UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 31, 1999 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, NEW YORK 14851 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (607) 273-3210 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Title of Class: COMMON STOCK ($.10 PAR VALUE) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the registrant's voting stock held by non-affiliates was approximately $150,944,950 on March 15, 2000, based on the closing sales price of the registrant's common stock, $.10 par value (the "Common Stock"), as reported on the American Stock Exchange, Inc. as of such date. The number of shares of the registrant's Common Stock outstanding as of March 10, 2000, was 7,040,373 shares. DOCUMENTS INCORPORATED BY REFERENCE Proxy Statement (the "Proxy Statement") filed with the Securities and Exchange Commission on March 30, 2000, in connection with the 2000 Annual Meeting of Stockholders, is incorporated herein by reference in Part III.
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<TABLE> TOMPKINS TRUSTCO, INC. 1999 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS <CAPTION> PART I PAGE <S> <C> <C> Item 1. Business of the Company 1 Item 2. Properties 4 Item 3. Legal Proceedings 6 Item 4. Submission of Matters for a Vote by Securities Holders 6 PART II Item 5. Market for Registrant's Common Equity and Related Securities 7 Item 6. Selected Financial Data 7 Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations 9 Item 7A. Quantitative and Qualitative Disclosure About Market Risk 20 Item 8. Financial Statements and Supplementary Data 21 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 48 PART III Item 10. Directors and Executive Officers of the Registrant 48 Item 11. Executive Compensation 48 Item 12. Security Ownership of Certain Beneficial Owners and Management 48 Item 13. Certain Relationships and Related Transactions 48 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 49 </TABLE>
PART I ITEM 1. BUSINESS OF THE COMPANY GENERAL Headquartered in Ithaca, New York, Tompkins Trustco, Inc. ("Tompkins" or "the Company") is the publicly traded parent company of Tompkins County Trust Company and The Bank of Castile, both of which are wholly-owned subsidiaries. Tompkins is also the parent company of The Mahopac National Bank, which is approximately 70 percent owned by the Company. The Trust Company, The Bank of Castile, and The Mahopac National Bank provide community banking services to their local market areas in New York State. Tompkins is registered as a multiple bank 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 Tompkins County Trust Company ("the Trust Company"), a commercial bank that has operated in the community of Ithaca, New York, and environs since 1836. On December 31, 1999, Tompkins completed a merger with Letchworth Independent Bancshares ("Letchworth"), which was the parent company for The Bank of Castile (a wholly-owned subsidiary), and The Mahopac National Bank (approximately 70 percent owned by Letchworth). The merger was accounted for as a pooling-of-interests, and upon completing the merger, Letchworth was merged with and into Tompkins. All prior period financial information has been restated to present the combined financial condition and results of operations of both companies as if the merger had been in effect for all periods presented. Further details pertaining to the merger are presented in Note 2 to the consolidated financial statements, included herein. NARRATIVE DESCRIPTION OF BUSINESS 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 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 management services through the Trust and Investment Services Divisions of its banking subsidiaries. These Trust and Investment Services Divisions provide a full range of money management services, including investment management accounts, custody accounts, living trusts, life insurance trusts, stand-by trusts, retirement plans and rollovers, will trusts, estate settlement, and financial planning. The Company maintains a portfolio of securities such as U.S. government and agency securities, obligations of states and political subdivisions thereof, equity securities, and interest-bearing deposits. It is the intention of management to maintain short to intermediate maturities in the Company's securities portfolio in order to better match the interest rate sensitivities of its assets and liabilities. Investment decisions are made within policy guidelines established by the Company's board of directors. The investment policy established by the board of directors is based on the asset/liability management goals of the Company. The intent of the policy is to establish a portfolio of high quality diversified securities, which optimize net interest income within acceptable limits of safety and liquidity. Purchases of securities, other than obligations of states and political subdivisions thereof, are classified as available-for-sale, though it is generally management's intent to hold all securities to maturity. Securities available-for-sale may be used to enhance total return, provide additional liquidity, or reduce interest rate risk. Information regarding the amortized cost and fair value of the securities portfolio for the years ended 1999 and 1998 is presented in Note 3 to the Company's consolidated financial statements. The amortized cost and fair value of the securities portfolio for the year ended 1997 is presented in the table below. 1
<TABLE> <CAPTION> AVAILABLE-FOR-SALE SECURITIES - ------------------------------------------------------------------------------------------------------------ GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR DECEMBER 31, 1997 (in thousands) COST GAINS LOSSES VALUE - ------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> U.S. Treasury securities and obligations of U.S. Government agencies $150,072 $1,470 $226 $151,316 Obligations of states and political subdivisions 4,812 112 1 4,923 Mortgage-backed securities 44,837 590 62 45,365 - ------------------------------------------------------------------------------------------------------------ Total debt securities 199,721 2,172 289 201,604 - ------------------------------------------------------------------------------------------------------------ Equity securities 8,983 428 0 9,411 - ------------------------------------------------------------------------------------------------------------ $208,704 $2,600 $289 $211,015 ============================================================================================================ </TABLE> Available-for-sale securities include $4,431,000 in equity securities, which are carried at amortized cost since fair values are not readily determinable. This figure includes $3,227,000 of Federal Home Loan Bank Stock. <TABLE> <CAPTION> HELD-TO-MATURITY SECURITIES - ---------------------------------------------------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR DECEMBER 31, 1997 (in thousands) COST GAINS LOSSES VALUE - ---------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> U.S. Treasury securities and obligations of U.S. Government agencies $11,958 $ 211 $ 1 $12,168 Obligations of states and political subdivisions 61,872 1,867 4 63,735 Mortgage-backed securities 6,190 35 5 6,220 - ---------------------------------------------------------------------------------------------------------- Total debt securities $80,020 $2,113 $10 $82,123 ========================================================================================================== </TABLE> COMPETITION The Company's subsidiary banks operate 29 offices, including 27 full-service branches, serving communities in upstate New York. The Trust Company operates 11 full-service banking offices in the counties of Tompkins and Schuyler. The Bank of Castile conducts its operations through its 12 branch offices in towns situated in and around the areas commonly known as the Letchworth State Park area and the Genesee Valley region of New York State. The Bank of Castile branch locations include its recently opened branch office in Monroe County. The Mahopac National Bank is located in Putnam County, and operated 3 full-service branches in that county as of December 31, 1999. A fourth office located in Brewster, New York, opened in February 2000. Deposits of all three banks are insured by the Federal Deposit Insurance Corporation. Competition for commercial banking and trust and investment services is strong in the Company's upstate New York market areas. Deregulation of the banking industry has created a highly competitive environment for commercial banking services. Increased competition has resulted in a decreasing number of community banks, and increased competition from regional and national financial service providers. In one or more aspects of its business, the Company competes with other commercial banks, savings institutions, credit unions, mortgage bankers and brokers, finance companies, mutual funds, insurance companies, brokerage and investment banking companies, and other financial intermediaries. Many of these competitors, some of which are affiliated with large bank holding companies, have substantially greater resources and lending limits, and may offer certain services the Company does not currently provide. In addition, many non-bank competitors, such as credit unions, are not subject to the same extensive federal regulations that govern bank holding companies and federally insured banks. Management believes the Letchworth acquisition will provide increased capacity for growth, and greater capital resources necessary to make investments in technology and services that will improve the Company's ability to compete. Since the locations of The Mahopac National Bank and The Bank of Castile are not immediately adjacent to markets served by the Trust Company, the merger provides Tompkins with enhanced growth opportunities with relatively little disruption to the core strategy or operation of the Trust Company. The Company intends to continue to operate the subsidiaries as three locally managed community banks. Community banking is a business understood by management of the Company, and is a core strength that will continue to be emphasized. The acquisition provides Tompkins with new areas to market products and services, thereby offering significant opportunities for growth. 2
The area served by the Trust Company consists primarily of Tompkins County, with an estimated population of 97,000 people. Education plays a significant role in the local economy with Cornell University and Ithaca College being two of the county's major employers. Current economic trends include low unemployment and moderate growth. The Bank of Castile serves a four-county market that is primarily rural in nature. The recent opening of a branch office in Chili, New York, will provide increased access to the suburban Rochester, New York, market. Excluding Monroe County, which includes Rochester, the population of counties served by The Bank of Castile is approximately 171,000. Economic growth has been relatively flat in The Bank of Castile's market area, although the significant population base of the suburban Rochester market (in excess of 700,000 people), provides significant opportunities for growth. The primary market area for The Mahopac National Bank is Putnam County, New York, with a population of approximately 93,000. Putnam County is about 60 miles north of Manhattan, and is the fastest growing county in New York State. REGULATION As a registered bank holding company, the Company is subject to examination and comprehensive regulation by the Federal Reserve Board (FRB). The Company's subsidiary banks are subject to examination and comprehensive regulation by various regulatory authorities, including the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the New York State Banking Department (NYSBD). Each of these agencies issues regulations and requires the filing of reports describing the activities and financial condition of the entities under its jurisdiction. Likewise, such agencies conduct examinations on a recurring basis to evaluate the safety and soundness of the institutions, and to test compliance with various regulatory requirements, including: consumer protection, fair lending, the Community Reinvestment Act, sales of non-deposit investments, electronic data processing, and trust department activities. Under FRB regulations, the Company may not, without providing prior notice to the FRB, purchase or redeem its own Common Stock if the gross consideration for the purchase or redemption, combined with the net consideration paid for all such purchases or redemptions during the preceding twelve months, is equal to ten percent or more of the Company's consolidated net worth. Additionally, FRB policy provides that dividends shall not be paid except out of current earnings and unless prospective rate of earnings retention by the Company appears consistent with its capital needs, asset quality, and overall financial condition. The FRB, the FDIC, and the OCC have promulgated capital adequacy guidelines that are considered by the agencies in examining and supervising a bank or bank holding company; and in analyzing any applications a bank or bank holding company may submit to the appropriate agency. In addition, for supervisory purposes, the agencies have promulgated regulations establishing five categories of capitalization, ranging from well capitalized to critically undercapitalized, depending upon the level of capitalization and other factors. Currently, the Company and its subsidiary banks maintain leverage and risk-based capital ratios above the required levels and are considered well capitalized under the applicable regulations. A comparison of the Company's capital ratios and the various regulatory requirements is included in Note 17 of the Company's consolidated financial statements. All deposit accounts of the Company's subsidiary banks are insured by the Bank Insurance Fund (BIF), generally in amounts up to $100,000 per depositor. The FDIC has the power to terminate a bank's insured status or to temporarily suspend it under special conditions. Deposit insurance coverage is maintained by payment of premiums assessed to banks insured by the BIF. Based on capital strength and a favorable FDIC risk classification, the subsidiary banks are not currently subject to BIF insurance assessments. Beginning in January 1997, all BIF insured banks are subject to special assessments to repay Financing Corporation (FICO) bonds, which were used to repay depositors of failed Savings and Loan Associations after the former Federal Savings and Loan Insurance Fund became insolvent. EMPLOYEES At December 31, 1999, the Company employed 494 employees, approximately 98 of whom were part-time. No employees are covered by a collective bargaining agreement and the Company believes its employee relations are excellent. 3
<TABLE> ITEM 2. PROPERTIES The following table provides information relating to the Company's facilities: <CAPTION> LOCATION FACILITY TYPE SQUARE FEET OWNED/LEASED* <S> <C> <C> <C> The Commons Trust Company 23,900 Owned Ithaca, NY Main Office 119 E. Seneca Street Trust Company 18,550 Owned Ithaca, NY Trust and Investment Services 121 E. Seneca Street Administration 18,900 Owned Ithaca, NY Rothschilds Building Operations and Data Processing 20,500 Leased The Commons, Ithaca, NY Central Avenue Trust Company 400 Leased Cornell University, Cornell Campus Branch Office Ithaca, NY 905 Hanshaw Road Trust Company 790 Leased Ithaca, NY Community Corners Branch Office 139 N. Street Trust Company 2,250 Owned Extension Dryden Branch Office Dryden, NY 1020 Ellis Hollow Road Trust Company 650 Leased Ithaca, NY East Hill Plaza Branch 775 S. Meadow Street Trust Company 2,280 Owned Ithaca, NY Plaza Branch Office Pyramid Mall Trust Company 610 Leased Ithaca, NY Pyramid Mall Office 116 E. Seneca Street Trust Company 775 Owned Ithaca, NY Seneca Street Drive-in 2251 N. Triphammer Trust Company 3,000 Leased Road Triphammer Road Branch Office Ithaca, NY 2 W. Main Street Trust Company 2,720 Owned Trumansburg, NY Trumansburg Branch Office 701 W. Seneca Street Trust Company 2,150 Owned Ithaca, NY West End Branch Office 2230 N. Triphammer Trust Company 204 Leased Road Kendal Branch Office Ithaca, NY (Part-time office) 100 Main Street Trust Company 3,115 Owned Odessa, NY Odessa Branch Office 50 N. Main Street The Bank of Castile 6,662 Owned Castile, NY Main Office 4
LOCATION FACILITY TYPE SQUARE FEET OWNED/LEASED* 604 W. Main Street The Bank of Castile 4,662 Owned Arcade, NY Arcade Branch Office 263 E. Main Street The Bank of Castile 3,303 Owned Avon, NY Avon, NY 408 E. Main Street The Bank of Castile 3,496 Owned Batavia, NY Batavia Branch Office 3155 State Street The Bank of Castile 4,680 Owned Caledonia, NY Caledonia Branch Office 3252 Chili Avenue The Bank of Castile 4,000 Owned Chili, NY Chili Branch Office 1 Main Street The Bank of Castile 1,448 Owned Gainesville, NY Gainesville Branch Office 11 South Street The Bank of Castile 9,700 Owned Geneseo, NY Geneseo Branch Office 29 Main Street The Bank of Castile 3,084 Owned LeRoy, NY LeRoy Branch Office 102 N. Center Street The Bank of Castile 4,702 Owned Perry, NY Perry Branch Office 2727 Genesee Street The Bank of Castile 2,220 Leased Retsof, NY Retsof Branch Office 445 N. Main Street The Bank of Castile 2,798 Owned Warsaw, NY Warsaw Branch Office 129 N. Center Street The Bank of Castile 11,138 Owned Perry, NY Processing Center ** 630 Route 6 The Mahopac National Bank 2,800 Owned Mahopac, NY Mahopac Office 591 Route 6N The Mahopac National Bank 3,000 Owned Mahopac Falls, NY Red Mills Office 21 Peekskill Hollow RoaThe Mahopac National Bank 17,950 Owned Putnam Valley, NY Putnam Valley Branch Office 925 S. Lake Boulevard The Mahopac National Bank 3,460 Owned Mahopac, NY Loan Center 1441 Route 22 The Mahopac National Bank 34,000 Owned Brewster, NY Brewster Office *** </TABLE> - ---------------------------- * Lease terminations for the Company's leased properties range from 2000 through 2042. ** Office includes two parcels of land that are being leased through 2004, and 2090, respectively. *** Branch office opened in February 2000. Management believes the current facilities are suitable for their present and intended purposes. The Bank of Castile submitted an application with the New York State Banking Department in February 2000, seeking approval to open a branch office in Medina, New York. 5
ITEM 3. 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 4. SUBMISSION OF MATTERS FOR A VOTE BY SECURITIES HOLDERS On December 20, 1999, Tompkins held a special meeting of shareholders to consider and vote on a proposal to approve and adopt the Agreement and Plan of Reorganization, dated July 30, 1999, by and between Tompkins and Letchworth. The agreement provided for the merger of Letchworth with and into Tompkins, and for each share of common stock of Letchworth, par value $1.00 per share, to be converted into and exchangeable for 0.685 shares of the common stock of Tompkins, par value $0.10 per share, plus cash in lieu of any fractional share interest. The proposal also provided for the issuance of the required number of shares of Tompkins common stock to be exchanged for Letchworth common stock, as contemplated in the agreement. The proposal was approved by the Tompkins shareholders, with shares voted as follows: 3,881,063 FOR; 17,887 AGAINST; and 25,968 ABSTAINED. Shares voted represented 82 percent of the 4,759,103 shares eligible to vote. A special meeting of Letchworth shareholders was also held on December 20, 1999, to approve the same Agreement and Plan of Reorganization, dated July 30, 1999. The proposal was approved by the Letchworth shareholders, with shares voted as follows: 2,729,417 FOR; 4,824 AGAINST; and 6,525 ABSTAINED. Shares voted represented 81 percent of the 3,376,408 shares eligible to vote. 6
PART II <TABLE> <CAPTION> ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SECURITIES MARKET PRICE** CASH MARKET PRICE & DIVIDEND INFORMATION HIGH LOW DIVIDENDS PAID** - ---------------------------------------------------------------------------------------------------- See Notes 1, 2, and 3 below: <S> <C> <C> <C> <C> 1998 1st Quarter $34.00 $28.50 $.21 2nd Quarter 38.75 33.38 .22 3rd Quarter 40.75 32.00 .23 4th Quarter 34.75 30.75 .25 1999 1st Quarter $35.88 $33.75 $.25 2nd Quarter 34.25 31.75 .25 3rd Quarter 35.50 30.69 .26 4th Quarter 31.50 28.25 .27 </TABLE> Note 1 - The range of reported high and low transaction prices reflects inter-dealer prices without retail markup, mark down or commission, and represents actual transactions as quoted on the American Stock Exchange. As of March 10, 2000, there were approximately 2,122 shareholders of record. Note 2 - All share and per share information has been adjusted for the stock splits effected in the form of a dividend. Note 3 - Dividends on Tompkins Trustco, Inc. common stock were paid on the 15th day of March, June, September, and December of each year. <TABLE> ITEM 6. SELECTED FINANCIAL DATA <CAPTION> YEAR ENDED DECEMBER 31 (dollar amounts in thousands except per share data) 1999 1998 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Assets $1,188,679 $954,705 $886,846 $836,397 $770,486 Deposits 974,239 733,644 693,905 635,649 574,706 Other borrowings 42,012 48,973 34,817 23,150 15,507 Shareholders' equity 96,624 97,652 89,003 78,419 77,916 Interest income 77,617 69,729 66,265 61,427 58,082 Interest expense 30,551 29,371 28,235 25,359 24,137 Net interest income 47,066 40,358 38,030 36,068 33,945 Provision for loan/lease losses 944 1,539 1,436 1,493 1,075 Net securities gains (losses) (59) (12) (48) 13 0 Net income 15,200 14,502 12,992 12,049 11,375 Basic earnings per share 2.15 2.05 1.91 1.70 1.60 Diluted earnings per share 2.12 2.01 1.84 1.66 1.57 Basic earnings per share-operating* 2.39 2.07 1.93 1.72 1.60 Diluted earnings per share-operating* 2.36 2.03 1.86 1.67 1.57 Cash dividends per share** 1.03 0.91 0.82 0.73 0.66 Return on average assets 1.41% 1.57% 1.51% 1.50% 1.52% Return on average equity 15.46% 16.09% 15.95% 15.29% 15.67% Return on average assets-operating* 1.57% 1.59% 1.52% 1.52% 1.52% Return on average equity-operating* 16.91% 16.22% 16.10% 15.41% 15.67% Shareholders' equity to average assets 8.97% 10.60% 10.32% 9.79% 10.44% Dividend payout ratio 40.52% 37.92% 36.68% 36.65% 35.08% (actual numerical count) - ---------------------------------------------------------------------------------------------------------------------- Employees (average full-time equivalent) 442 365 361 356 347 Shareholders of record 2,070 1,773 1,683 1,728 1,702 Full-service banking offices 26 22 22 21 20 Bank access centers (ATMs) 36 33 32 30 30 ====================================================================================================================== </TABLE> * Uses net income before amortization of intangible assets and one-time merger-related expenses, net of applicable tax benefit. ** Cash dividends per share and stock price reflect historical information for Tompkins Trustco, Inc. 7
