Tompkins Financial Corporation — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; unaudited. Tompkins is a community-focused financial holding company operating banking, insurance, and wealth-management businesses in New York and Pennsylvania.
Financial performance and condition
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net interest income | $40.5 | $39.8 | $80.5 | $78.0 |
| Provision for loan and lease losses | $0.1 | $2.5 | $0.8 | $3.5 |
| Noninterest income | $17.7 | $16.5 | $35.2 | $33.9 |
| Noninterest expense | $38.9 | $37.8 | $77.1 | $75.3 |
| Net income attributable to Tompkins | $13.1 | $11.0 | $25.6 | $22.5 |
| Diluted earnings per share | $0.87 | $0.75 | $1.72 | $1.55 |
- Revenue: Net interest income plus noninterest income was $58.2 million in Q2 and $115.7 million for the first half, each approximately 3.3% above the prior-year comparable period.
- Margins and returns: Taxable-equivalent net interest margin was 3.55% for Q2 and 3.58% year to date, versus 3.58% and 3.59%. Q2 return on average assets was 1.04% (0.89% prior year) and return on average equity was 10.91% (9.87%).
- Cash flow: First-half operating cash flow was $34.2 million, investing cash outflow was $58.0 million, and financing cash flow was $24.3 million. Cash and cash equivalents increased $0.5 million to $83.4 million.
- Balance sheet at June 30: Total assets were $5.06 billion, up 1.1% from year-end; net loans and leases were $3.20 billion; deposits were $4.04 billion, up 2.5%; and total equity was $489.2 million. Interest-bearing borrowings and trust preferred debentures totaled approximately $469.2 million, down from $536.4 million at year-end.
- Credit quality: The allowance for loan and lease losses was $27.5 million. Nonperforming loans and leases were $26.7 million and nonperforming assets were $33.5 million, down from $39.0 million and $43.3 million at year-end. Allowance coverage of nonperforming loans was 103.1%, versus 71.7% at year-end.
- Capital: Company regulatory capital ratios were 13.92% total capital to risk-weighted assets, 13.07% Tier 1 risk-based capital, and 8.79% Tier 1 leverage; each exceeded the stated well-capitalized threshold.
Changes versus comparable periods
- Quarterly and first-half net income rose about 18.7% and 13.8%, respectively. Lower credit-loss provisions were a major contributor, alongside higher net interest income and fee income.
- Net interest income increased despite lower loan yields; growth in average earning assets and lower funding costs helped offset yield pressure. First-half net interest margin was nearly unchanged year over year.
- Noninterest income increased, with stronger deposit service charges, card services, and investment-services income. Insurance commissions declined in Q2, partly reflecting the loss of two large Pennsylvania accounts in the second half of 2013.
- Noninterest expense increased, primarily because of higher salaries, additional employees, merit increases, and incentive compensation.
- Credit indicators improved: nonperforming assets declined from year-end, and originated loans classified as special mention, substandard, or doubtful were down 33.3% from June 2013.
Outlook, risks, and notable items
- The filing provides no specific earnings or revenue guidance. Management said it had identified no circumstances likely to cause a material near-term change in liquidity and considered the allowance adequate, while noting that economic conditions, interest rates, collateral values, and credit quality could alter results.
- Interest-rate risk is the primary market risk. Modeling estimated a 0.8% decrease in one-year net interest income under a 200-basis-point rate increase and a 1.1% decrease under a 100-basis-point decline. The company’s one-year static gap was negative $225.3 million, or 4.46% of assets; actual outcomes may differ from model estimates.
- Other cited risks include economic and regulatory changes, competitive and technology pressures, and uncertainty in estimates for loan losses, acquired loans, benefit plans, and securities impairment. Management reported no investment securities considered other-than-temporarily impaired.
- Covered acquired loans remain subject to FDIC loss-sharing arrangements; the FDIC indemnification asset fell to $3.5 million from $4.8 million at year-end.
- Tompkins Insurance acquired certain assets of Breakthrough Benefits for $350,000 in January 2014; the purchase allocation included $103,000 of goodwill and $244,000 of customer-related and noncompete intangibles.
- On July 24, 2014, the board authorized discretionary repurchases of up to 400,000 shares over 24 months. The filing also reports a nonmaterial correction to comparative acquired-loan principal balances.
- The company said it and its bank subsidiaries exceeded current well-capitalized requirements and management believed they would meet Basel III requirements on a fully phased-in basis if effective at June 30, 2014.
Important facts for investors to verify
- Whether credit-quality improvement and the unusually low Q2 provision persist, including trends in classified loans, nonperforming assets, charge-offs, and allowance coverage.
- Whether loan growth and deposit mix can sustain net interest income as asset yields and market rates change; assess the disclosed rate sensitivity and negative one-year gap.
- Whether higher personnel expenses and the insurance segment’s weaker earnings affect future operating leverage.
- The condition and realization of acquired and covered loans, related FDIC reimbursements, and the potential exposure from troubled debt restructurings and potential problem credits.
- Capital and liquidity after dividends and any execution of the newly authorized share repurchase; also review pledged securities and reliance on noncore funding.