# Tompkins Financial Corp: Form 10-K for the period ended Dec 31, 2010 - Company: [Tompkins Financial Corp](/companies/tmp.md) (CIK 1005817) - Form: 10-K - Filed: 2011-03-17 - Accepted by EDGAR: Mar 17, 2011, 17:52 ET - Period: 2010-12-31 - Accession: 0001019056-11-000330 - Inline XBRL: no - Main document: https://www.sec.gov/Archives/edgar/data/1005817/000101905611000330/tompkins_10k10.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1005817/000101905611000330/ ## Business As filed, 54,715 characters. *The disclosures set forth in this Item1. Business are qualified by the section captioned “Forward-Looking Statements” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Report and other cautionary statements set forth elsewhere in this Report.* ### General Tompkins Financial Corporation, (“Tompkins” or the “Company”) is headquartered in Ithaca, New York and is registered as a Financial Holding Company with the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended. The Company is a locally oriented, community-based financial services organization that offers a full array of products and services, including commercial and consumer banking, leasing, trust and investment management, financial planning and wealth management, insurance, and brokerage services. The Company’s subsidiaries include: three wholly-owned banking subsidiaries, Tompkins Trust Company (the “Trust Company”), The Bank of Castile, The Mahopac National Bank (“Mahopac National Bank”) and AM&M Financial Services, Inc., a wholly owned registered investment advisor (“AM&M”); and a wholly-owned insurance agency subsidiary, Tompkins Insurance Agencies, Inc. (“Tompkins Insurance”). AM&M and the trust division of the Trust Company provide a full array of investment services under the Tompkins Financial Advisors division, including investment management, trust and estate, financial and tax planning as well as life, disability and long-term care insurance services. 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 NYSE-Amex under the Symbol “TMP.” Tompkins was organized in 1995, under the laws of the State of New York, as a bank holding company for the Trust Company, a commercial bank that has operated in Ithaca, New York and surrounding communities since 1836. Information relating to revenues, profit and loss, and total assets for the Company’s two business segments – banking and financial services - is incorporated herein by reference to Part II, Item 8. of this Report. The Company’s strategic initiatives include diversification within its markets, growth of its fee-based businesses, and growth internally and through acquisitions of financial institutions, branches, and financial services businesses. As such, the Company from time to time considers acquiring banks, thrift institutions, branch offices of banks or thrift institutions, or other businesses within markets currently served by the Company or in other locations that would complement the Company’s business or its geographic reach. The Company generally targets merger or acquisition partners that are culturally similar and have experienced management and possess either significant market presence or have potential for improved profitability through financial management, economies of scale and expanded services. The Company has pursued acquisition opportunities in the past, and continues to review new opportunities. The Company did not make any acquisitions in 2010 and 2009. In 2008, the Company acquired Sleepy Hollow Bancorp, Inc., (“Sleepy Hollow”), a privately held bank holding company located in Sleepy Hollow, New York. The cost of the Sleepy Hollow acquisition was approximately $30.5 million, including acquisition related costs of approximately $234,000. Upon completion of the Sleepy Hollow acquisition, Sleepy Hollow Bank, the wholly-owned subsidiary of Sleepy Hollow, was merged into Mahopac National Bank, and its five full service offices and one limited service office, all in Westchester County, New York, became offices of Mahopac National Bank. Additional information on acquisitions is provided in “Note 2 Mergers and Acquisitions” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Report. Although Tompkins is a corporate entity, legally separate and distinct from its affiliates, bank holding companies such as Tompkins are generally required to act as a source of financial strength for their banking subsidiaries. Tompkins’ principal source of income is dividends from its subsidiaries. There are certain regulatory restrictions on the extent to which these subsidiaries can pay dividends or otherwise supply funds to Tompkins. See the section “Supervision and Regulation” for further details. ### Narrative Description of Business Information about the Company’s business segments are included in “Note 22 Segment and Related Information” in the Notes to Consolidated Financial Statements in Part II, Item 8. of this Report. The Company has identified two business segments, banking and financial services. Financial services activities consist of the results of the Company’s trust, financial planning and wealth management services, broker-dealer services, and insurance and risk management operations. All other activities are considered banking. Banking services consist primarily of attracting deposits from the areas served by the Company’s banking subsidiaries’ 45 banking offices and using those deposits to originate a variety of commercial loans, agricultural loans, consumer loans, real estate loans, and leases in those same areas. The Company’s lending function is managed within the guidelines of a comprehensive Board-approved lending policy. Policies and procedures are reviewed on a regular basis. Reporting systems are in place to provide management with ongoing information related to loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming and potential problem loans. The Company has an independent third party loan review process that reviews and validates the risk identification and assessment made by the lenders and credit personnel. The results of these reviews are presented to the Board of Directors of each of the Company’s banking subsidiaries, and the Company’s Audit Committee. Residential real estate mortgage loans are generally underwritten in accordance with Federal Home Loan Mortgage Corporation (“FHLMC”) guidelines, which enhance the liquidity of these lending products. The Company’s subsidiary banks have sold residential mortgage loans to FHLMC over the past several years to manage exposure to changing interest rates and to take advantage of favorable market conditions. The Company’s subsidiary banks retain the servicing of the loans sold to FHLMC and record a servicing asset at the time of sale. For additional details on loan sales, refer to the section entitled “Loans and Leases” elsewhere in this Report. The Company maintains a portfolio of securities such as obligations of U.S. government agencies and U.S. government sponsored entities, obligations of states and political subdivisions thereof, and equity securities. Management typically invests in securities with short to intermediate average lives in order to better match the interest rate sensitivities of its assets and liabilities. Investment decisions are made within policy guidelines established by the Company’s Board of Directors. The investment policy is based on the asset/liability management goals of the Company, and is monitored by the Company’s Asset/Liability Management Committee. The intent of the policy is to establish a portfolio of high quality diversified securities, which optimizes net interest income within safety and liquidity limits deemed acceptable by the Asset/Liability Management Committee. Financial services consist of providing insurance, financial planning and wealth management, and trust services to individuals and businesses in the Company’s market area. The Company has expanded its financial services segment over the past ten years. In that time period, the Company has acquired nine small insurance agencies and successfully consolidated them into one insurance agency. In 2006, the Company acquired AM&M, a financial planning and wealth management company, to complement its existing trust and investment services businesses. In 2010, the Company unified the branding of its trust and investment services business and its wealth management and financial planning business and began marketing these services under Tompkins Financial Advisors. The Company’s principal expenses are interest on deposits, interest on borrowings, and operating and general administrative expenses, as well as provisions for loan and lease losses. Funding sources, other than deposits, include borrowings, securities sold under agreements to repurchase, and cash flow from lending and investing activities. Tompkins provides a variety of financial services to individuals and small business customers. Some of the traditional banking services and financial services are detailed below. ### Commercial Services The Company’s subsidiary banks provide financial services to corporations and other business clients. Lending activities include loans for a variety of business purposes, including real estate financing, construction, equipment financing, accounts receivable financing, and commercial leasing. Other commercial services include deposit and cash management services, letters of credit, sweep accounts, credit cards, purchasing cards, Internet-based account services, and remote deposit services. ### Retail Services The Company’s subsidiary banks provide a variety of retail banking services including checking accounts, savings accounts, time deposits, IRA products, brokerage services, residential mortgage loans, personal loans, home equity loans, credit cards, debit cards and safe deposit services. Retail services are accessible through a variety of delivery systems including branch facilities, ATMs, voice response, Internet banking, and remote deposit services. ### Trust and Investment Management Services The Company offers a comprehensive suite of financial services to customers, including trust and estate services, investment management, and financial and insurance planning. These services are offered through Tompkins Investment Services (“TIS”), a division of Tompkins Trust Company, and AM&M. In 2010, the Company unified these services under the Tompkins Financial Advisors brand name. Tompkins Financial Advisors has office locations at all three of the Company’s subsidiary banks, and provides a full range of money management services, including investment management, trust and estate, financial and tax planning as well as life, disability and long-term care insurance services. ### Broker-Dealer Services AM&M operates a broker-dealer subsidiary, Ensemble Financial Services, Inc., which is an outsourcing company for financial planners and investment advisors. ### Insurance Services The Company provides property and casualty insurance services and employee benefits consulting through Tompkins Insurance. Tompkins Insurance is an independent insurance agency, representing many major insurance carriers. Tompkins Insurance has automated systems for record keeping, claim processing and coverage confirmation, and can provide insurance pricing comparisons from a wide range of insurance companies. Tompkins Insurance provides employee benefits consulting to employers in Western and Central New York, assisting them with their medical, group life insurance and group disability insurance. In addition to its seven stand-alone offices, Tompkins Insurance shares several offices with The Bank of Castile and The Trust Company. AM&M also provides insurance services for financial planning and wealth management clients, offering customized risk management plans using life, disability and long-term care insurance products. ### Subsidiaries The Company operates three banking subsidiaries, an insurance agency subsidiary, and a financial planning, wealth management, and broker-dealer subsidiary in New York. In addition, the Company also owns 100% of the common stock of Tompkins Capital Trust I and Sleepy Hollow Capital Trust I. The Company’s subsidiary banks operate 45 offices, including 3 limited-service offices, serving communities in New York. The decision to operate as three locally managed community banks reflects management’s commitment to community banking as a business strategy. For Tompkins, personal delivery of high quality services, a commitment to the communities in which we operate, and the convergence of a single-source financial service provider characterize management’s community banking approach. The combined resources of the Tompkins organization provides increased capacity for growth and the greater capital resources necessary to make investments in technology and services. Tompkins has developed several specialized financial services that are now available in markets served by all three subsidiary banks. These services include trust and investment services, insurance, leasing, card services, Internet banking, and remote deposit services. ### Tompkins Trust Company (the “Trust Company”) The Trust Company is a New York State-chartered commercial bank that has operated in Ithaca, New York and surrounding communities since 1836. The Trust Company operates 15 banking offices, including 2 limited-service banking offices in the counties of Tompkins, Cortland, Cayuga and Schuyler, New York. The Trust Company’s largest market area is Tompkins County, which has a population of approximately 102,000. Education plays a significant role in the Tompkins County economy with Cornell University and Ithaca College being two of the county’s major employers. The Trust Company has a full-service office in Cortland, New York and a full-service office in Auburn, New York. Both of these offices are located in counties contiguous to Tompkins County. ### The Bank of Castile (“The Bank of Castile”) The Bank of Castile is a New York State-chartered commercial bank and conducts its operations through its 15 banking offices, in towns situated in and around the areas commonly known as the Letchworth State Park area and the Genesee Valley region of New York State. The main business office for The Bank of Castile is located in Batavia, New York and is shared with Tompkins Insurance. The Bank of Castile serves a five-county market, much of which is rural in nature, but also includes Monroe County, where the city of Rochester is located. The population of the counties served by The Bank of Castile, other than Monroe, is approximately 204,000. The Bank of Castile’s lending portfolio includes loans to the agricultural industry. ### The Mahopac National Bank (“Mahopac National Bank”) Mahopac National Bank operates 15 banking offices, including 1 limited-service office in counties north of New York City. The 15 banking offices include 5 full-service offices in Putnam County, New York, 3 full-service offices in Dutchess County, New York, and 6 full-service offices, and 1 limited-service office in Westchester County, New York. Mahopac’s presence in Westchester County increased with the May 9, 2008 acquisition of Sleepy Hollow Bancorp, Inc. (“Sleepy Hollow”). At the time of the acquisition, Sleepy Hollow Bank, the wholly-owned subsidiary of Sleepy Hollow, operated 5 full-service offices and 1 limited-service facility, all in Westchester County, New York. Upon completion of the Sleepy Hollow acquisition, Sleepy Hollow Bank was merged into Mahopac National Bank. Putnam County has a population of approximately 99,000 and is about 60 miles north of Manhattan. Dutchess County has a population of approximately 294,000, and Westchester County has a population of approximately 956,000. All three counties have seen an increase in the unemployment rate as a result of the downturn in the State and national economies. #### Tompkins Insurance Agencies, Inc. (“Tompkins Insurance”) Tompkins Insurance is headquartered in Batavia, New York, and offers property and casualty insurance to individuals and businesses primarily in Western and Central 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 four stand-alone offices in Western New York and two stand-alone offices in Tompkins County, New York. ### AM&M Financial Services, Inc. (“AM&M”) AM&M is headquartered in Pittsford, New York and offers financial 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 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. ### Tompkins Capital Trust I Tompkins Capital Trust I is a Delaware statutory business trust formed in 2009. In 2009, Tompkins Capital Trust I issued $20.5 million of trust preferred securities and lent the proceeds to the Company to support business growth and for general corporate purposes. The Company guarantees, on a subordinated basis, payments of distributions on the trust preferred securities and payments on the redemption of the trust preferred securities. In accordance with the applicable accounting standards related to variable interest entities, the accounts of Tompkins Capital Trust I are not included in the Company’s consolidated financial statements. However, the $20.5 million of fixed rate (7%) trust preferred securities issued by Tompkins Capital Trust I are included in the Tier 1 capital of the Company for regulatory capital purposes pursuant to regulatory guidelines. ### Sleepy Hollow Capital Trust I Sleepy Hollow Capital Trust I, a Delaware statutory business trust, was formed in August 2003 and issued $4.0 million of floating rate (three-month LIBOR plus 305 basis points) trust preferred securities. The Company acquired Sleepy Hollow Capital Trust I through the acquisition of Sleepy Hollow Bancorp, Inc. in May 2008. For additional details on Tompkins Capital Trust I and Sleepy Hollow Capital Trust I refer to “Note 12 Trust Preferred Debentures” in the Notes to Consolidated Financial Statements in Part II, Item 8. of this Report. ### Competition Competition for commercial banking and other financial services is strong in the Company’s market areas. In one or more aspects of its business, the Company’s subsidiaries compete with other commercial banks, savings and loan associations, credit unions, finance companies, Internet-based financial services companies, mutual funds, insurance companies, brokerage and investment banking companies, and other financial intermediaries. Some of these competitors have substantially greater resources and lending capabilities and may offer services that the Company does not currently provide. In addition, many of the Company’s non-bank competitors are not subject to the same extensive Federal regulations that govern financial holding companies and Federally-insured banks. Competition among financial institutions is based upon interest rates offered on deposit accounts, interest rates charged on loans and other credit and service charges, the quality and scope of the services rendered, the convenience of facilities and, in the case of loans to commercial borrowers, relative lending limits. Management believes that a community based financial organization is better positioned to establish personalized financial relationships with both commercial customers and individual households. The Company’s community commitment and involvement in its primary market areas, as well as its commitment to quality and personalized financial services, are factors that contribute to the Company’s competitiveness. Management believes that each of the Company’s subsidiary banks can compete successfully in its primary market areas by making prudent lending decisions quickly and more efficiently than its competitors, without compromising asset quality or profitability, although no assurances can be given that such factors will assure success. ### Supervision and Regulation ### Regulatory Agencies As a registered financial holding company, the Company is subject to examination and comprehensive regulation by the Federal Reserve Board (“FRB”). The Company’s banking subsidiaries are subject to examination and comprehensive regulation by various regulatory authorities, including the Federal Deposit Insurance Corporation (“FDIC”), the Office of the Comptroller of the Currency (“OCC”), and the New York State Banking Department (“NYSBD”). Each of these agencies issues regulations and requires the filing of reports describing the activities and financial condition of the entities under its jurisdiction. Likewise, such agencies conduct examinations on a recurring basis to evaluate the safety and soundness of the institutions, and to test compliance with various regulatory requirements, including: consumer protection, privacy, fair lending, the Community Reinvestment Act, the Bank Secrecy Act, sales of non-deposit investments, electronic data processing, and trust department activities. The Company’s financial services subsidiaries are subject to examination and regulation by various regulatory agencies, including the New York State Insurance Department, Securities and Exchange Commission (“SEC”), and the Financial Industry Regulatory Authority (“FINRA”). The trust division of Tompkins Trust Company is subject to examination and comprehensive regulation by the FDIC and NYSBD. ### Share Repurchases and Dividends Under FRB regulations, the Company may not, without providing prior notice to the FRB, purchase or redeem its own common stock if the gross consideration for the purchase or redemption, combined with the net consideration paid for all such purchases or redemptions during the preceding twelve months, is equal to ten percent or more of the Company’s consolidated net worth. FRB regulations provide that dividends shall not be paid except out of current earnings and unless the prospective rate of earnings retention by the Company appears consistent with its capital needs, asset quality, and overall financial condition. Tompkins’ primary source of funds to pay dividends on its common stock is dividends from its subsidiary banks. The subsidiary banks are subject to regulations that restrict the dividends that they may pay to Tompkins. ### Support of Subsidiary Banks The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), codifies the Federal Reserve Board’s longstanding policy of requiring bank holding companies to act as a source of financial and managerial strength to their subsidiary banks, as a statutory requirement. Under this requirement, Tompkins is expected to commit resources to support its banking subsidiaries, including at times when it may not be advantageous for Tompkins to do so. Any capital loans by a bank holding company to any of its subsidiary banks are subordinated in right of payment to deposits and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment. ### Liability of Commonly Controlled Institutions FDIC-insured depository institutions can be held liable for any loss incurred, or reasonably expected to be incurred, by the FDIC due to the default of an FDIC-insured depository institution controlled by the same bank holding company, or for any assistance provided by the FDIC to an FDIC-insured depository institution controlled by the same bank holding company that is in danger of default. “Default” means generally the appointment of a conservator or receiver. “In danger of default” means generally the existence of certain conditions indicating that default is likely to occur in the absence of regulatory assistance. ### Transactions with Affiliates and Other Related Parties There are Federal laws and regulations that govern transactions between the Company’s non-bank subsidiaries and its banking subsidiaries. These laws establish certain quantitative limits and other prudent requirements for loans, purchases of assets, and certain other transactions between a member bank and its affiliates. In general, transactions between the banking subsidiaries and its non-bank subsidiaries must be on terms and conditions, including credit standards, that are substantially the same or at least as favorable to the banking subsidiaries as those prevailing at the time for comparable transactions involving non-affiliated companies. The Dodd-Frank Act significantly expands the coverage and scope of the limitations on affiliate transactions within a banking organization. The Company’s authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons, is governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O as promulgated by the Federal Reserve. Among other things, these provisions require that extensions of credit to insiders (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and (ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank’s capital. In addition, extensions of credit in excess of certain limits must be approved by the Bank’s board of directors. ### Mergers and Acquisitions The Bank Holding Company Act requires bank holding companies to obtain the prior approval of the Federal Reserve Board before: (1) it may acquire direct or indirect ownership or control of any voting share of any bank or savings and loan association, if after such acquisition, the bank holding company will directly or indirectly own or control 5% or more of the voting shares of the institution; (2) it or any of its subsidiaries, other than a bank, may acquire all or substantially all of the assets of and bank or savings and loan association; or (3) it may merge or consolidate with any other bank holding company. ### Capital Adequacy The FRB, the OCC and the FDIC have substantially similar risk-based capital ratio and leverage ratio guidelines for banking institutions. The guidelines are intended to ensure that banking organizations have adequate capital given the risk levels of assets and off-balance sheet financial instruments. Under the guidelines, banking organizations are required to maintain minimum ratios for Tier I capital and total capital to risk-weighted assets. For purposes of calculating the ratios, a banking organization’s assets and some of its specified off-balance sheet commitments and obligations are assigned to various risk categories. A depository institution’s or holding company’s capital, in turn, is classified in one of three tiers, depending upon type: *Core Capital (Tier 1).* Tier 1 capital includes common equity, retained earnings, qualifying non-cumulative preferred stock, a limited amount of qualifying cumulative preferred stock at the holding company level, minority interests in equity accounts of consolidated subsidiaries, qualifying trust preferred securities, less goodwill, most intangible assets and certain other assets. *Supplementary Capital (Tier 2).* Tier 2 capital includes, among other things, perpetual preferred stock and trust preferred securities not meeting the Tier 1 definition, qualifying mandatory convertible debt securities, qualifying subordinated debt, and allowances for possible loan losses, subject to limitations. *Market Risk Capital (Tier 3).