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, 2002 ----------------- 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 of (I.R.S. Employer Identification No.) 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. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes[X] No[ ] The aggregate market value of the registrant's voting stock held by non-affiliates was approximately $301,959,000 on June 28, 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 21, 2003, was 7,369,598 shares. DOCUMENTS INCORPORATED BY REFERENCE Proxy Statement (the "Proxy Statement") filed with the Securities and Exchange Commission in connection with the 2003 Annual Meeting of Stockholders, is incorporated herein by reference in Part III.
TOMPKINS TRUSTCO, INC. 2002 Annual Report on Form 10-K Table of Contents Page PART I Item 1. Business of the Company ................................. 1 Item 2. Properties .............................................. 4 Item 3. Legal Proceedings ....................................... 6 Item 4. Submission of Matters for a Vote by Securities Holders .. 6 PART II Item 5. Market for Registrant's Common Equity and Related Securities .............................................. 8 Item 6. Selected Financial Data ................................. 8 Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations ..................... 9 Item 7A. Quantitative and Qualitative Disclosure About Market Risk .................................................... 28 Item 8. Financial Statements and Supplementary Data ............. 31 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..................... 61 PART III Item 10. Directors and Executive Officers of the Registrant ...... 61 Item 11. Executive Compensation .................................. 61 Item 12. Security Ownership of Certain Beneficial Owners and Management .............................................. 61 Item 13. Certain Relationships and Related Transactions .......... 61 Item 14. Controls and Procedures ................................. 61 Item 15. Principal Accountant Fees and Services .................. 61 PART IV Item 16. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ............................................. 62 Certification of Chief Executive Officer Certification of Chief Financial Officer Powers of Attorney i
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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 33 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, a commercial bank that has operated in Ithaca and surrounding communities since 1836. 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. 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. 1
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 Company's Asset/Liability Management Committee. 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. Competition The Company's subsidiary banks operate 33 offices, including 1 limited-service office, serving communities in upstate New York. The Trust Company operates 13 full-service and 1 limited service banking offices in the counties of Tompkins, Cortland, and Schuyler. The Bank of Castile conducts its operations through its 13 full-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 offices in that county, and 2 full-service offices in Dutchess County. The decision to operate as three locally managed community banks reflects management's commitment to community banking as a business strategy. For Tompkins, this community banking approach is characterized by a commitment to prompt, accurate service, and the personal touch provided by knowledgeable, dedicated employees. The combined resources of the Tompkins organization provides increased capacity for growth, and greater capital resources necessary to make investments in technology and services. Tompkins has developed several specialized financial services that are now available in markets served by all three affiliate banks. These services include trust and investment services, leasing, card services, and Internet banking. The 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. In December 2002, the Trust Company opened its first office in Cortland, New York, which has a population of 48,599. The Trust Company also recently acquired a building in Auburn, New York, which is in Cayuga County with a population of 81,963. This building will be the site of the Company's first Cayuga County office, expected to open in mid-2003. 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 and LaGrange offices are 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. Deregulation has contributed to a decrease in the number of community banks, and an increase in 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 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 than the Company, 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. 2
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, 2002, the Company employed 582 employees, approximately 109 of who were part-time. No employees are covered by a collective bargaining agreement and the Company believes its employee relations are excellent. Available Information The Company maintains a website with the address www.tompkinstrustco.com. The Company is not including the information contained on the Company's website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. The Company makes available free of charge (other than an investor's own Internet access charges) through its website its Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after the Company electronically files such material with, or furnishes such material to, the Securities and Exchange Commission (the "SEC"). These reports may also be obtained at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20599. Information on the operation of the Public Reference Room is available by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website (SEC.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. 3
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 24,500 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 33 Clinton Avenue Trust Company 1,900 Leased Cortland, NY Cortland Office 86 North Street Trust Company 4,600 Owned Auburn, NY Proposed Auburn Office 50 N. Main Street The Bank of Castile 6,662 Owned Castile, NY Main Office </TABLE> 4
<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 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 706 Freedom Plains Road Mahopac National Bank 2,200 Owned Poughkeepsie, NY LaGrange Office 1822 Route 82 Mahopac National Bank 1,200 Leased Hopewell Junction, NY Hopewell Office </TABLE> 5
<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 700 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 2003 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 2002. Executive Officers of the Company <TABLE> <CAPTION> Age Title Joined Company --- ----- -------------- <S> <C> <C> <C> James J. Byrnes 61 Chairman of the Board, and Chief Executive Officer January 1989 James W. Fulmer 51 President, Director January 2000 Brenda L. Copeland 51 Executive Vice President January 2000 Stephen E. Garner 56 Executive Vice President January 2000 Stephen S. Romaine 38 Executive Vice President January 2000 Donald S. Stewart 58 Executive Vice President December 1972 Robert B. Bantle 51 Senior Vice President March 2001 Francis M. Fetsko 38 Senior Vice President and Chief Financial Officer October 1996 Joyce P. Maglione 60 Senior Vice President March 1981 Lawrence A. Updike 57 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. 6
James W. Fulmer was appointed president of the Company in January 2000. Effective January 1, 2003, Mr. Fulmer was appointed president and chief executive officer of The Bank of Castile. 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 the Company, and Mr. Fulmer became president of the Company. Brenda L. Copeland retired as president and chief executive officer of The Bank of Castile, effective December 31, 2002. Ms. Copeland served as the president of The Bank of Castile since January 1991 and chief executive officer since April 1999. Stephen E. Garner was appointed executive vice president of the Company in May 2000. Effective January 1, 2003, Mr. Garner was appointed president and chief executive officer of Tompkins Trust Company. Prior to this appointment, Mr. Garner was the president and chief executive officer of Mahopac National Bank since January 1994. Stephen S. Romaine was appointed president and chief executive officer of Mahopac National Bank effective January 1, 2003. Prior to this appointment, Mr. Romaine was executive vice president, chief financial officer and manager Support Services Division of Mahopac National Bank. 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. 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. 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. 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: 2002 1st Quarter $43.50 $38.70 $ .28 2nd Quarter 48.94 37.00 .28 3rd Quarter 48.10 42.75 .30 4th Quarter 47.25 39.50 .30 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 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 21, 2003, there were approximately 1,787 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 2002, and on the 15th day of March, June, September, and December of 2001. Equity Compensation Plan A discussion regarding the Company's Equity Compensation Plan is set forth in Item 12 of this report, which, in turn, incorporates by reference certain provisions of the Proxy Statement. Item 6. Selected Financial Data <TABLE> <CAPTION> Year ended December 31 (in thousands except per share data) 2002 2001 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> FINANCIAL STATEMENT HIGHLIGHTS Assets $1,670,203 $1,420,695 $1,304,894 $1,188,679 $954,705 Deposits 1,340,285 1,087,458 1,034,901 974,239 733,644 Other borrowings 81,930 75,581 67,257 42,012 48,973 Shareholders' equity 150,597 131,072 114,995 96,624 97,652 Interest and dividend income 93,959 94,158 92,018 77,617 69,729 Interest expense 28,818 36,175 40,076 30,551 29,371 Net interest income 65,141 57,983 51,942 47,066 40,358 Provision for loan/lease losses 2,235 1,606 1,216 944 1,539 Net securities gains (losses) 363 66 450 (59) (12) Net income 22,914 19,627 17,512 15,200 14,502 PER SHARE INFORMATION Basic earnings per share 3.09 2.65 2.47 2.15 2.05 Diluted earnings per share 3.03 2.62 2.45 2.12 2.01 Cash dividends per share* 1.16 1.10 1.08 1.03 0.91 SELECTED RATIOS Return on average assets 1.45% 1.46% 1.42% 1.41% 1.57% Return on average equity 16.41% 15.82% 17.09% 15.46% 16.09% Shareholders' equity to average assets 9.51% 9.73% 9.31% 8.97% 10.60% Dividend payout ratio* 37.54% 41.51% 43.95% 40.52% 37.92% OTHER SELECTED DATA (in whole numbers, unless otherwise noted) - ---------------------------------------------------------------------------------------------------------------------------------- Employees (average full-time equivalent) 530 513 462 442 365 Full-service banking offices 32 29 28 26 22 Bank access centers (ATMs) 48 45 41 36 33 Trust and investment services assets under management (in thousands) $1,207,786 $1,138,341 $1,094,452 $1,106,059 $952,880 - ---------------------------------------------------------------------------------------------------------------------------------- </TABLE> * Cash dividends per share reflects historical information for Tompkins Trustco, Inc. 8
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 included in Item 8. 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. Prior to the Company's acquisition of Letchworth, Letchworth acquired 70.17% of the outstanding common stock of Mahopac National Bank in a cash transaction accounted for as a purchase on June 4, 1999. 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 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, 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 $4.4 million, which was recorded as goodwill. 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. 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 met certain income targets in 2001 and 2002. The contingent consideration includes 25,093 shares, which were payable if the income targets were met, and an additional 8,333 shares which were payable if income targets for the two-year period were exceeded by 5%. Tompkins Insurance met the 2001, 2002, and 2-year income targets, resulting in the release of 12,547 shares in 2001 and 20,879 in 2002 as additional consideration. Such shares are considered outstanding for purposes of computing diluted earnings per share beginning on October 1, 2001 for shares released in 2001 and beginning on July 1, 2002 for shares released in 2002. 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. 9
Critical Accounting Policies In the course of the Company's normal business activity, management must select and apply many accounting policies and methodologies that lead to the financial results presented in the consolidated financial statements of the Company. Some of these policies are more critical than others. Management considers the accounting policy relating to the reserve for loan/lease losses to be a critical accounting policy because of the uncertainty and subjectivity inherent in estimating the levels of allowance needed to cover probable credit losses with in the loan portfolio and the material effect that these estimates can have on the Company's results of operations. While management's evaluation of the reserve for loan/lease losses as of December 31, 2002 considers the allowance to be adequate, under adversely different conditions or assumptions, the Company would need to increase the allowance. All accounting policies are important and the reader of the financial statements should review these policies, described in Note 1 to the consolidated financial statements, to gain a greater understanding of how the Company's financial performance is reported. 10
Results of Operations (Comparison of December 31, 2002 and 2001 results) General Net income for the year ended December 31, 2002, was up 16.7% to $22.9 million, compared to $19.6 million in 2001. On a per share basis, the Company earned $3.03 per diluted share in 2002 compared to $2.62 per share in 2001. Return on average shareholders' equity (ROE) was 16.41% in 2002, compared to 15.82% in 2001. The increase in ROE in 2002 is due to earnings growth outpacing equity growth during the period. Return on average assets (ROA) was 1.45% in 2002, which is in line with ROA of 1.46% in 2001. The Company's strong earnings performance in 2002 is attributable to the success of the core business strategies of the Company. These strategies include a commitment to community banking through 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. 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 $67.4 million in 2002, up from $60.0 million in 2001. Net interest income benefited from growth in earning assets, an improved mix of earning assets, and growth in deposits. A low interest rate environment led to a decrease in asset yields, which contributed to a decrease in the net interest margin from 4.87% in 2001, to 4.64% in 2002. Average earning assets increased by $220.9 million or 17.9% in 2002, from $1.2 billion to $1.5 billion. Growth in average earning assets was primarily centered in the investment portfolio. Average securities (excluding changes in unrealized gains and losses on available-for-sale securities) increased by $144.0 million between 2001 and 2002. Average loans grew by $75.6 million, which included a $33.5 million increase in average commercial loans, a $44.1 million increase in average real estate loans, and a $3.0 million decrease in consumer and other loans. Core deposits, which include demand deposits, savings accounts, non-municipal money market accounts, and time deposits less than $100,000, represent the Company's largest and lowest cost funding source. Growth in average assets was funded primarily with core deposits, which increased by 18.9% from an average balance of $860.4 million in 2001, to $1.0 billion in 2002. Non-core funding sources, which include time deposits of $100,000 or more, brokered deposits, municipal money market deposits, Federal funds purchased, securities sold under repurchase agreements, and other borrowings provided additional sources of funding to support asset growth. Average balances on these non-core funding sources increased by $57.6 million between 2001 and 2002. The primary component of non-core funding sources at December 31, 2002 was municipal money market accounts with an average balance of $122.1 million. 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 $7.4 million increase in tax-equivalent net interest income from 2001 to 2002 included a $53,000 increase in interest income and a $7.4 million decrease in interest expense. An increased volume of earning assets contributed to a $12.3 million increase in net interest income between 2001 and 2002, while changes in interest rates reduced net interest income by $4.9 million, resulting in the net increase of $7.4 million. 11
