SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-12709 TOMPKINS TRUSTCO INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) New York 16-1482357 ---------------------------- ------------------------------------ (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) The Commons, P.O. Box 460, Ithaca, NY 14851 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (607) 273-3210 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No [ ]. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes[X] No[ ] Indicate the number of shares of the Registrant's Common Stock outstanding as of the latest practicable date: Class Outstanding as of October 31, 2003 ---------------------------- ---------------------------------- Common Stock, $.10 par value 8,151,883 shares
TOMPKINS TRUSTCO, INC. FORM 10-Q INDEX PART I -FINANCIAL INFORMATION PAGE ---- Item 1 -Financial Statements (Unaudited) Condensed Consolidated Statements of Condition as of September 30, 2003 and December 31, 2002 3 Condensed Consolidated Statements of Income for the three months and nine months ended September 30, 2003 and 2002 4 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002 5 Condensed Consolidated Statements of Changes in Shareholders' Equity for the nine months ended September 30, 2003 and 2002 6 Notes to Unaudited Condensed Consolidated Financial Statements 7-10 Item 2 -Management's Discussion and Analysis of Financial Condition and Results of Operations 11-17 Item 3 -Quantitative and Qualitative Disclosures about Market Risk 18 Item 4 -Controls and Procedures 18 Average Consolidated Balance Sheet and Net Interest Analysis 19 PART II - OTHER INFORMATION Item 1 -Legal Proceedings 20 Item 2 -Changes in Securities and Use of Proceeds 20 Item 3 -Defaults on Senior Securities 20 Item 4 -Submission of Matters to a Vote of Securities Holders 20 Item 5 -Other Information 20 Item 6 -Exhibits and Reports on Form 8-K 20 SIGNATURES 21 EXHIBIT INDEX 22 2
PART I - FINANCIAL INFORMATION Item 1. Financial Statements CONDENSED CONSOLIDATED STATEMENTS OF CONDITION (In thousands, except share data) (Unaudited) <TABLE> <CAPTION> As of As of ASSETS 09/30/2003 12/31/2002 ----------- ----------- <S> <C> <C> Cash and noninterest bearing balances due from banks $ 70,888 $ 53,898 Interest bearing balances due from banks 2,173 10,000 Federal funds sold 0 400 Available-for-sale securities, at fair value 569,594 493,780 Held-to-maturity securities, fair value of $43,655 at September 30, 2003 and $40,260 at December 31, 2002 41,937 38,722 Loans and leases net of unearned income and deferred costs and fees 1,038,193 995,346 Less: Reserve for loan/lease losses 11,621 11,704 - -------------------------------------------------------------------------------------------------------------------- Net Loans/Leases 1,026,572 983,642 Bank premises and equipment, net 27,685 27,111 Corporate owned life insurance 22,155 21,382 Goodwill 10,761 10,684 Intangible assets 3,253 3,422 Accrued interest and other assets 30,062 27,162 - -------------------------------------------------------------------------------------------------------------------- Total Assets $ 1,805,080 $ 1,670,203 - -------------------------------------------------------------------------------------------------------------------- LIABILITIES, MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES AND SHAREHOLDERS' EQUITY Deposits: Interest bearing: Checking, savings and money market $ 748,956 $ 710,753 Time 378,482 379,603 Noninterest bearing 276,795 249,929 - -------------------------------------------------------------------------------------------------------------------- Total Deposits 1,404,233 1,340,285 Federal funds purchased and securities sold under agreements to repurchase 152,075 77,843 Other borrowings 72,341 81,930 Other liabilities 21,190 18,059 - -------------------------------------------------------------------------------------------------------------------- Total Liabilities 1,649,839 1,518,117 - -------------------------------------------------------------------------------------------------------------------- Minority interest in consolidated subsidiaries 1,525 1,489 Shareholders' equity: Common Stock - par value $.10 per share, authorized 15,000,000 shares Issued: 8,148,633 at September 30, 2003; and 8,211,815 at December 31, 2002 815 747 Surplus 75,800 45,997 Undivided profits 75,167 96,722 Accumulated other comprehensive income 2,400 7,597 Treasury stock, at cost - 26,981 shares at September 30, 2003, and December 31, 2002 (466) (466) - -------------------------------------------------------------------------------------------------------------------- Total Shareholders' Equity 153,716 150,597 - -------------------------------------------------------------------------------------------------------------------- Total Liabilities, Minority Interest in Consolidated Subsidiaries and Shareholders' Equity $ 1,805,080 $ 1,670,203 ==================================================================================================================== </TABLE> Share data has been retroactively adjusted to reflect a 10% stock dividend paid on August 15, 2003. See accompanying notes to unaudited condensed consolidated financial statements. 3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) (Unaudited) <TABLE> <CAPTION> Three months ended Nine months ended ------------------------ ----------------------- 09/30/2003 09/30/2002 09/30/2003 09/30/2002 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> INTEREST AND DIVIDEND INCOME Loans $ 17,342 $ 17,246 $ 51,338 $ 50,898 Balances due from banks 7 10 25 10 Federal funds sold 1 63 15 164 Available-for-sale securities 4,870 6,116 15,503 18,278 Held-to-maturity securities 374 378 1,154 1,084 - ----------------------------------------------------------------------------------------------------------------------------------- Total Interest and Dividend Income 22,594 23,813 68,035 70,434 - ----------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Deposits: Time certificates of deposits of $100,000 or more 680 739 2,166 2,436 Other deposits 3,007 4,876 10,322 14,481 Federal funds purchased and securities sold under agreements to repurchase 915 609 2,320 1,884 Other borrowings 956 1,038 3,093 3,121 - ----------------------------------------------------------------------------------------------------------------------------------- Total Interest Expense 5,558 7,262 17,901 21,922 - ----------------------------------------------------------------------------------------------------------------------------------- Net Interest Income 17,036 16,551 50,134 48,512 - ----------------------------------------------------------------------------------------------------------------------------------- Less: Provision for loan/lease losses 585 686 1,723 1,497 - ----------------------------------------------------------------------------------------------------------------------------------- Net Interest Income After Provision for Loan/Lease Losses 16,451 15,865 48,411 47,015 - ----------------------------------------------------------------------------------------------------------------------------------- NONINTEREST INCOME Trust and investment services income 1,092 930 3,138 3,100 Service charges on deposit accounts 1,863 1,698 5,215 4,580 Insurance commissions and fees 1,371 1,312 3,974 3,745 Other service charges 1,309 1,381 4,077 3,739 Increase in cash surrender value of corporate owned life insurance 262 348 777 948 Gains on sale of loans 24 236 849 541 Other income 429 323 655 660 Net realized (loss) gain on available-for-sale securities (241) 74 101 54 - ----------------------------------------------------------------------------------------------------------------------------------- Total Noninterest Income 6,109 6,302 18,786 17,367 - ----------------------------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSES Salary and wages 5,921 5,653 17,944 16,612 Pension and other employee benefits 1,642 1,408 5,197 4,381 Net occupancy expense of bank premises 837 779 2,521 2,239 Furniture and fixture expense 810 802 2,454 2,433 Amortization of intangible assets 170 212 544 676 Other operating expense 3,878 3,943 10,999 11,780 - ----------------------------------------------------------------------------------------------------------------------------------- Total Noninterest Expenses 13,258 12,797 39,659 38,121 - ----------------------------------------------------------------------------------------------------------------------------------- Income Before Income Tax Expense and Minority Interest in Consolidated Subsidiaries 9,302 9,370 27,538 26,261 - ----------------------------------------------------------------------------------------------------------------------------------- Minority interest in consolidated subsidiaries 34 34 101 101 Income Tax Expense 3,092 3,128 9,187 8,825 - ----------------------------------------------------------------------------------------------------------------------------------- Net Income $ 6,176 $ 6,208 $ 18,250 $ 17,335 - ----------------------------------------------------------------------------------------------------------------------------------- Basic Earnings Per Share $ 0.76 $ 0.76 $ 2.25 $ 2.13 Diluted Earnings Per Share $ 0.75 $ 0.75 $ 2.21 $ 2.08 =================================================================================================================================== </TABLE> Per share data has been retroactively adjusted to reflect a 10% stock dividend paid on August 15, 2003. See accompanying notes to unaudited condensed consolidated financial statements. 