UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
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Commission File Number 1-12709
[GRAPHIC OMITTED]
TOMPKINS
TRUSTCO INC.
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(Exact name of registrant as specified in its charter)
New York 16-1482357
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
The Commons, P.O. Box 460, Ithaca, New York 14851
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (607) 273-3210
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class: Common Stock ($.10 Par Value)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of Securities Act. Yes [ ] No [X].
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X].
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a nonaccelerated filer.
Large Accelerated Filer [ ] Accelerated Filer [X] Nonaccelerated Filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes[ ] No[X].
The aggregate market value of the registrant's voting stock held by
non-affiliates was $341,727,000 on June 30, 2006, based on the closing sales
price of a share of the registrant's common stock, $.10 par value (the "Common
Stock"), as reported on the American Stock Exchange, on such date.
The number of shares of the registrant's Common Stock outstanding as of March 1,
2007, was 9,847,356 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement relating to its 2007
Annual Meeting of stockholders to be held on May 14, 2007, which will be
subsequently filed with the Securities and Exchange Commission within 120 days
after the end of the fiscal year to which this Report relates, are incorporated
by reference into Part III of this Form 10-K where indicated.
[This Page Intentionally Left Blank]
TOMPKINS TRUSTCO, INC.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2006
Table of Contents
Page
PART I
Item 1. Business 1
Item 1A. Risk Factors 6
Item 1B. Unresolved Staff Comments 8
Item 2. Properties 8
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Executive Officers of the Registrant 11
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 12
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 37
Item 8. Financial Statements and Supplementary Data 40
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 76
Item 9A. Controls and Procedures 76
Item 9B. Other Information 76
PART III
Item 10. Directors, Executive Officers, and Corporate Governance 76
Item 11. Executive Compensation 77
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 77
Item 13. Certain Relationships and Related Transactions, and
Director Independence 77
Item 14. Principal Accountant Fees and Services 77
Part IV
Item 15. Exhibits and Financial Statement Schedules 77
[This Page Intentionally Left Blank]
PART I
Item 1. Business
The disclosures set forth in this Item1. Business are qualified by the section
captioned "Forward-Looking Statements" in Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations of this Report and
other cautionary statements set forth elsewhere in this Report.
General
Tompkins Trustco, Inc., ("Tompkins" or the "Company") is headquartered in
Ithaca, New York and is registered as a Financial Holding Company with the
Federal Reserve Board under the Bank Holding Company Act of 1956, as amended.
The Company conducts its business through its three wholly-owned banking
subsidiaries, Tompkins Trust Company (the "Trust Company"), The Bank of Castile
and The Mahopac National Bank ("Mahopac National Bank"), through its
wholly-owned insurance subsidiary, Tompkins Insurance Agencies, Inc. ("Tompkins
Insurance"), and through its wholly-owned financial planning and wealth
management subsidiary, AM&M Financial Services, Inc. (AM&M). Unless the context
otherwise requires, the term "Company" refers to Tompkins Trustco, Inc. and its
subsidiaries. The Company's principal offices are located at The Commons,
Ithaca, New York, 14851, and its telephone number is (607) 273-3210. The
Company's common stock is traded on the American Stock Exchange under the Symbol
"TMP."
Tompkins was organized in 1995, under the laws of the State of New York, as a
bank holding company for the Trust Company, a commercial bank that has operated
in Ithaca and surrounding communities since 1836. On December 31, 1999, the
Company completed a merger with Letchworth Independent Bancshares Corporation
("Letchworth"), at which time Letchworth was merged with and into Tompkins. Upon
completion of the merger, Letchworth's two subsidiary banks, The Bank of Castile
and Mahopac National Bank, became subsidiaries of Tompkins.
On January 6, 2006, the Company completed its acquisition of AM&M Financial
Services, Inc. (AM&M), a fee-based financial planning firm headquartered in
Pittsford, New York. Under the terms of the Agreement and Plan of Merger, the
Company acquired all of the issued and outstanding shares of AM&M stock for an
initial merger consideration of $2,375,000 in cash and 59,377 shares of Tompkins
common stock. In addition to the merger consideration paid at closing,
additional contingent amounts of up to $8.5 million (payable one-half in cash
and one-half in Tompkins shares) may be paid over a period of four years from
closing, depending on the operating results of AM&M. AM&M met the income targets
in 2006, resulting in an estimated payout of $2.5 million. The contingent
payment will be recorded as additional goodwill in accordance with SFAS No. 141.
As of December 31, 2006, the transaction has resulted in intangible assets of
$7.1 million, including goodwill of $6.0 million, customer related intangible of
$968,000, and a covenant-not-to-compete of $108,000. The customer related
intangible and the covenant-not-to-compete are being amortized over 15 years and
5 years, respectively.
The merger was accounted for using the purchase method of accounting, which
requires that the Company's financial statements include the activity of AM&M
effective January 6, 2006. The Company's consolidated financial statements for
the years prior to 2006 do not include the operations of AM&M.
AM&M operates as a wholly-owned subsidiary of the Company. It has three
operating companies: (1) AM&M Planners, Inc., which provides fee based financial
planning and wealth management services for corporate executives, small business
owners and high net worth individuals; (2) Ensemble Financial Services, Inc., an
independent broker-dealer and leading outsourcing company for financial planners
and investment advisors; and (3) Ensemble Risk Solutions, Inc., which creates
customized risk management plans using life, disability and long-term care
insurance products.
The Company also continued to expand its insurance business in 2006, with the
acquisition of four insurance agencies in New York. The acquisitions include the
Farrell-Messler Agency in Trumansburg, New York (March 2006), certain assets of
Potter Enterprises of WNY, Inc. in Orchard Park, New York (April 2006), the Kemp
Agency in Dansville and Nunda, New York (July 2006), and the Carey McKinney
Group in Ithaca, New York (December 2006).
Additional information on these acquisitions is provided in "Note 6 Goodwill and
Other Intangible Assets" in the Notes to Consolidated Financial Statements in
Part II, Item 8. of this Report.
Narrative Description of Business
Information about the Company's business segments is included in Note 19 of
"Notes to Consolidated Financial Statements" filed herewith in Part II, Item 8,
"Financial Statements and Supplementary Data." The Company has identified two
business segments, banking and financial services. Financial services activities
consist of the results of the Company's trust, financial planning and wealth
management, broker-dealer services, and risk management operations. All other
activities are considered banking.
Banking services consist primarily of attracting deposits from the areas served
by the Company's banking subsidiaries' 37 banking offices and using those
deposits to originate a variety of commercial loans, consumer loans, real estate
loans, and leases in those same areas. Residential real estate mortgage loans
are generally underwritten in accordance with Federal Home Loan Mortgage
1
Corporation (FHLMC) guidelines, which enhances the liquidity of these lending
products. The Company's subsidiary banks have sold residential mortgage loans to
FHLMC over the past several years to manage exposure to changing interest rates
and to take advantage of favorable market conditions. The Company's subsidiary
banks retain the servicing of the loans sold to FHLMC and record a servicing
asset at the time of sale. For additional details on loan sales, refer to "Note
4 Loan/Lease Classification Summary and Related Party Transactions" in the Notes
to Consolidated Financial Statements in Part II, Item 8. of this Report.
The Company's lending function is managed within the guidelines of a
comprehensive Board-approved lending policy. Policies and procedures are
reviewed on a regular basis. Reporting systems are in place to provide
management with ongoing information related to loan production, loan quality,
concentrations of credit, loan delinquencies and nonperforming and potential
problem loans. The Company has an independent loan review process that reviews
and validates the risk identification and assessment made by the lenders and
credit personnel. The results of these reviews are presented to the Board of
Directors of each of the Company's banking subsidiaries.
The Company's principal expenses are interest on deposits, interest on
borrowings, and operating and general administrative expenses, as well as
provisions for loan/lease losses. Funding sources, other than deposits, include
borrowings, securities sold under agreements to repurchase, and cash flow from
lending and investing activities. Tompkins provides a variety of financial
services to individuals and small business customers. Some of the traditional
banking services and financial services are detailed below.
Commercial Services
The Company's subsidiary banks provide financial services to corporations and
other business clients. Lending activities include loans for a variety of
business purposes, including real estate financing, construction, equipment
financing, accounts receivable financing, and commercial leasing. Other
commercial services include deposit and cash management services, letters of
credit, sweep accounts, credit cards, purchasing cards, and Internet-based
account services.
Retail Services
The Company's subsidiary banks provide a variety of retail banking services
including checking accounts, savings accounts, time deposits, IRA products,
brokerage services, residential mortgage loans, personal loans, home equity
loans, credit cards, debit cards and safe deposit services. Retail services are
accessible through a variety of delivery systems including branch facilities,
ATMs, voice response, and Internet banking. In 2006, the Company expanded its
retail brokerage services and also added remote deposit services, a convenient
new service that brings deposit capability to an individuals desk any time of
the day or night.
Securities Portfolio
The Company maintains a portfolio of securities such as U.S. government and
agency securities, obligations of states and political subdivisions thereof,
equity securities, and interest-bearing deposits. Management typically invests
in securities with short to intermediate average lives in order to better match
the interest rate sensitivities of its assets and liabilities.
Investment decisions are made within policy guidelines established by the
Company's Board of Directors. The investment policy established by the Company's
Board of Directors is based on the asset/liability management goals of the
Company, and is monitored by the Company's Asset/Liability Management Committee.
The intent of the policy is to establish a portfolio of high quality diversified
securities, which optimizes net interest income within safety and liquidity
limits deemed acceptable by the Asset/Liability Management Committee.
Securities, other than certain obligations of states and political subdivisions
thereof, are classified as available-for-sale. Securities available-for-sale may
be used to enhance total return, provide additional liquidity, or reduce
interest rate risk.
Trust and Investment Management Services
The Company provides trust and investment services through Tompkins Investment
Services (TIS), a division of Tompkins Trust Company, and investment services
through AM&M. Tompkins Investment Services, with office locations at all three
of the Company's subsidiary banks, provides a full range of money management
services, including investment management accounts, custody accounts, trusts,
retirement plans and rollovers, estate settlement, and financial planning. AM&M
provides fee-based financial planning for small business owners, professionals
and corporate executives and other individuals with complex financial needs.
AM&M also provides wealth management services and operates a broker-dealer
subsidiary, which is a leading outsourcing company for financial planners and
investment advisors. The Company also expanded its retail brokerage services in
2006.
Insurance Services
The Company provides property and casualty insurance services through Tompkins
Insurance and AM&M. Tompkins Insurance is an independent insurance agency,
representing several major insurance carriers with access to special risk
property and liability markets. Tompkins Insurance has automated systems for
record keeping, claim processing and coverage confirmation, and can provide
insurance pricing comparisons from some of the country's finest insurance
companies. In addition to its seven stand-alone offices, Tompkins Insurance
shares several offices with The Bank of Castile and The Trust Company. AM&M
operates a subsidiary that creates customized risk management plans using life,
disability and long-term care insurance products.
2
Subsidiaries
The Company operates three banking subsidiaries, an insurance agency subsidiary,
and effective January 6, 2006, a financial planning and wealth management
subsidiary in New York. The Company's subsidiary banks operate 37 offices,
including 1 limited-service office, serving communities in New York. The
decision to operate as three locally managed community banks reflects
management's commitment to community banking as a business strategy. For
Tompkins, personal delivery of high quality services, a commitment to the
communities in which we operate, and the convergence of a single-source
financial service provider characterize management's community banking approach.
The combined resources of the Tompkins organization provides increased capacity
for growth and greater capital resources necessary to make investments in
technology and services. Tompkins has developed several specialized financial
services that are now available in markets served by all three subsidiary banks.
These services include trust and investment services, insurance, leasing, card
services, and Internet banking. In 2006, the Company opened Tompkins Financial
Center, in Ithaca, New York. This facility will have house representatives from
the bank's lending function, Tompkins Insurance and AM&M. The Company opened a
similar facility in Batavia, New York in 2004.
Tompkins Trust Company ("Tompkins Trust Company") Tompkins Trust Company is a
commercial bank that has operated in Ithaca, New York and surrounding
communities since 1836. The Trust Company operates 13 full-service and 1
limited-service banking offices in the counties of Tompkins, Cortland, Cayuga
and Schuyler, New York.
Tompkins Trust Company's market area consists primarily of Tompkins County, New
York with population of approximately 100,000. The majority of Tompkins Trust
Company's 13 full-service offices are located within Tompkins County. Education
plays a significant role in the local economy with Cornell University and Ithaca
College being two of the county's major employers. Current economic trends
include low unemployment and moderate growth. Tompkins Trust Company has a
full-service office in Cortland, New York and a full-service office in Auburn,
New York. Both of these offices are located in counties contiguous to Tompkins
County.
The Bank of Castile ("The Bank of Castile")
The Bank of Castile conducts its operations through its 14 full-service offices,
in towns situated in and around the areas commonly known as the Letchworth State
Park area and the Genesee Valley region of New York State. The Bank of Castile
serves a five-county market that is primarily rural in nature. The Company
opened a new banking office in 2006 in Greece, New York. This new office
provides additional access to the suburban Rochester, New York, market.
Excluding Monroe County, which includes Rochester, the population of the
counties served by The Bank of Castile is approximately 212,000. Economic growth
has been relatively flat in The Bank of Castile's market area, although the
significant population base of the suburban Rochester market (in excess of
700,000 people) provides continued opportunities for growth.
Mahopac National Bank ("Mahopac National Bank")
Mahopac National Bank is located in Putnam County, New York and operates 5
full-service offices in that county, 3 full-service offices in Dutchess County,
New York and 1 full-service office in Westchester County, New York. Mahopac
National Bank opened two new banking offices in 2006. The Southeast Office
(March 2006) is located in Putnam County. The Wappinger Falls Office (December
2006) is located in Dutchess County. Mahopac National Bank also relocated its
Hopewell Office to a larger facility in 2006.
The primary market area for Mahopac National Bank is Putnam County, with a
population of approximately 100,000. Putnam County is about 60 miles north of
Manhattan, and is one of the fastest growing counties in New York State. Mahopac
National Bank's Hopewell Junction and LaGrange offices are located in Dutchess
County, which has a population of approximately 280,000. Mahopac National Bank's
Mount Kisco office is located in Westchester County, which has a population of
916,000.
Tompkins Insurance Agencies, Inc. ("Tompkins Insurance")
Tompkins Insurance is headquartered in Batavia, New York, and offers property
and casualty insurance to individuals and businesses primarily in Western New
York. Over the past several years, Tompkins Insurance has acquired smaller
insurance agencies generally in the market areas serviced by the Company's
banking subsidiaries. Tompkins Insurance offers services to customers of the
Company's banking subsidiaries by sharing offices with The Bank of Castile and
The Trust Company. In addition, to these shared offices, Tompkins Insurance has
five stand-alone offices in Western New York, and two stand-alone offices in
Tompkins County, including The Carey McKinney Group located in Ithaca, New York,
effective December 31, 2006.
3
AM&M Financial Services, Inc. ("AM&M")
AM&M is headquartered in Pittsford, New York and offers fee-based financial
planning services through three operating companies: (1) AM&M Planners, Inc.,
which provides fee based financial planning and wealth management services for
corporate executives, small business owners and high net worth individuals; (2)
Ensemble Financial Services, Inc., an independent broker-dealer and leading
outsourcing company for financial planners and investment advisors; and (3)
Ensemble Risk Solutions, Inc., which creates customized risk management plans
using life, disability and long-term care insurance products. AM&M has 44
employees.
Competition
Competition for commercial banking and other financial services is strong in the
Company's market areas. The deregulation of the banking industry and the
widespread enactment of state laws that permit multi-bank holding companies, as
well as an increasing level of interstate banking, have created a highly
competitive environment for commercial banking. In one or more aspects of its
business, the Company's subsidiaries compete with other commercial banks,
savings and loan associations, credit unions, finance companies, Internet-based
financial services companies, mutual funds, insurance companies, brokerage and
investment banking companies, and other financial intermediaries. Some of these
competitors have substantially greater resources and lending capabilities and
may offer services that the Company does not currently provide. In addition,
many of the Company's non-bank competitors are not subject to the same extensive
Federal regulations that govern financial holding companies and Federally
insured banks.
Competition among financial institutions is based upon interest rates offered on
deposit accounts, interest rates charged on loans and other credit and service
charges, the quality and scope of the services rendered, the convenience of
banking facilities and, in the case of loans to commercial borrowers, relative
lending limits. Management believes that a community bank is better positioned
to establish personalized banking relationships with both commercial customers
and individual households. The Company's community commitment and involvement in
its primary market areas, as well as its commitment to quality and personalized
banking services, are factors that contribute to the Company's competitiveness.
Management believes that each of the Company's subsidiary banks can compete
successfully in its primary market areas by making prudent lending decisions
quickly and more efficiently than its competitors, without compromising asset
quality or profitability, although no assurances can be given that such factors
will assure success.
Supervision and Regulation
Regulatory Agencies
As a registered financial holding company, the Company is subject to examination
and comprehensive regulation by the Federal Reserve Board (FRB). The Company's
banking subsidiaries are subject to examination and comprehensive regulation by
various regulatory authorities, including the Federal Deposit Insurance
Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the
New York State Banking Department (NYSBD). Each of these agencies issues
regulations and requires the filing of reports describing the activities and
financial condition of the entities under its jurisdiction. Likewise, such
agencies conduct examinations on a recurring basis to evaluate the safety and
soundness of the institutions, and to test compliance with various regulatory
requirements, including: consumer protection, privacy, fair lending, the
Community Reinvestment Act, the Bank Secrecy Act, sales of non-deposit
investments, electronic data processing, and trust department activities.
The Company's financial services subsidiaries are subject to examination and
regulation by various regulatory agencies, including the New York State
Insurance Department, Securities and Exchange Commission (SEC) and the National
Association of Securities Dealers (NASD). Tompkins Investment Services is
subject to examination and comprehensive regulation by various regulatory
authorities, including the FDIC and NYSBD.
Share Repurchases and Dividends
Under FRB regulations, the Company may not, without providing prior notice to
the FRB, purchase or redeem its own common stock if the gross consideration for
the purchase or redemption, combined with the net consideration paid for all
such purchases or redemptions during the preceding twelve months, is equal to
ten percent or more of the Company's consolidated net worth.
FRB policy provides that dividends shall not be paid except out of current
earnings and unless the prospective rate of earnings retention by the Company
appears consistent with its capital needs, asset quality, and overall financial
condition. Tompkins' primary source of funds to pay dividends on its common
stock is dividends from its subsidiary banks. The subsidiary banks are subject
to regulations that restrict the dividends that they may pay to Tompkins.
Liability of Commonly Controlled Institutions
FDIC-insured depository institutions can be held liable for any loss incurred,
or reasonably expected to be incurred, by the FDIC due to the default of an
FDIC-insured depository institution controlled by the same bank holding company,
or for any assistance provided by the FDIC to and FDIC-insured depository
institution controlled by the same bank holding company that is in danger of
default. "Default" means generally the appointment of a conservator or receiver.
"In danger of default" means generally the existence of certain conditions
indicating that default is likely to occur in the absence of regulatory
assistance.
4
Intercompany Transactions
There are Federal laws and regulations that govern transactions between the
Company's non-bank subsidiaries and its banking subsidiaries. These laws
establish certain quantitative limits and other prudent requirements for loans,
purchases of assets, and certain other transactions between a member bank and
its affiliates.
Capital Adequacy
The FRB, the FDIC, and the OCC have promulgated capital adequacy guidelines that
are considered by these agencies in examining and supervising a bank or bank
holding company, and in analyzing any applications a bank or bank holding
company may submit to the appropriate agency. In addition, for supervisory
purposes, these agencies have promulgated regulations establishing five
categories of capitalization, ranging from well capitalized to critically
undercapitalized, depending upon the level of capitalization and other factors.
Currently, the Company and its subsidiary banks maintain leverage and risk-based
capital ratios above the required levels and are considered well capitalized
under applicable regulations. A comparison of the Company's capital ratios and
the various regulatory requirements is included in "Note 17 Regulations and
Supervision" in Notes to Consolidated Financial Statements in Part II, Item 8.
of this Report on Form 10-K.
Deposit Insurance
All deposit accounts of the Company's subsidiary banks are insured by the
Deposit Insurance Fund ("DIF"), generally in amounts up to $100,000 per
depositor. Legislation, discussed below, was passed in 2006 that increased
insurance coverage for certain self-directed retirement accounts to $250,000 and
indexed insurance levels for inflation. Deposit insurance coverage is maintained
by payment of premiums assessed to banks insured by the DIF. The FDIC uses a
risk-based assessment system that determines insurance premiums based upon a
bank's capital level and supervisory rating. Based on capital strength and
favorable FDIC risk classifications, the Company's subsidiary banks are not
currently subject to BIF insurance assessments.
In February 2006, The Federal Deposit Insurance Reform Act of 2005 and The
Federal Deposit Insurance Reform Conforming Amendments Act of 2005 (collectively
the "Reform Act") were signed into law. The Reform Act provided for the merging
of the Bank Insurance Fund and Savings Association Insurance Fund into the new
DIF, effective March 31, 2006. Under the Reform Act, the FDIC has modified its
risk-based deposit premium assessment system under which each depository
institution is placed in one of four assessment categories based on the
institution's capital classification under the prompt corrective action
provisions and an institution's long-term debt issuer ratings. Effective January
1, 2007, the adjusted assessment rates for insured institutions under the
modified system range from .05% to .43% depending upon the assessment category
into which the insured institution is placed. Under the previous assessment
system, the adjusted assessment rates ranged from .00% to .27%.
The Reform Act provides for a one-time assessment credit for eligible insured
depository institutions (those institutions that were in existence on December
31, 1996 and paid a deposit insurance assessment prior to that date, or are a
successor to any such institution). The credit is determined based on the
assessment base of the institution as of December 31, 1996 as compared with the
combined aggregate assessment base of all eligible institutions as of that date.
The credit may be used to offset up to 100% of the 2007 DIF assessment, and if
not completely used in 2007, may be applied to not more than 90% of each of the
aggregate 2008, 2009 and 2010 DIF assessments.
The insurance assessments under the Reform Act are not expected to have a
significant adverse impact on the results of operations and financial condition
of the Company's subsidiary banks in 2007 or 2008.
Depositor Preference
The Federal Deposit Insurance Act provides that, in the event of the
"liquidation or other resolution" of an insured depository, the claims of
depositors of the institution, including the claims of the FDIC, as subrogee of
the insured depositors, and certain claims for administrative expenses of the
FDIC as receiver, will have priority over other general unsecured claims against
the institution. If an insured depository institution fails, insured and
uninsured depositors, along with the FDIC, will have priority in payment ahead
of unsecured, non-deposit creditors, including the parent bank holding company,
with respect to any extensions of credit they have made to such insured
depository institutions.
Community Reinvestment Act
The Company's subsidiary banks are subject to the Community Reinvestment Act
(CRA) and to certain fair lending and reporting requirements that relate to home
mortgage lending. The CRA requires the federal banking regulators to assess the
record of a financial institution in meeting the credit needs of the local
communities, including low-and moderate-income neighborhoods, consistent with
the safe and sound operation of the bank. The federal agencies consider an
institution's performance under the CRA in evaluating applications for mergers
and acquisitions, and new offices. The ratings assigned by the federal agencies
are publicly disclosed.
5
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 implemented a broad range of corporate
governance, accounting and reporting requirements for companies that have
securities registered under the Exchange Act of 1934. These requirements
include: (1) requirements for audit committees, including independence and
financial expertise; (2) certification of financial statements by the chief
executive officer and chief financial officer of the reporting company; (3)
standards for auditors and regulation of audits; (4) disclosure and reporting
requirements for the reporting company and directors and executive officers; and
(5) a range of civil and criminal penalties for fraud and other violations of
securities laws.
The USA Patriot Act
The Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act) imposes
obligations on financial institutions, including banks and broker-dealer
subsidiaries to implement policies, procedures and controls which are reasonably
designed to detect and report instances of money laundering and the financing of
terrorism
Employees
At December 31, 2006, the Company employed 702 employees, approximately 79 of
whom were part-time. No employees are covered by a collective bargaining
agreement and the Company believes its employee relations are excellent.
Available Information
The Company maintains a website at www.tompkinstrustco.com. The Company makes
available free of charge (other than an investor's own Internet access charges)
through its website its annual reports on Form 10-K, quarterly reports on Form
10-Q, and current reports on Form 8-K, its proxy statements related to its
annual shareholders' meetings, and amendments to these reports or statements,
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934 as amended (the "Exchange Act"), as soon as reasonably practicable
after the Company electronically files such material with, or furnishes such
material to, the Securities and Exchange Commission (the "SEC"). Copies of these
reports are also available at no charge to any person who requests them, with
such requests directed to Tompkins Trustco, Inc., Investor Relations Department,
The Commons, Ithaca, New York 14851, telephone no. (607) 273-3210. Materials
that the Company files with the SEC may be read and copied at the SEC's Public
Reference Room at 100 F Street, NE, Washington, D.C. 20549. This information may
also be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an
Internet website that contains reports, proxy and information statements and
other information regarding issuers that file electronically with the SEC at
www.sec.gov. The Company is not including the information contained on the
Company's website as a part of, or incorporating it by reference into, this
Annual Report on Form 10-K, or into any other report filed with or furnished to
the SEC by the Company.
Item 1A. Risk Factors
The Company's business, operating results, financial condition, liquidity, and
cash flow may be impacted by numerous factors, including but not limited to
those discussed below. These items may cause the Company's results to vary
materially from recent results.
Interest Rate Risk
The Company's earnings, financial condition and liquidity are susceptible to
fluctuations in market interest rates. Net interest income, which is the
difference between interest earned on loans and investments and interest paid on
deposits and borrowings, is the largest component of the Company's total
revenues. The level of net interest income is dependent upon the volume and mix
of interest-earning assets and interest-bearing liabilities, the level of
nonperforming assets, and the level and trend of interest rates. Changes in
market interest rates will also affect the level of prepayments on the Company's
loans and payments on mortgage-backed securities, resulting in the receipt of
proceeds that may be reinvested at a lower rate than the loan or mortgage-backed
security being prepaid. Interest rates are highly sensitive to many factors,
including: inflation, economic growth, employment levels, monetary policy and
international markets. Significant fluctuations in interest rates could have a
material adverse affect on the Company's earnings, financial condition, and
liquidity.
The Company manages interest rate risk using income simulation to measure
interest rate risk inherent in its on-balance sheet and off-balance sheet
financial instruments at a given point in time by showing the potential effect
of interest rate shifts on net interest income for future periods. Each quarter
the Company's Asset/Liability Management Committee reviews the simulation
results to determine whether the exposure of net interest income to changes in
interest rates remains within board-approved levels. The Committee also
discusses strategies to manage this exposure and incorporates these strategies
into the investment and funding decisions of the Company. In addition, the
Company has focused on expanding its fee-based business as a percentage of
revenues to help mitigate its exposure to fluctuations in interest rates.
For additional information about how the Company manages its interest rate risk,
refer to Part II, Item 7A, "Quantitative and Qualitative Disclosures About
Market Risk" of this Report.
6
Credit Risk
The Company's business of originating and underwriting loans involves credit
risk, which is the risk of loss of principal or interest because borrowers,
guarantors and related parties fail to perform in accordance with the terms of
their loan agreements. The Company has adopted comprehensive credit policies,
underwriting standards and loan review procedures and maintains a reserve for
loan/lease losses to mitigate credit losses. The Company reviews the adequacy of
its allowance for loan/lease losses on a regular basis to ensure that the
allowance is adequate to cover the estimated loss exposure in its portfolio.
Management believes that it has established policies and procedures that are
appropriate to mitigate the risk of loss. Nonetheless, these policies and
procedures may not prevent unexpected losses that could have a material adverse
effect on the Company's business, financial condition, results of operations, or
liquidity. See Part II, Item 7, "Loans/Leases" and "The Allowance for Loan/Lease
Losses" of this Report for further discussion of the lending portfolio and the
allowance for loan/lease losses.
Government Laws and Regulations
The Company is subject to extensive state and federal laws and regulations,
supervision, and legislation that affect how it conducts its business. The
majority of these laws and regulations are for the protection of consumers,
depositors and the deposit insurance funds. Any changes to state and federal
banking laws and regulations may negatively impact the Company's ability to
expand services and to increase shareholder value. There can also be significant
cost related to compliance with various laws and regulations. The Company has
established an extensive internal control structure to ensure compliance with
governing laws and regulations, including those related to financial reporting.
Refer to "Supervision and Regulation" for additional information on laws and
regulations.
The Federal Reserve's monetary policies also affect the Company's operating
results and financial condition. These policies, which include open market
operations in U.S. Government securities, changes in the discount rate on member
bank borrowings, and changes in reserve requirements against member bank
deposits, can have a major effect upon the source and cost of funds and the
rates of return earned on loans and investments.
The Company is subject to state and federal tax laws and regulations. Changes to
these regulations could impact future tax expense and the value of deferred tax
assets. The fiscal 2007 budget for New York proposes a change in the tax
treatment for certain real estate investment trusts (REIT). Each of the
Company's banking subsidiaries is a majority owner in a REIT. If the proposed
change is passed in its current form, it may have a negative impact on the
Company's tax expense.
Competition
Competition for commercial banking and other financial services is strong in the
Company's market areas. The deregulation of the banking industry and the
widespread enactment of state laws that permit multi-bank holding companies, as
well as an increasing level of interstate banking, have created a highly
competitive environment for commercial banking. In one or more aspects of its
business, the Company's subsidiaries compete with other commercial banks,
savings and loan associations, credit unions, finance companies, Internet-based
financial services companies, mutual funds, insurance companies, brokerage and
investment banking companies, and other financial intermediaries. Some of these
competitors have substantially greater resources and lending capabilities and
may offer services that the Company does not currently provide. In addition,
many of the Company's non-bank competitors are not subject to the same extensive
Federal regulations that govern financial holding companies and Federally
insured banks. The Company focuses on providing unparalleled customer service,
which includes offering a strong suite of products and services.
Economic Conditions
General economic conditions have an impact on the banking industry. The
Company's operating results depend on providing products and services to
customers in our local market areas. Unemployment rates, real estate values,
demographic changes, property tax rates, and local and state governments have an
impact on local and regional economic conditions. An increase in unemployment, a
decrease in real estate values, an increase in property tax rates, or a decrease
in population could weaken the local economies in which the Company operates.
Weak economic conditions could lead to credit quality concerns related to
repayment ability and collateral protection. The Company operates in three
primary market areas which mitigates the impact on local economic conditions and
has focused on providing a full suite of products to increase its fee based
business as a percentage of total revenues.
Operational Risk
The Company is subject to certain operational risks, including, but not limited
to, data processing system failures and errors, customer or employee fraud and
catastrophic failures resulting from terrorist acts or natural disasters. The
Company depends upon data processing, software, communication, and information
exchange on a variety of computing platforms and networks and over the Internet.
Despite instituted safeguards, the Company cannot be certain that all of its
systems are entirely free from vulnerability to attack or other technological
difficulties or failures. If information security is breached or other
technology difficulties or failures occur, information may be lost or
misappropriated, services and operations may be interrupted and the Company
could be exposed to claims from customers. Any of these results could have a
material adverse effect on the Company's business, financial condition, results
of operations or liquidity. The Company maintains a system of internal controls
to mitigate against such occurrences and maintains insurance coverage for
exposures that are insurable. The Company regularly tests internal controls to
ensure that they are appropriate and functioning as designed.
7
Technological Development and Changes
The financial services industry is subject to rapid technological changes with
frequent introductions of new technology driven products and services. In
addition to improving the Company's ability to serve customers, the effective
use of technology increases efficiencies and helps to maintain or reduce
expenses. The Company's ability to keep pace with technological changes
affecting the financial industry and to introduce new products and services
based on this new technology will be important to the Company's continued
success.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The following table provides information relating to the Company's facilities:
Location Facility Type Square Feet Owned/Leased*
------------------------------------------------------------------------------------------------------------------------------------
110 N. Tioga St., The Commons Trust Company 23,900 Owned
Ithaca, NY Main Office
119 E. Seneca Street Trust Company 18,550 Owned
Ithaca, NY Trust and Investment Services
121 E. Seneca Street Tompkins Trustco, Inc./Trust Company 18,900 Owned
Ithaca, NY Administration and Executive Offices
215 E. State St., The Commons Tompkins Trustco, Inc./Trust Company 24,500 Leased
Rothschilds Building Operations and Data Processing
Ithaca, NY
86 North Street Trust Company 4,600 Owned
Auburn, NY Auburn Office
905 Hanshaw Road Trust Company 790 Leased
Ithaca, NY Community Corners Office
Cornell Bookstore Trust Company 400 Leased
Central Avenue Cornell Campus Office
Cornell University, Ithaca, NY
33 Clinton Avenue Trust Company 1,900 Leased
Cortland, NY Cortland Office
139 N. Street Extension Trust Company 2,250 Owned
Dryden, NY Dryden Office
1020 Ellis Hollow Road Trust Company 650 Leased
Ithaca, NY East Hill Plaza Office
2230 N. Triphammer Road Trust Company 204 Leased
Ithaca, NY Kendal Office (Part-time office)
100 Main Street Trust Company 3,115 Owned
Odessa, NY Odessa Office
775 S. Meadow Street Trust Company 2,280 Owned
Ithaca, NY Plaza Office
116 E. Seneca Street Trust Company 775 Owned
Ithaca, NY Seneca Street Drive-In Office
8
Location Facility Type Square Feet Owned/Leased*
------------------------------------------------------------------------------------------------------------------------------------
2251 N. Triphammer Road Trust Company 3,000 Leased
Ithaca, NY Triphammer Road Office
2 W. Main Street Trust Company 2,720 Owned
Trumansburg, NY Trumansburg Office
701 W. Seneca Street Trust Company 2,150 Owned
Ithaca, NY West End Office
832 Hanshaw Rd Tompkins Financial Center 5,200 Leased
Ithaca, NY Trust Company/Tompkins Insurance/
Tompkins Investment Services
90 Main Street Trust Company 18,000 Owned
Batavia. NY Administrative Office for Bank of
Castile and Tompkins Insurance
50 N. Main Street The Bank of Castile 6,662 Owned
Castile, NY Castile/Main Office
604 W. Main Street The Bank of Castile 4,662 Owned
Arcade, NY Arcade Office
263 E. Main Street The Bank of Castile 3,303 Owned
Avon, NY Avon Office
408 E. Main Street The Bank of Castile 3,496 Owned
Batavia, NY Batavia Office
3155 State Street The Bank of Castile 4,680 Owned
Caledonia, NY Caledonia Office
3252 Chili Avenue The Bank of Castile 4,000 Owned
Chili, NY Chili Office
1 Main Street The Bank of Castile 1,448 Owned
Gainesville, NY Gainesville Office
11 South Street The Bank of Castile 9,700 Owned
Geneseo, NY Geneseo Office
724 Long Pond Rd. The Bank of Castile 6,500 Owned
Greece, NY Greece Office
29 Main Street The Bank of Castile 3,084 Owned
LeRoy, NY LeRoy Office
1410 S. Main Street The Bank of Castile 1,250 Owned
Medina, NY Medina Office
133 N. Center Street The Bank of Castile 4,702 Owned
Perry, NY Perry Office
129 N. Center Street The Bank of Castile 11,138 Owned
Perry, NY Processing Center **
2727 Genesee Street The Bank of Castile 2,220 Leased
Retsof, NY Retsof Office
2367 Route 19 North The Bank of Castile 6,950 Owned
Warsaw, NY Warsaw Office
9
Location Facility Type Square Feet Owned/Leased*
------------------------------------------------------------------------------------------------------------------------------------
1441 Route 22 Mahopac National Bank 34,000 Owned
Brewster, NY Brewster Office and Administration
831 Route 82 Mahopac National Bank 3,670 Leased
Hopewell Junction, NY Hopewell Office
706 Freedom Plains Rd Mahopac National Bank 2,200 Leased
Poughkeepsie, NY Lagrange Office
630 Route 6 Mahopac National Bank 2,800 Owned
Mahopac, NY Mahopac Office
293 Lexington Avenue Mahopac National Bank 4,400 Leased
Mt. Kisco, NY Mt. Kisco Office
591 Route 6N Mahopac National Bank 3,000 Owned
Mahopac Falls, NY Red Mills Office
21 Peekskill Hollow Road Mahopac National Bank 17,950 Owned
Putnam Valley, NY Putnam Valley Office
100 - D Independent Way Mahopac National Bank 3,100 Leased
Southeast, NY Southeast Office
1281 Route 9 Mahopac National Bank 4,700 Leased
Wappingers Falls, NY Wappingers Falls Office
13360 Broadway Tompkins Insurance 1,200 Owned
Alden, NY Alden Office ***
14 Market Street Tompkins Insurance 4,000 Leased
Attica, NY Attica Office ***
170 Franklin Street Tompkins Insurance 1,920 Owned
Dansville, NY Dansville Office ***
415 N. Tioga Street Tompkins Insurance 1,100 Leased
Ithaca, NY Ithaca Office ***
40 Main Street Tompkins Insurance 3,700 Leased
Leroy, NY Leroy Office ***
25 North State Street Tompkins Insurance 1,350 Owned
Nunda, NY Nunda Office ***
44 East Main Street Tompkins Insurance 1,600 Leased
Trumansburg, NY Trumansburg Office ***
179 Sully'sTrail AM&M Financial Services, Inc. 20,174 Leased
Pittsford, NY Rochester Office
------------------------------------------------------------------------------------------------------------------------------------
* Lease terminations for the Company's leased properties range from 2007
through 2042.