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> ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Tompkins Trustco, Inc. or ("Tompkins" or "the Company") was organized in 1995, as the parent company of Tompkins County Trust Company (the "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, became subsidiaries of Tompkins. The Trust Company and The Bank of Castile are wholly-owned subsidiaries, and The Mahopac National Bank is approximately 70 percent owned by the Company. The merger with Letchworth was accounted for as a pooling-of-interests, and accordingly all prior period financial information has been restated to present the combined financial condition and results of operations of both companies as if the merger had been in effect for all periods presented. On June 4, 1999, Letchworth acquired 70.17 percent of the outstanding common stock of The Mahopac National Bank in a cash transaction, accounted for as a purchase. Accordingly, the 1999 consolidated financial information in this annual report includes the results of operations of The Mahopac National Bank for the seven-month period ending December 31, 1999. The 29.83 percent interest in The Mahopac National Bank, which is not owned by Tompkins, is shown as a minority interest in consolidated subsidiaries on the 1999 consolidated statement of condition. Further details pertaining to the merger with Letchworth are presented in Note 2 to the consolidated financial statements included herein. Tompkins has assumed an option to acquire the remaining outstanding shares of The Mahopac National Bank from the minority shareholders, at 90 percent of their fair value. The option becomes exercisable in December 2000, if the Company's shares in The Mahopac National Bank have not been acquired by the minority shareholders at 90 percent of their fair value. Management anticipates that Tompkins will be able to exercise its option in 2000, at which time The Mahopac National Bank will become a wholly-owned subsidiary of the Company. Since the merger with Letchworth was completed on December 31, 1999, operating results for 1999 reflect no cost savings or revenue enhancements resulting from the merger. Management anticipates that certain cost savings and revenue enhancement opportunities will be realized beginning in the second quarter of 2000. Additionally, two branch office openings--the Chili Office of The Bank of Castile (opened in the fourth quarter of 1999), and the Brewster Office of The Mahopac National Bank (opened in the first quarter of 2000)--are expected to contribute positively to the Company's earnings beginning in the second half of 2000. The following analysis is intended to provide the reader with a further understanding of the consolidated financial condition and results of operations of the Company and its operating subsidiaries for the periods shown. For a full understanding of this analysis, it should be read in conjunction with the consolidated financial statements and notes thereto. 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, risk, and uncertainties, all of which could change over time. Actual results could differ materially from forward-looking statements. RESULTS OF OPERATIONS Net income before amortization of intangible assets and one-time merger-related expenses (operating earnings) increased 15.5 percent in 1999, reflecting strength in the core business strategies of the Company's community banking subsidiaries. Net income for 1999 was $15.2 million, or $2.15 per basic share; increasing from $14.5 million, or $2.05 per basic share in 1998; and $13.0 million, or $1.91 per basic share in 1997. The Company has diversified revenue sources, which consist of net interest income generated from the loan and securities portfolios, trust and investment services income, and other service charges and fees for providing banking and related financial services. For the year ended December 31, 1999, total other income increased 21.0 percent over 1998, and represented 19.4 percent of total tax-equivalent revenue. Tax-equivalent net interest income for 1999 was $49.1 million, reflecting growth of 16.0 percent over 1998. Return on average shareholders' equity was 15.46 percent in 1999, compared to 16.09 percent in 1998, and 15.95 percent in 1997. Return on average shareholders' equity declined slightly in 1999 as a result of one-time merger-related expenses. Operating return on equity (using net income before amortization of intangible assets and one-time merger-related expenses) improved to 16.91 percent in 1999, compared to 16.22 percent and 16.10 percent in 1998 and 1997, respectively. Return on average assets of 1.41 percent in 1999 also includes the negative effects of one-time merger-related expenses, declining from 1.57 percent in 1998, and 1.52 percent in 1997. Operating return on average assets was 1.57 percent in 1999, 1.59 percent in 1998, and 1.52 percent in 1997. 9
> <TABLE> <CAPTION> TABLE 1 - AVERAGE STATEMENTS OF CONDITION AND NET INTEREST ANALYSIS DECEMBER 31 - ------------------------------------------------------------------------------------------------------------------------------------ 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE (dollar amounts in thousands) BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE BALANCE INTERESTYIELD/RATE - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> ASSETS Interest-earning assets: Securities (1) U.S. Government securities $210,598 $13,751 6.53% $204,357 $13,545 6.63% $203,245 $13,663 6.72% State and municipal (2) 75,531 5,463 7.23% 67,613 5,222 7.72% 63,858 5,039 7.89% Other securities (2) 24,858 1,580 6.36% 26,455 1,657 6.26% 24,187 1,551 6.41% - -------------------------------------------------------------------------------------------------------------------------------- Total securities 310,987 20,794 6.69% 298,425 20,424 6.84% 291,290 20,253 6.95% Federal funds sold 17,717 980 5.53% 12,018 632 5.26% 10,132 549 5.42% Loans, net of unearned income (3) Residential real estate 274,321 21,049 7.67% 216,479 17,422 8.05% 197,177 16,271 8.25% Commercial real estate 138,882 12,464 8.97% 107,204 10,164 9.48% 89,289 8,539 9.56% Commercial loans (2) 122,288 11,855 9.69% 113,595 11,263 9.92% 113,197 10,979 9.70% Consumer and other 123,655 11,233 9.08% 109,442 10,784 9.85% 100,116 10,568 10.56% Lease financing 15,602 1,249 8.01% 12,438 1,002 8.06% 12,210 994 8.14% - -------------------------------------------------------------------------------------------------------------------------------- Total loans, net of unearned income 674,748 57,850 8.57% 559,158 50,635 9.06% 511,989 47,351 9.25% - -------------------------------------------------------------------------------------------------------------------------------- Total interest-earning 1,003,452 79,624 7.94% 869,601 71,691 8.24% 813,411 68,153 8.38% assets - -------------------------------------------------------------------------------------------------------------------------------- Noninterest-earning assets 74,122 51,587 48,686 Total assets $1,077,574 $921,188 $862,097 ================================================================================================================================ LIABILITIES & SHAREHOLDERS' EQUITY Deposits: Interest-bearing deposits Interest checking, savings, and money market $361,115 $8,436 2.34% $294,188 $7,459 2.54% $278,822 $7,279 2.61% Time Dep > $100,000 149,124 7,565 5.07% 125,329 6,905 5.51% 107,032 6,066 5.67% Time Dep < $100,000 186,603 9,206 4.93% 174,853 9,395 5.37% 170,900 8,976 5.25% - -------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing 696,842 25,207 3.62% 594,370 23,759 4.00% 556,754 22,321 4.01% deposits Federal funds purchased and securities sold under agreements to repurchase 60,662 2,852 4.70% 60,391 3,110 5.15% 82,075 4,340 5.29% Other borrowings 49,966 2,492 4.99% 44,444 2,502 5.63% 26,029 1,574 6.05% - -------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities Liabilities 807,470 30,551 3.78% 699,205 29,371 4.20% 664,858 28,235 4.25% - -------------------------------------------------------------------------------------------------------------------------------- Non-interest bearing deposits 154,803 120,036 105,659 Accrued expenses and other 15,555 11,487 10,109 liabilities - -------------------------------------------------------------------------------------------------------------------------------- Total liabilities 977,828 830,728 780,626 Minority Interest 1,404 324 0 Shareholders' equity 98,342 90,136 81,471 - -------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $1,077,574 $921,188 $862,097 ================================================================================================================================ Interest rate spread 4.16% 4.04% 4.13% - -------------------------------------------------------------------------------------------------------------------------------- Net interest income/margin on earning assets $49,073 4.89% $42,320 4.87% $39,918 4.91% - -------------------------------------------------------------------------------------------------------------------------------- </TABLE> (1) Average balances and yields on available-for-sale securities are based on amortized cost. (2) Interest income includes the tax effects of taxable-equivalent adjustments using a combined New York State and federal effective income tax rate of 40 percent in 1999, and 41 percent in 1998 and 1997, to increase tax-exempt interest income to a taxable equivalent basis. (3) Nonaccrual loans are included in the average loan totals presented above. Payments received on nonaccrual loans have been recognized as disclosed in Note 1 of the consolidated financial statements. 10
NET INTEREST INCOME Table 1 illustrates the trend in average interest-earning assets and interest-bearing liabilities, and the corresponding yield or cost associated with each. The Company continues to focus on earning asset growth to improve net interest income, as the competitive environment for loans and deposits, combined with local and national economic conditions, continues to put downward pressure on net interest margins. The Company's average earning assets grew by 15.4 percent in 1999, following growth of 6.9 percent in 1998. The increase in earning assets resulted in tax-equivalent net interest income growth of $6.8 million in 1999, and $2.4 million in 1998. The Company's 1999 net interest income benefited from the acquisition of The Mahopac National Bank in June 1999, which added $91.3 million in average loans and $134.3 million in average core deposits (total deposits, less time deposits of $100,000 or more). The favorable mix of high quality earning assets and low cost funding helped improve the Company's net interest margin to 4.89 percent in 1999, from 4.87 percent in 1998. Interest rates generally trended upward in 1999, although average interest rates for 1999 were generally lower than in 1998. As a result, declines were noted in both the yields on earning assets and in the cost of interest-bearing liabilities. Net interest margin was helped by an improved mix of earning assets and interest-bearing liabilities. Average loans for 1999 increased to 67.2 percent of average earning assets, compared to 64.3 percent in 1998, while average core deposits improved to 52.3 percent of average interest-bearing liabilities, compared to 50.5 percent in 1998. Changes in net interest income occur from a combination of changes in the volume of interest-earning assets and interest-bearing liabilities, and the rate of interest earned or paid on them. Table 2 illustrates changes in interest income and interest expense attributable to changes in volume (change in average balance multiplied by prior year rate), changes in rate (change in rate multiplied by prior year volume), and the net change in net interest income. The net change attributable to the combined impact of volume and rate has been allocated to each in proportion to the absolute dollar amounts of the change. The $6.8 million increase in tax-equivalent net interest income from 1998 to 1999 included a $7.9 million increase in interest income, which was partially offset by a $1.2 million increase in interest expense. An increased volume of earning assets resulted in a $7.2 million increase in net interest income between 1998 and 1999, while lower average interest rates had a greater dollar impact on earning assets during the period than on interest-bearing liabilities, causing a $492,000 reduction in net interest income. Between 1997 and 1998, net interest income increased by $2.4 million, with a $3.5 million increase in interest income offset by a $1.1 million increase in interest expense. An increased volume of earning assets contributed $3.3 million to the increase in net interest income, which was offset by a $930,000 decline in net interest income due to an unfavorable rate variance. <TABLE> <CAPTION> TABLE 2 - ANALYSIS OF CHANGES IN NET INTEREST INCOME (dollar amounts in thousands)(taxable equivalent)1999 VS. 1998 1998 VS. 1997 - ------------------------------------------------------------------------------------------------------------------------------------ INCREASE (DECREASE) DUE INCREASE (DECREASE) DUE TO CHANGE IN AVERAGE TO CHANGE IN AVERAGE VOLUME RATE TOTAL VOLUME RATE TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST INCOME: <S> <C> <C> <C> <C> <C> <C> Federal funds sold $ 314 $ 34 $ 348 $ 100 $ (17) $ 83 Investments: Taxable 299 (183) 116 173 (193) (20) Tax-exempt 595 (341) 254 335 (144) 191 Loans, net: Taxable 9,770 (2,573) 7,197 4,261 (976) 3,285 Tax-exempt 22 (4) 18 (2) 1 (1) - ------------------------------------------------------------------------------------------------------------------------------------ Total interest income $11,000 $(3,067) $7,933 $4,867 $(1,329) $3,538 - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST EXPENSE: Interest bearing deposits: Interest checking, savings, and money market 1,600 (623) 977 384 (204) 180 Time 1,849 (1,378) 471 1,225 33 1,258 Federal funds purchased and securities sold under agreements to repurchase 14 (272) (258) (1,118) (112) (1,230) Other borrowings 292 (302) (10) 1,044 (116) 928 - ------------------------------------------------------------------------------------------------------------------- Total interest expense $3,755 $(2,575) $1,180 $1,535 $(399) $1,136 - ------------------------------------------------------------------------------------------------------------------- Net interest income $7,245 $(492) $6,753 $3,332 $(930) $2,402 =================================================================================================================== Notes: See notes to Table 1. </TABLE> 11
PROVISION FOR LOAN/LEASE LOSSES The provision for loan/lease losses represents management's estimate of the expense necessary to maintain the reserve for loan/lease losses at an adequate level. The provision for loan/lease losses declined to $944,000 in 1999, from $1.5 million in 1998, and $1.4 million in 1997. The lower provision in 1999 is reflective of the generally high quality of the Company's loan portfolio, as evidenced by the low level of nonperforming loans, and a declining trend in net charge-offs. Nonperforming loans and leases were $3.2 million at December 31, 1999, representing a modest 0.42 percent of total loans and leases outstanding at year-end. Nonperforming loans and leases at year-end 1998 were $2.6 million, or 0.44 percent of total loans and leases. Net charge-offs of $632,000 in 1999 represented 0.09 percent of average loans and leases outstanding during the year, compared to net charge-offs of $1.1 million in 1998, representing 0.20 percent of average loans and leases. OTHER INCOME Management considers growth in noninterest income an important strategic focus for the Company. Although net interest income remains a key revenue source for the Company, competitive, regulatory, and economic conditions have led management to focus increasingly on other income opportunities as a source for long-term revenue growth. The success of this strategy is evident, as other income grew 21 percent in 1999 to $11.8 million, following growth of 19.3 percent in 1998. Other income, excluding sales of securities, has increased steadily as a percentage of average assets from 0.95 percent in 1997, to 1.06 percent in 1998, to 1.10 percent in 1999. Of the $2.1 million increase in other income from 1998 to 1999, $587,000 is attributable other income of The Mahopac National Bank, which has been included for the seven months ended December 31, 1999. Income from trust and investment services remains the largest source of other income. The Trust and Investment Services Division generates fee income through managing investments or providing custody services for individuals, businesses, personal trusts, estates, and employee benefits plans. Trust and investment services income of $4.1 million in 1999 represents an 8.1 percent increase over the $3.8 million reported in 1998. Trust and investment services income grew by 20.6 percent from 1997 to 1998. Increased fee income is attributable to the continued growth in assets managed by, or in the custody of, the Trust and Investment Services Division. Total assets managed by, or in the custody of, the division had a market value of $1.1 billion at December 31, 1999, compared to $952.9 million at December 31, 1998, and $838.8 million at December 31, 1997. The Trust and Investment Services Division is expected to remain important to future revenue growth of the Company. Trust and investment services are primarily provided to customers in the Trust Company's market area of Tompkins County and surrounding areas, although the division currently manages assets for clients in more than 40 states. In 1997, the Company expanded the reach of the Trust and Investment Services Division by offering trust and investment services through a "Trust Alliance" program, through which the Company provides servicing and administrative support to trust departments of other banks. The first bank to participate in this Trust Alliance program was The Bank of Castile, which became a subsidiary of the Company upon the completion of the merger with Letchworth. The Company has formed Trust Alliances with two additional non-affiliated community banks, which have assets under management totaling $37.1 million at December 31, 1999. Card services, included in other service charges on the consolidated statements of income, has been another growth area for the Company, as technology has created opportunities to provide customers with new products to better serve their needs. Card services products include traditional credit cards, purchasing cards, debit cards, and merchant card processing. Fee income associated with card services increased 56.7 percent to $1.7 million in 1999, compared to $1.1 million in 1998. The Company continues to invest in technology to meet consumer demands for more convenient banking services. The Trust Company and The Mahopac National Bank currently offer Internet banking products. In the second quarter of 2000, the Trust Company will be introducing an improved Internet banking product for individuals and businesses. The Bank of Castile is expected to begin offering Internet banking by the end of 2000. Through the Trust Company, the Company has invested significant resources in developing fee income producing products and services. Many of these products and services can be offered to customers of The Bank of Castile and The Mahopac National Bank, thereby expanding the customer base for these products. Through this expanded customer base, the Company anticipates continued growth from noninterest related sources. Other income includes a $723,000 increase in cash surrender value of corporate owned life insurance, up from $66,000 in 1998, and $38,000 in 1997. This income is exempt from taxes. The corporate owned life insurance was purchased primarily in the third and fourth quarters of 1998, and relates to life insurance provided to certain senior officers. Increases in the cash surrender value of the insurance are reflected as other operating income, and the related mortality expense is recognized as an other operating expense. Although income associated with the insurance policies is not included in interest income, increases in the cash surrender value produced a tax-adjusted return of approximately 8.1 percent in 1999. 12