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) <TABLE> <CAPTION> Nine months ended ------------------------ 09/30/2003 09/30/2002 ---------- ---------- <S> <C> <C> OPERATING ACTIVITIES Net income $ 18,250 $ 17,335 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan/lease losses 1,723 1,497 Depreciation and amortization premises, equipment, and software 2,351 2,178 Amortization of intangible assets 544 676 Earnings from corporate owned life insurance, net (777) (913) Net amortization on securities 3,263 1,112 Net realized gain on available-for-sale securities (101) (54) Net gain on sale of loans (849) (541) Proceeds from sale of loans 42,155 25,134 Loans originated for sale (37,027) (24,554) Net loss (gain) on sales of bank premises and equipment 30 (8) ISOP/ESOP shares released for allocation 0 414 Increase in accrued interest receivable (184) (369) Decrease in accrued interest payable (59) (1,085) Other, net 3,440 941 - --------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 32,759 21,763 - --------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Proceeds from maturities of available-for-sale securities 250,898 166,410 Proceeds from sales of available-for-sale securities 93,512 13,134 Proceeds from maturities of held-to maturity securities 9,340 8,777 Purchases of available-for-sale securities (392,328) (277,006) Purchases of held-to-maturity securities (12,612) (18,526) Net increase in loans (88,595) (61,820) Proceeds from sale of bank premises and equipment 32 25 Purchases of bank premises and equipment (2,768) (3,318) Redemption of corporate owned life insurance 0 437 Net cash used in acquisitions (53) (21) - --------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (142,574) (171,908) - --------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net increase in demand, money market, and savings deposits 65,069 258,695 Net decrease in time deposits (1,121) (32,766) Net increase (decrease) in Federal funds purchased and securities sold under agreements to repurchase 74,232 (35,536) Increase in other borrowings 60,000 14,269 Repayment of other borrowings (69,668) (7,774) Cash dividends (6,647) (6,369) Cash paid in lieu of fractional shares - 10% stock dividend (13) 0 Common stock repurchased and returned to unissued status (3,712) (1,304) Net proceeds from exercise of stock options and related tax benefit 438 430 - --------------------------------------------------------------------------------------------------------- Net Cash Provided by Financing Activities 118,578 189,645 - --------------------------------------------------------------------------------------------------------- Net Increase in Cash and Cash Equivalents 8,763 39,500 Cash and Cash Equivalents at beginning of Period 64,298 44,117 Total Cash & Cash Equivalents at End of Period $ 73,061 $ 83,617 ========================================================================================================= Supplemental Information: Cash paid during the year for: Interest 17,960 23,007 Taxes 3,681 3,740 Non-cash Investing Activities: Securitization of Loans 39,663 0 </TABLE> See accompanying notes to unaudited condensed consolidated financial statements. 5
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands, except share and per share data) (Unaudited) <TABLE> <CAPTION> Accumulated Other Common Undivided Comprehensive Treasury Unallocated Stock Surplus Profits Income (Loss) Stock ISOP/ESOP Total =================================================================================================================================== <S> <C> <C> <C> <C> <C> <C> <C> Balances at January 1, 2002 $ 744 $ 45,456 $ 82,385 $ 3,039 ($ 466) ($ 86) $ 131,072 - ----------------------------------------------------------------------------------------------------------------------------------- Comprehensive Income: Net Income 17,335 17,335 Other comprehensive income 4,975 4,975 ---------- Total Comprehensive Income 22,310 ========== Cash dividends ($0.78/Share) (6,369) (6,369) Exercise of stock options and related tax benefit (29,103 shares, net) 3 427 430 Common stock repurchased and returned to unissued status (37,004 shares) (4) (1,300) (1,304) ESOP shares committed to be released for allocation (11,187 shares) 328 86 414 - ----------------------------------------------------------------------------------------------------------------------------------- Balances at September 30, 2002 $ 743 $ 44,911 $ 93,351 $ 8,014 ($ 466) $ 0 $ 146,553 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Balances at January 1, 2003 $ 747 $ 45,997 $ 96,722 $ 7,597 ($ 466) $ 0 $ 150,597 - ----------------------------------------------------------------------------------------------------------------------------------- Comprehensive Income: Net Income 18,250 18,250 Other comprehensive loss (5,197) (5,197) ---------- Total Comprehensive Income 13,053 ========== Cash dividends ($0.82/Share) (6,647) (6,647) Exercise of stock options and related tax benefit (32,915 shares, net) 3 435 438 Common stock repurchased and returned to unissued status (95,799 shares) (9) (3,703) (3,712) Effect of 10% stock dividend 74 33,071 (33,145) 0 Cash paid in lieu of fractional shares (298 shares) (13) (13) - ----------------------------------------------------------------------------------------------------------------------------------- Balances at September 30, 2003 $ 815 $ 75,800 $ 75,167 $ 2,400 ($ 466) $ 0 $ 153,716 - ----------------------------------------------------------------------------------------------------------------------------------- </TABLE> Share and per share data have been retroactively adjusted to reflect a 10% stock dividend paid on August 15, 2003. See accompanying notes to unaudited condensed consolidated financial statements. 6
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Business Tompkins Trustco, Inc. ("Tompkins" or the "Company"), is the corporate parent to three community banks, Tompkins Trust Company ("Trust Company"), The Bank of Castile, and The Mahopac National Bank ("Mahopac National Bank"), which together operate 34 banking offices in New York State market areas served by its subsidiary banks. Headquartered in Ithaca, New York, Tompkins is registered as a Financial Holding Company with the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended. Tompkins was organized in 1995, under the laws of the State of New York, as a bank holding company for Tompkins Trust Company, a commercial bank that has operated in Ithaca and surrounding communities since 1836. Through its community banking subsidiaries, the Company provides traditional banking services. Tompkins offers trust and investment services through Tompkins Investment Services, a division of Tompkins Trust Company. The Company also offers insurance services through its Tompkins Insurance Agencies, Inc. ("Tompkins Insurance") subsidiary, an independent agency with a history of over 100 years of service to individual and business clients throughout Western New York. Each Tompkins subsidiary operates with a community focus, meeting the needs of the unique communities served. 2. Basis of Presentation The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. In the application of certain accounting policies management is required to make assumptions regarding the effect of matters that are inherently uncertain. These estimates and assumptions affect the reported amounts of certain assets, liabilities, revenues, and expenses in the consolidated financial statements. Different amounts could be reported under different conditions, or if different assumptions were used in the application of these accounting policies. The accounting policy considered critical in this respect is the determination of the reserve for loan/lease losses. In management's opinion, the unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year ended December 31, 2003. The unaudited condensed consolidated financial statements should be read in conjunction with the Company's 2002 Annual Report on Form 10-K. The consolidated financial information included herein combines the results of operations, the assets, liabilities, and shareholders' equity of the Company and its subsidiaries. Amounts in the prior period's consolidated financial statements are reclassified when necessary to conform to the current period's presentation. All significant intercompany balances and transactions are eliminated in consolidation. 3. Earnings Per Share A computation of Basic Earnings Per Share ("EPS") and Diluted EPS for the three and nine month periods ending September 30, 2003 and 2002, is presented in the table below. <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------ Weighted * Per * Three months ended September 30, 2003 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 $6,176 8,112,827 $0.76 Effect of dilutive securities (Stock options) 157,771 Diluted EPS Income available to common shareholders plus assumed conversions $6,176 8,270,598 $0.75 ================================================================================================================== </TABLE> 7
