SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-12709
TOMPKINS TRUSTCO INC.
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(Exact name of registrant as specified in its charter)
New York 16-1482357
---------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
The Commons, P.O. Box 460, Ithaca, NY 14851
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (607) 273-3210
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes [X] No [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes[X] No[ ]
Indicate the number of shares of the Registrant's Common Stock outstanding as of
the latest practicable date:
Class Outstanding as of October 31, 2003
---------------------------- ----------------------------------
Common Stock, $.10 par value 8,151,883 shares
TOMPKINS TRUSTCO, INC.
FORM 10-Q
INDEX
PART I -FINANCIAL INFORMATION
PAGE
----
Item 1 -Financial Statements (Unaudited)
Condensed Consolidated Statements of Condition as of
September 30, 2003 and December 31, 2002 3
Condensed Consolidated Statements of Income for
the three months and nine months ended September 30, 2003
and 2002 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2003 and 2002 5
Condensed Consolidated Statements of Changes in
Shareholders' Equity for the nine months ended
September 30, 2003 and 2002 6
Notes to Unaudited Condensed Consolidated Financial
Statements 7-10
Item 2 -Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-17
Item 3 -Quantitative and Qualitative Disclosures about Market Risk 18
Item 4 -Controls and Procedures 18
Average Consolidated Balance Sheet and Net Interest
Analysis 19
PART II - OTHER INFORMATION
Item 1 -Legal Proceedings 20
Item 2 -Changes in Securities and Use of Proceeds 20
Item 3 -Defaults on Senior Securities 20
Item 4 -Submission of Matters to a Vote of Securities Holders 20
Item 5 -Other Information 20
Item 6 -Exhibits and Reports on Form 8-K 20
SIGNATURES 21
EXHIBIT INDEX 22
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION
(In thousands, except share data) (Unaudited)
As of As of
ASSETS 09/30/2003 12/31/2002
----------- -----------
Cash and noninterest bearing balances due from banks $ 70,888 $ 53,898
Interest bearing balances due from banks 2,173 10,000
Federal funds sold 0 400
Available-for-sale securities, at fair value 569,594 493,780
Held-to-maturity securities, fair value of $43,655 at
September 30, 2003 and $40,260 at December 31, 2002 41,937 38,722
Loans and leases net of unearned income and deferred costs and fees 1,038,193 995,346
Less: Reserve for loan/lease losses 11,621 11,704
- --------------------------------------------------------------------------------------------------------------------
Net Loans/Leases 1,026,572 983,642
Bank premises and equipment, net 27,685 27,111
Corporate owned life insurance 22,155 21,382
Goodwill 10,761 10,684
Intangible assets 3,253 3,422
Accrued interest and other assets 30,062 27,162
- --------------------------------------------------------------------------------------------------------------------
Total Assets $ 1,805,080 $ 1,670,203
- --------------------------------------------------------------------------------------------------------------------
LIABILITIES, MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest bearing:
Checking, savings and money market $ 748,956 $ 710,753
Time 378,482 379,603
Noninterest bearing 276,795 249,929
- --------------------------------------------------------------------------------------------------------------------
Total Deposits 1,404,233 1,340,285
Federal funds purchased and securities sold under agreements to repurchase 152,075 77,843
Other borrowings 72,341 81,930
Other liabilities 21,190 18,059
- --------------------------------------------------------------------------------------------------------------------
Total Liabilities 1,649,839 1,518,117
- --------------------------------------------------------------------------------------------------------------------
Minority interest in consolidated subsidiaries 1,525 1,489
Shareholders' equity:
Common Stock - par value $.10 per share, authorized 15,000,000 shares
Issued: 8,148,633 at September 30, 2003; and 8,211,815 at December 31, 2002 815 747
Surplus 75,800 45,997
Undivided profits 75,167 96,722
Accumulated other comprehensive income 2,400 7,597
Treasury stock, at cost - 26,981 shares at September 30, 2003,
and December 31, 2002 (466) (466)
- --------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 153,716 150,597
- --------------------------------------------------------------------------------------------------------------------
Total Liabilities, Minority Interest in Consolidated Subsidiaries
and Shareholders' Equity $ 1,805,080 $ 1,670,203
====================================================================================================================
Share data has been retroactively adjusted to reflect a 10% stock dividend paid
on August 15, 2003.
See accompanying notes to unaudited condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data) (Unaudited)
Three months ended Nine months ended
------------------------ -----------------------
09/30/2003 09/30/2002 09/30/2003 09/30/2002
---------- ---------- ---------- ----------
INTEREST AND DIVIDEND INCOME
Loans $ 17,342 $ 17,246 $ 51,338 $ 50,898
Balances due from banks 7 10 25 10
Federal funds sold 1 63 15 164
Available-for-sale securities 4,870 6,116 15,503 18,278
Held-to-maturity securities 374 378 1,154 1,084
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest and Dividend Income 22,594 23,813 68,035 70,434
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits:
Time certificates of deposits of $100,000 or more 680 739 2,166 2,436
Other deposits 3,007 4,876 10,322 14,481
Federal funds purchased and securities sold under agreements
to repurchase 915 609 2,320 1,884
Other borrowings 956 1,038 3,093 3,121
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 5,558 7,262 17,901 21,922
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 17,036 16,551 50,134 48,512
- -----------------------------------------------------------------------------------------------------------------------------------
Less: Provision for loan/lease losses 585 686 1,723 1,497
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan/Lease Losses 16,451 15,865 48,411 47,015
- -----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trust and investment services income 1,092 930 3,138 3,100
Service charges on deposit accounts 1,863 1,698 5,215 4,580
Insurance commissions and fees 1,371 1,312 3,974 3,745
Other service charges 1,309 1,381 4,077 3,739
Increase in cash surrender value of corporate owned life insurance 262 348 777 948
Gains on sale of loans 24 236 849 541
Other income 429 323 655 660
Net realized (loss) gain on available-for-sale securities (241) 74 101 54
- -----------------------------------------------------------------------------------------------------------------------------------
Total Noninterest Income 6,109 6,302 18,786 17,367
- -----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES
Salary and wages 5,921 5,653 17,944 16,612
Pension and other employee benefits 1,642 1,408 5,197 4,381
Net occupancy expense of bank premises 837 779 2,521 2,239
Furniture and fixture expense 810 802 2,454 2,433
Amortization of intangible assets 170 212 544 676
Other operating expense 3,878 3,943 10,999 11,780
- -----------------------------------------------------------------------------------------------------------------------------------
Total Noninterest Expenses 13,258 12,797 39,659 38,121
- -----------------------------------------------------------------------------------------------------------------------------------
Income Before Income Tax Expense and Minority
Interest in Consolidated Subsidiaries 9,302 9,370 27,538 26,261
- -----------------------------------------------------------------------------------------------------------------------------------
Minority interest in consolidated subsidiaries 34 34 101 101
Income Tax Expense 3,092 3,128 9,187 8,825
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 6,176 $ 6,208 $ 18,250 $ 17,335
- -----------------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share $ 0.76 $ 0.76 $ 2.25 $ 2.13
Diluted Earnings Per Share $ 0.75 $ 0.75 $ 2.21 $ 2.08
===================================================================================================================================
Per share data has been retroactively adjusted to reflect a 10% stock dividend
paid on August 15, 2003.
