Tompkins Financial Corporation — Q1 2023 Form 10-Q
Business context and period: Community-based financial services company headquartered in Ithaca, New York, with banking, insurance and wealth management segments. This unaudited report covers the three months ended March 31, 2023; balance-sheet comparisons are with December 31, 2022.
Key financial results
Amounts are in millions of dollars except per-share data, percentages and where noted.
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior year-end |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $74.6 | $76.6 in Q1 2022 |
| Net interest income | $54.2 | $56.6 in Q1 2022 |
| Net interest margin | 2.99% | 3.04% in Q1 2022 |
| Net income attributable to Tompkins Financial Corporation | $19.4; diluted EPS $1.35 | $23.3; diluted EPS $1.60 in Q1 2022 |
| Return on average assets / equity | 1.03% / 12.45% | 1.19% / 13.24% in Q1 2022 |
| Noninterest expense | $50.2 | $46.8 in Q1 2022 |
| Cash and cash equivalents | $70.5 | $77.8 at December 31, 2022 |
| Total assets | $7,644.4 | $7,670.7 at December 31, 2022 |
| Loans and leases, net | $5,227.6 | $5,223.0 at December 31, 2022 |
| Deposits | $6,509.0 | $6,602.3 at December 31, 2022 |
| Other borrowings | $327.0 | $291.3 at December 31, 2022 |
| Total equity | $649.8 | $617.4 at December 31, 2022 |
Material changes and operating drivers
- Net income fell 16.7% year over year. Management attributed the decline principally to higher funding costs and operating expenses.
- Interest income rose 17.0%, but interest expense increased 485.2% to $15.0 million as deposit and borrowing costs rose. Average interest-bearing liability cost increased to 1.26% from 0.21%.
- Noninterest income increased 2.1% to $20.4 million, including higher insurance commissions and bank-owned life insurance income, plus $450,000 of debit-card contract incentives. Wealth management income declined amid lower assets under management and volatile markets.
- Noninterest expenses rose about 7% to $50.2 million, with higher compensation, healthcare, technology and FDIC insurance costs. The expense-to-revenue ratio increased to 67.2% from 61.2%.
- Quarterly operating cash flow was $22.8 million versus $23.9 million in Q1 2022. Investing activities provided $29.1 million, compared with using $47.9 million a year earlier; financing activities used $59.1 million, versus providing $135.9 million. Cash declined $7.3 million during the quarter.
- Deposits decreased $93.3 million, including a $140.6 million decline in noninterest-bearing deposits, partly offset by $93.9 million growth in time deposits. Borrowings increased $35.7 million. Loans were broadly stable, with commercial real estate loans up $56.9 million and commercial and industrial loans down $52.5 million from year-end.
- Accumulated other comprehensive loss narrowed by $20.8 million during the quarter, mainly reflecting a reduction in unrealized available-for-sale securities losses. The portfolio still had $209.6 million of gross unrealized losses on available-for-sale securities and $45.3 million on held-to-maturity securities at quarter-end.
Liquidity, capital and credit quality
- Management reported $1.7 billion of ready-access liquidity and described liquidity and the balance sheet as stable following industry banking volatility. Available borrowing capacity included $1.6 billion with the FHLB and $157 million with the Federal Reserve; the company also reported $265 million of unencumbered securities available to support additional secured borrowing.
- Estimated uninsured deposits were $2.6 billion, unchanged from year-end; this included $1.1 billion of collateralized government deposits and $1.5 billion of uninsured customer deposits without liquid collateral pledged. Insured and collateralized government deposits represented 76.9% of total deposits.
- Regulatory capital ratios exceeded minimum and well-capitalized requirements. Total capital to risk-weighted assets was 14.62%; Tier 1 leverage was 9.63%.
- The loan allowance was $46.1 million, or 0.87% of loans. Nonperforming loans and leases were $28.4 million, or 0.54% of loans; coverage by the allowance was 162.11%. The quarter recorded net recoveries of $1.3 million. Management identified 17 potential problem commercial relationships totaling $32.8 million.
Outlook, risks and other notable items
- The filing provides no formal earnings or revenue guidance. Management’s base-case interest-rate simulation indicated a slightly increasing net interest margin over the next 12–18 months, subject to model assumptions and actual balance-sheet behavior.
- The company’s one-year net interest-rate gap was negative $738.8 million, or 9.67% of assets. A modeled 200-basis-point rate increase implied a 4.3% decline in one-year net interest income; a 200-basis-point decrease implied a 2.6% increase. Management cautioned that actual results may differ and that the balance sheet is more liability-sensitive in a rising-rate environment.
- Management cited bank-industry volatility, potential deposit outflows, funding availability and cost, interest-rate and inflation conditions, credit quality, regulation and economic developments as risks. It had established access to the Federal Reserve’s Bank Term Funding Program and described deposit outflows as minimal during the quarter.
- Unrealized securities losses were attributed primarily to interest rates and market liquidity, not credit deterioration. Management said it did not intend to sell the securities and did not believe it was more likely than not that it would need to sell before recovery of amortized cost; no investment-securities credit impairment charge was recorded in Q1.
- The company adopted ASU 2022-02 on January 1, 2023, eliminating troubled-debt-restructuring classification and changing modification disclosures; adoption reduced opening retained earnings by $64,000. Management reported no new modified loans under the new guidance in Q1.
- Management did not expect pending ordinary-course litigation to materially affect consolidated financial position, but noted a particular period’s operating results could be affected. Disclosure controls were deemed effective, and no material change in internal control was reported.
Important facts for investors to verify
- Deposit stability, uninsured deposit composition, deposit pricing and continued access to wholesale funding.
- Whether rising funding costs continue to outpace loan and securities yield increases, and the resulting effect on net interest margin and earnings.
- Changes in commercial real estate concentrations, potential problem loans, delinquencies, nonperforming assets and allowance adequacy.
- Available liquidity and the potential effect of securities valuation losses if funding conditions require asset sales.
- Execution of the modeled rate outlook, including the assumptions for deposit repricing, prepayments and balance-sheet mix.