UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-12709
TOMPKINS
FINANCIAL [LOGO]
Tompkins Financial Corporation
(Exact name of registrant as specified in its charter)
New York 16-1482357
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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
Registrant's former name (if changed since last report): Tompkins Trustco, Inc.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [ ].
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [ ] Accelerated Filer [X] Non-Accelerated Filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act.)
Yes [ ] No [X].
Indicate the number of shares of the Registrant's Common Stock outstanding as of
the latest practicable date:
Class Outstanding as of October 30, 2007
------------------ ----------------------------------
Common Stock, $.10 par value 9,556,786 shares
TOMPKINS FINANCIAL CORPORATION
FORM 10-Q
INDEX
PART I -FINANCIAL INFORMATION
PAGE
--------
Item 1 - Financial Statements (Unaudited)
Condensed Consolidated Statements of Condition
as of September 30, 2007 and December 31, 2006 3
Condensed Consolidated Statements of Income for
the three and nine months ended September 30,
2007 and 2006 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 2007
and 2006 5
Condensed Consolidated Statements of Changes in
Shareholders' Equity for the nine months ended
September 30, 2007 and 2006 6
Notes to Unaudited Condensed Consolidated Financial
Statements 7-15
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 15-27
Item 3 - Quantitative and Qualitative Disclosures about
Market Risk 27-28
Item 4 - Controls and Procedures 28
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 29
Item 1A - Risk Factors 29
Item 2 - Unregistered Sales of Equity Securities and Use
of Proceeds 29
Item 3 - Defaults Upon Senior Securities 29
Item 4 - Submission of Matters to a Vote of Security Holders 30
Item 5 - Other Information 30
Item 6 - Exhibits 30
SIGNATURES 30
EXHIBIT INDEX 31
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TOMPKINS FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION
(In thousands, except share data) (Unaudited)
As of As of
ASSETS 09/30/2007 12/31/2006
----------------- ----------------
Cash and noninterest bearing balances due from banks $ 56,456 $ 48,251
Interest bearing balances due from banks 2,670 1,723
Federal funds sold 0 2,200
Trading securities, at fair value 66,340 0
Available-for-sale securities, at fair value 634,353 655,322
Held-to-maturity securities, fair value of $50,780 at September 30, 2007,
and $59,606 at December 31, 2006 50,549 59,038
Loans and leases, net of unearned income and deferred costs and fees 1,383,928 1,326,298
Less: Allowance for loan/lease losses 14,410 14,328
------------------------------------------------------------------------------------------------------------------------
Net Loans/Leases 1,369,518 1,311,970
Bank premises and equipment, net 44,807 43,273
Corporate owned life insurance 26,555 25,622
Goodwill 21,371 21,235
Other intangible assets 3,683 4,051
Accrued interest and other assets 40,560 38,152
------------------------------------------------------------------------------------------------------------------------
Total Assets $ 2,316,862 $ 2,210,837
========================================================================================================================
LIABILITIES, MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest bearing:
Checking, savings and money market $ 750,639 $ 680,844
Time 609,985 669,222
Noninterest bearing 365,104 359,354
------------------------------------------------------------------------------------------------------------------------
Total Deposits 1,725,728 1,709,420
Federal funds purchased and securities sold under agreements to
repurchase ($15,257 valued at fair value at September 30, 2007) 196,085 191,490
Other borrowings ($10,410 valued at fair value at September 30, 2007) 148,213 85,941
Other liabilities 55,541 32,914
------------------------------------------------------------------------------------------------------------------------
Total Liabilities $ 2,125,567 $ 2,019,765
------------------------------------------------------------------------------------------------------------------------
Minority interest in consolidated subsidiaries 1,487 1,452
Shareholders' equity:
Common Stock - par value $.10 per share: Authorized 15,000,000 shares;
Issued: 9,612,681 at September 30, 2007; and 9,889,569 at December 31, 2006 961 989
Additional paid-in capital 147,498 158,203
Retained earnings 52,889 44,429
Accumulated other comprehensive loss (9,826) (12,487)
Treasury stock, at cost - 69,272 shares at September 30, 2007,
and 64,418 shares at December 31, 2006 (1,714) (1,514)
------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity $ 189,808 $ 189,620
------------------------------------------------------------------------------------------------------------------------
Total Liabilities, Minority Interest in Consolidated Subsidiaries
and Shareholders' Equity $ 2,316,862 $ 2,210,837
========================================================================================================================
See accompanying notes to unaudited condensed consolidated financial statements.
3
TOMPKINS FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data) (Unaudited)
Three months ended Nine months ended
09/30/2007 09/30/2006 09/30/2007 09/30/2006
---------- ---------- ---------- ----------
INTEREST AND DIVIDEND INCOME
Loans $ 24,644 $ 22,798 $ 72,341 $ 66,360
Due from banks 29 8 183 73
Federal funds sold 14 0 217 9
Trading securities 813 0 1,989 0
Available-for-sale securities 7,227 7,281 22,018 20,992
Held-to-maturity securities 497 632 1,560 2,046
---------------------------------------------------------------------------------------------------------------------
Total Interest and Dividend Income 33,224 30,719 98,308 89,480
---------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits:
Time certificates of deposits of $100,000 or more 3,204 3,064 11,748 9,439
Other deposits 7,786 6,677 22,908 18,006
Federal funds purchased and securities sold under agreements
to repurchase 2,066 1,482 6,066 4,093
Other borrowings 1,665 1,392 3,031 3,050
---------------------------------------------------------------------------------------------------------------------
Total Interest Expense 14,721 12,615 43,753 34,588
---------------------------------------------------------------------------------------------------------------------
Net Interest Income 18,503 18,104 54,555 54,892
---------------------------------------------------------------------------------------------------------------------
Less: Provision for loan/lease losses 387 482 1,050 1,015
---------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan/Lease Losses 18,116 17,622 53,505 53,877
---------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Investment services income 3,621 3,173 10,628 9,128
Insurance commissions and fees 2,910 2,568 8,440 7,038
Service charges on deposit accounts 2,789 2,030 7,517 6,025
Card services income 884 746 2,587 2,144
Other service charges 631 651 1,927 1,867
Mark-to-market gain on trading securities 346 0 221 0
Mark-to-market loss on liabilities held at fair value (644) 0 (667) 0
Increase in cash surrender value of corporate owned life 302 276 858 846
insurance
Life insurance proceeds 0 0 0 685
Gains on sale of loans 54 40 151 118
Other income 408 477 877 1,127
Net gain on sale of available-for-sale securities 283 0 289 0
---------------------------------------------------------------------------------------------------------------------
Total Noninterest Income 11,584 9,961 32,828 28,978
---------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES
Salary and wages 9,045 8,265 26,616 24,928
Pension and other employee benefits 2,598 2,074 7,712 6,629
Net occupancy expense of bank premises 1,484 1,239 4,531 3,667
Furniture and fixture expense 949 885 2,895 2,753
Marketing expense 568 648 1,748 1,850
Professional fees 925 392 2,297 1,086
Software licenses and maintenance 552 459 1,555 1,434
Cardholder expense 241 289 732 959
Amortization of intangible assets 155 183 498 540
Other operating expense 3,182 3,026 9,885 10,013
---------------------------------------------------------------------------------------------------------------------
Total Noninterest Expenses 19,699 17,460 58,469 53,859
---------------------------------------------------------------------------------------------------------------------
Income Before Income Tax Expense and Minority
Interest in Consolidated Subsidiaries 10,001 10,123 27,864 28,996
---------------------------------------------------------------------------------------------------------------------
Minority interest in consolidated subsidiaries 33 33 98 98
Income Tax Expense 3,163 3,287 8,820 8,919
=====================================================================================================================
Net Income $ 6,805 $ 6,803 $ 18,946 $ 19,979
=====================================================================================================================
Basic Earnings Per Share $ 0.71 $ 0.69 $ 1.94 $ 2.02
=====================================================================================================================
Diluted Earnings Per Share $ 0.70 $ 0.68 $ 1.93 $ 2.00
=====================================================================================================================
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
Nine months ended
09/30/2007 09/30/2006
---------- ----------
OPERATING ACTIVITIES
Net income $ 18,946 $ 19,979
Adjustments to reconcile net income to net cash
Provided by operating activities:
Provision for loan/lease losses 1,050 1,015
Depreciation and amortization premises, equipment, and software 3,279 3,058
Amortization of intangible assets 498 540
Earnings from corporate owned life insurance (858) (846)
Net amortization on securities 1,100 1,202
Mark-to-market gain on trading securities (221) 0
Mark-to-market loss on liabilities held at fair value 667 0
Net realized gain on available-for-sale securities (289) 0
Net gain on sale of loans (151) (118)
Proceeds from sale of loans 9,646 8,486
Loans originated for sale (9,326) (8,188)
Net loss (gain) on sale of bank premises and equipment 18 (25)
Stock-based compensation expense 525 542
Increase in accrued interest receivable (634) (1,152)
(Decrease) increase in accrued interest payable (182) 500
Proceeds from sales of trading securities 61,912 0
Purchases of trading securities (72,300) 0
Payments/maturities from trading securities 7,525 0
Other, net (4,237) 8,827
----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 16,968 33,820
----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from maturities of available-for-sale securities 73,223 54,844
Proceeds from sales of available-for-sale securities 27,432 25,978
Proceeds from maturities of held-to-maturity securities 11,933 32,258
Purchases of available-for-sale securities (117,641) (121,408)
Purchases of held-to-maturity securities (3,528) (11,725)
Net increase in loans (58,767) (48,127)
Proceeds from sale of bank premises and equipment 111 68
Purchases of bank premises and equipment (4,541) (7,467)
Net cash used in acquisitions (314) (3,115)
Other, net 0 (82)
----------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (72,092) (78,776)
----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in demand, money market, and savings deposits 75,546 22,087
Net decrease in time deposits (59,237) (1,658)
Net increase in securities sold under agreements
to repurchase and Federal funds purchased 4,338 18,028
Increase in other borrowings 145,800 84,799
Repayment of other borrowings (83,938) (61,548)
Cash dividends (8,964) (8,370)
Cash paid in lieu of fractional shares - 10% stock dividend 0 (10)
Common stock repurchased and returned to unissued status (11,969) (9,261)
Net proceeds from exercise of stock options 475 1,406
Tax benefit from stock options exercises 25 253
----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 62,076 45,726
----------------------------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 6,952 770
Cash and cash equivalents at beginning of period 52,174 65,797
----------------------------------------------------------------------------------------------------------------------------
Total Cash & Cash Equivalents at End of Period $ 59,126 $ 66,567
============================================================================================================================
Supplemental Information:
Cash paid during the year for - Interest $ 43,935 $ 34,089
Cash paid during the year for - Taxes 9,754 3,605
Non-cash investing and financing activities:
Fair value of non-cash assets acquired in purchase acquisitions -- $ 852
Fair value of liabilities assumed in purchase acquisitions -- $ 945
Fair value of shares issued for acquisitions $ 11 $ 2,753
Securities purchased not yet settled $ 24,697 --
Transfer of available-for-sale securities to trading securities with adoption of SFAS No. 159 $ 63,383 $ 32,040
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
