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 June 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 (I.R.S. Employer
of 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 July 27, 2006
---------------------------- -------------------------------
Common Stock, $.10 par value 9,827,315 shares
TOMPKINS TRUSTCO, INC.
FORM 10-Q
INDEX
PART I -FINANCIAL INFORMATION
PAGE
Item 1 - Financial Statements (Unaudited)
Condensed Consolidated Statements of Condition as of
June 30, 2006 and December 31, 2005 3
Condensed Consolidated Statements of Income for
the three and six months ended June 30, 2006 and 2005 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2006 and 2005 5
Condensed Consolidated Statements of Changes in
Shareholders' Equity for the six months ended
June 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 13-24
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 29
EXHIBIT INDEX 30
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 06/30/2006 12/31/2005
------------ ------------
Cash and noninterest bearing balances due from banks $ 54,582 $ 62,436
Interest bearing balances due from banks 818 861
Federal funds sold 0 2,500
Available-for-sale securities, at fair value 641,894 576,242
Held-to-maturity securities, fair value of $76,011 at June 30, 2006,
and $82,768 at December 31, 2005 76,336 82,658
Loans and leases, net of unearned income and deferred costs and fees 1,242,408 1,271,349
Less: Reserve for loan/lease losses 13,710 13,677
-----------------------------------------------------------------------------------------------------------
Net Loans/Leases 1,228,698 1,257,672
Bank premises and equipment, net 39,986 36,938
Corporate owned life insurance 25,094 27,169
Goodwill 16,939 12,286
Other intangible assets 3,224 2,160
Accrued interest and other assets 49,117 45,948
-----------------------------------------------------------------------------------------------------------
Total Assets $ 2,136,688 $ 2,106,870
===========================================================================================================
LIABILITIES, MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest bearing:
Checking, savings and money market $ 695,701 688,521
Time 597,526 634,607
Noninterest bearing 353,306 359,882
-----------------------------------------------------------------------------------------------------------
Total Deposits 1,646,533 1,683,010
Federal funds purchased and securities sold under agreements to repurchase 149,027 152,651
Other borrowings 134,353 63,673
Other liabilities 24,195 24,863
-----------------------------------------------------------------------------------------------------------
Total Liabilities $ 1,954,108 $ 1,924,197
-----------------------------------------------------------------------------------------------------------
Minority interest in consolidated subsidiaries 1,457 1,452
Shareholders' equity:
Common Stock - par value $.10 per share: Authorized 15,000,000 shares;
Issued: 9,859,962 at June 30, 2006; and 9,899,546 at December 31, 2005 986 900
Surplus 157,448 118,663
Undivided profits 35,726 69,228
Accumulated other comprehensive loss (11,646) (6,308)
Treasury stock, at cost - 61,590 shares at June 30, 2006,
and 58,831 shares at December 31, 2005 (1,391) (1,262)
-----------------------------------------------------------------------------------------------------------
Total Shareholders' Equity $ 181,123 $ 181,221
-----------------------------------------------------------------------------------------------------------
Total Liabilities, Minority Interest in Consolidated Subsidiaries
and Shareholders' Equity $ 2,136,688 $ 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 Six months ended
--------------------------- ---------------------------
06/30/2006 06/30/2005 06/30/2006 06/30/2005
------------ ------------ ------------ ------------
INTEREST AND DIVIDEND INCOME
Loans $ 21,937 $ 19,749 $ 43,562 $ 38,409
Balances due from banks 8 6 65 48
Federal funds sold 4 2 9 13
Available-for-sale securities 7,097 5,908 13,710 11,618
Held-to-maturity securities 693 595 1,415 1,138
-----------------------------------------------------------------------------------------------------------------------------------
Total Interest and Dividend Income 29,739 26,260 58,761 51,226
-----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits:
Time certificates of deposits of $100,000 or more 3,430 1,492 6,375 2,691
Other deposits 5,981 3,928 11,329 7,478
Federal funds purchased and securities sold under agreements
to repurchase 1,300 1,204 2,611 2,269
Other borrowings 959 835 1,658 1,564
-----------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 11,670 7,459 21,973 14,002
-----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 18,069 18,801 36,788 37,224
-----------------------------------------------------------------------------------------------------------------------------------
Less: Provision for loan/lease losses 74 716 533 1,168
-----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan/Lease Losses 17,995 18,085 36,255 36,056
-----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Investment services income 3,095 1,351 5,956 2,734
Insurance commissions and fees 2,261 1,935 4,465 3,789
Service charges on deposit accounts 2,085 2,055 3,995 3,904
Card services income 708 665 1,398 1,268
Other service charges 578 796 1,217 1,453
Increase in cash surrender value of corporate owned life insurance 265 264 570 516
Life insurance proceeds 685 0 685 0
Gains on sale of loans 44 78 78 120
Other income 395 470 648 609
Net gain on sale of available-for-sale securities 0 13 0 19
-----------------------------------------------------------------------------------------------------------------------------------
Total Noninterest Income 10,116 7,627 19,012 14,412
-----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES
Salary and wages 8,386 7,124 16,664 13,931
Pension and other employee benefits 2,204 1,844 4,550 3,868
Net occupancy expense of bank premises 1,252 1,013 2,428 2,058
Furniture and fixture expense 925 896 1,868 1,800
Marketing expense 654 590 1,202 1,137
Professional fees 331 346 694 671
Software licenses and maintenance 545 473 975 906
Cardholder expense 319 338 670 663
Amortization of intangible assets 182 153 357 315
Other operating expense 3,684 2,561 6,986 5,207
-----------------------------------------------------------------------------------------------------------------------------------
Total Noninterest Expenses 18,482 15,338 36,394 30,556
-----------------------------------------------------------------------------------------------------------------------------------
Income Before Income Tax Expense and Minority
Interest in Consolidated Subsidiaries 9,629 10,374 18,873 19,912
-----------------------------------------------------------------------------------------------------------------------------------
Minority interest in consolidated subsidiaries 33 33 65 66
Income Tax Expense 2,817 3,393 5,632 6,485
===================================================================================================================================
Net Income $ 6,779 $ 6,948 $ 13,176 $ 13,361
===================================================================================================================================
Basic Earnings Per Share $ 0.69 $ 0.71 $ 1.33 $ 1.36
===================================================================================================================================
Diluted Earnings Per Share $ 0.68 $ 0.70 $ 1.31 $ 1.34
===================================================================================================================================
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)
Six months ended
----------------------------
06/30/2006 06/30/2005
------------ ------------
OPERATING ACTIVITIES
Net income $ 13,176 $ 13,361
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan/lease losses 533 1,168
Depreciation and amortization premises, equipment, and software 2,077 1,892
Amortization of intangible assets 357 315
Earnings from corporate owned life insurance (570) (516)