Table 1 - Average Statements of Condition and Net Interest Analysis <TABLE> <CAPTION> December 31 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ 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 $ 1,479 $ 37 2.50% $ 329 $ 3 0.91% $ 0 $ 0 0.00% Securities (1) U.S. Government securities 384,286 20,276 5.28 273,951 17,517 6.39 242,611 15,929 6.57 State and municipal (2) 79,604 5,551 6.97 68,854 5,120 7.44 78,474 5,654 7.20 Other securities (2) 46,889 1,618 3.45 23,951 1,329 5.55 13,715 1,142 8.33 - ------------------------------------------------------------------------------------------------------------------------------------ Total securities 510,779 27,445 5.37 366,756 23,966 6.53 334,800 22,725 6.79 Federal funds sold 12,446 206 1.66 12,329 487 3.95 11,992 726 6.05 Loans, net of unearned income (3) Residential real estate 353,998 24,945 7.05 327,279 25,959 7.93 326,139 25,488 7.82 Commercial real estate 200,803 15,672 7.80 183,428 15,308 8.35 161,104 16,402 10.18 Commercial loans (2) 244,903 16,119 6.58 211,404 17,823 8.43 183,736 16,602 9.04 Consumer and other 108,971 10,283 9.44 111,964 11,126 9.94 108,911 10,785 9.90 Lease financing 19,708 1,513 7.68 18,700 1,495 7.99 17,315 1,368 7.90 - ------------------------------------------------------------------------------------------------------------------------------------ Total loans, net of unearned income 928,383 68,532 7.38 852,775 71,711 8.41 797,205 70,645 8.86 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-earning assets 1,453,087 96,220 6.62 1,232,189 96,167 7.80 1,143,997 94,096 8.23 - ------------------------------------------------------------------------------------------------------------------------------------ Noninterest-earning assets 130,416 114,261 91,040 Total assets $1,583,503 $1,346,450 $1,235,037 ==================================================================================================================================== LIABILITIES & SHAREHOLDERS' EQUITY Deposits: Interest-bearing deposits Interest checking, savings, and money market $ 660,905 $ 9,759 1.48% $ 427,665 $ 7,857 1.84% $ 412,864 $ 10,311 2.50% Time Deposits > $100,000 107,329 3,233 3.01 169,978 7,970 4.69 167,149 10,205 6.11 Time Deposits < $100,000 247,278 8,604 3.48 238,798 12,319 5.16 220,402 11,977 5.43 Brokered Time Deposits: < $100,000 14,839 571 3.85 6,292 282 4.48 0 0 0.00 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 1,030,351 22,167 2.15 842,733 28,428 3.37 800,415 32,493 4.06 Federal funds purchased and securities sold under agreements to repurchase 74,055 2,448 3.31 79,132 3,453 4.36 68,305 3,996 5.85 Other borrowings 82,471 4,203 5.10 75,101 4,294 5.72 59,125 3,587 6.07 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 1,186,877 28,818 2.43 996,966 36,175 3.63 927,845 40,076 4.32 - ------------------------------------------------------------------------------------------------------------------------------------ Noninterest-bearing deposits 236,574 206,653 186,505 Accrued expenses and other liabilities 18,919 17,213 13,444 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities 1,442,370 1,220,832 1,127,794 Minority Interest 1,519 1,518 4,791 Shareholders' equity 139,614 124,100 102,452 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $1,583,503 $1,346,450 $1,235,037 - ------------------------------------------------------------------------------------------------------------------------------------ Interest rate spread 4.19% 4.17% 3.92% - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income/margin on earning assets $ 67,402 4.64% $ 59,992 4.87% $ 54,020 4.72% ==================================================================================================================================== </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% to increase tax-exempt interest income to a taxable equivalent basis. The tax equivalent adjustments for 2002, 2001 and 2000 were as follows: $2,261,000; $2,009,000; and $2,078,000. (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) 2002 vs. 2001 2001 vs. 2000 - ------------------------------------------------------------------------------------------------------------ Increase (Decrease) Due to Change in Increase (Decrease) Due to Change in Average Average Volume Rate Total Volume Rate Total - ------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> INTEREST INCOME: Certificates of deposit $ 23 $ 11 $ 34 $ 3 $ 0 $ 3 Federal funds sold 5 (286) (281) 20 (259) (239) Investments: Taxable 7,325 (4,308) 3,017 2,744 (793) 1,951 Tax-exempt 716 (254) 462 (788) 78 (710) Loans, net: Taxable 6,004 (9,223) (3,219) 4,629 (3,748) 881 Tax-exempt 26 14 40 166 19 185 - ------------------------------------------------------------------------------------------------------------ Total interest income $ 14,099 $ (14,046) $ 53 $ 6,774 $ (4,703) $ 2,071 - ------------------------------------------------------------------------------------------------------------ INTEREST EXPENSE: Interest-bearing deposits: Interest checking, savings, and money market 3,667 (1,765) 1,902 358 (2,812) (2,454) Time (2,076) (6,087) (8,163) 1,502 (3,113) (1,611) Federal funds purchased and securities sold under agreements to repurchase (210) (795) (1,005) 572 (1,115) (543) Other borrowings 400 (491) (91) 923 (216) 707 - ------------------------------------------------------------------------------------------------------------ Total interest expense $ 1,781 $ (9,138) $ (7,357) $ 3,355 $ (7,256) $ (3,901) - ------------------------------------------------------------------------------------------------------------ Net interest income $ 12,318 $ (4,908) $ 7,410 $ 3,419 $ 2,553 $ 5,972 ============================================================================================================ </TABLE> Notes: See notes to Table 1 above. 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 $2.2 million in 2002, compared to $1.6 million in 2001. The increase in 2002 is primarily due to continued growth in the loan/lease portfolio, as well as the changing composition of the loan/lease portfolio, which includes increased levels of commercial loans and commercial real estate loans. The Company's loan/lease portfolio remains of generally high quality. Nonperforming loans/leases were $7.5 million at December 31, 2002, representing 0.76% of total loans/leases outstanding at December 31, 2002. Nonperforming loans/leases at December 31, 2001 were $7.5 million, representing 0.85% of total loans/leases. Net charge-offs of $1.2 million in 2002 represented 0.13% of average loans/leases during the period, compared to net charge-offs of $724,000 in 2001, representing 0.08% of average loans/leases. Net charge-offs in 2001 benefited from a $320,000 recovery on a commercial relationship. 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 $23.7 million in noninterest income for 2002, a 19.3% increase over 2001 noninterest income of $19.9 million. Sources of noninterest income include trust and investment services, insurance fees and commissions, service charges on deposit accounts, and card services products. The Company has been able to expand the contribution of noninterest income to total revenues by developing and introducing new products and by marketing its services across all of the Company's markets. 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. Tompkins Investment Services has also expanded its marketing efforts and has dedicated staff to serve clients in The Bank of Castile and Mahopac National Bank markets. 13
Revenue from trust and investment services is a significant source of noninterest income for the Company, generating $4.2 million in revenue in 2002, a decrease of 10.2% from trust revenue of $4.6 million in 2001. Lower fee income is primarily attributable to the weak performance of national stock markets in 2002. Income generated by Tompkins Investment Services is largely based on the value of the assets managed by the division as well as the mix of accounts between the various categories, including personal trust and agency accounts, employee benefit accounts, investment management accounts, and custody accounts. The value of assets managed by or in custody of Tompkins Investment Services is 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 2002, the market value of assets managed by, or in custody of, Tompkins Investment Services increased by $69.4 million to $1.2 billion at December 31, 2002 from $1.1 billion at December 31, 2001. Service charges on deposit accounts were $6.3 million in 2002, compared to $4.7 million in 2001. The increase in 2002 is largely due to the introduction of a new service in early 2002, which automated overdraft payment decisions. An increase in deposit accounts also contributed to the increase in service charges as the average dollar volume of noninterest-bearing accounts increased by $29.9 million between 2001 and 2002, from $206.7 million to $236.6 million, while savings and money market accounts increased by $233.2 million over the same period, from $427.7 million to $660.9 million. Insurance commissions and fees generated through Tompkins Insurance added $4.9 million in noninterest income in 2002 compared to $4.2 million in 2001, an increase of 16.0%. The agencies primarily offer property and casualty insurance to individuals and businesses in western New York State. Rising premium costs instituted by underwriting insurance companies contributed to commission growth in 2002. The largest category of other service charges is card services fees. Card services remains a 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 $2.8 million in 2002, compared to $2.4 million in 2001, an increase of 16.0%. Noninterest income also includes $1.4 million from increases in cash surrender value of corporate owned life insurance, up from $1.1 million in 2001. This income is exempt from taxes. The corporate owned life insurance relates to life insurance policies covering certain senior officers of the Company and its subsidiaries. Increases in the cash surrender value of the insurance are reflected as other noninterest income, net of the related mortality 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 9.08% in 2002, and 8.07% in 2001. The Company has an investment in a small business investment company partnership, Cephas Capital Partners, L.P. ("Cephas"), totaling $4.2 million at December 31, 2002, a slight increase from $4.1 million at December 31, 2001. Because the Company's percentage ownership in Cephas exceeds 20%, the equity method of accounting is utilized, such that the Company's percentage of Cephas' income is recognized as income on its investment; and likewise, any loss by Cephas is recognized as a loss on the Company's investment. For 2002, the Company recognized income of $90,000 compared with a loss of $300,000 in 2001. During the fourth quarter of 2001, Cephas recognized a $2.0 million loss on a single investment. The Company's portion of that loss totaled $770,000, which was recognized in the fourth quarter of 2001 as a reduction to other operating income. The Company believes that as of December 31, 2002, there is no impairment with respect to this investment. Noninterest Expense Noninterest expenses for the year ended December 31, 2002, were $52.3 million, an increase of 13.5% over noninterest expenses of $46.1 million for the year ended December 31, 2001. The increase in 2002 is largely concentrated in salaries and employee benefits and reflects an increase in full-time equivalents (FTE). Average FTEs increased from 513 at December 31, 2001 to 530 at December 31, 2002. Personnel-related expenses comprise the largest segment of other expense, representing approximately 56.5% of noninterest expenses in 2002, compared to approximately 55.0% in 2001. Total personnel-related expenses increased by $4.2 million in 2002, to $29.5 million from $25.3 million. The higher personnel-related expenses reflect the increase in FTE associated primarily with staffing of new offices, including the Hopewell (October 2001) and LaGrange (July 2002) offices of Mahopac National Bank and the Cortland office (December 2002) of the Trust Company. Pension related expenses were also higher in 2002 than in 2001. The increase in pension expense includes a nonrecurring charge of approximately $650,000 associated with a reevaluation of certain pension liabilities. Expense for premises, furniture, and fixtures increased to $6.3 million in 2002, from $5.8 million in 2001. The increase in 2002 is due to the opening of the Hopewell and LaGrange offices of Mahopac National Bank, and the Cortland office of the Trust Company. Also contributing to the increase is additional depreciation associated with continued investments in technology. Technology investments in 2002 included equipment upgrades to bring Mahopac National Bank onto the same core processing systems used by the Trust Company and The Bank of Castile, improved automation for check processing, improved document imaging technology, and an upgrade to the Company's mainframe computer system. 14
The adoption of Statement of Financial Accounting Standards (SFAS) No. 142 on January 1, 2002 contributed to the $813,000 decrease in the amortization of intangible assets in 2002 over 2001. Amortization of intangible assets decreased from $1.7 million in 2001 to $867,000 in 2002. Upon adoption, the Company was no longer required to amortize its goodwill. The effect of the adoption of SFAS No. 142 is presented in Note 2 to the consolidated financial statements. Under SFAS No. 142, the Company is required to perform an annual assessment of intangible assets for impairment. The Company performed an impairment testing of its intangible assets as of December 31, 2002, and no impairment loss is required. 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, 2002, core deposit intangible assets totaled $2.7 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, fees paid for marketing services, postage and courier services, telephone expense, donations, software maintenance and amortization, and card services related expense. The increase in other expenses, from $13.2 million in 2001 to $15.5 million in 2002, is attributable to several factors, including normal increases associated with growth in noninterest revenue, marketing costs associated with new branch openings, additional reserves for leased vehicles residual losses, increased penalties associated with the prepayment of certain borrowings, and increased technology costs. In 2002, management decided to prepay certain higher interest rate borrowings with the Federal Home Loan Bank to reduce borrowing costs, resulting in the increase in prepayment penalties. The Company's efficiency ratio, defined as operating expense excluding amortization of intangible assets, divided by tax-equivalent net interest income plus noninterest income before securities gains and losses (increase in the cash surrender value of COLI is shown on a tax equivalent basis), was 56.3% in 2002, compared to 55.4% in 2001. The increased costs of opening new offices, including personnel costs, premises and equipment expenses, and marketing costs, contributed to the unfavorable increase in the Company's efficiency ratio. 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. The Company had minority interest expense of $134,000 in each of 2001 and 2002, 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 2002 provision was $11.3 million, compared to $10.4 million in 2001. The increase was primarily due to a higher level of taxable income, although the effective tax rate for the Company decreased in 2002 to 33.0%, compared to 34.5% in 2001. The decrease in the effective tax rate is due to a variety of factors, including a change in the tax treatment of dividends paid on shares of Company common stock held in the ESOP. 15
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. Return on average shareholders' equity (ROE) was 15.82% in 2001, compared to 17.09% in 2000. The decline in ROE in 2001 was 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. Return on average assets (ROA) was 1.46% in 2001, up slightly from 1.42% 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 to $1.2 billion from $1.1 billion in 2000. 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 municipal money market 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 5.0% from an average balance of $819.8 million in 2000, to $860.4 million in 2001. Non-core funding sources, which include time deposits of $100,000 or more, brokered deposits, municipal money market deposits, federal funds purchased, securities sold under agreements to repurchase, and other borrowings provided additional sources of funding to support asset growth. Average balances on these non-core funding sources increased by $29.6 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. 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/lease portfolio, as well as the changing composition of the loan/lease portfolio, which includes increased levels of commercial loans and consumer loans. Despite an increase in nonperforming loans/leases as of December 31, 2001, nonperforming loans/leases totaled $7.5 million or 0.85% of total loans/leases at December 31, 2001. Nonperforming loans/leases at December 31, 2000 were $4.7 million, representing 0.56% of total loans/leases. Net charge-offs of $724,000 in 2001 represented 0.08% of average loans/leases during the period, compared to net charge-offs of $620,000 in 2000, also representing 0.08% of average loans/leases. Noninterest Income Management's focus on noninterest income resulted in $19.9 million in noninterest income for 2001, a 37.7% increase over noninterest income of $14.4 million in 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 were excluded from 2001 results for comparison purposes, noninterest income would reflect an increase of $1.2 million, or 8.4%. 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 16
assets for clients in more than 40 states. In 2001, 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 trust revenue of $4.6 million in 2000. Increased fee income was 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 was largely due to the increase in deposit accounts. The average dollar volume of noninterest-bearing accounts increased by $20.2 million between 2000 and 2001, from $186.5 million to $206.7 million, while savings and money market accounts increased by $14.8 million over the same period, from $412.9 million to $427.7 million. 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 card services income of $2.2 million in 2000. Noninterest income includes $1.1 million from increases in cash surrender value of corporate owned life insurance in 2001, 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 Cephas exceeds 20%, the equity method of accounting is utilized, such that the Company's percentage of the Cephas' income is recognized as income on its investment; and likewise, any loss by Cephas 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. Declining interest rates in 2001 resulted in significant 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 noninterest expenses of $38.8 million 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. The Company's efficiency ratio, defined as operating expense excluding amortization of intangible assets, divided by tax-equivalent net interest income plus noninterest income before securities gains and losses (income and expense associated with COLI are shown on a tax equivalent basis), 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 17
