UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-12709
[GRAPHIC OMITTED]
TOMPKINS TRUSTCO INC.
(Exact name of registrant as specified in its charter)
New York 16-1482357
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
The Commons, P.O. Box 460, Ithaca, NY 14851
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (607) 273-3210
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 whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [ ] Accelerated Filer [X] Non-Accelerated 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].
Indicate the number of shares of the registrant's common stock outstanding as of
the latest practicable date:
Class Outstanding as of October 27, 2006
---------------------------- ----------------------------------
Common Stock, $.10 par value 9,786,147 shares
TOMPKINS TRUSTCO, INC.
FORM 10-Q
INDEX
PAGE
----
PART I -FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Condensed Consolidated Statements of Condition as of
September 30, 2006 and December 31, 2005 3
Condensed Consolidated Statements of Income for the
three and nine months ended September 30, 2006 and 2005 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2006 and 2005 5
Condensed Consolidated Statements of Changes in
Shareholders' Equity for the nine months ended
September 30, 2006 and 2005 6
Notes to Unaudited Condensed Consolidated Financial
Statements 7-13
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-24
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 25
Item 4 - Controls and Procedures 26
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 27
Item 1A - Risk Factors 27
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 27
Item 3 - Defaults Upon Senior Securities 28
Item 4 - Submission of Matters to a Vote of Security Holders 28
Item 5 - Other Information 28
Item 6 - Exhibits 28
SIGNATURES 28
EXHIBIT INDEX 29
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION
(In thousands, except share data) (Unaudited)
As of As of
ASSETS 09/30/2006 12/31/2005
------------ ------------
Cash and noninterest bearing balances due from banks $ 65,657 $ 62,436
Interest bearing balances due from banks 910 861
Federal funds sold 0 2,500
Available-for-sale securities, at fair value 648,217 576,242
Held-to-maturity securities, fair value of $62,440 at September 30, 2006,
and $82,768 at December 31, 2005 62,025 82,658
Loans held-for-sale 9,132 181
Loans and leases, net of unearned income and deferred costs and fees 1,277,552 1,271,168
Less: Reserve for loan/lease losses 14,120 13,677
----------------------------------------------------------------------------------------------------------------------
Net Loans/Leases 1,263,432 1,257,491
Bank premises and equipment, net 41,773 36,938
Corporate owned life insurance 25,344 27,169
Goodwill 17,459 12,286
Other intangible assets 3,241 2,160
Accrued interest and other assets 42,505 45,948
----------------------------------------------------------------------------------------------------------------------
Total Assets $ 2,179,695 $ 2,106,870
======================================================================================================================
LIABILITIES, MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest bearing:
Checking, savings and money market $ 728,253 688,521
Time 632,949 634,607
Noninterest bearing 342,237 359,882
----------------------------------------------------------------------------------------------------------------------
Total Deposits 1,703,439 1,683,010
Federal funds purchased and securities sold under agreements to repurchase 170,679 152,651
Other borrowings 87,003 63,673
Other liabilities 28,159 24,863
----------------------------------------------------------------------------------------------------------------------
Total Liabilities $ 1,989,280 $ 1,924,197
----------------------------------------------------------------------------------------------------------------------
Minority interest in consolidated subsidiaries 1,487 1,452
Shareholders' equity:
Common Stock - par value $.10 per share: Authorized 15,000,000 shares;
Issued: 9,823,194 at September 30, 2006; and 9,899,546 at December 31, 2005 982 900
Surplus 155,712 118,663
Undivided profits 39,578 69,228
Accumulated other comprehensive loss (5,893) (6,308)
Treasury stock, at cost - 63,025 shares at September 30, 2006,
and 58,831 shares at December 31, 2005 (1,451) (1,262)
----------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity $ 188,928 $ 181,221
----------------------------------------------------------------------------------------------------------------------
Total Liabilities, Minority Interest in Consolidated Subsidiaries
and Shareholders' Equity $ 2,179,695 $ 2,106,870
======================================================================================================================
Share data has been retroactively adjusted to reflect a 10% stock dividend paid
on May 15, 2006.
See accompanying notes to unaudited condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data) (Unaudited)
Three months ended Nine months ended
09/30/2006 09/30/2005 09/30/2006 09/30/2005
------------ ------------ ------------ ------------
INTEREST AND DIVIDEND INCOME
Loans $ 22,798 $ 20,901 $ 66,360 $ 59,309
Balances due from banks 8 4 73 53
Federal funds sold 0 0 9 13
Available-for-sale securities 7,281 5,803 20,992 17,420
Held-to-maturity securities 632 648 2,046 1,787
---------------------------------------------------------------------------------------------------------------------------------
Total Interest and Dividend Income 30,719 27,356 89,480 78,582
---------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits:
Time certificates of deposits of $100,000 or more 3,064 1,724 9,439 4,415
Other deposits 6,677 4,398 18,006 11,876
Federal funds purchased and securities sold under agreements
to repurchase 1,482 1,320 4,093 3,588
Other borrowings 1,392 825 3,050 2,389
---------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 12,615 8,267 34,588 22,268
---------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 18,104 19,089 54,892 56,314
---------------------------------------------------------------------------------------------------------------------------------
Less: Provision for loan/lease losses 482 662 1,015 1,831
---------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan/Lease Losses 17,622 18,427 53,877 54,483
---------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Investment services income 3,173 1,270 9,128 4,003
Insurance commissions and fees 2,567 2,017 7,032 5,806
Service charges on deposit accounts 2,030 2,234 6,025 6,138
Card services income 746 663 2,144 1,931
Other service charges 651 793 1,867 2,246
Increase in cash surrender value of corporate owned life insurance 276 270 846 786
Life insurance proceeds 0 0 685 0
Net gains on sale of loans 40 47 118 168
Other income 477 413 1,127 1,021
Net gain on sale of available-for-sale securities 0 0 0 19
---------------------------------------------------------------------------------------------------------------------------------
Total Noninterest Income 9,960 7,707 28,972 22,118
---------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES
Salary and wages 8,265 7,183 24,928 21,114
Pension and other employee benefits 2,073 1,873 6,623 5,741
Net occupancy expense of bank premises 1,239 984 3,667 3,042
Furniture and fixture expense 885 894 2,753 2,694
Marketing expense 648 549 1,850 1,686
Professional fees 392 531 1,086 1,202
Software licenses and maintenance 459 433 1,434 1,339
Cardholder expense 289 357 959 1,021
Amortization of intangible assets 183 140 540 455
Other operating expense 3,026 2,661 10,013 7,867
---------------------------------------------------------------------------------------------------------------------------------
Total Noninterest Expenses 17,459 15,605 53,853 46,161
---------------------------------------------------------------------------------------------------------------------------------
Income Before Income Tax Expense and Minority
Interest in Consolidated Subsidiaries 10,123 10,529 28,996 30,440
---------------------------------------------------------------------------------------------------------------------------------
Minority interest in consolidated subsidiaries 33 33 98 98
Income Tax Expense 3,287 3,386 8,919 9,871
=================================================================================================================================
Net Income $ 6,803 $ 7,110 $ 19,979 $ 20,471
=================================================================================================================================
Basic Earnings Per Share $ 0.69 $ 0.72 $ 2.02 $ 2.08
=================================================================================================================================
Diluted Earnings Per Share $ 0.68 $ 0.71 $ 2.00 $ 2.05
=================================================================================================================================
Per share data has been retroactively adjusted to reflect a 10% stock dividend
paid on May 15, 2006. See accompanying notes to unaudited condensed consolidated
financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
Nine months ended
09/30/2006 09/30/2005
------------ ------------
OPERATING ACTIVITIES
Net income $ 19,979 $ 20,471
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan/lease losses 1,015 1,831
Depreciation and amortization premises, equipment, and software 3,058 2,831
Amortization of intangible assets 540 455
Earnings from corporate owned life insurance (846) (786)
Net amortization on securities 1,202 1,387
Net gain on sale of available-for-sale securities 0 (19)
Net gain on sale of loans (118) (168)
Proceeds from sale of loans 8,486 11,796
Loans originated for sale (8,188) (11,620)
Net gain on sale of bank premises and equipment (25) (215)
Tax benefit from stock option exercises 0 193
Stock-based compensation expense 542 0
Increase in accrued interest receivable (1,152) (1,190)
Increase in accrued interest payable 500 581
Other, net 8,825 12,067
---------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 33,820 37,614
---------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from maturities of available-for-sale securities 54,844 70,440
Proceeds from sales of available-for-sale securities 25,978 24,318
Proceeds from maturities of held-to-maturity securities 32,258 22,262
Purchases of available-for-sale securities (121,408) (95,797)
Purchases of held-to-maturity securities (11,725) (32,873)
Net increase in loans (48,127) (76,746)
Proceeds from sale of bank premises and equipment 68 362
Purchases of bank premises and equipment (7,467) (4,316)
Net cash used in acquisitions (3,115) 0
Purchase of corporate owned life insurance 0 (2,080)
Other, net (82) 0
---------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (78,776) (94,430)
---------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase (decrease) in demand, money market,
and savings deposits 22,087 (41,682)
Net (decrease) increase in time deposits (1,658) 102,771
Net increase in securities sold under agreements
to repurchase and Federal funds purchased 18,028 15,122
Increase in other borrowings 84,799 67,000
Repayment of other borrowings (61,548) (50,454)
Cash dividends (8,370) (7,814)
Cash paid in lieu of fractional shares - 10% stock dividend (10) (13)
Common stock repurchased and returned to unissued status (9,261) (897)
Net proceeds from exercise of stock options 1,406 678
Tax benefit from stock option exercises 253 0
---------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 45,726 84,711
---------------------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 770 27,895
Cash and cash equivalents at beginning of period 65,797 40,932
---------------------------------------------------------------------------------------------------------------------
