UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
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Commission File Number 1-12709
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TOMPKINS TRUSTCO INC.
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(Exact name of registrant as specified in its charter)
New York 16-1482357
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
The Commons, P.O. Box 460, Ithaca, New York 14851
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (607) 273-3210
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Title of Class:
Common Stock ($.10 Par Value)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes[X] No[ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates was approximately $301,959,000 on June 28, 2002, based on the
closing sales price of the registrant's common stock, $.10 par value (the
"Common Stock"), as reported on the American Stock Exchange, as of such date.
The number of shares of the registrant's Common Stock outstanding as of March
21, 2003, was 7,369,598 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement (the "Proxy Statement") filed with the Securities and Exchange
Commission in connection with the 2003 Annual Meeting of Stockholders, is
incorporated herein by reference in Part III.
TOMPKINS TRUSTCO, INC.
2002 Annual Report on Form 10-K
Table of Contents
Page
PART I
Item 1. Business of the Company ................................. 1
Item 2. Properties .............................................. 4
Item 3. Legal Proceedings ....................................... 6
Item 4. Submission of Matters for a Vote by Securities Holders .. 6
PART II
Item 5. Market for Registrant's Common Equity and Related
Securities .............................................. 8
Item 6. Selected Financial Data ................................. 8
Item 7. Management Discussion and Analysis of Financial
Condition and Results of Operations ..................... 9
Item 7A. Quantitative and Qualitative Disclosure About Market
Risk .................................................... 28
Item 8. Financial Statements and Supplementary Data ............. 31
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ..................... 61
PART III
Item 10. Directors and Executive Officers of the Registrant ...... 61
Item 11. Executive Compensation .................................. 61
Item 12. Security Ownership of Certain Beneficial Owners and
Management .............................................. 61
Item 13. Certain Relationships and Related Transactions .......... 61
Item 14. Controls and Procedures ................................. 61
Item 15. Principal Accountant Fees and Services .................. 61
PART IV
Item 16. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K ............................................. 62
Certification of Chief Executive Officer
Certification of Chief Financial Officer
Powers of Attorney
i
[This Page Intentionally Left Blank]
PART I
Item 1. Business of the Company
General
Tompkins Trustco, Inc. ("Tompkins" or the "Company"), is the corporate parent to
three community banks, Tompkins Trust Company ("Trust Company"), The Bank of
Castile, and The Mahopac National Bank ("Mahopac National Bank"), which together
operate 33 banking offices in local market areas throughout New York State.
Through its community banking subsidiaries, the Company provides traditional
banking services, and offers a full range of money management services through
Tompkins Investment Services, a division of Tompkins Trust Company. The Company
also offers insurance services through its Tompkins Insurance Agencies, Inc.
("Tompkins Insurance") subsidiary, an independent agency with a history of over
100 years of service to individual and business clients throughout western New
York. Each Tompkins subsidiary operates with a community focus, meeting the
needs of the unique communities served.
Headquartered in Ithaca, New York, Tompkins is registered as a Financial Holding
Company with the Federal Reserve Board under the Bank Holding Company Act of
1956, as amended. Tompkins was organized in 1995, under the laws of the State of
New York, as a bank holding company for the Tompkins Trust Company, a commercial
bank that has operated in Ithaca and surrounding communities since 1836.
Narrative Description of Business
The Company provides traditional banking related services, which constitute the
Company's only reportable business segment. Banking services consist primarily
of attracting deposits from the areas served by its banking offices and using
those deposits to originate a variety of commercial loans, consumer loans, real
estate loans, and leases. The Company's principal expenses are interest on
deposits, interest on borrowings, and operating and general administrative
expenses, as well as provisions for loan/lease losses. Funding sources, other
than deposits, include borrowings, securities sold under agreements to
repurchase, and cash flow from lending and investing activities. Tompkins
provides a variety of financial services to individuals and small business
customers. Some of the traditional banking and related 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, merchant processing, and
Internet-based account services.
Retail Services
The Company's subsidiary banks provide a variety of retail banking services
including checking accounts, savings accounts, time deposits, IRA products,
brokerage services, residential mortgage loans, personal loans, home equity
loans, credit cards, debit cards and safe deposit services. Retail services are
accessible through a variety of delivery systems including branch facilities,
ATMs, voice response, and Internet banking.
Trust and Investment Management Services
The Company provides trust and investment services through Tompkins Investment
Services, a division of Tompkins Trust Company. Tompkins Investment Services,
with office locations at all three of the Company's subsidiary banks, provides a
full range of money management services, including investment management
accounts, custody accounts, trusts, retirement plans and rollovers, estate
settlement, and financial planning.
Insurance Services
The Company provides insurance services through its Tompkins Insurance
subsidiary. Tompkins Insurance is an independent agency, representing 22 major
insurance carriers with access to special risk property and liability markets.
Tompkins Insurance has state of the art computer systems for record keeping,
claim processing and coverage confirmation, and can provide instant insurance
pricing comparisons from some of the country's finest insurance companies.
1
Securities Portfolio
The Company maintains a portfolio of securities such as U.S. government and
agency securities, obligations of states and political subdivisions thereof,
equity securities, and interest-bearing deposits. Management typically invests
in securities with short to intermediate average lives in order to better match
the interest rate sensitivities of its assets and liabilities.
Investment decisions are made within policy guidelines established by the
Company's board of directors. The investment policy established by the 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 acceptable limits of safety and
liquidity. Securities, other than certain obligations of states and political
subdivisions thereof, are classified as available-for-sale, though it is
generally management's intent to hold all securities to maturity. Securities
available-for-sale may be used to enhance total return, provide additional
liquidity, or reduce interest rate risk.
Competition
The Company's subsidiary banks operate 33 offices, including 1 limited-service
office, serving communities in upstate New York. The Trust Company operates 13
full-service and 1 limited service banking offices in the counties of Tompkins,
Cortland, and Schuyler. The Bank of Castile conducts its operations through its
13 full-service offices, in towns situated in and around the areas commonly
known as the Letchworth State Park area and the Genesee Valley region of New
York State. Mahopac National Bank is located in Putnam County, and operates 4
full-service offices in that county, and 2 full-service offices in Dutchess
County.
The decision to operate as three locally managed community banks reflects
management's commitment to community banking as a business strategy. For
Tompkins, this community banking approach is characterized by a commitment to
prompt, accurate service, and the personal touch provided by knowledgeable,
dedicated employees. The combined resources of the Tompkins organization
provides increased capacity for growth, and greater capital resources necessary
to make investments in technology and services. Tompkins has developed several
specialized financial services that are now available in markets served by all
three affiliate banks. These services include trust and investment services,
leasing, card services, and Internet banking. The addition of Tompkins Insurance
adds a line of insurance and risk management products to the Company's array of
financial products.
The area served by the Trust Company consists primarily of Tompkins County, with
an estimated population of 97,000. Education plays a significant role in the
local economy with Cornell University and Ithaca College being two of the
county's major employers. Current economic trends include low unemployment and
moderate growth. In December 2002, the Trust Company opened its first office in
Cortland, New York, which has a population of 48,599. The Trust Company also
recently acquired a building in Auburn, New York, which is in Cayuga County with
a population of 81,963. This building will be the site of the Company's first
Cayuga County office, expected to open in mid-2003. The Bank of Castile serves a
five-county market that is primarily rural in nature. The opening of a branch
office in Chili, New York, in 1999 provides increased access to the suburban
Rochester, New York, market. Excluding Monroe County, which includes Rochester,
the population of the counties served by The Bank of Castile is approximately
171,000. Economic growth has been relatively flat in The Bank of Castile's
market area, although the significant population base of the suburban Rochester
market (in excess of 700,000 people) provides continued opportunities for
growth. The primary market area for Mahopac National Bank is Putnam County, with
a population of approximately 96,000. Putnam County is about 60 miles north of
Manhattan, and is one of the fastest growing counties in New York State. The
Hopewell Junction and LaGrange offices are located in Dutchess County, which has
a population of approximately 280,000.
Competition for commercial banking and other financial services is strong in the
Company's market areas. Deregulation of the banking industry has created a
highly competitive environment for commercial banking services. Deregulation has
contributed to a decrease in the number of community banks, and an increase in
competition from regional and national financial service providers. In one or
more aspects of its business, the Company competes with other commercial banks,
savings institutions, credit unions, mortgage bankers and brokers, finance
companies, mutual funds, insurance companies, brokerage and investment
companies, and other financial intermediaries. Many of these competitors, some
of which are affiliated with large financial holding companies, have
substantially greater resources and lending limits than the Company, and may
offer certain services the Company does not currently provide. In addition, many
non-bank competitors, such as credit unions, are not subject to the same taxes
or extensive federal regulations that apply to financial holding companies and
federally insured banks.
Regulation
As a registered financial holding company, the Company is subject to examination
and comprehensive regulation by the Federal Reserve Board (FRB). The Company's
subsidiary banks 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.
2
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. Additionally, FRB
policy provides that dividends shall not be paid except out of current earnings
and unless prospective rate of earnings retention by the Company appears
consistent with its capital needs, asset quality, and overall financial
condition.
The FRB, the FDIC, and the OCC have promulgated capital adequacy guidelines that
are considered by the agencies in examining and supervising a bank or bank
holding company; and in analyzing any applications a bank or bank holding
company may submit to the appropriate agency. In addition, for supervisory
purposes, the agencies have promulgated regulations establishing five categories
of capitalization, ranging from well capitalized to critically undercapitalized,
depending upon the level of capitalization and other factors. Currently, the
Company and its subsidiary banks maintain leverage and risk-based capital ratios
above the required levels and are considered well capitalized under the
applicable regulations. A comparison of the Company's capital ratios and the
various regulatory requirements is included in Note 17 of the Company's
consolidated financial statements.
All deposit accounts of the Company's subsidiary banks are insured by the Bank
Insurance Fund (BIF), generally in amounts up to $100,000 per depositor. The
FDIC has the power to terminate a bank's insured status or to temporarily
suspend it under special conditions. Deposit insurance coverage is maintained by
payment of premiums assessed to banks insured by the BIF. Based on capital
strength and favorable FDIC risk classifications, the subsidiary banks are not
currently subject to BIF insurance assessments. Beginning in January 1997, all
BIF insured banks are subject to special assessments to repay Financing
Corporation (FICO) bonds, which were used to repay depositors of failed Savings
and Loan Associations after the former Federal Savings and Loan Insurance Fund
became insolvent.
Employees
At December 31, 2002, the Company employed 582 employees, approximately 109 of
who 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 with the address www.tompkinstrustco.com. 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.
The Company makes available free of charge (other than an investor's own
Internet access charges) through its website its Annual Report on Form 10-K,
quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments
to these reports, 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").
These reports may also be obtained at the SEC's Public Reference Room at 450
Fifth Street, NW, Washington, DC 20599. Information on the operation of the
Public Reference Room is available by calling the SEC at 1-800-SEC-0330. The SEC
also maintains a website (SEC.gov) that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC.
3
Item 2. Properties
The following table provides information relating to the Company's facilities:
Location Facility Type Square Feet Owned/Leased*
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The Commons Trust Company 23,900 Owned
Ithaca, NY Main Office
119 E. Seneca Street Trust Company 18,550 Owned
Ithaca, NY Trust and Investment Services
121 E. Seneca Street Administration 18,900 Owned
Ithaca, NY
Rothschilds Building Operations and Data Processing 24,500 Leased
The Commons, Ithaca, NY
Central Avenue Trust Company 400 Leased
Cornell University, Ithaca, NY Cornell Campus Office
905 Hanshaw Road Trust Company 790 Leased
Ithaca, NY Community Corners Office
139 N. Street Extension Trust Company 2,250 Owned
Dryden, NY Dryden Office
1020 Ellis Hollow Road Trust Company 650 Leased
Ithaca, NY East Hill Plaza Office
775 S. Meadow Street Trust Company 2,280 Owned
Ithaca, NY Plaza Office
Pyramid Mall Trust Company 610 Leased
Ithaca, NY Pyramid Mall Office
116 E. Seneca Street Trust Company 775 Owned
Ithaca, NY Seneca Street Drive-in
2251 N. Triphammer Road Trust Company 3,000 Leased
Ithaca, NY Triphammer Road Office
2 W. Main Street Trust Company 2,720 Owned
Trumansburg, NY Trumansburg Office
701 W. Seneca Street Trust Company 2,150 Owned
Ithaca, NY West End Office
2230 N. Triphammer Road Trust Company 204 Leased
Ithaca, NY Kendal Office (Part-time office)
100 Main Street Trust Company 3,115 Owned
Odessa, NY Odessa Office
33 Clinton Avenue Trust Company 1,900 Leased
Cortland, NY Cortland Office
86 North Street Trust Company 4,600 Owned
Auburn, NY Proposed Auburn Office
50 N. Main Street The Bank of Castile 6,662 Owned
Castile, NY Main Office
4
Location Facility Type Square Feet Owned/Leased*
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604 W. Main Street The Bank of Castile 4,662 Owned
Arcade, NY Arcade Office
263 E. Main Street The Bank of Castile 3,303 Owned
Avon, NY Avon Office
408 E. Main Street The Bank of Castile 3,496 Owned
Batavia, NY Batavia Office
3155 State Street The Bank of Castile 4,680 Owned
Caledonia, NY Caledonia Office
3252 Chili Avenue The Bank of Castile 4,000 Owned
Chili, NY Chili Office
1 Main Street The Bank of Castile 1,448 Owned
Gainesville, NY Gainesville Office
11 South Street The Bank of Castile 9,700 Owned
Geneseo, NY Geneseo Office
29 Main Street The Bank of Castile 3,084 Owned
LeRoy, NY LeRoy Office
102 N. Center Street The Bank of Castile 4,702 Owned
Perry, NY Perry Office
2727 Genesee Street The Bank of Castile 2,220 Leased
Retsof, NY Retsof Office
445 N. Main Street The Bank of Castile 2,798 Owned
Warsaw, NY Warsaw Office
129 N. Center Street The Bank of Castile 11,138 Owned
Perry, NY Processing Center **
1410 S. Main Street The Bank of Castile 1,250 Leased
Medina, NY 14103 Medina Office
630 Route 6 Mahopac National Bank 2,800 Owned
Mahopac, NY Mahopac Office
591 Route 6N Mahopac National Bank 3,000 Owned
Mahopac Falls, NY Red Mills Office
21 Peekskill Hollow Road Mahopac National Bank 17,950 Owned
Putnam Valley, NY Putnam Valley Office
1441 Route 22 Mahopac National Bank 34,000 Owned
Brewster, NY Brewster Office
706 Freedom Plains Road Mahopac National Bank 2,200 Owned
Poughkeepsie, NY LaGrange Office
1822 Route 82 Mahopac National Bank 1,200 Leased
Hopewell Junction, NY Hopewell Office
5
Location Facility Type Square Feet Owned/Leased*
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14 Market Street Tompkins Insurance 11,424 Leased
Attica, NY Attica Office
34 N. Main Street Tompkins Insurance 2,280 Leased
Warsaw, NY Warsaw Office
13360 Broadway Tompkins Insurance 1,000 Owned
Alden, NY Alden Office
3212 State Street Tompkins Insurance 700 Leased
Caledonia, NY Caledonia Office
40 Main Street Tompkins Insurance 3,700 Leased
Leroy, NY Leroy Office
216 E. Main Street Tompkins Insurance 1,140 Leased
Batavia, NY Batavia Office
============================================================================================================
* Lease terminations for the Company's leased properties range from 2003
through 2042.
** Office includes two parcels of land that are being leased through 2004 and
2090, respectively.
Management believes the current facilities are suitable for their present and
intended purposes.
Item 3. Legal Proceedings
The Company is involved in legal proceedings in the normal course of business,
none of which are expected to have a material adverse impact on the financial
condition or operations of the Company.
Item 4. Submission of Matters for a Vote by Securities Holders
There were no matters submitted for shareholder vote in the fourth quarter of
2002.
Executive Officers of the Company
Age Title Joined Company
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James J. Byrnes 61 Chairman of the Board, and Chief Executive Officer January 1989
James W. Fulmer 51 President, Director January 2000
Brenda L. Copeland 51 Executive Vice President January 2000
Stephen E. Garner 56 Executive Vice President January 2000
Stephen S. Romaine 38 Executive Vice President January 2000
Donald S. Stewart 58 Executive Vice President December 1972
Robert B. Bantle 51 Senior Vice President March 2001
Francis M. Fetsko 38 Senior Vice President and Chief Financial Officer October 1996
Joyce P. Maglione 60 Senior Vice President March 1981
Lawrence A. Updike 57 Senior Vice President December 1965
Business Experience of the Executive Officers:
James J. Byrnes has been chairman of the board of the Company since April 1992,
and chief executive officer of the Company since January 1989. From 1978 to
1988, Mr. Byrnes was employed at the Bank of Montreal, most recently as senior
vice president.
6
James W. Fulmer was appointed president of the Company in January 2000.
Effective January 1, 2003, Mr. Fulmer was appointed president and chief
executive officer of The Bank of Castile. Mr. Fulmer is the former president and
chief executive officer of Letchworth Independent Bancshares Corporation, where
he served as president and chief executive officer since January 1991. Effective
December 31, 1999, Letchworth was merged with and into the Company, and Mr.
Fulmer became president of the Company.
Brenda L. Copeland retired as president and chief executive officer of The Bank
of Castile, effective December 31, 2002. Ms. Copeland served as the president of
The Bank of Castile since January 1991 and chief executive officer since April
1999.
Stephen E. Garner was appointed executive vice president of the Company in May
2000. Effective January 1, 2003, Mr. Garner was appointed president and chief
executive officer of Tompkins Trust Company. Prior to this appointment, Mr.
Garner was the president and chief executive officer of Mahopac National Bank
since January 1994.
Stephen S. Romaine was appointed president and chief executive officer of
Mahopac National Bank effective January 1, 2003. Prior to this appointment, Mr.
Romaine was executive vice president, chief financial officer and manager
Support Services Division of Mahopac National Bank.
Donald S. Stewart has been employed by the Company since 1972, served as senior
vice president in charge of trust and investment services since December 1984,
and was promoted to executive vice president in 1997.
Robert B. Bantle has been employed by the Company since March 2001, and has
served as a senior vice president since that time. He is primarily responsible
for retail banking services. Prior to joining the Company, Mr. Bantle was
employed by Iroquois Bancorp and First National Bank of Rochester as senior vice
president.
Francis M. Fetsko has been employed by the Company since 1996, and has served as
senior vice president and chief financial officer since December 2000. Prior to
joining the Company, Mr. Fetsko was employed as a Federal Bank Examiner with the
Federal Deposit Insurance Corporation from 1986 to 1995.
Joyce P. Maglione has been employed by the Company since March 1981, and has
served as senior vice president since December 1999. Ms. Maglione is primarily
responsible for personnel administration.
Lawrence A. Updike has been employed by the Company since 1965, and has served
as senior vice president in charge of operations and systems since December
1988.
7
PART II
Item 5. Market for Registrant's Common Equity and Related Securities
Market Price Cash
Market Price & Dividend Information High Low Dividends Paid
- --------------------------------------------------------------------------------
See Notes 1 and 2 below:
2002 1st Quarter $43.50 $38.70 $ .28
2nd Quarter 48.94 37.00 .28
3rd Quarter 48.10 42.75 .30
4th Quarter 47.25 39.50 .30
2001 1st Quarter $31.35 $27.00 $ .27
2nd Quarter 40.13 29.00 .27
3rd Quarter 39.95 35.25 .28
4th Quarter 40.95 36.60 .28
Note 1 - The range of reported high and low price for Tompkins Trustco, Inc.
common stock for actual transactions as quoted on the American Stock Exchange.
As of March 21, 2003, there were approximately 1,787 shareholders of record.
Note 2 - Dividends on Tompkins Trustco, Inc. common stock were paid on the 15th
day of February, May, August, and November of 2002, and on the 15th day of
March, June, September, and December of 2001.
Equity Compensation Plan
A discussion regarding the Company's Equity Compensation Plan is set forth in
Item 12 of this report, which, in turn, incorporates by reference certain
provisions of the Proxy Statement.
Item 6. Selected Financial Data
Year ended December 31
(in thousands except per share data) 2002 2001 2000 1999 1998
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FINANCIAL STATEMENT HIGHLIGHTS
Assets $1,670,203 $1,420,695 $1,304,894 $1,188,679 $954,705
Deposits 1,340,285 1,087,458 1,034,901 974,239 733,644
Other borrowings 81,930 75,581 67,257 42,012 48,973
Shareholders' equity 150,597 131,072 114,995 96,624 97,652
Interest and dividend income 93,959 94,158 92,018 77,617 69,729
Interest expense 28,818 36,175 40,076 30,551 29,371
Net interest income 65,141 57,983 51,942 47,066 40,358
Provision for loan/lease losses 2,235 1,606 1,216 944 1,539
Net securities gains (losses) 363 66 450 (59) (12)
Net income 22,914 19,627 17,512 15,200 14,502
PER SHARE INFORMATION
Basic earnings per share 3.09 2.65 2.47 2.15 2.05
Diluted earnings per share 3.03 2.62 2.45 2.12 2.01
Cash dividends per share* 1.16 1.10 1.08 1.03 0.91
SELECTED RATIOS
Return on average assets 1.45% 1.46% 1.42% 1.41% 1.57%
Return on average equity 16.41% 15.82% 17.09% 15.46% 16.09%
Shareholders' equity to average assets 9.51% 9.73% 9.31% 8.97% 10.60%
Dividend payout ratio* 37.54% 41.51% 43.95% 40.52% 37.92%
OTHER SELECTED DATA (in whole numbers, unless otherwise noted)
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Employees (average full-time equivalent) 530 513 462 442 365
Full-service banking offices 32 29 28 26 22
Bank access centers (ATMs) 48 45 41 36 33
Trust and investment services assets under
management (in thousands) $1,207,786 $1,138,341 $1,094,452 $1,106,059 $952,880
- ----------------------------------------------------------------------------------------------------------------------------------
* Cash dividends per share reflects historical information for Tompkins Trustco,
Inc.
8
Item 7. Management Discussion and Analysis of Financial Condition and Results
of Operations
The following analysis is intended to provide the reader with a further
understanding of the consolidated financial condition and results of operations
of the Company and its operating subsidiaries for the periods shown. For a full
understanding of this analysis, it should be read in conjunction with the
consolidated financial statements and notes thereto included in Item 8.
Overview
Tompkins Trustco, Inc. ("Tompkins" or the "Company") was organized in 1995, as
the parent company of Tompkins Trust Company (the "Trust Company"), which traces
its charter back to 1836. On December 31, 1999, the Company completed a merger
with Letchworth Independent Bancshares Corporation ("Letchworth"), at which time
Letchworth was merged with and into Tompkins. Upon completion of the merger,
Letchworth's two subsidiary banks, The Bank of Castile and The Mahopac National
Bank ("Mahopac National Bank"), became subsidiaries of Tompkins. The merger with
Letchworth was accounted for as a pooling-of-interests, and accordingly all
prior period financial information has been restated to present the combined
financial condition and results of operations of both companies as if the merger
had been in effect for all periods presented.
Prior to the Company's acquisition of Letchworth, Letchworth acquired 70.17% of
the outstanding common stock of Mahopac National Bank in a cash transaction
accounted for as a purchase on June 4, 1999. This transaction with Mahopac
National Bank resulted in a core deposit intangible of $3.5 million and goodwill
of $2.5 million.
Effective September 1, 2000, and early in 2001, Tompkins completed the purchase
of the minority interest in Mahopac National Bank, primarily in a
stock-for-stock transaction accounted for as a purchase. Prior to September 1,
2000, the approximately 30% interest in Mahopac National Bank, which was not
owned by Tompkins, was shown as a minority interest in consolidated subsidiaries
on the consolidated statements of condition. Subsequent to September 1, 2000,
all of the net income of Mahopac National Bank is included in Tompkins'
consolidated net income. The approximately 30% acquisition of Mahopac National
Bank resulted in a core deposit intangible of $1.9 million and goodwill of $3.2
million.
