SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-12709 TOMPKINS TRUSTCO, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) New York 16-1482357 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) The Commons, P.O. Box 460, Ithaca, NY 14851 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (607) 273-3210 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No [ ]. Indicate the number of shares of the Registrant's Common Stock outstanding as of the latest practicable date: Class Outstanding as of July 31, 2002 - ---------------------------- -------------------------------- Common Stock, $.10 par value 7,409,522 shares
TOMPKINS TRUSTCO, INC. FORM 10-Q INDEX PART I -FINANCIAL INFORMATION PAGE ---- Item 1 - Financial Statements (Unaudited) Condensed Consolidated Statements of Condition as of June 30, 2002 and December 31, 2001 ............ 3 Condensed Consolidated Statements of Income for the three months and six months ended June 30, 2002 and 2001 ............................................. 4 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and 2001 .............. 5 Condensed Consolidated Statements of Changes in Shareholders' Equity for the six months ended June 30, 2002 and 2001 ............................... 6 Notes to Unaudited Condensed Consolidated Financial Statements ........................................... 7-11 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations .................. 12-18 Item 3 - Quantitative and Qualitative Disclosures about Market Risk ................................................. 19 Average Consolidated Balance Sheet and Net Interest Analysis ............................................. 20 PART II - OTHER INFORMATION Item 1 - Legal Proceedings ...................................... 21 Item 2 - Changes in Securities and Use of Proceeds .............. 21 Item 3 - Defaults on Senior Securities .......................... 21 Item 4 - Submission of Matters to a Vote of Securities Holders .............................................. 21 Item 5 - Other Information ...................................... 21 Item 6 - Exhibits and Reports on Form 8-K ....................... 21 SIGNATURES ............................................................... 22 EXHIBIT INDEX ............................................................ 23 2
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS -------------------- <TABLE> <CAPTION> CONDENSED CONSOLIDATED STATEMENTS OF CONDITION (In thousands, except share data) (Unaudited) As of As of 06/30/2002 12/31/2001 ----------- ----------- <S> <C> <C> ASSETS Cash & noninterest bearing balances due from banks $ 49,298 $ 43,946 Interest bearing balances due from banks 0 21 Federal funds sold 10,625 150 Available-for-sale securities, at fair value 488,611 386,369 Held-to-maturity securities, fair value of $36,279 at June 30, 2002 and $27,255 at December 31, 2001 35,203 26,846 Loans/leases net of unearned income 927,863 889,842 Less: Reserve for loan/lease losses 11,055 10,706 - ------------------------------------------------------------------------------------------------------------- Net Loans/Leases 916,808 879,136 Bank premises and equipment, net 26,278 25,034 Corporate owned life insurance 20,580 20,451 Intangible assets 13,651 14,072 Accrued interest and other assets 25,124 24,670 - ------------------------------------------------------------------------------------------------------------- Total Assets $ 1,586,178 $ 1,420,695 ============================================================================================================= LIABILITIES, MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES AND SHAREHOLDERS' EQUITY Deposits: Interest bearing: Checking, savings and money market $ 664,063 $ 457,427 Time 349,219 404,532 Noninterest bearing 256,903 225,499 - ------------------------------------------------------------------------------------------------------------- Total Deposits 1,270,185 1,087,458 Securities sold under agreements to repurchase and Federal funds purchased 69,752 109,669 Other borrowings 84,361 75,581 Other liabilities 19,627 15,423 - ------------------------------------------------------------------------------------------------------------- Total Liabilities $ 1,443,925 $ 1,288,131 - ------------------------------------------------------------------------------------------------------------- Minority interest in consolidated subsidiaries 1,495 1,492 Shareholders' equity: Common Stock - par value $.10 per share, authorized 15,000,000 shares Issued: 7,420,321 at June 30, 2002; and 7,442,177 at December 31, 2001 742 744 Surplus 44,636 45,456 Undivided profits 89,364 82,385 Accumulated other comprehensive income 6,513 3,039 Treasury stock, at cost - 24,529 shares at June 30, 2002, and 24,529 shares at December 31, 2001 (466) (466) Unallocated ISOP/ESOP: 2,773 shares at June 30, 2002, 10,170 shares at December 31, 2001 (31) (86) - ------------------------------------------------------------------------------------------------------------- Total Shareholders' Equity $ 140,758 $ 131,072 - ------------------------------------------------------------------------------------------------------------- Total Liabilities, Minority Interest in Consolidated Subsidiaries and Shareholders' Equity $ 1,586,178 $ 1,420,695 ============================================================================================================= </TABLE> See accompanying notes to unaudited condensed consolidated financial statements. 3
<TABLE> <CAPTION> CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) (Unaudited) Three months ended Six months ended 06/30/2002 06/30/2001 06/30/2002 06/30/2001 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> INTEREST AND DIVIDEND INCOME Loans $ 16,887 $ 18,032 $ 33,652 $ 36,524 Federal funds sold 45 133 101 328 Available-for-sale securities 6,517 5,352 12,162 10,193 Held-to-maturity securities 421 307 707 630 - -------------------------------------------------------------------------------------------------------------- Total Interest and Dividend Income 23,870 23,824 46,622 47,675 - -------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Deposits: Time certificates of deposits of $100,000 or more 794 2,311 1,697 5,060 Other deposits 4,991 5,346 9,605 10,947 Securities sold under agreements to repurchase and Federal funds purchased 636 765 1,275 1,672 Other borrowings 1,063 1,158 2,084 2,219 - -------------------------------------------------------------------------------------------------------------- Total Interest Expense 7,484 9,580 14,661 19,898 - -------------------------------------------------------------------------------------------------------------- Net Interest Income 16,386 14,244 31,961 27,777 - -------------------------------------------------------------------------------------------------------------- Less: Provision for loan/lease losses 435 320 811 505 - -------------------------------------------------------------------------------------------------------------- Net Interest Income After Provision for Loan/Lease Losses 15,951 13,924 31,150 27,272 - -------------------------------------------------------------------------------------------------------------- NONINTEREST INCOME Trust and investment services income 1,091 1,082 2,170 2,315 Service charges on deposit accounts 1,567 1,208 2,882 2,297 Insurance commissions and fees 1,256 1,068 2,433 2,029 Other service charges 1,259 1,133 2,358 2,136 Increase in cash surrender value of corporate owned life 289 261 600 515 insurance Other income 312 264 641 554 Net realized gain (loss) on available-for-sale securities (20) 0 (20) 6 - -------------------------------------------------------------------------------------------------------------- Total Noninterest Income 5,754 5,016 11,064 9,852 - -------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSES Salary and wages 5,510 4,980 10,942 9,741 Pension and other employee benefits 1,418 1,299 2,990 2,610 Net occupancy expense of bank premises 724 678 1,459 1,397 Furniture and fixture expense 814 779 1,632 1,507 Amortization of intangible assets 226 419 464 844 Other operating expense 4,004 3,427 7,836 6,409 - -------------------------------------------------------------------------------------------------------------- Total Noninterest Expenses 12,696 11,582 25,323 22,508 - -------------------------------------------------------------------------------------------------------------- Income Before Income Tax Expense and Minority Interest in Consolidated Subsidiaries 9,009 7,358 16,891 14,616 - -------------------------------------------------------------------------------------------------------------- Minority interest in consolidated subsidiaries 34 33 67 67 Income Tax Expense 3,053 2,552 5,697 4,984 - -------------------------------------------------------------------------------------------------------------- Net Income $ 5,922 $ 4,773 $ 11,127 $ 9,565 ============================================================================================================== Basic Earnings Per Share $ 0.80 $ 0.65 $ 1.50 $ 1.29 Diluted Earnings Per Share $ 0.78 $ 0.64 $ 1.48 $ 1.28 ============================================================================================================== </TABLE> See accompanying notes to unaudited condensed consolidated financial statements. 4
