Tompkins Financial Corporation — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; filed March 14, 2014. Tompkins is a community-focused financial services company operating banking, insurance and wealth management businesses in New York and Pennsylvania. Comparisons below are principally with 2012; the 2012 results include VIST only from its August 1 acquisition date.
Financial performance and position
| Metric | 2013 | 2012 |
|---|---|---|
| Total assets, year-end | $5.003 billion | $4.837 billion |
| Total loans, year-end | $3.194 billion | $2.955 billion |
| Deposits, year-end | $3.947 billion | $3.950 billion |
| Net interest income | $161.1 million | $134.1 million |
| Noninterest income | $69.9 million | $54.8 million |
| Net income attributable to Tompkins | $50.9 million | $31.3 million |
| Diluted EPS | $3.46 | $2.43 |
| Return on average assets / equity | 1.03% / 11.47% | 0.76% / 8.30% |
| Tax-equivalent net interest margin | 3.65% | 3.65% |
| Efficiency ratio | 64.0% | 62.7% |
Net interest income plus noninterest income was approximately $231.0 million, up from $189.0 million. The loan-loss provision was $6.2 million versus $8.8 million; net charge-offs were $2.8 million, down from $11.8 million. Net cash provided by operating activities was $83.7 million; investing activities used $278.4 million and financing activities provided $158.6 million. Cash and cash equivalents ended the year at $82.9 million, down from $118.9 million.
At year-end, shareholders’ equity was $457.9 million, up from $441.4 million. Other borrowings rose to $331.5 million from $111.8 million, while trust preferred debentures declined to $37.2 million from $43.7 million. Core deposits were $3.3 billion, or 83.4% of deposits; unused FHLB borrowing capacity was $1.1 billion. All four bank subsidiaries were reported as well-capitalized; consolidated total risk-based capital was 13.4% and Tier 1 leverage was 8.5%.
Material changes versus 2012
- Net income increased 62.6% and diluted EPS rose 42.4%. Management attributed the improvement mainly to a full year of VIST operations versus five months in 2012, and $9.7 million of after-tax merger and integration costs recorded in 2012.
- Loans grew 8.1%, largely through organic growth; deposits were nearly flat. Time deposits fell $108.2 million as noninterest-bearing and interest-bearing transaction and savings balances increased.
- Higher loans and lower funding costs supported net interest income growth, but average loan and securities yields declined. The annual tax-equivalent margin remained flat.
- Noninterest income increased 27.5%, led by insurance commissions, reflecting the full-year VIST contribution, as well as deposit and card fees. Noninterest expenses rose 11.3%; salaries and benefits, occupancy and other costs were higher, largely due to VIST and its integration.
- Credit indicators improved overall: nonperforming loans and leases were 1.22% of loans versus 1.34%; nonperforming assets were 0.87% of assets versus 0.92%. The allowance increased to $28.0 million from $24.6 million.
- Accumulated other comprehensive loss widened to $25.1 million from $2.1 million, mainly reflecting lower fair values of available-for-sale securities as market rates changed.
Outlook, commentary, risks and unusual items
The filing provides no quantified earnings or revenue guidance. Management said available liquidity sources were adequate for reasonably likely needs and reported no identified near-term trends expected to materially increase or decrease liquidity. Management also stated that the company met Basel III capital requirements in its pro forma analysis as of year-end, including the fully phased-in capital conservation buffer.
Fourth-quarter 2013 net income was $14.3 million, compared with $11.2 million a year earlier; diluted EPS was $0.96 versus $0.77. Fourth-quarter net interest margin was 3.78%, compared with 3.83% a year earlier. The quarter included a $1.3 million pretax gain from converting certain deposit accounts; management’s adjusted diluted EPS was $0.91, versus $0.81 in the comparable quarter.
- Credit concentration and acquired loans: Commercial and commercial real estate loans were 68.2% of total loans. Acquired loans totaled $667.0 million (20.9% of loans); management cautioned that acquired-credit losses could exceed current estimates. Agricultural lending also carries exposure to weather, commodity prices and farm operating conditions.
- Interest-rate and securities risk: The company reported a negative one-year static gap of $288.7 million, or 5.77% of assets. Its simulation estimated net interest income declines of 1.10% under a 200-basis-point rise and 0.80% under a 100-basis-point decline, subject to model assumptions. Available-for-sale securities had $33.5 million of gross unrealized losses at year-end; management did not consider them other-than-temporary.
- Liquidity and funding: Cash declined, other borrowings increased substantially, and 74.7% of securities were pledged or sold under repurchase agreements. The company relies on core deposits and wholesale funding, including FHLB advances, and subsidiary dividends are subject to regulatory limits.
- Other risks and contingencies: Risks include economic and real-estate conditions in New York and Pennsylvania, competition, regulatory changes, cybersecurity and vendor disruptions, and acquisition integration. Off-balance-sheet lending commitments and standby letters of credit totaled $760.1 million. Management did not expect ordinary-course legal proceedings to have a material effect.
- Unusual items: 2013 results included after-tax gains of $846,000 on trust preferred redemption and $771,000 on an IRA conversion, plus $140,000 of after-tax merger-related expense. Adjusted earnings are non-GAAP measures and exclude specified items.
KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Important facts for investors to verify
- How much of 2013 earnings growth is sustainable without the full-year VIST comparison benefit and the 2012 merger-cost comparison?
- Whether loan growth, commercial real estate exposure and acquired-loan credit performance support current reserve levels and future provisions.
- How rising rates, securities valuation changes, and increased FHLB borrowing affect net interest income, capital and liquidity.
- Whether expense growth and the deterioration in the efficiency ratio moderate as VIST integration proceeds.
- The sustainability of dividend payments given regulatory restrictions, subsidiary dividend capacity and the parent company’s reliance on subsidiary distributions.