SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 Commission File Number 1-12709
[GRAPHIC OMITTED]
TOMPKINS TRUSTCO INC.
(Exact name of registrant as specified in its charter)
New York 16-1482357
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
The Commons, P.O. Box 460, Ithaca, NY 14851
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (607) 273-3210
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 July 31, 2004
---------------------------- --------------------------------
Common Stock, $.10 par value 8,113,628 shares
TOMPKINS TRUSTCO, INC.
FORM 10-Q
INDEX
PART I -FINANCIAL INFORMATION
PAGE
----
Item 1 - Financial Statements (Unaudited)
Condensed Consolidated Statements of Condition as of
June 30, 2004 and December 31, 2003 3
Condensed Consolidated Statements of Income for
the three months and six months ended
June 30, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows for
the six months ended June 30, 2004 and 2003 5
Condensed Consolidated Statements of Changes in
Shareholders' Equity for the six months ended
June 30, 2004 and 2003 6
Notes to Unaudited Condensed Consolidated Financial
Statements 7-10
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-18
Item 3 - Quantitative and Qualitative Disclosures about
Market Risk 18
Item 4 - Controls and Procedures 19
Average Consolidated Balance Sheet and Net Interest Analysis 20
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 21
Item 2 - Changes in Securities and Use of Proceeds 21
Item 3 - Defaults on Senior Securities 21
Item 4 - Submission of Matters to a Vote of Securities Holders 21-22
Item 5 - Other Information 22
Item 6 - Exhibits and Reports on Form 8-K 22
SIGNATURES 23
EXHIBIT INDEX 24
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION
(In thousands, except share data) (Unaudited)
As of As of
ASSETS 06/30/2004 12/31/2003
------------ ------------
Cash and noninterest bearing balances due from banks $ 52,103 $ 56,540
Interest bearing balances due from banks 1,000 9,216
Federal funds sold 0 0
Available-for-sale securities, at fair value 610,202 592,137
Held-to-maturity securities, fair value of $54,123 at
June 30, 2004 and $51,441 at December 31, 2003 53,691 49,528
Loans and leases net of unearned income and deferred costs and fees 1,121,987 1,069,140
Less: Reserve for loan/lease losses 12,100 11,685
- --------------------------------------------------------------------------------------------------------------------
Net Loans/Leases 1,109,887 1,057,455
Bank premises and equipment, net 29,764 28,466
Corporate owned life insurance 23,328 22,843
Goodwill 11,541 11,541
Other intangible assets 2,905 3,322
Accrued interest and other assets 34,939 33,398
====================================================================================================================
Total Assets $ 1,929,360 $ 1,864,446
====================================================================================================================
LIABILITIES, MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest bearing:
Checking, savings and money market $ 772,273 $ 747,691
Time 413,830 381,175
Noninterest bearing 304,472 282,259
- --------------------------------------------------------------------------------------------------------------------
Total Deposits 1,490,575 1,411,125
Securities sold under agreements to repurchase 189,350 187,908
Other borrowings 73,052 87,111
Other liabilities 17,725 17,843
- --------------------------------------------------------------------------------------------------------------------
Total Liabilities $ 1,770,702 $ 1,703,987
- --------------------------------------------------------------------------------------------------------------------
Minority interest in consolidated subsidiaries 1,495 1,489
Shareholders' equity:
Common Stock - par value $.10 per share: Authorized 15,000,000 shares;
Issued: 8,165,517 at June 30, 2004; and 8,185,816 at December 31, 2003 817 819
Surplus 76,215 76,926
Undivided profits 86,028 78,676
Accumulated other comprehensive (loss) income (4,948) 3,015
Treasury stock, at cost - 41,734 shares at June 30, 2004,
and 26,981 shares at December 31, 2003 (949) (466)
- --------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity $ 157,163 $ 158,970
====================================================================================================================
Total Liabilities, Minority Interest in Consolidated Subsidiaries
and Shareholders' Equity $ 1,929,360 $ 1,864,446
====================================================================================================================
See accompanying notes to unaudited condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data) (Unaudited)
Three months ended Six months ended
06/30/2004 06/30/2003 06/30/2004 06/30/2003
------------ ------------ ------------ ------------
INTEREST AND DIVIDEND INCOME
Loans $ 16,842 $ 17,104 $ 33,430 $ 33,996
Balances due from banks 28 3 76 18
Federal funds sold 5 1 17 14
Available-for-sale securities 5,973 5,157 11,920 10,633
Held-to-maturity securities 454 386 890 780
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest and Dividend Income 23,302 22,651 46,333 45,441
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits:
Time certificates of deposits of $100,000 or more 659 731 1,276 1,485
Other deposits 3,008 3,507 6,013 7,316
Federal funds purchased and securities sold under agreements
to repurchase 1,091 792 2,182 1,405
Other borrowings 934 1,068 1,897 2,137
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 5,692 6,098 11,368 12,343
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income 17,610 16,553 34,965 33,098
- ---------------------------------------------------------------------------------------------------------------------------
Less: Provision for loan/lease losses 736 598 1,525 1,138
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan/Lease Losses 16,874 15,955 33,440 31,960
- ---------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trust and investment services income 1,338 1,045 2,664 2,046
Service charges on deposit accounts 1,948 1,674 3,795 3,352
Insurance commissions and fees 1,657 1,332 3,191 2,603
Card services income 631 618 1,189 1,158
Other service charges 741 820 1,644 1,610
Increase in cash surrender value of corporate owned life
insurance 280 263 582 515
(Losses) gains on sale of loans (3) 326 119 825
Other income 191 192 425 227
Net realized gain on available-for-sale securities 19 283 78 342
- ---------------------------------------------------------------------------------------------------------------------------
Total Noninterest Income 6,802 6,553 13,687 12,678
- ---------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES
Salary and wages 6,790 6,035 13,264 12,023
Pension and other employee benefits 1,782 1,720 3,653 3,549
Net occupancy expense of bank premises 920 789 1,874 1,685
Furniture and fixture expense 820 811 1,699 1,625
Marketing expense 573 525 970 917
Amortization of intangible assets 170 183 348 373
Other operating expense 3,592 3,111 7,042 6,230
- ---------------------------------------------------------------------------------------------------------------------------
Total Noninterest Expenses 14,647 13,174 28,850 26,402
- ---------------------------------------------------------------------------------------------------------------------------
Income Before Income Tax Expense and Minority
Interest in Consolidated Subsidiaries 9,029 9,334 18,277 18,236
- ---------------------------------------------------------------------------------------------------------------------------
Minority interest in consolidated subsidiaries 34 34 67 67
Income Tax Expense 2,893 3,111 5,960 6,095
===========================================================================================================================
Net Income $ 6,102 $ 6,189 $ 12,250 $ 12,074
===========================================================================================================================
Basic Earnings Per Share $ 0.75 $ 0.76 $ 1.50 $ 1.48
===========================================================================================================================
Diluted Earnings Per Share $ 0.74 $ 0.75 $ 1.48 $ 1.46