Additional Other
Common Paid-in Retained Comprehensive Treasury
Stock Capital Earnings Loss Stock Total
-----------------------------------------------------------------------------------------------------------------------------------
Balances at January 1, 2006 $ 900 $ 118,663 $ 69,228 ($ 6,308) ($1,262) $ 181,221
-----------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Net Income 19,979 19,979
Other comprehensive loss 415 415
------------
Total Comprehensive Income 20,394
Cash dividends ($0.85 per share) (8,370) (8,370)
Exercise of stock options and related
tax benefit (70,825 shares, net) 7 1,652 1,659
Common stock repurchased and returned to
unissued status (224,070 shares) (23) (9,238) (9,261)
Effect of 10% stock dividend 91 41,158 (41,249) 0
Cash paid in lieu of fractional shares
(262 shares) (10) (10)
Directors deferred compensation plan
(6,574 shares, net) 189 (189) 0
Stock-based compensation expense 542 542
Shares issued for purchase acquisition
(77,155 shares) 7 2,746 2,753
-----------------------------------------------------------------------------------------------------------------------------------
Balances at September 30, 2006 $ 982 $ 155,712 $ 39,578 ($ 5,893) ($1,451) $ 188,928
===================================================================================================================================
-----------------------------------------------------------------------------------------------------------------------------------
Balances at January 1, 2007 $ 989 $ 158,203 $ 44,429 ($12,487) ($1,514) $ 189,620
-----------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Net Income 18,946 18,946
Other comprehensive loss 1,139 1,139
------------
Total Comprehensive Income 20,085
Cash dividends ($0.92 per share) (8,964) (8,964)
Exercise of stock options and related
tax benefit (29,399 shares, net) 3 497 500
Common stock repurchased and returned to
unissued status (309,099 shares) (31) (11,938) (11,969)
Directors deferred compensation plan
(4,854 shares, net) 200 (200) 0
Stock-based compensation expense 525 525
Cumulative effect adjustment - adoption
of SFAS 159 (1,522) 1,522 0
Shares issued for purchase acquisition
(2,812 shares) 11 11
-----------------------------------------------------------------------------------------------------------------------------------
Balances at September 30, 2007 $ 961 $ 147,498 $ 52,889 ($ 9,826) ($1,714) $ 189,808
===================================================================================================================================
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 Financial Corporation ("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
investment services subsidiary, AM&M Financial Services, Inc. ("AM&M"). AM&M has
three operating companies: (1) AM&M Planners, Inc., which provides fee based
financial planning and wealth management services for corporate executives,
small business owners, and high net worth individuals; (2) Ensemble Financial
Services, Inc., an independent broker-dealer and 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. Unless the context otherwise requires, the
term "Company" refers to Tompkins Financial Corporation 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
that management considers critical in this respect are the determination of the
allowance 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, 2007. 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, 2006. The Company elected to early adopt Statement of Financial
Accounting Standards ("SFAS") No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, and SFAS No. 157, Fair Value Measurements,
effective January 1, 2007. Other than the adoption of these two accounting
pronouncements, there have been no significant changes to the Company's
accounting policies from those presented in the 2006 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.
3. Accounting Pronouncements
In February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, The Fair Value Option for Financial Assets and Financial Liabilities --
Including an amendment of FASB Statement No. 115 ("SFAS 159"). SFAS 159 allows
companies to report selected financial assets and liabilities at fair value. The
changes in fair value are recognized in earnings and the assets and liabilities
measured under this methodology are required to be displayed separately in the
balance sheet. SFAS 159's objective is to reduce both complexity in accounting
for financial instruments and the volatility in earnings caused by measuring
related assets and liabilities differently. SFAS 159 establishes presentation
and disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities. SFAS 159 requires companies to provide additional information that
will help investors and other users of financial statements to more easily
understand the effect of the company's choice to use fair value on its earnings.
It also requires entities to display the fair value of those assets and
liabilities for which the company has chosen to use fair value on the face of
the balance sheet. The Company elected to early adopt SFAS 159, effective
January 1, 2007, and also apply the provisions of SFAS 157 Fair Value
Measurements ("SFAS 157").
7
In the first quarter of 2007, the Company elected to apply the fair value option
for certain securities within its available-for-sale portfolio with an aggregate
cost basis of $65.9 million and an aggregate book value of $63.4 million as of
the January 1, 2007 date of adoption. Included in the $65.9 million were $40.6
million of U.S. Government agencies (total portfolio of $217.5 million) and
$25.3 million of mortgage-backed securities (total portfolio of $349.8 million).
The Company selected these securities based upon yield and average remaining
life. The securities selected had yields of less than 4.0% and average lives
greater than 1.5 years. As a result of the election to early adopt, the
cumulative unrealized loss related to these available-for-sale securities of
$2.5 million was recorded directly in the Company's financial statements as a
cumulative-effect adjustment, net of tax, to retained earnings. This net of tax
amount of $1.5 million was previously included within accumulated other
comprehensive loss as of December 31, 2006, based on the Company's ability and
intent to hold these securities to recovery. The Company changed its intent with
respect to these securities to enable the Company to record the losses directly
to retained earnings rather than current income based on the transition provided
and after evaluating various alternative investments that could have improved
returns and met certain liquidity objectives that more closely match the
Company's needs. At March 31, 2007, these securities were reported as trading
securities on the Company's Consolidated Statements of Condition. The Company
recognized a pre-tax gain of approximately $452,000 in the first quarter of
2007, representing the change in fair value of these securities since adoption
of SFAS 159 on January 1, 2007.
In April 2007, Tompkins initiated a securities portfolio restructuring
transaction whereby it sold the approximately $62.0 million in securities that
were carried in the Company's trading portfolio subsequent to the adoption of
SFAS 159. During the second quarter, the Company realized a pre-tax loss of
approximately $198,000 on these $62.0 million of securities, reflecting changes
in fair value. Proceeds from the sale were reinvested in securities that provide
for a higher yield for accounting purposes that will reflect an improvement in
the Company's liquidity and interest rate risk exposure position, although no
change in cash yield received. As of September 30, 2007, the Company's trading
securities totaled $66.3 million. The trading revenues related to the $66.3
million of trading securities held at September 30, 2007 were $346,000 and
$43,000 for the three and nine months ended September 30, 2007, respectively.
These mark-to-market adjustments are reflected in the Company's Consolidated
Statements of Income in "Mark-to-Market Gain (Loss) on Trading Securities."
The Company determines fair value for its trading securities using independently
quoted market prices. Interest income on trading securities is recognized when
earned and included on the Company's Consolidated Statements of Income in
"Interest and Dividend Income Trading Securities."
During the second quarter of 2007, the Company elected to apply the fair value
option for approximately $25.0 million of borrowings incurred during the
quarter. The borrowings are with the Federal Home Loan Bank of New York ("FHLB")
and include: a $10.0 million, 10-year fixed convertible advance at 5.183%,
convertible at the end of 3 years; a $10.0 million, 3-year repo convertible
advance at 5.046%, convertible at the end of 1 year; and a $5.0 million, 7-year
repo convertible advance at 4.715%, convertible at the end of 3 years. The
Company borrowed a total of $65.0 million in term advances and $15.0 million in
repurchase agreements with the FHLB during the second quarter. The $25.0 million
identified for fair value were selected because their durations were similar to
the durations of trading securities. As of September 30, 2007, the aggregate
fair value of the $25.0 million of FHLB advances was approximately $25.7
million. For the three and nine months ended September 30, 2007, the fair value
of these borrowings decreased by $644,000 and $667,000, respectively. These
changes in fair value are included on the Company's Consolidated Statements of
Income in "Mark-to-Market (Loss) Gain on Liabilities Held at Fair Value."
The Company determines fair value for its borrowings using a discounted cash
flow technique based upon expected cash flows and current spreads on FHLB
advances with the same structure and terms. The Company also receives pricing
information from third parties, including the FHLB. The pricing obtained is
considered representative of the transfer price if the liabilities were assumed
by a third party. The Company's potential credit risk did not have a material
impact on the quoted settlement prices used in measuring the fair value of the
FHLB borrowings for the three months ended September 30, 2007. Interest expense
on these borrowings is accrued and included on the Company's Consolidated
Statements of Income in "Interest Expense Federal Funds Purchased and Securities
Sold Under Agreements to Repurchase" and "Interest Expense Other Borrowings."
In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, Fair Value Measurements ("SFAS 157"). SFAS 157 defines fair value,
establishes guidelines for measuring fair value and expands disclosures
regarding fair value measurements. SFAS 157 does not require any new fair value
measurements but rather eliminates inconsistencies in guidance found in various
prior accounting pronouncements. SFAS 157 provides a single definition of fair
value, together with a framework for measuring it, and requires additional
disclosure about the use of fair value to measure assets and liabilities. SFAS
157 also emphasizes that fair value is a market-based measurement, not an
entity-specific measurement, and sets out a fair value hierarchy with the
highest priority being quoted prices in active markets. Under SFAS
8
157, fair value measurements are disclosed by level within that hierarchy. SFAS
157 is effective for fiscal years beginning after November 15, 2007. The Company
elected to adopt SFAS 157 effective January 1, 2007.
Fair Value Measurements at September 30, 2007 Using
----------------------------------------------------------------------------
Quoted Prices Significant
Carrying in Active Markets Significant Other Unobservable
Value for Identical Observable Inputs Inputs
(In thousands) 09/30/07 Assets (Level 1) (Level 2) (Level 3)
------------------------------------------------------------------------------------------------------------------------
Trading securities $ 66,340 $ 66,340 $ 0 $ 0
Available-for-sale securities 634,353 566,173 66,114 2,066
Borrowings 25,667 0 25,667 0
========================================================================================================================
The change in the book value of the $2.1 million of available-for-sale
securities valued using significant unobservable inputs (Level 3), between
January 1, 2007 and September 30, 2007 was immaterial in relation to the total
market value of available-for-sale securities.
In July 2006, FASB issued FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, an Interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48
establishes a recognition threshold and measurement for income tax positions
recognized in an enterprise's financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. FIN 48 also establishes a
two-step evaluation process for tax positions, recognition and measurement. For
recognition, a determination is made whether it is more-likely-than-not that a
tax position will be sustained upon examination, including resolution of related
appeals or litigation processes, based on the technical merits of the position.