** Office includes two parcels of land that are being leased through 2007 and
2090, respectively.
*** Offices for Tompkins Insurance shown above are stand-alone offices;
Tompkins Insurance also shares office space with The Bank of Castile and
The Trust Company.
In 2007, the Company acquired the property housing the office of the Carey
McKinney Group. The property is located at 1051 Craft Road, Ithaca, New York and
is approximately 7,540 square feet. As of result of this transaction, the
Company vacated the leased property at 415 N. Tioga Street, Ithaca, New York
when the lease expired at year-end 2006.
10
Management believes the current facilities are suitable for their present and
intended purposes. The lease for the Lagrange office expired and an extension is
being negotiated. The Company plans on opening one new banking office in 2007.
For additional information about the Company's facilities, including rental
expenses, see "Note 7 Bank premises and Equipment" in Notes to Consolidated
Financial Statements in Part II, Item 8. of this Report on Form 10-K.
Item 3. Legal Proceedings
The Company is involved in legal proceedings in the normal course of business,
none of which are expected to have a material adverse impact on the financial
condition or results of operations of the Company.
Item 4. Submission of Matters to a Vote by Security Holders
There were no matters submitted to a vote of the Tompkins stockholders in the
fourth quarter of 2006.
Executive Officers of the Registrant
The information concerning the Company's executive officers is provided below as
of March 1, 2007. Unless otherwise stated, executive officers' terms run until
the first meeting of the board of directors after the Company's annual meeting
of shareholders, and until their successors are elected and qualified.
Age Title Joined Company
Stephen S. Romaine 42 President and CEO January 2000
James W. Fulmer 55 Vice Chairman of the Board January 2000
Robert B. Bantle 55 Executive Vice President March 2001
David S. Boyce 40 Executive Vice President January 2001
Francis M. Fetsko 42 Executive Vice President and Chief Financial Officer October 1996
Gregory J. Hartz 46 Executive Vice President August 2002
Gerald J. Klein, Jr. 48 Executive Vice President April 1995
Thomas J. Rogers 36 Executive Vice President January 2006
Donald S. Stewart 62 Executive Vice President December 1972
Lawrence A. Updike 61 Executive Vice President December 1965
Kathleen Rooney 54 Senior Vice President April 2004
Business Experience of the Executive Officers:
Stephen S. Romaine was appointed President and Chief Executive Officer of the
Company effective January 1, 2007. From 2003 through 2006, he served as
President and Chief Executive Officer of Mahopac National Bank. Prior to this
appointment, Mr. Romaine was Executive Vice President and Chief Financial
Officer and Manager of Mahopac National Bank. Mr. Romaine currently serves on
the boards of the New York Bankers Association and the Independent Bankers
Association of New York State.
James W. Fulmer has served as Vice Chairman since January 1, 2007, and Director
of the Company since 2000. He previously served as President of the Company
since 2000. He also serves as a Director of The Bank of Castile since 1988 and
as its Chairman since 1992. Effective December 18, 2002, he assumed the
additional responsibilities of President and Chief Executive Officer of The Bank
of Castile. Mr. Fulmer has served as a Director of Mahopac National Bank since
1999, as Chairman of Tompkins Insurance Agencies since January 1, 2001, and as
Chairman of AM&M Financial Services, Inc. since January 2006. He served as the
President and Chief Executive Officer of Letchworth Independent Bancshares
Corporation from 1991 until its merger with the Company in 1999. Mr. Fulmer also
served as the Chief Executive Officer of The Bank of Castile from 1996 through
April 2000. He was elected to the Board of the Federal Home Loan Bank in 2006,
effective January 2007.
Robert B. Bantle has been employed by the Company since March 2001. He currently
serves as Executive Vice President of Tompkins Services, a group that provides
support to the Company in the areas of Operations, Information Technology, Human
Resources, Training & Development, Remote Banking, Collections, and Card
Services. Prior to this assignment, he was primarily responsible for the
Company's retail banking services.
David S. Boyce has been employed by the Company since January 2001 and was
promoted to Executive Vice President in April 2004. He was appointed President
and Chief Executive Officer of Tompkins Insurance Agencies in 2002. He has been
employed by Tompkins Insurance Agencies, and a predecessor company to Tompkins
Insurance Agencies for 16 years.
Francis M. Fetsko has been employed by the Company since 1996, and has served as
Chief Financial Officer since December 2000. In July 2003, he was promoted to
Executive Vice President. Mr. Fetsko also serves as Chief Financial Officer and
Treasurer of Tompkins Trust Company.
11
Gregory J. Hartz has been employed by the Company since 2002 and was appointed
President and Chief Executive Officer of Tompkins Trust Company and Executive
Vice President of the Company effective January 1, 2007. Previously, he was
Senior Vice President of Tompkins Trust Company, with responsibility for
Tompkins Investment Services.
Gerald J. Klein, Jr. has been employed by the Company since 1995 and was
appointed President and Chief Executive Officer of Mahopac National Bank and
Executive Vice President of the Company effective January 1, 2007. Previously,
he was Executive Vice President of Mahopac National Bank, responsible for all
lending and credit functions at the Bank.
Thomas J. Rogers has been employed by the Company since its acquisition of AM&M
Financial Services, Inc. in January 2006, and was appointed President and Chief
Executive Officer of AM&M Financial Services, Inc. at that time. He was
appointed Executive Vice President of the Company on January 24, 2007. He was
been employed by AM&M Financial Services, Inc. since 1998.
Donald S. Stewart has been employed by the Company since 1972, and has served as
the executive in charge of the Tompkins Investment Services Division of Tompkins
Trust Company since December 1984. He was promoted to Executive Vice President
in 1997.
Lawrence A. Updike has been employed by the Company since 1965, and has served
as the executive in charge of operations and systems since December 1988. In
July 2003, he was promoted to Executive Vice President.
Kathleen Rooney has been employed by the Company since April 2004 and has served
as Senior Vice President and Corporate Marketing Officer since April 2005. Ms.
Rooney is also a Senior Vice President of Mahopac National Bank with
responsibility for the Bank's Community Banking Division. Prior to joining the
Company, Ms. Rooney was employed by JP Morgan Chase for over 28 years in various
capacities, most recently as the Senior Vice President and Investments Executive
responsible for sales, service, operation and compliance of brokerage, portfolio
management and trust products for the retail bank.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Market Price and Dividend Information
The Company's common stock is traded under the symbol "TMP" on the American
Stock Exchange ("AMEX"). The high and low closing sale prices, which represent
actual transactions as quoted on AMEX, of the Company's common stock for each
quarterly period in 2006 and 2005 are presented below. The per share dividends
paid by the Company in each quarterly period in 2006 and 2005 are also presented
below. Cash dividends on Tompkins common stock were paid on the 15th day of
February, May, August and November of 2006; and on the 15th day of February, the
16th day of May, and the 15th day of August and November of 2005.
Market Price Cash Dividends
High Low Paid
-----------------------------------------------------------------------------------------
2006 1st Quarter $ 44.08 $ 40.18 $ .273
2nd Quarter 44.00 38.10 .273
3rd Quarter 45.95 41.37 .300
4th Quarter 50.80 44.00 .300
2005 1st Quarter $ 43.80 $ 38.27 $ .248
2nd Quarter 40.00 35.24 .273
3rd Quarter 44.18 38.37 .273
4th Quarter 44.00 37.00 .273
Note 1 - Per share data has been retroactively adjusted to reflect a 10% stock
dividend paid on May 15, 2006 and a 10% stock dividend paid on February 15,
2005.
As of March 1, 2007, there were approximately 2,080 holders of record of the
Company's common stock.
The Company's ability to pay dividends is generally limited to earnings from the
prior year, although retained earnings and dividends from its subsidiaries may
also be used to pay dividends under certain circumstances. The Company's primary
source of funds to pay for shareholder dividends is receipt of dividends from
its subsidiaries. Future dividend payments to the Company by its subsidiaries
will be dependent on a number of factors, including the earnings and financial
condition of each subsidiary, and are subject to the regulatory limitations
discussed in "Note 17 Regulations and Supervision" in Notes to Consolidated
Financial Statements in Part II, Item 8. of this Report.
12
Issuer Purchases of Equity Securities
The following table includes all Company repurchases, including those made
pursuant to publicly announced plans or programs during the quarter ended
December 31, 2006.
------------------------------------------------------------------------------------------------------
Maximum Number
Total Number (or Approximate
of Shares Dollar Value) of
Purchased as Part Shares that May
Total Number Average of Publicly Yet Be Purchased
of Shares Price Paid Announced Plans Under the Plans
Purchased Per Share or Programs or Programs
Period (a) (b) (c) (d)
------------------------------------------------------------------------------------------------------
October 1, 2006 through
October 31, 2006 5,592 $ 44.85 4,400 373,272
November 1, 2006 through
November 30, 2006 3,701 $ 45.37 3,500 369,772
December 1, 2006 through
December 31, 2006 8,000 $ 46.61 8,000 361,772
------------------------------------------------------------------------------------------------------
Total 17,293 $ 45.78 15,900 361,772
------------------------------------------------------------------------------------------------------
On July 19, 2006, the Company announced that the Company's Board of Directors
approved, on July 18, 2006, a new stock repurchase plan (the "2006 Plan") to
replace the expired 2004 Plan. The 2006 Plan authorizes the repurchase of up to
450,000 shares of the Company's outstanding common stock over a two-year period.
Previously, the Company's board approved a stock repurchase plan on July 27,
2004 (the "2004 Plan"). Under the 2004 Plan, the Company was authorized to
repurchase up to 484,000 shares of Tompkins common stock over a two-year period,
which ended July 27, 2006. Over the life of the 2004 Plan, 175,924 shares were
repurchased at an average cost of $40.03.
Included above are 1,192 shares purchased in October 2006 at an average cost of
$44.34 and 201 shares purchased in December 2006 at an average cost of $48.48 by
the trustee of a rabbi trust established by the Company under the Company's
Stock Retainer Plan For Eligible Directors of Tompkins Trustco, Inc., and
Participating Subsidiaries and were part of the director deferred compensation
under that plan. Shares purchased by the rabbi trust are not part of the 2006
Plan.
Recent Sales of Unregistered Securities
As part of the Company's acquisition of Carey McKinney Group in the fourth
quarter of fiscal 2006, the Company issued 24,086 shares of Tompkins common
stock pursuant to an exemption from registration under Section 4(2) of the
Securities Act of 1933, as amended.
Equity Compensation Plan Information
Information regarding securities authorized for issuance under equity
compensation plans is provided in Part III, "Item 12. Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters" of
this Report.
13
Performance Graph
The following graph compares the Company's cumulative total stockholder return
since December 31, 2001, with (1) the total return index for the NASDAQ
Composite and (2) the total return index for SNL Bank Index. The graph assumes
$100.00 was invested on December 31, 2001, in the Company's common stock and the
comparison groups and assumes the reinvestment of all cash dividends prior to
any tax effect and retention of all stock dividends.
[GRAPHIC CHART OMITTED]
Total Return Performance
Period Ending
----------------------------------------------------------------------------
Index 12/31/01 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06
------------------------------------------------------------------------------------------------------------
Tompkins Trustco, Inc. 100.00 112.49 132.60 158.09 149.61 171.45
NASDAQ Composite 100.00 68.76 103.67 113.16 115.57 127.58
SNL Bank Index 100.00 91.69 123.69 138.61 140.50 164.35
In accordance with and to the extent permitted by applicable law or regulation,
the information set forth above under the heading "Performance Graph" shall not
be incorporated by reference into any future filing under the Securities Act of
1933, as amended (the "Securities Act"), or Exchange Act and shall not be deemed
to be "soliciting material" or to be "filed" with the SEC under the Securities
Act or the Exchange Act.
14
Item 6. Selected Financial Data
Year ended December 31
(in thousands except per share data) 2006 2005 2004 2003 2002
-----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENT HIGHLIGHTS
Assets $ 2,210,837 $ 2,106,870 $ 1,970,295 $ 1,864,446 $ 1,670,203
Deposits 1,709,420 1,683,010 1,560,873 1,411,125 1,340,285
Other borrowings 85,941 63,673 63,303 87,111 81,930
Shareholders' equity 189,620 181,221 171,002 158,970 150,597
Interest and dividend income 121,041 106,707 94,673 90,995 93,959
Interest expense 48,184 31,686 23,327 23,493 28,818
Net interest income 72,857 75,021 71,346 67,502 65,141
Provision for loan/lease losses 1,424 2,659 2,860 2,497 2,235
Net securities gains (losses) 15 (1,526) 98 43 363
Net income 27,767 27,685 25,615 24,205 22,914
PER SHARE INFORMATION
Basic earnings per share 2.82 2.81 2.60 2.46 2.33
Diluted earnings per share 2.78 2.77 2.56 2.42 2.28
Cash dividends per share 1.15 1.07 0.99 0.92 0.86
SELECTED RATIOS
Return on average assets 1.30% 1.36% 1.32% 1.37% 1.45%
Return on average equity 15.02% 15.82% 15.68% 15.90% 16.41%
Shareholders' equity to average assets 8.86% 8.89% 8.82% 8.98% 9.51%
Dividend payout ratio 40.78% 37.94% 38.11% 37.25% 37.54%
OTHER SELECTED DATA (in whole numbers, unless otherwise noted)
-----------------------------------------------------------------------------------------------------------------------------------
Employees (average full-time equivalent) 658 587 578 546 530
Banking offices 37 34 34 33 32
Bank access centers (ATMs) 59 51 51 49 48
Trust and investment services assets under
management, or custody (in thousands) $ 2,183,114 $ 1,534,557 1,495,196 $ 1,389,879 $ 1,207,786
===================================================================================================================================
Per share data has been retroactively adjusted to reflect a 10% stock dividend
paid on May 15, 2006, a 10% stock dividend paid on February 15, 2005 and a 10%
stock dividend paid on August 15, 2003.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following analysis is intended to provide the reader with a further
understanding of the consolidated financial condition and results of operations
of the Company and its operating subsidiaries for the periods shown. This
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with other sections of this Report on
Form 10-K, including Part I, "Item 1. Business", Part II, "Item 6. Selected
Financial Data", and Part III, "Item 8. Financial Statements and Supplementary
Data".
OVERVIEW
Tompkins Trustco, Inc. ("Tompkins" or the "Company"), is the corporate parent of
three community banks, Tompkins Trust Company ("Trust Company"), The Bank of
Castile, and The Mahopac National Bank ("Mahopac National Bank"), which together
operate 37 banking offices, including 1 limited-service office, in local market
areas throughout New York State. Through its community banking subsidiaries, the
Company provides traditional banking services, and offers a full range of money
management services through Tompkins Investment Services, a division of Tompkins
Trust Company. The Company also offers insurance services through its
wholly-owned subsidiary, Tompkins Insurance Agencies, Inc. ("Tompkins Insurance
Agencies"), an independent insurance agency with a history of over 100 years of
service to individual and business clients throughout Western New York. Tompkins
Insurance expanded its geographic footprint through the acquisition of Banfield
& Associates, Inc., an insurance agency located in Ithaca, New York on December
31, 2004. Tompkins Insurance has since acquired two additional agencies in the
Ithaca, New York market area. The Company completed its acquisition of AM&M
Financial Services, Inc. (AM&M), a fee-based financial planning firm
headquartered in Pittsford, New York, effective January 6, 2006. AM&M has three
operating companies: (1) AM&M Planners, Inc., which provides fee based financial
planning and wealth management services for corporate executives, small business
owners, and high net worth individuals; (2) Ensemble Financial Services, Inc.,
an independent broker-dealer and leading outsourcing company for financial
planners and investment advisors; and (3) Ensemble Risk Solutions, Inc., which
creates customized risk management plans using life, disability and long-term
care insurance products.
Each Tompkins subsidiary operates with a community focus, meeting the needs of
the unique communities served. The Company conducts its business through its
wholly-owned subsidiaries, Tompkins Trust Company, The Bank of Castile, Mahopac
National Bank, and Tompkins Insurance. Unless the context otherwise requires,
the term "Company" refers to Tompkins Trustco, Inc. and its subsidiaries.
15
Headquartered in Ithaca, New York, Tompkins is registered as a financial holding
company with the Federal Reserve Board under the Bank Holding Company Act of
1956, as amended. Tompkins was organized in 1995 under the laws of the State of
New York, as a bank holding company for Tompkins Trust Company, a commercial
bank that has operated in Ithaca and surrounding communities since 1836.
Forward-Looking Statements
The Company is making this statement in order to satisfy the "Safe Harbor"
provision contained in the Private Securities Litigation Reform Act of 1995. The
statements contained in this Report on Form 10-K that are not statements of
historical fact may include forward-looking statements that involve a number of
risks and uncertainties. Such forward-looking statements are made based on
management's expectations and beliefs concerning future events impacting the
Company and are subject to certain uncertainties and factors relating to the
Company's operations and economic environment, all of which are difficult to
predict and many of which are beyond the control of the Company, that could
cause actual results of the Company to differ materially from those matters
expressed and/or implied by forward-looking statements. The following factors
are among those that could cause actual results to differ materially from the
forward-looking statements: changes in general economic, market and regulatory
conditions; the development of an interest rate environment that may adversely
affect the Company's interest rate spread, other income or cash flow anticipated
from the Company's operations, investment and/or lending activities; changes in
laws and regulations affecting banks, bank holding companies and/or financial
holding companies; technological developments and changes; the ability to
continue to introduce competitive new products and services on a timely,
cost-effective basis; governmental and public policy changes, including
environmental regulation; protection and validity of intellectual property
rights; reliance on large customers; and financial resources in the amounts, at
the times and on the terms required to support the Company's future businesses.
In addition, such forward-looking statements could be affected by general
industry and market conditions and growth rates, general economic and political
conditions, including interest rate and currency exchange rate fluctuations, and
other factors.
Critical Accounting Policies
In the course of the Company's normal business activity, management must select
and apply many accounting policies and methodologies that lead to the financial
results presented in the consolidated financial statements of the Company. Some
of these policies are more critical than others. Management considers the
accounting policy relating to the allowance for loan/lease losses ("allowance")
to be a critical accounting policy because of the uncertainty and subjectivity
inherent in estimating the levels of allowance needed to cover probable credit
losses within the loan portfolio and the material effect that these estimates
can have on the Company's results of operations.
The Company has developed a methodology to measure the amount of estimated loan
loss exposure inherent in the loan portfolio to ensure that an adequate
allowance is maintained. The methodology includes an estimate of exposure for
the following: specifically reviewed and graded loans, historical loss
experience by product type, past due and nonperforming loans, and other internal
and external factors such as local and regional economic conditions, growth
trends, and credit policy and underwriting standards. The methodology includes a
review of loans considered impaired in accordance with the Statement of
Financial Accounting Standards (SFAF) No. 114, "Accounting by Creditors for
Impairment of a Loan", as well as other commercial loans and commercial mortgage
loans that are evaluated using an internal rating system. An estimated exposure
amount is assigned to these internally reviewed credits based upon a review of
the borrower's financial condition, payment history, collateral adequacy, and
business conditions. For commercial loans and commercial mortgage loans not
specifically reviewed, and for more homogenous loan portfolios such as
residential mortgage loans and consumer loans, estimated exposure amounts are
assigned based upon historical loss experience as well as past due status.
Lastly, additional reserves are maintained based upon management judgment and
assessment of other quantitative and qualitative factors such as regional and
local economic conditions and portfolio growth trends.
Since the methodology is based upon historical experience and trends as well as
management's judgment, factors may arise that result in different estimations.
Significant factors that could give rise to changes in these estimates may
include, but are not limited to, changes in economic conditions in the local
area, concentration of risk, and declines in local property values. While
management's evaluation of the allowance for loan/lease losses as of December
31, 2006, considers the allowance to be adequate, under adversely different
conditions or assumptions, the Company would need to increase the allowance.
Another critical accounting policy is the policy for pensions and other
post-retirement benefits. The calculation of the expenses and liabilities
related to pensions and post-retirement benefits requires estimates and
assumptions of key factors including, but not limited to, discount rate, return
on plan assets, future salary increases, employment levels, employee retention,
and life expectancies of plan participants. The Company uses an actuarial firm
in making these estimates and assumptions. Changes in these assumptions due to
market conditions, governing laws and regulations, or Company specific
circumstances may result in material changes to the Company's pension and other
post-retirement expenses and liabilities.
All accounting policies are important and the reader of the financial statements
should review these policies, described in "Note 1 Summary of Significant
Accounting Policies" in Notes to Consolidated Financial Statements in Part II,
Item 8. of this Form 10-K, to gain a better understanding of how the Company's
financial performance is reported.
16
RESULTS OF OPERATIONS
(Comparison of December 31, 2006 and 2005 results)
General
The Company recorded its 34th consecutive year of earnings growth. Net income
for the year ended December 31, 2006, was $27.8 million compared to $27.7
million in 2005. On a per share basis, the Company earned $2.78 per diluted
share in 2006, compared to $2.77 per diluted share in 2005. In addition to
earnings per share growth, key performance measurements for the Company include
return on average shareholders' equity (ROE) and return on average assets (ROA).
ROE was 15.02% in 2006, compared to 15.82% in 2005, while ROA was 1.30% in 2006,
compared to 1.36% in 2005. The decrease in ROA and ROE in 2006 was mainly a
result of the decline in net interest margin as well as the growth in average
assets and average shareholders' equity exceeding growth in net income. ROA and
ROE for Tompkins continue to compare favorably to bank holding company peer
ratios widely available from the Federal Reserve Board.
Earnings performance in 2006 reflects continued execution of the Company's key
business strategies, including ongoing investment in traditional banking
services with the opening of three new banking offices in 2006, and the
expansion of our fee-based financial services businesses of trust, investment
services, and insurance with the acquisitions of AM&M Financial Services, Inc.
("AM&M") and four insurance agencies in 2006, as well as the expansion of retail
brokerage services. These initiatives contributed to the 7.7% growth in revenues
(net interest income plus noninterest income) to $113.9 million in 2006 over
$105.8 million in 2005.
The rise in short-term interest rates contributed to increases in funding costs,
while the inverted yield curve constrained the yields of longer-term earning
assets. Interest income of $121.0 million in 2006 was up 13.4% over 2005,
reflecting both growth in average earning assets and increases in loan and
securities yields. The increase in interest income was offset by higher funding
costs, resulting in a decrease in net interest margin for the year when compared
to 2005. The net interest margin was 3.81% in 2006, compared to 4.11% in 2005.
Total assets were up 4.9% to $2.2 billion at December 31, 2006. Asset growth
over the past twelve months included a $54.9 million increase in total loans and
leases and a $55.5 million increase in the securities portfolio. Growth in
average total loans and leases is net of the securitization of $32.0 million of
residential mortgage loans in the second quarter of 2006. These residential
loans were packaged into mortgage-backed securities, which are held in the
Company's available-for-sale securities portfolio. Asset quality remained strong
with reductions in nonperforming assets and net charge-offs compared with the
prior year. Improvement in asset quality trends, along with the lower level of
net charge-offs, resulted in a lower provision expense for 2006 compared to
comparable prior year periods.
Noninterest income for 2006 was $41.1 million, an increase of 33.5% over 2005.
Growth in noninterest income benefited from the first quarter 2006 acquisition
of AM&M, the expansion of retail brokerage services, and the acquisition of
three insurance agencies during 2006. Noninterest income in 2006 and 2005 also
included some nonrecurring items. In the fourth quarter of 2006 the Company
recognized a net pre-tax gain of $2.6 million on the sale of approximately $9.4
million of credit card loans. Concurrent with the sale, the Company entered into
a sales and servicing agreement with a large credit card issuer to expand its
card product offerings. Earnings in 2005 included a net pre-tax gain of $3.0
million, resulting from an agreement with NOVA Information Systems (NOVA) to
transfer the Company's merchant card processing relationships, and a pre-tax
loss of $1.5 million on the sale of approximately $80 million of
available-for-sale securities.
Noninterest expenses were $71.9 million in 2006, up 15.8% over 2005. The
increase in 2006 was primarily due to higher compensation and benefits related
expenses. Contributing to the increase in noninterest expense is the acquisition
of AM&M, stock-based compensation expense related to the adoption of FAS 123R,
insurance agency acquisitions, expansion of retail brokerage services, and the
expansion of banking offices.
Net Interest Income
Table 1-Average Statements of Condition and Net Interest Analysis illustrates
the trend in average interest-earning assets and interest-bearing liabilities,
and the corresponding yield or cost associated with each. Taxable-equivalent net
interest income of $75.7 million in 2006 was down 2.8% from $77.9 million in
2005, driven by higher funding costs. The Federal Reserve continued to raise
short-term interest rates in 2006, which contributed to a 100 basis point
increase in the prime rate in 2006. The higher prime rate had a favorable impact
on commercial loan yields as the Company's prime rate based loans repriced
upwards. The yield on average earning assets increased 45 basis points from
5.78% for the fiscal year ended December 31, 2005, to 6.23% for fiscal 2006,
while the cost of interest bearing liabilities increased 94 basis points from
2.09% to 3.03% over the same time period, resulting in a 49 basis point decline
in the net interest spread. Growth in noninterest-bearing liabilities offset
some of the decline in the net interest spread.
17
Taxable-equivalent interest income was up 13.1% in 2006 over the same period in
the prior year, driven by an increase in loan and investment volumes and yields.
Average loan balances grew by $49.6 million in 2006, or 4.1%, while average loan
yields increased 45 basis points to 7.08%. Average investment balances were up
$43.2 million in 2006, or 6.4%, while average securities yields were up 47 basis
points to 4.73%. Loan growth in 2006 included a $43.4 million increase in
average commercial real estate loans and a $20.8 million increase in average
commercial loans. Average residential loan balances were flat; however, balances
are net of the securitization of $32.0 million of residential mortgage loans in
the second quarter of 2006. These residential loans were packaged into
mortgage-backed securities, which are held in the Company's available-for-sale
securities portfolio. Average consumer loans were down $9.9 million in 2006,
mainly in credit card loans, due in part to the fourth quarter sale of the
entire $9.4 million portfolio, and indirect auto loans. Yields on commercial and
industrial loans, and commercial real estate loans benefited from increases in
market interest rates. Home equity loan yields were also higher due to the
variable rate nature of the majority of this portfolio.
Increases in taxable-equivalent interest income in 2006 were offset by a 52.1%
increase in interest expense driven by the rise in short-term market interest
rates. The average rate paid on deposits during 2006 of 2.86% was 102 basis
points higher than the average rate paid in 2005. Rates on time deposits moved
higher with the rise in short-term rates and resulted in an increased volume of
these deposits. Average time deposit balances increased $93.8 million or 17.0%
to $646.9 million at December 31, 2006, from $553.2 million at December 31,
2005. The Company was able to offset some of the impact of higher deposit rates
by growing average noninterest bearing deposits to $338.4 million, up 4.5% over
average balances for 2005. The average rate paid on borrowings for 2006 was also
up over 2005, as a result of the increase in short-term interest rates. Average
borrowings were up $10.2 million or 4.4% over prior year.
Changes in net interest income occur from a combination of changes in the volume
of interest-earning assets and interest-bearing liabilities, and in the rate of
interest earned or paid on them. Table 2-Analysis of Changes in Net Interest
Income illustrates changes in interest income and interest expense attributable
to changes in volume (change in average balance multiplied by prior year rate),
changes in rate (change in rate multiplied by prior year volume), and the net
change in net interest income. The net change attributable to the combined
impact of volume and rate has been allocated to each in proportion to the
absolute dollar amounts of the change. The $2.2 million decrease in
taxable-equivalent net interest income from 2005 to 2006 resulted from a $14.3
million increase in interest income and a $16.5 million increase in interest
expense. An increased volume of earning assets, in excess of interest bearing
liabilities contributed to a net $1.9 million increase in taxable-equivalent net
interest income between 2005 and 2006, while changes in interest rates reduced
taxable-equivalent net interest income by $4.1 million, resulting in the net
decrease of $2.2 million from 2005.
18
Table 1 - Average Statements of Condition and Net Interest Analysis
December 31
2006 2005 2004
----------------------------------------------------------------------------------------------------------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
(dollar amounts in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Certificates of
deposit, other
banks $ 2,486 $ 86 3.46% $ 3,668 $ 89 2.43% $ 9,086 $ 93 1.02%
Securities (1)
U.S. Government
securities 570,585 25,381 4.45 529,732 20,805 3.93 544,943 21,317 3.91
State and municipal (2) 121,305 7,134 5.88 120,891 6,882 5.69 102,917 6,081 5.91
Other securities (2) 23,001 1,290 5.61 21,072 905 4.29 24,953 566 2.27
----------------------------------------------------------------------------------------------------------------------------------
Total securities 714,891 33,805 4.73 671,695 28,592 4.26 672,813 27,964 4.16
Federal funds sold 231 15 6.49 818 24 2.93 2,281 25 1.14
Loans, net of
unearned income (3)
Residential real estate 463,825 28,745 6.20 465,124 27,042 5.81 426,116 24,121 5.66
Commercial real estate 392,636 28,112 7.16 349,190 23,923 6.85 290,959 19,015 6.54
Commercial loans (2) 308,207 25,086 8.14 287,455 20,238 7.04 272,954 15,745 5.77
Consumer and other 92,959 7,289 7.84 102,845 8,649 8.41 105,095 8,886 8.46
Lease financing (2) 12,023 709 5.90 15,402 988 6.41 21,841 1,426 6.53
----------------------------------------------------------------------------------------------------------------------------------
Total loans,
net of
unearned income 1,269,650 89,941 7.08 1,220,016 80,840 6.63 1,116,965 69,193 6.19
----------------------------------------------------------------------------------------------------------------------------------
Total interest-
earning assets 1,987,258 123,847 6.23 1,896,197 109,545 5.78 1,801,145 97,275 5.40
----------------------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 151,934 141,843 138,078
Total assets $2,139,192 $2,038,040 $1,939,223
==================================================================================================================================
LIABILITIES &
SHAREHOLDERS' EQUITY
Deposits:
Interest-bearing deposits
Interest checking,
savings, and money market $ 702,826 $ 11,247 1.60% $ 733,596 $ 7,519 1.02% $ 774,989 $ 5,527 0.71%
Time Deposits > $100,000 296,714 13,350 4.50 224,248 6,973 3.11 138,056 2,890 2.09
Time Deposits < $100,000 318,648 12,486 3.92 290,370 7,943 2.74 256,612 5,954 2.32
Brokered Time Deposits:
< $100,000 31,566 1,482 4.69 38,545 1,228 3.19 29,691 853 2.87
----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
deposits 1,349,754 38,565 2.86 1,286,759 23,663 1.84 1,199,348 15,224 1.27
Federal funds purchased and
securities sold under
agreements to repurchase 159,147 5,905 3.71 157,817 4,852 3.07 175,168 4,390 2.51
Other borrowings 79,310 3,714 4.68 70,486 3,171 4.50 81,213 3,713 4.57
----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 1,588,211 48,184 3.03 1,515,062 31,686 2.09 1,455,729 23,327 1.60
----------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing
deposits 338,448 323,976 297,627
Accrued expenses and
other liabilities 26,181 22,533 21,002
----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,952,840 1,861,571 1,774,358
Minority Interest 1,480 1,483 1,511
Shareholders' equity 184,872 174,986 163,354
----------------------------------------------------------------------------------------------------------------------------------
Total liabilities
and shareholders'
equity $2,139,192 $2,038,040 $1,939,223
----------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 3.20% 3.69% 3.80%
----------------------------------------------------------------------------------------------------------------------------------
Net interest
income/margin
on earning assets $ 75,663 3.81% $ 77,859 4.11% $ 73,948 4.11%
==================================================================================================================================
(1) Average balances and yields on available-for-sale securities are based on
amortized cost.
(2) Interest income includes the tax effects of taxable-equivalent adjustments
using a combined New York State and Federal effective income tax rate of
40% to increase tax-exempt interest income to a taxable equivalent basis.
The tax equivalent adjustments for 2006, 2005, and 2004 were as follows:
$2,806,000, $2,838,000, and $2,602,000, respectively.
(3) Nonaccrual loans are included in the average loan totals presented above.
Payments received on nonaccrual loans have been recognized as disclosed in
"Note 1 Summary of Significant Accounting Policies" in the Notes to
Consolidated Financial Statements in Part II, Item 8. of this Report.