OTHER EXPENSE The Company's 1999 other expense increased 27.8 percent, over 1998, to $34.3 million. Operating expense, which excludes amortization of intangible assets and one-time merger expense increased 20.9 percent. The $5.6 million increase in operating expense includes $3.5 million of expenses attributable to The Mahopac National Bank, which has been included for the seven months ended December 31, 1999. The Company's efficiency ratio (operating expense divided by tax-equivalent net interest income and other income before securities gains and losses) was 52.62 percent in 1999, compared to 50.91 percent in 1998 and 51.48 percent in 1997. The ratio increased slightly in 1999 due to increased expenses associated with the opening of the Chili Office of The Bank of Castile and the Brewster Office of The Mahopac National Bank. In addition, The Bank of Castile and The Mahopac National Bank incurred a combined $270,000 in professional fees and other expenses associated with the formation of subsidiary real estate investment trusts. Personnel-related expenses comprise the largest segment of other expense, representing approximately 57.8 percent of operating expense in 1999, compared to approximately 56.6 percent in 1998. Total personnel-related expenses increased by $3.5 million in 1999, to $18.6 million. The increase includes $2.1 million associated with the acquisition of The Mahopac National Bank. Although the Company does not anticipate significant personnel reductions as a result of the merger, certain operational changes are expected to result in more efficient personnel utilization. Expense for premises, furniture, and fixtures increased from $3.8 million, to $4.1 million, including a $189,000 increase associated with The Mahopac National Bank acquisition. The opening of the two additional branches will result in increased occupancy expenses in 2000. Intangible asset expense for 1999 includes $530,000 of amortization expense related to core deposit intangible assets and approximately $157,000 of amortization expense related to goodwill. Included in the 1999 intangible amortization expense is $447,000 of expense related to The Mahopac National Bank acquisition. Goodwill of $2.5 million resulting from The Mahopac National Bank acquisition is being amortized over a twenty year period. A core deposit intangible asset of $3.5 million resulting from The Mahopac National Bank transaction is being amortized over ten years. Merger-related expenses of $1.5 million are primarily related to investment banking services and other professional services associated with the Letchworth merger. Other expenses included, among other things, fees paid for marketing services, postage and courier services, telephone expense, donations, software maintenance and amortization, and card services related expense. The $1.7 million increase in other expense from 1998 to 1999 included $1.1 million associated with The Mahopac National Bank acquisition. MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES Minority interest expense represents the portion of net income in consolidated majority-owned subsidiaries that is attributable to the minority owners of the subsidiary. Minority interest expense for 1999 includes $403,000 related to the minority owners of The Mahopac National Bank, and $155,000 related to the minority interest in the Tompkins Real Estate Holdings, Inc, which is approximately 99 percent owned by the Trust Company. INCOME TAX EXPENSE The provision for income taxes provides for federal and New York State income taxes. The 1999 provision was $7.8 million, compared to $7.2 million in 1998, and $6.8 million in 1997. The increasing trend is primarily due to increased levels of taxable income. The effective tax rate for 1999 was 34.1 percent, compared to 33.3 percent in 1998, and 34.2 percent in 1997. 13
FINANCIAL CONDITION During 1999, total assets grew by 24.5 percent to $1.2 billion, compared to $955 million at December 31, 1998. Asset growth included $158 million in assets from The Mahopac National Bank acquisition in June 1999, and $6.0 million of intangible assets created in the acquisition. Assets acquired from The Mahopac National Bank included approximately $18.8 million in cash and cash equivalents, $39.4 million in securities, $89.8 million in net loans, and $10 million in other assets. Table 3 provides a comparison of average and year-end balances of selected balance sheet categories over the past three years, and the change in those balances between 1998 and 1999. Earning asset growth in 1999 consisted of a $163.1 million increase in loans, and a $53.6 million increase in securities. Asset growth was funded primarily with core deposits, which increased by $199.4 million, including $134.3 million in core deposits acquired in The Mahopac National Bank acquisition. <TABLE> <CAPTION> TABLE 3 - BALANCE SHEET COMPARISONS AVERAGE BALANCE SHEET CHANGE (1998-1999) (dollar amounts in thousands) 1999 1998 1997 AMOUNT PERCENTAGE - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Total assets $1,077,574 $921,188 $862,097 $156,386 16.98% Earning assets* 1,003,452 869,601 813,411 133,851 15.39% Total loans and leases, less unearned income and net deferred costs and fees 674,748 559,158 511,989 115,590 20.67% Securities* 310,987 298,425 291,290 12,562 4.21% Core deposits 702,521 589,077 555,381 113,444 19.26% Time deposits of $100,000 and more 149,124 125,329 107,032 23,795 18.99% Federal funds purchased and securities sold under agreements to repurchase 60,662 60,391 82,075 271 0.45% Other borrowings 49,966 44,444 26,029 5,522 12.42% Shareholders' equity 98,342 90,136 81,471 8,206 9.10% - ------------------------------------------------------------------------------------------------------------------- ENDING BALANCE SHEET CHANGE (1998-1999) (dollar amounts in thousands) 1999 1998 1997 AMOUNT PERCENTAGE - ------------------------------------------------------------------------------------------------------------------- Total assets $1,188,679 $954,705 $886,846 $233,974 24.51% Earning assets* 1,107,510 890,676 830,430 216,834 24.34% Total loans and leases, less unearned income and net deferred costs and fees 755,382 592,193 537,156 163,189 27.56% Securities* 333,278 279,633 288,724 53,645 19.18% Core deposits 794,303 594,914 575,787 199,389 33.52% Time deposits of $100,000 and more 179,936 138,730 118,118 41,206 29.70% Federal funds purchased and securities sold under agreements to repurchase 57,846 61,205 59,672 (3,359) -5.49% Other borrowings 42,012 48,973 34,817 (6,961) -14.21% Shareholders' equity 96,624 97,652 89,004 (1,028) -1.05% - ------------------------------------------------------------------------------------------------------------------- </TABLE> * Balances of available-for-sale securities are shown at amortized cost. SHAREHOLDERS' EQUITY The consolidated statements of changes in shareholders' equity, included under Item 8 herein, detail the changes in equity capital, including payments to shareholders in the form of cash dividends. Per share cash dividends represent the historical per share dividends paid on Tompkins common stock, while the dollar amount of the dividends paid represents the cash dividends paid by the combined organization. The Company continued the long history of increasing cash dividends with an increase of 13.2 percent in 1999, which followed an 11.0 percent increase in 1998. Dividends per share amounted to $1.03 in 1999, compared to $0.91 in 1998, and $0.82 in 1997. Total cash dividends paid represented 40.52 percent, 37.92 percent, and 36.68 percent of net income after tax in each of 1999, 1998, and 1997, respectively. Total shareholders' equity was $96.6 million at December 31, 1999, compared to $97.7 million at December 31, 1998, and $89.0 million in 1997. The decline in shareholders' equity from year-end 1998 to year-end 1999 is due primarily to a decline in the fair value of the available-for-sale securities portfolio, as a result of rising interest rates in the second half of 1999. The decline in fair value of securities resulted in an other comprehensive loss of $7.1 million for the year ended December 31, 1999. The unrealized loss in the available-for-sale securities portfolio represents approximately 2.1 percent of the amortized cost of the portfolio. Shareholders' equity also declined by approximately $4.1 million in 1999 due to the repurchase of 128,731 shares of common stock. Shares repurchased in 1999 were partially offset by 71,786 net shares issued through the exercise of stock options. Tangible equity of $90.4 million represented 7.64 percent of tangible assets as of December 31, 1999, compared to 10.14 percent at December 31, 1998. The decline in the tangible equity ratio reflects the increase in assets, and the intangible assets created as a 14
result of The Mahopac National Bank acquisition. The Company and its subsidiary banks are subject to quantitative capital measures established by regulation to ensure capital adequacy. Consistent with the objective of operating a sound financial organization, the Company and its subsidiary banks maintain capital ratios well above regulatory minimums, as detailed in Note 17 of the consolidated financial statements. SECURITIES In 1999, the securities portfolio (excluding fair value adjustments on available-for-sale securities) increased 19.2 percent over 1998, to $333.3 million. The $53.6 million increase included $39.4 million attributable to The Mahopac National Bank acquisition. Note 3 to the consolidated financial statements details the types of securities held, the carrying and fair values, and the contractual maturities. Qualified tax-exempt debt securities, primarily obligations of state and political subdivisions, were $78.9 million, or 23.68 percent of all securities at year-end 1999, compared to $66.6 million, or 23.81 percent at December 31, 1998. Mortgage-backed securities, consisting solely of securities issued by U.S. government agencies, totaled $85.3 million at December 31, 1999, compared to $71.5 million at December 31, 1998. Management's policy is to purchase investment grade securities that, on average, have relatively short expected maturities. This policy helps mitigate interest rate risk and provides sources of liquidity without significant risk to capital. A large percentage of securities are direct obligations of the federal government and its agencies. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalty. At December 31, 1999, approximately 8.1 percent of total debt securities were scheduled to mature in one year or less. The maturity distribution of debt securities and mortgage-backed securities as of December 31, 1999, along with the weighted average yield of each category, is presented in Table 4. Balances are shown at amortized cost. TABLE 4 - MATURITY DISTRIBUTION <TABLE> <CAPTION> DUE AFTER ONE DUE AFTER FIVE DUE IN ONE YEAR THROUGH YEARS THROUGH DUE AFTER (dollar amounts in thousands) YEAR OR LESS YIELD FIVE YEARS YIELD TEN YEARS YIELD TEN YEARS YIELD - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> AVAILABLE-FOR-SALE: U.S. Treasury securities and obligations of U.S. Government agencies $15,024 4.78% $55,654 5.79% $154,883 6.68% 68,971 7.76% - ------------------------------------------------------------------------------------------------------------------------------------ $15,024 $55,654 $154,883 68,971 HELD-TO-MATURITY: Obligations of state and political subdivisions* $11,420 4.79% $14,721 5.19% $3,450 5.08% $1,384 4.81% - ------------------------------------------------------------------------------------------------------------------- $11,420 $14,721 $3,450 $1,384 - ------------------------------------------------------------------------------------------------------------------- Total $26,444 $70,375 $158,333 $70,355 - ------------------------------------------------------------------------------------------------------------------- * Yields on obligations of state and political subdivisions are shown before tax-equivalent adjustments </TABLE> LOANS Total loans and leases, net of unearned income and net deferred loan fees and costs, grew 27.8 percent, to $757.0 million at December 31, 1999. The $164.8 million increase in loans and leases from 1998 to 1999 includes $91.3 million related to the purchase of The Mahopac National Bank. Loans acquired in The Mahopac National Bank acquisition included $48.2 million of residential real estate loans, $24.2 million of commercial real estate loans, $5.8 million of real estate construction loans, $9.0 million of commercial loans, $4.1 million of consumer and other loans. Table 5 details the composition and volume changes in the loan portfolio over the past five years. 15
<TABLE> <CAPTION> TABLE 5 - LOAN CLASSIFICATION SUMMARY DECEMBER 31 (Dollar amounts in thousands) 1999 1998 1997 1996 1995 - --------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Residential real estate $312,506 $232,167 $208,455 $188,332 $163,344 Commercial real estate 141,903 105,222 96,389 81,526 71,436 Real estate construction 19,046 9,064 5,267 1,203 663 Commercial 166,263 154,085 143,791 142,189 135,644 Consumer and other 99,206 78,018 70,678 72,132 71,777 Leases 18,850 15,691 14,313 12,740 13,563 - --------------------------------------------------------------------------------------------- Total loans and leases 757,774 594,247 538,893 498,122 456,428 Less unearned income and net deferred fees and costs (2,392) (2,054) (1,737) (1,416) (1,659) - --------------------------------------------------------------------------------------------- Total loans and leases, net of unearned income and deferred fees and costs $755,382 $592,193 $537,156 $496,706 $454,769 ============================================================================================= </TABLE> Residential real estate loans grew by $80.4 million or 34.6 percent in 1999, and comprised 41 percent of total loans and leases. Residential real estate loan growth has exceeded 10 percent in each of the last five years. The Company occasionally sells some of its residential mortgage loans to federal agencies and retains all servicing rights. The Company sold $6.0 million of residential mortgage loans in 1999, compared to $1.0 million in 1998. Mortgage servicing on sold loans continues to provide fee income. Residential mortgage loans serviced for others totaled $59.2 million at December 31, 1999, compared to $31.6 million at December 31, 1998. Commercial real estate loans increased by $36.7 million in 1999, or 34 percent. Commercial real estate loans of $141.1 million represented 18 percent of total loans and leases at December 31, 1999. Commercial loans totaled $166.3 million at December 31, 1999, an increase of 7.9 percent over 1998. The consumer loan portfolio includes personal installment loans, indirect automobile financing, credit card loans, and overdraft lines of credit. Consumer and other loans were $99.2 million at December 31, 1999, up from $78 million at December 31, 1998. Approximately $10.3 million of the growth in consumer loans from 1998 to 1999 is attributable to an increased emphasis in indirect automobile financing at The Bank of Castile. The lease portfolio increased by 20 percent in 1999, to $18.9 million. The lease portfolio has traditionally consisted of leases on vehicles for consumers and small businesses. Competition for automobile financing has increased in recent years, resulting in a decline in the consumer leasing portfolio. In response to the decline in consumer leasing opportunities, management has increased its marketing efforts relating to commercial leasing. These efforts have been successful as the commercial lease portfolio has grown to $10.8 million, an increase of $6.8 million since 1997. As of December 31, 1999, commercial leases represented 57.6 percent of total leases, compared to 45.0 percent at year-end 1998. THE RESERVE FOR LOAN/LEASE LOSSES Management reviews the adequacy of the reserve for loan/lease losses on a regular basis. 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 loan review department; 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 nonaccrual loan statistics; and a historical review of loan and lease loss experience. Based upon consideration of the above factors, management believes that the allowance for loan/lease losses is adequate to provide for the risk of loss inherent in the current loan and lease portfolio. Management uses a model to measure some of these factors and the resulting quantitative analysis, combined with qualitative assessments, comprise the basis on which the adequacy of the reserve for loan/lease losses is determined. The reserve for loan/lease losses increased by $1.8 million from 1998 to 1999. The increase included $1.5 million attributable to The Mahopac National Bank acquisition, and a $300,000 increase as a result of the provision for loan/lease losses exceeding the net loan losses for the year. The allocation of the Company's reserve for loan/lease losses for year-end 1999, and each of the previous four year-ends is illustrated in Table 6. 16
<TABLE> <CAPTION> TABLE 6 - ALLOCATION OF THE RESERVE FOR LOAN/LEASE LOSSES DECEMBER 31 (dollar amounts in thousands) 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> TOTAL LOANS OUTSTANDING AT END OF YEAR $755,382 $592,193 $537,156 $496,706 $454,769 - ------------------------------------------------------------------------------------------------------------- ALLOCATION OF THE RESERVE BY LOAN TYPE: Commercial $3,281 1,906 981 699 1,188 Real estate 1,964 1,384 1,458 944 927 Consumer and all other 3,202 2,935 2,256 2,463 2,678 Unallocated 781 1,180 2,312 2,514 1,627 - ------------------------------------------------------------------------------------------------------------- TOTAL $9,228 $7,405 $7,007 $6,620 6,420 ============================================================================================================= ALLOCATION OF THE RESERVE AS A PERCENT OF TOTAL RESERVE: Commercial 36% 26% 14% 11% 19% Real estate 21% 19% 21% 14% 14% Consumer and all other 35% 40% 32% 37% 42% Unallocated 8% 15% 33% 38% 25% - ------------------------------------------------------------------------------------------------------------- TOTAL 100% 100% 100% 100% 100% ============================================================================================================= LOAN/LEASE TYPES AS A PERCENT OF TOTAL LOANS/LEASES: Commercial 22% 26% 27% 29% 28% Real estate 62% 59% 58% 55% 51% Consumer and all other 16% 15% 15% 16% 21% - ------------------------------------------------------------------------------------------------------------- TOTAL 100% 100% 100% 100% 100% ============================================================================================================= Loans 90 days past due and accruing $ 168 $ 507 $ 183 $ 400 $ 546 Nonaccruing loans 3,698 1,611 3,425 2,486 1,475 Troubled debt restructurings not included above 400 471 483 428 205 Other real estate owned 214 235 244 128 247 - ------------------------------------------------------------------------------------------------------------- RESERVE AS PERCENT OF LOANS OUTSTANDING AT END OF YEAR 1.22% 1.25% 1.30% 1.33% 1.41% ============================================================================================================= </TABLE> The reserve represented 1.22 percent of total loans and leases outstanding at year-end 1999, down slightly from 1.25 percent at December 31, 1998. The reserve coverage of nonperforming loans (loans past due 90 days and accruing, nonaccrual loans, and restructured troubled debt) declined slightly to 2.16 times at December 31, 1999, compared to 2.86 times at December 31, 1998. Management is committed to early recognition of loan problems and to maintaining an adequate reserve. Based upon management's review, the reserve is believed adequate to absorb probable losses in the portfolio. The Company's historical loss experience is detailed in Table 7 . 17
<TABLE> <CAPTION> TABLE 7 - ANALYSIS OF THE RESERVE FOR LOAN/LEASE LOSSES dollar amounts in thousands) 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> Average loans outstanding during year $674,748 559,158 511,989 469,942 439,159 Balance of reserve at beginning of year $7,405 7,007 6,620 6,420 6,181 Allowance related to purchase acquisition 1,511 N/A N/A N/A N/A LOANS CHARGED-OFF, DOMESTIC: Commercial, financial, and agricultural 241 326 230 124 154 Real estate - mortgage 105 509 64 174 50 Installment loans to individuals 647 674 1,200 1,369 757 Lease financing 1 10 8 10 4 Other loans 114 70 69 59 355 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL LOANS CHARGED-OFF 1,108 1,589 1,571 1,736 1,320 - ------------------------------------------------------------------------------------------------------------------------------------ RECOVERIES OF LOANS PREVIOUSLY CHARGED-OFF, DOMESTIC: Commercial, financial, and agricultural 62 69 74 61 41 Real estate - mortgage 49 4 3 7 54 Installment loans to individuals 343 349 412 348 273 Lease financing 0 5 4 7 17 Other loans 22 21 29 21 98 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL LOANS RECOVERED 476 448 522 444 483 - ------------------------------------------------------------------------------------------------------------------------------------ Net loans charged-off 632 1,141 1,049 1,292 837 Additions to reserve charged to operations 944 1,539 1,436 1,492 1,076 - ------------------------------------------------------------------------------------------------------------------------------------ Balance of reserve at end of year $9,228 7,405 7,007 6,620 6,420 - ------------------------------------------------------------------------------------------------------------------------------------ Net charge-offs as percent of average loans outstanding during year 0.09% 0.20% 0.20% 0.28% 0.19% - ------------------------------------------------------------------------------------------------------------------------------------ </TABLE> DEPOSITS AND OTHER LIABILITIES Total deposits grew by $240.6 million in 1999, to $974.2 million. Deposit growth consisted primarily of core deposits, which increased by $199.4 million, while time deposits of $100,000 or more grew by $41.2 million. The strength of The Mahopac National Bank's core deposit base was an important consideration in management's decision to acquire The Mahopac National Bank. At the time of the acquisition, The Mahopac National Bank had core deposits of $134.4 million, which increased to $143.5 million by December 31, 1999. Core deposit growth was strong at all three of the Company's subsidiary banks. The Company's liability for securities sold under agreements to repurchase ("repurchase agreements") amounted to $57.8 million at December 31, 1999, representing a $3.4 million decline from year-end 1998. 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. Management generally views local repurchase agreements as an alternative to large time deposits. As of December 31, 1999, securities pledged to secure certain large deposits, repurchase agreements, and other borrowings amounted to $249.3 million, compared to $203.2 million as of December 31, 1998. Total securities pledged for deposits and repurchase agreements represented 76.7 percent of total securities at December 31, 1999, compared to 71.7 percent of total securities at December 31, 1998. During 1999, the Company reduced its borrowings from the Federal Home Loan Bank (FHLB) by $7.1 million, to $41.9 million. Borrowings outstanding at December 31, 1999, included $10 million in borrowings due in one year or less, and $31.9 million due in more than one year. The weighted average interest rate on borrowings due in more than one year carried an average interest rate of 5.46 percent at December 31, 1999. 18
