Tompkins Financial Corporation — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; balance-sheet comparisons are with December 31, 2020. Amounts below are in U.S. dollars unless noted.
Business context
Tompkins is a community-based financial services company operating in New York and Pennsylvania, with banking, insurance and wealth-management businesses. Its four bank subsidiaries had regulatory approval to combine into one bank, Tompkins Community Bank, under the Tompkins brand; the combination was anticipated in January 2022.
Financial performance and condition
| Metric | Q3 2021 | Comparable period / change |
|---|---|---|
| Net income attributable to Tompkins | $21.3 million | Down 11.9% from Q3 2020 |
| Diluted EPS | $1.45 | $1.63 in Q3 2020 |
| Net interest income | $56.1 million | Down 3.7% from Q3 2020 |
| Net interest margin | 2.89% | 3.26% in Q3 2020 |
| Noninterest income | $20.9 million | Up 10.4% from Q3 2020 |
| Noninterest expense | $50.2 million | Up 7.3% from Q3 2020 |
| Net income, nine months | $69.8 million; diluted EPS $4.72 | Net income up 30.1%; diluted EPS was $3.59 in 2020 |
For the first nine months, net interest income was $166.0 million, down 1.0%; noninterest income was $59.7 million, up 8.5%; and noninterest expense was $142.1 million, up 3.2%. The year-to-date earnings increase primarily reflected lower credit-loss provisions and higher noninterest revenue.
At September 30, total assets were $8.11 billion, up 6.4% from year-end 2020. Loans and leases were $5.10 billion, down 3.1%; deposits were $7.09 billion, up 10.1%; and cash and cash equivalents were $333.5 million, down $55.0 million. Securities totaled approximately $2.34 billion, up $709 million. Shareholders’ equity was $720.9 million; total equity was $722.4 million.
For the first nine months, operating cash flow was $91.4 million, investing cash flow was negative $587.4 million and financing cash flow was $441.0 million. Cash dividends paid were $24.1 million ($1.62 per share), and the company repurchased $21.2 million of stock. Other borrowings fell to $110 million from $265 million at year-end; trust preferred debentures were redeemed and had no balance at quarter-end.
Regulatory capital ratios remained above stated minimums: total capital to risk-weighted assets was 14.21%, Tier 1 capital was 13.24%, and Tier 1 capital to average assets was 8.54%.
Material changes and unusual items
- Q3 earnings included approximately $4.1 million, or $0.21 per share, of nonrecurring costs related to borrowing prepayments and redemption of trust preferred securities. The $2.9 million FHLB prepayment penalty was recorded in noninterest expense. Management said the transactions should reduce future interest expense.
- Net interest margin declined year over year as lower earning-asset yields and a larger mix of lower-yielding securities and bank balances outweighed lower funding costs.
- The nine-month credit-loss provision was a $6.1 million credit, versus $17.4 million of expense in 2020, reflecting improved economic forecasts, partly offset by specific and qualitative reserves.
- Available-for-sale securities had a net unrealized loss of $5.6 million at quarter-end, compared with a net unrealized gain of $29.5 million at year-end 2020. The change was reflected in other comprehensive loss and was attributed primarily to market-rate changes; management did not expect to have to sell impaired securities before recovery.
Asset quality, liquidity, outlook and risks
Nonperforming assets were $60.9 million, or 0.75% of total assets, compared with $45.9 million, or 0.60%, at year-end. Nonperforming loans and leases were 1.19% of total loans, and allowance coverage of those loans was 76.15%. The increase largely involved two commercial real estate relationships totaling $16.6 million, including a $9.1 million hospitality loan on nonaccrual and a $7.5 million loan 90 days past due but still accruing interest. The allowance for credit losses was $46.3 million, or 0.91% of loans.
COVID-related payment deferrals had fallen to $12.8 million, or 0.25% of loans, at September 30. Management cautioned that future credit performance remained difficult to assess, including amid uncertainty about the pandemic, the Delta variant, economic recovery and the phase-out of government assistance. The company reported no significant pandemic-related effect on liquidity or funding and had $2.3 billion of unused FHLB borrowing capacity.
Management provided no formal earnings guidance. Its rate-simulation analysis indicated that net interest income could decline 2.7% under a 200-basis-point rate increase and 3.8% under a 100-basis-point decline over one year; the model assumes no balance-sheet growth or management action. The base case showed a slightly declining net interest margin over the next 12–18 months. Management noted that actual results may differ from modeled outcomes.
Other disclosed risks include competition, changing economic and regulatory conditions, interest-rate movements, credit quality and dependence on customers’ ability to repay. Pending litigation was not expected by management to have a material effect on consolidated financial position, though a material effect on results in a particular future period could not be ruled out. The company said there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the elevated commercial real estate nonperforming balances, potential problem loans and hospitality exposures improve or require additional reserves.
- How net interest margin and funding costs respond to changing rates, including after the FHLB advance prepayment and trust preferred redemption.
- Whether deposit growth and liquidity remain durable as PPP-related balances and government stimulus effects run off.
- Completion and costs of the planned bank consolidation and rebranding, anticipated for January 2022.
- Year-end eligibility for the New York tax benefit, which depends on average assets remaining no more than $8 billion under the applicable tax definition.