* Tier 3 capital includes qualifying unsecured subordinated debt. The regulators have established minimum capital ratios for bank holding companies, including financial holding companies, and depository institutions. Tompkins, like other bank holding companies, is required to maintain Tier 1 capital and “total capital” (the sum of Tier 1, Tier 2 and Tier 3 capital) equal to at least 4.0% and 8.0%, respectively, of its total risk-weighted assets. The bank subsidiaries, like other depository institutions, are required to maintain similar capital levels under capital adequacy guidelines. For a depository institution to be “well capitalized” under the regulatory framework for prompt corrective action, its Tier 1 and total capital ratios must be at least 6.0% and 10.0% on a risk-adjusted basis, respectively. Bank holding companies and banks are also required to comply with minimum leverage ratio requirements. The leverage ratio is the ratio of a banking organization’s Tier 1 capital to its total adjusted quarterly average assets. The minimum permissible leverage ratio is 3.0% for financial holding companies and banks that either have the highest supervisory rating or have implemented the appropriate federal regulatory authority’s risk-adjusted measure for market risk. All other financial holding companies and banks are required to maintain a minimum leverage ratio of 4.0%, unless a different minimum is specified by an appropriate regulatory authority. For a depository institution to be considered “well capitalized” under the regulatory framework for prompt corrective action, its leverage ratio must be at least 5.0%. On September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee, announced agreement on the calibration and phase-in arrangements for a strengthened set of capital requirements, known as Basel III. Basel III proposes to increase the minimum Tier 1 common equity ratio to 4.5%, net of regulatory deductions, and introduces a capital conservation buffer of an additional 2.5% of common equity to risk-weighted assets, raising the target minimum common equity ratio to 7%. This capital conservation buffer also increases the minimum Tier 1 capital ratio from 6% to 8.5% and the minimum total capital ratio from 8% to 10.5%. In addition, Basel III introduces a counter-cyclical capital buffer of up to 2.5% of common equity or other fully loss absorbing capital for periods of excess credit growth. Basel III also introduces a non-risk adjusted Tier 1 leverage ratio of 3%, based on a measure of total exposure rather than total assets, and new liquidity standards. The Basel III capital and liquidity standards will be phased in over a multi-year period. The final package of Basel III reforms was submitted to the Seoul G20 Leaders Summit in November 2010 for endorsement by G20 leaders, and then will be subject to individual adoption by member nations, including the United States. The Federal Reserve will likely implement changes to the capital adequacy standards applicable to the Company and our subsidiary banks in light of Basel III. In light of the recent economic downturn, bank regulatory agencies have been requiring many banks to maintain higher minimum capital ratios. This is particularly true in the case of institutions with significant commercial real estate loan portfolios and/or increasing levels of non-performing assets, such as Mahopac National Bank, one of the Company’s three banking subsidiaries. During the first quarter of 2010, the OCC notified the Company that it was requiring Mahopac National Bank, one of the Company’s three banking subsidiaries, to maintain certain minimum capital ratios at levels higher than those otherwise required by applicable regulations. Mahopac has agreed to maintain a Tier 1 capital to average assets ratio of 8.0%, a Tier 1 risk-based capital to risk-weighted capital ratio of 10.0% and a Total risk-based capital to risk-weighted assets ratio of 12.0%. Mahopac exceeded these minimum requirements at the time of the notification and continues to maintain ratios above these minimums. Since Mahopac’s capital ratios were above the minimum requirements at the time of notification, there was not a material impact to Mahopac or the Company. As of December 31, 2010, Mahopac had a Tier 1 capital to average assets ratio of 8.7%, a Tier 1 risk-based capital to risk-weighted capital ratio of 12.6% and a Total risk-based capital to risk-weighted assets ratio of 13.9%. As of December 31, 2010, the capital ratios for the Company’s other two subsidiary banks also exceeded the minimum levels required to be considered well capitalized. For further information concerning the regulatory capital requirements, actual capital amounts and the ratios of Tompkins and its bank subsidiaries, see the discussion in “Note 20 Regulations and Supervision” in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report. ### Deposit Insurance The Bank’s deposits are insured to the maximum extent permitted by the Deposit Insurance Fund (“DIF”). Upon enactment of the Emergency Economic Stabilization Act of 2008 on October 3, 2008, federal deposit insurance coverage levels under the DIF temporarily increased from $100,000 to $250,000 per deposit category, per depositor, per institution, through December 31, 2009. On May 20, 2009, the Helping Families Save Their Homes Act extended the temporary increase through December 31, 2013. The Dodd-Frank Act permanently increases the maximum amount of deposit insurance to $250,000 per deposit category, per depositor, per institution retroactive to January 1, 2008, and noninterest-bearing transaction accounts have unlimited deposit insurance through December 31, 2013. The FDIC has implemented a risk-based assessment system under which FDIC-insured depository institutions pay annual premiums at rates based on their risk classification. A bank’s risk classification is based on its capital levels and regulatory rating. Regulatory ratings reflect the applicable bank regulatory agency’s evaluation of the depository institution’s capital, asset quality, management, earnings, liquidity and sensitivity to risk. Institutions assigned to higher risk classifications (that is, institutions that pose a greater risk of loss to the DIF) pay assessments at higher rates than institutions that pose a lower risk. A decrease in a bank’s capital ratios or the occurrence of events that have an adverse effect on a bank’s asset quality, management, earnings or liquidity could result in a substantial increase in deposit insurance premiums paid by a bank, which would adversely affect earnings. In addition, the FDIC can impose special assessments in certain instances. The range of assessments in the risk-based system is a function of the reserve ratio in the DIF. Each insured institution is assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is assigned. Risk Category I, which contains the least risky depository institutions, is expected to include more than 90% of all institutions. Unlike the other categories, Risk Category I contains further risk differentiation based on the FDIC’s analysis of financial ratios, examination component ratings and other information. Assessment rates are determined by the FDIC and, including potential adjustments to reflect an institution’s risk profile, currently range from seven to twenty-four basis points for the healthiest institutions (Risk Category I) to 77.5 basis points of assessable deposits for the riskiest (Risk Category IV). The FDIC may adjust rates uniformly from one quarter to the next, except that no single adjustment can exceed three basis points. On May 22 2009, the FDIC approved a final rule for a special assessment of 5 basis points on each insured depository institution’s assets minus Tier 1 capital; not to exceed 10 basis points of the institution’s risk-based assessment as of June 30, 2009, to restore the DIF. The Company’s subsidiary banks paid a special assessment in the aggregate amount of $1.4 million in 2009. On November 12, 2009, the FDIC adopted a final rule requiring insured depository institutions to prepay their estimated quarterly insurance premium for the fourth quarter of 2009, and all of 2010, 2011 and 2012. For purposes of calculating the assessment; beginning on September 29, 2009, the FDIC increased annual assessment rates uniformly by 3 basis points beginning in 2011. In addition, an institution’s third quarter 2009 assessment base was increased quarterly at a 5 percent annual growth rate through the end of 2012. On December 30, 2009, the Company paid $12.2 million related to the 3 year premium FDIC insurance prepayments for its subsidiary banks. As of December 31, 2010, $8.1 million of prepaid deposit insurance assessments is included in other assets in the Consolidated Statements of Financial Condition. In October 2010, the FDIC adopted a new DIF restoration plan to ensure that the fund reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Act. Under the new restoration plan, the FDIC will forego the uniform three-basis point increase in initial assessment rates scheduled to take place on January 1, 2011 and maintain the current schedule of assessment rates for all depository institutions. At least semi-annually, the FDIC will update its loss and income projections for the fund and, if needed, will increase or decrease assessment rates, following notice-and-comment rulemaking if required. In November 2010, the FDIC issued a notice of proposed rulemaking to change the deposit insurance assessment base from total domestic deposits to average total assets minus average tangible equity, as required by the Dodd-Frank Act, effective April 1, 2011. The FDIC also issued a notice of proposed rulemaking to revise the deposit insurance assessment system for large institutions. The FDIC proposed to create a two tier system—one for most large institutions that have more than $10 billion in assets, and another for “highly complex” institutions that have over $50 billion in assets and are fully owned by a parent with over $500 billion in assets. The Company’s subsidiary banks are not affected by these proposals. On February 9, 2011, the FDIC adopted a final rule which redefines the deposit insurance assessment base as required by the Dodd-Frank Act. The final rule sets the deposit insurance assessment base as average consolidated total assets minus average tangible equity. It also sets a new assessment rate schedule which reflects assessment rate adjustments including potentially reduced rates tied to unsecured debt and potentially increased rates for brokered deposits. The final rule generally becomes effective on April 1, 2011. FDIC insurance expense totaled $3.8 million, $5.0 million and $933,000 in 2010, 2009 and 2008, respectively. FDIC insurance expense includes deposit insurance assessments, assessments related to participation in the Temporary Liquidity Guaranty Program (“TLGP”) program, and Financing Corporation (“FICO”) assessments related to outstanding FICO bonds. Insurance expense in 2009 also included a special deposit insurance assessment of $1.4 million. The FICO is a mixed-ownership government corporation established by the Competitive Equality Banking Act of 1987 whose sole purpose was to function as a financing vehicle for the now defunct Federal Savings & Loan Insurance Corporation. Under the Federal Deposit Insurance Reform Act of 2005, which became law in 2006, the Company’s banking subsidiaries received a one-time assessment credit of $1.0 million to be applied against future deposit insurance assessments, subject to certain limitations. This credit was utilized to offset $370,000 of deposit insurance assessments during 2008. The Company paid FICO assessments of $261,000 in 2010, $246,000 in 2009 and $225,000 in 2008. ### Depositor Preference The Federal Deposit Insurance Act provides that, in the event of the “liquidation or other resolution” of an insured depository, the claims of depositors of the institution, including the claims of the FDIC, as subrogee of the insured depositors, and certain claims for administrative expenses of the FDIC as receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including the parent bank holding company, with respect to any extensions of credit they have made to such insured depository institutions. ### The Emergency Economic Stabilization Act of 2008 In the third quarter of 2008, the Federal Reserve, the U.S. Treasury, and the FDIC initiated measures to stabilize the financial markets and to provide liquidity for financial institutions. The Emergency Economic Stabilization Act of 2008 (“EESA”) was enacted in October of 2008 and authorizes the U.S. Treasury to provide funds to be used to restore liquidity and stability to the U.S. financial system. Under authority of EESA, the U.S. Treasury initiated a voluntary capital purchase program to encourage financial institutions to build capital to increase lending and to support the economy. Under the program, the U.S. Treasury has been purchasing senior preferred shares of financial institutions, together with warrants to purchase shares of common stock. The Company determined that it did not need additional capital and, although eligible to participate in this program, elected not to issue and sell shares of preferred stock. ### Community Reinvestment Act The Company’s subsidiary banks are subject to the Community Reinvestment Act (“CRA”) and to certain fair lending and reporting requirements that relate to home mortgage lending. The CRA requires the federal banking regulators to assess the record of a financial institution in meeting the credit needs of the local communities, including low-and moderate-income neighborhoods, consistent with the safe and sound operation of the bank. The federal agencies consider an institution’s performance under the CRA in evaluating applications for mergers and acquisitions, and new offices. The ratings assigned by the federal agencies are publicly disclosed. ### Sarbanes-Oxley Act of 2002 The Sarbanes-Oxley Act of 2002 implemented a broad range of corporate governance, accounting and reporting requirements for companies that have securities registered under the Securities Exchange Act of 1934. These requirements include: (1) requirements for audit committees, including independence and financial expertise; (2) certification of financial statements by the chief executive officer and chief financial officer of the reporting company; (3) standards for auditors and regulation of audits; (4) disclosure and reporting requirements for the reporting company and directors and executive officers; and (5) a range of civil and criminal penalties for fraud and other violations of securities laws. ### The USA Patriot Act The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA Patriot Act”) imposes obligations on financial institutions, including banks and broker-dealer subsidiaries to implement policies, procedures and controls which are reasonably designed to detect and report instances of money laundering and the financing of terrorism. ### Financial Privacy In accordance with the Gramm Leach Bliley Act, federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to non-affiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a non-affiliated third party. These provisions affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. ### Office of Foreign Assets Control Regulation The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These are known as the “OFAC” rules based on their administration by the US Treasury Department Office of Foreign Assets Control (“OFAC”). The OFAC-administered sanctions take many forms. Generally, however, they include restrictions on trade with or investment in a sanctioned country and a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest. ### Consumer Protection Laws In connection with their lending and leasing activities, the Company’s banking subsidiaries are subject to a number of federal and state laws designed to protect borrowers and promote lending. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Home Mortgage Disclosure Act, and the Real Estate Settlement Procedures Act, and similar laws at the State level. Effective July 1, 2010, a new federal banking rule under the Electronic Fund Transfer Act prohibits financial institutions from charging consumers fees for paying overdrafts on automated teller machines (“ATM”) and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those type of transactions. If a consumer does not opt in, any ATM transaction or debit that overdraws the consumer’s account will be denied. Overdrafts on the payment of checks and regular electronic bill payments are not covered by this new rule. Before opting in, the consumer must be provided a notice that explains the financial institution’s overdraft services, including the fees associated with the service, and the consumer’s choices. Financial institutions must provide consumers who do not opt in with the same account terms, conditions and features (including pricing) that they provide to consumers who do opt in. The Company did see a reduction in overdraft fees as a result of the adoption of the new rule. The Company cannot provide any assurance as to the ultimate impact of this rule on the amount of overdraft/insufficient funds charges reported in future periods. ### Dodd-Frank Wall Street Reform and Consumer Protection Act The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law on July 21, 2010. The Dodd-Frank Act contains numerous and wide-ranging reforms to the structure and operation of the U.S. financial system. Among the Dodd-Frank Act’s significant regulatory changes are (i) the imposition of more stringent capital requirements on bank holding companies by, among other things, imposing leverage ratios and prohibiting new trust preferred issuances from counting as Tier 1 capital; (ii) making permanent the temporary increase in FDIC deposit insurance coverage from $100,000 to $250,000 and providing for unlimited deposit insurance on noninterest-bearing transaction accounts, together with an increase in the minimum Deposit Insurance Fund reserve requirement and a change in the assessment base from deposits to net assets; (iii) the creation of the Bureau of Consumer Financial Protection, a new financial consumer protection agency, which is empowered to promulgate new consumer protection regulations and revise existing regulations in many areas of consumer compliance; (iv) provisions permitting states to adopt stricter consumer protection laws and permitting state attorneys general to enforce rules issued by the Bureau of Consumer Financial Protection; (v) increased regulation of derivatives and hedging transactions and restrictions on the Company’s ability to engage in certain proprietary trading and investing activities; (vi) limitations on debit card interchange fees; (vii) the imposition of new disclosure and other requirements related to corporate governance and executive compensation; (viii) the creation of the Financial Stability Oversight Council, with responsibility for identifying and monitoring systemic risks posed by financial firms, activities and practices; and (ix) the repeal of the federal prohibitions on the payment of interest on demand deposits, therby permitting depository institutions to pay interest on business transaction and other accounts. The Company is currently evaluating the potential impact of the Act on its business, financial condition and results of operations. While many of the provisions in the Dodd-Frank Act are applicable to larger institutions (greater than $10 billion in assets), management expects that some provisions of the Dodd-Frank Act may have adverse effects on the Company, such as the cost of complying with numerous new regulations and disclosure and reporting requirements mandated by the Dodd- Frank Act. Portions of the Dodd-Frank Act become effective at different times, and many of the Dodd-Frank Act’s provisions consist of general statements directing various regulators to issue more detailed rules. Consequently, the full scope of the Dodd-Frank Act’s impact on the financial system in general and the Company in particular cannot be predicted at this time. ### Incentive Compensation In June 2010, the FRB, OCC and FDIC issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. Management believes the current and past compensation practices of the Company do not encourage excessive risk taking or undermine the safety and soundness of the organization. The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies. In February 2011, the FRB, the OCC and the FDIC approved a joint proposed rulemaking to implement Section 956 of the Dodd-Frank Act, which prohibits incentive-based compensation arrangements that encourage inappropriate risk taking by covered financial institutions and that are deemed to be excessive, or that may lead to material losses. ### Other Legislative Initiatives From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory authorities. These initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to change the financial institution regulatory environment. Such legislation could change banking laws and the operating environment of Tompkins in substantial, but unpredictable ways. We cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations would have on our financial condition or results of operations. ### Employees At December 31, 2010, the Company had 766 employees, approximately 81 of whom were part-time. No employees are covered by a collective bargaining agreement and the Company believes its employee relations are excellent. ### Available Information The Company maintains a website at www.tompkinsfinancial.com. The Company makes available free of charge through its website its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, its proxy statements related to its annual shareholders’ meetings, and amendments to these reports or statements, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as amended (the “Exchange Act”), as soon as reasonably practicable after the Company electronically files such material with, or furnishes such material to, the Securities and Exchange Commission (the “SEC”). Copies of these reports are also available at no charge to any person who requests them, with such requests directed to Tompkins Financial Corporation, Investor Relations Department, The Commons, Ithaca, New York 14851, telephone no. (607) 273-3210. Materials that the Company files with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. This information may also be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. The Company is not including the information contained on the Company’s website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K, or into any other report filed with or furnished to the SEC by the Company. ## Risk factors As filed, 23,485 characters. The Company’s business, operating results, financial condition, liquidity, and cash flow may be impacted by numerous factors, including but not limited to those discussed below. These items may cause the Company’s results to vary materially from recent results. ### Risks Related to the Company’s Business **Repayment of the Company’s commercial business loans is often dependent on the cash flows of the borrower, which may be difficult to predict, and the collateral securing these loans may fluctuate in value.** The Company offers different types of commercial loans to a variety of businesses. Real estate lending is generally considered to be collateral based lending with loan amounts based on predetermined loan to collateral values and liquidation of the underlying real estate collateral being viewed as the primary source of repayment in the event of borrower default. The Company’s commercial business loans are primarily made based on the cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The borrowers’ cash flow may be difficult to predict, and collateral securing these loans may fluctuate in value. Although commercial business loans are often collateralized by equipment, inventory, accounts receivable, or other business assets, the liquidation of collateral in the event of default is often an insufficient source of repayment. Accordingly, the repayment of commercial business loans depends primarily on the cash flow and credit worthiness of the borrower and secondarily on the underlying collateral provided by the borrower. As of December 31, 2010, commercial and commercial real estate loans totaled $1.1 billion or 56.9% of total loans. As part of the Company’s commercial business lending activities, the Company’s subsidiary banks originate agricultural loans, consisting of agricultural real estate loans and agricultural operating loans. As of December 31, 2010, $114.4 million or 6.0% of the Company’s total loan portfolio consisted of agriculturally-related loans, including $48.5 million in agricultural real estate loans and $65.9 million in agricultural operating loans. Payments on agricultural loans, primarily dairy loans, are typically dependent on the profitable operation or management of the related farm property. The success of the farm may be affected by many factors outside the control of the borrower, including adverse weather conditions that prevent the planting of a crop or limit crop yields, declines in market prices for agricultural products and the impact of governmental regulations and subsidies. In 2009, low milk prices and generally weak economic conditions led to weak financial results for many farms in the Company’s primary market areas, which led to an increase in the Company’s internally criticized and classified agricultural loans. In 2010, milk prices rebounded and many of the Company’s agricultural customers reported improved operating results and financial conditions, which led to an upgrade in risk ratings for several agricultural loans. Many farms are dependent upon a limited number of key individuals whose injury or death may significantly affect the successful operation of the farm. If the cash flow from a farming operation is diminished, the borrower’s ability to repay the loan may be impaired. While agricultural operating loans are generally secured by a blanket lien on the farm’s operating assets, any repossessed collateral in respect of a defaulted loan may not provide an adequate source of repayment of the outstanding balance as a result of the greater likelihood of damage, loss or depreciation. **Declines in asset values may result in impairment charges and may adversely affect the value of the Company’s investments, financial performance, and capital.