See accompanying notes to unaudited condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
Nine months ended
------------------------
09/30/2003 09/30/2002
---------- ----------
OPERATING ACTIVITIES
Net income $ 18,250 $ 17,335
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan/lease losses 1,723 1,497
Depreciation and amortization premises, equipment, and software 2,351 2,178
Amortization of intangible assets 544 676
Earnings from corporate owned life insurance, net (777) (913)
Net amortization on securities 3,263 1,112
Net realized gain on available-for-sale securities (101) (54)
Net gain on sale of loans (849) (541)
Proceeds from sale of loans 42,155 25,134
Loans originated for sale (37,027) (24,554)
Net loss (gain) on sales of bank premises and equipment 30 (8)
ISOP/ESOP shares released for allocation 0 414
Increase in accrued interest receivable (184) (369)
Decrease in accrued interest payable (59) (1,085)
Other, net 3,440 941
- ---------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 32,759 21,763
- ---------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from maturities of available-for-sale securities 250,898 166,410
Proceeds from sales of available-for-sale securities 93,512 13,134
Proceeds from maturities of held-to maturity securities 9,340 8,777
Purchases of available-for-sale securities (392,328) (277,006)
Purchases of held-to-maturity securities (12,612) (18,526)
Net increase in loans (88,595) (61,820)
Proceeds from sale of bank premises and equipment 32 25
Purchases of bank premises and equipment (2,768) (3,318)
Redemption of corporate owned life insurance 0 437
Net cash used in acquisitions (53) (21)
- ---------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (142,574) (171,908)
- ---------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in demand, money market, and savings deposits 65,069 258,695
Net decrease in time deposits (1,121) (32,766)
Net increase (decrease) in Federal funds purchased and securities
sold under agreements to repurchase 74,232 (35,536)
Increase in other borrowings 60,000 14,269
Repayment of other borrowings (69,668) (7,774)
Cash dividends (6,647) (6,369)
Cash paid in lieu of fractional shares - 10% stock dividend (13) 0
Common stock repurchased and returned to unissued status (3,712) (1,304)
Net proceeds from exercise of stock options and related tax benefit 438 430
- ---------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 118,578 189,645
- ---------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 8,763 39,500
Cash and Cash Equivalents at beginning of Period 64,298 44,117
Total Cash & Cash Equivalents at End of Period $ 73,061 $ 83,617
=========================================================================================================
Supplemental Information:
Cash paid during the year for:
Interest 17,960 23,007
Taxes 3,681 3,740
Non-cash Investing Activities:
Securitization of Loans 39,663 0
See accompanying notes to unaudited condensed consolidated financial statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except share and per share data) (Unaudited)
Accumulated
Other
Common Undivided Comprehensive Treasury Unallocated
Stock Surplus Profits Income (Loss) Stock ISOP/ESOP Total
===================================================================================================================================
Balances at
January 1, 2002 $ 744 $ 45,456 $ 82,385 $ 3,039 ($ 466) ($ 86) $ 131,072
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Net Income 17,335 17,335
Other comprehensive income 4,975 4,975
----------
Total Comprehensive Income 22,310
==========
Cash dividends ($0.78/Share) (6,369) (6,369)
Exercise of stock options and related
tax benefit (29,103 shares, net) 3 427 430
Common stock repurchased and
returned to unissued status
(37,004 shares) (4) (1,300) (1,304)
ESOP shares committed to be released
for allocation (11,187 shares) 328 86 414
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at
September 30, 2002 $ 743 $ 44,911 $ 93,351 $ 8,014 ($ 466) $ 0 $ 146,553
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at
January 1, 2003 $ 747 $ 45,997 $ 96,722 $ 7,597 ($ 466) $ 0 $ 150,597
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Net Income 18,250 18,250
Other comprehensive loss (5,197) (5,197)
----------
Total Comprehensive Income 13,053
==========
Cash dividends ($0.82/Share) (6,647) (6,647)
Exercise of stock options and related
tax benefit (32,915 shares, net) 3 435 438
Common stock repurchased and
returned to unissued status
(95,799 shares) (9) (3,703) (3,712)
Effect of 10% stock dividend 74 33,071 (33,145) 0
Cash paid in lieu of fractional
shares (298 shares) (13) (13)
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at
September 30, 2003 $ 815 $ 75,800 $ 75,167 $ 2,400 ($ 466) $ 0 $ 153,716
- -----------------------------------------------------------------------------------------------------------------------------------
Share and per share data have been retroactively adjusted to reflect a 10%
stock dividend paid on August 15, 2003.
See accompanying notes to unaudited condensed consolidated financial statements.
6
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Business
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 34 banking offices in New York State market areas served by its
subsidiary banks. 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 Tompkins Trust Company,
a commercial bank that has operated in Ithaca and surrounding communities since
1836.
Through its community banking subsidiaries, the Company provides traditional
banking services. Tompkins offers trust and investment 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.
2. Basis of Presentation
The unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America. In the application of certain accounting policies management is
required to make assumptions regarding the effect of matters that are inherently
uncertain. These estimates and assumptions affect the reported amounts of
certain assets, liabilities, revenues, and expenses in the consolidated
financial statements. Different amounts could be reported under different
conditions, or if different assumptions were used in the application of these
accounting policies. The accounting policy considered critical in this respect
is the determination of the reserve for loan/lease losses.
In management's opinion, the unaudited condensed consolidated financial
statements reflect all adjustments (consisting of normal recurring accruals)
considered necessary for fair presentation. The results of operations for the
interim periods are not necessarily indicative of the results of operations to
be expected for the full year ended December 31, 2003. The unaudited condensed
consolidated financial statements should be read in conjunction with the
Company's 2002 Annual Report on Form 10-K. The consolidated financial
information included herein combines the results of operations, the assets,
liabilities, and shareholders' equity of the Company and its subsidiaries.
Amounts in the prior period's consolidated financial statements are reclassified
when necessary to conform to the current period's presentation. All significant
intercompany balances and transactions are eliminated in consolidation.
3. Earnings Per Share
A computation of Basic Earnings Per Share ("EPS") and Diluted EPS for the three
and nine month periods ending September 30, 2003 and 2002, is presented in the
table below.