Effective January 1, 2001, the Company completed the acquisition of 100% of the
common stock of Austin, Hardie, Wise Agency, Inc. and Ernest Townsend & Son,
Inc., in a cash and stock transaction accounted for as a purchase. The purchase
price exceeded the fair value of identifiable assets acquired less liabilities
assumed by $4.4 million, which was recorded as goodwill. The two agencies have
been merged with and into Tompkins Insurance Agencies, Inc. ("Tompkins
Insurance"), a wholly-owned subsidiary of Tompkins. Tompkins Insurance has six
Western New York office locations serving markets contiguous to The Bank of
Castile. The purchase agreements for the insurance agencies include provisions
for additional consideration to be paid in the form of the release of shares of
Company stock from escrow if Tompkins Insurance met certain income targets in
2001 and 2002. The contingent consideration includes 25,093 shares, which were
payable if the income targets were met, and an additional 8,333 shares which
were payable if income targets for the two-year period were exceeded by 5%.
Tompkins Insurance met the 2001, 2002, and 2-year income targets, resulting in
the release of 12,547 shares in 2001 and 20,879 in 2002 as additional
consideration. Such shares are considered outstanding for purposes of computing
diluted earnings per share beginning on October 1, 2001 for shares released in
2001 and beginning on July 1, 2002 for shares released in 2002.
On June 22, 2001, Tompkins Insurance acquired the assets of Youngs & Linfoot of
LeRoy, Inc. in a cash transaction accounted for as a purchase. The purchase
price exceeded the fair value of identifiable assets acquired less liabilities
assumed by $287,000, which was recorded as goodwill.
Additional information on the Company's merger and acquisition activities is
discussed in Note 2 to the consolidated financial statements.
Forward-Looking Statements
This report may include forward-looking statements with respect to revenue
sources, growth, market risk, and corporate objectives. The Company assumes no
duty, and specifically disclaims any obligation, to update forward-looking
statements, and cautions that these statements are subject to numerous
assumptions, risk, and uncertainties, all of which could change over time.
Actual results could differ materially from forward-looking statements.
9
Critical Accounting Policies
In the course of the Company's normal business activity, management must select
and apply many accounting policies and methodologies that lead to the financial
results presented in the consolidated financial statements of the Company. Some
of these policies are more critical than others. Management considers the
accounting policy relating to the reserve for loan/lease losses 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 with
in the loan portfolio and the material effect that these estimates can have on
the Company's results of operations. While management's evaluation of the
reserve for loan/lease losses as of December 31, 2002 considers the allowance to
be adequate, under adversely different conditions or assumptions, the Company
would need to increase the allowance.
All accounting policies are important and the reader of the financial statements
should review these policies, described in Note 1 to the consolidated financial
statements, to gain a greater understanding of how the Company's financial
performance is reported.
10
Results of Operations
(Comparison of December 31, 2002 and 2001 results)
General
Net income for the year ended December 31, 2002, was up 16.7% to $22.9 million,
compared to $19.6 million in 2001. On a per share basis, the Company earned
$3.03 per diluted share in 2002 compared to $2.62 per share in 2001. Return on
average shareholders' equity (ROE) was 16.41% in 2002, compared to 15.82% in
2001. The increase in ROE in 2002 is due to earnings growth outpacing equity
growth during the period. Return on average assets (ROA) was 1.45% in 2002,
which is in line with ROA of 1.46% in 2001.
The Company's strong earnings performance in 2002 is attributable to the success
of the core business strategies of the Company. These strategies include a
commitment to community banking through diversified revenue sources consisting
of net interest income generated from the loan and securities portfolios, trust
and investment services income, and other service charges and fees for providing
banking and related financial services.
Net Interest Income
Table 1 illustrates the trend in average interest-earning assets and
interest-bearing liabilities, and the corresponding yield or cost associated
with each. Tax-equivalent net interest income improved to $67.4 million in 2002,
up from $60.0 million in 2001. Net interest income benefited from growth in
earning assets, an improved mix of earning assets, and growth in deposits. A low
interest rate environment led to a decrease in asset yields, which contributed
to a decrease in the net interest margin from 4.87% in 2001, to 4.64% in 2002.
Average earning assets increased by $220.9 million or 17.9% in 2002, from $1.2
billion to $1.5 billion. Growth in average earning assets was primarily centered
in the investment portfolio. Average securities (excluding changes in unrealized
gains and losses on available-for-sale securities) increased by $144.0 million
between 2001 and 2002. Average loans grew by $75.6 million, which included a
$33.5 million increase in average commercial loans, a $44.1 million increase in
average real estate loans, and a $3.0 million decrease in consumer and other
loans. Core deposits, which include demand deposits, savings accounts,
non-municipal money market accounts, and time deposits less than $100,000,
represent the Company's largest and lowest cost funding source. Growth in
average assets was funded primarily with core deposits, which increased by 18.9%
from an average balance of $860.4 million in 2001, to $1.0 billion in 2002.
Non-core funding sources, which include time deposits of $100,000 or more,
brokered deposits, municipal money market deposits, Federal funds purchased,
securities sold under repurchase agreements, and other borrowings provided
additional sources of funding to support asset growth. Average balances on these
non-core funding sources increased by $57.6 million between 2001 and 2002. The
primary component of non-core funding sources at December 31, 2002 was municipal
money market accounts with an average balance of $122.1 million.
Changes in net interest income occur from a combination of changes in the volume
of interest-earning assets and interest-bearing liabilities, and in the rate of
interest earned or paid on them. Table 2 illustrates changes in interest income
and interest expense attributable to changes in volume (change in average
balance multiplied by prior year rate), changes in rate (change in rate
multiplied by prior year volume), and the net change in net interest income. The
net change attributable to the combined impact of volume and rate has been
allocated to each in proportion to the absolute dollar amounts of the change.
The $7.4 million increase in tax-equivalent net interest income from 2001 to
2002 included a $53,000 increase in interest income and a $7.4 million decrease
in interest expense. An increased volume of earning assets contributed to a
$12.3 million increase in net interest income between 2001 and 2002, while
changes in interest rates reduced net interest income by $4.9 million, resulting
in the net increase of $7.4 million.
11
Table 1 - Average Statements of Condition and Net Interest Analysis
December 31
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
(dollar amounts in thousands) Balance Interest Yield/Rate Balance Interest Yield/Rate Balance Interest Yield/Rate
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Certificates of deposit,
other banks $ 1,479 $ 37 2.50% $ 329 $ 3 0.91% $ 0 $ 0 0.00%
Securities (1)
U.S. Government
securities 384,286 20,276 5.28 273,951 17,517 6.39 242,611 15,929 6.57
State and municipal (2) 79,604 5,551 6.97 68,854 5,120 7.44 78,474 5,654 7.20
Other securities (2) 46,889 1,618 3.45 23,951 1,329 5.55 13,715 1,142 8.33
- ------------------------------------------------------------------------------------------------------------------------------------
Total securities 510,779 27,445 5.37 366,756 23,966 6.53 334,800 22,725 6.79
Federal funds sold 12,446 206 1.66 12,329 487 3.95 11,992 726 6.05
Loans, net of unearned
income (3)
Residential real estate 353,998 24,945 7.05 327,279 25,959 7.93 326,139 25,488 7.82
Commercial real estate 200,803 15,672 7.80 183,428 15,308 8.35 161,104 16,402 10.18
Commercial loans (2) 244,903 16,119 6.58 211,404 17,823 8.43 183,736 16,602 9.04
Consumer and other 108,971 10,283 9.44 111,964 11,126 9.94 108,911 10,785 9.90
Lease financing 19,708 1,513 7.68 18,700 1,495 7.99 17,315 1,368 7.90
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans, net of
unearned income 928,383 68,532 7.38 852,775 71,711 8.41 797,205 70,645 8.86
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets 1,453,087 96,220 6.62 1,232,189 96,167 7.80 1,143,997 94,096 8.23
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 130,416 114,261 91,040
Total assets $1,583,503 $1,346,450 $1,235,037
====================================================================================================================================
LIABILITIES & SHAREHOLDERS'
EQUITY
Deposits:
Interest-bearing deposits
Interest checking,
savings, and money
market $ 660,905 $ 9,759 1.48% $ 427,665 $ 7,857 1.84% $ 412,864 $ 10,311 2.50%
Time Deposits > $100,000 107,329 3,233 3.01 169,978 7,970 4.69 167,149 10,205 6.11
Time Deposits < $100,000 247,278 8,604 3.48 238,798 12,319 5.16 220,402 11,977 5.43
Brokered Time Deposits:
< $100,000 14,839 571 3.85 6,292 282 4.48 0 0 0.00
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
deposits 1,030,351 22,167 2.15 842,733 28,428 3.37 800,415 32,493 4.06
Federal funds purchased and
securities sold under
agreements to repurchase 74,055 2,448 3.31 79,132 3,453 4.36 68,305 3,996 5.85
Other borrowings 82,471 4,203 5.10 75,101 4,294 5.72 59,125 3,587 6.07
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 1,186,877 28,818 2.43 996,966 36,175 3.63 927,845 40,076 4.32
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 236,574 206,653 186,505
Accrued expenses and other
liabilities 18,919 17,213 13,444
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,442,370 1,220,832 1,127,794
Minority Interest 1,519 1,518 4,791
Shareholders' equity 139,614 124,100 102,452
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $1,583,503 $1,346,450 $1,235,037
- ------------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 4.19% 4.17% 3.92%
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income/margin
on earning assets $ 67,402 4.64% $ 59,992 4.87% $ 54,020 4.72%
====================================================================================================================================
(1) Average balances and yields on available-for-sale securities are based on
amortized cost.
(2) Interest income includes the tax effects of taxable-equivalent adjustments
using a combined New York State and Federal effective income tax rate of 40% to
increase tax-exempt interest income to a taxable equivalent basis. The tax
equivalent adjustments for 2002, 2001 and 2000 were as follows: $2,261,000;
$2,009,000; and $2,078,000.
(3) Nonaccrual loans are included in the average loan totals presented above.
Payments received on nonaccrual loans have been recognized as disclosed in Note
1 of the consolidated financial statements.
12
Table 2 - Analysis of Changes in Net Interest Income
(in thousands)(taxable equivalent) 2002 vs. 2001 2001 vs. 2000
- ------------------------------------------------------------------------------------------------------------
Increase (Decrease) Due to Change in Increase (Decrease) Due to Change in
Average Average
Volume Rate Total Volume Rate Total
- ------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Certificates of deposit $ 23 $ 11 $ 34 $ 3 $ 0 $ 3
Federal funds sold 5 (286) (281) 20 (259) (239)
Investments:
Taxable 7,325 (4,308) 3,017 2,744 (793) 1,951
Tax-exempt 716 (254) 462 (788) 78 (710)
Loans, net:
Taxable 6,004 (9,223) (3,219) 4,629 (3,748) 881
Tax-exempt 26 14 40 166 19 185
- ------------------------------------------------------------------------------------------------------------
Total interest income $ 14,099 $ (14,046) $ 53 $ 6,774 $ (4,703) $ 2,071
- ------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest-bearing deposits:
Interest checking,
savings, and money market 3,667 (1,765) 1,902 358 (2,812) (2,454)
Time (2,076) (6,087) (8,163) 1,502 (3,113) (1,611)
Federal funds purchased and
securities sold under
agreements to repurchase (210) (795) (1,005) 572 (1,115) (543)
Other borrowings 400 (491) (91) 923 (216) 707
- ------------------------------------------------------------------------------------------------------------
Total interest expense $ 1,781 $ (9,138) $ (7,357) $ 3,355 $ (7,256) $ (3,901)
- ------------------------------------------------------------------------------------------------------------
Net interest income $ 12,318 $ (4,908) $ 7,410 $ 3,419 $ 2,553 $ 5,972
============================================================================================================
Notes: See notes to Table 1 above.
Provision for Loan/Lease Losses
The provision for loan/lease losses represents management's estimate of the
expense necessary to maintain the reserve for loan/lease losses at an adequate
level. The provision for loan/lease losses was $2.2 million in 2002, compared to
$1.6 million in 2001. The increase in 2002 is primarily due to continued growth
in the loan/lease portfolio, as well as the changing composition of the
loan/lease portfolio, which includes increased levels of commercial loans and
commercial real estate loans. The Company's loan/lease portfolio remains of
generally high quality. Nonperforming loans/leases were $7.5 million at December
31, 2002, representing 0.76% of total loans/leases outstanding at December 31,
2002. Nonperforming loans/leases at December 31, 2001 were $7.5 million,
representing 0.85% of total loans/leases. Net charge-offs of $1.2 million in
2002 represented 0.13% of average loans/leases during the period, compared to
net charge-offs of $724,000 in 2001, representing 0.08% of average loans/leases.
Net charge-offs in 2001 benefited from a $320,000 recovery on a commercial
relationship.
Noninterest Income
Although net interest income remains the primary revenue source for the Company,
competitive, regulatory, and economic conditions have led management to target
noninterest income opportunities as an important driver of long-term revenue
growth. Management believes a continued focus on noninterest income will improve
the Company's ability to compete with non-bank competitors, and reduce earnings
volatility that may result from changes in the general interest rate
environment. These efforts resulted in $23.7 million in noninterest income for
2002, a 19.3% increase over 2001 noninterest income of $19.9 million. Sources of
noninterest income include trust and investment services, insurance fees and
commissions, service charges on deposit accounts, and card services products.
The Company has been able to expand the contribution of noninterest income to
total revenues by developing and introducing new products and by marketing its
services across all of the Company's markets.
The Tompkins Investment Services Division of the Trust Company generates fee
income through managing trust and investment relationships, managing estates,
providing custody services, and managing employee benefits plans. Services are
primarily provided to customers in the Trust Company's market area of Tompkins
County and surrounding areas, although the division currently manages assets for
clients in more than 40 states. Tompkins Investment Services has also expanded
its marketing efforts and has dedicated staff to serve clients in The Bank of
Castile and Mahopac National Bank markets.
13
Revenue from trust and investment services is a significant source of
noninterest income for the Company, generating $4.2 million in revenue in 2002,
a decrease of 10.2% from trust revenue of $4.6 million in 2001. Lower fee income
is primarily attributable to the weak performance of national stock markets in
2002. Income generated by Tompkins Investment Services is largely based on the
value of the assets managed by the division as well as the mix of accounts
between the various categories, including personal trust and agency accounts,
employee benefit accounts, investment management accounts, and custody accounts.
The value of assets managed by or in custody of Tompkins Investment Services is
affected by general trends in the stock market, as well as the amount of new
business generated. Despite generally unfavorable trends in the stock market
during 2002, the market value of assets managed by, or in custody of, Tompkins
Investment Services increased by $69.4 million to $1.2 billion at December 31,
2002 from $1.1 billion at December 31, 2001.
Service charges on deposit accounts were $6.3 million in 2002, compared to $4.7
million in 2001. The increase in 2002 is largely due to the introduction of a
new service in early 2002, which automated overdraft payment decisions. An
increase in deposit accounts also contributed to the increase in service charges
as the average dollar volume of noninterest-bearing accounts increased by $29.9
million between 2001 and 2002, from $206.7 million to $236.6 million, while
savings and money market accounts increased by $233.2 million over the same
period, from $427.7 million to $660.9 million.
Insurance commissions and fees generated through Tompkins Insurance added $4.9
million in noninterest income in 2002 compared to $4.2 million in 2001, an
increase of 16.0%. The agencies primarily offer property and casualty insurance
to individuals and businesses in western New York State. Rising premium costs
instituted by underwriting insurance companies contributed to commission growth
in 2002.
The largest category of other service charges is card services fees. Card
services remains a growth area for the Company, as technology has created
opportunities to better serve customers with new products. Card services
products include traditional credit cards, purchasing cards, debit cards,
automated teller machines (ATM), and merchant card processing. Fee income
associated with card services was $2.8 million in 2002, compared to $2.4 million
in 2001, an increase of 16.0%.
Noninterest income also includes $1.4 million from increases in cash surrender
value of corporate owned life insurance, up from $1.1 million in 2001. This
income is exempt from taxes. The corporate owned life insurance relates to life
insurance policies covering certain senior officers of the Company and its
subsidiaries. Increases in the cash surrender value of the insurance are
reflected as other noninterest income, net of the related mortality expense.
Although income associated with the insurance policies is not included in
interest income, increases in the cash surrender value produced a tax-adjusted
return of approximately 9.08% in 2002, and 8.07% in 2001.
The Company has an investment in a small business investment company
partnership, Cephas Capital Partners, L.P. ("Cephas"), totaling $4.2 million at
December 31, 2002, a slight increase from $4.1 million at December 31, 2001.
Because the Company's percentage ownership in Cephas exceeds 20%, the equity
method of accounting is utilized, such that the Company's percentage of Cephas'
income is recognized as income on its investment; and likewise, any loss by
Cephas is recognized as a loss on the Company's investment. For 2002, the
Company recognized income of $90,000 compared with a loss of $300,000 in 2001.
During the fourth quarter of 2001, Cephas recognized a $2.0 million loss on a
single investment. The Company's portion of that loss totaled $770,000, which
was recognized in the fourth quarter of 2001 as a reduction to other operating
income. The Company believes that as of December 31, 2002, there is no
impairment with respect to this investment.
Noninterest Expense
Noninterest expenses for the year ended December 31, 2002, were $52.3 million,
an increase of 13.5% over noninterest expenses of $46.1 million for the year
ended December 31, 2001. The increase in 2002 is largely concentrated in
salaries and employee benefits and reflects an increase in full-time equivalents
(FTE). Average FTEs increased from 513 at December 31, 2001 to 530 at December
31, 2002.
Personnel-related expenses comprise the largest segment of other expense,
representing approximately 56.5% of noninterest expenses in 2002, compared to
approximately 55.0% in 2001. Total personnel-related expenses increased by $4.2
million in 2002, to $29.5 million from $25.3 million. The higher
personnel-related expenses reflect the increase in FTE associated primarily with
staffing of new offices, including the Hopewell (October 2001) and LaGrange
(July 2002) offices of Mahopac National Bank and the Cortland office (December
2002) of the Trust Company. Pension related expenses were also higher in 2002
than in 2001. The increase in pension expense includes a nonrecurring charge of
approximately $650,000 associated with a reevaluation of certain pension
liabilities.
Expense for premises, furniture, and fixtures increased to $6.3 million in 2002,
from $5.8 million in 2001. The increase in 2002 is due to the opening of the
Hopewell and LaGrange offices of Mahopac National Bank, and the Cortland office
of the Trust Company. Also contributing to the increase is additional
depreciation associated with continued investments in technology. Technology
investments in 2002 included equipment upgrades to bring Mahopac National Bank
onto the same core processing systems used by the Trust Company and The Bank of
Castile, improved automation for check processing, improved document imaging
technology, and an upgrade to the Company's mainframe computer system.
14
The adoption of Statement of Financial Accounting Standards (SFAS) No. 142 on
January 1, 2002 contributed to the $813,000 decrease in the amortization of
intangible assets in 2002 over 2001. Amortization of intangible assets decreased
from $1.7 million in 2001 to $867,000 in 2002. Upon adoption, the Company was no
longer required to amortize its goodwill. The effect of the adoption of SFAS No.
142 is presented in Note 2 to the consolidated financial statements. Under SFAS
No. 142, the Company is required to perform an annual assessment of intangible
assets for impairment. The Company performed an impairment testing of its
intangible assets as of December 31, 2002, and no impairment loss is required.
Other identifiable intangibles on the Company's books consist primarily of core
deposit intangibles related to the acquisition of Mahopac National Bank. At
December 31, 2002, core deposit intangible assets totaled $2.7 million, and are
being amortized over a 10-year period. Amortization of core deposit intangible
assets is not affected by the adoption of SFAS No. 142.
Other expenses include, fees paid for marketing services, postage and courier
services, telephone expense, donations, software maintenance and amortization,
and card services related expense. The increase in other expenses, from $13.2
million in 2001 to $15.5 million in 2002, is attributable to several factors,
including normal increases associated with growth in noninterest revenue,
marketing costs associated with new branch openings, additional reserves for
leased vehicles residual losses, increased penalties associated with the
prepayment of certain borrowings, and increased technology costs. In 2002,
management decided to prepay certain higher interest rate borrowings with the
Federal Home Loan Bank to reduce borrowing costs, resulting in the increase in
prepayment penalties.
The Company's efficiency ratio, defined as operating expense excluding
amortization of intangible assets, divided by tax-equivalent net interest income
plus noninterest income before securities gains and losses (increase in the cash
surrender value of COLI is shown on a tax equivalent basis), was 56.3% in 2002,
compared to 55.4% in 2001. The increased costs of opening new offices, including
personnel costs, premises and equipment expenses, and marketing costs,
contributed to the unfavorable increase in the Company's efficiency ratio.
Minority Interest in Consolidated Subsidiaries
Minority interest expense represents the portion of net income in consolidated
majority-owned subsidiaries that is attributable to the minority owners of a
subsidiary. The Company had minority interest expense of $134,000 in each of
2001 and 2002, related to minority interests in three real estate investment
trusts, which are substantially owned by the Company's banking subsidiaries.
Income Tax Expense
The provision for income taxes provides for Federal and New York State income
taxes. The 2002 provision was $11.3 million, compared to $10.4 million in 2001.
The increase was primarily due to a higher level of taxable income, although the
effective tax rate for the Company decreased in 2002 to 33.0%, compared to 34.5%
in 2001. The decrease in the effective tax rate is due to a variety of factors,
including a change in the tax treatment of dividends paid on shares of Company
common stock held in the ESOP.
15
Results of Operations
(Comparison of December 31, 2001 and 2000 results)
General
Net income for the year ended December 31, 2001, was up 12.1% to $19.6 million,
compared to $17.5 million in 2000. On a per share basis, the Company earned
$2.62 per diluted share compared to $2.45 per share in 2000. Return on average
shareholders' equity (ROE) was 15.82% in 2001, compared to 17.09% in 2000. The
decline in ROE in 2001 was due to the fact the average equity grew more rapidly
than earnings. Contributing to the growth in average equity in 2001 was
approximately $8.2 million related to the September 2000 acquisition of the
minority interest in Mahopac National Bank, approximately $3.4 million related
to the acquisition of Austin, Hardie, Wise Agency, Inc. and Ernest Townsend &
Son, Inc., and approximately $7.0 million of unrealized gains on
available-for-sale securities. Return on average assets (ROA) was 1.46% in 2001,
up slightly from 1.42% in 2000.
Net Interest Income
Table 1 illustrates the trend in average interest-earning assets and
interest-bearing liabilities, and the corresponding yield or cost associated
with each. Tax-equivalent net interest income improved to $60.0 million in 2001,
up from $54.0 million in 2000. Several interest rate reductions by the Federal
Reserve Board contributed to improvement in the net interest margin from 4.72%
in 2000, to 4.87% in 2001. Net interest income also benefited from other
factors, including: growth in earning assets, an improved mix of earning assets,
and growth in deposits.
Average earning assets increased by $88.2 million, or 7.7% in 2001 to $1.2
billion from $1.1 billion in 2000. Growth in average earning assets was
primarily centered in the loan portfolio, which included a $27.7 million
increase in average commercial loans, and a $23.5 million increase in average
real estate loans. Average securities (excluding changes in unrealized gains and
losses on available-for-sale securities) increased by $32.0 million between 2000
and 2001. Core deposits (total deposits, less brokered deposits municipal money
market deposits, and time deposits of $100,000 or more) represent the Company's
largest and lowest cost funding source. Growth in average assets was funded
primarily with core deposits, which increased by 5.0% from an average balance of
$819.8 million in 2000, to $860.4 million in 2001. Non-core funding sources,
which include time deposits of $100,000 or more, brokered deposits, municipal
money market deposits, federal funds purchased, securities sold under agreements
to repurchase, and other borrowings provided additional sources of funding to
support asset growth. Average balances on these non-core funding sources
increased by $29.6 million between 2000 and 2001.
Changes in net interest income occur from a combination of changes in the volume
of interest-earning assets and interest-bearing liabilities, and in the rate of
interest earned or paid on them. Table 2 illustrates changes in interest income
and interest expense attributable to changes in volume (change in average
balance multiplied by prior year rate), changes in rate (change in rate
multiplied by prior year volume), and the net change in net interest income. The
net change attributable to the combined impact of volume and rate has been
allocated to each in proportion to the absolute dollar amounts of the change.
The $6.0 million increase in tax-equivalent net interest income from 2000 to
2001 included a $2.1 million increase in interest income and a $3.9 million
decrease in interest expense. An increased volume of earning assets contributed
to a $3.4 million increase in net interest income between 2000 and 2001, while
the impact from changes in interest rates added $2.6 million in net interest
income.