If the tax position meets the more-likely-than-not recognition threshold, it is
measured and recognized in the financial statements as the largest amount of tax
benefit that is greater than 50% likely of being realized. If a tax position
does not meet the more-likely-than-not recognition threshold, the benefit of
that position is not recognized in the financial statements. Tax positions that
meet the more-likely-than-not recognition threshold at the effective date of FIN
48 may be recognized or, continue to be recognized, upon adoption of this
Interpretation. The cumulative effect of applying the provisions of FIN 48 shall
be reported as an adjustment to the opening balance of retained earnings for
that fiscal year. FIN 48 is effective for fiscal years beginning after December
15, 2006. The Company's adoption of FIN 48 on January 1, 2007, did not have a
material impact on the consolidated financial position, results of operations or
cash flows.
As of September 30, 2007 and January 1, 2007, the Company did not have any
significant unrecognized tax benefits. The Company's policy is to recognize
interest and penalties on unrecognized tax benefits in income tax expense in the
Consolidated Statements of Income. The amount of interest and penalties for the
three months and nine months ended September 30, 2007 was immaterial. The tax
years open to examination by Federal taxing authorities are 2003 through 2006,
and the tax years open to State taxing authorities are 2004 through 2006.
In September 2006, the Emerging Issues Task Force ("EITF") reached a final
consensus on Issue 06-04, Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements. The consensus stipulates that an agreement by an employer to share
a portion of the proceeds of a life insurance policy with an employee during the
postretirement period is a postretirement benefit arrangement required to be
accounted for under SFAS No. 106 or Accounting Principles Board Opinion ("APB")
No. 12, "Omnibus Opinion -- 1967." The consensus concludes that the purchase of
a split-dollar life insurance policy does not constitute a settlement under SFAS
No. 106 and, therefore, a liability for the postretirement obligation must be
recognized under SFAS No. 106 if the benefit is offered under an arrangement
that constitutes a plan or under APB No. 12 if it is not part of a plan. Issue
06-04 is effective for annual or interim reporting periods beginning after
December 15, 2007. The provisions of Issue 06-04 should be applied through
either a cumulative-effect adjustment to retained earnings as of the beginning
of the year of adoption or retrospective application. The Company is reviewing
the impact of adopting the provisions of Issue 06-04 on the Company's financial
position or results of operations.
In September 2006, the EITF also reached a final consensus on Issue 06-05,
Accounting for Purchases of Life Insurance -- Determining the Amount That Could
be Realized in Accordance with FASB Technical Bulletin No. 85-4. The consensus
concludes that in determining the amount that could be realized under an
insurance contract accounted for under FASB Technical Bulletin No. 85-4,
"Accounting for Purchases of Life Insurance," the policyholder should (1)
consider any additional amounts included in the contractual terms of the policy;
(2) assume the surrender value on a individual-life by individual-life policy
basis; and (3) not discount the cash surrender value component of the amount
that could be realized when contractual restrictions on the ability to surrender
a policy exist. Issue 06-05 is effective for fiscal years beginning after
9
December 15, 2006. The consensus in Issue 06-05 should be adopted through either
(1) a change in accounting principle through a cumulative-effect adjustment to
retained earning as of the beginning of the year of adoption or (2) a change in
accounting principle through retrospective application to all prior periods. At
September 30, 2007, the Company had bank owned life insurance policies with a
carrying value of $26.6 million. The Company's adoption of the provisions of
Issue 06-05 did not have a material effect on the Company's financial position
or results of operations.
4. Earnings Per Share
The Company follows the provisions of SFAS No. 128, Earnings Per Share ("EPS").
A computation of Basic EPS and Diluted EPS for the three- and nine-month periods
ending September 30, 2007, and 2006 is presented in the table below.
-----------------------------------------------------------------------------------------------------------------------
Weighted
Average Per
Three months ended September 30, 2007 Net Income Shares Share
(in thousands except share and per share data) (Numerator) (Denominator) Amount
-----------------------------------------------------------------------------------------------------------------------
Basic EPS:
Income available to holders of common stock $ 6,805 9,627,356 $ 0.71
Effect of dilutive securities:
Stock options 57,884
Shares issuable as contingent considerations 13,851
Diluted EPS:
Income available to holders of common stock plus assumed conversions $ 6,805 9,699,091 $ 0.70
=======================================================================================================================
The effect of dilutive securities calculation for the three-month period ended
September 30, 2007, excludes stock options covering 477,650 shares of common
stock because they are anti-dilutive.
-----------------------------------------------------------------------------------------------------------------------
Weighted
Average Per
Three months ended September 30, 2006 Net Income Shares Share
(In thousands except share and per share data) (Numerator) (Denominator) Amount
-----------------------------------------------------------------------------------------------------------------------
Basic EPS:
Income available to holders of common stock $ 6,803 9,816,272 $ 0.69
Effect of dilutive securities:
Stock options 128,876
Shares issuable as contingent considerations 15,192
Diluted EPS:
Income available to holders of common stock plus assumed conversions $ 6,803 9,960,340 $ 0.68
=======================================================================================================================
The effect of dilutive securities calculation for the three-month period ended
September 30, 2006, excludes stock options covering 265,747 shares of common
stock because they are anti-dilutive.
10
-----------------------------------------------------------------------------------------------------------------------
Weighted
Average Per
Nine months ended September 30, 2007 Net Income Shares Share
(In thousands except share and per share data) (Numerator) (Denominator) Amount
-----------------------------------------------------------------------------------------------------------------------
Basic EPS:
Income available to holders of common stock $ 18,946 9,742,581 $ 1.94
Effect of dilutive securities:
Stock options 75,362
Shares issuable as contingent considerations 4,617
Diluted EPS:
Income available to holders of common stock plus assumed conversions $ 18,946 9,822,560 $ 1.93
=======================================================================================================================
The effect of dilutive securities calculation for the nine-month period ended
September 30, 2007, excludes stock options of 289,294 because they are
anti-dilutive.
-----------------------------------------------------------------------------------------------------------------------
Weighted
Average Per
Nine months ended September 30, 2006 Net Income Shares Share
(In thousands except share and per share data) (Numerator) (Denominator) Amount
-----------------------------------------------------------------------------------------------------------------------
Basic EPS:
Income available to holders of common stock $ 19,979 9,870,995 $ 2.02
Effect of dilutive securities:
Stock options 126,532
Shares issuable as contingent considerations 5,064
Diluted EPS:
Income available to holders of common stock plus assumed conversions $ 19,979 10,002,591 $ 2.00
=======================================================================================================================
The effect of dilutive securities calculation for the nine-month period ended
September 30, 2006 excludes stock options of 282,982 because they are
anti-dilutive.
5. Comprehensive Income
Three months ended Nine months ended
(In thousands) 09/30/2007 09/30/2006 09/30/2007 09/30/2006
-------------------------------------------------------------------------------------------------------------------------
Net income $ 6,805 $ 6,803 $ 18,946 $ 19,979
-------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains arising during period 4,467 5,753 987 415
Memo: Pre-tax net unrealized holding gain 7,445 9,588 1,646 692
Reclassification adjustment for (gains) losses included in
net income (170) 0 (173) 0
Memo: Pre-tax net realized gain (283) 0 (289) 0
Employee benefit plans:
Amortization of previously recorded benefit plan amounts 109 0 325 0
Memo: Pre-tax amounts 180 0 543 0
---------- ---------- ---------- ----------
Other comprehensive income 4,406 5,753 1,139 415
-------------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 11,211 $ 12,556 $ 20,085 $ 20,394
=========================================================================================================================
11
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) 09/30/2007 09/30/2006 09/30/2007 09/30/2006 09/30/2007 09/30/2006
-----------------------------------------------------------------------------------------------------------------------------
Service cost $ 468 $ 395 $ 30 $ 13 $ 43 $ 17
Interest cost 512 466 76 64 121 110
Expected return on plan assets for the period (721) (689) 0 0 0 0
Amortization of transition liability 0 0 17 18 0 0
Amortization of prior service cost (27) (27) 0 0 23 24
Amortization of net loss 144 179 0 0 23 28
-----------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 376 $ 324 $ 123 $ 95 $ 210 $ 179
=============================================================================================================================
Pension Benefits Life and Health SERP Benefits
Nine months ended Nine months ended Nine months ended
(In thousands) 09/30/2007 09/30/2006 09/30/2007 09/30/2006 09/30/2007 09/30/2006
-----------------------------------------------------------------------------------------------------------------------------
Service cost $ 1,404 $ 1,185 $ 90 $ 39 $ 129 $ 54
Interest cost 1,537 1,398 229 191 363 328
Expected return on plan assets for the period (2,164) (2,067) 0 0 0 0
Amortization of transition liability 0 0 51 56 0 0
Amortization of prior service cost (80) (81) 0 0 70 70
Amortization of net loss 433 536 0 0 69 84
-----------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 1,130 $ 971 $ 370 $ 286 $ 631 $ 536
=============================================================================================================================
The Company realized approximately $325,000 net of tax, for the nine months
ended September 30, 2007, as amortization of amounts previously recognized in
accumulated other comprehensive income.
The Company previously disclosed in its audited consolidated financial
statements for the year ended December 31, 2006, 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 2007, it may voluntarily contribute to the
pension plan in 2007. There was no contribution to the pension plan through the
first nine months of 2007.
12
7. Financial Guarantees
Financial Accounting Standards Board ("FASB") Interpretation No. 45 (FIN No.
45), Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others; an Interpretation of
FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34
requires certain disclosures and potential liability recognition for the fair
value at issuance of guarantees that fall within its scope. Based upon
management's interpretation of FIN No. 45, the Company currently does not issue
any guarantees that would require liability recognition under FIN No. 45, other
than standby letters of credit. The Company extends standby letters of credit to
its customers in the normal course of business. The standby letters of credit
are generally short-term. As of September 30, 2007, the Company's maximum
potential obligation under standby letters of credit was $52.3 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 any significant losses as a result
of these transactions.
8. Segment and Related Information
The Company manages its operations through two business segments: banking and
financial services. Financial services activities consist of the results of the
Company's trust, wealth and risk management operations. All other activities,
including holding company activities, are considered banking. The Company
accounts for intercompany fees and services at an estimated fair value according
to regulatory requirements for the services provided. Intercompany items relate
primarily to the use of human resources, information systems, accounting and
marketing services provided by any of the Banks and the holding company. All
other accounting policies are the same as those described in the summary of
significant accounting policies.
Summarized financial information concerning the Company's reportable segments
and the reconciliation to the Company's consolidated results is shown in the
following table. Investment in subsidiaries is netted out of the presentations
below. The "Intercompany" column identifies the intercompany activities of
revenues, expenses and other assets between the banking and financial services
segment.