Net amortization on securities 840 936
Net realized gain on available-for-sale securities 0 (19)
Net gain on sale of loans (78) (120)
Proceeds from sale of loans 4,769 7,853
Loans originated for sale (4,560) (7,691)
Net gain on sale of bank premises and equipment (24) (210)
Tax benefit from stock option exercises 0 143
Stock-based compensation expense 370 0
Increase in accrued interest receivable (694) (771)
Increase in accrued interest payable 421 699
Other, net 1,605 5,138
-----------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 18,222 22,178
-----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from maturities of available-for-sale securities 46,967 50,503
Proceeds from sales of available-for-sale securities 407 20,988
Proceeds from maturities of held-to-maturity securities 17,412 8,365
Purchases of available-for-sale securities (90,896) (77,500)
Purchases of held-to-maturity securities (11,157) (14,145)
Net increase in loans (3,730) (51,427)
Proceeds from sale of bank premises and equipment 67 357
Purchases of bank premises and equipment (4,831) (3,085)
Net cash used in acquisitions (2,808) 0
Purchase of corporate owned life insurance 0 (2,080)
Other, net (82) 0
-----------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (48,651) (68,024)
-----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase (decrease) in demand, money market,
and savings deposits 604 (52,018)
Net (decrease) increase in time deposits (37,081) 81,237
Net (decrease) increase in securities sold under agreements
to repurchase and Federal funds purchased (3,624) 13,208
Increase in other borrowings 84,799 21,500
Repayment of other borrowings (14,198) (368)
Cash dividends (5,419) (5,127)
Cash paid in lieu of fractional shares - 10% stock dividend (10) (13)
Common stock repurchased and returned to unissued status (6,147) (897)
Net proceeds from exercise of stock options 999 432
Tax benefit from stock option exercises 109 0
-----------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 20,032 57,954
-----------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents (10,397) 12,108
Cash and cash equivalents at beginning of period 65,797 40,932
-----------------------------------------------------------------------------------------------------------
Total Cash & Cash Equivalents at End of Period $ 55,400 $ 53,040
===========================================================================================================
Supplemental Information:
Cash paid during the year for:
Interest $ 21,553 $ 13,302
Taxes 3,256 4,264
Non-cash investing and financing activities:
Fair value of non-cash assets acquired in purchase acquisitions $ 805 $ 0
Fair value of liabilities assumed in purchase acquisitions $ 899 $ 0
Fair value of shares issued for acquisitions $ 2,163 $ 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 13,361 13,361
Other comprehensive loss (2,463) (2,463)
----------
Total Comprehensive Income 10,898
==========
Cash dividends ($0.52 per share) (5,127) (5,127)
Exercise of stock options and related
tax benefit (24,864 shares, net) 2 573 575
Common stock repurchased and returned
to unissued status (24,183 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
(2,176 shares, net) 96 (96) 0
-------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 2005 $ 898 $ 117,991 $ 60,281 $ (1,592) $ (1,140) $ 176,438
=========================================================================================================================
-------------------------------------------------------------------------------------------------------------------------
Balances at January 1, 2006 $ 900 $ 118,663 $ 69,228 $ (6,308) $ (1,262) $ 181,221
-------------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Net Income 13,176 13,176
Other comprehensive loss (5,338) (5,338)
----------
Total Comprehensive Income 7,838
==========
Cash dividends ($0.55 per share) (5,419) (5,419)
Exercise of stock options and related
tax benefit (53,046 shares, net) 5 1,103 1,108
Common stock repurchased and returned to
unissued status (151,742 shares) (15) (6,132) (6,147)
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
(5,139 shares, net) 129 (129) 0
Compensation expense stock options 370 370
Shares issued for purchase acquisition
(59,374 shares) 5 2,157 2,162
-------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 2006 $ 986 $ 157,448 $ 35,726 $ (11,646) $ (1,391) $ 181,123
=========================================================================================================================
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 six months ended June 30, 2006.
Weighted Average Aggregate
Weighted Average Remaining Intrinsic
Number of Shares Exercise Price Contractual Term Value
-------------------------------------------------------------------------------------------------------------------
Outstanding at January 1, 2006 628,894 $ 31.23
Granted 234,465 42.39
Exercised (65,881) 23.57
Expired (2,178) 39.34
Forfeited (33,775) 38.59
-------------------------------------------------------------------------------------------------------------------
Outstanding at June 30, 2006 761,525 34.98 7.20 $ 6,109,800
===================================================================================================================
Exercisable at June 30, 2006 457,675 $ 31.16 6.08 $ 5,418,467
===================================================================================================================
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 six months of 2006. No options
were granted in the first six months of 2005. The weighted average grant-date
fair value of the options granted in 2006 was $11.48. 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
$88,000 and $353,000 for the three months ended June 30, 2006 and 2005,
respectively, and $1.3 million and $539,000 for the six months ended June 30,
2006 and 2005, respectively.
As of June 30, 2006, unrecognized compensation cost related to unvested stock
options totaled $2.7 million.
The amount of cash received from the exercise of stock options for the six
months ended June 30, 2006 and 2005 was $999,000 and $432,000, respectively. The
tax benefit realized from stock options exercised during the six months ended
June 30, 2006 and 2005 was $109,000 and $143,000, 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 six months ended
June 30, 2006 was $220,000 and $370,000, 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
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.
8
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 Six months ended
(In thousands except per share data) 06/30/2005 06/30/2005
---------------------------------------------------------------------------------------------------------------
Net Income:
As reported $ 6,948 $ 13,361
Deduct: Total stock-based employee compensation expense determined under
fair value based method for all awards, net of all related tax effects 222 441
---------------------------------------------------------------------------------------------------------------
Pro forma $ 6,726 $ 12,920
---------------------------------------------------------------------------------------------------------------
Basic earnings per share:
As reported $ 0.71 $ 1.36
---------------------------------------------------------------------------------------------------------------
Pro forma 0.68 1.31
---------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
As reported $ 0.70 $ 1.34
---------------------------------------------------------------------------------------------------------------
Pro forma 0.67 1.29
===============================================================================================================
Per share data has been retroactively adjusted to reflect a 10% stock dividend
paid on May 15, 2006.
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
===============================================================================================================
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-month periods ending June 30, 2006 and 2005 is presented in the
table below.