Provision for Loan/Lease Losses
The provision for loan/lease losses represents management's estimate of the
expense necessary to maintain the reserve for loan/lease losses at an adequate
level. The provision for loan/lease losses was $1.6 million in 2001, compared to
$1.2 million in 2000. The increase in 2001 is primarily due to continued growth
in the loan/lease portfolio, as well as the changing composition of the
loan/lease portfolio, which includes increased levels of commercial loans and
consumer loans. Despite an increase in nonperforming loans/leases as of December
31, 2001, nonperforming loans/leases totaled $7.5 million or 0.85% of total
loans/leases at December 31, 2001. Nonperforming loans/leases at December 31,
2000 were $4.7 million, representing 0.56% of total loans/leases. Net
charge-offs of $724,000 in 2001 represented 0.08% of average loans/leases during
the period, compared to net charge-offs of $620,000 in 2000, also representing
0.08% of average loans/leases.
Noninterest Income
Management's focus on noninterest income resulted in $19.9 million in
noninterest income for 2001, a 37.7% increase over noninterest income of $14.4
million in 2000. The acquisition of Tompkins Insurance, effective January 1,
2001, contributed to the strong growth in noninterest income, adding $4.2
million in revenue from insurance commissions and fees. The agencies primarily
offer property and casualty insurance to individuals and businesses in Western
New York State. If revenue from Tompkins Insurance were excluded from 2001
results for comparison purposes, noninterest income would reflect an increase of
$1.2 million, or 8.4%.
The Tompkins Investment Services Division of the Trust Company generates fee
income through managing trust and investment relationships, managing estates,
providing custody services, and managing employee benefits plans. Services are
primarily provided to customers in the Trust Company's market area of Tompkins
County and surrounding areas, although the division currently manages
16
assets for clients in more than 40 states. In 2001, Tompkins Investment Services
expanded its marketing efforts and has dedicated staff to serve clients in The
Bank of Castile and Mahopac National Bank markets.
Revenue from trust and investment services is a significant source of
noninterest income for the Company, generating $4.6 million in revenue in 2001,
an increase of 1.3% over trust revenue of $4.6 million in 2000. Increased fee
income was primarily attributable to the continued growth in average assets
managed by, or in the custody of, Tompkins Investment Services. Income generated
by Tompkins Investment Services is largely based on the value of the assets
managed by the division, which can be affected by general trends in the stock
market, as well as the amount of new business generated. Despite generally
unfavorable trends in the stock market during 2001, the market value of assets
managed by, or in custody of, Tompkins Investment Services increased by $43.9
million to $1.1 billion at December 31, 2001.
Service charges on deposit accounts were $4.7 million in 2001, compared to $3.7
million in 2000. The increase in 2001 was largely due to the increase in deposit
accounts. The average dollar volume of noninterest-bearing accounts increased by
$20.2 million between 2000 and 2001, from $186.5 million to $206.7 million,
while savings and money market accounts increased by $14.8 million over the same
period, from $412.9 million to $427.7 million. Fee increases for certain deposit
related services were also implemented in the first quarter of 2001,
contributing to the increase in the current year.
The largest category of other service charges is card services fees. Card
services have been another growth area for the Company, as technology has
created opportunities to better serve customers with new products. Card services
products include traditional credit cards, purchasing cards, debit cards,
automated teller machines (ATM), and merchant card processing. Fee income
associated with card services was $2.4 million in 2001, an increase of 12.1%
over card services income of $2.2 million in 2000.
Noninterest income includes $1.1 million from increases in cash surrender value
of corporate owned life insurance in 2001, up from $956,000, in 2000. This
income is exempt from taxes. The corporate owned life insurance relates to life
insurance provided to certain senior officers of the Company and its
subsidiaries. Increases in the cash surrender value of the insurance are
reflected as other noninterest income, and the related mortality expense is
recognized as an other operating expense. Although income associated with the
insurance policies is not included in interest income, increases in the cash
surrender value produced a tax-adjusted return of approximately 8.07% in 2001,
and 8.38% in 2000.
The Company has an investment in a small business investment company
partnership, Cephas Capital Partners, L.P. ("Cephas"), totaling $4.1 million at
December 31, 2001, and $3.3 million at December 31, 2000. Because the Company's
percentage ownership in Cephas exceeds 20%, the equity method of accounting is
utilized, such that the Company's percentage of the Cephas' income is recognized
as income on its investment; and likewise, any loss by Cephas is recognized as a
loss on the Company's investment. During the fourth quarter of 2001, Cephas
recognized a $2.0 million loss on a single investment. The Company's portion of
this loss totaled $770,000, which was recognized in the fourth quarter of 2001
as a reduction to other operating income. The year-to-date net loss from the
Company's investment in Cephas was $300,000 in 2001, compared to net income of
$304,000 in 2000.
Declining interest rates in 2001 resulted in significant mortgage application
volume for the Company. As a result of this record application volume, which
included a high percentage of applications to refinance loans currently serviced
by the Company, the volume of residential mortgage loan sales increased from
$7.2 million in 2000 to $27.6 million in 2001. Net gains from loan sales are
included in other operating income and amounted to $560,000 in 2001, compared to
$74,000 in 2000.
Noninterest Expense
Noninterest expenses for the year ended December 31, 2001, were $46.1 million,
an increase of 18.7% over noninterest expenses of $38.8 million in 2000. The
increase in 2001 is largely attributable to operating expenses associated with
Tompkins Insurance, along with increased amortization expense related to the
January 1, 2001, acquisition of Austin, Hardie, Wise Agency, Inc. and Ernest
Townsend & Son, Inc. (now Tompkins Insurance) and the September 1, 2000,
purchase of the minority interest in Mahopac National Bank. Expenses of Tompkins
Insurance added $3.2 million of noninterest expense in 2001, before amortization
of intangible assets. Amortization of intangible assets increased $545,000 to
$1.7 million in 2001, up from $1.1 million in 2000. The additional amortization
expense included $285,000 related to Tompkins Insurance, and $260,000 related to
the purchase of the minority interest in Mahopac National Bank.
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 (income and expense
associated with COLI are shown on a tax equivalent basis), was 55.4% in 2001,
compared to 55.1% in 2000. The ratio is relatively unchanged from the previous
year, as improvement at the Company's bank subsidiaries was offset by the
addition of Tompkins Insurance, which due to its smaller size and the nature of
its operations, operates with a relatively higher cost structure than the banks.
Personnel-related expenses comprise the largest segment of other expense,
representing approximately 55.0% of noninterest expenses in 2001, compared to
approximately 55.3% in 2000. Total personnel-related expenses increased by $3.9
million in 2001, to $25.3 million. The higher personnel-related expenses reflect
an increase in full-time equivalent employees from 462 in 2000 to 513 in 2001.
Additional staffing levels relate primarily to the addition of Tompkins
Insurance, as well as staffing of the Hopewell Office of
17
Mahopac National Bank, which opened in October 2001. Personnel-related expenses
in 2001 include some increased costs associated with the consolidation of a
majority of the Company's benefit plans, including the pension, 401(k), and ESOP
plans, effective January 1, 2001. Although the consolidated benefit plans have
increased benefits costs in the current year, management believes the revised
benefits make the Company more competitive for recruiting and retaining
employees, while providing all employees in the Company an opportunity to
receive profit sharing based on the success of Company-wide goals.
Expense for premises, furniture, and fixtures increased to $5.8 million in 2001,
from $5.0 million in 2000. The increase in 2001 is primarily related to Tompkins
Insurance, which added $434,000 in expenses for premises, furniture, and
fixtures in 2001. Also contributing to the increase were the opening of the
Hopewell Office in October 2001, and increased depreciation associated with
continued investments in technology.
As noted above, amortization of intangible assets increased by $545,000 in 2001,
due to amortization of intangible assets associated with Tompkins Insurance
beginning in January 2001, and the purchase of the minority interest in Mahopac
National Bank in September 2000. At December 31, 2001, the Company had
unamortized goodwill related to its various acquisitions of $9.7 million. Upon
adoption of Statement of Financial Accounting Standards (SFAS) No. 142 on
January 1, 2002, the Company is no longer required to record amortization
expense related to goodwill; accordingly, amortization expense in 2002 will be
approximately $545,000 less than in 2001. Under SFAS No. 142, the Company is
required to perform an annual assessment of intangible assets for impairment.
Although impairment testing has yet to be completed, management does not expect
to record an impairment loss in 2002 as a result of the adoption of SFAS No.
142.
Other identifiable intangibles on the Company's books consist primarily of core
deposit intangibles related to the acquisition of Mahopac National Bank. At
December 31, 2001, core deposit intangible assets totaled $3.5 million, and are
being amortized over a 10-year period. Amortization of core deposit intangible
assets is not affected by the adoption of SFAS No. 142.
Other expenses include, among other things, fees paid for marketing services,
postage and courier services, telephone expense, donations, software maintenance
and amortization, and card services related expense. The increase from $11.2
million in 2000 to $13.2 million in 2001, is attributable to several factors,
including normal increases associated with growth in noninterest revenue;
increased marketing costs associated with a new branch opening, increased
technology costs, and the inclusion of expenses related to Tompkins Insurance in
2001.
Minority Interest in Consolidated Subsidiaries
Minority interest expense represents the portion of net income in consolidated
majority-owned subsidiaries that is attributable to the minority owners of a
subsidiary. For Tompkins, minority interest expense in 2000 includes $433,000
related to the approximate 30% interest held by minority owners of Mahopac
National Bank for the period from January 1, 2000, through September 1, 2000.
Effective September 1, 2000, the Company acquired the interest held by the
minority owners. The Company also had minority interest expense of $135,000 and
$134,000 in 2000 and 2001, respectively, related to minority interests in three
real estate investment trusts, which are substantially owned by the Company's
banking subsidiaries.
Income Tax Expense
The provision for income taxes provides for Federal and New York State income
taxes. The 2001 provision was $10.4 million, compared to $8.3 million in 2000.
The increase was primarily due to a higher level of taxable income, although the
effective tax rate for the Company increased in 2001 to 34.5%, compared to 31.5%
in 2000. The increase in the effective tax rate is due to a variety of factors,
including a reduction in income from tax-exempt municipal securities from $5.7
million in 2000 to $5.1 million in 2001.
FINANCIAL CONDITION
During 2002, total assets grew by 17.56% to $1.7 billion at December 31, 2002,
compared to $1.4 billion at December 31, 2001. Table 3 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 2001 and 2002. Earning
asset growth in 2002 consisted of a $105.5 million increase in loans, and a
$111.7 million increase in the amortized cost of securities. Asset growth was
funded primarily with core deposits, which increased by $135.6 million during
2002 from $900.2 million to $1.0 billion.
18
Table 3 - Balance Sheet Comparisons
AVERAGE BALANCE SHEET
Change (2001-2002)
(dollar amounts in thousands) 2002 2001 2000 Amount Percentage
- ---------------------------------------------------------------------------------------------------------------
Total assets $1,583,503 $1,346,450 $1,235,037 $ 237,053 17.61%
Earning assets * 1,453,087 1,232,189 1,143,997 220,898 17.93%
Total loans and leases, less earned income and
net deferred costs and fees 928,383 852,775 797,205 75,608 8.87%
Securities * 510,779 366,756 334,800 144,023 39.27%
Core deposits ** 1,022,625 860,425 819,771 162,200 18.85%
Time deposits of $100,000 and more 107,329 169,978 167,149 (62,649 -36.86%
Federal funds purchased and securities
sold under agreements to repurchase 74,055 79,132 68,305 (5,077) -6.42%
Other borrowings 82,471 75,101 59,125 7,370 9.81%
Shareholders' equity 139,614 124,100 102,452 15,514 12.50%
- ---------------------------------------------------------------------------------------------------------------
ENDING BALANCE SHEET
Change (2001-2002)
(dollar amounts in thousands) 2002 2001 2000 Amount Percentage
- ---------------------------------------------------------------------------------------------------------------
Total assets $1,670,203 $1,420,695 $1,304,894 $ 249,508 17.56%
Earning assets * 1,525,586 1,298,163 1,195,419 227,423 17.52%
Total loans and leases, less earned income and
net deferred costs and fees 995,346 889,842 845,758 105,504 11.86%
Securities * 519,840 408,150 330,236 111,690 27.36%
Core deposits ** 1,035,855 900,248 851,449 135,607 15.06%
Time deposits of $100,000 and more 112,338 163,480 183,452 (51,142) -31.28%
Federal funds purchased and securities
sold under agreements to repurchase 77,843 109,669 72,231 (31,826) -29.02%
Other borrowings 81,930 75,581 67,257 6,349 8.40%
Shareholders' equity 150,597 131,072 114,995 19,525 14.90%
===============================================================================================================
* 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
financial statements of the Company contained in Item 8 herein, detail the
changes in equity capital, including payments to shareholders in the form of
cash dividends. The Company continued the long history of increasing cash
dividends with a per share increase of 5.5% in 2002, which followed an increase
of 1.9% in 2001. Dividends per share amounted to $1.16 in 2002, compared to
$1.10 in 2001, and $1.08 in 2000. Cash dividends paid represented 37.4%, 41.5%,
and 44.0%, of after-tax net income in each of 2002, 2001, and 2000,
respectively.
Total shareholders' equity was $150.6 million at December 31, 2002, compared to
$131.1 million at December 31, 2001. The $19.5 million increase in shareholders'
equity from December 31, 2001 to December 31, 2002 included a $14.3 million
increase in undivided profits, a $821,000 increase from the issuance of
contingently issueable shares related to the purchase of Austin, Hardie, Wise
Agency, Inc. and Ernest Townsend & Son, Inc., which were issued in 2002, and
$4.6 million of other comprehensive income related to unrealized net gains on
available-for-sale securities. Increases in shareholders' equity were partially
offset by the repurchase of 34,840 shares of common stock during 2002, at a
total cost of $1.4 million. These shares were purchased under a repurchase plan
(the "Plan") approved by the Company's board of directors on August 12, 2000.
The Plan authorized the repurchase of up to 400,000 of the Company's common
stock over a 24-month period. As of August 12, 2002, 278,943 shares had been
repurchased under the Plan at an average price per share of $30.23. On July 24,
2002, the board of directors of the Company approved a new repurchase plan ("new
Plan") authorizing the repurchase of up to 400,000 shares over a 24-month
period. As of December 31, 2002, 1,200 shares had been repurchased under the new
Plan at an average purchase price of $41.00 per share.
The $16.1 million increase in shareholders' equity between December 31, 2000 and
December 31, 2001 was primarily due to an $11.5 million increase in undivided
profits and a $3.5 million increase from the issuance of shares to purchase
Austin, Hardie, Wise Agency, Inc. and Ernest Townsend & Son, Inc. The $3.0
million of other comprehensive income in 2001 was offset by $3.4 million in
common stock repurchased and returned to unissued status.
19
Tangible equity of $136.5 million represented 8.2% of tangible assets at
December 31, 2002, compared to tangible equity of $117.0 million representing
8.3% of tangible assets as of December 31, 2001. Tangible book value per share
increased from $15.77 at December 31, 2001, to $18.34 at December 31, 2002.
The Company and its subsidiary banks are subject to quantitative capital
measures established by regulation to ensure capital adequacy. Consistent with
the objective of operating a sound financial organization, the Company and its
subsidiary banks maintain capital ratios well above regulatory minimums, as
detailed in Note 17 of the consolidated financial statements.
Securities
The securities portfolio (excluding fair value adjustments on available-for-sale
securities) at December 31, 2002, was $519.8 million, reflecting an increase of
27.4%, from $408.2 million in 2001. Note 3 to the consolidated financial
statements included in Item 8 of this report, details the types of securities
held, the carrying and fair values, and the contractual maturities. The
amortized cost and fair value of the securities portfolio at December 31, 2000,
is presented in the table below. Qualified tax-exempt debt securities, primarily
obligations of state and political subdivisions, were $84.1 million at December
31, 2002, or 16.2% of total securities, compared to $70.2 million, or 17.2% of
total securities at December 31, 2001. Mortgage-backed securities, consisting
mainly of securities issued by U.S. government agencies, totaled $264.3 million
at December 31, 2002, compared to $185.9 million at December 31, 2001.
Available-for-Sale Securities
- --------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2000 (in thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------
U.S. Treasury securities and obligations of
U.S. Government agencies $160,470 $ 103 $ 503 $160,070
Obligations of states and political subdivisions 46,432 696 190 46,938
Mortgage-backed securities 84,342 340 376 84,306
U.S corporate securities 4,489 4 25 4,468
- --------------------------------------------------------------------------------------------------
Total debt securities 295,733 1,143 1,094 295,782
Equity securities 8,640 0 64 8,576
- --------------------------------------------------------------------------------------------------
Total available-for-sale securities $304,373 $ 1,143 $ 1,158 $304,358
==================================================================================================
Available-for-sale securities include $7,089,000 in nonmarketable equity
securities, which are carried at cost since fair values are not readily
determinable. This figure includes $6,270,000 of Federal Home Loan Bank Stock.
Substantially all of the above mortgage-backed securities are direct pass
through securities issued or backed by Federal agencies.
Held-to-Maturity Securities
- --------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2000 (in thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------
Obligations of states and political subdivisions $ 25,863 $ 284 $ 0 $ 26,147
- --------------------------------------------------------------------------------------------------
Total held-to-maturity debt securities $ 25,863 $ 284 $ 0 $ 26,147
==================================================================================================
Management's policy is to purchase investment grade securities that, on average,
have relatively short expected durations. This policy helps mitigate interest
rate risk and provides sources of liquidity without significant risk to capital.
A large percentage of securities are direct obligations of the Federal
government and its agencies. Expected maturities will differ from contractual
maturities presented in Table 4 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. The contractual
maturity distribution of debt securities and mortgage-backed securities as of
December 31, 2002, along with the weighted average yield of each category, is
presented in Table 4. Balances are shown at amortized cost.
20
Table 4 - Maturity Distribution
As of December 31, 2002
- ------------------------------------------------------------------------------------------------
Securities Securities
Available-for-Sale * Held-to-Maturity
- ------------------------------------------------------------------------------------------------
(dollar amounts in thousands) Amount Yield (FTE) Amount Yield (FTE)
- ------------------------------------------------------------------------------------------------
U.S. Treasuries and Agencies
Within 1 year $ 8,974 2.53% $ 0 0.00%
Over 1 to 5 years 58,560 4.03% 0 0.00%
Over 5 to 10 years 65,837 5.45% 0 0.00%
Over 10 years 25,876 3.50% 0 0.00%
- ------------------------------------------------------------------------------------------------
$159,247 4.45% $ 0 0.00%
- ------------------------------------------------------------------------------------------------
State and political subdivisions
Within 1 year $ 6,440 5.22% $ 9,290 3.93%
Over 1 to 5 years 18,036 6.09% 8,163 6.19%
Over 5 to 10 years 13,875 6.57% 12,720 6.04%
Over 10 years 6,997 6.20% 8,549 6.53%
- ------------------------------------------------------------------------------------------------
$ 45,348 6.13% $ 38,722 5.67%
- ------------------------------------------------------------------------------------------------
Mortgage-backed securities
Within 1 year $ 341 6.96% $ 0 0.00%
Over 1 to 5 years 15,555 3.32% 0 0.00%
Over 5 to 10 years 39,186 5.25% 0 0.00%
Over 10 years 209,194 5.02% 0 0.00%
- ------------------------------------------------------------------------------------------------
$264,276 4.96% $ 0 0.00%
- ------------------------------------------------------------------------------------------------
Other Securities
Within 1 year $ 0 0.00% $ 0 0.00%
Over 1 to 5 years 0 0.00% 0 0.00%
Over 5 to 10 years 0 0.00% 0 0.00%
Over 10 years 3,034 5.31% 0 0.00%
No fixed maturity 9,213 2.60% 0 0.00%
- ------------------------------------------------------------------------------------------------
$ 12,247 3.27% $ 0 0.00%
- ------------------------------------------------------------------------------------------------
Total Securities
Within 1 year $ 15,755 3.72% $ 9,290 3.93%
Over 1 to 5 years 92,151 4.32% 8,163 6.19%
Over 5 to 10 years 118,898 5.52% 12,720 6.04%
Over 10 years 245,101 4.90% 8,549 6.53%
No fixed maturity 9,213 2.60% 0 0.00%
- ------------------------------------------------------------------------------------------------
$481,118 4.86% $ 38,722 5.67%
================================================================================================
* Balances of available-for-sale securities are shown at amortized cost.
21
Loans/Leases
Total loans and leases, net of unearned income and net deferred loan fees and
costs, grew 11.9%, to $995.3 million at December 31, 2002 from $889.8 million at
December 31, 2001. Table 5 details the composition and volume changes in the
loan/lease portfolio over the past five years.
Table 5 - Loan/Lease Classification Summary
(in thousands) 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------
Residential real estate $391,120 $327,987 $344,715 $312,506 $232,167
Commercial real estate 196,517 168,452 152,218 141,903 105,222
Real estate construction 26,110 25,112 18,746 19,046 9,064
Commercial 256,010 237,483 202,956 166,263 154,085
Consumer and other 103,853 111,880 110,126 99,206 78,018
Leases 25,511 21,787 19,565 18,850 15,691
- -----------------------------------------------------------------------------------------------------------
Total loans and leases 999,121 892,701 848,326 757,774 594,247
Less: unearned income and related deferred costs
and fees (3,775) (2,859) (2,568) (2,392) (2,054)
- -----------------------------------------------------------------------------------------------------------
Total loans and leases, net of unearned income
and deferred costs and fees $995,346 $889,842 $845,758 $755,382 $592,193
- -----------------------------------------------------------------------------------------------------------
Residential real estate loans increased by $63.1 million or 19.3% in 2002, from
$328.0 million to $391.1 million, and comprised 39.2% of total loans and leases
at December 31, 2002. A low interest rate environment coupled with new branch
offices contributed to the growth in the residential portfolio. The growth in
residential loans is net of $28.8 million of loan sales to Federal agencies. The
compounded annual growth rate in residential loans for the five years ended
December 31, 2002 is 13.4%.
When residential mortgage loans are sold or securitized, the Company typically
retains all servicing which provides a source of fee income. Residential
mortgage loans serviced for others totaled $110.2 million at December 31, 2002,
compared to $113.6 million at December 31, 2001. Capitalized mortgage servicing
rights totaled $706,000 at December 31, 2002, and $663,000 at December 31, 2001,
and are reported as intangible assets on the consolidated statements of
condition.
Commercial real estate loans increased by $28.0 million or 16.7% in 2002 over
2001, from $168.5 million to $196.5 million. Commercial real estate loans of
$196.5 million represented 19.7% of total loans and leases at December 31, 2002.
Commercial loans totaled $256.0 million at December 31, 2002, an increase of
7.8% over $237.5 million at December 31, 2001. Growth in commercial lending
reflects an increased emphasis in commercial lending. Management believes that
the Company's community banking strategy can provide value to small business
customers, while commercial lending products are typically attractive to the
Company from a yield and interest rate risk perspective.
The consumer loan portfolio includes personal installment loans, indirect
automobile financing, credit card loans, and overdraft lines of credit. The
Company faces significant competition from local and national lenders for
consumer lending products. Consumer and other loans were $103.9 million at
December 31, 2002, down from $111.9 million at December 31, 2001.
The lease portfolio increased by 17.1% to $25.5 million at December 31, 2002
from $21.8 million at December 31, 2001. 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. In response to the decline in consumer leasing,
management increased its marketing efforts relating to other leasing
opportunities, including commercial leasing and municipal leasing, which have
been the primary sources of growth in the lease portfolio. As of December 31,
2002, commercial leases and municipal leases represented 90.8% of total leases,
while consumer leases made up the remaining 9.2%. As of December 31, 2001,
commercial leases and municipal leases represented 81.3% of total leases, while
consumer leases made up the remaining 18.7%.
The Company's loan/lease customers are located primarily in the upstate New York
communities served by its three subsidiary banks. The Trust Company operates
fourteen banking offices in the counties of Tompkins, Cortland, and Schuyler.
The Bank of Castile operates thirteen banking offices in towns situated in and
around the areas commonly known as the Letchworth State Park area and the
Genesee Valley region of New York State. Mahopac National Bank is located in
Putnam County, and operates four banking offices in that county and two full
service offices in neighboring Dutchess County. The Dutchess County offices
opened in 2002 and 2001. Other than general economic risks, management is not
aware of any material concentrations of credit risk to any industry or
individual borrower. Further information on the Company's lending activities,
including related party transactions, is included in Note 5 to the consolidated
financial statements included in Item 8 below.
