UNITED STATES 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, 2005 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 April 28, 2005 ---------------------------- -------------------------------- Common Stock, $.10 par value 8,954,479 shares
TOMPKINS TRUSTCO, INC. FORM 10-Q INDEX <TABLE> <CAPTION> PART I -FINANCIAL INFORMATION PAGE ---- <S> <C> Item 1 - Financial Statements (Unaudited) Condensed Consolidated Statements of Condition as of 3 March 31, 2005 and December 31, 2004 Condensed Consolidated Statements of Income for the three months ended March 31, 2005 and 2004 4 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004 5 Condensed Consolidated Statements of Changes in Shareholders' Equity for the three months ended March 31, 2005 and 2004 6 Notes to Unaudited Condensed Consolidated Financial Statements 7-10 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 11-19 Item 3 - Quantitative and Qualitative Disclosures about Market Risk 19-20 Item 4 - Controls and Procedures 20 Average Consolidated Balance Sheet and Net Interest Analysis 21 PART II - OTHER INFORMATION Item 1 - Legal Proceedings 22 Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 22 Item 3 - Defaults Upon Senior Securities 22 Item 4 - Submission of Matters to a Vote of Security Holders 22 Item 5 - Other Information 22 Item 6 - Exhibits 23 SIGNATURES 24 EXHIBIT INDEX 25 </TABLE> 2
PART I - FINANCIAL INFORMATION Item 1. Financial Statements CONDENSED CONSOLIDATED STATEMENTS OF CONDITION (In thousands, except share data) (Unaudited) <TABLE> <CAPTION> As of As of ASSETS 03/31/2005 12/31/2004 ------------ ------------ <S> <C> <C> Cash and noninterest bearing balances due from banks $ 44,031 $ 39,911 Interest bearing balances due from banks 1,352 1,021 Available-for-sale securities, at fair value 594,823 591,071 Held-to-maturity securities, fair value of $71,718 at March 31, 2005, and $70,526 at December 31, 2004 70,872 69,252 Loans and leases, net of unearned income and deferred costs and fees 1,193,530 1,172,148 Less: Reserve for loan/lease losses 12,920 12,549 - ------------------------------------------------------------------------------------------------------------------ Net Loans/Leases 1,180,610 1,159,599 Bank premises and equipment, net 34,119 33,118 Corporate owned life insurance 24,195 23,940 Goodwill 12,286 12,280 Other intangible assets 2,604 2,782 Accrued interest and other assets 40,808 37,321 - ------------------------------------------------------------------------------------------------------------------ Total Assets $ 2,005,700 $ 1,970,295 ================================================================================================================== LIABILITIES, MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES AND SHAREHOLDERS' EQUITY Deposits: Interest bearing: Checking, savings and money market $ 756,883 $ 784,850 Time 548,564 455,942 Noninterest bearing 300,753 320,081 - ------------------------------------------------------------------------------------------------------------------ Total Deposits 1,606,200 1,560,873 Federal funds purchased and securities sold under agreements to repurchase 141,506 153,715 Other borrowings 67,019 63,303 Other liabilities 19,974 19,937 - ------------------------------------------------------------------------------------------------------------------ Total Liabilities $ 1,834,699 $ 1,797,828 - ------------------------------------------------------------------------------------------------------------------ Minority interest in consolidated subsidiaries 1,485 1,465 Shareholders' equity: Common Stock - par value $.10 per share: Authorized 15,000,000 shares; Issued: 8,986,147 at March 31, 2005; and 8,980,049 at December 31, 2004 899 816 Surplus 118,379 75,837 Undivided profits 56,018 94,522 Accumulated other comprehensive (loss) income (4,701) 871 Treasury stock, at cost - 49,247 shares at March 31, 2005, and 48,719 shares at December 31, 2004 (1,079) (1,044) - ------------------------------------------------------------------------------------------------------------------ Total Shareholders' Equity $ 169,516 $ 171,002 - ------------------------------------------------------------------------------------------------------------------ Total Liabilities, Minority Interest in Consolidated Subsidiaries and Shareholders' Equity $ 2,005,700 $ 1,970,295 ================================================================================================================== </TABLE> Share data has been retroactively adjusted to reflect a 10% stock dividend paid on February 15, 2005. See accompanying notes to unaudited condensed consolidated financial statements. 3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) (Unaudited) <TABLE> <CAPTION> Three months ended 03/31/2005 03/31/2004 ------------ ------------ <S> <C> <C> INTEREST AND DIVIDEND INCOME Loans $ 18,659 $ 16,587 Balances due from banks 42 49 Federal funds sold 10 11 Available-for-sale securities 5,710 5,948 Held-to-maturity securities 544 437 - ---------------------------------------------------------------------------------------------------------------- Total Interest and Dividend Income 24,965 23,032 - ---------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Deposits: Time certificates of deposits of $100,000 or more 1,199 618 Other deposits 3,550 3,004 Federal funds purchased and securities sold under agreements to repurchase 1,064 1,092 Other borrowings 729 963 - ---------------------------------------------------------------------------------------------------------------- Total Interest Expense 6,542 5,677 - ---------------------------------------------------------------------------------------------------------------- Net Interest Income 18,423 17,355 - ---------------------------------------------------------------------------------------------------------------- Less: Provision for loan/lease losses 452 788 - ---------------------------------------------------------------------------------------------------------------- Net Interest Income After Provision for Loan/Lease Losses 17,971 16,567 - ---------------------------------------------------------------------------------------------------------------- NONINTEREST INCOME Trust and investment services income 1,358 1,326 Service charges on deposit accounts 1,849 1,847 Insurance commissions and fees 1,854 1,533 Card services income 603 558 Other service charges 654 904 Increase in cash surrender value of corporate owned life insurance 253 302 Gains on sale of loans 42 122 Other income 166 235 Net realized gain on available-for-sale securities 6 58 - ---------------------------------------------------------------------------------------------------------------- Total Noninterest Income 6,785 6,885 - ---------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSES Salary and wages 6,806 6,474 Pension and other employee benefits 2,024 1,871 Net occupancy expense of bank premises 1,045 954 Furniture and fixture expense 904 879 Marketing expense 547 397 Professional fees 325 306 Software licenses and maintenance 433 342 Cardholder expense 325 279 Amortization of intangible assets 161 178 Other operating expense 2,648 2,523 - ---------------------------------------------------------------------------------------------------------------- Total Noninterest Expenses 15,218 14,203 - ---------------------------------------------------------------------------------------------------------------- Income Before Income Tax Expense and Minority Interest in Consolidated Subsidiaries 9,538 9,249 - ---------------------------------------------------------------------------------------------------------------- Minority interest in consolidated subsidiaries 33 34 Income Tax Expense 3,092 3,067 - ---------------------------------------------------------------------------------------------------------------- Net Income $ 6,413 $ 6,148 - ---------------------------------------------------------------------------------------------------------------- Basic Earnings Per Share $ 0.72 $ 0.68 Diluted Earnings Per Share $ 0.70 $ 0.67 ================================================================================================================ </TABLE> Per share data has been retroactively adjusted to reflect a 10% stock dividend paid on February 15, 2005. See accompanying notes to unaudited condensed consolidated financial statements. 