<TABLE> <CAPTION> CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Six months ended 6/30/2002 6/30/2001 --------- --------- <S> <C> <C> OPERATING ACTIVITIES Net income $ 11,127 $ 9,565 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan/lease losses 811 505 Depreciation and amortization premises, equipment, and software 1,448 1,399 Amortization of intangible assets 464 844 Earnings from corporate owned life insurance, net (576) (515) Net amortization on securities 695 90 Net realized loss (gain) on available-for-sale securities 20 (6) Net gain on sale of loans (305) (150) Proceeds from sale of loans 19,340 9,783 Loans originated for sale (18,760) (9,337) Net gain on sales of bank premises and equipment 0 (25) Issuance of treasury stock 0 10 ISOP/ESOP shares released for allocation 287 370 (Increase) decrease in accrued interest receivable (305) 1,398 Decrease in accrued interest payable (780) (1,196) Other, net 2,376 1,109 - ------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 15,842 13,844 - ------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Proceeds from maturities of available-for-sale securities 105,875 111,683 Proceeds from sales of available-for-sale securities 6,066 437 Proceeds from maturities of held-to maturity securities 6,036 6,845 Purchases of available-for-sale securities (209,055) (100,188) Purchases of held-to-maturity securities (14,407) (2,474) Net increase in loans (38,758) (38,514) Proceeds from sale of bank premises and equipment 0 27 Purchases of bank premises and equipment (2,608) (1,369) Redemption of corporate owned life insurance 448 0 Net cash used in acquisitions (21) (1,004) - ------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (146,424) (24,557) - ------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net increase in demand, money market, and savings deposits 238,040 27,076 Net decrease in time deposits (55,313) (33,964) Net (decrease) increase in securities sold under agreements to repurchase and Federal funds purchased (39,917) 7,197 Net increase in other borrowings 8,780 14,416 Cash dividends (4,148) (4,017) Common stock repurchased and returned to unissued status (1,304) (2,665) Net proceeds from exercise of stock options and related tax benefit 250 525 - ------------------------------------------------------------------------------------------------------- Net Cash Provided by Financing Activities 146,388 8,568 - ------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash and Cash Equivalents 15,806 (2,145) Cash and Cash Equivalents at beginning of Period 44,117 65,364 Total Cash & Cash Equivalents at End of Period $ 59,923 $ 63,219 ======================================================================================================= ======================================================================================================= Supplemental Information: Cash paid during the year for: Interest 15,441 21,084 Taxes 1,110 2,617 Noncash investing activities: Fair value of noncash assets acquired in purchase acquisition 0 1,504 Fair value of liabilities acquired in purchase acquisition 0 1,449 Shares issued for acquisitions 0 3,058 Securitization of loans 0 32,845 </TABLE> See accompanying notes to unaudited condensed consolidated financial statements. 5
<TABLE> <CAPTION> CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands, except share data) (Unaudited) Accumulated Other Comprehensive Common Undivided Income Treasury Unallocated Stock Surplus Profits (Loss) Stock ISOP/ESOP Total ================================================================================================================================= <S> <C> <C> <C> <C> <C> <C> <C> Balances at January 1, 2001 $ 734 $ 44,182 $ 70,894 ($ 9) ($ 473) ($ 333) $114,995 - --------------------------------------------------------------------------------------------------------------------------------- Comprehensive Income: Net Income 9,565 9,565 Other comprehensive income 1,502 1,502 -------- Total Comprehensive Income 11,067 ======== Cash dividends ($0.54/Share) (4,017) (4,017) Exercise of stock options, and related tax benefit (39,755 shares, net) 4 521 525 Common stock repurchased and returned to unissued status (94,377 shares) (9) (2,656) (2,665) Treasury stock issued (336 shares) 3 7 10 Stock issued for purchase acquisition (151,719 shares) 15 3,043 3,058 ESOP shares committed to be released for allocation (11,376 shares) 204 166 370 - --------------------------------------------------------------------------------------------------------------------------------- Balances at June 30, 2001 $ 744 $ 45,297 $ 76,442 $ 1,493 ($ 466) ($ 167) $123,343 - --------------------------------------------------------------------------------------------------------------------------------- ================================================================================================================================= Balances at January 1, 2002 $ 744 $ 45,456 $ 82,385 $ 3,039 ($ 466) ($ 86) $131,072 - --------------------------------------------------------------------------------------------------------------------------------- Comprehensive Income: Net Income 11,127 11,127 Other comprehensive income 3,474 3,474 -------- Total Comprehensive Income 14,601 ======== Cash dividends ($0.56/Share) (4,148) (4,148) Exercise of stock options and related tax benefit (11,784 shares, net) 1 249 250 Common stock repurchased and returned to unissued status (33,640 shares) (3) (1,301) (1,304) ESOP shares committed to be released for allocation (7,397 shares) 232 55 287 - --------------------------------------------------------------------------------------------------------------------------------- Balances at June 30, 2002 $ 742 $ 44,636 $ 89,364 $ 6,513 ($ 466) ($ 31) $140,758 - --------------------------------------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes to unaudited condensed consolidated financial statements. 6
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Business Tompkins Trustco, Inc. ("Tompkins" or the "Company"), is the corporate parent to three community banks, Tompkins Trust Company ("Trust Company"), The Bank of Castile, and The Mahopac National Bank ("Mahopac National Bank"), which together operate 32 banking offices in local New York State market areas served by its subsidiary banks. Headquartered in Ithaca, New York, Tompkins is registered as a Financial Holding Company with the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended. Tompkins was organized in 1995, under the laws of the State of New York, as a bank holding company for Tompkins Trust Company (formerly known as Tompkins County Trust Company), a commercial bank that has operated in Ithaca and surrounding communities since 1836. Through its community banking subsidiaries, the Company provides traditional banking services. Tompkins offers trust and investment services through Tompkins Investment Services, a division of Tompkins Trust Company. The Company also offers insurance services through its Tompkins Insurance Agencies, Inc. ("Tompkins Insurance") subsidiary, an independent agency with a history of over 100 years of service to individual and business clients throughout western New York. Each Tompkins subsidiary operates with a community focus, meeting the needs of the unique communities served. 