19
Table 2 - Analysis of Changes in Net Interest Income
(in thousands)(taxable equivalent) 2006 vs. 2005 2005 vs. 2004
-----------------------------------------------------------------------------------------------------------------------
Increase (Decrease) Due Increase (Decrease) Due
to Change in Average to Change in Average
Volume Rate Total Volume Rate Total
-----------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Certificates of deposit, other banks $ (34) $ 31 $ (3) $ (79) $ 75 $ (4)
Federal funds sold (25) 16 (9) (24) 23 (1)
Investments:
Taxable 1,741 3,220 4,961 (744) 571 (173)
Tax-exempt 64 188 252 1,029 (228) 801
Loans, net:
Taxable 3,456 5,763 9,219 6,692 5,014 11,706
Tax-exempt (79) (39) (118) (61) 2 (59)
-----------------------------------------------------------------------------------------------------------------------
Total interest income $ 5,123 $ 9,179 $ 14,302 $ 6,813 $ 5,457 $ 12,270
-----------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest-bearing deposits:
Interest checking,
savings, and money market (328) 4,056 3,728 (309) 2,301 1,992
Time 3,073 8,101 11,174 3,370 3,077 6,447
Federal funds purchased and
Securities sold under
agreements to repurchase 41 1,012 1,053 (465) 927 462
Other borrowings 409 134 543 (484) (58) (542)
-----------------------------------------------------------------------------------------------------------------------
Total interest expense $ 3,195 $ 13,303 $ 16,498 $ 2,112 $ 6,247 $ 8,359
-----------------------------------------------------------------------------------------------------------------------
Net interest income $ 1,928 $ (4,124) $ (2,196) $ 4,701 $ (790) $ 3,911
=======================================================================================================================
Notes: See notes to Table 1 above.
Provision for Loan/Lease Losses
The provision for loan/lease losses represents management's estimate of the
expense necessary to maintain the reserve for loan/lease losses at an adequate
level. The provision for loan/lease losses was $1.4 million in 2006, compared to
$2.7 million in 2005. The decrease in 2006 is primarily due to positive trends
in asset quality measures. Nonperforming loans/leases were $3.0 million or 0.23%
of total loans/leases at December 31, 2006, compared with $4.1 million or 0.33%
of total loans/leases at December 31, 2005. Net charge-offs of $773,000 in 2006
represented 0.06% of average loans/leases during the period, compared to net
charge-offs of $1.5 million in 2005, representing 0.13% of average loans/leases.
See the section captioned "The Allowance for Loan/Lease Losses" included within
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Financial Condition" of this Report for further analysis of the
Company's allowance for loan/lease losses.
Noninterest Income
Total noninterest income was $41.1 million in 2006, an increase of 33.5% over
2005. The majority of the growth was concentrated in investment services income
and insurance commissions and fees and reflects the benefit of the first quarter
2006 acquisition of AM&M, acquisitions of insurance agencies during 2006, and
the expansion of retail brokerage services. In addition to the growth in these
core fee-based businesses, noninterest income in both 2006 and 2005 included
nonrecurring items. In the fourth quarter of 2006 the Company entered into an
agreement with Elan Financial Services (Elan) to sell its credit card portfolio
of nearly $9.4 million, resulting in a net pre-tax gain of approximately $2.6
million. Through a relationship with Elan, the Company is able to offer an
expanded suite of credit card products to its customers. Fourth quarter 2005
earnings included a net pre-tax gain of approximately $3.0 million resulting
from an agreement with NOVA Information Systems (NOVA) related to the transfer
of merchant card processing relationships. The fourth quarter 2005 results were
also affected by the sale of approximately $80 million of available-for-sale
securities, which resulted in approximately $1.5 million in pre-tax securities
losses being realized during the fourth quarter of 2005.
The Company has been able to expand the contribution of noninterest income to
total revenues by developing and introducing new products and by marketing its
services across all of the Company's markets. Noninterest income represented
36.1% of total revenue in 2006, compared with 29.1 % in 2005.
20
Investment services generated $12.2 million in revenue in 2006, an increase of
125.9% over revenue of $5.4 million in 2005. Investment services reflects income
from Tompkins Investment Services (TIS), a division within Tompkins Trust
Company, and AM&M. Investment services income includes: trust services,
financial planning, wealth management services, and brokerage related services.
TIS generates fee income through managing trust and investment relationships,
managing estates, providing custody services, and managing investments in
employee benefits plans. TIS also oversees retail brokerage activities in the
Company's banking offices. TIS income was $6.2 million in 2006, an increase of
$777,000 or 14.4% over the same period in 2005. With fees largely based on the
market value and the mix of assets managed, the general direction of the stock
market can have a considerable impact on fee income. The market value of assets
managed by, or in custody of, TIS was $1.7 billion at December 31, 2006, up 8.1%
from $1.5 billion at December 31, 2005. These figures include $480.1 million and
$435.2 million, respectively, of Company-owned securities where TIS is
custodian. Trends for new business in trust and investment services remain
positive. The number of accounts increased by 7.2% between December 31, 2006,
and December 31, 2005.
AM&M contributed $6.0 million to the growth in 2006 investment services income.
AM&M provides fee-based financial planning services, wealth management services,
and brokerage services to independent financial planners and investment
advisors. The acquisition of AM&M also contributed approximately $618,000 to
2006 insurance commissions and fees. AM&M offers customized risk management
plans using life, disability and long-term care insurance products.
Insurance commissions and fees were $9.4 million in 2006, an increase of $1.9
million or 25.8% over 2005. The growth was mainly at Tompkins Insurance, and
primarily related to revenue from commercial property and casualty lines.
Tompkins Insurance acquired three insurance agencies during (March, April and
July) 2006 and a fourth agency, effective December 31, 2006. These acquisitions
added approximately $784,000 to the increase in commission and fees in 2006.
Additionally, Tompkins Insurance has continued its efforts to offer services to
customers of the Company's banking subsidiaries. These efforts include locating
Tompkins Insurance representatives in offices of The Bank of Castile and The
Trust Company. The Company opened a Tompkins Financial Center office in Ithaca,
New York in 2006 to cater to customer needs for mortgage, investments, financial
planning, and insurance services.
Service charges on deposit accounts were $8.1 million, down 2.4% compared to
$8.3 million in 2005, mainly as a result of lower cycle fees on checking and
savings deposits. Overdraft fees, the largest component of service charges on
deposit accounts were flat year-over-year.
Card services income of $3.0 million in 2006 was up $327,000 or 12.4% over
income of $2.6 million in 2005. The primary component of card services income is
fees related to debit card transactions. An increased number of cardholders and
higher transaction volume contributed to the growth in card services income in
2006.
Net gains from loan sales of $2.7 million includes the net pre-tax gain of $2.6
million on the sale of the credit card portfolio in the fourth quarter of 2006.
Other service charges were down $478,000 or 16.1% to $2.5 million in 2006. The
decrease is primarily the result of the sale of the Company's merchant card
processing relationships in the fourth quarter of 2005. Merchant card processing
income was $42,000 in 2006 compared to $453,000 in 2005.
Noninterest income includes $1.1 million of increases, net of the related
mortality expense, in cash surrender value of corporate owned life insurance
(COLI), which is in line with 2005. The COLI relates to life insurance policies
covering certain senior officers of the Company and its subsidiaries. The
Company's average investment in COLI was $26.4 million during 2006, compared to
$25.8 million during 2005. Although income associated with the insurance
policies is not included in interest income, the COLI produced an annualized
tax-equivalent return of 7.02% for 2006, compared to 7.08% for 2005. In 2006,
the Company recognized $685,000 in proceeds from death benefits on corporate
owned life insurance. The Company did not purchase additional COLI in 2006.
The $148,000 increase in other income in 2006 over 2005 was largely driven by
increased income related to the Company's investment in a Small Business
Investment Company, Cephas Capital Partners, L.P. ("Cephas"). The Company's
investment totaled $3.6 million at December 31, 2006 compared to $3.4 million at
December 31, 2005. Because the Company's percentage ownership in Cephas exceeds
20%, the equity method of accounting is utilized, such that the Company's
percentage of Cephas' income is recognized as income on its investment; and
likewise, any loss by Cephas is recognized as a loss on the Company's
investment. For 2006, the Company recognized income from this investment of
$600,000, compared with income of $333,000 in 2005. The Company believes that as
of December 31, 2006, there is no impairment with respect to this investment.
21
Noninterest Expense
Noninterest expenses for the year ended December 31, 2006, were $71.9 million,
an increase of 15.8% over noninterest expenses of $62.1 million for the year
ended December 31, 2005. The increase in 2006 over 2005 was primarily due to
higher compensation and benefits related expenses. Factors contributing to the
increase in noninterest expense include the acquisition of AM&M, stock-based
compensation expense related to the adoption of FAS 123R, insurance agency
acquisitions, expansion of retail brokerage services, and the expansion of
banking offices. The addition of AM&M contributed approximately $5.5 million of
the $9.8 million increase in 2006 noninterest expense. Changes in the various
components of noninterest expense are discussed below.
Personnel-related expenses comprise the largest segment of noninterest expense,
representing 58.4% of noninterest expenses in 2006, compared to 58.2% in 2005.
Total personnel-related expenses increased by $5.9 million or 16.3% in 2006, to
$42.0 million from $36.1 million. The increase was primarily a result of higher
salaries and wages related to an increase in average full-time equivalent
employees (FTEs), from 587 at December 31, 2005, to 658 at December 31, 2006,
along with, annual salary adjustments. The acquisitions of AM&M and three
smaller insurance agencies in 2006, the staffing requirements at the Company's
newer offices, and the expansion of retail brokerage services were the primary
contributors to the increase in FTEs. Personnel-related expenses in 2006 include
$692,000 related to the expensing of stock options required by the Company's
adoption of Statement of Financial Accounting Standard No. 123 (Revised)
"Share-Based Payment" on January 1, 2006. Refer to "Note 1 Summary of
Significant Accounting Policies" in Notes to Consolidated Financial Statements
in Part II, Item 8. of this Report. Healthcare and pension expenses were also up
in 2006 over 2005.
Expense for premises, furniture, and fixtures totaled $8.8 million in 2006, an
increase of $1.1 million, or 14.1% over expense of $7.7 million in 2005. The
addition of new banking offices, the acquisition of AM&M, as well as higher real
estate taxes, maintenance, and insurance contributed to the increased expenses
for bank premises and furniture and fixtures year-over-year.
Marketing expense was up 10.3% in 2006 over 2005. Planned marketing initiatives
for 2006, including special promotions related to new office openings accounted
for the increase in marketing expenditures over the prior year.
Professional fees totaled $1.7 million in 2006 compared with $1.5 million in
2005. The acquisition of AM&M contributed approximately $151,000 to the increase
in this category.
Software licenses and maintenance expenses were $1.9 million, an increase of
$162,000 or 9.1% over 2005. Increases in annual maintenance contracts
contributed to the increase in this category, as did expenses related to the
implementation of new systems.
Other operating expenses were $13.1 million for 2006 and $10.9 million for 2005.
The acquisition of AM&M contributed approximately $1.3 million to the increase
in this category. Charitable contributions in 2006 were up $290,000 over the
same period in 2005, reflecting contributions to a charitable fund in support of
future community needs. Business development, telephone, postage, printing and
supplies, legal fees, education and training, and loss on sale of other real
estate were also up over the same periods in 2005.
The Company's efficiency ratio, defined as operating expense excluding
amortization of intangible assets, divided by tax-equivalent net interest income
plus noninterest income before securities gains and losses (increase in the cash
surrender value of COLI is shown on a tax equivalent basis), was 60.7% in 2006,
compared to 55.5% in 2005. This ratio is negatively impacted by growth in fee
income businesses such as insurance and investment services. Tax equivalency was
based upon a 40% tax rate. Excluding the tax equivalent adjustments for
tax-exempt securities, tax-exempt loans/leases, and COLI income, the efficiency
ratio would be 62.5% in 2006 and 57.3% in 2005.
Minority Interest in Consolidated Subsidiaries
Minority interest expense represents the portion of net income in consolidated
majority-owned subsidiaries that is attributable to the minority owners of a
subsidiary. The Company had minority interest expense of $131,000 in 2006 and
2005, related to minority interests in three real estate investment trusts,
which are substantially owned by the Company's banking subsidiaries.
Income Tax Expense
The provision for income taxes provides for Federal and New York State income
taxes. The 2006 provision was $12.7 million, compared to $13.2 million in 2005.
The effective tax rate for the Company decreased in 2006 to 31.4%, from 32.3% in
2005. The recognition of $685,000 of life insurance proceeds in the second
quarter of 2006 contributed to the decrease in the effective rate in 2006
compared with 2005. Also contributing to the lower effective rate is higher
levels of tax-advantaged income, such as income from investments in municipal
bonds, and economic zone credits as well as additional investments in real
estate investment trusts in 2006. Each of the Company's banking subsidiaries is
a majority owner in a REIT. Legislation has been proposed at the State level
that would change the tax treatment of dividends paid by real estate investment
trusts ("REIT"). The Company's tax benefit associated with the REIT dividends
was approximately $884,000 in 2006. The current proposed legislation would
potentially reduce the amount of this benefit in 2007.
22
RESULTS OF OPERATIONS
(Comparison of December 31, 2005 and 2004 results)
General
Net income for the year ended December 31, 2005, was up 8.1% to $27.7 million,
compared to $25.6 million in 2004. On a per share basis, the Company earned
$2.77 per diluted share in 2005, compared to $2.56 per diluted share in 2004.
Return on average shareholders' equity (ROE) was 15.82% in 2005, compared to
15.68% in 2004, while return on average assets (ROA) was 1.36% in 2005, up from
1.32% in 2004.
The favorable performance in 2005 over 2004 reflect continued execution of the
Company's key business strategies, including a commitment to community banking
through diversified revenue sources consisting of net interest income generated
from the loan and securities portfolios, trust and investment services income,
insurance commissions and fees, and other service charges and fees for providing
banking and related financial services. Evidence of the success of these
strategies includes the 8.5% growth in total loans and the 3.9% growth in core
deposits (total deposits less time deposits of $100,000 and more, brokered
deposits, and municipal money market deposits) from December 31, 2004 to
December 31, 2005, as well as growth in key fee income categories as discussed
below. Noninterest income included a $3.0 million net pre-tax gain on the
transfer of the Company's merchant card processing relationships to NOVA
Information Systems (NOVA). Under the agreement NOVA receives all future revenue
from the Company's current merchant customers, while Tompkins generates referral
fees and income based on a percentage of net sales revenue from new customers
referred to NOVA.
An interest rate environment of rising short-term rates and stable long-term
rates made 2005 a challenging year. Increases in the yields on the Company's
average earning assets were offset by increases in the Company's cost of funds,
resulting in a flat net interest margin for the year when compared to 2004.
Year-over-year loan growth of 8.5% was a key factor contributing to the 5.2%
increase in net interest income to $75.0 million in 2005.
Asset quality was strong with reductions in nonperforming assets and net
charge-offs compared with prior year. Nonperforming assets of $4.5 million at
December 31, 2005, were down from $7.7 million at December 31, 2004. Net
loan/lease charge-offs improved to $1.5 million in 2005 from $2.0 million in
2004.
Noninterest income for 2005 was $30.8 million, an increase of 10.0% over 2004.
The growth trends for key fee generating business activities were positive for
the year. Insurance commissions and fees were $7.5 million, up 17.3% from prior
year; service charges on deposit accounts were $8.3 million, up 3.4%; and trust
and investment services income was $5.4 million, up about 1.0%.
Noninterest expenses were $62.1 million in 2005, up 6.7% over 2004. These
increases were primarily due to higher compensation and benefits related
expenses, which were up $2.2 million for the year-to-date period. The
acquisition of Banfield & Associates, Inc., effective December 31, 2004,
contributed to the increased personnel costs in 2005 over 2004.
Net Interest Income
Table 1-Average Statements of Condition and Net Interest Analysis illustrates
the trend in average interest-earning assets and interest-bearing liabilities,
and the corresponding yield or cost associated with each. Taxable-equivalent net
interest income improved to $77.9 million in 2005, up 5.3% from $73.9 million in
2004. Taxable-equivalent net interest income benefited from growth in average
earning assets and growth in deposits. The Federal Reserve raised short-term
interest rates in 2005, which contributed to a 200 basis point increase in the
prime rate in 2005. The higher prime rate had a favorable impact on commercial
loan yields as the Company's prime rate based loans repriced upwards. The higher
short-term interest rates also led to increased funding costs as rates on
deposits and borrowings moved upwards. While short-term rates rose, the spread
between long-term and short-term rates narrowed as longer-term rates did not
increase in line with short-term rates. The yield on average earning assets
increased 38 basis points from 5.40% for the fiscal year ended December 31,
2004, to 5.78% for fiscal 2005, while the cost of interest bearing liabilities
increased 49 basis points from 1.60% to 2.09% over the same time period,
resulting in an 11 basis point decline in the net interest spread. Growth in
noninterest-bearing liabilities offset some of the decline in the spread
resulting in a tax-equivalent net interest margin that is unchanged from 2004.
Taxable-equivalent interest income was up 12.6% over the same period prior year,
driven by an increase in the loan volumes and yields. Average loans grew by
$103.1 million, or 9.2%, which included a $58.2 million increase in average
commercial real estate loans, a $39.0 million increase in average residential
loans, and a $14.5 million increase in average commercial loans. Yields on
commercial and industrial loans, commercial real estate loans, and home equity
loans benefited from increases in market interest rates.
Increases in taxable-equivalent interest income were partially offset by a 35.8%
increase in interest expense driven by the rise in short-term market interest
rates. Rates on time deposits moved higher with the rise in short-term rates and
resulted in an increased volume of these deposits. Core deposits, which include
demand deposits, savings accounts, non-municipal money market accounts, and time
deposits less than $100,000, represent the Company's largest and lowest cost
funding source. Average core deposits increased by $46.0 million or 3.9%, to
$1.2 billion in 2005, providing funding to support average earning asset growth.
Core deposit growth included a $26.3 million or 8.9% increase in average
noninterest-bearing deposits, from $297.6 million in 2004 to $324.0 million in
2005.
23
Non-core funding sources, which include time deposits of $100,000 or more,
brokered deposits, municipal money market deposits, Federal funds purchased,
securities sold under repurchase agreements, and other borrowings provided
additional sources of funding to support asset growth. Average balances on these
non-core funding sources increased by $39.8 million from $578.2 million at
year-end 2004, to $618.0 million at year-end 2005. Average time deposits of
$100,000 or more increased by $86.2 million to $224.2 million at year-end 2005.
Upward movement in time deposit interest rates beginning in the latter half of
2004 contributed to the growth in this deposit category. Growth in core and
non-core deposits allowed for a reduction in average borrowings and securities
sold under repurchase agreements from 2004 to 2005.
Changes in net interest income occur from a combination of changes in the volume
of interest-earning assets and interest-bearing liabilities, and in the rate of
interest earned or paid on them.
Table 2-Analysis of Changes in Net Interest Income illustrates changes in
interest income and interest expense attributable to changes in volume (change
in average balance multiplied by prior year rate), changes in rate (change in
rate multiplied by prior year volume), and the net change in net interest
income. The net change attributable to the combined impact of volume and rate
has been allocated to each in proportion to the absolute dollar amounts of the
change. The $3.9 million increase in taxable-equivalent net interest income from
2004 to 2005 resulted from a $12.3 million increase in interest income and an
$8.4 million increase in interest expense. An increased volume of earning assets
contributed to a net $4.7 million increase in taxable-equivalent net interest
income between 2004 and 2005, while changes in interest rates reduced
taxable-equivalent net interest income by $790,000, resulting in the net
increase of $3.9 million.
Provision for Loan/Lease Losses
The provision for loan/lease losses represents management's estimate of the
expense necessary to maintain the reserve for loan/lease losses at an adequate
level. Management has developed a model to measure the amount of estimated loan
loss exposure inherent in the loan portfolio to ensure that an adequate reserve
is maintained. The provision for loan/lease losses was $2.7 million in 2005,
compared to $2.9 million in 2004. The decrease in 2005 is primarily due to
positive trends in asset quality measures. Nonperforming loans/leases were $4.1
million or 0.33% of total loans/leases at December 31, 2005, compared with $7.6
million or 0.65% of total loans/leases at December 31, 2004. The improvement in
nonperforming loans/leases benefited from the return to accruing status of a
large commercial credit based on an improved financial position. Net charge-offs
of $1.5 million in 2005 represented 0.13% of average loans/leases during the
period, compared to net charge-offs of $2.0 million in 2004, representing 0.18%
of average loans/leases.
Noninterest Income
Total noninterest income was $30.8 million in 2005, an increase of 10.0% over
2004. The Company has been able to expand the contribution of noninterest income
to total revenues by developing and introducing new products and by marketing
its services across all of the Company's markets. Noninterest income represented
29.1% of total revenue in 2005, compared with 28.2% in 2004.
In late 2005, the Company entered into an agreement with NOVA Information
Systems (NOVA) to transfer customer service, processing services, and support
operations for all merchant card processing customers. The agreement calls for
NOVA to receive all future revenue from the Company's current merchant
customers, and resulted in a pre-tax net gain of approximately $3.0 million in
the fourth quarter of 2005. The Company generates referral fees and income based
on a percentage of net sales revenue from new customers referred to NOVA. The
agreement with NOVA provides the Company's customers with improved technology
for merchant card processing that is available through economies of scale that
NOVA has as one of the largest merchant processing companies in the country.
Service charges on deposit accounts were up $269,000 or 3.4% to $8.3 million in
2005, compared to $8.0 million in 2004. An increase in the number of transaction
accounts, fee increases, and additional deposit services contributed to the
growth in service charges on deposit accounts in 2005 over 2004. The average
dollar volume of noninterest-bearing accounts increased by 8.9% between 2004 and
2005, from $297.6 million to $324.0 million. The largest component of service
charges on deposit accounts is overdraft fees. Overdraft fees over the past
several years have benefited from the implementation of an automated overdraft
payment program in mid-2002 for personal accounts. This overdraft program was
expanded in mid-2004 to encompass a broader customer base, including commercial
accounts.
Insurance commissions and fees were $7.5 million in 2005, an increase of $1.1
million or 17.3% over 2004. Tompkins Insurance's acquisition of the Banfield &
Associates, Inc., an insurance agency in Ithaca, New York, at year-end 2004
contributed to the growth in commission income in 2005 over 2004. This
acquisition also provides an opportunity to offer insurance services to the
customers of Tompkins Trust Company. Additionally, Tompkins Insurance has
continued its efforts to offer services to customers of The Bank of Castile.
These efforts include locating Tompkins Insurance representatives in offices of
The Bank of Castile.
Trust and investment services generated $5.4 million in revenue in 2005, an
increase of 0.7% over revenue of $5.4 million in 2004. With fees largely based
on the market value and mix of assets managed, the general direction of the
stock market can have a considerable impact on fee income. The market value of
assets managed by, or in custody of, Tompkins Investment Services was $1.5
billion at December 31, 2005, up 2.6% from December 31, 2004. These figures
include $435.2 million and $413.8 million, respectively, of Company-owned
securities where Tompkins Investment Services is custodian. Tompkins Investment
Services generates fee income through managing trust and investment
24
relationships, managing estates, providing custody services, and managing
investments in employee benefits plans. Services are primarily provided to
customers in the Trust Company's market area of Tompkins County; however,
Tompkins Investment Services representatives also serve clients in The Bank of
Castile and Mahopac National Bank markets. The number of accounts increased by
7.5% between December 31, 2005, and December 31, 2004.
Card services income of $2.6 million in 2005 was up $174,000 or 7.0% over income
of $2.5 million in 2004. An increased number of cardholders and higher
transaction volume contributed to the growth in card services income in 2005.
Noninterest income also includes $1.1 million from increases in cash surrender
value of corporate owned life insurance (COLI), down from $1.2 million in 2004.
The Company's average investment in COLI was $25.8 million during 2005, compared
to $23.3 million during 2004. The Company purchased about $2.1 million in
additional COLI in 2005. Although income associated with the insurance policies
is not included in interest income, increases in the cash surrender value
produced a tax-adjusted return of approximately 7.08% in 2005, and 8.53% in
2004.
The $206,000 increase in other income in 2005 over 2004 was largely driven by a
$207,000 gain on sale of real estate. In 2004, The Bank of Castile relocated its
Warsaw Office to a newly renovated building. The former Warsaw Office building
was sold in 2005 for a gain of $207,000.
The Company has an investment in a Small Business Investment Company, Cephas
Capital Partners, L.P. ("Cephas"), totaling $3.4 million at December 31, 2005
and December 31, 2004. For 2005, the Company recognized income from this
investment of $333,000 compared with income of $381,000 in 2004. The Company
believes that as of December 31, 2005, there is no impairment with respect to
this investment.
In late 2005, the Company sold approximately $80 million of available-for-sale
securities as part of a portfolio restructuring that resulted in a pre-tax loss
of approximately $1.5 million. Proceeds from the sale have been primarily used
to acquire higher-yielding securities, which is expected to have a positive
impact on interest income in future periods.
Noninterest Expense
Noninterest expenses for the year ended December 31, 2005, were $62.1 million,
an increase of 6.7% over noninterest expenses of $58.2 million for the year
ended December 31, 2004. Changes in the various components of noninterest
expense are discussed below.
Personnel-related expenses represented 58.2% of noninterest expenses in 2005,
compared to 58.4% in 2004. Total personnel-related expenses increased by $2.2
million or 6.4% in 2005, to $36.1 million from $34.0 million. The increase in
personnel-related expenses is concentrated in salaries and wages and reflects an
increased number of employees and salary increases. Average full-time
equivalents (FTEs) increased from 578 for the year ended December 31, 2004, to
587 for the year ended December 31, 2005. Tompkins Insurance's acquisition of
Banfield & Associates, Inc. in late 2004 contributed to the increase in year-end
FTEs. Also included in 2005 salaries and wages was $63,000 resulting from the
decision to accelerate unvested stock options for all non-executives in late
2005.
Also included in personnel-related expenses are post-retirement benefits, which
were also up over prior year. Post-retirement benefits expense did benefit from
a change in the Company's post-retirement health care plan during 2005. Refer to
"Note 11 Employee Benefit Plans" in Notes to Consolidated Financial Statements
in Part II, Item 8. of this Report.
Expense for premises, furniture, and fixtures totaled $7.7 million in 2005, an
increase of $569,000 or 8.0% over expense of $7.1 million in 2004. Additions to
the Company's branch network, including the Mount Kisco office of Mahopac
National Bank, which opened in July 2004, and the opening of the Tompkins
Financial Center in Batavia, New York, in early 2005, as well as higher real
estate taxes, insurance and utility costs contributed to the increase in
year-over-year expenses for bank premises and furniture.
Marketing expense was up 16.1% in 2005 over 2004. Planned marketing initiatives
for 2005 accounted for the increase in marketing expenditures over the prior
year.
Professional fees totaled $1.5 million in 2005 compared with $1.7 million in
2004. The $184,000 or 11.1% decline in this category is mainly a result of lower
expenses related to the Company's compliance with the internal control over
financial reporting requirements under Section 404 of the Sarbanes-Oxley Act.
External costs for professional services related to the implementation and
compliance with Section 404 were $618,000 in 2004, whereas ongoing compliance
costs in 2005 included the addition of one staff position and $185,000 in costs
related to external professional services.
Software licenses and maintenance expenses were $1.8 million, an increase of
$325,000 or 22.4% over 2004. Increases in annual maintenance contracts
contributed to the increase in this category, as did expenses related to the
implementation of new systems.
Other operating expenses totaled $10.9 million in 2005, which is up 7.1% over
the same period in 2004. The increase was distributed across the following
expense categories: business development, printing and supplies, software
amortization, audits and examinations, and education and training.
25
The Company's efficiency ratio, defined as operating expense excluding
amortization of intangible assets, divided by tax-equivalent net interest income
plus noninterest income before securities gains and losses (increase in the cash
surrender value of COLI is shown on a tax equivalent basis), was 55.5% in 2005,
compared to 56.1% in 2004. Tax equivalency was based upon a 40% tax rate.
Excluding the tax equivalent adjustments for tax-exempt securities, tax-exempt
loans/leases, and COLI income, the efficiency ratio would be 57.3% in 2005 and
58.0% in 2004.
Minority Interest in Consolidated Subsidiaries
Minority interest expense represents the portion of net income in consolidated
majority-owned subsidiaries that is attributable to the minority owners of a
subsidiary. The Company had minority interest expense of $131,000 in 2005
compared to $133,000 in 2004, related to minority interests in three real estate
investment trusts, which are substantially owned by the Company's banking
subsidiaries.
Income Tax Expense
The provision for income taxes provides for Federal and New York State income
taxes. The 2005 provision was $13.2 million, compared to $12.5 million in 2004.
The increase was primarily due to a higher level of taxable income. The
effective tax rate for the Company decreased in 2005 to 32.3%, from 32.8% in
2004. The decrease in the effective rate in 2005 compared with 2004 is due to
higher levels of tax-advantaged income, such as income from investments in
municipal bonds, economic zone credits, and new market tax credits as well as
additional investments in real estate investment trusts in 2005.
FINANCIAL CONDITION
Total assets grew by $104.0 million or 4.9% to $2.2 billion at December 31,
2006, compared to $2.1 billion at December 31, 2005. Table 3-Balance Sheet
Comparisons below provides a comparison of average and year-end balances of
selected balance sheet categories over the past three years, and the change in
those balances between 2005 and 2006. Over the past several years, the Company
has focused on growing average earning assets to increase net interest income
and offset the negative impact of a narrowing spread between the yield on
earning assets and the cost of interest bearing liabilities. Earning asset
growth in 2006 included a $54.9 million increase in loans, mainly commercial
real estate, commercial loans, and residential real estate. Residential loan
growth is net of $12.5 million in sales of fixed rate residential mortgage loans
and $32.0 million of residential mortgage loans securitized with FHLMC during
2006. A more detailed discussion of the loan portfolio is provided below in this
section under the caption "Loan/Leases".
The Company's investment portfolio (excluding fair value adjustments on
available-for-sale securities) was up 7.9% to approximately $722.3 million at
year-end 2006. Contributing to the increase in the investment portfolio was the
second quarter 2006 securitization of about $32.0 million of Company originated
residential mortgage loans, which subsequent to securitization with FHLMC, are
part of the Company's available-for-sale investment portfolio. A more detailed
discussion of the investment portfolio is provided below in this section under
the caption "Securities".
Deposit growth generated by the Company's branch network has supported the
majority of the growth in earning assets. Core deposits remain the primary
source of funding with core deposits increasing by $21.1 million or 1.7% to $1.3
billion at year-end 2006. Time deposits of $100,000 and more increased $16.3
million, or 5.5%, to $313.1 million at year-end 2006, from $296.8 million at
year end 2005, as the rates on these products increased with market rates. The
Company also uses wholesale funding sources, which include borrowings and
securities sold under agreements to repurchase, to support asset growth. These
funding sources were up $61.1 million or 28.2% between year-end 2006 and
year-end 2005 at $277.4 million and $216.3 million, respectively. Refer to "Note
9 Securities Sold Under Agreements to Repurchase and Federal Funds Purchased"
and "Note 10 Other Borrowings" in Notes to Consolidated Financial Statements in
Part II, Item 8. of this Report on Form 10-K for further details on these
funding sources.
26
Table 3 - Balance Sheet Comparisons
AVERAGE BALANCE SHEET
Change (2005-2006)
(in thousands) 2006 2005 2004 Amount Percentage
-------------------------------------------------------------------------------------------------------------------------------
Total assets $2,139,192 $2,038,040 $1,939,223 $ 101,152 4.96%
Earning assets * 1,987,258 1,896,197 1,801,145 91,061 4.80%
Total loans and leases, less unearned income
and net deferred costs and fees 1,269,650 1,220,016 1,116,965 49,634 4.07%
Securities * 714,891 671,695 672,813 43,196 6.43%
Core deposits ** 1,254,536 1,221,082 1,175,110 33,454 2.74%
Time deposits of $100,000 and more 296,714 224,248 138,056 72,466 32.32%
Federal funds purchased and securities
sold under agreements to repurchase 159,147 157,817 175,168 1,330 0.84%
Other borrowings 79,310 70,486 81,213 8,824 12.52%
Shareholders' equity 184,872 174,986 163,354 9,886 5.65%
-------------------------------------------------------------------------------------------------------------------------------
ENDING BALANCE SHEET
Change (2005-2006)
(in thousands) 2006 2005 2004 Amount Percentage
-------------------------------------------------------------------------------------------------------------------------------
Total assets $2,210,837 $2,106,870 $1,970,295 $ 103,967 4.93%
Earning assets * 2,052,478 1,944,124 1,832,043 108,354 5.57%
Total loans and leases, less unearned income
and net deferred costs and fees 1,326,298 1,271,349 1,172,148 54,949 4.32%
Securities * 722,257 669,414 658,872 52,843 7.89%
Core deposits ** 1,269,428 1,248,314 1,201,988 21,114 1.69%
Time deposits of $100,000 and more 313,137 296,806 150,076 16,331 5.50%
Federal funds purchased and securities
sold under agreements to repurchase 191,490 152,651 153,715 38,839 25.44%
Other borrowings 85,941 63,673 63,303 22,268 34.97%
Shareholders' equity 189,620 181,221 171,002 8,399 4.63%
===============================================================================================================================
* Balances of available-for-sale securities are shown at amortized cost.
** Core deposits equal total deposits less time deposits of $100,000 and more,
brokered deposits, and municipal money market deposits.
Shareholders' Equity
The Consolidated Statements of Changes in Shareholders' Equity included in the
Consolidated Financial Statements of the Company contained in Part II, Item 8.
of this Report, detail the changes in equity capital, including payments to
shareholders in the form of cash and stock dividends. The Company continued its
long history of increasing cash dividends with a per share increase of 7.5% in
2006, which follows an increase of 8.1% in 2005. Dividends per share amounted to
$1.15 in 2006, compared to $1.07 in 2005, and $0.99 in 2004. Cash dividends paid
represented 40.7%, 37.9%, and 38.1% of after-tax net income in each of 2006,
2005, and 2004, respectively.
Total shareholders' equity was up $8.4 million or 4.6% to $189.6 million at
December 31, 2006, from $181.2 million at December 31, 2005. On May 15, 2006,
the Company paid a 10% stock dividend. The stock dividend has no impact on the
Company's total equity capital, but does result in a reallocation of equity,
primarily by reducing retained earnings and increasing additional paid-in
capital. Retained earnings were down $24.8 million between year-end 2005 and
year-end 2006, from $69.2 million to $44.4 million, while additional paid-in
capital increased by $39.5 million, from $118.7 million at December 31, 2005, to
$158.2 million at December 31, 2006, mainly due to the 10% stock dividend. The
increase in accumulated other comprehensive loss is due to adoption of SFAS No.
158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement
Plans--An Amendment of FASB No. 87, 88, 106 and 132(R)" ("SFAS 158"). SFAS 158
requires that the funded status of defined benefit postretirement plans be
recognized on the company's balance sheet, and changes in the funded status be
reflected in comprehensive income, effective for fiscal years ending after
December 15, 2006. The Company's adoption of SFAS 158, effective December 31,
2006, resulted in a $7.7 million, net of tax, increase in accumulated other
comprehensive loss, a component of shareholders' equity.
On July 27, 2004, the Company's Board of Directors approved a stock repurchase
plan (the "2004 Plan"), which authorized the repurchase of up to 484,000 shares
of the Company's outstanding common stock over a two-year period. The 2004 Plan
expired on July 27, 2006. During 2006, the Company repurchased 151,742 shares at
an average cost of $42.30 per share under the 2004 Plan. Over the two-year term
of the 2004 Plan, the Company repurchased 175,924 shares at an average cost of
$40.03.