As of and for the three months ended September 30, 2007
---------------------------------------------------------------------------------------------
Financial
(in thousands) Banking Services Intercompany Consolidated
---------------------------------------------------------------------------------------------
Interest income $ 33,154 $ 89 $ (19) $ 33,224
Interest expense 14,738 2 (19) 14,721
---------------------------------------------------------------------------------------------
Net interest income 18,416 87 0 18,503
---------------------------------------------------------------------------------------------
Provision for loan losses 387 0 0 387
Noninterest income 5,215 6,543 (174) 11,584
Noninterest expense 15,404 4,469 (174) 19,699
---------------------------------------------------------------------------------------------
Income before income taxes 7,840 2,161 0 10,001
---------------------------------------------------------------------------------------------
Minority interest 33 0 0 33
Provision for income taxes 2,398 765 0 3,163
---------------------------------------------------------------------------------------------
Net Income $ 5,409 $ 1,396 $ 0 $ 6,805
=============================================================================================
---------------------------------------------------------------------------------------------
Depreciation and amortization $ 1,026 $ 57 $ 0 $ 1,083
Assets 2,293,779 26,014 (2,931) 2,316,862
Goodwill 5,377 15,994 0 21,371
Other intangibles 1,430 2,253 0 3,683
Loans, net 1,366,089 3,429 0 1,369,518
Deposits 1,727,326 955 (2,553) 1,725,728
Equity 169,166 20,642 0 189,808
=============================================================================================
13
As of and for the three months ended September 30, 2006
---------------------------------------------------------------------------------------------
(in thousands) Financial
Banking Services Intercompany Consolidated
---------------------------------------------------------------------------------------------
Interest income $ 30,640 $ 81 $ (2) $ 30,719
Interest expense 12,614 3 (2) 12,615
---------------------------------------------------------------------------------------------
Net interest income 18,026 78 0 18,104
---------------------------------------------------------------------------------------------
Provision for loan losses 482 0 0 482
Noninterest income 4,231 5,800 (70) 9,961
Noninterest expense 13,565 3,965 (70) 17,460
---------------------------------------------------------------------------------------------
Income before income taxes 8,210 1,913 0 10,123
---------------------------------------------------------------------------------------------
Minority interest 33 0 0 33
Provision for income taxes 2,574 713 0 3,287
---------------------------------------------------------------------------------------------
Net Income $ 5,603 $ 1,200 $ 0 $ 6,803
=============================================================================================
---------------------------------------------------------------------------------------------
Depreciation and amortization $ 950 $ 58 $ 0 $ 1,008
Assets 2,158,374 22,775 (1,454) 2,179,695
Goodwill 5,377 12,082 0 17,459
Other intangibles 1,757 1,484 0 3,241
Loans, net 1,268,736 3,828 0 1,272,564
Deposits 1,701,385 3,468 (1,414) 1,703,439
Equity 173,008 15,920 0 188,928
=============================================================================================
For the nine months ended September 30, 2007
---------------------------------------------------------------------------------------------
(in thousands) Financial
Banking Services Intercompany Consolidated
---------------------------------------------------------------------------------------------
Interest income $ 98,100 $ 245 $ (37) $ 98,308
Interest expense 43,782 8 (37) 43,753
---------------------------------------------------------------------------------------------
Net interest income 54,318 237 0 54,555
---------------------------------------------------------------------------------------------
Provision for loan losses 1,050 0 0 1,050
Noninterest income 14,119 19,019 (310) 32,828
Noninterest expense 45,330 13,449 (310) 58,469
---------------------------------------------------------------------------------------------
Income before income taxes 20,057 5,808 0 27,864
---------------------------------------------------------------------------------------------
Minority interest 98 0 0 98
Provision for income taxes 6,732 2,088 0 8,820
---------------------------------------------------------------------------------------------
Net Income $ 15,227 $ 3,719 $ 0 $ 18,946
=============================================================================================
---------------------------------------------------------------------------------------------
Depreciation and amortization $ 3,104 $ 175 $ 0 $ 3,279
=============================================================================================
14
For the nine months ended September 30, 2006
----------------------------------------------------------------------------------------------------------
(in thousands) Financial
Banking Services Intercompany Consolidated
----------------------------------------------------------------------------------------------------------
Interest income $ 89,252 $ 233 $ (5) $ 89,480
Interest expense 34,584 9 (5) 34,588
----------------------------------------------------------------------------------------------------------
Net interest income 54,668 224 0 54,892
----------------------------------------------------------------------------------------------------------
Provision for loan losses 1,015 0 0 1,015
Noninterest income 12,951 16,189 (162) 28,978
Noninterest expense 42,688 11,333 (162) 53,859
----------------------------------------------------------------------------------------------------------
Income before income taxes 23,916 5,080 0 28,996
----------------------------------------------------------------------------------------------------------
Minority interest 98 0 0 98
Provision for income taxes 7,236 1,683 0 8,919
----------------------------------------------------------------------------------------------------------
Net Income $ 16,582 $ 3,399 $ 0 $ 19,979
==========================================================================================================
----------------------------------------------------------------------------------------------------------
Depreciation and amortization $ 2,896 $ 162 $ 0 $ 3,058
==========================================================================================================
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
BUSINESS
Tompkins Financial Corporation ("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 Financial Corporation and its
subsidiaries.
The Company has identified two business segments, banking and financial
services. Financial services activities include the results of the Company's
trust, financial planning, wealth management and broker-dealer services, risk
management, and insurance agency operations. All other activities are considered
banking. Information about the Company's business segments is included in Note
8, "Segment and Other Related Information," in Notes to Unaudited Condensed
Consolidated Financial Statements.
Banking services consist primarily of attracting deposits from the areas served
by the community bank subsidiaries' 39 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. 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 ("TIS"), a division of Trust Company, and investment services through
AM&M. TIS, with office locations at all three of the Company's subsidiary banks,
provides a full range of money management services, including investment
management accounts, custody accounts, trusts, retirement plans and rollovers,
estate settlement, and financial planning. TIS also expanded its retail
brokerage services in 2006. AM&M provides fee-based financial planning for small
business owners, professionals and corporate executives and other individuals
with complex financial needs. AM&M also provides wealth management services and
operates a broker-dealer subsidiary, which is an outsourcing company for
financial planners and investment advisors.
The Company provides property and casualty insurance services through Tompkins
Insurance and life, long-term care and disability insurance through AM&M.
Tompkins Insurance is headquartered in Batavia, New York, and offers property
and casualty insurance to individuals and businesses primarily in Western New
York. Over the past several years, Tompkins Insurance has acquired smaller
insurance agencies generally in the market areas serviced by the Company's
banking subsidiaries. Tompkins Insurance offers services to customers of the
Company's banking subsidiaries by sharing offices with The Bank of Castile and
The Trust Company. In addition to these shared offices, Tompkins Insurance has
five stand-alone
15
offices in Western New York, and two stand-alone offices in Tompkins County.
AM&M operates a subsidiary that creates customized risk management plans using
life, disability and long-term care insurance products.
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, Internet-based financial
services 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. Banking and financial services are also highly regulated. As a
financial holding company of three community banks, the Company is subject to
examination and regulation by the Federal Reserve Board, the Federal Deposit
Insurance Corporation, the Office of the Comptroller of Currency, and the New
York State Banking Department. Additionally, the Company is subject to
examination and regulation from the New York State Insurance Department, the
Securities and Exchange Commission and the National Association of Securities
Dealers.
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. Trends in market interest rates and competitive
pressures have been challenging for the banking subsidiaries over the past
several years. Growth in loans and deposits as well as continued efforts to
expand fee-based businesses have helped to offset the pressures of the current
interest rate environment. The Company's community bank subsidiaries operate, in
the aggregate, 39 banking offices, including one limited-service office, serving
communities in many upstate New York markets. Economic climates in these markets
vary by region.
The following discussion is intended to provide an understanding of the
consolidated financial condition and results of operations of the Company for
the three and nine months ended September 30, 2007. 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, 2006, 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 and regulatory conditions; the development of an interest rate
environment that may adversely affect the Company's interest rate spread, other
income or cash flow anticipated from the Company's operations, investment and/or
lending activities; changes in laws and regulations affecting banks, 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. In addition, such
forward-looking statements could be affected by general industry and market
conditions and growth rates, general economic and political conditions,
including interest rate and currency exchange rate fluctuations, and other
factors.
16
Critical Accounting Policies
In the course of the Company's normal business activity, management must select
and apply many accounting policies and methodologies that lead to the financial
results presented in the consolidated financial statements of the Company. Some
of these policies are more critical than others. Management considers the
accounting policy relating to the allowance for loan/lease losses (reserve) to
be a critical accounting policy because of the uncertainty and subjectivity
inherent in estimating the levels of allowance needed to cover probable credit
losses within the loan portfolio and the material effect that these estimates
can have on the Company's results of operations.
The Company has developed a methodology to measure the amount of estimated loan
loss exposure inherent in the loan portfolio to ensure that an adequate 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 (SFAS) No. 114, Accounting by Creditors for Impairment of a
Loan, as well as other commercial loans and commercial mortgage loans that are
evaluated using an internal rating system. An estimated exposure amount is
assigned to these internally reviewed credits based upon a review of the
borrower's financial condition, payment history, collateral adequacy, and
business conditions. For commercial loans and commercial mortgage loans not
specifically reviewed, and for 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 allowances 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 allowance for loan/lease losses as of September
30, 2007, considers the allowance to be adequate, under adversely different
conditions or assumptions, the Company would need to increase the allowance.
Another critical accounting policy is the policy for pensions and other
post-retirement benefits. The calculation of the expenses and liabilities
related to pensions and post-retirement benefits requires estimates and
assumptions of key factors including, but not limited to, discount rate, return
on plan assets, future salary increases, employment levels, employee retention,
and life expectancies of plan participants. The Company employs an actuarial
firm in making these estimates and assumptions. Changes in these assumptions due
to market conditions, governing laws and regulations, or Company specific
circumstances may result in material changes to the Company's pension and other
post-retirement expenses and liabilities.
All accounting policies are important and the reader of the 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, 2006, to gain a greater understanding of how the
Company's financial performance is reported.
OVERVIEW
Net income for the third quarter of 2007 was $6.8 million or $0.70 per diluted
share compared to $6.8 million or $0.68 per diluted share for the third quarter
of 2006, and $6.4 million or $0.65 per diluted share for the second quarter of
2007. For the first nine months of 2007, net income was $18.9 million or $1.93
per diluted share, down from $20.0 million or $2.00 per diluted share for the
first nine months of 2006. The decrease in year-to-date September 30, 2007 net
income is mainly a result of lower net interest income and higher noninterest
expenses, partially offset by an increase in noninterest income. 2007
noninterest expenses included approximately $1.2 million (pre-tax) of
reorganization, severance and associated consulting charges recognized in the
third quarter related to profit improvement initiatives. Earnings per share
benefited from the repurchase of common shares made under the Company's
previously announced program. The Company repurchased 96,820 shares during the
third quarter of 2007 at an average price of $37.57 per shares, and 309,099
shares during the first nine months of 2007 at an average price of $38.73 per
share.
