Tompkins Financial Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet figures are as of March 31, 2013. Unaudited. Tompkins is a community-based financial services company providing banking, insurance, and wealth-management services. Comparisons with Q1 2012 are significantly affected by the August 2012 VIST Financial acquisition.
Financial performance
- Revenue: Net interest income plus noninterest income was $55.6 million, up from $39.1 million in Q1 2012. Net interest income was $38.2 million, up 39.2%; noninterest income was $17.4 million, up 49.1%.
- Profit: Net income attributable to Tompkins was $11.5 million versus $7.8 million, up about 47%. Basic EPS was $0.80 and diluted EPS $0.79, versus $0.70 for both in Q1 2012. Management reported non-GAAP operating net income of $11.6 million, or $0.81 diluted EPS, excluding after-tax merger integration costs of $118,000.
- Margins and returns: Tax-equivalent net interest margin was 3.57%, compared with 3.51%. Return on average assets was 0.95% versus 0.91%; return on average equity was 10.53% versus 10.35%.
- Expenses and credit costs: Noninterest expense was $37.5 million, up 42.3%, primarily reflecting VIST. Provision for loan and lease losses was $1.0 million versus $1.1 million.
- Cash flow: Operating activities provided $21.4 million, investing activities used $185.1 million, and financing activities provided $143.9 million. Cash and cash equivalents ended the quarter at $99.2 million, down from $118.9 million at year-end.
Financial position and material changes
- Assets and loans: Total assets were $5.0 billion, up 3.1% from year-end. Net loans and leases were $2.97 billion, up $39.2 million (1.3%); available-for-sale securities were $1.53 billion, up $134.2 million.
- Funding and debt: Deposits totaled $4.07 billion, up $122.2 million (3.1%) from year-end. Federal funds purchased and repurchase agreements were $194.1 million; other borrowings were $156.6 million, up $44.8 million; trust preferred debentures were $43.7 million. Q1 financing included a $49.9 million increase in other borrowings and deposit growth.
- Liquidity: Management cited a stable core-deposit base and diverse funding sources. Unused established FHLB borrowing capacity was $1.1 billion. Securities pledged or sold under repurchase agreements totaled approximately $1.2 billion.
- Capital: Total equity was $446.8 million, up $5.5 million from year-end. Regulatory capital ratios exceeded well-capitalized thresholds: total risk-based capital 12.93%, Tier 1 risk-based capital 12.15%, and Tier 1 leverage 8.11%. Quarterly dividends were $0.38 per share.
- Acquisition effect: VIST expanded Tompkins into southeastern Pennsylvania and materially increased reported assets, loans, deposits, revenue, and expenses. Accordingly, year-over-year growth is not solely organic.
Outlook, risks, and unusual items
- No quantitative earnings or revenue guidance is provided. Management said low interest rates continue to pressure asset yields and net interest margin, partly offset by deposit pricing and earning-asset growth. It reported signs of improving local credit conditions but cautioned that the recovery remains uncertain.
- Management’s interest-rate simulation projected net interest income approximately 0.74% above its base case under a 200-basis-point increase and 0.02% above base under a 100-basis-point decline over one year. The one-year static gap was negative $60.4 million; actual results may differ from model estimates.
- Nonperforming assets were $41.2 million, or 0.83% of assets, versus $44.4 million and 0.92% at year-end. Classified loans totaled $91.9 million, down from $101.4 million at year-end. However, loans 30–89 days past due increased to $20.1 million from $13.3 million. Management identified $44.3 million of potential problem loans across originated and acquired portfolios.
- Available-for-sale securities had $3.9 million of gross unrealized losses at quarter-end, attributed primarily to interest rates and market liquidity; management did not consider them other-than-temporary. Other comprehensive loss was $3.1 million, and accumulated other comprehensive loss increased to $5.2 million, primarily reflecting securities valuation changes.
- Q1 included $367,000 in realized securities gains, including approximately $94,000 from sales of previously impaired non-agency mortgage securities; the securities had incurred $441,000 of cumulative credit impairment charges in prior periods. Merger integration expense was $196,000 before tax.
- On April 1, 2013, two lawsuits concerning the VIST merger proxy disclosures were settled for $250,000; insurance carriers covered the entire amount. Management reported no material change in previously disclosed risk factors. Key risks include economic and credit conditions, interest rates, regulation, competition, and acquisition integration.
Important facts for investors to verify
- How much of the reported growth and earnings improvement reflects VIST versus organic performance, and what remaining integration costs or synergies are expected?
- Whether loan quality continues to improve, particularly commercial real estate exposures, past-due loans, and identified potential problem credits.
- How interest-rate changes could affect net interest margin, deposit costs, securities values, and liquidity.
- Whether deposit growth and borrowing levels remain sustainable, including reliance on non-core funding and pledged securities.
- Capital and asset-quality disclosures, and the assumptions underlying acquired-loan cash flows, allowance estimates, and securities impairment judgments.