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, 2001 ----------------- 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 $261,008,000 on March 11, 2002, 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, as of such date. The number of shares of the registrant's Common Stock outstanding as of March 11, 2002, was 7,423,865 shares. DOCUMENTS INCORPORATED BY REFERENCE Proxy Statement (the "Proxy Statement") filed with the Securities and Exchange Commission in connection with the 2002 Annual Meeting of Stockholders, is incorporated herein by reference in Part III.
TOMPKINS TRUSTCO, INC. 2001 Annual Report on Form 10-K Table of Contents PART I Page Item 1. Business of the Company 1 Item 2. Properties 5 Item 3. Legal Proceedings 7 Item 4. Submission of Matters for a Vote by Securities Holders 7 PART II Item 5. Market for Registrant's Common Equity and Related Securities 8 Item 6. Selected Financial Data 8 Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations 10 Item 7A. Quantitative and Qualitative Disclosure About Market Risk 27 Item 8. Financial Statements and Supplementary Data 29 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 59 PART III Item 10. Directors and Executive Officers of the Registrant 59 Item 11. Executive Compensation 60 Item 12. Security Ownership of Certain Beneficial Owners and Management 60 Item 13. Certain Relationships and Related Transactions 60 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 61
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PART I Item 1. Business of the Company General Tompkins Trustco, Inc. ("Tompkins" or the "Company"), is the corporate parent to three community banks, Tompkins Trust Company ("Trust Company"), The Bank of Castile, and The Mahopac National Bank ("Mahopac National Bank"), which together operate 31 banking offices in local market areas throughout New York State. Through its community banking subsidiaries, the Company provides traditional banking services, and offers a full range of money management services through Tompkins Investment Services, a division of Tompkins Trust Company. The Company also offers insurance services through its Tompkins Insurance Agencies, Inc. ("Tompkins Insurance") subsidiary, an independent agency with a history of over 100 years of service to individual and business clients throughout western New York. Each Tompkins subsidiary operates with a community focus, meeting the needs of the unique communities served. Headquartered in Ithaca, New York, Tompkins is registered as a Financial Holding Company with the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended. Tompkins was organized in 1995, under the laws of the State of New York, as a bank holding company for the Tompkins Trust Company (formerly known as Tompkins County Trust Company), a commercial bank that has operated in Ithaca and surrounding communities since 1836. Mergers and Acquisitions On December 31, 1999, Tompkins completed a merger with Letchworth Independent Bancshares Corporation ("Letchworth"), which was at the time, the parent company for The Bank of Castile (a wholly-owned subsidiary) and Mahopac National Bank (approximately 70% owned by Letchworth). The merger was accounted for as a pooling-of-interests, and upon completion of 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. On June 4, 1999, Letchworth acquired 70.17% of the outstanding common stock of Mahopac National Bank in a cash transaction accounted for as a purchase. Accordingly, operating results for Mahopac National Bank are not included for periods prior to June 4, 1999. Subsequent to June 4, 1999, net income of Mahopac National Bank is included in Tompkins' net income based upon the percentage of Tompkins' ownership of Mahopac National Bank. Effective September 1, 2000, and early in 2001, Tompkins completed the purchase of the minority interest in Mahopac National Bank, primarily in a stock-for-stock transaction accounted for as a purchase. Prior to September 1, 2000, the approximately 30% interest in Mahopac National Bank, which was not owned by Tompkins, was shown as a minority interest in consolidated subsidiaries on the consolidated statements of condition. Effective January 1, 2001, the Company completed the acquisition of 100% of the common stock of Austin, Hardie, Wise Agency, Inc. and Ernest Townsend & Son, Inc., in a cash and stock transaction accounted for as a purchase. The two agencies have been merged with and into Tompkins Insurance Agencies, Inc., a wholly-owned subsidiary of Tompkins. The agencies primarily offer property and casualty insurance to individuals and businesses in Western New York State. On June 22, 2001, Tompkins Insurance acquired the assets of Youngs & Linfoot of LeRoy, Inc. in a cash transaction accounted for as a purchase. Tompkins Insurance has offices in Attica, Warsaw, Alden, LeRoy, Batavia and Caledonia. Further details pertaining to the mergers and acquisitions are presented in Note 2 to the consolidated financial statements, included herein. Narrative Description of Business The Company provides traditional banking related services, which constitute the Company's only reportable business segment. Banking services consist primarily of attracting deposits from the areas served by its banking offices and using those deposits to originate a variety of commercial loans, consumer loans, real estate loans, and leases. The Company's principal expenses are interest on deposits, interest on borrowings, and operating and general administrative expenses, as well as provisions for loan/lease losses. Funding sources, other than deposits, include borrowings, securities sold under agreements to repurchase, and cash flow from lending and investing activities. Tompkins provides a variety of financial services to individuals and small business customers. Some of the traditional banking and related financial services are detailed below. 1
Commercial Services The Company's subsidiary banks provide financial services to corporations and other business clients. Lending activities include loans for a variety of business purposes, including real estate financing, construction, equipment financing, accounts receivable financing, and commercial leasing. Other commercial services include, deposit and cash management services, letters of credit, sweep accounts, credit cards, purchasing cards, merchant processing, and Internet-based account services. Retail Services The Company's subsidiary banks provide a variety of retail banking services including checking accounts, savings accounts, time deposits, IRA products, brokerage services, residential mortgage loans, personal loans, home equity loans, credit cards, debit cards and safe deposit services. Retail services are accessible through a variety of delivery systems including branch facilities, ATMs, voice response, and Internet banking. Trust and Investment Management Services The Company provides trust and investment services through Tompkins Investment Services, a division of Tompkins Trust Company. Tompkins Investment Services, with office locations at all three of the Company's subsidiary banks, provides a full range of money management services, including investment management accounts, custody accounts, trusts, retirement plans and rollovers, estate settlement, and financial planning. Insurance Services The Company provides insurance services through its Tompkins Insurance subsidiary. Tompkins Insurance is an independent agency, representing 22 major insurance carriers with access to special risk property and liability markets. Tompkins Insurance has state of the art computer systems for record keeping, claim processing and coverage confirmation, and can provide instant insurance pricing comparisons from some of the country's finest insurance companies. Securities Portfolio 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. Management typically invests in securities with short to intermediate average lives 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, and is monitored by the Asset/Liability Management Committees of the subsidiary banks. The intent of the policy is to establish a portfolio of high quality diversified securities which optimizes net interest income within acceptable limits of safety and liquidity. Securities, other than certain 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 December 31, 2001 and 2000, respectively, 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 December 31, 1999, is presented in the table below. <TABLE> <CAPTION> Available-for-Sale Securities - ----------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair December 31, 1999 (in thousands) Cost Gains Losses Value - ----------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> U.S. Treasury securities and obligations of 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 =========================================================================================================== </TABLE> Available-for-sale securities include $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. 2
<TABLE> <CAPTION> Held-to-Maturity Securities - ----------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair December 31, 1999 (in thousands) Cost Gains Losses Value - ----------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Obligations of states and political subdivisions $ 30,975 $ 349 $ 59 $ 31,265 - ----------------------------------------------------------------------------------------------------------- Total held-to-maturity debt securities $ 30,975 $ 349 $ 59 $ 31,265 =========================================================================================================== </TABLE> Competition The Company's subsidiary banks operate 31 offices, including two limited-service offices, serving communities in upstate New York. The Trust Company operates 12 full-service and one limited service banking offices in the counties of Tompkins and Schuyler. The Bank of Castile conducts its operations through its 12 full-service and one limited service 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. Mahopac National Bank is located in Putnam County, and operates 4 full-service branches in that county, and in October 2001, opened its first branch in Dutchess County. The decision to operate as three locally managed community banks reflects management's commitment to community banking as a business strategy that will continue to be emphasized. For Tompkins, this community banking approach is characterized by prompt, accurate service, and the personal touch provided by knowledgeable, committed employees. The Letchworth acquisition has provided increased capacity for growth, and greater capital resources necessary to make investments in technology and services. Through the Trust Company, Tompkins has developed several specialized financial services that are now available in markets served by The Bank of Castile and Mahopac National Bank. These services include trust and investment services, leasing, card services, and Internet banking. The recent addition of Tompkins Insurance adds a line of insurance and risk management products to the Company's array of financial products. The area served by the Trust Company consists primarily of Tompkins County, with an estimated population of 97,000. 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 five-county market that is primarily rural in nature. The opening of a branch office in Chili, New York, in 1999 provides increased access to the suburban Rochester, New York, market. Excluding Monroe County, which includes Rochester, the population of the 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 continued opportunities for growth. The primary market area for Mahopac National Bank is Putnam County, with a population of approximately 96,000. Putnam County is about 60 miles north of Manhattan, and is one of the fastest growing counties in New York State. The Hopewell Junction office is located in Dutchess County, which has a population of approximately 280,000. Competition for commercial banking and other financial services is strong in the Company's 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 financial 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 taxes or extensive federal regulations that apply to financial holding companies and federally insured banks. Regulation As a registered financial 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, privacy, fair lending, the Community Reinvestment Act, the Bank Secrecy Act, sales of non-deposit investments, electronic data processing, and trust department activities. 3
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 favorable FDIC risk classifications, 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, 2001, the Company employed 558 employees, approximately 80 of whom were part-time. No employees are covered by a collective bargaining agreement and the Company believes its employee relations are excellent. 4
Item 2. Properties The following table provides information relating to the Company's facilities: <TABLE> <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, Ithaca, NY Cornell Campus Office 905 Hanshaw Road Trust Company 790 Leased Ithaca, NY Community Corners Office 139 N. Street Extension Trust Company 2,250 Owned Dryden, NY Dryden Office 1020 Ellis Hollow Road Trust Company 650 Leased Ithaca, NY East Hill Plaza Office 775 S. Meadow Street Trust Company 2,280 Owned Ithaca, NY Plaza 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 Road Trust Company 3,000 Leased Ithaca, NY Triphammer Road Office 2 W. Main Street Trust Company 2,720 Owned Trumansburg, NY Trumansburg Office 701 W. Seneca Street Trust Company 2,150 Owned Ithaca, NY West End Office 2230 N. Triphammer Road Trust Company 204 Leased Ithaca, NY Kendal Office (Part-time office) 100 Main Street Trust Company 3,115 Owned Odessa, NY Odessa Office 50 N. Main Street The Bank of Castile 6,662 Owned Castile, NY Main Office </TABLE> 5
<TABLE> <CAPTION> Location Facility Type Square Feet Owned/Leased* - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> 604 W. Main Street The Bank of Castile 4,662 Owned Arcade, NY Arcade Office 263 E. Main Street The Bank of Castile 3,303 Owned Avon, NY Avon Office 408 E. Main Street The Bank of Castile 3,496 Owned Batavia, NY Batavia Office 3155 State Street The Bank of Castile 4,680 Owned Caledonia, NY Caledonia Office 3252 Chili Avenue The Bank of Castile 4,000 Owned Chili, NY Chili Office 1 Main Street The Bank of Castile 1,448 Owned Gainesville, NY Gainesville Office 11 South Street The Bank of Castile 9,700 Owned Geneseo, NY Geneseo Office 29 Main Street The Bank of Castile 3,084 Owned LeRoy, NY LeRoy Office 102 N. Center Street The Bank of Castile 4,702 Owned Perry, NY Perry Office 2727 Genesee Street The Bank of Castile 2,220 Leased Retsof, NY Retsof Office 445 N. Main Street The Bank of Castile 2,798 Owned Warsaw, NY Warsaw Office 129 N. Center Street The Bank of Castile 11,138 Owned Perry, NY Processing Center ** 1410 S. Main Street The Bank of Castile 1,250 Leased Medina, NY 14103 Medina Office (Loan Production Office) 630 Route 6 Mahopac National Bank 2,800 Owned Mahopac, NY Mahopac Office 591 Route 6N Mahopac National Bank 3,000 Owned Mahopac Falls, NY Red Mills Office 21 Peekskill Hollow Road Mahopac National Bank 17,950 Owned Putnam Valley, NY Putnam Valley Office 1441 Route 22 Mahopac National Bank 34,000 Owned Brewster, NY Brewster Office 1822 Route 82 Mahopac National Bank 1,200 Leased Hopewell Junction, NY Hopewell Office </TABLE> 6
<TABLE> <CAPTION> Location Facility Type Square Feet Owned/Leased* - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> 14 Market Street Tompkins Insurance 11,424 Leased Attica, NY Attica Office 34 N. Main Street Tompkins Insurance 2,280 Leased Warsaw, NY Warsaw Office 13360 Broadway Tompkins Insurance 1,000 Owned Alden, NY Alden Office 3212 State Street Tompkins Insurance 400 Leased Caledonia, NY Caledonia Office 40 Main Street Tompkins Insurance 3,700 Leased Leroy, NY Leroy Office 216 E. Main Street Tompkins Insurance 1,140 Leased Batavia, NY Batavia Office ==================================================================================================================== </TABLE> * Lease terminations for the Company's leased properties range from 2002 through 2042. ** Office includes two parcels of land that are being leased through 2004, and 2090, respectively. Management believes the current facilities are suitable for their present and intended purposes. 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 There were no matters submitted for shareholder vote in the fourth quarter of 2001. 7
PART II 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 and 2 below: 2001 1st Quarter $31.35 $27.00 $.27 2nd Quarter 40.13 29.00 .27 3rd Quarter 39.95 35.25 .28 4th Quarter 40.95 36.60 .28 2000 1st Quarter $29.13 $22.63 $.27 2nd Quarter 26.06 23.13 .27 3rd Quarter 29.06 23.75 .27 4th Quarter 29.00 26.75 .27 Note 1 - The range of reported high and low price for Tompkins Trustco, Inc. common stock for actual transactions as quoted on the American Stock Exchange. As of March 16, 2002, there were approximately 1,650 shareholders of record. Note 2 - Dividends on Tompkins Trustco, Inc. common stock were paid on the 15th day of February, May, August, and November of 2001, and on the 15th day of March, June, September, and December of 2000. Item 6. Selected Financial Data <TABLE> <CAPTION> Year ended December 31 (in thousands except per share data) 2001 2000 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> FINANCIAL STATEMENT HIGHLIGHTS Assets $ 1,420,695 $ 1,304,894 $ 1,188,679 $ 954,705 $ 886,846 Deposits 1,087,458 1,034,901 974,239 733,644 693,905 Other borrowings 75,581 67,257 42,012 48,973 34,817 Shareholders' equity 131,072 114,995 96,624 97,652 89,003 Interest and dividend income 94,158 92,018 77,617 69,729 66,265 Interest expense 36,175 40,076 30,551 29,371 28,235 Net interest income 57,983 51,942 47,066 40,358 38,030 Provision for loan/lease losses 1,606 1,216 944 1,539 1,436 Net securities gains (losses) 66 450 (59) (12) (48) Net income 19,627 17,512 15,200 14,502 12,992 PER SHARE INFORMATION Basic earnings per share 2.65 2.47 2.15 2.05 1.91 Diluted earnings per share 2.62 2.45 2.12 2.01 1.84 Basic earnings per share-cash basis* 2.82 2.57 2.39 2.07 1.93 Diluted earnings per share-cash basis* 2.78 2.55 2.36 2.03 1.86 Cash dividends per share** 1.10 1.08 1.03 0.91 0.82 SELECTED RATIOS Return on average assets 1.46% 1.42% 1.41% 1.57% 1.51% Return on average equity 15.82% 17.09% 15.46% 16.09% 15.95% Return on average assets-cash basis* 1.55% 1.48% 1.57% 1.59% 1.52% Return on average equity-cash basis* 16.64% 17.70% 16.91% 16.22% 16.10% Shareholders' equity to average assets 9.73% 9.31% 8.97% 10.60% 10.32% Dividend payout ratio** 41.51% 43.95% 40.52% 37.92% 36.68% OTHER SELECTED DATA (actual numerical count) - -------------------------------------------------------------------------------------------------------------------------------- Employees (average full-time equivalent) 513 462 442 365 361 Full-service banking offices 29 28 26 22 22 Bank access centers (ATMs) 45 41 36 33 32 Trust and investment services assets under management (in thousands) $ 1,138,341 $ 1,094,452 $ 1,106,059 $ 952,880 $ 838,813 ================================================================================================================================ </TABLE> * Uses net income before amortization of intangible assets and one-time merger-related expenses, net of applicable tax benefit. ** Cash dividends per share reflects historical information for Tompkins Trustco, Inc. 8
<TABLE> <CAPTION> Unaudited Quarterly Financial Data: 2001 - ----------------------------------------------------------------------------------------------------------------- (in thousands except per share data) First Second Third Fourth - ----------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Interest and dividend income $23,851 $23,824 $23,464 $23,019 Interest expense 10,318 9,579 8,670 7,608 Net interest income 13,533 14,245 14,794 15,411 Provision for loan/lease losses 185 320 401 700 Income before income taxes 7,224 7,325 8,190 7,307 Net income 4,793 4,773 5,265 4,796 Net income per common share (basic) .65 .65 .71 .65 Net income per common share (diluted) .64 .64 .70 .64 - ----------------------------------------------------------------------------------------------------------------- 2000 - ----------------------------------------------------------------------------------------------------------------- (in thousands except per share data) First Second Third Fourth - ----------------------------------------------------------------------------------------------------------------- Interest and dividend income $21,792 $22,598 $23,599 $24,029 Interest expense 8,964 9,567 10,690 10,855 Net interest income 12,828 13,031 12,909 13,174 Provision for loan/lease losses 240 274 301 401 Income before income taxes 6,464 6,282 6,644 6,374 Net income 4,326 4,188 4,572 4,426 Net income per common share (basic) .62 .60 .64 .61 Net income per common share (diluted) .61 .60 .64 .60 ================================================================================================================= </TABLE> 9
Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations 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. In the application of certain accounting policies management is required to make assumptions regarding the effect of matters that are inherently uncertain. These estimates and assumptions affect the reported amounts of certain assets, liabilities, revenues, and expenses in the consolidated financial statements. Different amounts could be reported under different conditions, or if different assumptions were used in the application of these accounting policies. The accounting policy considered critical in this respect is the determination of the allowance for loan and lease losses. Overview Tompkins Trustco, Inc. ("Tompkins" or the "Company") was organized in 1995, as the parent company of Tompkins 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 ("Mahopac National Bank"), became subsidiaries of Tompkins. 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% of the outstanding common stock of Mahopac National Bank in a cash transaction accounted for as a purchase. Accordingly, operating results for Mahopac National Bank are not included for periods prior to June 4, 1999. Subsequent to June 4, 1999, net income of Mahopac National Bank is included in Tompkins' net income based upon the percentage of Tompkins' ownership of Mahopac National Bank. This transaction with Mahopac National Bank resulted in a core deposit intangible of $3.5 million, and goodwill of $2.5 million. Effective September 1, 2000, and early in 2001, Tompkins Trustco, Inc. completed the purchase of the minority interest in Mahopac National Bank, primarily in a stock-for-stock transaction accounted for as a purchase. Prior to September 1, 2000, the approximately 30% interest in Mahopac National Bank, which was not owned by Tompkins, was shown as a minority interest in consolidated subsidiaries on the consolidated statements of condition. Subsequent to September 1, 2000, effectively all of the net income of Mahopac National Bank is included in Tompkins' consolidated net income. The approximately 30% acquisition of Mahopac National Bank resulted in a core deposit intangible of $1.9 million, and goodwill of $3.2 million. Effective January 1, 2001, the Company completed the acquisition of 100% of the common stock of Austin, Hardie, Wise Agency, Inc. and Ernest Townsend & Son, Inc., in a cash and stock transaction accounted for as a purchase. The purchase price exceeded the fair value of identifiable assets acquired less liabilities assumed by $4.36 million, which was recorded as goodwill. The purchase agreements for the insurance agencies include provisions for additional consideration to be paid in the form of Company stock if certain income targets are met. The two agencies have been merged with and into Tompkins Insurance Agencies, Inc. ("Tompkins Insurance"), a wholly-owned subsidiary of Tompkins. Tompkins Insurance has six Western New York office locations serving markets contiguous to The Bank of Castile. On June 22, 2001, Tompkins Insurance acquired the assets of Youngs & Linfoot of LeRoy, Inc. in a cash transaction accounted for as a purchase. The purchase price exceeded the fair value of identifiable assets acquired less liabilities assumed by $287,000, which was recorded as goodwill. Additional information on the Company's merger and acquisition activities is discussed in Note 2 to the consolidated financial statements. 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. 10
Results of Operations (Comparison of December 31, 2001 and 2000 results) General Net income for the year ended December 31, 2001, was up 12.1% to $19.6 million, compared to $17.5 million in 2000. On a per share basis, the Company earned $2.62 per diluted share compared to $2.45 per share in 2000. Cash earnings, which exclude amortization of intangible assets, were $20.8 million for the year ended December 31, 2001, up 14.2% from 2000 cash earnings of $18.3 million. The Company's strong earnings performance in 2001 is attributable to the success of the core business strategies of the Company and its community banking subsidiaries, which include diversified revenue sources consisting 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. Although net interest income remains the Company's primary revenue source, management continues to focus on growing revenue from noninterest related sources. Return on average shareholders' equity (ROE) was 15.82% in 2001, compared to 17.09% in 2000. The decline in ROE in 2001 is due to the fact the average equity grew more rapidly than earnings. Contributing to the growth in average equity in 2001 was approximately $8.2 million related to the September 2000 acquisition of the minority interest in Mahopac National Bank, approximately $3.4 million related to the acquisition of Austin, Hardie, Wise Agency, Inc. and Ernest Townsend & Son, Inc., and approximately $7.0 million of unrealized gains on available-for-sale securities. ROE reported on a cash basis was 16.64% in 2001, compared to 17.70% in 2000. Return on average assets (ROA) was 1.46% in 2001, up slightly from 1.42% in 2000. ROA reported on a cash basis was 1.55% in 2001, compared to 1.48% in 2000. 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. Tax-equivalent net interest income improved to $60.0 million in 2001, up from $54.0 million in 2000. Several interest rate reductions by the Federal Reserve Board contributed to improvement in the net interest margin from 4.72% in 2000, to 4.87% in 2001. Net interest income also benefited from other factors, including: growth in earning assets, an improved mix of earning assets, and growth in deposits. Average earning assets increased by $88.2 million, or 7.7% in 2001. Growth in average earning assets was primarily centered in the loan portfolio, which included a $27.7 million increase in average commercial loans, and a $23.5 million increase in average real estate loans. Average securities (excluding changes in unrealized gains and losses on available-for-sale securities) increased by $32.0 million between 2000 and 2001. Core deposits (total deposits, less brokered deposits and time deposits of $100,000 or more) represent the Company's largest and lowest cost funding source. Growth in average assets was funded primarily with core deposits, which increased by 6.5% from an average balance of $819.8 million in 2000, to $873.1 million in 2001. Non-core funding sources, which include time deposits of $100,000 or more, brokered deposits, federal funds purchased, securities sold under agreements to repurchase, and other borrowings provided additional sources of funding to support asset growth. Average balances on these non-core funding sources increased by $35.9 million between 2000 and 2001. Changes in net interest income occur from a combination of changes in the volume of interest-earning assets and interest-bearing liabilities, and in 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 $6.0 million increase in tax-equivalent net interest income from 2000 to 2001 included a $2.1 million increase in interest income and a $3.9 million decrease in interest expense. An increased volume of earning assets contributed to a $3.4 million increase in net interest income between 2000 and 2001, while the impact from changes in interest rates added $2.6 million in net interest income. 11
<TABLE> <CAPTION> Table 1 - Average Statements of Condition and Net Interest Analysis December 31 - ------------------------------------------------------------------------------------------------------------------------------------ 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Average Average Average Average Average Average (dollar amounts in thousands) Balance Interest Yield/Rate Balance Interest Yield/Rate Balance Interest Yield/Rate - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> ASSETS Interest-earning assets: Certificates of deposit, other banks $ 329 $ 3 0.91% $ 0 $ 0 0.00% $ 0 $ 0 0.00% Securities (1) U.S. Government securities 273,951 17,517 6.39 242,611 15,929 6.57 210,598 13,751 6.53 State and municipal (2) 68,854 5,120 7.44 78,474 5,654 7.20 75,531 5,463 7.23 Other securities (2) 23,951 1,329 5.55 13,715 1,142 8.33 24,858 1,580 6.36 - ------------------------------------------------------------------------------------------------------------------------------------ Total securities 366,756 23,966 6.53 334,800 22,725 6.79 310,987 20,794 6.69 Federal funds sold 12,329 487 3.95 11,992 726 6.05 17,717 980 5.53 Loans, net of unearned income (3) Residential real estate 327,279 25,959 7.93 326,139 25,488 7.82 274,321 21,049 7.67 Commercial real estate 183,428 15,308 8.35 161,104 16,402 10.18 138,882 12,464 8.97 Commercial loans (2) 211,404 17,823 8.43 183,736 16,602 9.04 122,288 11,855 9.69 Consumer and other 111,964 11,126 9.94 108,911 10,785 9.90 123,655 11,233 9.08 Lease financing 18,700 1,495 7.99 17,315 1,368 7.90 15,602 1,249 8.01 - ------------------------------------------------------------------------------------------------------------------------------------ Total loans, net of unearned income 852,775 71,711 8.41 797,205 70,645 8.86 674,748 57,850 8.57 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest- earning assets 1,232,189 96,167 7.80 1,143,997 94,096 8.23 1,003,452 79,624 7.94 - ------------------------------------------------------------------------------------------------------------------------------------ Noninterest-earning assets 114,261 91,040 74,122 Total assets $1,346,450 $1,235,037 $1,077,574 ==================================================================================================================================== LIABILITIES & SHAREHOLDERS' EQUITY Deposits: Interest-bearing deposits Interest checking, savings, and money market $ 427,665 $ 7,857 1.84% $ 412,864 $ 10,311 2.50% $ 361,115 $ 8,436 2.34% Time Deposits > $100,000 169,978 7,970 4.69 167,149 10,205 6.11 149,124 7,498 5.03 Time Deposits < $100,000 238,798 12,319 5.16 220,402 11,977 5.43 186,603 9,206 4.93 Brokered Time Deposits: < $100,000 6,292 282 4.48 0 0 0.00 0 0 0.00 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest- bearing deposits 842,733 28,428 3.37 800,415 32,493 4.06 696,842 25,140 3.61 Federal funds purchased and securities sold under agreements to repurchase 79,132 3,453 4.36 68,305 3,996 5.85 60,662 2,919 4.81 Other borrowings 75,101 4,294 5.72 59,125 3,587 6.07 49,966 2,492 4.99 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest- bearing liabilities 996,966 36,175 3.63 927,845 40,076 4.32 807,470 30,551 3.78 - ------------------------------------------------------------------------------------------------------------------------------------ Noninterest-bearing deposits 206,653 186,505 154,803 Accrued expenses and other liabilities 17,213 13,444 15,555 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities 1,220,832 1,127,794 977,828 Minority Interest 1,518 4,791 1,404 Shareholders' equity 124,100 102,452 98,342 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $1,346,450 $1,235,037 $1,077,574 - ------------------------------------------------------------------------------------------------------------------------------------ Interest rate spread 4.17% 3.92% 4.16% - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income/margin on earning assets $ 59,992 4.87% $ 54,020 4.72% $ 49,073 4.89% ==================================================================================================================================== </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% in 2001, 2000, and 1999, 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. 12
Table 2 - Analysis of Changes in Net Interest Income <TABLE> <CAPTION> (in thousands)(taxable equivalent) 2001 vs. 2000 2000 vs. 1999 - ------------------------------------------------------------------------------------------------------- Increase (Decrease) Due to Increase (Decrease) Due to Change in Average Change in Average Volume Rate Total Volume Rate Total - ------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> INTEREST INCOME: Certificates of deposit $ 3 $ 0 $ 3 $ 0 $ 0 $ 0 Federal funds sold 20 (259) (239) (340) 86 (254) Investments: Taxable 2,744 (793) 1,951 1,393 325 1,718 Tax-exempt (788) 78 (710) 200 13 213 Loans, net: Taxable 4,629 (3,748) 881 10,794 2,001 12,795 Tax-exempt 166 19 185 4 (4) 0 - ------------------------------------------------------------------------------------------------------- Total interest income $ 6,774 $ (4,703) $ 2,071 $ 12,051 $ 2,421 $ 14,472 - ------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Interest-bearing deposits: Interest checking, savings, and money market 358 (2,812) (2,454) 1,265 610 1,875 Time 1,502 (3,113) (1,611) 2,783 2,628 5,411 Federal funds purchased and securities sold under agreements to repurchase 572 (1,115) (543) 389 755 1,144 Other borrowings 923 (216) 707 502 593 1,095 - ------------------------------------------------------------------------------------------------------- Total interest expense $ 3,355 $ (7,256) $ (3,901) $ 4,939 $ 4,586 $ 9,525 - ------------------------------------------------------------------------------------------------------- Net interest income $ 3,419 $ 2,553 $ 5,972 $ 7,112 $ (2,165) $ 4,947 ======================================================================================================= </TABLE> Notes: See notes to Table 1. 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 was $1.6 million in 2001, compared to $1.2 million in 2000. The increase in 2001 is primarily due to continued growth in the loan portfolio, as well as the changing composition of the loan portfolio, which includes increased levels of commercial and consumer loans. The Company's loan portfolio remains of generally high quality, despite an increase in nonperforming loans as of December 31, 2001. Nonperforming loans and leases were $7.5 million at December 31, 2001, representing a modest 0.85% of total loans and leases outstanding at year-end. Nonperforming loans and leases at year-end 2000 were $4.7 million, representing 0.56% of total loans and leases. Net charge-offs of $724,000 in 2001 represented 0.08% of average loans during the period, compared to net charge-offs of $620,000 in 2000, also representing 0.08% of average loans and leases. Noninterest Income Although net interest income remains the primary revenue source for the Company, competitive, regulatory, and economic conditions have led management to target noninterest income opportunities as an important driver of long-term revenue growth. Management believes a continued focus on noninterest income will improve the Company's ability to compete with non-bank competitors, and reduce earnings volatility that may result from changes in the general interest rate environment. These efforts resulted in $19.9 million in noninterest income for 2001, a 37.7% increase over 2000. The acquisition of Tompkins Insurance, effective January 1, 2001, contributed to the strong growth in noninterest income, adding $4.2 million in revenue from insurance commissions and fees. The agencies primarily offer property and casualty insurance to individuals and businesses in Western New York State. If revenue from Tompkins Insurance is excluded from 2001 results for comparison purposes, noninterest income would reflect an increase of $1.2 million, or 8.4%. 13
Through the Trust Company, the Company has invested significant resources in developing fee income producing products and services. Many of these products and services are now being offered to customers of The Bank of Castile and Mahopac National Bank, thereby expanding the customer base for these products. The process of marketing these products throughout the Tompkins organization was started in 2000 and is expected to continue in 2002 and beyond, creating continued opportunities for growth in noninterest income. The Tompkins Investment Services Division of the Trust Company generates fee income through managing trust and investment relationships, managing estates, providing custody services, and managing employee benefits plans. Services are primarily provided to customers in the Trust Company's market area of Tompkins County and surrounding areas, although the division currently manages assets for clients in more than 40 states. Recently, Tompkins Investment Services expanded its marketing efforts and has dedicated staff to serve clients in The Bank of Castile and Mahopac National Bank markets. Revenue from trust and investment services is a significant source of noninterest income for the Company, generating $4.6 million in revenue in 2001, an increase of 1.3% over 2000. Increased fee income is primarily attributable to the continued growth in average assets managed by, or in the custody of, Tompkins Investment Services. Income generated by Tompkins Investment Services is largely based on the value of the assets managed by the division, which can be affected by general trends in the stock market, as well as the amount of new business generated. Despite generally unfavorable trends in the stock market during 2001, the market value of assets managed by, or in custody of, Tompkins Investment Services increased by $43.9 million to $1.1 billion at December 31, 2001. Service charges on deposit accounts were $4.7 million in 2001, compared to $3.7 million in 2000. The increase in 2001 is largely due to the increase in deposit accounts. The average dollar volume of noninterest-bearing accounts increased by $20.1 million between 2000 and 2001, while savings and money market accounts increased by $14.8 million over the same period. Fee increases for certain deposit related services were also implemented in the first quarter of 2001, contributing to the increase in the current year. The largest category of other service charges is card services fees. Card services have been another growth area for the Company, as technology has created opportunities to better serve customers with new products. Card services products include traditional credit cards, purchasing cards, debit cards, automated teller machines (ATM), and merchant card processing. Fee income associated with card services was $2.4 million in 2001, an increase of 12.1% over 2000. Noninterest income includes $1.1 million from increases in cash surrender value of corporate owned life insurance, up from $956,000, in 2000. This income is exempt from taxes. The corporate owned life insurance relates to life insurance provided to certain senior officers of the Company and its subsidiaries. Increases in the cash surrender value of the insurance are reflected as other noninterest 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 8.07% in 2001, and 8.38% in 2000. The Company has an investment in a small business investment company partnership, Cephas Capital Partners, L.P. ("Cephas"), totaling $4.1 million at December 31, 2001, and $3.3 million at December 31, 2000. Because the Company's percentage ownership in this partnership exceeds 20%, the equity method of accounting is utilized, such that the Company's percentage of the partnership's income is recognized as income on its investment; and likewise, any loss by the partnership is recognized as a loss on the Company's investment. During the fourth quarter of 2001, Cephas recognized a $2.0 million loss on a single investment. The Company's portion of this loss totaled $770,000, which was recognized in the fourth quarter of 2001 as a reduction to other operating income. The year-to-date net loss from the Company's investment in Cephas was $300,000 in 2001, compared to net income of $304,000 in 2000. While management believes that at December 31, 2001, there are no additional write-downs necessary related to the Cephas investment, deterioration in the general economy and other factors could result in additional losses on investments in the Cephas partnership. The Company believes that as of December 31, 2001, there is no impairment with respect to this investment. Declining interest rates in 2001 resulted in record mortgage application volume for the Company. As a result of this record application volume, which included a high percentage of applications to refinance loans currently serviced by the Company, the volume of residential mortgage loan sales increased from $7.2 million in 2000 to $27.6 million in 2001. Net gains from loan sales are included in other operating income and amounted to $560,000 in 2001, compared to $74,000 in 2000. Noninterest Expense Noninterest expenses for the year-ended December 31, 2001, were $46.1 million, an increase of 18.7% over the same period in 2000. The increase in 2001 is largely attributable to operating expenses associated with Tompkins Insurance, along with increased amortization expense related to the January 1, 2001, acquisition of Austin, Hardie, Wise Agency, Inc. and Ernest Townsend & Son, Inc. (now Tompkins Insurance) and the September 1, 2000, purchase of the minority interest in Mahopac National Bank. Expenses of Tompkins Insurance added $3.2 million of noninterest expense in 2001, before amortization of intangible assets. Amortization of intangible assets increased $545,000 to $1.7 million in 2001, up from $1.1 million in 2000. The additional amortization expense included $285,000 related to Tompkins Insurance, and $260,000 related to the purchase of the minority interest in Mahopac National Bank. 14
The Company's efficiency ratio (operating expense excluding amortization of intangible assets, divided by tax-equivalent net interest income plus noninterest income before securities gains and losses) was 55.4% in 2001, compared to 55.1% in 2000. The ratio is relatively unchanged from the previous year, as improvement at the Company's bank subsidiaries was offset by the addition of Tompkins Insurance, which due to its smaller size and the nature of its operations, operates with a relatively higher cost structure than the banks. Personnel-related expenses comprise the largest segment of other expense, representing approximately 55.0% of noninterest expenses in 2001, compared to approximately 55.3% in 2000. Total personnel-related expenses increased by $3.9 million in 2001, to $25.3 million. The higher personnel-related expenses reflect an increase in full-time equivalent employees from 462 in 2000 to 513 in 2001. Additional staffing levels relate primarily to the addition of Tompkins Insurance, as well as staffing of the Hopewell Office of Mahopac National Bank, which opened in October 2001. Personnel-related expenses in 2001 include some increased costs associated with the consolidation of a majority of the Company's benefit plans, including the pension, 401-K, and ESOP plans, effective January 1, 2001. Although the consolidated benefit plans have increased benefits costs in the current year, management believes the revised benefits make the Company more competitive for recruiting and retaining employees, while providing all employees in the Company an opportunity to receive profit sharing based on the success of Company-wide goals. Expense for premises, furniture, and fixtures increased to $5.8 million in 2001, from $5.0 million in 2000. The increase in 2001 is primarily related to Tompkins Insurance, which added $434,000 in expenses for premises, furniture, and fixtures in 2001. Also contributing to the increase were the opening of the Hopewell Office in October 2001, and increased depreciation associated with continued investments in technology. As noted above, amortization of intangible assets increased by $545,000 in 2001, due to amortization of intangible assets associated with Tompkins Insurance beginning in January 2001, and the purchase of the minority interest in Mahopac National Bank in September 2000. At December 31, 2001, the Company had unamortized goodwill related to its various acquisitions of $9.7 million. Upon adoption of Statement of Financial Accounting Standards (SFAS) No. 142 on January 1, 2002, the Company is no longer required to record amortization expense related to goodwill; accordingly, amortization expense in 2002 will be approximately $545,000 less than in 2001. Under SFAS No. 142, the Company is required to perform an annual assessment of intangible assets for impairment. Although impairment testing has yet to be completed, management does not expect to record an impairment loss in 2002 as a result of the adoption of SFAS No. 142. Other identifiable intangibles on the Company's books consist primarily of core deposit intangibles related to the acquisition of Mahopac National Bank. At December 31, 2001, core deposit intangible assets totaled $3.5 million, and are being amortized over a 10-year period. Amortization of core deposit intangible assets is not affected by the adoption of SFAS No. 142. Other expenses include, 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 increase from $11.2 million in 2000 to $13.2 million in 2001, is attributable to several factors, including normal increases associated with growth in noninterest revenue; increased marketing costs associated with a new branch opening, increased technology costs, and the inclusion of expenses related to Tompkins Insurance in 2001. 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 a subsidiary. For Tompkins, minority interest expense in 2000 includes $433,000 related to the approximate 30% interest held by minority owners of Mahopac National Bank for the period from January 1, 2000, through September 1, 2000. Effective September 1, 2000, the Company acquired the interest held by the minority owners. The Company also had minority interest expense of $135,000 and $134,000 in 2000 and 2001, respectively, related to minority interests in three real estate investment trusts, which are substantially owned by the Company's banking subsidiaries. Income Tax Expense The provision for income taxes provides for Federal and New York State income taxes. The 2001 provision was $10.4 million, compared to $8.3 million in 2000. The increase was primarily due to a higher level of taxable income, although the effective tax rate for the Company increased in 2001 to 34.5%, compared to 31.5% in 2000. The increase in the effective tax rate is due to a variety of factors, including a reduction in income from tax-exempt municipal securities from $5.7 million in 2000 to $5.1 million in 2001. 15