17
Return on average assets (ROA) for the quarter ended September 30, 2007, was
1.19% compared to 1.26% for the quarter ended September 30, 2006. Return on
average shareholders' equity (ROE) for the third quarter of 2007 was 14.56%,
compared to 14.73% for the same period in 2006. For the nine month period ended
September 30, 2007, ROA was 1.13%, compared to 1.26% for the same period prior
year. ROE for the nine months ended September 30, 2007 was 13.51%, compared to
14.62% for the nine months ended September 30, 2006. The decrease in ROA and ROE
reflects flat quarterly net income and lower year-to-date net income coupled
with an increase in average assets and average equity for the three and nine
months ended September 30, 2007 compared to the same periods in 2006.
Total revenues, consisting of net interest income and noninterest income, were
$30.1 million in the third quarter of 2007 and $87.4 million in the first nine
months of 2007, up 7.2% and 4.2%, respectively, over the comparable periods in
2006. Both periods benefited from growth in noninterest income, while the
quarterly comparison also benefited from higher net interest income. Net
interest income for the third quarter of 2007, was up 2.2% over the same period
prior year and up 0.07% over the second quarter of 2007. For the year-to-date
September 30, 2007 net interest income was down $337,000 or 0.6% compared to the
same period in 2006. Net interest income continues to be constrained by a
challenging interest rate environment that has existed for the past several
years. The flat to inverted yield curve has contributed to funding costs
increasing faster than asset yields. The net interest margin for the third
quarter was down from the same period prior year, and the second quarter of
2007.
Noninterest income was up 16.3% for the quarter and 13.3% for the first nine
months of 2007 over the same periods in 2006, with growth in all major fee based
products and services. The growth in noninterest income reflects the successful
expansion of retail brokerage services, insurance agency acquisitions, and
implementation of certain profit improvement initiatives. Noninterest income
also includes net trading revenues, which represent the change in fair value of
securities designated as trading securities with the adoption of SFAS 159, and
gains on the sale of mastercard stock. Partially offsetting these positive
factors are mark-to-market losses on the Company's $25.0 million of Federal Home
Loan Bank borrowings for which it elected the fair value option for in the
second quarter of 2007. For additional information on the adoption of SFAS 159,
refer to Note 3 of Notes to Unaudited Condensed Consolidated Financial
Statements.
Noninterest expenses were up 12.8% for the quarter and 8.6% for the first nine
months of 2007 over the same periods in 2006. During the third quarter of 2007,
the Company recognized $1.2 million in pre-tax reorganization and associated
consulting charges related to profit improvement initiatives. Compensation and
benefits related expenses, premises and fixed asset expenses, and professional
fees were all up over prior year, and impacted by business expansion initiatives
that included insurance agency acquisitions, expansion of retail brokerage
services, and the expansion of banking offices.
RESULTS OF OPERATIONS
Net Interest Income
The following table shows average interest-earning assets and interest-bearing
liabilities, and the corresponding yield or cost associated with each.
Taxable-equivalent net interest income increased by $318,000, or 1.7% and
decreased by $689,000, or 1.2% for the three and nine months ended September 30,
2007, respectively, compared to the same periods in 2006. The Company's
taxable-equivalent net interest income benefited from growth in average earnings
assets for the three and nine months ended September 30, 2007, over the same
periods in 2006; however, offsetting this benefit has been a narrower net
interest margin as increases in funding costs have outpaced improvements in
asset yields. The taxable-equivalent net interest margin for the third quarter
of 2007 of 3.61% was down from the 3.75% for the third quarter of 2006, and down
from 3.66% for the second quarter of 2007. For the nine months ended September
30, 2007, the taxable-equivalent net interest margin was 3.61%, down from 3.87%
for the same period in 2006. The interest rate environment has been challenging
over the past few years with short-term rates rising and long-term rate
remaining flat or declining. The resulting flat or inverted yield curve
contributed to funding costs rising at a faster rate than asset yields.
The Company has been able to offset the impact of the margin compression on
quarterly net interest income by growing average earning assets and average
noninterest-bearing deposits. The average volume of earning assets for the third
quarter of 2007 increased $111.9 million or 5.6% compared to the third quarter
of 2006. For the first nine months of 2007, the average volume of earning assets
increased $115.1 million or 5.8% over same period in 2006. The average volume of
noninterest-bearing deposits for the third quarter of 2007 increased $20.8
million or 6.1% compared to the third quarter of 2006. For the first nine months
of 2007, the average volume of noninterest-bearing deposits increased $15.1
million 4.5% over same period in 2006.
18
Taxable-equivalent interest income was up 7.7% for the third quarter and 9.3%
for the year-to-date 2007, over the comparable periods in 2006. The growth in
taxable-equivalent interest income was primarily a result of higher average loan
volumes and improved yields on the Company's securities portfolio. Average loan
balances are up 8.6% quarter-to-date and 7.1% year-to-date over the same periods
in 2006. Loan growth was seen in commercial, commercial real estate and
residential real estate loans. The decrease in average consumer loan balances is
mainly due to the sale of the Company's credit card portfolio in the fourth
quarter of 2006. For the three and nine months ended September 30, 2007, the
average yield on loans and leases decreased by 3 basis points and increased by
12 basis points, respectively, compared to the same periods in 2006. The
positive year-to-date comparison reflects the benefit of higher interest rates
as the prime interest rate increased 50 basis points in the first quarter of
2006 and 50 basis points in the second quarter of 2006. The 50 basis point
decrease in the prime rate to 7.75% in September 2007, contributed to the flat
quarter-over-quarter comparison and will place some pressure on asset yields
going forward. Average yields on securities were also up for the quarter and
year-to-date 2007 over the corresponding periods in 2006, while average balances
were flat for the quarter and up year-to-date over the same periods in 2006. The
average yield on securities was up 31 basis points in the third quarter and 29
basis points year-to-date 2007 over the same periods prior year.
Interest expense was up 16.7% for the third quarter and 26.5% for the
year-to-date 2007 over the comparable periods in 2006, reflecting both higher
rates paid on deposits and borrowings as well as higher volumes. The rise in
short-term market rates during 2006 and competitive market conditions have
contributed to higher funding costs. The average rate paid on deposits for the
three and nine months ended September 30, 2007 were 3.24% and 3.32%,
respectively, up 30 basis points and 58 basis points over the same periods in
2006. Average interest-bearing deposits increased by $31.2 million or 2.4% and
by $53.1 million or 4.0% for the three and nine months ended September 30, 2007,
respectively, compared to the same periods of 2006. The majority of the growth
in year-to-date average deposit balances from 2006 was in time deposits, which
generally have higher rates than other interest bearing deposit products.
Year-to-date 2007 average time deposit balances are up $43.3 million, or 6.8%
from 2006. Average deposit balances for the quarter reflected an increase of
$22.2 million or 3.1% in interest checking, money market, and savings balances
and an increase of $20.8 million or 6.1% in noninterest bearing checking
balances, while time deposits were down $9.5 million or 1.6% from the same
quarter last year. Average balances of securities sold under agreements to
repurchase are also up for both the quarter and year-to-date, to partially fund
loan growth. Quarter-to-date 2007 other borrowings were up $17.3 million or
15.4% from the third quarter of 2006.
19
Average Consolidated Balance Sheet and Net Interest Analysis
Quarter Ended Year to Date Period Ended Year to Date Period Ended
Sept-07 Sept-07 Sept-06
------------------------------------------------------------------------------------------------------------------------------------
Average Average Average
Balance Average Balance Average Balance Average
(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 $ 3,236 $ 29 3.56% $ 5,378 $ 183 4.55% $ 2,663 $ 73 3.67%
Securities (1)
U.S. Government Securities 524,500 6,259 4.74% 531,137 18,966 4.77% 567,366 18,825 4.44%
Trading Securities 62,745 813 5.14% 58,334 1,989 4.56% 0 0 0
State and municipal (2) 101,596 1,552 6.06% 103,600 4,710 6.08% 126,016 5,526 5.86%
Other Securities (2) 33,247 484 5.78% 36,436 1,635 6.00% 18,609 744 5.35%
------------------------------------------------------------------------------------------------
Total securities 722,088 9,108 5.01% 729,507 27,300 5.00% 711,911 25,095 4.71%
Federal Funds Sold 1,026 14 5.41% 5,508 217 5.27% 270 9 4.46%
Loans, net of unearned
income (3)
Real Estate 939,039 16,049 6.79% 916,906 46,721 6.81% 849,435 42,015 6.61%
Commercial Loans (2) 340,320 6,978 8.13% 339,519 20,889 8.23% 301,955 18,234 8.07%
Consumer Loans 83,543 1,498 7.11% 81,988 4,340 7.08% 95,230 5,680 7.97%
Direct Lease Financing 9,713 147 6.00% 9,984 482 6.45% 12,289 550 5.98%
------------------------------------------------------------------------------------------------
Total loans, net of
unearned income 1,371,615 24,672 7.14% 1,348,397 72,432 7.18% 1,258,909 66,479 7.06%
------------------------------------------------------------------------------------------------
Total interest-earning
assets 2,097,965 33,823 6.40% 2,088,790 100,132 6.41% 1,973,833 91,656 6.21%
------------------------------------------------------------------------------------------------
Other assets 161,836 159,798 151,126
------------ ----------- -----------
Total assets $ 2,259,801 $ 2,248,588 $ 2,124,959
============ =========== ===========
------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES & SHAREHOLDERS' EQUITY
Deposits
Interest-bearing deposits
Interest bearing checking,
savings, & money market 726,668 3,728 2.04% 711,288 10,416 1.96% 701,703 8,049 1.53%
Time Dep > $100,000 266,345 3,204 4.77% 319,370 11,748 4.92% 291,168 9,439 4.33%
Time Dep < $100,000 344,338 3,945 4.55% 346,153 11,870 4.58% 313,549 8,769 3.74%
Brokered Time Dep < $100,000 9,100 112 4.88% 16,773 622 4.96% 34,295 1,188 4.63%
------------------------------------------------------------------------------------------------
Total interest-bearing
deposits 1,346.451 10,989 3.24% 1,393,584 34,656 3.32% 1,340,715 27,445 2.74%
Federal funds purchased &
securities sold under agreements
to repurchase 198,700 2,066 4.13% 198,067 6,066 4.09% 151,733 4,093 3.61%
Other borrowings 129,503 1,665 5.10% 84,366 3,031 4.80% 86,789 3,050 4.70%
------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 1,674,654 14,720 3.49% 1,676,017 43,753 3.49% 1,579,237 34,588 2.93%
Noninterest bearing deposits 364,352 350,834 335,711
Accrued expenses and other
liabilities 33,939 32,701 25,832
------------ ----------- -----------
Total liabilities 2,072,945 2,059,552 1,940,780
Minority Interest 1,472 1,474 1,476
Shareholders' equity 185,384 187,559 182,703
------------ ----------- -----------
Total liabilities and
shareholders' equity $ 2,259,801 $ 2,248,588 $ 2,124,959
============ =========== ===========
Interest rate spread 2.91% 2.92% 3.28%
------------------- ------------------- -------------------
Net interest income/margin on
earning assets $ 19,103 3.61% $ 56,379 3.61% $ 57,068 3.87%
Tax Equivalent Adjustment (600) (1,824) (2,176)
-------- -------- --------
Net interest income per
consolidated financial statements $ 18,503 $ 54,555 $ 54,892
====================================================================================================================================
(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, 2006.
