Tompkins Financial Corporation — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Tompkins is a community-focused financial services company operating banking, insurance and wealth management businesses. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Financial performance and condition
- Q2 results: Net income attributable to Tompkins was $8.5 million, or $0.59 diluted EPS, versus $20.9 million, or $1.45, a year earlier. Return on average assets was 0.45% and return on average equity was 5.22%.
- First-half results: Net income was $27.9 million, or $1.94 diluted EPS, compared with $44.1 million, or $3.05, in the first half of 2022.
- Revenue and margin: Q2 net interest income was $51.9 million, down 10.9% year over year; net interest margin was 2.83%, versus 3.09%. First-half net interest income was $106.1 million, down 7.6%, and margin was 2.90%, versus 3.06%. Noninterest income was $12.6 million for Q2 and $33.0 million year to date; both periods included a $7.1 million pretax securities-sale loss.
- Credit costs: Provision for credit losses was $2.3 million in Q2 and $1.4 million for the first half, versus $0.9 million and $0.3 million in the comparable 2022 periods. The allowance for credit losses was $48.5 million, or 0.91% of loans, at June 30.
- Cash flow: For the first half, operating activities provided $44.7 million and investing activities provided $40.5 million; financing activities used $81.5 million. Cash and cash equivalents ended the period at $81.6 million.
- Balance sheet and funding: Total assets were $7.63 billion, loans and leases were $5.35 billion, deposits were $6.45 billion, and total equity was $636.4 million. Other borrowings were $387.1 million, up $95.8 million from year-end; deposits declined $147.6 million.
- Capital and liquidity: Company regulatory ratios included total capital of 14.48%, Tier 1 capital of 13.51% of risk-weighted assets, and Tier 1 leverage of 9.57%. The company reported $1.7 billion of FHLB borrowing capacity, $245.7 million of Federal Reserve borrowing capacity, and a liquidity ratio of 19.6% of assets, above its 6% policy minimum.
Material changes versus comparable periods
- Q2 net income fell 59.4% year over year, and first-half net income fell 36.9%. Management attributed the decline chiefly to funding costs rising faster than asset yields and the $7.1 million securities-sale loss.
- Interest expense rose sharply: $20.0 million in Q2 versus $2.7 million in Q2 2022, and $35.0 million for the first half versus $5.3 million. Higher deposit rates and greater borrowing costs compressed net interest margin.
- Noninterest expense increased 5.8% in Q2 and 6.4% year to date, reflecting compensation, benefits, professional fees and other costs. The filing also cited increased losses associated primarily with HELOC-related fraud.
- Loans grew 1.6% from year-end, led by commercial real estate; deposits declined 2.2%, while time deposits and borrowings increased. Core deposits fell 5.3% from year-end.
- Available-for-sale securities had $220.1 million of gross unrealized losses at June 30, compared with $236.8 million at year-end. Management attributed losses primarily to interest rates and liquidity, not issuer credit quality, and said it did not expect to need to sell the securities before recovery.
Outlook, commentary and risks
- No formal earnings or revenue guidance is provided. Management’s base-case interest-rate simulation indicated net interest margin could increase slightly over the next 12–18 months. The modeled one-year net interest income impact was a 4.4% decline under a 200-basis-point rate increase and a 3.3% increase under a 200-basis-point decline; results depend on assumptions and actual outcomes may differ.
- Management said deposit outflows remained limited amid 2023 banking-sector volatility. Estimated uninsured deposits were $2.8 billion; reported insured and collateralized government deposits represented 73.6% of FDIC-insurable deposits. The filing describes ready liquidity access but highlights continued reliance on deposits and wholesale funding.
- Asset quality indicators were mixed: nonperforming loans and leases were 0.59% of loans, down from 0.62% at year-end, while Special Mention and Substandard loans increased $19.8 million. The company identified 18 potential problem commercial relationships totaling $47.0 million and noted a $15.3 million CRE loan moved to Substandard and an $18.6 million relationship to Special Mention.
- Key sensitivities include interest-rate and funding-cost changes, deposit retention, economic conditions, credit quality—particularly commercial real estate—and regulatory, cybersecurity and competitive risks. Management reported no material change in previously disclosed risk factors.
- Pending litigation was not expected to materially affect consolidated financial position, though the company cannot rule out material effects on results in a future period. The CFO was scheduled to retire effective October 1, 2023, with a transition role through December 2024.
Important facts for investors to verify
- Whether deposit trends, deposit pricing and reliance on FHLB or other wholesale borrowings improve or worsen after June 30.
- How net interest margin and funding costs evolve relative to management’s interest-rate simulations.
- Updates to CRE risk grades, potential problem loans, nonperforming assets and allowance adequacy.
- Whether unrealized securities losses remain manageable and whether any securities sales or further realized losses occur.
- The continuing impact of HELOC-related fraud losses, higher operating expenses and the CFO transition.