Results of Operations (Comparison of December 31, 2000 and 1999 results) Net income for the year ended December 31, 2000, was up 15.2% to $17.5 million, compared to $15.2 million in 1999. On a per share basis the Company earned $2.45 per diluted share compared to $2.12 per share in 1999. Cash earnings, which exclude amortization of intangible assets and one-time merger related expense in 1999, were $18.3 million for the year ended December 31, 2000, up 8.3% from 1999 cash earnings of $16.9 million. Return on average shareholders' equity (ROE) was 17.09% in 2000, compared to 15.46% in 1999. The lower ROE in 1999 includes the effects of one-time merger-related expenses associated with the Letchworth merger. ROE (using cash earnings) was 17.70% in 2000, and 16.91% in 1999. Return on average assets (ROA) was 1.42% in 2000, and 1.41% in 1999. ROA (using cash earnings) was 1.48% in 2000, and 1.57% in 1999. Net Interest Income As illustrated in Table 1, tax-equivalent net interest income improved to $54.0 million in 2000, up from $49.1 million in 1999. The growth was supported by an increased volume of earning assets, which grew by 14.0% in 2000. A portion of the growth is attributable to the fact that average earnings assets include earning assets of Mahopac National Bank for a full year in 2000 and only seven months in 1999. Growth in average earning assets between year-end 1999 and year-end 2000 was primarily in the loan portfolio, which included a $61.4 million increase in average commercial loans, and a $51.8 million increase in average residential real estate loans. Net interest income also benefited from an improved mix of earning assets and interest-bearing liabilities. Average loans for 2000 increased to 69.7% of average earning assets, compared to 67.2% in 1999, while average core deposits improved to 72.7% of average liabilities in 2000, compared to 71.9% in 1999. The $117.3 million increase in average core deposits from 1999 to 2000 was primarily centered in the Company's two newest branches - the Brewster Office of Mahopac National Bank, which opened in the first quarter of 2000; and the Chili Office of The Bank of Castile, which opened in the second quarter of 1999. The Company's net interest margin declined slightly in 2000 to 4.72%, from 4.89% in 1999. The net interest margin in 2000 was negatively impacted by rising short term interest rates, which resulted in an inverted yield curve for much of 2000, whereby short term interest rates exceeded longer term interest rates. Additionally, the net interest margin experienced downward pressure due to the competitive environment for loans and deposits in the markets in which the Company competes. 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 $4.9 million increase in tax-equivalent net interest income from 1999 to 2000 included a $14.5 million increase in interest income, which was partially offset by a $9.5 million increase in interest expense. An increased volume of earning assets contributed to a $7.1 million increase in net interest income between 1999 and 2000, while the impact from changes in interest rates resulted in a $2.2 million reduction in net interest income. Provision for Loan/Lease Losses The provision for loan/lease losses was $1.2 million in 2000, and $944,000 in 1999. The increase in 2000 was primarily due to growth in the loan portfolio. Nonperforming loans and leases were $4.7 million at December 31, 2000, representing a modest 0.56% of total loans and leases outstanding at year-end. Nonperforming loans and leases at year-end 1999 were $4.3 million, also representing 0.56% of total loans and leases. Net charge-offs of $620,000 in 2000 represented 0.08% of average loans during the period, compared to net charge-offs of $632,000 in 1999, representing 0.09% of average loans and leases. Noninterest Income Although net interest income remains the primary revenue source for the Company, noninterest income, excluding sales of securities, increased as a percentage of revenue (net interest income, plus other noninterest income) from 20.1% in 1999, to 21.2% in 2000. The increase reflects success in management's focus on improving noninterest income to better compete with non-bank competitors, and reduce earnings volatility that may result from changes in the general interest rate environment. Noninterest income of $14.4 million for the year ended December 31, 2000, reflects an increase of $2.6 million or 22.2% over 1999. A portion of the growth in 2000 is attributable to the fact that noninterest income of Mahopac National Bank is included for the full year in 2000, and only seven months in 1999. If income from Mahopac National Bank were included for the full year in 1999, the growth in 2000 would have been approximately $2.1 million, or 17.4%. 16
Trust and investments services income of $4.6 million in 2000 represents an 11.3% increase over 1999. Income generated by Tompkins Investment Services is largely based on the value of the assets managed by the division, which can be affected by general trends in the stock market, as well as the amount of new business generated. Total assets managed by, or in custody of, Tompkins Investment Services had a market value of $1.1 billion at December 31, 2000 and 1999. Service charges on deposit accounts increased from $3.2 million in 1999, to $3.7 million in 2000. The increase in 2000 is largely attributable to the increase in deposit accounts. The average dollar volume of noninterest-bearing accounts increased by $31.7 million between 1999 and 2000, while saving and money market accounts increased by $51.7 million over the same period. Card services income is included in other service charges on the consolidated statements of income. Card services products include traditional credit cards, purchasing cards, debit cards, automated teller machines (ATM), and merchant card processing. Fee income associated with card services increased 31.6% in 2000 to $2.1 million, following growth of 56.7% in 1999. Noninterest income includes a $956,000 increase in cash surrender value of corporate owned life insurance, up from $723,000, in 1999. 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 8.38% in 2000, and 8.10% in 1999. Noninterest Expense The Company's 2000 noninterest expenses increased by 13.1% over 1999, to $38.8 million. Operating expenses, which exclude amortization of intangible assets and one-time merger expense, increased 17.1%. The $5.5 million increase in operating expenses is partially attributable to the fact that expenses of Mahopac National Bank are included for the full year in 2000, and only seven months in 1999. If expenses of Mahopac National Bank were included for the full year in 1999, then the growth in 2000 would have been $3.3 million, or approximately 9.9%. The increase in 2000 also includes approximately $1.1 million of increased expenses associated with two branch office openings -- the Chili Office of The Bank of Castile (opened in the third quarter of 1999), and the Brewster Office of Mahopac National Bank (opened in the first quarter of 2000). The Company's efficiency ratio (operating expense divided by tax-equivalent net interest income plus noninterest income before securities gains and losses) was 55.1% in 2000, and 52.6% in 1999. The increase in 2000 is primarily due to increased expenses associated with the opening of the Chili Office of The Bank of Castile and the Brewster Office of Mahopac National Bank. Personnel-related expenses comprise the largest segment of noninterest expense, representing approximately 55.3% of noninterest expenses in 2000, compared to approximately 54.2% in 1999. Total personnel-related expenses increased by $2.9 million in 2000, to $21.5 million. If expenses of Mahopac National Bank were included for the full year in 1999, then the increase in 2000 would have been approximately $1.6 million, or approximately 8.2%. Expense for premises, furniture, and fixtures increased to $5.0 million in 2000, from $4.1 million in 1999. The increase in 2000 is primarily due to increased expenses associated with the opening of the Chili and Brewster offices. Approximately $277,000 of the increase relates to the fact that expenses of Mahopac National Bank are included for the full year in 2000, and only seven months in 1999. Amortization of intangible assets for 2000 includes $885,000 of amortization expense related to core deposit intangible assets and approximately $250,000 of amortization expense related to goodwill. Merger-related expenses in 1999 of $1.5 million are primarily related to investment banking services and other professional services associated with the Letchworth merger. Other expenses include, 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 increase from $9.5 million in 1999 to $11.2 million in 2000, is attributable to several factors, including: normal increases associated with growth in noninterest revenue; increased marketing costs associated with new branch openings; increased technology costs, including the introduction of an improved Internet banking service; and approximately $611,000 related to expenses of Mahopac National Bank that are included for the full year in 2000, and only seven months in 1999. Minority Interest in Consolidated Subsidiaries Minority interest expense for 2000 includes $433,000 related to the approximate 30% interest held by minority owners of Mahopac National Bank for the period from January 1, 2000, through September 1, 2000. Effective September 1, 2000, the Company acquired the interest held by the minority owners. Minority interest expense for 1999 includes $403,000 related to the minority owners of Mahopac National Bank for the period from June 3, 1999, through December 31, 1999. The Company also had minority interest expense of $135,000 in 2000, and $155,000 in 1999 related to minority interests in three real estate investment trusts, which are substantially owned by the Company's banking subsidiaries. 17
Income Tax Expense The provision for income taxes provides for Federal and New York State income taxes. The 2000 provision was $8.3 million, compared to $7.8 million in 1999. The upward trend is due to increased levels of taxable income. The effective tax rate for 2000 was 31.5%, compared to 34.1% in 1999. FINANCIAL CONDITION During 2001, total assets grew by 8.9% to $1.4 billion, compared to $1.3 billion at December 31, 2000. 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 2000 and 2001. Earning asset growth in 2001 consisted of a $44.1 million increase in loans, and a $77.9 million increase in the amortized cost of securities. Asset growth was funded primarily with core deposits, which increased by $64.4 million, and was also supported by a $37.4 million increase in securities sold under agreements to repurchase, and an $8.3 million increase in borrowings. Table 3 - Balance Sheet Comparisons <TABLE> <CAPTION> AVERAGE BALANCE SHEET Change (2000-2001) (dollar amounts in thousands) 2001 2000 1999 Amount Percentage - ---------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Total assets $1,346,450 $1,235,037 $1,077,574 $ 111,413 9.02% Earning assets * 1,232,189 1,143,997 1,003,452 88,192 7.71% Total loans and leases, less earned income and net deferred costs and fees 852,775 797,205 674,748 55,570 6.97% Securities * 366,756 334,800 310,987 31,956 9.54% Core deposits 873,116 819,771 702,521 53,345 6.51% Time deposits of $100,000 and more 169,978 167,149 149,124 2,829 1.69% Federal funds purchased and securities sold under agreements to repurchase 79,132 68,305 60,662 10,827 15.85% Other borrowings 75,101 59,125 49,966 15,976 27.02% Shareholders' equity 124,100 102,452 98,342 21,648 21.13% - ---------------------------------------------------------------------------------------------------------------- ENDING BALANCE SHEET Change (2000-2001) (dollar amounts in thousands) 2001 2000 1999 Amount Percentage - ---------------------------------------------------------------------------------------------------------------- Total assets $1,420,695 $1,304,894 $1,188,679 $ 115,801 8.87% Earning assets * 1,298,163 1,195,419 1,107,510 102,744 8.59% Total loans and leases, less earned income and net deferred costs and fees 889,842 845,758 755,382 44,084 5.21% Securities * 408,150 330,236 333,278 77,914 23.59% Core deposits 915,856 851,449 794,303 64,407 7.56% Time deposits of $100,000 and more 163,480 183,452 179,936 (19,972) -10.89% Federal funds purchased and securities sold under agreements to repurchase 109,669 72,231 57,846 37,438 51.83% Other borrowings 75,581 67,257 42,012 8,324 12.38% Shareholders' equity 131,072 114,995 96,624 16,077 13.98% ================================================================================================================ </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 reported dollar amount of dividends paid in periods prior to 2000 represents the cash dividends paid by the combined organization. The Company continued the long history of increasing cash dividends with a per share increase of 1.9% in 2001, which followed an increase of 4.9% in 2000. Dividends per share amounted to $1.10 in 2001, compared to $1.08 in 2000, and $1.03 in 1999. Cash dividends paid represented 41.5%, 44.0%, and 40.5%, of after-tax net income in each of 2001, 2000, and 1999, respectively. 18
Total shareholders' equity was $131.1 million at December 31, 2001, compared to $115.0 million at December 31, 2000. The $16.1 million increase in shareholders' equity from year-end 2000 to year-end 2001 included an $11.5 million increase in undivided profits, a $3.5 million increase from the issuance of shares to purchase Austin, Hardie, Wise Agency, Inc. and Ernest Townsend & Son, Inc., and $3.0 million of other comprehensive income related to unrealized net gains on available-for-sale securities. Increases in shareholders' equity were partially offset by the repurchase of 115,079 shares of common stock during 2001, at a total cost of $3.4 million. On August 15, 2000, the board of directors of the Company approved a repurchase plan (the "Plan") authorizing the repurchase of up to 400,000 shares of the Company's common stock over a 24-month period. As of December 31, 2001, 245,303 shares had been repurchased under the Plan at an average purchase price of $27.92 per share. The $18.4 million increase in shareholders' equity between year-end 1999 and year-end 2000 was primarily due to a $9.8 million increase in undivided profits and an $8.2 million increase from the issuance of shares to purchase the minority interest in Mahopac National Bank. The $4.7 million of other comprehensive income in 2000 was offset by $4.9 million in common stock repurchased and returned to unissued status. Tangible equity of $117.0 million represented 8.3% of tangible assets at December 31, 2001, compared to tangible equity of $105.1 million representing 8.1% of tangible assets as of December 31, 2000. Tangible book value per share increased from $14.36 at December 31, 2000, to $15.77 at December 31, 2001. 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 The securities portfolio (excluding fair value adjustments on available-for-sale securities) at December 31, 2001, was $408.2 million, reflecting an increase of 23.6%, from the previous year-end. 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 $70.2 million at December 31, 2001, or 17.2% of total securities, compared to $70.8 million, or 21.4% of securities at year-end 2000. Mortgage-backed securities, consisting mainly of securities issued by U.S. government agencies, totaled $185.9 million at December 31, 2001, compared to $84.3 million at December 31, 2000. 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, 2001, approximately 6.0% 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, 2001, along with the weighted average yield of each category, is presented in Table 4. Balances are shown at amortized cost. 19
Table 4 - Maturity Distribution <TABLE> <CAPTION> As of December 31, 2001 - ------------------------------------------------------------------------------------------------------ Securities Securities Available-for-Sale * Held-to-Maturity - ------------------------------------------------------------------------------------------------------ (dollar amounts in thousands) Amount Yield (FTE) Amount Yield (FTE) - ------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> U.S. Treasuries and Agencies Within 1 year $ 1,003 6.68% $ 0 0.00% Over 1 to 5 years 19,909 5.40% 0 0.00% Over 5 to 10 years 87,317 6.07% 0 0.00% Over 10 years 29,340 5.56% 0 0.00% - ------------------------------------------------------------------------------------------------------ $137,569 5.87% $ 0 0.00% - ------------------------------------------------------------------------------------------------------ State and political subdivisions Within 1 year $ 14,218 5.45% $ 7,878 6.69% Over 1 to 5 years 16,933 6.50% 6,928 7.32% Over 5 to 10 years 12,869 6.61% 5,469 6.63% Over 10 years 895 7.21% 6,571 6.72% - ------------------------------------------------------------------------------------------------------ $ 44,915 6.21% $ 26,846 6.85% - ------------------------------------------------------------------------------------------------------ Mortgage-backed securities Within 1 year $ 429 5.62% $ 0 0.00% Over 1 to 5 years 2,297 6.72% 0 0.00% Over 5 to 10 years 12,567 6.16% 0 0.00% Over 10 years 170,652 6.21% 0 0.00% - ------------------------------------------------------------------------------------------------------ $185,945 6.21% $ 0 0.00% - ------------------------------------------------------------------------------------------------------ Other Securities Within 1 year $ 502 6.67% $ 0 0.00% Over 1 to 5 years 989 6.91% 0 0.00% Over 5 to 10 years 0 0.00% 0 0.00% Over 10 years 3,021 6.03% 0 0.00% No fixed maturity 8,363 3.06% 0 0.00% - ------------------------------------------------------------------------------------------------------ $ 12,875 4.19% $ 0 0.00% - ------------------------------------------------------------------------------------------------------ Total Securities Within 1 year $ 16,152 5.57% $ 7,878 6.69% Over 1 to 5 years 40,128 5.98% 6,928 7.32% Over 5 to 10 years 112,753 6.15% 5,469 6.63% Over 10 years 203,908 6.11% 6,571 6.72% No fixed maturity 8,363 3.06% 0 0.00% - ------------------------------------------------------------------------------------------------------ $381,304 6.01% $ 26,846 6.85% - ------------------------------------------------------------------------------------------------------ </TABLE> * Balances of available-for-sale securities are shown at amortized cost. 20