2. Basis of Presentation The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. In the application of certain accounting policies management is required to make assumptions regarding the effect of matters that are inherently uncertain. These estimates and assumptions affect the reported amounts of certain assets, liabilities, revenues, and expenses in the consolidated financial statements. Different amounts could be reported under different conditions, or if different assumptions were used in the application of these accounting policies. The accounting policy considered critical in this respect is the determination of the reserve for loan/lease losses. In management's opinion, the unaudited condensed consolidated financial statements reflect all adjustments of a normal recurring nature. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year ended December 31, 2002. The unaudited condensed consolidated financial statements should be read in conjunction with the Company's 2001 Annual Report on Form 10-K. The consolidated financial information included herein combines the results of operations, the assets, liabilities, and shareholders' equity of the Company and its subsidiaries. Amounts in the prior period's consolidated financial statements are reclassified when necessary to conform to the current period's presentation. All significant intercompany balances and transactions are eliminated in consolidation. 7
3. Earnings Per Share A computation of Basic Earnings Per Share ("EPS") and Diluted EPS for the three and six month periods ending June 30, 2002 and 2001, is presented in the table below. <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------------- Weighted Per Three months ended June 30, 2002 Net Income Average Shares Share (In thousands except share and per share data) (Numerator) (Denominator) Amount - -------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Basic EPS Income available to common shareholders $ 5,922 7,409,957 $ 0.80 Effect of dilutive securities (Stock options) 134,785 Diluted EPS Income available to common shareholders plus assumed conversions $ 5,922 7,544,742 $ 0.78 - -------------------------------------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------------- Weighted Per Three months ended June 30, 2001 Net Income Average Shares Share (In thousands except share and per share data) (Numerator) (Denominator) Amount - -------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Basic EPS Income available to common shareholders $ 4,773 7,395,260 $ 0.65 Effect of dilutive securities (Stock options) 108,077 Diluted EPS Income available to common shareholders plus assumed conversions $ 4,773 7,503,337 $ 0.64 - -------------------------------------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------------- Weighted Per Six months ended June 30, 2002 Net Income Average Shares Share (In thousands except share and per share data) (Numerator) (Denominator) Amount - -------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Basic EPS Income available to common shareholders $ 11,127 7,410,642 $ 1.50 Effect of dilutive securities (Stock options) 131,842 Diluted EPS Income available to common shareholders plus assumed conversions $ 11,127 7,542,484 $ 1.48 - -------------------------------------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------------- Weighted Per Six months ended June 30, 2001 Net Income Average Shares Share (In thousands except share and per share data) (Numerator) (Denominator) Amount - -------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Basic EPS Income available to common shareholders $ 9,565 7,400,228 $ 1.29 Effect of dilutive securities (Stock options) 87,801 Diluted EPS Income available to common shareholders plus assumed conversions $ 9,565 7,488,029 $ 1.28 - -------------------------------------------------------------------------------------------------------- </TABLE> The effect of dilutive securities calculation for 2001 excludes weighted average options of 2,000 because the exercise price of the options was greater than the average market value during the period. 8
4. Comprehensive Income (Loss) <TABLE> <CAPTION> Three months ended Six months ended (in thousands) 6/30/2002 6/30/2001 06/30/2002 06/30/2001 - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net Income $ 5,922 $ 4,773 $ 11,127 $ 9,565 - ------------------------------------------------------------------------------------------------------------- Net unrealized holding gains (losses) during the period 5,753 (522) 3,462 1,506 Memo: Pre-tax net unrealized holding gain (loss) 9,588 (870) 5,770 2,510 Reclassification adjustment for net realized loss (gain) on available-for-sale securities 12 0 12 (4) Memo: Pretax net realized loss (gain) 20 0 20 (6) - ------------------------------------------------------------------------------------------------------------- Other Comprehensive Income (Loss) 5,765 (522) 3,474 1,502 - ------------------------------------------------------------------------------------------------------------- Total Comprehensive Income $ 11,687 $ 4,251 $ 14,601 $ 11,067 ============================================================================================================= </TABLE> 5. Recent Accounting Pronouncements ACCOUNTING FOR BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE ASSETS: In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also specifies the criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Effective January 1, 2002, SFAS No. 121 was superseded by SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Currently, the FASB has stated that the unidentifiable intangible asset acquired in the acquisition of a bank or thrift (including acquisitions of branches), where the fair value of the liabilities assumed exceeds the fair value of the assets acquired, should continue to be accounted for under SFAS No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions. Under SFAS No. 72, all of the intangible assets associated with branch acquisitions recorded on the Company's consolidated balance sheet as of December 31, 2001 will continue to be amortized. The FASB has announced that additional research will be performed to decide whether unidentifiable intangible assets recorded under SFAS No. 72 should be accounted for similarly to goodwill under SFAS No. 142. However, issuance of final opinion with respect to this matter is not expected until the fourth quarter of 2002. The Company adopted the provisions of SFAS No. 141 in 2001. The adoption of SFAS No. 141 did not have an impact on the Company's consolidated financial statements. The Company adopted the provisions of SFAS No. 142 effective January 1, 2002. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 continued to be amortized prior to the adoption of SFAS No. 142. SFAS No. 141 requires upon adoption of SFAS No. 142, that the company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and 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 to be recognized as a result of adopting SFAS 142. 9
At December 31, 2001, the Company had unamortized goodwill related to its various acquisitions totaling $9.7 million. In accordance with SFAS No. 142, the Company no longer amortizes this goodwill subsequent to December 31, 2001. At December 31, 2001, the Company had core deposit intangible assets related to various acquisitions of $3.5 million. In accordance with SFAS No. 142, these intangible assets continue to be amortized. At December 31, 2001, other intangible assets totaled $956,000, which included mortgage servicing intangible assets of $663,000. Also included in this amount were approximately $234,000 of unidentified intangible assets related to various branch acquisitions accounted for under SFAS No. 72. These intangible assets are currently excluded from the scope of SFAS No. 142. As noted above, while the FASB is reconsidering the exclusion of this type of intangible asset from the scope of SFAS No. 142, at the present time this intangible asset continues to be amortized. 