===========================================================================================================================
See accompanying notes to unaudited condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
Six months ended
06/30/2004 06/30/2003
------------ ------------
OPERATING ACTIVITIES
Net income $ 12,250 $ 12,074
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan/lease losses 1,525 1,138
Depreciation and amortization premises, equipment, and software 1,801 1,529
Amortization of intangible assets 348 373
Earnings from corporate owned life insurance (582) (515)
Net amortization on securities 1,144 2,100
Net realized gain on available-for-sale securities (78) (342)
Net gain on sale of loans (119) (825)
Proceeds from sale of loans 7,810 27,488
Loans originated for sale (7,691) (26,354)
Net loss on sales of bank premises and equipment (13) 38
Decrease in accrued interest receivable 34 151
(Decrease) increase in accrued interest payable (186) 18
Other, net 3,649 173
- ----------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 19,892 17,046
- ----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from maturities of available-for-sale securities 151,959 179,996
Proceeds from sales of available-for-sale securities 23,835 38,559
Proceeds from maturities of held-to-maturity securities 11,456 8,177
Purchases of available-for-sale securities (208,141) (264,373)
Purchases of held-to-maturity securities (15,677) (10,016)
Net increase in loans (53,957) (49,391)
Proceeds from sale of bank premises and equipment 41 4
Purchases of bank premises and equipment (2,898) (1,753)
Redemption of corporate owned life insurance 98 0
Net cash used in acquisitions 0 (53)
- ----------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (93,284) (98,850)
- ----------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in demand, money market,
and savings deposits 46,795 9,031
Net increase in time deposits 32,655 12,963
Net increase in securities sold under agreements
to repurchase and Federal funds purchased 1,442 86,343
Increase in other borrowings 5,023 60,000
Repayment of other borrowings (19,082) (59,441)
Cash dividends (4,898) (4,438)
Common stock repurchased and returned to unissued status (1,627) (3,532)
Net proceeds from exercise of stock options and related tax benefit 431 375
- ----------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 60,739 101,301
- ----------------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents (12,653) 19,497
Cash and cash equivalents at beginning of period 65,756 64,298
===============================================================================================================
Total Cash & Cash Equivalents at End of Period $ 53,103 $ 83,795
===============================================================================================================
Supplemental Information:
Cash paid during the year for:
Interest $ 11,554 $ 12,325
Taxes 4,708 3,445
See accompanying notes to unaudited condensed consolidated financial statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except share data) (Unaudited)
Accumulated
Other
Common Undivided Comprehensive Treasury
Stock Surplus Profits Income (Loss) Stock Total
=========================================================================================================================
January 1, 2003 $ 747 $ 45,997 $ 96,722 $ 7,597 ($ 466) $ 150,597
- -------------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Net Income 12,074 12,074
Other comprehensive loss (769) (769)
----------
Total Comprehensive Income 11,305
==========
Cash dividends ($0.55/Share) (4,438) (4,438)
Exercise of stock options, and related
tax benefit (16,387 shares, net) 1 374 375
Common stock repurchased and returned
to unissued status (91,355 shares) (8) (3,524) (3,532)
=========================================================================================================================
Balances at June 30, 2003 $ 740 $ 42,847 $ 104,358 $ 6,828 ($ 466) $ 154,307
=========================================================================================================================
- -------------------------------------------------------------------------------------------------------------------------
January 1, 2004 $ 819 $ 76,926 $ 78,676 $ 3,015 ($ 466) $ 158,970
- -------------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Net Income 12,250 12,250
Other comprehensive loss (7,963) (7,963)
----------
Total Comprehensive Income 4,287
==========
Cash dividends ($0.60/Share) (4,898) (4,898)
Exercise of stock options and related
tax benefit ( 15,947 shares, net) 2 429 431
Common stock repurchased and returned
to unissued status ( 36,246 shares) (4) (1,623) (1,627)
Directors deferred compensation plan
(14,753 shares) 483 (483) 0
=========================================================================================================================
Balances at June 30, 2004 $ 817 $ 76,215 $ 86,028 ($ 4,948) ($ 949) $ 157,163
=========================================================================================================================
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 35 banking offices in New York State market areas served by its
subsidiary banks. Unless the context otherwise requires, the term "Company"
refers to Tompkins Trustco, Inc. and its subsidiaries.
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 included in this
quarterly report 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 management considers 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 of a normal recurring nature. The results of
operations for the interim periods are not necessarily indicative of the results
of operations to be expected for the full year ended December 31, 2004. The
unaudited condensed consolidated financial statements should be read in
conjunction with the Company's 2003 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. Share and per share data have been retroactively adjusted to
reflect a 10% stock dividend paid on August 15, 2003.
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.
7
Three months ended Six months ended
(in thousands except per share data) 06/30/2004 06/30/2003 06/30/2004 06/30/2003
- ---------------------------------------------------------------------------------------------------------------
Net Income:
As reported $ 6,102 $ 6,189 $ 12,250 $ 12,074
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of all related tax effects 167 149 312 261
- ---------------------------------------------------------------------------------------------------------------
Pro forma $ 5,935 $ 6,040 $ 11,938 $ 11,813
- ---------------------------------------------------------------------------------------------------------------
Basic earnings per share:
As reported $ 0.75 $ 0.76 $ 1.50 $ 1.48
- ---------------------------------------------------------------------------------------------------------------
Pro forma 0.73 0.74 1.46 1.45
- ---------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
As reported $ 0.74 $ 0.75 $ 1.48 $ 1.46
===============================================================================================================
Pro forma 0.72 0.73 1.44 1.43
===============================================================================================================
The per share weighted average fair value of the 199,000 stock options granted
during the first six months of 2004 was $15.00. The per share weighted average
fair value of the 1,000 stock options granted during the first six months of
2003 was $16.21. Fair values were arrived at using the Black Scholes
option-pricing model with the following assumptions:
2004 2003
- ---------------------------------------------------------------------------------------------------------------
Risk-free interest rate 3.82% 3.44%
Expected dividend yield 2.70% 3.00%
Volatility 39.76% 46.20%
Expected life (years) 5.00 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 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.
3. Earnings Per Share
A computation of Basic Earnings Per Share ("EPS") and Diluted EPS for the three
and six month periods ending June 30, 2004 and 2003 is presented in the table
below.