Total Cash & Cash Equivalents at End of Period $ 66,567 $ 68,827
=====================================================================================================================
Supplemental Information:
Cash paid during the year for:
Interest $ 34,089 $ 21,687
Taxes 3,605 4,317
Non-cash investing and financing activities:
Fair value of non-cash assets acquired in purchase acquisitions $ 852 $ 0
Fair value of liabilities assumed in purchase acquisitions $ 945 $ 0
Fair value of shares issued for acquisitions $ 2,753 $ 0
Securitization of loans $ 32,040 $ 0
See accompanying notes to unaudited condensed consolidated financial statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except share data) (Unaudited)
Accumulated
Other
Common Undivided Comprehensive Treasury
Stock Surplus Profits Income (Loss) Stock Total
--------------------------------------------------------------------------------------------------------------------------------
Balances at January 1, 2005 $ 816 $ 75,837 $ 94,522 $ 871 $ (1,044) $ 171,002
--------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Net Income 20,471 20,471
Other comprehensive loss (3,868) (3,868)
-----------
Total Comprehensive Income 16,603
===========
Cash dividends ($0.79 per share) (7,814) (7,814)
Exercise of stock options and related
tax benefit (39,565 shares, net) 3 868 871
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
(3,673 shares, net) 158 (158) 0
--------------------------------------------------------------------------------------------------------------------------------
Balances at September 30, 2005 $ 899 $ 118,348 $ 64,704 $ (2,997) $ (1,202) $ 179,752
================================================================================================================================
--------------------------------------------------------------------------------------------------------------------------------
Balances at January 1, 2006 $ 900 $ 118,663 $ 69,228 $ (6,308) $ (1,262) $ 181,221
--------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Net Income 19,979 19,979
Other comprehensive income 415 415
-----------
Total Comprehensive Income 20,394
===========
Cash dividends ($0.85 per share) (8,370) (8,370)
Exercise of stock options and related
tax benefit (70,825 shares, net) 7 1,652 1,659
Common stock repurchased and returned to
unissued status (224,070 shares) (23) (9,238) (9,261)
Effect of 10% stock dividend 91 41,158 (41,249) 0
Cash paid in lieu of fractional shares
(262 shares) (10) (10)
Directors deferred compensation plan
(6,574 shares, net) 189 (189) 0
Compensation expense stock options 542 542
Shares issued for purchase acquisition
(77,155 shares) 7 2,746 2,753
--------------------------------------------------------------------------------------------------------------------------------
Balances at September 30, 2006 $ 982 $ 155,712 $ 39,578 $ (5,893) $ (1,451) $ 188,928
================================================================================================================================
Share and per share data have been retroactively adjusted to reflect a 10% stock
dividend paid on May 15, 2006.
See accompanying notes to unaudited condensed consolidated financial statements.
6
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Business
Headquartered in Ithaca, New York, Tompkins Trustco, Inc., ("Tompkins" or the
"Company") 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 (i) three wholly-owned banking subsidiaries,
Tompkins Trust Company, The Bank of Castile and The Mahopac National Bank
("Mahopac National Bank"), its (ii) wholly-owned insurance subsidiary, Tompkins
Insurance Agencies, Inc., and its (iii) wholly-owned fee-based financial
planning and investment 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."
2. Basis of Presentation
The unaudited condensed consolidated financial statements included in this
quarterly report have been prepared in accordance with accounting principles
generally accepted in the United States of America and the instructions for Form
10-Q and Rule 10-01 of Regulation S-X. In the application of certain accounting
policies management is required to make assumptions regarding the effect of
matters that are inherently uncertain. These estimates and assumptions affect
the reported amounts of certain assets, liabilities, revenues, and expenses in
the unaudited condensed consolidated financial statements. Different amounts
could be reported under different conditions, or if different assumptions were
used in the application of these accounting policies. The accounting policies
management consider critical in this respect are the determination of the
reserve for loan/lease losses, and the expenses and liabilities associated with
the Company's pension and post-retirement benefits.
In management's opinion, the unaudited condensed consolidated financial
statements reflect all adjustments of a normal recurring nature. The results of
operations for the interim periods are not necessarily indicative of the results
of operations to be expected for the full year ended December 31, 2006. The
unaudited condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and the notes
thereto in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2005. On January 1, 2006, the Company began recognizing
compensation expense for stock options with the adoption of Statement of
Financial Accounting Standard ("SFAS") No. 123 (Revised), "Share-Based Payment"
("SFAS No. 123(R)"). There have been no other significant changes to the
Company's accounting policies from those presented in the 2005 Annual Report on
Form 10-K.
The consolidated financial information included herein combines the results of
operations, the assets, liabilities, and shareholders' equity of the Company and
its subsidiaries. Amounts in the prior period's consolidated financial
statements are reclassified when necessary to conform to the current period's
presentation. All significant intercompany balances and transactions are
eliminated in consolidation.
On April 25, 2006, the Company's Board of Directors approved a 10% stock
dividend payable on May 15, 2006, to holders of record of the Company's common
stock on May 3, 2006. Share and per share data contained in this Form 10-Q have
been retroactively adjusted to reflect this 10% stock dividend.
3. 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. 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.
7
The following table presents the activity related to options under all plans for
the nine months ended September 30, 2006.
Weighted Weighted Aggregate
Average Average Remaining
Number of Exercise Contractual Intrinsic
Shares Price Term Value
--------------------------------------------------------------------------------------------------------
Outstanding at January 1, 2006 628,894 $ 31.23
Granted 234,465 42.39
Exercised (84,988) 23.72
Expired (2,178) 39.34
Forfeited (35,425) 38.77
--------------------------------------------------------------------------------------------------------
Outstanding at September 30, 2006 740,768 $ 35.24 7.00 $ 7,564,736
========================================================================================================
Exercisable at September 30, 2006 458,371 $ 31.43 5.86 $ 6,428,660
========================================================================================================
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 the first nine months of 2006. No options
were granted in the first nine months of 2005. The weighted average grant-date
fair value of the options granted in 2006 was $11.48. 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
--------------------------------------------------------------------------------------------------------
Risk-free interest rate 4.32%
Expected dividend yield 2.60%
Volatility 28.28%
Expected life (years) 6.5
========================================================================================================
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 $362,000 and $362,000 for the three months ended
September 30, 2006 and 2005, respectively, and $1.6 million and $900,000 for the
nine months ended September 30, 2006 and 2005, respectively.
As of September 30, 2006, unrecognized compensation cost related to unvested
stock options totaled $2.5 million. The amount of cash received from the
exercise of stock options for the nine months ended September 30, 2006 and 2005
was $1.4 million and $678,000, respectively. The tax benefit realized from stock
options exercised during the nine months ended September 30, 2006 and 2005 was
$253,000 and $193,000, respectively.
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). 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. Since the Company granted options
with the exercise price equal to the fair value of the underlying stock at the
grant date, there was no compensation expense recorded in net income in 2005.
Compensation expense related to stock options for the three and nine months
ended September 30, 2006 was $172,000 and $542,000, respectively.
In December 2005, the Compensation Committee of the Board of Directors of
Tompkins approved the accelerated vesting of all then currently outstanding
unvested stock options, except for those options issued to executive officers of
Tompkins. The decision to accelerate the vesting, which was effective on
December 27, 2005, was made primarily to reduce non-cash compensation expense
8
that the Company would have recorded in its income statement in future periods
upon the adoption of SFAS No. 123(R) in January 2006. The Compensation Committee
believed it was in the best interest of its shareholders to accelerate the
vesting of these options to eliminate compensation expense in future periods. It
is expected that in 2006 Tompkins will not be required to recognize
approximately $434,000, net of taxes, as a result of the accelerated vesting.
Tompkins estimates that the accelerated vesting will result in lower
compensation expense related to stock options of approximately $1.2 million, net
of taxes, over the remaining vesting period of the affected options. The
affected options were previously awarded to officers and employees under the
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 officers of Tompkins were affected by the vesting acceleration. As a
result of accelerated vesting, options to purchase up to 221,307 shares of
common stock became immediately exercisable. In the absence of such, the options
would have vested on dates ranging from April 18, 2006 to October 3, 2010.
The following table illustrates the effect 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.
Three months ended Nine months ended
(In thousands except per share data) 09/30/2005 09/30/2005
------------------------------------------------------------------------------------------------------------------------------
Net Income:
As reported $ 7,110 $ 20,471
Deduct: Total stock-based employee compensation expense determined under
fair value based method for all awards, net of all related tax effects 211 651
------------------------------------------------------------------------------------------------------------------------------
Pro forma $ 6,899 $ 19,820
------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share:
As reported $ 0.72 $ 2.08
------------------------------------------------------------------------------------------------------------------------------
Pro forma 0.70 2.01
------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
As reported $ 0.71 $ 2.05
------------------------------------------------------------------------------------------------------------------------------
Pro forma 0.69 1.98
==============================================================================================================================
Per share data has been retroactively adjusted to reflect a 10% stock dividend
paid on May 15, 2006.