Loans/Leases Total loans and leases, net of unearned income and net deferred loan fees and costs, grew 5.2%, to $889.8 million at December 31, 2001. Table 5 details the composition and volume changes in the loan/lease portfolio over the past five years. <TABLE> <CAPTION> Table 5 - Loan/Lease Classification Summary December 31 (in thousands) 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Residential real estate $ 327,987 $ 344,715 $ 312,506 $ 232,167 $ 208,455 Commercial real estate 168,452 152,218 141,903 105,222 96,389 Real estate construction 25,112 18,746 19,046 9,064 5,267 Commercial 237,483 202,956 166,263 154,085 143,791 Consumer and other 111,880 110,126 99,206 78,018 70,678 Leases 21,787 19,565 18,850 15,691 14,313 - ------------------------------------------------------------------------------------------------------------------- Total loans and leases 892,701 848,326 757,774 594,247 538,893 Less unearned income and net deferred cost and fees (2,859) (2,568) (2,392) (2,054) (1,737) - ------------------------------------------------------------------------------------------------------------------- Total loans and leases, net of unearned income and deferred costs and fees $ 889,842 $ 845,758 $ 755,382 $ 592,193 $ 537,156 =================================================================================================================== </TABLE> Residential real estate loans decreased by $16.7 million or 4.9% in 2001, and comprised 36.9% of total loans and leases. Contributing to the decrease in the residential portfolio was the sale of $27.6 million of residential mortgages and the securitization of an additional $41.4 million of mortgages. The $41.4 million in mortgages securitized in 2001 are now carried as mortgage-backed securities in the Company's available-for-sale securities portfolio. Excluding the residential loan sales and securitizations in 2001, residential real estate loan growth has exceeded 10% in each of the last five years. The Company sold $7.2 million of residential mortgage loans to Federal agencies in 2000. When residential mortgage loans are sold or securitized, the Company typically retains all servicing which provides a source of fee income. Residential mortgage loans serviced for others totaled $113.6 million at December 31, 2001, compared to $63.3 million at December 31, 2000. The $113.6 million includes the $41.4 million of mortgages securitized in 2001 and now carried as mortgage-backed securities in the Company's available-for-sale securities portfolio. Capitalized mortgage servicing rights totaled $663,000 at December 31, 2001, and $286,000 at December 31, 2000, and are reported as intangible assets on the consolidated statements of condition. Commercial real estate loans increased by $16.2 million in 2001, or 10.7%. Commercial real estate loans of $168.5 million represented 18.9% of total loans and leases at December 31, 2001. Commercial loans totaled $237.5 million at December 31, 2001, an increase of 17.0% over 2000. Growth in commercial lending reflects an increased emphasis in commercial lending. Management believes that the Company's community banking strategy can provide value to small business customers, while commercial lending products are typically attractive to the Company from a yield and interest rate risk perspective. The consumer loan portfolio includes personal installment loans, indirect automobile financing, credit card loans, and overdraft lines of credit. Consumer and other loans were $111.9 million at December 31, 2001, up from $110.1 million at December 31, 2000. The lease portfolio increased by 11.4% in 2001, to $21.8 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 lease portfolio. In response to the decline in consumer leasing opportunities, management has increased its marketing efforts relating to commercial leasing, which has been the primary source of growth in the lease portfolio. As of December 31, 2001, commercial leases represented 82.1% of total leases, compared to 69.2% at year-end 2000. 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 thirteen banking offices in the counties of Tompkins and Schuyler. The Bank of Castile operates thirteen banking 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. Mahopac National Bank is located in Putnam County, and operates four banking offices in that county and one full service office in neighboring Dutchess County. The Dutchess County branch opened in 2001. Other than general economic risks, management is not aware of any material concentrations of credit risk to any industry or individual borrower. Further information on the Company's lending activities, including related party transactions, is included in Note 5 to the consolidated financial statements. 21
The Reserve for Loan/Lease Losses Management reviews the adequacy of the reserve for loan/lease losses (reserve) on a regular basis. Management considers the accounting policy relating to the allowance for loan and lease losses to be a critical accounting policy, given the inherent uncertainty in evaluating the levels of the allowance required to cover credit losses in the portfolio and the material effect that assumption could have on the results of operations. Factors considered in determining the adequacy of the reserve and the related provision include: management's approach to granting new credit; the ongoing monitoring of existing credits by the internal and external loan review functions; the growth and composition of the loan and lease portfolio; comments received during the course of independent examinations; current local economic conditions; past due and nonperforming loan statistics; the estimated values of collateral; and a historical review of loan and lease loss experience. Based upon consideration of the above factors, management believes that the reserve is adequate to provide for the risk of loss inherent in the current loan and lease portfolio. 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 is determined. The $882,000 increase in the reserve between year-end 2000 and year-end 2001 resulted from the provision for loan/lease losses exceeding the net loan losses for the year. The allocation of the Company's reserve for year-end 2001, and each of the previous four year-ends is illustrated in Table 6. Table 6 - Allocation of the Reserve for Loan/Lease Losses <TABLE> <CAPTION> December 31 (dollar amounts in thousands) 2001 2000 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Total loans outstanding at end of year $889,842 $845,758 $755,382 $592,193 $537,156 - ---------------------------------------------------------------------------------------------------------- Allocation of the reserve by loan type: Commercial $ 3,011 $ 2,526 $ 3,281 $ 1,906 $ 981 Real estate 2,755 2,210 1,964 1,384 1,458 Consumer and all other 2,976 2,771 3,202 2,935 2,256 Unallocated 1,964 2,317 781 1,180 2,312 - ---------------------------------------------------------------------------------------------------------- Total $ 10,706 $ 9,824 $ 9,228 $ 7,405 $ 7,007 - ---------------------------------------------------------------------------------------------------------- Allocation of the reserve as a percentage of total reserve: Commercial 28% 26% 36% 26% 14% Real estate 26% 22% 21% 19% 21% Consumer and all other 28% 28% 35% 40% 32% Unallocated 18% 24% 8% 15% 33% - ---------------------------------------------------------------------------------------------------------- Total 100% 100% 100% 100% 100% - ---------------------------------------------------------------------------------------------------------- Loan/lease types as a percentage of total loans/leases: Commercial 26% 24% 22% 26% 27% Real estate 59% 61% 62% 59% 58% Consumer and all other 15% 15% 16% 15% 15% - ---------------------------------------------------------------------------------------------------------- Total 100% 100% 100% 100% 100% - ---------------------------------------------------------------------------------------------------------- Loans 90 days past due and accruing $ 1,612 $ 226 $ 168 $ 507 $ 183 Nonaccruing loans 5,736 4,134 3,698 1,611 3,425 Troubled debt restructurings not included above 185 389 400 471 483 - ---------------------------------------------------------------------------------------------------------- Total nonperforming loans/leases 7,533 4,749 4,266 2,589 4,091 - ---------------------------------------------------------------------------------------------------------- Other real estate owned 43 175 214 235 244 - ---------------------------------------------------------------------------------------------------------- Total nonperforming assets $ 7,576 $ 4,924 $ 4,480 $ 2,824 $ 4,335 - ---------------------------------------------------------------------------------------------------------- Reserve as a percent of loans outstanding 1.20% 1.16% 1.22% 1.25% 1.30% - ---------------------------------------------------------------------------------------------------------- Reserve as a percent of nonperforming - ---------------------------------------------------------------------------------------------------------- loans/leases 142.12% 206.87% 216.32% 286.02% 171.28% ========================================================================================================== </TABLE> 22
The reserve represented 1.20% of total loans and leases outstanding at year-end 2001, up slightly from 1.16% at December 31, 2000. The reserve coverage of nonperforming loans (loans past due 90 days and accruing, nonaccrual loans, and restructured troubled debt) declined slightly to 1.42 times at December 31, 2001, compared to 2.07 times at December 31, 2000. Management is committed to early recognition of loan problems and to maintaining an adequate reserve. The above allocation is neither indicative of the specific amounts or the loan categories in which future charge-offs may occur, nor is it an indicator of future loss trends. The allocation of the reserve to each category does not restrict the use of the reserve to absorb losses in any category. The Company's historical loss experience is detailed in Table 7. Table 7 - Analysis of the Reserve for Loan/Lease Losses <TABLE> <CAPTION> December 31 (dollar amounts in thousands) 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Average loans outstanding during year $852,775 $797,205 $674,748 $559,158 $511,989 Balance of reserve at beginning of year 9,824 9,228 7,405 7,007 6,620 Allowance related to purchase acquisition N/A N/A 1,511 N/A N/A Loans charged-off, domestic: Commercial, financial, and agricultural 371 130 241 326 230 Real estate - mortgage 44 108 105 509 64 Installment loans to individuals 843 677 647 674 1,200 Lease financing 28 8 1 10 8 Other loans 108 106 114 70 69 - ------------------------------------------------------------------------------------------------------------- Total loans charged-off $ 1,394 $ 1,029 $ 1,108 $ 1,589 $ 1,571 - ------------------------------------------------------------------------------------------------------------- Recoveries of loans previously charged-ofF, domestic: Commercial, financial, and agricultural 360 28 62 69 74 Real estate - mortgage 16 31 49 4 3 Installment loans to individuals 259 317 343 349 412 Lease financing 1 2 0 5 4 Other loans 34 31 22 21 29 - ------------------------------------------------------------------------------------------------------------- Total loans recovered $ 670 $ 409 $ 476 $ 448 $ 522 - ------------------------------------------------------------------------------------------------------------- Net loans charged-off 724 620 632 1,141 1,049 Additions to reserve charged to operations 1,606 1,216 944 1,539 1,436 - ------------------------------------------------------------------------------------------------------------- Balance of reserve at end of year $ 10,706 $ 9,824 $ 9,228 $ 7,405 $ 7,007 - ------------------------------------------------------------------------------------------------------------- Net charge-offs as a percent of average loans outstanding during year 0.08% 0.08% 0.09% 0.20% 0.20% ============================================================================================================= </TABLE> At December 31, 2001, in addition to nonperforming loans, the Company, through its internal loan review function has identified 20 commercial relationships totaling $11.0 million, which it has classified as substandard. These loans remain in a performing status due to a variety of factors, including payment history, the value of collateral supporting the credits, and personal or government guarantees. These factors, when considered in aggregate, give management reason to believe that the current risk exposure on these loans is not significant. Approximately, $2.2 million of these loans are backed by guarantees of U.S. government agencies. While in a performing status as of December 31, 2001, these loans exhibit certain risk factors, which have the potential to cause them to become nonperforming. Accordingly, management's attention is focused on these credits, which are reviewed on at least a quarterly basis. 23
Deposits and Other Liabilities Total deposits of $1.1 billion at December 31, 2001, reflected an increase of $52.6 million over total deposits at year-end 2000. Deposit growth consisted primarily of core deposits, which increased by $64.4 million, while time deposits of $100,000 or more decreased by $20.0 million. Core deposit growth was fairly strong at all of the Company's subsidiary banks. The Company's Hopewell Office, opened in October 2001 contributed $7.1 million of core deposits in 2001. The Company's liability for securities sold under agreements to repurchase ("repurchase agreements") amounted to $101.5 million at December 31, 2001, representing a $29.2 million increase over year-end 2000. The Company uses both retail and wholesale repurchase agreements. Retail repurchase agreements are arrangements with local customers of the Company, in which the Company agrees to sell securities to the customer with an agreement to repurchase those securities at a specified later date. Retail repurchase agreements totaled $61.5 million at December 31, 2001, and $72.2 million at December 31, 2000. Management generally views local repurchase agreements as an alternative to large time deposits. The Company's wholesale repurchase agreements are with the Federal Home Loan Bank (FHLB) and amounted to $40.0 million at year-end 2001. There were no wholesale repurchase agreements at December 31, 2000. During 2001, the Company increased its other borrowings from the FHLB by $8.1 million, to $75.3 million. Other borrowings outstanding at December 31, 2001, included $2.9 million in borrowings due in one year or less, and $72.4 million due in more than one year. The weighted average interest rate on borrowings due in more than one year was 5.25% at December 31, 2001. 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 individually and on a combined basis. These Committees review periodic reports on the liquidity and interest rate sensitivity positions. Comparisons with industry and peer groups are also monitored. The Company's strong reputation in the communities it serves, along with its strong financial condition, provide access to numerous sources of liquidity as described below. Management believes these diverse liquidity sources provide sufficient means to meet all demands on the Company's liquidity that are reasonably likely to occur. Core deposits remain the key funding source, representing 84.2% of total deposits, and 71.1% of total liabilities at December 31, 2001. Non-core funding sources (time deposits of $100,000 or more, brokered time deposits, repurchase agreements, and other borrowings) increased as a percentage of total liabilities from 27.2% at December 31, 2000, to 27.7% at December 31, 2001. Short-term investments, consisting of securities with maturities of one year or less and Federal funds sold, decreased from $52.5 million at December 31, 2000, to $23.9 million at December 31, 2001. The ratio of short-term investments to short-term non-core liabilities decreased from 19.5% at year-end 2000, to 10.4% at year-end 2001, indicating an increase in the volume of long-term assets supported by short-term non-core liabilities. Non-core funding sources may require securities to be pledged against the underlying liability. At December 31, 2001, securities pledged to secure certain large deposits, repurchase agreements, and other borrowings amounted to $299.0 million, compared to $261.5 million at December 31, 2000. Total securities pledged for deposits and repurchase agreements represented 72.3% of total securities at December 31, 2001, compared to 79.2% of total securities at December 31, 2000. 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, 2001, the unused borrowing capacity on established lines with the FHLB was $151.3 million. As members of the FHLB, the Company's subsidiary banks can use unencumbered mortgage-related assets to secure additional borrowings from the FHLB. The majority of the Company's unrestricted real estate assets are held in real estate investment trusts ("REITs"), which are substantially owned by the three subsidiary banks. At December 31, 2001, total qualifying real estate assets in the Company's REITs were $312.3 million. Cash flow from the loan and investment portfolios provides a significant source of liquidity. These assets may have stated maturities in excess of one year, but have monthly principal reductions. Total mortgage-backed securities, at fair value, increased from $84.3 million at year-end 2000, to $188.5 million at year-end 2001. Using current prepayment assumptions, cash flow from mortgage-backed securities is expected to be approximately $60 million in 2002. Investments in residential mortgage loans, consumer loans, and leases totaled approximately $461.7 million at December 31, 2001. Aggregate amortization from monthly payments on these loan assets provides significant additional cash flow to the Company. Table 8 details total scheduled maturities of selected loan categories. 24
Table 8 - Loan Maturity <TABLE> <CAPTION> Remaining maturity of selected loans At December 31, 2001 (dollar amounts in thousands) Total Within 1 year 1-5 years After 5 years - ------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Commercial real estate $168,452 $ 2,443 $ 13,307 $152,702 Real estate construction 25,112 6,492 1,711 16,909 Commercial 237,483 66,450 48,414 122,619 - ------------------------------------------------------------------------------------------------------ Total $431,047 $ 75,385 $ 63,432 $292,230 ====================================================================================================== </TABLE> In the normal course of business the Company is party to certain 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. Further information on the Company's commitments and contingent liabilities is provided in Note 14 to the consolidated financial statements. RECENT ACCOUNTING STANDARDS Accounting For Derivative Instruments and Hedging Activities: The Company adopted the provisions of Financial Accounting Standards Board (FASB) SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, effective January 1, 2001. This statement establishes accounting and reporting standards for derivative instruments, including certain derivatives embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities on the balance sheet and measure those assets at fair value. Changes in fair value of the derivative financial instruments are reported as either net income or as a component of comprehensive income, depending on whether or not it qualifies for hedge accounting. Consequently, for those entities using derivative instruments, there may be increased volatility in net income and shareholders' equity as a result of accounting for derivatives in accordance with SFAS No. 133. Special hedge accounting treatment is permitted only if specific criteria are met, including a requirement that the hedging relationship be highly effective both at inception and on an ongoing basis. Results of effective hedges are recognized in current earnings for fair value hedges, and in other comprehensive income for cash flow hedges. Ineffective portions of hedges are recognized immediately in earnings and are not deferred. The adoption of SFAS No. 133 by the Company on January 1, 2001, did not have a material effect on the Company's consolidated financial statements. Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities: In September 2000, The FASB issued SFAS No. 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 140 replaces identically titled SFAS No. 125, and it carries forward most of SFAS No. 125's provisions without change. It does revise accounting standards for securitizations and certain other transfers of financial assets and collateral. The statement is generally applied prospectively to transactions and servicing activities occurring after March 31, 2001, although provisions with respect to collateral and certain disclosure requirements are effective for fiscal years ending after December 15, 2000. The adoption of this statement did not have a material impact on the consolidated financial statements of the Company. ACCOUNTING FOR BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE ASSETS: In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also specifies the criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Effective January 1, 2002, SFAS No. 121 was superceded by SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Currently, the FASB has stated that the unidentifiable intangible asset acquired in the acquisition of a bank or thrift (including acquisitions of branches), where the fair value of the liabilities assumed exceeds the fair value of the assets acquired, should continue to be accounted for under SFAS No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions. Under SFAS No. 72, all of the intangible assets associated with branch acquisitions recorded on the Company's consolidated balance sheet as of December 31, 2001 will continue to be amortized. The FASB has announced that additional research will be performed to decide whether unidentifiable intangible assets recorded under SFAS No. 72 should be accounted for similarly to goodwill under SFAS No. 142. However, issuance of final opinion with respect to this matter is not expected until the fourth quarter of 2002. 25
ACCOUNTING FOR BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE ASSETS: (continued) The Company adopted the provisions of SFAS No. 141 in 2001. The adoption of SFAS No. 141 did not have an impact on the Company's consolidated financial statements. The Company is required to adopt the provisions of SFAS No. 142 effective January 1, 2002. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 continued to be amortized prior to the adoption of SFAS No. 142. SFAS No. 141 will require upon adoption of SFAS No. 142, that the company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in SFAS No. 141 for recognition apart from goodwill. Upon adoption of SFAS No. 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible assets is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of SFAS No. 142 within the first interim period. In connection with the transitional goodwill impairment evaluation, SFAS No. 142 requires the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption based upon criteria contained in SFAS No. 142. Any transitional impairment loss would be recognized as the cumulative effect of a change in accounting principle in the Company's consolidated statement of income. At this time, the Company has not completed its transitional goodwill impairment evaluation. However, the Company does not anticipate there will be any significant transitional impairment losses from the adoption of SFAS No. 142. At December 31, 2001, the Company had unamortized goodwill related to its various acquisitions (see note 2) totaling $9.7 million. The amortization of this goodwill amounted to $.5 million for the year ended December 31, 2001 ($.6 million when annualized for a full year's amortization of the goodwill recorded in 2001). In accordance with SFAS No. 142, the Company will no longer amortize this goodwill subsequent to December 31, 2001, which will reduce non-interest expenses by $.5 million in 2002, as compared to 2001. At December 31, 2001, the Company had core deposit intangible assets related to various acquisitions (see note 2) of $3.5 million. The amortization of these intangible assets amounted to $.9 million during the year ended December 31, 2001. In accordance with SFAS No. 142, these intangible assets will continue to be amortized. At December 31, 2001, the Company had unidentified intangible assets accounted for under SFAS No. 72 of approximately $234,000 related to various branch acquisitions. This intangible asset is currently excluded from the scope of SFAS No. 142. The amortization expense related to these unidentified intangible assets totaled $239,000 for the year ended December 31, 2001. As noted above, while the FASB is reconsidering the exclusion of this type of intangible asset from the scope of SFAS No. 142, at the present time this intangible asset will continue to be amortized. ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS: In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, that replaces SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, are to be applied prospectively. The adoption of SFAS No. 144 on January 1, 2002, did not have a material impact on the Company's financial condition or results of operations. 26