** A majority of the Company’s investment portfolio is comprised of securities which are collateralized by residential mortgages. These residential mortgage-backed securities include securities of U.S. government agencies, U.S. government-sponsored entities, and private-label collateralized mortgage obligations (“CMOs”). The Company’s securities portfolio also includes obligations of U.S. government-sponsored entities, obligations of states and political subdivisions thereof, U.S. corporate debt securities and equity securities. A more detailed discussion of the investment portfolio, including types of securities held, the carrying and fair values, and contractual maturities is provided in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Report. The fair value of investments in the Company’s portfolio has become increasingly volatile over the past two years. The fair value of investments may be affected by factors other than the underlying performance of the issuer or composition of the obligations themselves, such as rating downgrades, adverse changes in the business climate and a lack of liquidity for resale of certain investment securities. The Company periodically, but not less than quarterly, evaluates investments and other assets for impairment indicators. Under U.S. generally accepted accounting principles, declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings to the extent the impairment is related to credit losses. The amount of the impairment related to other non-credit related factors for available-for-sale securities is recognized in other comprehensive income provided that the Company does not intend to sell the underlying debt security and it is more-likely-than not that the Company would not have to sell the debt security prior to recovery of the unrealized loss, which may be to maturity. If the Company intended to sell any securities with an unrealized loss or it is more-likely-than not that the Company would be required to sell the investment securities, before recovery of their amortized cost basis, then the entire unrealized loss would be recorded in earnings. The fair value of certain investments in the Company’s securities portfolio, and the amount of any recorded charges for other-than-temporary impairment (“OTTI”) during the most recent fiscal year, are discussed in Part II, Item 8 of this Report on Form 10-K. With the national downturn in real estate markets and the high mortgage delinquency and foreclosure rates, investors are concerned about these types of securities. Given the market conditions and the significant judgments involved, there is risk that further declines in fair value may occur and additional OTTI charges may be recorded in earnings in future periods. The current market environment limits the Company’s ability to mitigate its exposure to valuation changes in its CMOs by selling them. This impairment could negatively impact the Company’s earnings and capital position. **The Company may be adversely affected by the soundness of other financial institutions.** Financial services institutions are interrelated as a result of counterparty relationships. The Company has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry. The most important counterparty for the Company, in terms of liquidity, is the Federal Home Loan Bank of New York (“FHLBNY”). The Company uses FHLBNY as its primary source of overnight funds and also has long-term advances and repurchase agreements with FHLBNY. The Company has placed sufficient collateral in the form of commercial and residential real estate loans at FHLBNY. In addition, the Company is required to hold stock in FHLBNY. The amount of borrowed funds and repurchase agreements with the FHLBNY, and the amount of FHLBNY stock held by the Company, at its most recent fiscal year end are discussed in Part II, Item 8 of this Report on Form 10-K. There are 12 branches of the FHLB, including New York. The FHLBNY is jointly and severally liable along with the other Federal Home Loan Banks for the consolidated obligations issued on behalf of the Federal Home Loan Banks through the Office of Finance. Dividends on, redemption of, or repurchase of shares of the FHLBNY’s capital stock can not occur unless the principal and interest due on all consolidated obligations have been paid in full. If another Federal Home Loan Bank were to default on its obligation to pay principal or interest on any consolidated obligations, the Federal Home Loan Finance Agency (the “Finance Agency”) may allocate the outstanding liability among one or more of the remaining Federal Home Loan Banks on a pro rata basis or on any other basis the Finance Agency may determine. As a result, the FHLBNY’s ability to pay dividends on, to redeem, or to repurchase shares of capital stock could be affected by the financial condition of one or more of the other Federal Home Loan Banks. However, no Federal Home Loan Bank has ever defaulted on its debt since the FHLB System was established in 1932. Systemic weakness in the FHLB could result in higher costs of FHLB borrowings, reduced value of FHLB stock, and increased demand for alternative sources of liquidity that are more expensive, such as brokered time deposits, the discount window at the Federal Reserve, or lines of credit with correspondent banks. **The Company relies on cash dividends from its subsidiaries to fund its operations, and payment of those dividends could be discontinued at any time.** The Company is a financial holding company whose principal assets and sources of income are its wholly-owned subsidiaries. The Company is a separate and distinct legal entity from its subsidiaries, and therefore the Company relies primarily on dividends from these banking and other subsidiaries to meet its obligations and to provide funds for the payment of dividends to the Company’s shareholders, to the extent declared by the Company’s board of directors. Various federal and state laws and regulations limit the amount of dividends that a bank may pay to its parent company and impose regulatory capital and liquidity requirements on the Company and its banking subsidiaries. In addition, as discussed in greater detail in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Report, during the first quarter of 2010 the OCC notified the Company that it was requiring Mahopac National Bank to maintain certain minimum capital ratios at levels higher than those otherwise required by applicable regulations, which could limit that subsidiary’s ability to pay dividends to the Company. Further, as a holding company, the Company’s right to participate in a distribution of assets upon the liquidation or reorganization of a subsidiary is subject to the prior claims of the subsidiary’s creditors (including, in the case of the Company’s banking subsidiaries, the banks’ depositors). The inability to receive dividends from its subsidiaries materially and adversely affects the Company’s liquidity and its ability to service its debt, pay its other obligations, or pay cash dividends on its common or preferred stock, which could have a material adverse effect on the Company’s business, financial condition and results of operations. **The Company’s business may be adversely affected by conditions in the financial markets and local and national economies.** General economic conditions impact the banking and financial services industry. The Company’s financial performance generally, and in particular the ability of borrowers to pay interest on and repay the principal of outstanding loans and the value of collateral securing these loans, is highly dependent upon the business environment in the markets where the Company operates. Although the Company serves numerous market areas within New York State, the Company is still dependent on the economic conditions of New York. Unfavorable or uncertain economic and market conditions could lead to credit quality concerns related to repayment ability and collateral protection as well as reduced demand for the services offered by the Company’s two business segments. Economic conditions have been weak over the last three years as evidenced by a weak housing market with falling home prices and rising foreclosures, higher unemployment, difficulties in financial and credit markets, slowdown in consumer spending, a decrease in consumer confidence, and generally reduced business activity across a wide range of industries and regions in the U.S. While economic conditions have started to show signs of improvement, there can be no assurance that this improvement will continue. A downturn in the economy or financial markets could adversely affect the credit quality of the Company’s loan portfolio, results of operations and financial condition. ### The Company is subject to interest rate risk. The Company’s earnings, financial condition and liquidity are susceptible to fluctuations in market interest rates. This exposure is a result of assets and liabilities repricing at different times and by different amounts as interest rates change. Net interest income, which is the difference between interest earned on loans and investments and interest paid on deposits and borrowings, is the largest component of the Company’s total revenues. The level of net interest income is dependent upon the volume and mix of interest-earning assets and interest-bearing liabilities, the level of nonperforming assets, and the level and trend of interest rates. Changes in market interest rates will also affect the level of prepayments on the Company’s loans and payments on mortgage-backed securities, resulting in the receipt of proceeds that may be reinvested at a lower rate than the loan or mortgage-backed security being prepaid. Interest rates are highly sensitive to many factors, including: inflation, economic growth, employment levels, monetary policy and international markets. Significant fluctuations in interest rates could have a material adverse affect on the Company’s earnings, financial condition, and liquidity. The Company manages interest rate risk using an income simulation to measure interest rate risk inherent in its on-balance sheet and off-balance sheet financial instruments at a given point in time by showing the potential effect of interest rate shifts on net interest income for future periods. Each quarter the Company’s Asset/Liability Management Committee reviews the simulation results to determine whether the exposure of net interest income to changes in interest rates remains within Board-approved levels. The Committee also discusses strategies to manage this exposure and incorporates these strategies into the investment and funding decisions of the Company. In addition, the Company has focused on expanding its fee-based business to help mitigate its exposure to fluctuations in interest rates. For additional information about how the Company manages its interest rate risk, refer to Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” of this Report. ### The Company is subject to liquidity risk. Liquidity risk refers to the Company’s ability to ensure sufficient cash flow and liquid assets are available to satisfy current and future financial obligations, including demand for loans and deposits withdrawals, funding operating costs, and for other corporate purposes. In addition to cash flow and short-term investments, the Company obtains funding through deposits and various short-term and long-term wholesale borrowings, including Federal funds purchased and securities sold under agreements to repurchase, brokered certificates of deposit, and borrowings from the Federal Home Loan Bank of New York (“FHLBNY”) and others. The Company also maintains available lines of credit with the FHLBNY that are secured by loans. Management closely monitors its liquidity position for compliance with internal policies and is comfortable that available sources of liquidity are adequate to meet funding needs in the normal course of business. **The Company operates in a highly regulated environment and may be adversely impacted by changes in laws and regulations.** The Company is subject to extensive state and federal laws and regulations, supervision, and legislation that affect how it conducts its business. The majority of these laws and regulations are for the protection of consumers, depositors and the deposit insurance funds. The regulations influence such things as the Company’s lending practices, capital structure, investment practices, and dividend policy. The Dodd-Frank Act, enacted in July 2010, represents a comprehensive overhaul of the financial services industry in the United States and requires federal agencies to implement many new rules. Any changes to state and federal banking laws and regulations may negatively impact the Company’s ability to expand services and to increase shareholder value. There can also be significant costs related to compliance with various laws and regulations. The Company has established an extensive internal control structure to ensure compliance with governing laws and regulations, including those related to financial reporting. Refer to “Supervision and Regulation” for additional information on laws and regulations. The Company is subject to state and federal tax laws and regulations. Changes to these regulations could impact future tax expense and the value of deferred tax assets. Each of the Company’s banking subsidiaries is a majority owner of a real estate investment trust (“REIT”). Legislation is periodically proposed at the State level that would change the treatment of dividends paid by the REITs. Changes to the laws governing the taxation of REITs would likely result in additional income tax expense. ### The Company operates in a highly competitive industry and market areas. Competition for commercial banking and other financial services is strong in the Company’s market areas. In one or more aspects of its business, the Company’s subsidiaries compete with other commercial banks, savings and loan associations, credit unions, finance companies, Internet-based financial services companies, mutual funds, insurance companies, brokerage and investment banking companies, and other financial intermediaries. Some of these competitors have substantially greater resources and lending capabilities and may offer services that the Company does not currently provide. In addition, many of the Company’s non-bank competitors are not subject to the same extensive Federal regulations that govern financial holding companies and Federally insured banks. The Company focuses on providing unparalleled customer service, which includes offering a strong suite of products and services. Based upon our ability to grow our customer base in recent years, management feels that this business model does allow the Company to compete effectively in the markets it serves. **The Company’s information systems may experience an interruption or breach in security.** The Company is subject to certain operational risks, including, but not limited to, data processing system failures and errors, customer or employee fraud and catastrophic failures resulting from terrorist acts or natural disasters. The Company depends upon data processing, software, communication, and information exchange on a variety of computing platforms and networks and over the Internet. Despite instituted safeguards, the Company cannot be certain that all of its systems are entirely free from vulnerability to attack or other technological difficulties or failures. If information security is breached or other technology difficulties or failures occur, information may be lost or misappropriated, services and operations may be interrupted and the Company could be exposed to claims from customers. Any of these results could have a material adverse effect on the Company’s business, financial condition, results of operations or liquidity. The Company maintains a system of internal controls to mitigate against such occurrences and maintains insurance coverage for exposures that are insurable. The Company regularly tests internal controls to ensure that they are appropriate and functioning as designed. ### Risks Associated with the Company’s Common Stock ### The Company’s stock price maybe volatile. The Company’s stock price can fluctuate widely in response to a variety of factors, including: actual or anticipated variations in our operating results; recommendations by securities analysts; significant acquisitions or business combinations; operating and stock price performance of other companies that investors deem comparable to Tompkins; new technology used, or services offered by our competitors; news reports relating to trends, concerns and other issues in the financial services industry; and changes in government regulations. Other factors, including general market fluctuations, industry-wide factors and economic and general political conditions and events, including terrorist attacks, economic slowdowns or recessions, interest rate changes, credit loss trends or currency fluctuations, may adversely affect the Company’s stock price even though they do not directly pertain to the Company’s operating results, **The trading volume in our common stock is less than that of other larger financial services companies, which may adversely affect the price of our common stock.** The Company’s common stock is traded on the New York Stock Exchange (NYSE). The trading volume in the Company’s common stock is less than that of other larger financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. Given the lower trading volume of the Company’s common stock, significant sales of our common stock, or the expectation of these sales, could cause our stock price to fall. ### An investment in our common stock is not an insured deposit. The Company’s common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in the Company’s common stock is inherently risky for the reasons described in this “Risk Factors” section and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire the Company’s common stock, you may lose some or all of your investment. ### Dividend Payouts Holders of Tompkins’ common stock are only entitled to receive such dividends as its board of directors may declare out of funds legally available for such payments. Tompkins has historically declared cash dividends on its common stock. Tompkins is not required to pay dividends on its common stock and could reduce or eliminate its common stock dividend in the future. This could adversely affect the market price of Tompkins’ common stock. Also, Tompkins is a bank holding company, and its ability to declare and pay dividends is dependent on certain federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital adequacy and dividends. ## Properties As filed, 751 characters. The Company’s executive offices are located at 110 North Tioga Street, Ithaca, New York. The Company’s banking subsidiaries have 45 branch offices, of which 28 are owned and 17 are leased at market rates. The Company’s insurance subsidiary has 5 stand-alone offices, of which 3 are owned by the Company and 2 are leased at market rents. The Company’s wealth management and financial planning subsidiary has 1 office, which it leases at a market rent. Management believes the current facilities are suitable for their present and intended purposes. For additional information about the Company’s facilities, including rental expenses, see “Note 8 Premises and Equipment” in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report. ## Legal proceedings As filed, 5,768 characters. The Company is involved in legal proceedings in the normal course of business, none of which are expected to have a material adverse impact on the financial condition or results of operations of the Company. ### Executive Officers of the Registrant The information concerning the Company’s executive officers is provided below as of March 1, 2011. | Name | Age | Title | Year Joined Company | | --- | ---: | --- | --- | | Stephen S. Romaine | 46 | President and CEO | January 2000 | | James W. Fulmer | 59 | Vice Chairman of the Board | January 2000 | | Robert B. Bantle | 59 | Executive Vice President | March 2001 | | David S. Boyce | 44 | Executive Vice President | January 2001 | | Francis M. Fetsko | 46 | Executive Vice President and CFO | October 1996 | | Gregory J. Hartz | 50 | Executive Vice President | August 2002 | | Gerald J. Klein, Jr. | 52 | Executive Vice President | January 2000 | | Thomas J. Rogers | 40 | Executive Vice President | January 2006 | | Kathleen M. Rooney | 58 | Executive Vice President | April 2004 | | Richard W. Page, Jr. | 49 | Senior Vice President and Chief Technology Officer | August 2008 | ### Business Experience of the Executive Officers: *Stephen S. Romaine* was appointed President and Chief Executive Officer of the Company effective January 1, 2007. From 2003 through 2006, he served as President and Chief Executive Officer of Mahopac National Bank. Prior to this appointment, Mr. Romaine was Executive Vice President and Chief Financial Officer of Mahopac National Bank. Mr. Romaine currently serves on the board of the New York Bankers Association. *James W. Fulmer* has served as Vice Chairman since January 1, 2007, and Director of the Company since 2000. From 2000 through 2006 he served as President of the Company. He has also served as a Director of The Bank of Castile since 1988 and as its Chairman since 1992. Effective December 18, 2002, he assumed the additional responsibilities of President and Chief Executive Officer of The Bank of Castile. Mr. Fulmer has served as a Director of Mahopac National Bank since 1999, as Chairman of Tompkins Insurance Agencies since January 1, 2001, and as Chairman of AM&M Financial Services, Inc. since January 2006. He served as the President and Chief Executive Officer of Letchworth Independent Bancshares Corporation from 1991 until its merger with the Company in 1999. Mr. Fulmer also served as the Chief Executive Officer of The Bank of Castile from 1996 through April 2000. He was elected to the Board of the Federal Home Loan Bank in 2006, effective January 2007. *Robert B. Bantle* has been employed by the Company since March 2001. He currently serves as Executive Vice President of Tompkins Services, a group that provides support to the Company in the areas of Human Resources, Training & Development, Consumer and Residential Lending Services, Collections, and Commercial Loan Operations. Prior to this assignment, he was also responsible for several additional areas including Operations, Information Technology, Remote Banking, and Card Services. *David S. Boyce* has been employed by the Company since January 2001 and was promoted to Executive Vice President in April 2004. He was appointed President and Chief Executive Officer of Tompkins Insurance Agencies in 2002. He has been employed by Tompkins Insurance Agencies, and a predecessor company to Tompkins Insurance Agencies for 16 years. *Francis M. Fetsko* has been employed by the Company since 1996, and has served as Chief Financial Officer since December 2000. In July 2003, he was promoted to Executive Vice President. Mr. Fetsko also serves as Chief Financial Officer of Tompkins Trust Company, The Bank of Castile, and Mahopac National Bank. *Gregory J. Hartz* has been employed by the Company since 2002 and was appointed President and Chief Executive Officer of Tompkins Trust Company and Executive Vice President of the Company effective January 1, 2007. Previously, he was Senior Vice President of Tompkins Trust Company, with responsibility for Tompkins Investment Services. *Gerald J. Klein, Jr.* has been employed by the Company since 2000 and was appointed President and Chief Executive Officer of Mahopac National Bank and Executive Vice President of the Company effective January 1, 2007. Previously, he was Executive Vice President of Mahopac National Bank, responsible for all lending and credit functions at the Bank. *Richard W. Page, Jr.* has been employed with Tompkins since 2007 as its Senior Vice President and Chief Technology Officer. He was made a Senior Vice President of the Company, effective August 4, 2008. He formerly served as Business Transformation Executive with IBM. *Thomas J. Rogers* has been employed by the Company since its acquisition of AM&M Financial Services, Inc. in January 2006, and was appointed President and Chief Executive Officer of AM&M Financial Services, Inc. at that time. He was appointed Executive Vice President of the Company on January 24, 2007. He has been employed by AM&M Financial Services, Inc. since 1998. *Kathleen M. Rooney* has been employed by the Company since April 2004 and served as Senior Vice President and Corporate Marketing Officer since April 2005. She was appointed Executive Vice President, Corporate Marketing Officer of the Company on April 24, 2007. Ms. Rooney is also a Senior Vice President of Mahopac National Bank with responsibility for the Bank’s Community Banking Division. Prior to joining the Company, Ms. Rooney was employed by JPMorgan Chase for over 28 years in various capacities, most recently as the Senior Vice President and Investments Executive responsible for sales, service, operation and compliance of brokerage, portfolio management and trust products for the retail bank. ## Management's discussion and analysis As filed, 133,944 characters. The following analysis is intended to provide the reader with a further understanding of the consolidated financial condition and results of operations of the Company and its operating subsidiaries for the periods shown. This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with other sections of this Report on Form 10-K, including Part I, “Item 1. Business”, Part II, “Item 6. Selected Financial Data”, and Part II, “Item 8. Financial Statements and Supplementary Data”. ### OVERVIEW 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. 