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 March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-12709
TOMPKINS COUNTY 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 the number of shares of the Registrant's Common Stock outstanding as of
the latest practicable date:
CLASS OUTSTANDING AS OF MAY 4, 1998
---------------------------- ------------------------------
Common Stock, $.10 par value 4,843,490 shares
TOMPKINS COUNTY TRUSTCO, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION
PAGE
ITEM 1 - FINANCIAL STATEMENTS CONDENSED CONSOLIDATED
STATEMENTS OF CONDITION AS OF MARCH 31, 1998
AND DECEMBER 31, 1997 3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR
THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
5
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND 1997
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
7-10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11-14
ITEM 3 - QUALITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 15
AVERAGE CONSOLIDATED BALANCE SHEET AND NET
INTEREST ANALYSIS 16
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
EXHIBIT INDEX 19
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION
(In thousands, except share data)
ASSETS AS OF AS OF
03/31/98 12/31/97
---------- ----------
Cash & noninterest bearing balances
due from banks $24,391 $22,089
Federal funds sold 1,000 3,000
Available-for-sale securities, at fair value 194,447 176,660
Held-to-maturity securities, fair value of $38,669
in 1998 and $37,882 in 1997 37,771 36,911
Loans/leases net of unearned income 378,253 377,184
Less: Reserve for loan/lease losses 4,991 4,979
- ----------------------------------------------------------------------------------------------------
NET LOANS/LEASES 373,262 372,205
Bank Premises and Equipment 6,743 6,832
Other Assets 9,928 9,210
- ----------------------------------------------------------------------------------------------------
TOTAL ASSETS $647,542 $626,907
- ----------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest bearing:
Checking $7,059 $63,364
Savings and money market 210,156 140,185
Time 189,635 185,436
Noninterest bearing 86,479 87,715
- ----------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 493,329 476,700
Securities Sold under agreements to repurchase and
Federal funds purchased 54,355 57,998
Other Borrowings 33,005 27,005
Other Liabilities 8,262 8,304
- ----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $588,951 $570,007
- ----------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
Shareholders' equity:
Common Stock - par value $.10 per share
Authorized 7,500,000 shares; issued and outstanding
4,892,346 in 1998 and 3,258,807 shares in 1997 $489 $326
Surplus 30,093 29,935
Undivided Profits 28,247 26,769
Accumulated other comprehensive Income 715 1,074
Treasury Stock - 29,727 shares in 1998, 30,069 shares
in 1997 (565) (571)
Deferred I.S.O.P. benefit expense - 19,429 Shares 1998
31,665 shares 1997. (388) (633)
- ----------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY $58,591 $56,900
- ----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $647,542 $626,907
====================================================================================================
* See accompanying notes to condensed consolidated financial statements
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
03/31/98 03/31/97
---------- ----------
INTEREST INCOME
Loans $8,350 $7,847
Deposits with other banks
Federal funds sold 50 118
Available-for-sale securities 3,109 2,855
Held-to maturity securities 482 502
- ------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 11,991 11,322
- ------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits:
Time certificates of deposits of $100,000 or more 1,383 1,057
Other Deposits 2,559 2,430
Federal funds Purchased and Securities sold under
agreements to repurchase 715 1,059
Borrowed funds 437 216
- ------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 5,094 4,762
- ------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 6,897 6,560
- ------------------------------------------------------------------------------------------------------
Less: Provision for loan/lease losses 151 414
- ------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN/LEASE LOSSES 6,746 6,146
- ------------------------------------------------------------------------------------------------------
OTHER INCOME
Trust and investment services income 960 819
Service charges on deposit accounts 415 457
Credit card merchant income 637 556
Other service charges 430 326
Other operating income 190 80
Gain (loss) on available-for-sale securities (95) 0
- ------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME 2,537 2,238
- ------------------------------------------------------------------------------------------------------
OTHER EXPENSES
Salary and wages 2,099 1,964
Pension and other employee benefits 513 522
Net Occupancy Expense of bank premises 340 328
Furniture and fixture expense 246 280
Credit Card Operating Expense 569 494
Other operating expense 1,355 1,067
- ------------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 5,122 4,655
- ------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 4,161 3,729
- ------------------------------------------------------------------------------------------------------
Income Taxes 1,476 1,298
- ------------------------------------------------------------------------------------------------------
NET INCOME $2,685 $2,431
- ------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE (BASIC) $0.56 $0.49
NET INCOME PER COMMON SHARE (DILUTED) $0.54 $0.49
