- By Madalene Ulrich
- Business & Technology
For the year-to-date period ended June 30, 2020, diluted earnings per share were $1.97, down 25.1% from the same period in 2019. Year-to-date net income was $29.4 million, down from $40.4 million, for the same period in 2019. Results for the 2020 year-to-date period were negatively impacted by economic stress resulting from the COVID-19 pandemic, which contributed to the $16.3 million provision for credit losses recognized during the first quarter of 2020.
Romaine commented, "We are pleased to report strong financial results for the quarter despite a very challenging business climate. Although the longer term impact of the pandemic and related economic conditions are still unknown, there have been several recent positive trends noted with certain national economic indicators, such as reduced levels of unemployment, improving retail sales and improving consumer confidence. At Tompkins, we have seen several positive trends as well, with very strong mortgage application volumes in the second quarter, higher levels of debit card spending, and favorable credit quality measures when compared to last quarter. We are encouraged by some of these recent favorable trends, though the recent rise in COVID-19 cases nationally makes it clear that much uncertainty remains. We will remain vigilant in monitoring risk trends as we navigate these challenging times.”
SELECTED HIGHLIGHTS FOR THE SECOND QUARTER:
Total loans of $5.4 billion were up $568 million, or 11.7% over June 30, 2019. The increase over the prior year included $465.6 million of PPP loans funded during the second quarter of 2020.
Total deposits of $6.4 billion increased by $1.4 billion, or 27.8% over June 30, 2019.
Net interest margin was 3.45% for the second quarter of 2020, up from 3.44% for the first quarter of 2020, and 3.43% for the fourth quarter of 2019
The ratio of Total Capital to risk-weighted assets improved to 13.95%, up from 13.62% at March 31, 2020, and 13.53% at December 31, 2019.
NET INTEREST INCOME
Net interest income was $56.4 million for the second quarter of 2020, compared to $52.3 million reported for the second quarter of 2019. For the year-to-date period, net interest income was $109.3 million, an increase of $5.1 million or 4.9% from the same six-month period in 2019.
Net interest income benefited from growth in average loans. Average loans were up $297.7 million, or 6.2% in the first six months of 2020, compared to the same six month period in 2019. The increase in average loans includes the benefit of $465.6 million of loans originated under the Small Business Administration's ("SBA") Paycheck Protection Program ("PPP") in the second quarter of 2020. Asset yields were down 20 basis points compared to the first six months of 2019, which reflects the impact of reductions in market interest rates during the first six months of 2020, and the addition of the lower yielding PPP loans originated in the second quarter.
Average total deposits were up $778.1 million, or 15.7% in the first six months of 2020, versus the same period in 2019. Average noninterest deposits were up $251.3 billion or 18.7% in the first six months of 2020, compared to the same period in 2019. Average deposit balances benefited from $465.6 million of PPP loan originations during the second quarter of 2020, the majority of which were deposited in Tompkins checking accounts. The average rate paid on interest-bearing deposit products in the first six months of 2020 decreased by 21 basis points over the same period in 2019.
Net interest margin was 3.45% for the second quarter of 2020, up compared to the 3.34% reported for the second quarter of 2019, and 3.44% for the first quarter of 2020. The improved net interest margin year-over-year was largely driven by lower funding costs, reflecting lower deposit rates and growth in deposit balances, which were used to reduce higher cost other borrowing balances.
As a result of its participation in the SBA's PPP, in the second quarter the Company recorded net deferred loan fees of $2.3 million, which are included in interest income.
Noninterest income represented 24.8% of total revenues in the first six months of 2020, as compared to 26.7% in the same period in 2019. Noninterest income of $17.2 million for the second quarter of 2020 was down 7.3% compared to the same period in 2019. For the year-to-date period, noninterest income of $36.1 million was down 4.7% from the same period in 2019. Total fee based services in the second quarter of 2020 were $14.7 million, down 10.5% compared to the same period in 2019. The reduction in fee based income in 2020 is largely related to the pandemic-related travel and business restrictions, which reduced card services and service charge income. Other noninterest income for the second quarter of 2020 included $691,000 related to gains on sales of residential mortgage loans.
