(7) Accumulated Other Comprehensive (Loss) Income
The following is a summary of the accumulated other comprehensive loss balances, net of tax:
| | Three months ended 9/30/15 | |
| (dollars in thousands) | | Balance at 7/1/2015 | | | Other Comprehensive Income- Before Reclassifications | | | Amount reclassified from Accumulated Other Comprehensive Loss | | | Other Comprehensive Income- Three months ended 9/30/15 | | | Balance at 9/30/2015 | |
| | | | | | | | | | | | | | | | |
| Net unrealized holding (loss) gain on securities available for sale, net of tax | | $ | (5,144 | ) | | | 4,713 | | | | - | | | | 4,713 | | | | (431 | ) |
| Net change in net actuarial gain (loss) and prior service cost on pension and postretirement benefit plans, net of tax | | | (783 | ) | | | - | | | | 40 | | | | 40 | | | | (743 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Accumulated other comprehensive (loss) income, net of tax | | | (5,927 | ) | | | 4,713 | | | | 40 | | | | 4,753 | | | | (1,174 | ) |
| | Three months ended 9/30/14 | |
| (dollars in thousands) | | Balance at 7/1/2014 | | | Other Comprehensive Loss- Before Reclassifications | | | Amount reclassified from Accumulated Other Comprehensive Loss | | | Other Comprehensive Income (loss)- Three months ended 9/30/14 | | | Balance at 9/30/2014 | |
| | | | | | | | | | | | | | | | |
| Net unrealized holding gain (loss) on securities available for sale, net of tax | | $ | (6,743 | ) | | | (770 | ) | | | (225 | ) | | | (995 | ) | | | (7,738 | ) |
| Net change in net actuarial loss and prior service credit on pension and postretirement benefit plans, net of tax | | | 4,132 | | | | - | | | | 98 | | | | 98 | | | | 4,230 | |
| | | | | | | | | | | | | | | | | | | | | |
| Accumulated other comprehensive income (loss), net of tax | | | (2,611 | ) | | | (770 | ) | | | (127 | ) | | | (897 | ) | | | (3,508 | ) |
| | | Nine months ended 9/30/15 | |
| (dollars in thousands) | | Balance at 1/1/2015 | | | Other Comprehensive Income- Before Reclassifications | | | Amount reclassified from Accumulated Other Comprehensive Loss | | | Other Comprehensive Income- Nine months ended 9/30/15 | | | Balance at 9/30/2015 | |
| | | | | | | | | | | | | | | | |
| Net unrealized holding gain (loss) on securities available for sale, net of tax | | $ | (3,693 | ) | | | 3,411 | | | | (149 | ) | | | 3,262 | | | | (431 | ) |
| Net change in net actuarial loss and prior service credit on pension and postretirement benefit plans, net of tax | | | (816 | ) | | | - | | | | 73 | | | | 73 | | | | (743 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Accumulated other comprehensive income (loss), net of tax | | | (4,509 | ) | | | 3,411 | | | | (76 | ) | | | 3,335 | | | | (1,174 | ) |
| | Nine months ended 9/30/14 | |
| (dollars in thousands) | | Balance at 1/1/2014 | | | Other Comprehensive Income- Before Reclassifications | | | Amount reclassified from Accumulated Other Comprehensive Income | | | Other Comprehensive Income (loss)- Nine months ended 9/30/14 | | | Balance at 9/30/2014 | |
| | | | | | | | | | | | | | | | |
| Net unrealized holding gain (loss) on securities available for sale, net of tax | | $ | (18,078 | ) | | | 10,569 | | | | (229 | ) | | | 10,340 | | | | (7,738 | ) |
| Net change in net actuarial loss and prior service credit on pension and postretirement benefit plans, net of tax | | | 4,275 | | | | - | | | | (45 | ) | | | (45 | ) | | | 4,230 | |
| | | | | | | | | | | | | | | | | | | | | |
| Accumulated other comprehensive income (loss), net of tax | | | (13,803 | ) | | | 10,569 | | | | (274 | ) | | | 10,295 | | | | (3,508 | ) |
The following represents the reclassifications out of accumulated other comprehensive income (loss) for the three months and nine months ended September 30, 2015 and 2014:
| (dollars in thousands) | | Three months ended September 30, | | | Nine months ended September 30, | | |
| | | 2015 | | | 2014 | | | 2015 | | | 2014 | | Affected Line Item in Statements |
| Unrealized gains (losses) on securities available for sale | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Realized gain on securities transactions | | $ | - | | | | 376 | | | $ | 249 | | | | 382 | | Net gain on securities transactions |
| Income tax expense | | | - | | | | (151 | ) | | | (100 | ) | | | (153 | ) | Income taxes |
| Net of tax | | | - | | | | 225 | | | | 149 | | | | 229 | | |
| | | | | | | | | | | | | | | | | | |
| Amortization of pension and postretirement benefit items | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Amortization of net actuarial (loss) gain | | | (43 | ) | | | 77 | | | | (53 | ) | | | 223 | | Salaries and employee benefits |
| Amortization of prior service cost | | | (23 | ) | | | (239 | ) | | | (68 | ) | | | (149 | ) | Salaries and employee benefits |
| Income tax benefit (expense) | | | 26 | | | | 64 | | | | 48 | | | | (29 | ) | Income taxes |
| Net of tax | | | (40 | ) | | | (98 | ) | | | (73 | ) | | | 45 | | |
| | | | | | | | | | | | | | | | | | |
| Total reclassifications, net of tax | | $ | (40 | ) | | | 127 | | | $ | 76 | | | | 274 | | |
(8) Agreement with the Office of the Comptroller of the Currency
On July 21, 2015 Trustco Bank (the “Bank”), the wholly owned subsidiary of TrustCo Bank Corp NY, entered into a formal agreement (the “Agreement”) with the Comptroller of the Currency of the United States (the “OCC”). The Agreement relates to the findings of the OCC following an examination of the Bank.
The Agreement requires the Bank to take various actions, within prescribed time frames, with respect to certain areas of the Bank. These include, among others, (i) establishment of a committee of at least three Directors to monitor and coordinate the Bank’s response to the Agreement; (ii) adoption of compliance plans to respond to the Agreement with the assistance of an independent qualified consultant; (iii) evaluation and implementation of improvements in corporate governance with the assistance of an independent qualified consultant; (iv) evaluation and implementation of improvements in internal audit; (v) development of a strategic plan; (vi) development of a revised capital plan consistent with the strategic plan; (vii) development and implementation of improvements to the Bank’s loan review system; and (viii) such other necessary steps to address the issues and questions noted by the OCC in the Agreement.
(9) New Accounting Pronouncements
In January 2014, the FASB amended existing guidance to clarify when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized. These amendments clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure, or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additional disclosures are required. These amendments are effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2014. The adoption of this standard did not have a material effect on the Company’s operating results or financial condition, but new disclosures were added.
Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)” implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (is) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. In July 2015, FASB deferred the effective date of the ASU by one year which means ASU 2014-09 will be effective for the Company on January 1, 2018. The Company is currently evaluating the potential impact of ASU 2014-09 on its consolidated financial statements.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
TrustCo Bank Corp NY
Glenville, New York
We have reviewed the accompanying consolidated statements of financial condition of TrustCo Bank Corp NY as of September 30, 2015, the related consolidated statements of income and comprehensive income for the three-month and nine-month periods ended September 30, 2015 and 2014, and the related changes in shareholders’ equity and cash flows for the nine-month periods ended September 30, 2015 and 2014. These interim financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.
New York, New York
November 6, 2015
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
Forward-looking Statements
Statements included in this report and in future filings by TrustCo Bank Corp NY (“TrustCo” or the “Company”) with the Securities and Exchange Commission, in TrustCo’s press releases, and in oral statements made with the approval of an authorized executive officer, which are not historical or current facts, are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. Forward-looking statements can be identified by the use of such words as may, will, should, could, would, estimate, project, believe, intend, anticipate, plan, seek, expect and similar expressions. Examples of forward-looking statements include, among others, statements TrustCo makes regarding its expectations for complying with the new regulatory capital rules, costs associated with the Formal Agreement that the Company’s subsidiary, Trustco Bank (or the “Bank”) has entered into with the Office of the Comptroller of the Currency (“OCC”), the profitability of growth of the Company’s balance sheet, the ability of its loan products to continue to attract customers if long-term rates rise and the ability to secure new sources of liquidity should the need arise. TrustCo wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.
In addition to factors described under Part II, Item 1A, Risk Factors, if any, and under the Risk Factor discussion in TrustCo’s Annual Report on Form 10-K for the year ended December 31, 2014 and in its Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, the following important factors, among others, in some cases have affected and in the future could affect TrustCo’s actual results, and could cause TrustCo’s actual financial performance to differ materially from that expressed in any forward-looking statement:
| · | TrustCo’s ability to continue to originate a significant volume of one-to-four family mortgage loans in its market areas; |
| · | TrustCo’s ability to continue to maintain noninterest expense and other overhead costs at reasonable levels relative to income; |
| · | TrustCo’s ability to comply with the Formal Agreement entered into with Trustco Bank’s regulator, the OCC, and potential regulatory actions if TrustCo or Trustco Bank fails to comply; |
| · | Restrictions or conditions imposed by TrustCo’s and Trustco Bank’s regulators on their operations that may make it more difficult to achieve TrustCo’s and Trustco Bank’s goals; |
| · | the future earnings and capital levels of TrustCo and Trustco Bank and the continued receipt of approvals from TrustCo’s and Trustco Bank’s primary federal banking regulators to distribute capital from Trustco Bank to TrustCo, which could affect the ability of TrustCo to pay dividends; |
| · | TrustCo’s ability to make accurate assumptions and judgments regarding the credit risks associated with its lending and investing activities, including changes in the level and direction of loan delinquencies and charge-offs, changes in property values, and changes in estimates of the adequacy of the allowance for loan losses; |
| · | the effects of and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation, interest rates, market and monetary fluctuations; |
| · | the perceived overall value of TrustCo’s products and services by users, including the features, pricing and quality compared to competitors’ products and services and the willingness of current and prospective customers to substitute competitors’ products and services for TrustCo’s products and services; |
| · | the effect of changes in financial services laws and regulations (including laws concerning taxation, banking and securities) and the impact of other governmental initiatives affecting the financial services industry; |
| · | results of examinations of Trustco Bank and the Company by their respective primary federal banking regulators, including the possibility that the regulators may, among other things, require us to increase our loss allowances or to take other actions that reduce capital or income; |
| · | real estate and collateral values; |
| · | changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board (“FASB”) or the Public Company Accounting Oversight Board; |
| · | changes in local market areas and general business and economic trends, as well as changes in consumer spending and saving habits; |
| · | TrustCo’s success at managing the risks involved in the foregoing and managing its business; and |
| · | other risks and uncertainties included under “Risk Factors” in TrustCo’s Form 10-K for the year ended December 31, 2014 and in its Form 10-Q for the quarter ended June 30, 2015. |
The foregoing list should not be construed as exhaustive, and the Company disclaims any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
Following this discussion are the tables "Distribution of Assets, Liabilities and Shareholders' Equity: Interest Rates and Interest Differential" which gives a detailed breakdown of TrustCo's average interest earning assets and interest bearing liabilities for the three month and nine month periods ended September 30, 2015 and 2014.