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 June 30, 2002 (In thousands) Amount Amortization Amount - ---------------------------------------------------------------------------------------------- <S> <C> <C> <C> Amortized intangible assets: - ---------------------------------------------------------------------------------------------- Core deposit intangible $ 5,459 $ 2,411 $ 3,048 - ---------------------------------------------------------------------------------------------- Other intangibles 2,288 1,362 926 - ---------------------------------------------------------------------------------------------- Subtotal amortized intangible assets 7,747 3,773 3,974 - ---------------------------------------------------------------------------------------------- Goodwill 10,479 802 9,677 - ---------------------------------------------------------------------------------------------- Total intangible assets $18,226 $ 4,575 $13,651 - ---------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------- Aggregate amortization expense: * - ---------------------------------------------------------------------------------------------- For the year to date period ended 6/30/02 * $ 464 - ---------------------------------------------------------------------------------------------- Estimated amortization expense: * - ---------------------------------------------------------------------------------------------- For the year ended 12/31/02 972 - ---------------------------------------------------------------------------------------------- For the year ended 12/31/03 859 - ---------------------------------------------------------------------------------------------- For the year ended 12/31/04 744 - ---------------------------------------------------------------------------------------------- For the year ended 12/31/05 564 - ---------------------------------------------------------------------------------------------- For the year ended 12/31/06 449 - ---------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------- </TABLE> * Aggregate amortization expense for the period does not include the amortization of mortgage servicing rights. Estimated amortization expense for the five years does include mortgage servicing rights amortization. Goodwill and other intangible assets - Effect of adoption of SFAS No. 142 - -------------------------------------------------------------------------------- (In thousands, except per share data) Three months ended Six months ended - -------------------------------------------------------------------------------- June 30, 2001 June 30, 2001 - -------------------------------------------------------------------------------- Reported Net Income $ 4,773 $ 9,565 - -------------------------------------------------------------------------------- Add back goodwill amortization 130 259 - -------------------------------------------------------------------------------- Adjusted Net Income 4,903 9,824 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Basic earning per share - as reported $ 0.65 $ 1.29 - -------------------------------------------------------------------------------- Adjust for goodwill 0.02 0.04 - -------------------------------------------------------------------------------- Basic earnings per share - adjusted 0.67 1.33 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Diluted earning per share - as reported $ 0.64 $ 1.28 - -------------------------------------------------------------------------------- Adjust for goodwill 0.02 0.03 - -------------------------------------------------------------------------------- Diluted earnings per share - adjusted 0.66 1.31 - -------------------------------------------------------------------------------- 10
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS: In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, that replaces SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, are to be applied prospectively. The adoption of SFAS No. 144 on January 1, 2002, did not have a material impact on the Company's financial condition or results of operations. RESCISSION OF FASB STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS: In May 2002, the Financial Accounting Standards Board issued SFAS No. 145, Rescission of FASB No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. The provisions of SFAS No. 145 are generally effective for financial statements issued for fiscal years beginning after May 15, 2002. The adoption of SFAS No. 145 is not expected to have a material impact on the Company's financial condition or results of operations. ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES: In July 2002, the Financial Accounting Standards Board issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. The provisions of SFAS No. 146 are effective for exit or disposal activities initiated after December 31, 2002, on a prospective basis. 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS ----------------------------------------------------------------------- OF OPERATIONS ------------- OVERVIEW Tompkins Trustco, Inc. ("Tompkins" or "the Company") was organized in 1995, as the parent company of Tompkins Trust Company (formerly known as Tompkins County Trust Company), which traces its charter back to 1836. On December 31, 1999, the Company completed a merger with Letchworth Independent Bancshares Corporation ("Letchworth"), at which time Letchworth was merged with and into Tompkins. Upon completion of the merger, Letchworth's two subsidiary banks, The Bank of Castile and The Mahopac National Bank ("Mahopac National Bank"), became subsidiaries of Tompkins. Effective January 1, 2001, the Company completed the acquisition of 100% of the common stock of Austin, Hardie, Wise Agency, Inc. and Ernest Townsend & Son, Inc., in a cash and stock transaction accounted for as a purchase. The two agencies have been merged with and into Tompkins Insurance Agencies, Inc. (Tompkins Insurance), a wholly-owned subsidiary of Tompkins. The agencies primarily offer property and casualty insurance to individuals and businesses in Western New York State. Tompkins Insurance has six offices located in the towns of Attica, Warsaw, Alden, LeRoy, Batavia and Caledonia. Further details pertaining to the mergers and acquisitions are presented in Note 2 to the Company's 2001 Annual Report on Form 10-K. Through its community bank subsidiaries, the Company provides traditional banking related services, which constitute the Company's only business segment. Banking services consist primarily of attracting deposits from the areas served by its banking offices and using those deposits to originate a variety of commercial loans, consumer loans, real estate loans (including commercial loans collateralized by real estate), and leases, and providing trust and investment related services. The Company's principal expenses are interest on deposits, interest on borrowings, and operating and general administrative expenses, as well as provisions for loan/lease losses. Funding sources, other than deposits, include borrowings, securities sold under agreements to repurchase, and cash flow from lending and investing activities. The Company conducts trust and investment services through Tompkins Investment Services, a division of Tompkins Trust Company. Tompkins Investment Services provides trust and investment services, including investment management accounts, custody accounts, trusts, retirement plans and rollovers, estate settlement, and financial planning. Tompkins Insurance services primarily consist of property and casualty insurance for individuals and businesses, which complement the services offered through the Company's banking subsidiaries. The following discussion is intended to provide the reader with a further understanding of the consolidated financial condition and results of operations of Tompkins Trustco, Inc. and its operating subsidiaries. It should be read in conjunction with the Company's Form 10-K and related notes for the year ended December 31, 2001, and the unaudited condensed consolidated financial statements and notes included elsewhere in this report. Forward-Looking Statements This report may include forward-looking statements with respect to revenue sources, growth, market risk, and corporate objectives. The Company assumes no duty, and specifically disclaims any obligation, to update forward-looking statements, and cautions that these statements are subject to numerous assumptions, risk, and uncertainties, all of which could change over time. Actual results could differ materially from forward-looking statements. 12