- ------------------------------------------------------------------------------------------------------------------
Weighted * Per *
Three months ended September 30, 2003 Net Income Average Shares Share
(In thousands except share and per share data) (Numerator) (Denominator) Amount
- ------------------------------------------------------------------------------------------------------------------
Basic EPS
Income available to common shareholders $6,176 8,112,827 $0.76
Effect of dilutive securities (Stock options) 157,771
Diluted EPS
Income available to common shareholders plus assumed conversions $6,176 8,270,598 $0.75
==================================================================================================================
7
3. Earnings Per Share (continued)
- ------------------------------------------------------------------------------------------------------------------
Weighted * Per *
Three months ended September 30, 2002 Net Income Average Shares Share
(In thousands except share and per share data) (Numerator) (Denominator) Amount
- ------------------------------------------------------------------------------------------------------------------
Basic EPS
Income available to common shareholders $6,208 8,142,575 $0.76
Effect of dilutive securities (Stock options) 177,780
Diluted EPS
Income available to common shareholders plus assumed conversions $6,208 8,320,355 $0.75
==================================================================================================================
- ------------------------------------------------------------------------------------------------------------------
Weighted * Per *
Nine months ended September 30, 2003 Net Income Average Shares Share
(In thousands except share and per share data) (Numerator) (Denominator) Amount
- ------------------------------------------------------------------------------------------------------------------
Basic EPS
Income available to common shareholders $18,250 8,125,410 $2.25
Effect of dilutive securities (Stock options) 140,757
Diluted EPS
Income available to common shareholders plus assumed conversions $18,250 8,266,167 $2.21
==================================================================================================================
- ------------------------------------------------------------------------------------------------------------------
Weighted * Per *
Nine months ended September 30, 2002 Net Income Average Shares Share
(In thousands except share and per share data) (Numerator) (Denominator) Amount
- ------------------------------------------------------------------------------------------------------------------
Basic EPS
Income available to common shareholders $17,335 8,148,629 $2.13
Effect of dilutive securities (Stock options) 171,255
Diluted EPS
Income available to common shareholders plus assumed conversions $17,335 8,319,884 $2.08
==================================================================================================================
* Share and per share data has been retroactively adjusted to reflect a 10%
stock dividend paid on August 15, 2003.
4. Comprehensive Income (Loss)
Three months ended Nine months ended
(In thousands) 09/30/2003 09/30/2002 09/30/2003 09/30/2002
- ----------------------------------------------------------------------------------------------------------------------------
Net Income $ 6,176 $ 6,208 $18,250 $17,335
- ----------------------------------------------------------------------------------------------------------------------------
Net unrealized holding (losses) gains during the period (4,573) 1,545 (5,136) 5,007
Memo: Pre-tax net unrealized holding (loss) gain (7,621) 2,575 (8,561) 8,345
Reclassification adjustment for net realized loss (gain) on
available-for-sale securities 145 (44) (61) (32)
Memo: Pretax net realized loss (gain) 241 (74) (101) (54)
- ----------------------------------------------------------------------------------------------------------------------------
Other Comprehensive (Loss) Income (4,428) 1,501 (5,197) 4,975
- ----------------------------------------------------------------------------------------------------------------------------
Total Comprehensive Income $ 1,748 $ 7,709 $13,053 $22,310
============================================================================================================================
8
5. Financial Guarantees
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
Statement s No. 5, 57, and 107 and rescission of FASB Interpretation No. 34. FIN
No. 45 requires certain 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
standby letters of credit. As of September 30, 2003, the Company's maximum
potential obligation under standby letters of credit was $12.1 million.
Management uses the same credit policies to extend standby letters of credit
that it uses for on-balance sheet lending decisions and may require collateral
to support standby letters of credit based upon its evaluation of the
counterparty. Management does not anticipate losses as a result of these
transactions.
6. Recent Accounting Pronouncements
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 adopted SFAS No. 143 on January 1, 2003. The adoption of SFAS
No. 143 did not have a material effect on the Company's consolidated 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, effective January 1, 2003, did not 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.
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.
Three months ended Nine months ended
(In thousands except per share data) 09/30/2003 09/30/2002 09/30/2003 09/30/2002
- ----------------------------------------------------------------------------------------------------------------
Net Income:
As reported $ 6,176 $ 6,208 $ 18,250 $ 17,335
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of all related tax effects 147 73 408 235
Pro forma $ 6,029 $ 6,135 $ 17,842 $ 17,100
- ----------------------------------------------------------------------------------------------------------------
Basic earnings per share:
As reported $ 0.76 $ 0.76 $ 2.25 $ 2.13
Pro forma 0.74 0.75 2.20 2.10
- ----------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
As reported $ 0.75 $ 0.75 $ 2.21 $ 2.08
Pro forma 0.73 0.74 2.16 2.06
================================================================================================================
Per share data has been retroactively adjusted to reflect a 10% stock dividend
paid on August 15, 2003.
9
The per share weighted average fair value of the 6,600 stock options granted
during the first nine months of 2003 was $17.48. The per share weighted average
fair value of the 177,100 stock options granted during the first nine months of
2002 was $14.75. Fair values were arrived at using the Black Scholes
option-pricing model with the following assumptions:
2003 2002
- --------------------------------------------------------------------------------
Risk-free interest rate 3.68% 3.44%
Expected dividend yield 2.80% 3.00%
Volatility 44.58% 46.20%
Expected life (years) 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.
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 were applicable to guarantees
issued or modified after December 31, 2002 and did not have a material effect on
the Company's 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
ending after December 15, 2003. The application of this Interpretation did not
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.
AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: In
April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. This Statement is generally effective for contracts entered into or
modified and hedging relationships designated after June 30, 2003. The adoption
of SFAS No. 149 did not have a material impact on its consolidated financial
statements as a result of the adoption of this Statement.
ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH
LIABILITIES AND EQUITY: In May 2003, FASB issued SFAS No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity. SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both a liability
and equity. It requires that an issuer classify certain financial instruments as
a liability, although the financial instrument may previously have been
classified as equity. This Statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS No. 150 did not have a material effect on the Company's
consolidated financial statements.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
Tompkins Trustco, Inc. ("Tompkins" or "the Company") was organized in 1995, as
the parent company of Tompkins 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.
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 two
agencies have been merged with and into Tompkins Insurance Agencies, Inc.
("Tompkins Insurance"), a wholly-owned subsidiary of Tompkins, offering property
and casualty insurance to individuals and businesses in Western New York State.
The seven offices of Tompkins Insurance include two offices that are shared with
The Bank of Castile. Further details pertaining to mergers and acquisitions are
presented in Note 2 of the Company's Consolidated Financial Statements included
in the Company's 2002 Annual Report on Form 10-K.