Introduction
The review that follows focuses on the factors affecting the financial condition and results of operations of TrustCo during the three month and nine month periods ended September 30, 2015, with comparisons to the corresponding periods in 2014, as applicable. Net interest margin is presented on a fully taxable equivalent basis in this discussion. The consolidated interim financial statements and related notes, as well as the 2014 Annual Report to Shareholders on Form 10-K, which was filed with the SEC on March 6, 2015, should also be read in conjunction with this review. Amounts in prior period consolidated interim financial statements are reclassified whenever necessary to conform to the current period's presentation.
Equity markets were roughly flat for the first half of the third quarter of 2015, followed by a fairly significant sell-off in the latter part of August. Overall volatility was higher during the quarter than in recent quarters. For the full third quarter, the S&P 500 Index was down 6.9% and the Dow Jones Industrial Average was down 7.6%. Credit markets continue to be driven by worldwide economic news and decreasing liquidity in some segments of the bond market. On average, the shape of the curve did not change significantly from Q2 to Q3. The 10 year Treasury bond averaged 2.22% during Q3 compared to 2.16% in Q2, an increase of 6 basis points. However, the 2 year Treasury bond average rate rose 8 basis points, resulting in a slightly less steep curve. The spread between the 10 year and the 2 year Treasury bonds decreased from 1.55% on average in Q2 to 1.53% in Q3. This spread remains well below where it was for much of 2014, including the 198 basis point spread averaged during the third quarter of 2014. Steeper yield curves are favorable for portfolio mortgage lenders like TrustCo. The table below illustrates the range of rate movements for both short term and longer term rates. The target Fed Funds range remained unchanged at zero to 0.25% during the third quarter of 2015. Spreads of certain asset classes, including agency securities and mortgage-backed securities, were consistent with recent quarters, remaining relatively narrow compared to the Treasury curve during the third quarter of 2015. Spreads generally remained well below the levels seen a year ago. One exception to this was in corporate bonds, where spreads have widened as risk perceptions have changed. Changes in rates and spreads during the current quarter were due to a number of factors; however, uncertainty about the timing of any actions that the Federal Reserve Board (“FRB”) would take in regard to the extraordinary accommodations that have influenced markets in recent years and further uncertainty regarding the economy and related issues were key factors. Low risk free rates in major nations have also caused investors to shift into alternative fixed income instruments, contributing to the compression of spreads over the risk free rate.
| | | 3 Month Yield (%) | | | 2 Year Yield (%) | | | 5 Year Yield (%) | | | 10 Year Yield (%) | | | 10 - 2 Year Spread (%) | |
| | | | | | | | | | | | | | | | | | |
| Q3/14 | | Beg of Q3 | | | 0.02 | | | | 0.47 | | | | 1.66 | | | | 2.58 | | | | 2.11 | |
| | Peak | | | 0.04 | | | | 0.59 | | | | 1.85 | | | | 2.63 | | | | 2.11 | |
| | Trough | | | 0.01 | | | | 0.42 | | | | 1.55 | | | | 2.34 | | | | 1.84 | |
| | End of Q3 | | | 0.02 | | | | 0.58 | | | | 1.78 | | | | 2.52 | | | | 1.94 | |
| | Average in Q3 | | | 0.03 | | | | 0.52 | | | | 1.70 | | | | 2.49 | | | | 1.98 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Q4/14 | | Beg of Q4 | | | 0.02 | | | | 0.53 | | | | 1.69 | | | | 2.42 | | | | 1.89 | |
| | Peak | | | 0.05 | | | | 0.73 | | | | 1.76 | | | | 2.45 | | | | 1.91 | |
| | Trough | | | 0.01 | | | | 0.34 | | | | 1.37 | | | | 2.07 | | | | 1.46 | |
| | End of Q4 | | | 0.04 | | | | 0.67 | | | | 1.65 | | | | 2.17 | | | | 1.50 | |
| | Average in Q4 | | | 0.02 | | | | 0.54 | | | | 1.60 | | | | 2.28 | | | | 1.74 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Q1/15 | | Beg of Q1 | | | 0.02 | | | | 0.66 | | | | 1.61 | | | | 2.12 | | | | 1.46 | |
| | Peak | | | 0.05 | | | | 0.73 | | | | 1.70 | | | | 2.24 | | | | 1.51 | |
| | Trough | | | 0.01 | | | | 0.44 | | | | 1.18 | | | | 1.68 | | | | 1.19 | |
| | End of Q1 | | | 0.03 | | | | 0.56 | | | | 1.37 | | | | 1.94 | | | | 1.38 | |
| | Average in Q1 | | | 0.02 | | | | 0.60 | | | | 1.46 | | | | 1.97 | | | | 1.36 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Q2/15 | | Beg of Q2 | | | 0.03 | | | | 0.55 | | | | 1.32 | | | | 1.87 | | | | 1.32 | |
| | Peak | | | 0.03 | | | | 0.75 | | | | 1.80 | | | | 2.50 | | | | 1.77 | |
| | Trough | | | 0.01 | | | | 0.49 | | | | 1.26 | | | | 1.85 | | | | 1.32 | |
| | End of Q2 | | | 0.01 | | | | 0.64 | | | | 1.63 | | | | 2.35 | | | | 1.71 | |
| | Average in Q2 | | | 0.02 | | | | 0.61 | | | | 1.53 | | | | 2.16 | | | | 1.55 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Q3/15 | | Beg of Q3 | | | 0.01 | | | | 0.69 | | | | 1.70 | | | | 2.43 | | | | 1.74 | |
| | Peak | | | 0.12 | | | | 0.82 | | | | 1.72 | | | | 2.44 | | | | 1.77 | |
| | Trough | | | 0.00 | | | | 0.55 | | | | 1.37 | | | | 2.01 | | | | 1.40 | |
| | End of Q3 | | | 0.00 | | | | 0.64 | | | | 1.37 | | | | 2.06 | | | | 1.42 | |
| | Average in Q3 | | | 0.04 | | | | 0.69 | | | | 1.56 | | | | 2.22 | | | | 1.53 | |
Despite some modest improvements in parts of the economy, the underlying economy of the United States continued to face significant challenges. Employment increased and the unemployment rate declined, although labor force participation remains weak. Wage growth also remains weak, with much of the new job creation coming from low wage jobs. Economic conditions vary significantly over geographic areas, with strength concentrated in and around major population centers on the coasts and in certain areas where economic activity has been driven by specific regional factors. The unprecedented intervention by governments in markets and attempts to stimulate the economy, including the sharp easing of monetary policy during 2007-2008 are now in the early stages of being stabilized, and eventually reversed. Economic activity in Europe, China and elsewhere has also been mixed at best, contributing to global economic issues and leading to additional government stimulation efforts in those areas. Finally, the impact of regulatory changes that have been enacted has only partly been felt at this point, and we expect that these changes will continue to impact the banking industry going forward. These regulatory changes have added significant operating expense and operational burden and fundamentally changed the way banks conduct business.
The federal government, primarily through the Treasury Department and the federal banking agencies, is also implementing the financial reform bill, the “Dodd–Frank Wall Street Reform and Consumer Protection Act” (the “Dodd-Frank Act”), which has had and will likely continue to have a significant impact on the financial services industry.
The Dodd-Frank Act also created a new agency, the Consumer Financial Protection Bureau (the “CFPB”), to centralize responsibility for consumer financial protection and be responsible for implementing, examining and enforcing compliance with federal consumer financial laws such as the Truth in Lending Act, the Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act and the Truth in Saving Act, among others. Depository institutions that have assets of $10 billion or less, such as the Bank, will continue to be supervised by their primary federal regulators (in the case of the Bank, the OCC). The CFPB will also have data collecting powers for fair lending purposes for both small business and mortgage loans, as well as authority to prevent unfair, deceptive and abusive acts and practices. These new and revised rules have and may continue to increase our regulatory compliance burden and costs and restrict the financial products and services we offer to our customers.
In January 2013, the CFPB issued a series of final rules related to mortgage loan origination and mortgage loan servicing. In particular, on January 10, 2013, the CFPB issued a final rule implementing the ability-to-repay and qualified mortgage (“QM”) provisions of the Truth in Lending Act, as amended by the Dodd-Frank Act (the “QM Rule”). The ability-to-repay provision requires creditors to make reasonable, good faith determinations that borrowers are able to repay their mortgages before extending the credit based on a number of factors and consideration of financial information about the borrower from reasonably reliable third-party documents. Under the Dodd-Frank Act and the QM Rule, loans meeting the definition of “qualified mortgage” are entitled to a presumption that the lender satisfied the ability-to-repay requirements. The presumption is a conclusive presumption/safe harbor for prime loans meeting the QM requirements, and a rebuttable presumption for higher-priced/subprime loans meeting the QM requirements. The definition of a “qualified mortgage” incorporates the statutory requirements, such as not allowing negative amortization or terms longer than 30 years. The QM Rule also adds an explicit maximum 43% debt-to-income ratio for borrowers if the loan is to meet the QM definition, though some mortgages that meet Government-Sponsored Enterprise, Federal Housing Administration and United States Department of Veterans Affairs (“VA”) underwriting guidelines may, for a period not to exceed seven years, meet the QM definition without being subject to the 43% debt-to-income limits. The QM Rule became effective on January 10, 2014.