---------------------------------------------------------------------------------------------------------------
Weighted
Three months ended June 30, 2006 Net Income Average Shares Per Share
(In thousands except share and per share data) (Numerator) (Denominator) Amount
---------------------------------------------------------------------------------------------------------------
Basic EPS:
Income available to holders of common stock $ 6,779 9,857,712 $ 0.69
Effect of dilutive securities:
Stock options 112,927
Diluted EPS:
Income available to holders of common stock plus
assumed conversions $ 6,779 9,970,639 $ 0.68
===============================================================================================================
9
The effect of dilutive securities calculation for the three-month period ended
June 30, 2006 excludes stock options covering 303,387 shares of common stock
because they are anti-dilutive.
---------------------------------------------------------------------------------------------------------------
Weighted
Three months ended June 30, 2005 Net Income Average Shares Per Share
(In thousands except share and per share data) (Numerator) (Denominator) Amount
---------------------------------------------------------------------------------------------------------------
Basic EPS:
Income available to holders of common stock $ 6,948 9,846,077 $ 0.71
Effect of dilutive securities:
Stock options 128,989
Diluted EPS:
Income available to holders of common stock plus
assumed conversions $ 6,948 9,975,066 $ 0.70
===============================================================================================================
The effect of dilutive securities calculation for the three-month period ended
June 30, 2005 excludes stock options of 235,103 because they are anti-dilutive.
---------------------------------------------------------------------------------------------------------------
Weighted
Six months ended June 30, 2006 Net Income Average Shares Per Share
(In thousands except share and per share data) (Numerator) (Denominator) Amount
---------------------------------------------------------------------------------------------------------------
Basic EPS:
Income available to holders of common stock $ 13,176 9,898,810 $ 1.33
Effect of dilutive securities:
Stock options 125,360
Diluted EPS:
Income available to holders of common stock plus
assumed conversions $ 13,176 10,024,170 $ 1.31
===============================================================================================================
The effect of dilutive securities calculation for the six-month period ended
June 30, 2006 excludes stock options of 280,165 because they are anti-dilutive.
---------------------------------------------------------------------------------------------------------------
Weighted
Six months ended June 30, 2005 Net Income Average Shares Per Share
(In thousands except share and per share data) (Numerator) (Denominator) Amount
---------------------------------------------------------------------------------------------------------------
Basic EPS:
Income available to holders of common stock $ 13,361 9,847,429 $ 1.36
Effect of dilutive securities:
Stock options 147,799
Diluted EPS:
Income available to holders of common stock plus
assumed conversions $ 13,361 9,995,228 $ 1.34
===============================================================================================================
The effect of dilutive securities calculation for the six-month period ended
June 30, 2005 excludes stock options of 235,266 because they are anti-dilutive.
10
5. Comprehensive Income
Three months ended Six months ended
(in thousands) 06/30/2006 06/30/2005 06/30/2006 06/30/2005
--------------------------------------------------------------------------------------------------------------------------------
Net Income $ 6,779 $ 6,948 $ 13,176 $ 13,361
Net unrealized holding (losses) gains during the period (3,584) 3,117 (5,338) (2,452)
Memo: Pre-tax net unrealized holding (loss) gain (5,973) 5,195 (8,897) (4,087)
Reclassification adjustment for net realized gain on
available-for-sale securities 0 (8) 0 (11)
Memo: Pretax net realized gain 0 (13) 0 (19)
Other Comprehensive (Loss) Income (3,584) 3,109 (5,338) (2,463)
================================================================================================================================
Total Comprehensive Income $ 3,195 $ 10,057 $ 7,838 $ 10,898
================================================================================================================================
6. Employee Benefit Plans
The following table sets forth the amount of the net periodic benefit cost
recognized by the Company 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) 06/30/2006 06/30/2005 06/30/2006 06/30/2005 06/30/2006 06/30/2005
--------------------------------------------------------------------------------------------------------------------------------
Service cost $ 450 $ 377 $ 13 $ 50 $ 17 $ 31
Interest cost 465 434 64 81 110 103
Expected return on plan assets for the period (690) (660) 0 0 0 0
Amortization of transition liability 0 0 18 29 0 0
Amortization of prior service cost (33) (33) 0 2 24 26
Amortization of net loss 181 164 0 3 28 27
--------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 373 $ 282 $ 95 $ 165 $ 179 $ 187
================================================================================================================================
Pension Benefits Life and Health SERP Benefits
Six months ended Six months ended Six months ended
(In thousands) 06/30/2006 06/30/2005 06/30/2006 06/30/2005 06/30/2006 06/30/2005
--------------------------------------------------------------------------------------------------------------------------------
Service cost $ 900 $ 754 $ 26 $ 100 $ 35 $ 61
Interest cost 930 868 128 162 219 207
Expected return on plan assets for the period (1,380) (1,320) 0 0 0 0
Amortization of transition liability 0 0 36 58 0 0
Amortization of prior service cost (66) (66) 0 4 47 53
Amortization of net loss 362 328 0 6 56 56
--------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 746 $ 564 $ 190 $ 330 $ 357 $ 377
================================================================================================================================
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 six 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 June 30, 2006, the Company's maximum potential obligation under standby
letters of credit was $24.1 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 assets 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 in with offices in Dansville and Nunda, New York in a stock and
cash transaction. The transaction resulted in goodwill of $546,000, customer
related intangibles of $134,000 and a covenant-not-to-compete of $90,000. The
covenant-not-to-compete and other identifiable intangibles are being amortized
over 6 years.
9. Accounting Pronouncements
On March 17, 2006, the FASB issued Statement No. 156, "Accounting for Servicing
of Financial Assets - an amendment of FASB Statement No. 140" ("SFAS 156"). SFAS
156 amends FASB Statement No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities-a replacement of FASB
Statement No. 125" ("SFAS 140"). SFAS 156 permits entities to subsequently
measure servicing rights at fair value and report changes in fair value in
earnings rather than amortize servicing rights in proportion to and over the
estimated net servicing income or loss and assess the rights for impairment or
the need for an increased obligation as required under SFAS 140. Entities that
elect to subsequently measure their servicing rights at fair value may no longer
find it necessary to qualify for and apply the provisions of FASB Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," to achieve
an income statement effect similar to the application of hedge accounting for
instruments used to manage the effect of interest rate changes on servicing
rights.
SFAS 156 is effective as of the beginning of an entity's first fiscal year that
begins after September 15, 2006. 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").
12
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 retained
earnings 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 retained earnings at the time of
adoption.
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 four 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
three insurance agencies in the county.
13
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.
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 June 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.