4. Earnings Per Share
The Company follows the provisions of SFAS No. 128, "Earnings Per Share"
("EPS"). Share and per share data have been retroactively adjusted to reflect a
10% dividend paid on May 15, 2006. A computation of Basic EPS and Diluted EPS
for the three- and nine- month periods ending September 30, 2006 and 2005 is
presented in the table below.
------------------------------------------------------------------------------------------------------------------------------
Weighted
Average Per
Three months ended September 30, 2006 Net Income Shares Share
(In thousands except share and per share data) (Numerator) (Denominator) Amount
------------------------------------------------------------------------------------------------------------------------------
Basic EPS:
Income available to holders of common stock $ 6,803 9,816,272 $ 0.69
Effect of dilutive securities:
Stock options 128,876
Shares issuable as contingent consideration for acquisition 15,192
Diluted EPS:
Income available to holders of common stock plus assumed conversions $ 6,803 9,960,340 $ 0.68
==============================================================================================================================
The effect of dilutive securities calculation for the three-month period ended
September 30, 2006, excludes stock options covering 265,747 shares of common
stock because they are anti-dilutive.
9
------------------------------------------------------------------------------------------------------------------------------
Weighted
Average Per
Three months ended September 30, 2005 Net Income Shares Share
(In thousands except share and per share data) (Numerator) (Denominator) Amount
------------------------------------------------------------------------------------------------------------------------------
Basic EPS:
Income available to holders of common stock $ 7,110 9,852,531 $ 0.72
Effect of dilutive securities:
Stock options 148,290
Diluted EPS:
Income available to holders of common stock plus assumed conversions $ 7,110 10,000,821 $ 0.71
==============================================================================================================================
------------------------------------------------------------------------------------------------------------------------------
Weighted
Average Per
Nine months ended September 30, 2006 Net Income Shares Share
(In thousands except share and per share data) (Numerator) (Denominator) Amount
------------------------------------------------------------------------------------------------------------------------------
Basic EPS:
Income available to holders of common stock $ 19,979 9,870,995 $ 2.02
Effect of dilutive securities:
Stock options 126,532
Shares issuable as contingent consideration for acquisition 5,064
Diluted EPS:
Income available to holders of common stock plus assumed conversions $ 19,979 10,002,591 $ 2.00
==============================================================================================================================
The effect of dilutive securities calculation for the nine-month period ended
September 30, 2006, excludes stock options of 282,982 because they are
anti-dilutive.
----------------------------------------------------------------------------------------------------------------------------
Weighted
Average Per
Nine months ended September 30, 2005 Net Income Shares Share
(In thousands except share and per share data) (Numerator) (Denominator) Amount
------------------------------------------------------------------------------------------------------------------------------
Basic EPS:
Income available to holders of common stock $ 20,471 9,849,148 $ 2.08
Effect of dilutive securities:
Stock options 147,962
Diluted EPS:
Income available to holders of common stock plus assumed conversions $ 20,471 9,997,110 $ 2.05
==============================================================================================================================
10
5. Comprehensive Income
Three months ended Nine months ended
(In thousands) 09/30/2006 09/30/2005 09/30/2006 09/30/2005
---------------------------------------------------------------------------------------------------------------------------------
Net Income $ 6,803 $ 7,110 $ 19,979 $ 20,471
Net unrealized holding gains (losses) arising during the period 5,753 (1,405) 415 (3,857)
Memo: Pre-tax net unrealized holding gain (loss) 9,588 (2,340) 692 (6,428)
Reclassification adjustment for net realized gain on
available-for-sale securities 0 0 0 (11)
Memo: Pretax net realized gain 0 0 0 (19)
Other Comprehensive Income (Loss) 5,753 (1,405) 415 (3,868)
---------------------------------------------------------------------------------------------------------------------------------
Total Comprehensive Income $ 12,556 $ 5,705 $ 20,394 $ 16,603
=================================================================================================================================
6. Employee Benefit Plans
The following table sets forth the amount of the net periodic benefit cost
recognized for the Company's pension plan, post-retirement plan (Life and
Health), and supplemental employee retirement plans (SERP) including the
following components: the service cost and interest cost; the expected return on
plan assets for the period; the amortization of the unrecognized transitional
obligation or transition asset; and the amounts of recognized gains and losses,
prior service cost recognized, and gain or loss recognized due to settlement or
curtailment.
Components of Net Period Benefit Cost
Pension Benefits Life and Health SERP Benefits
Three months ended Three months ended Three months ended
(In thousands) 09/30/2006 09/30/2005 09/30/2006 09/30/2005 09/30/2006 09/30/2005
---------------------------------------------------------------------------------------------------------------------------------
Service cost $ 395 $ 377 $ 13 $ 50 $ 17 $ 32
Interest cost 466 434 64 80 110 99
Expected return on plan assets for
the period (689) (660) 0 0 0 0
Amortization of transition
liability 0 0 18 29 0 0
Amortization of prior service cost (27) (33) 0 2 24 26
Amortization of net loss 179 164 0 3 28 20
---------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 324 $ 282 $ 95 $ 164 $ 179 $ 177
=================================================================================================================================
Pension Benefits Life and Health SERP Benefits
Nine months ended Nine months ended Nine months ended
(In thousands) 09/30/2006 09/30/2005 09/30/2006 09/30/2005 09/30/2006 09/30/2005
---------------------------------------------------------------------------------------------------------------------------------
Service cost $ 1,185 $ 1,130 $ 39 $ 150 $ 54 $ 97
Interest cost 1,398 1,302 191 241 328 296
Expected return on plan assets for
the period (2,067) (1,980) 0 0 0 0
Amortization of transition
liability 0 0 56 87 0 0
Amortization of prior service cost (81) (98) 0 5 70 79
Amortization of net loss 536 492 0 10 84 60
---------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 971 $ 846 $ 286 $ 493 $ 536 $ 532
=================================================================================================================================
The Company previously disclosed in its audited consolidated financial
statements for the year ended December 31, 2005, contained in the Company's
Annual Report on Form 10-K, that although the Company is not required to
contribute to the pension plan in 2006, it could voluntarily contribute to the
pension plan in 2006. There was no contribution to the pension plan through the
first nine months of 2006.
11
7. Financial Guarantees
The Company extends standby letters of credit to its customers in the normal
course of business. The standby letters of credit are generally short-term. As
of September 30, 2006, the Company's maximum potential obligation under standby
letters of credit was $50.7 million. Management uses the same credit policies to
extend standby letters of credit that it uses for on-balance sheet lending
decisions and may require collateral to support standby letters of credit based
upon its evaluation of the counterparty. Management does not anticipate losses
as a result of these transactions.
8. 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. The merger resulted in intangible assets of $4.7
million, including goodwill of $3.8 million, customer related intangible of
$845,000, and a covenant-not-to-compete of $94,000. The customer related
intangible and the covenant-not-to-compete are being amortized over 10 years and
6 years, respectively.
Effective 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 $667,000, customer related intangibles of
$114,000 and a covenant-not-to-compete of $79,000. The covenant-not-to-compete
and other identifiable intangibles are being amortized over 6 years.
Effective 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 $212,000, customer related intangibles of $23,000 and a
covenant-not-to-compete of $15,000. The covenant-not-to-compete and other
identifiable intangibles are being amortized over 5 years.
Effective 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 $521,000, customer
related intangibles of $135,000 and a covenant-not-to-compete of $90,000. The
covenant-not-to-compete and other identifiable intangibles are being amortized
over 5 and 6 years, respectively.
9. Accounting Pronouncements
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
12
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. Earlier adoption of the Statement is permitted
as of the beginning of an entity's fiscal year, provided the entity has not yet
issued financial statements for any interim period of that fiscal year.
Management 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 plans to adopt FIN
48 on January 1, 2007. The Company is evaluating the impact of adopting FIN 48
and is unable, at this time, to quantify the impact, if any, to undivided
profits at the time of adoption.
In July 2006, the FASB issued FASB Staff Position ("FSP") No. 13-2 "Accounting
for a Change or Projected Change in the Timing of Cash Flows Relating to Income
Taxes Generated by a Leveraged Lease Transaction" ("FSP 13-2"), which amends
SFAS-13, Accounting for Leases. Under FSP 13-2, a material revision in the
timing of expected cash flows of a leveraged lease requires a recalculation of
the original lease assumptions. The cumulative effect of adopting the provisions
of FSP 13-2 shall be recorded as an adjustment to the beginning balance of
retained earnings in the period of adoption. After adoption, changes in cash
flow assumptions that result in a change in the net investment of the lease
shall be recognized as a gain or loss in the year in which the assumption is
changed. FSP 13-2 is effective for fiscal years beginning after December 15,
2006. Accordingly, the Company plans to adopt FSP 13-2 on January 1, 2007. The
Company is evaluating the impact of adopting FSP No. 13-2 and is unable, at this
time, to quantify the impact, if any, to undivided profits at the time of
adoption.
