Tompkins Financial(TMP) - 2019 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis of Tompkins Financial Corporation's performance and condition Item 1 – Condensed Financial Statements Presents unaudited condensed consolidated financial statements and notes, showing slight decreases in net income and EPS due to higher funding costs Consolidated Statements of Condition Total assets decreased by $104.0 million, while total equity increased by $36.8 million, reflecting changes in liabilities | Metric | June 30, 2019 (Unaudited) (in thousands) | December 31, 2018 (Audited) (in thousands) | Change (Absolute) (in thousands) | Change (%) | | :----------------------------------- | :-------------------------- | :-------------------------- | :---------------- | :--------- | | Total Assets | $6,654,390 | $6,758,436 | $(104,046) | -1.54% | | Total Liabilities | $5,996,713 | $6,137,565 | $(140,852) | -2.29% | | Total Equity | $657,677 | $620,871 | $36,806 | 5.93% | - Net Loans and Leases increased by $24.483 million (0.51%) from $4.791 billion at December 31, 2018, to $4.815 billion at June 30, 2019[10] - Total Deposits increased by $99.938 million (2.04%) from $4.889 billion at December 31, 2018, to $4.989 billion at June 30, 2019[10] Consolidated Statements of Income Net income attributable to Tompkins Financial Corporation decreased for both the quarter and six months due to higher interest expenses | Metric | 3 Months Ended 6/30/2019 (in thousands) | 3 Months Ended 6/30/2018 (in thousands) | Change (Absolute) (in thousands) | Change (%) | | :----------------------------------- | :----------------------- | :----------------------- | :---------------- | :--------- | | Total Interest Income | $66,093 | $62,143 | $3,950 | 6.36% | | Total Interest Expense | $13,775 | $9,429 | $4,346 | 46.10% | | Net Interest Income | $52,318 | $52,714 | $(396) | -0.75% | | Provision for Loan and Lease Losses | $601 | $1,045 | $(444) | -42.49% | | Total Noninterest Income | $18,520 | $21,158 | $(2,638) | -12.47% | | Total Noninterest Expenses | $46,070 | $44,985 | $1,085 | 2.41% | | Net Income Attributable to Tompkins Financial Corporation | $19,392 | $22,059 | $(2,667) | -12.09% | | Basic Earnings Per Share | $1.27 | $1.44 | $(0.17) | -11.81% | | Diluted Earnings Per Share | $1.27 | $1.43 | $(0.16) | -11.19% | | Metric | 6 Months Ended 6/30/2019 (in thousands) | 6 Months Ended 6/30/2018 (in thousands) | Change (Absolute) (in thousands) | Change (%) | | :----------------------------------- | :----------------------- | :----------------------- | :---------------- | :--------- | | Total Interest Income | $131,021 | $122,283 | $8,738 | 7.15% | | Total Interest Expense | $26,789 | $16,882 | $9,907 | 58.68% | | Net Interest Income | $104,232 | $105,401 | $(1,169) | -1.11% | | Provision for Loan and Lease Losses | $1,046 | $1,612 | $(566) | -35.11% | | Total Noninterest Income | $37,927 | $38,988 | $(1,061) | -2.72% | | Total Noninterest Expenses | $90,279 | $88,706 | $1,573 | 1.77% | | Net Income Attributable to Tompkins Financial Corporation | $40,432 | $42,495 | $(2,063) | -4.85% | | Basic Earnings Per Share | $2.64 | $2.78 | $(0.14) | -5.04% | | Diluted Earnings Per Share | $2.63 | $2.76 | $(0.13) | -4.71% | Consolidated Statements of Comprehensive Income Total comprehensive income significantly increased for both periods, driven by a positive shift in other comprehensive income | Metric | 3 Months Ended 6/30/2019 (in thousands) | 3 Months Ended 6/30/2018 (in thousands) | Change (Absolute) (in thousands) | Change (%) | | :-------------------------------------------------------- | :----------------------- | :----------------------- | :---------------- | :--------- | | Net income attributable to noncontrolling interests and Tompkins Financial Corporation | $19,424 | $22,091 | $(2,667) | -12.07% | | Other comprehensive income (loss), net of tax | $10,776 | $(3,819) | $14,595 | -382.19% | | Total comprehensive income attributable to Tompkins Financial Corporation | $30,168 | $18,240 | $11,928 | 65.39% | | Metric | 6 Months Ended 6/30/2019 (in thousands) | 6 Months Ended 6/30/2018 (in thousands) | Change (Absolute) (in thousands) | Change (%) | | :-------------------------------------------------------- | :----------------------- | :----------------------- | :---------------- | :--------- | | Net income attributable to noncontrolling interests and Tompkins Financial Corporation | $40,496 | $42,559 | $(2,063) | -4.85% | | Other comprehensive income (loss), net of tax | $22,991 | $(18,205) | $41,196 | -226.29% | | Total comprehensive income attributable to Tompkins Financial Corporation | $63,423 | $24,290 | $39,133 | 161.11% | Consolidated Statements of Cash Flows Net cash provided by operating activities increased, while investing activities shifted from usage to provision, and financing activities reversed | Metric | 6 Months Ended 6/30/2019 (in thousands) | 6 Months Ended 6/30/2018 (in thousands) | Change (Absolute) (in thousands) | Change (%) | | :---------------------------------------- | :----------------------- | :----------------------- | :---------------- | :--------- | | Net Cash Provided by Operating Activities | $46,009 | $40,172 | $5,837 | 14.53% | | Net Cash Provided by (Used in) Investing Activities | $152,333 | $(118,859) | $271,192 | -228.16% | | Net Cash (Used in) Provided by Financing Activities | $(197,718) | $77,057 | $(274,775) | -356.59% | | Net Increase/Decrease in Cash and Cash Equivalents | $624 | $(1,630) | $2,254 | -138.28% | - Cash paid for interest increased by $9.541 million (54.23%) from $17.594 million in 2018 to $27.135 million in 2019 for the six months ended June 30[21] - Cash paid for taxes decreased by $7.243 million (50.47%) from $14.351 million in 2018 to $7.108 million in 2019 for the six months ended June 30[21] Consolidated Statements of Changes in