22
The Reserve for Loan/Lease Losses
Management reviews the adequacy of the reserve for loan/lease losses (reserve)
on a regular basis. Management considers the accounting policy relating to the
reserve to be a critical accounting policy, given the inherent uncertainty in
evaluating the levels of the reserve required to cover credit losses in the
portfolio and the material effect that assumption could have on the results of
operations. Factors considered in determining the adequacy of the reserve and
the related provision include: management's approach to granting new credit; the
ongoing monitoring of existing credits by the internal and external loan review
functions; the growth and composition of the loan/lease portfolio; comments
received during the course of independent examinations; current local economic
conditions; past due and nonperforming loan statistics; the estimated values of
collateral; and a historical review of loan/lease loss experience. Based upon
consideration of the above factors, management believes that the reserve is
adequate to provide for the risk of loss inherent in the current loan/lease
portfolio.
Management uses a model to measure some of these factors and the resulting
quantitative analysis, combined with qualitative assessments, comprise the basis
on which the adequacy of the reserve is determined. The $998,000 increase in the
reserve between December 31, 2001 and December 31, 2002 resulted from the
provision for loan/lease losses exceeding the net loan losses for the year. The
allocation of the Company's reserve as of December 31, 2002, and each of the
previous four year ends is illustrated in Table 6.
Table 6 - Allocation of the Reserve for Loan/Lease Losses
December 31
(dollar amounts in thousands) 2002 2001 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------
Total loans outstanding at end of year $995,346 $889,842 $845,758 $755,382 $592,193
- ---------------------------------------------------------------------------------------------------------------
ALLOCATION OF THE RESERVE BY
LOAN TYPE:
Commercial $ 4,349 $ 3,011 $ 2,526 $ 3,281 $ 1,906
Real estate 2,809 2,755 2,210 1,964 1,384
Consumer and all other 2,912 2,976 2,771 3,202 2,935
Unallocated 1,634 1,964 2,317 781 1,180
- ---------------------------------------------------------------------------------------------------------------
Total $ 11,704 $ 10,706 $ 9,824 $ 9,228 $ 7,405
- ---------------------------------------------------------------------------------------------------------------
ALLOCATION OF THE RESERVE AS
A PERCENTAGE OF TOTAL RESERVE:
Commercial 37% 28% 26% 36% 26%
Real estate 24% 26% 22% 21% 19%
Consumer and all other 25% 28% 28% 35% 40%
Unallocated 14% 18% 24% 8% 15%
- ---------------------------------------------------------------------------------------------------------------
Total 100% 100% 100% 100% 100%
- ---------------------------------------------------------------------------------------------------------------
LOAN/LEASE TYPES AS A PERCENTAGE
OF TOTAL LOANS/LEASES:
Commercial 26% 26% 24% 22% 26%
Real estate 62% 59% 61% 62% 59%
Consumer and all other 12% 15% 15% 16% 15%
- ---------------------------------------------------------------------------------------------------------------
Total 100% 100% 100% 100% 100%
- ---------------------------------------------------------------------------------------------------------------
Loans 90 days past due and accruing $ 368 $ 1,612 $ 226 $ 168 $ 507
Nonaccrual loans 6,977 5,736 4,134 3,698 1,611
Troubled debt restructurings not included above 179 185 389 400 471
- ---------------------------------------------------------------------------------------------------------------
Total nonperforming loans/leases 7,524 7,533 4,749 4,266 2,589
- ---------------------------------------------------------------------------------------------------------------
Other real estate owned 279 43 175 214 235
- ---------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 7,803 $ 7,576 $ 4,924 $ 4,480 $ 2,824
- ---------------------------------------------------------------------------------------------------------------
Reserve as a percentage of loans/leases outstanding 1.18% 1.20% 1.16% 1.22% 1.25%
- ---------------------------------------------------------------------------------------------------------------
Reserve as a percentage of nonperforming
loans/leases 155.56% 142.12% 206.87% 216.32% 286.02%
===============================================================================================================
23
The reserve represented 1.18% of total loans/leases outstanding at December 31,
2002, down slightly from 1.20% at December 31, 2001. The reserve coverage of
nonperforming loans (loans past due 90 days and accruing, nonaccrual loans, and
restructured troubled debt) improved to 1.56 times at December 31, 2002,
compared to 1.46 times at December 31, 2001. Management is committed to early
recognition of loan problems and to maintaining an adequate reserve. 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 reserve to each category does not restrict the use
of the reserve to absorb losses in any category. The Company's historical loss
experience is detailed in Table 7.
Table 7 - Analysis of the Reserve for Loan/Lease Losses
December 31
(dollar amounts in thousands) 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------
Average loans outstanding during year $928,383 $852,775 $797,205 $674,748 $559,158
Balance of reserve at beginning of year 10,706 9,824 9,228 7,405 7,007
Reserve related to purchase acquisition N/A N/A N/A 1,511 N/A
LOANS CHARGED-OFF, DOMESTIC:
Commercial, financial, agricultural 335 371 130 241 326
Real estate - mortgage 41 44 108 105 509
Installment loans to individuals 940 843 677 647 674
Lease financing 133 28 8 1 10
Other loans 272 108 106 114 70
- ------------------------------------------------------------------------------------------------------
Total loans charged-off, domestic $ 1,721 $ 1,394 $ 1,029 $ 1,108 $ 1,589
- ------------------------------------------------------------------------------------------------------
RECOVERIES OF LOANS PREVIOUSLY
CHARGED-OFF, DOMESTIC:
Commercial, financial, agricultural 91 360 28 62 69
Real estate - mortgage 15 16 31 49 4
Installment loans to individuals 320 259 317 343 349
Lease financing 22 1 2 0 5
Other loans 36 34 31 22 21
- ------------------------------------------------------------------------------------------------------
Total loans recovered, domestic $ 484 $ 670 $ 409 $ 476 $ 448
- ------------------------------------------------------------------------------------------------------
Net loans charged-off 1,237 724 620 632 1,141
Additions to reserve charged to operations 2,235 1,606 1,216 944 1,539
- ------------------------------------------------------------------------------------------------------
Balance of reserve at end of year $ 11,704 $ 10,706 $ 9,824 $ 9,228 $ 7,405
- ------------------------------------------------------------------------------------------------------
Net charge-offs as a percentage of average
loans/leases outstanding during the year 0.13% 0.08% 0.08% 0.09% 0.20%
======================================================================================================
Potential problem loans/leases are loans/leases that are currently performing,
but where known information about possible credit problems of the related
borrowers causes management to have serious doubt as to the ability of such
borrowers to comply with the present loan payment terms and may result in
disclosure of such loans/leases as nonperforming at sometime in the future.
Management considers loans/leases classified as Substandard, which continue to
accrue interest, to be potential problem loans/leases. At December 31, 2002, the
Company, through its internal loan review function has identified 27 commercial
relationships totaling $6.9 million, which it has classified as Substandard,
which continue to accrue interest. These loans remain in a performing status due
to a variety of factors, including payment history, the value of collateral
supporting the credits, and personal or government guarantees. These factors,
when considered in aggregate, give management reason to believe that the current
risk exposure on these loans is not significant. Approximately $1.2 million of
these loans are backed by guarantees of U.S. government agencies. While in a
performing status as of December 31, 2002, these loans exhibit certain risk
factors, which have the potential to cause them to become nonperforming.
Accordingly, management's attention is focused on these credits, which are
reviewed on at least a quarterly basis.
24
Deposits and Other Liabilities
Total deposits of $1.3 billion at December 31, 2002, reflected an increase of
$252.8 million over total deposits at December 31, 2001. Deposit growth
consisted primarily of core deposits, which increased by $135.6 million, while
time deposits of $100,000 or more decreased by $41.6 million. Core deposit
growth was fairly strong at all of the Company's subsidiary banks and included
growth in mature offices as well as newer offices. Offices opened after January
1, 2001, contributed $35.8 million to the growth in 2002, while the remaining
$217.0 million of growth was in offices opened prior to January 1, 2001.
The Company's liability for securities sold under agreements to repurchase
("repurchase agreements") amounted to $77.8 million at December 31, 2002,
representing a $31.8 million decrease over December 31, 2001. 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 $42.8
million at December 31, 2002, and $61.5 million at December 31, 2001. Management
generally views local repurchase agreements as an alternative to large time
deposits. The Company's wholesale repurchase agreements are with the Federal
Home Loan Bank (FHLB) and amounted to $35.0 million at December 31, 2002 and
$40.0 million at December 31, 2001.
The Company's other borrowings represent amounts owed to the FHLB. During 2002,
the Company increased its other borrowings from the FHLB by $6.3 million, to
$81.7 million. Borrowings with the FHLB outstanding at December 31, 2002,
included $5.4 million due in one year or less, and $76.3 million due in more
than one year. The weighted average interest rate on other borrowings due in
more than one year was 5.11% at December 31, 2002.
LIQUIDITY MANAGEMENT
The objective of liquidity management is to ensure the availability of adequate
funding sources to satisfy the demand for credit, deposit withdrawals, and
business investment opportunities. The Company's large, stable core deposit base
and strong capital position are the foundation for the Company's liquidity
position. Asset and liability positions are monitored primarily through
Asset/Liability Management Committees of the subsidiary banks individually and
on a combined basis. These Committees review periodic reports on the liquidity
and interest rate sensitivity positions. Comparisons with industry and peer
groups are also monitored. The Company's strong reputation in the communities it
serves, along with its strong financial condition, provide access to numerous
sources of liquidity as described below. Management believes these diverse
liquidity sources provide sufficient means to meet all demands on the Company's
liquidity that are reasonably likely to occur.
Core deposits remain the key funding source, representing 77.3% of total
deposits, and 68.3% of total liabilities at December 31, 2002. Non-core funding
sources (time deposits of $100,000 or more, brokered time deposits, municipal
money market accounts repurchase agreements, and other borrowings) increased as
a percentage of total liabilities from 28.9% at December 31, 2001, to 30.6% at
December 31, 2002. Short-term investments, consisting of securities with
maturities of one year or less increased from $23.7 million at December 31,
2001, to $24.8 million at December 31, 2002.
Non-core funding sources may require securities to be pledged against the
underlying liability. At December 31, 2002, securities pledged to secure certain
large deposits, repurchase agreements, and other borrowings amounted to $382.4
million, compared to $299.0 million at December 31, 2001. Total securities
pledged for deposits and repurchase agreements represented 71.8% of total
securities at December 31, 2002, compared to 72.3% of total securities at
December 31, 2001.
The Company's liquidity is enhanced by ready access to national and regional
wholesale funding sources including Federal funds purchased, repurchase
agreements, negotiable certificates of deposit, and FHLB advances. Through its
subsidiary banks, the Company has borrowing relationships with the FHLB and
correspondent banks, which provide secured and unsecured borrowing capacity. At
December 31, 2002, the unused borrowing capacity on established lines with the
FHLB was $142.7 million. As members of the FHLB, the Company's subsidiary banks
can use unencumbered mortgage-related assets to secure additional borrowings
from the FHLB. At December 31, 2002, total unencumbered residential real estate
assets were $206.2 million. Additional assets may also qualify as collateral for
FHLB advances upon approval of the FHLB.
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, increased from $188.5 million at December 31, 2001, to $272.0 million at
December 31, 2002. Using current prepayment assumptions, cash flow from the
investment portfolio is estimated to be approximately $196.4 million in 2003.
Investments in residential mortgage loans, consumer loans, and leases totaled
approximately $520.3 million at December 31, 2002. Aggregate amortization from
monthly payments on these loan assets provides significant additional cash flow
to the Company. Table 8 details total scheduled maturities of selected loan
categories.
25
Table 8 - Loan Maturity
Remaining maturity of selected loans At December 31, 2002
(dollar amounts in thousands) Total Within 1 year 1-5 years After 5 years
- -----------------------------------------------------------------------------------------------
Commercial real estate $196,517 $ 7,478 $ 12,500 $176,539
Real estate construction 26,110 9,279 596 16,235
Commercial 256,010 86,023 48,271 121,716
- -----------------------------------------------------------------------------------------------
Total $478,637 $102,780 $ 61,367 $314,490
===============================================================================================
In the normal course of business the Company is party to certain financial
instruments with off-balance-sheet risk such as commitments under stand-by
letters of credit, unused portions of lines of credit, and commitments to fund
new loans. The Company's policy is to record such instruments when funded.
Further information on the Company's commitments and contingent liabilities is
provided in Note 14 to the consolidated financial statements set forth in Item 8
below.
RECENT ACCOUNTING STANDARDS
ACCOUNTING FOR BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE ASSETS:
The Company adopted the provisions of SFAS No. 142, Goodwill and Other
Intangible Assets, effective January 1, 2002. Goodwill and intangible assets
acquired in business combinations completed before July 1, 2001 continued to be
amortized prior to the adoption of SFAS No. 142. Upon adoption of SFAS No. 142,
SFAS No. 141, Business Combinations, required the company to evaluate its
existing intangible assets and goodwill that were acquired in a prior purchase
business combination, and to make any necessary reclassifications in order to
conform with the new criteria in SFAS No. 141 for recognition apart from
goodwill. Under SFAS No. 142, the Company was required to reassess the useful
lives and residual values of all intangible assets acquired in purchase business
combinations, and make any necessary amortization period adjustments by the end
of the first interim period after adoption. In addition, to the extent an
intangible assets was identified as having an indefinite useful life, the
Company was required to test the intangible asset for impairment in accordance
with the provisions of SFAS No. 142 within the first interim period.
In connection with the transitional goodwill impairment evaluation, SFAS No. 142
required the Company to perform an assessment of whether there was an indication
that goodwill was impaired as of the date of adoption based upon criteria
contained in SFAS No. 142. Any transitional impairment loss was to be recognized
as a cumulative effect of a change in accounting principle in the Company's
consolidated statement of income. The Company has performed an impairment
evaluation and based upon this analysis, no transitional impairment loss is
required as a result of adopting SFAS 142.
Prior to October 1, 2002, the FASB required unidentifiable intangible assets
acquired in the acquisition of a bank or thrift (including acquisitions of
branches), where the fair value of the liabilities assumed exceeds the fair
value of the assets acquired, to be accounted for under SFAS No. 72, Accounting
for Certain Acquisitions of Banking or Thrift Institutions. Under SFAS No. 72,
all intangible assets associated with branch acquisitions recorded on the
Company's consolidated statement of condition as of December 31, 2001, continued
to be amortized through September 30, 2002. In October 2002, the FASB issued
SFAS No. 147, Acquisitions of Certain Financial Institutions. SFAS No. 147
amends SFAS No. 72 and SFAS No. 144 and FASB Interpretation No. 9, Applying APB
Opinions Nos. 16 and 17 When a Savings and Loan Association of a Similar
Institution is Acquired in a Business Combination Accounted for by the Purchase
Method. SFAS No. 147 is effective on October 1, 2002 and requires that
unidentifiable intangible assets related to branch acquisitions no longer be
amortized as of the adoption date for SFAS No. 142, and that the unidentified
intangible assets be evaluated annually for impairment in accordance with SFAS
No. 142.
SFAS No. 147 also amends the provisions of SFAS No. 144 to apply to long-term
customer relationship intangible assets recognized in the acquisition of a
financial institution. Accordingly, effective October 1, 2002, the Company will
evaluate its core deposit intangible assets for impairment in accordance with
the provisions of SFAS No. 144. The adoption of SFAS No. 147 did not have a
material effect on the consolidated statements of condition or consolidated
statements of income.
ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS: In June 2001, FASB issued SFAS No.
143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. The Company is required to adopt SFAS No. 143 on January 1, 2003. The
adoption of SFAS No. 143 is not expected to have a material effect on the
Company's consolidated financial statements.
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS: In October 2001,
the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, that replaces SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The provisions of
SFAS No. 144 are effective for financial statements issued for fiscal years
beginning after December 15, 2001 and, generally, are to be applied
prospectively. The adoption of SFAS No. 144 on January 1, 2002, did not have a
material impact on the Company's financial condition or results of operations.
26
RESCISSION OF FASB STATEMENTS NO. 4, 44, and 64, AMENDMENT OF FASB NO. 13, AND
TECHNICAL CORRECTIONS: In April 2002, the FASB issued SFAS No. 145, Rescission
of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. SFAS No. 145 amends existing guidance on reporting gains
and losses on the extinguishment of debt to prohibit the classification of the
gain or loss as extraordinary, as the use of such extinguishments have become
part of the risk management strategy of many companies. SFAS No. 145 also amends
SFAS No. 13 to require sale-leaseback accounting for certain lease modifications
that have economic effects similar to sale-leaseback transactions. The
provisions of the Statement related to the rescission of Statement No. 4 are
applied in fiscal years beginning after May 15, 2002. Earlier application of
these provisions is encouraged. The provisions of the Statement related to
Statement No. 13 were effective for transactions occurring after May 15, 2002,
with early application encouraged. The adoption of SFAS No. 145 is not expected
to have a material effect on the Company's financial statements.
ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES: In June 2002,
the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities. SFAS No. 146 addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies Emerging
Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity. The provisions of this
Statement are effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The adoption of SFAS No.
146 is not expected to have a material effect on the Company's financial
statements.
ACCOUNTING FOR STOCK-BASED COMPENSATION-TRANSITION AND DISCLOSURE, AN AMENDMENT
OF SFAS NO. 123: In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation-transition and Disclosure, an Amendment of SFAS No.
123. This statement amends SFAS No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to
these consolidated financials statements.
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING
INDIRECT GUARANTEES OF INDEBTEDNESS TO OTHERS: In November 2002, the FASB issued
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness to Others, an
interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB
Interpretation No. 34. This Interpretation elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under guarantees issued. The Interpretation also clarifies that a
guarantor is required to recognize, at inception of a guarantee, a liability for
the fair value of the obligation undertaken. The initial recognition and
measurement provisions of the Interpretation are applicable to guarantees issued
or modified after December 31, 2002 and are not expected to have a material
effect on the Company's financial statements. The disclosure requirements are
effective for financial statements of interim or annual periods ending after
December 15, 2002 and are included in these consolidated financial statements.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES: In January 2003, the FASB issued
Interpretation No. 46, Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51. This Interpretation addresses the consolidation by
business enterprises of variable interest entities as defined in the
Interpretation. The Interpretation applies immediately to variable interests in
variable interest entities created after January 31, 2003, and to variable
interests in variable interest entities obtained after January 31, 2003. For
public enterprises with a variable interest in a variable interest entity
created before February 1, 2003, the Interpretation applies to that enterprise
no later than the beginning of the first interim or annual reporting period
beginning after June 15, 2003. The application of this Interpretation is not
expected to have a material effect on the Company's financial statements. The
Interpretation requires certain disclosures in financial statements issued after
January 31, 2003 if it is reasonably possible that the Company will consolidate
or disclose information about variable interest entities when the Interpretation
becomes effective. The Company did not have any disclosures required in these
consolidated financial statements.
27
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
MARKET RISK
The Company's primary market risk exposure relates to sensitivity to interest
rate changes. Interest rate sensitivity refers to the volatility in earnings
resulting from changes in interest rates. Each quarter, or more frequently if
necessary, the Asset/Liability Management Committees estimate the earnings
impact of changes in interest rates. The findings of the committees are
incorporated into investment and funding decisions, and in the business planning
process.
Table 9 is a Condensed Static Gap Report, which illustrates the anticipated
repricing intervals of assets and liabilities as of December 31, 2002. The
analysis reflects a relatively balanced position with some short-term
sensitivity to rising interest rates in the 0-3 month repricing interval
followed by longer-term asset sensitivity in the 3-12 month repricing intervals.
This analysis suggests that the Company's net interest income is more vulnerable
to a sustained low interest rate environment than it is to rising interest
rates.
Table 9 - Interest Rate Risk Analysis
Condensed Static Gap - December 31, 2002 Repricing Interval
Cumulative
(dollar amounts in thousands) Total 0-3 months 3-6 months 6-12 months 12 months
- ----------------------------------------------------------------------------------------------------------------------
Interest-earning assets* $1,525,586 $ 465,991 $ 127,412 $ 175,776 $ 769,179
Interest-bearing liabilities 1,250,129 538,674 93,377 118,781 750,832
- ----------------------------------------------------------------------------------------------------------------------
Net gap position (72,683) 34,035 56,995 18,347
- ----------------------------------------------------------------------------------------------------------------------
Net gap position as a percentage of total assets (4.35%) 2.04% 3.41% 1.10%
======================================================================================================================
* Balances of available-for-sale securities are shown at amortized cost.
The Company's Board of Directors has set a policy that interest rate risk
exposure will remain within a range whereby net interest income will not decline
by more than 10% in one year as a result of a 200 basis point change in rates.
Based upon the simulation analysis performed as of December 31, 2002, a 200
basis point upward shift in interest rates over a one-year time frame would
result in a one-year decline from the base case scenario, which assumes interest
rates remain at current levels, of approximately 0.86% in net interest income,
and management takes no action to address balance sheet mismatches. The same
simulation indicates that a 100 basis point decline in interest rates over a
one-year period would result in a decrease in net interest income of 1.23%, when
compared to the base case.
Although the simulation model suggests relatively modest exposure to changes in
interest rates, the base case scenario (which assumes interest rates remain at
current levels) indicates a downward trending net interest margin due to more
assets repricing in the current low rate environment than liabilities. Given the
expectation of a lower net interest margin in 2003, maintaining net interest
income in 2003 at the amount realized in 2002 will depend upon continued growth
in earnings assets. The simulation model is useful in identifying potential
exposure to interest rate movements; however, management feels that certain
actions could be taken to offset some of the negative effects of unfavorable
movements in interest rates.
Additional information regarding market risk of the Company's financial
instruments at December 31, 2002 is provided in Table 10.
28
Table 10 - Repricing Intervals of Selected Financial Instruments
Greater
(dollar amounts in thousands) 0-1 year 1-2 years 2-3 years 3-5 years than 5 years Total Fair Value
- ----------------------------------------------------------------------------------------------------------------------------
Financial Assets:
Available-for-sale securities $239,841 $104,421 $ 42,329 $ 50,343 $ 56,846 $493,780 $493,780
Average interest rate* 4.60% 5.26% 5.03% 4.98% 4.90% 4.85%
Held-to-maturity securities 10,156 5,356 1,574 3,742 17,894 38,722 40,260
Average interest rate* 3.82% 4.93% 4.94% 4.78% 4.44% 4.40%
Loans/leases 486,023 155,432 111,765 142,348 99,778 995,346 999,649
Average interest rate* 6.28% 7.48% 7.40% 7.19% 6.90% 6.78%
Financial Liabilities:
Time deposits $283,309 $ 58,710 $ 15,021 $ 21,921 $ 642 $379,603 $384,903
Average interest rate 2.74% 3.76% 4.14% 4.72% 3.33% 3.05%
Federal funds sold and securities sold
under agreements to repurchase 42,843 24,200 800 5,000 5,000 77,843 77,878
Average interest rate 2.26% 4.49% 2.38% 4.27% 4.03% 3.24%
Other borrowings 5,379 16,392 10,928 8,400 40,831 81,930 82,466
Average interest rate 4.04% 4.80% 5.67% 4.17% 4.86% 5.03%
============================================================================================================================
* Interest rate on tax-exempt obligations is shown before tax-equivalent
adjustments.
29
[This Page Intentionally Left Blank]
30
Item 8. Financial Statements and Supplementary Data
Consolidated Statements of Condition
As of December 31
(in thousands except share and per share data) 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and non-interest bearing balances due from banks $ 53,898 $ 43,946
Interest bearing balances due from banks 10,000 21
Federal funds sold 400 150
Available-for-sale securities, at fair value 493,780 386,369
Held-to-maturity securities, fair value of $40,260 at
December 31, 2002, and $27,255 at December 31, 2001 38,722 26,846
Loans and leases, net of unearned income and deferred costs and fees 995,346 889,842
Less reserve for loan/lease losses 11,704 10,706
- -----------------------------------------------------------------------------------------------------------------------------------
Net Loans/Leases 983,642 879,136
Bank premises and equipment, net 27,111 25,034
Corporate owned life insurance 21,382 20,451
Intangible assets 14,106 14,072
Accrued interest and other assets 27,162 24,670
- -----------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 1,670,203 $ 1,420,695
LIABILITIES, MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES,
AND SHAREHOLDERS' EQUITY
Deposits:
Interest-bearing:
Checking, savings, and money market $ 710,753 $ 457,427
Time 379,603 404,532
Noninterest-bearing 249,929 225,499
- -----------------------------------------------------------------------------------------------------------------------------------
Total Deposits 1,340,285 1,087,458
Federal funds purchased and securities sold under agreements to repurchase 77,843 109,669
Other borrowings 81,930 75,581
Other liabilities 18,059 15,423
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 1,518,117 1,288,131
- -----------------------------------------------------------------------------------------------------------------------------------
Minority interest in consolidated subsidiaries 1,489 1,492
Shareholders' equity:
Common stock - par value $0.10 per share: Authorized 15,000,000 shares;
Issued 7,465,286 shares at December 31, 2002, and 7,442,177 shares at December 31, 2001 747 744
Surplus 45,997 45,456
Undivided profits 96,722 82,385
Accumulated other comprehensive income 7,597 3,039
Treasury stock at cost: 24,529 shares at December 31, 2002, and December 31, 2001 (466) (466)
Unallocated ESOP: 10,170 shares at December 31, 2001 0 (86)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 150,597 131,072
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities, Minority Interest in Consolidated Subsidiaries,
and Shareholders' Equity $ 1,670,203 $ 1,420,695
===================================================================================================================================
See notes to consolidated financial statements.
