Tompkins Financial Corporation — 2016 Form 10-K
Business context and reporting period
Annual report for the fiscal year ended December 31, 2016; fourth-quarter results are also summarized. Tompkins is a community-focused financial holding company operating four banks, an insurance agency and wealth-management services, primarily in New York and Pennsylvania. The financial statements received an unqualified audit opinion from KPMG.
Financial performance and condition
- Earnings: Net income attributable to Tompkins was $59.3 million, up 1.6% from $58.4 million in 2015; diluted EPS was $3.91 versus $3.87. The 2015 comparison included a $3.6 million after-tax pension curtailment gain. Excluding that gain, 2015 adjusted diluted EPS was $3.63, compared with $3.91 in 2016.
- Revenue and margins: Net interest income increased 7.3% to $180.6 million; noninterest income fell 4.4% to $68.8 million. Net interest margin on a taxable-equivalent basis narrowed to 3.33% from 3.38%. Noninterest expense rose to $158.6 million, while expense as a percentage of total revenue improved to 63.45% from 64.72%.
- Fourth quarter: Net income was $15.1 million, up 9.1% year over year; diluted EPS was $0.99 versus $0.92. Taxable-equivalent net interest income increased 6.5% to $47.4 million, while margin narrowed to 3.30% from 3.35%.
- Cash flow: Operating cash flow was $90.9 million, investing cash outflow was $573.5 million and financing cash inflow was $488.3 million. Cash and cash equivalents increased $5.7 million to $64.0 million. Loan growth was a major investing cash use.
- Balance sheet and funding: Total assets grew 9.6% to $6.24 billion. Loans and leases rose 12.9% to $4.26 billion; deposits increased 5.2% to $4.63 billion. Other borrowings increased 65.0% to $884.8 million, primarily to fund loan growth exceeding deposit growth. Core deposits were $3.7 billion, or 81.1% of deposits; unused FHLB borrowing capacity was $1.0 billion.
- Credit and capital: Nonperforming loans and leases were 0.51% of loans, down from 0.58%; nonperforming assets were 0.36% of assets, down from 0.43%. The allowance was $35.8 million, or 164.98% of nonperforming loans. Consolidated regulatory ratios were 12.2% total capital, 11.0% CET1, 11.4% Tier 1 risk-based and 8.4% leverage; subsidiary banks were categorized as well capitalized.
- Shareholder returns: Annual dividends were $1.77 per share, up from $1.70; the payout ratio was approximately 44.9%. The company repurchased 22,356 shares for $1.2 million under its prior plan; no purchases had been made under the new 400,000-share authorization as of the report.
Material changes versus 2015
- Loan growth drove higher interest income and net interest income, but average earning-asset yields and net interest margin declined modestly. Average borrowings rose as loan growth outpaced deposit growth.
- Net income growth was modest on a reported basis, but stronger against 2015 earnings excluding the pension-plan gain. 2016 expense included $313,000 to terminate an FDIC loss-share agreement and $546,000 of planned core-system conversion costs.
- Credit quality indicators improved overall, although provision expense rose to $4.3 million from $2.9 million, mainly reflecting loan growth.
- Tompkins acquired Shepard, Maxwell & Hale Insurance on January 1, 2016, for consideration valued at $2.2 million. It also ended its remaining FDIC loss-share agreement, recording $313,000 of pretax expense.
Outlook, risks and unusual items
- No numerical earnings or growth guidance is provided. Management said its base-case simulation showed net interest margin stable to higher over the next 12–18 months, but modeled a 1.7% decline in one-year net interest income under a 200-basis-point rate increase and a 1.5% decline under a 100-basis-point decrease. These are model scenarios, not guidance.
- Management identifies concentration in commercial and commercial real estate lending as a key exposure: these loans represented 69.6% of total loans at year-end. Regional economic weakness, borrower cash flows and collateral values could affect credit results.
- Funding and interest-rate risks include increased reliance on wholesale and FHLB funding. The one-year static interest-rate gap was negative $520.7 million, or 8.35% of assets, indicating greater modeled sensitivity to rising rates in the near term.
- The company planned a core banking system conversion in 2017 and warned that integration, data migration or vendor problems could disrupt operations. It was also building a new Ithaca headquarters, expected to be completed in 2018.
- Under the Volcker Rule, Tompkins held approximately $1.1 million in covered funds requiring divestiture. An application for an extended transition period for $600,000 of eligible investments was pending; absent approval, those holdings, as well as another $500,000 investment, were due to be divested before July 21, 2017.
- Tompkins early adopted share-based compensation accounting guidance in 2016, reducing income tax expense by $1.4 million. It redeemed $20.5 million of trust preferred securities on January 31, 2017; the reported year-end capital ratios excluded that amount.
- Management did not expect pending ordinary-course legal matters to materially affect results. Management and KPMG concluded internal control over financial reporting was effective at year-end.
Important facts for investors to verify
- Whether loan and deposit growth can continue without greater reliance on wholesale funding, and how borrowing costs affect net interest margin.
- Commercial real estate and commercial business loan concentrations, credit migration, allowance adequacy and subsequent nonperforming-loan trends.
- Execution and costs of the 2017 core-system conversion and the 2018 headquarters project.
- Disposition or regulatory extension of the covered-fund investments, and the effect of the trust preferred redemption on capital and interest expense.
- How much of 2016 earnings growth reflects recurring operations versus the $1.4 million tax benefit from early adoption of share-based compensation guidance.