LIQUIDITY MANAGEMENT The objective of liquidity management is to ensure the availability of adequate funding sources to satisfy the demand for credit, deposit withdrawals, and business investment opportunities. The Company's large, stable core deposit base and strong capital position are the foundation for the Company's liquidity position. Asset and liability positions are monitored primarily through Asset/Liability Management Committees of the subsidiary banks, which review monthly reports on the liquidity and interest rate sensitivity positions. Comparisons with industry and peer groups are also monitored. Core deposits remain the key funding source, representing 81 percent of total deposits, and 73 percent of total liabilities at December 31, 1999. Non-core funding sources (time deposits of $100,000 or more, repurchase agreements, and other borrowings) declined as a percentage of total liabilities from 29 percent at December 31, 1998, to 26 percent at December 31, 1999. Short-term investments consisting of securities with maturities of one year or less and federal funds sold decreased from $55.1 million at December 31, 1998, to $42.6 million at December 31, 1999. The ratio of short-term investments to short-term non-core liabilities declined from 22.1 percent at year-end 1998, to 15.2 percent at year-end 1999, indicating an increase in the volume of long-term assets supported by short-term non-core liabilities. The decline in this ratio is partially attributable to an increase in mortgage-backed securities, which have stated maturities in excess of one year, but have monthly principal reductions. Total mortgage-backed securities increased from $71.8 million at year-end 1998, to $83.2 million at year-end 1999. Cash flow from the loan and investment portfolios provides a significant source of liquidity. Investment in residential mortgage loans, mortgage-backed securities, and consumer loans totaled approximately $312.6 million at December 31, 1999. Aggregate amortization from monthly payments on these assets provides significant cash flow to the Company. Table 8 details total scheduled maturities of selected loan categories. TABLE 8 - LOAN MATURITY <TABLE> <CAPTION> REMAINING MATURITY OF SELECTED LOANS AT DECEMBER 31, 1999 (dollar amounts in thousands) TOTAL WITHIN 1 YEAR 1-5 YEARS AFTER 5 YEARS - ---------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Commercial real estate $141,903 15,811 38,382 87,710 Real estate construction 19,046 7,735 364 10,947 Commercial 166,263 76,733 34,767 54,763 - ---------------------------------------------------------------------------------------------- TOTAL $327,212 100,279 73,513 153,420 ============================================================================================== </TABLE> 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 December 31, 1999, the unused borrowing capacity on established lines with the FHLB was $106.9 million. As members of the FHLB, the Company's subsidiary banks can use unencumbered mortgage-related assets to secure additional borrowings from the FHLB. At December 31, 1999, total real estate loans of the Company were $454.5 million. RECENT ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivatives embedded in other contracts, and for hedging activities. As amended, this statement is effective for fiscal years beginning after June 15, 2000. Management is currently evaluating the impact, if any, of this statement on the Company's consolidated financial statements. 19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK MARKET RISK The Company's primary market risk exposure relates to sensitivity to interest rate changes. Interest rate sensitivity refers to the volatility in earnings, resulting from changes in interest rates. Each month the Asset/Liability Management Committees estimate the earnings impact of changes in interest rates. The findings of the committees are incorporated into investment and funding decisions, and in the business planning process. Table 9 is a Condensed Static Gap Report, which illustrates the anticipated repricing intervals of assets and liabilities as of December 31, 1999. The analysis reflects a liability sensitive position, suggesting that earnings would benefit from a declining interest rate environment and would be hindered by a rising rate environment. TABLE 9 - INTEREST RATE RISK ANALYSIS <TABLE> <CAPTION> CONDENSED STATIC GAP - DECEMBER 31, 1999 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 $1,107,510 $265,242 $40,804 $85,693 $391,739 Interest-bearing liabilities 891,411 438,310 99,573 69,619 607,502 - ---------------------------------------------------------------------------------------------------------- Net gap position (173,068) (58,769) 16,074 (215,763) - ---------------------------------------------------------------------------------------------------------- Net gap position as a percentage of total assets (14.56%) (4.94%) (1.35%) (18.15%) ========================================================================================================== </TABLE> Management uses a simulation model to assess the potential impact from various interest rate movements. Based upon the simulation analysis performed as of December 31, 1999, a 200 basis point upward shift in interest rates over a one-year time frame would result in a one-year decline of approximately 3 percent in net interest income, assuming management takes no action to address balance sheet mismatches. The same simulation indicates that a 200 basis point decline in interest rates over a one-year period would increase net interest income by approximately 1 percent. The simulation model is useful in identifying potential exposure to interest rate movements; however, management feels that certain actions could be taken to offset some of the negative effects of unfavorable movements in interest rates. Although the analysis reflects some exposure to rising interest rates, management feels the exposure is not significant in relation to the earnings and capital strength of the Company. Additional information regarding market risk of the Company's financial instruments at December 31, 1999 is provided in Table 10. <TABLE> <CAPTION> TABLE 10 - REPRICING INTERVALS OF SELECTED FINANCIAL INSTRUMENTS GREATER (dollar amounts in thousands) 0-1 YEAR 1-2 YEARS 2-3 YEARS 3-5 YEARS THAN 5 YEARS TOTAL FAIR VALUE - ------------------------------------------------------------------------------------------------------------------------------------ FINANCIAL ASSETS: <S> <C> <C> <C> <C> <C> <C> <C> Available-for-sale securities $44,722 $31,761 $25,329 $48,541 $143,846 $294,199 $294,199 Average interest rate 6.07% 6.25% 6.17% 6.09% 6.69% 6.41% Held-to-maturity securities 11,411 6,530 4,651 3,488 4,895 30,975 31,265 Average interest rate* 4.97% 5.45% 5.40% 5.18% 5.04% 5.17% Loans 285,604 71,735 70,766 135,798 191,479 755,382 750,271 Average interest rate* 8.58% 8.31% 8.30% 8.13% 8.32% 8.47% FINANCIAL LIABILITIES: Time deposits $307,377 $51,887 $10,563 $6,524 $20 $376,371 $376,307 Average interest rate 5.02% 5.39% 5.84% 5.54% 5.76% 5.10% Federal funds sold and securities sold under agreements to repurchase 57,719 127 0 0 0 57,846 57,834 Average interest rate 5.10% 5.75% 0.00% 0.00% 0.00% 5.20% Other borrowings 18,443 9,328 9,328 3,354 1,559 42,012 41,845 Average interest rate 4.39% 5.20% 5.24% 6.80% 6.80% 5.04% ========================================================================================================== </TABLE> * Interest rate on tax-exempt obligations is shown before tax-equivalent adjustments. 20
<TABLE> <CAPTION> ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED STATEMENTS OF CONDITION YEAR ENDED DECEMBER 31 (in thousands except share and per share data) 1999 1998 - ------------------------------------------------------------------------------------------- ASSETS <S> <C> <C> Cash and noninterest bearing balances due from banks $35,938 $27,818 Federal funds sold 18,850 18,850 Available-for-sale securities, at fair value 294,199 249,255 Held-to-maturity securities, fair value of $31,265 at December 31, 1999 and $35,011 at December 31, 1998 30,975 34,088 Loans and leases, net of unearned income 755,382 592,193 - ------------------------------------------------------------------------------------------- Less reserve for loan/lease losses 9,228 7,405 NET LOANS/LEASES 746,154 584,788 Bank premises and equipment, net 21,147 13,755 Corporate owned life insurance 13,267 11,219 Intangible assets 6,271 951 Accrued interest and other assets 21,878 13,981 - ------------------------------------------------------------------------------------------- TOTAL ASSETS $1,188,679 $954,705 LIABILITIES, MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES, AND SHAREHOLDERS' EQUITY Deposits: Interest bearing: Checking, savings, and money market $416,836 $295,378 Time 376,371 312,277 Non-interest bearing 181,032 125,989 - ------------------------------------------------------------------------------------------- TOTAL DEPOSITS 974,239 733,644 Securities sold under agreements to repurchase 57,846 61,205 Other borrowings 42,012 48,973 Other liabilities 11,766 11,855 - ------------------------------------------------------------------------------------------- TOTAL LIABILITIES $1,085,863 $855,677 - ------------------------------------------------------------------------------------------- Minority interest in consolidated subsidiaries $6,192 $1,376 Shareholders' equity: Common stock - par value $0.10 per share: authorized: 15,000,000 shares; Issued: 7,099,606 shares at December 31, 1999, and 7,156,246 shares at December 31, 1998 $ 710 $717 Surplus 40,548 43,774 Undivided profits 61,078 52,037 Accumulated other comprehensive (loss) income (4,745) 2,339 Treasury stock at cost: 27,663 shares at December 31, 1999, and 28,889 shares at December 31, 1998 (525) (548) Unallocated ISOP/ESOP: 37,637 shares at December 31, 1999, and 51,801 shares at December 31, 1998 (442) (667) - ------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 96,624 97,652 - ------------------------------------------------------------------------------------------- TOTAL LIABILITIES, MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES, AND SHAREHOLDERS' EQUITY $1,188,679 $954,705 - ------------------------------------------------------------------------------------------- See notes to consolidated financial statements. </TABLE> 21
<TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF INCOME YEAR ENDED DECEMBER 31 (in thousands except per share data) 1999 1998 1997 - --------------------------------------------------------------------------------------- INTEREST AND DIVIDEND INCOME <S> <C> <C> <C> Loans $57,790 $50,578 $47,296 Federal funds sold 980 632 549 Available-for-sale securities 17,229 15,020 13,995 Held-to-maturity securities 1,618 3,499 4,425 - --------------------------------------------------------------------------------------- TOTAL INTEREST AND DIVIDEND INCOME 77,617 69,729 66,265 - --------------------------------------------------------------------------------------- INTEREST EXPENSE Deposits: Time certificates of deposit of $100,000 or more 7,565 6,905 6,066 Other deposits 17,642 16,854 16,255 Federal funds purchased and securities sold under agreements to repurchase 2,852 3,110 4,340 Other borrowings 2,492 2,502 1,574 - --------------------------------------------------------------------------------------- TOTAL INTEREST EXPENSE 30,551 29,371 28,235 - --------------------------------------------------------------------------------------- NET INTEREST INCOME 47,066 40,358 38,030 LESS PROVISION FOR LOAN/LEASE LOSSES 944 1,539 1,436 - --------------------------------------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN/LEASE LOSSES 46,122 38,819 36,594 OTHER INCOME Trust and investment services income 4,119 3,811 3,159 Service charges on deposit accounts 3,223 2,722 2,729 Other service charges 2,716 2,008 1,849 Increase in cash surrender value of corporate owned life insurance 723 66 38 Other operating income 1,083 1,160 452 Loss on sale of available-for-sale securities (59) (12) (48) - --------------------------------------------------------------------------------------- TOTAL OTHER INCOME 11,805 9,755 8,179 - --------------------------------------------------------------------------------------- OTHER EXPENSES Salaries and wages 15,131 12,358 11,490 Pension and other employee benefits 3,469 2,697 2,693 Net occupancy expense of bank premises 1,801 1,839 1,806 Net furniture and fixture expense 2,255 1,958 1,890 Amortization of intangible assets 687 239 241 Merger and acquisition-related expenses 1,463 0 0 Other operating expenses 9,514 7,765 6,907 - --------------------------------------------------------------------------------------- TOTAL OTHER EXPENSES 34,320 26,856 25,027 - --------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAX EXPENSE AND MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 23,607 21,718 19,746 Minority interest in consolidated subsidiaries 558 0 0 INCOME TAX EXPENSE 7,849 7,216 6,754 - --------------------------------------------------------------------------------------- NET INCOME $15,200 $14,502 $12,992 ======================================================================================= Basic earnings per share $2.15 $2.05 $1.91 Diluted earnings per share $2.12 $2.01 $1.84 ======================================================================================= See notes to consolidated financial statements. </TABLE> 22
<TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31 (in thousands) 1999 1998 1997 - --------------------------------------------------------------------------------------- OPERATING ACTIVITIES <S> <C> <C> <C> Net income $15,200 $14,502 $12,992 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan/lease losses 944 1,539 1,436 Depreciation and amortization premises, equipment, and software 2,166 1,890 1,769 Amortization of intangible assets 687 239 241 Earnings from corporate owned life insurance (723) (66) (38) Net amortization on securities 266 287 201 Deferred income tax benefit (576) (537) (375) Loss on sale of securities 59 12 48 Net gain on sales of loans (27) (107) (12) Net gain on sales of bank premises and equipment (32) (11) (45) ISOP/ESOP shares released for allocation 384 507 449 Increase in interest receivable (802) (420) (382) (Decrease) increase in interest payable (18) 35 136 Other, net (2,127) 2,928 269 - --------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 15,401 20,798 16,689 - --------------------------------------------------------------------------------------- INVESTING ACTIVITIES Proceeds from maturities of available-for-sale securities 82,381 86,514 61,153 Proceeds from sales of available-for-sale securities 12,983 26,237 14,712 Proceeds from maturities of held-to-maturity securities 12,296 19,018 18,096 Purchases of available-for-sale securities (115,701) (115,231) (83,177) Purchases of held-to-maturity securities (6,766) (7,071) (16,999) Proceeds from sales of loans 7,436 8,564 4,312 Net increase in loans/leases (79,905) (64,636) (45,800) Proceeds from sales of bank premises and equipment 74 25 64 Purchases of bank premises and equipment (2,434) (2,184) (2,324) Purchase of corporate owned life insurance (815) (10,980) 0 Net cash provided by acquisition of The Mahopac National Bank 4,258 0 0 - --------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (86,193) (59,744) (49,963) - --------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net increase in demand deposits, money market accounts, and savings accounts 58,059 21,416 22,853 Net increase in time deposits 40,701 18,323 35,404 Net (decrease) increase in securities sold under agreements to repurchase and federal funds purchased (3,359) 1,533 (32,023) Net (decrease) increase in other borrowings (6,961) 14,156 11,668 Cash dividends (6,159) (5,499) (4,766) Sale of treasury stock 41 40 41 Repurchase of common shares (4,101) (2,138) (2,670) Repurchase of warrants 0 0 (430) Net proceeds from exercise of stock options, warrants, and related tax benefit 691 281 4,160 Common shares acquired by ESOP 0 0 (346) - --------------------------------------------------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 78,912 48,112 33,891 - --------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 8,120 9,166 617 - --------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of year 46,668 37,502 36,885 - --------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $54,788 $46,668 $37,502 ======================================================================================= SUPPLEMENTAL INFORMATION: Cash paid during the year for: Interest $30,569 $29,410 $28,099 Income taxes $10,307 $5,221 $6,586 Non-cash investing activities: Change in net unrealized holding (loss) gain on available-for-sale securities $(11,814) $1,399 $1,926 Fair value of noncash assets acquired in purchase acquisition 143,298 0 0 Fair value of liabilities assumed in purchase acquisition 147,556 0 0 See notes to consolidated financial statements. </TABLE> 23
<TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY ACCUMULATED OTHER COMMON TREASURY UNDIVIDED COMPREHENSIVE UNALLOCATED (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) STOCK STOCK SURPLUS PROFITS INCOME (LOSS) ISOP/ESOP TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> BALANCES AT DECEMBER 31, 1996 $398 $(604) $44,315 $34,971 $229 $(890) $78,419 ==================================================================================================================================== Comprehensive income: Net income 12,992 12,992 Other comprehensive income 1,154 1,154 --------- TOTAL COMPREHENSIVE INCOME 14,146 Cash dividends ($.82 per share) (4,766) (4,766) Exercise of stock options, warrants, and related tax benefit (384,753 shares, net) 13 4,147 4,160 Repurchase of warrants (36,271 shares) (430) (430) Treasury stock sold (1,735 shares) 33 8 41 Common stock repurchased and returned to unissued status (120,000 shares) (8) (2,662) (2,670) ISOP/ESOP shares released or committed to be released for allocation (17,623 shares) 144 305 449 Shares purchased by ESOP (30,928 shares) (346) (346) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCES AT DECEMBER 31, 1997 $403 $(571) $45,522 $43,197 $1,383 $(931) $89,003 ==================================================================================================================================== Comprehensive income: Net income 14,502 14,502 Other comprehensive income 956 956 ------- TOTAL COMPREHENSIVE INCOME 15,458 Cash dividends ($.91 per share) (5,499) (5,499) Exercise of stock options, and related tax benefit (33,215 shares, net) 3 278 281 Treasury stock sold (1,180 shares) 23 17 40 Treasury stock purchased and returned to unissued status by pooled company (59,490 shares) (5) (1,549) (1,554) Common stock repurchased and returned to unissued status (17,245 shares) (1) (583) (584) ISOP/ESOP shares released or committed to be released for allocation (16,182 shares) 243 264 507 Effect of stock splits in the form of stock dividends 317 (154) (163) 0 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCES AT DECEMBER 31, 1998 $717 $(548) $43,774 $52,037 $2,339 $(667) $97,652 ==================================================================================================================================== Comprehensive income: Net income 15,200 15,200 Other comprehensive loss (7,084) (7,084) ----------- TOTAL COMPREHENSIVE INCOME 8,116 Cash dividends ($1.03 per share) (6,159) (6,159) Exercise of stock options, and related tax benefit (71,786 shares, net) 7 684 691 Treasury stock sold (1,226 shares) 23 18 41 Treasury stock purchased and returned to unissued status by pooled company (9,465 shares) (1) (215) (216) Common stock repurchased and returned to unissued status (119,266 shares) (13) (3,872) (3,885) ISOP/ESOP shares released or committed to be released for allocation (14,164 shares) 159 225 384 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCES AT DECEMBER 31, 1999 $710 $(525) $40,548 $61,078 $(4,745) $(442) $96,624 ==================================================================================================================================== SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. </TABLE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION: Tompkins Trustco, Inc. ("Tompkins" or "the Company") is a bank holding company, organized under the laws of New York State, and is the parent company of Tompkins County Trust Company (the "Trust Company"), The Bank of Castile, and The Mahopac National Bank. The Trust Company and The Bank of Castile are 100 percent owned by Tompkins, and The Mahopac National Bank is approximately 70 percent owned by Tompkins. The consolidated financial information included herein combines the results of operations, the assets, liabilities, and shareholders' equity of the Company and its subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclose contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. Amounts in the prior years' consolidated financial statements are reclassified when necessary to conform with the current year's presentation. MERGER WITH LETCHWORTH INDEPENDENT BANCSHARES CORPORATION: On December 31, 1999, Letchworth Independent Bancshares Corporation ("Letchworth") was merged with and into Tompkins Trustco, Inc. The merger was accounted for as a pooling-of-interests and, accordingly, the financial information for all prior periods has been restated to present the combined financial condition and results of operations of both companies as if the merger had been in effect for all periods presented. Further