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United States
Securities and Exchange Commission
Washington, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2017
 
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
 
For the transition period from _____ to ______
 
Commission File Number 1-12709

 
 tmp-logoa01.jpg 

Tompkins Financial Corporation
(Exact name of registrant as specified in its charter)
New York
 
16-1482357
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
The Commons, P.O. Box 460, Ithaca, NY
 
14851
(Address of principal executive offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code: (888) 503-5753
Former name, former address, and former fiscal year, if changed since last report: NA
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐.
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No ☐.
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large Accelerated Filer ☒
Accelerated Filer ☐
 
Non-Accelerated Filer ☐ (Do not check if a smaller reporting company)
Smaller Reporting Company ☐
 
 
Emerging Growth Company ☐
  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of Exchange Act.☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ☐ No ☒.
 


Indicate the number of shares of the Registrant’s Common Stock outstanding as of the latest practicable date:
Class
 
Outstanding as of July 24, 2017
Common Stock, $0.10 par value
 
15,190,881 shares
 
 
 
 
 

1



TOMPKINS FINANCIAL CORPORATION
 
FORM 10-Q
 
INDEX
 
 
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2




TOMPKINS FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION

(In thousands, except share and per share data)
As of
 
As of
ASSETS
6/30/2017
 
12/31/2016
 
(unaudited)
 
(audited)
Cash and noninterest bearing balances due from banks
$
76,079

 
$
62,074

Interest bearing balances due from banks
2,096

 
1,880

Cash and Cash Equivalents
78,175

 
63,954

 
 
 
 
Available-for-sale securities, at fair value (amortized cost of $1,433,013 at June 30, 2017 and $1,442,724 at December 31, 2016)
1,424,871

 
1,429,538

Held-to-maturity securities, at amortized cost (fair value of $141,654 at June 30, 2017 and $142,832 at December 31, 2016)
139,994

 
142,119

Originated loans and leases, net of unearned income and deferred costs and fees
4,070,755

 
3,863,922

Acquired loans and leases
347,841

 
394,111

Less:  Allowance for loan and lease losses
37,157

 
35,755

Net Loans and Leases
4,381,439

 
4,222,278

 
 
 
 
Federal Home Loan Bank and other stock
45,714

 
43,133

Bank premises and equipment, net
72,884

 
70,016

Corporate owned life insurance
79,093

 
77,905

Goodwill
92,291

 
92,623

Other intangible assets, net
10,251

 
11,349

Accrued interest and other assets
90,300

 
83,841

Total Assets
$
6,415,012

 
$
6,236,756

LIABILITIES
 

 
 

Deposits:
 

 
 

Interest bearing:
 

 
 

Checking, savings and money market
2,643,292

 
2,518,318

Time
826,933

 
870,788

Noninterest bearing
1,280,497

 
1,236,033

Total Deposits
4,750,722

 
4,625,139

 
 
 
 
Federal funds purchased and securities sold under agreements to repurchase
50,360

 
69,062

Other borrowings
952,035

 
884,815

Trust preferred debentures
16,605

 
37,681

Other liabilities
68,375

 
70,654

Total Liabilities
$
5,838,097

 
$
5,687,351

EQUITY
 

 
 

Tompkins Financial Corporation shareholders’ equity:
 

 
 

Common Stock - par value $.10 per share: Authorized 25,000,000 shares; Issued: 15,225,363 at June 30, 2017; and 15,171,816 at December 31, 2016
1,522

 
1,517

Additional paid-in capital
362,555

 
357,414

Retained earnings
249,179

 
230,182

Accumulated other comprehensive loss
(33,624
)
 
(37,109
)
Treasury stock, at cost – 117,302 shares at June 30, 2017, and 117,997 shares at December 31, 2016
(4,204
)
 
(4,051
)
Total Tompkins Financial Corporation Shareholders’ Equity
575,428

 
547,953

 
 
 
 
Noncontrolling interests
1,487

 
1,452

Total Equity
$
576,915

 
$
549,405

Total Liabilities and Equity
$
6,415,012

 
$
6,236,756

 
See notes to unaudited condensed consolidated financial statements.


3



TOMPKINS FINANCIAL CORPORATION
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME 
 
Three Months Ended
 
Six Months Ended
(In thousands, except per share data) (Unaudited)
6/30/2017
 
6/30/2016
 
6/30/2017
 
6/30/2016
INTEREST AND DIVIDEND INCOME
 

 
 

 
 

 
 

Loans
$
47,357

 
$
41,834

 
$
92,308

 
$
82,321

Due from banks
4

 
1

 
6

 
3

Trading securities
0

 
77

 
0

 
158

Available-for-sale securities
7,647

 
7,284

 
14,969

 
14,815

Held-to-maturity securities
870

 
903

 
1,748

 
1,814

Federal Home Loan Bank and other stock
464

 
318

 
932

 
615

 Total Interest and Dividend Income
56,342

 
50,417

 
109,963

 
99,726

INTEREST EXPENSE
 

 
 

 
 

 
 

Time certificates of deposits of $250,000 or more
466

 
422

 
907

 
812

Other deposits
2,482

 
2,264

 
4,829

 
4,473

Federal funds purchased and securities sold under agreements to repurchase
43

 
644

 
151

 
1,310

Trust preferred debentures
256

 
594

 
623

 
1,183

Other borrowings
2,794

 
1,586

 
5,118

 
3,003

 Total Interest Expense
6,041

 
5,510

 
11,628

 
10,781

 Net Interest Income
50,301

 
44,907

 
98,335

 
88,945

Less:  Provision for loan and lease losses
976

 
978

 
1,745

 
1,833

 Net Interest Income After Provision for Loan and Lease Losses
49,325

 
43,929

 
96,590

 
87,112

NONINTEREST INCOME
 

 
 

 
 

 
 

Insurance commissions and fees
7,092

 
7,517

 
14,210

 
15,079

Investment services income
3,891

 
3,834

 
7,682

 
7,620

Service charges on deposit accounts
2,045

 
2,092

 
4,212

 
4,356

Card services income
2,676

 
2,002

 
4,685

 
3,943

Mark-to-market loss on trading securities
0

 
(60
)
 
0

 
(106
)
Mark-to-market gain on liabilities held at fair value
0

 
92

 
0

 
149

Other income
1,746

 
1,367

 
3,901

 
3,074

Gain on sale of available-for-sale securities
0

 
240

 
0

 
472

 Total Noninterest Income
17,450

 
17,084

 
34,690

 
34,587

NONINTEREST EXPENSES
 

 
 

 
 

 
 

Salaries and wages
20,424

 
19,333

 
39,937

 
38,322

Pension and other employee benefits
5,092

 
4,934

 
10,851

 
10,217

Net occupancy expense of premises
3,390

 
2,999

 
6,901

 
6,147

Furniture and fixture expense
1,637

 
1,577

 
3,234

 
3,266

FDIC insurance
617

 
783

 
1,155

 
1,605

Amortization of intangible assets
485

 
521

 
978

 
1,048

Other operating expense
9,923

 
9,241

 
19,880

 
18,289

 Total Noninterest Expenses
41,568

 
39,388

 
82,936

 
78,894

 Income Before Income Tax Expense
25,207

 
21,625

 
48,344

 
42,805

 Income Tax Expense
8,248

 
6,760

 
15,637

 
13,656

 Net Income attributable to Noncontrolling Interests and Tompkins Financial Corporation
16,959

 
14,865

 
32,707

 
29,149

Less:  Net income attributable to noncontrolling interests
33

 
32

 
65

 
65

 Net Income Attributable to Tompkins Financial Corporation
$
16,926

 
$
14,833

 
$
32,642

 
$
29,084

Basic Earnings Per Share
$
1.11

 
$
0.99

 
$
2.15

 
$
1.94

Diluted Earnings Per Share
$
1.11

 
$
0.98

 
$
2.13

 
$
1.92

 
See notes to unaudited condensed consolidated financial statements.


4



TOMPKINS FINANCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 
 
Three Months Ended
(In thousands) (Unaudited)
6/30/2017
 
6/30/2016
Net income attributable to noncontrolling interests and Tompkins Financial Corporation
$
16,959

 
$
14,865

Other comprehensive income, net of tax:
 

 
 

 
 
 
 
Available-for-sale securities:
 

 
 

Change in net unrealized gain/loss during the period
1,831

 
5,018

Reclassification adjustment for net realized gain on sale of available-for-sale securities included in net income
0

 
(144
)
 
 
 
 
Employee benefit plans:
 

 
 

Amortization of net retirement plan actuarial gain
238

 
195

Amortization of net retirement plan prior service (credit) cost
(9
)
 
5

 
 
 
 
Other comprehensive income  
2,060

 
5,074

 
 
 
 
Subtotal comprehensive income attributable to noncontrolling interests and Tompkins Financial Corporation
19,019

 
19,939

Less: Net income attributable to noncontrolling interests
(33
)
 
(32
)
Total comprehensive income attributable to Tompkins Financial Corporation
$
18,986

 
$
19,907


See notes to unaudited condensed consolidated financial statements.

 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Six Months Ended
(In thousands) (Unaudited)
6/30/2017
 
6/30/2016
Net income attributable to noncontrolling interests and Tompkins Financial Corporation
$
32,707

 
$
29,149

Other comprehensive income, net of tax:
 

 
 

 
 
 
 
Available-for-sale securities:
 

 
 

Change in net unrealized gain during the period
3,028

 
17,593

Reclassification adjustment for net realized gain on sale of available-for-sale securities included in net income
0

 
(283
)
 
 
 
 
Employee benefit plans:
 

 
 

Amortization of net retirement plan actuarial gain
452

 
401

Amortization of net retirement plan prior service cost
5

 
23

 
 
 
 
Other comprehensive income
3,485

 
17,734

 
 
 
 
Subtotal comprehensive income attributable to noncontrolling interests and Tompkins Financial Corporation
36,192

 
46,883

Less: Net income attributable to noncontrolling interests
(65
)
 
(65
)
Total comprehensive income attributable to Tompkins Financial Corporation
$
36,127

 
$
46,818


See notes to unaudited condensed consolidated financial statements.

5



TOMPKINS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Six Months Ended
(In thousands) (Unaudited)
6/30/2017
 
6/30/2016
OPERATING ACTIVITIES
 

 
 

Net income attributable to Tompkins Financial Corporation
$
32,642

 
$
29,084

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Provision for loan and lease losses
1,745

 
1,833

Depreciation and amortization of premises, equipment, and software
3,641

 
3,356

Amortization of intangible assets
978

 
1,048

Earnings from corporate owned life insurance
(1,188
)
 
(1,127
)
Net amortization on securities
5,233

 
5,301

Amortization/accretion related to purchase accounting
(1,606
)
 
(1,345
)
Mark-to-market loss on trading securities
0

 
106

Mark-to-market gain on liabilities held at fair value
0

 
(149
)
Net gain on securities transactions
0

 
(472
)
Net gain on sale of loans originated for sale
(23
)
 
(35
)
Proceeds from sale of loans originated for sale
478

 
1,493

Loans originated for sale
(455
)
 
(912
)
Net (gain) loss on sale of bank premises and equipment
(22
)
 
20

Net excess tax benefit from stock based compensation
299

 
333

Stock-based compensation expense
1,405

 
1,115

(Increase) decrease in accrued interest receivable
(985
)
 
81

Decrease in accrued interest payable
(35
)
 
(173
)
Proceeds from maturities and payments of trading securities
0

 
536

Other, net
(989
)
 
(440
)
Net Cash Provided by Operating Activities
41,118

 
39,653

INVESTING ACTIVITIES
 

 
 

Proceeds from maturities, calls and principal paydowns of available-for-sale securities
77,092

 
117,580

Proceeds from sales of available-for-sale securities
0

 
59,195

Proceeds from maturities, calls and principal paydowns of held-to-maturity securities
3,695

 
5,141

Purchases of available-for-sale securities
(72,419
)
 
(179,260
)
Purchases of held-to-maturity securities
(1,765
)
 
(4,240
)
Net increase in loans
(159,747
)
 
(206,383
)
Net increase in Federal Home Loan Bank stock
(2,581
)
 
(6,492
)
Proceeds from sale of bank premises and equipment
35

 
53

Purchases of bank premises, equipment and software
(15,135
)
 
(4,485
)
Net cash used in acquisition
0

 
(218
)
Other, net
487

 
0

Net Cash Used in Investing Activities
(170,338
)
 
(219,109
)
FINANCING ACTIVITIES
 

 
 

Net increase in demand, money market, and savings deposits
169,438

 
46,228

Net (decrease) increase in time deposits
(43,297
)
 
28,830

Net decrease in Federal funds purchased and securities sold under agreements to repurchase
(18,702
)
 
(39,491
)
Increase in other borrowings
398,750

 
400,301

Repayment of other borrowings
(331,530
)
 
(236,411
)
Redemption of trust preferred debentures
(21,161
)
 
0

Cash dividends
(13,645
)
 
(13,206
)
Repurchase of common stock
0

 
(1,166
)
Shares issued for dividend reinvestment plan
2,047

 
1,003

Shares issued for employee stock ownership plan
2,296

 
1,938

Net shares issued related to restricted stock awards
(435
)
 
(286
)
Net proceeds from exercise of stock options
(320
)
 
(156
)
Net Cash Provided by Financing Activities
143,441

 
187,584

Net Increase in Cash and Cash Equivalents
14,221

 
8,128

Cash and cash equivalents at beginning of period
63,954

 
58,257

Total Cash & Cash Equivalents at End of Period
$
78,175

 
$
66,385

 
See notes to unaudited condensed consolidated financial statements.

6



TOMPKINS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Six Months Ended
(In thousands) (Unaudited)
6/30/2017
 
6/30/2016
Supplemental Information:
 

 
 

Cash paid during the year for  - Interest
$
12,222

 
$
11,527

Cash paid during the year for  - Taxes
13,801

 
12,315

Transfer of loans to other real estate owned
2,693

 
448

 
See notes to unaudited condensed consolidated financial statements.
 

7



TOMPKINS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
 
(In thousands except share and per share data)
 
Common
Stock
 
Additional Paid-in Capital
 
Retained
Earnings
 
Accumulated Other Comprehensive (Loss) Income
 
Treasury
Stock
 
Non-
controlling Interests
 
Total
Balances at January 1, 2016
 
$
1,502

 
$
350,823

 
$
197,445

 
$
(31,001
)
 
$
(3,755
)
 
$
1,452

 
$
516,466

Net income attributable to noncontrolling interests and Tompkins Financial Corporation
 
 

 
 

 
29,084

 
 

 
 

 
65

 
29,149

Other comprehensive income
 
 

 
 

 
 

 
17,734

 
 

 
 

 
17,734

Total Comprehensive Income
 
 

 
 

 
 

 
 

 
 

 
 

 
46,883

Cash dividends ($0.88 per share)
 
 

 
 

 
(13,206
)
 
 

 
 

 
 

 
(13,206
)
Net exercise of stock options (12,168 shares)
 
1

 
(21
)
 
 

 
 

 
 

 
 

 
(20
)
Stock-based compensation expense
 
 

 
1,115

 
 

 
 

 
 

 
 

 
1,115

Common stock repurchased and returned to unissued status (22,356 shares)
 
(2
)
 
(1,164
)
 
 

 
 

 
 

 
 

 
(1,166
)
Shares issued for employee stock ownership plan (31,435 shares)
 
3

 
1,935

 
 

 
 

 
 

 
 

 
1,938

Directors deferred compensation plan ((2,016) shares)
 
 

 
19

 
 

 
 

 
(19
)
 
 

 
0

Common stock issued for purchase acquisition (32,553 shares)
 
3

 
1,705

 
 

 
 

 
 

 
 

 
1,708

Restricted stock activity ((13,631) shares)
 
(1
)
 
(285
)
 
 

 
 

 
 

 
 

 
(286
)
Shares issued for dividend reinvestment plan (15,516 shares)
 
1

 
1,002

 
 

 
 

 
 

 
 

 
1,003

Balances at June 30, 2016
 
$
1,507

 
$
355,129

 
$
213,323

 
$
(13,267
)
 
$
(3,774
)
 
$
1,517

 
$
554,435

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at January 1, 2017
 
$
1,517

 
$
357,414

 
$
230,182

 
$
(37,109
)
 
$
(4,051
)
 
$
1,452

 
$
549,405

Net income attributable to noncontrolling interests and Tompkins Financial Corporation
 
 

 
 

 
32,642

 
 

 
 

 
65

 
32,707

Other comprehensive income
 
 

 
 

 
 

 
3,485

 
 

 
 

 
3,485

Total Comprehensive Income
 
 

 
 

 
 

 
 

 
 

 
 

 
36,192

Cash dividends ($0.90 per share)
 
 

 
 

 
(13,645
)
 
 

 
 

 
 

 
(13,645
)
Net exercise of stock options (10,035 shares)
 
1

 
(321
)
 
 

 
 

 
 

 
 

 
(320
)
Shares issued for dividend reinvestment plan (24,075 shares)
 
2

 
2,045

 
 

 
 

 
 

 
 

 
2,047

Stock-based compensation expense
 
 

 
1,405

 
 

 
 

 
 

 
 

 
1,405

Shares issued for employee stock ownership plan (27,412 shares)
 
3

 
2,293

 
 

 
 

 
 

 
 

 
2,296

Directors deferred compensation plan ((695) shares)
 
 

 
153

 
 

 
 

 
(153
)
 
 

 
0

Restricted stock activity ((7,975) shares)
 
(1
)
 
(434
)
 
 

 
 

 
 

 
 

 
(435
)
Partial repurchase of noncontrolling interest
 
 
 
 
 
 

 
 

 
 

 
(30
)
 
(30
)
Balances at June 30, 2017
 
$
1,522

 
$
362,555

 
$
249,179

 
$
(33,624
)
 
$
(4,204
)
 
$
1,487

 
$
576,915

 
See notes to unaudited condensed consolidated financial statements


8



NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
1. Business
 
Tompkins Financial Corporation (“Tompkins” or the “Company”) is headquartered in Ithaca, New York and is registered as a Financial Holding Company with the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended. The Company is a locally oriented, community-based financial services organization that offers a full array of products and services, including commercial and consumer banking, leasing, trust and investment management, financial planning and wealth management, and insurance services. At June 30, 2017, the Company’s subsidiaries included: four wholly-owned banking subsidiaries, Tompkins Trust Company (the “Trust Company”), The Bank of Castile (DBA Tompkins Bank of Castile), Mahopac Bank (formerly known as Mahopac National Bank, DBA Tompkins Mahopac Bank), VIST Bank (DBA Tompkins VIST Bank); and a wholly-owned insurance agency subsidiary, Tompkins Insurance Agencies, Inc. (“Tompkins Insurance”). The trust division of the Trust Company provides a full array of investment services, including investment management, trust and estate, financial and tax planning as well as life, disability and long-term care insurance services. The Company’s principal offices are located at The Commons, Ithaca, New York, 14851, and its telephone number is (888) 503-5753. The Company’s common stock is traded on the NYSE MKT LLC under the Symbol “TMP.”
 
As a registered financial holding company, the Company is regulated under the Bank Holding Company Act of 1956 (“BHC Act”), as amended and is subject to examination and comprehensive regulation by the Federal Reserve Board (“FRB”). The Company is also subject to the jurisdiction of the Securities and Exchange Commission (“SEC”) and is subject to disclosure and regulatory requirements under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. The Company is subject to the rules of the NYSE MKT LLC for listed companies.
 
The Company’s banking subsidiaries are subject to examination and comprehensive regulation by various regulatory authorities, including the Federal Deposit Insurance Corporation (“FDIC”), the New York State Department of Financial Services (“NYSDFS”), and the Pennsylvania Department of Banking and Securities (“PDBS”). Each of these agencies issues regulations and requires the filing of reports describing the activities and financial condition of the entities under its jurisdiction. Likewise, such agencies conduct examinations on a recurring basis to evaluate the safety and soundness of the institutions, and to test compliance with various regulatory requirements, including: consumer protection, privacy, fair lending, the Community Reinvestment Act, the Bank Secrecy Act, sales of non-deposit investments, electronic data processing, and trust department activities.
 
The trust division of Tompkins Trust Company is subject to examination and comprehensive regulation by the FDIC and NYSDFS.
 
The Company’s insurance subsidiary is subject to examination and regulation by the NYSDFS and the Pennsylvania Insurance Department.
 
2. Basis of Presentation
 
The unaudited consolidated financial statements included in this quarterly report do not include all of the information and footnotes required by GAAP for a full year presentation and certain disclosures have been condensed or omitted in accordance with rules and regulations of the SEC. In the application of certain accounting policies, management is required to make assumptions regarding the effect of matters that are inherently uncertain. These estimates and assumptions affect the reported amounts of certain assets, liabilities, revenues, and expenses in the unaudited condensed consolidated financial statements. Different amounts could be reported under different conditions, or if different assumptions were used in the application of these accounting policies. The accounting policies that management considers critical in this respect are the determination of the allowance for loan and lease losses, the expenses and liabilities associated with the Company’s pension and post-retirement benefits, and the review of its securities portfolio for other than temporary impairment.
 
In management’s opinion, the unaudited condensed consolidated financial statements reflect all adjustments of a normal recurring nature. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year ended December 31, 2017. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. There have been no significant changes to the Company’s accounting policies from those presented in the 2016 Annual Report on Form 10-K. Refer to Note 3- “Accounting Standards Updates” of this Report for a discussion of recently issued accounting guidelines.
 

9



Cash and cash equivalents in the consolidated statements of cash flow include cash and noninterest bearing balances due from banks, interest-bearing balances due from banks, and money market funds. Management regularly evaluates the credit risk associated with the counterparties to these transactions and believes that the Company is not exposed to any significant credit risk on cash and cash equivalents.
 
The Company has evaluated subsequent events for potential recognition and/or disclosure, and determined that no further disclosures were required.
 
The consolidated financial information included herein combines the results of operations, the assets, liabilities, and shareholders’ equity of the Company and its subsidiaries. Amounts in the prior periods’ unaudited condensed consolidated financial statements are reclassified when necessary to conform to the current periods’ presentation. Information for the third quarter, second quarter, and first quarter of 2016 has been revised to reflect the impact of the adoption of ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting", in the fourth quarter of 2016, retroactive to January 1, 2016. All significant intercompany balances and transactions are eliminated in consolidation.
 
3. Accounting Standards Updates
 
ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 was originally going to be effective for us on January 1, 2017; however, the FASB recently issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606) - Deferral of the Effective Date" which deferred the effective date of ASU 2014-09 by one year to January 1, 2018. Tompkins’ revenue is comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09, and non-interest income. With respect to noninterest income, the Company has identified revenue streams within the scope of the guidance, and is performing an evaluation of the underlying revenue contracts. Tompkins does not expect these changes to have a significant impact on the Company’s consolidated financial statements. The Company expects to adopt the standard in the first quarter of 2018 with a cumulative effect adjustment to opening retained earnings, if such adjustment is deemed to be significant.

ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-1, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (viii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale. ASU 2016-1 will be effective for us on January 1, 2018 and is not expected to have a significant impact on our consolidated financial statements.

ASU 2016-02,“Leases (Topic 842).” ASU 2016-02 will, among other things, require lessees to recognize a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model and ASC Topic 606, “Revenue from Contracts with Customers.” ASU 2016-2 will be effective for Tompkins on January 1, 2019 and will require transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company occupies certain banking offices and uses certain equipment under noncancelable operating lease agreements, which currently are not reflected in its consolidated statement of condition. Upon adoption of the guidance, the Company expects to report increased assets and increased liabilities as a result of recognizing right-of-use assets and lease liabilities on its consolidated statement of condition. Tompkins is currently evaluating the extent of the impact that the adoption of this ASU will have on our consolidated financial statements.

10





ASU 2016-05“Derivatives and Hedging (Topic 815) Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships.” ASU 2016-05 clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under ASC Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. ASU 2016-05 became effective for Tompkins on January 1, 2017 and did not have a significant impact on our consolidated financial statements.

