trading securities in 2012 were $332,000, compared
to pre-tax net mark-to-market gains of $62,000 in 2011 and $219,000 in 2010.
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 December 31, 2012, the Company owned five corporate, non-U.S. Government agency collateralized
mortgage obligation issues (“CMO’s”) in super senior or senior tranches of which the aggregate historical cost
basis for three of these non-agency CMO’s was greater than their estimated fair value. At December 31, 2012, all five non-agency
CMO’s with an amortized cost basis of $4.5 million were collateralized by residential real estate. None of the five non-agency
CMO’s whose aggregate historical cost basis is greater than their estimated fair value are currently deferring or are in
default of interest payments to the Company.
The Company uses a two step modeling approach
to analyze each non-agency CMO issue to determine whether or not the current unrealized losses are due to credit impairment and
therefore other-than-temporarily impaired (“OTTI”). Step one in the modeling process applies default and severity credit
vectors to each security based on current credit data detailing delinquency, bankruptcy, foreclosure and real estate owned (REO)
performance. The results of the credit vector analysis are compared to the security’s current credit support coverage to
determine if the security has adequate collateral support. If the security’s current credit support coverage falls below
certain predetermined levels, step two is utilized. In step two, the Company uses a third party to assist in calculating the present
value of current estimated cash flows to ensure there are no adverse changes in cash flows during the quarter leading to an other-than-temporary-impairment.
Management’s assumptions used in step two include default and severity vectors and prepayment assumptions along with various
other criteria including: percent decline in fair value; credit rating downgrades; probability of repayment of amounts due, credit
support and changes in average life. For the year ended December 31, 2012, three non-U.S. Government agency CMO’s qualified
for the step two modeling approach. In 2011 and 2012, the Company recognized a subsequent net credit impairment charge to earnings
of $65,000 and $196,000, respectively, on these three non-agency CMO securities. As a result of the modeling process, the Company
does not consider the remaining two non-agency CMO’s to be other-than-temporarily impaired at December 31, 2012. Future changes
in interest rates or the credit quality and credit support of the underlying issuers may reduce the market value of these and other
securities. If such decline is determined to be other than temporary, the Company will record the necessary charge to earnings
and/or accumulated other comprehensive income to reduce the securities to their then current fair value.
The Company also holds non-marketable Federal
Home Loan Bank New York (“FHLBNY”) stock, non-marketable Federal Home Loan Bank Pittsburgh (“FHLBPITT”)
stock and non-marketable Federal Reserve Bank (“FRB”) stock, all of which are required to be held for regulatory purposes
and for borrowing availability. The required investment in FHLB stock is tied to the Company’s borrowing levels with the
FHLB. Holdings of FHLBNY stock, FHLBPITT stock, and FRB stock totaled $13.2 million, $4.1 million, and $2.1 million at December
31, 2012, respectively. Holdings of FHLBNY stock and FRB stock totaled $17.0 million and $2.1 million at December 31, 2011, respectively.
These securities are carried at par, which is also cost. The FHLBNY and FHLBPITT continue to pay dividends and repurchase stock.
As such, the Company has not recognized any impairment on its holdings of FHLBNY and FHLBPITT stock.
Management’s policy is to purchase investment
grade securities that, on average, have relatively short expected durations. This policy helps mitigate interest rate risk and
provides sources of liquidity without significant risk to capital. The contractual maturity distribution of debt securities and
mortgage-backed securities as of December 31, 2012, along with the weighted average yield of each category, is presented in
Table
4-Maturity Distribution
below. Balances are shown at amortized cost and weighted average yields are calculated on a fully taxable-equivalent
basis. Expected maturities will differ from contractual maturities presented in
Table 4-Maturity Distribution
below, because
issuers may have the right to call or prepay obligations with or without penalty and mortgage-backed securities will pay throughout
the periods prior to contractual maturity.
Table 4 - Maturity Distribution
|
|
|
|
As of December 31, 2012
|
|
|
|
Securities
|
|
|
Securities
|
|
|
|
Available-for-Sale *
|
|
|
Held-to-Maturity
|
|
(dollar amounts in thousands)
|
|
Amount
|
|
|
Yield (FTE)
|
|
|
Amount
|
|
|
Yield (FTE)
|
|
U.S. Treasury securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year
|
|
$
|
1,001
|
|
|
|
2.97
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
|
$
|
1,001
|
|
|
|
2.97
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. Government sponsored entities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year
|
|
$
|
28,105
|
|
|
|
2.09
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
Over 1 to 5 years
|
|
|
308,241
|
|
|
|
2.42
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
Over 5 to 10 years
|
|
|
234,525
|
|
|
|
1.82
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
$
|
570,871
|
|
|
|
2.11
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. state and political subdivisions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year
|
|
$
|
10,446
|
|
|
|
5.18
|
%
|
|
$
|
13,070
|
|
|
|
3.84
|
%
|
Over 1 to 5 years
|
|
|
44,546
|
|
|
|
5.26
|
%
|
|
|
7,974
|
|
|
|
6.27
|
%
|
Over 5 to 10 years
|
|
|
21,270
|
|
|
|
5.09
|
%
|
|
|
2,283
|
|
|
|
7.08
|
%
|
Over 10 years
|
|
|
541
|
|
|
|
7.30
|
%
|
|
|
735
|
|
|
|
8.05
|
%
|
|
|
$
|
76,803
|
|
|
|
5.71
|
%
|
|
$
|
24,062
|
|
|
|
6.31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities - residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year
|
|
$
|
351
|
|
|
|
3.54
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
Over 1 to 5 years
|
|
|
8,162
|
|
|
|
5.36
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
Over 5 to 10 years
|
|
|
168,322
|
|
|
|
2.84
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
Over 10 years
|
|
|
516,839
|
|
|
|
2.25
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
$
|
693,674
|
|
|
|
3.50
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over 1 to 5 years
|
|
|
2,509
|
|
|
|
4.01
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
Over 10 years
|
|
|
2,500
|
|
|
|
3.09
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
Equity securities
|
|
|
2,058
|
|
|
|
2.96
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
$
|
7,067
|
|
|
|
3.35
|
%
|
|
$
|
0
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year
|
|
$
|
39,903
|
|
|
|
2.94
|
%
|
|
$
|
13,070
|
|
|
|
3.84
|
%
|
Over 1 to 5 years
|
|
|
363,458
|
|
|
|
2.85
|
%
|
|
|
7,974
|
|
|
|
6.27
|
%
|
Over 5 to 10 years
|
|
|
424,117
|
|
|
|
2.40
|
%
|
|
|
2,283
|
|
|
|
7.08
|
%
|
Over 10 years
|
|
|
519,880
|
|
|
|
2.26
|
%
|
|
|
735
|
|
|
|
8.05
|
%
|
Equity securities
|
|
|
2,058
|
|
|
|
2.96
|
%
|
|
|
0
|
|
|
|
0.00
|
%
|
|
|
$
|
1,349,416
|
|
|
|
2.68
|
%
|
|
$
|
24,062
|
|
|
|
6.31
|
%
|
*
Balances of available-for-sale securities are shown at amortized
cost.
