Tompkins Financial Corporation — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; balance-sheet comparisons are to December 31, 2014. Tompkins is a community-focused financial services company operating banking, insurance and wealth-management businesses in New York and Pennsylvania. Unless otherwise noted, amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net interest income | $41.3 million | $40.5 million | $82.6 million | $80.5 million |
| Provision for loan and lease losses | $0.9 million | $0.1 million | $1.1 million | $0.8 million |
| Noninterest income | $19.0 million | $17.7 million | $36.6 million | $35.2 million |
| Noninterest expense | $32.9 million | $38.9 million | $72.6 million | $77.1 million |
| Net income attributable to Tompkins | $17.4 million | $13.1 million | $30.1 million | $25.6 million |
| Diluted EPS | $1.15 | $0.87 | $2.00 | $1.72 |
Reported earnings included a one-time pension-plan curtailment gain of $3.6 million after tax. Excluding it, management reported adjusted diluted EPS of $0.91 for Q2 and $1.75 year to date, versus $0.87 and $1.72, respectively, in 2014. Q2 return on average assets was 1.29% and return on average equity was 13.79%. Net interest margin was 3.37% for Q2 and 3.41% year to date; the year-to-date margin was down from 3.58% in the prior-year period.
For the first half, operating cash flow was $39.2 million, investing cash outflow was $181.4 million, and financing cash inflow was $146.3 million. Cash and cash equivalents increased $4.1 million to $60.1 million.
Financial condition, funding and asset quality
- Total assets were $5.44 billion, up 3.2% from year-end. Net loans and leases were $3.49 billion, up from $3.36 billion; originated lending growth was partly offset by lower acquired loans.
- Deposits were $4.20 billion, up 0.8% from year-end. Other borrowings rose 38.4% to $493.3 million, primarily reflecting loan growth outpacing deposit growth. Federal funds purchased and repurchase agreements were $131.1 million; trust preferred debentures were $37.4 million.
- Total equity was $505.4 million. Regulatory capital ratios included total capital to risk-weighted assets of 13.46%, Tier 1 risk-based capital of 12.61%, common equity Tier 1 of 11.61%, and Tier 1 leverage of 8.92%; each exceeded the filing’s well-capitalized thresholds.
- Cash and cash equivalents were $60.1 million. The company reported $1.2 billion of unused FHLB borrowing capacity and $491.2 million of unencumbered residential mortgages and securities. Management said it had identified no near-term trends likely to materially change liquidity.
- The allowance for loan and lease losses was $30.1 million. Nonperforming loans and leases were $21.6 million, or 0.61% of total loans; nonperforming assets were $24.2 million, or 0.44% of assets. These measures improved versus year-end and June 2014, although the quarterly provision increased substantially from the prior-year quarter.
Material changes, commentary and risks
- Net income increased year over year, with the pension curtailment gain a significant contributor. The pension plan was frozen effective July 31, 2015; the Q2 statements recognized a $6.0 million pretax curtailment credit to benefit expense. Excluding the after-tax gain, earnings still increased modestly year over year.
- Net interest income benefited from growth in average earning assets and lower funding costs, while lower asset yields reduced margin. Average loans increased 7.5% in Q2 year over year; management attributed the higher loan-loss provision mainly to loan growth. Net charge-offs remained low.
- Noninterest income benefited from higher securities-sale gains and a $0.9 million gain on sale of other real estate owned. Securities sales were described as portfolio and interest-rate-risk management. The company recorded $1.0 million of securities-sale gains in the first half, versus $0.1 million in the comparable period.
- Management identified interest-rate risk as its primary market risk. Its model estimated that a 200-basis-point parallel rate increase would reduce one-year net interest income by about 1.6%; a 100-basis-point decline would reduce it by about 1.3%. The one-year static gap was negative $368.7 million, or 6.78% of assets. Actual results may differ from modeled estimates.
- Key stated risks include economic, market and regulatory changes; interest-rate movements; competition; cybersecurity incidents; reliance on large customers; and ability to fund and support future business. Management reported no material change in previously disclosed risk factors and no pending litigation expected to materially affect results or financial condition.
- No specific earnings or financial guidance was provided. Management noted that interim results are not necessarily indicative of full-year results. The company said disclosure controls were effective and there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile reported earnings and EPS to the pension curtailment adjustment, and assess the plan freeze’s future expense and funding effects.
- Track net interest margin, asset yields, funding costs and the increased reliance on FHLB and other borrowings as loans grow faster than deposits.
- Review loan growth, criticized and potential problem credits, nonperforming assets, provision levels and allowance coverage for signs of deterioration.
- Assess the quality and sustainability of noninterest income, including securities and foreclosed-property gains, and monitor securities’ interest-rate sensitivity.
- Confirm ongoing liquidity and capital levels, including the use and availability of pledged collateral and wholesale funding capacity.