Noninterest expense was $46.9 million for the second quarter of 2020, up $818,000, or 1.8%, over the second quarter of 2019. For the year-to-date period, noninterest expense was $92.6 million, up $2.3 million, or 2.6%, from the same period in 2019. The increase in noninterest expense for both the second quarter and year-to-date periods was primarily attributable to normal annual increases in salaries and wages. Other expense for the second quarter and year-to-date period of 2020 included $1.2 million and $1.7 million, respectively, related to allowance for credit losses for off-balance sheet exposures. Other expense during the quarter also included a loss of $675,000 related to the pending sale of real estate.
INCOME TAX EXPENSE
The Company's effective tax rate was 20.5% for the second quarter of 2020, compared to 19.6% for the same period in 2019. The effective tax rate for the six months ended June 30, 2020 was 20.2%, compared to 20.3% reported for the same period in 2019.
Asset quality trends remained strong in the second quarter of 2020. Nonperforming assets represented 0.40% of total assets at June 30, 2020, down from 0.47% at December 31, 2019. Nonperforming asset levels continue to be below the most recent Federal Reserve Board Peer Group Average1 of 0.49%.
Provision for credit losses in the second quarter of 2020 was a negative provision of $348,000 compared to an expense of $601,000 for the same period in 2019. Provision expense for the six months ended June 30, 2020 was $15.9 million, compared to $1.0 million for the same period in 2019. The first quarter of 2020 included provision expense of $16.3 million related to the impact of the economic shutdown related to COVID-19 on economic forecasts and other model assumptions relied upon by management in determining the allowance. Net recoveries for the second quarter of 2020 were $26,000 compared to net charge-offs of $139,000 reported in the second quarter of 2019.
The allowance for credit losses represented 0.96% of total loans and leases at June 30, 2020, compared to 1.06% at March 31, 2020, 0.81% at December 31, 2019, and 0.84% at June 30, 2019. The decline in the ratio during the second quarter this year is largely due to the increase in loan balances being largely driven by $465.6 million of PPP loans for which no reserves have been allocated. The ratio of the allowance to total nonperforming loans and leases was 172.62% at June 30, 2020, improved from 126.90% at December 31, 2019, and 171.42% at June 30, 2019.
Overall credit quality has been supported by several initiatives initiated by the Company in response to the pandemic. As previously announced, Tompkins has initiated and participated in a number of credit initiatives to support employees and customers who have been impacted by the economic conditions associated with the COVID-19 pandemic. For non-executive employees affected by COVID-19, the Company implemented a low interest loan program. The Company also implemented a payment deferral program to assist both consumer and business borrowers that may be experiencing financial hardship due to COVID-19. Weekly deferral requests for the last week of June were down 98% from peak levels the Company experienced in late March. As of June 30, 2020, the Company had granted payment deferral requests for approximately 3,900 loans totaling $2.3 billion to individuals and businesses. As of July 20, 2020, nearly 50% of loans that had received deferrals had begun making regular payments.
As previously noted, the Company participated in the U.S. Small Business Administration (SBA) Paycheck Protection Program (“PPP”). This program provides borrower guarantees for lenders, as well as loan forgiveness incentives for borrowers that utilize the loan proceeds to cover employee compensation-related expenses and certain other eligible business operating costs, all in accordance with the rules and regulations established by the SBA. The Company began accepting applications for PPP loans on April 3, 2020, and had funded approximately 2,997 loans totaling about $465.6 million as of June 30, 2020.
Capital ratios remained well above the regulatory minimums for well capitalized institutions. The ratio of Total capital to risk-weighted assets improved to 13.95% at June 30, 2020, up from 13.62% at March 31, 2020, and 13.53% at December 31, 2019. The ratio of Tier 1 capital to average assets was 8.79% at June 30, 2020, down from 9.61% at December 31, 2019, and 9.25% at June 30, 2019. The current period Tier 1 capital to average assets was negatively impacted by $465.6 million of PPP loans originated in the second quarter of 2020.