27
On July 18, 2006, the Company's Board of Directors approved a new stock
repurchase plan (the "2006 Plan") to replace the 2004 Plan, which expired in
July 2006. The 2006 Plan authorizes the repurchase of up to 450,000 shares of
the Company's outstanding common stock over a two-year period. During 2006, the
Company repurchased 88,228 shares at an average cost of $43.58 under the 2006
Plan.
Total shareholders' equity was up $10.2 million or 6.0% to $181.2 million at
December 31, 2005, from $171.0 million at December 31, 2004. On February 15,
2005, the Company paid a 10% stock dividend. Retained earnings were down $25.3
million between year-end 2004 and year-end 2005, from $94.5 million to $69.2
million, while additional paid-in capital increased by $42.8 million, from $75.8
million at December 31, 2004, to $118.7 million at December 31, 2005, mainly due
to the 10% stock dividend. The decrease in accumulated other comprehensive
income (loss) is due to an increase in unrealized losses on available-for-sale
securities largely driven by increases in short-term interest rates.
The Company and its subsidiary banks are subject to quantitative capital
measures established by regulation to ensure capital adequacy. Consistent with
the objective of operating a sound financial organization, the Company and its
subsidiary banks maintain capital ratios well above regulatory minimums, as
detailed in "Note 17 Regulations and Supervision" in Notes to Consolidated
Financial Statements in Part II, Item 8. of this Report on Form 10-K.
Securities
The Company's securities portfolio (excluding fair value adjustments on
available-for-sale securities) at December 31, 2006, was $722.3 million,
reflecting an increase of 7.9% from $669.4 million at December 31, 2005. "Note 2
Securities" in Notes to Consolidated Financial Statements in Part II, Item 8. of
this Report, details the types of securities held, the carrying and fair values,
and the contractual maturities as of December 31, 2006 and 2005. Qualified
tax-exempt debt securities, primarily obligations of state and political
subdivisions, were $106.8 million at December 31, 2006, or 14.8% of total
securities, compared to $129.5 million, or 19.3% of total securities at December
31, 2005. Mortgage-backed securities, consisting mainly of securities issued by
U.S. Government agencies, totaled $356.6 million at December 31, 2006, compared
to $321.2 million at December 31, 2005. Contributing to the growth in
mortgage-backed securities was the Company's second quarter 2006 securitization
of $32.0 million of residential loans, which are now held in the Company's
available-for-sale securities portfolio.
The amortized cost and fair value of the Company's securities portfolio at
December 31, 2004, is presented in the table below.
Available-for-Sale Securities
-------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2004 (in thousands) Cost Gains Losses Value
-------------------------------------------------------------------------------------------------------------
Obligations of U.S. Government sponsored agencies $ 231,201 $ 614 $ 1,933 $ 229,882
Obligations of states and political subdivisions 43,024 1,396 86 44,334
Mortgage-backed securities 300,359 2,853 1,343 301,869
U.S. corporate securities 3,000 0 50 2,950
-------------------------------------------------------------------------------------------------------------
Total debt securities 577,584 4,863 3,412 579,035
Equity securities 12,036 0 0 12,036
-------------------------------------------------------------------------------------------------------------
Total available-for-sale securities $ 589,620 $ 4,863 $ 3,412 $ 591,071
=============================================================================================================
Held-to-Maturity Securities
-------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2004 (in thousands) Cost Gains Losses Value
-------------------------------------------------------------------------------------------------------------
Obligations of states and political subdivisions $ 69,252 $ 1,498 $ 224 $ 70,526
-------------------------------------------------------------------------------------------------------------
Total held-to-maturity debt securities $ 69,252 $ 1,498 $ 224 $ 70,526
=============================================================================================================
Available-for-sale securities at year-end 2006 include $14.7 million in
nonmarketable equity securities, which are carried at cost since fair values are
not readily determinable. This figure includes $11.6 million of Federal Home
Loan Bank (FHLB) stock, and $724,000 of Federal Reserve Bank (FRB) stock, which
are required to be held for regulatory purposes and for borrowings availability.
The required investment in FHLB stock is tied to the Company's borrowing levels
with the FHLB. Substantially all of the above mortgage-backed securities are
direct pass through securities or collateralized mortgage obligations issued or
backed by Federal agencies.
Management's policy is to purchase investment grade securities that, on average,
have relatively short expected durations. This policy helps mitigate interest
rate risk and provides sources of liquidity without significant risk to capital.
A large percentage of securities are direct obligations of the Federal
government and its agencies. The contractual maturity distribution of debt
securities and mortgage-backed securities as of December 31, 2006, along with
the weighted average yield of each category, is presented in Table 4-Maturity
28
Distribution below. Balances are shown at amortized cost and weighted average
yields are calculated on a fully taxable-equivalent basis. Expected maturities
will differ from contractual maturities presented in Table 4-Maturity
Distribution below, because issuers may have the right to call or prepay
obligations with or without penalty and mortgage-backed securities will pay
throughout the periods prior to contractual maturity
Table 4 - Maturity Distribution
As of December 31, 2006
-------------------------------------------------------------------------------------------------------------------
Securities Securities
Available-for-Sale * Held-to-Maturity
-------------------------------------------------------------------------------------------------------------------
(dollar amounts in thousands) Amount Yield (FTE) Amount Yield (FTE)
-------------------------------------------------------------------------------------------------------------------
Obligations of U.S. Government sponsored agencies
Within 1 year $ 19,990 3.76% $ 0 0.00%
Over 1 to 5 years 174,950 4.09% 0 0.00%
Over 5 to 10 years 36,660 5.06% 0 0.00%
Over 10 years 10,000 5.75% 0 0.00%
-------------------------------------------------------------------------------------------------------------------
$ 241,600 4.28% $ 0 0.00%
-------------------------------------------------------------------------------------------------------------------
State and political subdivisions
Within 1 year $ 4,997 4.42% $ 15,897 5.09%
Over 1 to 5 years 16,520 5.72% 21,954 5.17%
Over 5 to 10 years 23,621 5.55% 17,294 5.94%
Over 10 years 2,653 5.72% 3,893 6.69%
-------------------------------------------------------------------------------------------------------------------
$ 47,791 5.50% $ 59,038 5.47%
-------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities
Within 1 year $ 11 5.08% $ 0 0.00%
Over 1 to 5 years 22,958 4.35% 0 0.00%
Over 5 to 10 years 122,146 4.60% 0 0.00%
Over 10 years 211,504 5.13% 0 0.00%
-------------------------------------------------------------------------------------------------------------------
$ 356,619 4.90% $ 0 0.00%
-------------------------------------------------------------------------------------------------------------------
Other securities
Within 1 year $ 0 0.00% $ 0 0.00%
Over 1 to 5 years 0 0.00% 0 0.00%
Over 5 to 10 years 0 0.00% 0 0.00%
Over 10 years 2,500 8.12% 0 0.00%
Equity securities 14,709 5.30% 0 0.00%
-------------------------------------------------------------------------------------------------------------------
$ 17,209 5.71% $ 0 0.00%
-------------------------------------------------------------------------------------------------------------------
Total securities
Within 1 year $ 24,998 3.90% $ 15,897 5.09%
Over 1 to 5 years 214,428 4.25% 21,954 5.17%
Over 5 to 10 years 182,427 4.82% 17,294 5.94%
Over 10 years 226,657 5.19% 3,893 6.69%
Equity securities 14,709 5.30% 0 0.00%
-------------------------------------------------------------------------------------------------------------------
$ 663,219 4.74% $ 59,038 5.47%
===================================================================================================================
* Balances of available-for-sale securities are shown at amortized cost.
At December 31, 2006, there were no holdings of any one issuer, other than the
U.S. Government sponsored agencies, in an amount greater than 10% of the
Company's shareholders' equity.
Loans/Leases
Interest and fees earned on loans is the Company's primary source of revenues.
Total loans and leases, net of unearned income and net deferred loan fees and
costs, grew 4.3%, to $1.33 billion at December 31, 2006, from $1.27 billion at
December 31, 2005. As of December 31, 2006, total loans represented 60.0% of
total assets compared to 60.3% as of December 31, 2005. Table 5-Loan/Lease
Classification Summary below details the composition and volume changes in the
loan/lease portfolio over the past five years.
29
Table 5 - Loan/Lease Classification Summary
As of December 31,
(in thousands) 2006 2005 2004 2003 2002
--------------------------------------------------------------------------------------------------------------------
Residential real estate $ 469,146 $ 475,155 $ 451,014 $ 404,487 $ 391,120
Commercial real estate 393,829 347,443 296,614 242,248 196,517
Real estate construction 26,130 30,309 27,163 21,788 26,110
Commercial 345,194 306,410 277,082 275,666 256,010
Consumer and other 82,341 100,249 100,971 104,647 103,853
Leases 11,962 14,864 23,121 24,340 25,511
--------------------------------------------------------------------------------------------------------------------
Total loans and leases 1,328,602 1,274,430 1,175,965 1,073,176 999,121
Less: unearned income and
deferred costs and fees (2,304) (3,081) (3,817) (4,036) (3,775)
--------------------------------------------------------------------------------------------------------------------
Total loans and leases, net of
unearned income and deferred
costs and fees $ 1,326,298 $ 1,271,349 $ 1,172,148 $ 1,069,140 $ 995,346
--------------------------------------------------------------------------------------------------------------------
Residential real estate loans of $469.1 million at year-end 2006 decreased by
$6.0 million or 1.3% from $475.2 million in 2005, and comprised 35.4% of total
loans and leases at December 31, 2006. Residential loan balances at year-end
2006 are net of $32.0 million of residential loans that were securitized in the
second quarter of 2006 and $12.5 million of loan sales to Federal agencies.
Residential real estate mortgage loans are generally underwritten in accordance
with secondary market guidelines to enhance the liquidity of these generally
longer-term assets. As part of its asset/liability management strategy the
Company may sell certain residential mortgage loans in the secondary market.
During 2006, 2005, and 2004, the Company sold residential mortgage loans
totaling $12.5 million, $16.5 million, and $14.7 million, respectively, and
realized gains on these sales of $177,000, $238,000, and $240,000, respectively.
When residential mortgage loans are sold or securitized, the Company typically
retains all servicing, providing the Company with a source of fee income. The
Company generally sells loans without recourse. In connection with the loan
sales and securitizations in 2006, 2005, and 2004, the Company recorded
mortgage-servicing assets of $294,000, $98,000, and $95,200, respectively.
Amortization of mortgage servicing amounted to $116,000, in 2006, $127,000 in
2005 and $168,000 in 2004. Residential mortgage loans serviced for others
totaled $162.0 million at December 31, 2006, compared to $135.6 million at
December 31, 2005. Capitalized mortgage servicing rights totaled $1.1 million at
December 31, 2006, and $949,000 at December 31, 2005, and are reported as
intangible assets on the consolidated statements of condition.
Commercial real estate loans increased by $46.4 million, or 13.4%, in 2006 over
2005, from $347.4 million in 2005 to $393.8 million in 2006. Commercial real
estate loans of $393.8 million represented 29.7% of total loans and leases at
December 31, 2006. Commercial loans totaled $345.2 million at December 31, 2006,
which is a 12.7% increase from commercial loans of $306.4 million at December
31, 2005. Growth in commercial lending, including commercial real estate
reflects a continued emphasis on commercial lending. Management believes that
the Company's community banking strategy can provide value to small business
customers, while commercial lending products are typically attractive to the
Company from a yield and interest rate risk perspective. The combined legal
lending limits of the Company's three subsidiary banks has allowed the Company
to attract larger lending relationships.
The consumer loan portfolio includes personal installment loans, indirect
automobile financing, and overdraft lines of credit. The Company faces
significant competition from local and national lenders as well as auto finance
companies for consumer lending products. Consumer and other loans were $82.3
million at December 31, 2006, down from $100.2 million at December 31, 2005. The
fourth quarter 2006 sale of the Company's credit card portfolio contributed to
the decrease in consumer loans at year-end 2006.
The lease portfolio decreased by 19.5% to $12.0 million at December 31, 2006
from $14.9 million at December 31, 2005. The lease portfolio has traditionally
consisted of leases on vehicles for consumers and small businesses. Competition
for automobile financing has led to a decline in the consumer lease portfolio
over the past several years. Management continues to focus on leasing
opportunities, primarily commercial leasing and municipal leasing. As of
December 31, 2006, commercial leases and municipal leases represented 99.2% of
total leases, while consumer leases made up the remaining 0.8%. As of December
31, 2005, commercial leases and municipal leases represented 99.8% of total
leases, while consumer leases made up the remaining 0.2.%.
The Company's loan/lease customers are located primarily in the New York
communities served by its three subsidiary banks. The Trust Company operates
fourteen banking offices in the counties of Tompkins, Cayuga, Cortland, and
Schuyler, New York. The Bank of Castile operates fourteen banking offices in
towns situated in and around the areas commonly known as the Letchworth State
Park area and the Genesee Valley region of New York State. Mahopac National Bank
is located in Putnam County, New York and operates five banking offices in that
county, three full service offices in neighboring Dutchess County, New York and
one full service office in Westchester County, New York. Other than general
economic risks, management is not aware of any material concentrations of credit
risk to any industry or individual borrower. Further information on the
Company's lending activities, including related party transactions, is provided
in "Note 4 Loan/Lease Classification Summary and Related Party Transactions" in
Notes to Consolidated Financial Statements in Part II, Item 8. of this Report.
30
The Allowance for Loan/Lease Losses
Management reviews the adequacy of the allowance for loan/lease losses
("allowance") on a regular basis. Management considers the accounting policy
relating to the allowance to be a critical accounting policy, given the inherent
uncertainty in evaluating the levels of the allowance required to cover credit
losses in the portfolio and the material effect that assumptions could have on
the Company's results of operations. Factors considered in determining the
adequacy of the allowance and related provision include: management's approach
to granting new credit; the ongoing monitoring of existing credits by the
internal and external loan review functions; the growth and composition of the
loan/lease portfolio; comments received during the course of independent
examinations; current local economic conditions; past due and nonperforming loan
statistics; the impact of competition on loan structuring and pricing; the
estimated values of collateral; and a historical review of loan/lease loss
experience.
The Company has developed a methodology to measure the amount of estimated loan
loss exposure inherent in the loan portfolio to ensure that an adequate
allowance is maintained. The methodology includes an estimate of exposure for
the following: specifically reviewed and graded loans, historical loss
experience by product type, past due and nonperforming loans, and other internal
and external factors such as local and regional economic conditions, growth
trends, and credit policy and underwriting standards. The methodology includes a
review of loans considered impaired in accordance with the Statement of
Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan", as well as other commercial loans and commercial mortgage
loans that are evaluated using an internal rating system. An estimated exposure
amount is assigned to these internally reviewed credits based upon a review of
the borrower's financial condition, payment history, collateral adequacy, and
business conditions. For commercial loans and commercial mortgage loans not
specifically reviewed, and for homogenous loan portfolios such as residential
mortgage loans and consumer loans, estimated exposure amounts are assigned based
upon historical loss experience, past due status, and management's judgment of
the effects of recent and forecasted economic conditions on portfolio
performance. Lastly, additional amounts are maintained based upon management
judgment and assessment of other quantitative and qualitative factors such as
regional and local economic conditions, concentrations of credit, industry
concerns, adverse market changes in estimated or appraised collateral value, and
portfolio growth trends.
Since the methodology is based upon historical experience and trends as well as
management's judgment, factors may arise that result in different estimations.
Significant factors that could give rise to changes in these estimates may
include, but are not limited to, changes in economic conditions in the local
area, concentration of risk, changes in interest rates, and declines in local
property values. While management's evaluation of the allowance as of December
31, 2006, considers the allowance to be adequate, under adversely different
conditions or assumptions, the Company would need to increase the allowance.
The allocation of the Company's allowance as of December 31, 2006, and each of
the previous four years is illustrated in Table 6- Allocation of the Allowance
for Loan/Lease Losses, below.
31
Table 6 - Allocation of the Allowance for Loan/Lease Losses
December 31
(dollar amounts in thousands) 2006 2005 2004 2003 2002
------------------------------------------------------------------------------------------------------------------------------
Total loans outstanding at end of year $ 1,326,298 $ 1,271,349 $ 1,172,148 $ 1,069,140 $ 995,346
------------------------------------------------------------------------------------------------------------------------------
ALLOCATION OF THE ALLOWANCE BY
LOAN TYPE:
Commercial $ 6,308 $ 5,354 $ 5,871 $ 5,872 $ 4,349
Real estate 5,609 5,357 3,947 2,909 2,809
Consumer and all other 2,236 2,850 2,731 2,904 2,912
Unallocated 175 116 0 0 1,634
------------------------------------------------------------------------------------------------------------------------------
Total $ 14,328 $ 13,677 $ 12,549 $ 11,685 $ 11,704
------------------------------------------------------------------------------------------------------------------------------
ALLOCATION OF THE ALLOWANCE AS
A PERCENTAGE OF TOTAL ALLOWANCE:
Commercial 44% 39% 47% 50% 37%
Real estate 39% 39% 31% 25% 24%
Consumer and all other 16% 21% 22% 25% 25%
Unallocated 1% 1% 0% 0% 14%
------------------------------------------------------------------------------------------------------------------------------
Total 100% 100% 100% 100% 100%
------------------------------------------------------------------------------------------------------------------------------
LOAN/LEASE TYPES AS A PERCENTAGE
OF TOTAL LOANS/LEASES:
Commercial 26% 24% 24% 26% 26%
Real estate 67% 67% 66% 62% 62%
Consumer and all other 7% 9% 10% 12% 12%
------------------------------------------------------------------------------------------------------------------------------
Total 100% 100% 100% 100% 100%
------------------------------------------------------------------------------------------------------------------------------
Management is committed to early recognition of loan problems and to maintaining
an adequate allowance. The above allocation is neither indicative of the
specific amounts or the loan categories in which future charge-offs may occur,
nor is it an indicator of future loss trends. The allocation of the allowance to
each category does not restrict the use of the allowance to absorb losses in any
category. The increase in the allowance between year-end 2005 and year-end 2006
reflects higher allocations due to growth in the loan portfolio and additional
allocations for specifically reviewed and graded loans.
The level of future charge-offs are dependent upon a variety of factors such as
national and local economic conditions, trends in various industries,
underwriting characteristics, and conditions unique to each borrower. Given
uncertainties surrounding these factors, it is difficult to estimate future
losses.
The principal balances of nonperforming loans/leases, including impaired
loans/leases, as of December 31 are detailed in the table below.
(dollar amounts in thousands) 2006 2005 2004 2003 2002
------------------------------------------------------------------------------------------------------------------------------
Loans 90 days past due and accruing $ 8 $ 12 $ 31 $ 26 $ 368
Nonaccrual loans 2,994 4,072 7,392 7,321 6,977
Troubled debt restructurings not included above 0 50 189 246 179
------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans/leases 3,002 4,134 7,612 7,593 7,524
------------------------------------------------------------------------------------------------------------------------------
Other real estate owned 348 366 89 385 279
------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 3,350 $ 4,500 $ 7,701 $ 7,978 $ 7,803
------------------------------------------------------------------------------------------------------------------------------
Allowance as a percentage of loans/leases
outstanding 1.08% 1.08% 1.07% 1.09% 1.18%
------------------------------------------------------------------------------------------------------------------------------
Allowance as a percentage of nonperforming
loans/leases 477.28% 330.84% 164.86% 153.89% 155.56%
------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets as a percentage of
total assets 0.15% 0.21% 0.39% 0.43% 0.47%
==============================================================================================================================
The allowance represented 1.08% of total loans/leases outstanding at December
31, 2006, unchanged from December 31, 2005. The reserve coverage of
nonperforming loans (loans past due 90 days and accruing, nonaccrual loans, and
restructured troubled debt) was 4.77 times at December 31, 2006, compared to
3.31 times at December 31, 2005. The difference between the interest income that
would have been recorded if these loans/leases had been paid in accordance with
their original terms and the interest income recorded for the years ended
December 31, 2006, 2005 and 2004 was not significant. A discussion of the
Company's policy for placing loans on nonaccrual status is included in "Note 1
Summary of Significant Accounting Policies" in Notes to Consolidated Financial
Statements in Part II, Item 8. of this Report.
32
The Company's historical loss experience is detailed in Table 7-Analysis of the
Allowance for Loan/Lease Losses
Table 7 - Analysis of the Allowance for Loan/Lease Losses
December 31
(in thousands) 2006 2005 2004 2003 2002
------------------------------------------------------------------------------------------------------------------------------
Average loans outstanding during year $ 1,269,650 $ 1,220,016 $ 1,116,965 $ 1,030,299 $ 928,383
Balance of allowance at beginning of year 13,677 12,549 11,685 11,704 10,706
LOANS CHARGED-OFF:
Commercial, financial, agricultural 333 890 1,221 1,595 335
Real estate - mortgage 43 408 78 122 41
Installment loans to individuals 504 595 977 887 940
Lease financing 210 0 27 9 133
Other loans 174 344 487 394 272
------------------------------------------------------------------------------------------------------------------------------
Total loans charged-off $ 1,264 $ 2,237 $ 2,790 $ 3,007 $ 1,721
------------------------------------------------------------------------------------------------------------------------------
RECOVERIES OF LOANS PREVIOUSLY
CHARGED-OFF:
Commercial, financial, agricultural 136 210 198 73 91
Real estate - mortgage 19 32 54 26 15
Installment loans to individuals 226 277 406 311 320
Lease financing 3 37 23 5 22
Other loans 107 150 113 76 36
------------------------------------------------------------------------------------------------------------------------------
Total loans recovered $ 491 $ 706 $ 794 $ 491 $ 484
------------------------------------------------------------------------------------------------------------------------------
Net loans charged-off 773 1,531 1,996 2,516 1,237
Additions to allowance charged to operations 1,424 2,659 2,860 2,497 2,235
------------------------------------------------------------------------------------------------------------------------------
Balance of allowance at end of year $ 14,328 $ 13,677 $ 12,549 $ 11,685 $ 11,704
------------------------------------------------------------------------------------------------------------------------------
Net charge-offs as a percentage of average
loans/leases outstanding during the year 0.06% 0.13% 0.18% 0.24% 0.13%
==============================================================================================================================
Net loans charged-off have decreased over the past several years after a spike
in 2003. Economic conditions were weak in 2003, particularly, in the Western New
York markets served by The Bank of Castile. Some major employers in the
Rochester, New York market were downsizing and there was softness in
agricultural related businesses. Economic conditions have improved in this
market area over the past few years. The economic climates in the Central New
York markets served by Tompkins Trust Company and the lower Hudson Valley
markets served by Mahopac National Bank remain favorable.
Management reviews the loan portfolio continuously for evidence of potential
problem loans/leases. Potential problem loans/leases are loans/leases that are
currently performing in accordance with contractual terms, but where known
information about possible credit problems of the related borrowers causes
management to have doubt as to the ability of such borrowers to comply with the
present loan payment terms and may result in disclosure of such loans/leases as
nonperforming at sometime in the future. Management considers loans/leases
classified as Substandard, which continue to accrue interest, to be potential
problem loans/leases. The Company, through its internal loan review function
identified 25 commercial relationships totaling $19.7 million at December 31,
2006, and 34 commercial relationships totaling $20.0 million at December 31,
2005, which it classified as Substandard, which continue to accrue interest.
These loans remain in a performing status due to a variety of factors, including
payment history, the value of collateral supporting the credits, and personal or
government guarantees. These factors, when considered in the aggregate, give
management reason to believe that the current risk exposure on these loans does
not warrant accounting for these loans as nonperforming. Approximately $3.9
million of these loans at December 31, 2006, are backed by guarantees of U.S.
government agencies. While in a performing status as of December 31, 2006, these
loans exhibit certain risk factors, which have the potential to cause them to
become nonperforming. Accordingly, management's attention is focused on these
credits, which are reviewed on at least a quarterly basis. The decrease in the
number and dollar amount of commercial relationships classified as Substandard,
which continue to accrue interest, between December 31, 2005, and December 31,
2006, primarily reflects upgrades of approximately $5.5 million due to
improvements in financial performance, paydowns of approximately $1.8 million,
charge-offs of $0.1 million, other real estate of $.5 million, which were
partially offset by additions of $7.6 million.
33
Deposits and Other Liabilities
Total deposits of $1.7 billion at December 31, 2006, reflected an increase of
$26.4 million over total deposits at December 31, 2005. Deposit growth consisted
of core deposits, which increased by $21.1 million. Core deposits totaled $1.3
billion at December 31, 2006, and represented 62.9% of total liabilities. This
compares to core deposits of $1.2 billion, representing 64.9% of total
liabilities at December 31, 2005. Brokered deposits were down by $19.4 million
to $20.1 million. The rise in short-term market rates led to competitive
pressures to increase the rates on time deposits over the period causing some
consumers, businesses and municipalities to move excess funds from lower
yielding savings and money markets to time deposits. The three new banking
offices opened in 2006 contributed approximately $24.7 million to the growth in
2006 deposits. Table 1-Average Statements of Condition and Net Interest Analysis
above shows the average balance and average rate paid on the Company's primary
deposit categories for the years ended December 31, 2006, 2005, and 2004. A
maturity schedule of time deposits outstanding at December 31, 2006, is included
in "Note 8 Deposits" in Notes to Consolidated Financial Statements in Part II,
Item 8. of this Report.
The Company's liability for securities sold under agreements to repurchase
("repurchase agreements") amounted to $191.5 million at December 31, 2006, up
$38.8 million or 25.4% from $152.7 million at December 31, 2005.
The Company uses both retail and wholesale repurchase agreements. Retail
repurchase agreements are arrangements with local customers of the Company, in
which the Company agrees to sell securities to the customer with an agreement to
repurchase those securities at a specified later date. Retail repurchase
agreements totaled $69.5 million at December 31, 2006, and $67.7 million at
December 31, 2005. Management generally views local repurchase agreements as an
alternative to large time deposits. The Company's wholesale repurchase
agreements are primarily with the Federal Home Loan Bank (FHLB) and amounted to
$122.0 million at December 31, 2006, and $85.0 million at December 31, 2005.
Refer to "Note 9 Securities Sold Under Agreements to Repurchase and Federal
Funds Purchased" in Notes to Consolidated Financial Statements in Part II, Item
8. of this Report for further details on the Company's repurchase agreements.
The Company's other borrowings include amounts owed to the FHLB and totaled
$85.9 million at year-end 2006, up $22.2 million or 35.0% from $63.7 million at
year-end 2005. The $85.9 million in borrowings at December 31, 2006, includes
$45.2 million in term advances and $40.5 million of overnight FHLB advances. At
December 31, 2005, there were $63.4 million in term advances with the FHLB. Of
the $45.2 million of term advances at year-end 2006, $5.1 million are due within
one year and have a weighted average rate of 4.41%; and $40.1 million are due
over one year and have a weighted average rate of 4.47%.
Other borrowings include a Treasury Tax and Loan Note account with the Federal
Reserve Bank of New York totaling $100,000 at December 31, 2006 and December 31,
2005. At December 31, 2006 and 2005, Tompkins Insurance had borrowings of
$160,000 and $142,000, respectively, from unrelated financial institutions.
Refer to "Note 10 Other Borrowings" in Notes to Consolidated Financial
Statements in Part II, Item 8. of this Report for further details on the
Company's term borrowings with the FHLB.
LIQUIDITY MANAGEMENT
The objective of liquidity management is to ensure the availability of adequate
funding sources to satisfy the demand for credit, deposit withdrawals, and
business investment opportunities. The Company's large, stable core deposit base
and strong capital position are the foundation for the Company's liquidity
position. The Company uses a variety of resources to meet its liquidity needs,
which include deposits, cash and cash equivalents, short-term investments, cash
flow from lending and investing activities, repurchase agreements, and
borrowings. The Company may also use borrowings as part of a growth strategy.
Asset and liability positions are monitored primarily through Asset/Liability
Management Committees of the Company's subsidiary banks individually and on a
combined basis. These Committees review periodic reports on the liquidity and
interest rate sensitivity positions. Comparisons with industry and peer groups
are also monitored. The Company's strong reputation in the communities it
serves, along with its strong financial condition, provide access to numerous
sources of liquidity as described below. Management believes these diverse
liquidity sources provide sufficient means to meet all demands on the Company's
liquidity that are reasonably likely to occur.
Core deposits are a primary funding source and represent a low cost funding
source obtained primarily through the Company's branch network. Core deposits
increased by $21.1 million to $1.3 billion at year-end 2006, with the increase
mainly in time deposits less than $100,000 as rates on these products moved up
with the increase in market rates. Noninterest-bearing deposit balances were
flat, while savings and money market deposit balances were down slightly when
compared with year-end 2005. Core deposits represented 74.3% of total deposits
and 62.9% of total liabilities at December 31, 2006, compared to 74.2% of total
deposits and 64.9% of total liabilities at December 31, 2005. The addition of
three new banking offices in 2006 contributed to the growth in core deposits in
2006 over 2005.
Non-core funding sources, which include time deposits of $100,000 or more,
brokered time deposits, municipal money market accounts, repurchase agreements,
and other borrowings, increased by $66.4 million between year-end 2005 and
year-end 2006, from $651.0 million to $717.4 million. As a percentage of total
liabilities, non-core funding sources increased from 33.8% at year-end 2005 to
35.5% at year-end 2006. The increase in the dollar volume of non-core funding
was concentrated in overnight and term advances from the FHLB.
34
Non-core funding sources may require securities to be pledged against the
underlying liability. Securities carried at $584.0 million and $516.8 million at
December 31, 2006 and 2005, respectively, were pledged as collateral for public
deposits and other borrowings, and pledged or sold under agreements to
repurchase. Pledged securities represented 81.8% of total securities at December
31, 2006, compared to 78.4% of total securities at December 31, 2006.
The Company's liquidity is enhanced by ready access to national and regional
wholesale funding sources including Federal funds purchased, repurchase
agreements, negotiable certificates of deposit, and FHLB advances. Through its
subsidiary banks, the Company has borrowing relationships with the FHLB and
correspondent banks, which provide secured and unsecured borrowing capacity. At
December 31, 2006, the unused borrowing capacity on established lines with the
FHLB was $366.1 million. As members of the FHLB, the Company's subsidiary banks
can use unencumbered mortgage-related assets to secure additional borrowings
from the FHLB. At December 31, 2006, total unencumbered residential real estate
assets were $276.0 million. Additional assets may also qualify as collateral for
FHLB advances upon approval of the FHLB.
Short-term investments, consisting of securities with maturities of one year or
less, totaled $40.7 million at year-end 2006, and $40.5 million at year-end
2005.
Cash flow from the loan and investment portfolios provides a significant source
of liquidity. These assets may have stated maturities in excess of one year, but
have monthly interest payments and principal reductions. Total mortgage-backed
securities, at fair value, were $352.4 million at December 31, 2006, compared
with $315.5 million at December 31, 2005. Using current prepayment assumptions,
cash flow from the investment portfolio is estimated to be approximately $136.5
million in 2007. Investments in residential mortgage loans, consumer loans, and
leases totaled approximately $563.4 million at December 31, 2006. Aggregate
amortization from monthly payments on these loan assets provides significant
additional cash flow to the Company. Table 8-Loan Maturity details total
scheduled maturities of selected loan categories.
Table 8 - Loan Maturity
At December 31, 2006
Remaining maturity of selected loans Within After
(in thousands) Total 1 year 1-5 years 5 years
------------------------------------------------------------------------------------------------
Commercial real estate $ 392,843 $ 1,920 $ 14,047 $ 376,876
Real estate construction 25,991 3,042 6,179 16,770
Commercial 345,106 119,569 103,092 122,445
------------------------------------------------------------------------------------------------
Total $ 763,940 $ 124,531 $ 123,318 $ 516,091
================================================================================================
Loan balances are shown net of unearned income and deferred costs and fees
Of the loan amounts shown above in Table 8-Loan Maturity maturing over one year,
$201.7 million have fixed rates and $437.7 million have adjustable rates.
OFF-BALANCE SHEET ARRANGEMENTS
In the normal course of business the Company is party to certain financial
instruments, which in accordance with accounting principles generally accepted
in the United States, are not included in its Consolidated Statements of
Condition. These transactions include commitments under stand-by letters of
credit, unused portions of lines of credit, and commitments to fund new loans
and are undertaken to accommodate the financing needs of the Company's
customers. Loan commitments are agreements by the Company to lend monies at a
future date. These loan and letter of credit commitments are subject to the same
credit policies and reviews as the Company's loans. Because most of these loan
commitments expire within one year from the date of issue, the total amount of
these loan commitments as of December 31, 2006, are not necessarily indicative
of future cash requirements. Further information on these commitments and
contingent liabilities is provided in "Note 14 Commitments and Contingent
Liabilities" in Notes to Consolidated Financial Statements in Part II, Item 8.
of this Report.
CONTRACTUAL OBLIGATIONS
The Company leases land, buildings, and equipment under operating lease
arrangements extending to the year 2090. Most leases include options to renew
for periods ranging from 5 to 20 years. In addition, the Company has a software
contract for its core banking application through August 1, 2010, along with
contracts for more specialized software programs through 2016. Further
information on the Company's lease arrangements is provided in "Note 7 Bank
Premises and Equipment" in Notes to Consolidated Financial Statements in Part
II, Item 8. of this Report. The Company's contractual obligations as of December
31, 2006, are shown in Table 9-Contractual Obligations and Commitments below.
35
Table 9 - Contractual Obligations and Commitments
Contractual Cash Obligations Payments Due By Period
(in thousands) Within 1 Over
As of December 31, 2006 Total year 1-3 years 3-5 years 5 years
--------------------------------------------------------------------------------------------------------------------
Long-term debt $ 205,298 $ 21,484 $ 44,285 $ 47,724 $ 91,805
Operating leases 19,103 1,605 2,717 1,921 12,860
Software contracts 3,083 1,104 1,829 86 64
--------------------------------------------------------------------------------------------------------------------
Total contractual cash obligations $ 227,484 $ 24,193 $ 48,831 $ 49,731 $ 104,729
====================================================================================================================
RECENT ACCOUNTING STANDARDS
In February 2006, the FASB issued Statement No. 155, "Accounting for Certain
Hybrid Financial Instruments - an amendment of FASB Statement No. 133 and 140"
("SFAS 155"). SFAS 155 (i) permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation, (ii) clarifies which interest-only strips and
principal-only strips are not subject to the requirements of SFAS No. 133, (iii)
establishes a requirement to evaluate interests in securitized financial assets
to identify interests that are freestanding derivatives or that are hybrid
financial instruments that contain an embedded derivative requiring bifurcation,
(iv) clarifies that concentrations of credit risk in the form of subordination
are not embedded derivatives, and (v) amends SFAS No. 140 to eliminate the
prohibition on a qualifying special-purpose entity from holding a derivative
financial instrument that pertains to a beneficial interest other than another
derivative financial instrument. SFAS 155 is effective on January 1, 2007, and
did not have a material impact on the Company's results of operations and
financial condition.
On March 17, 2006, the FASB issued Statement No. 156, "Accounting for Servicing
of Financial Assets - an amendment of FASB Statement No. 140" ("SFAS 156"). SFAS
156 amends FASB Statement No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities-a replacement of FASB
Statement No. 125" ("SFAS 140"). SFAS 156 permits entities to subsequently
measure servicing rights at fair value and report changes in fair value in
earnings rather than amortize servicing rights in proportion to and over the
estimated net servicing income or loss and assess the rights for impairment or
the need for an increased obligation as required under SFAS 140. Entities that
elect to subsequently measure their servicing rights at fair value may no longer
find it necessary to qualify for and apply the provisions of FASB Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," to achieve
an income statement effect similar to the application of hedge accounting for
instruments used to manage the effect of interest rate changes on servicing
rights.