TrustCo believes that its long-term focus on traditional banking services and practices has enabled the Company to avoid significant impact from asset quality problems and that the Company’s strong liquidity and solid capital positions have allowed the Company to continue to conduct business in a manner consistent with its past practice. TrustCo has not engaged in the types of high risk loans and investments that have led to the widely reported problems in the industry. Nevertheless, the Company did experience an increase in nonperforming loans (“NPLs”) relative to historical levels, although NPLs have declined over recent years, and management believes the current level remains manageable. While the Company does not expect to see a significant change in the inherent risk of loss in its loan portfolio at September 30, 2015, should general housing prices and other economic measures, such as unemployment in the Company’s market areas, deteriorate, the Company may experience an increase in the level of credit risk and in the amount of its classified and nonperforming loans.
In addition, the natural flight to quality that occurs in financial crises as investors focus on the safest possible investments, cuts in targeted interest rates and liquidity injections by the Federal government have all served to reduce yields available on both short term liquidity (Federal Funds and other short term investments), as well as the low risk types of securities typically invested in by the Company. As noted, the slope of the curve was roughly flat in the quarter as compared to the preceding quarter. A steeper slope in the yield curve is generally better for mortgage lender profitability. The future course of interest rates is subject to significant uncertainty, as various indicators are providing contradicting signals. Somewhat better economic activity could potentially lead to higher rates. Potentially offsetting this is that Treasuries continue to be viewed as a safe haven by many investors around the world, with their demand serving to dampen or completely outweigh any upward pressure on yields. Finally, the Dodd-Frank Act creates additional uncertainty for the Company and the Bank. This law significantly changed the current bank regulatory structure and affects the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies.
Overview
TrustCo recorded net income of $10.6 million, or $0.111 of diluted earnings per share for the three months ended September 30, 2015, compared to net income of $10.7 million or $0.113 of diluted earnings per share in the same period in 2014. Return on average assets was 0.88% and 0.92%, respectively, for the three months ended September 30, 2015 and 2014. Return on average equity was 10.35% and 10.96%, respectively, for the three months ended September 30, 2015 and 2014.
For the nine months ended September 30, 2015, net income was $32.1 million versus $33.5 million for the year earlier period, while diluted earnings per share were $0.337 compared to $0.354, for the same periods.
The primary factors accounting for the change in net income for three month and nine month periods ended September 30, 2015 compared to the same periods of the prior year were:
| · | An increase in the average balance of interest earning assets of $164.4 million to $4.68 billion for the third quarter of 2015 compared to the same period in 2014, and an increase of $151.3 million for the first nine months of 2015 compared to the prior year period. |
| · | An increase in the average balance of interest bearing liabilities of $103.8 million to $3.97 billion for the third quarter of 2015 compared to the same period in 2014, and an increase of $102.0 million for the first nine months of 2015 compared to the prior year period. |
| · | A decrease in taxable equivalent net interest margin for the third quarter of 2015 to 3.08% from 3.16% in the prior year period. The decrease in the margin was more than offset by the increase in average earning assets, resulting in an increase of $393 thousand in taxable equivalent net interest income in the third quarter of 2015 compared to the third quarter of 2014. For the nine month period, taxable equivalent net interest income was up $1.1 million, due to the increase in average earning assets as the net interest margin declined from 3.15% to 3.08%. |
| · | A decrease in the provision for loan losses to $800 thousand in the third quarter of 2015 from $1.1 million in the third quarter of 2014. For the nine months ended September 30, 2015, the provision was $2.4 million, compared to $4.1 million during the same period in 2014. |
| · | An increase of $1.3 million in noninterest expense, including net other real estate (“ORE”) expense, for the third quarter of 2015 compared to the third quarter of 2014. Excluding ORE costs, expenses were up $1.5 million. For the nine months ended September 30, 2015 as compared to the corresponding prior year period noninterest expense, including net ORE expense, increased by $5.0 million. Noninterest expense for the nine month period in 2014 includes a $2.4 million gain from a large ORE sale. |
| · | A decrease of $1.0 million in income taxes, in the third quarter of 2015 compared to the prior year due to lower pre-tax earnings and adjustments made to valuations of deferred tax assets and liabilities related to the filing of the 2014 tax return during the quarter and a decrease of $2.5 million for the nine month period versus the prior year, also due primarily to lower pre-tax earnings as well as the noted adjustments in the third quarter of 2015. |
Regulatory Agreement
On July 21, 2015 Trustco Bank, the wholly owned subsidiary of TrustCo Bank Corp NY, entered into a formal agreement with the OCC.
The Formal Agreement relates to the findings of the OCC following its regularly scheduled examination of the Bank. Since the completion of the examination, the Bank believes it has been working diligently to address the findings of the examination and to develop and implement appropriate formal action plans.
The Formal Agreement requires the Bank to take various actions, within prescribed time frames, with respect to certain areas of the Bank. These include, among others, (i) establishment of a committee of at least three Directors to monitor and coordinate the Bank’s response to the Formal Agreement; (ii) adoption of compliance plans to respond to the Formal Agreement with the assistance of an independent qualified consultant; (iii) evaluation and implementation of improvements in corporate governance with the assistance of an independent qualified consultant; (iv) evaluation and implementation of improvements in internal audit; (v) development of a strategic plan; (vi) development of a revised capital plan consistent with the strategic plan; (vii) development and implementation of improvements to the Bank’s loan review system; and (viii) such other necessary steps to address the issues and questions noted by the OCC in the Formal Agreement. The Company expects the cost to comply with the agreement to be approximately $5.0 million annually.
Asset/Liability Management
The Company strives to generate its earnings capabilities through a mix of core deposits funding a prudent mix of earning assets. Additionally, TrustCo attempts to maintain adequate liquidity and reduce the sensitivity of net interest income to changes in interest rates to an acceptable level while enhancing profitability both on a short-term and long-term basis.
TrustCo’s results are affected by a variety of factors including competitive and economic conditions in the specific markets in which the Company operates, and more generally in the national economy, financial market conditions and the regulatory environment. Each of these factors is dynamic, and changes in any area can have an impact on TrustCo’s results. Included in the Annual Report to Shareholders on Form 10-K for the year ended December 31, 2014 is a description of the effect interest rates had on the results for the year 2014 compared to 2013. Many of the same market factors discussed in the 2014 Annual Report continued to have a significant impact on results through the third quarter of 2015.
TrustCo competes with other financial service providers based upon many factors including quality of service, convenience of operations and rates paid on deposits and charged on loans. In the experience of management, the absolute level of interest rates, changes in interest rates and customers’ expectations with respect to the direction of interest rates have a significant impact on the volume of loan and deposit originations in any particular period.
Interest rates have a significant impact on the operations and financial results of all financial services companies. One of the most important interest rates used to implement national economic policy is the Federal Funds rate. This is the interest rate utilized within the banking system for overnight borrowings for institutions with the highest credit rating. The Federal Funds target rate decreased from 4.25% at the beginning of 2008 to a target range of 0.00% to 0.25% by the end of 2008. The target range has not been changed since. Management believes that FRB officials have not been completely consistent or clear in regard to expectations for the future and have generally stressed the need to be accommodative given economic conditions, but have noted that conditions may be in place to raise the target rate later this year.
Traditionally, interest rates on bank deposit accounts are heavily influenced by the Federal Funds rate. The average rate on interest bearing deposits was 1 basis point higher in the third quarter of 2015 relative to the prior year period and flat as compared to the second quarter of 2015. Relative to the year ago period, lower rates on money market and savings deposits offset most of the rate increases on time deposits. Please refer to the statistical disclosures in the table below entitled “Distribution of Assets, Liabilities and Shareholders’ Equity: Interest Rates and Interest Differential.”
The interest rate on the 10 year Treasury bond and other long-term interest rates have significant influence on the rates for new residential real estate loans. The FRB has attempted to influence rates on mortgage loans by means other than targeting a lower Federal Funds rate, including direct intervention in the mortgage-backed securities market through purchasing these securities in an attempt to raise prices and reduce yields. Currently (based on the FRB’s statement released September 17, 2015) this includes the reinvestment of principal payments received on its holdings of agency securities, agency mortgage-backed securities and Treasury securities. While no longer increasing its holdings of these securities, the reinvestment of principal means that the existing holdings are not being unwound. Eventually, management believes, the FRB will have to unwind these positions, which would likely put upward pressure on rates, although other factors may mitigate this pressure. These changes in interest rates can have an effect on the Company relative to the interest income on loans, securities and Federal Funds sold and other short term instruments, as well as on interest expense on deposits and borrowings.
TrustCo’s principal loan products are residential real estate loans. As noted above, residential real estate loans and longer-term investments are most affected by the changes in longer term market interest rates such as the 10 year Treasury. As noted previously, the 10 year Treasury yield was up somewhat, on average, during the third quarter of 2015 compared to the second quarter of 2015, but the yield remains at relatively lower levels compared to historical yields.
Interest rates on new residential real estate loan originations are also influenced by the rates established by secondary market participants such as Freddie Mac and Fannie Mae. As a portfolio lender, TrustCo does not sell loans into the secondary market in the normal course of business, and is able to establish rates that management determines are appropriate in light of the long-term nature of residential real estate loans while remaining competitive with the secondary market rates. Financial market volatility and the problems faced by the financial services industry have lessened the influence of the secondary market; however, various programs initiated by arms of the federal government have had an impact on rate levels for certain products. Most importantly, a government goal of keeping mortgage rates low has been supported by targeted buying of certain securities, thus supporting prices and constraining yields, as noted above. The futures of Freddie Mac and Fannie Mae remain uncertain as Congress debates the structure of both entities.