The average taxable-equivalent yield on the
securities portfolio was 2.61% in 2012 compared to 3.11% in 2011 and 3.86% in 2010. The decreases in yields were primarily a result
of the reinvestment of proceeds from principal repayments and maturities at lower market rates.
At December 31, 2012, there were no holdings
of any one issuer, other than the U.S. Government sponsored entities, in an amount greater than 10% of the Company’s shareholders’
equity.
Loans and Leases
Table 5 Composition of Loan and Lease Portfolio
Originated Loans and Leases as of December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Commercial and industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture
|
|
$
|
77,777
|
|
|
$
|
67,566
|
|
|
$
|
65,918
|
|
|
$
|
71,480
|
|
|
$
|
64,358
|
|
Commercial and industrial other
|
|
|
446,876
|
|
|
|
417,128
|
|
|
|
409,432
|
|
|
|
423,015
|
|
|
|
403,061
|
|
Subtotal commercial and industrial
|
|
|
524,653
|
|
|
|
484,694
|
|
|
|
475,350
|
|
|
|
494,495
|
|
|
|
467,419
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
41,605
|
|
|
|
47,304
|
|
|
|
58,519
|
|
|
|
55,626
|
|
|
|
47,311
|
|
Agriculture
|
|
|
48,309
|
|
|
|
53,071
|
|
|
|
48,485
|
|
|
|
40,516
|
|
|
|
39,942
|
|
Commercial real estate other
|
|
|
722,273
|
|
|
|
665,859
|
|
|
|
619,458
|
|
|
|
601,221
|
|
|
|
531,988
|
|
Subtotal commercial real estate
|
|
|
812,187
|
|
|
|
766,234
|
|
|
|
726,462
|
|
|
|
697,363
|
|
|
|
619,241
|
|
Residential real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
|
|
159,720
|
|
|
|
161,278
|
|
|
|
164,765
|
|
|
|
166,618
|
|
|
|
161,063
|
|
Mortgages
|
|
|
573,861
|
|
|
|
500,034
|
|
|
|
462,032
|
|
|
|
458,823
|
|
|
|
469,003
|
|
Subtotal residential real estate
|
|
|
733,581
|
|
|
|
661,312
|
|
|
|
626,797
|
|
|
|
625,441
|
|
|
|
630,066
|
|
Consumer and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect
|
|
|
26,679
|
|
|
|
32,787
|
|
|
|
41,668
|
|
|
|
51,363
|
|
|
|
51,176
|
|
Consumer and other
|
|
|
32,251
|
|
|
|
30,961
|
|
|
|
31,757
|
|
|
|
35,324
|
|
|
|
36,822
|
|
Subtotal consumer and other
|
|
|
58,930
|
|
|
|
63,748
|
|
|
|
73,425
|
|
|
|
86,687
|
|
|
|
87,998
|
|
Leases
|
|
|
4,618
|
|
|
|
6,489
|
|
|
|
9,949
|
|
|
|
12,821
|
|
|
|
14,968
|
|
Total loans and leases
|
|
|
2,133,969
|
|
|
|
1,982,477
|
|
|
|
1,911,983
|
|
|
|
1,916,807
|
|
|
|
1,819,692
|
|
Less: unearned income and deferred costs and fees
|
|
|
(863
|
)
|
|
|
(628
|
)
|
|
|
(1,625
|
)
|
|
|
(1,989
|
)
|
|
|
(2,161
|
)
|
Total originated loans and leases, net of unearned income and deferred costs and fees
|
|
$
|
2,133,106
|
|
|
$
|
1,981,849
|
|
|
$
|
1,910,358
|
|
|
$
|
1,914,818
|
|
|
$
|
1,817,531
|
|
Acquired Loans and Leases as of December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial other
|
|
|
167,427
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Subtotal commercial and industrial
|
|
|
167,427
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
43,074
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Agriculture
|
|
|
3,247
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Commercial real estate other
|
|
|
445,359
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Subtotal commercial real estate
|
|
|
491,680
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Residential real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
|
|
81,657
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Mortgages
|
|
|
41,618
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Subtotal residential real estate
|
|
|
123,275
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Consumer and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect
|
|
|
24
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Consumer and other
|
|
|
1,498
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Subtotal consumer and other
|
|
|
1,522
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Covered loans
|
|
|
37,600
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Total acquired loans and leases, net of unearned income and deferred costs and fees
|
|
$
|
821,504
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
The Company did not have any acquired loans accounted for
in accordance with ASC Topic 805 for the years ended December 31, 2011, 2010, 2009 and 2008.
Total loans and leases of $3.0 billion at December
31, 2012 were up $972.8 million or 49.1% from December 31, 2011. The growth is due to the acquisition of VIST Financial as well
as organic loan growth. On August 1, 2012, the Company acquired $889.3 million of loans in the VIST Financial acquisition. These
loans are shown in the table under the acquired loan and lease heading. All other loans, including loans originated by VIST Bank
since acquisition date of August 1, 2012, are considered originated loans. Originated loan balances at December 31, 2012 are up
7.6% over year-end 2011. The increase in originated loans was in commercial, commercial real estate and residential real estate
loans; consumer loans were down compared to the prior year. As of December 31, 2012 total loans and leases represented 61.1% of
total assets compared to 58.3% of total assets at December 31, 2011.
Residential real estate loans, including home
equity loans, of $856.9 million at December 31, 2012 increased by $195.5 million or 29.6% from $661.3 million at year-end 2011,
and comprised 29.0% of total loans and leases at December 31, 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.
Prior to August 2012, loans were generally
sold to Federal Home Loan Mortgage Corporation (“FHLMC”) or State of New York Mortgage Agency (“SONYMA”).
With the acquisition to VIST on August 1, 2012, the Company also sells loans to other third parties, including money center banks.
These residential real estate loans are generally sold without recourse in accordance with standard secondary market loan sale
agreements. These residential real estate loans also are subject to customary representations and warranties made by the Company,
including representations and warranties related to gross incompetence and fraud. The Company has not had to repurchase any loans
as a result of these general representations and warranties. While in the past in rare circumstances the Company agreed to sell
residential real estate loans with recourse, the Company has not done so in the past several years and the amount of such loans
included on the Company’s balance sheet at December 31, 2012 is insignificant. The Company has never had to repurchase a
loan sold with recourse.
During 2012, 2011, and 2010, the Company sold
residential mortgage loans totaling $37.5 million, $26.6 million, and $56.3 million, respectively, and realized net gains on these
sales of $885,000, $496,000, and $955,000, respectively.
These residential real estate loans are generally
sold without recourse in accordance with standard secondary market loan sale agreement.