SFAS 156 is effective as of the beginning of an entity's first fiscal year that
begins after September 15, 2006. The Company adopted SFAS 156 beginning January
1, 2007, and does not expect the adoption to have a material impact on the
Company's financial condition, results of operations or cash flows.
In July 2006, FASB issued FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement No 109 ("FIN 48"). FIN 48
establishes a recognition threshold and measurement for income tax positions
recognized in an enterprise's financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. FIN 48 also establishes a
two-step evaluation process for tax positions, recognition and measurement. For
recognition, a determination is made whether it is more-likely-than-not that a
tax position will be sustained upon examination, including resolution of related
appeals or litigation processes, based on the technical merits of the position.
If the tax position meets the more-likely-than-not recognition threshold it is
measured and recognized in the financial statements as the largest amount of tax
benefit that is greater than 50% likely of being realized. If a tax position
does not meet the more-likely-than-not recognition threshold, the benefit of
that position is not recognized in the financial statements. Tax positions that
meet the more-likely-than-not recognition threshold at the effective date of FIN
48 may be recognized or, continue to be recognized, upon adoption of this
Interpretation. The cumulative effect of applying the provisions of FIN 48 shall
be reported as an adjustment to the opening balance of retained earnings for
that fiscal year. FIN 48 is effective for fiscal years beginning after December
15, 2006. Accordingly, the Company adopted FIN 48 on January 1, 2007. The
Company does not expect the adoption of FIN 48 to have a material impact on the
consolidated financial position, results of operations or cash flows.
In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157 ("SFAS 157"), "Fair Value Measurements," which defines fair value,
establishes guidelines for measuring fair value and expands disclosures
regarding fair value measurements. SFAS 157 does not require any new fair value
measurements but rather eliminates inconsistencies in guidance found in various
prior accounting pronouncements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007. Earlier adoption is permitted, provided the
company has not yet issued financial statements, including for interim periods,
for that fiscal year. The Company does not expect the adoption of SFAS 157 to
have a material impact on the consolidated financial position, results of
operations or cash flows.
36
In September 2006, the Emerging Issues Task Force ("EITF") reached a final
consensus on Issue 06-04, "Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements." The consensus stipulates that an agreement by an employer to
share a portion of the proceeds of a life insurance policy with an employee
during the postretirement period is a postretirement benefit arrangement
required to be accounted for under SFAS No. 106 or Accounting Principles Board
Opinion ("APB") No. 12, "Omnibus Opinion -- 1967." The consensus concludes that
the purchase of a split-dollar life insurance policy does not constitute a
settlement under SFAS No. 106 and, therefore, a liability for the postretirement
obligation must be recognized under SFAS No. 106 if the benefit is offered under
an arrangement that constitutes a plan or under APB No. 12 if it is not part of
a plan. Issue 06-04 is effective for annual or interim reporting periods
beginning after December 15, 2007. The provisions of Issue 06-04 should be
applied through either a cumulative-effect adjustment to retained earnings as of
the beginning of the year of adoption or retrospective application. The Company
does not anticipate that the adoption of the provisions of Issue 06-04 will have
a material effect on the Company's financial position or results of operations.
In September 2006, the EITF also reached a final consensus on Issue 06-05,
"Accounting for Purchases of Life Insurance -- Determining the Amount That Could
be Realized in Accordance with FASB Technical Bulletin No. 85-4." The consensus
concludes that in determining the amount that could be realized under an
insurance contract accounted for under FASB Technical Bulletin No. 85-4,
"Accounting for Purchases of Life Insurance," the policyholder should (1)
consider any additional amounts included in the contractual terms of the policy;
(2) assume the surrender value on a individual-life by individual-life policy
basis; and (3) not discount the cash surrender value component of the amount
that could be realized when contractual restrictions on the ability to surrender
a policy exist. Issue 06-05 is effective for fiscal years beginning after
December 15, 2006. The consensus in Issue 06-05 should be adopted through either
(1) a change in accounting principle through a cumulative-effect adjustment to
retained earning as of the beginning of the year of adoption or (2) a change in
accounting principle through retrospective application to all prior periods. At
December 31, 2006, the Company had bank owned life insurance policies with a
carrying value of $25.6 million. The Company does not anticipate that the
adoption of the provisions of Issue 06-05 will have a material effect on the
Company's financial position or results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
MARKET RISK
Interest rate risk is the primary market risk category associated with the
Company's operations. Interest rate risk refers to the volatility of earnings
caused by changes in interest rates. The Company manages interest rate risk
using income simulation to measure interest rate risk inherent in its on-balance
sheet and off-balance sheet financial instruments at a given point in time by
showing the potential effect of interest rate shifts on net interest income for
future periods. Each quarter the Company's Asset/Liability Management Committee
reviews the simulation results to determine whether the exposure of net interest
income to changes in interest rates remains within board-approved levels. The
Committee also discusses strategies to manage this exposure and incorporates
these strategies into the investment and funding decisions of the Company. The
Company does not currently use derivatives, such as interest rate swaps, to
manage its interest rate risk exposure, but may consider such instruments in the
future.
Table 10-Interest Rate Risk Analysis below is a Condensed Static Gap Report,
which illustrates the anticipated repricing intervals of assets and liabilities
as of December 31, 2006. The analysis reflects sensitivity to rising rates in
all repricing intervals shown. This analysis suggests that the Company's net
interest income is more vulnerable to a rising rate environment than it is to
sustained low interest rates.
37
Table 10 - Interest Rate Risk Analysis
Condensed Static Gap - December 31, 2006 Repricing Interval
Cumulative
(dollar amounts in thousands) Total 0-3 months 3-6 months 6-12 months 12 months
-------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets* $ 2,052,478 $ 445,360 $ 84,462 $ 180,624 $ 710,446
Interest-bearing liabilities 1,627,497 655,099 122,233 285,782 1,063,114
-------------------------------------------------------------------------------------------------------------------------------
Net gap position (209,739) (37,771) (105,158) (352,668)
-------------------------------------------------------------------------------------------------------------------------------
Net gap position as a percentage of total assets (9.49%) (1.71%) (4.76%) (15.95%)
===============================================================================================================================
* Balances of available-for-sale securities are shown at amortized cost.
The Company's board of directors has set a policy that interest rate risk
exposure will remain within a range whereby net interest income will not decline
by more than 10% in one year as a result of a 200 basis point change in rates.
Based upon the simulation analysis performed as of December 31, 2006, a 200
basis point upward shift in interest rates over a one-year time frame would
result in a one-year decline in net interest income of approximately 2.8%,
assuming no balance sheet growth and no management action to address balance
sheet mismatches. The same simulation indicates that a 200 basis point decline
in interest rates over a one-year period would result in a decrease in net
interest income of 1.9%. The negative exposure in a rising rate environment is
mainly driven by the repricing assumptions of the Company's core deposit base
and the lag in the repricing of the Company's adjustable rate assets.
Longer-term, the impact of a rising rate environment is positive as the asset
base continues to reset at higher levels, while the repricing of the rate
sensitive liabilities moderates. The negative exposure in the 200 basis point
decline scenario results from the Company's assets repricing downward more
rapidly than the rates on the Company's interest-bearing liabilities, mainly
deposits, as deposit rates are at low levels given the historically low interest
rate environment experienced in recent years. The aforementioned percentage
changes in net interest income are from our base case scenario. In our most
recent simulation, the base case scenario, which assumes interest rates remain
unchanged from the date of the simulation, showed a relatively flat net interest
margin during 2006 in the present interest rate environment.
Although the simulation model is useful in identifying potential exposure to
interest rate movements, actual results may differ from those modeled as the
repricing, maturity, and prepayment characteristics of financial instruments may
change to a different degree than modeled. In addition, the model does not
reflect actions that management may employ to manage its interest rate risk
exposure. The Company's current liquidity profile, capital position, and growth
prospects, offer a level of flexibility for management to take actions that
could offset some of the negative effects of unfavorable movements in interest
rates. Management believes the current exposure to changes in interest rates is
not significant in relation to the earnings and capital strength of the Company
Additional information regarding market risk of the Company's financial
instruments at December 31, 2006 is provided in Table 11-Repricing Intervals of
Selected Financial Instruments below.
Table 11 - Repricing Intervals of Selected Financial Instruments
(dollar amounts in thousands) Greater
0-1 year 1-2 years 2-3 years 3-5 years than 5 years Total Fair Value
------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS:
Available-for-sale securities $ 101,990 $ 86,151 $ 118,447 $ 174,545 $ 105,623 $ 586,756 $ 576,242
Average interest rate* 4.65% 4.28% 4.08% 4.23% 4.64% 4.36%
Held-to-maturity securities 34,272 7,640 5,286 12,822 22,638 82,658 82,768
Average interest rate* 3.13% 3.24% 3.39% 3.62% 3.95% 3.46%
Loans/leases 528,312 164,545 164,467 209,632 190,716 1,257,672 1,251,187
Average interest rate* 7.07% 6.12% 5.99% 6.34% 6.26% 6.56%
FINANCIAL LIABILITIES:
Time deposits $ 550,807 $ 65,035 $ 11,805 $ 6,960 $ 0 $ 634,607 $ 630,102
Average interest rate 3.37% 3.85% 3.59% 3.76% 0.00% 3.43%
Federal funds sold and
securities sold under
agreements to repurchase 85,651 10,000 20,000 17,000 20,000 152,651 152,717
Average interest rate 3.48% 3.78% 2.92% 3.58% 3.62% 3.45%
Other borrowings 25,479 5,054 146 994 32,000 63,673 62,981
Average interest rate 3.75% 4.41% 6.53% 5.33% 4.79% 4.36%
====================================================================================================================================
* Interest rate on tax-exempt obligations is shown before tax-equivalent
adjustments.
38
[This Page Intentionally Left Blank]
39
Item 8. Financial Statements and Supplementary Data
Financial Statements and Supplementary Data consist of the financial statements
as indexed and presented below and the Unaudited Quarterly Financial Data
presented in Part II, Item 8. of this Report
Index to Financial Statements Page
Management's Statement of Responsibility 41
Report of KPMG LLP, Independent Registered Public Accounting Firm 42
Report of Independent Registered Public Accounting Firm 43
Consolidated Statements of Condition - December 31, 2006 and 2005 44
Consolidated Statements of Income - Years ended December 31, 2006, 2005 and 2004 45
Consolidated Statements of Cash Flows - Years ended December 31, 2006, 2005 and 2004 46
Consolidated Statements of Changes in Shareholders' Equity - Years ended
December 31, 2006, 2005 and 2004 47
Notes to Consolidated Financial Statements 48
40
Management's Statement of Responsibility
Management is responsible for preparation of the consolidated financial
statements and related financial information contained in all sections of this
annual report, including the determination of amounts that must necessarily be
based on judgments and estimates. It is the belief of management that the
consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America.
Management establishes and monitors the Company's system of internal accounting
controls to meet its responsibility for reliable financial statements. The
system is designed to provide reasonable assurance that assets are safeguarded,
and that transactions are executed in accordance with management's authorization
and are properly recorded.
The Audit/Examining Committee of the board of directors, composed solely of
outside directors, meets periodically and privately with management, internal
auditors, and independent registered public accounting firm, KPMG LLP, to review
matters relating to the quality of financial reporting, internal accounting
control, and the nature, extent, and results of audit efforts. The independent
registered public accounting firm and internal auditors have unlimited access to
the Audit/Examining Committee to discuss all such matters. The consolidated
financial statements have been audited by KPMG, LLP for the purpose of
expressing an opinion on the consolidated financial statements. In addition,
KPMG, LLP has audited management's assessment of, and the effective operation
of, internal control over financial reporting.
/s/ STEPHEN S. ROMAINE /s/ FRANCIS M. FETSKO Date: March 14, 2007
Stephen S. Romaine Francis M. Fetsko
Chief Executive Officer Chief Financial Officer
41
Report of KPMG LLP,
Independent Registered Public Accounting Firm
Board of Directors and Shareholders, Tompkins Trustco, Inc.
We have audited the accompanying consolidated statements of condition of
Tompkins Trustco, Inc. and subsidiaries (the Company) as of December 31, 2006
and 2005, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2006. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tompkins Trustco,
Inc. and subsidiaries as of December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2006, in conformity with U.S. generally accepted accounting
principles.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Tompkins
Trustco, Inc.'s internal control over financial reporting as of December 31,
2006, based on criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated March 14, 2007 expressed an unqualified opinion on
management's assessment of, and the effective operation of, internal control
over financial reporting.
/s/ KPMG LLP
March 14, 2007
Syracuse, New York
42
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Tompkins Trustco, Inc.
We have audited management's assessment, included in the accompanying
Management's Annual Report on Internal Control Over Financial Reporting, that
Tompkins Trustco, Inc. (the Company) maintained effective internal control over
financial reporting as of December 31, 2006, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included an understanding of internal control over financial
reporting, evaluating management's assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing such other
procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and the
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company's assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Tompkins Trustco, Inc. maintained
effective internal control over financial reporting as of December 31, 2006, is
fairly stated, in all material respects, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2006, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated statements of
condition of Tompkins Trustco, Inc. and subsidiaries as of December 31, 2006 and
2005, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2006, and our report dated March 14, 2007 expressed an
unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Syracuse, New York
March 14, 2007
43
Consolidated Statements of Condition
As of December 31
(in thousands except share and per share data) 2006 2005
--------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and noninterest bearing balances due from banks $ 48,251 $ 62,436
Interest bearing balances due from banks 1,723 861
Federal funds sold 2,200 2,500
Available-for-sale securities, at fair value 655,322 576,242
Held-to-maturity securities, fair value of $59,606 at December 31, 2006,
and $82,768 at December 31, 2005 59,038 82,658
Loans and leases, net of unearned income and deferred costs and fees 1,326,298 1,271,349
Less: Allowance for loan/lease losses 14,328 13,677
--------------------------------------------------------------------------------------------------------------------------
Net Loans/Leases 1,311,970 1,257,672
Bank premises and equipment, net 43,273 36,938
Corporate owned life insurance 25,622 27,169
Goodwill 21,235 12,286
Other intangible assets 4,051 2,160
Accrued interest and other assets 38,152 45,948
--------------------------------------------------------------------------------------------------------------------------
Total Assets $ 2,210,837 $ 2,106,870
--------------------------------------------------------------------------------------------------------------------------
LIABILITIES, MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES,
AND SHAREHOLDERS' EQUITY
Deposits:
Interest bearing:
Checking, savings, and money market $ 680,844 $ 688,521
Time 669,222 634,607
Noninterest bearing 359,354 359,882
--------------------------------------------------------------------------------------------------------------------------
Total Deposits 1,709,420 1,683,010
Securities sold under agreements to repurchase 191,490 152,651
Other borrowings 85,941 63,673
Other liabilities 32,914 24,863
--------------------------------------------------------------------------------------------------------------------------
Total Liabilities 2,019,765 1,924,197
--------------------------------------------------------------------------------------------------------------------------
Minority interest in consolidated subsidiaries 1,452 1,452
Shareholders' equity:
Common stock - par value $0.10 per share: Authorized 15,000,000 shares;
Issued: 9,889,569 shares at December 31, 2006, and 9,899,546 shares
at December 31, 2005 989 900
Additional paid-in capital 158,203 118,663
Retained earnings 44,429 69,228
Accumulated other comprehensive loss (12,487) (6,308)
Treasury stock at cost: 64,418 shares at December 31, 2006, and
58,831 shares at December 31, 2005 (1,514) (1,262)
--------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity $ 189,620 $ 181,221
--------------------------------------------------------------------------------------------------------------------------
Total Liabilities, Minority Interest in Consolidated Subsidiaries,
and Shareholders' Equity $ 2,210,837 $ 2,106,870
==========================================================================================================================
Share data has been retroactively adjusted to reflect a 10% stock dividend paid
on May 15, 2006.
See notes to consolidated financial statements.
44
Consolidated Statements of Income
Year ended December 31
(in thousands except per share data) 2006 2005 2004
------------------------------------------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME
Loans $ 89,784 $ 80,617 $ 68,935
Due from banks 86 89 93
Federal funds sold 15 24 25
Available-for-sale securities 28,536 23,491 23,720
Held-to-maturity securities 2,620 2,486 1,900
------------------------------------------------------------------------------------------------------------------------------
Total Interest and Dividend Income 121,041 106,707 94,673
------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits:
Time certificates of deposit of $100,000 or more 13,350 6,973 2,890
Other deposits 25,215 16,690 12,334
Federal funds purchased and securities sold under agreements to repurchase 5,905 4,852 4,390
Other borrowings 3,714 3,171 3,713
------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 48,184 31,686 23,327
------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 72,857 75,021 71,346
Less Provision for Loan/Lease Losses 1,424 2,659 2,860
------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan/Lease Losses 71,433 72,362 68,486
------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Investment services income 12,225 5,412 5,372
Insurance commissions and fees 9,407 7,479 6,374
Service charges on deposit accounts 8,054 8,256 7,987
Card services income 2,972 2,645 2,471
Other service charges 2,483 2,961 3,202
Gains on sale of loans 2,741 238 240
Gain on sale of merchant card processing relationships 0 2,971 0
Increase in cash surrender value of corporate owned life insurance 1,111 1,097 1,195
Life insurance proceeds 685 0 0
Other operating income 1,398 1,250 1,044
Net gain (loss) on available-for-sale securities 15 (1,526) 98
------------------------------------------------------------------------------------------------------------------------------
Total Noninterest Income 41,091 30,783 27,983
------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES
Salaries and wages 33,365 28,306 26,866
Pension and other employee benefits 8,660 7,836 7,115
Net occupancy expense of bank premises 5,068 4,086 3,700
Net furniture and fixture expense 3,733 3,628 3,445
Marketing expense 2,432 2,205 1,899
Software licensing and maintenance 1,938 1,776 1,451
Professional fees 1,679 1,480 1,664
Cardholder expense 1,219 1,350 1,296
Amortization of intangible assets 674 593 653
Other operating expenses 13,142 10,862 10,139
------------------------------------------------------------------------------------------------------------------------------
Total Noninterest Expenses 71,910 62,122 58,228
------------------------------------------------------------------------------------------------------------------------------
Income Before Income Tax Expense and Minority
Interest in Consolidated Subsidiaries 40,614 41,023 38,241
Minority interest in consolidated subsidiaries 131 131 133
Income Tax Expense 12,716 13,207 12,493
------------------------------------------------------------------------------------------------------------------------------
Net Income $ 27,767 $ 27,685 $ 25,615
------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 2.82 $ 2.81 $ 2.60
Diluted earnings per share $ 2.78 $ 2.77 $ 2.56
==============================================================================================================================
Per share data has been retroactively adjusted to reflect a 10% stock dividend
paid on May 15, 2006.
See notes to consolidated financial statements.
45
Consolidated Statements of Cash Flows Year ended December 31
(in thousands) 2006 2005 2004
------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 27,767 $ 27,685 $ 25,615
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan/lease losses 1,424 2,659 2,860
Depreciation and amortization premises, equipment, and software 4,155 3,824 3,598
Amortization of intangible assets 674 593 653
Earnings from corporate owned life insurance, net (1,111) (1,097) (1,195)
Net amortization on securities 1,566 1,778 2,211
Deferred income tax (benefit) expense (2,264) (2,222) 160
Net (gain) loss on sale of securities (15) 1,526 (98)
Net gain on sale of loans (2,741) (238) (240)
Proceeds from sale of loans 12,680 16,770 14,931
Loans originated for sale (12,491) (16,445) (14,719)
Net gain on sale of bank premises and equipment (19) (234) (38)
Stock-based compensation expense 692 0 0
Tax benefit of stock option exercises 0 239 112
Increase in interest receivable (1,527) (1,436) (61)
Increase in interest payable 1,255 962 74
Other, net 7,509 3,823 2,004
------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 37,554 38,187 35,867
------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from maturities of available-for-sale securities 79,266 87,695 221,582
Proceeds from sales of available-for-sale securities 34,692 117,872 53,494
Proceeds from maturities of held-to-maturity securities 39,748 26,393 16,645
Purchases of available-for-sale securities (159,021) (205,882) (279,575)
Purchases of held-to-maturity securities (16,263) (39,924) (36,492)
Net increase in loans/leases (96,520) (100,819) (104,976)
Proceeds from sale of credit card portfolio 11,310 0 0
Proceeds from sales of bank premises and equipment 86 381 80
Purchase of bank premises and equipment (9,648) (7,195) (7,799)
Purchase of corporate owned life insurance 0 (2,077) 0
Purchase of new market tax credit 0 0 (2,200)
Net cash used in acquisitions (3,294) 0 (484)
Other, net (207) (620) (749)
------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (119,851) (124,176) (140,474)
------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net (decrease) increase in demand deposits, money market accounts,
and savings accounts (8,205) (56,528) 74,981
Net increase in time deposits 34,615 178,665 74,767
Net increase (decrease) in securities sold under agreements to
repurchase and Federal funds purchased 38,839 (1,064) (34,193)
Increase in other borrowings 116,075 78,577 16,628
Repayment of other borrowings (94,011) (78,207) (40,436)
Cash dividends (11,307) (10,504) (9,769)
Cash paid in lieu of fractional shares - 10% stock dividend (10) (13) 0
Repurchase of common stock (9,983) (897) (2,976)
Net proceeds from exercise of stock options 2,251 825 781
Tax benefit from stock option exercises 410 0 0
------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 68,674 110,854 79,783
------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (13,623) 24,865 (24,824)
------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 65,797 40,932 65,756
------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 52,174 $ 65,797 $ 40,932
==============================================================================================================================
SUPPLEMENTAL INFORMATION:
Cash paid during the year for:
Interest $ 46,930 $ 30,724 $ 23,253
Income taxes $ 8,783 $ 14,483 $ 10,948
Non-cash investing and financing activities:
Fair value of non-cash assets acquired in purchase acquisition $ 1,375 $ 0 $ 45
Fair value of liabilities assumed in purchase acquisitions $ 2,276 $ 0 $ 17
Fair value of shares issued for acquisitions $ 4,758 $ 0 $ 413
Securitization of loans $ 32,040 $ 0 $ 0
See notes to consolidated financial statements.
46
Consolidated Statements of Changes in Shareholders' Equity
----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Additional Comprehensive
Common Paid-in Retained Income Treasury
(in thousands except share and per share data) Stock Capital Earnings (Loss) Stock Total
----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 2003 $ 819 $ 76,926 $ 78,676 $ 3,015 $ (466) $ 158,970
----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 25,615 25,615
Other comprehensive loss (2,144) (2,144)
----------
Total Comprehensive Income 23,471
----------
Cash dividends ($0.99 per share) (9,769) (9,769)
Exercise of stock options, and related tax
benefit (41,973 shares, net) 3 890 893
Common stock repurchased and returned to
unissued status (79,794 shares) (7) (2,969) (2,976)
Shares issued for purchase acquisition (11,037 shares) 1 412 413
Directors deferred compensation plan (20,943 shares) 578 (578) 0
----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 2004 $ 816 $ 75,837 $ 94,522 $ 871 $ (1,044) $ 171,002
----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 27,685 27,685
Other comprehensive loss (7,179) (7,179)
----------
Total Comprehensive Income 20,506
----------
Cash dividends ($1.07 per share) (10,504) (10,504)
Exercise of stock options and related tax
benefit (45,982 shares, net) 4 1,060 1,064
Common stock repurchased and returned to
unissued status (24,182 shares) (2) (895) (897)
Effect of 10% stock dividend 82 42,380 (42,462) 0
Cash paid in lieu of fractional shares (307 shares) (13) (13)
Directors deferred compensation plan (5,240 shares) 218 (218) 0
Stock-based compensation expense 63 63
----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 2005 $ 900 $ 118,663 $ 69,228 $ (6,308) $ (1,262) $ 181,221
----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 27,767 27,767
Other comprehensive income 1,570 1,570
----------
Total Comprehensive Income 29,337
----------
Cash dividends ($1.15 per share) (11,307) (11,307)
Exercise of stock options and related tax
benefit (101,881 shares, net) 10 2,651 2,661
Common stock repurchased and returned to
unissued status (239,970 shares) (24) (9,959) (9,983)
Effect of 10% stock dividend 91 41,158 (41,249) 0
Cash paid in lieu of fractional shares (262 shares) (10) (10)
Stock issued for purchase acquisition (128,374 shares) 12 4,746 4,758
Directors deferred compensation plan (7,967 shares) 252 (252) 0
Adjustment to initially apply FASB Statement No. 158,
net of tax (7,749) (7,749)
Stock-based compensation expense 692 692
----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 2006 $ 989 $ 158,203 $ 44,429 $ (12,487) $ (1,514) $ 189,620
----------------------------------------------------------------------------------------------------------------------------------
Share data has been retroactively adjusted to reflect a 10% stock dividend paid
on May 15, 2006 and a 10% stock dividend paid on February 15, 2005.
See notes to consolidated financial statements.
47
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies
BASIS OF PRESENTATION: Tompkins Trustco, Inc. ("Tompkins" or "the Company") is a
registered Financial Holding Company with the Federal Reserve Board pursuant to
the Bank Holding Company Act of 1956, as amended, organized under the laws of
New York State, and is the parent company of Tompkins Trust Company (the "Trust
Company"), The Bank of Castile, The Mahopac National Bank ("Mahopac National
Bank"), Tompkins Insurance Agencies, Inc. ("Tompkins Insurance") and AM&M
Financial Services, Inc. ("AM&M"). The consolidated financial information
included herein combines the results of operations, the assets, liabilities, and
shareholders' equity (including comprehensive income) of the Company and its
subsidiaries. All significant intercompany balances and transactions are
eliminated in consolidation.
The consolidated financial statements have been prepared in accordance with U.S.
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities, and disclose contingent assets and
liabilities, at the date of the financial statements and the reported amounts of
revenue and expense during the reporting period. Actual results could differ
from those estimates. Significant items subject to such estimates and
assumptions include the reserve for loan/lease losses, valuation of intangible
assets, deferred income tax assets, and obligations related to employee
benefits. Amounts in the prior years' consolidated financial statements are
reclassified when necessary to conform to the current year's presentation.
CASH EQUIVALENTS: Cash equivalents in the Consolidated Statements of Cash Flows
include cash and noninterest bearing balances due from banks, interest bearing
balances due from banks, and Federal funds sold.
SECURITIES: Management determines the appropriate classification of debt and
equity securities at the time of purchase. Securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold
the securities to maturity. Held-to-maturity securities are stated at amortized
cost. Debt securities not classified as held-to-maturity and marketable equity
securities are classified as available-for-sale. Available-for-sale securities
are stated at fair value with the unrealized gains and losses, net of tax,
excluded from earnings and reported as a separate component of accumulated
comprehensive income or loss, in shareholders' equity. Securities with limited
marketability or restricted equity securities, such as Federal Home Loan Bank
stock and Federal Reserve Bank stock, are carried at cost.
Premiums and discounts are amortized or accreted over the expected life of the
related security as an adjustment to yield using the interest method. Dividend
and interest income are recognized when earned. Realized gains and losses on the
sale of securities are included in securities gains (losses). The cost of
securities sold is based on the specific identification method.
The Company reviews its investment portfolio quarterly for any declines in fair
value that are deemed other-than-temporary. A decline in the fair value of any
available-for-sale or held-to-maturity security below cost that is deemed to be
other than temporary is charged to earnings, resulting in the establishment of a
new cost basis for the security. In estimating other-than-temporary impairment
losses, management considers, among other factors, the length of time and extent
to which the fair value has been less than cost, the financial condition and
near term prospects of the issuer, and the intent and ability of the Company to
hold the security for a period of time sufficient to allow for any anticipated
recovery in fair value.
LOANS AND LEASES: Loans are reported at their principal outstanding balance, net
of deferred loan origination fees and costs, and unearned income. The Company
has the ability and intent to hold its loans for the foreseeable future, except
for certain residential real estate loans held-for-sale. The Company provides
motor vehicle and equipment financing to its customers through direct financing
leases. These leases are carried at the aggregate of lease payments receivable,
plus estimated residual values, less unearned income. Unearned income on direct
financing leases is amortized over the lease terms, resulting in a level rate of
return.
Loan origination fees and costs are deferred and recognized over the life of the
loan as an adjustment to yield.
Loans originated and intended for sale in the secondary market are carried at
the lower of aggregate cost or estimated market value. Fair value is determined
on the basis of the rates quoted in the secondary market. Net unrealized losses
attributable to changes in market interest rates are recognized through a
valuation allowance by charges to income. Loans are generally sold on a
non-recourse basis. The Company may use commitments at the time loans are
originated or identified for sale to mitigate interest rate risk. The
commitments to sell loans are considered derivatives under SFAS No. 133. The
impact of the estimated fair value adjustment was not significant to the
consolidated financial statements.
ALLOWANCE FOR LOAN/LEASE LOSSES: The allowance for loan/lease losses is
regularly evaluated by management in order to maintain the allowance at a level
consistent with the inherent risk of loss in the loan and lease portfolios.
Management's evaluation of the adequacy of the allowance is based upon a review
of the Company's historical loss experience, known and inherent risks in the
loan and lease portfolios, the estimated value of collateral, the level of
nonperforming loans, and trends in delinquencies. External factors, such as the
level and trend of interest rates and the national and local economies, are also
considered. Management believes that the current allowance for loan/lease losses
is adequate.
Management considers a loan to be impaired if, based on current information, it
is probable that the Company will be unable to collect all scheduled payments of
principal or interest when due, according to the contractual terms of the loan
agreement. When a loan is considered to be impaired, the amount of the
impairment is measured based on the present value of expected future cash flows
discounted at the effective interest rate of the loan or, as a practical
expedient, at the observable market price or the fair value of collateral if the
loan is collateral dependent. Management excludes large groups of smaller
balance homogeneous loans such as residential mortgages, consumer loans, and
leases, which are collectively evaluated. All loans and leases restructured in a
troubled debt restructuring are also considered impaired loans. Impairment
losses are included in the allowance for loan/lease losses through a charge to
the provision for loan/lease losses.
48
Note 1 Summary of Significant Accounting Policies (continued)
The Company has developed a methodology to measure the amount of estimated loan
loss exposure inherent in the loan portfolio to ensure that an adequate
allowance is maintained. The methodology includes an estimate of exposure for
the following: specifically reviewed and graded loans, historical loss
experience by product type, past due and nonperforming loans, and other internal
and external factors such as local and regional economic conditions, growth
trends, and credit policy and underwriting standards. The methodology includes a
review of loans considered impaired in accordance with the Statement of
Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan", as well as other commercial loans and commercial mortgage
loans that are evaluated using an internal rating system. An estimated exposure
amount is assigned to these internally reviewed credits based upon a review of
the borrower's financial condition, payment history, collateral adequacy, and
business conditions. For commercial loans and commercial mortgage loans not
specifically reviewed, and for homogenous loan portfolios such as residential
mortgage loans and consumer loans, estimated exposure amounts are assigned based
upon historical loss experience as well as past due status. Lastly, additional
allowances are maintained based upon management judgment and assessment of other
quantitative and qualitative factors such as regional and local economic
conditions, portfolio growth trends, new lending products, and new market areas.
Since the methodology is based upon historical experience and trends as well as
management's judgment, factors may arise that result in different estimations.
Significant factors that could give rise to changes in these estimates may
include, but are not limited to, changes in economic conditions in the local
area, concentration of risk, and declines in local property values. In addition,
various Federal and State regulatory agencies, as part of their examination
process, review the Company's allowance and may require the Company to recognize
additions to the allowance based on their judgments about information available
to them at the time of their examination which may not be currently available to
management.
INCOME RECOGNITION ON IMPAIRED AND NONACCRUAL LOANS AND LEASES: Loans and
leases, including impaired loans, are generally classified as nonaccrual if they
are past due as to maturity or payment of principal or interest for a period of
more than 90 days, unless such loans are well secured and in the process of
collection. Loans that are past due less than 90 days may also be classified as
nonaccrual if repayment in full of principal or interest is in doubt.
Loans may be returned to accrual status when all principal and interest amounts
contractually due (including arrearages) are reasonably assured of repayment
within an acceptable time period, and there is a sustained period of repayment
performance by the borrower in accordance with the contractual terms of the loan
agreement. Payments received on loans carried as nonaccrual are generally
applied as a reduction to the outstanding balance on the Company's books. When
the future collectibility of the recorded loan balance is expected, interest
income may be recognized on a cash basis.
OTHER REAL ESTATE OWNED: Other real estate owned consists of properties formerly
pledged as collateral to loans, which have been acquired by the Company through
foreclosure proceedings or acceptance of a deed in lieu of foreclosure. Upon
transfer of a loan to foreclosure status, an appraisal is obtained and any
excess of the loan balance over the fair value, less estimated costs to sell, is
charged against the allowance for loan/lease losses. Expenses and subsequent
adjustments to the fair value are treated as other operating expense.
BANK PREMISES AND EQUIPMENT: Land is carried at cost. Bank premises and
equipment are stated at cost, less allowances for depreciation. The provision
for depreciation for financial reporting purposes is computed generally by the
straight-line method at rates sufficient to write-off the cost of such assets
over their estimated useful lives. Bank premises are amortized over a period of
10-39 years, and furniture, fixtures, and equipment are amortized over a period
of 2-20 years. Maintenance and repairs are charged to expense as incurred. Gains
or losses on disposition are reflected in earnings.
INCOME TAXES: Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Deferred taxes are reviewed quarterly
and reduced by a valuation allowance if, based upon the information available,
it is more likely than not that some or all of the deferred tax assets will not
be realized.
GOODWILL: Goodwill represents the excess of purchase price over the fair value
of assets acquired in a transaction using purchase accounting. The Company tests
goodwill for impairment at least annually.
OTHER INTANGIBLE ASSETS: Other intangible assets include core deposit
intangibles, customer related intangibles, covenants not to compete, and
mortgage servicing rights. Core deposit intangibles represent a premium paid to
acquire a base of stable, low cost deposits in the acquisition of a bank, or a
bank branch, using purchase accounting. The amortization period for core deposit
intangible ranges from 5 years to 10 years, using an accelerated method. The
covenants not to compete are amortized on a straight-line basis over 5 to 6
years, while the customer related intangible is amortized on an accelerated
basis over a range of 6 to 15 years. The amortization period is monitored to
determine if circumstances require such periods to be revised. The Company
periodically reviews its intangible assets for changes in circumstances that may
indicate the carrying amount of the asset is impaired. The Company tests its
intangible assets for impairment on an annual basis or more frequently if
conditions indicate that an impairment loss has more likely than not been
incurred.
49
Note 1 Summary of Significant Accounting Policies (continued)
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE: Securities sold under agreements
to repurchase (repurchase agreements) are agreements in which the Company
transfers the underlying securities to a third-party custodian's account that
explicitly recognizes the Company's interest in the securities. The agreements
are accounted for as secured financing transactions provided the Company
maintains effective control over the transferred securities and meets other
criteria as specified in SFAS No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." The Company's
agreements are accounted for as secured financings; accordingly, the transaction
proceeds are reflected as liabilities and the securities underlying the
agreements continue to be carried in the Company's securities portfolio.