14
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 June 30,
2006, considers the reserve to be adequate, under adversely different conditions
or assumptions, the Company would need to increase the reserve.
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.
15
OVERVIEW
For the quarter ended June 30, 2006, net income of $6.8 million was down 2.4%
from the same period in 2005. Diluted earnings per share were $0.68 for the
second quarter of 2006, compared to $0.70 for the same period in 2005. For the
first six months of 2006, net income was $13.2 million, a decrease of $185,000,
or 1.4% over the same period in 2005. Diluted earnings per share for the first
six months of 2006 were $1.31 compared to $1.34 for the same period in 2005.
Return on average assets (ROA) for the quarter ended June 30, 2006, was 1.28%
compared to 1.37% for the quarter ended June 30, 2005. Return on average
shareholders' equity (ROE) for the second quarter of 2006 was 15.12%, compared
to 16.16% for the same period in 2005. For the six-month period ended June 30,
2006, ROA was 1.25%, compared to 1.34% for the same period prior year. ROE for
the six months ended June 30, 2006 was 14.56%, compared to 15.66% for the six
months ended June 30, 2005.
The current interest rate environment has unfavorably impacted operating
performance and contributed to the decline in the above earnings measures. The
environment of rising short-term interest rates and flat to modestly higher
longer-term rates continued to pressure the Company's net interest margin in the
second quarter of 2006. The cost of interest-bearing liabilities, principally
deposits, has risen faster than the average yield on our interest-bearing
assets, mainly loans. Consequently, our net interest margin for the second
quarter and year-to-date periods in 2006 is lower than the same periods in 2005.
Noninterest income was up 32.6% in the second quarter and 31.9% 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 contributed
to the growth in these fee businesses. The quarter and year-to-date growth also
includes $685,000 of death benefits proceeds on corporate owned life insurance.
Noninterest expenses were up 20.5% over the second quarter of 2005, and 19.1%
over the year-to-date 2005. In addition to the AM&M acquisition, costs
associated with certain strategic initiatives also contributed to higher costs
in 2006, including: the opening of our Southeast Office of Mahopac National Bank
(our fifth full-service office in Putnam County) in March 2006; the opening of
our Greece Office of the Bank of Castile in July 2006; Tompkins Insurance's
acquisition of the Farrell-Messler Agency in Trumansburg, New York in March 2006
and certain assets of the Potter Agency in April 2006; and the recent expansion
of retail brokerage services. The Company also made a tax-deductible $300,000
contribution to Tompkins County Trust Company Charitable Fund in the second
quarter of 2006, which increased "other expense" by the amount of the
contribution.
Asset quality at June 30, 2006, improved when compared to the same period last
year, with nonperforming assets decreasing to $4.0 million at June 30, 2006,
from $6.1 million at June 30, 2005. The ratio of nonperforming assets to total
assets improved from 0.30% at June 30, 2005, to 0.19% at June 30, 2006. Net
charge-offs in the second quarter and year-to-date 2006 were $166,000, and
$500,000, respectively, compared to $651,000 and $732,000 in the same periods in
2005. With the improvement in asset quality, the provision for loan and lease
losses decreased to $74,000 in the second quarter of 2006 from $716,000 in the
same period in 2005. For the year-to-date period, the provision for loan and
leases losses decreased from $1.2 million in 2005 to $533,000 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
June-06 June-06 June-05
------------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Balance Average Balance Average Balance ----------
(Dollar amounts in thousands) (QTD) Interest Yield/Rate (YTD) Interest Yield/Rate (YTD) Interest Yield/Rate
------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets
Interest-bearing balances
due from banks $ 1,255 $ 8 2.56% $ 3,505 $ 65 3.74% $ 4,402 $ 48 2.20%
Securities (1)
U.S. Government
Securities 575,460 6,394 4.46% 557,259 12,220 4.42% 530,440 10,345 3.93%
State and municipal (2) 130,093 1,893 5.84% 130,569 3,795 5.86% 116,228 3,283 5.70%
Other Securities (2) 15,365 206 5.38% 19,221 526 5.52% 21,704 383 3.56%
------------------------------------------------------------------------------------------------------
Total securities 720,918 8,493 4.73% 707,049 16,541 4.72% 668,372 14,011 4.23%
Federal Funds Sold 358 4 4.48% 407 9 4.46% 1,022 13 2.57%
Loans, net of unearned
income (3)
Real Estate 848,246 13,973 6.61% 849,783 27,682 6.57% 799,060 24,473 6.18%
Commercial Loans (2) 293,728 5,933 8.10% 298,026 11,797 7.98% 278,830 9,266 6.70%
Consumer Loans 94,819 1,889 7.99% 96,346 3,789 7.93% 101,818 4,241 8.40%
Direct Lease Financing 12,277 182 5.95% 12,507 377 6.08% 16,904 550 6.56%
------------------------------------------------------------------------------------------------------
Total loans, net of
unearned income 1,249,070 21,977 7.06% 1,256,662 43,645 7.00% 1,196,612 38,530 6.49%
------------------------------------------------------------------------------------------------------
Total interest-earning
assets 1,971,601 30,482 6.20% 1,967,623 60,260 6.18% 1,870,408 52,602 5.67%
------------------------------------------------------------------------------------------------------
Other assets 146,450 150,732 141,930
---------- ---------- ----------
Total assets $2,118,051 $2,118,355 $2,012,338
========== ========== ==========
LIABILITIES & SHAREHOLDERS' EQUITY
Deposits
Interest-bearing deposits
Interest bearing checking,
savings, & money market 694,424 2,664 1.54% 700,036 5,003 1.44% 752,315 3,333 0.89%
Time Dep > $100,000 315,183 3,430 4.36% 307,443 6,375 4.18% 202,450 2,691 2.68%
Time Dep < $100,000 310,243 2,882 3.73% 307,478 5,457 3.58% 283,106 3,497 2.49%
Brokered Time
Dep < $100,000 36,439 435 4.79% 38,678 869 4.53% 43,461 648 3.01%
------------------------------------------------------------------------------------------------------
Total interest-bearing
deposits 1,356,289 9,411 2.78% 1,353,635 17,704 2.64% 1,281,332 10,169 1.60%
Federal funds purchased &
securities sold under
agreements to repurchase 143,788 1,300 3.63% 150,591 2,611 3.50% 153,272 2,269 2.99%
Other borrowings 83,674 959 4.60% 73,869 1,658 4.53% 68,309 1,564 4.62%
------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 1,583,751 11,670 2.96% 1,578,095 21,973 2.81% 1,502,913 14,002 1.88%
Noninterest bearing deposits 329,597 331,728 313,906
Accrued expenses and other
liabilities 23,399 24,604 21,934
---------- ---------- ----------
Total liabilities 1,936,747 1,934,427 1,838,753
Minority Interest 1,491 1,478 1,482
Shareholders' equity 179,813 182,450 172,103
---------- ---------- ----------
Total liabilities and
shareholders' equity $2,118,051 $2,118,355 $2,012,338
========== ========== ==========
Interest rate spread 3.24% 3.37% 3.79%
----------------- ------------------- -------------------
Net interest income/margin
on earning assets $18,812 3.83% $ 38,287 3.92% $ 38,600 4.16%
Tax Equivalent Adjustment (743) (1,499) (1,376)
------- -------- --------
Net interest income per
consolidated financial
statements $18,069 $ 36,788 $ 37,224
====================================================================================================================================
(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 June 30, 2006, a decrease of 3.5% from the same period in
2005. For the six months ended June 30, 2006, the Company earned
taxable-equivalent net interest income of $38.3 million, a decrease of 0.8% from
$38.6 million for the first six 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 earning assets. Yields on earnings assets were up 47 basis points
in the second quarter and 51 basis points in the year-to-date period over the
corresponding periods in 2005, while the cost of funds increased by 98 basis
points and 93 basis points, respectively, over the same periods. The impact of
higher funding costs was partially offset by growth in average interest-earning
assets (primarily loans), higher yields on loans, and growth in deposits,
including noninterest bearing deposits.