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) <TABLE> <CAPTION> Three months ended 03/31/2005 03/31/2004 ------------ ------------ <S> <C> <C> OPERATING ACTIVITIES Net income $ 6,413 $ 6,148 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan/lease losses 452 788 Depreciation and amortization premises, equipment, and software 924 893 Amortization of intangible assets 161 178 Earnings from corporate owned life insurance (253) (302) Net amortization on securities 475 532 Net realized gain on available-for-sale securities (6) (58) Net gain on sale of loans (42) (122) Proceeds from sale of loans 2,860 5,156 Loans originated for sale (2,582) (5,228) Tax benefit from stock option exercises 22 31 (Increase) decrease in accrued interest receivable (578) 35 Increase (decrease) in accrued interest payable 441 (53) Other, net 290 3,121 - ----------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 8,577 11,119 - ----------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Proceeds from maturities of available-for-sale securities 48,319 91,611 Proceeds from sales of available-for-sale securities 15,826 15,298 Proceeds from maturities of held-to-maturity securities 4,721 6,149 Purchases of available-for-sale securities (77,619) (141,469) Purchases of held-to-maturity securities (6,372) (9,800) Net increase in loans (21,699) (20,275) Purchases of bank premises and equipment (1,787) (885) Redemption of corporate owned life insurance 0 150 - ----------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (38,611) (59,221) - ----------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net (decrease) increase in demand, money market, and savings deposits (47,295) 51,096 Net increase in time deposits 92,622 25,542 Net (decrease) increase in securities sold under agreements to repurchase and Federal funds purchased (12,209) 1,108 Increase in other borrowings 4,000 0 Repayment of other borrowings (284) (5,735) Cash dividends (2,442) (2,448) Cash paid in lieu of fractional shares - 10% stock dividend (13) 0 Common stock repurchased and returned to unissued status 0 (256) Net proceeds from exercise of stock options 106 343 - ----------------------------------------------------------------------------------------------------------------- Net Cash Provided by Financing Activities 34,485 69,650 - ----------------------------------------------------------------------------------------------------------------- Net Increase in Cash and Cash Equivalents 4,451 21,548 Cash and cash equivalents at beginning of period 40,932 65,756 - ----------------------------------------------------------------------------------------------------------------- Total Cash & Cash Equivalents at End of Period $ 45,383 $ 87,304 ================================================================================================================= Supplemental Information: Cash paid during the year for: Interest $ 6,102 $ 5,730 Taxes 1,578 680 </TABLE> See accompanying notes to unaudited condensed consolidated financial statements. 5
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands, except share data) (Unaudited) <TABLE> <CAPTION> Accumulated Other Common Undivided Comprehensive Treasury Stock Surplus Profits Income (Loss) Stock Total - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Balances at January 1, 2004 $ 819 $ 76,926 $ 78,676 $ 3,015 ($ 466) $ 158,970 - ----------------------------------------------------------------------------------------------------------------------------------- Comprehensive Income: Net Income 6,148 6,148 Other comprehensive income 2,444 2,444 ------------ Total Comprehensive Income 8,592 ============ Cash dividends ($0.27 per share) (2,448) (2,448) Exercise of stock options, and related tax benefit (15,128 shares, net) 1 373 374 Common stock repurchased and returned to unissued status (6,087 shares) (1) (255) (256) - ----------------------------------------------------------------------------------------------------------------------------------- Balances at March 31, 2004 $ 819 $ 77,044 $ 82,376 $ 5,459 ($ 466) $ 165,232 =================================================================================================================================== - ----------------------------------------------------------------------------------------------------------------------------------- Balances at January 1, 2005 $ 816 $ 75,837 $ 94,522 $ 871 ($ 1,044) $ 171,002 - ----------------------------------------------------------------------------------------------------------------------------------- Comprehensive Income: Net Income 6,413 6,413 Other comprehensive loss (5,572) (5,572) ------------ Total Comprehensive Income 841 ============ Cash dividends ($0.27 per share) (2,442) (2,442) Exercise of stock options and related tax benefit (6,377 shares, net) 1 127 128 Effect of 10% stock dividend 82 42,380 (42,462) 0 Directors deferred compensation plan (528 shares, net) 35 (35) 0 Cash paid in lieu of fractional shares (279 shares) (13) (13) - ----------------------------------------------------------------------------------------------------------------------------------- Balances at March 31, 2005 $ 899 $ 118,379 $ 56,018 ($ 4,701) ($ 1,079) $ 169,516 =================================================================================================================================== </TABLE> Share and per share data have been retroactively adjusted to reflect a 10% stock dividend paid on February 15, 2005. 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, which together operate 34 banking offices in New York State, and to one insurance agency subsidiary, Tompkins Insurance Agencies, Inc. ("Tompkins Insurance"). 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 the 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 and related financial services. Tompkins offers trust and investment services through Tompkins Investment Services, a division of Trust Company. The Company also offers insurance services through Tompkins Insurance, an independent agency with a history of over 100 years of service to individual and business clients throughout western New York. At year-end 2004, Tompkins Insurance expanded its geographic presence through its acquisition of Banfield & Associates, Inc., an insurance agency in Ithaca, 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 unaudited condensed 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, 2005. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2004. 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 February 15, 2005. The Company applies Accounting Principles Board Opinion (APB Opinion) No. 25, "Accounting for Stock Issued to Employees," 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. Since the Company grants options with the exercise price equal to the fair value of the underlying stock at the grant date, there is no compensation expense recorded in net income. Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," 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
<TABLE> <CAPTION> Three months ended (In thousands except per share data) 03/31/2005 03/31/2004 - ---------------------------------------------------------------------------------------------------------- <S> <C> <C> Net Income: As reported $ 6,413 $ 6,148 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of all related tax effects 219 144 - ---------------------------------------------------------------------------------------------------------- Pro forma $ 6,194 $ 6,004 - ---------------------------------------------------------------------------------------------------------- Basic earnings per share: As reported $ 0.72 $ .068 - ---------------------------------------------------------------------------------------------------------- Pro forma 0.69 0.67 - ---------------------------------------------------------------------------------------------------------- Diluted earnings per share: As reported $ 0.70 $ 0.67 - ---------------------------------------------------------------------------------------------------------- Pro forma 0.68 0.66 ========================================================================================================== </TABLE> No stock options were granted during the first three months of 2005 and 2004. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model. In December 2004, The FASB issued SFAS No. 123R, "Share-Based Payment." This Statement is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation" and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees" and its related implementation guidance. SFAS No. 123R eliminates the ability to account for stock-based compensation using APB No. 25 and requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost will be recognized over the period during which an employee is required to provide service in exchange for the award. The grant-date fair value of employee stock options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of those instruments (unless observable market prices for the same or similar instruments are available). For equity awards that are modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. In the future, the notes to consolidated financial statements will include information to assist users of financial information to understand the nature of share-based payment transactions and the effects of those transactions on the financial statements. On April 14, 2005, the Securities and Exchange Commission amended the date for compliance with SFAS No. 123R to the first interim or annual reporting period of the first fiscal year beginning on or after June 15, 2005. SFAS No. 123R is therefore effective for the Company beginning January 1, 2006. The Company's method and timing of adoption has not yet been determined. 