10-Q/A: Tompkins 10-Q/A: EPS up, CRE reserve added

Amendment corrects exhibit certifications; Q1 2025 shows higher EPS and margin with stronger deposits and capital, offset by higher credit provisions and a rise in CRE nonaccruals.

Summary

• Amendment No. 1 updates CEO/CFO certifications (Exhibits 31.1, 31.2, 32.1, 32.2) to correct references; no changes to financial statements or disclosures.
• Q1 2025 net income was $19.7 million (up 16.6% YoY); diluted EPS $1.37 (vs $1.18 in Q1 2024).
• Net interest income rose 11.8% YoY to $56.7 million; net interest margin expanded to 2.98% (vs 2.73% a year ago).
• Provision for credit losses increased to $5.3 million (vs $0.9 million YoY), largely due to a specific reserve on one CRE relationship.
• Noninterest income grew 13.1% YoY to $25.0 million, driven by insurance commissions/contingency income and a $1.9 million OREO gain; card fees declined on a tough compare.
• Noninterest expense was $50.6 million (up 1.5% YoY); expense-to-revenue ratio improved to 61.9%.
• Total assets reached $8.20 billion (+1.1% vs Dec 31, 2024); loans net were $6.01 billion (+0.7%); deposits were $6.75 billion (+4.4%).
• Borrowings declined to $493.2 million from $790.2 million at year-end; Fed funds purchased and repos rose to $123.0 million.
• Allowance for credit losses increased to $61.0 million (1.01% of loans) from $56.5 million (0.94%) at year-end.
• Nonperforming loans and leases increased to $71.1 million (1.17% of total loans), mainly from one $17.3 million CRE loan moving to nonaccrual.
• Capital remains strong: CET1 12.25%, Tier 1 12.25%, Total capital 13.28%, Leverage 9.31%—all above well-capitalized thresholds.
• Dividend paid was $0.62 per share ($8.9 million total) in Q1 2025; shares outstanding were 14,434,454 as of May 1, 2025.

Sentiment

Score: 6

Explanation: Improved profitability, margin, deposits, and capital are offset by higher provisions and increased nonperforming CRE exposure; overall constructive but cautious.

Positives

• Earnings expansion: Q1 2025 net income $19.7 million; diluted EPS $1.37 (up 16.1% YoY).
• Margin improvement: net interest margin 2.98% (vs 2.73% YoY) with higher loan yields and better funding mix.
• Fee income growth: noninterest income up 13.1% YoY to $25.0 million, including stronger insurance revenues and a $1.9 million OREO gain.
• Operating efficiency: noninterest expense up only 1.5% YoY; expense-to-revenue ratio improved to 61.9%.
• Deposit growth and mix: total deposits up $281.7 million (+4.4%) since year-end; core deposits up $82.1 million (+1.6%).
• Lower reliance on term funding: other borrowings down to $493.2 million from $790.2 million at year-end.
• Capital strength: CET1 12.25%, Total capital 13.28%, leverage 9.31%—well above regulatory minimums.
• AOCI improvement: accumulated other comprehensive loss narrowed to $(102.2) million from $(118.5) million, reflecting lower unrealized losses on AFS securities.
• Liquidity robust: policy on-balance-sheet liquidity at 11.4%; FHLB capacity $1.5 billion; FRB capacity $135.2 million; $687.7 million unencumbered securities.

Negatives

• Credit costs elevated: provision for credit losses increased to $5.3 million (vs $0.9 million YoY).
• Asset quality mixed: nonperforming loans and leases rose to $71.1 million (1.17% of loans) from $50.9 million at year-end 2024.
• Specific CRE pressure: $4.2 million specific reserve on one CRE relationship ($18.1 million) and a separate $17.3 million construction loan moved to nonaccrual.
• Card services income declined $313,000 YoY due to one-time prior-year sign-on bonus; derivative fee income also lower.