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. FINANCIAL CONDITION During 2002, total assets grew by 17.56% to $1.7 billion at December 31, 2002, compared to $1.4 billion at December 31, 2001. 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 2001 and 2002. Earning asset growth in 2002 consisted of a $105.5 million increase in loans, and a $111.7 million increase in the amortized cost of securities. Asset growth was funded primarily with core deposits, which increased by $135.6 million during 2002 from $900.2 million to $1.0 billion. 18
Table 3 - Balance Sheet Comparisons <TABLE> <CAPTION> AVERAGE BALANCE SHEET Change (2001-2002) (dollar amounts in thousands) 2002 2001 2000 Amount Percentage - --------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Total assets $1,583,503 $1,346,450 $1,235,037 $ 237,053 17.61% Earning assets * 1,453,087 1,232,189 1,143,997 220,898 17.93% Total loans and leases, less earned income and net deferred costs and fees 928,383 852,775 797,205 75,608 8.87% Securities * 510,779 366,756 334,800 144,023 39.27% Core deposits ** 1,022,625 860,425 819,771 162,200 18.85% Time deposits of $100,000 and more 107,329 169,978 167,149 (62,649 -36.86% Federal funds purchased and securities sold under agreements to repurchase 74,055 79,132 68,305 (5,077) -6.42% Other borrowings 82,471 75,101 59,125 7,370 9.81% Shareholders' equity 139,614 124,100 102,452 15,514 12.50% - --------------------------------------------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> ENDING BALANCE SHEET Change (2001-2002) (dollar amounts in thousands) 2002 2001 2000 Amount Percentage - --------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Total assets $1,670,203 $1,420,695 $1,304,894 $ 249,508 17.56% Earning assets * 1,525,586 1,298,163 1,195,419 227,423 17.52% Total loans and leases, less earned income and net deferred costs and fees 995,346 889,842 845,758 105,504 11.86% Securities * 519,840 408,150 330,236 111,690 27.36% Core deposits ** 1,035,855 900,248 851,449 135,607 15.06% Time deposits of $100,000 and more 112,338 163,480 183,452 (51,142) -31.28% Federal funds purchased and securities sold under agreements to repurchase 77,843 109,669 72,231 (31,826) -29.02% Other borrowings 81,930 75,581 67,257 6,349 8.40% Shareholders' equity 150,597 131,072 114,995 19,525 14.90% =============================================================================================================== </TABLE> * Balances of available-for-sale securities are shown at amortized cost. ** Core deposits equal total deposits less time deposits of $100,000 and more, brokered deposits, and municipal money market deposits. Shareholders' Equity The consolidated statements of changes in shareholders' equity included in the financial statements of the Company contained in Item 8 herein, detail the changes in equity capital, including payments to shareholders in the form of cash dividends. The Company continued the long history of increasing cash dividends with a per share increase of 5.5% in 2002, which followed an increase of 1.9% in 2001. Dividends per share amounted to $1.16 in 2002, compared to $1.10 in 2001, and $1.08 in 2000. Cash dividends paid represented 37.4%, 41.5%, and 44.0%, of after-tax net income in each of 2002, 2001, and 2000, respectively. Total shareholders' equity was $150.6 million at December 31, 2002, compared to $131.1 million at December 31, 2001. The $19.5 million increase in shareholders' equity from December 31, 2001 to December 31, 2002 included a $14.3 million increase in undivided profits, a $821,000 increase from the issuance of contingently issueable shares related to the purchase of Austin, Hardie, Wise Agency, Inc. and Ernest Townsend & Son, Inc., which were issued in 2002, and $4.6 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 34,840 shares of common stock during 2002, at a total cost of $1.4 million. These shares were purchased under a repurchase plan (the "Plan") approved by the Company's board of directors on August 12, 2000. The Plan authorized the repurchase of up to 400,000 of the Company's common stock over a 24-month period. As of August 12, 2002, 278,943 shares had been repurchased under the Plan at an average price per share of $30.23. On July 24, 2002, the board of directors of the Company approved a new repurchase plan ("new Plan") authorizing the repurchase of up to 400,000 shares over a 24-month period. As of December 31, 2002, 1,200 shares had been repurchased under the new Plan at an average purchase price of $41.00 per share. The $16.1 million increase in shareholders' equity between December 31, 2000 and December 31, 2001 was primarily due to an $11.5 million increase in undivided profits and a $3.5 million increase from the issuance of shares to purchase Austin, Hardie, Wise Agency, Inc. and Ernest Townsend & Son, Inc. The $3.0 million of other comprehensive income in 2001 was offset by $3.4 million in common stock repurchased and returned to unissued status. 19
Tangible equity of $136.5 million represented 8.2% of tangible assets at December 31, 2002, compared to tangible equity of $117.0 million representing 8.3% of tangible assets as of December 31, 2001. Tangible book value per share increased from $15.77 at December 31, 2001, to $18.34 at December 31, 2002. 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, 2002, was $519.8 million, reflecting an increase of 27.4%, from $408.2 million in 2001. Note 3 to the consolidated financial statements included in Item 8 of this report, details the types of securities held, the carrying and fair values, and the contractual maturities. The amortized cost and fair value of the securities portfolio at December 31, 2000, is presented in the table below. Qualified tax-exempt debt securities, primarily obligations of state and political subdivisions, were $84.1 million at December 31, 2002, or 16.2% of total securities, compared to $70.2 million, or 17.2% of total securities at December 31, 2001. Mortgage-backed securities, consisting mainly of securities issued by U.S. government agencies, totaled $264.3 million at December 31, 2002, compared to $185.9 million at December 31, 2001. <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 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> Management's policy is to purchase investment grade securities that, on average, have relatively short expected durations. 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 will differ from contractual maturities presented in Table 4 because issuers may have the right to call or prepay obligations with or without penalty and mortgage-backed securities will pay throughout the periods prior to contractual maturity. The contractual maturity distribution of debt securities and mortgage-backed securities as of December 31, 2002, along with the weighted average yield of each category, is presented in Table 4. Balances are shown at amortized cost. 20
Table 4 - Maturity Distribution <TABLE> <CAPTION> As of December 31, 2002 - ------------------------------------------------------------------------------------------------ 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 $ 8,974 2.53% $ 0 0.00% Over 1 to 5 years 58,560 4.03% 0 0.00% Over 5 to 10 years 65,837 5.45% 0 0.00% Over 10 years 25,876 3.50% 0 0.00% - ------------------------------------------------------------------------------------------------ $159,247 4.45% $ 0 0.00% - ------------------------------------------------------------------------------------------------ State and political subdivisions Within 1 year $ 6,440 5.22% $ 9,290 3.93% Over 1 to 5 years 18,036 6.09% 8,163 6.19% Over 5 to 10 years 13,875 6.57% 12,720 6.04% Over 10 years 6,997 6.20% 8,549 6.53% - ------------------------------------------------------------------------------------------------ $ 45,348 6.13% $ 38,722 5.67% - ------------------------------------------------------------------------------------------------ Mortgage-backed securities Within 1 year $ 341 6.96% $ 0 0.00% Over 1 to 5 years 15,555 3.32% 0 0.00% Over 5 to 10 years 39,186 5.25% 0 0.00% Over 10 years 209,194 5.02% 0 0.00% - ------------------------------------------------------------------------------------------------ $264,276 4.96% $ 0 0.00% - ------------------------------------------------------------------------------------------------ Other Securities Within 1 year $ 0 0.00% $ 0 0.00% Over 1 to 5 years 0 0.00% 0 0.00% Over 5 to 10 years 0 0.00% 0 0.00% Over 10 years 3,034 5.31% 0 0.00% No fixed maturity 9,213 2.60% 0 0.00% - ------------------------------------------------------------------------------------------------ $ 12,247 3.27% $ 0 0.00% - ------------------------------------------------------------------------------------------------ Total Securities Within 1 year $ 15,755 3.72% $ 9,290 3.93% Over 1 to 5 years 92,151 4.32% 8,163 6.19% Over 5 to 10 years 118,898 5.52% 12,720 6.04% Over 10 years 245,101 4.90% 8,549 6.53% No fixed maturity 9,213 2.60% 0 0.00% - ------------------------------------------------------------------------------------------------ $481,118 4.86% $ 38,722 5.67% ================================================================================================ </TABLE> * Balances of available-for-sale securities are shown at amortized cost. 21
Loans/Leases Total loans and leases, net of unearned income and net deferred loan fees and costs, grew 11.9%, to $995.3 million at December 31, 2002 from $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 5 - Loan/Lease Classification Summary <TABLE> <CAPTION> (in thousands) 2002 2001 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Residential real estate $391,120 $327,987 $344,715 $312,506 $232,167 Commercial real estate 196,517 168,452 152,218 141,903 105,222 Real estate construction 26,110 25,112 18,746 19,046 9,064 Commercial 256,010 237,483 202,956 166,263 154,085 Consumer and other 103,853 111,880 110,126 99,206 78,018 Leases 25,511 21,787 19,565 18,850 15,691 - ----------------------------------------------------------------------------------------------------------- Total loans and leases 999,121 892,701 848,326 757,774 594,247 Less: unearned income and related deferred costs and fees (3,775) (2,859) (2,568) (2,392) (2,054) - ----------------------------------------------------------------------------------------------------------- Total loans and leases, net of unearned income and deferred costs and fees $995,346 $889,842 $845,758 $755,382 $592,193 - ----------------------------------------------------------------------------------------------------------- </TABLE> Residential real estate loans increased by $63.1 million or 19.3% in 2002, from $328.0 million to $391.1 million, and comprised 39.2% of total loans and leases at December 31, 2002. A low interest rate environment coupled with new branch offices contributed to the growth in the residential portfolio. The growth in residential loans is net of $28.8 million of loan sales to Federal agencies. The compounded annual growth rate in residential loans for the five years ended December 31, 2002 is 13.4%. 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 $110.2 million at December 31, 2002, compared to $113.6 million at December 31, 2001. Capitalized mortgage servicing rights totaled $706,000 at December 31, 2002, and $663,000 at December 31, 2001, and are reported as intangible assets on the consolidated statements of condition. Commercial real estate loans increased by $28.0 million or 16.7% in 2002 over 2001, from $168.5 million to $196.5 million. Commercial real estate loans of $196.5 million represented 19.7% of total loans and leases at December 31, 2002. Commercial loans totaled $256.0 million at December 31, 2002, an increase of 7.8% over $237.5 million at December 31, 2001. 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. The Company faces significant competition from local and national lenders for consumer lending products. Consumer and other loans were $103.9 million at December 31, 2002, down from $111.9 million at December 31, 2001. The lease portfolio increased by 17.1% to $25.5 million at December 31, 2002 from $21.8 million at December 31, 2001. The lease portfolio has traditionally consisted of leases on vehicles for consumers and small businesses. Competition for automobile financing has led to a decline in the consumer lease portfolio over the past several years. In response to the decline in consumer leasing, management increased its marketing efforts relating to other leasing opportunities, including commercial leasing and municipal leasing, which have been the primary sources of growth in the lease portfolio. As of December 31, 2002, commercial leases and municipal leases represented 90.8% of total leases, while consumer leases made up the remaining 9.2%. As of December 31, 2001, commercial leases and municipal leases represented 81.3% of total leases, while consumer leases made up the remaining 18.7%. 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 fourteen banking offices in the counties of Tompkins, Cortland, 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 two full service offices in neighboring Dutchess County. The Dutchess County offices opened in 2002 and 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 included in Item 8 below. 22
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 reserve to be a critical accounting policy, given the inherent uncertainty in evaluating the levels of the reserve required to cover credit losses in the portfolio and the material effect that assumption could have on the results of operations. Factors considered in determining the adequacy of the reserve and the related provision include: management's approach to granting new credit; the ongoing monitoring of existing credits by the internal and external loan review functions; the growth and composition of the loan/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/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/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 $998,000 increase in the reserve between December 31, 2001 and December 31, 2002 resulted from the provision for loan/lease losses exceeding the net loan losses for the year. The allocation of the Company's reserve as of December 31, 2002, 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) 2002 2001 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Total loans outstanding at end of year $995,346 $889,842 $845,758 $755,382 $592,193 - --------------------------------------------------------------------------------------------------------------- ALLOCATION OF THE RESERVE BY LOAN TYPE: Commercial $ 4,349 $ 3,011 $ 2,526 $ 3,281 $ 1,906 Real estate 2,809 2,755 2,210 1,964 1,384 Consumer and all other 2,912 2,976 2,771 3,202 2,935 Unallocated 1,634 1,964 2,317 781 1,180 - --------------------------------------------------------------------------------------------------------------- Total $ 11,704 $ 10,706 $ 9,824 $ 9,228 $ 7,405 - --------------------------------------------------------------------------------------------------------------- ALLOCATION OF THE RESERVE AS A PERCENTAGE OF TOTAL RESERVE: Commercial 37% 28% 26% 36% 26% Real estate 24% 26% 22% 21% 19% Consumer and all other 25% 28% 28% 35% 40% Unallocated 14% 18% 24% 8% 15% - --------------------------------------------------------------------------------------------------------------- Total 100% 100% 100% 100% 100% - --------------------------------------------------------------------------------------------------------------- LOAN/LEASE TYPES AS A PERCENTAGE OF TOTAL LOANS/LEASES: Commercial 26% 26% 24% 22% 26% Real estate 62% 59% 61% 62% 59% Consumer and all other 12% 15% 15% 16% 15% - --------------------------------------------------------------------------------------------------------------- Total 100% 100% 100% 100% 100% - --------------------------------------------------------------------------------------------------------------- Loans 90 days past due and accruing $ 368 $ 1,612 $ 226 $ 168 $ 507 Nonaccrual loans 6,977 5,736 4,134 3,698 1,611 Troubled debt restructurings not included above 179 185 389 400 471 - --------------------------------------------------------------------------------------------------------------- Total nonperforming loans/leases 7,524 7,533 4,749 4,266 2,589 - --------------------------------------------------------------------------------------------------------------- Other real estate owned 279 43 175 214 235 - --------------------------------------------------------------------------------------------------------------- Total nonperforming assets $ 7,803 $ 7,576 $ 4,924 $ 4,480 $ 2,824 - --------------------------------------------------------------------------------------------------------------- Reserve as a percentage of loans/leases outstanding 1.18% 1.20% 1.16% 1.22% 1.25% - --------------------------------------------------------------------------------------------------------------- Reserve as a percentage of nonperforming loans/leases 155.56% 142.12% 206.87% 216.32% 286.02% =============================================================================================================== </TABLE> 23