20
Provision for Loan/Lease Losses
The provision for loan/lease losses represents management's estimate of the
expense necessary to maintain the allowance for loan/lease losses at an adequate
level. The provision for loan and lease losses was $387,000 and $1.1 million for
the three and nine months ended September 30, 2007, compared to $482,000 and
$1.0 million for the same periods in 2006. The allowance for loan/lease losses,
as a percentage of period end loans was 1.04% at September 30, 2007, compared to
1.10% at September 30, 2006. Refer to the section captioned "Allowance for
Loan/Lease Losses and Nonperforming Assets" elsewhere in this discussion for
further details on the allowance for loan/lease losses.
Noninterest Income
Management considers noninterest income an important driver of long-term revenue
growth and a way to reduce earnings volatility that may result from changes in
general market interest rates. Noninterest income for the three months ended
September 30, 2007, was $11.6 million, an increase of 16.3% from the same period
in 2006. Year-to-date 2007, noninterest income was $32.8 million, up 13.3% over
the same period in 2006. Noninterest income represented 38.5% of third quarter
total revenues and 37.6% of year-to-date total revenues, compared to 35.5% and
34.6%, respectively, for the same periods in 2006. 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 third quarter and year-to-date over the comparable
periods in 2006. Changes in the components of noninterest income are discussed
below.
Investment services income was $3.6 million in the third quarter of 2007, up
14.1% over the same period in 2006. For the first nine months of 2007,
investment services income was $10.6 million, an increase of 16.4% over the same
period in 2006. Investment services reflects income from Tompkins Investment
Services ("TIS"), a division within Tompkins Trust Company, and AM&M. Investment
services income includes: trust services, financial planning, wealth management
services, and brokerage related services. TIS generates fee income through
managing trust and investment relationships, managing estates, providing custody
services, and managing investments in employee benefits plans. TIS also oversees
retail brokerage activities in the Company's banking offices. TIS revenues for
the three and nine months ended September 30, 2007, increased by $360,000 or
23.6% and $812,000 or 17.8%, respectively, as compared to the same periods in
2006. The increase in revenues was a result of favorable equity markets, new
account generation and some revisions to the fee schedules. With fees largely
based on the market value and the mix of assets managed, the general direction
of the stock market has a considerable impact on fee income. The market value of
assets managed by, or in custody of, TIS was $1.7 billion at September 30, 2007,
up 5.7% from $1.6 billion at September 30, 2006. These figures include $484.1
million and $495.0 million, respectively, of Company-owned securities of which
TIS is custodian. Trends for new business in trust and investment services
remain positive.
AM&M provides fee-based financial planning services, wealth management services,
and brokerage services to independent financial planners and investment
advisors. AM&M revenues increased by $88,000 or 5.3% and by $689,000 or 15.1%
for the three and nine months ended September 30, 2007, compared to the same
periods in 2006, driven by growth in wealth management business and brokerage
services. The market value of assets under management by AM&M was $532.2 million
at September 30, 2007, up 24.0% from $429.3 million at September 30, 2006.
Insurance commissions and fees for the three and nine months ended September 30,
2007, increased by $342,000 or 13.3% and $1.4 million or 19.9%, respectively, as
compared to the same periods in 2006. Revenue growth was in both commercial and
personal business lines. Tompkins Insurance acquired four insurance agencies in
2006, which contributed to the year-over-year growth in revenues.
Service charges on deposit accounts for the three and nine months ended
September 30, 2007, increased by $759,000 or 37.4% and $1.5 million or 24.8%,
respectively, as compared to the same periods in 2006. The largest component of
this category is overdraft fees, which is largely driven by customer activity.
Customer activity has been changing over the past several years, with electronic
transactions such as debit cards and Internet banking reducing the volume of
checks. The Company reviewed and revised the way that it processes these
transactions during the second quarter to process electronic transactions
substantially the same as paper transactions, which has had a favorable impact
on overdraft income.
Card services income for the three and nine months ended September 30, 2007,
increased by $138,000 or 18.5% and $443,000 or 20.7%, respectively, as compared
to the same periods in 2006. The increase is mainly due to an increase in
interchange income as a result of increased transactional volume from debit
cards in 2007 over 2006.
21
Trading revenues for the three and nine months ended September 30, 2007, were
$346,000 and $221,000, respectively. There was no trading activity in 2006.
Trading revenues relate to the change in the fair value of securities designated
as trading that were positively affected by lower interest rates during the
quarter. The Company designated approximately $62.0 million of securities as
trading in the first quarter of 2007 with the adoption of SFAS 159, effective
January 1, 2007. The Company recognized a pre-tax gain of approximately $452,000
in the first quarter of 2007, representing the change in fair value of
securities identified as trading securities between the adoption of SFAS 159 on
January 1, 2007 and March 31, 2007. In April 2007, the Company initiated a
securities portfolio restructuring transaction and sold the $62.0 million of
trading securities and subsequently reinvested the majority of the proceeds in
securities designated as trading securities.
For the three and nine months ended September 30, 2007, the Company had
mark-to-market losses of $644,000, and $667,000, respectively, reflecting the
change in fair value on the $25.0 million of FHLB borrowings that the Company
selected the fair value option for in the second quarter of 2007.
Noninterest income for the third quarter of 2007 includes $302,000 of income
relating to increases in the cash surrender value of corporate owned life
insurance (COLI). This compares to $276,000 for the same period in 2006. For the
year-to-date period COLI related income was $858,000 compared to $846,000 for
the same period in 2006. The COLI relates to life insurance policies covering
certain executive officers of the Company. The Company's average investment in
COLI was $26.6 million for the three-month period ended September 30, 2007,
compared to $25.2 million for the same period in 2006. Although income
associated with the insurance policies is not included in interest income, the
COLI produced a tax-equivalent return of 7.33% for the first nine months of
2007, compared to 7.06% for the same period in 2006. For the year-to-date
periods end September 30, 2006, the Company recognized $685,000 in proceeds from
death benefits on corporate owned life insurance.
The net gain on sale of available-for-sale securities of $283,000 for the third
quarter of 2007, was primarily on the sale of the Company's Mastercard stock
that it received as a member bank at the time of Mastercard's initial public
offering.
Other income decreased by $69,000 or 14.5% and by $250,000 or 22.2% for the
three and nine months ended September 30, 2007, respectively, from the same
period prior year. The decrease was mainly a result of lower income related to
the Company's investment in a Small Business Investment Company.
Noninterest Expenses
Total noninterest expenses increased 12.8% to $19.7 million for the three months
ended September 30, 2007, compared to $17.5 million for the same period in 2006,
and increased 8.6% to $58.5 million for the nine months ended September 30,
2007, from $53.9 million for the same period in 2006. During the third quarter
the company recognized $1.2 million in pre- tax reorganization and associated
consulting charges related to profit improvement initiatives. The increase in
2007 over 2006 was primarily in compensation and benefits related expenses,
premises and fixed asset expenses, and professional fees, which were all
impacted by business expansion initiatives that included insurance agency
acquisitions, expansion of retail brokerage services, and the expansion of
banking offices. Changes in the components of noninterest expense are discussed
below.
Personnel-related expense increased by $1.3 million or 12.6% and by $2.8 million
or 8.8% for the three and nine-month periods ended September 30, 2007.
Contributing to the increase is the previously mentioned charges related to the
reorganization and profit improvement initiatives. In the third quarter of 2007,
the Company recognized $740,000 pre-tax of severance charges related to these
initiatives. Actual full time equivalent employees (FTEs) totaled 644 at
September 30, 2007 compared to 664 at June 30, 2007, and 669 at September 30,
2006. Year-to-date September 30, 2007 average FTE of 663 were up from 652 at
September 30, 2006. The increase in average FTEs is a result of the staffing
requirements at the Company's newer offices and four insurance agency
acquisitions by Tompkins Insurance in 2006. In addition to the salaries and
wages associated with the increased number of average FTEs, annual salary
adjustments also contributed to the increase in 2007 over 2006. Employee benefit
related expenses including pension, 401-K, health insurance, and postretirement
healthcare were also up over the same periods in 2006.
Expenses related to bank premises and furniture and fixtures increased by
$309,000 or 14.5% and by $1.0 million or 15.7% for the three and nine month
periods ended September 30, 2007. Additions to the Company's branch network,
insurance agency acquisitions, as well as higher real estate taxes, insurance
and utility costs contributed to the increased expenses for premises and
furniture and fixtures year-over-year.
Professional fees increased by $533,000 or 136.0% for the third quarter and by
$1.2 million or 111.5% for the nine months ended September 30, 2007, as compared
to the same periods last year. In the first quarter of 2007, the Company engaged
a consulting group to assist management in continuing to identify and implement
profit improvement initiatives designed to
22
reduce expenses and increase revenue. Implementation of certain initiatives took
place in the second quarter and management is encouraged by the preliminary
results of this effort. Consulting fees related to profit improvement
initiatives were $447,000 in the third quarter and $827,000 year-to-date 2007.
The Company began to see benefits from these initiatives in the second and third
quarters, and expects these initiatives to have a positive impact on financial
results in the fourth quarter of 2007 and future periods.
Cardholder expenses were down $48,000 or 16.6% and $227,000 or 23.7% for the
three and nine months ended September 30, 2007, driven by the fourth quarter
2006 sale of the Company's credit card portfolio.
Other operating expenses increased by $156,000 or 5.2% and decreased by $128,000
or 1.3% for the three and nine months ended September 30, 2007, respectively.
Contributing to the decrease in other operating expenses was a decrease in
donation expenses in 2007, compared to 2006, which included a $300,000
contribution to Tompkins County Trust Company Charitable Fund in the second
quarter of 2006.
Income Tax Expense
The provision for income taxes provides for Federal and New York State income
taxes. The provision for the three months ended September 30, 2007, was $3.2
million, compared to $3.3 million for the same period in 2006. For the
year-to-date period ended September 30, 2007, the provision was $8.8 million
compared to $8.9 million for the same period in 2006. The Company's effective
tax rate for the third quarter of 2007 was 31.6%, compared to 32.4% for the same
period in 2006. For the nine months ended September 30, 2007, the effective tax
rate was 31.5% compared to 30.7% for the comparable prior year period. The
recognition of $685,000 of life insurance proceeds in the second quarter of 2006
contributed to the lower effective rate in 2006 compared with 2007.