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”), which together operate 45 banking offices, including 3 limited-service offices, in local market areas throughout New York State. The Company expanded its banking offices in 2008 with the acquisition of Sleepy Hollow Bancorp, Inc., effective May 9, 2008, which added 6 banking offices, including 1 limited service office, all in Westchester County, New York. In addition to traditional banking products and services, AM&M and the trust division of the Trust Company provides a full array of investment services under the Tompkins Financial Advisors brand, including investment management, trust and estate, financial and tax planning as well as life, disability and long-term care insurance services. Tompkins Insurance is headquartered in Batavia, New York, and offers property and casualty insurance to individuals and businesses primarily in Western and Central 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 four stand-alone offices in Western New York and two stand-alone offices in Tompkins County, New York. ### Forward-Looking Statements The Company is making this statement in order to satisfy the “Safe Harbor” provision contained in the Private Securities Litigation Reform Act of 1995. The statements contained in this Report on Form 10-K that are not statements of historical fact may include forward-looking statements that involve a number of risks and uncertainties. Such forward-looking statements are made based on management’s expectations and beliefs concerning future events impacting the Company and are subject to certain uncertainties and factors relating to the Company’s operations and economic environment, all of which are difficult to predict and many of which are beyond the control of the Company, that could cause actual results of the Company to differ materially from those matters expressed and/or implied by forward-looking statements. The following factors, in addition to those listed as Risk Factors in Item 1.A are among those that could cause actual results to differ materially from the forward-looking statements: changes in general economic, market and regulatory conditions; the development of an interest rate environment that may adversely affect the Company’s interest rate spread, other income or cash flow anticipated from the Company’s operations, investment and/or lending activities; changes in laws and regulations affecting banks, bank holding companies and/or financial holding companies, such as the Dodd-Frank Act and Basel III; technological developments and changes; the ability to continue to introduce competitive new products and services on a timely, cost-effective basis; governmental and public policy changes, including environmental regulation; protection and validity of intellectual property rights; reliance on large customers; and financial resources in the amounts, at the times and on the terms required to support the Company’s future businesses. In addition, such forward-looking statements could be affected by general industry and market conditions and growth rates, general economic and political conditions, including interest rate and currency exchange rate fluctuations, and other factors. ### Critical Accounting Policies In the course of normal business activity, management must select and apply many accounting policies and methodologies and make estimates and assumptions that lead to the financial results presented in the consolidated financial statements and accompanying notes of the Company. There are uncertainties inherent in making these estimates and assumptions, which could materially affect our results of operations and financial position. Management considers the accounting policy relating to the allowance for loan and lease losses (“allowance”) to be a critical accounting policy because of the uncertainty and subjectivity inherent in estimating the levels of allowance needed to cover probable credit losses within the loan portfolio and the material effect that these estimates can have on the Company’s results of operations. The Company has developed a methodology to measure the amount of estimated loan loss exposure inherent in the loan portfolio to assure that an adequate allowance is maintained. The Company’s methodology is based upon guidance provided in SEC Staff Accounting Bulletin No. 102, *Selected Loan Loss Allowance Methodology and Documentation Issues* and includes allowance allocations calculated in accordance with Accounting Standards Codification (“ASC”) Topic 310, *Receivables*, and allowance allocations calculated in accordance with ASC Topic 450 *Contingencies.* The Company’s methodology for determining and allocating the allowance for loan and lease losses focuses on ongoing reviews of larger individual loans and leases, historical net charge-offs, delinquencies in the loan and lease portfolio, the level of impaired and nonperforming assets, values of underlying loan and lease collateral, the overall risk characteristics of the portfolios, changes in character or size of the portfolios, geographic location, current economic conditions, changes in capabilities and experience of lending management and staff, and other relevant factors. The various factors used in the methodologies are reviewed on a periodic basis. Since the methodology is based upon historical experience, market trends, and 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, changes in interest rates, concentration of risk, declines in local property values, and the view of regulatory authorities towards loan classifications. While management believes that the allowance is appropriate to absorb probable losses on the loan and lease portfolio as of December 31, 2010, under adversely different conditions or assumptions, the Company would need to increase the allowance. Refer to the section captioned “Allowance for Loan and Lease Losses” elsewhere in this discussion for further details on the Company’s methodology and allowance. Another critical accounting policy is the policy for pensions and other post-retirement benefits. The calculation of the expenses and liabilities related to pensions and post-retirement benefits requires estimates and assumptions of key factors including, but not limited to, discount rate, return on plan assets, future salary increases, employment levels, employee retention, and life expectancies of plan participants. The Company uses an actuarial firm in making these estimates and assumptions. Changes in these assumptions due to market conditions, governing laws and regulations, or Company specific circumstances may result in material changes to the Company’s pension and other post-retirement expenses and liabilities. Another critical accounting policy is the policy for reviewing available-for-sale securities and held-to-maturity securities to determine if declines in fair value below amortized cost are other-than-temporary as required by FASB ASC Topic 320, *Investments – Debt and Equity Securities.* When an other-than-temporary impairment has occurred, the amount of the other-than-temporary impairment recognized in earnings depends on whether the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. If the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment is recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment is separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. In estimating other-than-temporary impairment losses, management considers, among other factors, the length of time and extent to which the fair value has been less than cost, the financial condition and near term prospects of the issuer, underlying collateral of the security, and the structure of the security. All accounting policies are important and the reader of the financial statements should review these policies, described in “Note 1 Summary of Significant Accounting Policies” in Notes to Consolidated Financial Statements in Part II, Item 8. of this Form 10-K, to gain a better understanding of how the Company’s financial performance is reported. ### RESULTS OF OPERATIONS ### (Comparison of December 31, 2010 and 2009 results) ### General The Company reported diluted earnings per share of $3.11 in 2010, an increase of 5.1% over diluted earnings per share of $2.96 in 2009. Net income for the year ended December 31, 2010, was $33.8 million, up 6.3% compared to $31.8 million in 2009. The increase in earnings performance in 2010 was mainly attributable to growth in net interest income. Net interest income benefited from growth in average earnings assets and lower funding costs in 2010 compared to 2009. The growth in net income over the prior period was impacted by a special event in the second quarter of 2009. The second quarter of 2009 included a $1.4 million (pre-tax) expense related to the FDIC’s special deposit insurance assessment, a negative impact of $0.07 per share of diluted earnings. In addition to earnings per share, key performance measurements for the Company include return on average shareholders’ equity (ROE) and return on average assets (ROA). ROE was 12.72% in 2010, compared to 13.66% in 2009, while ROA was 1.06% in 2010 and 2009, respectively. Tompkins’ ROA and ROE continue to compare favorably to peer ratios, ranking in the 83rd percentile for ROA and the 91st percentile for ROE of its peer group. The peer group is from the Federal Reserve Board and represents banks and bank holding companies with assets between $3.0 billion and $10.0 billion. The peer ratios are as of December 31, 2010, the most recent data available from the Federal Reserve Board. Total revenues, consisting of net interest income and noninterest income, were $157.9 million in 2010, up $4.7 million or 3.1% over 2009. Total revenues in 2010 benefited from growth in net interest income, resulting from lower funding costs and growth in average earning assets. Noninterest income was fairly flat year-over-year as increases in investment services income, insurance commissions and fees and card services income were more than offset by lower service charges on deposit accounts. ### Segment Reporting The Company has identified two business segments, banking and financial services. Financial services activities consist of the results of the Company’s trust, financial planning and wealth management, broker-dealer services, and risk management operations. All other activities are considered banking. The Banking segment reported net income of $30.5 million in 2010, up $2.0 million or 7.2% from net income of $28.4 million in 2009, driven by growth in net interest income. Net interest income of $111.5 million was up $4.7 million, or 4.4% in 2010 from $106.8 million in 2009. Net interest income benefited from growth in average earning assets and lower rates paid on interest-bearing liabilities. The year-over-year comparison of operating results is impacted by the FDIC special deposit insurance assessment of $1.4 million (pre-tax) in the second quarter of 2009. The provision for loan and lease losses in 2010 was $8.5 million, compared to $9.3 million in 2009. Noninterest income of $20.2 million in 2010 was down 5.0% from 2009. The two main contributors to the lower noninterest income were an increase in mark-to-market losses on securities and liabilities held at fair value and lower service fees on deposit accounts. Net mark-to-market losses on securities and liabilities held at fair value totaled $222,000 in 2010 compared to net mark-to-market gains of $1.5 million in 2009. Service charges on deposit accounts were down $758,000 or 8.1% in 2010 compared to 2009. The decrease was mainly a result of lower overdraft fees. In November 2009, the Federal Reserve Board issued a final rule that, effective July 1, 2010, prohibits financial institutions from charging consumers fees for paying overdrafts on automated teller machine and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions. Consumers must be provided a notice that explains the financial institution’s overdraft services, including the fees associated with these services, and the consumer’s choices. The Company cannot provide any assurance as to the ultimate impact of this rule on the amount of overdraft/insufficient funds charges reported in future periods. Card services income totaled $4.3 million in 2010, an increase of $621,000 or 16.9% over 2009. The increase was mainly in debit card income and reflects a higher transaction volume, partially attributable to an increase in the number of cardholders. Noninterest expenses totaled $78.1 million in 2010, an increase of $1.4 million or 1.8% over the same period in 2009. Increases in salaries and other benefit related accruals, reflecting additional headcount, annual merit increases, and healthcare insurance and pension costs, were partially offset by lower FDIC insurance expense. The second quarter of 2009 included a FDIC special deposit insurance assessment of $1.4 million (pre-tax). The Financial Services segment had net income of $3.4 million in 2010, which was in line with the results from 2009. Noninterest income derived from the Financial Services segment was $27.0 million in 2010, an increase of $1.4 million or 5.6% compared to the same period in 2009. Improvement in the bond and equity markets from a volatile market in 2009 and stabilization in the overall economy in 2010 had a positive effect on fee-based businesses, including investment services income. The market value of assets managed by or in custody of the Company at year-end 2010 was up over prior year-end, increasing over the course of the year as a result of higher market levels and new business initiatives. Insurance commissions and fees were up $431,000 or 3.5% in 2010 over prior year. Noninterest expenses of $22.0 million in 2010 were up $1.4 million or 6.7% over the same period prior year. The increase was mainly in salaries and benefits, reflecting annual merit increases, stock-based and other incentive compensation accruals, and other operating expenses. ### Net Interest Income Net interest income is the Company’s largest source of revenue, representing 77.6% of total revenues for the twelve months ended December 31, 2010 and 72.9% of total revenues for the twelve months ended December 31, 2009. Net interest income is dependent on the volume and composition of interest earning assets and interest-bearing liabilities and the level of market interest rates. The Company’s net interest income over the past several years has benefitted from steady growth in average earning assets, as well as the low interest rate environment. Over this period the Company’s interest-bearing liabilities repriced at a faster pace than our interest earning assets. With deposit rates currently at low levels, the downward pricing of these liabilities has slowed, while interest earning assets continue to reprice downward at a steady rate. This has contributed to a decrease in net interest margin for the twelve months ended December 31, 2010 compared to the same period in 2009. The taxable equivalent net interest margin of 3.86% for 2010 is below the 3.92% for 2009. The decrease in the net interest margin was also partly due to the impact of the growth in interest earning assets over prior year being concentrated in lower yielding securities rather than higher yielding loans. *Table 1 – Average Statements of Condition and Net Interest Analysis* shows average interest-earning assets and interest-bearing liabilities, and the corresponding yield or cost associated with each. Taxable-equivalent net interest income for 2010 was $114.4 million, an increase of $4.4 million, or 4.0%, compared to the same period in 2009. Taxable-equivalent net interest income was positively impacted by the lower cost of funds, which outpaced lower yields on interest-earning assets. For 2010, average earning assets were up $160.2 million or 5.7%, over the same period in 2009. The average cost of interest bearing liabilities decreased 38 basis points from 1.72% in 2009 to 1.34% in 2010, while the average yield on interest-earning assets decreased by 39 basis points from 5.34% to 4.95%, respectively. The average yield on interest-earring assets was primarily impacted by changes in market interest rates as well as changes in the volume and relative mix of interest-earning assets. Taxable-equivalent interest income decreased by 2.1% in 2010 over 2009. The decrease in taxable-equivalent interest income was primarily a result of lower average yields on interest-earning assets year-over-year. In addition to the lower level of market interest rates, the yield on interest earning assets was also impact by the composition of interest earning assets. Average security balances were up $121.5 million or 13.7% over prior year, while average yields were down 75 basis points to 3.86%. During 2010, cash flow from securities maturities and prepayments have been reinvested at lower yields as a result of the decrease in market interest rates. Average loan balances were up $47.5 million or 2.6% in 2010 over 2009, while the average yield on loans decreased 21 basis points to 5.62%. Loan growth in 2010 included a $60.5 million increase in average commercial real estate loans, and a decrease of $6.9 million and $4.7 million in average consumer and commercial loan balances, respectively. The decrease in yields on average loans in 2010 was mainly due to the prime interest rate reduction of 400 basis points to 3.25% in 2009, which has remained there over the subsequent years. Interest expense for 2010 was down $7.5 million or 18.8% compared to 2009, reflecting lower average rates paid on deposits and borrowings, partially offset by growth in average balances. The average rate paid on interest-bearing deposits during 2010 of 0.88% was 40 basis points lower than the average rate paid in 2009. The decrease in the average cost of interest-bearing deposits reflects a decrease in the interest rates offered on deposit products due to decreases in average market rates combined with an increase in the relative proportion of lower cost savings and money market deposits. Average interest-bearing deposit balances increased by $116.2 million or 6.1% in 2010 compared to 2009. The majority of the increase was in average interest bearing checking, savings and money market deposit balances, which were up 8.7% to $1.2 billion, and average time deposits of $100,000 or more which were up 7.9% to $327.6 million, and were partially offset by lower average brokered time deposits of $100,000 or less which were down $18.3 million or 42.4%. Average noninterest bearing deposit balances of $468.2 million were up 9.6% in 2010 over the same period in 2009. Average other borrowings of $193.3 million were down 5.5% over prior year. ### Table 1 - Average Statements of Condition and Net Interest analysis *(Dollar amounts in thousands)* | ASSETS Interest-earning assets | December 31, 2010 Average Balance (YTD) | Interest | Average Yield/Rate | 2009 Average Balance (YTD) | Interest | Average Yield/Rate | 2008 Average Balance (YTD) | Interest | Average Yield/Rate | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Interest-bearing balances due from banks | **$25,189** | **$31** | **0.12%** | $17,017 | $27 | 0.16% | $6,239 | $133 | 2.13% | | Money market funds | **100** | **—** | **0.00%** | 17,130 | 36 | 0.21% | 9,064 | 246 | 2.71% | | Securities (1) | | | | | | | | | | | U.S. Government Securities | **857,724** | **30,964** | **3.61%** | 721,438 | 31,812 | 4.41% | 615,234 | 29,130 | 4.73% | | Trading Securities | **27,389** | **1,085** | **3.96%** | 35,067 | 1,362 | 3.88% | 43,331 | 1,923 | 4.44% | | State and municipal (2) | **107,376** | **6,059** | **5.64%** | 111,253 | 6,715 | 6.04% | 110,551 | 6,648 | 6.01% | | Other Securities (2) | **17,465** | **849** | **4.86%** | 20,710 | 1,047 | 5.06% | 21,620 | 1,177 | 5.44% | | Total securities | **1,009,954** | **38,957** | **3.86%** | 888,468 | 40,936 | 4.61% | 790,736 | 38,878 | 4.92% | | Federal Funds Sold | **9,233** | **17** | **0.18%** | 8,542 | 15 | 0.18% | 5,258 | 115 | 2.19% | | FHLBNY and FRB stock | **19,597** | **1,049** | **5.35%** | 20,274 | 910 | 4.49% | 18,490 | 1,074 | 5.81% | | Loans, net of unearned income (3) | | | | | | | | | | | Residential Real Estate | **624,136** | **31,327** | **5.02%** | 623,176 | 33,576 | 5.39% | 575,356 | 34,057 | 5.92% | | Commercial Real Estate | **721,404** | **44,283** | **6.14%** | 660,887 | 41,903 | 6.34% | 535,366 | 33,711 | 6.30% | | Commercial Loans (2) | **461,339** | **24,730** | **5.36%** | 466,076 | 25,461 | 5.46% | 402,263 | 28,383 | 7.06% | | Consumer Loans | **80,412** | **5,619** | **6.99%** | 87,283 | 6,083 | 6.97% | 85,350 | 6,118 | 7.17% | | Direct Lease Financing | **10,692** | **643** | **6.01%** | 13,031 | 784 | 6.02% | 14,381 | 841 | 5.85% | | Total loans, net of unearned income | **1,897,983** | **106,602** | **5.62%** | 1,850,453 | 107,807 | 5.83% | 1,612,716 | 103,110 | 6.39% | | **Total interest-earning assets** | **2,962,056** | **146,656** | **4.95%** | **2,801,884** | 149,731 | **5.34%** | **2,442,503** | **143,556** | **5.88%** | | Other assets | **229,784** | | | 207,123 | | | 190,517 | | | | **Total assets** | **3,191,840** | | | **3,009,007** | | | **2,633,020** | | | | **LIABILITIES & EQUITY** | | | | | | | | | | | Deposits | | | | | | | | | | | Interest-bearing deposits | | | | | | | | | | | Interest bearing checking, savings, & money market | **1,226,852** | **5,994** | **0.49%** | 1,128,648 | 8,694 | 0.77% | 906,404 | 12,983 | 1.43% | | Time Dep \> $100,000 | **327,626** | **4,297** | **1.31%** | 303,761 | 5,442 | 1.79% | 282,547 | 9,039 | 3.20% | | Time Dep \< $100,000 | **432,804** | **6,984** | **1.61%** | 420,351 | 9,223 | 2.19% | 384,903 | 12,273 | 3.19% | | Brokered Time Dep \< $100,000 | **24,886** | **402** | **1.62%** | 43,218 | 852 | 1.97% | 7,580 | 233 | 3.07% | | Total interest-bearing deposits | **2,012,168** | **17,677** | **0.88%** | 1,895,978 | 24,211 | 1.28% | 1,581,434 | 34,528 | 2.18% | | Federal funds purchased & securities sold under agreements to repurchase | | | | | | | | | | | repurchase | **185,563** | **5,418** | **2.92%** | 190,975 | 6,254 | 3.27% | 203,385 | 7,496 | 3.69% | | Other borrowings | **193,296** | **7,611** | **3.94%** | 204,467 | 8,206 | 4.01% | 192,144 | 8,216 | 4.28% | | Trust preferred debentures | **25,058** | **1,581** | **6.31%** | 17,311 | 1,087 | 6.28% | 2,552 | 153 | 6.00% | | **Total interest-bearing liabilities** | **2,416,085** | **32,287** | **1.34%** | **2,308,731** | **39,758** | **1.72%** | **1,979,515** | **50,393** | **2.55%** | | Noninterest bearing deposits | **468,219** | | | 427,025 | | | 407,336 | | | | Accrued expenses and other liabilities | **41,593** | | | 40,242 | | | 35,384 | | | | **Total liabilities** | **2,925,897** | | | 2,775,998 | | | 2,422,235 | | | | Tompkins Financial Corporation Shareholders’ equity | **264,431** | | | 231,498 | | | 207,382 | | | | Noncontrolling interest’s | **1,512** | | | 1,511 | | | 3,403 | | | | **Total equity** | **265,943** | | | **233,009** | | | **210,785** | | | | **Total liabilities and equity** | **$3,191,840** | | | **$3,009,007** | | | **$2,633,020** | | | | Interest rate spread | | | **3.61%** | | | **3.62%** | | | **3.33%** | | Net interest income/margin on earning assets | | **114,369** | **3.86%** | | **109,973** | **3.92%** | | **93,163** | **3.81%** | | Tax Equivalent Adjustment | | **(2,594)** | | | **(2,936)** | | | **(2,773)** | | | Net interest income per consolidated financial statements | | **$111,775** | | | **$107,037** | | | **$90,390** | | (1) Average balances and yields on available-for-sale securities are based on historical amortized cost. (2) Interest income includes the tax effects of taxable-equivalent adjustments using a combined New York State and Federal effective income tax rate of 40% to increase tax exempt interest income to taxable-equivalent basis. (3) Nonaccrual loans are included in the average asset totals presented above. Payments received on nonaccrual loans have been recognized as disclosed in Note 1 of the Company’s condensed consolidated financial statements included in Part I of the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2010. 