details pertaining to the merger are presented in Note 2 to the Company's consolidated financial statements. CASH EQUIVALENTS: Cash equivalents in the consolidated statements of cash flows include cash and amounts due from banks and federal funds sold. SECURITIES: Management determines the appropriate classification of debt and equity securities at the time of purchase. Securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. Debt securities not classified as held-to-maturity and marketable equity securities are classified as available-for-sale. Available-for-sale securities are stated at fair value with the unrealized gains and losses, net of tax, excluded from earnings and reported as a separate component of accumulated comprehensive income, in shareholders' equity. Premiums and discounts are amortized or accreted over the expected life of the related security as an adjustment to yield using the interest method. Dividend and interest income are recognized when earned. Realized gains and losses on the sale of securities are included in securities gains (losses). The cost of securities sold is based on the specific identification method. A decline in the fair value of any available-for-sale or held-to-maturity security below cost that is deemed to be other than temporary is charged to earnings, resulting in the establishment of a new cost basis for the security. LOANS AND LEASES: Loans are reported at their principal outstanding balance, net of deferred loan origination fees and costs, and unearned income. The Company has the ability and intent to hold its loans for the foreseeable future, except for education loans which are sold to a third party from time to time upon reaching repayment status. The Company provides motor vehicle and equipment financing to its customers through direct financing leases. These leases are carried at the aggregate of lease payments receivable, plus estimated residual values, less unearned income. Unearned income on direct financing leases is amortized over the lease terms, resulting in a level rate of return. RESERVE FOR LOAN/LEASE LOSSES: The reserve for loan/lease losses is regularly evaluated by management in order to maintain the reserve at a level consistent with the inherent risk of loss in the loan and lease portfolios. Management's evaluation of the adequacy of the reserve is based upon a review of the Company's historical loss experience, known and inherent risks in the loan and lease portfolios, the estimated value of collateral, the level of nonperforming loans, and trends in delinquencies. External factors, such as the level and trend of interest rates and the national and local economies, are also considered. Management believes that the reserve for loan/lease losses is adequate. Management considers a loan to be impaired if, based on current information, it is probable that the Company will be unable to collect all scheduled payments of principal or interest when due, according to the contractual terms of the loan agreement. When a loan is considered to be impaired, the amount of the impairment is measured based on the present value of expected future cash flows discounted at the effective interest rate of the loan or, as a practical expedient, at the observable market price or the fair value of collateral if the loan is collateral dependent. Management excludes large groups of smaller balance homogeneous loans such as residential mortgages, consumer loans, and leases, which are collectively evaluated. Impairment losses are included in the reserve for loan/lease losses through a charge to the provision for loan/lease losses. Loans and leases restructured in a troubled debt restructuring are also considered impaired loans INCOME RECOGNITION ON IMPAIRED AND NONACCRUAL LOANS AND LEASES: Loans and leases, including impaired loans, are generally classified as nonaccrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans are well secured and in the process of collection. Loans that are past due less than 90 days may also be classified as nonaccrual if repayment in full of principal or interest is in doubt. Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within an acceptable time period, and there is a sustained period of repayment performance by the borrower in accordance with the contractual terms of the loan agreement. Payments received on loans carried as nonaccrual are generally applied as a reduction to principal. When the future collectibility of the recorded loan balance is expected, interest income may be recognized on a cash basis. 25
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) OTHER REAL ESTATE OWNED: Other real estate owned consists of properties formerly pledged as collateral to loans, which have been acquired by the Company through foreclosure proceedings or acceptance of a deed in lieu of foreclosure. Other real estate owned is carried at the lower of the recorded investment in the loan or the fair value of the real estate, less estimated costs to sell. Upon transfer of a loan to foreclosure status, an appraisal is obtained and any excess of the loan balance over the fair value, less estimated costs to sell, is charged against the reserve for loan/lease losses. Expenses and subsequent adjustments to the fair value are treated as other operating expense. BANK PREMISES AND EQUIPMENT: Land is carried at cost. Bank premises and equipment are stated at cost, less allowances for depreciation. The provision for depreciation for financial reporting purposes is computed generally by the straight-line method at rates sufficient to write-off the cost of such assets over their estimated useful lives. Bank premises are amortized over a period of 10-39 years, and furniture, fixtures, and equipment are amortized over a period of 2-20 years. Maintenance and repairs are charged to expense as incurred. INCOME TAXES: Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. GOODWILL AND CORE DEPOSIT INTANGIBLE: Goodwill represents the excess of purchase price over the fair value of assets acquired in a transaction using purchase accounting. Core deposit intangible represents a premium paid to acquire a base of stable low cost deposits in the acquisition of a bank, or a bank branch, using purchase accounting. The amortization period of goodwill ranges from 10 years to 20 years, and the amortization period for core deposit intangible ranges from 5 years to 10 years. The amortization periods are monitored to determine if circumstances require such period to be reduced. The Company periodically reviews its intangible assets for changes in circumstances that may indicate the carrying amount of the asset is impaired. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE: Securities sold under agreements to repurchase (repurchase agreements) are agreements in which the Company transfers the underlying securities to a third-party custodian's account that explicitly recognizes the Company's interest in the securities. The agreements are accounted for as secured financing transactions provided the Company maintains effective control over the transferred securities and meets other criteria as specified in Statement of Financial Accounting Standards (SFAS) No. 125. The Company's agreements are accounted for as secured financings; accordingly, the transaction proceeds are reflected as liabilities and the securities underlying the agreements continue to be carried in the Company's securities portfolio. TREASURY STOCK: The cost of treasury stock is shown on the consolidated statements of condition as a separate component of shareholders' equity, and is a reduction to total shareholders' equity. Shares are released from treasury at fair value, with any gain or loss on the sale reflected as an adjustment to shareholders' equity. All shares currently carried in treasury are the result of a single purchase; therefore, the cost basis for shares released is equal to the actual cost. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK: The Company does not engage in the use of derivative financial instruments. The Company is party to certain other financial instruments with off-balance-sheet risk such as commitments under stand-by letters of credit, unused portions of lines of credit, and commitments to fund new loans. The Company's policy is to record such instruments when funded. TRUST AND INVESTMENT SERVICES DIVISION: Assets held in fiduciary or agency capacities for customers are not included in the accompanying consolidated statements of condition, since such items are not assets of the Company. Fees associated with providing trust management services are recorded on a cash basis of income recognition and are included in other income. EARNINGS PER SHARE: Basic earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of shares outstanding during the year. Diluted earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of shares outstanding during the year plus the maximum dilutive effect of stock issuable upon conversion of stock options and warrants. CASH DIVIDENDS PER SHARE: Cash dividends per share reflect actual historical information for Tompkins Trustco, Inc. SEGMENT REPORTING: The Company's operations are solely in the financial services industry and include the provisions of traditional commercial banking services. The Company operates primarily in the geographical areas in the proximity of its branch locations in New York State. Operating decisions are made based upon a review of the Company's traditional banking services, which constitute the Company's only reportable segment. COMPREHENSIVE INCOME: For the Company, comprehensive income represents net income plus the net change in unrealized gains or losses on securities available for sale for the period (net of taxes), and is presented in the consolidated statements of changes in shareholders' equity. Accumulated other comprehensive income represents the net unrealized gains or losses on securities available for sale as of the dates of the consolidated statements of condition. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivatives embedded in other contracts, and for hedging activities. As amended, this statement is effective for fiscal years beginning after June 15, 2000. Management is currently evaluating the impact, if any, of this statement on the Company's consolidated financial statements. 26
NOTE 2 MERGERS AND ACQUISITIONS On December 20, 1999, the shareholders of Tompkins Trustco, Inc. and Letchworth Independent Bancshares Corporation approved a merger between the two companies. Effective December 31, 1999, Letchworth was merged with and into Tompkins, and each issued and outstanding share of Letchworth common stock was converted into 0.685 shares of Tompkins common stock, plus cash in lieu of any fractional shares. This merger resulted in the issuance of approximately 2.3 million additional shares of Tompkins common stock, bringing Tompkins' total outstanding shares to approximately 7.1 million shares immediately following the merger. Letchworth was the holding company for The Bank of Castile, Castile, New York, and The Mahopac National Bank, Mahopac, New York. The Bank of Castile will continue to operate its community banking business as a wholly-owned subsidiary of Tompkins. The Bank of Castile conducts its operations through its main office located in Castile, New York, and at its eleven branch offices in towns situated in and around the areas commonly known as the Letchworth State Park area and the Genesee Valley region of New York State. The Bank of Castile recently opened its first branch office in Monroe County. The Mahopac National Bank will continue to operate its community banking business as a majority-owned subsidiary of Tompkins, with Tompkins owning approximately 70 percent of Mahopac's outstanding common stock. The Mahopac National Bank is located in Putnam County, New York, and operates three bank branches in that county. As a result of the merger, the Company incurred one-time merger-related expenses of approximately $1.5 million ($1.3 million after tax impact), which were recognized in the fourth quarter of 1999. The expenses related primarily to fees for professional services and also include fees for data processing conversion and certain employment-related costs. No significant additional expenses are expected in 2000 as a result of the merger. The merger qualified as a tax-free reorganization and was accounted for as a pooling-of-interests. All historical financial information in this annual report has been restated for the combination of the two companies. The following table presents the results of operations as reported by each of the companies, and on a combined basis: <TABLE> <CAPTION> YEAR ENDED DECEMBER 31 (dollar amounts in thousands, except per share) 1999 1998 1997 - ------------------------------------------------------------------------------------------ Net interest income: <S> <C> <C> <C> Tompkins $29,111 $28,231 $26,630 Letchworth 17,955 12,127 11,400 - ------------------------------------------------------------------------------------------ COMBINED $47,066 $40,358 $38,030 Net income: Tompkins $11,865 $11,189 $9,856 Letchworth 3,335 3,313 3,136 - ------------------------------------------------------------------------------------------ COMBINED $15,200 $14,502 $12,992 Basic earnings per share: Tompkins $2.46 $2.31 $2.02 Letchworth $1.01 $1.01 $1.10 - ------------------------------------------------------------------------------------------ COMBINED $2.15 $2.05 $1.91 Diluted earnings per share: Tompkins $2.43 $2.27 $2.00 Letchworth $1.00 $.99 $1.00 - ------------------------------------------------------------------------------------------ COMBINED $2.12 $2.01 $1.84 ========================================================================================== </TABLE> On June 4, 1999, Letchworth acquired 70.17 percent of the outstanding common stock of The Mahopac National Bank in a cash transaction accounted for as a purchase. Accordingly, the 1999 consolidated financial information in this annual report includes the results of operations of Mahopac for the seven-month period ending December 31, 1999. The 29.83 percent interest in The Mahopac National Bank, which is not owned by Tompkins, is shown as a minority interest in consolidated subsidiaries on the 1999 consolidated statement of condition. The Mahopac transaction resulted in a core deposit intangible of $3.5 million, which is being amortized over a ten year period, and goodwill of $2.5 million, which is being amortized over a 20 year period. Pursuant to the agreement by which Letchworth acquired approximately 70 percent ownership interest in The Mahopac National Bank, Tompkins has assumed an option to acquire the remaining outstanding shares of The Mahopac National Bank from the minority shareholders, at 90 percent of their fair value. The option becomes exercisable in December 2000, if the Company's shares in The Mahopac National Bank have not been acquired by the minority shareholders at 90 percent of their fair value. 27
<TABLE> <CAPTION> NOTE 3 SECURITIES The following summarizes securities: AVAILABLE-FOR-SALE SECURITIES - ------------------------------------------------------------------------------------------------------------------------------------ GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR DECEMBER 31, 1999 (IN THOUSANDS) COST GAINS LOSSES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ U.S. Treasury securities and obligations of <S> <C> <C> <C> <C> U.S. Government agencies $156,763 $ 63 $6,025 $150,801 Obligations of states and political subdivisions 47,943 325 628 47,640 Mortgage-backed securities 85,340 50 2,204 83,186 U.S. corporate securities 4,486 7 25 4,468 - ------------------------------------------------------------------------------------------------------------------------------------ Total debt securities 294,532 445 8,882 286,095 - ------------------------------------------------------------------------------------------------------------------------------------ Equity securities 7,771 333 0 8,104 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL AVAILABLE-FOR-SALE SECURITIES $302,303 $778 $8,882 $294,199 ==================================================================================================================================== Available-for-sale securities includes $6,665,000 in equity securities, which are carried at amortized cost since fair values are not readily determinable. This figure includes $5,039,000 of Federal Home Loan Bank Stock. HELD-TO-MATURITY SECURITIES - ------------------------------------------------------------------------------------------------------------------------------------ GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR DECEMBER 31, 1999 (IN THOUSANDS) COST GAINS LOSSES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ Obligations of states and political subdivisions $30,975 $349 $59 $31,265 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL HELD-TO-MATURITY DEBT SECURITIES $30,975 $349 $59 $31,265 ==================================================================================================================================== AVAILABLE-FOR-SALE SECURITIES GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR DECEMBER 31, 1998 (IN THOUSANDS) COST GAINS LOSSES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ U.S. Treasury securities and obligations of U.S. Government agencies $135,719 $1,858 $ 21 $137,556 Obligations of states and political subdivisions 32,487 1,415 25 33,877 Mortgage-backed securities 71,570 444 134 71,880 - ------------------------------------------------------------------------------------------------------------------------------------ Total debt securities 239,776 3,717 180 243,313 Equity securities 5,769 173 0 5,942 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL AVAILABLE-FOR-SALE SECURITIES $245,545 $3,890 $180 $249,255 ==================================================================================================================================== Available-for-sale securities includes $4,833,000 in equity securities, which are carried at amortized cost since fair values are not readily determinable. This figure includes $3,629,000 of Federal Home Loan Bank Stock. HELD-TO-MATURITY SECURITIES - ------------------------------------------------------------------------------------------------------------------------------------ GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR DECEMBER 31, 1998 (IN THOUSANDS) COST GAINS LOSSES VALUE - ------------------------------------------------------------------------------------------------------------------------------------ Obligations of states and political subdivisions $34,088 $923 $0 $35,011 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL HELD-TO-MATURITY DEBT SECURITIES $34,088 $923 $0 $35,011 - ------------------------------------------------------------------------------------------------------------------------------------ </TABLE> 28
NOTE 3 SECURITIES (continued) The amortized cost and estimated fair value of debt securities by contractual maturity are shown in the following table. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. <TABLE> <CAPTION> AMORTIZED FAIR DECEMBER 31, 1999 (in thousands) COST VALUE - --------------------------------------------------------------------------- Available-for-sale securities: <S> <C> <C> Due in one year or less $12,288 $12,630 Due after one year through five years 50,134 49,325 Due after five years through ten years 136,749 131,116 Due after ten years 10,019 9,838 TOTAL AVAILABLE-FOR-SALE DEBT SECURITIES 209,190 202,909 - --------------------------------------------------------------------------- Mortgage-backed securities 85,342 83,186 Equity securities 7,771 8,104 - --------------------------------------------------------------------------- TOTAL AVAILABLE-FOR-SALE SECURITIES $302,303 $294,199 =========================================================================== AMORTIZED FAIR DECEMBER 31, 1999 (in thousands) COST VALUE - --------------------------------------------------------------------------- Held-to-maturity securities: Due in one year or less $11,420 $11,457 Due after one year through five years 14,721 14,949 Due after five years through ten years 3,450 3,516 Due after ten years 1,384 1,343 - --------------------------------------------------------------------------- TOTAL HELD-TO-MATURITY DEBT SECURITIES $30,975 $31,265 =========================================================================== Gains from the sales of available-for-sale securities were $37,000 in 1999, $89,000 in 1998, and $37,000 in 1997; losses from the sales of available-for-sale securities were $96,000 in 1999, $101,000 in 1998, and $85,000 in 1997. At December 31, 1999, securities with a carrying value of $249,258,000 were pledged to secure public deposits (as required by law), and securities were sold under agreements to repurchase. Except for U.S. government securities, there were no holdings, when taken in aggregate, of any single issuer that exceeded 10 percent of shareholders' equity at December 31, 1999. NOTE 4 COMPREHENSIVE INCOME Comprehensive income for the three years ended December 31, 1999, is summarized below: - --------------------------------------------------------------------------------------- DECEMBER 31 (in thousands) 1999 1998 1997 - --------------------------------------------------------------------------------------- Net income $15,200 $14,502 $12,992 - --------------------------------------------------------------------------------------- Net unrealized holding gain (loss) on available-for-sale securities during the year. Pre-tax unrealized holding gain (loss) was $(11,873) in 1999, $1,387 in 1998, and $1,878 in 1997. (7,119) 948 1,125 Reclassification adjustment for net realized loss on sale of available-for-sale securities (pre-tax of $59 in 1999, $12 in 1998, and $48 in 1997). 35 8 29 - --------------------------------------------------------------------------------------- Other comprehensive (loss) income (7,084) 956 1,154 - --------------------------------------------------------------------------------------- TOTAL COMPREHENSIVE INCOME $ 8,116 $15,458 $14,146 ======================================================================================== </TABLE> 29