- ------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share data)
Three Months Ended
03/31/98 03/31/97
---------- ----------
OPERATING ACTIVITIES
Net income $2,685 $2,432
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan/lease losses 151 414
Provision for depreciation and amortization 257 259
Net amortization on securities 66 41
Provision (benefit) for deferred income taxes 1,217 0
Net loss on sale of investments 95 0
Net (gain) loss on sale of loans (3) 0
Net (gain) loss on sales of bank premises and equipment 4 (4)
ISOP shares released for allocation 351 5
(Increase) decrease in other assets (743) (527)
(Decrease) Increase in other liabilities (999) 1,338
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,081 3,958
- --------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from maturities of available-for-sale securities 25,981 6,182
Proceeds from sales of available-for-sale securities 19,905 0
Proceeds from maturities of held-to maturity securities 2,859 4,736
Purchases of available-for-sale securities (64,431) (17,191)
Purchases of held-to-maturity securities (3,741) (5,242)
Proceeds from sale of loans 584 539
Net increase in loans (1,789) (925)
Proceeds from sale of bank premises and equipment 1 4
Purchases of bank premises and equipment (148) (256)
- --------------------------------------------------------------------------------
NET CASH USED IN INVESTMENT ACTIVITIES (20,779) (12,153)
- --------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in demand deposits,
money market accounts, and savings accounts 12,429 11,045
Net increase in time deposits 4,200 7,675
Net decrease in securities sold under agreements to
repurchase and Federal funds purchased (3,643) (1,258)
Net increase (decrease) in other borrowings 6,000 (1,000)
Cash dividends (1,044) (988)
Sale of treasury stock 10 9
Proceeds from issuance of common stock 49 0
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 18,001 15,483
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 303 7,288
Cash and Cash Equivalents at beginning of Period 25,088 25,319
TOTAL CASH & CASH EQUIVALENTS AT END OF PERIOD $25,391 $32,607
================================================================================
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except share data)
Accumulated Deferred
Other ISOP
Common Treasury Undivided Comprehensive Benefit
Stock Stock Surplus Profits Income Expense Total
=======================================================================================================================
BALANCES AT
JANUARY 1, 1997* $334 ($604) $32,529 $20,925 $66 ($637) $52,613
-----------------------------------------------------------------------------------------------------------------------
Net income 2,432 2,432
Common stock issued
Cash dividends ($0.20/Share) (988) (988)
Treasury stock sold 8 1 9
Change in net unrealized gain (loss) on
available-for-sale securities, net (942) (942)
of taxes
ISOP Shares released for allocation 1 4 5
-----------------------------------------------------------------------------------------------------------------------
BALANCES AT
MARCH 31, 1997 $334 ($596) $32,531 $22,369 ($876) ($633) $53,129
-----------------------------------------------------------------------------------------------------------------------
=======================================================================================================================
BALANCES AT
JANUARY 1, 1998 $326 ($571) $29,935 $26,769 $1,074 ($633) $56,900
-----------------------------------------------------------------------------------------------------------------------
Net income 2,685 2,685
Common stock issued 49 49
Cash dividends ($0.21/Share) (1,044) (1,044)
Treasury stock sold 6 3 9
Change in net unrealized gain (loss) on
available-for-sale securities, net (359) (359)
of taxes
ISOP Shares released for allocation 106 245 351
Effect of 3 for 2 stock split in
the form of a stock dividend 163 (163)
-----------------------------------------------------------------------------------------------------------------------
BALANCES AT
MARCH 31, 1998 $489 ($565) $30,093 $28,247 $715 ($388) $58,591
=======================================================================================================================
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Tompkins County Trustco, Inc. (the "Company") is a registered bank holding
company, organized under the laws of New York State. On April 26, 1995, the
shareholders of Tompkins County Trust Company (the "Trust Company") approved a
proposal to revise its corporate structure by establishing the Company as a one
bank holding company. On January 1, 1996, the Trust Company became a wholly
owned subsidiary of the Company and all issued and outstanding shares of Trust
Company common stock were converted to shares of the Company's common stock. The
holding company formation was accounted for similar to a pooling of interests.
Accordingly, the financial information included herein combines the results of
operations, and the assets, liabilities, and shareholders equity of the Company
and the Trust Company for all periods presented. The Trust Company traces its
charter back to 1836 and provides loan, deposit, and trust and investment
services to its customers primarily in Tompkins County, New York.
2. BASIS OF PRESENTATION
The financial statements have been prepared in accordance with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that effect the
reported amounts of assets and liabilities as of the date of the statements of
condition and statements of income and expenses for the period. Actual amounts
could differ from estimates.