ASU 2016-07, “Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.” The amendments affect all entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. ASU 2016-07 simplifies the transition to the equity method of accounting by eliminating retroactive adjustment of the investment when an investment qualifies for use of the equity method, among other things. ASU 2016-07 became effective for Tompkins on January 1, 2017 and did not have a significant impact on our consolidated financial statements.

ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net).” ASU 2016-08 was issued to clarify certain principal versus agent considerations within the implementation guidance of ASC Topic 606, “Revenue from Contracts with Customers.” The effective date and transition of ASU 2016-08 is the same as the effective date and transition of ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," as discussed above. Tompkins is currently evaluating the potential impact of ASU 2016-08 on our consolidated financial statements.

ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.” ASU 2016-10 was issued to clarify ASC Topic 606, “Revenue from Contracts with Customers” related to (i) identifying performance obligations; and (ii) the licensing implementation guidance. The effective date and transition of ASU 2016-10 is the same as the effective date and transition of ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” as discussed above. Tompkins is currently evaluating the potential impact of ASU 2016-10 on our consolidated financial statements.

ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 will be effective on January 1, 2020. Tompkins is currently evaluating the requirements of the new guidance to determine what modifications to our existing allowance methodology may be required. The Company expects that the new guidance will likely result in an increase in the allowance; however, Tompkins is unable to quantify the impact at this time since we are still reviewing the guidance. The extent of any impact to our allowance will depend, in part, upon the composition of our loan portfolio at the adoption date as well as economic conditions and loss forecasts at that date.

ASU 2016-15, “Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 provides guidance related to certain cash flow issues in order to reduce the current and potential future diversity in practice. ASU 2016-15 will be effective for us on January 1, 2018. Tompkins is currently evaluating the potential impact of ASU 2016-15 but does not expect it to have a significant impact on our consolidated financial statements.

ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates Step 2 from the goodwill impairment test which required entities to compute the implied fair value of goodwill. Under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 will be effective for us on January 1, 2020, with early adoption permitted for interim or annual impairment tests beginning in 2017. Tompkins is currently evaluating the potential impact of ASU 2017-04 on our consolidated financial statements.

ASU 2017-05, “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) - Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets.” ASU 2017-05 clarifies the scope of Subtopic 610-20 and adds guidance for partial sales of nonfinancial assets, including partial sales of real estate. Historically, U.S. GAAP contained several different accounting models to evaluate whether the transfer of certain assets qualified for sale treatment. ASU 2017-05 reduces the number of potential accounting models that might apply and clarifies which model does apply

11



in various circumstances. ASU 2017-05 will be effective for us on January 1, 2018. Tompkins is currently evaluating the potential impact of ASU 2017-05 on our consolidated financial statements.

ASU 2017-07, “Compensation-Retirement Benefits (Topic 715 - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.”), which requires that the service cost component of the Company's net periodic pension cost and net periodic postretirement benefit cost be included in the same line item as other compensation costs arising from services rendered by employees, with the other components of net periodic benefit cost being classified outside of a subtotal of income from operations. Of the components of net periodic benefit cost, only the service cost component will be eligible for asset capitalization. ASU 2017-07 is effective for the Company beginning January 1, 2018 and is required to be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement. Tompkins is currently evaluating the potential impact of ASU 2017-07 on our consolidated financial statements.

ASU 2017-08 “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20) - Premium Amortization on Purchased Callable Debt Securities.” ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium to require such premiums to be amortized to the earliest call date unless applicable guidance related to certain pools of securities is applied to consider estimated prepayments. Under prior guidance, entities were generally required to amortize premiums on individual, non-pooled callable debt securities as a yield adjustment over the contractual life of the security. ASU 2017-08 does not change the accounting for callable debt securities held at a discount. ASU 2017-08 will be effective for us on January 1, 2019, with early adoption permitted. Tompkins is currently evaluating the potential impact of ASU 2017-08 on our consolidated financial statements.

ASU 2017-09, “Compensation-Stock Compensation (Topic 718)- Scope of Modification Accounting.” ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Under ASU 2017-09, an entity will not apply modification accounting to a share-based payment award if all of the following are the same immediately before and after the change: (i) the award's fair value, (ii) the award's vesting conditions and (iii) the award's classification as an equity or liability instrument. ASU 2017-09 will be effective for us on January 1, 2018 and is not expected to have a significant impact on our consolidated financial statements.



4. Securities

Available-for-Sales Securities
The following table summarizes available-for-sale securities held by the Company at June 30, 2017:
 
Available-for-Sale Securities
June 30, 2017
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
(in thousands)
 

 
 

 
 

 
 

Obligations of U.S. Government sponsored entities
$
526,734

 
$
2,906

 
$
1,260

 
$
528,380

Obligations of U.S. states and political subdivisions
92,151

 
593

 
299

 
92,445

Mortgage-backed securities – residential, issued by
 

 
 

 
 

 
 

U.S. Government agencies
149,281

 
1,025

 
1,824

 
148,482

U.S. Government sponsored entities
661,251

 
1,613

 
10,477

 
652,387

Non-U.S. Government agencies or sponsored entities
96

 
0

 
0

 
96

U.S. corporate debt securities
2,500

 
0

 
338

 
2,162

Total debt securities
1,432,013

 
6,137

 
14,198

 
1,423,952

Equity securities
1,000

 
0

 
81

 
919

 Total available-for-sale securities
$
1,433,013

 
$
6,137

 
$
14,279

 
$
1,424,871

 

12



 The following table summarizes available-for-sale securities held by the Company at December 31, 2016:  
 
Available-for-Sale Securities
December 31, 2016
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
(in thousands)
 

 
 

 
 

 
 

Obligations of U.S. Government sponsored entities
$
527,057

 
$
2,873

 
$
2,303

 
$
527,627

Obligations of U.S. states and political subdivisions
89,910

 
286

 
1,140

 
89,056

Mortgage-backed securities – residential, issued by
 

 
 

 
 

 
 

U.S. Government agencies
159,417

 
1,081

 
2,272

 
158,226

U.S. Government sponsored entities
662,724

 
1,993

 
13,287

 
651,430

Non-U.S. Government agencies or sponsored entities
116

 
0

 
0

 
116

U.S. corporate debt securities
2,500

 
0

 
338

 
2,162

Total debt securities
1,441,724

 
6,233

 
19,340

 
1,428,617

Equity securities
1,000

 
0

 
79

 
921

Total available-for-sale securities
$
1,442,724

 
$
6,233

 
$
19,419

 
$
1,429,538

 
Held-to-Maturity Securities
The following table summarizes held-to-maturity securities held by the Company at June 30, 2017:  
 
Held-to-Maturity Securities
June 30, 2017
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
(in thousands)
 

 
 

 
 

 
 

Obligations of U.S. Government sponsored entities
$
131,903

 
$
1,617

 
$
102

 
$
133,418

Obligations of U.S. states and political subdivisions
8,091

 
151

 
6

 
8,236

Total held-to-maturity debt securities
$
139,994

 
$
1,768

 
$
108

 
$
141,654

 
The following table summarizes held-to-maturity securities held by the Company at December 31, 2016:  
 
Held-to-Maturity Securities
December 31, 2016
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
(in thousands)
 

 
 

 
 

 
 

Obligations of U.S. Government sponsored entities
$
132,098

 
$
804

 
$
283

 
$
132,619

Obligations of U.S. states and political subdivisions
10,021

 
195

 
3

 
10,213

Total held-to-maturity debt securities
$
142,119

 
$
999

 
$
286

 
$
142,832


The Company may from time to time sell investment securities from its available-for-sale portfolio. Realized gains on available-for-sale securities were $0 for the three and six months ended June 30, 2017 and $239,000 and $472,000 for the same periods during 2016. Realized losses on available-for-sale securities were $0 for the three and six months ended June 30, 2017 and $0 for the same periods during 2016. The sales of available-for-sale investment securities were the result of general investment portfolio and interest rate risk management.
 

13



The following table summarizes available-for-sale securities that had unrealized losses at June 30, 2017:  
 
Less than 12 Months
 
12 Months or Longer
 
Total
(in thousands)
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Obligations of U.S. Government sponsored entities
$
136,587

 
$
1,255

 
$
245

 
$
5

 
$
136,832

 
$
1,260

Obligations of U.S. states and political subdivisions
33,531

 
299

 
0

 
0

 
33,531

 
299

 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities – residential, issued by
 

 
 

 
 

 
 

 
 

 
 

U.S. Government agencies
89,033

 
1,024

 
30,703

 
800

 
119,736

 
1,824

U.S. Government sponsored entities
464,443

 
6,214

 
127,008

 
4,263

 
591,451

 
10,477

U.S. corporate debt securities
0

 
0

 
2,163

 
338

 
2,163

 
338

Equity securities
0

 
0

 
919

 
81

 
919

 
81

Total available-for-sale securities
$
723,594

 
$
8,792

 
$
161,038

 
$
5,487

 
$
884,632

 
$
14,279

   
The following table summarizes available-for-sale securities that had unrealized losses at December 31, 2016:  
 
Less than 12 Months
 
12 Months or Longer
 
Total
(in thousands)
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Obligations of U.S. Government sponsored entities
$
208,940

 
$
2,303

 
$
0

 
$
0

 
$
208,940

 
$
2,303

Obligations of U.S. states and political subdivisions
58,852

 
1,139

 
751

 
1

 
59,603

 
1,140

 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities – residential, issued by
 

 
 

 
 

 
 

 
 

 
 

U.S. Government agencies
98,307

 
1,570

 
22,376

 
702

 
120,683

 
2,272

U.S. Government sponsored entities
463,009

 
8,933

 
123,915

 
4,354

 
586,924

 
13,287

U.S. corporate debt securities
0

 
0

 
2,162

 
338

 
2,162

 
338

Equity securities
0

 
0

 
921

 
79

 
921

 
79

Total available-for-sale securities
$
829,108

 
$
13,945

 
$
150,125

 
$
5,474

 
$
979,233

 
$
19,419



                          
The following table summarizes held-to-maturity securities that had unrealized losses at June 30, 2017.
 
Less than 12 Months
 
12 Months or Longer
 
Total
(in thousands)
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Obligations of U.S. Government sponsored entities
$
10,006

 
$
102

 
$
0

 
$
0

 
$
10,006

 
$
102

 
 
 
 
 
 
 
 
 
 
 
 
Obligations of U.S. states and political subdivisions
3,623

 
6

 
0

 
0

 
3,623

 
6

Total held-to-maturity securities
$
13,629

 
$
108

 
$
0

 
$
0

 
$
13,629

 
$
108

 








14



The following table summarizes held-to-maturity securities that had unrealized losses at December 31, 2016.

 
Less than 12 Months
 
12 Months or Longer
 
Total
(in thousands)
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Obligations of U.S. Government sponsored entities
$
40,802

 
$
283

 
$
0

 
$
0

 
$
40,802

 
$
283

 
 
 
 
 
 
 
 
 
 
 
 
Obligations of U.S. states and political subdivisions
2,567

 
3

 
0

 
0

 
2,567

 
3

Total held-to-maturity securities
$
43,369

 
$
286

 
$
0

 
$
0

 
$
43,369

 
$
286

  
The gross unrealized losses reported for residential mortgage-backed securities relate to investment securities issued by U.S. government sponsored entities such as Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and U.S. government agencies such as Government National Mortgage Association. The total gross unrealized losses, shown in the tables above, were primarily attributable to changes in interest rates and levels of market liquidity, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities.
 
The Company does not intend to sell other-than-temporarily impaired investment securities that are in an unrealized loss position until recovery of unrealized losses (which may be until maturity), and it is not more-likely-than not that the Company will be required to sell the investment securities, before recovery of their amortized cost basis, which may be at maturity. Accordingly, as of June 30, 2017, and December 31, 2016, management has determined that the unrealized losses detailed in the tables above are not other-than-temporary.
 
Ongoing Assessment of Other-Than-Temporary Impairment
 
On a quarterly basis, the Company performs an assessment to determine whether there have been any events or economic circumstances indicating that a security with an unrealized loss has suffered other-than-temporary impairment (“OTTI”). A debt security is considered impaired if the fair value is less than its amortized cost basis (including any previous OTTI charges) at the reporting date. If impaired, the Company then assesses whether the unrealized loss is other-than-temporary. An unrealized loss on a debt security is generally deemed to be other-than-temporary and a credit loss is deemed to exist if the present value, discounted at the security’s effective rate, of the expected future cash flows is less than the amortized cost basis of the debt security. As a result, the credit loss component of an other-than-temporary impairment write-down for debt securities is recorded in earnings while the remaining portion of the impairment loss is recognized, net of tax, in other comprehensive income provided that the Company does not intend to sell the underlying debt security and it is more-likely-than not that the Company would not have to sell the debt security prior to recovery of the unrealized loss, which may be to maturity. If the Company intended to sell any securities with an unrealized loss or it is more-likely-than not that the Company would be required to sell the investment securities, before recovery of their amortized cost basis, then the entire unrealized loss would be recorded in earnings.

The Company considers the following factors in determining whether a credit loss exists.
 
The length of time and the extent to which the fair value has been less than the amortized cost basis;
 
The level of credit enhancement provided by the structure which includes, but is not limited to, credit subordination positions, excess spreads, overcollateralization, protective triggers;

Changes in the near term prospects of the issuer or underlying collateral of a security, such as changes in default rates, loss severities given default and significant changes in prepayment assumptions;

The level of excess cash flow generated from the underlying collateral supporting the principal and interest payments of the debt securities; and

Any adverse change to the credit conditions of the issuer or the security such as credit downgrades by the rating agencies.

As a result of the other-than-temporarily impairment review process, the Company does not consider any investment security held at June 30, 2017 to be other-than-temporarily impaired.
 

15



The amortized cost and estimated fair value of debt securities by contractual maturity are shown in the following table. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities are shown separately since they are not due at a single maturity date.

June 30, 2017
 

 
 

(in thousands)
Amortized Cost
 
Fair Value
Available-for-sale securities:
 

 
 

Due in one year or less
$
38,168

 
$
38,336

Due after one year through five years
403,122

 
405,059

Due after five years through ten years
162,335

 
162,211

Due after ten years
17,760

 
17,381

Total
621,385

 
622,987

Mortgage-backed securities
810,628

 
800,965

Total available-for-sale debt securities
$
1,432,013

 
$
1,423,952


December 31, 2016
 

 
 

(in thousands)
Amortized Cost
 
Fair Value
Available-for-sale securities:
 

 
 

Due in one year or less
$
17,878

 
$
18,034

Due after one year through five years
376,777

 
378,631

Due after five years through ten years
210,985

 
208,999

Due after ten years
13,827

 
13,181

Total
619,467

 
618,845

Mortgage-backed securities
822,257

 
809,772

Total available-for-sale debt securities
$
1,441,724

 
$
1,428,617


June 30, 2017
 

 
 

(in thousands)
Amortized Cost
 
Fair Value
Held-to-maturity securities:
 

 
 

Due in one year or less
$
6,351

 
$
6,363

Due after one year through five years
31,832

 
32,368

Due after five years through ten years
101,811

 
102,923

Total held-to-maturity debt securities
$
139,994

 
$
141,654


December 31, 2016
 

 
 

(in thousands)
Amortized Cost
 
Fair Value
Held-to-maturity securities:
 

 
 

Due in one year or less
$
7,452

 
$
7,469

Due after one year through five years
27,480

 
27,866

Due after five years through ten years
107,187

 
107,497

Due after ten years
0

 
0

Total held-to-maturity debt securities
$
142,119

 
$
142,832

 

16



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 Atlantic Community Bankers Bank stock ("ACBB"), 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 ACBB stock totaled $31.2 million, $14.4 million and $95,000 at June 30, 2017, respectively. These securities are carried at par, which is also cost. The FHLBNY and FHLBPITT continue to pay dividends and repurchase stock. Quarterly, we evaluate our investment in the FHLB for impairment. We evaluate recent and long-term operating performance, liquidity, funding and capital positions, stock repurchase history, dividend history and impact of legislative and regulatory changes. Based on our most recent evaluation, as of June 30, 2017, we have determined that no impairment write-downs are currently required.
 

5. Loans and Leases
Loans and Leases at June 30, 2017 and December 31, 2016 were as follows:
 
6/30/2017
 
12/31/2016
(in thousands)
Originated
 
Acquired
 
Total Loans and Leases
 
Originated
 
Acquired
 
Total Loans and Leases
Commercial and industrial
 

 
 

 
 

 
 

 
 

 
 

Agriculture
$
89,017

 
$
0

 
$
89,017

 
$
118,247

 
$
0

 
$
118,247

Commercial and industrial other
977,891

 
61,134

 
1,039,025

 
847,055

 
79,317

 
926,372

Subtotal commercial and industrial
1,066,908

 
61,134

 
1,128,042

 
965,302

 
79,317

 
1,044,619

Commercial real estate
 

 
 

 
 

 
 

 
 

 
 

Construction
95,634

 
1,526

 
97,160

 
135,834

 
8,936

 
144,770

Agriculture
120,643

 
257

 
120,900

 
102,509

 
267

 
102,776

Commercial real estate other
1,503,385

 
226,772

 
1,730,157

 
1,431,690

 
241,605

 
1,673,295

Subtotal commercial real estate
1,719,662

 
228,555

 
1,948,217

 
1,670,033

 
250,808

 
1,920,841

Residential real estate
 

 
 

 
 

 
 

 
 

 
 

Home equity
211,179

 
33,530

 
244,709

 
209,277

 
37,737

 
247,014

Mortgages
1,001,630

 
23,726

 
1,025,356

 
947,378

 
25,423

 
972,801

Subtotal residential real estate
1,212,809

 
57,256

 
1,270,065

 
1,156,655

 
63,160

 
1,219,815

Consumer and other
 

 
 

 
 

 
 

 
 

 
 

Indirect
13,088

 
0

 
13,088

 
14,835

 
0

 
14,835

Consumer and other
46,274

 
896

 
47,170

 
44,393

 
826

 
45,219

Subtotal consumer and other
59,362

 
896

 
60,258

 
59,228

 
826

 
60,054

Leases
15,931

 
0

 
15,931

 
16,650

 
0

 
16,650

Total loans and leases
4,074,672

 
347,841

 
4,422,513

 
3,867,868

 
394,111

 
4,261,979

Less: unearned income and deferred costs and fees
(3,917
)
 
0

 
(3,917
)
 
(3,946
)
 
0

 
(3,946
)
Total loans and leases, net of unearned income and deferred costs and fees
$
4,070,755

 
$
347,841

 
$
4,418,596

 
$
3,863,922

 
$
394,111

 
$
4,258,033



17



The outstanding principal balance and the related carrying amount of the Company’s loans acquired in the VIST Bank acquisition are as follows at June 30, 2017 and December 31, 2016:
(in thousands)
6/30/2017
 
12/31/2016
Acquired Credit Impaired Loans
 

 
 

Outstanding principal balance
$
21,525

 
$
26,237

Carrying amount
16,597

 
22,517

 
 
 
 
Acquired Non-Credit Impaired Loans
 

 
 

Outstanding principal balance
333,608

 
375,471

Carrying amount
331,244

 
371,594

 
 
 
 
Total Acquired Loans
 

 
 

Outstanding principal balance
355,133

 
401,708

Carrying amount
347,841

 
394,111

 
The Company has adopted comprehensive lending policies, underwriting standards and loan review procedures. Management reviews these policies and procedures on a regular basis. The Company discussed its lending policies and underwriting guidelines for its various lending portfolios in Note 3 – “Loans and Leases” in the Notes to Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. There have been no significant changes in these policies and guidelines since the date of that report. As such, these policies are reflective of new originations as well as those balances held at June 30, 2017. 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 origination, loan quality, concentrations of credit, loan delinquencies and nonperforming loans and potential problem loans.
 
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments are due. Generally loans are placed on nonaccrual status if principal or interest payments become 90 days or more past due and/or management deems the collectability of the principal and/or interest to be in question as well as when required by regulatory agencies. When interest accrual is discontinued, all unpaid accrued interest is reversed. Payments received on loans on nonaccrual are generally applied to reduce the principal balance of the loan. Loans are generally returned to accrual status when all the principal and interest amounts contractually due are brought current, the borrower has established a payment history, and future payments are reasonably assured. When management determines that the collection of principal in full is not probable, management will charge-off a partial amount or full amount of the loan balance. Management considers specific facts and circumstances relative to each individual credit in making such a determination. For residential and consumer loans, management uses specific regulatory guidance and thresholds for determining charge-offs.
 
Acquired loans that met the criteria for nonaccrual of interest prior to the acquisition may be considered performing after the date of acquisition, regardless of whether the customer is contractually delinquent, if we can reasonably estimate the timing and amount of the expected cash flows on such loans and if the Company expects to fully collect the new carrying value of the loans. As such, we may no longer consider the loan to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable discount. To the extent we cannot reasonably estimate cash flows, interest income recognition is discontinued. The Company has determined that it can reasonably estimate future cash flows on our acquired loans that are past due 90 days or more and accruing interest and the Company expects to fully collect the carrying value of the loans.
 

18



The below table is an age analysis of past due loans, segregated by originated and acquired loan and lease portfolios, and by class of loans, as of June 30, 2017 and December 31, 2016.
 
