Tompkins Financial Corporation — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; includes fourth-quarter results. Tompkins is a community-focused financial services holding company operating banking, insurance and wealth-management businesses in New York and Pennsylvania.
Financial performance
| Metric | 2019 | 2018 |
|---|---|---|
| Net income attributable to Tompkins | $81.7 million | $82.3 million |
| Diluted EPS | $5.37 | $5.35 |
| Net interest income | $210.6 million | $211.8 million |
| Noninterest income | $75.4 million | $77.4 million |
| Noninterest expense | $181.8 million | $181.1 million |
| Return on average assets / equity | 1.22% / 12.55% | 1.23% / 13.93% |
- Net interest margin on a taxable-equivalent basis was 3.39%, up from 3.37%. Interest income rose, but higher deposit and borrowing costs more than offset the increase, leaving net interest income down 0.6%.
- Noninterest expense as a share of total revenue increased to 63.6% from 62.6%. The effective tax rate declined to 20.5% from 20.9%.
- Fourth-quarter net income was $21.1 million, versus $18.9 million a year earlier; diluted EPS was $1.40 versus $1.23. Fourth-quarter net interest income was essentially unchanged at $53.2 million, while the provision for loan losses was a $1.0 million benefit versus $2.1 million of expense in Q4 2018.
Balance sheet, cash flow and capital
- Year-end assets were $6.73 billion, down 0.5%; loans and leases were $4.92 billion, up 1.7%; deposits were $5.21 billion, up 6.6%.
- Other borrowings fell $418.0 million to $658.1 million, chiefly as deposit growth and proceeds from securities sales reduced FHLB overnight advances. Cash and cash equivalents rose to $138.0 million from $80.4 million.
- Operating cash flow was $101.6 million; investing activities provided $134.0 million and financing activities used $178.0 million. Cash increased $57.6 million during the year.
- Shareholders’ equity rose 6.8% to $663.1 million. Consolidated regulatory capital ratios included 13.5% total capital, 12.3% common equity Tier 1 and 9.6% Tier 1 leverage; the company and subsidiary banks were reported well-capitalized.
- Annual cash dividends were $2.02 per share, up from $1.94. The company repurchased 376,021 shares under its plan for approximately $29.9 million. A new authorization for up to 400,000 shares was approved in January 2020.
Changes, business segments and unusual items
- Banking segment net income was $74.5 million, down 0.6%. Insurance net income rose 28.5% to $4.2 million; wealth-management net income fell 26.3% to $3.1 million, largely because 2018 included fees from settling a large estate.
- 2019 noninterest income was affected by the absence of 2018’s $2.9 million property-sale gain and $2.5 million recovery of fees and nonaccrual interest on a previously charged-off loan. 2019 included a $0.5 million merchant-card incentive payment and $0.6 million of securities gains.
- The company sold about $152.1 million of lower-yielding securities in 2019 and used the proceeds mainly to reduce borrowings. It also early adopted an accounting update and reclassified about $138.2 million of held-to-maturity securities to available-for-sale.
- Tompkins Insurance acquired the Cali Agency in 2019. No material impairment of goodwill or intangible assets was recorded.
Outlook, risks and contingencies
- The filing provides no formal earnings or revenue guidance. Management’s base-case interest-rate simulation indicated a net interest margin stable to higher over the following 12–18 months. A 200-basis-point rate increase modeled a 3.2% decline in one-year net interest income; a 100-basis-point decline modeled a 0.25% increase. These estimates assume no balance-sheet growth or management action.
- CECL was scheduled for adoption January 1, 2020. Management estimated an initial allowance for credit losses of $34–$39 million, compared with the year-end 2019 allowance of $39.9 million; the final adoption impact could differ.
- Key exposures include commercial real estate and commercial business lending, which together represented 70.2% of loans, as well as agricultural credit, geographic concentration in New York and Pennsylvania, interest-rate and funding risk, LIBOR transition, cybersecurity and third-party service-provider risk, competition and regulatory costs.
- Nonperforming loans rose to $31.4 million, or 0.64% of loans, from $26.6 million, or 0.55%. Net charge-offs increased to $4.8 million, principally reflecting a $3.3 million commercial real estate charge-off. Management considered the allowance appropriate; estimates remain judgmental.
- Available FHLB borrowing capacity was $1.3 billion; management stated that it believed liquidity sources were sufficient for reasonably likely needs. Legal matters arise in the ordinary course; management did not expect pending or threatened matters to materially affect consolidated financial position, while noting period-specific effects cannot be ruled out.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal control over financial reporting were effective at year-end.
Investor verification priorities
- Track credit quality, especially commercial real estate and agricultural exposures, criticized loans, nonperforming assets and the effect of CECL adoption.
- Verify whether deposit growth continues to support lower wholesale borrowing needs and how funding costs affect net interest margin.
- Assess the realized earnings contribution of insurance and wealth management, including the sustainability of contingent commissions and market-sensitive fees.
- Review the actual CECL day-one adjustment and subsequent allowance levels against management’s stated estimate.
- Monitor capital, liquidity, dividends and repurchases, including regulatory constraints and the execution of the 2020 repurchase authorization.