TMP - Tompkins Financial: Margin Pressure To Hurt Earnings

2023-05-25 16:56:36 ET

Summary

• The anticipated deterioration of the funding mix will hurt the margin, and consequently earnings.
• The economies of New York and Pennsylvania currently provide a mixed outlook for credit demand.
• The year-end target price suggests a small downside from the current market price. TMP is offering a good dividend yield.
• The risk level appears moderate due to the presence of sizable unrealized losses and uninsured deposits.

Earnings of Tompkins Financial Corporation ( TMP ) will most likely fall this year due to pressure on the net interest margin. On the other hand, regional economic factors will sustain loan growth, which will, in turn, support earnings. Overall, I'm expecting the company to report earnings of $5.06 per share for 2023, down 14% from last year. Compared to my last report on the company, I've reduced my earnings estimate as I've slashed my margin estimate. The year-end target price is quite close to the current market price. As a result, I'm maintaining a hold rating on Tompkins Financial Corporation.

Loan Growth Outlook Remains Mixed

Loan growth slowed to just 0.1% in the first quarter of 2023 from 1.1% in the fourth quarter of 2022. I'm expecting loan growth to be subdued in the upcoming quarters because regional economic factors currently present a mixed outlook for credit demand.

Tompkins loan customers are primarily located in New York and Pennsylvania. Comparing the slopes of the trend lines below, we can see that the economic activity in both states is currently trailing the national average.

Further, the unemployment rates of both states are higher than the national average. However, the unemployment situation has recently improved in both states, and the unemployment rate looks good compared to the past.

Agricultural loans make up 5% of Tompkins total loan book; therefore, agricultural commodity prices are also an appropriate indicator of credit demand. The agricultural products of both states are quite diverse; however, corn is an important crop for both. As shown below, corn prices are still very high despite last year's downturn.

Considering these factors, I'm expecting the loan portfolio to grow by 0.75% in each of the last three quarters of 2023, which is better than the first quarter. For the full year, I'm expecting the loan book to grow by 2.4%. Further, I'm expecting deposit growth to trail loan growth because of the monetary tightening in the economy. The following table shows my balance sheet estimates.

Considering these factors, I'm expecting the margin to dip by five basis points in the second quarter of the year before stabilizing. Compared to my last report on the company, I've slashed my margin estimate because my outlook on the funding mix is worse than before.

Earnings Likely to Dip by Around 14%

Earnings of Tompkins Financial will likely suffer this year from pressure on the net interest margin. On the other hand, subdued loan growth will provide some support to the bottom line. Overall, I'm expecting Tompkins Financial to report earnings of $5.06 per share for 2023, down 14% year-over-year. The following table shows my income statement estimates.

Multiplying the average P/TB multiple with the forecast tangible book value per share of $40.40 gives a target price of $51.00 for the end of 2023. This price target implies a 6.9% downside from the May 24 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.

Equally weighting the target prices from the two valuation methods gives a combined target price of $52.30 , which implies a 4.5% downside from the current market price. Adding the forward dividend yield gives a total expected return of negative 0.1%. Hence, I'm maintaining a hold rating on Tompkins Financial.

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