Taxable-equivalent interest income was up 13.1% for the second quarter and 14.6%
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. Loan growth was primarily in the
commercial real estate, commercial and industrial, and residential real estate
portfolios. Loan yields on commercial and industrial loans, and commercial real
estate loans benefited from increases in benchmark market interest rates. During
the second quarter, the prime interest rate increased by 50 basis points to
8.25%, which is 200 basis points higher than the prime interest rate of 6.25% in
the second quarter of 2005. Home equity loan yields were also higher as initial
introductory rates repriced to fully indexed rates. The yield on average total
loans and leases increased 49 basis points to 7.06% for the three months ended
June 30, 2006, from the same period in 2005. Through the first six months of
2006, the yield on average total loans and leases was up 51 basis points to
7.00% over the comparable prior year period.
Average interest-earning assets increased 4.5% and 5.2% for the three- and
six-month periods ended June 30, 2006, respectively, as compared to the same
periods in 2005. For the second quarter of 2006, average total loans and leases
were up $39.8 million and average securities (excluding changes in unrealized
gains and losses on available-for-sale securities) were up $45.7 million over
the same period in 2005. The growth in average loans and leases for the quarter
included a $38.0 million increase in average commercial real estate loans, an
$8.0 million increase in average commercial loans, and a $4.3 million increase
in average residential mortgage loans. The growth in average residential real
estate loans and 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. Consumer loans and direct financing leases were down by $7.9
million and $2.6 million, respectively. For the six months ended June 30, 2006,
average total loans and leases were up $60.1 million and average securities were
up $38.7 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 is partially attributable to the new markets served by
the four banking offices opened over the past three years.
Increases in taxable-equivalent interest income were more than offset by higher
funding costs driven by the increase in short-term market interest rates and
competitive market conditions. Interest expense for the second quarter was up
$4.2 million or 56.5% over the second quarter of 2005. For the six months ended
June 30, 2006, interest expense of $22.0 million was up $8.0 million or 56.9%
over the corresponding period of 2005. While average interest-bearing
liabilities balances were up 4.6% for the quarter and 5.0% 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 98 basis points in the second quarter of 2006 over the
corresponding quarter in 2005 and by 93 basis points for the six months ended
June 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) were used to support the growth
in average assets in the second quarter and the first six months of 2006 over
the same periods in 2005. For the quarter, average core deposits increased by
$18.8 million, or 1.6%, from an average balance of $1.21 billion for the second
quarter of 2005. For the first six months of 2006, average core deposits
increased by $24.6 million, or 2.0% to $1.23 billion, from an average balance of
$1.21 billion for the first six months of 2005. Growth in average core deposits
for the quarter and first six months of 2006 included $12.8 million and $17.9
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 63.7% of average liabilities for the
first six months of 2006. This compares to 65.6% 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 second quarter of 2006, average balances on non-core funding sources
increased by $64.4 million over the same period of 2005. Average balances on
non-core funding sources increased by $68.5 million in the first six months of
2006 as compared to the same period in 2005. Time deposits of $100,000 or more
18
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 $102.2 million or 48.0% in the second
quarter of 2006 over the same period in 2005. For the six months ended June 30,
2006, average time deposits of $100,000 or more were up $105.0 million, or 51.9%
over the year earlier period. As of June 30, 2006, time deposits over $100,000
represented the largest component of non-core funding sources, with a six-month
average balance of $307.4 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 4.36% for the second quarter of 2006 and 4.18%
for the year-to-date period ended June 30, 2006 compared with 2.81% for the
second quarter of 2005 and 2.68% for the year-to-date-period ended June 30,
2005.
The taxable-equivalent net interest margin decreased from 4.15% in the second
quarter of 2005 to 3.83% in the second quarter of 2006. For the six months ended
June 30, 2006, the taxable-equivalent net interest margin was 3.92%, down from
4.16% for the same period in 2005. Increases in funding costs outpacing the rise
in asset yields has contributed to the compression of the net interest margin.
Growth in noninterest bearing deposits over the same period helped offset some
of the effects of the narrowing interest rate spread.
