Tompkins Financial Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are to December 31, 2014. Tompkins is a community-based financial services company operating banking, insurance, and wealth-management businesses in New York and Pennsylvania. Financial statements are unaudited.
Financial and operating performance
| Metric | Q1 2015 / March 31, 2015 | Comparable period / prior date |
|---|---|---|
| Net interest income | $41.2 million | $40.0 million, Q1 2014 |
| Net interest margin | 3.45% | 3.60%, Q1 2014 |
| Provision for loan and lease losses | $0.2 million | $0.7 million, Q1 2014 |
| Noninterest income | $17.6 million | $17.4 million, Q1 2014 |
| Noninterest expense | $39.7 million | $38.2 million, Q1 2014 |
| Income before tax | $19.0 million | $18.5 million, Q1 2014 |
| Net income attributable to Tompkins | $12.7 million | $12.6 million, Q1 2014 |
| Diluted EPS | $0.84 | $0.84, Q1 2014 |
| Cash from operating activities | $18.2 million | $10.7 million, Q1 2014 |
Net income increased about 0.9%; reported basic EPS was $0.85 in both quarters. Management attributed the broadly stable earnings to growth in average earning assets and better credit trends, offset by margin compression and higher operating costs. Return on average assets was 0.97% (1.02% in Q1 2014); return on average equity was 10.35% (10.88%).
Balance sheet, funding, and capital
- Total assets were $5.36 billion, up 1.7% from year-end. Net loans and leases were $3.40 billion; gross loans and leases increased about $34 million from year-end.
- Deposits were $4.28 billion, up 2.7%, primarily reflecting seasonal municipal deposit inflows. Core deposits were $3.4 billion, or 80.1% of deposits.
- Cash and cash equivalents were $64.0 million, compared with $56.1 million at year-end. Cash and cash equivalents increased $7.9 million during the quarter. Investing activities used $84.2 million, principally reflecting securities purchases and loan growth; financing activities provided $74.0 million.
- Other borrowings were $330.9 million, down 7.2% from year-end; federal funds purchased and repurchase agreements were $135.8 million. Trust preferred debentures were $37.4 million. Total liabilities were $4.85 billion.
- Equity was $504.3 million, up 3.0%. Regulatory capital ratios were 13.36% total capital to risk-weighted assets, 12.51% Tier 1 risk-based capital, 11.50% Tier 1 common equity, and 8.85% Tier 1 leverage; the company reported ratios above well-capitalized requirements.
- Available-for-sale securities were $1.45 billion at fair value. The company reported $7.2 million of gross unrealized losses on that portfolio and $63,000 on held-to-maturity securities, which management attributed primarily to rates and liquidity, not credit, and did not consider other-than-temporary impairment.
Changes, credit quality, and unusual items
- Net interest income rose 3.0%, but net interest margin fell 15 basis points as asset yields declined; growth in earning assets and lower funding costs partly offset the pressure.
- Credit metrics improved year over year: nonperforming loans and leases were $20.3 million, versus $35.5 million at March 31, 2014; nonperforming assets were $26.1 million, or 0.49% of assets, versus $40.9 million, or 0.81%. The allowance was $29.5 million, covering 145.11% of nonperforming loans and leases. Q1 net recoveries were $279,000, compared with net charge-offs of $699,000 a year earlier.
- Salary and wage expense increased 5.5%, primarily from staffing, merit increases, and incentives. Other operating expenses also rose; management cited litigation-settlement costs, contract termination, and write-downs of small nonmarketable equity investments.
- Adoption of accounting guidance for qualified affordable housing investments reduced retained earnings by $725,000 and added approximately $0.1 million of Q1 tax expense. Prior-period results were not restated because the effect was considered immaterial.
- Cash dividends were $0.42 per share, up from $0.40 a year earlier. The company did not repurchase shares under its announced public repurchase plan during the quarter.
Outlook, risks, and contingencies
The filing provides no earnings or revenue guidance. Management said it had not identified trends reasonably likely to cause material near-term liquidity increases or decreases and believed available funding sources were sufficient for reasonably likely demands. Interest-rate risk is a key exposure: modeled net interest income declined 1.0% under a 200-basis-point increase and 1.4% under a 100-basis-point decrease over one year; the one-year static gap was negative $314.5 million. Management cautioned that actual results may differ from models and described sensitivity to rates, prepayments, and deposit behavior.
Other risks include economic, market, regulatory, technology, competitive, credit, and interest-rate developments. Management identified $28.8 million of potential problem commercial relationships across originated and acquired portfolios for monitoring. Standby letters of credit had maximum potential obligations of $58.5 million; management did not anticipate significant losses. The company reported ordinary-course litigation but said no pending claim was expected to materially affect results or financial condition. Risk factors were unchanged from the 2014 Form 10-K. Disclosure controls were assessed as effective, with no material internal-control changes reported.
Important facts for investors to verify
- Whether loan and deposit growth can continue to offset ongoing net interest margin pressure.
- Whether improved credit quality and net recoveries persist, particularly in the identified potential problem relationships and acquired loan portfolio.
- The sustainability of expense growth, including staffing and the cited settlement, contract-termination, and investment write-down costs.
- Capital and liquidity resilience under changing interest rates, including reliance on wholesale funding and the share of securities pledged or sold under repurchase agreements.
- Effects of municipal deposit seasonality, affordable-housing accounting adoption, and the announced director stock-plan purchases on future comparisons.