Tompkins Financial Corporation — Q2 2013 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and six months ended June 30, 2013. Tompkins is a community-focused financial services company with banking, insurance, and wealth management businesses operating primarily in New York and southeastern Pennsylvania. Results include VIST Financial, acquired August 1, 2012, so comparisons with 2012 are materially affected by the acquisition.
Financial performance and position
Amounts are in millions of dollars except per-share data, percentages, and where otherwise indicated.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net interest income | $39.8 | $28.1 | $78.0 | $55.6 |
| Provision for loan and lease losses | $2.5 | $1.0 | $3.5 | $2.1 |
| Noninterest income | $16.5 | $12.8 | $33.9 | $24.4 |
| Noninterest expense | $37.8 | $26.9 | $75.3 | $53.2 |
| Net income attributable to Tompkins | $11.0 | $8.8 | $22.5 | $16.6 |
| Diluted EPS | $0.75 | $0.72 | $1.55 | $1.42 |
- Tax-equivalent net interest margin was 3.58% for Q2 and 3.59% year to date, compared with 3.52% and 3.51%, respectively, in 2012.
- Q2 return on average assets was 0.89% and return on average equity 9.87%, versus 1.00% and 10.17% a year earlier. Six-month figures were 0.92% and 10.20%, versus 0.96% and 10.26%.
- Management’s non-GAAP operating net income was $10.9 million, or $0.75 diluted EPS, for Q2 and $22.5 million, or $1.56 diluted EPS, for the first half. These figures exclude specified merger/integration costs and, in the 2012 comparison, a VISA litigation accrual reversal.
- Six-month operating cash flow was $50.9 million, compared with $24.9 million in 2012. Investing activities used $204.2 million and financing activities provided $100.9 million; cash and cash equivalents declined $52.4 million to $66.5 million.
Balance sheet at June 30, 2013: Total assets were $4.93 billion, up 2.0% from year-end 2012. Net loans and leases were $3.03 billion, up about $99.8 million; deposits were $3.91 billion, down $37.3 million. Other borrowings rose to $299.1 million from $111.8 million, while federal funds purchased and repurchase agreements declined to $171.5 million from $214.0 million. Total equity was $431.9 million, down $9.5 million, principally reflecting a $25.6 million increase in accumulated other comprehensive loss, largely from unrealized securities valuation changes.
- The allowance for loan and lease losses was $25.5 million. Nonperforming assets were $44.1 million, or 0.89% of assets, versus 0.92% at year-end 2012 and 1.17% at June 30, 2012.
- Regulatory capital ratios exceeded the stated well-capitalized thresholds: total capital/risk-weighted assets 13.34%, Tier 1/risk-weighted assets 12.52%, and Tier 1/average assets 8.16%.
- Core deposits were $3.2 billion, 82.8% of deposits. Unused borrowing capacity with the FHLB was $1.2 billion. Management said it believed available liquidity sources were sufficient to meet reasonably likely needs.
Material changes and management commentary
- Net income increased year over year, with the VIST acquisition contributing to higher earning assets, loans, deposits, fee income, and expenses. Management attributed higher net interest income to growth in average earning assets and lower funding costs, which more than offset declining asset yields.
- Insurance commissions increased substantially, largely due to VIST Insurance; investment services income was broadly stable for the quarter and higher for the half-year. Higher salaries, benefits, occupancy, and other operating costs largely reflected the expanded organization.
- Credit costs rose, primarily because of a large acquired commercial relationship that was partially charged off. Acquired loans classified as special mention or substandard increased to $84.4 million from $70.6 million at year-end; acquired nonaccrual loans increased to $6.9 million from $4.4 million. Originated classified loans declined, and originated loans had net recoveries in the first half.
- Available-for-sale securities had $23.2 million of gross unrealized losses at June 30, all on positions held less than 12 months. Management attributed losses mainly to interest rates and market liquidity, said it did not intend to sell the securities and did not expect forced sales before recovery, and concluded the losses were not other-than-temporary.
- The one-year net interest rate gap was negative $220.8 million, or 4.48% of assets. Simulations estimated net interest income would decline 0.81% under a 200-basis-point parallel rate increase and 0.71% under a 100-basis-point decline. Management cautioned that actual outcomes can differ from modeled results.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or financial guidance. Management cited continued pressure from a low-rate environment and uncertainty in the economic recovery, while noting signs of improving local economic conditions. It cautioned that economic weakness, interest-rate changes, and property-value declines could adversely affect credit quality, earnings, and financial condition.
- Other stated risks include competition, regulatory and legislative changes (including Basel III and Dodd-Frank implementation), technology and product-development demands, and the ability to obtain funding on acceptable terms. The company said it was reviewing the potential impact of new capital rules.
- VIST-related merger and integration expense was $233,000 before tax for the first half of 2013; after-tax merger expense was reported as $140,000 in the MD&A reconciliation. A $165,000 goodwill adjustment in Q2 related to the final VIST acquisition tax return.
- On April 1, 2013, the company settled two former-VIST-shareholder class actions for $250,000, entirely covered by insurance. Standby letters of credit totaled $67.9 million; management did not anticipate significant losses. The filing reports no material changes to previously disclosed risk factors and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Separate acquisition-driven growth from organic growth and assess the ongoing cost and revenue contribution of VIST.
- Track acquired-loan credit performance, charge-offs, criticized loans, nonaccruals, and the adequacy of the allowance.
- Assess the effect of interest rates on net interest margin, securities values, deposit pricing, and borrowing costs, including the sizable unrealized-loss movement in accumulated other comprehensive income.
- Monitor the increase in other borrowings, seasonal deposit trends, pledged securities, and liquidity capacity.
- Reconcile GAAP earnings with management’s non-GAAP operating measures and confirm the treatment of merger costs and other unusual items.