Through its community bank subsidiaries, the Company provides traditional
banking related services, which constitute the Company's only 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 (including commercial loans
collateralized by real estate), and leases, and providing trust and investment
related services. The Company's principal expenses are interest on deposits,
interest on borrowings, and operating and general administrative expenses, as
well as provisions for loan/lease losses. Funding sources, other than deposits,
include borrowings, securities sold under agreements to repurchase, and cash
flow from lending and investing activities. The Company conducts trust and
investment services through Tompkins Investment Services, a division of Tompkins
Trust Company. Tompkins Investment Services provides trust services, investment
management accounts, custody accounts, retirement plans and rollovers, estate
settlement, and financial planning. Tompkins Insurance primarily provides
services consisting of property and casualty insurance for individuals and
businesses, which complement the services offered through the Company's banking
subsidiaries.
The following discussion is intended to provide the reader with a further
understanding of the consolidated financial condition and results of operations
of Tompkins and its operating subsidiaries. It should be read in conjunction
with the Company's Form 10-K and Consolidated Financial Statement notes for the
year ended December 31, 2002, and the unaudited condensed consolidated financial
statements and notes included elsewhere in this report.
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, risks, and uncertainties, all of which could change over time.
Actual results could differ materially from forward-looking statements.
Critical Accounting Policies
In the course of the Company's normal business activity, management must select
and apply many accounting policies and methodologies that contribute 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
(the "Reserve") to be a critical accounting policy because of the uncertainty
and subjectivity inherent in estimating the levels of Reserve needed to cover
probable credit losses within the loan portfolio and the material effect that
these estimates can have on the Company's results of operations. Based upon
management's evaluation of the Reserve as of September 30, 2003, management
considers the Reserve to be adequate (Refer to "Reserve for Loan /Lease Losses
and Nonperforming Assets", pg. 16). Under different conditions or assumptions,
however, the Company would need to increase or decrease the Reserve.
All accounting policies are important and the reader of the financial statements
should review these policies, described in Note 1 of the Company's Consolidated
Financial Statements included in the Company's Form 10-K for the year ended
December 31, 2002, to gain a greater understanding of how the Company's
financial performance is reported.
11
RESULTS OF OPERATIONS
For the quarter ended September 30, 2003, net income was $6.2 million, which was
approximately unchanged from the same period in 2002. Diluted earnings per share
was $0.75 for third quarter of 2003, compared to $0.75 for the same period in
2002. Earnings per share numbers included in this report have been adjusted for
a 10% stock dividend which was paid on August 15, 2003. Despite some declines
from the third quarter of 2002, the Company's key performance ratios remain
strong. Return on average assets (ROA) for the quarter ended September 30, 2003,
was 1.38%, compared to 1.53% for the same period in 2002. Return on average
shareholders' equity (ROE) for the third quarter of 2003 was 16.14%, compared to
17.22% for the same period in 2002.
Net income for the nine month period ended September 30, 2003, was $18.3
million, an increase of 5.3% over the same period in 2002. Diluted earnings per
share was $2.21 for the first nine months of 2003, compared to $2.08 for the
same period in 2002. Return on average assets for the first nine months of 2003
was 1.40%, compared to 1.49% for the same period in 2002. Return on average
shareholders' equity for the first nine months of 2003 was 16.14%, compared to
16.90% for the same period in 2002. The decrease in ROE is attributable to the
10.2% growth in average equity outpacing the 5.3% growth in net income.
Net Interest Income
The attached Average Consolidated Balance Sheet and Net Interest Analysis
illustrates the trend in average interest-earning assets and interest-bearing
liabilities, and the corresponding yield or cost associated with each. The
Company earned tax-equivalent net interest income of $17.6 million for the three
months ended September 30, 2003, compared to $17.1 million for the same period
in 2002. An increased volume of earning assets helped offset a decline in net
interest margin in the current quarter. The net interest margin for the third
quarter declined from 4.61% in 2002, to 4.26% in 2003.
Year-to-date September 30, 2003, the Company earned tax-equivalent net interest
income of $51.9 million, an increase of 3.4% over the $50.2 million earned in
the first nine months of 2002. Net interest margin for the nine months ended
September 30, 2003, was 4.32%, down from 4.70% for the same period in 2002.
The low interest rate environment has resulted in declines in both the yield on
earning assets and the cost of interest-bearing liabilities. The yield on
earning assets declined from 6.75% for the first nine months of 2002, to 5.81%
for the same period in 2003. The cost of interest bearing liabilities declined
from 2.51% to 1.82% over the same period.
Average earning assets for the year-to-date period ended September 30, 2003,
increased $177.6 million, or 12.4%, over the same period in 2002. Growth in
earning assets was concentrated in residential real estate, securities, and
commercial lending products. Application volume for residential mortgages over
the past 12 months remained very strong, driven by a low interest rate
environment. However, as a result of increasing rates in the third quarter of
2003, refinance application volume has slowed significantly. Year-to-date
September 30, 2003, average residential mortgage loans increased by $63.0
million, or 18.2%, over the same period last year. The Company sold $41.3
million of residential mortgages over the first nine months of 2003 and
securitized another $39.7 million of residential mortgages during the third
quarter of 2003. The securitized loans are held in the Company's
available-for-sale securities portfolio.
Average securities (excluding changes in unrealized gains and losses on
available-for-sale securities) increased by $77.1 million from the first nine
months of 2002. Growth in the securities portfolio includes a $54.7 million
increase in average U.S. Government mortgage-backed securities, and a $28.9
million increase in average U.S. Government agency securities. The low interest
rate environment led to higher prepayments on mortgage-backed securities in 2003
than in 2002. Consequently, premium amortizations on mortgage-backed securities
were also significantly greater in 2003 than in 2002. For the first nine months
of 2003, net amortization on securities totaled $3.3 million compared with $1.1
million for the same period in 2002.
Between September 30, 2002, and September 30, 2003, average balances for
commercial real estate loans, commercial loans, and commercial leases increased
by $26.7 million, $15.6 million, and $0.9 million, respectively. These
commercial lending products represented 47.0% of average loans at September 30,
2003, down from 47.8% of average loans at September 30, 2002. Management
continues to emphasize commercial services, as these commercial loan products
are typically attractive to the Company from a yield and interest rate risk
management perspective.
The cost of interest-bearing liabilities declined from 2.51% for the nine months
ended September 30, 2002, to 1.82% for the first nine months of 2003. Core
deposits (total deposits, less: brokered deposits, municipal money market
deposits, and
12
time deposits of $100,000 or more) remain a key source of funding for asset
growth. Core deposits increased by $52.9 million, or 5.2%, from an average
balance of $1.0 billion for the first nine months of 2002, to $1.1 billion for
the same period in 2003. Core deposits represent the Company's largest and
lowest cost funding source, with average core deposits representing 67.2% of
average liabilities for the first nine months of 2003. This compares to 71.8%
for the same period 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 agreements to repurchase (repurchase agreements), and
other borrowings provide additional sources of funding to support asset growth.