The reserve represented 1.18% of total loans/leases outstanding at December 31, 2002, down slightly from 1.20% at December 31, 2001. The reserve coverage of nonperforming loans (loans past due 90 days and accruing, nonaccrual loans, and restructured troubled debt) improved to 1.56 times at December 31, 2002, compared to 1.46 times at December 31, 2001. 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) 2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> Average loans outstanding during year $928,383 $852,775 $797,205 $674,748 $559,158 Balance of reserve at beginning of year 10,706 9,824 9,228 7,405 7,007 Reserve related to purchase acquisition N/A N/A N/A 1,511 N/A LOANS CHARGED-OFF, DOMESTIC: Commercial, financial, agricultural 335 371 130 241 326 Real estate - mortgage 41 44 108 105 509 Installment loans to individuals 940 843 677 647 674 Lease financing 133 28 8 1 10 Other loans 272 108 106 114 70 - ------------------------------------------------------------------------------------------------------ Total loans charged-off, domestic $ 1,721 $ 1,394 $ 1,029 $ 1,108 $ 1,589 - ------------------------------------------------------------------------------------------------------ RECOVERIES OF LOANS PREVIOUSLY CHARGED-OFF, DOMESTIC: Commercial, financial, agricultural 91 360 28 62 69 Real estate - mortgage 15 16 31 49 4 Installment loans to individuals 320 259 317 343 349 Lease financing 22 1 2 0 5 Other loans 36 34 31 22 21 - ------------------------------------------------------------------------------------------------------ Total loans recovered, domestic $ 484 $ 670 $ 409 $ 476 $ 448 - ------------------------------------------------------------------------------------------------------ Net loans charged-off 1,237 724 620 632 1,141 Additions to reserve charged to operations 2,235 1,606 1,216 944 1,539 - ------------------------------------------------------------------------------------------------------ Balance of reserve at end of year $ 11,704 $ 10,706 $ 9,824 $ 9,228 $ 7,405 - ------------------------------------------------------------------------------------------------------ Net charge-offs as a percentage of average loans/leases outstanding during the year 0.13% 0.08% 0.08% 0.09% 0.20% ====================================================================================================== </TABLE> Potential problem loans/leases are loans/leases that are currently performing, but where known information about possible credit problems of the related borrowers causes management to have serious doubt as to the ability of such borrowers to comply with the present loan payment terms and may result in disclosure of such loans/leases as nonperforming at sometime in the future. Management considers loans/leases classified as Substandard, which continue to accrue interest, to be potential problem loans/leases. At December 31, 2002, the Company, through its internal loan review function has identified 27 commercial relationships totaling $6.9 million, which it has classified as Substandard, which continue to accrue interest. These loans remain in a performing status due to a variety of factors, including payment history, the value of collateral supporting the credits, and personal or government guarantees. These factors, when considered in aggregate, give management reason to believe that the current risk exposure on these loans is not significant. Approximately $1.2 million of these loans are backed by guarantees of U.S. government agencies. While in a performing status as of December 31, 2002, 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. 24
Deposits and Other Liabilities Total deposits of $1.3 billion at December 31, 2002, reflected an increase of $252.8 million over total deposits at December 31, 2001. Deposit growth consisted primarily of core deposits, which increased by $135.6 million, while time deposits of $100,000 or more decreased by $41.6 million. Core deposit growth was fairly strong at all of the Company's subsidiary banks and included growth in mature offices as well as newer offices. Offices opened after January 1, 2001, contributed $35.8 million to the growth in 2002, while the remaining $217.0 million of growth was in offices opened prior to January 1, 2001. The Company's liability for securities sold under agreements to repurchase ("repurchase agreements") amounted to $77.8 million at December 31, 2002, representing a $31.8 million decrease over December 31, 2001. 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 $42.8 million at December 31, 2002, and $61.5 million at December 31, 2001. 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 $35.0 million at December 31, 2002 and $40.0 million at December 31, 2001. The Company's other borrowings represent amounts owed to the FHLB. During 2002, the Company increased its other borrowings from the FHLB by $6.3 million, to $81.7 million. Borrowings with the FHLB outstanding at December 31, 2002, included $5.4 million due in one year or less, and $76.3 million due in more than one year. The weighted average interest rate on other borrowings due in more than one year was 5.11% at December 31, 2002. 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 77.3% of total deposits, and 68.3% of total liabilities at December 31, 2002. Non-core funding sources (time deposits of $100,000 or more, brokered time deposits, municipal money market accounts repurchase agreements, and other borrowings) increased as a percentage of total liabilities from 28.9% at December 31, 2001, to 30.6% at December 31, 2002. Short-term investments, consisting of securities with maturities of one year or less increased from $23.7 million at December 31, 2001, to $24.8 million at December 31, 2002. Non-core funding sources may require securities to be pledged against the underlying liability. At December 31, 2002, securities pledged to secure certain large deposits, repurchase agreements, and other borrowings amounted to $382.4 million, compared to $299.0 million at December 31, 2001. Total securities pledged for deposits and repurchase agreements represented 71.8% of total securities at December 31, 2002, compared to 72.3% of total securities at December 31, 2001. The Company's 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, 2002, the unused borrowing capacity on established lines with the FHLB was $142.7 million. As members of the FHLB, the Company's subsidiary banks can use unencumbered mortgage-related assets to secure additional borrowings from the FHLB. At December 31, 2002, total unencumbered residential real estate assets were $206.2 million. Additional assets may also qualify as collateral for FHLB advances upon approval of the FHLB. 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 $188.5 million at December 31, 2001, to $272.0 million at December 31, 2002. Using current prepayment assumptions, cash flow from the investment portfolio is estimated to be approximately $196.4 million in 2003. Investments in residential mortgage loans, consumer loans, and leases totaled approximately $520.3 million at December 31, 2002. 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. 25
Table 8 - Loan Maturity <TABLE> <CAPTION> Remaining maturity of selected loans At December 31, 2002 (dollar amounts in thousands) Total Within 1 year 1-5 years After 5 years - ----------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Commercial real estate $196,517 $ 7,478 $ 12,500 $176,539 Real estate construction 26,110 9,279 596 16,235 Commercial 256,010 86,023 48,271 121,716 - ----------------------------------------------------------------------------------------------- Total $478,637 $102,780 $ 61,367 $314,490 =============================================================================================== </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 set forth in Item 8 below. RECENT ACCOUNTING STANDARDS ACCOUNTING FOR BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE ASSETS: The Company adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, 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. Upon adoption of SFAS No. 142, SFAS No. 141, Business Combinations, required the company to 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. Under SFAS No. 142, the Company was 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 was identified as having an indefinite useful life, the Company was 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 required the Company to perform an assessment of whether there was an indication that goodwill was impaired as of the date of adoption based upon criteria contained in SFAS No. 142. Any transitional impairment loss was to be recognized as a cumulative effect of a change in accounting principle in the Company's consolidated statement of income. The Company has performed an impairment evaluation and based upon this analysis, no transitional impairment loss is required as a result of adopting SFAS 142. Prior to October 1, 2002, the FASB required unidentifiable intangible assets 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, to be accounted for under SFAS No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions. Under SFAS No. 72, all intangible assets associated with branch acquisitions recorded on the Company's consolidated statement of condition as of December 31, 2001, continued to be amortized through September 30, 2002. In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial Institutions. SFAS No. 147 amends SFAS No. 72 and SFAS No. 144 and FASB Interpretation No. 9, Applying APB Opinions Nos. 16 and 17 When a Savings and Loan Association of a Similar Institution is Acquired in a Business Combination Accounted for by the Purchase Method. SFAS No. 147 is effective on October 1, 2002 and requires that unidentifiable intangible assets related to branch acquisitions no longer be amortized as of the adoption date for SFAS No. 142, and that the unidentified intangible assets be evaluated annually for impairment in accordance with SFAS No. 142. SFAS No. 147 also amends the provisions of SFAS No. 144 to apply to long-term customer relationship intangible assets recognized in the acquisition of a financial institution. Accordingly, effective October 1, 2002, the Company will evaluate its core deposit intangible assets for impairment in accordance with the provisions of SFAS No. 144. The adoption of SFAS No. 147 did not have a material effect on the consolidated statements of condition or consolidated statements of income. ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS: In June 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company is required to adopt SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 143 is not expected to have a material effect on the Company's consolidated financial statements. ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS: In October 2001, the FASB 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
RESCISSION OF FASB STATEMENTS NO. 4, 44, and 64, AMENDMENT OF FASB NO. 13, AND TECHNICAL CORRECTIONS: In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 amends existing guidance on reporting gains and losses on the extinguishment of debt to prohibit the classification of the gain or loss as extraordinary, as the use of such extinguishments have become part of the risk management strategy of many companies. SFAS No. 145 also amends SFAS No. 13 to require sale-leaseback accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. The provisions of the Statement related to the rescission of Statement No. 4 are applied in fiscal years beginning after May 15, 2002. Earlier application of these provisions is encouraged. The provisions of the Statement related to Statement No. 13 were effective for transactions occurring after May 15, 2002, with early application encouraged. The adoption of SFAS No. 145 is not expected to have a material effect on the Company's financial statements. ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES: In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of SFAS No. 146 is not expected to have a material effect on the Company's financial statements. ACCOUNTING FOR STOCK-BASED COMPENSATION-TRANSITION AND DISCLOSURE, AN AMENDMENT OF SFAS NO. 123: In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-transition and Disclosure, an Amendment of SFAS No. 123. This statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to these consolidated financials statements. GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS TO OTHERS: In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on the Company's financial statements. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002 and are included in these consolidated financial statements. CONSOLIDATION OF VARIABLE INTEREST ENTITIES: In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. For public enterprises with a variable interest in a variable interest entity created before February 1, 2003, the Interpretation applies to that enterprise no later than the beginning of the first interim or annual reporting period beginning after June 15, 2003. The application of this Interpretation is not expected to have a material effect on the Company's financial statements. The Interpretation requires certain disclosures in financial statements issued after January 31, 2003 if it is reasonably possible that the Company will consolidate or disclose information about variable interest entities when the Interpretation becomes effective. The Company did not have any disclosures required in these consolidated financial statements. 27
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, 2002. The analysis reflects a relatively balanced position with some short-term sensitivity to rising interest rates in the 0-3 month repricing interval followed by longer-term asset sensitivity in the 3-12 month repricing intervals. This analysis suggests that the Company's net interest income is more vulnerable to a sustained low interest rate environment than it is to rising interest rates. Table 9 - Interest Rate Risk Analysis <TABLE> <CAPTION> Condensed Static Gap - December 31, 2002 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* $1,525,586 $ 465,991 $ 127,412 $ 175,776 $ 769,179 Interest-bearing liabilities 1,250,129 538,674 93,377 118,781 750,832 - ---------------------------------------------------------------------------------------------------------------------- Net gap position (72,683) 34,035 56,995 18,347 - ---------------------------------------------------------------------------------------------------------------------- Net gap position as a percentage of total assets (4.35%) 2.04% 3.41% 1.10% ====================================================================================================================== </TABLE> * Balances of available-for-sale securities are shown at amortized cost. The Company's Board of Directors has set a policy that interest rate risk exposure will remain within a range whereby net interest income will not decline by more than 10% in one year as a result of a 200 basis point change in rates. Based upon the simulation analysis performed as of December 31, 2002, a 200 basis point upward shift in interest rates over a one-year time frame would result in a one-year decline from the base case scenario, which assumes interest rates remain at current levels, of approximately 0.86% in net interest income, and management takes no action to address balance sheet mismatches. The same simulation indicates that a 100 basis point decline in interest rates over a one-year period would result in a decrease in net interest income of 1.23%, when compared to the base case. Although the simulation model suggests relatively modest exposure to changes in interest rates, the base case scenario (which assumes interest rates remain at current levels) indicates a downward trending net interest margin due to more assets repricing in the current low rate environment than liabilities. Given the expectation of a lower net interest margin in 2003, maintaining net interest income in 2003 at the amount realized in 2002 will depend upon continued growth in earnings assets. 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. Additional information regarding market risk of the Company's financial instruments at December 31, 2002 is provided in Table 10. 28
Table 10 - Repricing Intervals of Selected Financial Instruments <TABLE> <CAPTION> Greater (dollar amounts in thousands) 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 $239,841 $104,421 $ 42,329 $ 50,343 $ 56,846 $493,780 $493,780 Average interest rate* 4.60% 5.26% 5.03% 4.98% 4.90% 4.85% Held-to-maturity securities 10,156 5,356 1,574 3,742 17,894 38,722 40,260 Average interest rate* 3.82% 4.93% 4.94% 4.78% 4.44% 4.40% Loans/leases 486,023 155,432 111,765 142,348 99,778 995,346 999,649 Average interest rate* 6.28% 7.48% 7.40% 7.19% 6.90% 6.78% Financial Liabilities: Time deposits $283,309 $ 58,710 $ 15,021 $ 21,921 $ 642 $379,603 $384,903 Average interest rate 2.74% 3.76% 4.14% 4.72% 3.33% 3.05% Federal funds sold and securities sold under agreements to repurchase 42,843 24,200 800 5,000 5,000 77,843 77,878 Average interest rate 2.26% 4.49% 2.38% 4.27% 4.03% 3.24% Other borrowings 5,379 16,392 10,928 8,400 40,831 81,930 82,466 Average interest rate 4.04% 4.80% 5.67% 4.17% 4.86% 5.03% ============================================================================================================================ </TABLE> * Interest rate on tax-exempt obligations is shown before tax-equivalent adjustments. 29
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Item 8. Financial Statements and Supplementary Data <TABLE> <CAPTION> Consolidated Statements of Condition As of December 31 (in thousands except share and per share data) 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> ASSETS Cash and non-interest bearing balances due from banks $ 53,898 $ 43,946 Interest bearing balances due from banks 10,000 21 Federal funds sold 400 150 Available-for-sale securities, at fair value 493,780 386,369 Held-to-maturity securities, fair value of $40,260 at December 31, 2002, and $27,255 at December 31, 2001 38,722 26,846 Loans and leases, net of unearned income and deferred costs and fees 995,346 889,842 Less reserve for loan/lease losses 11,704 10,706 - ----------------------------------------------------------------------------------------------------------------------------------- Net Loans/Leases 983,642 879,136 Bank premises and equipment, net 27,111 25,034 Corporate owned life insurance 21,382 20,451 Intangible assets 14,106 14,072 Accrued interest and other assets 27,162 24,670 - ----------------------------------------------------------------------------------------------------------------------------------- Total Assets $ 1,670,203 $ 1,420,695 LIABILITIES, MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES, AND SHAREHOLDERS' EQUITY Deposits: Interest-bearing: Checking, savings, and money market $ 710,753 $ 457,427 Time 379,603 404,532 Noninterest-bearing 249,929 225,499 - ----------------------------------------------------------------------------------------------------------------------------------- Total Deposits 1,340,285 1,087,458 Federal funds purchased and securities sold under agreements to repurchase 77,843 109,669 Other borrowings 81,930 75,581 Other liabilities 18,059 15,423 - ----------------------------------------------------------------------------------------------------------------------------------- Total Liabilities 1,518,117 1,288,131 - ----------------------------------------------------------------------------------------------------------------------------------- Minority interest in consolidated subsidiaries 1,489 1,492 Shareholders' equity: Common stock - par value $0.10 per share: Authorized 15,000,000 shares; Issued 7,465,286 shares at December 31, 2002, and 7,442,177 shares at December 31, 2001 747 744 Surplus 45,997 45,456 Undivided profits 96,722 82,385 Accumulated other comprehensive income 7,597 3,039 Treasury stock at cost: 24,529 shares at December 31, 2002, and December 31, 2001 (466) (466) Unallocated ESOP: 10,170 shares at December 31, 2001 0 (86) - ----------------------------------------------------------------------------------------------------------------------------------- Total Shareholders' Equity 150,597 131,072 - ----------------------------------------------------------------------------------------------------------------------------------- Total Liabilities, Minority Interest in Consolidated Subsidiaries, and Shareholders' Equity $ 1,670,203 $ 1,420,695 =================================================================================================================================== </TABLE> See notes to consolidated financial statements. 31