June 30, 2017
(in thousands)
30-89 days
 
90 days or more
 
Current Loans
 
Total Loans
 
90 days and accruing
 
Nonaccrual
Originated Loans and Leases
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 

 
 

 
 

 
 

 
 

 
 

Agriculture
$
0

 
$
0

 
$
89,017

 
$
89,017

 
$
0

 
$
0

Commercial and industrial other
822

 
646

 
976,423

 
977,891

 
639

 
1,880

Subtotal commercial and industrial
822

 
646

 
1,065,440

 
1,066,908

 
639

 
1,880

Commercial real estate
 

 
 

 
 

 
 

 
 

 
 

Construction
0

 
0

 
95,634

 
95,634

 
0

 
0

Agriculture
15

 
0

 
120,628

 
120,643

 
0

 
0

Commercial real estate other
1,016

 
2,654

 
1,499,715

 
1,503,385

 
0

 
4,716

Subtotal commercial real estate
1,031

 
2,654

 
1,715,977

 
1,719,662

 
0

 
4,716

Residential real estate
 

 
 

 
 

 
 

 
 

 
 

Home equity
235

 
766

 
210,178

 
211,179

 
0

 
1,263

Mortgages
3,637

 
1,583

 
996,410

 
1,001,630

 
0

 
6,165

Subtotal residential real estate
3,872

 
2,349

 
1,206,588

 
1,212,809

 
0

 
7,428

Consumer and other
 

 
 

 
 

 
 

 
 

 
 

Indirect
20

 
173

 
12,895

 
13,088

 
0

 
0

Consumer and other
443

 
9

 
45,822

 
46,274

 
0

 
260

Subtotal consumer and other
463

 
182

 
58,717

 
59,362

 
0

 
260

Leases
0

 
0

 
15,931

 
15,931

 
0

 
0

Total loans and leases
6,188

 
5,831

 
4,062,653

 
4,074,672

 
639

 
14,284

Less: unearned income and deferred costs and fees
0

 
0

 
(3,917
)
 
(3,917
)
 
0

 
0

Total originated loans and leases, net of unearned income and deferred costs and fees
$
6,188

 
$
5,831

 
$
4,058,736

 
$
4,070,755

 
$
639

 
$
14,284

Acquired Loans and Leases
 

 
 

 
 

 
 

 
 

 
 

Commercial and industrial
 

 
 

 
 

 
 

 
 

 
 

Commercial and industrial other
12

 
421

 
60,701

 
61,134

 
29

 
0

Subtotal commercial and industrial
12

 
421

 
60,701

 
61,134

 
29

 
0

Commercial real estate
 

 
 

 
 

 
 

 
 

 
 

Construction
0

 
0

 
1,526

 
1,526

 
0

 
0

Agriculture
0

 
0

 
257

 
257

 
0

 
0

Commercial real estate other
77

 
2,667

 
224,028

 
226,772

 
1,840

 
972

Subtotal commercial real estate
77

 
2,667

 
225,811

 
228,555

 
1,840

 
972

Residential real estate
 

 
 

 
 

 
 

 
 

 
 

Home equity
580

 
777

 
32,173

 
33,530

 
166

 
731

Mortgages
81

 
1,756

 
21,889

 
23,726

 
546

 
1,200

Subtotal residential real estate
661

 
2,533

 
54,062

 
57,256

 
712

 
1,931

Consumer and other
 

 
 

 
 

 
 

 
 

 
 

Consumer and other
1

 
0

 
895

 
896

 
0

 
0

Subtotal consumer and other
1

 
0

 
895

 
896

 
0

 
0

Total acquired loans and leases, net of unearned income and deferred costs and fees
$
751

 
$
5,621

 
$
341,469

 
$
347,841

 
$
2,581

 
$
2,903


19



 

December 31, 2016
(in thousands)
30-89 days
 
90 days or more
 
Current Loans
 
Total Loans
 
90 days and accruing
 
Nonaccrual
Originated loans and leases
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 

 
 

 
 

 
 

 
 

 
 

Agriculture
$
0

 
$
0

 
$
118,247

 
$
118,247

 
$
0

 
$
0

Commercial and industrial other
1,312

 
281

 
845,462

 
847,055

 
0

 
526

Subtotal commercial and industrial
1,312

 
281

 
963,709

 
965,302

 
0

 
526

Commercial real estate
 

 
 

 
 

 
 

 
 

 
 

Construction
0

 
0

 
135,834

 
135,834

 
0

 
0

Agriculture
17

 
0

 
102,492

 
102,509

 
0

 
162

Commercial real estate other
2,546

 
3,071

 
1,426,073

 
1,431,690

 
0

 
5,988

Subtotal commercial real estate
2,563

 
3,071

 
1,664,399

 
1,670,033

 
0

 
6,150

Residential real estate
 

 
 

 
 

 
 

 
 

 
 

Home equity
433

 
1,954

 
206,890

 
209,277

 
0

 
2,016

Mortgages
1,749

 
3,244

 
942,385

 
947,378

 
0

 
5,442

Subtotal residential real estate
2,182

 
5,198

 
1,149,275

 
1,156,655

 
0

 
7,458

Consumer and other
 

 
 

 
 

 
 

 
 

 
 

Indirect
444

 
376

 
14,015

 
14,835

 
0

 
166

Consumer and other
193

 
8

 
44,192

 
44,393

 
0

 
0

Subtotal consumer and other
637

 
384

 
58,207

 
59,228

 
0

 
166

Leases
0

 
0

 
16,650

 
16,650

 
0

 
0

Total loans and leases
6,694

 
8,934

 
3,852,240

 
3,867,868

 
0

 
14,300

Less: unearned income and deferred costs and fees
0

 
0

 
(3,946
)
 
(3,946
)
 
0

 
0

Total originated loans and leases, net of unearned income and deferred costs and fees
$
6,694

 
$
8,934

 
$
3,848,294

 
$
3,863,922

 
$
0

 
$
14,300

Acquired loans and leases
 

 
 

 
 

 
 

 
 

 
 

Commercial and industrial
 

 
 

 
 

 
 

 
 

 
 

Commercial and industrial other
12

 
87

 
79,218

 
79,317

 
40

 
212

Subtotal commercial and industrial
12

 
87

 
79,218

 
79,317

 
40

 
212

Commercial real estate
 

 
 

 
 

 
 

 
 

 
 

Construction
0

 
0

 
8,936

 
8,936

 
0

 
0

Agriculture
0

 
0

 
267

 
267

 
0

 
0

Commercial real estate other
1,461

 
3,952

 
236,192

 
241,605

 
1,402

 
2,926

Subtotal commercial real estate
1,461

 
3,952

 
245,395

 
250,808

 
1,402

 
2,926

Residential real estate
 

 
 

 
 

 
 

 
 

 
 

Home equity
251

 
637

 
36,849

 
37,737

 
185

 
663

Mortgages
829

 
1,651

 
22,943

 
25,423

 
930

 
940

Subtotal residential real estate
1,080

 
2,288

 
59,792

 
63,160

 
1,115

 
1,603

Consumer and other
 

 
 

 
 

 
 

 
 

 
 

Consumer and other
0

 
0

 
826

 
826

 
0

 
0

Subtotal consumer and other
0

 
0

 
826

 
826

 
0

 
0

Covered loans
0

 
0

 
0

 
0

 
0

 
0

Total acquired loans and leases, net of unearned income and deferred costs and fees
$
2,553

 
$
6,327

 
$
385,231

 
$
394,111

 
$
2,557

 
$
4,741

1 Includes acquired loans that were recorded at fair value at the acquisition date.

20



 
6. 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 ASC Topic 310, Receivables and ASC Topic 450, Contingencies.
 
The model is comprised of four major components that management has deemed appropriate in evaluating the appropriateness of the allowance for loan and lease losses. While none of these components, when used independently, is effective in arriving at a reserve level that appropriately measures the risk inherent in the portfolio, management believes that using them collectively, provides reasonable measurement of the loss exposure in the portfolio. The four components include: impaired loans; individually reviewed and graded loans; historical loss experience; and qualitative or subjective analysis.
 
Since the methodology is based upon historical experience and trends as well as management’s judgment, factors may arise that result in different estimates. Significant factors that could give rise to changes in these estimates may include, but are not limited to, changes in economic conditions in the local area, concentration of risk, changes in interest rates, and declines in local property values. While management’s evaluation of the allowance as of June 30, 2017, considers the allowance to be appropriate, under adversely different conditions or assumptions, the Company would need to increase or decrease the allowance.
 
Acquired Loans and Leases
 
Acquired loans accounted for under ASC 310-30
 
For our acquired loans, our allowance for loan losses is estimated based upon our expected cash flows for these loans. To the extent that we experience a deterioration in borrower credit quality resulting in a decrease in our expected cash flows subsequent to the acquisition of the loans, an allowance for loan losses would be established based on our estimate of future credit losses over the remaining life of the loans.
 
Acquired loans accounted for under ASC 310-20
 
We establish our allowance for loan losses through a provision for credit losses based upon an evaluation process that is similar to our evaluation process used for originated loans. This evaluation, which includes a review of loans on which full collectability may not be reasonably assured, considers, among other matters, the estimated fair value of the underlying collateral, economic conditions, historical net loan loss experience, carrying value of the loans, which includes the remaining net purchase discount or premium, and other factors that warrant recognition in determining our allowance for loan losses.
 
The following tables detail activity in the allowance for loan and lease losses segregated by originated and acquired loan and lease portfolios and by portfolio segment for the three and six months ended June 30, 2017 and 2016. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
 
Three months ended June 30, 2017
 
 

 
 

 
 

 
 

(in thousands)
Commercial
and Industrial

 
Commercial
Real Estate

 
Residential
Real Estate

 
Consumer
and Other

 
Finance
Leases

 
Total

Allowance for originated loans and leases
Beginning balance
$
10,273

 
$
19,114

 
$
5,386

 
$
1,142

 
$
0

 
$
35,915

 
 
 
 
 
 
 
 
 
 
 
 
Charge-offs
(2
)
 
0

 
(68
)
 
(249
)
 
0

 
(319
)
Recoveries
54

 
218

 
109

 
137

 
0

 
518

Provision (credit)
517

 
(211
)
 
334

 
206

 
0

 
846

Ending Balance
$
10,842

 
$
19,121

 
$
5,761

 
$
1,236

 
$
0

 
$
36,960


21



 
Three months ended June 30, 2017
 
 

 
 

 
 

 
 

(in thousands)
Commercial
and Industrial

 
Commercial
Real Estate

 
Residential
Real Estate

 
Consumer
and Other

 
Finance
Leases

 
Total

Allowance for acquired loans
 
 

 
 

 
 

 
 

 
 

Beginning balance
$
0

 
$
76

 
$
169

 
$
6

 
$
0

 
$
251

 
 
 
 
 
 
 
 
 
 
 
 
Charge-offs
(65
)
 
0

 
(152
)
 
(1
)
 
0

 
(218
)
Recoveries
0

 
16

 
12

 
6

 
0

 
34

Provision (credit)
115

 
(5
)
 
25

 
(5
)
 
0

 
130

Ending Balance
$
50

 
$
87

 
$
54

 
$
6

 
$
0

 
$
197

 
Three months ended June 30, 2016
 
 

 
 

 
 

 
 

(in thousands)
Commercial
and Industrial

 
Commercial
Real Estate

 
Residential
Real Estate

 
Consumer
and Other

 
Finance
Leases

 
Total

Allowance for originated loans and leases
 
 

 
 

 
 

 
 

 
 

Beginning balance
$
9,291

 
$
17,108

 
$
4,275

 
$
1,307

 
$
0

 
$
31,981

 
 
 
 
 
 
 
 
 
 
 
 
Charge-offs
(337
)
 
(12
)
 
0

 
(115
)
 
0

 
(464
)
Recoveries
89

 
210

 
15

 
159

 
0

 
473

Provision (credit)
(106
)
 
923

 
196

 
(35
)
 
0

 
978

Ending Balance
$
8,937

 
$
18,229

 
$
4,486

 
$
1,316

 
$
0

 
$
32,968

 
Three months ended June 30, 2016
 
 

 
 

 
 

 
 

(in thousands)
Commercial
and Industrial

 
Commercial
Real Estate

 
Residential
Real Estate

 
Consumer
and Other

 
Covered
Loans

 
Total

Allowance for acquired loans
 
 

 
 

 
 

 
 

 
 

Beginning balance
$
433

 
$
33

 
$
59

 
$
24

 
$
0

 
$
549

 
 
 
 
 
 
 
 
 
 
 
 
Charge-offs
(324
)
 
(182
)
 
0

 
0

 
0

 
(506
)
Recoveries
0

 
114

 
0

 
0

 
0

 
114

Provision (credit)
(62
)
 
100

 
(36
)
 
(2
)
 
0

 
0

Ending Balance
$
47

 
$
65

 
$
23

 
$
22

 
$
0

 
$
157

 
Six months ended June 30, 2017
 
 

 
 

 
 

 
 

(in thousands)
Commercial
and Industrial

 
Commercial
Real Estate

 
Residential
Real Estate

 
Consumer
and Other

 
Finance
Leases

 
Total

Allowance for originated loans and leases
 
 

 
 

 
 

 
 

 
 

Beginning balance
$
9,389

 
$
19,836

 
$
5,149

 
$
1,224

 
$
0

 
$
35,598

 
 
 
 
 
 
 
 
 
 
 
 
Charge-offs
(77
)
 
(21
)
 
(441
)
 
(530
)
 
0

 
(1,069
)
Recoveries
130

 
452

 
136

 
265

 
0

 
983

Provision (credit)
1,400

 
(1,146
)
 
917

 
277

 
0

 
1,448

Ending Balance
$
10,842

 
$
19,121

 
$
5,761

 
$
1,236

 
$
0

 
$
36,960




22




Six months ended June 30, 2017
 
 

 
 

 
 

 
 

(in thousands)
Commercial
and Industrial

 
Commercial
Real Estate

 
Residential
Real Estate

 
Consumer
and Other

 
Covered
Loans

 
Total

Allowance for acquired loans
Beginning balance
$
0

 
$
97

 
$
54

 
$
6

 
$
0

 
$
157

 
 
 
 
 
 
 
 
 
 
 
 
Charge-offs
(74
)
 
(73
)
 
(152
)
 
(1
)
 
0

 
(300
)
Recoveries
0

 
25

 
12

 
6

 
0

 
43

Provision (credit)
124

 
38

 
140

 
(5
)
 
0

 
297

Ending Balance
$
50

 
$
87

 
$
54

 
$
6

 
$
0

 
$
197


Six months ended June 30, 2016
 
 

 
 

 
 

 
 

(in thousands)
Commercial
and Industrial

 
Commercial
Real Estate

 
Residential
Real Estate

 
Consumer
and Other

 
Finance
Leases

 
Total

Allowance for originated loans and leases
 
 

 
 

 
 

 
 

 
 

Beginning balance
$
10,495

 
$
15,479

 
$
4,070

 
$
1,268

 
$
0

 
$
31,312

 
 
 
 
 
 
 
 
 
 
 
 
Charge-offs
(451
)
 
(12
)
 
(201
)
 
(361
)
 
0

 
(1,025
)
Recoveries
107

 
420

 
32

 
272

 
0

 
831

Provision (credit)
(1,214
)
 
2,342

 
585

 
137

 
0

 
1,850

Ending Balance
$
8,937

 
$
18,229

 
$
4,486

 
$
1,316

 
$
0

 
$
32,968


Six months ended June 30, 2016
 
 

 
 

 
 

 
 

(in thousands)
Commercial
and Industrial

 
Commercial
Real Estate

 
Residential
Real Estate

 
Consumer
and Other

 
Covered
Loans

 
Total

Allowance for acquired loans
 
 

 
 

 
 

 
 

 
 

Beginning balance
$
433

 
$
61

 
$
198

 
$
0

 
$
0

 
$
692

 
 
 
 
 
 
 
 
 
 
 
 
Charge-offs
(387
)
 
(182
)
 
(16
)
 
(93
)
 
0

 
(678
)
Recoveries
0

 
160

 
0

 
0

 
0

 
160

Provision (credit)
1

 
26

 
(159
)
 
115

 
0

 
(17
)
Ending Balance
$
47

 
$
65

 
$
23

 
$
22

 
$
0

 
$
157


At June 30, 2017 and December 31, 2016, the allocation of the allowance for loan and lease losses summarized on the basis of the Company’s impairment methodology was as follows:
 
(in thousands)
Commercial
and Industrial

 
Commercial
Real Estate

 
Residential
Real Estate

 
Consumer
and Other

 
Finance
Leases

 
Total

Allowance for originated loans and leases
 
 

 
 

June 30, 2017
 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
293

 
$
0

 
$
0

 
$
0

 
$
0

 
$
293

Collectively evaluated for impairment
10,549

 
19,121

 
5,761

 
1,236

 
0

 
36,667

Ending balance
$
10,842

 
$
19,121

 
$
5,761

 
$
1,236

 
$
0

 
$
36,960

 

23



(in thousands)
Commercial
and Industrial

 
Commercial Real Estate

 
Residential Real Estate

 
Consumer
and Other

 
Covered Loans

 
Total

Allowance for acquired loans
 

 
 

 
 

 
 

 
 

 
 

June 30, 2017
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
50

 
$
75

 
$
0

 
$
0

 
$
0

 
$
125

Collectively evaluated for impairment
0

 
12

 
54

 
6

 
0

 
72

Ending balance
$
50

 
$
87

 
$
54

 
$
6

 
$
0

 
$
197

(in thousands)
Commercial and Industrial

 
Commercial Real Estate

 
Residential Real Estate

 
Consumer
and Other

 
Finance Leases

 
Total

Allowance for originated loans and leases
 
 

 
 

 
 

 
 

 
 

December 31, 2016
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
95

 
$
322

 
$
0

 
$
0

 
$
0

 
$
417

Collectively evaluated for impairment
9,294

 
19,514

 
5,149

 
1,224

 
0

 
35,181

Ending balance
$
9,389

 
$
19,836

 
$
5,149

 
$
1,224

 
$
0

 
$
35,598

(in thousands)
Commercial and Industrial

 
Commercial Real Estate

 
Residential Real Estate

 
Consumer
and Other

 
Covered Loans

 
Total

Allowance for acquired loans
 

 
 

 
 

 
 

 
 

 
 

December 31, 2016
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
0

 
$
76

 
$
0

 
$
0

 
$
0

 
$
76

Collectively evaluated for impairment
0

 
21

 
54

 
6

 
0

 
81

Ending balance
$
0

 
$
97

 
$
54

 
$
6

 
$
0

 
$
157

 
The recorded investment in loans and leases summarized on the basis of the Company’s impairment methodology as of June 30, 2017 and December 31, 2016 was as follows:
(in thousands)
Commercial and Industrial

 
Commercial Real Estate

 
Residential Real Estate

 
Consumer
and Other

 
Finance Leases

 
Total

Originated loans and leases
 

 
 

 
 

 
 

 
 

 
 

June 30, 2017
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
1,583

 
$
6,523

 
$
3,700

 
$
0

 
$
0

 
$
11,806

Collectively evaluated for impairment
1,065,325

 
1,713,139

 
1,209,109

 
59,362

 
15,931

 
4,062,866

Total
$
1,066,908

 
$
1,719,662

 
$
1,212,809

 
$
59,362

 
$
15,931

 
$
4,074,672



24



(in thousands)
Commercial and Industrial

 
Commercial Real Estate

 
Residential Real Estate

 
Consumer 
and Other

 
Covered Loans

 
Total

Acquired loans
 

 
 

 
 

 
 

 
 

 
 

June 30, 2017
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
102

 
$
1,454

 
$
1,514

 
$
0

 
$
0

 
$
3,070

Loans acquired with deteriorated credit quality
228

 
9,450

 
6,919

 
0

 
0

 
16,597

Collectively evaluated for impairment
60,804

 
217,651

 
48,823

 
896

 
0

 
328,174

Total
$
61,134

 
$
228,555

 
$
57,256

 
$
896

 
$
0

 
$
347,841

 
(in thousands)
Commercial and Industrial

 
Commercial Real Estate

 
Residential Real Estate

 
Consumer 
and Other

 
Finance Leases

 
Total

Originated loans and leases
 

 
 

 
 

 
 

 
 

 
 

December 31, 2016
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
635

 
$
8,812

 
$
3,507

 
$
0

 
$
0

 
$
12,954

Collectively evaluated for impairment
964,667

 
1,661,221

 
1,153,148

 
59,228

 
16,650

 
3,854,914

Total
$
965,302

 
$
1,670,033

 
$
1,156,655

 
$
59,228

 
$
16,650

 
$
3,867,868

 
(in thousands)
Commercial and Industrial

 
Commercial Real Estate

 
Residential Real Estate

 
Consumer 
and Other

 
Covered Loans

 
Total

Acquired loans
 

 
 

 
 

 
 

 
 

 
 

December 31, 2016
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
172

 
$
4,081

 
$
1,372

 
$
0

 
$
0

 
$
5,625

Loans acquired with deteriorated credit quality
448

 
14,368

 
7,701

 
0

 
0

 
22,517

Collectively evaluated for impairment
78,697

 
232,359

 
54,087

 
826

 
0

 
365,969

Total
$
79,317

 
$
250,808

 
$
63,160

 
$
826

 
$
0

 
$
394,111

 
A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans consist of our non-homogenous nonaccrual loans, and all loans restructured in a troubled debt restructuring (TDR). Specific reserves on individually identified impaired loans that are not collateral dependent are measured based on the present value of expected future cash flows discounted at the original effective interest rate of each loan. For loans that are collateral dependent, impairment is measured based on the fair value of the collateral less estimated selling costs, and such impaired amounts are generally charged off. The majority of impaired loans are collateral dependent impaired loans that have limited exposure or require limited specific reserves because of the amount of collateral support with respect to these loans, and previous charge-offs. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured. In these cases, interest is recognized on a cash basis. Impaired loans are as follows:
 

25



 
6/30/2017
 
12/31/2016
(in thousands)
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
Originated loans and leases with no related allowance
 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 

 
 

 
 

 
 

 
 

 
 

Commercial and industrial other
$
375

 
$
399

 
$
0

 
$
276

 
$
370

 
$
0

Commercial real estate
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate other
6,523

 
7,048

 
0

 
6,979

 
7,263

 
0

Residential real estate
 

 
 

 
 

 
 

 
 

 
 

Home equity
3,700

 
3,847

 
0

 
3,507

 
3,535

 
0

Subtotal
$
10,598

 
$
11,294

 
$
0

 
$
10,762

 
$
11,168

 
$
0

 
 
 
 
 
 
 
 
 
 
 
 
Originated loans and leases with related allowance
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 

 
 

 
 

 
 

 
 

 
 

Commercial and industrial other
1,208

 
1,208

 
293

 
359

 
276

 
95

Commercial real estate
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate other
0

 
0

 
0

 
1,833

 
2,042

 
322

Subtotal
$
1,208

 
$
1,208

 
$
293

 
$
2,192

 
$
2,318

 
$
417

Total
$
11,806

 
$
12,502

 
$
293

 
$
12,954

 
$
13,486

 
$
417

 
 
6/30/2017
 
12/31/2016
(in thousands)
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
Acquired loans and leases with no related allowance
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 

 
 

 
 

 
 

 
 

 
 

Commercial and industrial other
$
2

 
$
2

 
$
0

 
$
172

 
$
472

 
$
0

Commercial real estate
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate other
1,187

 
1,369

 
0

 
4,003

 
4,386

 
0

Residential real estate
 

 
 

 
 

 
 

 
 

 
 

Home equity
1,514

 
1,453

 
0

 
1,372

 
1,372

 
0

Subtotal
$
2,703

 
$
2,824

 
$
0

 
$
5,547

 
$
6,230

 
$
0

 
 
 
 
 
 
 
 
 
 
 
 
Acquired loans and leases with related allowance
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 

 
 

 
 

 
 

 
 

 
 

Commercial and industrial other
100

 
100

 
50

 
0

 
0

 
0

Commercial real estate
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate other
267

 
267

 
75

 
78

 
78

 
76

Subtotal
$
367

 
$
367

 
$
125

 
$
78

 
$
78

 
$
76

Total
$
3,070

 
$
3,191

 
$
125

 
$
5,625

 
$
6,308

 
$
76



26



The average recorded investment and interest income recognized on impaired loans for the three months ended June 30, 2017 and 2016 was as follows:
 
 
Three Months Ended 06/30/2017
 
Three Months Ended 06/30/16
(in thousands)
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
Originated loans and leases with no related allowance
 

 
 

 
 

 
 

Commercial and industrial
 

 
 

 
 

 
 

Commercial and industrial other
301

 
0

 
382

 
0

Commercial real estate
 

 
 

 
 

 
 

Commercial real estate other
7,614

 
0

 
6,445

 
0

Residential real estate
 

 
 

 
 

 
 

Home equity
3,628

 
0

 
2,544

 
0

Subtotal
$
11,543

 
$
0

 
$
9,371

 
$
0

 
 
 
 
 
 
 
 
Originated loans and leases with related allowance
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Commercial and industrial
 

 
 

 
 

 
 

Commercial and industrial other
612

 
0

 
34

 
0

Commercial real estate
 

 
 

 
 

 
 

Commercial real estate other
0

 
0

 
767

 
0

Subtotal
$
612

 
$
0

 
$
801

 
$
0

Total
$
12,155

 
$
0

 
$
10,172

 
$
0

 
 
Three Months Ended 06/30/2017
 
Three Months Ended 06/30/2016
(in thousands)
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
Acquired loans and leases with no related allowance
 

 
 

 
 

 
 

Commercial and industrial
 

 
 

 
 

 
 

Commercial and industrial other
83

 
0

 
289

 
0

Commercial real estate
 

 
 

 
 

 
 

Construction
0

 
0

 
304

 
0

Commercial real estate other
1,299

 
0

 
4,292

 
0

Residential real estate
 

 
 

 
 

 
 

Home equity
1,443

 
0

 
997

 
0

Subtotal
$
2,825

 
$
0

 
$
5,882

 
$
0

 
 
 
 
 
 
 
 
Acquired loans and leases with related allowance
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Commercial and industrial
 

 
 

 
 

 
 

Commercial and industrial other
50

 
0

 
23

 
0

Commercial real estate
 

 
 

 
 

 
 

Commercial real estate other
267

 
0

 
31

 
0

Subtotal
$
317

 
$
0

 
$
54

 
$
0

Total
$
3,142

 
$
0

 
$
5,936

 
$
0






27



The average recorded investment and interest income recognized on impaired loans for the six months ended June 30, 2017 and 2016 was as follows:

 
Six Months Ended 06/30/17
 
Six Months Ended 06/30/16
(in thousands)
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
Originated loans and leases with no related allowance
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Commercial and industrial
 

 
 

 
 

 
 

Commercial and industrial other
334

 
0

 
572

 
0

Commercial real estate
 

 
 

 
 

 
 

Commercial real estate other
8,031

 
0

 
6,022

 
0

Residential real estate
 

 
 

 
 

 
 

Home equity
3,485

 
0

 
2,452

 
0

Subtotal
$
11,850

 
$
0

 
$
9,046

 
$
0

 
 
 
 
 
 
 
 
Originated loans and leases with related allowance
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Commercial and industrial
 

 
 

 
 

 
 

Commercial and industrial other
340

 
0

 
46

 
0

Commercial real estate
 

 
 

 
 

 
 

Commercial real estate other
0

 
0

 
607

 
0

Subtotal
$
340

 
$
0

 
$
653

 
$
0

Total
$
12,190

 
$
0

 
$
9,699

 
$
0


 
Six Months Ended 06/30/17
 
Six Months Ended 06/30/16
(in thousands)
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
Acquired loans and leases with no related allowance
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Commercial and industrial
 

 
 

 
 

 
 

Commercial and industrial other
66

 
0

 
408

 
0

Commercial real estate
 

 
 

 
 

 
 

Construction
51

 
0

 
322

 
0

Commercial real estate other
2,774

 
0

 
4,447

 
0

Residential real estate
 

 
 

 
 

 
 

Home equity
1,694

 
0

 
1,260

 
0

Subtotal
$
4,585

 
$
0

 
$
6,437

 
$
0

 
 
 
 
 
 
 
 
Acquired loans and leases with related allowance
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Commercial and industrial
 

 
 

 
 

 
 

Commercial and industrial other
20

 
0

 
16

 
0

Commercial real estate
 

 
 

 
 

 
 

Commercial real estate other
267

 
0

 
31

 
0

Subtotal
$
287

 
$
0

 
$
47

 
$
0

Total
$
4,872

 
$
0

 
$
6,484

 
$
0


 

28



Loans are considered modified in a TDR when, due to a borrower’s financial difficulties, the Company makes concessions to the borrower that it would not otherwise consider. These modifications may include, among others, an extension for the term of the loan, and granting a period when interest-only payments can be made with the principal payments made over the remaining term of the loan or at maturity.
 