Shareholders' Equity Total equity increased by $36.8 million, primarily due to net income and a reduction in accumulated other comprehensive losses | Metric | 6 Months Ended 6/30/2019 (in thousands) | 6 Months Ended 6/30/2018 (in thousands) | Change (Absolute) (in thousands) | Change (%) | | :-------------------------------------------------------- | :----------------------- | :----------------------- | :---------------- | :--------- | | Total Equity (Beginning Balance) | $620,871 | $576,202 | $44,669 | 7.75% | | Net income attributable to noncontrolling interests and Tompkins Financial Corporation | $40,496 | $42,559 | $(2,063) | -4.85% | | Other comprehensive income (loss) | $22,991 | $(18,205) | $41,196 | -226.29% | | Cash dividends | $(15,315) | $(14,664) | $(651) | 4.44% | | Common stock repurchased and returned to unissued status | $(12,284) | $(1,205) | $(11,079) | 919.42% | | Total Equity (Ending Balance) | $657,677 | $590,649 | $67,028 | 11.35% | - Accumulated other comprehensive loss decreased from $(63.165) million at January 1, 2019, to $(40.174) million at June 30, 2019, primarily due to a $22.991 million increase in other comprehensive income[24] Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures for the financial statements, covering business operations, accounting policies, and specific financial items 1. Business Tompkins Financial Corporation is a financial holding company providing diverse banking, wealth management, and insurance services through its subsidiaries - Tompkins Financial Corporation is headquartered in Ithaca, New York, and is registered as a Financial Holding Company with the Federal Reserve Board[25] - The Company 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[25] - Subsidiaries include four wholly-owned banking subsidiaries (Tompkins Trust Company, The Bank of Castile, Mahopac Bank, VIST Bank) and a wholly-owned insurance agency subsidiary (Tompkins Insurance Agencies, Inc.)[25] 2. Basis of Presentation Interim financial statements are prepared under GAAP, relying on critical management estimates for loan losses and securities impairment, with no significant policy changes - The unaudited consolidated financial statements do not include all information and footnotes required by GAAP for a full year presentation, with certain disclosures condensed or omitted per SEC rules[28] - Critical accounting policies include the determination of the allowance for loan and lease losses and the review of the securities portfolio for other than temporary impairment, due to inherent uncertainties in estimates[28] - No significant changes to the Company's accounting policies have occurred since the 2018 Annual Report on Form 10-K[29] 3. Accounting Standards Updates The Company adopted new lease accounting standards in 2019, recognizing ROU assets and liabilities without material income impact, and is evaluating future credit loss standards - ASU No. 2016-02, 'Leases,' was adopted on January 1, 2019, requiring lessees to recognize lease liabilities and right-of-use assets for all leases, which did not have a material impact on consolidated statements of income or cash flows[33] - The Company elected transition options under ASU No. 2018-11, 'Leases - Targeted Improvements,' not to recast comparative periods and to separate lease and non-lease components, with no material impact[34] - ASU No. 2016-13, 'Financial Instruments - Credit Losses,' effective January 1, 2020, requires measurement of all expected credit losses; the Company is evaluating its impact but does not expect a significant impact to capital[39] 4. Securities The securities portfolio, including available-for-sale and held-to-maturity, totaled $1.33 billion, with unrealized losses primarily due to interest rate changes, not credit quality | Category | Amortized Cost (6/30/2019) (in thousands) | Fair Value (6/30/2019) (in thousands) | Gross Unrealized Gains (6/30/2019) (in thousands) | Gross Unrealized Losses (6/30/2019) (in thousands) | | :--------------------------------------- | :------------------------- | :----------------------- | :--------------------------------- | :---------------------------------- | | Available-for-sale securities | | | | | | U.S. Treasuries | $280 | $278 | $0 | $2 | | Obligations of U.S. Government sponsored entities | $348,360 | $349,662 | $1,562 | $260 | | Obligations of U.S. states and political subdivisions | $79,891 | $80,783 | $927 | $35 | | Mortgage-backed securities – residential, issued by U.S. Government agencies | $169,799 | $169,555 | $1,289 | $1,533 | | Mortgage-backed securities – residential, issued by U.S. Government sponsored entities | $590,032 | $586,529 | $2,371 | $5,874 | | Non-U.S. Government agencies or sponsored entities | $7 | $7 | $0 | $0 | | U.S. corporate debt securities | $2,500 | $2,432 | $0 | $68 | | Total available-for-sale securities | $1,190,869 | $1,189,246 | $6,149 | $7,772 | | Held-to-maturity securities | | | | | | Obligations of U.S. Government sponsored entities | $131,103 | $134,057 | $2,954 | $0 | | Obligations of U.S. states and political subdivisions | $9,458 | $9,491 | $34 | $1 | | Total held-to-maturity debt securities | $140,561 | $143,548 | $2,988 | $1 | - Realized gains on available-for-sale securities were $0.866 million for the three and six months ended June 30, 2019, compared to $0.172 million and $0.297 million for the same periods in 2018, respectively[43] - The Company determined that no investment security held at June 30, 2019, was other-than-temporarily impaired, as unrealized losses were primarily due to interest rate changes and not credit quality[53] 5. Loans and Leases Total loans and leases increased slightly to $4.86 billion, with growth in originated loans offsetting a decrease in acquired loans | Loan Category | June 30, 2019 (in thousands) | December 31, 2018 (in thousands) | Change (Absolute) (in thousands) | Change (%) | | :--------------------------- | :------------ | :---------------- | :---------------- | :--------- | | Originated Loans and Leases | $4,612,198 | $4,572,537 | $39,661 | 0.87% | | Acquired Loans | $247,319 | $265,198 | $(17,879) | -6.74% | | Total Loans and Leases | $4,859,517 | $4,837,735 | $21,782 | 0.45% | | Commercial and industrial | $1,043,789 | $1,077,635 | $(33,846) | -3.14% | | Commercial real estate | $2,401,976 | $2,340,661 | $61,315 | 2.62% | | Residential real estate | $1,324,206 | $1,333,894 | $(9,688) | -0.73% | | Consumer and other | $73,689 | $70,989 | $2,700 | 3.80% | | Leases | $15,857 | $14,556 | $1,301 | 8.94% | - Originated loans 90 days or more past due and accruing interest totaled $6.665 million at June 30, 2019, down from $8.651 million at December 31, 2018[67][68] - Acquired loans 90 days or more past due and accruing interest totaled $2.131 million at June 30, 2019, down from $2.621 million at December 31, 2018[67][68] 6. Allowance for Loan and Lease Losses The allowance for loan and lease losses decreased to $40.7 million, mainly due to a commercial real estate write-down, while impaired loans totaled $15.2 million | Metric | 6 Months Ended 6/30/2019 (in thousands) | 6 Months Ended 6/30/2018 (in thousands) | Change (Absolute) (in thousands) | Change (%) | | :------------------------------ | :----------------------- | :----------------------- | :---------------- | :--------- | | Originated Loans and Leases | | | | | | Beginning balance | $43,321 | $39,686 | $3,635 | 9.16% | | Charge-offs | $(4,277) | $(1,314) | $(2,963) | 225.49% | | Recoveries | $575 | $1,096 | $(521) | -47.54% | | Provision (credit) | $1,070 | $1,643 | $(573) | -34.87% | | Ending Balance | $40,689 | $41,111 | $(422) | -1.03% | | Acquired Loans | | | | | | Beginning balance | $89 | $85 | $4 | 4.71% | | Charge-offs | $(29) | $(104) | $75 | -72.12% | | Recoveries | $65 | $164 | $(99) | -60.37% | | Provision (credit) | $(24) | $(31) | $7 | -22.58% | | Ending Balance | $101 | $114 | $(13) | -11.40% | - The decrease in the originated allowance was mainly due to a $3.1 million write-down of a single commercial real estate relationship in Q1 2019[84][265] | Impaired Loans | June 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :---------------------------- | :------------ | :---------------- | | Originated loans and leases | $11,678 | $14,167 | | Acquired loans | $3,504 | $3,438 | | Total Impaired Loans | $15,182 | $17,605 | 7. Earnings Per Share Basic and diluted EPS decreased for both the three and six months ended June 30, 2019, compared to the prior year | Metric | 3 Months Ended 6/30/2019 | 3 Months Ended 6/30/2018 | Change (Absolute) | Change (%) | | :----- | :----------------------- | :----------------------- | :---------------- | :--------- | | Basic EPS | $1.27 | $1.44 | $(0.17) | -11.81% | | Diluted EPS | $1.27 | $1.43 | $(0.16) | -11.19% | | Metric | 6 Months Ended 6/30/2019 | 6 Months Ended 6/30/2018 | Change (Absolute) | Change (%) | | :----- | :----------------------- | :----------------------- | :---------------- | :--------- | | Basic EPS | $2.64 | $2.78 | $(0.14) | -5.04% | | Diluted EPS | $2.63 | $2.76 | $(0.13) | -4.71% | - Stock-based compensation awards representing 18,355 and 19,668 common shares for the three months ended June 30, 2019 and 2018, respectively, were anti-dilutive and excluded from diluted EPS calculations[112] 8. Other Comprehensive Income (Loss) Accumulated other comprehensive loss significantly decreased to $(40.2) million, primarily due to reduced unrealized losses on available-for-sale securities | Component | Balance at 1/1/2019 (in thousands) | Balance at 6/30/2019 (in thousands) | Change (Absolute) (in thousands) | Change (%) | | :---------------------------------------- | :------------------ | :------------------- | :---------------- | :--------- | | Available-for-Sale Securities | $(23,589) | $(1,223) | $22,366 | -94.82% | | Employee Benefit Plans | $(39,576) | $(38,951) | $625 | -1.58% | | Total Accumulated Other Comprehensive (Loss) Income | $(63,165) | $(40,174) | $22,991 | -36.40% | - The change in net unrealized gain/loss during the six months ended June 30, 2019, for available-for-sale securities was a gain of $22.570 million, net of tax, compared to a loss of $(18.638) million in the prior year[116] 9. Employee Benefit Plan The Company recognized net periodic benefit costs for its pension, post-retirement, and SERP plans, with the pension plan showing net benefit income | Component | Pension Benefits (6 Months Ended 6/30/2019) (in thousands) | Life and Health (6 Months Ended 6/30/2019) (in thousands) | SERP Benefits (6 Months Ended 6/30/2019) (in thousands) | | :------------------------------------------------ | :------------------------------------------ | :----------------------------------------- | :--------------------------------------- | | Service cost | $0 | $80 | $77 | | Interest cost | $1,468 | $145 | $456 | | Expected return on plan assets | $(2,466) | $0 | $0 | | Amortization of net retirement plan actuarial loss | $667 | $0 | $154 | | Amortization of net retirement plan prior service (credit) cost | $(5) | $(31) | $44 | | Net periodic benefit (income) cost | $(336) | $194 | $731 | - The Company realized approximately $0.625 million, net of tax, as amortization of amounts previously recognized in accumulated other comprehensive (loss) income for the six months ended June 30, 2019[126] 10. Other Income and Operating Expense Other noninterest income decreased significantly due to a non-recurring gain on asset sales in 2018, while operating expenses remained stable | Category | 3 Months Ended 6/30/2019 (in thousands) | 3 Months Ended 6/30/2018 (in thousands) | Change (Absolute) (in thousands) | Change (%) | | :------------------------------------------------ | :----------------------- | :----------------------- | :---------------- | :--------- | | Noninterest Income | | | | | | Other service charges | $703 | $722 | $(19) | -2.63% | | Increase in cash surrender value of corporate owned life insurance | $544 | $504 | $40 | 7.94% | | Net gain (loss) on sale of fixed assets | $0 | $2,959 | $(2,959) | -100.00% | | Other income | $559 | $713 | $(154) | -21.59% | | Total other income | $1,806 | $4,898 | $(3,092) | -63.13% | | Noninterest Expenses | | | | | | Marketing expense | $1,645 | $1,414 | $231 | 16.34% | | Professional fees | $2,827 | $1,712 | $1,115 | 65.13% | | Legal fees | $138 | $292 | $(154) | -52.74% | | Technology expense | $2,623 | $2,290 | $333 | 14.54% | | Cardholder expense | $604 | $810 | $(206) | -25.43% | | Other expenses | $4,289 | $5,917 | $(1,628) | -27.51% | | Total other operating expense | $12,126 | $12,435 | $(309) | -2.48% | 11. Revenue Recognition Adoption of ASC 606 increased retained earnings by $1.8 million, altering timing for insurance commission recognition and increasing contract liabilities to $2.4 million - Adoption of ASC 606 on January 1, 2018, resulted in a net increase to beginning retained earnings of $1.8 million, mainly due to the recognition of contingency income in the insurance business[130] - Under ASC 606, commission revenue on installment-billed policies is now recognized upon the policy effective date, earlier than previously, creating a current asset for unbilled revenue[134] - Contract liabilities, representing obligations for services for which payment has been received, increased to $2.4 million at June 30, 2019, from $1.8 million at December 31, 2018[149] 12. Financial Guarantees The Company's maximum potential obligation under standby letters of credit increased to $27.7 million, with no significant losses anticipated - The Company's maximum potential obligation under standby letters of credit was $27.7 million at June 30, 2019, an increase from $21.7 million at December 31, 2018[152] - Management uses the same credit policies for standby letters of credit as for on-balance sheet lending and may require collateral[152] - Management does not anticipate any significant losses from these transactions and has determined the fair value of standby letters of credit is not significant[152] 13. Segment and Related Information Tompkins Financial Corporation operates through Banking, Insurance, and Wealth Management segments, with intercompany activities accounted for at fair value - The Company operates through three reportable business segments: Banking, Insurance (Tompkins Insurance Agencies, Inc.), and Wealth Management (Tompkins Financial Advisors)[153] | Segment | Net Income (3 Months Ended 6/30/2019) (in thousands) | Net Income (3 Months Ended 6/30/2018) (in thousands) | Change (Absolute) (in thousands) | Change (%) | | :--------------------- | :------------------------------------ | :------------------------------------ | :---------------- | :--------- | | Banking | $17,619 | $20,119 | $(2,500) | -12.42% | | Insurance | $1,122 | $933 | $189 | 20.26% | | Wealth Management | $651 | $1,007 | $(356) | -35.35% | | Consolidated | $19,392 | $22,059 | $(2,667) | -12.09% | | Segment | Net Income (6 Months Ended 6/30/2019) (in thousands) | Net Income (6 Months Ended 6/30/2018) (in thousands) | Change (Absolute) (in thousands) | Change (%) | | :--------------------- | :------------------------------------ | :------------------------------------ | :---------------- | :--------- | | Banking | $36,462 | $38,731 | $(2,269) | -5.86% | | Insurance | $2,504 | $1,832 | $672 | 36.79% | | Wealth Management | $1,466 | $1,932 | $(466) | -24.12% | | Consolidated | $40,432 | $42,495 | $(2,063) | -4.85% | 14. Fair Value Financial assets and liabilities are measured using a three-level fair value hierarchy, with available-for-sale securities primarily Level 2 and loans/leases largely Level 3 - The fair value hierarchy prioritizes inputs: Level 1 (unadjusted quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[164] | Asset/Liability | Total Fair Value (6/30/2019) (in thousands) | Level 1 (6/30/2019) (in thousands) | Level 2 (6/30/2019) (in thousands) | Level 3 (6/30/2019) (in thousands) | | :----------------------------- | :--------------------------- | :------------------ | :------------------ | :------------------ | | Available-for-sale securities | $1,189,246 | $0 | $1,189,246 | $0 | | Equity securities, at fair value | $912 | $0 | $0 | $912 | | Loans/leases, net | $4,743,186 | $0 | $3,485 | $4,739,701 | - For nonrecurring fair value measurements, impaired loans and other real estate owned are valued using Level 2 or Level 3 inputs, with collateral values estimated using observable market data or appraisals[171] 15. Leasing Adoption of ASU 2016-02 resulted in recognition of $34.2 million in ROU assets and $36.4 million in lease liabilities for operating leases - The Company adopted ASU 2016-02, 'Leases,' on January 1, 2019, using the modified retrospective method, with no adjustments to retained earnings on adoption[189] | Metric | June 30, 2019 (in thousands) | | :-------------------- | :------------ | | ROU assets | $34,212 | | Current lease liabilities | $3,402 | | Non-current lease liabilities | $33,046 | | Total lease liabilities | $36,448 | | Lease Costs | 6 Months Ended June 30, 2019 (in thousands) | | :------------------------- | :--------------------------- | | Operating lease cost | $2,315 | | Variable lease cost | $190 | | Short-term lease cost | $1 | | Sublease income | $(17) | | Total lease cost | $2,489 | Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations This section reviews Tompkins Financial Corporation's business, strategy, and financial performance, noting decreased net income due to higher funding costs and non-recurring gains BUSINESS This section outlines Tompkins