24 ### Table 2 - Analysis of Changes in Net Interest Income | (in thousands)(taxable equivalent) INTEREST INCOME: | 2010 vs. 2009 Increase (Decrease) Due to Change in Average Volume | Yield/Rate | Total | 2009 vs. 2008 Increase (Decrease) Due to Change in Average Volume | Yield/Rate | Total | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Certificates of deposit, other banks | **$11** | **$(7)** | **$4** | $91 | $(197) | $(106) | | Money market funds | **(18)** | **(18)** | **(36)** | 120 | (330) | (210) | | Federal funds sold | **2** | **0** | **2** | 45 | (145) | (100) | | Investments | | | | | | | | Taxable | **5,060** | **(6,383)** | **(1,323)** | 4,418 | (2,410) | 2,008 | | Tax-exempt | **(229)** | **(427)** | **(656)** | (4) | 71 | 67 | | FHLB and FRB stock | **(31)** | **170** | **139** | 96 | (277) | (181) | | Loans, net: | | | | | | | | Taxable | **2,654** | **(3,620)** | **(966)** | 14,276 | (9,886) | 4,390 | | Tax-exempt | **70** | **(309)** | **(239)** | 88 | 219 | 307 | | Total interest income | **$7,519** | **$(10,594)** | **$(3,075)** | $19,130 | $(12,955) | $6,175 | | **INTEREST EXPENSE:** | | | | | | | | Interest-bearing deposits: | | | | | | | | Interest checking, savings and money market | **702** | **(3,402)** | **(2,700)** | 2,673 | (6,962) | (4,289) | | Time | **357** | **(4,191)** | **(3,834)** | 2,653 | (8,681) | (6,028) | | Federal funds purchased and securities sold under agreements to repurchase | **(172)** | **(664)** | **(836)** | (439) | (803) | (1,242) | | Other borrowings | **(144)** | **43** | **(101)** | 1,251 | (327) | 924 | | Total interest expense | **$743** | **$(8,214)** | **$(7,471)** | $6,138 | $(16,773) | $(10,635) | | Net interest income | **$6,776** | **$(2,380)** | **$4,396** | $12,992 | $3,818 | $16,810 | Changes in net interest income occur from a combination of changes in the volume of interest-earning assets and interest-bearing liabilities, and in the rate of interest earned or paid on them. The above table illustrates changes in interest income and interest expense attributable to changes in volume (change in average balance multiplied by prior year rate), changes in rate (change in rate multiplied by prior year volume), and the net change in net interest income. The net change attributable to the combined impact of volume and rate has been allocated to each in proportion to the absolute dollar amounts of the change. In 2010 both interest income and expense decreased by $3.1 million and $7.5 million, respectively. The decrease in interest expense outpaced the interest income decrease, resulting in a $4.4 million increase in taxable-equivalent net interest income. An increased volume of interest earning assets, in excess of interest bearing liabilities contributed to a net $6.8 million increase in taxable-equivalent net interest income between 2009 and 2010. ### Provision for Loan and Lease Losses The provision for loan and lease losses represents management’s estimate of the expense necessary to maintain the allowance for loan and lease losses at an appropriate level. The provision for loan and lease losses was $8.5 million in 2010, compared to $9.3 million in 2009. In 2010 and 2009, the provision was higher than historical levels due to increases in nonperforming loans and leases and net charge-offs as well as concerns over weak economic conditions and uncertain market condition. At December 31, 2010, the allowance for loan and lease losses totaled $27.8 million or 1.46% of total loans compared to $24.4 million or 1.27% of total loans at December 31, 2009. See the section captioned “The Allowance for Loan and Lease Losses” included within “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Financial Condition” of this Report for further analysis of the Company’s allowance for loan and lease losses. ### Noninterest Income Noninterest income is a significant source of income for the Company, representing 29.2% of total revenues in 2010, and 30.2% in 2009, and is an important factor in the Company’s results of operations. The decrease in noninterest income as a percentage of revenues in 2010 compared to 2009 was due to an increase in net interest income year-over-year, lower service charges on deposit accounts and an increase in net mark-to-market losses on liabilities held at fair value. Investment services income was $14.3 million in 2010, an increase of 7.5% from $13.3 million in 2009. Investment services income includes trust services, financial planning, wealth management services, and brokerage related services. With fees largely based on the market value and the mix of assets managed, the general direction of the stock market can have a considerable impact on fee income. The market value of assets managed by, or in custody of, Tompkins was $2.9 billion at December 31, 2010, up 12.5% from $2.5 billion at December 31, 2009. These figures include $844.9 million and $733.0 million, respectively, of Company-owned securities where Tompkins Investment Services serves as custodian. The increase in the market value of assets over prior year reflects a rebound in equity markets and new business. The Company was successful with business development initiatives and customer retention despite the challenging equities markets in 2010 and the recent turmoil in the financial markets. Insurance commissions and fees were $12.7 million in 2010, an increase of $431,000 or 3.5% over 2009. Health and benefit related insurance commissions and fees were up $285,000 over prior year. The Company established this business line in late 2007. Revenues for personal insurance lines were up $76,000 or 1.6% over prior year, while revenues for commercial insurance lines were up $50,000 or 1.13% over prior year. Service charges on deposit accounts were $8.6 million in 2010, down 8.1% compared to $9.3 million in 2009. Beginning in the third quarter of 2010, a new rule issued by the Federal Reserve Board prohibits financial institutions from charging consumers fees for paying overdrafts on automated teller machine and one-time transactions. Consumers must be provided a notice that explains the financial institutions’ overdraft services, including the fees associated with the service, and the consumer’s choices. The Company continues to monitor the impact of this new regulation on overdraft activity and fees and cannot provide any assurance as to the ultimate impact of this rule on the amount of overdraft/insufficient funds charges collected in future periods. Card services income of $4.3 million in 2010 was up $621,000 or 16.9% from 2009. The primary components of card services income are fees related to debit card transactions and ATM usage. Debit card income and fees associated with debit card transactions increased by 24.3% compared to 2009 to $3.3 million, the increase was mainly due to increased number of cards and transactions as well as an increase in interchange fees. ATM fee income was relatively flat compared to December 31, 2009. As mentioned above in the “Supervision and Regulation” section of Item 1. Business, the Dodd-Frank Act requires the Federal Reserve Board to establish rules regarding interchange fees charged in electronic debit card transaction by payment issuers. Currently, these new rules would only apply to banks with total assets exceeding $10 billion, which exempts Tompkins. However, the impact of any new regulations is uncertain. Net mark-to-market losses on securities and borrowings held at fair value totaled $222,000 in 2010, compared to net mark-to-market gains of $1.5 million in 2009. Mark-to-market losses or gains relate to the change in the fair value of securities and borrowings where the Company has elected the fair value option. The year-over-year loss is mainly attributed to changes in market interest rates. Other income of $6.3 million in 2010 is up $398,000 or 6.7% from 2009. The primary components of other income are other service charges, increases in cash surrender value of life insurance, gains on sales of residential mortgage loans and income from miscellaneous equity investments, including the Company’s investment in a Small Business Investment Company (“SBIC”). Other service charge income, included in other income on the consolidated statements of income, of $2.4 million was up $502,000 or 26.0% compared to the same period in 2009. Higher loan related fees and safe deposit box fees were the primary contributors to the increase in other service charge income. ### Noninterest Expense Noninterest expenses for 2010 were $99.0 million, an increase of 2.5% over noninterest expenses of $96.6 million for 2009. The increase in 2010 over 2009 was primarily in compensation and benefits related expenses. Personnel-related expense increased by $3.2 million or 6.0% in 2010 over 2009. Salaries and wages increased by $2.1 million year over year, mainly a result of the increase in average FTEs, as well as annual merit increases. The average number of FTEs increased from 720 in 2009 to 726 for 2010. Included in salaries and wages is stock option expense, which increased year-over-year by $281,000 or 30.0%, as a result of additional stock awards granted in late 2009. Pension and other employee benefit related expenses increased by $1.2 million to $14.5 million for 2010 compared to $13.4 million in 2009. Pension expense was up $552,000, while health and dental insurance was up $280,000 for the year ended December 31, 2010, when compared to the same period in 2009. FDIC insurance of $3.8 million in 2010 is down from prior year by $1.2 million or 24.3%. The decrease is mainly related to the special deposit insurance assessment of $1.4 million levied in the second quarter of 2009. Growth in deposits and higher premiums in 2010 and 2009 partially offset the impact of the special assessment in 2009. Other operating expenses increased by 2.3% in 2010 when compared to 2009. The primary components of other operating expense are marketing expense, professional fees, software licensing and maintenance, cardholder expense and other. Professional fees for 2010 increased by $343,000 or 10.4% compared to 2009. Professional fees include amounts paid to outside consultants for assistance on projects or initiatives. Software licensing and maintenance fee expense increased by $207,000 or 6.4% in 2010 over 2009. The increase in 2010 was mainly due to increased software amortization related to growth and technology upgrades. Cardholder expenses were up $294,000 or 19.2% for 2010 over 2009. The year-over-year increase is mainly a result of the increased number of cards and a higher volume of customer transactions. Additional items contributing to the change in other operating expenses were the following: telephone expense (down $254,000), and printing and supplies (up $111,000). The Company’s efficiency ratio, defined as operating expense excluding amortization of intangible assets, divided by tax-equivalent net interest income plus noninterest income before securities gains and losses (increase in the cash surrender value of COLI is shown on a tax equivalent basis), improved to 60.9% in 2010, compared to 61.2% in 2009. Tax equivalency was based upon a 40% tax rate. Excluding the tax equivalent adjustments for tax-exempt securities and tax-exempt loans and leases, the efficiency ratio would be 62.0% in 2010 and 62.3% in 2009. ### Noncontrolling Interests Net income attributable to noncontrolling interests represents the portion of net income in consolidated majority-owned subsidiaries that is attributable to the minority owners of a subsidiary. The Company had net income attributable to noncontrolling interests of $131,000 in 2010, which is in line with prior year. The noncontrolling interests are mainly in three real estate investment trusts, which are substantially owned by the Company’s banking subsidiaries. ### Income Tax Expense The provision for income taxes provides for Federal and New York State income taxes. The 2010 provision was $16.4 million, compared to $15.4 million in 2009. The effective tax rate for the Company was 32.7% in 2010, consistent with 32.6% in 2009. ### RESULTS OF OPERATIONS ### (Comparison of December 31, 2009 and 2008 results) ### General The Company reported diluted earnings per share of $2.96 in 2009, an increase of 6.5% over diluted earnings per share of $2.78 in 2008. Net income for the year ended December 31, 2009, was $31.8 million, up 6.7% compared to $29.8 million in 2008. Improvement in 2009 results over prior year was largely due to improved net interest margin and growth in earning assets. Both 2009 and 2008 results included certain nonrecurring items. Net income for 2009 included $1.4 million of expense related to the FDIC’s special deposit insurance assessment. This item negatively impacted 2009 diluted earnings per share by $0.07. Net income for 2008 included after-tax income of $983,000 ($1.6 million pre-tax) related to the Visa IPO. This item added $0.09 to 2008 diluted earnings per share. In addition to earnings per share, key performance measurements for the Company include return on average shareholders’ equity (ROE) and return on average assets (ROA). ROE was 13.66% in 2009, compared to 14.15% in 2008, while ROA was 1.06% in 2009, compared to 1.13% in 2008. Total revenues, consisting of net interest income and noninterest income, were $153.3 million in 2009, up $16.8 million or 12.3% over 2008. Revenues in 2008 included $1.6 million of income related to the Visa IPO. Total revenues in 2009 benefited from solid growth in net interest income, resulting from lower funding costs and growth in average earning assets. Low market interest rates in 2009 affected both asset yields and funding costs. However, deposit pricing strategies resulted in funding costs decreasing at a faster rate than asset yields. Noninterest income in 2009 benefited from net gains on assets and liabilities held at fair value and gains on the sales of residential mortgage loans as low interest rates led to higher volumes of loan originations. Total assets were up 10.0% to $3.2 billion at December 31, 2009. Asset growth included a $97.3 million increase in total loans and leases and a $168.7 million increase in the securities portfolio. Nonperforming assets increased to 1.12% of total assets, up from 0.56% at year-end 2008, driven in part by deteriorating trends in asset quality due to weak economic conditions. ### Segment Reporting The Banking segment reported net income of $28.4 million in 2009, up $2.4 million or 9.5% from net income of $26.0 million in 2008, driven by strong growth in net interest income. Net interest income of $106.8 million was up $16.6 million, or 18.4% in 2009 from $90.2 million in 2008. Net interest income benefited from growth in average earning assets and lower rates paid on interest-bearing liabilities. Both 2009 and 2008 had nonrecurring items, which affect the year-over-year comparison of operating results. Noninterest expense in 2009 included $1.4 million of expense ($0.07 per diluted share) related to the FDIC’s special assessment, while noninterest income in 2008 included $1.6 million ($0.09 per diluted share) related to the Visa IPO. The provision for loan and lease losses in 2009 was $9.3 million, compared to $5.4 million in 2008. The higher provision expense reflects deterioration in asset quality measures as evidenced by an increase in net charge-offs and nonperforming loans, growth in loans and leases, and the impacts of a weak economy. Noninterest income of $21.2 million in 2009 was up 1.6% over 2008. As previously mentioned, 2008 noninterest income included $1.6 million of proceeds from the Visa IPO. Service charges on deposit accounts were down $880,000 or 8.6% in 2009 from the prior year. Noninterest income in 2009 benefited from net mark-to-market gains on securities and liabilities held at fair value of $1.5 million compared to net mark-to-market losses of $1.2 million in 2008. Higher residential loan originations and sales in 2009 produced gains on sales of loans of $1.4 million in 2009, up from $105,000 in 2008. Noninterest expenses totaled $76.7 million in 2009, an increase of $9.0 million or 13.3% over the same period in 2008. The two main contributors to the growth in noninterest expense were FDIC deposits insurance assessments and salaries and benefits. FDIC deposit insurance assessments totaled $5.0 million in 2009, up from $933,000 in 2008, reflecting the special assessment and higher deposit premiums. The Financial Services segment had net income of $3.4 million in 2009, a decrease of $464,000 or 12.0% from net income of $3.9 million in 2008. Noninterest income derived from the Financial Services segment was $25.6 million in 2009, a decrease of $207,000 or 0.8% compared the same period in 2008. Volatility in the bond and equity markets and a weak overall economy in 2009 had an adverse affect on fee-based businesses, including investment services income. The market value of assets managed by or in custody of the Company at year-end 2009 was up over prior year-end, increasing over the course of the year as a result of higher market levels and new business initiatives. Insurance revenues were up $700,000 or 6.0% in 2009 over prior year. Noninterest expenses of $20.5 million in 2009 were up $550,000 or 2.8% over the same period prior year. The increase was mainly in salaries and benefits, reflecting annual merit increases, stock-based and other incentive compensation accruals, and other operating expenses. ### Net Interest Income Taxable-equivalent net interest income for 2009 was $110.0 million, an increase of $16.8 million, or 18.0%, compared to the same period in 2008. The favorable year-over-year comparison primarily resulted from an increase in the average volume of interest-earning assets, and an increase in net interest margin compared to the same period in the prior year. For 2009, average earning assets were up $359.4 million or 14.7%, over the same period in 2008. The taxable-equivalent net interest margin for 2009 of 3.92% was up from 3.81% in 2008. The net interest margin benefited from the decrease in short-term market interest rates throughout 2009, which reduced both asset yields and funding costs. The lower short-term market rates led to a 54 basis point decrease in the yield on average earning assets to 5.34% for 2009, compared to 5.88% for 2008; however, the decrease in yield on average earning assets was more than offset by lower funding costs. The average cost of interest-bearing liabilities for 2009 was down 83 basis points to 1.72%, compared to 2.55% for 2008. Taxable-equivalent interest income was up 4.3% in 2009 over 2008. The growth in taxable-equivalent interest income was primarily a result of higher average loan and investment balances as average yields were lower year-over-year. Average loan balances were up $237.7 million or 14.7% in 2009 over 2008, while the average yield on loans decreased 56 basis points to 5.83%. Loan growth in 2009 included a $125.5 million increase in average commercial real estate loans, and a $47.8 million increase in average residential real estate loans. The decrease in yields on average loans in 2009 was partly due to refinancing activity as a result of the prime interest rate reduction of 400 basis points in 2008. Average securities balances were up $97.7 million in 2009 over 2008, while average yields were down 31 basis points. Interest expense for 2009 was down 21.1% compared to 2008, reflecting lower average rates paid on deposits and borrowings, partially offset by growth in average balances. The average rate paid on interest-bearing deposits during 2009 of 1.28% was 90 basis points lower than the average rate paid in 2008. The decrease in the average cost of interest-bearing deposits reflects a decrease in the interest rates offered on deposit products due to decreases in average market rates combined with an increase in the relative proportion of lower cost savings and money market deposits. Average interest-bearing deposit balances increased by $314.5 million or 19.9% in 2009 compared to 2008. The majority of the increase was in average interest checking, savings and money market deposit balances, which were up 24.5% to $1.1 billion, and average time deposits of $100,000 or less balances were up 9.2% to $420.4 million. Average noninterest bearing deposit balances of $427.0 million were up 4.8% in 2009 over the same period in 2008. Average other borrowings of $204.5 million were up 6.4% over prior year, while the average yield was down 27 basis points from prior year. ### Provision for Loan and Lease Losses The provision for loan and lease losses was $9.3 million in 2009, compared to $5.4 million in 2008. The increase in 2009 over prior year was due to growth in the overall loan portfolio, increases in nonperforming loans and leases and net charge-offs, as well as concerns over deteriorating economic conditions and uncertain real estate markets. Nonperforming loans and leases were $34.9 million or 1.82% of total loans and leases at December 31, 2009, compared with $16.0 million or 0.88% of total loans and leases at December 31, 2008. Net charge-offs of $3.6 million in 2009 represented 0.20% of average loans and leases during the period, compared to net charge-offs of $2.8 million in 2008, representing 0.18% of average loans and leases. ### Noninterest Income Noninterest income represented 30.2% of total revenues in 2009, and 33.7% in 2008. The decrease in noninterest income as a percentage of revenues in 2009 compared to 2008 was due to the $16.6 million or 18.4% growth in net interest income outpacing the growth in noninterest income which remained relatively flat compared to 2008. The May 2008 acquisition of Sleepy Hollow Bancorp, Inc. (“Sleepy Hollow”) contributed to the stronger growth in net interest income, as the impact of the acquisition on the Company’s financial statements is included for a full year in 2009, and only a partial year in 2008. Investment services income was $13.3 million in 2009, a decrease of 6.0% from $14.2 million in 2008. With fees largely based on the market value and the mix of assets managed, the general direction of the stock market can have a considerable impact on fee income. The market value of assets managed by, or in custody of, Tompkins was $2.5 billion at December 31, 2009, up 13.6% from $2.2 billion at December 31, 2008. These figures include $733.0 million and $541.1 million, respectively, of Company-owned securities where TIS is custodian. The increase in the market value of assets over prior year, reflects a rebound in equity markets and new business. The Company was successful with business development initiatives and customer retention despite the challenging equities markets in 2009 and the turmoil in the financial markets. Insurance commissions and fees were $12.3 million in 2009, an increase of $700,000 or 6.0% over 2008. The growth was at Tompkins Insurance and AM&M. Health and benefit related insurance commissions and fees were up $302,000 or 112.8% over prior year. The Company established this business line in late 2007, and added staff to expand its presence in the life, health and benefits areas. Revenues for personal lines were up $139,000 or 3.0% over prior year, while revenues for commercial lines were in line with prior year. Service charges on deposit accounts were $9.3 million in 2009, down 8.6% compared to $10.2 million in 2008. 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. Card services income of $3.7 million in 2009 was up $326,000 or 9.8% from 2008. The primary components of card services income are fees related to debit card transactions and ATM usage. Debit card income increased by 7.8% compared to 2008 to $2.3 million, the increase was mainly due to higher volume, partially attributable to the full year impact of a reward based program implemented in the second quarter of 2008. ATM fee income increased by 7.8% compared to 2008, mainly due increased foreign transaction fees. Net mark-to-market gains on securities and borrowings held at fair value totaled $1.5 million in 2009, compared to net mark-to-market losses of $1.2 million in 2008. Mark-to-market losses or gains relate to the change in the fair value of securities and borrowings where the Company has elected the fair value option. The favorable gain year-over-year is mainly attributed to changes in market interest rates. The $1.6 million gain on Visa stock redemption in 2008 relates to the proceeds received from the Company’s allocation of the Visa, Inc. initial public offering (the “Visa IPO”), and consists of a $1.2 million gain on the partial redemption of Visa stock and a $0.4 million partial reversal of a fourth quarter 2007 accrual for indemnification charges. Visa withheld a portion of the shares allocated to its member banks to create an escrow account to cover the costs and liabilities associated with certain litigation for which its member banks are obligated to indemnify Visa. Visa’s funding of this escrow account allowed member banks to reverse litigation related accruals made in the fourth quarter of 2007, up to each bank’s proportionate membership interest in the $3.0 billion used to fund the escrow account. Other income of $5.9 million in 2009 is up $140,000 or 2.4% from 2008. The primary components of other income are other service charges, increases in cash surrender value of life insurance, gains on sales of residential mortgage loans and income from miscellaneous equity investments, including the Company’s investment in a Small Business Investment Company (“SBIC”). Other service charge income of $1.9 million was down $720,000 or 27.1% compared to the same period in 2008. Lower safe deposit box fees, lower loan related fees, and lower servicing income were the primary contributors to the decrease in other service charge income. Increases in cash surrender value of corporate owned life insurance (“COLI”), net of mortality expense, were $1.1 million in 2009, compared to $1.4 million in 2008. The Company’s average investment in COLI was $35.3 million during 2009, compared to $32.8 million during 2008. The increase reflects earnings as well as the full year impact of the $3.5 million of COLI acquired in the Sleepy Hollow acquisition during the second quarter of 2008. Although income associated with the insurance policies is not included in interest income, the COLI produced an annualized tax-equivalent return of 5.1% for 2009, compared to 7.4% for 2008. Net gains on the sales of residential mortgage loans totaled $1.4 million for 2009, compared to net gains of $105,000 in 2008. The increase in gains on sales of residential mortgage loans in 2009 is mainly a result of increased residential mortgage refinancing activity and the decision to sell certain loans in the secondary market to FHLMC. Low market interest rates led to a significant increase in the volume of homeowners refinancing existing mortgages to lower fixed rates. To manage interest rate risk exposures, the Company sold certain fixed rate loan production that had rates below or maturities greater than the thresholds set by the Company’s Asset/Liability Committee. As of December 31, 2009, the Company’s miscellaneous equity investments, including its investment in an SBIC, totaled $4.3 million, compared to $4.5 million at year-end 2008. Income related to these investments was $767,000 in 2009, up from $546,000 in 2008. The increase in 2009 over 2008 reflects gains on the sale of one equity investment as the company was acquired. This gain was partially offset by lower income related to the Company’s SBIC investment. For 2009, the Company recognized income from this investment of $212,000, compared with income of $546,000 in 2008. Management may periodically sell available-for-sale securities for liquidity purposes, to improve yields, or to adjust the risk profile of the portfolio. In 2009, the Company recognized net gains of $348,000 on sales of available-for-sale securities, primarily securities of U.S. government entities. The net gains on sales of available-for-sale securities of $477,000 in 2008 were 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. ### Noninterest Expense Noninterest expenses for 2009 were $96.6 million, an increase of 11.0% over noninterest expenses of $87.1 million for 2008. The increase in 2009 over 2008 was primarily in compensation and benefits related expenses, and FDIC deposit insurance expense. The acquisition of Sleepy Hollow impacted several noninterest expense categories discussed below. Personnel-related expense increased by $3.4 million or 6.7% in 2009 over 2008. The increase was mainly in pension and other employee benefit related expenses, which were up $3.1 million or 29.7% in 2009 over 2008. Pension expense was up $2.0 million, while health and dental insurance was up $598,000 for the year ended December 31, 2009, when compared to the same period in 2008. The increase was partially due to an increase in average full-time equivalent employees (“FTEs”). Year-to-date December 31, 2009 FTEs of 720 were up from 686 at December 31, 2008. Salaries and wages were also up over prior year as a result of the increase in average FTEs, as well as annual merit increases. Expenses related to bank premises and furniture and fixtures increased by $561,000 or 5.1% for the twelve months ended December 31, 2009 over the same period in 2008. 