When residential mortgage loans
are sold to FHLMC or SONYMA, the Company typically retains all servicing rights, which provides the Company with a source of fee
income. In connection with the sales in 2012, 2011, and 2010, the Company recorded mortgage-servicing assets of $123,000, $176,000,
and $376,000, respectively.
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 totaled $1.3 billion
at December 31, 2012; an increase of $537.6 million compared to December 31, 2011, and represented 44.1% of total loans and leases
at December 31, 2012, up from 38.7% at December 31, 2011.
Commercial and industrial loans totaled $692.1
million at December 31, 2012, which is an increase of $207.4 million from $484.7 million reported as of December 31, 2011. Demand
for commercial loans was soft in the 2012, reflecting weak economic conditions. As of December 31, 2012, agriculturally-related
loans totaled $129.3 million or 4.4% of total loans and leases, down from $120.6 million or 6.1% of total loans and leases 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 $60.5 million at
December 31, 2012, compared to $63.7 million at December 31, 2011. The originated consumer and other loan portfolio at December
31, 2012 was down 7.6% from year-end 2011, mainly in the indirect auto loan category as a result of competition.
The lease portfolio decreased by 28.8% to $4.6
million at December 31, 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 December 31, 2012, commercial leases and municipal leases represented 99.6% of total leases,
while consumer leases made up the remaining percentage which is comparable to December 31, 2011.
Acquired loans
were recorded at fair value pursuant to the purchase accounting guidelines in FASB ASC 805 – “Fair Value
Measurements and Disclosures”
(as determined by the present value of expected future cash flows) with no
valuation allowance (i.e., the allowance for loan losses).
At acquisition, the Company evaluated
whether each acquired loan (regardless of size) was within the scope of ASC Subtopic 310-30, “Receivables – Loans
and Debt Securities Acquired with Deteriorated Credit Quality”.
The carrying value of loans acquired from
VIST and accounted for in accordance with ASC Subtopic 310-30, “Receivables-Loans and Debt Securities Acquired with
Deteriorated Credit Quality,” was $80.2 million at December 31, 2012, as compared to $92.3 million at acquisition date
of August 1, 2012. The difference represents loan payments received after August 1, 2012. Under ASC Subtopic 310-30, loans
may be aggregated and accounted for as pools of loans if the loans being aggregated have common risk characteristics. The
Company elected to account for the loans with evidence of credit deterioration individually rather than aggregate them into
pools. The difference between the undiscounted cash flows expected at acquisition and the investment in the acquired loans,
or the “accretable yield,” is recognized as interest income utilizing the level-yield method over the life of
each loan. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at
acquisition, or the “non-accretable difference,” are not recognized as a yield adjustment, as a loss accrual or
as a valuation allowance.
Increases in expected cash flows subsequent
to the acquisition are recognized prospectively through an adjustment of the yield on the loans over the remaining life, while
decreases in expected cash flows are recognized as impairment through a loss provision and an increase in the allowance for loan
losses. Valuation allowances (recognized in the allowance for loan losses) on these impaired loans reflect only losses incurred
after the acquisition (representing all cash flows that were expected at acquisition but currently are not expected to be received).
There were no material increases or
decreases in the expected cash flows between August 1, 2012 (the “acquisition date”) and December 31, 2012. The
Company recognized $3.8 million of accretion in interest income on the loans acquired with evidence of credit
deterioration in the period since acquisition.
The carrying value of loans not exhibiting
evidence of credit impairment at the time of the acquisition (i.e. loans outside of the scope of ASC 310-30) was $741.3 million
at December 31, 2012. The fair value of the acquired loans not exhibiting evidence of credit impairment was determined by projecting
contractual cash flows discounted at risk-adjusted interest rates.
The carrying value of the acquired loans reflects
management’s best estimate of the amount to be realized from the acquired loan and lease portfolios. However, the amounts
the Company actually realizes on these loans could differ materially from the carrying value reflected in these financial statements,
based upon the timing of collections on the acquired loans in future periods, underlying collateral values and the ability of borrowers
to continue to make payments.
Purchased performing loans were recorded
at fair value, including a credit discount. Credit losses on acquired performing loans are estimated based on analysis of the
performing portfolio. The purchased performing portfolio also included a general interest rate mark (premium). Both the
credit discount and interest rate mark are accreted/amortized as a yield adjustment over the estimated lives of the loans.
Interest is accrued daily on the outstanding principal balances of purchased performing loans.
At December 31, 2012, acquired loans included
$37.6 million of covered loans. VIST Financial had acquired these loans in an FDIC assisted transaction in the fourth quarter of
2010. In accordance with loss sharing agreements with the FDIC, certain losses and expenses relating to covered loans may be reimbursed
by the FDIC at 70% or, if certain levels of reimbursement are reached, 80%. See Note 6 – “FDIC Indemnification Asset
Related to Covered Loans” in the Notes to Consolidated Financial Statements in Part II, Item 8. of this Report on Form 10-K.
The Company has adopted comprehensive lending
policies, underwriting standards and loan review procedures. The Company reviewed the lending policies of Tompkins and VIST Financial,
and adopted a uniform policy for the Company. There were no significant changes to the Company’s existing policies, underwriting
standards and loan review. The Company’s Board of Directors approves the lending policies at least annually. The Company
recognizes that exceptions to policy guidelines may occasionally occur and has established procedures for approving exceptions
to these policy guidelines. Management has also implemented reporting systems to monitor loan originations, loan quality, concentrations
of credit, loan delinquencies and nonperforming loans and potential problem loans.
The Company’s loan and lease customers
are located primarily in the New York and Pennsylvania communities served by its four subsidiary banks. Although operating in numerous
communities in New York State and Pennsylvania, the Company is still dependent on the general economic conditions of these states.
Other than geographic and general economic risks, management is not aware of any material concentrations of credit risk to any
industry or individual borrower.