FINANCIAL CONDITION
Total assets were $2.3 billion at September 30, 2007, up 4.8% over December 31,
2006, and up 6.3% over September 30, 2006. Asset growth over year-end 2006
included a $57.6 million increase in the total loans and leases, a $36.9 million
increase in securities, and a $8.2 million increase in cash and equivalents. The
growth in total loans and leases, which represented a 4.4% increase from
year-end 2006, was primarily in commercial and residential real estate loans;
the consumer and leasing portfolios were down from year-end 2006. Total
securities were up 5.2% compared to year-end 2006, primarily in mortgage-backed
securities issued by U.S. Government agencies. The Company's decision to early
adopt SFAS 159, The Fair Value Option for Financial Assets and Financial
Liabilities, effective January 1, 2007, resulted in transfer of securities from
the available-for-sale portfolio to the trading portfolio. As of September 30,
2007, the trading portfolio totaled $66.3 million. For the three and nine months
ended September 30, 2007, revenues related to the securities trading portfolio
were $346,000 and $221,000, respectively.
Total deposits were $1.7 billion at September 30, 2007, up about 1.0% from
year-end 2006, and up $22.3 million or 1.3% from September 30, 2006. The growth
in total deposits since September 30, 2006 was in money market and savings
balances and noninterest bearings balances, which are up are up 3.1% and 6.7%,
respectively, from September 30, 2006. Time deposit balances have decreased 8.9%
from year-end 2006 and 3.6% from quarter-end September 30, 2006, primarily due
to lower municipal time deposits and brokered time deposits. Other borrowings
increased $62.3 million from year-end 2006 to $148.2 million at September 30,
2007 as the Company used borrowings with the Federal Home Loan Bank (FHLB) to
support asset growth as an alternative to higher cost wholesale deposits. During
the second quarter of 2007, the Company elected the fair value option for $25.0
million of FHLB borrowings incurred during the quarter. As of September 30,
2007, the fair value of these borrowings was about $667,000 lower than the book
value.
Nonperforming loans were $8.4 million at September 30, 2007, up from $3.8
million at September 30, 2006. The increase is mainly due to the addition of a
single $3.7 million nonperforming commercial relationship in the first quarter
of 2007, of which approximately $3.3 million is 90% guaranteed by a government
agency. For the three months and nine months ended September 30, 2007, net
charge-offs were $334,000, and $968,000, respectively, up from $72,000 and
$572,000 in the same periods of 2006.
There has been significant attention to subprime consumer real estate lending in
the media. The Company has not engaged in the origination or purchase of
subprime loans as a line of business and residential loan charge-offs amount to
only $98,000 for the current year-to-date compared to $40,000 for the same
period in 2006.
23
Capital
Total shareholders' equity totaled $189.8 million at September 30, 2007, an
increase of $188,000 from December 31, 2006. Additional paid-in capital
decreased by $10.7 million, from $158.2 million at December 31, 2006, to $147.5
million at September 30, 2007, reflecting the effects of repurchases of the
Company's common stock, which were partially offset by the exercise of stock
options and stock-based compensation expense. The Company repurchased 309,099
shares of its common stock for $12.0 million during the nine month period ended
September 30, 2007. Retained earnings increased $8.5 million from $44.4 million
at December 31, 2006, to $52.9 million at September 30, 2007, reflecting net
income of $18.9 million less dividends paid of $9.0 million and a
cumulative-effect adjustment of $1.5 million related to the adoption of SFAS
159. Accumulated other comprehensive loss decreased by nearly $2.7 million
between December 31, 2006 and September 30, 2007, reflecting the effects of the
adoption of SFAS 159, an decrease in unrealized losses on available-for-sale
securities due to lower market rates, and amounts recognized in other
comprehensive income related to postretirement benefit plans. The early adoption
of SFAS 159 required that any cumulative unrealized losses or gains related to
securities where the fair value option was elected be included in the
cumulative-effect adjustment, net of tax.
Cash dividends paid in the first nine months of 2007 totaled approximately $9.0
million, representing 47.3% of year-to-date earnings. Cash dividends of $0.92
per share paid during the first nine months of 2007 were up 8.2% over cash
dividends of $0.85 per share paid in the first nine months of 2006.
On July 18, 2006, the Company's Board of Directors approved a stock repurchase
plan (the "2006 Plan"). The 2006 Plan authorizes the repurchase of up to 450,000
additional shares of the Company's outstanding common stock over a two-year
period. During the first nine months of 2007, the Company repurchased 309,099
shares at an average cost of $38.73. As of September 30, 2007, the Company has
repurchased 397,327 shares under the 2006 Plan at an average cost of $39.80 per
share.
The Company and its banking subsidiaries are subject to various regulatory
capital requirements administered by Federal banking agencies. Management
believes the Company and its subsidiaries meet all capital adequacy requirements
to which they are subject. The table below reflects the Company's capital
position at September 30, 2007, compared to the regulatory capital requirements
for "well capitalized" institutions.
REGULATORY CAPITAL ANALYSIS - September 30, 2007
--------------------------------------------------------------------------------
Actual Well Capitalized
Requirement
(Dollar amounts in thousands) Amount Ratio Amount Ratio
-------------------------------------------------------------------------------------
Total Capital (to risk weighted assets) $191,713 12.4% $155,085 10.0%
Tier I Capital (to risk weighted assets) $177,169 11.4% $ 93,051 6.0%
Tier I Capital (to average assets) $177,169 7.9% $112,024 5.0%
=====================================================================================
As illustrated above, the Company's capital ratios on September 30, 2007, remain
well above the minimum requirement for well capitalized institutions. As of
September 30, 2007, the capital ratios for each of the Company's subsidiary
banks also exceeded the minimum levels required to be considered well
capitalized.
Allowance for Loan/Lease Losses and Nonperforming Assets
Management reviews the adequacy of the allowance for loan/lease losses (the
"allowance") on a regular basis. Management considers the accounting policy
relating to the allowance to be a critical accounting policy, given the inherent
uncertainty in evaluating the levels of the allowance required to cover credit
losses in the 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 allowance 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 an historical review of loan and lease loss experience.
Based upon consideration of the above factors, management believes that the
allowance is adequate to provide for the risk of loss inherent in the current
loan and lease portfolio. Activity in the Company's allowance for loan/lease
losses during the first nine months of 2007 and 2006 is illustrated in the table
below.
24
ANALYSIS OF THE ALLOWANCE FOR LOAN/LEASE LOSSES (In thousands)
--------------------------------------------------------------------------------
September 30, 2007 September 30, 2006
--------------------------------------------------------------------------------------------------------------
Average Loans and Leases Outstanding Year to Date $1,348,398 $1,258,909
--------------------------------------------------------------------------------------------------------------
Beginning Balance 14,328 13,677
--------------------------------------------------------------------------------------------------------------
Provision for loan/lease losses 1,050 1,015
Loans charged off (1,356) (985)
Loan recoveries 388 413
--------------------------------------------------------------------------------------------------------------
Net charge-offs (968) (572)
--------------------------------------------------------------------------------------------------------------
Ending Balance $ 14,410 $ 14,120
==============================================================================================================
The allowance represented 1.04% of total loans and leases outstanding at
September 30, 2007, down from 1.10% at September 30, 2006. The allowance
coverage of nonperforming loans (loans past due 90 days and accruing, nonaccrual
loans, and restructured troubled debt) decreased from 3.7 times at September 30,
2006, to 1.7 times at September 30, 2007. The decrease in this ratio is mainly
due to the addition of one large commercial relationship totaling $3.7 million
in nonperforming assets at June 30, 2007. Approximately $3.3 million of this
relationship has a 90% guarantee of a U.S. government agency.
The level of nonperforming assets at September 30, 2007, and 2006, is
illustrated in the table below. Nonperforming assets of $8.7 million as of
September 30, 2007, were up $4.6 million from nonperforming assets of $4.2
million as of September 30, 2006. Nonperforming assets represented 0.38% of
total assets at September 30, 2007, compared to 0.19% at September 30, 2006.
Approximately $3.5 million of nonperforming loans at September 30, 2007, were
secured by U.S. government guarantees, while $247,000 were secured by
one-to-four family residential properties.
NONPERFORMING ASSETS (In thousands)
--------------------------------------------------------------------------------
September 30, 2007 September 30, 2006
--------------------------------------------------------------------------------------------------------------
Nonaccrual loans and leases $ 7,869 $ 3,307
Loans past due 90 days and accruing 370 519
Troubled debt restructuring not included above 150 0
--------------------------------------------------------------------------------------------------------------
Total nonperforming loans 8,389 3,826
--------------------------------------------------------------------------------------------------------------
Other real estate, net of allowances 345 354
--------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 8,734 $ 4,180
--------------------------------------------------------------------------------------------------------------
Total nonperforming loans/leases as a percent of total loans/leases 0.61% 0.30%
--------------------------------------------------------------------------------------------------------------
Total nonperforming assets as a percentage of total assets 0.38% 0.19%
==============================================================================================================
Potential problem loans/leases are loans/leases that are currently performing,
but where known information about possible credit problems of the related
borrowers causes management to have doubt as to the ability of such borrowers to
comply with the present loan payment terms and may result in disclosure of such
loans/leases as nonperforming at some time in the future. Management considers
loans/leases classified as Substandard that continue to accrue interest to be
potential problem loans/leases. At September 30, 2007, the Company's internal
loan review function had identified 31 commercial relationships totaling $11.0
million, which it has classified as Substandard, which continue to accrue
interest. As of December 31, 2006, the Company's internal loan review function
had classified 25 commercial relationships as Substandard totaling $19.7
million, which continue to accrue interest. These loans remain in a performing
status due to a variety of factors, including payment history, the value of
collateral supporting the credits, and personal or government guarantees. These
factors, when considered in aggregate, give management reason to believe that
the current risk exposure on these loans is not significant. At September 30,
2007, approximately $454,000 of these loans were backed by guarantees of U.S.
government agencies. While in a performing status as of September 30, 2007,
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 at least quarterly. The decrease in
the dollar amount of commercial relationships classified as Substandard and
still accruing between December 31, 2006 and September 30, 2007 was mainly due
to three commercial relationships totaling $7.2 million that were classified as
Substandard and accruing at December 31, 2006, and Substandard and nonaccruing
at September 30, 2007.
25
Deposits and Other Liabilities
Total deposits of $1.7 billion at September 30, 2007 were up $16.3 million or
about 1.0% from December 31, 2006 and up $22.3 million or 1.3% from September
30, 2006. The increase over September 30, 2006 was mainly in interest-checking,
savings and money market balances, which were up $22.4 million or 3.1%, and non
interest bearing checking accounts, which were up $22.9 million or 6.7%. Between
year-end 2006 and September 30, 2007, municipal time deposits of $100,000 or
more decreased by $62.2 million or 39.6%, while interest-checking, savings and
money markets increased by approximately $69.8 million or 10.3%. The decrease in
municipal deposit balances was mainly due to two large time deposits that were
deposited in the first quarter for a short time period.