<TABLE> <CAPTION> Consolidated Statements of Income Year ended December 31 (in thousands except per share data) 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> INTEREST AND DIVIDEND INCOME Loans $68,383 $71,592 $70,587 Interest on balances due from banks 37 3 0 Federal funds sold 207 487 726 Available-for-sale securities 23,862 20,861 19,216 Held-to-maturity securities 1,470 1,215 1,489 - ----------------------------------------------------------------------------------------------------------------------------------- Total Interest and Dividend Income 93,959 94,158 92,018 - ----------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Deposits: Time certificates of deposit of $100,000 or more 3,233 7,970 10,205 Other deposits 18,934 20,458 22,288 Federal funds purchased and securities sold under agreements to repurchase 2,448 3,453 3,996 Other borrowings 4,203 4,294 3,587 - ----------------------------------------------------------------------------------------------------------------------------------- Total Interest Expense 28,818 36,175 40,076 - ----------------------------------------------------------------------------------------------------------------------------------- Net Interest Income 65,141 57,983 51,942 Less Provision for Loan/Lease Losses 2,235 1,606 1,216 Net Interest Income After Provision for Loan/Lease Losses 62,906 56,377 50,726 - ----------------------------------------------------------------------------------------------------------------------------------- NONINTEREST INCOME Trust and investment services income 4,174 4,646 4,586 Service charges on deposit accounts 6,324 4,676 3,739 Insurance commissions and fees 4,900 4,225 0 Other service charges 5,029 4,259 3,812 Increase in cash surrender value of corporate owned life insurance 1,383 1,068 956 Other operating income 1,531 924 882 Gain on sale of available-for-sale securities 363 66 450 - ----------------------------------------------------------------------------------------------------------------------------------- Total Noninterest Income 23,704 19,864 14,425 - ----------------------------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSES Salaries and wages 22,692 20,338 17,354 Pension and other employee benefits 6,827 5,004 4,112 Net occupancy expense of bank premises 3,021 2,787 2,439 Net furniture and fixture expense 3,320 3,042 2,582 Amortization of intangible assets 867 1,680 1,135 Other operating expenses 15,543 13,210 11,197 - ----------------------------------------------------------------------------------------------------------------------------------- Total Noninterest Expenses 52,270 46,061 38,819 - ----------------------------------------------------------------------------------------------------------------------------------- Income Before Income Tax Expense and Minority Interest in Consolidated Subsidiaries 34,340 30,180 26,332 Minority interest in consolidated subsidiaries 134 134 568 Income Tax Expense 11,292 10,419 8,252 - ----------------------------------------------------------------------------------------------------------------------------------- Net Income $22,914 $19,627 $17,512 - ----------------------------------------------------------------------------------------------------------------------------------- Basic earnings per share $3.09 $2.65 $2.47 Diluted earnings per share $3.03 $2.62 $2.45 =================================================================================================================================== </TABLE> See notes to consolidated financial statements. 32
<TABLE> <CAPTION> Consolidated Statements of Cash Flows Year ended December 31 (in thousands) 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> OPERATING ACTIVITIES Net income $22,914 $19,627 $17,512 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan/lease losses 2,235 1,606 1,216 Depreciation and amortization premises, equipment, and software 2,945 2,770 2,461 Amortization of intangible assets 867 1,680 1,135 Earnings from corporate owned life insurance, net (1,340) (985) (956) Net amortization on securities 2,008 431 17 Deferred income tax benefit (630) (332) (599) Net gain on sale of securities (363) (66) (450) Net gain on sale of loans (671) (560) (74) Proceeds from sale of loans 29,464 28,125 8,336 Loans originated for sale (32,771) (28,356) (8,262) Net (gain) loss on sale of bank premises (19) (32) 3 Treasury stock issued 0 10 75 ISOP/ESOP shares released or committed to be released for allocation 414 744 159 Decrease (increase) in interest receivable 212 943 (1,419) (Decrease) increase in interest payable (1,200) (1,655) 1,271 Other, net (1,573) (4,541) (268) - ----------------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 22,492 19,409 20,157 - ----------------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Proceeds from maturities of available-for-sale securities 237,856 206,590 39,768 Proceeds from sales of available-for-sale securities 25,611 1,497 9,393 Proceeds from maturities of held-to-maturity securities 10,083 9,191 10,750 Purchases of available-for-sale securities (364,819) (244,016) (50,955) Purchases of held-to-maturity securities (21,989) (10,194) (5,674) Net increase in loans/leases (102,763) (85,458) (90,996) Proceeds from sales of bank premises and equipment 82 234 33 Purchase of bank premises and equipment (4,928) (3,738) (5,547) Redemption (purchase) of corporate owned life insurance 409 (885) (4,358) Net cash used in acquisitions (21) (1,058) 0 - ----------------------------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (220,479) (127,837) (97,586) - ----------------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net increase in demand deposits, money market accounts, and savings accounts 277,756 68,280 16,778 Net (decrease) increase in time deposits (24,929) (15,723) 43,884 Net (decrease) increase in securities sold under agreements to repurchase and Federal funds purchased (31,826) 37,438 14,385 Increase in other borrowings 16,093 49,027 80,040 Repayment of other borrowings (9,744) (41,031) (54,795) Cash dividends (8,577) (8,136) (7,696) Repurchase of common stock (1,353) (3,408) (4,870) Net proceeds from exercise of stock options, warrants, and related tax benefit 748 734 288 Cash paid in lieu of fractional Letchworth common shares 0 0 (9) - ----------------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Financing Activities 218,168 87,181 88,005 - ----------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 20,181 (21,247) 10,576 - ----------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of year 44,117 65,364 54,788 - ----------------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $64,298 $44,117 $65,364 =================================================================================================================================== SUPPLEMENTAL INFORMATION: Cash paid during the year for: Interest $30,018 $37,830 $38,805 Income taxes $10,728 $11,017 $9,307 Non-cash investing and financing activities: Fair value of non-cash assets acquired in purchase acquisition $ 0 $ 1,504 $60,034 Fair value of liabilities assumed in purchase acquisitions $ 0 $ 1,449 $55,469 Fair value of shares issued for acquisitions $ 821 $ 3,458 $ 8,176 Securitization of loans $ 0 $41,440 $ 0 </TABLE> See notes to consolidated financial statements. 33
<TABLE> <CAPTION> Consolidated Statements of Changes in Shareholders' Equity - ----------------------------------------------------------------------------------------------------------------------------------- Accumulated Other (in thousands except share and per share data) Common Undivided Comprehensive Treasury Unallocated data) Stock Surplus Profits (Loss) Income Stock ESOP Total - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> 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 -------- Cash paid in lieu of fractional Letchworth common shares (9) (9) 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 -------- Cash dividends ($1.10 per share) (8,136) (8,136) 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 acquisition (164,266 shares) 16 3,442 3,458 - ----------------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 2001 $ 744 $ 45,456 $ 82,385 $ 3,039 $ (466) $ (86) $131,072 - ----------------------------------------------------------------------------------------------------------------------------------- Comprehensive income: Net income 22,914 22,914 Other comprehensive income 4,558 4,558 -------- Total Comprehensive Income 27,472 -------- Cash dividends ($1.16 per share) (8,577) (8,577) Exercise of stock options and related tax benefit (37,070 shares, net) 4 744 748 Common stock repurchased and returned to unissued status (34,840 shares) (3) (1,350) (1,353) ESOP shares released or committed to be released for allocation (10,170 shares) 328 86 414 Shares issued for purchase acquisition (20,879 shares) 2 819 821 - ----------------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 2002 $ 747 $ 45,997 $ 96,722 $ 7,597 $ (466) $ 0 $150,597 =================================================================================================================================== </TABLE> See notes to consolidated financial statements. 34
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. Significant items subject to such estimates and assumptions include the reserve for loan/lease losses, valuation of intangible assets, deferred income tax assets, and obligations related to employee benefits. 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 noninterest-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. 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. Loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or estimated market value. Net unrealized losses attributable to changes in market interest rates are recognized through a valuation allowance by charges to income. 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. 35
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 period is 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 Statement of Financial Accounting Standards (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". 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 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 release identified on an average cost basis. 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 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. SFAS No. 123 requires companies not using a fair value based method of accounting for stock options to provide pro forma disclosure of net income and earnings per share as if the fair value method of accounting had been applied. Had the Company determined compensation cost based on the fair value of its stock options at the grant date under SFAS No. 123, the Company's net income and earnings per share would have been reduced to pro forma amounts indicated in the following table. 36
Note 1 Summary of Significant Accounting Policies (continued) <TABLE> <CAPTION> (in thousands except per share data) 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Net income: As reported $22,914 $19,627 $17,512 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects 389 329 156 Pro forma 22,525 19,298 17,356 - ----------------------------------------------------------------------------------------------------------------------------------- Basic earnings per share: As reported $ 3.09 $ 2.65 $ 2.47 Pro forma 3.04 2.61 2.44 - ----------------------------------------------------------------------------------------------------------------------------------- Diluted earnings per share As reported $ 3.03 $ 2.62 $ 2.45 Pro forma 2.98 2.57 2.42 =================================================================================================================================== </TABLE> The per share weighted average fair value of stock options granted during 2002, 2001, and 2000 was $16.23, $15.80, and $10.96, respectively. Fair values were arrived at using the Black Scholes option-pricing model with the following assumptions: <TABLE> <CAPTION> 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Risk-free interest rate 3.44% 5.25% 5.91% Expected dividend yield 3.00% 3.10% 3.90% Volatility 46.20% 50.00% 52.00% Expected life (years) 7.00 7.00 7.00 =================================================================================================================================== </TABLE> 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. ACCOUNTING FOR BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE ASSETS: The Company adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, 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. Upon adoption of SFAS No. 142, SFAS No. 141, Business Combinations, required the company to 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. Under SFAS No. 142, the Company was 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 was identified as having an indefinite useful life, the Company was required to test the intangible asset for impairment in accordance with the provisions of SFAS No. 142. In connection with the transitional goodwill impairment evaluation, SFAS No. 142 required the Company to perform an assessment of whether there was an indication that goodwill was impaired as of the date of adoption based upon criteria contained in SFAS No. 142. The Company has performed an impairment evaluation and based upon this analysis, no transitional impairment loss is required as a result of adopting SFAS 142. Prior to October 1, 2002, the FASB required unidentifiable intangible assets 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, to be accounted for under SFAS No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions. Under SFAS No. 72, all intangible assets associated with branch acquisitions recorded on the Company's consolidated statement of condition as of December 31, 2001, continued to be amortized through September 30, 2002. In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial Institutions. SFAS No. 147 amends SFAS No. 72 and SFAS No. 144 and FASB Interpretation No. 9, Applying APB Opinions Nos. 16 and 17 When a Savings and Loan Association of a Similar Institution is Acquired in a Business Combination Accounted for by the Purchase Method. SFAS No. 147 is effective on October 1, 2002 and requires that unidentifiable intangible assets related to branch acquisitions no longer be amortized as of the adoption date for SFAS No. 142, and that the unidentified intangible assets be evaluated annually for impairment in accordance with SFAS No. 142. SFAS No. 147 also amends the provisions of SFAS No. 144 to apply to long-term customer relationship intangible assets recognized in the acquisition of a financial institution. Accordingly, effective October 1, 2002, the Company will evaluate its core deposit intangible assets for impairment in accordance with the provisions of SFAS No. 144. The adoption of SFAS No. 147 did not have a material effect on the consolidated statements of condition or consolidated statements of income. 37
Note 1 Summary of Significant Accounting Policies (continued) ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS: In June 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company is required to adopt SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 143 is not expected to have a material effect on the Company's consolidated financial statements. ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS: In October 2001, the FASB 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. RESCISSION OF FASB STATEMENTS NO. 4, 44, and 64, AMENDMENT OF FASB NO. 13, AND TECHNICAL CORRECTIONS: In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 amends existing guidance on reporting gains and losses on the extinguishment of debt to prohibit the classification of the gain or loss as extraordinary, as the use of such extinguishments have become part of the risk management strategy of many companies. SFAS No. 145 also amends SFAS No. 13 to require sale-leaseback accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. The provisions of the Statement related to the rescission of Statement No. 4 are applied in fiscal years beginning after May 15, 2002. Earlier application of these provisions is encouraged. The provisions of the Statement related to Statement No. 13 were effective for transactions occurring after May 15, 2002, with early application encouraged. The adoption of SFAS No. 145 is not expected to have a material effect on the Company's financial statements. ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES: In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of SFAS No. 146 is not expected to have a material effect on the Company's financial statements. ACCOUNTING FOR STOCK-BASED COMPENSATION-TRANSITION AND DISCLOSURE, AN AMENDMENT OF SFAS NO. 123: In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-transition and Disclosure, an Amendment of SFAS No. 123. This statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to these consolidated financials statements. GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS TO OTHERS: In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on the Company's financial statements. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002 and are included in these consolidated financial statements. CONSOLIDATION OF VARIABLE INTEREST ENTITIES: In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. For public enterprises with a variable interest in a variable interest entity created before February 1, 2003, the Interpretation applies to that enterprise no later than the beginning of the first interim or annual reporting period beginning after June 15, 2003. The application of this Interpretation is not expected to have a material effect on the Company's financial statements. The Interpretation requires certain disclosures in financial statements issued after January 31, 2003 if it is reasonably possible that the Company will consolidate or disclose information about variable interest entities when the Interpretation becomes effective. The Company did not have any disclosures required in these consolidated financial statements. 38