The Federal Funds sold and other short term investments portfolios are affected primarily by changes in the Federal Funds target rate. Also, changes in interest rates have an effect on the recorded balance of the securities available for sale portfolio, which is recorded at fair value. Generally, as interest rates increase the fair value of these securities will decrease.
Interest rates generally remained below historic norms on both short term and longer term investments during the third quarter of 2015. As noted above, time deposit costs were higher in the third quarter of 2015 compared to the prior year quarter.
While TrustCo has been affected by aspects of the overall changes in financial markets, it was not affected to the degree the mortgage crisis affected some banks and financial institutions in the United States beginning in 2007. Generally, the crisis revolved around actual and future levels of delinquencies and defaults on mortgage loans, in many cases arising, in management’s view, from lenders with overly liberal underwriting standards, changes in the types of mortgage loans offered, significant upward resets on adjustable rate loans and fraud, among other factors. The Company utilizes a traditional underwriting process in evaluating loan applications, and since originated loans are retained in portfolio there is a strong incentive to be conservative in making credit decisions. For additional information concerning TrustCo’s loan portfolio and nonperforming loans, please refer to the discussions under “Loans” and “Nonperforming Assets,” respectively. Further, the Company does not rely on borrowed funds to support its assets and maintains a significant level of liquidity on the asset side of the balance sheet. These characteristics provide the Company with increased flexibility and stability during periods of market disruption and interest rate volatility.
A fundamental component of TrustCo’s strategy has been to grow customer relationships and the deposits and loans that are part of those relationships. The Company has significant capacity to grow its balance sheet given its existing infrastructure. The Company expects that growth to be profitable. The current interest rate environment has narrowed the margin on incremental balance sheet expansion. While the Company has not changed its fundamental long term strategy in regard to utilizing its excess capacity, management continually evaluates changing conditions and may seek to limit growth or reduce the size of the balance sheet if its analysis indicates that doing so would be beneficial in the short term.
For the third quarter of 2015, the net interest margin was 3.08%, down 8 basis points versus the prior year’s quarter. The quarterly results reflect the following significant factors:
| • | The average balance of Federal Funds sold and other short-term investments increased by $54.0 million while the average yield was flat at 25 basis points in the third quarter of 2015 compared to the same period in 2014. The increase in the average balance reflects the decision to temporarily limit purchases of additional investment securities to make funds available for lending given the relative attractiveness of yields on loans versus securities. |
| • | The average balance of securities available for sale decreased by $92.9 million while the average yield decreased to 1.96% for the third quarter of 2015 compared to 2.03% for the same period in 2014. The average balance of held to maturity securities decreased by $14.3 million and the average yield increased to 3.97% for the third quarter of 2015 compared to 3.67% for the same period in 2014. |
| • | The average loan portfolio grew by $218.1 million to $3.26 billion and the average yield decreased 15 basis points to 4.37% in the third quarter of 2015 compared to the same period in 2014. The decline in the average yield primarily reflects the decline in market interest rates on new loan originations as older, higher rate loans pay down or are paid off. |
| • | The average balance of interest bearing liabilities (primarily deposit accounts) increased $103.8 million and the average rate paid increased 1 basis point to 0.41% in the third quarter of 2015 compared to the same period in 2014. |
During the third quarter of 2015, the Company continued to focus on its strategy to expand the loan portfolio by offering competitive interest rates. Management believes the TrustCo residential real estate loan product is very competitive compared to local and national competitors. Competition remains strong in the Company’s market areas.
The strategy on the funding side of the balance sheet continues to be to attract deposit customers to the Company based upon a combination of service, convenience and interest rate.
Earning Assets
Total average interest earning assets increased from $4.51 billion in the third quarter of 2014 to $4.68 billion in the same period of 2015 with an average yield of 3.51% in 2014 and 3.43% in 2015. Interest income on average earning assets increased from $39.6 million in the third quarter of 2014 to $40.2 million in the third quarter of 2015, on a tax equivalent basis, with higher volume more than offsetting the lower yield.
Loans
The average balance of loans was $3.26 billion in the third quarter of 2015 and $3.04 billion in the comparable period in 2014. The yield on loans decreased 15 basis points to 4.37%. The higher average balances more than offset the lower yield, leading to an increase in the interest income on loans from $34.4 million in the third quarter of 2014 to $35.6 million in the third quarter of 2015.
Compared to the third quarter of 2014, the average balance of the loan portfolio during the third quarter of 2015 increased in all categories except commercial loans, with increases in residential mortgage, home equity and installment loan categories. The average balance of residential mortgage loans was $2.69 billion in 2015 compared to $2.47 billion in 2014, an increase of 8.7%. The average yield on residential mortgage loans decreased by 17 basis points to 4.41% in the third quarter of 2015 compared to 2014.
TrustCo actively markets the residential loan products within its market territories. Mortgage loan rates are affected by a number of factors including rates on Treasury securities, the Federal Funds rate and rates set by competitors and secondary market participants. TrustCo aggressively markets the unique aspects of its loan products thereby attempting to create a differentiation from other lenders. These unique aspects include low closing costs, fast turn-around time on loan approvals, no escrow or mortgage insurance requirements for qualified borrowers and the fact that the Company typically holds these loans in portfolio and does not sell them into the secondary markets. Assuming a rise in long-term interest rates, the Company would anticipate that the unique features of its loan products will continue to attract customers in the residential mortgage loan area.
Commercial loans, which consist primarily of loans secured by commercial real estate, decreased $11.9 million to an average balance of $208.5 million in the third quarter of 2015 compared to the same period in the prior year. The average yield on this portfolio decreased 1 basis point to 5.15% over the same period.
The average yield on home equity credit lines decreased 6 basis points to 3.53% during the third quarter of 2015 compared to 3.59% in the year earlier period. Given the stability of the underlying repricing index in recent years, changes in portfolio yield are driven primarily by the proportion of loans that are within the lower introductory rate offered on new lines at times relative to fully priced balances and balances that have priced to the floor rate. The average balances of home equity lines increased 3.5% to $354.6 million in the third quarter of 2015 as compared to the prior year.
Securities Available for Sale
The average balance of the securities available for sale portfolio for the third quarter of 2015 was $691.8 million compared to $784.8 million for the comparable period in 2014. The decreased balances reflect routine paydowns, calls and maturities, partly offset by new investment purchases. During the quarter, continued low market yields on securities eligible to be added to the portfolio resulted in loans being a more attractive option for the deployment of cash. The average yield was 1.96% for the third quarter of 2015 and 2.03% for the third quarter of 2014 for the available for sale portfolio. The decline in yield primarily reflects the maturities, calls and paydowns of higher yielding securities. This portfolio is primarily comprised of agency issued residential mortgage backed securities, bonds issued by government sponsored enterprises (such as Fannie Mae, the Federal Home Loan Bank, and Freddie Mac), agency-issued commercial mortgage backed securities, Small Business Administration participation certificates and municipal bonds. These securities are recorded at fair value with any adjustment in fair value included in other comprehensive income (loss), net of tax.
The net unrealized loss in the available for sale securities portfolio was $721 thousand as of September 30, 2015 compared to a net unrealized loss of $6.2 million as of December 31, 2014. The unrealized gain or loss in the portfolio is primarily the result of changes in market interest rate levels.
Held to Maturity Securities
The average balance of held to maturity securities was $61.9 million for the third quarter of 2015 compared to $76.2 million in the third quarter of 2014. The decrease in balances reflects routine paydowns, calls and maturities and follows the overall decline in securities with a shift towards cash for more flexibility and loans for greater yield. The average yield was 3.97% for the third quarter of 2015 compared to 3.67% for the year earlier period. The higher yield reflects a modest change in mix and slower prepayments on MBS, which reduced premium amortization. TrustCo expects to hold the securities in this portfolio until they mature or are called.
As of September 30, 2015, the securities in this portfolio include residential mortgage-backed securities and corporate bonds. The balances for these securities are recorded at amortized cost.
Federal Funds Sold and Other Short-term Investments
The 2015 third quarter average balance of federal funds sold and other short-term investments was $652.3 million, a $54.0 million increase from the $598.3 million average for the same period in 2014. The yield was unchanged at 0.25%. Interest income from this portfolio increased $34 thousand from $374 thousand in 2014 to $408 thousand in 2015, reflecting the average balance increase.
The Federal Funds sold and other short-term investments portfolio is utilized to generate additional interest income and liquidity as funds are waiting to be deployed into the loan and securities portfolios.
Funding Opportunities
TrustCo utilizes various funding sources to support its earning asset portfolio. The vast majority of the Company’s funding comes from traditional deposit vehicles such as savings, demand deposits, interest-bearing checking, money market and time deposit accounts.
Total average interest bearing deposits (which includes interest bearing checking, money market accounts, savings and certificates of deposit) increased $106.7 million to $3.79 billion for the third quarter of 2015 versus the third quarter in the prior year, and the average rate paid increased from 0.39% for 2014 to 0.40% for 2015. Total interest expense on these deposits increased $202 thousand to $3.8 million in the third quarter of 2015 compared to the year earlier period. The increase in deposits versus the prior year was due to strong growth in both core deposits and certificates of deposit. From the third quarter of 2014 to the third quarter of 2015, interest bearing demand account average balances were up 11.9%, certificates of deposit average balances were up 3.6%, non-interest demand average balances were up 11.8% and average savings balances increased 1.7%. Money market balances were down 5.1%. The Company has not utilized brokered deposits as a funding source, but does incorporate them as a contingent funding source within its Asset/Liability Policy. Like other contingent funding sources, brokered CDs may be tested from time to time to ensure operational and market readiness. The Company does not pay premium rates on certificates with balances over $100,000 within its branch network.