Analysis of Past Due and Nonperforming Loans
|
(dollar amounts in thousands)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Loans 90 days past due and accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
842
|
|
|
$
|
294
|
|
|
$
|
0
|
|
Residential real estate
|
|
|
257
|
|
|
|
1,378
|
|
|
|
368
|
|
|
|
75
|
|
|
|
143
|
|
Consumer and other
|
|
|
0
|
|
|
|
2
|
|
|
|
0
|
|
|
|
0
|
|
|
|
18
|
|
Leases
|
|
|
0
|
|
|
|
0
|
|
|
|
7
|
|
|
|
0
|
|
|
|
0
|
|
Total loans 90 days past due and accruing
|
|
|
257
|
|
|
|
1,380
|
|
|
|
1,217
|
|
|
|
369
|
|
|
|
161
|
|
Nonaccrual loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
1,340
|
|
|
|
7,105
|
|
|
|
7,271
|
|
|
|
7,334
|
|
|
|
2,606
|
|
Commercial real estate
|
|
|
25,014
|
|
|
|
26,352
|
|
|
|
24,791
|
|
|
|
16,664
|
|
|
|
8,288
|
|
Residential real estate
|
|
|
11,084
|
|
|
|
5,884
|
|
|
|
9,111
|
|
|
|
7,070
|
|
|
|
4,497
|
|
Consumer and other
|
|
|
302
|
|
|
|
237
|
|
|
|
309
|
|
|
|
193
|
|
|
|
407
|
|
Leases
|
|
|
0
|
|
|
|
10
|
|
|
|
19
|
|
|
|
28
|
|
|
|
0
|
|
Total nonaccrual loans
|
|
|
37,740
|
|
|
|
39,587
|
|
|
|
41,501
|
|
|
|
31,289
|
|
|
|
15,798
|
|
Troubled debt restructurings not included above
|
|
|
1,532
|
|
|
|
428
|
|
|
|
2,564
|
|
|
|
3,265
|
|
|
|
69
|
|
Total nonperforming loans and leases
|
|
|
39,529
|
|
|
|
41,396
|
|
|
|
45,282
|
|
|
|
34,923
|
|
|
|
16,028
|
|
Other real estate owned
|
|
|
4,862
|
|
|
|
1,334
|
|
|
|
1,255
|
|
|
|
299
|
|
|
|
110
|
|
Total nonperforming assets
|
|
$
|
44,391
|
|
|
$
|
42,730
|
|
|
$
|
46,537
|
|
|
$
|
35,222
|
|
|
$
|
16,138
|
|
Allowance
as a percentage of originated loans and leases outstanding
|
|
|
1.16
|
%
|
|
|
1.39
|
%
|
|
|
1.46
|
%
|
|
|
1.27
|
%
|
|
|
1.03
|
%
|
Allowance
as a percentage of total loans and leases outstanding
|
|
|
0.83
|
%
|
|
|
1.39
|
%
|
|
|
1.46
|
%
|
|
|
1.27
|
%
|
|
|
1.03
|
%
|
Allowance as a percentage of nonperforming loans and leases
|
|
|
62.34
|
%
|
|
|
66.65
|
%
|
|
|
61.46
|
%
|
|
|
69.72
|
%
|
|
|
116.50
|
%
|
Total nonperforming assets as percentage of total assets
|
|
|
0.92
|
%
|
|
|
1.26
|
%
|
|
|
1.43
|
%
|
|
|
1.12
|
%
|
|
|
0.56
|
%
|
* The 2012 column in the above table excludes $18.7 million of acquired
loans that are 90 days past due and accruing interest. These loans were originally recorded at fair value on the acquisition date
of August 1, 2012. These loans are considered to be accruing as we can reasonably estimate future cash flows on these acquired
loans and we expect to fully collect the carrying value of these loans. Therefore, we are accreting the difference between the
carrying value of these loans and their expected cash flows into interest income.
The level of nonperforming assets at
the past five year ends is illustrated in the table above. In general, nonperforming assets increased in 2009 and 2010
reflective of weak economic conditions which began in the latter part of 2008. The Company has seen the level of
nonperforming assets decrease over the past two years. The dollar volume of nonperforming assets at year-end 2012 is up 3.9%
from year-end 2011; however, the ratio of nonperforming assets to total assets was down over the same period. The increase
in nonperforming assets was partially due to an increase in other real estate owned. The increase in other real estate owned
included $2.2 million acquired in the VIST Financial acquisition. While certain economic indicators have started to show
signs of improvement there is much debate over the strength and sustainability of the upturn and weaknesses remain such as
high unemployment. The Company has seen some improvement in the financial conditions of many of the Company’s
commercial and agricultural customers. The Company’s ratio of nonperforming assets to total assets continues to compare
favorably to its peer group’s most recent ratio of 1.97% at December 31, 2012. The peer data is from the Federal
Reserve Board and represents banks or bank holding companies with assets between $3.0 billion and $10.0 billion.
Nonperforming loans at December 31, 2012 were
down $1.9 million or 4.5% from December 31, 2011. Nonperforming loans represented 1.85% of total originated loans at December 31,
2012, compared to 2.09% of total loans at December 31, 2011, and 2.37% of total loans at December 30, 2010. A breakdown of nonperforming
loans by portfolio segment is shown above. Loans secured by commercial real estate represent 63.3% of total nonperforming loans
at December 31, 2012. Included in this category are two relationships with an aggregate balance of $10.0 million at December 31,
2012 and $12.5 million at December 31, 2011. Both of these relationships are considered impaired and have been written down to
fair value. The decrease in nonaccrual commercial and industrial loans from December 31, 2011 to December 31, 2012 is largely due
to a charge-off of $4.2 million of one commercial loan. The increase in residential nonaccrual loans reflects the impact of the
weakness in the economy and real estate markets.
Loans are considered modified in a troubled
debt restructuring (“TDR”) when, due to a borrower’s financial difficulties; the Company makes a concession(s)
to the borrower that it would not otherwise consider. When modifications are provided for reasons other than as a result of the
financial distress of the borrower, these loans are not classified as TDRs or impaired. These modifications 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 have shown a satisfactory period of repayment (generally six consecutive months) and where full collection
of all is reasonably assured. The TDR amount of $1.5 million at December 31, 2012, consists of two commercial relationships where
three loans were modified with concessions granted due to the stressed financial condition of the borrower. The TDR at December
31, 2011 was one commercial relationship with an outstanding balance of $428,000. By the end of 2012, this relationship was no
longer classified as a TDR as it had been accruing for a year and it yields a market rate of interest. At December 31, 2012 the
Company had $9.8 million in TDRs of which $8.3 million were included in nonaccrual loans in the table above.
In general, the Company places a loan on nonaccrual
status if principal or interest payments becomes 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 called for by regulatory requirements. 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 December 31, 2012, the Company was regularly receiving
payments on approximately 37% of the loans categorized as nonaccrual. The difference between the interest income that would have
been recorded if these loans and leases had been paid in accordance with their original terms and the interest income that was
recorded for the year ended December 31, 2012, was $1.7 million. The amount for the year ended December 31, 2011, was $2.7 million
and $1.7 million for December 31, 2010. The Company had no material commitments to make additional advances to borrowers with nonperforming
loans.
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 loans that are 90 days or more past due. 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 Company’s recorded investment in
loans and leases that are considered impaired totaled $24.7 million at December 31, 2012, and $32.8 million at December 31, 2011.
At December 31, 2012, the $24.7 million did not have any specific reserve allocations. At December 31, 2011, $8.7 million of the
$32.8 million of impaired loans had specific reserve allocations of $3.5 million and $24.1 million had no specific reserve allocation.
The decrease in impaired loans at year-end 2012 from year-end 2011 was mainly due to charge-offs related to three credits, all
of which had specific reserve allocations at year-end 2011. 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 or the loans have been written down to fair value. 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 $0 for both 2012 and 2011 and $252,000 for 2010.