In September 2006, the FASB issued Statement No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans (an amendment of FASB
Statements No. 87,88,106 and 132R)" ("SFAS 158"). SFAS 158 requires an employer
to recognize the overfunded or underfunded status of its defined benefit
postretirement plans as an asset or liability in its statement of financial
position. The funded status is measured as the difference between plan assets at
fair value and the benefit obligation (the projected benefit obligation for
pension plans or the accumulated benefit obligation for other postretirement
benefit plans). An employer is also require to measure the funded status of a
plan as of the end of its fiscal year and reflect changes in the funded status
in comprehensive income. The Company has two pension plans and a post retirement
benefit plan that are subject to the requirements of SFAS 158. The Company is
evaluating the impact of adopting SFAS158, which is effective December 31, 2006,
and is unable, at this time, to quantify the impact. The Company does expect the
adoption to result in a charge to comprehensive income.
10. Subsequent Events
On October 27, 2006, the Company entered into an agreement with Elan Financial
Services ("Elan") whereby the Company agreed to sell Elan all of its
approximately $8.7 million credit card portfolio. The Company expects to
recognize a gain, net of transaction expenses, of approximately $2.2 million
($1.3 million after-tax) in the fourth quarter related to the sale. The Company
will continue to market credit cards to its customers through an ongoing
servicing relationship with Elan.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
BUSINESS
Tompkins Trustco, Inc. ("Tompkins" or the "Company") is a registered financial
holding company incorporated in 1995 under the laws of the State of New York and
its common stock is listed on the American Stock Exchange (Symbol: TMP).
Tompkins is headquartered at The Commons, Ithaca, New York. Tompkins 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"); an insurance agency, Tompkins Insurance Agencies, Inc. ("Tompkins
Insurance"); and a fee-based financial planning and wealth management firm, AM&M
Financial Services, Inc. ("AM&M). Unless the context otherwise requires, the
term "Company" refers collectively to Tompkins Trustco, Inc. and its
subsidiaries.
Through its community bank subsidiaries, the Company provides traditional
banking and related financial services, which constitute the Company's only
reportable business segment. Banking services consist primarily of attracting
deposits from the areas served by the community bank subsidiaries' 36 banking
offices and using those deposits to originate a variety of commercial loans,
consumer loans, real estate loans (including commercial loans collateralized by
real estate), and leases, and providing trust and investment related services.
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. The Company provides trust and investment
services through Tompkins Investment Services, a division of Trust Company,
including investment management accounts, custody accounts, trusts, retirement
plans and rollovers, estate settlement, and financial planning.
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 expanded its efforts
to offer services to bank customers of the Company's community banking
subsidiaries by sharing certain offices with The Bank of Castile. Tompkins
Insurance has seven stand-alone offices in Western New York and eight offices
that it shares with The Bank of Castile. In the past two years, Tompkins
Insurance has expanded its presence in Tompkins County with the acquisition of
two insurance agencies in the county.
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.
The banking industry is highly competitive, as deregulation has opened the
industry to nontraditional commercial banking companies. Competition for
commercial banking and other financial services is strong in the Company's
market area. Competition includes other commercial banks, savings and loan
associations, credit unions, finance companies, mutual funds, insurance
companies, brokerage and investment companies, and other financial
intermediaries. The Company differentiates itself from its competitors through
its full complement of banking and related financial services, and through its
community commitment and involvement in its primary market areas, as well as its
commitment to quality and personalized banking services. The banking industry is
also highly regulated. As a financial holding company of three community banks,
the Company is subject to examination and regulation from the Federal Reserve
Board, the Federal Deposit Insurance Corporation, the Office of the Comptroller
of Currency, and the New York State Banking Department.
Other external factors affecting the Company's operating results are market
rates of interest, the condition of financial markets, and both national and
regional economic conditions. The interest rate environment of rising short-term
rates and flat to lower longer-term rates has pressured the performance of the
banking subsidiaries over the past several years. Growth in loans and deposits
as well as continued efforts to expand its fee-based businesses has helped to
offset the pressures of the current interest rate environment. The Company's
community bank subsidiaries operate, in the aggregate, 36 banking offices,
including one limited-service office, serving communities in many upstate New
York markets. Economic climates in these markets vary by region. The Western New
York market served by The Bank of Castile has been the most challenging in
recent years, due to cutbacks and layoffs by some major employers in Rochester,
New York. Conditions in this market appear to have recently improved. 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.
14
The following discussion is intended to provide the reader with an understanding
of the consolidated financial condition and results of operations of Tompkins
for the quarter and year-to-date periods ended September 30, 2006. It should be
read in conjunction with the Company's audited consolidated financial statements
and the notes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2005, and the unaudited condensed consolidated
financial statements and notes included elsewhere in this Quarterly Report on
Form 10-Q.
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 Quarterly Report on Form 10-Q 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 such 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, political, 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, including interest rate and currency rate
fluctuations; changes in laws and regulations affecting banks, insurance
companies, 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.
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 reserve for loan/lease losses (reserve) to be
a critical accounting policy because of the uncertainty and subjectivity
inherent in estimating the levels of reserve 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 reserve
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 changes in local property values. While
management's evaluation of the reserve for loan/lease losses as of September 30,
2006, considers the reserve to be adequate, under adversely different conditions
or assumptions, the Company would need to increase the reserve.
15
Another critical accounting policy is the policy for pensions and
post-retirement benefits. Expenses and liabilities associated with the Company's
pension and post-retirement benefit plans are based on estimates of future
salary increases, employment levels, employee retention, discount rates, life
expectancies, and the long-term rates of investment returns. 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 post-retirement expenses.
All accounting policies are important and the reader of the Company's financial
statements should review these policies, described in Note 1 to the notes to
consolidated financials statements to the Company's audited consolidated
financial statements contained in the Company's Annual Report on Form 10-K for
the year ended December 31, 2005, to gain a greater understanding of how the
Company's financial performance is reported.
OVERVIEW
For the quarter ended September 30, 2006, net income of $6.8 million was down
4.3% from the same period in 2005. Diluted earnings per share were $0.68 for the
third quarter of 2006, compared to $0.71 for the same period in 2005. For the
first nine months of 2006, net income was $20.0 million, a decrease of $492,000,
or 2.4% over the same period in 2005. Diluted earnings per share for the first
nine months of 2006 were $2.00 compared to $2.05 for the same period in 2005.
Return on average assets (ROA) for the quarter ended September 30, 2006, was
1.26% compared to 1.38% for the quarter ended September 30, 2005. Return on
average shareholders' equity (ROE) for the third quarter of 2006 was 14.73%,
compared to 15.95% for the same period in 2005. For the nine-month period ended
September 30, 2006, ROA was 1.26%, compared to 1.35% for the same period prior
year. ROE for the nine months ended September 30, 2006 was 14.62%, compared to
15.76% for the nine months ended September 30, 2005.
The current interest rate environment has unfavorably impacted operating
performance and contributed to the decline in the above earnings measures.
Rising short-term interest rates have contributed to higher funding costs, while
the inverted yield curve has limited the yields on average earning assets. The
increase in funding costs has exceeded the improvements in our asset yields,
resulting in a lower net interest margin for the third quarter and year-to-date
periods in 2006 compared to the same periods in 2005.
Noninterest income was up 29.2% in the third quarter and 31.0% year-to-date
2006, from the same periods prior year, driven by growth in investment services
income and insurance commissions and fees. The acquisition of AM&M and three
smaller insurance agencies in 2006 contributed to the growth in these fee-based
businesses. The year-to-date growth in noninterest income also includes $685,000
of death benefits proceeds on corporate owned life insurance. Noninterest
expenses were up 11.9% over the third quarter of 2005, and 16.7% over the
year-to-date 2005. Contributing to the growth in noninterest expenses were the
previously mentioned acquisitions, the opening of two new banking offices, the
relocation of one banking office, the expansion of retail brokerage services,
and stock option expenses related to the adoption of SFAS No. 123R.
Asset quality at September 30, 2006, improved when compared to the same period
last year, with nonperforming assets decreasing to $4.1 million at September 30,
2006, from $4.4 million at September 30, 2005. The ratio of nonperforming assets
to total assets improved from 0.21% at September 30, 2005, to 0.19% at September
30, 2006. Net charge-offs in the third quarter and year-to-date 2006 were
$72,000, and $572,000, respectively, compared to $264,000 and $996,000 in the
same periods in 2005. The provision for loan and lease losses decreased to
$482,000 in the third quarter of 2006 from $662,000 in the same period in 2005.
For the year-to-date period, the provision for loan and leases losses decreased
from $1.8 million in 2005 to $1.0 million in 2006.
RESULTS OF OPERATIONS
Net Interest Income
The following table illustrates the trend in average interest-earning assets and
interest-bearing liabilities, and the corresponding yield or cost associated
with each.