- ---------------------------------------------------------------------------------------------------------------
Three months ended June 30, 2004 Net Income Weighted Per
(In thousands except share and per share data) (Numerator) Average Shares Share
(Denominator) Amount
- ---------------------------------------------------------------------------------------------------------------
Basic EPS
Income available to common shareholders $ 6,102 8,161,048 $ 0.75
Effect of dilutive securities (Stock options) 129,511
Diluted EPS
===============================================================================================================
Income available to common shareholders plus assumed conversions $ 6,102 8,290,559 $ 0.74
===============================================================================================================
8
3. Earnings Per Share (continued)
- ---------------------------------------------------------------------------------------------------------------
Three months ended June 30, 2003 Net Income Weighted Per
(In thousands except share and per share data) (Numerator) Average Shares Share
(Denominator) Amount
- ---------------------------------------------------------------------------------------------------------------
Basic EPS
Income available to common shareholders $ 6,189 8,108,616 $ 0.76
Effect of dilutive securities (Stock options) 134,340
Diluted EPS
===============================================================================================================
Income available to common shareholders plus assumed conversions $ 6,189 8,242,956 $ 0.75
===============================================================================================================
- ---------------------------------------------------------------------------------------------------------------
Six months ended June 30, 2004 Net Income Weighted Per
(In thousands except share and per share data) (Numerator) Average Shares Share
(Denominator) Amount
- ---------------------------------------------------------------------------------------------------------------
Basic EPS
Income available to common shareholders $ 12,250 8,161,893 $ 1.50
Effect of dilutive securities (Stock options) 135,349
Diluted EPS
===============================================================================================================
Income available to common shareholders plus assumed conversions $ 12,250 8,297,242 $ 1.48
===============================================================================================================
- ---------------------------------------------------------------------------------------------------------------
Six months ended June 30, 2003 Net Income Weighted Per
(In thousands except share and per share data) (Numerator) Average Shares Share
(Denominator) Amount
- ---------------------------------------------------------------------------------------------------------------
Basic EPS
Income available to common shareholders $ 12,074 8,131,806 $ 1.48
Effect of dilutive securities (Stock options) 132,250
Diluted EPS
===============================================================================================================
Income available to common shareholders plus assumed conversions $ 12,074 8,264,056 $ 1.46
===============================================================================================================
4. Comprehensive Income (Loss)
Three months ended Six months ended
(in thousands) 06/30/2004 06/30/2003 06/30/2004 06/30/2003
- ---------------------------------------------------------------------------------------------------------------
Net Income $ 6,102 $ 6,189 $ 12,250 $ 12,074
Net unrealized holding (losses) gains during the period (10,396) 805 (7,916) (564)
Memo: Pre-tax net unrealized holding (loss) gain (17,327) 1,342 (13,193) (940)
Reclassification adjustment for net realized gain on
available-for-sale securities (11) (170) (47) (205)
Memo: Pretax net realized gain (19) (283) (78) (342)
Other Comprehensive (Loss) Income (10,407) 635 (7,963) (769)
===============================================================================================================
Total Comprehensive (Loss) Income ($ 4,305) $ 6,824 $ 4,287 $ 11,305
===============================================================================================================
9
5. Employee Benefit Plans
The following table sets forth the amount of the net periodic benefit cost
recognized, including the following components: the service cost and interest
cost; the expected return on plan assets for the period; the amortization of the
unrecognized transitional obligation or transition asset; and the amounts of
recognized gains and losses, prior service cost recognized, and gain or loss
recognized due to settlement or curtailment, for the Company's pension plan and
post-retirement plan.
Components of Net Period Benefit Cost
Pension Benefit Other Benefits
Three months ended Three months ended
(In thousands) 06/30/2004 06/30/2003 06/30/2004 06/30/2003
- ---------------------------------------------------------------------------------------------------------------
Service cost $ 334 $ 292 $ 44 $ 37
Interest cost 407 384 77 71
Expected return on plan assets for the period (579) (451) 0 0
Amortization of transition (asset) liability 0 (14) 29 29
Amortization of prior service cost (33) (33) 2 2
Amortization of net loss 164 175 1 0
================================================================================================================
Net periodic benefit cost $ 293 $ 353 $ 153 $ 139
================================================================================================================
Pension Benefit Other Benefits
Six months ended Six months ended
(In thousands) 06/30/2004 06/30/2003 06/30/2004 06/30/2003
- ---------------------------------------------------------------------------------------------------------------
Service cost $ 668 $ 584 $ 88 $ 74
Interest cost 814 768 154 142
Expected return on plan assets for the period (1,158) (902) 0 0
Amortization of transition (asset) liability 0 (28) 58 58
Amortization of prior service cost (66) (66) 4 4
Amortization of net loss 328 350 2 0
================================================================================================================
Net periodic benefit cost $ 586 $ 706 $ 306 $ 278
================================================================================================================
Although the Company is not required to contribute to the pension plan in 2004,
it may voluntarily contribute to the pension plan in 2004.
In addition to the Company's noncontributory defined-benefit retirement and
pension plan, the Company provides supplemental employee retirement plans to
certain executives. For the three month period ended June 30, 2004, the net
periodic benefit cost was $134,000, consisting of the following: service cost of
$18,000; interest cost of $83,000; amortization of prior service cost of
$26,000; and amortization of net loss of $7,000. For the three month period
ended June 30, 2003, the net periodic benefit cost was $126,000, consisting of
the following: service cost of $16,000; interest cost of $78,000; amortization
of prior service cost of $26,000; and amortization of net loss of $6,000.
For the six month period ended June 30, 2004, the net periodic benefit cost was
$268,000, consisting of the following: service cost of $36,000; interest cost of
$166,000; amortization of prior service cost of $52,000; and amortization of net
loss of $14,000. For the six month period ended June 30, 2003, the net periodic
benefit cost was $252,000, consisting of the following: service cost of $32,000;
interest cost of $156,000; amortization of prior service cost of $52,000; and
amortization of net loss of $12,000.
In December 2003, The Medicare Prescription Drug, Improvement and Modernization
Act of 2003 ("Medicare Act") was signed into law. The Medicare Act introduced
both a Medicare prescription-drug benefit and a federal subsidy to sponsors of
retiree healthcare plans that provide a benefit at least "actuarially
equivalent" to the Medicare benefit. These provisions of the Medicare Act will
affect accounting measurements under SFAS No. 106.
In May 2004, the Financial Accounting Standards Board (FASB) issued Staff
Position (FSP) No. FAS 106-2, "Accounting and Disclosure Requirements Related to
the Medicare Prescription Drug, Improvement and Modernization Act of 2003",
which supersedes FSP FAS 106-1 of the same title. The FSP clarifies the
accounting for the benefits attributable to new government subsidies for
10
companies that provide prescription drug benefits to retirees. The new
accounting requirements are not effective until the third calendar quarter of
2004. In accordance with FSP FAS 106-1, the Company elected to defer accounting
for the economic effects of the new Medicare Act. Accordingly, any measures of
the accumulated postretirement benefit obligation or net periodic postretirement
benefit cost in the financial statements or accompanying notes do not reflect
the effect of the subsidy because the Company, as of June 30, 2004, has not
concluded whether the benefits provided by the plan are actuarially equivalent
to Medicare Part D under the Act.
6. 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
Statements 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 June 30, 2004, the Company's maximum potential
obligation under standby letters of credit was $20.2 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.
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. Subsequently, the
Company has acquired three additional insurance agencies, which have been merged
into Tompkins Insurance. The agencies primarily offer property and casualty
insurance to individuals and businesses in Western New York State. Tompkins
Insurance has six offices located in the towns of Attica, Warsaw, Alden, LeRoy,
Batavia and Caledonia. Further details pertaining to the mergers and
acquisitions are presented in Note 6 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2003.
Through its community bank subsidiaries, 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 (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
and investment services, including investment management accounts, custody
accounts, trusts, 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.
11
The banking industry is highly competitive, as deregulation has opened the
industry for nontraditional commercial banking companies. Competition for
commercial banking and other financial services is strong in the Company's
market area. Competition includes other commercial banks, savings and loan
associations, credit unions, finance companies, mutual funds, insurance
companies, brokerage and investment companies, and other financial
intermediaries. The Company differentiates itself from its competitors through
its full complement of banking and related financial services, and through its
community commitment and involvement in its primary market areas, as well as its
commitment to quality and personalized banking services. The industry is also
highly regulated. As a multi-bank holding company, the Company is subject to
examination and regulation from the Federal Reserve Board, the Federal Deposit
Insurance Corporation, the Office of the Comptroller of Currency, and the New
York State Banking Department.