31
Consolidated Statements of Income
Year ended December 31
(in thousands except per share data) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME
Loans $68,383 $71,592 $70,587
Interest on balances due from banks 37 3 0
Federal funds sold 207 487 726
Available-for-sale securities 23,862 20,861 19,216
Held-to-maturity securities 1,470 1,215 1,489
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest and Dividend Income 93,959 94,158 92,018
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits:
Time certificates of deposit of $100,000 or more 3,233 7,970 10,205
Other deposits 18,934 20,458 22,288
Federal funds purchased and securities sold under agreements to repurchase 2,448 3,453 3,996
Other borrowings 4,203 4,294 3,587
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 28,818 36,175 40,076
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 65,141 57,983 51,942
Less Provision for Loan/Lease Losses 2,235 1,606 1,216
Net Interest Income After Provision for Loan/Lease Losses 62,906 56,377 50,726
- -----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trust and investment services income 4,174 4,646 4,586
Service charges on deposit accounts 6,324 4,676 3,739
Insurance commissions and fees 4,900 4,225 0
Other service charges 5,029 4,259 3,812
Increase in cash surrender value of corporate owned life insurance 1,383 1,068 956
Other operating income 1,531 924 882
Gain on sale of available-for-sale securities 363 66 450
- -----------------------------------------------------------------------------------------------------------------------------------
Total Noninterest Income 23,704 19,864 14,425
- -----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES
Salaries and wages 22,692 20,338 17,354
Pension and other employee benefits 6,827 5,004 4,112
Net occupancy expense of bank premises 3,021 2,787 2,439
Net furniture and fixture expense 3,320 3,042 2,582
Amortization of intangible assets 867 1,680 1,135
Other operating expenses 15,543 13,210 11,197
- -----------------------------------------------------------------------------------------------------------------------------------
Total Noninterest Expenses 52,270 46,061 38,819
- -----------------------------------------------------------------------------------------------------------------------------------
Income Before Income Tax Expense and Minority
Interest in Consolidated Subsidiaries 34,340 30,180 26,332
Minority interest in consolidated subsidiaries 134 134 568
Income Tax Expense 11,292 10,419 8,252
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income $22,914 $19,627 $17,512
- -----------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $3.09 $2.65 $2.47
Diluted earnings per share $3.03 $2.62 $2.45
===================================================================================================================================
See notes to consolidated financial statements.
32
Consolidated Statements of Cash Flows
Year ended December 31
(in thousands) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $22,914 $19,627 $17,512
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan/lease losses 2,235 1,606 1,216
Depreciation and amortization premises, equipment, and software 2,945 2,770 2,461
Amortization of intangible assets 867 1,680 1,135
Earnings from corporate owned life insurance, net (1,340) (985) (956)
Net amortization on securities 2,008 431 17
Deferred income tax benefit (630) (332) (599)
Net gain on sale of securities (363) (66) (450)
Net gain on sale of loans (671) (560) (74)
Proceeds from sale of loans 29,464 28,125 8,336
Loans originated for sale (32,771) (28,356) (8,262)
Net (gain) loss on sale of bank premises (19) (32) 3
Treasury stock issued 0 10 75
ISOP/ESOP shares released or committed to be released for allocation 414 744 159
Decrease (increase) in interest receivable 212 943 (1,419)
(Decrease) increase in interest payable (1,200) (1,655) 1,271
Other, net (1,573) (4,541) (268)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 22,492 19,409 20,157
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from maturities of available-for-sale securities 237,856 206,590 39,768
Proceeds from sales of available-for-sale securities 25,611 1,497 9,393
Proceeds from maturities of held-to-maturity securities 10,083 9,191 10,750
Purchases of available-for-sale securities (364,819) (244,016) (50,955)
Purchases of held-to-maturity securities (21,989) (10,194) (5,674)
Net increase in loans/leases (102,763) (85,458) (90,996)
Proceeds from sales of bank premises and equipment 82 234 33
Purchase of bank premises and equipment (4,928) (3,738) (5,547)
Redemption (purchase) of corporate owned life insurance 409 (885) (4,358)
Net cash used in acquisitions (21) (1,058) 0
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (220,479) (127,837) (97,586)
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in demand deposits, money market accounts, and savings accounts 277,756 68,280 16,778
Net (decrease) increase in time deposits (24,929) (15,723) 43,884
Net (decrease) increase in securities sold under agreements to repurchase and
Federal funds purchased (31,826) 37,438 14,385
Increase in other borrowings 16,093 49,027 80,040
Repayment of other borrowings (9,744) (41,031) (54,795)
Cash dividends (8,577) (8,136) (7,696)
Repurchase of common stock (1,353) (3,408) (4,870)
Net proceeds from exercise of stock options, warrants, and related tax benefit 748 734 288
Cash paid in lieu of fractional Letchworth common shares 0 0 (9)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 218,168 87,181 88,005
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 20,181 (21,247) 10,576
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 44,117 65,364 54,788
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $64,298 $44,117 $65,364
===================================================================================================================================
SUPPLEMENTAL INFORMATION:
Cash paid during the year for:
Interest $30,018 $37,830 $38,805
Income taxes $10,728 $11,017 $9,307
Non-cash investing and financing activities:
Fair value of non-cash assets acquired in purchase acquisition $ 0 $ 1,504 $60,034
Fair value of liabilities assumed in purchase acquisitions $ 0 $ 1,449 $55,469
Fair value of shares issued for acquisitions $ 821 $ 3,458 $ 8,176
Securitization of loans $ 0 $41,440 $ 0
See notes to consolidated financial statements.
33
Consolidated Statements of Changes in Shareholders' Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
(in thousands except share and per share data) Common Undivided Comprehensive Treasury Unallocated
data) Stock Surplus Profits (Loss) Income Stock ESOP Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1999 $ 710 $ 40,548 $ 61,078 $ (4,745) $ (525) $ (442) $ 96,624
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 17,512 17,512
Other comprehensive income 4,736 4,736
--------
Total Comprehensive Income 22,248
--------
Cash paid in lieu of fractional Letchworth
common shares (9) (9)
Cash dividends ($1.08 per share) (7,696) (7,696)
Exercise of stock options, and related tax
benefit (16,208 shares, net) 2 286 288
Treasury stock issued (2,777 shares) 23 52 75
Common stock repurchased and returned to
unissued status (185,696 shares) (19) (4,851) (4,870)
ESOP shares released or committed to
be released for allocation (5,376 shares) 50 109 159
Shares issued for purchase acquisition
(415,000 shares) 41 8,135 8,176
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2000 $ 734 $ 44,182 $ 70,894 $ (9) $ (473) $ (333) $114,995
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 19,627 19,627
Other comprehensive income 3,048 3,048
--------
Total Comprehensive Income 22,675
--------
Cash dividends ($1.10 per share) (8,136) (8,136)
Exercise of stock options, and related tax
benefit (48,177 shares, net) 5 729 734
Treasury stock issued (357 shares) 3 7 10
Common stock repurchased and returned to
unissued status (115,079 shares) (11) (3,397) (3,408)
ESOP shares released or committed to be
released for allocation (22,091 shares) 497 247 744
Shares issued for purchase acquisition
(164,266 shares) 16 3,442 3,458
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2001 $ 744 $ 45,456 $ 82,385 $ 3,039 $ (466) $ (86) $131,072
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income 22,914 22,914
Other comprehensive income 4,558 4,558
--------
Total Comprehensive Income 27,472
--------
Cash dividends ($1.16 per share) (8,577) (8,577)
Exercise of stock options and related tax
benefit (37,070 shares, net) 4 744 748
Common stock repurchased and returned to
unissued status (34,840 shares) (3) (1,350) (1,353)
ESOP shares released or committed to be
released for allocation (10,170 shares) 328 86 414
Shares issued for purchase acquisition
(20,879 shares) 2 819 821
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2002 $ 747 $ 45,997 $ 96,722 $ 7,597 $ (466) $ 0 $150,597
===================================================================================================================================
See notes to consolidated financial statements.
34
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies
BASIS OF PRESENTATION: Tompkins Trustco, Inc. ("Tompkins" or "the Company") is a
Financial Holding Company, organized under the laws of New York State, and is
the parent company of Tompkins Trust Company (the "Trust Company"), The Bank of
Castile, and The Mahopac National Bank ("Mahopac National Bank"); and Tompkins
Insurance Agencies, Inc. ("Tompkins Insurance"). The consolidated financial
information included herein combines the results of operations, the assets,
liabilities, and shareholders' equity (including comprehensive income) of the
Company and its subsidiaries. All significant intercompany balances and
transactions are eliminated in consolidation.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities, and disclose contingent assets and
liabilities, at the date of the financial statements and the reported amounts of
revenue and expense during the reporting period. Actual results could differ
from those estimates. Significant items subject to such estimates and
assumptions include the reserve for loan/lease losses, valuation of intangible
assets, deferred income tax assets, and obligations related to employee
benefits. Amounts in the prior years' consolidated financial statements are
reclassified when necessary to conform to the current year's presentation.
CASH EQUIVALENTS: Cash equivalents in the consolidated statements of cash flows
include cash and noninterest-bearing balances due from banks, interest-bearing
balances due from banks, and Federal funds sold.
SECURITIES: Management determines the appropriate classification of debt and
equity securities at the time of purchase. Securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold
the securities to maturity. Held-to-maturity securities are stated at amortized
cost. Debt securities not classified as held-to-maturity and marketable equity
securities are classified as available-for-sale. Available-for-sale securities
are stated at fair value with the unrealized gains and losses, net of tax,
excluded from earnings and reported as a separate component of accumulated
comprehensive income or loss, in shareholders' equity.
Premiums and discounts are amortized or accreted over the expected life of the
related security as an adjustment to yield using the interest method. Dividend
and interest income are recognized when earned. Realized gains and losses on the
sale of securities are included in securities gains (losses). The cost of
securities sold is based on the specific identification method.
A decline in the fair value of any available-for-sale or held-to-maturity
security below cost that is deemed to be other than temporary is charged to
earnings, resulting in the establishment of a new cost basis for the security.
LOANS AND LEASES: Loans are reported at their principal outstanding balance, net
of deferred loan origination fees and costs, and unearned income. The Company
has the ability and intent to hold its loans for the foreseeable future, except
for certain residential real estate loans held-for-sale. The Company provides
motor vehicle and equipment financing to its customers through direct financing
leases. These leases are carried at the aggregate of lease payments receivable,
plus estimated residual values, less unearned income. Unearned income on direct
financing leases is amortized over the lease terms, resulting in a level rate of
return.
Loans originated and intended for sale in the secondary market are carried at
the lower of aggregate cost or estimated market value. Net unrealized losses
attributable to changes in market interest rates are recognized through a
valuation allowance by charges to income.
RESERVE FOR LOAN/LEASE LOSSES: The reserve for loan/lease losses is regularly
evaluated by management in order to maintain the reserve at a level consistent
with the inherent risk of loss in the loan and lease portfolios. Management's
evaluation of the adequacy of the reserve is based upon a review of the
Company's historical loss experience, known and inherent risks in the loan and
lease portfolios, the estimated value of collateral, the level of nonperforming
loans, and trends in delinquencies. External factors, such as the level and
trend of interest rates and the national and local economies, are also
considered. Management believes that the current reserve for loan/lease losses
is adequate.
Management considers a loan to be impaired if, based on current information, it
is probable that the Company will be unable to collect all scheduled payments of
principal or interest when due, according to the contractual terms of the loan
agreement. When a loan is considered to be impaired, the amount of the
impairment is measured based on the present value of expected future cash flows
discounted at the effective interest rate of the loan or, as a practical
expedient, at the observable market price or the fair value of collateral if the
loan is collateral dependent. Management excludes large groups of smaller
balance homogeneous loans such as residential mortgages, consumer loans, and
leases, which are collectively evaluated. All loans and leases restructured in a
troubled debt restructuring are also considered impaired loans. Impairment
losses are included in the reserve for loan/lease losses through a charge to the
provision for loan/lease losses.
INCOME RECOGNITION ON IMPAIRED AND NONACCRUAL LOANS AND LEASES: Loans and
leases, including impaired loans, are generally classified as nonaccrual if they
are past due as to maturity or payment of principal or interest for a period of
more than 90 days, unless such loans are well secured and in the process of
collection. Loans that are past due less than 90 days may also be classified as
nonaccrual if repayment in full of principal or interest is in doubt.
Loans may be returned to accrual status when all principal and interest amounts
contractually due (including arrearages) are reasonably assured of repayment
within an acceptable time period, and there is a sustained period of repayment
performance by the borrower in accordance with the contractual terms of the loan
agreement. Payments received on loans carried as nonaccrual are generally
applied as a reduction to principal. When the future collectibility of the
recorded loan balance is expected, interest income may be recognized on a cash
basis.
35
Note 1 Summary of Significant Accounting Policies (continued)
OTHER REAL ESTATE OWNED: Other real estate owned consists of properties formerly
pledged as collateral to loans, which have been acquired by the Company through
foreclosure proceedings or acceptance of a deed in lieu of foreclosure. Upon
transfer of a loan to foreclosure status, an appraisal is obtained and any
excess of the loan balance over the fair value, less estimated costs to sell, is
charged against the reserve for loan/lease losses. Expenses and subsequent
adjustments to the fair value are treated as other operating expense.
BANK PREMISES AND EQUIPMENT: Land is carried at cost. Bank premises and
equipment are stated at cost, less allowances for depreciation. The provision
for depreciation for financial reporting purposes is computed generally by the
straight-line method at rates sufficient to write-off the cost of such assets
over their estimated useful lives. Bank premises are amortized over a period of
10-39 years, and furniture, fixtures, and equipment are amortized over a period
of 2-20 years. Maintenance and repairs are charged to expense as incurred.
INCOME TAXES: Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
GOODWILL AND CORE DEPOSIT INTANGIBLE: Goodwill represents the excess of purchase
price over the fair value of assets acquired in a transaction using purchase
accounting. Core deposit intangible represents a premium paid to acquire a base
of stable low cost deposits in the acquisition of a bank, or a bank branch,
using purchase accounting. The amortization period for core deposit intangible
ranges from 5 years to 10 years. The amortization period is monitored to
determine if circumstances require such period to be reduced. The Company
periodically reviews its intangible assets for changes in circumstances that may
indicate the carrying amount of the asset is impaired. Prior to the adoption of
Statement of Financial Accounting Standards (SFAS) No. 142 on January 1, 2002,
the amortization period of goodwill ranged from 10 years to 20 years. Refer to
"Accounting For Business Combinations and Goodwill and Other Intangible Assets".
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE: Securities sold under agreements
to repurchase (repurchase agreements) are agreements in which the Company
transfers the underlying securities to a third-party custodian's account that
explicitly recognizes the Company's interest in the securities. The agreements
are accounted for as secured financing transactions provided the Company
maintains effective control over the transferred securities and meets other
criteria as specified in SFAS No. 140. The Company's agreements are accounted
for as secured financings; accordingly, the transaction proceeds are reflected
as liabilities and the securities underlying the agreements continue to be
carried in the Company's securities portfolio.
TREASURY STOCK: The cost of treasury stock is shown on the consolidated
statements of condition as a separate component of shareholders' equity, and is
a reduction to total shareholders' equity. Shares are released from treasury at
fair value, with any gain or loss on the release identified on an average cost
basis.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK: In the normal course of
business the Company is party to certain financial instruments with
off-balance-sheet risk such as commitments under stand-by letters of credit,
unused portions of lines of credit, and commitments to fund new loans. The
Company's policy is to record such instruments when funded.
TRUST AND INVESTMENT SERVICES: Assets held in fiduciary or agency capacities for
customers are not included in the accompanying consolidated statements of
condition, since such items are not assets of the Company. Fees associated with
providing trust and investment services are included in noninterest income.
EARNINGS PER SHARE: Basic earnings per share is calculated by dividing net
income available to common shareholders by the weighted average number of shares
outstanding during the year. Diluted earnings per share is calculated by
dividing net income available to common shareholders by the weighted average
number of shares outstanding during the year plus the dilutive effect of stock
issuable upon conversion of stock options or certain other contingencies.
CASH DIVIDENDS PER SHARE: Cash dividends per share reflect actual historical
dividends paid by Tompkins Trustco, Inc. for all periods presented.
SEGMENT REPORTING: The Company's operations are solely in the financial services
industry and include traditional commercial banking and related financial
services. The Company operates primarily in the geographical areas in the
proximity of its branch locations in New York State. Operating decisions are
made based upon a review of the Company's traditional banking and related
financial services, which constitute the Company's only reportable segment.
COMPREHENSIVE INCOME: For the Company, comprehensive income represents net
income plus the net change in unrealized gains or losses on securities
available-for-sale for the period (net of taxes), and is presented in the
consolidated statements of changes in shareholders' equity. Accumulated other
comprehensive income represents the net unrealized gains or losses on securities
available-for-sale (net of tax) as of the dates of the consolidated statements
of condition.
STOCK BASED COMPENSATION: The Company applies APB Opinion No. 25 and related
interpretations in accounting for its stock option plan. Accordingly,
compensation expense is recognized only if the exercise price of the option is
less than the fair value of the underlying stock at the grant date. SFAS No. 123
requires companies not using a fair value based method of accounting for stock
options to provide pro forma disclosure of net income and earnings per share as
if the fair value method of accounting had been applied. Had the Company
determined compensation cost based on the fair value of its stock options at the
grant date under SFAS No. 123, the Company's net income and earnings per share
would have been reduced to pro forma amounts indicated in the following table.
36
Note 1 Summary of Significant Accounting Policies (continued)
(in thousands except per share data) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Net income:
As reported $22,914 $19,627 $17,512
Deduct: Total stock-based employee compensation expense determined under
fair value based method for all awards, net of related tax effects 389 329 156
Pro forma 22,525 19,298 17,356
- -----------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share:
As reported $ 3.09 $ 2.65 $ 2.47
Pro forma 3.04 2.61 2.44
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share
As reported $ 3.03 $ 2.62 $ 2.45
Pro forma 2.98 2.57 2.42
===================================================================================================================================
The per share weighted average fair value of stock options granted during 2002,
2001, and 2000 was $16.23, $15.80, and $10.96, respectively. Fair values were
arrived at using the Black Scholes option-pricing model with the following
assumptions:
2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Risk-free interest rate 3.44% 5.25% 5.91%
Expected dividend yield 3.00% 3.10% 3.90%
Volatility 46.20% 50.00% 52.00%
Expected life (years) 7.00 7.00 7.00
===================================================================================================================================
In management's opinion the existing models do not necessarily provide a
reliable measure of the fair value of its employee stock options because the
Company's employee stock options have characteristics significantly different
from those of traded options for which the Black-Scholes model was developed,
and because changes in the subjective assumptions can materially affect fair
value estimate.
ACCOUNTING FOR BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE ASSETS:
The Company adopted the provisions of SFAS No. 142, Goodwill and Other
Intangible Assets, effective January 1, 2002. Goodwill and intangible assets
acquired in business combinations completed before July 1, 2001 continued to be
amortized prior to the adoption of SFAS No. 142. Upon adoption of SFAS No. 142,
SFAS No. 141, Business Combinations, required the company to evaluate its
existing intangible assets and goodwill that were acquired in a prior purchase
business combination, and to make any necessary reclassifications in order to
conform with the new criteria in SFAS No. 141 for recognition apart from
goodwill. Under SFAS No. 142, the Company was required to reassess the useful
lives and residual values of all intangible assets acquired in purchase business
combinations, and make any necessary amortization period adjustments by the end
of the first interim period after adoption. In addition, to the extent an
intangible assets was identified as having an indefinite useful life, the
Company was required to test the intangible asset for impairment in accordance
with the provisions of SFAS No. 142.
In connection with the transitional goodwill impairment evaluation, SFAS No. 142
required the Company to perform an assessment of whether there was an indication
that goodwill was impaired as of the date of adoption based upon criteria
contained in SFAS No. 142. The Company has performed an impairment evaluation
and based upon this analysis, no transitional impairment loss is required as a
result of adopting SFAS 142.
Prior to October 1, 2002, the FASB required unidentifiable intangible assets
acquired in the acquisition of a bank or thrift (including acquisitions of
branches), where the fair value of the liabilities assumed exceeds the fair
value of the assets acquired, to be accounted for under SFAS No. 72, Accounting
for Certain Acquisitions of Banking or Thrift Institutions. Under SFAS No. 72,
all intangible assets associated with branch acquisitions recorded on the
Company's consolidated statement of condition as of December 31, 2001, continued
to be amortized through September 30, 2002. In October 2002, the FASB issued
SFAS No. 147, Acquisitions of Certain Financial Institutions. SFAS No. 147
amends SFAS No. 72 and SFAS No. 144 and FASB Interpretation No. 9, Applying APB
Opinions Nos. 16 and 17 When a Savings and Loan Association of a Similar
Institution is Acquired in a Business Combination Accounted for by the Purchase
Method. SFAS No. 147 is effective on October 1, 2002 and requires that
unidentifiable intangible assets related to branch acquisitions no longer be
amortized as of the adoption date for SFAS No. 142, and that the unidentified
intangible assets be evaluated annually for impairment in accordance with SFAS
No. 142.
SFAS No. 147 also amends the provisions of SFAS No. 144 to apply to long-term
customer relationship intangible assets recognized in the acquisition of a
financial institution. Accordingly, effective October 1, 2002, the Company will
evaluate its core deposit intangible assets for impairment in accordance with
the provisions of SFAS No. 144. The adoption of SFAS No. 147 did not have a
material effect on the consolidated statements of condition or consolidated
statements of income.
37
Note 1 Summary of Significant Accounting Policies (continued)
ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS: In June 2001, FASB issued SFAS No.
143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. The Company is required to adopt SFAS No. 143 on January 1, 2003. The
adoption of SFAS No. 143 is not expected to have a material effect on the
Company's consolidated financial statements.
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS: In October 2001,
the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, that replaces SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The provisions of
SFAS No. 144 are effective for financial statements issued for fiscal years
beginning after December 15, 2001 and, generally, are to be applied
prospectively. The adoption of SFAS No. 144 on January 1, 2002, did not have a
material impact on the Company's financial condition or results of operations.
RESCISSION OF FASB STATEMENTS NO. 4, 44, and 64, AMENDMENT OF FASB NO. 13, AND
TECHNICAL CORRECTIONS: In April 2002, the FASB issued SFAS No. 145, Rescission
of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. SFAS No. 145 amends existing guidance on reporting gains
and losses on the extinguishment of debt to prohibit the classification of the
gain or loss as extraordinary, as the use of such extinguishments have become
part of the risk management strategy of many companies. SFAS No. 145 also amends
SFAS No. 13 to require sale-leaseback accounting for certain lease modifications
that have economic effects similar to sale-leaseback transactions. The
provisions of the Statement related to the rescission of Statement No. 4 are
applied in fiscal years beginning after May 15, 2002. Earlier application of
these provisions is encouraged. The provisions of the Statement related to
Statement No. 13 were effective for transactions occurring after May 15, 2002,
with early application encouraged. The adoption of SFAS No. 145 is not expected
to have a material effect on the Company's financial statements.
ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES: In June 2002,
the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities. SFAS No. 146 addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies Emerging
Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity. The provisions of this
Statement are effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The adoption of SFAS No.
146 is not expected to have a material effect on the Company's financial
statements.
ACCOUNTING FOR STOCK-BASED COMPENSATION-TRANSITION AND DISCLOSURE, AN AMENDMENT
OF SFAS NO. 123: In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation-transition and Disclosure, an Amendment of SFAS No.
123. This statement amends SFAS No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to
these consolidated financials statements.