The ratio of the allowance to
nonperforming loans (loans past due 90 days and accruing, nonaccrual loans and restructured troubled debt) was 62.3% at
December 31, 2012, compared to 66.7% at December 31, 2011. The Company’s nonperforming loans are mostly made up of
collateral dependent impaired loans requiring little to no specific allowance due to the level of collateral available with
respect to these loans and/or previous charge-offs. The Company’s ratio is below our peer group ratio of 101.15% as of
December 31, 2012.
Management reviews the loan portfolio
continuously for evidence of potential problem loans and leases. Potential problem loans and leases are loans and leases that
are currently performing in accordance with contractual terms, but where known information about possible credit problems of
the related borrowers causes management to have doubt as to the ability of such borrowers to comply with the present loan
payment terms and may result in such loans and leases becoming nonperforming at some time in the future. Management considers
loans and leases classified as Substandard, which continue to accrue interest, to be potential problem loans and leases. The
Company, through its credit administration function, identified 42 commercial relationships from the originated portfolio
and 49 commercial relationships from the acquired portfolio totaling $25.4 million and $30.2 million respectively at December
31, 2012 that were potential problem loans. This presents an improvement in the originated portfolio from the 60 commercial
relationships totaling $40.2 million at December 31, 2011, which were classified as Substandard, and continued to accrue
interest. Of the 42 commercial relationships from the originated portfolio, there are 10 relationships that equaled or
exceeded $1.0 million, which in aggregate totaled $19.8 million. Of the 49 commercial relationships from the acquired loan
portfolio, there are 8 relationships that equaled or exceeded $1.0 million, which in aggregate totaled $15.6 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 to a risk grading better than
Substandard as well as the charge off of a certain credit. The Company continues to monitor these 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.
The Allowance for Loan and Lease Losses
Originated loans and leases
Management reviews the appropriateness of the
allowance for loan and lease losses (“allowance”) on a regular basis. Management considers the accounting policy relating
to the allowance to be a critical accounting policy, given the inherent uncertainty in evaluating the levels of the allowance required
to cover credit losses in the portfolio and the material effect that assumptions could have on the Company’s results of operations.
The Company has developed a methodology to measure the amount of estimated loan loss exposure inherent in the loan portfolio to
assure that an appropriate allowance is maintained. The Company’s methodology is based upon guidance provided in SEC Staff
Accounting Bulletin No. 102,
Selected Loan Loss Allowance Methodology and Documentation Issues
and allowance allocations
are calculated in accordance with ASC Topic 310,
Receivables
and ASC Topic 450,
Contingencies
.
The Company’s methodology for determining
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 and industrial 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 industrial 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 bank 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 6 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 discounted cash flows. 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 December 31, 2012, management considers the allowance to be appropriate. Under adversely different conditions
or assumptions, the Company would need to increase or decrease the allowance.
The allocation of the Company’s originated
allowance as of December 31, 2012, and each of the previous four years is illustrated in
Table 6- Allocation of the Allowance
for Loan and Lease Losses
, below. As of December 31, 2012, there was no allowance for acquired loans.
Acquired Loans and Leases
As part of our determination of the fair value
of our acquired loans at the time of acquisition, the Company established a credit mark to provide for future losses in our acquired
loan portfolio. There was no allowance for loan losses carried over from the acquired company. To the extent that credit quality
deteriorates subsequent to acquisition, such deterioration would result in the establishment of an allowance for the acquired loan
portfolio. In general the loans acquired from VIST have performed in line with our
expectations at acquisition. As such, as of December 31, 2012, there was no allowance for acquired loans. There were also no charge-offs
or provision expense related to acquired loans between the acquisition date of August 1, 2012 and December 31, 2012.
Acquired loans accounted for under ASC 310-30
Acquired loans were accounted for under ASC
310-30, and 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.
Table 6 - Allocation of the Allowance for Originated Loan and Lease Losses
|
|
|
As of December 31,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Originated loans outstanding at end of year
|
|
$
|
2,133,106
|
|
|
$
|
1,981,849
|
|
|
$
|
1,910,358
|
|
|
$
|
1,914,818
|
|
|
$
|
1,817,531
|
|
Acquired loans outstanding at end of year
|
|
|
821,504
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Total loans outstanding at end of year
|
|
$
|
2,954,610
|
|
|
$
|
1,981,849
|
|
|
$
|
1,910,358
|
|
|
$
|
1,914,818
|
|
|
$
|
1,817,531
|
|
Allocation of the originated allowance by originated loan type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
7,533
|
|
|
$
|
8,936
|
|
|
$
|
7,824
|
|
|
$
|
7,304
|
|
|
$
|
6,225
|
|
Commercial real estate
|
|
|
10,184
|
|
|
|
12,662
|
|
|
|
14,445
|
|
|
|
11,119
|
|
|
|
7,190
|
|
Residential real estate
|
|
|
4,981
|
|
|
|
4,247
|
|
|
|
3,526
|
|
|
|
3,616
|
|
|
|
2,960
|
|
Consumer and other
|
|
|
1,940
|
|
|
|
1,709
|
|
|
|
1,976
|
|
|
|
2,230
|
|
|
|
2,219
|
|
Leases
|
|
|
5
|
|
|
|
39
|
|
|
|
61
|
|
|
|
81
|
|
|
|
78
|
|
Total
|
|
$
|
24,643
|
|
|
$
|
27,593
|
|
|
$
|
27,832
|
|
|
$
|
24,350
|
|
|
$
|
18,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of the originated allowance as a percentage of total originated allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
31
|
%
|
|
|
32
|
%
|
|
|
28
|
%
|
|
|
30
|
%
|
|
|
33
|
%
|
Commercial real estate
|
|
|
41
|
%
|
|
|
46
|
%
|
|
|
52
|
%
|
|
|
46
|
%
|
|
|
39
|
%
|
Residential real estate
|
|
|
20
|
%
|
|
|
16
|
%
|
|
|
13
|
%
|
|
|
15
|
%
|
|
|
16
|
%
|
Consumer and other
|
|
|
8
|
%
|
|
|
6
|
%
|
|
|
7
|
%
|
|
|
9
|
%
|
|
|
12
|
%
|
Leases
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Loan and lease types as a percentage of total loans and leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
24
|
%
|
|
|
24
|
%
|
|
|
25
|
%
|
|
|
26
|
%
|
|
|
26
|
%
|
Commercial real estate
|
|
|
39
|
%
|
|
|
39
|
%
|
|
|
38
|
%
|
|
|
36
|
%
|
|
|
34
|
%
|
Residential real estate
|
|
|
33
|
%
|
|
|
33
|
%
|
|
|
32
|
%
|
|
|
32
|
%
|
|
|
34
|
%
|
Consumer and other
|
|
|
4
|
%
|
|
|
3
|
%
|
|
|
4
|
%
|
|
|
5
|
%
|
|
|
5
|
%
|
Leases
|
|
|
0
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
* There was no allowance for acquired loans accounted for
in accordance with ASC Topic 805 for the periods shown above.