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 quarter, or more frequently if necessary, 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, 2001. The analysis reflects a slightly liability sensitive position, suggesting that earnings would benefit from a declining interest rate environment and would be hindered by a rising rate environment. Due to the current low interest rate environment; however, simulation models suggest that the Company's earnings would suffer more in a declining rate environment than in a rising rate environment as assets yields have more room to decline than costs on the Company's funding sources. Table 9 - Interest Rate Risk Analysis <TABLE> <CAPTION> Condensed Static Gap - December 31, 2001 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* $1,298,163 $ 391,582 $ 83,048 $ 134,957 $ 609,587 Interest-bearing liabilities 1,047,209 436,494 71,255 112,517 620,266 - --------------------------------------------------------------------------------------------------------------------- Net gap position 0 (44,912) 11,793 22,440 (10,679) - --------------------------------------------------------------------------------------------------------------------- Net gap position as a percentage of total assets 0 (3.41%) 0.89% 1.70% (0.81%) ===================================================================================================================== </TABLE> * Balances of available-for-sale securities are shown at amortized cost. The board of directors has set a policy that the Company's interest rate risk exposure will remain within a range whereby net interest income will not decline by more than 10% in one year as a result of 200 basis point change in rates. Based upon the simulation analysis performed as of December 31, 2001, a 200 basis point upward shift in interest rates over a one-year time frame would result in a one-year decline of approximately 0.5% 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 result in a decrease in net interest income of 2.3%. 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 changes in interest rates, management believes 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, 2001 is provided in Table 10. Table 10 - Repricing Intervals of Selected Financial Instruments <TABLE> <CAPTION> (dollar amounts in thousands) Greater 0-1 year 1-2 years 2-3 years 3-5 years than 5 years Total Fair Value - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> Financial Assets: Available-for-sale securities $ 164,431 $ 68,688 $ 47,761 $ 44,559 $ 60,930 $ 386,369 $ 386,369 Average interest rate* 5.27% 6.21% 6.13% 6.01% 6.09% 5.75% Held-to-maturity securities 8,627 2,763 1,780 3,160 10,516 26,846 27,255 Average interest rate* 5.41% 5.38% 5.29% 5.36% 4.97% 5.22% Loans/leases 412,059 134,261 123,335 113,532 106,655 889,842 903,543 Average interest rate* 7.20% 8.08% 8.27% 8.01% 7.76% 7.62% Financial Liabilities: Time deposits $ 345,938 $ 33,892 $ 20,821 $ 3,881 $ 0 $ 404,532 $ 408,237 Average interest rate 3.68% 4.13% 4.95% 5.41% 0% 3.83% Federal funds sold and securities sold under agreements to repurchase 74,669 5,000 10,000 15,000 5,000 109,669 109,827 Average interest rate 2.87% 4.11% 5.12% 4.27% 4.29% 3.37% Other borrowings 2,912 2,475 11,773 24,421 34,000 75,581 77,796 Average interest rate 5.13% 5.94% 4.61% 6.04% 4.85% 5.24% ==================================================================================================================================== </TABLE> * Interest rate on tax-exempt obligations is shown before tax-equivalent adjustments. 27
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Item 8. Financial Statements and Supplementary Data Consolidated Statements of Condition <TABLE> <CAPTION> As of December 31 (in thousands except share and per share data) 2001 2000 - --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> ASSETS Cash and non-interest bearing balances due from banks $ 43,946 $ 45,939 Interest bearing balances due from banks 21 0 Federal funds sold 150 19,425 Available-for-sale securities, at fair value 386,369 304,358 Held-to-maturity securities, fair value of $27,255 at December 31, 2001, and $26,147 at December 31, 2000 26,846 25,863 Loans and leases, net of unearned income and deferred costs and fees 889,842 845,758 Less reserve for loan/lease losses 10,706 9,824 - --------------------------------------------------------------------------------------------------------------------------------- Net Loans/Leases 879,136 835,934 Bank premises and equipment, net 25,034 23,861 Corporate owned life insurance 20,451 18,581 Intangible assets 14,072 9,858 Accrued interest and other assets 24,670 21,075 - --------------------------------------------------------------------------------------------------------------------------------- Total Assets $ 1,420,695 $ 1,304,894 Liabilities, Minority Interest in Consolidated Subsidiaries, And shareholders' equity Deposits: Interest-bearing: Checking, savings, and money market $ 457,427 $ 406,081 Time 404,532 420,255 Noninterest-bearing 225,499 208,565 - --------------------------------------------------------------------------------------------------------------------------------- Total Deposits 1,087,458 1,034,901 Federal funds purchased and securities sold under agreements to repurchase 109,669 72,231 Other borrowings 75,581 67,257 Other liabilities 15,423 14,020 - --------------------------------------------------------------------------------------------------------------------------------- Total Liabilities 1,288,131 1,188,409 - --------------------------------------------------------------------------------------------------------------------------------- Minority interest in consolidated subsidiaries 1,492 1,490 Shareholders' equity: Common stock - par value $0.10 per share: Authorized 15,000,000 shares; Issued 7,442,177 shares at December 31, 2001, and 7,344,813 shares at December 31, 2000 744 734 Surplus 45,456 44,182 Undivided profits 82,385 70,894 Accumulated other comprehensive income (loss) 3,039 (9) Treasury stock at cost: 24,529 shares at December 31, 2001, and 24,886 shares at December 31, 2000 (466) (473) Unallocated ESOP: 10,170 shares at December 31, 2001, and 32,261 shares at December 31, 2000 (86) (333) - --------------------------------------------------------------------------------------------------------------------------------- Total Shareholders' Equity 131,072 114,995 - --------------------------------------------------------------------------------------------------------------------------------- Total Liabilities, Minority Interest in Consolidated Subsidiaries, and Shareholders' Equity $ 1,420,695 $ 1,304,894 ================================================================================================================================= </TABLE> See notes to consolidated financial statements. 29
Consolidated Statements of Income <TABLE> <CAPTION> Year ended December 31 (in thousands except per share data) 2001 2000 1999 - --------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Interest and Dividend Income Loans $ 71,592 $ 70,587 $ 57,790 Interest on balances due from banks 3 0 0 Federal funds sold 487 726 980 Available-for-sale securities 20,861 19,216 17,229 Held-to-maturity securities 1,215 1,489 1,618 - --------------------------------------------------------------------------------------------------------------------- Total Interest and Dividend Income 94,158 92,018 77,617 - --------------------------------------------------------------------------------------------------------------------- Interest Expense Deposits: Time certificates of deposit of $100,000 or more 7,970 10,205 7,498 Other deposits 20,458 22,288 17,642 Federal funds purchased and securities sold under agreements to repurchase 3,453 3,996 2,919 Other borrowings 4,294 3,587 2,492 - --------------------------------------------------------------------------------------------------------------------- Total Interest Expense 36,175 40,076 30,551 - --------------------------------------------------------------------------------------------------------------------- Net Interest Income 57,983 51,942 47,066 Less Provision for Loan/Lease Losses 1,606 1,216 944 Net Interest Income After Provision for Loan/Lease Losses 56,377 50,726 46,122 - --------------------------------------------------------------------------------------------------------------------- Noninterest Income Trust and investment services income 4,646 4,586 4,119 Service charges on deposit accounts 4,676 3,739 3,223 Insurance commissions and fees 4,225 0 0 Other service charges 4,259 3,812 2,716 Increase in cash surrender value of corporate owned life insurance 1,068 956 723 Other operating income 924 882 1,083 Gain (loss) on sale of available-for-sale securities 66 450 (59) - --------------------------------------------------------------------------------------------------------------------- Total Noninterest Income 19,864 14,425 11,805 - --------------------------------------------------------------------------------------------------------------------- Noninterest Expenses Salaries and wages 20,338 17,354 15,131 Pension and other employee benefits 5,004 4,112 3,469 Net occupancy expense of bank premises 2,787 2,439 1,801 Net furniture and fixture expense 3,042 2,582 2,255 Amortization of intangible assets 1,680 1,135 687 Merger and acquisition-related expenses 0 0 1,463 Other operating expenses 13,210 11,197 9,514 - --------------------------------------------------------------------------------------------------------------------- Total Noninterest Expenses 46,061 38,819 34,320 - --------------------------------------------------------------------------------------------------------------------- Income Before Income Tax Expense and Minority Interest in Consolidated Subsidiaries 30,180 26,332 23,607 Minority interest in consolidated subsidiaries 134 568 558 Income Tax Expense 10,419 8,252 7,849 - --------------------------------------------------------------------------------------------------------------------- Net Income $ 19,627 $ 17,512 $ 15,200 - --------------------------------------------------------------------------------------------------------------------- Basic earnings per share $ 2.65 $ 2.47 $ 2.15 Diluted earnings per share $ 2.62 $ 2.45 $ 2.12 ===================================================================================================================== </TABLE> See notes to consolidated financial statements. 30
Consolidated Statements of Cash Flows <TABLE> <CAPTION> Year ended December 31 (in thousands) 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> OPERATING ACTIVITIES Net income $ 19,627 $ 17,512 $ 15,200 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan/lease losses 1,606 1,216 944 Depreciation and amortization premises, equipment, and software 2,770 2,461 2,166 Amortization of intangible assets 1,680 1,135 687 Earnings from corporate owned life insurance, net (985) (956) (723) Net amortization on securities 431 17 266 Deferred income tax benefit (332) (599) (576) Net (gain) loss on sale of securities (66) (450) 59 Net gain on sale of loans (560) (74) (27) Proceeds from sale of loans 28,125 8,336 7,463 Loans originated for sale (28,356) (8,262) (7,436) Net (gain) loss on sale of bank premises (32) 3 (32) Treasury stock issued 10 75 41 ISOP/ESOP shares released or committed to be released for allocation 744 159 384 Decrease (increase) in interest receivable 943 (1,419) (802) (Decrease) increase in interest payable (1,655) 1,271 (18) Other, net (4,541) (268) (2,127) - ------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 19,409 20,157 15,469 - ------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Proceeds from maturities of available-for-sale securities 206,590 39,768 82,381 Proceeds from sales of available-for-sale securities 1,497 9,393 12,983 Proceeds from maturities of held-to-maturity securities 9,191 10,750 12,296 Purchases of available-for-sale securities (244,016) (50,955) (115,701) Purchases of held-to-maturity securities (10,194) (5,674) (6,766) Net increase in loans/leases (85,458) (90,996) (72,496) Proceeds from sales of bank premises and equipment 234 33 74 Purchase of bank premises and equipment (3,738) (5,547) (2,434) Purchase of corporate owned life insurance (885) (4,358) (815) Net cash (used in) provided by acquisitions (1,058) 0 4,258 - ------------------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (127,837) (97,586) (86,220) - ------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net increase in demand deposits, money market accounts, and savings accounts 68,280 16,778 58,059 Net (decrease) increase in time deposits (15,723) 43,884 40,701 Net increase (decrease) in securities sold under agreements to repurchase and Federal funds purchased 37,438 14,385 (3,359) Net increase (decrease) in other borrowings 7,996 25,245 (6,961) Cash dividends (8,136) (7,696) (6,159) Repurchase of common stock (3,408) (4,870) (4,101) Net proceeds from exercise of stock options, warrants, and related tax benefit 734 288 691 Cash paid in lieu of fractional Letchworth common shares 0 (9) 0 - ------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Financing Activities 87,181 88,005 78,871 - ------------------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (21,247) 10,576 8,120 - ------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of year 65,364 54,788 46,668 - ------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 44,117 $ 65,364 $ 54,788 ========================================================================================================================= SUPPLEMENTAL INFORMATION: Cash paid during the year for: Interest $ 37,830 $ 38,805 $ 30,569 Income taxes $ 11,017 $ 9,307 $ 10,307 Non-cash investing and financing activities: Fair value of non-cash assets acquired in purchase acquisition $ 1,504 $ 60,034 $ 143,298 Fair value of liabilities assumed in purchase acquisitions $ 1,449 $ 55,469 $ 147,556 Fair value of shares issued for acquisitions $ 3,458 $ 8,176 $ 0 Securitization of loans $ 41,440 $ 0 $ 0 </TABLE> See notes to consolidated financial statements. 31
Consolidated Statements of Changes in Shareholders' Equity <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------------------------ Accumulated Other (in thousands except share and Common Undivided Comprehensive Treasury Unallocated per share data) Stock Surplus Profits Income (Loss) Stock ESOP Total - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> Balances at December 31, 1998 $ 717 $ 43,774 $ 52,037 $ 2,339 $ (548) $ (667) $ 97,652 - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive income: Net income 15,200 15,200 Other comprehensive loss (7,084) (7,084) --------- Total Comprehensive Income 8,116 --------- (6,159) (6,159) Cash dividends ($1.03 per share) Exercise of stock options, and related tax benefit (71,786 shares, net) 7 684 691 Treasury stock issued (1,226 shares) 18 23 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 $ 40,548 $ 61,078 $ (4,745) $ (525) $ (442) $ 96,624 - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive income: Net income 17,512 17,512 Other comprehensive income 4,736 4,736 --------- Total Comprehensive Income 22,248 --------- (9) (9) Cash paid in lieu of fractional Letchworth common shares Cash dividends ($1.08 per share) (7,696) (7,696) Exercise of stock options, and related tax benefit (16,208 shares, net) 2 286 288 Treasury stock issued (2,777 shares) 23 52 75 Common stock repurchased and returned to unissued status (185,696 shares) (19) (4,851) (4,870) ESOP shares released or committed to be released for allocation (5,376 shares) 50 109 159 Shares issued for purchase acquisition (415,000 shares) 41 8,135 8,176 - ------------------------------------------------------------------------------------------------------------------------------------ Balances at December 31, 2000 $ 734 $ 44,182 $ 70,894 $ (9) $ (473) $ (333) $ 114,995 - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive income: Net income 19,627 19,627 Other comprehensive income 3,048 3,048 --------- Total Comprehensive Income 22,675 --------- (8,136) (8,136) Cash dividends ($1.10 per share) Exercise of stock options and related tax benefit (48,177 shares, net) 5 729 734 Treasury stock issued (357 shares) 3 7 10 Common stock repurchased and returned to unissued status (115,079 shares) (11) (3,397) (3,408) ESOP shares released or committed to be released for allocation (22,091 shares) 497 247 744 Shares issued for purchase acquisitions (164,266 shares) 16 3,442 3,458 - ------------------------------------------------------------------------------------------------------------------------------------ Balances at December 31, 2001 $ 744 $ 45,456 $ 82,385 $ 3,039 $ (466) $ (86) $ 131,072 ==================================================================================================================================== </TABLE> See notes to consolidated financial statements. 32
Notes to Consolidated Financial Statements Note 1 Summary of Significant Accounting Policies Basis of Presentation: Tompkins Trustco, Inc. ("Tompkins" or "the Company") is a Financial Holding Company, organized under the laws of New York State, and is the parent company of -Tompkins Trust Company (the "Trust Company"), The Bank of Castile, and The Mahopac National Bank ("Mahopac National Bank"); and Tompkins Insurance Agencies, Inc. ("Tompkins Insurance"). The consolidated financial information included herein combines the results of operations, the assets, liabilities, and shareholders' equity (including comprehensive income) 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 to the current year's presentation. Cash Equivalents: Cash equivalents in the consolidated statements of cash flows include cash and non-interest bearing balances due from banks, interest-bearing balances 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 or loss, 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 certain residential real estate loans held-for-sale and 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 current 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. All loans and leases restructured in a troubled debt restructuring are also considered impaired loans. Impairment losses are included in the reserve for loan/lease losses through a charge to the provision for loan/lease losses. 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. 33
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. 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 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. Prior to the adoption of SFAS No. 142 on January 1, 2002, the amortization period of goodwill ranged from 10 years to 20 years. Refer to "ACCOUNTING FOR BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE ASSETS" below for change affecting the future accounting treatment of goodwill and other intangibles. 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. 140. 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. Financial Instruments with Off-Balance-Sheet Risk: In the normal course of business the Company is party to certain 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: 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 and investment services are included in noninterest 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 or certain other contingencies. Cash Dividends Per Share: Cash dividends per share reflect actual historical dividends paid by Tompkins Trustco, Inc. for all periods presented. Segment Reporting: The Company's operations are solely in the financial services industry and include traditional commercial banking and related financial 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 and related financial 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 (net of tax) as of the dates of the consolidated statements of condition. STOCK BASED COMPENSATION: The Company applies APB Opinion No. 25 and related interpretations in accounting for its stock option plan. Accordingly, compensation expense is recognized only if the exercise price of the option is less than the fair value of the underlying stock at the grant date. Statement of Financial Accounting Standards (SFAS) No. 123 requires companies not using a fair value based method of accounting for stock options to provide pro forma disclosure of net income and earnings per share as if the fair value method of accounting had been applied. 34
