# Tompkins Financial Corp: Form 10-Q for the period ended Jun 30, 2015

- Company: [Tompkins Financial Corp](/companies/tmp.md) (CIK 1005817)
- Form: 10-Q
- Filed: 2015-08-10
- Accepted by EDGAR: Aug 10, 2015, 17:24 ET
- Period: 2015-06-30
- Accession: 0001387131-15-002365
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1005817/000138713115002365/tmp-10q_063015.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1005817/000138713115002365/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2015-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2015-04-01 to 2015-06-30 | $5.1m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2015-01-01 to 2015-06-30 | $10.1m | us-gaap:InterestExpense |
| Income tax | 3 months, 2015-04-01 to 2015-06-30 | $9.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2015-01-01 to 2015-06-30 | $15.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2015-04-01 to 2015-06-30 | $17.4m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2015-01-01 to 2015-06-30 | $30.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2015-04-01 to 2015-06-30 | $1.15 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2015-01-01 to 2015-06-30 | $2.00 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2015-04-01 to 2015-06-30 | $1.16 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2015-01-01 to 2015-06-30 | $2.01 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2015-04-01 to 2015-06-30 | 14,878,107 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2015-01-01 to 2015-06-30 | 14,858,127 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2015-01-01 to 2015-06-30 | $39.2m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 6 months, 2015-01-01 to 2015-06-30 | $2.5m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2015-01-01 to 2015-06-30 | $12.6m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 6 months, 2015-01-01 to 2015-06-30 | $1.4m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2015-06-30 | $60.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2015-06-30 | $5.44bn | us-gaap:Assets |
| Total liabilities | at 2015-06-30 | $4.93bn | us-gaap:Liabilities |
| Shareholders' equity | at 2015-06-30 | $503.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 86,339 characters.

### 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, 2015, 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.”

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’ 62 banking offices (43 offices in New York and 19 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 under the trade name Tompkins Financial Advisors. Tompkins Financial Advisors has office locations 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. The VIST Financial acquisition in 2012, which included VIST Insurance, was the largest acquisition and nearly doubled the Company’s annual insurance revenues. 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.

### 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 a community based financial organization is better 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, 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, 2015. 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, 2014, 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 117 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, 2015 (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, 2014. 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.

### Critical Accounting Policies

The accounting and reporting policies followed by the Company conform, in all material respects, to accounting principles generally accepted in the United States and to general practices within the financial services industry. In the course of normal business activity, management must select and apply many accounting policies and methodologies and make estimates and assumptions that lead to the financial results presented in the Company’s consolidated financial statements and accompanying notes. There are uncertainties inherent in making these estimates and assumptions, which could materially affect the Company’s results of operations and financial position.

Management considers accounting estimates to be critical to reported financial results if (i) the accounting estimates require management to make assumptions about matters that are highly uncertain, and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the Company’s financial statements. Management considers the accounting policies relating to the allowance for loan and lease losses (“allowance”), pension and postretirement benefits, the review of the securities portfolio for other-than-temporary impairment, and acquired loans to be critical accounting policies because of the uncertainty and subjectivity involved in these policies and the material effect that estimates related to these areas can have on the Company’s results of operations.

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, 2014. There have been no significant changes in the Company’s application of critical accounting policies since December 31, 2014. 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.

### OVERVIEW

Net income for the second quarter was $17.4 million or $1.15 diluted earnings per share, compared to $13.1 million or $0.87 diluted earnings per share for the same period in 2014. Net income for the first six months of 2015 was $30.1 million or $2.00 diluted earnings per share, compared to $25.6 million or $1.72 diluted earnings per share in the first six months of 2014. Results for the current quarter and year to date were positively impacted by a one-time curtailment gain of $3.6 million, after-tax, related to changes to the Company’s defined benefit pension plan. Exclusive of this one-time gain, net income and diluted earnings per share for the current quarter would have been $13.8 million and $0.91, respectively, and for the first six months of 2015, $26.0 million and $1.75, respectively.

Return on average assets (“ROA”) for the quarter ended June 30, 2015 was 1.29%, compared to 1.04% for the quarter ended June 30, 2014. Return on average shareholders’ equity (“ROE”) for the second quarter of 2015 was 13.79%, compared to 10.91%, for the same period in 2014. Tompkins’ second quarter ROA and ROE compare to the most recent peer average ratios of 0.95% and 8.50%, respectively, ranking Tompkins’ ROA in the 52nd percentile and ROE in the 71st percentile of the peer group.

In addition to these performance measures, management also considers operating return on average tangible common equity an important ratio in measuring financial performance. This ratio is considered a non-GAAP measure. The following table shows the calculation of this non-GAAP ratio and reconciliation to the comparable GAAP measure. The Company believes this non-GAAP measure provides a meaningful comparison of our underlying operational performance and facilitates managements’ and investors’ assessments of business and performance trends in comparison to others in the financial services industry. This non-GAAP financial measure should not be considered in isolation or as a measure of the Company’s profitability or liquidity; it is in addition to, and is not a substitute for, financial measures under GAAP. Net operating income as presented herein may be different from non-GAAP financial measures used by other companies, and may not be comparable to similarly titled measures reported by other companies. Further, the Company may utilize other measures to illustrate performance in the future. Non-GAAP financial measures have limitations since they do not reflect all of the amounts associated with the Company’s results of operations as determined in accordance with GAAP.

*(in thousands, except per share data)*

| Adjusted Diluted Earnings Per Share | Three Months Ended 06/30/2015 | 06/30/2014 | Six Months Ended 06/30/2015 | 06/30/2014 |
| --- | ---: | ---: | ---: | ---: |
| Net income attributable to Tompkins Financial Corporation | $17,390 | $13,061 | $30,070 | $25,630 |
| Less: dividends and undistributed earnings allocated to unvested stock awards | (234) | (118) | (420) | (235) |
| Net income available to common shareholders (GAAP) | 17,156 | 12,943 | 29,650 | 25,395 |
| Diluted earnings per share (GAAP) | 1.15 | 0.87 | 2.00 | 1.72 |
| Adjustments for non-operating income and expense, net of tax: |  |  |  |  |
| Gain on pension plan curtailment | (3,602) | 0 | (3,602) | 0 |
| Total adjustments, net of tax | (3,602) | 0 | (3,602) | 0 |
| Net operating income available to common shareholders (Non-GAAP) | 13,554 | 12,943 | 26,048 | 25,395 |
| Adjusted diluted earnings per share (Non-GAAP) | 0.91 | 0.87 | 1.75 | 1.72 |

*Operating Return on Average Tangible Common Equity (Non-GAAP)*

*(in thousands)*

|  | Three Months Ended 06/30/2015 | 06/30/2014 | Six Months Ended 06/30/2015 | 06/30/2014 |
| --- | ---: | ---: | ---: | ---: |
| Net operating income available to common shareholders (Non-GAAP) | 13,554 | 12,943 | 26,048 | 25,395 |
| Amortization of intangibles, net of tax | 300 | 315 | 604 | 631 |
| Adjusted net operating income available to common shareholders (Non-GAAP) | 13,854 | 13,258 | 26,652 | 26,026 |
| Average Tompkins Financial Corporation shareholders’ common equity | 504,166 | 478,561 | 499,896 | 472,836 |
| Average goodwill and intangibles 1 | 105,130 | 106,988 | 105,385 | 107,193 |
| Average Tompkins financial Corporation shareholders’ tangible common equity (Non-GAAP) | 399,036 | 371,573 | 394,511 | 365,643 |
| Adjusted operating return on average shareholders’ tangible common equity (Non-GAAP) | 13.93% | 14.31% | 13.62% | 14.35% |

1 *Average goodwill and intangibles exclude mortgage servicing rights*

### 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 $15.3 million for the second quarter of 2015, up $3.8 million or 33.3% from net income of $11.5 million for the same period in 2014. For the six months ended June 30, 2015, the banking segment reported net income of $26.4 million, up $4.1 million or 18.2% over the same period in 2014.