At September 30, 2015, the maturity of total time deposits is as follows:
| (dollars in thousands) | | | |
| | | | |
| Under 1 year | | $ | 980,728 | |
| 1 to 2 years | | | 156,348 | |
| 2 to 3 years | | | 12,098 | |
| 3 to 4 years | | | 13,855 | |
| 4 to 5 years | | | 5,686 | |
| Over 5 years | | | 193 | |
| | | $ | 1,168,908 | |
Average short-term borrowings for the quarter were $177.2 million in 2015 compared to $180.1 million in 2014. The average rate decreased during this time period from 0.72% in 2014 to 0.65% in 2015. The short-term borrowings of the Company are cash management accounts, which represent retail accounts with customers for which the Bank has pledged certain assets as collateral.
Net Interest Income
Taxable equivalent net interest income increased by $393 thousand to $36.1 million in the third quarter of 2015 compared to the same period in 2014. The net interest spread was down 9 basis points to 3.02% in the third quarter of 2015 compared to the year ago period. As previously noted, the net interest margin was down 8 basis points to 3.08% for the third quarter of 2015 compared to the same period in 2014.
Nonperforming Assets
Nonperforming assets include nonperforming loans (“NPLs”), which are those loans in a non-accrual status and loans past due three payments or more and still accruing interest. Also included in the total of nonperforming assets are foreclosed real estate properties, which are included in other assets and categorized as other real estate owned.
The following describes the nonperforming assets of TrustCo as of September 30, 2015:
Nonperforming loans and foreclosed real estate: Total NPLs were $31.9 million at September 30, 2015, compared to $34.0 million at December 31, 2014 and $37.1 million at September 30, 2014. There were $31.9 million of non-accrual loans at September 30, 2015 compared to $33.9 million at December 31, 2014 and $37.0 million at September 30, 2014. There were no loans at September 30, 2015 and 2014 and December 31, 2014 that were past due 90 days or more and still accruing interest.
At September 30, 2015, nonperforming loans primarily include a mix of commercial and residential loans. Of total nonperforming loans of $31.9 million at September 30, 2015, $28.2 million were residential real estate loans, $3.7 million were commercial mortgages and $78 thousand were installment loans, compared to $30.1 million, $3.8 million and $90 thousand, respectively at December 31, 2014.
A significant percentage of nonperforming loans are residential real estate loans, which are historically lower-risk than most other types of loans. Net charge-offs were 0.16% of average residential real estate loans (including home equity lines of credit) for the third quarter of 2015 (annualized) compared to 0.19% for the third quarter of 2014. Management believes that these loans have been appropriately written down where required.
Ongoing portfolio management is intended to result in early identification and disengagement from deteriorating credits. TrustCo has a diversified loan portfolio that includes a significant balance of residential mortgage loans to borrowers in the Capital Region of New York and avoids concentrations to any one borrower or any single industry. TrustCo has no advances to borrowers or projects located outside the United States. TrustCo continues to identify delinquent loans as quickly as possible and to move promptly to resolve problem loans. Efforts to resolve delinquencies begin immediately after the payment grace period expires, with repeated, automatically generated notices, as well as personalized phone calls and letters. Loans are placed in nonaccrual status once they are 90 days past due, or earlier if management has determined that such classification is appropriate. Once in nonaccrual status, loans are either brought current and maintained current, at which point they may be returned to accrual status, or they proceed through the foreclosure process. The collateral on nonaccrual loans is evaluated periodically, and the loan value is written down if the collateral value is insufficient.
The Company originates loans throughout its deposit franchise area. At September 30, 2015, 80.9% of its gross loan portfolio balances were in New York State and the immediately surrounding areas (including New Jersey, Vermont and Massachusetts), and 19.1% were in Florida. Those figures compare to 82.7% and 17.3%, respectively at December 31, 2014. Within these two geographic regions, commercial loans constitute a larger component of the local outstandings in New York than in Florida, at 7.3% and 2.5%, respectively, as of September 30, 2015. The Florida and New York levels of commercial loans as a percent of total loans within each geographic region were similar to the December 31, 2014 numbers of 7.8% in New York and 3.6% in Florida.
Economic conditions vary widely by geographic location. Florida experienced a more significant downturn than New York during the recession. Reflecting that, nonperforming loans (NPLs as a percentage of the portfolio) had generally been more heavily weighted towards Florida in recent years. However, as of September 30, 2015, NPLs were roughly in line with regional outstandings, as 6.5% of nonperforming loans were to Florida borrowers, compared to 93.5% in New York and surrounding areas. The level of Florida based NPLs was 8.1% of total NPLs as of December 31, 2014. For the three months ended September 30, 2015, New York and surrounding areas experienced net charge-offs of approximately $1.2 million, compared to $34 thousand in Florida.
Other than loans currently identified as nonperforming, management is aware of no other loans in the Bank’s portfolio that pose material risk of the eventual non-collection of principal and interest. Also as of September 30, 2015, there were no other loans classified for regulatory purposes that management reasonably expects will materially impact future operating results, liquidity, or capital resources.
TrustCo has identified nonaccrual commercial and commercial real estate loans, as well as all loans restructured under a troubled debt restructuring (TDR), as impaired loans. There were $4.0 million of commercial mortgages and commercial loans classified as impaired as of September 30, 2015, compared to $4.1 million at December 31, 2014. There were $23.1 million of impaired residential loans at September 30, 2015, compared to $22.4 million at December 31, 2014. The average balances of all impaired loans were $28.8 million during the nine months of 2015 and $27.7 million for the full year 2014.
As of September 30, 2015 and December 31, 2014, the Company’s loan portfolio did not include any subprime mortgages or loans acquired with deteriorated credit quality.
At September 30, 2015 there was $5.9 million of foreclosed real estate compared to $6.4 million at December 31, 2014.
Allowance for loan losses: The balance of the allowance for loan losses is maintained at a level that is, in management’s judgment, representative of the amount of probable incurred losses in the loan portfolio.
| (dollars in thousands) | | As of September 30, 2015 | | | As of December 31, 2014 | |
| | | Amount | | | Percent of Loans to Total Loans | | | Amount | | | Percent of Loans to Total Loans | |
| Commercial | | $ | 3,832 | | | | 5.86 | % | | $ | 3,764 | | | | 6.41 | % |
| Real estate - construction | | | 393 | | | | 0.86 | % | | | 571 | | | | 1.22 | % |
| Real estate mortgage - 1 to 4 family | | | 34,120 | | | | 82.15 | % | | | 35,394 | | | | 80.98 | % |
| Home equity lines of credit | | | 6,358 | | | | 10.86 | % | | | 6,430 | | | | 11.15 | % |
| Installment Loans | | | 446 | | | | 0.27 | % | | | 168 | | | | 0.24 | % |
| | | $ | 45,149 | | | | 100.00 | % | | $ | 46,327 | | | | 100.00 | % |
At September 30, 2015, the allowance for loan losses was $45.1 million, compared to $46.5 million at September 30, 2014 and $46.3 million at December 31, 2014. The allowance represents 1.38% of the loan portfolio as of September 30, 2015 compared to 1.51% at September 30, 2014 and 1.47% at December 31, 2014.
The provision for loan losses was $800 thousand for the quarter ended September 30, 2015 compared to $1.1 million for the third quarter of 2014. Net charge-offs for the three-month period ended September 30, 2015 were $1.2 million, compared to $1.5 million in the year earlier period. The decrease in the provision for loan losses in 2015 was primarily related to improving trends in asset quality and generally better economic conditions in Florida, where loss severity was particularly high during the financial crisis.
During the third quarter of 2015, there were $3 thousand of gross commercial loan charge-offs and $1.4 million of gross residential mortgage and consumer loan charge-offs as compared with $124 thousand of gross commercial loan charge-offs and $1.5 million of residential mortgage and consumer loan charge-offs in the third quarter of 2014. Gross recoveries during the third quarter of 2015 were $3 thousand for commercial loans and $167 thousand for residential mortgage and consumer loans, compared to $1 thousand for commercial loans and $132 thousand for residential and consumer in the third quarter of 2014.
In determining the adequacy of the allowance for loan losses, management reviews the current nonperforming loan portfolio as well as loans that are past due and not yet categorized as nonperforming for reporting purposes. Also, there are a number of other factors that are taken into consideration, including:
| · | The magnitude and nature of recent loan charge-offs and recoveries, |
| · | The growth in the loan portfolio and the implication that it has in relation to the economic climate in the Bank’s market territories, and |
| · | The economic environment in the Upstate New York territory primarily (the Company’s largest geographical market) over the last several years, as well as in the Company’s other market areas. |
Management continues to monitor these factors in determining future loan loss provisions or recaptures in relation to the economic environment, loan charge-offs, recoveries and the level and trends of nonperforming loans.
Liquidity and Interest Rate Sensitivity
TrustCo seeks to obtain favorable sources of funding and to maintain prudent levels of liquid assets in order to satisfy varied liquidity demands. Management believes that TrustCo’s earnings performance and strong capital position enable the Company to easily secure new sources of liquidity. The Company actively manages its liquidity through target ratios established under its liquidity policies. Continual monitoring of both historical and prospective ratios allows TrustCo to employ strategies necessary to maintain adequate liquidity. Management has also defined various degrees of adverse liquidity situations which could potentially occur and has prepared appropriate contingency plans should such a situation arise.
The Company uses an industry standard external model as the primary tool to identify, quantify and project changes in interest rates and prepayment speeds taken both from industry sources and internally generated data based upon historical trends in the Bank’s balance sheet. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in market interest rates are also incorporated into the model. This model calculates an economic or fair value amount with respect to non-time deposit categories since these deposits are part of the core deposit products of the Company. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure the fair value of capital or precisely predict the impact of fluctuations in interest rates on the fair value of capital.
Using this model, the fair value of capital projections as of September 30, 2015 are referenced below. The base case (current rates) scenario shows the present estimate of the fair value of capital assuming no change in the operating environment or operating strategies and no change in interest rates from those existing in the marketplace as of September 30, 2015. The table indicates the impact on the fair value of capital assuming interest rates were to instantaneously increase by 100 bp, 200 bp, 300 bp and 400 bp or to decrease by 100 bp.
