Tompkins Financial Corporation — Q2 2017 Form 10-Q
Business context and reporting period
Community-based financial services holding company operating four banks, an insurance agency and wealth-management services, primarily in New York and Pennsylvania. This unaudited filing covers the quarter and six months ended June 30, 2017; balance-sheet comparisons are with December 31, 2016.
Financial performance and condition
| Metric | Q2 / June 30, 2017 | Comparison |
|---|---|---|
| Net income attributable to Tompkins | $16.9 million; diluted EPS $1.11 | Q2 2016: $14.8 million; $0.98 diluted EPS |
| Six-month net income / diluted EPS | $32.6 million / $2.13 | First half 2016: $29.1 million / $1.92 |
| Net interest income | Q2: $50.3 million; first half: $98.3 million | Up 12.0% and 10.6%, respectively, year over year |
| Net interest margin | 3.45% Q2; 3.42% first half, taxable-equivalent basis | 3.36% and 3.36% in comparable 2016 periods |
| Noninterest income / expense | Q2: $17.5 million / $41.6 million; first half: $34.7 million / $82.9 million | Q2 income up 2.1%; expense up 5.5% |
| Assets / loans | Assets $6.42 billion; net loans and leases $4.38 billion | Assets up 2.9% from year-end; originated loans grew 5.4% |
| Deposits / borrowings | Deposits $4.75 billion; other borrowings $952.0 million; repurchase agreements and federal funds $50.4 million | Deposits up 2.7%; other borrowings up 7.6% from year-end |
| Cash and cash flow | Cash and equivalents $78.2 million; first-half operating cash flow $41.1 million | Cash increased $14.2 million; investing used $170.3 million and financing provided $143.4 million |
| Capital and credit quality | Equity $576.9 million; CET1 11.23%; total capital ratio 12.45%; nonperforming loans 0.47% of loans | Capital ratios exceeded applicable well-capitalized requirements |
For the first half, net charge-offs were $343,000, or 0.02% of average loans and leases. The allowance was $37.2 million. Nonperforming assets totaled $23.1 million, or 0.36% of assets. The company paid $0.90 per share in dividends during the first half.
Material changes versus comparable periods
- Earnings growth was driven chiefly by higher net interest income, reflecting loan growth, slightly higher loan yields and a larger share of loans in earning assets. Average loans grew about 12% year over year in both the quarter and first half.
- Noninterest expense rose, including higher compensation and benefits, occupancy, technology and card-service costs. Core-system-conversion costs were $411,000 in Q2 and $673,000 for the first half; management said the conversion was completed in Q2.
- Insurance and wealth-management segment earnings declined year over year. Insurance revenue was affected by sales of certain Pennsylvania customer relationships; wealth-management expenses increased.
- Special Mention loans rose to $39.0 million from $21.0 million at year-end, largely reflecting agricultural borrowers affected by lower milk prices. Management said payments in that portfolio were current at June 30.
- The company redeemed $20.5 million of trust preferred securities in January. Trust preferred debentures were $16.6 million at quarter-end, versus $37.7 million at year-end.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. The base-case interest-rate simulation indicated a stable-to-higher net interest margin over the next 12–18 months.
- Interest-rate simulations estimated net interest income would decline 1.3% under a 200-basis-point parallel rate increase and 1.6% under a 100-basis-point decline over one year. The company reported a negative one-year gap of $507.7 million, or 7.91% of assets; actual results may differ from model assumptions.
- Management identified general economic, interest-rate, regulatory, competitive, technology and cybersecurity risks. It cited dependence on conditions in its New York and Pennsylvania markets and exposure to agricultural borrowers; management cannot predict whether potential problem loans will deteriorate.
- Management judged investment-security unrealized losses to be primarily rate- and liquidity-related, not credit-related, and reported no securities as other-than-temporarily impaired. It warned that future rate or credit changes could reduce values.
- Standby letters of credit represented a maximum potential obligation of $52.0 million; management did not anticipate significant losses. Management said no pending litigation was expected to have a material adverse effect and reported no material changes to previously disclosed risk factors.
- New credit-loss accounting guidance effective in 2020 is expected likely to increase the allowance, but the impact was not quantified. Management said the 2018 revenue standard was not expected to have a significant impact.
Important facts for investors to verify
- Whether the increase in agricultural Special Mention loans and other potential problem credits leads to higher delinquencies, provisions or charge-offs.
- How loan growth is funded, including the higher reliance on FHLB borrowings, and whether core-deposit growth continues; unused FHLB borrowing capacity was $1.0 billion.
- Whether the reported margin outlook holds as funding costs and asset yields reprice, particularly given the negative one-year interest-rate gap.
- Whether expense growth moderates following completion of the core-system conversion, and whether card-services gains, including about $500,000 of branding-agreement incentives, recur.
- The eventual allowance effect of the expected-credit-loss standard and any material revisions to management’s estimates or assumptions.