TOMPKINS FINANCIAL CORP quarterly report, Q3 FY2011

Tompkins Financial Corporation — Q3 2011 Form 10-Q

Business context and reporting period

Community-based financial holding company serving New York markets through banking and financial-services businesses. This unaudited filing covers the quarter and nine months ended September 30, 2011; balance-sheet comparisons are with December 31, 2010 unless noted.

Key financial metrics

MetricQ3 2011 / Sep. 30, 2011Comparable period / prior date
Total revenue (net interest income plus noninterest income)$40.2 million, up 2.9%$39.1 million in Q3 2010
Net income attributable to Tompkins$7.9 million; diluted EPS $0.71$7.5 million; $0.69 in Q3 2010
Nine-month net income / diluted EPS$26.0 million / $2.36$24.9 million / $2.30 in 2010
Net interest income$27.9 million Q3; $83.4 million nine months$27.9 million; $83.9 million, respectively, in 2010
Tax-equivalent net interest margin3.71% Q3; 3.75% nine months3.85%; 3.91% in 2010
Provision for loan and lease losses$4.9 million Q3; $7.8 million nine months$3.5 million; $7.1 million in 2010
Cash from operating activities$53.5 million for nine months$54.8 million in 2010
Total assets / loans and leases, net$3.36 billion / $1.92 billionAssets $3.26 billion / net loans $1.88 billion at year-end 2010
Deposits / total equity$2.68 billion / $309.3 million$2.50 billion / $273.4 million at year-end 2010
Cash and cash equivalents$108.8 million$49.7 million at year-end 2010
Other borrowings$138.0 million; trust preferred debentures $25.1 millionOther borrowings $244.2 million at year-end 2010

For the nine months, noninterest income increased 8.7% to $36.8 million, while noninterest expense rose 0.7% to $74.4 million. The filing does not provide a standalone revenue line; revenue above is calculated from reported net interest and noninterest income. It does not present a conventional corporate debt total.

Material changes versus comparable periods

  • Revenue growth was driven by fee-based activities and other income; net interest income was nearly flat in Q3 and lower year to date. Lower funding costs were offset by declining asset yields, with asset growth concentrated in lower-yielding securities.
  • Credit costs increased: Q3 provision rose 39.8% year over year, following $5.5 million of quarterly charge-offs, including a $5.0 million charge-off on one commercial real estate development relationship.
  • Nonperforming loans and leases declined to $41.2 million from $45.3 million at year-end 2010 and $54.0 million a year earlier. Nonperforming assets were $42.9 million, or 1.28% of assets, versus 1.43% and 1.72%, respectively.
  • Deposits grew 7.2% from year-end, led by checking, savings, and money-market accounts. The company used deposit growth and soft loan demand to reduce other borrowings by 43.5%.
  • Commercial real estate loans increased to $767.2 million from $726.5 million at year-end; total loans grew 2.2%. Total equity rose 13.1%, including a $13.4 million increase in accumulated other comprehensive income, mainly reflecting unrealized securities gains.

Outlook, commentary, risks, and unusual items

  • No numerical earnings or revenue guidance is provided. Management reported early signs of local economic and credit-quality improvement but cautioned that the recovery remained uncertain and could adversely affect borrowers, results, and financial condition.
  • Management considered the loan-loss allowance appropriate at $27.9 million, or 1.43% of loans. It noted that adverse economic conditions, unemployment, weaker property values, interest rates, or credit concentrations could require a higher allowance.
  • Interest-rate sensitivity modeling estimated a 0.02% increase in one-year net interest income under a 200-basis-point rate increase and a 0.55% decrease under a 100-basis-point decline. The filing cautions that actual outcomes may differ from the model. The one-year static gap was negative $93.8 million.
  • Q3 other income included about $600,000 of nonrecurring gains on real estate and other assets; the quarter also included a $286,000 gain on securities sales. Nine-month miscellaneous investment income included a $504,000 gain distributed by an SBIC.
  • In June, the company acquired Olver & Associates, an insurance agency, for consideration with an acquisition-date fair value of $3.2 million. Goodwill of $2.3 million was recorded. On October 25, 2011, the board authorized a repurchase plan for up to 335,000 shares over 24 months.
  • Regulatory capital ratios exceeded “well-capitalized” thresholds. The filing cites uncertainty about future Basel III and Dodd-Frank requirements. Standby letters of credit carried a maximum potential obligation of $54.6 million; management did not anticipate significant losses. Ordinary-course legal proceedings were not expected to have a material adverse impact.

Important facts for investors to verify

  • Whether the large commercial real estate charge-off and elevated quarterly charge-offs lead to further credit losses or allowance increases.
  • Trends in nonperforming, criticized, and restructured loans, especially commercial real estate exposures and borrower collateral values.
  • Whether fee-income growth can offset pressure on net interest margin as loans and securities reprice in a low-rate environment.
  • The sustainability of unusual gains, including real-estate and asset-sale gains and the SBIC distribution.
  • Deposit retention, liquidity access, borrowing reductions, and the effects of pledged securities and changing regulatory capital rules.
  • Execution and financial effects of the Olver acquisition and the newly authorized share-repurchase plan.