TREASURY STOCK: The cost of treasury stock is shown on the Consolidated
Statements of Condition as a separate component of shareholders' equity, and is
a reduction to total shareholders' equity. Shares are released from treasury at
fair value, identified on an average cost basis.
TRUST AND INVESTMENT SERVICES: Assets held in fiduciary or agency capacities for
customers are not included in the accompanying Consolidated Statements of
Condition, since such items are not assets of the Company. Fees associated with
providing trust and investment services are included in noninterest income.
EARNINGS PER SHARE: Basic earnings per share is calculated by dividing net
income available to common shareholders by the weighted average number of shares
outstanding during the year. Diluted earnings per share is calculated by
dividing net income available to common shareholders by the weighted average
number of shares outstanding during the year plus the dilutive effect of stock
issuable upon conversion of stock options or certain other contingencies.
SEGMENT REPORTING: The Company has identified two business segments, banking and
financial services. Financial services activities consist of the results of the
Company's trust, financial planning and wealth management, broker-dealer, and
risk management operations. All other activities are considered banking.
COMPREHENSIVE INCOME: For the Company, comprehensive income represents net
income plus the net change in unrealized gains or losses on securities
available-for-sale for the period (net of taxes), and is presented in the
Consolidated Statements of Changes in Shareholders' Equity. Accumulated other
comprehensive income (loss) represents the net unrealized gains or losses on
securities available-for-sale (net of tax) and the effect of the adoption of
SFAS No. 158 "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans (an amendment of FASB Statements No. 87,88,106 and 132R)"
as of the dates of the Consolidated Statements of Condition.
PENSION AND OTHER EMPLOYEE BENEFITS: The Company incurs certain
employment-related expenses associated with its noncontributory defined-benefit
pension plan, supplemental employee retirement plan and post-retirement
healthcare benefit plan. In order to measure the expense associated with these
plans, various assumptions are made including the discount rate used to value
certain liabilities, expected return on plan assets, anticipated mortality
rates, and expected future healthcare costs. The assumptions are based on
historical experience as well as current facts and circumstances. A third-party
actuarial firm is used to assist management in measuring the expense and
liability associated with the plans. The Company uses a December 31 measurement
date for its plans. As of the measurement date, plan assets are determined based
on fair value, generally representing observable market prices. The projected
benefit obligation is primarily determined based on the present value of
projected benefit distributions at an assumed discount rate.
Periodic pension expense or credits include interest costs based on the assumed
discount rate, the expected return on plan assets based on an actuarially
derived market-related values, and amortization of actuarial gains or losses.
Periodic postretirement benefit expense or credits include service costs,
interest costs based on the assumed discount rate, amortization of unrecognized
net transition obligations, and recognized actuarial gains or losses.
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 158, "Employers' Accounting for Defined Benefit Pension
and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106,
and 132(R)" on December 31, 2006. SFAS No. 158 required the Company to recognize
in its statement of condition an asset for a plan's overfunded status or a
liability for a plan's underfunded status. SFAS No. 158 also required that the
Company measure the Plans' assets and obligations that determine its funded
status as of the end of the fiscal year and to recognize those changes in the
year in which the changes occur as a component of other comprehensive income,
net of taxes. The adoption of SFAS No. 158 added approximately $7.7 million, net
of tax, to the Company's accumulated other comprehensive loss.
STOCK BASED COMPENSATION: The Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123 (Revised), "Share-Based Payment" ("SFAS No. 123(R)") on
January 1, 2006, using the modified prospective method. Under this method,
compensation costs recognized beginning in 2006 includes: (a) the compensation
cost for all share-based payments granted prior to, but not yet vested as of
January 1, 2006, based upon the grant date fair value estimated in accordance
with the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation",
and (b) the compensation cost for all share-based payments granted subsequent to
January 1, 2006, based on the grant date fair value estimated in accordance with
the provisions of SFAS No. 123(R). Compensation cost is recorded on a
straight-line basis over the vesting period of the awards. Results from prior
periods have not been restated. Prior to adoption of SFAS No. 123(R) on January
1, 2006, the Company applied Accounting Principles Board Opinion (APB Opinion)
No. 25, "Accounting for Stock Issued to Employees," ("APB No. 25") and related
interpretations in accounting for its stock option plan. Under APB No. 25,
compensation expense is recognized only if the exercise price of the option is
less than the fair value of the underlying stock at the grant date.
50
Note 1 Summary of Significant Accounting Policies (continued)
The following table illustrates the effects on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS no.
123(R) to all outstanding and unvested awards in 2005 and 2004.
(in thousands except per share data) 2005 2004
-----------------------------------------------------------------------------------------------------------------
Net income:
As reported $ 27,685 $ 25,615
Add: Stock-based compensation expense included in reported net income, net of
related tax effects 63 0
Deduct: Total stock-based employee compensation expense determined under
fair value based method for all awards, net of related tax effects 1,976 757
-----------------------------------------------------------------------------------------------------------------
Pro forma 25,772 24,858
-----------------------------------------------------------------------------------------------------------------
Basic earnings per share:
As reported $ 2.81 $ 2.60
Pro forma 2.62 2.52
-----------------------------------------------------------------------------------------------------------------
Diluted earnings per share
As reported $ 2.77 $ 2.56
Pro forma 2.58 2.48
=================================================================================================================
Per share data has been retroactively adjusted to reflect a 10% stock dividend
paid on May 15, 2006 and a 10% stock dividend paid on February 15, 2005.
In December 2005, the Compensation Committee of the Board of Directors of
Tompkins approved the accelerated vesting of all currently outstanding unvested
stock options, except for those options issued to executive officers of
Tompkins. The affected options were previously awarded to officers and employees
under the Company's 2001 Stock Option Plan. There is no change to the Company's
compensation philosophy and all other terms and conditions applicable to such
options, including the exercise prices and exercise periods, remain unchanged.
No options held by executive vice presidents or chief executive officers are
affected by the vesting acceleration. The acceleration of the unvested options
contributed to the increase in total stock-based compensation expense, net of
tax effects, determined under the fair value method shown above from $757,000 in
2004 to $1.9 million in 2005. As a result, the acceleration lowered compensation
expense related to stock options by approximately $1.2 million, net of taxes,
which would have been recognized in its financial statements over future years.
As a result of the acceleration, the Company also recognized $63,000 of
compensation expense in 2005 earnings. Compensation expense related to stock
options for 2006 was $692,000. The acceleration also resulted in options to
purchase up to 221,307 shares of common stock becoming exercisable immediately.
Without the acceleration, the options would have vested on dates ranging from
April 18, 2006 to October 3, 2010. This action contributed to the increase in
exercisable shares at year-end 2005 to 504,484 from 232,558 at year-end 2004.
The Company's stock-based employee compensation plan is described in Note 12
"Stock Plans and Stock Based Compensation", of this Report.
Statements of Financial Accounting Standards
In February 2006, the FASB issued Statement No. 155, "Accounting for Certain
Hybrid Financial Instruments - an amendment of FASB Statement No. 133 and 140"
("SFAS 155"). SFAS 155 (i) permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation, (ii) clarifies which interest-only strips and
principal-only strips are not subject to the requirements of SFAS No. 133, (iii)
establishes a requirement to evaluate interests in securitized financial assets
to identify interests that are freestanding derivatives or that are hybrid
financial instruments that contain an embedded derivative requiring bifurcation,
(iv) clarifies that concentrations of credit risk in the form of subordination
are not embedded derivatives, and (v) amends SFAS No. 140 to eliminate the
prohibition on a qualifying special-purpose entity from holding a derivative
financial instrument that pertains to a beneficial interest other than another
derivative financial instrument. SFAS 155 is effective on January 1, 2007, and
is not expected to have a material impact on the Company's results of operations
and financial condition.
On March 17, 2006, the FASB issued Statement No. 156, "Accounting for Servicing
of Financial Assets - an amendment of FASB Statement No. 140" ("SFAS 156"). SFAS
156 amends FASB Statement No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities-a replacement of FASB
Statement No. 125" ("SFAS 140"). SFAS 156 permits entities to subsequently
measure servicing rights at fair value and report changes in fair value in
earnings rather than amortize servicing rights in proportion to and over the
estimated net servicing income or loss and assess the rights for impairment or
the need for an increased obligation as required under SFAS 140. Entities that
elect to subsequently measure their servicing rights at fair value may no longer
find it necessary to qualify for and apply the provisions of FASB Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," to achieve
an income statement effect similar to the application of hedge accounting for
instruments used to manage the effect of interest rate changes on servicing
rights.
51
Note 1 Summary of Significant Accounting Policies (continued)
SFAS 156 is effective as of the beginning of an entity's first fiscal year that
begins after September 15, 2006. The Company adopted SFAS 156 effective January
1, 2007, and does not expect the adoption to have a material impact on the
Company's financial condition, results of operations or cash flows.
In July 2006, FASB issued FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement No 109 ("FIN 48"). FIN 48
establishes a recognition threshold and measurement for income tax positions
recognized in an enterprise's financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. FIN 48 also establishes a
two-step evaluation process for tax positions, recognition and measurement. For
recognition, a determination is made whether it is more-likely-than-not that a
tax position will be sustained upon examination, including resolution of related
appeals or litigation processes, based on the technical merits of the position.
If the tax position meets the more-likely-than-not recognition threshold it is
measured and recognized in the financial statements as the largest amount of tax
benefit that is greater than 50% likely of being realized. If a tax position
does not meet the more-likely-than-not recognition threshold, the benefit of
that position is not recognized in the financial statements. Tax positions that
meet the more-likely-than-not recognition threshold at the effective date of FIN
48 may be recognized or, continue to be recognized, upon adoption of this
Interpretation. The cumulative effect of applying the provisions of FIN 48 shall
be reported as an adjustment to the opening balance of retained earnings for
that fiscal year. FIN 48 is effective for fiscal years beginning after December
15, 2006. The Company's adoption of FIN 48, effective January 1, 2007, did not
have a material impact on the consolidated financial position, results of
operations or cash flows.
In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157 ("SFAS 157"), "Fair Value Measurements," which defines fair value,
establishes guidelines for measuring fair value and expands disclosures
regarding fair value measurements. SFAS 157 does not require any new fair value
measurements but rather eliminates inconsistencies in guidance found in various
prior accounting pronouncements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007. Earlier adoption is permitted, provided the
company has not yet issued financial statements, including for interim periods,
for that fiscal year. The Company does not expect the adoption of SFAS 157 to
have a material impact on the consolidated financial position, results of
operations or cash flows.
In September 2006, the Emerging Issues Task Force ("EITF") reached a final
consensus on Issue 06-04, "Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements." The consensus stipulates that an agreement by an employer to
share a portion of the proceeds of a life insurance policy with an employee
during the postretirement period is a postretirement benefit arrangement
required to be accounted for under SFAS No. 106 or Accounting Principles Board
Opinion ("APB") No. 12, "Omnibus Opinion -- 1967." The consensus concludes that
the purchase of a split-dollar life insurance policy does not constitute a
settlement under SFAS No. 106 and, therefore, a liability for the postretirement
obligation must be recognized under SFAS No. 106 if the benefit is offered under
an arrangement that constitutes a plan or under APB No. 12 if it is not part of
a plan. Issue 06-04 is effective for annual or interim reporting periods
beginning after December 15, 2007. The provisions of Issue 06-04 should be
applied through either a cumulative-effect adjustment to retained earnings as of
the beginning of the year of adoption or retrospective application. The Company
does not anticipate that the adoption of the provisions of Issue 06-04 will have
a material effect on the Company's financial position or results of operations.
In September 2006, the EITF also reached a final consensus on Issue 06-05,
"Accounting for Purchases of Life Insurance -- Determining the Amount That Could
be Realized in Accordance With FASB Technical Bulletin No. 85-4." The consensus
concludes that in determining the amount that could be realized under an
insurance contract accounted for under FASB Technical Bulletin No. 85-4,
"Accounting for Purchases of Life Insurance," the policyholder should (1)
consider any additional amounts included in the contractual terms of the policy;
(2) assume the surrender value on a individual-life by individual-life policy
basis; and (3) not discount the cash surrender value component of the amount
that could be realized when contractual restrictions on the ability to surrender
a policy exist. Issue 06-05 is effective for fiscal years beginning after
December 15, 2006. The consensus in Issue 06-05 should be adopted through either
(1) a change in accounting principle through a cumulative-effect adjustment to
retained earning as of the beginning of the year of adoption or (2) a change in
accounting principle through retrospective application to all prior periods. At
December 31, 2006, the Company had bank owned life insurance policies with a
carrying value of $25.6 million. The Company does not anticipate that the
adoption of the provisions of Issue 06-05 will have a material effect on the
Company's financial position or results of operations.
52
Note 2 Securities
The following summarizes securities held by the Company:
Available-for-Sale Securities
-------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2006 (in thousands) Cost Gains Losses Value
-------------------------------------------------------------------------------------------------------------------------
Obligations of U.S. Government sponsored agencies $ 241,600 $ 49 $ 3,981 $ 237,668
Obligations of states and political subdivisions 47,791 523 290 48,024
Mortgage-backed securities 356,619 559 4,757 352,421
U.S. corporate securities 2,500 0 0 2,500
-------------------------------------------------------------------------------------------------------------------------
Total debt securities 648,510 1,131 9,028 640,613
Equity securities 14,709 0 0 14,709
-------------------------------------------------------------------------------------------------------------------------
Total available-for-sale securities $ 663,219 $ 1,131 $ 9,028 $ 655,322
=========================================================================================================================
Available-for-sale securities include $14.5 million in nonmarketable equity
securities, which are carried at cost since fair values are not readily
determinable. This figure includes $11.6 million of Federal Home Loan Bank
(FHLB) stock and $724,000 of Federal Reserve Bank (FRB) stock, which are
required to be held for regulatory purposes and for borrowings availability. The
required investment in FHLB stock is tied to the Company's borrowing levels with
the FHLB. Substantially all of the above mortgage-backed securities are direct
pass through securities or collateralized mortgage obligations issued or backed
by Federal agencies.
Held-to-Maturity Securities
-------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2006 (in thousands) Cost Gains Losses Value
-------------------------------------------------------------------------------------------------------------------------
Obligations of states and political subdivisions $ 59,038 $ 897 $ 329 $ 59,606
-------------------------------------------------------------------------------------------------------------------------
Total held-to-maturity debt securities $ 59,038 $ 897 $ 329 $ 59,606
-------------------------------------------------------------------------------------------------------------------------
Available-for-Sale Securities
-------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2005 (in thousands) Cost Gains Losses Value
-------------------------------------------------------------------------------------------------------------------------
Obligations of U.S. Government sponsored agencies $ 205,723 $ 25 $ 5,114 $ 200,634
Obligations of states and political subdivisions 46,821 642 421 47,042
Mortgage-backed securities 321,168 645 6,291 315,522
U.S. corporate securities 2,500 0 0 2,500
-------------------------------------------------------------------------------------------------------------------------
Total debt securities 576,212 1,312 11,826 565,698
Equity securities 10,544 0 0 10,544
-------------------------------------------------------------------------------------------------------------------------
Total available-for-sale securities $ 586,756 $ 1,312 $ 11,826 $ 576,242
=========================================================================================================================
Available-for-sale securities include $10.3 million in nonmarketable equity
securities, which are carried at cost since fair values are not readily
determinable. This figure includes $8.8 million of FHLB stock and $721,000 of
FRB stock, which are required to be held for regulatory purposes and for
borrowings availability. The required investment in FHLB stock is tied to the
Company's borrowing levels with the FHLB. Substantially all of the above
mortgage-backed securities are direct pass through securities or collateralized
mortgage obligations issued or backed by Federal agencies.
53
Note 2 Securities (continued)
Held-to-Maturity Securities
-----------------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2005 (in thousands) Cost Gains Losses Value
-----------------------------------------------------------------------------------------------------------------------------------
Obligations of states and political subdivisions $ 82,658 $ 773 $ 663 $ 82,768
-----------------------------------------------------------------------------------------------------------------------------------
Total held-to-maturity debt securities $ 82,658 $ 773 $ 663 $ 82,768
===================================================================================================================================
The amortized cost and fair value of debt securities by contractual maturity,
except for mortgage-backed securities, are shown in the following table.
Expected maturities will differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
Amortized Fair
December 31, 2006 (in thousands) Cost Value
-----------------------------------------------------------------------------------------------------------------------------------
Available-for-sale securities:
Due in one year or less $ 24,987 $ 24,755
Due after one year through five years 191,470 188,285
Due after five years through ten years 60,281 60,127
Due after ten years 15,153 15,025
-----------------------------------------------------------------------------------------------------------------------------------
Total 291,891 288,192
-----------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities 356,619 352,421
-----------------------------------------------------------------------------------------------------------------------------------
Total available-for-sale debt securities $ 648,510 $ 640,613
===================================================================================================================================
Amortized Fair
December 31, 2006 (in thousands) Cost Value
-----------------------------------------------------------------------------------------------------------------------------------
Held-to-maturity securities:
Due in one year or less $ 15,897 $ 15,885
Due after one year through five years 21,954 21,933
Due after five years through ten years 17,294 17,673
Due after ten years 3,893 4,115
-----------------------------------------------------------------------------------------------------------------------------------
Total held-to-maturity debt securities $ 59,038 $ 59,606
===================================================================================================================================
Realized gains on available-for-sale securities were $15,000 in 2006, $39,000 in
2005, and $257,000 in 2004; realized losses on available-for-sale securities
were $0 in 2006, $1,565,000 in 2005, and $159,000 in 2004.
The following table summarizes securities that had unrealized losses at
December 31, 2006:
-----------------------------------------------------------------------------------------------------------------------------------
Less than 12 Months 12 Months or Longer Total
-----------------------------------------------------------------------------------------------------------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
(in thousands) Value Losses Value Losses Value Losses
-----------------------------------------------------------------------------------------------------------------------------------
Obligations of U.S. Government
sponsored agencies $ 40,299 $ 171 $ 176,675 $ 3,810 $ 216,974 $ 3,981
Obligations of states and political
subdivisions 13,275 85 37,617 534 50,892 619
Mortgage-backed securities 100,649 496 188,086 4,261 288,735 4,757
-----------------------------------------------------------------------------------------------------------------------------------
Total debt securities 154,223 752 402,378 8,605 556,601 9,357
Equity securities 0 0 0 0 0 0
-----------------------------------------------------------------------------------------------------------------------------------
Total securities $ 154,223 $ 752 $ 402,378 $ 8,605 $ 556,601 $ 9,357
===================================================================================================================================
54
Note 2 Securities (continued)
The following table summarizes securities that had unrealized losses at December 31, 2005:
-----------------------------------------------------------------------------------------------------------------------------------
Less than 12 Months 12 Months or Longer Total
-----------------------------------------------------------------------------------------------------------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
(in thousands) Value Losses Value Losses Value Losses
-----------------------------------------------------------------------------------------------------------------------------------
Obligations of U.S. Government
sponsored agencies $ 97,789 $ 1,698 $ 87,841 $ 3,416 $ 185,630 $ 5,114
Obligations of states and
political subdivisions 58,743 650 14,944 434 73,687 1,084
Mortgage-backed securities 197,968 2,959 83,183 3,332 281,151 6,291
-----------------------------------------------------------------------------------------------------------------------------------
Total debt securities 354,500 5,307 185,968 7,182 540,468 12,489
Equity securities 0 0 0 0 0 0
-----------------------------------------------------------------------------------------------------------------------------------
Total securities $ 354,500 $ 5,307 $ 185,968 $ 7,182 $ 540,468 $ 12,489
===================================================================================================================================
Declines in the fair value of held-to-maturity and available-for-sale securities
below their cost that are deemed to be other than temporary are reflected in
earnings as realized losses. In estimating other-than-temporary impairment
losses, management considers, among other things, (i) the length of time and the
extent to which the fair value has been less than cost, (ii) the financial
condition and near-term prospects of the issuer, and (iii) the intent and
ability of the Company to retain its investment in the issuer for a period of
time sufficient to allow for any anticipated recovery in fair value.
Management has the ability and intent to hold the securities classified as
held-to-maturity until they mature, at which time the Company will receive full
value for the securities. Furthermore, as of December 31, 2006 and December 31,
2005, management also had the ability and intent to hold the securities
classified as available-for-sale for a period of time sufficient for a recovery
of cost, which could be maturity. The unrealized losses are largely due to
increases in market interest rates over the yields available at the time the
underlying securities were purchased. The fair value is expected to recover as
the bonds approach their maturity date or repricing date or if market yields for
similar investments decline. Management does not believe any of the securities
are impaired due to reasons of credit quality. Accordingly, as of December 31,
2006, and December 31, 2005, management believes the impairments detailed in the
tables above are temporary and no impairment loss has been realized in the
Company's Consolidated Statements of Income.
The Company uses securities to pledge as collateral for public deposits and
other borrowings, and sells securities under agreements to repurchase (see Note
9 Securities Sold Under Agreements to Repurchase and Federal Funds Purchased).
Securities carried at $584.0 million and $516.8 million at December 31, 2006 and
2005, respectively, were either pledged or sold under agreements to repurchase.
Except for U.S. government securities, there were no holdings, when taken in the
aggregate, of any single issuer that exceeded 10% of shareholders' equity at
December 31, 2006.
The Company has an equity investment in a small business investment company
(SBIC) established for the purpose of providing financing to small businesses in
market areas served by the Company. As of December 31, 2006 and 2005, this
investment totaled $3.6 million and $3.4 million, respectively, and was included
in other assets on the Company's Consolidated Statements of Condition. The
investment is accounted for under the equity method of accounting.
Note 3 Comprehensive Income
Comprehensive income for the three years ended December 31 is summarized below:
-----------------------------------------------------------------------------------------------------------------------------------
(in thousands) 2006 2005 2004
-----------------------------------------------------------------------------------------------------------------------------------
Net income $ 27,767 $ 27,685 $ 25,615
Net unrealized holding gain (loss) on available-for-sale securities
during the year. Pre-tax net unrealized holding gain (loss) was $2,632 in 2006
$(13,490) in 2005, $(3,475) in 2004 1,579 (8,095) (2,085)
Reclassification adjustment for net realized (gain) loss on the sale of
available-for-sale securities (pre-tax net (gain) loss of $(15) in 2006, $1,526 in
2005, and $(98) in 2004) (9) 916 (59)
-----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) 1,570 (7,179) (2,144)
-----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 29,337 $ 20,506 $ 23,471
===================================================================================================================================
55
Note 4 Loan/Lease Classification Summary and Related Party Transactions
Loans/Leases at December 31 were as follows:
(in thousands) 2006 2005
----------------------------------------------------------------------------------------------------------
Residential real estate $ 469,146 $ 475,155
Commercial real estate 393,829 347,443
Real estate construction 26,130 30,309
Commercial 345,194 306,410
Consumer and other 82,341 100,249
Leases 11,962 14,864
----------------------------------------------------------------------------------------------------------
Total loans and leases 1,328,602 1,274,430
Less unearned income and net deferred costs and fees (2,304) (3,081)
----------------------------------------------------------------------------------------------------------
Total loans and leases, net of unearned income and deferred costs and fees $ 1,326,298 $ 1,271,349
==========================================================================================================
As part of its asset/liability management strategy the Company may sell certain
residential mortgage loans in the secondary market. During 2006, 2005, and 2004,
the Company sold residential mortgage loans totaling $12,503,000, $16,532,000,
and $14,691,000, respectively, and realized gains on these sales of $177,000,
$238,000, and $240,000, respectively. When residential mortgage loans are sold
or securitized, the Company typically retains all servicing rights, which
provides the Company with a source of fee income. In connection with the sales
in 2006, 2005, and 2004, the Company recorded mortgage-servicing assets of
$294,000, $98,000, and $95,200, respectively.
Amortization of mortgage servicing assets amounted to $116,000 in 2006, $127,000
in 2005 and $168,000 in 2004. At December 31, 2006 and 2005, the Company
serviced residential mortgage loans aggregating $162.0 million and $135.6
million, including loans securitized and held as available-for-sale securities.
Mortgage servicing rights totaled $1.1 million and $949,000 at December 31, 2006
and 2005, respectively. Loans held for sale, which are included in residential
real estate in the table above, totaled $169,000, and $180,000 at December 31,
2006 and 2005, respectively. Residential mortgage loans secured in 2006 totaled
$32.0 million. No loans were securitized in 2005.
As members of the FHLB, the Company's subsidiary banks may use unencumbered
mortgage related assets to secure borrowings from the FHLB. At December 31,
2006, the Company had $45.2 million in term advances from the FHLB that were
secured by residential mortgage loans.
The Company's loan/lease customers are located primarily in the upstate New York
communities served by its three subsidiary banks. The Trust Company operates
fourteen banking offices in the counties of Tompkins, Cayuga, Cortland, and
Schuyler, New York. The Bank of Castile operates fourteen banking offices in
towns situated in and around the areas commonly known as the Letchworth State
Park area and the Genesee Valley region of New York State. Mahopac National Bank
is located in Putnam County, New York, and operates five offices in that county,
three offices in neighboring Dutchess County, New York, and one office in
Westchester County, New York. Other than general economic risks, management is
not aware of any material concentrations of credit risk to any industry or
individual borrower.
Directors and officers of the Company and its affiliated companies were
customers of, and had other transactions with, the Company's banking
subsidiaries in the ordinary course of business. Such loans and commitments were
made on substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with other persons,
and did not involve more than normal risk of collectibility or present other
unfavorable features.
Loan transactions with related parties are summarized as follows:
(in thousands) 2006 2005
----------------------------------------------------------------------------------------------------------
Balance at beginning of year $ 10,854 $ 9,964
New Directors/Executive Officers 250 0
Former Directors/Executive Officers (336) (8)
New loans and advancements 2,383 3,034
Loan payments (2,120) (2,136)
----------------------------------------------------------------------------------------------------------
Balance at end of year $ 11,031 $ 10,854
==========================================================================================================
56
Note 5 Allowance for Loan/Lease Losses
Changes in the allowance for loan/lease losses are summarized as follows:
(in thousands) 2006 2005 2004
------------------------------------------------------------------------------------------------
Allowance at beginning of year $ 13,677 $ 12,549 $ 11,685
Provisions charged to operations 1,424 2,659 2,860
Recoveries on loans/leases 491 706 794
Loans/leases charged-off (1,264) (2,237) (2,790)
------------------------------------------------------------------------------------------------
Allowance at end of year 14,328 $ 13,677 $ 12,549
================================================================================================
The Company's recorded investment in loans/leases that are considered impaired
totaled $2,115,000 at December 31, 2006, and $2,687,000 at December 31, 2005.
The average recorded investment in impaired loans/leases was $2,047,000 in 2006,
$3,582,000 in 2005, and $4,274,000 in 2004. The December 31, 2006, recorded
investment in impaired loans/leases includes $1,349,000 of loans/leases that had
related allowances of $322,000. The December 31, 2005, recorded investment in
impaired loans/leases includes $1,660,000 of loans/leases that had related
allowances of $345,000. Interest income recognized on impaired loans/leases, all
collected in cash, was $92,000 for 2006, $93,000 for 2005, and $114,000 for
2004.
The principal balances of nonperforming loans/leases, including impaired loans/leases, are
detailed in the table below.
December 31
(in thousands) 2006 2005
------------------------------------------------------------------------------------------------
Loans 90 days past due and accruing $ 8 $ 12
Nonaccrual loans 2,994 4,072
Troubled debt restructurings not included above 0 50
------------------------------------------------------------------------------------------------
Nonperforming loans/leases $ 3,002 $ 4,134
================================================================================================
The difference between the interest income that would have been recorded if
these loans/leases had been paid in accordance with their original terms and the
interest income that recorded for the years ended December 31, 2006, 2005, and
2004 was not significant.
Note 6 Goodwill and Other Intangible Assets
On January 6, 2006, the Company completed its acquisition of AM&M Financial
Services, Inc. (AM&M), a fee-based financial planning firm headquartered in
Pittsford, New York. Under the terms of the Agreement and Plan of Merger dated
November 21, 2005 by and between the Company and AM&M, the Company acquired all
of the issued and outstanding shares of AM&M stock for an initial merger
consideration of $2,375,000 in cash and 59,377 shares of Tompkins common stock.
In addition to the merger consideration paid at closing, additional contingent
amounts of up to $8.5 million (payable one-half in cash and one-half in Tompkins
common stock) may be paid over a period of four years from closing, depending on
the operating results of AM&M. As of December 31, 2006, AM&M had exceeded the
earnings target for 2006, resulting in additional consideration of $2.5 million
(payable one-half in cash and one-half in Tompkins common stock). The
transaction resulted in intangible assets of $7.1 million, including goodwill of
$6.0 million, customer related intangible of $968,000, and a
covenant-not-to-compete of $108,000. The customer related intangible and the
covenant-not-to-compete are being amortized over 15 years and 5 years,
respectively.
On March 1, 2006, Tompkins Insurance acquired the Farrell-Messler Agency, an
insurance agency in Trumansburg, New York, in a cash transaction. The
transaction resulted in goodwill of $631,000, customer related intangibles of
$159,000 and a covenant-not-to-compete of $79,000. The customer related
intangibles and covenant-not-to-compete are being amortized over 15 and 5 years,
respectively.
On April 1, 2006, Tompkins Insurance acquired certain assets of the Potter
Enterprises of WNY, Inc., an insurance agency headquartered in Orchard Park, New
York, in a cash transaction. Only the operations attributable to the Castile, NY
branch were included in this transaction. The transaction resulted in goodwill
of $180,000, customer related intangibles of $56,000 and a
covenant-not-to-compete of $14,000. The customer related intangibles and
covenant-not-to-compete are being amortized over 15 and 4 years, respectively.
On July 1, 2006, Tompkins Insurance acquired the Kemp Agency, an insurance
agency with offices in Dansville and Nunda, New York in a stock and cash
transaction. The transaction resulted in goodwill of $611,000, customer related
intangibles of $195,000 and a covenant-not-to-compete of $65,000. The customer
57
Note 6 Goodwill and Other Intangible Assets (continued)
related intangibles and covenant-not-to-compete are being amortized over 15 and
5 years, respectively.
Effective December 31, 2006, Tompkins Insurance acquired the Carey McKinney
Group, an insurance agency in Ithaca, New York, in a cash and stock transaction.
The transaction resulted in goodwill of $1.5 million, customer related
intangibles of $457,000 and a covenant-not-to-compete of $246,000. The customer
related intangibles and covenant-not-to-compete are being amortized over 15 and
5 years, respectively.
At December 31, 2006, the Company had unamortized goodwill related to its
various acquisitions totaling $21,235,000 compared with $12,286,000 at December
31, 2005. The increase reflects $6.0 million of goodwill related to the
acquisition of AM&M and $2.9 million of goodwill related to the four insurance
agency acquisitions in 2006.
At December 31, 2006, the Company had core deposit intangible assets related to
various acquisitions of $535,000 compared to $916,000 at December 31, 2005. The
amortization of these intangible assets amounted to $381,000 in 2006 and
$483,000 in 2005.
At December 31, 2006, other intangible assets, consisting of mortgage servicing
rights, customer lists and contracts, and covenants-not-to-compete, totaled
$3,516,000.
The Company reviews its goodwill and intangible assets annually, or more
frequently if conditions warrant, for impairment. Based on the Company's 2006
review, there was no impairment of its goodwill or intangible assets.
Information regarding the carrying amount and the amortization expense of the
Company's acquired intangible assets are disclosed in the table below.
December 31, 2006 (in thousands) Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
-----------------------------------------------------------------------------------------------------
Amortized intangible assets:
Core deposit intangible $ 5,459 $ 4,924 $ 535
Other intangibles 5,152 1,636 3,516
-----------------------------------------------------------------------------------------------------
Subtotal amortized intangible assets 10,611 6,560 4,051
Goodwill 23,259 2,024 21,235
-----------------------------------------------------------------------------------------------------
Total intangible assets $ 33,870 $ 8,584 $ 25,286
-----------------------------------------------------------------------------------------------------
Aggregate amortization expense: *
For the year ended December 31, 2006 $ 674
Estimated amortization expense: *
For the year ended December 31, 2007 661
For the year ended December 31, 2008 517
For the year ended December 31, 2009 365
For the year ended December 31, 2010 259
For the year ended December 31, 2011 176
=====================================================================================================
o Excludes the amortization of mortgage servicing rights as the amounts
are not material. Amortization of mortgage servicing rights was
$116,000, $127,000, and $168,000 in 2006, 2005, and 2004, respectively.
December 31, 2005 (in thousands) Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
-----------------------------------------------------------------------------------------------------
Amortized intangible assets:
Core deposit intangible $ 5,459 $ 4,543 $ 916
Other intangibles 2,137 893 1,244
-----------------------------------------------------------------------------------------------------
Subtotal amortized intangible assets 7,596 5,436 2,160
Goodwill 14,310 2,024 12,286
-----------------------------------------------------------------------------------------------------
Total intangible assets $ 21,906 $ 7,460 $ 14,446
-----------------------------------------------------------------------------------------------------
The changes in the carrying amount of goodwill for the year ended December 31,
2006 are as follows:
Gross Carrying Net Carrying
(in thousands) Amount Amount
-----------------------------------------------------------------------------------------------------
Balance as of January 1, 2006 $ 14,310 $ 12,286
Goodwill resulting from acquisition of insurance agencies 2,970 2,970
Goodwill resulting from acquisition of AM&M 5,979 5,979
-----------------------------------------------------------------------------------------------------
Balance as of December 31, 2006 $ 23,259 $ 21,235
-----------------------------------------------------------------------------------------------------
58
Note 7 Bank Premises and Equipment
Bank premises and equipment at December 31 were as follows:
(in thousands) 2006 2005
-----------------------------------------------------------------------------------------------------
Land $ 7,611 $ 6,803
Bank premises 41,122 35,433
Furniture, fixtures, and equipment 31,118 27,475
Accumulated depreciation and amortization (36,578) (32,773)
-----------------------------------------------------------------------------------------------------
Total $ 43,273 $ 36,938
=====================================================================================================
Depreciation and amortization expenses in 2006, 2005, and 2004 are included in
operating expenses as follows:
(in thousands) 2006 2005 2004
-----------------------------------------------------------------------------------------------------
Bank premises $ 1,148 $ 1,056 $ 1,022
Furniture, fixtures, and equipment 2,390 2,172 2,083
-----------------------------------------------------------------------------------------------------
Total $ 3,538 $ 3,228 $ 3,105
=====================================================================================================
The following is a summary of the future minimum lease payments under
non-cancelable operating leases as of December 31, 2006:
(in thousands)
-------------------------------------------------------------------------
2007 $ 1,605
2008 1,493
2009 1,224
2010 1,168
2011 753
Thereafter 12,860
-------------------------------------------------------------------------
Total $19,103
-------------------------------------------------------------------------
The Company leases land, buildings and equipment under operating lease
arrangements extending to the year 2090. Total rental expense amounted to $1.7
million in 2006, $1.1 million in 2005, and $813,000 in 2004. Most leases include
options to renew for periods ranging from 5 to 20 years. Options to renew are
not included in the above future minimum rental commitments. The Company has two
land lease commitments with terms expiring in 2042 and 2090.