The accompanying interim condensed consolidated financial statements and related
notes should be read in conjunction with the Company's Form 10-K and related
notes for the year ended December 31, 1997.
The condensed consolidated financial statements included herein reflect all
adjustments of a normal recurring nature which are, in the opinion of
management, necessary for a fair presentation of the Company's financial
position at March 31, 1998, and December 31, 1997, and the results of operations
for the three months ended March 31, 1998 and 1997. Certain reclassifications
have been made to prior period amounts for consistency in reporting.
3. STOCK SPLIT
On February 10, 1998, the Company announced that its board of directors approved
a 3-for-2 stock split in the form of a dividend (the "Stock Split"), payable on
March 15, 1998, to shareholders of record on March 1, 1998. All share and per
share data in the consolidated financial statements and notes thereto have been
retroactively adjusted to reflect the Stock Split.
4. STOCK REPURCHASE PROGRAM
In November 1996, the board of directors approved a stock repurchase program,
which authorizes the repurchase of up to $3 million in common stock of the
Company in open market transactions. No open market transactions have been
completed under this program. On May 14, 1997, the Company repurchased 120,000
shares of its common stock in a privately negotiated transaction. The shares,
which have been returned to the status of authorized and unissued, were
purchased at $22.25 per share, for a total purchase price of $2.67 million.
5. SECURITIES
Management determines the appropriate classification of debt and equity
securities at the time of purchase. Debt securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold
the securities to maturity. Held-to-maturity securities are stated at amortized
cost. Debt securities not classified as held-to-maturity and marketable equity
securities are classified as available-for-sale. Available-for-sale securities
are stated at fair value, with the unrealized gains and losses, net of tax,
excluded from earnings and reported as a separate component of shareholders'
equity.
7
Amortized cost of held-to-maturity debt securities is adjusted for amortization
of premiums and accretion of discounts to maturity, or in the case of
mortgage-backed securities, over the estimated life of the security. Realized
gains and losses, and declines in value judged to be other-than-temporary, are
included in net securities gains (losses). The cost of securities sold is based
on the specific identification method.
Transfers of securities between categories are recorded at fair value at the
date of transfer. Unrealized holding gains or losses included in the separate
component of shareholders' equity for securities transferred from
available-for-sale to held-to-maturity are maintained and amortized into
earnings over the remaining life of the security as an adjustment to yield in a
manner consistent with the amortization or accretion of premium or discount on
the associated security.
As of March 31, 1998, net unrealized gains on securities classified as
available-for-sale totaled $1.2 million, resulting in an after tax increase to
shareholders' equity of $715,000. As of December 31, 1997, available-for-sale
securities had net unrealized gains of $1.9 million, resulting in an after tax
shareholders' equity capital increase of $1.1 million.
6. LOANS/LEASES
Loans/leases are reported at their principal outstanding balance net of
charge-offs, deferred loan fees and costs, and unearned income. The Company
provides motor vehicle and equipment financing to its customers through direct
financing leases. These leases are carried at the aggregate lease payments
receivable, plus estimated residual values, less unearned income. Unearned
income on direct financing leases is amortized over the lease terms resulting in
a level rate of return.
Loans/leases, including impaired loans/leases, are generally classified as
nonaccrual if they are past due as to maturity or payment of principal or
interest for a period of more than 90 days, unless such loans/leases are well
secured and in the process of collection. Loans/leases that are past due less
than 90 days may also be classified as nonaccrual if repayment in full of
principal and/or interest is in doubt. Loans/leases may be returned to accrual
status when all principal and interest amounts contractually due (including
arrearages) are reasonably assured of repayment within an acceptable time
period, and there is a sustained period of repayment performance by the borrower
in accordance with the contractual terms of the loan agreement. Payments
received on loans/leases carried as nonaccrual are generally applied as a
reduction to principal. When the future collectibility of the recorded loan
balance is expected, interest income may be recognized on a cash basis.
The Company's recorded investment in loans/leases considered impaired was $1.3
million on March 31, 1998, and the average recorded investment in impaired
loans/leases was $1.3 million through the first three months of 1998. Included
in this amount was $720,000 of impaired loans/leases for which related reserves
total $313,000. The recorded investment in impaired loans/leases as of December
31, 1997, was $1.4 million. The December 31, 1997 amount includes $806,000 of
impaired loans/leases which had related reserves of $329,000. The effect on
interest income from impaired loans/leases was not material during the first
three months of 1998.
