Tompkins Financial Corporation — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; the filing also reports fourth-quarter results. Tompkins is a community-focused financial services company operating banking, insurance, and wealth-management businesses in New York and Pennsylvania.
Financial performance and condition
| Metric | 2018 | 2017 | Change or context |
|---|---|---|---|
| Total revenue (net interest income plus noninterest income) | $289.2 million | $270.5 million | Up 6.9% |
| Net income attributable to Tompkins | $82.3 million | $52.5 million | Up 56.8%; 2017 included a $14.9 million noncash tax-reform charge |
| Diluted EPS | $5.35 | $3.43 | Adjusted diluted EPS was $5.33 vs. $4.42 |
| Net interest income | $211.8 million | $201.3 million | Up 5.2% |
| Net interest margin | 3.37% | 3.41% | Down 4 basis points |
| Provision for loan and lease losses | $3.9 million | $4.2 million | Lower year over year |
| Noninterest income / expense | $77.4 million / $181.1 million | $69.2 million / $171.1 million | Expense-to-revenue ratio improved to 62.6% from 63.3% |
| Return on average assets / equity | 1.23% / 13.93% | 0.82% / 9.09% | Improved; 2017 earnings were affected by tax reform |
Total assets were $6.76 billion, loans and leases $4.83 billion, deposits $4.89 billion, and shareholders’ equity $620.9 million at year-end. Other borrowings were $1.08 billion; trust preferred debentures were $16.9 million, and repurchase agreements were $81.8 million. Cash and cash equivalents were $80.4 million, down from $84.3 million.
Operating cash flow was $107.3 million, compared with $86.1 million in 2017. Investing activities used $143.6 million, principally reflecting loan growth and capital spending; financing activities provided $32.4 million. Cash dividends were $29.6 million, or $1.94 per share. The company reported a 9.1% consolidated Tier 1 leverage ratio and 11.8% common equity Tier 1 ratio; all four bank subsidiaries were categorized as well capitalized.
Changes versus the prior year
- Loans grew 3.5% to $4.83 billion, while deposits rose 1.1% to $4.89 billion. Core deposits increased 2.8% and represented 84.0% of deposits.
- Loan growth exceeded deposit growth, supporting continued reliance on FHLB borrowings. Average other borrowings rose 23.2%; funding costs increased faster than asset yields and pressured the net interest margin.
- Nonperforming loans and leases increased to $26.6 million, or 0.55% of total loans, from $23.0 million, or 0.49%. A $4.8 million commercial real estate relationship contributed to the increase.
- Unrealized losses on available-for-sale securities increased, and accumulated other comprehensive loss widened to $63.2 million from $51.3 million, primarily reflecting interest-rate-related securities losses and employee-benefit plan changes.
Outlook, commentary, and material items
Management provided no specific earnings or growth guidance. It described the base-case interest-rate simulation as indicating a net interest margin stable to higher over the next 12 to 18 months, while warning that rising deposit costs and competition for deposits could constrain results. A 200-basis-point rate increase was modeled to reduce one-year net interest income by about 3.7%; a 200-basis-point decline was modeled to increase it by about 0.9%. These are model estimates, not forecasts.
- Tax reform: The 2017 tax law reduced the federal corporate rate to 21% from 35%, but caused a one-time $14.9 million deferred-tax-asset write-down in 2017. The 2018 effective tax rate was 20.9%, versus 44.8% in 2017. Fourth-quarter 2018 net income was $18.9 million and diluted EPS $1.23; fourth-quarter 2017 net income was $2.5 million and diluted EPS $0.16, including the tax charge. Excluding that charge, 2017 fourth-quarter diluted EPS was $1.15.
- Other unusual items: 2018 included a $2.9 million gain on sale of two properties, $2.5 million from collecting fees and nonaccrual interest on a loan charged off in 2010, and approximately $2.3 million of lease write-downs. A large estate settlement benefited wealth-management fees. Adjusted results are non-GAAP measures.
- Credit and accounting: Commercial and commercial real estate loans were 70.7% of total loans. Management expects CECL adoption on January 1, 2020 to affect the allowance methodology and potentially increase the allowance; the impact was not quantified.
- Liquidity and regulation: Management said it considered liquidity sources sufficient and identified no near-term trend likely to materially change liquidity. Unused FHLB borrowing capacity was $1.0 billion. Crossing $10 billion in assets would bring heightened regulatory requirements; year-end assets were $6.8 billion.
- Legal and audit: The company reported ordinary-course legal matters not expected to have a material adverse effect. KPMG issued unqualified opinions on the financial statements and internal controls; management also concluded controls were effective.
Important facts for investors to verify
- How much of reported earnings growth is recurring, given the 2017 tax charge and 2018 property-sale and loan-recovery items; compare GAAP and adjusted results.
- Whether commercial real estate concentrations, the specific reserve on a downgraded relationship, and increases in nonperforming loans remain manageable.
- Whether deposit pricing and borrowing costs continue to outpace asset-yield increases, and how that affects net interest margin and earnings.
- The market-value and duration exposure of the securities portfolio, including the effect of unrealized losses on equity and future results.
- The eventual CECL allowance and capital impact, and progress toward adoption in 2020.
- Whether core deposit growth, available FHLB capacity, and capital support continued lending, dividends, and repurchases without increased funding pressure.