Tompkins Financial Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are to December 31, 2017. Tompkins is a community-focused financial services company operating banking, insurance, and wealth-management businesses in New York and Pennsylvania. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net interest income | $52.7 million | $48.0 million |
| Noninterest income | $17.8 million | $17.2 million |
| Noninterest expense | $43.7 million | $41.4 million |
| Provision for loan and lease losses | $0.6 million | $0.8 million |
| Net income attributable to Tompkins | $20.4 million | $15.7 million |
| Diluted earnings per share | $1.33 | $1.03 |
| Net interest margin | 3.42% | 3.38% |
| Return on average assets | 1.25% | 1.02% |
| Return on average equity | 14.41% | 11.47% |
| Operating cash flow | $19.1 million | $14.9 million |
Net income increased about 30% year over year. Management attributed stronger net interest income primarily to loan growth and stable funding costs; average loans rose 10.0%. The effective tax rate fell to 22.0% from 31.9%, reflecting the reduction in the federal statutory tax rate. Noninterest expense increased 5.7%, including higher compensation, technology spending, and checking-account fraud losses.
Financial condition, liquidity, and capital
- Total assets were $6.65 billion, essentially unchanged from year-end. Loans and leases, net of unearned income and before allowance, were $4.70 billion, up about 0.8%; deposits were $4.93 billion, up $92.1 million or 1.9%.
- Cash and cash equivalents were $68.1 million, down from $84.3 million at year-end. Other borrowings were $995.1 million, down $76.7 million; total liabilities were $6.07 billion and total equity was $579.4 million.
- Management reported $1.1 billion of unused FHLB borrowing capacity and $518.4 million of unencumbered residential mortgage loans and securities. It considered available liquidity sources adequate. Securities pledged or sold under repurchase agreements represented 90.0% of the securities portfolio.
- Regulatory capital ratios exceeded stated minimums, including fully phased-in capital conservation buffer requirements. Total capital to risk-weighted assets was 12.50%; common equity Tier 1 was 11.28%.
- Investing activities used $40.0 million of cash and financing activities provided $4.6 million; cash decreased $16.2 million during the quarter.
Material changes, risks, and unusual items
- Asset quality weakened modestly from year-end: nonperforming loans and leases increased to $25.2 million from $23.0 million, and nonperforming assets rose to $27.3 million from $25.1 million. The nonperforming-loan ratio increased to 0.54% from 0.49%. Management cited one $2.9 million commercial and industrial relationship moved to nonaccrual. Potential problem commercial relationships in the originated portfolio totaled $24.3 million, up from $11.2 million at year-end.
- The allowance for loan and lease losses was $40.2 million; coverage of nonperforming loans and leases declined to 159.34% from 172.84%. Management considered the allowance appropriate but noted it depends on estimates and could change with economic conditions, credit concentrations, interest rates, and property values.
- Available-for-sale securities had $37.7 million of gross unrealized losses at quarter-end, versus $19.5 million at year-end, primarily reflecting interest-rate and liquidity changes. Management did not consider the losses other-than-temporary and stated it did not expect to be forced to sell before recovery.
- Other comprehensive loss was $14.4 million, largely from securities valuation changes, reducing accumulated other comprehensive equity. This did not affect regulatory capital under the company’s elected treatment.
- The company adopted ASC 606 on January 1, 2018, recording a $1.8 million increase to opening retained earnings, mainly for insurance contingency income. Management said adoption did not significantly affect Q1 results. Adoption of ASU 2016-01 also included a $65,000 cumulative adjustment.
- Interest-rate simulation indicated net interest income would decline approximately 1.6% under a 200-basis-point rise and 0.8% under a 100-basis-point decline over one year. The one-year static gap was negative $804.1 million. Management described the balance sheet as more vulnerable to rising rates in the near term, while its base case indicated a stable-to-higher margin over 12–24 months. These are model estimates, not earnings guidance.
- The company disclosed no material change in previously reported risk factors and no pending litigation claim expected by management to materially affect results or financial condition. It gave no specific earnings or revenue guidance.
- Management said it met applicable capital requirements and identified no near-term liquidity trend likely to cause a material change. The filing cautions that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether loan growth and net interest margin can offset higher funding costs, particularly given increased reliance on FHLB borrowings and the negative one-year rate gap.
- Developments in nonaccrual loans, potential problem commercial credits, nonperforming-asset coverage, and the adequacy of the loan-loss allowance.
- Whether securities valuation losses remain interest-rate-related and whether any portfolio sales or impairment charges become necessary.
- Deposit stability and liquidity, including municipal deposit seasonality, the share of pledged securities, and available borrowing capacity.
- The sustainability of expense growth, fraud-related losses, and gains in wealth-management and insurance income; also confirm the reported return-on-equity comparison against the underlying statements.