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.
Financial Position | FY18 | FY19 | FY20 | FY21 | FY22 | FY23E |
Net Loans | 4,791 | 4,878 | 5,209 | 5,033 | 5,223 | 5,346 |
Growth of Net Loans | 3.5% | 1.8% | 6.8% | (3.4)% | 3.8% | 2.4% |
Other Earning Assets | 1,476 | 1,301 | 1,995 | 2,369 | 1,967 | 1,963 |
Deposits | 4,889 | 5,213 | 6,438 | 6,791 | 6,602 | 6,607 |
Borrowings and Sub-Debt | 1,175 | 735 | 344 | 191 | 348 | 414 |
Common equity | 619 | 662 | 716 | 728 | 616 | 676 |
Book Value Per Share ($) | 40.9 | 44.2 | 48.6 | 49.7 | 42.8 | 47.0 |
Tangible BVPS ($) | 34.3 | 37.6 | 42.0 | 43.1 | 36.1 | 40.4 |
Source: SEC Filings, Author's Estimates (In USD million unless otherwise specified) |
Margin to Come Under Pressure
For the last few quarters, Tompkins' net interest margin remained range bound, as deposit re-pricing almost equally matched loan re-pricing. Further, the company did not make big changes in its loan and deposit mixes.
However, going forward I'm expecting material changes in the funding mix as Tompkins will have to rely on borrowings to bridge the gap between loan and deposit growth. The cost of borrowings is significantly higher than the cost of deposits. Therefore, the anticipated funding mix change will have a significant impact on interest expenses.
Rates on Funds During 1Q 2023 | |
Average Rate | |
Interest-Bearing Checking, Savings, and Money Market | 0.91% |
Time Deposits | 2.13% |
Fed Funds Purchased and Repos | 0.10% |
Other Borrowings | 4.20% |
Source: 1Q 2023 10-Q Filing |
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 $5.06 per share for 2023, down 14% year-over-year. The following table shows my income statement estimates.
Income Statement | FY18 | FY19 | FY20 | FY21 | FY22 | FY23E |
Net interest income | 212 | 211 | 225 | 224 | 230 | 216 |
Provision for loan losses | 4 | 1 | 17 | (2) | 3 | 2 |
Non-interest income | 77 | 75 | 74 | 79 | 78 | 82 |
Non-interest expense | 181 | 182 | 184 | 190 | 196 | 201 |
Net income - Common Sh. | 81 | 80 | 77 | 89 | 85 | 73 |
EPS - Diluted ($) | 5.35 | 5.37 | 5.20 | 6.05 | 5.89 | 5.06 |
Source: SEC Filings, Earnings Releases, Author's Estimates (In USD million unless otherwise specified) |
Compared to my last report on the company, I've slashed my earnings estimate because I've reduced my margin estimate.
Risks are Elevated Due to Unrealized Losses and Uninsured Deposits
Tompkins Financial has a rather large securities portfolio. As a result, the rising-rate environment has built up large unrealized mark-to-market losses on the securities portfolio. As of the end of March 2023, these losses amounted to $209.6 million, which is a sizable 32% of the equity book value. I'm expecting these losses to reverse as interest rates trend downward next year. However, there is still a chance that some of these losses will get realized if management decides to sell these securities. There is currently no pressure to sell these securities, but management may decide to shift funds away from securities and towards higher-yielding loans.
Uninsured and uncollateralized deposits also present risks to Tompkins Financial. According to details given in the 10-Q filing, these deposits made up around 23% of total deposits at the end of March 2023. A deposit run is highly unlikely; nevertheless, the large balance of uninsured and uncollateralized deposits bears monitoring.
Overall, I believe Tompkins Financial's risk level is moderate.
Maintaining a Hold Rating
Tompkins Financial is offering a dividend yield of 4.4% at the current quarterly dividend rate of $0.60 per share. The earnings and dividend estimates suggest a payout ratio of 48% for 2023, which is above the five-year average of 38%, but still easily sustainable. Therefore, the dividend payout appears secure.
I'm using the peer average price-to-tangible book ("P/TB") and price-to-earnings ("P/E") multiples to value Tompkins Financial. Peers are trading at an average P/TB ratio of 1.26 and an average P/E ratio of 10.6, as shown below.
TMP | BFC | CFFN | BRKL | FBMS | RBCAA | Peer Average | |
P/E ("ttm") | 9.71 | 14.35 | 11.52 | 7.38 | 10.48 | 9.29 | 10.60 |
P/E ("fwd") | 11.35 | 14.09 | 18.09 | 8.43 | 9.33 | 9.67 | 11.92 |
P/B ("ttm") | 1.22 | 1.40 | 0.75 | 0.65 | 0.92 | 0.94 | 0.93 |
P/TB ("ttm") | 1.43 | 2.22 | 0.75 | 0.85 | 1.51 | 0.99 | 1.26 |
Source: Seeking Alpha |
Multiplying the average P/TB multiple with the forecast tangible book value per share of $40.40 gives a target price of $51.00 for the end of 2023. This price target implies a 6.9% downside from the May 24 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.
P/TB Multiple | 1.06x | 1.16x | 1.26x | 1.36x | 1.46x |
TBVPS - Dec 2023 ($) | 40.4 | 40.4 | 40.4 | 40.4 | 40.4 |
Target Price ($) | 42.9 | 47.0 | 51.0 | 55.0 | 59.1 |
Market Price ($) | 54.8 | 54.8 | 54.8 | 54.8 | 54.8 |
Upside/(Downside) | (21.6)% | (14.3)% | (6.9)% | 0.5% | 7.8% |
Source: Author's Estimates |
Multiplying the average P/E multiple with the forecast earnings per share of $5.06 gives a target price of $53.60 for the end of 2023. This price target implies a 2.1% downside from the May 24 closing price. The following table shows the sensitivity of the target price to the P/E ratio.
P/E Multiple | 8.6x | 9.6x | 10.6x | 11.6x | 12.6x |
EPS 2023 ($) | 5.06 | 5.06 | 5.06 | 5.06 | 5.06 |
Target Price ($) | 43.5 | 48.6 | 53.6 | 58.7 | 63.7 |
Market Price ($) | 54.8 | 54.8 | 54.8 | 54.8 | 54.8 |
Upside/(Downside) | (20.6)% | (11.3)% | (2.1)% | 7.1% | 16.4% |
Source: Author's Estimates |
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.
For further details see:
Tompkins Financial: Margin Pressure To Hurt Earnings