Tompkins Financial Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are to December 31, 2015. Amounts are in U.S. dollars; financial amounts are generally shown in millions unless noted. The filing is unaudited.
Business context
Tompkins is a New York-based community financial services company with banking, insurance, and wealth-management businesses operating principally in New York and Pennsylvania. It reported four banking subsidiaries and a wholly owned insurance agency subsidiary.
Financial performance
- Net income attributable to Tompkins: $14.2 million, up 11.8% from $12.7 million in Q1 2015. Diluted EPS was $0.94 versus $0.84; basic EPS was $0.95 versus $0.85.
- Revenue: Net interest income was $44.0 million, up 6.8%; noninterest income was $17.5 million, down 0.8%. Combined, these totaled $61.5 million, up approximately 4.5% year over year.
- Net interest margin: 3.36%, compared with 3.45% in Q1 2015. Average earning assets grew 8.7%, while average loan yield declined 16 basis points. The reported margin was consistent with the preceding three quarters.
- Credit costs: Provision for loan and lease losses rose to $855,000 from $209,000. Net charge-offs were $329,000, versus net recoveries of $279,000 a year earlier.
- Expenses and taxes: Noninterest expense was $39.5 million, down 0.5%. Salaries and wages rose 8.1%, partly offset by lower pension, healthcare, and other operating expenses. The effective tax rate was 32.9%, versus 33.0%.
- Returns: Return on average assets was 0.99% versus 0.97%; return on average shareholders’ equity was 10.77% versus 10.35%.
- Segments: Banking net income increased 16.2% to $12.9 million; insurance net income declined 9.5% to $758,000; wealth-management net income declined 25.7% to $568,000.
Financial position, cash flow, and liquidity
- Assets and loans: Total assets were $5.765 billion, up 1.3% from year-end. Net loans and leases were $3.788 billion, up $48.3 million; originated loans grew while acquired loans declined.
- Deposits and borrowings: Deposits rose 3.6% to $4.555 billion, primarily reflecting seasonal municipal deposits. Other borrowings declined 15.1% to $455.3 million; federal funds purchased and repurchase agreements totaled $116.6 million, and trust preferred debentures were $37.6 million.
- Cash flow: Operating activities provided $17.5 million; investing activities used $74.2 million, including $49.3 million of net loan growth; financing activities provided $53.9 million. Cash and cash equivalents ended at $55.5 million, down $2.7 million during the quarter.
- Capital: Total equity was $539.9 million, up 4.5% from year-end. Regulatory capital ratios included total capital to risk-weighted assets of 13.18%, Tier 1 capital of 12.32%, Tier 1 common equity of 11.39%, and Tier 1 leverage of 8.79%; the filing says the company and subsidiary banks exceeded applicable well-capitalized requirements.
- Liquidity: Management cited core deposits and diversified funding sources as support for liquidity, and reported $1.3 billion of unused established FHLB borrowing capacity. Securities of $1.3 billion were pledged or sold under repurchase agreements.
Material changes and notable items
- The company acquired Shepard, Maxwell & Hale Insurance effective January 1, 2016. Consideration was approximately $2.2 million, including cash and 32,553 shares; the acquisition added $0.8 million of goodwill and customer-related and noncompete intangibles.
- Available-for-sale securities moved from net unrealized losses of $4.6 million at year-end to net unrealized gains of $16.2 million at March 31, principally due to lower market interest rates. Other comprehensive income was $12.7 million for the quarter.
- Total nonperforming loans and leases declined to $20.7 million from $21.8 million at year-end. Nonperforming assets were $22.6 million, or 0.39% of assets, versus $24.5 million, or 0.43%, at year-end.
- The company paid dividends of $0.44 per share in the quarter, compared with $0.42 a year earlier, and repurchased 22,356 shares under its buyback plan.
- The defined-benefit pension plan had been frozen effective July 31, 2015. Management attributed lower year-over-year pension expense partly to that curtailment.
Outlook, risks, and contingencies
The filing provides no numerical earnings or revenue guidance. Management said results for the interim period are not necessarily indicative of full-year results and reported no near-term liquidity trends expected to cause material changes. Key disclosed uncertainties include local economic and borrower conditions, interest rates and net interest margin, credit quality and loan-loss estimates, regulatory changes, competition, technology and cybersecurity, and the valuation of acquired loans and securities.
The company’s interest-rate simulation estimated that a 200-basis-point parallel increase would reduce one-year net interest income by approximately 1.3%, while a 100-basis-point decline would reduce it by approximately 1.5%, assuming no balance-sheet growth or management action. The one-year static gap was negative $422.4 million. Management cautioned that actual results may differ from model estimates. Standby letters of credit had a maximum potential obligation of $58.7 million; management did not anticipate significant losses. Management stated that pending ordinary-course litigation was not expected to have a material effect, and that there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether loan growth, particularly commercial real estate exposure, is accompanied by stable credit quality and adequate reserves as the provision and net charge-offs increased.
- Whether margin pressure persists, given the decline to 3.36% and the company’s disclosed sensitivity to rising rates and deposit repricing.
- How sustainable the growth in earnings is after considering acquisition effects, higher salary expense, and weaker wealth-management results.
- Whether seasonal municipal deposits remain stable and how the company manages wholesale funding, pledged securities, and borrowings.
- The composition and subsequent performance of acquired loans, potential problem credits, and the remaining FDIC loss-sharing arrangements.