Tompkins Financial Corporation — Q3 2023 Form 10-Q
Business and period: Community-based financial services company headquartered in Ithaca, New York, with banking, insurance, and wealth management businesses. This unaudited report covers the quarter and nine months ended September 30, 2023; balance-sheet comparisons are to December 31, 2022. Dollar amounts below are in millions unless noted.
Financial results and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net interest income | $51.0 | $58.1 | $157.2 | $173.0 |
| Net income attributable to Tompkins | $(33.4) | $21.3 | $(5.5) | $65.5 |
| Diluted earnings per share | $(2.35) | $1.48 | $(0.39) | $4.53 |
| Provision for credit losses | $1.2 | $1.1 | $2.6 | $1.4 |
| Noninterest expense | $49.9 | $49.6 | $152.0 | $145.6 |
- Unusual item: The company recorded pre-tax losses on available-for-sale securities sales of $62.9 million in Q3 and $70.0 million year to date, principally from a September portfolio repositioning. Excluding securities-sale losses, management reported adjusted net income (non-GAAP) of $14.2 million for Q3 and $47.4 million year to date; adjusted diluted EPS was $1.00 and $3.31, respectively.
- Margins and returns: Net interest margin was 2.75% in Q3 (3.04% a year earlier) and 2.85% year to date (3.05%). GAAP ROA and ROE were (1.73)% and (20.84)% for Q3; adjusted Q3 figures were 0.74% and 8.86% (non-GAAP).
- Balance sheet at September 30: Assets were $7.69 billion; loans and leases, net, were $5.39 billion; deposits were $6.62 billion; total equity was $612.4 million. Loans grew 3.1% from year-end, while total deposits were approximately flat.
- Funding and liquidity: Cash and cash equivalents were $140.2 million, up from $77.8 million at year-end. Other borrowings were $296.8 million and repurchase-agreement funding was $56.1 million. Management reported ready access to $1.6 billion of liquidity through FHLB and Federal Reserve sources; its liquidity measure was 14.5% of assets versus a 6% policy minimum.
- Cash flows, nine months: Operating activities provided $70.1 million; investing activities provided $0.6 million; financing activities used $8.3 million. Cash and cash equivalents increased $62.4 million.
- Capital: Company total capital to risk-weighted assets was 13.46%, Tier 1 capital was 12.49%, and Tier 1 leverage was 9.01%. The filing says company and bank ratios exceeded applicable well-capitalized requirements.
- Credit quality: Allowance for credit losses was $49.3 million, or 0.91% of loans, versus 0.87% at year-end. Nonperforming loans and leases were $31.4 million (0.58% of loans); coverage was 156.96%. Special Mention and Substandard loans increased $24.7 million from year-end.
Changes, outlook, and risks
- Management attributed lower earnings chiefly to securities-sale losses, declining net interest income, and higher operating costs. Funding costs rose faster than yields on earning assets; Q3 interest expense was $24.5 million versus $5.6 million a year earlier.
- The Q3 repositioning involved selling approximately $429.6 million of securities with an average yield of 0.93%; proceeds were largely reinvested in securities estimated to yield approximately 5.12%, with an average life of about 4.3 years. Management expects the transaction to support future securities revenue, but gave no specific earnings guidance.
- Total estimated uninsured deposits were $3.1 billion, including $1.8 billion without liquid collateral pledged; insured and collateralized government deposits represented 72.4% of FDIC-eligible deposits. Core deposits fell 2.7% from year-end, while non-core funding increased 13.1%.
- Interest-rate exposure remains important: the one-year static gap was negative $671.2 million. Modeling estimated a 4.4% decrease in one-year net interest income under a 200-basis-point rate increase and a 3.3% increase under a 200-basis-point decrease, subject to stated assumptions. Management described the balance sheet as liability-sensitive in the near term.
- Commercial real estate was 55.1% of loans. Management identified 20 potential problem commercial relationships totaling $43.3 million and noted that adverse economic conditions could further affect borrowers. The filing also cites deposit retention, inflation and economic conditions, regulation, cybersecurity, and geopolitical events among risks.
- Available-for-sale securities had $194.6 million of net unrealized losses at quarter-end; held-to-maturity securities had $59.4 million of unrealized losses. Management attributed the declines primarily to interest rates and liquidity, not issuer credit quality, and said it did not expect to be forced to sell before recovery of amortized cost.
- Management reported no material change to previously disclosed risk factors and no material expected litigation liability, while cautioning that litigation could affect results in a future period. Disclosure controls were concluded effective; no material internal-control changes were reported.
Important facts for investors to verify
- Whether deposit mix, uninsured balances, and reliance on wholesale funding remain stable, and whether disclosed borrowing capacity is available under current conditions.
- Whether the securities repositioning produces the expected higher yields and improves net interest income, and how unrealized securities losses and capital ratios evolve.
- Trends in deposit pricing, net interest margin, and the company’s sensitivity to interest-rate changes versus the model assumptions.
- Developments in commercial real estate and potential-problem credits, including the rising classified-loan balance and adequacy of credit-loss reserves.
- The sustainability of dividends and capital levels following year-to-date losses; the company paid $1.80 per share in dividends during the first nine months.
- How adjusted, non-GAAP results reconcile to GAAP results; the filing’s adjusted figures exclude securities-sale losses and are not substitutes for GAAP measures.