The Company's subsidiary banks operate 35 offices, including 1 limited-service
office, serving communities located in upstate New York. The general economic
climate of the markets served by the Company vary by region, with the Western
New York market representing the most challenging due to recent cutbacks and
layoffs by some major employers in Rochester, New York. The economic climates in
Tompkins County and in the counties the Company serves near the New York City
area are more favorable.
The following discussion is intended to provide the reader with a further
understanding of the consolidated financial condition and results of operations
of Tompkins Trustco, Inc. and its operating subsidiaries. It should be read in
conjunction with the Company's Form 10-K and related notes for the year ended
December 31, 2003, and the unaudited condensed consolidated financial statements
and notes included elsewhere in this report.
Forward-Looking Statements
The Company is making this statement in order to satisfy the "Safe Harbor"
provision contained in the Private Securities Litigation Reform Act of 1995. The
statements contained in this Report on Form 10-K that are not statements of
historical fact may include forward-looking statements that involve a number of
risks and uncertainties. Such forward-looking statements are made based on
management's expectations and beliefs concerning future events impacting the
Company and are subject to certain uncertainties and factors relating to the
Company's operations and economic environment, all of which are difficult to
predict and many of which are beyond the control of the Company, that could
cause actual results of the Company to differ materially from those matters
expressed and/or implied by such forward-looking statements. The following
factors are among those that could cause actual results to differ materially
from the forward-looking statements: changes in general economic, market and
regulatory conditions; the development of an interest rate environment that may
adversely affect the Company's interest rate spread, other income or cash flow
anticipated from the Company's operations, investment and/or lending activities;
changes in laws and regulations affecting banks, bank holding companies and/or
financial holding companies; technological developments and changes; the ability
to continue to introduce competitive new products and services on a timely,
cost-effective basis; governmental and public policy changes, including
environmental regulation; protection and validity of intellectual property
rights; reliance on large customers; and financial resources in the amounts, at
the times and on the terms required to support the Company's future businesses.
In addition, such forward-looking statements could be affected by general
industry and market conditions and growth rates, general economic and political
conditions, including interest rate and currency exchange rate fluctuations, and
other factors.
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 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. Significant factors that could give rise to
changes in these estimates may include, but are not limited to, changes in
economic conditions in the local area, concentration of risk, and declines in
local property values. While management's evaluation of the reserve for
loan/lease losses as of June 30, 2004, considers the reserve to be adequate,
under adversely different conditions or assumptions, the Company would need to
increase 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 Form 10-K for
the year ended December 31, 2003, to gain a greater understanding of how the
12
Company's financial performance is reported. Share and per share data have been
retroactively adjusted to reflect a 10% stock dividend paid on August 15, 2003.
RESULTS OF OPERATIONS
For the quarter ended June 30, 2004, net income was $6.1 million, a decrease of
1.4% compared to net income of $6.2 million for the same period in 2003. Diluted
earnings per share was $0.74 for the second quarter of 2004, compared to $0.75
for the same period in 2003. For the six months ended June 30, 2004, net income
was $12.3 million compared to $12.1 million for the six months ended June 30,
2003. Diluted earnings per share were $1.48 for the first six months of 2004
compared to $1.46 for the same period in 2003. The Company recorded an increase
in net interest income as well as increases in key fee income categories,
reflecting the successful execution of the Company's primary business
strategies. These strategies include a commitment to community banking through
diversified revenue sources, including net interest income generated from the
loan and securities portfolios, trust and investment services income,
commissions from insurance sales, and other service charges and fees for
providing banking and related financial services.
The historically low interest rate environment continues to be a challenge to
operating performance, as yields on the Company's earning assets reprice
downward more rapidly than the interest cost on the Company's interest-bearing
liabilities. The Company's net interest margin decreased from 4.25% for the
second quarter of 2003 to 4.08% for the second quarter of 2004. Despite the
decline in the net interest margin, net interest income increased by 6.4% to
$17.6 million for the three months ended June 30, 2004, from $16.6 million for
the same period in 2003. The increase in net interest income during this period
of declining margins was achieved through solid growth in earning assets.
Average earning assets increased by $179.3 million, or 11.1%, from $1.6 billion
at June 30, 2003, to $1.8 billion at June 30, 2004. Growth in average earning
assets included an 8.0% increase in average loans and a 14.2% increase in
average securities, excluding market value adjustments.
Asset quality showed some deterioration when compared to the same period last
year, with nonperforming assets increasing to $8.6 million at June 30, 2004,
from $7.6 million at June 30, 2003. Despite the increase in nonperforming
assets, the ratio of nonperforming assets to total assets reflected only a
modest increase from 0.43% at June 30, 2003, to 0.44% at June 30, 2004. Economic
weaknesses in the Western New York markets served by the Company contributed to
the increase in net charge-offs in the second quarter of 2004 to $737,000,
compared to $331,000 in the second quarter of 2003. The provision expense
increased to $736,000 in the second quarter of 2004 from $598,000 in the same
period in 2003.
Noninterest income was up $249,000, or 3.8%, to $6.8 million for the three
months ended June 30, 2004, from $6.6 million for the same period in 2003. The
majority of the increase was due to solid growth in trust and investment
services income, insurance commissions and fees, and service charges on deposit
accounts. Trust and investment services income benefited from new business
initiatives as well as the rebound in the stock markets, while insurance
commissions and fees benefited from an acquisition of a small insurance agency
in the fourth quarter of 2003. Recent additions to the Company's branch network
and an increase in fees and related services contributed to the growth in
deposit fees.
Key performance measurements for the Company include return on average assets
and return on average equity. Return on average assets for the quarter ended
June 30, 2004, was 1.27%, compared to 1.42% for the same period in 2003. Return
on average shareholders' equity for the second quarter of 2004 was 15.25%,
compared to 16.39% for the same period in 2003. Return on average assets for the
six months ended June 30, 2004, was 1.29%, compared to 1.41% for the same period
in 2003. Return on average shareholders' equity for the six months ended 2004
was 15.28%, compared to 16.14% for the same period in 2003. The narrowing net
interest margin and significant growth in average earning assets contributed to
the decrease in return on average assets and return on average equity.
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 $18.2 million for the three
months ended June 30, 2004, an increase of 6.3% over the same period in 2003. An
increased volume of earning assets and noninterest bearing deposits offset a
lower net interest margin and contributed to the growth in net interest income.
The net interest margin declined from 4.25% in the second quarter of 2003 to
4.08% in the second quarter of 2004.
For the six months ended June 30, 2004, the Company earned tax-equivalent net
interest income of $36.2 million, an increase of 5.6% over $34.3 million for the
first six months of 2003. The net interest margin for the six months ended June
30, 2004 was 4.10%, down from 4.35% for the same period in 2003.
13
The historically 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 5.92% for the first six months of 2003, to
5.39% for the same period in 2004. The cost of interest-bearing liabilities
declined from 1.90% to 1.58% over the same period. The larger decline in asset
yields has contributed to the compression in the Company's net interest margin.
The recent increase in longer term interest rates, and the resulting increased
spread between longer-term rates and short-term rates had a positive impact on
the Company's net interest margin in the second quarter of 2004. Although the
net interest margin continued to decline during the quarter, the rate of decline
on a sequential quarter comparison was less in the second quarter of 2004, than
in either of the preceding two quarters.
