Business Context and Reporting Period
Tompkins Financial Corporation (NYSE-Amex: TMP) is a financial holding company headquartered in Ithaca, New York. The company operates through two primary segments: Banking (three wholly-owned community banks) and Financial Services (trust, wealth management, insurance, and investment services). This Form 10-Q covers the quarterly period ended June 30, 2009.
Key Financial Metrics
| Metric | Q2 2009 | Q2 2008 | YTD 2009 | YTD 2008 |
|---|---|---|---|---|
| Net Income (Attributable to Tompkins) | $7.45 million | $7.12 million | $15.16 million | $14.63 million |
| Diluted EPS | $0.76 | $0.73 | $1.55 | $1.50 |
| Total Revenues | $38.05 million | $33.46 million | $74.83 million | $65.81 million |
| Net Interest Income | $26.51 million | $21.87 million | $52.36 million | $41.55 million |
| Noninterest Income | $11.54 million | $11.60 million | $22.47 million | $24.26 million |
| Noninterest Expense | $24.67 million | $21.76 million | $47.96 million | $42.14 million |
| Provision for Loan Losses | $2.37 million | $1.18 million | $4.40 million | $1.81 million |
| Return on Average Assets (ROA) | 1.00% | 1.10% | 1.04% | 1.17% |
| Return on Average Equity (ROE) | 12.98% | 13.48% | 13.49% | 14.11% |
| Total Assets | $2.97 billion | $2.71 billion | As of June 30, 2009 | |
| Total Deposits | $2.29 billion | $2.06 billion | As of June 30, 2009 | |
| Net Loans and Leases | $1.82 billion | $1.64 billion | As of June 30, 2009 | |
| Shareholders' Equity | $229.31 million | $209.34 million | As of June 30, 2009 |
Material Changes vs. Prior Period
- Net Income Growth: Net income increased 4.6% year-over-year for Q2 and 3.6% year-over-year for the six-month period. Growth was driven by a 21.2% increase in net interest income, offset by higher noninterest expenses and provisions.
- Net Interest Margin Expansion: The taxable-equivalent net interest margin improved to 3.93% in Q2 2009 from 3.77% in Q2 2008. This was achieved through disciplined deposit pricing, reducing the cost of funds by 84 basis points, which more than offset a 50 basis point decline in asset yields.
- Expense Increases: Noninterest expenses rose 13.4% in Q2 2009. A significant driver was a $1.4 million special FDIC deposit insurance assessment recorded in the quarter. FDIC insurance expense increased by $2.0 million compared to the prior year quarter.
- Asset Quality Deterioration: Nonperforming loans increased to $25.7 million (1.40% of total loans) from $16.0 million (0.88%) at year-end 2008. Net charge-offs for the six months ended June 30, 2009, were $1.76 million, compared to $1.07 million in the prior year period.
- Capital Raise: In Q2 2009, the company issued $18.6 million of 7.0% cumulative trust preferred securities to support business growth and regulatory capital.
Outlook, Risks, and Management Commentary
- Economic Environment: Management notes weak economic conditions in its market areas, evidenced by higher unemployment and a slowdown in real estate sales. While asset quality measures remain favorable compared to peers, a worsening economic situation could lead to further declines in asset quality and increased loan losses.
- Interest Rate Risk: The company maintains a negative interest rate gap of $83,000 (2.79% of assets) for the one-year horizon. Simulation analysis suggests net interest income would increase 0.7% in a 200 basis point rate rise scenario but decrease marginally (0.4%) in a 100 basis point decline scenario.
- Noninterest Income Pressures: Fee-based businesses continue to be impacted by the economic downturn and volatility in equity markets, which reduced the market value of assets under management and related investment fees.
- Regulatory Capital: As of June 30, 2009, the company and its subsidiaries exceeded the minimum requirements to be considered "well capitalized" under regulatory guidelines.
Investor Verification Checklist
- FDIC Assessment Impact: Verify the sustainability of earnings given the one-time $1.4 million FDIC special assessment and the trend of rising insurance premiums.
- Asset Quality Trends: Monitor the trajectory of nonperforming loans (up 60% from year-end 2008) and the adequacy of the allowance for loan losses (1.16% of total loans).
- Deposit Composition: Assess the stability of the deposit base, noting the significant increase in municipal money market deposits which are seasonal and rate-sensitive.
- Fee Income Volatility: Evaluate the exposure of the Financial Services segment to equity market performance, as investment services fees declined due to lower asset valuations.
- Capital Structure: Review the terms of the newly issued $18.6 million trust preferred securities, including the 7.0% fixed rate and conversion features starting in 2019.