Net interest income of $41.3 million for the second quarter of 2015 was up $807,000 or 2.0% over the same period in 2014. For the six months ended June 30, 2015, net interest income of $82.5 million was up $2.0 million or 2.5% compared to prior year. Growth in average earning assets and lower funding costs offset the effect of lower asset yields and contributed to favorable year-over-year comparisons. Net interest margin for the six months ended June 30, 2015 was 3.41% compared to 3.58% for the same period prior year.

The provision for loan and lease losses was $922,000 for the three months ended June 30, 2015; up from $67,000 for the same period in 2014. Provision expense also increased for the six months ended June 30, 2015 to $1.1 million from $810,000 in the previous year. The increase in provision expense was largely attributable to growth in total loans.

Noninterest income for the three months ended June 30, 2015 of $7.7 million was up $749,000 or 10.8% compared to the same period in 2014, and for the six months ended June 30, 2015 was up $826,000 or 6.2% to $14.1 million compared to $13.2 million for the six months ending June 30, 2014. The primary contributors to the three and six month increase include: gains on the sale of other real estate owned (up $885,000), and net realized gains on securities transactions (up $884,000). Partially offsetting these items were decreases in loan fees, including gains on sales of residential loans (down $482,000), card services income (down $189,000), and service charges on deposit accounts (down $102,000).

Noninterest expense of $24.9 million for the second quarter and $55.8 million for the six months ending June 30, 2015 were down $5.7 million or 18.6% and down $4.6 million or 7.6%, respectively, from the same periods in 2014. The declines are primarily attributed to the curtailment of the Company’s defined benefit pension plan, which resulted in a $6.0 million credit to pension and other employee benefits expense in the second quarter of 2015 in accordance with accounting guidance. This decrease was partially offset by an increase in salaries and wages due to normal annual merit and market increases, increases in incentive compensation, as well as an increase in the number of employees.

### Insurance Segment

The insurance segment reported net income of $1.1 million for the three months ended June 30, 2015; up $367,000 or 46.9% from the second quarter of 2014. For the six month period ended June 30, 2015, net income rose $309,000 or 18.4% compared to 2014. Noninterest income was up $364,000 or 5.1% in the second quarter of 2015, compared to the same period in 2014 and up $524,000 or 3.6% to $14.9 million for the six months ending June 30, 2015. Noninterest expenses for the three months ended June 30, 2015 were down $268,000 or 4.6% compared to the second quarter of 2014 and for the first six months of 2015 were flat compared to the same period in 2014. The decline in noninterest expense for the second quarter is mainly the result of the aforementioned defined benefit pension plan curtailment adjustment. Partially offsetting this adjustment were increases in salaries and wages reflecting normal annual merit adjustments and sales commissions.

### Wealth Management Segment

The wealth management segment reported net income of $929,000 for the three months ended June 30, 2015, up $136,000 or 17.2% compared to the second quarter of 2014. Net income for the six months ended June 30, 2015 increased $63,000 or 3.9% to $1.7 million compared to the same period in 2014. Noninterest income was flat for the second quarter of 2015 and down $112,000 for the first six months of 2015 compared to the prior year. Noninterest expenses for the three months ended June 30, 2015, were down $192,000 or 6.8% and for the six months ended June 30, 2015 were down $181,000 or 3.1% compared to the same period of 2014 due primarily to the Company’s curtailment of its defined benefit pension plan mentioned above.

### Average Consolidated Statements of Condition and Net Interest Analysis (Unaudited)

*(Dollar amounts in thousands)*

| ASSETS Interest-earning assets | Quarter Ended June 30, 2015 Average Balance (QTD) | Interest | Average Yield/Rate | Year to Date Period Ended June 30, 2015 Average Balance (YTD) | Interest | Average Yield/Rate | Year to Date Period Ended June 30, 2014 Average Balance (YTD) | Interest | Average Yield/Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest-bearing balances due from banks | $1,824 | $1 | 0.22% | $1,607 | $2 | 0.25% | $885 | $1 | 0.23% |
| Securities (1) |  |  |  |  |  |  |  |  |  |
| U.S. Government securities | 1,450,039 | 7,513 | 2.08% | 1,442,846 | 15,366 | 2.15% | 1,301,015 | 14,877 | 2.31% |
| Trading securities | 8,453 | 90 | 4.27% | 8,654 | 184 | 4.29% | 10,584 | 219 | 4.17% |
| State and municipal (2) | 86,710 | 832 | 3.85% | 87,502 | 1,703 | 3.92% | 89,964 | 2,127 | 4.77% |
| Other securities (2) | 3,752 | 30 | 3.21% | 3,758 | 60 | 3.22% | 4,729 | 76 | 3.24% |
| Total securities | 1,548,954 | 8,465 | 2.19% | 1,542,760 | 17,313 | 2.26% | 1,406,292 | 17,299 | 2.48% |
| FHLBNY and FRB stock | 23,927 | 225 | 3.76% | 22,355 | 572 | 5.15% | 20,670 | 404 | 3.94% |
| Total loans and leases, net of unearned income (2)(3) | 3,463,881 | 38,680 | 4.48% | 3,431,282 | 76,635 | 4.50% | 3,206,950 | 75,161 | 4.73% |
| **Total interest-earning assets** | **5,038,586** | **47,371** | **3.77%** | **4,998,004** | **94,522** | **3.81%** | **4,634,797** | **92,865** | **4.04%** |
| Other assets | 352,528 |  |  | 355,264 |  |  | 371,552 |  |  |
| **Total assets** | **5,391,114** |  |  | **5,353,268** |  |  | **5,006,349** |  |  |
| **LIABILITIES & EQUITY** |  |  |  |  |  |  |  |  |  |
| Deposits |  |  |  |  |  |  |  |  |  |
| Interest-bearing deposits |  |  |  |  |  |  |  |  |  |
| Interest bearing checking, savings, & money market | 2,326,361 | 924 | 0.16% | 2,337,605 | 1,914 | 0.17% | 2,272,478 | 2,211 | 0.20% |
| Time deposits | 917,986 | 1,697 | 0.74% | 912,016 | 3,328 | 0.74% | 895,073 | 3,308 | 0.75% |
| Total interest-bearing deposits | 3,244,347 | 2,621 | 0.32% | 3,249,621 | 5,242 | 0.33% | 3,167,551 | 5,519 | 0.35% |
| Federal funds purchased & securities sold under agreements to repurchase | 131,324 | 665 | 2.03% | 136,811 | 1,335 | 1.97% | 153,939 | 1,580 | 2.07% |
| Other borrowings | 422,364 | 1,234 | 1.17% | 385,233 | 2,373 | 1.24% | 263,633 | 2,401 | 1.84% |
| Trust preferred debentures | 37,395 | 573 | 6.15% | 37,374 | 1,143 | 6.17% | 37,205 | 1,141 | 6.18% |
| **Total interest-bearing liabilities** | **3,835,430** | **5,093** | **0.53%** | **3,809,039** | **10,093** | **0.53%** | **3,622,328** | **10,641** | **0.59%** |
| Noninterest bearing deposits | 983,199 |  |  | 978,233 |  |  | 856,161 |  |  |
| Accrued expenses and other liabilities | 66,818 |  |  | 64,615 |  |  | 53,539 |  |  |
| **Total liabilities** | 4,885,447 |  |  | 4,851,887 |  |  | 4,532,028 |  |  |
| Tompkins Financial Corporation Shareholders’ equity | 504,166 |  |  | 499,896 |  |  | 472,836 |  |  |
| Noncontrolling interest | 1,501 |  |  | 1,485 |  |  | 1,485 |  |  |
| **Total equity** | **505,667** |  |  | **501,381** |  |  | **474,321** |  |  |
| **Total liabilities and equity** | **$5,391,114** |  |  | **$5,353,268** |  |  | **$5,006,349** |  |  |
| Interest rate spread |  |  | **3.24%** |  |  | **3.28%** |  |  | **3.45%** |
| Net interest income/margin on earning assets |  | **42,278** | **3.37%** |  | **84,429** | **3.41%** |  | **82,224** | **3.58%** |
| Tax Equivalent Adjustment |  | **(948)** |  |  | **(1,871)** |  |  | **(1,681)** |  |
| Net interest income per consolidated financial statements |  | **$41,330** |  |  | **$82,558** |  |  | **$80,543** |  |