Average balances on these non-core funding sources increased by $119.5 million
between September 30, 2002 and September 30, 2003. The primary component of
non-core funding sources at September 30, 2003 was municipal money market
deposits with an average balance of $153.2 million.
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 (the "Reserve")
at an adequate level. The provision for loan/lease losses of $1.7 million for
the first nine months of 2003, is up from $1.5 million for the same period in
2002. The increase in the provision for loan/lease losses in the first nine
months of 2003 is attributable to an increase in net charge-offs, an increase in
the dollar volume of nonperforming loans, as well as continued growth in the
loan portfolio. Net charge-offs were $1.8 million for the first nine months of
2003, compared to $858,000 in 2002. The Reserve as a percentage of period end
loans was 1.12% at September 30, 2003, and 1.18% at December 31, 2002.
Noninterest Income
Noninterest income is an important component of the Company's revenue mix.
Noninterest income for the nine months ended September 30, 2003, was $18.8
million, an increase of 8.2% over the same period in 2002. Year-to-date
September 30, 2003, noninterest income represented 27.3% of total revenue,
compared to 26.4% for the same period last year. Excluding gains and losses on
the sale of available-for-sale securities, noninterest income for the three
months ended September 30, 2003, was $6.3 million, an increase of 1.9% over the
$6.2 million earned in same period in 2002.
Trust and Investment Services income was $3.1 million in the first nine months
of 2003, which is in line with the first nine months of 2002. For the third
quarter 2003, Trust and Investment Services income of $1.1 million was up
approximately $162,000, or 17.4%, from the same period last year. Tompkins
Investment Services 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; however,
Tompkins Investment Services representatives serve clients in The Bank of
Castile and Mahopac National Bank markets, and the division currently manages
assets for clients in nearly 40 states. Trends for new business in trust and
investments services remain positive. The general downward trend in national
stock markets in 2002 and early 2003 had an unfavorable impact on trust
commissions and fees. Improvements in the stock markets and revenue for the
division were noted in the second and third quarters of 2003. The market value
of assets managed by, or in custody of, Tompkins Investment Services was
approximately $1.3 billion at September 30, 2003, up nearly 10.3% from December
31, 2002.
Service charges on deposit accounts were $5.2 million for the nine month period
ended September 30, 2003, compared to $4.6 million for the same period in 2002.
For the third quarter of 2003, service charges on deposits were $1.9 million, an
increase of $165,000, or 9.7%, over the same quarter last year. The increase in
2003 is due to the increase in deposit accounts, fee increases, and additional
deposit related services. The average dollar volume of noninterest-bearing
accounts increased by 9.8%, from $233.5 million for the nine months ended
September 30, 2002, to $256.3 million for the nine months ended September 30,
2003.
Commission and fee income generated through Tompkins Insurance was $4.0 million
for the first nine months of 2003, up 6.1% from $3.7 million for the same period
last year. For the third quarter of 2003, commission and fee income from
Tompkins Insurance was $1.4 million, up 4.5% over the $1.3 million earned in the
third quarter of 2002. Tompkins Insurance primarily offers property and casualty
insurance to individuals and businesses in Western New York State. Rising
premium costs instituted by underwriting insurance companies contributed to the
growth in commissions and fees in 2003.
Income associated with card services was $2.5 million for the nine months ended
September 30, 2003, an increase of approximately 15.7% from the $2.2 million
earned in the first nine months of 2002. Card services income was $844,000 in
13
the third quarter of 2003, an increase of 5.0% over income of $804,000 in the
same quarter of 2002. An increased number of cardholders and higher transaction
volume contributed to the increase in income in 2003 over 2002. Income from card
services, included in other service charges on the consolidated statements of
income, continues to be an important source of revenue. The Company continues to
expand its product offerings to better serve the needs of customers. Card
services products include traditional credit cards, purchasing cards, debit
cards, and merchant card processing.
The Company has corporate owned life insurance (COLI), which relates to life
insurance and certain other benefits provided to certain senior officers of the
Company and its subsidiaries. Increases in the cash surrender value of COLI are
reflected as noninterest income, net of the related mortality expense.
Noninterest income for the first nine months of 2003 includes $777,000 of income
relating to increases in COLI. This compares to $948,000 for the same period in
2002. The decrease in earnings in the first nine months of 2003 compared to the
same period in 2002 reflects lower returns on the insurance assets as a result
of weak market conditions. The Company's average investment in COLI was $21.8
million for the nine month period ended September 30, 2003, compared to $20.6
million for the same period in 2002. The tax-equivalent return on COLI was 7.96%
for the nine month period ended September 30, 2003, compared to 10.27% for the
same period in 2002.
During 2003, residential loan volume benefited from the historically low
interest rate environment. As a result of strong 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
$24.6 million in the first nine months of 2002 to $41.3 million in 2003. Net
gains from loan sales amounted to $849,000 for the nine months ended September
30, 2003, compared to $541,000 for the same period in 2002. The volume of
refinancing applications slowed considerably in the third quarter of 2003 as a
result of the upward movement in interest rates. The upward movement in rates
also had a negative impact on gains on the sale of loans, which decreased from
$236,000 in the third quarter of 2002 to $24,000 in the third quarter of 2003.
Management has been proactive in evaluating the performance of individual
securities within the securities portfolio given the recent volatility of
interest rates. As a result, the Company sold $55.0 million of securities during
the third quarter of 2003 and $93.5 million of securities during the first nine
months of 2003. These securities were replaced with securities that management
believes will perform better in the current interest rate environment. Realized
losses on sale of available-for-sale securities amounted to $241,000 in the
third quarter of 2003, compared to gains of $74,000 in the third quarter of
2002. For the nine months ended September 30, 2003, realized gains on
available-for-sale securities were $101,000, compared to realized gains of
$54,000 for the same period in 2002.
Noninterest Expenses
Total noninterest expenses were $39.7 million for the first nine months of 2003,
an increase of $1.5 million, or 4.0%, over the same period in 2002. For the
third quarter of 2003, noninterest expenses were $13.3 million, up 3.6% over the
same quarter prior year. The increase in noninterest expense in the first nine
months of 2003 is largely due to higher personnel-related costs.
Personnel-related expenses comprise the largest segment of noninterest expense,
representing approximately 58.4% of noninterest expense in the first nine months
of 2003 compared to 55.1% in the same period of 2002. Personnel-related expenses
of $23.1 million for the nine months ended September 30, 2003, reflect an
increase of 10.2% from $21.0 million in the same period in 2002. The increase in
personnel-related expenses is attributable to a variety of factors including an
increased number of employees, and higher benefit related costs for medical
insurance and pensions. A portion of the increase is attributable to the opening
of two new Trust Company offices in Cortland (December 2002) and Auburn (July
2003), and a new Mahopac National Bank office in LaGrange (July 2002).