As of September 30, 2015 | | Estimated Percentage of Fair value of Capital to Fair value of Assets | |
| +400 BP | | | 19.90 | % |
| +300 BP | | | 21.02 | |
| +200 BP | | | 22.07 | |
| +100 BP | | | 22.84 | |
| Current rates | | | 21.89 | |
| -100 BP | | | 21.20 | |
Noninterest Income
Total noninterest income for the third quarter of 2015 was $4.4 million, compared to $4.9 million in the prior year period. For the nine months ended September 30, 2015 total noninterest income was $13.4 million compared to $15.2 million in the prior year period. The 2014 nine month period included gains on securities sales of $382 thousand and a gain of $1.6 million on the sale of the Company’s planned Florida regional administrative center, while the 2015 period included gains on securities sale of $249 thousand. Excluding all gains, noninterest income was down $23 thousand to $13.2 million for the nine month periods.
Trustco Financial Services income decreased $120 thousand to $1.4 million for the third quarter of 2015 compared to the third quarter of 2014. The fair value of assets under management were $895 million at September 30, 2015 compared to $918 million at December 31, 2014 and $879 million at September 30, 2014. The decrease in assets was due to market value declines offset by net account acquisition.
The total of fees for other services to customers plus other income was $3.0 million in the third quarter of 2015, down $29 thousand. For the nine months ended September 30, 2015 fees for other services to customers plus other income was $8.7 million, compared to $10.4 million for the first nine months of 2014. The nine month 2014 period includes the $1.6 million gain on sale of a Bank building.
Noninterest Expenses
Total noninterest expenses were $23.5 million for the three months ended September 30, 2015, compared to $22.2 million for the three months ended September 30, 2014. The largest cause of the increase in expenses was a $1.1 million increase in FDIC and other insurance expenses which is a direct result of our most recent regulatory exam. Other significant increases included higher professional services expenses and “other” expenses. Professional services expenses were up $691 thousand for the period, due in large part to legal and consulting fees related to the agreement with the OCC. “Other” expenses were up $190 thousand due to costs associated with the upgrade to EMV chip enabled debit cards for our customers. Salaries and benefits were down $438 thousand due to adjustments for stock based compensation plans and other executive benefit programs, which had an $838 thousand beneficial impact on the quarter. Full time equivalent headcount was 778 as of September 30, 2015, compared to 733 as of September 30, 2014. Decreases of $195 in ORE expense, net, $129 thousand in equipment expense and $84 thousand in occupancy expense offset a portion of the increases. ORE expenses were down due to a decline in the number of properties held during the current year versus the prior year. Excluding the ORE line, noninterest expenses were up $1.5 million in the third quarter of 2015 compared to the prior year.
For the nine months ended September 30, 2015, total noninterest expenses were $67.5 million, compared to $62.4 million for the nine months ended September 30, 2014, an increase of $5.0 million. Excluding the ORE line, noninterest expenses were up $3.8 million for the nine month period ended September 30, 2015 compared to the prior year, with increases in professional service expenses, FDIC and other insurance and salaries and benefits contributing most of the total increase. In the first nine months of 2014, the ORE expense, net line included a $2.4 million gain on the sale of a large ORE property.
Income Taxes
In the third quarter of 2015, TrustCo recognized income tax expense of $5.5 million, compared to $6.5 million for the third quarter of 2014. The effective tax rates were 34.3% and 37.9% for the third quarters of 2015 and 2014, respectively. For the nine month period ended September 30, 2015, as compared to the year earlier period, tax expense fell to $18.4 million from $20.9 million and the tax rate was 36.5% down from 38.4%. The decrease in taxes reflects lower pre-tax income levels in 2015 for both the three and nine month periods, and is also a result of adjustments made to valuations of deferred assets and liabilities upon finalizing the 2014 tax return which was filed during the third quarter of 2015.
Capital Resources
Consistent with its long-term goal of operating a sound and profitable financial organization, TrustCo strives to maintain strong capital ratios.
Banking regulators have moved towards higher required capital requirements due to the standards included in the Basel III reform measures and the Dodd-Frank Act, as well as a general trend towards reducing risk in the banking system by providing a greater capital margin.
Total shareholders’ equity at September 30, 2015 was $412.3 million, compared to $389.5 million at September 30, 2014. TrustCo declared a dividend of $0.065625 per share in the third quarter of 2015. This results in a dividend payout ratio of 58.82% based on third quarter 2015 earnings per share of $0.111.
The Bank reported the following capital ratios as of September 30, 2015 and December 31, 2014:
| (dollars in thousands) | | As of September 30, 2015 | | | Well Capitalized* | | | Adequately Capitalized* | |
| | | Amount | | | Ratio |
| | | | | | | | | | | | | |
| Tier 1 leverage capital | | $ | 401,225 | | | | 8.42 | % | | | 5.00 | % | | | 4.00 | |
| Common equity tier 1 capital | | | 401,225 | | | | 16.97 | | | | 6.50 | | | | 4.50 | |
| Tier 1 risk-based capital | | | 401,225 | | | | 16.97 | | | | 8.00 | | | | 6.00 | |
| Total risk-based capital | | | 430,979 | | | | 18.23 | | | | 10.00 | | | | 8.00 | |
| (dollars in thousands) | | As of December 31, 2014 | | | Well Capitalized* | | | Adequately Capitalized* | |
| | | Amount | | | Ratio |
| | | | | | | | | | | | | |
| Tier 1 (core) capital | | $ | 386,913 | | | | 8.33 | % | | | 5.00 | % | | | 4.00 | |
| Tier 1 risk-based capital | | | 386,913 | | | | 16.60 | | | | 6.00 | | | | 4.00 | |
| Total risk-based capital | | | 416,269 | | | | 17.86 | | | | 10.00 | | | | 8.00 | |
*Federal regulatory minimum requirements to be considered to be Well Capitalized and Adequately Capitalized
The following is a summary of actual capital amounts and ratios as of September 30, 2015 and December 31, 2014 for TrustCo on a consolidated basis:
| (dollars in thousands) | | As of September 30, 2015 | |
| | | Amount | | | Ratio | |
| | | | | | | |
| Tier 1 leverage capital | | $ | 412,913 | | | | 8.66 | % |
| Common equity tier 1 capital | | | 412,913 | | | | 17.45 | |
| Tier 1 risk-based capital | | | 412,913 | | | | 17.45 | |
| Total risk-based capital | | | 442,685 | | | | 18.71 | |
| (dollars in thousands) | | As of December 31, 2014 | |
| | | Amount | | | Ratio | |
| | | | | | | |
| Leverage capital | | $ | 397,400 | | | | 8.55 | % |
| Tier 1 risk-based capital | | | 397,400 | | | | 17.04 | |
| Total risk-based capital | | | 426,770 | | | | 18.30 | |
In addition, at September 30, 2015, the consolidated equity to total assets ratio was 8.72%, compared to 8.47% at December 31, 2014 and 8.50% at September 30, 2014.
TrustCo became subject to Federal Reserve regulations requiring minimum capital requirements in January 2015 when new regulatory capital rules issued in July 2013 by the federal banking agencies, including the Federal Reserve and the OCC, took effect. The new capital rules substantially amend the prior regulatory capital rules and implemented the “Basel III” regulatory capital reforms, as well as certain changes required by the Dodd-Frank Act.
The final rule includes new minimum risk-based capital and leverage ratios, and refines the definition of what constitutes “capital” for purposes of calculating these ratios. The new minimum capital requirements are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 capital to average consolidated assets ratio (known as the “leverage ratio”) of 4% (unchanged from current rules). The final rule also establishes a “capital conservation buffer” of 2.5% above the new regulatory minimum capital ratios and when fully phased in, effectively, will result in the following minimum ratios that banks and bank holding companies must maintain in order to avoid being subject to, among other matters, limitations on dividends, share repurchases and discretionary bonus payments to executive officers: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 to risk-based assets capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement would be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase in increments of 0.625% each year until fully implemented in January 2019.
The following chart compares the risk-based capital ratios required under the prior rules to those prescribed under the new final rules:
| | | Prior Rules | | | Final Rules | |
| | | | | | | |
| Common equity tier 1 capital | | | N/A | | | | 4.50 | % |
| Tier 1 risk-based capital | | | 4.00 | % | | | 6.00 | % |
| Total risk-based capital | | | 8.00 | % | | | 8.00 | % |
| Common equity tier 1 capital conservation buffer* | | | N/A | | | | 2.50 | % |
*When fully phased in, which will occur on January 1, 2019.
The final rules also implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses and instruments that will no longer qualify as Tier 1 capital.
The application of more stringent capital requirements for the Company and the Bank could, among other things, result in lower returns on equity, require the raising of additional capital and result in regulatory actions, such as the inability to pay dividends or repurchase shares, if we were to be unable to comply with such requirements.
In addition to the updated capital requirements, the final rules also contain revisions to the prompt corrective action framework. Beginning January 1, 2015, the minimum ratios for the Company and the Bank to be considered well-capitalized are as follows:
| | | Prior Rules | | | Final Rules | |
| | | | | | | |
| Common equity tier 1 capital | | | N/A | | | | 6.50 | % |
| Tier 1 risk-based capital | | | 6.00 | % | | | 8.00 | % |
| Total risk-based capital | | | 10.00 | % | | | 10.00 | % |
| Tier 1 leverage capital | | | 5.00 | % | | | 5.00 | % |
The Bank and the Company continue to meet the regulatory requirements to be classified as well capitalized.
Critical Accounting Policies:
Pursuant to SEC guidance, management of the Company is encouraged to evaluate and disclose those accounting policies judged to be critical policies - those most important to the portrayal of the Company’s financial condition and results, and that require management’s most difficult subjective or complex judgments.
Management considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy given the inherent uncertainty in evaluating the levels of the allowance required to cover the inherent risk of losses in the loan portfolio and the material effect that such judgments can have on the results of operations. Included in Note 1 to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 is a description of the significant accounting policies that are utilized by the Company in the preparation of the Consolidated Financial Statements.
