Tompkins Financial Corporation — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; balance sheet comparisons are to December 31, 2020. Amounts below are in U.S. dollars unless stated otherwise.
Business context
Tompkins is a community-focused financial holding company serving New York and Pennsylvania, with banking, insurance, and wealth-management businesses. Its four banking subsidiaries planned to combine as Tompkins Community Bank, subject to regulatory approval; applications were filed July 12, 2021, with implementation anticipated later in 2021.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $54.8 million | $56.4 million | $109.9 million | $109.3 million |
| Noninterest income | $18.9 million | $17.2 million | $38.8 million | $36.1 million |
| Noninterest expense | $47.4 million | $45.7 million | $92.0 million | $90.9 million |
| Net income attributable to Tompkins | $22.8 million | $21.4 million | $48.5 million | $29.4 million |
| Diluted earnings per share | $1.54 | $1.44 | $3.26 | $1.97 |
| Net interest margin | 2.91% | 3.45% | 2.96% | 3.45% |
Q2 net income increased 6.5% year over year, mainly reflecting a $3.1 million credit to provision for credit losses and higher fee income, partly offset by lower net interest income and higher expenses. First-half net income rose 64.9%, principally because the prior-year period included substantial COVID-related credit-loss provisioning. Q2 return on average assets was 1.15% (1.16% prior year); return on average equity was 12.70% (12.48%). First-half figures were 1.24% and 13.55%, respectively, versus 0.84% and 8.63%.
At June 30, assets were $8.0 billion, up 4.8% from year-end. Deposits were $6.84 billion, up 6.2%; loans and leases, net of unearned income and deferred costs, were $5.18 billion, down 1.6%. Securities increased to about $2.17 billion from $1.63 billion, while cash and cash equivalents fell to $291.0 million from $388.5 million. Total equity was $728.3 million.
First-half cash provided by operating activities was $50.5 million; investing activities used $484.0 million, largely reflecting securities purchases; financing activities provided $336.1 million. Cash and cash equivalents decreased $97.4 million during the half.
At June 30, the allowance for credit losses was $47.5 million, 0.92% of loans, versus $51.7 million and 0.98% at year-end. Nonperforming assets were $53.9 million, or 0.67% of assets, compared with $45.9 million and 0.60% at year-end. Regulatory capital ratios exceeded stated minimums, including a 14.62% total capital ratio and 13.45% Tier 1 common equity ratio.
Material changes and management commentary
- Net interest margin contracted as lower market rates and a higher share of lower-yielding securities and bank balances reduced asset yields; lower deposit and borrowing costs provided partial offset.
- Fee income grew, led by insurance commissions, investment services, and card services. Investment-services growth reflected higher assets under management; card income benefited from recovered transaction volumes.
- Management recorded a $4.9 million first-half provision credit, versus $17.6 million of provision expense in the prior-year period, citing improved unemployment and GDP forecasts. The allowance nevertheless includes qualitative reserves for pandemic-affected borrowers and industries.
- Commercial and industrial loans declined, including as PPP loans were forgiven; commercial real estate lending was broadly stable. The company reported $258.964 million of PPP loans at June 30 and approximately $471.4 million of cumulative PPP forgiveness through July 19, 2021.
- COVID-19 deferrals had been granted on approximately 3,843 loans totaling $1.6 billion. By June 30, 3,709 loans totaling about $1.4 billion had exited deferral; $129.4 million remained in deferral, or 2.5% of loans. Hotels and motels had $56.8 million in deferral, representing 28.55% of that segment’s loans.
- One $9.1 million hospitality-related commercial real estate relationship moved to nonaccrual in Q2. Special Mention loans were $108.3 million, up from $44.7 million a year earlier; management cited retail, hospitality, and agriculture downgrades. Potential problem relationships totaled $25.0 million.
Outlook, risks, and unusual items
The filing provides no specific earnings or revenue guidance. Management said the base-case simulation indicated a slightly declining net interest margin over the next 12–18 months. Its May 31 rate simulation estimated net interest income would decrease 3.8% under a 200-basis-point rate increase and 1.9% under a 100-basis-point decrease over one year, assuming no balance-sheet growth or management action. The one-year interest-rate gap was negative $229.7 million, indicating greater modeled near-term vulnerability to rising rates.
Management identified continuing uncertainty around COVID-19, borrowers’ ability to resume payments, economic and regulatory conditions, interest rates, competition, technology, and the company’s dependence on its regional markets. It reported no significant pandemic-related effect on liquidity or funding as of quarter-end and stated that available liquidity sources were sufficient. Unused FHLB borrowing capacity was $2.2 billion.
Unusual items include a $410,000 Q2 occupancy expense related to lease termination and $650,000 of accelerated noncash purchase-accounting discount expense associated with redemption of $5.2 million of trust preferred securities. Subsequent to quarter-end, on August 7, the company redeemed trust preferred securities with $10.0 million par value, resulting in a $1.2 million noncash charge to interest income. Management stated pending litigation was not expected to materially affect consolidated financial position, though an individual period’s results could be affected.
Important facts for investors to verify
- Whether regulatory approval and the planned bank consolidation and rebranding are completed on the anticipated timetable.
- Whether remaining COVID-19 deferrals, particularly in hospitality, convert to delinquency, nonaccrual status, or losses, and whether the allowance remains adequate.
- How deposit growth, loan demand, PPP forgiveness, and securities purchases affect liquidity, earning-asset mix, and net interest margin.
- The effect of interest-rate changes on funding costs and asset yields, given the negative one-year gap and modeled margin pressure.
- The accounting and continuing earnings effects of the August trust preferred redemption and its noncash charge.