Tompkins Financial Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Tompkins is a community-based financial services company operating banking, insurance and wealth management businesses in New York and Pennsylvania. Amounts below are in U.S. dollars; financial statement figures are generally in millions.
Financial performance and condition
| Metric | Q3 2020 / Sep. 30, 2020 | Comparable period / change |
|---|---|---|
| Net income attributable to Tompkins | $24.2 million; diluted EPS $1.63 | Q3 2019: $20.2 million; $1.34 per diluted share |
| Nine-month net income / diluted EPS | $53.6 million / $3.59 | Nine months 2019: $60.6 million / $3.97 |
| Net interest income | Q3: $58.3 million; nine months: $167.6 million | Up 9.6% and 6.5%, respectively, year over year |
| Net interest margin | Q3: 3.26%; nine months: 3.38% | Q3 2019: 3.43%; nine months 2019: 3.37% |
| Provision for credit losses | Q3: $0.2 million; nine months: $16.1 million | 2019 comparable periods: $1.3 million and $2.4 million |
| Noninterest income / expense | Q3: $18.9 million / $46.3 million; nine months: $55.0 million / $139.0 million | Q3 income down 3.3%, expense up 1.5%; nine-month income down 4.2%, expense up 2.2% |
| Assets / deposits | $7.79 billion / $6.60 billion | Assets up 15.9% and deposits up 26.6% from Dec. 31, 2019 |
| Loans and allowance | Net loans $5.35 billion; allowance $52.3 million, or 0.97% of loans | Loans up 9.8% from year-end; allowance was 0.81% at year-end |
| Borrowings and equity | Other borrowings $285.0 million; total equity $713.6 million | Other borrowings down 56.7%; equity up 7.6% from year-end |
| Cash flows, nine months | Operating cash flow $61.3 million; investing cash use $815.5 million; financing cash flow $991.0 million | Cash and equivalents increased $236.8 million to $374.7 million |
Regulatory capital ratios exceeded stated minimums and well-capitalized thresholds: total capital to risk-weighted assets was 14.26%, Tier 1 capital 13.18%, common equity Tier 1 12.84%, and Tier 1 leverage 8.85% at quarter-end. The company reported $2.1 billion of unused FHLB borrowing capacity.
Material changes and management commentary
- Quarterly earnings increased year over year, mainly because net interest income rose and provision expense fell. Year-to-date earnings declined, primarily reflecting the substantially higher credit-loss provision recorded in Q1.
- Lower market rates reduced interest expense, while deposit growth and a shift away from borrowings supported net interest income. Lower asset yields and a greater proportion of lower-yielding cash and securities weighed on Q3 margin.
- Total loans grew by $480.7 million from year-end, including $465.6 million of PPP originations. Deposits rose $1.4 billion, including $295 million of short-term brokered deposits obtained to bolster liquidity; $95 million mature in December 2020 and $200 million in April 2021.
- Operating cash flow was lower than the prior-year nine-month period. Investing cash use largely reflected purchases of available-for-sale securities and loan growth; financing inflows primarily reflected deposit growth and net repayment of borrowings.
- Tompkins adopted CECL on January 1, 2020. Adoption increased retained earnings by $1.7 million, net of tax, and reduced the loan allowance by $2.5 million at transition. The allowance later increased to $52.3 million, mainly because of pandemic-related economic assumptions and reserves.
Outlook, risks and unusual items
- COVID-19 and credit: $120 million of loans, or 2.2% of total loans, remained in payment deferral at September 30. Of loans that had exited deferral, about 85% had made a payment and 0.18% were more than 30 days delinquent. Management reported increased borrower stress and uncertainty about local economic conditions.
- Loans rated Special Mention rose to $122.7 million from $44.7 million at June 30, principally in retail, hospitality and agriculture. Nonperforming assets were $34.0 million, or 0.44% of assets; nonperforming loans and leases were 0.63% of total loans.
- Management reported no significant COVID-related liquidity or funding impact through quarter-end. The company had activated access to the Federal Reserve’s PPP lending facility and confirmed other funding lines. PPP loans submitted for forgiveness were still under review at September 30; by October 26, $6.2 million related to 168 forgiven loans had been received.
- Q3 provision expense was $0.2 million, versus $16.3 million of provision expense in Q1. Management said Q3 reserve reductions from improved economic forecasts were offset by qualitative reserves for higher-risk industries and loans still in deferral. The allowance estimate depends on assumptions and forecasts that may change.
- Management’s interest-rate simulation projected a 2.5% decrease in one-year net interest income under a 200-basis-point rate increase and a 0.1% increase under a 100-basis-point decline. The base case showed margin declining slightly over the next 12–18 months; actual results may differ.
- No formal earnings or financial guidance is provided in the supplied filing text. The company declared a fourth-quarter dividend of $0.54 per share. Share repurchases under the 2020 plan were suspended in March; management had not determined when they would resume.
- A $673,000 real estate write-down pending sale was identified as a nonrecurring item for the first nine months; adjusted diluted EPS was $3.63 versus GAAP diluted EPS of $3.59. Management said pending litigation was not expected to be material to consolidated financial position, while noting future-period operating results could be affected.
Important facts for investors to verify
- Subsequent performance of deferred loans, borrower delinquencies, and the migration of Special Mention or potential problem credits into nonperforming status.
- Whether the $52.3 million loan allowance and $2.1 million off-balance-sheet reserve remain adequate as economic forecasts and CECL assumptions evolve.
- PPP forgiveness timing, outstanding balances, and the recognition of related deferred fees and interest income.
- Deposit stability and funding costs, including maturities of brokered deposits, use of FHLB funding, and the company’s liquidity under less favorable conditions.
- Net interest margin trends as low rates, asset repricing, deposit costs and balance-sheet growth affect earnings.