TrustCo Bank Corp NY
Management's Discussion and Analysis
STATISTICAL DISCLOSURE
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY:
INTEREST RATES AND INTEREST DIFFERENTIAL
The following table summarizes the component distribution of the average balance sheet, related interest income and expense and the average annualized yields on interest earning assets and annualized rates on interest bearing liabilities of TrustCo (adjusted for tax equivalency) for each of the reported periods.Nonaccrual loans are included in loans for this analysis. The average balances of securities available for sale and held to maturity are calculated using amortized costs for these securities. Included in the average balance of shareholders' equity is the unrealized loss, net of tax, in the available for sale portfolio of ($3.5) million in 2015 and ($3.3) million in 2014. The subtotals contained in the following table are the arithmetic totals of the items contained in that category. Increases and decreases in interest income and expense due to both rate and volume have been allocated to the categories of variances (volume and rate) based on the percentage relationship of such variances to each other.
| | | Three months ended September 30, 2015 | | | Three months ended September 30, 2014 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (dollars in thousands) | | | | | Interest | | | | | | | | | Interest | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Securities available for sale: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U. S. government sponsored enterprises | | $ | 157,454 | | | | 584 | | | | 1.48 | % | | $ | 93,098 | | | | 297 | | | | 1.27 | % | | $ | 287 | | | | 232 | | | | 55 | |
| Mortgage backed securities and collateralized mortgage obligations-residential | | | 425,092 | | | | 2,230 | | | | 2.10 | % | | | 569,352 | | | | 3,040 | | | | 2.14 | % | | | (810 | ) | | | (754 | ) | | | (56 | ) |
| State and political subdivisions | | | 1,937 | | | | 34 | | | | 7.02 | % | | | 3,307 | | | | 60 | | | | 7.26 | % | | | (26 | ) | | | (24 | ) | | | (2 | ) |
| Corporate bonds | | | - | | | | - | | | | 0.00 | % | | | 1,403 | | | | 2 | | | | 0.48 | % | | | (2 | ) | | | (1 | ) | | | (1 | ) |
| Small Business Administration-guaranteed participation securities | | | 96,109 | | | | 497 | | | | 2.07 | % | | | 106,109 | | | | 535 | | | | 2.02 | % | | | (38 | ) | | | (114 | ) | | | 76 | |
| Mortgage backed securities and collateralized mortgage obligations-commercial | | | 10,532 | | | | 37 | | | | 1.41 | | | | 10,803 | | | | 38 | | | | 1.40 | | | | (1 | ) | | | (2 | ) | | | 1 | |
| Other | | | 685 | | | | 4 | | | | 2.34 | % | | | 685 | | | | 4 | | | | 2.34 | % | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total securities available for sale | | | 691,809 | | | | 3,386 | | | | 1.96 | % | | | 784,757 | | | | 3,976 | | | | 2.03 | % | | | (590 | ) | | | (664 | ) | | | 74 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Federal funds sold and other short-term Investments | | | 652,274 | | | | 408 | | | | 0.25 | % | | | 598,318 | | | | 374 | | | | 0.25 | % | | | 34 | | | | 34 | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Held to maturity securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Corporate bonds | | | 9,969 | | | | 153 | | | | 6.17 | % | | | 9,954 | | | | 153 | | | | 6.18 | % | | | - | | | | 1 | | | | (1 | ) |
| Mortgage backed securities and collateralized mortgage obligations-residential | | | 51,928 | | | | 461 | | | | 3.55 | % | | | 66,206 | | | | 545 | | | | 3.29 | % | | | (84 | ) | | | (313 | ) | | | 229 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total held to maturity securities | | | 61,897 | | | | 614 | | | | 3.97 | % | | | 76,160 | | | | 698 | | | | 3.67 | % | | | (84 | ) | | | (312 | ) | | | 228 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Federal Reserve Bank and Federal Home Loan Bank stock | | | 9,480 | | | | 113 | | | | 4.77 | % | | | 9,884 | | | | 127 | | | | 5.14 | % | | | (14 | ) | | | (5 | ) | | | (9 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial loans | | | 208,492 | | | | 2,688 | | | | 5.15 | % | | | 220,347 | | | | 2,842 | | | | 5.16 | % | | | (154 | ) | | | (149 | ) | | | (5 | ) |
| Residential mortgage loans | | | 2,689,072 | | | | 29,617 | | | | 4.41 | % | | | 2,473,857 | | | | 28,315 | | | | 4.58 | % | | | 1,302 | | | | 6,808 | | | | (5,506 | ) |
| Home equity lines of credit | | | 354,552 | | | | 3,151 | | | | 3.53 | % | | | 342,456 | | | | 3,102 | | | | 3.59 | % | | | 49 | | | | 312 | | | | (263 | ) |
| Installment loans | | | 8,678 | | | | 183 | | | | 8.33 | % | | | 6,048 | | | | 168 | | | | 11.02 | % | | | 15 | | | | 218 | | | | (203 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans, net of unearned income | | | 3,260,794 | | | | 35,639 | | | | 4.37 | % | | | 3,042,708 | | | | 34,427 | | | | 4.52 | % | | | 1,212 | | | | 7,190 | | | | (5,978 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total interest earning assets | | | 4,676,254 | | | | 40,160 | | | | 3.43 | % | | | 4,511,827 | | | | 39,602 | | | | 3.51 | % | | | 558 | | | | 6,242 | | | | (5,684 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for loan losses | | | (45,829 | ) | | | | | | | | | | | (47,115 | ) | | | | | | | | | | | | | | | | | | | | |
| Cash & non-interest earning assets | | | 133,241 | | | | | | | | | | | | 134,110 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total assets | | $ | 4,763,666 | | | | | | | | | | | $ | 4,598,822 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liabilities and shareholders' equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest bearing checking accounts | | $ | 727,693 | | | | 117 | | | | 0.06 | % | | $ | 650,132 | | | | 94 | | | | 0.06 | % | | | 23 | | | | 23 | | | | - | |
| Money market accounts | | | 623,381 | | | | 537 | | | | 0.34 | % | | | 656,935 | | | | 648 | | | | 0.39 | % | | | (111 | ) | | | (32 | ) | | | (79 | ) |
| Savings | | | 1,251,031 | | | | 603 | | | | 0.19 | % | | | 1,229,712 | | | | 644 | | | | 0.21 | % | | | (41 | ) | | | 69 | | | | (110 | ) |
| Time deposits | | | 1,189,763 | | | | 2,544 | | | | 0.85 | % | | | 1,148,419 | | | | 2,213 | | | | 0.76 | % | | | 331 | | | | 77 | | | | 254 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total interest bearing deposits | | | 3,791,868 | | | | 3,801 | | | | 0.40 | % | | | 3,685,198 | | | | 3,599 | | | | 0.39 | % | | | 202 | | | | 138 | | | | 64 | |
| Short-term borrowings | | | 177,230 | | | | 290 | | | | 0.65 | % | | | 180,063 | | | | 327 | | | | 0.72 | % | | | (37 | ) | | | (5 | ) | | | (32 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total interest bearing liabilities | | | 3,969,098 | | | | 4,091 | | | | 0.41 | % | | | 3,865,261 | | | | 3,926 | | | | 0.40 | % | | | 165 | | | | 133 | | | | 32 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Demand deposits | | | 360,080 | | | | | | | | | | | | 322,083 | | | | | | | | | | | | | | | | | | | | | |
| Other liabilities | | | 27,524 | | | | | | | | | | | | 23,783 | | | | | | | | | | | | | | | | | | | | | |
| Shareholders' equity | | | 406,964 | | | | | | | | | | | | 387,695 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total liabilities and shareholders' equity | | $ | 4,763,666 | | | | | | | | | | | $ | 4,598,822 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income , tax equivalent | | | | | | | 36,069 | | | | | | | | | | | | 35,676 | | | | | | | $ | 393 | | | | 6,109 | | | | (5,716 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest spread | | | | | | | | | | | 3.02 | % | | | | | | | | | | | 3.11 | % | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest margin (net interest income to total interest earning assets) | | | | | | | | | | | 3.08 | % | | | | | | | | | | | 3.16 | % | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Tax equivalent adjustment | | | | | | | (19 | ) | | | | | | | | | | | (28 | ) | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | | | | | | 36,050 | | | | | | | | | | | | 35,648 | | | | | | | | | | | | | | | | | |
TrustCo Bank Corp NY
Management's Discussion and Analysis
STATISTICAL DISCLOSURE
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY:
INTEREST RATES AND INTEREST DIFFERENTIAL
The following table summarizes the component distribution of the average balance sheet, related interest income and expense and the average annualized yields on interest earning assets and annualized rates on interest bearing liabilities of TrustCo (adjusted for tax equivalency) for each of the reported periods.Nonaccrual loans are included in loans for this analysis. The average balances of securities available for sale and held to maturity are calculated using amortized costs for these securities. Included in the average balance of shareholders' equity is the unrealized loss, net of tax, in the available for sale portfolio of ($3.0) million in 2015 and ($6.1) million in 2014. The subtotals contained in the following table are the arithmetic totals of the items contained in that category. Increases and decreases in interest income and expense due to both rate and volume have been allocated to the categories of variances (volume and rate) based on the percentage relationship of such variances to each other.