#### 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. Payment received on nonaccrual loans have been recognized as disclosed in Note 1 of the Company’s condensed consolidated financial statements included in Part 1 of the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2014.*

52

### Net Interest Income

Net interest income is the Company’s largest source of revenue, representing 68.6% and 69.3%, respectively, of total revenues for the three and six month periods ended June 30, 2015, compared to 69.6% for the same periods in 2014. 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, 2015 was up 2.0% and 2.5%, respectively, over the same periods in 2014, as growth in average earning assets offset a decrease in net interest margin for the second quarter and year-to-date in 2015 compared to the same periods in 2014. The decrease in net interest margin reflects lower yields on average earning assets as a result of low interest rate environment as well as a slight shift in composition of average earning assets between loans and securities. For the three and six months ended June 30, 2015, average loans and average securities represented 68.8% and 68.6%, respectively, of average earning assets compared to 69.0% and 69.2%, respectively, for the same periods in 2014.

Taxable-equivalent interest income for the three and six month periods ended June 30, 2015 was $47.4 million and $94.5 million, respectively, up 1.6% and 1.8% compared to the same periods of 2014. The increase in taxable-equivalent interest income was mainly the result of an increase in average loans, which was partially offset by a decrease in the yield on average loans. Average loan balances for the three months and six months ended June 30, 2015 were up $242.7 million or 7.5%, and $224.3 million or 7.0%, respectively, while the average yield decreased 22 basis points and 23 basis points, respectively, from the same periods in 2014. Average securities balances for the three and six months ended June 30, 2015 were up by $161.4 million or 11.3% and $136.5 million or 9.7%, respectively, while the average yield for the three and six month periods were down 25 and 22 basis points, respectively, compared to the same periods in 2014.

Interest expense for the three and six months ended June 30, 2015 decreased by $210,000 or 4.0%, and $548,000 or 5.2%, respectively, compared to the same periods in 2014. The average rate paid on interest bearing deposits during the three and six months ended June 30, 2015 was 0.32% and 0.33%, respectively, compared to 0.35% reported for the same periods of 2014. Average interest bearing deposits for the second quarter of 2015 were up $85.5 million or 2.7% compared to the same period in 2014, while year-to-date average interest bearing deposits were up $82.1 million or 2.6% compared to the same period in 2014. Average noninterest bearing deposits for the three and six month periods ended June 30, 2015 were up $106.0 million or 12.1% and $122.1 million or 14.3%, respectively, compared to the same periods in 2014. Average other borrowings for the three and six months ended June 30, 2015 were up $143.9 million or 51.7% and $121.6 million or 46.1% compared to the same periods in 2014. The increase was mainly in overnight borrowings with the FHLB, which contributed to the decrease in average funding cost in this category in 2015.

### Provision for Loan and Lease Losses

The provision for loan and lease losses represents management’s estimate of the amount necessary to maintain the allowance for loan and lease losses at an adequate level. The provision for loan and lease losses was $922,000 for the second quarter of 2015 and $1.1 million for the six months ended June 30, 2015. The increase in provision for loan and lease losses in 2015 over the three and six month comparative periods in 2014 is mainly a result loan growth in 2015. 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 $19.0 million for the second quarter of 2015 and $36.6 million for the first six months of 2015. This represents an increase of 7.0% for the quarter and 4.1% for the year-to-date period compared to the same periods in 2014. Noninterest income represented 31.5% of total revenue for the second quarter of 2015 and 30.7% for the year-to-date period, compared to 30.4% for the same periods in 2014.

Insurance commissions and fees were $7.4 million for the second quarter of 2015, an increase of 5.1% over the same period prior year. For the first six months of 2015, insurance commissions and fees were up $474,000 or 3.3% over the first six months of 2014. Commissions from commercial lines, personal insurance lines and health and life insurance were up in 2015 over the same period in 2014.

Investment services income was $3.8 million in the second quarter of 2015, a decrease of 1.6% from $3.9 million in the second quarter of 2014. For the first six months of 2015, investment services income was down $68,000 or 0.9% from the first six months of 2014. At the end of the first quarter, the Company concluded operations attributable to their internal broker dealer and registered investment advisory group and engaged a new broker dealer of record. This contributed to a slight decline in year-over-year income. Investment services income includes trust services, financial planning, wealth management services, and brokerage related services. With fees largely based on the market value and the mix of assets managed, the general direction of the stock market can have a considerable impact on fee income. The fair value of assets managed by, or in custody of, Tompkins was $3.9 billion at June 30, 2015, up 9.7% from $3.6 billion at June 30, 2014. These figures include $1.2 billion of Company-owned securities where Tompkins Trust Company is custodian.

Service charges on deposit accounts were down $144,000 or 6.0% for the second quarter of 2015 compared to the second quarter of 2014, and down $102,000 or 2.3% for the six months ended June 30, 2015 compared to the same period in 2014. Net overdraft fees, the largest component of service charges on deposit accounts, were down 9.3% and 6.3% for the three and six months ended June 30, 2015 compared to the same periods in 2014.

Card services income for the three months and six months ended June 30, 2015 was up $105,000 or 5.5%, and down $189,000 or 4.7% over the same periods in 2014. Income benefited from a first quarter accrual adjustment related to the termination of a debit card reward program to reflect actual redemption rate on program incentives than management’s original estimates. The number of debit cards issued and transaction volume during the second quarter and year-to-date periods in 2015 were favorable to 2014.

The Company recognized gains on the sales/calls of available-for-sale securities of $723,000 and $1.0 million for the three and six months ended June 30, 2015, compared to gains of $35,000 and $129,000 for the same periods in 2014. Sales of available-for-sale securities are generally the result of general portfolio maintenance and interest rate risk management.

