Tompkins Financial Corporation — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; balance-sheet comparisons are primarily against December 31, 2013. The New York-based financial holding company operates community banking, insurance and wealth-management businesses across New York and Pennsylvania.
Financial performance and condition
Amounts are in millions of dollars unless otherwise stated. Income-statement comparisons are year over year.
- Third quarter: Net interest income was $41.6 million, up 2.7%; noninterest income was $17.6 million, down 5.3%. Net income attributable to Tompkins was $13.7 million, down 2.3%, and diluted EPS was $0.92 versus $0.95.
- First nine months: Net interest income was $122.1 million, up 3.0%; noninterest income was $52.7 million, up 0.5%. Net income was $39.4 million, up 7.6%, and diluted EPS was $2.64 versus $2.50.
- Margins and returns: Net interest margin was 3.58% for the first nine months, compared with 3.60% in 2013. Third-quarter ROA was 1.08% versus 1.10%; ROE was 11.11% versus 12.83%.
- Assets and lending: Total assets were $5.09 billion, up 1.8% from year-end. Net loans and leases were $3.23 billion, up 2.0%; originated loans grew 5.9%, partly offset by a 12.7% decline in acquired loans.
- Deposits and borrowings: Deposits totaled $4.21 billion, up 6.7%, mainly reflecting municipal deposit inflows. Other borrowings were $166.5 million, down $165.0 million, primarily after repayment of short-term FHLB advances. Trust preferred debentures were $37.3 million.
- Credit quality: The allowance for loan and lease losses was $27.8 million. Nonperforming loans and leases were $25.5 million, down from $39.0 million at year-end; nonperforming assets were 0.63% of assets versus 0.87%. The allowance covered 108.9% of nonperforming loans and leases.
- Cash flow: For the nine months, operating activities provided $57.8 million, investing activities used $103.2 million and financing activities provided $47.7 million. Cash and cash equivalents ended at $85.1 million, up $2.2 million from the start of the period.
- Capital and liquidity: Total equity was $490.6 million, up 7.1% from year-end. Regulatory capital ratios were 13.92% total capital to risk-weighted assets, 13.08% Tier 1 to risk-weighted assets and 8.85% Tier 1 leverage, each above the filing’s well-capitalized thresholds. Unused FHLB borrowing capacity was $1.1 billion.
Material changes and management commentary
- Nine-month earnings improved as higher net interest income and substantially lower loan-loss provisioning more than offset modest expense growth. Provision expense fell to $0.8 million from $5.6 million in 2013; the third quarter included a $59,000 provision credit.
- Management attributed lower provision expense to improving credit quality and recoveries. Net charge-offs were $0.9 million for the nine months, compared with $3.8 million in 2013. Classified originated commercial loans declined year over year, while potential problem loans remain under quarterly monitoring.
- Third-quarter 2014 earnings were below the comparable quarter, in part because third-quarter 2013 included a $1.4 million pretax gain on redemption of a trust preferred debenture. The 2013 quarter also benefited from recognition of a historical tax-credit benefit. Nine-month 2013 results included the redemption gain, partly offset by merger-related expenses.
- Management reported that lower funding costs and growth in average earning assets helped offset lower asset yields. The company’s average loan yield declined year over year; management noted that deposit growth, including noninterest-bearing deposits, supported funding costs.
- Other notable items: the company repurchased 65,059 shares under a new authorization for up to 400,000 shares over 24 months. It also acquired employee-benefits businesses in Pennsylvania and New York during 2014.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management said it had not identified trends likely to cause material near-term changes in liquidity and believed its diverse funding sources were sufficient for reasonably likely needs.
- Interest-rate risk is the principal market risk. Modeling estimated that a 200-basis-point parallel rate increase would reduce one-year net interest income by about 0.5%, while a 100-basis-point decrease would reduce it by about 1.2%. The model assumes no balance-sheet growth or management action; actual results may differ. The one-year static gap was negative $226.9 million, or 4.46% of assets.
- Risks include economic and market conditions, interest-rate movements, regulatory changes including Basel III and Dodd-Frank, competition, credit quality and collateral values. Management believed the company and its subsidiary banks would meet Basel III capital requirements on a fully phased-in basis if then effective.
- Standby letters of credit represented a maximum potential obligation of $60.5 million; management did not anticipate significant losses. Covered loans remain subject to FDIC loss-sharing terms, and the related indemnification asset was $2.3 million, down from $4.8 million at year-end.
- Management identified the loan-loss allowance, acquired-loan estimates, employee benefits and securities impairment assessments as critical accounting areas. It reported no material change in previously disclosed risk factors, no legal proceedings, and effective disclosure controls as of quarter-end.
Important facts for investors to verify
- Whether loan and deposit growth can continue without weakening funding costs, net interest margin or underwriting quality.
- Trends in nonperforming assets, classified and potential problem loans, charge-offs, recoveries and allowance adequacy.
- The durability of lower provisioning and the effects of interest-rate changes on margins and earnings.
- Municipal deposit concentration and seasonal behavior, reliance on wholesale funding, and availability of pledged collateral and FHLB capacity.
- How much reported earnings comparisons depend on prior-period unusual gains and tax benefits, and the performance and integration of recent acquisitions.
- Future capital requirements and distributions, including the share-repurchase program, dividends and Basel III implementation.