16
Quarter Ended Year to Date Period Ended Year to Date Period Ended
Sept-06 Sept-06 Sept-05
----------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
(Dollar amounts Balance Yield/ Balance Yield/ Balance Yield/
in thousands) (QTD) Interest Rate (YTD) Interest Rate (YTD) Interest Rate
----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets
Interest-bearing balances
due from banks $ 1,006 $ 8 3.15% $ 2,663 $ 73 3.67% $ 3,272 $ 53 2.17%
Securities (1)
U.S. Government
Securities 587,252 6,605 4.46% 567,366 18,825 4.44% 527,932 15,445 3.91%
State and municipal (2) 117,058 1,732 5.87% 126,016 5,526 5.86% 118,587 5,024 5.66%
Other Securities (2) 17,406 218 4.97% 18,609 744 5.35% 21,453 653 4.07%
-----------------------------------------------------------------------------------------------------
Total securities 721,716 8,555 4.70% 711,911 25,095 4.71% 667,972 21,122 4.23%
Federal Funds Sold 0 0 0.00% 270 9 4.46% 696 13 2.50%
Loans, net of unearned
income (3)
Real Estate 848,751 14,333 6.70% 849,435 42,015 6.61% 807,153 37,489 6.21%
Commercial Loans (2) 309,683 6,437 8.25% 301,955 18,234 8.07% 284,977 14,778 6.93%
Consumer Loans 93,036 1,891 8.06% 95,230 5,680 7.97% 102,653 6,442 8.39%
Direct Lease Financing 11,858 175 5.86% 12,289 550 5.98% 16,006 775 6.47%
-----------------------------------------------------------------------------------------------------
Total loans, net of
unearned income 1,263,328 22,836 7.17% 1,258,909 66,479 7.06% 1,210,789 59,484 6.57%
-----------------------------------------------------------------------------------------------------
Total interest-earning
assets 1,986,050 31,399 6.27% 1,973,833 91,656 6.21% 1,882,729 80,672 5.73%
-----------------------------------------------------------------------------------------------------
Other assets 151,992 151,126 142,052
---------- ---------- ----------
Total assets $2,138,042 $2,124,959 $2,024,781
========== ========== ==========
LIABILITIES & SHAREHOLDERS' EQUITY
----------------------------------
Deposits
Interest-bearing deposits
Interest bearing
checking, savings,
& money market 704,983 3,045 1.71% 701,703 8,049 1.53% 741,869 5,308 0.96%
Time Dep > $100,000 259,149 3,064 4.69% 291,168 9,439 4.33% 205,538 4,415 2.87%
Time Dep < $100,000 325,495 3,313 4.04% 313,549 8,769 3.74% 289,459 5,617 2.59%
Brokered Time Dep
< $100,000 25,672 319 4.93% 34,295 1,188 4.63% 41,313 951 3.08%
-----------------------------------------------------------------------------------------------------
Total interest-bearing
deposits 1,315,299 9,741 2.94% 1,340,715 27,445 2.74% 1,278,179 16,291 1.70%
Federal funds purchased &
securities sold under
agreements to
repurchase 153,979 1,482 3.82% 151,733 4,093 3.61% 157,505 3,588 3.05%
Other borrowings 112,208 1,392 4.92% 86,789 3,050 4.70% 70,968 2,389 4.50%
-----------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 1,581,486 12,615 3.16% 1,579,237 34,588 2.93% 1,506,652 22,268 1.98%
Noninterest bearing deposits 343,548 335,711 320,828
Accrued expenses and other
liabilities 28,337 25,832 22,114
---------- ---------- ----------
Total liabilities 1,953,371 1,940,780 1,849,594
========== ========== ==========
Minority Interest 1,472 1,476 1,480
Shareholders' equity 183,199 182,703 173,707
---------- ---------- ----------
Total liabilities and
shareholders' equity $2,138,042 $2,124,959 $2,024,781
========== ========== ==========
Interest rate spread 3.11% 3.28% 3.75%
----------------- -------------------- -----------------
Net interest income/margin
on earning assets $ 18,784 3.75% $ 57,068 3.87% $ 58,404 4.15%
Tax Equivalent Adjustment (680) (2,176) (2,090)
-------- -------- --------
Net interest income per
consolidated
financial statements $ 18,104 $ 54,892 $ 56,314
(1) Average balances and yields exclude unrealized gains and losses on
available-for-sale securities.
(2) Interest income includes the effects of taxable-equivalent adjustments
using a blended Federal and State income tax rate of 40% to increase tax
exempt interest income to a taxable-equivalent basis.
(3) Nonaccrual loans are included in the average loans totals presented above.
Payments received on nonaccrual loans have been recognized as disclosed in
Note 1 to the Company's Annual Report on Form 10-K for its fiscal year
ended December 31, 2005.
17
The Company earned taxable-equivalent net interest income of $18.8 million for
the three months ended September 30, 2006, a decrease of 5.1% from the same
period in 2005. For the nine months ended September 30, 2006, the Company earned
taxable-equivalent net interest income of $57.1 million, a decrease of 2.3% from
$58.4 million for the first nine months of 2005. Quarter-to-date and
year-to-date decreases in taxable-equivalent net interest income as compared to
the same periods in 2005 is mainly a result of funding costs increasing at a
faster rate than yields on average earning assets. Yields on earnings assets
were up 43 basis points in the third quarter and 48 basis points in the
year-to-date period over the corresponding periods in 2005, while the cost of
funds increased by 99 basis points and 95 basis points, respectively, over the
same periods. The Company has been able to partially offset higher funding costs
with growth in average earning assets and noninterest bearing deposits.
Taxable-equivalent interest income was up 11.9% for the third quarter and 13.6%
for the year-to-date over the comparable periods in 2005. The growth in
taxable-equivalent interest income was primarily a result of higher loan yields
and higher average loan volumes. Investment yields and average balances were
also up over the corresponding periods in 2005. The yield on average total loans
and leases increased 46 basis points to 7.17% for the three months ended
September 30, 2006, from the same period in 2005. Through the first nine months
of 2006, the yield on average total loans and leases was up 49 basis points to
7.06% over the comparable prior year period. Loan yields on commercial and
industrial loans, and commercial real estate loans benefited from increases in
benchmark market interest rates. During the third quarter, the prime interest
rate remained stable at 8.25%, which is 150 basis points higher than the prime
interest rate of 6.75% in the third quarter of 2005. Home equity loan yields
were also higher as initial introductory rates repriced to fully indexed rates.
Average interest-earning assets increased 4.2% and 4.8% for the three- and
nine-month periods ended September 30, 2006, respectively, as compared to the
same periods in 2005. For the third quarter of 2006, average total loans and
leases were up $24.6 million and average securities (excluding changes in
unrealized gains and losses on available-for-sale securities) were up $54.5
million over the same period in 2005. The growth in average loans and leases for
the quarter included a $42.7 million increase in average commercial real estate
loans and a $12.6 million increase in average commercial loans, which were
partially offset by a $17.0 million decrease in average residential mortgage
loans, and an $11.5 million decrease in average consumer loans. The decrease in
average residential real estate loans and increase average securities reflects
the effects of the securitization of $32.0 million of residential mortgage loans
that occurred late in the second quarter of 2006. For the nine months ended
September 30, 2006, average total loans and leases were up $48.1 million and
average securities were up $43.9 million over the same period of 2005. Growth in
the loan and lease portfolio for the quarter and year-to-date periods occurred
across the Company's banking subsidiaries and has benefited from newer markets
served by the banking offices opened over the past several years.
Higher funding costs, driven by the increases in short-term market interest
rates and competitive market conditions more than offset increases in
taxable-equivalent interest income. Interest expense for the third quarter was
up $4.3 million or 52.6% over the third quarter of 2005. For the nine months
ended September 30, 2006, interest expense of $34.6 million was up $12.3 million
or 55.3% over the corresponding period of 2005. While average interest-bearing
liabilities balances were up 4.5% for the quarter and 4.8% for the year-to-date
period over the same periods of 2005, the increase in interest expense is driven
by higher deposit and borrowing rates. The average cost of interest-bearing
liabilities increased by 99 basis points in the third quarter of 2006 over the
corresponding quarter in 2005 and by 95 basis points for the nine months ended
September 30, 2006, from the same period in 2005.
Core deposits (total deposits, less brokered deposits, municipal money market
deposits, and time deposits of $100,000 or more) supported the growth in average
assets in the third quarter and the first nine months of 2006 over the same
periods in 2005. For the quarter, average core deposits increased by $27.3
million, or 2.2%, from an average balance of $1.24 billion for the third quarter
of 2005. For the first nine months of 2006, average core deposits increased by
$25.5 million, or 2.1% to $1.24 billion, from an average balance of $1.22
billion for the first nine months of 2005. Growth in average core deposits for
the quarter and first nine months of 2006 included $9.0 million and $11.1
million, respectively, of growth in noninterest-bearing deposits. Recent
additions to the Company's branch network contributed to the growth in deposits.
Core deposits represent the Company's largest and lowest cost funding source,
with average core deposits representing 64.1% of average liabilities for the
first nine months of 2006 compared to 65.9% for the same period in 2005.
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 agreements to repurchase (repurchase agreements), and
other borrowings provided additional sources of funding to support asset growth.
For the third quarter of 2006, average balances on non-core funding sources
increased by $49.2 million over the same period of 2005. Average balances on
non-core funding sources increased by $62.0 million in the first nine months of
2006 as compared to the same period in 2005. Time deposits of $100,000 or more
accounted for the majority of the growth in average non-core funding sources for
the quarter and year-to-date periods over the same periods in 2005. Average time
deposits of $100,000 or more were up $47.5 million or 22.5% in the third quarter
18
of 2006 over the same period in 2005. For the nine months ended September 30,
2006, average time deposits of $100,000 or more were up $85.6 million, or 41.7%
over the year earlier period. As of September 30, 2006, time deposits over
$100,000 represented the largest component of non-core funding sources, with a
nine-month average balance of $291.2 million. The growth in average time
deposits of $100,000 or more for the quarter and the year-to-date period was
partially offset by declines in municipal money market deposits. The increase in
market interest rates and competitive market conditions led to an increase in
the interest rates offered on most time deposit categories. The average cost of
time deposits of $100,000 or more was 4.69% for the third quarter of 2006 and
4.33% for the year-to-date period ended September 30, 2006 compared with 3.23%
for the third quarter of 2005 and 2.87% for the year-to-date-period ended
September 30, 2005.