Note 2 Mergers and Acquisitions Mahopac National Bank On June 4, 1999, the Company 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 the Company's net income based upon the percentage of the Company's 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, the Company 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 the Company was shown as a minority interest in consolidated subsidiaries on the consolidated statements of condition. Subsequent to September 1, 2000, 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 $3.2 million. 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. <TABLE> <CAPTION> Year Ended December 31 (dollar amounts in thousands, except per share) 2000 - ------------------------------------------------------------------------------------ <S> <C> Net interest income: As reported $51,942 Pro forma combined $51,942 Net income: - ------------------------------------------------------------------------------------ As reported $17,512 Pro forma combined 17,818 Basic earnings per share: - ------------------------------------------------------------------------------------ As reported $ 2.47 Pro forma combined 2.41 Diluted earnings per share: - ------------------------------------------------------------------------------------ As reported $ 2.45 Pro forma combined 2.40 ==================================================================================== </TABLE> The pro forma combined financial information does not reflect any potential cost savings or revenue enhancements that are expected to result from the acquisitions. Accordingly, the pro forma combined financial information may not be indicative of operations that would have been achieved had the 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 met certain income targets in 2001 and 2002. The contingent consideration includes 25,093 shares, which were payable if the income targets were met, and an additional 8,333 shares which were payable if income targets for the two-year period were exceeded by 5%. Tompkins Insurance met the 2001, 2002, and 2-year income targets, resulting in the release of 12,547 shares in 2001 and 20,879 in 2002 as additional consideration. Such shares are considered outstanding for purposes of computing diluted earnings per share beginning on October 1, 2001 for shares released in 2001 and beginning on July 1, 2002 for shares released in 2002. 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. 39
Note 2 Mergers and Acquisitions (continued) Goodwill and Other Intangible Assets At December 31, 2002, the Company had unamortized goodwill related to its various acquisitions totaling $10.7 million compared with $9.9 million at December 31, 2001. The increase reflects the $0.8 million of goodwill recorded as a result of Tompkins Insurance exceeding the income targets specified in the purchase agreements for 2001 and 2002. The purchase agreements included provisions for additional consideration to be paid to Tompkins Insurance in the form of Company stock if certain income targets were met. In accordance with SFAS No. 142, the Company no longer amortizes this goodwill subsequent to December 31, 2001. Included in this amount is approximately $170,000 of unidentified intangible assets related to various branch acquisitions, which prior to October 1, 2002, were accounted for under SFAS No. 72. With the adoption of SFAS No. 147, effective October 1, 2002, these intangible assets are no longer amortized. At December 31, 2002, the Company had core deposit intangible assets related to various acquisitions of $2.7 million. The amortization of these intangible assets amounted to $854,000 in 2002. In accordance with SFAS No. 142, these intangible assets continue to be amortized. At December 31, 2002, other intangible assets, consisting primarily of mortgage servicing assets, totaled $751,000. Information regarding the carrying amount and the amortization expense of the Company's acquired intangible assets are disclosed in the table below. <TABLE> <CAPTION> Gross Carrying Accumulated Net Carrying December 31, 2002 (in thousands) Amount Amortization Amount - ------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Amortized intangible assets: Core deposit intangible $ 5,459 $ 2,788 $ 2,671 Other intangibles 994 243 751 - ------------------------------------------------------------------------------------------------------- Subtotal amortized intangible assets 6,453 3,031 3,422 Goodwill 12,708 2,024 10,684 - ------------------------------------------------------------------------------------------------------- Total intangible assets $19,161 $ 5,055 $14,106 - ------------------------------------------------------------------------------------------------------- Aggregate amortization expense: * For the year to date period ended 12/31/02 $ 867 Estimated amortization expense: * For the year ended 12/31/03 700 For the year ended 12/31/04 598 For the year ended 12/31/05 496 For the year ended 12/31/06 387 For the year ended 12/31/07 278 ======================================================================================================= </TABLE> * Excludes the amortization of mortgage servicing rights as the amounts are not material. <TABLE> <CAPTION> Goodwill and Other Intangible Assets - Effect of Adoption of SFAS No. 142 Year ended Year ended (dollar amounts in thousands, except per share) December 31, 2001 December 31, 2000 - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Reported Net Income $19,627 $17,512 Add back goodwill amortization 679 309 - ------------------------------------------------------------------------------------------------------------------- Adjusted Net Income 20,306 17,821 - ------------------------------------------------------------------------------------------------------------------- Basic earning per share - as reported $ 2.65 $ 2.47 Adjust for goodwill 0.09 0.04 - ------------------------------------------------------------------------------------------------------------------- Basic earnings per share - adjusted 2.74 2.51 - ------------------------------------------------------------------------------------------------------------------- Diluted earning per share - as reported $ 2.62 $ 2.45 Adjust for goodwill 0.09 0.04 - ------------------------------------------------------------------------------------------------------------------- Diluted earnings per share - adjusted 2.71 2.49 =================================================================================================================== </TABLE> 40
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, 2002 (in thousands) Cost Gains Losses Value - ----------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> U.S. Treasury securities and obligations of U.S. Government agencies $159,247 $ 2,975 $ 0 $162,222 Obligations of states and political subdivisions 45,348 2,193 17 47,524 Mortgage-backed securities 264,276 7,763 52 271,987 U.S corporate securities 3,034 0 200 2,834 - ----------------------------------------------------------------------------------------------------------------- Total debt securities 471,905 12,931 269 484,567 Equity securities 9,213 0 0 9,213 - ----------------------------------------------------------------------------------------------------------------- Total available-for-sale securities $481,118 $ 12,931 $ 269 $493,780 ================================================================================================================= </TABLE> Available-for-sale securities include $8,808,000 in nonmarketable equity securities, which are carried at cost since fair values are not readily determinable. This figure includes $7,293,000 of Federal Home Loan Bank Stock. Substantially all of the above mortgage-backed securities are direct pass through securities or collateralized mortgage obligations issued or backed by Federal agencies. <TABLE> <CAPTION> Held-to-Maturity Securities - ----------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair December 31, 2002 (in thousands) Cost Gains Losses Value - ----------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Obligations of states and political subdivisions $ 38,722 $ 1,566 $ 28 $ 40,260 - ----------------------------------------------------------------------------------------------------------------- Total held-to-maturity debt securities $ 38,722 $ 1,566 $ 28 $ 40,260 ================================================================================================================= </TABLE> <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 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 or collateralized mortgage obligations issued or backed by Federal agencies. 41
Note 3 Securities (continued) <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> 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. <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------------- Amortized Fair December 31, 2002 (in thousands) Cost Value - ----------------------------------------------------------------------------------------------------------------- <S> <C> <C> Available-for-sale securities: Due in one year or less $ 15,414 $ 15,526 Due after one year through five years 76,596 78,455 Due after five years through ten years 79,712 82,369 Due after ten years 35,907 36,230 - ----------------------------------------------------------------------------------------------------------------- Total 207,629 212,580 - ----------------------------------------------------------------------------------------------------------------- Mortgage-backed securities 264,276 271,987 Equity securities 9,213 9,213 - ----------------------------------------------------------------------------------------------------------------- Total available-for-sale securities $481,118 $493,780 ================================================================================================================= </TABLE> <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------------- Amortized Fair December 31, 2002 (in thousands) Cost Value - ----------------------------------------------------------------------------------------------------------------- <S> <C> <C> Held-to-maturity securities: Due in one year or less $ 9,290 $ 9,337 Due after one year through five years 8,163 8,600 Due after five years through ten years 12,720 13,369 Due after ten years 8,549 8,954 - ----------------------------------------------------------------------------------------------------------------- Total held-to-maturity debt securities $ 38,722 $ 40,260 ================================================================================================================= </TABLE> Realized gains on available-for-sale securities were $396,000 in 2002, $66,000 in 2001, and $453,000 in 2000; realized losses on available-for-sale securities were $33,000 in 2002, $0 in 2001, and $3,000 in 2000. At December 31, 2002, securities with a carrying value of $382,366,000 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, 2002. 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, 2002 and 2001, this investment totaled $4,194,000 and $4,104,000, 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. 42
Note 4 Comprehensive Income Comprehensive income for the three years ended December 31 is summarized below: <TABLE> <CAPTION> (in thousands) 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Net income $ 22,914 $ 19,627 $ 17,512 - --------------------------------------------------------------------------------------------------------------------- Net unrealized holding gain on available-for-sale securities during the year. Pre-tax net unrealized holding gain was $7,960 in 2002, $5,146 in 2001 and $8,539 in 2000. 4,776 3,088 5,006 Reclassification adjustment for net realized gain on the sale of available-for-sale securities (pre-tax net gain of $363 in 2002, $66 in 2001, and $450 in 2000). (218) (40) (270) - --------------------------------------------------------------------------------------------------------------------- Other comprehensive income 4,558 3,048 4,736 - --------------------------------------------------------------------------------------------------------------------- Total comprehensive income $ 27,472 $ 22,675 $ 22,248 ===================================================================================================================== </TABLE> Note 5 Loan/Lease Classification Summary and Related Party Transactions Loans/Leases at December 31 were as follows: <TABLE> <CAPTION> (in thousands) 2002 2001 - ---------------------------------------------------------------------------------------------------------- <S> <C> <C> Residential real estate $391,120 $327,987 Commercial real estate 196,517 168,452 Real estate construction 26,110 25,112 Commercial 256,010 237,483 Consumer and other 103,853 111,880 Leases 25,511 21,787 - ---------------------------------------------------------------------------------------------------------- Total loans and leases 999,121 892,701 Less unearned income and net deferred costs and fees (3,775) (2,859) - ---------------------------------------------------------------------------------------------------------- Total loans and leases, net of unearned income and deferred costs and fees $995,346 $889,842 ========================================================================================================== </TABLE> During 2002, the Company sold $28,793,000 of mortgage loans, realizing net gains of $671,000. During 2001, the Company sold $27,565,000 of mortgage loans, realizing a net gain 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. 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, which are included in residential real estate in the table above, totaled $4,769,000 and $791,000 at December 31, 2002 and 2001, 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 2002. At December 31, 2002, the Company serviced mortgage loans aggregating $110,169,000, including loans securitized and held as available-for-sale, compared to $113,628,000 at December 31, 2001. Capitalized mortgage servicing rights totaled $706,000 and $663,000 at December 31, 2002 and 2001, respectively. As members of the FHLB, the Company's subsidiary banks may use unencumbered mortgage related assts to secure borrowings from the FHLB. At December 31, 2002, the Company had $81,719,000 in term advances from the FHLB that were secured by residential mortgage loans. 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 fourteen banking offices in the counties of Tompkins, Cortland, 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 offices in that county and two offices in neighboring Dutchess County. 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. 43
Note 5 Loan/Lease Classification Summary and Related Party Transactions (continued) Loan transactions with related parties are summarized as follows: (in thousands) 2002 2001 - ------------------------------------------------------------------------------- Balance January 1 $ 3,640 $ 4,104 Former Directors/Executive Officers (93) (463) New Executive Officers 125 242 New loans and advancements 283 2,533 Loan payments (2,249) (2,776) - ------------------------------------------------------------------------------- Balance December 31 $ 1,706 $ 3,640 =============================================================================== Note 6 Reserve for Loan/Lease Losses Changes in the reserve for loan/lease losses are summarized as follows: (in thousands) 2002 2001 2000 - ------------------------------------------------------------------------------- Reserve at beginning of year $10,706 $ 9,824 $ 9,228 Provisions charged to operations 2,235 1,606 1,216 Recoveries on loans/leases 484 670 409 Loans/leases charged-off (1,721) (1,394) (1,029) - ------------------------------------------------------------------------------- Reserve at end of year $11,704 $10,706 $ 9,824 =============================================================================== The Company's recorded investment in loans/leases that are considered impaired totaled $4,159,000 at December 31, 2002, and $3,771,000 at December 31, 2001. The average recorded investment in impaired loans/leases was $2,765,000 in 2002, $2,937,000 in 2001, and $1,636,000 in 2000. The December 31, 2002, recorded investment in impaired loans/leases includes $1,730,000 of loans/leases that had related reserves of $547,000. The recorded investment in impaired loans/leases at December 31, 2001, included $1,779,000 of loans/leases, which had related reserves of $838,000. Interest income recognized on impaired loans/leases, all collected in cash, was $48,000 for 2002, $184,000 for 2001, and $94,000 for 2000. The principal balances of nonperforming loans/leases, including impaired loans/leases, are detailed in the table below. December 31 (in thousands) 2002 2001 - ------------------------------------------------------------------------------- Loans 90 days past due and accruing $ 368 $ 1,612 Nonaccrual loans 6,977 5,736 Troubled debt restructurings not included above 179 185 - ------------------------------------------------------------------------------- Nonperforming loans/leases $ 7,524 $ 7,533 =============================================================================== 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, 2002, was not significant. 44
