Tompkins Financial Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; includes fourth-quarter results. Filed March 1, 2021. Tompkins is a community-focused financial holding company operating banking, insurance, and wealth-management businesses in New York and Pennsylvania.
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Total assets | $7.62 billion | $6.73 billion |
| Net interest income | $225.3 million | $210.6 million |
| Provision for credit losses | $16.2 million | $1.4 million |
| Noninterest income | $73.9 million | $75.4 million |
| Noninterest expense | $185.4 million | $181.8 million |
| Net income attributable to Tompkins | $77.6 million | $81.7 million |
| Diluted EPS | $5.20 | $5.37 |
| Return on average assets / equity | 1.05% / 11.09% | 1.22% / 12.55% |
| Net interest margin | 3.31% | 3.39% |
| Operating cash flow | $101.4 million | $101.6 million |
Revenue, measured as net interest income plus noninterest income, was approximately $299.2 million, up from $286.1 million. Fourth-quarter net income was $24.0 million, or $1.61 diluted EPS, versus $21.1 million and $1.40 in Q4 2019; quarterly net interest margin declined to 3.12% from 3.44%.
Balance sheet, credit and liquidity
- Loans and leases were $5.26 billion, up 7.0%; commercial and commercial real estate loans represented 71.2% of total loans. PPP loans were $291.3 million at year-end, following $465.6 million funded during 2020.
- Deposits rose 23.5% to $6.44 billion, while other borrowings fell to $265.0 million from $658.1 million. Year-end cash and cash equivalents were $388.5 million, up from $138.0 million.
- Management reported $2.1 billion of unused FHLB borrowing capacity and $1.6 billion of unencumbered mortgage loans and securities. It said it had experienced no significant pandemic-related liquidity impact.
- Allowance for credit losses was $51.7 million, or 0.98% of loans, compared with $39.9 million and 0.81% in 2019. Nonperforming assets were 0.60% of assets versus 0.47%; nonperforming loans were 0.87% of loans versus 0.64%.
- Consolidated regulatory capital ratios remained above well-capitalized thresholds: total capital 14.4%, CET1 13.1%, and Tier 1 leverage 8.8%. The four bank subsidiaries were categorized as well capitalized.
- Cash dividends were $2.10 per share, up from $2.02; the company repurchased 127,690 shares under its 2020 plan.
Material changes and management commentary
- Net income declined 5.1% year over year. Lower interest rates reduced asset yields and net interest margin, but sharply lower funding costs and deposit growth lifted net interest income.
- Credit-loss provision increased substantially, primarily due to the pandemic’s effect on economic forecasts and CECL adoption. The allowance increase was concentrated in the first quarter; later forecast improvements were partly offset by qualitative reserves for hospitality and other higher-risk exposures.
- COVID-19 deferrals remaining at year-end totaled approximately $212.2 million, or 4.0% of loans; hotels and motels made up about 53% of deferred balances. Of loans that exited the program, 94.4% had made at least one payment and 0.13% were more than 30 days delinquent.
- Hospitality-related downgrades contributed to higher nonperforming and Substandard loans. A hospitality credit of $11.8 million was placed on nonaccrual in Q4 and remained in deferral.
- PPP activity generated $9.2 million of net loan-fee income in 2020. The company reported approximately $171.0 million of 2021 PPP applications submitted by February 21, 2021.
- Segment net income: banking $69.3 million, down 7.0%; insurance $4.4 million, up 4.7%; wealth management $4.0 million, up 29.0%, benefiting in part from settlement of a large estate. Wealth-management assets under management or custody were $4.4 billion, up 9.5%.
- The company adopted CECL on January 1, 2020, recording a $1.7 million net increase to retained earnings. The auditor issued unqualified opinions on the financial statements and internal controls; the allowance for credit losses was identified as a critical audit matter.
Outlook, risks and contingencies
The filing provides no quantified earnings or revenue guidance. Management described the pandemic’s eventual effects as uncertain and said the base-case interest-rate simulation showed net interest margin declining slightly over the next 12 to 18 months. A 200-basis-point rate increase was modeled to reduce one-year net interest income by about 2.0%; a 100-basis-point decrease by about 0.7%, subject to model assumptions and potential management actions.
- Key risks include continued pandemic-related borrower stress, especially in hospitality; concentrated commercial and real estate lending; uncertainty in CECL assumptions and reserves; low rates and margin pressure; and local economic concentration in New York and Pennsylvania.
- Other stated risks include deposit and wholesale-funding availability, LIBOR transition costs and disputes, cybersecurity and third-party vendor exposure, regulatory and compliance costs, and possible impairment of goodwill or other assets.
- Outstanding off-balance-sheet credit commitments totaled approximately $1.01 billion, including $830.9 million of undisbursed lines of credit. Management did not anticipate losses from these arrangements.
- Management said pending or threatened litigation was not expected to materially affect consolidated financial position, while noting outcomes could affect a particular period’s results. No material legal proceeding was identified in the provided filing text.
Important facts for investors to verify
- Subsequent performance and payment behavior of deferred borrowers, particularly hotel and hospitality credits, and the status of the $11.8 million hospitality nonaccrual loan.
- Changes in the allowance for credit losses, criticized loan classifications, charge-offs, and nonperforming assets as pandemic support and deferrals unwind.
- Whether deposit growth and lower borrowings persist, including the maturity of the remaining $200 million of short-term brokered deposits in April 2021.
- Net interest margin and funding-cost trends, and the realized effects of rate changes compared with management’s interest-rate simulations.
- PPP forgiveness, fee recognition, and repayment or forgiveness of 2021 PPP originations.
- Regulatory capital and dividend capacity, including reliance on subsidiary-bank dividends and the company’s continued distance from the $10 billion enhanced-regulation threshold.