2009 reflected a full year of additional expense associated with the May 2008 acquisition of Sleepy Hollow, which added six banking offices to the Company’s branch network. FDIC insurance of $5.0 million in 2009 is over prior year by $4.0 million, or 433.3%. The increase reflects higher insurance premiums and a special deposit insurance assessment of $1.4 million in the second quarter of 2009. The increase in 2009 was also partly related to the additional 10 basis points paid on covered transaction accounts exceeding the $250,000 under the Temporary Liquidity Guaranty Program. Deposit insurance expense in 2008 was also favorably impacted by the Company’s use of available credits to offset deposit assessments; these credits were fully used in 2008. Other operating expenses increased by $1.6 million or 6.6% in 2009 when compared to 2008. The primary components of other operating expense are marketing expense, professional fees, software licensing and maintenance, cardholder expense and other. Professional fees for 2009 increased by $296,000 or 9.8% compared to 2008. Professional fees include amounts paid to outside consultants for assistance on projects or initiatives. Software licensing and maintenance fee expense increased by $240,000 or 7.9% in 2009 over 2008. The increase in 2009 was mainly due to increased licensing fees related to the core operating system and the implementation of new software applications. Cardholder expenses were up $307,000 or 25.1% for 2009 over 2008, as a result of higher volume of customer transactions. Additional items contributing to the change in other operating expenses were the following: legal expense (up $253,000), audit and examination expense (up $147,000), education and training (up $115,000), telephone (up $241,000), printing and supplies (down $202,000), and merger related expenses (down $266,000). The Company’s efficiency ratio, defined as operating expense excluding amortization of intangible assets, divided by tax-equivalent net interest income plus noninterest income before securities gains and losses (increase in the cash surrender value of COLI is shown on a tax equivalent basis), improved to 61.2% in 2009, compared to 61.7% in 2008. Tax equivalency was based upon a 40% tax rate. Excluding the tax equivalent adjustments for tax-exempt securities and tax-exempt loans and leases, the efficiency ratio would be 62.3% in 2009 and 63.0% in 2008. ### Noncontrolling Interests Net income attributable to noncontrolling interests represented the portion of net income in consolidated majority-owned subsidiaries that is attributable to the minority owners of a subsidiary. The Company had net income attributable to noncontrolling interests of $131,000 in 2009, down from $297,000 in the prior year. The noncontrolling interests were mainly in three real estate investment trusts, which are substantially owned by the Company’s banking subsidiaries. In 2008, the Company acquired noncumulative redeemable preferred stock of $4.5 million in connection with the acquisition of Sleepy Hollow. This preferred stock was accounted for as a noncontrolling interest on the consolidated financial statements. On October 15, 2008, the Company redeemed all noncumulative redeemable preferred stock acquired in the acquisition of Sleepy Hollow. ### Income Tax Expense The provision for income taxes provides for Federal and New York State income taxes. The 2009 provision was $15.4 million, compared to $13.8 million in 2008. The effective tax rate for the Company was 32.6% in 2009 compared to 31.6% in 2008. The increase in the effective rate in 2009 compared to 2008 was primarily the result of a lower proportion of tax advantaged income as a percentage of total pre-tax income. ### FINANCIAL CONDITION Total assets grew by $107.1 million or 3.4% to $3.3 billion at December 31, 2010, compared to $3.2 billion at December 31, 2009. *Table 3-Balance Sheet Comparisons* below provides a comparison of average and year-end balances of selected balance sheet categories over the past three years, and the change in those balances between 2009 and 2010. Earning asset growth over year-end 2009 was attributed to a $112.1 million increase in total securities while loans remained flat. Loan demand continues to be impacted by weak economic conditions. As such, deposit growth has been invested in short-term liquid assets and short duration available-for-sale securities to maintain flexibility to redeploy funds when loan demand picks up. As of December 31, 2010, total securities were $1.1 billion or 34.3% of total assets, compared to $1.0 billion or 31.9% of total assets at year-end 2009. The securities portfolio is comprised primarily of mortgage-backed securities, obligations of U.S. Government sponsored entities, and obligations of states and political subdivisions. The Company has no investments in preferred stock of U.S. Government sponsored entities and no investments in pools of Trust Preferred securities. A more detailed discussion of the securities portfolio is provided below in this section under the caption “Securities”. Loans and leases totaled $1.9 billion or 58.6% of total assets at December 31, 2010, compared to $1.9 billion or 60.7% of total assets at December 31, 2009. In general, weak economic conditions have strained some borrowers and softened the demand for lending products. The residential real estate portfolio was comparable in size with year-end 2009, as the Company decided to sell certain loans in the secondary market to FHLMC. A more detailed discussion of the loan portfolio is provided below in this section under the caption “Loans and Leases”. Nonperforming loans (loans on nonaccrual, loans past due 90 days or more and still accruing interest, and loans restructured in a troubled debt restructuring) were $45.3 million at December 31, 2010, up from $34.9 million at December 31, 2009. Nonperforming loans represented 2.37% of total loans at December 31, 2010, compared to 1.82% of total loans at December 31, 2009. For 2010, net charge-offs were $5.0 million, up from $3.6 million in the same period of 2009. A more detailed discussion of nonperforming loans and other asset quality measures is provided below in this section under the caption “Allowance for Loan and Lease Losses”. Total deposits were $2.5 billion at December 31, 2010, up $56.0 million or 2.3% over December 31, 2009. The growth in total deposits from December 31, 2010 was mainly in noninterest bearing deposit balances, which were up $61.2 million or 13.3%. Checking, money market and savings balances were up $47.7 million or 4.0%. Time deposit balances were down $52.9 million or 6.7%. Other funding sources include Federal funds purchased, securities sold under agreements to repurchase, other borrowings, and trust preferred debentures. These funding sources totaled $452.9 million at December 31, 2010, up $26.1 million or 6.1% from $426.8 million at December 31, 2009. Included in this total are certain borrowings that the Company elected to account for at fair value. As of December 31, 2010, the Company had $10.0 million of borrowings with the FHLB accounted for at fair value, with an aggregate fair value of $11.6 million. During 2009, the Company issued $20.5 million aggregate liquidation amount of 7.0% cumulative trust preferred securities through a newly-formed subsidiary, Tompkins Capital Trust I, a wholly-owned Delaware statutory trust. A more detailed discussion of deposits and borrowings is provided below in this section under the caption “Deposits and Other Liabilities”. In addition, refer to “Note 10 Securities Sold Under Agreements to Repurchase and Federal Funds Purchased”, “Note 11 Other Borrowings”, and “Note 12 Trust Preferred Debentures” in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report for further details on these funding sources. *Table 3 Balance Sheet Comparisons* *(in thousands)* | AVERAGE BALANCE SHEET | As of December 31, 2010 | 2009 | 2008 | Change (2009 to 2010) Amount | Percentage | | --- | ---: | ---: | ---: | ---: | ---: | | Total assets | **$3,191,840** | $3,009,007 | $2,633,020 | 182,833 | 6.08% | | Earning assets\* | **2,962,056** | 2,801,884 | 2,442,503 | 160,172 | 5.72% | | Total loans and leases, less unearned income and net deferred costs and fees | **1,897,983** | 1,850,453 | 1,612,716 | 47,530 | 2.57% | | Securities\* | **1,009,954** | 888,468 | 790,736 | 121,486 | 13.67% | | Core deposits\*\* | **1,819,300** | 1,674,160 | 1,516,226 | 145,140 | 8.67% | | Time deposits of $100,000 and more | **327,626** | 303,761 | 282,547 | 23,865 | 7.86% | | Federal funds purchased and securities sold under agreements to repurchase | **185,563** | 190,975 | 203,385 | (5,412) | (2.83%) | | Other borrowings | **193,296** | 204,467 | 192,144 | (11,171) | (5.46%) | | Shareholders’ equity | **265,943** | 233,009 | 210,785 | 32,934 | 14.13% | *(in thousands)* | ENDING BALANCE SHEET | As of December 31, 2010 | 2009 | 2008 | Change (2009 to 2010) Amount | Percentage | | --- | ---: | ---: | ---: | ---: | ---: | | Total assets | **$3,260,343** | $3,153,260 | $2,867,722 | 107,083 | 3.40% | | Earning assets\* | **3,029,621** | 2,922,138 | 2,664,650 | 107,483 | 3.68% | | Total loans and leases, less unearned income and net deferred costs and fees | **1,910,358** | 1,914,818 | 1,817,531 | (4,460) | (0.23%) | | Securities\* | **1,094,952** | 985,503 | 820,030 | 109,449 | 11.11% | | Core deposits\*\* | **1,917,886** | 1,725,315 | 1,631,354 | 192,571 | 11.16% | | Time deposits of $100,000 and more | **296,399** | 327,890 | 277,847 | (31,491) | (9.60%) | | Federal funds purchased and securities sold under agreements to repurchase | **183,609** | 192,784 | 196,304 | (9,175) | (4.76%) | | Other borrowings | **244,193** | 208,965 | 274,791 | 35,228 | 16.86% | | Shareholders’ equity | **273,408** | 245,008 | 219,361 | 28,400 | 11.59% | \* *Balances of available-for-sale securities are shown at amortized cost.* \*\* *Core deposits equal total deposits less time deposits of $100,000 and more, brokered deposits, and municipal money market deposits* ### Shareholders’ Equity The Consolidated Statements of Changes in Shareholders’ Equity included in the Consolidated Financial Statements of the Company contained in Part II, Item 8. of this Report, detail the changes in equity capital, including payments to shareholders in the form of cash and stock dividends. The Company continued its long history of increasing cash dividends with a per share increase of 7.3% in 2010, which follows an increase of 3.3% in 2009. Dividends per share amounted to $1.33 in 2010, compared to $1.24 in 2009, and $1.20 in 2008. Dividends per share were retroactively adjusted to reflect a 10% stock dividend paid February 15, 2010. Cash dividends paid represented 42.5%, 41.5%, and 42.7% of after-tax net income in each of 2010, 2009, and 2008, respectively. Total shareholders’ equity was up $28.4 million or 11.6% to $273.4 million at December 31, 2010, from $245.0 million at December 31, 2009. The increase was mainly due to the Company’s strong financial performance, reflecting net income of $33.8 million less dividend of $14.4 million. The Company paid a 10% stock dividend in February 2010 which increased additional paid-in capital by $35.3 million and decreased retained earnings by $35.4 million. Additional paid-in capital increased by $42.5 million, from $155.6 million at December 31, 2009, to $198.1 million at December 31, 2010. The $42.5 million included the following: $1.5 million of proceeds from stock option exercises and the related tax benefits of $212,000; $1.2 million related to stock-based compensation; $2.9 million related to shares issued for dividend reinvestment plans, $1.3 million in funds for shares issued for the employee stock ownership plan, and $111,000 related to shares issued for director deferred compensation plan. Accumulated other comprehensive loss decreased by $1.8 million, from a net unrealized loss of $3.1 million at December 31, 2009, to a net unrealized loss of $1.3 million at December 31, 2010. The change resulted from a $1.6 million increase in unrealized gains on available-for-sale securities due to lower market rates, and a $233,000 positive adjustment related to postretirement benefit plans. Under regulatory requirements, amounts reported as accumulated other comprehensive income/loss related to net unrealized gain or loss on available-for-sale securities and the funded status of the Company’s defined benefit post-retirement benefit plans do not increase or reduce regulatory capital and are not included in the calculation of risk-based capital and leverage ratios. Total shareholders’ equity was up $25.6 million or 11.7% to $245.0 million at December 31, 2009, from $219.4 million at December 31, 2008. The increase was mainly in retained earnings, which increased by $18.6 million to $92.4 million, reflecting net income of $31.8 million less dividend of $13.2 million. Additional paid-in capital increased by $2.7 million, from $152.8 million at December 31, 2008, to $155.6 million at December 31, 2009. The $2.7 million included the following: $952,000 of proceeds from stock option exercises and the related tax benefits of $163,000; $938,000 related to stock-based compensation; $629,000 related to shares issued for dividend reinvestment plans; and $243,000 related to shares issued for director deferred compensation plan. In the fourth quarter of 2009, the Company began to issue shares of the Company’s common stock for its dividend reinvestment plan. Previously, the shares were purchased in the open market by the plan. The Company repurchased 5,000 shares of its common stock for $177,000 during the twelve month period ended December 31, 2009. Accumulated other comprehensive loss decreased by $4.5 million, from a net unrealized loss of $7.6 million at December 31, 2008, to a net unrealized loss of $3.1 million at December 31, 2009. The change resulted from a $3.6 million increase in unrealized gains on available-for-sale securities due to lower market rates, and an $875,000 positive adjustment related to postretirement benefit plans. On July 22, 2008, the Company’s Board of Directors approved a stock repurchase plan (the “2008 Plan”). The 2008 Plan authorizes the repurchase of up to 150,000 shares of the Company’s outstanding common stock over a two-year period. The Company repurchased 5,000 shares of common stock at an average price of $35.51 under the 2008 Plan during the first quarter of 2009; no shares were repurchased during the remainder of 2009 or in 2010. Since inception of the 2008 Plan, the Company has repurchased 6,500 shares at an average price of $36.21. During 2009, the Company issued $20.5 million aggregate liquidation amount of 7.0% cumulative trust preferred securities through a newly-formed subsidiary, Tompkins Capital Trust I, a wholly-owned Delaware statutory trust (“Tompkins Capital Trust I”). In accordance with the applicable accounting standards related to variable interest entities, the accounts of Tompkins Capital Trust I will not be included in the Company’s consolidated financial statements. However, the $20.5 million in Tompkins’ Subordinated Debentures issued to Tompkins Capital Trust I is included in the Tier 1 capital of the Company for regulatory capital purposes pursuant to regulatory guidelines. Under the recently enacted Dodd-Frank Act, then outstanding trust preferred securities at the effective date of the Act will continue to qualify as Tier 1 capital for bank holding companies with total assets less than $15 billion. However, trust preferred securities issued in the future may no longer qualify as Tier 1 capital. The proceeds from the issuance of the Trust Preferred Securities, together with the Company’s capital contribution of $636,000 to the trust, were used to acquire the Company’s Subordinated Debentures that are due concurrently with the Trust Preferred Securities. The net proceeds of the offering are being used to support business growth and for general corporate purposes. The Trust Preferred Securities have a 30 year maturity, and carry a fixed rate of interest of 7.0%. The Trust Preferred Securities have a liquidation amount of $1,000 per security. The Company has retained the right to redeem the Trust Preferred Securities at par (plus accrued but unpaid interest) at a date which is no earlier than 5 years from the date of issuance. Commencing in 2019, and during specified annual windows thereafter, holders may exchange the Trust Preferred Securities for shares of the Company’s common stock at an exchange price equal to the greater of (i) $41.35, or (ii) the average closing price of Tompkins Financial Corporation’s common stock during the first three months of the year in which the conversion will be completed. The Company has guaranteed the distributions with respect to, and amounts payable upon liquidation or redemption of, the Trust Preferred Securities on a subordinated basis as and to the extent set forth in the Preferred Securities Guarantee Agreement entered into on April 10, 2009, between the Company and Wilmington Trust Company, as Preferred Guarantee Trustee. The Company and its subsidiary banks are subject to quantitative capital measures established by regulation to ensure capital adequacy. Consistent with the objective of operating a sound financial organization, the Company and its subsidiary banks maintain capital ratios well above regulatory minimums. During the first quarter of 2010, the Comptroller of the Currency (“OCC”) notified the Company that it was requiring Mahopac National Bank, one of the Company’s three banking subsidiaries, to maintain certain minimum capital ratios at levels higher than those otherwise required by applicable regulations. Mahopac has agreed to maintain a Tier 1 capital to average assets ratio of 8.0%, a Tier 1 risk-based capital to risk-weighted capital ratio of 10.0% and a Total risk-based capital to risk-weighted assets ratio of 12.0%. Mahopac exceeded these minimum requirements at the time of the notification and continues to maintain ratios above these minimums. Since Mahopac’s ratios were above the minimum requirements at the time of notification, this was not a material impact to Mahopac or the Company. As of December 31, 2010, Mahopac had a Tier 1 capital to average assets ratio of 8.7%, a Tier 1 risk-based capital to risk-weighted capital ratio of 12.6% and a Total risk-based capital to risk-weighted assets ratio of 13.9%. As of December 31, 2010, the capital ratios for the Company’s other two subsidiary banks also exceeded the minimum levels required to be considered well capitalized. Additional information on the Company’s capital ratios and regulatory requirements is provided in “Note 20 Regulations and Supervision” in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report on Form 10-K. ### Securities The Company maintains a portfolio of securities such as U.S. government sponsored entities securities, U.S. government agencies, obligations of states and political subdivisions thereof and equity securities. Management typically invests in securities with short to intermediate average lives in order to better match the interest rate sensitivities of its assets and liabilities. Investment decisions are made within policy guidelines established by the Company’s Board of Directors. The investment policy established by the Company’s Board of Directors is based on the asset/liability management goals of the Company, and is monitored by the Company’s Asset/Liability Management Committee. The intent of the policy is to establish a portfolio of high quality diversified securities, which optimizes net interest income within safety and liquidity limits deemed acceptable by the Asset/Liability Management Committee. Securities, other than certain obligations of states and political subdivisions thereof, are generally classified as available-for-sale. Securities available-for-sale may be used to enhance total return, provide additional liquidity, or reduce interest rate risk. The Company elected FASB ASC Topic 825, *Financial Instruments (“*ASC Topic 825”), effective January 1, 2008. With the election, the Company accounted for certain securities and certain borrowings at fair value, with unrealized gains or losses included in earnings. The Company’s securities portfolio (excluding fair value adjustments on available-for-sale securities) at December 31, 2010, was $1.1 billion, reflecting an increase of 11.1% from $985.5 million at December 31, 2009. The increase was mainly in mortgage-backed securities issued by Government National Mortgage Association (“GNMA”), a U.S. government agency. “Note 3 Securities” in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report, details the types of securities held, the carrying and fair values, and the contractual maturities as of December 31, 2010 and 2009. *(in thousands)* | Available-for-Sale Securities | 2010 Amortized Cost | Fair Value | 2009 Amortized Cost | Fair Value | 2008 Amortized Cost | Fair Value | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | U.S. Treasury securities | **$2,043** | **$2,129** | $1,991 | $2,079 | $3,102 | $3,263 | | Obligations of U.S. Government sponsored entities | **402,057** | **407,440** | 377,920 | 379,015 | 191,435 | 196,262 | | Obligations of U.S. states and political subdivisions | **60,707** | **63,037** | 61,176 | 63,695 | 63,158 | 63,554 | | Mortgage-backed securities - residential, issued by | | | | | | | | U.S. Government agencies | **143,319** | **146,013** | 75,714 | 78,055 | 41,549 | 42,271 | | U.S. Government sponsored entities | **393,331** | **405,478** | 373,307 | 388,860 | 406,807 | 416,690 | | Non-U.S. Government agencies or sponsored entities | **9,636** | **9,283** | 12,656 | 10,766 | 17,256 | 15,010 | | U.S. corporate debt securities | **5,024** | **5,203** | 5,032 | 5,136 | 2,500 | 2,500 | | Total debt securities | **1,016,117** | **1,038,583** | 907,796 | 927,606 | 725,807 | 739,550 | | Equity securities | **1,025** | **1,025** | 1,164 | 1,164 | 1,669 | 1,669 | | **Total available-for-sale securities** | **$1,017,142** | **$1,039,608** | **$908,960** | **$928,770** | **$727,476** | **$741,219** | 35 Equity securities include miscellaneous investments carried at fair value, which approximates cost. Quarterly, the Company evaluates all investment securities with a fair value less than amortized cost to identify any other-than-temporary impairment as defined under generally accepted accounting principles. During the third quarter of 2009, the Company determined that three of the five non-U.S. Government mortgage backed securities held in the available-for-sale portfolio were other-than-temporarily impaired. As a result, the Company recorded other-than-temporary impairment charges of $1.8 million in 2009 on these investments. The credit loss component of $146,000 was recorded as other-than-temporary impairment losses in the consolidated statements of income, while the remaining non-credit portion of the impairment loss was recognized in other comprehensive income (loss) in the consolidated statements of condition and changes in shareholders’ equity. The Company reviewed these five securities throughout 2010 and determined that an additional other-than-temporary charge of $34,000 related to the three non-U.S. Government mortgage backed securities was necessary. As of December 31, 2010, the amount by which the carrying value of these three securities exceeded their fair value was $333,100. A continuation or worsening of current economic conditions may result in additional credit loss component of other-than-temporary impairment losses related to these investments. | Held-to-Maturity Securities | 2010 Amortized Cost | Fair Value | 2009 Amortized Cost | Fair Value | 2008 Amortized Cost | Fair Value | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Obligations of U.S. states and political subdivisions | **$54,973** | **$56,064** | $44,825 | $46,340 | $54,453 | $55,064 | | **Total held-to-maturity securities** | **$54,973** | **$56,064** | $44,825 | $46,340 | $54,453 | $55,064 | | Held-for-Trading Securities | 2010 Fair Value | 2009 Fair Value | 2008 Fair Value | | --- | ---: | ---: | ---: | | Obligations of U.S. Government sponsored entities | **$13,139** | $17,986 | $18,370 | | Mortgage-backed securities-residential | **9,698** | 13,732 | 19,731 | | **Total held-for-trading securities** | **$22,837** | $31,718 | $38,101 | The decrease in trading securities reflects maturities or calls during 2010. The pre-tax mark-to-market gains on trading securities in 2010 were $219,000, compared to pre-tax net mark-to-market gains of $204,000 in 2009 and $811,000 in 2008. The Company holds non-marketable Federal Home Loan Bank New York (“FHLBNY”) stock and non-marketable Federal Reserve Bank (“FRB”) stock, both of which are required to be held for regulatory purposes and for borrowing availability. The required investment in FHLB stock is tied to the Company’s borrowing levels with the FHLB. Holdings of FHLBNY stock and FRB stock totaled $19.9 million and $21.0 million at December 31, 2010, respectively, $18.1 million and $1.9 million at December 31, 2009, respectively, and $21.0 million and $1.9 million at December 31, 2008, respectively. These securities are carried at par, which is also cost. The FHLBNY continues to pay dividends and repurchase its stock. As such, the Company has not recognized any credit loss other-than-temporary impairment on its holdings of FHLBNY stock. Management’s policy is to purchase investment grade securities that, on average, have relatively short expected durations. This policy helps mitigate interest rate risk and provides sources of liquidity without significant risk to capital. The contractual maturity distribution of debt securities and mortgage-backed securities as of December 31, 2010, along with the weighted average yield of each category, is presented in *Table 4-Maturity Distribution* below. Balances are shown at amortized cost and weighted average yields are calculated on a fully taxable-equivalent basis. Expected maturities will differ from contractual maturities presented in *Table 4-Maturity Distribution* below, because issuers may have the right to call or prepay obligations with or without penalty and mortgage-backed securities will pay throughout the periods prior to contractual maturity. ### Table 4 - Maturity Distribution *(dollar amounts in thousands)* | U.S. Treasury securities | As of December 31, 2010 Securities Available-for-Sale \* Amount | Yield (FTE) | Securities Held-to-Maturity Amount | Yield (FTE) | | --- | ---: | ---: | ---: | ---: | | Over 1 to 5 years | 2,043 | 2.88% | 0 | 0.00% | | | $2,043 | 2.88% | $0 | $0.00% | | Obligations of U.S. Government sponsored entities | | | | | | Within 1 year | $250 | 2.25% | $0 | $0.00% | | Over 1 to 5 years | 270,462 | 2.25% | 0 | 0.00% | | Over 5 to 10 years | 126,329 | 3.46% | 0 | 0.00% | | Over 10 years | 5,016 | 5.10% | 0 | 0.00% | | | $402,057 | 2.67% | $0 | $0.00% | | Obligations of U.S. state and political subdivisions | | | | | | Within 1 year | $7,520 | 4.33% | $34,645 | $2.73% | | Over 1 to 5 years | 34,164 | 4.95% | 15378 | 5.97% | | Over 5 to 10 years | 17,353 | 5.51% | 3765 | 6.82% | | Over 10 years | 1,670 | 6.06% | 1185 | 7.13% | | | $60,707 | 5.06% | $54,973 | $4.01% | | Mortgage-backed securities - residential | | | | | | Within 1 year | $1 | 6.00% | $0 | $0.00% | | Over 1 to 5 years | 9,594 | 5.06% | 0 | 0.00% | | Over 5 to 10 years | 173,132 | 3.62% | 0 | 0.00% | | Over 10 years | 363,559 | 4.08% | 0 | 0.00% | | | $546,286 | 3.95% | $0 | $0.00% | | Other securities | | | | | | Over 1 to 5 years | 2,524 | 4.01% | 0 | 0.00% | | Over 10 years | 2,500 | 3.04% | 0 | 0.00% | | Equity securities | 1,025 | 1.12% | 0 | 0.00% | | | $6,049 | 3.12% | $0 | $0.00% | | Total securities | | | | | | Within 1 year | $7,771 | 4.26% | $34,645 | $2.73% | | Over 1 to 5 years | 318,787 | 2.63% | 15,378 | 5.97% | | Over 5 to 10 years | 316,814 | 3.66% | 3,765 | 6.82% | | Over 10 years | 372,745 | 4.09% | 1,185 | 7.13% | | Equity securities | 1,025 | 1.12% | 0 | 0.00% | | | $1,017,142 | 3.50% | $54,973 | $4.01% | \* *Balances of available-for-sale securities are shown at amortized cost.