Tompkins Financial Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Tompkins is a New York-based community financial services company with banking, insurance, and wealth management businesses. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2016 / Sep. 30, 2016 | Comparison |
|---|---|---|
| Net interest income | $45.3 million for Q3; $134.3 million year to date | Q3 +7.0%; YTD +7.5% versus 2015 |
| Noninterest income | $17.9 million for Q3; $52.5 million year to date | Q3 +2.8%; YTD −2.8% |
| Net income attributable to Tompkins | $14.9 million for Q3; $43.6 million year to date | Q3 $14.5 million; YTD $44.6 million in 2015 |
| Diluted EPS | $0.97 for Q3; $2.87 year to date | $0.96 and $2.96, respectively, in 2015 |
| Net interest margin | 3.31% for Q3; 3.34% year to date, on a taxable-equivalent basis | 3.35% and 3.39%, respectively, in 2015 |
| Total assets | $6,102.2 million | +7.2% from Dec. 31, 2015 |
| Net loans and leases | $4,055.4 million | +8.4% from Dec. 31, 2015; originated loan growth was the main driver |
| Deposits | $4,690.3 million | +6.7% from Dec. 31, 2015 |
| Cash and cash equivalents | $179.6 million | $58.3 million at Dec. 31, 2015 |
| Total equity | $561.2 million | $516.5 million at Dec. 31, 2015 |
For the first nine months, operating cash flow was $64.1 million, investing activities used $297.8 million, and financing activities provided $355.0 million. Cash increased by $121.3 million to $179.6 million. These cash flow measures reflect banking operations and should be considered alongside deposit, loan, and funding trends.
Q3 return on average assets was 1.00% and return on average equity was 10.61%, versus 1.05% and 11.29% in Q3 2015. Year-to-date ROA and ROE were 1.00% and 10.73%, respectively. The company reported regulatory capital ratios of 12.97% total capital to risk-weighted assets, 12.12% Tier 1 capital to risk-weighted assets, 11.23% Tier 1 common equity, and 8.83% Tier 1 capital to average assets; management said subsidiary banks also exceeded well-capitalized thresholds.
Changes versus comparable periods
- Q3 net income and diluted EPS increased modestly from 2015. YTD net income and diluted EPS declined, but 2015 included a one-time pension-curtailment gain of $3.6 million after tax. Excluding that item, management cited 2015 YTD net income of $41.0 million and diluted EPS of $2.72.
- Growth in average earning assets, especially loans, supported higher net interest income; lower asset yields in the low-rate environment reduced margins. YTD average loans grew 12.0%, while loan yields fell 11 basis points.
- YTD provision for loan and lease losses rose to $2.6 million from $1.4 million, mainly reflecting loan growth. Noninterest expense increased to $119.2 million from $110.5 million, with the prior year benefiting from a $6.0 million pretax pension-curtailment credit.
- YTD noninterest income fell, including lower gains on OREO sales and lower deposit service charges. Insurance commissions grew, helped by internal growth and a 2016 agency acquisition.
- Nonperforming loans and leases declined to $18.3 million from $21.8 million at year-end 2015; nonperforming assets fell to $19.3 million from $24.5 million. The allowance was $34.1 million, covering 186.45% of nonperforming loans and leases.
Outlook, commentary, risks, and unusual items
- The filing provides no quantified earnings or revenue guidance. Management said it had not identified near-term trends reasonably likely to materially change liquidity and considered current interest-rate exposure not significant relative to earnings and capital.
- Management cited loan growth and stable funding costs as supports to net interest income, while warning that low rates pressure asset yields. Interest-rate modeling estimated net interest income declines of 1.8% under a 200-basis-point rate increase and 1.5% under a 100-basis-point decline over one year, assuming no balance-sheet growth or management action.
- Other borrowings rose $134.7 million, or 25.1%, from year-end as loan growth outpaced deposit growth. Core deposits increased to $3.9 billion; unused FHLB borrowing capacity was $1.1 billion. Securities pledged or sold under repurchase agreements totaled $1.3 billion, or 88.5% of securities.
- Credit risks include commercial real estate concentration (44.3% of loans and leases), potential problem credits, and uncertainty in local New York and Pennsylvania economies. Internally classified Special Mention, Substandard, and Doubtful loans were up $4.5 million, or 8.1%, from year-end, despite improved nonperforming asset measures.
- In Q3, the company terminated an FDIC loss-share agreement and recorded $313,000 of pretax expense, including a write-off of the remaining indemnification asset. It also sold its remaining trading securities. No investment security was considered other-than-temporarily impaired.
- The company acquired Shepard, Maxwell & Hale Insurance effective Jan. 1, 2016, for consideration with an acquisition-date fair value of $2.2 million. It was also incurring core banking system conversion costs; approximately $295,000 of YTD costs were expensed, with conversion scheduled for May 2017.
- Management identified competition, changing economic, market, regulatory and interest-rate conditions, technology and cybersecurity risks, and the ability to fund and execute growth as factors that could affect results. It reported no material change in previously disclosed risk factors, no material litigation claims known to management, and effective disclosure controls.
- Subsequent event: On Nov. 9, 2016, the company amended executive retirement plans and entered into related supplemental retirement arrangements. These arrangements address the 2015 pension freeze and change certain disability, change-in-control, severance, and deferred-compensation terms.
Most important facts for investors to verify
- Whether loan growth continues to outpace deposit growth and how the resulting borrowing levels affect funding costs and net interest margin.
- Trends in commercial real estate and other criticized or potential problem loans, provision expense, and the adequacy of the allowance.
- Underlying earnings comparisons after adjusting for the prior-year pension-curtailment gain, as well as expense trends and the costs and progress of the core system conversion.
- Liquidity and funding composition, including reliance on FHLB advances, the high proportion of pledged securities, and the sustainability of core deposit growth.
- Capital ratios, dividend payout, and any activity under the new authorization to repurchase up to 400,000 shares; none had been repurchased under the new plan as of the filing.
- Terms and potential expense implications of the executive retirement arrangements disclosed after quarter-end.