Tompkins Financial Corporation — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Unaudited results; financial statement amounts below are in millions of dollars unless otherwise noted. Tompkins is a New York-based community financial services company with banking and financial services segments.
Financial performance and position
| Metric | Q2 2011 / June 30, 2011 | Comparable period / prior date |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $40.0 Q2; $80.0 first half | Up 1.3% and 1.7%, respectively, year over year |
| Net income attributable to Tompkins | $9.4 Q2; $18.2 first half | $9.0 and $17.4; up 4.1% for both periods |
| Diluted EPS | $0.85 Q2; $1.65 first half | $0.83 and $1.61 |
| Net interest income | $28.0 Q2; $55.5 first half | $28.1 and $56.1 |
| Tax-equivalent net interest margin | 3.77% Q2 and first half | 3.91% Q2 2010; 3.93% first half 2010 |
| Noninterest income / expense | $12.0 / $25.2 Q2; $24.5 / $50.4 first half | Noninterest income up 6.0% / 8.2%; expense up 2.6% / 2.8% year over year |
| Provision for loan and lease losses | $1.0 Q2; $2.9 first half | $1.4 and $3.6 |
| Cash flow | First-half operating cash flow $31.5; ending cash and equivalents $51.5 | Operating cash flow was $40.2 in first-half 2010; ending cash was $64.6 |
| Total assets / equity | $3,287.6 / $300.1 | Assets up 0.8% and equity up $26.7 from December 31, 2010 |
| Deposits / borrowings | Deposits $2,572.0; other borrowings $172.6; repos and federal funds $178.5; trust preferred debentures $25.1 | Deposits rose $76.1 and other borrowings fell $71.6 from year-end |
| Regulatory capital | Total capital to risk-weighted assets 13.98%; Tier 1 risk-based 12.73%; Tier 1 leverage 8.39% | All above stated “well-capitalized” thresholds |
Material changes and operating developments
- Fee-based activity supported earnings: first-half investment services income rose 4.4%, insurance commissions and fees 7.5%, and card services income 23.2%. Lower deposit and borrowing costs helped offset lower asset yields.
- Net interest margin declined as earning-asset yields fell and asset growth was concentrated in lower-yielding securities amid soft loan demand. Average earning assets increased, but their yield fell 42 basis points in Q2 and 43 basis points year to date versus 2010.
- Loans and leases totaled $1,920.7, up $10.4 from year-end. Commercial real estate loans increased $34.8; commercial and industrial loans declined $27.0. Deposits grew, primarily in checking, savings and money market accounts, and supported repayment of borrowings.
- Nonperforming loans and leases were $41.0, down from $45.3 at year-end but above $38.7 a year earlier. Nonperforming assets were $42.7, or 1.30% of assets, versus 1.43% at year-end and 1.27% a year earlier. Commercial real estate was the largest nonperforming loan category, including a $12.4 relationship past due 90 days or more.
- The allowance was $28.4, or 1.48% of loans and leases, versus $27.8 and 1.46% at year-end. First-half net charge-offs were $2.4, compared with $1.4 in 2010; management nevertheless cited improving credit indicators and lower provision expense.
- In June, Tompkins Insurance acquired Olver & Associates for $3.2, including cash and 75,188 shares. The acquisition generated $2.4 of goodwill and additional customer-related and noncompete intangibles.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management noted that interim results are not necessarily indicative of full-year results and described the recovery as uncertain.
- Management cited interest rates, economic and regulatory conditions, soft loan demand, unemployment and local property values as factors that could affect earnings, credit quality and financial condition. The company is assessing the potential effects of Dodd-Frank and Basel III; their full impact was not yet clear.
- Interest-rate simulations showed estimated one-year net interest income declines of 0.69% under a 200-basis-point rate increase and 0.43% under a 100-basis-point decrease. The one-year static gap was negative $188.1, or 5.72% of assets. The model assumes no balance-sheet growth or management response; actual results may differ.
- Management considered the allowance adequate but cautioned that adverse economic conditions or assumptions could require an increase. It reported no additional impairment charge on the identified non-U.S. mortgage-backed securities in Q2; further economic deterioration could cause additional credit losses. Management did not intend or expect to be required to sell securities in unrealized-loss positions before recovery.
- First-half other income included a $504,000 gain distributed by an investment in a small business investment company. Other real estate owned expenses rose with foreclosures. The company reported $53.8 of maximum potential obligations under standby letters of credit and did not expect significant losses.
- Management said legal proceedings in the ordinary course were not expected to have a material adverse effect, reported no material change in previously disclosed risk factors, and concluded disclosure controls were effective.
Key facts for investors to verify
- Whether margin pressure continues and fee income can offset lower asset yields and rising operating costs.
- Trends in nonperforming and criticized loans, charge-offs, commercial real estate exposures and allowance adequacy, especially the $12.4 past-due relationship.
- Quality and sustainability of noninterest income, including the card rewards accrual adjustment and SBIC gain.
- Deposit retention, funding mix, repayment of borrowings, pledged securities and continued access to the stated $954.8 of unused FHLB borrowing capacity.
- Capital and liquidity effects of Dodd-Frank, Basel III and the enhanced capital requirements applicable to Mahopac National Bank.