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING
INDIRECT GUARANTEES OF INDEBTEDNESS TO OTHERS: In November 2002, the FASB issued
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness to Others, an
interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB
Interpretation No. 34. This Interpretation elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under guarantees issued. The Interpretation also clarifies that a
guarantor is required to recognize, at inception of a guarantee, a liability for
the fair value of the obligation undertaken. The initial recognition and
measurement provisions of the Interpretation are applicable to guarantees issued
or modified after December 31, 2002 and are not expected to have a material
effect on the Company's financial statements. The disclosure requirements are
effective for financial statements of interim or annual periods ending after
December 15, 2002 and are included in these consolidated financial statements.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES: In January 2003, the FASB issued
Interpretation No. 46, Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51. This Interpretation addresses the consolidation by
business enterprises of variable interest entities as defined in the
Interpretation. The Interpretation applies immediately to variable interests in
variable interest entities created after January 31, 2003, and to variable
interests in variable interest entities obtained after January 31, 2003. For
public enterprises with a variable interest in a variable interest entity
created before February 1, 2003, the Interpretation applies to that enterprise
no later than the beginning of the first interim or annual reporting period
beginning after June 15, 2003. The application of this Interpretation is not
expected to have a material effect on the Company's financial statements. The
Interpretation requires certain disclosures in financial statements issued after
January 31, 2003 if it is reasonably possible that the Company will consolidate
or disclose information about variable interest entities when the Interpretation
becomes effective. The Company did not have any disclosures required in these
consolidated financial statements.
38
Note 2 Mergers and Acquisitions
Mahopac National Bank
On June 4, 1999, the Company acquired 70.17% of the outstanding common stock of
Mahopac National Bank in a cash transaction accounted for as a purchase.
Accordingly, operating results for Mahopac National Bank are not included for
periods prior to June 4, 1999. Subsequent to June 4, 1999, net income of Mahopac
National Bank is included in the Company's net income based upon the percentage
of the Company's ownership of Mahopac National Bank. This transaction resulted
in a core deposit intangible of $3.5 million, which is being amortized over a
10-year period. The transaction also resulted in goodwill of $2.5 million, which
prior to the adoption of SFAS No. 142 on January 1, 2002, was being amortized
over a 20-year period.
Effective September 1, 2000, and early in 2001, the Company completed the
purchase of the minority interest in Mahopac National Bank, primarily in a
stock-for-stock transaction accounted for as a purchase. Prior to September 1,
2000, the approximately 30% interest in Mahopac National Bank which was not
owned by the Company was shown as a minority interest in consolidated
subsidiaries on the consolidated statements of condition. Subsequent to
September 1, 2000, all of the net income of Mahopac National Bank is included in
Tompkins' consolidated net income. The approximately 30% acquisition of Mahopac
National Bank resulted in a core deposit intangible of $1.9 million, which is
being amortized over a 10-year period, and goodwill of $3.2 million. Prior to
the adoption of SFAS No. 142 on January 1, 2002, the goodwill was being
amortized over a 20-year period.
The table below presents the pro forma combined results of operations of
Tompkins and Mahopac National Bank, as if Mahopac had been 100% owned for all
periods presented.
Year Ended December 31 (dollar amounts in thousands, except per share) 2000
- ------------------------------------------------------------------------------------
Net interest income:
As reported $51,942
Pro forma combined $51,942
Net income:
- ------------------------------------------------------------------------------------
As reported $17,512
Pro forma combined 17,818
Basic earnings per share:
- ------------------------------------------------------------------------------------
As reported $ 2.47
Pro forma combined 2.41
Diluted earnings per share:
- ------------------------------------------------------------------------------------
As reported $ 2.45
Pro forma combined 2.40
====================================================================================
The pro forma combined financial information does not reflect any potential cost
savings or revenue enhancements that are expected to result from the
acquisitions. Accordingly, the pro forma combined financial information may not
be indicative of operations that would have been achieved had the acquisitions
occurred on the dates indicated, nor do they purport to be indicative of the
results of operations that may be achieved in the future.
Tompkins Insurance
Effective January 1, 2001, the Company completed the acquisition of 100% of the
common stock of Austin, Hardie, Wise Agency, Inc. and Ernest Townsend & Son,
Inc., in a cash and stock transaction accounted for as a purchase. In connection
with these acquisitions, the two agencies were merged with and into Tompkins
Insurance, a wholly-owned subsidiary of Tompkins. The agencies continue to
operate from their western New York locations, which include Attica, Warsaw,
Alden, LeRoy, Batavia and Caledonia. The acquisition was accounted for as a
purchase transaction, with the $4.4 million excess of the purchase price over
the fair value of identifiable assets acquired less liabilities assumed recorded
as goodwill. Prior to the adoption of SFAS No. 142 on January 1, 2002, the
goodwill was being amortized on a straight-line basis over 15 years.
The purchase agreements for the insurance agencies include provisions for
additional consideration to be paid in the form of the release of shares of
Company stock from escrow if Tompkins Insurance met certain income targets in
2001 and 2002. The contingent consideration includes 25,093 shares, which were
payable if the income targets were met, and an additional 8,333 shares which
were payable if income targets for the two-year period were exceeded by 5%.
Tompkins Insurance met the 2001, 2002, and 2-year income targets, resulting in
the release of 12,547 shares in 2001 and 20,879 in 2002 as additional
consideration. Such shares are considered outstanding for purposes of computing
diluted earnings per share beginning on October 1, 2001 for shares released in
2001 and beginning on July 1, 2002 for shares released in 2002.
On June 22, 2001, Tompkins Insurance acquired the assets of Youngs & Linfoot of
LeRoy, Inc. in a cash transaction accounted for as a purchase. The excess of the
purchase price over the fair value of identifiable assets acquired less
liabilities assumed of $287,000 has been recorded as goodwill. Prior to the
adoption of SFAS No. 142 on January 1, 2002, the goodwill was being amortized on
a straight-line basis over 15 years.
39
Note 2 Mergers and Acquisitions (continued)
Goodwill and Other Intangible Assets
At December 31, 2002, the Company had unamortized goodwill related to its
various acquisitions totaling $10.7 million compared with $9.9 million at
December 31, 2001. The increase reflects the $0.8 million of goodwill recorded
as a result of Tompkins Insurance exceeding the income targets specified in the
purchase agreements for 2001 and 2002. The purchase agreements included
provisions for additional consideration to be paid to Tompkins Insurance in the
form of Company stock if certain income targets were met. In accordance with
SFAS No. 142, the Company no longer amortizes this goodwill subsequent to
December 31, 2001. Included in this amount is approximately $170,000 of
unidentified intangible assets related to various branch acquisitions, which
prior to October 1, 2002, were accounted for under SFAS No. 72. With the
adoption of SFAS No. 147, effective October 1, 2002, these intangible assets are
no longer amortized.
At December 31, 2002, the Company had core deposit intangible assets related to
various acquisitions of $2.7 million. The amortization of these intangible
assets amounted to $854,000 in 2002. In accordance with SFAS No. 142, these
intangible assets continue to be amortized.
At December 31, 2002, other intangible assets, consisting primarily of mortgage
servicing assets, totaled $751,000.
Information regarding the carrying amount and the amortization expense of the
Company's acquired intangible assets are disclosed in the table below.
Gross Carrying Accumulated Net Carrying
December 31, 2002 (in thousands) Amount Amortization Amount
- -------------------------------------------------------------------------------------------------------
Amortized intangible assets:
Core deposit intangible $ 5,459 $ 2,788 $ 2,671
Other intangibles 994 243 751
- -------------------------------------------------------------------------------------------------------
Subtotal amortized intangible assets 6,453 3,031 3,422
Goodwill 12,708 2,024 10,684
- -------------------------------------------------------------------------------------------------------
Total intangible assets $19,161 $ 5,055 $14,106
- -------------------------------------------------------------------------------------------------------
Aggregate amortization expense: *
For the year to date period ended 12/31/02 $ 867
Estimated amortization expense: *
For the year ended 12/31/03 700
For the year ended 12/31/04 598
For the year ended 12/31/05 496
For the year ended 12/31/06 387
For the year ended 12/31/07 278
=======================================================================================================
* Excludes the amortization of mortgage servicing rights as the amounts are not
material.
Goodwill and Other Intangible Assets - Effect of Adoption of SFAS No. 142
Year ended Year ended
(dollar amounts in thousands, except per share) December 31, 2001 December 31, 2000
- -------------------------------------------------------------------------------------------------------------------
Reported Net Income $19,627 $17,512
Add back goodwill amortization 679 309
- -------------------------------------------------------------------------------------------------------------------
Adjusted Net Income 20,306 17,821
- -------------------------------------------------------------------------------------------------------------------
Basic earning per share - as reported $ 2.65 $ 2.47
Adjust for goodwill 0.09 0.04
- -------------------------------------------------------------------------------------------------------------------
Basic earnings per share - adjusted 2.74 2.51
- -------------------------------------------------------------------------------------------------------------------
Diluted earning per share - as reported $ 2.62 $ 2.45
Adjust for goodwill 0.09 0.04
- -------------------------------------------------------------------------------------------------------------------
Diluted earnings per share - adjusted 2.71 2.49
===================================================================================================================
40
Note 3 Securities
The following summarizes securities held by the Company:
Available-for-Sale Securities
- -----------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2002 (in thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------
U.S. Treasury securities and obligations of
U.S. Government agencies $159,247 $ 2,975 $ 0 $162,222
Obligations of states and political subdivisions 45,348 2,193 17 47,524
Mortgage-backed securities 264,276 7,763 52 271,987
U.S corporate securities 3,034 0 200 2,834
- -----------------------------------------------------------------------------------------------------------------
Total debt securities 471,905 12,931 269 484,567
Equity securities 9,213 0 0 9,213
- -----------------------------------------------------------------------------------------------------------------
Total available-for-sale securities $481,118 $ 12,931 $ 269 $493,780
=================================================================================================================
Available-for-sale securities include $8,808,000 in nonmarketable equity
securities, which are carried at cost since fair values are not readily
determinable. This figure includes $7,293,000 of Federal Home Loan Bank Stock.
Substantially all of the above mortgage-backed securities are direct pass
through securities or collateralized mortgage obligations issued or backed by
Federal agencies.
Held-to-Maturity Securities
- -----------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2002 (in thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------
Obligations of states and political subdivisions $ 38,722 $ 1,566 $ 28 $ 40,260
- -----------------------------------------------------------------------------------------------------------------
Total held-to-maturity debt securities $ 38,722 $ 1,566 $ 28 $ 40,260
=================================================================================================================
Available-for-Sale Securities
- -----------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2001 (in thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------
U.S. Treasury securities and obligations of
U.S. Government agencies $137,569 $ 1,936 $ 313 $139,192
Obligations of states and political subdivisions 44,915 1,120 94 45,941
Mortgage-backed securities 185,945 2,951 355 188,541
U.S corporate securities 4,512 70 250 4,332
- -----------------------------------------------------------------------------------------------------------------
Total debt securities 372,941 6,077 1,012 378,006
Equity securities 8,363 0 0 8,363
- -----------------------------------------------------------------------------------------------------------------
Total available-for-sale securities $381,304 $ 6,077 $ 1,012 $386,369
=================================================================================================================
Available-for-sale securities include $8,155,000 in nonmarketable equity
securities, which are carried at cost since fair values are not readily
determinable. This figure includes $6,642,000 of Federal Home Loan Bank Stock.
Substantially all of the above mortgage-backed securities are direct pass
through securities or collateralized mortgage obligations issued or backed by
Federal agencies.
41
Note 3 Securities (continued)
Held-to-Maturity Securities
- -----------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2001 (in thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------
Obligations of states and political subdivisions $ 26,846 $ 626 $ 217 $ 27,255
- -----------------------------------------------------------------------------------------------------------------
Total held-to-maturity debt securities $ 26,846 $ 626 $ 217 $ 27,255
=================================================================================================================
The amortized cost and fair value of debt securities by contractual maturity are
shown in the following table. Expected maturities will differ from contractual
maturities because issuers may have the right to call or prepay obligations with
or without call or prepayment penalties.
- -----------------------------------------------------------------------------------------------------------------
Amortized Fair
December 31, 2002 (in thousands) Cost Value
- -----------------------------------------------------------------------------------------------------------------
Available-for-sale securities:
Due in one year or less $ 15,414 $ 15,526
Due after one year through five years 76,596 78,455
Due after five years through ten years 79,712 82,369
Due after ten years 35,907 36,230
- -----------------------------------------------------------------------------------------------------------------
Total 207,629 212,580
- -----------------------------------------------------------------------------------------------------------------
Mortgage-backed securities 264,276 271,987
Equity securities 9,213 9,213
- -----------------------------------------------------------------------------------------------------------------
Total available-for-sale securities $481,118 $493,780
=================================================================================================================
- -----------------------------------------------------------------------------------------------------------------
Amortized Fair
December 31, 2002 (in thousands) Cost Value
- -----------------------------------------------------------------------------------------------------------------
Held-to-maturity securities:
Due in one year or less $ 9,290 $ 9,337
Due after one year through five years 8,163 8,600
Due after five years through ten years 12,720 13,369
Due after ten years 8,549 8,954
- -----------------------------------------------------------------------------------------------------------------
Total held-to-maturity debt securities $ 38,722 $ 40,260
=================================================================================================================
Realized gains on available-for-sale securities were $396,000 in 2002, $66,000
in 2001, and $453,000 in 2000; realized losses on available-for-sale securities
were $33,000 in 2002, $0 in 2001, and $3,000 in 2000.
At December 31, 2002, securities with a carrying value of $382,366,000 were
pledged to secure public deposits (as required by law), and securities sold
under agreements to repurchase (see also Note 9). Except for U.S. government
securities, there were no holdings, when taken in aggregate, of any single
issuer that exceeded 10% of shareholders' equity at December 31, 2002.
The Company has an equity investment in a small business investment company
(SBIC) established for the purpose of providing financing to small businesses in
market areas served by the Company. As of December 31, 2002 and 2001, this
investment totaled $4,194,000 and $4,104,000, respectively, and was included in
other assets on the Company's consolidated statements of condition. The
investment is accounted for under the equity method of accounting.
42
Note 4 Comprehensive Income
Comprehensive income for the three years ended December 31 is summarized below:
(in thousands) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 22,914 $ 19,627 $ 17,512
- ---------------------------------------------------------------------------------------------------------------------
Net unrealized holding gain on available-for-sale securities
during the year. Pre-tax net unrealized holding gain was
$7,960 in 2002, $5,146 in 2001 and $8,539 in 2000. 4,776 3,088 5,006
Reclassification adjustment for net realized gain on the sale of
available-for-sale securities (pre-tax net gain of $363 in 2002,
$66 in 2001, and $450 in 2000). (218) (40) (270)
- ---------------------------------------------------------------------------------------------------------------------
Other comprehensive income 4,558 3,048 4,736
- ---------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 27,472 $ 22,675 $ 22,248
=====================================================================================================================
Note 5 Loan/Lease Classification Summary and Related Party Transactions
Loans/Leases at December 31 were as follows:
(in thousands) 2002 2001
- ----------------------------------------------------------------------------------------------------------
Residential real estate $391,120 $327,987
Commercial real estate 196,517 168,452
Real estate construction 26,110 25,112
Commercial 256,010 237,483
Consumer and other 103,853 111,880
Leases 25,511 21,787
- ----------------------------------------------------------------------------------------------------------
Total loans and leases 999,121 892,701
Less unearned income and net deferred costs and fees (3,775) (2,859)
- ----------------------------------------------------------------------------------------------------------
Total loans and leases, net of unearned income and deferred costs and fees $995,346 $889,842
==========================================================================================================
During 2002, the Company sold $28,793,000 of mortgage loans, realizing net gains
of $671,000. During 2001, the Company sold $27,565,000 of mortgage loans,
realizing a net gain of $560,000. During 2000, the Company sold $1,068,000 of
student loans and $7,194,000 of mortgage loans, realizing a net gain of $74,000.
Net gains and losses on the sale of loans are included in other operating income
on the Company's consolidated statements of income. Loans held for sale, which
are included in residential real estate in the table above, totaled $4,769,000
and $791,000 at December 31, 2002 and 2001, respectively. During 2001, the
Company securitized $41,440,000 of residential mortgage loans with Federal Home
Loan Mortgage Corporation, which are now held as available-for-sale securities.
No loans were securitized in 2002. At December 31, 2002, the Company serviced
mortgage loans aggregating $110,169,000, including loans securitized and held as
available-for-sale, compared to $113,628,000 at December 31, 2001. Capitalized
mortgage servicing rights totaled $706,000 and $663,000 at December 31, 2002 and
2001, respectively.
As members of the FHLB, the Company's subsidiary banks may use unencumbered
mortgage related assts to secure borrowings from the FHLB. At December 31, 2002,
the Company had $81,719,000 in term advances from the FHLB that were secured by
residential mortgage loans.
The Company's loan/lease customers are located primarily in the upstate New York
communities served by its three subsidiary banks. The Trust Company operates
fourteen banking offices in the counties of Tompkins, Cortland, and Schuyler.
The Bank of Castile operates thirteen banking offices in towns situated in and
around the areas commonly known as the Letchworth State Park area and the
Genesee Valley region of New York State. Mahopac National Bank is located in
Putnam County, and operates four offices in that county and two offices in
neighboring Dutchess County. Other than general economic risks, management is
not aware of any material concentrations of credit risk to any industry or
individual borrower.
Directors and officers of the Company and its affiliated companies were
customers of, and had other transactions with, the Company in the ordinary
course of business. Such loans and commitments were made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons, and did not involve more
than normal risk of collectibility or present other unfavorable features.
43
Note 5 Loan/Lease Classification Summary and Related Party Transactions
(continued)
Loan transactions with related parties are summarized as follows:
(in thousands) 2002 2001
- -------------------------------------------------------------------------------
Balance January 1 $ 3,640 $ 4,104
Former Directors/Executive Officers (93) (463)
New Executive Officers 125 242
New loans and advancements 283 2,533
Loan payments (2,249) (2,776)
- -------------------------------------------------------------------------------
Balance December 31 $ 1,706 $ 3,640
===============================================================================
Note 6 Reserve for Loan/Lease Losses
Changes in the reserve for loan/lease losses are summarized as follows:
(in thousands) 2002 2001 2000
- -------------------------------------------------------------------------------
Reserve at beginning of year $10,706 $ 9,824 $ 9,228
Provisions charged to operations 2,235 1,606 1,216
Recoveries on loans/leases 484 670 409
Loans/leases charged-off (1,721) (1,394) (1,029)
- -------------------------------------------------------------------------------
Reserve at end of year $11,704 $10,706 $ 9,824
===============================================================================
The Company's recorded investment in loans/leases that are considered impaired
totaled $4,159,000 at December 31, 2002, and $3,771,000 at December 31, 2001.
The average recorded investment in impaired loans/leases was $2,765,000 in 2002,
$2,937,000 in 2001, and $1,636,000 in 2000. The December 31, 2002, recorded
investment in impaired loans/leases includes $1,730,000 of loans/leases that had
related reserves of $547,000. The recorded investment in impaired loans/leases
at December 31, 2001, included $1,779,000 of loans/leases, which had related
reserves of $838,000. Interest income recognized on impaired loans/leases, all
collected in cash, was $48,000 for 2002, $184,000 for 2001, and $94,000 for
2000.
The principal balances of nonperforming loans/leases, including impaired
loans/leases, are detailed in the table below.
December 31
(in thousands) 2002 2001
- -------------------------------------------------------------------------------
Loans 90 days past due and accruing $ 368 $ 1,612
Nonaccrual loans 6,977 5,736
Troubled debt restructurings not included above 179 185
- -------------------------------------------------------------------------------
Nonperforming loans/leases $ 7,524 $ 7,533
===============================================================================
The difference between the interest income that would have been recorded if
these loans/leases had been paid in accordance with their original terms and the
interest income recorded for the three-year period ended December 31, 2002, was
not significant.
44
Note 7 Bank Premises and Equipment
Bank premises and equipment at December 31 were as follows:
(in thousands) 2002 2001
- -------------------------------------------------------------------------------
Land $ 4,112 $ 3,365
Bank premises 26,457 25,818
Furniture, fixtures, and equipment 22,028 19,002
Accumulated depreciation and amortization (25,486) (23,151)
- -------------------------------------------------------------------------------
Total $ 27,111 $ 25,034
===============================================================================
Depreciation and amortization expenses in 2002, 2001, and 2000 are included in
operating expenses as follows:
(in thousands) 2002 2001 2000
- -------------------------------------------------------------------------------
Bank premises $ 936 $ 845 $ 808
Furniture, fixtures, and equipment 1,852 1,766 1,501
- -------------------------------------------------------------------------------
Total $ 2,788 $ 2,611 $ 2,309
===============================================================================
Note 8 Deposits
The aggregate time deposits of $100,000 or more were $112,338,000 at December
31, 2002, and $163,480,000 at December 31, 2001. Scheduled maturities of time
deposits at December 31, 2002, were as follows:
Less than $100,000
(in thousands) $100,000 and over Total
- -------------------------------------------------------------------------------
Maturity
Three months or less $ 59,058 $ 36,876 $ 95,934
Over three through six months 67,062 24,068 91,130
Over six through twelve months 66,471 29,774 96,245
- -------------------------------------------------------------------------------
Total due in 2003 192,591 90,718 283,309
2004 47,219 11,491 58,710
2005 8,992 6,029 15,021
2006 5,084 1,839 6,923
2007 12,983 2,015 14,998
2008 and thereafter 396 246 642
- -------------------------------------------------------------------------------
Total $267,265 $112,338 $379,603
===============================================================================
45
Note 9 Federal Funds Purchased and Securities Sold Under Agreements to
Repurchase
Information regarding securities sold under agreements to repurchase as of
December 31, 2002, is summarized below:
Collateral Securities Repurchase Liability
- ---------------------------------------------------------------------------------------
Weighted
Estimated Average
Amortized Fair Interest
(dollar amounts in thousands) Cost Value Amount Rate
- ---------------------------------------------------------------------------------------
Maturity at Origination/Type of Asset
Demand:
U.S. Government agency securities $ 3,861 $ 4,089 $ 3,866 2.10%
Mortgage-backed certificates 37,389 38,819 37,016 1.52%
2 to 30 days:
U.S. Government agency securities 113 114 113 1.40%
Mortgage-backed certificates 223 242 227 1.40%
31 to 89 days:
U.S. Government agency securities 514 539 514 3.30%
90 to 365 days:
U.S. Government agency securities 1,103 1,113 1,107 3.49%
Over 365 days:
U.S. Government agency securities 25,019 25,939 27,000 4.28%
Mortgage-backed securities 7,686 8,124 8,000 5.12%
- ---------------------------------------------------------------------------------------
Total $ 75,908 $ 78,979 $ 77,843 2.92%
=======================================================================================
The amount reported in "Over 365 days" includes wholesale repurchase agreements
with the Federal Home Loan Bank (FHLB) totaling $35,000,000. The scheduled
maturities of these advances are $10,000,000 in 2004, $15,000,000 in 2006,
$5,000,000 in 2011, and $5,000,000 in 2012. Of the $35,000,000 of wholesale
repurchase agreements due in over 365 days, $20,000,000 are callable by the FHLB
if certain conditions are met.
At December 31, 2002, the FHLB held substantially all of the above securities.
Additional information regarding securities sold under agreements to repurchase
and Federal funds purchased for the years ended December 31, is detailed in the
table below:
Securities Sold Under Agreements to Repurchase (dollar amounts in thousands) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------
Total outstanding at December 31 $ 77,843 $101,469 $ 72,231
Maximum month-end balance 92,073 106,458 75,525
Average balance during the year 73,637 77,663 61,207
Weighted average rate at December 31 2.92% 3.54% 5.85%
Average interest rate paid during the year 3.31% 4.36% 5.73%
===============================================================================================================
Federal Funds Purchased (dollar amounts in thousands) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------
Total outstanding at December 31 $ 0 $ 8,200 $ 0
Maximum month-end balance 2,500 8,630 18,000
Average balance during the year 418 1,469 7,098
Weighted average rate at December 31 N/A 1.81% N/A
Average interest rate paid during the year 1.98% 4.66% 6.85%
===============================================================================================================
46
Note 10 Other Borrowings
The Company, through its subsidiary banks, had available line-of-credit
agreements with banks permitting borrowings to a maximum of approximately
$42,000,000 at December 31, 2002, and $38,500,000 at December 31, 2001. No
advances were outstanding against those lines at December 31, 2002, or 2001.