Average earning assets for the year-to-date period ended June 30, 2004 were up
$185.8 million, or 11.7%, to $1.8 billion from $1.6 billion for the period ended
June 30, 2003. Growth in earning assets was concentrated in securities,
residential real estate, and commercial lending products. Average securities
(excluding changes in unrealized gains and losses on available-for-sale
securities) increased by $91.5 million for the first six months of 2004 compared
to the same period of 2003. Growth in the securities portfolio included a $39.7
million increase in average U.S. Government agency securities, and a $44.3
million increase in U.S. Government mortgage-backed securities. The increase in
mortgage-backed securities includes the effects of $39.7 million in securities
that were created from the Company's own mortgage production in August 2003.
Between June 30, 2003 and June 30, 2004, year-to-date average balances for
commercial real estate loans and commercial loans increased by $53.7 million and
$16.6 million, respectively. The combined average balances of commercial loan
products, including commercial leases, increased by 14.1% for the first six
months of 2004 compared to the same period in 2003. These commercial lending
products represented 49.4% of average loans at June 30, 2004, compared with
46.7% of average loans at June 30, 2003. 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.
Average residential real estate loans increased by $8.1 million, despite $33.6
million in residential mortgage loan sales between June 30, 2003 and June 30,
2004, and the securitization of another $39.7 million of residential mortgage
loans in 2003.
Core deposits (total deposits, less brokered deposits, municipal money market
deposits, and time deposits of $100,000 or more) supported the growth in average
assets in 2004. Average core deposits increased by $98.7 million, or 9.4%, from
an average balance of $1.1 billion for the first six months of 2003, to $1.2
billion for the same period in 2004. Core deposits represent the Company's
largest and lowest cost funding source, with average core deposits representing
65.6% of average liabilities for the first six months of 2004. This compares to
66.8% for the same period in 2003.
Non-core funding sources, which include time deposits of $100,000 or more,
brokered deposits, municipal money market deposits, Federal funds purchased,
securities sold under agreements to repurchase (repurchase agreements), and
other borrowings provided additional sources of funding to support asset growth.
Average balances on these non-core funding sources increased by $79.9 million
between June 30, 2003, and June 30, 2004. The primary component of non-core
funding sources at June 30, 2004 was municipal money market deposits with an
average balance of $161.8 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 at an adequate
level. The provision for loan/lease losses of $1.5 million for the first six
months of 2004 is up from $1.1 million for the same period in 2003. The increase
in the provision for loan/lease losses in 2004 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, including an increased level of
commercial real estate and commercial loans. Net charge-offs were $1.1 million
for the first six months of 2004, compared to $585,000 for the same period in
2003. The reserve for loan/lease losses as a percentage of period end loans was
1.08% at June 30, 2004, and 1.09% at December 31, 2003.
Noninterest Income
Although net interest income is the Company's primary revenue source,
competitive, regulatory and economic conditions have led management to target
noninterest income sources as important drivers of long-term revenue growth.
Noninterest income for the six months ended June 30, 2004, was $13.7 million, an
increase of 8.0% over the same period in 2003. For the year-to-date period ended
June 30, 2004, noninterest income represented 28.1% of total revenue, compared
to 27.7% for the same period in 2003. Noninterest income for the three months
ended June 30, 2004 was $6.8 million, an increase of 3.8% over the same period
in 2003. The growth in noninterest income during the period is significant in
that 2004 results were negatively affected by reduced income from sales of
residential mortgages and reduced gains from sales of available-for-sale
securities. For the second quarter, gains on sales of residential loans were
down $329,000, while gains on sales of available-for-sale securities were down
$264,000 compared to the same period in 2003. For the first six months of 2004,
gains on sales of residential loans were down $706,000, while gains on sales of
available-for-sale securities were down $264,000 compared to the same period in
2003.
14
Trust and investment services income was $2.7 million in the first six months of
2004, which is up 30.2% over the same period in 2003. For the second quarter of
2004, trust and investment services income of $1.3 million increased $293,000 or
28.0% over the same period last year. Growth in new business and an increase in
the major stock market indices contributed to the growth in trust and investment
services income for the quarter. With fees largely based on the market value and
mix of assets managed, the general direction of the stock market can have a
considerable impact on fee income. The market value of assets managed by, or in
custody of, Tompkins Investment Services was $1.4 billion at June 30, 2004, up
14.2% from June 30, 2003. Tompkins Investment Services generates fee income
through managing trust and investment relationships, managing estates, providing
custody services, and managing investments in employee benefits plans. Services
are primarily provided to customers in the Trust Company's market area of
Tompkins County; however, Tompkins Investment Services representatives serve
clients in The Bank of Castile and Mahopac National Bank markets. Trends for new
business in trust and investments services remain positive.
Service charges on deposit accounts were $3.8 million for the six-month period
ended June 30, 2004, compared to $3.4 million for the same period in 2003. For
the second quarter of 2004, service charges on deposit accounts were $1.9
million, an increase of $274,000 over the same quarter last year. The growth in
2004 over 2003 reflects an increase in deposit accounts, fee increases, and
additional deposit related services. The average dollar volume of
noninterest-bearing accounts increased by $36.0 million between June 30, 2003,
and June 30, 2004, to $283.8 million from $247.8 million. Interest-bearing
checking, savings and money market accounts increased by $59.9 million over the
same period, from $717.3 million to $777.2 million.
Insurance commissions and fees were $3.2 million for the first six months of
2004, up 22.6% from the $2.6 million for the same period last year. For the
second quarter of 2004, income from insurance commissions and fees was $1.7
million, up $325,000 or 24.4% from the second quarter of 2003. Higher premium
costs instituted by underwriting insurance companies and Tompkins Insurance's
acquisition of two small insurance agencies in 2003 contributed to the growth in
commission income in the first six months of 2004. Tompkins Insurance has also
expanded its efforts to offer services to bank customers by sharing certain
offices with The Bank of Castile.
Card services income of $1.2 million for the six months ended June 30, 2004, and
$631,000 for the second quarter of 2004 were consistent with those for the same
periods in 2003. The Company continues to expand its product offerings to better
serve the needs of customers. Card services products include traditional credit
cards, purchasing cards, and debit cards. An increased number of cardholders and
higher transaction volumes contributed to the increase in income period over
period.
Noninterest income for the first six months of 2004 includes $582,000 of income
relating to increases in the cash surrender value of corporate owned life
insurance (COLI). This compares to $515,000 for the same period in 2003. The
COLI relates to life insurance policies covering certain senior officers of the
Company. The Company's average investment in COLI was $23.0 million for the
six-month period ended June 30, 2004, compared to $21.6 million for the same
period in 2003. Although income associated with the insurance policies is not
included in interest income, increases in the cash surrender value produced a
tax-equivalent return of 7.97% for the first six months of 2004, compared to
8.01% for the same period in 2003.
Residential loan volume was lower in the first six months of 2004, when compared
to the same period last year, as an increase in interest rates for residential
loan products slowed the volume of applications to refinance loans. Historically
low interest rates in 2003 led to strong application volume, including
applications to refinance mortgage loans currently serviced by the Company and
others. As a result of lower application volume in 2004, loan sales decreased to
$7.7 million in the first six months of 2004, down from $26.7 million in the
first six months of 2003. Gains on loan sales were $119,000 in the first six
months of 2004, compared with $825,000 during the same period last year.