3. Earnings Per Share (continued) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------ Weighted * Per * Three months ended September 30, 2002 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 $6,208 8,142,575 $0.76 Effect of dilutive securities (Stock options) 177,780 Diluted EPS Income available to common shareholders plus assumed conversions $6,208 8,320,355 $0.75 ================================================================================================================== - ------------------------------------------------------------------------------------------------------------------ Weighted * Per * Nine months ended September 30, 2003 Net Income Average Shares Share (In thousands except share and per share data) (Numerator) (Denominator) Amount - ------------------------------------------------------------------------------------------------------------------ Basic EPS Income available to common shareholders $18,250 8,125,410 $2.25 Effect of dilutive securities (Stock options) 140,757 Diluted EPS Income available to common shareholders plus assumed conversions $18,250 8,266,167 $2.21 ================================================================================================================== - ------------------------------------------------------------------------------------------------------------------ Weighted * Per * Nine months ended September 30, 2002 Net Income Average Shares Share (In thousands except share and per share data) (Numerator) (Denominator) Amount - ------------------------------------------------------------------------------------------------------------------ Basic EPS Income available to common shareholders $17,335 8,148,629 $2.13 Effect of dilutive securities (Stock options) 171,255 Diluted EPS Income available to common shareholders plus assumed conversions $17,335 8,319,884 $2.08 ================================================================================================================== </TABLE> * Share and per share data has been retroactively adjusted to reflect a 10% stock dividend paid on August 15, 2003. 4. Comprehensive Income (Loss) <TABLE> <CAPTION> Three months ended Nine months ended (In thousands) 09/30/2003 09/30/2002 09/30/2003 09/30/2002 - ---------------------------------------------------------------------------------------------------------------------------- Net Income $ 6,176 $ 6,208 $18,250 $17,335 - ---------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net unrealized holding (losses) gains during the period (4,573) 1,545 (5,136) 5,007 Memo: Pre-tax net unrealized holding (loss) gain (7,621) 2,575 (8,561) 8,345 Reclassification adjustment for net realized loss (gain) on available-for-sale securities 145 (44) (61) (32) Memo: Pretax net realized loss (gain) 241 (74) (101) (54) - ---------------------------------------------------------------------------------------------------------------------------- Other Comprehensive (Loss) Income (4,428) 1,501 (5,197) 4,975 - ---------------------------------------------------------------------------------------------------------------------------- Total Comprehensive Income $ 1,748 $ 7,709 $13,053 $22,310 ============================================================================================================================ </TABLE> 8
5. Financial Guarantees In November 2002, the FASB issued FASB Interpretation No. 45 (FIN No. 45), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others; an Interpretation of FASB Statement s No. 5, 57, and 107 and rescission of FASB Interpretation No. 34. FIN No. 45 requires certain disclosures and potential liability recognition for the fair value at issuance of guarantees that fall within its scope. Based upon the Company's interpretation of FIN No. 45, the Company currently does not issue any guarantees that would require liability recognition under FIN No. 45, other than standby letters of credit. As of September 30, 2003, the Company's maximum potential obligation under standby letters of credit was $12.1 million. Management uses the same credit policies to extend standby letters of credit that it uses for on-balance sheet lending decisions and may require collateral to support standby letters of credit based upon its evaluation of the counterparty. Management does not anticipate losses as a result of these transactions. 6. Recent Accounting Pronouncements ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS: In June 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company adopted SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 143 did not have a material effect on the Company's consolidated financial statements. ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES: In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of SFAS No. 146, effective January 1, 2003, did not have a material effect on the Company's financial statements. ACCOUNTING FOR STOCK-BASED COMPENSATION-TRANSITION AND DISCLOSURE, AN AMENDMENT OF SFAS NO. 123: In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-transition and Disclosure, an Amendment of SFAS No. 123. This statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002. The Company applies APB Opinion No. 25 and related interpretations in accounting for its stock option plan. Accordingly, compensation expense is recognized only if the exercise price of the option is less than the fair value of the underlying stock at the grant date. SFAS No. 123 requires companies not using a fair value based method of accounting for stock options to provide pro forma disclosure of net income and earnings per share as if the fair value method of accounting had been applied. Had the Company determined compensation cost based on the fair value of its stock options at the grant date under SFAS No. 123, the Company's net income and earnings per share would have been reduced to pro forma amounts indicated in the following table. <TABLE> <CAPTION> Three months ended Nine months ended (In thousands except per share data) 09/30/2003 09/30/2002 09/30/2003 09/30/2002 - ---------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net Income: As reported $ 6,176 $ 6,208 $ 18,250 $ 17,335 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of all related tax effects 147 73 408 235 Pro forma $ 6,029 $ 6,135 $ 17,842 $ 17,100 - ---------------------------------------------------------------------------------------------------------------- Basic earnings per share: As reported $ 0.76 $ 0.76 $ 2.25 $ 2.13 Pro forma 0.74 0.75 2.20 2.10 - ---------------------------------------------------------------------------------------------------------------- Diluted earnings per share: As reported $ 0.75 $ 0.75 $ 2.21 $ 2.08 Pro forma 0.73 0.74 2.16 2.06 ================================================================================================================ </TABLE> Per share data has been retroactively adjusted to reflect a 10% stock dividend paid on August 15, 2003. 9
The per share weighted average fair value of the 6,600 stock options granted during the first nine months of 2003 was $17.48. The per share weighted average fair value of the 177,100 stock options granted during the first nine months of 2002 was $14.75. Fair values were arrived at using the Black Scholes option-pricing model with the following assumptions: 2003 2002 - -------------------------------------------------------------------------------- Risk-free interest rate 3.68% 3.44% Expected dividend yield 2.80% 3.00% Volatility 44.58% 46.20% Expected life (years) 7.00 7.00 ================================================================================ In management's opinion the existing models do not necessarily provide a reliable measure of the fair value of its employee stock options because the Company's employee stock options have characteristics significantly different from those of traded options for which the Black-Scholes model was developed, and because changes in the subjective assumptions can materially affect fair value estimate. GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS TO OTHERS: In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation were applicable to guarantees issued or modified after December 31, 2002 and did not have a material effect on the Company's financial statements. CONSOLIDATION OF VARIABLE INTEREST ENTITIES: In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. For public enterprises with a variable interest in a variable interest entity created before February 1, 2003, the Interpretation applies to that enterprise no later than the beginning of the first interim or annual reporting period ending after December 15, 2003. The application of this Interpretation did not have a material effect on the Company's financial statements. The Interpretation requires certain disclosures in financial statements issued after January 31, 2003 if it is reasonably possible that the Company will consolidate or disclose information about variable interest entities when the Interpretation becomes effective. The Company did not have any disclosures required in these consolidated financial statements. AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement is generally effective for contracts entered into or modified and hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on its consolidated financial statements as a result of the adoption of this Statement. ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY: In May 2003, FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both a liability and equity. It requires that an issuer classify certain financial instruments as a liability, although the financial instrument may previously have been classified as equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material effect on the Company's consolidated financial statements. 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW Tompkins Trustco, Inc. ("Tompkins" or "the Company") was organized in 1995, as the parent company of Tompkins Trust Company, which traces its charter back to 1836. On December 31, 1999, the Company completed a merger with Letchworth Independent Bancshares Corporation ("Letchworth"), at which time Letchworth was merged with and into Tompkins. Upon completion of the merger, Letchworth's two subsidiary banks, The Bank of Castile and The Mahopac National Bank ("Mahopac National Bank"), became subsidiaries of Tompkins. Effective January 1, 2001, the Company completed the acquisition of 100% of the common stock of Austin, Hardie, Wise Agency, Inc. and Ernest Townsend & Son, Inc., in a cash and stock transaction accounted for as a purchase. The two agencies have been merged with and into Tompkins Insurance Agencies, Inc. ("Tompkins Insurance"), a wholly-owned subsidiary of Tompkins, offering property and casualty insurance to individuals and businesses in Western New York State. The seven offices of Tompkins Insurance include two offices that are shared with The Bank of Castile. Further details pertaining to mergers and acquisitions are presented in Note 2 of the Company's Consolidated Financial Statements included in the Company's 2002 Annual Report on Form 10-K. Through its community bank subsidiaries, the Company provides traditional banking related services, which constitute the Company's only business segment. Banking services consist primarily of attracting deposits from the areas served by its banking offices and using those deposits to originate a variety of commercial loans, consumer loans, real estate loans (including commercial loans collateralized by real estate), and leases, and providing trust and investment related services. The Company's principal expenses are interest on deposits, interest on borrowings, and operating and general administrative expenses, as well as provisions for loan/lease losses. Funding sources, other than deposits, include borrowings, securities sold under agreements to repurchase, and cash flow from lending and investing activities. The Company conducts trust and investment services through Tompkins Investment Services, a division of Tompkins Trust Company. Tompkins Investment Services provides trust services, investment management accounts, custody accounts, retirement plans and rollovers, estate settlement, and financial planning. Tompkins Insurance primarily provides services consisting of property and casualty insurance for individuals and businesses, which complement the services offered through the Company's banking subsidiaries. The following discussion is intended to provide the reader with a further understanding of the consolidated financial condition and results of operations of Tompkins and its operating subsidiaries. It should be read in conjunction with the Company's Form 10-K and Consolidated Financial Statement notes for the year ended December 31, 2002, and the unaudited condensed consolidated financial statements and notes included elsewhere in this report. Forward-Looking Statements This report may include forward-looking statements with respect to revenue sources, growth, market risk, and corporate objectives. The Company assumes no duty, and specifically disclaims any obligation, to update forward-looking statements, and cautions that these statements are subject to numerous assumptions, risks, and uncertainties, all of which could change over time. Actual results could differ materially from forward-looking statements. Critical Accounting Policies In the course of the Company's normal business activity, management must select and apply many accounting policies and methodologies that contribute to the financial results presented in the consolidated financial statements of the Company. Some of these policies are more critical than others. Management considers the accounting policy relating to the reserve for loan/lease losses (the "Reserve") to be a critical accounting policy because of the uncertainty and subjectivity inherent in estimating the levels of Reserve needed to cover probable credit losses within the loan portfolio and the material effect that these estimates can have on the Company's results of operations. Based upon management's evaluation of the Reserve as of September 30, 2003, management considers the Reserve to be adequate (Refer to "Reserve for Loan /Lease Losses and Nonperforming Assets", pg. 16). Under different conditions or assumptions, however, the Company would need to increase or decrease the Reserve. All accounting policies are important and the reader of the financial statements should review these policies, described in Note 1 of the Company's Consolidated Financial Statements included in the Company's Form 10-K for the year ended December 31, 2002, to gain a greater understanding of how the Company's financial performance is reported. 11
RESULTS OF OPERATIONS For the quarter ended September 30, 2003, net income was $6.2 million, which was approximately unchanged from the same period in 2002. Diluted earnings per share was $0.75 for third quarter of 2003, compared to $0.75 for the same period in 2002. Earnings per share numbers included in this report have been adjusted for a 10% stock dividend which was paid on August 15, 2003. Despite some declines from the third quarter of 2002, the Company's key performance ratios remain strong. Return on average assets (ROA) for the quarter ended September 30, 2003, was 1.38%, compared to 1.53% for the same period in 2002. Return on average shareholders' equity (ROE) for the third quarter of 2003 was 16.14%, compared to 17.22% for the same period in 2002. Net income for the nine month period ended September 30, 2003, was $18.3 million, an increase of 5.3% over the same period in 2002. Diluted earnings per share was $2.21 for the first nine months of 2003, compared to $2.08 for the same period in 2002. Return on average assets for the first nine months of 2003 was 1.40%, compared to 1.49% for the same period in 2002. Return on average shareholders' equity for the first nine months of 2003 was 16.14%, compared to 16.90% for the same period in 2002. The decrease in ROE is attributable to the 10.2% growth in average equity outpacing the 5.3% growth in net income. Net Interest Income The attached Average Consolidated Balance Sheet and Net Interest Analysis illustrates the trend in average interest-earning assets and interest-bearing liabilities, and the corresponding yield or cost associated with each. The Company earned tax-equivalent net interest income of $17.6 million for the three months ended September 30, 2003, compared to $17.1 million for the same period in 2002. An increased volume of earning assets helped offset a decline in net interest margin in the current quarter. The net interest margin for the third quarter declined from 4.61% in 2002, to 4.26% in 2003. Year-to-date September 30, 2003, the Company earned tax-equivalent net interest income of $51.9 million, an increase of 3.4% over the $50.2 million earned in the first nine months of 2002. Net interest margin for the nine months ended September 30, 2003, was 4.32%, down from 4.70% for the same period in 2002. The low interest rate environment has resulted in declines in both the yield on earning assets and the cost of interest-bearing liabilities. The yield on earning assets declined from 6.75% for the first nine months of 2002, to 5.81% for the same period in 2003. The cost of interest bearing liabilities declined from 2.51% to 1.82% over the same period. Average earning assets for the year-to-date period ended September 30, 2003, increased $177.6 million, or 12.4%, over the same period in 2002. Growth in earning assets was concentrated in residential real estate, securities, and commercial lending products. Application volume for residential mortgages over the past 12 months remained very strong, driven by a low interest rate environment. However, as a result of increasing rates in the third quarter of 2003, refinance application volume has slowed significantly. Year-to-date September 30, 2003, average residential mortgage loans increased