8
7. EARNINGS PER SHARE
On December 31, 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share", which
requires dual presentation of "Basic EPS" and "Diluted EPS" on the face of the
income statement for all entities with complex capital structures. All prior
period EPS data has been restated to conform to the provisions of this
statement. A computation of Basic EPS and Diluted EPS for the three month
periods ending March 31, 1998 and 1997, is presented in the table below.
Average Per
Period Ending March 31, 1998 Income Shares Share
(In thousands except share and per share data) (Numerator) (Denominator) Amount
----------------------------------------------------------------------------------------------------
BASIC EPS
INCOME AVAILABLE TO COMMON SHAREHOLDERS 2,685 4,835,910 0.56
EFFECT OF DILUTIVE SECURITIES
OPTIONS 92,331
DILUTED EPS
INCOME AVAILABLE TO COMMON SHAREHOLDERS PLUS ASSUMED 2,685 4,928,241 0.54
----------------------------------------------------------------------------------------------------
Average Per
Period Ending March 31, 1997 Income Shares Share
(In thousands except share and per share data) (Numerator) (Denominator) Amount
----------------------------------------------------------------------------------------------------
BASIC EPS
INCOME AVAILABLE TO COMMON SHAREHOLDERS 2,431 4,941,462 0.49
EFFECT OF DILUTIVE SECURITIES
OPTIONS 44,826
DILUTED EPS
INCOME AVAILABLE TO COMMON SHAREHOLDERS PLUS ASSUMED 2,431 4,986,288 0.49
----------------------------------------------------------------------------------------------------
8. ACCOUNTING CHANGES
Effective January 1, 1998, the Company adopted the remaining provisions of SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which relate to accounting for securities
lending, repurchase agreements, and other secured financing activities. These
provisions, which were delayed for implementation by SFAS No. 127, are not
expected to have a material impact on the Company. In addition, the Financial
Accounting Standards Board is considering certain amendments and interpretations
of SFAS No. 125, which if enacted in the future, could affect the accounting for
transactions with in their scope.
On January 1, 1998 the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income." This Statement establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. Comprehensive income includes the
reported net income of a company, adjusted for items that are currently
accounted for as direct entries to equity. These items may include
mark-to-market adjustments on securities available-for-sale, foreign currency
items, and minimum pension liability adjustments.
At the Company, comprehensive income represents net income plus other
comprehensive income, which consists of net change in unrealized gains or losses
on securities available-for-sale for the period. Accumulated other comprehensive
income represents the net unrealized gains or losses on securities
available-for-sale as of the balance sheet dates.
9
Comprehensive income for the three-month periods ended March 31, 1997 and 1998
is summarized in the table below:
(In thousands)
- -------------------------------------------------------------------------------
03/31/98 03/31/97
- -------------------------------------------------------------------------------
NET INCOME $2,685 $2,431
Unrealized holding gains (losses) arising during the period, (359) (942)
net of tax (Pre-tax loss of $619 in 1998, and a
Pre-tax loss of $1,623 in 1997).
- -------------------------------------------------------------------------------
COMPREHENSIVE INCOME $2,326 $1,489
- -------------------------------------------------------------------------------
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information. SFAS No.
131 requires publicly held companies to report financial and other information
about key revenue-producing segments of the entity for which such information is
available and is utilized by the chief operation decision maker. Specific
information to be reported for individual segments includes profit or loss,
certain revenue and expense items, and total assets. A reconciliation of segment
financial information to amounts reported in the financial statements would be
provided. SFAS No. 131 is effective for the Company in 1998 and will not have a
material impact on the Company's consolidated financial statements.
In February 1998, the Financial Accounting Standards Board issued SFAS No. 132,
"Employer's Disclosures about Pensions and Other Post Retirement Benefits". This
Statement revises employers' disclosures about pension and other post retirement
benefit plans. It does not change the measurement or recognition of these plans.
This Statement is effective for the Company in 1998 and will have no impact on
the Company's financial position or results of operations.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion is intended to provide the reader with a further understanding
of the consolidated financial condition and results of operations of Tompkins
County Trustco, Inc. and its operating subsidiary the Tompkins County Trust
Company. It should be read in conjunction with the Company's Form 10-K and
related notes for the year ended December 31, 1997, and the condensed
consolidated financial statements and notes included elsewhere in this report.