3. Earnings Per Share The Company follows the provisions of SFAS No. 128, "Earnings per Share" ("EPS"). A computation of Basic EPS and Diluted EPS for the three-month periods ending March 31, 2005 and 2004 is presented in the table below. <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------- Weighted Per Three months ended March 31, 2005 Net Income Average Shares Share (In thousands except share and per share data) (Numerator) (Denominator) Amount - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Basic EPS: Income available to common shareholders $ 6,413 8,953,452 $ 0.72 Effect of dilutive securities: Stock options 151,462 Diluted EPS: Income available to common shareholders plus assumed conversions $ 6,413 9,104,914 $ 0.70 ============================================================================================================= </TABLE> 8
3. Earnings Per Share (continued) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------- Weighted Per Three months ended March 31, 2004 Net Income Average Shares Share (In thousands except share and per share data) (Numerator) (Denominator) Amount - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Basic EPS: Income available to common shareholders $ 6,148 8,979,013 $ 0.68 Effect of dilutive securities: Stock options 155,305 Diluted EPS: Income available to common shareholders plus assumed conversions $ 6,148 9,134,318 $ 0.67 ============================================================================================================= </TABLE> * Share and per share data have been retroactively adjusted to reflect a 10% stock dividend paid on February 15, 2005. The effect of dilutive securities calculation for 2004 excludes stock options of 6,050 because the exercise price of the options was greater than the average market value of the Company's common stock during the period. 4. Comprehensive Income <TABLE> <CAPTION> Three months ended (In thousands) 03/31/2005 03/31/2004 - ---------------------------------------------------------------------------------------------------- <S> <C> <C> Net income $ 6,413 $ 6,148 - ---------------------------------------------------------------------------------------------------- Net unrealized holding (losses) gains during the period (5,568) 2,479 Memo: Pre-tax net unrealized holding (loss) gain (9,280) 4,131 Reclassification adjustment for net realized gain on available-for-sale securities (4) (35) Memo: Pretax net realized gain (6) (58) - ---------------------------------------------------------------------------------------------------- Other comprehensive (loss) income (5,572) 2,444 - ---------------------------------------------------------------------------------------------------- Total comprehensive income $ 841 $ 8,592 ==================================================================================================== </TABLE> 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, post-retirement plan (Life and Heath), and supplemental employee retirement plans (SERP). Components of Net Period Benefit Cost <TABLE> <CAPTION> Pension Benefits Life and Health SERP Benefits Three months ended Three months ended Three months ended (In thousands) 03/31/2005 03/31/2004 03/31/2005 03/31/2004 03/31/2005 03/31/2004 - ----------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Service cost $ 377 $ 345 $ 50 $ 44 $ 32 $ 18 Interest cost 434 409 81 77 99 83 Expected return on plan assets for the period (660) (584) 0 0 0 0 Amortization of transition (asset) liability 0 0 29 29 0 0 Amortization of prior service cost (33) (33) 2 2 26 26 Amortization of net loss 164 168 3 1 20 7 - ----------------------------------------------------------------------------------------------------------------------------- Net periodic benefit cost $ 282 $ 305 $ 165 $ 153 $ 177 $ 134 ============================================================================================================================= </TABLE> 9
The Company previously disclosed in its financial statements for the year ended December 31, 2004, included in its 2004 Annual Report on Form 10-K, that although it was not required to contribute to the pension plan in 2005, it may voluntarily contribute to the pension plan in 2005. There was no contribution to the pension plan through the first three months of 2005. 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 companies that provide prescription drug benefits to retirees. The new accounting requirements became effective at the beginning of 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 pending specific authoritative guidance on the accounting for the federal subsidy. The Company has reviewed the requirements of the Medicare Act relative to its post-retirement plan and has determined that the effects will not be material to the Company's consolidated financial statements. 6. Financial Guarantees 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 requires certain disclosures and potential liability recognition for the fair value at issuance of guarantees that fall within its scope. Based upon management'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. The Company extends standby letters of credit to its customers in the normal course of business. The standby letters of credit are generally short-term. As of March 31, 2005, the Company's maximum potential obligation under standby letters of credit was $28.2 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. 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations BUSINESS 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 were merged with and into Tompkins Insurance Agencies, Inc. ("Tompkins Insurance"), a wholly-owned subsidiary of Tompkins. Subsequently, the Company has acquired four additional insurance agencies, which have been merged into Tompkins Insurance. Tompkins Insurance primarily offers property and casualty insurance to individuals and businesses in Western New York State. Tompkins Insurance has eight offices located in a geographic area that closely matches the footprint of The Bank of Castile. At year-end 2004, Tompkins Insurance expanded its geographic presence into the Ithaca, New York market with the acquisition of Banfield and Associates, Inc., an insurance agency in Ithaca, New York. Further details pertaining to the mergers and acquisitions are presented in Note 6 to the notes to consolidated financial statements to the Company's audited consolidated financial statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2004. The Company completed construction of Tompkins Financial Center in Batavia, New York in the first quarter of 2005. The building will house the management of The Bank of Castile and Tompkins Insurance Agencies, Inc. Representatives from Tompkins Investment Services, a division of Tompkins Trust Company will also be available to discuss financial planning and management. Through its community bank subsidiaries, the Company provides traditional banking and related financial services, which constitute the Company's only reportable business segment. Banking services consist primarily of attracting deposits from the areas served by its 34 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, 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. 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. Other external factors affecting the Company's operating results are market rates of interest, the condition of financial markets, and both national and regional economic conditions. The Company's subsidiary banks operate 34 offices, including one limited-service office, serving communities in many upstate New York markets. Economic climates in these markets vary by region. The Western New York market served by The Bank of Castile was the most challenging in recent years, due to cutbacks and layoffs by some major employers in Rochester, New York. Conditions in this market appear to have improved. The economic climates in the Central New York markets served by Tompkins Trust Company and the lower Hudson Valley markets served by Mahopac National Bank remain favorable. 11