Provision for Loan/Lease Losses
The provision for loan/lease losses represents management's estimate of the
expense necessary to maintain the reserve for loan/lease losses at an adequate
level. Management has developed a model to measure the amount of estimated loss
exposure inherent in the loan/lease portfolio to ensure that an adequate reserve
is maintained. The provision for loan and lease losses for the second quarter
and year-to-date period ended June 30, 2006 was lower than the provision for the
same periods in 2005. The provision for loan and lease losses was $533,000 for
the first six months of 2006, down from $1.2 million for the same period in
2005. The decrease in the provision for loan and lease losses in 2006 was a
result of improved asset quality as evidenced by lower net charge-offs and a
decrease in the dollar volume of nonperforming loans. Net charge-offs were
$500,000 for the first six months of 2006, compared to $732,000 for the same
period in 2005. The reserve for loan/lease losses as a percentage of period end
loans was 1.10% at June 30, 2006, and 1.06% at June 30, 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
June 30, 2006, was $10.1 million, an increase of 32.6% from the same period in
2005. Year-to-date 2006, noninterest income was $19.0 million, up 31.9% over the
same period in 2005. Noninterest income represented 35.9% of second quarter
total revenues and 34.1% of year-to-date total revenues, compared to 28.9% and
27.9%, 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. These
categories were all up in the second quarter and year-to-date over the
comparable periods in 2005. Investment services income and insurance commissions
and fees benefited from the acquisition of AM&M on January 6, 2006, and the
acquisition of two insurance agencies during the first half 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 $3.1 million in the second quarter of 2006,
up 129.1% over the same period in 2005. For the first six months of 2006,
investment services income was $6.0 million, an increase of 117.9% over the same
period in 2005. AM&M contributed $1.6 million and $2.9 million, respectively, to
the growth in second 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 second quarter of
2006, an increase of $177,000 or 13.1% over the same period in 2005. For the six
months ended June 30, 2006, TIS income was $3.0 million compared with $2.7
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. The market value of assets managed by,
or in custody of, TIS was $1.6 billion at June 30, 2006, up 7.8% from $1.5
billion at June 30, 2005. These figures include $509.7 million and $422.8
million, respectively, of Company-owned securities where Tompkins Investment
Services is custodian.
19
Insurance commissions and fees were $2.3 million in the second quarter of 2006,
an increase of 16.8% over the second quarter of 2005. For the first six months
of 2006, insurance commissions and fees were $4.5 million, up 17.8% from $3.8
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
$34,000 and $169,000, respectively, to the second quarter and year-to-date 2006
increase in insurance commissions and fees. AM&M offers customized risk
management plans using life, disability and long-term care insurance products.
The acquisition of two insurance agencies in 2006 (March and April) also
contributed to the growth in commissions in 2006 over 2005.
Service charges on deposit accounts increased 1.5% to $2.1 million in the second
quarter of 2006 compared to the second quarter of 2005. For the six months ended
June 30, 2006, service charges on deposit accounts were $4.0 million, a 2.3%
increase over the same period in 2005. An increase in the number of transaction
accounts and fee increases contributed to the growth in service charges on
deposit accounts in 2006 over 2005.
Card services income increased by 6.5% or $43,000, to $708,000 for the second
quarter of 2006 over the same quarter in 2005. Card services income of $1.4
million for the six months ended June 30, 2006 was up 10.3% from $1.3 million
for the six months ended June 30, 2005. The increase in income over prior year
was concentrated in debit card income and reflects an increased number of
cardholders, higher transaction volume, and fee increases.
Other services charges were down 27.4% in the second quarter of 2006 to $578,000
from $796,000 in the same period of 2005. For the six months ended June 30,
2006, other service charges were down 16.2% to $1.2 million from $1.5 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 $151,000 in the second quarter of 2005 and
$220,000 year-to-date 2005, compared to $1,000 in the second quarter of 2006 and
$43,000 year-to-date 2006.
Noninterest income for the second quarter of 2006 includes $265,000 of income
relating to increases in the cash surrender value of corporate owned life
insurance (COLI). This compares to $264,000 for the same period in 2005. For the
year-to-date period COLI related income was $570,000, up 10.5% 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
$27.6 million for the three-month period ended June 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 a
tax-equivalent return of 6.98% for the first six months of 2006, compared to
7.01% for the same period in 2005. For the quarter and year-to-date periods
ended June 30, 2006, the Company recognized $685,000 in proceeds from death
benefits on corporate owned life insurance.
Other income for the second quarter of 2006 was down $75,000 to $395,000 from
the same period in 2005. The decrease was largely driven by a $207,000 gain on
sale of real estate related to the 2005 relocation of The Bank of Castile's
Warsaw Office to a newly renovated building and the sale of the former office
building. For the second quarter 2006, the Company recognized income of $253,000
attributable to its investment in a small business investment company (SBIC)
compared to $144,000 for the second quarter of 2005. Other income increased from
$609,000 for the first six months of 2005 to $648,000 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 $184,000 through June
30, 2005 to $343,000 through June 30, 2006.
Noninterest Expenses
Total noninterest expenses were $18.5 million for the second quarter of 2006, an
increase of 20.5% over noninterest expenses of $15.3 million for the same period
in 2005. Year-to-date June 30, 2006 noninterest expense increased to $36.4
million from $30.6 million for the prior year period. The addition of AM&M
contributed approximately $1.3 million of the $3.2 million increase in quarterly
noninterest expenses and $2.6 million of the $5.8 million increase in
year-to-date noninterest expense.
Personnel-related expenses comprise the largest segment of noninterest expense,
representing 57.3% of noninterest expense for the second quarter of 2006
compared to 58.5% of noninterest expense for the same period of 2005. The 18.1%
increase in personnel-related expenses period-over-period was primarily a result
of higher salaries and wages related to an increase in average full-time
equivalent employees (FTEs), from 599 at June 30, 2005, to 664 at June 30, 2006,
along with, annual salary adjustments. The increase in average FTEs is primarily
a result of the acquisitions of AM&M, staffing requirements at the Company's
newer offices, and the recent insurance agency acquisitions by Tompkins
Insurance in 2006. Compensation costs increased by $370,000 due 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
20
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.
Expenses related to bank premises and furniture and fixtures totaled $2.2
million for the three-month period end June 30, 2006, an increase of 14.0% over
the same period last year. For the six month period ended June 30, 2006,
expenses related to bank premises and furniture and fixtures totaled $4.3
million, an increase of 11.4% 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, insurance and utility costs contributed to the increased expenses for
bank premises and furniture and fixtures year-over-year.
Other noninterest expenses amounted to $3.7 million for the second quarter 2006
compared to $2.6 million for the corresponding quarter in 2005. Other
noninterest expenses were $7.0 million for the first six months of 2006 and $5.2
million for the similar period of 2005. The acquisition of AM&M contributed
approximately $274,000 to the quarterly increase and $616,000 to the
year-to-date increase in this category. The $300,000 charitable contribution
mentioned above also contributed to the growth in this category. 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. The provision for the three months ended June 30, 2006, was $2.8 million,
compared to $3.4 million for the same period in 2005. For the year-to-date
period ended June 30, 2006, the provision $5.6 million, down from $6.5 million
for the same period in 2005. The Company's effective tax rate for the second
quarter of 2006 was 29.3%, compared to 32.7% for the same period in 2005. For
the six months ended June 30, 2006, the effective tax rate was 29.8% compared to
32.6% for the comparable prior year period. The recognition of $685,000 of life
insurance proceeds in the second quarter of 2006 contributed to the decrease in
the effective rate in 2006 compared with 2005. Also contributing to the lower
effective rate is higher levels of tax-advantaged income, such as income from
investments in municipal bonds, and economic zone credits.