Noninterest Expenses
Total noninterest expenses were $28.9 million for the six months of 2004, an
increase of 9.3% over noninterest expenses of $26.4 million for the same period
in 2003. For the second quarter of 2004, noninterest expenses were $14.6
million, up 11.2% over the prior year second quarter. The increase in
noninterest expense in the first six months of 2004 is concentrated in
personnel-related costs. Personnel-related expenses comprise the largest segment
of noninterest expense, representing 58.6% of noninterest expense for the first
half of 2004 compared to 59.0% of noninterest expense for the first six months
15
of 2003. The 8.6% increase in personnel-related expenses year-over-year was
primarily a result of higher salaries and wages related to an increase in
average full time equivalents (FTEs), from 547 at June 30, 2003, to 575 at June
30, 2004, as well as annual salary adjustments. The increase in average FTEs is
primarily a result of staffing requirements at the Company's newer offices,
including the Mount Kisco office of Mahopac National Bank, which opened in June
2004, the Auburn office of Tompkins Trust Company, which opened in July 2003,
and the two small insurance agency acquisitions by Tompkins Insurance in 2003.
Expenses related to bank premises and furniture and fixtures totaled $3.6
million for the first six months of 2004, an increase of 8.0% over the same
period last year. The additions to the Company's branch network mentioned above
as well as higher taxes, insurance and utility costs contributed to the
increased expenses for bank premises and furniture and fixtures year-over-year.
Other operating expense amounted to $7.0 million in the first half of 2004,
compared to $6.2 million for the same period in 2003. Contributing to the
increase in other operating expenses were: higher professional fees related to
complying with Sarbanes-Oxley Act of 2002 and higher software license and
maintenance fees mainly related to upgrades to our mainframe.
Income Tax Expense
The provision for income taxes provides for Federal and New York State income
taxes. The provision for the six months ended June 30, 2004, was $6.0 million,
compared to $6.1 million for the same period in 2003. The decreased provision is
primarily due to increased levels of nontaxable income, such as income from
investments in municipal bonds. The Company's effective tax rate for the first
six months of 2004 was 32.6%, compared to 33.4% for the same period in 2003.
FINANCIAL CONDITION
The Company's total assets were $1.9 billion at June 30, 2004, representing an
increase of $64.9 million over total assets reported at December 31, 2003. Asset
growth included a $52.8 million increase in total loans and a $22.2 million
increase in the carrying value of securities. Loan growth during the period is
net of $7.7 million in sales of fixed rate residential mortgage loans during the
first six months of 2004. Loan growth was concentrated in the commercial real
estate and residential real estate loan portfolios. Growth in the securities
portfolio reflects enhanced utilization of the Company's liquidity position.
Deposits were up $79.5 million in the first six months of 2004, from $1.4
billion at December 31, 2003, to $1.5 billion at June 30, 2004. Additions to the
Company's branch network and municipal deposits contributed to the growth in
deposits in the first six months of 2004.
Capital
Total shareholders' equity totaled $157.2 million at June 30, 2004, a decrease
of $1.8 million from December 31, 2003. Surplus decreased $711,000 from $76.9
million at December 31, 2003, to $76.2 million at June 30, 2004, while
accumulated other comprehensive income was down $8.0 million over the same
period. The decrease in other comprehensive income relates to a decrease in
unrealized gains on available-for-sale securities. Undivided profits at June 30,
2004, were up $7.4 million from December 31, 2003. Cash dividends paid in the
first six months of 2004 totaled approximately $4.9 million, representing 40.0%
of year to date earnings. Cash dividends of $0.60 per share for the first six
months of 2004 were up from $0.55 per share for the same period in 2003.
On July 24, 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. To date, 133,365 shares have been
purchased under this Plan at an average cost of $40.40. This includes 36,246
shares purchased in the first six months of 2004, at an average cost of $44.87
per share.
On July 27, 2004, the Company's board of directors approved a new stock
repurchase plan (the "new Plan") to replace the above Plan, which expired in
July 2004. The new Plan authorizes the repurchase of up to 400,000 shares of the
Company's outstanding common stock over a two-year period.
The Company and its banking subsidiaries are subject to various regulatory
capital requirements administered by Federal banking agencies. Management
believes the Company and its subsidiaries meet all capital adequacy requirements
to which they are subject. The table below reflects the Company's capital
position at June 30, 2004, compared to the regulatory capital requirements for
"well capitalized" institutions.
16
REGULATORY CAPITAL ANALYSIS - June 30, 2004
- ---------------------------------------------------------------------------------------------------------------------
Actual Well Capitalized
Requirement
(Dollar amounts in thousands) Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------
Total Capital (to risk weighted assets) $162,837 13.3% $122,007 10.0%
Tier I Capital (to risk weighted assets) $150,737 12.4% $ 73,204 6.0%
Tier I Capital (to average assets) $150,737 7.9% $ 95,819 5.0%
=====================================================================================================================
As illustrated above, the Company's capital ratios on June 30, 2004, remain well
above the minimum requirement for well capitalized institutions. As of June 30,
2004, the capital ratios for each of the Company's subsidiary banks also
exceeded the minimum levels required to be considered well capitalized.
Reserve for Loan/Lease Losses and Nonperforming Assets
Management reviews the adequacy of the reserve for loan/lease losses (reserve)
on a regular basis. Management considers the accounting policy relating to the
reserve to be a critical accounting policy, given the inherent uncertainty in
evaluating the levels of the reserve required to cover credit losses in the
Company's portfolio and the material effect that assumption could have on the
Company's results of operations. Factors considered in determining the adequacy
of the reserve and the related provision include: management's approach to
granting new credit; the ongoing monitoring of existing credits by the internal
and external loan review functions; the growth and composition of the loan and
lease portfolio; 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 for
loan/lease losses during the first six months of 2004 and 2003 is illustrated in
the table below.
ANALYSIS OF THE RESERVE FOR LOAN/LEASE LOSSES (In thousands)
- ---------------------------------------------------------------------------------------------------------------------
June 30, 2004 June 30, 2003
- ---------------------------------------------------------------------------------------------------------------------
Average Loans and Leases Outstanding Year to Date $ 1,092,384 $ 1,012,605
- ---------------------------------------------------------------------------------------------------------------------
Beginning Balance 11,685 11,704
- ---------------------------------------------------------------------------------------------------------------------
Provision for loan/lease losses 1,525 1,138
Loans charged off (1,559) (828)
Loan recoveries 449 243
- ---------------------------------------------------------------------------------------------------------------------
Net charge-offs 1,110 585
- ---------------------------------------------------------------------------------------------------------------------
Ending Balance $ 12,100 $ 12,257
=====================================================================================================================
The reserve represented 1.08% of total loans and leases outstanding at June 30,
2004, down from 1.17% at June 30, 2003. The reserve coverage of nonperforming
loans (loans past due 90 days and accruing, nonaccrual loans, and restructured
troubled debt) decreased from 1.66 times at June 30, 2003, to 1.44 times at June
30, 2004. Management is committed to early recognition of loan problems and to
maintaining an adequate reserve.
