Tompkins Financial Corporation — Q1 2020 Form 10-Q
Business and period. Community-based financial services company operating banking, insurance and wealth-management businesses in New York and Pennsylvania. This unaudited report covers the three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. COVID-19 effects began to emerge late in the quarter.
Financial results and condition
| Metric | Q1 2020 / March 31, 2020 | Comparable period / prior date |
|---|---|---|
| Net interest income | $53.0 million | $51.9 million in Q1 2019 |
| Net interest margin | 3.44% taxable-equivalent | 3.34% in Q1 2019 |
| Provision for credit losses | $16.3 million | $0.4 million in Q1 2019 |
| Noninterest income / expense | $19.0 million / $45.7 million | $19.4 million / $44.2 million in Q1 2019 |
| Net income attributable to Tompkins Financial Corp. | $7.9 million; diluted EPS $0.53 | $21.0 million; diluted EPS $1.37 in Q1 2019 |
| Return on average assets / equity | 0.48% / 4.71% | 1.27% / 13.53% in Q1 2019 |
| Total assets | $6.743 billion | $6.726 billion at December 31, 2019 |
| Loans and leases, gross / net | $4.942 billion / $4.885 billion | $4.921 billion gross at year-end |
| Deposits | $5.409 billion | $5.213 billion at year-end |
| Other borrowings | $458.0 million | $658.1 million at year-end |
| Cash and cash equivalents | $115.3 million | $138.0 million at year-end |
| Total equity | $682.6 million | $663.1 million at year-end |
Q1 cash flows were $24.1 million provided by operations, $38.4 million used in investing and $8.4 million used in financing; cash and equivalents declined $22.7 million. The credit-loss allowance was $52.4 million, or 1.06% of loans, versus $39.9 million at year-end before CECL adoption. Nonperforming loans and leases were $30.7 million (0.62% of loans); nonperforming assets were $31.2 million (0.46% of assets).
At March 31, total capital to risk-weighted assets was 13.62%, Tier 1 risk-based capital 12.55%, common equity Tier 1 12.20%, and Tier 1 leverage 9.53%; each exceeded applicable minimums. The company reported $1.5 billion of unused FHLB borrowing capacity. Deposits rose 3.8% from year-end while other borrowings fell 30.4%.
Changes and drivers
- Net income fell 62% year over year, principally because the credit-loss provision increased $15.8 million. Management attributed the provision increase mainly to COVID-related economic forecasts and CECL modeling, not to newly identified portfolio-specific credit risks.
- Net interest income rose 2.0%, benefiting from lower funding costs, deposit growth and a shift from borrowings to deposits. Interest expense declined 21.4%.
- Noninterest income declined 2.3%, including lower card transaction activity and the absence of a $0.5 million merchant-card incentive received in Q1 2019. Noninterest expense rose 3.5%, driven chiefly by compensation and technology spending.
- Q1 other comprehensive income was $22.3 million, largely from unrealized securities gains; accumulated other comprehensive loss narrowed to $21.3 million from $43.6 million at year-end.
- Adoption of CECL on January 1 reduced the loan allowance by $2.5 million and increased retained earnings by $1.7 million, net of tax and other adoption effects. The allowance subsequently increased during the quarter due to provision expense and portfolio activity.
Outlook, risks and unusual items
- COVID-19 exposure: Management cautioned that the duration and economic effects of the pandemic were highly uncertain and could materially affect credit quality, earnings, liquidity, asset values and demand. Further deterioration could require additional provisions and possible impairment of goodwill, lease assets or other real estate.
- Deferrals and PPP: COVID-related payment deferrals covered $377.8 million of loans, or 7.7% of the portfolio, at March 31; by April 20 they covered $1.5 billion, or 29.9%. As of May 10, the company had approved more than 2,900 PPP loans totaling approximately $500 million. These are subsequent-period figures, not March 31 balances. PPP forgiveness guidance was still evolving.
- The company said it had not experienced a significant COVID-related liquidity or funding impact as of March 31, and described liquidity and capital as strong. It increased liquid assets in April and confirmed access to FHLB, Federal Reserve PPP and correspondent-bank funding facilities.
- Management gave no quantitative earnings or operating guidance. It reported reduced card transaction volumes and wealth-management fees late in Q1, and deferred executive annual pay increases indefinitely.
- The company paid $0.52 per share in Q1 dividends and repurchased 71,288 shares for $5.6 million. It suspended share repurchases on March 19 in response to the pandemic.
- Interest-rate sensitivity modeling indicated net interest income would decline about 3.6% under a 200-basis-point rate increase and rise about 1.6% under a 100-basis-point decline over one year. The filing notes that actual results may differ from model assumptions.
- Management did not expect pending or threatened litigation to have a material effect on consolidated financial position, but could not rule out a material effect on results in a particular future period.
Important facts for investors to verify
- How loan deferrals perform as they expire, and whether delinquencies, nonaccruals, charge-offs or required reserves rise.
- Whether the CECL allowance and its economic forecasts adequately reflect the severity and duration of COVID-19 effects.
- PPP loan volume, funding, forgiveness outcomes and fee recognition, including the impact of evolving SBA guidance.
- Deposit stability, concentration in municipal balances, liquidity availability and the cost of replacing or extending borrowings.
- Trends in net interest margin, fee income, operating expenses and the sustainability of the quarterly dividend.
- Capital ratios and asset values under prolonged economic stress, including potential impairment indicators.