The following tables present information on loans modified in troubled debt restructuring during the periods indicated.
June 30, 2017
Three Months Ended
 
 
 
 
 
 
 
Defaulted TDRs2 
 (in thousands)
Number of Loans
 
Pre-Modification Outstanding Recorded Investment
 
Post-Modification Outstanding Recorded Investment
 
Number of Loans
 
Post-Modification Outstanding Recorded Investment
Residential real estate
 

 
 

 
 

 
 

 
 

Home equity1 
1

 
89

 
89

 
0

 
0

 Total
1

 
$
89

 
$
89

 
0

 
$
0

1 Represents the following concessions:  extension of term and reduction of rate.
TDRs that defaulted during the three months ended June 30, 2017 that were restructured in the prior twelve months.
 
June 30, 2016
Three Months Ended
 
 
 
 
 
 
 
Defaulted TDRs2 
 (in thousands)
Number of Loans
 
Pre-Modification Outstanding Recorded Investment
 
Post-Modification Outstanding Recorded Investment
 
Number of Loans
 
Post-Modification Outstanding Recorded Investment
Residential real estate
 

 
 

 
 

 
 

 
 

Home equity1 
2

 
613

 
613

 
0

 
0

Total
2

 
$
613

 
$
613

 
0

 
$
0


1 Represents the following concessions:  extension of term and reduction of rate.
TDRs that defaulted during the three months ended June 30, 2016 that had been restructured in the prior twelve months.
June 30, 2017
Six Months Ended
   
 

 
 

 
 

 
Defaulted TDRs2 
(in thousands)
Number of
Loans
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
 
Number of
Loans
 
Post-
Modification
Outstanding
Recorded
Investment
Residential real estate
 

 
 

 
 

 
 

 
 

Home equity1 
2

 
162

 
162

 
1

 
55

Total
2

 
$
162

 
$
162

 
1

 
$
55


1 Represents the following concessions:  extension of term and reduction of rate.
TDRs that defaulted during the six months ended June 30, 2017 that had been restructured in the prior twelve months.

29



June 30, 2016
Six Months Ended
 
 

 
 

 
 

 
Defaulted TDRs3 
(in thousands)
Number of
Loans
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
 
Number of
Loans
 
Post-
Modification
Outstanding
Recorded
Investment
Commercial and industrial  
 

 
 

 
 

 
 

 
 

Commercial and industrial other1 
2

 
$
1,115

 
$
1,115

 
0

 
$
0

Residential real estate
 

 
 

 
 

 
 

 
 

Home equity2 
5

 
782

 
782

 
0

 
0

Total
7

 
$
1,897

 
$
1,897

 
0

 
$
0


1 Represents the following concessions:  extension of term and reduction of rate.
2 Represents the following concessions:  extension of term and reduction of rate.
TDRs that defaulted during the six months ended June 30, 2016 that had been restructured in the prior twelve months.

The following tables present credit quality indicators (internal risk grade) by class of commercial and industrial loans and commercial real estate loans as of June 30, 2017 and December 31, 2016.
 
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and Industrial
 
Commercial and Industrial
 
CommercialReal Estate
 
CommercialReal Estate
 
CommercialReal Estate
 
 
(in thousands)
Other
 
Agriculture
 
Other
 
Agriculture
 
Construction
 
Total

Originated Loans and Leases
 

 
 

 
 

 
 

 
 

 
 

Internal risk grade:
 

 
 

 
 

 
 

 
 

 
 

Pass
$
965,156

 
$
78,390

 
$
1,477,335

 
$
112,035

 
$
95,634

 
$
2,728,550

Special Mention
7,545

 
10,570

 
11,765

 
8,608

 
0

 
38,488

Substandard
5,190

 
57

 
14,285

 
0

 
0

 
19,532

Total
$
977,891

 
$
89,017

 
$
1,503,385

 
$
120,643

 
$
95,634

 
$
2,786,570

 
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and Industrial
 
Commercial and Industrial
 
Commercial Real Estate
 
Commercial Real Estate
 
Commercial Real Estate
 
 
(in thousands)
Other
 
Agriculture
 
Other
 
Agriculture
 
Construction
 
Total

Acquired Loans and Leases
 

 
 

 
 

 
 

 
 

 
 

Internal risk grade:
 

 
 

 
 

 
 

 
 

 
 

Pass
$
60,019

 
$
0

 
$
218,544

 
$
257

 
$
1,526

 
$
280,346

Special Mention
0

 
0

 
547

 
0

 
0

 
547

Substandard
1,115

 
0

 
7,681

 
0

 
0

 
8,796

Total
$
61,134

 
$
0

 
$
226,772

 
$
257

 
$
1,526

 
$
289,689

 

30



December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and Industrial
 
Commercial and Industrial
 
Commercial Real Estate
 
Commercial Real Estate
 
Commercial Real Estate
 
 
(in thousands)
Other
 
Agriculture
 
Other
 
Agriculture
 
Construction
 
Total

Originated Loans and Leases
Internal risk grade:
 

 
 

 
 

 
 

 
 

 
 

Pass
$
836,788

 
$
117,135

 
$
1,403,370

 
$
101,407

 
$
135,834

 
$
2,594,534

Special Mention
7,218

 
755

 
11,939

 
573

 
0

 
20,485

Substandard
3,049

 
357

 
16,381

 
529

 
0

 
20,316

Total
$
847,055

 
$
118,247

 
$
1,431,690

 
$
102,509

 
$
135,834

 
$
2,635,335

 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and Industrial
 
Commercial and Industrial
 
Commercial Real Estate
 
Commercial Real Estate
 
Commercial Real Estate
 
 
(in thousands)
Other
 
Agriculture
 
Other
 
Agriculture
 
Construction
 
Total

Acquired Loans and Leases
Internal risk grade:
 

 
 

 
 

 
 

 
 

 
 

Pass
$
77,921

 
$
0

 
$
229,334

 
$
267

 
$
8,936

 
$
316,458

Special Mention
0

 
0

 
526

 
0

 
0

 
526

Substandard
1,396

 
0

 
11,745

 
0

 
0

 
13,141

Total
$
79,317

 
$
0

 
$
241,605

 
$
267

 
$
8,936

 
$
330,125

 
The following tables present credit quality indicators by class of residential real estate loans and by class of consumer loans. Nonperforming loans include nonaccrual, impaired, and loans 90 days past due and accruing interest. All other loans are considered performing as of June 30, 2017 and December 31, 2016. For purposes of this footnote, acquired loans that were recorded at fair value at the acquisition date and are 90 days or greater past due are considered performing.
 
June 30, 2017
 
 
 
 
 
 
 
 
 
(in thousands)
Residential
Home Equity
 
Residential
Mortgages
 
Consumer
Indirect
 
Consumer
Other
 
Total
Originated Loans and Leases
 

 
 

 
 

 
 

 
 

Performing
$
209,916

 
$
995,465

 
$
12,828

 
$
46,274

 
$
1,264,483

Nonperforming
1,263

 
6,165

 
260

 
0

 
7,688

Total
$
211,179

 
$
1,001,630

 
$
13,088

 
$
46,274

 
$
1,272,171

 
June 30, 2017
 
 
 
 
 
 
 
 
 
(in thousands)
Residential
Home Equity
 
Residential
Mortgages
 
Consumer
Indirect
 
Consumer
Other
 
Total
Acquired Loans and Leases
 

 
 

 
 

 
 

 
 

Performing
$
32,799

 
$
22,526

 
$
0

 
$
896

 
$
56,221

Nonperforming
731

 
1,200

 
0

 
0

 
1,931

Total
$
33,530

 
$
23,726

 
$
0

 
$
896

 
$
58,152

 

31



December 31, 2016
(in thousands)
Residential
Home Equity
 
Residential
Mortgages
 
Consumer
Indirect
 
Consumer
Other
 
Total
Originated Loans and Leases
 

 
 

 
 

 
 

 
 

Performing
$
207,261

 
$
941,936

 
$
14,669

 
$
44,393

 
$
1,208,259

Nonperforming
2,016

 
5,442

 
166

 
0

 
7,624

Total
$
209,277

 
$
947,378

 
$
14,835

 
$
44,393

 
$
1,215,883

 
December 31, 2016
(in thousands)
Residential
Home Equity
 
Residential
Mortgages
 
Consumer
Indirect
 
Consumer
Other
 
Total
Acquired Loans and Leases
 

 
 

 
 

 
 

 
 

Performing
$
37,074

 
$
24,483

 
$
0

 
$
826

 
$
62,383

Nonperforming
663

 
940

 
0

 
0

 
1,603

Total
$
37,737

 
$
25,423

 
$
0

 
$
826

 
$
63,986


7. FDIC Indemnification Asset Related to Covered Loans
 
Prior to the third quarter of 2016, the Company had certain loans acquired in the VIST Financial acquisition which were covered loans with loss share agreements with the FDIC. Based on an analysis of outstanding loans covered under the one remaining loss share agreement, management decided to early terminate its one remaining loss share agreement with the FDIC during the third quarter of 2016. At that time the Company recorded pre-tax expense of $313,000 to terminate the agreement and write-off the remaining book value of the FDIC indemnification asset, which included $174,000 in expense for early termination and $139,000 to write off the remaining asset. The remaining balances of the loans previously reported as Covered Loans are included in the acquired loan balances by loan type subsequent to termination.



32



8. Earnings Per Share
 
Earnings per share in the table below, for the three and six month periods ended June 30, 2017 and 2016 are calculated under the two-class method as required by ASC Topic 260, Earnings Per Share. ASC 260 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The Company has issued restricted stock awards that contain such rights and are therefore considered participating securities. Basic earnings per common share are calculated by dividing net income allocable to common stock by the weighted average number of common shares, excluding participating securities, during the period. Diluted earnings per common share include the dilutive effect of participating securities.
 
 
Three Months Ended
(in thousands, except share and per share data)
6/30/2017
 
6/30/2016
Basic
 

 
 

Net income available to common shareholders
$
16,926

 
$
14,833

Less: income attributable to unvested stock-based compensation awards
(266
)
 
(228
)
Net earnings allocated to common shareholders
16,660

 
14,605

 
 
 
 
Weighted average shares outstanding, including unvested stock-based compensation awards
15,184,835

 
15,027,648

 
 
 
 
Less: unvested stock-based compensation awards
(239,901
)
 
(229,133
)
Weighted average shares outstanding - Basic
14,944,934

 
14,798,515

 
 
 
 
Diluted
 

 
 

Net earnings allocated to common shareholders
16,660

 
14,605

 
 
 
 
Weighted average shares outstanding - Basic
14,944,934

 
14,798,515

 
 
 
 
Plus:  incremental shares from assumed conversion of stock-based compensation awards
121,927

 
118,691

 
 
 
 
Weighted average shares outstanding - Diluted
15,066,861

 
14,917,206

 
 
 
 
Basic EPS
1.11

 
0.99

Diluted EPS
1.11

 
0.98



Stock-based compensation awards representing 21,317 and 0 of common shares during the three months ended June 30, 2017 and 2016, respectively, were not included in the computations of diluted earnings per common share because the effect on those periods would have been antidilutive.

33




 
Six Months Ended
(in thousands, except share and per share data)
6/30/2017
 
6/30/2016
Basic
 

 
 

Net income available to common shareholders
$
32,642

 
$
29,084

Less: income attributable to unvested stock-based compensation awards
(527
)
 
(458
)
Net earnings allocated to common shareholders
32,115

 
28,626

 
 
 
 
Weighted average shares outstanding, including unvested stock-based compensation awards
15,168,310

 
15,014,991

 
 
 
 
Less: unvested stock-based compensation awards
(245,242
)
 
(235,595
)
Weighted average shares outstanding - Basic
14,923,068

 
14,779,396

 
 
 
 
Diluted
 

 
 

Net earnings allocated to common shareholders
32,115

 
28,626

 
 
 
 
Weighted average shares outstanding - Basic
14,923,068

 
14,779,396

 
 
 
 
Plus: incremental shares from assumed conversion of stock-based compensation awards
131,802

 
103,016

 
 
 
 
Weighted average shares outstanding - Diluted
15,054,870

 
14,882,412

 
 
 
 
Basic EPS
2.15

 
1.94

Diluted EPS
2.13

 
1.92


Stock-based compensation awards representing approximately 41,559 and 24,123 of common shares during the six months ended June 30, 2017 and 2016, respectively were not included in the computations of diluted earnings per common share because the effect on those periods would have been antidilutive.






34



9. Other Comprehensive Income (Loss)

The following tables present reclassifications out of the accumulated other comprehensive income (loss) for the three and six month periods ended June 30, 2017 and 2016.



 
Three Months Ended June 30, 2017
(in thousands)
Before-Tax
Amount
 
Tax (Expense)
Benefit
 
Net of Tax
Available-for-sale securities:
 

 
 

 
 

Change in net unrealized gain/loss during the period
$
3,051

 
$
(1,220
)
 
$
1,831

Reclassification adjustment for net realized gain on sale of available-for-sale securities included in net income
0

 
0

 
0

Net unrealized gains
3,051

 
(1,220
)
 
1,831

 
 
 
 
 
 
Employee benefit plans:
 

 
 

 
 

Amortization of net retirement plan actuarial gain
397

 
(159
)
 
238

Amortization of net retirement plan prior service cost
(15
)
 
6

 
(9
)
Employee benefit plans
382

 
(153
)
 
229

Other comprehensive income
$
3,433

 
$
(1,373
)
 
$
2,060

 
 
Three Months Ended June 30, 2016
(in thousands)
Before-Tax
Amount
 
Tax (Expense)
Benefit
 
Net of Tax
Available-for-sale securities:
 

 
 

 
 

Change in net unrealized gain/loss during the period
$
8,362

 
$
(3,344
)
 
$
5,018

Reclassification adjustment for net realized gain on sale of available-for-sale securities included in net income
(240
)
 
96

 
(144
)
Net unrealized gains
8,122

 
(3,248
)
 
4,874

 
 
 
 
 
 
Employee benefit plans:
 

 
 

 
 

Amortization of net retirement plan actuarial gain
326

 
(131
)
 
195

Amortization of net retirement plan prior service cost
8

 
(3
)
 
5

Employee benefit plans
334

 
(134
)
 
200

Other comprehensive income
$
8,456

 
$
(3,382
)
 
$
5,074

 


35




 
Six Months Ended June 30, 2017
(in thousands)
Before-Tax
Amount
 
Tax (Expense)
Benefit
 
Net of Tax
Available-for-sale securities:
 

 
 

 
 

Change in net unrealized gain/loss during the period
$
5,044

 
$
(2,016
)
 
$
3,028

Reclassification adjustment for net realized gain on sale of available-for-sale securities included in net income
0

 
0

 
0

Net unrealized gains
5,044

 
(2,016
)
 
3,028

 
 
 
 
 
 
Employee benefit plans:
 

 
 

 
 

Amortization of net retirement plan actuarial gain
754

 
(302
)
 
452

Amortization of net retirement plan prior service cost
8

 
(3
)
 
5

Employee benefit plans
762

 
(305
)
 
457

Other comprehensive income
$
5,806

 
$
(2,321
)
 
$
3,485



 
Six Months Ended June 30, 2016
(in thousands)
Before-Tax
Amount
 
Tax (Expense)
Benefit
 
Net of Tax
Available-for-sale securities:
 

 
 

 
 

Change in net unrealized gain/loss during the period
$
29,317

 
$
(11,724
)
 
$
17,593

Reclassification adjustment for net realized gain on sale of available-for-sale securities included in net income
(472
)
 
189

 
(283
)
Net unrealized  gains
28,845

 
(11,535
)
 
17,310

 
 
 
 
 
 
Employee benefit plans:
 

 
 

 
 

Amortization of net retirement plan actuarial gain
669

 
(268
)
 
401

Amortization of net retirement plan prior service credit
38

 
(15
)
 
23

Employee benefit plans
707

 
(283
)
 
424

 
 
 
 
 
 
Other comprehensive income
$
29,552

 
$
(11,818
)
 
$
17,734



















36



The following table presents the activity in our accumulated other comprehensive income (loss) for the periods indicated:
 
(in thousands)
Available-for-
Sale Securities
 
Employee
Benefit Plans
 
Accumulated
Other
Comprehensive
(Loss) Income
Balance at March 31, 2017
$
(6,718
)
 
$
(28,966
)
 
$
(35,684
)
Other comprehensive income before reclassifications
1,831

 
0

 
1,831

Amounts reclassified from accumulated other comprehensive (loss) income
0

 
229

 
229

Net current-period other comprehensive income
1,831

 
229

 
2,060

Balance at June 30, 2017
$
(4,887
)
 
$
(28,737
)
 
$
(33,624
)
 
 
 
 
 
 
Balance at January 1, 2017
$
(7,915
)
 
$
(29,194
)
 
$
(37,109
)
Other comprehensive income before reclassifications
3,028

 
0

 
3,028

Amounts reclassified from accumulated other comprehensive (loss) income
0

 
457

 
457

Net current-period other comprehensive income
3,028

 
457

 
3,485

Balance at June 30, 2017
$
(4,887
)
 
$
(28,737
)
 
$
(33,624
)

(in thousands)
Available-for-
Sale Securities
 
Employee
Benefit Plans
 
Accumulated
Other
Comprehensive
(Loss) Income
Balance at March 31, 2016
$
9,692

 
$
(28,033
)
 
$
(18,341
)
Other comprehensive income before reclassifications
5,018

 
0

 
5,018

Amounts reclassified from accumulated other comprehensive (loss) income
(144
)
 
200

 
56

Net current-period other comprehensive income
4,874

 
200

 
5,074

Balance at June 30, 2016
$
14,566

 
$
(27,833
)
 
$
(13,267
)
 
 
 
 
 
 
Balance at January 1, 2016
$
(2,744
)
 
$
(28,257
)
 
$
(31,001
)
Other comprehensive income before reclassifications
17,593

 
0

 
17,593

Amounts reclassified from accumulated other comprehensive (loss) income
(283
)
 
424

 
141

Net current-period other comprehensive income
17,310

 
424

 
17,734

Balance at June 30, 2016
$
14,566

 
$
(27,833
)
 
$
(13,267
)

The following tables present the amounts reclassified out of each component of accumulated other comprehensive (loss) income for the three and six months ended June 30, 2017 and 2016

37



Three months ended June 30, 2017
 
 
 
Details about Accumulated other Comprehensive Income
Components (in thousands)
Amount
Reclassified from
Accumulated
Other
Comprehensive
(Loss) Income
 
Affected Line Item in the
Statement Where Net Income is
Presented
Available-for-sale securities:
 

 
 
Unrealized gains and losses on available-for-sale securities
$
0

 
Net gain on securities transactions
 
0

 
Tax expense
 
0

 
Net of tax
Employee benefit plans:
 

 
 
Amortization of the following 
 

 
 
Net retirement plan actuarial gain
(397
)
 
Pension and other employee benefits
Net retirement plan prior service cost
15

 
Pension and other employee benefits
 
(382
)
 
Total before tax
 
153

 
Tax benefit
 
(229
)
 
Net of tax
 



Six Months Ended June 30, 2017
 
 
 
Details about Accumulated other Comprehensive Income Components (in thousands)
Amount
Reclassified from
Accumulated
Other
Comprehensive
Income
1 
 
Affected Line Item in the
Statement Where Net Income is
Presented
Available-for-sale securities:
  
 
 
Unrealized gains and losses on available-for-sale securities
$
0

 
Net gain on securities transactions
  
0

 
Tax expense
  
0

 
Net of tax
Employee benefit plans:
  
 
 
Amortization of the following 2 
  
 
 
Net retirement plan actuarial loss
(754
)
 
Pension and other employee benefits
Net retirement plan prior service credit
(8
)
 
Pension and other employee benefits
  
(762
)
 
Total before tax
  
305

 
Tax benefit
  
(457
)
 
Net of tax




38




Three Months Ended June 30, 2016
 
 
 
Details about Accumulated other Comprehensive Income Components (in thousands)
Amount
Reclassified from
Accumulated
Other
Comprehensive
(Loss) Income
1 
 
Affected Line Item in the
Statement Where Net Income is
Presented
Available-for-sale securities:
  
 
 
Unrealized gains and losses on available-for-sale securities
$
240

 
Net gain on securities transactions
  
(96
)
 
Tax expense
  
144

 
Net of tax
Employee benefit plans:
  
 
 
Amortization of the following 2 
  
 
 
Net retirement plan actuarial gain
(326
)
 
Pension and other employee benefits
Net retirement plan prior service credit
(8
)
 
Pension and other employee benefits
  
(334
)
 
Total before tax
  
134

 
Tax benefit
  
(200
)
 
Net of tax



Six Months Ended June 30, 2016
 
 
 
Details about Accumulated other Comprehensive Income Components (in thousands)
Amount
Reclassified from
Accumulated
Other
Comprehensive
(Loss) Income
1 
 
Affected Line Item in the
Statement Where Net Income is
Presented
Available-for-sale securities:
  
 
 
Unrealized gains and losses on available-for-sale securities
$
472

 
Net gain on securities transactions
  
(189
)
 
Tax expense
  
283

 
Net of tax
Employee benefit plans:
  
 
 
Amortization of the following
  
 
 
Net retirement plan actuarial loss
(669
)
 
Pension and other employee benefits
Net retirement plan prior service cost
(38
)
 
Pension and other employee benefits
  
(707
)
 
Total before tax
  
283

 
Tax benefit
  
(424
)
 
Net of tax

Amounts in parentheses indicated debits in income statement.
The accumulated other comprehensive (loss) income components are included in the computation of net periodic benefit cost (See Note 10 - “Employee Benefit Plan”).
 

39



10. Employee Benefit Plan
 
The following table sets forth the amount of the net periodic benefit cost recognized by the Company for the Company’s pension plan, post-retirement plan (Life and Health), and supplemental employee retirement plans (“SERP”) including the following components: service cost, interest cost, expected return on plan assets for the period, amortization of the unrecognized transitional obligation or transition asset, and the amounts of recognized gains and losses, prior service cost recognized, and gain or loss recognized due to settlement or curtailment.