RESULTS OF OPERATIONS For the quarter ended June 30, 2002, net income was $5.9 million, an increase of 24.1% over the same period in 2001. Diluted earnings per share was $0.78 for second quarter of 2002, compared to $0.64 for the same period in 2001. The Company's key performance ratios remain strong. Return on average assets (ROA) for the quarter ended June 30, 2002, was 1.51%, compared to 1.44% for the same period in 2001. Return on average shareholders' equity (ROAE) for the second quarter was of 2002 was 17.56%, compared to 15.66% for the same period in 2001. Net income for the six month period ended June 30, 2002, was $11.1 million, an increase of 16.3% over the same period in 2001. Diluted earnings per share was $1.48 for first six months of 2002, compared to $1.28 for the same period in 2001. Return on average assets (ROA) for the first six months of 2002 was 1.47%, compared to 1.47% for the same period in 2001. Return on average shareholders' equity (ROAE) for the first six months of 2002 was 16.72%, compared to 16.08% for the same period in 2001. The improvement in ROAE is attributable to the 16.3% growth in net income outpacing the 11.9% growth in average equity. Management also monitors earnings on a cash basis, which excludes amortization of intangible assets, net of applicable tax benefit. Cash earnings for the second quarter increased by 19.3% to $6.1 million, or $0.80 per diluted share. For the six months ended June 30, 2002, cash earnings increased by 12.1% to $11.4 million, or $1.51 per diluted share. ROAE measured on a cash basis was 17.11% for the six months of 2002, compared to 17.02% for the same period in 2001. On January 1, 2002, the Company adopted Statement of Financial Accounting Standard No. 142 (SFAS No. 142), Goodwill and Other Intangible Assets. The effect of adopting SFAS No. 142 is a $130,000 reduction in goodwill amortization expense in the second quarter of 2002 as compared to the second quarter of 2001. In the first six months of 2002, the adoption of SFAS 142 resulted in a $259,000 reduction in goodwill amortization expense as compared to the same period of 2001. If SFAS No. 142 had not been adopted on January 1, 2002, then goodwill amortization expense would have been $304,000 in the first six months of 2002 due to additions to goodwill subsequent to June 30, 2001. The Company continues to amortize other identifiable intangible assets (primarily core deposit intangibles), for which the Company recorded pre-tax amortization expense of $464,000 in the first six months of 2002, compared to $585,000 for the first six months of 2001. Net Interest Income The attached Average Consolidated Balance Sheet and Net Interest Analysis illustrates the trend in average interest-earning assets and interest-bearing liabilities, and the corresponding yield or cost associated with each. The Company earned tax-equivalent net interest income of $17.0 million for the three months ended June 30,,2002, an increase of 15.2% over the same period in 2001. An increased volume of earning assets helped offset a decline in net interest margin in the current quarter. The net interest margin for the quarter declined from 4.86% in 2001, to 4.69% in 2002. Year-to-date June 30, 2002, the Company earned tax-equivalent net interest income of $33.1 million, an increase of 14.8% over the first six months of 2001. Net interest margin for the six months ended June 30, 2002, was 4.74%, down from 4.82% for the same period in 2001. A declining trend in interest rates has resulted in declines in both the yield on earning assets and the cost of interest-bearing liabilities. The yield on earning assets declined from 8.15% for the first six month of 2001, to 6.84% for the same period in 2002. The cost of interest bearing liabilities declined from 4.09% to 2.57% over the same period. Average earning assets as of June 30, 2002, increased $202.0 million, or 16.8% over the same period in 2001. Growth in earning assets included steady growth in commercial lending products. Between June 30, 2001, and June 30, 2002, average balances for commercial real estate loans, commercial loans, and commercial leases increased by $17.5 million, $35.3 million, and $2.9 million, respectively. These commercial lending products represented 47.8% of average loans at June 30, 2002, up from 44.6% of average loans at June 30, 2001. Management continues to emphasize commercial services, as these commercial loan products are typically attractive to the Company from a yield and interest rate risk management perspective. Application volumes for residential mortgages over the past 12 months remained strong, contributing to a $31.2 million increase in average residential real estate loans. Average loans for the first half of 2002 are net of $19.0 million in loans sold during the first six months of 2002. 13
Average securities (excluding changes in unrealized gains and losses on available-for-sale securities) increased by $125.0 million from the first six months of 2001. Growth in the securities portfolio include a $23.5 million increase in average U.S. Government agency securities, and a $83.6 million increase in U.S. Government mortgage-backed securities. Asset growth in 2002 was funded primarily with core deposits (total deposits, less: brokered deposits, municipal money market deposits, and time deposits of $100,000 or more). Core deposits increased by 20.2% from an average balance of $836.8 million for the first half of 2001, to $1.0 billion for the first half of 2002. Core deposits represent the Company's largest and lowest cost funding source, with average core deposits representing 72.2% of average liabilities for the first six months of 2002. This compares to 70.1% for the same period in 2001. Non-core funding sources (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) represent an additional source of funds to support asset growth. Average balances on these non-core funding sources decreased by $30.4 million between the first half of 2001 to the first half of 2002. The cost of interest-bearing liabilities declined from 4.09% for the six months ended June 30, 2001, to 2.57% for the first six months of 2002. 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 of $811,000 for the first six months of 2002, is up from $505,000 for the same period in 2001. The increase in the provision for loan/lease losses in the first half of 2002 is attributable to an increase in net charge-offs, a modest increase in the dollar volume of nonperforming loans, as well as continued growth in the loan portfolio. Net charge-offs were $462,000 for the first six months of 2002, compared to $60,000 in 2001. Net charge-offs in 2001 benefited from a $320,000 recovery in the first quarter. The reserve for loan/lease losses as a percentage of period end loans was 1.19% at June 30, 2002, and 1.20% at December 31, 2001. Noninterest Income Management continues to emphasize noninterest income as an important component of the Company's future success. Noninterest income for the six months ended June 30, 2002, was $11.1 million, an increase of 12.3% over the same period in 2001. Year-to-date June 30, 2002, noninterest income represented 25.1% of total revenue, compared to 25.5% for the same period last year. Noninterest income for the three months ended June 30, 2002, was $5.8 million, an increase of 14.7% over the same period in 2001. The Tompkins Investment Services Division of Tompkins 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 nearly 40 states. Recently, Tompkins Investment Services expanded its marketing efforts and has dedicated staff to serve clients in The Bank of Castile and Mahopac National Bank markets. Trends for new business in trust and investments services remain positive, although the general downward trend in national stock markets has caused earnings to decline in the first half of 2002, when compared to the prior year. The market value of assets managed by, or in custody of, Tompkins Investment Services was approximately $1.2 billion at June 30, 2002, relatively unchanged from the prior year. Trust and Investment Services income was $2.2 million in the first six months of 2002, compared to $2.3 million in the first six months of 2001. For the second quarter 2002, Trust and Investment Services income of $1.1 million was up approximately $9,000 over the same period last year. Tompkins Insurance is an independent agency, representing 22 major insurance carriers with access to special risk property and liability markets. Tompkins Insurance has sophisticated 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. The agency primarily offers property and casualty insurance to individuals and businesses in Western New York State. Commission and fee income from Tompkins Insurance was $2.4 million for the first half of 2002, up 19.9% from the same period last year. For the second quarter of 2002, commission and fee income from Tompkins Insurance was $1.3 million, up 17.6% over the prior year. Service charges on deposit accounts were $2.9 million for the six month period ended June 30, 2002, compared to $2.3 million for the same period in 2001. For the second quarter of 2002, service charges on deposits were $1.6 million, an increase of $359,000 over the same quarter last year. The increase in 2002 is largely due to the increase in deposit accounts. 14