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 audited consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2004, and the unaudited condensed consolidated financial statements and notes included elsewhere in this Quarterly Report on Form 10-Q. 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 Quarterly Report on Form 10-Q 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, insurance companies, 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 Policy 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 (the "reserve") to be a critical accounting policy because of the uncertainty and subjectivity inherent in estimating the levels of reserve needed to cover probable credit losses within the loan portfolio and the material effect that these estimates can have on the Company's results of operations. The Company has developed a methodology to measure the amount of estimated loan loss exposure inherent in the loan portfolio to ensure that an adequate reserve is maintained. The methodology includes an estimate of exposure for the following: specifically reviewed and graded loans, historical loss experience by product type, past due and nonperforming loans, and other internal and external factors such as local and regional economic conditions, growth trends, and credit policy and underwriting standards. The methodology includes a review of loans considered impaired in accordance with the Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan", as well as other commercial loans and commercial mortgage loans that are evaluated using an internal rating system. An estimated exposure amount is assigned to these internally reviewed credits based upon a review of the borrower's financial condition, payment history, collateral adequacy, and business conditions. For commercial loans and commercial mortgage loans not specifically reviewed, and for more homogenous loan portfolios such as residential mortgage loans and consumer loans, estimated exposure amounts are assigned based upon historical loss experience as well as past due status. Lastly, an additional reserve is maintained based upon management's judgment and assessment of other quantitative and qualitative factors such as regional and local economic conditions and portfolio growth trends. Since the methodology is based upon historical experience and trends as well as management's judgment, factors may arise that result in different estimations. Significant factors that could give rise to changes in these estimates may include, but are not limited to, changes in economic conditions in the local area, concentration of risk, and declines in local property values. While management's evaluation of the reserve for loan/lease losses as of March 31, 2005, considers the reserve to be adequate, under adversely different conditions or assumptions, the Company would need to increase the reserve. 12
All accounting policies are important and the reader of the Company's financial statements should review these policies, described in Note 1 to the notes to consolidated financials statements to the Company's audited consolidated financial statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2004, to gain a greater understanding of how the Company's financial performance is reported. OVERVIEW For the quarter ended March 31, 2005, net income was $6.4 million, an increase of 4.3% compared to net income of $6.1 million for the same period in 2004. Diluted earnings per share were $0.70 for the first quarter of 2005, compared to $0.67 for the same period in 2004. Higher net interest income was the principal driver of net income growth in 2005 over the same period in 2004. Net interest income benefited from growth in average earnings assets, primarily loans, and growth in core deposits, including noninterest-bearing deposits. Noninterest income benefited from strong growth in insurance commissions and fees, while other key fee income categories were relatively flat compared to the same period in 2004. The Company's strategies include a commitment to community banking and a diversification of revenue sources, by offering a strong suite of products and services, including trust and investment services, insurance sales, card services, and other banking and related financial services, in addition to the interest and fees generated from loans and securities. Key performance measurements for the Company include return on average assets (ROA) and return on average shareholders' equity (ROE). Return on average assets for the quarter ended March 31, 2005, was 1.30%, which is unchanged from that reported for the same period in 2004. Return on average shareholders' equity for the first quarter of 2005 was 15.14%, compared to 15.30% for the same period in 2004. Although interest rates are low by historical standards, the rising interest rate environment is a primary challenge to the Company's operating performance in the short term. The low interest rate environment over the past two years has resulted in a decline in the Company's asset yields and a low cost of funds. As rates move upwards, the Company's funding sources, including deposits, are likely to reprice faster than its asset base, which would put pressure on the net interest margin in the short term. Asset quality for the first quarter 2005 showed some improvement when compared to the same period last year, with nonperforming assets decreasing to $6.6 million at March 31, 2005, from $8.6 million at March 31, 2004. The ratio of nonperforming assets to total assets improved from 0.44% at March 31, 2004, to 0.33% at March 31, 2005. Net charge-offs in the first quarter of 2005 were $81,000, compared to $374,000 in the first quarter of 2004. With the improvement in asset quality, the provision expense decreased to $452,000 in the first quarter of 2005 from $788,000 in the same period in 2004. RESULTS OF OPERATIONS Net Interest Income The Average Consolidated Balance Sheet and Net Interest Analysis included in this Quarterly Report on Form 10-Q illustrates the trend in average interest-earning assets and interest-bearing liabilities, and the corresponding yield or cost associated with each. The Company earned taxable-equivalent net interest income of $19.1 million for the three months ended March 31, 2005, an increase of 6.2% over the same period in 2004. Taxable-equivalent net interest income benefited from growth in average earning assets, primarily loans, higher interest rates on loans, and growth in deposits, which replaced higher cost non-core funding sources. Growth in commercial loans and commercial real estate loans coupled with an increase in the Prime Lending Rate led to an increase in the yield on average earning assets from 5.42% for the first quarter of 2004, to 5.61% for the same period in 2005. The net interest margin improved from 4.12% in the first quarter of 2004, to 4.18% in the first quarter of 2005. Average earning assets for the first quarter of 2005 increased by $99.9 million, or 5.7% over the same period in 2004. Growth in average earning assets was concentrated in commercial and residential lending products. Average total loans grew by $105.8 million, which included a $61.9 million increase in average commercial real estate loans, a $46.3 million increase in average residential real estate loans, and a $5.4 million increase in average commercial loans. Average commercial lending products represented 50.5% of average total loans at March 31, 2005, compared to 49.5% at March 31, 2004. Consumer loans and direct financing leases were down by $4.3 million and $2.7 million, respectively. The growth in the loan portfolio occurred across the Company's banking subsidiaries and is partially attributable to the new markets served by the four banking offices opened over the past three years. Average securities (excluding changes in unrealized gains and losses on available-for-sale securities) for the first quarter of 2005 were up 1.4% over the same period in 2004, while average liquid assets (Federal funds sold and interest-bearing bank balances) were down $15.0 million or 62.0% over the same period. These short-term liquid assets were used to support loan growth. 13
