Tompkins Financial Corporation — FY 2017 Form 10-K
Business context and period. Tompkins Financial is a community-focused financial holding company operating four banks and insurance and wealth-management businesses across New York and Pennsylvania. This filing covers the fiscal year ended December 31, 2017; comparisons are primarily with 2016.
Financial results and condition
| Metric | FY 2017 / year-end | FY 2016 / change |
|---|---|---|
| Total assets | $6.65 billion | $6.24 billion; up 6.6% |
| Loans and leases | $4.67 billion | $4.26 billion; up 9.7% |
| Deposits | $4.84 billion | $4.63 billion; up 4.6% |
| Total borrowings | $1.16 billion, including $1.07 billion other borrowings and $75.2 million repurchase agreements | Borrowings rose; other borrowings increased 21.1% |
| Net interest income | $201.3 million | $180.6 million; up 11.4% |
| Noninterest income | $69.2 million | $68.8 million |
| Net income attributable to Tompkins | $52.5 million; diluted EPS $3.43 | $59.3 million; diluted EPS $3.91 |
| Operating cash flow | $86.1 million | $90.9 million |
| Cash and cash equivalents | $84.3 million | $64.0 million |
Net interest margin increased to 3.41% from 3.33%. The average yield on interest-earning assets rose to 3.84% from 3.73%, while the average cost of interest-bearing liabilities rose to 0.57% from 0.53%. The reported noninterest-expense-to-total-revenue ratio was 63.3%, versus 63.6%.
Profitability declined on a GAAP basis primarily because of a $14.9 million noncash deferred-tax-asset write-down following the December 2017 federal tax law change. Excluding that item, management’s non-GAAP adjusted diluted EPS was $4.42, up 13.0% from $3.91. The adjustment is non-GAAP and should not be viewed as a replacement for GAAP results.
Investing activities used $427.0 million, mainly reflecting $411.8 million of net loan growth and premises, equipment and software purchases. Financing activities provided $361.2 million, including net growth in borrowings. The cash-flow statement reports a $20.3 million net increase in cash. The company paid $1.82 per share in dividends, up from $1.77; the payout ratio increased to 52.6% from 44.9%.
At year-end, shareholders’ equity was $576.2 million. The company’s CET1, Tier 1, and total risk-based capital ratios were 11.1%, 11.4%, and 12.3%, respectively; all four subsidiary banks were categorized as well-capitalized. Core deposits were $4.0 billion, or 82.6% of deposits. Unused FHLB borrowing capacity was $950.8 million, subject to collateral and other requirements.
Material changes versus 2016
- Loan growth and improved asset yields drove the increase in net interest income; average loans and leases grew 11.2%.
- Net income fell 11.5% and diluted EPS fell 12.3%, chiefly due to the tax-reform charge. Excluding that charge, adjusted diluted EPS increased 13.0%.
- Noninterest expense rose 7.9% to $171.1 million, including a $2.7 million write-off of a historic tax-credit investment and $731,000 in core-system deconversion expense.
- Other borrowings rose $186.9 million as loan growth exceeded deposit growth. Noncore funding sources increased 8.8% to $2.0 billion.
- Nonperforming loans and leases were 0.49% of loans, compared with 0.51%; nonperforming assets were 0.38% of assets, up from 0.36%. The allowance was $39.8 million, or 172.8% of nonperforming loans.
Outlook, risks and unusual items
- Fourth quarter: Net income was $2.5 million and diluted EPS was $0.16, versus $15.1 million and $0.99 in Q4 2016. Management said Q4 2017 diluted EPS would have been $1.15 excluding the tax-reform charge. The quarter also included $3.3 million of tax credits from a historic preservation investment, alongside the $2.7 million investment write-off.
- Interest rates: Management’s base-case simulation indicated a stable-to-higher net interest margin over the next 12–18 months. A modeled 200-basis-point rate increase reduced one-year net interest income by 1.4%; a 100-basis-point decline reduced it by 1.1%. The company’s one-year static interest-rate gap was negative $762.6 million, indicating greater modeled near-term sensitivity to rising rates. These are model estimates, not guidance.
- Credit and concentration: Commercial and commercial real estate loans were 70.5% of total loans; commercial real estate alone was 47.1%. Management noted an increase in criticized and classified originated loans, particularly in agricultural Special Mention credits. Results remain sensitive to borrower cash flows, collateral values, local economic conditions, and agriculture-related risks.
- Funding and liquidity: Loan growth outpaced deposit growth and was partly funded by increased FHLB advances. Management considered available liquidity sources sufficient for reasonably likely needs, but identified wholesale-funding access and cost as risks.
- Operations and accounting: The core operating system was converted in 2017, with further module conversions expected in 2018; management disclosed migration, integration, vendor-performance, and customer-service risks. The new Ithaca headquarters was expected to be completed in Q2 2018. The company expected the CECL credit-loss standard, effective for it in 2020, likely to increase the allowance, but could not quantify the effect.
- Tax and contingencies: The federal corporate rate fell from 35% to 21% beginning in 2018. Certain tax-reform calculations were provisional, with completion expected within the permitted measurement period ending December 22, 2018. The filing states ordinary-course legal matters were not expected to have a material adverse effect. The company also had $991.6 million of loan commitments, standby letters of credit, and undisbursed credit lines; actual funding needs may be lower because commitments may expire unused.
Important facts for investors to verify
- Reconcile GAAP EPS of $3.43 with adjusted diluted EPS of $4.42, including the tax write-down and historic tax-credit items.
- Assess whether loan growth can continue to be funded with core deposits without further reliance on higher-cost borrowings.
- Review commercial real estate and agricultural credit concentrations, criticized loans, nonperforming assets, and allowance assumptions.
- Confirm completion and financial effects of the core-system migration, headquarters project, and provisional tax accounting.
- Review regulatory capital and liquidity disclosures, including collateral availability and dividend capacity at the parent company.
KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective as of year-end.