TOMPKINS FINANCIAL CORP quarterly report, Q3 FY2013

Tompkins Financial Corporation — Q3 2013 Form 10-Q

Business context and reporting period. Community-based financial holding company operating banking, insurance and wealth-management businesses in New York and southeastern Pennsylvania. This unaudited filing covers the quarter and nine months ended September 30, 2013. Comparisons are affected by the August 2012 VIST Financial acquisition, whose results are included from its acquisition date.

Key financial results

Metric	Q3 2013	Q3 2012	Nine months 2013	Nine months 2012
Net interest income	$40.5 million	$36.7 million	$118.5 million	$92.3 million
Noninterest income	$18.5 million	$14.8 million	$52.5 million	$39.2 million
Net income attributable to Tompkins	$14.0 million	$3.5 million	$36.6 million	$20.1 million
Diluted EPS	$0.95	$0.25	$2.50	$1.63
Provision for loan and lease losses	$2.0 million	$1.0 million	$5.6 million	$3.2 million

Q3 total revenue, defined as net interest income plus noninterest income, was $59.0 million, versus $51.5 million. Nine-month total revenue was $171.0 million, versus $131.5 million.
Taxable-equivalent net interest margin was 3.63% for Q3 and 3.60% year to date, compared with 3.66% and 3.57%, respectively, in 2012. Low market rates continued to pressure asset yields; loan growth and lower funding costs helped offset this.
Operating net income, a company-defined non-GAAP measure excluding specified items, was $13.2 million for Q3 and $35.9 million for nine months, versus $11.9 million and $29.1 million. Adjusted diluted EPS was $0.89 and $2.45, respectively. These measures are not substitutes for GAAP results.
At September 30, 2013, total assets were $4.93 billion, net loans and leases $3.09 billion, deposits $3.97 billion and total equity $444.3 million. Total assets increased 2.0% from year-end 2012.
Cash and cash equivalents were $88.6 million, down from $118.9 million at year-end. For the nine months, operating cash flow was $77.6 million, investing cash flow was negative $195.3 million, and financing cash flow was positive $87.4 million; cash declined by $30.4 million.
Other borrowings were $242.2 million, compared with $111.8 million at year-end; federal funds purchased and repurchase-agreement balances were $162.1 million. The company reported $1.3 billion of unused FHLB borrowing capacity.
Regulatory capital ratios exceeded well-capitalized thresholds: total risk-based capital 13.32%, Tier 1 risk-based capital 12.48%, and Tier 1 leverage 8.37%.

Material changes versus prior periods

GAAP earnings rose sharply, particularly in Q3, partly because Q3 2012 included $13.8 million of merger-related expense ($8.4 million after tax). On the company’s operating measure, Q3 net income increased more moderately.
VIST contributed to higher average earning assets, loans, deposits, fee income and operating costs; the acquisition was included for only part of the comparable 2012 periods.
Loan growth was led by originated commercial and real-estate lending. Total loans and leases increased 5.6% from year-end, while acquired loans declined as balances paid down.
Available-for-sale securities’ fair value fell to $1.36 billion from $1.39 billion at year-end, and accumulated other comprehensive loss widened to $27.8 million from $2.1 million, primarily reflecting interest-rate-driven unrealized securities losses.
Nonperforming assets increased to $49.4 million, or 1.00% of assets, from $44.4 million, or 0.92%, at year-end. Nonperforming loans were $43.2 million; the allowance was $26.4 million.

Management commentary, outlook and risks

Management cited growth in average earning assets, strategic deposit pricing, lower funding costs and increased loan balances as offsets to pressure from low interest rates. It reported signs of improvement in local credit conditions, while noting the recovery remains uncertain.
Provision expense increased, largely due to deterioration in an acquired commercial credit relationship that was partially charged off in Q2 2013. Management considered the allowance appropriate but noted that different economic conditions, interest rates, concentrations or property values could change required reserves.
Interest-rate simulation estimated that a parallel +200-basis-point move would reduce one-year net interest income by approximately 0.86%, and a -100-basis-point move by approximately 0.78%, assuming no balance-sheet growth or management action. The one-year static gap was negative $285.6 million. Management cautioned actual results may differ from modeled estimates.
The company stated it had no identified near-term liquidity trends reasonably likely to cause material changes and believed its funding sources were sufficient. It was assessing the impact of Basel III capital rules, with principal requirements beginning in 2015.
Standby letters of credit represented maximum potential obligations of $66.5 million; management did not anticipate significant losses. The filing reported no legal proceedings and no material changes to previously disclosed risk factors. No specific earnings guidance was provided.
Unusual items included a $1.4 million pretax gain on redemption of a VIST-acquired trust preferred debenture, merger-integration costs, and a historic tax-credit benefit affecting Q3 taxes. The filing stated unrealized securities losses were primarily rate- and liquidity-related, and management did not consider them other-than-temporary.

Investor verification priorities

Separate recurring earnings growth from VIST acquisition effects, prior-year merger costs and the 2013 trust-preferred redemption gain.
Review acquired-loan credit performance, the large commercial relationship charge-off, rising acquired nonaccruals and reserve adequacy.
Assess interest-rate sensitivity, especially the negative one-year gap, deposit repricing and unrealized securities losses.
Monitor funding mix and borrowing growth against loan growth, pledged securities and available FHLB capacity.
Confirm capital impact under Basel III and the company’s ability to sustain dividends as capital and credit conditions evolve.