All bank subsidiaries are members of the FHLB and as such, may apply for
advances secured by certain residential mortgage loans and other assets,
provided that certain standards for credit worthiness have been met. At December
31, 2002, the Company, through its subsidiaries, had established unused lines of
credit with the FHLB of $142,675,000. At December 31, 2002, there were
$81,719,000 in term advances from the FHLB, compared to $75,265,000 at December
31, 2001.
At December 31, 2002, there were advances due within one year of $5,379,000 with
a weighted average rate of 4.04%, and advances due in more than one year of
$76,340,000 with a weighted average rate of 5.11%. Maturities of advances
included $16,392,000 maturing in 2004, $10,928,000 in 2005, $3,423,000 in 2006,
$4,977,000 in 2007, $3,620,000 in 2009, $10,000,000 in 2010, $22,000,000 in 2011
and $5,000,000 in 2012. The Company's FHLB borrowings at December 31, 2002,
included $67,000,000 in fixed-rate callable borrowings, which can be called by
the FHLB if certain conditions are met.
Other borrowings included a Treasury Tax and Loan Note account with the Federal
Reserve Bank of New York totaling $100,000 at December 31, 2002, and $166,000 at
December 31, 2001. At December 31, 2002 and 2001, Tompkins Insurance had
borrowings of $111,000 and $150,000, respectively, from unrelated financial
institutions and officers of Tompkins Insurance.
Note 11 Employee Benefit Plans
The Company maintains a noncontributory defined-benefit pension plan covering
substantially all employees of the Company. The benefits are based on years of
service and percentage of the employees' average compensation. Prior to October
1, 2000, the Company maintained two noncontributory defined benefit plans,
Tompkins County Trust Company Retirement Plan and The Bank of Castile Employees
Retirement Plan. Effective October 1, 2000, the Company amended and merged these
two plans. Assets of the Company's defined benefit plan are invested in common
and preferred stock, U. S. Government securities, corporate bonds and notes, and
mutual funds. At December 31, 2002, the plan assets included 25,018 shares of
Tompkins common stock.
The Trust Company also offers post-retirement medical coverage and life
insurance coverage to full-time employees who have worked ten years and attained
age 55. Medical coverage is contributory with contributions reviewed annually.
The Trust Company assumes the majority of the cost for these other benefits,
while retirees share some of the cost through co-insurance and deductibles.
47
Note 11 Employee Benefit Plans (continued)
The following table sets forth the changes in the plans' benefit obligation and
plan assets, and the plans' funded status and amounts recognized in the
Company's consolidated statements of condition at December 31, 2002 and 2001.
Pension Benefits Other Benefits
(dollar amounts in thousands) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 19,626 $ 16,958 $ 4,032 $ 3,725
Service cost 1,026 889 135 109
Interest cost 1,396 1,298 285 268
Amendments 87 213 86 (6)
Actuarial loss 1,402 1,167 110 92
Benefits paid (985) (899) (164) (156)
- --------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 22,552 $ 19,626 $ 4,484 $ 4,032
- --------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of year $ 18,985 $ 18,114 $ 0 $ 0
Actual loss return on plan assets (2,288) (800) 0 0
Employer contribution 4,645 2,570 164 156
Benefits paid (985) (899) (164) (156)
- --------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 20,357 $ 18,985 $ 0 $ 0
- --------------------------------------------------------------------------------------------------
Unfunded status (2,195) (641) (4,484) $ (4,032)
Unrecognized net actuarial loss 12,059 7,056 353 243
Net transition (asset) obligation (56) (132) 1,155 1,271
Unrecognized prior service cost (1,795) (2,012) 74 (6)
- --------------------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $ 8,013 $ 4,271 $ (2,902) $ (2,524)
- --------------------------------------------------------------------------------------------------
Weighted-average assumptions as of December 31:
Discount rate 6.75% 7.25% 6.75% 7.25%
Expected return on plan assets 8.50% 8.50% NA NA
Rate of compensation increase (1) 4.00-5.00% 4.00-5.00% 4.00% 4.00%
==================================================================================================
(1) The rate of compensation increase for the Trust Company is 4%, and is
5% for all other groups.
The Trust Company currently offers medical coverage and life insurance coverage
to substantially all of its employees upon retirement. The weighted average
annual assumed rate of increase in the per capita cost of covered benefits (the
health care cost trend rate) is 10.75% beginning in 2002, and is assumed to
decrease gradually to 5.0% in 2010 and beyond. Increasing the assumed health
care cost trend rates by 1% in each year would increase the accumulated
post-retirement benefit obligation as of December 31, 2002, by $22,000 and the
net periodic post-retirement benefit cost for 2002 by $1,000. Decreasing the
assumed health care cost trend rates by 1% each year would decrease the
accumulated post-retirement benefit obligation as of December 31, 2002, by
$28,000 and decrease the net periodic post-retirement benefit cost by $2,000.
Net periodic benefit cost includes the following components:
Components of net periodic benefit cost Pension Benefits Other Benefits
(in thousands) 2002 2001 2000 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------
Service cost $ 1,026 $ 889 $ 704 $ 135 $ 109 $ 98
Interest cost 1,396 1,298 1,258 285 269 259
Expected return on plan assets (1,655) (1,508) (1,487) 0 0 0
Amortization of prior service cost (130) (136) 15 6 (1) 0
Recognized net actuarial gain 342 165 96 0 0 0
Amortization of transition (asset) liability (76) (76) (106) 116 116 116
Other N/A N/A 107 N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 903 $ 632 $ 587 $ 542 $ 493 $ 473
============================================================================================================
48
Note 11 Employee Benefit Plans (continued)
As of January 1, 2001, the Company adopted a new Employee Stock Ownership Plan
(ESOP) and a new 401-K Investment and Stock Ownership Plan (ISOP) covering
substantially all employees of the Company, and replacing the ESOP, ISOP, and
401-K plans which were previously in place at the Company's subsidiaries. The
ESOP allows for Company contributions in the form of cash and/or stock of the
Company. Contributions are determined by the board of directors in accordance
with a performance-based formula, and were limited to a maximum amount as
stipulated in the respective plan. The Company recognized compensation expense
related to the ESOP of $700,000 in 2002 and $785,000 in 2001. Compensation
expense related to the separate ISOP/ESOP plans was $159,000 in 2000.
The Company provided certain matching contributions to the ISOP based upon the
amount of contributions made by plan participants. The expense associated with
these matching provisions was $708,000 in 2002 and $636,000 in 2001. Matching
contributions to the separate ISOP plans were $160,000 in 2000.
Life insurance benefits are provided to certain officers of the Company. In
connection with these benefits, the Company reflects life insurance assets on
its consolidated statements of condition of $21.4 million at December 31, 2002,
and $20.5 million at December 31, 2001. The insurance is carried at its cash
surrender value on the consolidated statements of condition. Increases in the
cash surrender value of the insurance are reflected as noninterest income, net
of any related mortality expense.
In addition to the Company's noncontributory defined-benefit retirement and
pension plan, the Company provides supplemental employee retirement plans to
certain executives. The amount of liability recognized in the Company's
consolidated statements of condition for supplemental retirement plans was $2.9
million at December 31, 2002, and $1.7 million at December 31, 2001. Benefits
expense associated with the supplemental retirement plans amounted to $1.3
million, $463,000 and $415,000 for the years ended December 31, 2002, 2001, and
2000, respectively.
Note 12 Stock Based Compensation
In January 2001, the Company adopted a stock option plan (the "2001 Plan"),
which authorizes grants of options up to 350,000 shares of authorized but
unissued common stock. At December 31, 2002, there were 132,000 shares available
for grant under the 2001 Plan. The board of directors may grant stock options to
officers, employees, and certain other individuals. Stock options are granted
with an exercise price equal to the stock's fair market value at the date of
grant, may not have a term in excess of ten years, and have vesting periods that
range between one and five years from the grant date. Prior to the adoption of
the 2001 Plan, the Company had similar stock option plans that authorized up to
494,100 shares of authorized but unissued common stock. These prior plans remain
in effect solely with respect to unexercised options issued under these plans.
49
Note 12 Stock Based Compensation (continued)
The following table presents the combined stock option activity for all option
plans during the periods indicated:
Weighted Average
Number of Shares Exercise Price
- --------------------------------------------------------------------------------
2002:
Beginning balance 376,198 $ 25.90
Granted 161,000 42.90
Exercised (53,578) 21.28
Forfeited (6,500) 30.05
- -------------------------------------------------------------------------------
Outstanding at year-end 477,120 32.10
- -------------------------------------------------------------------------------
Exercisable at year-end 142,995 $ 22.01
- -------------------------------------------------------------------------------
2001:
Beginning balance 384,744 $ 22.35
Granted 64,500 37.17
Exercised (68,671) 16.43
Forfeited (4,375) 28.35
- -------------------------------------------------------------------------------
Outstanding at year-end 376,198 25.90
- -------------------------------------------------------------------------------
Exercisable at year-end 150,551 $ 20.58
- -------------------------------------------------------------------------------
2000:
Beginning balance 251,977 $ 19.46
Granted 163,500 26.63
Exercised (19,546) 18.32
Forfeited (11,187) 26.79
- -------------------------------------------------------------------------------
Outstanding at year-end 384,744 22.35
- -------------------------------------------------------------------------------
Exercisable at year-end 196,200 $ 18.89
===============================================================================
The following summarizes outstanding and exercisable options at December 31,
2002:
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------------------------------------------
Range of Weighted Average Weighted Weighted
Exercise Number Remaining Average Number Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ----------------------------------------------------------------------------------------------------------------------
$14.12-23.66 106,995 4.49 $20.35 106,995 $20.35
$26.63-26.63 145,125 7.70 $26.63 33,375 $26.63
$28.67-37.75 64,000 8.38 $37.01 2,625 $31.00
$42.90-42.90 161,000 9.75 $42.90 0 $ 0
- ----------------------------------------------------------------------------------------------------------------------
477,120 7.76 $32.10 142,995 $22.01
======================================================================================================================
50
Note 13 Income Taxes
The income tax expense (benefit) attributable to income from operations is
summarized as follows:
(in thousands) Current Deferred Total
- --------------------------------------------------------------------------------
2002
Federal $10,364 $ (544) $ 9,820
State 1,558 (86) 1,472
- --------------------------------------------------------------------------------
Total $11,922 $ (630) $11,292
- --------------------------------------------------------------------------------
2001
Federal $ 9,326 $ (283) $ 9,043
State 1,425 (49) 1,376
- --------------------------------------------------------------------------------
Total $10,751 $ (332) $10,419
- --------------------------------------------------------------------------------
2000
Federal $ 7,772 $ (530) $ 7,242
State 1,079 (69) 1,010
- --------------------------------------------------------------------------------
Total $ 8,851 $ (599) $ 8,252
================================================================================
The primary reasons for the differences between income tax expense and the
amount computed by applying the statutory federal income tax rate to earnings
are as follows:
2002 2001 2000
- -------------------------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 2.8 3.0 2.5
Tax exempt income (3.4) (3.6) (4.3)
All other (1.4) 0.1 (1.7)
- -------------------------------------------------------------------------------
Total 33.0% 34.5% 31.5%
===============================================================================
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31 were as
follows:
(in thousands) 2002 2001
- -------------------------------------------------------------------------------
Deferred tax assets:
Reserve for loan/lease losses $ 4,654 $ 4,051
Compensation and benefits 3,538 2,676
Other 876 1,190
- -------------------------------------------------------------------------------
Total deferred tax assets $ 9,068 $ 7,917
- -------------------------------------------------------------------------------
Deferred tax liabilities:
Leasing transactions $ 1,046 $ 1,418
Prepaid pension 3,195 1,718
Depreciation 155 469
Purchase accounting adjustment 438 650
Other 488 546
- -------------------------------------------------------------------------------
Total deferred tax liabilities $ 5,322 $ 4,801
- -------------------------------------------------------------------------------
Net deferred tax asset at year-end $ 3,746 $ 3,116
- -------------------------------------------------------------------------------
Net deferred tax asset at beginning of year $ 3,116 $ 2,352
- -------------------------------------------------------------------------------
Increase in net deferred tax asset (630) (764)
Purchase accounting adjustments, net 0 432
- -------------------------------------------------------------------------------
Deferred tax benefit $ (630) $ (332)
===============================================================================
51
Note 13 Income Taxes (continued)
This analysis does not include the recorded deferred tax liabilities of
$5,065,000 as of December 31, 2002 and $2,026,000 as of December 31, 2001
related to the net unrealized holding gain/loss in the available-for-sale
securities portfolio.
Realization of deferred tax assets is dependent upon the generation of future
taxable income or the existence of sufficient taxable income within the
carry-back period. A valuation allowance is provided when it is more likely than
not that some portion of the deferred tax assets will not be realized. In
assessing the need for a valuation allowance, management considers the scheduled
reversal of the deferred tax liabilities, the level of historical taxable
income, and the projected future taxable income over the periods in which the
temporary differences comprising the deferred tax assets will be deductible.
Based on its assessment, management determined that no valuation allowance is
necessary at December 31, 2002 and 2001.
Note 14 Commitments and Contingent Liabilities
The Company leases land, buildings, and equipment under operating lease
arrangements extending to the year 2090. Rental expense included in operating
expenses amounted to $681,000 in 2002, $519,000 in 2001, and $347,000 in 2000.
The future minimum rental commitments as of December 31, 2002, for all operating
leases that cannot be canceled are as follows:
(in thousands)
2003 $ 478
2004 345
2005 264
2006 261
2007 226
Thereafter $3,446
Most leases include options to renew for periods ranging from 5 to 20 years.
Options to renew are not included in the above future minimum rental
commitments. The Company has two land lease commitments with terms expiring in
2042 and 2090, respectively.
The Company has a software contract for its core banking application through
August 1, 2004. Estimated minimum annual payments under the above contract are
$382,000 in 2003, with annual increases based upon asset growth of the banks
serviced under the contract.
The Company, in the normal course of business, is a party to financial
instruments with off-balance-sheet risk to meet the financial needs of its
customers. These financial instruments include loan commitments, stand-by
letters of credit, and unused portions of lines of credit. The contract, or
notional amount, of these instruments represents the Company's involvement in
particular classes of financial instruments. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized on the consolidated statements of condition.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN No. 45),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others; an Interpretation of FASB
Statements No. 5,57 and 107 and rescission of FASB Interpretation No. 34. FIN
No. 45 requires certain new disclosures and potential liability recognition for
the fair value at issuance of guarantees that fall within its scope. Based upon
the Company's interpretation of FIN No. 45, the Company currently does not issue
any guarantees that would require liability recognition under FIN No. 45, other
than its stand-by letters of credit, the amount of which is not considered
significant at December 31, 2002.
The Company's maximum potential obligations to extend credit for loan
commitments (unfunded loans, unused lines of credit, and stand-by letters of
credit) outstanding on December 31 were as follows:
(in thousands) 2002 2001
- --------------------------------------------------------------------------------
Loan commitments $ 73,664 $ 68,951
Stand-by letter of credit 18,864 8,528
Undisbursed portion of lines of credit 181,591 168,479
- --------------------------------------------------------------------------------
Total $274,119 $245,958
================================================================================
52
Note 14 Commitments and Contingent Liabilities (continued)
Commitments to extend credit (including lines of credit) are agreements to lend
to a customer as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Stand-by letters of credit
are conditional commitments to guarantee the performance of a customer to a
third party. Management uses the same credit policies in making commitments to
extend credit and stand-by letters of credit as are used for on-balance-sheet
lending decisions. Based upon management's evaluation of the counterparty, the
Company may require collateral to support commitments to extend credit and
stand-by letters of credit. The credit risk amounts are equal to the contractual
amounts, assuming the amounts are fully advanced and collateral or other
security is of no value. The Company does not anticipate losses as a result of
these transactions. These commitments also have off-balance-sheet interest-rate
risk, in that the interest rate at which these commitments were made may not be
at market rates on the date the commitments are fulfilled. Since some
commitments and stand-by letters of credit are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash flow requirements.
At December 31, 2002, the Company had rate lock agreements associated with
mortgage loans to be sold in the secondary market (certain of which relate to
loan applications for which no formal commitment has been made) amounting to
approximately $12.0 million. In order to limit the interest rate risk associated
with rate lock agreements, as well as the interest rate risk associated with
mortgages held for sale, the Company enters into agreements to sell loans in the
secondary market to unrelated investors on a loan-by-loan basis. At December 31,
2002, the Company had approximately $7.5 million of commitments to sell
mortgages to unrelated investors on a loan-by-loan basis.
In the normal course of business, the Company is involved in various legal
proceedings. In the opinion of management, based upon the review with counsel,
the proceedings are not expected to have a material effect on the consolidated
financial statements.
53
Note 15 Earnings Per Share
Calculation of basic earnings per share (Basic EPS) and diluted earnings per
share (Diluted EPS) is as follows:
Weighted
Net Average
For year ended December 31, 2002 Income Shares Per Share
(in thousands except share and per share data) (Numerator) (Denominator) Amount
- -----------------------------------------------------------------------------------------------------------------
Basic EPS:
Income available to common shareholders $ 22,914 7,409,672 $ 3.09
Effect of dilutive securities:
Stock options 133,149
Shares issueable as contingent consideration for acquisition 10,440
Diluted EPS:
Income available to common shareholders plus assumed conversions $ 22,914 7,553,261 $ 3.03
=================================================================================================================
Shares issueable as contingent consideration for acquisition recognizes the
effect of 20,879 shares that became issueable in the third quarter of 2002 as a
result of Tompkins Insurance Agencies meeting certain income targets.
Weighted
Net Average
For year ended December 31, 2001 Income Shares Per Share
(in thousands except share and per share data) (Numerator) (Denominator) Amount
- -----------------------------------------------------------------------------------------------------------------
Basic EPS:
Income available to common shareholders $ 19,627 7,397,628 $ 2.65
Effect of dilutive securities:
Stock options 106,447
Shares issueable as contingent consideration for acquisition 1,066
Diluted EPS:
Income available to common shareholders plus assumed conversions $ 19,627 7,505,141 $ 2.62
=================================================================================================================
The effect of dilutive securities calculation for 2001 excludes 26,025 options
because the exercise price was greater than the average market price for the
period. Shares issueable as contingent consideration for acquisition recognizes
the effect of 12,547 shares that became issueable in the fourth quarter of 2001
as a result of Tompkins Insurance Agencies meeting certain income targets.
Weighted
Net Average
For year ended December 31, 2000 Income Shares Per Share
(in thousands except share and per share data) (Numerator) (Denominator) Amount
- -----------------------------------------------------------------------------------------------------------------
Basic EPS:
Income available to common shareholders $ 17,512 7,103,784 $ 2.47
Effect of dilutive securities:
Stock options 55,184
Diluted EPS:
Income available to common shareholders plus assumed conversions $ 17,512 7,158,968 $ 2.45
=================================================================================================================
The effect of dilutive securities calculation for 2000 excludes 52,347 options
because the exercise price was greater than the average market price for the
period.
54
Note 16 Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at December 31, 2002 and 2001. The carrying
amounts shown in the table are included in the consolidated statements of
condition under the indicated captions.
Estimated Fair Value of Financial Instruments 2002 2001
- ---------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------
Financial Assets:
Cash and cash equivalents $ 64,298 $ 64,298 $ 44,117 $ 44,117
Securities - available-for-sale 493,780 493,780 386,369 386,369
Securities - held-to-maturity 38,722 40,260 26,846 27,255
Loans/leases, net 1 983,642 987,945 879,136 892,837
Accrued interest receivable 8,551 8,551 8,762 8,762
Financial Liabilities
Time deposits $379,603 $384,903 $404,532 $408,237
Other deposits 960,682 960,682 682,926 682,926
Securities sold under agreements to repurchase 77,843 77,878 109,669 109,827
Other borrowings 81,930 82,466 75,581 77,796
Accrued interest payable 2,395 2,395 3,595 3,595
===================================================================================================
1 Lease receivables, although excluded from the scope of SFAS No. 107, are
included in the estimated fair value amounts at their carrying value.
The following methods and assumptions were used in estimating fair value
disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the consolidated
statements of condition for cash, noninterest-bearing deposits, and Federal
funds sold approximate the fair value of those assets.
SECURITIES: Fair values for securities are based on quoted market prices. When
no secondary market exists to quote a market price the fair value is estimated
based upon comparable securities, or the carrying amount of the security is used
as the estimated fair value. Note 3 discloses the fair values of securities.
LOANS/LEASES: For variable rate loans/leases that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values. The
fair values of fixed rate loans/leases are estimated using discounted cash flow
analyses, and interest rates currently offered for loans/leases with similar
terms and credit quality.
DEPOSITS: The fair values disclosed for demand deposits (e.g. interest and
noninterest checking) are, by definition, equal to the amount payable on demand
at the reporting date (i.e., the carrying amounts). The carrying amounts of
variable-rate money market accounts and time deposits approximate their fair
values at the reporting date. Fair values for fixed-rate time deposits are
estimated using a discounted cash flows calculation that applies current
interest rates to a schedule of aggregate expected monthly maturities.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE: The carrying amounts of
securities sold under agreements to repurchase with maturities of 90 days or
less approximate their fair values. Fair values of repurchase agreements with
maturities of more than 90 days are estimated using discounted cash flow
analyses based on the Company's current incremental borrowing rate for similar
types of borrowing arrangements.
OTHER BORROWINGS: The fair values of other borrowings are estimated using
discounted cash flow analysis, discounted at the Company's current incremental
borrowing rate for similar borrowing arrangements.
OFF-BALANCE-SHEET INSTRUMENTS: The fair values of outstanding loan commitments,
including unused lines of credit, and stand-by letters of credit are based on
fees currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements, the counterparties' credit standing, and
discounted cash flow analyses. The fair values of these instruments approximate
the value of the related fees and are not significant.
55
Note 17 Regulations and Supervision
The Company and its subsidiary banks are subject to various regulatory capital
requirements administered by Federal bank regulatory agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Company's consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action (PCA), banks must meet specific guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. Capital amounts and
classifications of the Company and its subsidiary banks are also subject to
qualitative judgments by regulators concerning components, risk weightings, and
other factors. Quantitative measures established by regulation to ensure capital
adequacy require the maintenance of minimum amounts and ratios (set forth in the
table below) of total capital and Tier I capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier I capital to average assets
(as defined). Management believes that the Company and its subsidiary banks meet
all capital adequacy requirements to which they are subject.
As of December 31, 2002, the most recent notifications from Federal bank
regulatory agencies categorized the Trust Company, The Bank of Castile, and
Mahopac National Bank as well capitalized under the regulatory framework for
PCA. To be categorized as well capitalized, the Company and its subsidiary banks
must maintain total risk-based, Tier I risk-based, and Tier I leverage ratios as
set forth in the table below. There are no conditions or events since that
notification that management believes have changed the capital category of the
Company or its subsidiary banks. Actual capital amounts and ratios of the
Company and its subsidiary banks are as follows:
Required Required
to be to be
Actual Adequately Capitalized Well Capitalized
- ------------------------------------------------------------------------------------------------------
(dollar amounts in thousands) Amount/Ratio Amount/Ratio Amount/Ratio
- ------------------------------------------------------------------------------------------------------
December 31, 2002:
Total Capital (to risk-weighted assets)
The Company (consolidated) $143,790/13.7% >$ 83,836/>8.0% >$104,795/>10.0%
Trust Company $ 76,431/14.4% >$ 42,596/>8.0% >$ 53,245/>10.0%
Castile $ 33,261/10.5% >$ 25,395/>8.0% >$ 31,744/>10.0%
Mahopac $ 23,963/12.2% >$ 15,687/>8.0% >$ 19,609/>10.0%
Tier I Capital (to risk-weighted assets)
The Company (consolidated) $132,086/12.6% >$ 41,918/>4.0% >$ 62,877/> 6.0%
Trust Company $ 70,777/13.3% >$ 21,298/>4.0% >$ 31,947/> 6.0%
Castile $ 29,557/ 9.3% >$ 12,698/>4.0% >$ 19,047/> 6.0%
Mahopac $ 21,617/11.0% >$ 7,844/>4.0% >$ 11,765/> 6.0%
Tier I Capital (to average assets)
The Company (consolidated) $132,086/ 8.0% >$ 49,236/>3.0% >$ 82,060/> 5.0%
Trust Company $ 70,777/ 7.5% >$ 28,132/>3.0% >$ 46,886/> 5.0%
Castile $ 29,557/ 7.2% >$ 12,300/>3.0% >$ 20,500/> 5.0%
Mahopac $ 21,617/ 6.8% >$ 9,594/>3.0% >$ 15,990/> 5.0%
======================================================================================================
December 31, 2001:
Total Capital (to risk-weighted assets)
The Company (consolidated) $128,141/13.8% >$ 74,151/>8.0% >$ 92,689/>10.0%
Trust Company $ 69,786/14.5% >$ 38,555/>8.0% >$ 48,193/>10.0%
Castile $ 30,374/10.9% >$ 22,260/>8.0% >$ 27,825/>10.0%
Mahopac $ 20,559/12.3% >$ 13,346/>8.0% >$ 16,682/>10.0%
Tier I Capital (to risk-weighted assets)
The Company (consolidated) $117,435/12.7% >$ 37,076/>4.0% >$ 55,613/> 6.0%
Trust Company $ 64,332/13.3% >$ 19,277/>4.0% >$ 28,916/> 6.0%
Castile $ 26,983/ 9.7% >$ 11,130/>4.0% >$ 16,695/> 6.0%
Mahopac $ 18,697/11.2% >$ 6,673/>4.0% >$ 10,009/> 6.0%
Tier I Capital (to average assets)
The Company (consolidated) $117,435/ 8.5% >$ 41,527/>3.0% >$ 69,212/> 5.0%
Trust Company $ 64,332/ 8.1% >$ 23,751/>3.0% >$ 39,585/> 5.0%
Castile $ 26,983/ 7.7% >$ 10,504/>3.0% >$ 17,506/> 5.0%
Mahopac $ 18,697/ 7.4% >$ 7,598/>3.0% >$ 12,663/> 5.0%
======================================================================================================
56
Note 17 Regulations and Supervision (continued)
Generally, dividends from the banking subsidiaries to the Company are limited to
retained net profits for the current year and two preceding years, unless
specific approval is received from the appropriate bank regulatory authority. At
December 31, 2002, the retained net profits of the Company's bank subsidiaries
available to pay dividends were $21,344,000.