Accounting For Derivative Instruments and Hedging Activities: The Company adopted the provisions of Financial Accounting Standards Board (FASB) SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, effective January 1, 2001. This statement establishes accounting and reporting standards for derivative instruments, including certain derivatives embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities on the balance sheet and measure those assets at fair value. Changes in fair value of the derivative financial instruments are reported as either net income or as a component of comprehensive income, depending on whether or not it qualifies for hedge accounting. Consequently, for those entities using derivative instruments, there may be increased volatility in net income and shareholders' equity as a result of accounting for derivatives in accordance with SFAS No. 133. Special hedge accounting treatment is permitted only if specific criteria are met, including a requirement that the hedging relationship be highly effective both at inception and on an ongoing basis. Results of effective hedges are recognized in current earnings for fair value hedges, and in other comprehensive income for cash flow hedges. Ineffective portions of hedges are recognized immediately in earnings and are not deferred. The adoption of SFAS No. 133 by the Company on January 1, 2001, did not have a material effect on the Company's consolidated financial statements. Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities: In September 2000, The FASB issued SFAS No. 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 140 replaces identically titled SFAS No. 125, and it carries forward most of SFAS No. 125's provisions without change. It does revise accounting standards for securitizations and certain other transfers of financial assets and collateral. The statement is generally applied prospectively to transactions and servicing activities occurring after March 31, 2001, although provisions with respect to collateral and certain disclosure requirements are effective for fiscal years ending after December 15, 2000. The adoption of this statement did not have a material impact on the consolidated financial statements of the Company. ACCOUNTING FOR BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE ASSETS: In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also specifies the criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Effective January 1, 2002, SFAS No. 121 was superceded by SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Currently, the FASB has stated that the unidentifiable intangible asset acquired in the acquisition of a bank or thrift (including acquisitions of branches), where the fair value of the liabilities assumed exceeds the fair value of the assets acquired, should continue to be accounted for under SFAS No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions. Under SFAS No. 72, all of the intangible assets associated with branch acquisitions recorded on the Company's consolidated balance sheet as of December 31, 2001 will continue to be amortized. The FASB has announced that additional research will be performed to decide whether unidentifiable intangible assets recorded under SFAS No. 72 should be accounted for similarly to goodwill under SFAS No. 142. However, issuance of final opinion with respect to this matter is not expected until the fourth quarter of 2002. The Company adopted the provisions of SFAS No. 141 in 2001. The adoption of SFAS No. 141 did not have an impact on the Company's consolidated financial statements. The Company is required to adopt the provisions of SFAS No. 142 effective January 1, 2002. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 continued to be amortized prior to the adoption of SFAS No. 142. SFAS No. 141 will require upon adoption of SFAS No. 142, that the company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in SFAS No. 141 for recognition apart from goodwill. Upon adoption of SFAS No. 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of SFAS No. 142 within the first interim period. In connection with the transitional goodwill impairment evaluation, SFAS No. 142 requires the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption based upon criteria contained in SFAS No. 142. Any transitional impairment loss would be recognized as the cumulative effect of a change in accounting principle in the Company's consolidated statement of income. At this time, the Company has not completed its transitional goodwill impairment evaluation. However, the Company does not anticipate there will be any significant transitional impairment losses from the adoption of SFAS No. 142. At December 31, 2001, the Company had unamortized goodwill related to its various acquisitions (see Note 2) totaling $9.7 million. The amortization of this goodwill amounted to $.5 million for the year ended December 31, 2001 ($.6 million when annualized for a full year's amortization of the goodwill recorded in 2001). In accordance with SFAS No. 142, the Company will no longer amortize this goodwill subsequent to December 31, 2001, which will reduce non-interest expenses by $.5 million in 2002, as compared to 2001. At December 31, 2001, the Company had core deposit intangible assets related to various acquisitions (see Note 2) of $3.5 million. The amortization of these intangible assets amounted to $.9 million during the year ended December 31, 2001. In accordance with SFAS No. 142, these intangible assets will continue to be amortized. 35
ACCOUNTING FOR BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE ASSETS: (continued) At December 31, 2001, the Company had unidentified intangible assets accounted for under SFAS No. 72 of approximately $234,000 related to various branch acquisitions. This intangible asset is currently excluded from the scope of SFAS No. 142. The amortization expense related to these unidentified intangible assets totaled $239,000 for the year ended December 31, 2001. As noted above, while the FASB is reconsidering the exclusion of this type of intangible asset from the scope of SFAS No. 142, at the present time this intangible asset will continue to be amortized. ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS: In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, that replaces SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, are to be applied prospectively. The adoption of SFAS No. 144 on January 1, 2002, did not have a material impact on the Company's financial condition or results of operations. 36
Note 2 Mergers and Acquisitions Letchworth Independent Bancshares Corporation On December 20, 1999, the shareholders of Tompkins Trustco, Inc. and Letchworth Independent Bancshares Corporation ("Letchworth") 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 Mahopac National Bank, Mahopac, New York. The Bank of Castile continues 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 thirteen 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. In 1999, The Bank of Castile opened its first branch office in Monroe County. Immediately following the Letchworth merger, Tompkins owned 70% of Mahopac National Bank outstanding common stock and Mahopac National Bank continued to operate its community banking business as a majority-owned subsidiary of Tompkins. As noted below, Tompkins subsequently purchased the additional remaining shares of Mahopac National Bank, such that at December 31, 2000, Tompkins effectively owned all of Mahopac National Bank outstanding common stock. Mahopac National Bank is located in Putnam County, New York, and operates four bank branches in that county, and one office in Dutchess 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. As of December 31, 2000, all amounts were paid. 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 for the year ended December 31, 1999, as reported by each of the companies, and on a combined basis: Year Ended December 31 (dollar amounts in thousands, except per share) 1999 - -------------------------------------------------------------------------------- Net interest income: Tompkins $ 29,111 Letchworth 17,955 - -------------------------------------------------------------------------------- Combined $ 47,066 Net income: Tompkins $ 11,865 Letchworth 3,335 - -------------------------------------------------------------------------------- Combined $ 15,200 Basic earnings per share: Tompkins $ 2.46 Letchworth $ 1.01 - -------------------------------------------------------------------------------- Combined $ 2.15 Diluted earnings per share: Tompkins $ 2.43 Letchworth $ 1.00 - -------------------------------------------------------------------------------- Combined $ 2.12 ================================================================================ 37
Note 2 Mergers and Acquisitions (continued) Mahopac National Bank On June 4, 1999, Letchworth acquired 70.17% of the outstanding common stock of Mahopac National Bank in a cash transaction accounted for as a purchase. Accordingly, operating results for Mahopac National Bank are not included for periods prior to June 4, 1999. Subsequent to June 4, 1999, net income of Mahopac National Bank is included in Tompkins' net income based upon the percentage of Tompkins' ownership of Mahopac National Bank. This transaction resulted in a core deposit intangible of $3.5 million, which is being amortized over a 10-year period. The transaction also resulted in goodwill of $2.5 million, which prior to the adoption of SFAS No. 142 on January 1, 2002, was being amortized over a 20-year period. Effective September 1, 2000, and early in 2001, Tompkins completed the purchase of the minority interest in Mahopac National Bank, primarily in a stock-for-stock transaction accounted for as a purchase. Prior to September 1, 2000, the approximately 30% interest in Mahopac National Bank, which was not owned by Tompkins, was shown as a minority interest in consolidated subsidiaries on the consolidated statements of condition. Subsequent to September 1, 2000, effectively all of the net income of Mahopac National Bank is included in Tompkins' consolidated net income. The approximately 30% acquisition of Mahopac National Bank resulted in a core deposit intangible of $1.9 million, which is being amortized over a 10-year period, and goodwill of $2.5 million. An additional $651,000 of goodwill was recorded in 2001 related to the conversion of Mahopac National Bank's core processing software. Prior to the adoption of SFAS No. 142 on January 1, 2002, the goodwill was being amortized over a 20-year period. The table below presents the pro forma combined results of operations of Tompkins and Mahopac National Bank, as if Mahopac had been 100% owned for all periods presented. Year Ended December 31 (dollar amounts in thousands, except per share) 2000 1999 - -------------------------------------------------------------------------------- Net interest income: As reported $ 51,942 $ 47,066 Pro forma combined $ 51,942 49,928 Net income: - -------------------------------------------------------------------------------- As reported $ 17,512 $ 15,200 Pro forma combined 17,818 15,866 Basic earnings per share: - -------------------------------------------------------------------------------- As reported $ 2.47 $ 2.15 Pro forma combined 2.41 2.12 Diluted earnings per share: - -------------------------------------------------------------------------------- As reported $ 2.45 $ 2.12 Pro forma combined 2.40 $ 2.09 ================================================================================ The pro forma combined financial information does not reflect any potential cost savings or revenue enhancements that are expected to result from the merger and acquisitions. Accordingly, the pro forma combined financial information may not be indicative of operations that would have been achieved had the merger and acquisitions occurred on the dates indicated, nor do they purport to be indicative of the results of operations that may be achieved in the future. Tompkins Insurance Effective January 1, 2001, the Company completed the acquisition of 100% of the common stock of Austin, Hardie, Wise Agency, Inc. and Ernest Townsend & Son, Inc., in a cash and stock transaction accounted for as a purchase. In connection with these acquisitions, the two agencies were merged with and into Tompkins Insurance, a wholly-owned subsidiary of Tompkins. The agencies continue to operate from their western New York locations, which include Attica, Warsaw, Alden, LeRoy, Batavia and Caledonia. The acquisition was accounted for as a purchase transaction, with the $4.4 million excess of the purchase price over the fair value of identifiable assets acquired less liabilities assumed recorded as goodwill. Prior to the adoption of SFAS No. 142 on January 1, 2002, the goodwill was being amortized on a straight-line basis over 15 years. The purchase agreements for the insurance agencies include provisions for additional consideration to be paid in the form of the release of shares of Company stock from escrow if Tompkins Insurance meets certain income targets in 2001 and 2002. The contingent consideration includes 25,093 shares, which are payable if the income targets are met, and an additional 8,333 shares which are payable if income targets for the two-year period are exceeded by 5%. Tompkins Insurance met the 2001 income target, resulting in the release of 12,547 shares as additional consideration. Such shares are not considered outstanding for purposes of computing earnings per share until all contingencies related to their issuance are met. On June 22, 2001, Tompkins Insurance acquired the assets of Youngs & Linfoot of LeRoy, Inc. in a cash transaction accounted for as a purchase. The excess of the purchase price over the fair value of identifiable assets acquired less liabilities assumed of $287,000 has been recorded as goodwill. Prior to the adoption of SFAS No. 142 on January 1, 2002, the goodwill was being amortized on a straight-line basis over 15 years. 38
Note 3 Securities The following summarizes securities held by the Company: <TABLE> <CAPTION> Available-for-Sale Securities - ---------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair December 31, 2001 (in thousands) Cost Gains Losses Value - ---------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> U.S. Treasury securities and obligations of U.S. Government agencies $ 137,569 $ 1,936 $ 313 $ 139,192 Obligations of states and political subdivisions 44,915 1,120 94 45,941 Mortgage-backed securities 185,945 2,951 355 188,541 U.S. corporate securities 4,512 70 250 4,332 - ---------------------------------------------------------------------------------------------------------- Total debt securities 372,941 6,077 1,012 378,006 - ---------------------------------------------------------------------------------------------------------- Equity securities 8,363 0 0 8,363 Total available-for-sale securities $ 381,304 $ 6,077 $ 1,012 $ 386,369 ========================================================================================================== </TABLE> Available-for-sale securities include $8,155,000 in nonmarketable equity securities, which are carried at amortized cost since fair values are not readily determinable. This figure includes $6,642,000 of Federal Home Loan Bank Stock. Substantially all of the above mortgage-backed securities are direct pass through securities issued or backed by Federal agencies. <TABLE> <CAPTION> Held-to-Maturity Securities - ---------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair December 31, 2001 (in thousands) Cost Gains Losses Value - ---------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Obligations of states and political subdivisions $ 26,846 $ 626 $ 217 $ 27,255 - ---------------------------------------------------------------------------------------------------------- Total held-to-maturity debt securities $ 26,846 $ 626 $ 217 $ 27,255 ========================================================================================================== </TABLE> <TABLE> <CAPTION> Available-for-Sale Securities - ---------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair December 31, 2000 (in thousands) Cost Gains Losses Value - ---------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> U.S. Treasury securities and obligations of U.S. Government agencies $ 160,470 $ 103 $ 503 $ 160,070 Obligations of states and political subdivisions 46,432 696 190 46,938 Mortgage-backed securities 84,342 340 376 84,306 U.S. corporate securities 4,489 4 25 4,468 - ---------------------------------------------------------------------------------------------------------- Total debt securities 295,733 1,143 1,094 295,782 - ---------------------------------------------------------------------------------------------------------- Equity securities 8,640 0 64 8,576 - ---------------------------------------------------------------------------------------------------------- Total available-for-sale securities $ 304,373 $ 1,143 $ 1,158 $ 304,358 ========================================================================================================== </TABLE> Available-for-sale securities include $7,089,000 in nonmarketable equity securities, which are carried at amortized cost since fair values are not readily determinable. This figure includes $6,270,000 of Federal Home Loan Bank Stock. Substantially all of the above mortgage-backed securities are direct pass through securities issued or backed by Federal agencies. <TABLE> <CAPTION> Held-to-Maturity Securities - ---------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair December 31, 2000 (in thousands) Cost Gains Losses Value - ---------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Obligations of states and political subdivisions $ 25,863 $ 284 $ 0 $ 26,147 - ---------------------------------------------------------------------------------------------------------- Total held-to-maturity debt securities $ 25,863 $ 284 $ 0 $ 26,147 ========================================================================================================== </TABLE> 39
Note 3 Securities (continued) The amortized cost and 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. Amortized Fair December 31, 2001 (in thousands) Cost Value - -------------------------------------------------------------------------------- Available-for-sale securities: Due in one year or less $ 15,723 $ 15,854 Due after one year through five years 37,831 38,770 Due after five years through ten years 100,186 101,860 Due after ten years 33,256 32,981 - -------------------------------------------------------------------------------- Total 186,996 189,465 - -------------------------------------------------------------------------------- Mortgage-backed securities 185,945 188,541 Equity securities 8,363 8,363 - -------------------------------------------------------------------------------- Total available-for-sale securities $381,304 $386,369 ================================================================================ Amortized Fair December 31, 2001 (in thousands) Cost Value - -------------------------------------------------------------------------------- Held-to-maturity securities: Due in one year or less $ 7,878 $ 7,957 Due after one year through five years 6,928 7,212 Due after five years through ten years 5,469 5,562 Due after ten years 6,571 6,524 - -------------------------------------------------------------------------------- Total held-to-maturity debt securities $ 26,846 $ 27,255 ================================================================================ Realized gains on available-for-sale securities were $66,000 in 2001, $453,000 in 2000, and $37,000 in 1999; realized losses on available-for-sale securities were $0 in 2001, $3,000 in 2000, and $96,000 in 1999. At December 31, 2001, securities with a carrying value of $299,047,000 were pledged to secure public deposits (as required by law), and securities sold under agreements to repurchase (see also Note 9). Except for U.S. government securities, there were no holdings, when taken in aggregate, of any single issuer that exceeded 10% of shareholders' equity at December 31, 2001. The Company has an equity investment in a small business investment company (SBIC) established for the purpose of providing financing to small businesses in market areas served by the Company. As of December 31, 2001 and 2000, this investment totaled $4,104,000 and $3,292,000, respectively, and was included in other assets on the Company's consolidated statements of condition. The investment is accounted for under the equity method of accounting. Note 4 Comprehensive Income Comprehensive income for the three years ended December 31 is summarized below: <TABLE> <CAPTION> (in thousands) 2001 2000 1999 - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Net income $ 19,627 $ 17,512 $ 15,200 - --------------------------------------------------------------------------------------------------------------------------- Net unrealized holding gain (loss) on available-for-sale securities during the year. Pre-tax net unrealized holding gain (loss) was $5,146 in 2001, $8,539 in 2000 and $(11,873) in 1999 3,088 5,006 (7,119) Reclassification adjustment for net unrealized (gain) loss on the sale of available-for-sale securities (pre-tax net gain of $66 in 2001, and $450 in 2000, and pre-tax net loss of $59 in 1999) (40) (270) 35 - --------------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss) 3,048 4,736 (7,084) - --------------------------------------------------------------------------------------------------------------------------- Total comprehensive income $ 22,675 $ 22,248 $ 8,116 =========================================================================================================================== </TABLE> 40
Note 5 Loan/Lease Classification Summary and Related Party Transactions Loans/Leases at December 31 were as follows: <TABLE> <CAPTION> (in thousands) 2001 2000 - ----------------------------------------------------------------------------------------------------------------- <S> <C> <C> Residential real estate $ 327,987 $ 344,715 Commercial real estate 168,452 152,218 Real estate construction 25,112 18,746 Commercial 237,483 202,956 Consumer and other 111,880 110,126 Leases 21,787 19,565 - ----------------------------------------------------------------------------------------------------------------- Total loans and leases 892,701 848,326 Less unearned income and net deferred costs and fees (2,859) (2,568) - ----------------------------------------------------------------------------------------------------------------- Total loans and leases, net of unearned income and deferred costs and fees $ 889,842 $ 845,758 ================================================================================================================= </TABLE> During 2001, the Company sold $27,565,000 of mortgage loans, realizing net gains of $560,000. During 2000, the Company sold $1,068,000 of student loans and $7,194,000 of mortgage loans, realizing a net gain of $74,000. During 1999, the Company sold $1,401,000 in student loans and $6,035,000 in mortgage loans, realizing a net gain of $27,000. Net gains and losses on the sale of loans are included in other operating income on the Company's consolidated statements of income. Loans held for sale totaled $791,000 and $0 at December 31, 2001 and 2000, respectively. During 2001, the Company securitized $41,440,000 of residential mortgage loans with Federal Home Loan Mortgage Corporation, which are now held as available-for-sale securities. No loans were securitized in 2000. At December 31, 2001, the Company serviced mortgage loans, which included the $41,440,000 securitized and held as available-for-sale securities, aggregating $113,628,000, compared to $63,250,000 serviced for unrelated third parties at December 31, 2000. Capitalized mortgage servicing rights totaled $663,000 and $286,000 at December 31, 2001 and 2000, respectively. 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 thirteen banking offices in the counties of Tompkins and Schuyler. The Bank of Castile operates thirteen banking 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. Mahopac National Bank is located in Putnam County, and operates four full-service branches in that county and one full-service branch in neighboring Dutchess County. The Dutchess County branch opened in 2001. Other than general economic risks, management is not aware of any material concentrations of credit risk to any industry or individual borrower. 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) 2001 2000 - ------------------------------------------------------------------------------- Balance January 1 $ 4,104 $ 5,438 Former Directors/Executive Officers (463) (1,133) New Executive Officers 242 96 New loans and advancements 2,533 2,138 Loan payments (2,776) (2,435) - ------------------------------------------------------------------------------- Balance December 31 $ 3,640 $ 4,104 =============================================================================== 41