FINANCIAL CONDITION
The Company's total assets were $2.1 billion at June 30, 2006, representing a
1.4% increase over total assets reported at December 31, 2005. Asset growth
included a $59.3 million increase in the carrying value of securities. Total
loans decreased by $28.9 million, while cash and cash equivalents decreased by
$10.4 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 June 30, 2006, these securitized loans were
held in the Company's available-for-sale securities portfolio as mortgage-backed
securities. The decrease in cash and equivalents reflects the reinvestment of
proceeds from securities sales at year-end 2005 in early 2006. Commercial real
estate loans were up $7.5 million from year-end 2005 to June 30, 2006. Deposits
were down $36.5 million from December 31, 2005 to June 30, 2006. The majority of
the decline in deposits was in time deposits of $100,000 or more and primarily
reflects activity in our municipal customer base.
Capital
Total shareholders' equity totaled $181.1 million at June 30, 2006, a decrease
of $98,000 from December 31, 2005. Surplus increased by $38.8 million, from
$118.7 million at December 31, 2005, to $157.4 million at June 30, 2006; while
undivided profits decreased $33.5 million from $69.2 million at December 31,
2005, to $35.7 million at June 30, 2006 and accumulated other comprehensive loss
widened $5.3 million 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.
The increase in accumulated other comprehensive loss relates to an increase in
unrealized losses on available-for-sale securities largely due to continued
increases in short-term market interest rates.
Cash dividends paid in the first six months of 2006 totaled approximately $5.4
million, representing 41.1% of year-to-date earnings. Cash dividends of $0.55
per share paid during the first six months of 2006 were up 5.8% over the $0.52
per share paid during the same period in 2005.
21
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. During the
first six months of 2006, 151,742 shares were repurchased at an average price of
$40.51. As of June 30, 2006, remaining shares available for repurchase under the
2004 Plan were 308,076. The 2004 Plan expired on July 27, 2006.
On July 18, 2006, the Company's Board of Directors approved a new stock
repurchase plan (the "2006 Plan") to replace the above 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.
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 June 30, 2006, compared to the regulatory capital requirements for
"well capitalized" institutions.
REGULATORY CAPITAL ANALYSIS - June 30, 2006
---------------------------------------------------------------------------------------------------------
Actual Well Capitalized
Requirement
(Dollar amounts in thousands) Amount Ratio Amount Ratio
---------------------------------------------------------------------------------------------------------
Total Capital (to risk weighted assets) $ 189,102 13.7% $ 138,421 10.0%
Tier I Capital (to risk weighted assets) $ 175,392 12.7% $ 83,053 6.0%
Tier I Capital (to average assets) $ 175,392 8.3% $ 105,456 5.0%
=========================================================================================================
As illustrated above, the Company's capital ratios on June 30, 2006, remain well
above the minimum requirement for well capitalized institutions. As of June 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 six months of 2006 and 2005 is illustrated in the table below.
ANALYSIS OF THE RESERVE FOR LOAN/LEASE LOSSES (In thousands)
---------------------------------------------------------------------------------------------------------
June 30, 2006 June 30, 2005
---------------------------------------------------------------------------------------------------------
Average Loans and Leases Outstanding Year to Date $ 1,256,662 $ 1,196,612
------------------------------------------------------------------------------------------ ------------
Beginning Balance 13,677 12,549
------------------------------------------------------------------------------------------ ------------
Provision for loan/lease losses 533 1,168
Loans charged off (733) (1,161)
Loan recoveries 233 429
------------------------------------------------------------------------------------------ ------------
Net charge-offs (500) (732)
------------------------------------------------------------------------------------------ ------------
Ending Balance $ 13,710 $ 12,985
=========================================================================================================
The reserve represented 1.10% of total loans and leases outstanding at June 30,
2006, up from 1.06% at June 30, 2005. The reserve coverage of nonperforming
loans (loans past due 90 days and accruing, nonaccrual loans, and restructured
troubled debt) increased from 2.20 times at June 30, 2005, to 3.86 times at June
30, 2006. Management is committed to early recognition of loan problems and to
maintaining an adequate reserve.
The level of nonperforming assets at June 30, 2006 and 2005, is illustrated in
the table below. Nonperforming assets of $4.0 million as of June 30, 2006,
reflect a decrease of $2.1 million from $6.1 million as of June 30, 2005. The
current level of nonperforming assets was 0.19% of total assets at June 30,
22
2006, compared to 0.30% at June 30, 2005. Approximately $370,000 of
nonperforming loans at June 30, 2006, were secured by U.S. Government
guarantees, while $1.0 million were secured by one-to-four family residential
properties.
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 June 30, 2006, the Company's internal loan
review function had identified 23 commercial relationships totaling $13.8
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 June 30, 2006,
approximately $3.8 million of these loans were backed by guarantees of U.S.
government agencies. While in a performing status as of June 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 June 30, 2006 primarily reflects
upgrades of approximately $4.6 million due to improvements in financial
performance, and paydowns of approximately $1.2 million.
NONPERFORMING ASSETS (In thousands)
---------------------------------------------------------------------------------------------------------
June 30, 2006 June 30, 2005
---------------------------------------------------------------------------------------------------------
Nonaccrual loans and leases $ 2,937 $ 5,290
Loans past due 90 days and accruing 475 570
Troubled debt restructuring not included above 50 50
---------------------------------------------------------------------------------------------------------
Total nonperforming loans 3,462 5,910
---------------------------------------------------------------------------------------------------------
Other real estate, net of allowances 513 202
---------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 3,975 $ 6,112
---------------------------------------------------------------------------------------------------------
Total nonperforming loans/leases as a percent of total loans/leases 0.29% 0.48%
---------------------------------------------------------------------------------------------------------
Total nonperforming assets as a percentage of total assets 0.19% 0.30%
=========================================================================================================
Deposits and Other Liabilities
Total deposits of $1.7 billion at June 30, 2006, decreased $36.5 million, or
2.2%, from December 31, 2005. The majority of the decline was in time deposits
of $100,000 or more as the rates on certain of these deposit accounts moved
higher. 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 down 1.0% from year-end 2005. Core
deposits totaled $1.3 billion at June 30, 2006, and represented 64.4% 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 $670.9 million at June 30,
2006, up from $651.0 million at December 31, 2005. Non-core funding at June 30,
2006, included municipal deposits, time deposits of $100,000 or more, term
advances and securities sold under agreements to repurchase ("repurchase
agreements") with the Federal Home Loan Bank (FHLB), and retail repurchase
agreements.