by $63.0 million, or 18.2%, over the same period last year. The Company sold $41.3 million of residential mortgages over the first nine months of 2003 and securitized another $39.7 million of residential mortgages during the third quarter of 2003. The securitized loans are held in the Company's available-for-sale securities portfolio. Average securities (excluding changes in unrealized gains and losses on available-for-sale securities) increased by $77.1 million from the first nine months of 2002. Growth in the securities portfolio includes a $54.7 million increase in average U.S. Government mortgage-backed securities, and a $28.9 million increase in average U.S. Government agency securities. The low interest rate environment led to higher prepayments on mortgage-backed securities in 2003 than in 2002. Consequently, premium amortizations on mortgage-backed securities were also significantly greater in 2003 than in 2002. For the first nine months of 2003, net amortization on securities totaled $3.3 million compared with $1.1 million for the same period in 2002. Between September 30, 2002, and September 30, 2003, average balances for commercial real estate loans, commercial loans, and commercial leases increased by $26.7 million, $15.6 million, and $0.9 million, respectively. These commercial lending products represented 47.0% of average loans at September 30, 2003, down from 47.8% of average loans at September 30, 2002. Management continues to emphasize commercial services, as these commercial loan products are typically attractive to the Company from a yield and interest rate risk management perspective. The cost of interest-bearing liabilities declined from 2.51% for the nine months ended September 30, 2002, to 1.82% for the first nine months of 2003. Core deposits (total deposits, less: brokered deposits, municipal money market deposits, and 12
time deposits of $100,000 or more) remain a key source of funding for asset growth. Core deposits increased by $52.9 million, or 5.2%, from an average balance of $1.0 billion for the first nine months of 2002, to $1.1 billion for the same period in 2003. Core deposits represent the Company's largest and lowest cost funding source, with average core deposits representing 67.2% of average liabilities for the first nine months of 2003. This compares to 71.8% for the same period in 2002. Non-core funding sources, which include time deposits of $100,000 or more, brokered deposits, municipal money market deposits, Federal funds purchased, securities sold under agreements to repurchase (repurchase agreements), and other borrowings provide additional sources of funding to support asset growth. Average balances on these non-core funding sources increased by $119.5 million between September 30, 2002 and September 30, 2003. The primary component of non-core funding sources at September 30, 2003 was municipal money market deposits with an average balance of $153.2 million. Provision for Loan/Lease Losses The provision for loan/lease losses represents management's estimate of the expense necessary to maintain the reserve for loan/lease losses (the "Reserve") at an adequate level. The provision for loan/lease losses of $1.7 million for the first nine months of 2003, is up from $1.5 million for the same period in 2002. The increase in the provision for loan/lease losses in the first nine months of 2003 is attributable to an increase in net charge-offs, an increase in the dollar volume of nonperforming loans, as well as continued growth in the loan portfolio. Net charge-offs were $1.8 million for the first nine months of 2003, compared to $858,000 in 2002. The Reserve as a percentage of period end loans was 1.12% at September 30, 2003, and 1.18% at December 31, 2002. Noninterest Income Noninterest income is an important component of the Company's revenue mix. Noninterest income for the nine months ended September 30, 2003, was $18.8 million, an increase of 8.2% over the same period in 2002. Year-to-date September 30, 2003, noninterest income represented 27.3% of total revenue, compared to 26.4% for the same period last year. Excluding gains and losses on the sale of available-for-sale securities, noninterest income for the three months ended September 30, 2003, was $6.3 million, an increase of 1.9% over the $6.2 million earned in same period in 2002. Trust and Investment Services income was $3.1 million in the first nine months of 2003, which is in line with the first nine months of 2002. For the third quarter 2003, Trust and Investment Services income of $1.1 million was up approximately $162,000, or 17.4%, from the same period last year. Tompkins Investment Services generates fee income through managing trust and investment relationships, managing estates, providing custody services, and managing employee benefits plans. Services are primarily provided to customers in the Trust Company's market area of Tompkins County and surrounding areas; however, Tompkins Investment Services representatives serve clients in The Bank of Castile and Mahopac National Bank markets, and the division currently manages assets for clients in nearly 40 states. Trends for new business in trust and investments services remain positive. The general downward trend in national stock markets in 2002 and early 2003 had an unfavorable impact on trust commissions and fees. Improvements in the stock markets and revenue for the division were noted in the second and third quarters of 2003. The market value of assets managed by, or in custody of, Tompkins Investment Services was approximately $1.3 billion at September 30, 2003, up nearly 10.3% from December 31, 2002. Service charges on deposit accounts were $5.2 million for the nine month period ended September 30, 2003, compared to $4.6 million for the same period in 2002. For the third quarter of 2003, service charges on deposits were $1.9 million, an increase of $165,000, or 9.7%, over the same quarter last year. The increase in 2003 is due to the increase in deposit accounts, fee increases, and additional deposit related services. The average dollar volume of noninterest-bearing accounts increased by 9.8%, from $233.5 million for the nine months ended September 30, 2002, to $256.3 million for the nine months ended September 30, 2003. Commission and fee income generated through Tompkins Insurance was $4.0 million for the first nine months of 2003, up 6.1% from $3.7 million for the same period last year. For the third quarter of 2003, commission and fee income from Tompkins Insurance was $1.4 million, up 4.5% over the $1.3 million earned in the third quarter of 2002. Tompkins Insurance primarily offers property and casualty insurance to individuals and businesses in Western New York State. Rising premium costs instituted by underwriting insurance companies contributed to the growth in commissions and fees in 2003. Income associated with card services was $2.5 million for the nine months ended September 30, 2003, an increase of approximately 15.7% from the $2.2 million earned in the first nine months of 2002. Card services income was $844,000 in 13
the third quarter of 2003, an increase of 5.0% over income of $804,000 in the same quarter of 2002. An increased number of cardholders and higher transaction volume contributed to the increase in income in 2003 over 2002. Income from card services, included in other service charges on the consolidated statements of income, continues to be an important source of revenue. The Company continues to expand its product offerings to better serve the needs of customers. Card services products include traditional credit cards, purchasing cards, debit cards, and merchant card processing. The Company has corporate owned life insurance (COLI), which relates to life insurance and certain other benefits provided to certain senior officers of the Company and its subsidiaries. Increases in the cash surrender value of COLI are reflected as noninterest income, net of the related mortality expense. Noninterest income for the first nine months of 2003 includes $777,000 of income relating to increases in COLI. This compares to $948,000 for the same period in 2002. The decrease in earnings in the first nine months of 2003 compared to the same period in 2002 reflects lower returns on the insurance assets as a result of weak market conditions. The Company's average investment in COLI was $21.8 million for the nine month period ended September 30, 2003, compared to $20.6 million for the same period in 2002. The tax-equivalent return on COLI was 7.96% for the nine month period ended September 30, 2003, compared to 10.27% for the same period in 2002. During 2003, residential loan volume benefited from the historically low interest rate environment. As a result of strong application volume, which included a high percentage of applications to refinance loans currently serviced by the Company, the volume of residential mortgage loan sales increased from $24.6 million in the first nine months of 2002 to $41.3 million in 2003. Net gains from loan sales amounted to $849,000 for the nine months ended September 30, 2003, compared to $541,000 for the same period in 2002. The volume of