Tompkins Financial Corporation — Q2 2016 Form 10-Q
Business context and reporting period. Community-based financial holding company with banking, insurance, and wealth-management businesses across New York and Pennsylvania. This unaudited report covers the quarter and six months ended June 30, 2016; balance-sheet comparisons are with December 31, 2015. Amounts below are in millions unless otherwise noted.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net interest income | $44.9 | $41.3 | $88.9 | $82.6 |
| Provision for loan and lease losses | $1.0 | $0.9 | $1.8 | $1.1 |
| Noninterest income | $17.1 | $19.0 | $34.6 | $36.6 |
| Noninterest expense | $39.4 | $32.9 | $78.9 | $72.6 |
| Net income attributable to Tompkins | $14.6 | $17.4 | $28.8 | $30.1 |
| Diluted EPS | $0.96 | $1.15 | $1.89 | $2.00 |
- Margins and returns: Year-to-date net interest margin was 3.36%, versus 3.41% in 2015. Q2 return on average assets was 1.00% and return on average equity 10.76%; year-to-date figures were 0.98% and 10.37%, respectively.
- Cash flow: For the first six months, operating activities provided $39.2 million, investing activities used $219.1 million, and financing activities provided $188.1 million. Cash and cash equivalents rose $8.1 million to $66.4 million.
- Balance sheet: Total assets were $5.925 billion, up $234.9 million (4.1%) from year-end. Net loans and leases were $3.945 billion, up $204.9 million; total deposits were $4.470 billion, up $74.4 million. Total equity was $554.4 million, up $38.0 million.
- Debt and liquidity: Other borrowings were $700.0 million, up $163.7 million (30.5%); federal funds purchased and repurchase agreements were $97.2 million. Cash and short-term investments totaled $103.0 million at quarter-end. The company reported $1.0 billion in unused FHLB borrowing capacity and $445.1 million in unencumbered residential mortgage loans and securities.
- Capital: Regulatory ratios exceeded well-capitalized requirements: total risk-based capital 12.95%, Tier 1 risk-based capital 12.11%, common equity Tier 1 11.21%, and Tier 1 leverage 8.79%. Subsidiary banks also exceeded well-capitalized minimums.
Material changes versus comparable periods
- Reported net income declined 16.2% in Q2 and 4.4% year to date. Comparisons are affected by a 2015 pension-plan curtailment gain: excluding its after-tax benefit of $3.6 million, management stated 2015 net income would have been $13.8 million for Q2 and $26.0 million year to date, versus $14.6 million and $28.8 million in 2016.
- Net interest income increased 8.7% in Q2 and 7.7% year to date, supported by loan and earning-asset growth. Management said this growth offset lower asset yields and a lower margin in a low-rate environment.
- Noninterest income fell 9.9% in Q2 and 5.5% year to date, mainly from lower securities gains and lower gains on sales of other real estate owned. Noninterest expense rose 19.7% in Q2 and 8.7% year to date, largely reflecting the 2015 pension-related expense credit; salary and benefit costs also increased.
- Originated loans grew 7.3% from year-end, while acquired loans declined 7.5% with portfolio runoff. Commercial real estate loans increased 7.8% and commercial and industrial loans 3.7%.
- Nonperforming loans and leases decreased to $18.1 million from $21.8 million at year-end; nonperforming assets fell to $19.1 million from $24.5 million. The allowance was $33.1 million, covering 183.01% of nonperforming loans and leases.
Outlook, commentary, risks, and unusual items
- No specific earnings or revenue guidance is provided. Management said interim results are not necessarily indicative of full-year results and described its diversified funding sources as sufficient for reasonably likely liquidity needs.
- Interest-rate risk is a key exposure. The company’s simulation estimated a 2.0% one-year decline in net interest income under a 200-basis-point rate increase and a 1.4% decline under a 100-basis-point decrease. The one-year static gap was negative $532.2 million (8.98% of assets); management characterized the company as moderately more vulnerable to rising rates. Simulations assume no balance-sheet growth or management response.
- Management cited credit risks from local economic conditions, borrower performance, collateral values, and loan concentrations; interest-rate and funding-cost changes; regulatory and competitive pressures; technology and cybersecurity; and the ability to fund future business needs. It identified potential problem commercial relationships totaling $11.8 million in originated loans and $9.8 million in acquired loans, which remain performing but are being monitored.
- Unrealized losses on available-for-sale securities were $2.2 million at June 30, down from $14.1 million at year-end. Management attributed losses mainly to interest rates and liquidity, and reported no securities as other-than-temporarily impaired.
- Tompkins Insurance acquired Shepard, Maxwell & Hale Insurance effective January 1, 2016; reported consideration was $2.2 million, including cash and company shares. On July 21, the board authorized a new repurchase plan for up to 400,000 shares over 24 months.
- Standby letters of credit totaled $54.3 million; management did not anticipate significant losses. Management reported no pending litigation expected to have a material effect, no material change in previously disclosed risk factors, effective disclosure controls, and no material quarter-to-quarter change in internal control over financial reporting.
Important facts for investors to verify
- How much of earnings growth excluding the 2015 pension curtailment is sustainable, given lower noninterest income and rising operating costs?
- Whether loan growth continues to outpace deposits, and how increased FHLB borrowings affect funding costs, liquidity, and interest-rate sensitivity.
- Trends in commercial real estate exposure, classified and potential problem loans, charge-offs, and the adequacy of the allowance as the portfolio expands.
- The sensitivity of net interest income and securities values to rate changes, including assumptions behind the company’s simulation and negative one-year gap.
- The financial contribution and integration costs of the insurance acquisition, and the timing and execution of the new share-repurchase authorization.