RESULTS OF OPERATIONS
Net income for the first quarter of 1998 was $2.7 million, compared to $2.4
million for the first quarter of 1997. Basic earnings per share in the first
quarter of 1998 increased by 12.5% to $0.56, compared to $0.49 in the first
quarter of 1997. On a diluted basis, earnings per share increased to $0.54 per
share in the first quarter of 1998, compared to $0.49 for the same period in
1997.
The significant improvement in per share earnings through the first three months
of 1998 was achieved primarily through 10% growth in net income, and benefited
from a 2% decline in the basic average number of shares outstanding. The
reduction in average shares outstanding is the result of a privately negotiated
transactions in which the Company repurchased 120,000 common shares in May of
1997.
The Company's return on average assets (ROAA) was 1.71% through the first three
months of 1998, compared to 1.64% for the same period in 1997. Return on average
shareholders' equity (ROAE) for the first three months of 1998 was 18.88%,
compared to 18.58% for the same period in 1997. Improvement in ROAA and ROAE
reflects the strong earnings growth in the first quarter of 1998, which outpaced
average total asset growth of 6% and average shareholders' equity growth of 9%
over the same three month period in 1997.
NET INTEREST INCOME
As reflected in the attached Average Consolidated Balance Sheet and Net Interest
Analysis, the Company earned tax-equivalent net interest income of $7.2 million
for the three months ended March 31, 1998, compared to $6.9 million for the same
period in 1997. The improvement in net interest income is attributable to growth
in the Company's earnings assets, which helped offset a modest decline in net
interest margin.
Average earning assets grew by $38.6 million between March 31, 1997 to March 31,
1998. Growth in average earning assets was supported by $22.1 million growth in
average core deposits (noninterest bearing deposits, savings and money market
deposits, and time deposits of less than $100,000), and $10.4 million in average
non-core funding (Time deposits of $100,000 and more, Federal funds purchased
and securities sold under agreements to repurchase, and other borrowings), and
$4.6 million growth in average shareholders' equity.
Tax-equivalent net interest margin on earning assets was 4.81% through the first
three months of 1998, compared to a 4.91% ratio through the first three months
of 1997. Yield on earning assets declined from 8.31% as of March 31, 1997, to
8.22% as of March 31, 1998. The decline in asset yields is reflective of the
general downward trending of interest rates over the period presented. Also
contributing to the decline in the Company's yield on earning assets is the fact
that growth was centered in lower yielding segments of the portfolio consisting
of securities and real estate loans, while higher yielding segments of the
portfolio consisting of commercial loans and consumer loans have declined.
The cost of interest bearing liabilities increased to 4.25% in the first quarter
of 1998, compared to 4.19% in the first quarter of 1997. Increases in the cost
of interest bearing deposits reflects the competitive environment for deposits
in the Company's market area. The increased cost of interest bearing deposits
was offset almost entirely by a $7.2 increase in average noninterest bearing
deposits. Noninterest bearing deposits contributed 84 basis points to the
Company's net interest margin in the first quarter of 1998, compared to 79 basis
points in the first quarter of 1997.
11
PROVISION FOR LOAN/LEASE LOSSES
The provision represents management's estimate of the expense necessary to
maintain the reserve for loan/lease losses at an adequate level. The first
quarter provision of $151,000 represents a 64% decline from the $414,000
provision in the first quarter of 1997. The significant decline in the provision
is reflective of a lower level of loan/lease losses in the current period, and
management's estimates of the reserves necessary given the overall quality of
the portfolio, growth expectations, and general economic conditions.
OTHER INCOME
Total other income of $2.5 million in the first quarter of 1998, compared
favorably to $2.2 million in the comparative period in 1997. Other income as a
percentage of average assets increased from 1.49% for the three months ended
March 31, 1997, compared to 1.59% for the same period in 1998.
Income from trust and investment services, the largest segment of other income,
increased 17% to $960,000, compared to $819,000 the first three months of 1997.
The increase is primarily attributable to continued asset growth in the Trust
and Investment Services Division. Total assets managed by, or in custody of, the
Trust and Investment Services Division were $936 million on March 31, 1998,
representing a $232 million increase from March 31, 1997. Assets in the custody
of the Trust and Investment Services Division included a portion of Trust
Company's securities portfolio, with market value $168 million on March 31,
1998, and $178 million on March 31, 1997.
Credit card merchant fee income of $637,000 through the first three months of
1998 represents a 15% increase from the same period in 1997. Growth in merchant
fee income is primarily attributable to an increase in the number of Trust
Company merchant customers. Other service charges increased from $326,000 for
three month period ending March 31, 1997, to $430,000 for the same period in
1998. Growth in other service charges reflects the Company's continued efforts
to generate income from noninterest related sources, and includes fees related
to debit card usage, wire transfer services, checkbook sales, and lockbox
services, all of which reflected increases over the same period in the previous
year.