Components of Net periodic Benefit Cost

 
Pension Benefits
Three Months Ended
 
Life and Health
Three Months Ended
 
SERP Benefits
Three Months Ended
(in thousands)
6/30/2017

 
6/30/2016

 
6/30/2017

 
6/30/2016

 
6/30/2017

 
6/30/2016

Service cost
$
0

 
$
0

 
$
28

 
$
47

 
$
29

 
$
14

Interest cost
643

 
587

 
62

 
65

 
217

 
205

Expected return on plan assets
(1,256
)
 
(1,207
)
 
0

 
0

 
0

 
0

Amortization of net retirement plan actuarial loss
286

 
249

 
13

 
2

 
98

 
75

Amortization of net retirement plan prior service (credit) cost
(3
)
 
(4
)
 
(35
)
 
4

 
22

 
8

Net periodic benefit (income) cost
$
(330
)
 
$
(375
)
 
$
68

 
$
118

 
$
366

 
$
302


  
Components of Net periodic Benefit Cost

 
Pension Benefits
Six Months Ended
 
Life and Health
Six Months Ended
 
SERP Benefits
Six Months Ended
(in thousands)
6/30/2017

 
6/30/2016

 
6/30/2017

 
6/30/2016

 
6/30/2017

 
6/30/2016

Service cost
$
0

 
$
0

 
$
96

 
$
129

 
$
83

 
$
86

Interest cost
1,250

 
1,237

 
134

 
141

 
426

 
416

Expected return on plan assets
(2,523
)
 
(2,422
)
 
0

 
0

 
0

 
0

Amortization of net retirement plan actuarial loss
537

 
487

 
17

 
3

 
199

 
179

Amortization of net retirement plan prior service cost (credit)
(5
)
 
(7
)
 
(31
)
 
8

 
44

 
38

Net periodic benefit (income) cost
$
(741
)
 
$
(705
)
 
$
216

 
$
281

 
$
752

 
$
719

  
The net periodic benefit (income) cost for the Company’s benefit plans are recorded as a component of salaries and benefits in the consolidated statements of income.
 
The Company realized approximately $457,000 and $424,000, net of tax, as amortization of amounts previously recognized in accumulated other comprehensive (loss) income, for the six months ended June 30, 2017 and 2016, respectively.
 
The Company is not required to contribute to the pension plan in 2017, but it may make voluntary contributions. The Company did not contribute to the pension plan in the first six months of 2017 and 2016.

40




11. Other Income and Operating Expense
 
Other income and operating expense totals are presented in the table below.  Components of these totals exceeding 1% of the aggregate of total noninterest income and total noninterest expenses for any of the years presented below are stated separately.
 
 
Three Months Ended
 
Six Months Ended
(in thousands)
6/30/2017

 
6/30/2016

 
6/30/2017

 
6/30/2016

Noninterest Income
 

 
 

 
 

 
 

Other service charges
$
727

 
$
616

 
$
1,547

 
$
1,366

Increase in cash surrender value of corporate owned life insurance
557

 
511

 
1,188

 
1,127

Other income
462

 
240

 
1,166

 
581

Total other income
$
1,746

 
$
1,367

 
$
3,901

 
$
3,074

Noninterest Expenses
 

 
 

 
 

 
 

Marketing expense
$
1,242

 
$
1,417

 
$
2,416

 
$
2,319

Professional fees
1,331

 
1,352

 
2,693

 
2,694

Legal fees
260

 
331

 
524

 
679

Technology expense
1,632

 
1,268

 
3,093

 
2,616

Cardholder expense
860

 
680

 
2,041

 
1,425

Other expenses
4,598

 
4,193

 
9,113

 
8,556

Total other operating expense
$
9,923

 
$
9,241

 
$
19,880

 
$
18,289

 


41



12. Financial Guarantees
 
The Company currently does not issue any guarantees that would require liability recognition or disclosure, other than standby letters of credit. The Company extends standby letters of credit to its customers in the normal course of business. The standby letters of credit are generally short-term. As of June 30, 2017, the Company’s maximum potential obligation under standby letters of credit was $52.0 million compared to $57.7 million at December 31, 2016. Management uses the same credit policies to extend standby letters of credit that it uses for on-balance sheet lending decisions and may require collateral to support standby letters of credit based upon its evaluation of the counterparty. Management does not anticipate any significant losses as a result of these transactions, and has determined that the fair value of standby letters of credit is not significant.
 
13. Segment and Related Information
 
The Company manages its operations through three reportable business segments in accordance with the standards set forth in FASB ASC 280, “Segment Reporting”: (i) banking (“Banking”), (ii) insurance (“Tompkins Insurance”) and (iii) wealth management (“Tompkins Financial Advisors”). The Company’s insurance services and wealth management services, other than trust services, are managed separately from the Banking segment.
 
Banking
 
The Banking segment is primarily comprised of the Company’s four banking subsidiaries: Tompkins Trust Company, a commercial bank with fourteen banking offices located in Ithaca, NY and surrounding communities; The Bank of Castile (DBA Tompkins Bank of Castile), a commercial bank with seventeen banking offices located in the Genesee Valley region of New York State as well as Monroe County; Mahopac Bank (DBA Tompkins Mahopac Bank), a commercial bank with fourteen full-service banking offices located in the counties north of New York City; and VIST Bank (DBA Tompkins VIST Bank), a banking organization with twenty-one banking offices headquartered and operating in the areas surrounding southeastern Pennsylvania.
 
Insurance
 
The Company provides property and casualty insurance services and employee benefits consulting through Tompkins Insurance Agencies, Inc., a 100% wholly-owned subsidiary of the Company, headquartered in Batavia, New York. Tompkins Insurance is an independent insurance agency, representing many major insurance carriers and provides employee benefit consulting to employers in Western and Central New York and Southeastern Pennsylvania, assisting them with their medical, group life insurance and group disability insurance. Tompkins Insurance has five stand-alone offices in Western New York, one stand-alone office in Tompkins County, New York and one stand-alone office in Montgomery County, Pennsylvania.
 
Wealth Management
 
The Wealth Management segment is generally organized under the Tompkins Financial Advisors brand. Tompkins Financial Advisors offers a comprehensive suite of financial services to customers, including trust and estate services, investment management and financial and insurance planning for individuals, corporate executives, small business owners and high net worth individuals. Tompkins Financial Advisors has offices in each of the Company’s four subsidiary banks. 

Summarized financial information concerning the Company’s reportable segments and the reconciliation to the Company’s consolidated results is shown in the following table. Investment in subsidiaries is netted out of the presentations below. The “Intercompany” column identifies the intercompany activities of revenues, expenses and other assets between the banking, insurance and wealth management services segments. The Company accounts for intercompany fees and services at an estimated fair value according to regulatory requirements for the services provided. Intercompany items relate primarily to the use of human resources, information systems, accounting and marketing services provided by any of the banks and the holding company. All other accounting policies are the same as those described in the summary of significant accounting policies in the 2016 Annual Report on Form 10-K.
 

42



As of and for the three months ended June 30, 2017
(in thousands)
Banking
 
Insurance
 
Wealth Management
 
Intercompany
 
Consolidated
Interest income
$
56,342

 
$
0

 
$
0

 
$
0

 
$
56,342

Interest expense
6,041

 
0

 
0

 
0

 
6,041

 Net interest income  
50,301

 
0

 
0

 
0

 
50,301

Provision for loan and lease losses
976

 
0

 
0

 
0

 
976

Noninterest income
6,720

 
7,132

 
4,015

 
(417
)
 
17,450

Noninterest expense
32,819

 
6,059

 
3,107

 
(417
)
 
41,568

 Income before income tax expense
23,226

 
1,073

 
908

 
0

 
25,207

Income tax expense
7,510

 
428

 
310

 
0

 
8,248

Net Income attributable to noncontrolling interests and Tompkins Financial Corporation
15,716

 
645

 
598

 
0

 
16,959

Less:  Net income attributable to noncontrolling interests
33

 
0

 
0

 
0

 
33

Net Income attributable to Tompkins Financial Corporation
$
15,683

 
$
645

 
$
598

 
$
0

 
$
16,926

 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
$
1,766

 
$
74

 
$
14

 
$
0

 
$
1,854

Assets
6,368,374

 
41,438

 
15,692

 
(10,492
)
 
6,415,012

Goodwill
64,370

 
19,710

 
8,211

 
0

 
92,291

Other intangibles, net
5,783

 
4,151

 
317

 
0

 
10,251

Net loans and leases
4,381,439

 
0

 
0

 
0

 
4,381,439

Deposits
4,761,017

 
0

 
0

 
(10,295
)
 
4,750,722

Total Equity
532,291

 
31,379

 
13,245

 
0

 
576,915

 As of and for the three months ended June 30, 2016
(in thousands)
Banking
 
Insurance
 
Wealth
Management
 
Intercompany
 
Consolidated
Interest income
$
50,417

 
$
0

 
$
0

 
$
0

 
$
50,417

Interest expense
5,510

 
0

 
0

 
0

 
5,510

 Net interest income  
44,907

 
0

 
0

 
0

 
44,907

Provision for loan and lease losses
978

 
0

 
0

 
0

 
978

Noninterest income
5,861

 
7,556

 
3,956

 
(289
)
 
17,084

Noninterest expense
30,645

 
6,160

 
2,872

 
(289
)
 
39,388

 Income before income tax expense
19,145

 
1,396

 
1,084

 
0

 
21,625

Income tax expense
5,818

 
575

 
367

 
0

 
6,760

Net Income attributable to noncontrolling interests and Tompkins Financial Corporation
13,327

 
821

 
717

 
0

 
14,865

Less:  Net income attributable to noncontrolling interests
32

 
0

 
0

 
0

 
32

Net Income attributable to Tompkins Financial  Corporation
$
13,295

 
$
821

 
$
717

 
$
0

 
$
14,833

 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
$
1,561

 
$
91

 
$
19

 
$
0

 
$
1,671

Assets
5,877,758

 
41,272

 
13,701

 
(7,825
)
 
5,924,906

Goodwill
64,370

 
20,361

 
8,211

 
0

 
92,942

Other intangibles, net
7,133

 
5,003

 
396

 
0

 
12,532

Net loans and leases
3,944,988

 
0

 
0

 
0

 
3,944,988

Deposits
4,477,266

 
0

 
0

 
(7,545
)
 
4,469,721

Total Equity
512,711

 
30,684

 
11,040

 
0

 
554,435


43



For the six months ended June 30, 2017
(in thousands)
Banking
 
Insurance
 
Wealth
Management
 
Intercompany
 
Consolidated
Interest income
$
109,963

 
$
1

 
$
0

 
$
(1
)
 
$
109,963

Interest expense
11,628

 
0

 
0

 
0

 
11,628

 Net interest income  
98,335

 
1

 
0

 
(1
)
 
98,335

Provision for loan and lease losses
1,745

 
0

 
0

 
0

 
1,745

Noninterest income
13,123

 
14,448

 
7,925

 
(806
)
 
34,690

Noninterest expense
65,306

 
12,139

 
6,297

 
(806
)
 
82,936

 Income before income tax expense
44,407


2,310


1,628


(1
)
 
48,344

Income tax expense
14,182

 
903

 
552

 
0

 
15,637

Net Income attributable to noncontrolling interests and Tompkins Financial Corporation
30,225


1,407


1,076


(1
)
 
32,707

Less:  Net income attributable to noncontrolling interests
65

 
0

 
0

 
0

 
65

Net Income attributable to Tompkins Financial Corporation
$
30,160


$
1,407


$
1,076


$
(1
)
 
$
32,642

 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
$
3,456

 
$
156

 
$
29

 
$
0

 
$
3,641


 For the six months ended June 30, 2016
(in thousands)
Banking
 
Insurance
 
Wealth
Management
 
Intercompany
 
Consolidated
Interest income
$
99,726

 
$
1

 
$
0

 
$
(1
)
 
$
99,726

Interest expense
10,781

 
1

 
0

 
(1
)
 
10,781

 Net interest income  
88,945

 
0

 
0

 
0

 
$
88,945

Provision for loan and lease losses
1,833

 
0

 
0

 
0

 
1,833

Noninterest income
12,132

 
15,155

 
7,866

 
(566
)
 
34,587

Noninterest expense
61,018

 
12,500

 
5,942

 
(566
)
 
78,894

 Income before income tax expense
38,226


2,655


1,924


0

 
$
42,805

Income tax expense
11,943

 
1,076

 
637

 
0

 
13,656

Net Income attributable to noncontrolling interests and Tompkins Financial Corporation
26,283


1,579


1,287


0

 
$
29,149

Less:  Net income attributable to noncontrolling interests
65

 
0

 
0

 
0

 
65

Net Income attributable to Tompkins Financial Corporation
$
26,218


$
1,579


$
1,287


$
0

 
$
29,084

 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
$
3,136

 
$
182

 
$
38

 
$
0

 
$
3,356



  


44



14. Fair Value
 
FASB ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FASB ASC Topic 820 also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Transfers between levels, when determined to be appropriate, are recognized at the end of each reporting period.  
 
The three levels of the fair value hierarchy under FASB ASC Topic 820 are:
 
Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; 

Level 2 – Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;
 
Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).  
 
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016, segregated by the level of valuation inputs within the fair value hierarchy used to measure fair value.
 
Recurring Fair Value Measurements
 
 
 
 
 
 
 
June 30, 2017
 
 
 
 
 
 
 
(in thousands)
Total
 
(Level 1)

 
(Level 2)

 
(Level 3)

Available-for-sale securities
 
 
 
 
 
 
 
Obligations of U.S. Government sponsored entities
$
528,380

 
$
0

 
$
528,380

 
$
0

Obligations of U.S. states and political subdivisions
92,445

 
0

 
92,445

 
0

Mortgage-backed securities – residential, issued by:
 
 
 
 
 
 
 
U.S. Government agencies
148,482

 
0

 
148,482

 
0

U.S. Government sponsored entities
652,387

 
0

 
652,387

 
0

Non-U.S. Government agencies or sponsored entities
96

 
0

 
96

 
0

U.S. corporate debt securities
2,162

 
0

 
2,162

 
0

Equity securities
919

 
0

 
0

 
919


45



 
The change in the fair value of available-for-sale equity securities valued using significant unobservable inputs (level 3), between January 1, 2017 and June 30, 2017 was immaterial.
 
Recurring Fair Value Measurements
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
(in thousands)
Total
 
(Level 1)

 
(Level 2)

 
(Level 3)

Available-for-sale securities
 
 
  

 
 

 
 

Obligations of U.S. Government sponsored entities
527,627

 
0

 
527,627

 
0

Obligations of U.S. states and political subdivisions
89,056

 
0

 
89,056

 
0

Mortgage-backed securities – residential, issued by:
 
 
 

 
 

 
 

U.S. Government agencies
158,226

 
0

 
158,226

 
0

U.S. Government sponsored entities
651,430

 
0

 
651,430

 
0

Non-U.S. Government agencies or sponsored entities
116

 
0

 
116

 
0

U.S. corporate debt securities
2,162

 
0

 
2,162

 
0

Equity securities
921

 
0

 
0

 
921

 
The change in the fair value of available-for-sale equity securities valued using significant unobservable inputs (level 3), between January 1, 2016 and December 31, 2016 was immaterial.
 
There were no transfers between Levels 1, 2 and 3 for the six months ended June 30, 2017.
 
The Company determines fair value for its trading securities using independently quoted market prices. The Company determines fair value for its available-for-sale securities using an independent bond pricing service for identical assets or very similar securities. The Company has reviewed the pricing sources, including methodologies used, and finds them to be fairly stated.
 
Certain assets are measured at fair value on a nonrecurring basis. For the Company, these include loans held for sale, collateral dependent impaired loans, and other real estate owned (“OREO”). During the second quarter and first half of 2017, certain collateral dependent impaired loans were remeasured and reported at fair value through a specific valuation allowance and/or partial charge-offs for loan and lease losses based upon the fair value of the underlying collateral. Collateral values are estimated using Level 2 inputs based upon observable market data. In addition to collateral dependent impaired loans, certain other real estate owned were remeasured and reported at fair value based upon the fair value of the underlying collateral. The fair values of other real estate owned are estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria. In general, the fair values of other real estate owned are based upon appraisals, with discounts made to reflect estimated costs to sell the real estate. Upon initial recognition, fair value write-downs on other real estate owned are taken through a charge-off to the allowance for loan and lease losses. Subsequent fair value write-downs on other real estate owned are reported in other noninterest expense.
 
Three months ended June 30, 2017
 
 
 
Fair value measurements at reporting
date using:
 
Gain (losses)
from fair
value changes
Assets:
As of 06/30/2017
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant other
observable inputs
(Level 2)
 
Significant
unobservable inputs
(Level 3)
 
Three months
ended
06/30/2017
Impaired loans
$
880

 
$
0

 
$
880

 
$
0

 
$
0

Other real estate owned
2,640

 
0

 
2,640

 
0

 
(111
)
 
 

46



Three months ended June 30, 2016
 
 
 
Fair value measurements at reporting
date using:
 
Gain (losses)
from fair
value changes
Assets:
As of
06/30/2016
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant other
observable inputs
(Level 2)
 
Significant
unobservable inputs
(Level 3)
 
Three months
ended
06/30/2016
Impaired loans
$
195

 
$
0

 
$
195

 
$
0

 
$
(129
)
Other real estate owned
276

 
0

 
276

 
0

 
(15
)


Six months ended June 30, 2017
 
 
Fair value measurements at reporting
date using:
 
Gain (losses)
from fair
value changes
Assets:
As of
06/30/2017
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant other
observable inputs
(Level 2)
 
Significant
unobservable inputs
(Level 3)
 
Six months
ended
06/30/2017
Impaired Loans
$
3,037

 
$
0

 
$
3,037

 
$
0

 
$
(332
)
Other real estate owned
2,331

 
0

 
2,331

 
0

 
(182
)


Six months ended June 30, 2016
 
 
Fair value measurements at reporting
date using:
 
Gain (losses)
from fair
value changes
Assets:
As of
06/30/2016
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant other
observable inputs
(Level 2)
 
Significant
unobservable inputs
(Level 3)
 
Six months
ended
06/30/2016
Impaired Loans
$
1,582

 
$
0

 
$
1,582

 
$
0

 
$
(169
)
Other real estate owned
488

 
0

 
488

 
0

 
(4
)

  
The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments at June 30, 2017 and December 31, 2016. The carrying amounts shown in the table are included in the Consolidated Statements of Condition under the indicated captions.
 
The fair value estimates, methods and assumptions set forth below for the Company’s financial instruments, including those financial instruments carried at cost, are made solely to comply with disclosures required by generally accepted accounting principles in the United States and do not always incorporate the exit-price concept of fair value prescribed by ASC Topic 820-10 and should be read in conjunction with the financial statements and notes included in this Report.
 

47



Estimated Fair Value of Financial Instruments
 
 
June 30, 2017
 
 
 
 
 
 
 
 
 
 (in thousands)
Carrying
Amount
 
Fair Value
 
(Level 1)
 
(Level 2)
 
(Level 3)
 Financial Assets:
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
78,175

 
$
78,175

 
$
78,175

 
$
0

 
$
0

Securities - held to maturity
139,994

 
141,654

 
0

 
141,654

 
0

FHLB and other stock
45,714

 
45,714

 
0

 
45,714

 
0

Accrued interest receivable
18,376

 
18,376

 
0

 
18,376

 
0

   Loans/leases, net1
4,381,439

 
4,330,206

 
0

 
3,037

 
4,327,169

 
 
 
 
 
 
 
 
 
 
 Financial Liabilities:
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
Time deposits
$
826,933

 
$
825,283

 
$
0

 
$
825,283

 
$
0

Other deposits
3,923,789

 
3,923,789

 
0

 
3,923,789

 
0

Fed funds purchased and securities sold
 

 
 

 
 

 
 

 
 

under agreements to repurchase
50,360

 
50,360

 
0

 
50,360

 
0

Other borrowings
952,036

 
951,600

 
0

 
951,600

 
0

Trust preferred debentures
16,605

 
22,111

 
0

 
22,111

 
0

Accrued interest payable
1,867

 
1,867

 
0

 
1,867

 
0

 
Estimated Fair Value of Financial Instruments
December 31, 2016
 
 
 
 
 
 
 
 
 
 (in thousands)
Carrying
Amount
 
Fair  Value
 
(Level 1)
 
(Level 2)
 
(Level 3)
 Financial Assets:
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
63,954

 
$
63,954

 
$
63,954

 
$
0

 
$
0

Securities - held to maturity
142,119

 
142,832

 
0

 
142,832

 
0

FHLB and other stock
43,133

 
43,133

 
0

 
43,133

 
0

Accrued interest receivable
17,390

 
17,390

 
0

 
17,390

 
0

   Loans/leases, net1
4,222,278

 
4,187,415

 
0

 
7,296

 
4,180,119

 
 
 
 
 
 
 
 
 
 
 Financial Liabilities:
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
Time deposits
$
870,788

 
$
867,921

 
$
0

 
$
867,921

 
$
0

Other deposits
3,754,351

 
3,754,351

 
0

 
3,754,351

 
0

Fed funds purchased and securities
 

 
 

 
 

 
 

 
 

sold under agreements to repurchase
69,062

 
69,109

 
0

 
69,109

 
0

Other borrowings
884,815

 
884,842

 
0

 
884,842

 
0

Trust preferred debentures
37,681

 
43,321

 
0

 
43,321

 
0

Accrued interest payable
1,902

 
1,902

 
0

 
1,902

 
0

Lease receivables, although excluded from the scope of ASC Topic 825, are included in the estimated fair value amounts at their carrying value.
 
The following methods and assumptions were used in estimating fair value disclosures for financial instruments.
 
Cash and Cash Equivalents: The carrying amounts reported in the Consolidated Statements of Condition for cash, noninterest-bearing deposits, money market funds, and Federal funds sold approximate the fair value of those assets.
 

48



Securities: Fair values for U.S. Treasury securities are based on quoted market prices. Fair values for obligations of U.S. government sponsored entities, mortgage-backed securities-residential, obligations of U.S. states and political subdivisions, and U.S. corporate debt securities are based on quoted market prices, where available, as provided by third party pricing vendors. If quoted market prices were not available, fair values are based on quoted market prices of comparable instruments in active markets and/or based upon matrix pricing methodology, which uses comprehensive interest rate tables to determine market price, movement and yield relationships. These securities are reviewed periodically to determine if there are any events or changes in circumstances that would adversely affect their value.

Loans and Leases: The fair values of residential loans are estimated using discounted cash flow analyses, based upon available market benchmarks for rates and prepayment assumptions. The fair values of commercial and consumer loans are estimated using discounted cash flow analyses, based upon interest rates currently offered for loans and leases with similar terms and credit quality. The fair value of loans held for sale are determined based upon contractual prices for loans with similar characteristics.
 
FHLB Stock: The carrying amount of FHLB stock approximates fair value. If the stock is redeemed, the Company will receive an amount equal to the par value of the stock. For miscellaneous equity securities, carrying value is cost.
 
Accrued Interest Receivable and Accrued Interest Payable: The carrying amount of these short term instruments approximate fair value.
 
Deposits: The fair values disclosed for noninterest bearing accounts and accounts with no stated maturities are equal to the amount payable on demand at the reporting date. The fair value of time deposits is based upon discounted cash flow analyses using rates offered for FHLB advances, which is the Company’s primary alternative source of funds.
 
Securities Sold Under Agreements to Repurchase: The carrying amounts of repurchase agreements and other short-term borrowings approximate their fair values. Fair values of long-term borrowings are estimated using a discounted cash flow approach, based on current market rates for similar borrowings. For securities sold under agreements to repurchase where the Company has elected the fair value option, the Company also receives pricing information from third parties, including the FHLB.
 
Other Borrowings: The fair values of other borrowings are estimated using discounted cash flow analysis, discounted at the Company’s current incremental borrowing rate for similar borrowing arrangements. For other borrowings where the Company has elected the fair value option, the Company also receives pricing information from third parties, including the FHLB.
 
Trust Preferred Debentures: The fair value of the trust preferred debentures has been estimated using a discounted cash flow analysis which uses a discount factor of a market spread over current interest rates for similar instruments.
 