NOTE 5 LOAN/LEASE CLASSIFICATION SUMMARY AND RELATED PARTY TRANSACTIONS Loans/Leases at December 31 were as follows: - -------------------------------------------------------------------------------- (in thousands) 1999 1998 - -------------------------------------------------------------------------------- Residential real estate $312,506 $232,167 Commercial real estate 141,903 105,222 Real estate construction 19,046 9,064 Commercial 166,263 154,085 Consumer and other 99,206 78,018 Leases 18,850 15,691 - -------------------------------------------------------------------------------- Total loans and leases 757,774 594,247 - -------------------------------------------------------------------------------- Less unearned income and net deferred costs and fees (2,392) (2,054) - -------------------------------------------------------------------------------- TOTAL LOANS AND LEASES, NET OF UNEARNED INCOME $755,382 $592,193 ================================================================================ Directors and officers of the Company and its affiliated companies were customers of, and had other transactions with, the Company in the ordinary course of business. Such loans and commitments were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than normal risk of collectibility or present other unfavorable features. Loan transactions with related parties are summarized as follows: (in thousands) 1999 1998 - -------------------------------------------------------------------------------- Balance January 1 $5,855 $5,579 Related party loans associated with purchase acquisition 576 0 New loans and advances 5,126 4,977 Loan payments (6,444) (4,701) - -------------------------------------------------------------------------------- BALANCE DECEMBER 31 $5,113 $5,855 ================================================================================ During 1999, the Company sold $1,401,000 of education loans and $6,035,000 of mortgage loans, realizing net gains of $27,000. During 1998, the Company sold $6,877,000 of student loans and $1,687,000 of mortgage loans, realizing a net gain of $107,000. During 1997, the Company sold $3,306,000 in student loans and $1,006,000 in mortgage loans, realizing a net gain of $12,000. Net gains and losses on the sale of loans are included in other operating income on the Company's consolidated statements of income. There were no loans held for sale at December 31, 1999, or 1998. At December 31, 1999, the Company serviced mortgage loans for third parties aggregating $59,145,000, compared to $31,646,000 at December 31, 1998. The Company's loan/lease customers are located primarily in the upstate New York communities served by its three subsidiary banks. The Trust Company operates eleven full-service banking offices in the counties of Tompkins and Schuyler. The Bank of Castile operates twelve branch offices in towns situated in and around the areas commonly known as the Letchworth State Park area and the Genesee Valley region of New York State. The Bank of Castile branch locations include its recently opened branch office in the Monroe County town of Chili. The Mahopac National Bank is located in Putnam County, and operated three full-service branches in that county on December 31, 1999. Other than general economic risks, management is not aware of any material concentrations of credit risk to any industry or individual borrower. 30
NOTE 6 RESERVE FOR LOAN/LEASE LOSSES Changes in the reserve for loan/lease losses are summarized as follows: (in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------ Reserve at beginning of year $7,405 $7,007 $6,620 Allowance related to purchase acquisition 1,511 0 0 Provisions charged to operations 944 1,539 1,436 Recoveries on loans/leases 476 448 522 Loans/leases charged-off (1,108) (1,589) (1,571) - ------------------------------------------------------------------------------ RESERVE AT END OF YEAR $9,228 $7,405 $7,007 ============================================================================== The Company's recorded investment in loans/leases that are considered impaired totaled $2,371,000 at December 31, 1999, and $684,000 at December 31, 1998. The average recorded investment in impaired loans/leases was $828,000 in 1999, $1,592,000 in 1998, and $1,399,000 in 1997. The December 31, 1999, recorded investment in impaired loans/leases includes $2,059,000 of loans/leases which had related reserves of $786,000. The recorded investment in impaired loans/leases at December 31, 1998, included $394,000 of loans/leases which had related reserves of $136,000. Interest income recognized for cash payments received on impaired loans/leases was $103,000 for 1999, and was not material to the accompanying financial statements for 1998 or 1997. The principal balance of loans/leases not accruing interest, including impaired loans/leases, amounted to approximately $3,698,000 and $1,611,000 at December 31, 1999, and 1998, respectively. The difference between the interest income that would have been recorded if these loans/leases had been paid in accordance with their original terms and the interest income recorded for the three-year period ended December 31, 1999, was not significant. NOTE 7 BANK PREMISES AND EQUIPMENT Bank premises and equipment at December 31 were as follows: (in thousands) 1999 1998 - ------------------------------------------------------------------------------ Land $ 3,148 $ 1,234 Bank premises 19,409 12,558 Furniture, fixtures, and equipment 17,574 14,793 Accumulated depreciation and amortization (18,984) (14,830) - ------------------------------------------------------------------------------ $21,147 $13,755 ============================================================================== Depreciation and amortization expense in 1999, 1998, and 1997 are included in operating expenses as follows: (in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------ Bank premises $ 702 $ 474 $ 434 Furniture, fixtures, and equipment 1,420 1,193 1,186 - ------------------------------------------------------------------------------ $2,122 $1,667 $1,620 - ------------------------------------------------------------------------------ NOTE 8 DEPOSITS The aggregate time deposits of $100,000 or more were $179,936,000 at December 31, 1999, and $138,730,000 at December 31, 1998. Scheduled maturities of time deposits at December 31, 1999, were as follows: LESS THAN $100,000 (in thousands) $100,000 AND OVER TOTAL - ------------------------------------------------------------------------------ Maturity: Three months or less $57,953 $121,578 $179,531 Over three through six months 41,164 35,718 76,882 Over six through twelve months 36,121 15,090 51,211 - ------------------------------------------------------------------------------ Total due in 2000 135,238 172,386 307,624 2001 45,898 5,780 51,678 2002 9,567 957 10,524 2003 3,043 511 3,554 2004 and thereafter 2,689 302 2,991 - ------------------------------------------------------------------------------ $196,435 $179,936 $376,371 ============================================================================== 31
NOTE 9 FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Information regarding securities sold under agreements to repurchase as of December 31, 1999, is summarized below: (dollar amounts in thousands) COLLATERAL SECURITIESREPURCHASE LIABILITY - -------------------------------------------------------------------------------- ESTIMATED WEIGHTED AVERAGE CARRYING FAIR INTEREST AMOUNT VALUE AMOUNT RATE - -------------------------------------------------------------------------------- Maturity/Type of Asset 2 to 30 days: U.S. Government agency securities $18 $18 $16 5.35% Mortgage-backed securities 309 309 312 5.25% Obligations of states and political subdivisions 115 117 99 5.35% 31 to 89 days: U.S. Treasury securities 509 509 518 4.82% Mortgage-backed securities 360 360 350 5.45% Over 90 days: Mortgage-backed securities 672 672 668 5.00% Obligations of states and political subdivisions 560 559 492 5.29% Demand: U.S. Treasury securities 5,461 5,461 5,439 5.43% U.S. Government agency securities 15,001 15,001 15,561 5.20% Corporate bonds 3,007 3,007 3,000 5.00% Mortgage-backed securities 30,791 30,791 31,391 4.94% - -------------------------------------------------------------------------------- $56,803 $56,804 $57,846 5.07% ================================================================================ At December 31, 1999, substantially all of the above securities were held by the Bank of New York or the Federal Reserve Bank of New York. Additional information regarding securities sold under agreements to repurchase and federal funds purchased for the years ended December 31, is detailed in the table below: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (dollar amounts in thousands) 1999 1998 - -------------------------------------------------------------------------------- Total outstanding at December 31 $57,846 $61,205 Maximum month-end balance 60,662 66,079 Average balance during the year 56,453 57,379 Average interest rate paid during year 4.76% 5.12% ================================================================================ FEDERAL FUNDS PURCHASED (dollar amounts in thousands) 1999 1998 - -------------------------------------------------------------------------------- Total outstanding at December 31 $0 $0 Maximum month-end balance 13,500 13,500 Average balance during the year 4,201 3,012 Average interest rate paid during year 5.27% 5.74% ================================================================================ 32
NOTE 10 OTHER BORROWINGS The Company, through its subsidiary banks, had available lines-of-credit agreements with banks permitting borrowings to a maximum of approximately $29,500,000 at December, 31, 1999, and $14,500,000 at December 31, 1998. No advances were outstanding against those lines at December 31, 1999, or 1998. All bank subsidiaries are members of the Federal Home Loan Bank (FHLB) and as such, may apply for advances secured by certain residential mortgage loans and other assets, provided that certain standards for credit worthiness have been met. At December 31, 1999, the Company, through its subsidiaries, had established unused lines of credit with the FHLB of $106,916,000. At December 31, 1999, the $41,913,000 in term advances from the FHLB, compared to $48,968,000 at December 31, 1998. FHLB term advances due in one year or less as of December 31, 1999, and 1998, are detailed in the table below: FEDERAL HOME LOAN BANK ADVANCES: (dollar amounts in thousands) 1999 1998 - -------------------------------------------------------------------------------- Due in one year or less: Total outstanding at December 31 $10,000 $ 1,570 Maximum month-end balance 10,000 31,000 Average balance during the year 2,285 21,535 Average interest rate paid during year 5.46% 5.78% ================================================================================ At December 31, 1999, there were advances due in more than one year of $31,913,000, with a weighted average rate of 5.49 percent. Maturities of advances included $15,000,000 maturing in 2003, $13,354,000 in 2004, $952,000 in 2006, $2,000,000 in 2009, and $606,000 in 2010. The Company's FHLB borrowings at December 31, 1999, include $25,000,000 in fixed-rate callable borrowings, which can be called by the FHLB on the first anniversary of the borrowing, and quarterly thereafter. Other borrowings at December 31, 1999, included a $100,000 Treasury Tax and Loan Note account with the Federal Reserve Bank of New York, compared to $5,000 at December 31, 1998. 33
NOTE 11 EMPLOYEE BENEFIT PLANS The Trust Company and The Bank of Castile have noncontributory defined-benefit pension plans covering substantially all employees. The benefits are based on years of service and a percentage of the employee's average compensation. In addition to the defined pension plan, the Trust Company offers post-retirement medical coverage, life insurance, and prescription drug coverage to full-time employees who have worked ten years and attained age 55. Medical coverage is contributory with contributions reviewed annually. The Trust Company assumes the majority of the cost for these other benefits, while retirees share some of the cost through co-insurance and deductibles. The Bank of Castile does not provide post-retirement benefits other than the defined-benefit pension plan. The following table sets forth the changes in the plans' accumulated benefit obligation and plan assets, and the plans' funded status and amounts recognized in the Company's consolidated statements of condition at December 31, 1999 and 1998. At December 31, 1999, and 1998, the Trust Company had a prepaid benefit cost of $2,396,000 and $2,149,000, respectively, and The Bank of Castile had an accrued benefit cost of $207,000 and $123,000, respectively. For purposes of this disclosure the defined-benefit pension plans have been combined. <TABLE> <CAPTION> PENSION BENEFITS OTHER BENEFITS - ------------------------------------------------------------------------------------------------------------ (dollar amounts in thousands) 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------ Change in benefit obligation: <S> <C> <C> <C> <C> Benefit obligation at beginning of year $17,375 $ 13,923 $ 3,114 $ 3,004 Service cost 646 548 88 78 Interest cost 1,134 1,041 227 203 Actuarial (gain) loss (1,396) 2,541 141 (19) Benefits paid (776) (678) (179) (152) - ------------------------------------------------------------------------------------------------------------ BENEFIT OBLIGATION AT END OF YEAR $16,983 $ 17,375 $ 3,391 $ 3,114 - ------------------------------------------------------------------------------------------------------------ Change in plan assets Fair value of plan assets at beginning of year $16,207 $ 16,621 $ 0 $ 0 Actual return on plan assets 1,523 38 0 0 Employer contribution 579 226 178 151 Benefits paid (776) (678) (178) (151) - ------------------------------------------------------------------------------------------------------------ FAIR VALUE OF PLAN ASSETS AT END OF YEAR $17,533 $16,207 $ 0 $ 0 - ------------------------------------------------------------------------------------------------------------ Funded status $ 550 $ (1,168) $(3,391) $(3,114) Unrecognized net actuarial loss (gain) 1,781 3,400 (9) (149) Net transition (asset) obligation (301) (377) 1,502 1,617 Unrecognized prior service cost 159 171 0 0 ============================================================================================================ PREPAID (ACCRUED) BENEFIT COST $ 2,189 $ 2,026 $(1,898) $(1,646) ============================================================================================================ TOMPKINS COUNTY TRUST COMPANY Weighted-average assumptions as of September 30: Discount rate 7.25% 6.90% 6.90% 6.90% Expected return on plan assets 8.50% 8.50% -- -- Rate of compensation increase 4.00% 4.00% 4.00% 4.00% THE BANK OF CASTILE Weighted-average assumptions as of September 30: Discount rate 7.25% 6.50% N/A N/A Expected return on plan assets 8.50% 7.75% N/A N/A Rate of compensation increase 5.00% 5.50% N/A N/A ============================================================================================================ </TABLE> The Trust Company currently provides certain life and health insurance benefits to substantially all of its employees upon retirement. The weighted average annual assumed rate of increase in the per capita cost of covered benefits (the health care cost trend rate) is 9.9 percent beginning in 2000, and is assumed to decrease gradually to 5.0 percent in 2046 and beyond. Increasing the assumed health care cost trend rates by 1 percent in each year would increase the accumulated post-retirement benefit obligation as of December 31, 1999, by $42,000 and the net periodic post-retirement benefit cost for 1999 by $3,000. Decreasing the assumed health care cost trend rates by 1 percent each year would decrease the accumulated post-retirement benefit obligation as of December 31, 1998, by $55,000 and the net periodic post-retirement benefit cost by $4,000. 34
NOTE 11 EMPLOYEE BENEFIT PLANS (continued) Net periodic benefit cost includes the following components: <TABLE> <CAPTION> COMPONENTS OF NET PERIODIC BENEFIT COST PENSION BENEFITS OTHER BENEFITS (in thousands) 1999 1998 1997 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> Service cost $ 646 $ 548 $ 576 $ 88 $ 78 $ 70 Interest cost 1,134 1,040 944 227 203 208 Expected return on plan assets (1,371) (1,381) (1,133) 0 0 0 Amortization of prior service cost 14 14 14 0 0 0 Recognized net actuarial gain (loss) 70 0 14 0 (4) 0 Amortization of transition (asset) liability (77) (77) (77) 116 116 116 - ------------------------------------------------------------------------------------------------------------ NET PERIODIC BENEFIT COST $ 416 $ 144 $ 338 $ 431 $ 393 $ 394 ============================================================================================================ </TABLE> In addition, the Trust Company and The Bank of Castile have an Incentive Stock Ownership Plan (ISOP) and an Employee Stock Ownership Plan (ESOP), which cover substantially all employees of those organizations. The plans allow for Company contributions in the form of cash and/or stock of the Company. Contributions are determined by the board of directors as determined by a performance-based formula, and are limited to a maximum amount as stipulated in the respective plans. In 1994, the Trust Company ISOP borrowed $1,650,000 from the Trust Company to purchase 82,500 common shares of the Company. The debt has a term of ten years and an interest rate of 9.5 percent. At December 31, 1999, the debt had been repaid and no shares remained unallocated. The Trust Company recognized compensation expense for the ISOP of $375,000 in 1999, $364,000 in 1998, and $351,000 in 1997, based on the average fair value of shares committed to be released. In 1997, The Bank of Castile ESOP borrowed $487,000 from The Bank of Castile to purchase Company stock for the ESOP. The debt has a term of ten years and on December 31, 1999, had an outstanding balance of $389,000 and an adjustable interest rate of 9.5 percent. On December 31, 1999, 37,637 shares remained unallocated with a fair market value of $1,087,000. Letchworth recognized compensation expense of $130,000 in 1999, $132,000 in 1998, and $102,000 in 1997 based on the average fair value of shares committed to be released. Life insurance benefits are provided to certain officers of the Company. In connection with these benefits, the Company purchased $815,000 and $10,980,000 in corporate owned life insurance in 1999 and 1998, respectively, which is carried at its cash surrender value as an other asset in the consolidated statements of condition. Increases in the cash surrender value of the insurance are reflected as other operating income, and the related mortality expense is recognized as other expense in the consolidated statements of income. NOTE 12 STOCK BASED COMPENSATION In 1992, the Company adopted a stock option plan (the "1992 Plan") which authorized grants of options up to 254,100 shares of authorized but unissued common stock. In 1998, the Company adopted the 1998 Stock Option Plan (the "1998 Plan") which authorized grants of options up to 240,000 shares of authorized but unissued common stock, plus to the extent authorized by the board of directors, shares which are reacquired by the Company. Under the 1992 Plan and the 1998 Plan, the board of directors may grant stock options to officers, employees, and certain other individuals. Stock options are granted with an exercise price equal to the stock's fair market value at the date of grant. Stock options may not have a term in excess of ten years, and have vesting periods that range between one and five years from the grant date. Outstanding options of Letchworth were converted to options of Tompkins at the time of the merger. At December 31, 1999, there were 113,697 shares available for grant under the 1992 and 1998 Plans. The Company applies APB Opinion No. 25 in accounting for stock based compensation, and accordingly, no compensation cost has been recognized for stock options in the accompanying consolidated financial statements. 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: (in thousands except per share data) 1999 1998 1997 - ------------------------------------------------------------------------------ Net income: As reported $ 15,200 14,502 12,992 Pro forma 14,958 14,387 12,907 - ------------------------------------------------------------------------------ Basic earnings per share: As reported $2.15 2.05 1.91 Pro forma 2.12 2.03 1.89 - ------------------------------------------------------------------------------ Diluted earnings per share: As reported $2.12 2.01 1.84 Pro forma 2.08 1.99 1.83 ============================================================================== 35