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 the first three months of 2005. Average core deposits for the three months ended March 31, 2005 increased by $65.5 million, or 5.7%, from an average balance of $1.1 billion for the first three months of 2004, to approximately $1.2 billion. Core deposits represent the Company's largest and lowest cost funding source, with average core deposits representing 66.2% of average liabilities for the first three months of 2005. This compares to 65.7% for the same period in 2004. Growth in average core deposits included a $30.4 million or 10.8% increase in noninterest-bearing deposits. Recent additions to the Company's branch network contributed to the growth in deposits. The cost of interest-bearing deposits increased to 1.51% for the first quarter of 2005, from 1.25% from the first quarter of 2004. 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 for the first quarter of 2005 were up by $19.5 million over average balances for the first quarter of 2004. This net increase reflects significant growth in time deposits of $100,000 or more, which was partially offset by declines in municipal money market accounts, securities sold under repurchase agreements, and other borrowings. Average time deposits of $100,000 or more for the first quarter of 2005 were up $77.9 million or 68.4% from the same period in 2004. There was some upward rate movement on some time deposit categories, which contributed to the growth in this deposit category. The Company used these deposits to replace other maturing, higher cost, non-core funding. Average other borrowings for the quarter ended March 31, 2005 were down $22.6 million or 26.6% and average securities sold under agreements to repurchase were down $39.5 million or 20.8% from the same period in 2004. 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. Management has developed a model to measure the amount of estimated loan loss exposure inherent in the loan portfolio to ensure that an adequate reserve is maintained. For the first quarter of 2005, the provision for loan/lease losses was $452,000, compared to $788,000 for the same period in 2004. The provision for loan/lease losses in 2005 benefited from lower net charge-offs and nonperforming loans compared to prior year. Net charge-offs were $81,000 for the first quarter of 2005 compared to $374,000 for the first quarter of 2004. Nonperforming loans and leases were $6.2 million, or 0.52% of total loans and leases at March 31, 2005 compared to $8.3 million, or 0.76% of total loans and leases at March 31, 2004. The reserve for loan/lease losses as a percentage of period end loans was 1.08% at March 31, 2005, compared 1.11% at March 31, 2004. 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 three months ended March 31, 2005, was $6.8 million, a decrease of 1.5% from the same period in 2004. For the first quarter of 2005, noninterest income represented 26.9% of total revenue, compared to 28.4% for the same period in 2004. Trust and investment services income was $1.4 million in the first quarter of 2005, which is up 2.4% over the same period in 2004. New business generation contributed to the growth in trust and investment services income for the first quarter of 2005. 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 and surrounding areas; however, Tompkins Investment Services has a growing client base in the Company's other market areas. The division currently manages assets for clients throughout the United States. Fees are largely based on the market value of assets managed by Tompkins Investment Services, and may vary by the mix of accounts between the various categories. Volatility in the equity and bond markets impact the market value of trust assets and the related investment fees. The market value of assets managed by, or in custody of, Tompkins Investment Services was $1.5 billion at March 31, 2005, up 7.8% from March 31, 2004. Trends for new business in trust and investments services remain positive. Service charges on deposit accounts of $1.8 million for the first three months of 2005 were flat compared to the same period in 2004. The largest component of this category is overdraft fees, which is largely driven by customer activity. A key factor affecting overdraft income is check volume, which has been trending downward as a result of increased debit card volumes and other electronic payment methods. The average dollar volume of noninterest-bearing accounts 14
increased by $30.4 million between March 31, 2005, and March 31, 2004, to $311.0 million. Average interest-bearing checking, savings and money market accounts were flat over the same period. Insurance commissions and fees were $1.9 million for the first three months of 2005, up 20.9% from the $1.5 million for the same period in 2004. The acquisition of Banfield & Associates, Inc., an insurance agency in Ithaca, New York, at year-end 2004 accounted for approximately 54.2% of the revenue growth for the first three months of 2005. Also contributing to the revenue growth over prior year were increased profit-sharing commissions from insurance underwriters and continued efforts by Tompkins Insurance to offer services to bank customers by sharing certain offices with The Bank of Castile. Card services income of $603,000 for the three months ended March 31, 2005, was up 8.1% from the $558,000 earned in the first three months of 2004. The increase in income over prior year was concentrated in debit card income and reflects an increased number of cardholders, higher transaction volume and fee increases. Card services continues to bolster revenues as technology has created opportunities to better serve customers with new products. This is a highly competitive business with many large national competitors. Other service charges were $654,000 for the first quarter of 2005 compared to $904,000 for the same period in 2004. Contributing to the $250,000 decrease in this category was an unfavorable adjustment in net merchant card processing income relating to a systems upgrade at our card processor, and lower loan related fees. Noninterest income for the first three months of 2005 includes $253,000 of income relating to increases in the cash surrender value of corporate owned life insurance (COLI). This compares to $302,000 for the same period in 2004. The COLI relates to life insurance policies covering certain senior officers of the Company. The Company's average investment in COLI was $24.1 million for the three-month period ended March 31, 2005, compared to $22.9 million for the same period in 2004. Although income associated with the insurance policies is not included in interest income, the COLI produced a tax-equivalent return of 7.10% for the first three months of 2005, compared to 7.81% for the same period in 2004. Net gains on loan sales were $42,000 in the first three months of 2005, compared with $122,000 during the same period last year. The recent increase in market interest rates has significantly slowed the volume of applications to refinance loans. Application volume is predominately purchase volume and the majority is being originated as portfolio loans since they meet the parameters for portfolio loans as established by the Company's Asset/Liability Management Committee. Loan sales decreased to $2.8 million in the first three months of 2005, down from $5.0 million in the first three months of 2004. Noninterest Expenses Total noninterest expenses were $15.2 million for the first three months of 2005, an increase of 7.1% over noninterest expenses of $14.2 million for the same period in 2004. The increase in noninterest expense in the first three months of 2005 is concentrated in personnel-related costs. Personnel-related expenses comprise the largest segment of noninterest expense, representing 58.0% of noninterest expense for the first three months of 2005 compared to 58.8% of noninterest expense for the first three months of 2004. The 5.8% 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 equivalent employees (FTEs), from 570 at March 31, 2004 to 582 at March 31, 2005, and annual salary adjustments. Healthcare costs and other postretirement benefits were also up over the same period in 2004, resulting in a $153,000 increase in pension and other employee benefits to $2.0 million for the first quarter of 2005. The increase in average FTEs is primarily a result of staffing requirements at the Company's newer offices and the recent insurance agency acquisition by Tompkins Insurance in 2004. Expenses related to bank premises and furniture and fixtures totaled $1.9 million for the first three months of 2005, an increase of 6.3% over the same period last year. Additions to the Company's branch network as well as higher real estate taxes, insurance and utility costs contributed to the increased expenses for bank premises and furniture and fixtures year-over-year. Marketing expense totaled $547,000 for the first three months of 2005, an increase of 37.8% over the same period in 2004. Planned marketing initiatives for 2005 accounted for the increase in marketing expenditures over the prior year. Software licenses and maintenance expenses were $433,000 in the first quarter of 2005 compared to $342,000 in the first quarter of 2004, an increase of 26.6%. Increases in annual maintenance contracts contributed to the increase in this category, as did expenses related to the implementation of a new procurement and accounts payable system. 15