Other income of $2.7 million in the second quarter of 2015 was up 12.3% over the second quarter of 2014. For the first six months of 2015, other income of $4.7 million was up 11.4% over the same period in 2014. The significant components of other income are other service charges, increases in cash surrender value of corporate owned life insurance (“COLI”), gains on the sales of residential mortgage loans, and income from miscellaneous equity investments. A main contributor of the year over year increase was a significant gain on the sale of an other real estate owned property in the second quarter 2015. Gains on sales of other real estate owned totaled $924,000 for the three and six months ended June 30, 2015 compared to a net loss of $80,000 for the three months ended June 30, 2014 and a net gain of $39,000 for the first six months of 2014. Partially offsetting the gains on sales of other real estate owned were lower loan related fees, including gains on the sales of residential loans.

### Noninterest Expense

Noninterest expense was $32.9 million for the second quarter of 2015, down 15.4% compared to the second quarter of 2014 and $72.6 million for the six months ended June 30, 2015, down 5.9% from the same period in 2014. The decrease in noninterest expense in 2015 compared to the same period prior year is mainly attributable to the curtailment of the Company’s defined benefit pension plan, which resulted in a $6.0 million credit to pension and other employee benefits expense in the second quarter of 2015 in accordance with accounting guidance.

Salaries and wages expense for the three and six months ended June 30, 2015 increased by $734,000 or 4.2%, and $1.7 million or 4.8%, respectively, over the same periods in 2014. The increase is mainly a result of normal merit and market adjustments, increases in incentive compensation as well as an increase in the number of employees. Pension and other employee related benefits were down $5.5 million over both the three and six month periods in 2014, mainly as a result of the pension curtailment discussed above.

Other operating expense for the second quarter of 2015 and for the first six months of 2015 was down $1.3 million or 12.1% and $757,000 or 3.8% compared to the same periods in 2014. The decrease is mainly related to lower legal fees, and other real estate owned related expenses.

Overall, all other expense categories remained relatively flat compared to the same period prior year.

### Income Tax Expense

The provision for income taxes was $9.0 million for an effective rate of 34.1% for the second quarter of 2015, compared to tax expense of $6.1 million and an effective rate of 32.0% for the same quarter in 2014. For the first six months of 2015 the tax provision was $15.3 million for an effective rate of 33.7% compared to a tax provision of $12.1 million and an effective rate of 31.9% for the same period in 2014. 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. The increase in the effective rate in the second quarter of 2015 was mainly a result of the accounting for the $6.0 million curtailment gain related to the change to the Company’s defined benefit pension plan.

FINANCIAL CONDITION

Total assets were $5.4 billion at June 30, 2015, up $166.6 million or 3.2% over December 31, 2014. The growth over year-end was primarily attributable to growth in originated loans, which were up $174.0 million or 6.1%, and growth in held-to-maturity securities which were up $57.6 million or 65.3%. This growth was partially offset by a decrease in acquired loans, which were down $45.4 million or 8.2% and a decrease in available-for-sale securities which were down $19.8 million or 1.4%. Total deposits increased $34.9 million or 0.8% compared to December 31, 2014, mainly a result of an inflow of municipal deposits. Other borrowings increased $136.8 million or 38.4% from December 31, 2014, as a result of loan growth outpacing deposit growth.

### Securities

As of June 30, 2015, the Company’s securities portfolio was $1.5 billion or 28.1% of total assets, compared to $1.4 billion or 28.5% of total assets at year-end 2014. The following table details the composition of available-for-sale and held-to-maturity securities.

*(in thousands)*

| Available-for-Sale Securities | 06/30/2015 Amortized Cost | Fair Value | 12/31/2014 Amortized Cost | Fair Value |
| --- | ---: | ---: | ---: | ---: |
| Obligations of U.S. Government sponsored entities | $539,336 | $544,273 | $553,300 | $557,820 |
| Obligations of U.S. states and political subdivisions | 71,948 | 72,310 | 70,790 | 71,510 |
| Mortgage-backed securities |  |  |  |  |
| U.S. Government agencies | 96,785 | 97,585 | 108,931 | 109,926 |
| U.S. Government sponsored entities | 669,663 | 665,000 | 660,195 | 659,120 |
| Non-U.S. Government agencies or sponsored entities | 208 | 211 | 267 | 271 |
| U.S. corporate debt securities | 2,500 | 2,162 | 2,500 | 2,162 |
| Total debt securities | 1,380,440 | 1,381,541 | 1,395,983 | 1,400,809 |
| Equity securities | 1,000 | 943 | 1,475 | 1,427 |
| **Total available-for-sale securities** | **$1,381,440** | **$1,382,484** | **$1,397,458** | **$1,402,236** |

*Held-to-Maturity Securities*

*(in thousands)*

|  | 06/30/2015 Amortized Cost | Fair Value | 12/31/2014 Amortized Cost | Fair Value |
| --- | ---: | ---: | ---: | ---: |
| Obligations of U.S. Government sponsored entities | $132,671 | $132,556 | $71,906 | $72,269 |
| Obligations of U.S. states and political subdivisions | $13,066 | $13,520 | $16,262 | $16,767 |
| **Total held-to-maturity debt securities** | **$145,737** | **$146,076** | **$88,168** | **$89,036** |

The decrease in the fair value of the available-for-sale portfolio was due primarily to changes in interest rates during the first six months of 2015. The increase in interest rates during 2015 resulted in a decrease in the unrealized gains in the available-for-sale portfolio. 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. The increase in the held-to-maturity portfolio was due to purchases of Obligations of U.S. Government sponsored entities during the six month period ended June 30, 2015.

The Company has no investments in preferred stock of U.S. government sponsored entities and no investments in pools of Trust Preferred securities. Quarterly, the Company evaluates all investment securities with a fair value less than amortized cost to identify any other-than-temporary impairment as defined under generally accepted accounting principles.

As a result of the other-than-temporarily impairment review process, the Company does not consider any investment security held at June 30, 2015 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.

The Company maintains a trading portfolio with a fair value of $8.2 million as of June 30, 2015, compared to $9.0 million at December 31, 2014. The decrease in the trading portfolio reflects maturities or payments during the three and six months ended June 30, 2015. For the three and six months ended June 30, 2015, net mark-to-market losses related to the securities trading portfolio were $74,000 and $137,000, respectively, compared to net mark-to-market losses for the three and six months ended June 30, 2014 of $34,000 and $93,000, respectively.