NOTE 12 STOCK BASED COMPENSATION (continued) Pro forma compensation cost is amortized over the options' vesting period. Pro forma net income reflects only options granted after January 1, 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS 123 is not reflected in the pro forma net income amounts presented above because compensation cost for options granted prior to January 1, 1995 is not considered. The per share weighted average fair value of stock options granted during 1999, 1998, and 1997 was $8.07, $8.52, and $5.18, respectively. Fair values were arrived at using the Black Scholes option-pricing model with the following assumptions: 1999 1998 1997 - -------------------------------------------------------------------------------- Risk-free interest rate 5.85% 5.31% 5.78% Expected dividend yield 3.43% 3.10% 3.64% Volatility 47.00% 27.60% 20.20% Expected life (years) 7.00 8.00 8.00 - -------------------------------------------------------------------------------- The following table presents the combined stock option activity for the 1992 Plan and the 1998 Plan during the periods indicated: WEIGHTED AVERAGE NUMBER OF SHARES EXERCISE PRICE - -------------------------------------------------------------------------------- 1999: Beginning balance 300,738 $16.78 Granted 33,568 20.17 Exercised (79,589) 10.25 Forfeited (2,740) 7.29 - -------------------------------------------------------------------------------- OUTSTANDING AT YEAR-END 251,977 19.46 ================================================================================ EXERCISABLE AT YEAR-END 158,377 $18.24 ================================================================================ Beginning balance 349,149 $15.88 Granted 12,600 25.64 Exercised (54,445) 12.45 Forfeited (6,566) 16.84 - -------------------------------------------------------------------------------- OUTSTANDING AT YEAR-END 300,738 16.78 ================================================================================ EXERCISABLE AT YEAR-END 154,640 $14.35 ================================================================================ 1997: Beginning balance 335,742 $13.25 Granted 63,000 23.66 Exercised (46,295) 8.02 Forfeited (3,298) 19.43 - -------------------------------------------------------------------------------- OUTSTANDING AT YEAR-END 349,149 15.88 ================================================================================ EXERCISABLE AT YEAR-END 144,348 $13.22 ================================================================================ <TABLE> <CAPTION> The following summarizes outstanding and exercisable options at December 31, 1999: OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ----------------------------------------------------------------------------------------------- RANGE OF WEIGHTED AVERAGE WEIGHTED WEIGHTED EXERCISE NUMBER REMAINING AVERAGE NUMBER AVERAGE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE - ----------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> $ 7.30-14.12 52,460 4.56 $13.23 47,322 $13.14 $15.56-19.27 85,695 5.98 $19.07 61,547 $18.99 $20.17-21.90 49,197 8.56 $20.54 24,564 $20.67 $23.66-32.75 64,625 7.68 $24.23 24,944 $23.66 - ----------------------------------------------------------------------------------------------- 251,977 6.62 $19.46 158,377 $18.24 =============================================================================================== </TABLE> 36
NOTE 13 INCOME TAXES <TABLE> <CAPTION> The income tax expense (benefit) attributable to income from operations is summarized as follows: (in thousands) CURRENT DEFERRED TOTAL - ------------------------------------------------------------------------------ 1999: <S> <C> <C> <C> Federal $7,338 $(523) $6,815 State 1,087 (53) 1,034 - ------------------------------------------------------------------------------ $8,425 $(576) $7,849 - ------------------------------------------------------------------------------ 1998: Federal $6,261 $(421) $5,840 State 1,492 (116) 1,376 - ------------------------------------------------------------------------------ $7,753 $(537) $7,216 - ------------------------------------------------------------------------------ 1997: Federal $5,449 $(324) $5,125 State 1,680 (51) 1,629 - ------------------------------------------------------------------------------ $7,129 $(375) $6,754 - ------------------------------------------------------------------------------ </TABLE> The primary reasons for the differences between income tax expense and the amount computed by applying the statutory federal income tax rate to earnings are as follows: 1999 1998 1997 - ------------------------------------------------------------------------------ Statutory federal income tax rate 35.0% 34.0% 34.0% State income taxes, net of federal tax benefit 2.9 4.2 5.4 Tax exempt income (4.8) (4.8) (5.0) Non-deductible merger costs 1.5 0 0 All other (0.5) (0.1) (0.2) - ------------------------------------------------------------------------------ 34.1% 33.3% 34.2% - ------------------------------------------------------------------------------ Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31 were as follows: (in thousands) 1999 1998 - ------------------------------------------------------------------------------ Deferred tax assets: Reserve for loan/lease losses $3,378 $2,660 Compensation and benefits 2,015 1,610 Other 779 370 - ------------------------------------------------------------------------------ TOTAL DEFERRED TAX ASSETS $6,172 $4,640 - ------------------------------------------------------------------------------ Deferred tax liabilities: Leasing transactions $1,432 $1,347 Prepaid pension 948 858 Depreciation 653 622 Purchase accounting adjustments 810 0 Other 270 122 - ------------------------------------------------------------------------------ TOTAL DEFERRED TAX LIABILITIES $4,113 $2,949 - ------------------------------------------------------------------------------ NET DEFERRED TAX ASSET AT YEAR-END $2,059 $1,691 ============================================================================== NET DEFERRED TAX ASSET AT BEGINNING OF YEAR $1,691 1,154 - ------------------------------------------------------------------------------ Increase in net deferred tax asset (368) (537) Net deferred tax asset acquired 723 0 Initial purchase accounting adjustments (931) 0 - ------------------------------------------------------------------------------ DEFERRED TAX BENEFIT $(576) $(537) ============================================================================== 37
NOTE 13 INCOME TAXES (continued) This analysis does not include the recorded deferred tax assets/(liabilities) of $3,359,000 and $(1,371,000) related to the net unrealized depreciation (appreciation) in the available-for-sale securities portfolio as of December 31, 1999, and 1998, respectively. Realization of deferred tax assets is dependent upon the generation of future taxable income or the existence of sufficient taxable income within the carry-back period. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. In assessing the need for a valuation allowance, management considers the scheduled reversal of the deferred tax liabilities, the level of historical taxable income, and the projected future taxable income over the periods in which the temporary differences comprising the deferred tax assets will be deductible. Based on its assessment, management determined that no valuation allowance is necessary. NOTE 14 COMMITMENTS AND CONTINGENT LIABILITIES The Company leases land, buildings, and equipment under operating lease arrangements extending to the year 2090. Rental expense included in operating expenses amounted to $359,000 in 1999, $343,000 in 1998, and $348,000 in 1997. The future minimum rental commitments as of December 31, 1999, for all operating leases that cannot be canceled are as follows: (in thousands) 2000 $ 193 2001 177 2002 156 2003 158 2004 133 Thereafter $3,552 Most leases include options to renew for periods ranging from five to 20 years. Options to renew are not included in the above future minimum rental commitments. The Company, in the normal course of business, is a party to financial instruments with off-balance-sheet risk to meet the financial needs of its customers. These financial instruments include loan commitments, stand-by letters of credit, and unused portions of lines of credit. The contract, or notional amount, of these instruments represents the Company's involvement in particular classes of financial instruments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the consolidated statements of condition. As of December 31, 1999, the Company was committed to invest $3,850,000 in a limited partnership formed to operate a Small Business Investment Company (SBIC). As of December 31, 1999, the Company had made equity investments in the SBIC of $2,988,000, which is accounted for under the equity method of accounting, and is included in other assets on the Company's consolidated statements of condition. On December 31, 1999, and 1998, the cost of the Company's investment in the SBIC approximates fair value. The Company's maximum potential obligations to extend credit for loan commitments (unfunded loans and unused lines of credit, stand-by letters of credit) outstanding, and its remaining commitment to invest in a Small Business Investment Company, on December 31 were as follows: (in thousands) 1999 1998 - ------------------------------------------------------------------------------ Loan commitments $146,254 $114,284 Stand-by letters of credit 3,793 2,542 Undisbursed portion of commercial lines of credit 30,592 12,376 Commitment to invest in limited partnership registered as a Small Business Investment Company 862 717 - ------------------------------------------------------------------------------ $181,501 $129,919 ============================================================================== Commitments to extend credit (including lines of credit) are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Stand-by letters of credit are conditional commitments to guarantee the performance of a customer to a third party. Management uses the same credit policies in making commitments to extend credit and stand-by letters of credit as are used for on-balance-sheet lending decisions. Based upon management's evaluation of the counterparty, the Company may require collateral to support commitments to extend credit and stand-by letters of credit. The credit risk amounts are equal to the contractual amounts, assuming the amounts are fully advanced and collateral or other security is of no value. The Company does not anticipate losses as a result of these transactions. These commitments also have off-balance-sheet interest-rate risk, in that the interest rate at which these commitments were made may not be at market rates on the date the commitments are fulfilled. Since some commitments and stand-by letters of credit are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements. 38
In the normal course of business, there are various outstanding legal proceedings. In the opinion of management, based upon a review with counsel, the proceedings should not have a material effect on the consolidated financial statements. <TABLE> <CAPTION> NOTE 15 EARNINGS PER SHARE Calculation of basic earnings per share (Basic EPS) and diluted earnings per share (Diluted EPS) is as follows: NET WEIGHTED FOR YEAR ENDED DECEMBER 31, 1999 INCOME AVERAGE SHARES PER SHARE (in thousands except share and per share data) (NUMERATOR) (DENOMINATOR) AMOUNT - -------------------------------------------------------------------------------------------------------------------------------- Basic EPS: <S> <C> <C> <C> Income available to common shareholders $15,200 7,068,409 $2.15 Effect of dilutive securities: Stock options 109,412 Diluted EPS: Income available to common shareholders plus assumed conversions $15,200 7,177,821 $2.12 - -------------------------------------------------------------------------------------------------------------------------------- The effect of dilutive securities calculation for 1999 excludes 2,000 options with an exercise price of $32.75 because the exercise price was greater than the average market price for the period. NET WEIGHTED FOR YEAR ENDED DECEMBER 31, 1998 INCOME AVERAGE SHARES PER SHARE (in thousands except share and per share data) (NUMERATOR) (DENOMINATOR) AMOUNT - -------------------------------------------------------------------------------------------------------------------------------- Basic EPS: Income available to common shareholders $14,502 7,081,213 $2.05 Effect of dilutive securities: Stock options 147,241 Stock warrants 47 Diluted EPS: Income available to common shareholders plus assumed conversions $14,502 7,228,501 $2.01 - -------------------------------------------------------------------------------------------------------------------------------- NET WEIGHTED FOR YEAR ENDED DECEMBER 31, 1997 INCOME AVERAGE SHARES PER SHARE (in thousands except share and per share data) (NUMERATOR) (DENOMINATOR) AMOUNT - -------------------------------------------------------------------------------------------------------------------------------- Basic EPS: Income available to common shareholders $12,992 6,811,571 $1.91 Effect of dilutive securities: Stock options 128,907 Stock warrants 128,240 Diluted EPS: Income available to common shareholders plus assumed conversions $12,992 7,068,718 $1.84 - -------------------------------------------------------------------------------------------------------------------------------- </TABLE> 39
NOTE 16 FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1999 and 1998. The carrying amounts shown in the table are included in the consolidated statements of condition under the indicated captions. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS: 1999 1998 - ------------------------------------------------------------------------------ CARRYING FAIR CARRYING FAIR (in thousands) AMOUNT VALUE AMOUNT VALUE - ------------------------------------------------------------------------------ Financial assets: Cash and cash equivalents $ 54,788 $ 54,788 $ 46,668 $ 46,668 Securities - available-for-sale 294,199 294,199 249,255 249,255 Securities - held-to-maturity 30,975 31,265 34,088 35,011 Loans/leases, net 746,154 741,043 584,788 591,322 Accrued interest receivable 7,842 7,842 7,040 7,040 Financial liabilities: Time deposits $376,371 $376,307 $312,277 $313,650 Other deposits 597,868 597,868 421,367 421,367 Securities sold under agreements to repurchase 57,846 57,834 61,205 61,543 Other borrowings 42,012 41,845 48,973 49,781 Accrued interest payable 3,880 3,880 3,898 3,898 - ------------------------------------------------------------------------------ The following methods and assumptions were used in estimating fair value disclosures for financial instruments: CASH AND CASH EQUIVALENTS: The carrying amounts reported in the consolidated statements of condition for cash, noninterest bearing deposits, and federal funds sold approximate the fair value of those assets. SECURITIES: Fair values for securities are based on quoted market prices. When no secondary market exists to quote a market price, the book value of the security is used as its fair value. Note 3 discloses the fair values of securities. LOANS/LEASES: For variable rate loans/leases that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair value of fixed rate loans/leases was estimated using discounted cash flow analyses, and interest rates currently offered for loans/leases with similar terms and credit quality. DEPOSITS: The fair values disclosed for demand deposits (e.g. interest and noninterest checking) are, by definition, equal to the amount payable on demand at the reporting date (i.e., the carrying amounts). The carrying amounts of variable-rate money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate time deposits are estimated using a discounted cash flow calculation that applies current interest rates to a schedule of aggregate expected monthly maturities. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE: The carrying amounts of securities sold under agreements to repurchase with maturities of 90 days or less approximate their fair values. Fair values of repurchase agreements with maturities of more than 90 days are estimated using discounted cash flow analyses based on the Company's current incremental borrowing rate for similar types of borrowing arrangements. OTHER BORROWINGS: The fair value of other borrowings was estimated using discounted cash flow analysis, discounted at the Company's current incremental borrowing rate for similar borrowing arrangements. OFF-BALANCE-SHEET INSTRUMENTS: The fair value of outstanding loan commitments and stand-by letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the counterparties' credit standing, and discounted cash flow analyses. The fair value of these instruments approximates the value of the related fees and is not significant. 40
NOTE 17 REGULATION AND SUPERVISION The Company and its subsidiary banks are subject to various regulatory capital requirements administered by Federal Bank Regulatory agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action (PCA), banks must meet specific guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classifications of the Company and its subsidiary banks are also subject to qualitative judgments by regulators concerning components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). Management believes that the Company and its subsidiary banks meet all capital adequacy requirements to which they are subject. As of December 31, 1999, the most recent notifications from federal bank regulatory agencies categorized the Trust Company, The Bank of Castile, and The Mahopac National Bank as well capitalized under the regulatory framework for PCA. To be categorized as well capitalized, the Company and its subsidiary banks must maintain total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the capital category of the Company or its subsidiary banks. Actual capital amounts and ratios of the Company and its subsidiary banks are as follows: <TABLE> <CAPTION> REQUIRED REQUIRED TO BE TO BE ACTUAL ADEQUATELY CAPITALIZED WELL CAPITALIZED - ---------------------------------------------------------------------------------------------------------------- (dollar amounts in thousands) AMOUNT/RATIO AMOUNT/RATIO AMOUNT/RATIO - ---------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1999: Total Capital (to risk-weighted assets) <S> <C> <C> <C> <C> <C> <C> The Company (consolidated) $109,105/14.5% >$60,026/>8.0% >$75,032/>10.0% Trust Company $70,264/16.0% >$35,080/>8.0% >$43,850/>10.0% Castile $21,628/10.1% >$17,079/>8.0% >$21,349/>10.0% Mahopac $17,907/16.7% >$8,572/>8.0% >$10,716/>10.0% Tier I Capital (to risk-weighted assets) The Company (consolidated) $99,877/13.3% >$30,013/>4.0% >$45,019/>6.0% Trust Company $65,135/14.9% >$17,540/>4.0% >$26,310/>6.0% Castile $19,077/ 8.9% >$8,540/>4.0% >$12,809/>6.0% Mahopac $16,580/15.5% >$4,286/>4.0% >$6,429/>6.0% Tier I Capital (to average assets) The Company (consolidated) $99,877/9.3% >$42,913/>4.0% >$53,641/>5.0% Trust Company $65,135/9.2% >$28,431/>4.0% >$35,539/>5.0% Castile $19,077/6.6% >$11,504/>4.0% >$14,381/>5.0% Mahopac $16,580/9.9% >$6,696/>4.0% >$8,370/>5.0% - ---------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1998: Total Capital (to risk-weighted assets) The Company (consolidated) $103,222/17.7% >$46,633/>8.0% >$58,291/>10.0% Trust Company $66,713/16.6% >$32,138/>8.0% >$40,173/>10.0% Castile $32,107/17.7% >$14,526/>8.0% >$18,157/>10.0% Tier I Capital (to risk-weighted assets) The Company (consolidated) $95,903/16.5% >$23,317/>4.0% >$34,975/>6.0% Trust Company $61,691/15.4% >$16,069/>4.0% >$24,104/>6.0% Castile $29,837/16.4% >$7,263/>4.0% >$10,894/>6.0% Tier I Capital (to average assets) The Company (consolidated) $95,903/10.2% >$37,598/>4.0% >$46,998/>5.0% Trust Company $61,691/ 9.4% >$26,193/>4.0% >$32,741/>5.0% Castile $29,837/11.0% >$10,818/>4.0% >$13,522/>5.0% - ---------------------------------------------------------------------------------------------------------------- </TABLE> The Company is subject to legal limitations on the amount of dividends that can be paid to shareholders. Generally, dividends are limited to retained net profits for the current year and two preceding years, which amounted to $26,107,000 as of December 31, 1999. Each bank subsidiary is required to maintain reserve balances by the Federal Reserve Bank of New York. On December 31, 1999, the reserve requirement totaled $6,480,000, $3,324,000 and $1,224,000 for the Trust Company, The Bank of Castile, and The Mahopac National Bank, respectively. 41
NOTE 18 CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS Condensed financial statements for Tompkins Trustco, Inc. (the Parent Company) as of December 31 are presented below. CONDENSED STATEMENTS OF CONDITION - ------------------------------------------------------------------------------ (in thousands) 1999 1998 - ------------------------------------------------------------------------------ ASSETS Cash $769 $1,563 Available-for-sale securities, at fair value 2,559 2,425 Investment in subsidiaries, at equity 90,251 93,350 Other, net 5,786 832 - ------------------------------------------------------------------------------ TOTAL ASSETS $99,365 $98,170 - ------------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities $2,741 518 Shareholders' equity 96,624 97,652 - ------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $99,365 $98,170 - ------------------------------------------------------------------------------ CONDENSED STATEMENTS OF INCOME - ------------------------------------------------------------------------------ (in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------ Dividends from available-for-sale investments $110 $97 $92 Dividends received from banking subsidiaries 24,365 6,369 8,386 Other income 72 24 2 - ------------------------------------------------------------------------------ TOTAL OPERATING INCOME 24,547 6,490 8,480 - ------------------------------------------------------------------------------ Amortization of intangible assets 370 0 0 Other expenses 2,198 728 352 - ------------------------------------------------------------------------------ TOTAL OPERATING EXPENSES 2,568 728 352 - ------------------------------------------------------------------------------ INCOME BEFORE TAXES AND UNDISTRIBUTED NET INCOME OF SUBSIDIARIES 21,979 5,762 8,128 - ------------------------------------------------------------------------------ Income tax benefit (414) (121) (13) Equity in undistributed income of subsidiaries (7,193) 8,619 4,851 - ------------------------------------------------------------------------------ NET INCOME $15,200 $14,502 $12,992 - ------------------------------------------------------------------------------ 42