The growth in non-core funding between December 31, 2005, and June 30, 2006, was
concentrated in short term borrowings. At December 31, 2005, borrowings maturing
in one year were $297,000 increasing to $76.0 million at June 30, 2006.
Overnight borrowings increased to $64.8 million at June 30, 2006. 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 $149.0 million at
June 30, 2006, which is down slightly from $152.7 million at December 31, 2005.
Included in repurchase agreements at June 30, 2006, were $82.0 million in FHLB
repurchase agreements and $67.0 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.
23
The Company's other borrowings include amounts owed to the FHLB. The Company
increased its other borrowings from the FHLB by $70.7 million, to $134.4 million
at June 30, 2006, from $63.7 million at year-end 2005 primarily in short-term
borrowings, including overnight lines of credit.
Included in the $151.3 million in term advances and repurchase agreements with
the FHLB are $102.0 million of callable advances. The advances have call dates
between 2006 and 2010 and are callable if certain conditions are met.
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, increased from 33.8% at
December 31, 2005 to 34.3% at June 30, 2006. The increase in the dollar volume
of non-core funding was concentrated in short term borrowings. Rates on these
borrowing increased as the Federal Reserve increase the Federal Funds Rate.
Cash and cash equivalents totaled $55.4 million as of June 30, 2006, down from
$65.8 million at December 31, 2005. Short-term investments, consisting of
securities due in one year or less, increased from $40.5 million at December 31,
2005, to $42.9 million on June 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 $530.9 million at June 30, 2006, were pledged
as collateral for public deposits, or other borrowings, or sold under agreements
to repurchase. Pledged securities represented 73.9% of total securities as of
June 30, 2006, compared to 78.4% 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 $350.1 million at June 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 $111.5 million over the
next 12 months. Investments in residential mortgage loans, consumer loans, and
leases totaled approximately $555.6 million at June 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 June 30, 2006, the unused
borrowing capacity on established lines with the FHLB was $331.8 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 June
30, 2006, total unencumbered residential mortgage loans of the Company were
$253.1 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 June 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 4.5%, while a 200
basis point decline in interest rates over a one-year period would result in an
increase in net interest income of 0.1%. 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 positive exposure in the 200 basis point decline scenario results from the
Company's liabilities in particular deposits repricing downward more rapidly
than the rates on the Company's assets. The Company's most recent base case
simulation, which assumes interest rates remain unchanged from the date of the
simulation, reflects a relatively flat net interest margin during 2006.
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 June 30, 2006.
The analysis reflects sensitivity to rising interest rates in all repricing
intervals shown.
Condensed Static Gap - June 30, 2006 Repricing Interval
Cumulative
(Dollar amounts in thousands) Total 0-3 months 3-6 months 6-12 months 12 months
---------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets $ 1,980,867 $ 419,280 $ 68,453 $ 153,541 $ 641,274
Interest-bearing liabilities 1,576,607 704,481 166,755 171,508 $ 1,042,744
---------------------------------------------------------------------------------------------------------------------------------
Net gap position (285,201) (98,302) (17,967) (401,470)
---------------------------------------------------------------------------------------------------------------------------------
Net gap position as a percentage of total assets (13.35%) (4.60%) (0.84%) (18.79%)
=================================================================================================================================
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 June 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 second quarter ended June 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 Dollar
Total Number of Shares Value) of Shares that
Purchased as Part of May Yet Be Purchased
Total Number of Shares Average Price Paid Publicly Announced Plans or Under the Plans or
Purchased Per Share Programs Programs
Period (a) (b) (c) (d)
-----------------------------------------------------------------------------------------------------------------------------------
April 1, 2006 through
April 30, 2006 24,202 $ 43.29 23,000 396,086
May 1, 2006 through
May 31, 2006 88,010 38.77 88,010 308,076
June 1, 2006 through
June 30, 2006 198 39.56 0 308,076
-----------------------------------------------------------------------------------------------------------------------------------
Total 112,410 $ 39.74 111,010 308,076
-----------------------------------------------------------------------------------------------------------------------------------
On July 28, 2004, the Company announced the Company's stock repurchase plan (the
"2004 Plan"), which was approved by the Company's Board of Directors on July 27,
2004. Under the 2004 Plan, the Company is 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 have been 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 above 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.
Included above are 1,202 shares purchased in April 2006 at an average cost of
$47.46 and 198 shares purchased in June 2006 at an average cost of $39.56 by the
trustee of the 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.
27
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of stockholders of the Company was held on May 8, 2006 (the
"Annual Meeting"). Proxies for the Annual Meeting were solicited pursuant to
Regulation 14 under the Securities Exchange Act of 1934, as amended.
The election of five directors for three-year terms was approved at the Annual
Meeting. Director nominees: Russell K. Achzet, James W. Fulmer, James R. Hardie,
Patricia A. Johnson, and Thomas R. Salm were each elected to a term of three
years expiring in 2009. Directors continuing in office: John A. Alexander, James
J. Byrnes, Elizabeth W. Harrison, Bonnie H. Howell, Hunter R. Rawlings, Michael
H. Spain, William D. Spain, and Hunter Rawlings. The voting for the directors is
shown below.
Number of Shares Number of Shares Voted Number of Shares
Director Voted For Against Withheld
----------------------------------------------------------------------------------------------------------------
Russell K. Achzet 6,873,370 214,289 1,959,735
James W. Fulmer 6,902,154 185,505 1,959,735
James R. Hardie 6,918,616 169,043 1,959,735
Patricia A. Johnson 6,918,156 169,503 1,959,735
Thomas R. Salm 6,897,919 189,740 1,959,735
Item 5. Other Information
None
Item 6. Exhibits
10.1* Amendment to the Tompkins Trustco, Inc. Supplemental
Retirement Agreement with James J. Byrnes (filed
herewith)
10.2* Tompkins Trustco, Inc. Officer Group Term Replacement
Plan, as amended on June 26, 2006 (filed herewith)
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)
28
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: August 8, 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)
29
EXHIBIT INDEX
-------------
Exhibit Number Description Pages
--------------------------------------------------------------------------------
10.1* Amendment to the Tompkins Trustco, Inc.
Supplemental Retirement Agreement with James J.
Byrnes 31
10.2* Tompkins Trustco, Inc. Officer Group Term
Replacement Plan, as amended on June 26, 2006 33
31.1 Certification of Principal Executive Officer and
required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended. 47
31.2 Certification of Principal Financial Officer and
required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended. 48
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 49
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 50
30