Expenses related to bank premises and furniture and fixtures totaled $5.0
million for the first nine months of 2003, an increase of $303,000, or 6.5%,
over the same period last year. The additions to Tompkins' branch network
mentioned above contributed to the increase in bank premises and furniture and
fixture expenses.
Other operating expense amounted to $11.0 million in the first nine months of
2003, compared to $11.8 million for the same period in 2002. This category
includes expenses for marketing, postage and courier, printing and supplies,
professional fees, software licenses and maintenance, and audits and
examinations. In addition, 2003 expenses include $200,000 of estimated losses
resulting from fraudulent credit card transactions perpetrated against Tompkins
Trust Company and several other banks in the third quarter of 2003. Comparison
of year to date results with 2002 results are favorably impacted by a $250,000
reduction in expense related to residual losses on leased vehicles and $195,000
reduction in expense related to penalties on discretionary prepayment of FHLB
borrowings.
14
Income Tax Expense
The provision for income taxes provides for Federal and New York State income
taxes. The provision for the nine months ended September 30, 2003, was $9.2
million, compared to $8.8 million in 2002. The increased provision is primarily
due to increased levels of taxable income. The effective tax rate for the first
nine months of 2003 was 33.4%, compared to 33.6% for the same period in 2002.
FINANCIAL CONDITION
The Company's total assets were $1.8 billion at September 30, 2003, representing
an increase of $134.9 million over total assets reported at December 31, 2002.
Asset growth since year end 2002 included a $42.8 million increase in total
loans and a $79.0 million increase in securities. Loan growth is net of $41.3
million in sales of fixed rate residential mortgage loans and $39.7 million of
residential mortgage loans that were securitized in the third quarter of 2003.
These securitized loans are now held in the Company's available-for-sale
mortgage-backed securities portfolio. The available-for-sale securities
portfolio (at amortized cost) increased by $84.5 million since year end 2002. In
addition to the securitization transaction, part of the increase in the
securities portfolio reflects the use of short-term borrowings from the Federal
Home Loan Bank ("FHLB") to purchase securities in advance of anticipated cash
flows from the securities portfolio. During the first nine months of 2003, asset
growth was supported by deposit growth, repurchase agreements and borrowings
from the FHLB.
Capital
Total shareholders' equity was $153.7 million at September 30, 2003, an increase
of $3.1 million over year end 2002. Surplus increased by $29.8 million, from
$46.0 million at December 31, 2002, to $75.8 million at September 30, 2003;
while undivided profits were down $21.6 million, and accumulated other
comprehensive income was down $5.2 million over the same period. The increase in
surplus and decrease in undivided profits is primarily due to the 10% stock
dividend paid on August 15, 2003. Surplus was also affected by the repurchase of
95,799 shares of Tompkins common stock at a total cost of $3.7 million. The
decrease in other comprehensive income relates to a decrease in unrealized gains
on available-for-sale securities largely due to recent increases in interest
rates. Cash dividends paid in the first nine months of 2003 totaled $6.6
million, representing 36.4% of year to date earnings. Cash dividends of $0.82
per share for the first nine months of 2003, were up from $0.78 per share for
the same period in 2002. Dividends per share were retroactively adjusted to
reflect the 10% stock dividend paid on August 15, 2003.
In July 2002, the Company's Board of Directors approved a stock repurchase plan
(the "Plan"), which authorizes the repurchase of up to 440,000 shares of
Tompkins common stock over a two year period. During the first nine months of
2003, 95,799 shares have been repurchased under this Plan at an average price of
$38.75. As of September 30, 2003, there were 342,881 shares available for
repurchase under the Plan.
The Company and its banking subsidiaries are subject to various regulatory
capital requirements administered by Federal banking agencies. Management
believes the Company and its subsidiaries meet all capital adequacy requirements
to which they are subject. The table below reflects the Company's capital
position at September 30, 2003, compared to the regulatory capital requirements
for "well capitalized" institutions.
REGULATORY CAPITAL ANALYSIS - September 30, 2003
- ---------------------------------------------------------------------------------------------------------
Actual Well Capitalized
Requirement
(Dollar amounts in thousands) Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------
Total Capital (to risk weighted assets) $152,226 13.6% $111,636 10.0%
Tier I Capital (to risk weighted assets) $140,605 12.6% $ 66,981 6.0%
Tier I Capital (to average assets) $140,605 8.0% $ 88,049 5.0%
=========================================================================================================
As illustrated above, the Company's capital ratios on September 30, 2003, remain
well above the minimum requirement for "well capitalized" institutions. As of
September 30, 2003, the capital ratios for each of the Company's subsidiary
banks also exceeded the minimum levels required to be considered "well
capitalized".
15
Reserve for Loan/Lease Losses and Nonperforming Assets
Management reviews the adequacy of the Reserve on a regular basis. Management
considers the accounting policy relating to the Reserve to be a critical
accounting policy, given the inherent uncertainty in evaluating the levels of
the Reserve required to cover credit losses in the 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 and lease portfolio; comments received during the
course of independent examinations; current local economic conditions; past due
and nonperforming loan statistics; estimated collateral values; and a historical
review of loan and lease loss experience. Based upon consideration of the above
factors, management believes that the Reserve is adequate to provide for the
risk of loss inherent in the current loan and lease portfolio. Activity in the
Company's Reserve during the first nine months of 2003 and 2002 is illustrated
in the table below.
ANALYSIS OF THE RESERVE FOR LOAN/LEASE LOSSES (In thousands)
- -----------------------------------------------------------------------------------------------------------
September 30, 2003 September 30, 2002
- -----------------------------------------------------------------------------------------------------------
Average Loans and Leases Outstanding Year to Date $1,023,888 $ 914,951
- -----------------------------------------------------------------------------------------------------------
Beginning Balance 11,704 10,706
- -----------------------------------------------------------------------------------------------------------
Provision for loan losses 1,723 1,497
Loans charged off (2,149) (1,194)
Loan recoveries 343 336
- -----------------------------------------------------------------------------------------------------------
Net charge-offs 1,806 858
- -----------------------------------------------------------------------------------------------------------
Ending Balance $ 11,621 $ 11,345
===========================================================================================================
The Reserve represented 1.12% of total loans and leases outstanding at September
30, 2003, down slightly from 1.19% at September 30, 2002. The Reserve coverage
of nonperforming loans (loans past due 90 days and accruing, nonaccrual loans,
and restructured troubled debt) decreased from 1.60 times at September 30, 2002,
to 1.25 times at September 30, 2003.