The level of nonperforming assets at June 30, 2004, and 2003 is illustrated in
the table below. Nonperforming assets of $8.6 million as of June 30, 2004,
reflect an increase of $934,000 from $7.6 million as of June 30, 2003. Despite
the increase in the dollar volume of nonperforming assets between June 30, 2003,
and June 30, 2004, the current level of nonperforming assets remains modest at
0.44% of total assets. Approximately $320,000 of the nonperforming loans at June
30, 2004, were secured by U.S. Government guarantees, while $2.5 million were
secured by one-to-four family residential properties.
Potential problem loans/leases are loans/leases that are currently performing,
but where known information about possible credit problems of the related
borrowers causes management to have doubt as to the ability of such borrowers to
comply with the present loan payment terms and may result in disclosure of such
loans/leases as nonperforming at some time in the future. Management considers
loans/leases classified as Substandard, which continue to accrue interest, to be
potential problem loans/leases. At June 30, 2004, the Company's internal loan
review function had identified 24 commercial relationships totaling $8.6
million, which it has classified as Substandard, which continue to accrue
interest. As of December 31, 2003, the Company's internal loan review function
had classified 32 commercial relationships totaling $11.5 million, which
continue to accrue interest, as Substandard. These loans remain in a performing
status due to a variety of factors, including payment history, the value of
collateral supporting the credits, and personal or government guarantees. These
factors, when considered in aggregate, give management reason to believe that
the current risk exposure on these loans is not significant. At June 30, 2004,
approximately $459,000 of these loans were backed by guarantees of U.S.
government agencies. While in a performing status as of June 30, 2004, these
loans exhibit certain risk factors, which have the potential to cause them to
17
become nonperforming in the future. Accordingly, management's attention is
focused on these credits, which are reviewed on at least a quarterly basis.
NONPERFORMING ASSETS (In thousands)
- -------------------------------------------------------------------------------------------------------------------
June 30, 2004 June 30, 2003
- -------------------------------------------------------------------------------------------------------------------
Nonaccrual loans and leases $ 8,177 $ 6,683
Loans past due 90 days and accruing 22 457
Troubled debt restructuring not included above 193 250
- -------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 8,392 7,390
- -------------------------------------------------------------------------------------------------------------------
Other real estate, net of allowances 167 235
===================================================================================================================
Total nonperforming assets $ 8,559 $ 7,625
===================================================================================================================
Total nonperforming loans/leases as a percent of total loans/leases 0.75% 0.71%
===================================================================================================================
Total nonperforming assets as a percentage of total assets 0.44% 0.43%
===================================================================================================================
Deposits and Other Liabilities
Total deposits of $1.5 billion on June 30, 2004, were up $79.5 million, or 5.6%,
from December 31, 2003. Core deposits represent the primary funding source for
the Company. As of June 30, 2004, core deposits of $1.2 billion represented
66.9% of total liabilities. This compares to core deposits of $1.1 billion,
representing 66.4% of total liabilities at December 31, 2003. The opening of the
Auburn office (July 2003) of the Trust Company helped support deposit growth.
The recent addition of the Mount Kisco office of Mahopac National Bank is
expected to have a positive impact on deposit growth beginning in the third
quarter of 2004.
Non-core funding sources for the Company totaled $569.1 million at June 30,
2004, up from $554.1 million at December 31, 2003. The majority of the increase
was in wholesale repurchase agreements and Federal funds purchased.
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 $53.1 million as of June 30, 2004, down from
$65.8 million at December 31, 2003. Short-term investments, consisting of
securities due in one year or less, decreased from $24.8 million at December 31,
2003, to $17.3 million on June 30, 2004. Securities carried at $454.7 million at
December 31, 2003, and $481.0 million at June 30, 2004, were designated as
pledged securities for public deposits, borrowed funds and for other purposes as
provided by law. Pledged securities represented 72.5% of total securities as of
June 30, 2004, compared to 70.9% as of December 31, 2003.
Liquidity is enhanced by ready access to national and regional wholesale funding
sources including Federal funds purchased, repurchase agreements, brokered
certificates of deposit, and Federal Home Loan Bank (FHLB) advances. Through its
subsidiary banks, the Company has borrowing relationships with the FHLB and
correspondent banks, which provide secured and unsecured borrowing capacity. At
June 30, 2004, the unused borrowing capacity on established lines with the FHLB
was $137.1 million. As members of the FHLB, the Company's subsidiary banks can
use certain unencumbered mortgage-related assets to secure additional borrowings
from the FHLB. At June 30, 2004, total unencumbered residential mortgage loans
of the Company were $240.0 million. Additional assets may also qualify as
collateral for FHLB advances upon approval of the FHLB.
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. Each quarter 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 table below is a Condensed Static Gap Report, which illustrates the
anticipated repricing intervals of assets and liabilities as of June 30, 2004.
18
Condensed Static Gap - June 30, 2004 Repricing Interval
Cumulative
(Dollar amounts in thousands) Total 0-3 months 3-6 months 6-12 months 12 months
- --------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets $ 1,795,126 $ 452,000 $ 77,797 $ 162,664 $ 692,461
Interest-bearing liabilities 1,448,504 578,532 118,207 158,184 854,923
- --------------------------------------------------------------------------------------------------------------------------------
Net gap position (126,532) (40,410) 4,480 (162,462)
- --------------------------------------------------------------------------------------------------------------------------------
Net gap position as a percentage of total assets (6.56%) (2.09%) 0.23% (8.42%)
================================================================================================================================
The Company's board of directors has set a policy that interest rate risk
exposure will remain within a range whereby net interest income will not decline
by more than 10% in one year as a result of a 200 basis point change in rates.
Based upon the simulation analysis performed as of June 30, 2004, 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 2.22%, 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 0.99%. The aforementioned percentage changes in net interest income
are from our base case scenario. The base case scenario in our most recent
simulation analysis showed a relatively flat net interest margin over the
remainder of 2004 in the present interest rate environment.
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 its Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and operations of
the Company's disclosure controls and procedures (as defined in Rule 13a-15
under the Securities Exchange Act of 1934, as amended) (the "Exchange Act") as
of June 30, 2004. Based upon that evaluation, the Company's management,
including the Chief Executive Officer and Chief Financial Officer, concluded
that the Company's disclosure controls and procedures were effective in
providing reasonable assurance that any material information relating to the
Company and its subsidiaries required to be included in reports filed or
submitted by the Company under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
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.
19
TOMPKINS TRUSTCO, INC.