*Loans and Leases*

*Loans and leases at June 30, 2015 and December 31, 2014 were as follows:*

*(in thousands)*

| Commercial and industrial | 06 /30/2015 Originated | Acquired | Total Loans and Leases | 12 /31/2014 Originated | Acquired | Total Loans and Leases |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Agriculture | **$61,744** | **$0** | **$61,744** | $78,507 | $0 | $78,507 |
| Commercial and industrial other | **724,196** | **92,875** | **817,071** | 688,529 | 97,034 | 785,563 |
| Subtotal commercial and industrial | **785,940** | **92,875** | **878,815** | 767,036 | 97,034 | 864,070 |
| Commercial real estate |  |  |  |  |  |  |
| Construction | **74,795** | **37,981** | **112,776** | 72,427 | 35,906 | 108,333 |
| Agriculture | **74,586** | **2,214** | **76,800** | 58,994 | 3,182 | 62,176 |
| Commercial real estate other | **1,055,007** | **278,825** | **1,333,832** | 979,621 | 308,488 | 1,288,109 |
| Subtotal commercial real estate | **1,204,388** | **319,020** | **1,523,408** | 1,111,042 | 347,576 | 1,458,618 |
| Residential real estate |  |  |  |  |  |  |
| Home equity | **193,332** | **48,717** | **242,049** | 186,957 | 56,008 | 242,965 |
| Mortgages | **760,858** | **30,607** | **791,465** | 710,904 | 32,282 | 743,186 |
| Subtotal residential real estate | **954,190** | **79,324** | **1,033,514** | 897,861 | 88,290 | 986,151 |
| Consumer and other |  |  |  |  |  |  |
| Indirect | **17,866** | **0** | **17,866** | 18,298 | 0 | 18,298 |
| Consumer and other | **39,842** | **973** | **40,815** | 35,874 | 1,095 | 36,969 |
| Subtotal consumer and other | **57,708** | **973** | **58,681** | 54,172 | 1,095 | 55,267 |
| Leases | **14,190** | **0** | **14,190** | 12,251 | 0 | 12,251 |
| Covered loans | **0** | **15,771** | **15,771** | 0 | 19,319 | 19,319 |
| Total loans and leases | **3,016,416** | **507,963** | **3,524,379** | 2,842,362 | 553,314 | 3,395,676 |
| Less: unearned income and deferred costs and fees | **(2,448)** | **0** | **(2,448)** | (2,388) | 0 | (2,388 |
| Total loans and leases, net of unearned income and deferred costs and fees | **$3,013,968** | **$507,963** | **$3,521,931** | $2,839,974 | $553,314 | $3,393,288 |

Residential real estate loans, including home equity loans at June 30, 2015 were $1.0 billion, $474 million or 4.8% compared to December 31, 2014, and comprised 29.3% of total loans and leases. Growth in residential loan balance 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. While in the past in rare circumstances the Company agreed to sell residential real estate loans with recourse, the Company has not done so in the past several years and the amount of such loans included on the Company’s balance sheet at June 30, 2015 was insignificant. The Company has never had to repurchase a loan sold with recourse.

During the first six months of 2015 and 2014, the Company sold residential mortgage loans totaling $0.7 million and $8.2 million, respectively, and realized gains on these sales of $10,000 and $221,000, respectively. These residential real estate loans were sold without recourse in accordance with standard secondary market loan sale agreements. When residential mortgage loans are sold, the Company typically retains all servicing rights, which provides the Company with a source of fee income. Mortgage servicing rights, at amortized basis, totaled $1.0 million at June 30, 2015 and $1.0 million at December 31, 2014.

The Company has not originated any hybrid loans, such as payment option ARMs. The Company underwrites residential real estate loans in accordance with secondary market standards in effect at the time of origination, including loan-to-value (“LTV”) and documentation requirements. The Company does not underwrite low or reduced documentation loans other than those that meet secondary market standards for low or reduced documentation loans. In those instances, W-2’s and paystubs are used instead of sending Verification of Employment forms to employers to verify income and bank deposit statements are used instead of Verification of Deposit forms mailed to financial institutions to verify deposit balances.

Commercial and industrial loans and commercial real estate loans totaled $878.8 million and $1.5 billion, and represented 25.0% and 43.3%, respectively of total loans as of June 30, 2015. The commercial real estate portfolio was up 4.4% over year-end 2014, while commercial and industrial loans were up 1.7%. As of June 30, 2015, agriculturally-related loans totaled $138.5 million or 3.9% of total loans and leases, down from $140.7 million or 4.2% of total loans and leases at December 31, 2014. There is generally an increase in agriculturally-related loans at year end related to tax planning and these loans are typically paid down over the first part of the year. 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 the acquired loans reflects management’s best estimate of the amount to be realized from the acquired loan and lease portfolios. However, the amounts the Company actually realizes on these loans could differ materially from the carrying value reflected in these financial statements, based upon the timing of collections on the acquired loans in future periods, underlying collateral values and the ability of borrowers to continue to make payments.

The carrying value of acquired loans acquired and accounted for in accordance with ASC Subtopic 310-30, “Receivables Loans and Debt Securities Acquired with Deteriorated Credit Quality,” was $30.5 million at June 30, 2015 as compared to $34.4 million at December 31, 2014. Under ASC Subtopic 310-30, loans may be aggregated and accounted for as pools of loans if the loans being aggregated have common risk characteristics. The Company elected to account for the loans with evidence of credit deterioration individually rather than aggregate them into pools. The difference between the undiscounted cash flows expected at acquisition and the investment in the acquired loans, or the “accretable yield,” is recognized as interest income utilizing the level-yield method over the life of each loan. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “non-accretable difference,” are not recognized as a yield adjustment, as a loss accrual or as a valuation allowance.

Increases in expected cash flows subsequent to the acquisition are recognized prospectively through an adjustment of the yield on the loans over the remaining life. Subsequent decreases to the expected cash flows require us to evaluate the need for an addition to the allowance for loan losses. Valuation allowances (recognized in the allowance for loan losses) on these impaired loans reflect only losses incurred after the acquisition (representing all cash flows that were expected at acquisition but currently are not expected to be received).

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 $477.5 million at June 30, 2015. At acquisition, these loans were recorded at fair value, including a credit discount. Credit losses on acquired performing loans are estimated based on analysis of the performing portfolio. The purchased performing portfolio also included a general interest rate mark (premium). Both the credit discount and interest rate mark are accreted/amortized as a yield adjustment over the estimated lives of the loans. Interest is accrued daily on the outstanding principal balance of purchased performing loans.

At June 30, 2015, acquired loans included $15.8 million of covered loans. VIST Financial Corp had acquired these loans in an FDIC assisted transaction in the fourth quarter of 2010. In accordance with loss sharing agreements with the FDIC, certain losses and expenses relating to covered loans may be reimbursed by the FDIC at 70% or, if certain levels of reimbursement are reached, 80%. See Note 7 – “FDIC Indemnification Asset Related to Covered Loans” in the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q.

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, 2014. There have been no significant changes in these policies and guidelines. As such, these policies are reflective of new originations as well as those balances held at June 30, 2015. 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)*

| Allowance for originated loans and leases | 06/30/2015 | 12/31/2014 | 06/30/2014 |
| --- | ---: | ---: | ---: |
| Commercial and industrial | $8,224 | $9,157 | $8,562 |
| Commercial real estate | 13,487 | 12,069 | 10,389 |
| Residential real estate | 5,583 | 5,030 | 5,445 |
| Consumer and other | 2,134 | 1,900 | 2,356 |
| **Total** | **$29,428** | **$28,156** | **$26,752** |

*(in thousands)*

| Allowance for acquired loans | 06/30/2015 | 12/31/2014 | 06/30/2014 |
| --- | ---: | ---: | ---: |
| Commercial and industrial | $384 | $431 | $159 |
| Commercial real estate | 167 | 337 | 460 |
| Residential real estate | 100 | 51 | 49 |
| Consumer and other | 12 | 22 | 97 |
| **Total** | **$663** | **$841** | **$765** |

As of June 30, 2015, the total allowance for loan and lease losses was $30.1 million, which was $1.1 million or 3.8% over year-end 2014. The increase in the allowance compared to year-end was mainly due growth in the originated loan portfolio. Loans internally-classified Special Mention, Substandard and Doubtful were down from prior year as were the level of nonperforming loans and leases. The allowance for loan and lease losses covered 139.36% of nonperforming loans and leases as of June 30, 2015, compared to 128.43% at December 31, 2014, and 103.08% at June 30, 2014.