The average dollar volume of noninterest-bearing accounts increased by 16.1% between June 30, 2001 and June 30, 2002. Also contributing to the year-over-year increase were fee increases for certain deposit related services, which were implemented in March 2001. Income from card services, included in other service charges on the consolidated statements of income, continues to be an important source of revenue. The Company continues to expand its product offerings to better serve the needs of customers. Card services products include traditional credit cards, purchasing cards, debit cards, and merchant card processing. Income associated with card services was $1.4 million for the six months ended June 30, 2002, an increase of approximately 15.9% from the six months of 2001. Card services income was $745,000 in the second quarter of 2002, an increase of 16.2% over the same quarter last year. Other income for the first half of 2002 includes $600,000 of income relating to increases in the cash surrender value of corporate owned life insurance (COLI). This compares to $515,000 for the same period in 2001. The corporate owned life insurance relates to life insurance and other benefits provided to certain senior officers of the Company and its subsidiaries. The Company's average investment in COLI was $20.5 million for the six month period ended June 30, 2002, compared to $18.8 million for the same period in 2001. Increases in the cash surrender value of insurance are reflected as other income, net of the related mortality expense. The current historically low interest rate environment resulted in record mortgage application volume for the Company in 2001, and has continued in 2002. As a result of this record application volume, which included a high percentage of applications to refinance loans currently serviced by Tompkins, the volume of residential mortgage loan sales increased from $9.6 million in the first half of 2001 to $19.0 million in 2002. Net gains from loan sales are included in other income and amounted to $305,000 in the first half of 2002, compared to $150,000 for the same period in 2001. Noninterest Expenses Total noninterest expenses were $25.3 million for the six months of 2002, an increase of 12.5% over the same period in 2001. For the second quarter of 2002, noninterest expenses were $12.7 million, up 9.6% over the prior year. The increase in noninterest expense in the first half of 2002 is largely due to higher personnel-related costs, which were up by 12.8%, or $1.6 million over the first half of 2001. Personnel-related expenses comprise the largest segment of other expense, representing approximately 55.0% of operating expense in the first six months of 2002. The increase in personnel-related expenses is attributable to a variety of factors including an increased number of employees, as well as higher benefit related costs for medical insurance and pensions. Expenses related to bank premises and furniture and fixtures totaled $3.1 million for the first half of 2002, and increase of 6.4% over the same period last year. A portion of the increase is attributable to the October 2001 opening of the Hopewell Junction office of Mahopac National Bank. Amortization expense decreased from $844,000 in the first six months of 2001, to $464,000 in the first six months of 2002. The decline in amortization is primarily attributable to the adoption of SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. The adoption of SFAS No. 142 has resulted in a $259,000 reduction in goodwill amortization expense in the first half of 2002 as compared to the same period last year. If SFAS No. 142 had not been adopted on January 1, 2002, then goodwill amortization expense would have been $304,000 in the first half of 2002. At June 30, 2002, the Company had unamortized goodwill related to its various acquisitions totaling $9.7 million. A evaluation of impairment of the Company's goodwill assets indicates that these assets were not impaired as of December 31, 2001. At June 30, 2002, the Company had other identifiable intangible assets (primarily core deposit intangibles) related to various acquisitions of $3.3 million. The amortization of these intangible assets amounted to $464,000 for the six months ended June 30, 2002, and $585,000 for the same period in 2001. In accordance with SFAS No. 142, these intangible assets continue to be amortized. Other operating expense amounted to $7.8 million in the first half of 2002, compared to $6.4 million for the same period in 2001. Along with increases in variable expenses associated with increased business volumes, software license 15
and maintenance fees were up $194,000, and marketing expenses were up $240,000, contributing to the growth in other operating expenses. Income Tax Expense The provision for income taxes provides for Federal and New York State income taxes. The provision for the six months ended June 30, 2002, was $5.7 million, compared to $5.0 million in 2001. The increased provision is primarily due to increased levels of taxable income. The effective tax rate for the first six months of 2002 was 33.7 percent, compared to 34.1% for the same period in 2001. FINANCIAL CONDITION The Company's total assets were $1.6 billion at June 30, 2002, representing an increase of $165.5 million over total assets reported as of December 31, 2001. Asset growth since year end has been largely centered in short-term investments. The available-for-sale securities portfolio (at amortized cost) increased by $96.5 million since year end. Loan originations were reasonably strong in the first half of 2002, with total loans of $927.9 million reflecting an increase of $38.0 million since year end 2001. Growth during the first half of 2002, is net of $19.0 million in sales of fixed rate residential mortgage loans. A $10.5 million increase in Federal funds sold also added to asset growth in the first half of 2002. Asset growth was largely driven by strong deposit growth during the first half of 2002, as deposits increased by $182.7 million, to $1.3 billion at June 30, 2002. Capital Total shareholders' equity grew to $140.8 million in the first half of 2002, an increase of $9.7 million from December 31, 2001. Undivided profits at June 30, 2002, were up $7.0 million from December 31, 2001, while other comprehensive income was up $3.5 million. Tangible book value per share increased from $15.77 at December 31, 2001, to $17.19 at June 30, 2002. Cash dividends paid in the first six months of 2002 totaled approximately $4.1 million, representing 37.3% of year to date earnings. Per share cash dividends of $0.56 for the first six months of 2002, were up from $0.54 for the same period in 2001. The Company has a stock repurchase plan (the "Plan"), which was approved by the board of directors on August 15, 2000. The Plan authorizes the repurchase of up to 400,000 shares over a two year period. As of June 30, 2002, 278,943 shares had been repurchased at an average price of $29.23 per share. There were 33,640 shares purchased under the Plan in the first half of 2002, at an average price of $38.76 per share. The Company and its banking subsidiaries are subject to various regulatory capital requirements administered by Federal banking agencies. Management believes the Company and its subsidiaries meet all capital adequacy requirements to which they are subject. The table below reflects the Company's capital position at June 30, 2002, compared to the regulatory capital requirements for "well capitalized" institutions. 16