NOTE 18 CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS (continued) CONDENSED STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------ (in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------ OPERATING ACTIVITIES Net Income $15,200 $14,502 $12,992 Adjustments to reconcile net income to cash provided by operating activities: Equity in undistributed income of subsidiaries 7,193 (8,619) (4,851) Amortization of intangible assets 370 0 0 ESOP compensation expenses 130 132 102 Other, net (334) (846) (516) - ------------------------------------------------------------------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 22,559 5,169 7,727 - ------------------------------------------------------------------------------ INVESTING ACTIVITIES Purchase of securities (191) (123) (933) Purchase of The Mahopac National Bank (14,624) 0 0 - ------------------------------------------------------------------------------ NET CASH USED IN INVESTING ACTIVITIES (14,815) (123) (933) - ------------------------------------------------------------------------------ FINANCING ACTIVITIES Cash dividends (6,159) (5,499) (4,766) Repurchase of common shares (4,101) (2,138) (2,670) Repurchase of warrants 0 0 (430) Treasury stock sold 41 40 41 Net proceeds from exercise of stock options, warrants, and related tax benefit 691 281 4,160 Advances from subsidiaries 1,265 0 0 Repayment of advances from subsidiaries (275) (49) (60) - ------------------------------------------------------------------------------ NET CASH USED IN FINANCING ACTIVITIES (8,538) (7,365) (3,725) - ------------------------------------------------------------------------------ (DECREASE) INCREASE IN CASH (794) (2,319) 3,069 - ------------------------------------------------------------------------------ CASH AT BEGINNING OF YEAR 1,563 3,882 813 - ------------------------------------------------------------------------------ CASH AT END OF YEAR $769 $1,563 $3,882 - ------------------------------------------------------------------------------ 43
NOTE 19 UNAUDITED INTERIM FINANCIAL INFORMATION SELECTED UNAUDITED QUARTERLY FINANCIAL DATA: 1999 - ------------------------------------------------------------------------------ (in thousands except per share data) FIRST SECOND THIRD FOURTH - ------------------------------------------------------------------------------ Interest income $17,233 $18,301 $20,756 $21,327 Interest expense 6,942 7,258 7,975 8,376 Net interest income 10,291 11,043 12,781 12,951 Provision for loan/lease losses 238 268 174 264 Income before income taxes 5,782 5,849 6,732 4,686 Net income 3,931 3,390 4,548 2,791 Net income per common share (basic) .56 .55 .64 .40 Net income per common share (diluted) .55 .55 .64 .39 - ------------------------------------------------------------------------------ 1998 - ------------------------------------------------------------------------------ (in thousands except per share data) FIRST SECOND THIRD FOURTH - ------------------------------------------------------------------------------ Interest income $17,091 $17,524 $17,598 $17,516 Interest expense 7,257 7,411 7,410 7,293 Net interest income 9,834 10,113 10,188 10,223 Provision for loan/lease losses 282 455 420 382 Income before income taxes 5,300 5,309 5,692 5,417 Net income 3,485 3,493 3,856 3,668 Net income per common share (basic) .49 .49 .55 .52 Net income per common share (diluted) .48 .48 .54 .51 - ------------------------------------------------------------------------------ 44
REPORT OF KPMG LLP, INDEPENDENT AUDITORS BOARD OF DIRECTORS AND SHAREHOLDERS, TOMPKINS TRUSTCO, INC. We have audited the accompanying consolidated statements of condition of Tompkins Trustco, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three year period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The consolidated financial statements give retroactive effect to the merger of Letchworth Independent Bancshares Corporation and Tompkins Trustco, Inc., which has been accounted for as a pooling-of-interests, as described in Note 2 to the consolidated financial statements. We did not audit the consolidated statement of condition of Letchworth Independent Bancshares Corporation as of December 31, 1998, or the related statements of income, changes in shareholders' equity, and cash flows of Letchworth Independent Bancshares Corporation for each of the years in the two year period ended December 31, 1998, which statements reflect total assets of $281.7 million as of December 31, 1998, and net interest income of $12.1 million and $11.4 million for the years ended December 31, 1998 and 1997, respectively. Those statements were audited by other auditors whose unqualified report dated January 22, 1999 has been furnished to us, and our opinion, insofar as it relates to the amounts included for Letchworth Independent Bancshares Corporation for 1998 and 1997, is based solely on the report of such other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based upon our audits and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tompkins Trustco, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 1999, in conformity with generally accepted accounting principles. [GRAPHIC OMITTED] SYRACUSE, NEW YORK JANUARY 28, 2000 45
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MANAGEMENT'S STATEMENT OF RESPONSIBILITY Management is responsible for preparation of the consolidated financial statements and related financial information contained in all sections of this annual report, including the determination of amounts that must necessarily be based on judgments and estimates. It is the belief of management that the consolidated financial statements have been prepared in conformity with generally accepted accounting principles appropriate in the circumstances, and that the financial information appearing throughout this annual report is consistent with the consolidated financial statements. Management establishes and monitors the Company's system of internal accounting controls to meet its responsibility for reliable financial statements. The system is designed to provide reasonable assurance that assets are safeguarded, and that transactions are executed in accordance with management's authorization and are properly recorded. The Audit/Examining Committee of the board of directors, composed solely of outside directors, meets periodically and privately with management, internal auditors, and independent auditors, KPMG LLP, to review matters relating to the quality of financial reporting, internal accounting control, and the nature, extent, and results of audit efforts. The independent and internal auditors have unlimited access to the Audit/Examining Committee to discuss all such matters. The consolidated financial statements have been audited by the Company's independent auditors for the purpose of expressing an opinion on the consolidated financial statements. /s/ James J. Byrnes /s/ Richard D. Farr ---------------------- ----------------------- James J. Byrnes Richard D. Farr Chief Executive Officer Chief Financial Officer 47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS Information relating to the Directors of the Company is incorporated herein by reference from the "Election of Directors" section of the Proxy Statement beginning on page 4 thereof. EXECUTIVE OFFICERS <TABLE> <CAPTION> AGE TITLE JOINED COMPANY --- ----- -------------- <S> <C> <C> <C> James J. Byrnes 58 Chairman of the Board, and Chief Executive Officer January 1989 James W. Fulmer 48 President, Director January 2000* Donald S. Stewart 55 Executive Vice President December 1984 Richard D. Farr 47 Senior Vice President and Chief Financial Officer December 1988 Thomas J. Smith 59 Senior Vice President December 1984 Lawrence A. Updike 54 Senior Vice President December 1988 </TABLE> BUSINESS EXPERIENCE OF THE EXECUTIVE OFFICERS: James J. Byrnes has been chairman of the board of the Company since April 1992, and chief executive officer of the Company since January 1989. From 1978 to 1988, Mr. Byrnes was employed at the Bank of Montreal, most recently as senior vice president. Richard D. Farr has been employed by the Company since 1984, and has served as senior vice president and chief financial officer since December 1988. Thomas J. Smith has been employed by the Company since 1964, and has served as senior vice president in charge of credit services since December 1984. Donald S. Stewart has been employed by the Company since 1972, served as senior vice president in charge of trust and investment services since December 1984, and was promoted to executive vice president in 1997. Lawrence A. Updike has been employed by the Company since 1965, and has served as senior vice president in charge of operations and systems since December 1988 *James W. Fulmer was appointed president of the Company in January 2000. Mr. Fulmer is the former president and chief executive officer of Letchworth Independent Bancshares Corporation, where he served as president and chief executive officer since January 1991. Effective December 31, 1999, Letchworth was merged with and into Tompkins Trustco, Inc. ITEM 11. EXECUTIVE COMPENSATION "Executive Compensation" beginning on page 8 of the Proxy Statement is incorporated by reference herein. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT "Security Ownership of Certain Beneficial Owners and Management" beginning on page 2 of the Proxy Statement is incorporated by reference herein. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS "Certain Relationships and Related Transactions" contained on page 12 of the Proxy Statement is incorporated by reference herein. 48
PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A)(1) THE FOLLOWING FINANCIAL STATEMENTS AND ACCOUNTANT'S REPORT ARE INCLUDED IN THIS ANNUAL REPORT ON FORM 10-K: Report of Independent Accountants Consolidated Statement of Condition for the years ended December 31, 1999, and 1998 Consolidated Statement of Income for the years ended December 31, 1999, 1998, and 1997 Consolidated Statement of Changes in Shareholders' Equity for the years ended December 31, 1999, 1998, and 1997 Consolidated Statement of Cash Flows for the years ended December 31, 1999, 1998, and 1997 Notes to Consolidated Financial Statements (A)(2) LIST OF FINANCIAL SCHEDULES Not Applicable. (A)(3) EXHIBITS Item No. Description 2. Agreement and Plan of Reorganization, dated as of March 14, 1995, among the Bank, the Company and the Interim Bank incorporated herein by reference to the identically numbered exhibit contained in the Registrant's Registration Statement on Form 8-A (No. 0-27514), as filed with the Commission on December 29, 1995, and amended. 3.1 Certificate of Incorporation of the Company incorporated herein by reference to the identically numbered exhibit contained in the Registrant's Registration Statement on Form 8-A (No. 0-27514), as filed with the Commission on December 29, 1995, and amended. 3.2 Bylaws of the Company incorporated herein by reference to the identically numbered exhibit contained in the Registrant's Registration Statement on Form 8-A (No. 0-27514), as filed with the Commission on December 29, 1995, and amended. 4. Form of Specimen Common Stock Certificate of the Company incorporated herein by reference to the identically numbered exhibit contained in the Registrant's Registration Statement on Form 8-A (No. 0-27514), as filed with the Commission on December 29, 1995, and amended. 10.2 1992 Stock Option Plan incorporated herein by reference to the identically numbered exhibit contained in the Registrant's Registration Statement on Form 8-A (No. 0-27514), as filed with the Commission on December 29, 1995, and amended. 10.3 1996 Stock Retainer Plan for Non-Employee Directors incorporated herein by reference to the identically numbered exhibit contained in the Registrant's Registration Statement on Form 8-A (No. 0-27514), as filed with the Commission on December 29, 1995, and amended. 10.4 Form of Director Deferred Compensation Agreement incorporated herein by reference to the identically numbered exhibit contained in the Registrant's Registration Statement on Form 8-A (No. 0-27514), as filed with the Commission on December 29, 1995, and amended. 10.5 Deferred Compensation Plan for Senior Officers incorporated herein by reference to the identically numbered exhibit contained in the Registrant's Registration Statement on Form 8-A (No. 0-27514), as filed with the Commission on December 29, 1995, and amended. 49
10.6 Supplemental Executive Retirement Agreement with James J. Byrnes incorporated herein by reference to the identically numbered exhibit contained in the Registrant's Registration Statement on Form 8-A (No. 0-27514), as filed with the Commission on December 29, 1995, and amended. 10.7 Severance Agreement with James J. Byrnes incorporated herein by reference to the identically numbered exhibit contained in the Registrant's Registration Statement on Form 8-A (No. 0-27514), as filed with the Commission on December 29, 1995, and amended. 10.8 Lease Agreement dated August 20, 1993, between Tompkins County Trust Company and Comex Plaza Associates, relating to leased property at the Rothschilds Building, Ithaca, NY, incorporated herein by reference to the identically numbered exhibit contained in the Registrant's Form 10-K, as filed with the Commission on March 26, 1996, and amended. 10.9 Employment Agreement, dated September 12, 1989, by and between Letchworth and James W. Fulmer, incorporated by reference to Letchworth's Amendment No. 1 to Form S-18 Registration Statement (Reg. No. 33-31149-NY), filed with the Commission on October 31, 1989, and wherein such Exhibit is designated Exhibit 10(a). 10.10 Employment Agreement, dated as of January 1,1991, by and between Letchworth and Brenda L. Copeland, incorporated by reference to Letchworth's Annual Report on Form 10-K for the year ended December 31, 1991, filed with the Commission on March 30, 1992, and wherein such Exhibit is designated Exhibit 10(b). 10.11 Employee Stock Ownership Plan of Letchworth, incorporated by reference to Letchworth's Registration Statement on Form S-18 (Reg. No. 33-31149-NY), filed with the Commission on September 2, 1989, and wherein such Exhibit is designated Exhibit 10(c). 10.12 Defined Benefit Pension Plan of Letchworth, incorporated by reference to Letchworth's Registration Statement on Form S-18 (Reg. No. 33-31149-NY), filed with the Commission on September 2, 1989, and wherein such Exhibit is designated Exhibit 10(d). 10.13 Form of Executive Supplemental Income Agreement, as amended, incorporated by reference to Letchworth's Annual Report on Form 10-K for the year ended December 31, 1991 and filed with the Commission on March 30, 1992, and where in such Exhibit is designated Exhibit 19. 10.14 Form of Director Deferred Compensation Agreement, incorporated by reference to Letchworth's Registration Statement on Form S-18 (Reg. No. 33-31149-NY), filed with the Commission on September 2, 1989, and wherein such Exhibit is designated Exhibit 10(f). 10.15 Loan and Pledge Agreement, dated June 16, 1986, by and between Employee Stock Ownership Trust of Letchworth and Salamanca Trust Company, incorporated by reference to Letchworth's Registration Statement on Form S-18 (Reg. No. 33-31149-NY), filed with the Commission on September 2, 1989, and wherein such Exhibit is designated Exhibit 10(g). 10.16 Loan and Pledge Agreement, dated June 16, 1986, by and between Employee Stock Ownership Trust of Letchworth and Community National Bank, incorporated by reference to Letchworth's Registration Statement on Form S-18 (Reg. No. 33-31149-NY), filed with the Commission on September 2, 1989, and wherein such Exhibit is designated Exhibit 10(h). 10.17 Lease Agreement, dated March 1, 1982, by and between Letchworth and Herald Ford, Inc., incorporated by reference to Letchworth's Registration Statement on Form S-18 (Reg. No. 33-31149-NY), filed with the Commission on September 2, 1989, and wherein such Exhibit is designated Exhibit 10(i). 10.18 Lease Agreement, dated April 12, 1982, and an Addendum thereto, dated January 25, 1973, by and between Letchworth and 15 South Center Street, Inc., incorporated by reference to Letchworth's Registration Statement on Form S-18 (Reg. No. 33-31149-NY), filed with the Commission on September 2, 1989, and wherein such Exhibit is designated Exhibit 10(j). 10.19 Lease Agreement, dated August 1, 1974, by and between The Citizen Bank, Attica and Fred Glickstein, which Lease Agreement was assumed by Letchworth on December 7, 1984, incorporated by reference to Letchworth's Registration Statement on Form S-18 (Reg. No. 33-31149-NY), filed with the Commission on September 2, 1989, and wherein such Exhibit is designated Exhibit 10(k). 50
10.20 Salary Savings Plan (401(k) Plan) of Letchworth, incorporated by reference to Letchworth's Amendment No. 1 to Form S-18 Registration Statement (Reg. No. 33-31149-NY), filed with the Commission on October 31, 1989, and wherein such Exhibit is designated Exhibit 10(l). 10.21 Loan Agreement, dated November 6, 1990, by and between Letchworth and Alden State Bank, incorporated by reference to Letchworth's Annual Report on Form 10-K for the year-ended December 31, 1990, and filed with the Commission on April 1, 1991, and wherein such Exhibit is designated Exhibit 10(m). 10.22 Sales Contract, dated September 10, 1991, by and between John Piraino, Jr. ("Piraino") and the Bank, incorporated by reference to Letchworth's Annual Report on Form 10-K for the year ended December 31, 1992, and filed with the Commission on March 30, 1993, and wherein such Exhibit is designated Exhibit 10(n). 10.23 Indenture of Lease, dated September 10, 1991, by and between Piraino and the Bank, incorporated by reference to Letchworth's Annual Report on Form 10-K for the year ended December 31, 1992, and filed with the Commission on March 30, 1993, and wherein such Exhibit is designated Exhibit 10(o). 10.24 Purchase and Assumption Agreement, dated as of January 10, 1991, by and between Letchworth, The Bank of Castile, and Anchor Savings Bank FSB, incorporated by reference to the Letchworth's Report on Form 8-K/A amending the Letchworth's Current Report on Form 8-K dated January 31, 1992, and which Form 8-K/A was filed with the Commission on April 3, 1992, and wherein such Exhibit is designated Exhibit 10(a). 10.25 Sales Contract, dated as of January 10, 1991, by and between The Bank of Castile and Anchor Savings Bank FSB, incorporated by reference to Letchworth's Report on Form 8-K/A amending the Letchworth's Current Report on Form 8-K dated January 31, 1992, and which Form 8-K/A was filed with the Commission on April 3, 1992, and wherein such Exhibit is designated Exhibit 10(b). 10.26 Purchase and Assumption Agreement, dated as of May 11, 1994, by and between The Bank of Castile and The Chase Manhattan Bank (National Association), incorporated by reference to Letchworth's Report on Form 8-K, dated December 12, 1994, and which Form 8-K was filed with the Commission on December 19, 1994, and wherein such Exhibit is designated Exhibit 2.1. 10.27 Sales Contract, dated as of May 11, 1994, by and between The Bank of Castile and The Chase Manhattan Bank (National Association), incorporated by reference to Letchworth's Report on Form 8-K, dated December 12, 1994, and which Form 8-K was filed with the Commission on December 19, 1994, and wherein such Exhibit is designated Exhibit 2.2. 10.28 Agreement and Plan of Reorganization, dated as of July 30, 1999 between Tompkins Trustco, Inc. and Letchworth Independent Bancshares Corporation, incorporated by reference to the Company's Registration Statement on Form S-4 (Registration No. 333-90411), in which such exhibit is included as Annex A. 10.29 Stock Purchase Agreement, dated October 31, 1998, between Letchworth and certain shareholders of The Mahopac National Bank, together with a letter agreement extending the closing date for said transaction until the close of business on June 4, 1999. The exhibit is incorporated by reference to Letchworth's report on Form 8-K dated June 17, 1999, as amended, wherein said exhibit is referenced as Exhibit 2(a). 10.30 Shareholder agreement dated October 16, 1998, by and among Letchworth and W. D. Spain & Sons Limited Partnership, William D. Spain, Jr., C. Compton Spain, Michael H. Spain, and William D. Spain. 11 Statement of Computation of Earnings Per Share Required information is incorporated by reference to Note 15 of the Company's consolidated financial statements included under Item 8. 51
21 Subsidiaries of Registrant: Tompkins County Trust Company, which is wholly-owned by the Company, and its subsidiary Tompkins Real Estate Holdings, Inc., which is approximately 99 percent owned by Tompkins County Trust Company. The Bank of Castile, which is wholly-owned by the Company, and its subsidiary Castile Funding Coporation, Inc., which is approximately 99 percent owned by The Bank of Castile. The Mahopac National Bank, which is approximately 70 percent owned by the Company, and its subsidiary Mahopac Funding Corporation, Inc., which is approximately 99 percent owned by The Mahopac National Bank. 23 Consent of KPMG LLP 23.1 Consent of PricewaterhouseCoopers LLP 27 Financial Data Schedule 99.1 Independent Auditors' Report from PricewaterhouseCoopers LLP (as auditors for Letchworth Independent Bancshares Corporation). (b) REPORTS ON FORM 8-K The Company filed no Current Reports on Form 8-K during the quarter ended December 31, 1999. 52
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TOMPKINS TRUSTCO, INC. /s/ James J. Byrnes ---------------------- By: James J. Byrnes Chairman of the Board and Chief Executive Officer Date: March 29, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities indicated: SIGNATURE CAPACITY /S/ JAMES J. BYRNES Chairman of the Board ------------------------- and Chief Executive Officer James J. Byrnes /S/ JAMES W. FULMER President, Director ------------------------- James W. Fulmer /S/ RICHARD D. FARR Senior Vice President ------------------------- and Chief Financial Officer Richard D. Farr /S/ JOHN ALEXANDER Director ------------------------- John E. Alexander /S/ REEDER D. GATES Director ------------------------- Reeder D. Gates /S/ WILLIAM W. GRISWOLD Director ------------------------- William W. Griswold /S/ EDWARD C. HOOKS Director ------------------------- Edward C. Hooks /S/ BONNIE H. HOWELL Vice Chairman ------------------------- Director Bonnie H. Howell /S/ HUNTER R. RAWLING, III Director ------------------------- /S/ Hunter R. Rawlings, III /S/ THOMAS R. SALM Director ------------------------- Thomas R. Salm /S/ WILLIAM D. SPAIN Director ------------------------- William D. Spain /S/ CRAIG YUNKER Director ------------------------- Craig Yunker 53
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