The Company’s allowance for originated loan and lease losses totaled $29.4 million at June 30, 2015, which represented 0.98% of total originated loans, compared to 0.99% at prior quarter end, and 1.02% at June 30, 2014. Originated loans internally-classified as Special Mention, Substandard and Doubtful totaled $47.3 million at June 30, 2015, which were in down $6.8 million or 12.6% compared to prior quarter, and down $9.4 million or 16.6% compared to June 30, 2014. The decrease is mainly due to paydowns of classified assets and upgrades of risk ratings in our commercial loan portfolio and commercial real estate construction portfolios as a result of improving financial conditions of our commercial customers.

The allowance for acquired loans at June 30, 2015 was $663,000, down $178,000 or 21.2% from year-end 2014 and down $102,000 or 13.3% compared to June 30, 2014. The amount of acquired loans internally-classified as Special Mention, Substandard and Doubtful totaled $23.5 million at June 30, 2015, down from $27.3 million at year-end 2014 and $42.4 million at June 30, 2014. Loan pay downs coupled with charge offs contributed to the decrease from the same quarter prior year and year-end 2014. Nonaccrual acquired loans were $5.0 million as of June 30, 2015 compared to $4.7 million at year-end 2014, and $5.9 million at June 30, 2014.

Activity in the Company’s allowance for loan and lease losses during the first six months of 2015 and 2014 is illustrated in the table below.

*Analysis of the Allowance for Originated Loan and Lease Losses*

*(in thousands)*

|  | 06/30/2015 | 06/30/2014 |
| --- | ---: | ---: |
| Average originated loans outstanding during period | **$2,900,786** | $2,559,332 |
| Balance of originated allowance at beginning of year | **$28,156** | $26,700 |
| **ORIGINATED LOANS CHARGED-OFF:** |  |  |
| Commercial and industrial | **44** | 254 |
| Commercial real estate | **14** | 613 |
| Residential real estate | **312** | 267 |
| Consumer and other | **510** | 666 |
| **Total loans charged-off** | **$880** | $1,800 |
| **RECOVERIES OF ORIGINATED LOANS PREVIOUSLY CHARGED-OFF:** |  |  |
| Commercial and industrial | **235** | 489 |
| Commercial real estate | **477** | 562 |
| Residential real estate | **49** | 86 |
| Consumer and other | **282** | 260 |
| **Total loans recoveries** | **$1,043** | $1,397 |
| Net loans (recovered) charged-off | **(163)** | 403 |
| Additions to originated allowance charged to operations | **1,109** | 455 |
| **Balance of originated allowance at end of period** | **$29,428** | $26,752 |
| **Allowance for originated loans and leases as a percentage of originated loans and leases** | **0.98%** | 1.02% |
| **Annualized net (recoveries) charge-offs on originated loans to average total originated loans and leases during the period** | **(0.01%)** | 0.03% |

59

*Analysis of the Allowance for Acquired Loan Losses*

*(in thousands)*

|  | 06/30/2015 | 06/30/2014 |
| --- | ---: | ---: |
| Average acquired loans outstanding during period | **$530,496** | $647,618 |
| Balance of acquired allowance at beginning of year | **841** | 1,270 |
| **ACQUIRED LOANS CHARGED-OFF:** |  |  |
| Commercial and industrial | **53** | 25 |
| Commercial real estate | **156** | 551 |
| Residential real estate | **112** | 277 |
| Consumer and other | **0** | 7 |
| **Total loans charged-off** | **$321** | $860 |
| Commercial and industrial | **7** | 0 |
| Commercial real estate | **112** | 0 |
| Residential real estate | **2** | 0 |
| **Total loans recovered** | **$121** | $0 |
| Net loans charged-off | **200** | 860 |
| Additions to acquired allowance charged to operations | **22** | 355 |
| **Balance of acquired allowance at end of period** | **$663** | $765 |
| **Allowance for acquired loans as a percentage of acquired loans outstanding acquired loans and leases** | **0.12%** | 0.12% |
| **Annualized net charge-offs on acquired loans as a percentage of average acquired loans and leases outstanding during the period** | **0.08%** | 0.25% |
| **Annualized total net charge-offs as a percentage of average loans and leases outstanding during the period** | **0.00%** | 0.08% |

60

*Analysis of Past Due and Nonperforming Loans*

*(in thousands)*

| Loans 90 days past due and accruing | 06/30/20151 | 12/31/20141 | 06/30/20141 |
| --- | ---: | ---: | ---: |
| Commercial and industrial | **$0** | $0 | $0 |
| Commercial real estate | **0** | 0 | 1 |
| Residential real estate | **58** | 106 | 542 |
| Total loans 90 days past due and accruing | **58** | 106 | 543 |
| Nonaccrual loans |  |  |  |
| Commercial and industrial | **2,012** | 2,116 | 1,758 |
| Commercial real estate | **6,872** | 7,520 | 10,008 |
| Residential real estate | **10,469** | 9,043 | 10,490 |
| Consumer and other | **243** | 349 | 569 |
| Total nonaccrual loans | **19,596** | 19,028 | 22,825 |
| Troubled debt restructurings not included above | **1,939** | 3,444 | 3,327 |
| **Total nonperforming loans and leases** | **21,593** | 22,578 | 26,695 |
| Other real estate owned | **2,570** | 5,683 | 6,795 |
| **Total nonperforming assets** | **$24,163** | $28,261 | $33,490 |
| **Allowance as a percentage of nonperforming loans and leases** | **139.36%** | 128.43% | 103.08% |
| **Total nonperforming loans and leases as percentage of total loans and leases** | **0.61%** | 0.67% | 0.83% |
| **Total nonperforming assets as percentage of total assets** | **0.44%** | 0.54% | 0.66% |

*1 The June 30, 2015, December 31, 2014, and June 30, 2014 columns in the above table exclude $3.7 million, $3.5 million, and $4.0 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.*

Net loan and lease charge-offs totaled $316,000 for the three months ended June 30, 2015, compared to $564,000 for the same period in 2014. Annualized net charge offs for the six month period ended June 30, 2015 as a percentage of average total loans and leases was 0.04% compared to 0.07% for the six months ended June 30, 2014, compared to the most recent peer percentage is 0.09%.

The provision for loan and lease losses was $922,000 and $1.1 million for the three and six months ended June 30, 2015, compared to $67,000 and $810,000 for the same periods in 2014. The increase in provision for loan and lease losses in 2015 compared to 2014 was mainly a result of growth in total loans, which was partially offset by generally favorable asset quality trends, including reductions in classified loans and nonperforming loans, and lower net charge-offs.

Nonperforming assets include nonaccrual loans, troubled debt restructurings (“TDR”), and foreclosed real estate/other real estate owned. Nonperforming assets represented 0.44% of total assets at June 30, 2015, compared to 0.54% at December 31, 2014, and 0.66% at June 30, 2014. The Company’s ratio of nonperforming assets to total assets continues to compare favorably to our peer group’s most recent ratio of 0.88% at March 31, 2015.

Total nonperforming loans and leases were down $985,000 or 4.4% from year end 2014, and down $5.1 million or 19.1% from June 30, 2014. A breakdown of nonperforming loans by portfolio segment is shown above. The decrease in nonperforming commercial real estate loans since June 30, 2014 is mainly due to significant payments received on two large commercial relationships in 2014. The decrease in the line captioned, ‘Troubled debt restructurings not included above’, from year-end 2014 was a result of several loans performing in accordance with their modified terms for an extended period and therefore no longer required to be reported on this line item. Total nonperforming assets were down $4.1 million compared to December 31, 2014. The decrease is mainly due to the sale of one property that was acquired through foreclosure in the second quarter of 2014.