The Company's primary funding source is core deposits, defined as total deposits
less time deposits of $100,000 or more, brokered time deposits, and municipal
money market deposits. Core deposits increased 6.0% from year-end 2006 to $1.4
billion at September 30, 2007 and represented 64.5% of total liabilities.
Non-core funding sources for the Company totaled $699.8 million at September 30,
2007, down from $717.4 million at December 31, 2006. Non-core funding at
September 30, 2007 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 decrease in non-core funding between December 31,
2006, and September 30, 2007 was concentrated in municipal time deposits which
were down $62.2 million to $94.8 million at September 30, 2007. This decline was
offset somewhat by the increase in other borrowings, mainly term advances with
the FHLB.
The Company's liability for repurchase agreements amounted to $196.1 million at
September 30, 2007, which is up from $191.5 million at December 31, 2006.
Included in repurchase agreements at September 30, 2007, were $127.3 million in
FHLB repurchase agreements and $68.8 million in retail repurchase agreements.
Retail repurchase agreements are arrangements with local customers of the
Company, in which the Company agrees to sell securities to the customer with an
agreement to repurchase those securities at a specified later date. Included in
the $127.3 million of repurchase agreements with the FHLB are $115.0 million
that have call dates between 2007 and 2017 and are callable if certain
conditions are met.
At September 30, 2007, other borrowings of $148.2 million were predominately
term advances with the FHLB. The increase in other borrowings from a year-end
2006 balance of $85.9 million included $91.0 million of term advances, offset by
the paydown of $28.0 million of overnight borrowings with the FHLB. Included in
the $135.0 million in term advances with the FHLB are $129.0 million of advances
that have call dates between 2007 and 2017 and are callable if certain
conditions are met, and $12.5 million of overnight borrowings.
As mentioned elsewhere in this report, the Company elected to apply the fair
value option for approximately $25.0 million of borrowings incurred during the
second quarter of 2007. The borrowings are with the FHLB of New York and
include: a $10.0 million, 10-year fixed convertible advance at 5.183%,
convertible at the end of 3-years; a $10.0 million, 3-year repo convertible
advance at 5.046%, convertible at the end of 1-year; and a $5.0 million, 7-year
repo convertible advance at 4.715%, convertible at the end of 3-years. As of
September 30, 2007, the aggregate fair value of the $25.0 million of FHLB
advances was approximately $25.7 million, reflecting a decrease in fair value of
about $667,000.
Liquidity
The objective of liquidity management is to ensure the availability of adequate
funding sources to satisfy the demand for credit, deposit withdrawals, and
business investment opportunities. The Company's large, stable core deposit base
and strong capital position are the foundation for the Company's liquidity
position. The Company uses a variety of resources to meet its liquidity needs,
which include deposits, cash and cash equivalents, short-term investments, cash
flow from lending and investing activities, repurchase agreements, and
borrowings. The Company may also use borrowings as part of a growth strategy.
Asset and liability positions are monitored primarily through Asset/Liability
Management Committees of the Company's subsidiary banks individually and on a
combined basis. These Committees review periodic reports on the liquidity and
interest rate sensitivity positions. Comparisons with industry and peer groups
are also monitored. The Company's strong reputation in the communities it
serves, along with its strong financial condition, provide access to numerous
sources of liquidity as described below. Management believes these diverse
liquidity sources provide sufficient means to meet all demands on the Company's
liquidity that are reasonably likely to occur.
Core deposits are a primary and low cost funding source obtained primarily
through the Company's branch network. Core deposits totaled $1.4 billion at
September 30, 2007, up $77.5 million or 6.0% from year-end 2006, and $65.3
million or 5.0% from September 30, 2006. Core deposits represented 79.4% of
total deposits and 64.5% of total liabilities at September 30, 2007, compared to
74.3% of total deposits and 62.9% of total liabilities at December 31, 2006.
26
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, were
32.9% at September 30, 2007, down from 35.5% at December 31, 2006. Time deposits
of $100,000 or more were down $59.2 million or 8.9% from year-end 2006 to
September 30, 2007, while FHLB advances were up $80.9 million or 60.7%. The
decrease in the time deposits of $100,000 or more was primarily a result of a
decrease in municipal deposits, which are somewhat seasonal.
Cash and cash equivalents totaled $59.1 million as of September 30, 2007, up
from $52.2 million at December 31, 2006. Short-term investments, consisting of
securities due in one year or less, increased from $49.1 million at December 31,
2006, to $76.0 million on September 30, 2007. The Company also has $66.3 million
of securities designated as trading securities. The Company pledges securities
as collateral for certain non-core funding sources. Securities carried at $584.0
million at December 31, 2006, and $541.8 million at September 30, 2007, were
pledged as collateral for public deposits or other borrowings, and pledged or
sold under agreements to repurchase. Pledged securities represented 72.1% of
total securities as of September 30, 2007, compared to 79.5% as of December 31,
2006.
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 $343.3 million at September 30, 2007 compared with $352.4 million at
December 31, 2006. Outstanding principle balances of residential mortgage loans,
consumer loans, and leases totaled approximately $588.9 million at June 30, 2007
as compared to $563.4 million at December 31, 2006. Aggregate amortization from
monthly payments on these assets provides significant additional cash flow to
the Company.
Liquidity is enhanced by ready access to national and regional wholesale funding
sources including Federal funds purchased, repurchase agreements, brokered
certificates of deposit, and FHLB advances. Through its subsidiary banks, the
Company has borrowing relationships with the FHLB and correspondent banks, which
provide secured and unsecured borrowing capacity. At September 30, 2007, the
unused borrowing capacity on established lines with the FHLB was $410.9 million.
As members of the FHLB, the Company's subsidiary banks can use certain
unencumbered mortgage-related assets to secure additional borrowings from the
FHLB. At September 30, 2007, total unencumbered residential mortgage loans of
the Company were $199.2 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.
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 parallel change in
rates. Based upon the simulation analysis performed as of September 30, 2007, a
200 basis point parallel upward shift in interest rates over a one-year time
frame would result in a one-year decline from the base case in net interest
income of approximately 1.4%, while a 200 basis point parallel decline in
interest rates over a one-year period would result in a decrease from the base
case in net interest income of 3.5%. 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 negative exposure in the 200 basis point decline scenario results from the
Company's assets repricing downward more rapidly than the rates on the Company's
interest-bearing liabilities, mainly deposits. In a downward rate environment,
the model assumes prepayment speeds accelerate, resulting in loans repricing
more rapidly than liabilities. A
27
base case simulation, assuming no change in rates and no balance sheet growth
projects improved net interest income of approximately 6.4% over the next twelve
months.
Although the simulation model is useful in identifying potential exposure to
interest rate movements, actual results may differ from those modeled as the
repricing, maturity, and prepayment characteristics of financial instruments may
change to a different degree than modeled. In addition, the model does not
reflect actions that management may employ to manage its interest rate risk
exposure. The Company's current liquidity profile, capital position, and growth
prospects offer management a level of flexibility to take actions that could
offset some of the negative effects of unfavorable movements in interest rates.
Management believes the current exposure to changes in interest rates is not
significant in relation to the earnings and capital strength of the Company.
The table below is a Condensed Static Gap Report, which illustrates the
anticipated repricing intervals of assets and liabilities as of September 30,
2007. The analysis reflects sensitivity to rising interest rates in all
repricing intervals shown.
Condensed Static Gap - September 30, 2007
Repricing Interval
Cumulative
(Dollar amounts in thousands) Total 0-3 months 3-6 months 6-12 months 12 months
---------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets $ 2,141,870 $ 505,378 $ 177,946 $ 220,846 $ 904,170
Interest-bearing liabilities 1,704,923 703,665 160,332 188,996 $ 1,052,993
---------------------------------------------------------------------------------------------------------------------------------
Net gap position (198,287) 17,614 31,850 (148,823)
---------------------------------------------------------------------------------------------------------------------------------
Net gap position as a percentage of total assets (8.56%) 0.76% 1.37% (6.42%)
=================================================================================================================================
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company's management, including its Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and operations of
the Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as
of September 30, 2007. 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 first quarter ended September 30, 2007, that
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
28
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, 2006.
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 of
Total Number of Shares Shares that May Yet
Purchased as Part of Be Purchased Under
Total Number of Average Price Paid Publicly Announced the Plans or
Shares Purchased Per Share Plans or Programs Programs
Period (a) (b) (c) (d)
----------------------------------------------------------------------------------------------------------------------
July 1, 2007 through
July 31, 2007 40,050 $ 37.23 38,451 111,042
August 1, 2007 through
August 31, 2007 6,905 32.22 6,617 104,425
September 1, 2007 through
September 30, 2007 51,752 38.59 51,752 52,673
----------------------------------------------------------------------------------------------------------------------
Total 98,707 $ 37.59 96,820 52,673
----------------------------------------------------------------------------------------------------------------------
On July 19, 2006, the Company announced that the Company's Board of Directors
approved, on July 18, 2006, a stock repurchase plan (the "2006 Plan") to replace
the expired 2004 Plan. The 2006 Plan authorizes the repurchase of up to 450,000
shares of the Company's outstanding common stock over a two-year period.
Included above are 1,599 shares purchased in July 2007 at an average cost of
$38.45 and 288 shares purchased in August 2007 at an average cost of $39.73 by
the trustee of the rabbi trust established by the Company under the Company's
Stock Retainer Plan For Eligible Directors of Tompkins Financial Corporation,
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.
Recent Sales of Unregistered Securities
The Company issued 29,944 of Tompkins common stock during the second quarter of
2007 related to the first quarter 2006 acquisition of AM&M, pursuant to an
exemption from registration under Section 4(2) of the Securities Act of 1933, as
amended.
Item 3. Defaults Upon Senior Securities
None
29
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
31.1 Certification of Principal Executive Officer and required by
Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended (filed herewith).
31.2 Certification of Principal Financial Officer and required by
Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended (filed herewith).
32.1 Certification of Principal Executive Officer and required by
Rule 13a-14(b) of the Securities Exchange Act of 1934, as
amended, 18 U.S.C. Section 1350 (filed herewith)
32.2 Certification of Principal Financial Officer and required by
Rule 13a-14(b) of the Securities Exchange Act of 1934, as
amended, 18 U.S.C. Section 1350 (filed herewith)
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Date: November 5, 2007
TOMPKINS FINANCIAL CORPORATION
By: /S/ Stephen S. Romaine
---------------------------------
Stephen S. Romaine
President and
Chief Executive Officer
(Principal Executive Officer)
By: /S/ Francis M. Fetsko
---------------------------------
Francis M. Fetsko
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
30
EXHIBIT INDEX
Exhibit Number Description Pages
-----------------------------------------------------------------------------------------------------
31.1 Certification of Principal Executive Officer and required by Rule 13a-14(a)
of the Securities Exchange Act of 1934, as amended. 32
31.2 Certification of Principal Financial Officer and required by Rule 13a-14(a)
of the Securities Exchange Act of 1934, as amended. 33
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 34
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 35
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31