Total other income is reduced by $95,000 by losses on the sale of
available-for-sale securities, the proceeds from which were reinvested into
securities which management feels better meet the longer term objectives of the
Company's securities portfolio.
OTHER EXPENSE
Total other expenses increased in the first quarter from $4.7 million in 1997 to
$5.1 million in 1998. Salary and wages remain the largest segment of other
expense, comprising 41% of other expenses as of March 31, 1998, compared to 42%
as of March 31, 1997. Total salary and wage expense for the three months ending
March 31, 1998, represents a 7% increase from the prior year.
Credit card operating expense is a variable expense that increases as the volume
of merchant and card holder transactions increases. The 15% increase in credit
card operating expenses during the first three months of 1998 is primarily due
to an increase in the volume of merchant customer transactions.
Year-to-date other operating expenses increased from $1.1 million in 1997, to
$1.4 million in 1998. Included in other operating expenses is approximately
$160,000 relating to consulting contracts initiated in the first quarter of 1998
to enhance the ability of the Company's employees to meet the needs of customers
through improved sales and service techniques and more efficient use of the
Company's existing technology.
12
FINANCIAL CONDITION
The Company's total assets were $647.5 million as of March 31, 1998,
representing a 3% increase over total assets reported as of December 31, 1997.
Growth was primarily in the securities portfolio which grew by approximately
$18.6 million (net of SFAS 115 market value adjustments on available-for-sale
securities). Total Loans/leases increased $1.1 million during the first three
months of 1998. Asset growth was funded through a combination of core deposit
growth, large time deposit growth, and other borrowings.
CAPITAL
Total shareholders' equity grew by 3% during the first three months of 1998 to
$58.5 million. Dividends through March 31, 1998 totaled approximately $1.0
million, or $0.21 per share. Dividends paid in the first three months of 1998
represent approximately 39% of year-to-date earnings. Dividends paid in the
first quarter of 1997 were $988,000, or $0.20 per share. In February of 1998,
the Company's board of directors approved a 3-for-2 stock split that was paid in
the form of a stock dividend to shareholders of record on March 1, 1998. The
Split increased the number of shares outstanding by 1,630,635 shares. The
transaction had no effect on the par value of shares outstanding or on the
number of shares authorized.
The Company and the Trust Company are subject to various regulatory capital
requirements administered by Federal banking agencies. Management believes the
Company and the Trust Company meet all capital adequacy requirements to which
they are subject. The table below reflects the Company's capital position at
March 31, 1998, compared to the regulatory capital requirements for "well
capitalized" institutions.
REGULATORY CAPITAL ANALYSIS - March 31, 1998
====================================================================================
Actual Well Capitalized
Requirement
(Dollar Amounts In Thousands) Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------
Total Capital (to risk weighted assets) 62,125 16.8% 36,963 10.0%
Tier I Capital (to risk weighted assets) 57,500 15.6% 22,178 6.0%
Tier I Capital (to average assets) 57,500 9.0% 31,830 5.0%
====================================================================================
As illustrated above, the Company's capital ratios on March 31, 1998 remain well
above the minimum requirement for well capitalized institutions. The ratios show
continued improvement from the levels reported on December 31, 1997. As of
December 31, 1997, the Company's Total Capital as a percentage of Risk Weighted
assets was 16.4%; Tier I Capital to risk weighted assets was 15.1%; and Tier I
Capital to average assets was 8.9%.
RESERVE FOR LOAN AND LEASE LOSSES AND NONPERFORMING ASSETS
Management reviews the adequacy of the reserve for loan and lease losses in a
detailed and ongoing basis, giving consideration to various risk elements that
may affect losses in the loan portfolio. Based upon management's review, the
current reserve of $5.0 million is believed to be adequate to absorb inherent
losses in the loan and lease portfolios. Activity in the Company's reserve for
loan and lease losses during the first three months of 1998 and 1997 is
illustrated in the table below.
ANALYSIS OF THE RESERVE FOR LOAN/LEASE LOSSES (In thousands)
==========================================================================================
March 31, 1998 March 31, 1997
- ------------------------------------------------------------------------------------------
Average Loans and Leases Outstanding Year to Date 378,040 350,126
- ------------------------------------------------------------------------------------------
Beginning Balance 4,979 4,779
- ------------------------------------------------------------------------------------------
Provision for loan losses 151 414
Loans charged off (235) (498)
Loan recoveries 96 134
- ------------------------------------------------------------------------------------------
Net Charge-offs (139) (364)
- ------------------------------------------------------------------------------------------
Ending Balance 4,991 4,829
==========================================================================================
13
Annualized net charge-offs through the first three months of 1998 amounted to
0.15% of average loans outstanding during the period. This ratio compares to
0.42% for the three months ended March 31, 1997.