refinancing applications slowed considerably in the third quarter of 2003 as a result of the upward movement in interest rates. The upward movement in rates also had a negative impact on gains on the sale of loans, which decreased from $236,000 in the third quarter of 2002 to $24,000 in the third quarter of 2003. Management has been proactive in evaluating the performance of individual securities within the securities portfolio given the recent volatility of interest rates. As a result, the Company sold $55.0 million of securities during the third quarter of 2003 and $93.5 million of securities during the first nine months of 2003. These securities were replaced with securities that management believes will perform better in the current interest rate environment. Realized losses on sale of available-for-sale securities amounted to $241,000 in the third quarter of 2003, compared to gains of $74,000 in the third quarter of 2002. For the nine months ended September 30, 2003, realized gains on available-for-sale securities were $101,000, compared to realized gains of $54,000 for the same period in 2002. Noninterest Expenses Total noninterest expenses were $39.7 million for the first nine months of 2003, an increase of $1.5 million, or 4.0%, over the same period in 2002. For the third quarter of 2003, noninterest expenses were $13.3 million, up 3.6% over the same quarter prior year. The increase in noninterest expense in the first nine months of 2003 is largely due to higher personnel-related costs. Personnel-related expenses comprise the largest segment of noninterest expense, representing approximately 58.4% of noninterest expense in the first nine months of 2003 compared to 55.1% in the same period of 2002. Personnel-related expenses of $23.1 million for the nine months ended September 30, 2003, reflect an increase of 10.2% from $21.0 million in the same period in 2002. The increase in personnel-related expenses is attributable to a variety of factors including an increased number of employees, and higher benefit related costs for medical insurance and pensions. A portion of the increase is attributable to the opening of two new Trust Company offices in Cortland (December 2002) and Auburn (July 2003), and a new Mahopac National Bank office in LaGrange (July 2002). Expenses related to bank premises and furniture and fixtures totaled $5.0 million for the first nine months of 2003, an increase of $303,000, or 6.5%, over the same period last year. The additions to Tompkins' branch network mentioned above contributed to the increase in bank premises and furniture and fixture expenses. Other operating expense amounted to $11.0 million in the first nine months of 2003, compared to $11.8 million for the same period in 2002. This category includes expenses for marketing, postage and courier, printing and supplies, professional fees, software licenses and maintenance, and audits and examinations. In addition, 2003 expenses include $200,000 of estimated losses resulting from fraudulent credit card transactions perpetrated against Tompkins Trust Company and several other banks in the third quarter of 2003. Comparison of year to date results with 2002 results are favorably impacted by a $250,000 reduction in expense related to residual losses on leased vehicles and $195,000 reduction in expense related to penalties on discretionary prepayment of FHLB borrowings. 14
Income Tax Expense The provision for income taxes provides for Federal and New York State income taxes. The provision for the nine months ended September 30, 2003, was $9.2 million, compared to $8.8 million in 2002. The increased provision is primarily due to increased levels of taxable income. The effective tax rate for the first nine months of 2003 was 33.4%, compared to 33.6% for the same period in 2002. FINANCIAL CONDITION The Company's total assets were $1.8 billion at September 30, 2003, representing an increase of $134.9 million over total assets reported at December 31, 2002. Asset growth since year end 2002 included a $42.8 million increase in total loans and a $79.0 million increase in securities. Loan growth is net of $41.3 million in sales of fixed rate residential mortgage loans and $39.7 million of residential mortgage loans that were securitized in the third quarter of 2003. These securitized loans are now held in the Company's available-for-sale mortgage-backed securities portfolio. The available-for-sale securities portfolio (at amortized cost) increased by $84.5 million since year end 2002. In addition to the securitization transaction, part of the increase in the securities portfolio reflects the use of short-term borrowings from the Federal Home Loan Bank ("FHLB") to purchase securities in advance of anticipated cash flows from the securities portfolio. During the first nine months of 2003, asset growth was supported by deposit growth, repurchase agreements and borrowings from the FHLB. Capital Total shareholders' equity was $153.7 million at September 30, 2003, an increase of $3.1 million over year end 2002. Surplus increased by $29.8 million, from $46.0 million at December 31, 2002, to $75.8 million at September 30, 2003; while undivided profits were down $21.6 million, and accumulated other comprehensive income was down $5.2 million over the same period. The increase in surplus and decrease in undivided profits is primarily due to the 10% stock dividend paid on August 15, 2003. Surplus was also affected by the repurchase of 95,799 shares of Tompkins common stock at a total cost of $3.7 million. The decrease in other comprehensive income relates to a decrease in unrealized gains on available-for-sale securities largely due to recent increases in interest rates. Cash dividends paid in the first nine months of 2003 totaled $6.6 million, representing 36.4% of year to date earnings. Cash dividends of $0.82 per share for the first nine months of 2003, were up from $0.78 per share for the same period in 2002. Dividends per share were retroactively adjusted to reflect the 10% stock dividend paid on August 15, 2003. In July 2002, the Company's Board of Directors approved a stock repurchase plan (the "Plan"), which authorizes the repurchase of up to 440,000 shares of Tompkins common stock over a two year period. During the first nine months of 2003, 95,799 shares have been repurchased under this Plan at an average price of $38.75. As of September 30, 2003, there were 342,881 shares available for repurchase under the Plan. The Company and its banking subsidiaries are subject to various regulatory capital requirements administered by Federal banking agencies. Management believes the Company and its subsidiaries meet all capital adequacy requirements to which they are subject. The table below reflects the Company's capital position at September 30, 2003, compared to the regulatory capital requirements for "well capitalized" institutions. <TABLE> <CAPTION> REGULATORY CAPITAL ANALYSIS - September 30, 2003 - --------------------------------------------------------------------------------------------------------- Actual Well Capitalized Requirement (Dollar amounts in thousands) Amount Ratio Amount Ratio - --------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Total Capital (to risk weighted assets) $152,226 13.6% $111,636 10.0% Tier I Capital (to risk weighted assets) $140,605 12.6% $ 66,981 6.0% Tier I Capital (to average assets) $140,605 8.0% $ 88,049 5.0% ========================================================================================================= </TABLE> As illustrated above, the Company's capital ratios on September 30, 2003, remain well above the minimum requirement for "well capitalized" institutions. As of September 30, 2003, the capital ratios for each of the Company's subsidiary banks also exceeded the minimum levels required to be considered "well capitalized". 15
