Business context and reporting period
Tompkins Financial Corporation is a New York-based community financial services company operating banking, insurance and wealth management businesses. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017; balance-sheet comparisons are to December 31, 2016. Figures below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2017 / September 30, 2017 | Comparison |
|---|---|---|
| Net income attributable to Tompkins | $17.4; diluted EPS $1.14 | Q3 2016: $15.1; $1.00 diluted EPS |
| Nine-month net income / diluted EPS | $50.0 / $3.27 | Nine months 2016: $44.2 / $2.92 |
| Net interest income | Q3 $51.0; nine months $149.3 | Up 12.5% and 11.2%, respectively, year over year |
| Net interest margin, taxable-equivalent | Q3 3.40%; nine months 3.41% | Q3 2016: 3.31%; nine months 2016: 3.34% |
| Return on average assets / equity | Q3 1.07% / 11.77%; nine months 1.06% / 11.70% | Q3 2016: 1.01% / 10.81%; nine months 2016: 1.01% / 10.88% |
| Total assets | $6,524 | Up 4.6% from year-end 2016 |
| Loans and leases, net | $4,452 | Originated loans grew $303.3 from year-end; acquired loans ran off $70.9 |
| Deposits | $4,944 | Up $318.8, or 6.9%, from year-end |
| Other borrowings / trust preferred debentures | $834.6 / $16.6 | Other borrowings down $50.2; trust preferred balance fell from $37.7 after redemption |
| Equity / regulatory capital | Total equity $589.9; total capital ratio 12.52%; Tier 1 leverage ratio 8.52% | Equity up 7.4% from year-end; company reported ratios above applicable requirements |
| Cash flows, nine months | Operating +$55.2; investing −$226.6; financing +$236.9; cash increased $65.5 to $129.4 | 2016: operating +$64.7; investing −$297.8; financing +$354.4 |
Material changes versus comparable periods
- Quarterly net income rose 14.9%; nine-month net income rose 13.2%. Management attributed the stronger net interest income primarily to loan growth, higher loan yields and improved margin.
- Quarterly provision for loan losses declined to $0.4 from $0.8; nine-month provision declined to $2.1 from $2.6, mainly reflecting improved net recoveries.
- Noninterest income was $17.2 in Q3, down 3.9%, partly due to $0.423 of realized securities-sale losses versus $0.455 of gains a year earlier. Nine-month noninterest income was $51.9, down 1.1%.
- Noninterest expense increased 3.9% in Q3 and 4.7% year to date. Compensation, health-benefit, technology and card-service costs contributed; year-to-date costs included $0.726 for a core system conversion completed in Q2.
- Nonperforming loans and leases were $22.4, or 0.50% of total loans, versus $21.7 and 0.51% at year-end. Nonperforming assets were $24.4, or 0.37% of assets, up from $22.6 and 0.36% at year-end.
Outlook, risks and unusual items
- The filing provides no numerical earnings or revenue guidance. Management’s base-case interest-rate simulation indicated net interest margin stable to higher over the next 12–18 months, but this is a modeled expectation, not formal guidance.
- Interest-rate sensitivity: the model estimated net interest income down 0.7% under a 200-basis-point rate increase and down 1.8% under a 100-basis-point decline over one year. The one-year static gap was negative $581.0, indicating moderate near-term liability sensitivity. Actual outcomes may differ from the model.
- Credit monitoring is important: Special Mention loans increased to $51.0 from $21.0 at year-end, largely tied to agricultural borrowers affected by lower 2016 milk prices. Management reported agricultural loan payments current at quarter-end, while also noting increases in certain classified and nonaccrual originated loans.
- Liquidity sources include core deposits, cash, securities cash flows and borrowing capacity; unused FHLB capacity was $1.1 billion. However, 92.6% of securities were pledged at quarter-end, versus 75.0% at year-end.
- Tompkins redeemed $20.5 of trust preferred securities in January 2017. It paid $20.5 in dividends during the first nine months, equal to 40.9% of year-to-date earnings. No shares were repurchased under the announced repurchase plan.
- Management said no investment security was other-than-temporarily impaired and no pending litigation was expected to materially affect results or financial condition. No material changes to previously disclosed risk factors were reported.
- Accounting changes to monitor include the expected January 2018 adoption of revenue recognition guidance, which management did not expect to have a significant financial-statement impact but was still evaluating. The company expects the 2020 credit-loss standard may increase the allowance, but could not quantify the effect.
Important facts for investors to verify
- Whether loan growth and deposit growth remain balanced, and how the resulting funding mix and borrowing costs affect net interest margin.
- Whether the rise in Special Mention, classified and nonaccrual loans leads to higher provisions or charge-offs, particularly in the agricultural and commercial real estate portfolios.
- How continuing expense growth, including technology and staffing costs, affects operating efficiency and earnings.
- Whether the securities portfolio’s unrealized losses, high pledged-securities share and interest-rate exposure change materially.
- Regulatory capital, liquidity availability, dividend sustainability and the financial effects of upcoming accounting standards.