* At December 31, 2010, there were no holdings of any one issuer, other than the U.S. Government sponsored entities, in an amount greater than 10% of the Company’s shareholders’ equity. *(in thousands)* | Table 5 Loans and Leases Loans and Leases at December 31 were as follows: Commercial and Industrial | 2010 | 2009 | 2008 | 2007 | 2006 | | --- | ---: | ---: | ---: | ---: | ---: | | Agriculture | **$65,918** | $71,480 | $64,358 | $52,227 | $56,822 | | Commercial and industrial other | **409,432** | 423,015 | 403,061 | 329,439 | 288,371 | | Subtotal Commercial and Industrial | **475,350** | 494,495 | 467,419 | 381,666 | 345,193 | | Commercial real estate | | | | | | | Construction | **58,519** | 55,626 | 47,311 | 39,992 | 18,088 | | Agriculture | **48,485** | 40,516 | 39,942 | 59,115 | 15,317 | | Commercial real estate other | **619,458** | 601,221 | 531,988 | 363,164 | 378,513 | | Subtotal Commercial real estate | **726,462** | 697,363 | 619,241 | 462,271 | 411,918 | | Residential real estate | | | | | | | Home equity | **164,765** | 166,618 | 161,063 | 125,698 | 114,766 | | Mortgages | **462,032** | 458,823 | 469,003 | 381,665 | 362,421 | | Subtotal Residential real estate | **626,797** | 625,441 | 630,066 | 507,363 | 477,187 | | Consumer and other | | | | | | | Indirect | **41,668** | 51,363 | 51,176 | 47,477 | 47,470 | | Consumer and other | **31,757** | 35,324 | 36,822 | 33,253 | 34,872 | | Subtotal Consumer and other | **73,425** | 86,687 | 87,998 | 80,730 | 82,342 | | Leases | **9,949** | 12,821 | 14,968 | 10,832 | 11,962 | | Total loans and leases | **1,911,983** | 1,916,807 | 1,819,692 | 1,442,862 | 1,328,602 | | Less: unearned income and deferred costs and fees | **(1,625)** | (1,989) | (2,161) | (2,740) | (2,304) | | **Total loans and leases, net of unearned income and deferred costs and fees** | **$1,910,358** | $1,914,818 | $1,817,531 | $1,440,122 | $1,326,298 | The Company has adopted comprehensive lending policies, underwriting standards and loan review procedures. Management reviews these policies and procedures on a regular basis. The Company’s Board of Directors approves the lending policies at least annually. The Company recognizes that exceptions to the above listed policy guidelines may occasionally occur and has established procedures for approving exceptions to these policy guidelines. There have been no significant changes in the policies over the past several years. As such, these policies are reflective of new originations as well as those balances held at year-end. See “Note 5 Loans and Leases” in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report for further details of the Company’s policy guidelines for loans. Management has also implemented reporting systems to monitor loan originations, loan quality, concentrations of credit, loan delinquencies and nonperforming loans and potential problem loans. Total loans and leases of $1.91 billion, at December 31, 2010, were flat to year-end 2009 balances, with growth in commercial real estate mainly offset by lower balances in commercial loans and consumer loans. Residential loan growth is affected by the Company’s decision to sell certain fixed rate residential loan originations in the secondary market for interest rate risk considerations. At of December 31, 2010 total loans and leases represented 58.6% of total assets compared to 60.7% of total assets at December 31, 2009. In general, weak economic conditions softened the demand for some lending products. Residential real estate loans, including home equity loans, of $626.8 million at year-end 2010 decreased by $1.4 million or 0.22% from $625.4 million at year-end 2009, and comprised 32.8% of total loans and leases at December 31, 2010. The Company has not originated any hybrid loans, such as payment option ARMs. The Company underwrites residential real estate loans in accordance with secondary market standards in effect at the time of origination, including loan-to-value (“LTV”) and documentation requirements. The Company does not underwrite low or reduced documentation loans other than those that meet secondary market standards for low or reduced documentation loans. In those instances, W2’s and paystubs are used instead of sending Verification of Employment forms to employers to verify income and bank deposit statements are used instead of Verification of Deposit forms mailed to financial institutions to verify deposit balances. The Company may sell residential real estate loans in the secondary market based on interest rate considerations. Loans are generally sold to the Federal Home Loan Mortgage Corporation (“FHLMC”) or State of New York Mortgage Agency (“SONYMA”). These residential real estate loans are generally sold without recourse in accordance with standard secondary market loan sale agreements. These residential real estate loan sales are subject to customary representations and warranties, including representations and warranties related to gross incompetence and fraud. The Company has not had to repurchase any loans as a result of these general representations and warranties. While in the past in rare circumstances the Company agreed to sell residential real estate loans with recourse, the Company has not done so in the past several years and the amount of such loans held in the loan portfolio is insignificant. The Company has never had to repurchase a loan sold with recourse. In addition to sales of residential real estate loans the Company may securitize residential real estate loans with FHLMC and hold the securitized loans as part of the Company’s available-for-sale securities. The Company has not securitized any residential real estate loans since 2006, when it securitized $32.0 million of residential loans with FHLMC. During 2010, 2009, and 2008, the Company sold residential mortgage loans totaling $53.6 million, $89.0 million, and $11.3 million, respectively, and realized gains on these sales of $955,000, $1.4 million, and $105,000, respectively. These residential real estate loans were sold without recourse in accordance with standard secondary market loan sale agreement. When residential mortgage loans are sold, the Company typically retains all servicing rights, which provides the Company with a source of fee income. In connection with the sales in 2010, 2009, and 2008, the Company recorded mortgage-servicing assets of $376,000, $648,000, and $26,000, respectively. Amortization of mortgage servicing assets amounted to $262,000 in 2010, $245,000 in 2009, and $117,000 in 2008. At December 31, 2010 and 2009, the Company serviced residential mortgage loans aggregating $223.4 million and $206.0 million, including loans securitized and held as available-for-sale securities. Mortgage servicing rights, at amortized basis, totaled $1.5 million at December 31, 2010 and $1.4 million at December 31, 2009. These mortgage servicing rights were evaluated for impairment at year end 2010 and 2009 and no impairment was recognized. Loans held for sale, which are included in residential real estate in the table above, totaled $1.3 million and $1.4 million at December 31, 2010 and 2009, respectively. No loans were securitized in 2010 and 2009. Commercial real estate loans increased by $29.1 million, or 4.2%, from $697.4 million at year-end 2009, to $726.5 million at year-end 2010. Commercial real estate loans of $726.5 million represented 38.0% of total loans and leases at December 31, 2010. Commercial and industrial loans totaled $475.4 million at December 31, 2010, which is a 3.9% decrease from commercial loans of $494.5 million at December 31, 2009. Demand for commercial and commercial real estate loans was soft in 2010, driven by weak economic conditions. As of December 31, 2010, agriculturally-related loans totaled $114.4 million or 6.0% of total loans and leases. Agriculturally-related loans include loans to dairy farms and cash and vegetable crop farms. Agriculturally-related loans are primarily made based on identified cash flows of the borrower with consideration given to underlying collateral, personal guarantees, and government related guarantees. Agriculturally-related loans are generally secured by the assets or property being financed or other business assets such as accounts receivable, livestock, equipment or commodities/crops. The consumer loan portfolio includes personal installment loans, indirect automobile financing, and overdraft lines of credit. Consumer and other loans were $73.4 million at December 31, 2010, down from $86.7 million at December 31, 2009. The decrease is mainly in indirect automobile loans and reflects competition as well as softened demand. The lease portfolio decreased by 22.4% to $9.9 million at December 31, 2010, from $12.8 million at December 31, 2009. The lease portfolio has traditionally consisted of leases on vehicles for consumers and small businesses. Competition for automobile financing has led to a decline in the consumer lease portfolio over the past several years. Management continues to review leasing opportunities, primarily commercial leasing and municipal leasing. As of December 31, 2010, commercial leases and municipal leases represented 96.8% of total leases, while consumer leases made up the remaining 3.2%. As of December 31, 2009, commercial leases and municipal leases represented 96.1% of total leases, while consumer leases made up the remaining 3.9%. The Company’s loan and lease customers are located primarily in the New York communities served by its three subsidiary banks. Although operating in numerous communities in New York State, the Company is still dependant on the general economic conditions of New York. Other than geographic and general economic risks, management is not aware of any material concentrations of credit risk to any industry or individual borrower. Further information on the Company’s lending activities, including related party transactions, is provided in “Note 5 Loans and Leases” in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report. ### The Allowance for Loan and Lease Losses Management reviews the appropriateness of the allowance for loan and lease losses (“allowance”) on a regular basis. Management considers the accounting policy relating to the allowance to be a critical accounting policy, given the inherent uncertainty in evaluating the levels of the allowance required to cover credit losses in the portfolio and the material effect that assumptions could have on the Company’s results of operations. The Company has developed a methodology to measure the amount of estimated loan loss exposure inherent in the loan portfolio to assure that an appropriate allowance is maintained. The Company’s methodology is based upon guidance provided in SEC Staff Accounting Bulletin No. 102, *Selected Loan Loss Allowance Methodology and Documentation Issues* and allowance allocations are calculated in accordance with ASC Topic 310, *Receivables* and ASC Topic 450, *Contingencies.* The Company’s methodology for determining and allocating the allowance for loan and lease losses focuses on ongoing reviews of larger individual loans and leases, historical net charge-offs, delinquencies in the loan and lease portfolio, the level of impaired and nonperforming loans, values of underlying loan and lease collateral, the overall risk characteristics of the portfolios, changes in character or size of the portfolios, geographic location, current economic conditions, changes in capabilities and experience of lending management and staff, and other relevant factors. The various factors used in the methodologies are reviewed on a regular basis. At least annually, management reviews all commercial and commercial real estate loans exceeding a certain threshold and assigns a risk rating. The Company uses an internal loan rating system of pass credits, special mention loans, substandard loans, doubtful loans, and loss loans (which are fully charged off). The definitions of “special mention”, “substandard”, “doubtful” and “loss” are consistent with banking regulatory definitions. Factors considered in assigning loan ratings include: the customer’s ability to repay based upon customer’s expected future cash flow, operating results, and financial condition; the underlying collateral, if any; and the economic environment and industry in which the customer operates. Special mention loans have potential weaknesses that if left uncorrected may result in deterioration of the repayment prospects and a downgrade to a more severe risk rating. A substandard loan credit has a well-defined weakness which makes payment default or principal exposure likely, but not yet certain. There is a possibility that the Company will sustain some loss if the deficiencies are not corrected. A doubtful loan has a high possibility of loss, but the extent of the loss is difficult to quantify because of certain important and reasonably specific pending factors. At least quarterly, management reviews all commercial and commercial real estate loans and leases and agriculturally related loans with an outstanding principal balance of over $500,000 that are internally risk rated 6 or worse, giving consideration to payment history, debt service payment capacity, collateral support, strength of guarantors, local market trends, industry trends, and other factors relevant to the particular borrowing relationship. Through this process, management identifies impaired loans. For loans and leases considered impaired, estimated exposure amounts are based upon collateral values or discounted cash flows. For commercial loans, commercial mortgage loans, and agricultural loans not specifically reviewed, and for homogenous loan portfolios such as residential mortgage loans and consumer loans, estimated exposure amounts are assigned based upon historical net loss experience and current charge-off trends, past due status, and management’s judgment of the effects of current economic conditions on portfolio performance. Since the methodology is based upon historical experience and trends as well as management’s judgment, factors may arise that result in different estimations. Significant factors that could give rise to changes in these estimates may include, but are not limited to, changes in economic conditions in the local area, concentration of risk, changes in interest rates, and declines in local property values. Based on its evaluation of the allowance as of December 31, 2010, management considers the allowance to be appropriate, under adversely different conditions or assumptions, the Company would need to increase the allowance. The allocation of the Company’s allowance as of December 31, 2010, and each of the previous four years is illustrated in *Table 6- Allocation of the Allowance for Loan and Lease Losses*, below. *Table 6 - Allocation of the Allowance for Loan and Lease Losses* *(in thousands)* | | As of December 31, 2010 | 2009 | 2008 | 2007 | 2006 | | --- | ---: | ---: | ---: | ---: | ---: | | **Total loans outstanding at end of year** | **$1,910,358** | **$1,914,818** | **$1,817,531** | **$1,440,122** | **$1,326,298** | | **ALLOCATION OF THE ALLOWANCE BY LOAN TYPE:** | | | | | | | Commercial and industrial | **$7,824** | $7,304 | $6,225 | $6,107 | $6,308 | | Commercial real estate | **14,445** | 11,119 | 7,190 | 4,917 | 3,987 | | Residential real estate | **3,526** | 3,616 | 2,960 | 1,759 | 1,622 | | Consumer and other | **1,976** | 2,230 | 2,219 | 1,807 | 2,158 | | Leases | **61** | 81 | 78 | 17 | 78 | | Unallocated | **0** | 0 | 0 | 0 | 175 | | **Total** | **$27,832** | $24,350 | $18,672 | $14,607 | $14,328 | | **ALLOCATION OF THE ALLOWANCE AS A PERCENTAGE OF TOTAL ALLOWANCE:** | | | | | | | Commercial and industrial | **28%** | 30% | 33% | 42% | 44% | | Commercial real estate | **52%** | 46% | 39% | 34% | 28% | | Residential real estate | **13%** | 15% | 16% | 12% | 11% | | Consumer and other | **7%** | 9% | 12% | 12% | 15% | | Leases | **0%** | 0% | 0% | 0% | 1% | | Unallocated | **0%** | 0% | 0% | 0% | 1% | | **Total** | **100%** | 100% | 100% | 100% | 100% | | **LOAN AND LEASE TYPES AS A PERCENTAGE OF TOTAL LOANS AND LEASES:** | | | | | | | Commercial and industrial | **25%** | 26% | 26% | 26% | 26% | | Commercial real estate | **38%** | 36% | 34% | 32% | 31% | | Residential real estate | **32%** | 32% | 34% | 35% | 36% | | Consumer and other | **4%** | 5% | 5% | 6% | 6% | | Leases | **1%** | 1% | 1% | 1% | 1% | | **Total** | **100%** | 100% | 100% | 100% | 100% | Management is committed to maintaining an appropriate allowance. The above allocation is neither indicative of the specific amounts or the loan categories in which future charge-offs may occur, nor is it an indicator of future loss trends. The allocation of the allowance to each category does not restrict the use of the allowance to absorb losses in any category. The allowance has steadily increased over the past three years, with the majority of the growth in the allowances allocated to commercial real estate and commercial loans. The increase in the overall allowance as well as the increase in these two loan categories over the past three years reflects higher allocations driven by deterioration in asset quality measures, including higher levels of net charge-offs, internally-classified commercial and commercial real estate loans, and nonperforming loans and leases; weak economic conditions; soft real estate markets; and growth in the loan portfolio. The increase in the Company’s net charge-offs during 2010, 2009, and 2008 led to higher historical loss factors in the allowance model. These historical loss factors were also adjusted upwards to reflect weak and uncertain economic conditions, including pressure on real estate values, and high unemployment. The allocations assigned to the internally-classified loans were also up in 2010, a result of an increase in the volume of loans internally-classified and higher historical loss factors. The level of future charge-offs is dependent upon a variety of factors such as national and local economic conditions, trends in various industries, underwriting characteristics, and conditions unique to each borrower. Given uncertainties surrounding these factors, it is difficult to estimate future losses. The principal balances of nonperforming loans and leases, including impaired loans and leases, as of December 31, are detailed in the table below. *Analysis of Past Due and Nonperforming Loans* *(dollar amounts in thousands)* | Loans 90 days past due and accruing | 2010 | 2009 | 2008 | 2007 | 2006 | | --- | ---: | ---: | ---: | ---: | ---: | | Commercial and industrial | **$842** | $294 | $0 | $0 | $0 | | Commercial real estate | **0** | 0 | 0 | 21 | 0 | | Residential real estate | **368** | 75 | 143 | 283 | 0 | | Consumer and other | **0** | 0 | 18 | 8 | 8 | | Leases | **7** | 0 | 0 | 0 | 0 | | Total loans 90 days past due and accruing | **1,217** | 369 | 161 | 312 | 8 | | Nonaccrual loans | | | | | | | Commercial and industrial | **7,271** | 7,334 | 2,606 | 1,922 | 1,053 | | Commercial real estate | **24,791** | 16,664 | 8,288 | 6,198 | 569 | | Residential real estate | **9,111** | 7,070 | 4,497 | 552 | 1,142 | | Consumer and other | **309** | 193 | 407 | 218 | 230 | | Leases | **19** | 28 | 0 | 0 | 0 | | Total nonaccrual loans | **41,501** | 31,289 | 15,798 | 8,890 | 2,994 | | Troubled debt restructurings not included above | **2,564** | 3,265 | 69 | 145 | 0 | | **Total nonperforming loans and leases** | **45,282** | 34,923 | 16,028 | 9,347 | 3,002 | | Other real estate owned | **1,255** | 299 | 110 | 5 | 348 | | **Total nonperforming assets** | **$46,537** | $35,222 | $16,138 | $9,352 | $3,350 | | **Allowance as a percentage of loans and leases outstanding** | **1.46%** | 1.27% | 1.03% | 1.01% | 1.08% | | **Allowance as a percentage of nonperforming loans and leases** | **61.46%** | 69.72% | 116.50% | 156.27% | 477.28% | | **Total nonperforming assets as percentage of total assets** | **1.43%** | 1.12% | 0.56% | 0.40% | 0.15% | Nonperforming assets include nonaccrual loans, troubled debt restructurings (“TDR”), and foreclosed real estate. The level of nonperforming assets over the past five year ends is illustrated in the table above. Nonperforming assets represented 1.43% of total assets at December 31, 2010, compared to 1.12% at December 31, 2009, and 0.56% at December 31, 2008. Although higher than the same period prior year, the Company’s ratio of nonperforming assets to total assets continues to compare favorably to our peer group’s most recent ratio of 3.38% at December 31, 2010. The peer data is from the Federal Reserve Board and represents banks or bank holding companies with assets between $3.0 billion and $10.0 billion. In general, the increase in nonperforming assets is reflective of the current weak economy, which has pressured real estate values in some of the Company’s markets and stressed the financial conditions of various commercial and agricultural borrowers. Nonperforming loans (loans in nonaccrual status, loans past due 90 days or more and still accruing interest, and loans restructured in a troubled debt restructuring) were $45.3 million at December 31, 2010, up from $34.9 million at December 31, 2009, and up from $16.0 million at December 31, 2008. Nonperforming loans represented 2.37% of total loans at December 31, 2010, compared to 1.82% of total loans at December 31, 2009, and 0.88% of total loans at December 30, 2008. A breakdown of nonperforming loans by portfolio segment is shown above. The increase in nonperforming loans over prior year is mainly centered in commercial real estate and is mainly due to the addition of a few larger commercial real estate related credits during the third quarter of 2010. Loans are considered modified in a TDR when, due to a borrower’s financial difficulties, the Company makes a concession(s) to the borrower that it would not otherwise consider. When modifications are provided for reasons other than as a result of the financial distress of the borrower, these loans are not classified as TDR’s or impaired. These modifications may include, among others, an extension of the term of the loan, and granting a period when interest-only payments can be made, with the principal payments made over the remaining term of the loan or at maturity. TDRs are included in the above table within the categories, loans 90 days past due and accruing, nonaccrual loans, or troubled debt restructuring, not included above. Loans in the latter include loans that meet the definition of a TDR but are performing in accordance with the modified terms. The TDR amounts of $2.6 million at December 31, 2010, and $3.3 million at December 31, 2009 consists of one commercial relationship where two loans were modified with concessions granted due to the stressed financial condition of the borrower. The decrease in the balance was due to a principal pay down resulting from the sale of some real estate collateral securing the loans. In general, the Company places a loan on nonaccrual status if principal or interest payments becomes 90 days or more past due and/or management deems the collectability of the principal and/or interest to be in question, as well as when required by regulatory requirements. Although in nonaccrual status, the Company may continue to receive payments on these loans. These payments are generally recorded as a reduction to principal and interest income is recorded only after principal recovery is reasonably assured. As of December 31, 2010, the Company was regularly receiving payments on approximately 63% of the loans categorized as nonaccrual. The Company’s recorded investment in loans and leases that are considered impaired totaled $35.2 million at December 31, 2010, and $30.0 million at December 31, 2009. A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans consist of our non-homogenous nonaccrual loans and loans that are 90 days or more past due. Specific reserves on individually identified impaired loans that are not collateral dependent are measured based on the present value of expected future cash flows discounted at the original effective interest rate of each loan. For loans that are collateral dependent, impairment is measured based on the fair value of the collateral less estimated selling costs, and such impaired amounts are generally charged off. The average recorded investment in impaired loans and leases was $36.9 million in 2010, $17.0 million in 2009, $8.6 million in 2008. At December 31, 2010, $15.4 million of impaired loans had specific reserve allocations of $3.2 million and $19.8 million had no specific reserve allocation. At December 31, 2009, $13.1 million of impaired loans had specific reserve allocations of $803,000 and $16.9 million had no specific reserve allocation. At December 31, 2008, $4.6 million of impaired loans had specific reserve allocations of $414,000 and $5.1 million had no specific reserve allocations. The majority of impaired loans are collateral dependant impaired loans that have limited exposure or require limited specific reserve because of the amount of collateral support with respect to these loans and previous charge-offs. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured. In these cases, interest is recognized on a cash basis. Interest income recognized on impaired loans and leases, all collected in cash, and was $252,000 for 2010, $234,000 for 2009, and $455,000 for 2008. As shown in Table 6 above, the Company’s allowance has steadily increased over the past three years. As of December 31, 2010, the allowance represented 1.46% of total loans and leases, up from 1.27% at December 31, 2009. The increase in the ratio of the allowance to total loans and leases outstanding is consistent with the increase in our nonperforming assets, net charge-offs and internally-classified loans during 2010 as well as the overall weakness and uncertainty in the economy. The allowance for loan and lease losses coverage of nonperforming loans and leases dropped from 1.17 times at year-end 2008 to 0.70 times at year-end 2009 to 0.61 times at year-end 2010 despite an increase in the level of the allowance to total loans to 1.46% at 2010 from 1.03% at year-end 2008. The decline of the allowance coverage of nonperforming loans and leases is primarily due to the increase in nonaccruing loans, which were mostly made up of collateral dependent impaired loans requiring little to no specific reserve due to the level of collateral available with respect to these loans and/or previous charge-offs. The Company’s policy is to underwrite loans with strong LTV percentages. This practice, among others, has had a positive impact on the level of our loan charge-offs. The difference between the interest income that would have been recorded if these loans and leases had been paid in accordance with their original terms and the interest income that was recorded for the year ended December 31, 2010, was $1.7 million. The amount for the year ended December 31, 2009, was $669,000. The amount for 2008 was not significant. The Company had no material commitments to make additional advances to borrowers with nonperforming loans. *Table 7 - Analysis of the Allowance for Loan and Lease Losses* *(in thousands)* | | December 31, 2010 | 2009 | 2008 | 2007 | 2006 | | --- | ---: | ---: | ---: | ---: | ---: | | Average loans outstanding during year | **$1,897,983** | $1,850,453 | $1,612,716 | $1,362,417 | $1,269,650 | | Balance of allowance at beginning of year | **24,350** | 18,672 | 14,607 | 14,328 | 13,677 | | **LOANS CHARGED-OFF:** | | | | | | | Commercial and industrial | **3,265** | 1,653 | 1,491 | 674 | 278 | | Commercial real estate | **1,167** | 558 | 473 | 2 | 55 | | Residential real estate | **791** | 828 | 112 | 118 | 43 | | Consumer and other | **912** | 1,195 | 1,214 | 966 | 888 | | **Total loans charged-off** | **$6,135** | $4,234 | $3,290 | $1,760 | $1,264 | | **RECOVERIES OF LOANS** | | | | | | | **PREVIOUSLY CHARGED-OFF:** | | | | | | | Commercial and industrial | **464** | 305 | 132 | 124 | 77 | | Commercial real estate | **225** | 27 | 0 | 19 | 59 | | Residential real estate | **85** | 24 | 2 | 9 | 19 | | Consumer and other | **336** | 268 | 308 | 358 | 333 | | Leases | **0** | 0 | 0 | 0 | 3 | | **Total loans recovered** | **$1,110** | $624 | $442 | $510 | $491 | | Net loans charged-off | **5,025** | 3,610 | 2,848 | 1,250 | 773 | | Allowance acquired in purchase acquisition | | 0 | 1,485 | 0 | 0 | | Additions to allowance charged to operations | **8,507** | 9,288 | 5,428 | 1,529 | 1,424 | | **Balance of allowance at end of year** | **$27,832** | $24,350 | $18,672 | $14,607 | $14,328 | | **Net charge-offs as a percentage of average loans and leases outstanding during the year** | **0.26%** | 0.20% | 0.18% | 0.09% | 0.06% | As previously stated, the provision for loan and lease losses represents management’s estimate of the expense necessary to maintain the allowance for loan and lease losses at an adequate level. The provision for loan and lease losses was $8.5 million in 2010, compared to $9.3 million in 2009. In 2010 and 2009, the provision was higher than historical levels due to increases in nonperforming loans and leases and net charge-offs as well as concerns over weak economic conditions and uncertain real estate markets. The ratio of net charge-offs to average total loans and leases of 0.26%, for 2010, is up over prior year, but is favorable to a peer ratio of 1.45%. The peer data is from the Federal Reserve Board and represents banks or bank holding companies with assets between $3.0 billion and $10.0 billion. The peer ratio is as of December 31, 2010, the most recent data available from the Federal Reserve Board. While overall economic conditions remain weak, there have been some improvements noted in the financial conditions of several of the Company’s large commercial customers and the Company’s agricultural related portfolio has benefited from improving milk prices. Management reviews the loan portfolio continuously for evidence of potential problem loans and leases. Potential problem loans and leases are loans and leases that are currently performing in accordance with contractual terms, but where known information about possible credit problems of the related borrowers causes management to have doubt as to the ability of such borrowers to comply with the present loan payment terms and may result in such loans and leases becoming nonperforming at some time in the future. Management considers loans and leases classified as Substandard, which continue to accrue interest, to be potential problem loans and leases. The Company, through its internal loan review function, identified 65 commercial relationships totaling $63.9 million at December 31, 2010, this presents an improvement from the 67 commercial relationships totaling $83.9 million at December 31, 2009, which were classified as Substandard, and continued to accrue interest. Of the 65 commercial relationships, there are 15 relationships that equaled or exceeded $1.0 million, which in aggregate totaled $53.0 million. Over the past few years, the Company has seen an increase in potential problem loans as weak economic conditions have strained borrowers’ cash flows and collateral values. The decrease in the dollar volume of potential problem loans since year-end 2009 was due to the upgrade of several large commercial credits to a risk grading better than Substandard, and a large commercial relationship being moved to nonaccrual status. The Company continues to monitor these relationships; however, management cannot predict the extent to which continued weak economic conditions or other factors may further impact borrowers. These loans remain in a performing status due to a variety of factors, including payment history, the value of collateral supporting the credits, and personal or government guarantees. These factors, when considered in the aggregate, give management reason to believe that the current risk exposure on these loans does not warrant accounting for these loans as nonperforming. However, these loans do exhibit certain risk factors, which have the potential to cause them to become nonperforming. Accordingly, management’s attention is focused on these credits, which are reviewed on at least a quarterly basis. ### Deposits and Other Liabilities Total deposits of $2.5 billion at December 31, 2010, were up $56.0 million or 2.3% over year-end 2009. Deposit growth included $47.7 million in interest checking, savings and money market balances and $61.2 million in noninterest bearing deposits. This growth was offset by a decline in time deposits of $52.9 million. Core deposits, defined as total deposits less time deposits of $100,000 or more, brokered deposits and municipal money market deposits, grew by $192.6 million or 11.2% to $1.9 billion at year-end 2010 from $1.7 billion at year-end 2009. Core deposits represented 76.8% of total deposits at December 31, 2010, compared to 70.7% of total deposits at December 31, 2009. Municipal money market accounts decreased by $75.2 million, or 22.0% to $265.9 million at year-end 2010 from $341.1 million at year-end 2009. Time deposits of $100,000 and more were down $31.5 million, or 9.6% between year-end 2010 and year-end 2009 while brokered deposits also declined $29.9 million or 66.6% over the same time period. *Table 1-Average Statements of Condition and Net Interest Analysis* shows the average balance and average rate paid on the Company’s primary deposit categories for the years ended December 31, 2010, 2009, and 2008. A maturity schedule of time deposits outstanding at December 31, 2010, is included in “Note 9 Deposits” in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report. The Company uses both retail and wholesale repurchase agreements. Retail repurchase agreements are arrangements with local customers of the Company, in which the Company agrees to sell securities to the customer with an agreement to repurchase those securities at a specified later date. Retail repurchase agreements totaled $43.6 million at December 31, 2010, and $47.3 million at December 31, 2009. Management generally views local repurchase agreements as an alternative to large time deposits. The Company’s wholesale repurchase agreements are primarily with the Federal Home Loan Bank (“FHLB”) and amounted to $140.0 million at December 31, 2010, and $145.5 million at December 31, 2009. During 2010, the Company prepaid a $5.0 million repurchase agreement with the FHLB where the Company had elected the fair value option. A net mark-to-market pre-tax loss of $147,000 related to this repurchase agreement is included in 2010 results within the Company’s Consolidated Statements of Income in the “Mark-to-Market Gain (Loss) on Liabilities Held at Fair Value” line item. Refer to “Note 10 Securities Sold Under Agreements to Repurchase and Federal Funds Purchased” in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report for further details on the Company’s repurchase agreements. The Company’s other borrowings totaled $244.2 million at year-end 2010, up $35.2 million or 16.9% from $209.0 million at year-end 2009. The $244.2 million in borrowings at December 31, 2010, included $144.0 million in term advances, $79.0 million of overnight FHLB advances, and a $19.4 million advance from a money center bank. Of the $144.0 million of the FHLB term advances at year-end 2010, $120.0 million are due over one year and have a weighted average rate of 4.47%. In 2007, the Company elected to account for a $10.0 million advance with the FHLB at fair value. The fair value of this advance increased by $294,000 (pre-tax net mark-to-market loss of $294,000) over the 12-months ended December 31, 2010. Refer to “Note 11 Other Borrowings” in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report for further details on the Company’s term borrowings with the FHLB. Other borrowings included a term borrowing with a bank totaling $19.4 million at December 31, 2010, and $25.0 million at December 31, 2009. There were also a Treasury Tax and Loan Note account with the Federal Reserve Bank of New York totaling $100,000 at December 31, 2010 and 2009, and borrowings from unrelated financial institutions totaling $21,000 and $30,000 at December 31, 2010 and 2009, respectively. ### LIQUIDITY MANAGEMENT The objective of liquidity management is to ensure the availability of adequate funding sources to satisfy the demand for credit, deposit withdrawals, operating expenses, 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 the Asset/Liability Management Committee of the Company’s subsidiary banks. This Committee reviews 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, provides 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 low cost funding source obtained mainly through the Company’s branch network. Core deposits totaled $1.9 billion at year-end 2010, up $192.6 million or 11.2% from year-end 2009, with the increase mainly in non-municipal money market and savings deposits and noninterest-bearing deposits. Core deposits represented 76.8% of total deposits and 64.2% of total liabilities at December 31, 2010, compared to 70.7% of total deposits and 59.3% of total liabilities at December 31, 2009. 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, overnight borrowings and term advances from the FHLB and other funding sources. Rates and terms are the primary determinants of the mix of these funding sources. Non-core funding sources decreased by $110.5 million to $1.0 billion at year end 2010, from $1.1 billion at year-end 2009. As a percentage of total liabilities, non-core funding sources decreased from 38.4% at year-end 2009 to 33.7% at year-end 2010. Overnight borrowing from the FHLB increased $65.5 million during 2010 to partially offset declines of $75.2 million in municipal money market accounts, $31.5 million in time deposits of $100,000 or more and $29.9 million in brokered time deposits. The robust growth of lower cost core deposits has allowed the Company to reduce higher cost funding sources. Non-core funding sources may require securities to be pledged against the underlying liability. Securities carried at $682.2 million and $772.7 million at December 31, 2010 and 2009, respectively, were either pledged or sold under agreements to repurchase. Pledged securities represented 67.6% of total securities at December 31, 2010, compared to 83.9% of total securities at December 31, 2009. Cash and cash equivalents totaled $49.7 million as of December 31, 2010, up from $45.5 million at December 31, 2009. Short-term investments, consisting of securities due in one year or less, increased from $30.1 million at December 31, 2009, to $42.5 million on December 31, 2010. The Company also has $22.8 million of securities designated as trading securities. 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 $560.8 million at December 31, 2010 compared with $477.7 million at December 31, 2009. Outstanding principal balances of residential mortgage loans, consumer loans, and leases totaled approximately $710.2 million at December 31, 2010 as compared to $722.5 million at December 31, 2009. 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 December 31, 2010, the unused borrowing capacity on established lines with the FHLB was $900.0 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 December 31, 2010, total unencumbered residential mortgage loans of the Company were $158.7 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. *Table 8-Loan Maturity* details total scheduled maturities of selected loan categories. ### Table 8 - Loan Maturity *(in thousands)* | Remaining maturity of selected loans | At December 31, 2010 Total | Within 1 year | 1-5 years | After 5 years | | --- | ---: | ---: | ---: | ---: | | Commercial and industrial | $473,232 | $180,301 | $150,421 | $142,510 | | Commercial real estate | 727,361 | 43,821 | 61,754 | 621,786 | | Residential real estate | 626,799 | 1,032 | 15,157 | 610,610 | | **Total** | **$1,827,392** | **$225,154** | **$227,332** | **$1,374,906** | Loan balances are shown net of deferred costs and fees. Of the loan amounts shown above in Table 8- Loan Maturity maturing over 1 year, $523.4 million have fixed rates and $1.1 billion have adjustable rates ### OFF-BALANCE SHEET ARRANGEMENTS In the normal course of business the Company is party to certain financial instruments, which in accordance with accounting principles generally accepted in the United States, are not included in its Consolidated Statements of Condition. These transactions include commitments under standby letters of credit, unused portions of lines of credit, and commitments to fund new loans and are undertaken to accommodate the financing needs of the Company’s customers. Loan commitments are agreements by the Company to lend monies at a future date. These loan and letter of credit commitments are subject to the same credit policies and reviews as the Company’s loans. Because most of these loan commitments expire within one year from the date of issue, the total amount of these loan commitments as of December 31, 2010, are not necessarily indicative of future cash requirements. Further information on these commitments and contingent liabilities is provided in “Note 17 Commitments and Contingent Liabilities” in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report. ### CONTRACTUAL OBLIGATIONS The Company leases land, buildings, and equipment under operating lease arrangements extending to the year 2090. Most leases include options to renew for periods ranging from 5 to 20 years. In addition, the Company has a software contract for its core banking application through July 31, 2015, along with contracts for more specialized software programs through 2016. Further information on the Company’s lease arrangements is provided in “Note 8 Premises and Equipment” in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report. The Company’s contractual obligations as of December 31, 2010, are shown in *Table 9-Contractual Obligations and Commitments* below. ### Table 9 - Contractual Obligations and Commitments *(in thousands)* | Contractual Cash Obligations As of December 31, 2010 | Payments Due By Period Within Total | 1 year | 1-3 years | 3-5 years | Over 5 Years | | --- | ---: | ---: | ---: | ---: | ---: | | Long-term debt | $327,583 | $54,284 | $96,527 | $66,060 | $110,712 | | Operating leases | 22,851 | 2,105 | 3,854 | 3,388 | 13,504 | | Software contracts | 4,049 | 1,322 | 1,737 | 877 | 113 | | **Total contractual cash obligations** | **$354,483** | **$57,711** | **$102,118** | **$70,325** | **$124,329** | ### RECENTLY ISSUED ACCOUNTING STANDARDS Refer to “Note 1 Summary of Significant Accounting Policies” in Notes to Consolidated Financial Statements in Part II, Item 8. of this Form 10-K for details of recently issued accounting pronouncements and their expected impact on the Company’s financial statements. ### Fourth Quarter Summary The Company reported diluted earnings per share of $0.81 for the fourth quarter of 2010, a 6.6% increase from $0.76 for the comparable year-ago period, and a 17.4% increase from $0.69 per share reported in the third quarter of 2010. Fourth quarter 2010 net income was $8.9 million, up 8.3% over fourth quarter 2009 net income of $8.2 million and up 18.7% from third quarter 2010 net income of $7.5 million. Taxable-equivalent net interest income of $28.5 million in the fourth quarter of 2010 was in line with the same quarter 2009 which represented a record quarterly level for the Company. The growth in taxable-equivalent net interest income was mainly due to lower funding costs, however growth in average earning assets help to offset the overall lower yields on earning assets. Average earning assets increased $90.1 million or 3.1%, to $3.0 billion in the fourth quarter of 2010 from $2.9 billion in the fourth quarter of 2009. The growth in average earnings assets in the fourth quarter over the year-earlier quarter included a $127.1 million or 13.5% increase in average securities. The yield on interest earning assets was 4.72% in the fourth quarter of 2010, down 46 basis points from 5.18% in the fourth quarter of 2009. The rate paid on interest-bearing liabilities was 1.21% in the fourth quarter of 2010, down 36 basis points from 1.57% in the same quarter prior year. The provision for loan and lease losses was $1.4 million for the fourth quarter of 2010, compared to $2.8 million for the fourth quarter of 2009. (Net charge-offs totaled $2.3 million in the fourth quarter of 2010, representing an annualized 0.48% of average loans and leases compared with net charge-offs of $1.2 million or an annualized 0.25% of average loans and lease in the same period of 2009.) Total noninterest income in the fourth quarter of 2010 was $12.3 million, up $138,000, or 1.1%, from the fourth quarter of 2009. Current quarter declines in service charges on deposit accounts were offset by increases in other key fee income categories such as card services income and insurance commissions and fees. Service charges on deposit accounts were negatively impacted by new regulatory requirements. Net mark-to-market gains on securities and liabilities held at fair value totaled $160,000 in the fourth quarter of 2010 compared to net mark-to-market gains of $352,000 in the same quarter prior year. Net realized gains on securities transactions were down from $218,000 in the fourth quarter of 2009 to $5,000 in the current quarter. The recognition of non-recurring deferred income on a loan workout of $332,000 was recorded in the fourth quarter of 2010. Noninterest expense totaled $25.2 million for the 2010 fourth quarter, up $253,000, or 1.0%, from $24.9 million for the 2009 fourth quarter. Salary and benefit related expenses were up $587,000 or 4.2% over the same quarter prior year. The increase was due to annual salary adjustments, additional FTEs, and higher benefit-related expenses, mainly pension and other employee benefits. Higher professional fees in the quarter were offset by lower technology expense. ## Market risk As filed, 5,489 characters. ### MARKET RISK Interest rate risk is the primary market risk category associated with the Company’s operations. Interest rate risk refers to the volatility of earnings caused by changes in interest rates. The Company manages interest rate risk using income simulation to measure interest rate risk inherent in its on-balance sheet and off-balance sheet financial instruments at a given point in time by showing the potential effect of interest rate shifts on net interest income for future periods. Each quarter the Company’s Asset/Liability Management Committee reviews the simulation results to determine whether the exposure of net interest income to changes in interest rates remains within Board-approved levels. The Committee also discusses strategies to manage this exposure and incorporates these strategies into the investment and funding decisions of the Company. The Company does not currently use derivatives, such as interest rate swaps, to manage its interest rate risk exposure, but may consider such instruments in the future. 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 100 basis point parallel change in rates. Based upon the simulation analysis performed as of November 30, 2010, a 200 basis point parallel upward change in interest rates over a one-year time frame would result in a one-year decline in net interest income from the base case of approximately 1.7%, while a 100 basis point parallel decline in interest rates over a one-year period would result in a marginal decrease in one-year net interest income from the base case of 1.2%. The 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 moderate exposure in the 100 basis point decline scenario results from the Company’s assets repricing downward to a greater degree than the rates on the Company’s interest-bearing liabilities, mainly deposits. Rates on savings and money market accounts are at low levels given the historically low interest rate environment experienced in recent years. In addition, the model assumes that prepayments accelerate in the down interest rate environment resulting in additional pressure on asset yields as proceeds are reinvested at lower rates. In our most recent simulation, the base case scenario, which assumes interest rates remain unchanged from the date of the simulation, showed a relatively flat net interest margin during 2011. Although the simulation model is useful in identifying potential exposure to interest rate movements, actual results may differ from those modeled as the repricing, maturity, and prepayment characteristics of financial instruments may change to a different degree than modeled. In addition, the model does not reflect actions that management may employ to manage its interest rate risk exposure. The Company’s current liquidity profile, capital position, and growth prospects, offer a level of flexibility for management to take actions that could offset some of the negative effects of unfavorable movements in interest rates. Management believes the current exposure to changes in interest rates is not significant in relation to the earnings and capital strength of the Company. In addition to the simulation analysis, management uses an interest rate gap measure. *Table 10-Interest Rate Risk Analysis* below is a Condensed Static Gap Report, which illustrates the anticipated repricing intervals of assets and liabilities as of December 31, 2010. The Company’s one-year interest rate gap was a negative $153,000 or 4.69% of total assets at December 31, 2010, compared with a negative $113,000 or 3.59% of total assets at December 31, 2009. A negative gap position exists when the amount of interest-bearing liabilities maturing or repricing exceeds the amount of interest-earning assets maturing or repricing within a particular time period. This analysis suggests that the Company’s net interest income is more vulnerable to an increasing rate environment than it is to a prolonged declining interest rate environment. An interest rate gap measure could be significantly affected by external factors such as a rise or decline in interest rates, loan or securities prepayments, and deposit withdrawals. *Condensed Static Gap - December 31, 2010* *(in thousands)* | Table 10 - Interest Rate Risk Analysis | Repricing Interval Total | 0-3 months | 3-6 months | 6-12 months | 12 months | | --- | ---: | ---: | ---: | ---: | ---: | | Interest-earning assets\* | $3,029,621 | $638,410 | $190,195 | $342,476 | $1,171,081 | | Interest-bearing liabilities | 2,400,446 | 952,286 | 162,717 | 208,916 | 1,323,919 | | Net gap position | | (313,876) | 27,478 | 133,560 | (152,838) | | Net gap position as a percentage of total assets | | **(9.63** **) %** | **0.84%** | **4.10%** | **(4.69)%** | | \*Balances of available-for-sale securities are shown at amortized cost | | | | | | 49 #### \[This Page Intentionally Left Blank\] ## Controls and procedures As filed, 2,740 characters. ### Evaluation of Disclosure Controls and Procedures The Company’s management, including its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operations of the Company’s disclosure controls and procedures (as defined in Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 31, 2010. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this Form 10-K, the Company’s disclosure controls and procedures were effective in providing reasonable assurance that information required to be disclosed by the Company in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that material information relating to the Company and its subsidiaries is made known to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. ### Management’s Annual Report on Internal Control Over Financial Reporting The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. As of December 31, 2010, management assessed the effectiveness of the Company’s internal control over financial reporting based on the framework for effective internal control over financial reporting established in “Internal Control - Integrated Framework,” issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on its evaluation under the COSO framework, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2010 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles. The results of management’s assessment was reviewed with the Company’s Audit Committee of its Board of Directors. The Company’s registered public accounting firm has issued an attestation report on the Company’s internal controls over financial reporting, which is included in Part II, Item 8 of this Report. ### Changes in Internal Control Over Financial Reporting There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s fourth quarter ended December 31, 2010, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. Filed Mar 17, 2011. Source: SEC EDGAR, the filing index for accession 0001019056-11-000330. Last ingested by Listed: Nov 14, 2026, 20:28 ET. No prices; not investment advice.