Note 7 Bank Premises and Equipment Bank premises and equipment at December 31 were as follows: (in thousands) 2002 2001 - ------------------------------------------------------------------------------- Land $ 4,112 $ 3,365 Bank premises 26,457 25,818 Furniture, fixtures, and equipment 22,028 19,002 Accumulated depreciation and amortization (25,486) (23,151) - ------------------------------------------------------------------------------- Total $ 27,111 $ 25,034 =============================================================================== Depreciation and amortization expenses in 2002, 2001, and 2000 are included in operating expenses as follows: (in thousands) 2002 2001 2000 - ------------------------------------------------------------------------------- Bank premises $ 936 $ 845 $ 808 Furniture, fixtures, and equipment 1,852 1,766 1,501 - ------------------------------------------------------------------------------- Total $ 2,788 $ 2,611 $ 2,309 =============================================================================== Note 8 Deposits The aggregate time deposits of $100,000 or more were $112,338,000 at December 31, 2002, and $163,480,000 at December 31, 2001. Scheduled maturities of time deposits at December 31, 2002, were as follows: Less than $100,000 (in thousands) $100,000 and over Total - ------------------------------------------------------------------------------- Maturity Three months or less $ 59,058 $ 36,876 $ 95,934 Over three through six months 67,062 24,068 91,130 Over six through twelve months 66,471 29,774 96,245 - ------------------------------------------------------------------------------- Total due in 2003 192,591 90,718 283,309 2004 47,219 11,491 58,710 2005 8,992 6,029 15,021 2006 5,084 1,839 6,923 2007 12,983 2,015 14,998 2008 and thereafter 396 246 642 - ------------------------------------------------------------------------------- Total $267,265 $112,338 $379,603 =============================================================================== 45
Note 9 Federal Funds Purchased and Securities Sold Under Agreements to Repurchase Information regarding securities sold under agreements to repurchase as of December 31, 2002, is summarized below: <TABLE> <CAPTION> Collateral Securities Repurchase Liability - --------------------------------------------------------------------------------------- Weighted Estimated Average Amortized Fair Interest (dollar amounts in thousands) Cost Value Amount Rate - --------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Maturity at Origination/Type of Asset Demand: U.S. Government agency securities $ 3,861 $ 4,089 $ 3,866 2.10% Mortgage-backed certificates 37,389 38,819 37,016 1.52% 2 to 30 days: U.S. Government agency securities 113 114 113 1.40% Mortgage-backed certificates 223 242 227 1.40% 31 to 89 days: U.S. Government agency securities 514 539 514 3.30% 90 to 365 days: U.S. Government agency securities 1,103 1,113 1,107 3.49% Over 365 days: U.S. Government agency securities 25,019 25,939 27,000 4.28% Mortgage-backed securities 7,686 8,124 8,000 5.12% - --------------------------------------------------------------------------------------- Total $ 75,908 $ 78,979 $ 77,843 2.92% ======================================================================================= </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 $10,000,000 in 2004, $15,000,000 in 2006, $5,000,000 in 2011, and $5,000,000 in 2012. 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. At December 31, 2002, the FHLB 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) 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Total outstanding at December 31 $ 77,843 $101,469 $ 72,231 Maximum month-end balance 92,073 106,458 75,525 Average balance during the year 73,637 77,663 61,207 Weighted average rate at December 31 2.92% 3.54% 5.85% Average interest rate paid during the year 3.31% 4.36% 5.73% =============================================================================================================== </TABLE> <TABLE> <CAPTION> Federal Funds Purchased (dollar amounts in thousands) 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Total outstanding at December 31 $ 0 $ 8,200 $ 0 Maximum month-end balance 2,500 8,630 18,000 Average balance during the year 418 1,469 7,098 Weighted average rate at December 31 N/A 1.81% N/A Average interest rate paid during the year 1.98% 4.66% 6.85% =============================================================================================================== </TABLE> 46
Note 10 Other Borrowings The Company, through its subsidiary banks, had available line-of-credit agreements with banks permitting borrowings to a maximum of approximately $42,000,000 at December 31, 2002, and $38,500,000 at December 31, 2001. No advances were outstanding against those lines at December 31, 2002, or 2001. 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, 2002, the Company, through its subsidiaries, had established unused lines of credit with the FHLB of $142,675,000. At December 31, 2002, there were $81,719,000 in term advances from the FHLB, compared to $75,265,000 at December 31, 2001. At December 31, 2002, there were advances due within one year of $5,379,000 with a weighted average rate of 4.04%, and advances due in more than one year of $76,340,000 with a weighted average rate of 5.11%. Maturities of advances included $16,392,000 maturing in 2004, $10,928,000 in 2005, $3,423,000 in 2006, $4,977,000 in 2007, $3,620,000 in 2009, $10,000,000 in 2010, $22,000,000 in 2011 and $5,000,000 in 2012. The Company's FHLB borrowings at December 31, 2002, included $67,000,000 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 $100,000 at December 31, 2002, and $166,000 at December 31, 2001. At December 31, 2002 and 2001, Tompkins Insurance had borrowings of $111,000 and $150,000, respectively, from unrelated financial institutions and officers of Tompkins Insurance. 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, 2002, 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. 47
Note 11 Employee Benefit Plans (continued) 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, 2002 and 2001. <TABLE> <CAPTION> Pension Benefits Other Benefits (dollar amounts in thousands) 2002 2001 2002 2001 - -------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Change in benefit obligation: Benefit obligation at beginning of year $ 19,626 $ 16,958 $ 4,032 $ 3,725 Service cost 1,026 889 135 109 Interest cost 1,396 1,298 285 268 Amendments 87 213 86 (6) Actuarial loss 1,402 1,167 110 92 Benefits paid (985) (899) (164) (156) - -------------------------------------------------------------------------------------------------- Benefit obligation at end of year $ 22,552 $ 19,626 $ 4,484 $ 4,032 - -------------------------------------------------------------------------------------------------- Change in plan assets Fair value of plan assets at beginning of year $ 18,985 $ 18,114 $ 0 $ 0 Actual loss return on plan assets (2,288) (800) 0 0 Employer contribution 4,645 2,570 164 156 Benefits paid (985) (899) (164) (156) - -------------------------------------------------------------------------------------------------- Fair value of plan assets at end of year $ 20,357 $ 18,985 $ 0 $ 0 - -------------------------------------------------------------------------------------------------- Unfunded status (2,195) (641) (4,484) $ (4,032) Unrecognized net actuarial loss 12,059 7,056 353 243 Net transition (asset) obligation (56) (132) 1,155 1,271 Unrecognized prior service cost (1,795) (2,012) 74 (6) - -------------------------------------------------------------------------------------------------- Prepaid (accrued) benefit cost $ 8,013 $ 4,271 $ (2,902) $ (2,524) - -------------------------------------------------------------------------------------------------- Weighted-average assumptions as of December 31: Discount rate 6.75% 7.25% 6.75% 7.25% Expected return on plan assets 8.50% 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. 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 10.75% beginning in 2002, 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, 2002, by $22,000 and the net periodic post-retirement benefit cost for 2002 by $1,000. Decreasing the assumed health care cost trend rates by 1% each year would decrease the accumulated post-retirement benefit obligation as of December 31, 2002, by $28,000 and decrease the net periodic post-retirement benefit cost by $2,000. Net periodic benefit cost includes the following components: <TABLE> <CAPTION> Components of net periodic benefit cost Pension Benefits Other Benefits (in thousands) 2002 2001 2000 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> Service cost $ 1,026 $ 889 $ 704 $ 135 $ 109 $ 98 Interest cost 1,396 1,298 1,258 285 269 259 Expected return on plan assets (1,655) (1,508) (1,487) 0 0 0 Amortization of prior service cost (130) (136) 15 6 (1) 0 Recognized net actuarial gain 342 165 96 0 0 0 Amortization of transition (asset) liability (76) (76) (106) 116 116 116 Other N/A N/A 107 N/A N/A N/A - ------------------------------------------------------------------------------------------------------------ Net periodic benefit cost $ 903 $ 632 $ 587 $ 542 $ 493 $ 473 ============================================================================================================ </TABLE> 48
Note 11 Employee Benefit Plans (continued) 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. The Company recognized compensation expense related to the ESOP of $700,000 in 2002 and $785,000 in 2001. Compensation expense related to the separate ISOP/ESOP plans was $159,000 in 2000. 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 $708,000 in 2002 and $636,000 in 2001. Matching contributions to the separate ISOP plans were $160,000 in 2000. Life insurance benefits are provided to certain officers of the Company. In connection with these benefits, the Company reflects life insurance assets on its consolidated statements of condition of $21.4 million at December 31, 2002, and $20.5 million at December 31, 2001. The insurance is carried at its cash surrender value on the consolidated statements of condition. Increases in the cash surrender value of the insurance are reflected as noninterest income, net of any related mortality expense. In addition to the Company's noncontributory 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 $2.9 million at December 31, 2002, and $1.7 million at December 31, 2001. Benefits expense associated with the supplemental retirement plans amounted to $1.3 million, $463,000 and $415,000 for the years ended December 31, 2002, 2001, and 2000, respectively. 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, 2002, there were 132,000 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 prior plans remain in effect solely with respect to unexercised options issued under these plans. 49
Note 12 Stock Based Compensation (continued) The following table presents the combined stock option activity for all option plans during the periods indicated: Weighted Average Number of Shares Exercise Price - -------------------------------------------------------------------------------- 2002: Beginning balance 376,198 $ 25.90 Granted 161,000 42.90 Exercised (53,578) 21.28 Forfeited (6,500) 30.05 - ------------------------------------------------------------------------------- Outstanding at year-end 477,120 32.10 - ------------------------------------------------------------------------------- Exercisable at year-end 142,995 $ 22.01 - ------------------------------------------------------------------------------- 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 =============================================================================== The following summarizes outstanding and exercisable options at December 31, 2002: <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> $14.12-23.66 106,995 4.49 $20.35 106,995 $20.35 $26.63-26.63 145,125 7.70 $26.63 33,375 $26.63 $28.67-37.75 64,000 8.38 $37.01 2,625 $31.00 $42.90-42.90 161,000 9.75 $42.90 0 $ 0 - ---------------------------------------------------------------------------------------------------------------------- 477,120 7.76 $32.10 142,995 $22.01 ====================================================================================================================== </TABLE> 50
Note 13 Income Taxes The income tax expense (benefit) attributable to income from operations is summarized as follows: (in thousands) Current Deferred Total - -------------------------------------------------------------------------------- 2002 Federal $10,364 $ (544) $ 9,820 State 1,558 (86) 1,472 - -------------------------------------------------------------------------------- Total $11,922 $ (630) $11,292 - -------------------------------------------------------------------------------- 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 ================================================================================ 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: 2002 2001 2000 - ------------------------------------------------------------------------------- Statutory federal income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal benefit 2.8 3.0 2.5 Tax exempt income (3.4) (3.6) (4.3) All other (1.4) 0.1 (1.7) - ------------------------------------------------------------------------------- Total 33.0% 34.5% 31.5% =============================================================================== 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) 2002 2001 - ------------------------------------------------------------------------------- Deferred tax assets: Reserve for loan/lease losses $ 4,654 $ 4,051 Compensation and benefits 3,538 2,676 Other 876 1,190 - ------------------------------------------------------------------------------- Total deferred tax assets $ 9,068 $ 7,917 - ------------------------------------------------------------------------------- Deferred tax liabilities: Leasing transactions $ 1,046 $ 1,418 Prepaid pension 3,195 1,718 Depreciation 155 469 Purchase accounting adjustment 438 650 Other 488 546 - ------------------------------------------------------------------------------- Total deferred tax liabilities $ 5,322 $ 4,801 - ------------------------------------------------------------------------------- Net deferred tax asset at year-end $ 3,746 $ 3,116 - ------------------------------------------------------------------------------- Net deferred tax asset at beginning of year $ 3,116 $ 2,352 - ------------------------------------------------------------------------------- Increase in net deferred tax asset (630) (764) Purchase accounting adjustments, net 0 432 - ------------------------------------------------------------------------------- Deferred tax benefit $ (630) $ (332) =============================================================================== 51
Note 13 Income Taxes (continued) This analysis does not include the recorded deferred tax liabilities of $5,065,000 as of December 31, 2002 and $2,026,000 as of December 31, 2001 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, 2002 and 2001. 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 $681,000 in 2002, $519,000 in 2001, and $347,000 in 2000. The future minimum rental commitments as of December 31, 2002, for all operating leases that cannot be canceled are as follows: (in thousands) 2003 $ 478 2004 345 2005 264 2006 261 2007 226 Thereafter $3,446 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. The Company has a software contract for its core banking application through August 1, 2004. Estimated minimum annual payments under the above contract are $382,000 in 2003, 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. In November 2002, the FASB issued FASB Interpretation No. 45 (FIN No. 45), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others; an Interpretation of FASB Statements No. 5,57 and 107 and rescission of FASB Interpretation No. 34. FIN No. 45 requires certain new disclosures and potential liability recognition for the fair value at issuance of guarantees that fall within its scope. Based upon the Company's interpretation of FIN No. 45, the Company currently does not issue any guarantees that would require liability recognition under FIN No. 45, other than its stand-by letters of credit, the amount of which is not considered significant at December 31, 2002. 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 on December 31 were as follows: (in thousands) 2002 2001 - -------------------------------------------------------------------------------- Loan commitments $ 73,664 $ 68,951 Stand-by letter of credit 18,864 8,528 Undisbursed portion of lines of credit 181,591 168,479 - -------------------------------------------------------------------------------- Total $274,119 $245,958 ================================================================================ 52
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, 2002, 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 $12.0 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, 2002, the Company had approximately $7.5 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. 53
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, 2002 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 $ 22,914 7,409,672 $ 3.09 Effect of dilutive securities: Stock options 133,149 Shares issueable as contingent consideration for acquisition 10,440 Diluted EPS: Income available to common shareholders plus assumed conversions $ 22,914 7,553,261 $ 3.03 ================================================================================================================= </TABLE> Shares issueable as contingent consideration for acquisition recognizes the effect of 20,879 shares that became issueable in the third quarter of 2002 as a result of Tompkins Insurance Agencies meeting certain income targets. <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. 54