The level of nonperforming assets at September 30, 2003 and 2002 is illustrated
in the table below. Nonperforming assets of $9.6 million as of September 30,
2003, reflect an increase of $2.2 million from September 30, 2002. Despite the
increase in nonperforming assets from September 30, 2002, the current level of
nonperforming assets remains modest at 0.53% of total assets. The increase in
nonperforming loans included several large commercial credits totaling $1.7
million that were brought current for principal and interest in October 2003.
Approximately $462,000 of the nonperforming loans at September 30, 2003, were
secured by U.S. Government guarantees, while $2.0 million were secured by one to
four family residential properties.
Potential problem loans/leases are loans/leases that are currently performing,
but where known information about possible credit problems of the related
borrowers causes management to have doubt as to the ability of such borrowers to
comply with the present loan payment terms and may result in disclosure of such
loans/leases as nonperforming at sometime in the future. Management considers
loans/leases classified as Substandard, which continue to accrue interest, to be
potential problem loans/leases. The Company, through its internal loan review
function had identified 25 commercial relationships totaling $11.0 million at
September 30, 2003, and 27 commercial relationships totaling $6.9 million at
December 31, 2002, 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 $500,000 of these loans are
backed by guarantees of U.S. government agencies. While in a performing status
as of September 30, 2003, 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. Management is committed to early recognition of loan problems
and to maintaining an adequate reserve.
16
NONPERFORMING ASSETS (In thousands)
- ----------------------------------------------------------------------------------------------------------
September 30, 2003 September 30, 2002
- ----------------------------------------------------------------------------------------------------------
Nonaccrual loans $ 9,000 $ 6,891
Loans past due 90 days and accruing 19 40
Troubled debt restructuring not included above 250 180
- ----------------------------------------------------------------------------------------------------------
Total nonperforming loans 9,269 7,111
- ----------------------------------------------------------------------------------------------------------
Other real estate, net of allowances 343 282
- ----------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 9,612 $ 7,393
- ----------------------------------------------------------------------------------------------------------
Total nonperforming loans as a percent of total loans 0.89% 0.75%
Total nonperforming assets as a percentage of total assets 0.53% 0.45%
==========================================================================================================
Deposits and Other Liabilities
Total deposits were $1.4 billion on September 30, 2003, up $63.9 million, or
4.8%, from December 31, 2002. Core deposits, which include demand deposits,
savings accounts, non-municipal money market accounts, and time deposits of less
than $100,000, represent the primary funding source for the Company. As of
September 30, 2003, core deposits of $1.2 billion represented 69.5% of total
liabilities. This compares to core deposits of $1.0 billion, representing 68.3%
of total liabilities at December 31, 2002. Recent additions to the Tompkins
branch network have helped support deposit growth. New offices include the
LaGrange office (July 2002) of the Mahopac National Bank, and the Cortland
(December 2002) and Auburn (July 2003) offices of the Trust Company.
Non-core funding sources for the Company include: time deposits greater than
$100,000, municipal money market deposits, brokered deposits, securities sold
under repurchase agreements, Federal funds purchased, and other borrowings.
These non-core funding sources totaled $482.2 million at September 30, 2003, up
$18.0 million from $464.2 million at December 31, 2002. The majority of the
increase was in securities sold under agreements to repurchase and other
borrowings. Securities sold under agreements to repurchase, totaled $152.1
million at September 30, 2003, compared to $77.8 million at December 31, 2002.
Other borrowings, consisting of term borrowings from the FHLB, decreased from
$81.9 million at December 31, 2002, to $72.3 million at September 30, 2003.
Municipal money market deposits decreased from $172.2 million at December 31,
2002, to $129.7 million at September 30, 2003.
Liquidity
Liquidity represents the Company's ability to efficiently and economically
accommodate decreases in deposits and other liabilities, and fund increases in
assets. The Company uses a variety of resources to meet its liquidity needs,
which include cash and cash equivalents, short term investments, cash flow from
lending and investing activities, deposit growth, securities sold under
repurchase agreements, and borrowings.
Cash and cash equivalents totaled $73.1 million as of September 30, 2003, up
from $64.3 million at December 31, 2002. Short term investments, consisting of
securities due in one year or less decreased from $24.8 million on December 31,
2002, to $19.2 million on September 30, 2003. Securities pledged to secure
certain large deposits and securities sold under repurchase agreements were
71.7% of total securities as of September 30, 2003, compared to 71.8% as of
December 31, 2002.
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 September 30, 2003, the
unused borrowing capacity on established lines with the FHLB was $162.7 million.
As members of the FHLB, the Company's subsidiary banks can use certain
unencumbered mortgage-related assets to secure additional borrowings from the
FHLB. At September 30, 2003, total unencumbered residential mortgage loans of
the Company were $257.9 million. Additional assets may also qualify as
collateral for FHLB advances upon approval of the FHLB.
17
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Interest rate risk is the primary market risk category associated with the
Company's operations. Interest rate risk refers to the volatility of earnings
caused by changes in interest rates. At least quarterly, the Asset/Liability
Management Committee estimates the likely impact on earnings resulting from
various changing interest rate scenarios. The findings of the Committee are
incorporated into the investment and funding decisions of the Company.
The Condensed Static Gap Table below illustrates the anticipated repricing
intervals of assets and liabilities as of September 30, 2003.
Condensed Static Gap - September 30, 2003 Repricing Interval
Cumulative
(Dollar amounts in thousands) Total 0-3 months 3-6 months 6-12 months 12 months
- ---------------------------------------------------------------------------------------------------------------------------
Interest-earning assets $1,647,897 $ 424,882 $ 127,597 $ 206,973 $ 759,452
Interest-bearing liabilities 1,351,854 507,465 97,230 136,050 740,745
- ---------------------------------------------------------------------------------------------------------------------------
Net gap position (82,583) 30,367 70,923 18,707
- ---------------------------------------------------------------------------------------------------------------------------
Net gap position as a percentage of total assets (4.58%) 1.68% 3.93% 1.04%
- ---------------------------------------------------------------------------------------------------------------------------
The Company's Board of Directors has established a policy pursuant to which the
Company's interest rate risk exposure will remain within a range whereby net
interest income will not decline by more than 10% in one year as a result of a
200 basis point change in rates. Based upon the simulation analysis performed as
of September 30, 2003, a 200 basis point upward shift in interest rates over a
one-year time frame would result in a one-year decline in net interest income of
approximately 1.63%, assuming no balance sheet growth and no management 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 2.22%.
Although the simulation model suggests a relatively modest exposure to changes
in interest rates, the base scenario (which assumes interest rates remain at
current levels) indicates a downward trending net interest margin due to more
assets repricing than liabilities in the current low rate environment. Given the
expectation of a lower net interest margin over the next 12 months, net interest
income growth will be largely dependent upon continued growth in earning assets.