Average Consolidated Balance Sheet and Net Interest Analysis
Quarter Ended Year to Date Period Ended Year to Date Period Ended
June-04 June-04 June-03
- -----------------------------------------------------------------------------------------------------------------------------------
Average
Average Average Average Average Average -------
Balance Yield/ Balance Yield/ Balance Yield/
(Dollar amounts in thousands) (QTD) Interest Rate (YTD) Interest Rate (YTD) Interest Rate
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets
Interest-bearing balances due
from banks $ 12,584 $ 28 0.89% $ 15,952 $ 76 0.96% $ 2,703 $ 18 1.34%
Securities (1)
U.S. Government Securities 549,656 5,392 3.95% 536,411 10,708 4.01% 452,416 9.049 4.03%
State and municipal (2) 98,919 1,506 6.12% 98,609 3,001 6.12% 86,140 2,850 6.67%
Other Securities (2) 24,789 110 1.78% 27,791 261 1.89% 32,769 611 3.76%
---------------------------------------------------------------------------------------------
Total securities 673,364 7,008 4.19% 662,811 13,970 4.24% 571,325 12,510 4.42%
Federal Funds Sold 2,321 5 0.87% 3,594 17 0.95% 2,322 14 1.22%
Loans, net of unearned income (3)
Real Estate 705,135 10,548 6.02% 690,832 20,761 6.04% 629,750 20,773 6.65%
Commercial Loans (2) 272,956 3,726 5.49% 273,657 7,598 5.58% 257,104 7,724 6.06%
Consumer Loans 106,133 2,249 8.52% 105,837 4,461 8.48% 102,292 4,769 9.40%
Direct Lease Financing 22,501 353 6.31% 22,058 676 6.16% 23,459 805 6.92%
---------------------------------------------------------------------------------------------
Total loans, net of
unearned income 1,106,725 16,876 6.13% 1,092,384 33,496 6.17% 1,012,605 34,071 6.79%
---------------------------------------------------------------------------------------------
Total interest-earning assets 1,794,994 23,917 5.36% 1,774,741 47,559 5.39% 1,588,955 46,613 5.92%
=============================================================================================
Other assets 134,323 140,323 137,860
----------- ---------- ----------
Total assets $ 1,929,317 $1,915,064 $1,726,815
=========== ========== ==========
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES & SHAREHOLDERS' EQUITY
- ----------------------------------
Deposits
Interest-bearing deposits
Interest bearing checking,
savings, & money market 783,161 1,349 0.69% 777,214 2,686 0.69% 717,289 3,382 0.95%
Time Dep > $100,000 127,269 659 2.08% 120,575 1,276 2.13% 115,664 1,485 2.59%
Time Dep < $100,000 252,873 1,453 2.31% 250,588 2,912 2.34% 250,206 3,540 2.85%
Brokered Time Dep < $100,000 29,194 206 2.84% 28,900 415 2.89% 21,730 394 3.66%
---------------------------------------------------------------------------------------------
Total interest-bearing deposits 1,192,497 3,667 1.24% 1,177,277 7,289 1.25% 1,104,889 8,801 1.61%
Federal funds purchased &
securities sold under agreements
to repurchase 185,842 1,091 2.36% 187,904 2,182 2.34% 105,688 1,405 2.68%
Other borrowings 84,197 934 4.46% 84,585 1,897 4.51% 96,538 2,137 4.46%
---------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 1,462,536 5,692 1.57% 1,449,766 11,368 1.58% 1,307,115 12,343 1.90%
Noninterest bearing deposits 286,870 283,765 247,767
Accrued expenses and other
liabilities 17,490 18,770 19,574
----------- ---------- ----------
Total liabilities 1,766,896 1,752,301 1,574,456
Minority Interest 1,530 1,518 1,518
Shareholders' equity 160,891 161,245 150,841
----------- ---------- ----------
Total liabilities and
shareholders' equity $ 1,929,317 $1,915,064 $1,726,815
=========== ========== ==========
Interest rate spread 3.79% 3.81% 4.02%
----------------- --------------- ---------------
Net interest income/margin on $ 18,225 4.08% $ 36,191 4.10% $34,270 4.35%
earning assets
Tax Equivalent Adjustment (615) (1,226) (1,172)
-------- -------- -------
Net interest income per
consolidated financial
statements $ 17,610 $ 34,965 $33,098
===================================================================================================================================
(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, 2003.
20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities
Issuer Purchases of Equity Securities
- ------------------------------------------------------------------------------------------------------------------
Maximum Number
Total Number of (or Approximate
Shares Purchased as Dollar Value) of
Part of Publicly Shares that May Yet
Total Number of Average Price Paid Announced Plans Be Purchased Under
Shares Purchased Per Share or Programs the Plans or Programs
Period (a) (b) (c) (d)
- ------------------------------------------------------------------------------------------------------------------
April 1, 2004 through
April 30, 2004 491 $46.59 N/A 337,347
May 1, 2004 through
May 31, 2004 8,100 $45.25 8,100 329,247
June 1, 2004 through
June 30, 2004 22,612 $44.42 22,612 306,635
- ------------------------------------------------------------------------------------------------------------------
Total 33,603 $44.71 30,712 306,635
- ------------------------------------------------------------------------------------------------------------------
On July 24, 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. To date, 133,365 shares have been
purchased under this Plan at an average cost of $40.40. This includes 30,712
shares purchased in the second quarter of 2004, at an average cost of $44.64 per
share.
On July 27, 2004, the Company's board of directors approved a new stock
repurchase plan (the "new Plan") to replace the above Plan, which expired in
July 2004. The new Plan authorizes the repurchase of up to 400,000 shares of the
Company's outstanding common stock over a 2-year period.
Item 3. Defaults on Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of stockholders of the Company was held on May 11, 2004 (the
"Annual Meeting"). Proxies for the Annual Meeting were solicited pursuant to
Regulation 14 under the Securities Exchange Act of 1934, as amended.
The election of five directors for three-year terms and one director for a
one-year term was approved at the Annual Meeting. Directors James J. Byrnes,
Reeder D. Gates, Bonnie H. Howell, Michael H. Spain and William D. Spain, Jr.
were each elected to a term of three years that expires in the year 2007.
Director Elizabeth W. Harrison was elected to a term of one year that expires in
2005. John E. Alexander, James W. Fulmer, William W. Griswald, James R. Hardie,
Edward C. Hooks, Hunter R. Rowlings, III, Thomas R. Salm and Craig Yunker will
continue as Directors. The voting for the directors is shown below.
21
Director In Favor Opposed Did Not Vote
James J. Byrnes 7,408,804 14,364 743,886
Reeder D. Gates 7,406,358 16,810 743,886
Elizabeth W. Harrison 7,398,815 24,351 743,888
Bonnie H. Howell 7,192,337 230,831 743,886
Michael H. Spain 7,168,656 254,512 743,886
William D. Spain, Jr. 7,406,663 16,504 743,887
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 (filed
herewith).
31.2 Certification of the Chief Financial Officer as required
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
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 (filed herewith).
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 (filed herewith).
(b) Reports on Form 8-K
On April 21, 2004, 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 April 21, 2004, announcing its earnings for the
calendar quarter ended March 31, 2004. A copy of the press release
was attached to the Form 8-K as an exhibit.
On May 28, 2004, Tompkins Trustco, Inc. furnished a Form 8-K
pursuant to "Item 9-Regulation FD Disclosure" of Form 8-K,
disclosing that the Company established a pre-arranged stock
repurchase plan intended to comply with the requirements of Rules
10b5-1 and 10b-18 under the Exchange Act, which plan provides for
the repurchase of up to 80,000 shares of the Company's common
stock through July 23, 2004, subject to conditions specified in
the plan.
22
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Date: August 5, 2004
TOMPKINS TRUSTCO, INC.
By: /s/ JAMES J. BYRNES
------------------------------
James J. Byrnes
Chairman of the Board,
Chief Executive Officer
By: /s/ FRANCIS M. FETSKO
------------------------------
Francis M. Fetsko
Executive Vice President and
Chief Financial Officer
23
EXHIBIT INDEX
- -------------
EXHIBIT NUMBER DESCRIPTION PAGES
- --------------------------------------------------------------------------------
31.1 Certification of Chief Executive Officer as required
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 25
31.2 Certification of Chief Financial Officer as required
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 26
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 27
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 28
24