The level of nonperforming loans, as illustrated in the table below, reflects a
modest increase from the prior year. Over 85% of nonperforming loans as of March
31, 1998 are secured by real estate, with 52% secured by 1-4 family residential
properties.
NONPERFORMING ASSETS (In thousands)
===========================================================================================
March 31, 1998 March 31, 1997
- -------------------------------------------------------------------------------------------
Nonaccrual loans 1,855 1,184
Loans past due 90 days and accruing 29 64
Troubled debt restructuring not included above 0 0
- -------------------------------------------------------------------------------------------
Total nonperforming loans 1,884 1,248
- -------------------------------------------------------------------------------------------
Other real estate, net of allowances 100 136
- -------------------------------------------------------------------------------------------
Total nonperforming assets 1,984 1,384
===========================================================================================
Total nonperforming loans as a percent of total loans 0.50% 0.36%
Total nonperforming assets as a percentage of total assets 0.31% 0.22%
===========================================================================================
DEPOSITS AND OTHER LIABILITIES
Total Deposits were $493.3 million on March 31, 1998, representing 3% growth
over total deposits on December 31, 1997. Core deposits, which include demand
deposits, savings and money market accounts, and time deposits of less than
$100,000 represent the primary funding source for the Company. As of March 31,
1998, core deposits of $391.7 million represented 66.5% of total liabilities.
This compares to core deposits of $379.7 million, representing 66.6% of total
liabilities on December 31, 1997.
The Company uses large time deposits, securities sold under repurchase
agreements, Federal funds purchased, and other borrowings as additional funding
sources. Time Deposits of $100,000 and over increased from $97.0 million on
December 31, 1997, to $102.6 million on March 31, 1998. As of March 31, 1998,
total securities sold under repurchase agreements amounted to $54.3 million,
compared to $60.0 million at December 31, 1997. Other borrowings of $33.0
million represent a $6.0 million increase from December 31, 1997.
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 of $25.3 million as of March 31, 1998 is relatively
unchanged from December 31, 1997. Short term investments consisting of
securities due in one year or less declined from $28.3 million on December 31,
1997, to $24.3 million on March 31, 1998. Total securities pledged to secure
certain large deposits and securities sold under repurchase agreements remained
relatively unchanged from December 31, 1997 to March 31, 1998 at approximately
74% of total securities (before market value adjustments on available-for-sale
securities).
Additional liquidity is provided through the Trust Company's Federal Home Loan
Bank (FHLB) membership. As of March 31, 1998, the Trust Company had
approximately $57.6 million in unused borrowing capacity through established
lines of credit with the FHLB. The Trust Company has approximately $157.3
million in loans secured by first liens on residential properties that can be
used to secure additional borrowings from the FHLB.
14
MARKET RISK
Interest rate sensitivity 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 month 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 decision of the Company.
The Company's March 31, 1998, one-year cumulative rate sensitivity gap was a
negative 20% of total assets. This suggests earnings would benefit from a
declining interest rate environment, and would be vulnerable to a rising
interest rate environment. Management estimates that a 200 basis point rise in
interest rates over a one year period would result in a 4% decline in net
interest income, assuming no management actions to reposition the balance sheet
in reaction to a changing rate environment. Management believes the current
interest rate risk exposure is not material given the Company's current level of
earnings and capital.
YEAR 2000 CONSIDERATIONS
Management has initiated an enterprise-wide program to prepare the Company's
computer systems and software applications for the year 2000. The Company uses
purchased software products for all of its internal transaction processing
applications; therefore, no significant internal programming is necessary to
prepare these systems to handle transaction in the year 2000. The majority of
the Company's efforts in preparation for year 2000 processing relate to testing
purchased and outsourced processing systems, as well as updating databases.
The Company's primary application, which handles processing of loans, deposits,
safe deposit, and general ledger, has been certified as year 2000 compliant by
the vendor. It is anticipated that all critical internal applications will be
certified and tested by December 31, 1998. To date, confirmations have been
received from the Company's primary processing vendors that plans are being
developed to address processing of transactions in the year 2000.