Reserve for Loan/Lease Losses and Nonperforming Assets Management reviews the adequacy of the Reserve on a regular basis. Management considers the accounting policy relating to the Reserve to be a critical accounting policy, given the inherent uncertainty in evaluating the levels of the Reserve required to cover credit losses in the portfolio and the material effect that assumption could have on the results of operations. Factors considered in determining the adequacy of the Reserve and the related provision include: management's approach to granting new credit; the ongoing monitoring of existing credits by the internal and external loan review functions; the growth and composition of the loan and lease portfolio; comments received during the course of independent examinations; current local economic conditions; past due and nonperforming loan statistics; estimated collateral values; and a historical review of loan and lease loss experience. Based upon consideration of the above factors, management believes that the Reserve is adequate to provide for the risk of loss inherent in the current loan and lease portfolio. Activity in the Company's Reserve during the first nine months of 2003 and 2002 is illustrated in the table below. <TABLE> <CAPTION> ANALYSIS OF THE RESERVE FOR LOAN/LEASE LOSSES (In thousands) - ----------------------------------------------------------------------------------------------------------- September 30, 2003 September 30, 2002 - ----------------------------------------------------------------------------------------------------------- <S> <C> <C> Average Loans and Leases Outstanding Year to Date $1,023,888 $ 914,951 - ----------------------------------------------------------------------------------------------------------- Beginning Balance 11,704 10,706 - ----------------------------------------------------------------------------------------------------------- Provision for loan losses 1,723 1,497 Loans charged off (2,149) (1,194) Loan recoveries 343 336 - ----------------------------------------------------------------------------------------------------------- Net charge-offs 1,806 858 - ----------------------------------------------------------------------------------------------------------- Ending Balance $ 11,621 $ 11,345 =========================================================================================================== </TABLE> The Reserve represented 1.12% of total loans and leases outstanding at September 30, 2003, down slightly from 1.19% at September 30, 2002. The Reserve coverage of nonperforming loans (loans past due 90 days and accruing, nonaccrual loans, and restructured troubled debt) decreased from 1.60 times at September 30, 2002, to 1.25 times at September 30, 2003. The level of nonperforming assets at September 30, 2003 and 2002 is illustrated in the table below. Nonperforming assets of $9.6 million as of September 30, 2003, reflect an increase of $2.2 million from September 30, 2002. Despite the increase in nonperforming assets from September 30, 2002, the current level of nonperforming assets remains modest at 0.53% of total assets. The increase in nonperforming loans included several large commercial credits totaling $1.7 million that were brought current for principal and interest in October 2003. Approximately $462,000 of the nonperforming loans at September 30, 2003, were secured by U.S. Government guarantees, while $2.0 million were secured by one to four family residential properties. Potential problem loans/leases are loans/leases that are currently performing, but where known information about possible credit problems of the related borrowers causes management to have doubt as to the ability of such borrowers to comply with the present loan payment terms and may result in disclosure of such loans/leases as nonperforming at sometime in the future. Management considers loans/leases classified as Substandard, which continue to accrue interest, to be potential problem loans/leases. The Company, through its internal loan review function had identified 25 commercial relationships totaling $11.0 million at September 30, 2003, and 27 commercial relationships totaling $6.9 million at December 31, 2002, which it has classified as Substandard, which continue to accrue interest. These loans remain in a performing status due to a variety of factors, including payment history, the value of collateral supporting the credits, and personal or government guarantees. These factors, when considered in aggregate, give management reason to believe that the current risk exposure on these loans is not significant. Approximately $500,000 of these loans are backed by guarantees of U.S. government agencies. While in a performing status as of September 30, 2003, these loans exhibit certain risk factors, which have the potential to cause them to become nonperforming. Accordingly, management's attention is focused on these credits, which are reviewed on at least a quarterly basis. Management is committed to early recognition of loan problems and to maintaining an adequate reserve. 16
<TABLE> <CAPTION> NONPERFORMING ASSETS (In thousands) - ---------------------------------------------------------------------------------------------------------- September 30, 2003 September 30, 2002 - ---------------------------------------------------------------------------------------------------------- <S> <C> <C> Nonaccrual loans $ 9,000 $ 6,891 Loans past due 90 days and accruing 19 40 Troubled debt restructuring not included above 250 180 - ---------------------------------------------------------------------------------------------------------- Total nonperforming loans 9,269 7,111 - ---------------------------------------------------------------------------------------------------------- Other real estate, net of allowances 343 282 - ---------------------------------------------------------------------------------------------------------- Total nonperforming assets $ 9,612 $ 7,393 - ---------------------------------------------------------------------------------------------------------- Total nonperforming loans as a percent of total loans 0.89% 0.75% Total nonperforming assets as a percentage of total assets 0.53% 0.45% ========================================================================================================== </TABLE> Deposits and Other Liabilities Total deposits were $1.4 billion on September 30, 2003, up $63.9 million, or 4.8%, from December 31, 2002. Core deposits, which include demand deposits, savings accounts, non-municipal money market accounts, and time deposits of less than $100,000, represent the primary funding source for the Company. As of September 30, 2003, core deposits of $1.2 billion represented 69.5% of total liabilities. This compares to core deposits of $1.0 billion, representing 68.3% of total liabilities at December 31, 2002. Recent additions to the Tompkins branch network have helped support deposit growth. New offices include the LaGrange office (July 2002) of the Mahopac National Bank, and the Cortland (December 2002) and Auburn (July 2003) offices of the Trust Company. Non-core funding sources for the Company include: time deposits greater than $100,000, municipal money market deposits, brokered deposits, securities sold under repurchase agreements, Federal funds purchased, and other borrowings. These non-core funding sources totaled $482.2 million at September 30, 2003, up $18.0 million from $464.2 million at December 31, 2002. The majority of the increase was in securities sold under agreements to repurchase and other borrowings. Securities sold under agreements to repurchase, totaled $152.1 million at September 30, 2003, compared to $77.8 million at December 31, 2002. Other borrowings, consisting of term borrowings from the FHLB, decreased from $81.9 million at December 31, 2002, to $72.3 million at September 30, 2003. Municipal money market deposits decreased from $172.2 million at December 31, 2002, to $129.7 million at September 30, 2003. Liquidity Liquidity represents the Company's ability to efficiently and economically accommodate decreases in deposits and other liabilities, and fund increases in assets. The Company uses a variety of resources to meet its liquidity needs, which include cash and cash equivalents, short term investments, cash flow from lending and investing activities, deposit growth, securities sold under repurchase agreements, and borrowings. Cash and cash equivalents totaled $73.1 million as of September 30, 2003, up from $64.3 million at December 31, 2002. Short term investments, consisting of securities due in one year or less decreased from $24.8 million on December 31, 2002, to $19.2 million on September 30, 2003. Securities pledged to secure certain large deposits and securities sold under repurchase agreements were 71.7% of total securities as of September 30, 2003, compared to 71.8% as of December 31, 2002. Liquidity is enhanced by ready access to national and regional wholesale funding sources including Federal funds purchased, repurchase agreements, negotiable certificates of deposit, and FHLB advances. Through its subsidiary banks, the Company has borrowing relationships with the FHLB and correspondent banks, which provide secured and unsecured borrowing capacity. At September 30, 2003, the unused borrowing capacity on established lines with the FHLB was $162.7 million. As members of the FHLB, the Company's subsidiary banks can use certain unencumbered mortgage-related assets to secure additional borrowings from the FHLB. At September 30, 2003, total unencumbered residential mortgage loans of the Company were $257.9 million. Additional assets may also qualify as collateral for FHLB advances upon approval of the FHLB. 17