49



Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

BUSINESS
 
Corporate Overview and Strategic Initiatives
Tompkins Financial Corporation (“Tompkins” or the “Company”) is headquartered in Ithaca, New York and is registered as a Financial Holding Company with the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended. The Company is a locally oriented, community-based financial services organization that offers a full array of products and services, including commercial and consumer banking, leasing, trust and investment management, financial planning and wealth management, and insurance services. At June 30, 2017, the Company’s subsidiaries included: four wholly-owned banking subsidiaries, Tompkins Trust Company (the “Trust Company”), The Bank of Castile (DBA Tompkins Bank of Castile), Mahopac Bank (formerly known as Mahopac National Bank, DBA Tompkins Mahopac Bank), VIST Bank (DBA Tompkins VIST Bank); and a wholly-owned insurance agency subsidiary, Tompkins Insurance Agencies, Inc. (“Tompkins Insurance”). The trust division of the Trust Company provides a full array of investment services, including investment management, trust and estate, financial and tax planning as well as life, disability and long-term care insurance services. The Company’s principal offices are located at The Commons, Ithaca, New York, 14851, and its telephone number is (888) 503-5753. The Company’s common stock is traded on the NYSE American under the Symbol “TMP.”
 
The Company’s strategic initiatives include diversification within its markets, growth of its fee-based businesses, and growth internally and through acquisitions of financial institutions, branches, and financial services businesses. As such, the Company from time to time considers acquiring banks, thrift institutions, branch offices of banks or thrift institutions, or other businesses within markets currently served by the Company or in other locations that would complement the Company’s business or its geographic reach. The Company generally targets merger or acquisition partners that are culturally similar and have experienced management and possess either significant market presence or have potential for improved profitability through financial management, economies of scale and expanded services. The Company has pursued acquisition opportunities in the past, and continues to review new opportunities. 

Business Segments
Banking services consist primarily of attracting deposits from the areas served by the Company’s four banking subsidiaries’ 66 banking offices (45 offices in New York and 21 offices in Pennsylvania) and using those deposits to originate a variety of commercial loans, consumer loans, real estate loans (including commercial loans collateralized by real estate), and leases. The Company’s lending function is managed within the guidelines of a comprehensive Board-approved lending policy. Reporting systems are in place to provide management with ongoing information related to loan production, loan quality, concentrations of credit, loan delinquencies, and nonperforming and potential problem loans. Banking services also include a full suite of products such as debit cards, credit cards, remote deposit, electronic banking, mobile banking, cash management, and safe deposit services.
 
Wealth management services consist of investment management, trust and estate, financial and tax planning as well as life, disability and long-term care insurance services. Wealth management services are provided by the Trust Company under the trade name Tompkins Financial Advisors. Tompkins Financial Advisors has office locations, and services are available, at all four of the Company’s subsidiary banks.
 
Insurance services include property and casualty insurance, employee benefit consulting, and life, long-term care and disability insurance. Tompkins Insurance is headquartered in Batavia, New York. Over the past fourteen years, Tompkins Insurance has acquired smaller insurance agencies in the market areas serviced by the Company’s banking subsidiaries and successfully consolidated them into Tompkins Insurance, most recently acquiring Shepard, Maxwell & Hale Insurance on January 1, 2016 as previously reported. Tompkins Insurance offers services to customers of the Company’s banking subsidiaries by sharing offices with The Bank of Castile, Trust Company, and VIST Bank. In addition to these shared offices, Tompkins Insurance has five stand-alone offices in Western New York, two stand-alone offices in Tompkins County, New York and one stand-alone office in Montgomery County, Pennsylvania.
 
The Company’s principal expenses are interest on deposits, interest on borrowings, and operating and general administrative expenses, as well as provisions for loan and lease losses. Funding sources, other than deposits, include borrowings, securities sold under agreements to repurchase, and cash flow from lending and investing activities.
 

50



Competition
Competition for commercial banking and other financial services is strong in the Company’s market areas. In one or more aspects of its businesses, the Company’s subsidiaries compete with other commercial banks, savings and loan associations, credit unions, finance companies, Internet-based financial services companies, mutual funds, insurance companies, brokerage and investment banking companies, and other financial intermediaries. Some of these competitors have substantially greater resources and lending capabilities and may offer service that the Company does not currently provide. In addition, many of the Company’s non-bank competitors are not subject to the same extensive Federal regulations that govern financial holding companies and Federally-insured banks.
 
Management believes that as a community based financial institution, it is well positioned to establish personalized financial relationships with both commercial customers and individual households. The Company’s community commitment and involvement in its primary market areas, as well as its commitment to quality and personalized financial services, are factors that contribute to the Company’s competitiveness. Management believes that each of the Company’s subsidiary banks can compete successfully in its primary market areas by making prudent lending decisions quickly and more efficiently than its competitors, without compromising asset quality or profitability, although no assurances can be given that such factors will assure success. 

Regulation
Banking, insurance services and wealth management are highly regulated. As a financial holding company with four community banks, a registered investment advisor, and an insurance agency subsidiary, the Company and its subsidiaries are subject to examination and regulation by the Federal Reserve Board (“FRB”), Securities and Exchange Commission (“SEC”), the Federal Deposit Insurance Corporation (“FDIC”), the New York State Department of Financial Services, Pennsylvania Department of Banking and Securities, the Financial Industry Regulatory Authority, and the Pennsylvania Insurance Department.

OTHER IMPORTANT INFORMATION
 
The following discussion is intended to provide an understanding of the consolidated financial condition and results of operations of the Company for the three and six months ended June 30, 2017. It should be read in conjunction with the Company’s Audited Consolidated Financial Statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, and the Unaudited Consolidated Financial Statements and notes thereto included in Part I of this Quarterly Report on Form 10-Q.
 
In this Report, there are comparisons of the Company’s performance to that of a peer group. Unless otherwise stated, this peer group is comprised of the group of 145 domestic bank holding companies with $3 billion to $10 billion in total assets as defined in the Federal Reserve’s “Bank Holding Company Performance Report” for March 31, 2017 (the most recent report available).
 
Forward-Looking Statements
The Company is making this statement in order to satisfy the “Safe Harbor” provision contained in the Private Securities Litigation Reform Act of 1995. The statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact may include forward-looking statements that involve a number of risks and uncertainties. Such forward-looking statements are made based on management’s expectations and beliefs concerning future events impacting the Company and are subject to certain uncertainties and factors relating to the Company’s operations and economic environment, all of which are difficult to predict and many of which are beyond the control of the Company. These uncertainties and factors that could cause actual results of the Company to differ materially from those matters expressed and/or implied by such forward-looking statements. The following factors are among those that could cause actual results to differ materially from the forward-looking statements: changes in general economic, market and regulatory conditions; the development of an interest rate environment that may adversely affect the Company’s interest rate spread, other income or cash flow anticipated from the Company’s operations, investment and/or lending activities; changes in laws and regulations affecting banks, insurance companies, bank holding companies and/or financial holding companies, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act and Basel III; technological developments and changes; the ability to continue to introduce competitive new products and services on a timely, cost-effective basis; governmental and public policy changes, including environmental regulation; protection and validity of intellectual property rights; reliance on large customers; the expenses and reputational damage if there were ever a material cybersecurity breach; financial resources in the amounts, at the times and on the terms required to support the Company’s future businesses; and other factors discussed elsewhere in this Quarterly Report on Form 10-Q and in other reports we file with the SEC, in particular the “Risk Factors” discussed in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. In addition, such forward-looking statements could be affected by general industry and market conditions and growth rates, general economic and political conditions (including changes in economic conditions in the Company’s primary market areas), including interest rate and currency exchange rate fluctuations, and other factors.

 

51



Critical Accounting Policies
The accounting and reporting policies followed by the Company conform, in all material respects, to accounting principles generally accepted in the United States and to general practices within the financial services industry. In the course of normal business activity, management must select and apply many accounting policies and methodologies and make estimates and assumptions that lead to the financial results presented in the Company’s consolidated financial statements and accompanying notes. There are uncertainties inherent in making these estimates and assumptions, which could materially affect the Company’s results of operations and financial position.
 
Management considers accounting estimates to be critical to reported financial results if (i) the accounting estimates require management to make assumptions about matters that are highly uncertain, and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the Company’s financial statements. Management considers the accounting policies relating to the allowance for loan and lease losses (“allowance”), pension and post-retirement benefits, and the review of the securities portfolio for other-than-temporary impairment to be critical accounting policies because of the uncertainty and subjectivity involved in these policies and the material effect that estimates related to these areas can have on the Company’s results of operations. 

For additional information on critical accounting policies and to gain a greater understanding of how the Company’s financial performance is reported, refer to Note 1 – “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements, and the section captioned “Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. There have been no significant changes in the Company’s application of critical accounting policies since December 31, 2016. Refer to Note 3 – “Accounting Standards Updates” in the Notes to Unaudited Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q for a discussion of recent accounting updates.

RESULTS OF OPERATION
 
Performance Summary
Net income for the second quarter of 2017 was $16.9 million or $1.11 diluted earnings per share, compared to $14.8 million or $0.98 diluted earnings per share for the same period in 2016. Net income for the first six months of 2017 was $32.6 million or $2.13 diluted earnings per share compared to $29.1 million or $1.92 diluted earnings per share for the first six months of 2016.

Return on average assets (“ROA”) for the quarter ended June 30, 2017 was 1.07%, compared to 1.02% for the quarter ended June 30, 2016. Return on average shareholders’ equity (“ROE”) for the second quarter of 2017 was 11.85%, compared to 10.98%, for the same period in 2016. For the year-to-date period ended June 30, 2017, ROA and ROE totaled 1.05% and 11.50%, respectively, compared to 1.01% and 10.92% for the same periods in 2016. Tompkins’ year-to-date ROA and ROE compare to the most recent peer average ratios of 1.04% and 9.46%, respectively, ranking Tompkins’ ROA in the 45th percentile and ROE in the 76th percentile of the peer group.
 
Segment Reporting
The Company operates in the following 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, organized under the Tompkins Financial Advisors brand. All other activities are considered banking.
 
Banking Segment
The banking segment reported net income of $15.7 million for the second quarter of 2017, up $2.4 million or 18.0% from net income of $13.3 million for the same period in 2016. For the six months ended June 30, 2017, the banking segment reported net income of $30.2 million, up $3.9 million or 15.0% over the same period in 2016.
 
Net interest income of $50.3 million for the second quarter of 2017 was up $5.4 million or 12.0% over the same period in 2016. For the six months ended June 30, 2017, net interest income of $98.3 million was up $9.4 million or 10.6% compared to the first six months of the prior year. The Company’s growth in average earning assets and stable funding costs contributed to favorable year-over-year comparisons in net interest income.
 
The provision for loan and lease losses was $976,000 for the three months ended June 30, 2017, which was flat compared to the same period in 2016. Provision expense declined slightly for the six months ended June 30, 2017 to $1.7 million from $1.8 million in the first six months of the previous year. The lower provision expense was largely attributable to stable credit quality, partially offset by loan growth experienced during the six months ended June 30, 2017.

52



 
Noninterest income of $6.7 million for the three months ended June 30, 2017 increased $859,000 or 14.7% compared to the same period in 2016 and for the six months ended June 30, 2017 was up $991,000 or 8.2% compared to the six months ended June 30, 2016. The increase in the three and six month results includes: card services fees (up $674,000 and $742,000, respectively) and gain on the sale of other real estate owned (“OREO”) properties (down $24,000 and up $148,000, respectively). Partially offsetting these items was a decrease in gains on sales of available for sale securities (down $240,000 and down $472,000) and service charges on deposit accounts (down $47,000 and down $144,000) during the three and six months ended June 30, 2017, respectively compared to the same periods of 2016.

Noninterest expense of $32.8 million for the second quarter of 2017 and $65.3 million for the six months ended June 30, 2017 was up $2.2 million or 7.1% and up $4.3 million or 7.0%, respectively from the same periods in 2016. The increase was mainly attributed to an increase in salary and wages and employee benefits reflecting normal annual merit and incentive adjustments and higher health insurance costs, respectively, over the comparable periods in the prior year.
 
Insurance Segment
The insurance segment reported net income of $645,000 for the three months ended June 30, 2017, which was down $176,000 or 21.4% compared to the second quarter of 2016. For the six months ended June 30, 2017, net income was down $172,000 or 10.9% compared to the same period prior year. Noninterest income was down $424,000 or 5.6% in the second quarter of 2017, compared to the same period in 2016. For the six months ended June 30, 2017, noninterest income was down $707,000 or 4.7% compared to the same period in 2016. The decrease in noninterest income was mainly in life and health insurance commissions and largely reflects impacts of the sale of certain customer relationships in the Pennsylvania market in the second half of 2016 and first quarter of 2017. Noninterest expenses for the three and six months ended June 30, 2017 were down $101,000 or 1.6% and down $361,000 or 2.9%, respectively, compared to the three and six months ended June 30, 2016, respectively. The decrease in noninterest expense for the second quarter and the six month period ending June 30, 2017 is the result of a decrease in salaries and wages, reflecting a decline in the number of employees.
 
Wealth Management Segment
The wealth management segment reported net income of $598,000 for the three months ended June 30, 2017, which was down $119,000 or 16.6% compared to the second quarter of 2016. For the six months ended June 30, 2017, net income of $1.1 million was down $211,000 or 16.4% compared to prior year. Noninterest income for the second quarter of 2017 was up $59,000 or 1.5% and flat for the first six months of 2017 compared to the same periods in the prior year. Noninterest expenses for the three months ended June 30, 2017 were up $235,000 or 8.2% and were up $355,000 or 6.0% for the six month period ending June 30, 2017 compared to the same period in 2016. The increase in 2017 over 2016 reflects increases in salaries and wages, reflecting annual merit increases and sales commissions.

Net Interest Income
The following tables show average interest-earning assets and interest-bearing liabilities, and the corresponding yield or cost associated with each for the three and six month periods ended June 30, 2017 and 2016.




53



Average Consolidated Statements of Condition and Net Interest Analysis (Unaudited)
 
 
Quarter Ended
 
Quarter Ended
 
 
June 30, 2017
 
June 30, 2016
 
 
Average
 
 
 
 
 
Average
 
 
 
 
 
 
Balance
 
 
 
Average
 
Balance
 
 
 
Average
(Dollar amounts in thousands)
 
(QTD)
 
Interest
 
Yield/Rate
 
(QTD)
 
Interest
 
Yield/Rate
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing balances due from banks
 
$
1,947

 
$
4

 
0.82
%
 
$
1,936

 
$
2

 
0.42
%
Securities (1)
 
 

 
 

 
 

 
 

 
 

 
 

U.S. Government securities
 
1,475,530

 
7,963

 
2.16
%
 
1,464,091

 
7,647

 
2.10
%
Trading securities
 
0

 
0

 
0
%
 
6,920

 
78

 
4.53
%
State and municipal (2)
 
102,488

 
859

 
3.37
%
 
99,493

 
840

 
3.40
%
Other securities (2)
 
3,603

 
32

 
3.56
%
 
3,641

 
30

 
3.31
%
Total securities
 
1,581,621

 
8,854

 
2.25
%
 
1,574,145

 
8,595

 
2.20
%
FHLBNY and FRB stock
 
40,731

 
464

 
4.56
%
 
31,617

 
318

 
4.05
%
Total loans and leases, net of unearned income (2)(3)
 
4,346,354

 
48,098

 
4.44
%
 
3,885,215

 
42,525

 
4.40
%
Total interest-earning assets
 
5,970,653

 
57,420

 
3.86
%
 
5,492,913

 
51,440

 
3.77
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Other assets
 
359,194

 
 

 
 

 
349,474

 
 

 
 

Total assets
 
6,329,847

 
 
 
 

 
5,842,387

 
 
 
 

LIABILITIES & EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing checking, savings,  & money market
 
2,696,258

 
1,203

 
0.18
%
 
2,531,393

 
982

 
0.16
%
Time deposits
 
865,219

 
1,745

 
0.81
%
 
890,864

 
1,704

 
0.77
%
Total interest-bearing deposits
 
3,561,477

 
2,948

 
0.33
%
 
3,422,257

 
2,686

 
0.32
%
Federal funds purchased & securities sold under agreements to repurchase
 
61,233

 
43

 
0.29
%
 
99,015

 
644

 
2.62
%
Other borrowings
 
835,573

 
2,794

 
1.34
%
 
584,193

 
1,586

 
1.09
%
Trust preferred debentures
 
16,577

 
256

 
6.19
%
 
37,566

 
594

 
6.36
%
Total interest-bearing liabilities
 
4,474,860

 
6,041

 
0.54
%
 
4,143,031

 
5,510

 
0.53
%
Noninterest bearing deposits
 
1,219,803

 
 

 
 

 
1,093,113

 
 

 
 

Accrued expenses and other liabilities
 
62,443

 
 

 
 

 
62,960

 
 

 
 

Total liabilities
 
5,757,106

 
 

 
 

 
5,299,104

 
 

 
 

Tompkins Financial Corporation Shareholders’ equity
 
571,271

 
 

 
 

 
541,781

 
 

 
 

Noncontrolling interest
 
1,470

 
 

 
 

 
1,502

 
 

 
 

Total equity
 
572,741

 
 

 
 

 
543,283

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities and equity
 
$
6,329,847

 
 
 
 

 
$
5,842,387

 
 
 
 

Interest rate spread
 
 

 
 

 
3.32
%
 
 

 
 

 
3.23
%
Net interest income/margin on earning assets
 
 

 
51,379

 
3.45
%
 
 

 
45,930

 
3.36
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Tax Equivalent Adjustment
 
 
 
(1,078
)
 
 
 
 
 
(1,023
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income per consolidated financial statements
 
 
 
$
50,301

 
 

 
 

 
$
44,907

 
 







54




Average Consolidated Statements of Condition and Net Interest Analysis (Unaudited)
 
 
Year to Date Period Ended
 
Year to Date Period Ended
 
 
June 30, 2017
 
June 30, 2016
 
 
Average
 
 
 
 
 
Average
 
 
 
 
 
 
Balance
 
 
 
Average
 
Balance
 
 
 
Average
(Dollar amounts in thousands)
 
(QTD)
 
Interest
 
Yield/Rate
 
(QTD)
 
Interest
 
Yield/Rate
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing balances due from banks
 
$
3,572

 
$
6

 
0.34
%
 
$
2,015

 
$
3

 
0.30
%
Securities (1)
 
 

 
 

 
 

 
 

 
 

 
 

U.S. Government securities
 
1,477,512

 
15,621

 
2.13
%
 
1,461,423

 
15,549

 
2.14
%
Trading securities
 
0

 
0

 
0
%
 
7,084

 
158

 
4.49
%
State and municipal (2)
 
101,598

 
1,701

 
3.38
%
 
98,562

 
1,678

 
3.42
%
Other securities (2)
 
3,608

 
64

 
3.58
%
 
3,664

 
61

 
3.35
%
Total securities
 
1,582,718

 
17,386

 
2.22
%
 
1,570,733

 
17,446

 
2.23
%
FHLBNY and FRB stock
 
39,426

 
932

 
4.77
%
 
29,708

 
615

 
4.16
%
Total loans and leases, net of unearned income (2)(3)
 
4,305,304

 
93,772

 
4.39
%
 
3,838,211

 
83,713

 
4.39
%
Total interest-earning assets
 
5,931,020

 
112,096

 
3.81
%
 
5,440,667

 
101,777

 
3.76
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Other assets
 
354,842

 
 

 
 

 
345,662

 
 

 
 

Total assets
 
6,285,862

 
 
 
 

 
5,786,329

 
 
 
 

LIABILITIES & EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing checking, savings,  & money market
 
2,680,639

 
2,265

 
0.17
%
 
2,532,290

 
1,938

 
0.15
%
Time deposits
 
867,571

 
3,471

 
0.81
%
 
879,479

 
3,347

 
0.77
%
Total interest-bearing deposits
 
3,548,210

 
5,736

 
0.33
%
 
3,411,769

 
5,285

 
0.31
%
Federal funds purchased & securities sold under agreements to repurchase
 
69,560

 
151

 
0.44
%
 
112,639

 
1,310

 
2.34
%
Other borrowings
 
813,477

 
5,118

 
1.27
%
 
543,256

 
3,003

 
1.11
%
Trust preferred debentures
 
20,063

 
623

 
6.26
%
 
37,545

 
1,183

 
6.33
%
Total interest-bearing liabilities
 
4,451,310

 
11,628

 
0.53
%
 
4,105,209

 
10,781

 
0.53
%
Noninterest bearing deposits
 
1,204,272

 
 

 
 

 
1,080,375

 
 

 
 

Accrued expenses and other liabilities
 
65,915

 
 

 
 

 
64,946

 
 

 
 

Total liabilities
 
5,721,497

 
 

 
 

 
5,250,530

 
 

 
 

Tompkins Financial Corporation Shareholders’ equity
 
562,896

 
 

 
 

 
534,314

 
 

 
 

Noncontrolling interest
 
1,469

 
 

 
 

 
1,485

 
 

 
 

Total equity
 
564,365

 
 

 
 

 
535,799

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities and equity
 
$
6,285,862

 
 
 
 

 
$
5,786,329

 
 
 
 

Interest rate spread
 
 

 
 

 
3.28
%
 
 

 
 

 
3.23
%
Net interest income/margin on earning assets
 
 

 
100,468

 
3.42
%
 
 

 
90,996

 
3.36
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Tax Equivalent Adjustment
 
 
 
(2,133
)
 
 
 
 
 
(2,051
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income per consolidated financial statements
 
 
 
$
98,335

 
 

 
 

 
$
88,945

 
 


1  Average balances and yields on available-for-sale securities are based on historical amortized cost
2  Interest income includes the tax effects of taxable-equivalent adjustments using a combined New York State and Federal effective income tax rate of 40% to increase tax exempt interest income to taxable-equivalent basis.
3  Nonaccrual loans are included in the average asset totals presented above.  Payments received on nonaccrual loans have been recognized as disclosed in Note 1 of the Company’s consolidated financial statements included in Part 1 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.    


55



Net Interest Income 
Net interest income is the Company’s largest source of revenue, representing 74.2% and 73.9%, respectively, of total revenues for the three and six months ended June 30, 2017, compared to 72.4% and 72.0% for the same periods in 2016. 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 above table shows average interest-earning assets and interest-bearing liabilities, and the corresponding yield or cost associated with each.
 
Taxable-equivalent net interest income for the three and six months ended June 30, 2017, was up 11.9% and 10.4%, respectively, over the same periods in 2016, benefiting from growth in average earning assets, an improved net interest margin and growth in noninterest bearing deposits. Net interest income benefited from a slight shift in the composition of average earning assets, with loans, which carry higher average yields than securities, comprising an increased percentage of average earning assets. For the three and six months ended June 30, 2017, average loans represented 72.8% and 72.6% of average earning assets compared to 70.7% and 70.6% for the same periods in 2016.
 
Taxable-equivalent interest income for the three and six months ended June 30, 2017, was $57.4 million and $112.1 million, respectively, up 11.6% and 10.1% compared to the same periods in 2016. The increase in taxable-equivalent interest income was mainly the result of an increase in average loans, as well as stable to slightly higher yields on average loans. Average loan balances for the three and six months ended June 30, 2017, were up $461.1 million or 11.9% and $467.1 million or 12.2%, respectively, while the average yield on loans increased 4 basis points in the second quarter of 2017 compared to the second quarter of 2016, and was flat for the first six months of 2017 compared to the first six months of 2016. Average securities balances for the three and six months ended June 30, 2017, were up $7.5 million or 0.5% and $12.0 million or 0.8%, respectively, and the average yield on securities was up 5 basis points and down 1 basis point compared to the same periods in 2016.
 