REGULATORY CAPITAL ANALYSIS - June 30, 2002 - -------------------------------------------------------------------------------- Actual Well Capitalized Requirement (Dollar amounts in thousands) Amount Ratio Amount Ratio - -------------------------------------------------------------------------------- Total Capital (to risk weighted assets) $134,979 13.8% $ 97,589 10.0% Tier I Capital (to risk weighted assets) $123,924 12.7% $ 58,553 6.0% Tier I Capital (to average assets) $123,924 8.0% $ 77,902 5.0% - -------------------------------------------------------------------------------- As illustrated above, the Company's capital ratios on June 30, 2002, remain well above the minimum requirement for well capitalized institutions. As of June 30, 2002, the capital ratios for each of the Company's subsidiary banks also exceeded the minimum levels required to be considered well capitalized. Reserve for Loan/Lease Losses and Nonperforming Assets 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 and lease portfolio; comments received during the course of independent examinations; current local economic conditions; past due and nonperforming loan statistics; estimated collateral values; and a historical review of loan and lease loss experience. Based upon consideration of the above factors, management believes that the reserve is adequate to provide for the risk of loss inherent in the current loan and lease portfolio. Activity in the Company's reserve for loan/lease losses during the first six months of 2002 and 2001 is illustrated in the table below. <TABLE> <CAPTION> ANALYSIS OF THE RESERVE FOR LOAN/LEASE LOSSES (In thousands) - ----------------------------------------------------------------------------------- June 30, 2002 June, 30, 2001 - ----------------------------------------------------------------------------------- <S> <C> <C> Average Loans and Leases Outstanding Year to Date $ 902,720 $ 843,335 - ----------------------------------------------------------------------------------- Beginning Balance 10,706 9,824 - ----------------------------------------------------------------------------------- Provision for loan losses 811 505 Loans charged off (657) (571) Loan recoveries 195 511 - ----------------------------------------------------------------------------------- Net charge-offs 462 60 - ----------------------------------------------------------------------------------- Ending Balance $ 11,055 $ 10,269 =================================================================================== </TABLE> The reserve represented 1.19% of total loans and leases outstanding at June 30, 2002, down slightly from 1.21% at June 30, 2001. The reserve coverage of nonperforming loans (loans past due 90 days and accruing, nonaccrual loans, and restructured troubled debt) increased from 1.68 times at June 30, 2001, to 1.73 times at June 30, 2002. Management is committed to early recognition of loan problems and to maintaining an adequate reserve. The level of nonperforming assets at June 30, 2002 and 2001 is illustrated in the table below. Nonperforming assets of $6.6 million as of June 30, 2002, reflect an increase of $476,000 from June 30, 2001. Despite the increase in nonperforming assets from June 30, 2001, the current level of nonperforming assets remains modest at 0.42% of total assets. Approximately $344,000 of the nonperforming loans at June 30, 2002, were secured by U.S. Government guarantees, while $1.4 million were secured by one to four family residential properties. 17
<TABLE> <CAPTION> NONPERFORMING ASSETS (In thousands) - -------------------------------------------------------------------------------------------- June 30, 2002 June 30, 2001 - -------------------------------------------------------------------------------------------- <S> <C> <C> Nonaccrual loans $ 6,152 $ 4,572 Loans past due 90 days and accruing 40 1,145 Troubled debt restructuring not included above 180 383 - -------------------------------------------------------------------------------------------- Total nonperforming loans 6,372 6,100 - -------------------------------------------------------------------------------------------- Other real estate, net of allowances 267 63 - -------------------------------------------------------------------------------------------- Total nonperforming assets $ 6,639 $ 6,163 ============================================================================================ Total nonperforming loans as a percent of total loans 0.69% 0.72% Total nonperforming assets as a percentage of total assets 0.42% 0.46% ============================================================================================ </TABLE> Deposits and Other Liabilities Total deposits were $1.3 billion on June 30, 2002, up 16.8% from December 31, 2001. Core deposits, which include demand deposits, savings accounts, non-municipal money market accounts, and time deposits of less than $100,000 represent the primary funding source for the Company. As of June 30, 2002, core deposits of $1.0 billion represented 71.8% of total liabilities. This compares to core deposits of $925.8 million, representing 71.9% of total liabilities at December 31, 2001. Deposit growth was aided by the opening of the Hopewell Office of Mahopac National Bank in October of 2001. In July of 2002, Mahopac National Bank opened an office in the Town of LaGrange, a suburb of Poughkeepsie, New York. The LaGrange Office is the second in Dutchess County and our 32nd office Company-wide. Non-core funding sources for the company include: time deposits greater than $100,000, municipal money market deposits, brokered deposits, securities sold under repurchase agreements, Federal funds purchased, and other borrowings. These non-core funding sources totaled $388.1 million at June 30, 2002, up from $372.5 million at December 31, 2001. The majority of the increase was in municipal money market accounts, which was partially offset by a decline in time deposits greater than $100,000. Other borrowings, consisting of term borrowings from the Federal Home Loan Bank (FHLB), increased from $75.6 million at December 31, 2001, to $84.3 million at June 30, 2002. Liquidity Liquidity represents the Company's ability to efficiently and economically accommodate decreases in deposits and other liabilities, and fund increases in assets. The Company uses a variety of resources to meet its liquidity needs which include cash and cash equivalents, short term investments, cash flow from lending and investing activities, deposit growth, securities sold under repurchase agreements, and borrowings. Cash and cash equivalents totaled $59.9 million as of June 30, 2002, up from $44.1 million at December 31, 2001. Short term investments, consisting of securities due in one year or less and Federal funds sold, increased from $23.9 million on December 31, 2001, to $43.5 million on June 30, 2002. Securities pledged to secure certain large deposits and securities sold under repurchase agreements were 67.4% of total securities as of June 30, 2002, compared to 72.3% as of December 31, 2001. 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 June 30, 2002, the unused borrowing capacity on established lines with the FHLB was $137.9 million. As members of the FHLB, the Company's subsidiary banks can use certain unencumbered mortgage-related assets to secure additional borrowings from the FHLB. At June 30, 2002, total residential mortgage loans of the Company were $354.0 million, the majority of which are available as collateral for FHLB borrowings. 18
