Tompkins Financial Corp. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Tompkins is a community-based financial services company operating banking, insurance, and wealth-management businesses in New York and Pennsylvania. Figures below are in U.S. dollars; financial-statement amounts are generally in millions unless otherwise noted.
Financial performance
- Third-quarter earnings: Net income attributable to Tompkins was $20.2 million, or $1.34 diluted EPS, versus $20.9 million and $1.36 a year earlier. Net interest income was essentially unchanged at $53.2 million; provision expense increased to $1.3 million from $0.3 million.
- Nine-month earnings: Net income was $60.6 million, or $3.97 diluted EPS, compared with $63.4 million and $4.12 in 2018. Net interest income declined 0.7% to $157.4 million.
- Margins and returns: Net interest margin was 3.43% for Q3 versus 3.35% in 2018, and 3.37% year to date versus 3.38%. Year-to-date ROA was 1.21% versus 1.27%; ROE was 12.53% versus 14.47%.
- Revenue and expenses: Q3 noninterest income rose 5.0% to $19.5 million; nine-month noninterest income was nearly flat at $57.5 million. Total noninterest expense rose 1.2% for Q3 and 1.6% year to date. Interest expense increased 16.6% for Q3 and 42.3% year to date, reflecting higher deposit costs and average interest-bearing deposits.
- Cash flows: For the first nine months, operating activities provided $74.2 million, investing activities provided $220.6 million, and financing activities used $247.7 million. Cash and cash equivalents increased $47.0 million to $127.4 million. Investing cash inflows primarily reflected securities maturities and sales; financing outflows included repayment of borrowings and share repurchases.
Financial condition, debt, and liquidity
- Total assets were $6.63 billion at September 30, down 1.9% from year-end 2018. Net loans and leases were $4.82 billion; total deposits were $5.37 billion, up 9.8% from year-end.
- Other borrowings were $429.0 million, down 60.1% from year-end, mainly following deposit growth and the use of securities-sale proceeds to repay overnight FHLB advances. Repurchase agreements were $50.5 million; trust preferred debentures were $17.0 million.
- Equity totaled $659.9 million. Regulatory capital ratios exceeded the stated fully phased-in minimums and well-capitalized thresholds: total capital 13.36%, Tier 1 risk-based capital 12.48%, common equity Tier 1 12.14%, and Tier 1 leverage 9.43%.
- Management described liquidity as supported by core deposits, cash, investment and loan cash flows, and borrowing access. Unused FHLB borrowing capacity was $1.6 billion; unencumbered residential mortgage loans and securities were $1.1 billion.
Material changes and unusual items
- Loan growth was modest: total loans and leases increased 0.5% from year-end, while originated loans rose 1.3% and acquired loans ran off 13.9%. Commercial real estate loans increased 3.7%; commercial and industrial loans declined 7.7%.
- Credit costs rose. Nine-month net charge-offs were $4.4 million versus $0.3 million in 2018, including a $3.1 million first-quarter write-down of one commercial real estate relationship. The total allowance was $41.4 million, down 4.7% from year-end.
- Nonperforming loans and leases increased to $30.1 million, or 0.62% of loans, from $26.6 million and 0.55% at year-end. Criticized and classified loans increased 36.9% to $103.3 million; management said approximately 92.1% were current or less than 30 days past due.
- Q3 expenses included a $470,000 write-down related to two branch closures, partly offset by $1.2 million in FDIC deposit-insurance credits. Nine-month 2018 noninterest income included $2.9 million of property-sale gains; 2019 included a $500,000 merchant-card incentive payment.
- The company sold approximately $152.1 million of available-for-sale securities in Q2, using proceeds to reduce borrowings. The securities portfolio’s net unrealized position improved to a $2.4 million gain from a $31.2 million loss at year-end, primarily due to interest-rate changes; management reported no securities as other-than-temporarily impaired.
- Tompkins Insurance acquired Cali Agency effective May 1, 2019. The filing reports $0.2 million of goodwill and $0.3 million of customer-related and noncompete intangibles arising from the acquisition.
Outlook, risks, and contingencies
- The filing provides no specific earnings or revenue guidance. Management’s base-rate simulation indicated a stable net interest margin over the next 12–18 months. A modeled 200-basis-point rate increase reduced one-year net interest income by approximately 2.9%; a 100-basis-point decline increased it by 0.05%. Management cautioned that actual results may differ from simulations.
- Key stated risks include economic and market conditions in the company’s New York and Pennsylvania markets, interest-rate changes and deposit pricing, loan quality and collateral values, competition, regulation, technology, and the company’s ability to fund growth. Management identified allowance estimation and securities impairment assessment as critical judgments.
- Management was evaluating the expected-credit-loss standard (CECL), effective for the company January 1, 2020. It did not expect a significant capital impact, but the allowance effect remained dependent on portfolio composition and economic forecasts at adoption.
- Standby letters of credit represented a maximum potential obligation of $28.2 million; management did not anticipate significant losses. The company stated that ordinary-course litigation was not expected to have a material adverse effect and reported no material changes to previously disclosed risk factors.
- After quarter-end, on November 8, 2019, the board approved executive compensation changes, including performance-based stock awards, an amendment to the CEO’s retirement-benefit calculation, and an increase in the CEO’s annual base salary from $665,000 to $719,000, effective November 12, 2019.
Important facts for investors to verify
- Whether elevated criticized/classified loans, nonperforming assets, and commercial real estate charge-offs lead to further provisions or charge-offs.
- How deposit-cost trends affect net interest margin and earnings as interest rates and funding mix change.
- The effect of CECL adoption on the allowance, earnings, and capital when the standard takes effect.
- Whether deposit growth and available borrowing capacity continue to support liquidity as securities and borrowing balances evolve.
- The remaining authorization under the 2018 repurchase plan: 42,817 shares at September 30, 2019; the company had repurchased 357,183 shares under the plan by that date.