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, 2002 and 2001. 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 2002 2001 - --------------------------------------------------------------------------------------------------- Carrying Fair Carrying Fair (in thousands) Amount Value Amount Value - --------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Financial Assets: Cash and cash equivalents $ 64,298 $ 64,298 $ 44,117 $ 44,117 Securities - available-for-sale 493,780 493,780 386,369 386,369 Securities - held-to-maturity 38,722 40,260 26,846 27,255 Loans/leases, net 1 983,642 987,945 879,136 892,837 Accrued interest receivable 8,551 8,551 8,762 8,762 Financial Liabilities Time deposits $379,603 $384,903 $404,532 $408,237 Other deposits 960,682 960,682 682,926 682,926 Securities sold under agreements to repurchase 77,843 77,878 109,669 109,827 Other borrowings 81,930 82,466 75,581 77,796 Accrued interest payable 2,395 2,395 3,595 3,595 =================================================================================================== </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. 55
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, 2002, 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, 2002: Total Capital (to risk-weighted assets) The Company (consolidated) $143,790/13.7% >$ 83,836/>8.0% >$104,795/>10.0% Trust Company $ 76,431/14.4% >$ 42,596/>8.0% >$ 53,245/>10.0% Castile $ 33,261/10.5% >$ 25,395/>8.0% >$ 31,744/>10.0% Mahopac $ 23,963/12.2% >$ 15,687/>8.0% >$ 19,609/>10.0% Tier I Capital (to risk-weighted assets) The Company (consolidated) $132,086/12.6% >$ 41,918/>4.0% >$ 62,877/> 6.0% Trust Company $ 70,777/13.3% >$ 21,298/>4.0% >$ 31,947/> 6.0% Castile $ 29,557/ 9.3% >$ 12,698/>4.0% >$ 19,047/> 6.0% Mahopac $ 21,617/11.0% >$ 7,844/>4.0% >$ 11,765/> 6.0% Tier I Capital (to average assets) The Company (consolidated) $132,086/ 8.0% >$ 49,236/>3.0% >$ 82,060/> 5.0% Trust Company $ 70,777/ 7.5% >$ 28,132/>3.0% >$ 46,886/> 5.0% Castile $ 29,557/ 7.2% >$ 12,300/>3.0% >$ 20,500/> 5.0% Mahopac $ 21,617/ 6.8% >$ 9,594/>3.0% >$ 15,990/> 5.0% ====================================================================================================== 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 $ 64,332/13.3% >$ 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) $117,435/ 8.5% >$ 41,527/>3.0% >$ 69,212/> 5.0% Trust Company $ 64,332/ 8.1% >$ 23,751/>3.0% >$ 39,585/> 5.0% Castile $ 26,983/ 7.7% >$ 10,504/>3.0% >$ 17,506/> 5.0% Mahopac $ 18,697/ 7.4% >$ 7,598/>3.0% >$ 12,663/> 5.0% ====================================================================================================== </TABLE> 56
Note 17 Regulations and Supervision (continued) 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, 2002, the retained net profits of the Company's bank subsidiaries available to pay dividends were $21,344,000. Each bank subsidiary is required to maintain reserve balances by the Federal Reserve Bank of New York. At December 31, 2002, and 2001, the reserve requirements for the Company's banking subsidiaries totaled $19,035,000 and $14,824,000, respectively. 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. <TABLE> <CAPTION> Condensed Statements of Condition (in thousands) 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> ASSETS Cash $ 5,401 $ 2,853 Available-for-sale securities, at fair value 121 121 Investment in subsidiaries, at equity 142,997 125,686 Other 2,929 3,189 - ----------------------------------------------------------------------------------------------------------------------------------- Total Assets $151,448 $131,849 - ----------------------------------------------------------------------------------------------------------------------------------- LIABILITIES and SHAREHOLDERS EQUITY Liabilities $ 851 $ 777 Shareholders' Equity 150,597 131,072 - ----------------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $151,448 $131,849 =================================================================================================================================== </TABLE> <TABLE> <CAPTION> Condensed Statements of Income (in thousands) 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Dividends from available-for-sale securities $ 6 $ 46 $ 169 Dividends received from subsidiaries 11,600 11,060 16,098 Securities gains 0 66 299 Other income 0 0 87 Other gain/(loss) 29 (86) 0 - ----------------------------------------------------------------------------------------------------------------------------------- Total Operating Income 11,635 11,086 16,653 - ----------------------------------------------------------------------------------------------------------------------------------- Amortization of intangibles 0 0 451 Other expenses 537 715 683 - ----------------------------------------------------------------------------------------------------------------------------------- Total Operating Expenses 537 715 1,134 - ----------------------------------------------------------------------------------------------------------------------------------- Income Before Taxes and Equity in Undistributed Earnings of Subsidiaries 11,098 10,371 15,519 Income tax benefit 286 296 375 Equity in undistributed earnings of subsidiaries 11,530 8,960 1,618 - ----------------------------------------------------------------------------------------------------------------------------------- Net Income $ 22,914 $ 19,627 $ 17,512 =================================================================================================================================== </TABLE> 57
Note 18 Condensed Parent Company Only Financial Statements (continued) <TABLE> <CAPTION> Condensed Statements of Cash Flows (in thousands) 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES <S> <C> <C> <C> Net income $ 22,914 $ 19,627 $ 17,512 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries (11,530) (8,960) (1,618) Amortization of intangible assets 0 0 451 Realized gains on available-for-sale securities 0 (66) (299) Issuance of treasury shares 0 10 75 ESOP compensation expenses 414 744 159 Other, net 1 (1,488) (649) - ----------------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 11,799 9,867 15,631 - ----------------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Purchase of available-for-sale securities 0 0 0 Proceeds from sale of available-for-sale securities 0 1,497 1,047 Net cash (used in) provided by acquisitions (21) (1,206) 0 - ----------------------------------------------------------------------------------------------------------------------------------- Net Cash (Used in) Provided by Investing Activities (21) 291 1,047 - ----------------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Cash dividends (8,577) (8,136) (7,696) Repurchase of common shares (1,353) (3,408) (4,870) Cash paid in lieu of fractional Letchworth common shares 0 0 (9) Net proceeds from exercise of stock options, warrants, and related tax benefits 748 734 288 Advances from subsidiaries 0 0 0 Repayment of advances from subsidiaries (48) (341) (1,314) - ----------------------------------------------------------------------------------------------------------------------------------- Net Cash Used in Financing Activities (9,230) (11,151) (13,601) - ----------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash 2,548 (993) 3,077 Cash at beginning of year 2,853 3,846 769 - ----------------------------------------------------------------------------------------------------------------------------------- Cash at End of Year $ 5,401 $ 2,853 $ 3,846 =================================================================================================================================== </TABLE> <TABLE> <CAPTION> Unaudited Quarterly Financial Data: 2002 - ----------------------------------------------------------------------------------------------------------------- (in thousands except per share data) First Second Third Fourth - ----------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Interest and dividend income $22,753 $23,869 $23,813 $23,524 Interest expense 7,176 7,484 7,262 6,896 Net interest income 15,577 16,385 16,551 16,628 Provision for loan/lease losses 376 435 686 738 Income before income tax 7,849 8,975 9,336 8,046 Net income 5,205 5,922 6,208 5,579 Net income per common share (basic) .70 .80 .84 .75 Net income per common share (diluted) .69 .78 .82 .74 ================================================================================================================= </TABLE> <TABLE> <CAPTION> 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 tax 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 ================================================================================================================= </TABLE> 58
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, 2002 and 2001, 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, 2002. 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, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP January 28, 2003 Syracuse, New York 59
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 accounting principles generally accepted in the United States of America, 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 60
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 The information required by Item 10 of Form 10-K with respect to the Company's directors is incorporated by reference from the information contained in the section captioned "Election of Directors" in the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held in May, 2003 (the "Proxy Statement"), a copy of which will be filed with the Securities and Exchange Commission before the meeting date. For information with respect to the Company's executive officers, see the section captioned "Executive Officers of the Company" at the end of Part I of this report. The information required by Item 10 of Form 10-K with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference from the information contained in the section captioned "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement. Item 11. Executive Compensation The information required by Item 11 of Form 10-K is incorporated by reference from the information contained in the section captioned "Executive Compensation" in the Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by Item 12 of Form 10-K is incorporated by reference from the information contained in the sections captioned "Security Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan Information" in the Proxy Statement. Item 13. Certain Relationships and Related Transactions The information required by Item 13 of Form 10-K is incorporated by reference from the information contained in the section captioned "Certain Relationships and Related Transactions" in the Proxy Statement. Item 14. Controls and Procedures The Company's management, including its Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operations of the Company's disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934, as amended) (the "Exchange Act") as January 27, 2003 (the "Evaluation Date") within 90 days of the filing date of this report. Based upon that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures were effective in timely alerting them to any material information relating to the Company and its subsidiaries required to be included in the Company's Exchange Act filings. There were no significant changes made in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation performed by the Company's Chief Executive Officer and Chief Financial Officer. Item 15. Principal Accountant Fees and Services The information required by Item 15 of Form 10-K is incorporated by reference from the information contained in the section captioned "Report of the Audit/Examining Committee of the Board of Directors" in the Proxy Statement. 61
PART IV Item 16. 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 Auditors Consolidated Statements of Condition for the years ended December 31, 2002 and 2001 Consolidated Statements of Income for the years ended December 31, 2002, 2001, and 2000 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001, and 2000 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2002, 2001, and 2000 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 Company'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, as amended to date, incorporated herein by reference to the identically numbered exhibit contained in the Company's Registration Statement on Form 8-A (No. 0-27514), as filed with the Commission on December 29, 1995. 3.2 Bylaws of the Company, as amended to date, incorporated herein by reference to the identically numbered exhibit contained in the Company's Registration Statement on Form 8-A (No. 0-27514), as filed with the Commission on December 29, 1995. 4. Form of Specimen Common Stock Certificate of the Company incorporated herein by reference to the identically numbered exhibit contained in the Company's Registration Statement on Form 8-A (No. 0-27514), as filed with the Commission on December 29, 1995. 10.2 1992 Stock Option Plan incorporated herein by reference to the identically numbered exhibit contained in the Company's Registration Statement on Form 8-A (No. 0-27514), as filed with the Commission on December 29, 1995. * 10.3 1996 Stock Retainer Plan for Non-Employee Directors incorporated herein by reference to the identically numbered exhibit contained in the Company's Registration Statement on Form 8-A (No. 0-27514), as filed with the Commission on December 29, 1995. * 10.4 Form of Director Deferred Compensation Agreement incorporated herein by reference to the identically numbered exhibit contained in the Company's Registration Statement on Form 8-A (No. 0-27514), as filed with the Commission on December 29, 1995. * 10.5 Deferred Compensation Plan for Senior Officers incorporated herein by reference to the identically numbered exhibit contained in the Company's Registration Statement on Form 8-A (No. 0-27514), as filed with the Commission on December 29, 1995. * 62
10.6 Supplemental Executive Retirement Agreement with James J. Byrnes incorporated herein by reference to the identically numbered exhibit contained in the Company'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 Company'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 Company'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). 63
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, incorporated by reference to the identically numbered exhibit contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2001 as filed with the commission on March 29, 2002. * 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, incorporated by reference to the identically numbered exhibit contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2001 as filed with the commission on March 29, 2002. * 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. 64
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. The Mahopac National Bank, which is wholly-owned by the Company, and its subsidiary Mahopac Funding Corporation, Inc., which is approximately 99% owned by The Mahopac National Bank. Tompkins Insurance Agencies, Inc., which is wholly-owned by the Company 23 Consent of KPMG LLP (filed herewith) 24 Power of Attorney, included on page 66 of this Report. 99.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Management contracts and compensatory plans and arrangements required to be filed as Exhibits to this Report on Form 10-K pursuant to Item 15(c) of the Report (b) Reports on Form 8-K The Company filed no Current Reports on Form 8-K during the quarter ended December 31, 2002. 65
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TOMPKINS TRUSTCO, INC. /s/ JAMES J. BYRNES ------------------------------------------------- By: James J. Byrnes Chairman of the Board and Chief Executive Officer Date: March 28, 2003 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints, jointly and severally, James J. Byrnes and Frank M. Fetsko, and each of them, as his or her true and lawful attorneys-in-fact and agents, each with full power of substitution, for him or her, and in his or her name, place and stead, in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with Exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. <TABLE> <CAPTION> Signature Capacity Signature Capacity - --------- -------- --------- -------- <S> <C> <C> <C> /s/ JAMES J. BYRNES Chairman of the Board and /s/ EDWARD C. HOOKS Director - --------------------------- Chief Executive Officer --------------------------- James J. Byrnes Edward C. Hooks /s/ JAMES W. FULMER President, Director /s/ BONNIE H. HOWELL Vice Chairman - --------------------------- --------------------------- Director James W. Fulmer Bonnie H. Howell /s/ FRANCIS M. FETSKO Senior Vice President and /s/ HUNTER R. RAWLINGS, III Director - --------------------------- Chief Financial Officer --------------------------- Francis M. Fetsko Hunter R. Rawlings, III /s/ JOHN ALEXANDER Director /s/ THOMAS R. SALM Director - --------------------------- --------------------------- John E. Alexander Thomas R. Salm /s/ REEDER D. GATES Director /s/ MICHAEL SPAIN Director - --------------------------- --------------------------- Reeder D. Gates Michael Spain /s/ WILLIAM W. GRISWOLD Director /s/ WILLIAM D. SPAIN Director - --------------------------- --------------------------- William W. Griswold William D. Spain /s/ JAMES R. HARDIE Director /s/ CRAIG YUNKER Director - --------------------------- --------------------------- James R. Hardie Craig Yunker </TABLE> 66
CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, James J. Byrnes, certify that: 1. I have reviewed this annual report on Form 10-K of Tompkins Trustco, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 /s/ JAMES J. BYRNES - ----------------------- James J. Byrnes Chairman and Chief Executive Officer 67
CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Francis M. Fetsko, certify that: 1. I have reviewed this annual report on Form 10-K of Tompkins Trustco, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 /s/ FRANCIS M. FETSKO - ----------------------- Francis M. Fetsko Senior Vice President and Chief Financial Officer 68
EXHIBIT INDEX - ------------- EXHIBIT NUMBER DESCRIPTION - -------------- ----------- 23 Consent of KPMG LLP 99.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act 2002 69
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