Item 3. Quantitative and Qualitative Disclosure About Market Risk Interest rate risk is the primary market risk category associated with the Company's operations. Interest rate risk refers to the volatility of earnings caused by changes in interest rates. At least quarterly, the Asset/Liability Management Committee estimates the likely impact on earnings resulting from various changing interest rate scenarios. The findings of the Committee are incorporated into the investment and funding decisions of the Company. The Condensed Static Gap Table below illustrates the anticipated repricing intervals of assets and liabilities as of September 30, 2003. <TABLE> <CAPTION> Condensed Static Gap - September 30, 2003 Repricing Interval Cumulative (Dollar amounts in thousands) Total 0-3 months 3-6 months 6-12 months 12 months - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Interest-earning assets $1,647,897 $ 424,882 $ 127,597 $ 206,973 $ 759,452 Interest-bearing liabilities 1,351,854 507,465 97,230 136,050 740,745 - --------------------------------------------------------------------------------------------------------------------------- Net gap position (82,583) 30,367 70,923 18,707 - --------------------------------------------------------------------------------------------------------------------------- Net gap position as a percentage of total assets (4.58%) 1.68% 3.93% 1.04% - --------------------------------------------------------------------------------------------------------------------------- </TABLE> The Company's Board of Directors has established a policy pursuant to which the Company's interest rate risk exposure will remain within a range whereby net interest income will not decline by more than 10% in one year as a result of a 200 basis point change in rates. Based upon the simulation analysis performed as of September 30, 2003, a 200 basis point upward shift in interest rates over a one-year time frame would result in a one-year decline in net interest income of approximately 1.63%, assuming no balance sheet growth and no management action to address balance sheet mismatches. The same simulation indicates that a 100 basis point decline in interest rates over a one-year period would result in a decrease in net interest income of 2.22%. Although the simulation model suggests a relatively modest exposure to changes in interest rates, the base scenario (which assumes interest rates remain at current levels) indicates a downward trending net interest margin due to more assets repricing than liabilities in the current low rate environment. Given the expectation of a lower net interest margin over the next 12 months, net interest income growth will be largely dependent upon continued growth in earning assets. Although the simulation model is useful in identifying potential exposure to interest rate movements, the Company's current liquidity profile, capital position, and growth prospects, offer a level of flexibility for management to take actions that could offset some of the negative effects of unfavorable movements in interest rates. Management believes the current exposure to changes in interest rates is not significant in relation to the earnings and capital strength of the Company Item 4. Controls and Procedures The Company's management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) (the "Exchange Act") as of the end of the period covered by this report. Based upon that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that, as of the end of such period, the Company's disclosure controls and procedures were effective in timely alerting them to any material information relating to the Company and its subsidiaries required to be included in the Company's Exchange Act filings. There were no significant changes made in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the Evaluation Date. 18
TOMPKINS TRUSTCO, INC. Average Consolidated Balance Sheet and Net Interest Analysis <TABLE> <CAPTION> Quarter Ended Year to Date Period Ended Year to Date Period Ended Sept-03 Sept-03 Sept-02 - ----------------------------------------------------------------------------------------------------------------------------------- Average Average Average Balance Average Balance Average Balance Average (Dollar amounts in thousands) (QTD) Interest Yield/Rate (YTD) Interest Yield/Rate (YTD) Interest Yield/Rate - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> ASSETS Interest-earning assets Interest-bearing balances due from banks Securities (1) $ 3,838 $ 7 0.72% $ 3,086 $ 25 1.08% $ 549 $ 10 2.44% U.S. Government Securities 471,993 4,244 3.57% 459,014 13,293 3.87% 375,395 15,562 5.54% State and municipal (2) 89,738 1,405 6.21% 87,352 4,254 6.51% 78,540 4,144 7.05% Other Securities (2) 29,155 138 1.88% 31,562 749 3.17% 46,896 1,230 3.51% --------------------------------------------------------------------------------------------- Total securities 590,886 5,787 3.89% 577,928 18,296 4.23% 500,831 20,936 5.59% Federal Funds Sold 1,024 1 0.39% 1,885 15 1.06% 12,871 164 1.70% Loans, net of unearned income (3) Real Estate 657,942 10,434 6.29% 639,250 31,207 6.53% 542,612 30,028 7.40% Commercial Loans (2) 263,788 4,279 6.44% 259,356 12,002 6.19% 243,766 12,134 6.66% Consumer Loans 102,576 2,321 8.98% 102,388 7,090 9.26% 109,477 7,728 9.44% Direct Lease Financing 21,781 347 6.32% 22,894 1,152 6.73% 19,096 1,119 7.83% --------------------------------------------------------------------------------------------- Total loans, net of unearned income 1,046,087 17,381 6.59% 1,023,888 51,451 6.72% 914,951 51,009 7.45% --------------------------------------------------------------------------------------------- Total interest-earning assets 1,641,835 23,176 5.60% 1,606,787 69,787 5.81% 1,429,202 72,119 6.75% --------------------------------------------------------------------------------------------- Other assets 136,613 137,428 126,679 ---------- ---------- ---------- Total assets $1,778,448 $1,744,215 $1,555,881 ========== ========== ========== - ----------------------------------------------------------------------------------------------------------------------------------- LIABILITIES & SHAREHOLDERS' EQUITY - ---------------------------------- Deposits Interest-bearing deposits Interest bearing checking, savings, & money market 716,412 1,189 0.66% 716,993 4,570 0.85% 642,600 7,489 1.56% Time Dep > $100,000 113,652 680 2.37% 114,986 2,166 2.52% 106,082 2,436 3.07% Time Dep < $100,000 250,076 1,618 2.57% 250,163 5,157 2.76% 245,719 6,611 3.60% Brokered Time Dep < $100,000 24,758 200 3.20% 22,750 595 3.50% 13,533 381 3.76% --------------------------------------------------------------------------------------------- Total interest-bearing deposits 1,104,898 3,687 1.32% 1,104,892 12,488 1.51% 1,007,934 16,917 2.24% Federal funds purchased & securities sold under agreements to repurchase 149,897 915 2.42% 120,586 2,320 2.57% 75,148 1,884 3.35% Other borrowings 76,726 956 4.94% 89,861 3,093 4.60% 82,614 3,121 5.05% --------------------------------------------------------------------------------------------- Total interest-bearing liabilities 1,331,521 5,558 1.66% 1,315,339 17,901 1.82% 1,165,696 21,922 2.51% Noninterest bearing deposits 272,982 256,263 233,492 Accrued expenses and other liabilities 20,580 19,915 18,028 ---------- ---------- ---------- Total liabilities 1,625,083 1,591,517 1,417,216 Minority Interest 1,510 1,515 1,515 Shareholders' equity 151,855 151,183 137,150 ---------- ---------- ---------- Total liabilities and shareholders' equity $1,778,448 $1,744,215 $1,555,881 ---------- ---------- ---------- Interest rate spread 3.94% 3.99% 4.24% ----------------- ------------------ ------------------ Net interest income/margin on earning assets $17,618 4.26% $51,886 4.32% $50,197 4.70% Tax Equivalent Adjustment (582) (1,752) (1,685) -------- -------- -------- Net interest income per consolidated financial statements $17,036 $50,134 $48,512 - ----------------------------------------------------------------------------------------------------------------------------------- </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 dated December 31, 2002. 19
PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is involved in legal proceedings in the normal course of business, none of which are expected to have a material adverse impact on the financial condition or operations of the Company. Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults on Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 31.1 Certification of the Chief Executive Officer as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Chief Financial Officer as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act 2002. (b) Reports on Form 8-K On July 24, 2003, Tompkins Trustco, Inc. furnished a Form 8-K pursuant to "Item 12-Results of Operations and Financial Condition" of Form 8-K, disclosing that the Company issued a press release on July 23, 2003 announcing its earnings for the calendar quarter ended June 30, 2003. A copy of the press release was attached to the Form 8-K as an exhibit. 20
SIGNATURES Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: November 5, 2003 TOMPKINS TRUSTCO, INC. By: /s/ JAMES J. BYRNES --------------------------------- James J. Byrnes Chairman of the Board and Chief Executive Officer By: /s/ FRANCIS M. FETSKO --------------------------------- Francis M. Fetsko Executive Vice President and Chief Financial Officer 21
EXHIBIT INDEX - ------------- EXHIBIT NUMBER DESCRIPTION PAGES - -------------- ----------- ----- 31.1 Certification of Chief Executive Officer as required pursuant to Section 302 of Sarbanes-Oxley Act of 2002. 23 31.2 Certification of Chief Financial Officer as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 24 32.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 25 32.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act 2002 26 22