Interest expense for the three and six months ended June 30, 2017, increased by $531,000 or 9.6% and $847,000 or 7.9%, respectively, compared to the same periods in 2016, driven mainly by an increase in the average volume of borrowings and deposits, which supported the growth in average loans. Average interest bearing deposits for the second quarter of 2017 were up $139.2 million or 4.1% compared to the same period in 2016, while year-to-date average interest bearing deposits were up $136.4 million or 4.0% compared to the same period in 2016. Average noninterest bearing deposits for the three and six months ended June 30, 2017 were up $126.7 million or 11.6% and $123.9 million or 11.5%, respectively, compared to the same periods in 2016. Average other borrowings for the three and six months ended June 30, 2017 were up $251.4 million or 43.0% and $270.2 million or 49.7% compared to the same periods in 2016; this increase was mainly in overnight borrowings with the FHLB. The average rate paid on interest bearing deposits during the three and six months ended June 30, 2017, was 0.33% for both periods compared to 0.32% and 0.31% for the same periods in 2016.

Provision for Loan and Lease Losses 
The provision for loan and lease losses represents management’s estimate of the amount necessary to maintain the allowance for loan and lease losses at an adequate level. The provision for loan and lease losses for the three and six months ended June 30, 2017 was $976,000 and $1.7 million, respectively, which was relatively flat compared to the same periods in 2016. The section captioned “Financial Condition – Allowance for Loan and Lease Losses and Nonperforming Assets” below has further details on the allowance for loan and lease losses and asset quality metrics.
 
Noninterest Income 
Noninterest income was $17.5 million for the second quarter of 2017, which was up 2.1% over the second quarter of 2016, and $34.7 million for the first six months of 2017, which was relatively flat compared to the same period prior year. Noninterest income represented 25.8% of total revenue for the second quarter of 2017 and 26.1% for the six months ended June 30, 2017, compared to 27.6% and 28.0% for the same periods in 2016. The decrease is mainly a result of growth in net interest income outpacing the growth in noninterest income.
 
Insurance commissions and fees, the largest component of noninterest income, were $7.1 million for the second quarter of 2017, a decrease of 5.7% from the same period prior year. For the first six months of 2017, insurance commissions and fees were down $869,000 or 5.8% compared to the same period in 2016. The decrease in insurance revenues in the second quarter and first six months of 2017 compared to the same periods in 2016 was mainly due to the sale of certain customer relationships in the second half of 2016 and the first quarter of 2017. In one transaction in 2016 and one transaction in 2017, certain customer relationships in Pennsylvania were sold, thus reducing commissions and fees.
 

56



Investment services income of $3.9 million in the second quarter of 2017 was up $57,000 or 1.5% compared to the second quarter of 2016. For the first six months of 2017, investment services income was up $62,000 or 0.8% compared to the same period in 2016. Investment services income includes trust services, financial planning, wealth management services, and brokerage related services. With fees largely based on the market value and the mix of assets managed, the general direction of the stock market can have a considerable impact on fee income. The fair value of assets managed by, or in custody of, Tompkins was $4.0 billion at June 30, 2017, which is in line with June 30, 2016. The fair value at June 30, 2017 includes $1.1 billion of Company-owned securities where Tompkins Trust Company is custodian.
 
Service charges on deposit accounts were down $47,000 or 2.2% for the second quarter of 2017 compared to the same period in 2016 and were down $144,000 or 3.3% for the first six months of 2017 compared to the same period in 2016. Net overdraft fees, the largest component of service charges on deposit accounts, were up 15.1% and 4.2% for the three and six months ended June 30, 2017 over the same periods in 2016. Net deposit cycle fees were down 29.5% and 16.2% for the three and six months ended June 30, 2017 compared to the same periods in 2016.  The decline in net deposit cycle fees was primarily attributable to customer behaviors.
 
Card services income for the three and six months ended June 30, 2017 was up $674,000 or 33.7% and $742,000 or 18.8% compared to the same periods in 2016. The primary components of card services income are fees related to interchange income and transaction fees for debit card transactions, credit card transactions and ATM usage. The increase in revenue in both the quarter and year to date period included approximately $500,000 of volume based incentives related to our branding agreement with MasterCard.
 
Other income of $1.7 million in the second quarter of 2017 was up 27.7% compared to the same period in 2016. For the first six months of 2017, other income of $3.9 million was up 26.9% compared to the same period in 2016. The significant components of other income are other service charges, increases in cash surrender value of corporate owned life insurance ("COLI"), gains on sales of residential mortgage loans, and income from miscellaneous equity investments. The primary contributer for the increase in the second quarter increase was approximately $130,000 of recoveries of nonaccrued interest on loans previously charged off.
 
Noninterest Expense 
Noninterest expense was $41.6 million for the second quarter of 2017 and $82.9 million for the first six months of 2017, up 5.5% and 5.1%, respectively, compared to the same periods in 2016.
 
Expenses associated with compensation and benefits are the largest component of noninterest expense, representing 61.4% and 61.2% of total noninterest expense for the three and six months ended June 30, 2017. Salaries and wages expense for the three and six months ended June 30, 2017 increased by $1.1 million or 5.6% and $1.6 million or 4.2%, respectively, compared to the same periods in 2016. The increase is mainly due to an increase in the number of employees, and normal merit and market adjustments, as well as higher stock based compensation expense. Pension and other employee related benefits expenses were up $158,000 and $634,000 over the three and six month periods in 2016, mainly as a result of higher costs associated with retirement benefits. For the six months ended June 30, 2017, health insurance expense was also up $382,000 or 12.5% over the first six months of 2016.

Other expense categories, not related to compensation and benefits, for the three and six months ended June 30, 2017, were up approximately $931,000 or 6.2% and $1.8 million or 5.9% over the same periods in 2016. Expenses for the second quarter and year to date period ended June 30, 2017, included $411,000 and $673,000, respectively, of expense related to our core system conversion which was completed in the second quarter of 2017. Core conversion expenses for the quarter and year to date periods in 2016 were $76,000. Higher expenses associated with occupancy, technology and card services also contributed to the increases in the current year over prior year.
 
Income Tax Expense 
The provision for income taxes was $8.2 million for an effective rate of 32.7% for the second quarter of 2017, compared to tax expense of $6.8 million and an effective rate of 31.3% for the same quarter in 2016. For the first six months of 2017, the provision for income taxes was $15.6 million for an effective rate of 32.3% compared to an effective rate of 31.9% for the same period in 2016. The effective rates differ from the U.S. statutory rate of 35.0% primarily due to the effect of tax-exempt income from loans, securities and life insurance assets, and the income tax effects associated with stock based compensation.


57



FINANCIAL CONDITION
 
Total assets were $6.4 billion at June 30, 2017, up $178.3 million or 2.9% over December 31, 2016. The growth over year-end was primarily attributable to growth in originated loans, which were up $206.8 million or 5.4%. This growth was partially offset by expected run-off in acquired loans, which were down $46.3 million or 11.7%. Total deposits increased $125.6 million or 2.7% compared to December 31, 2016. Other borrowings increased $67.2 million or 7.6% from December 31, 2016, as a result of loan growth outpacing deposit growth in the period.

Securities
As of June 30, 2017, the Company’s securities portfolio was $1.57 billion or 24.4% of total assets, compared to $1.57 billion or 25.2% of total assets at year-end 2016. The following table details the composition of available-for-sale and held-to-maturity securities.
 

Available-for-Sale Securities
 
 
 
 
6/30/2017
 
12/31/2016
(in thousands)
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Obligations of U.S. Government sponsored entities
$
526,734

 
$
528,380

 
$
527,057

 
$
527,627

Obligations of U.S. states and political subdivisions
92,151

 
92,445

 
89,910

 
89,056

Mortgage-backed securities - residential, issued by
 

 
 

 
 

 
 

U.S. Government agencies
149,281

 
148,482

 
159,417

 
158,226

U.S. Government sponsored entities
661,251

 
652,387

 
662,724

 
651,430

Non-U.S. Government agencies or sponsored entities
96

 
96

 
116

 
116

U.S. corporate debt securities
2,500

 
2,162

 
2,500

 
2,162

Total debt securities
1,432,013

 
1,423,952

 
1,441,724

 
1,428,617

Equity securities
1,000

 
919

 
1,000

 
921

Total available-for-sale securities
$
1,433,013

 
$
1,424,871

 
$
1,442,724

 
$
1,429,538

 
Held-to-Maturity Securities
 

 
 

 
 

 
 

 
6/30/2017
 
12/31/2016
(in thousands)
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Obligations of U.S. Government sponsored entities
$
131,903

 
$
133,418

 
$
132,098

 
$
132,619

Obligations of U.S. states and political subdivisions
$
8,091

 
$
8,236

 
$
10,021

 
$
10,213

Total held-to-maturity debt securities
$
139,994

 
$
141,654

 
$
142,119

 
$
142,832

  
The decrease in unrealized losses, which reflects the amount that amortized cost exceeds fair value, related to the available-for-sale portfolio was due primarily to changes in market interest rates during the first six months of 2017. Management’s policy is to purchase investment grade securities that on average have relatively short duration, which helps mitigate interest rate risk and provides sources of liquidity without significant risk to capital.
 
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 a result of the other-than-temporary impairment review process, the Company does not consider any investment security held at June 30, 2017 to be other-than-temporarily impaired. Future changes in interest rates or the credit quality and credit support of the underlying issuers may reduce the market value of these and other securities. If such decline is determined to be other than temporary, the Company will record the necessary charge to earnings and/or accumulated other comprehensive income to reduce the securities to their then current fair value.
 

58




 
Loans and Leases  
Loans and leases at June 30, 2017 and December 31, 2016 were as follows:
 
6/30/2017
 
12/31/2016
(in thousands)
Originated
 
Acquired
 
Total
Loans and
Leases
 
Originated

 
Acquired

 
Total Loans
and Leases

Commercial and industrial
 

 
 

 
 

 
 

 
 

 
 

Agriculture
$
89,017

 
$
0

 
$
89,017

 
$
118,247

 
$
0

 
$
118,247

Commercial and industrial other
977,891

 
61,134

 
1,039,025

 
847,055

 
79,317

 
926,372

Subtotal commercial and industrial
1,066,908

 
61,134

 
1,128,042

 
965,302

 
79,317

 
1,044,619

Commercial real estate
 

 
 

 
 

 
 

 
 

 
 

Construction
95,634

 
1,526

 
97,160

 
135,834

 
8,936

 
144,770

Agriculture
120,643

 
257

 
120,900

 
102,509

 
267

 
102,776

Commercial real estate other
1,503,385

 
226,772

 
1,730,157

 
1,431,690

 
241,605

 
1,673,295

Subtotal commercial real estate
1,719,662

 
228,555

 
1,948,217

 
1,670,033

 
250,808

 
1,920,841

Residential real estate
 

 
 

 
 

 
 

 
 

 
 

Home equity
211,179

 
33,530

 
244,709

 
209,277

 
37,737

 
247,014

Mortgages
1,001,630

 
23,726

 
1,025,356

 
947,378

 
25,423

 
972,801

Subtotal residential real estate
1,212,809

 
57,256

 
1,270,065

 
1,156,655

 
63,160

 
1,219,815

Consumer and other
 

 
 

 
 

 
 

 
 

 
 

Indirect
13,088

 
0

 
13,088

 
14,835

 
0

 
14,835

Consumer and other
46,274

 
896

 
47,170

 
44,393

 
826

 
45,219

Subtotal consumer and other
59,362

 
896

 
60,258

 
59,228

 
826

 
60,054

Leases
15,931

 
0

 
15,931

 
16,650

 
0

 
16,650

Total loans and leases
4,074,672

 
347,841

 
4,422,513

 
3,867,868

 
394,111

 
4,261,979

Less: unearned income and deferred costs and fees
(3,917
)
 
0

 
(3,917
)
 
(3,946
)
 
0

 
(3,946
)
Total loans and leases, net of unearned income and deferred
costs and fees
$
4,070,755

 
$
347,841

 
$
4,418,596

 
$
3,863,922

 
$
394,111

 
$
4,258,033

 
Residential real estate loans, including home equity loans were $1.3 billion at June 30, 2017, up $50.3 million or 4.1% compared to December 31, 2016, and comprised 28.7% of total loans and leases at June 30, 2017. Growth in residential loan balances is impacted by the Company’s decision to retain these loans or sell them in the secondary market due to interest rate considerations. The Company’s Asset/Liability Committee meets regularly and establishes standards for selling and retaining residential real estate mortgage originations.
 
The Company may sell residential real estate loans in the secondary market based on interest rate considerations. These residential real estate loans are generally sold to Federal Home Loan Mortgage Corporation (“FHLMC”) or State of New York Mortgage Agency (“SONYMA”) 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 representations and warranties.
 
During the first six months of 2017 and 2016, the Company retained the vast majority of residential mortgage loans originated, selling only $0.5 million and $1.5 million, respectively, recognizing gains on these sales of $23,000 and $35,000, respectively. These residential real estate loans were sold without recourse in accordance with standard secondary market loan sale agreements. When residential mortgage loans are sold, the Company typically retains all servicing rights, which provides the Company with a source of fee income. Mortgage servicing rights totaled $0.7 million at June 30, 2017 and $0.8 million at December 31, 2016


59



Commercial real estate loans and commercial and industrial loans totaled $1.9 billion and $1.1 billion, and represented 44.1% and 25.5%, respectively of total loans as of June 30, 2017. The commercial real estate portfolio was up 1.4% over year-end 2016, while commercial and industrial loans were up 8.0%. As of June 30, 2017, agriculturally-related loans totaled $209.9 million or 4.8% of total loans and leases, compared to $221.0 million or 5.2% of total loans and leases at December 31, 2016. 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 acquired loans in the above table reflect loans acquired in the acquisition of VIST Financial Corp. during the third quarter of 2012. The acquired loans were recorded at fair value pursuant to the purchase accounting guidelines in FASB ASC 805 – “Fair Value Measurements and Disclosures” (as determined by the present value of expected future cash flows) with no valuation allowance (i.e., the allowance for loan losses). Upon acquisition, the Company evaluated whether each acquired loan (regardless of size) was within the scope of ASC 310-30, “Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality”.
The carrying value of acquired loans accounted for in accordance with this guidance was $16.6 million at June 30, 2017 as compared to $22.5 million at December 31, 2016. 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 $331.2 million at June 30, 2017, compared to $371.6 million at December 31, 2016.
 
The Company has adopted comprehensive lending policies, underwriting standards and loan review procedures. Management reviews these policies and procedures on a regular basis. The Company discussed its lending policies and underwriting guidelines for its various lending portfolios in Note 3 – “Loans and Leases” in the Notes to Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. There have been no significant changes in these policies and guidelines since the date of that report. Therefore, both new originations as well as those balances held at June 30, 2017, reflect these policies and guidelines. 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 and the local economic conditions of the communities within those states in which the Company does business. Other than geographic and general economic risks, management is not aware of any material concentrations of credit risk to any industry or individual borrower.
 
The Allowance for Loan and Lease Losses
 
The tables below provide, as of the dates indicated, an allocation of the allowance for probable and inherent loan losses by type. The allocation is neither indicative of the specific amounts or the loan categories in which future charge-offs may occur, nor is it an indicator of future loss trends. The allocation of the allowance to each category does not restrict the use of the allowance to absorb losses in any category. 
(in thousands)
6/30/2017
 
12/31/2016
 
6/30/2016
Allowance for originated loans and leases
 

 
 

 
 

Commercial and industrial
$
10,842

 
$
9,389

 
$
8,937

Commercial real estate
19,121

 
19,836

 
18,229

Residential real estate
5,761

 
5,149

 
4,486

Consumer and other
1,236

 
1,224

 
1,316

Total
$
36,960

 
$
35,598

 
$
32,968

 

60



(in thousands)
6/30/2017

 
12/31/2016

 
6/30/2016

Allowance for acquired loans
 

 
 

 
 

Commercial and industrial
$
50

 
$
0

 
$
47

Commercial real estate
87

 
97

 
65

Residential real estate
54

 
54

 
23

Consumer and other
6

 
6

 
22

Total
$
197

 
$
157

 
$
157

 
As of June 30, 2017, the total allowance for loan and lease losses was $37.2 million, which increased by $1.4 million or 3.9% over year-end 2016. The increase in the allowance compared to year-end 2016 was mainly due to growth in the originated loan portfolio, which was up $206.8 million or 5.4% over year-end 2016. In addition, although most credit quality metrics remained relatively stable for the quarter, the level of Special Mention loans increased during the quarter to $39.0 million, up from $21.0 million at year-end 2016 and up from $21.2 million at June 30, 2016. The increase is largely related to the Company’s agricultural loan portfolio, which has been negatively impacted by lower milk prices over the past 12 months. Though lower prices have negatively impacted cash flow for this group of borrowers, payments on all of the loans in this portfolio were current as of June 30, 2017. The allowance for loan and lease losses covered 178.6% of nonperforming loans and leases as of June 30, 2017, compared to 164.98% at December 31, 2016, and 183.01% at June 30, 2016. The ratio of nonperforming loans and leases to total loans and leases was 0.47% at June 30, 2017 compared to 0.51% at December 31, 2016 and 0.45% at June 30, 2016.
 
The Company’s allowance for originated loan and lease losses totaled $37.0 million at June 30, 2017, which represented 0.91% of total originated loans, down from 0.92% at December 31, 2016, and down from 0.93% at June 30, 2016. Asset quality metrics in the originated portfolio continue to be favorable at June 30, 2017. Originated loans internally-classified as Special Mention, Substandard and Doubtful totaled $58.0 million at June 30, 2017, up from $40.8 million at year-end 2016 and up from $37.1 million at June 30, 2016. As stated above, the increase was in Special Mention loans in the Company's agricultural loan portfolio. Nonaccrual originated loans were $14.3 million as of June 30, 2017, unchanged from year-end 2016, and up from $11.0 million at June 30, 2016. Net charge-offs of originated loans were $86,000 for the six months ended June 30, 2017 compared to net charge-offs of $194,000 for the six months ended June 30, 2016.
 
The allowance for acquired loans at June 30, 2017 was $197,000, up $40,000 compared to both year-end 2016 and at June 30, 2016. As part of the determination of the fair value of acquired loans at the time of acquisition, the Company established a credit mark to provide for future credit losses in the acquired portfolio. To the extent that credit quality deteriorates subsequent to acquisition, such deterioration will result in the establishment of an allowance for the acquired portfolio. The amount of acquired loans internally-classified as Special Mention, Substandard and Doubtful totaled $9.3 million at June 30, 2017, down from $13.7 million at year-end 2016 and $14.5 million at June 30, 2016. Loan pay downs coupled with charge offs contributed to the decrease from June 30, 2016 and year-end 2016. Nonaccrual acquired loans were $2.9 million as of June 30, 2017 compared to $4.7 million at year-end 2016, and $4.8 million at June 30, 2016.  The acquired portfolio had net charge-offs of $257,000 for the six months ended June 30, 2017 compared to net charge-offs of $518,000 for the six months ended June 30, 2016.


61



Activity in the Company’s allowance for loan and lease losses during the first six months of 2017 and 2016 is illustrated in the table below.
 
Analysis of the Allowance for Originated Loan and Lease Losses
(in thousands)
6/30/2017

 
6/30/2016

Average originated loans outstanding during period
$
3,931,211

 
$
3,388,933

Balance of originated allowance at beginning of year
$
35,598

 
$
31,312

ORIGINATED LOANS CHARGED-OFF:
 

 
 

Commercial and industrial
77

 
451

Commercial real estate
21

 
12

Residential real estate
441

 
201

Consumer and other
530

 
361

Total loans charged-off
$
1,069

 
$
1,025

RECOVERIES OF ORIGINATED LOANS PREVIOUSLY CHARGED-OFF:
 

 
 

Commercial and industrial
130

 
107

Commercial real estate
452

 
420

Residential real estate
136

 
32

Consumer and other
265

 
272

Total loans recoveries
$
983

 
$
831

Net loans charged-off (recovered)
86

 
194

Additions to originated allowance charged to operations
1,448

 
1,850

Balance of originated allowance at end of period
$
36,960

 
$
32,968

Allowance for originated loans and leases as a percentage of originated loans and leases
0.91
%
 
0.93
%
Annualized net charge-offs (recoveries) on originated loans to average total originated loans and leases during the period
0.00
%
 
0.01
%
 

62



Analysis of the Allowance for Acquired Loan Losses
(in thousands)
6/30/2017

 
6/30/2016

Average acquired loans outstanding during period
$
374,094

 
$
449,278

Balance of acquired allowance at beginning of year
157

 
692

ACQUIRED LOANS CHARGED-OFF:
 

 
 

Commercial and industrial
74

 
387

Commercial real estate
73

 
182

Residential real estate
152

 
16

Consumer and other
1

 
93

Total loans charged-off
$
300

 
$
678

Commercial real estate
25

 
160

Residential real estate
12

 
0

Consumer and other
$
6

 
$
0

Total loans recovered
$
43

 
$
160

Net loans charged-off
257

 
518

Additions to acquired allowance charged to operations
297

 
(17
)
Balance of acquired allowance at end of period
$
197

 
$
157

Allowance for acquired loans as a percentage of acquired loans outstanding acquired loans and leases
0.06
%
 
0.03
%
Annualized net charge-offs on acquired loans as a percentage of average acquired loans and leases outstanding during the period
0.14
%
 
0.23
%
Annualized total net charge-offs as a percentage of average loans and leases outstanding during the period
0.02
%
 
0.04
%
 
Net loan and lease chargeoffs totaled $343,000 for the six months ended June 30, 2017, compared to $712,000 for the same period in 2016. Annualized net chargeoffs were 0.02% of average total loans and leases, down compared to 0.04% for the same period in 2016. The most recent peer percentage is 0.06%.
 
The provision for loan and lease losses was $1.0 million and $1.7 million for the three and six months ended June 30, 2017, compared to $1.0 million and $1.8 million for the same periods in 2016.


63



Analysis of Past Due and Nonperforming Loans
 

 
 

 
 

(in thousands)
6/30/2017

 
12/31/2016

 
6/30/2016

Loans 90 days past due and accruing


 


 


Commercial and industrial
639

 
0

 
0

Residential real estate
0

 
0

 
89

Total loans 90 days past due and accruing
639

 
0

 
89

Nonaccrual loans
  
 
  
 
  
Commercial and industrial
1,880

 
738

 
206

Commercial real estate
5,688

 
9,076

 
7,493

Residential real estate
9,359

 
9,061

 
8,052

Consumer and other
260

 
166

 
88

Total nonaccrual loans
17,187

 
19,041

 
15,839

Troubled debt restructurings not included above
2,980

 
2,631

 
2,172

Total nonperforming loans and leases
20,806

 
21,672

 
18,100

Other real estate owned
2,331

 
908

 
1,001

Total nonperforming assets
$
23,137

 
$
22,580

 
$
19,101

Allowance as a percentage of nonperforming loans and leases
178.59
%
 
164.98
%
 
183.01
%
Total nonperforming loans and leases as percentage of total loans and leases
0.47
%
 
0.51
%
 
0.45
%
Total nonperforming assets as percentage of total assets
0.36
%
 
0.36
%
 
0.32
%
 
The June 30, 2017, December 31, 2016, and June 30, 2016 columns in the above table exclude $2.6 million, $2.6 million, and $1.9 million, respectively, of acquired loans that are 90 days past due and accruing interest.  These loans were originally recorded at fair value on the acquisition date of August 1, 2012.  These loans are considered to be accruing as we can reasonably estimate future cash flows on these acquired loans and we expect to fully collect the carrying value of these loans.  Therefore, we are accreting the difference between the carrying value of these loans and their expected cash flows into interest income.
 
Nonperforming assets include nonaccrual loans, troubled debt restructurings (“TDR”), and foreclosed real estate/other real estate owned. Nonperforming assets represented 0.36% of total assets at June 30, 2017, unchanged from December 31, 2016, and up from 0.32% at June 30, 2016. The Company’s ratio of nonperforming assets to total assets continues to compare favorably to our peer group’s most recent ratio of 0.55% at March 31, 2017. Total nonperforming assets of $23.1 million at June 30, 2017 were up$557,000 compared to December 31, 2016, and $ 4.0 million compared to June 30, 2016. During the first quarter of 2017, a larger commercial real estate loan moved from nonaccrual loans into other real estate owned, thus resulting in a decrease in nonperforming loans and leases compared to year end 2016. Total nonperforming loans and leases of $20.8 million were down $0.9 million or 4.0% from year end 2016, and up $2.7 million or 15.0% from June 30, 2016. A breakdown of nonperforming loans and leases by portfolio segment is shown above.