Each bank subsidiary is required to maintain reserve balances by the Federal
Reserve Bank of New York. At December 31, 2002, and 2001, the reserve
requirements for the Company's banking subsidiaries totaled $19,035,000 and
$14,824,000, respectively.
Note 18 Condensed Parent Company Only Financial Statements
Condensed financial statements for Tompkins Trustco, Inc. (the Parent Company)
as of December 31 are presented below.
Condensed Statements of Condition
(in thousands) 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash $ 5,401 $ 2,853
Available-for-sale securities, at fair value 121 121
Investment in subsidiaries, at equity 142,997 125,686
Other 2,929 3,189
- -----------------------------------------------------------------------------------------------------------------------------------
Total Assets $151,448 $131,849
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES and SHAREHOLDERS EQUITY
Liabilities $ 851 $ 777
Shareholders' Equity 150,597 131,072
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $151,448 $131,849
===================================================================================================================================
Condensed Statements of Income
(in thousands) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Dividends from available-for-sale securities $ 6 $ 46 $ 169
Dividends received from subsidiaries 11,600 11,060 16,098
Securities gains 0 66 299
Other income 0 0 87
Other gain/(loss) 29 (86) 0
- -----------------------------------------------------------------------------------------------------------------------------------
Total Operating Income 11,635 11,086 16,653
- -----------------------------------------------------------------------------------------------------------------------------------
Amortization of intangibles 0 0 451
Other expenses 537 715 683
- -----------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 537 715 1,134
- -----------------------------------------------------------------------------------------------------------------------------------
Income Before Taxes and Equity in Undistributed
Earnings of Subsidiaries 11,098 10,371 15,519
Income tax benefit 286 296 375
Equity in undistributed earnings of subsidiaries 11,530 8,960 1,618
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 22,914 $ 19,627 $ 17,512
===================================================================================================================================
57
Note 18 Condensed Parent Company Only Financial Statements (continued)
Condensed Statements of Cash Flows
(in thousands) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 22,914 $ 19,627 $ 17,512
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries (11,530) (8,960) (1,618)
Amortization of intangible assets 0 0 451
Realized gains on available-for-sale securities 0 (66) (299)
Issuance of treasury shares 0 10 75
ESOP compensation expenses 414 744 159
Other, net 1 (1,488) (649)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 11,799 9,867 15,631
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of available-for-sale securities 0 0 0
Proceeds from sale of available-for-sale securities 0 1,497 1,047
Net cash (used in) provided by acquisitions (21) (1,206) 0
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Investing Activities (21) 291 1,047
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Cash dividends (8,577) (8,136) (7,696)
Repurchase of common shares (1,353) (3,408) (4,870)
Cash paid in lieu of fractional Letchworth common shares 0 0 (9)
Net proceeds from exercise of stock options, warrants, and related tax benefits 748 734 288
Advances from subsidiaries 0 0 0
Repayment of advances from subsidiaries (48) (341) (1,314)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (9,230) (11,151) (13,601)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 2,548 (993) 3,077
Cash at beginning of year 2,853 3,846 769
- -----------------------------------------------------------------------------------------------------------------------------------
Cash at End of Year $ 5,401 $ 2,853 $ 3,846
===================================================================================================================================
Unaudited Quarterly Financial Data:
2002
- -----------------------------------------------------------------------------------------------------------------
(in thousands except per share data) First Second Third Fourth
- -----------------------------------------------------------------------------------------------------------------
Interest and dividend income $22,753 $23,869 $23,813 $23,524
Interest expense 7,176 7,484 7,262 6,896
Net interest income 15,577 16,385 16,551 16,628
Provision for loan/lease losses 376 435 686 738
Income before income tax 7,849 8,975 9,336 8,046
Net income 5,205 5,922 6,208 5,579
Net income per common share (basic) .70 .80 .84 .75
Net income per common share (diluted) .69 .78 .82 .74
=================================================================================================================
2001
- -----------------------------------------------------------------------------------------------------------------
(in thousands except per share data) First Second Third Fourth
- -----------------------------------------------------------------------------------------------------------------
Interest and dividend income $23,851 $23,824 $23,464 $23,019
Interest expense 10,318 9,579 8,670 7,608
Net interest income 13,533 14,245 14,794 15,411
Provision for loan/lease losses 185 320 401 700
Income before income tax 7,224 7,325 8,190 7,307
Net income 4,793 4,773 5,265 4,796
Net income per common share (basic) .65 .65 .71 .65
Net income per common share (diluted) .64 .64 .70 .64
=================================================================================================================
58
Report of KPMG LLP,
Independent Auditors
Board of Directors and Shareholders, Tompkins Trustco, Inc.
We have audited the accompanying consolidated statements of condition of
Tompkins Trustco, Inc. and subsidiaries as of December 31, 2002 and 2001, and
the related consolidated statements of income, changes in shareholders' equity,
and cash flows for each of the years in the three-year period ended December 31,
2002. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tompkins Trustco,
Inc. and subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.
KPMG LLP
January 28, 2003
Syracuse, New York
59
Management's Statement of Responsibility
Management is responsible for preparation of the consolidated financial
statements and related financial information contained in all sections of this
annual report, including the determination of amounts that must necessarily be
based on judgments and estimates. It is the belief of management that the
consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, and
that the financial information appearing throughout this annual report is
consistent with the consolidated financial statements.
Management establishes and monitors the Company's system of internal accounting
controls to meet its responsibility for reliable financial statements. The
system is designed to provide reasonable assurance that assets are safeguarded,
and that transactions are executed in accordance with management's authorization
and are properly recorded.
The Audit/Examining Committee of the board of directors, composed solely of
outside directors, meets periodically and privately with management, internal
auditors, and independent auditors, KPMG LLP, to review matters relating to the
quality of financial reporting, internal accounting control, and the nature,
extent, and results of audit efforts. The independent and internal auditors have
unlimited access to the Audit/Examining Committee to discuss all such matters.
The consolidated financial statements have been audited by the Company's
independent auditors for the purpose of expressing an opinion on the
consolidated financial statements.
/s/ JAMES J. BYRNES /s/ FRANCIS M. FETSKO
- ------------------------------ ------------------------------
James J. Byrnes Francis M. Fetsko
Chief Executive Officer Chief Financial Officer
60
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by Item 10 of Form 10-K with respect to the Company's
directors is incorporated by reference from the information contained in the
section captioned "Election of Directors" in the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in May, 2003 (the
"Proxy Statement"), a copy of which will be filed with the Securities and
Exchange Commission before the meeting date. For information with respect to the
Company's executive officers, see the section captioned "Executive Officers of
the Company" at the end of Part I of this report. The information required by
Item 10 of Form 10-K with respect to compliance with Section 16(a) of the
Securities Exchange Act of 1934 is incorporated by reference from the
information contained in the section captioned "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement.
Item 11. Executive Compensation
The information required by Item 11 of Form 10-K is incorporated by reference
from the information contained in the section captioned "Executive Compensation"
in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 of Form 10-K is incorporated by reference
from the information contained in the sections captioned "Security Ownership of
Certain Beneficial Owners and Management" and "Equity Compensation Plan
Information" in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by Item 13 of Form 10-K is incorporated by reference
from the information contained in the section captioned "Certain Relationships
and Related Transactions" in the Proxy Statement.
Item 14. 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-14(c)
under the Securities Exchange Act of 1934, as amended) (the "Exchange Act") as
January 27, 2003 (the "Evaluation Date") within 90 days of the filing date of
this report. Based upon that evaluation, the Company's management, including the
Chief Executive Officer and Chief Financial Officer concluded that, as of the
Evaluation Date, the Company's disclosure controls and procedures were effective
in timely alerting them to any material information relating to the Company and
its subsidiaries required to be included in the Company's Exchange Act filings.
There were no significant changes made in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of the evaluation performed by the Company's Chief Executive Officer and
Chief Financial Officer.
Item 15. Principal Accountant Fees and Services
The information required by Item 15 of Form 10-K is incorporated by reference
from the information contained in the section captioned "Report of the
Audit/Examining Committee of the Board of Directors" in the Proxy Statement.
61
PART IV
Item 16. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) The following financial statements and accountant's report are included
in this Annual Report on Form 10-K:
Report of Independent Auditors
Consolidated Statements of Condition for the years ended December 31,
2002 and 2001
Consolidated Statements of Income for the years ended December 31,
2002, 2001, and 2000
Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001, and 2000
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 2002, 2001, and 2000
Notes to Consolidated Financial Statements
(a)(2) List of Financial Schedules
Not Applicable.
(a)(3) Exhibits
Item No. Description
2. Agreement and Plan of Reorganization, dated as of March 14,
1995, among the Bank, the Company and the Interim Bank
incorporated herein by reference to the identically numbered
exhibit contained in the Company's Registration Statement on
Form 8-A (No. 0-27514), as filed with the Commission on
December 29, 1995, and amended.
3.1 Certificate of Incorporation of the Company, as amended to
date, incorporated herein by reference to the identically
numbered exhibit contained in the Company's Registration
Statement on Form 8-A (No. 0-27514), as filed with the
Commission on December 29, 1995.
3.2 Bylaws of the Company, as amended to date, incorporated herein
by reference to the identically numbered exhibit contained in
the Company's Registration Statement on Form 8-A (No.
0-27514), as filed with the Commission on December 29, 1995.
4. Form of Specimen Common Stock Certificate of the Company
incorporated herein by reference to the identically numbered
exhibit contained in the Company's Registration Statement on
Form 8-A (No. 0-27514), as filed with the Commission on
December 29, 1995.
10.2 1992 Stock Option Plan incorporated herein by reference to the
identically numbered exhibit contained in the Company's
Registration Statement on Form 8-A (No. 0-27514), as filed
with the Commission on December 29, 1995. *
10.3 1996 Stock Retainer Plan for Non-Employee Directors
incorporated herein by reference to the identically numbered
exhibit contained in the Company's Registration Statement on
Form 8-A (No. 0-27514), as filed with the Commission on
December 29, 1995. *
10.4 Form of Director Deferred Compensation Agreement incorporated
herein by reference to the identically numbered exhibit
contained in the Company's Registration Statement on Form 8-A
(No. 0-27514), as filed with the Commission on December 29,
1995. *
10.5 Deferred Compensation Plan for Senior Officers incorporated
herein by reference to the identically numbered exhibit
contained in the Company's Registration Statement on Form 8-A
(No. 0-27514), as filed with the Commission on December 29,
1995. *
62
10.6 Supplemental Executive Retirement Agreement with James J.
Byrnes incorporated herein by reference to the identically
numbered exhibit contained in the Company's Registration
Statement on Form 8-A (No. 0-27514), as filed with the
Commission on December 29, 1995, and amended. *
10.7 Severance Agreement with James J. Byrnes incorporated herein
by reference to the identically numbered exhibit contained in
the Company's Registration Statement on Form 8-A (No.
0-27514), as filed with the Commission on December 29, 1995,
and amended. *
10.8 Lease Agreement dated August 20, 1993, between Tompkins County
Trust Company and Comex Plaza Associates, relating to leased
property at the Rothschilds Building, Ithaca, NY, incorporated
herein by reference to the identically numbered exhibit
contained in the Company's Form 10-K, as filed with the
Commission on March 26, 1996, and amended.
10.9 Employment Agreement, dated September 12, 1989, by and between
Letchworth and James W. Fulmer, incorporated by reference to
Letchworth's Amendment No. 1 to Form S-18 Registration
Statement (Reg. No. 33-31149-NY), filed with the Commission on
October 31, 1989, and wherein such Exhibit is designated
Exhibit 10(a).*
10.10 Employment Agreement, dated as of January 1,1991, by and
between Letchworth and Brenda L. Copeland, incorporated by
reference to Letchworth's Annual Report on Form 10-K for the
year ended December 31, 1991, filed with the Commission on
March 30, 1992, and wherein such Exhibit is designated Exhibit
10(b). *
10.11 Employee Stock Ownership Plan of Letchworth, incorporated by
reference to Letchworth's Registration Statement on Form S-18
(Reg. No. 33-31149-NY), filed with the Commission on September
2, 1989, and wherein such Exhibit is designated Exhibit 10(c).
*
10.12 Defined Benefit Pension Plan of Letchworth, incorporated by
reference to Letchworth's Registration Statement on Form S-18
(Reg. No. 33-31149-NY), filed with the Commission on September
2, 1989, and wherein such Exhibit is designated Exhibit 10(d).
*
10.13 Form of Executive Supplemental Income Agreement, as amended,
incorporated by reference to Letchworth's Annual Report on
Form 10-K for the year ended December 31, 1991 and filed with
the Commission on March 30, 1992, and where in such Exhibit is
designated Exhibit 19. *
10.14 Form of Director Deferred Compensation Agreement, incorporated
by reference to Letchworth's Registration Statement on Form
S-18 (Reg. No. 33-31149-NY), filed with the Commission on
September 2, 1989, and wherein such Exhibit is designated
Exhibit 10(f). *
10.15 Loan and Pledge Agreement, dated June 16, 1986, by and between
Employee Stock Ownership Trust of Letchworth and Salamanca
Trust Company, incorporated by reference to Letchworth's
Registration Statement on Form S-18 (Reg. No. 33-31149-NY),
filed with the Commission on September 2, 1989, and wherein
such Exhibit is designated Exhibit 10(g).
10.16 Loan and Pledge Agreement, dated June 16, 1986, by and between
Employee Stock Ownership Trust of Letchworth and Community
National Bank, incorporated by reference to Letchworth's
Registration Statement on Form S-18 (Reg. No. 33-31149-NY),
filed with the Commission on September 2, 1989, and wherein
such Exhibit is designated Exhibit 10(h).
10.17 Lease Agreement, dated March 1, 1982, by and between
Letchworth and Herald Ford, Inc., incorporated by reference to
Letchworth's Registration Statement on Form S-18 (Reg. No.
33-31149-NY), filed with the Commission on September 2, 1989,
and wherein such Exhibit is designated Exhibit 10(i).
10.18 Lease Agreement, dated April 12, 1982, and an Addendum
thereto, dated January 25, 1973, by and between Letchworth and
15 South Center Street, Inc., incorporated by reference to
Letchworth's Registration Statement on Form S-18 (Reg. No.
33-31149-NY), filed with the Commission on September 2, 1989,
and wherein such Exhibit is designated Exhibit 10(j).
10.19 Lease Agreement, dated August 1, 1974, by and between The
Citizen Bank, Attica and Fred Glickstein, which Lease
Agreement was assumed by Letchworth on December 7, 1984,
incorporated by reference to Letchworth's Registration
Statement on Form S-18 (Reg. No. 33-31149-NY), filed with the
Commission on September 2, 1989, and wherein such Exhibit is
designated Exhibit 10(k).
63
10.20 Salary Savings Plan (401(k) Plan) of Letchworth, incorporated
by reference to Letchworth's Amendment No. 1 to Form S-18
Registration Statement (Reg. No. 33-31149-NY), filed with the
Commission on October 31, 1989, and wherein such Exhibit is
designated Exhibit 10(l). *
10.21 Loan Agreement, dated November 6, 1990, by and between
Letchworth and Alden State Bank, incorporated by reference to
Letchworth's Annual Report on Form 10-K for the year-ended
December 31, 1990, and filed with the Commission on April 1,
1991, and wherein such Exhibit is designated Exhibit 10(m).
10.22 Sales Contract, dated September 10, 1991, by and between John
Piraino, Jr. ("Piraino") and the Bank, incorporated by
reference to Letchworth's Annual Report on Form 10-K for the
year ended December 31, 1992, and filed with the Commission on
March 30, 1993, and wherein such Exhibit is designated Exhibit
10(n).
10.23 Indenture of Lease, dated September 10, 1991, by and between
Piraino and the Bank, incorporated by reference to
Letchworth's Annual Report on Form 10-K for the year ended
December 31, 1992, and filed with the Commission on March 30,
1993, and wherein such Exhibit is designated Exhibit 10(o).
10.24 Purchase and Assumption Agreement, dated as of January 10,
1991, by and between Letchworth, The Bank of Castile, and
Anchor Savings Bank FSB, incorporated by reference to the
Letchworth's Report on Form 8-K/A amending the Letchworth's
Current Report on Form 8-K dated January 31, 1992, and which
Form 8-K/A was filed with the Commission on April 3, 1992, and
wherein such Exhibit is designated Exhibit 10(a).
10.25 Sales Contract, dated as of January 10, 1991, by and between
The Bank of Castile and Anchor Savings Bank FSB, incorporated
by reference to Letchworth's Report on Form 8-K/A amending the
Letchworth's Current Report on Form 8-K dated January 31,
1992, and which Form 8-K/A was filed with the Commission on
April 3, 1992, and wherein such Exhibit is designated Exhibit
10(b).
10.26 Purchase and Assumption Agreement, dated as of May 11, 1994,
by and between The Bank of Castile and The Chase Manhattan
Bank (National Association), incorporated by reference to
Letchworth's Report on Form 8-K, dated December 12, 1994, and
which Form 8-K was filed with the Commission on December 19,
1994, and wherein such Exhibit is designated Exhibit 2.1.
10.27 Sales Contract, dated as of May 11, 1994, by and between The
Bank of Castile and The Chase Manhattan Bank (National
Association), incorporated by reference to Letchworth's Report
on Form 8-K, dated December 12, 1994, and which Form 8-K was
filed with the Commission on December 19, 1994, and wherein
such Exhibit is designated Exhibit 2.2.
10.28 Agreement and Plan of Reorganization, dated as of July 30,
1999 between Tompkins Trustco, Inc. and Letchworth Independent
Bancshares Corporation, incorporated by reference to the
Company's Registration Statement on Form S-4 (Registration No.
333-90411), in which such exhibit is included as Annex A.
10.29 Stock Purchase Agreement, dated October 31, 1998, between
Letchworth and certain shareholders of Mahopac National Bank,
together with a letter agreement extending the closing date
for said transaction until the close of business on June 4,
1999. The exhibit is incorporated by reference to Letchworth's
report on Form 8-K dated June 17, 1999, as amended, wherein
said exhibit is referenced as Exhibit 2(a).
10.30 Employment Agreement, dated January 1999, by and between
Mahopac National Bank and Stephen E. Garner, incorporated by
reference to the identically numbered exhibit contained in the
Company's Annual Report on Form 10-K for the year ended
December 31, 2001 as filed with the commission on March 29,
2002. *
10.31 2001 Stock Option Plan incorporated herein by reference to
Exhibit 99 contained in the Registrant's Registration
Statement on Form S-8 (No. 333-75822), as filed with the
Commission on December 12, 2001, and amended *
10.32 Mahopac National Bank Supplemental Executive Retirement
Agreement, dated May 15, 2000, by and between Mahopac National
Bank and Stephen E. Garner, incorporated by reference to the
identically numbered exhibit contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 2001 as
filed with the commission on March 29, 2002. *
11. Statement of Computation of Earnings Per Share Required
information is incorporated by reference to Note 15 of the
Company's consolidated financial statements included under
Item 8.
64
21 Subsidiaries of Registrant:
Tompkins Trust Company, which is wholly-owned by the Company,
and its subsidiary Tompkins Real Estate Holdings, Inc., which
is approximately 99% owned by Tompkins Trust Company.
The Bank of Castile, which is wholly-owned by the Company, and
its subsidiary Castile Funding Corporation, Inc., which is
approximately 99% owned by The Bank of Castile.
The Mahopac National Bank, which is wholly-owned by the
Company, and its subsidiary Mahopac Funding Corporation, Inc.,
which is approximately 99% owned by The Mahopac National Bank.
Tompkins Insurance Agencies, Inc., which is wholly-owned by
the Company
23 Consent of KPMG LLP (filed herewith)
24 Power of Attorney, included on page 66 of this Report.
99.1 Certification of the Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of the Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Management contracts and compensatory plans and arrangements
required to be filed as Exhibits to this Report on Form 10-K
pursuant to Item 15(c) of the Report
(b) Reports on Form 8-K
The Company filed no Current Reports on Form 8-K during the quarter
ended December 31, 2002.
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TOMPKINS TRUSTCO, INC.
/s/ JAMES J. BYRNES
-------------------------------------------------
By: James J. Byrnes
Chairman of the Board and Chief Executive Officer
Date: March 28, 2003
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints, jointly and severally, James J. Byrnes and Frank
M. Fetsko, and each of them, as his or her true and lawful attorneys-in-fact and
agents, each with full power of substitution, for him or her, and in his or her
name, place and stead, in any and all capacities, to sign any amendments to this
Report on Form 10-K, and to file the same, with Exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite or
necessary to be done as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature Capacity Signature Capacity
- --------- -------- --------- --------
/s/ JAMES J. BYRNES Chairman of the Board and /s/ EDWARD C. HOOKS Director
- --------------------------- Chief Executive Officer ---------------------------
James J. Byrnes Edward C. Hooks
/s/ JAMES W. FULMER President, Director /s/ BONNIE H. HOWELL Vice Chairman
- --------------------------- --------------------------- Director
James W. Fulmer Bonnie H. Howell
/s/ FRANCIS M. FETSKO Senior Vice President and /s/ HUNTER R. RAWLINGS, III Director
- --------------------------- Chief Financial Officer ---------------------------
Francis M. Fetsko Hunter R. Rawlings, III
/s/ JOHN ALEXANDER Director /s/ THOMAS R. SALM Director
- --------------------------- ---------------------------
John E. Alexander Thomas R. Salm
/s/ REEDER D. GATES Director /s/ MICHAEL SPAIN Director
- --------------------------- ---------------------------
Reeder D. Gates Michael Spain
/s/ WILLIAM W. GRISWOLD Director /s/ WILLIAM D. SPAIN Director
- --------------------------- ---------------------------
William W. Griswold William D. Spain
/s/ JAMES R. HARDIE Director /s/ CRAIG YUNKER Director
- --------------------------- ---------------------------
James R. Hardie Craig Yunker
66
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, James J. Byrnes, certify that:
1. I have reviewed this annual report on Form 10-K of Tompkins Trustco, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
/s/ JAMES J. BYRNES
- -----------------------
James J. Byrnes
Chairman and Chief Executive Officer
67
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Francis M. Fetsko, certify that:
1. I have reviewed this annual report on Form 10-K of Tompkins Trustco, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
/s/ FRANCIS M. FETSKO
- -----------------------
Francis M. Fetsko
Senior Vice President and Chief Financial Officer
68
EXHIBIT INDEX
- -------------
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
23 Consent of KPMG LLP
99.1 Certification of the Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of the Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act 2002
69
[COMPANY LOGO OMITTED]
P.O. Box 460, Ithaca, New York 14851
(607) 273-3210
www.tompkinstrustco.com