Note 6 Reserve for Loan/Lease Losses Changes in the reserve for loan/lease losses are summarized as follows: (in thousands) 2001 2000 1999 - -------------------------------------------------------------------------------- Reserve at beginning of year $ 9,824 $ 9,228 $ 7,405 Allowance related to purchase acquisition 0 0 1,511 Provisions charged to operations 1,606 1,216 944 Recoveries on loans/leases 670 409 476 Loans/leases charged-off (1,394) (1,029) (1,108) - -------------------------------------------------------------------------------- Reserve at end of year $ 10,706 $ 9,824 $ 9,228 ================================================================================ The Company's recorded investment in loans/leases that are considered impaired totaled $3,771,000 at December 31, 2001, and $2,710,000 at December 31, 2000. The average recorded investment in impaired loans/leases was $2,937,000 in 2001, $1,636,000 in 2000, and $828,000 in 1999. The December 31, 2001, recorded investment in impaired loans/leases includes $1,779,000 of loans/leases that had related reserves of $838,000. The recorded investment in impaired loans/leases at December 31, 2000, included $1,882,000 of loans/leases, which had related reserves of $706,000. Interest income recognized on impaired loans/leases, all collected in cash, was $184,000 for 2001, $94,000 for 2000, and $103,000 for 1999. The principal balances of nonperforming loans/leases, including impaired loans/leases, are detailed in the table below. December 31 (in thousands) 2001 2000 - -------------------------------------------------------------------------------- Loans 90 days past due and accruing $ 1,612 $ 226 Nonaccrual loans 5,736 4,134 Troubled debt restructurings not included above 185 389 - -------------------------------------------------------------------------------- Nonperforming Loans/Leases $ 7,533 $ 4,749 ================================================================================ 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, 2001, was not significant. Note 7 Bank Premises and Equipment Bank premises and equipment at December 31 were as follows: (in thousands) 2001 2000 - -------------------------------------------------------------------------------- Land $ 3,365 $ 3,229 Bank premises 25,818 22,271 Furniture, fixtures, and equipment 19,002 18,758 Accumulated depreciation and amortization (23,151) (20,397) - -------------------------------------------------------------------------------- Total $ 25,034 $ 23,861 ================================================================================ At December 31, 2001, certain equipment was pledged to secure borrowings. Depreciation and amortization expenses in 2001, 2000, and 1999 are included in operating expenses as follows: (in thousands) 2001 2000 1999 - -------------------------------------------------------------------------------- Bank premises $ 845 $ 808 $ 702 Furniture, fixtures, and equipment 1,766 1,501 1,420 - -------------------------------------------------------------------------------- Total $2,611 $2,309 $2,122 ================================================================================ 42
Note 8 Deposits The aggregate time deposits of $100,000 or more were $163,480,000 at December 31, 2001, and $183,452,000 at December 31, 2000. Scheduled maturities of time deposits at December 31, 2001, were as follows: Less than $100,000 (in thousands) $100,000 and over Total - -------------------------------------------------------------------------------- Maturity Three months or less $ 68,288 $109,874 $178,162 Over three through six months 58,830 24,833 83,663 Over six through twelve months 65,987 18,126 84,113 - -------------------------------------------------------------------------------- Total due in 2002 193,105 152,833 345,938 2003 28,184 5,708 33,892 2004 16,567 4,254 20,821 2005 2,666 565 3,231 2006 and thereafter 530 120 650 - -------------------------------------------------------------------------------- Total $241,052 $163,480 $404,532 ================================================================================ Note 9 Federal Funds Purchased and Securities Sold Under Agreements to Repurchase Information regarding securities sold under agreements to repurchase as of December 31, 2001, is summarized below: <TABLE> <CAPTION> Collateral Repurchase Securities Liability - ---------------------------------------------------------------------------------------------- Weighted Estimated Average Carrying Fair Interest (dollar amounts in thousands) Amount Value Amount Rate - ---------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Maturity/Type of Asset Demand: U.S. Government agency securities $ 28,177 $ 28,631 $ 28,299 3.47% Mortgage-backed securities 29,137 29,860 28,804 2.26% Corporate bonds 2,015 2,058 2,000 2.45% 2 to 30 days: U.S. Government agency securities 5,065 5,189 5,000 2.54% Obligations of states and political subdivisions 107 109 112 2.05% 31 to 89 days: U.S. Government agency securities 550 567 521 5.65% Mortgage-backed securities 174 182 172 2.05% 90 to 365 days: U.S. Government agency securities 150 154 183 4.99% Mortgage-backed securities 754 795 789 4.07% Obligations of states and political subdivisions 488 513 583 3.55% Corporate bonds 5 5 6 3.55% Over 365 days: U.S. Government agency securities 24,002 24,270 23,000 4.84% Obligations of states and political subdivisions 11,748 12,138 12,000 4.77% - ---------------------------------------------------------------------------------------------- Total $102,372 $104,471 $101,469 3.54% ============================================================================================== </TABLE> The amount reported in "Over 365 days" includes wholesale repurchase agreements with the Federal Home Loan Bank (FHLB) totaling $35,000,000. The scheduled maturities of these advances are $5,000,000 in 2003, $10,000,000 in 2004, $15,000,000 in 2006, and $5,000,000 in 2011. Of the $35,000,000 of wholesale repurchase agreements due in over 365 days, $20,000,000 are callable by the FHLB if certain conditions are met. 43
Note 9 Federal Funds Purchased and Securities Sold Under Agreements to Repurchase (Continued) At December 31, 2001, the Federal Home Loan Bank of New York held substantially all of the above securities. 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: <TABLE> <CAPTION> Securities Sold Under Agreements to Repurchase (dollar amounts in thousands) 2001 2000 1999 - ---------------------------------------------------------------------------------------- <S> <C> <C> <C> Total outstanding at December 31 $101,469 $ 72,231 $ 57,846 Maximum month-end balance 106,458 75,525 60,662 Average balance during the year 77,663 61,207 56,453 Weighted average rate at December 31 3.54% 5.85% 5.07% Average interest rate paid during the year 4.36% 5.73% 4.76% ======================================================================================== Federal Funds Purchased (dollar amounts in thousands) 2001 2000 1999 - ---------------------------------------------------------------------------------------- Total outstanding at December 31 $ 8,200 $ 0 $ 0 Maximum month-end balance 8,630 18,000 13,500 Average balance during the year 1,469 7,098 4,201 Weighted average rate at December 31 1.81% N/A N/A Average interest rate paid during the year 4.66% 6.85% 5.27% ======================================================================================== </TABLE> 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 $38,500,000 at December 31, 2001, and $29,500,000 at December 31, 2000. No advances were outstanding against those lines at December 31, 2001, or 2000. All bank subsidiaries are members of the 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, 2001, the Company, through its subsidiaries, had established unused lines of credit with the FHLB of $151,345,000. At December 31, 2001, there were $75,265,000 in term advances from the FHLB, compared to $67,117,000 at December 31, 2000. At December 31, 2001, there were advances due within one year of $2,912,000 with a weighted average rate of 5.13%, and advances due in more than one year of $72,353,000 with a weighted average rate of 5.25%. Maturities of advances included $2,475,000 maturing in 2003, $21,735,000 in 2004, $10,723,000 in 2005, $3,163,000 in 2006, $66,000 in 2007, $71,000 in 2008, $2,076,000 in 2009, $10,044,000 in 2010 and $22,000,000 in 2011. The Company's FHLB borrowings at December 31, 2001, included $39,000,000 in fixed-rate callable borrowings, which can be called by the FHLB if certain conditions are met. Other borrowings included a Treasury Tax and Loan Note account with the Federal Reserve Bank of New York totaling $166,000 at December 31, 2001, and $140,000 at December 31, 2000. At December 31, 2001, Tompkins Insurance had borrowings of $150,000 from unrelated financial institutions and officers of Tompkins Insurance. These borrowings are primarily secured by equipment. 44
Note 11 Employee Benefit Plans The Company maintains a noncontributory defined-benefit pension plan covering substantially all employees of the Company. The benefits are based on years of service and percentage of the employees' average compensation. Prior to October 1, 2000, the Company maintained two noncontributory defined benefit plans, Tompkins County Trust Company Retirement Plan and The Bank of Castile Employees Retirement Plan. Effective October 1, 2000, the Company amended and merged these two plans. Assets of the Company's defined benefit plan are invested in common and preferred stock, U. S. Government securities, corporate bonds and notes, and mutual funds. At December 31, 2001, the plan assets included 25,018 shares of Tompkins common stock. The Trust Company also offers post-retirement medical coverage and life insurance 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 following table sets forth the changes in the plans' benefit obligation and plan assets, and the plans' funded status and amounts recognized in the Company's consolidated statements of condition at December 31, 2001 and 2000. <TABLE> <CAPTION> Pension Benefits Other Benefits (dollar amounts in thousands) 2001 2000(2) 2001 2000 - ------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Change in benefit obligation: Benefit obligation at beginning of year $ 16,958 $ 16,983 $ 3,725 $ 3,391 Service cost 889 704 109 98 Interest cost 1,298 1,258 268 259 Amendments 213 (2,500) (6) 0 Actuarial loss 1,167 1,892 92 160 Benefits paid (899) (1,379) (156) (183) - ------------------------------------------------------------------------------------------------------------------ Benefit obligation at end of year $ 19,626 $ 16,958 $ 4,032 $ 3,725 - ------------------------------------------------------------------------------------------------------------------ Change in plan assets Fair value of plan assets at beginning of year $ 18,114 $ 17,533 $ 0 $ 0 Actual (loss) return on plan assets (800) 1,231 0 0 Employer contribution 2,570 729 156 183 Benefits paid (899) (1,379) (156) (183) - ------------------------------------------------------------------------------------------------------------------ Fair value of plan assets at end of year $ 18,985 $ 18,114 $ 0 $ 0 - ------------------------------------------------------------------------------------------------------------------ Funded status (641) $ 1,156 $ (4,032) $ (3,725) Unrecognized net actuarial loss 7,056 3,801 243 151 Net transition (asset) obligation (132) (195) 1,271 1,386 Unrecognized prior service cost (2,012) (2,429) (6) 0 - ------------------------------------------------------------------------------------------------------------------ Prepaid (accrued) benefit cost $ 4,271 $ 2,333 $ (2,524) $ (2,188) - ------------------------------------------------------------------------------------------------------------------ Weighted-average assumptions as of December 31: Discount rate 7.25% 7.50% 7.25% 7.50% Expected return on plan assets 8.5% 8.50% NA NA Rate of compensation increase (1) 4.00-5.00% 4.00-5.00% 4.00% 4.00% ================================================================================================================== </TABLE> (1) The rate of compensation increase for the Trust Company is 4%, and is 5% for all other groups. (2) Change in benefit obligation' and `Change in plan assets' sections represent reconciliations from October 1, 1999 through December 31, 2000 for the Trust Company group, and January 1, 2000, through December 31, 2000 for The Bank of Castile group. The Trust Company currently offers medical coverage and life insurance coverage 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 11.5% beginning in 2001, and is assumed to decrease gradually to 5.0% in 2010 and beyond. Increasing the assumed health care cost trend rates by 1% in each year would increase the accumulated post-retirement benefit obligation as of December 31, 2001, by $32,000 and the net periodic post-retirement benefit cost for 2001 by $2,000. Decreasing the assumed health care cost trend rates by 1% each year would decrease the accumulated post-retirement benefit obligation as of December 31, 2001, by $40,000 and decrease the net periodic post-retirement benefit cost by $3,000. 45
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) 2001 2000 1999 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> Service cost $ 889 $ 704 $ 646 $ 109 $ 98 $ 88 Interest cost 1,298 1,258 1,134 269 259 227 Expected return on plan assets (1,508) (1,487) (1,371) 0 0 0 Amortization of prior service cost (136) 15 14 (1) 0 0 Recognized net actuarial gain 165 96 70 0 0 0 Amortization of transition (asset) liability (76) (106) (77) 116 116 116 Other N/A 107 N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------------ Net periodic benefit cost $ 632 $ 587 $ 416 $ 493 $ 473 $ 431 ============================================================================================================ </TABLE> As of January 1, 2001, the Company adopted a new Employee Stock Ownership Plan (ESOP) and a new 401-K Investment and Stock Ownership Plan (ISOP) covering substantially all employees of the Company, and replacing the ESOP, ISOP, and 401-K plans which were previously in place at the Company's subsidiaries. The ESOP allows for Company contributions in the form of cash and/or stock of the Company. Contributions are determined by the board of directors in accordance with a performance-based formula, and were limited to a maximum amount as stipulated in the respective plan. At December 31, 2001, the ESOP had debt with an outstanding balance of $285,000, an adjustable interest rate of 5.75%, and a stated maturity of 2005. On December 31, 2001, 10,170 shares remained unallocated with a fair market value of $409,000. The Company recognized compensation expense related to the ESOP of $785,000 in 2001. Compensation expense related to the separate ISOP/ESOP plans was $159,000 in 2000, and $522,000 in 1999. The Company provided certain matching contributions to the ISOP based upon the amount of contributions made by plan participants. The expense associated with these matching provisions was $636,000 in 2001. Matching contributions to the separate ISOP plans prior to 2001 were $160,000 in 2000, and $175,000 in 1999. Life insurance benefits are provided to certain officers of the Company. In connection with these benefits, the Company purchased $885,000 and $4.4 million in corporate owned life insurance in 2001 and 2000, respectively. The insurance is carried at its cash surrender value as an other asset on the consolidated statements of condition. Increases in the cash surrender value of the insurance are reflected as noninterest income, and the related mortality expense is recognized as other employee benefits expense in the consolidated statements of income. In addition to the Company's non-contributory defined benefit retirement and pension plan, the Company provides supplemental employee retirement plans to certain executives. The amount of liability recognized in the Company's consolidated statements of condition for supplemental retirement plans was $1.7 million at December 31, 2001, and $1.3 million at December 31, 2000. Benefits expense associated with the supplemental retirement plans amounted to $463,000, $415,000 and $195,000 for the years ended December 31, 2001, 2000, and 1999, respectively. 46
Note 12 Stock Based Compensation In January 2001, the Company adopted a stock option plan (the "2001 Plan"), which authorizes grants of options up to 350,000 shares of authorized but unissued common stock. At December 31, 2001, there were 291,000 shares available for grant under the 2001 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, 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. Prior to the adoption of the 2001 Plan, the Company had similar stock option plans that authorized up to 494,100 shares of authorized but unissued common stock. These plans remain in effect solely with respect to unexercised options issued under these plans. In connection with the Letchworth merger, outstanding options of Letchworth were converted to options of Tompkins at the time of the merger, effective December 31, 1999. 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) 2001 2000 1999 - -------------------------------------------------------------------------------- Net income: As reported $ 19,627 $ 17,512 $ 15,200 Pro forma 19,298 17,356 14,958 - -------------------------------------------------------------------------------- Basic earnings per share: As reported $ 2.65 $ 2.47 $ 2.15 Pro forma 2.61 2.44 2.12 - -------------------------------------------------------------------------------- Diluted earnings per share As reported $ 2.62 $ 2.45 $ 2.12 Pro forma 2.57 2.42 2.08 ================================================================================ The per share weighted average fair value of stock options granted during 2001, 2000, and 1999 was $15.80, $10.96, and $8.07, respectively. Fair values were arrived at using the Black Scholes option-pricing model with the following assumptions: 2001 2000 1999 - -------------------------------------------------------------------------------- Risk-free interest rate 5.25% 5.91% 5.85% Expected dividend yield 3.10% 3.90% 3.43% Volatility 50.00% 52.00% 47.00% Expected life (years) 7.00 7.00 7.00 ================================================================================ In management's opinion the existing models do not necessarily provide a reliable measure of the fair value of its employee stock options because the Company's employee stock options have characteristics significantly different from those of traded options for which the Black-Scholes model was developed, and because changes in the subjective assumptions can materially affect fair value estimate. 47
Note 12 Stock Based Compensation (continued) The following table presents the combined stock option activity for the 1992 Plan, the 1998 Plan, and the 2001 Plan during the periods indicated: Weighted Average Number of Shares Exercise Price - -------------------------------------------------------------------------------- 2001: Beginning balance 384,744 $22.35 Granted 64,500 37.17 Exercised (68,671) 16.43 Forfeited (4,375) 28.35 - -------------------------------------------------------------------------------- Outstanding at year-end 376,198 25.90 - -------------------------------------------------------------------------------- Exercisable at year-end 150,551 $20.58 - -------------------------------------------------------------------------------- 2000: Beginning balance 251,977 $19.46 Granted 163,500 26.63 Exercised (19,546) 18.32 Forfeited (11,187) 26.79 - -------------------------------------------------------------------------------- Outstanding at year-end 384,744 22.35 - -------------------------------------------------------------------------------- Exercisable at year-end 196,200 $18.89 - -------------------------------------------------------------------------------- 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 ================================================================================ The following summarizes outstanding and exercisable options at December 31, 2001: <TABLE> <CAPTION> 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> $11.21-19.27 69,107 3.92 $18.35 69,107 $18.35 $20.17-23.66 87,591 6.21 $22.22 79,694 $22.29 $26.63-28.67 155,000 8.68 $26.64 750 $28.67 $30.95-37.75 64,500 9.47 $37.23 1,000 $32.75 - ---------------------------------------------------------------------------------------------------------- 376,198 7.37 $25.90 150,551 $20.58 ========================================================================================================== </TABLE> 48
Note 13 Income Taxes The income tax expense (benefit) attributable to income from operations is summarized as follows: (in thousands) Current Deferred Total - -------------------------------------------------------------------------------- 2001 Federal $ 9,326 $ (283) $ 9,043 State 1,425 (49) 1,376 - -------------------------------------------------------------------------------- Total $10,751 $ (332) $10,419 - -------------------------------------------------------------------------------- 2000 Federal $ 7,772 $ (530) $ 7,242 State 1,079 (69) 1,010 - -------------------------------------------------------------------------------- Total $ 8,851 $ (599) $ 8,252 - -------------------------------------------------------------------------------- 1999 Federal $ 7,338 $ (523) $ 6,815 State 1,087 (53) 1,034 - -------------------------------------------------------------------------------- Total $ 8,425 $ (576) $ 7,849 ================================================================================ 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: 2001 2000 1999 - -------------------------------------------------------------------------------- Statutory federal income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal benefit 3.0 2.5 2.9 Tax exempt income (3.6) (4.3) (4.8) Non-deductible merger costs 0 0 1.5 All other 0.1 (1.7) (0.5) - -------------------------------------------------------------------------------- Total 34.5% 31.5% 34.1% ================================================================================ 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) 2001 2000 - -------------------------------------------------------------------------------- Deferred tax assets: Reserve for loan/lease losses $ 4,051 $ 3,636 Compensation and benefits 2,676 2,319 Other 1,190 627 - -------------------------------------------------------------------------------- Total deferred tax assets $ 7,917 $ 6,582 - -------------------------------------------------------------------------------- Deferred tax liabilities: Leasing transactions $ 1,418 $ 1,595 Prepaid pension 1,718 930 Depreciation 469 543 Purchase accounting adjustment 650 887 Other 546 275 - -------------------------------------------------------------------------------- Total deferred tax liabilities $ 4,801 $ 4,230 - -------------------------------------------------------------------------------- Net deferred tax asset at year-end $ 3,116 $ 2,352 ================================================================================ Net deferred tax asset at beginning of year $ 2,352 $ 2,059 - -------------------------------------------------------------------------------- Increase in net deferred tax asset (764) (293) Purchase accounting adjustments, net 432 (306) - -------------------------------------------------------------------------------- Deferred tax benefit $ (332) $ (599) ================================================================================ 49