Risks

• Interest rate risk: a modeled +200 bps parallel rate shock would reduce 1-year net interest income by ~3.4%; a -200 bps shock would increase NII by ~3.3%.
• Credit risk concentration in CRE: rise in nonaccruals and a large specific reserve indicate sensitivity to collateral values and tenant performance.
• Liquidity and deposit competition: reliance on non-core funding (27.2% of liabilities) and use of ICS/CDARS and brokered deposits could pressure funding costs if markets tighten.
• Regulatory and compliance risk: potential changes in laws, FDIC assessment rules, and heightened supervisory scrutiny.
• Macroeconomic risks: inflation, unemployment trends, and GDP forecasts impact CECL assumptions and could drive higher provisions.
• Cybersecurity and operational risks: exposure to incidents and threats as noted in forward-looking statements.
• Geopolitical and systemic risks: war, political uncertainty, and potential bank-sector stress could affect markets and funding conditions.
• Geographic concentration: dependence on New York and Pennsylvania local economies.

Future Outlook

Base-case modeling points to net interest margin rising over the next 12–18 months, with sensitivity analysis showing a 3.4% one-year NII decline under a +200 bps rate shock and a 3.3% increase under a −200 bps shock. Strategic focus remains on responsible, sustainable organic growth and opportunistic acquisitions, supported by strong capital and diversified liquidity.

Management Comments

• Earnings growth was driven by higher net interest income from improved yields and funding mix, alongside growth in fee businesses.
• The higher provision reflects a specific reserve on one commercial real estate relationship based on a late-quarter appraisal and updated macro forecasts.
• Liquidity and capital positions are strong, with ample secured borrowing capacity and improved AOCI from lower unrealized securities losses.
• Net interest margin is expected to trend higher over the next 12–18 months in the base case scenario.

Industry Context

Regional and community banks broadly saw stabilization in deposit trends and gradual margin recovery as funding costs plateaued in early 2025, while commercial real estate—particularly office and construction—remains a focal credit risk across peers. Use of reciprocal and brokered deposits (ICS/CDARS) and FHLB capacity is consistent with industry liquidity practices.

Comparison to Industry Standards

• Nonperforming assets to total assets were 0.87% vs the peer group average of 0.49% (as of Dec 31, 2024 per the Bank Holding Company Performance Report), indicating above-peer problem asset levels.
• Capital well above regulatory minimums: CET1 at 12.25% vs well-capitalized threshold of 6.5%; Total capital at 13.28% vs 10.0% threshold; Leverage ratio at 9.31% vs 5.0% threshold.
• Interest rate risk within conservative bounds: modeled +200 bps rate scenario shows a manageable ~3.4% NII decline over one year, in line with prudent risk limits commonly observed across well-managed community banks.

Legal Proceedings

• Subject to ordinary-course claims; management does not expect outcomes to be material to the consolidated financial position.

Related Party Transactions

• On January 6, 2025, issued 549 shares to non-employee directors under the Director Retainer Plan (aggregate value $36,816) in transactions exempt under Section 4(a)(2).

Stakeholder Impact

• Shareholders: higher EPS and continued dividends ($0.62/share in Q1); improved AOCI supports tangible book value.
• Depositors: liquidity remains strong with diversified funding sources and significant contingent capacity.
• Creditors: balance sheet de-risking through reduced term borrowings; robust capital ratios enhance creditor protection.
• Employees: higher salaries and benefits expense reflects investment in talent and healthcare costs.

Next Steps

• Monitor and manage the specific CRE relationship with a $4.2 million reserve; finalize internal review of the updated appraisal.
• Continue optimizing funding mix to support margin trajectory and reduce reliance on higher-cost borrowings.
• Pursue responsible organic growth and evaluate selective M&A consistent with strategy and capital levels.
• Maintain strong liquidity posture leveraging FHLB and FRB capacity and unencumbered securities.

Key Dates

Recommendation

Earnings momentum and margin expansion are clear positives, supported by strong capital and liquidity; however, rising nonperforming CRE exposure and higher provisioning temper the outlook. A balanced stance is warranted until asset quality trends stabilize while monitoring margin follow-through and funding costs.

Keywords

Tompkins Financial, TMP, community bank, commercial real estate, CRE credit, net interest margin, provision for credit losses, nonperforming loans, insurance brokerage, wealth management, deposits, FHLB advances, ICS CDARS, capital ratios, AOCI