Tompkins Financial Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Tompkins is a community-based financial services company operating banking, insurance and wealth management businesses in New York and Pennsylvania. Unless otherwise noted, amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net interest income | $56.4 | $52.3 | $109.3 | $104.2 |
| Provision for credit losses | $(0.3) credit | $0.6 expense | $15.9 expense | $1.0 expense |
| Noninterest income | $17.2 | $18.5 | $36.1 | $37.9 |
| Noninterest expense | $46.9 | $46.1 | $92.6 | $90.3 |
| Net income attributable to Tompkins | $21.4 | $19.4 | $29.4 | $40.4 |
| Diluted earnings per share | $1.44 | $1.27 | $1.97 | $2.63 |
| Net interest margin | 3.45% | 3.34% | 3.45% | 3.34% |
- Q2 net income rose about 10% year over year, primarily from higher net interest income and lower credit-loss provision; lower noninterest income partly offset the gains. First-half net income fell about 27%, mainly reflecting the first-quarter COVID-related credit provision.
- Q2 return on average assets was 1.16% and return on average equity was 12.48%, versus 1.15% and 11.96% a year earlier. First-half ROA and ROE were 0.84% and 8.63%, versus 1.21% and 12.73%.
- Lower market rates, deposit growth and reduced reliance on higher-cost borrowings supported net interest income and margin. Average loan yields declined, while the $465.6 million of PPP loans added volume at comparatively low yields. PPP-related deferred fees of $2.3 million were included in interest income.
- Noninterest income declined year over year, reflecting lower card transaction and deposit service-charge income during shutdowns, as well as weaker insurance-related revenue. Noninterest expense increased modestly, including compensation growth and credit-loss allowances on off-balance-sheet exposures.
Financial position, liquidity and capital
- At June 30, total assets were $7.58 billion, up 12.7% from year-end 2019. Net loans were $5.37 billion; total deposits were $6.38 billion; total equity was $698.0 million.
- Loans and leases increased 10.3% from year-end, including $465.6 million of PPP loans. Deposits increased 22.3%; other borrowings declined 50.6% to $325.0 million as deposit growth funded balance-sheet needs. The company also had $50.9 million of repurchase-agreement funding and $17.1 million of trust preferred debentures.
- Cash and cash equivalents rose to $479.1 million from $138.0 million at year-end. First-half cash flows were $43.1 million provided by operations, $503.3 million used in investing, and $801.4 million provided by financing, resulting in a $341.1 million increase in cash.
- Management reported $1.7 billion of unused FHLB borrowing capacity and $1.4 billion of unencumbered residential mortgage loans and securities. It also obtained $295 million of short-term brokered deposits in April to bolster liquidity. Management said there had been no significant COVID-related effect on liquidity or funding through June 30.
- Regulatory capital ratios exceeded stated minimums and well-capitalized thresholds: total capital to risk-weighted assets was 13.95%, Tier 1 capital 12.86%, common equity Tier 1 12.52%, and Tier 1 capital to average assets 8.79%.
Credit quality, changes and unusual items
- The allowance for credit losses was $52.1 million, or 0.96% of loans, at June 30, compared with $39.9 million at December 31. First-half provision expense was $15.9 million; management attributed the increase principally to COVID-related economic forecasts and assumptions. The quarter itself recorded a $348,000 provision credit.
- Nonperforming loans and leases were $30.2 million, or 0.56% of loans, and nonperforming assets were $30.4 million, or 0.40% of assets. Both nonperforming measures were lower than at year-end, although nonperforming assets were higher than a year earlier. Potential problem commercial relationships totaled $37.6 million.
- COVID-related payment deferrals totaled $2.3 billion across 3,878 borrowers at June 30, equal to 42.0% of the loan portfolio: $2.0 billion of commercial loans and $254.2 million of retail loans. By July 27, 1,847 participating loans had resumed monthly payments and 86 had missed a scheduled payment date. The company said qualified modifications were not reported as TDRs under applicable CARES Act provisions and regulatory guidance.
- Tompkins funded about 2,997 PPP loans. These loans generally carried SBA guarantees and no credit-loss allowance was allocated to them at June 30. Their balances and forgiveness or repayment outcomes affect future loan growth, liquidity and interest income.
- The company adopted CECL on January 1, 2020. Adoption increased retained earnings by $1.7 million net of tax; the loan allowance decreased $2.5 million at adoption, before subsequent provision increases. Prior-year credit-loss figures use the prior accounting method, limiting direct comparability.
- Other notable items included a $675,000 loss related to a pending real estate sale in Q2, and a $5.6 million first-quarter share repurchase. The company suspended repurchases on March 19, 2020. First-half dividends were $1.04 per share.
Outlook, commentary and risks
The filing provides no specific earnings or financial guidance. Management described the company as well positioned at June 30, with strong liquidity, capital and asset-quality measures, but stated that COVID-19’s future effect remained uncertain. Its interest-rate simulation indicated a 3.8% decrease in one-year net interest income under a 200-basis-point rise and a 0.3% increase under a 100-basis-point decline; the model assumes no balance-sheet growth or management response. The base case suggested a slightly declining net interest margin over the next 12 to 18 months.
The company identified continuing risks from the pandemic and economic disruption, including borrower repayment difficulties, higher credit losses and allowance needs, weaker collateral values, pressure on net interest margin, reduced fee revenues, market volatility, remote-work cybersecurity and fraud exposure, and possible effects on goodwill, deferred tax assets and dividends. Management said pending or threatened litigation was not expected to materially affect consolidated financial position, while noting that an outcome could affect results in a particular future period.
Investor verification priorities
- Track deferral exits, missed payments, delinquencies and credit performance, especially in commercial real estate and other commercial portfolios.
- Assess whether the $52.1 million allowance adequately reflects changing economic forecasts and credit exposures, including off-balance-sheet commitments.
- Verify the persistence and cost of deposit growth, including the $295 million of short-term brokered deposits, and the use of FHLB and Federal Reserve funding facilities.
- Monitor PPP fee recognition, forgiveness and repayment, and the effect of PPP balances on loan yields, liquidity and capital ratios.
- Compare subsequent net interest margin, fee income and credit costs with the filing’s rate sensitivity and COVID-related risk disclosures.