The taxable-equivalent net interest margin decreased from 4.12% in the third
quarter of 2005 to 3.75% in the third quarter of 2006. For the nine months ended
September 30, 2006, the taxable-equivalent net interest margin was 3.87%, down
from 4.15% for the same period in 2005.
Provision for Loan/Lease Losses
The provision for loan/lease losses ("provision") represents management's
estimate of the expense necessary to maintain the reserve for loan/lease losses
at an adequate level. Management uses a model to measure the amount of estimated
loss exposure inherent in the loan/lease portfolio to ensure that an adequate
reserve is maintained. The provision for the third quarter and first nine months
of 2006 was $482,000 and $1.0 million, respectively, down from $662,000 and $1.8
million, respectively, for the same periods in 2005. Lower net charge-offs and a
decrease in the volume of nonperforming loans contributed to the lower provision
expense. Net charge-offs were $572,000 for the first nine months of 2006,
compared to $996,000 for the same period in 2005.
Noninterest Income
Management considers noninterest income an important driver of long-term revenue
growth and a way to reduce earnings volatility that may result from changes in
general market interest rates. Noninterest income for the three months ended
September 30, 2006, was $10.0 million, an increase of 29.2% from the same period
in 2005. Year-to-date 2006, noninterest income was $29.0 million, up 31.0% over
the same period in 2005. Noninterest income represented 35.5% of third quarter
total revenues and 34.6% of year-to-date total revenues, compared to 28.8% and
28.2%, respectively, for the same periods in 2005. The primary components of
noninterest income are fees from investment services, insurance commissions and
fees, service charges on deposit accounts, and card services income. Investment
services income and insurance commissions and fees were up in the third quarter
and year-to-date 2006 over the same periods in 2005, benefiting from the
acquisition of AM&M on January 6, 2006, and the acquisition of three insurance
agencies during the first nine months of 2006.
Investment services reflects income from Tompkins Investment Services (TIS), a
division within Tompkins Trust Company, and AM&M. Investment services income,
which includes trust services, financial planning, wealth management services,
and brokerage related services, was $3.2 million in the third quarter of 2006,
up 149.8% over the same period in 2005. For the first nine months of 2006,
investment services income was $9.1 million, an increase of 128.0% over the same
period in 2005. AM&M contributed $1.6 million and $4.6 million, respectively, to
the growth in third quarter and year-to-date 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.
TIS generates fee income through managing trust and investment relationships,
managing estates, providing custody services, and managing investments in
employee benefits plans. TIS income was $1.5 million in the third quarter of
2006, an increase of $250,000 or 20.1% over the same period in 2005. For the
nine months ended September 30, 2006, TIS income was $4.5 million compared with
$3.9 million for the same period prior year. 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. New account generation
coupled with improved market conditions contributed to the growth in income in
2006 over 2005. The market value of assets managed by, or in custody of, TIS was
$1.7 billion at September 30, 2006, up 9.0% from $1.5 billion at September 30,
2005. These figures include $495.0 million and $423.3 million, respectively, of
Company-owned securities where Tompkins Investment Services is custodian.
Insurance commissions and fees were $2.6 million in the third quarter of 2006,
an increase of 27.3% over the third quarter of 2005. For the first nine months
of 2006, insurance commissions and fees were $7.0 million, up 21.1% from $5.8
million for the same period in 2005. The growth was mainly in revenue generated
from commercial lines as well as an increase in profit-sharing commissions from
insurance underwriters. The acquisition of AM&M also contributed approximately
$100,000 and $270,000, respectively, to the third quarter and year-to-date 2006
increase in insurance commissions and fees. AM&M offers customized risk
19
management plans using life, disability and long-term care insurance products.
The acquisition of three insurance agencies in 2006 also contributed to the
growth in commissions in 2006 over 2005.
Service charges on deposit accounts decreased 9.1% to $2.0 million in the third
quarter of 2006 compared to the third quarter of 2005. For the nine months ended
September 30, 2006, service charges on deposit accounts were $6.0 million, a
1.8% decrease over the same period in 2005. The decrease in the third quarter
was primarily due to lower overdraft fees and cycle fees.
Card services income increased by 12.5% or $83,000, to $746,000 for the third
quarter of 2006 over the same quarter in 2005. Card services income of $2.1
million for the nine months ended September 30, 2006 was up 11.0% from $1.9
million for the nine months ended September 30, 2005. The increase in income
over prior year was concentrated in debit card income and reflected an increased
number of cardholders, higher transaction volume, and fee increases.
Other services charges were down 17.9% in the third quarter of 2006 to $651,000
from $793,000 in the same period of 2005. For the nine months ended September
30, 2006, other service charges were down 16.9% to $1.9 million from $2.2
million in the same period of 2005. 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 $135,000 in the third
quarter of 2005 and $355,000 year-to-date 2005, compared to $0 in the third
quarter of 2006 and $42,000 year-to-date 2006.
For the year-to-date period income relating to the increases in the cash
surrender value of corporate owned life insurance (COLI) related income was
$846,000, up 7.6% from the same period in 2005. The COLI relates to life
insurance policies covering certain executive officers of the Company. The
Company's average investment in COLI was $26.7 million for the nine-month period
ended September 30, 2006, compared to $25.4 million for the same period in 2005.
Although income associated with the insurance policies is not included in
interest income, the COLI produced an annualized tax-equivalent return of 7.06%
for the first nine months of 2006, compared to 6.90% for the same period in
2005. For the year-to-date period ended September 30, 2006, the Company
recognized $685,000 in proceeds from death benefits on corporate owned life
insurance.
Other income for the third quarter of 2006 was up $64,000 or 15.5% from $413,000
from the same period in 2005. For the third quarter 2006, the Company recognized
income of $144,000 attributable to its investment in a small business investment
company (SBIC) compared to $119,000 for the third quarter of 2005. Other income
increased from $1.0 million for the first nine months of 2005 to $1.1 million
for the same period in 2006. The year to date increase in other income is
largely driven by the increase in income from the Company's SBIC investment from
$303,000 through September 30, 2005, to $487,000 through September 30, 2006.
Noninterest Expenses
Total noninterest expenses were $17.5 million for the third quarter of 2006, an
increase of 11.9% over noninterest expenses of $15.6 million for the same period
in 2005. Year-to-date September 30, 2006 noninterest expense increased to $53.9
million from $46.2 million for the prior year period. The addition of AM&M
contributed approximately $1.4 million of the $1.9 million increase in quarterly
noninterest expenses and $4.1 million of the $7.7 million increase in
year-to-date noninterest expense.
Personnel-related expenses comprise the largest segment of noninterest expense,
representing 59.2% of noninterest expense for the third quarter of 2006,
compared to 58.0% of noninterest expense for the same period of 2005.
Personnel-related expenses for the three and nine month periods ended September
30, 2006 increased $1.3 million or 14.2%, and $4.7 million or 17.5%, compared to
the same periods prior year. The increases were primarily a result of higher
salaries and wages related to an increase in average full-time equivalent
employees (FTEs), from 594 at September 30, 2005, to 672 at September 30, 2006,
along with, annual salary adjustments. The acquisitions of AM&M and three
smaller insurance agencies in 2006, and the staffing requirements at the
Company's newer offices were the primary contributors to the increase in FTEs.
Personnel-related expenses include $172,000 and $542,000 for the three and nine
months ended September 30, 2006, respectively, 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 3 "Stock Plans and Stock-Based Compensation" to the Notes to Unaudited
Condensed Consolidated Financial Statements for additional details on the impact
of the adoption of SFAS No. 123(R). Healthcare and pension expenses were also up
over the same period in 2005.
20
Expenses related to bank premises and furniture and fixtures totaled $2.1
million for the three-month period end September 30, 2006, an increase of 13.1%
over the same period last year. For the nine month period ended September 30,
2006, expenses related to bank premises and furniture and fixtures totaled $6.4
million, an increase of 11.9% over the same period last year. Additions to the
Company's branch network, 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.
Other noninterest expenses amounted to $3.0 million for the third quarter 2006,
compared to $2.7 million for the corresponding quarter in 2005. Other
noninterest expenses were $10.0 million for the first nine months of 2006 and
$7.9 million for the similar period of 2005. The acquisition of AM&M contributed
approximately $330,000 to the quarterly increase and $950,000 to the
year-to-date increase in this category. Charitable contributions were up
$390,000 year-to-date over the same period in 2005, mainly due to a $300,000
donation in the second quarter of 2006. Business development, 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.
Income Tax Expense
The provision for income taxes provides for Federal and New York State income
taxes. For the year-to-date September 30, 2006, the tax provision was $8.9
million, down 9.6% from $9.9 million for the same period in 2005. The Company's
effective tax rate for the third quarter of 2006 was 32.4%, compared to 32.1%
for the same period in 2005. For the nine months ended September 30, 2006, the
effective tax rate was 30.7% compared to 32.4% for the comparable prior year
period. The recognition of $685,000 of life insurance proceeds in the second
quarter of 2006 contributed to the year to date 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.