Note 13 Income Taxes (continued) This analysis does not include the recorded deferred tax liability of $2,026,000 as of December 31, 2001, and deferred tax asset of $6,000 as of December 31, 2000 related to the net unrealized holding gain/loss in the available-for-sale securities portfolio. 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 at December 31, 2001 and 2000. 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 $518,952 in 2001, $347,000 in 2000, and $359,000 in 1999. The future minimum rental commitments as of December 31, 2001, for all operating leases that cannot be canceled are as follows: (in thousands) 2002 $ 346 2003 283 2004 125 2005 64 2006 62 Thereafter $3,401 Most leases include options to renew for periods ranging from 5 to 20 years. Options to renew are not included in the above future minimum rental commitments. The Company has two land lease commitments with terms expiring in 2042 and 2090, respectively. In August 2000, the Company renewed its software contract for the core banking application used by Tompkins Trust Company and The Bank of Castile. During 2001, Mahopac National Bank terminated its existing data processing contract, which was scheduled to expire in July 2005, and effective March 2002, will be covered under the same contract as Tompkins Trust Company and The Bank of Castile. Estimated minimum annual payments under the above contract are $275,000 in 2002, with annual increases based upon asset growth of the banks serviced under the contract. 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. The Company's maximum potential obligations to extend credit for loan commitments (unfunded loans, unused lines of credit, and 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) 2001 2000 - -------------------------------------------------------------------------------- Loan commitments $ 68,951 $ 55,712 Stand-by letter of credit 8,528 6,220 Undisbursed portion of lines of credit 168,479 145,740 Commitment to invest in limited partnerships registered as a Small Business Investment Company 0 558 - -------------------------------------------------------------------------------- Total $245,958 $208,230 ================================================================================ 50
Note 14 Commitments and Contingent Liabilities (Continued) 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. At December 31, 2001, the Company had rate lock agreements associated with mortgage loans to be sold in the secondary market (certain of which relate to loan applications for which no formal commitment has been made) amounting to approximately $7.6 million. In order to limit the interest rate risk associated with rate lock agreements, as well as the interest rate risk associated with mortgages held for sale, the Company enters into agreements to sell loans in the secondary market to unrelated investors on a loan-by-loan basis. At December 31, 2001, the Company had approximately $6.5 million of commitments to sell mortgages to unrelated investors on a loan-by-loan basis. In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, based upon the review with counsel, the proceedings are not expected to have a material effect on the consolidated financial statements. 51
Note 15 Earnings Per Share Calculation of basic earnings per share (Basic EPS) and diluted earnings per share (Diluted EPS) is as follows: <TABLE> <CAPTION> Weighted Net Average For year ended December 31, 2001 Income Shares Per Share (in thousands except share and per share data) (Numerator) (Denominator) Amount - ---------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Basic EPS: Income available to common shareholders $ 19,627 7,397,628 $ 2.65 Effect of dilutive securities: Stock options 106,447 Shares issueable as contingent consideration for acquisition 1,066 Diluted EPS: Income available to common shareholders plus assumed conversions $ 19,627 7,505,141 $ 2.62 ========================================================================================================== </TABLE> The effect of dilutive securities calculation for 2001 excludes 26,025 options because the exercise price was greater than the average market price for the period. Shares issueable as contingent consideration for acquisition recognizes the effect of 12,547 shares that became issueable in the fourth quarter of 2001 as a result of Tompkins Insurance Agencies meeting certain income targets. <TABLE> <CAPTION> Weighted Net Average For year ended December 31, 2000 Income Shares Per Share (in thousands except share and per share data) (Numerator) (Denominator) Amount - ---------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Basic EPS: Income available to common shareholders $ 17,512 7,103,784 $ 2.47 Effect of dilutive securities: Stock options 55,184 Diluted EPS: Income available to common shareholders plus assumed conversions $ 17,512 7,158,968 $ 2.45 ========================================================================================================== </TABLE> The effect of dilutive securities calculation for 2000 excludes 52,347 options because the exercise price was greater than the average market price for the period. <TABLE> <CAPTION> Weighted Net Average For year ended December 31, 1999 Income Shares Per Share (in thousands except share and per share data) (Numerator) (Denominator) Amount - ---------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Basic EPS: 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 ========================================================================================================== </TABLE> The effect of dilutive securities calculation for 1999 excludes 2,000 options because the exercise price was greater than the average market price for the period. 52
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, 2001and 2000. The carrying amounts shown in the table are included in the consolidated statements of condition under the indicated captions. <TABLE> <CAPTION> Estimated Fair Value of Financial Instruments: 2001 2000 - ---------------------------------------------------------------------------------------------------- Carrying Fair Carrying Fair (in thousands) Amount Value Amount Value - ---------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Financial assets: Cash and cash equivalents $ 44,117 $ 44,117 $ 65,364 $ 65,364 Securities - available-for-sale 386,369 386,369 304,358 304,358 Securities - held-to-maturity 26,846 27,255 25,863 26,147 Loans/leases, net (1) 879,136 892,837 835,934 836,731 Accrued interest receivable 8,762 8,762 9,705 9,705 Financial liabilities: Time deposits $ 404,532 $ 408,237 $ 420,255 $ 420,458 Other deposits 682,926 682,926 614,646 614,646 Securities sold under agreements to repurchase 109,669 109,827 72,231 72,231 Other borrowings 75,581 77,796 67,257 67,576 Accrued interest payable 3,595 3,595 5,249 5,249 ==================================================================================================== </TABLE> (1) Lease receivables, although excluded from the scope of SFAS No. 107, are included in the estimated fair value amounts at their carrying value. 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 fair value is estimated based upon comparable securities, or the carrying amount of the security is used as the estimated 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 values of fixed rate loans/leases are 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 time deposits approximate their fair values at the reporting date. Fair values for fixed-rate time deposits are estimated using a discounted cash flows 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 values of other borrowings are 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 values of outstanding loan commitments, including unused lines of credit, 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 values of these instruments approximate the value of the related fees and are not significant. 53
Note 17 Regulations 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 capital 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, 2001, the most recent notifications from Federal bank regulatory agencies categorized the Trust Company, The Bank of Castile, and 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 below. 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 - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> December 31, 2001: Total Capital (to risk-weighted assets) The Company (consolidated) $128,141/13.8% >$74,151/>8.0% >$92,689/>10.0% Trust Company $69,786/14.5% >$38,555/>8.0% >$48,193/>10.0% Castile $30,374/10.9% >$22,260/>8.0% >$27,825/>10.0% Mahopac $20,559/12.3% >$13,346/>8.0% >$16,682/>10.0% Tier I Capital (to risk-weighted assets) The Company (consolidated) $117,435/12.7% >$37,076/>4.0% >$55,613/>6.0% Trust Company $64,322/13.3% >$19,277/>4.0% >$28,916/>6.0% Castile $26,983/9.7% >$11,130/>4.0% >$16,695/>6.0% Mahopac $18,697/11.2% >$6,673/>4.0% >$10,009/>6.0% Tier I Capital (to average assets) The Company (consolidated) $117,435/8.5% >$55,369/>4.0% >$69,212/>5.0% Trust Company $64,332/8.1% >$31,668/>4.0% >$39,585/>5.0% Castile $26,983/7.7% >$14,005/>4.0% >$17,506/>5.0% Mahopac $18,697/7.4% >$10,130/>4.0% >$12,663/>5.0% ======================================================================================================================= December 31, 2000: Total Capital (to risk-weighted assets) The Company (consolidated) $116,746/13.0% >$72,048/>8.0% >$90,060/>10.0% Trust Company $66,387/14.5% >$36,715/>8.0% >$45,893/>10.0% Castile $26,661/10.7% >$19,972/>8.0% >$24,965/>10.0% Mahopac $18,864/13.3% >$11,312/>8.0% >$14,141/>10.0% Tier I Capital (to risk-weighted assets) The Company (consolidated) $106,922/11.9% >$36,024/>4.0% >$54,036/>6.0% Trust Company $61,208/13.3% >$18,357/>4.0% >$27,536/>6.0% Castile $23,642/9.5% >$9,986/>4.0% >$14,979/>6.0% Mahopac $17,238/12.2% >$5,656/>4.0% >$8,484/>6.0% Tier I Capital (to average assets) The Company (consolidated) $106,922/8.5% >$50,489/>4.0% >$63,111/>5.0% Trust Company $61,208/8.4% >$29,178/>4.0% >$36,472/>5.0% Castile $23,642/7.2% >$13,129/>4.0% >$16,411/>5.0% Mahopac $17,238/8.5% >$8,093/>4.0% >$10,116/>5.0% ======================================================================================================================= </TABLE> Generally, dividends from the banking subsidiaries to the Company are limited to retained net profits for the current year and two preceding years, unless specific approval is received from the appropriate bank regulatory authority. At December 31, 2001, the retained net profits of the Company's bank subsidiaries available to pay dividends were $14,381,000. Each bank subsidiary is required to maintain reserve balances by the Federal Reserve Bank of New York. At December 31, 2001, and 2000, the reserve requirements for the Company's banking subsidiaries totaled $14,824,000 and $10,406,000, respectively. 54
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 <TABLE> <CAPTION> (in thousands) 2001 2000 - -------------------------------------------------------------------------------------------------- <S> <C> <C> ASSETS Cash $ 2,853 $ 3,846 Available-for-sale securities, at fair value 121 1,488 Investment in subsidiaries, at equity 125,686 108,545 Other 3,189 2,054 - -------------------------------------------------------------------------------------------------- Total Assets $131,849 $115,933 - -------------------------------------------------------------------------------------------------- LIABILITIES and SHAREHOLDERS EQUITY Liabilities $ 777 $ 938 Shareholders' Equity 131,072 114,995 - -------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $131,849 $115,933 ================================================================================================== </TABLE> <TABLE> <CAPTION> Condensed Statements of Income (in thousands) 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Dividends from available-for-sale securities $ 46 $ 169 $ 110 Dividends received from subsidiaries 11,060 16,098 24,365 Securities gains 66 299 0 Other income 0 87 72 Other loss (86) 0 0 - ----------------------------------------------------------------------------------------------------------------------- Total Operating Income 11,086 16,653 24,547 - ----------------------------------------------------------------------------------------------------------------------- Amortization of intangibles 0 451 370 Other expenses 715 683 2,198 - ----------------------------------------------------------------------------------------------------------------------- Total Operating Expenses 715 1,134 2,568 - ----------------------------------------------------------------------------------------------------------------------- Income Before Taxes and Equity in Undistributed Net Income of Subsidiaries 10,371 15,519 21,979 Income tax benefit (296) (375) (414) Equity in undistributed earnings (excess of dividends over net income) of subsidiaries 8,960 1,618 (7,193) - ----------------------------------------------------------------------------------------------------------------------- Net Income $ 19,627 $ 17,512 $ 15,200 ======================================================================================================================= </TABLE> 55
Note 18 Condensed Parent Company Only Financial Statements (Continued) <TABLE> <CAPTION> Condensed Statements of Cash Flows (in thousands) 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> OPERATING ACTIVITIES Net income $ 19,627 $ 17,512 $ 15,200 Adjustments to reconcile net income to net cash provided by operating activities: (Equity in undistributed earnings) excess of dividends over net income of subsidiaries (8,960) (1,618) 7,193 Amortization of intangible assets 0 451 370 Realized gains on available-for-sale securities (66) (299) 0 Issuance of treasury shares 10 75 41 ESOP compensation expenses 744 159 130 Other, net (1,488) (649) (334) - ---------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 9,867 15,631 22,600 - ---------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Purchase of available-for-sale securities 0 0 (191) Proceeds from sale of available-for-sale securities 1,497 1,047 0 Net cash (used in) provided by acquisitions (1,206) 0 (14,624) - ---------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Investing Activities 291 1,047 (14,815) - ---------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Cash dividends (8,136) (7,696) (6,159) Repurchase of common shares (3,408) (4,870) (4,101) Cash paid in lieu of fractional Letchworth common shares 0 (9) 0 Net proceeds from exercise of stock options, warrants, and related tax benefits 734 288 691 Advances from subsidiaries 0 0 1,265 Repayment of advances from subsidiaries (341) (1,314) (275) - ---------------------------------------------------------------------------------------------------------------------------- Net Cash Used in Financing Activities (11,151) (13,601) (8,579) - ---------------------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash (993) 3,077 (794) Cash at beginning of year 3,846 769 1,563 - ---------------------------------------------------------------------------------------------------------------------------- Cash at End of Year $ 2,853 $ 3,846 $ 769 ============================================================================================================================ </TABLE> 56
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, 2001 and 2000, 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, 2001. 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. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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, 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, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP - ---------------------- January 24, 2002 Syracuse, New York 57
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/ FRANCIS M. FETSKO ----------------------------- --------------------------- James J. Byrnes Francis M. Fetsko Chief Executive Officer Chief Financial Officer 58
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 60 Chairman of the Board, and Chief Executive Officer January 1989 James W. Fulmer 50 President, Director January 2000 Brenda L. Copeland 50 Executive Vice President January 2000 Stephen E. Garner 55 Executive Vice President January 2000 Donald S. Stewart 57 Executive Vice President December 1972 Robert B. Bantle 50 Senior Vice President March 2001 Francis M. Fetsko 37 Senior Vice President and Chief Financial Officer October 1996 Joyce P. Maglione 59 Senior Vice President March 1981 Thomas J. Smith 61 Senior Vice President December 1964 Lawrence A. Updike 56 Senior Vice President December 1965 </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. 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. Brenda L. Copeland was appointed executive vice president of the Company in May 2000. Ms. Copeland is the president and chief executive officer of The Bank of Castile, where she served as president since January 1991 and chief executive officer since April 1999. Stephen E. Garner was appointed executive vice president of the Company in May 2000. Mr. Garner is the president and chief executive officer of Mahopac National Bank, where he served in that capacity since January 1994. Robert B. Bantle has been employed by the Company since March 2001, and has served as a senior vice president since that time. He is primarily responsible for retail banking services. Prior to joining the Company, Mr. Bantle was employed by Iroquois Bancorp and First National Bank of Rochester as senior vice president. Francis M. Fetsko has been employed by the Company since 1996, and has served as senior vice president and chief financial officer since December 2000. Prior to joining the Company, Mr. Fetsko was employed as a Federal Bank Examiner with the Federal Deposit Insurance Corporation from 1986 to 1995. Joyce P. Maglione has been employed by the Company since March 1981, and has served as senior vice president since December 1999. Ms. Maglione is primarily responsible for personnel administration. 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. 59
Item 11. Executive Compensation "Executive Compensation" beginning on page 7 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 13 of the Proxy Statement is incorporated by reference herein. 60
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, 2001 and 2000 Consolidated Statement of Income for the years ended December 31, 2001, 2000, and 1999 Consolidated Statement of Changes in Shareholders' Equity for the years ended December 31, 2001, 2000, and 1999 Consolidated Statement of Cash Flows for the years ended December 31, 2001, 2000, and 1999 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. 61
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). 62
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 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 Employment Agreement, dated January 1999, by and between Mahopac National Bank and Stephen E. Garner. 10.31 2001 Stock Option Plan incorporated herein by reference to Exhibit 99 contained in the Registrant's Registration Statement on Form S-8 (No. 333-75822), as filed with the Commission on December 12, 2001, and amended 10.32 Mahopac National Bank Supplemental Executive Retirement Agreement, dated May 15, 2000, by and between Mahopac National Bank and Stephen E. Garner. 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. 63
21. Subsidiaries of Registrant: Tompkins Trust Company, which is wholly-owned by the Company, and its subsidiary Tompkins Real Estate Holdings, Inc., which is approximately 99% owned by Tompkins Trust Company. The Bank of Castile, which is wholly-owned by the Company, and its subsidiary Castile Funding Corporation, Inc., which is approximately 99% owned by The Bank of Castile. Mahopac National Bank, which is wholly-owned by the Company, and its subsidiary Mahopac Funding Corporation, Inc., which is approximately 99% owned by Mahopac National Bank. Tompkins Insurance Agencies, Inc. which is wholly-owned by the Company 23. Consent of KPMG LLP (b) Reports on Form 8-K The Company filed no Current Reports on Form 8-K during the quarter ended December 31, 2001. 64
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. By: /s/ JAMES J. BYRNES ------------------------------------------------- James J. Byrnes Chairman of the Board and Chief Executive Officer Date: March 25, 2002 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/ FRANCIS M. FETSKO Senior Vice President and - ---------------------------- Chief Financial Officer Francis M. Fetsko /s/ JOHN ALEXANDER Director - ---------------------------- John E. Alexander /s/ REEDER D. GATES Director - ---------------------------- Reeder D. Gates /s/ WILLIAM W. GRISWOLD Director - ---------------------------- William W. Griswold /s/ JAMES R. HARDIE Director - ---------------------------- James R. Hardie /s/ EDWARD C. HOOKS Director - ---------------------------- Edward C. Hooks /s/ BONNIE H. HOWELL Vice Chairman - ---------------------------- Director Bonnie H. Howell /s/ HUNTER R. RAWLINGS, III Director - ---------------------------- Hunter R. Rawlings, III /s/ THOMAS R. SALM Director - ---------------------------- Thomas R. Salm /s/ MICHAEL SPAIN Director - ---------------------------- Michael Spain /s/ WILLIAM D. SPAIN Director - ---------------------------- William D. Spain /s/ CRAIG YUNKER Director - ---------------------------- Craig Yunker 65