The Company expects to incur internal staff costs as well as consulting and
other expenses related to preparing the systems for year 2000. Testing and
conversion of system applications is expected to cost approximately $125,000
over the next eighteen months. A significant portion of these costs are not
likely to be incremental costs, but rather will involve redeployment of existing
personnel related information technology resources.
15
TOMPKINS COUNTY TRUSTCO, INC.
AVERAGE CONSOLIDATED BALANCE SHEET AND NET INTEREST ANALYSIS
- -----------------------------------------------------------------------------------------------------------------------------
Quarter Quarter
Ended Ended
Mar-98 Mar-97
- -----------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
(DOLLAR AMOUNTS IN THOUSANDS) Balance Interest Yield/Rate Balance Interest Yield/Rate
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-earning assets
Certificates of deposit with other banks $0 $0 $0 $0
Securities (1) 70,729,004
U.S. Government Securities 180,366 3,021 6.79% 165,574 2,799 6.86%
State and municipal (2) 37,641 748 8.06% 39,052 780 8.10%
Other Securities (2) 5,867 99 6.84% 3,051 67 8.91%
----------------------------------------------------------------------------
Total securities 223,874 3,868 7.01% 207,677 3,646 7.12%
Federal Funds Sold 3,704 50 5.47% 9,208 118 5.20%
Loans, net of unearned income (3)
Residential real estate 159,565 3,169 8.05% 143,592 2,908 8.21%
Commercial Real Estate 68,020 1,555 9.27% 50,570 1,175 9.42%
Commercial Loans (2) 77,723 1,838 9.59% 82,366 1,918 9.44%
Consumer Loans 60,174 1,548 10.43% 61,954 1,622 10.62%
Direct Lease Financing 12,558 253 8.17% 11,645 238 8.29%
----------------------------------------------------------------------------
Total loans, net of unearned income 378,040 8,363 8.97% 350,126 7,861 9.11%
----------------------------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS 605,618 12,281 8.22% 567,011 11,625 8.31%
----------------------------------------------------------------------------
Noninterest-earning assets 32,594 33,259
----------- -------
TOTAL ASSETS 638,212 600,270
----------- -------
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES & SHAREHOLDERS' EQUITY
Deposits
Interest-bearing deposits
Interest checking, savings, and
market money 209,115 1,418 2.75% 196,490 1,320 2.72%
Time Dep > $100,000 101,629 1,383 5.52% 78,997 1,057 5.43%
Time Dep < $100,000 88,541 1,141 5.23% 86,199 1,110 5.22%
----------------------------------------------------------------------------
Total interest-bearing deposits 399,285 3,942 4.00% 361,686 3,487 3.91%
Federal funds purchased & securities sold
under agreements to repurchase 55,464 715 5.23% 84,288 1,059 5.10%
Other borrowings 31,105 437 5.70% 14,538 215 6.00%
----------------------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES 485,854 5,094 4.25% 460,512 4,761 4.19%
Non-interest bearing deposits 85,894 78,666
Accrued expenses and other liabilities 8,805 8,023
----------- -------
TOTAL LIABILITIES 580,553 547,201
SHAREHOLDERS' EQUITY 57,659 53,069
----------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 638,212 600,270
----------- -------
Interest rate spread 3.97% 4.12%
Impact of noninterest-bearing
liabilities 0.84% 0.79%
------------------- -------------------
Net interest income/margin on
earning assets $7,187 4.81% $6,864 4.91%
- -----------------------------------------------------------------------------------------------------------------------------
(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 41% to increase tax
exempt interest income to a taxable-equivalent basis.
(3) Nonaccrual loans are included in the average asset totals presented above.
Payments received on nonaccrual loans have been recognized as disclosed in
Note 6 to the condensed consolidated financial statements included.
16
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule.
(b) On February 12, 1998, the Company filed a Form 8-K with the Securities and
Exchange Commission, reporting under, Item 5 Other Events, the approval by the
Company's board of directors of a 3-for-2 stock split (the Split) in the form of
a stock dividend, with said Split payable on March 15, 1998, to shareholders of
record on March 1, 1998.
17
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: May 14, 1998
TOMPKINS COUNTY TRUSTCO, INC.
By: /s/ JAMES J. BYRNES
-----------------------------------------
James J. Byrnes
Chairman of the Board,
President and Chief Executive Officer
By: /s/ RICHARD D. FARR
-----------------------------------------
Richard D. Farr
Senior Vice President and
Chief Financial Officer
18
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGES
EXHIBIT 27 FINANCIAL DATA SCHEDULE
19