Tompkins Financial Corporation — Q3 2022 Form 10-Q
Business context and period: Community-based financial services company operating banking, insurance and wealth-management businesses. This unaudited report covers the quarter and nine months ended September 30, 2022; year-end balance-sheet comparisons are to December 31, 2021. Effective January 1, 2022, the four banking subsidiaries were combined into Tompkins Community Bank.
Financial performance
Amounts below are in millions of dollars unless otherwise noted.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $58.1 | $56.1 | $173.0 | $166.0 |
| Noninterest income | $20.7 | $20.9 | $59.6 | $59.7 |
| Net income attributable to Tompkins | $21.3 | $21.3 | $65.5 | $69.8 |
| Diluted EPS | $1.48 | $1.45 | $4.53 | $4.72 |
| Net interest margin | 3.04% | 2.89% | 3.05% | 2.94% |
- Combined net interest and noninterest income was $78.8 million in Q3 and $232.6 million year to date. Q3 net income was essentially unchanged year over year; nine-month net income declined 6.2%.
- Nine-month provision for credit losses was $1.4 million, versus a $6.1 million credit in 2021, a $7.5 million adverse pretax comparison identified by management as the principal driver of lower year-to-date earnings.
- Q3 return on average assets and equity were 1.08% and 13.33%; nine-month figures were 1.11% and 13.22%.
- Nine-month operating cash flow was $82.3 million, investing cash flow was negative $115.5 million, and financing cash flow was positive $73.7 million. Cash and cash equivalents ended the period at $103.6 million, up from $63.1 million at year-end 2021.
Financial condition, funding and capital
- Total assets were $7.78 billion, down 0.5% from year-end 2021. Net loans and leases were $5.16 billion, up 2.6%; excluding PPP loans, loan growth was 4.1%. Deposits were $6.94 billion, up 2.1%, with core deposits up 3.3% to $6.0 billion.
- Cash and cash equivalents were $103.6 million. Other borrowings were $101.0 million, down from $124.0 million at year-end; repurchase agreements and federal funds purchased were $55.3 million. Management described its liquidity sources as adequate and reported $1.6 billion of established FHLB borrowing capacity, supported by $1.5 billion of available unencumbered mortgage-related assets.
- Total equity was $573.0 million, down 21.4% from year-end, primarily reflecting the securities-related increase in accumulated other comprehensive loss. The company reported total capital/risk-weighted assets of 14.26%, common equity Tier 1 of 13.35%, and Tier 1 capital/average assets of 9.14%; it stated that the company and bank exceeded applicable well-capitalized requirements.
- Available-for-sale securities had $269.2 million of gross unrealized losses at quarter-end, compared with $32.9 million at year-end 2021. Held-to-maturity securities had $53.6 million of unrealized losses. Management attributed the losses mainly to higher interest rates and market liquidity, said it did not intend to sell and did not expect to be required to sell before recovery, and recorded no securities credit-loss allowance.
- The allowance for credit losses was $44.8 million, or 0.86% of loans, versus $42.8 million and 0.84% at year-end. Nonperforming loans and leases were 0.67% of loans; nonperforming assets were 0.45% of assets. A commercial real estate relationship totaling approximately $7.4 million moved to nonaccrual during Q3.
Changes, outlook and risks
- Net interest income and margin improved year over year, but margin declined from 3.09% in Q2 2022 to 3.04% in Q3 as funding costs rose. Management’s base-case model indicated a slight margin increase over the next 12–18 months; it cautioned that asset and funding repricing could differ from assumptions.
- Interest-rate modeling showed a 3.6% one-year net-interest-income decline under a 200-basis-point parallel rate increase, and a 1.0% increase under a 100-basis-point decline. The one-year static gap was negative $520.9 million, which management said indicated greater near-term exposure in a rising-rate environment.
- Management increased credit-loss provisioning based on loan growth and weaker unemployment and GDP forecasts. It removed pandemic-related qualitative reserves for certain portfolios, including hotels, citing improved and stabilized metrics. It also identified 17 potential problem commercial relationships totaling $22.9 million; these remained performing but were subject to monitoring.
- Insurance segment earnings increased, while wealth-management earnings fell, partly due to lower assets under management from market conditions and higher technology costs. Consolidation of the bank charters, core-system conversion and rebranding generated $1.2 million of year-to-date nonrecurring expense; Q3 also included a $452,000 one-time lease expense.
- The company expected its average assets to exceed New York’s $8.0 billion threshold for a tax benefit, contributing to higher effective tax rates. No quantitative earnings or revenue guidance was provided. Legal matters were described as ordinary-course matters not expected to materially affect consolidated financial position, though period-specific results could be affected; no material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether rising deposit and borrowing costs outpace asset repricing, and how that affects net interest margin and earnings.
- Whether unrealized securities losses remain principally rate-related and whether liquidity or any need to sell securities changes that assessment.
- Credit performance in commercial real estate, including the approximately $7.4 million relationship placed on nonaccrual, and changes in nonperforming loans, criticized credits and the allowance.
- Actual loan and deposit growth, funding mix, and capital ratios as the company operates near or above the New York tax-benefit asset threshold.
- Progress and total costs of the bank consolidation and core-system conversion, and whether wealth-management revenue recovers from market-driven declines.