Note 8 Deposits
The aggregate time deposits of $100,000 or more were $313,137,000 at December
31, 2006, and $296,806,000 at December 31, 2005. Scheduled maturities of time
deposits at December 31, 2006, were as follows:
Less than $100,000
(in thousands) $100,000 and over Total
-----------------------------------------------------------------------------------------------------
Maturity
Three months or less $ 87,310 $ 189,452 $ 276,762
Over three through six months 95,450 51,519 146,969
Over six through twelve months 139,663 61,779 201,442
-----------------------------------------------------------------------------------------------------
Total due in 2007 322,423 302,750 625,173
2008 25,199 7,733 32,932
2009 5,412 1,437 6,849
2010 1,244 1,117 2,361
2011 1,779 100 1,879
2012 and thereafter 28 0 28
-----------------------------------------------------------------------------------------------------
Total $ 356,085 $ 313,137 $ 669,222
=====================================================================================================
59
Note 9 Securities Sold Under Agreements to Repurchase and Federal Funds
Purchased
Securities sold under agreements to repurchase are secured borrowings that
typically mature within thirty to ninety days, although the Company has entered
into repurchase agreements with the Federal Home Loan Bank ("FHLB") with
maturities that extend through 2016. As of December 31, 2006, the Company had
$112.0 million in repurchase agreements with the FHLB that mature over one year.
Maturities of advances due over one year include $20.0 million in 2008, $12.0
million in 2009, $5.0 million in 2010, $10.0 million in 2011, $5.0 million in
2012, $15.0 million in 2013, and $45.0 million in 2016. Securities sold under
agreements to repurchase are stated at the amount of cash received in connection
with the transaction. The Company may be required to provide additional
collateral based on the fair value of the underlying securities. Federal funds
purchased are short-term borrowings that typically mature within one to ninety
days.
Information regarding securities sold under agreements to repurchase and Federal
funds purchased for the years ended December 31, is detailed in the table below:
Securities Sold Under Agreements to Repurchase
(dollar amounts in thousands) 2006 2005 2004
-----------------------------------------------------------------------------------------------------
Total outstanding at December 31 $ 191,490 $ 152,651 $ 153,715
Maximum month-end balance 191,490 172,353 195,137
Average balance during the year 158,818 157,646 174,398
Weighted average rate at December 31 3.92% 3.21% 2.75%
Average interest rate paid during the year 3.71% 3.07% 2.51%
=====================================================================================================
Federal Funds Purchased
(dollar amounts in thousands) 2006 2005 2004
-----------------------------------------------------------------------------------------------------
Total outstanding at December 31 $ 0 $ 0 $ 0
Maximum month-end balance 3,500 3,000 9,200
Average balance during the year 328 171 771
Weighted average rate at December 31 N/A N/A N/A
Average interest rate paid during the year 3.71% 3.25% 1.50%
=====================================================================================================
Note 10 Other Borrowings
The following table summaries the Company's borrowings for the years ending
December 31, 2006 and 2005.
(in thousands) 2006 2005
-----------------------------------------------------------------------------------------------------
Overnight FHLB advances $ 40,500 $ 0
Term FHLB advances 45,181 63,430
Other 260 243
-----------------------------------------------------------------------------------------------------
Total borrowings $ 85,941 $ 63,673
=====================================================================================================
The Company, through its subsidiary banks, had available line-of-credit
agreements with banks permitting borrowings to a maximum of approximately
$31,587,000 at December 31, 2006 and $31,558,000 at December 31, 2005. There
were no outstanding advances against those lines at December 31, 2006 or 2005.
As members of the Federal Home Loan Bank (FHLB) each bank subsidiary may apply
for advances secured by certain residential mortgage loans and other assets,
provided that certain standards for credit worthiness have been met. At December
31, 2006, the Company, through its subsidiary banks, had established unused
lines of credit with the FHLB of $366,056,000. At December 31, 2006, there were
$45,181,000 in term advances from the FHLB, compared to $63,430,000 at December
31, 2005. Of the $45,181,000 of term advances, $5,062,000 are due within one
year and have a weighted average rate of 4.41%; and $40,119,000 are due over one
year and have a weighted average rate of 4.47%. Maturities of advances due over
one year include $146,000 in 2008, $973,000 in 2009, $10.0 million in 2010,
$14.0 million in 2011, $5.0 million in 2012, and $10.0 million in 2015.
60
Note 10 Other Borrowings (continued)
The Company's FHLB borrowings at December 31, 2006 included $43.0 million in
fixed-rate callable borrowings, which can be called by the FHLB if certain
conditions are met. Additional details on the fixed-rate callable advances are
provided in the following table.
Current Call
Balance Rate Maturity Date Call Date Frequency Call Features
--------------------------------------------------------------------------------------------------
$ 4,000,000 4.290 January 30, 2007 January 30, 2004 Quarterly LIBOR strike 7.0%
10,000,000 4.945 December 21, 2010 December 21, 2001 Quarterly FHLB option
3,000,000 5.120 January 31, 2011 January 30, 2004 Quarterly FHLB option
3,000,000 4.880 January 31, 2011 January 30, 2003 Quarterly FHLB option
3,000,000 5.120 March 7, 2011 March 5, 2006 Quarterly FHLB option
5,000,000 4.710 November 28, 2011 November 28, 2006 Quarterly FHLB option
5,000,000 3.260 September 18, 2012 September 18, 2007 Quarterly FHLB option
10,000,000 3.850 June 3, 2015 June 3, 2010 One time FHLB option
------------
Total $ 43,000,000
============
Other borrowings included a Treasury Tax and Loan Note account with the Federal
Reserve Bank of New York totaling $100,000 at December 31, 2006 and December 31,
2005. At December 31, 2006 and 2005, Tompkins Insurance had borrowings of
$160,000 and $142,000, respectively, from unrelated financial institutions.
Note 11 Employee Benefit Plans
The Company maintains a noncontributory defined-benefit retirement and pension
plan covering substantially all employees of the Company. The benefits are based
on years of service and percentage of the employees' average compensation.
Assets of the Company's defined benefit plan are invested in common and
preferred stock, U. S. Government securities, corporate bonds and notes, and
mutual funds. At December 31, 2006, the plan assets included 38,357 shares of
Tompkins common stock that had a fair value of $1.7 million.
In addition to the Company's noncontributory defined-benefit retirement and
pension plan, the Company provides supplemental employee retirement plans (SERP)
to certain executives.
The Company amended its plan for post-retirement health benefits in 2005.
Employees commencing employment after January 1, 2005 will have no contribution
from the Company towards a plan of benefits, after retirement. Retirees and
employees who were currently eligible to retire when the plan was amended were
unaffected. Generally, all other then current employees were eligible for Health
Savings Accounts (HSA's) with an initial balance equal to the amount of the
Company's estimated then current liability. Contributions to the plan are
limited to an annual contribution of 4% of the total HSA balances. Employees,
upon retirement, will be able to utilize their HSA for qualified health costs
and deductibles.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans--An Amendment of FASB No.
87, 88, 106 and 132(R)" ("SFAS 158"). Effective for fiscal years ending after
December 31, 200, SFAS 158 requires that the funded status of defined benefit
postretirement plans be recognized on the company's balance sheet, and changes
in the funded status be reflected in comprehensive income in the year in which
the change occurred. However, gains or losses, prior service costs or credits,
and transition assets or obligations that have not been included in net periodic
benefit cost as of the end of 2006, the year in which SFAS 158 is initially
applied were recognized as components of the ending balance of accumulated other
comprehensive income(loss), net of tax. Retroactive application of this
accounting rule is prohibited; therefore, 2006 is presented as required by SFAS
158 and 2005 is presented as required under the accounting rules prior to SFAS
158. The adoption of SFAS 158 in 2006 has no effect on the computation of net
periodic expense for pensions and other post-retirement benefits.
The Company engages independent, external actuaries to compute the amounts of
liabilities and expenses relating to these plans, subject to the assumptions
that the Company selects. The benefit obligation for these plans represents the
liability of the Company for current and retired employees, and is affected
primarily by the following:
o Service cost (benefits attributed to employee service during the
period)
o Interest cost (interest on the liability due to the passage of time)
o Actuarial gains/losses (experience during the year different from that
assumed and changes in plan assumptions)
o Benefits paid to participants.
61
Note 11 Employee Benefit Plans (continued)
The following table sets forth the changes in the projected benefit obligation
for the defined-benefit retirement and pension plan and SERP and the accumulated
benefit obligation for the post-retirement plan; and the respective plan assets,
and the plans' funded status and amounts recognized in the Company's
consolidated statements of condition at December 31, 2006 and 2005 (the
measurement dates of the plans).
Pension Benefits Life and Health Benefits SERP Benefits
-----------------------------------------------------------------------------------------------------------------------------
(in thousands) 2006 2005 2006 2005 2006 2005
-----------------------------------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning
of year $ 32,947 $ 29,508 $ 4,590 $ 5,495 $ 6,917 $ 6,597
Service cost 1,577 1,624 108 140 70 122
Interest cost 1,865 1,746 260 272 438 414
Plan participants' contributions 0 0 70 88 0 0
Actuarial (gain)/loss (1,348) 1,287 (148) (734) (254) 602
Benefits paid (1,306) (1,218) (241) (316) (43) (31)
Business combinations 0 0 472 0 0 0
Plan amendments 353 0 0 (355) 639 (787)
=============================================================================================================================
Benefit obligation at end of year $ 34,088 $ 32,947 $ 5,111 $ 4,590 $ 7,767 $ 6,917
-----------------------------------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at
beginning of year $ 33,064 $ 31,631 $ 0 $ 0 $ 0 $ 0
Actual return on plan assets 3,959 2,151 0 0 0 0
Plan participants' contributions 0 0 70 88 0 0
Employer contribution 0 500 171 228 43 31
Benefits paid (1,306) (1,218) (241) (316) (43) (31)
-----------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of
year $ 35,717 $ 33,064 $ 0 $ 0 $ 0 $ 0
-----------------------------------------------------------------------------------------------------------------------------
Funded (unfunded) status $ 1,629 $ 117 $ (5,111) $ (4,590) $ (7,767) $ (6,917)
-----------------------------------------------------------------------------------------------------------------------------
The accumulated benefit obligation for the pension plan for 2006 and 2005 was
$34,088,000 and $32,947,000, respectively. The accumulated benefit obligation
for the SERP for 2006 and 2005 was $5,181,000 and $4,696,000, respectively.
Effective 2006, SFAS 158 required that companies recognize a balance sheet asset
or liability for each of their pension and other post-retirement benefit plans
equal to the funded status of the plan. The funded status, or amount by which
the benefit obligation exceeds the fair value of plan assets, represents a
liability. Conversely, the amount by which the fair value of plan assets exceeds
the benefit obligation represents an asset. The funded status of the pension
plan of $1,629,000 is recognized in the accompanying Consolidated Statements of
Condition as a prepaid asset. The unfunded status of the life and health benefit
plan and the SERP of $5,111,000 and $7,767,000, respectively, are recognized in
the accompanying Consolidated Statements of Condition as accrued liabilities.
For 2005, a liability was recognized if net periodic pension cost recognized
over the life of the plan exceeds amounts the employer had contributed to the
plan. An asset was recognized if net periodic pension cost was less than amounts
the employer had contributed to the plan.
The following table shows the reconciliation of the funded status of the
Company's plans with the amounts recorded in the Consolidated Statements of
Condition.
Pension Benefits Life and Health Benefits SERP Benefits
-----------------------------------------------------------------------------------------------------------------------------
(in thousands) 2006 2005 2006 2005 2006 2005
-----------------------------------------------------------------------------------------------------------------------------
Funded (unfunded) status $ 1,629 $ 117 $ (5,111) $ (4,590) $ (7,767) $ (6,917)
Unrecognized net actuarial loss 0 13,946 0 44 0 2,026
Net transition obligation 0 0 0 520 0 0
Unrecognized prior service cost 0 (1,403) 0 0 0 144
-----------------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $ 1,629 $ 13,422 $ (5,111) $ (4,026) $ (7,767) $ (4,747)
-----------------------------------------------------------------------------------------------------------------------------
62
Note 11 Employee Benefit Plans (continued)
Weighted-average assumptions used in accounting for the plans were as follows:
Pension Benefits Life and Health Benefits SERP Benefits
-------------------------------------------------------------------------------------------------------------------------------
2006 2005 2004 2006 2005 2004 2006 2005 2004
-------------------------------------------------------------------------------------------------------------------------------
Discount rates:
Benefit Cost for Plan Year 5.75% 6.00% 6.25% 5.75% 6.00% 6.25% 5.75% 6.00% 6.25%
Benefit Obligation at End of
Plan Year 6.00% 5.75% 6.00% 6.00% 5.75% 6.00% 6.00% 5.75% 6.00%
Expected long-term return on
plan assets
Benefit Cost for Plan Year 8.50% 8.50% 8.50% N/A N/A N/A N/A N/A N/A
Benefit Obligation at End of
Plan Year N/A N/A N/A N/A N/A N/A N/A N/A N/A
Rate of compensation increase (1) 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 5.00% 5.00% 5.00%
=================================================================================================================================
(1) The rate of compensation increase for the Trust Company is 4%, and is 5%
for all other groups.
Net periodic benefit cost includes the following components:
Components of net periodic benefit cost
(in thousands) Pension Benefits Life and Health Benefits SERP Benefits
---------------------------------------------------------------------------------------------------------------------------------
2006 2005 2004 2006 2005 2004 2006 2005 2004
---------------------------------------------------------------------------------------------------------------------------------
Service cost $ 1,577 $ 1,624 $ 1,382 $ 108 $ 140 $ 178 $ 70 $ 122 $ 116
Interest cost 1,865 1,746 1,634 260 272 305 438 414 366
Expected return on plan assets (2,754) (2,647) (2,338) 0 0 0 0 0 0
Amortization of prior service cost (107) (131) (131) 0 5 7 93 106 105
Recognized net actuarial loss 716 669 673 0 0 6 111 111 61
Amortization of transition liability 0 0 0 67 103 116 0 0 0
Other N/A N/A N/A N/A N/A N/A N/A N/A N/A
---------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 1,297 $ 1,261 $ 1,220 $ 435 $ 520 $ 612 $ 712 $ 753 $ 648
---------------------------------------------------------------------------------------------------------------------------------
Tompkins Trust Company offers post-retirement health care benefits, although as
previously mentioned, has discontinued adding participants to the plan. The
weighted average annual assumed rate of increase in the per capita cost of
covered benefits (the health care cost trend rate) is 8.25% beginning in 2007,
and is assumed to decrease gradually to 5.0% in 2012 and beyond. For every 1%
change in the assumed health care cost trend rate, service and interest costs
will change approximately $16,000 and the Company's benefit obligation will
change approximately $200,000.
The balance as of December 31, 2006 of pre-tax amounts to be amortized in the
future that are included in accumulated other comprehensive income (net of tax)
(a component of Stockholders' Equity) are listed below:
Life and Health
(in thousands) Pension Benefits SERP
--------------------------------------------------------------------------------
Net actuarial loss (gain) $ 10,678 $ (104) $ 1,660
Prior service cost (credit) (944) 0 691
Unrecognized net initial obligation 0 453 0
--------------------------------------------------------------------------------
Total $ 9,734 $ 349 $ 2,351
================================================================================
63
Note 11 Employee Benefit Plans (continued)
The pre-tax amounts included in accumulated other comprehensive income that are
expected to be recognized in net periodic pension cost during the fiscal year
ended December 31, 2007 are shown below.
Life and
Health
(in thousands) Pension Benefits SERP
-------------------------------------------------------------------------------------------
Actuarial loss $ 487 $ 0 $ 80
Prior service cost (107) 0 93
Net initial obligation 0 67 0
-------------------------------------------------------------------------------------------
Total $ 380 $ 67 $ 173
===========================================================================================
The following table illustrates the incremental effect of applying SFAS 158 on
individual items on the Company's Consolidated Statements of Condition at
December 31, 2006:
Increase/
(decrease) Ending
Balance prior SFAS 158 balance after
to adoption of adoptions adoption of
(in thousands) SFAS 158 adjustments SFAS 158
-----------------------------------------------------------------------------------------------
Pension assets 11,363 (9,734) $ 1,629
Deferred tax assets 10,402 4,685 15,087
Total Assets 2,215,886 (5,049) 2,210,837
SERP benefits liability 5,416 2,351 7,767
Post-retirement benefits liability 4,762 349 5,111
Total Liabilities 2,017,065 2,700 2,019,765
Accumulated other comprehensive loss (4,738) (7,749) (12,487)
Total stockholders' equity 197,369 (7,749) 189,620
Total Liabilities and Equity 2,215,886 (5,049) $ 2,210,837
Pension Protection Act of 2006
In August 2006, the President of the United States signed the Pension Protection
Act of 2006 into law. Included in this legislation were changes to the method of
valuing pension plan assets and liabilities for funding purposes, as well as the
minimum funding levels required by 2008. The Company feels the new requirements
will not have a material impact on the Company's cash flow in 2007, as the plan
is currently fully funded. The Company will not be required to make a
contribution if plan assets exceed plan obligations and current costs.
Cash Flows
Plan assets are amounts that have been segregated and restricted to provide
benefits, and include amounts contributed by the Company and amounts earned from
investing contributions, less benefits paid. The Company funds the cost of the
SERP and the post-retirement medical and life insurance benefits on a
pay-as-you-go basis.
The benefits as of December 31, 2006, expected to be paid in each of the next
five fiscal years, and in the aggregate for the five fiscal years thereafter
were as follows:
Life and
Health
(in thousands) Pension Benefits SERP
-------------------------------------------------------------------------------------------
2007 1,452 266 75
2008 1,513 276 236
2009 1,590 295 232
2010 1,769 322 228
2011 1,945 352 392
2012-2016 12,157 1,983 2,058
-------------------------------------------------------------------------------------------
Total 20,426 3,494 3,221
-------------------------------------------------------------------------------------------
64
Note 11 Employee Benefit Plans (continued)
Plan Assets
The Company's pension plan weighted-average asset allocations at December 31,
2006 and 2005, by asset category are as follows:
2006 2005
----------------------------------------------------------------------
Equity securities 73% 83%
Debt securities 20% 14%
Other 7% 3%
----------------------------------------------------------------------
Total Allocation 100% 100%
----------------------------------------------------------------------
The Company is not required to make a contribution to its pension plan in 2007;
however, the Company may voluntarily contribute to the pension plan in 2007.
To develop the expected long-term rate of return on asset assumption, the
Company considered the historical returns and the future expectations for
returns for each asset class, as well as target asset allocations of the pension
portfolio. Based on this analysis, the Company selected 8.50% as the long-term
rate of return on assets assumption.
It is the policy of the Trustees to invest the Pension Trust Fund (the "Fund")
for total return. The Trustees seek the maximum return consistent with the
interests of the participants and beneficiaries and prudent investment
management. The management of the Fund's assets is in compliance with the
guidelines established in the Company's Pension Plan and Trust Investment
Policy, which is reviewed and approved annually by the Tompkins Board of
Directors, and the Pension Investment Review Committee.
The intention is for the Fund to be prudently diversified. The Fund's
investments will be invested among the fixed income, equity and cash equivalent
sectors. The pension committee will designate minimum and maximum positions in
any of the sectors. In no case shall more than 10% of the Fund assets consist of
qualified securities or real estate of the Company. In addition, the following
investments are prohibited:
1. Restricted stock, private placements, short positions, calls,
puts, or margin transactions;
2. Commodities, oil and gas properties, real estate properties,
or
3. Any investment that would constitute a prohibited transaction
as described in the Employee Retirement Income Security Act of
1974 ("ERISA"), section 407, 29 U.S.C. 1106.
In general, the investment in debt securities is limited to readily marketable
debt securities having a Standard & Poor's rating of "A" or Moody's rating of
"A", securities of, or guaranteed by the United States Government or it
agencies, or obligations of banks or their holding companies that are rated in
the three highest ratings assigned by Fitch Investor Service, Inc. In addition,
investments in equity securities must be listed on the New York Stock Exchange
(NYSE), the American Stock Exchange (AMEX) or are traded on the national Over
The Counter market or listed on the NASDAQ. Cash equivalents generally may be
United States Treasury obligations, commercial paper having a Standard & Poor's
rating of "A-1" or Moody's National Credit Officer rating of "P-1"or higher.
The Company has an Employee Stock Ownership Plan (ESOP) and a 401(k) Investment
and Stock Ownership Plan (ISOP) covering substantially all employees of the
Company. The ESOP allows for Company contributions in the form of common stock
of the Company. Annually, the Tompkins Board of Directors determines a
profit-sharing payout to its employees in accordance with a performance-based
formula. A percentage of the approved amount is paid in Company common stock
into the ESOP. Contributions are limited to a maximum amount as stipulated in
the ESOP. The remaining percentage is either paid out in cash or deferred into
the ISOP at the direction of the employee. Compensation expense related to the
ESOP and ISOP totaled $1.6 million in 2006 and 2005, and $1.8 million in 2004.
Under the ISOP, employees may contribute a percentage of their eligible
compensation with a Company match of such contributions up to a maximum match of
4%. The Company provided certain matching contributions to the ISOP based upon
the amount of contributions made by plan participants. The expense associated
with these matching provisions was $1.0 million in 2006, $871,000 in 2005, and
$801,000 in 2004.
Life insurance benefits are provided to certain officers of the Company. In
connection with these benefits, the Company reflects life insurance assets on
its Consolidated Statements of Condition of $25.6 million at December 31, 2006,
and $27.2 million at December 31, 2005. Proceeds from death benefits are used to
provide the life insurance benefits to the officers of the Company. The
insurance is carried at its cash surrender value on the Consolidated Statements
of Condition. Increases in the cash surrender value of the insurance are
reflected as noninterest income, net of any related mortality expense.
65
Note 12 Stock Plans and Stock Based Compensation
The Company's 2001 Stock Option Plan, as amended, (the "Stock Option Plan")
authorizes the grant of options to purchase up to 1,131,350 shares of the
Company's common stock. At December 31, 2006, there were 456,742 shares
available for grant under the 2001 Plan. The Board of Directors of Tompkins may
grant stock options to officers, employees and certain other qualified
individuals. Stock options are granted at an exercise price equal to the stock's
fair market value at the date of grant, may not have a term in excess of ten
years, and have vesting periods that range between one and seven years from the
grant date. Prior to the adoption of the Stock Option Plan, the Company had
similar stock option plans, which remain in effect solely with respect to
unexercised options issued under these plans.
The following table presents the activity related to options under all plans for
the twelve months ended December 31, 2006.
Weighted
Weighted Average
Average Remaining Aggregate
Number of Exercise Contractual Intrinsic
Shares Price Term Value
----------------------------------------------------------------------------------------------------------
Outstanding at January 1, 2006 628,894 $ 31.23
Granted 234,465 42.39
(124,879) 25.91
Exercised
Expired (2,178) 39.34
Forfeited (35,425) 38.77
----------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2006 700,877 $ 35.50 6.84 $ 6,971,289
==========================================================================================================
Exercisable at December 31, 2006 418,480 $ 31.51 5.65 $ 5,835,212
==========================================================================================================
The Company's practice is to issue original issue shares of its common stock
upon exercise of stock options rather than treasury shares. The Company granted
234,465 options to its employees in 2006, 2,200 in 2005, and 240,800 in 2004.
The Company uses the Black-Scholes option-valuation model to determine the fair
value of each option at the date of grant. This valuation model estimates fair
value based on the assumptions listed in the table below. The risk-free interest
rate is the interest rate available on zero-coupon U.S. Treasury instruments
with a remaining term equal to the expected term of the share option at the time
of grant. The expected dividend yield is based on dividend trends and the market
price of the Company's stock price at grant. Volatility is largely based on
historical volatility of the Company's stock price. Expected term is based upon
historical experience of employee exercises and terminations as well as the
vesting term of the grants.
2006 2005 2004
----------------------------------------------------------------------------------------------------------
Weighted per share average fair value at grant date $ 11.48 $ 10.10 $ 12.39
Risk-free interest rate 4.32% 4.20% 3.82%
Expected dividend yield 2.60% 2.60% 2.70%
Volatility 28.28% 30.00% 39.76%
Expected life (years) 6.50 5.00 5.00
----------------------------------------------------------------------------------------------------------
The total intrinsic value, which is the amount by which the fair value of the
underlying stock exceeds the exercise price of an option on the exercise date,
of options exercised was $2,279,000 in 2006, $1,014,000 in 2005 and $839,000 in
2004.
As of December 31, 2006, unrecognized compensation cost related to unvested
stock options totaled $2,300,000. The cost is expected to be recognized over a
weighted average period of 3.0 years. The amount of cash received from the
exercise of stock options was $2,200,000 for 2006, $825,000 for 2005 and
$781,000 for 2004, respectively. The tax benefit realized from stock options
exercised during 2006, 2005, and 2004 was $410,000, $239,000, and $112,000,
respectively.
The following summarizes outstanding and exercisable options at December 31,
2006:
Options Outstanding Options Exercisable
---------------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
---------------------------------------------------------------------------------------
$15.10-32.23 269,216 4.64 $ 26.90 257,900 $ 26.67
$37.32-39.45 212,046 7.35 $ 39.29 160,580 $ 39.28
$42.39-42.39 219,615 9.06 $ 42.39 0 $ 00.00
---------------------------------------------------------------------------------------
700,877 6.84 $ 34.35 418,480 $ 31.51
=======================================================================================
66
Note 13 Income Taxes
The income tax expense (benefit) attributable to income from operations is
summarized as follows:
(in thousands) Current Deferred Total
-------------------------------------------------------------------------------------------
2006
Federal $ 13,468 $ (1,845) $ 11,623
State 1,512 (419) 1,093
-------------------------------------------------------------------------------------------
Total $ 14,980 $ (2,264) $ 12,716
-------------------------------------------------------------------------------------------
2005
Federal $ 13,927 $ (1,843) $ 12,084
State 1,502 (379) 1,123
-------------------------------------------------------------------------------------------
Total $ 15,429 $ (2,222) $ 13,207
-------------------------------------------------------------------------------------------
2004
Federal $ 10,655 $ 276 $ 10,931
State 1,678 (116) 1,562
-------------------------------------------------------------------------------------------
Total $ 12,333 $ 160 $ 12,493
===========================================================================================
The primary reasons for the differences between income tax expense and the
amount computed by applying the statutory federal income tax rate to earnings
are as follows:
2006 2005 2004
-------------------------------------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 1.8 1.8 2.6
Tax exempt income (3.6) (3.6) (3.5)
All other (1.8) (0.9) (1.3)
-------------------------------------------------------------------------------------------
Total 31.4% 32.3% 32.8%
===========================================================================================
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31 were as
follows:
(in thousands) 2006 2005
-------------------------------------------------------------------------------------------
Deferred tax assets:
Allowance for loan/lease losses $ 5,668 $ 5,422
Compensation and benefits 6,200 5,375
Other 1,712 1,067
-------------------------------------------------------------------------------------------
Total deferred tax assets $ 13,580 $ 11,864
-------------------------------------------------------------------------------------------
Deferred tax liabilities:
Prepaid pension $ 4,521 $ 5,038
Depreciation 581 792
Intangibles 668 9
Other 567 587
-------------------------------------------------------------------------------------------
Total deferred tax liabilities $ 6,337 $ 6,426
-------------------------------------------------------------------------------------------
Net deferred tax asset at year-end $ 7,243 $ 5,438
-------------------------------------------------------------------------------------------
Net deferred tax asset at beginning of year $ 5,438 $ 3,216
-------------------------------------------------------------------------------------------
Increase in net deferred tax asset 1,805 2,222
Purchase accounting adjustments, net 459 0
-------------------------------------------------------------------------------------------
Deferred tax benefit $ (2,264) $ (2,222)
===========================================================================================
This analysis does not include the recorded deferred tax assets of $3,159,000 as
of December 31, 2006 and $4,206,000 as of December 31, 2005 related to the net
unrealized holding loss/gain in the available-for-sale securities portfolio. In
addition, the analysis excludes the recorded deferred tax assets of $4.7 million
as of December 31, 2006 related to the reduction of the prepaid pension asset
with the adoption of SFAS No. 158.
67
Note 13 Income Taxes (continued)
Realization of deferred tax assets is dependent upon the generation of future
taxable income or the existence of sufficient taxable income within the
carry-back period. A valuation allowance is provided when it is more likely than
not that some portion of the deferred tax assets will not be realized. In
assessing the need for a valuation allowance, management considers the scheduled
reversal of the deferred tax liabilities, the level of historical taxable
income, and the projected future taxable income over the periods in which the
temporary differences comprising the deferred tax assets will be deductible.
Based on its assessment, management determined that no valuation allowance is
necessary at December 31, 2006 and 2005.
Note 14 Commitments and Contingent Liabilities
The Company, in the normal course of business, is a party to financial
instruments with off-balance-sheet risk to meet the financial needs of its
customers. These financial instruments include loan commitments, stand-by
letters of credit, and unused portions of lines of credit. The contract, or
notional amount, of these instruments represents the Company's involvement in
particular classes of financial instruments. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized on the consolidated statements of condition.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN No. 45),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others; an Interpretation of FASB
Statements No. 5,57 and 107 and rescission of FASB Interpretation No. 34. FIN
No. 45 requires certain new disclosures and potential liability recognition for
the fair value at issuance of guarantees that fall within its scope. Based upon
the Company's interpretation of FIN No. 45, the Company currently does not issue
any guarantees that would require liability recognition under FIN No. 45, other
than its stand-by letters of credit, the amount of which is not considered
significant at December 31, 2006 and 2005.
The Company's maximum potential obligations to extend credit for loan
commitments (unfunded loans, unused lines of credit, and stand-by letters of
credit) outstanding on December 31 were as follows:
(in thousands) 2006 2005
----------------------------------------------------------------------------
Loan commitments $ 72,504 $ 69,234
Stand-by letter of credit 53,875 24,695
Undisbursed portion of lines of credit 240,325 229,503
----------------------------------------------------------------------------
Total $ 366,704 $ 323,432
============================================================================
Commitments to extend credit (including lines of credit) are agreements to
lend to a customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration
dates or other termination clauses and may require payment of a fee.
Stand-by letters of credit are conditional commitments to guarantee the
performance of a customer to a third party. Management uses the same credit
policies in making commitments to extend credit and stand-by letters of
credit as are used for on-balance-sheet lending decisions. Based upon
management's evaluation of the counterparty, the Company may require
collateral to support commitments to extend credit and stand-by letters of
credit. The credit risk amounts are equal to the contractual amounts,
assuming the amounts are fully advanced and collateral or other security is
of no value. The Company does not anticipate losses as a result of these
transactions. These commitments also have off-balance-sheet interest-rate
risk, in that the interest rate at which these commitments were made may not
be at market rates on the date the commitments are fulfilled. Since some
commitments and stand-by letters of credit are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash flow requirements.
At December 31, 2006, the Company had rate lock agreements associated with
mortgage loans to be sold in the secondary market (certain of which relate
to loan applications for which no formal commitment has been made) amounting
to approximately $125,000. In order to limit the interest rate risk
associated with rate lock agreements, as well as the interest rate risk
associated with mortgages held for sale, if any, the Company enters into
agreements to sell loans in the secondary market to unrelated investors on a
loan-by-loan basis. At December 31, 2006, the Company had approximately
$294,000 of commitments to sell mortgages to unrelated investors on a
loan-by-loan basis.
In the normal course of business, the Company is involved in various legal
proceedings. In the opinion of management, based upon the review with
counsel, the proceedings are not expected to have a material effect on the
Company's financial condition or results of operations.
68
Note 15 Earnings Per Share
Calculation of basic earnings per share (Basic EPS) and diluted earnings per
share (Diluted EPS) is shown below. Per share data has been retroactively
adjusted to reflect a 10% stock dividend paid on May 15, 2006.
Weighted
Net Average
For year ended December 31, 2006 Income Shares Per Share
(in thousands except share and per share data) (Numerator) (Denominator) Amount
---------------------------------------------------------------------------------------------------------------
Basic EPS:
Income available to common shareholders $ 27,767 9,857,787 $ 2.82
Effect of dilutive securities:
Stock options 130,997
Shares issuable as contingent consideration for acquisition 10,581
Diluted EPS:
Income available to common shareholders plus assumed conversions $ 27,767 9,999,365 $ 2.78
===============================================================================================================
The effect of dilutive securities calculation for the year ended December 31,
2006 excludes stock options of 206,378 because the exercise price of the options
was greater than the average market value of the Company's common stock during
the period.
Weighted
Net Average
For year ended December 31, 2005 Income Shares Per Share
(in thousands except share and per share data) (Numerator) (Denominator) Amount
---------------------------------------------------------------------------------------------------------------
Basic EPS:
Income available to common shareholders $ 27,685 9,852,789 $ 2.81
Effect of dilutive securities:
Stock options 147,511
Diluted EPS:
Income available to common shareholders plus assumed conversions $ 27,685 10,000,300 $ 2.77
===============================================================================================================
The effect of dilutive securities calculation for the year ended December 31,
2005 excludes stock options of 58,776 because the exercise price of the options
was greater than the average market value of the Company's common stock during
the period.
Weighted
Net Average
For year ended December 31, 2004 Income Shares Per Share
(in thousands except share and per share data) (Numerator) (Denominator) Amount
---------------------------------------------------------------------------------------------------------------
Basic EPS:
Income available to common shareholders $ 25,615 9,851,615 $ 2.60
Effect of dilutive securities:
Stock options 161,275
Diluted EPS:
Income available to common shareholders plus assumed conversions $ 25,615 10,012,890 $ 2.56
===============================================================================================================
The effect of dilutive securities calculation for the year ended December 31,
2004 excludes stock options of 101,357 because the exercise price of the options
was greater than the average market value of the Company's common stock during
the period.
69
Note 16 Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at December 31, 2006 and 2005. The carrying
amounts shown in the table are included in the consolidated statements of
condition under the indicated captions.
Estimated Fair Value of Financial Instruments 2006 2005
---------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
---------------------------------------------------------------------------------------------------------------
Financial Assets:
Cash and cash equivalents $ 52,174 $ 52,174 $ 65,797 $ 65,797
Securities - available-for-sale 655,322 655,322 576,242 576,242
Securities - held-to-maturity 59,038 59,606 82,658 82,768
Loans/leases, net (1) 1,311,970 1,304,968 1,257,672 1,251,187
Accrued interest receivable 11,725 11,725 10,198 10,198
Financial Liabilities
Time deposits $ 669,222 $ 667,298 $ 634,607 $ 630,102
Other deposits 1,040,198 1,040,198 1,048,403 1,048,403
Securities sold under agreements to repurchase 191,490 188,375 152,651 152,717
Other borrowings 85,941 85,633 63,673 62,981
Accrued interest payable 4,545 4,545 3,291 3,291
===============================================================================================================
(1) Lease receivables, although excluded from the scope of SFAS No. 107, are
included in the estimated fair value amounts at their carrying value.
The following methods and assumptions were used in estimating fair value
disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the consolidated
statements of condition for cash, noninterest-bearing deposits, and Federal
funds sold approximate the fair value of those assets.