Other noninterest expenses amounted to $2.6 million in the three-month period ended March 31, 2005, compared to $2.5 million for the same period in 2004. The increase was in numerous expense categories including business development, printing and supplies, collections, audits and examinations, legal fees, education and training, and donations. Income Tax Expense The provision for income taxes provides for Federal and New York State income taxes. The provision for the three months ended March 31, 2005, was $3.1 million, which was unchanged from the same period in 2004. The Company's effective tax rate for the first three months of 2005 was 32.5%, compared to 33.3% for the same period in 2004. The lower effective tax rate reflects higher levels of nontaxable income, such as income from investments in municipal bonds and tax-exempt loans and leases. FINANCIAL CONDITION The Company's total assets were $2.0 billion at March 31, 2005, representing an increase of $35.4 million over total assets reported at December 31, 2004. Asset growth included a $21.4 million increase in total loans and a $5.4 million increase in the carrying value of securities. Loan growth during the period is net of $2.8 million in sales of fixed rate residential mortgage loans during the first three months of 2005. Loan growth was concentrated in the commercial lending products and residential real estate loans. Deposits were up $45.3 million in the first three months of 2005, to $1.6 billion at March 31, 2005. Newer offices in the Company's branch network continued to support growth in deposits in the first three months of 2005. Capital Total shareholders' equity totaled $169.5 million at March 31, 2005, a decrease of $1.5 million from December 31, 2004. Surplus increased by $42.5 million, from $75.8 million at December 31, 2004, to $118.4 million at March 31, 2005; while undivided profits decreased $38.5 million from $94.5 million at December 31, 2004, to $56.0 million at March 31, 2005 and accumulated other comprehensive income decreased $5.6 million over the same period. The increase in surplus and decrease in undivided profits reflects the 10% stock dividend paid on February 15, 2005. The decrease in accumulated other comprehensive income relates to a decrease in unrealized gains on available-for-sale securities largely due to recent increases in interest rates. Cash dividends paid in the first three months of 2005 totaled approximately $2.4 million, representing 38.1% of year-to-date earnings. Cash dividends of $0.27 per share paid during the first quarter of 2005 were unchanged from the $0.27 per share paid during the same period in 2004. Dividends per share amounts were retroactively adjusted to reflect the 10% stock dividend paid on February 15, 2005. On July 27, 2004, the Company's board of directors approved a stock repurchase plan (the "2004 Plan") to replace the expiring 2002 Plan. The 2004 Plan authorizes the repurchase of up to 440,000 shares of the Company's outstanding common stock over a two-year period. There were no purchases under the 2004 Plan during the first quarter of 2005. As of March 31, 2005, remaining shares available for repurchase under the 2004 Plan were 440,000. 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 March 31, 2005, compared to the regulatory capital requirements for "well capitalized" institutions. <TABLE> <CAPTION> REGULATORY CAPITAL ANALYSIS - March 31, 2005 - -------------------------------------------------------------------------------------- Actual Well Capitalized Requirement (Dollar amounts in thousands) Amount Ratio Amount Ratio - -------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Total Capital (to risk weighted assets) $ 175,104 13.6% $ 128,961 10.0% Tier I Capital (to risk weighted assets) $ 162,184 12.6% $ 77,376 6.0% Tier I Capital (to average assets) $ 162,184 8.2% $ 99,176 5.0% ====================================================================================== </TABLE> As illustrated above, the Company's capital ratios on March 31, 2005, remain well above the minimum requirement for well capitalized institutions. As of March 31, 2005, the capital ratios for each of the Company's subsidiary banks also exceeded the minimum levels required to be considered well capitalized. 16
Reserve for Loan/Lease Losses and Nonperforming Assets Management reviews the adequacy of the reserve for loan/lease losses (the "reserve") on a regular basis. Management considers the accounting policy relating to the reserve to be a critical accounting policy, given the inherent uncertainty in evaluating the levels of the reserve required to cover credit losses in the 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 regulatory 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 three months of 2005 and 2004 is illustrated in the table below. <TABLE> <CAPTION> ANALYSIS OF THE RESERVE FOR LOAN/LEASE LOSSES (In thousands) - ------------------------------------------------------------------------------------------------ March 31, 2005 March 31, 2004 - ------------------------------------------------------------------------------------------------ <S> <C> <C> Average Loans and Leases Outstanding Year to Date $ 1,183,797 $ 1,078,043 - ------------------------------------------------------------------------------------------------ Beginning Balance 12,549 11,685 - ------------------------------------------------------------------------------------------------ Provision for loan/lease losses 452 788 Loans charged off (265) (576) Loan recoveries 184 203 - ------------------------------------------------------------------------------------------------ Net charge-offs (81) 373 - ------------------------------------------------------------------------------------------------ Ending Balance $ 12,920 $ 12,100 ================================================================================================ </TABLE> The reserve represented 1.08% of total loans and leases outstanding at March 31, 2005, down from 1.11% at March 31, 2004. The reserve coverage of nonperforming loans (loans past due 90 days and accruing, nonaccrual loans, and restructured troubled debt) increased from 1.46 times at March 31, 2004, to 2.09 times at March 31, 2005. Management is committed to early recognition of loan problems and to maintaining an adequate reserve. The level of nonperforming assets at March 31, 2005, and 2004, is illustrated in the table below. Nonperforming assets of $6.6 million as of March 31, 2005, reflect a decrease of $2.0 million from $8.6 million as of March 31, 2005. The current level of nonperforming assets was 0.33% of total assets at March 31, 2005, compared to 0.44% at March 31, 2004. Approximately $312,000 of nonperforming loans at March 31, 2005, were secured by U.S. Government guarantees, while $1.7 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 that continue to accrue interest to be potential problem loans/leases. At March 31, 2005, the Company's internal loan review function had identified 35 commercial relationships totaling $18.8 million, which it has classified as Substandard, which continue to accrue interest. As of December 31, 2004, the Company's internal loan review function had classified 25 commercial relationships totaling $13.9 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 March 31, 2005, approximately $3.8 million of these loans were backed by guarantees of U.S. government agencies. While in a performing status as of March 31, 2005, these loans exhibit certain risk factors, which have the potential to cause them to become nonperforming in the future. Accordingly, management's attention is focused on these credits, which are reviewed on at least a quarterly basis. 17