| | | Nine months ended September 30, 2015 | | | Nine months ended September 30, 2014 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (dollars in thousands) | | | | | Interest | | | | | | | | | Interest | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Securities available for sale: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U. S. government sponsored enterprises | | $ | 116,824 | | | | 1,162 | | | | 1.33 | % | | $ | 124,133 | | | | 1,184 | | | | 1.27 | % | | $ | (22 | ) | | | (95 | ) | | | 73 | |
| Mortgage backed securities and collateralized mortgage obligations-residential | | | 448,223 | | | | 6,899 | | | | 2.05 | % | | | 568,257 | | | | 9,417 | | | | 2.21 | % | | | (2,518 | ) | | | (1,875 | ) | | | (643 | ) |
| State and political subdivisions | | | 1,989 | | | | 108 | | | | 7.32 | % | | | 4,411 | | | | 235 | | | | 7.10 | % | | | (127 | ) | | | (139 | ) | | | 12 | |
| Corporate bonds | | | 813 | | | | 1 | | | | 0.16 | % | | | 3,758 | | | | 63 | | | | 2.23 | % | | | (62 | ) | | | (28 | ) | | | (34 | ) |
| Small Business Administration-guaranteed participation securities | | | 98,868 | | | | 1,522 | | | | 2.05 | % | | | 108,078 | | | | 1,630 | | | | 2.01 | % | | | (108 | ) | | | (158 | ) | | | 50 | |
| Mortgage backed securities and collateralized mortgage obligations-commercial | | | 10,600 | | | | 112 | | | | 1.41 | % | | | 10,870 | | | | 114 | | | | 1.40 | % | | | (2 | ) | | | (3 | ) | | | 1 | |
| Other | | | 685 | | | | 12 | | | | 2.34 | % | | | 670 | | | | 12 | | | | 2.39 | % | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total securities available for sale | | | 678,002 | | | | 9,816 | | | | 1.93 | % | | | 820,177 | | | | 12,655 | | | | 2.06 | % | | | (2,839 | ) | | | (2,298 | ) | | | (541 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Federal funds sold and other short-term Investments | | | 662,879 | | | | 1,231 | | | | 0.25 | % | | | 593,577 | | | | 1,101 | | | | 0.25 | % | | | 130 | | | | 130 | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Held to maturity securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Corporate bonds | | | 9,965 | | | | 461 | | | | 6.17 | % | | | 9,950 | | | | 461 | | | | 6.18 | % | | | - | | | | 1 | | | | (1 | ) |
| Mortgage backed securities and collateralized mortgage obligations-residential | | | 55,569 | | | | 1,419 | | | | 3.41 | % | | | 70,273 | | | | 1,747 | | | | 3.31 | % | | | (328 | ) | | | (409 | ) | | | 81 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total held to maturity securities | | | 65,534 | | | | 1,880 | | | | 3.83 | % | | | 80,223 | | | | 2,208 | | | | 3.67 | % | | | (328 | ) | | | (408 | ) | | | 80 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Federal Reserve Bank and Federal Home Loan Bank stock | | | 9,392 | | | | 347 | | | | 4.93 | % | | | 10,438 | | | | 388 | | | | 4.96 | % | | | (41 | ) | | | (39 | ) | | | (2 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial loans | | | 212,617 | | | | 8,194 | | | | 5.14 | % | | | 221,492 | | | | 8,481 | | | | 5.11 | % | | | (287 | ) | | | (366 | ) | | | 79 | |
| Residential mortgage loans | | | 2,644,216 | | | | 87,946 | | | | 4.44 | % | | | 2,410,435 | | | | 82,845 | | | | 4.59 | % | | | 5,101 | | | | 9,224 | | | | (4,123 | ) |
| Home equity lines of credit | | | 353,630 | | | | 9,304 | | | | 3.52 | % | | | 341,014 | | | | 9,102 | | | | 3.57 | % | | | 202 | | | | 394 | | | | (192 | ) |
| Installment loans | | | 8,236 | | | | 534 | | | | 8.66 | % | | | 5,825 | | | | 502 | | | | 11.52 | % | | | 32 | | | | 228 | | | | (196 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans, net of unearned income | | | 3,218,699 | | | | 105,978 | | | | 4.39 | % | | | 2,978,766 | | | | 100,930 | | | | 4.52 | % | | | 5,048 | | | | 9,480 | | | | (4,432 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total interest earning assets | | | 4,634,506 | | | | 119,252 | | | | 3.43 | % | | | 4,483,181 | | | | 117,282 | | | | 3.49 | % | | | 1,970 | | | | 6,865 | | | | (4,895 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for loan losses | | | (46,203 | ) | | | | | | | | | | | (47,570 | ) | | | | | | | | | | | | | | | | | | | | |
| Cash & non-interest earning assets | | | 136,906 | | | | | | | | | | | | 133,456 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total assets | | $ | 4,725,209 | | | | | | | | | | | $ | 4,569,067 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liabilities and shareholders' equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest bearing checking accounts | | $ | 704,323 | | | | 333 | | | | 0.06 | % | | $ | 629,542 | | | | 267 | | | | 0.06 | % | | | 66 | | | | 66 | | | | - | |
| Money market accounts | | | 632,143 | | | | 1,701 | | | | 0.36 | % | | | 652,886 | | | | 1,865 | | | | 0.38 | % | | | (164 | ) | | | (62 | ) | | | (102 | ) |
| Savings | | | 1,243,544 | | | | 1,860 | | | | 0.20 | % | | | 1,231,761 | | | | 1,999 | | | | 0.22 | % | | | (139 | ) | | | 34 | | | | (173 | ) |
| Time deposits | | | 1,186,846 | | | | 7,478 | | | | 0.84 | % | | | 1,144,164 | | | | 6,199 | | | | 0.72 | % | | | 1,279 | | | | 234 | | | | 1,045 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total interest bearing deposits | | | 3,766,856 | | | | 11,372 | | | | 0.40 | % | | | 3,658,353 | | | | 10,330 | | | | 0.38 | % | | | 1,042 | | | | 272 | | | | 770 | |
| Short-term borrowings | | | 184,079 | | | | 936 | | | | 0.68 | % | | | 190,599 | | | | 1,062 | | | | 0.74 | % | | | (126 | ) | | | (37 | ) | | | (89 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total interest bearing liabilities | | | 3,950,935 | | | | 12,308 | | | | 0.42 | % | | | 3,848,952 | | | | 11,392 | | | | 0.40 | % | | | 916 | | | | 234 | | | | 682 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Demand deposits | | | 344,606 | | | | | | | | | | | | 318,306 | | | | | | | | | | | | | | | | | | | | | |
| Other liabilities | | | 26,689 | | | | | | | | | | | | 23,074 | | | | | | | | | | | | | | | | | | | | | |
| Shareholders' equity | | | 402,979 | | | | | | | | | | | | 378,735 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total liabilities and shareholders' equity | | $ | 4,725,209 | | | | | | | | | | | $ | 4,569,067 | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income , tax equivalent | | | | | | | 106,944 | | | | | | | | | | | | 105,890 | | | | | | | $ | 1,054 | | | | 6,631 | | | | (5,577 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest spread | | | | | | | | | | | 3.01 | % | | | | | | | | | | | 3.09 | % | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest margin (net interest income to total interest earning assets) | | | | | | | | | | | 3.08 | % | | | | | | | | | | | 3.15 | % | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Tax equivalent adjustment | | | | | | | (58 | ) | | | | | | | | | | | (106 | ) | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | | | | | | 106,886 | | | | | | | | | | | | 105,784 | | | | | | | | | | | | | | | | | |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
As detailed in the Annual Report to Shareholders as of December 31, 2014, the Company is subject to interest rate risk as its principal market risk. As noted in detail throughout this Management’s Discussion and Analysis for the three and nine month periods ended September 30, 2015 and 2014, the Company continues to respond to changes in interest rates in a fashion to position the Company to meet short term earning goals and to also allow the Company to respond to changes in interest rates in the future. Consequently, for the third quarter of 2015, the Company had an average balance of Federal Funds sold and other short-term investments of $652.3 million compared to $598.3 million in the third quarter of 2014. As investment opportunities present themselves, management plans to invest funds from the Federal Funds sold and other short-term investment portfolio into the securities available for sale, securities held to maturity and loan portfolios. Additional disclosure of interest rate risk can be found under “Liquidity and Interest Rate Sensitivity” and “Asset/Liability Management” in the Management’s Discussion and Analysis section of this document.
| Item 4. | Controls and Procedures |
An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report.
The Company maintains disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (“Exchange Act”)) designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon this evaluation of those disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer of the Company concluded, as of the end of the period covered by this report, that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required.
In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Further, no evaluation of a cost-effective system of controls can provide absolute assurance that all control issues and instances of fraud, if any, will be detected.
There have been no changes in internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter to which this report relates that have materially affected or are reasonably likely to materially affect, the internal control over financial reporting.
None.
There were no material changes to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 and in the Company’s Form 10-Q for the quarter ended June 30, 2015.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
| Item 3. | Defaults Upon Senior Securities |
None.
None.
None.
| Exhibit No. | Description |
| | |
| 15 | Crowe Horwath LLP Letter Regarding Unaudited Interim Financial Information |
| | |
| 31(a) | Rule 13a-15(e)/15d-15(e) Certification of Robert J. McCormick, principal executive officer. |
| | |
| 31(b) | Rule 13a-15(e)/15d-15(e) Certification of Michael M. Ozimek, principal financial officer. |
| | |
| 32 | Section 1350 Certifications of Robert J. McCormick, principal executive officer and Michael M. Ozimek, principal financial officer. |
| | |
| 101.INS | Instance Document |
| | |
| 101.SCH | XBRL Taxonomy Extension Schema Document |
| | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
| | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
| | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
| | |
| 101.PRE | XBRLTaxonomy Extension Presentation Linkbase Document |
SIGNATURES
Pursuant to the requirements 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.
| TrustCo Bank Corp NY | |
| | | |
| | By: /s/ Robert J. McCormick | |
| | Robert J. McCormick | |
| | President and Chief Executive Officer | |
| | | |
| | By: /s/ Michael M. Ozimek | |
| | Michael M. Ozimek | |
| | Senior Vice President | |
| | and Chief Financial Officer | |
| | | |
| Date: November 6, 2015 | | |
Exhibits Index
Reg S-K Exhibit No. | Description |
| | |
| Crowe Horwath LLP Letter Regarding Unaudited Interim Financial Information |
| | |
| Rule 13a-15(e)/15d-15(e) Certification of Robert J. McCormick, principal executive officer. |
| | |
| Rule 13a-15(e)/15d-15(e) Certification of Michael M. Ozimek, principal financial officer. |
| | |
| Section 1350 Certifications of Robert J. McCormick, principal executive officer and Michael M. Ozimek, principal financial officer. |
| | |
| 101.INS | Instance Document |
| | |
| 101.SCH | XBRL Taxonomy Extension Schema Document |
| | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
| | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
| | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
| | |
| 101.PRE | XBRLTaxonomy Extension Presentation Linkbase Document |
63