FINANCIAL CONDITION
The Company's total assets were $2.2 billion at September 30, 2006, representing
a $72.8 million or 3.5% increase over total assets reported at December 31,
2005. Asset growth included a $51.3 million increase in the carrying value of
securities and a $15.3 million increase in total loans, including loans
held-for-sale. Cash and cash equivalents were roughly flat at $66.6 million.
Balances for securities and loans were impacted by the securitization of
residential mortgage loans in June 2006. The Company entered into an agreement
with FHLMC to securitize $32.0 million of the Company's residential mortgage
loans. As of September 30, 2006, these securitized loans were held in the
Company's available-for-sale securities portfolio as mortgage-backed securities.
Loan growth between year-end 2005 and September 30, 2006 included $30.6 million
of commercial real estate loans and $14.3 million of commercial loans. Total
deposits were up $20.4 million from December 31, 2005 to September 30, 2006,
with the majority of the growth centered in money market and savings deposits.
Time deposit balances were flat, while noninterest bearing deposit balances were
down $17.6 million.
Capital
Total shareholders' equity totaled $188.9 million at September 30, 2006, an
increase of $7.7 million from December 31, 2005. Surplus increased by $37.0
million, from $118.7 million at December 31, 2005, to $155.7 million at
September 30, 2006; while undivided profits decreased $29.7 million from $69.2
million at December 31, 2005, to $39.6 million at September 30, 2006 and
accumulated other comprehensive loss narrowed by $415,000 over the same period.
The Company paid a 10% stock dividend on May 15, 2006, which contributed to the
increase in surplus and decrease in undivided profits. The increase in common
stock reflects shares issued for stock option exercises and shares issued in
connection with the acquisition of AM&M and the Kemp Agency. The decrease in
accumulated other comprehensive loss relates to a decrease in unrealized losses
on available-for-sale securities.
Cash dividends paid in the first nine months of 2006 totaled approximately $8.4
million, representing 41.9% of year-to-date earnings. Cash dividends of $0.85
per share paid during the first nine months of 2006 were up 7.6% over the $0.79
per share paid during the same period in 2005.
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 $40.50 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.
21
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 additional
shares of the Company's outstanding common stock over a two-year period. During
the third quarter, the Company repurchased 72,328 shares at an average cost of
$43.06 under the 2006 Plan.
The Company and its banking subsidiaries are subject to various regulatory
capital requirements administered by Federal banking agencies. Management
believes the Company and its subsidiaries meet all capital adequacy requirements
to which they are subject. The table below reflects the Company's capital
position at September 30, 2006, compared to the regulatory capital requirements
for "well capitalized" institutions.
REGULATORY CAPITAL ANALYSIS - September 30, 2006
----------------------------------------------------------------------------------------------------
Well Capitalized
Actual Requirement
(Dollar amounts in thousands) Amount Ratio Amount Ratio
----------------------------------------------------------------------------------------------------
Total Capital (to risk weighted assets) $ 190,947 13.2% $ 144,820 10.0%
Tier I Capital (to risk weighted assets) $ 176,827 12.2% $ 86,892 6.0%
Tier I Capital (to average assets) $ 176,827 8.3% $ 106,344 5.0%
----------------------------------------------------------------------------------------------------
As illustrated above, the Company's capital ratios on September 30, 2006, remain
well above the minimum requirement for well capitalized institutions. As of
September 30, 2006, the capital ratios for each of the Company's subsidiary
banks also exceeded the minimum levels required to be considered well
capitalized.
Reserve for Loan/Lease Losses and Nonperforming Assets
Management reviews the adequacy of the reserve for loan/lease losses (the
"reserve") on a regular basis. Management considers the accounting policy
relating to the reserve to be a critical accounting policy, given the inherent
uncertainty in evaluating the levels of the reserve required to cover credit
losses in the Company's portfolio and the material effect that assumption could
have on the Company's results of operations. Factors considered in determining
the adequacy of the reserve and the 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 and lease portfolio; the level and trend of market interest rates;
comments received during the course of regulatory examinations; current local
economic conditions; past due and nonperforming loan statistics; estimated
collateral values; and a historical review of loan and lease loss experience.
Based upon consideration of the above factors, management believes that the
reserve is adequate to provide for the risk of loss inherent in the current loan
and lease portfolio. Activity in the Company's reserve for loan/lease losses
during the nine months of 2006 and 2005 is illustrated in the table below.
ANALYSIS OF THE RESERVE FOR LOAN/LEASE LOSSES (In thousands)
------------------------------------------------------------------------------------------------------------
September 30, 2006 September 30, 2005
------------------------------------------------------------------------------------------------------------
Average Loans and Leases Outstanding Year to Date $ 1,258,909 $ 1,210,789
------------------------------------------------------------------------------------------------------------
Beginning Balance 13,677 12,549
------------------------------------------------------------------------------------------------------------
Provision for loan/lease losses 1,015 1,831
Loans charged off (985) (1,600)
Loan recoveries 413 604
------------------------------------------------------------------------------------------------------------
Net charge-offs (572) (996)
------------------------------------------------------------------------------------------------------------
Ending Balance $ 14,120 $ 13,384
============================================================================================================
The reserve represented 1.11% of total loans and leases outstanding at September
30, 2006, up from 1.07% at September 30, 2005. The reserve coverage of
nonperforming loans (loans past due 90 days and accruing, nonaccrual loans, and
restructured troubled debt) increased from 3.11 times at September 30, 2005, to
3.69 times at September 30, 2006. Management is committed to early recognition
of loan problems and to maintaining an adequate reserve.
The level of nonperforming assets at September 30, 2006 and 2005, is illustrated
in the table below. Nonperforming assets of $4.2 million as of September 30,
2006, reflect a decrease of $200,000 from $4.4 million as of September 30, 2005.
The current level of nonperforming assets was 0.19% of total assets at September
30, 2006, compared to 0.21% at September 30, 2005. Approximately $484,000 of
nonperforming loans at September 30, 2006, were secured by U.S. Government
guarantees, while $1.6 million were secured by one-to-four family residential
properties.
22
Potential problem loans/leases are loans/leases that are currently performing,
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 some time in the future. Management considers
loans/leases classified as Substandard that continue to accrue interest to be
potential problem loans/leases. At September 30, 2006, the Company's internal
loan review function had identified 23 commercial relationships totaling $17.0
million, which it has classified as Substandard, which continue to accrue
interest. As of December 31, 2005, the Company's internal loan review function
had classified 34 commercial relationships as Substandard totaling $20.0
million, 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 aggregate, give management reason to believe that
the current risk exposure on these loans is not significant. At September 30,
2006, approximately $3.9 million of these loans were backed by guarantees of
U.S. government agencies. While in a performing status as of September 30, 2006,
these loans exhibit certain risk factors, which have the potential to cause them
to become nonperforming in the future. 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 between December 31, 2005 and September 30, 2006 primarily
reflects upgrades of approximately $5.0 million due to improvements in financial
performance, and paydowns of approximately $1.3 million, which were partially
offset by additions of $4.5 million.
NONPERFORMING ASSETS (In thousands)
------------------------------------------------------------------------------------------------------------
September 30, 2006 September 30, 2005
------------------------------------------------------------------------------------------------------------
Nonaccrual loans and leases $ 3,307 $ 4,203
Loans past due 90 days and accruing 519 100
Troubled debt restructuring not included above 0 0
------------------------------------------------------------------------------------------------------------
Total nonperforming loans 3,826 4,303
------------------------------------------------------------------------------------------------------------
Other real estate, net of allowances 354 96
------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 4,180 $ 4,399
------------------------------------------------------------------------------------------------------------
Total nonperforming loans/leases as a percent of total loans/leases 0.30% 0.34%
------------------------------------------------------------------------------------------------------------
Total nonperforming assets as a percentage of total assets 0.19% 0.21%
============================================================================================================
Deposits and Other Liabilities
Total deposits of $1.7 billion at September 30, 2006, increased $20.4 million,
or 1.2%, from December 31, 2005. The majority of the increase was in checking,
savings and money market accounts. Total time deposits were flat, with decrease
in time deposits of $100,000 or more offset by increase in time deposits less
than $100,000. Core deposits, (total deposits less time deposits of $100,000 or
more, brokered time deposits, and municipal money market deposits), which
represent the Company's primary funding source, were up 4.6% from year-end 2005.
Core deposits totaled $1.3 billion at September 30, 2006, and represented 65.6%
of total liabilities. This compares to core deposits of $1.2 billion,
representing 64.9% of total liabilities at December 31, 2005.
Non-core funding sources for the Company totaled $656.0 million at September 30,
2006, compared to $651.0 million at December 31, 2005. While the level was
relatively unchanged there was some minor shifting within non-core funding
instruments, with decreases in time deposits of $100,000 or more being offset by
increase in FHLB borrowings, mainly repurchase agreements and overnight
borrowings. As municipal deposits and time deposits over $100,000 fluctuate, the
Company relies on overnight borrowings to meet short-term liquidity needs.
