Tompkins Financial Corporation — Q1 2017 Form 10-Q
Business context and reporting period
Community-based financial services company headquartered in Ithaca, New York, with banking, insurance and wealth-management businesses. This unaudited quarterly report covers the three months ended March 31, 2017; balance-sheet comparisons are against December 31, 2016 unless otherwise noted.
Financial performance and position
| Metric | Q1 2017 / March 31, 2017 | Comparison |
|---|---|---|
| Net interest income | $48.0 million | Up 9.1% from Q1 2016 |
| Noninterest income | $17.2 million | $17.5 million in Q1 2016 |
| Noninterest expense | $41.4 million | Up 4.7% from Q1 2016 |
| Net income attributable to Tompkins Financial Corporation | $15.7 million | $14.3 million in Q1 2016 |
| Diluted earnings per share | $1.03 | $0.94 in Q1 2016 |
| Net interest margin | 3.38% | 3.36% in Q1 2016, on a taxable-equivalent basis |
| Return on average assets / equity | 1.02% / 11.47% | 1.00% / 10.85% in Q1 2016 |
| Total assets | $6.28 billion | Up $43.3 million from year-end |
| Total deposits | $4.85 billion | Up $225.4 million from year-end |
| Net loans and leases | $4.26 billion | Up from $4.22 billion at year-end |
| Shareholders’ equity, including noncontrolling interests | $563.5 million | Up $14.1 million from year-end |
Net cash provided by operating activities was $14.9 million, versus $17.6 million in Q1 2016. Investing activities used $35.3 million; financing activities provided $35.0 million. Cash and cash equivalents rose $14.5 million during the quarter to $78.5 million.
Other borrowings were $717.3 million, down $167.5 million from year-end; repurchase agreements and federal funds purchased were $70.7 million. Trust preferred debentures were $16.6 million after the January redemption described below. Regulatory capital ratios exceeded applicable well-capitalized requirements; total capital to risk-weighted assets was 12.41% and Tier 1 leverage was 8.36%.
Material changes versus comparable periods
- Net income increased about 10% and diluted EPS rose from $0.94 to $1.03 year over year. Management attributed stronger net interest income principally to growth in average earning assets, especially loans, and stable funding costs.
- Average loans were up 12.5% year over year, while the average loan yield declined 3 basis points. Net interest margin improved 2 basis points.
- Noninterest income was relatively flat year over year. Lower insurance commissions and deposit service charges were partly offset by higher card income and other income.
- Noninterest expense increased 4.7%, including higher compensation, benefits, occupancy, marketing, technology and card-service costs.
- Since year-end, deposit growth supported asset growth and repayment of borrowings. Originated loans increased $58.5 million while acquired loans ran off by $18.7 million.
Outlook, management commentary, risks and unusual items
- No formal earnings or revenue guidance is provided. Management said its base-rate simulation indicated net interest margin stable to higher over the next 12–18 months. Simulated net interest income declined about 1.5% under either a 200-basis-point rate increase or a 100-basis-point decline; management cautioned actual results may differ.
- Management cited improving credit quality: nonperforming loans and leases were 0.47% of total loans, down from 0.51% at year-end; the allowance covered 180.02% of nonperforming loans. Total nonperforming assets were $22.6 million, or 0.36% of assets. However, management identified $21.0 million of commercial relationships as potential problem loans across originated and acquired portfolios and said they are monitored at least quarterly.
- Quarterly provision for loan and lease losses was $769,000, down from $855,000 in Q1 2016. The allowance was $36.2 million. Management notes that allowance estimates depend on uncertain assumptions and could change with local economic conditions, credit concentrations, interest rates and property values.
- Liquidity resources included $78.5 million of cash and cash equivalents, $1.2 billion of unused FHLB borrowing capacity and $479.3 million of unencumbered residential mortgage loans and securities. Management reported no near-term trend expected to materially change liquidity. Municipal deposits are seasonal; pledged securities were 80.2% of total securities at quarter-end.
- The company redeemed all Tompkins Capital Trust I preferred securities on January 31, 2017, for an aggregate $20.5 million, plus accrued interest. It also reported $262,000 in costs associated with a planned core-system conversion expected to be completed in Q2 2017.
- Other notable items included a commercial real-estate loan moving from nonaccrual status to other real estate owned, and gains on OREO sales and insurance customer-relationship sales. Management said unrealized securities losses were principally interest-rate and liquidity-related, did not consider securities other-than-temporarily impaired, and did not expect a material impact from adopting the 2018 revenue-recognition standard. It expects the future credit-loss standard may increase the allowance, but the impact is not quantifiable.
- Management reported no material change in previously disclosed risk factors and no pending litigation expected to materially affect results or financial condition. Disclosure controls were deemed effective; no material internal-control changes were reported.
Most important facts for investors to verify
- Whether loan growth, deposit growth and net interest margin hold up as funding costs and interest rates change.
- Developments in the identified potential problem commercial relationships, nonperforming assets and the adequacy of the loan-loss allowance.
- The stability and composition of deposits, including seasonal municipal balances, and the company’s reliance on FHLB and other borrowings.
- Whether increased operating costs, including the core-system conversion, affect future earnings and efficiency.
- The eventual effect of the expected-credit-loss accounting standard and interest-rate changes on reserves, securities values and earnings.