Tompkins Financial Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are against December 31, 2021. Amounts are U.S. dollars unless otherwise stated. Tompkins is a community-focused financial services company with banking, insurance, and wealth management businesses. Effective January 1, 2022, its four banking subsidiaries were combined into Tompkins Community Bank.
Financial performance and condition
- Earnings: Net income attributable to Tompkins was $23.3 million, down 9.2% from $25.6 million in Q1 2021. Diluted EPS was $1.60, versus $1.72. Return on average assets was 1.19% (1.33% prior year); return on average equity was 13.24% (14.42%).
- Revenue and margins: Net interest income was $56.6 million, up 2.9%; noninterest income was $20.0 million, essentially unchanged. Net interest margin increased to 3.04% from 3.01%. Noninterest expense rose 5.2% to $46.8 million; expense as a share of total revenue increased to 61.2% from 60.2%.
- Credit costs and asset quality: The income statement recorded a $520,000 credit for credit loss expense, compared with a $1.8 million credit in Q1 2021. The loan allowance was $42.1 million, or 0.83% of loans, versus $42.8 million and 0.84% at year-end. Nonperforming loans and leases were $30.3 million, or 0.60% of loans, down from $31.2 million and 0.61% at year-end. Potential problem commercial relationships totaled $27.5 million, down from $36.5 million.
- Assets and lending: Total assets were $7.89 billion, up 0.9% from year-end. Loans and leases were $5.06 billion, down 0.2%; excluding PPP loans, they increased 0.7%. PPP balances fell to $24.1 million from $71.3 million.
- Funding and liquidity: Deposits were $7.02 billion, up 3.3%. Cash and cash equivalents were $175.1 million, compared with $63.1 million at year-end. Other borrowings declined to $60.0 million from $124.0 million, including repayment of $50 million in FHLB term advances. Management reported $1.47 billion in established FHLB borrowing capacity and $1.41 billion in available unencumbered mortgage-related assets.
- Cash flow: Operating activities provided $23.9 million, compared with $30.3 million in Q1 2021. Investing activities used $47.9 million; financing activities provided $135.9 million. Cash increased $112.0 million during the quarter.
- Capital: Total equity was $657.5 million, down 9.8% from year-end, mainly reflecting securities-related accumulated other comprehensive losses. Regulatory capital ratios remained above applicable minimums and well-capitalized thresholds: total capital 14.23%, Tier 1 risk-based 13.34%, and Tier 1 leverage 8.89%.
Material changes versus the prior comparable period
- Lower earnings reflected a smaller credit-loss provision credit, reduced PPP fees, and higher operating expenses. Lower interest expense supported higher net interest income, while lower loan yields and balances reduced interest income.
- Noninterest expenses increased, including technology costs related partly to system upgrades and bank consolidation, marketing, salaries, and healthcare costs.
- Rising market interest rates sharply reduced securities fair values: available-for-sale securities had $125.8 million of net unrealized losses at March 31, compared with $19.3 million at year-end. The resulting quarterly other comprehensive loss was $79.9 million; management attributed securities losses primarily to interest rates and liquidity, not credit quality, and said it did not intend or expect to be required to sell before recovery.
- The company repurchased 130,168 shares under its announced plan for approximately $10.4 million during the quarter and paid dividends of $0.57 per share.
Outlook, management commentary, and risks
- The filing provides no specific earnings or revenue guidance. Management said the base-case simulation indicates a slightly declining net interest margin over the next 12 to 18 months. A 200-basis-point rate increase was modeled to reduce one-year net interest income by approximately 3.2%; a 100-basis-point decline was modeled to reduce it by 1.3%. These estimates assume no balance-sheet growth or management response and may differ from actual results.
- The one-year net interest-rate gap was negative $352.8 million, or 4.5% of assets, indicating greater near-term sensitivity to rising rates. Management noted that deposit and short-term funding costs may rise faster than yields on longer-term assets.
- COVID-19 deferral balances were approximately $2.6 million, or 0.05% of loans; management continued to monitor credit conditions and hospitality exposures. Management cited improving credit quality and economic assumptions in reducing reserves.
- The company expects average assets may exceed $8.0 billion for the 2022 tax year, potentially removing certain New York State tax benefits and raising its effective tax rate. Average assets under the relevant tax definition were slightly below the threshold at quarter-end.
- Risks discussed include economic, market, interest-rate, regulatory, competitive, technology, pandemic, and geopolitical uncertainty, including the war in Ukraine, as well as borrower repayment and liquidity risks. Management said pending litigation was not expected to materially affect consolidated financial position, though a material effect on results in a particular future period could not be ruled out. No material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- Whether deposit growth and lower funding costs can offset loan-yield pressure and repricing costs as rates change.
- Whether the substantial unrealized securities losses remain interest-rate-related and whether the company can avoid selling securities before recovery.
- Trends in commercial real estate, hospitality, potential problem loans, and reserve adequacy as economic forecasts evolve.
- The impact of the $8.0 billion New York tax threshold on the effective tax rate, and the sustainability of operating expenses and capital returns.
- Execution and any continuing costs or benefits from the January 2022 bank subsidiary consolidation.