The stock of Tompkins Financial (NYSE:TMP) has dramatically underperformed the broad market this year, as it has plunged 36% whereas the S&P 500 has rallied 17%. The vast underperformance has resulted primarily from the bankruptcy of Silicon Valley Bank, Credit Suisse and First Republic. These bankruptcies have caused an indiscriminate sell-off in the category of regional banks. Tompkins Financial has been hurt by the ongoing financial turmoil, but it is likely to endure this downturn thanks to its resilient business model and its prudent management, which is the key behind the solid performance record of the bank. As the stock is offering a 10-year high dividend yield of 4.8% and is trading at a nearly 10-year low price-to-earnings ratio of 11.0x, it has become highly attractive from a long-term perspective.
The reasons behind the plunge
Tompkins Financial is a regional bank that is headquartered in Ithaca, New York, and has a history of 187 years. It offers a wide range of services, such as deposit and checking accounts, time deposits, loans, credit cards, insurance services, and wealth management to its customers in New York and Pennsylvania.
Just like many regional banks, Tompkins Financial has been hurt by the negative market sentiment over regional banks, which has resulted from the collapse of the aforementioned banks. The effect of the turmoil was evident in the latest earnings report of the company.
Net interest margin shrank from 3.09% in the prior year’s quarter to 2.83% due to an increased cost of deposits amid 15-year high interest rates. Earnings per share slumped 59%, from $1.45 to $0.59, partly due to a loss per share of $0.37 caused by the sale of $80.9 million of securities. In simple terms, the bank had to sell $80.9 million of its bonds to improve its liquidity and hence it incurred material losses, as the value of bonds has plunged due to the surge of interest rates to 15-year highs.
Silicon Valley Bank incurred losses for the same reason and led the market to lose confidence in the bank, thus triggering a bank run. However, there are striking differences between Silicon Valley Bank and Tompkins Financial. The former had a few large corporate depositors and posted excessive losses, whereas the latter has numerous retail depositors and has remained highly profitable. To be sure, analysts expect Tompkins Financial to post earnings per share of $4.47 this year. This level is 24% lower than the earnings per share of $5.89 in 2022, but it is important to note that 2022 was the second-best year in the history of the bank and hence it formed a somewhat high comparison base.
It is also important to note that Tompkins Financial is likely to eventually benefit from the above sale of its bonds, as these bonds had an average yield of only 0.48% whereas the company reinvested the proceeds at an average yield of 4.3%. Moreover, the bank grew its loans 3.7% over the prior year’s quarter.
The other negative element of the latest earnings report of Tompkins Financial was a 4.65% decrease in the total deposits of the bank over the prior year’s quarter. As per management, the decrease in deposits resulted primarily from the tightening monetary policy of the Fed, which has reduced total deposits on a national level. However, the annual decrease in the deposits of Tompkins Financial slowed from 7.2% in the previous quarter. It is also remarkable that the sequential decrease in deposits was only 0.85%. Therefore, the worse seems to be behind the company in reference to this metric.
Moreover, Tompkins Financial has solid financial metrics related to its capitalization. Its ratio of total capital to risk-weighted assets improved from 14.1% in last year’s quarter to 14.5% and its ratio of Tier 1 capital to average assets improved from 9.0% to 9.6%. These financial metrics certainly bode well for the ability of the bank to endure the ongoing downturn.
Investors should also be aware that Tompkins Financial has a significant competitive advantage, namely the loyalty of many of its customers, thanks to the regional character of the bank. Thanks to this advantage and its prudent management, Tompkins Financial has proved one of the most resilient banks to downturns. In the Great Recession, the fiercest financial crisis of the last 90 years, most banks incurred excessive losses and cut their dividends, but Tompkins Financial grew its earnings per share 17% and continued raising its dividend. The 36-year dividend growth streak of the company is a testament to its exemplary management and its defensive business model in my view, which is paramount during downturns.
Tompkins Financial also proved resilient throughout the coronavirus crisis. In 2020, when many banks incurred a significant decrease in their earnings due to the severe recession caused by the pandemic, Tompkins Financial posted just a 3% decrease in its bottom line, from an all-time high of $5.37 in 2019 to $5.20.
It is also worth noting the consistent performance record of Tompkins Financial. The bank grew its earnings per share every single year between 2008 and 2019. The pandemic caused a 3% decrease in earnings per share in 2020, but the bank recovered swiftly, with record earnings per share in 2021. Tompkins Financial is currently facing another downturn due to the rising cost of deposits amid 15-year high interest rates. However, the Fed is likely to begin reducing interest rates at some point in 2024. Whenever interest rates begin to moderate, Tompkins Financial is likely to see an improvement in its net interest margin.
Valuation
Tompkins Financial is currently trading at a nearly 10-year low forward price-to-earnings ratio of 11.0x. This earnings multiple is much lower than the 10-year average of 15.1 of the stock. The depressed valuation level has resulted from the indiscriminate sell-off of regional banks, which has been caused by the collapse of the aforementioned banks, and the 15-year high interest rates, which greatly reduce the present value of future earnings and hence they exert pressure on the valuation of the stock.
However, it is unreasonable to expect interest rates to remain around their current level for years. I believe that as soon as the Fed sees inflation restored to its target range of 2.0%-2.5%, it will probably begin reducing interest rates. Whenever interest rates begin to moderate, Tompkins Financial is likely to see its valuation revert towards its historical average.
Dividend
Tompkins Financial has an outstanding dividend growth record. To be sure, the company has grown its dividend for 36 consecutive years. As this period includes the Great Recession and the pandemic, it confirms the resilience of the business model of the bank to downturns.
Moreover, Tompkins Financial is currently offering a 10-year high dividend yield of 4.8%.
Tompkins Financial has a payout ratio of only 50%. On the one hand, this is a nearly 10-year high level for this stock. On the other hand, it is a healthy payout ratio, which provides a wide margin of safety for the dividend. Overall, investors are given the opportunity to purchase this Dividend Aristocrat with a 10-year high dividend yield and rest assured that the dividend has a material margin of safety.
The only caveat is the lackluster dividend growth rate of the stock. The bank has raised its dividend by only 4.7% per year on average over the last decade and over the last five years. Nevertheless, given the exceptionally high current dividend yield, the stock appears attractive for income-oriented investors.
Risk
The primary risk factor is the adverse scenario of sticky inflation for years. In such a case, the Fed is likely to maintain excessive interest rates for a prolonged period and thus it will adversely affect the cost of deposits of Tompkins Financial and its valuation. However, this scenario has low odds of materializing due to the cooling effect of 15-year high interest rates on the economy. Inflation has already corrected from a 40-year high of 9.2% in June 2022 to 3.6% now. Therefore, the central bank is likely to begin lowering interest rates at some point next year, in my view.
Final thoughts
Tompkins Financial is offering a 10-year high dividend yield and is trading at a nearly 10-year low valuation level, largely due to the negative market sentiment over regional banks and the impact of 15-year high interest rates on the cost of deposits and the valuation of the stock. Tompkins Financial has proved to be one of the most resilient banks to downturns and hence I believe it is likely to more easily endure the financial turmoil surrounding regional banks, which has already begun to abate. Whenever interest rates begin to normalize, the stock will probably enjoy an expansion of its valuation level towards its historical average.
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