Management is committed to maintaining an appropriate
allowance. The above 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.
As shown above, the allowance increased from
2008 to 2010, remained relatively flat at year-end 2011 compared to year-end 2010 and decreased in 2012 compared to year-end 2011.
The majority of the growth in the allowance has been allocated to commercial real estate, commercial loans, and residential real
estate loans and was driven by deterioration in asset quality measures, including: higher levels of net charge-offs, internally-classified
commercial and commercial real estate loans, and nonperforming loans and leases; weak economic conditions; soft real estate markets;
and growth in the loan portfolio. The increase in the Company’s net charge-offs over the above period has led to higher historical
loss factors in the allowance model. These historical loss factors were also adjusted upwards between 2008 to 2011 to reflect weak
and uncertain economic conditions, including pressure on real estate values, and high unemployment. The allocations assigned to
the internally-classified loans were also up as a result of an increase in the volume of loans internally-classified and higher
historical loss factors. Over the past two years, the Company has seen some signs of improvement in the economies within its market
areas as well as in the financial conditions of its customers. This has been evidenced by a decrease in the level of nonperforming
loans and leases and internally-classified loans and leases over the past two years. The amount of originated loans internally-classified
Special Mention, Substandard and Doubtful totaled $101.4 million at December 31, 2012 compared to $126.6 million at December 31,
2011 and $172.6 million at December 31, 2010.
Reserve allocations for residential loans are
up over year-end 2011 amid concern over continued high unemployment, soft real estate values in some of the Company’s market
areas, and an increase in nonperforming residential loans in 2012 over 2011. The decrease in the allocation for commercial and
industrial loans was mainly a result of a decrease in allocations for specific loans and a decrease in the level of Substandard
commercial and industrial loans. In 2012, the Company upgraded a larger 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. Commercial and industrial
loan charge-offs were up in 2012 compared to 2011; however, the increase was mainly due to a $4.2 million charge off of a commercial
and industrial loan during the fourth quarter of 2012. This loan was previously identified and had specific allocations assigned
in prior quarters based upon the facts and circumstances in effect in those prior quarters. As a result of events that occurred
during the fourth quarter, the Company recorded the $4.2 million charge-off. The decrease in the allocation for commercial real
estate was mainly a result of a decrease in the level of classified commercial real estate loans as well as an overall decrease
in commercial real estate related charge-offs. The allocation for consumer loans is up as the increase in consumer loan charge-offs
during the period. This was mitigated by a decrease in the outstanding balance for this portfolio.
The level of future charge-offs is dependent
upon a variety of factors such as national and local economic conditions, trends in various industries, underwriting characteristics,
and conditions unique to each borrower. Given uncertainties surrounding these factors, it is difficult to estimate future losses.
Table 7 - Analysis of the Allowance for Originated Loan and Lease Losses
|
|
|
December 31,
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Average originated loans outstanding during year
|
|
$
|
2,301,901
|
|
|
$
|
1,928,540
|
|
|
$
|
1,897,983
|
|
|
$
|
1,850,453
|
|
|
$
|
1,612,716
|
|
Balance of allowance at beginning of year
|
|
|
27,593
|
|
|
|
27,832
|
|
|
|
24,350
|
|
|
|
18,672
|
|
|
|
14,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated loans charged-off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
5,328
|
|
|
|
2,403
|
|
|
|
3,265
|
|
|
|
1,653
|
|
|
|
1,491
|
|
Commercial real estate
|
|
|
3,977
|
|
|
|
4,488
|
|
|
|
1,167
|
|
|
|
558
|
|
|
|
473
|
|
Residential real estate
|
|
|
2,390
|
|
|
|
2,730
|
|
|
|
791
|
|
|
|
828
|
|
|
|
112
|
|
Consumer and other
|
|
|
826
|
|
|
|
608
|
|
|
|
912
|
|
|
|
1,195
|
|
|
|
1,214
|
|
Leases
|
|
|
0
|
|
|
|
3
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Total loans charged-off
|
|
$
|
12,521
|
|
|
$
|
10,232
|
|
|
$
|
6,135
|
|
|
$
|
4,234
|
|
|
$
|
3,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries of originated loans previously charged-off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
198
|
|
|
|
424
|
|
|
|
464
|
|
|
|
305
|
|
|
|
132
|
|
Commercial real estate
|
|
|
200
|
|
|
|
280
|
|
|
|
225
|
|
|
|
27
|
|
|
|
0
|
|
Residential real estate
|
|
|
30
|
|
|
|
33
|
|
|
|
85
|
|
|
|
24
|
|
|
|
2
|
|
Consumer and other
|
|
|
306
|
|
|
|
311
|
|
|
|
336
|
|
|
|
268
|
|
|
|
308
|
|
Total loans recovered
|
|
$
|
734
|
|
|
$
|
1,048
|
|
|
$
|
1,110
|
|
|
$
|
624
|
|
|
$
|
442
|
|
Net loans charged-off
|
|
|
11,787
|
|
|
|
9,184
|
|
|
|
5,025
|
|
|
|
3,610
|
|
|
|
2,848
|
|
Allowance acquired in purchase acquisition
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,485
|
|
Additions to allowance charged to operations
|
|
|
8,837
|
|
|
|
8,945
|
|
|
|
8,507
|
|
|
|
9,288
|
|
|
|
5,428
|
|
Balance of allowance at end of year
|
|
$
|
24,643
|
|
|
$
|
27,593
|
|
|
$
|
27,832
|
|
|
$
|
24,350
|
|
|
$
|
18,672
|
|
Allowance as a
percentage of originated loans and leases outstanding
|
|
|
1.16
|
%
|
|
|
1.39
|
%
|
|
|
1.46
|
%
|
|
|
1.27
|
%
|
|
|
1.03
|
%
|
Net
charge-offs as a percentage of average originated loans and leases outstanding during the year
|
|
|
0.51
|
%
|
|
|
0.48
|
%
|
|
|
0.26
|
%
|
|
|
0.20
|
%
|
|
|
0.18
|
%
|
* There was no allowance for acquired loans accounted
for in accordance with ASC Topic 805 for the periods shown above. There were no charge-offs or recoveries in the acquired portfolio.
The provision for loan
and lease losses represents management estimate of the expense necessary to maintain the allowance for loan and lease losses
at an appropriate level. The provision for loan and lease losses was $8.8 million in 2012, compared to $8.9 million in 2011.
Net loan charge-offs of $11.8 million in 2012 were up from $9.2 million in 2011, and included one commercial loan charge-off
of about $4.2 million in the fourth quarter of 2012.
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 prior year end.
The ratio of net charge-offs to average originated
total loans and leases of 0.51% for 2012 is up slightly over the prior year, but is favorable to a peer ratio of 0.64%. The peer
data is from the Federal Reserve Board and represents banks or bank holding companies with assets between $3.0 billion and $10.0
billion. The peer ratio is as of December 31, 2012, the most recent data available from the Federal Reserve Board.