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, 2015 the Company had $6.1 million in TDRs, and of that total $4.2 million were reported as nonaccrual and $1.9 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.

The Company’s recorded investment in loans and leases that are considered impaired totaled $16.7 million at June 30, 2015, compared to $12.6 million at December 31, 2014 and $17.5 million at June 30, 2014. 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 $20.7 million at June 30, 2015, compared to $19.2 million at June 30, 2014. At June 30, 2015 there was a specific reserve of $1.1 million on impaired loans compared to $1.2 million of specific reserves at December 31, 2014. The specific reserve of $1.1 million reported at June 30, 2015 includes a specific reserve of $735,000 for one commercial real estate loan in the originated portfolio and specific reserves of $387,000 on 5 loans within 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 (loans past due 90 days and accruing, nonaccrual loans and restructured troubled debt) was 139.36% at June 30, 2015, improved from 128.43% in December 31, 2014, and 103.08% at June 30, 2014. The improvement in the ratio reflects the decrease in nonperforming loans over the year as well as an increase in the total allowance. The Company’s nonperforming loans are mostly made up of collateral dependent impaired loans with limited exposure or requiring limited specific reserve due to the level of collateral available with respect to these loans and/or previous charge-offs. The Company’s peer group ratio as provided by the Federal Reserve Bank was 162.44% as of March 31, 2015.

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 32 commercial relationships from the originated portfolio and 22 commercial relationships from the acquired portfolio totaling $15.7 million and $11.4 million, respectively at June 30, 2015 that were potential problem loans. At December 31, 2014, the Company had identified 34 relationships totaling $14.8 million in the originated portfolio and 21 relationships totaling $8.8 million in the acquired portfolio that were potential problem loans. Of the 32 commercial relationships in the originated portfolio at June 30, 2015, that were Substandard, there were 5 relationships that equaled or exceeded $1.0 million, which in aggregate totaled $9.2 million, the largest of which was $3.5 million. Of the 22 commercial relationships from the acquired loan portfolio at June 30, 2015, that were Substandard, there were 3 relationships that equaled or exceeded $1.0 million, which in aggregate totaled $5.4 million, the largest of which is $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.

### Capital

Total equity was $505.4 million at June 30, 2015, an increase of $15.8 million or 3.2% from December 31, 2014. The increase reflects growth in retained earnings and additional paid-in capital.

Additional paid-in capital increased by $2.7 million, from $348.9 million at December 31, 2014, to $351.5 million at June 30, 2015. The increase is primarily attributable to the following: $1.6 million related to shares issued under the employee stock ownership plan, $1.6 million related to shares issued for the exercise of stock options, and $953,000 related to stock-based compensation. Retained earnings increased by $16.8 million from $165.2 million at December 31, 2014, to $182.0 million at June 30, 2015, reflecting net income of $30.1 million less dividends paid of $12.6 million. Retained earnings were also impacted by the adoption of accounting guidance related to accounting for investments in qualified affordable housing projects in the first quarter of 2015. The adoption resulted in a $725,000 reduction of retained earnings. Accumulated other comprehensive loss increased from a net loss of $24.0 million at December 31, 2014 to a net loss of $27.6 million at June 30, 2015, reflecting a $2.2 million decrease in unrealized gains on available-for-sale securities due to an increase in market rates, and a $1.4 million increase related to postretirement benefit plans. During the second quarter of 2015, the Company recorded a one-time; $3.2 million loss to accumulated other comprehensive income due to the curtailment of its defined benefit pension plan in accordance with FASB ASC 715. Under regulatory requirements, amounts reported as accumulated other comprehensive income/loss related to net unrealized gain or loss on available-for-sale securities and the funded status of the Company’s defined benefit post-retirement benefit plans do not increase or reduce regulatory capital and are not included in the calculation of risk-based capital and leverage ratios.

Cash dividends paid in the first six months of 2015 totaled approximately $12.6 million, representing 41.7% of year to date 2015 earnings. Cash dividends of $0.84 per common share paid in the first six months of 2015 were up 5.0% over cash dividends of $0.80 per common share paid in the first six months of 2014.

On July 24, 2014, the Company’s Board of Directors authorized, at the discretion of senior management, the repurchase of up to 400,000 shares of the Company’s outstanding common stock. Purchases may be made on the open market or in privately negotiated transactions over the 24 months following adoption of the repurchase program. The Company did not repurchase any shares during the first quarter and repurchased 27,892 shares in the second quarter of 2015 at an average price of $51.66. As of June 30, 2015 the Company has repurchased an aggregate of 129,358 shares under the plan at an average price of $46.75.

The Company and its banking subsidiaries are subject to various regulatory capital requirements administered by Federal banking agencies. In July 2013, the FRB approved and published the final Basel III Capital Rules establishing a new comprehensive capital framework for U.S. banking organizations. The rules implement the Basel Committee’s December 2010 framework known as “Basel III” for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act. The Basel III Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions, including Tompkins Financial, compared to the current U.S. risk-based capital rules. The Basel III Capital Rules define the components of capital, and address risk weights and other issues affecting the denominator in banking institutions’ regulatory capital ratios. It also replaces the existing risk-weighting approach, with a more risk-sensitive approach based, in part, on the standardized approach in the Basel Committee’s 2004 “Basel II” capital accords and implements the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings utilized in the federal banking agencies’ rules. The Basel III Capital Rules were effective for Tompkins on January 1, 2015 (subject to a phase-in period).

As required under Dodd-Frank, a new capital ratio, “common equity tier 1 capital ratio” (CET1) was established. This ratio allows only common equity to qualify as tier 1 capital. The new CET1 ratio also will include most elements of accumulated other comprehensive income, including unrealized securities gains and losses, as part of both total regulatory capital (numerator) and total assets (denominator). Community banks however were given the opportunity to make a one-time irrevocable election to include or not to include certain elements of other comprehensive income, most notably unrealized securities gains or losses. Tompkins elected to not include the certain items of other comprehensive income in its capital calculation.

In addition to setting higher minimum capital ratios, the new rules, introduce 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 will be phased-in over five years beginning on January 1, 2016 and will be set at 2.5% when fully phased-in. If a banking organization fails to hold capital above minimum capital ratios, including the capital conservation buffer, it will be subject to certain restrictions on capital distributions and discretionary bonus payments.

The final rules eliminated the proposed phase-out over 10 years of Trust Preferred Services, or “TRUPs” as tier 1 capital for banks, such as Tompkins Financial, that have less than $15 billion in total assets. Under the final rule, grandfathered TRUPs, such as Tompkins Financial’s outstanding TRUPs, would continue to qualify as tier 1 capital until they mature or are redeemed, up to a limit of 25% of tier 1 capital (for grandfathered TRUPs and other grandfathered tier 1 capital components).

The following table provides a summary of the Company’s capital ratios as of June 30, 2015.

