Tompkins Financial Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; filed May 8, 2019. Tompkins is a community-focused financial services company operating banking, insurance and wealth management businesses, primarily in New York and Pennsylvania. Dollar amounts below are U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Key financial results
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Net interest income | $51.9 million | $52.7 million; down 1.5% |
| Net interest margin | 3.34% | 3.42% |
| Noninterest income | $19.4 million | $17.8 million; up 8.8% |
| Noninterest expense | $44.2 million | $43.7 million; up 1.1% |
| Income before taxes | $26.7 million | $26.2 million |
| Net income attributable to Tompkins | $21.0 million | $20.4 million |
| Diluted earnings per share | $1.37 | $1.33 |
| Return on average assets / equity | 1.27% / 13.53% | 1.25% / 14.41% |
| Operating cash flow | $16.4 million | $19.1 million |
Total interest income rose to $64.9 million from $60.1 million, but interest expense increased more sharply, to $13.0 million from $7.5 million. Management attributed margin pressure to funding costs rising faster than asset yields amid higher market rates. Noninterest income growth included stronger insurance and card-services revenue. The effective tax rate was 21.0%, versus 22.0%.
Financial position, liquidity and capital
- Total assets were $6.74 billion at March 31, 2019, broadly in line with year-end 2018. Net loans and leases were $4.75 billion; deposits were $4.99 billion, up 2.1% from year-end.
- Other borrowings were $923.4 million, down $152.6 million from year-end; repurchase agreements and federal funds purchased were $66.9 million. Trust preferred debentures were $16.9 million.
- Cash and cash equivalents were $70.6 million, down from $80.4 million at year-end. Quarterly cash flows were $16.4 million provided by operating activities, $47.9 million provided by investing activities and $74.2 million used in financing activities, resulting in a $9.8 million decrease in cash.
- Management said liquidity was supported by core deposits and diverse funding sources; unused FHLB borrowing capacity was $1.2 billion. Core deposits represented 85.4% of deposits. Securities pledged or sold under repurchase arrangements were 82.4% of the securities portfolio.
- Total equity was $647.3 million. Regulatory capital ratios exceeded fully phased-in minimums and well-capitalized thresholds: total capital to risk-weighted assets 13.39%, Tier 1 risk-based capital 12.53%, common equity Tier 1 12.19%, and Tier 1 leverage 9.24%.
Credit quality and material changes
- Total loans and leases declined 0.9% from year-end, which management attributed partly to higher-than-expected paydowns and payoffs in a competitive market. Commercial real estate loans were broadly stable; commercial and industrial balances declined 1.7%.
- Nonperforming loans and leases were $23.0 million, or 0.48% of loans, compared with $26.6 million and 0.55% at year-end. Nonperforming assets were $24.6 million, or 0.36% of assets. The allowance covered 175.51% of nonperforming loans and leases.
- First-quarter net charge-offs were $3.5 million, versus $127,000 a year earlier. The increase mainly reflected a $3.1 million write-down of one commercial real estate relationship; the related reserve had been established in 2018. The allowance for loan and lease losses was $40.3 million at quarter-end.
- Net income increased year over year. Banking segment income rose 1.2%, insurance income rose 53.6%, and wealth management income fell 11.9%, primarily because of lower estate and terminating trust fees.
Outlook, commentary, risks and unusual items
- Management’s base-case simulation indicated net interest margin stable to higher over the next 12–18 months. A modeled parallel 200-basis-point rate increase implied a 4.0% decrease in one-year net interest income; a 200-basis-point decrease implied a 1.4% increase. The model assumes no balance-sheet growth or management response, and actual results may differ.
- The quarter included a one-time $500,000 merchant-card incentive payment. Other income also included approximately $200,000 in fees related to a large credit relationship that paid off and a $272,000 partial reversal of a prior-year accrual for estimated letter-of-credit exposure.
- Tompkins adopted the new lease standard on January 1, 2019, recording $35.0 million of operating lease right-of-use assets and $37.3 million of lease liabilities at March 31. Adoption did not materially affect income or cash flows.
- The company expects the credit-loss accounting standard effective January 1, 2020, to likely increase its allowance, but said the impact could not yet be quantified.
- Key risks identified include economic, market and regulatory changes; interest-rate and funding-cost movements; competition; technology and cybersecurity-related investment needs; and reliance on large customers. Management reported no material changes to previously disclosed risk factors, no pending litigation expected to have a material effect, and effective disclosure controls.
Most important facts for investors to verify
- Whether deposit pricing and other funding costs continue to outpace loan and securities yield increases, affecting net interest margin.
- Loan growth, commercial real estate and other criticized-credit exposures, charge-offs, and the adequacy of the allowance—especially after the single-relationship write-down.
- How much reported noninterest-income growth depended on the one-time merchant-card payment and other unusual items.
- Progress in maintaining core deposits and liquidity while reducing wholesale borrowings, and any change in pledged collateral or available FHLB capacity.
- The eventual quantified effect of adopting the expected-credit-loss standard in 2020 and the trajectory of estate-related wealth-management fees.