Tompkins Financial Corp. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Tompkins is a community-oriented financial services company operating banking, insurance, and wealth management businesses in New York and Pennsylvania. Unless noted, amounts below are in millions of dollars.
Financial performance and position
- Q2 earnings: Net income attributable to Tompkins was $19.4 million, or $1.27 diluted EPS, versus $22.1 million and $1.43 a year earlier. For the first half, net income was $40.4 million and diluted EPS was $2.63, versus $42.5 million and $2.76.
- Revenue and margins: Q2 net interest income was $52.3 million, down 0.8%; total noninterest income was $18.5 million, down 12.5%. Net interest margin was 3.34%, compared with 3.36%. For the first half, net interest income was $104.2 million, down 1.1%, and noninterest income was $37.9 million, down 2.7%; net interest margin was 3.34%, versus 3.39%.
- Expense and returns: Q2 noninterest expense was $46.1 million, up 2.4%. Q2 return on average assets was 1.15% and return on average equity was 11.96%, versus 1.32% and 15.13%. First-half figures were 1.21% and 12.73%, respectively.
- Loans and credit: Total loans and leases were $4.86 billion, up 0.5% from year-end 2018. The allowance for loan and lease losses was $40.8 million. Nonperforming loans and leases were $23.8 million, or 0.49% of loans, down from $26.6 million and 0.55% at year-end. First-half net charge-offs were $3.7 million, compared with net recoveries of $0.2 million in first-half 2018.
- Balance sheet and funding: Total assets were $6.65 billion, down 1.5% from year-end. Deposits rose 2.0% to $4.99 billion; other borrowings fell 23.4% to $824.6 million. Cash and cash equivalents were $81.0 million. Shareholders’ equity was $656.2 million and total equity was $657.7 million.
- Cash flow: In the first half, operating activities provided $46.0 million, investing activities provided $152.3 million, and financing activities used $197.7 million. Cash and cash equivalents increased $0.6 million.
- Capital: At June 30, the company reported total capital to risk-weighted assets of 13.34%, Tier 1 capital of 12.48%, common equity Tier 1 of 12.13%, and Tier 1 capital to average assets of 9.25%. Management said the company and subsidiary banks exceeded applicable minimum and well-capitalized requirements.
Material changes versus comparable periods
- Earnings fell year over year, primarily as higher deposit and borrowing costs outpaced growth in interest income. Interest expense rose 46.1% in Q2 and 58.7% for the first half; the average cost of interest-bearing deposits increased to 0.84% in Q2 from 0.42%.
- Noninterest income comparisons were affected by approximately $2.9 million of property-sale gains in 2018. First-quarter 2019 also included a $0.5 million one-time merchant-card incentive payment.
- In June, Tompkins sold about $152.1 million of lower-yielding securities and used the proceeds to reduce overnight FHLB borrowings. Securities declined from 21.8% to 20.0% of assets between year-end and June 30.
- The allowance declined from $43.4 million at year-end. Management cited a $3.1 million write-down of one commercial real estate relationship in Q1, slower loan growth, and stable asset-quality measures. Classified Special Mention or Substandard loans increased $9.1 million from year-end, including two credits downgraded in Q2 totaling $7.8 million.
- Tompkins Insurance acquired the Cali Agency effective May 1, 2019; acquisition-related goodwill and other intangible assets totaled approximately $0.5 million.
Outlook, risks, and unusual items
- No specific earnings or revenue guidance was provided. Management described its base-case interest-rate simulation as indicating a stable net interest margin over the next 12 to 18 months. A modeled parallel 200-basis-point rate increase would reduce one-year net interest income by approximately 5.0%; a 200-basis-point decline would increase it by 1.2%. Management cautioned that actual results may differ from model assumptions.
- Management identified interest-rate, economic, regulatory, technology, competitive, and funding conditions as risks. The company remains more liability-sensitive over a one-year horizon; the static one-year gap was negative $643.2 million, or 9.7% of assets.
- Management reported $1.2 billion of unused FHLB borrowing capacity and said it believed available liquidity sources were sufficient. Core deposits were 83.0% of total deposits; securities pledged or sold under repurchase arrangements represented 92.7% of total securities.
- Management said it did not consider any investment security other-than-temporarily impaired. Unrealized security losses were attributed primarily to interest rates and market liquidity, rather than credit quality.
- CECL credit-loss guidance was scheduled for adoption January 1, 2020. The company was still evaluating the effect and did not expect a significant impact to capital; the allowance impact remained dependent on portfolio composition and economic conditions at adoption.
- The filing reported no material changes to previously disclosed risk factors and no pending litigation claims management believed would materially affect results or financial condition. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether deposit pricing and other funding costs continue to rise faster than yields on loans and securities, and the resulting effect on net interest margin.
- Developments in the two newly downgraded credits, the commercial real estate relationship written down in Q1, classified loans, and net charge-offs.
- How loan and deposit growth, securities portfolio changes, and the decline in FHLB borrowings affect liquidity and funding mix.
- The actual impact of CECL adoption on the allowance and capital, once management completes its evaluation.
- Whether insurance and wealth-management income trends offset weaker banking earnings and the absence of 2018 property-sale gains.