The ratio of the allowance for originated loan
and lease losses as a percentage of total loans decreased 23 basis points from 1.39% at year-end 2011 to 1.16% at year-end 2012,
which is reflective of the improvement in the level of classified loans and nonperforming loans and leases. Management believes
that, based upon its evaluation as of December 31, 2012, the allowance is appropriate.
Deposits and Other Liabilities
Total deposits of $4.0 billion at
December 31, 2012, were up $1.3 billion or 48.5% over year-end 2012. VIST Bank had total deposits of $1.2 billion as of the
acquisition date of August 1, 2012. Deposit growth included $787.5 million in interest checking, savings and money market
balances (VIST Bank had a balance of $661.8 million at acquisition) and $215.5 million in noninterest bearing deposits (VIST
Bank had $129.5 million at acquisition). Time deposits increased by 41.7% or $286.6 million in 2012 over 2011. VIST Bank had
$393.9 million of time deposits at the time of acquisition. During the fourth quarter of 2012, the Company paid down $61.9
million in non-core time deposits that were acquired in the VIST Financial acquisition. The low interest rate environment has
resulted in a shift in customer savings trends, as time deposits have continued to decline, while noninterest-bearing
deposits and savings deposits have increased.
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 $1.0 billion or 46.8%
($890.2 million due to VIST Bank acquisition) to $3.2 billion at year-end 2012 from $2.2 billion at year-end 2011. Core deposits
represented 82.2% of total deposits at December 31, 2012, compared to 83.1% of total deposits at December 31, 2011.
Municipal money market accounts increased
by $132.8 million or 45.5% to $424.5 million at year-end 2012 ($124.8 million due to the VIST Bank acquisition) from
$291.7 million at year-end 2011. 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.
Table 1-Average Statements of Condition
and Net Interest Analysis
shows the average balance and average rate paid on the Company’s primary deposit categories
for the years ended December 31, 2012, 2011, and 2010. Average interest-bearing deposits were up 25.6% in 2012 over 2011; VIST
Bank had total interest-bearing deposits of $1.0 billion at acquisition. The average cost of interest-bearing deposits decreased
to 0.47% for 2012 from 0.63% in 2011. A maturity schedule of time deposits outstanding at December 31, 2012, is included in “Note
9 Deposits” in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report.
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 $65.4 million at December 31, 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 amounted to $148.5 million at December 31, 2012, and $120.0 million at
December 31, 2011. At December 31, 2012, the wholesale repurchase agreements included $115.0 with the FHLB and $33.5 million
with a large financial institution due to the VIST Financial acquisition. Refer to “Note 10 Federal Funds
Purchased and Securities Sold Under Agreements to Repurchase” in Notes to Consolidated Financial Statements in Part II,
Item 8. of this Report for further details on the Company’s repurchase agreements.
The Company’s other borrowings totaled
$111.8 million at year-end 2012, down $74.2 million or 39.9% from $186.1 million at year-end 2011.
The
decrease in borrowings primarily reflects the pay down of FHLB borrowings as a result of deposit growth and soft loan demand.
The
$111.8 million in borrowings at December 31, 2012, included $91.8 million in term advances and a $20.0 million advance from a bank.
Of the $91.8 million of the FHLB term advances at year-end 2012, $80.0 million are due over one year
and have a weighted average rate of 4.79%.
In 2007, the Company elected to account for a $10.0 million advance with the
FHLB at fair value. The fair value of this advance decreased by $246,000 (pre-tax net mark-to-market gain of $246,000) over the
12-months ended December 31, 2012.
Refer to “Note 11 Other Borrowings”
in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report for further details on the Company’s term
borrowings with the FHLB.
LIQUIDITY MANAGEMENT
The objective of
liquidity management is to ensure the availability of adequate funding sources to satisfy the demand for credit, deposit withdrawals,
operating expenses, 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 may also use borrowings as part of a growth strategy.
Asset
and liability positions are monitored primarily through the Asset/Liability Management Committee of the Company’s subsidiary
banks. This Committee reviews periodic reports on the 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 accounts, securities sold under agreements
to repurchase, overnight borrowings and term advances from the FHLB and other funding sources. Rates and terms are the primary
determinants of the mix of these funding sources.
Non-core funding
sources totaled $1.0 billion at December 31, 2012, an increase of $224.3 million or 27.9% from $804.0 million at December 31,
2011. A large contributor to the increase in non-core funding sources at year-end 2012 from year-end 2011 is the VIST Financial
acquisition. VIST Financial had $329.0 million in non-core funding on the date of acquisition. Excluding the non-core funding sources
acquired from the VIST Financial acquisition, non-core funding sources decreased year-over-year as the Company used growth in core
deposits to pay down FHLB advances and securities sold under agreements to repurchase as loan demand continued to be relatively
soft. In addition, as part of a planned balance sheet restructuring following the VIST Financial acquisition, the Company
sold approximately $74.9 million of available-for-sale securities, at a pre-tax loss of $194,000 and used the proceeds, together
with other available cash, to prepay repurchase agreements of about $85.6 million, inclusive of prepayment fees.
With
the growth in core deposits, including those acquired in the VIST acquisition, non-core funding sources as a percentage of total
liabilities decreased from 25.9% at year-end 2011 to 23.4% at year-end 2012.
Non-core funding sources may require securities
to be pledged against the underlying liability. Securities carried at $986.8 million and $730.6 million at December 31, 2012 and
2011, respectively, were either pledged or sold under agreements to repurchase. Pledged securities represented 68.8% of total securities
at December 31, 2012, compared to 66.1% of total securities at December 31, 2011.
Cash and cash equivalents totaled $118.9 million
as of December 31, 2012, up from $49.5 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 $53.1 million on December 31, 2012. The Company also has $16.5
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 $712.4 million at December 31, 2012 compared with $653.0 million
at December 31, 2011. Outstanding principal balances of residential mortgage loans, consumer loans, and leases totaled approximately
$796.7 million at December 31, 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 December 31, 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 December
31, 2012, total unencumbered residential mortgage loans of the Company were $564.8 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.
