Tompkins Financial Corporation — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; filed March 8, 2012. Tompkins is a New York-based financial holding company operating three community banks and providing insurance, wealth management, trust, and brokerage services.
Financial performance and condition
- Revenue and earnings: Net interest income was $111.4 million, down 0.3% from 2010; noninterest income rose 4.0% to $48.0 million. Net income attributable to Tompkins was $35.4 million, up 4.7%; diluted EPS increased 2.9% to $3.20.
- Margins and returns: Taxable-equivalent net interest margin declined to 3.72% from 3.86%. Return on average assets was 1.07% (1.06% in 2010); return on average equity was 12.02% (12.72%). The efficiency ratio improved to 60.3% from 60.9%.
- Fourth quarter: Net income was $9.4 million and diluted EPS was $0.84, up 5.6% and 3.7%, respectively, year over year. Noninterest income fell 8.8%, including lower investment-services and other income; expenses declined 3.9%.
- Balance sheet: Assets were $3.40 billion, up 4.3%; loans were $1.98 billion, up 3.7%; deposits were $2.66 billion, up 6.6%. Shareholders’ equity increased 9.4% to $299.1 million.
- Credit quality: Nonperforming loans and leases declined 8.6% to $41.4 million, or 2.09% of loans, from 2.37%. Net charge-offs increased to $9.2 million from $5.0 million; the allowance was $27.6 million, or 1.39% of loans, versus 1.46%.
- Cash flow: Operating activities provided $72.0 million; investing activities used $152.6 million; financing activities provided $80.5 million. Cash and cash equivalents ended at $49.6 million, essentially unchanged.
- Debt and liquidity: Other borrowings were $186.1 million, repurchase agreements and federal funds purchased totaled $169.1 million, and trust preferred debentures were $25.1 million. Unused FHLB borrowing capacity was $973.7 million. Management said available liquidity was adequate in the normal course of business.
- Capital and dividends: The consolidated total risk-based capital ratio was 14.2% and Tier 1 risk-based ratio was 12.9%; the company and bank subsidiaries were categorized as well capitalized. Annual dividends were $1.40 per share, up from $1.33.
Material changes versus 2010
- Earnings improved, supported mainly by higher fee income and lower noninterest expense. Net interest income was nearly flat as falling asset yields offset lower funding costs.
- Average earning-asset yields fell 39 basis points, while the average cost of interest-bearing liabilities fell 28 basis points. Growth in earning assets was concentrated in lower-yielding securities amid soft loan demand.
- Noninterest income gains included card-services income, up 18.1%, and insurance commissions, up 6.3%. Deposit service charges remained affected by overdraft-fee regulations.
- Loan charge-offs included a $5.0 million charge-off on one commercial real estate relationship. Despite higher charge-offs, year-end nonperforming loans and internally classified credits improved.
- Tompkins Insurance acquired Olver & Associates in June 2011 for consideration valued at $3.2 million. The acquisition added $2.3 million of goodwill.
Outlook, risks, and unusual items
- Outlook: No quantitative earnings or revenue guidance is provided. Management described loan demand as soft and noted that continued low rates could pressure asset yields and net interest margin. The interest-rate simulation showed a relatively flat 2012 base case; modeled net interest income declined 0.48% under a 100-basis-point rate decrease and 0.18% under a 200-basis-point increase.
- Pending merger: On January 25, 2012, Tompkins agreed to acquire VIST Financial Corp., which had $1.4 billion of assets at year-end 2011. Closing was anticipated in the third quarter of 2012, subject to shareholder and regulatory approvals and other conditions. A shareholder lawsuit sought to enjoin the transaction; Tompkins said claims against it were without merit and intended to defend them.
- Credit and concentration risks: Commercial and commercial real estate loans totaled $1.1 billion, 57.0% of total loans. Commercial real estate made up 63.7% of nonperforming loans. Results remain exposed to borrower cash flows, collateral values, regional economic conditions, and agricultural risks.
- Other notable exposures: The company recorded $65,000 of securities impairment losses in earnings in 2011 and identified possible further impairment risk in certain non-government mortgage-backed securities. Pension and post-retirement plan remeasurement contributed to a larger accumulated other comprehensive loss. A $450,000 liability remained for potential Visa litigation-related losses.
- Regulatory condition: Mahopac National Bank was subject to higher OCC capital requirements; it exceeded them at year-end. Dodd-Frank implementation and other regulatory changes could increase compliance costs.
- Audit and controls: KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Progress, approvals, integration plans, and any litigation developments relating to the VIST merger.
- Whether credit trends continue to improve, particularly commercial real estate delinquencies, classified loans, and charge-offs after the $5.0 million CRE charge-off.
- Future net interest margin and funding costs as assets reprice in a low-rate environment and loan demand changes.
- Allowance adequacy, collateral valuations, and potential additional securities impairment or pension-related effects.
- Capital and liquidity after dividends, acquisition financing, and any changes in subsidiary dividend capacity or regulatory requirements.