*REGULATORY CAPITAL ANALYSIS*

*(dollar amounts in thousands)*

| June 30, 2015 | Actual Amount | Ratio | Well Capitalized Requirement Amount | Ratio |
| --- | ---: | ---: | ---: | ---: |
| Total Capital (to risk weighted assets) | $503,602 | 13.46% | $374,020 | 10.00% |
| Tier 1 Capital (to risk weighted assets) | $471,580 | 12.61% | $299,216 | 8.00% |
| Tier 1 Common Equity (to risk weighted assets) | $434,157 | 11.61% | $243,113 | 6.50% |
| Tier 1 Capital (to average assets) | $471,580 | 8.92% | $264,342 | 5.00% |

As illustrated above, the Company’s capital ratios on June 30, 2015 remained above the minimum requirements for well capitalized institutions. Total capital as a percent of risk weighted assets decreased from 13.6% as of December 31, 2014 to 13.5% at June 30, 2015. Tier 1 capital as a percent of risk weighted assets decreased from 12.8% at the end of 2014 to 12.6% as of June 30, 2015. Tier 1 capital as a percent of average assets was 8.9% at June 30, 2015 up from 8.7% at year end December 31, 2014. Common equity tier 1 capital was 11.6% at the end of the second quarter of 2015, up from 11.5% at the end of the first quarter. All ratios were negatively impacted by the new Basel III requirements the Company was subject to in the reporting period.

As of June 30, 2015, the capital ratios for the Company’s subsidiary banks also exceeded the minimum levels required to be considered well capitalized.

### Deposits and Other Liabilities

Total deposits of $4.2 billion at June 30, 2015 were flat compared to December 31, 2014 as a $66.8 million increase in money market savings and interest bearing checking deposits were offset by a $40.1 million decline in noninterest bearing deposits. The improvement in money market savings and interest checking deposits can be attributed primarily to municipal customers and reflects an inflow of tax receipts. The decrease in noninterest bearing balances was partially due to the seasonality experienced by the Company’s agricultural related businesses, as deposit balances generally accumulate at year end and are subsequently put to use during the first half of the year.

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 of $3.4 billion were relatively flat at June 30, 2015 compared to year-end 2014. Core deposits represented 80.7% of total deposits at June 30, 2015, compared to 81.1% of total deposits at December 31, 2014.

Municipal money market savings and interest checking accounts of $706.8 million at June 30, 2015 increased $48.6 million or 7.4% from $658.2 million at year-end 2014. 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 the Company receive an additional inflow at the end of March from the electronic deposit of state funds.

The Company uses both retail and wholesale repurchase agreements. Retail repurchase agreements are arrangements with local customers of the Company, in which the Company agrees to sell securities to the customer with an agreement to repurchase those securities at a specified later date. Retail repurchase agreements totaled $45.3 million at June 30, 2015, and $60.7 million at December 31, 2014. Management generally views local repurchase agreements as an alternative to large time deposits. The Company’s wholesale repurchase agreements totaled $85.7 million at June 30, 2015 and included $55.0 million with the FHLB and $30.7 million with a large financial institution. Wholesale repurchase agreements totaled $86.3 million at December 31, 2014.

The Company’s other borrowings totaled $493.3 million at June 30, 2015, up $136.8 million or 38.4% from $356.5 million at December 31, 2014. Borrowings at June 30, 2015 included $249.0 million in FHLB overnight advances, $230.8 million of FHLB term advances, and a $13.5 million advance from a bank. Borrowings at year-end 2014 included $232.1 million in overnight advances from FHLB, $111.0 million of FHLB term advances, and a $13.5 million advance from a bank. The increase in term borrowings reflects growth in earning assets as deposit balances remained flat during the period. Of the $230.8 million in FHLB term advance at June 30, 2015, $160.1 million is due over one year. In 2007, the Company elected the fair value option under FASB ASC Topic 825 for a $10.0 million advance with the FHLB. The fair value of this advance decreased by $145,000 (net mark-to-market gain of $145,000) over the six months ended June 30, 2015.

### 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 $1.4 billion at June 30, 2015 increased $144.0 million or 11.1% as compared to year end 2014. Non-core funding sources, as a percentage of total liabilities, were 29.1% at June 30, 2015, compared to 27.0% at December 31, 2014. The increase in non-core funding sources reflects an increase in mainly in term borrowings from the FHLB.

Non-core funding sources may require securities to be pledged against the underlying liability. Securities carried at $1.2 billion and $1.1 billion at June 30, 2015 and December 31, 2014, respectively, were either pledged or sold under agreements to repurchase. Pledged securities represented 75.3% of total securities at June 30, 2015, compared to 72.3% of total securities at December 31, 2014.

Cash and cash equivalents totaled $60.1 million as of June 30, 2015 which increased from $56.1 million at December 31, 2014. Short-term investments, consisting of securities due in one year or less, decreased from $79.8 million at December 31, 2014, to $73.3 million on June 30, 2015. The Company also had $8.2 million of securities designated as trading securities at June 30, 2015.

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 $762.8 million at June 30, 2015 compared with $769.3 million at December 31, 2014. Outstanding principal balances of residential mortgage loans, consumer loans, and leases totaled approximately $1.1 billion at June 30, 2015 as compared to $1.1 billion at December 31, 2014. Aggregate amortization from monthly payments on these assets provides significant additional cash flow to the Company.

Liquidity is enhanced by ready access to national and regional wholesale funding sources including Federal funds purchased, repurchase agreements, brokered certificates of deposit, and FHLB advances. Through its subsidiary banks, the Company has borrowing relationships with the FHLB and correspondent banks, which provide secured and unsecured borrowing capacity. At June 30, 2015, the unused borrowing capacity on established lines with the FHLB was $1.2 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, 2015, total unencumbered residential mortgage loans and securities of the Company were $491.2 million. Additional assets may also qualify as collateral for FHLB advances upon approval of the FHLB.

The Company has not identified any trends or circumstances that are reasonably likely to result in material increases or decreases in liquidity in the near term.

## Market risk

As filed, 4,828 characters.

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, 2015 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 1.6%, 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 1.3%. The simulation assumes no balance sheet growth and no management action to address balance sheet mismatches.

If rates rise in a parallel fashion (+200 basis points over 12 months, or +400 basis points over 24 months), 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. Once market rates stabilize, increases to funding costs dissipate while asset yields continue to cycle higher. As a result, net interest income improves for the remainder of the projection period.

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, 2015. The Company’s one-year net interest rate gap was a negative $368.7 million or 6.78% of total assets at June 30, 2015, compared with a negative $225.8 million or 4.28% of total assets at December 31, 2014. 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.

*(in thousands)*

| Condensed Static Gap – June 30, 2015 | Total | Repricing Interval 0-3 months | 3-6 months | 6-12 months | Cumulative 12 months |
| --- | ---: | ---: | ---: | ---: | ---: |
| Interest-earning assets1 | $5,086,290 | $1,009,984 | $219,555 | $483,779 | $1,713,318 |
| Interest-bearing liabilities | 3,882,665 | 1,653,991 | 157,777 | 270,212 | 2,081,980 |
| Net gap position |  | (644,007) | 61,778 | 213,567 | (368,662) |
| Net gap position as a percentage of total assets |  | (11.85%) | 1.14% | 3.93% | (6.78%) |

#### 1 Balances of available securities are shown at amortized cost

## Controls and procedures

As filed, 944 characters.

### 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, 2015. 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, 2015, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 193 characters.

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, 2014.

Filed Aug 10, 2015.
Source: SEC EDGAR, the filing index for accession 0001387131-15-002365. Last ingested by Listed: Oct 31, 2026, 15:15 ET. No prices; not investment advice.