The Company's liability for repurchase agreements amounted to $170.7 million at
September 30, 2006, which is up slightly from $152.7 million at December 31,
2005. Included in repurchase agreements at September 30, 2006, were $97.0
million in FHLB repurchase agreements and $73.7 million in retail repurchase
agreements. Retail repurchase agreements are arrangements with local customers,
in which the Company agrees to sell securities to the customer with an agreement
to repurchase those securities at a specified later date.
The Company's other borrowings include amounts owed to the FHLB. The Company
increased its other borrowings from the FHLB by $23.3 million, to $87.0 million
at September 30, 2006, from $63.7 million at year-end 2005, primarily in
short-term borrowings, including overnight lines of credit.
Included in the $152.2 million in term advances and repurchase agreements with
the FHLB are $123.0 million of callable advances. The advances have call dates
between 2006 and 2010 and are callable if certain conditions are met.
23
Liquidity
Liquidity represents the Company's ability to efficiently and economically
accommodate decreases in deposits and other liabilities, and fund increases in
assets. The Company uses a variety of resources to meet its liquidity needs,
which include cash and cash equivalents, short-term investments, cash flow from
lending and investing activities, deposit growth, repurchase agreements, and
borrowings. The Company may also use borrowings as part of a growth strategy.
The Company's Asset Liability Management Committee reviews periodic reports on
liquidity and interest rate sensitivity.
Core deposits are a primary funding source and represent a low cost funding
source obtained primarily through the Company's branch network. In addition to
core deposits, the Company uses non-core funding sources to support asset
growth. These non-core funding sources include time deposits of $100,000 or
more, brokered time deposits, municipal money market accounts, securities sold
under agreements to repurchase and term advances from the FHLB. Rates and terms
are the primary determinants of the mix of these funding sources. Non-core
funding sources, as a percentage of total liabilities, decreased from 33.8% at
December 31, 2005 to 33.0% at September 30, 2006. The dollar volume of non-core
funding was relatively flat at September 30, 2006 compared to year-end 2005.
Cash and cash equivalents totaled $66.6 million as of September 30, 2006, in
line with the $65.8 million at December 31, 2005. Short-term investments,
consisting of securities due in one year or less, decreased from $40.5 million
at December 31, 2005, to $28.9 million on September 30, 2006. The Company also
pledges securities as collateral for certain non-core funding sources.
Securities carried at $516.8 million at December 31, 2005, and $587.2 million at
September 30, 2006, were pledged as collateral for public deposits, or other
borrowings, or sold under agreements to repurchase. Pledged securities
represented 82.7% of total securities as of September 30, 2006 and as of
December 31, 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 principal reductions. Total mortgage-backed securities, at fair
value, were $346.4 million at September 30, 2006, compared with $316.4 million
at December 31, 2005. Using current prepayment assumptions, cash flow from the
investment portfolio is estimated to be approximately $148.1 million over the
next 12 months. Investments in residential mortgage loans, consumer loans, and
leases totaled approximately $560.4 million at September 30, 2006 as compared to
$574.9 million at December 31, 2005. Aggregate amortization from monthly
payments on these loan assets provides significant additional cash flow to the
Company.
Liquidity is enhanced by ready access to national and regional wholesale funding
sources including Federal funds purchased, repurchase agreements, brokered
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 September 30, 2006, the
unused borrowing capacity on established lines with the FHLB was $375.1 million.
As members of the FHLB, the Company's subsidiary banks can use certain
unencumbered mortgage-related assets to secure additional borrowings from the
FHLB. At September 30, 2006, total unencumbered residential mortgage loans of
the Company were $263.0 million. Additional assets may also qualify as
collateral for FHLB advances upon approval of the FHLB.
The Company has not identified any trends or circumstances that are reasonably
likely to result in material increases or decreases in liquidity in the near
term.
24
Item 3. Quantitative and Qualitative Disclosure About 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. The
simulation models are used to estimate the potential effect of interest rate
shifts on net interest income for future periods. Each quarter the
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 considers strategies to manage
this exposure and incorporates these strategies into the investment and funding
decisions of the Company. The Company does not use derivatives, such as interest
rate swaps, to manage its interest rate risk exposure.
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 September 30, 2006, a 200
basis point upward shift in interest rates over a one-year time frame would
result in a one-year decrease in net interest income of approximately 2.6%,
while a 200 basis point decline in interest rates over a one-year period would
result in an decrease in net interest income of 1.0%. This simulation assumes no
balance sheet growth and no management action to address balance sheet
mismatches.
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 Company's most recent base case simulation, which assumes interest rates
remain unchanged from the date of the simulation, reflects continued pressure on
the net interest margin during the remainder of 2006 and into early 2007.
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 management a level of flexibility 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.
The table below is a Condensed Static Gap Report, which illustrates the
anticipated repricing intervals of assets and liabilities as of September 30,
2006. The analysis reflects sensitivity to rising interest rates in all
repricing intervals shown.
Condensed Static Gap - September 30, 2006 Repricing Interval
Cumulative
(Dollar amounts in thousands) Total 0-3 months 3-6 months 6-12 months 12 months
----------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets $ 2,007,660 $ 448,052 $ 82,674 $ 155,575 $ 686,301
Interest-bearing liabilities 1,618,885 748,790 101,557 235,249 $ 1,085,596
----------------------------------------------------------------------------------------------------------------------------------
Net gap position (300,738) (18,883) (79,674) (399,295)
----------------------------------------------------------------------------------------------------------------------------------
Net gap position as a percentage of total assets (13.80%) (0.87%) (3.66%) (18.32%)
==================================================================================================================================
25
Item 4. 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(e)
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as
of September 30, 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 Report on Form 10-Q the Company's disclosure controls and
procedures were effective in providing reasonable assurance that any 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.
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 third quarter ended September 30, 2006, that
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
26
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 1A. Risk Factors
There has not been any material change in the risk factors disclosure
from that contained in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table includes all Company repurchases made on a monthly basis
during the period covered by this Quarterly Report on Form 10-Q, including those
made pursuant to publicly announced plans or programs.
---------------------------------------------------------------------------------------------------------------
Maximum Number
(or Approximate
Total Number Dollar Value) of
of Shares Purchased Shares that May
Average as Part of Publicly Yet Be Purchased
Total Number of Price Paid Announced Plans Under the Plans
Shares Purchased Per Share or Programs or Programs
Period (a) (b) (c) (d)
---------------------------------------------------------------------------------------------------------------
July 1, 2006 through
July 31, 2006 13,447 $ 43.35 12,220 437,780
August 1, 2006 through
August 31, 2006 54,916 42.70 54,708 383,072
September 1, 2006 through
September 30, 2006 5,400 45.66 5,400 377,672
---------------------------------------------------------------------------------------------------------------
Total 73,763 $ 43.04 72,328 377,672
---------------------------------------------------------------------------------------------------------------
The Company's stock repurchase plan (the "2004 Plan") was approved by the
Company's Board of Directors on July 27, 2004. 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.
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.
Included above are 1,227 shares purchased in July 2006 at an average cost of
$41.69 and 208 shares purchased in September 2006 at an average cost of $43.61
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 under the rabbi trust are not part of the
Board approved stock repurchase plan.
As part of the Company's acquisition of the Kemp Agency, effective July 1, 2006,
the Company issued 17,781 shares of Tompkins common stock pursuant to an
exemption from registration under Section 4(2) of the Securities Act of 1933, as
amended.
27
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
3(ii) Bylaws of Tompkins Trustco, Inc., as amended through and
including October 24, 2006, incorporated herein by reference
to Exhibit 3(ii) to Tompkins Trustco, Inc.'s Current Report on
Form 8-K, filed with the Commission on October 26, 2006.
31.1 Certification of Principal Executive Officer and required by
Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended (filed herewith).
31.2 Certification of Principal Financial Officer and required by
Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended (filed herewith).
32.1 Certification of Principal Executive Officer and required by
Rule 13a-14(b) of the Securities Exchange Act of 1934, as
amended, 18 U.S.C. Section 1350 (filed herewith)
32.2 Certification of Principal Financial Officer and required by
Rule 13a-14(b) of the Securities Exchange Act of 1934, as
amended, 18 U.S.C. Section 1350 (filed herewith)
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Date: November 7, 2006
TOMPKINS TRUSTCO, INC.
By: /s/ JAMES J. BYRNES By: /s/ FRANCIS M. FETSKO
--------------------------------- --------------------------------
Chairman of the Board Executive Vice President and
Chief Executive Officer Chief Financial Officer
(Principal Executive Officer) (Principal Financial Officer)
28
EXHIBIT INDEX
-------------
Exhibit Number Description Pages
--------------------------------------------------------------------------------
3(ii) Bylaws of Tompkins Trustco, Inc., as amended through
and including October 24, 2006, incorporated herein
by reference to Exhibit 3(ii) to Tompkins Trustco,
Inc.'s Current Report on Form 8-K, filed with the
Commission on October 26, 2006.
31.1 Certification of Principal Executive Officer and
required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended. 30
31.2 Certification of Principal Financial Officer and
required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended. 31
32.1 Certification of Principal Executive Officer and
required by Rule 13a-14(b) of the Securities
Exchange Act of 1934, as amended, 18 U.S.C. Section
1350 32
32.2 Certification of Principal Financial Officer and
required by Rule 13a-14(b) of the Securities
Exchange Act of 1934, as amended, 18 U.S.C. Section
1350 33
29