<TABLE> <CAPTION> NONPERFORMING ASSETS (In thousands) - --------------------------------------------------------------------------------------------------------- March 31, 2005 March 31, 2004 - --------------------------------------------------------------------------------------------------------- <S> <C> <C> Nonaccrual loans and leases $ 6,000 $ 8,062 Loans past due 90 days and accruing 6 46 Troubled debt restructuring not included above 185 195 - --------------------------------------------------------------------------------------------------------- Total nonperforming loans 6,191 8,303 - --------------------------------------------------------------------------------------------------------- Other real estate, net of allowances 359 299 - --------------------------------------------------------------------------------------------------------- Total nonperforming assets $ 6,550 $ 8,602 - --------------------------------------------------------------------------------------------------------- Total nonperforming loans/leases as a percent of total loans/leases 0.52% 0.76% - --------------------------------------------------------------------------------------------------------- Total nonperforming assets as a percentage of total assets 0.33% 0.44% ========================================================================================================= </TABLE> Deposits and Other Liabilities Total deposits of $1.6 billion at March 31, 2005 were up $45.3 million, or 2.9%, from December 31, 2004. The majority of the growth was in time deposits of $100,000 or more as the rates on certain of these deposit accounts moved higher. Core deposits, which represent the primary funding source for the Company, were down less than 1.0% from year-end 2004. Core deposits totaled $1.2 billion at March 31, 2005, and represented 65.1% of total liabilities. This compares to core deposits of $1.2 billion, representing 66.9% of total liabilities, at December 31, 2004. Non-core funding sources for the Company totaled $620.4 million at March 31, 2005, up from $575.9 million at December 31, 2004. Non-core funding at March 31, 2005 included municipal deposits, time deposits of $100,000 or more, term advances and repurchase agreements with the Federal Home Loan Bank (FHLB), Federal funds purchased, and retail repurchase agreements. The growth in non-core funding between December 31, 2004 and March 31, 2005 was almost entirely in time deposits of $100,000 or more, which were up $72.7 million to $222.8 million at March 31, 2005, from $150.1 million at December 31, 2004. The growth was primarily due to an increase in interest rates on certain time deposit products. The growth in time deposits of $100,000 or more was partially offset by a decrease in other non-core funding sources. The Company's liability for securities sold under agreements to repurchase ("repurchase agreements") amounted to $139.9 million at March 31, 2005, a decrease of $13.8 million from $153.7 million at December 31, 2004. Included in repurchase agreements at March 31, 2005, were $90.0 million in Federal Home Loan Bank ("FHLB") repurchase agreements and $49.9 million in retail repurchase agreements. Retail repurchase agreements are arrangements with local customers of the Company, in which the Company agrees to sell securities to the customer with an agreement to repurchase those securities at a specified later date. The Company's other borrowings include amounts owed to the FHLB. The Company increased its other borrowings from the FHLB by $3.7 million, to $67.0 million at March 31, 2005, from $63.3 million at year-end 2004. Included in the $157.0 million in term advances and repurchase agreements with the FHLB are $106.0 million of callable advances. The advances have call dates between 2005 and 2007 and are callable quarterly at the option of the FHLB. 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. The Company may also use borrowings as part of a growth strategy. The Company's Asset Liability Management Committee reviews periodic reports on liquidity and interest rate sensitivity. Cash and cash equivalents totaled $45.4 million as of March 31, 2005, up from $40.9 million at December 31, 2004. Short-term investments, consisting of securities due in one year or less, increased from $33.8 million at December 31, 2004, to $35.1 million on March 31, 2005. The Company also pledges securities as collateral for certain non-core funding sources. Securities carried at $522.1 million at December 31, 2004, and $541.9 million at March 31, 2005, were designated as pledged as collateral for public deposits or other borrowings, and pledged or sold under agreements to repurchase. Pledged securities represented 81.4% of total securities as of March 31, 2005, compared to 79.1% as of December 31, 2004. 18
Cash flow from the loan and investment portfolios provides a significant source of liquidity. These assets may have stated maturities in excess of one year, but have monthly principal reductions. Total mortgage-backed securities, at fair value, were $298.0 million at March 31, 2005 compared with $301.9 million at December 31, 2004. Using current prepayment assumptions, cash flow from the investment portfolio is estimated to be approximately $138.2 million over the next 12 months. Investments in residential mortgage loans, consumer loans, and leases totaled approximately $570.0 million at March 31, 2005. Aggregate amortization from monthly payments on these loan assets provides significant additional cash flow to the Company. Core deposits are a primary funding source and represent a low cost funding source obtained primarily through its branch network. In addition to core deposits, the Company uses non-core funding source to support asset growth. These non-core funding sources include time deposits of $100,000 or more, brokered time deposits, municipal money market accounts, securities sold under agreements to repurchase and term advances from the FHLB. Rates and terms are the primary determinants of the mix of these funding sources. Non-core funding sources, as a percentage of total liabilities, increased from 32.0% at December 31, 2004 to 33.8% at March 31, 2005. The increase in the dollar volume of non-core funding was concentrated in time deposits of $100,000 or more. Rates on these products have moved up due to higher market interest rates and competitive market conditions. Liquidity is enhanced by ready access to national and regional wholesale funding sources including Federal funds purchased, repurchase agreements, brokered certificates of deposit, and FHLB advances. Through its subsidiary banks, the Company has borrowing relationships with the FHLB and correspondent banks, which provide secured and unsecured borrowing capacity. At March 31, 2005, the unused borrowing capacity on established lines with the FHLB was $134.2 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 March 31, 2005, total unencumbered residential mortgage loans of the Company were $268.1 million. Additional assets may also qualify as collateral for FHLB advances upon approval of the FHLB. The Company has not identified any trends or circumstances that are reasonably likely to result in material increases or decreases in liquidity in the near term. 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. The Company manages interest rate risk using income simulation to measure interest rate risk inherent in its on-balance sheet and off-balance sheet financial instruments at a given point in time. The simulation models are used to estimate the potential effect of interest rate shifts on net interest income for future periods. Each quarter the Asset/Liability Management Committee reviews the simulation results to determine whether the exposure of net interest income to changes in interest rates remains within board-approved levels. The Committee also discusses strategies to manage this exposure and incorporates these strategies into the investment and funding decisions of the Company. The Company has not made use of derivatives, such as interest rate swaps, to manage its interest rate risk exposure. 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 March 31, 2005, 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 2.41%, while a 100 basis point decline in interest rates over a one-year period would result in a decrease in net interest income of 0.95%. This simulation assumes no balance sheet growth and no management action to address balance sheet mismatches. Over the past several years, balance sheet growth has helped to offset the effects of a lower interest rate environment and to increase net interest income. The negative exposure in a rising rate environment is mainly driven by the repricing assumptions of the Company's core deposit base and the lag in the repricing of the Company's adjustable rate assets. Longer-term, the impact of a rising rate environment is positive as the asset base continues to reset at higher levels, while the repricing of the rate sensitive liabilities moderates. The negative exposure in the 100 basis point decline scenario results from the Company's assets repricing downward more rapidly than the rates on the Company's interest-bearing liabilities, mainly deposits, as deposit rates are at low levels given the historically low interest rate environment over the several years. The aforementioned percentage changes in net interest income are from our base case scenario. In our most recent base case simulation, which assumes interest rates remain unchanged from the date of the simulation, showed a relatively flat net interest margin during 2005. Although the simulation model is useful in identifying potential exposure to interest rate movements, actual results may differ from those modeled as the repricing, maturity, and prepayment characteristics of financial instruments may change to a different degree than modeled. In addition, the model does not reflect actions that management may employ to manage its interest rate risk exposure. The Company's current liquidity profile, capital position, and growth prospects offer management a level of flexibility to take actions that could 19