Although the simulation model is useful in identifying potential exposure to
interest rate movements, the Company's current liquidity profile, capital
position, and growth prospects, offer a level of flexibility for management to
take actions that could offset some of the negative effects of unfavorable
movements in interest rates. Management believes the current exposure to changes
in interest rates is not significant in relation to the earnings and capital
strength of the Company
Item 4. Controls and Procedures
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and operation of
the Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended) (the
"Exchange Act") as of the end of the period covered by this report. Based upon
that evaluation, the Company's management, including the Chief Executive Officer
and Chief Financial Officer, concluded that, as of the end of such period, 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
Evaluation Date.
18
TOMPKINS TRUSTCO, INC.
Average Consolidated Balance Sheet and Net Interest Analysis
Quarter Ended Year to Date Period Ended Year to Date Period Ended
Sept-03 Sept-03 Sept-02
- -----------------------------------------------------------------------------------------------------------------------------------
Average Average Average
Balance Average Balance Average Balance Average
(Dollar amounts in thousands) (QTD) Interest Yield/Rate (YTD) Interest Yield/Rate (YTD) Interest Yield/Rate
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets
Interest-bearing balances due
from banks Securities (1) $ 3,838 $ 7 0.72% $ 3,086 $ 25 1.08% $ 549 $ 10 2.44%
U.S. Government Securities 471,993 4,244 3.57% 459,014 13,293 3.87% 375,395 15,562 5.54%
State and municipal (2) 89,738 1,405 6.21% 87,352 4,254 6.51% 78,540 4,144 7.05%
Other Securities (2) 29,155 138 1.88% 31,562 749 3.17% 46,896 1,230 3.51%
---------------------------------------------------------------------------------------------
Total securities 590,886 5,787 3.89% 577,928 18,296 4.23% 500,831 20,936 5.59%
Federal Funds Sold 1,024 1 0.39% 1,885 15 1.06% 12,871 164 1.70%
Loans, net of unearned
income (3)
Real Estate 657,942 10,434 6.29% 639,250 31,207 6.53% 542,612 30,028 7.40%
Commercial Loans (2) 263,788 4,279 6.44% 259,356 12,002 6.19% 243,766 12,134 6.66%
Consumer Loans 102,576 2,321 8.98% 102,388 7,090 9.26% 109,477 7,728 9.44%
Direct Lease Financing 21,781 347 6.32% 22,894 1,152 6.73% 19,096 1,119 7.83%
---------------------------------------------------------------------------------------------
Total loans, net of
unearned income 1,046,087 17,381 6.59% 1,023,888 51,451 6.72% 914,951 51,009 7.45%
---------------------------------------------------------------------------------------------
Total interest-earning
assets 1,641,835 23,176 5.60% 1,606,787 69,787 5.81% 1,429,202 72,119 6.75%
---------------------------------------------------------------------------------------------
Other assets 136,613 137,428 126,679
---------- ---------- ----------
Total assets $1,778,448 $1,744,215 $1,555,881
========== ========== ==========
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES & SHAREHOLDERS' EQUITY
- ----------------------------------
Deposits
Interest-bearing deposits
Interest bearing checking,
savings, & money market 716,412 1,189 0.66% 716,993 4,570 0.85% 642,600 7,489 1.56%
Time Dep > $100,000 113,652 680 2.37% 114,986 2,166 2.52% 106,082 2,436 3.07%
Time Dep < $100,000 250,076 1,618 2.57% 250,163 5,157 2.76% 245,719 6,611 3.60%
Brokered Time Dep
< $100,000 24,758 200 3.20% 22,750 595 3.50% 13,533 381 3.76%
---------------------------------------------------------------------------------------------
Total interest-bearing
deposits 1,104,898 3,687 1.32% 1,104,892 12,488 1.51% 1,007,934 16,917 2.24%
Federal funds purchased &
securities sold under agreements
to repurchase 149,897 915 2.42% 120,586 2,320 2.57% 75,148 1,884 3.35%
Other borrowings 76,726 956 4.94% 89,861 3,093 4.60% 82,614 3,121 5.05%
---------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 1,331,521 5,558 1.66% 1,315,339 17,901 1.82% 1,165,696 21,922 2.51%
Noninterest bearing deposits 272,982 256,263 233,492
Accrued expenses and other
liabilities 20,580 19,915 18,028
---------- ---------- ----------
Total liabilities 1,625,083 1,591,517 1,417,216
Minority Interest 1,510 1,515 1,515
Shareholders' equity 151,855 151,183 137,150
---------- ---------- ----------
Total liabilities and
shareholders' equity $1,778,448 $1,744,215 $1,555,881
---------- ---------- ----------
Interest rate spread 3.94% 3.99% 4.24%
----------------- ------------------ ------------------
Net interest income/margin on
earning assets $17,618 4.26% $51,886 4.32% $50,197 4.70%
Tax Equivalent Adjustment (582) (1,752) (1,685)
-------- -------- --------
Net interest income per
consolidated financial statements $17,036 $50,134 $48,512
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Average balances and yields exclude unrealized gains and losses on
available-for-sale securities.
(2) Interest income includes the effects of taxable-equivalent adjustments using
a blended Federal and State income tax rate of 40% to increase tax exempt
interest income to a taxable-equivalent basis.
(3) Nonaccrual loans are included in the average loans totals presented above.
Payments received on nonaccrual loans have been recognized as disclosed in
Note 1 to the Company's Annual Report on Form 10-K dated December 31, 2002.
19
PART II - OTHER INFORMATION
Item 1. 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 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults on Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of the Chief Executive Officer as required pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer as required pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 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.
32.2 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.
(b) Reports on Form 8-K
On July 24, 2003, Tompkins Trustco, Inc. furnished a Form 8-K
pursuant to "Item 12-Results of Operations and Financial Condition"
of Form 8-K, disclosing that the Company issued a press release on
July 23, 2003 announcing its earnings for the calendar quarter ended
June 30, 2003. A copy of the press release was attached to the Form
8-K as an exhibit.
20
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Date: November 5, 2003
TOMPKINS TRUSTCO, INC.
By: /s/ JAMES J. BYRNES
---------------------------------
James J. Byrnes
Chairman of the Board and
Chief Executive Officer
By: /s/ FRANCIS M. FETSKO
---------------------------------
Francis M. Fetsko
Executive Vice President and
Chief Financial Officer
21
EXHIBIT INDEX
- -------------
EXHIBIT NUMBER DESCRIPTION PAGES
- -------------- ----------- -----
31.1 Certification of Chief Executive Officer as
required pursuant to Section 302 of Sarbanes-Oxley
Act of 2002. 23
31.2 Certification of Chief Financial Officer as
required pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. 24
32.1 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 25
32.2 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 26
22