Tompkins Financial Corporation — Q3 2018 Form 10-Q
Business context and reporting period
Community-focused financial holding company with banking, insurance and wealth-management businesses, operating primarily in New York and Pennsylvania. This unaudited report covers the quarter and nine months ended September 30, 2018; balance-sheet comparisons are with December 31, 2017.
Financial performance and condition
- Q3 earnings: Net income attributable to Tompkins was $20.9 million, up 20.2% from $17.4 million; diluted EPS was $1.36 versus $1.14. Q3 revenue, defined as net interest income plus noninterest income, was $71.8 million, up 5.2%.
- Nine-month earnings: Net income was $63.4 million, up 26.7%; diluted EPS was $4.12 versus $3.27. Revenue was $216.2 million, up 7.4%.
- Interest income and margins: Nine-month net interest income rose 6.2% to $158.6 million. Net interest margin declined to 3.38% from 3.41% year over year (Q3: 3.35% versus 3.40%). Loan growth and higher asset yields supported income, but funding costs rose faster than asset yields.
- Noninterest results and expenses: Nine-month noninterest income increased 11.0% to $57.6 million; noninterest expense rose 7.2% to $133.8 million. The 2018 effective tax rate was 21.1% for nine months, compared with 32.5%, largely reflecting the federal tax-rate reduction.
- Cash flow: For the first nine months, operating activities provided $67.6 million; investing activities used $100.4 million and financing activities provided $61.7 million. Cash and cash equivalents increased $28.9 million to $113.2 million.
- Balance sheet and funding: Total assets were $6.75 billion, up 1.5% since year-end. Net loans and leases were $4.76 billion, up 2.9%; deposits were $5.03 billion, up 3.9%. Other borrowings declined 7.8% to $988.5 million; total liabilities were $6.15 billion and equity was $599.1 million.
- Liquidity and capital: Management cited a stable core-deposit base and diverse funding sources; unused FHLB borrowing capacity was $1.1 billion. Regulatory capital ratios exceeded stated minimums and well-capitalized requirements: total capital 12.87%, Tier 1 risk-based 11.99%, common equity Tier 1 11.65%, and Tier 1 leverage 8.89%.
- Credit quality: Allowance for loan and lease losses was $41.4 million, or 0.91% of originated loans. Nonperforming loans and leases were $24.5 million (0.51% of loans); nonperforming assets were $26.3 million (0.39% of assets). Classified Special Mention/Substandard loans increased, including two large credits downgraded in 2018; management said most such loans were current or less than 30 days past due.
Changes, management commentary and risks
- Profitability improved year over year, with reported Q3 ROA of 1.23% and ROE of 13.89%; nine-month ROA was 1.27% and ROE 14.47%.
- Noninterest income benefited from approximately $2.9 million in gains on two property sales associated with the new headquarters, as well as higher mortgage-sale and securities gains. Expenses included $2.5 million in nine-month write-downs related to two leases on vacated space. Excluding specified items, nine-month adjusted diluted EPS was $4.10 versus reported GAAP EPS of $4.12.
- Available-for-sale securities had $50.2 million of gross unrealized losses at September 30, versus $19.4 million at year-end 2017. Management attributed the increase primarily to interest-rate and market-liquidity movements, and concluded no securities were other-than-temporarily impaired. The accumulated other comprehensive loss widened to $74.9 million.
- Management gave no specific earnings or revenue guidance. Its interest-rate simulation estimated that a 200-basis-point parallel rate increase would reduce one-year net interest income by about 2.9%; a 100-basis-point decline would increase it by about 0.1%. The company reported a negative one-year repricing gap of $725.0 million and noted that funding costs may rise faster than asset yields in the near term.
- Key risks cited include local economic conditions, credit quality and collateral values, interest-rate changes, competition, regulation, technology and dependence on funding sources. The company expects the 2019 lease-accounting standard to increase reported assets and liabilities; it is still assessing the impact. It expects the 2020 credit-loss standard could increase the allowance, but cannot quantify the effect.
- ASC 606 adoption added $1.8 million to beginning retained earnings, primarily from insurance contingency income; management said adoption did not materially affect current-period results. Management reported effective disclosure controls, no material change in internal control, and no pending litigation expected to materially affect results or financial condition.
Important facts for investors to verify
- Whether loan growth, deposit funding and rising borrowing costs support or further pressure net interest margin.
- Performance and resolution of downgraded and potential-problem credits, nonperforming loans, and the allowance relative to portfolio growth and risk.
- Whether securities valuation losses deepen, and whether interest-rate or liquidity changes alter management’s impairment assessment.
- How recurring earnings compare with reported earnings after the property-sale gain and vacated-lease write-downs.
- The eventual balance-sheet and credit-cost effects of the upcoming lease and expected-credit-loss accounting standards.