Loans are considered modified in a TDR when, due to a borrower’s financial difficulties, the Company makes a concession(s) to the borrower that it would not otherwise consider and the borrower could not obtain elsewhere. These modifications may include, among others, an extension of the term of the loan, and granting a period when interest-only payments can be made, with the principal payments made over the remaining term of the loan or at maturity. TDRs are included in the above table within the following categories: “loans 90 days past due and accruing”, “nonaccrual loans”, or “troubled debt restructurings not included above”. Loans in the latter category include loans that meet the definition of a TDR but are performing in accordance with the modified terms and therefore classified as accruing loans. At June 30, 2017 the Company had $8.1 million in TDRs, and of that total $5.1 million were reported as nonaccrual and $3.0 million were considered performing and included in the table above.
 
In general, the Company places a loan on nonaccrual status if principal or interest payments become 90 days or more past due and/or management deems the collectability of the principal and/or interest to be in question, as well as when required by applicable regulations. Although in nonaccrual status, the Company may continue to receive payments on these loans. These payments are generally recorded as a reduction to principal, and interest income is recorded only after principal recovery is reasonably assured. 


64



The Company’s recorded investment in loans and leases that are considered impaired totaled $14.9 million at June 30, 2017, compared to $18.6 million at December 31, 2016 and $16.5 million at June 30, 2016. A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans consist of our non-homogenous nonaccrual loans, and all TDRs. Specific reserves on individually identified impaired loans that are not collateral dependent are measured based on the present value of expected future cash flows discounted at the original effective interest rate of each loan. For loans that are collateral dependent, impairment is measured based on the fair value of the collateral less estimated selling costs, and such impaired amounts are generally charged off.
 
The year to date average recorded investment in impaired loans and leases was $17.1 million at June 30, 2017, compared to $16.2 million at June 30, 2016. At June 30, 2017, there was a specific reserve of $418,000 on impaired loans compared to $493,000 of specific reserves at December 31, 2016. The specific reserve of $418,000 at June 30, 2017 includes specific reserves of $293,000 for the originated portfolio, and specific reserves of $125,000 for the acquired portfolio. The majority of impaired loans are collateral dependent impaired loans that have limited exposure or require limited specific reserve because of the amount of collateral support with respect to these loans and previous charge-offs. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured. In these cases, interest is recognized on a cash basis.
 
The ratio of the allowance to nonperforming loans and leases (loans past due 90 days and accruing, nonaccrual loans and restructured troubled debt) was 178.59% at June 30, 2017, improved from 164.98% at December 31, 2016, and down slightly from the 183.01% at June 30, 2016. The Company’s nonperforming loans and leases are mostly made up of collateral dependent impaired loans with limited exposure or require limited specific reserve due to the level of collateral available with respect to these loans and/or previous charge-offs.
 
Management reviews the loan portfolio continuously for evidence of potential problem loans and leases. Potential problem loans and leases are loans and leases that are currently performing in accordance with contractual terms, but where known information about possible credit problems of the related borrowers causes management to have doubt as to the ability of such borrowers to comply with the present loan payment terms and may result in such loans and leases becoming nonperforming at some time in the future. Management considers loans and leases classified as Substandard, which continue to accrue interest, to be potential problem loans and leases. The Company, through its internal loan review function, identified 30 commercial relationships from the originated portfolio and 15 commercial relationships from the acquired portfolio totaling $12.1 million and $6.2 million, respectively at June 30, 2017 that were potential problem loans. At December 31, 2016, the Company had identified 27 relationships totaling $7.6 million in the originated portfolio and 18 relationships totaling $8.4 million in the acquired portfolio that were potential problem loans. Of the 30 commercial relationships in the originated portfolio at June 30, 2017 that were Substandard, there were 4 relationships that equaled or exceeded $1.0 million, which in aggregate totaled $7.7 million, the largest of which was $3.1 million. Of the 15 commercial relationships from the acquired loan portfolio at June 30, 2017 that were Substandard, there was 1 relationship that equaled or exceeded $1.0 million, which in aggregate totaled $2.0 million. The Company continues to monitor these potential problem relationships; however, management cannot predict the extent to which continued weak economic conditions or other factors may further impact borrowers. These loans remain in a performing status due to a variety of factors, including payment history, the value of collateral supporting the credits, and personal or government guarantees. These factors, when considered in the aggregate, give management reason to believe that the current risk exposure on these loans does not warrant accounting for these loans as nonperforming. However, these loans do exhibit certain risk factors, which have the potential to cause them to become nonperforming. Accordingly, management’s attention is focused on these credits, which are reviewed on at least a quarterly basis. 


65



Capital
Total equity was $576.9 million at June 30, 2017, an increase of $27.5 million or 5.0% from December 31, 2016. The increase reflects growth in retained earnings, additional paid-in capital, and a decrease in accumulated other comprehensive losses.
 
Additional paid-in capital increased by $5.1 million, from $357.4 million at December 31, 2016, to $362.6 million at June 30, 2017. The increase is primarily attributable to the following: $2.3 million related to shares issued under the employee stock ownership plan, $2.0 million related to shares issued in connection with the dividend reinvestment plan, and $1.4 million related to stock based compensation. Retained earnings increased by $19.0 million from $230.2 million at December 31, 2016, to $249.2 million at June 30, 2017, reflecting net income of $32.6 million less dividends paid of $13.6 million. Accumulated other comprehensive loss decreased from a net loss of $37.1 million at December 31, 2016, to a net loss of $33.6 million at June 30, 2017, reflecting a $3.0 million decrease in unrealized losses on available-for-sale securities due to changes in market rates, and a $0.5 million increase related to post-retirement benefit plans. In connection with the effectiveness of the Basel III Capital Rules on January 1, 2015, the Company elected to opt-out of the requirement to include most components of other comprehensive income in regulatory capital. Accordingly, amounts reported as accumulated other comprehensive income/loss related to net unrealized gain or loss on available-for-sale securities and the funded status of the Company’s defined benefit post-retirement benefit plans do not increase or reduce regulatory capital and are not included in the calculation of risk-based capital and leverage ratios.
 
Cash dividends paid in the first six months of 2017 totaled approximately $13.6 million, representing 41.8% of year to date 2017 earnings. Cash dividends of $0.90 per common share paid in the first six months of 2017 were up 2.3% over cash dividends of $0.88 per common share paid in the first six months of 2016.
 
On July 21, 2016, the Company’s Board of Directors authorized a stock repurchase plan for the Company to repurchase up to 400,000 shares of the Company’s common stock (the "2016 Repurchase Plan"). Purchases may be made over the 24 months following adoption of the plan. The repurchase program may be suspended, modified or terminated by the Board of Directors at any time for any reason. The 2016 Repurchase Plan replaced the Company’s 400,000 share repurchase plan announced on July 25, 2014 (the “2014 Repurchase Plan”).
 
The Company repurchased 22,356 shares under the 2014 Repurchase Plan during the first six months of 2016, at an average price of $52.18. As of June 30, 2017, the Company had not purchased any shares under the 2016 Repurchase Plan.
 
The Company and its subsidiary banks are subject to various regulatory capital requirements administered by Federal bank regulatory agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on the Company’s business, results of operation and financial condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action (PCA), banks must meet specific guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classifications of the Company and its subsidiary banks are also subject to qualitative judgments by regulators concerning components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the maintenance of minimum amounts and ratios of common equity Tier 1 capital, Total capital and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes that the Company and its subsidiary banks meet all capital adequacy requirements to which they are subject.

In addition to setting higher minimum capital ratios, the Basel III Capital Rules introduced a capital conservation buffer, which must be added to each of the minimum capital ratios and is designed to absorb losses during periods of economic stress. The capital conservation buffer is being phased-in over five years beginning on January 1, 2016 and ranges from 0.625% in 2016, to 1.25% in 2017, to 1.875% in 2018 and to 2.5% when fully phased-in on January 1, 2019.




66



The following table provides a summary of the Company’s capital ratios as of June 30, 2017
REGULATORY CAPITAL ANALYSIS
June 30, 2017
Actual
 
Well Capitalized Requirement
(dollar amounts in thousands)
Amount
 
Ratio
 
Amount
 
Ratio
Total Capital (to risk weighted assets)
$
564,667

 
12.45
%
 
$
453,468

 
10.00
%
Tier 1 Capital (to risk weighted assets)
$
525,647

 
11.59
%
 
$
362,774

 
8.00
%
Tier 1 Common Equity (to risk weighted assets)
$
509,041

 
11.23
%
 
$
294,754

 
6.50
%
Tier 1 Capital (to average assets)
$
525,647

 
8.43
%
 
$
311,688

 
5.00
%
 
On June 30, 2017, the Company’s capital ratios exceeded the minimum required capital ratios plus the required conservation buffer, the minimum required capital ratios plus the fully phased-in capital conservation buffer, and the minimum required capital ratios for well capitalized institutions. The capital levels required to be considered well capitalized, presented in the above table, are based upon prompt corrective action regulations, as amended to reflect the changes under Basel III Capital Rules.

Total capital as a percent of risk weighted assets increased to 12.5% at June 30, 2017, compared with 12.2% as of December 31, 2016. Tier 1 capital as a percent of risk weighted assets increased slightly from 11.4% at the end of 2016 to 11.6% as of June 30, 2017. Tier 1 capital as a percent of average assets was 8.4% at June 30, 2017, which is unchanged from December 31, 2016. Common equity tier 1 capital was 11.2% at the end of the second quarter of 2017, up slightly from 11.0% at the end of 2016.

On January 31, 2017, the Company redeemed all of the trust preferred of Tompkins Capital Trust I for an aggregate of $20.5 million, at a redemption price equal to 100% of the liquidation amount of the securities ($1,000 per security), plus any accrued and unpaid interest up to the redemption date.

As of June 30, 2017, the capital ratios for the Company’s subsidiary banks also exceeded the minimum required capital ratios plus the required conservation buffer, the minimum required capital ratios plus the fully phased-in capital conservation buffer, and the minimum required capital ratios for well capitalized institutions.
 
Deposits and Other Liabilities
Total deposits of $4.8 billion at June 30, 2017 increased $125.6 million or 2.7% from December 31, 2016. The increase from year-end 2016 was comprised mainly of increases in money market, savings and interest bearing checking deposits, which in aggregate were up $125.0 million. The growth in deposits reflects increases in municipal balances as well as both personal and business balances over year end.
 
The most significant source of funding for the Company is core deposits. The Company defines core deposits as total deposits less time deposits of $250,000 or more, brokered deposits and municipal money market deposits. Core deposits grew by $132.7 million or 3.5% to $3.9 billion at June 30, 2017, from $3.7 billion at year-end 2016. Core deposits represented 81.7% of total deposits at June 30, 2017, compared to 81.1% of total deposits at December 31, 2016.
 
Municipal money market savings accounts totaled $540.0 million at June 30, 2017 which was an increase of 6.2% compared to year-end 2016. 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 an additional inflow at the end of March from the electronic deposit of state funds.
 
The Company uses both retail and wholesale repurchase agreements. Retail repurchase agreements are arrangements with local customers of the Company, in which the Company agrees to sell securities to the customer with an agreement to repurchase those securities at a specified later date. Retail repurchase agreements totaled $50.4 million at June 30, 2017, and $59.1 million at December 31, 2016. Management generally views local repurchase agreements as an alternative to large time deposits.
 
The Company’s other borrowings totaled $952.0 million at June 30, 2017, up $67.2 million or 7.6% from $884.8 million at December 31, 2016. Borrowings increased due to seasonal deposit runoff. Borrowings at June 30, 2017 included $500.0 million in FHLB overnight advances, $440.0 million of FHLB term advances, and a $12.0 million advance from a bank. Borrowings at year-end 2016 included $503.8 million in overnight advances from FHLB, $365.0 million of FHLB term advances, and a $16.0 million advances from a bank. Of the $440.0 million in FHLB term advances at June 30, 2017, $260.0 million is due in over one year.
 

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Liquidity
The objective of liquidity management is to ensure the availability of adequate funding sources to satisfy the demand for credit, deposit withdrawals, and business investment opportunities. The Company’s large, stable core deposit base and strong capital position are the foundation for the Company’s liquidity position. The Company uses a variety of resources to meet its liquidity needs, which include deposits, cash and cash equivalents, short-term investments, cash flow from lending and investing activities, repurchase agreements, and borrowings. The Company’s Asset/Liability Management Committee monitors asset and liability positions of the Company’s subsidiary banks individually and on a combined basis. The Committee reviews periodic reports on liquidity and interest rate sensitivity positions. Comparisons with industry and peer groups are also monitored. The Company’s strong reputation in the communities it serves, along with its strong financial condition, provides access to numerous sources of liquidity as described below. Management believes these diverse liquidity sources provide sufficient means to meet all demands on the Company’s liquidity that are reasonably likely to occur.
 
Core deposits, discussed above under “Deposits and Other Liabilities”, are a primary and low cost funding source obtained primarily through the Company’s branch network. In addition to core deposits, the Company uses non-core funding sources to support asset growth. These non-core funding sources include time deposits of $250,000 or more, brokered time deposits, national deposit listing services, municipal money market deposits, bank borrowings, securities sold under agreements to repurchase and overnight and term advances from the FHLB. Rates and terms are the primary determinants of the mix of these funding sources. Non-core funding sources of $1.9 billion at June 30, 2017 increased $41.4 million or 2.3% as compared to year end 2016. The increase in non-core funding sources reflects mainly an increase in term borrowings with the FHLB and municipal deposits, partially offset by a decrease in brokered deposits compared to year-end 2016. Non-core funding sources, as a percentage of total liabilities, were 32.0% at June 30, 2017, compared to 32.2% at December 31, 2016
 
Non-core funding sources may require securities to be pledged against the underlying liability. Securities carried at $1.2 billion at June 30, 2017 and December 31, 2016, were either pledged or sold under agreements to repurchase. Pledged securities represented 78.8% of total securities at June 30, 2017, compared to 75.0% of total securities at December 31, 2016. The increase is attributable to the growth of deposits from municipal customers and the shift of investment balances into higher yielding loans.
 
Cash and cash equivalents totaled $78.2 million as of June 30, 2017 which increased from $64.0 million at December 31, 2016. Short-term investments, consisting of securities due in one year or less, increased from $25.5 million at December 31, 2016, to $44.7 million on June 30, 2017.
 
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 $801.0 million at June 30, 2017 compared with $810.0 million at December 31, 2016. Outstanding principal balances of residential mortgage loans, consumer loans, and leases totaled approximately $1.3 billion at June 30, 2017, unchanged compared with year end 2016. Aggregate amortization from monthly payments on these assets provides significant additional cash flow to the Company.

The Company's liquidity is enhanced by ready access to national and regional wholesale funding sources including Federal funds purchased, repurchase agreements, brokered certificates of deposit, and FHLB advances. Through its subsidiary banks, the Company has borrowing relationships with the FHLB and correspondent banks, which provide secured and unsecured borrowing capacity. At June 30, 2017, the unused borrowing capacity on established lines with the FHLB was $1.0 billion.

As members of the FHLB, the Company’s subsidiary banks can use certain unencumbered mortgage-related assets and securities to secure additional borrowings from the FHLB. At June 30, 2017, total unencumbered residential mortgage loans and securities were $370.3 million. Additional assets may also qualify as collateral for FHLB advances upon approval of the FHLB.
 
The Company has not identified any trends or circumstances that are reasonably likely to result in material increases or decreases in liquidity in the near term.
 

 

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Item 3.
Quantitative and Qualitative Disclosure About Market Risk
 
Interest rate risk is the primary market risk category associated with the Company’s operations. Interest rate risk refers to the volatility of earnings caused by changes in interest rates. The Company manages interest rate risk using income simulation to measure interest rate risk inherent in its on-balance sheet and off-balance sheet financial instruments at a given point in time. The simulation models are used to estimate the potential effect of interest rate shifts on net interest income for future periods. Each quarter, the Company’s Asset/Liability Management Committee reviews the simulation results to determine whether the exposure of net interest income to changes in interest rates remains within levels approved by the Company’s Board of Directors. The Committee also considers strategies to manage this exposure and incorporates these strategies into the investment and funding decisions of the Company. The Company does not currently use derivatives, such as interest rate swaps, to manage its interest rate risk exposure, but may consider such instruments in the future.
 
The Company’s Board of Directors has set a policy that interest rate risk exposure will remain within a range whereby net interest income will not decline by more than 10% in one year as a result of a 100 basis point parallel change in rates. Based upon the simulation analysis performed as of May 31, 2017, a 200 basis point parallel upward change in interest rates over a one-year time frame would result in a one-year decrease in net interest income from the base case of approximately 1.3%, while a 100 basis point parallel decline in interest rates over a one-year period would result in an decrease in one-year net interest income from the base case of 1.6%. The simulation assumes no balance sheet growth and no management action to address balance sheet mismatches.
 
The decrease in net interest income in the rising rate scenario is a result of the balance sheet showing a more liability sensitive position over a one year time horizon. As such, in the short-term net interest income is expected to trend slightly below the base assumption, as upward adjustments to rate sensitive deposits and short-term funding outpace increases to asset yields which are concentrated in intermediate to longer-term products. As intermediate and longer-term assets continue to reprice/adjust into higher rate environment and funding costs stabilize, net interest income is expected to trend upwards.

The exposure in the 100 basis point decline scenario results from the Company’s assets repricing downward to a greater degree than the rates on the Company’s interest-bearing liabilities, mainly deposits. Rates on savings and money market accounts are at low levels given the historically low interest rate environment experienced in recent years. In addition, the model assumes that prepayments accelerate in the down interest rate environment resulting in additional pressure on asset yields as proceeds are reinvested at lower rates.

The most recent simulation of a base case scenario, which assumes interest rates remain unchanged from the date of the simulation, reflects a net interest margin that is stable to higher over the next 12 to 18 months.

Although the simulation model is useful in identifying potential exposure to interest rate movements, actual results may differ from those modeled as the repricing, maturity, and prepayment characteristics of financial instruments may change to a different degree than modeled. In addition, the model does not reflect actions that management may employ to manage the Company’s interest rate risk exposure. The Company’s current liquidity profile, capital position, and growth prospects, offer a level of flexibility for management to take actions that could offset some of the negative effects of unfavorable movements in interest rates. Management believes the current exposure to changes in interest rates is not significant in relation to the earnings and capital strength of the Company.
 
In addition to the simulation analysis, management uses an interest rate gap measure. The table below is a Condensed Static Gap Report, which illustrates the anticipated repricing intervals of assets and liabilities as of June 30, 2017. The Company’s one-year net interest rate gap was a negative $507.7 million or 7.91% of total assets at June 30, 2017, compared with a negative $520.7 million or 8.35% of total assets at December 31, 2016. A negative gap position exists when the amount of interest-bearing liabilities maturing or repricing exceeds the amount of interest-earning assets maturing or repricing within a particular time period. This analysis suggests that the Company’s net interest income is moderately more vulnerable to an increasing rate environment than it is to a prolonged declining interest rate environment. An interest rate gap measure could be significantly affected by external factors such as a rise or decline in interest rates, loan or securities prepayments, and deposit withdrawals.
 

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Condensed Static Gap – June 30, 2017
 
 
 
 
Repricing Interval
 
 
(in thousands)
Total
 
0-3 months
 
3-6 months
 
6-12 months
 
Cumulative 12 months
 
 
 
 
 
 
 
 
 
 
Interest-earning assets1 
$
6,039,413

 
$
1,241,576

 
$
235,349

 
$
475,773

 
$
1,952,698

Interest-bearing liabilities
4,489,226

 
1,961,850

 
171,596

 
326,923

 
2,460,369

Net gap position
 

 
(720,274
)
 
63,753

 
148,850

 
(507,671
)
Net gap position as a percentage of total assets
 

 
(11.23
)%
 
0.99
%
 
2.32
%
 
(7.91
)%
 
1 Balances of available securities are shown at amortized cost 


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Item 4.
Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of June 30, 2017. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Report on Form 10-Q, the Company’s disclosure controls and procedures were effective.
 
Changes in Internal Control Over Financial Reporting
 
There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2017, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
PART II - OTHER INFORMATION
 
Item 1.
Legal Proceedings
 
Due to the nature of the Company’s business, the Company is party to a certain amount of litigation arising out of the ordinary course of the Company’s business. In the opinion of management, there are no pending claims which, if determined adversely, would have a material effect on the Company’s results of operations or financial condition.
 
Item 1A.
Risk Factors
 
There have been no material changes in the risk factors previously disclosed under Item 1A. of the Company’s Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2016.
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
Issuer Purchases of Equity Securities
 
 
Total Number of Shares Purchased (a)

 
Average Price Paid Per Share (b)

 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (c)

 
Maximum Number  of Shares that May Yet Be Purchased Under the Plans or Programs (d)

 
 
 
 
 
 
 
 
April 1, 2017 through April 30, 2017
1,469

 
$
78.72

 
0

 
400,000

 
 
 
 
 
 
 
 
May 1, 2017 through May 31, 2017
5,560

 
83.97

 
0

 
400,000

 
 
 
 
 
 
 
 
June 1, 2017 through June 30, 2017
0

 
0

 
0

 
400,000

 
 
 
 
 
 
 
 
Total
7,029

 
$
162.69

 
0

 
400,000

 
Included in the table above are 1,408 shares purchased on the open market in April 2017, at an average cost of $78.55, and 449 shares purchased on the open market in May 2017, at an average cost of $81.11, by the trustee of the rabbi trust established by the Company under the Company’s Stock Retainer Plan For Eligible Directors of Tompkins Financial Corporation and Participating Subsidiaries, which were part of the director deferred compensation under that plan. In addition, the table includes 61 shares in April 2017 and 5,111 shares in May 2017 delivered to the Company by employees at an average cost of $82.67 and $84.22; respectively, to satisfy mandatory tax withholding requirements upon the vesting of restricted stock under the Company's 2009 Equity Plan. 


71



On July 21, 2016, the Company’s Board of Directors authorized a stock repurchase plan for the Company to repurchase up to 400,000 shares of the Company’s common stock. Purchases may be made over the 24 months following adoption of the plan. The repurchase program may be suspended, modified or terminated by the Board of Directors at any time for any reason. No shares have been repurchased under this Plan as of the date of this report.

Recent Sales of Unregistered Securities
 
None
 
Item 3.
Defaults Upon Senior Securities
 
None
 
Item 4.
Mine Safety Disclosures
 
Not applicable
 
Item 5.
Other Information
 
None
    
Item 6.
Exhibits
 
The information called for by this item is incorporated by reference to the Exhibit Index included in this Quarterly Report on Form 10-Q, immediately following the signature page.
 


72



SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Date:
August 8, 2017
 
TOMPKINS FINANCIAL CORPORATION
 
By:
/S/ Stephen S. Romaine
 
 
Stephen S. Romaine
 
 
President and Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
By:
/S/ Francis M. Fetsko
 
 
Francis M. Fetsko
 
 
Executive Vice President, Chief Financial Officer, and Chief Operating Officer
 
(Principal Financial Officer)
 
 
(Principal Accounting Officer)
 
 


73



EXHIBIT INDEX
 
Exhibit Number
Description
Pages
 
 
 
31.1
Certification of Principal Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
 
 
 
 
31.2
Certification of Principal Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
 
 
 
 
32.1
Certification of Principal Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, 18 U.S.C. Section 1350
 
 
 
 
32.2
Certification of Principal Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, 18 U.S.C. Section 1350 
 
 
 
 
101
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, formatted in XBRL (eXtensible Business Reporting Language):  (i) Condensed Consolidated Statements of Condition as of June 30, 2017 and December 31, 2016; (ii) Condensed Consolidated Statements of Income for the three and six months ended June 30, 2017 and 2016; (iii) Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2017 and 2016; (iv) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016; (v) Condensed Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2017 and 2016; and (vi) Notes to Unaudited Condensed Consolidated Financial Statements.  
 





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