Table 8 - Loan Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining maturity of originated loans
|
|
At December 31, 2012
|
|
(in thousands)
|
|
Total
|
|
|
Within 1 year
|
|
|
1-5 years
|
|
|
After 5 years
|
|
Commercial and industrial
|
|
$
|
524,653
|
|
|
$
|
195,627
|
|
|
$
|
186,171
|
|
|
$
|
142,855
|
|
Commercial real estate
|
|
|
812,187
|
|
|
|
51,179
|
|
|
|
70,032
|
|
|
|
690,976
|
|
Residential real estate
|
|
|
733,581
|
|
|
|
757
|
|
|
|
22,266
|
|
|
|
710,558
|
|
Total
|
|
$
|
2,070,421
|
|
|
$
|
247,563
|
|
|
$
|
278,469
|
|
|
$
|
1,544,389
|
|
Remaining maturity of acquired loans
|
|
At December 31, 2012
|
|
(in thousands)
|
|
Total
|
|
|
Within 1 year
|
|
|
1-5 years
|
|
|
After 5 years
|
|
Commercial and industrial
|
|
$
|
167,427
|
|
|
$
|
65,910
|
|
|
$
|
33,642
|
|
|
$
|
67,875
|
|
Commercial real estate
|
|
|
491,680
|
|
|
|
40,339
|
|
|
|
157,733
|
|
|
|
293,608
|
|
Residential real estate
|
|
|
123,275
|
|
|
|
34,265
|
|
|
|
3,130
|
|
|
|
85,880
|
|
Covered Loans
|
|
|
37,600
|
|
|
|
15,446
|
|
|
|
11,864
|
|
|
|
10,290
|
|
Total
|
|
$
|
819,982
|
|
|
$
|
155,960
|
|
|
$
|
206,369
|
|
|
$
|
457,653
|
|
Of the loan amounts shown above in Table 8- Loan Maturity, maturing
over 1 year, $925.6 million have fixed rates and $1.5 billion have adjustable rates.
OFF-BALANCE SHEET ARRANGEMENTS
In the normal course of business the Company
is party to certain financial instruments, which in accordance with accounting principles generally accepted in the United States,
are not included in its Consolidated Statements of Condition. These transactions include commitments under standby letters of credit,
unused portions of lines of credit, and commitments to fund new loans and are undertaken to accommodate the financing needs of
the Company’s customers. Loan commitments are agreements by the Company to lend monies at a future date. These loan and letter
of credit commitments are subject to the same credit policies and reviews as the Company’s loans. Because most of these loan
commitments expire within one year from the date of issue, the total amount of these loan commitments as of December 31, 2012,
are not necessarily indicative of future cash requirements. Further information on these commitments and contingent liabilities
is provided in “Note 18 Commitments and Contingent Liabilities” in Notes to Consolidated Financial Statements in Part
II, Item 8. of this Report.
CONTRACTUAL OBLIGATIONS
The Company leases land, buildings, and equipment
under operating lease arrangements extending to the year 2090. Most leases include options to renew for periods ranging from 5
to 20 years. In addition, the Company has a software contract for its core banking application through July 31, 2017, along with
contracts for more specialized software programs through 2016. Further information on the Company’s lease arrangements is
provided in “Note 8 Premises and Equipment” in Notes to Consolidated Financial Statements in Part II, Item 8. of this
Report. The Company’s contractual obligations as of December 31, 2012, are shown in
Table 9-Contractual Obligations and
Commitments
below.
Table 9 - Contractual Obligations and Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual cash obligations
|
|
Payments Due By Period
|
|
(in thousands)
|
|
Within
|
|
|
Over 5
|
|
As of December 31, 2012
|
|
Total
|
|
|
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
Years
|
|
Long-term debt
|
|
$
|
262,984
|
|
|
$
|
53,595
|
|
|
$
|
83,502
|
|
|
$
|
125,887
|
|
|
$
|
0
|
|
Operating leases
|
|
|
45,749
|
|
|
|
4,884
|
|
|
|
8,530
|
|
|
|
7,577
|
|
|
|
24,758
|
|
Software contracts
|
|
|
4,068
|
|
|
|
1,257
|
|
|
|
1,831
|
|
|
|
980
|
|
|
|
0
|
|
Total contractual cash obligations
|
|
$
|
312,801
|
|
|
$
|
59,736
|
|
|
$
|
93,863
|
|
|
$
|
134,444
|
|
|
$
|
24,758
|
|
RECENTLY ISSUED ACCOUNTING STANDARDS
Refer to “Note
1 Summary of Significant Accounting Policies” in Notes to Consolidated Financial Statements in Part II, Item 8. of this Form
10-K for details of recently issued accounting pronouncements and their expected impact on the Company’s financial statements.
Fourth Quarter Summary
Fourth quarter 2012 net income was $11.2 million,
up 18.9% over fourth quarter 2011 net income of $9.4 million. Despite the rise in net income, diluted earnings per share of $0.77
for the fourth quarter of 2012, were down 8.3% from $0.84 for the comparable year-ago period. The decline was due to the greater
number of shares outstanding in 2012 as a result of shares issued to complete the VIST Financial acquisition, and in the April
2012 capital raise.
The net interest margin for the fourth quarter
of 2012 was 3.83%, an improvement from the 3.66% margin reported in the third quarter of 2012, and from the 3.62% margin reported
in the fourth quarter of 2011. The margin improvement in the most recent two quarters benefited from the inclusion of VIST Bank
into the Company’s combined results. The pay down of certain higher cost borrowings and non-core time deposits also helped
the margin in the fourth quarter of 2012.
Taxable-equivalent
net interest income of $49.6 million was up 43.8% compared to $28.6 million during the same quarter 2011. Taxable-equivalent
net interest income benefitted from the acquisition of VIST Bank. Average earning assets increased $1.3 billion or 41.9%, to $4.4
billion in the fourth quarter of 2012 from $3.1 billion in the fourth quarter of 2011 largely as a result of the VIST Bank acquisition.
The growth in average earnings assets in the fourth quarter over the year-earlier quarter included a $978.6 million or 49.9% increase
in average loans and $317.2 million or 28.1% increase in average securities. The yield on interest earning assets was 4.45% in
the fourth quarter of 2012, up 8 basis points from 4.37% in the fourth quarter of 2011.
The rate
paid on interest-bearing liabilities was 0.77% in the fourth quarter of 2012, down 19 basis points from 0.96% in the same quarter
prior year.
Provision for loan and lease losses was $5.7
million for the fourth quarter of 2012, up from $1.2 million in the fourth quarter of 2011. Net charge-offs totaled $7.6 million
in the fourth quarter of 2012, representing an annualized 1.03% of average loans and leases, compared with net charge-offs of $1.4
million in the fourth quarter of 2011, representing an annualized 0.29% of average loans and leases. The fourth quarter 2012 loan
charge-offs included the charge-off of one large commercial relationship totaling $4.2 million.
Noninterest income was up $4.4 million or 39.4%
for the fourth quarter compared to the same period in 2011. The largest category of improvement was insurance commissions and fees,
which nearly doubled as a result of the VIST acquisition. The increase was partially offset by lower service charges on deposit
accounts, which were impacted by regulatory changes implemented in the first quarter of 2012. Improvement in other income benefited
from higher loan related fees (up $334,000) and gains on the sale of loans (up $187,000). Fourth quarter noninterest income also
reflected $499,000 in losses on the sale of investments, which were used to pay down certain higher cost borrowings and non-core
time deposits.
Noninterest expense for the fourth quarter
of 2012 was $38.2 million, up 57.8% from the same period last year. The increase was mainly a result of the VIST acquisition and
additional expenses related to the integration of VIST into the Company’s operations beginning in the third quarter of this
year.