Tompkins Financial Corporation — Q1 2012 Form 10-Q
Business context and reporting period
Community-based financial holding company headquartered in Ithaca, New York, operating banking and financial-services businesses. This unaudited report covers the three months ended March 31, 2012; balance-sheet comparisons are primarily with December 31, 2011. Amounts below are rounded to millions unless noted.
Financial results and key metrics
- Revenue: Net interest income was $27.4 million versus $27.5 million a year earlier; noninterest income was $11.7 million versus $12.5 million. Combined revenue was approximately $39.1 million, down 2.3%.
- Profit: Net income attributable to Tompkins was $7.8 million, down 11.0% from $8.8 million. Diluted EPS was $0.70 versus $0.80. ROA was 0.91% and ROE was 10.35%, compared with 1.09% and 12.83%, respectively.
- Margins and expenses: Tax-equivalent net interest margin declined to 3.51% from 3.78%. Noninterest expense rose 4.6% to $26.4 million; personnel, marketing, professional fees and other operating costs contributed. The effective tax rate was 32.4% versus 31.8%.
- Credit costs: Provision for loan and lease losses fell to $1.1 million from $1.9 million. Net charge-offs were $1.8 million versus $1.7 million; annualized net charge-offs were 0.36% of average loans.
- Cash flow: Operating activities provided $5.8 million, investing activities used $96.9 million and financing activities provided $144.9 million. Cash and equivalents increased $53.8 million to $103.3 million. The $5.0 million pension contribution affected operating cash flow.
Balance sheet, debt and liquidity
- Total assets were $3.547 billion, up 4.3% from year-end. Net loans and leases were $1.951 billion, nearly unchanged from year-end; deposits increased 7.5% to $2.859 billion.
- Available-for-sale securities increased to $1.241 billion from $1.144 billion. Management attributed portfolio growth mainly to purchases of government-sponsored entity obligations.
- Other borrowings declined to $132.9 million from $186.1 million, primarily through repayment of short-term FHLB advances as deposits grew. Federal funds purchased and repurchase agreements were $169.5 million; trust preferred debentures were $25.1 million.
- Total equity was $306.0 million. Regulatory capital ratios were 14.37% total capital to risk-weighted assets, 13.13% Tier 1 risk-based capital, and 8.46% Tier 1 capital to average assets; each exceeded the stated well-capitalized threshold. Mahopac National Bank remained subject to higher OCC minimums and reported ratios above those requirements.
- Management reported $1.0 billion of unused FHLB borrowing capacity and considered liquidity sources sufficient for reasonably likely demands. Securities pledged or sold under repurchase agreements were $871.1 million, or 71.5% of total securities.
Material changes versus comparable periods
- Lower asset yields and growth concentrated in lower-yielding securities offset growth in average earning assets; interest expense declined 15.7%, helping keep net interest income broadly stable.
- Fee income decreased, including investment-services income (down 11.6%) and deposit service charges (down 10.0%). Card-services income rose 26.0%, and insurance commissions and fees increased 7.8%.
- Nonperforming loans and leases were $40.4 million, down 7.2% from March 31, 2011. Classified loans totaled $122.3 million, down 23.2% year over year. The allowance was $26.9 million, or 1.36% of loans and leases, versus 1.46% a year earlier.
- Total deposits and assets grew, while loans remained broadly flat. The company said soft loan demand contributed to growth in securities and repayment of borrowings.
Outlook, transactions and risks
- No specific full-year earnings or revenue guidance is provided. Management said the base-case rate simulation indicated a slight decline in net interest margin over the next 12 months as assets reprice downward and funding-cost reductions are limited.
- On January 25, 2012, Tompkins agreed to acquire VIST Financial Corp. VIST had approximately $1.4 billion in assets, $1.2 billion in deposits and $958 million in loans at December 31, 2011. The company anticipated closing in Q3 2012, subject to shareholder and regulatory approvals and other customary conditions. Merger-related costs included $94,000 in other operating expense during Q1.
- After quarter-end, on April 3, Tompkins completed a public offering of 1,006,250 shares at $40 per share, for $40.25 million in gross proceeds before underwriting discounts and commissions. On April 19, it filed to register up to 2,627,904 shares issuable for the proposed VIST merger.
- Management cited uncertainty in economic recovery, local property values, borrower cash flows, interest rates, deposit costs, regulation and competition. Commercial real estate was the largest component of nonperforming loans. Management considered the allowance adequate but warned adverse conditions could require an increase.
- Five non-U.S.-government mortgage-backed securities had a fair value of $5.6 million; management reported no additional impairment was needed in Q1, but worsening conditions could result in further credit impairment. The filing contains differing stated carrying-value-to-fair-value gaps for these securities ($447,000 in a note and $23,000 in MD&A).
- Legal proceedings in the ordinary course were not expected to have a material adverse effect. The company reported no material changes to previously disclosed risk factors and no material change in internal control over financial reporting.
Important facts for investors to verify
- VIST merger approvals, expected closing timing, integration plans and final share issuance or transaction costs.
- Net interest margin and asset yields, especially given management’s projected downward pressure and the negative one-year static gap.
- Loan quality trends, including commercial real estate exposures, nonperforming assets, classified loans, charge-offs and allowance adequacy.
- Net proceeds and dilution from the April share offering, and the effect of the merger share registration.
- The filing’s inconsistent $447,000 and $23,000 figures for the non-U.S.-government mortgage-backed securities’ carrying-value-to-fair-value gap.