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. The table below is a Condensed Static Gap Report, which illustrates the anticipated repricing intervals of assets and liabilities as of March 31, 2005. <TABLE> <CAPTION> Condensed Static Gap - March 31, 2005 Repricing Interval Cumulative (Dollar amounts in thousands) Total 0-3 months 3-6 months 6-12 months 12 months - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Interest-earning assets $1,868,410 $ 452,157 $ 74,369 $ 152,446 $ 678,972 Interest-bearing liabilities 1,513,972 581,776 125,402 180,589 887,767 - ----------------------------------------------------------------------------------------------------------------------- Net gap position (129,619) (51,033) (28,143) (208,795) - ----------------------------------------------------------------------------------------------------------------------- Net gap position as a percentage of total assets (6.46%) (2.54%) (1.40%) (10.41%) ======================================================================================================================= </TABLE> Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures The Company's management, including its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operations of the Company's disclosure controls and procedures (as defined in Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of March 31, 2005. Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer, concluded that as of the end of the period covered by this Report on Form 10-Q the Company's disclosure controls and procedures were effective in providing reasonable assurance that any information required to be disclosed by the Company in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that material information relating to the Company and its subsidiaries is made known to management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. Changes in Internal Control Over Financial Reporting There were no changes identified in connection with the Company's management's evaluation, which evaluation included the participation of the Company's Chief Executive Officer and Chief Financial Officer, of changes made in the Company's internal control over financial reporting that occurred during the Company's first quarter ended March 31, 2005, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 20
Average Consolidated Balance Sheet and Net Interest Analysis <TABLE> <CAPTION> Year to Date Period Ended Year to Date Period Ended Mar-05 Mar-04 - -------------------------------------------------------------------------------------------------------------------------------- Average Average Balance Average Balance Average (Dollar amounts in thousands) (YTD) Interest Yield/Rate (YTD) Interest Yield/Rate - -------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> ASSETS Interest-earning assets Certificates of deposit with other banks $ 7,465 $ 42 2.28% $ 19,319 $ 49 1.02% Securities (1) U.S. Government Securities 525,201 5,103 3.94% 523,166 5,316 4.09% State and municipal (2) 113,372 1,595 5.71% 98,299 1,495 6.12% Other Securities (2) 22,860 167 2.96% 30,793 151 1.97% ------------------------------------------------------------------------------ Total securities 661,433 6,865 4.21% 652,258 6,962 4.29% Federal Funds Sold 1,737 10 2.57% 4,867 11 0.91% Loans, net of unearned income (3) Real Estate 792,171 12,011 6.15% 684,870 10,340 6.07% Commercial Loans (2) 271,823 4,331 6.46% 266,410 3,762 5.68% Consumer Loans 100,890 2,068 8.31% 105,149 2,196 8.40% Direct Lease Financing 18,913 312 6.69% 21,614 344 6.40% ------------------------------------------------------------------------------ Total loans, net of unearned income 1,183,797 18,722 6.41% 1,078,043 16,642 6.21% ------------------------------------------------------------------------------ Total interest-earning assets 1,854,432 25,639 5.61% 1,754,487 23,664 5.42% ------------------------------------------------------------------------------ Other assets 142,270 146,323 ---------- ---------- Total assets $1,996,702 $1,900,810 ========== ========== - -------------------------------------------------------------------------------------------------------------------------------- LIABILITIES & SHAREHOLDERS' EQUITY EQUITY Deposits Interest-bearing deposits Interest bearing checking, savings, & money market 770,208 1,607 0.85% 771,268 1,336 0.70% Time Dep > $100,000 191,784 1,199 2.54% 113,882 618 2.18% Time Dep < $100,000 276,038 1,644 2.42% 248,304 1,459 2.36% Brokered Time Dep < $100,000 41,001 299 2.96% 28,605 209 2.94% ------------------------------------------------------------------------------ Total interest-bearing deposits 1,279,031 4,749 1.51% 1,162,059 3,622 1.25% Federal funds purchased & securities sold under agreements to repurchase 150,270 1,064 2.87% 189,967 1,092 2.31% Other borrowings 62,377 729 4.74% 84,973 963 4.56% ------------------------------------------------------------------------------ Total interest-bearing liabilities 1,491,678 6,542 1.78% 1,436,999 5,677 1.59% Noninterest bearing deposits 311,011 280,661 Accrued expenses and other liabilities 20,775 20,046 ---------- ---------- Total liabilities 1,823,464 1,737,706 Minority Interest 1,470 1,506 Shareholders' equity 171,768 161,598 ---------- ---------- Total liabilities and shareholders' equity $1,996,702 $1,900,810 ========== ========== Interest rate spread 3.83% 3.83% ------------------------ ------------------------ Net interest income/margin on earning assets $ 19,097 4.18% $ 17,987 4.12% Tax equivalent adjustment (674) (632) ---------- ---------- Net interest income per consolidated financial statements $ 18,423 $ 17,355 ================================================================================================================================ </TABLE> (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 for the year ended December 31, 2004. 21
PART II - OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Issuer Purchases of Equity Securities The following table includes all Company repurchases made on a monthly basis during the period covered by this Quarterly Report on Form 10-Q, including those made pursuant to publicly announced plans or programs. <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------------------------------- Maximum Number (or Approximate Dollar Total Number of Shares Value) of Shares Purchased as Part of that May Yet Be Total Number of Average Price Paid Publicly Announced Purchased Under the Shares Purchased Per Share Plans or Programs Plans or Programs Period (a) (b) (c) (d) - ---------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> January 1, 2005 through January 31, 2005 832 $48.76 0 440,000 February 1, 2005 through February 28, 2005 0 0 0 440,000 March 1, 2005 through March 31, 2005 0 0 0 440,000 - ---------------------------------------------------------------------------------------------------------------------------- Total 832 $48.76 0 440,000 - ---------------------------------------------------------------------------------------------------------------------------- </TABLE> The shares repurchased in the first quarter of 2005 were part of a directors deferred stock compensation plan pursuant to the Company's 1996 Stock Retainer Plan for Non-Employee Directors. Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None 22
Item 6. Exhibits 10.1 Summary of Compensation Arrangements for Named Executive Officers and Directors 31.1 Certification of the Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. 31.2 Certification of the Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. 32.1 Certification of the Chief Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, 18 U.S.C. Section 1350 (filed herewith). 32.2 Certification of the Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, 18 U.S.C. Section 1350 (filed herewith). 23
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 5, 2005 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 24
EXHIBIT INDEX - ------------- EXHIBIT NUMBER DESCRIPTION PAGES - -------------------------------------------------------------------------------- 10.1 Summary of Compensation Arrangements for Named Executive Officers and Directors 26 31.1 Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended 28 31.2 Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended 29 32.1 Certification of the Chief Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 as amended, 18 U.S.C. Section 1350 30 32.2 Certification of the Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 as amended, 18 U.S.C. Section 1350 31 25