TOMPKINS FINANCIAL CORP quarterly report, Q3 FY2015

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Tompkins Financial Corporation — 2015 Third-Quarter Form 10-Q

Reporting period: Three and nine months ended September 30, 2015. Tompkins is a community-focused financial services company operating banking, insurance, and wealth-management businesses, primarily in New York and Pennsylvania. Amounts below are in U.S. dollars; financial figures are generally rounded to millions.

Financial performance and condition

  • Third-quarter results: Net income attributable to Tompkins was $14.5 million, up from $13.7 million a year earlier. Diluted EPS was $0.96 versus $0.92. Net interest income was $42.4 million; noninterest income was $17.4 million; and noninterest expense was $37.9 million.
  • Nine-month results: Net income was $44.6 million versus $39.4 million, and diluted EPS was $2.96 versus $2.64. Results included a one-time pension curtailment gain of $3.6 million after tax. Excluding it, non-GAAP operating net income was $40.4 million and adjusted diluted EPS was $2.72, compared with $39.0 million and $2.64 in 2014.
  • Interest earnings and margins: Net interest income increased 1.9% for the quarter and 2.3% year to date. Tax-equivalent net interest margin was 3.35% for the quarter and 3.39% year to date, down from 3.58% in the comparable 2014 periods. Growth in earning assets and noninterest-bearing deposits helped offset lower asset yields.
  • Returns: Third-quarter return on average assets was 1.05% versus 1.08%; return on average shareholders’ equity was 11.29% versus 11.11%.
  • Balance sheet at September 30: Total assets were $5.59 billion, up 6.2% from year-end 2014. Net loans and leases were $3.60 billion; deposits were $4.44 billion, up 6.4%; and shareholders’ equity was $516.4 million. Cash and cash equivalents were $107.1 million.
  • Credit quality: The allowance for loan and lease losses was $31.0 million. Nonperforming loans and leases were $23.3 million, or 0.64% of loans; nonperforming assets were $26.4 million, or 0.47% of assets. The allowance covered 133.18% of nonperforming loans and leases. Management reported improved asset-quality measures versus the prior year, while noting increased provision expense, mainly reflecting loan growth.
  • Cash flow, first nine months: Operating activities provided $60.7 million; investing activities used $291.1 million, including a $237.6 million net increase in loans; financing activities provided $281.4 million. Cash and cash equivalents increased $51.0 million to $107.1 million.
  • Funding and capital: Other borrowings were $398.9 million, including $320.7 million of FHLB term advances. Total capital to risk-weighted assets was 13.29%, tier 1 capital was 12.43%, tier 1 common equity was 11.46%, and tier 1 leverage was 8.89%; each exceeded the filing’s well-capitalized thresholds.

Material changes versus comparable periods

  • Third-quarter net income and diluted EPS increased year over year; nine-month GAAP growth was meaningfully affected by the pension curtailment gain. Excluding that gain, adjusted nine-month EPS rose to $2.72 from $2.64.
  • Net interest margin declined despite growth in average earning assets. Average asset yields fell, while average funding costs also declined.
  • Noninterest expense fell 1.7% in the quarter and 4.5% year to date. The year-to-date comparison reflects a $6.0 million pre-tax pension curtailment credit; excluding the pension effect, expenses were slightly higher than in 2014.
  • Originated loans grew $309.4 million from year-end, while acquired loans declined. Total deposits rose $267.9 million; management attributed much of the increase to municipal deposits. Other borrowings increased $42.4 million as loan growth outpaced deposit growth.
  • The company froze its defined-benefit pension plan effective July 31, 2015. It also adopted new accounting for qualified affordable-housing investments, reducing retained earnings by $725,000 and adding $0.3 million to nine-month tax expense.

Outlook, risks, contingencies, and unusual items

  • The filing gives no specific earnings or revenue guidance. Management stated that interim results are not necessarily indicative of full-year results and continued to review acquisition opportunities.
  • Interest-rate risk is a key exposure. The company’s one-year static gap was negative $249.2 million, or 4.45% of assets. Its simulation estimated a 1.0% one-year net-interest-income decline under either a 200-basis-point parallel increase or a 100-basis-point decline in rates; actual results may differ, and the model assumes no balance-sheet growth or management action.
  • Liquidity sources include core deposits, cash, securities cash flows, and borrowing capacity. Unused FHLB borrowing capacity was $1.2 billion. Securities pledged or sold under repurchase agreements totaled $1.3 billion, equal to 83.0% of securities. Management reported no identified near-term trend likely to materially change liquidity.
  • Credit risks include commercial and real-estate lending, potential problem credits, and uncertainty in acquired-loan cash flows and collateral values. Management identified $13.0 million of originated and $15.2 million of acquired commercial potential-problem loans. It cautioned that economic weakness and other factors could affect borrowers.
  • Standby letters of credit carried a maximum potential obligation of $58.4 million; management did not anticipate significant losses. Certain FDIC loss-sharing protections on acquired loans remain, but the non-residential loss-sharing period expires December 31, 2015.
  • Unrealized securities losses were attributed primarily to interest rates and market liquidity, not credit deterioration; management considered the securities not other-than-temporarily impaired. Ordinary-course litigation was disclosed, with no pending claim expected by management to materially affect results or financial condition.
  • Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. No material changes to previously reported risk factors were identified.

Important facts for investors to verify

  1. How much reported earnings growth depends on the nonrecurring pension curtailment gain, and how pension-plan changes affect future costs and benefits.
  2. Whether loan growth can sustain earnings as net interest margin and asset yields decline, and as funding needs and borrowings change.
  3. Trends in nonperforming and potential-problem loans, commercial real-estate concentrations, acquired-loan performance, and allowance adequacy.
  4. The durability and composition of deposit growth, municipal-deposit seasonality, pledged collateral, and available borrowing capacity.
  5. The effects of interest-rate movements and the expiration of FDIC loss-sharing protections on earnings, liquidity, and credit costs.