SECURITIES: Fair values for securities are based on quoted market prices. When
no secondary market exists to quote a market price the fair value is estimated
based upon comparable securities, or the carrying amount of the security is used
as the estimated fair value. Note 3 discloses the fair values of securities.
LOANS/LEASES: The fair values of fixed rate loans/leases are estimated using
discounted cash flow analyses, and interest rates currently offered for
loans/leases with similar terms and credit quality.
DEPOSITS: The fair values disclosed for non-interest bearing accounts and
accounts with no stated maturities are equal to the amount payable on demand at
the reporting date. The fair value of time deposits was estimated by discounting
expected monthly maturities at interest rates approximating those currently
being offered on time deposits of similar terms.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE: The carrying amounts of
repurchase agreements and other short-term borrowings approximate their fair
values. Fair values of long-term borrowings are estimated using a discounted
cash flow approach, based on current market rates for similar borrowings.
OTHER BORROWINGS: The fair values of other borrowings are estimated using
discounted cash flow analysis, discounted at the Company's current incremental
borrowing rate for similar borrowing arrangements.
OFF-BALANCE-SHEET INSTRUMENTS: The fair values of outstanding loan commitments,
including unused lines of credit and stand-by letters of credit are based on
fees currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements, the counterparties' credit standing, and
discounted cash flow analyses. In fixed rate loan commitments, fair value
estimates also consider the difference between current market rates and the
committed rates. At December 31, 2006 and 2005, the fair values of these
instruments approximate the value of the related fees and are not significant.
70
Note 17 Regulations and Supervision
The Company and its subsidiary banks are subject to various regulatory capital
requirements administered by Federal bank regulatory agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material adverse effect on the Company's business, results of operation
and financial condition. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action (PCA), banks must meet specific
guidelines that involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. Capital amounts and classifications of the Company and its subsidiary
banks are also subject to qualitative judgments by regulators concerning
components, risk weightings, and other factors. Quantitative measures
established by regulation to ensure capital adequacy require the maintenance of
minimum amounts and ratios (set forth in the table below) of total capital and
Tier I capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier I capital to average assets (as defined). Management
believes that the Company and its subsidiary banks meet all capital adequacy
requirements to which they are subject.
As of December 31, 2006, the most recent notifications from Federal bank
regulatory agencies categorized the Tompkins Trust Company, The Bank of Castile
and Mahopac National Bank as "well capitalized" under the regulatory framework
for PCA. To be categorized as well capitalized, the Company and its subsidiary
banks must maintain total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the table below. There are no conditions or events since
that notification that management believes have changed the capital category of
the Company or its subsidiary banks. Actual capital amounts and ratios of the
Company and its subsidiary banks are as follows:
Required Required
to be to be
Actual Adequately Capitalized Well Capitalized
------------------------------------------------------------------------------------------------------------------------------
(dollar amounts in thousands) Amount/Ratio Amount/Ratio Amount/Ratio
------------------------------------------------------------------------------------------------------------------------------
December 31, 2006:
Total Capital (to risk-weighted assets)
The Company (consolidated) $193,830/13.1% >$118,458/>8.0% >$148,073/>10.0%
Trust Company $101,750/14.9% >$54,753/>8.0% >$68,441/>10.0%
Castile $46,604/10.7% >$34,724/>8.0% >$43,405/>10.0%
Mahopac $38,308/10.8% >$28,262/>8.0% >$35,327/>10.0%
Tier I Capital (to risk-weighted assets)
The Company (consolidated) $179,502/12.1% >$59,229/>4.0% >$88,844/>6.0%
Trust Company $95,928/14.0% >$27,377/>4.0% >$41,065/>6.0%
Castile $41,184/9.5% >$17,362/>4.0% >$26,043/>6.0%
Mahopac $35,222/10.0% >$14,131/>4.0% >$21,196/>6.0%
Tier I Capital (to average assets)
The Company (consolidated) $179,502/8.3% >$64,918/>3.0% >$108,197/>5.0%
Trust Company $95,928/8.5% >$33,815/>3.0% >$56,358/>5.0%
Castile $41,184/7.1% >$17,320/>3.0% >$28,866/>5.0%
Mahopac $35,222/7.5% >$14,111/>3.0% >$23,519/>5.0%
==============================================================================================================================
December 31, 2005:
Total Capital (to risk-weighted assets)
The Company (consolidated) $189,434/13.7% >$110,262/>8.0% >$137,828/>10.0%
Trust Company $98,370/14.9% >$52,931/>8.0% >$66,163/>10.0%
Castile $43,865/10.8% >$32,461/>8.0% >$40,577/>10.0%
Mahopac $35,042/11.2% >$24,993/>8.0% >$31,242/>10.0%
Tier I Capital (to risk-weighted assets)
The Company (consolidated) $175,757/12.8% >$55,131/>4.0% >$82,697/>6.0%
Trust Company $92,407/14.0% >$26,465/>4.0% >$39,698/>6.0%
Castile $39,122/9.6% >$16,231/>4.0% >$24,346/>6.0%
Mahopac $32,071/10.3% >$12,497/>4.0% >$18,745/>6.0%
Tier I Capital (to average assets)
The Company (consolidated) $175,757/8.5% >$62,197/>3.0% >$103,662/>5.0%
Trust Company $92,407/8.5% >$32,632/>3.0% >$54,386/>5.0%
Castile $39,122/7.3% >$16,088/>3.0% >$26,813/>5.0%
Mahopac $32,071/6.9% >$14,024/>3.0% >$23,374/>5.0%
==============================================================================================================================
71
Note 17 Regulations and Supervision (continued)
The above capital ratios exclude the impact of the adoption of SFAS 158,
"Employer's Accounting for Defined Benefit Pension and Other Postretirement
Plans." The federal bank regulatory agencies adopted on December 14, 2006, an
interim decision excluding any amounts recorded in accumulated other
comprehensive income (loss) resulting from the adoption of SFAS 158.
Generally, dividends from the banking subsidiaries to the Company are limited to
retained net profits for the current year and two preceding years, unless
specific approval is received from the appropriate bank regulatory authority. At
December 31, 2006 the retained net profits of the Company's bank subsidiaries
available to pay dividends were $34.8 million.
Each bank subsidiary is required to maintain reserve balances by the Federal
Reserve Bank of New York. At December 31, 2006, and 2005 the reserve
requirements for the Company's banking subsidiaries totaled $3,675,000.
Note 18 Condensed Parent Company Only Financial Statements
Condensed financial statements for Tompkins (the Parent Company) as of December
31 are presented below.
Condensed Statements of Condition
(in thousands) 2006 2005
------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash $ 11 $ 4,911
Available-for-sale securities, at fair value 1,161 121
Investment in subsidiaries, at equity 185,057 172,397
Other 6,004 5,017
------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 192,233 $ 182,446
------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS EQUITY
Liabilities $ 2,613 $ 1,225
Shareholders' Equity 189,620 181,221
------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 192,233 $ 182,446
==============================================================================================================================
Condensed Statements of Income
(in thousands) 2006 2005 2004
------------------------------------------------------------------------------------------------------------------------------
Dividends from available-for-sale securities $ 44 $ 4 $ 4
Dividends received from subsidiaries 20,664 15,556 10,365
Other income 198 111 109
------------------------------------------------------------------------------------------------------------------------------
Total Operating Income 20,906 15,671 10,478
------------------------------------------------------------------------------------------------------------------------------
Other expenses 2,835 923 1,218
------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 2,835 923 1,218
------------------------------------------------------------------------------------------------------------------------------
Income Before Taxes and Equity in Undistributed
Earnings of Subsidiaries 18,071 14,748 9,260
Income tax benefit 1,108 331 441
Equity in undistributed earnings of subsidiaries 8,588 12,606 15,914
------------------------------------------------------------------------------------------------------------------------------
Net Income $ 27,767 $ 27,685 $ 25,615
==============================================================================================================================
72
Note 18 Condensed Parent Company Only Financial Statements (continued)
Condensed Statements of Cash Flows
(in thousands) 2006 2005 2004
------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 27,767 $ 27,685 $ 25,615
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed earnings of subsidiaries (8,588) (12,606) (15,914)
Tax benefit of stock options exercised 0 239 112
Stock-based compensation expense 692 0 0
Other, net (4,232) (537) (108)
------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 15,639 14,781 9,705
------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net cash used in acquisitions (1,693) 0 0
Other, net (207) (1,250) (749)
------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (1,900) (1,250) (749)
------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Cash dividends (11,307) (10,504) (9,769)
Cash paid in lieu of fractional shares - 10% stock dividend (10) (13) 0
Repurchase of common shares (9,983) (897) (2,976)
Net proceeds from exercise of stock options 2,251 825 781
Tax benefits of stock options exercised 410 0 0
------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (18,639) (10,589) (11,964)
------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash (4,900) 2,942 (3,008)
Cash at beginning of year 4,911 1,969 4,977
------------------------------------------------------------------------------------------------------------------------------
Cash at End of Year $ 11 $ 4,911 $ 1,969
==============================================================================================================================
A statement of changes in shareholders' equity has not been presented since it
is the same as the Consolidated Statement of Changes in Shareholders' Equity
previously presented.
Note 19 Segment and Related Information
The Company manages its operations through two business segments: banking and
financial services. Financial services activities consist of the results of the
Company's trust, wealth and risk management operations. All other activities,
including holding company activities, are considered banking. The Company
accounts for intercompany fees and services at an estimated fair value according
to regulatory requirements for the services provided. Intercompany items relate
primarily to the use of human resources, accounting and marketing services
provided by any of the Banks and the holding company. All other accounting
policies are the same as those described in the summary of significant
accounting policies.
73
Note 19 Segment and Related Information (continued)
Summarized financial information concerning the Company's reportable segments
and the reconciliation to the Company's consolidated results is shown in the
following table. Investment in subsidiaries is netted out of the presentations
below. The "Intercompany" column identifies the intercompany activities of
revenues, expenses and other assets between the banking and financial services
segment.
As of and for the year ended December 31, 2006
------------------------------------------------------------------------------------------------------------------------------
Financial
(in thousands) Banking Services Intercompany Consolidated
------------------------------------------------------------------------------------------------------------------------------
Interest income $ 120,736 $ 311 $ (6) $ 121,041
Interest expense 48,179 11 (6) 48,184
------------------------------------------------------------------------------------------------------------------------------
Net interest income 72,557 300 0 72,857
------------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 1,424 0 0 1,424
Noninterest income 19,635 21,652 (196) 41,091
Noninterest expense 56,788 15,318 (196) 71,910
------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 33,980 6,634 0 40,614
------------------------------------------------------------------------------------------------------------------------------
Minority interest 131 0 0 131
Provision for income taxes 10,470 2,246 0 12,716
------------------------------------------------------------------------------------------------------------------------------
Net Income $ 23,379 $ 4,388 $ 0 $ 27,767
==============================================================================================================================
------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization $ 3,932 $ 223 $ 0 $ 4,155
Assets 2,183,880 28,455 (1,498) 2,210,837
Goodwill 5,377 15,858 0 21,235
Other intangibles 1,663 2,388 0 4,051
Loans, net 1,308,544 3,551 (125) 1,311,970
Deposits 1,708,792 1,984 (1,356) 1,709,420
Equity 168,178 21,442 0 189,620
As of and for the year ended December 31, 2005
------------------------------------------------------------------------------------------------------------------------------
Financial
(in thousands) Banking Services Intercompany Consolidated
------------------------------------------------------------------------------------------------------------------------------
Interest income $ 106,395 $ 320 $ (7) $ 106,708
Interest expense 31,687 7 (7) 31,687
------------------------------------------------------------------------------------------------------------------------------
Net interest income 74,708 313 0 75,021
------------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 2,659 0 0 2,659
Noninterest income 17,946 12,885 (48) 30,783
Noninterest expense 53,546 8,624 (48) 62,123
------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 36,449 4,574 0 41,023
------------------------------------------------------------------------------------------------------------------------------
Minority interest 131 0 0 131
Provision for income taxes 11,602 1,605 0 13,207
------------------------------------------------------------------------------------------------------------------------------
Net Income $ 24,716 $ 2,969 $ 0 $ 27,685
==============================================================================================================================
------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization $ 3,665 $ 160 $ 0 $ 3,825
Assets 2,092,610 15,817 (1,557) 2,106,870
Goodwill 5,377 6,909 0 12,286
Other intangibles 1,865 295 0 2,160
Loans, net 1,253,255 4,417 0 1,257,672
Deposits 1,683,619 905 (1,514) 1,683,010
Equity 168,503 12,718 0 181,221
74
Note 19 Segment and Related Information (continued
For the year ended December 31, 2004
------------------------------------------------------------------------------------------------------------------------------
Financial
(in thousands) Banking Services Intercompany Consolidated
------------------------------------------------------------------------------------------------------------------------------
Interest income $ 94,448 $ 232 $ (7) $ 94,673
Interest expense 23,325 9 (7) 23,327
------------------------------------------------------------------------------------------------------------------------------
Net interest income 71,123 223 0 71,346
------------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 2,860 0 0 2,860
Noninterest income 16,148 11,887 (52) 27,983
Noninterest expense 50,934 7,346 (52) 58,228
------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 33,477 4,764 0 38,241
------------------------------------------------------------------------------------------------------------------------------
Minority interest 133 0 0 133
Provision for income taxes 10,778 1,715 0 12,493
------------------------------------------------------------------------------------------------------------------------------
Net Income $ 22,566 $ 3,049 $ 0 $ 25,615
==============================================================================================================================
Unaudited Quarterly Financial Data
2006
------------------------------------------------------------------------------------------------------------------------------
(in thousands except per share data) First Second Third Fourth
------------------------------------------------------------------------------------------------------------------------------
Interest and dividend income $ 29,022 $ 29,739 $ 30,719 $ 31,561
Interest expense 10,303 11,670 12,615 13,596
Net interest income 18,719 18,069 18,104 17,965
Provision for loan/lease losses 459 74 482 409
Income before income tax 9,211 9,597 10,090 11,585
Net income 6,397 6,779 6,803 7,788
Net income per common share (basic) .64 .69 .69 .79
Net income per common share (diluted) .63 .68 .68 .78
==============================================================================================================================
2005
------------------------------------------------------------------------------------------------------------------------------
(in thousands except per share data) First Second Third Fourth
------------------------------------------------------------------------------------------------------------------------------
Interest and dividend income $ 24,965 $ 26,260 $ 27,356 $ 28,126
Interest expense 6,542 7,459 8,267 9,418
Net interest income 18,423 18,801 19,089 18,708
Provision for loan/lease losses 452 716 662 829
Income before income tax 9,505 10,341 10,496 10,550
Net income 6,413 6,948 7,110 7,214
Net income per common share (basic) .72 .78 .79 .80
Net income per common share (diluted) .70 .77 .78 .79
==============================================================================================================================
Per share data has been retroactively adjusted to reflect a 10% stock dividend
paid on May 15, 2006.
75
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company's management, including its Chief Executive Officer and Chief
Financial Officer evaluated the effectiveness of the design and operations of
the Company's disclosure controls and procedures (as defined in Rule 13a-15
under the Securities Exchange Act of 1934, as amended) (the "Exchange Act") as
of December 31, 2006. Based upon that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer, concluded that as of the end of the period
covered by this Form 10-K, the Company's disclosure controls and procedures were
effective in providing reasonable assurance that information required to be
disclosed by the Company in its reports filed or submitted under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms and that
material information relating to the Company and its subsidiaries is made known
to management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding disclosure.
Management's Annual Report on Internal Control Over Financial Reporting
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting for the Company. As of
December 31, 2006, management assessed the effectiveness of the Company's
internal control over financial reporting based on the framework for effective
internal control over financial reporting established in "Internal Control -
Integrated Framework," issued by the Committee of Sponsoring Organizations
(COSO) of the Treadway Commission. Based on its evaluation under the COSO
framework, management concluded that the Company's internal control over
financial reporting was effective as of December 31, 2006 to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external reporting purposes in accordance with
generally accepted accounting principles. The results of management's assessment
was reviewed with the Company's Audit Committee of its Board of Directors.
Management's assessment of the effectiveness of internal control over financial
reporting as of December 31, 2006 and the effectiveness of internal control over
financial reporting as of December 31, 2006 has been audited by KPMG, LLP, an
independent registered public accounting firm, as stated in their attestation
report, which is included herein.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company's internal control over financial reporting
that occurred during the Company's fourth quarter ended December 31, 2006, that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item is incorporated herein by reference to the
material under the captions "Proposal 1 - Election of Directors" and Section
16(a) Beneficial Ownership Reporting Compliance"; the discussion of the
Company's code of ethics under the caption "Corporate Governance Matters-Policy
Regarding Director Attendance at Annual Meetings"; the discussion of director
nominees by stockholders and the Audit/Examining Committee under the caption
"Board of Director Meetings and Committees" in the Company's definitive proxy
statement relating to its 2007 annual meeting of shareholders to be held May 14,
2007 (the "Proxy Statement"); and the material captioned "Executive Officers of
the Registrant" in Part I of this Report on Form 10-K.
76
Item 11. Executive Compensation
The information called for by this item is incorporated herein by reference to
the material under the captions, "Executive Compensation", "Compensation
Committee Interlocks and Insider Participation" and "Compensation Committee
Report" in the Proxy Statement.
The material incorporated herein by reference to the material under the caption
"Compensation Committee Report" in the Proxy Statement shall be deemed
furnished, and not filed, in this Report on Form 10-K and shall not be deemed
incorporated by reference into any filing under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended, as a result of this
furnishing, except to the extent that the Company specifically incorporates it
by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information called for by this item is incorporated herein by reference to
the material under the captions "Equity Compensation Plan Information" and
"Securities Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement.
Item 13. Certain Relationships and Related Transactions, and Director
Independence
The information called for by this item is incorporated herein by reference to
the material under the captions "Director Independence" and "Transactions with
Related Persons" in the Proxy Statement.
Item 14. Principal Accounting Fees and Services
The information called for by this item is incorporated herein by reference to
the material under the caption "Independent Auditors" in the Proxy Statement.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) The following financial statements and accountant's report are included
in this Annual Report on Form 10-K:
Consolidated Statements of Condition for the years ended December 31,
2006 and 2005
Consolidated Statements of Income for the years ended December 31,
2006, 2005, and 2004
Consolidated Statements of Cash Flows for the years ended December 31,
2006, 2005, and 2004
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 2006, 2005, and 2004
Notes to Consolidated Financial Statements
Unaudited Quarterly Financial Data
(a)(2) List of Financial Schedules
Not Applicable.
77
(a)(3) Exhibits
Item No. Description
2.1 Agreement and Plan of Reorganization, dated as of March 14,
1995, among the Bank, the Company and the Interim Bank
incorporated herein by reference to Exhibit 2 to the
Company's Registration Statement on Form 8-A (No. 0-27514),
filed with the Commission on December 29, 1995, and amended
by the Company's Form 8-A/A filed with the Commission of
January 22, 1996.
2.2 Agreement and Plan of Reorganization, dated as of July 30,
1999 between the Company and Letchworth, incorporated by
reference to Annex A to the Company's Registration
Statement of Form S-4 (Registration No. 333-90411), filed
with the Commission of November 5, 1999.
3.1 Certificate of Incorporation of the Company, incorporated
herein by reference to Exhibit 3.1 to the Company's
Registration Statement on Form 8-A (No. 0-27514), filed
with the Commission on December 29, 1995, as amended by
Certificate of Amendment of the Certificate of
Incorporation of the Company.
3.2 Bylaws of the Company, as amended through and including
October 28, 2005, incorporated herein by reference to
Exhibit 3(ii) to the Company's Current Report on Form 8-K,
filed with the Commission on October 26, 2006.
4. Form of Specimen Common Stock Certificate of the Company,
incorporated herein by reference to Exhibit 4 to the
Company's Registration Statement on Form 8-A (No. 0-27514),
filed with the Commission on December 29, 1995.
10.1* 1992 Stock Option Plan, incorporated herein by reference to
Exhibit 10.2 to the Company's Registration Statement on
Form 8-A (No. 0-27514), filed with the Commission on
December 29, 1995.
10.2* Stock Retainer Plan for Eligible Directors of Tompkins
Trustco, Inc. and Participating Subsidiaries, incorporated
herein by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K, filed with the Commission on
May 15, 2005.
10.3* Form of Director Deferred Compensation Agreement,
incorporated herein by reference to Exhibit 10.4 to the
Company's Registration Statement on Form 8-A (No. 0-27514),
filed with the Commission on December 29, 1995.
10.4* Deferred Compensation Plan for Senior Officers,
incorporated herein by reference to Exhibit 10.5 to the
Company's Registration Statement on Form 8-A (No. 0-27514),
filed with the Commission on December 29, 1995
10.5* Supplemental Executive Retirement Agreement with James J.
Byrnes, incorporated herein by reference to Exhibit 10.6 to
the Company's Registration Statement on Form 8-A (No.
0-27514), filed with the Commission on December 29, 1995.
10.6* Severance Agreement with James J. Byrnes, incorporated
herein by reference to Exhibit 10.7 to the Company's
Registration Statement on Form 8-A (No. 0-27514), filed
with the Commission on December 29, 1995.
10.7* Lease Agreement dated August 20, 1993, between Tompkins
County Trust Company and Comex Plaza Associates, relating
to leased property at the Rothschilds Building, Ithaca, NY,
incorporated herein by reference to Exhibit 10.8 to the
Company's Form 10-K, filed with the Commission on March 26,
1996.
10.8* Employment Agreement, dated September 12, 1989, by and
between Registrant and James W. Fulmer, incorporated by
reference to the Registrant's Amendment No. 1 to Form S-18
Registration Statement (Reg. No. 33-3114-NY), filed with
the Commission on October 31, 1989 and wherein such Exhibit
is designated as Exhibit 10(a).
10.9* 2001 Stock Option Plan, incorporated herein by reference to
Exhibit 99 to the Company's Registration Statement on Form
S-8 (No. 333-75822), filed with the Commission on December
12, 2001.
78
10.10* Mahopac National Bank Supplemental Executive Retirement
Agreement, dated May 15, 2000, by and between Mahopac
National Bank and Stephen E. Garner, incorporated by
reference to Exhibit 10.32 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2001, filed
with the Commission on March 29, 2002.
10.11* Summary of Compensation Arrangements for Named Executive
Officers and Directors, incorporated herein by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K,
filed with the Commission on January 26, 2007.
10.12* Supplemental Executive Retirement Agreement between James
W. Fulmer and Tompkins Trustco, Inc., dated December 28,
2005, incorporated herein by reference to Exhibit 10.14 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 2005, filed with the Commission on March 16,
2006.
10.13* Supplemental Executive Retirement Agreement between Stephen
E. Garner and Tompkins Trustco, Inc., dated December 28,
2005, incorporated herein by reference to Exhibit 10.15 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 2005, filed with the Commission on March 16,
2006.
10.14* Supplemental Executive Retirement Agreement between Stephen
S. Romaine and Tompkins Trustco, Inc., dated December 28,
2005, incorporated herein by reference to Exhibit 10.16 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 2005, filed with the Commission on March 16,
2006.
10.15* Supplemental Executive Retirement Agreement between Francis
M. Fetsko and Tompkins Trustco, Inc., dated December 28,
2005, incorporated herein by reference to Exhibit 10.17 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 2005, filed with the Commission on March 16,
2006.
10.16* Supplemental Executive Retirement Agreement between David
S. Boyce and Tompkins Trustco, Inc., dated December 28,
2005, incorporated herein by reference to Exhibit 10.18 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 2005, filed with the Commission on March 16,
2006.
10.17* Supplemental Executive Retirement Agreement between Robert
B. Bantle and Tompkins Trustco, Inc., dated December 28,
2005, incorporated herein by reference to Exhibit 10.19 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 2005, filed with the Commission on March 16,
2006.
10.18* Form of Officer Group Term Life Replacement Plan (the
"Plan") among Tompkins Trustco, Inc., or Tompkins Trust
Company and the Participants in the Plan, including form of
Split Dollar Policy Endorsement - Exhibit D to the Plan,
including Exhibit D to Officer Group Term Replacement Plan
for each executive officer filed individually.
10.19* Consulting Agreement between Russell K. Achzet and Tompkins
Trustco, Inc., dated January 5, 2006, incorporated herein
by reference to Exhibit 10.21 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2005,
filed with the Commission on March 16, 2006.
10.20* Amendment to the Tompkins Trustco, Inc. Supplemental
Retirement Agreement with James J. Byrnes, incorporated
herein by reference to Exhibit 10.1 to the Company's Form
10-Q, filed with the Commission on August 9, 2006.
10.21* Tompkins Trustco, Inc. Officer Group Term Replacement Plan,
as amended on June 26, 2006, incorporated herein by
reference to Exhibit 10.2 to the Company's Form 10-Q, filed
with the Commission on August 9, 2006.
10.22 Tompkins Trustco, Inc. Code of Ethics For Chief Executive
Officer and Senior Financial Officers dated April 25, 2006
(filed herewith).
21. Subsidiaries of Registrant, incorporated by reference to
Exhibit 21 to the Company's Annual Report on Form 10-K for
the year ended December 31, 2003, filed with the Commission
on March 15, 2004.
23. Consent of Independent Registered Public Accounting Firm
(filed herewith)
24. Power of Attorney, included on page 81 of this Report on
Form 10-K.
79
31.1 Certification of the Chief Executive Officer as required
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(filed herewith).
31.2 Certification of the Chief Financial Officer as required
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(filed herewith).
32.1 Certification of the Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (filed herewith).
32.2 Certification of the Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (filed herewith).
* Management contracts and compensatory plans and arrangements
required to be filed as Exhibits to this Report on Form 10-K
pursuant to Item 15(c) of the Report.
80
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TOMPKINS TRUSTCO, INC.
By: /s/ STEPHEN S. ROMAINE
-------------------------------
Stephen S. Romaine
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 14, 2007
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints, jointly and severally, Stephen S. Romaine and
Frank M. Fetsko, and each of them, as his or her true and lawful
attorneys-in-fact and agents, each with full power of substitution, for him or
her, and in his or her name, place and stead, in any and all capacities, to sign
any amendments to this Report on Form 10-K, and to file the same, with Exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite or necessary to be done as fully to all intents and purposes as he or
she might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature Date Capacity Signature Date Capacity
/s/ JAMES J. BYRNES 3/14/07 Chairman of the Board /s/ JAMES R. HARDIE 3/14/07 Director
---------------------- ------- --------------------------- -------
James J. Byrnes James R. Hardie
/s/ STEPHEN S. ROMAINE 3/14/07 President and Chief Executive Officer /s/ ELIZABETH W. HARRISON 3/14/07 Director
---------------------- ------- (Principal Executive Officer) --------------------------- -------
Stephen S. Romaine Elizabeth W. Harrison
/s/ THOMAS R. SALM 3/14/07 Vice Chairman, Director /s/ PATRICIA A. JOHNSON 3/14/07 Director
---------------------- ------- --------------------------- -------
Thomas R. Salm Patricia A. Johnson
/s/ JAMES W. FULMER 3/14/07 Vice Chairman, Director /s/ CARL E. HAYNES 3/14/07 Director
---------------------- ------- --------------------------- -------
James W. Fulmer Carl E. Haynes
/s/ FRANCIS M. FETSKO 3/14/07 Executive Vice President and /s/ HUNTER R. RAWLINGS, III 3/14/07 Director
---------------------- ------- Chief Financial Officer --------------------------- -------
Francis M. Fetsko (Principal Financial Officer) Hunter R. Rawlings, III
/s/ RUSSELL K. ACHZET 3/14/07 Director /s/ MICHAEL H. SPAIN 3/14/07 Director
---------------------- ------- -------------------------- -------
Russell K. Achzet Michael H. Spain
/s/ JOHN E. ALEXANDER 3/14/07 Director /s/ WILLIAM D. SPAIN, JR. 3/14/07 Director
---------------------- ------- --------------------------- -------
John E. Alexander William D. Spain
/s/ REEDER D. GATES 3/14/07 Director /s/ CRAIG YUNKER 3/14/07 Director
---------------------- ------- --------------------------- -------
Reeder D. Gates Craig Yunker
81
Exhibits Index
Item No. Description
2.1 Agreement and Plan of Reorganization, dated as of March 14, 1995,
among the Bank, the Company and the Interim Bank incorporated herein
by reference to Exhibit 2 to the Company's Registration Statement on
Form 8-A (No. 0-27514), filed with the Commission on December 29,
1995, and amended by the Company's Form 8-A/A filed with the
Commission of January 22, 1996.
2.2 Agreement and Plan of Reorganization, dated as of July 30, 1999
between the Company and Letchworth, incorporated by reference to
Annex A to the Company's Registration Statement of Form S-4
(Registration No. 333-90411), filed with the Commission of November
5, 1999.
3.1 Certificate of Incorporation of the Company, incorporated herein by
reference to Exhibit 3.1 to the Company's Registration Statement on
Form 8-A (No. 0-27514), filed with the Commission on December 29,
1995, as amended by Certificate of Amendment of the Certificate of
Incorporation of the Company.
3.2 Bylaws of the Company, as amended through and including October 28,
2005, incorporated herein by reference to Exhibit 3(ii) to the
Company's Current Report on Form 8-K, filed with the Commission on
October 26, 2006.
4. Form of Specimen Common Stock Certificate of the Company,
incorporated herein by reference to Exhibit 4 to the Company's
Registration Statement on Form 8-A (No. 0-27514), filed with the
Commission on December 29, 1995.
10.1* 1992 Stock Option Plan, incorporated herein by reference to Exhibit
10.2 to the Company's Registration Statement on Form 8-A (No.
0-27514), filed with the Commission on December 29, 1995.
10.2* Stock Retainer Plan for Eligible Directors of Tompkins Trustco, Inc.
and Participating Subsidiaries, incorporated herein by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K, filed with
the Commission on May 15, 2005.
10.3* Form of Director Deferred Compensation Agreement, incorporated herein
by reference to Exhibit 10.4 to the Company's Registration Statement
on Form 8-A (No. 0-27514), filed with the Commission on December 29,
1995.
10.4* Deferred Compensation Plan for Senior Officers, incorporated herein
by reference to Exhibit 10.5 to the Company's Registration Statement
on Form 8-A (No. 0-27514), filed with the Commission on December 29,
1995
10.5* Supplemental Executive Retirement Agreement with James J. Byrnes,
incorporated herein by reference to Exhibit 10.6 to the Company's
Registration Statement on Form 8-A (No. 0-27514), filed with the
Commission on December 29, 1995.
10.6* Severance Agreement with James J. Byrnes, incorporated herein by
reference to Exhibit 10.7 to the Company's Registration Statement on
Form 8-A (No. 0-27514), filed with the Commission on December 29,
1995.
10.7* Lease Agreement dated August 20, 1993, between Tompkins County Trust
Company and Comex Plaza Associates, relating to leased property at
the Rothschilds Building, Ithaca, NY, incorporated herein by
reference to Exhibit 10.8 to the Company's Form 10-K, filed with the
Commission on March 26, 1996.
10.8* Employment Agreement, dated September 12, 1989, by and between
Registrant and James W. Fulmer, incorporated by reference to the
Registrant's Amendment No. 1 to Form S-18 Registration Statement
(Reg. No. 33-3114-NY), filed with the Commission on October 31, 1989
and wherein such Exhibit is designated as Exhibit 10(a).
10.9* 2001 Stock Option Plan, incorporated herein by reference to Exhibit
99 to the Company's Registration Statement on Form S-8 (No.
333-75822), filed with the Commission on December 12, 2001.
10.10* Mahopac National Bank Supplemental Executive Retirement Agreement,
dated May 15, 2000, by and between Mahopac National Bank and Stephen
E. Garner, incorporated by reference to Exhibit 10.32 to the
Company's Annual Report on Form 10-K for the year ended December 31,
2001, filed with the Commission on March 29, 2002.
10.11* Summary of Compensation Arrangements for Named Executive Officers and
Directors, incorporated herein by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K, filed with the Commission on
January 26, 2007.
10.12* Supplemental Executive Retirement Agreement between James W. Fulmer
and Tompkins Trustco, Inc., dated December 28, 2005, incorporated
herein by reference to Exhibit 10.14 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2005, filed with the
Commission on March 16, 2006.
10.13* Supplemental Executive Retirement Agreement between Stephen E. Garner
and Tompkins Trustco, Inc., dated December 28, 2005, incorporated
herein by reference to Exhibit 10.15 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2005, filed with the
Commission on March 16, 2006.
10.14* Supplemental Executive Retirement Agreement between Stephen S.
Romaine and Tompkins Trustco, Inc., dated December 28, 2005,
incorporated herein by reference to Exhibit 10.16 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2005,
filed with the Commission on March 16, 2006.
10.15* Supplemental Executive Retirement Agreement between Francis M. Fetsko
and Tompkins Trustco, Inc., dated December 28, 2005, incorporated
herein by reference to Exhibit 10.17 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2005, filed with the
Commission on March 16, 2006.
10.16* Supplemental Executive Retirement Agreement between David S. Boyce
and Tompkins Trustco, Inc., dated December 28, 2005, incorporated
herein by reference to Exhibit 10.18 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2005, filed with the
Commission on March 16, 2006.
10.17* Supplemental Executive Retirement Agreement between Robert B. Bantle
and Tompkins Trustco, Inc., dated December 28, 2005, incorporated
herein by reference to Exhibit 10.19 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2005, filed with the
Commission on March 16, 2006.
10.18* Form of Officer Group Term Life Replacement Plan (the "Plan") among
Tompkins Trustco, Inc., or Tompkins Trust Company and the
Participants in the Plan, including form of Split Dollar Policy
Endorsement - Exhibit D to the Plan, including Exhibit D to Officer
Group Term Replacement Plan for each executive officer filed
individually.
10.19* Consulting Agreement between Russell K. Achzet and Tompkins Trustco,
Inc., dated January 5, 2006, incorporated herein by reference to
Exhibit 10.21 to the Company's Annual Report on Form 10-K for the
year ended December 31, 2005, filed with the Commission on March 16,
2006.
10.20* Amendment to the Tompkins Trustco, Inc. Supplemental Retirement
Agreement with James J. Byrnes, incorporated herein by reference to
Exhibit 10.1 to the Company's Form 10-Q, filed with the Commission on
August 9, 2006.
10.21* Tompkins Trustco, Inc. Officer Group Term Replacement Plan, as
amended on June 26, 2006, incorporated herein by reference to Exhibit
10.2 to the Company's Form 10-Q, filed with the Commission on August
9, 2006.
10.22 Tompkins Trustco, Inc. Code of Ethics For Chief Executive Officer and
Senior Financial Officers dated April 25, 2006 (filed herewith).
21. Subsidiaries of Registrant, incorporated by reference to Exhibit 21
to the Company's Annual Report on Form 10-K for the year ended
December 31, 2003, filed with the Commission on March 15, 2004.
23. Consent of Independent Registered Public Accounting Firm (filed
herewith)
24. Power of Attorney, included on page 81 of this Report on Form 10-K.
31.1 Certification of the Chief Executive Officer as required pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2 Certification of the Chief Financial Officer as required pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
32.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
* Management contracts and compensatory plans and arrangements required to
be filed as Exhibits to this Report on Form 10-K pursuant to Item 15(c) of
the Report.