Financial Corporation's corporate overview, strategic initiatives, business segments, competitive landscape, and regulatory environment Corporate Overview and Strategic Initiatives Tompkins Financial Corporation is a community-based financial services organization focused on high-quality products, operational effectiveness, and profitable growth - Tompkins Financial Corporation is a locally oriented, community-based financial services organization offering commercial and consumer banking, leasing, trust and investment management, financial planning and wealth management, and insurance services[198] - The Company's strategic initiatives focus on delivering high-quality products, improving operational effectiveness, investing in people, maintaining risk management, and delivering profitable growth across all business lines[198] - Growth strategy includes organic growth and potential acquisitions of financial institutions, branches, and financial services businesses that are culturally similar and have experienced management[198] Business Segments The Company operates Banking, Wealth Management, and Insurance segments, providing diverse financial services and expanding through strategic acquisitions - Banking services primarily involve attracting deposits and originating commercial, consumer, and real estate loans and leases across 66 banking offices in New York and Pennsylvania[199] - Wealth management services, provided by Tompkins Financial Advisors, include investment management, trust and estate, financial and tax planning, and various insurance services[200] - Insurance services, offered by Tompkins Insurance Agencies, Inc., include property and casualty insurance and employee benefit consulting; in Q2 2019, Tompkins Insurance acquired the Cali Agency, Inc., adding goodwill and other intangible assets[201] Competition The Company faces intense competition from diverse financial institutions, differentiating itself through a community-based approach and personalized services - Competition is strong from commercial banks, savings and loan associations, credit unions, finance companies, Internet-based financial services companies, mutual funds, insurance companies, and brokerage firms[203] - Many non-bank competitors are not subject to the same extensive federal regulations as financial holding companies and federally-insured banks[203] - The Company competes by establishing personalized financial relationships, community involvement, prudent lending decisions, and offering a strong suite of products and services[204] Regulation Tompkins Financial Corporation and its subsidiaries are highly regulated, subject to extensive examination and oversight by multiple federal and state authorities - The Company and its subsidiaries are subject to examination and regulation by the Federal Reserve Board, SEC, FDIC, New York State Department of Financial Services, Pennsylvania Department of Banking and Securities, Financial Industry Regulatory Authority, and the Pennsylvania Insurance Department[205] OTHER IMPORTANT INFORMATION This section addresses forward-looking statements, highlighting inherent risks, and details the Company's critical accounting policies and their application Forward-Looking Statements Forward-looking statements in this report are subject to risks and uncertainties from economic, market, and regulatory changes - Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied[209] - Key factors influencing actual results include changes in general economic, market, and regulatory conditions, interest rate environment, technological developments, and governmental and public policy changes[209] Critical Accounting Policies Critical accounting policies, including ALL and OTTI, involve significant management judgment and have not materially changed since 2018 - Critical accounting policies require management to make assumptions about highly uncertain matters, where different estimates could materially impact financial statements[211] - The allowance for loan and lease losses (ALL) and the review of the securities portfolio for other-than-temporary impairment (OTTI) are considered critical accounting policies[211] - There have been no significant changes in the Company's application of critical accounting policies since December 31, 2018[212] RESULTS OF OPERATION This section analyzes the Company's financial performance, including net income, segment results, non-GAAP measures, net interest income, and expense trends Performance Summary Net income and diluted EPS decreased for both Q2 and YTD 2019, though ROA and ROE remained favorable compared to peers | Metric | Q2 2019 | Q2 2018 | Change (Absolute) | Change (%) | | :----- | :------ | :------ | :---------------- | :--------- | | Net income (in millions) | $19.4 | $22.1 | $(2.7) | -12.22% | | Diluted EPS | $1.27 | $1.43 | $(0.16) | -11.19% | | ROA | 1.15% | 1.32% | -0.17% | -12.88% | | ROE | 11.96% | 15.13% | -3.17% | -20.95% | | Metric | YTD 2019 | YTD 2018 | Change (Absolute) | Change (%) | | :----- | :------- | :------- | :---------------- | :--------- | | Net income (in millions) | $40.4 | $42.5 | $(2.1) | -4.94% | | Diluted EPS | $2.63 | $2.76 | $(0.13) | -4.71% | | ROA | 1.21% | 1.28% | -0.07% | -5.47% | | ROE | 12.73% | 14.78% | -2.05% | -13.87% | - Tompkins' ROA (1.15%) and ROE (11.96%) for Q2 2019 compare favorably to the peer average ratios of 1.13% and 10.21%, ranking Tompkins in the 57th and 81st percentile, respectively[214] Segment Reporting Banking segment net income decreased due to higher funding costs, while Insurance net income increased, and Wealth Management net income declined | Segment | Q2 2019 Net Income (in millions) | Q2 2018 Net Income (in millions) | Change (Absolute) (in millions) | Change (%) | | :-------------------- | :----------------- | :----------------- | :---------------- | :--------- | | Banking | $17.6 | $20.2 | $(2.6) | -12.87% | | Insurance | $1.1 | $0.9 | $0.2 | 22.22% | | Wealth Management | $0.7 | $1.0 | $(0.3) | -30.00% | | Segment | YTD 2019 Net Income (in millions) | YTD 2018 Net Income (in millions) | Change (Absolute) (in millions) | Change (%) | | :-------------------- | :------------------ | :------------------ | :---------------- | :--------- | | Banking | $36.5 | $38.8 | $(2.3) | -5.93% | | Insurance | $2.5 | $1.8 | $0.7 | 38.89% | | Wealth Management | $1.5 | $1.9 | $(0.4) | -21.05% | - The decrease in Banking segment noninterest income was mainly due to a $2.9 million gain on the sale of two properties in 2018, partially offset by a $0.5 million one-time incentive payment in Q1 2019[219] Non-GAAP Disclosure Non-GAAP measures are provided to enhance understanding of operational performance, with adjusted net operating income at $40.4 million and adjusted operating return at 15.08% for YTD 2019 - Non-GAAP measures adjust GAAP measures to exclude acquisition-related intangible amortization expense, providing insights into underlying operational performance[224] | Metric | 6 Months Ended 6/30/2019 (in thousands, except %) | 6 Months Ended 6/30/2018 (in thousands, except %) | Change (Absolute) (in thousands) | Change (%) | | :-------------------------------------------------------- | :----------------------- | :----------------------- | :---------------- | :--------- | | Net operating income available to common shareholders | $39,777 | $41,789 | $(2,012) | -4.82% | | Amortization of intangibles, net of tax | $627 | $706 | $(79) | -11.19% | | Adjusted net operating income available to common shareholders (Non-GAAP) | $40,404 | $42,495 | $(2,091) | -4.92% | | Adjusted operating return on average shareholders' tangible common equity (Non-GAAP) | 15.08% | 17.95% | -2.87% | -15.99% | | Metric | 6 Months Ended 6/30/2019 (in thousands, except per share) | 6 Months Ended 6/30/2018 (in thousands, except per share) | Change (Absolute) (in thousands) | Change (%) | | :-------------------------------------- | :----------------------- | :----------------------- | :---------------- | :--------- | | Tangible common equity (Non-GAAP) | $557,503 | $489,190 | $68,313 | 13.96% | | Tangible common equity per share (Non-GAAP) | $36.77 | $32.34 | $4.43 | 13.70% | Net Interest Income Net interest income decreased due to rising funding costs, leading to a slight compression in net interest margin to 3.34% for both Q2 and YTD 2019 - Net interest income represented 73.9% and 73.3% of total revenues for the three and six months ended June 30, 2019, respectively[232] - Taxable-equivalent net interest income decreased by 0.8% for Q2 2019 and 1.2% for YTD 2019, driven by higher funding costs exceeding asset yield increases[233] | Metric | Q2 2019 | Q2 2018 | YTD 2019 | YTD 2018 | | :----- | :------ | :------ | :------- | :------- | | Net Interest Margin | 3.34% | 3.36% | 3.34% | 3.39% | | Average Loan Yield | 4.76% | 4.48% | 4.73% | 4.46% | | Average Cost of Interest-Bearing Deposits | 0.84% | 0.42% | 0.79% | 0.37% | Provision for Loan and Lease Losses The provision for loan and lease losses decreased for both periods in 2019, reflecting slower loan growth and stable asset quality | Metric | 3 Months Ended 6/30/2019 (in thousands) | 3 Months Ended 6/30/2018 (in thousands) | Change (Absolute) (in thousands) | Change (%) | | :------------------------------------ | :----------------------- | :----------------------- | :---------------- | :--------- | | Provision for loan and lease losses | $601 | $1,045 | $(444) | -42.49% | | Metric | 6 Months Ended 6/30/2019 (in thousands) | 6 Months Ended 6/30/2018 (in thousands) | Change (Absolute) (in thousands) | Change (%) | | :------------------------------------ | :----------------------- | :----------------------- | :---------------- | :--------- | | Provision for loan and lease losses | $1,046 | $1,612 | $(566) | -35.11% | - The decrease in provision expense is mainly due to slower loan growth and stable asset quality[218][270] Noninterest Income Noninterest income decreased due to a non-recurring gain on property sales in 2018, despite growth in insurance commissions and fees | Metric | Q2 2019 (in millions) | Q2 2018 (in millions) | Change (Absolute) (in millions) | Change (%) | | :------------------- | :------ | :------ | :---------------- | :--------- | | Total Noninterest Income | $18.5 | $21.2 | $(2.7) | -12.74% | | Insurance commissions and fees | $7.8 | $7.4 | $0.4 | 5.41% | | Investment services income | $3.9 | $4.0 | $(0.1) | -2.50% | | Other income | $1.8 | $4.9 | $(3.1) | -63.27% | | Metric | YTD 2019 (in millions) | YTD 2018 (in millions) | Change (Absolute) (in millions) | Change (%) | | :------------------- | :------- | :------- | :---------------- | :--------- | | Total Noninterest Income | $37.9 | $39.0 | $(1.1) | -2.82% | | Insurance commissions and fees | $15.8 | $14.8 | $1.0 | 6.76% | | Investment services income | $8.0 | $8.3 | $(0.3) | -3.61% | | Other income | $4.3 | $6.7 | $(2.4) | -35.82% | - The decrease in other income for both periods was mainly due to approximately $2.9 million of gains on the sale of two properties in 2018 related to the Company's new headquarters building[242] Noninterest Expense Noninterest expense increased due to higher compensation and benefits, including salaries, wages, and healthcare expenses | Metric | Q2 2019 (in millions) | Q2 2018 (in millions) | Change (Absolute) (in millions) | Change (%) | | :------------------- | :------ | :------ | :---------------- | :--------- | | Total Noninterest Expense | $46.1 | $45.0 | $1.1 | 2.44% | | Salaries and wages | $22.1 | $21.4 | $0.7 | 3.27% | | Other employee benefits | $5.7 | $5.2 | $0.5 | 9.62% | | Metric | YTD 2019 (in millions) | YTD 2018 (in millions) | Change (Absolute) (in millions) | Change (%) | | :------------------- | :------- | :------- | :---------------- | :--------- | | Total Noninterest Expense | $90.3 | $88.7 | $1.6 | 1.80% | | Salaries and wages | $43.2 | $42.4 | $0.8 | 1.89% | | Other employee benefits | $11.3 | $10.6 | $0.7 | 6.60% | - Expenses for Q2 and YTD 2019 included increases in professional fees and technology-related expenses associated with strategic initiatives[245] Income Tax Expense Income tax expense decreased for both periods in 2019, with effective tax rates of 19.6% and 20.3%, influenced by tax-exempt income | Metric | Q2 2019 (in millions) | Q2 2018 (in millions) | Change (Absolute) (in millions) | Change (%) | | :------------------- | :------ | :------ | :---------------- | :--------- | | Income Tax Expense | $4.7 | $5.8 | $(1.1) | -18.97% | | Effective Tax Rate | 19.6% | 20.7% | -1.1% | -5.31% | | Metric | YTD 2019 (in millions) | YTD 2018 (in millions) | Change (Absolute) (in millions) | Change (%) | | :------------------- | :------- | :------- | :---------------- | :--------- | | Income Tax Expense | $10.3 | $11.5 | $(1.2) | -10.43% | | Effective Tax Rate | 20.3% | 21.3% | -1.0% | -4.69% | - Effective tax rates differ from the U.S. statutory rate due to tax-exempt income from loans, securities, life insurance assets, and stock-based compensation effects[246] FINANCIAL CONDITION This section details the Company's financial position, including total assets, securities, loans, allowance for loan losses, capital, deposits, and liquidity Total Assets Total assets decreased by $104.0 million to $6.7 billion, primarily due to a $152.1 million sale of securities to reduce borrowings - Total assets were $6.7 billion at June 30, 2019, down $104.0 million or 1.5% from December 31, 2018[247] - The decrease was mainly due to the sale of about $152.1 million of low yielding and short average life securities in June 2019, with proceeds used to reduce overnight borrowings[247] - Total deposits were up $99.9 million or 2.0% from December 31, 2018, while other borrowings decreased $251.5 million or 23.4%[247] Securities The securities portfolio decreased to $1.3 billion due to a $152.1 million sale of available-for-sale securities, with unrealized losses attributed to interest rate changes - The securities portfolio decreased to $1.3 billion (20.0% of total assets) at June 30, 2019, from $1.5 billion (21.8% of total assets) at year-end 2018[248] - The decrease was mainly due to the sale of $152.1 million of available-for-sale securities in June 2019[248] - The decrease in unrealized losses on the available-for-sale portfolio was primarily due to changes in market interest rates, and no investment securities were considered other-than-temporarily impaired[250][251] Loans and Leases Total loans and leases increased by $21.9 million to $4.9 billion, driven by originated loan growth, with commercial real estate as the largest segment | Loan Category | June 30, 2019 (in thousands) | December 31, 2018 (in thousands) | Change (Absolute) (in thousands) | Change (%) | | :--------------------------- | :------------ | :---------------- | :---------------- | :--------- | | Total loans and leases | $4,859,517 | $4,837,735 | $21,782 | 0.45% | | Originated loan balances | $4,612,198 | $4,572,537 | $39,661 | 0.87% | | Acquired loans | $247,319 | $265,198 | $(17,879) | -6.74% | | Commercial real estate loans | $2,401,976 | $2,340,661 | $61,315 | 2.62% | | Commercial and industrial loans | $1,043,789 | $1,077,635 | $(33,846) | -3.14% | - Residential real estate loans, including home equity, decreased by $9.7 million (0.7%) to $1.3 billion at June 30, 2019, comprising 27.3% of total loans[254] - Agriculturally-related loans totaled $274.1 million (5.6% of total loans) at June 30, 2019, slightly down from $277.7 million at December 31, 2018[257] The Allowance for Loan and Lease Losses The allowance for loan and lease losses decreased to $40.8 million due to a commercial real estate write-down, while nonperforming loans decreased to $23.8 million | Metric | 6/30/2019 (in thousands) | 12/31/2018 (in thousands) | Change (Absolute) (in thousands) | Change (%) | | :---------------------------------------- | :-------- | :--------- | :---------------- | :--------- | | Allowance for originated loans and leases | $40,689 | $43,321 | $(2,632) | -6.07% | | Allowance for acquired loans | $101 | $89 | $12 | 13.48% | | Total allowance for loan and lease losses | $40,790 | $43,410 | $(2,620) | -6.04% | | Asset Quality Metric | 6/30/2019 (in thousands, except %) | 12/31/2018 (in thousands, except %) | Change (Absolute) (in thousands, except %) | Change (%) | | :-------------------------------------------- | :-------- | :--------- | :---------------- | :--------- | | Total nonperforming loans and leases | $23,795 | $26,591 | $(2,796) | -10.51% | | Total nonperforming assets | $26,024 | $28,186 | $(2,162) | -7.67% | | Allowance as a percentage of nonperforming loans and leases | 171.42% | 163.25% | 8.17% | 5.00% | | Total nonperforming loans and leases as percentage of total loans and leases | 0.49% | 0.55% | -0.06% | -10.91% | | Annualized net charge-offs on originated loans to average total originated loans and leases during the period | 0.16% | 0.01% | 0.15% | 1500.00% | - Potential problem loans (Substandard, accruing interest) increased to $38.9 million at June 30, 2019, from $34.9 million at December 31, 2018, primarily due to six newly classified relationships totaling $10.1 million[279] Capital Total equity increased by $36.8 million to $657.7 million, exceeding all minimum regulatory capital ratios, with 155,093 shares repurchased - Total equity was $657.7 million at June 30, 2019, an increase of $36.8 million or 5.9% from December 31, 2018[281] | Capital Ratio | 6/30/2019 Actual | Minimum Required - Basel III (Fully Phased-In) | Well Capitalized Requirement | | :------------ | :--------------- | :--------------------------------------------- | :--------------------------- | | Total Capital (to risk weighted assets) | 13.34% | 10.50% | 10.00% | | Tier 1 Capital (to risk weighted assets) | 12.48% | 8.50% | 8.00% | | Tier 1 Common Equity (to risk weighted assets) | 12.13% | 7.00% | 6.50% | | Tier 1 Capital (to average assets) | 9.25% | 4.00% | 5.00% | - During the first six months of 2019, the Company repurchased 155,093 shares of common stock at an average price of $79.00 under the 2018 Repurchase Plan[289] Deposits and Other Liabilities Total deposits increased by $99.9 million to $5.0 billion, while other borrowings significantly decreased by $251.5 million due to securities sales and deposit growth - Total deposits of $5.0 billion at June 30, 2019, were up $99.9 million or 2.0% from December 31, 2018[291] - Core deposits grew by $32.0 million to $4.1 billion at June 30, 2019, representing 83.0% of total deposits[292] - Other borrowings totaled $824.6 million at June 30, 2019, down $251.5 million or 23.4% from December 31, 2018, due to proceeds from securities sales and deposit growth[294] Liquidity The Company maintains strong liquidity with a stable core deposit base, reduced non-core funding, and significant unused borrowing capacity - The Company's liquidity is supported by a large, stable core deposit base and strong capital position[295] - Non-core funding sources decreased by $201.5 million or 10.4% to $1.7 billion at June 30, 2019, mainly due to a decrease in overnight borrowings with the FHLB[297] - At June 30, 2019, the unused borrowing capacity on established lines with the FHLB was $1.2 billion, and total unencumbered residential mortgage loans and securities were $708.6 million[301][302] Item 3 - Quantitative and Qualitative Disclosures About Market Risk The Company's primary market risk is interest rate risk, managed via income simulation, with a negative one-year net interest rate gap of $643.2 million Interest Rate Risk Management Interest rate risk is the primary market risk, managed through income simulation to limit net interest income decline from rate changes - Interest rate risk is the primary market risk, managed using income simulation to estimate the effect of interest rate shifts on net interest income[305] - The Board of Directors' policy limits net interest income decline to no more than 10% in one year from a 200 basis point parallel change in rates[306] - As of May 31, 2019, a 200 bps upward shift would decrease one-year net interest income by approximately 5.0%, while a 200 bps downward shift would result in a 1.2% increase[306] Condensed Static Gap Report The Company's one-year net interest rate gap was a negative $643.2 million, indicating moderate vulnerability to rising interest rates - The Company's one-year net interest rate gap was a negative $643.2 million or 9.7% of total assets at June 30, 2019, compared to a negative $762.6 million or 11.47% at December 31, 2018[311] - A negative gap position indicates that interest-bearing liabilities maturing or repricing exceed interest-earning assets maturing or repricing within a particular time period, suggesting moderate vulnerability to an increasing rate environment[311] Item 4 - Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of June 30, 2019 - The Company's Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were effective as of June 30, 2019[314] Changes in Internal Control Over Financial Reporting No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2019 - There were no changes in the Company's internal control over financial reporting during the quarter ended June 30, 2019, that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[315] PART II - OTHER INFORMATION This section covers legal proceedings, risk factors, equity security sales, defaults, mine safety, other information, and exhibits Item 1. Legal Proceedings The Company is involved in ordinary course litigation, but management does not anticipate a material adverse effect on financial results - The Company is party to litigation arising out of the ordinary course of business[316] - Management believes there are no pending claims which, if determined adversely, would have a material effect on the Company's results of operations or financial condition[316] Item 1A. Risk Factors No material changes to the risk factors previously disclosed in the Company's 2018 Annual Report on Form 10-K - No material changes in the risk factors previously disclosed under Item 1A. of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2018[317] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Company repurchased 161,706 common shares in Q2 2019 at an average price of $79.30, with 172,076 shares repurchased under the 2018 plan | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :-------------------------------- | :----------------------------- | :--------------------------- | | April 1, 2019 through April 30, 2019 | 1,488 | $76.60 | | May 1, 2019 through May 31, 2019 | 112,867 | $79.09 | | June 1, 2019 through June 30, 2019 | 47,351 | $79.90 | | Total | 161,706 | $79.30 | - The 2018 Repurchase Plan authorized the Company to repurchase up to 400,000 shares of common stock over 24 months, with 155,093 shares purchased under this plan during the second quarter of 2019[318][319] - As of June 30, 2019, a total of 172,076 shares had been repurchased under the 2018 Repurchase Plan at an average price of $78.61[320] Item 3. Defaults Upon Senior Securities No defaults upon senior securities were reported - No defaults upon senior securities[321] Item 4. Mine Safety Disclosures Mine safety disclosures are not applicable to the Company's operations - Mine Safety Disclosures are not applicable[321] Item 5. Other Information No other information was reported in this section - No other information[321] [Ite