Item 3. Quantitative and Qualitative Disclosure About Market Risk --------------------------------------------------------- Interest rate risk is the primary market risk category associated with the Company's operations. Interest rate risk refers to the volatility of earnings caused by changes in interest rates. Each month the Asset/Liability Management Committee estimates the likely impact on earnings resulting from various changing interest rate scenarios. The findings of the committee are incorporated into the investment and funding decisions of the Company. The table below is a Condensed Static Gap Report, which illustrates the anticipated repricing intervals of assets and liabilities as of June 30, 2002. <TABLE> <CAPTION> Condensed Static Gap - June 30, 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 $ 1,450,062 $ 362,498 $ 89,569 $ 173,552 $ 625,619 Interest-bearing liabilities 1,167,394 526,953 67,869 104,604 699,426 - ---------------------------------------------------------------------------------------------------------------------------- Net gap position (164,455) 21,700 68,948 (73,807) - ---------------------------------------------------------------------------------------------------------------------------- Net gap position as a percentage of total assets (10.37%) 1.37% 4.35% (4.65%) ============================================================================================================================ </TABLE> The analysis reflects a slightly liability sensitive position, suggesting that earnings would benefit from a declining interest rate environment and would be hindered by a rising rate environment. Due to the current low interest rate environment; however, simulation models suggest that the Company's earnings could suffer in a declining rate environment as well, as asset yields have more room to decline than costs on the Company's funding sources. The board of directors has set a policy that the Company's interest rate risk exposure will remain within a range whereby net interest income will not decline by more than 10% in one year as a result of a 200 basis point change in rates. Based upon the simulation analysis performed as of June 30, 2002, a 200 basis point upward shift in interest rates over a one-year time frame would result in a one-year decline in net interest income of approximately 2.88%, assuming no balance sheet growth and no management action to address balance sheet mismatches. The same simulation indicates that a 100 basis point decline in interest rates over a one-year period would result in a decrease in net interest income of 0.76%. 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. While the analysis reflects some exposure to changes in interest rates, management believes the exposure is not significant in relation to the earnings and capital strength of the Company. 19
<TABLE> <CAPTION> TOMPKINS TRUSTCO, INC. Average Consolidated Balance Sheet and Net Interest Analysis Quarter Ended Year to Date Period Ended Year to Date Period Ended Jun-02 Jun-02 Jun-01 - ------------------------------------------------------------------------------------------------------------------------------------ Average Average Average Average Average Average Balance Yield/ Balance Yield/ Balance Yield/ (Dollar amounts in thousands) (QTD) Interest Rate (YTD) Interest Rate (YTD) Interest Rate - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> ASSETS - ------------------------------- Interest-earning assets Securities (1) U.S. Government Securities 400,031 5,554 5.57% 366,898 10,347 5.69% 259,875 8,547 6.63% State and municipal (2) 81,588 1,505 7.40% 76,755 2,726 7.16% 69,425 2,609 7.58% Other Securities (2) 48,951 453 3.71% 47,863 829 3.49% 19,351 631 6.58% ---------------------------------------------------------------------------------------------------- Total securities 530,570 7,512 5.68% 491,516 13,902 5.70% 348,651 11,787 6.82% Federal Funds Sold 10,424 45 1.73% 12,225 101 1.67% 12,466 328 5.31% Loans, net of unearned income (3) Real Estate 540,389 9,919 7.36% 532,965 19,818 7.50% 509,316 20,911 8.28% Commercial Loans (2) 245,684 4,088 6.67% 240,872 8,011 6.71% 205,537 9,384 9.21% Consumer Loans 107,382 2,550 9.52% 109,674 5,149 9.47% 110,031 5,541 10.16% Direct Lease Financing 18,821 367 7.82% 19,209 748 7.85% 18,452 742 8.11% ---------------------------------------------------------------------------------------------------- Total loans, net of unearned income 912,276 16,924 7.44% 902,720 33,726 7.53% 843,336 36,578 8.75% ---------------------------------------------------------------------------------------------------- Total interest-earning assets 1,453,270 24,481 6.76% 1,406,461 47,729 6.84% 1,204,453 48,693 8.15% ---------------------------------------------------------------------------------------------------- Other assets 121,322 122,316 110,548 ---------- ---------- ---------- Total assets $1,574,592 $1,528,777 $1,315,001 ========== ========== ========== - ------------------------------------------------------------------------------------------------------------------------------------ LIABILITIES & SHAREHOLDERS' EQUITY - ------------------------------- Deposits Interest-bearing deposits Interest bearing checking, savings, & money market 677,901 2,712 1.60% 624,920 4,904 1.58% 414,029 4,273 2.08% Time Dep > $100,000 100,267 794 3.18% 111,273 1,697 3.08% 187,377 5,060 5.45% Time Dep < $100,000 242,116 2,162 3.58% 241,665 4,489 3.75% 236,287 6,606 5.64% Brokered Time Dep < $100,000 13,034 117 3.60% 11,700 212 3.65% 2,928 68 4.68% ---------------------------------------------------------------------------------------------------- Total interest-bearing deposits 1,033,318 5,785 2.25% 989,558 11,302 2.30% 840,621 16,007 3.84% Federal funds purchased & securities sold under agreements to repurchase 71,139 636 3.59% 76,948 1,275 3.34% 64,414 1,672 5.23% Other borrowings 83,199 1,063 5.12% 82,527 2,084 5.09% 75,870 2,219 5.90% ---------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 1,187,656 7,484 2.53% 1,149,033 14,661 2.57% 980,905 19,898 4.09% Noninterest bearing deposits 234,359 228,068 196,411 Minority Interest 1,529 1,518 1,517 Accrued expenses and other liabilities 15,803 15,976 16,214 ---------- ---------- ---------- Total liabilities 1,439,347 1,394,595 1,195,047 Shareholders' equity 135,245 134,182 119,954 Total liabilities and ---------- ---------- ---------- shareholders' equity $1,574,592 $1,528,777 $1,315,001 ========== ========== ========== Interest rate spread 4.23% 4.27% 4.06% Net interest income/margin on earning assets $ 16,997 4.69% $ 33,068 4.74% $ 28,795 4.82% - ------------------------------------------------------------------------------------------------------------------------------------ </TABLE> (1) Average balances and yields exclude unrealized gains and losses on available-for-sale securities. (2) Interest income includes the effects of taxable-equivalent adjustments using a blended Federal and State income tax rate of 40% to increase tax exempt interest income to a taxable-equivalent basis. (3) Nonaccrual loans are included in the average loans totals presented above. Payments received on nonaccrual loans have been recognized as disclosed in Note 1 to the Company's Annual Report on Form 10-K dated December 31, 2001. 20
PART II - OTHER INFORMATION ITEM 1. Legal Proceedings ----------------- None ITEM 2. Changes in Securities and Use of Proceeds ----------------------------------------- None ITEM 3. Defaults on Senior Securities ----------------------------- None ITEM 4. Submission of Matters to a Vote by Security Holders --------------------------------------------------- The Annual Meeting of stockholders of the Company was held on May 14, 2002 (the "Annual Meeting"). Proxies for the Annual Meeting were solicited pursuant to Regulation 14 under the Securities and Exchange Act of 1934, as amended. The election of four directors for three-year terms was approved at the Annual Meeting. Directors John E. Alexander, Edward C. Hooks, Hunter R. Rawlings, III and Craig Yunker were each elected to a term of three years which expires in the year 2005. James J. Byrnes, James W. Fulmer, Reeder D. Gates, William W. Griswold, James R. Hardie, Bonnie H. Howell, Thomas R. Salm, Michael H. Spain and William D. Spain, Jr. will continue as Directors. ITEM 5. Other Information ----------------- None ITEM 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits 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 (b) Reports on Form 8-K None 21
SIGNATURES Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: August 5, 2002 TOMPKINS TRUSTCO, INC. By: /s/ JAMES J. BYRNES ------------------------- James J. Byrnes Chairman of the Board, Chief Executive Officer By: /s/ FRANCIS M. FETSKO ------------------------- Francis M. Fetsko Senior Vice President and Chief Financial Officer 22
EXHIBIT INDEX ------------- EXHIBIT NUMBER DESCRIPTION PAGES - -------------- ----------- ----- 99.1 Certification of the Chief Executive Officer Pursuant 24 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 25 to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act 2002 23